M & M Leasing Corp. v. Seattle First Nat. Bank, s. 75-2576 and 75-2577
| Decision Date | 04 November 1977 |
| Docket Number | Nos. 75-2576 and 75-2577,s. 75-2576 and 75-2577 |
| Citation | 563 F.2d 1377 |
| Parties | M & M LEASING CORPORATION, Goodway Leasing, Inc., Bill Pierre Leasing, Inc., Budget Rent-a-Car of Washington-Oregon, Plaintiffs-Appellants, v. SEATTLE FIRST NATIONAL BANK, a National Bank, Firstbank Leasing Corporation, a Washington Corporation, James E. Smith, Comptroller of the Currency of the United States, Defendants-Appellees. M & M LEASING CORPORATION, Goodway Leasing, Inc., Bill Pierre Leasing, Inc., Budget Rent-a-Car of Washington-Oregon, Plaintiffs-Appellees, v. PEOPLES NATIONAL BANK OF WASHINGTON, a National Bank, Peoples Leasing Company, a Washington Corporation, James E. Smith, Comptroller of the Currency of the United States, Defendants-Appellants, James E. Smith, Comptroller of the Currency of the United States, Defendant-Cross-Appellant. |
| Court | U.S. Court of Appeals — Ninth Circuit |
John P. Lycette, Lycette, Diamond & Sylvester, Seattle, Wash., for plaintiffs-appellants.
Anthony J. Steinmeyer, Atty., Appellate Section, Civil Division, Dept. of Justice, Washington, D. C., Bradley C. Diggs, Seattle, Wash., for Seattle First National.
Appeal from the United States District Court for the Western District of Washington.
Before KOELSCH and SNEED, Circuit Judges, and RICHEY, * District Judge.
Appellees, Seattle First National Bank (Seafirst) and Peoples National Bank of Washington, are engaged in the leasing of motor vehicles and other personal property. Appellants, M & M Leasing Corporation, Goodway Leasing, Inc., Bill Pierre Leasing, Inc., and Budget Rent-a-Car of Washington-Oregon, Inc., are independent corporations engaged principally in motor vehicle leasing. Defendant-cross-appellant is the Comptroller of Currency of the United States.
Appellants, plaintiffs in the trial court, sought a declaration that the appellees' leasing of motor vehicles and other personal property was not authorized by 12 U.S.C. § 24 (Seventh), 1 despite the fact that it is sanctioned by the Comptroller of the Currency. 2 Appellants also requested an injunction barring appellees and their subsidiaries from further motor vehicle leasing activities. Moreover, appellants asserted that, even if the Comptroller's rulings relied upon to sanction appellees' activities are valid, such activities exceeded the authorization the rulings provided and should be enjoined to that extent.
The trial court in an able opinion distinguished between motor vehicle lease transactions in which the banks do not assume the risk of residual value fluctuation upon termination of the lease (so-called "open end" leases) and those in which the banks do assume such risk (so-called "closed end" leases). In its initial judgment the trial court enjoined the appellees "from engaging in motor vehicle lease transactions in which the banks assume the risk of residual value fluctuation upon termination of the lease" (II C.R. 575) and declared the Comptroller's interpretive rulings, 12 C.F.R. §§ 7.3400 and 7.7376, invalid to the extent they authorized such leases.
None of the parties was entirely satisfied by this disposition of their dispute. The appellee banks moved to clarify the opinion and judgment to remove "closed end" leases in which there is to be a "full payout" prior to termination of the lease from the scope of the trial court's injunction and to delete the words "motor vehicle" from the language of the injunction. The appellants thought the court's injunction should embrace all leasing and the Comptroller of Currency indicated displeasure with the restrictiveness of the trial court's opinion and injunction.
The trial court in due course amended its injunction to delete the words "motor vehicle" so that it currently reads "from engaging in lease transactions in which the banks assume the risk of residual value fluctuation upon termination of the lease." (II C.R. 598). Also, by order, the trial court construed its opinion and judgment as follows:
"Lease transactions in which the lessor bank, during the initial lease term, is repaid the cost of the property leased, plus the cost of financing the transaction, in the form of rentals, tax benefits and/or the guarantee of a financially responsible guarantor, are neither disapproved in the Court's opinion nor enjoined by the judgment entered herein." (II C.R. 596).
These modifications satisfied the appellees but, of course, neither the appellants nor the Comptroller. Hence, this appeal was taken by them. We affirm in part and reverse in part.
In essence, we view the trial court's holding as correct, so far as it goes, but somewhat more restrictive than the law requires. As we see it, the "business of banking," which 12 U.S.C. § 24 (Seventh), authorizes the appellees to conduct, includes leases of personal property when, in the light of all relevant circumstances, the transactions constitute the loan of money secured by the properties leased. A transaction may be so characterized, in our opinion, even if it is designed so that the lessor bank does not recover during the initial lease term every penny of the cost of the leased property plus its financing costs. A lease ceases to be a secured loan when the lessor assumes material burdens other than those of a lender of money and is subject to significant risks not ordinarily incident to a secured loan. The bright line traced by the trial court provides a sound guide by which leases can be kept within the scope of the "business of banking." We are not, however, prepared to say that the trial court's bright line constitutes the precise outer limit of the "business of banking."
To support our holding, we first will describe the nature and scope of national banks' involvement in the leasing of personal property, we will next analyze the term "business of banking" and apply the analysis to such leasing, and, finally, we will identify some of the characteristics of leases which lie beyond the outer limits of the "business of banking."
Leasing By National Banks.
The record of this case indicates that the role of national banks, such as Seafirst and Peoples, in personal property leasing generally is essentially that of a financing agency. To illustrate this it is useful to divide personal property leases into motor vehicle leases and leases of aircraft, ships and other so-called "big ticket" items.
Motor vehicle leases usually, but not invariably, are generated by automobile dealers. Particular dealers will enter into an agreement with a bank under which dealers will lease automobiles to their customers. The major terms of a lease, i. e., make, model, accessories, term, and payment schedule, are fashioned by the dealer in a manner that fits his and the customer's interests and conforms to the lease design envisioned by the dealer's arrangement with the bank. To protect itself against improvident leases the bank possesses the right to review both the substantive terms of a lease and the credit-worthiness of the lessee before accepting the lease. The crucial items reviewed are the credit rating of the customer and the vehicle's residual value. Upon accepting the lease the lessee-customer is notified and instructed to make lease payments to the bank. The title of the vehicle shows the bank as the legal owner, while the customer is listed as registered owner and lessee. Customers who approach the bank initially are usually referred to dealers with whom the bank has leasing arrangements.
The bank functions somewhat differently with respect to "big ticket" items. With respect to them, generally the customer calls the bank directly and expresses an interest in leasing particular personal property. This contact essentially is to inquire about the availability of credit. The bank performs no procurement function. The customer chooses the property he wishes to lease, selects a vendor and negotiates with him the terms of the purchase. Assuming the bank finds the customer an acceptable credit risk, it then purchases the property and leases it to the customer. Delivery by the seller is made directly to the customer-lessee who makes the lease payments to the bank.
Both motor vehicle leases and "big ticket" leases provide that the burdens of operating costs and risks are borne by the lessee. Thus, the lessee agrees to purchase insurance sufficient to cover the bank's interest, to pay all repairs and maintenance, and to assume the risk of loss or damage.
Motor vehicle leases and "big ticket" leases frequently differ, however, in certain important respects. Foremost is the difference in the lessee's responsibility at the expiration of the initial term of the lease. Motor vehicle leases, for example, include a guarantee by the lessee that the vehicle will have a certain residual value at the expiration of the usual two or three year term.
This residual value is simply the anticipated resale value of the vehicle at the lease's termination. Should resale value in fact be less than the guaranteed residual value, the lessee must pay the difference. Should it be more, the excess when realized is refunded to the lessee. "Big ticket" item leases, on the other hand, normally impose no residual value guarantee on the lessees. The need for such guarantees is reduced, if not eliminated, by the fact that such leases typically are for a term which approximates the economic life of the properties. Leases in which there is a residual value guarantee are designated, in the language of commerce, as "open end" leases, while those in which no such guarantee exists are designated "closed end" leases.
Closed end leases, therefore, do impose on the lessor bank a risk not borne in the case of open end leases. In the former the lessor bank must absorb any difference between the estimated residual value at the end of the lease and a lesser actual resale price. In the open end lease, on the other hand, any such difference is guaranteed by the lessee. It is this distinction between the two types...
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