In CI No 1,108, Hesh Wiener, the acknowledged leading expert on computer leasing company bankruptcies, reviewed the gloomy out look for Continental Information Systems and all who did business with the bankrupt firm. Today he looks at the unpleasant surprises that are likely to lie in store for many of the unsuspecting companies that have leased various pieces of IBM equipment from CIS over a period of time, and the subtransactions that work fine while the lessor is solvent but can turn very sour if it goes bankrupt. Lessees of computers from Syracuse, New York-based Continental Information Systems Corp, which filed for Chapter XI bankruptcy protection on Friday January 13, will likely be the last to catch on to the implications for them of the court proceedings: many indeed are completely unaware that their company’s obligations are held in the sticky hands of bankrupt CIS. The interests of these numerous but relatively minor casualties of CIS’ merry ride to the drain and down it may well be pushed aside. Sadly, bankruptcy law deals with financial disruptions and does not address the human aspect. The signatories on the users’ sides of CIS’ leases may find their careers taking surprising new turns. The lucky among them will be those who inherited, rather than executed, deals with Continental. Their predecessors will serve as scapegoats and their heroism under fire might even earn them rare gratitude from their employers.
Root canal CIS’ lessees would be wise to rush lickety-split to the office of the nearest lawyer because their leases may well have been assigned to another party, even if they pay rent to CIS. In that case, the assignee as well as CIS could ask for money, even though only one of them is entitled to it. Funds sent to the wrong party could be lost in the morass of CIS’ bankruptcy, necessitating a second payment for the same rent bill. When OPM went under, the savviest lessees put their rent cheques into special escrow accounts, promptly told OPM and any assignees what they did, and promised to turn over the funds when their lawyers told them to. The lessees’ lawyers gave the okay only after the bankrupt OPM and its lenders jointly agreed where the user’s money should go. No user acting this way was deprived of the use of leased hardware, and quite a few were saved from grief. Users who have subleased unwanted machines to CIS, and who expect regular payment from the bankrupt lessor, may not get such clear and simple advice from their advisors. More likely, they will have an experience that can be filed somewhere between root canal and natural childbirth, but unaccompanied by the subsequent relief. For instance, users who sublet equipment to third parties usually don’t perfect their interest in the capital asset. This means that their claims against CIS, while essentially valid, could well be treated as secondary to those of secured creditors. A good number of CIS’ sublease arrangements are, unfortunately, the kind that put the user in a bad position. The users who will have the worst headaches are the ones that subleased equipment to CIS under a separate contract. If CIS was in arrears before filing its bankruptcy petition, the money owed will probably be treated as an unsecured debt. Post-petition payments will be made in a more timely fashion… if CIS’ noble knights of the bar can’t come up with a pretext for tearing up the whole obligation. Nonetheless, CIS’ typical arrangements aren’t the riskiest in the trade. There are users that sign two contracts to get one new machine… and a third covering the takeout of whatever installed iron they have outgrown. These deals consist of a long-term hell-or-high-water lease and a separate agreement under which the lessor agrees to lease back the equipment in the middle of the term. The lessee is apparently convinced that this is the same as a single short lease. It isn’t. The long lease is in fact quickly banked by the lessor, which has thereby bought the machine with the user’s credit. If this kind of lessor gets into trouble, the user’s long lease sticks whi
le the future takeout promise slides away on the legal Teflon of the Bankruptcy Code. Thus far, we have not uncovered any such deals between CIS and users, but CIS may yet turn out to be a party in a few. A different problem users often fail to recognise arises as a byproduct of the complex financial markets that form the backdrop for equipment leasing. Sharkskin In the leasing game, it is common but far from universal for lessors to trade assignable deals with each other. Users may discover that their contracts have ended up at CIS, or have passed through it on the way to a funding source, even though they signed up with another lessor. The bucks passed down the chain of lessors may well stop at CIS: a company in Chapter XI resembles nothing so much as a cockroach trap – your money checks in but doesn’t come out again. Yesterday would be a good time for any lessee to ask its immediate lessor exactly where all its contracts and subleased machines happen to be. Now will have to do. All these headaches are not necessarily part of every computer lease. There are several legal mechanisms by which users can protect themselves from lessors’ foibles. None of these procedures is completely waterproof, but some have survived the attempts of bankruptcy lawyers to soak the lessee. To avoid trouble, the user should not blindly trust industry folklore, instincts or the recollections of newsletter publishers; one must review legal theories surrounding leases, contract law, bankruptcy and the like with appropriate professionals. Developing the right agreement for a particular user’s leasing situation is not easy, and that’s why competent contract lawyers can afford their so aptly yclept sharkskin suits. But lawyers know contracts, not the leasing trade. It’s up to the user to choose lessors wisely.
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