When our client, a large manufacturer of semiconductor chips, was faced with a multi-million dollar claim for breach of a purchase option under an equipment lease, Morris James employed a cost-effective strategy that allowed for a prompt favorable resolution.
Near the end of a master lease on December 31, 2015, our client (“Lessee”) exercised its option to buy leased equipment from its Lessor. The equipment’s purchase price was set and paid by Lessee on February 17, 2016. By the end of the lease, Lessee had paid nearly $65 million to lease the equipment for three-and-a-half years.
Lessor nevertheless filed an action in Delaware, seeking over $3.5 million from Lessee (or nearly 73% of the equipment’s purchase price) based on Lessee’s alleged 45-day delay in paying the purchase price. Lessor sought liquidated damages for double the rent, late-charge interest on the alleged past-due purchase price, return of the equipment, and attorneys’ fees.
When a lessee exercises a purchase option in an equipment lease, the terms of the purchase control the parties’ relationship. The former lessor becomes a seller of the equipment, the former lessee becomes the buyer, and as such the seller no longer has rights as a lessor to charge rent for the buyer’s continuing possession of the previously-leased equipment or demand the equipment’s return due to a late payment of the purchase price. The only exception to this rule is an agreement in which the terms governing the purchase option expressly provide for a right to charge rent or the equipment’s return in connection with any period between the expiration of the lease and payment of the purchase price. Absent such an express term, if the payment of the purchase price is untimely or past due, awarding interest on the purchase price fully compensates a seller who awaited payment.
Lessee believed that Lessor’s action was governed by these established legal principles, and presented a discrete legal question: since Lessee timely elected to purchase the equipment, could Lessor still recover rent and enforce other remedies related to the lease of the equipment if Lessee’s payment of the purchase price was past due, or instead, was Lessor limited to seeking an award of interest if the payment of the purchase price was past due?
To obtain a prompt answer, and to avoid the costs of discovery and unnecessary attorneys’ fees, Morris James proposed to both Lessor’s counsel and the Complex Commercial Litigation Division of the Superior Court to cross-move for partial summary judgment. Morris James posited that the Superior Court’s answer to this discrete question would narrow Lessor’s potential damages from millions of dollars related to the lease of the equipment, to thousands in interest for any past-due payment of the purchase price. This answer would in turn compel a resolution of Lessor’s action. The Superior Court and Lessor agreed to Morris James’ proposal.
On December 22, 2016, the Superior Court granted Lessee summary judgment that the lease was extinguished and a sales contract to purchase the equipment arose. Thus, Lessor was not entitled to rent or repossession of the equipment under the purchase option in the lease. Instead, if Lessee’s payment of the purchase price was late, Lessor was limited to damages equal to late-charge interest, and attorneys’ fees solely for prosecution of its late-charge interest claims.
As expected, faced with the economic constraints of discovery or an interlocutory appeal, and a well-reasoned decision that limited recovery to thousands of dollars, not millions, Lessor opted to settle for a de minimis amount. Our client was grateful not only for this result, but also for Morris James’ cost-effective strategy which brought this action to a quick and favorable resolution.