LEASING LAW By Dominic A. Liberatore Unraveling the Risks of Bundling F INANCING CONTRACTS that include some combination of equipment, services, supplies, consumables and software (collectively, “bundled solutions”) are an industry hot topic. However, this financing product presents some unique risk and operational challenges to third-party lenders. Is this type of lending right for your company? This article will explore some key considerations. ment for equipment financing and re-lated services, but that explicitly refers to a stand-alone service agreement, is not truly a bundled solution, even though it shares some similar optics (for example, the customer is often unaware of the break out of the equip-ment use and service components of the single payment owing under the cost per copy agreement). The key distinctions are that there is a sepa-rate service agreement and separate cost-per-copy agreement, which latter agreement does not contain any obli-gations (service or otherwise) from the payee/creditor to the customer/debtor. Most bundled solutions agreements look very little like leases in terms of structure, content or even page count. They are often very lengthy, with some more than 100 pages long. A large por-tion of such agreements relate to the details of the underlying equipment and related services and software be-ing supplied rather than industry standard equipment leasing terms. This is because end-users generally do not view these arrangements as leases but instead as service agreements with equipment included. From an internal resource perspective, reviewing and processing these agreements is con-siderably more cumbersome than tra-ditional leases. Further, there is often little ability to negotiate them and thus funding sources are forced to rely more heavily on the vendor. These solutions can make a great deal of sense from the end-user’s per-spective by providing an all-in solution. They also make sense to equipment vendors that make a fair amount of profit on the equipment, services and support. The value proposition for a Financing bundled solutions has been a popular ELFA Legal Forum ses-sion topic for a number of years and has given rise to a number of industry articles. Each has generated spirited discussions. Once largely the domain of captive finance subsidiaries, many vendors and end-users are now asking their funding sources to consider en-tering into this niche area by taking an assignment of the receivables arising from bundled solutions agreements. A recent Equipment Leasing & Fi-nance magazine article by Robert Ihne (March/April 2014 edition) focused on certain important legal considerations when taking an assignment of a bun-dled solution. This article will focus on some key risk factors inherent in offer-ing the product itself. Overview of Certain Risks and Operational Considerations Based on informal polls taken during recent ELFA Legal Forums, few third-party funding sources are doing this type of lending on any systematic basis. Bundled solutions can present a very arduous and potentially risky proposi-tion for funding sources. Frankly, apart from captive subsidiaries, this area is not for the faint of heart. At its core, a bundled solution is one in which there is a single agreement be-tween an equipment vendor and end-user providing for one total solution for the supply of equipment and rendering of ongoing services, supplies and/or software. There is not a separate lease distinct from the service agreement. From a traditional equipment financing perspective, this raises huge red flags. By way of contrast, a cost-per-copy agreement that has one bundled pay-32 MAY/JUNE 2015 EQUIPMENT LEASING & FINANCE MAGAZINE funding source can be more nuanced but would include vendor “lock-in” and interest and fee income. It is not at all clear that bundled solutions agreements constitute chattel paper under the Uniform Commercial Code (UCC). To the extent not deter-mined to be chattel paper, such agree-ments would not obtain the benefits given to chattel paper, including the super-priority relating to possession of the original chattel paper (which would trump a prior UCC-1 filing). Hence, any assignees of bundled solutions would be well advised to file a UCC-1 against the originating vendor and then obtain UCC searches and, as needed, a lien waiver or subordination from cred-itors holding prior blanket liens. Given that end-users do not gener-ally view these arrangements as leases, they often will not accept traditional “hell or high water” lease language in such agreements. To the end-users, in-herent in the total solution concept is that they would not in fact be obligated to make payments if the equipment and/or service and supplies are not performing as agreed. Indeed, service level agreements and representations abound in these agreements. Further, even if the end-user is amenable to agreeing that the pay-ment obligations are absolute and un-conditional (i.e., a hell or high water obligation), it is by no means certain that a court would enforce such pro-visions. The concept of hell or high water obligations essentially arose to reflect that passive equipment lessors who had no role in selecting the equip-ment or maintaining same, but instead were merely funding sources, should be allowed to have certainty that the