Copyright (c) 1999 University of Wisconsin Law School
Wisconsin Law Review
COMMENT: BROTHERS AT ARM'S LENGTH: U.C.C. ARTICLE 2A, CAPTIVE FINANCE COMPANIES,
AND THE CLOSE-CONNECTION DOCTRINE
1999 Wis. L. Rev. 1051
Matthew A. Smith *
Suppose that BigCopy Corporation agrees to lease a copy machine to Bill's Copy Shop. In the majority of states the lease agreement would be governed by Article 2A of the Uniform Commercial Code. 1 Under Article 2A, if the copy machine is defective in breach of warranty, Bill's Copy Shop may withhold lease payments from BigCopy Corporation. 2
Suppose, however, that BigCopy Corporation would like a third party to finance all of its credit-related transactions. BigCopy Corporation creates BigCopy Credit, a legally distinct but wholly owned subsidiary. BigCopy Coporation then sells the copier to BigCopy Credit, which in turn leases the copier to Bill's Copy Shop. Under emerging interpretations of Article 2A, if the copy machine is defective in breach of warranty, BigCopy Credit may nevertheless collect lease payments even though it is wholly owned by BigCopy Corporation.
The latter trilateral transaction is called a "finance lease" under Article 2A. 3 The "supplier" or "vendor" is BigCopy Corporation, the "finance lessor" is BigCopy Credit, and the "finance lessee" is Bill's Copy Shop. The vendor supplies the equipment to be leased, selling it to the finance lessor. The finance lessor provides the cash to buy the equipment, and allows the finance lessee to pay rent in installments. The finance lessee does not have to purchase the equipment outright, but will effectively pay interest over the term of the lease.
Article 2A ...
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