Lenders, Be Wary When Extending Credit on Rental Income Stream
- Friday, June 12, 2015
By: Alison Rind; Lerch, Early & Brewer (Maryland, USA - TAGLaw)
A recent 7th U.S. Circuit Court of Appeals case reminds lenders that it is incumbent upon the lender to verify the income stream before extending credit based on rental income. In Wells Fargo Equipment Finance Inc. v Titan Leasing, Inc., the bank extended non-recourse credit (a loan secured only by collateral) to a manufacturer of locomotives relying on the income stream from a specific lease executed by the borrower and its lessee for a locomotive. The borrower presented a fully executed copy of the lease to the bank as evidence of the income stream. The borrower warranted in the loan documents that the locomotive was delivered and accepted by the lessee and that the lessee acknowledged the locomotive’s receipt and acceptance.
Despite these warranties, the lessee returned the locomotive for repair during the loan closing because it was damaged during delivery. The lessee rejected the locomotive after it was returned several months later, and never made a payment on the lease. While the bank took possession of the locomotive to recover the amounts owed, it also sued the borrower alleging breach of warranties under the security agreement—namely, that the borrower’s representation and warranty that the locomotive was received was untrue.
Read the article in full at, "Lenders, Be Wary When Extending Credit on Rental Income Stream."
This article originally appeared in Lerch Early's Commercial Lending Bulletin. To subscribe, visit http://www.lerchearly.com/publications/7.