Pub. 8 2017 Issue 4

www.wvbankers.org 18 West Virginia Banker By Andrew J. Kalgreen, Steptoe & Johnson PLLC A bank is planning to sell equipment collateral – either repossessed equipment taken after a borrower’s default or leased equipment that has been returned by a lessee at the end of the lease term. [In this article, the term “bank” is used as short-hand for any equipment finance company.] The proposed sale agreement includes the standard disclaimer that the bank is selling the equipment “as-is, where-is” and the bank feels confident that it does not have to worry about any mechanical or other problems with the condition of the equipment once the buyer pays the purchase price. However, two cases dealing with aircraft may give the seller reason to question its confidence. In the case of Luig v. North Bay Enterprises, Inc., the court considered a sale contract for a Bell helicopter which included both an “as-is, where-is” disclaimer and a requirement that the seller deliver an “airworthy” aircraft. After the buyer inspected the helicopter, the seller made repairs that the buyer requested and the buyer paid the sale price and accepted the helicopter. Sometime after delivery, the buyer learned that the helicopter did not comply with an FAA airworthiness directive and the helicopter’s original engine had been replaced with a non- compliant engine. The court ruled that: (a) the disclaimer terms of the sale contract disclaimed only implied warranties; (b) the terms of the sale contract regarding airworthiness constituted an express warranty that the helicopter was to be delivered in an airworthy condition; and (c) the condition of the helicopter breached the seller’s express warranties about its airworthiness. The case of McMahan Jets, LLC v. Roadlink Transportation, Inc., involved the sale of a Cessna Citation business jet. The sale contract included an “as-is, where-is” warranty disclaimer and a provision that the seller “shall deliver Aircraft … with all systems functioning normally … and in Airworthy Condition …”. Almost two years after delivery, Cessna (the manufacturer) inspect- ed the aircraft and discovered that holes had been drilled in a major structural component to accommodate a speaker system in the passen- ger cabin. Cessna concluded that, due to these holes, the aircraft was not airworthy. The court determined that the parties had allocated the risk associated with the condition of the aircraft to the buyer (a) by granting the buyer pre-pur- chase inspection rights (and if discrepancies were discovered, the right to have the discrepan- cies repaired at seller’s expense or to terminate the sale contract or to negotiate a reduction in the purchase price) and (b) by including explicit disclaimers of warranties. Essentially, the court ruled that the warranty disclaimers control. Although these cases came to different conclusions about the sale of an aircraft– one upholding the “as-is, where-is” disclaimer, the other negating it – they expose the very real difficulties that a bank could encounter when its sells any equipment (not just aircraft) and the buyer discovers previously unknown problems. If this happens and the issues go to trial, the judge must reconcile the broad disclaimer of any product warranties with both any warranty-like provisions as well as the post-delivery discovery of one or more material defects in the equipment. Most items of equipment today are complex machines (often including computerized components and related software) that are subject to significant on-going maintenance, service and inspection requirements, not only from the manufacturer, but also from government agencies (such as OSHA for commercial equipment, the U.S. Department of Transportation for trucks and trailers, the FAA for aircraft, the U.S. Coast Guard for vessels, etc.). Also, maintenance records can be voluminous and incomplete depending on the age of the equipment, the number of prior owners and operators, and the The “As-Is, Where-Is” Disclaimer – How Strong Is It?