Buyer Beware: The Hidden Dangers of Bus and Copier Lease Financing

School officials often encounter vendors offering seemingly simple financing packages to assist schools with paying for buses, copiers, or other school equip­ment. Those financing packages should be evaluated carefully because they may contain unfavorable or illegal provisions.

A financing package typically uses a lease purchase agreement (“LPA”) or other form of lease financing with a third-party financing company. Under an LPA, a school avoids creating a debt obliga­tion by pledging general fund dollars to make lease payments, subject to the school’s right to annually ap­propriate funds to support a current “operating” obligation. While title to the equipment usually passes to the school upon delivery, the financing company retains a security interest in the equipment and may repossess it if the school fails to appropriate money to make the lease payments.

The proposed financing package typically will include a request for insurance certificates, an equipment-acceptance certificate and, if issued as a tax-exempt obligation, an IRS Form 8038-G or 8038‑GC. Some packages also include a sample board resolution or an “authorization certificate” where the signing individual represents that he or she has board authority to enter into the financing contract.

We strongly recommend that our clients avoid these financing packages presented by equipment vendors because the financing documents frequently contain problematic provisions. In a single financing contract proposal, we routinely encounter the following problems:

• closing fees, document processing fees, and other “hidden” fees;
• terms allowing the financing company to unilaterally increase monthly payments with­out the school’s consent;
• terms requiring the school to pay the financing company’s attorney fees and collection fees in the event of a default or dispute;
• terms requiring the school to in­demnify the financing company for the company’s losses, which is illegal in Michigan;
• waiver of the school’s right to a jury trial;
• waiver of the school’s rights and remedies, such as the ability to revoke acceptance of la­tently defective equipment;
• terms requiring that in the event of a default, the financing company may: (1) charge the school harsh late fees; (2) charge the school de­fault interest; (3) repossess the equipment; and (4) require the school to continue making monthly payments;
• personal liability on the school official executing the contract if the school defaults;
• vendor service charges (e.g., copier maintenance fees) rolled into the lease pay­ments that obligate the school to make the payments to the financing company, even if the service vendor goes out of business;
• marketing gimmicks that allow the financing company to collect a school official’s contact in­formation and send telemarketing calls or spam mail; and
• provisions that trigger a default for inconsequential or minor issues, such as a spelling error in the school’s legal name (thus entitling the financing company to the cumulative remedies discussed above).

Since vendors and financing companies often are not familiar with the laws applicable to schools, their proposed lease-financing structure may violate federal tax law or result in a lack of proper board authoriza­tion under Michigan law. Those errors typically are discovered after legal counsel reviews the financing package, which is frequently late in the process. This result may cause significant delays. To exacerbate the problem, most financing companies are reluctant to change the terms of their financing documents to re­solve the issues described above, leaving school officials with a difficult choice: find alternative financing with a corresponding delay in equipment delivery or sign an unfavorable, and perhaps unlawful, agreement.

To avoid the common pitfalls associated with equipment financing, we recommend contacting a Thrun Law Firm finance attorney to discuss financing options at least six weeks before the anticipated equipment delivery date. Thrun Law Firm frequently assists schools with soliciting bids from local banks to finance equipment using an installment purchase agreement. The documents are prepared by our office, contain favorable terms, and are widely accepted by local financial institutions throughout Michigan.