For equipment leasing and finance professionals who operate in multiple states, keeping abreast of sometimes obscure laws and regulations in each state can be a great challenge. To that end, there are two unique and somewhat obscure laws on the books in New Jersey of which industry members should take note. If not complied with, these laws could potentially have a devastating effect on a New Jersey portfolio and one’s bottom line.

New Jersey’s Unique Filing Requirements for UCC Records

Last year, New Jersey enacted a law which revamped some of the basic filing requirements for UCC records. While the intent of the law was to address the perceived growth in fraudulent filings, it unfortunately applies to all filings with potentially devastating effects for the unsuspecting secured creditor. Given that the law is relatively new (May 2015) and that it only applies in New Jersey, many creditors may be unaware of its requirements and thus jeopardizing their liens in collateral.

In short, the new law revised several provisions of Article 9. The most significant of those revisions for the equipment leasing and finance industry were to sections 12A:9-502 and 12A:9-516(b).

First, New Jersey now requires that a financing statement list the name of the secured party (or its representative), “which discloses the identity of the secured party or representative”. See N.J. Stat. §12A:9-502(a)(2). In other words, a filer must ensure that the name listed in the filing for the secured party or its representative identifies the actual party. Failure to do so could render the filing ineffective. To that end, best practices would be to use the actual legal name or a registered (in New Jersey) trade name. Unless the trade name is registered in New Jersey, it should not be used because it can be argued that it does not identify the secured party or its representative and thus renders the filing ineffective.

Second, not only must the financing statement properly indicate the collateral covered (a topic in and of itself), but under the new law, it must also indicate that the collateral falls within the scope of Article 9. See N.J. Stat. §12A:9-502(a)(3). While of course competent counsel should be consulted, suggested language is as follows: “all described collateral herein falls within the scope of Article 9 of the Uniform Commercial Code (as adopted by the State of New Jersey) pursuant to N.J. Stat. §12A:9-102 and §12A:9-109” As with the “actual name” requirement above, failure to properly comply with this new requirement could also render the filing ineffective.

The new law became effective May 11, 2015, which means any filings on or after that date must comply with these requirements (and secured creditors should consult counsel and consider amending any post-5/10/15 filings that do not comply).

It is critical to remember that failure to comply with these requirements could result in the filing being refused and rejected. Moreover, even if a non-compliant filing is accepted, it may be deemed ineffective as a matter of law. If that happens, the secured creditor’s lien in the subject collateral may be deemed unperfected which comes with a whole host of potential negative consequences, including subsequent creditors and bankruptcy trustees taking priority in the collateral. Indeed, this is likely to be a fertile area for New Jersey bankruptcy trustees trying to attack Article 9 liens.

In addition, in December 2014, new administrative rules were adopted, including, effective July 1, 2015, all UCC records must be electronically filed. See N.J. Admin. Code §17:33-2.9. We presume in today’s day and age, most creditors as a matter of course file electronically, but it should be noted that whereas in 48 states electronic filing is optional, New Jersey is now the second state to mandate it (Colorado being the other).

Secured creditors should also take note that electronic filing does not mean immediate filing. Under the new administrative rules (N.J. Admin. Code §17:33-2.4(a)(4)), the file date assigned to an electronically filed UCC record is the “work day” when the computer system analyzes the filing for compliance with filing requirements. For example, if July 4th was on a Monday and you filed at 5:05 p.m. the Friday before, the official time of filing may be as late 5:00 p.m. the following Tuesday.

In sum, in filing UCC records in NJ, creditors should be careful to:

1. List their actual legal name or their registered (in New Jersey) trade name (or that of their representative handling the filing);
2. Include language that the collateral falls within the scope of Article 9;
3. Make sure to electronically file; and
4. Recognize, and plan accordingly, that a filing may not be deemed filed until days later.

The New Jersey Consumer Protection Leasing Act

While on the topic of unique New Jersey laws, equipment lessors who lease motor vehicles in New Jersey should take note of a somewhat obscure and unique – but nonetheless very important – New Jersey law called the New Jersey Consumer Protection Leasing Act (N.J. Stat. §56:12-60, et al) (the “Leasing Act”). The Leasing Act has been on the books in New Jersey for some time, but it has been our experience that many lessors are not familiar with it and thus, may not always comply with the law. The title of the Leasing Act is misleading because it applies not only to consumer transactions, but to commercial ones as well; and indeed, even to substantial commercial transactions. This makes New Jersey’s “consumer” Leasing Act materially different from most “consumer” laws around the country. Unless lessors structure their deals to avail themselves of one of the exceptions discussed below, the Leasing Act subjects lessors to onerous statutory requirements and exposes them to liability and defenses for failure to comply with such requirements.

Thankfully, due to a strong lobby, there are a number of substantial exceptions to the Leasing Act. For example, the Leasing Act does not apply to a “fleet lease”, a “fair market value commercial lease”, a “TRAC lease”, or a lease with a nominal purchase option. See N.J. Stat. §56:12-61 (where the definition of “Lease” excludes the foregoing ).(1.) Thus, the Leasing Act applies to any commercial lease with an option for a sum greater than a nominal value, but less than fair market value, and which is not a fleet lease or a TRAC lease.

Where the Leasing Act applies to a lease transaction, the lease documents must include many specific disclosures similar to those required under the federal consumer leasing laws, and must include a provision entitling the lessee to at least one opportunity to cure before the lessor may enforce its remedies.

Finally, it should be noted that if a lessor enters into three or more applicable leases per year, the lessor also needs to be a licensed dealer in New Jersey. See N.J. Stat. §56:12-61 (definition of “Leasing dealer”).

In sum, when leasing motor vehicles in New Jersey – even six and seven figure commercial transactions – the Leasing Act and the exceptions to it, should be carefully considered in structuring deals.

Endnote:

(1.) A “TRAC” lease is as defined in the Internal Revenue Code, 26 U.S. Code §7701(h) (see N.J. Stat. §56:12-61 where the definition of “TRAC lease” defers to the IRC). However, in essence it is a lease where the parties estimate the residual value of the leased equipment. At the conclusion of the lease term, the leased equipment is either sold or appraised. If the value is less than that estimated by the parties, the lessee must pay the shortfall as additional rent. If the value is greater than the parties had estimated, the surplus is often refunded to the lessee, as a rent rebate. A “fleet lease” is defined as a lease in which the vehicles are to be used for business or commercial purposes and where the lease is for at least two vehicles with an option for at least one addition the vehicle, or a lease for five vehicles or more. See N.J. Stat. §56:12-61 (definition of “Fleet lease”).