The use of a stipulated loss value (SLV) formula to measure a lessor’s damages resulting from lessee defaults in equipment lease contracts will be debated during a dynamic session at the Equipment Leasing and Finance Association (ELFA) Legal Forum May 7 in Washington, D.C. Presenters will make the case from both lessee and lessor perspectives. A key question is whether current industry formulae are enforceable in court or are merely unenforceable penalties.

Appearing for the lessee in this mock trial will be Paul Bent, senior managing director of The Alta Group, and Elizabeth Fella, partner, Quarles & Brady; and, for the lessor side will be Richard J. Tannebaum, partner, Reed Smith, and Lisa M. Moore, senior counsel, PNC Equipment Finance. Serving as the judge for the trial will be Debbie Devassy Babu, partner, Askounis & Darcy. Time permitting, the audience will serve as the “jury” in the case by voting and deciding the fate of SLVs in default situations.

This interactive break-out session, “SLV on Trial: Issues on Enforceability” from 4 to 5 p.m. on May 7 will also discuss court holdings related to SLV, specifically the Tidewater bankruptcy case with its implications for how SLV damage calculations may or may not be honored going forward.

The 2017 Tidewater bankruptcy case raised the issue of enforcement when this owner and operator of a large fleet of offshore support vessels (under pressure as oil prices dropped) defaulted on its lease obligations. The company’s default affected multiple lessors who had entered into sale/leaseback charter agreements on Tidewater’s vessels.

Tidewater argued that using SLV to determine the lessors’ damages on default was unfair because the Stip Loss amounts were more than double the amount of the lessors’ unpaid and undiscounted rental payments remaining in the contracts.

Although the Court ruled in preliminary proceedings that the use of stipulated loss values in this context is an unenforceable penalty, the case is nevertheless “very illuminating on the issue for equipment lessors, both in legal and in economic terms, making this timely review of the use of SLV well worth our exploration,” said Bent, who has participated in previous mock trials at ELFA conventions that were well attended. “We expect there will be lively interaction among the panelists and audience,” he added. Bent is the leader of Alta’s Legal Services practice.