Okla. Stat. tit. 12A § 2A-303
Okla. Stat. tit. 12A, § 2A-303
Oklahoma Code Comment
The 1991 amendments substantially rewrite this section. Reference should be made to the Supplementary Commentary. The following discussion, therefore, remains to explain the section before amendment, and how the section reflects or changes prior law.
Perhaps the core provision in Part 3 of Article 2A is this section, which deals with the right of a party to a lease to transfer their leasehold interest and, in the case of the lessor, also the right of the lessor to transfer the lessor's residual interest, whether by assignment, sublease, security interest or involuntary transfer as in bankruptcy or levy by execution.
Section 2A-303(1) (amended subsection (2)) states the general rule that any interest of a party under a lease contract and the lessor's residual interest in the goods may be transferred. This provision conforms to the general policy of transferability for interests under contracts in the UCC. See UCC §§ 2-210, 9-311 and 9-318(4). Indeed, under § 2A-303(7) (amended subsection (8)), in order for a prohibition of a voluntary transfer to be effective, the language of the prohibition must be written, specific and conspicuous. This requirement, however, does not extend to a prohibition on a transfer of the lessor's residual interest or to a clause that makes a transfer an event of default (the amended section does deal with default).
It should be clear that generally a party to the lease cannot transfer what that party does not have. This accords with prior Oklahoma law. See Owen v. Allen, 36 P.2d 277 (Okla.1934) and Hughes v. Winchell, 33 P.2d 787 (1934) (bailee in possession of property for a particular purpose is not vested with such appearance of ownership as will enable him to pass title by sale as against the owner). A good illustration of the kinds of questions that may arise in this respect is Danning v. World Airways, Inc., 647 F.2d 977 (9th Cir.1981). Petroleum Investments Services owned a plane and leased it to Holiday under a lease which allocated maintenance and repair to Holiday and which provided that the lessee had no right to consent to or allow any lien on the plane. Holiday's maintenance agreement with World Airways gave World a lien on the plane for services rendered. In the litigation, the majority upheld the encumbrance since it was not asserted to impinge on the rights of the owner. That seems correct if we assume the lien was limited to the lessee's leasehold and that the prohibition in the lease did not go to a lien on that. A concurring judge thought the lien was asserted on the plane, but that the prohibition did not apply the lien related to the maintenance maintenance The dissenting judge thought the lien was asserted on the plane, and that the prohibition rendered it invalid. One might assume the majority is correct because the lessee should have no right to grant an interest in other than its leasehold, but the analysis the concurring judge used may have been just what the prohibition was aimed at. See Oklahoma Comments to §§ 2A-306 and 2A -307.
Notwithstanding the general rule favoring assignability, in recognition of the fact that a lease may involve mutual obligations where a transfer could impair one party's expectation interest, § 2A-303(1)(a) (now amended subsection (2)), in the case of a voluntary transfer, allows the parties to prohibit a transfer. This rule seems simple enough in application when the transferee is an assignee of the lessee or a sublessee, and perhaps even if the transferee is a secured party of the lessee. See the discussion of the Danning case above. But what if the transferee is a secured party of the lessor; that is, takes an express assignment of the chattel paper. 12A Oklahoma Statutes § 9-105(1)(b) defines "chattel paper" to include a writing which evidences both a monetary obligation and a lease of specific goods. This hypothetical assumes an express assignment of the chattel paper because whether the secured party could claim the chattel paper as proceeds if it had a security interest in the goods leased as inventory is questionable even without regard to the transferability issue. See DeKoven, Secured Transactions, 37 Bus.Law. 1011, at 1027-28 (1982).
In analyzing the transferability issue, § 2A-303(6) (amended subsection (4)) would appear to override any prohibition on assignment if the rents arise out of the assignor's due performance of the lease obligation. It does not seem a reasonable position to argue that the entire obligation is not performed simply because there are warranties; these are basically performed or not at delivery. Compare UCC § 2-210(2), Official Comment 3. Moreover, in Oklahoma because of a non-uniform amendment to 12A Oklahoma Statutes § 9-318(4) which, as applicable, provides that a term in any contract is ineffective if it prohibits assignment of chattel paper, it might be argued that the lease prohibition fails. However, as 12A Oklahoma Statutes § 9-201 expresses a rule deferring to provisions of other Articles, and the Official Comment to § 2A-303 evinces a clear intent to subordinate the policy of UCC § 9-318(4) to the provisions of this section where appropriate, that argument should be rejected. The amendments have a dear impact here, however. Nonetheless, in some cases the prohibition should hold, as where the lessor's obligation is not limited to delivery of the goods and there is a maintenance obligation. That would be precisely the case where the lessee might have an interest in a prohibitory clause. In the end, the practical answer to any issue in this regard is that a lessor who contemplates assigning the chattel paper not only will not agree to a prohibition on assignment but will include an express clause whereby the lessee assents to the transfer and perhaps even waives claims and defenses. See 12A Oklahoma Statutes § 9-206 and Official Comment to § 2A-303; Miller, Leases of Goods in Oklahoma - The New Rules, 41 Okla.L.Rev. (Fall 1988); and Bayer, Personal Property Leasing: Article 2A of the Uniform Commercial Code, 43 Bus.Law. (August 1988).
Nonetheless, as lease receivables are common collateral, some secured lenders have argued that the lessor's interest should be pledgeable without the ability of the lessee to contractually preclude the transfer. This position also is argued for the residual interest on the basis the two interests must be treated together. However, any position that would invalidate entirely such contractual preclusions as to security interests given by the lessor clearly goes too far in at least some respects. See Harris, The Rights of Creditors Under Article 2A, 39 Ala.L.Rev. 803, 853 (1988). The amendments primarily address this issue. See amended § 2A 303(3) and (4).
Section 2A-303(1)(b) deals with voluntary transfers that have not been prohibited by agreement and with involuntary transfers. An involuntary or voluntary transfer is effective unless the transfer materially changes the duty of or materially increases the burden or risk imposed on the other party to the lease contract and that party within a reasonable time after notice of the transfer demands that the transferee (a) cure or provide adequate assurance of cure of any default (other than one arising from the transfer), (b) compensate or provide adequate assurance of compensation for any loss resulting from the transfer, (c) provide adequate assurance of future due performance, and (d) assume the lease, and the transferee fails to comply. The obvious application of this provision is in bankruptcy, or where either the lessor or the lessee assigns all their rights or the lessee subleases. A not so obvious application is with respect to creditors of the lessor. The amendments drop this structure in favor of other remedies. See § 2A-303(5).
Assume again a security interest granted in the chattel paper and the lessor's residual interest. It would seem relatively unlikely that this transfer would materially change the duty of or materially increase the burden or risk imposed on the lessee since the lessor still will be obligated to perform. Moreover, the lessee has a remedy for any insecurity resulting from the transfer under § 2A-401. See Hams, The Rights of Creditors Under Article 2A, 39 Ala.L.Rev. 803, 840-854 (1988). Nonetheless, such situations perhaps are not impossible to contemplate. Again the practical answer seems to be that a lessor contemplating use of this type of collateral ought to obtain a consent to the assignment, or to assignments generally, to diffuse a potential application of §2A-303(1)(b). A seemingly harder case is a judgment creditor of the lessor which garnishes the lessee as to rent payable. But that creditor should not be able to obtain the rent in a circumstance where obtaining these funds would impair the lessor's ability to perform, since in those circumstances the lessee could force the creditor to guarantee the lessor's performance. Thus practically the rents should only be available under circumstances where the lessee really does not care who they are paid to.
Turning to creditors of the lessee, subjecting the lessee's leasehold interest to a security interest may not pose any threat to the lessor. If it is perceived to pose a threat, - the lessor may, and should, control the matter under § 2A-303(1)(a), particularly since if no prohibition or due on encumbrance clause is placed in the lease, if the lessee defaults on the secured transaction, the secured party will dispose of the leasehold interest and whomever purchases that interest may pose a much different situation than existed when the leasehold was merely collateral. It is not clear whether the purchaser from the secured party might be able in such a case to argue that the lessor should have acted when the security interest attached and that no demand now is effective. On the other hand, a secured party lending on a lessee's leasehold interest alone, if that is wise as opposed to also obtaining a subordination of the lessor's title, would be wise to obtain the lessor's consent before the loan to both the attachment of the lien and its enforcement. A fair amount can be learned here from the real estate experience, even if not all of it can be applied because of the difference in importance and structure of the transactions. See N. Penney, R. Broude and R. Cunningham, Land Financing 775-785 (3rd ed. 1986). Now see, amended § 2A-303(3) and (4).
The real issue in this context perhaps is whether a due on encumbrance clause will work if the lessee's interest is seized by a judgment creditor. An argument can be made the answer is no by way of implication from the fact only a voluntary transfer may be prohibited, and from the statement that a transferee after demand need not cure a default arising from the transfer. On the other hand, since one cannot cure a default that equates with the transfer itself, that statement may only say the obvious and the general principle of Article 2A in favor of freedom of contract perhaps should control unless a clear expression otherwise exists. In the end, a practical answer would seem to be that the levying creditor (or perhaps the judicial sale purchaser) would have to guarantee the. lease if the lessor made a justified demand, and that consideration should make the issue disappear. The reason is, if the lease is a good one for the lessor, it is unlikely to be of interest to a creditor of the lessee but, if nonetheless it is of interest to a creditor, the lessor is unlikely to object to the transfer. If the lease is a valuable one for the lessee so a creditor is interested in it, that interest should assure the lessor that the lessor will realize its bargain. The amendments specifically cover the default matter.