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Advanta Bank Corporation v. Omne Pacific Ltd.

A-5400-02T3 (N.J. Super. App. Div. 2004) (Unpublished)

LEASES; DAMAGES—An equipment leasing company has an obligation to mitigate its damages when the lessee defaults and the resulting damages may be measured by taking into account the price at which a third party vendor has agreed to repurchase the leased equipment upon such a default.

A gas station operating under a corporate structure leased an ATM. Under the agreement, the gas station was to pay $269 per month, while the company marketing the ATM was to pay the gas station $264 per month derived from advertising fees. Therefore, the gas station’s net outlay each month for the machine was to be only five dollars. The marketing company also had an agreement with a financing company to provide lease financing for the marketing company’s customers. Under this arrangement, the financing company bought the ATM from the marketing company and then leased it to a customer (in this case, the gas station). The agreement between the financing and marketing companies also provided that if the gas station defaulted on the lease, the marketing company would repurchase the ATM from the financing company at a certain price based upon the length of time the machine had been in the customer’s possession.

After the gas station had the ATM for approximately twelve months, the marketing company stopped making payments to the gas station. Therefore, the gas station stopped paying its lease because it could not afford to make the lease payments without the marketing company’s payments. This resulted in the leasing company bringing suit against the gas station to recover the balance due under the lease.

After a bench trial, the lower court found the gas station liable under the lease, but it also found that the leasing company had not complied with its duty to mitigate. According to the lower court, the leasing company essentially had a duty to repurchase the ATM from the gas station, knowing the gas station could not make payments without first receiving payments from the marketing company. In addition, no effort was made to find someone else to take the machine. When the gas station notified the leasing company and said “take the machine, I can’t pay you,” the company should have acted immediately to mitigate its damages and to reclaim the machine.

The Appellate Division affirmed the lower court’s holding that the leasing company had a duty to mitigate. It also upheld the way the lower court determined how much the gas station owed. The lower court looked at the repurchase agreement between the leasing and marketing companies, which set forth what the marketing company would have had to pay if there was a default. That agreement provided that if the gas station defaulted during the second year of the lease, the marketing company would repurchase the equipment for ninety percent of its original cost. Under this analysis, each court ruled that the gas station was liable for only ten percent of the value of the machine.

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