## Facts

- Samey A. Jawad (debtor), doing business as International Auto, sought to obtain an air-conditioned modular office building from a third-party vendor.
- Jawad entered into a “business equipment lease” structured as a finance lease with Michael R. White & Associates (White) (creditor/lessor), under which White would buy the modular office from the vendor and lease it to Jawad for 60 months.
- The transaction contemplated that White would pay the vendor in two installments: $17,000 upon execution of the lease and $19,805 after completion and delivery of the modular office to Jawad.
- The lease payment schedule required Jawad to make monthly payments over 60 months totaling nearly $79,000.
- Although the lease stated that risk of loss would shift upon delivery, a separate addendum treated the equipment as “accepted” when the lease was signed rather than when the modular office was delivered.
- White paid the initial $17,000 installment, but the vendor never delivered the modular office to Jawad, and White never made the second installment payment.
- Over time, through Jawad’s payments and related recoveries tied to the failed vendor transaction, White received almost $24,000 in total—more than White’s $17,000 initial outlay.
- Despite the non-delivery, White asserted a claim in Jawad’s later bankruptcy case for the remaining lease payments, plus interest and attorneys’ fees—seeking a total recovery that would substantially exceed its original advance.
- Jawad objected to White’s claim, arguing that enforcing the lease payment stream after total non-delivery (especially given the addendum’s “acceptance upon signing” language) was unconscionable.
- White argued that the documents shifted the risk of non-delivery to Jawad and therefore required Jawad to pay the lease as written even though the modular office never arrived.
- The bankruptcy court disallowed White’s claim, and White appealed.

## Issues

1. Whether a finance lessor may enforce the remaining stream of lease payments (and related charges) when the leased goods were never delivered, based on an addendum deeming the goods accepted upon signing.
2. Whether the bankruptcy court properly disallowed the lessor’s claim as unenforceable under applicable nonbankruptcy law due to unconscionability arising from total non-delivery and the lessor’s attempt to obtain a large return after recouping its advance.

## Decision

- The Bankruptcy Appellate Panel affirmed the bankruptcy court’s order disallowing White’s claim.
- The Panel agreed that enforcing the lease terms to require Jawad to pay the full rental stream despite never receiving the modular office was unconscionable on these facts.
- The Panel rejected White’s attempt to use contract language deeming “acceptance” at signing to impose on Jawad the entire loss from the vendor’s non-delivery while allowing White to obtain a substantial gain over its initial advance.

## Legal Principles

- In bankruptcy, a claim is disallowed to the extent it is unenforceable against the debtor under applicable nonbankruptcy law (including state-law defenses such as unconscionability).
- In a finance-lease setting, risk-of-loss and “hell-or-high-water” type payment obligations generally presuppose a transaction in which the lessee actually receives the goods and the risk shift operates in a commercially reasonable way.
- Contract provisions that deem acceptance before delivery may be refused enforcement where total non-delivery occurs and enforcing the payment obligation would produce an unfair result inconsistent with the basic exchange contemplated by the parties.
- Where a lessor has already recouped its actual outlay in a failed delivery transaction, a claim seeking additional profit-like recovery for the entire lease term may be disallowed as unconscionable.

## Conclusion

The BAP affirmed disallowance of the finance lessor’s claim because the modular office was never delivered, and enforcing an “acceptance upon signing” addendum to require the debtor to pay the entire lease stream—after the lessor had already recovered nearly $24,000 on a $17,000 advance—was unconscionable and therefore unenforceable under applicable law.


In re Jawad, 2006 WL 6810985 (2006)