CASES AND MATERIALS FOR
PERSONAL PROPERTY LEASES
PROFESSOR MARK BUDNITZ
Law 7418
SUPPLEMENT NUMBER ONE
SPRING 1999
TABLE OF CONTENTS
True Leases and Disguised Security Interests 1
Taylor v. Subway Equipment Leasing Corp. 3
In Re Murray 10
Jarrells v. Mr. C's Rent to Own 16
In Re Paz 22
NationsBank of North Carolina, N.A., v. Capital Associates International.
Inc. 28
NEC Technologies v. Nelson 33
BMW Financial Services, N.A., Inc. v. Smoke Rise Corporation 39
Walnut Equipment Leasing Co. v. Moreno 41
Siemens Credit Corp. v. Newlands 48
Vacation Village, Inc. v. Hitachi America, Ltd. 56
Mercedes-Benz Credit Corp. v. Lotito 58
Ghionis v. Deer Valley Resort Co., Ltd. 65
Colonial Pacific Leasing Corp. v. McNatt 71
Colorado Interstate Corporation v. The CIT Group/Equipment Financing,
Inc. 77
AT&T Credit Corporation v. Transglobal Telecom Alliance, Inc. 87
Friedland Family Enterprises v. Amoroso 92
Hollerbach & Andrews Equipment Company, Inc. v. Southern Concrete
Pumping, Inc. 97
TRUE LEASES AND DISGUISED SECURITY INTERESTS
NOTE: "Lease"is defined in Uniform Commercial Code §2A-103(j).
However, in order to determine whether a transaction will be treated as
a lease, we turn most often, not to this definition, but rather to the
definition of "security interest" in §1-201(37).
1) Laura Lawyer obtains a set of twenty computers and software for her
law firm from Acme Office Supply. The agreement between the parties is
entered into on July 12, 1996 and it provides that the law firm will pay
$3,333.33 per month for 30 months for a total of $100,000. A dispute arises
concerning the performance of the computers and payment of the monthly
amounts and the parties go to court. Although the agreement identifies
Laura as the "lessee" and Acme as the "lessor," Laura contends that the
parties intended the transaction to be treated as a sale with Acme retaining
a security interest. (In other words, Laura contends the agreement is a
"disguised" security interest," or a "lease intended for security." ) She
produces a tape recording of the parties' negotiating session which clearly
indicates both parties intended a sale with a security interest. Assuming
there is no bar to the admission of the tape, such as the parol evidence
rule (2A-202), of what relevance is evidence of the parties' intent?
2) Is there a true lease if the agreement provides that Laura has the
right to terminate at any time, and for any reason, and that upon termination
Laura will not owe anything for the remainder of the term of the lease?
3) Assume the agreement provides that Laura has no right to terminate
the lease. Can the court conclude from that fact alone that the transaction
is a disguised security interest?
4) Assume the agreement provides that Laura has no right to terminate
and as of July 12, 1996, the reasonable expectation was that at the end
of the 30 month term of the lease, the equipment would be worth $10,000.
However, due to the failure of the computers to be Y2K compliant, as of
January 12, 1999 the computers are worth $0. Is the agreement a true lease
or a disguised security interest?
5) Same facts as in #4 except on July 12, 1996 the reasonable expectation
is that the computers will be worth $0 at the end of term of the lease.
True lease?
6) Laura has no right to terminate and the lease provides that at the
end of the term Laura can become the owner of the computers by paying an
additional $500. True lease?
7) The lease provides that Laura is to pay for services and maintenance
of the computers as well as any taxes and insurance. She contends that
this proves the agreement is a disguised security interest because the
agreement confers indicia of ownership upon her. If this were a true lease,
according to Laura, the lessor as owner would have an expectation that
at the end of the term he would regain possession and therefore would retain
the indicia of ownership.
8) Assume that at the time of contracting the computers were expected
to have a value of $30,000 by the end of the lease term. However, the lease
provides that Laura is obligated to renew the lease for another 30 months
for $1,00 per month. Is this a true lease?
9) Assume that at the time of contracting, the computers were expected
to have a value of $5,000 at the end of the lease term. The lease granted
Laura the option to renew the lease for 6 months for $800 per month. Is
this a true lease?
10) At the time of contracting, the computers were expected to have
a value of $30,000 by the end of the lease term. The lease contained no
option to renew or to become the owner, and the lessee was not required
to renew the lease. Nevertheless, at the end of the lease term, Laura renewed
for another 30 months at $1,000 per month. Was the lease a true lease at
the end of the first term? Has the lease changed its character and become
something else at the end of the second term?
11) Does the scheme employed by §1-201(37) make sense in the case
of new equipment employing advanced technology? Can the parties make any
reasonable estimate of the "remaining economic life" of advanced computer
systems? An unanticipated breakthrough next month may make equipment purchased
in December obsolete by next May. On the other hand, the Boeing 707 was
anticipated to have a useful life of twelve years, but actually had a much
longer one.
TAYLOR v. SUBWAY EQUIPMENT LEASING CORP.
209 B.R. 482 (Bankr. S.D. Ill. 1997)
KENNETH J. MEYERS, Bankruptcy Judge.
This matter is before the Court on cross-motions for summary judgment
on Banterra Bank's Complaint to Determine Extent, Validity, and Priority
of Liens. The issue before the Court is whether an agreement between the
debtor and the defendant constitutes a "true lease" or whether it is, in
fact, a disguised security agreement pursuant to s 1-201(37) of the Illinois
Uniform Commercial Code.
FACTS
The debtor in this case, Susan Elaine Taylor, owned several Subway Sandwich
Shops in southern Illinois. In August 1993, she entered into an agreement
with the defendant, Subway Equipment Leasing Corporation ("Subway"), to
"lease" equipment valued at $26,009.75 for her restaurant in Herrin, Illinois.
Pursuant to the terms of the agreement, debtor, in addition to making a
security deposit of $2,500, was required to make monthly payments of $702.27
for a term of 60 months. Although Subway reserved the right to terminate
the contract in the event of default, there was no provision that expressly
allowed the debtor to terminate the agreement. The only way the debtor
could be free of the obligations of the "lease" prior to expiration of
the sixty month term was to purchase the equipment. Attached to the agreement
was a "buyout calculation schedule" which indicated the buyout option price
for the equipment after each month of the lease. According to that schedule,
at the expiration of sixty months, the debtor had the option to purchase
the equipment for $2,600.97. [FN1] The contract specifically provided that
the debtor was entitled only to the exclusive use of the property and that
title to the equipment would remain in Subway unless and until the debtor
exercised the purchase option. Subway Lease, p 16.
FN1. The contract provided that Ms. Taylor could apply her security
deposit against this amount so, at the conclusion of the "lease," she could
own the equipment by paying an additional $100.97.
On February 7, 1994, the debtor executed a promissory note and security
agreement in favor of the plaintiff, Banterra Bank ("Banterra"). In connection
with that transaction, the debtor granted Banterra a security interest
in the equipment that was the subject of the Subway agreement. At this
time, the debtor had not exercised her option to purchase the equipment
from Subway. Banterra *484 subsequently filed a UCC-1 financing statement
with the Illinois Secretary of State evidencing its security interest.
On February 28, 1996, the debtor filed for Chapter 7 bankruptcy protection.
Banterra then filed this adversary proceeding to determine the validity
and priority of its lien. The parties agreed to have the subject equipment
sold and the proceeds placed in the Court registry pending the resolution
of this adversary. It is undisputed that the equipment was sold to a third
party for $14,058.47.
Banterra argues that the contract between the debtor and Subway is not
a "true lease," but is, rather, a security agreement subject to UCC filing
requirements. The Bank maintains that because Subway failed to file a UCC
financing statement perfecting its interest in the equipment, [FN2] its
lien is superior to that of Subway's and, therefore, it is entitled to
recover the proceeds of the sale. Subway, on the other hand, argues that
its agreement with the debtor is, in fact, a lease which was violated by
the debtor when she granted the Bank a security interest in the equipment.
Subway maintains that the debtor actually had no ownership interest in
the property to give to Banterra and that the Bank's lien, therefore, is
void.
FN2. The agreement between the debtor and Subway authorized Subway to
file a financing statement if it wished to do so. Paragraph 17 of that
contract specifically states: "It is understood between the Lessor and
the Lessee that this agreement is regarded by them as a true lease and
not a contract for security[,] and the reservation by the Lessor of the
right to file a financing statement is solely for the purpose of allowing
it to maintain on record a notice of its right in the equipment." Subway
Lease at p 17.
DISCUSSION
It is well established that the existence, nature, and extent of a security
interest in property is controlled by state law. In re Powers, 983 F.2d
88 (7th Cir.1993); In re Meeks, BK No. 95-40734 (Bankr.S.D.Ill.Dec. 15,
1995). The standard for determining whether a transaction constitutes a
"true lease" or a security agreement is set forth in Section 1-201(37)
of the Illinois Uniform Commercial Code. Pursuant to that provision, [w]hether
a transaction creates a lease or a security interest is determined by the
facts of each case; however, a transaction creates a security interest
if the consideration the lessee is to pay the lessor for the right to possession
and use of the goods is an obligation for the term of the lease not subject
to termination by the lessee; and * * * * * *
(d) the lessee has an option to become the owner of the goods for no
additional consideration or nominal additional consideration upon compliance
with the lease agreement.
810 ILCS 5/1-201(37) (emphasis added).
In any analysis under s 1-201(37), the intent of the parties is no longer
the primary consideration. [FN3] Rather, the focus is on the "economic
realities" of the transaction. Meeks at 4; In re Lerch, 147 B.R. 455, 460
(Bankr.C.D.Ill.1992); William D. Hawkland et al, Article 9: Secured Transactions;
Sales of Accounts, Contract Rights and Chattel Paper s 9-102:04 (1996).
Under this approach, the lease will be construed as a security interest
as a matter of law if the debtor cannot terminate the lease and one of
the enumerated requirements is satisfied. Lerch at 460. If the Court determines
that the transaction is not a disguised security agreement*485 per se,
it must then look at the specific facts of the case to determine whether
the "economics of the transaction" suggest such a result. Id.; Meeks at
4.
FN3. Section 1-201(37) was amended effective January 1, 1992. The previous
version of the statute required that the agreement be analyzed in light
of the parties' intent. It stated, in pertinent part: Whether a lease is
intended as security is to be determined by the facts of each case; however,
(a) the inclusion of an option to purchase does not of itself make the
lease one intended for security, and (b) an agreement that upon compliance
with the terms of the lease the lessee shall become or has the option to
become the owner of the property for no additional consideration or for
a nominal consideration does not make the lease one intended for security.
Ill.Rev.Stat. ch. 26, p 1-201(37). Under the prior codification, the courts
adopted numerous subjective tests to discern the parties' actual intent.
However, because leases and security agreements can sometimes share common
characteristics, these "tests" often produced unreliable and inconsistent
results. For this reason, the section was amended to provide a more objective
standard for distinguishing between the two types of transactions. See
J. White & R. Summers, Uniform Commercial Code, s 30- 3(b) (4th ed.1995).
In determining whether the transaction in this case is a security agreement
as a matter of law, the first issue the Court must address is whether the
agreement is subject to termination by the debtor/lessee. While the defendant
admits that the agreement does not expressly provide the debtor with the
right to terminate the agreement, it maintains that the monthly "buyout"
provisions in the contract are the equivalent of an option to terminate
and should be construed as such. The Court disagrees.
The Seventh Circuit has issued two opinions which discuss a lessee's
right to terminate a lease under s 1-201(37). In In re Marhoefer Packing
Co., Inc., 674 F.2d 1139 (7th Cir.1982), the lessee entered into a four-year
lease of equipment. The agreement provided that at the end of the lease
term, the lessee could either terminate the contract and return the property
with no further obligation, purchase the equipment for a substantial sum,
or renew the contract for an additional four-year term. If the lessee chose
to renew the lease, it was then given the option to purchase the equipment
for one dollar at the conclusion of the term. The court, in explaining
why the Marhoefer transaction was not a security agreement as a matter
of law, stated: In our view, the conclusive presumption provided under
[section 1- 201(37) ] applies only where the option to purchase for nominal
consideration necessarily arises upon compliance with the lease (citation
omitted). It does not apply where the lessee has the right to terminate
the lease before that option arises with no further obligation to continue
paying rent. Id. at 1142-43 (emphasis added). [FN4]
FN4. In support of its reasoning the Marhoefer court quoted: It is ...
essential in order to make a conditional sale ... that the buyer should
be bound to take title of the property, or at least to pay the price for
it. Therefore, a lease which provides for a certain rent in installments
is not a conditional sale if the buyer can terminate the transaction at
any time by returning the property .... Id. at 1143 (quoting S. Williston,
The Law Governing Sales of Goods at Common Law and Under the Uniform Sales
Act s 336, p. 528 (1909)) (emphasis added).
Similarly, in Powers v. Royce Inc., 983 F.2d 88 (7th Cir.1993), the
Seventh Circuit found that the agreement in question was a "true lease,"
even though it contained an option to purchase the goods for nominal consideration
at the end of the lease term, because it allowed the lessee to terminate
the agreement after the initial two-week rental period without any further
obligation. In comparing the leases in Marhoefer and Powers, the court
noted that the Marhoefer contract resemble[d] the Royce Agreements in one
critical respect: under both agreements, the lessee was under no obligation
to make the installment payments that would ultimately allow the lessee
to exercise or refuse the option to own the goods.... In other words, [in
the Marhoefer contract], because the lessee could terminate the lease at
any time, the presence of an option to acquire the goods for a nominal
price did not convert the leases into installment sales. The same conclusion
applies to the Royce Agreements: even though the lessee [could] acquire
the goods at the end of the lease's term, the lessee [was] under no obligation
to make the payments that [would] allow him to exercise the option. Powers,
983 F.2d at 91 (emphasis added). See also TKO Equipment Co. v. C &
G Coal Co., 863 F.2d 541, 543 (7th Cir.1988) (lease found to be a "true
lease," even though it contained a buyout option, where lessee could have
returned the goods without obligation).
Reasoning from these decisions, it follows that an option to terminate
a lease differs from a buyout option in that, under a termination clause,
a lessee is free to cease performance under the contract without incurring
further obligation. In this case, the lease did not provide the debtor
with the opportunity to terminate the agreement at any time. Rather, in
order to be released from this agreement, the debtor was required to purchase
the property pursuant to the defendant's buyout schedule. She could *486
not simply return the equipment to the defendant and walk away. The lease
here was not subject to termination by the debtor and, therefore, satisfies
the first criterion for finding a security agreement under s 1-201(37).
The Court must now address the second criterion, which is whether the
option to purchase the equipment at the end of the lease constituted nominal
consideration. Unfortunately, there is no "bright line" test for determining
"nominal" consideration. Some courts have evaluated the nominality of an
option price by comparing it to the total rent to be paid. National Equip.
Rental Ltd. v. Priority Electronics Corp., 435 F.Supp. 236, 238-239 (E.D.N.Y.1977).
Still others have compared the option price to the original cost of the
equipment. Percival Constr. Co. v. Miller & Miller Auctioneers, 532
F.2d 166, 171 (10th Cir.1976). [FN5] The standard for determining nominality
in the Seventh Circuit was announced in Marhoefer where the Court held:
FN5. The court in Percival Construction adopted a "percentage test"
as its guide for determining nominality. There, the court held that an
option price that was less than 25% of the property's original value constituted
nominal consideration. 532 F.2d at 171. Similarly, White and Summers take
the position that payment of less than 50% of the predicted fair market
value of the equipment should be considered nominal. 4 J. White & R.
Summers, Uniform Commercial Code, s 30-3 (4th ed.1995). This Court declines
to adopt such guidelines. Rather, the determination of nominality shall
be made based on the facts and circumstances of each case.
[I]n determining whether an option price is nominal, the proper figure
to compare it with is not the actual fair market value of the leased goods
at the time the option arises, but their fair market value at that time
as anticipated by the parties when the lease is signed.
Marhoefer, 674 F.2d at 1144-1145. See also In re Triple B Oil Producers,
Inc., 75 B.R. 461 (Bankr.S.D.Ill.1987). [7] The parties here have stipulated
that the equipment was worth $26,009.75 at the time the lease was signed.
Further, there was evidence at the hearing on summary judgment indicating
that the projected fair market value of the equipment after 60 months would
be fifty-percent (50%) of its original value, or $13,004.88. Gilbert Stern
Aff., Supp. to Pltf.'s Mot.Sum.Judg. at 2. [FN6] Pursuant to the Subway
agreement, the debtor had the option to purchase the equipment after 60
months for $2,600.97 or approximately twenty-percent (20%) of that projected
fair market value. Banterra argues that such an option price is "clearly
nominal." The Court disagrees.
FN6. At the hearing on summary judgment, when asked whether he disputed
the valuation of the equipment contained in Mr. Stern's affidavit, Subway's
counsel stated that he did not dispute the value so much as the fact that
the plaintiff's valuation focused only on the option price at the end of
the lease and not on the other option prices that were offered to the debtor/lessee
throughout the course of the lease. In its brief Subway asserted that the
projected fair market value of the equipment at the end of the 60-month
term was the stated option price of $2,600.97. Def's Mem. Opp. Pltf's Mot.
Sum. Judg. at 7.
Section 1-201(37)(x) of the Illinois Uniform Commercial Code provides,
in pertinent part, that additional consideration is nominal if "it is less
than the lessee's reasonably predictable cost of performing under the lease
agreement if the option is not exercised." 810 ILCS 5/1-201(37)(x). This
codification of what has traditionally been referred to as the "economic
realities" test focuses on whether the lessee has, in light of all of the
facts and circumstances, no sensible alternative but to exercise the purchase
option. In re Fogelsong 88 B.R. 194 (Bankr.C.D.Ill.1988). See also 1D Peter
F. Coogan et. al, Secured Transactions under U.C.C. s 30.02[4][c][iii]
(1990). Under this test, if only a fool would fail to exercise the purchase
option, the option price is generally considered nominal and the transaction
characterized as a disguised security agreement. Fogelson at 196; 4 J.
White & R. Summers, Uniform Commercial Code s 30-3 at p. 13 (4th ed.1995).
Applying this test to the facts here, it is evident that the option price
representing twenty-percent of the equipment's projected fair market value
is not so "economically compelling" that a lessee would have no reasonable
alternative but to exercise the purchase option, and, therefore, this option
amount does not constitute nominal *487 consideration. [FN7] See Western
Enterprises, Inc. v. Arctic Office Machines, Inc., 667 P.2d 1232 (Alaska
1983) (court held that lower court finding that purchase option price in
purported lease of 20% of value of property was not nominal).
FN7. Admittedly, the similarity between the amount of the security deposit
and the amount of the final buyout is suspect. However, because the lease
reserves to the lessee the option to have the deposit returned, the Court
is constrained to find that $2,600.97 is the buyout amount rather than
$100.
Having concluded that the option price in this case is not nominal,
the Court cannot, as a matter of law, categorize this contract as a security
agreement under s 1-201(37). However, this conclusion does not necessarily
render summary judgment inappropriate. Summary judgment is proper "if the
pleadings, depositions, answers to interrogatories, and admissions on file,
together with the affidavits, if any, show that there is no genuine issue
as to any material fact and that the moving party is entitled to judgment
as a matter of law." Fed.R.Civ.P. 56; In re Stevens, No. 90-31144, Adv.
No. 91- 3061, slip op. at 2 (Bankr.S.D.Ill. Nov. 11, 1992). In this case,
there is no dispute between the parties as to the material facts. Therefore,
the Court can proceed to analyze the agreement in light of the following
factors to determine whether the economics of the transaction indicate
a security agreement rather than a "true lease": (1) whether the lessee
has the option to renew the lease or to become the owner of the property;
(2) whether the amount of rent exceeds the fair market value of the property;
(3) whether the debtor is responsible for payment of taxes, insurance and
other costs incident to ownership; and (4) whether the useful life of the
property exceeds the length of the term of the lease. In re Meeks, No.
95-40734, slip op. at 5 (Bankr.S.D.Ill.Dec. 15, 1995). See also Marhoefer,
674 F.2d 1139; In re Spears, 146 B.R. 772 (Bankr.S.D.Ill.1992).
Although the agreement in this case does not grant the debtor a renewal
option, it does grant the debtor an option to become the owner of the equipment.
Section 1-201(37) specifically provides that "[a] transaction does not
create a security agreement merely because it provides that ... the lessee
has an option to renew the lease or to become the owner of the goods...."
810 ILCS 5/1-201(37)(c) (emphasis added). In evaluating the circumstances
under which the existence of an option might create a security agreement,
the Seventh Circuit has focused on whether the lessee has the right to
terminate the agreement prior to exercising the purchase option. In Marhoefer
the court held that the inclusion of a purchase option does not necessarily
create a security agreement if the lessee also has a right to terminate
the contract at any time prior to the option arising. Marhoefer 674 F.2d
at 1143. Similarly, in In re Powers, 983 F.2d 88 (7th Cir.1993), the court
concluded that the agreement in that case was a "true lease" because "even
though the lessee [could] acquire the goods at the end of the lease's term,
the lessee [was] under no obligation to make the payments that [would]
allow him to exercise that option." Id. at 91. As explained above, the
lessee in this case did not have the right to terminate the agreement at
any time. The only way she could unburden herself from the lease obligations
was to purchase the equipment. This rigidity suggests that the agreement
in this case was not a lease but, rather, was one intended for security.
Second, the Court must consider whether the amount of rental payments
due under the lease exceeds the fair market value of the property. Courts
have generally held that "[i]f the total rental payments under the lease
equal or exceed the purchase price, then a security agreement is indicated."
1D Coogan, Secured Transactions Under U.C.C. s 30.02[4][c][v] at 30-66.
While the importance of this test has been reduced under the amendments
to s 1-201(37), it is not without relevance. Under the current version
of s 1-201(37), [a] transaction does not create a security interest merely
because it provides that: (a) the present value of the consideration the
lessee is obligated to pay the lessor for the right to possession and use
of the goods is substantially equal to or *488 greater than the fair market
value of the goods at the time the lease is entered into.... 810 ILCS 5/1-201(37)(a)
(emphasis added). Again, although the Court cannot rely on this factor
exclusively in classifying a contract as a security agreement, it is still
an important consideration in evaluating the economics of the transaction.
Here, the parties agree that the original value of the equipment was $26,009.75.
Pursuant to the terms of the agreement, the debtor was obligated to make
monthly rental payments of $702.27 to Subway for a period of sixty months.
At the conclusion of the lease, the debtor would have paid $42,136.20 for
the equipment, an amount substantially more than its fair market value.
Therefore, this, too, is indicative of a security agreement rather than
a lease.
An analysis of the third factor further indicates that the agreement
is not a lease but a security agreement. Under the agreement, the lessee
bears all costs of insurance, taxes, and maintenance for the equipment
as well as the risk of loss in the event of damage to the property. The
Court is aware that the Seventh Circuit places minimal emphasis on this
factor, having stated, in Marhoefer, that "[c]osts such as taxes, insurance
and repairs are necessarily borne by one party or the other. They reflect
less the true character of the transaction than the strength of the parties'
respective bargaining positions." Marhoefer at 1146. However, the assignment
of costs and risk in this case, when coupled with the fact that Subway
disclaimed all warranties that are generally found in a lease, is a relevant
consideration tending to show the agreement is not a "true lease." See
In re Maritt, 155 B.R. 12, 13 (Bankr.D.Idaho 1993) (lessor's disclaimer
of warranties is a relevant consideration in determining the actual nature
of the parties' agreement).
By contrast, the final factor that must be analyzed, whether the useful
life of the property exceeds the length of the term of the lease, supports
a finding that the agreement is a lease. In general, courts have held that
where the useful life of the property exceeds the term of the lease, the
agreement is, in fact, a true lease. Marhoefer at 1145. Although there
was conflicting evidence at the hearing on summary judgment concerning
the projected fair market value of the equipment at the end of the lease
period, this discrepancy is irrelevant. Banterra's evidence indicates that
after 60 months, the equipment in question would retain fifty-percent of
its value ($13,000). Gilbert Stern Aff., Supp. to Pltf.'s Mot. Sum. Judg.
at 2. Subway, on the other hand, argued that the fair market value of the
equipment after 60 months would be only $2,600. It is undisputed that the
property has subsequently been sold to a third party for $14,058.47. Thus,
regardless of the figure the Court uses, it is evident the useful life
of the property in this case would exceed the term of the lease.
Although the analysis under this final test favors a finding of a lease,
consideration of all of the other factors leads the Court to conclude that
the agreement is not a lease, but is, in fact, a security agreement. The
problem with agreements such as the one in this case is that the lessors/drafters
attempt to draft the document so that it is capable of functioning as either
a lease or a security agreement, depending on the situation. While it is
true that the agreement here has several characteristics of a lease, other
more compelling features require its interpretation as a security agreement,
the most significant being the absence of a right to terminate the agreement
by the lessee. Therefore, for the reasons stated herein, the Court finds
that the subject agreement is a security agreement rather than a true lease.
Plaintiff Banterra Bank's motion for summary judgment is granted, and defendant's
cross- motion for summary judgment is, accordingly, denied.
IN RE MURRAY.
191 B.R. 309 (Bankr. E.D. 1996)
THOMAS M. TWARDOWSKI, Bankruptcy Judge.
Before the court is the motion of CoreStates Bank, N.A. ("movant") requesting
relief from the automatic stay and/or turnover of property ("motion") in
the possession of debtor, Edmond C. Murray ("debtor"). The issue presented
is whether a document denominated "Motor Vehicle Lease and Disclosure Statement"
("Lease") is in fact a "true lease" or alternatively, an installment purchase
agreement with a security interest. For the reasons stated herein, we conclude
that the Lease is a true lease subject to assumption or rejection by debtor
pursuant to s 365(a) of the United States Bankruptcy Code ("Code"), 11
U.S.C. s 365(a). Consistent with this conclusion, debtor shall be provided
an opportunity either to reject the Lease or to assume the Lease and cure
past defaults.
JURISDICTIONAL STATEMENT [omitted]
BACKGROUND
As previously noted, the issue before us is whether the Lease is a "true
lease" of a 1994 Dodge conversion van, Vehicle Identification Number 2B7HB21X6RK126962
("Vehicle"), or rather, as debtor contends, a disguised security agreement.
Simply put, debtor urges us to construe the Lease as a security agreement
so he may retain possession of the Vehicle by bifurcating movant's claim
into secured and unsecured components, e.g. 11 U.S.C. s 506(a), "cramdown"
the secured portion of the claim to the current fair market value of the
Vehicle, e.g. 11 U.S.C. ss 1322(b)(2) and 1325(a)(5)(B), and then pay the
full amount of the secured claim under an amended Chapter 13 plan. If,
on the other hand, we conclude that the Lease is in fact a true lease,
then debtor may only retain the Vehicle by assuming the Lease and complying
with 11 U.S.C. s 365, which requires that debtor cure prior defaults, or
give adequate assurance that prior defaults will be cured, and give adequate
assurance that future obligations will be performed.
The following factual record was developed from the parties' submissions
and the evidence received at the hearing.
Movant introduced into the record, as Exhibit "M-1," a copy of the
Lease which was executed by debtor and D'Ambrosio's Dodge-North, Inc.,
on or about June 10, 1994. At the hearing, debtor's counsel stipulated
*312 that: a) the Lease was assigned to First Pennsylvania Consumer Services,
Inc. ("First Pennsylvania"); b) movant is the successor-in-interest to
First Pennsylvania; and c) movant is a party in interest in debtor's bankruptcy
proceeding and therefore has standing to bring this action.
On its face, the Lease specifies an "Initial Lease Term" of sixty months,
requiring payments by the "lessee," identified therein as debtor, in the
amount of $436.50 per month. Id. The Lease provides for an "Annual Mileage
Allowance" of 15,000 miles per year, or 75,000 total miles during the lease
term, subject to an "Excess Charge" of $.10 per mile for mileage exceeding
these limits. Id. at p 16. The Lease also provides debtor with the option
of purchasing the Vehicle at the end of the lease term by, inter alia,
paying the "End of Term Price" of $6,894.47, plus "any official fees and
taxes" that may be due on account of the sale. Id. Debtor may also purchase
the Vehicle before the end of the lease term by complying with the early
termination provisions contained in p 17, and by paying the "Early Termination
Value" as determined under p 18, plus any additional fees, e.g. taxes,
license and registration. Id. p 11. The Lease specifies a "Monthly Termination
Factor" of $300.01 which is applicable to determining the Early Termination
Value. Id. at p 18. Movant's witness, Thomas C. Hirst ("Hirst"), testified
that this sum represents movant's estimate of the Vehicle's monthly depreciation
during the term of the lease.
Further, under the terms of the Lease debtor assumed responsibility
for: a) paying all "official fees ... and taxes" associated with the acquisition,
ownership, possession and use of the Vehicle, id. at p 7; b) obtaining
insurance, id. at p 10; c) paying the costs of "Maintenance, Expenses,
Fees, Taxes, Licensing and Inspections," id. at p 13; d) paying any "Fines,
Tickets, and Penalties," id. at p 14; and e) paying the costs of any unreasonable
wear and use. Id. p 16. In addition, during the term of the Lease movant
assigned to debtor any new car warranties as well as any rights that might
arise under state and federal repair and/or "lemon" laws. Id. at p 15.
The registered owner of the Vehicle, as listed on the Certificate of
Title, attached as an Exhibit to the Motion, is CoreStates Dealer Services
("CDS"). The title also reflects a first lien in favor of CDS. Debtor testified
that the Vehicle is insured, and that movant is designated under the policy
as "loss payee." Hirst testified that the Lease is in default and that
debtor's last payment to movant was made on or about December 8, 1994.
He further testified that the total balance due under the Lease, including
the end of term purchase price, is $24,094.65. Debtor confirmed that he
has made no payments on account of the Lease outside of the proposed Chapter
13 plan.
In their memoranda, both parties agree that 13 Pa.C.S.A. s 1201(6)
provides the applicable standard by which agreements are evaluated in Pennsylvania
to determine whether they constitute security agreements or leases. Movant
contends that when these criteria are applied to the facts of this case
it becomes clear that the Lease is in fact a "true lease." Movant argues
that it is entitled to relief from the automatic stay, presumably under
both ss 362(d)(1) and (2), alleging that: a) its interests in the Vehicle
are not adequately protected since debtor continues to use the Vehicle
but has made no payments under the Lease since December 8, 1994; and b)
debtor lacks equity in the Vehicle and the Vehicle is not necessary for
an effective reorganization.
Debtor argues, on the other hand, that while the guidelines contained
in 13 Pa.C.S.A. s 1201(6) are instructive, they do not provide the exclusive
means by which such agreements are evaluated. Debtor contends, inter alia,
that the Lease should be construed as a security agreement because most
of the normal incidents of ownership of the Vehicle run to him and because,
in debtor's estimation, the purchase option price constitutes nominal consideration.
It is therefore debtor's position that the Lease is a disguised financing
agreement with a security interest which may be crammed down and paid under
his chapter 13 plan.
Having thus framed the issues, we now proceed to consider the merits
of the parties' positions.
DISCUSSION
It is well established that the determination of whether a particular
agreement constitutes a lease or a security agreement for purposes of 11
U.S.C. s 365 is to be made by reference to state law. E.g. In re Bumgardner,
183 B.R. 224, 225 (Bankr.D.Idaho 1995); Phoenix Pipe & Tube, L.P.,
154 B.R. 197, 199 (Bankr.E.D.Pa.1993). Turning to the law of Pennsylvania,
we find that 13 Pa.C.S.A. s 1201 provides the applicable standard for determining
whether a transaction creates a lease or a security agreement.
We observe that 13 Pa.C.S.A. s 1201 was amended in 1992 to incorporate
into Pennsylvania law revised s 1-201(37) of Article 2A of the Uniform
Commercial Code ("UCC"). See U.C.C. Art. 2A, s 1- 201(37) (Supp.1995) (historical
notes); 1A J. White & R. Summers Article 2A Leases of Goods 8 (3d ed.
1991). The former version of the statute was much less detailed than its
current iteration and led to the development of inconsistent views among
courts regarding the criteria to be applied in determining whether an agreement
creates a true lease or a security interest. See e.g. Carlson v. Giacchetti,
35 Mass.App.Ct. 57, 616 N.E.2d 810, 812 (1993); White & Summers at
p. 14. In contrast, the revised statute provides standardized provisions
intended to focus a court's inquiry on the most salient criteria for distinguishing
between true leases and those intended for security. White & Summers
at p. 9. In the words of one commentator, in amending U.C.C. s 1-201(37)
the drafters attempted to "re-assert the significance of residual value
as the touchstone of the common law definition of true leases." Naples,
A Review and Analysis of the New Article 2A, 93 Com.L.J. 342, 349 (1988);
accord, Bumgardner, 183 B.R. at 228; Carlson, 616 N.E.2d at 813.
[Portions omitted.]
We observe that revised U.C.C. s 1-201(37) consists of several new paragraphs
and detailed standards which are to be employed in determining the lease/security
interest issue. The following analysis, established by the Bankruptcy Court
in In re Lerch, 147 B.R. 455 (Bankr.C.D.Ill.1992) (applying I.C. s 28-1-201(37),
an Illinois statute that is substantially similar to 13 Pa.C.S.A. s 1201),
provides guidance in applying the new statute. Accord, In re Zaleha, 159
B.R. 581, 583 (Bankr.D.Idaho 1993). The initial portion of the first sentence
of the second unnumbered paragraph contains the basic direction that the
determination is made based on the facts of each case. The latter portion
of the first sentence of the second unnumbered paragraph starting with
the word "however" creates an exception to the basic direction that the
determination is made on the facts of each case, as it provides that without
looking at all the facts, a lease will be construed as a security interest
if a debtor cannot terminate the lease, and if one of the four enumerated
terms is present in the lease. Absent a mandated classification [e.g. that
the agreement is a security interest], the determination is based on the
facts of the case. At this point the third unnumbered paragraph comes into
effect. Focussing on the economics of the transaction, it states that a
security interest is not created merely because it contains any of the
five terms enumerated in [that] paragraph. Id. at 460.
Having thus explored the background of the changes made to 13 Pa.C.S.A.
s 1201(6), as well as their practical application, we turn to the facts
of this case. Here, we observe that since debtor has the ability to terminate
the Lease unilaterally prior to the end of the lease term, the Lease cannot
be deemed a security interest as a matter of law under the exception provided
in 13 Pa.C.S.A. s 1201(6)(i). [FN8] Lerch, 147 B.R. at 460. Therefore,
the lease/security interest issue must be "determined by the facts of [the]
case." 13 Pa.C.S.A. s 1201(6). Our attention is thus directed to an examination
of the non-exclusive list of factors enumerated in 13 Pa.C.S.A. s 1201(6)(ii).
Lerch, 147 B.R. at 460. The key emphasis at this point of the inquiry is
on whether movant retains a meaningful residual interest in the Vehicle.
See Bumgardner, 183 B.R. at 228; see also In re Aspen Impressions, Inc.,
94 B.R. 861, 866 (Bankr.E.D.Pa.1989) (discussing the revisions made to
U.C.C. s 1-201(37) prior to their enactment in Pennsylvania).
FN8. Had debtor not been granted the right to terminate the Lease prior
to the expiration of its term and if one of the four factors outlined in
13 Pa.C.S.A. s 1201(6)(i)(A)-(D) could be established, the Lease would
be deemed a security agreement under s 1201(6)(i).
Our analysis is facilitated by the fact that the Lease contains a fixed
price purchase option. As explained by the Bankruptcy Court in Lerch, this
circumstance was used in an example discussed in the Comments. In pertinent
part, the Comments state: The relationship of the second paragraph of this
subsection to the third paragraph ... deserves to be explored. The fixed
price purchase option provides a useful example. A fixed price purchase
option in a lease does not in and of itself create a security interest.
This is particularly true if the fixed price is equal to or greater *316
than the reasonably predictable fair market of the goods at the time the
option is to be performed. A security interest is created only if the option
price is nominal and the conditions stated in the introduction to the second
paragraph of this subsection are met. U.C.C. s 1-201(37) (historical notes)
(emphasis added).
In the instant case, the only evidence in the record concerning the
reasonably predictable fair market value of the Vehicle at the time that
the purchase option was to be performed is the Lease itself, which establishes
an End of Term Price of $6,894.47, and the testimony of movant's witness
Hirst. Hirst testified that the End of Term Price represented movant's
estimate of the end of term residual value of the Vehicle calculated at
the time the Lease was executed. Movant's estimate of the fair market value
of the Vehicle is consistent with 13 Pa.C.S.A. s 1201(6)(iii)(B) which
generally provides that "reasonably predictable fair market value" is to
be determined with reference to the facts and circumstances extant at the
time the transaction is entered into, not at a later time, e.g., at the
end of the lease term when the actual fair market value can be determined
with certainty. Id. Debtor, whose burden it is prove that the Lease is
other than what it purports to be, Zaleha, 159 B.R. at 586, neither offered
evidence to rebut movant's proof of the Vehicle's estimated residual value
of $6,894.47 nor introduced any evidence to show that this sum is nominal.
Thus, the fact that the fixed option purchase price is equal to movant's
estimate of the residual value strongly supports the conclusion that the
Lease is a true lease. Lerch, 147 B.R. at 461; Comments, U.C.C. s 1-201(37)
(historical notes).
Debtor contends, however, that the Lease creates a security interest
because under its terms he has assumed responsibility for many of the usual
semblances of ownership of a motor vehicle, e.g. the risk of loss and payment
of taxes and fees, maintenance costs, etc. The statute is clear, however,
that a transaction does not create a security interest merely because "the
lessee assumes risk of loss of the goods, or agrees to pay taxes, insurance,
filing, recording or registration fees, or service or maintenance costs
with respect to the goods." 13 Pa.C.S.A. s 1201(6)(ii)(B). Contrary to
debtor's position, these kinds of factors are typical of "net" leases,
Lerch, 147 B.R. at 461, and "reflect less the character of the transaction
than the strength of the parties' respective bargaining positions." In
Marhoefer Packing Co., Inc., 674 F.2d 1139, 1146 (7th Cir.1982).
Debtor also contends that the economics of the transaction compels
the conclusion that it is a security agreement rather than a true lease.
In this regard, debtor posits that the Lease is identical to an installment
purchase, and should therefore be construed as creating a security interest,
because the present value of the lease payments and the end of term price
is approximately equal to the price at which movant purchased the Vehicle.
[FN9] This argument, however, ignores subsections (A) and (E) of 13 Pa.C.S.A.
s 1201(6)(ii), which state that a transaction does not create a security
interest merely because the present value of the lease payments is "substantially
equal to or greater than the fair market value of the goods at the time
the lease is entered into," id. at s 1201(6)(ii)(A), or because the lessee
can become the owner of the Vehicle by paying a sum that is equal to its
"reasonably predictable fair market value" at the end of the lease term.
Id. at s 1201(6)(ii)(E).
FN9. Hirst testified that movant purchased the Vehicle from D'Ambrosio's
Dodge-North, Inc. for the sum of $23,372.00.
Furthermore, in order for the Lease to have created a security interest
it must have provided debtor with some ownership interest in the Vehicle.
In re Winston, 181 B.R. 589, 594 (Bankr.N.D.Ala.1995). The evidence establishes,
however, that the Lease provided debtor only with the use and possession
of the Vehicle which was at all times owned by movant. The evidence further
established that debtor's use of the Vehicle was defined by a set term,
at the completion of which debtor was obligated to either return *317 the
Vehicle or pay movant a fixed purchase price equal to the reasonably predictable
fair market value of the Vehicle at the end of the term. Neither anything
in the Lease nor the evidence presented at the hearing supports debtor's
claim to an ownership interest in the Vehicle.
Based on the foregoing, we conclude that debtor has not satisfied his
burden of demonstrating that the Lease is a security agreement rather than
a true lease as denominated on its face. Consistent with this conclusion,
debtor shall be provided a reasonable opportunity to assume or reject the
Lease pursuant to the provisions of 11 U.S.C. s 365. An Order consistent
with the foregoing Opinion shall be entered.
JARRELLS v. MR. C'S RENT TO OWN
205 B.R. 994 (M.D. Ga. 1997)
MEMORANDUM OPINION
ROBERT F. HERSHNER, Jr., Chief Judge.
Mr. C's Rent to Own, Movant, filed on September 17, 1996, its Objection
to Confirmation of Plan. The Court held a hearing on Movant's objection
on December 4, 1996. The Court, having considered the evidence presented
and the arguments of counsel, now publishes this memorandum opinion.
Movant is a rent to own business owned by Dave Conger. Movant rents
and sells new and used furniture and appliances. Johnnie Bell Jarrells,
Debtor, Respondent, signed a Rental Purchase Agreement with Movant for
a used living room suite. The agreement provides, in part:
RENTAL PURCHASE AGREEMENT
Date: 12/28/95....
RENTAL PURCHASE DISCLOSURES
RENTAL TERM: MONTHLY....
Rental payments are due at the beginning of each term that you choose
to rent the property. There are no refunds if you choose to return the
property before the end of the term.
DESCRIPTION OF PROPERTY AND RENTAL RATES:
Categ./Descp Mo.Rent Ashley 59.00
LR Suite
3. INITIAL RENTAL PAYMENT.
Your initial rental payment will include the following charges:
Rent Delivery Charge Total
59.00 5.00 59.00
....
COST OF LEASE.
If you choose to rent to own you must renew this lease for the following
number of months or weeks:
15 Months @ 59/mo. for a total cost of 885.00
OUR ESTIMATED FAIR MARKET VALUE FOR THIS PROPERTY IS 395.00
7. COST OF LEASE SERVICES.
If you renew this lease for the number of terms necessary to acquire
ownership the cost of lease services will be 490
EARLY PURCHASE OPTION.
If you wish to purchase the rental property you may do so at any time
by the payment of 55% of the remaining Cost of Lease calculated at that
time.
....
TYPE OF TRANSACTION: THIS IS A RENTAL TRANSACTION. You may use the
property for the term of this lease. At your option, you may renew this
lease. To do this, you must make a rental payment in advance for each term
you wish to rent the property. The rental rates are shown above. Time is
of the essence in this lease. There are no grace periods.
TERMINATION: You may voluntarily terminate this lease at the end of
any term with no penalty. To do so, you must return the property and pay
all rental payments and other charges due through the date of return.
....
TITLE, MAINTENANCE AND TAXES: We retain title to the property at all
times and will pay any taxes which might be levied on the property. You
do not own the property unless you buy it or acquire ownership as provided
by the terms of this lease. We will maintain the property in good working
order as long as you rent it.
....
INTENT: You agree that by signing this lease your intent is to rent
rather than purchase the property.
....
BY SIGNING THIS LEASE, YOU ADMIT THAT YOU HAVE READ IT, THAT YOU UNDERSTAND
IT AND THAT YOU HAVE RECEIVED A SIGNED COPY OF IT. YOU ALSO ADMIT THAT
YOU RECEIVED THE PROPERTY IN SATISFACTORY CONDITION.
WITNESS: /s/ Conger RENTER: Lilla Lipton LESSOR: Mr Cs CO-RENTER: Johnnie
B. Jarrells
*996 Respondent later signed on June 21, 1996, a Rental Purchase Agreement
for an air conditioner. This agreement is on the same form as the prior
Rental Purchase Agreement for the living room furniture. The agreement
for the air conditioner provides that the rental term is weekly. The rent
is $28 per week. The estimated fair market value of the air conditioner
is $595. Respondent must renew the agreement for fifty-two weeks if she
wants to own the air conditioner.
The Rental Purchase Agreements provide that the rental terms are week
to week for the air conditioner and month to month for the furniture. Respondent
can return the property at the end of any term without any further obligation.
Respondent is not required to renew the agreements or to purchase the property.
Movant is responsible for maintaining and paying any taxes assessed on
the property.
Respondent essentially was current on her payments to Movant when Respondent
filed a petition under Chapter 13 of the Bankruptcy Code on July 2, 1996.
Respondent's Chapter 13 plan proposes to pay in full the remaining lease
payments, plus interest, to Movant over the three-and-one-half-year term
of the Chapter 13 plan. Respondent's Chapter 13 plan treats Movant as having
fully secured claims. Respondent argues that the Rental Purchase Agreements
are secured sales agreements which can be modified through her Chapter
13 plan.
Respondent has worked for the same employer for twenty-five years.
Respondent cannot afford the weekly and monthly payments called for in
the Rental Purchase Agreements. Respondent, however, can pay the balance
owed to Movant over the term of her Chapter 13 plan.
Movant argues that the Rental Purchase Agreements are true leases.
Movant argues that Respondent must faithfully perform the terms of the
agreements if she wants to retain the furniture and air conditioner.
The issue presented is whether the Rental Purchase Agreements are true
leases or secured sales agreements. "The legislative history to section
365 of the Bankruptcy Code states that whether a lease constitutes a security
agreement should be determined by state law. A security interest in personal
property is subject to Georgia's version of the uniform Commercial Code."
National Traveler, Inc. v. Paccom Leasing Corp. (In re National Traveler,
Inc.), 110 B.R. 619, 620 (Bankr.M.D.Ga.1990). In In re Paz, [FN2] Judge
Walker, speaking for the Bankruptcy Court for the Southern District of
Georgia, stated:
FN2. 179 B.R. 743 (Bankr.S.D.Ga.1995).
The Georgia Legislature amended O.C.G.A. s 11-1-201(37) in 1993 to
provide a codified distinction between documents creating security interests
and lease agreements. The agreement before the Court, having been entered
into after the effective date of the amendments, is subject to scrutiny
under the amended law. 179 B.R. at 746.
The court also stated:
The 1993 amendment to section 11-1-201(37) is largely consistent with
Georgia case law prior to the amendment. The amendment provides a yardstick
for the Court to measure the facts of each individual case. 179 B.R. at
747.
Section 11-1-201(37) of the Georgia Code [FN3] provides: [Omitted.]
FN3. O.C.G.A. s 11-1-201(37) (Supp.1996).
In National Traveler, Inc. v. Paccom Leasing Corp. (In re National
Traveler, Inc.), [FN4] this Court stated:
FN4. 110 B.R. 619 (Bankr.M.D.Ga.1990).
Georgia law does not require "magic words" to create a valid security
interest. Rather, the court must refer to the general law of contracts
and determine whether the parties intended to create a security agreement.
United States v. Hollie (In re Hollie), 42 B.R. 111, 117 (Bankr.M.D.Ga.1984).
The determining factor is the intention of the parties at the time the
agreement was entered into as construed in light of facts and circumstances
as they existed at that time. Citizens & Southern Equipment Leasing,
Inc. v. Atlanta Federal Savings & Loan Assoc., 144 Ga.App. 800, 805,
243 S.E.2d 243, 247 (1978). A document is construed according to the intent
of the parties as ascertained from factors that distinguish true leases
from security agreements. Leasing Service Corp. v. River City Construction,
Inc., 743 F.2d 871, 878 (11th Cir.1984). The best test for determining
the intent of an agreement which provides for an option to buy is a comparison
of the option price with the market value of the equipment at the time
the option is to be exercised. Such a comparison shows whether the lessee
is paying actual value or acquiring the property at a substantially lower
price. Mejia v. Citizens & Southern Bank, 175 Ga.App. [80] at 82, 332
S.E.2d [170] at 172 [ (1985) ]; Ford Motor Credit Co. v. Dowdy, 159 Ga.App.
at 667, 284 S.E.2d at 680. If the lessee has the option to become the owner
of the property for no additional or for a nominal consideration, the lease
is deemed to be intended for security. Any determination of whether consideration
is nominal must be made on a case-by-case basis. Mejia v. Citizens &
Southern Bank, 175 Ga.App. at 82, 332 S.E.2d at 172. 110 B.R. at 621.
Georgia courts also have considered other factors in determining the
intent of the parties. In Ford Motor Credit Co. v. Dowdy, [FN5] the Georgia
Court of Appeals stated:
FN5. 159 Ga.App. 666, 284 S.E.2d 679 (1981), overruled on other grounds,
Adams v. D & D Leasing Co. of Georgia, Inc., 191 Ga.App. 121, 381 S.E.2d
94 (1989), cert. denied.
Whether [an agreement] is intended as security is to be determined
by the facts of each case; the name which the parties give it is not conclusive....
Other factors present in this case which are listed in Davis Brothers as
quoted from In re Transcontinental Industries, Inc., 3 UCC Rep. 235 [1965
WL 8366] (N.D.Georgia 1965) as tending to establish that the transaction
is a conditional sale are: the lessor's purchase of the equipment from
a supplier; the requirement that the lessee be responsible for the payment
of all taxes, insurance and expenses for repairs, an initial down payment,
and an additional payment of security deposit. ... The predominate opinion
appears to be that a true lease may or may not contain an option to purchase,
its effect rather than its presence being the predominative [sic] element.
284 S.E.2d at 680-81.
In Woods v. General Electric Credit Auto Lease, Inc., [FN6] the Georgia
Court of Appeals stated:
FN6. 187 Ga.App. 57, 369 S.E.2d 334 (1988).
Although the [car lease agreement] does contain certain provisions
more likely to be found in a security transaction, for example, that the
appellant and her husband would be responsible for all necessary vehicle
repairs, vehicle maintenance, taxes and vehicle insurance, examination
of the *999 document reveals that these factors are not controlling. Mejia,
supra 175 Ga.App. at 82, 332 S.E.2d 170.
The Agreement specifically is labeled a lease and consistently refers
to appellant and her husband as lessees. It includes the original lessor's
assignment to the appellee of "all right, title and interest in and to
the leased vehicle and to this lease...." Moreover, it expressly provides
"that this ... is a true lease...." While these factors are not dispositive
in construing the nature of the Agreement, see generally, Mejia, supra
at 81, 332 S.E.2d 170 and Ford Motor Credit Co., supra 159 Ga.App. at 667,
284 S.E.2d 679, they are entitled to reasonable weight, as they are an
indicator of the parties' contractual intent and the purpose of the Agreement.
Other factors indicative of a true lease, and which are present in
this case include (a) that the original lessor was apparently in the automobile
leasing business, Mejia, supra 175 Ga.App. at 82, 332 S.E.2d 170; (b) that
the lessor did not require a financing statement, Mejia, supra at 82, 332
S.E.2d 170; and (c) that the Agreement expressly provided that the lessees
"have absolutely no equity or other ownership rights in the vehicle," unless
they exercise their option to purchase the vehicle, see generally Ford
Motor Credit Co., supra 159 Ga.App. at 667, 284 S.E.2d 679, and cases cited
therein. Additionally, the leasing of automobiles by individuals, as well
as by business entities, is not an uncommon practice today. ... This Agreement
on its face required no "initial down payment," and the security deposit,
which was refundable, was roughly equivalent to the amount required for
a monthly leasing payment. Such an amount is not unreasonable and entirely
consistent with a lease transaction.
369 S.E.2d at 335-36.
Turning to the case at bar, the Court notes that the Rental Purchase
Agreements contain provisions that are found both in a true lease and in
a sales agreement. Respondent is not required to make any additional payments
when the agreements terminate to own the property. Movant's trade name
implies that customers who rent will someday own the property. The agreements
are entitled "Rental Purchase Agreement." These factors support Respondent's
contention that the agreements are secured sales agreements.
The agreements, however, also contain provisions found in a true lease.
Respondent can return the property at the end of any weekly or monthly
term without any further obligation. Respondent is not required to renew
the agreements or to purchase the property. Respondent was not required
to make a down payment or security deposit. Movant is responsible for maintaining
the property and paying any taxes assessed on the property. The agreements
expressly provide that, by signing the agreements, Respondent intends to
rent rather than purchase the property. The agreements expressly provide
that Respondent will not own the property unless she buys it or acquires
ownership as provided by the terms of the agreements.
The Court, having considered the facts presented and the applicable
Georgia law, is persuaded that the Rental Purchase Agreements are true
leases.
IN RE PAZ
179 B.R. 743 (S.D. Ga. 1995)
MEMORANDUM OPINION
JAMES D. WALKER, Jr., Bankruptcy Judge.
This matter comes before the Court on Motion for Relief From Stay filed
by Gold Key Lease, Inc., ("Gold Key") a creditor in this Chapter 13 case.
At issue is the characterization of an agreement as either a lease which
must be assumed or rejected, or a security instrument capable of bifurcation
into secured and unsecured component claims. This is a core matter pursuant
to 28 U.S.C. s 157(b)(2)(G). Based on the following discussion, the Court
will deny Gold Key's Motion for Relief From Stay subject to the requirement
that Debtor amend his plan.
FINDINGS OF FACT
On June 16, 1994, Johan Paz ("Debtor") and Nalley Brunswick Automobiles,
Inc., ("Nalley") entered into an agreement which Nalley subsequently assigned
to Gold Key. In the agreement, Debtor obtained the right to possession
and use of a new 1994 GMC Sonoma truck. In return, Debtor agreed to pay
Gold Key the sum of Two Hundred Seventy-five Dollars and Twenty-six Cents
($275.26) per month for a period of forty-eight months. Debtor paid Six
Hundred Sixteen Dollars and Twenty-six Cents ($616.26) at the inception
of the agreement, which included a security deposit of Three Hundred Dollars
($300.00). Upon expiration of the *744 agreement, Debtor would have had
the option of purchasing the vehicle for either Three Thousand Four Hundred
Fifty-eight Dollars and Thirty-six Cents ($3,458.36) or Ninety-five percent
(95%) of the value of the vehicle as determined by the NADA Official Wholesale
Used Car Trade-in Guide, whichever is less. Debtor had the option to purchase
the vehicle during the term of the agreement by paying Gold Key a sum determined
by the number of unpaid payments in relation to the NADA Wholesale value.
The agreement is entitled "Lease Agreement--Gold Key", and is the subject
of this dispute between Debtor and Gold Key. Debtor testified that he was
told he would be permitted to keep the car at the conclusion of the 48
month term if he would keep paying the same payment for twelve more months.
At the end of that additional twelve month term he would acquire ownership.
If Debtor were to exercise this option, the twelve additional payments,
totaling Three Thousand Three Hundred Three Dollars and Twelve Cents ($3,303.12),
would approximate the predicted residual value of the vehicle. The cash
price of the car was Ten Thousand Dollars ($10,000.00). The title to the
vehicle remained in Gold Key's name at all times during the term of the
agreement. On February 14, 1995, this Court granted Gold Key's Motion to
Modify the Automatic Stay and directed Debtor to turn the vehicle over
to Gold Key until Debtor could provide proof of insurance on the vehicle
or until further order. To date, there is no evidence of proof of insurance.
Gold Key has filed a proof of claim for Twelve Thousand Seven Hundred
Twenty- five Dollars and Sixty-four Cents ($12,725.64). Gold Key's proof
of claim states that the basis for the debt is a lease, and asserts secured
status. Debtor contends that the agreement is a disguised sale, and proposes
to bifurcate Gold Key's claim into secured and unsecured components. Gold
Key contends that the agreement is a true lease, and Debtor must either
assume or reject the lease without modifying its terms.
CONCLUSION OF LAW
The characterization of this agreement as either a lease or sale will resolve
the dispute between the parties and determine how Gold Key's claim will
be treated in this bankruptcy case. In order to understand why such a characterization
impacts so profoundly upon the bankruptcy process, it is necessary to review
the economic circumstances associated with leasing compared to purchasing.
A transaction is often characterized as a lease rather than a sale so that
the lessee can write off the lease payments as a tax deductible expense
rather than amortizing the purchase of the property as a capital asset.
A lease may provide for the lessee to be able to surrender the property
and relieve himself from the responsibility to continue payments on the
property. When the lessee opts for that result, there would be no incentive
for the lessee to argue for recharacterization. On the other hand, where
a lessee plans to become the owner of the property, the lease transaction
may not favor his interest. Lessee obtains no equity, or ownership interest,
in property under a lease. The lease fees and costs associated with a lease
agreement often amount to a significant increase over what a lessee would
pay to purchase goods in a cash or credit transaction. For example, the
ultimate price Debtor would pay for the subject vehicle at the end of the
lease term upon exercising the purchase option would be a minimum of $16,515.60
as compared to the original purchase price of $10,000.00 had Debtor paid
cash. Financing the vehicle in a purchase transaction for the same five
year period would yield a significantly lower cost over the same period
as the lease. For example, assuming the cost of the vehicle is $10,000.00,
including a sales tax of 6% the purchaser would need to finance $10,600.00
for the purchase of the vehicle. At a 7% interest rate, amortized over
a five year period, the purchaser would pay $209.89 per month for a total
of $12,593.40. Of that amount, $1993.40 would represent interest. [FN1]
When one compares the *745 total amount spent over the same period, the
cost of leasing versus purchasing becomes apparent.
FN1. These figures are offered for illustrative purposes only. Individual
lending policies vary between institutions. For the purposes of this example,
the Court assumes no money down and no fees or extraneous charges.
The fact that debtors are often uninformed regarding the consequences
of the nature of a transaction is not surprising given the fact that the
law does not require the disclosure of the purchase price of the vehicle
or the interest rate in a leasing transaction. Entering into a lease with
an option to buy allows creditors to finance the sale of a new car to marginally
credit worthy purchasers and charge a higher price and a higher interest
rate. Both factors are not readily apparent to the lessee aspiring to purchase.
Bankruptcy adds another dimension to the leasing transaction. Lessees
who file for relief under the Bankruptcy Code may propose to characterize
the transaction as a sale, as in this case, then value the property and
bifurcate the claim between secured and unsecured components. The significance
of this distinction is aptly described as follows: The Code permits a debtor
to modify the rights of secured creditors and to remain in possession of
the secured property. [footnote omitted]. The plan must provide that the
secured creditor receive 100 percent of the fair market value of the property
plus interest, but the difference between the value of the property and
the debt secured by the property is treated as an unsecured claim. On this
portion of the claim, the creditor may receive only pennies on the dollar.
In ordinary usage, this has become known as the cram down.
The theory behind the cram down starts with the premise that the debtor
is unable to pay debts in full and on schedule. Thus, the creditor is not
going to be paid by the debtor, at least, not in accordance with the terms
of the debt. At most, the creditor hopes to receive the value of the property
after the property has been repossessed and disposed of at a commercially
reasonable sale. Any deficiency is probably uncollectible. By paying the
fair market value of the property with interest plus a portion of the "deficiency"
through the plan, the creditor is left in a better position than the creditor
would have been had the debtor not filed for bankruptcy.
Lessors are treated differently under the Code. A debtor's unexpired
lease must be assumed, rejected, or assigned. [footnote omitted]. If a
lease is rejected, the property must be returned to the lessor and the
debtor is no longer bound by the lease, although the lessor may have a
claim for damages arising from the rejection or for pre and postpetition
back rent. [footnote omitted]. If the lease is assumed, it must be accepted
according to its terms. The rental payments called for under the lease
must be paid, any default must be cured within a reasonable time, and the
lessor must be given adequate assurance of future performance. [footnote
omitted]. A lease is not subject to a cram down and the debtor has no right
to modify any of its terms. If an agreement is a "true" lease, the only
way for the debtor to remain in possession of the property is to assume
the agreement according to its terms.
This makes sense. A cram down is permitted in secured transactions
because it leaves a secured creditor at least as well off as the creditor
would have been had the bankruptcy not been filed. A retail creditor wants
to get paid. Aside from automobile dealers, most retail sellers have no
interest in recovering property from the debtor because they have no interest
in selling used property. A lessor, however, does have an interest in recovering
property from a debtor. Unlike most retail sellers, leasing or selling
used property is an ordinary part of a lessor's business. A cram down would
not leave a lessor as well off as it would have been had the bankruptcy
not been filed.
If a Chapter 13 plan proposes a cram down for what is in fact a "true"
lease, the plan is proposing something that is not authorized by the Code.
The Code does not, however, provide any test for determining what is or
is not a "true" lease. For the answer to this question we have to *746
look outside the Code to the substantive state law. [FN2]
FN2. Barkley Clark et al., "RENT-TO-OWN" AGREEMENTS IN BANKRUPTCY:
SALES OR LEASES?, 2 Am.Bankr.Inst.L.Rev. 115, 123-124 (Spring, 1994).
As the above discussion reveals, creditors gain certain advantages
by characterizing agreements as leases. Outside of bankruptcy, lessors
are not forced to comply with the often complex and time consuming requirements
imposed upon secured creditors by Georgia's Uniform Commercial Code [FN3]
in the event a debtor fails to make payments. The same requirements which
hamper a secured creditor's efforts toward foreclosure benefit a debtor
by making it easier to keep the property. Besides obtaining a generally
higher price on leasing agreements, lessor creditors are able to achieve
better treatment in bankruptcy than secured creditors.
FN3. O.C.G.A. s 11-1-101 et seq.
While Congress has specified the treatment each species of creditor
is to receive in bankruptcy, the role of defining what constitutes a security
interest versus a lease is left to the state legislature. Rent-A-Center,
Inc. v. Mahoney (In re Mahoney), 153 B.R. 174, 176 (E.D.Mich.1992) (citing
In re White, 109 B.R. 768, 769 (Bankr.S.D.Ohio 1989)). The Georgia Code
provides the Court with guidance. The Georgia Legislature amended O.C.G.A.
s 11-1-201(37) in 1993 to provide a codified distinction between documents
creating security interests and lease agreements. [FN4] The agreement before
the Court, having been entered into after the effective date of the amendments,
[FN5] is subject to scrutiny under the amended law. O.C.G.A. s 11-1-201(37)
provides in pertinent part:
FN4. For a more complete discussion of the 1993 amendments to the Georgia
Commercial Code, see Sarah B. King, LEASES: PROVIDE REGULATIONS RELATING
TO LEASES OF GOODS, 10 Ga.St.U.L.Rev. 34 (1993).
FN5. July 1, 1993.
[The court next paraphrased §1-201(37).]
The 1993 amendment to section 11-1-201(37) is largely consistent with
Georgia case law prior to the amendment. [FN6] [Footnote and portions of
opinion omitted.]
The evidence submitted to the Court does not reveal that Debtor was
able to terminate the lease prior to the expiration of the term of the
agreement. [Portions omitted.]
However, finding that the agreement is not subject to termination by
Debtor is insufficient to establish that the document is a security agreement.
Upon review of the additional factors cited by the Georgia Code which create
a security agreement, the Court finds that none of those factors are present
in this case. Specifically, the Court finds: (a) The original term of the
lease is less than the remaining economic life of the goods at the time
Debtor entered into the agreement.
The vehicle Debtor obtained through the present agreement was new at
the time the contract was formed. The term of the lease is four years.
This Court cannot find at the end of the four year lease that the vehicle
would have no economic value. *748 (b) Debtor is neither bound to renew
the lease for the remaining economic life of the vehicle, nor bound to
purchase the vehicle.
While the agreement provided that Debtor was able to exercise an option
to purchase the vehicle, Debtor was under no obligation to do so or to
renew the lease. Indeed, the document was silent as to whether Debtor was
able to renew the lease. The fact that Debtor was given the opportunity
to purchase the vehicle by continuing payments for an additional twelve
months does not create an obligation binding Debtor to renew the lease.
[FN7]
FN7. This testimony may be inadmissible in accordance with the parol
evidence rule. As this opinion indicates, the admission of the testimony
does not effect the outcome of the case.
(c) The lease does not provide an option to renew for nominal consideration.
The lease is silent regarding renewal. Hence, this factor is inapplicable.
(d) Debtor's option to become the owner cannot be exercised for nominal
consideration. The lease provides that Debtor may become the owner of the
vehicle upon payment of either $3,458.36 (estimated wholesale value) or
95% of the NADA Wholesale value at the end of the contract's natural term.
Should Debtor elect to purchase the vehicle prior to the natural expiration
of the term, the price would be calculated by reference to the unpaid lease
payments in conjunction with the NADA Wholesale value. In either instance,
reference is made to the fair market value of the vehicle at the time the
option is exercised. The Georgia Code provides that fair market value is
not nominal. O.C.G.A. s 11- 1-201(37)(x)(ii). [FN8]
FN8. Prior to the 1993 amendments, determination of nominal versus
fair market value was a difficult endeavor. It is easy enough to see how
a 12 or 24 month lease with a fair market value residual could never be
a sale. Similarly, it is easy enough to see how a 58 month lease with a
residual of $500.00 may be a sale. If a lease runs long enough, the value
of the property will dissipate to a point where it may become virtually
worthless. If this happens, and if the lessee is obligated to pay the lease
according to its terms for such a time period, the lease may be a sale
even though the buy out price is approximately equal to the fair market
value of the goods. This scenario might satisfy part (a) above (O.C.G.A.
s 11-1-201(37)(a) (of (a)-(d)) and require that the transaction be characterized
as a lease.
A review of the cost Debtor would ultimately pay for the vehicle supports
Gold Key's assertion that the purchase price is not nominal. The total
payments called for under the lease are Thirteen Thousand Two Hundred Twelve
Dollars and Forty-eight Cents ($13,212.48). Of that amount, Four Thousand
Three Hundred Eighty-six Dollars and Four Cents ($4,386.04) represent taxes,
fees, and lease charges. The remaining sum of Eight Thousand Eight Hundred
Twenty-six Dollars and Forty-four Cents ($8,826.44) represents payments
toward reduction of the vehicle's actual cost should the option to purchase
be exercised. Considering the lowest possible payout by Debtor in exercising
the option ($3,303.12 by continuing payments in the amount called for in
the agreement for an additional 12 months) Debtor would ultimately pay
Twelve Thousand One Hundred Twenty-nine Dollars and Fifty-six Cents ($12,129.56)
toward the capital cost of the vehicle under the agreement. A residual
cost of $3,303.12 is not nominal in light of either the ultimate capital
cost of the vehicle or the original purchase price of $10,000.00. The Court
finds that none of the factors stated in the Georgia Code which would establish
the present agreement as a security interest are present. The Court notes
that several factors cited by the Georgia Code in subsections (a)-(e) are
present. Specifically, the total amount to be paid under the agreement
approximates the fair market value of the vehicle at the inception of the
agreement (if the purchase option is exercised), Debtor pays applicable
taxes through the agreement, and Debtor has an option to become the owner
of the goods at the end of the agreement. However, there are merely additional
factors the Court considers in evaluating the facts of each case. Standing
alone or together, they do not evidence a security agreement. *749 Considering
the facts of this case in light of the plain language of the Georgia Code,
the Court finds that the present agreement constitutes a lease under Georgia
law. O.C.G.A. s 11-1-201(37). As such, Gold Key's treatment in this bankruptcy
case is governed by 11 U.S.C. s 365.
Pursuant to 11 U.S.C. s 365(d)(2), the Chapter 13 trustee will be directed
to either assume or reject the Gold Key lease within twenty (20) days of
the entry of this memorandum opinion and order. [Remainder of opinion is
omitted.]
NATIONSBANK OF NORTH CAROLINA, N.A.,
v.
CAPITAL ASSOCIATES INTERNATIONAL, INC.,
916 F. Supp. 549 (W.D. N. Caro. 1996).
MULLEN, District Judge.
THIS MATTER comes before the court following a non-jury trial on October
4, 1994. This case is a declaratory judgment action filed by the plaintiff,
NationsBank of North Carolina, N.A., as Trustee for the NationsBank and
Designated Subsidiaries Retirement Plan and Trust ("NationsBank") against
the defendant, Capital Associates International, Inc. ("Capital Associates")
seeking a determination as to the ownership and title to certain property
located in Mecklenburg County, North Carolina. More specifically, the action
seeks a determination of ownership and title with regard to a specified
list of property hereinafter referred to as the "disputed items." The issue
of damages is also before the court.
FINDINGS OF FACTS AND CONCLUSIONS OF LAW
The defendant, Capital Associates, is a Colorado Corporation whose business
includes the leasing of office furniture, equipment, and computers to other
business enterprises throughout the United States. On or about March 31,
1988, Capital Associates entered into a Master Lease Agreement with Pandick,
Inc. ("Pandick"), a corporation involved in the electronic dissemination
of business and legal information. Under the terms of the Master Lease
Agreement, Capital Associates would agree to purchase and then lease back
to Pandick, all office furniture, furnishings, equipment, and computers
as may be required by Pandick for its operation in any of its locations.
Sometime around July 1988, representatives from Pandick began investigating
the possibility of locating an office at the Huntersville Business Park
located in Huntersville, North Carolina. In July of 1988, there were several
buildings either recently constructed, *551 or under construction, which
were owned by NationsBank, and were constructed for the purpose of housing
business offices or manufacturing facilities. The representatives from
Pandick met with Mr. Ralph Oldham of Spectrum Properties, Inc., a real
estate brokerage firm acting as rental agent for NationsBank. After some
negotiations, a lease agreement was entered into in late July, 1988 by
Pandick and NationsBank for the lease of building space in the Huntersville
Business Park. As part of the lease agreement, NationsBank promised to
provide an up-fit allowance to Pandick of $25 per square foot. For the
space rented, the total up-fit allowance was $862,250. Pandick contracted
with Edison-Foard as general contractor for performing the up-fit of the
building. Because of the complex electrical need for Pandick's computer
operation, Reid Electric Company was separately hired as electrical contractor
to perform the electrical work. Edison-Foard employed various subcontractors
to assist in the completion of the up-fits for Pandick's office space.
NationsBank expended the entire up-fit allowance in paying for improvements
made by, for, or at the request of Pandick, and in accordance with plans
and specification prepared by or at the direction of Pandick. NationsBank
conditioned the payment of the up-fit allowance upon Pandick presenting
to it draw requests describing newly constructed or installed improvements,
after which NationsBank would obtain confirmation from its construction
staff and an architect that the improvements indicated on the draw request
had been obtained and properly installed. The up-fit allowance was disbursed
through a series of direct payments to Pandick.
NationsBank did not know that Pandick and Capital Associates had entered
into a lease for equipment; however, Capital Associates did know that its
equipment was being installed in a building in the Huntersville Business
Park where Pandick was a tenant. Capital Associates did not itself notify
NationsBank of its claimed interest in the disputed items and also did
not require Pandick to obtain from its landlord, NationsBank, a waiver
or estoppel certificate with respect to rights to the equipment being installed
in the Huntersville Business Park, even though paragraph 3.12 of the lease
between Capital Associates and Pandick provides: If required by Lessor
[Capital Associates] or its Assignee, Lessee [Pandick] shall obtain as
to the site where any item of Equipment is located, a waiver from the landlord
[NationsBank] and mortgagee thereof with respect to any of their rights
under local law to levy or distrain upon the Equipment. Lessee agrees to
promptly and duly execute and file all documents necessary to protect and
place on public record Lessor's rights hereunder. Neither did Pandick file
any documents to protect and place on public record any rights of Capital
Associates to the disputed items.
On or about September 17, 1990, Pandick filed a petition under Chapter
11 of the Bankruptcy Code seeking protection from its creditors, including
NationsBank as its landlord and Capital Associates as lessor of equipment
under the Master Lease Agreement. Subsequently, Pandick's Chapter 11 petition
was converted to a Chapter 7 bankruptcy. At some point in the bankruptcy
proceedings, Pandick abandoned the property located in the leased premises
in Huntersville to its creditors. Pandick no longer remains in business.
NationsBank allowed Capital Associates to remove all of its equipment
and furnishings from the leased premises except the following disputed
items which NationsBank claimed are fixtures and therefore must remain
with the property: (1) Computer raised/access flooring (approximately 24,000
square feet).
(2) Uninterruptable Power System ("UPS"), including the following components:
(a) Liebert 400 KVA with ten minute sealed battery system, battery disconnect
switch, remote status panel, and five percent (5%) harmonic distortion
filter; (b) UPS wiring; (c) Automatic transfer switch; and (d) UPS bypass
switch.
*552 (3) Heating, ventilating and air-conditioning ("HVAC") systems
in two components: (a) Rooftop HVAC units; and (b) Five specialized Liebert
"room air conditioners" installed in the computer rooms. All such units
are connected with hard wire cables and piping (through walls and concrete
flooring) to compressors located outside the Premises. (4) Six Liebert
Precision Power Centers served as electrical power distribution equipment
for the Premises. (5) Liebert Sitemaster 200, which monitored the Liebert
room air conditioners and controlled the temperature in each of the computer
rooms.
When NationsBank refused to release the disputed items, this lawsuit
was filed. Subsequent to the filing of this lawsuit, items 2, 3(b), 4,
and 5 of the above list of disputed items were removed and stored by NationsBank.
Items 1 and 3(a), remain in place and in use by the current tenant of the
facility, Electronic Data Systems Corporation ("EDS"). This court finds
itself in the atypical situation where an experienced banking institution
and an experienced asset-based financing company failed to protect themselves
by appropriate public records, and this court now must determine ownership
of the disputed items under North Carolina Fixture and trade fixture law.
If either party had protected itself, a lawsuit such as this one would
not have been necessary.
In deciding the rightful owner of the disputed items, this court must
first determine whether the Master Lease Agreement between Pandick and
Capital Associates was a "true lease" or a conditional sales contract in
which the equipment was actually sold to Pandick.
[The court applied North Carolina law to find that the transaction
was a "true lease."]
Having concluded that the Master Lease Agreement is a "true lease,"
the court must now decide if the disputed items are real estate fixtures
and thus must remain with the property or trade fixtures which may be removed.
A fixture is defined as property "which, though originally a movable
chattel, is, by reason of its annexation to land, or association in the
use of land, regarded as part of the land, partaking of its character."
Little v. Nat'l Serv. Indus., Inc., 79 N.C.App. 688, 692, 340 S.E.2d 510,
513 (1986). North Carolina courts have developed the following factors
to determine whether an article of property is sufficiently connected to
land so as to render it a fixture: (1) the manner in which the article
is attached to realty ...; (2) the nature of the article and the purpose
for which it is attached to the realty ...; and (3) the intention with
which the annexation of the article to realty is made. Id. The "controlling
test" is the intention with which the parties attached the articles to
the real estate. Ingold v. Phoenix Assurance Co., 230 N.C. 142, 52 S.E.2d
366 (1949); Lee-Moore Oil Co. v. Cleary, 295 N.C. 417, 419, 245 S.E.2d
720, 722 (1978) ("whether a thing attached to the land be a fixture or
chattel personal, depends upon the agreement of the parties, expressed
or implied").
The lease between Pandick and NationsBank provides that "NCNB [NationsBank]
will build out 100% of [Pandick's] space at [NationsBank] expense and that:
All alterations, additions or improvements, including without limitation,
all walls, railings, carpeting, floor and wall coverings and other permanent
real estate fixtures (excluding, however Lessee's trade fixtures ...) made
by, for, or at the direction of Lessee [Pandick], shall when made, become
the property of Lessor [NationsBank] and shall remain upon the Premises
*554 at the expiration or earlier termination of this Lease. NationsBank
Lease, para. 4. Thus, the parties contemplated that NationsBank would provide
the up-fit allowance for the improvements to the premises, and in return,
NationsBank would receive the title to all non-trade fixture improvements.
The general rule is that "trade fixtures are those items of personal
property brought upon the land by a tenant which are necessary to carry
on the trade or business to which the land will be devoted." 35 Am.Jur.2d,
Fixtures, s 3, p. 701. A North Carolina court has also said that "the tenant
is allowed to remove what has apparently become affixed to the land, if
affixed for the purpose of trade and not merely for the better enjoyment
of the premises." Springs v. Atlantic Refining Company, 205 N.C. 444, 171
S.E. 635 (1933).
The question still before this court is whether the disputed items
are real estate fixtures which must remain with NationsBank or trade fixtures
which belong to Capital Associates. This court finds that the access flooring
and rooftop air-conditioners are fixtures which must remain with the property.
The remaining disputed items are trade fixtures which rightfully belong
to Capital Associates.
The computer access flooring attached to the premises has become part
of the premises, indeed it is the actual floor in most of the premises.
If the flooring were removed the entire proportion of the space would be
thrown off, for instance the doors would be hanging too high. Furthermore,
the parties' intention in the NationsBank Lease was that the floor covering
the concrete slab would belong to NationsBank ("floor and wall coverings
... made by, for, or at the direction of Lessee, shall when made become
the property of Lessor"). There is nothing unique about Pandick's business
which would render the floor a trade fixture. Raised access flooring is
utilized in many office spaces, because it maximizes flexibility in the
arrangement of computers, which almost any business today uses.
The rooftop air-conditioners are also part of the building itself in
that they provide the air-conditioning and heating for the building. Any
tenant would require such a system for any business. The rooftop air- conditioners
are attached to the building both by being affixed to structural supports
built into the roof and by the fact that the finished roof is built around
the installed air-conditioner. In order to remove the air-conditioners,
it would be necessary to tear up part of the roof itself.
Unlike the flooring and the rooftop air-conditioners, the remaining
disputed items are not so related to the premises that they are part of
the premises. The remaining disputed items, the UPS, five Liebert room
air conditioners, six Liebert Power Centers, and Liebert Sitemaster 200,
are related to the business or "trade" that Pandick conducted on the premises
and are therefore trade fixtures. All of the remaining disputed items are
necessary to conduct a business of data processing; they are not necessary
for the premises to be utilized for another business. They were brought
onto the premises for the purpose of the trade and not for the general
betterment of the premises. In fact, the contract clearly contemplates
that the room air conditioners are trade fixtures, because it requires
them to be capped off if removed.
Damages
NationsBank argues in its post-trial brief that even if any of the
disputed items are found to belong to Capital Associates, it should retain
possession of the items and pay Capital Associates the 1991 fair market
value of the items. This court disagrees with NationsBank analysis. The
disputed items which have been found by this court to belong to Capital
Associates are to be returned to the possession of Capital Associates.
These items are: the UPS, the five room air-conditioners, the six Liebert
Precision Power Centers, and the Liebert Sitemaster 200.
Furthermore, NationsBank must pay Capital Associates for the diminution
of value of these items from 1991 to 1994. Luckily, the parties' post-trial
briefs agreed in their assessment of the diminution in value of the items
which this court has found to belong to *555 Capital Associates. The diminution
in value from 1991 to 1994 is as follows:
UPS $ 5,000.00
UPS Battery Back-up 5,000.00
Liebert A/C and PDU's (all units combined) 0.00
----------
Total $10,000.00
Therefore, NationsBank must pay Capital Associates $10,000 in damages
plus post-judgment interest in addition to returning the items that this
court has found that it unlawfully converted.
NEC TECHNOLOGIES
v.
NELSON
267 Ga. 390, 478 S.E.2d 769 (1996)
HUNSTEIN, Justice.
Arthur and Kathy Nelson brought suit against Curtis Mathes Corporation,
C.M. City, Inc. d/b/a Curtis Mathes Home Entertainment Center, and NEC
Technologies, Inc. ("NEC"), seeking to recover property damages they sustained
in a fire allegedly caused by a defect in the Curtis Mathes television
set they had purchased. The Nelsons asserted causes of action sounding
in strict liability, negligence, and breach of warranty. Based on language
in the express warranty on the television set which provided that the warranty
"Excludes All Incidental and Consequential Damages," Curtis Mathes and
C.M. City moved for partial summary judgment on the Nelsons' claim for
consequential property damages under the breach of warranty claim. Holding
as a matter of law that the exclusion was not unconscionable at the time
of the sale to the Nelsons, the trial court granted the motion. In regard
to the Nelsons' claim that NEC was liable to them as the manufacturer of
the television set's electronic components, the trial court granted summary
judgment to the corporation, finding that it did not manufacture the electronic
components but instead was the exclusive importer, marketer and distributer
of the components; the manufacturer of the components was NEC Home Electronics
(USA), Ltd. (hereinafter "NEC Ltd."). The trial court further found that
NEC was not the alter ego of NEC Ltd. The Court of Appeals reversed the
trial court on both issues. **771 Nelson v. C.M. City, Inc., 218 Ga.App.
850(4), (6), 463 S.E.2d 902 (1995). We granted certiorari to consider that
court's rulings on both of these issues. We reverse.
1. Georgia law expressly allows manufacturers of products to limit
or exclude consequential damages. OCGA s 11-2-719(3). However, manufacturers
may not limit or exclude such damages where the result would be unconscionable.
Id. The Legislature recognized both the distinction between consumer and
commercial purchasers of products and the distinction between personal
injury and property damages, in that OCGA s 11-2-719(3) expressly states
that a limitation on consequential damages for personal injury in the case
of consumer goods is prima facie unconscionable. [FN1] The Legislature
could *391 have provided that a limitation on consequential property damages
in the case of consumer goods is prima facie unconscionable, as it did
with consequential damages for personal injuries, but it chose not to do
so. Warranty limitations on the recovery of consequential damages to property
in consumer cases have been upheld. E.g., McCrimmon v. Tandy Corp., 202
Ga.App. 233(3) , 414 S.E.2d 15 (1991); Sharpe v. General Motors Corp.,
198 Ga.App. 313(5), 401 S.E.2d 328 (1991). It follows from a review of
OCGA s 11-2-719(3) and case law that only those limitations/exclusions
on consequential property damages in consumer cases that are "unconscionable"
are barred under Georgia law.
FN1. OCGA s 11-2-719(3) provides:
Consequential damages may be limited or excluded unless the limitation
or exclusion is unconscionable. Limitation of consequential damages for
injury to the person in the case of consumer goods is prima facie unconscionable
but limitation of damages where the loss is commercial is not.
The Uniform Commercial Code and the Georgia UCC, see OCGA s 11-1-101
et seq., contain no definition of "unconscionability." This Court has noted
that the basic test for determining unconscionability is "whether, in the
light of the general commercial background and the commercial needs of
the particular trade or case, the clauses involved are so one-sided as
to be unconscionable under the circumstances existing at the time of the
making of the contract." Comment 1 to Uniform Commercial Code s 2-302.
R.L. Kimsey Cotton Co. v. Ferguson, 233 Ga. 962, 965(3), 214 S.E.2d
360 (1975). [FN2] However, the process by which a court reaches the conclusion
that a contract provision is unconscionable has been discussed by our appellate
courts only in abbreviated and conclusory fashion. E.g., Ga. Magnetic Imaging
v. Greene County Hosp. Auth., 219 Ga.App. 502(5), 466 S.E.2d 41 (1995);
Fiat Auto U.S.A. v. Hollums, 185 Ga.App. 113(2), 363 S.E.2d 312 (1987).
Thus, to assist this Court in resolving this appeal, we have found it helpful
to conduct a review of foreign authorities.
FN2. Other definitions of an unconscionable contract include " 'such
an agreement as no sane man not acting under a delusion would make and
that no honest man would take advantage of,' [cit.]," R.L. Kimsey Cotton
Co. v. Ferguson, supra, 233 Ga. at 966(3), 214 S.E.2d 360 and a contract
that is " 'abhorrent to good morals and conscience. It is one where one
of the parties takes a fraudulent advantage of another.' " F.N. Roberts
Pest Control Co. v. McDonald, 132 Ga.App. 257, 260, 208 S.E.2d 13 (1974).
It has been recognized that "unconscionability" as set forth in UCC
s 2-302 is "not a concept, but a determination to be made in light of a
variety of factors not unifiable into a formula." (Footnote and emphasis
deleted.) Vol. 1, White & Summers, Uniform Commercial Code (4th Ed.),
s 4-3, p. 213. See also A & M Produce Co. v. FMC Corp., 135 Cal.App.3d
473, 186 Cal.Rptr. 114, 120 (1982) (unconscionability is "a flexible doctrine
designed to allow courts to directly consider numerous *392 factors which
may adulterate the contractual process"). Foreign courts have generally
divided the relevant factors into procedural and substantive elements.
See UCC-Unconscionability Warranty Disclaimer, 38 A.L.R.4th 25, ss 2, 3(a)(b).
Procedural unconscionability addresses the process of making the contract,
while substantive unconscionability looks to the contractual terms themselves.
Id.; White & Summers, supra. A non-inclusive list of some factors courts
have considered in determining whether a contract is procedurally**772
unconscionable includes the age, education, intelligence, business acumen
and experience of the parties, their relative bargaining power, the conspicuousness
and comprehensibility of the contract language, the oppressiveness of the
terms, and the presence or absence of a meaningful choice. See, e.g., Fotomat
Corp. of Fla. v. Chanda, 464 So.2d 626, 629 (Fla.App. 5 Dist.1985); Wille
v. Southwestern Bell Telephone, 219 Kan. 755, 549 P.2d 903, 906-907 (1976)
(commercial transaction); Schroeder v. Fageol Motors, 86 Wash.2d 256, 544
P.2d 20, 23 (1975). See also White & Summers, supra, s 4- 3, p. 215,
fn. 15. As to the substantive element of unconscionability, courts have
focused on matters such as the commercial reasonableness of the contract
terms, the purpose and effect of the terms, the allocation of the risks
between the parties, and similar public policy concerns. See, e.g., Fotomat
Corp. of Fla. v. Chanda, supra, 464 So.2d at 629; A & M Produce Co.
v. FMC Corp., supra, 186 Cal.Rptr. at 122 (commercial transaction). See
also White & Summers, supra, ss 4-4 through 4-6. We find the procedural-substantive
analysis of unconscionability helpful and apply it to the case at bar.
2. For purposes of addressing the motion for partial summary judgment
on the consequential property damages issue, the trial court assumed, despite
sharply contested evidence adduced by the parties, that the television
set was indeed defective. [FN3] The trial court then considered the evidence
before it, consisting of documentary evidence such as the warranty issued
by Curtis Mathes [FN4] as well as *393 the affidavits and depositions of
the parties and other witnesses regarding matters such as the manner in
which the Nelsons chose a Curtis Mathes television set and how the parties
contracted for the purchase of the television set. The trial court expressly
pronounced this evidence sufficient to render it unnecessary to hold a
hearing as to the warranty's commercial setting, purpose, and effect under
OCGA s 11-2- 302(2). The trial court granted partial summary judgment to
Curtis Mathes and C.M. City on the basis that it was not unconscionable
at the time of the sale of the product, see OCGA s 11-2-302(1), to exclude
recovery of consequential property damages and limit recovery to the replacement
of parts, service, labor and like matters.
FN3. The trial court noted that the city fire chief and the fire marshall
opined that the fire started from an electrical shortage unassociated with
the television set, while the Nelsons' expert opined the fire originated
around a defective resistor in the set.
FN4. There is some dispute whether the applicable warranty was a six-year
or a four-year warranty. Construing the evidence in favor of the Nelsons,
as respondents on motion for summary judgment, we will presume the applicability
here of the six-year warranty. That warranty was denominated an "Exclusive
Six Year Limited Protection Plan." It stated the protection plan was provided
by Curtis Mathes Corporation; explained who was covered, how long they
were covered and what was covered; and set forth the steps an owner was
required to follow to obtain service and possible costs therefor. Under
the bold-faced section titled "What Are The Exceptions," there were several
brief paragraphs containing various exclusions, such as for damages caused
by abuse and acts of nature, shipping and handling charges, and non-coverage
of commercial or educational use. The fifth paragraph provides: This Exclusive
Limited Protection Plan Excludes All Incidental and Consequential Damages.
Some states do not allow the exclusion of incidental or consequential damages,
so the above exclusion may not apply to you. This language is followed
by a paragraph excluding implied warranties. The warranty concludes with
the statement that the protection plan "gives you specific legal rights.
You may have other rights which vary from state to state," and then provides
that "[f]or further information about this Protection Plan" interested
individuals could contact the Curtis Mathes Protection Plan Administrator,
setting forth an address and telephone number.
Our review of the record regarding all of the circumstances surrounding
the process in which these parties entered into the contract for the purchase
of the television set reveals no basis for concluding the warranty exclusion
should be voided for procedural unconscionability. The language setting
forth the warranty exclusion was conspicuous and comprehensible; the warranty
apprised consumers that the absolute language in an exclusion may not apply
to them; and the warranty itself provided a source to be contacted if further
information or clarification was desired. See fn. 4, supra. Ms. Nelson
in her deposition detailed the manner in **773 which the television set
was purchased. [FN5] She deposed that she had owned for five years a 40-inch
Curtis Mathes television when she decided (during the course of moving
furniture to another home) that rather than move the old set, she would
exchange it for a new set. She contacted C.M. City and asked a salesperson
if the store was interested in an exchange. She was informed that the 40-inch
model was no longer available and that the most comparable model had a
46-inch screen. Ms. Nelson arranged during this telephone conversation
to have C.M. City pick up the old set and deliver a new 46-inch television
to the other home. She received $500 for the trade-in and paid the $1,970.80
balance on the new set in cash. She was aware there was a six-year warranty
on the set; the sales receipt also reflects a handwritten notation regarding
*394 the six- year warranty. Although employees of C.M. City were deposed,
they were unable to provide any further details regarding the transaction.
FN5. It is uncontroverted that Mr. Nelson was not involved in the purchase
of the set. The record does not reflect Ms. Nelson's education or age,
though it appears that at the time of the purchase she was a mature adult
(in that she had recently married Mr. Nelson after the end of a first marriage
that had lasted 40 years) and that she possessed some business experience
(having worked in a furniture store and as a manager's assistant).
The record as developed reveals no evidence that the Nelsons looked
at other manufacturers' sets, compared warranties between sets available
on the market, or made any inquiry of C.M. City or other dealers regarding
the extent of warranties available on such sets. The record does reflect
that Ms. Nelson was able to bargain over certain matters in the contract,
such as the trade-in of the old set and delivery arrangements, and there
is some evidence that Ms. Nelson obtained the benefit of a six-year warranty
rather than a four-year warranty on the television set. However, there
is no evidence that any other aspect of the warranty played any part in
the bargaining process or in Ms. Nelson's decision to purchase the television
set. Given this evidence, we conclude that Curtis Mathes and C.M. City
discharged their burden as movants for summary judgment by demonstrating
from the testimony and documents adduced that there is an absence of evidence
to support a finding of procedural unconscionability in the warranty limitation
in issue. See generally Lau's Corp. v. Haskins, 261 Ga. 491, 405 S.E.2d
474 (1991). [2] 3. We pretermit the issue whether the lack of procedural
unconscionability in this case is determinative of the unconscionability
issue [FN6] because we conclude that there is likewise an absence of evidence
to support a finding of substantive unconscionability.
FN6. Research supports the statement made in Fotomat Corp. of Fla.
v. Chanda, supra, 464 So.2d at 629, that [m]ost courts take a "balancing
approach" to the unconscionability question, and to tip the scales in favor
of unconscionability, most courts seem to require a certain quantum of
procedural plus a certain quantum of substantive unconscionability.
Initially, we recognize that the exclusion of consequential property
damages in the warranty cannot, in and of itself, be deemed to be against
public policy since, as discussed in Div. 1, supra, the Legislature has
allowed manufacturers to so exclude consequential property damages. What
the Legislature allows cannot be contrary to public policy. Avery v. Aladdin
Products Div., etc., Inc., 128 Ga.App. 266(2), 196 S.E.2d 357 (1973). [FN7]
FN7. Similarly, because the Legislature also provides a trial court
with the authority to refuse to enforce any part of a contract it deems
unconscionable or to limit the application of any unconscionable clause
as to avoid any unconscionable result, OCGA s 11-2-302(1), we find meritless
the Nelsons' argument that the entire exclusion clause at issue should
be stricken as unconscionable because the exclusion fails to differentiate
between damage to property and personal injury. Because the Nelsons' claim
involves only property damages, they cannot show how the exclusion of consequential
damages for personal injury was unconscionable as to them.
OCGA s 11-2-302(1) directs the trial court to determine as a matter
of law whether a contract or any clause thereof was unconscionable "*395
at the time it was made": the unconscionability of a contract is not to
be judged based on subsequently-acquired knowledge. See White & Summer,
supra, s 4-3, p. 211. There is nothing in the record to indicate **774
that at the time the Nelsons executed the sales contract for their television
set, they were not aware of the normal hazards associated with the use
of any electrical appliance. A review of the record before the trial court
reveals nothing to indicate that Curtis Mathes or C.M. City had any knowledge
that the particular design of television set purchased by the Nelsons posed
any greater danger than that presented by other products designed to utilize
electricity in their operation. A warranty that limited the consumer's
remedy to the replacement of parts, labor, services, and perhaps the value
of the television set itself was not unreasonable as a matter of law in
light of the remote, albeit dire, possibility that a defect might be present
in the television set and that the consequences of the defect might be
a fire that could extend beyond the set itself. Thus, while it has been
recognized that a contractual term "is substantively suspect if it reallocates
the risks of the bargain in [an] objectively unreasonable or unexpected
manner, [cits.]" A & M Produce Co. v. FMC Corp., supra, 186 Cal.Rptr.
at 122, we cannot conclude under the circumstances in this case that the
allocation of the risk of property damage to the Nelsons was unconscionable.
We recognize that to hold this exclusion of consequential property damages
unconscionable could necessitate voiding as unconscionable such exclusions
in the warranties of virtually every type of electrical appliance sold
to a consumer, a result clearly contrary to the provisions of OCGA s 11-2-719(3).
The Court of Appeals found the exclusion in this case to be unconscionable
"given the manufacturer's (Curtis Mathes's) use of its name and reputation
as the manufacturer of superior quality products, while failing to disclose
that it did not actually manufacture the product." Nelson v. C.M. City,
supra, 218 Ga.App. at 854, 463 S.E.2d 902. The Court of Appeals previously
held in the same opinion that Curtis Mathes was the manufacturer of the
television set, in that "the television was manufactured, prepared, assembled
and packaged according to Curtis Mathes's own 'plan, intention, design,
specifications, [and] formulation.' [Cit.]" Id. at 852(2), 463 S.E.2d 902.
Given that the Nelsons themselves assert for purposes of strict liability
that Curtis Mathes was the manufacturer of the television set and have
sought and obtained such a ruling from the Court of Appeals, see id., we
cannot agree with the Court of Appeals that the Nelsons can claim Curtis
Mathes is a manufacturer for strict liability but use the fact that Curtis
Mathes did not manufacture the product to void a warranty limitation on
the basis of unconscionability. Further, given that the unconscionability
of contractual provisions is determined as a matter *396 of law, OCGA s
11-2-302(1), we reject the Court of Appeals' holding that as a matter of
law a manufacturer commits fraud by selling under its own label and as
its own wares a complex product such as a television set which contains
components that were not in every aspect designed, formulated, fabricated,
constructed, and assembled exclusively by the manufacturer. Such a holding
fails to reflect the reality and complexity of today's world-wide marketplace.
Because there is an absence of evidence that Curtis Mathes or C.M. City
acted fraudulently in the particular manner in which this television set
was sold to the Nelsons, see Lau's Corp. v. Haskins, supra, the trial court
correctly held that the exclusion in issue was not unconscionable.
4. OCGA s 11-2-302 provides Georgia courts with a potent tool for shielding
disadvantaged and uneducated consumers from overreaching merchants. However,
Georgia law also recognizes and protects the freedom of parties to contract.
See, e.g., National Consultants v. Burt, 186 Ga.App. 27, 32, 366 S.E.2d
344 (1988). " 'People should be entitled to contract on their own terms
without the indulgence of paternalism by courts in the alleviation of one
side or another from the effects of a bad bargain. Also, they should be
permitted to enter into contracts that actually may be unreasonable or
which may lead to hardship on one side. It is only where it turns out that
one side or the other is to be penalized by the enforcement of the terms
of a contract so unconscionable that no decent, fairminded person would
view the ensuing result without being possessed of a profound sense of
injustice, that equity will deny the use of its good offices in the enforcement
of such unconscionability.' " **775 Fotomat Corp. of Fla. v. Chanda, supra,
464 So.2d at 630. Based on a review of the evidence in light of both procedural
and substantive elements of unconscionability, we cannot conclude as a
matter of law that decent, fairminded persons would possess a profound
sense of injustice from the enforcement of this warranty provision excluding
the recovery of consequential property damages in the sale of a television
set so as to render the exclusion unconscionable under OCGA s 11-2-302.
Therefore, the Court of Appeals erred by reversing the trial court when
it found that the warranty provision excluding the Nelsons from recovering
consequential property damages was not unconscionable and that the Nelsons
can recover under their breach of warranty claim only those damages allowed
by the warranty. We note that this holding will not leave the Nelsons without
recourse for their property damages, as they may seek to recover those
losses *397 under their strict liability and negligence causes of action.
[Portion of opinion discussing whether NEC was alter ego of NEC Ltd.
is omitted.]
BMW FINANCIAL SERVICES,N.A.,INC.
v.
SMOKE RISE CORPORATION
226 Ga. App. 469, 486 S.E.2d 629 (1997)
POPE, Presiding Judge.
In this action to enforce an excess mileage provision in a motor vehicle
lease, the plaintiff lessor appeals from the trial court's denial of its
motion for summary judgment. Because there is no question of material fact
regarding plaintiff's right to enforce the provision, we granted its application
for interlocutory appeal and now reverse. Defendant Smoke Rise Corporation
leased a BMW automobile from plaintiff, and the corporation's president,
defendant William Probst, personally guaranteed the lease. The lease, as
modified in an extension agreement, provided that at the end of the lease
term defendants could purchase the vehicle for $16,863.75, the estimated
end-of-term wholesale value of the vehicle. It also provided that if defendants
returned the vehicle rather than exercising their option to purchase it,
they would have to pay a charge of "up to 15 cents" for each mile the vehicle
had been driven in excess of 85,011 miles. Defendants chose not to purchase
the vehicle and returned it with an odometer reading of 180,409 miles,
but they refused to pay for the excess mileage. Plaintiff seeks $14,309.70,
which is 15 cents times 95,398 (the difference between 180,409 and 85,011
miles), plus attorney fees.
In their defense, Smoke Rise and Probst contend the excess mileage
provision is unconscionable because the $14,309.70 charge is almost as
much as the projected end-of-term value of the car, and is considerably
more than their experts say the actual value of the car is with 180,409
miles. Unconscionability is evaluated by looking at the circumstances at
the time the contract was originally made, however, and determining whether,
in light of the commercial needs of the particular trade involved, the
agreement is one which " 'no sane man not acting under a delusion would
make and ... no honest man would take advantage of.' [Cits.]" R.L. Kimsey
Cotton Co. v. Ferguson, 233 Ga. 962, 966(3), 214 S.E.2d 360 (1975); accord
Zepp v. Mayor etc. of Athens, 180 Ga.App. 72, 79(2), 348 S.E.2d 673 (1986).
See also OCGA s 11- 2A-108. In the context of a corporation leasing a luxury
vehicle, an excess mileage charge of 15 cents per mile is not unreasonable
and certainly does not shock the conscience. Such a charge serves the necessary
commercial function of compensating for out-of-the-ordinary usage which
will affect the residual value of the car. If *470 at the end of the term
defendants discovered the excess mileage charge was too high relative to
the value of the car, they could have exercised their option to purchase
it. But they did not do so, and now they cannot complain about a charge
they agreed to pay.
Defendants' argument that the provision is too indefinite to enforce
is also without merit. Plaintiff is entitled to anything up to 15 cents
per mile, and that includes 15 cents per mile. And the fact that it was
willing to take less earlier in the dispute does not undermine its right
to 15 cents per mile.
The excess mileage provision is clear and unambiguous and must be enforced
as written. See Saf-T-Green of Atlanta v. Lazenby Sprinkler Co., 169 Ga.App.
249, 250, 312 S.E.2d 163 (1983). Accordingly, the trial court erred in
denying plaintiff's motion for summary judgment.
Judgment reversed.
WALNUT EQUIPMENT LEASING CO.
v.
MORENO
643 So.2d 327 (La. Ct. App. 1994)
VICTORY, Judge.
Plaintiff, Walnut Equipment Leasing Company, appeals a trial court judgment
rejecting its claims against defendants, Clarence and Glenda Moreno d/b/a
P & M Texaco, for unpaid rent for the lease of a tire changer. We reverse
and render.
FACTS
Sometime prior to November 30, 1989, Larry Brown, a salesman for Webb
Equipment Company, Inc. ("Webb") of Shreveport, Louisiana, approached Clarence
and Glenda Moreno, d/b/a P & M Texaco (the "Morenos"), regarding the
sale of a tire changer for use in their automobile service station. After
Brown unloaded the machine and demonstrated its capabilities and safety
features, Mr. Moreno decided that it suited the station's needs and orally
agreed to either lease the tire changer or purchase it for $2,600.00. After
consulting two certified public accountants, Mr. Moreno opted to lease
the machine for tax purposes.
The lease was arranged through Walnut Equipment Leasing Company, Inc.
("Walnut"), a Pennsylvania corporation. Brown presented a Walnut lease
application to the Morenos, which described the exact tire **329 changer
selected (Hofmann TC 12 SE, Serial Number 1971091), listed P & M Texaco's
and Webb's addresses, and indicated that Brown was the Webb salesman responsible
for the transaction. On November 30, 1989, Mr. Moreno, on behalf of "P
& M Texaco Service," wrote a $312.00 check payable to Walnut, representing
the first monthly rental payment and the last two monthly rental payments,
as a security deposit.
Brown then presented a Walnut lease form to the Morenos, which was
signed by both of them sometime during December, 1989, and was accepted
by Walnut on January 4, 1990. According to the terms of the lease, the
Morenos *2 were to pay monthly rentals of $104.00 for 39 months. At the
end of the lease, the Morenos were to have no ownership interest in the
tire changer and no option to purchase the machine. Additionally, Paragraph
II of the lease contained a warranty disclaimer, which provided that Walnut
made no representations or warranties of any kind, express or implied,
as to the condition of the equipment, its merchantability or its fitness.
On January 4, 1990, Walnut issued a purchase order to Webb requesting purchase
of the Hofmann TC 12 SE, tire changer, Serial Number 1971091, and requesting
delivery to P & M Texaco. [FN1]
FN1. It is unclear when the tire changer was actually delivered. Mr.
Moreno testified that it was delivered before he wrote the November 30,
1989, check to Walnut. However, Walnut's president, Mr. Shapiro, testified
that it was customary for the equipment to be delivered only after Walnut
accepted the lease and issued a purchase order to the supplier. Apparently
the request for delivery of the tire changer to P & M Texaco in the
January 4, 1990, purchase order was merely a formality.
Mr. Moreno also signed a document entitled "Certificate of Acceptance
and Satisfaction," whereby he acknowledged receipt of the tire changer,
and stated that he read and understood the terms of the lease. The certificate
further provided that the Morenos had selected both the equipment and the
supplier from whom the tire changer was purchased, and that neither the
supplier nor the salesman were Walnut agents. Additionally, the certificate
stated that the Morenos understood that Walnut made no warranties, express
or implied, as to the condition of the equipment, and that Walnut would
not be liable to the Morenos for losses or damages caused by the equipment
or its use. Finally, the certificate provided that if the equipment did
not operate as represented by the supplier or if it was not satisfactory
for any reason, the Morenos would assert their claims solely against the
supplier, Webb, and would nevertheless pay Walnut all of the rent due under
the lease. *3
Walnut followed up the transaction by telephoning Mr. Moreno on two
different occasions to confirm that he was satisfied, and that he understood
the terms of the lease and his obligations thereunder. The contents of
both conversations were memorialized by Joan Demow, a Webb employee, through
a written telephone memorandum. The first telephone call was placed on
January 8, 1990. According to the memorandum, Mr. Moreno confirmed receipt
of the tire changer and stated that he was satisfied. He also acknowledged
that Walnut was not responsible for service, repairs or maintenance of
the leased equipment.
On or about February 2, 1990, the tire changer "blew up" while a P
& M Texaco employee was repairing a tire. The tire and rim being repaired
were damaged, and the tire changer was rendered unusable. Mr. Moreno contacted
Brown to advise of the malfunction, who later came out to the service station
to inspect the tire changer. After inspecting the machine, Brown decided
that it was necessary to take it to Webb, in Shreveport, for repair. A
few days later, Brown telephoned Mr. Moreno to inform him that it would
cost approximately $2,000.00 to repair the tire changer. Mr. Moreno objected
to the high cost of the repairs, since a new machine could be purchased
for $2,600.00.
The Morenos refused to pay for the repairs. They also discontinued
making monthly rental payments to Walnut. After making several oral and
written demands for payment, Walnut sued the Morenos in Pennsylvania, and
on August 1, 1990, obtained a "default" judgment for $5,463.64, representing
accelerated and back lease payments, late charges, collection fees and
taxes. On December **330 27, 1990, Walnut filed an "Ex Parte Petition for
Enforcement of Foreign Judgment," in *4 Caldwell Parish, Louisiana, requesting
that the court recognize the Pennsylvania judgment.
On January 31, 1991, the Morenos answered Walnut's petition to enforce
the Pennsylvania judgment. Therein, they generally denied Walnut's allegations
and specifically pled that the Pennsylvania court lacked personal jurisdiction
over them. They also claimed that the tire changer was defective and that
it was not suitable for the purposes for which it was intended. The Morenos
also reconvened against Walnut and Webb, claiming that the tire changer
should have been repaired pursuant to the warranty provisions affiliated
with the purchase/lease. The Morenos prayed for dismissal of Walnut's claims,
rescission of the lease, and attorney fees and costs.
[Portions omitted.]
After considering the testimony and other evidence presented, the *5
trial court ruled in favor of the Morenos, declaring the lease null and
void and ordering Walnut to refund all previously made payments. The trial
court concluded that:
... the lessor simply cannot be allowed to exact a waiver of the obligation
of warranting fitness from vices and defects while retaining the right
to collect rent for the entire thirty-nine (39) month term, even if equipment
proves defective less than one (1) month after commencement of the lease.
[Portions discussing choice of law omitted.]
*9 WAIVER OF WARRANTIES UNDER PENNSYLVANIA LAW Having found that Pennsylvania
law governs all aspects of the lease, except those relating to default,
remedies and charges, we now turn to the effectiveness of the waiver of
warranty provision under that state's law. [6] Pennsylvania's "Sales" articles
are based substantially upon those set forth in Article 2 of the Uniform
Commercial Code, and are located at 13 Pa.C.S.A. ss 2101 through 2725.
Although the transaction at issue involves a lease, rather than a sale,
the Pennsylvania courts have found that the "warranty" and "waiver of warranty"
provisions applicable to sales, 13 Pa.C.S.A. ss 2313 through 2316, may
be applied by analogy to leases. [FN4] Cucchi v. Rollins Protective Services
Co., 524 Pa. 514, 574 A.2d 565 (1990); Keblish v. Thomas Equipment, Ltd.,
427 Pa.Super. 93, 628 A.2d 840 (1993); Fetrow, Uniform Commercial Code--Pennsylvania
Applies Article 2 Warranty Provisions to Personal Property Lease Transactions--Cucchi
v. Rollins Protective Services, 64 Temp.L.Rev. 355 (1991).
FN4. It is noteworthy that, effective July 9, 1993, the Pennsylvania
legislature enacted the "Uniform Commercial Code Modernization Act," Act
No. 1992-97. By this legislation, Article 2A, Leases, was codified at 13
Pa.C.S.A. s 2A101 et seq. The Article 2A warranty provisions for leases
are essentially the same as those for sales.
The applicable warranties are set forth in 13 Pa.C.S.A. ss 2314 and
2315, which provide, in pertinent part, that: s 2314. Implied warranty;
merchantability; usage of trade (a) Sale by merchant.--Unless excluded
or modified (section 2316), a warranty that the goods shall be merchantable
is implied in a contract for their sale if the seller is a merchant with
respect to goods of that kind.... *10 (b) Merchantability standards for
goods.--Goods to be merchantable must be at least such as: * * * * * *
(3) are fit for the ordinary purposes for which such goods are used.
s 2315. Implied warranty: fitness for particular purpose Where the seller
at the time of contracting has reason to know: (1) any particular purpose
for which the goods are required; and (2) that the buyer is relying on
the skill or judgment of the seller to select or furnish suitable goods;
**333 there is unless excluded or modified under s 2316 (relating to exclusion
or modification of warranties) an implied warranty that the goods shall
be fit for such purpose.
To exclude or modify the implied warranty of merchantability, according
to 13 Pa.C.S.A. s 2316, the written contract language must mention merchantability
and must be conspicuous. To exclude or modify the implied warranty of fitness,
the exclusion must be in writing and conspicuous. The statute also provides
that, "Language to exclude all implied warranties of fitness is sufficient
if it states, for example, that 'There are no warranties which extend beyond
the description on the face hereof.' "
A term is conspicuous when it is so written that a reasonable person
against whom it is to operate ought to have noticed it. 13 Pa.C.S.A. s
1201. See also, Keblish, supra; Moscatiello v. Pittsburgh Contractors Equipment
Company, 407 Pa.Super. 363, 595 A.2d 1190 (1991), appeal denied, 529 Pa.
650, 602 A.2d 860 (1992). Additionally, language in the body of a form
is conspicuous if it is in larger or other contrasting type or color. 13
Pa.C.S.A. s 1201.
Some of the important characteristics that Pennsylvania courts consider
when determining whether a reasonable person should have noticed the disclaimer
*11 include: (1) the placement of the clause in the document (beginning/end
or front/back of document); (2) the size of the disclaimer's print; and
(3) whether the disclaimer was highlighted or called to the reader's attention
by being in all caps or a different type style. Keblish, supra; Moscatiello,
supra; U.S. Leasing Corporation v. Stephenson Equipment, Inc., 230 Pa.Super.
181, 326 A.2d 472 (1974).
The waiver of warranty provision at issue provides:
II WARRANTIES--LESSEE AGREES THAT LESSOR HAS MADE NO REPRESENTATIONS
OR WARRANTIES OF ANY KIND, NATURE OR DESCRIPTION, EXPRESS OR IMPLIED AS
WITH RESPECT TO ANY OTHER MATTER WHATSOEVER, INCLUDING WITHOUT LIMITATION,
THE CONDITION OR USE OF THE EQUIPMENT, ITS MERCHANTABILITY, OR ITS FITNESS
FOR ANY PARTICULAR PURPOSE. (Caps and bold in original.) This provision
is located on the front side of the lease, which is one page in length
with printed information on both sides. Furthermore, it is located almost
directly in the middle of the front page of the lease, and is immediately
noticeable because it is in larger type, all caps and boldfaced. The majority
of the printed information is smaller in size, not boldfaced and not capitalized.
It is the only capitalized and boldfaced paragraph that is listed under
the section entitled TERMS AND CONDITIONS OF LEASE.
We find that the warranty disclaimer here is sufficiently noticeable
to satisfy the conspicuousness requirement of 13 Pa.C.S.A. s 2316. The
warranty disclaimer also satisfies the remaining requirements of 13 Pa.C.S.A.
s 2316 because it is "written" and makes specific reference to "merchantability."
As such, the Morenos waived any breach of warranty claims that they
may have had against Walnut. According to the terms of the lease, the Morenos
bore *12 the risk that the tire changer was merchantable and that it would
be fit for its particular purpose. A waiver of claims against Walnut for
nonsatisfactory condition or defective conditions of the leased equipment
was an effective allocation of foreseeable risks.
FAIRNESS AND UNCONSCIONABILITY
The Morenos have obligated themselves to tender all rental payments,
regardless of the condition of the tire changer. This is provided for in
the lease, which has the phrase, "THIS LEASE IS NON-CANCELLABLE" (bold
and caps in original), typed just above the signature lines on the front
page. Further, the "Certificate of Acceptance and Satisfaction," signed
by Mr. Moreno, provided that:
Lessee further acknowledges the following:
e) that if the equipment is not properly installed, does not operate
as represented by supplier, or is unsatisfactory for any **334 reason,
Lessee shall make claim on account thereof solely against supplier and
shall nevertheless pay Lessor all rent payable under this Lease; Lessee
hereby waiving any and all rights, claims and set-offs against the Lessor
that might otherwise have arisen under the Lease agreement. (Emphasis added.)
The Morenos contend that enforcement of both these provisions and the
warranty disclaimer would be unfair because: (1) Mr. Moreno is an unsophisticated
lessee who was not given an opportunity to read the lease, and was not
explained the terms of the lease; (2) it is unconscionable to require Mr.
Moreno to waive all warranties, while at the same time demanding the payment
of all rentals due under the lease. We disagree.
*13 Mr. Moreno testified that he completed seven years of formal education
and received a General Equivalency Diploma or G.E.D. He is able to read
and write. Furthermore, Mr. Moreno has been an insurance agent for ten
years, and is the proprietor of his own insurance agency. While Mr. Moreno
has no college education or formal corporate titles, he is a small businessman
with significant experience in business matters. His insurance agency has
apparently been successful enough to remain open for a number of years.
As owner, Mr. Moreno must have some influence on the business and its success
must be attributable to him. Furthermore, the nature of the insurance business
leads us to believe that Mr. Moreno must understand the purpose of entering
into written contracts, and the significance of reading contractual terms
before signing an instrument.
Mr. Moreno is not uneducated and unsophisticated in business matters.
He admitted that he did not read the lease, and acknowledged that he should
have done so. Under Pennsylvania law, in the absence of proof of fraud,
the failure to read a contract one signs is an unavailing excuse or defense,
and can not justify an avoidance, modification or nullification of the
contract or any provision thereof. Estate of Brant, 463 Pa. 230, 344 A.2d
806 (1975); Stanley A. Klopp, Inc. v. John Deere Co., 510 F.Supp. 807 (E.D.Pa.1981),
affirmed, 676 F.2d 688 (3d Cir.1982).
With regard to the Morenos' claims of unconscionability, we look to
13 Pa.C.S.A. s 2302, which provides: (a) Finding and authority of court.--If
the court as a matter of law finds the contract or any clause of the contract
to have been unconscionable at the time it was made, the court may:
(1) refuse to enforce the contract;
*14 (2) enforce the remainder of the contract without the unconscionable
clause; or (3) so limit the application of any unconscionable clause as
to avoid any unconscionable result. (b) Evidence by parties.--When it is
claimed or appears to the court that the contract or any clause thereof
may be unconscionable the parties shall be afforded a reasonable opportunity
to present evidence as to its commercial setting, purpose and effect to
aid the court in making the determination.
Although this provision is contained within Pennsylvania's "Sales"
Articles, it has been applied to leases. Bishop v. Washington, 331 Pa.Super.
387, 398, 480 A.2d 1088, 1093 (1984), citing Leasing Service Corp. v. Broetje,
545 F.Supp. 362 (S.D.N.Y.1982). Whether a contract or clause is unconscionable
is a question of law. Stanley A. Klopp, supra. Generally the party challenging
a contract or a particular contract term has the burden of proving unconscionability.
Bishop, supra.
According to the Pennsylvania Supreme Court, the test of unconscionability
is twofold. First, for a contract or a term to be unconscionable, the party
signing the contract must have lacked a meaningful choice in accepting
the challenged provision. Second, the challenged provision must unreasonably
favor the party asserting it. Witmer v. Exxon Corp., 495 Pa. 540, 551,
434 A.2d 1222, 1228 (1981).
The Morenos have failed to meet their burden of proving that, as the
parties signing the lease, they lacked a meaningful choice in accepting
the terms and conditions thereof. Mr. Moreno testified that he debated
about **335 whether to lease or purchase the tire changer. After consulting
with two certified public accountants, he opted to lease the machine for
tax advantages. There is no evidence that Mr. Moreno attempted to negotiate
or change any terms of the lease. *15 Additionally, Walnut was not the
only lease financing company available. Had they objected to the terms
of the lease and Walnut refused to modify them, the Morenos could have
requested that Webb suggest another lessor or the Morenos could have found
their own leasing company. If this avenue proved impractical, the Morenos
simply could have purchased the tire changer from Webb. Where, as here,
a contract provision affects commercial entities with meaningful choices
at their disposal, the clause in question will rarely be deemed unconscionable.
Vasilis v. Bell of Pennsylvania, 409 Pa.Super. 396, 399, 598 A.2d 52, 54
(1991).
We also find that these provisions do not unreasonably favor Walnut.
They are provisions commonly found in three-party lease transactions, and
the Morenos are not left without recourse.
[Remainder of opinion discussing role of financing lessor is omitted.]
DISSENTING OPINION
*20 BROWN, Judge, dissenting.
Plaintiff buys the machine and leases it to defendant. Plaintiff, however,
does not even guarantee that the machine is a tire-changer. The machine
blows up within a month. Plaintiff now wants defendant to continue to make
the lease payments for the unworkable machine. I find this result unconscionable.
It should be plaintiff's responsibility to proceed against the supplier
and manufacturer.
SIEMENS CREDIT CORP.
v.
NEWLANDS
905 F. Supp. 757 (N.D. Cal. 1994)
.
FERN M. SMITH, District Judge.
ISSUES
This motion requires the Court to decide the following questions: (1) is
the Lease entered into by the parties a financing lease, so that the plaintiff's
obligation was limited to financing defendant's equipment purchase, and
so that defendant was obligated to look to the supplier of the equipment;
(2) has defendant created a material issue of fact as to whether plaintiff
represented to him that plaintiff and the supplier of the equipment were
all "part of the same company" such that plaintiff acted fraudulently and
in bad *760 faith; (3) is the Lease unconscionable and unenforceable; and
(4) is plaintiff entitled to the full amount of damages it claimed under
the Lease?
BACKGROUND
Plaintiff Siemens Credit Corporation ("Siemens Credit") has filed this
motion for summary judgment against defendant Allan E. Newlands, individually
and doing business as Matrix Marketing Strategists ("Matrix"). Plaintiff
seeks to recover lease payments on which defendant has defaulted. The lease
was for equipment which Siemens Credit acquired, at defendant's request,
from Siemens Information Systems, Inc. ("SISI"), the manufacturer and supplier
of the equipment. Siemens Credit acquired the equipment so that it could
lease it back to defendant.
I. DEFENDANT'S NEGOTIATIONS AND TRANSACTION WITH THE EQUIPMENT SUPPLIER
(SISI)
Defendant prints brochures and materials for mass marketing. In need
of advanced printing technology and machinery to satisfy his customers'
needs, defendant, prior to March 22, 1991, conducted several meetings and
discussions with sales representatives of SISI, an equipment manufacturer
and supplier not a party to this action. Mr. Newlands discussed his company's
specific needs with SISI's sales representatives, and he was assured by
the representatives that the equipment which is the subject of this litigation
would meet those needs. Newlands Decl. pp 2-3. Based on these assurances,
he entered into an Equipment Purchase Agreement ("Purchase Agreement")
and an Equipment Maintenance Agreement ("Maintenance Agreement") with SISI,
on March 22, 1991, and an Equipment Purchase Contract Addendum with SISI,
on March 29, 1991. Id. pp 4-5.
Financing arrangements were also discussed during the course of the
meetings with SISI's sales representatives. Mr. Newlands told the sales
representatives that it was important to him that he "purchase or lease,
and finance, the equipment through the same company, in order to avoid
a situation where payments would have to be made to a lender for equipment
that was defective, and having the lender claim that that was not the lender's
problem." Id. p 10. Mr. Newlands, in other words, did not wish to be precluded
from asserting defects in the equipment as a defense to making lease payments.
Id. p 9. Mr. Newlands alleges that the sales representatives told him that
the equipment could be leased, and that financing for the lease could be
arranged through "our (Siemens) credit company." Id. p 6. These individuals
represented to him that the manufacturer and lender were all part of the
same company, and that the problem he was concerned about would not occur.
Id. p 10. There are no allegations that any employee of Siemens Credit
made any misrepresentations.
II. DEFENDANT'S TRANSACTION WITH THE PLAINTIFF LESSOR (SIEMENS CREDIT)
Financing was ultimately arranged through plaintiff, Siemens Credit,
a corporation organized and existing under the laws of the State of Delaware
and qualified to transact business in the State of California. Joint Statement
of
Undisputed Facts, filed September 16, 1994, p 1.
On May 13, 1991, plaintiff and defendant entered into a written Master
Equipment Lease Agreement ("Master Agreement") and Leasing Schedule (subsequently
modified by Contract Addendum Supplemental No. 1 dated October 15, 1991)
(collectively "Schedule No. 1"). On June 26, 1992, the parties entered
into a second Leasing Schedule ("Schedule No. 2") (The Master Agreement,
Schedule No. 1 and Schedule No. 2 shall be collectively referred to as
the "Lease"). On May 14, 1991, the parties also entered into a written
Purchase Agreement Assignment (the "Assignment"), which assigned defendant's
rights in the Purchase Agreement between defendant and SISI to plaintiff,
so that plaintiff could purchase the equipment from SISI and lease it to
defendant. Newlands Decl., Ex. D Plaintiff purchased the equipment from
SISI, pursuant to the Lease and the Assignment, and delivered the equipment
to defendant. *761 Schedule No. 1 required defendant to make monthly payments
of $4,978.00, starting on September 7, 1991. Plaintiff received only 10
payments from defendant pursuant to Schedule 1; defendant made no Schedule
1 payments after the June 7, 1992 payment. Schedule No. 2 required defendant
to make monthly rental payments of $522.46 for 38 months, starting on July
7, 1992. Plaintiff received only 4 payments from defendant pursuant to
Schedule 2; defendant made no Schedule 2 payments after the October 7,
1992 payment.
Under Paragraph 9(a) of the Master Agreement, the failure to make monthly
rental payments constitutes default. Plaintiffs, therefore, repossessed
the equipment from defendant in June of 1993, and re-leased it to Neodata,
Inc. on a six-month lease at $8,500 per month, starting on December 1,
1993.
Defendant claims that the equipment never worked properly and proved
unsuitable and unable to perform the tasks which SISI's sales representatives
had represented it would perform. The equipment was not capable of performing,
due to both shortcomings in design, and defects in its workmanship. Newlands
Decl. p 11. Due to the equipment's shortcomings, he was unable to fulfill
his production commitments, resulting in significant loss of income and
an inability to make the payments under the Lease. Id. p 12. Under Paragraph
9(b) of the Master Agreement, plaintiffs are entitled to all past due Lease
payments and all future Lease payments discounted at 6% per annum. The
balance due for rental payments under the Lease is $206,154.86. Joint Statement
p 13. The Lease also provides that upon defendant's default, it is entitled
to its attorneys' fees and prejudgment interest on the Lease balance. Plaintiff
claims attorneys' fees in the amount of $17,209.08, and prejudgment interest
in the amount of $22,382.72. Additionally, although the Lease does not
require plaintiff to re-sell or re-lease the equipment, plaintiff originally
proposed giving defendant a credit in the amount of $25,500.00 for payments
received from Neodata. This brings the total damages claimed by plaintiffs
to $220,246.66. Id. pp 13, 15-16.
DISCUSSION
Defendant does not dispute that he ceased making payments under the
Lease. Instead, defendant opposes plaintiff's motion for summary judgment
on the grounds that (1) plaintiff "breached the Equipment Purchase Agreement,"
in that the equipment was not free from defects in workmanship and materials
as warranted; (2) that plaintiff breached oral and express warranties of
suitability and fitness; (3) that plaintiff acted in bad faith and fraudulently
in representing to defendant that plaintiff and SISI (or its successor
in interest, Siemens Nixdorf (hereinafter, "Nixdorf") were all "part of
the same company" and defendant was falsely led to believe he was purchasing
and leasing the equipment from the same company; and (4) that the Lease
Agreement was unconscionable and unenforceable because it is adhesive in
nature, purports to eliminate breach of express or implied warranties as
defenses to the obligation to make lease payments, and was secured through
unequal bargaining, misrepresentation or fraud.
[Portion of opinion discussing summary judgment standards omitted.]
II. PLAINTIFF PERFORMED THE LIMITED FUNCTION OF FINANCING DEFENDANT'S
EQUIPMENT PURCHASE; THE LEASE WAS, THEREFORE, A FINANCE LEASE AND DEFENDANT
MUST LOOK EXCLUSIVELY TO THE SUPPLIER, SIEMENS NIXDORF, FOR REPRESENTATIONS,
COVENANTS AND WARRANTIES
Defendant argues that plaintiff "breached the Equipment Purchase Agreement,"
by supplying equipment that contained defects in workmanship and materials;
that plaintiff breached oral and express warranties of suitability and
fitness; and that the Lease Agreement is unconscionable and unenforceable
because it purports to eliminate breach of express or implied warranties
as defenses to the obligation to make lease payments. The Court rejects
these arguments because the Lease was a "finance" lease. Plaintiff was,
therefore, obligated to do no more than finance defendant's equipment lease,
and defendant was obligated to look exclusively to the manufacturer for
all representations, covenants and warranties.
Finance leases are defined in section 2A-103 of the Uniform Commercial
Code. Official comment (g) to that section describes these types of transactions
as follows:
A finance lease is the product of a three party transaction. The supplier
manufactures or supplies the goods pursuant to the lessee's specification,
perhaps even pursuant to a purchase order, sales agreement, or lease agreement
between the supplier and the lessee. After the prospective finance lease
is negotiated, a purchase order, sales agreement, or lease agreement is
entered into by the lessor (as buyer or prime lessee) or an existing order,
agreement or lease is assigned by the lessee to the lessor, and the lessor
and the lessee then enter into a lease or sublease of the goods. Due to
the limited function usually performed by the lessor, the lessee looks
almost exclusively to the supplier for representations, covenants and warranties.
If a manufacturer's warranty carries through, the lessee may also look
to that. Yet, this definition does not restrict the lessor's function solely
to the supply of funds. If the lessor undertakes or performs other functions,
express warranties, covenants and the common law will protect the lessee.
U.C.C. s 2A-103, Official Comment (g).
Florida law controls this transaction, and the Florida version of Article
2A differs slightly from the official version. Florida *763 statute section
680.1031(1)(g) provides in pertinent part: (g) 'Financed lease' means a
lease in which:
1. The lessor does not select, manufacture, or supply the goods; 2.
The lessor acquires the goods or the right to possession and use of the
goods in connection with the lease; and 3. Either:
a. The lessee receives a copy of the contract evidencing the lessor's
purchase of the goods on or before signing the lease contract; ...
Fla.Stat. s 680.1031(1)(g) (1993).
The Lease meets Florida's requirements for a finance lease. Subparagraph
1 is satisfied as the Lease clearly indicates, and it is undisputed by
defendant, that plaintiff did not select manufacturer or supply the equipment.
Subparagraph 2 is satisfied as plaintiff only acquired the equipment in
order to lease it to defendant. Exhibit E to Newlands Decl. (Master Agreement)
p 3. Finally, subparagraph 3(a) is satisfied, as defendant executed the
Purchase Agreement Assignment, which defendant received and approved in
connection with the execution of the Lease.
As comment (g) to U.C.C. section 2A-103 noted, if the lessor undertakes
or performs functions other than financing, express warranties, covenants
and the common law will protect the lessee. Here, however, Siemens Credit's
only role in the transaction was to finance the acquisition of the equipment.
Defendant has not provided any evidence that plaintiff made any express
warranties with respect to the equipment. In fact, the Lease disclosed,
in capital letters, that plaintiff disclaimed all express and implied warranties
and that defendants would be required to rely solely on the warranties
given by the vendor (SISI, and its successor in interest, Siemens Nixdorf,
hereinafter, "Nixdorf"). Master Agreement p 3. In addition, as a matter
of law, there are no implied warranties given by a lessor in connection
with a finance lease. U.C.C. s 2A-212.
Defendant argues that Siemens Credit and SISI (and subsequently Nixdorf)
are affiliated companies; therefore, Siemens Credit's disclaimers of warranties
are unenforceable. The fact that the prime lessor and the supplier may
be affiliated companies does not eliminate the Lease's status as a finance
lease, and does not make the prime lessor's disclaimer of warranties unenforceable.
Official comment (g) to U.C.C. section 2A-103 plainly states, "this article
creates no special rule where the lessor is an affiliate of the supplier;
whether the transaction qualifies as a finance lease will be determined
by the facts of each case." Here, the facts establish that the Lease was
indeed a finance lease. Defendant also argues that when he assigned his
rights to plaintiff under the Assignment Agreement, he "arguably" had no
right or ability to claim breach of implied or express warranty, or defective
product or workmanship, against either plaintiff or the manufacturer. This
is clearly inaccurate. Under the Assignment, plaintiff accepted only the
obligation to purchase and pay for the equipment. Assignment p 3. Plaintiff's
rights to assert any rights against the manufacturer under any warranties,
were, in fact, assigned to defendant as plaintiff's agent:
For the Term, Lessor [Siemens Credit] hereby appoints Lessee [Newlands]
as Lessor's agent, so long as no Default (as hereinafter defined) has occurred
and is continuing, to assert at Lessee's expense (if any) and to the extent
permitted by applicable law, any right Lessor may have against any vendor,
manufacturer and/or service company to enforce any product warranties with
respect to the Equipment, provided however, Lessee shall indemnify and
defend Lessor from and against all claims, expenses, damages, losses and
liabilities incurred or suffered by Lessor in connection with any such
action taken. Id.
Any issues concerning the performance or warranty of the equipment
are matters that should have, therefore, been addressed by defendant to
the manufacturer (SISI, or Siemens Nixdorf, as successor in interest to
SISI). *764
III. DEFENDANT HAS NOT CREATED A MATERIAL ISSUE OF FACT AS TO WHETHER
PLAINTIFF REPRESENTED TO DEFENDANT THAT PLAINTIFF AND SISI (OR NIXDORF)
WERE ALL "PART OF THE SAME COMPANY"
Defendant's argument that plaintiff acted fraudulently and in bad faith
in representing to defendant that plaintiff and SISI (or its successor
in interest, Siemens Nixdorf (hereinafter, "Nixdorf") were all "part of
the same company" and that defendant was falsely led to believe he was
purchasing and leasing the equipment from the same company also fails.
There is simply no evidence that the plaintiff made any such representations.
Defendant has not presented evidence creating a material issue of fact
that plaintiff falsely led defendant to believe he was purchasing and leasing
the equipment from the same company. Defendant, in his declaration, states
several times that "Siemens' sales representatives" were the individuals
who represented that the purchase or lease, and the financing, would be
arranged through the same company. Newlands Decl. pp 6, 10. Moreover, the
Assignment Agreement clearly states at paragraph 6 that "Customer [Newlands]
acknowledges that Vendor [Nixdorf] is not an agent of [Siemens Credit],
that Vendor has no power of authority to bind [Siemens Credit], and that
in any dispute Customer will look to Vendor and not [Siemens Credit] for
refund of any advance or down payments paid to Vendor." Although this paragraph
was in the same type face as the rest of the agreement, the Assignment
is a simple one page contract with only six short paragraphs. In short,
if any misrepresentations were made, they were made by the vendor, SISI,
and not by plaintiff.
IV. THE LEASE AGREEMENT WAS NOT UNCONSCIONABLE AND UNENFORCEABLE
The Court turns finally to defendant's argument that the Lease Agreement
was unconscionable and unenforceable because it is adhesive in nature,
and was secured through unequal bargaining, misrepresentation or fraud.
The Court finds these arguments unpersuasive as well.
"Unconscionability has generally been recognized to include an absence
of meaningful choice on the part of one of the parties together with contract
terms which are unreasonably favorable to the other party." A & M Produce
v. FMC Corp., 135 Cal.App.3d 473, 486, 186 Cal.Rptr. 114 (1982) (quoting
Williams v. Walker-Thomas Furniture Co., 350 F.2d 445, 449 (D.C.Cir.1965)).
Unconscionability has both a "procedural" and a "substantive" element.
Id.
The procedural element focuses on oppression, which results from an
inequality of bargaining power, and surprise, which involves the extent
to which the supposedly agreed-upon terms of the bargain are hidden in
a prolix form drafted by the party seeking to enforce the disputed terms.
Defendant concentrates on the surprise element in arguing that the
Purchase and Lease Agreements were unconscionable. He cites Dorman v. International
Harvester Company, 46 Cal.App.3d 11, 19, 120 Cal.Rptr. 516 (1975), for
the proposition that in order to be valid, a disclaimer provision must
use clear and distinct language and be prominently set forth in large bold
print in such a position as to compel notice.
Defendant first argues that the warranty disclaimer language "situated
between the fine print" on the back of the Purchase Agreement does not
compel notice. While the Court fails to see how plaintiff, the lessor,
can be held responsible for a disclaimer by the manufacturer appearing
in a Purchase Agreement to which it was not a party (other than as assignee
under the subsequent Assignment Agreement), the Court finds, nevertheless,
that the disclaimer in the Purchase Agreement meets the Dorman test. The
court in Dorman, citing California U.C.C. section 2316, noted that an exclusion
of the implied warranty of merchantability "in case of a writing must be
conspicuous," and that exclusion of the implied warranty of fitness for
a particular purpose "must be by a writing and conspicuous." Id. at 17,
120 Cal.Rptr. 516. The code defines "conspicuous" as "so written that a
reasonable person *765 against whom it is to operate ought to have noticed
it." Id. "A printed heading in capital letters (as: NON-NEGOTIABLE BILL
OF LADING) is conspicuous. Language in the body of a form is 'conspicuous'
if it is in larger or other contrasting type or color." Id. at 18, 120
Cal.Rptr. 516.
The disclaimer in the Purchase Agreement appears at paragraph 6. It
is both bold faced and set off in a contrasting type. As the only section
in the agreement, other than paragraph headings, set off in large type,
it plainly meets the California U.C.C. definition of "conspicuous."
Defendant also challenges the conspicuousness of the disclaimer provision
in the Lease. The disclaimer in the Lease appears at paragraph 3 of the
Master Lease Agreement. Although the type-face is not as large as that
in the Purchase Agreement, it is both bold faced and set off in a contrasting
type. Also, as it is one of the first three paragraphs in the document,
it too meets the requirements of the California U.C.C. test.
Defendant makes another procedural unconscionability argument when
he alleges that the Lease is a contract of adhesion. While defendant correctly
notes that the Court may refuse to enforce an unconscionable term in a
pre-printed contract, there are no unconscionable terms in the Lease Agreement
to refuse to enforce.
Even if a contract term fails the test of procedural unconscionability,
an "unbargained for" term will only be denied enforcement if it is also
substantively unreasonable. A & M Produce, 135 Cal.App.3d at 487, 186
Cal.Rptr. 114. A (substantively) unconscionable bargain has been defined
as one that "no man in his senses and not under delusion would make on
the one hand, and no honest and fair man would accept on the other." Hume
v. United States, 132 U.S. 406, 10 S.Ct. 134, 33 L.Ed. 393 (1889). This
standard has not changed in the intervening 100 years. See e.g. Garrett
v. Janiewski, 480 So.2d 1324, 1326 (1985) (unconscionable synonymous with
"shocking to the conscience" and "monstrously harsh").
Here, it cannot be said that the terms of the Lease were "shocking
to the conscience." The risks of the bargain were allocated in an objectively
reasonable way. Defendant was obligated to make payments on the Lease,
and to seek any relief for breach of warranties, covenants, or representations
from the manufacturer. Plaintiff, for its part, was left with the usual
risks of a lender, for example, the risk that the defendant might default
and plaintiff's loan might be subordinated in a bankruptcy proceeding,
or the risk that the interest rate would rise.
Further, while a contractual term may be substantively suspect if it
reallocates the risks of the bargain in an objectively unreasonable or
unexpected manner, not all unreasonable risk allocations are unconscionable.
Rather, "enforceability of the clause is tied to the procedural aspects
of unconscionability such that the greater the unfair surprise or inequality
of bargaining power, the less unreasonable the risk reallocation which
will be tolerated." A & M Produce, 135 Cal.App.3d at 487, 186 Cal.Rptr.
114. As noted earlier, the agreements were not procedurally unconscionable,
but even if they were, the level of procedural inequity here would be so
low as to require an extremely unreasonable reallocation of risk.
Finally, as to defendant's claim that the Lease Agreement was unconscionable
and unenforceable because it was secured through unequal bargaining, misrepresentation
or fraud, defendant presents no evidence, other than his claims that the
warranty release in the Lease was inconspicuous and that the Lease was
a contract of adhesion, that plaintiff misrepresented anything about the
financing arrangement defendant requested. Summary judgment is, therefore,
GRANTED, as to the issue of the enforceability of the contract.
V. PLAINTIFF IS ENTITLED TO THE FULL AMOUNT DUE ON THE LEASE
Defendant makes one final argument, that if this Court were to grant
plaintiff's request for damages, these damages would amount to a "double
recovery" in violation of U.C.C. ss 2-602 and 2-718. This argument has
no basis in law. *766
U.C.C. s 2-602 deals with a "constructive rejection" of goods. Defendant,
however, has presented no evidence that he specifically rejected the equipment.
U.C.C. section 2A-509, which deals with a lessee's rights on improper delivery,
states that "[r]ejection of goods is ineffective unless it is within a
reasonable time after tender or delivery of the goods and the lessee seasonably
notifies the lessor." Defendant relies on Garetto v. Almaden Vineyards,
118 Cal.App.2d 99, 257 P.2d 477 (1953), for the proposition that a delay
in rejection as a result of negotiation with the seller in an attempt to
reconcile the breach of warranty excuses the delay. Garetto, however, is
inapposite because the case involved a sale of goods, not a lease. Moreover,
the delay in Garetto, about two weeks, can hardly be compared to the almost
ten month delay here. Finally, the Court fails to see how defendant can
claim constructive rejection after he made fourteen payments on the Lease.
Defendant argues that he is entitled to an "offset" for the equipment
that he has recently surrendered to the plaintiff. But, as defendants correctly
note, this request misses the essential fact that plaintiff was and currently
is the owner of the equipment. Because plaintiff has at all times owned
the equipment it cannot be required to credit defendant for the value of
its own property. This is especially true here, where the Lease did not
require plaintiff to dispose of the equipment or otherwise mitigate its
damages. [FN1]
FN1. Plaintiff did, in fact, mitigate its damages by releasing the
equipment to Neodata for six months at $8,500 per month. At oral argument,
plaintiff generously offered to credit defendant for the full $51,000 received
from Neodata, reducing defendant's obligation under the Lease to $194,746.66.
CONCLUSION
For the foregoing reasons, plaintiff's motion for summary judgment
is GRANTED in its entirety. Defendant and Siemens Nixdorf, are hereby ORDERED
to contact the Court's ADR administrators to arrange for an Early Neutral
Evaluation ("ENE") of defendant's third-party claim against Siemens Nixdorf
and Siemens Nixdorf's cross-claim against defendant, within 90 days. If
the
third-party claim and cross-claim are not resolved after 90 days, defendant
and Siemens Nixdorf shall return to this Court on February 3, 1995. SO
ORDERED.
VACATION VILLAGE, INC., d/b/a Vacation Village Hotel & Casino,
and
C.E.H. Properties, Ltd., Appellants,
v.
HITACHI AMERICA, LTD., Respondent.
110 Nev. 481, 874 P.2d 744 (1994)
PER CURIAM:
This dispute arose from a finance lease [FN1] entered into between Vacation
Village and GECC for the lease-purchase of a
business telephone system and related equipment (collectively referred
to as "the equipment") which were manufactured and supplied by Hitachi.
Vacation Village arranged for the purchase of the Hitachi equipment through
RCA Corporation. Vacation Village assigned its contract right to purchase
the equipment to GECC. GECC completed the purchase and then leased the
equipment to Vacation Village, with an option for Vacation Village to purchase
the equipment upon lease expiration.
FN1. GECC did not select, manufacture or supply the equipment that
is the subject matter of the agreement between GECC and Vacation Village.
GECC merely provided Vacation Village with the financial assistance necessary
to accommodate the acquisition of the equipment. Moreover, Vacation Village
directed GECC where to acquire the equipment. Thus, the agreement between
GECC and Vacation Village was a finance lease. See NRS 104A.2103(1)(g).
Shortly after the equipment was installed at Vacation Village, problems
developed with its operation and use. As a result, Vacation Village filed
an action in the district court against Hitachi alleging that Hitachi breached
the implied warranty of merchantability by selling GECC defective equipment
which ultimately was leased to Vacation Village.
[Portions omitted.]
Warranty of Merchantability
Hitachi manufactured and supplied GECC with telephone equipment that
was the subject matter of the finance lease between Vacation Village and
GECC. The UCC provides that unless excluded or modified, **747 there is
an implied warranty that a good is merchantable and suitable for the particular
purpose for *485 which it is sold. See NRS 104.2314; NRS 104.2315. Nonetheless,
Hitachi asserts that it was not subject to the implied warranties under
the UCC because the finance lease between Vacation Village and GECC was
a lease and not a sale. In support of this proposition, Hitachi cites to
U C Leasing, Inc. v. Laughlin, 96 Nev. 157, 160, 606 P.2d 167, 169 (1980),
where this court held that a "true lease" is not subject to the provisions
of Nevada's UCC. However, Hitachi's reliance on U C Leasing is misplaced.
The precedent set forth in U C Leasing has been abrogated by the subsequent
enactment of NRS 104A (UCC--Leases). 1989 Nev.Stat., ch. 166, s 1 at 340.
These statutes took effect on January 1, 1990, and provide for an implied
warranty of merchantability in finance lease agreements. See NRS 104A.2209.
Vacation Village and GECC entered into the finance lease subsequent to
the enactment of NRS 104A, thus, the implied warranty of merchantability
applies to the instant situation.
Vertical Privity
Hitachi asserts that the agreement between GECC and Vacation Village
expressly provides that GECC is not required to enforce the manufacturer's
warranties on behalf of itself or on behalf of Vacation Village, indicating
that Vacation Village was not intended as a third-party beneficiary of
the agreement between Hitachi and GECC. However, Hitachi offers no authority
in support of this proposition. Moreover, whether GECC was required to
enforce Hitachi's warranties on behalf of Vacation Village is not dispositive
of whether Hitachi's warranties extend to Vacation Village. [9] In pertinent
part, NRS 104A.2209 provides that:
1. The benefit of the supplier's promises to the lessor under the supply
contract and of all warranties, whether express or implied ... extends
to the lessee to the extent of the lessee's leasehold interest under a
finance lease related to the supply contract....
(Emphasis added.) Vacation Village is the lessee under a finance lease
with GECC, and as such, the implied warranties of merchantability extend
to Vacation Village. In addition, this court has held that "lack of privity
between the buyer and manufacturer does not preclude an action against
the manufacturer for the recovery of economic losses caused by breach of
warranties." Hiles Co. v. Johnston Pump Co., 93 Nev. 73, 79, 560 P.2d 154,
157 (1977) (citations omitted). Thus, Vacation Village can bring *486 a
complaint against Hitachi for breach of warranty despite Vacation Village's
lack of privity with Hitachi.
CONCLUSION
Appellants' complaint sets forth allegations sufficient to make out
the elements of a right to relief. Moreover, appellants' complaint gave
fair notice to respondent of the nature and basis of a legally sufficient
claim and the relief requested. Consequently, the district court's dismissal
of appellants' complaint for failure to state a claim upon which relief
can be granted was error. Accordingly, the district court's order of dismissal
is reversed and remanded for proceedings consistent with this opinion.
MERCEDES-BENZ CREDIT CORP.
v.
LOTITO
306 N.J. Super. 25, 703 A.2d 288 (1997)
PAUL G. LEVY, J.A.D.
This issue presented for decision in this case is whether a leasing
company which is closely affiliated with an automobile manufacturer, a
distributor and a dealer, yet still a separate entity, is subject to a
customer's defense of breach of warranty. The specific question here is
whether the leasing company may enforce a vehicle lease over a defense
that the vehicle suffers from manufacturing defects in breach of the new
car warranty. We hold that enforcement must await determination of the
breach of warranty issues.
Defendant selected a luxury car offered for sale by Ray Catena Motor
Car Corp. (Catena) and chose to lease the vehicle. Using a form of lease
provided by plaintiff, Mercedes-Benz Credit Corporation (MBCC), Catena
as lessor and defendant as lessee executed a lease on July 10, 1993, for
a new Mercedes Benz model 500SL, at the monthly rate of $1,419 for forty-eight
months. The total monthly payments would be $68,112 with a stated residual
value of $53,585. The lease provided for simultaneous assignment by Catena
to MBCC, "pursuant to the terms of the Dealer Automobile Purchase and Lease
Assignment by and between Lessor and [MBCC]," and the certificate of title
was issued to MBCC.
The terms of the lease purported to insulate MBCC from liability for
breach of any warranty or any claim by defendant with respect to the car.
The pertinent parts of the relevant paragraphs state: 6. VEHICLE WARRANTIES
AND DISCLAIMERS.
To the extent they are assignable, you [lessor] agree to assign to
me [defendant] all your rights and remedies under the manufacturer's standard
written warranties applicable to the vehicle. I acknowledge that you make
no express **290 warranties regarding the vehicle as to its condition,
merchantability, or fitness for use, that you disclaim any implied warranties
and that I am leasing it from you "as is".
19. ABATEMENT
The monthly rent shall be paid for the full term of the lease ... without
setoff, counterclaim, reduction, abatement, suspension, deferment, or any
other defense because of ... unsatisfactory performance of the vehicle
or for any other reason whatever including, but not limited to, mechanical
or warranty problems.... *28 Paragraph nineteen also provided that defendant
agreed to use the manufacturer's dispute resolution system before taking
any action against MBCC if there was a dispute regarding the manufacturer's
warranty.
When defendant leased the car, he received warranties on the vehicle
from both the manufacturer and the dealer. The warranty from the manufacturer
provided that Mercedes-Benz of North America (MBNA) would "make any repairs
or replacements necessary, to correct defects in material or workmanship."
Catena, as the authorized Mercedes dealer, was a "co-warrantor." Both the
express warranties and any warranties implied by law were to last for either
forty-eight months or 50,000 miles, whichever came first.
Defendant paid the monthly rent on the lease for twenty-five months,
but he was continually dissatisfied with the car's performance. He experienced
repeated problems with it and frequently returned to Catena for repairs
during that period of time. Aside from scheduled maintenance, forty-eight
days were used to perform $22,269 of warranty work at Catena. Defendant
admits he never informed MBCC of problems with the car, but rather, dealt
with personnel at the Catena dealership, because it was his belief that
the two entities were the same.
Frustrated at the fact that the car repeatedly manifested problems
and could not seem to be repaired properly, defendant stopped paying on
the lease in July 1995. In November 1995, MBCC filed an action against
defendant in the Law Division, alleging that defendant was in default of
payments due on the lease. It therefore requested a writ of replevin ordering
defendant to turn over the vehicle, as well as damages for monies due and
unpaid under the lease. Defendant filed an answer with separate defenses
and a counterclaim against MBCC; one of the separate defenses asserted
that MBCC breached the applicable warranties "in conspiracy with the third-party
defendants" and thereby breached the lease. Also included was a third-party
action against MBCC, Catena, MBNA, and Mercedes-Benz A.G. *29 MBAG), a
German company that manufactured the automobile in question. MBNA, MBCC
and MBAG are each subsidiaries of Daimler-Benz A.G., a German corporation.
Defendant surrendered the car in January 1996, and MBCC eventually
sold it at auction. When the final credits and charges were totaled, MBCC
claimed defendant owed it $34,443.13 including attorneys' fees and costs
of $5,506.06. [FN1] MBCC was granted summary judgment in that amount and
defendant's counterclaim was dismissed with prejudice. The order granting
that relief was certified as a final judgment, pursuant to R. 4:42-2, leaving
the third-party action to be prosecuted.
FN1. The figures were not contested.
The motion judge found that using MBCC as a leasing company "was a
convenience, but there's nothing here to suggest anything other than a
separate entity. Obviously [the third-party defendants] worked together
because--it becomes a very convenient arrangement. But that does not destroy
the separateness of [MBCC] in the context of the role it played in this
lease arrangement." The judge did not otherwise attempt to analyze the
relationships among the third-party defendants or explain why MBCC was
clothed with "separateness," despite the unrefuted allegations of the many
indicia of a working relationship involving MBNA, MBCC and Catena.
On appeal, defendant contends summary judgment was erroneously granted
because: **291 (1) the disclaimer and waiver provisions of the lease were
unenforceable and he is entitled to relief under the "lemon law," N.J.S.A.
56:12-29 to -49, and (2) because the car was so defective, there was a
breach of express and implied warranties. Regardless of the legal analyses
expressed by the parties, we believe the starting point must be Unico v.
Owen, 50 N.J. 101, 232 A.2d 405 (1967). In Unico, a consumer responded
to an advertisement to purchase 140 record albums and a stereo from Universal
Stereo *30 Corporation. The purchase price was financed through a retail
installment contract and note providing for a down payment and thirty-six
monthly payments. Universal was to deliver the records over a six-year
period. Universal and the buyer entered into an installment contract, which
consisted of "11 fine print paragraphs." [FN2] The contract was directly
assigned to a lender, Unico, as patently contemplated. The "reasonable
and normal expectation" of the buyer was that "performance of the delivery
obligation was a condition precedent to his undertaking to make installment
payments." Id. at 106, 232 A.2d 405. However, there was a clause stating
that if the contract was assigned, the buyer's liability to the assignee
would be "immediate and absolute and not affected by any default whatsoever
of the Seller signing this contract." The buyer also agreed not to set
up any defense viable against the seller if sued by the note's assignee
for nonpayment. Ibid.
FN2. The Court's opinion makes no mention of a disclaimer of warranty
clause in the contract.
Unico was a "partnership formed expressly for the purpose of financing
Universal Stereo Corporation" which had "a substantial degree of control
of [the] entire business" of Universal. Id. at 114, 232 A.2d 405. Specifically,
Unico set forth the credit qualifications of buyers, the requirements for
making the notes and the endorsements, and the maximum length of term for
the consumer contracts involved. Id. at 114-15, 232 A.2d 405. The Court
summarized this control as one in which Unico "had a thorough knowledge
of the nature and method of operation of Universal's business [and] also
exercised control over it." Id. at 115, 232 A.2d 405. "To say the relationship
between Unico and the business operations of Universal was close, and that
Unico was involved therein, is to put it mildly." Id. at 115-16, 232 A.2d
405.
The buyer received the stereo and the first delivery of twelve albums
and he paid the next succeeding twelve monthly installments, but he never
received another record album. When Unico *31 sought payment several months
later, the buyer advised that payments would be resumed if the albums were
delivered. None were delivered because Universal was insolvent, and Unico
sued for the balance due on the note plus attorneys fees. The trial court
found Unico was not a holder in due course of the note and Universal's
breach of the contract barred recovery.
On appeal, our Supreme Court noted the disparity of more than two years
between the payment obligation and the delivery obligation. Calling this
"hyper-executory," the Court expressed concern over this disparity in rights
between buyer and seller or transferee. Together with the provisions governing
the defenses against the assignee, the Court described the arrangement
as "designed to put the buyer-consumer in an unfair and burdensome legal
strait jacket" from which there was no "escape no matter what the default
of the seller, while permitting the note-holder, contract-assignee to force
payment from [the buyer] while enveloping itself in the formal status of
holder in due course." Id. at 115, 232 A.2d 405. The
Supreme Court upheld the buyer's right to defend against the suit for
payment on the note based on the seller's alleged default. Holder in due
course status was neither necessary nor desirable when the transferee knew
a great deal about, or controlled or participated in, the underlying transaction.
Id. at 109-110, 232 A.2d 405. Consistent with other decisions protecting
the consumer in transactions involving a consumer and a commercial entity,
such as Henningsen v. Bloomfield Motors, 32 N.J. 358, 161 A.2d 69 (1960),
the Court explained that courts should give special scrutiny to such contracts
to ensure that they were consistent with "principles of equity and public
policy." Unico, supra, 50 N.J. at 112, 232 A.2d 405. **292 Underlying these
decisions was the inequality in bargaining power between the typical consumer
and lender; the lender had not only more economic and bargaining power,
but greater expertise, along with the ability to write adhesion contracts
that unduly favored the lender. Id. at 110, 232 A.2d 405.
*32 Accordingly, the Court declared that in "consumer good sales cases,"
holder in due course status would be denied to finance companies whose
"involvement with the seller's business is ... close, and whose knowledge
of ... the terms of the underlying sale agreement is ... pervasive." Id.
at 116, 232 A.2d 405. [FN3] The Court relied on decisions from other states
which also denied holder in due course status in cases involving not only
individual buyers, but commercial ones as well. See Commercial Credit Corp.
v. Orange County Mach. Wks., 34 Cal.2d 766, 214 P.2d 819 (1950); Local
Acceptance Co. v. Kinkade, 361 S.W.2d 830 (Mo.1962); International Finance
Corp. v. Rieger, 272 Minn. 192, 137 N.W.2d 172 (1965); Mutual Finance Co.
v. Martin, 63 So.2d 649 (Fla.1953).
F3. The protection was extended to the plaintiff not in his capacity
as "buyer" but rather as "consumer." Thus, the policy of consumer protection
supporting this holding applies equally to buyers as well as lessees. See
A-Leet Leasing Corp. v. Kingshead Corp., 150 N.J.Super. 384, 392, 375 A.2d
1208 (App.Div.) (" 'in this day of expanding rental and leasing enterprises,'
the consumer who leases a product should be given protection equivalent
to the consumer who purchases."), certif. denied, 75 N.J. 528, 384 A.2d
508 (1977).
The Court explained its holding succinctly: For purposes of consumer
goods transactions, we hold that where the seller's performance is executory
in character and when it appears from the totality of the arrangements
between dealer and financer that the financer has had a substantial voice
in setting standards for the underlying transaction, or has approved the
standards established by the dealer, and has agreed to take all or a predetermined
or substantial quantity of the negotiable paper which is backed by such
standards, the financer should be considered a participant in the original
transaction and therefore not entitled to holder in due course status.
[Id. at 122-23, 232 A.2d 405.]
The Court, however, reserved decision on the very issue presented in
this case: "whether, when the buyer's claim is breach of warranty as distinguished
from failure of consideration, the seller's default as to the former may
be raised as defenses against the financer." Id. at 123, 232 A.2d 405.
The Court also struck as unconscionable the clause in which the buyer promised
that in the event the lender sued, the buyer would waive any defenses *33
otherwise good against the seller. Id. at 123-25, 232 A.2d 405. The legalistic
waiver provision, buried in a small-print contract, was "fraught with opportunities
for misuse" and therefore would be stricken as unconscionable. Id. at 125,
232 A.2d 405. Citing N.J.S.A. 12A:2-302 and 12A:9-206, the Court observed
"in the enactment of these two sections of the Code an intention to leave
in the hands of the courts the continued application of common law principles
in deciding in consumer goods cases whether such waiver clauses as the
one imposed on Owen in this case are so one-sided as to be contrary to
public policy." Ibid. We now take the next step and hold that a consumer
lessee may raise a breach of warranty against the lessor when there is
a sufficiently close relationship between the seller, the manufacturer
and the lessor, and that an attempt to disclaim such obligations by contract
is unenforceable.
In Unico and here, there is a tripartite contract involving a consumer,
a buyer, and a financer. The difference, however, is that Unico involved
a loan with an affiliated company, while this case involves a lease with
an affiliated company. However, that makes no difference. These two types
of arrangements are truly similar, especially from the individual consumer's
perspective. In each case, a financing company supplies capital to an individual
buyer in order to acquire a product, here an automobile.
As in Unico, the relationship between the lessor (MBCC) and the dealer
(Catena) and the manufacturer (MBNA and Daimler-Benz) is very close. MBCC
created the lease form and authorized personnel at dealerships to execute
the leases essentially on its behalf. **293 Although MBCC was not literally
dominating the sales component of Mercedes-Benz's business, the fact remains
that MBCC had a close involvement with Catena and MBCC's knowledge of "the
terms of the underlying sale agreement" was extensive. Unico, 50 N.J. at
116, 232 A.2d 405. Thus, there is sufficient closeness between the financer
and the seller here to justify treating this case similarly to Unico.
*34 The disparity in bargaining power evident in Unico, which cannot
be denied as a reason for the decision, is also sufficiently similar in
this case. Decisions like Unico are plainly based, in part, on economic
disparity or knowledge disparity between buyer and seller/lender. And,
although the buyer here was able to afford a luxury car with high monthly
payments and was a successful businessman, more able than most consumers
to evaluate lease and finance options, he is still an individual consumer
subject to the pressures attendant to an adhesion contract.
In addition, study of Article 2A of the Uniform Commercial Code is
required as a source of public policy because it will govern all leasing
transactions after January 10, 1995. L. 1994, c. 114, s 12. Although not
applicable to this transaction which was made a year before the legislation
was enacted, the Code imposes on certain lessors both implied and express
warranties with respect to the goods. See N.J.S.A. 12A:2A-212, -213. Nothing
in the adoption of Article 2A, as a source of public policy governing lease
law, bars extending the rule of Unico (dealing with failure of consideration
as a defense to a loan contract) to this case (dealing with breach of warranty
as a defense to a lease contract). To the contrary, the comments to Article
2A make it clear that the courts will determine, case-by-case, whether
finance lessors that are "affiliate[s] of the supplier of goods" should
answer for a seller's warranty. Official Comment to U.C.C. s 2A-101, "Finance
Leases"; Official Comment to U.C.C. s 2A-103(h).
Expanding the defenses which may be asserted against a lessor in a
consumer goods transaction involving close ties between seller, manufacturer
and lessor requires a balancing of the rights of the consumer and these
entities. A major consideration of Unico is protection of consumer expectations
and rights, such as the notion that if a consumer buys a product and that
product is defective, the consumer does not have to pay for it unless its
warranties were validly disclaimed; rather, it will be repaired or the
purchase price will be returned. This is a sound and reasonable expectation
to protect. Thus, if a consumer bought a new car *35 and received warranties
on it, absent unusual circumstances it would be expected that the seller
will answer for any defects and fix them. Similarly, where a truly independent
lender finances a consumer's acquisition of a car, it is ordinarily expected
that the lender will not be responsible if the car is a "lemon." But the
financing agency here is not truly independent, and is instead an affiliated
company with relations so close to the actual seller that they are equivalent
to the relationship the court scrutinized in Unico.
Of course in Unico, the seller was insolvent and the consumer could
only look to the lender as a source of recovery. Here, plaintiff's reasonable
expectations as a consumer can be satisfied by Catena or MBNA if the warranties
were breached. Other jurisdictions have subjected an affiliated financer
to warranty liability when the seller cannot answer for a breach of warranty.
See U.S. Roofing v. Credit Alliance Corp., 228 Cal.App.3d 1431, 279 Cal.Rptr.
533 (1991) (a lessor may disclaim warranties in equipment selected solely
by the lessee provided that the lessee "has an adequate remedy against
the manufacturer or supplier for any defect in the equipment.")
We hold, however, that the financial stability of the expected warrantor
is not the qualifier to assertion of a breach of warranty as a defense
to a suit for breach of the lease or the loan on which the original sale
was based. Here, the trial judge entered judgment in MBCC's favor without
exploring whether there had been a breach of warranty in this case. In
other words, the third-party claims against Catena, MBNA and MBAG were
left unresolved. Implicitly, the trial judge also dismissed defendant's
second defense to the suit against him, that MBCC breached the applicable
warranties "in conspiracy **294 with the third-party defendants" and thereby
breached the lease.
We think this was incorrect. Thus, if defendant proves the car to be
defective and that he was damaged thereby, the case becomes a question
of which component in the chain of distribution of Mercedes-Benz products
will bear the loss caused by a *36 manufacturing defect: the manufacturer,
its financing company, or its franchisee. Of course, that loss could be
more than, less than or the same as the damages proved by MBCC for defendant's
failure to maintain the lease.
From this, it follows that the judge erred in granting judgment in
MBCC's favor without determining whether there was a breach of warranty
in this case. Thus, the order of the trial judge is proper if deemed a
partial summary judgment in MBCC's favor, subject to the outcome of defendant's
proofs on his second separate defense against MBCC, that is, the breach
of warranty claims. We so modify the ruling. This disposition of the MBCC-defendant
claim also allows for a more orderly apportionment of credits and debits
between the parties and provides for satisfaction by each party of its
particular responsibilities. See Freeman v. Hubco Leasing, Inc., 253 Ga.
698, 324 S.E.2d 462 (1985)(where lessor and dealer were brother-sister
corporations, lessor's money damages under the lease can be setoff against
dealer's liability for damages attendant on revocation of acceptance and
lessor is estopped from separate execution on its judgment).
Therefore, if defendant fails to show the car is defective, MBCC will
have an award against defendant. On the other hand, if defendant succeeds
in showing the car is defective, his liability to MBCC may be erased or
reduced. In addition, MBCC or defendant or both may have awards against
the third-party defendants. We express no view on these issues, but hold
instead that the trial court acted precipitously in granting summary judgment
resolving the MBCC-defendant claims, defenses, and counterclaims at this
point in the litigation.
This disposition recognizes the disparity in economic power between
a consumer like defendant and companies like the third-party defendants.
The latter are clearly more able than an individual consumer to "absorb
the impact of a single imprudent or unfair exchange." Unico, supra, 50
N.J. at 110, 232 A.2d 405. Again, although MBCC's damages are uncontested,
the trial court should hear from defendant on his breach of warranty claims.
It *37 should also hear the other parties' evidence on the breach of warranty
issues and only then enter final judgment. Rather than allowing these affiliated
companies to inequitably squeeze plaintiff, MBCC will not be permitted
to collect sums due from him until the third-party claims are resolved
and the breach of warranty issues decided. Freeman, supra, 324 S.E.2d at
469; see also Hallowell v. American Honda Motor Co., Inc., 297 N.J.Super.
314, 688 A.2d 110 (App.Div.1997). Such a disposition also promotes judicial
economy by preventing piecemeal appellate review of a single case.
The designation of the order granting summary judgment to MBCC as a
final judgment is reversed. The order is deemed to be one of partial summary
judgment and the matter is remanded to the Law Division for reconsideration
of factual proofs on defendant's breach of warranty claims and entry of
a final judgment. We do not retain jurisdiction.
GHIONIS
v.
DEER VALLEY RESORT CO. LTD.
839 F. Supp. 789 (D. Utah 1993)
ORDER DENYING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT
ALDON J. ANDERSON, Senior District Judge.
I. Background.
Plaintiff Christina Ghionis ("Ghionis"), is a resident of Florida who visited
Utah in March of 1990. While in Utah she decided to go skiing at Deer Valley
resort owned by defendant ("Deer Valley"). Ghionis went into Deer Valley's
rental shop with the intention of renting boots, skis and bindings. She
had originally planned to use her own equipment which she had brought with
her from Florida. However, she was told that her bindings were obsolete
and, accordingly, decided to rent equipment prior to buying new equipment.
While in the rental shop, Ghionis was informed by Deer Valley certified
technician that she could use her old ski boots with new bindings. Relying
upon the technician's representations, Ghionis rented bindings and skis
from the shop, but did not rent new boots. This was unfortunate because,
contrary to the technicians representations, Ghionis's boots were not compatible
with the leased bindings. Indeed, the manufacturer of the bindings expressly
recommended against using its bindings with the type of boots owned by
Ghionis.
Following the rental of the bindings and the skis, Ghionis signed up
for a skiing lesson to familiarize herself with skiing in Utah. During
the lesson, Ghionis's instructor pointed out a sign posted by Deer Valley
talking about varying ski conditions. However, the instructor did not inform
Ghionis or the other students of the increased risks of skiing in "crud"
snow which exists during the spring in Utah. The instructor also failed
to inspect Ghionis's equipment to determine if it was appropriate. If the
instructor had done so, the incompatibility of the Ghionis's boots and
bindings may have been noticed.
Approximately two hours into the ski lesson, Ghionis ran into crud
snow and fell. Her bindings did not release, and Ghionis's knee was injured.
Ghionis, who is a licensed attorney in Florida, brought this action against
Deer Valley asserting negligence, product liability, and breach of express
and implied warranties. Deer Valley then moved for summary judgment dismissing
Ghionis's complaint because of a release signed by Ghionis at the time
that she leased the bindings and skis. Deer Valley also moved for summary
judgment under the Utah Inherent Risks of Skiing Act, Utah Code Ann. s
78-27-51 et seq. and because of its status as a lessor of equipment as
opposed to a manufacturer or seller. *792
Having considered the matter, and drawing all factual inferences in
favor of Ghionis, the nonmovant, the court is persuaded that summary judgment
is inappropriate in this case.
II. Discussion.
A. Standard of Review.
[Omitted.]
B. The Release Signed By Ghionis Is Ambiguous And May Not Be Relied
Upon By Deer Valley To Escape Liability.
Deer Valley's primary arguments in favor of summary judgment are based
upon a Release Agreement (the "Release") signed by Ghionis in favor of
Deer Valley at the time she rented the ski bindings and skis. [FN2] Under
Utah law, which must be applied in *793 this diversity action, [FN3] exculpatory
agreements are binding so long as they are clear and unequivocal in expressing
the parties' agreement to absolve a defendant of liability. See Walker
Bank & Trust Co. v. First Security Corp., 341 P.2d 944, 947 (Utah 1959);
Pickhover v. Smith's Management Corp., 771 P.2d 664 (Utah App.1989). General
language of release, however, without specificity as to the shifting of
responsibility is not enough to relieve a party at fault from liability.
FN2. Pertinent provisions of the Release Agreement are as follows:
(1) I accept for use as is the equipment listed on this form, and accept
full responsibility for the care of the equipment while it is in my possession.
* * * * * * (3) I agree to hold harmless and indemnify the ski shop
and its owners, agents and employees for any loss or damage, including
any that results from claims for personal injury or property damage related
to the use of this equipment, except reasonable wear and tear.
* * * * * * (5) I understand that there are inherent and other risks
involved in the sport for which this equipment is to be used, snow skiing,
that injuries are a common and ordinary occurrence of the sport, and I
freely assume those risks. (6) I understand that the ski-boot-bind system
will not release at all times or under all circumstances, nor is it possible
to predict every situation in which it will release, and is therefore no
guarantee for my safety. (7) I hereby release the ski shop, and its owners,
agents and employees from any and all liability for damage and injury to
myself or to any person or property resulting from negligence, installation,
maintenance, the selection, adjustment and use of this equipment, accepting
myself the full responsibility for any and all such damage or injury which
may result.
* * * * * * (10) All instructions on the use of my rental equipment
have been made clear to me, and I understand the function of my equipment.
FN3. Erie R.R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed.
1188 (1938).
Deer Valley argues that the Release unequivocally protects it against
claims for breach of express and implied warranties because it states at
paragraph 1 that Ghionis accepts "for use as is the equipment listed on
this form." It is Deer Valley's view that the use of the terms "as is"
in paragraph 1 constituted an express disclaimer by Deer Valley that any
implied warranties existed.
The problem with Deer Valley's view is that the terms "as is," as set
forth in the Release, [FN4] are not "conspicuous" as contemplated by Utah
Code Ann. s 70A-2a-214(3)(a). [FN5] The terms are not set apart with quotation
marks or typed in a bold type. Instead, the terms are slipped into paragraph
1, without any indication to the average consumer that they are words of
art with distinct legal meaning. Indeed, a review of paragraph 1, from
a layman's perspective, is that it is primarily aimed at getting the renter's
agreement to "care for the equipment while it is in [his or her] possession."
[FN6] The court declines, therefore, to find a disclaimer of warranties
by Deer Valley.
FN4. See footnote 2 supra.
FN5. Utah Code Ann. s 70A-2a-214(3)(a) provides, in pertinent part:
[A]ll implied warranties are excluded by expressions like "as is," "with
all faults" or other language which in common understanding calls the buyer's
attention to the exclusion of warranties and makes plain that there is
no implied warranty, if in writing and conspicuous. (Emphasis added.)
FN6. Throughout Deer Valley's memoranda, filed in support of its motion
for summary judgment, Ghionis is referred to as "plaintiff/attorney." Deer
Valley uses the description to ask the court to hold Ghionis to a higher
standard than the average consumer vis-a-vis the terms of the Release.
This court declines the request. Defendants who use form releases to escape
liability for damage caused by their own fault, must be held to a standard
that protects the average consumer who might be asked by that defendant
to sign the form release. The mere fact that a consumer might be an attorney,
or a sophisticated businessman or woman, does not relieve the defendant
from drafting a release that is nonambiguous from a layman's perspective.
See Puritan Life Ins. Co. v. Guess, 598 P.2d 900, 907 (Alaska 1979); Koorstad
v. Washington Nat'l Ins. Co., 257 Cal.App.2d 399, 64 Cal.Rptr. 882, 886-87
(1967).
The Release document is also ambiguous with regard to indemnity and
the scope of the release. As this court pointed out in Zollman v. Myers,
797 F.Supp. 923, 927 (D.Utah 1992):
[W]hether [an] exculpatory provision is ambiguous, and therefore, unenforceable,
... is a question of law (Citations omitted) ... [and] must be determined
by the court. (Citation omitted.) ... " '[A] cardinal rule in construing
... a contract is to give effect to the intentions of the parties.' " (Citation
omitted.) To assess whether a contract is ambiguous, and consequently,
whether the intention of the parties is unclear, " '[t]he settled rule
[for] interpreting a contract [is to] look to the four corners of the agreement
to determine the intentions of the parties.' " (Citation omitted.)
In Zollman the court determined that a release given by a snow mobile
park operator was ambiguous because it contained contradictory clauses,
including a general release clause and a clause instructing a participant
to stop and await instructions from the park operation in case of confronting
a hazardous situation. Where the instructions given lead to injury, a reasonable
person would assume the general release did not apply.
Like the release in Zollman the court finds the Deer Valley Release
is ambiguous *794 in that it is conditioned upon the renter receiving and
understanding instructions on the use of the rental equipment. See paragraph
10 of the Release. [FN7] Where those instructions are lacking or deceptive,
as is claimed by Ghionis on the compatibility of her boots and the ski
binding, the release clause of paragraph 7 does not apply. Similarly, the
indemnity provision of the Release document is inapplicable. [FN8]
FN7. The language of the Release is set forth at footnote 2 supra.
FN8. Even if applicable, the indemnity provision of the Release, paragraph
3, would not provide protection to Deer Valley as it is capable of being
read by a lay consumer as only obligating the renter to an indemnity obligation
where a third party has been injured as a result of the use of the shop's
equipment by the renter.
C. Deer Valley May Not Rely Upon Ghionis's Assumption Of Risk To Escape
Liability.
Deer Valley's next argument, in support of summary judgment, is that
Ghionis assumed the risks which led to her injury. In that regard, Deer
Valley notes that the Release states at paragraphs 5 that the renter of
equipment is aware of the "inherent and other risks involved in [skiing]
... and ... freely assume [s] those risks." Further, paragraph 6 of the
Release expressly recognizes the risk "that the ski-boot-binding system
will not release at all times ... is, therefore, no guarantee for [the
renter's] safety." Deer Valley also notes, in support of an assumption
of risk defense, that at the time Ghionis rented the ski bindings and skis,
there was playing in the background of the shop a video tape warning customers
of the inherent dangers of skiing. Ghionis's response to the assumption
of risk argument is that while she may have been aware of the normal and
usual risks of skiing, she was not aware of the particular risk which caused
her injury, that being the incompatibility of the rented ski bindings and
her boots. On the contrary, Ghionis argues that Deer Valley's personnel
assured her that no incompatibility existed, and that it was not necessary
for her to rent boots.
As noted by the Utah courts, assumption of risk requires a voluntary
assumption of a known danger. Mikkelsen v. Haslam, 764 P.2d 1384, 1388
(Utah App.1988). Where the risk is not known because of the injured party's
reasonable reliance upon faulty instructions, assumption of risk does not
exist. Id.
D. Deer Valley, As A Lessor Of Equipment May Be Subject To Strict Liability.
Deer Valley argues that Ghionis's claim for strict products liability
should be dismissed because it was not a manufacturer or seller of a product.
The court disagrees. First, a finder of fact may determine that for all
intents and purposes Deer Valley manufactured a ski equipment system for
Ghionis consisting of skis, bindings and boots. To the extent the system
was defective, exposing Ghionis to an unreasonable risk of danger, a strict
liability claim may exist. Second, while no technical "sale" of equipment
to Ghionis took place, the court is persuaded that the Utah courts will
extend its rulings on strict product liability to apply to lessors of products
such as Deer Valley. See Utah Code Ann. s 70A-2-312 et seq. (implied warranties
exist in leased goods); Utah Code Ann. s 13-11-1 et seq. (Consumer protection
to leases); Wade v. Jobe, 818 P.2d 1006 (Utah 1991) (recognizing trend
in the law to protect consumers, including lessees).
Deer Valley's reliance upon Conger v. Tel Tech, Inc., 798 P.2d 279
(Utah App.1990), to limit strict liability to "sellers" of products, is
misplaced. In that case, the trial court granted a directed verdict dismissing
a strict liability claim by a plaintiff who complained that defendant Tel
Tech, Inc. negligently installed a cleaning system on a milk truck upon
which he had been injured. The appellate court upheld the dismissal and
published opinion has a headnote to the effect that a sale of a product
is required for a strict liability claim. The problem with the headnote,
and consequently the difficulty of Deer Valley's argument, is that a "sale"
of a product did, in fact, occur in Conger. Id. at 281 n. 2. The actual
basis of the dismissal of the *795 strict liability claim was that plaintiff's
injury arose not from the product itself, but rather the installation of
the product. Consequently, no strict liability cause existed. [FN9] Deer
Valley's reliance upon Utah Code Ann. s 78-15-6(1) [FN10] is also misplaced
as a reading of the statute clearly indicates that the purpose of the section
is not to restrict the class of potential defendants, but rather to impose
a statutory restriction of when a product defect must have come into existence
in order to be subject to strict liability.
FN9. Courts have consistently recognized the difference between leasing
a product, for which strict liability is available, and servicing a product,
for which strict liability is not available. Compare Bachner v. Pearson,
479 P.2d 319 (Alaska 1970) (lessor of airplane strictly liable for defects
in the airplane) with Swenson Trucking & Excavating, Inc. v. Truckweld
Equip. Co., 604 P.2d 1113, 1116 (Alaska 1980) ("strict liability applies
to products not services").
FN10. Utah Code Ann. s 78-15-6(1) provides:
In any action for damages for personal injury, death, or property damage
allegedly caused by a defect in a product (1) No product shall be construed
to have a defect or to be in a defective condition, unless at the time
the product was sold by the manufacturer or other initial seller, there
was a defect or defective condition in the product which made the product
unreasonably dangerous to the user or consumer.
The reasoning for applying strict liability to lessors of products
is succinctly set forth by the Illinois Supreme Court in Crowe v. Public
Building Commission of Chicago, 74 Ill.2d 10, 23 Ill.Dec. 80, 82, 383 N.E.2d
951, 953 (1978): The limiting language of the Restatement [(Second) 2d
Torts s 402A referring to sellers] has not deterred Illinois, or the majority
of jurisdictions which have considered the question, from extending strict
liability to lessors. (Citation omitted.) Courts have recognized that commercial
leasing has become an increasingly practicable way for businesses to market
their products. (Citations omitted.) The nature of a commercial transaction
by which a product is placed in the stream of commerce is irrelevant to
the policy considerations which justify strict liability. A lessor is subject
to strict liability because his position in the "overall production and
marketing enterprise" (citation omitted) is no different from that of a
seller. Typically, the commercial lessor is within the original chain of
distribution and reaps a profit by placing a product in the stream of commerce.
At the point in the chain of distribution where the product passes through
the hands of the lessor, he becomes as capable as a seller to prevent a
defective product from proceeding through the stream of commerce. In the
context of ski shops, rental of ski equipment is a basic first step in
the marketing process. Many beginning skiers, and skiers looking to upgrade
their equipment, first rent equipment before putting out the heavy expense
of purchasing new ski equipment. To only impose the potential of strict
liability upon sellers of ski equipment would frustrate the basic purposes
of Restatement (Second) 2d s 402A, [FN11] and would ignore the reality
of the ski market. [FN12]
FN11. The reference to "sellers" in Restatement (Second) 2d Torts s
402A is merely "a description of the situation that has most commonly arisen
rather than as a deliberate limitation of the principle to cases where
the product has been sold, intentionally excluding instances where a manufacturer
has placed a defective article in the stream of commerce by other means."
Crowe v. Public Bldg. Com'n of Chicago, 74 Ill.2d 10, 23 Ill.Dec. 80, 82-83,
383 N.E.2d 951, 952-53 (1978) quoting Delaney v. Towmotor Corp., 339 F.2d
4, 6 (2d Cir.1964).
FN12. In Persons v. Salomon North America, Inc., 217 Cal.App.3d 168,
265 Cal.Rptr. 773 (1990), a lessee of ski bindings was allowed to proceed
on a strict liability claim for failure to warn. The court stated at 265
Cal.Rptr. page 779: Cornice was in the business of renting skis and bindings.
It had an independent duty to exercise reasonable care in supplying this
equipment and was itself subject to strict liability for failure to warn
its customers of the dangerous propensities of the articles it rented.
E. The Utah Inherent Risks of Skiing Act Does Not Preclude A Ghionis
Claim For Negligent Instruction.
[Remainder of opinion is omitted.]
COLONIAL PACIFIC LEASING CORP.
v.
MCNATT
268 Ga. 265, 486 S.E.2d 804 (1997)
BENHAM, Chief Justice.
We granted a writ of certiorari to the Court of Appeals to review its decision
in McNatt v. Colonial Pacific Leasing Corp., 221 Ga.App. 768, 472 S.E.2d
435 (1996). We expressed particular concern with whether the "hell or high
water" clause in the equipment finance leases at issue insulated the assignees
of the lessor from the lessee's claim of fraud allegedly perpetrated by
agents of the supplier of the equipment. We conclude that a "hell or high
water" clause does not insulate a lessor's assignee from a claim of fraud
where an agency relationship can be established between the assignee and
the perpetrators of the alleged fraud.
In early 1991, Linda and William McNatt, sole shareholders and president
and secretary-treasurer, respectively, of Quick-Trip *266 Printers, Inc.,
entered into negotiations with representatives of Itex Systems Southeast,
Inc., for the acquisition of an Itex computer printing system. The McNatts
selected the equipment Quick-Trip Printers desired to obtain from Itex
and, on June 10, 1991, executed equipment finance leases with Burnham Leasing
Company, whereby Burnham agreed to purchase the equipment chosen by Quick-Trip
Printers from the supplier with which Quick-Trip had dealt, and to then
lease the equipment to Quick-Trip for a monthly rental payment. Burnham
Leasing immediately assigned its interest in the leases to appellants Colonial
Pacific Leasing Corporation and Datronic Rental Corporation [FN1]. Though
she did not later recall signing it, Linda McNatt's signature appears on
an "Acknowledgment and Acceptance of Equipment by Lessee," [FN2] dated
June 11, 1991. Linda **806 McNatt also purportedly executed a personal
guaranty of the lease agreement on June 10, 1991. [FN3]
FN1. The leases executed by Quick-Trip Printers and Burnham Leasing
authorized Burnham to assign its interest in the lease, and stated that
any assignee of Burnham would have all of the rights but none of the obligations
of Burnham under the lease. Quick-Trip Printers, as lessee, agreed that
it would not assert against the assignee lessor any defense, counterclaim,
or setoff that it might have against Burnham.
FN2. In that document, Quick-Trip acknowledged that the specified equipment
had been received "in good condition and repair, has been properly installed,
tested, and inspected, and is operating satisfactorily in all respects
for all of Lessee's intended uses and purposes." The document went on to
state that "Lessee hereby accepts unconditionally and irrevocably the Equipment"
and "specifically authorizes and requests Lessor to make payment to the
supplier of the Equipment." Just above the signature line, in upper-case
letters, was the lessee's acknowledgment and agreement "THAT LESSEE'S OBLIGATIONS
TO LESSOR BECOME ABSOLUTE AND IRREVOCABLE AND LESSEE SHALL BE FOREVER ESTOPPED
FROM DENYING THE TRUTHFULNESS OF THE REPRESENTATIONS MADE IN THIS DOCUMENT."
FN3. While acknowledging that the signature on the personal guaranty
looked like her signature, Mrs. McNatt questioned whether she had signed
the document, noting that she was not acquainted with the person who purportedly
witnessed her signature. The witness, an employee of Burnham Leasing, executed
an affidavit in which she stated she had witnessed Mrs. McNatt sign the
personal guaranty.
Quick-Trip Printers experienced problems with the equipment, and the
assignee/lessors delayed payment to Itex. While Itex was ultimately paid
for the equipment, Quick-Trip Printers never made a lease payment to the
assignee/lessors because the equipment never performed as the Itex agents
led the McNatts to believe it would. The lessors repossessed the equipment
and, four months after it signed the leasing documents, Quick-Trip Printers
filed suit against the equipment supplier, the manufacturer, and the lessors,
seeking, among other things, rescission of the leases. In an amended pleading,
Quick Trip Printers sought damages for the assignee/lessors' alleged negligent
release of funds to Itex. Colonial Pacific and Datronic each filed a counterclaim
seeking payment pursuant to the leases assigned to them. The trial court
granted summary judgment in favor of the assignee/lessors on the main claims,
relying on Quick-Trip Printers' disclaimer of all warranties concerning
the suitability of the equipment, [FN4] and a finding that lessee Quick-Trip
Printers had *267 authorized the release of the funds. The trial court
also granted the assignee/lessors summary judgment on their counterclaims,
"pursuant to the terms of their respective equipment leases." [FN5]
FN4. Prominently displayed on the front page of both leases signed
by Quick-Trip was Burnham Leasing's disclaimer of warranties and claims:
THERE ARE NO WARRANTIES BY OR ON BEHALF OF LESSOR. Lessee acknowledges
and agrees by his signature below as follows: (a) LESSOR MAKES NO WARRANTIES
EITHER EXPRESS OR IMPLIED AS TO THE CONDITION OF THE EQUIPMENT, ITS MERCHANTABILITY,
ITS FITNESS OR SUITABILITY FOR ANY PARTICULAR PURPOSE, ITS DESIGN, ITS
CAPACITY, ITS QUALITY, OR WITH RESPECT TO ANY CHARACTERISTICS OF THE EQUIPMENT;
... (e) If the Equipment is not properly installed, does not operate as
represented or warranted by the supplier or manufacturer, or is unsatisfactory
for any reason, regardless of cause or consequence, Lessee's only remedy,
if any, shall be against the supplier or manufacturer of the Equipment
and not against Lessor.
FN5. In each lease, Quick-Trip Printers "acknowledge[d] and agree[d]"
that "NO DEFECT, DAMAGE OR UNFITNESS OF THE EQUIPMENT FOR ANY PURPOSE SHALL
RELIEVE LESSEE OF THE OBLIGATION TO PAY RENT OR RELIEVE LESSEE OF ANY OTHER
OBLIGATION UNDER THIS LEASE." It further agreed to pay the total rent,
that it would not "abate, set off, deduct any amount, or reduce any payment
for any reason," that the lease was not cancelable or terminable by Quick-
Trip, and that it would not "assert against the [lessor's] assignee any
defense, counterclaim, or setoff that [Quick-Trip] may have against [Burnham
Leasing.]" The requirement that the lessee continue to make payments regardless
of the condition of the equipment and that the lessee not assert against
the assignee lessors defenses assertable against the original lessor is
commonly referred to as a "hell or high water" clause.
The Court of Appeals reversed the trial court's judgment on the
main claims, finding issues of material fact on Quick-Trip's assertion
of failure of consideration and on Quick-Trip's claim that the assignee/lessors
negligently released funds to the equipment supplier. The appellate court
reversed the grant of summary judgment to the assignee/lessors on their
counterclaim for the unpaid rent, holding that the leases' requirement
that the rental payments be made even if the equipment were damaged, defective,
or unfit could not be enforced when it was alleged that employees of the
equipment vendor, Itex, had fraudulently induced Quick-Trip to acquire
the equipment. That is to say, the "hell or high water" clauses in the
leases requiring payment to the assignee/lessors were of no moment where
the lessee **807 alleged the lease was procured by the fraudulent misrepresentations
of the vendor's agents.
1. The leases in question are classic examples of "lease financing,"
described by one commentator as possibly " 'the most important single source
of funds to support business expenditures for capital equipment.' [Cit.]."
Amelia H. Boss, The History of Article 2A: A Lesson for Practitioner and
Scholar Alike, 39 Ala. L.Rev. 575, 577 (1988). The tax laws, rulings of
the Comptroller of the Currency, as well as amendments to the Bank Holding
Company Act and government regulations have fueled the trend toward equipment
leasing. Edwin E. Huddleson III, Old Wine in New Bottles: UCC Article 2A--Leases,
39 Ala. L.Rev. 615, 616 n. 1 (1988). As of 1992, it was estimated that
30% of capital equipment in the United States was *268 acquired through
leasing. Robert D. Strauss, Equipment Leases under U.C.C. Article 2A--Analysis
and Practice Suggestions, 43 Mercer L.Rev. 853, 854 (1992). Most finance
lessors view the "hell or high water" clause at issue in the cases at bar
as sacrosanct. Huddleson, supra, 39 Ala. L.R. at 666.
A "finance lease" involves three parties--the lessee/business, the
finance lessor, and the equipment supplier. The lessee/business selects
the equipment and negotiates particularized modifications with the equipment
supplier. Instead of purchasing the equipment from the supplier, the lessee/business
has a finance lessor purchase the selected equipment, and then leases the
equipment from the finance lessor.
Traditionally, a finance lessor has been thought of as a passive lessor,
whose transactions remain functionally the equivalent of an extension of
credit. It is typically the lessee, not the lessor, who selects the goods
in a "finance lease." Moreover, a finance lessor often has neither the
opportunity nor the expertise to inspect the goods in order to discover
defects in them. Given the limited function of the lessor, the lessee relies
almost entirely on the supplier for representations, covenants, and warranties.
Huddleson, supra, 39 Ala. L.Rev. at 660.
In effect, the [lessee/business] is relying upon the [supplier] to
provide the promised goods and to stand by its promises and warranties;
the [lessee/business] does not look to the [finance lessor] for these.
The [finance lessor] is only a finance lessor, and deals largely in paper,
rather than goods. In that situation it makes no sense to treat the [finance
lessor] as a seller to the [business/lessee] with warranty liability, nor
does it make any sense to free the [supplier] from liability for breach
of promises and warranties that it would have given in an outright sale
to the [business/lessee]. Usually, the [finance lessor] expects to be paid,
even though the [equipment] might prove to be defective or totally unsuitable
for the [lessee/business's] particular business.
2 J. White & R. Summers, Uniform Commercial Code, s 13-3(a) (4th
ed.1995).
2. In Georgia, all lease contracts for "goods," including finance leases,
first made or first effective on or after July 1, 1993, are governed by
Article 2A of the Uniform Commercial Code. OCGA ss 11-2A-101 et seq. Ga.
L.1993, p. 633, s 5. Because the leases at issue were executed prior to
the effective date of Article 2A, we must look to the *269 Georgia law
relating to the lease of personal property that Article 2A supplanted--"a
hybrid of the law of bailment, contract, UCC Article 2 (Sales of Goods),
UCC Article 9 (Secured Transactions), together with common law principles
concerning personal property and real estate leases." Sarah B. King, Commercial
Code, Leases: Provide Regulations Relating to Leases of Goods, 10 G.S.U.
L.Rev. 34 (1993).
Under pre-Article 2A Georgia law, the conduct of the parties to a lease
finance transaction is governed by the terms of the lease. Citicorp Ind'l
Credit v. Rountree, 185 Ga.App. 417, 420, 364 S.E.2d 65 (1987). Georgia
case law generally upholds the bargains struck by parties, as long as the
contract is not the product of fraud (OCGA s 13-4-60), or is not violative
of the public policy of this State. Emory Univ. v. Porubiansky, **808 248
Ga. 391, 393, 282 S.E.2d 903 (1981). A finance lessor's disclaimer of warranties
expressed clearly and unambiguously is not prohibited by law or public
policy (Petroziello v. United States Leasing Corp., 176 Ga.App. 858, 860,
338 S.E.2d 63 (1985)), and a finance lease may authorize a lessor to assign
its rights in the contract free from claims and defenses which the lessee
might have against the original lessor. Short v. General Electric Credit
Corp., 113 Ga.App. 476, 148 S.E.2d 450 (1965). A contractual requirement
that the lessee make its rental payments is valid in the absence of fraud
on the part of or imputed to the finance lessor. Woods v. Advanta Leasing
Corp., 201 Ga.App. 844(1), 412 S.E.2d 607 (1991). See Holcomb v. Commercial
Credit Serv. Corp., 180 Ga.App. 451, 349 S.E.2d 523 (1986).
The inclusion of a "hell or high water" clause, however, does not resolve
the issue in favor of the assignee lessors. In Doss v. EPIC Healthcare
Mgt. Co., 901 S.W.2d 216 (Mo.App.1995), the Court of Appeals of Missouri
held that the clause did not protect an assignee who knew at the time of
assignment that the agreement was in default, that the lessee no longer
possessed the chattel, and that the agreement had been terminated. In Louisiana,
the clause may not be enforced when the lessee withholds payment because
the assignee lessor has not provided the lessee with peaceful possession
of the equipment for the term of the lease. Angelle v. Energy Builders
Co., 496 So.2d 509 (La.App.1986). Most recently, the Kansas Court of Appeals
concluded that the clause did not preclude a lessee from asserting equitable
estoppel. Toshiba Master Lease v. Ottawa Univ., 23 Kan.App.2d 129, 927
P.2d 967 (1996)
Each of the leases in the cases at bar clearly exclude warranty and
promissory liability of the finance lessor and its assignees to Quick-Trip
Printers, each states that Quick-Trip agreed to pay the full amount of
the rental agreement to assignee/lessors, regardless of defect, damage,
or unfitness of the equipment for any purpose, and each states that the
lessee agreed not to assert against the assignee *270 lessors defenses
it could assert against the original lessor. Thus, the contract precludes
the business lessee from asserting the fraud of or imputable to the original
finance lessor as a defense against the assignee lessors' claim for payment.
However, the business lessee in the case at bar did not wait until
it was sued by the assignee lessors to allege fraud. Instead, Quick-Trip
Printers took the offensive, filing suit in an effort to enforce its statutory
right (OCGA s 13-4-60) to rescind its lease contracts with the assignee/lessors
on the ground that the equipment supplier's employees fraudulently induced
Quick- Trip to enter into the equipment lease contracts with the original
finance lessor. In order for the purported fraud of the employees of the
equipment supplier to authorize rescission of the finance lease, their
actions must somehow be imputed to the assignee lessors through the finance
lessor. Although the finance leases clearly stated that Quick-Trip acknowledged
that the employees of the equipment supplier were not the agents of the
finance lessor, such a contractual statement "is not necessarily conclusive
as to the non-existence of such a relationship." Potomac Leasing Co. v.
Thrasher, 181 Ga.App. 883(1), 354 S.E.2d 210 (1987). In Potomac, evidence
that the supplier's employees were trained with regard to completing the
finance leasing documents and were authorized by the finance lessor to
negotiate a finance lease for the finance lessor was sufficient to defeat
the finance lessor's motion for directed verdict. However, the supplier's
employee who merely submitted a business/lessee's credit application to
the finance lessor for review and decision is not, as a matter of law,
an agent of the finance lessor. Gulf Winds v. First Union Bank, 187 Ga.App.
383(1), 370 S.E.2d 508 (1988). In the cases at bar, appellee William McNatt
testified on deposition that the equipment supplier's employees who purportedly
made the fraudulent statements to the McNatts wanted the McNatts to sign
a lease and told Mr. McNatt the monthly leasing costs. Mr. McNatt provided
a financing statement to the supplier's employees as part of the effort
to secure a finance lease, and the lease documents were presented to the
McNatts by the supplier's employees. Mr. McNatt stated unequivocally on
deposition **809 that the equipment supplier's employees never represented
themselves as being agents of the finance lessors, and Mrs. McNatt, who
was also deposed, stated that the employees of the equipment supplier never
discussed being employees of the finance lessors. We conclude from our
review of the record that the equipment supplier's employees acted only
as a conduit of information between the business lessee and the finance
lessor; there is no evidence that the finance lease was negotiated by the
supplier's employees pursuant to authorization given them by the finance
lessor. In other words, there is no evidence of a relationship *271 pursuant
to which the purported fraud of the supplier's employers could be imputed
to the finance lessor and vitiate the contracts executed by Quick-Trip
with the finance lessor. Woods v. Advanta Leasing, supra, 201 Ga.App. 844,
412 S.E.2d 607; Holcomb v. Commercial Credit Services, supra, 180 Ga.App.
451, 349 S.E.2d 523. Contrary to the holding of the Court of Appeals, there
is no material issue of fact concerning the imputation of fraud to the
assignee lessors and whether Quick-Trip was entitled to rescission of the
assigned leases. As there is no evidence of fraud imputable to the assignee
lessors, the leases are not rescindable unders 13- 4-60, and the hell or
high water clauses contained in the lease are viable.
3. Quick-Trip Printers cited failure of consideration as a defense
to the assignee lessors' counterclaims for the unpaid rent. In light of
its contractual agreement not to assert against the assignee lessors any
defense it might have against the original lessor, Quick-Trip is estopped
to assert failure of consideration as a defense to the assignee lessors'
counterclaims. Furthermore, in the absence of fraud, a lessee is precluded
from asserting the defense of failure of consideration against the assignee
lessors of a contract in which the lessee waived all express and implied
warranties. United States Leasing Corp. v. Jones Pharmacy, 144 Ga.App.
26, 240 S.E.2d 300 (1977). As was discussed in Division 2, supra, there
is no evidence of fraud imputable to the finance lessors. The Court of
Appeals, citing its decision in Granite Equip. Leasing Corp. v. Folds,
133 Ga.App. 856, 212 S.E.2d 490 (1975), concluded that the contractual
waiver of warranty was not effective against Quick-Trip since Quick-Trip
asserted that the equipment received was not as orally promised by the
supplier's employees (the alleged fraud which permeates these cases), and
the serial numbers on the equipment received did not match the serial numbers
contained in the leasing contract. In Granite, the Court of Appeals held
that the lessee's defense of failure of consideration had not been waived
by the disclaimer of warranty because the disclaimer applied to the type
of machine for which the contract called, "a 'factory rebuilt' press,"and
not to that which was actually delivered--"a 'reconditioned' press." (Emphasis
supplied). See also Avery v. Key Capital Corp., 186 Ga.App. 712(1), 368
S.E.2d 364 (1988) (disclaimers in lease applicable to 1984 vehicle described
therein, but not to 1983 model delivered). Linda McNatt testified in her
deposition that the equipment listed in the lease agreements was delivered
to Quick-Trip. Her husband did not dispute that the pieces received were
the type of machine for which the contract called. He testified only that
he noted discrepancies between the serial numbers listed on the contract
for individual pieces, and the serial numbers of the parts actually delivered.
There being no discrepancy in the type of equipment contractually promised
and that actually delivered, the *272 contractual waiver of warranty was
effective and defeated Quick-Trip's defense of failure of consideration.
[Portion of opinion discussing contention that assignee lessors are
liable to Quick-Trip for negligent release of funds to Itex is omitted.]
COLORADO INTERSTATE CORPORATION
v.
The CIT GROUP/EQUIPMENT FINANCING, INC..
993 F.2d 743 (1993)
McKAY, Chief Judge.
In this diversity action, Plaintiffs Colorado Interstate Corporation and
Colorado Interstate Gas Company (hereinafter collectively referred to as
"Colorado Interstate") appeal from a district court order granting summary
judgment to Defendant, The CIT Group/Equipment Financing, Inc. (hereinafter
referred to as "CIT") on Colorado Interstate's restitution and breach of
contract claims. 775 F.Supp. 369 (D.Col.1991). The claims arise from Colorado
Interstate's lease of computer equipment. In 1985, Colorado Interstate
leased computer equipment from CMI Corporation (hereinafter referred to
as "CMI"). The lease between CMI and Colorado Interstate (hereinafter referred
to as the Master Lease) contained what is known as a "hell or high water
clause" and provided for the assignment of rent payments. The Master Lease
contained the following pertinent terms: 4. Assignment, Obligation to Pay
Rent Unconditional.
Lessee ... (iii) agrees to comply fully with the terms of any such
assignments and/or grants provided that such assignments and/or grants
do not increase the Lessee's obligations nor decrease the Lessee's rights....
provided, however, that Assignee shall not be obligated to perform the
obligations of Lessor hereunder unless Assignee expressly agrees to do
so in writing.... ....
This Master Lease is a net lease and Lessee agrees that its obligations
to pay all Basic Rent and other sums payable hereunder (collectively, Rent
), and the rights of Lessor and Assignee in and to such Rent, are absolute
and unconditional and are not subject to any abatement, reduction, setoff,
defense, counterclaim or recoupment due or alleged to be due to, or by
reason of, any past, present or future claims which Lessee may have against
Lessor, Assignee, the manufacturer or seller of the equipment, or against
any person for any reason whatsoever.
....
18. Miscellaneous.
....
(d) Applicable Law. This Master Lease and Equipment Schedule(s) will
be governed by, and construed in accordance with, the laws of the State
of Texas.
....
(k) Quiet Enjoyment. Provided that no Event of Default has occurred
or is continuing hereunder, Lessor, Assignee or their agents or assigns
shall not interfere with Lessee's right of quiet enjoyment and use of the
Equipment. (Appellee's Supp.App. at 50, 55-57.)
In 1986, Colorado Interstate decided to upgrade its mainframe computer
system. In *746 order to effectuate this upgrade, CMI entered into a lease
with Electronic Data Systems Leasing Corporation (hereinafter "EDS") on
December 4, 1986, whereby EDS leased the equipment to CMI (hereinafter
referred to as the Prime Lease). CMI subsequently leased this equipment
to Colorado Interstate on December 11, 1986, pursuant to an Equipment Schedule
which incorporated by reference the terms of the Master Lease. In June
of 1987, CMI assigned its right to payments under the Master Lease to CIT.
Preparatory to the assignment, Colorado Interstate signed a Consent and
Agreement to assignment which provided in pertinent part: The Company [Colorado
Interstate] agrees:
(i) To remit and deliver all Moneys directly to [CIT] ... with identification
of the source and application of the funds, without abatement, reduction,
counterclaim or offset....
....
[CIT] hereby agrees that so long as no Event of Default as defined
in the lease shall have occurred and be continuing, it [CIT] will not disturb
[Colorado Interstate's] quiet and peaceful possession of the Equipment
and its unrestricted use of the Equipment for its intended purpose under
the terms of the Lease.
(Appellee's Supp.App. at 65-66.) As a result, Colorado Interstate unconditionally
agreed to pay all rents to CIT until the Master Lease expired in August
of 1989.
In November of 1988, CMI ceased making payments to EDS under the Prime
Lease. In January of 1989, CMI filed a petition under Chapter 11 of the
Bankruptcy Code. CMI and EDS subsequently entered into an agreement approved
by the bankruptcy court declaring the Prime Lease terminated as of November
8, 1988. [FN1]
FN1. In light of our holding, we need not determine the validity of
this stipulation vis-a-vis other parties.
Because it was no longer receiving rent payments from CMI, EDS demanded
the return of the equipment from Colorado Interstate and threatened a replevin
action. In order to avoid being dispossessed of the equipment, Colorado
Interstate began paying EDS the amounts owed by CMI under the Prime Lease.
Colorado Interstate also continued making payments to CIT in accordance
with the assignment. [FN2]
FN2. In March, Colorado Interstate began making the payments to CIT
under "reservations of rights."
In May of 1991, Colorado Interstate initiated this action against CIT
seeking to recoup the rents paid to CIT after the termination of the Prime
Lease in November 1988. Colorado Interstate also sought damages for breach
of an agreement not to disturb Colorado Interstate's quiet enjoyment. The
district court granted summary judgment in CIT's favor and awarded costs
and attorney fees. Colorado Interstate brought this appeal.
I.
Our review of the district court's grant of summary judgment is de
novo. Boone v. Carlsbad Bancorporation, Inc., 972 F.2d 1545, 1550 (10th
Cir.1992). Summary judgment is only appropriate if the record demonstrates
"there is no genuine issue as to any material fact and that the moving
party is entitled to judgment as a matter of law." Id.; Fed.R.Civ.P. 56(c).
After a review of the record in this case, we are satisfied that no genuine
issue of material fact exists that would preclude summary judgment.
A.
Colorado Interstate argues that upon the termination of the Prime Lease
in November 1988, the Master Lease also terminated. Thus, Colorado Interstate
argues that its duty to pay ended with the termination of the Master Lease.
It is clear that under Texas law, a sublessee's right of possession
vis- a-vis the original lessor is secondary because there is no privity
of contract between a sublessee and the original lessor. Rogers v. Burton,
496 S.W.2d 673, 675 (Tex.Civ.App.1973), cert. denied, 415 U.S. 921, 94
S.Ct. 1422, 39 L.Ed.2d 476 (1974). However, it does not *747 follow that
the obligations under a sublease cease upon termination of the prime lease.
In Frankfurt v. Decker, 180 S.W.2d 985 (Tex.Civ.App.1944), the Texas Civil
Court of Appeals held a sublessor did not escape his obligations under
a sublease notwithstanding the termination of the prime lease. Noting principles
of privity, the court rejected the sublessor's assertion that the sublessee's
rights under the sublease were limited by the terms of the prime lease
and affirmed an award of damages to the sublessee when he was evicted by
the original lessor. See id. at 987.
Applied to the facts of this case, it is clear that Colorado Interstate's
obligations under the Master Lease continued notwithstanding the termination
of the Prime Lease. Colorado Interstate's remedy upon EDS's threatened
replevin action was to bring an action against CMI for breach of its contractual
obligations. Accordingly, Colorado Interstate's argument in this regard
is unavailing.
B.
Colorado Interstate also argues that the district court erred in holding
that the obligation to pay rent under the hell or high water clause continued
notwithstanding the fact that Colorado Interstate's right of quiet enjoyment
was disturbed. Colorado Interstate argues that it was only obligated to
pay rent under the hell or high water clause as long as it was obligated
to pay rent at all, and that the duty to pay ceased when its quiet enjoyment
was disturbed. Essentially, Colorado Interstate argues that its obligation
to pay rent under the hell or high water clause and the covenant of quiet
enjoyment are mutual or interdependent obligations under the contract.
CIT argues that even assuming, arguendo, that Colorado Interstate's
quiet enjoyment was disturbed, under the hell or high water clause its
right to uninterrupted rent payments continued because Colorado Interstate's
unconditional obligation to pay rent was independent from the obligations
of both CMI and CIT. [FN3]
FN3. CIT also disputes that Colorado Interstate's right to quiet enjoyment
was ever violated because Colorado Interstate never lost possession of
the equipment. CIT points out that in accordance with the lease, it never
assumed CMI's obligation to pay rent to EDS under the prime lease, nor
did it assume responsibility for CMI's promise not to disturb Colorado
Interstate's quiet enjoyment. CIT contends that it only covenanted that
neither CIT nor its agents would disturb Colorado Interstate's quiet enjoyment,
and that it has lived up to this promise. In light of our holding, we need
not address these points.
A review of the unambiguous language of the lease reveals that Colorado
Interstate did in fact agree to an unconditional obligation to pay rent
that was separate from any duty or obligation of CMI or CIT. The lease
states that the rights of Lessor and Assignee in and to such Rent, are
absolute and unconditional and are not subject to any abatement, reduction,
setoff, defense, counterclaim or recoupment due or alleged to be due to,
or by reason of, any past, present or future claims which Lessee may have
against Lessor, Assignee, the manufacturer or seller of the equipment,
or against any person for any reason whatsoever.
(Appellee's Supp.App. at 50.) Likewise, Colorado Interstate agreed
in the Consent and Agreement "to remit and deliver all [rents] directly
to [CIT] ... without abatement, reduction, counterclaim or offset...."
Id. at 65. Colorado Interstate's assertion that its duty to pay rent only
continued as long as its quiet enjoyment remained undisturbed is without
merit. When Colorado Interstate agreed to the terms of the Master Lease
which contained the hell or high water clause, it agreed to continue making
rent payments despite any claim it might have against either CMI or CIT.
Colorado Interstate's sole remedy was limited to bringing an action against
CMI while continuing to make rent payments. Neither the assignment nor
CMI's status as debtor in bankruptcy relieved Colorado Interstate of this
obligation. Essentially, Colorado Interstate assumed the risk of CMI's
nonperformance.
Colorado Interstate attempts to circumvent this result by citing Texas
constructive eviction cases for the proposition that breach of the covenant
of quiet enjoyment relieves a *748 tenant from the duty to pay rent. See
Downtown Realty, Inc. v. 509 Tremont Bldg., Inc., 748 S.W.2d 309, 312-13
(Tex.Ct.App.1988); Fidelity Mut. Life Ins. Co. v. Kaminsky, 768 S.W.2d
818, 819 (Tex.Ct.App.1989). Assuming that Colorado Interstate's right of
quiet enjoyment was disturbed in a manner cognizable under Texas law, [FN4]
Colorado Interstate's reliance on these cases is still misplaced. Downtown
and Fidelity are clearly distinguishable in that the leases at issue did
not contain a hell or high water clause that effectively separated the
parties' respective duties and obligations. Accordingly, Colorado Interstate's
reliance on these cases for the proposition that the right of quiet enjoyment
is inseparable from the duty to pay rent is without merit.
FN4. In light of our holding, we need not determine whether, under
the facts of this case, Colorado Interstate's right to quiet enjoyment
was in fact violated or whether CIT is responsible for any such violation.
Although the Texas courts have not expressly ruled on the enforceability
of the hell or high water clause at issue in this case, they have as a
general matter recognized the enforceability of an unconditional obligation
to pay rent. [FN5] In Stewart v. United States Leasing Corp., 702 S.W.2d
288 (Tex.Ct.App.1985), Stewart arranged for United States Leasing to purchase
a copy machine from Salt and Pepper Copiers and then lease it to him. Stewart
agreed to an unconditional obligation to pay rent to the defendant, regardless
of any claim plaintiff might have against the vendor. When the vendor failed
to deliver the copier to Stewart, he ceased making rent payments and United
States Leasing brought suit. The court noted:
FN5. Texas law also recognizes unconditional obligation to make payments
under a waiver of defense clause. See Texas Bus. & Comm.Code Ann. s
9.206 (Vernon Supp.1990).
An examination of the lease reveals that Salt and Pepper Copiers was
not an agent of [defendant], the lessor, and that any claims regarding
the equipment were to be made solely against the vendor, Salt and Pepper
Copiers. It further expressly provided that regardless of claims against
Salt and Pepper Copiers, Stewart was to pay all rents payable under the
lease. Id. at 290. The court went on to reject Stewart's claim of lack
of consideration and enforced the Stewart's unconditional obligation to
pay rent.
Other courts that have considered the enforceability of hell or high
water clauses have enforced such provisions in analogous situations. See,
e.g., American Computer v. Jack Farrell Implement, 763 F.Supp. 1473, 1484
n. 9 (D.Minn.1991), aff'd, 967 F.2d 1208 (8th Cir.1992), cert. denied,
506 U.S. 956, 113 S.Ct. 414, 121 L.Ed.2d 338 (1992); Philadelphia Sav.
Fund Soc'y v. Deseret Management Corp., 632 F.Supp. 129, 135-36 (E.D.Pa.1985);
In re CLE Corp., No. 85-06877-SWC, slip op. at 15-18 (Bankr.N.D.Ga., April
5, 1989); West Virginia v. Hassett (In re O.P.M. Leasing Services, Inc.),
21 B.R. 993, 1006-07 (Bankr.S.D.N.Y.1982). In O.P.M., after reviewing the
effect of a similar hell or high water clause, the court reasoned as follows:
To deny this clause its full force and effect would effectively reconstruct
the contract contrary to the intent of the parties, which reconstruction
would be impermissible.
Moreover, it is a well-settled principle that "parties to a contract
are given broad latitude within which to fashion their own remedies for
breach of contract.... It follows that contractual limitations upon remedies
are generally to be enforced unless unconscionable."
....
The essential practical consideration requiring liability as a matter
of law in these situations is that these clauses are essential to the equipment
leasing industry. To deny their effect as a matter of law would seriously
chill business in this industry because it is by means of these clauses
that a prospective financier-assignee of rental payments is guaranteed
meaningful security for his outright loan to the lessor. Without giving
full effect to such clauses, if the equipment were to malfunction, the
only security for this assignee would be to repossess equipment with substantially
diminished value. *749 O.P.M., 21 B.R. at 1006-07 (citations omitted).
The court went on to enforce the provisions of the hell or high water clause
and held that despite the lessor's breach of an obligation to maintain
the equipment, the lessee's unconditional obligation to pay rent continued.
As one commentator has noted:
Under the hell or high water provision, the lessee undertakes to pay
rentals ... once the lessee has formally accepted the property.... Whether
the property functions satisfactorily, is useful to the lessee, is suitable
for the purposes intended, or is lost, stolen, condemned, or destroyed,
and whether the lessee has any right of offset against the lessor or the
lenders, is irrelevant. In short, rent payments continue to come hell or
high water, without any reduction or offset, even if the lessee is wrongfully
dispossessed of the equipment by the lessor.... 1 Bruce E. Fritch et. al.,
Equipment Leasing-Leveraged Leasing 152-53 (3d ed. 1988).
Where sophisticated parties enter into an agreement setting forth their
rights and obligations, the terms of the agreement should control unless
the agreement would otherwise be void under state law. E.g., Graham Const.
Co. v. Walker Process Equip., Inc., 422 S.W.2d 478, 483 (Tex.Civ.App.1967).
As noted by the O.P.M. court, there are significant policy reasons for
upholding hell or high water clauses where, as in the equipment leasing
industry, the enforceability of the provision aids the parties in obtaining
financing that would not otherwise be available. [FN6] Such policy justifications
are particularly important in the computer leasing industry where advances
in technology significantly decrease the value of equipment that is quickly
becoming obsolete. Cf., O.P.M., 21 B.R. at 1007 (noting that in the absence
of a hell or high water clause, if the equipment malfunctioned, the only
security available to the assignee would be the repossession of equipment
having substantially reduced value).
FN6. As evidence of the growing acceptance of a hell or high water
provisions in the equipment leasing industry, we note that s 2A-407 of
the U.C.C. provides that in all finance leases other than those involving
a consumer, "the lessee's promises under the lease contract become irrevocable
and independent upon the lessee's acceptance of the goods." Id. As the
Comments note, "[t]his section is self-executing; no special provision
need be added to the contract." Id., cmt. To date, the Texas legislature
has not adopted s 2A of the U.C.C.
In the instant case, sophisticated and well-represented parties entered
into an agreement which detailed their rights and obligations. The agreement
was advantageous to all parties involved and provided Colorado Interstate
with equipment it may not have been able to obtain absent the unconditional
obligation to pay rent. In the absence of fraud or deceit which is not
claimed here, it is our view that under Texas law the parties should be
held to their agreement. We are of the view that Colorado Interstate assumed
the risk of CMI's nonperformance and should not be relieved of its obligations
under the agreement simply because CMI happens to be a debtor in bankruptcy.
See Fritch at 153. We hold that pursuant to the terms of the hell or high
water clause, Colorado Interstate's obligation to pay rent continued notwithstanding
CMI's default and the threat of a replevin action by EDS.
C.
Colorado Interstate attempts to distinguish the instant situation from
other cases that have enforced hell or high water clauses on a number of
grounds. Colorado Interstate argues that, unlike other cases, it was deprived
of the very item contemplated by the contract. Given the result in Stewart
where the lessee likewise was denied the subject matter of the lease, we
find this argument unpersuasive.
D.
Colorado Interstate also attempts to distinguish this case because
of the nondiminution in rights clause contained in the Master Lease. The
Master Lease provided as follows: "Lessee ... (iii) agrees to comply fully
with the terms of any such assignments and/or grants provided that such
assignments and/or grants do not increase the Lessee's obligations nor
decrease the Lessee's *750 rights." (Appellee's Supp.App. at 50.) Colorado
Interstate argues that the nondiminution in rights clause requires that
Colorado Interstate be no worse off after an assignment than before. Colorado
Interstate argues that had the assignment not occurred, it would not have
had an unconditional obligation to continue paying CMI because when its
right to quiet enjoyment was disturbed by CMI's cessation of payments to
EDS, its obligation to continue paying rent would have ceased. Colorado
Interstate therefore asserts that the nondiminution of rights clause requires
the same result after the assignment.
As we have previously noted, the hell or high water clause in this
case effectively separated the obligations of CMI and CIT from Colorado
Interstate's obligation to pay rent. As a result, even absent the assignment,
Colorado Interstate would not have been released from its obligation to
pay rent upon CMI's default; Colorado Interstate's remedy would have been
limited to bringing an action against CMI while it continued to make rent
payments pursuant to the lease. Accordingly, Colorado Interstate's contention
in this regard is without merit.
E.
Colorado Interstate also argues that the policy justifications for
enforcing the hell or high water clause in the O.P.M. case are not present
in this case because the record would not support the conclusion that CIT
was a finance lessor. In O.P.M., the court noted that other courts had
distinguished between finance lessors and merchant lessors in considering
the enforceability of a hell or high water clause. [FN7] See O.P.M., 21
B.R. at 1007. Colorado Interstate does not argue that CIT is a merchant
lessor or that the same policy would not apply to a financier-assignee
such as CIT; rather, it merely asserts the record would not support a finding
that CIT is a finance lessor.
FN7. The court defined finance and merchant lessors as follows: "[A]
finance lessor [is one] whose only service is to provide funds and who
is not [a] merchant lessor. A merchant lessor is one who deals in goods
and holds itself out as having specialized knowledge about the design,
operation and repair of the chattel leased." O.P.M., 21 B.R. at 1007. The
significance of being classified as a merchant lessor is that merchant
lessors may be charged with statutory warranties of merchantability and
suitability for a particular purpose under 2A of Uniform Commercial Code,
or by applying the provisions of article 2 by analogy in those jurisdictions
that have yet to adopt article 2A. See Fritch, supra, at 48-49, 63-64,
66-68.
As an initial matter it is important to note that the distinction between
merchant and finance lessors in the context of determining the enforceability
of hell or high water clauses in O.P.M. was but part of the court's reasoning.
In any event, the rationale for enforcing a hell or high water clause in
a case involving a financier-assignee clearly applies, as noted by the
O.P.M. court. [FN8]
FN8. In exchange for permanent financing of $700,000, CMI assigned
its right to receive the rental payments to CIT. (Appellee's Supp.App.
at 331- 32.)
The essential practical consideration requiring liability as a matter
of law in these situations is that these clauses are essential to the equipment
leasing industry. To deny their effect as a matter of law would seriously
chill business in this industry because it is by means of these clauses
that a prospective financier-assignee of rental payments is guaranteed
meaningful security for his outright loan to the lessor. O.P.M. 21 B.R.
at 1007. Moreover, we are of the view that the policy reasons for distinguishing
between merchant lessors and finance lessors when determining the enforceability
of a hell or high water clause should not apply where, as in this case,
the lessor has expressly disclaimed all warranties of merchantability and
suitability, and the lessee has expressly assumed responsibility, vis-a-vis
the lessor, for the suitability and functioning of the leased equipment.
[FN9] Accordingly, *751 Colorado Interstate's attempt to distinguish this
case on this ground is without merit. [FN10]
FN9. The Master Lease provided as follows:
3. Acceptance, Warranties, Limitation of Liability. Lessee represents
and agrees that ... each Leased Item is of a size, design, capacity and
manufacture selected by Lessee and that Lessee has as between Lessee and
Lessor unconditionally accepted such Item.... LESSOR SHALL HAVE NO LIABILITY
TO LESSEE FOR ANY CLAIM, LOSS OR DAMAGE CAUSED OR ALLEGED TO BE CAUSED
DIRECTLY, INDIRECTLY, INCIDENTALLY OR CONSEQUENTIALLY BY THE EQUIPMENT,
BY ANY INADEQUACY THEREOF OR DEFICIENCY OR DEFECT THEREIN, BY ANY INCIDENT
WHATSOEVER IN CONNECTION THEREWITH, OR IN ANY WAY RELATED TO OR ARISING
OUT OF THIS AGREEMENT EXCEPT AS SUCH CLAIM, LOSS OR DAMAGE RESULTS FROM
THE NEGLIGENCE OR WILLFUL MISCONDUCT OF THE LESSOR. LESSOR MAKES NO EXPRESS
OR IMPLIED WARRANTIES OF ANY KIND, INCLUDING THOSE OF MERCHANTABILITY,
DURABILITY AND FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO
THE EQUIPMENT AND EXPRESSLY DISCLAIMS THE SAME. (Appellee's Supp.App. at
49-50.)
FN10. Under Article 2A of the Uniform Commercial Code, the distinction
between finance and merchant lessors is not dispositive for determining
the enforceability of a hell or high water clause. If a lease is "finance
lease," the obligation to pay rent automatically is separated from a lessor's
obligation. See supra, note 5. A finance lease is defined as a lease in
which (i) the lessor does not select, manufacture or supply the goods,
(ii) the lessor acquires the goods or the right to possession and use of
the goods in connection with the lease, and (iii) either the lessee receives
a copy of the contract evidencing the lessor's purchase of the goods on
or before signing the lease contract, the lessee's approval of the contract
evidencing the lessor's purchase of the goods is a condition to effectiveness
of the lease contract. s 2A-103(1)(g), Uniform Commercial Code. The comments
to this section states: "A lessor who is a merchant with respect to goods
of the kind subject to the lease may be a lessor under a finance lease."
Id., cmt. As previously mentioned, Texas has yet to adopt Article 2A.
F.
Additionally, Colorado Interstate asserts the enforcement of the hell
or high water clause under the circumstances of this case would amount
to an impermissible penalty under Texas law. A review of the record in
this case reveals that Colorado Interstate did not raise this matter in
the trial court. Nonetheless, in dicta the district court addressed this
issue sua sponte: "If CMI or [EDS] had in fact repossessed the computer
equipment, under Texas law the continued obligation to pay rent is a penalty
and would be unenforceable." (Appellee's Supp.App. at 5.)
It is well established that a federal appellate court will not consider
an issue "which was not presented to, considered or decided by the trial
court." Cavic v. Pioneer Astro Indus., Inc., 825 F.2d 1421, 1425 (10th
Cir.1987). However, "[t]he matter of what questions may be taken up and
resolved for the first time on appeal is one left primarily to the discretion
of the courts of appeals, to be exercised on the facts of individual cases."
Singleton v. Wulff, 428 U.S. 106, 121, 96 S.Ct. 2868, 2877, 49 L.Ed.2d
826 (1976).
Although the district court did not have the benefit of argument on
this issue, the issue was considered by the court. In addition, the issue
has been briefed fully on appeal. Because the determination of whether
a contractual provision is an unenforceable penalty is a matter of law,
see Lefevere v. Sears, 629 S.W.2d 768, 771 (Tex.Civ.App.1981), we will
exercise our discretion and consider this issue. [FN11]
FN11. In exercising our discretion to consider this issue, we do not
hold that Colorado Interstate was entitled to review of this issue as a
matter of right.
Under Texas law, "[t]he right of competent parties to make their own
bargains is not unlimited." Stewart v. Basey, 150 Tex. 666, 245 S.W.2d
484, 486 (1952). One such limitation is where a stipulated damage provision
is viewed to constitute a penalty. See id.
245 S.W.2d at 486-87. "The universal rule for measuring damages for
breach of contract is just compensation for the loss or damages actually
sustained," and "[a] party has no right to have a court enforce a stipulation
which violates that rule." [FN12] Id. at 486. Thus, where an "agreement
contains several matters of different degrees of importance, and yet the
sum named is payable for the breach of any, even the least[,] ... the sum
stipulated to be paid has been treated as a penalty." Id.
FN12. In addition to the just compensation requirement, Texas law also
requires that the amount stipulated to be reasonable when judged at the
time of the making of the contract, and that the amount be difficult or
impossible to accurately ascertain. Id. at 448 (citing the Restatement
of Contracts s 339); Presnal v. TLL Energy Corp., 788 S.W.2d 123, 127 (Tex.Ct.App.1990).
Although there is no stipulated damage provision at issue in the instant
case, Colorado Interstate nonetheless contends that the effect of the hell
or high water clause in this case amounts to a penalty because Colorado
Interstate was required to pay twice for the computer equipment to avoid
having it repossessed. In support of this position, Colorado Interstate
cites Texas case law holding a lessor could not enforce a liquidated damage
provision requiring full payments for future rents where the lessor had
also repossessed the equipment. See American Lease Plan v. Ben-Kro Corp.,
508 S.W.2d 937, 943-44 (Tex.Civ.App.1974); Southwest Park Outpatient Surgery,
Ltd. v. Chandler Leasing Div., 572 S.W.2d 53 (Tex.Civ.App.1978). Because
there is no stipulated damage provision at issue in this case, an analysis
under penalty law does not lend itself to the present inquiry. See id.
at 55 (the question of whether a contractual provision provides for a penalty
may be determined entirely from the face of the contract). [FN13] In any
event, Colorado Interstate's assertion in this regard is unavailing because
the primary focus of a penalty inquiry is just compensation. Unlike the
facts in American Lease and Southwest Park, [FN14] there is no issue of
unjust compensation in this case. Furthermore, Colorado Interstate had
a cause of action against CMI when it ceased making payments to EDS. Because
the reasonableness of a stipulated damage provision is determined at the
time the parties entered into the agreement, the fact that CMI is presently
in bankruptcy should not affect the determination of the issue of just
compensation in this case. In contrast, in American Lease and Southwest
Park there was never an available cause of action to recover damages for
the repossession of the leased equipment.
FN13. At best, Colorado Interstate could argue that the effect of the
hell or high water clause and CMI's bankruptcy was to set a stipulated
damage of $0 for CMI's breach. However, low stipulated damages, as opposed
to high stipulated damages, are analyzed under unconscionability doctrines--
not penalty doctrines. See Restatement (Second) of Contracts, s 356 cmt.
a (1981).
FN14. In American Lease, the lessee failed to make rent payments. The
lessor repossessed the equipment and sought damages for all future rentals
pursuant to a liquidated damage clause. The court held that the lessor
was not entitled to repossess the equipment and also recover the full amount
of unaccrued and unearned rentals for the unexpired term of the lease because
such a recovery would be in excess of just compensation. American Lease,
508 S.W.2d at 943. In Southwest Park, the lessor had disclaimed, and the
lessee had assumed, responsibility for the suitability and functioning
of certain equipment. When the equipment proved to be unsuitable, the lessee
ceased making rent payments. The lessor sought to repossess the equipment
and collect future rentals pursuant to the terms of a liquidated damage
clause. Citing to American Lease, the court struck the liquidated damage
provision of the lease because it would permit a measure of recovery in
excess of just compensation because it did not require the lessor to credit
to lessee's account those funds received from the sale or releasing of
the equipment. Southwest Park, 572 S.W.2d at 56-57.
Although Colorado Interstate may have been forced to choose between
making double payments or having the equipment repossessed, this does not
create an unenforceable penalty under Texas law. By agreeing to the terms
of the Master Lease and Equipment Schedule, Colorado Interstate assumed
the risk of CMI's nonperformance. Accordingly, Colorado Interstate's argument
in this regard is without merit.
[The portion of the opinion dealing with attorney's fees and costs
is omitted.]
and that if attorney fees were warranted, the amount requested was
unreasonable. Appellant's App. (No. 92-1226), Ex. B at 1-3.
[11] As an initial matter we must determine whether we can properly
address the arguments Colorado Interstate raises on appeal and
AT & T CREDIT CORPORATION
v.
TRANSGLOBAL TELECOM ALLIANCE, INC.
966 F. Supp. 299 (D. N.J. 1997)
POLITAN, District Judge.
Dear Counsel:
This matter comes before the Court on the motion of plaintiff, AT &
T Credit Corporation ("AT & T Credit"), for summary judgment against
defendants Transglobal Telecom Alliance ("Transglobal") and James Carraway
("Carraway") (collectively referred to as "defendants") seeking a determination
that defendants breached the terms of a lease agreement and guaranty between
AT & T Credit and the defendants. AT & T Credit also seeks an award
of damages and a determination that it is entitled to possession of the
equipment it leased to Transglobal. Defendants brought a cross-claim to
compel discovery responses. Oral argument was heard in this matter on February
24, 1997. Based upon a review of the record and the arguments of counsel,
and as more fully set forth below, AT & T Credit's motion for summary
judgment is GRANTED. The Court, however, declines to certify the judgment
as final due to the remaining claims in the case between defendants and
AT & T Corporation, a third-party defendant.
STATEMENT OF FACTS
On or about July 19, 1994, defendant Transglobal executed a Master Equipment
Lease Agreement ("Agreement") which was accepted by plaintiff, AT &
T Credit, on August 5, 1994. Pursuant to this Agreement, AT & T Credit
agreed to lease AT & T Corp. *301 telephone equipment to Transglobal.
At the same time, Transglobal executed Master Equipment Lease Agreement
Schedule 00010 ("Schedule 00010"). According to Schedule 00010, AT &
T Credit leased to Transglobal an AT & T Corp. Conversant Communications
System and other related equipment ("the Leased Equipment") for a lease
term of forty-eight months, commencing August 31, 1994, with monthly rental
payments of $4,537.41. [FN1]
FN1. The telephone equipment was installed and operational on June
6, 1994.
On or about July 19, 1994, Transglobal executed a document acknowledging
that the Agreement, Schedule 00010, and all other agreements constituted
the entire agreement between Transglobal and AT & T Credit relating
to the Leased Equipment. Transglobal also executed a Master Equipment Lease
Agreement Commencement Certificate ("Commencement Certificate"), in which
Transglobal acknowledged delivery, acceptance, and proper working condition
of the Leased Equipment. Also on or about that same day, defendant Carraway
executed a Master Equipment Lease Agreement Guaranty ("Guaranty"), personally
guaranteeing to AT & T Credit the full and prompt payment, observance,
and performance when due of all obligations of Transglobal under the lease.
Soon after the lease commenced on August 31, 1994, Transglobal's account
became delinquent with AT & T Credit. Transglobal made its November
1994 payment, but made no further payments. The Agreement and Schedule
00010 (collectively referred to as "the Lease") provide for a series of
specific remedies to AT & T Credit in the event of Transglobal's default.
If Transglobal fails to make any monthly payment within ten days of the
due date, Transglobal is obligated to pay AT & T Credit a late charge
of 5% of the monthly payment. It also obligates Transglobal to pay AT &
T Credit interest at a rate of 1 1/2 % per month. Paragraph 20 of the Agreement
is a liquidated damages provision, which provides that if default occurs,
AT & T Credit has the right to recover damages in the amount of the
Lessor's Return, which is defined as the sum of the following amounts:
(a) the aggregate amount of delinquent rental payments (including late
fees and interest); plus (b) the present value of all rental payments due
for the remaining term of the lease, discounted at 5%; plus (c) the present
value (discounted at 5%) of the casualty value of the equipment. As of
May 2, 1996, AT & T Credit calculated that amount as $250,658.58. The
Agreement also provides for the payment of costs to AT & T Credit,
and allows AT & T Credit to take possession of or render unusable the
Leased Equipment. Defendants deny that they are in default in performing
their obligations under the Lease documents and that any payments are due
to AT & T Credit. Defendants allege that the reason they had to discontinue
their operations was that AT & T Corp. breached its agreement with
Transglobal. AT & T Corp. and Transglobal had entered into an agreement
which provided that AT & T Corp. would provide equipment, lines, and
minutes to Transglobal to start up its call turnaround ("CTA") business.
[FN2]
FN2. CTA exploits the differential between the lower rates charged
for international and long distance telephone service provided by major
United States telecommunications carriers and the substantially higher
rates charged for such service by the government-controlled foreign telephone
administrations or postal, telephone, or telegraph authorities. CTA technology
allows a telephone customer in a foreign country to place an international
or long distance call at a rate available from a CTA provider by using
international outbound service to call an established CTA telephone number
in the United States.
Transglobal joined AT & T Corp. as a third-party defendant in this
matter for breach of this agreement. There are several allegations against
AT & T, with one being that AT & T Corp. continued amending the
agreement after Transglobal had begun operations at an agreed-upon rate.
Most simply put, Transglobal contends that the equipment lease with AT
& T Credit was merely a component of a complex business arrangement
with AT & T Corp. and that Transglobal*302 and Carraway have valid
defenses to the enforcement of the Agreement and the Guaranty.
DISCUSSION
[Discussion of standard for summary judgment is omitted.]
Transglobal
In order for AT & T Credit to prevail, it must show that a contractual
relationship existed between it and Transglobal, that Transglobal breached
the contract, and that AT & T Credit suffered damages.
It is undisputed that Trangslobal entered into the Lease, as Transglobal
admits in its Answer, and the terms of the Lease are the embodiment of
the parties' agreement.
Additionally, Transglobal has failed to make any payments under the
Lease since November 1994. Transglobal has not pointed to any fact to show
that it made any payments. The Agreement provides that the lessee "agrees
that it has an unconditional obligation to pay all rental payments and
other amounts when due." Agreement, p 14. Furthermore, pursuant to the
Agreement, the lessee is not entitled to "recoupments, cross-claims, counterclaims
or any other defenses to any rental payments or other amounts due hereunder,
whether those defenses arise out of claims by lessee against lessor, seller,
this agreement, any schedule or otherwise." Agreement, p 12.
Transglobal contends that summary judgment is inappropriate based on
the claims pending against AT & T Corp. However, those claims are independent
of the claims by AT & T Credit. No allegation in Transglobal's third-party
complaint against AT & T Corp. claims that AT & T Credit committed
any wrongdoing. The Agreement provides that "lessor shall not be bound
by, or liable for, any representation or promise made by seller (even if
lessor is affiliated with seller)." Id.
New Jersey law governs this dispute, as stated by the express provisions
of the Lease. Under New Jersey law, a promise to make all requisite payments
and not to assert any defenses to payment are valid and enforceable. The
New Jersey Uniform Commercial Code ("NJUCC") provides:
(1) In the case of a finance lease that is not a consumer lease the
lessee's promise under the lease contract becomes irrevocable and independent
upon the lessee's acceptance of the goods. (2) A promise that has become
irrevocable and independent under subsection (1): (a) is effective and
enforceable between the parties, and by or against third parties including
assignees of the parties, and (b) is not subject to cancellation, termination,
modification, repudiation, excuse, *303 or substitution without the consent
of the party to whom the promise runs.
N.J.S.A. 12A:2A-407 (West Supp.1997).
The controlling question in this matter is whether the Lease is in
fact a finance lease as defined under the NJUCC: (g) "Finance lease" means
a lease with respect to which:
(i) the lessor does not select, manufacture, or supply the goods;
(ii) the lessor acquires the goods or the right to possession and use
of the goods in connection with the lease; and (iii) one of the following
occurs:
[inapplicable subsections deleted]
(D) if the lease is not a consumer lease, the lessor, before the lessee
signs the lease contract, informs the lessee in writing (a) of the identity
of the person supplying the goods to the lessor ... (b) that the lessee
is entitled under this chapter to the promises and warranties, including
those of any third party, provided to the lessor by the person supplying
the goods in connection with or as part of the contract by which the lessor
acquired the goods or the right to possession and use of the goods, and
(c) that the lessee may communicate with the person supplying the goods
to the lessor and receive an accurate and complete statement of those promises
and warranties, including any disclaimers and limitations of them or of
remedies. N.J.S.A. 12A:2A-103(g) (West Supp.1997).
The first two conditions are satisfied, in that AT & T Credit did
not select, manufacture, or supply the Leased Equipment, and it acquired
the equipment in connection with the Lease.
Subsection (g)(iii)(D), the third condition, is also satisfied. Transglobal
clearly had possession of the Lease documents before signing, and therefore
was provided with the requirements enunciated by subsection (g)(iii)(D).
Transglobal was made aware of the warranties and representations in the
Lease documents and that Transglobal had a right to pursue the seller (AT
& T Corp.) for "any and all claims and warranties relating to the equipment."
Agreement, p 15, "Lessor Disclaimers; Limitation of Remedies." [FN3]
FN3. The pertinent portion of the text of this disclaimer is as follows
(the wording in the Agreement is in bold-face type and in capital letters):
It is specifically understood and agreed that: (A) Lessor shall not
be deemed to have made any representation, warranty or promise made by
seller, neither seller nor lessor shall act as, or be deemed to be, an
agent of the other, and lessor shall not be bound by, or liable for, any
representation or promise made by seller (even if lessor is affiliated
with seller) ... It is further agreed that lessor shall have no liability
to lessee, lessee's customers, or any third parties for any direct, indirect,
special or consequential damages arising out of this agreement or any schedule
or concerning any equipment ... provided, however, that nothing in this
agreement shall deprive lessee of any rights it may have against any person
other than lessor. Lessee shall look solely to seller for any and all claims
and warranties relating to the equipment.
Comment (g) to NJUCC section 2A-103 is instructive in this matter.
The Comment provides in part: Due to the limited function usually performed
by the lessor, the lessee looks almost entirely to the supplier for representations,
covenants and warranties. If a manufacturer's warranty carries through,
the lessee may also look to that. Yet, this definition does not restrict
the lessor's function solely to the supply of funds; if the lessor undertakes
or performs other functions, express warranties, covenants and the common
law will protect the lessee. N.J.S.A. 12A:2A-103, Comment (g) (West Supp.1997).
Here, AT & T Credit merely provided the vehicle necessary for Transglobal
to finance the equipment. AT & T Credit performed no other function.
Its disclaimers were prominent in the Lease, and the Lease provided that
Transglobal had a right of action as to AT & T Corp. for any warranties,
representations, etc. [3] Transglobal argues that the "close connection"
between AT & T Credit and AT & T Corp. gives it defenses not otherwise
available for a finance lease. This argument is without merit. The NJUCC
"creates no special rule where the lessor is an affiliate of *304 the supplier;
whether the transaction qualifies as a finance lease will be determined
by the facts of each case." Id. The terms of the Lease are clear and unambiguous.
Transglobal discontinued making its monthly payments while in possession
of the Leased Equipment. Therefore, this Court finds that the Lease in
this matter between AT & T Credit and Transglobal is a finance lease
and that Transglobal breached the Lease. Consequently, summary judgment
is appropriate as to Transglobal.
[The remainder of the opinion, relating to Carraway's personal guaranty
is omitted.]
FRIEDLAND FAMILY ENTERPRISES
v.
AMOROSO
630 So.2d 1067 (Fla. 1994)
GRIMES, Justice.
We review Amoroso v. Samuel Friedland Family Enterprises, 604 So.2d 827,
835 (Fla. 4th DCA 1992), in which the court certified the following question
as being of great public importance: WHETHER THE DOCTRINE OF STRICT LIABILITY
AS TO DEFECTIVE PRODUCTS EXTENDS TO COMMERCIAL LEASE TRANSACTIONS OF THOSE
PRODUCTS? We have jurisdiction pursuant to article V, section 3(b)(4) of
the Florida Constitution. The Diplomat Hotel is a waterfront property in
Hollywood, Florida. Sunrise Water Sports, Inc. (Sunrise) leased part of
the Diplomat's property and operated a sailboat rental stand there. The
boats are owned by Sunrise. However, the actual rentals are handled by
Atlantic Sailing Center, Inc. (Atlantic) which subleases the rental stand
and was organized to operate the rental business at the Diplomat.
The Amorosos were guests at the Diplomat and rented sailboats on three
occasions. The third time, Mrs. Amoroso was injured when the sailboat's
crossbar broke. As a result of her injuries, Mr. and Mrs. Amoroso sued
the Diplomat, Sunrise, Atlantic, and a welder who had repaired the crossbar
a few days before the accident. *1068
The Amorosos asserted a claim in strict liability against the Diplomat,
Sunrise, and Atlantic. [FN1] The trial court directed verdicts in favor
of all of the defendants on this claim. The district court of appeal reversed.
The court recognized that strict liability is a valid theory of recovery
in Florida and held that the doctrine of strict liability extends to commercial
lease transactions. [FN2]
FN1. The Amorosos also asserted claims for negligent repair and maintenance
and breach of implied warranties of fitness and merchantability against
the Diplomat, Sunrise, and Atlantic, and negligence against the welder.
Both the trial court and the district court addressed these causes of action
and the Diplomat, in its brief to this Court, assigns error to a number
of the rulings below. However, as those issues are not within the scope
of the certified question, we have elected not to address them.
FN2. While the Diplomat was not the lessor of the sailboat, as such,
the court held that there was sufficient evidence to prove that Sunrise
was operating its business under the apparent authority of the Diplomat.
The underlying basis for the doctrine of strict liability is that those
entities within a product's distributive chain "who profit from the sale
or distribution of [the product] to the public, rather than an innocent
person injured by it, should bear the financial burden of even an undetectable
product defect." North Miami General Hosp., Inc. v. Goldberg, 520 So.2d
650, 651 (Fla. 3d DCA 1988). Those entities are in a better position to
ensure the safety of the products they market, to insure against defects
in those products, and to spread the cost of any injuries resulting from
a defect.
This Court adopted the doctrine of strict liability, as stated by the
A.L.I. Restatement (Second) of Torts section 402A (1965), in West v. Caterpillar
Tractor Co., 336 So.2d 80, 87 (Fla.1976).[Portions omitted.]
In the instant case, we must decide whether the doctrine of strict
liability applies to commercial lessors.
In addition to the court below, several other district courts of appeal
have already applied the doctrine to commercial lessors. American Aerial
Lift, Inc. v. Perez, 629 So.2d 169 (Fla. 3d DCA 1993); Futch v. Ryder Truck
Rental, Inc., 391 So.2d 808 (Fla. 5th DCA 1980); Ford v. Highlands Insurance
Co., 369 So.2d 77 (Fla. 1st DCA), cert. denied, 378 So.2d 345 (Fla.1979).
The courts of many other states have also held that commercial lessors
can be held strictly liable for defective products they lease. Allan E.
Korpela, Annotation, Products Liability: Application of Strict Liability
in Tort Doctrine to Lessor of Personal Property, 52 A.L.R.3d 121 (1973).
In Cintrone v. Hertz Truck Leasing & Rental Service, 45 N.J. 434,
212 A.2d 769, 778-79 (1965), the New Jersey Supreme Court held that a truck
rental company could *1069 be held strictly liable for injuries caused
by a defective condition in one of the trucks it leased. In reaching this
conclusion, the court found little difference between sales and lease transactions,
and recognized that, like a purchaser of new goods, a lessee is entitled
to expect that a product is being delivered in a nondefective condition.
Id., 212 A.2d at 776-77. In fact, after taking note of the growth of the
car and truck rental business, the court suggested that the rationale for
imposing strict liability on manufacturers and sellers may even be greater
in the context of leased goods as a lessee usually has less opportunity
to inspect items and lessors, by repeatedly introducing and reintroducing
products into the stream of commerce, are exposing the public to a proportionately
greater risk of injury. Id.
In Price v. Shell Oil Co., 2 Cal.3d 245, 85 Cal.Rptr. 178, 179, 466
P.2d 722, 723 (1970), the Supreme Court of California also addressed the
application of strict liability to commercial lease transactions. Price
involved an aircraft mechanic who was injured when a ladder, which was
attached to a gasoline truck, broke. Id., 85 Cal.Rptr. at 179-80, 466 P.2d
at 723-24. The truck was leased by the mechanic's employer from Shell Oil
Company. Id. at 182, 466 P.2d at 726. Prior to Price, California courts
had applied the doctrine of strict tort liability to manufacturers, retailers,
suppliers of personal property, and residential builders. Id. at 181-82,
466 P.2d at 725-26. In determining whether to further expand the strict
liability cause of action, the court reasoned:
Such a broad philosophy evolves naturally from the purpose of imposing
strict liability which "is to insure that the costs of injuries resulting
from defective products are borne by the manufacturers that put such products
on the market rather than by the injured persons who are powerless to protect
themselves." [Greenman v. Yuba Power Products, Inc., 59 Cal.2d 57, 27 Cal.Rptr.
697, 701, 377 P.2d 897, 901 (1963).] Essentially the paramount policy to
be promoted by the rule is the protection of otherwise defenseless victims
of manufacturing defects and the spreading throughout society of the cost
of compensating them.... ... [W]e can perceive no substantial difference
between sellers of personal property and non-sellers, such as bailors and
lessors. In each instance, the seller or non-seller "places [an article]
on the market, knowing that it is to be used without inspection for defects,...."
[Greenman, 27 Cal.Rptr. at 700, 377 P.2d at 900.] In light of the policy
to be subserved, it should make no difference that the party distributing
the article has retained title to it. Nor can we see how the risk of harm
associated with the use of the chattel can vary with the legal form under
which it is held. Having in mind the market realities and the widespread
use of the lease of personalty in today's business world, we think it makes
good sense to impose on the lessors of chattels the same liability for
physical harm which has been imposed on the manufacturers and retailers.
The former, like the latter, are able to bear the cost of compensating
for injuries resulting from defects by spreading the loss through an adjustment
of the rental. Price, 85 Cal.Rptr. at 181-82, 466 P.2d at 725-26 (footnote
omitted). The court concluded that lessors can be held strictly liable.
Id. at 179, 466 P.2d at 723. However, this holding was limited to those
lessors "found to be in the business of leasing, in the same general sense
as the seller of personalty is found to be in the business of manufacturing
or retailing." Id. at 184, 466 P.2d at 728. To do otherwise would work
an injustice on those lessors who cannot adjust the costs associated with
strict liability in an economically viable manner, such as where the lease
is an isolated transaction. Id. at 183, 466 P.2d at 727.
The Diplomat argues that the district court opinion in the instant
case "casts too wide a net." They contend that applying the doctrine of
strict liability to all commercial lease transactions is unfair. It would
cause a vast increase in potential liability which small businesses in
Florida would be unable to bear. Thus, if we were to apply the doctrine
of strict liability to commercial lease transactions, the Diplomat urges
us to limit our *1070 holding to those lessors who are "mass dealers in
chattel."
However, we note that no state which has applied strict liability to
lessors has retreated from this view because of its economic consequences
on commercial leasing. Also, we can find no express authority for the proposition
that the doctrine of strict liability should be limited to those lessors
who can be called "mass dealers in chattel," and, if such authority does
exist, it is certainly a minority view. For purposes of applying strict
liability, we can discern no reason to differentiate between a business
which is a mass dealer in a product and one which is not, provided each
is actually engaged in the business of leasing the defective product.
The Diplomat next contends that lessors should be treated similarly
to sellers of used goods in strict liability actions, and cites Keith v.
Russell T. Bundy & Associates, Inc., 495 So.2d 1223, 1228 (Fla. 5th
DCA 1986), in which the court refused to apply the doctrine of strict liability
to a dealer in used equipment. We disagree.
Lessors and the sellers of used goods are not necessarily analogous
in light of the policies underlying strict tort liability. The Supreme
Court of Wisconsin rejected a similar argument in holding that the doctrine
of strict liability applied to commercial lessors. Kemp v. Miller, 154
Wis.2d 538, 453 N.W.2d 872, 879 (1990). Prior to Kemp, the court had held
that "a seller of used products was subject to strict liability for manufacturing
and design defects but was not subject to strict liability for defects
arising after a product left the manufacturer and the original seller."
Id.; Burrows v. Follett & Leach, Inc., 115 Wis.2d 272, 340 N.W.2d 485
(1983). Attempting to limit the application of strict liability, the lessor
argued that it "should be subject to strict liability to the same extent
as a seller of used products." Id.
Discussing the unique position of sellers of used products, the court
stated: This court's decision in Burrows is based on the realization that
the imposition of strict liability on a seller of used products, for defects
that arise after manufacture and before the product reaches the seller,
places the risk of loss associated with the use of defective products on
one who has neither created nor assumed the risk and on one who is not
in a position to implement procedures to avoid the distribution of defective
products in the future. Defects in a used product typically arise before
the product reaches the seller and while the product was in the hands of
an unknown previous owner. The used product seller is rarely familiar with
the prior history of the products he or she sells and can discover and
correct latent defects in those products only at great cost by means of
individual inspection. See Chattel Leasing, 48 U.Pitt.L.Rev. at 334. Further,
the used goods market generally operates on the understanding that the
seller makes no particular assurance as to quality simply by offering a
product for sale. See Tillman v. Vance Equipment Co., 286 Or. 747, 755,
596 P.2d 1299, 1303 (1979). Kemp, 453 N.W.2d at 879.
The court then explained that commercial lessors are in a different
position regarding the products they lease. [T]he imposition of strict
liability on a commercial lessor, for defects that arise after manufacture
and while the product is under the ownership and control of the lessor,
places the risk of loss associated with the use of defective products on
one who created and assumed the risk and on one who can implement procedures
to avoid the distribution of defective products in the future. Defects
in a leased product may surface or be discovered after a product reaches
the lessor. The commercial lessor is familiar with the characteristics
and prior history of the products he or she leases and is in a position
to discover and correct defects in those products by means of routine inspection,
servicing, and repair. Further, by placing products on the market, the
commercial lessor impliedly represents that those products will be fit
for use throughout the term of the lease and, consequently, assumes the
risk of damages resulting from a defective product. Id. Accord American
Aerial Lift v. Perez.
Mindful of the recent growth of the commercial leasing business in
recent years, *1071 we believe that the rationale justifying the imposition
of strict liability on manufacturers and sellers is also applicable to
commercial lessors. Thus, we hold that the doctrine of strict liability
is applicable to commercial lease transactions in Florida. However, we
limit our holding to those lessors who are engaged in the business of leasing
the allegedly defective product. The strict liability cause of action is
not applicable to those leases which are isolated or infrequent transactions
not related to the principal business of the lessor. See Kemp, 453 N.W.2d
at 880; Price, 85 Cal.Rptr. at 184, 466 P.2d at 728; Bachner v. Pearson,
479 P.2d 319, 328 (Alaska 1970).
We turn now to the facts presented by the instant case. Sunrise leased
the property on which the sailboat rental stand was located and owned the
sailboats which were rented from the stand. The company was clearly engaged
in the business of leasing sailboats and, therefore, could properly be
held strictly liable for leasing a defective boat to the Amorosos.
The question of the Diplomat's liability is more difficult. The Diplomat
is, of course, a hotel, and would not commonly be considered to be in the
business of renting sailboats. On the other hand, the Diplomat leased its
property to Sunrise specifically for the purpose of establishing a sailboat
rental business and the hotel was actively involved in marketing the boats
to its guests. The district court noted:
The Diplomat placed brochures in each room advertising the availability
of sailing at the hotel. The rental stand was on the Diplomat Beach....
[N]either Sunrise nor Atlantic were identified as the owner or operator
at the beach. The sailboats were paid for by charging them to the room
and leaving the room key as security for the rental. Mrs. Amoroso also
testified that she saw in the brochure a sail with the Diplomat logo on
it.... [T]his evidence taken together was sufficient to show that the Diplomat
represented to their guests that the sailboat rental stand was a part of
the hotel operations. Amoroso, 604 So.2d at 831 (emphasis added). The emphasized
portion is particularly significant. The record reflects that, when the
Amorosos, and presumably the other hotel guests, rented a boat, they reasonably
believed that they were renting it from the Diplomat. Further, the Amorosos
were entitled to expect that the sailboat was being delivered to them in
a safe, nondefective condition. We find that, under the circumstances presented
here, the hotel's involvement was sufficient to sustain a strict liability
cause of action against it as a lessor engaged in the business of leasing
the sailboats.
Accordingly, we answer the certified question in the affirmative. We
approve the district court's holding that the doctrine of strict liability
is applicable to commercial lease transactions, subject to the limitations
set forth in this opinion, and we approve the application of the doctrine
to Sunrise and the Diplomat in this case. It is so ordered.
McDONALD, Justice, concurring in part, dissenting in part. I fully
concur with the decision under review insofar as it holds that the Diplomat
and Sunrise may be held liable under the theories of implied warranty of
fitness and negligence. There clearly is an implied warranty of fitness
for ordinary use in the leasing of boats by a hotel, its agents, or its
franchisees, to members of the public. Strict liability, on the other hand,
has serious overtones. I do not feel it is appropriate to apply this doctrine
to a hotel where the furnishing of rental boats is an incidental part of
its business. I thus dissent to that part of the majority opinion extending
strict liability to the Diplomat in this case. The implied warranty of
fitness and negligence theories are adequate to protect the public.
HOLLERBACH & ANDREWS EQUIPMENT COMPANY, INC.
v.
SOUTHERN CONCRETE PUMPING, INC.
1996 WL 250657 (D. Md. 1996)
MEMORANDUM
HARGROVE, Senior Judge.
*1 Plaintiff Hollerbach & Andrews Equipment Company, Inc. ("Hollerbach")
initiated this suit against Defendant Southern Pumping Concrete, Inc. and
its guarantors Guy D. Blank and Jo L. Blank (collectively "Southern Pumping")
to recover ninety thousand dollars ($90,000) in unpaid rent due under a
lease agreement executed by the parties. On September 29, 1995, the Court
partially granted Hollerbach's Motion for Summary Judgment, finding no
material facts existed regarding Southern Pumping's liability for breaching
the lease agreement. The Court, however, denied Hollerbach's claim for
lost profits because of the complete lack of evidence supplied by Hollerbach
on this issue. Instead, the Court ordered Hollerbach to proffer support
for its claim. Subsequently, arguing Hollerbach never specifically plead
lost profit damages in its Complaint as required under Federal Rule of
Civil Procedure 9(b), Southern Pumping filed a Motion for Judgment on the
Pleadings. In response, Hollerbach maintained that it should be allowed
to amend its Complaint to conform to the evidence under Rule 15(b). Hollerbach,
however, failed to provide sufficient evidence of lost profits to warrant
such an amendment; thus, on January 17, 1996, the Court dismissed Hollerbach's
claim for lost profits.
The issue of damages remains to be resolved by the Court. In its January
17, 1996 Order, the Court requested additional briefing from Hollerbach
on the issue of damages, noting that under Maryland Commercial Law Code
s 2A- 527(2), Hollerbach could be entitled to recover the difference between
the total sum owed by Southern Pumping pursuant to the lease, $90,000,
and the actual amount it realized from renting the truck, as well as any
incidental damages allowed under s 2A-530. In accordance with the Court's
Order, Hollerbach filed a Memorandum of Damages, in which Hollerbach argued
that, despite its efforts, it was unable to rent or lease the pump truck,
[FN1] and therefore did not realize any income from "renting" the truck
at issue. Instead, Hollerbach decided to put the unit to use in its own
business, thereby generating $91,629.52 in gross revenues: a sum in excess
of the $90,000.00 it would have realized had Southern Pumping fulfilled
the terms of the contract between the parties.
FN1. Hollerbach provides no support for its claim that it made "extensive
efforts" to rent or lease the truck returned by Southern Pumping. In fact,
in response to an interrogatory question posed by Southern Pumping concerning
Hollerbach's attempts to mitigate its damages, Hollerbach cited only one
instance where it verbally quoted and demonstrated the concrete pump. Aside
from this one failed attempt, Hollerbach supplies no other facts concerning
its efforts to mitigate damages. Clearly, one attempt is not an effort
to mitigate, much less an "extensive effort."
Because Hollerbach used the truck for its own business, its disposition
of the truck does not fall under s 2A-527(2) of the Maryland Code. And
Hollerbach does not provide the Court with the section in the Maryland
Code under which it seeks to recover damages from Southern Pumping. Rather,
in its Memorandum on Damages, Hollerbach asserts that in using the truck
for its own business, it incurred over $50,588.31 in incidental costs.
[FN2] Deducting this sum from the gross income the pump truck generated,
$91,629.53, Hollerbach explains that it netted only $41,041.22 from use
of the concrete pump. Then, taking this amount off of the agree upon lease
figure of $90,000.00, Hollerbach concludes it is entitled to exactly $48,953.78
in damages as a result of Southern Pumping's breach of the lease agreement.
FN2. These costs are broken down as follows:
Labor $ 21,151,08 (employing an operator)
Travel Time 14,552.10 (spent by the operators)
Fuel 3,854.51 (used to operate the truck)
Maintenance 11,030.62 (pumping 8,824.5 yards of concrete at $1.25 a
yard)
----------
Total $ 50,588.31
In response to Hollerbach's Memorandum of Damages, Southern Pumping
argues that Hollerbach is not entitled to general damages because Hollerbach's
revenues from use of the concrete pump truck exceed the amount it would
have realized had Southern Pumping fulfilled its obligations under the
lease. Without general damages, Southern Pumping maintains Hollerbach is
precluded from recovering any incidental damages. [FN3 is omitted.] In
support of its contention, Southern Pumping cites Associated Metals &
Minerals Corp. v. Sharon Steel Corp., 590 F.Supp. 18 (S.D.N.Y.), aff'd
742 F.2d 1431 (2d Cir.1983), where the district court refused to recognize
a cause of action for incidental damages standing alone. In Associated
Metals, the plaintiff sought damages for defendant's failure to make payments
under the contracts as they came due pursuant to s 2-710 of the Uniform
Commercial Code, the statutory source for s 2A-530 of the Maryland Code.
Finding s 2-710 "merely defines the scope of [ ] 'incidental damages,'
" the court held that incidental damages were not available for "any breach,"
but only for "the type of breach for which the seller is given a specific
right of action in Article 2." Id. at 21. Because the plaintiff did not
bring an action for which the Code provided a specific right of action,
such as repudiation of contract under s 2-708, the court dismissed the
plaintiff's claim for incidental damages.
*2 The present case is distinguishable from Associated Metals in that
Hollerbach's claim for damages is based on Southern Pumping's wrongfully
repudiation of the installment lease contract. Although the precise sum
of such damages is in dispute, Hollerbach seeks damages for repudiation,
not for incidental sums standing alone. Because s 2A-523 of the Maryland
Code allows a lessor to recover damages for wrongful repudiation of an
installment lease contract, Hollerbach has a specific right of action under
the Code, and may seek incidental damages in connection with its cause
of action. Southern Pumping next argues that the costs Hollerbach claims
it incurred are too remote to be "incidental" as defined under s 2A-530.
Section 2A-530 provides:
Incidental damages to an aggrieved lessor include any commercially
reasonable charges, expenses or commissions incurred in stopping delivery,
in the transportation, care and custody of goods after the lessee's default,
in connection with return or disposition of the goods, or otherwise resulting
from the default. Md.Com.Law Code Ann. s 2A-530 (emphasis added).
The costs claimed by Hollerbach as "incidental" concern expenses resulting
from Hollerbach's decision to use the pump truck in its own business. [FN4]
The labor, fuel, travel and maintenance [FN5] costs, which accumulated
over the year after the default, are business expenses and not reasonably
incidental to Southern Pumping's breach of the lease. Section 2A-530 was
intended to cover only those expenses occasioned by such things as the
lessor's need to care for, store, move, and, if necessary, dispose of,
the goods in a commercially reasonably manner. Further, such costs must
be incurred directly as a result of the default. Hollerbach has cited no
authority, and this Court has found none, that allows a lessor who chooses
to use returned goods in its own business to then recover the costs of
using such goods as an incidental expense. Indeed, the costs Hollerbach
seeks to recover are akin to consequential damages, not recoverable under
s 2A-530. Because Hollerbach has failed to show the $50,588.31 in costs
were reasonably incidental to Southern Pumping's breach, Hollerbach may
not recover these expenses in connection with its action for damages.
FN4. Although Hollerbach claims that the costs were incurred in an
effort to "mitigate" its damages, the Court finds that Hollerbach did not
reasonably attempt to actually mitigate its damages by re-leasing the truck
to a third party. Rather, Hollerbach decided to use the truck for its own
profit; thereby incurring costs not "directly as a result" of Southern
Pumping's breach of the lease agreement, as required by s 2A-530, but to
make a profit for its business.
FN5. Hollerbach has proffered no evidence that the truck required any
repairs or maintenance after Southern Pumping returned the truck. Hollerbach
stated sum of $11,030.62 in maintenance costs is derived from multiplying
the number of yards of concrete pumped by $1.25. This figure may represent
depreciation, but it hardly relates to costs incurred for maintenance of
the concrete pump as a result of Southern Pumping's breach.
Despite having numerous opportunities, Hollerbach has failed to show
the Court that it suffered any recoverable damages as a result of Southern
Pumping's breach of the lease. Hollerbach earned over $90,000.00 in revenue
from use of the pump truck in its own business. The measure of damages
for breach of contract is the amount necessary to place Hollerbach in as
good a position as if Southern Pumping had fully performed, but not in
a better position. The Court will not allow Hollerbach to recover business
expenses incurred in using the concrete pump for a profit, when these expenses
were not intended to be covered under section 2A-530, and where Hollerbach
did not reasonably attempt to mitigate its damages. Instead, the Court
will permit Hollerbach to retain the $7,500 security deposit as compensation
for Southern Pumping's breach. This sum should cover any expenses incurred
by Hollerbach as a result of the breach; thus, putting Hollerbach in a
financial position equivalent to that had the contract been fully performed.
CONCLUSION
*3 For the reasons outlined above, the Court will award Hollerbach $7,500.00
in damages as a result of Southern Pumping's breach of the lease agreement.
The Court will thus deny Southern Pumping's Second Motion for Judgment
on the Pleadings. Additionally, having reviewed Southern Pumping's Motion
for Reconsideration, and finding no just reason to reconsider its September
29, 1995 Order, the Court will deny Southern Pumping's motion.
ORDER
In accordance with the attached Memorandum Opinion, it is this 28th day
of March, 1996, by the United States District Court for the District of
Maryland, hereby ORDERED:
1. That Hollerbach is entitled to retain the seven-thousand five hundred
dollar ($7,500) security deposit as damages for Southern Pumping's breach
of the lease agreement between the parties
[Remainder of Order is omitted.]