TERRY FOSTER AND KAREN FOSTER D/B/A DADDIO'S PIZZA v. FIRST FEDERAL LEASING
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RENDERED: May 24, 2002; 10:00 a.m.
NOT TO BE PUBLISHED
C ommonwealth O f K entucky
C ourt O f A ppeals
NO.
2000-CA-002952-MR
TERRY FOSTER AND KAREN FOSTER
D/B/A DADDIO'S PIZZA
APPELLANTS
APPEAL FROM BULLITT CIRCUIT COURT
HONORABLE THOMAS L. WALLER, JUDGE
ACTION NO. 00-CI-00060
v.
FIRST FEDERAL LEASING
APPELLEE
OPINION
AFFIRMING
** ** ** ** **
BEFORE:
BUCKINGHAM, MCANULTY, AND TACKETT, JUDGES.
TACKETT, JUDGE:
Terry Foster and his wife, Karen, appeal from an
order of the Bullitt Circuit Court granting directed verdicts in
favor of First Federal Leasing (First Federal or the bank) in a
lawsuit over a finance lease.
We affirm.
The factual situation underlying this appeal is rather
complicated; therefore, we will set forth in some detail the
circumstances surrounding the parties’ transaction.
Terry and
Karen Foster are the owners and operators of Daddio’s Pizza in
Lebanon Junction, Kentucky.
One day a salesman by the name of
Sherman Alex Ollie approached them about adding barbeque to their
menu.
He proposed to make arrangements for them to lease to own
a brand new Kook-Rite-Kooker (Kooker), serial number 503328,
which he would deliver and install.
Believing that he was
receiving a franchise without a name, Terry negotiated a purchase
price for the Kooker and signed an application for a loan from
Midwest Leasing in order to fund the equipment purchase.
Midwest
Leasing sent the application to First Federal for approval on
September 17, 1999, and First Federal agreed to purchase the
Kooker and lease it to Terry according to the terms of the loan
agreement he had signed the previous day.
On September 21, 1999, Ollie brought Terry the lease
contract with an attachment titled “Schedule A” which described
the equipment which Terry was leasing from First Federal.
Despite the fact that he had not received the Kooker, Terry also
signed a delivery and acceptance receipt acknowledging that he
had the equipment and was satisfied with it.
In addition, Karen
Foster signed an individual guaranty obligating herself to the
lease payments of $294.68 per month if Terry should default.
Sometime during the day, Ollie did, in fact, deliver a Kooker
although it was a used demonstration model which Ollie left
uninstalled in an out-building behind the Fosters’ restaurant.
The next day, Terry received phone calls from both Midwest
Leasing and First Federal, as is common practice in the finance
lease business, seeking to verify the delivery of the Kooker.
Without having looked at the equipment, Terry assured them both
that it had been delivered in satisfactory condition.
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In a tape-
recorded statement, Terry gave First Federal permission to
release payment for the Kooker to Ollie.
On November 3, 1999, Terry finally informed First
Federal that Ollie had actually delivered a used and uninstalled
piece of equipment, and that the serial number did not match the
one in the lease agreement between himself and First Federal.
Terry was told that, pursuant to the lease agreement, he was
still obligated to pay First Federal because they had spent the
money to purchase the Kooker.
Furthermore, First Federal
reminded Terry that he should bring his complaints about the
equipment to the attention of Ollie who was not the bank’s agent.
Although under no obligation to do so, First Federal tried to
locate the equipment which it had purchased by contacting the
vendor.
Ollie informed the bank that he would deliver the Kooker
with the correct serial number and replace the demo model he had
left behind with Foster.
However, Ollie failed to do so, and
First Federal was unable to locate him again.
Terry’s lease payments became increasingly delinquent,
and First Federal sent him a letter on December 13, 1999,
informing him that his account was past due for the months of
October and November, that the bank had been trying
unsuccessfully to contact him regarding the delinquency, and that
it would refer the matter to an attorney if Terry failed to send
a payment.
Terry responded by sending a letter to Midwest
Leasing advising them that he wanted to cancel the lease.
After
December’s payment was also past due, First Federal sent another
letter on December 21, 1999, instructing Terry to contact the
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vendor (Ollie) regarding his problems with the equipment.
Finally, the bank sent a letter on December 22, 1999, notifying
him that the lease was being referred to an attorney for legal
action to collect because his account was three months past due.
It was the Fosters who filed suit, however, against
First Federal and Ollie in January 1998 alleging breach of
contract and fraud.
They did not name Midwest Leasing as a
defendant in their lawsuit.
First Federal counterclaimed for
breach of contract requesting as damages the total amount of
$18,337.04 due under the lease, plus costs and attorney’s fees.
The bank also filed a motion for summary judgment which the trial
court denied.
Prior to trial, the Fosters obtained a default
judgment against Ollie; however, in the meantime Ollie died
leaving the judgment unsatisfied.
At trial, Karen’s motion to
dismiss the counterclaim against her as a guarantor was
overruled.
The trial court granted directed verdicts dismissing
the Fosters’ claims for breach of contract and fraud holding that
these claims properly sounded against the vendor, Ollie.
First
Federal also moved for a directed verdict on its counterclaim for
breach of contract arguing that the lease involved was a finance
lease and that Terry’s acceptance of the wrong equipment rendered
the lease irrevocable.
The trial court granted judgment against
the Fosters holding them jointly and severally liable for the
entire amount due under the lease, plus $5,821.37 in costs and
attorney’s fees.
This appeal followed.
The Fosters argue that the trial court erred in denying
their claims for breach of contract and fraud against First
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Federal.
In order to sustain a claim for fraud in Kentucky, the
Fosters must prove that First Federal made “(a) a material
representation, (b) which is false, (c) known to be false or made
recklessly, (d) made with inducement to be acted upon, (e) acted
in reliance thereon, and (f) causing injury.”
Wahba v. Don
Corlett Motors, Inc., Ky. App., 573 S.W.2d 357, 359 (1978).
The
only representation which First Federal made regarding the
equipment delivered to the Fosters was the serial number, listed
in the lease, which did not match that of the used Kooker they
actually received.
However, First Federal did not knowingly or
recklessly misrepresent the serial number; rather the bank relied
on Terry who signed the delivery and acceptance receipt for a new
Kooker with the correct serial number and confirmed by telephone
the following day that he had received the equipment described in
the lease.
Terry admits that he did not read the lease agreement
prior to signing it; therefore, he cannot claim now that he was
induced to enter into the agreement by any statements in the
lease prepared by First Federal.
The deceit perpetrated on the
Fosters was the result of the vendor’s action in leaving a used
and uninstalled piece of equipment instead of the new Kooker
which was the subject of the lease agreement between First
Federal and Terry.
According to the Fosters, Ollie was acting as an agent
for First Federal and, consequently, the bank is liable for his
fraudulent behavior.
Ollie originally contacted Midwest Leasing
to finance the piece of equipment he wished to lease to Terry.
At the time the lease was signed, First Federal had not been in
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contact with Terry and had no business dealings with Ollie.
Simply put, the Fosters have failed to prove any fraud on the
part of First Federal or any relationship between the bank and
Ollie which would allow his conduct to be imputed to First
Federal.
Regarding the bank’s liability for Ollie’s fraudulent
conduct, there were no “disputed issues of material fact on which
reasonable minds could differ” and, therefore, the trial court
properly granted a directed verdict denying the Fosters’ claims
against First Federal.
Bierman v. Klapheke, Ky., 967 S.W.2d 16
(1998).
The Fosters next argue that the trial court erred in
granting a directed verdict holding them liable for the entire
amount due under the lease plus costs and attorney’s fees.
The
dispositive issue here is whether the lease agreement between
Terry and First Federal qualifies as a finance lease under the
Uniform Commercial Code as codified by Kentucky Revised Statute
(KRS) 355.2A-103(1)(g):
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.
One of the following occurs:
. . .
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,
unless the lessee has selected that
person and directed the lessor to
acquire the goods or the right to
possession and use of the goods
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from that person, (b) that the
lessee is entitled under this
article 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 review an accurate and complete
statement of those promises and
warranties, including any
disclaimers and limitations of them
or of remedies.
The lease between First Federal and Terry clearly meets the
statutory requirements for a finance lease.
First Federal did
not select, manufacture, or supply the goods, but rather they
were selected by Terry, supplied by Ollie, and manufactured by an
entity which is not a party to this action.
Furthermore, the
bank acquired title to the goods under the lease as described in
KRS 355.2A-103(1)(g)(2).
Finally in accordance with
(1)(g)(3)(d), after Terry selected the goods, Ollie arranged for
the bank’s financing, and the lease informed Terry of all of the
warranties and directed him to contact the supplier if he had any
problems with the goods.
A further provision of the Uniform Commercial Code,
known as a “hell or high water clause,” mandates that a finance
lease becomes irrevocable once the lessee accepts the goods.
have codified this provision in KRS 355.2A-407 as follows:
1.
In the case of a finance lease that is
not a consumer lease, the lessee’s
promises under the lease contract become
irrevocable and independent upon the
lessee’s acceptance of the goods.
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We
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, or substitution without the
consent of the party to whom the promise
runs. . . .
Acceptance of goods is defined by KRS 355.2A-515 as
follows:
Acceptance of goods occurs after the lessee
has had a reasonable opportunity to inspect
the goods; and
(a)
The lessee signifies or acts with
respect to the goods in a manner that
signifies to the lessor or the supplier
that the goods are conforming or that
the lessee will take or retain them in
spite of their nonconformity . . .
Terry argues that he did not have an adequate opportunity to
inspect the goods prior to signing the delivery and acceptance
receipt and, therefore, he is not bound to the terms of the lease
under KRS 355.2A-407. However, at the same time he concedes that
there was no reason why he had to sign the lease and the delivery
and acceptance receipt without reading the documents and prior to
the delivery of the equipment.
Critically, when Ollie actually
delivered a Kooker to Terry and left it in his out-building,
Terry made no move to inspect it.
Instead, he relayed to Midwest
Leasing and First Federal on the telephone that the correct
equipment had been installed.
By doing so, he conveyed his
acceptance of the defective equipment to First Federal and
irrevocably bound himself under the terms of the lease which
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included First Federal’s right to recover upon Terry’s default
for costs and attorney’s fees.
Finally, the Fosters claim that the trial court erred
in granting a directed verdict holding Karen liable under her
individual guaranty.
They argue that the guaranty did not refer
directly to the lease and, therefore, was not valid under KRS
371.065.
Although the guaranty is not dated, it refers to a
lease of equipment between FFL (First Federal) and Terry Foster
doing business as (d/b/a) Daddio’s Pizza and it is the only such
lease that was signed between these parties.
The guaranty is
further imprinted in the top right hand corner with the number
25102 which is the same number on the lease between Terry and
First Federal and noted as “Lease No.”
The Fosters have failed
to demonstrate that Karen’s guaranty does not comply with the
statutory requirements of KRS 371.065.
Their claim that Karen’s
guaranty was conditioned on Ollie’s performance of the sales
contract is similarly unfounded due to the fact that the document
plainly states that “the undersigned unconditionally guarantees
to Lessor the prompt payments when due of all of Lessee’s
obligations to Lessor under the Lease.”
Moreover, their claim
that the guaranty should be invalidated because Ollie
fraudulently induced Karen to sign it also fails, because Karen’s
signature guaranteed Terry’s obligation to First Federal which
committed no fraud.
For the foregoing reasons, the judgment of the Bullitt
Circuit Court is affirmed.
ALL CONCUR.
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BRIEF FOR APPELLANTS:
BRIEF FOR APPELLEE:
Franklin S. Yudkin
Louisville, Kentucky
Eric Griffin Farris
Becker, Farris & Gallagher
Shepherdsville, Kentucky
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