Kimco Leasing Co. v. Lake Hortonia Properties

KIMCO_LEASING_CO_V_LAKE_HORTONIA_PROP.92-519; 161 Vt. 425; 640 A.2d 18

[Opinion Filed 27-Dec-1993]

[Motion for Reargument Denied 08-Mar-1994]

 NOTICE:  This opinion is subject to motions for reargument under V.R.A.P. 40
 as well as formal revision before publication in the Vermont Reports.
 Readers are requested to notify the Reporter of Decisions, Vermont Supreme
 Court, 109 State Street, Montpelier, Vermont 05609-0801 of any errors in
 order that corrections may be made before this opinion goes to press.


                                 No. 92-519


 Kimco Leasing Company                        Supreme Court

                                              On Appeal from
      v.                                      Rutland Superior Court


 Lake Hortonia Properties d/b/a               May Term, 1993
 The New You Fitness Center,
 Beverly S. Ellis, Ray R. Ellis,
 June May Camera and Jean Henska,
 jointly as individuals


 Arthur J. O'Dea, J.

 Matthew F. Valerio of Abatiell & Wysolmerski, Rutland, for plaintiff-
    appellee

 Carolyn Brown Anderson of Abell, Kenlan, Schwiebert & Hall, P.C., Rutland,
     for defendants-appellants



 PRESENT:  Allen, C.J., Gibson, Dooley, Morse and Johnson, JJ.


      GIBSON, J.   Defendants Lake Hortonia Properties d/b/a The New You
 Fitness Center and its guarantors appeal from a judgment for $33,987.61,
 plus costs and attorney's fees, in favor of plaintiff Kimco Leasing Company,
 which had sued to recover monies due under the terms of an equipment lease
 agreement.  In defense, defendants asserted that plaintiff had breached
 implied warranties of merchantability and fitness for a particular purpose
 under Article 2 of the Uniform Commercial Code (UCC) because the equipment
 was defective.  The court held that plaintiff was not the seller of the

 

 equipment, but rather the financier of defendants' purchase, and therefore,
 breach of warranty was not a defense to this action.  We affirm.
      The Fitness Center, a Vermont corporation, acquired toning tables and a
 sun room from Sun America Corporation through Sun America's offices in
 Florida.  Sun America arranged for Kimco Leasing Company, an Indiana
 corporation, to finance the transaction.  Kimco purchased the equipment and
 then "leased" it to the Fitness Center.  The lease agreement gave the
 Fitness Center an option to purchase the equipment at the end of the lease
 for about ten percent of the original purchase price.  Sun America shipped
 the equipment directly to the Fitness Center.
      The equipment did not work properly when it was first delivered, and
 Sun America sent mechanics to Vermont to fix it.  Despite repeated attempts
 to make repairs, the equipment continued to have problems that impeded its
 full use and enjoyment.  Because the Fitness Center was dissatisfied with
 the equipment, it eventually stopped making payments to Kimco.  Kimco served
 a notice of default and then brought this action.  The court ruled that
 Kimco was the financing party, not the vendor, and therefore, breach of
 warranty could not be asserted as a defense to the action.  The Fitness
 Center and its guarantors appeal.
      Initially, we note that the lease agreement provides that it shall be
 governed by Indiana law.  Provided the state chosen has a reasonable
 relation to the transaction, the parties may agree that the law of that
 state shall govern their agreement.  See 9A V.S.A. { 1-105(1).  The Fitness
 Center and its guarantors do not dispute the applicability of Indiana law,
 but argue that they are entitled to judgment as a matter of law under
 either Vermont or Indiana law.  Kimco maintains that Indiana law applies, as

 

 provided in the agreement.  Absent any dispute to the contrary, we agree
 and therefore apply Indiana law.
      The Fitness Center and its guarantors argue that (1) the lease of
 equipment was actually a sale of goods and is therefore subject to Article 2
 of the UCC; (2) the implied warranties of merchantability and fitness for a
 particular purpose, see Ind. Code Ann. {{ 26-1-2-314, 26-1-2-315 (Burns
 1992), applied to this sale because Kimco, or Kimco's agent Sun America, was
 a merchant with respect to the equipment; (3) the warranty disclaimers in
 the lease agreement were ineffective, see Ind. Code Ann. { 26-1-2-316 (Burns
 1992); and (4) Kimco breached the implied warranties.  Kimco does not
 dispute that the Fitness Center actually purchased the equipment but argues
 that (1) the lease agreement was intended as security for a debt and
 therefore Article 2 does not apply, see Ind. Code Ann. { 26-1-2-102 (Burns
 1992); (2) no agency relationship exists between Sun America and Kimco; and
 (3) Kimco properly disclaimed the implied warranties in the lease agreement.
      We do not decide whether the transaction constitutes a sale-and-
 security agreement or a true lease because the implied warranties of Article
 2 are not applicable under either theory advanced by the Fitness Center.
 Section 26-1-2-315 provides:
           Where the seller at the time of contracting has reason
           to know any particular purpose of which the goods are
           required and that the buyer is relying on the seller's
           skill or judgment to select or furnish suitable goods,
           there is, unless excluded or modified under IC 26-1-2-
           316, an implied warranty that the good be fit for such
           purpose.  (Emphasis added.)

 Kimco did not select the equipment that the Fitness Center purchased;
 rather, the equipment was selected by officers of the Fitness Center.  Since
 the Fitness Center did not rely on Kimco's judgment in selecting suitable

 

 goods, there was no implied warranty of fitness for a particular purpose on
 the part of Kimco.  Cf. Pacific American Leasing Corp. v. S.P.E. Bldg.
 Sys., 730 P.2d 273, 279 (Ariz. Ct. App. 1986) (lessor did not warrant goods
 for particular purpose when lessee/buyer selected goods and told lessor
 "exactly what to buy"); All-States Leasing Co. v. Bass, 538 P.2d 1177, 1183
 (Idaho 1975) (lessor did not warrant equipment for particular purpose where
 lessee inspected it and selected it based on manufacturer's literature and
 statements made by manufacturer's salesperson); Miller Auto Leasing Co. v.
 Weinstein, 461 A.2d 174, 177 (N.J. Super. Ct. Law Div. 1983) (no implied
 warranties arise against lessor "who has no function in transaction other
 than to supply the capital, and upon whose skill and judgment the lessee did
 not rely"); All-States Leasing Co. v. Ochs, 600 P.2d 899, 909 (Or. Ct. App.
 1979) (lessee did not rely on lessor's judgment as to suitability of goods;
 therefore lessor did not warrant goods for particular purpose); World Wide
 Lease, Inc. v. Grobschmit, 586 P.2d 889, 893 (Wash. Ct. App. 1978)
 (supplier, not lessor/financier, owed lessee implied warranty of fitness for
 particular purpose where lessee relied on supplier's selection of
 equipment).
      Similarly, the implied warranty of merchantability does not apply.
 Section 26-1-2-314 provides in part that "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."  A "merchant" is defined as "a
 person who deals in goods of the kind or otherwise by his occupation holds
 himself out as having knowledge or skill peculiar to the practices or goods
 involved in the transaction" or to whom such knowledge or skill may be
 attributed under principles of agency.  Ind. Code Ann. { 26-1-2-104(1)

 

 (Burns 1992).  The official comment to this section states that the implied
 warranty of merchantability, which applies only when the seller is a
 merchant with respect to goods of that kind, "requires a professional status
 as to particular kinds of goods."
      The Fitness Center and its guarantors contend that Kimco is a merchant
 of the equipment at issue because during the past seven years Kimco entered
 into 275 lease agreements for Sun America equipment and purchased over
 $3,000,000 worth of equipment, which amounted to eight percent of Kimco's
 business.  These facts are insufficient to establish Kimco as a merchant of
 Sun America equipment, however.  Kimco does not manufacture, repair, or
 store the equipment, or make any representations that it has any expertise
 regarding the equipment.  Under such circumstances, it cannot be considered
 a merchant for purposes of the implied warranty of merchantability.  See
 All-States Leasing Co. v. Ochs, 600 P.2d  at 910 (lessor/financier is not
 merchant as to particular kinds of goods where no evidence indicated it had
 any expertise with respect to equipment); All-States Leasing Co. v. Bass,
 538 P.2d  at 1184-85 (lessor who handled between forty and fifty transactions
 concerning car-wash system over six- to eight-month period was not merchant
 for purposes of UCC implied warranty of merchantability).
      Alternatively, the Fitness Center argues that the implied warranty of
 merchantability applies because Kimco used Sun America as its agent in the
 sale of goods.  An agency relationship results when one party consents to
 another party acting as its agent.  Swanson v. Wabash College, 504 N.E.2d 327, 331 (Ind. Ct. App. 1987).  The agent must also "acquiesce to the
 arrangement and be subject to the principal's control."  Id.  An apparent
 agency is initiated by the manifestation of the principal to a third party,

 

 who reasonably believes that the other individual is the agent.  Id. at 332.
 Statements of the agent are insufficient to create an apparent agency
 relationship.  Id.
      The Fitness Center failed to produce evidence sufficient to establish
 an agency relationship between Kimco and Sun America.  There was no evidence
 suggesting that Kimco had consented to Sun America acting as its agent, nor
 was there any evidence tending to show that Sun America had acquiesced to
 Kimco's control.  Finally, there was no evidence of communications from
 Kimco to the Fitness Center that would reasonably lead the Fitness Center to
 believe that Sun America was Kimco's agent.
      In CIT Financial Services, Inc. v. Gott, 615 P.2d 774 (Kan. Ct. App.
 1980), the buyer/lessee also asserted that the dealer who sold it allegedly
 defective office equipment was an agent of the financier/lessor.  The Kansas
 Court of Appeals found no evidence tending to prove an agency relationship.
 Id. at 779.  The court stated:
           [W]e find nothing in this record to indicate that [the
           financier/lessor] exercised any control whatsoever over
           the business affairs of [the dealer] or had any voice in
           setting the policies and standards to be followed by
           [the dealer] beyond apprising that company that, if its
           customers wanted to finance a purchase from [the dealer]
           with funds provided by [the financier/lessor], certain
           forms and instruments were to be completed in a
           particular manner and submitted, after which [the
           financier/lessor] would make the decision as to whether
           to provide funds for that purpose.  [The dealer] did not
           have authority to bind the [financier/lessor] in any
           transaction nor were [the dealer's] customers required
           to purchase on terms dictated by [the financier/lessor].

 Id.  The facts in the instant case are similar, and we agree that they are
 insufficient to establish an agency relationship.
      This issue has also been considered by the federal court of appeals for
 the Third Circuit.

 

           Nor have we found a case from any jurisdiction where
           U.C.C. buyer's remedies have been enforced on behalf of
           a nominal lessee who will ultimately acquire ownership
           of the leased property and against a finance lessor who
           had no connection with the lessee's choice of equipment
           to be leased and who had no relationship by agency or
           assignment with the actual supplier of the equipment.
           On the contrary, courts have held that in such
           situations a buyer/lessee's remedy is properly against
           the actual supplier.

 General Elec. Credit Corp. v. Ger-Beck Mach. Co., 806 F.2d 1207, 1210 (3d
 Cir. 1986); see also Briscoe's Foodland, Inc. v. Capital Assocs., 502 So. 2d 619, 622 (Miss. 1986) (financing lessor did not manufacture equipment and
 was not sufficiently like seller so as to impose Article 2 warranties);
 Coastal Leasing Corp. v. O'Neal, 405 S.E.2d 208, 209 (N.C. Ct. App. 1991)
 (allowing lessee to cross-claim against supplier for breach of warranty
 where judgment was entered for lessor on equipment lease).  We find no
 reason to believe the Indiana Supreme Court would hold otherwise.
      With respect to the agency argument, the Fitness Center relies on
 Thompson Farms, Inc. v. Corno Feed Prods., 366 N.E.2d 3, 12 (Ind. Ct. App.
 1977), in which the court concluded "that the only reasonable interpretation
 of the evidence supports the finding of implied agency."  We distinguish
 that case because the defendants therein produced uncontradicted evidence
 that the financier authorized the alleged agent to market the financier's
 hog marketing plan, that the alleged agent consented to represent the
 financier and promote its feed products, and that the financier's sales
 representative actively participated in the sales presentations to the
 defendant regarding the plan.  The facts of this case are quite different.
      The Fitness Center also relies on Lectro Management, Inc. v. Freeman,
 Everett & Co., 135 Vt. 213, 373 A.2d 544 (1977), which is factually almost
 indistinguishable from the instant case.  In Lectro Management, however,

 

 the Court never addressed the issue of agency.  It concluded that, even if
 the defendant established agency, the warranty disclaimers in the lease
 agreement were valid and enforceable.  Id. at 216, 373 A.2d  at 546.  Thus,
 Lectro Management does not support the argument that Article 2's implied
 warranties may be enforced against a financing lessor who did not select the
 equipment and who had no agency relationship with the supplier of the
 equipment. (FN1)
      Finally, the Fitness Center and its guarantors argue that the court
 erred in failing to grant their motion for summary judgment because, based
 on the undisputed facts, they were entitled to judgment as a matter of law.
 We agree that the relevant facts were undisputed but, for the reasons stated
 above, defendants were not entitled to summary judgment.
      Affirmed.

                                    FOR THE COURT:



                                    ________________________________
                                    Associate Justice




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                               Footnotes

FN1.    We note that had defendants relied on "revocation of acceptance,"
Ind. Code Ann. { 26-1-2-608 (Burns 1992), rather than on breach of implied
warranties as their defense to plaintiff's claim, the result here may well
have been different.  See General Elec. Credit Corp. v. Ger-Beck Mach. Co.,
806 F.2d 1207, 1215 (3d Cir. 1986) (Becker, J., dissenting) (examining
difference between remedies of breach of implied warranty and revocation of
acceptance and stating, "[u]nlike an implied warranty of merchantability,
the remedy of revocation of acceptance is available against all sellers, not
just merchants").