Lyon Financial Services, Inc., d/ba/ The Manifest Group, Respondent, vs. Young Vending Services, et al., Appellants.

This opinion will be unpublished and

may not be cited except as provided by

Minn. Stat. § 480 A. 08, subd. 3 (2002).

 

 

STATE OF MINNESOTA

IN COURT OF APPEALS

A03-73

 

 

Lyon Financial Services, Inc., d/ba/ The Manifest Group,

Respondent,

 

vs.

 

Young Vending Services, et al.,

Appellants.

 

 

Filed September 23, 2003

Affirmed

Robert H. Schumacher, Judge

 

Lyon County District Court

File No. C80290

 

 

Kevin K. Stroup, Ronald E. Seanor, Stoneberg, Giles & Stroup, P.A., 300 O'Connell Street, Marshall, MN 56258 (for respondent)

 

Jack E. Pierce, Pierce Law Firm, P.A., 4230 Central Avenue Northeast, Minneapolis, MN 55421 (for appellants)

 

 

            Considered and decided by Lansing, Presiding Judge, Toussaint, Chief Judge, and Schumacher, Judge.

U N P U B L I S H E D   O P I N I O N

ROBERT H. SCHUMACHER, Judge

Appellants Young Vending Services and Chae Lee (collectively Young Vending) challenge the district court's entry of judgment against them in an action brought by respondent Lyon Financial Services, Inc., d/b/a The Manifest Group, to collect payments under an equipment lease.  Young Vending argues (1) the lease was unenforceable because its terms were unconscionable; (2) the lease was unenforceable because it was for illegal goods; (3) they rejected the leased goods as nonconforming; (4) they are entitled to damages due to nonconforming goods; and (5) they are entitled to damages under the Texas Deceptive Trade Practices Act.  We affirm.

FACTS

In July 2000, Young Vending Services, a Texas business entity, and Lee, a Texas resident, entered into an equipment lease agreement with Lyon, a Minnesota corporation doing business as The Manifest Group.  Pursuant to the lease, Lyon provided the financing for Young Vending's purchase of 11 new video gaming machines supplied by a third party, Sinko America Corporation.  As used by Young Vending, the machines were slot machines that accepted coins and randomly dispensed tickets exchangeable for Wal-Mart gift certificates.  It is undisputed Lee chose to do business with Sinko, selected the machines, and negotiated the purchase price. 

The 36-month lease provided Lyon would own and hold title to the machines, which it would then lease to Young Vending; the monthly payment schedule was structured so that Young Vending would own the machines at the end of the lease period. 

The lease included a two-page document signed by Lyon (the lessor), Young Vending (the lessee), guaranteed by Lee's signature and identifying Sinko as the supplier of the machines.  The agreement's acceptance of delivery clause provides:

Upon your signing [this Lease], your promises herein will be irrevocable and unconditional in all respects.  You understand and agree that we have purchased the equipment from the supplier, and you may contact the above supplier for your warranty rights, if any, which we transfer to you for the term of this lease.

 

The agreement contained the following provision:

 

WE MAKE NO WARRANTY EXPRESS OR IMPLIED, THAT THE EQUIPMENT IS FIT FOR A PARTICULAR PURPOSE OR THAT THE EQUIPMENT IS MERCHANTIBLE.  YOU AGREE THAT YOU HAVE SELECTED THE SUPPLIER AND EACH ITEM OF EQUIPMENT BASED UPON YOUR OWN JUDGMENT AND DISCLAIM ANY RELIANCE UPON ANY STATEMENTS OR REPRESENTATIONS MADE BY US OR ANY SUPPLIER.  WE DO NOT TAKE RESPONSIBILITY FOR THE INSTALLATION OR PERFORMANCE OF THE EQUIPMENT.  THE SUPPLIER IS NOT AN AGENT OF OURS AND NOTHING THE SUPPLIER STATES CAN AFFECT YOUR OBLIGATION UNDER THE LEASE.  YOU WILL CONTINUE TO MAKE ALL PAYMENTS UNDER THIS AGREEMENT REGARDLESS OF ANY CLAIM OR COMPLAINT AGAINST SUPPLIER.

 

The lease also contained a forum-selection clause providing the lease would be "governed by and construed in accordance with the laws of the State of Minnesota."  An addendum to the lease entitled the "Delivery Guarantee" provided:

Lessee understands and agrees that in the event the Lessee is not satisfied with the working condition of the equipment that Lessee shall only look to persons other than Lessor or its assigns such as the manufacturer, vendor, installer, or carrier, and shall not assert against Lessor or its assigns any claim or defense that Lessee may have with reference to the Equipment, the installation, or delivery.  Lessee understands that despite the fact that certain items of Equipment to be leased have not been delivered or installed, this Addendum authorizes Lessor to start the Lease and Lessee's duty to make monthly payments will commence immediately.  Further, Lessee authorizes Lessor to pay:

 

Sinko America Corp. [, which] is the Vendor for the equipment and the Lessee understands that payments shall begin on the same date that the Lessee executes this agreement and shall be continuous thereafter per the terms of the Lease. 

 

$35,200 will be paid to Sinko America Corp. (Vendor) upon execution of this agreement.

 

There was no discussion as to the legality of operating the machines in Texas. 

Lee picked the machines up personally from Sinko in September 2000.  Upon inspection, Lee discovered all the machines showed signs of useincluding cigarette burnsand 9 of the 11 machines did not function properly.  Lee twice contacted Sinko, which twice sent mechanics to repair the machines.  Lee did not call Lyon to discuss the machines' nonconformity.  Lee then put the machines in service in a public game room, where they continued to malfunction. 

            Lee made three monthly payments under the lease and then ceased payment.  In January 2001, approximately six months later, Young Vending notified Lyon the machines were nonconforming and their operation illegal in Texas.  He then returned the machines to Lyon.  The machines were liquidated for $2,000.  Lyon then filed a claim against Young Vending, alleging breach of lease and seeking damages equal to the deficiency, plus interest, and various costs and expenses.  Young Vending counterclaimed, alleging (1) the lease was unenforceably unconscionable, (2) the lease was unenforceable because it was for illegal goods, (3) it had rejected the contracted-for goods as nonconforming, (4) it was entitled to damages due to nonconforming goods, and (5) it was entitled to damages under the Texas Deceptive Trade Practices Act. 

Following a court trial, the district court entered judgment in Lyon's favor, concluding the lease was a valid and enforceable contract that Young Vending breached by accepting the machines and then ceasing payment to Lyon.  The court also concluded the lease's valid choice-of-law provision precluded Young Vending's claim under the Texas Deceptive Trade Practices Act and denied Young Vending's motion for amended findings and a new trial. 

D E C I S I O N

A lease is a contract to be construed according to the rules of contract interpretation.  Amoco Oil Co. v. Jones, 467 N.W.2d 357, 360 (Minn. App. 1991).  "The construction and effect of a contract presents a question of law, unless an ambiguity exists."  Brookfield Trade Ctr., Inc. v. County of Ramsey, 584 N.W.2d 390, 394 (Minn. 1998).  There is no allegation of ambiguity here.  "In interpreting a contract, the language is to be given its plain and ordinary meaning."  Id. (citation omitted).  This court will not set aside the trial court's findings of fact unless they are clearly erroneous but reviews the court's conclusions of law de novo.  Modrow v. JP Foodservices, Inc., 656 N.W.2d 389, 393 (Minn. 2003). 

1.         Young Vending argues the lease was unenforceable as unconscionable.  Whether a contract provision is unconscionable is a question of law.  Osgood v. Med., Inc.  415 N.W.2d 896, 901 (Minn. App. 1987), review denied (Minn. Feb. 12, 1988).

A contract is unconscionable if it is such that no sensible, lucid person would make it and no honest and fair person would accept it.  See Hume v. United States, 132 U.S. 406, 411, 10 S. Ct. 134, 136 (1889).  "The principle is one of the prevention of oppression and unfair surprise . . . ."  Osgood v. Medical, 415 N.W.2d at 901  (emphasis omitted) (quotation omitted).  Upon finding that a contract was unconscionable at the time it was entered, a court may refuse to enforce the contract, remove the unconscionable clause or limit its application to avoid an unfair result.  Minn. Stat. § 336.2-302(1) (2002).

Young Vending argues the lease was unconscionable because it disclaimed Lyon's warranty liability to Young Vending and made Young Vending's obligation to continue to make payments to Lyon unconditionally irrevocable upon Lee's signature.  Lyon argues the lease was an enforceable finance lease.  We find Lyon's argument convincing.

The characteristics of finance leases are established by statute; in such a lease,

(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

 

(i)        the lessee receives a copy of the contract evidencing the lessor's purchase of the goods or a disclaimer statement on or before signing the lease contract, or

 

(ii)       the lessee's approval of the contract evidencing the lessor's purchase of the goods or a disclaimer statement is a condition to effectiveness of the lease contract.

 

"Disclaimer statement" means a written statement that is part of or separate from the lease contract that discloses all warranties and other rights provided to the lessee by the lessor and supplier in connection with the lease contract and informs the lessee in a conspicuous manner that there are no warranties or other rights provided to the lessee by the lessor and supplier other than those disclosed in the statement.

 

Minn. Stat. § 336.2A-103 (2002).  The irrevocable nature of a finance lease is also specifically authorized by statute:

(1)       In the case of a finance lease, the lessee's promises under the lease contract become 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, or substitution without the consent of the party to whom the promise runs.

 

Minn. Stat. § 336.2A-407 (2002).  This provision, known as a "hell or high water clause," underscores the distinguishing characteristic of a finance lease.  It requires a finance lessee to look exclusively to the supplier, and not the lessor, to perform the lease's essential covenants, representations, and warranties; the lessor's limited obligation is to provide financing.  Minn. Stat. Ann. § 336.2A-407 U.C.C. cmt. at 1 (West 2002).

            It is undisputed Young Vending selected the gaming machines and the vendor and negotiated the sale before it contacted Lyon to arrange the financing.  It is also undisputed Lyon purchased the machines from Sinko in connection with the lease. 

            Young Vending argues the warranty-disclaimer provision is unconscionable and can have no effect because the entire lease was procured by fraud.  But contract provisions that limit the liability of one party in a commercial transaction are enforceable under Minnesota law.  See Indep. Sch. Dist. No. 877 v. Loberg Plumbing & Heating Co., 266 Minn. 426, 434, 123 N.W.2d 793, 798-99 (1963).  In addition, the language of the lease's warranty disclaimer satisfies the disclaimer requirements found in Minn. Stat. § 336.2-316 (2002), governing the exclusion or modification of warranties in business contracts.  It is conspicuously set forth in bold type and specifically describes the implied warranties of merchantability and fitness.

            Young Vending also argues the lease unconscionably deprived it of any meaningful remedies.  But under a finance lease, the lessee receives the benefit of all promises and warranties that run from the vendor to the lessor.  Minn. Stat. § 336.2A-209 (1) (2002).  Lyon's disclaimer of warranty obligations does not deprive Young Vending of remedies; it merely requires that Young Vending seek enforcement of its warranty rights against Sinko, the supplier. 

We further observe the lease is enforceable whether or not it is characterized as a finance lease.  The record indicates the agreement was an arm's length transaction between experienced businesspeople that "should be honored by the parties and enforced by the courts absent some compelling and countervailing reason."  Hauenstein & Bermeister, Inc. v. Met-Fab Indus., Inc., 320 N.W.2d 886, 891 (Minn. 1982).  Even if the statutory provisions applicable to finance leases do not apply, Young Vending has no claim for compensation from Lyon. The agreement itself expressly disclaimed any warranties.  We conclude the lease was not unenforceable as unconscionable.

2.         Young Vending argues the lease was unenforceable because the video gaming machines are gambling devices, possession of which is illegal in Texas, where the machines were located.  See First Nat'l Bank of Barron v. Strimling, 308 Minn. 207, 213, 241 N.W.2d 478, 481 (1976) (stating contracts for illegal goods are unenforceable). 

            The lease specifically disclaims Lyon's warranty of the machines' fitness for a particular purpose and requires that Young Vending address all claims concerning the machines to Sinko.  Because we conclude the lease is otherwise enforceable, we do not address the issue of the machines' illegality, which must properly be raised by Young Vending with Sinko.  We note, however, that under Texas law, whether a gaming machine is an illegal gambling device is determined by the nature of the prizes awarded, not by an inherent quality of the machine.  See Texas v. Del Sur Pueblo, 220 F. Supp. 2d. 668, 704 (W.D. Tex. 2001), opinion modified (May 17, 2002).  That Young Vending's choice of prizes may have made the machines's operation illegal has no bearing on whether the machines could be operated legally under other circumstances.

3.         Young Vending argues it rejected the machines as nonconforming, thereby revoking its prior acceptance of the lease and rendering the lease unenforceable.  We disagree.

Young Vending's obligations to Lyon were irrevocable under the terms of the lease, which became "irrevocable and unconditional" upon execution in July, 2000.  By statute, a finance lessee may revoke acceptance when the lessee does not discover the nonconformity and the acceptance was induced by the lessor's assurances.  Minn. Stat. § 336.2A-517 (2002).  Here, Young Vending admits it knew of the nonconformity upon receipt of the machines and the record shows Young Vending relied upon Sinko, not Lyon, for all representations concerning the quality and operation of the machines. 

Even if Young Vending's obligations to Lyon were revocable, the record demonstrates Young Vending did not reject the machines.  The district court found Lee kept the machines for approximately three months after receipt and put the machines into service before notifying Lyon the machines were nonconforming.  These findings are not clearly erroneous and support the conclusion Young Vending accepted the machines.

We therefore also conclude Young Vending is not entitled to collect damages from Lyon due to nonconforming goods.  We note the statute governing finance leases does not contemplate the award of damages against the lessor for nonconforming accepted goods:  "following the lessee's acceptance of the goods the lessee will have no rights or remedies against the lessor, because the lessor's obligations to the lessee are minimal."    Minn. Stat. Ann. § 336.2A-508 U.C.C. cmt. at 10 (West 2002); Minn. Stat. § 336.2A-515 (2002). 

4.         Young Vending argues it is entitled to damages under the Texas Deceptive Trade Practices Act because the contracted-for machines were represented as new but were in fact used.  We disagree.  The lease contained a forum-selection clause providing it would be "governed by and construed in accordance with the laws of the State of Minnesota."  Further, there is no evidence Lyon made any representations to Young Vending concerning the machines; even if there were, Young Vending explicitly disclaimed reliance on any representations made by Lyon concerning the fitness and performance of the machines when it signed the lease. 

            Affirmed.