Leasing Service Corp. v. Broetje, 81 Civ. 6436(CES).

• Citation: 545 F. Supp. 362
• Decision Date: 10 August 1982
• Docket Number: No. 81 Civ. 6436(CES).,81 Civ. 6436(CES).
• Parties: LEASING SERVICE CORPORATION, Plaintiff, v. Ralph E. BROETJE, Don L. Chappell, Richard J. Carman, Betty J. Carman, Deanna V. Chappell, John W. Carman, and Jeannie Carman, Defendants.
• Court: U.S. District Court — Southern District of New York

545 F. Supp. 362

LEASING SERVICE CORPORATION, Plaintiff, v. Ralph E. BROETJE, Don L. Chappell, Richard J. Carman, Betty J. Carman, Deanna V. Chappell, John W. Carman, and Jeannie Carman, Defendants.

No. 81 Civ. 6436(CES).

United States District Court, S. D. New York.

August 10, 1982.

COPYRIGHT MATERIAL OMITTED

Sol D. Bromberg, New York City, for plaintiff.

Gerald A. Novack, Barrett Smith Schapiro Simon & Armstrong, Joseph P. Callahan, Callahan & Wolkoff, P. C., New York City, for defendants.

MEMORANDUM DECISION

STEWART, District Judge:

Plaintiff Leasing Service Corporation ("LSC") brought this contract action in diversity against Ralph E. Broetje, Don L. Chappell, Richard J. Carman, Betty J. Carman, Deanna V. Chappell, John W. Carman, and Jeannie Carman. LSC is a New York corporation. Richard and Betty Carman are residents of Idaho. All other defendants are residents of the State of Washington. The case concerns the lease of a Driltech D40K water well drilling rig ("the rig" or "the equipment") by LSC's assignor to Don Chappell and the transfer of the lease to Broetje. The other defendants are guarantors of Chappell's original contract, each of whom approved the transfer to Broetje in writing. After defendants defaulted on the payments, LSC repossessed and sold the equipment at an auction at which LSC itself was the only bidder. LSC sued for the alleged unpaid balance of the contract, late charges and attorney's fees.

The defendants move to dismiss pursuant to Fed.R.Civ.P. 12(b) or in the alternative to dismiss or to transfer the action to the Eastern District of Washington pursuant to 28 U.S.C. § 1404. Broetje claims that he was induced to sign the transfer agreement through fraud so the lease is unenforceable. Defendants allege that the lease is unenforceable because its provisions are unconscionable. They also allege that the sale of the rig by LSC was commercially unreasonable, and that process and notice of the sale were insufficient. LSC cross-moves for summary judgment. LSC claims that the transfer agreement, the lease, and subsequent sale of the rig were neither induced by fraud, nor unconscionable, nor unreasonable and that venue is properly laid in the Southern District of New York pursuant to the lease's venue selection clause, which it asserts is valid and binding.

I

In considering defendants' motion to dismiss, we accept the factual allegations of the complaint as true. However, the complaint unquestionably states a claim for relief. Defendants do not dispute the existence of the lease or transfer agreement and do not deny their default. Instead, defendants seek to defeat enforcement of the various agreements. It is thus necessary to review the undisputed facts for the purposes of ruling on LSC's cross-motion for summary judgment. LSC bears the burden of demonstrating the absence of material issues of fact. See American Int'l Group, Inc. v. London Am. Int'l Corp. Ltd., 664 F.2d 348, 351 (2d Cir. 1981).

On January 27, 1978, Lynnwood Equipment, Inc. ("Lynnwood") leased a water well drilling rig to Don Chappell. By the same instrument Lynnwood assigned the lease to LSC, a nationwide finance company. The lease price was $340,380.00, payable in 57 monthly installments, and the lease was guaranteed by Deanna Chappell, John and Jeannie Carman, and by John Carman's parents, Richard and Betty Carman.

The original lease, a densely-worded form contract, contained many different creditor's remedies. The entire outstanding balance would become due upon default. Late charges of 1/15th of 1% per day (24.33% annually) accrued on past due payments. The lease also provided for liquidated damages equal to 15% of the total rent, attorney's fees of 20% of "any amount sought", appointment of attorney-in-fact for service, confession of judgment (except where prohibited by law), waiver of jury trial and right to hearing prior to repossession, and waiver and release of relief from any appraisement, stay or exemption laws. Chappell was given a purchase option for the equipment, also dated January 27, 1978, at a price of $25,966 (7% of the lease price) on expiration of the lease. The lease designated venue and jurisdiction in any New York State court. Novack Aff. Ex. A, p. 2. The guaranty agreements signed by Deanna Chappell and by the Carmans provide for their joint and several liability for the payments due under the contract. They also contain many of the creditor's remedies in the lease.

In the spring of 1978, Ralph Broetje, a farmer near Yakima, Washington, desired to have a water well dug on his property to irrigate his farm. Finding most well drillers already committed to other jobs, Broetje determined that he would have a long wait unless he could find an available drilling rig. Broetje eventually contacted John Carman, who had sublet Chappell's rig. John Carman was not then using the rig and wanted to dispose of it. Broetje learned that Dave Carman wanted to use the rig in his business.

Lynnwood's sales manager, Bob Freeman, arranged a meeting with Broetje and John Carman. At the meeting Broetje signed a "Transfer and Assumption Agreement" ("transfer agreement"). He was not asked to and did not sign the original lease. Indeed, Broetje claims and LSC does not deny that Freeman told him not to read the original lease and did not give him a copy of it. Broetje Aff. ¶¶ 18-21; Novack Aff. ¶ 9.

The transfer agreement, also a densely-worded form document, provided that Transferee (Broetje) would assume and become a party to the lease "as though Transferee were to all intents and purposes the purchaser or lessee named in the contract...." Novack Aff., Ex. B. It also provided that Chappell remained liable on the contract, that Broetje waived, as to LSC, any defense, set off, recoupment claim or counterclaim that he might have against Chappell, maintained LSC's security interest in the equipment and granted LSC a further security interest in "all equipment, inventory, goods, and property of every kind now owned and/or hereafter required by Transferee Broetje". Id.

Following the transfer from Chappell to Broetje, Dave Carman did use the rig, but allegedly due to frequent breakdowns of the equipment, Dave Carman stopped making payments to Broetje after a short time. Broetje Aff. ¶¶ 22-26. Broetje made regular payments to LSC until August 1980 when he fell behind in his payments. He continued making payments through January 1981. LSC's Statement Pursuant to Rule 3(g) ¶ 7.

In late July 1981, LSC sent letters to each defendant stating that the rig would be sold at auction. LSC also placed advertisements (costing $298.80) to that effect in the Tri-City Herald of Pasco, Washington and Contractors Hot Line. LSC Statement Pursuant to Rule 3(g) ¶ 11. On August 19, 1981, LSC conducted a public auction (without auctioneer) at which only LSC and Lynnwood were present and LSC was the only bidder. LSC purchased the rig for $50,000.¹

LSC now sues for the unpaid balance of $119,133, for late charges ($17,633.02), and for attorney's fees ($26,765.14). The credit of $50,000 (the sale price of the rig) against the amount owed was wiped out by reducing it by liquidated damages ($51,047). The total for which defendants are alleged to be liable is $213,531.16, of which $160,590.84 (plus interest) is alleged to be unpaid.²

II

Issues of material fact remain as to Broetje's allegation that he was induced to enter the contract by LSC's fraudulent concealment of material facts. The elements of fraudulent concealment are: (1) a relationship between the contracting parties that creates a duty to disclose; (2) knowledge of the material facts by the party bound to make such disclosures; (3) non-disclosure; (4) scienter; (5) reliance; and (6) damage. Fidenas AG v. Honeywell Inc., 501 F.Supp. 1029, 1039 (S.D.N.Y.1980). To show fraud based on a failure to disclose information, Broetje must, at a minimum, produce evidence that LSC knew that Broetje was acting under a mistaken belief with respect to a material fact. Frigitemp Corp. v. Financial Dynamics Fund, 524 F.2d 275, 283 (2d Cir. 1975). The element of scienter includes representations known to be untrue or made with a reckless indifference to error, with the intent to cause the other party to act in reliance upon them. Ainger v. Michigan General Corp., 476 F.Supp. 1209, 1227 (S.D.N.Y.1979).

In support of his fraudulent concealment claim, Broetje states and LSC does not deny that Lynnwood's sales manager actively discouraged Broetje from looking at any documents other than the transfer agreement, telling Broetje that the transfer agreement was the only document which concerned him. Broetje Aff. ¶¶ 19-20; Novack Aff. ¶ 9. Although the transfer agreement incorporates the lease's provisions by reference, it does not reiterate any of the terms of the lease. It is undisputed that Broetje only signed the transfer agreement and did not sign the original lease. Broetje also alleges and LSC does not deny that Lynnwood's sales manager did not provide a copy of the original lease at the meeting at which Broetje signed the transfer agreement or at any time thereafter until he received the complaint in this case. Broetje Aff. ¶ 19; Novack Aff. ¶ 9. Broetje also avers that he would not have entered into the agreement if he had known of the various onerous lease clauses. These allegations raise material factual issues with respect to each element of the fraudulent concealment.³

III

The defendants also allege that the lease is unenforceable because of unconscionability. Generally, an unconscionable agreement is one marked by an absence of meaningful choice on the part of one of the parties, together with contract terms that are unreasonably favorable to the other party. Blake v. Biscardi, 62 A.D.2d 975, 977, 403 N.Y.S.2d 544, 547 (1978) (quoting Williams v. Walker-Thomas Furniture Co., 350 F.2d 445, 449-50 (D.C.Cir.1965)). Whether a meaningful choice is present in a particular case can only be...