All-States Leasing Co. v. Ochs

Decision Date24 September 1979
Docket NumberNo. 77-1948,ALL-STATES,77-1948
Citation27 U.C.C.Rep. Serv. 808,42 Or.App. 319,600 P.2d 899
Parties, 27 UCC Rep.Serv. 808 LEASING COMPANY, a Montana Corporation, Respondent- Cross-Appellant, v. Randal N. OCHS, M.D. and J. Darlene Ochs, dba Myrtle Creek Hospital & Medical Center, Appellants-Cross-Respondents. ; CA 11421.
CourtOregon Court of Appeals

William C. Wolke, Roseburg, argued the cause for appellants-cross-respondents. With him on the brief was Luoma, Kelley & Wolke, Roseburg.

Paul Gerhardt, Portland, argued the cause and filed the briefs for respondent-cross-appellant.

Before SCHWAB, C. J., and LEE and BUTTLER, JJ.


Plaintiff is a Montana Corporation in the business, nationwide, of leasing all types of equipment. Defendants Ochs own and operate the Myrtle Creek Hospital and Medical Center, which leased from plaintiff a Burroughs L-5000 computer for use in its bookkeeping. Defendants ceased paying rent for the computer after it continually malfunctioned. Plaintiff ultimately accelerated the balance of rental payable under the lease, took possession of the computer and sold it through private bidding. This action is for the accelerated balance of rental payable under the lease less the amount obtained upon resale.

Defendants asserted an affirmative defense and four counterclaims. They were withdrawn from the jury, which returned a verdict of $5,975 for plaintiff. Defendants appeal the court's refusal to submit their affirmative defense and counterclaims to the jury, to the refusal to give, and the giving of, certain jury instructions, and the court's award of attorney's fees to plaintiff. Plaintiff cross-appeals, also claiming error in the court's instructions. We affirm.

When defendants began considering the purchase of a computer to replace their existing system, Dr. Ochs, one of the defendants, contacted a Burroughs distributor to inquire about the L-5000 computer with which he had become familiar while associated with a clinic in California. After a demonstration by Burroughs, Dr. Ochs decided to purchase a used L-5000, based upon representations and assurances made by Burroughs and upon his prior experience with that model. He signed a purchase agreement with Burroughs, but shortly thereafter, for reasons relating to cash flow and tax considerations, decided to lease the machine. Burroughs did not lease equipment, so defendants made arrangements for plaintiff, with whom defendants had dealt on another matter, to purchase the computer and lease it to them.

All-States' standard lease form was executed by the parties on June 26, 1975; it did not include an option to purchase, but the parties appear to agree that an option was agreed upon later. In the lease, plaintiff disclaimed 1 all warranties, express or implied, and assigned to defendants all of plaintiff's rights against Burroughs. 2

Problems arose with the equipment soon after delivery to the hospital. After unsuccessful attempts by Burroughs to cure the problems, defendants ceased making payments, and in June, 1977, plaintiff accelerated the lease payments and demanded surrender of the computer. Defendants shipped the machine to plaintiff who, over a period of time, requested bids from a list of purchasers to whom it had sold repossessed equipment in the past. Finally, the computer was sold in February, 1978, for $1800. After receiving the computer, but before selling it, plaintiff brought this action for the balance of rental due under the lease.

This case presents myriad complex issues relating to the application of the Oregon Uniform Commercial Code (UCC) to a commercial transaction. Although many of them are argued in the briefs, not all of them are properly before us. The complaint simply alleged the execution of the lease, defendants' failure to make the lease payments due May 10, 1977, and thereafter, and that the balance of the unpaid rentals is due and owing from defendants. The answer is a general denial followed by an affirmative defense premised on unconscionability within the meaning of ORS 72.3020, and four counterclaims for damages for breach of (1) express warranties; (2) implied warranty of merchantability; (3) implied warranty of fitness for a particular purpose, and (4) ORS 646.608(1)(e) and (k) (unfair trade practices) in the making of certain false and misleading representations. The reply was a general denial together with an affirmative allegation of an accord and satisfaction with defendants whereby they agreed to "withdraw" their claims on which their affirmative defense and four counterclaims are premised. 3

From the foregoing summary outline of the pleadings, it is apparent that defendants did not allege that the arrangement was not a true lease, but was a secured transaction to which ORS 79.1010 to 79.5070 (Uniform Commercial Code Secured Transaction) applied. 4 However, defendants took that position at trial and plaintiff did not contend that the issue was not properly raised. The trial court treated the issue properly as one of law, holding that the transaction was intended as a secured transaction. That issue, then, we treat as properly before us.

Plaintiff has assigned error to that determination and the applicability of the requirements that flow from it. Whether a lease is a " pure" lease or one intended as security, and therefore controlled by the provisions of ORS 79.1010 to 79.5070, depends upon the intention of the parties as determined by the facts of each case. Even though the determination is made on a case by case basis, the presence of certain factors can be indicative, including, but not limited to: (1) whether the lessee is given an option to purchase the equipment, and, if so, whether the option price is nominal, ORS 71.2010(37); 5 (2) whether the lessee acquires any equity in the equipment; (3) whether the lessee is required to bear the entire risk of loss; or (4) pay all charges and taxes imposed on ownership; (5) whether there is a provision for acceleration of rent payments, and (6) whether the property was purchased specifically for lease to this lessee.

While the agreement here does not contain an option to purchase, the parties apparently did agree subsequently on one whereby defendants were granted an option to purchase the computer at the end of the seven-year term for 10% Of the original purchase price. There is, however, no evidence as to what the fair market value of the computer would be at the end of the term, so we cannot determine whether the option called for only nominal consideration. Peco, Inc. v. Hartbauer Tool and Die Co., 262 Or. 573, 500 P.2d 708 (1972). If it were clear that the option price was nominal, that is, that there would be no "sensible alternative" to the exercise of the option, that factor alone would be sufficient to make the lease intended for security. ORS 71.2010(37); Peco, Inc. v. Hartbauer Tool and Die Co., supra. However, the existence of the option in and of itself is not determinative of whether the lease was intended as security.

Therefore, other factors involved in the transaction must be considered. Here, the agreement provides for an acceleration of rental payments in the event of default; the lessee is required to bear the entire risk of loss, to insure the computer, and to pay all taxes imposed upon the equipment; further, the equipment was selected by the lessee, purchased by the lessor specifically for the lessee's use, and was delivered directly to the lessee. Those factors, coupled with the fact that plaintiff fashions itself as a " financing lessor," whose only function was to provide the funds for the computer and whose principal concern was to be secured adequately in doing so, lead us to the conclusion that the lease is one which was "intended for security" and is governed by the provisions of ORS 79.1010 to 79.5070.

Upon default by defendant, plaintiff, under ORS 79.5040 6 and the terms of the lease, was entitled to take possession of the computer (which it did) and to dispose of it so long as all aspects of the disposition "including the method, manner, time, place and terms" are commercially reasonable. ORS 79.5040(3). Both parties have assigned error to the court's instructions to the jury on this issue. Although plaintiff's contention in this court is correct that the trial court erred in defining "commercially reasonable" as including the requirement that the disposition result in "the highest price obtainable," Vetter v. Bank of Oregon, 39 Or.App. 181, 591 P.2d 768 (1979), it did not raise that objection adequately below. Plaintiff took exception to the instruction on the ground that ORS 79.5040 was not applicable because the transaction involved a true lease, not a secured transaction, and therefore the "commercially reasonable" standard imposed by the UCC was inapplicable. Actually, it takes the same position here: plaintiff does not seek a new trial; it asks that we reverse and remand with instructions to enter judgment for the full amount plaintiff claims. We do not, therefore, consider the error in our disposition of the case.

The defendant assigns error to the court's instructions on the factors relevant in determining commercial reasonableness. We conclude that the jury was adequately instructed on that issue. Defendant's contentions regarding the unreasonableness of plaintiff's selling the collateral without repairing it and holding it for eight months before selling it were proper subjects for jury argument, not specific instructions. Weiss v. Northwest Accept. Corp., 274 Or. 343, 546 P.2d 1065 (1976); Spears v. Huddleston, 265 Or. 168, 508 P.2d 438 (1973).

The record presents a jury question as to whether plaintiff sold the computer in a commercially reasonable manner. The trial court instructed the jury that plaintiff had the burden of proof on this issue, and although no objection was made to this allocation of the burden, it may have been more favorable...

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