CIT Financial Services, Inc. v. Gott

• Decision Date: 25 July 1980
• Docket Number: No. 50644,50644
• Citation: 615 P.2d 774,5 Kan.App.2d 224
• Parties: , 29 UCC Rep.Serv. 1395 CIT FINANCIAL SERVICES, INC., of Kansas, Appellee, v. Henry GOTT et al.; Ernest A. Peterson et al.; Kice Metal Products Co., Inc.; Robert Ireland and Ray Barber, d/b/a Ireland and Barber, Appellants.
• Court: Kansas Court of Appeals

Page 774

615 P.2d 774

5 Kan.App.2d 224, 29 UCC Rep.Serv. 1395

CIT FINANCIAL SERVICES, INC., of Kansas, Appellee, v. Henry GOTT et al.; Ernest A. Peterson et al.; Kice Metal Products Co., Inc.; Robert Ireland and Ray Barber d/b/a Ireland and Barber, Appellants.

No. 50644.

Court of Appeals of Kansas.

July 25, 1980.

Review Denied Sept. 8, 1980.

Syllabus by the Court

In four actions consolidated for jury trial and on appeal, wherein plaintiff as lessor sought to recover from defendants as lessees of Royal Bond Mark I copiers sold to defendants by SSS Corporation, not a party to this action, the record is examined and it is held: (1) As between plaintiff and the various defendants, the transactions represented by their "lease" agreements were intended to create only a security interest (as defined by K.S.A. 84-1-201(37) (b )) in plaintiff, and the rights of the parties are governed by the provisions of UCC article 9, K.S.A. 84-9-101 et seq. (2) What constitutes agency and whether there is any competent evidence reasonably tending to prove that relationship is a question of law, and there is no evidence reasonably tending to establish that relationship between plaintiff and SSS Corporation. (3) Because there was a buyer-seller relationship between defendants and SSS with only a security interest in plaintiff, the warranty provisions of UCC article 2 which apply only to the seller are not applicable as against the plaintiff; and, since such provisions are not applicable, defendants' contention that plaintiff's disclaimer of warranty was unconscionable must fail. (4) The court did not err in granting plaintiff's motion for directed verdicts, in its ruling that UCC article 2 does not apply to the transactions here involved, or in denying defendants' motions for new trial.

Paul S. McCausland of Gott, Hope, Gott, Young & Saffels, P. A., Wichita, for appellant Henry Gott.

Michael L. Jones of Hershberger, Patterson, Jones & Roth, Wichita, for appellant Ernest A. Peterson.

Jerry G. Elliott of Foulston, Siefkin, Power & Eberhardt, Wichita, for appellant Kice Metal Products Co., Inc.

Bryson E. Mills of Mills & Wessling, Wichita, for appellants Robert Ireland and Ray Barber.

Ernest McRae of McRae & Early, Wichita, for appellee.

Before FOTH, C. J., and SPENCER and SWINEHART, JJ.

SPENCER, Judge:

In four actions consolidated for jury trial and on appeal, CIT Financial Services, Inc., of Kansas (hereinafter plaintiff or CIT) seeks to recover amounts allegedly due and owing under certain written "leases" of copying equipment. After all of the evidence had been presented, the trial court sustained plaintiff's motion for directed verdicts in its favor and entered judgment in each case accordingly. Defendants have specified six issues on appeal, all of which are included in the proposition of whether the trial court erred in granting plaintiff's motion for directed verdicts.

Plaintiff's position at trial was that the respective defendants had purchased Royal Bond copiers and related equipment from SSS Corporation (hereinafter SSS), which company has since been adjudicated bankrupt; that the purchases were financed through plaintiff by means of written lease agreements; that, although the instruments evidencing the transactions were couched in lease terms, they were in fact and in law security agreements granting purchase money security interests to plaintiff and obligating defendants to pay plaintiff according to the terms of those instruments; and that defendants were in default, entitling plaintiff to accelerate the obligations to maturity.

Defendants admitted they obtained copiers from SSS but asserted the machines did not operate properly; that SSS made certain fraudulent representations relating to the machines; that SSS was the agent of plaintiff for the purpose of obtaining the lease agreements from defendants; and that plaintiff was responsible for the misrepresentations made to defendants and was subject to defenses which defendants would have had against SSS. In addition to allegations of agency, fraud, and failure of consideration, defendants relied on (1) unconscionability (K.S.A. 84-2-302); (2) breach of warranty of title (K.S.A. 84-2-312); (3) breach of express warranty (K.S.A. 84-2-313); (4) breach of implied warranty of merchantability (K.S.A. 84-2-314); and (5) breach of implied warranty of fitness for a particular purpose (K.S.A. 84-2-315).

In directing verdicts, the court ruled as a matter of law that no agency existed between plaintiff and SSS by which the defenses of fraud and failure of consideration could be asserted as against plaintiff, and that UCC article 2 was inapplicable to the transactions involved.

The facts of all four cases are essentially the same. SSS was formed in April of 1972 and was engaged in the business of selling office machines and equipment. In 1973, Wallace Ure, the chief executive officer and major stockholder of SSS contacted CIT for the purpose of making arrangements for financing certain office equipment then being sold by SSS. Ure thereafter met with John Burbank, a district sales manager for CIT, at which time CIT's "lease" program was explained. Following discussions between Ure and Burbank, SSS was established as a so-called "seller prospect" for CIT.

Among equipment carried for sale by SSS were "Royal Bond" copier machines, marketed by Royal Typewriter Company, a division of Litton Business Systems, Inc. During 1973, Ure obtained certain "speed-up kits," which when installed on Royal Bond copiers had the effect of increasing the copy speed from ten to twenty copies per minute. After installation of the speed-up kits, SSS began selling the modified copiers under the label "Royal Bond Mark I." The defendants in each case obtained such copiers generally in the manner set forth below.

Pursuant to the arrangement between CIT and SSS, SSS was furnished with sets of "lease agreement forms" and was provided instructions on the proper manner of completing those forms. CIT also provided SSS with a lease timetable, sets of UCC financing statements, and other documents. If CIT financing was to be utilized, it was expected that SSS would follow CIT's instructions in filling out the forms and SSS was aware of CIT's requirements in doing so. However, customers of SSS were not required to finance their purchases through CIT. Each had the option to arrange other financing or to pay cash. Ure testified that SSS had dealt with companies other than CIT in similar lease-financing arrangements.

When there was a prospective customer wishing to purchase a Royal Bond copier and desiring CIT financing, SSS personnel would fill out a lease application form with the customer's assistance, or would have it filled out by the customer who would return it to SSS to be forwarded to CIT. SSS would then collect from the customer and forward to CIT the first month's advance lease payment required under the lease. SSS would complete the UCC financing statement, secure the customer's signature, and forward it to CIT, and CIT would cause it to be filed with the secretary of state upon completion of the transaction. Upon receipt of the completed documents, CIT would conduct its own investigation of the customer, make a credit check, and decide whether to approve the transaction. If approved for financing, CIT would send SSS a purchase order and notify the customer of approval. SSS would then ship the copier to the customer, invoice CIT as the "purchaser," and CIT, after receiving acknowledgment of receipt of the equipment dated and signed by the customer together with assurance of the customer's then satisfaction with the machine, would issue its check to SSS in payment for the equipment.

The lease agreements were executed only by CIT and the customer, but clearly reflect CIT as "lessor," SSS as "seller," and the various defendants as lessee. " The lease agreements were irrevocable and the customers were obligated to pay a fixed amount per month over a period of sixty months. Payments under the lease were calculated to return to CIT the purchase price of the equipment plus sales tax and finance charges. Sales tax was paid by CIT. The lease provided that ownership of the equipment was to remain in CIT and, upon default, CIT had the option of declaring the entire obligation immediately due and payable. After all rentals to become due thereunder had been paid, lessee had the option to purchase the equipment for the sum of $1 or to renew the lease for annual periods at reduced rental. In addition, the lease contained the following clause:

"Lessor, not being the manufacturer of the equipment, nor manufacturer's agent, makes no warranty or representation, either express or implied, as to the fitness, quality, design, condition, capacity, suitability, merchantability or performance of the equipment or of the material or workmanship thereof, it being agreed that the equipment is leased 'as is' and that all risks, as between the Lessor and the Lessee, are to be borne by the Lessee at its sole risk and expense. Lessee accordingly agrees not to assert any claim whatsoever against the lessor based thereon. . . . Lessor shall have no obligation to install, erect, test, adjust or service the equipment."

In October, 1974, CIT discontinued its financing arrangements with SSS customers and SSS thereafter went into bankruptcy. Defendants experienced various difficulties with the machines, allegedly as a result of the installation of the "speed-up kits," and discontinued payments to CIT. These actions followed.

In summation, the record in this case reveals: (1) CIT had no personal contact with the defendants until shortly before these actions were commenced. (2) Negotiations for the sale and purchase of each Royal Bond Mark I copier were conducted between SSS and the various defendants. (3) The equipment ordered by defendants was delivered and installed by SSS and customer complaints were to be made...