FMC Finance Corp. v. Murphree

Decision Date08 December 1980
Docket NumberNo. 78-1834,78-1834
Citation632 F.2d 413
Parties30 UCC Rep.Serv. 496 FMC FINANCE CORPORATION, Plaintiff-Appellee, v. Albert D. MURPHREE, Jr. and Dorothy E. Murphree, Defendants-Appellants.
CourtU.S. Court of Appeals — Fifth Circuit

Charles C. Jacobs, Jr., John Kirkham Povall, Cleveland, Miss., for defendants-appellants.

Lake, Tindall, Hunger & Thackston, Charles S. Tindall, III, W. Wayne Drinkwater, Jr., Greenville, Miss., for plaintiff-appellee.

Appeal from the United States District Court for the Northern District of Mississippi.

Before TUTTLE, AINSWORTH and SAM D. JOHNSON, Circuit Judges.

SAM D. JOHNSON, Circuit Judge:

Plaintiff FMC Finance Corporation (FMC Finance) brought this diversity action to enforce an unconditional personal guaranty contract of payment against the defendant guarantors, Albert D. Murphree, Jr., and Dorothy Murphree. The guaranty contract covered payment of monies that a closely held Georgia corporation, Perimeter Express, Inc., owed to FMC Finance under a lease agreement. At the close of the defendants' presentation of their evidence, the district judge granted FMC Finance's motion for a directed verdict. After entry of the judgment, the defendants filed and the district court denied a motion for a new trial.

Under the standard for review of directed verdicts, this Court affirms the judgment of the district court that the lease clause disclaiming any express warranties and disclaiming any implied warranties of merchantability and fitness for a particular purpose by FMC Finance is not inconspicuous and is thus valid. This Court reverses, however, the judgment of the district court that FMC Finance and its parent, FMC Corporation, are separate corporations under the "piercing the corporate veil" doctrine. On remand, the district court is to submit the issue of corporate separateness to the jury. If the jury finds that FMC Finance and FMC Corporation are the same corporate entity under the piercing the corporate veil doctrine, then the court shall reach the additional issues of whether FMC Corporation breached its express manufacturer's warranty of repair and replacement, and if so, whether the defendants as guarantors can assert the breach as a defense against FMC Finance in this suit on the guaranty.

I. Summary of the Facts

In 1974 representatives of Perimeter Express, Inc., a closely held Georgia corporation, executed a lease agreement with FMC Leasing Corporation (FMC Leasing), a wholly owned subsidiary of FMC Finance, on six buses for its shuttle service. Perimeter's stockholders included defendant Albert D. Murphree, Jr., a farmer and experienced businessman who provided the majority of the initial capital for Perimeter Express.

The shareholders had contacted the local distributor for the Motor Coach Division of FMC Corporation. This local dealer was able to locate and secure the purchase from other dealers of six demonstrator buses. The buses were the first manufactured by FMC Corporation in its attempt to convert its recreational vehicle line of business into a mass transit line of business. On the suggestion of the Motor Coach Division, the local dealer in Atlanta contacted FMC Corporation's wholly owned subsidiary, FMC Finance, concerning purchase financing, and arranged a meeting between the Perimeter Express representatives and the FMC Finance representatives at FMC Finance's corporate offices. After negotiations, the parties agreed to finance the buses through a leasing arrangement. FMC Finance provided the funds for FMC Leasing to purchase the six buses from the local dealer.

Perimeter Express as lessee agreed to pay FMC Leasing as lessor a monthly rental for thirty-six months with the right to purchase the six buses at the end of the lease term upon payment of an additional month's rent. In addition, to provide security for the financing, the Murphrees executed in favor of FMC Finance a personal unconditional guaranty of the lease obligation of Perimeter Express. During the negotiations leading to the lease agreement, FMC Finance officials telephoned the Motor Coach Division of FMC Corporation to discuss the suitability of the buses for the proposed shuttle service, the anticipated useful life of the buses, and the need for a suitable maintenance program to be followed by Perimeter Express. As a result of that discussion, FMC Finance inserted into the lease agreement a maintenance supervisory clause giving FMC Corporation's Motor Coach Division the right to approve and inspect the maintenance programs of Perimeter Express and, if the program fell below certain standards, the right to repossess the buses. Additionally, the lease expressly disclaimed all express and implied warranties including warranties of merchantability and fitness for a particular purpose. FMC Corporation as manufacturer issued an express warranty of repair or replacement on four of the six buses, and these manufacturer's warranties were assigned by FMC Leasing to Perimeter Express. Finally FMC Corporation executed a remarketing agreement with FMC Finance: if Perimeter Express defaulted on its lease obligation, FMC Finance had the option to make FMC Corporation pay off the remaining unpaid lease balance and bear the costs of repossession and remarketing.

In 1975, apparently dissatisfied with the performance of the buses, Perimeter Express defaulted on its lease obligation and subsequently returned the buses to the local distributor of FMC Corporation. After FMC Finance gave notice and demand for payment to Perimeter Express and the Murphrees, FMC Leasing assigned the lease to FMC Finance. FMC Finance then declared all unpaid monthly rentals immediately due and payable, and after this demand was refused FMC Finance sold the buses and sued Perimeter Express and the Murphrees for the deficiency in the United States District Court for the Northern District of Georgia. The suit against the Murphrees was dismissed for lack of in personam jurisdiction; Perimeter Express then filed a petition in bankruptcy.

After Perimeter Express was discharged from all its debts, FMC Finance instituted suit on the personal guaranty of the Murphrees in the United States District Court for the Northern District of Mississippi. The Murphrees alleged that the lease disclaimer of warranties was invalid because it was not conspicuous, and therefore asserted against FMC Finance the defense of breach of implied warranties. The Murphrees also contended that FMC Corporation's Motor Coach Division acted as agent of FMC Leasing and FMC Finance when the Motor Coach Division refused to honor the express-warranty-of-repair-or-replacement claims of Perimeter Express. By counterclaim the Murphrees made the related argument that FMC Leasing, FMC Finance, and FMC Corporation had entered into a joint venture. 1 FMC Finance argued that the disclaimer was conspicuous, and that FMC Corporation and FMC Finance were separate corporations. The district court granted FMC Finance's motion for directed verdict on these grounds.

II. Law to Be Applied

Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), requires federal courts when sitting in diversity to apply the law of the forum state. A federal court in a case governed by the Erie doctrine is also required to apply whatever conflict of laws rules would be applied by the forum state. Klaxon Co. v. Stentor Electric Manufacturing Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941).

The parties agree that the issues presented on appeal are governed by Illinois law. The lease contract itself provided that it was to be governed by Illinois law. Mississippi, the forum state for this case, recognizes that parties may legitimately control the choice of substantive law in a contract dispute as long as the state law selected bears a reasonable relation to the transaction. United States v. Biloxi Municipal School District, 219 F.Supp. 691, 695 (S.D.Miss.1963), aff'd sub nom. United States v. Madison County Board of Education, 326 F.2d 237 (5th Cir. 1963); Miss.Code Ann. § 75-1-105(1) (1972). See also Dunavent Enterprises, Inc. v. Ford, 294 So.2d 788, 791 (Miss.1974). Because of the sufficient contacts of this case with Illinois, 2 the lease contract validly invokes Illinois law.

III. Validity of Warranty Disclaimer
A. Disclaimer Conspicuousness

Illinois has adopted the Uniform Commercial Code and applies selected provisions of the U.C.C. to equipment leases. Walter E. Heller & Co. v. Convalescent Home of the First Church of Deliverance, 49 Ill.App.3d 213, 8 Ill.Dec. 823, 365 N.E.2d 1285, 1289 (1977). The warranty disclaimer provisions of Ill.Ann.Stat. ch. 26, § 2-316 apply to equipment leases when the Illinois U.C.C. implied warranties are found applicable. Walter E. Heller, 8 Ill.Dec. at 828, 365 N.E.2d at 1290. Assuming without deciding that the U.C.C. implied warranties of merchantability and fitness for a particular purpose apply to this case, section 2-316(2) of the Illinois U.C.C. thus controls whether the warranty disclaimer in the lease agreement is valid. 3

Section 2-316(2) provides that for a written disclaimer of the implied warranties to be valid, the disclaimer language must be "conspicuous." Section 1-201(10) defines a conspicuous writing as one that a reasonable person against whom it is to operate ought to have noticed. It further provides that a printed heading in capitals is conspicuous, and that language in the body of a form is conspicuous if it is in larger or other contrasting type or color. 4 The concept of conspicuousness is thus one of reasonable notice-whether the writing would have invited the attention of a reasonable person. Alan Wood Steel Co. v. Capital Equipment Enterprises, Inc., 39 Ill.App.3d 48, 349 N.E.2d 627 (App.Ct.1976); U.C.C. § 1-201, Official Comment 10.

Disclaimers of implied warranties are not favored by Illinois courts and are strictly construed against sellers. Overland Bond & Investment Corp. v....

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