Leasing Service Corp. v. River City Const., Inc.
| Decision Date | 09 October 1984 |
| Docket Number | No. 83-7545,83-7545 |
| Citation | 743 F.2d 871 |
| Parties | 39 UCC Rep.Serv. 1054 LEASING SERVICE CORPORATION, Plaintiff-Appellee, v. RIVER CITY CONSTRUCTION, INC., and Welborn Dent, Defendants-Appellants. |
| Court | U.S. Court of Appeals — Eleventh Circuit |
Stanley Bynum, Birmingham, Ala., for defendants-appellants.
Alan W. Heldman, Michael L. Hall, Johnston, Barton, Proctor, Swedlaw and Naff, Birmingham, Ala., for plaintiff-appellee.
Appeal from the United States District Court for the Northern District of Alabama.
Before HILL and HENDERSON, Circuit Judges, and WISDOM *, Senior Circuit Judge.
Chatham Machinery, Inc. leased two large cranes to River City Construction Company, the defendant-appellant in this diversity action. Chatham assigned the lease to Leasing Service Corporation, the plaintiff-appellee. When River City, lessee, defaulted on the lease, Leasing Service repossessed the equipment, sold it, and brought this suit for a deficiency judgment against the lessee. The district court entered judgment in favor of Leasing Service. River City appeals, arguing that Leasing Service did not meet the requirements of a holder in due course and was subject to an alleged defense against the original lessor; that the sale of the repossessed equipment was not commercially reasonable; and that Leasing Service was not entitled to collect "unearned or unaccrued interest" upon the acceleration of the balance owed. We affirm, with modification, the district court's judgment for Leasing Service.
River City installs prefabricated steel products in construction projects in Georgia, Alabama, and Mississippi. Its offices and the residence of its sole shareholder and president, Mr. Welborn Dent, are located in Birmingham, Alabama. In 1979, the company began leasing two heavy duty truck cranes from Chatham Machinery, Inc. In early 1980, Chatham's main creditor, which held the title to the equipment in question and to much of Chatham's inventory, began to press for repayment. In the spring of 1980, Theodore Shearouse, an employee of Chatham, asked Dent to transfer the financing on the two cranes to Leasing Service. The purported benefits for River City were lower monthly terms and a longer "payout period". Shearouse testified that he told Dent, "in the event that River City was unable to make a payment or payments on either crane, there would be no claim for a deficiency brought by anyone either against River City or Mr. Dent": Chatham would simply sell off the cranes in the event of nonpayment (Shearouse Aff. at 3).
In July 1980, Chatham and River City entered into a written equipment lease that Leasing Service had prepared. Dent personally guaranteed the rental payments. This lease agreement was then immediately assigned to Leasing Service. The agreement called for an initial payment ("advance rent") of $105,163, an immediate rental payment of $7500, and monthly "installments" of $7500 thereafter for 77 months. The "Total Rent" thus came to $690,163. Under the terms of a separate agreement, River City had the option to purchase the equipment at the end of the lease's term for $40,300.
Unlike River City's prior agreement with Chatham, which called only for the delinquent rent and fifteen percent of that amount as attorney's fees in the event of default, the densely worded form contract prepared by Leasing Service contained a panoply of creditor's remedies: an acceleration clause, a liquidated damages provision for 15% of the total rent, a provision for attorney's fees of 20% of "any amount sought", waiver of trial by jury, appointment of attorney-in-fact for service, confession of judgment ("except in any jurisdiction where such action is not permitted by law"), and waiver or release from any appraisal, stay, or exemption laws. Late charges of 1/15th of one percent per day (24% annually) were due on "delinquent" payments.
River City made the required payments from August 1980 through July 1981 and then defaulted. As permitted by the lease, Leasing Service repossessed the equipment in October 1981. It then disposed of the equipment at a public auction in Birmingham on December 1, 1981. Before the auction, Leasing Service published notice of the sale in the Birmingham News, the Decatur Daily, and a trade magazine; it also notified River City and Dent of the sale by certified mail on November 19, 1981. Welborn Dent attended the sale. The two pieces of equipment brought a total of $330,000. Expenses of the sale were $372.49.
After the sale, Leasing Service attempted to collect the outstanding balance and various fees and damages from River City. On July 29, 1982, Leasing Service sued in the Southern District of New York for the amount River City allegedly owed. On motion by River City, Judge Weinfeld transferred the action to the Northern District of Alabama. On the plaintiff's motion for summary judgment, the district judge held that there were no issues of material fact, and awarded Leasing Service judgment against River City for $304,185. 1
River City raised numerous affirmative defenses in the district court. It now urges that the district court erred in dismissing these defenses. We consider each in turn.
If the action had remained in the Southern District of New York, that court would have applied New York's choice of law rule. Erie v. Tompkins, 1938, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188. The transfer pursuant to 28 U.S.C. Sec. 1404(a) did not change the choice of law to be applied. Van Dusen v. Barrack, 1964, 376 U.S. 612, 84 S.Ct. 805, 11 L.Ed.2d 945. In New York, the main factor in determining which law to apply is the express intention of the parties. Reger v. National Association of Bedding Mfrs., 1975, 83 Misc.2d 527, 372 N.Y.S.2d 97; U.C.C. Sec. 1-105. This contract provided that the "enforceability and effectiveness of each provision shall be determined by the law of the state of residence or principal place of business of Lessee [Alabama] or Lessor [New York] or the original lessor [Georgia], whichever may render each such provision effective". Because New York, Alabama, and Georgia all would have upheld the contract provisions, New York law applies, as correctly determined by the district court.
The defendants argue that Chatham perpetuated fraud when Dent executed the July 1980 agreement and that this fraud constitutes a defense against Leasing Service. Specifically, River City contends that Shearouse, acting for Chatham, represented that River City would not be liable to Leasing Service in the event of default: Leasing Service allegedly was "on recourse" with Chatham; in the event of River City's default, Chatham would repossess the equipment and make good any deficiency to Leasing Service. Dent also contended that Shearouse showed him a "recourse agreement" between Chatham and Leasing Service. The defendants were unable to obtain this document through discovery. If proven, this fraud would constitute a defense against Chatham. River City now seeks to assert that defense against Leasing Service.
The assignee of a non-negotiable chose in action or of an unendorsed negotiable note payable to order takes it subject to all defenses which the obligor may have had against the assignor, even though he buys it for value and in good faith. This general rule, however, must yield when the nature or terms of the contract show that it was to be assigned free from such equities. An assignee and a buyer or lessee can contractually agree that the buyer or lessee will not assert any claim he may have against the seller or lessor. See U.C.C. Sec. 9-206.
In the instant case, the first term of the contract between Chatham and River City waived the defense that River City now asserts:
"Lessee further acknowledges notice of the intended assignment of this lease to [Leasing Service] and upon such assignment, Lessee agrees not to assert against the Lessor and any subsequent Assignee any defense, setoff, recoupment, claim or counterclaim which Lessee may have against the original lessor...."
Because of the great protection these waivers afford an assignee, 2 they are valid only if the assignee takes the assignment for value, in good faith, and without notice of any claim or defense. These are the Code's requirements for the status of a holder in due course. See Ala.Code Sec. 7-9-206(1); Ga.Code Ann. Sec. 109A-9-206(1); N.Y.U.C.C. Sec. 9-206(1) (McKinney's 1964). Thus, although the waiver of defense clause may effectively grant the assignee the same protection as a holder in due course, the assignee enjoys such protection only when he meets the tests for a true holder in due course. International Harvestor Credit Corp. v. Hill, M.D.Tenn. 1979, 496 F.Supp. 329; First New Eng. Fin'l Corp. v. Woffard, Fla.1982, 421 So.2d 590. That the agreement here was a lease rather than a true negotiable instrument does not preclude the assignee's enjoying the status of a holder in due course. United Counties Trust Co. v. Mac Lum, Inc., 5 Cir.1981, 643 F.2d 1140, 1144; Banker's Trust Co. v. Litton Systems, Inc., 2 Cir.1979, 599 F.2d 488, 491. River City must therefore show either that Leasing Service is not entitled to the status of a holder in due course or that there is a "real" defense that would lie against even a holder in due course.
River City argues that Leasing Service is not entitled to the status of holder in due course because of an alleged lack of good faith in taking the assignment. River City contends that there are close connections between Chatham and Leasing Service (Chatham used a form from Leasing Service for its lease and assignment) and that Chatham's immediate assignment to Leasing Service precludes a finding of good faith. Rehurek v. Chrysler Credit Corp., Fla.App.1972, 262 So.2d 452; Commercial Credit Co. v....
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