Patriot General Life Ins. Co. v. CFC Inv. Co.

Decision Date26 May 1981
Citation11 Mass.App.Ct. 857,420 N.E.2d 918
CourtAppeals Court of Massachusetts

Roberta L. Paris, Framington, for plaintiff.

Richmond T. Edes, Concord, for defendant.

Before HALE, C. J., and BROWN and KASS, JJ.

KASS, Justice.

When computer hardware and software supplied to the plaintiff, Patriot General Life Insurance Company (Patriot), by Asyst, Inc. (Asyst), no longer functioned, Patriot suspended monthly payments to the equipment lessor, CFC Investment Company (CFC). On the basis of the text of the equipment lease, as well as the factual circumstances, we hold that the equipment lessor is not liable for the malfunction of the computer equipment package, and that the equipment lessee is liable for the balance of payments due under the equipment lease.

Asyst first approached Patriot in February, 1973, with a proposition for a package of computer hardware (i. e., electronic equipment, printers, specialized typewriter, specialized desk enclosure) and software (i. e., a specialized computer language and computer programs) designed to produce sales illustrations and sales proposals with which to woo prospective customers for life insurance policies. Patriot was interested and negotiations followed. Prophetically, in view of what later transpired, Patriot evinced concern about how it could use the Asyst program should Asyst go out of business. Asyst met this concern with a letter of May 18, 1973, in which it agreed that, "Asyst will initiate procedures to place in trust source, object and documentation information so that Patriot General could continue to maintain and service its system in the event Asyst ... should discontinue operations." It is not unfair to remark that the extract just quoted appears to be written in neither English nor COMAT, the computer language which Asyst had devised. With the help of testimony taken at trial, we understand that Asyst proposed to place the key to its language, COMAT, and programs devised for Patriot in knowledgeable, but not piratical, hands which would use the material only in the event Asyst vanished from the field. Unless its user talked COMAT to the computer, the computer would not talk sense to Patriot.

On June 11, 1973, Patriot and Asyst signed an agreement describing what Asyst would furnish to Patriot, and the business terms of the deal. The agreement described a purchase price of $35,823 for the package but indicated an intent by Patriot to use an equipment lease "to pay Supplier (Asyst) for use of Equipment." Asyst warranted that "the hardware ... will be operational at (the) time of installation and fit for the purpose of running of the software."

Asyst arranged that CFC would buy the computer package and lease it to Patriot. As of November 29, 1973, CFC made a lease of the equipment to Patriot for five years at a monthly rent of $763. The equipment lease contained an express provision that, "Lessor shall have no liability to Lessee in the event any supplier, manufacturer or one or more others fail(s) to perform any obligations at any time due to Lessor and/or Lessee." Immediately above the signature block of the lease there also appeared, typed entirely in capital letters for emphasis, a disclaimer of warranties of any kind by the lessor of "the condition of the equipment, its merchantability, (or) the fitness of the equipment for a particular purpose," and the reservation to the lessee of any rights it might have against the supplier of the equipment.

A letter to Patriot dated May 7, 1976, made the unsettling announcement that "Asyst is undergoing reorganization," service on the Asyst computer packages had been discontinued, and would be resumed following "reorganization" and the formation of a new corporation. Nothing in fact happened and the computer system which Patriot had purchased became mute and useless. Patriot notified CFC in December, 1976, that it was terminating the lease and would ship back the equipment. After Patriot returned the equipment the next month (January, 1977), CFC billed Patriot $11,552, an amount which was seventy percent of the remaining lease payments. 1

Patriot refused to make any further payments and, instead, filed a complaint for a declaratory judgment, to which CFC responded with an answer and a counterclaim. After trial without a jury, a judge of the Superior Court determined that Patriot was liable to CFC under the equipment lease, found the damages and entered judgment for CFC in the amount of $17,116. 2

Patriot has argued that its agreement with Asyst and the equipment lease with CFC are so intertwined as to constitute an indivisible contract, that Asyst and CFC were joint venturers and that, therefore, Asyst's failure excused Patriot from performance of its obligation under the equipment lease.

We have had occasion recently in Eastern Elec. Co. v. Taylor Woodrow Blitman Constr. Corp., --- Mass.App. ---, --- - ---, a 414 N.E.2d 1023 (1981), to review the cases in Massachusetts, and some of the literature, concerning joint ventures. The disparate roles which Asyst and CFC played, the former as supplier of materials and services, the latter as financier, do not suggest a joint venture. There was no sharing in profits, no joint interest in particular assets, and no joint control of performance. Air Technology Corp. v. General Elec. Co., 347 Mass. 613, 625, 199 N.E.2d 538 (1964). See Berwin v. Cable, 313 Mass. 431, 435, 47 N.E.2d 951 (1943); Kleinschmidt v. United States, 146 F.Supp. 253, 256 (D.Mass.1956). There was no pooling of proceeds received from Patriot for distribution to Asyst and CFC should there be any net profits. Rather Asyst and CFC each received their respective payments from Patriot pursuant to the agreement which each had with Patriot. Indeed, insofar as there was a profit to be made on the sale of the computer package, Asyst earned it by selling the goods to CFC so that CFC, in turn, could lease the package to Patriot.

Tax and accounting considerations have caused a considerable burgeoning in the volume of equipment leasing. Coogan, Leases, of Equipment and Some Other Unconventional Security Devices: An Analysis of UCC Section 1-201(37) and Article 9, 1973 Duke L.Rev. 909. Reisman, Drafting and Negotiating the Equipment Lease, in Equipment Leasing-Leveraged Leasing 1, 4-7 (Fritch & Reisman ed. 1977). Commentators have categorized equipment lessors as merchant-lessors, who deal in goods and hold themselves out as having specialized knowledge about the design, operation and repair of the chattel leased, 3 and finance-lessors, whose service is to provide funds and who are not merchants. 4 Carlin, Product Liability for the Equipment Lessor? Merchant-Lessor Versus Finance-Lessor, in Equipment Leasing-Leveraged Leasing 565, 566 (Fritch & Reisman ed. 1977). In the instant case, Asyst designed the computer package and undertook to service it; CFC provided money only and disclaimed any responsibility for the working of the product. It is apparent to us that CFC's status was that of a finance-lessor. 5 See Holmes Packaging Mach. Corp. v. Bingham, 252 Cal.App.2d 862, 873-874, 60 Cal.Rptr. 769 (1967); All-States Leasing Co. v. Ochs, 42 Or.App. 319, 335-336, 600 P.2d 899 (1979).

In arguing the indivisibility of the sales contract and the equipment lease, Patriot stresses: (1) references in the equipment lease to the role of Asyst in servicing the equipment; (2) the appending to the lease of the description of the equipment which appeared in the agreement between Patriot and Asyst; (3) that all three parties signed an "exhibit" which gave Patriot a cancellation privilege (of the lease and the agreement) upon sixty days' notice, return of the equipment, and payment of seventy percent of the balance of the lease payments; and (4) that CFC and Asyst acted together on approximately eleven similar arrangements. That the equipment lease would incorporate property descriptions and take into account aspects of the underlying deal between Asyst and Patriot is hardly to be wondered at. The same drafting device appears in other forms of financing paper such as construction mortgages. As to the fact that CFC and Patriot often worked in tandem, it is scarcely uncommon that a vendor of real or personal property recommends a source of financing. See All-States Leasing Co. v. Bass, 96 Idaho 873,...

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