State ex rel. Celebrezze v. Tele-Communications, Inc.

• Citation: 62 Ohio Misc.2d 405,601 N.E.2d 234
• Decision Date: 29 November 1990
• Docket Number: No. 89-08219-PR,TELE-COMMUNICATION,INC,89-08219-PR
• Parties: The STATE ex rel. CELEBREZZE, Atty. Gen., et al. v.*
• Court: Court of Claims of Ohio

Page 405

62 Ohio Misc.2d 405

601 N.E.2d 234

The STATE ex rel. CELEBREZZE, Atty. Gen., et al. v. TELE-COMMUNICATIONS, INC. ^*

No. 89-08219-PR.

Court of Claims of Ohio.

Decided Nov. 29, 1990.

Anthony J. Celebrezze, Jr., Atty. Gen., and Nancy J. Miller, Asst. Atty. Gen., Columbus, for plaintiffs

Carlile, Patchen & Murphy, Denis J. Murphy, Hakim B. Adjoua and Dennis J. Concilla, Columbus, for defendant.

RUSSELL LEACH, Judge.

This cause originates from a series of agreements purporting to be leases entered into between plaintiff Auditor of the state of Ohio and defendant Tele-Communications, Inc. ("TCI"). These agreements were executed on May 11, 1987, and provided that TCI would install a computer-aided telephone system in all of the offices of the Auditor. These phone systems were installed and payments were being made under the agreement. Additional installations also occurred.

Following a series of newspaper articles, plaintiff Attorney General apparently advised the Auditor that the agreements were, in substance, purchases and that they had been entered into without the required competitive bidding On April 28, 1989, plaintiffs commenced the present action with the filing of a five-count complaint in the Common Pleas Court of Franklin County. Defendant's answer included a multifaceted counterclaim that was followed by a petition for removal to this court. In essence, plaintiffs seek to void the agreement through any of several theories, i.e., that the transaction was a disguised conditional sale, that it was subject to competitive bidding and Controlling Board approval, that it violated the Ohio Constitution's ban on commitments beyond the two-year period, and that it was illegal for any of several other reasons which are discussed below.

or approval of the Controlling Board. The Auditor thereafter stopped all payments to TCI.

TCI's counterclaim asserts that the agreements are leases and were validly entered into, which facts, it is contended, the state is now estopped from denying. As its basis for recovery, defendant asserts that the Auditor is in breach of the agreement, entitling it to various contractual remedies, and, in the event the court holds for plaintiffs upon their assertions, that defendant has been the victim of fraud, conversion, breach of warranty, etc.

The trial commenced on May 7, 1990. Thereafter, the case was re-opened on plaintiffs' motion to receive transcripts of testimony from certain federal criminal proceedings. The case was closed and submitted on September 20, 1990. This cause is now determined upon all the evidence submitted by the parties.

A determination of this case shall begin by a resolution of the central point of contention throughout the proceedings, that is, whether the agreements were true leases or disguised conditional sales. Although there were three agreements actually executed, the language used in each is identical and so they shall be hereinafter referred to in the singular. At the time of this transaction, the applicability of laws regulating the acquisition of products and services by public agencies turned upon whether the acquisition was a "purchase." Once the agreement is properly classified, it is evaluated pursuant to the applicable law. Finally, the counterclaims are considered.

THE AGREEMENT

I

The determination in this case hinges greatly upon whether the agreement entered into by plaintiff Auditor of State and TCI constituted a true lease or was merely a disguised conditional sale. Plaintiffs repeatedly contended that a court must look to the substance of the agreement and to the intent of the parties, and not merely to the form of the agreement, in order to determine whether the parties created a lease or a conditional sale. Plaintiffs would have the court determine the intent of the parties by a review of their actions, statements, expectations and the asserted economic realities of the transaction, citing Bill Swad Leasing Co. v. Stikes (C.A.5, 1978), 571 F.2d 1361; State ex rel. Kitchen v. Christman (1972), 31 Ohio St.2d 64, 60 O.O.2d 42, 285 N.E.2d 362; Columbus Motor Car Co. v. Textile-Tech, Inc. (1981), 68 Ohio Misc. 25, 22 O.O.3d 354, 428 N.E.2d 882. A review of such extrinsic factors, it is contended, would convince the court that the agreement was not a true lease, but was a conditional sale, subject to all of the requirements of a purchase.

Plaintiffs actually seek to support two different legal conclusions by the suggested review of the transaction. On the one hand, they have asserted that the agreement was actually a conditional sale despite the appearance of the agreement, and therefore was an ultra vires transaction. On the other hand, they contend that such evidence proves that they have actually purchased the property at issue.

On these same issues, TCI asserts that the court is required to confine its analysis to the four corners of the document. It has pointed to the fact that the agreement refers to the parties as "lessor" and "lessee" throughout the writing, to payments as "rental payments," and that the agreement is, in form, a lease.

Insofar as determining the rights and obligations of the parties to an agreement, the law as enunciated in the parol evidence rule and the Statute of Frauds, excludes extrinsic evidence of the parties' intentions and "the writing alone shall be the sole repository of the terms of the agreement." Marion Production Credit Assn. v. Cochran (1988), 40 Ohio St.3d 265, 533 N.E.2d 325, paragraph four of the syllabus; Ameritrust Co. v. Murray (1984), 20 Ohio App.3d 333, 20 OBR 436, 486 N.E.2d 180; see, also, the plethora of cases set forth in 43 Ohio Jurisprudence 3d (1983), Evidence and Witnesses, Section 541, fn. 54.

The terms of the agreement speak for themselves as invocations of particular law; and plaintiffs cannot, in the guise of challenging the character of the agreement, seek, by way of mere parol evidence, to vary those terms to which the parties have agreed. See Cochran, supra, at Part III; Bowman v. Tax Comm. (1939), 135 Ohio St. 295, 14 O.O. 189, 20 N.E.2d 916. The question of ownership of the property at issue, as well as the other rights and obligations of the parties, can only be determined, absent fraud or illegality, by the document they have signed.

A different question is presented where the issue is the overall character of the document and whether an agreement, taken as a whole, is to be subject to a particular body of the law. Where the focus is not upon the rights and obligations of the parties as defined by the terms of the agreement but is instead upon the effect that inclusion of particular terms has upon the overall character of an agreement, then the parol evidence rule does not bind so securely. For example, evidence of the statements and conduct of the parties is often introduced to prove whether, under Uniform Commercial Code Section 1-201(37), an agreement was intended as security. (See the analysis which follows in Part III.) Thus, evidence of the existence of an oral purchase option would, regardless of the legal effectiveness of such option, indicate that the agreement was to provide a security interest. In this circumstance, the rights and obligations under the lease are secondary to the document's character as a security device, subject to the filing requirements of UCC Article 9.

In the present case, the concern is not whether a security interest has been created. Instead, the court must focus upon the overall character of the agreement. Whether the agreement is determined to be a lease or a disguised installment sale resolves several closely related and dependent issues. To this end, the court will consider all relevant factors bearing upon the character of the agreement, beginning with the agreement's own terms, then expanding into other indicators of the parties' intentions.

II

Both the conditional sale and the lease are ancient kinds of transactions and the legal distinction between the two has afforded substantially different remedies to the parties. See Leary, The Procrustean Bed of Finance Leasing (1981), 56 N.Y.U.L.Rev. 1061, 1065-1066, fn. 19, quoting III Gaius, Institutes of Roman Law (Whittuck Ed.1904), Section 146. In the modern age, leasing, like the installment sale, has become a widespread method of obtaining the use of various kinds of personal property.

The problems attendant to distinguishing a lease from certain installment sales are not new ones and the issue has been the subject of litigation in American courts for some time. See, e.g., Hervey v. Rhode Island Locomotive Works (1876), 93 U.S. 664, 23 L.Ed. 1003; Williston, The Law Governing Sales of Goods at Common Law and Under the Uniform Sales Act (1 Ed.1909), Sections 336, 338; Jones, The Law of Chattel Mortgages and Conditional Sales (5 Ed. Bowers Ed.1933), Sections 934-968.

A perusal of the literature indicates that this issue has arisen in a number of specialized legal contexts. Whether a transaction is a sale or a lease has affected the rights of the parties under the laws of taxation, secured transactions, bankruptcy, and the Truth In Lending Act. See, e.g., Claxton, Lease or Security Interest: A Classic Problem of Commercial Law (1977), 28 Mercer L.Rev. 599; Note, The Applicability of the Federal Truth In Lending Act To Rental Purchase Contracts (1980), 66 Cornell L.Rev. 118; Coogan, Is There a Difference Between A Long Term Lease And An Installment Sale of Personal Property? (1981), 56 N.Y.U.L.Rev. 1036; Hiller, Security Aspects of Chattel Leases in Bankruptcy (1966), 34 Fordham L.Rev. 439; Baskes, Tax Planning For Lease Transactions, 1972 U.Ill.L.F. 482. Also, accountants are required to notice the proper classification of a transaction, which may have an impact upon financial statements. See Financial Accounting Standards Board, Statement of Financial Accounting Standards No. 13--Accounting For Leases (Nov. 1976 and subsequent amendments).

The cumulative...