Transamerica Leasing Corp. v. Van's Realty Co.

• Citation: 427 P.2d 284,91 Idaho 510
• Decision Date: 02 May 1967
• Docket Number: No. 9788,9788
• Parties: TRANSAMERICA LEASING CORPORATION, a California corporation, Plaintiff-Respondent, v. VAN'S REALTY COMPANY, Inc., an Idaho corporation, Defendant-Appellant.
• Court: United States State Supreme Court of Idaho

Page 284

427 P.2d 284

91 Idaho 510

TRANSAMERICA LEASING CORPORATION, a California corporation, Plaintiff-Respondent, v. VAN'S REALTY COMPANY, Inc., an Idaho corporation, Defendant-Appellant.

No. 9788.

Supreme Court of Idaho.

May 2, 1967.

As Corrected May 10, 1967.

Scott W. Reed, Coeur d'Alene, for appellant.

Miller & Knudson, Coeur d'Alene, for respondent.

McQUADE, Justice.

This case concerns a lease of machinery by Skaggs Utah Leasing Corporation to Van Kleeck Creamery, Inc. With regard to the lease, appellant, Van's Realty Co., Inc., is successor in interest to Van Kleeck Creamery, and respondent, Transamerica Leasing Corporation, is successor in interest to Skaggs Utah Leasing Co. Western Frozen Products Co., Inc., not a party to this proceeding, ¹ built the machine. As the following statement of facts reveals, Van Kleeck assisted Western regarding the machine's construction, but the degree of Van Kleeck's participation and the nature of Van Kleeck's relation with Western is disputed. Western asked Skaggs to finance the venture by purchasing the machine from it when constructed, and then immediately to lease it to Van Kleeck. This was done, but the parties controvert whether Skaggs' role was only that of financial intermediary or whether Skaggs assumed responsibility for the machine's efficient operation. The machine, composed of a number of separate devices, was delivered by Western to Van Kleeck, whereupon Skaggs paid Western the purchase price and Van Kleeck began remitting monthly rent to Skaggs. The machine never operated properly and this action brought by Skaggs to recover rent from Van Kleeck must determine as between the successors of Van Kleeck and Skaggs which will bear the los. The pertinent facts are detailed hereinafter.

In early 1958, Harold Komberec and Harold Fiedler conferred with Royal Shields, then acting manager of Van Kleeck Creamery, in the creamery's Coeur d'Alene office, regarding the production and sale of a novelty ice cream confection, Froz-O-Log. ² Komberec and Fiedler showed Fields samples of the confection and a small machine, non-automatic in some of its operations, which produced the novelty food. After agreeing with Shields on a royalty payment plan, Komberec and Fiedler soon began manufacturing Froz-O-Logs in Van Kleeck's Coeur d'Alene plant, the creamery supplying some of the materials and marketing the finished product. The venture prospered and, as Royal Shields testified, 'eventually our demand grew to such an extent that the machine was not capable of producing enough logs.'

In the spring of 1960, Harold Ellison, a managing official of Western Frozen Products Co., Inc., met with Royal Shields in Van Kleeck's Coeur d'Alene plant concerning the construction of a larger and more efficient Froz-O-Log machine. This meeting followed up an earlier discussion during which Shields had told Ellison that Van Kleeck intended to expand its production of the confection. The managing officials of Western Frozen Products (who besides Harold Ellison were David Ellison and Harold Ellsworth) consulted with Komberec and Fiedler, who were then operating the original Forz-O-Log machine in Van Kleeck's plant, regarding the original machine's mechanical operation. Komberec and Fiedler, according to Fiedler's testimony, 'went with Western Frozen Products in an effort to develop an automatic equipment system.' Komberec's and Fiedler's business relation with Western was as follows, Fiedler testified:

'We (Komberec and he) did not have finances to handle a product like this (constructing a new, fully automatic machine) * * * therefore we had agreed with Western Frozen Products (that) * * * we would furnish to them the amount of research and development we had, the information we had and they would take it from there and furnish the funds in order to develop a piece of equipment that would meet the industry standard at that time.'

The project to develop a new, automatic Froz-O-Log machine was admittedly a speculative venture. The collaboration between Western Frozen Products and Komberec and Fiedler, according to Fiedler, 'was the first stage in development of an automatic machine' to make the confection. Fiedler also testified: 'there was speculation as to whether or not you could manufacture this type of automatic machine to manufacture Froz-o-Logs,' and the machine's construction was 'sort of a trial and error process.' Komberec testified that during 1960 the confection was a 'new innovation' and 'the equipment * * * used * * * was in the development stage' Royal Shields, who holds a college engineering degree, had been in the creamery business for at least twenty-five years by 1960 and during that year managed a business and interlocking operations with gross annual sales above one million dollars. Van Kleeck Creamery was constantly expanding, ampliying its products and services, during the late 1950's and early 1960's and Shields knew, he testified, that an automatic Froz-O-Log machine would be a 'new innovation.' Fiedler said he 'assumed' that Shields knew during early 1960 that a fully automatic Froz-O-Log machine had never been constructed.

Approximately one month after their first conference in the spring of 1960, Harold Ellison and Royal Shields again met a Van Kleeck's office in Coeur d'-Alene, at which time Ellison reported that he had procured a design for an automatic Froz-O-Log machine. In response to a question concerning the initial expense during its construction, Ellison immediately made outside inquiries about financing. A lease was offered by a third party but was unacceptable to Shields. Shortly thereafter, David Ellison and Harold Ellsworth, on behalf of Western Frozen Products, approached Lewis North, then president and the managing official of Skaggs Utah Leasing Co., to determine if Skaggs would consider issuing a lease on the new machine to Van Kleeck Creamery. Skaggs Utah Leasing Co. was at that time primarily a one-man operation, North being its only employee (although a credit committee had some control over prospective leases). The company leased a variety of items, including furniture and fixtures, cash registers, trailers and heavy duty machinery. The officials of Western Frozen Products gave him no description of the machanics in the new device, North testified, ³ nor did he inquire about the machine's operation. He was told only that the new machine would be specially built to make Froz-O-Logs. On behalf of Skaggs Utah Leasing Co. North told Western's officers, he testified, that 'we would be glad to consider it (a lease) based on the financial stabilization of' Van Kleeck Creamery.

Skaggs limited its investigation of the prospective lease to examination of Van Kleeck Creamery's financial position; no technical study was made of the machinery itself. This was Skaggs' normal procedure, for North testified, 'Our basis, of course, was handling the money. The machinery would be up to the manufacturer and the client, the manufacturer's client.' Skaggs' credit committee shortly determined to issue the lease to Van Kleeck and as a preliminary matter, on May 25, 1960, Skaggs granted Western Frozen Products an option to repurchase the Froz-O-Log machine at the end of the original lease which Skaggs was about to contract with Van Kleeck. This was at Western's request 'possibly to protect their franchise agreements' on the Froz-O-Log product, North suggested.

Skaggs never had any direct contact with Van Kleeck's; all of Skaggs' business regarding issuance of the lease was arranged with the officials of Western. In response to questions by respondent's attorney, North described Skaggs' usual conduct regarding communication with the lessee before issuing a lease:

'Q. In regard to contacting the lessee, who has arranged the transaction insofar as equipment is concerned, the manufacturer?

'A The manufacturer, supplier of the equipment.

'Q Insofar as equipment or machinery, whichever is being leased, that is the arrangement between the lessee and the manufacturer?

'A Yes.

'Q After the manufacturer and the lessee have come to their arrangement or their agreement, then you buy the equipment from the manufacturer and lease it to the lessee?

'A Yes, that is correct.

'Q This is your usual and normal way of doing business?

'A That's correct.

'Q You don't buy it until the lessee has stated he accepted the equipment from the manufacturer?

'A That is correct.

'Q This is the normal way you do this business?

'A Yes, sir.'

On June 4, 1960, Harold Ellison and Ellsworth of Western Frozen Products brought the lease, in Ellsworth's private plane, to the Van Kleeck Creamery in Coeur d'Alene. Royal Shields and Arvid Johnson, president of Van Kleeck Creamery, Inc., there signed the lease and a corporate guarantee which Shields made out for a maximum of $35,000, the amount on which Skaggs and Western had agreed and which formed the basis for computation of rent payments in the lease. A franchise agreement for the manufacture, production and marketing of Froz-O-Logs was simultaneously entered between Shields for Van Kleeck ('Licensee'), and Harold Ellison for Western ('Licensor'). Four areas in the western states were delineated and the agreement gave Van Kleeck immediate right to produce and market in one area with an option on each and all of the remaining areas. The franchise agreement recited 'the Licensor (Western) has leased to the Licensee (Van Kleeck) one model 80 Froz-o-Log freezer machine * * * for the purpose of servicing Distribution Area No. 1,' and the option agreement provided that if Van Kleeck sought to exercise an option for any or all of the other three areas, it had to 'lease from the Licensor (Western) a Froz-o-Log freezer machine or machines capable of producing 500 dozen Froz-o-Logs per hour' for each optioned area, which 'lease of said Forz-o-Log machine shall be in all respects the same as the lease of the Forz-o-Log machine heretofore leased by the...