Vesta State Bank v. Independent State Bank of Minnesota

• Decision Date: 30 June 1994
• Docket Number: No. C6-93-150,C6-93-150
• Citation: 518 N.W.2d 850
• Parties: 24 UCC Rep.Serv.2d 553 VESTA STATE BANK, et al., Respondents, v. INDEPENDENT STATE BANK OF MINNESOTA, Defendant and Third-Party Plaintiff, Petitioner, Appellant, Clayton Management, Inc., et al., Third-Party Defendants, Respondents.
• Court: Minnesota Supreme Court

Page 850

518 N.W.2d 850

24 UCC Rep.Serv.2d 553

VESTA STATE BANK, et al., Respondents, v. INDEPENDENT STATE BANK OF MINNESOTA, Defendant and Third-Party Plaintiff, Petitioner, Appellant, Clayton Management, Inc., et al., Third-Party Defendants, Respondents.

No. C6-93-150.

Supreme Court of Minnesota.

June 30, 1994.

Rehearing Denied Sept. 12, 1994.

J. Patrick McDavitt and John Troyer, Briggs and Morgan, P.A., Minneapolis, for appellant.

Clarance E. Hagglund and Britton D. Weimer, Hagglund & Weimer, Minneapolis, for respondents.

Gary F. Albrect, Christoffel & Elliott, St. Paul, for third party defendants Clayton Management, Inc.

Syllabus by the Court

1. A transaction for the sale of an agricultural combine and an accompanying lease constitutes a sale of goods, and not the provision of services, and therefore is subject to the Uniform Commercial Code's four-year statute of limitations.

2. Settlement of an action to enforce a personal guaranty is not a bar to a later action against other parties based on their fraudulent misrepresentation as to the value of the guaranty and the financial reliability of the guarantor.

Heard, considered and decided by the court en banc.

OPINION

GARDEBRING, Justice.

This case involves a lawsuit brought by a lessor of agricultural equipment against parties involved in the development of the lease, after default by the lessee. We are asked to decide whether the purchase of an agricultural combine, along with the lessor's interest in the accompanying lease, is the sale of goods or the provision of services. We conclude that this transaction is a sale of goods; therefore, the Uniform Commercial Code's (U.C.C.) four-year statute of limitations governs the claim. We reverse the court of appeals' decision to the contrary. In addition, we affirm the court of appeals' holding that acceptance of a settlement on a personal guaranty does not bar a subsequent suit against other parties that alleges misrepresentation as to the value of the guaranty and the financial reliability of the guarantor. 506 N.W.2d 307.

In November 1981, respondent Vesta State Bank of Minnesota and State Bank of Belview (collectively "Vesta") jointly entered into an agreement with Lease Resources Corporation ("Lease Resources") for the purchase of an agricultural combine and the lessor's interest in an accompanying lease. Lease Resources originated the sale of the combine and lease, prepared the lease documentation, purchased the equipment, entered into a lease with Wendell Klockmann & Sons, Inc. ("Klockmann & Sons"), and then sold the combine and accompanying lease to Vesta. Independent State Bank of Minnesota ("Independent") acted as a broker, arranging for Vesta to engage in the transaction with Lease Resources, and for Clayton Management, Inc. ("Clayton") to manage the lease. ¹ Clayton prepared the bill of sale and serviced the lease, collecting rental payments and remitting them to Vesta.

Under the lease terms, Vesta was assigned the lessor's interest in the combine under a five-year lease to Klockmann & Sons. The lessee was obligated to make payments in the total amount of approximately $141,000 and to purchase the combine for $19,600 at the end of the lease. In connection with the lease, Wendell Klockmann ("Wendell"), president of Klockmann & Sons, executed a written guaranty, guaranteeing payment and performance of the lease.

In 1983, Klockmann & Sons defaulted on the lease. Clayton, acting as Vesta's agent, sued Klockmann & Sons in California in 1984 to replevin the combine. Clayton obtained possession of the combine and sold it in 1987 for $22,000. For $25,000, Vesta settled claims against Wendell individually to enforce his guaranty. ²

Vesta filed suit against Independent in Minnesota in April of 1987, alleging that Independent had misrepresented both that the lease was individually guaranteed by Wendell and that Wendell had assets in excess of $2 million. Vesta sought to rescind the transaction and claimed damages for out-of-pocket losses. Independent filed a third-party complaint against Clayton and Lease Resources in July of 1987.

In November of 1987 and again in March of 1988, based on discoveries made as a result of the California litigation, Vesta moved to amend its complaint to assert additional tort and contract claims, including a fraud claim. The trial court denied both motions, the first on the basis that the amended complaint lacked the acknowledgment language required by Minn.Stat. § 549.21 (1986) and that fraud was not pleaded with particularity, and the second on the basis that the amended complaint was barred by the U.C.C.'s four-year statute of limitations.

In September of 1992, Independent moved for summary judgment on the claims in Vesta's original complaint, all of which related to the reliability of Wendell's personal guaranty. Independent argued that Vesta's claims were barred by U.C.C.'s four-year statute of limitations, that Vesta was barred by the election of remedies doctrine because it had settled with Wendell on the guaranty issue in the California lawsuit, and that Wendell's guaranty was enforceable. The trial court granted Independent summary judgment on the election of remedies theory, but denied summary judgment on the alternative grounds that Vesta's complaint was time-barred or that Wendell's guaranty was enforceable. Vesta appealed both the denial of its motions to amend the complaint and the trial court's grant of summary judgment.

The court of appeals held that the predominant purpose of the transaction was the sale of services, not goods, and that therefore Vesta's claims were not time barred. The court of appeals further held that the trial court erred in denying both Vesta's requests to amend the complaint. Finally, the court of appeals reversed the trial court's holding that Vesta's claims were barred by the doctrine of election of remedies because the California suit involved different parties and alleged different wrongs.

We are asked here to determine whether any of Vesta's claims properly remain before the trial court, or whether they are barred either by the U.C.C.'s four-year statute of limitations or by the election of remedies doctrine. Neither party challenges the court of appeals' determination that the trial court erred in denying appellant's first motion to amend the complaint. Further, the second amendment was denied on the basis of the application of the U.C.C.'s four-year statute of limitations, which we conclude may not bar the fraud-based claims alleged in the amendments. Therefore, we review this matter taking into account the complaint and both the first and second amendments.

The role of this court in reviewing summary judgment is to determine whether there are any genuine issues of material fact and whether the trial court erred in its application of the law. Wartnick v. Moss & Barnett, 490 N.W.2d 108 (Minn.1992). Summary judgment is properly granted when there is no genuine issue as to any material fact and one party is entitled to judgment as a matter of law. Minn.R.Civ.P. 56.03 (1994).

We are first called upon to determine which statute of limitations applies to Vesta's claims, the U.C.C.'s four-year limit, which governs actions involving the sale of goods, or the more general statute of limitations applicable to the provision of services. Section 2-102 of the U.C.C. specifies that the U.C.C. "applies to transactions in goods." Minn.Stat. § 336.2-102 (1992). The applicable statute of limitations for such "transactions in goods" is provided in Minn.Stat. § 336.2-725 (1992):

1) An action for breach of any contract for sale must be commenced within four years after the cause of action has accrued. By the original agreement the parties may reduce the period of limitation to not less than one year but may not extend it.

(Emphasis added). The more general statute of limitations applicable to transactions involving services is six years, according to Minn.Stat. § 541.05, subd. 1(1) (1992).

However, the transaction in this case involves both goods and services. We use the "predominant purpose" test to determine when Article 2 of the U.C.C. applies to hybrid transactions that involve both the sale of goods and the provision of services. Valley Farmers' Elevator v. Lindsay Bros., 398 N.W.2d 553, 556 (Minn.1987), overruled on other grounds by Hapka v. Paquin Farms, 458 N.W.2d 683 (Minn.1990); McCarthy Well Co. v. St. Peter Creamery, Inc., 410 N.W.2d 312, 315 (Minn.1987). Under the predominant purpose test, a hybrid transaction is classified according to its dominant characteristic. Valley Farmers', 398 N.W.2d at 556; McCarthy, 410 N.W.2d at 315.

What then is the dominant characteristic of this hybrid transaction? Vesta argues that the entire purpose behind its purchase of the combine and lease was to obtain investment services and income, and that it had no interest in possessing or using or owning the combine at the end of the lease period. In support of this argument it points to certain characteristics of the transaction: first, that Vesta obtained a contingent rather than absolute ownership interest in the combine; second, that Vesta was not involved in selecting the combine; and third, that "numerous" lease investment and management services were performed in connection with the transaction. ³

The court of appeals agreed, characterizing the transaction as the purchase of a lease investment package and concluding that the predominant purpose was the provision of services. ⁴ The court of appeals' reasoning turned on the nature of the business entities involved in the transaction: Vesta and Belview are bankers and not farmers, and Independent, Clayton, and Lease Resources are in the business of putting together and servicing lease packages, rather than selling farm equipment. The court also found persuasive the argument that the purpose of the transaction was to provide a stream of income, not farm equipment.

We disagree....