U.S. Roofing, Inc. v. Credit Alliance Corp.

Opinion

This case presents the question of what remedies are available to a lessee-buyer in the purchase and sale of equipment financed by a lease arrangement when the equipment is defective and the financing lessor has disclaimed all express and implied warranties to the equipment. We hold that a financing lessor may validly disclaim all warranties, provided the lessee-buyer has an adequate remedy against the manufacturer or supplier for any defect in the equipment, and it is the role of the trial court, not the jury, to determine whether the disclaimer is valid. We further hold that where the disclaimer is valid and the equipment conforms to all provisions of the lease relating to the equipment, such as the description of the equipment and the terms of delivery, so that the equipment cannot be considered nonconforming to the lease, the remedy of revocation of acceptance is not available as against the financing lessor even though the equipment is defective.

Because of dissatisfaction with a crane it intended to purchase through lease financing, U.S. Roofing, Inc. (U.S. Roofing) stopped making payments on the lease and brought suit against National Crane, the manufacturer, Liquid Asphalt Systems (LAS), the supplier, Steve Jones, its president, and Credit Alliance Corporation and Leasing Service Corporation (LSC), the leasing company, for breach of warranty.^[1] LSC filed a cross-complaint for breach of the lease, seeking a deficiency judgment. A jury determined that both LAS and LSC were liable to U.S. Roofing for different amounts. The jury also found for U.S. Roofing on LSC’s cross-complaint for breach of the lease. National Crane was not held liable. Both LAS and LSC appeal. LAS contends the judgment against it cannot stand as a matter of law, in effect claiming there is insufficient evidence. We affirm this judgment as to LAS’s liability to U.S. Roofing, but remand the case for a new trial limited to

William Bagby of LSC testified in support of LSC’s claim for a deficiency judgment. On November 22, 1983, LSC made a demand on U.S. Roofing for the accelerated unpaid balance of the lease, including late payments and taxes, in the amount of $142,199. The crane was repossessed in late December or early January. Mr. Bagby explained after attempts at a private sale of the crane failed, LSC set up a public sale. Notices of the sale were published and sent to U.S. Roofing, as well as to potential buyers. LSC purchased the crane at the public auction for $60,000.

Mr. Bagby also testified about the calculation of the deficiency judgment. As of the date of the auction the deficiency was $125,354.60, which was determined by computing the balance due (lease payments, late charges and taxes) and subtracting the net proceeds of the sale. He then updated the deficiency to the time of trial by calculating the late charges of $76 per day to date. The late charges totalled $136,496; the total deficiency was $261,850.60.

Neither U.S. Roofing nor LAS challenged the commercial reasonableness of the public sale or the calculation of the deficiency. The trial court was concerned about continuing to assess the late charge after the crane was repossessed and sold.

After the conclusion of plaintiff’s case-in-chief, all of the defendants moved for a nonsuit; the motions were denied. At the end of the trial the defendants moved for a directed verdict and these motions were also denied.

An eight-person jury returned a verdict on the complaint in favor of U.S. Roofing by a vote of six to two; it found against LAS in the amount of $42,555.76 and against LSC in the amount of $10,734.19.^[2] The verdict on the cross-complaint was in favor of U.S. Roofing, by a vote of seven to one.

LSC moved for a judgment notwithstanding the verdict or a new trial. The motion was denied.

Both LAS and LSC appealed.

Both LAS and LSC contend the jury erred in its verdicts. LAS objects to the jury’s findings of the facts, maintaining that the factual determinations are incorrect as a matter of law. LSC, on the other hand, claims the jury was erroneously instructed. We begin with LAS’s contentions and find sufficient evidence to sustain the jury’s verdict. Then we turn to the points raised by LSC. We find the trial court erroneously submitted a question of law—whether the disclaimer of warranties was unconscionable—to the jury. We find the disclaimer is not unconscionable and so reverse the judgment and direct judgment to be entered in favor of LSC.

LAS contends the jury misapplied the facts to the law and erroneously concluded that LAS was liable in part for damages suffered by U.S. Roofing. LAS takes the position that the factual determinations underlying the ultimate determination that LAS is liable could not be made as a matter of law, contending in effect there is insufficient evidence to support the jury verdict.

A

LAS asserts that it is not liable for any breach of warranty as a matter of law. It puts forward several reasons to support this position. First, pointing to the lack of any written agreement between LAS and U.S. Roofing for the sale of the crane, LAS claims it cannot be liable for breach of warranty because there is no privity of contract between LAS and U.S. Roofing. Vertical privity is a prerequisite in California for recovery on a theory of breach of the implied warranties of fitness and merchantability. (Burr v. Sherwin Williams Co. (1954) 42 Cal.2d 682 , 695-696 [ 268 P.2d 1041 ]; Osborne v. Subaru of America, Inc. (1988) 198 Cal.App.3d 646 , 656 [ 243 Cal.Rptr. 815 ].)

In response to LAS’s motion for a nonsuit, based in part on lack of privity, U.S. Roofing argued that the sale of the crane was between LAS and U.S. Roofing, with LSC providing the financing. The trial court denied the motion and determined that the identity of the parties to the sale was a factual issue for the jury to decide.^[3] The jury was instructed that privity of

LAS asserts that since the evidence showed LAS sold the crane to LSC, not to U.S. Roofing, as a matter of law there was no privity between LAS and U.S. Roofing. Accordingly, LAS cannot be liable for breach of an implied warranty. This argument focuses solely on the paper contract; it ignores the considerable testimony regarding the direct dealings between LAS and U.S. Roofing for the sale and purchase of the crane. These parties had an oral agreement for the sale of the crane, supported by a deposit of $1,000, followed by a second deposit. LAS admits it made at least one express warranty as to the crane. When U.S. Roofing experienced problems with the crane, it contacted LAS for relief. Repairs on the crane were arranged and paid for by LAS. From this evidence the jury could find the necessary privity to support liability for breach of an implied warranty.

B

LAS asserts that it made no express warranty that was breached and further that all warranties, express or implied, were disclaimed. The verdict does not indicate whether the jury found the breached warranty to be express or implied. The evidence supports a finding that the implied warranties of merchantability and fitness for a particular purpose were breached; therefore, the lack of an express warranty would not aid LAS’s position. A disclaimer of warranties was made, but the disclaimer appeared in the lease agreement between LSC and U.S. Roofing. The lease also provided that the lessee could request the lessor to ask the supplier to authorize the lessee to enforce in its name all warranties made by the supplier to either the lessor or the lessee. LAS was not a party to that agreement. There was no evidence that LAS disclaimed any warranties.

C

LAS urges that U.S. Roofing’s claim for breach of warranty was barred by U.S. Roofing’s misuse of the crane. The jury was instructed that the plaintiff could not recover if its damages were caused by its improper use of the equipment.^[4] LAS argues the evidence shows conclusively that the

D

LAS contends it cannot be liable for breach of warranty because U.S. Roofing refused to allow it to cure any nonconformity in the crane. The court instructed the jury that the seller had the right to cure any nonconformity before the buyer could revoke its acceptance.^[5] We question whether these instructions were proper. LAS claims it has the right to cure under California Uniform Commercial Code section 2508. (All further statutory references are to the California Uniform Commercial Code unless otherwise indicated.) By its terms, section 2508 applies only where the buyer seeks to reject acceptance of goods, not where it seeks to revoke the buyer’s acceptance.^[6] Section 2508 has not been interpreted in California;

“A buyer cannot unreasonably refuse to allow the making of repairs or adjustments that reasonably appear adequate to remove the nonconformity in the goods.

“Where a buyer unreasonably refuses to accept the seller’s repair or cure of nonconformities in the goods, the buyer is barred from claiming damages based on breach of warranty.

“Where a buyer rejects, as nonconforming or defective, goods delivered by the seller, which the seller has reasonable grounds to believe would be acceptable with or without money allowance, the seller has the right, if he timely notifies the buyer, to have a further reasonable time to substitute conforming or nondefective goods.

“The seller’s right to cure nonconforming goods includes the situation in which the seller makes repairs or adjustments to the goods in order to correct or repair any nonconformity so that the goods conform to any warrant.”

“(2) Where the buyer rejects a nonconforming tender which the seller had reasonable grounds to believe would be acceptable with or without money allowance the seller may if he

One such alleged error occurred when the trial court permitted the jury to determine whether the disclaimer in the lease was unconscionable. The court instructed the jury: “It is the position of the plaintiff that the limitation of warranties contained in the lease, as well as the measure of damages contained in the lease, are unenforceable under the doctrine of unconscionability. Said clauses shall not be valid and shall be unenforceable, if plaintiff proves the provisions are unconscionable. The law does not precisely define what is or is not unconscionable. Unconscionability is recognized to include: An absence of meaningful choice on the part of one of the parties, together with contract terms which are unreasonably favorable to the other party.” The only other instruction proposed on this issue was one proposed by U.S. Roofing, which stated that the court had found the disclaimer unconscionable as a matter of law. The court refused to give this instruction.

U.S. Roofing contends that since LSC did not object to the instruction below, it cannot now raise the issue on appeal. LSC responds the record shows that the trial court deemed LSC to have objected to all of the instructions proposed by U.S. Roofing. We do not find the record so clear. At a hearing on the instructions LSC objected to two specific instructions. Twice during this hearing discussions were held off record. The second time this occurred the trial court stated, “Only reason I asked the reporter to turn herself off is the fact that it is deemed you objected to it.” It is unclear whether, in stating an objection was deemed to have been made, the court was referring to the instruction specifically objected to or all instructions. In any event Code of Civil Procedure section 647 declares that “giving an

LSC argues the disclaimer is valid because it comports with the requirements of section 2316.^[8] Although California did not adopt section 2-302 of the Uniform Commercial Code,^[9] which permits a court to refuse to enforce any provision of a contract that it finds unconscionable as a matter of law, the doctrine of unconscionability is recognized in California as a common law doctrine and has thus been applied by courts in the absence of

The question of whether a contract or clause is unconscionable, however, is one of law. (Civ. Code, § 1670.5, subd. (a); Central Bank v. Kaiperm Santa Clara Fed. Credit Union (1987) 191 Cal.App.3d 186 , 205 [ 236 Cal.Rptr. 262 ]; A & M Produce Co. v. FMC Corp., supra, 135 Cal.App.3d at p. 489.)

Unconscionability involves both procedural and substantive aspects. (A & M Produce Co. v. FMC Corp., supra, at p. 486.) The procedural element focuses on the “oppression” arising from an inequality of bargaining power between the parties and the “surprise” of a clause hidden in a printed document. (Ibid.) The substantive element is concerned with whether the terms are overly harsh or one-sided. (Id. at p. 487.)

Recognizing that California courts have not ruled on whether a disclaimer of warranties in a financing lease is unconscionable, LSC relies on cases from other jurisdictions.^[10] It places primary reliance on Konicki v. Salvaco, Inc. (1984) 16 Ohio App.3d 40 [ 474 N.E.2d 347 ], which also involved the sale of equipment financed by a lease. When the equipment would not function properly and repairs failed to correct the problem, Konicki, the lessee, stopped making payments on the lease and sued both the manufacturer and the leasing company. The leasing company counterclaimed for the balance due under the lease. (474 N.E.2d at p. 349.) The manufacturer and Konicki settled before trial. The trial court found

In McCormick Machinery, Inc. v. Johnson & Sons (Fla.Dist.Ct.App. 1988) 523 So.2d 651 , 656, the court noted that if all warranties were disclaimed, the goods could not be nonconforming, citing Konicki, Crume, and Clark. The revocation of acceptance was valid, however, because the disclaimer was ineffective for failure to mention merchantability. (Id. at p. 653.)

Other cases have permitted the remedy of revocation of acceptance when there is a disclaimer of warranties.^[11] In Seekings v. Jimmy GMC of Tucson, Inc. (1982) 130 Ariz. 596 [ 638 P.2d 210 ], the court permitted the buyer of a motor home to revoke acceptance against the dealer/seller who had validly disclaimed all warranties. The court permitted revocation when the goods failed to conform to the seller’s representation of the goods and the nonconformity substantially impaired the value of the goods. (638 P.2d at p. 216.) The court found the dealer impliedly represented that the buyers would receive a motor home warranted by certain manufacturers for which it was an authorized repair agent. (Id. at pp. 216-217.) The motor home was not sold “as-is.” (Id. at p. 217.) In Beneficial Commercial Corp. v. Cottrell, supra, 688 P.2d 1254 , the issue was rejection of goods, not revocation of acceptance. The court reversed a summary judgment against the lessees and remanded for trial on the question of whether the lessee properly rejected the goods. The court held the disclaimer of warranties deprived the lessees of the defense of breach of warranties, but not other remedies available under the Uniform Commercial Code. (Id. at pp. 1256-1257.) Presumably, these other remedies could include revocation of acceptance. The court did not address the question of whether the goods conformed to the contract with the disclaimer.

We believe that where a financing lessor has validly disclaimed all warranties, and the goods conform to the provisions of the lease, the lessee

LSC next contends it is entitled to a deficiency judgment. Upon U.S. Roofing’s continued default in making payments, LSC accelerated the amount due under the lease and made a written demand. When U.S. Roofing did not pay, LSC elected to exercise its rights under paragraph 17 of the lease and sections 9503 and 9504 to repossess the equipment from U.S. Roofing, and sell it. The sale of the equipment must be in accordance with section 9504, which requires the sale to be conducted in a commercially reasonable manner with appropriate notices given. Generally, whether a sale is conducted in a commercially reasonable manner is a question of fact. (Crocker Nat. Bank v. Emerald (1990) 221 Cal.App.3d 852 , 862 [ 270 Cal.Rptr. 699 ].) In this case the evidence on this issue was uncontroverted. LSC put forth evidence it complied with the notice requirements of section 9504. Neither U.S. Roofing nor LAS contests the commercial reasonableness of the sale or the amount of the deficiency. Accordingly, LSC requests this court to direct entry of judgment in its favor for the amount LSC claims as the deficiency.

Although we agree LSC has shown its entitlement to a deficiency judgment, we share the trial court’s concern with LSC’s assessment of the late charge after repossession and sale of the equipment. LSC claimed it was entitled to the late charge until it received payment in full of the deficiency. We disagree.

The late charge applies only to delinquent payments under the lease. When LSC exercised its right to accelerate, repossess, sell and recover the deficiency, it altered the rights and duties of both itself and U.S. Roofing. At that point U.S. Roofing no longer had any right in the equipment and consequently no duty to continue to make payments. Although it could redeem the equipment by fulfilling its obligations to LSC under the lease (§ 9506), U.S. Roofing had no duty to do so. Instead, U.S. Roofing was then only responsible for any deficiency after the sale. Without an obligation to make payments, there could be no delinquent payments giving rise to a late charge. Therefore, U.S. Roofing was not responsible for any late charge after LSC elected to exercise its rights to repossess and sell the equipment.

We direct judgment be granted in favor of LSC in the amount of $125,354.60, the amount of the deficiency after the sale.