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Breaches of the Peace, Forum Selection Clauses in the face of Fraudulent Inducement Claims; and Article 2A Finance Leases

Dispatches from the Trenches

This issue of Dispatches from the Trenches discusses: (1) how a big-time breach of the peace (think dead cat and broken foot) does not constitute a trespass but may give rise to a cause of action for wrongful repossession; (2) the enforceability of forum selection clauses in the face of fraudulent inducement claim; and (3) Article 2A "finance leases" in action.

Callaway v. Whittenton, 52 UCC Rep.Serv.2d 52 (Ala. 2003)

A recent edition of dispatches from the trenches discussed lessor's rights to repossess leased equipment as long as they do so without "breaching the peace." This case involves that same subject and shows what happens to trespass and wrongful repossession claims when a repo-man runs over the debtor's foot and kills his cat.

Christopher Callaway ("Purchaser") purchased a vehicle from Summerdale Budget Auto & Truck, Inc. ("Budget") and financed the vehicle through Baldwin Finance. The relevant documentation gave both Budget and Baldwin Finance the right to repossess the vehicle in the event of default. The Purchaser failed to make his October payment and Baldwin hired Whittenton, an independent contractor, to repossess the vehicle.

Though the facts were disputed, Purchaser alleged that as Whittenton began driving his tow-truck out of the Purchaser's driveway with the repossessed vehicle attached, Purchaser began banging on the truck and yelling to get Whittenton's attention. Purchaser then grabbed the roll bar of the vehicle and hung on as the vehicle rolled over his foot and dragged him down the driveway. To make matters worse, Whittenton ran over the Purchaser's cat too. The Purchaser sued Whittenton, Budget, and Lender, alleging, among other things, trespass and wrongful repossession. The trial court granted Whittenton's motion for judgment as a matter of law on the trespass and wrongful repossession claims and the Purchaser appealed.

The Alabama Supreme Court noted that a secured party may repossess collateral without judicial process if it proceeds without breach of the peace. Having entered the property for the purpose of repossession, Whittenton, as agent for a secured creditor, entered as a matter of right under Alabama law and therefore the Court affirmed the trial court's judgment as a matter of law on the trespass claim.

Addressing the wrongful repossession claim, the Court stated the legal requirement that the repossession occur "without breach of the peace" necessarily means that it must be "without risk of injury to the secured party, the debtor, or any innocent bystanders." The Court, in viewing the evidence most favorable to the Purchaser, stated they had presented sufficient evidence from which a jury could conclude that a breach of the peace occurred and reversed the judgment as a matter of law on the wrongful repossession claim.

Ex parte LeaseComm Corp., 2003 WL 22272912, (Ala. Oct. 3, 2003)

One claim that unhappy lessees often use in an attempt to avoid the hell-and-high-water nature of finance leases is to argue "fraud in the inducement" under the theory that, if the lessee was induced by fraud into executing the lease, the provisions of the lease never became effective and therefore were not relevant to the law suit. In this case, the court held a forum selection clause that was contained in the lease to be enforceable even in the face of a claim of fraudulent inducement. Jeffrey Sisk, a convenience store owner ("Lessee") leased credit-card processing equipment from Leasecomm. The lease agreement contained a forum-selection clause that named Massachusetts as the choice of venue for all disputes arising out of the agreement. A few years into the agreement, the leased equipment malfunctioned and Leasecomm refused to repair it. Lessee brought suit against Leasecomm in Etowah Circuit Court in Alabama, alleging fraud in the inducement, continuing fraud, misrepresentation and breach of contract. Leasecomm moved to dismiss the complaint for improper venue or alternatively to transfer the case to an appropriate court in Massachusetts. The trial court denied Leasecomm's motion.

The Alabama Supreme Court reversed the trial court, holding that forum-selection clauses should be enforced so long as they are neither unfair nor unreasonable. Any party challenging a forum-selection clause must establish either that either: (a) enforcement would be unfair because the contract was affected by fraud, undue influence or overwhelming bargaining power, or (b) enforcement would be unreasonable because the forum would be seriously inconvenient for the trial of the action.

The Court further held that it was not enough to show fraud in the inducement of the contract generally to invalidate the forum-selection clause, stating "the proper inquiry is whether the forum-selection clause is the result of fraud in the inducement in the negotiation or inclusion in the agreement of the forum selection clause itself [and] if the claim of fraud in the inducement is directed towards the entire contract, the fraud exception to enforcement of the forum selection clause does not apply."

In this particular case, the alleged fraud was that Lessee was induced to sign the contract before reading it, under the guise that he could read the contract at a later date and cross out any provisions he did not like. The Court held that the fraud was alleged towards the entire contract and not the forum selection clause in particular. The Court also noted that Lessee had failed to demonstrate undue influence, overweening bargaining power or serious inconvenience for the trial of the action. Thus the forum-selection clause was held valid and the Supreme Court directed the trial court dismiss the action for improper venue.

Information Leasing Corp. v. Helen King, d.b.a. Helen's Kitchen, et al., 800 N.E.2d 73 (Ohio App. 2003); 52 U.C.C. Rep. Serv.2d 443.

Once again, the Article 2A "finance lease" saves the day. In a series of transactions, Information Leasing Corporation ("Lessor") leased automated teller machines ("ATMs") to individuals. A third party vendor, named Credit Card Center ("CCC"), would find a customer interested in having an ATM on its premises, arrange for that customer to sign a lease with Lessor, agree to service the machine and keep it stocked with cash, and pay the customer a monthly commission. Ms. King leased an ATM to be located in her restaurant, Helen's Kitchen, and signed as a personal guarantor of the lease. When CCC went bankrupt and stopped servicing King's ATM, King stopped making monthly lease payments to Lessor. Discovery revealed potential fraud claims against CCC and King tried to impute them to Lessor.

The Court of Appeals held that the underlying lease was a "finance lease" under Article 2A and that such a holding prevented Lessor from being responsible for the actions of CCC. The Court noted that the lease provided the necessary written notice to King of the identity of the supplier, her entitlement to promises and warranties provided to Lessor and her right to communicate with the supplier. In particular, the lease stated: "Any warranties the vendor gave to us, if any, we hereby assign (pass) to you. You may contact the vendor for a statement of such warranties, if any."

The lease itself also contained an express provision designating it as a finance lease, stating: "You agree that this is a 'finance lease' under Article 2A--Leases of the Ohio Uniform Commercial Code. By signing this Lease, You agree that either: (a) You have reviewed, approved and received a copy of the Supply Contract or (b) that we have informed you of the identity of the Supplier, that you may have rights under the Supply Contract, and that you may contact the Supplier for a description of those rights."According to the Court, "[t]he sine qua non of a finance lease is that the finance lessor acts as the supplier of money and not as a merchant of goods" and that was the essence of the parties' relationships here.

The Court of Appeals also held the forum-selection clause valid and enforceable. Even if King were inexperienced in business matters, though she had owned her own restaurant for 20 years, her lack of knowledge, legal terms, and familiarity with lease agreements did not invalidate the forum-selection clause in the lease in question.

Article appeared in the September,  2004 issue of the Monitor.
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