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Caterpillar Financial Services Corp. v. Wells

Decided: July 26, 1994.


Kole, J.A.D., Retired and Temporarily Assigned on Recall



KOLE, J.A.D., Retired and Temporarily Assigned on Recall

This is an action by Caterpillar Financial Services Corp. (CATF) for a deficiency against four guarantors of a lease of two pieces of heavy construction equipment in which CATF was the lessor and Wells Excavating, Inc. (the Wells Corporation) was the lessee. Given as collateral by the lessee under the lease was a third piece of heavy construction equipment owned by it that was subject to a security agreement assigned to CATF.

The fact pattern in this case is somewhat unusual. Based on what I consider to be the credible evidence, I make the findings of fact and Conclusions of law that follow.

The persons involved in the significant events include Richard Wells, Jr. He is not a guarantor and is thus not being sued for the deficiency. In or about August, 1988, he owned and operated Rigale Construction Co. (Rigale). He also was involved in the business of Wells Excavating, Inc. with his brother, Scott Wells. Scott and his wife, Janet, and Richard Wells, Sr. and his wife, Roberta, are the individual guarantors of the lease.

Caterpillar, Inc. (Caterpillar), the manufacturer of the Caterpillar heavy equipment involved herein, is the parent of CATF, its wholly owned subsidiary and financing entity. Caterpillar sells its equipment generally through a network of dealers, one of which is Foley Machinery (Foley), the selling dealer in the area covering New Jersey. It also has a dealer, Carter Machinery Co. (Carter), in which it has an ownership interest, the exact nature of which was not disclosed at trial by CATF. I find that it has a sufficiently substantial interest in Carter to justify a reasonable inference that a sale of equipment to Carter eventually benefits Caterpillar financially if Carter makes a profit thereon.

In 1988, Rigale purchased from Foley a 1987 excavator for $165,000. It entered into an installment sale and security agreement with Foley to finance the net amount of $136,430 (after deduction of various items, including a $92,000 trade-in). The total time balance was $160,812, to be paid in 36 monthly installments of $4,467, commencing February 10, 1988 and ending January 10, 1991. This installment sales contract and security agreement, with the underlying Rigale promissory note, were assigned by Foley, together with contracts and security agreements of other Foley customers, as a group, to CATF on August 3, 1988.

In October 1990, Rigale transferred its rights under the 1987 excavator contract to the Wells Corporation. At that time the

installments thereunder were almost paid in full, there being only three payments left, totalling $13,848.20, or approximately $14,000.

Some time prior to October 30, 1990, Foley, as lessor, entered into two equipment leases with the Wells Corporation, as lessee: (1) On March 29, 1990, for the wheel loader (valued at $90,000), at a rental of $4,875 per month, apparently on a month-to-month basis. (2) On December 13, 1989, for the 1989 excavator, (valued at $171,000), at a rental of $7,495 per month, apparently on a month-to-month basis. Neither lease provides for an option to buy by the lessee; but instead, requires that at the expiration of the lease term, the equipment must be returned to the lessor, Foley. The leases provide that at all times title to the equipment is in the lessor. The total monthly payments on both leases were thus $12,370. Foley filed UCC financing statements with respect to both pieces of leased equipment.

The Wells Corporation found these payments to be onerous. After discussing the matter with Foley's representative, the latter arranged for a conversion of the two leases into the present CATF lease, under which both pieces of equipment were leased from CATF at lower rental amounts by reason of a purchase option allowable to the lessee and a fixed term of 36 months. The conversion documents on Foley's invoices, dated October 31, 1990, show the following:

Wheel loader

Selling Price $90,000.00

Rentals Paid 13,500.00


Sales Tax 5,355.00

Interest 6,645.77

(apparently on past-due rents)

Total: $88,500.77

1989 Excavator

Selling Price $171,000.00

Rentals Paid 39,000.00


Sales Tax 9,240.00

Interest 18,651.40

(apparently on past-due rents)

Total: $159,891.40

The purchase option amounts at the end of the 36 months CATF lease term reduced the monthly rental payments on these two pieces of equipment. The reduced rentals resulted in a total saving to the Wells Corporation in excess of $6,500 per month. The option price at which the Wells Corporation could buy the wheel loader was $23,750; the option price for the 1989 excavator was $44,000. The options would have to be exercised not less than 60 days before the end of the lease term, but the price would be paid at the end of the term. The CATF lease, dated January 31, 1991 ("utilization date" in the lease), but executed on or about October 30, 1990, would terminate on January 31, 1994.

It should be noted that, although the Wells Corporation made only one rental payment under the lease with CATF, on November 29, 1990, covering each piece of equipment, in fact, there had been earlier rental payments thereon that were made to Foley under its leases.

The lease between CATF and the Wells Corporation required the latter to give additional collateral to CATF by way of granting CATF a "continuing security interest" in the 1987 excavator that Rigale had purchased from Foley and had transferred to the Wells Corporation; that equipment was subject to the security interest of Foley. In August 1988, as indicated, as part of a group of unrelated security agreements, Foley had already assigned its rights in the security agreement and the note it secured to CATF. The value of the 1987 excavator, when it was given as additional collateral to CATF, obviously was substantially more than approximately $14,000, the remaining balance under the installment sale and security agreement with Foley.

The CATF lease also required the guarantees of the Wells individuals and their wives, with the exception of Richard Jr. and his wife. Those guarantees, like the CATF lease itself, are in small and somewhat light type--all very difficult to read.

There are various values, in the proofs, placed on the wheel loader and the 1989 excavator. On October 31, 1990, when converting to the CATF lease, Foley placed a value on the wheel loader of $88,500.77 and on the 1989 excavator of $159,891.40, or a total of $248,392.17. By use of amortization tables, CATF at trial placed the value as of August 7, 1991, when the equipment was sold by it to Carter, predicated on the principal balance remaining and past-due rent charges, with interest as follows:

Wheel Loader -- approximately $84,000.00

1989 Excavator 150,849.00

Total: $234,849.00

According to defendant's expert, Alan Atkins (Atkins), as of January 11, 1991, a forced sale of the 1987 excavator would bring $75,000; of the 1989 excavator, $110,000, and of the wheel loader, $68,000--or a total forced sale value of $253,000 on all 3 pieces of equipment, and a total such value on the CATF leased equipment (the wheel loader and the 1989 excavator) of $178,000. With a 6% commission deducted for a forced sale involving an auction, the net values in January 1991 would be $103,400 for the 1989 excavator, $63,920 for the wheel loader, and $70,500 for the 1987 excavator.

The Wells Corporation executed UCC-1 Financing Statements in favor of CATF with respect to the wheel loader and the 1989 excavator, which were filed by CATF with the appropriate recording officers. The UCC-1 financing statements executed by the Wells Corporation in favor of Foley in connection with the Foley leases of the same equipment before the conversion to the CATF lease, and filed with the appropriate recording officers, were assigned by Foley to CATF. As indicated, the UCC-1 Financing Statements relating to the 1987 excavator, given as additional collateral under the CATF lease, had been assigned to CATF earlier, when the Foley note and security agreements were assigned to it.

The guarantees of the lease were signed by the four Wells family members who are parties to this deficiency action. Each of them unconditionally guaranteed payment to CATF of all rentals

under the lease, and, on demand, agreed to pay the amounts due and unpaid by the lessee, the Wells Corporation, including any costs, attorney's fees and expenses incurred by CATF by reason of the lessee's or guarantor's default. The guarantor waived "notice of any default by lessee, of any sale...or Disposition of the (leased) Equipment" or any fact materially increasing the guarantor's risk. There are further waiver provisions by the guarantor: The guarantor waived any right to require CATF (1) to proceed against the lessee; (2) to sell or otherwise dispose of the leased equipment; (3) to foreclose on or exhaust any security held from the lessee; or (4) to pursue any remedy to mitigate damages.

That the guarantees were given by reason of CATF's insistence that they be executed in order to enter into the lease with the Wells Corporation does not make them contracts of adhesion, entitling the guarantors to any special consideration on that score alone. The same may be said, for present purposes, as to the difficulty of reading (and thereby understanding) the fine light print in both the lease and the guarantees. These were contracts between business persons of bargaining positions that, although not equal, were not such that the lessee and guarantors can be said to be at such an economic or other disadvantage that, when the lease and guarantees were entered into, they were or could be imposed upon by CATF. No unconscionable conduct by CATF at that time has been shown. Indeed, it was the Wells Corporation, at its own request, that received needed rent payment relief as a result of the lease with CATF. Further, Richard Wells, Sr., at the time, was an experienced and substantial builder of home developments and apartment houses, who should have known, inquired and understood what he and his wife were signing. Robert Wells, to a lesser extent, had sufficient building and heavy equipment business experience similarly to protect himself and his wife. If necessary, the male guarantors, as businessmen, could have sought assistance in reading the significant language of the lease and the guarantees. Nevertheless, in

other circumstances, in the not-too-distant future, a court might well hold that the size and lightness of the type used in these documents by CATF so as to make them almost indecipherable should bar their enforcement on a presumed thesis of unconscionability. See, e.g., Milton Roberts, Annotation, Unconscionability, Under UCC Section 2-302 or Section 2-719(3), of Disclaimer of Warranties or Limitation or Exclusion of Damages in Contract Subject to UCC Article 2 (Sales), 38 A.L.R.4th 25, Section 26 (1985). I note that in order for the court to read them, an enlarged version had to be made.

The Wells Corporation, in early 1991, had difficulty in collecting money due it on a large project. It was thus compelled to file a Chapter 11 bankruptcy petition on February 7, 1991. On or about March 1, 1991, since the Wells Corporation had paid only one rental payment for each of the items of equipment under the lease, CATF sent a written demand to each of the guarantors seeking payment of $146,035.65, the amount due under the lease for the 1989 excavator, and of $71,951.88, the amount due under the lease for the wheel loader. The total amount due was thus $217,987.53. No payment was made.

Prior to the bankruptcy filing and prior to receipt of the March 1, 1991 demand letters by the guarantors, the Wells Corporation had defendants' expert, Atkins, appraise the three pieces of equipment. His forced sale value (without auctioneer commissions and related expenses), as of January 11, 1991, as already discussed, for all of the equipment was $253,000 and for the leased equipment alone, $178,000.

On March 22, 1991, the Wells Corporation filed a notice in the bankruptcy court proposing to abandon, among other items subject to lease or lien, the three pieces of equipment, claiming that it had no equity in them, and setting forth the amount of the liens: 1989 excavator (lien of $172,044); wheel loader (lien of $95,592); 1987 excavator (lien of $13,401). The property was stated to be of "inconsequential value" to the bankruptcy estate.

Despite the abandonment of the equipment, they, together with other property to be abandoned, were scheduled to be publicly auctioned on May 1, 1991--apparently with the acquiescence of the bankruptcy court. The auctioneer was A. J. Wilner and Company; the auction was to take ...

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