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First National State Bank of New Jersey v. Reliance Electric Co.

decided: December 30, 1981.



Before Hunter, Rosenn, and Weis, Circuit Judges.

Author: Per Curiam


This diversity case, removed from the Superior Court of New Jersey to the United States District Court on the petition of the defendant, Reliance Electric Co. (Reliance), pursuant to 28 U.S.C. ยง 1441, is now before us on an appeal by the First National State Bank of New Jersey (the Bank) from the judgment of the United States District Court for the District of New Jersey. Plaintiff's claims and defendant's counterclaim were tried to a jury which made special findings and specifically found "(t)hat neither party is entitled to damages." The Bank filed motions seeking judgment notwithstanding the verdict or in the alternative a new trial. The trial Judge, Chief Judge Fisher, denied the motions and the Bank appealed. We affirm.


On September 29, 1976, Reliance, which has its principal place of business in Cleveland, Ohio, entered into a Master Lease Agreement with Wiltek Leasing, Inc. (Leasing). Leasing is a wholly owned non-operating subsidiary of Wiltek, Inc. (Wiltek), and the two corporations have common officers. Under the lease, which provided that New York law would govern the agreement, Reliance leased certain telecommunication equipment from Leasing for use in transmission and receipt of its inter-company communications. The parties understood that Wiltek would manufacture the equipment; Leasing's sole corporate function was to execute lease documents with Wiltek's customers, hold title to the leased Wiltek equipment, and serve as a conduit through which funds would pass to Wiltek.

Under the terms of the Master Lease entered into between Leasing and Reliance, Reliance agreed to pay a monthly rental commencing February 1, 1977, of $9,650 for a period of 60 months. It also executed a Service Agreement with Wiltek, the manufacturer, dated September 29, 1976, under which Wiltek agreed to service the leased equipment at a monthly service rate of $3,770 beginning on February 1, 1977. In addition, Reliance signed a Certificate of Acceptance by which it certified that the equipment referred to in the attached schedule was "accepted as satisfactory in all respects." Reliance claimed and the evidence established that the Certificates of Acceptance did not acknowledge delivery of the equipment but only that the equipment modules listed in the schedules "were acceptable." Reliance executed another lease on October 29, 1976, for additional equipment referred to in the schedule attached to that agreement and another Certificate of Acceptance. The second lease made deletions and additions to the schedule attached to the first lease. By the terms of each of the two certificates, the "Initial Payment Date" was fixed at February 1, 1977.

Leasing executed non-negotiable promissory notes on October 12, 1976, and November 2, 1976, in sums of $579,000 and $128,000 respectively, payable to the Bank in 60 monthly installments commencing February 1, 1977. On the basis of these notes, which were coterminous with the Reliance leases and accompanied by certain collateral documents, the Bank made substantial loans to Leasing which are the genesis of this litigation. Although the equipment had not yet been manufactured, the collateral documents consisted of bills of sale from Wiltek to Leasing, security agreements which purported to give the Bank a lien on the equipment leased to Reliance, an assignment of the Reliance leases, and the rental money due under them.

Each of the promissory notes executed by Leasing to the Bank contained a provision that the obligation to repay was to be satisfied solely from the rental payments due under the lease from Reliance. By letters dated October 27, 1976, and November 9, 1976, the Bank notified Reliance of the assignment of the leases and the amount of the rental payments due commencing February 1, 1977. The letters did not disclose, however, that the Bank had advanced monies on the basis of the assignments and did not direct the payment to it of the rentals.

Unfortunately, the equipment was never delivered to Reliance and Reliance never made the payment due on February 1, 1977, or any rental payments called for in the lease agreements. On February 2, 1977, Wiltek filed an involuntary petition in bankruptcy. In August 1977, the Bank instituted these proceedings to recover the rental payments due under the leases in the sum of $707,100, attorney's fees, and interest. Reliance charged the Bank with fraud and conspiracy and filed a counterclaim for damages allegedly sustained by it because of Leasing's failure to honor its contractual obligations to Reliance.

Although on appeal the Bank raises eight issues, they can be distilled into two arguments: (1) the bank had status similar to that of a holder in due course and Reliance is therefore not entitled to assert the defense of the failure of consideration; (2) the testimony of Homer Kripke, an expert witness, was improperly admitted into evidence.

At trial, the Bank claimed that as allowed by section 9-206 of the Uniform Commercial Code (UCC)*fn1 Reliance waived all defenses to payment of rent to an assignee of the lease by undertaking an unconditional obligation to make the rental payments to any such assignee as set forth in paragraph 2 of each of the leases. The Bank emphasized that the waiver extended to the non-delivery of the non-existent equipment. The Bank's theory at trial in support of its claim was that Reliance entered into this unusual arrangement and assumed the absolute risk of total liability because it was anxious to lease the equipment and through this arrangement Wiltek was provided the money necessary for manufacturing the equipment. In effect, the Bank argued that Reliance was willing to permit Wiltek to make use of Reliance's credit as a way of obtaining the funds necessary for the manufacture of the telecommunications equipment which Reliance was so anxious to lease. The jury implicitly rejected the Bank's contentions. We have carefully examined the record and find no plausible evidence whatever to support the Bank's theory.

First, Reliance had no contact whatsoever with the Bank in arranging the proposed loan to Leasing, its terms or conditions. Second, no sophisticated national corporation would have entered into a transaction to finance the manufacture of equipment for it without taking conventional precautions to protect itself against the risks involved. For example, Reliance might have demanded that the funds be set aside for this specific purpose and that the Bank obtain a lien against the materials and equipment during manufacture, advancing money to Wiltek only as needed for manufacturing. No protective procedures were discussed or provided. Third, Wiltek's primary lender and the company upon which it could be expected to call for loans for manufacturing purposes was not the Bank but the Chemical Bank of New York. Fourth, the Bank took the assignment of the first Reliance lease on October 13, 1976, and on October 18, 1976, made a loan to Leasing of $444,226.68. This sum went directly into Wiltek's account at the Bank without any inquiry as to arrangements for the manufacture of the equipment. It made an additional loan of $98,788.08 on November 4, 1976, and in the same fashion. However, the Bank had previously advanced Wiltek $331,585.22 against an Amstar lease which turned unsatisfactory and which Wiltek cancelled. The Bank thereupon cancelled the loan made on the basis of the Amstar lease and, according to the Bank's vice president, obtained payment of this obligation by withdrawing on October 18, 1976, the sum of $331,585.22 from the funds credited to Wiltek's account on the Reliance lease. Had not Wiltek been credited on the Reliance transaction on October 18, the Bank could not have obtained payment on Wiltek's Amstar debt. The Wiltek account would have been short of the $331,585.22 by ...

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