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BANK OF NOVA SCOTIA v. EQUITABLE FIN. MGMT.

February 16, 1989

BANK OF NOVA SCOTIA
v.
EQUITABLE FINANCIAL MANAGEMENT, INC. and A.R. SCALISE, INC.



The opinion of the court was delivered by: SMITH

 This is an action for conversion. Several machines for use in sheet metal fabrication were sold by Power Ventilation Canada, Ltd. (PV) in violation of a perfected security interest held by plaintiff, Bank of Nova Scotia (Nova Scotia), to which PV was indebted in the amount of approximately $ 123,000. The machinery was shipped to defendant A.R. Scalise, Inc. (Scalise), a Pennsylvania corporation. The transaction was financed by and title was taken by defendant Equitable Financial Management, Inc. (EFM). On January 6, 1988, this Court, per Honorable Hubert I. Teitelbaum, entered summary judgment in favor of plaintiff Nova Scotia against Scalise, ruling that Scalise possessed and refused to return the machinery in violation of Nova Scotia's security interest. The computation of damages, the liability to Nova Scotia of defendant EFM, and the crossclaims of Scalise against EFM were left for another day. Subsequently the matter was reassigned to this judge on November 8, 1988. On November 15, 1988, we directed Scalise to surrender the equipment to Nova Scotia to give effect to Judge Teitelbaum's Order of January 6, 1988.

 Currently before the Court are cross-motions for summary judgment by defendants Scalise and EFM. This matter was originally listed for trial for Monday, December 12, 1988, but in the afternoon of December 9, 1988, plaintiff Nova Scotia informed the Court by letter that it was satisfied that possession of the machinery provided it with an adequate remedy and implicitly abandoned any further claim for damages against either defendant. We presume Nova Scotia based its decision on the evaluation of its expert's appraisal of the machinery which we had ordered at the December 5, 1988, pretrial conference. Later in the afternoon of December 9, 1988, defendants Scalise and EFM proposed to submit Scalise's crossclaims against EFM on a case-stated basis. Having received the final reply brief on January 9, 1989, we proceed to dispose of this action. At the same time we address the surrender of possession of the machinery, stayed by our Order of December 12, 1988.

 Scalise asserts two theories of liability against EFM. First, it claims that EFM breached its warranty of title to Scalise that the machinery was free of liens or claims; secondly, it claims that EFM was negligent in failing to undertake the lien search which would have disclosed Nova Scotia's security interest, before financing the purchase of the equipment. Counsel for Scalise has ably set forth the elements it must prove to prevail in its breach of warranty crossclaim against EFM: (1) that the EFM-Scalise transaction imposes on EFM the warranty of title requirements of Article 2 of the Uniform Commercial Code; *fn1" (2) that EFM did not or could not convey good title to the machinery due to the prior interest of Nova Scotia; (3) that Scalise purchased the machinery without knowledge of the security interest; and (4) EFM did not exclude the warranty of title. The crux of the matter, it can be seen, is the characterization of the EFM-Scalise relationship. Scalise contends that EFM purchased the equipment from PV and is, despite the use of a lease form, a seller of goods subject to the warranty of title requirements in its contract for sale to Scalise. 13 Pa.C.S. Section 2312. EFM maintains that it merely provided financing to Scalise and owes no warranty of title to Scalise because its lease is a security interest, and only a security interest, which does not subject EFM to the requirements of Article 2 of the UCC. 13 Pa.C.S. Section 2102.

 Tort Theory

 Before beginning our analysis of the breach of warranty claim, we address briefly the tort theory advanced by Scalise. If EFM is, as we find here, merely acting as the financer of the purchase of machinery from PV by Scalise, no duty is imposed on EFM to search for liens against the machinery for the benefit of Scalise. There are sound business reasons for a lender to search for encumbrances on equipment the purchase of which it expects to finance and on which it expects to secure its own encumbrance. We also find from the evidence that it is business custom for a lender to search for liens on used machinery in a sale-leaseback arrangement in which it is purchasing equipment from the borrower itself. However, we are cited no statute or case which imposes a duty on a lender to conduct a lien search for the benefit of the borrower solely due to its status as a lender. Accepting, as we do, Scalise's evidence that EFM has the greater expertise to conduct a lien search, we still decline to create new legal duties in the market place.

 Warranty Theory

 It is not in dispute that Scalise and EFM entered into a lease agreement (See Brief of EFM In Support of Motion for Summary Judgment, Exhibit "1") signed February 3, 1986, under which EFM provided $ 100,000 for the purchase of the fabricating machinery and under which Scalise agreed to make sixty (60) monthly payments to EFM of $ 2,409.38. See Pretrial Stipulation VI, 5. EFM provided $ 85,000 directly to PV and $ 15,000 to Scalise in reimbursement for an earlier deposit that Scalise had made to PV. The lease provided, inter alia, that EFM made no warranties of fitness or merchantability to Scalise, that EFM had the sole option to terminate the lease if Scalise did not receive the machinery from PV within sixty (60) days, that Scalise bore all risk of loss or theft, and, in paragraph 24, that:

 
Equipment is, and shall at all times remain, the property of [EFM] and [Scalise] shall have no right title or interest therein or thereto except as expressly set forth in this lease.

 Additionally, Scalise and EFM agreed that, upon the expiration of the lease term, Scalise would have the option to purchase the machinery for one dollar. (See Brief in Support of Motion of A.R. Scalise, Inc., for Summary Judgment, Exhibit "A"; Exhibit "J" (Buckman deposition, 13)).

 Several sections of Pennsylvania's Uniform Commercial Code are relevant to assessing these facts, beginning with 13 Pa.C.S. Section 2312:

 
(a) Subject to subsection (b) there is in a contract for sale a warranty by the seller that:
 
(1) the title conveyed shall be good, and its transfer rightful and
 
(2) the goods shall be delivered free of any security interest or other lien or encumbrance of which the buyer at the time of ...

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