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CIT Finance LLC v. Treon, Aguirre, Newman & Norris PA

United States District Court, D. Arizona

November 8, 2016

CIT Finance LLC, Plaintiff/Counter-Defendant,
Treon, Aguirre, Newman & Norris PA, Defendant/Counter-Claimant. Treon, Aguirre, Newman & Norris PA, Third-Party Plaintiff,
Pacific Office Automation Inc., et al., Third-Party Defendants.


          James A. Teilborg, Senior United States District Judge

         Following the judgment entered by the Court upon stipulation of the parties Plaintiff CIT Finance LLC ("CIT") and Defendant Treon, Aguirre, Newman & Norris PA ("Treon Aguirre"), (Doc. 101), Treon Aguirre's Third-Party Complaint against Pacific Office Automation, Inc. ("POA"), Darin DuMolin, and Derek Abert ("Defendants") remained, (Doc. 48 at 12-17). Now pending before the Court is Third-Party Defendants' Motion for Summary Judgment ("Motion"). (Doc. 102). The Court now rules on the Motion.


         In early 2013, Treon Aguirre ("Plaintiff), a Phoenix law firm, and POA, an office equipment supplier, entered into negotiations to lease office equipment, including printers, copiers, and scanners. (Plaintiff's Statement of Supplemental Controverting Facts, Doc. 107 ("PSSCF") at ¶ 1; Third Party Defendants' Statement of Facts in Support of Its Motion for Summary Judgment, Doc. 103 ("DSOF") at ¶¶ 1, 2)- As part of these negotiations, POA representatives Darin DuMolin and Derek Abert met multiple times with Plaintiffs employees to determine the firm's equipment needs. (Third-Party Plaintiffs Statement of Controverting Facts, Doc. 107 ("PCSOF") at ¶ 3; DSOF at ¶ 3). During these meetings, Mr. DuMolin and Mr. Abert represented to the employees that the new equipment would "meet or exceed the office's current equipment." (Doc. 107-1 at 6). Additionally, the POA representatives promised that the equipment would perform specific functions, such as "printing] envelopes, offset[ing] documents, and hole-punching] documents." (PSSCF at ¶¶ 2, 3; Doc. 107-1 at 6).

         In February 2013, POA delivered the equipment to Plaintiff's office and began installation. (PSSCF at ¶ 5). Upon delivery, Plaintiff's employees immediately noticed that the new equipment fell short of their expectations. (Id. at ¶ 6; PCSOF at ¶¶ 4, 13; Doc. 107-1 at 6, 7, 24). The equipment could not perform many of the functions that POA representatives had promised, and Plaintiff's employees believed that the equipment did not perform as well as their previous equipment. (PSSCF at ¶ 6; Doc. 107-1 at 6-8, 13, 19, 24). Plaintiffs accountant, Deborah Carter, expressed dissatisfaction to Mr. DuMolin and mentioned returning the majority of the new printers. (Doc. 107-1 at 28-41).

         In March 2013, Plaintiff's founding partner, John Aguirre, signed a Modified Lease Agreement (the "Agreement"), (Doc. 103-1 at 2-4), and Equipment Delivery and Acceptance Receipts (the "Acceptance Receipts"), (Doc. 103-4 at 2, 3), acknowledging "the complete and satisfactory delivery and installation of the [e]quipment leased from [POA]." (Id.). These documents covered 34 pieces of equipment, including the printers Ms. Carter had wanted returned. (Docs. 103-1 at 2-4; 103-4 at 2, 3). As part of the Agreement, POA agreed to "buyout" Plaintiffs then-existing equipment leases, (DSOF at ¶ 6; PCSOF at ¶ 6); Plaintiff agreed to make a minimum monthly payment of $3, 781, (Doc. 103-1 at 2).

         In April 2013, pursuant to the Agreement, POA paid $32, 066.36 to GE Capital and $3, 970.64 directly to Plaintiff because "it was in collections for nonpayment." (DSOF at ¶ 6; PCSOF at ¶ 6). POA sold its Agreement with Plaintiff to CIT, a third-party finance company but maintained an obligation to provide service and supplies on the equipment. (DSOF at ¶¶ 8, 9; PCSOF at ¶¶ 8, 9). Meanwhile, Plaintiff failed to make any payments under the Agreement. (DSOF at ¶ 12; PCSOF at ¶ 12).

         In May 2013, despite frequent maintenance visits by POA over the prior two months, some of the leased equipment continued to exhibit problems. (Docs. 103-3 at 2-12; 107-1 at 45-52). On May 16, Ms. Carter again contacted Mr. DuMolin to return the desktop printers. (Doc. 107-1 at 52). Mr. DuMolin then sought to meet with Mr. Aguirre or Richard Treon, Plaintiffs other founding partner; however, because "communication broke down, " the parties never met. (Id.; PCSOF at ¶¶ 14, 15). Despite the equipment deficiencies, Plaintiff used much of the equipment, generating over 1.3 million copies on the large format photocopiers, running over 14, 678 images on the fax machine, and generating over 45, 858 images on the smaller-scale printers. (DSOF at ¶ 19; PCSOF at ¶ 19).


         Summary judgment is appropriate when "there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). A party asserting that a fact cannot be or is genuinely disputed must support that assertion by "citing to particular parts of materials in the record, " including depositions, affidavits, interrogatory answers or other materials, or by "showing that materials cited do not establish the absence or presence of a genuine dispute, or that an adverse party cannot produce admissible evidence to support the fact." Id. 56(c)(1). Thus, summary judgment is mandated "against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).

         Initially, the movant bears the burden of pointing out to the Court the basis for the motion and the elements of the causes of action upon which the non-movant will be unable to establish a genuine issue of material fact. Id. at 323. The burden then shifts to the non-movant to establish the existence of material fact. Id. A material fact is any factual issue that might affect the outcome of the case under the governing substantive law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The non-movant "must do more than simply show that there is some metaphysical doubt as to the material facts" by "com[ing] forward with 'specific facts showing that there is a genuine issue for trial.'" Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87 (1986) (quoting Fed.R.Civ.P. 56(e)). A dispute about a fact is "genuine" if the evidence is such that a reasonable jury could return a verdict for the non-moving party. Liberty Lobby, Inc., 477 U.S. at 248. The non-movant's bare assertions, standing alone, are insufficient to create a material issue of fact and defeat a motion for summary judgment. Id. at 247-48. However, in the summary judgment context, the Court construes all disputed facts in the light most favorable to the non-moving party. Ellison v. Robertson, 357 F.3d 1072, 1075 (9th Cir. 2004).

         At the summary judgment stage, the trial judge's function is to determine whether there is a genuine issue for trial. There is no issue for trial unless there is sufficient evidence favoring the non-moving party for a jury to return a verdict for that party. Liberty Lobby, Inc., 477 U.S. at 249-50. If the evidence is merely colorable or is not significantly probative, the judge may grant summary judgment. Id.

         A. Rescission of the Agreement

         Plaintiff argues that Defendants misrepresented material facts regarding equipment functions during negotiations, and, thus, Plaintiff seeks to rescind the Agreement with POA. (Doc. 48 at ¶¶ 60-68). Defendants rejoin that Plaintiff is "prohibited from simultaneously maintaining an action to rescind the [l]ease (based [on] alleged fraud) and [an] action for damages" and, alternatively, Plaintiff ratified the Agreement, thereby waiving its rescission argument. (Doc. 102 at 6-7).

         The parties do not dispute that Chapter 2A of the Arizona Uniform Commercial Code applies here. However, as the Court held in an earlier summary judgment order for this case, the U.C.C. does not preclude a common-law fraud defense to rescind a contract. (Doc. 42). The Court, in analyzing whether "hell or high water clauses" (express or incorporated by Ariz. Rev. Stat. § 47-2A407 (2005)) bar a finance lessee's common-law fraud defense, explained as follows:

Arizona courts have not decided the issue, and it appears that other courts do not entirely agree on the answer. Compare Eureka Broadband Corp. v. Wentworth Leasing Corp., 400F.3d 62, 68 (1st Or. 2005) ("Nothing in the Code explicitly preempts common law actions for fraudulent misrepresentation, and courts have entertained such actions in commercial cases [involving hell or high water clauses]."), and Colo. Interstate Corp. v. CIT Grp./Equip. Fin., Inc., 993 F.2d 743, 749 (10th Cir. 1993) ("In the absence of fraud or deceit which is not claimed here, it is our view that under Texas law the parties should be held to their agreement [containing a hell or high water clause]."), with C & J Vantage Leasing Co. v. Wolfe, 778 N.W.2d 66 (Iowa Ct. App. 2009), vacated C & J Vantage Leasing Co. v. Wolfe, 795 N.W.2d 65 (Iowa 2011) ("The enforceability of this [hell or high water] provision precludes Wolfe's affirmative defenses of fraud in the inducement, estoppel, mutual mistake, and an interest-rate disclosure defense grounded in Iowa Code chapter 535.") (citing In re O.P.M. Leasing Servs., Inc., 21 B.R. 993, 1007 (Bankr. S.D.N.Y. 1982)), and Colonial Pac. Leasing Corp. v. McNatt, 486 S.E.2d 804, 805 (1997) ("We conclude that a 'hell or high water' clause does not insulate a lessor's assignee from a claim of fraud where an agency relationship can be established between the assignee and the perpetrators of the alleged fraud.").
Addressing U.C.C. provisions virtually identical to Arizona's, the First Circuit held that "[n]othing in the [Massachusetts] Code explicitly preempts common law actions for fraudulent misrepresentation, and courts have entertained such actions in commercial cases." Eureka, 400 F.3d at 68. The court reasoned that several U.C.C. provisions specifically preserve the fraud defense, including a provision in Chapter 2A, which deals with leases. Id. (citing Mass. Gen. Laws ch. 106, §8 1-103, 2A-505(4)). The court also noted that the U.C.C. provision that expressly precludes fraud claims only applies when a buyer has bought goods on credit and misrepresented its solvency. Id. (citing Mass. Gen. Laws ch. 106, § 2-702).
The Court agrees with the First Circuit that the text of the U.C.C. does not preclude fraud claims by finance lessees who have accepted the goods. As the First Circuit points out, Chapter 2A specifically provides that "[rlights and remedies for material misrepresentation or fraud include, without limitation, all rights and remedies available under this article for default." A.R.S. 8 47-2A505(d). To be sure, the U.C.C. limits some of the rights and remedies of finance lessees who have accepted goods, see A.R.S. § 47-2A517 (providing for the right to revoke acceptance of goods "[elxcept in the case of a finance lease"); A.R.S. § 47-2A407(a) (a finance lessee's "promises under the lease contract become irrevocable and independent upon the lessee's acceptance of the goods"), but no provision in the U.C.C. precludes fraud claims by finance lessees. Furthermore, the official comment to the U.C.C. notes that a "hell or high water" provision is only enforceable "absent. . . application of the principles of law and equity, including the law with respect to fraud." Uniform Commercial Code 8 2A-407 cmt. 5. Thus, as evidenced by its text as legislative history, the U.C.C. does not preclude all defenses by a finance lessee.
Additionally, and more fundamentally, Arizona courts recognize that "when fraud enters into a transaction to the extent of inducing execution of a written document, the instrument never becomes a valid contract, and the party seeking to rescind the contract is not bound by its terms.' Wagner v. Rao,885 P.2d 174, 176 (Ariz.Ct.App. 1994) (citing City Dodge, Inc. v. Gardner,208 S.E.2d 794 (Ga. 1974)). Accordingly, "any provision in a contract making it possible for a party thereto to free himself from the consequences of his own fraud in procuring its execution is invalid." Lutfy v. R. D. Roper & Sons Motor Co., 115 P.2d 161, 166 (Ariz. 1941). In other words, a hell or high water clause in a lease that was induced by fraud is invalid because the lease itself is invalid. For the same reason, even though a finance lessees' "promises under the lease contract become irrevocable upon the lessee's acceptance, " A.R.S ยง 47-2A407(a), a lessee who enters into a lease by fraudulent inducement has made no "promises" at all. Precluding a party from asserting fraudulent inducement could ...

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