Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-92-01226/USCOURTS-ca10-92-01226-0/pdf.json

Parties Involved:
CIT Group/Equipment Financing, Inc.
Appellee
Colorado Interstate Corporation
Appellant
Colorado Interstate Gas Company
Appellant

Document Text:

PUBLISH FILLD 

United States Court of Appeal! Tenth Circuit 

UNITED STATES COURT OF APPEALS MAY 171993 

TENTH CIRCUIT 

COLORADO INTERSTATE CORPORATION; ) 

COLORADO INTERSTATE GAS COMPANY, ) 

) 

Plaintiffs-Appellants, ) 

) 

v. ) 

) 

THE CIT GROUP/EQUIPMENT FINANCING, ) 

INC., ) 

) 

Defendant-Appellee. ) 

ROBERT L. HOECKER 

Clerk 

Nos. 91-1406 

92-1226 

APPEAL FROM THE UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF COLORADO 

(D.C. No. 91-B-749) 

Karen L. Pauley (Jeffrey M. Goldsmith and Rebecca H. Noecker with 

her on the briefs) of Colorado Interstate Gas Company, Colorado 

Springs, Colorado, for Plaintiffs-Appellants. 

Alan s. Kopit of Hahn Loeser & Parks, Cleveland, Ohio (Katharine 

A. Van Tassel of Hahn Loeser & Parks, Cleveland, Ohio; Richard R. 

Young and Brent E. Rychener of Holme Roberts & Owen, Colorado 

Springs, Colorado, with him on the brief), for Defendant-Appellee. 

Before McKAY, Chief Judge, LOGAN and SEYMOUR, Circuit Judges. 

McKAY, Chief Judge. 

Appellate Case: 92-1226 Document: 010110114176 Date Filed: 05/17/1993 Page: 1 
- In this diversity action, Plaintiffs Colorado Interstate Corporation and Colorado Interstate Gas Company (hereinafter collectively referred to as "Colorado Interstate") appeal from a district court order granting summary judgment to Defendant, The CIT 

Group/Equipment Financing, Inc. (hereinafter referred to as "CIT") 

on Colorado Interstate's restitution and breach of contract 

claims. The claims arise from Colorado Interstate's lease of computer equipment. 

Iμ 1985, Colorado Interstate leased computer equipment from 

CMI Corporation (hereinafter referred to as "CMI"). The lease 

between CMI and Colorado Interstate (hereinafter referred to as 

the Master Lease) contained what is known as a "hell or high water 

clause" and provided for the assignment of rent payments. The 

Master Lease contained the following pertinent terms: 

4. Assignment, Obligation to Pay Rent Unconditional. 

Lessee ... (iii) agrees to comply fully with the terms 

of any such assignments and/or grants provided that such 

assignments and/or grants do not increase the Lesse~'s 

obligations nor decrease the Lessee's rights .... provided, however, that Assignee shall not be obligated to ~perform the obligations of Lessor hereunder unless 

Assignee expressly agrees to do so in writing .... 

This Master Lease is a net lease and Lessee agrees 

that its obligations to pay all Basic Rent and other 

sums payable hereunder (collectively, Rent), and the 

rights of Lessor and Assignee in and to such Rent, are 

absolute and unconditional and are not subject to any 

abatement, reduction, setoff, defense, counterclaim or 

recoupment due or alleged to be due to, or by reason of, 

any past, present or future claims which Lessee may have 

against Lessor, Assignee, the manufacturer or seller of 

the equipment, or against any person for any reason 

whatsoever. 

2 

Appellate Case: 92-1226 Document: 010110114176 Date Filed: 05/17/1993 Page: 2 
10. Miscellaneous. 

(d) Aoolicable Law. This Master Lease and Equipment Schedule(s) will be governed by, and construed in 

accordance with, the laws of the State of Texas. 

(k) Quiet Enjoyment. Provided that no Event of Default 

has occurred or is continuing hereunder, Lessor, 

Assignee or their agents or assigns shall not interfere 

with Lessee's right of quiet enjoyment and use of the 

Equipment. 

(Appel;Lee's Supp. App. at 50, 55 .- 57.) 

In 1986, Colorado Interstate decided to upgrade its mainframe 

computer system. In order to effectuate this upgrade, CMI entered 

into a lease with Electronic Data Systems Leasing Corporation 

(hereinafter "EDS") on December 4, 1986, whereby EDS leased the 

equipment to CMI (hereinafter referred to as the Prime Lease). 

CMI subsequently leased this equipment to Colorado Interstate on 

December 11, 1986, pursuant to an Equipment Schedule whiGh incorporated by reference the terms of the Master Lease. 

In June of 1987, CMI assigned its right to payments under the 

Master Lease to CIT. Preparatory to the assignment, Colorado 

Interstate signed a Consent and Agreement to assignment which provided in pertinent part: 

The Company [Colorado Interstate] agrees: 

(i) To remit and deliver all Moneys directly to [CIT] . with identification of the source and application 

of the funds, without abatement, reduction, counterclaim 

or offset .... 

3 

Appellate Case: 92-1226 Document: 010110114176 Date Filed: 05/17/1993 Page: 3 
[CIT] hereby agrees that so long as no Event of 

Default as defined in the lease shall have occurred and 

be continuing, it [CIT] will not disturb [Colorado 

Interstate's] quiet and peaceful possession of the 

Equipment and its unrestricted use of the Equipment for 

its intended purpose under the terms of the Lease. 

(Appellee's Supp. App. at 65-66.) As a result, Colorado 

Interstate unconditionally agreed to pay all rents to CIT until 

the Master Lease expired in August of 1989. 

In November of 1988, CMI ceased making payments to EDS under 

the Prime Lease. In January of 1989, CMI filed a petition under 

Chapter 11 of the Bankruptcy Code .. CMI and EDS subsequently 

entered into an agreement approved by the bankruptcy court declar- ~ 

ing the Prime Lease terminated as of November 8, 1988. 1 

Because it was no longer receiving rent payments from CMI, 

EDS demanded the ret~rn of the equipment from Colorado Interstate 

and threatened a replevin action. In order to avoid being dispos-

) 

sessed of the equipment, Colorado Interstate began paying EDS the 

amounts owed by CMI under the Prime Lease. Colorado Interstate 

also continued making payments to CIT in accordance with the 

. 2 assignment. I' 

1 In light of our holding, we need not determine the validity 

of this stipulation vis-a-vis other parties. 

2 In March, Colorado Interstate began making the payments to 

CIT under "reservations of rights." 

4 

Appellate Case: 92-1226 Document: 010110114176 Date Filed: 05/17/1993 Page: 4 
- In May of 1991, Colorado Interstate initiated this action 

against CIT seeking to recoup the rents paid to CIT after the termination of the Prime Lease in November 1988. Colorado Interstate 

also sought damages for breach of an agreement not to disturb 

Colorado Interstate's quiet enjoyment. The district court granted 

summary judgment in CIT's favor and awarded costs and attorney 

fees. Colorado Interstate brought this appeal. 

I. 

Oμr review of the district court's grant of summary judgment 

is de novo. Boone v. Carlsbad Banco;r:poration, Inc., 972 F.2d 

1545, 1550 (10th Cir. 1992). Summary judgment is only appropriate 

if the record demonstrates "there is no genuine issue as to any 

material fact and that the moving party is entitled to judgment as 

a matter of law." Id.; Fed. R. Civ. P. 56(c). 

After a review of the record in this case, we are satisfied 

that no genuine issue of material fact exists that would .preclude 

summary judgment. 

A. 

Colorado Interstate argues that upon the termination of the 

Prime Lease in November 1988, the Master Lease also terminated. 

Thus, Colorado Interstate argues that its duty to pay ended with 

the termination of the Master Lease. 

5 

Appellate Case: 92-1226 Document: 010110114176 Date Filed: 05/17/1993 Page: 5 
- It is clear that under Texas law, a sublessee's right o£ 

possession vis-a~vis the original lessor is secondary because 

there is no privity of contract between a sublessee and the original lessor. Rogers v. Burton, 496 S.W.2d 673, 675 (Tex. Civ. App. 

1973), cert. denied, 415 U.S. 921 (1974). However, it does not 

follow that the obligations under a sublease cease upon termination of the prime lease. In Frankfurt v. Decker, 180 S.W.2d 985 

(Tex. Civ. App. 1944), the Texas Civil Court of Appeals held a 

sublessor did not escape his obligations under a sublease notwithstandipg the termination of the prime lease. Noting principles of 

privity, the court rejected the sublessor's assertion that the 

sublessee's rights under the sublease were limited by the terms of 

the prime lease and affirmed• an award of damages to the sublessee 

when he was evicted by the original lessor. See id. at 987. 

Applied to the facts of this case, it is clear that Colorado 

Interstate's obligations under the Master Lease continued notwithstanding the termination of the Prime Lease. Colorado 

Interstate's remedy upon EDS's threatened replevin action was to 

bring an action against CMI for breach of its contractual obligations. Accordingly, Colorado Interstate's argument in this regard 

is unavailing. 

B. 

Colorado Interstate also argues that the district court erred 

in holding that the obligation to pay rent under the hell or high 

water clause continued notwithstanding the fact that Colorado 

6 

Appellate Case: 92-1226 Document: 010110114176 Date Filed: 05/17/1993 Page: 6 
1 

Interstate's right of quiet enjoyment was disturbed. Colorado 

Interstate argues that it was only obligated to pay rent under the 

hell or high water clause as long as it was obligated to pay rent 

at all, and that the duty to pay ceased when its quiet enjoyment 

was disturbed. Essentially, Colorado Interstate argues that its 

obligation to pay rent under the hell or high water clause and the 

covenant of quiet enjoyment are mutual or interdependent obligations under the contract. 

ClT argues that even assuming, arguendo, that Colorado 

Interstate's quiet enjoyment was disturbed, under the hell or high 

water clause its right to uninterrupted rent payments continued 

because Colorado Interstate's unconditional obligation to pay rent 

was independent from the obligations of both CMI and CIT. 3 

A review of the unambiguous language of the lease reveals 

that Colorado Interstate did in fact agree to an unconditional 

obligation to pay rent that was separate from any duty or obligation of CMI or CIT. The lease states that 

the rights of Lessor and Assignee in and to such Rent, 

are absolute and unconditional and are not subject to 

any abatement, reduction, setoff, defense, counterclaim 

or recoupment due or alleged to be due to, or by reason 

3 CIT also disputes that Colorado Interstate's right to quiet 

enjoyment was ever violated because Colorado Interstate never lost 

possession of the equipment. CIT points out that in accordance 

with the lease, it never assumed CMI's obligation to pay rent to 

EDS under the prime lease, nor did it assume responsibility for 

CMI's promise not to disturb Colorado Interstate's quiet enjoyment. CIT contends that it only covenanted that neither CIT nor 

its agents would disturb Colorado Interstate's quiet enjoyment, 

and that it has lived up to this promise. In light of our holding, wa need not address these points. 

7 

Appellate Case: 92-1226 Document: 010110114176 Date Filed: 05/17/1993 Page: 7 
of, any past, present or future claims which Lessee may 

have against Lessor, Assignee, the manufacturer or 

seller of the equipment, or against any person for any 

reason whatsoever. 

(Appellee's Supp. App. at 50.) Likewise, Colorado Interstate 

agreed in the Consent and Agreement "to remit and deliver all 

[rents] directly to [CIT] without abatement, reduction, 

counterclaim or offset .... " Id. at 65. 

Colorado Interstate's assertion that its duty to pay rent 

only continued as long as its quiet enjoyment remained undisturbed 

is without merit. When Colorado Interstate agreed to the terms of 

the Master Lease which contained the hell or high water clause, it 

agreed to continue making rent payments despite any claim it might 

have against either CMI or CIT. Colorado Interstate's sole remedy 

was limited to bringing an action against CMI while continuing to 

make rent payments. Neither the assignment nor CMI's status as 

debtor in bankruptcy relieved Colorado Interstate of this obligation. Essentially, Colorado Interstate assumed the risk of CMI's 

nonperformance. 

Colorado Interstate attempts to circumvent this result by 

citing Texas constructive eviction cases for the proposition that 

breach of the covenant of quiet enjoyment relieves a tenant from 

the . duty to pay rent. ~ Downtown Realty, Inc. v. 509 Tremont 

Bldg., Inc., 748 S.W.2d 309, 312-13 (Tex. Ct. App. 1988); Fidelity 

Mut. Life Ins. Co. v, Kaminsky. 768 S.W.2d 818, 819 (Tex. Ct. App. 

8 

Appellate Case: 92-1226 Document: 010110114176 Date Filed: 05/17/1993 Page: 8 
- 1989). Assuming that Colorado Interstate's right of quiet enjoy- -

ment was disturbed in a manner cognizable under Texas law, 4 

Colorado Interstate's reliance on these cases is still misplaced. 

Downtown and Fidelity are clearly distinguishable in that the 

leases at issue did not contain a hell or high water clause that 

effectively separated the parties' respective duties and obligations. Accordingly, Colorado Interstate's reliance on these cases 

for the proposition that the right of quiet enjoyment is inseparable from the duty to pay rent is without merit. 

Although the Texas courts have not expressly ruled on the 

enforceability of the hell or high water clause at issue in this 

case, they have as a general matter recognized the enforceability 

of an unconditional obligation to pay rent. 5 In Stewart v. United 

States Leasing Cox:p., 702 S.W.2d 288 (Tex. Ct. App. 1985), Stewart 

arranged for United States Leasing to purchase a copy machine from 

Salt and Pepper Copiers and then lease it to him. Stewart agreed 

to an unconditional obligation to pay rent to the defendant, 

regardless of any claim plaintiff might have against the vendor. 

When the vendor failed to deliver the copier to Stewart, he ceased 

making rent payments and United States Leasing brought suit. The 

court noted: 

4 In light of our holding, we need not determine whether, 

the facts of this case, Colorado Interstate's right to quiet 

enjoyment was in fact violated or whether CIT is responsible 

any such violation. 

under 

for 

5 Texas law also recognizes unconditional obligation to make 

payments under a waiver of defense clause. ~ Texas Bus. & Comm. 

Code Ann. § 9.206 (Vernon Supp. 1990). 

9 

Appellate Case: 92-1226 Document: 010110114176 Date Filed: 05/17/1993 Page: 9 
An examination of the lease reveals that Salt and Pepper 

Copiers was not an agent of [defendant], the lessor, and 

that any claims regarding the equipment were to be made 

solely against the vendor,. Salt and Pepper Copiers. It 

further expressly provided that regardless of claims 

against Salt and Pepper Copiers, Stewart was to pay all 

rents payable under the lease. 

Id. at 290. The court went on to reject Stewart's claim of lack 

of consideration and enforced the Stewart's unconditional obligation to pay rent. 

Other courts that have considered the enforceability of hell 

or hign water clauses have enforced such provisions in analogous 

situations. See,~, American Computer v. Jack Farrell Implement, 763 F. Supp. 1473, 1484 n.9 (D. Minn. 1991), aff'd, 967 F.2d 

1208 (8th Cir. 1992), cert. denied, 113 S. Ct. 414 (1992); 

Philadelphia Sav. Fund Soc'y v. Deseret Management Corp., 632 F. 

Supp. 129, 135-36 (E.D. Pa. 1985); In re CLE Corp., No. 85-06877-

SWC, slip op. at 15-18 (Bankr. N.D. Ga., April 5, 1989); West 

Virginia v. Hassett (In re O.P.M. Leasing Services, Inc.), 21 B.R. 

993, 1006-07 (Bankr. S.D.N.Y. 1982). 

In O.P.M., after reviewing the effect of a similar hell or 

high water clause, the court reasoned as follows: 

To deny this clause its full force and effect would 

effectively reconstruct the contract contrary to the 

intent of the parties, which reconstruction would be 

impermissible. 

Moreover, it is a well-settled principle that 

"parties to a contract are given broad latitude within 

which to fashion their own remedies for breach of contract .... It follows that contractual limitations 

10 

Appellate Case: 92-1226 Document: 010110114176 Date Filed: 05/17/1993 Page: 10 
upon remedies are generally to be enforced unless unconscionable." 

The essential practical consideration requiring 

liability as a matter of law in these situations is that 

these clauses are essential to the equipment leasing 

industry. To deny their effect as a matter of law would 

seriously chill business in this industry because it is 

by means of these clauses that a prospective financierassignee of rental payments is guaranteed meaningful 

security for his outright loan to the lessor. Without 

giving full effect to such clauses, if the equipment 

were to malfunction, the only security for this assignee 

would be to repossess equipment with substantially 

diminished value. 

O.P.M., 21 B.R. at 1006-07 (citations omitted). The court went on 

to enforce the provisions of the hell or high water clause and 

held that despite the lessor's breach of an obligation to maintain 

the equipment, the lessee's unconditional obligation to pay rent 

continued. 

As one commentator has noted: 

Under the hell or high water provision, the lessee 

undertakes to pay rentals ... once the lessee has formally accepted the property .... Whether the property functions satisfactorily, is useful to the lessee, 

is suitable for the purposes intended, or is lost, 

stolen, condemned, or destroyed, and whether the lessee 

has any right of offset against the lessor or the 

lenders, is irrelevant. In short, rent payments continue to come hell or high water, without any reduction 

or offset, even if the lessee is wrongfully dispossessed 

of the equipment by the lessor .... 

1 Bruce E. Fritch et. al., Equipment Leasing-Leveraged Leasing 

152-53 (3d ed. 1988). 

Where sophisticated parties enter into an agreement setting 

forth their rights and obligations, the terms of the agreement 

11 

Appellate Case: 92-1226 Document: 010110114176 Date Filed: 05/17/1993 Page: 11 
- should control unless the agreement would otherwise be void under 

state law. ~' Graham Const. Co. v. Walker Process Egμip., 

Inc., 422 S.W.2d 478, 483 (Tex. Civ. App. 1967). As noted by the 

O.P.M. court, there are significant policy reasons for upholding 

hell or high water clauses where, as in the equipment leasing 

industry, the enforceability of the provision aids the parties in 

obtaining financing that would not otherwise be available. 6 Such 

policy justifications are particularly important in the computer 

leasing industry where advances in technology significantly 

decrea~e the value of equipment that is quickly becoming obsolete. 

Cf., O.P.M., 21 B.R. at 1007 (noting that in the absence of a hell 

or high water clause, if the equipment malfunctioned, the only 

security available to the assignee would be the repossession of 

equipment having substantially reduced value). 

In the instant case, sophisticated and well-represented 

parties entered into an agreement which detailed their rights and 

obligations. The agreement was advantageous to all parties 

involved and provided Colorado Interstate with equipment it may 

not have been able to obtain absent the unconditional obligation 

to pay rent. In the absence of fraud or deceit which is not 

claimed here, it is our view that under Texas law the parties 

6 As evidence of the growing acceptance of a hell or high water 

provisions in the equipment leasing industry, we note that§ 2A407 of the U.C.C. provides that in all finance leases other than 

those involving a consumer, "the lessee's promises under the lease 

contract become irrevocable and independent upon the lessee's 

acceptance of the goods." Id.:.. As the Comments note, "[t]his sec- . tion is self-executing; no special provision need be added to the 

contract." Id., cmt. To date, the Texas legislature has not 

adopteq § 2A of the U.C.C. 

12 

Appellate Case: 92-1226 Document: 010110114176 Date Filed: 05/17/1993 Page: 12 
- should be held to their agreement. We are of the view that 

Colorado Interstate assumed the risk of CMI's nonperformance and 

should not be relieved of its obligations under the agreement 

simply because CMI happens to be a debtor in bankruptcy. ~ 

Fritch at 153. We hold that pursuant to the terms of the hell or 

high water clause, Colorado Interstate's obligation to pay rent 

continued notwithstanding CMI's default and the threat of a 

replevin action by EDS. 

C. 

Colorado Interstate attempts to distinguish the instant situation from other cases that have enforced hell or high water 

clauses on a number of grounds. Colorado Interstate argues that, 

unlike other cases, it was deprived of the very item contemplated 

by the contract. Given the result in Stewart where the lessee 

likewise was denied the subject matter of the lease, we find this 

argument unpersuasive. 

D. 

Colorado Interstate also attempts to distinguish this case 

because of the nondiminution in rights clause contained in the 

Master Lease. The Master Lease provided as follows: "Lessee 

... (iii) agrees to comply fully with the terms of any such 

assignments and/or grants provided that such assignments and/or 

grants do not increase the Lessee's obligations nor decrease the 

Lessee's rights." (Appellee's Supp. App. at 50.) Colorado 

Interstate argues that the nondiminution in rights clause requires 

13 

Appellate Case: 92-1226 Document: 010110114176 Date Filed: 05/17/1993 Page: 13 
. that Colorado Interstate be no worse off after an assignment than 

before. Colorado Interstate argues that had the assignment not 

occurred, it would not have had an unconditional obligation to 

continue paying CMI because when its right to quiet enjoyment was 

disturbed by CMI's cessation of payments to EDS, its obligation to 

continue paying rent would have ceased. Colorado Interstate 

therefore asserts that the nondiminution of rights clause requires 

the same result after the assignment. 

~ we have previously noted, the hell or high water clause in 

this case effectively separated the obligations of CMI and CIT 

from Colorado Interstate's obligation to pay rent. As a result, 

~-even absent the assignment, Colorado Interstate would not have 

been released from its obligation to pay rent upon CMI's default; 

Colorado Interstate's remedy would have been limited to bringing 

an action against CMI while it continued to make rent payments 

pursuant to the lease. Accordingly, Colorado Interstate's contention in this regard is without merit. 

E. 

Colorado Interstate' also argues that the policy justifications for enforcing the hell or high water clause in the O.P.M. 

case are not present in this case because the record would not 

support the -conclusion that CIT was a finance lessor. In O.P.M., 

the court noted that other courts had distinguished between 

14 

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• 

finance lessors and merchant lessors in considering the enforceability of a hell or high water clause. 7 ~ O.P.M,, 21 B.R. at 

1007. Colorado Interstate does not argue that CIT is a merchant 

lessor or that the same policy would not apply to a financierassignee such as CIT; rather, it merely asserts the record would 

not support a finding that CIT is a finance lessor. 

As an initial matter it is important to note that the distinction between merchant and finance lessors in the context of 

dete~ining the enforceability of hell or high water clauses in 

O.P.M. was but part of the court's reasoning. In any event, the 

rationale for enforcing a hell or high water clause in a case 

involving a financier-assignee clearly applies, as noted by the 

O.P.M. court. 8 

The essential practical consideration requiring 

liability as a matter of law in these situations is that 

these clauses are essential to the equipment leasing 

industry. To deny their effect as a matter of law would 

seriously chill business in this industry because it is 

by means of these clauses that a prospective financierassignee of rental payments is guaranteed meaningful 

security for his outright loan to the lessor. 

7 The court defined finance and merchant lessors as follows: 

"[Al finance lessor [is one] whose only service is to provide 

funds and who is not [a] merchant lessor. A merchant lessor is 

one who deals in goods and holds itself out as having specialized 

knowledge about the design, operation and repair of the chattel 

leased." O.P,M., 21 B.R. at 1007. The significance of being 

classified as a merchant lessor is that merchant lessors may be 

charged with statutory warranties of merchantability and suitability for a particular purpose under 2A of Uniform Conunercial 

Code, or by applying the provisions of article 2 by analogy in 

those jurisdictions that have yet to adopt article 2A . .s.e.e. 

Fritch, supra, at 48-49, 63-64, 66-68. 

8 In exchange for permanent financing of $700,000, CMI assigned 

its right to receive the rental payments to CIT. (Appellee's 

15 

Appellate Case: 92-1226 Document: 010110114176 Date Filed: 05/17/1993 Page: 15 
- O.P.M. 21 B.R. at 1007. Moreover, we are of the view that the 

policy reasons for distinguishing between merchant lessors and 

finance lessors when determining the enforceability of · a hell or 

high water clause should not apply where, as in this case, the 

lessor has expressly disclaimed all warranties of merchantability 

and suitability, and the lessee has expressly assumed responsibility, vis-a-vis the lessor, for the suitability and functioning of 

the leased equipment. 9 Accordingly, Colorado Interstate's attempt 

to distinguish this case on this ground is without merit. 10 

Supp. App. at 331-32.) 

9 The Master Lease provided as follows: 

3. Acceptance, Warranties, Limitation of Liability. 

Lessee represents and agrees that ... each Leased Item 

is of a size, design, capacity and manufacture selected 

by Lessee and that Lessee has as between Lessee and 

Lessor unconditionally accepted such Item .... LESSOR 

SHALL HAVE NO LIABILITY TO .LESSEE FOR ANY CLAIM, LOSS OR 

DAMAGE CAUSED OR ALLEGED TO BE CAUSED DIRECTLY, 

INDIRECTLY, INCIDENTALLY OR CONSEQUENTIALLY BY THE 

EQUIPMENT, BY ANY INADEQUACY THEREOF OR DEFICIENCY OR 

DEFECT THEREIN, BY ANY INCIDENT WHATSOEVER IN CONNECTION 

THEREWITH, OR IN ANY WAY RELATED TO OR ARISING OUT OF 

THIS AGREEMENT EXCEPT AS SUCH CLAIM, LOSS OR DAMAGE 

RESULTS FROM THE NEGLIGENCE OR WILLFUL MISCONDUCT OF THE 

LESSOR. LESSOR MAKES NO EXPRESS OR IMPLIED WARRANTIES 

OF ANY KIND, INCLUDING THOSE OF MERCHANTABIL_ITY, DURABILITY AND FITNESS FOR A PARTICULAR PURPOSE OR USE WITH 

RESPECT TO THE EQUIPMENT AND EXPRESSLY DISCLAIMS THE 

SAME. . . ·1 

(Appellee's Supp. App. at 49-50.) 

10 Under Article 2A of the Uniform Commercial Code, the distinction between finance and merchant lessors is not dispositive for 

determining the enforceability of a hell or high water clause. If 

a lease is "finance lease," the obligation to pay rent automatically is separated from a lessor's obligation. See supra, note 

5. A finance lease is defined as 

a .lease in which (i) the lessor does not select, manu16 

Appellate Case: 92-1226 Document: 010110114176 Date Filed: 05/17/1993 Page: 16 
F. 

Additionally, Colorado Interstate asserts the enforcement of 

the hell or high water clause under the circumstances of this case 

would amount to an impennissible penalty under Texas law. A 

review of the record in this case reveals that Colorado Interstate 

did not raise this matter in the trial court. Nonetheless, in 

dicta the district court addressed this issue sua sponte: "If CMI 

or [EDS] had in fact repossessed the computer equipment, under 

Texas law the continued obligation to pay rent is a penalty and 

would be unenforceable." (Appellee's Supp. App. at 5.) 

It is well established that a federal appellate court will 

not consider an issue "which was not presented to, considered or 

decided by the trial court." Cavic v. Pioneer Astro Indus., Inc., 

825 F.2d 1421, 1425 (10th Cir. 1987). However, "[t]he matter of 

what questions may be taken up and resolved for the first time on 

appeal is one left primarily to the discretion of the courts of 

appeals, to be exercised on the facts of individual case~." 

facture or supply the goods, (ii) the lessor acquires 

the goods or the right to possession and use of the 

goods in connection with the lease, and (iii) either the 

lessee receives a copy of the contract evidencing the 

lessor's purchase of the goods on or before signing the 

lease contract, the lessee's approval of the contract 

evidencing the lessor's purchase of the goods is a condition to effectiveness of the lease contract. 

§ 2A-103(g), Unifonn Commercial Code. The comments to this section states: "A lessor who is a merchant with respect to goods of 

the kind subject to the lease may be a lessor under a finance 

lease." ~. cmt. As previously mentioned, Texas has yet to 

adopt Article 2A. 

17 

Appellate Case: 92-1226 Document: 010110114176 Date Filed: 05/17/1993 Page: 17 
Singleton v. Wulf, 428 U.S. 106, 121 (1976). 

Although the district court did not have the benefit of argument on this issue, the issue was considered by the court. In 

addition, the issue has been briefed fully on appeal. Because the 

determination of whether a contractual provision is an unenforceable penalty is a matter of law, see Lefevere v. Sears, 629 S.W.2d 

768, 771 (Tex. Civ. App. 1981), we will exercise our discretion 

d 'd h' . 11 an consi er tis issue. 

Under Texas law, "[t]he right of competent parties to make 

their own bargains is not unlimited." Stewart v. Basey, 245 

S :W.2d 484, 486 (Tex. 1952). _One such limitation is where a stipulated damage provision is viewed to constitute a penalty. See 

id. at 486-87. "The universal rule for measuring damages for 

breach of contract is just compensation for the loss or damages 

actually sustained," and "[a] party has no right to have a court 

enforce a stipulation which violates that rule." 12 Id. ~t 486. 

Thus, where an "agreement contains several matters of different 

degrees of importance, and yet the sum named is payable for the 

11 In exercising our discretion · to consider this issue, we do 

not hold that Colorado Interstate was entitled to review of this 

issue as a matter of right. 

12 In addition to the just compensation requirement, Texas law 

also requires that the amount .stipulated to be reasonable when 

judged at the time of the making of the contract, and that the 

amount be difficult .or impossible to accurately ascertain. ~ 

448 (citing the Restatement of Contracts§ 339); Presnal ·v. TLL 

Energy Corp., 788 S.W.2d 123, 127 (Tex. Ct. App. 1990). 

18 

at · 

Appellate Case: 92-1226 Document: 010110114176 Date Filed: 05/17/1993 Page: 18 
- breach of any, even the least[,] ... the sum stipulated to be 

paid has been treated as a penalty." .Ids_ 

Although there is no stipulated damage provision at issue in 

the instant case, Colorado Interstate nonetheless contends that 

the effect of the hell or high water clause in this case amounts 

to a penalty because Colorado Interstate was required to pay twice 

for the computer equipment to avoid having it repossessed. In 

support of this position, Colorado Interstate cites Texas case law 

holding a lessor could not enforce a liquidated damage provision 

requiring full payments for future rents where the lessor had also 

repossessed the equipment. ~ American Lease Plan v. Ben-Kro 

Co;n>., 508 S.W.2d 937, 943-44 (Tex. Civ. App. 1974); Southwest 

Park Outpatient Surgery, Ltd. v. Chandler Leasing Div., 572 S.W.2d 

53 (Tex. Civ. App. 1978). 

Because there is no stipulated damage provision at issue in 

this case, an analysis under penalty law does not lend itself to 

the present inquiry. ~ .i.d..t.. at 55 (the question of whether a 

contractual provision provides for a penalty may be determined 

entirely from the face of the contract) .

13 In any event, Colorado 

Interstate's assertion in this regard is unavailing because the 

primary focus of a penalty inquiry is just compensation. Unlike 

13 At best, Colorado Interstate could argue that the effect of 

the hell or high water clause and CMI's bankruptcy was to set a 

stipulated damage of $0 for CMI's breach. However, low stipulated 

damages, as opposed to high stipulated damages, are analyzed under 

unconscionability doctrines--not penalty doctrines. ~ 

Restatement (Second) of Contracts, § 356 cmt. a (1981). 

19 

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14 - the facts in American Lease and Southwest Park, there is no 

issue of unjust compensation in this case. Furthermore, Colorado 

Interstate had a cause of action against CMI when it ceased making 

payments to EDS. Because the reasonableness of a stipulated damage provision is determined at the time the parties entered into 

the agreement, the fact that CMI is presently in bankruptcy should 

not affect the determination of the issue of just compensation in 

this case. In contrast, in American Lease and Southwest Park 

there was never an available cause of action to recover damages 

for the repossession of the leased equipment. 

Although Colorado Interstate may have been forced to choose 

between making double payments or having the equipment repossessed, this does not create an unenforceable penalty under Texas 

law. By agreeing to the terms of the Master Lease and Equipment 

14 In American Lease, the lessee failed to make rent payments. 

The lessor repossessed the equipment and sought damages for all 

futur~ rentals pursuant to a liquidated damage clause. The court 

held that the lessor was not entitled to repossess the equipment 

and also recover the full amount of unaccrued and unearned rentals 

for the unexpired term of the lease because such a recovery would 

be in excess of just compensation. American Lease. 505 S.W.2d at 

943. In Southwest Park, the lessor had disclaimed, and the lessee 

had assumed, responsibility for the suitability and functioning of 

certain equipment. When the equipment proved to be unsuitable, 

the lessee ceased making rent payments. The lessor sought to 

repossess the equipment and collect future rentals pursuant to the 

terms of a liquidated damage clause. Citing to American Lease, 

the court struck the liquidated damage provision of the lease 

because it would permit a measure of recovery in excess of just 

compensation because it did not require the lessor to credit to 

lessee's account those funds received from the sale or releasing 

of the equipment. Southwest Park, 572 S.W.2d at 56-57. 

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t 

- Schedule, Colorado Interstate assumed the risk of CMI's nonperformance. Accordingly, Colorado Interstate's argument in this regard 

is without merit. 

II. 

Colorado Interstate also appeals the district court's award 

of attorney fees and costs pursuant to section 18(c) of the Master 

Lease. Colorado Interstate argues that CIT was not entitled to 

fees and costs and that the district court misinterpreted the 

Secur~ty Agreement. 

After the court ruled in favor of CIT's motion for summary 

judgment, CIT filed a motion for costs and attorney fees pursuant 

to the terms of the Master Lease. In a response brief, Colorado 

Interstate objected to CIT's motion for fees and costs. 15 Thereafter, CIT filed a reply to Colorado Interstate's response. Subsequently, CIT filed a motion to amend its motion for attorney 

fees and costs to which Colorado Interstate objected by _filing a 

response brief. In reply to Colorado Interstate's response, CIT 

filed a reply brief to which it attached for the first time, a 

15 Colorado Interstate made the following arguments: the costs 

claimed exceeded that allowed under the Federal Cost Statute; the 

Federal Cost Statue does not provide for attorney fees; the judgment didn't provide for attorney fees; CIT was not entitled to 

recover fees under the American rule or under the Master Lease; 

CIT had failed to demonstrate that any right in the Master Lease 

had been assigned to it; even if CIT was entitled to collect 

attorney fees under 18(c) of the Master Lease, any recovery is 

barred because CIT failed request attorney -fees as part of a compulsory counterclaim as required by Fed. R. Civ. Proc. Rule 13; 

and that if attorney fees were warranted, the amount requested was 

unreasonable. Appellant's App. (No. 92-1226), Ex.Bat 1-3. 

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- copy of the Security Agreement which contained the actual assignment. Thereafter, Colorado Interstate filed a motion requesting 

leave to respond to CIT's reply . . In the brief that was attached 

to the motion to respond, Colorado Interstate made the arguments 

that it now makes on appeal: that CIT was only assigned the right 

to receive rental payments and that default was a condition 

precedent to the exercise of all other rights; and that all rights 

CIT received as a result of the assignment terminated upon satisfaction of the Security Agreement. The court denied Colorado 

Inters~ate's motion to file a response to CIT's reply brief and 

did not address the arguments raised therein. 

As an initial matter we must determine whether we can properly address the arguments Colorado Interstate raises on appeal 

and which it attempted to raise when it filed its motion for leave 

to file a response to CIT's reply brief. As previously noted, we 

normally will not consider an issue "which was not presented to, 

considered or decided by the trial court." Cavic, 825 F>2d at 

1425 (10th Cir. 1987). In this case, however, we are of the view 

that the circumstances justify exercising our discretion because 

the arguments Colorado Interstate makes on appeal should have been 

considered by the trial court as they were proffered immediately 

after, and in response to evidence proffered by CIT. 

Although Colorado Interstate could have properly raised these 

arguments earlier given the lack of any dispute as to whether an 

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t 

assignment actually occurred, 16 it was not entirely inappropriate 

for Colorado Interstate to make these arguments only after the 

assignment was actually proffered by CIT. While we understand the 

court's desire to cut off briefing and its apparent impatience 

with Colorado Interstate given the nature of several of the objections it raised to CIT's motion for costs and attorney fees, we 

are of the view .that the court should nonetheless have considered 

the arguments Colorado Interstate attempted to make when it filed 

its motion for leave to file a response. Because the court should 

have considered Colorado Interstate's arguments, and because resolution of this matter is solely a legal matter of contract interpretation,17 we will address Colorado Interstate's contentions in 

this regard. 

The Master Lease provided that "[i]n the event of an assignment, Lessor shall notify Lessee of such assignment and thereafter, all references herein to Lessor shall include Assignee; 

16 The Consent and Agreement, which was part of the record, contained the following language: 

[Colorado Interstate] hereby acknowledges and consents 

to the assignment by CMI to [CIT] of all right, title, 

interest, claim and demand, as lessor, in, to and under 

the [Master Lease], and the rental payments due thereunder (conunencing with the rental payment due on August 

1, 1987) and all other moneys from time to time payable 

to or receivable by CMI under any provisions of the 

[Master Lease], all such amounts being hereinafter 

referred to as the "Moneys" .... 

Appellant's Initial Br. (No. 92-1226), Ex. D at 1. This language 

is nearly identical to that contained in the Security Agreement. 

17 Colorado Interstate does not assert that an ambiguity exists 

which precludes our legal interpretation of the contractual provisions. 

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- n (Appellee's Supp. App. (No. 92-1226) at 7.) Section 

18(c) of the Master Lease provided that "[i]n the event of any 

action at law or suit in equity in relation to this Master Lease 

or any Equipment Schedule, the prevailing party will be entitled 

to a reasonable sum for its attorney's fees and costs." Id. at 13 

(emphasis added). The Security Agreement provided as follows: 

CMI hereby Grants to [CIT] all of CMI's right, title, 

interest, claim and demand in, to and under the [Master 

Lease] (other than amounts payable to CMI pursuant to 

any indemnification provisions) .... 

Section 1.07. Assignment of [Master Lease). Confirmatory of its Grant of the [Master Lease], CMI hereby 

irrevocably Grants to [CIT] ... all its right, title, 

interest, claim and demand in, to and under the [Master 

Lease], and all rental payments and rental installments 

due thereunder (commencing with the rental payments due 

on August 1, 1987), damages, and other moneys from time 

to time payable to or receivable by CMI under the 

[Master Lease] other than amounts payable to CMI pursuant to the indemnification provisions of the Master 

Lease .... So long as no Event of Default shall have 

occurred and be continuing under this Agreement, CMI 

shall be entitled to exercise all of its rights under 

the [Master Lease] except the right to receive Moneys 

directly from the Lessee (which shall be [CIT's] whether 

or not an event of Default shall have occurred) and . except to the extent that such exercise would violate 

any provision of this Agreement. Upon the occurrence 

and continuance of an Event of Default under this Agreement, [CIT] shall be entitled to exercise all of CMI's 

rights under the [Master Lease] to the extent ass·igned 

hereby upon notice to CMI as provided herein, and CMI 

shall have no further rights thereunder with respect to 

such rights ... until the termination of the lien created under this Agreement as provided herein, whereupon 

all rights granted hereunder to CIT shall terminate and 

revert to CMI .... 

(Appellant's Initial Br. (No. 92-1226), Ex.Cat 1, 3.) 

Initially, Colorado Interstate argues that CMI did not assign 

all of jts rights in the Master Lease, but rather only the right 

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' 

to receive rental payments. Thus, Colorado Interstate argues that 

in the absence of a default on the part of CMI which would have 

triggered an assignment of all remaining rights to CIT, CMI 

retained rights including the right to rely on the attorney fees 

provision which were never passed on to CIT. Colorado Interstate 

argues that because no evidence was presented indicating CMI's 

default under the agreement, CIT never became entitled to rely on 

the costs and attorney fees provision in section 18(c) of the 

Master Lease. 

The granting clause of the Security Agreement clearly 

assigned to CIT all of CMI's rights under the lease excepting only 

CMI's right to receive payments pursuant to an indemnification 

provision. Section 1.07 reiterates that all of CMI's rights, 

except the right to receive payments pursuant to the indemnification provision, were assigned to CIT. In addition, section 1.07 

specifically articulates that the assignment to CIT included the 

right to receive all rental payments, damages, and other. moneys 

payable pursuant to the Master Lease. This language clearly disposes of Colorado Interstate's contention that only the right to 

receive rental payments was assigned. Moreover, we are of the 

view that the reference to damages and other moneys includes the 

right to recover attorney fees and costs. In addition, this section indicates that CIT's right to receive moneys is not dependent 

upon the occurrence of an event of default. Accordingly, we hold 

that Colorado Interstate's contentions in this regard are without 

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merit. 

Colorado Interstate also argues that even assuming CIT did 

receive a right to the attorney fees and cost provision, upon satisfaction of the lien all of the rights CIT received pursuant to 

the assignment terminated. Colorado Interstate asserts that 

CIT Group failed to prove that the lien did not terminate thereby causing such a right to revert to CMI. 

There is no evidence in the record that the terms and 

conditions of the Security Agreement were not met or 

that the Secured Note was not paid off in full upon 

receipt of all of the rental payments from Colorado 

Ipterstate . 

. . . Thus, even if CIT Group could have demonstrated an assumption of rights under the attorneys' 

fees clause, a second condition precedent to exercise of 

those rights against Colorado Interstate was not proven. 

(Appellant's Br. (No. 92-1226) at 14-15.) 

A review of section lB(c) of the Master Lease suggests the 

parties intended that the attorney fees and costs provision be 

construed broadly as evidenced by the expansive language that in 

"any action ... in relation to this Master Lease," attorney fees 

and costs be awarded. Appellee's Supp. App. (No. 92-1226) at 13 

(emphasis added). This language suggests that the parties 

intended that the protection of the attorney fees and costs provision apply irrespective of when the action was brought. For 

example, if CIT had brought an action against Colorado Interstate 

claiming all rental payments had not been paid when in fact they 

had, we are of the view that Colorado Interstate would have been 

able to collect attorney fees pursuant to the terms of the Master 

Lease ~ven if they had shown as part of their defense that all 

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' 

payments had in fact been paid and that the lien had been satisfied. Applying this reasoning to the instant case, it is apparent 

that the fees and costs provision should remain in effect to benefit CIT. 

In any event, Colorado Interstate's argument regarding an 

unestablished condition precedent is unavailing. As an initial 

matter, we note that satisfaction of the lien would not be a condition precedent to CIT's right to the attorney fees and cost pro-

. . ' h b h d' ' ub 18 v1s1O~ int e Master Lease, ut rat er a con 1t1on s sequent. 

Moreover, a proponent of a condition subsequent has the burden of 

demonstrating the condition has taken place. ~ Employers 

Casualty Co. v. Ragley. 197 S.W.2d 536, 538 (Tex. Civ. App. 1946); 

St. Paul Fire & Marine Ins. Co. v. Westmoreland, 105 S.W.2d 203, 

204-05 (Tex. Comm. App. 1937); Supreme Lodge of Knights of Honor 

v. Wollschlager, 44 P. 598, 598-99 (Colo. 1896) (proponent of condition subsequent had burden of alleging and proving existence of 

condition); John D. Calamari & Joseph M. Perillo, Contracts§ 11-

7, at 442 (3rd ed. 1987); William Jaeger, Williston on Contracts 

§667, at 150-51 (3rd. ed. 1968). Taking Colorado Interstate's 

assertion regarding the state of the record as true, we hold that 

Colorado Interstate has failed to meet its burden regarding the 

occurrence of the condition and that CIT's right to the attorney 

18 A condition precedent is "one which is to be performed before 

some right dependent thereon accrues." Black's Law Dictionary 293 

(6th ed. 1990). A condition subsequent is "a condition referring 

to a future event, upon the happening of which the obligation 

becomes no longer binding upon the other party .... " .ISL. at 

294. 

27 

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- fees and cost provision continued. Because the instant action 

clearly related to the Master Lease, we hold that the district 

court properly awarded attorney fees and costs to CIT. 19 

The judgment of the district court is AFFIRMED. 

19 Colorado Interstate does not assert on appeal that the amount 

awarded was unreasonable. 

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