Opinion ID: 171393
Heading Depth: 1
Heading Rank: 3

Heading: Right to Test

Text: Rafter Seven's appeal does not challenge the facts as gathered at trial and recounted by the bankruptcy court. Rather, it contends it had a right to test the equipment before it was required to reject it, implying there was no time frame within which it was required to test. The applicable statutes dictate otherwise. The right to inspect, synonymous with the right to test, is not separate from the obligation to notify the lessor of rejection within a reasonable time. Under WYO. STAT. ANN. § 34.1-2.A-407, a commercial lessee's promises in a finance agreement become irrevocable and independent upon acceptance of the goods. Because this is a finance lease, acceptance of goods with the knowledge of nonconformity precludes revocation of acceptance. Id. at § 34.1-2.A-516(b). Acceptance of goods is defined in § 34.1-2.A-515(a). Acceptance of goods occurs after the lessee has had a reasonable opportunity to inspect the goods and: (i)[t]he lessee signifies or acts with respect to the goods in a manner that signifies to the lessor or the supplier that the goods are conforming or that the lessee will take or retain them in spite of their nonconformity; or (ii)[t]he lessee fails to make an effective rejection of the goods (section 34.1-2.A-509(b)). Id. Under § 34.1-2.A-509(b), [r]ejection of goods is ineffective unless it is within a reasonable time after tender or delivery of the goods and the lessee seasonably notifies the lessor. If, as here, no time for rejection is prescribed by the relevant agreement, then a reasonable time for taking any action depends on the nature, purpose and circumstances of such action. Id. at § 34.1-1-204(b). An action is taken seasonably if it is taken within a reasonable time. Id. at § 34.1-1-204(c). Rafter Seven contends it did not accept the sprinklers within the meaning of § 34.1-2.A-515 because it never had an opportunity to test them given that they were not even delivered in usable form. Application of the law to the facts does not support Rafter Seven's position. Rafter Seven received the first sprinkler in late July. Knowing the sprinkler did not conform, Rafter Seven kept it and made use of it anyway. Use of a nonconforming good constitutes acceptance. See 34.1-2.A-515(a)(i). Although Rafter Seven did not use the second and third sprinklers, received between mid-August and mid-September of 2001, it failed to effectively reject them. It inspected the second and third sprinklers upon delivery, determined they were junk, refused to have them assembled, and then let them sit in the fields for approximately six weeks before making what it argues is a rejection of the goods. Effective rejection of the goods did not occur until, at the earliest, November 1, 2001, when Rafter Seven wrote its letter to Brown. Even if we assume this letter constituted an unambiguous rejection of the sprinklers, six weeks was an unreasonable period of time to inspect given the facts of this case. To convince us otherwise, Rafter Seven cites Capitol Dodge Sales, Inc. v. N. Concrete Pipe, Inc., 131 Mich.App. 149, 346 N.W.2d 535 (1983). In Capitol Dodge, a commercial company sought to buy a truck with a snowplow attachment. Id. at 537. During the test drive, the truck overheated. The seller represented that the overheating was the result of incorrect placement of the snowplow attachment. The buyer accepted the explanation and attempted to properly attach the snowplow per the seller's instructions. Over the next two days, the vehicle overheated several times and the buyer repeatedly contacted the seller, ultimately telling him he did not want to buy the truck. Id. at 537-38. Upon suit, the seller contended the buyer's use of the truck constituted acceptance, while the buyer claimed he was only exercising his right to a reasonable inspection period. The court held that approximately three days of inspection was not unreasonable. Id. at 540. In Colonial Pacific Leasing Corp. v. JWCJR Corp., 977 P.2d 541 (Utah App. 1999), also cited by Rafter Seven, an auto shop purchased a computer and software system financed by Colonial Pacific. On the day of delivery, the debtor informed the creditor that the equipment was received but not yet operational. Id. at 543. On the second day, the creditor contacted the debtor and this time the debtor informed it that the software system was working. Later that same day, the system crashed. The debtor called the software company but was unable to get the system working. Soon after, the debtor contacted the software company to come and pick up the equipment. Id. The debtor also called the creditor twice within ten days of the system crashing to inform it that the equipment was not operational. Id. at 546. Through his conversations with the creditor, the debtor understood that he was no longer obligated on the lease due to his rejection of the goods. Id. More than two years later, the creditor brought suit against the debtor to recover unpaid lease payments. The trial judge ruled for the creditor. The appellate court reversed, holding that the trial court failed to make factual findings about whether the debtor had a reasonable opportunity to inspect the system. In so doing, the court noted: Taking possession of the goods is not determinative of acceptance, nor is the signing of a form acceptance before receipt of goods, nor the making of a lease payment. A reasonable time to inspect under the UCC must allow an opportunity to put the product to its intended use, or for testing to verify its capability to perform as intended. Id. at 545 (internal citations and quotation marks omitted). We agree with this interpretation of a reasonable time to inspect or test, but that does not change the outcome of this case. The facts of both Capitol Dodge and Colonial Pacific diverge significantly from those here. With respect to the second and third sprinklers, Rafter Seven recognized immediately that the used sprinklers delivered to it were nonconforming to the leases and were junk. No testing was necessary to determine nonconformance. Instead of notifying Brown, however, Rafter Seven left the sprinklers sitting in the field. This is in stark contrast to Capitol Dodge and Colonial Pacific, where the buyers attempted to put the purchased goods to use and immediately contacted the appropriate party upon finding the defects. Seasonable rejection is intertwined with the concept of a reasonable time to inspect. See § 34.1-1-204. For either concept, the reasonable time period is tied to the difficulty of discovering the nonconformity. See 1 JAMES J. WHITE & ROBERT S. SUMMERS, UNIFORM COMMERCIAL CODE § 8-3 at 447-48 (4th ed.1996) (hereinafter WHITE & SUMMERS). In this case, Rafter Seven knew immediately on inspection that the second and third sprinklers were nonconforming because not all of the parts were delivered and the equipment was not operable. Case law supports the conclusion that Rafter Seven's time to reject was relatively short in these circumstances. Compare Pioneer Peat, Inc. v. Quality Grassing & Servs., Inc., 653 N.W.2d 469 (Minn.App.2002) (one month lapse between acceptance and rejection not reasonable where company knew product was nonconforming); McClure Oil Corp. v. Murray Equip., Inc., 515 N.E.2d 546, 552 (Ind.App.1987) (ineffective rejection where buyer did not give unambiguous rejection until nineteen days after receipt of product during which time he used product, claimed to be dissatisfied with product from first day of use, and ordered alternative equipment nine days after receipt of disputed equipment); EPN-Delaval, S.A. v. Inter-Equip, Inc., 542 F.Supp. 238, 243, 247 (S.D.Tex.1982) (where defect is total and blatant, sixty-five days constitutes unreasonable rejection time); with Integrated Circuits Unlimited, Inc. v. E.F. Johnson Co., 691 F.Supp. 630, 631, 634 (E.D.N.Y.1988) (one month reasonable where purchaser actively testing complex electronic equipment), rev'd on other grounds, 875 F.2d 1040 (2d Cir.1989); Tri-Continental Leasing Corp. v. Law Office of Richard W. Burns, 710 S.W.2d 604 (Tex. App.1985) (testing time of one month reasonable where equipment malfunctioned immediately and buyer was constantly working with seller to make equipment operable); Moses v. Newman, 658 S.W.2d 119 (Tenn.App.1983) (one day not long enough to constitute reasonable time to inspect). Rafter Seven knew upon inspection that the equipment was nonconforming, yet it did nothing to reject the second and third sprinklers for at least six weeks after they were delivered. [1] According to the specific language of the statute, these actions are consistent with acceptance rather than rejection. See § 34.1-2.A-515 (acceptance occurs when lessee does any of three things after a reasonable opportunity to inspect the goods: (a) signifies acceptance; (b) fails to make an effective rejection; or (c) does any act that signifies acceptance). While a reasonable opportunity to inspect and test is available under the UCC, six weeks was an unreasonable period in the circumstances of this case, given Rafter Seven's immediate recognition of the defective condition of the equipment. WHITE & SUMMERS make clear why speedy notification is important: The policies for speedy notification are not mysterious. The obvious policies behind the notice provisions are to give the seller [here, the lessor] an opportunity to cure, to permit the seller to assist the buyer in minimizing the buyer's losses, and to return the goods to seller earlybefore they have depreciated, rotted or worse. If the seller can cure the difficulty and so save the sale and prevent lost profits that the buyer might otherwise suffer, the policy has been fulfilled. Even if the seller's inspection discloses that the goods are defective and the seller agrees to take them back, the entire loss from the transaction may be minimized by early action, because the seller may be able to resell the goods to another party and at a higher price than the goods would command after they had depreciated. WHITE & SUMMERS at 445-46. The dissent does not believe the Uniform Commercial Code [would] really leave a lessee in Rafter Seven's position to be so rooked without recourse, dissent at 5, and suggests we are ignoring the realities of the situation. To the contrary, as the lease agreements note, this is a case in which the lessee, Rafter Seven, chose the supplier, Ochs, and authorized the finance lessor, Brown, to pay the supplier for the cost of the sprinklers before the goods were delivered to the lessee. This is also a case in which Rafter Seven agreed that Brown would not be responsible for warranting the fitness of the equipment, and that Rafter Seven would look only to Ochs in the event that any item of equipment was defective. As one court has explained in a tripartite situation such as this: When the commercial context has been, as here, a financing lease, the weight of authority is that the consideration which flows from the financing lessor is money, not a functioning product. Accordingly a breach by the supplier of the equipment does not excuse the lessee from making lease payments to the finance-lessor, unless the equipment lease otherwise provides. Where, as in many lease documents with a finance-lessor (and in the instant case), there is an express disclaimer of liability for malfunctioning equipment, the position of the finance-lessor is that much stronger. Patriot Gen'l Life Ins. Co. v. CFC Investment Co., 11 Mass.App.Ct. 857, 420 N.E.2d 918, 922 (1981) (footnote omitted) (citing cases). Given that Rafter Seven knew immediately, without testing, that the long-overdue sprinklers were non-conforming, it was clearly obligated by § 34.1-2A-515 to so inform Brown to whom it owed payments for financing the transaction. The bankruptcy court correctly determined that Rafter Seven had all the time it needed to inspect the facially nonconforming goods, and that its rejection was therefore not seasonable. [2]