Court Opinion

ID: 8946577
Source: CourtListenerOpinion
Date Created: 2022-11-27 08:25:50.906713+00
Date Added: 2024-06-11T17:09:51.952470
License: Public Domain

BECKER, Circuit Judge,
dissenting.
This case turns on the structure of the underlying transaction. Was the transaction one “intended to operate only as a security transaction,” to which Article Two of the Uniform Commercial Code is inapplicable under § 2-102, N.J.S.A. § 12A:2-102? If not, was GECC a “seller” against whom acceptance can be revoked under § 2-608 of the Uniform Commercial Code, N.J.S.A. § 12A:2-608? As I read the record, it is incontrovertible that this transaction was structured by GECC, making use of its own standard forms, so that it would first take title from the manufacturer and then enter an arrangement with Ger-Beck whereby GECC would be the seller of the equipment and Ger-Beck the buyer. In short, GECC used its considerable leverage to structure the transaction in part as a sale, presumably for its own advantage, and these sales aspects must be governed by Article Two.
Notwithstanding the jury verdict in favor of the defendant, the majority now relieves defendant GECC from the risk of its chosen path — the risk that Ger-Beck would exercise its § 2-608 remedy of revocation of acceptance against GECC as seller of a substantially nonconforming product. It bases this result on dictum in a single footnote in one New Jersey trial court case (which was later affirmed in a single-paragraph per curiam opinion) that declines to imply warranties against a non-“merchant.” The majority reasons that we are thereby compelled to find that the New Jersey Supreme Court would hold that a buyer may never revoke acceptance against a seller for the mere reason that the seller is a finance company. In my view, the majority misreads that footnote and the balance of the opinion in Miller Auto Leasing Co. v. Weinstein, 189 N.J.Super. 543, 461 A.2d 174 (Law Div.1983), aff’d per curiam 193 N.J.Super. 328, 473 A.2d 996 (App.Div.1984), cert. denied, 97 N.J. 676, 483 A.2d 192 (1984), which expressly applies only to breach of warranty remedies under §§ 2-314 and 315 of the Uniform Commercial Code, N.J.S.A. 12A:2-314, 315, and not to the very different remedy of revocation of acceptance under U.C.C. § 2-608, N.J.S.A. § 12A:2-608. This misreading limits the affected purchaser to his Article Nine remedies only, as if no title had been transferred. I believe that the New Jersey Supreme Court would hold to the contrary, that even where warranties cannot be implied, the separate Article Two remedy of revocation of acceptance is available and was properly invoked in this case. I therefore respectfully dissent.
I.
The majority highlights certain facts that lend support to its result, but ignores additional facets of the record. Given the district court’s limited scope of review in set*1212ting aside a jury verdict,1 these facts are especially important.
As trial testimony from both GECC and Ger-Beck witnesses makes clear, GECC purposefully structured its relationship with Ger-Beck so that GECC would pay the purchase price of the lathe directly to the manufacturer and thereby acquire title to the equipment. See Record at 40a, 43a-44a, 48a, 73a, 104a. GECC and Ger-Beck then signed a standard GECC lease form, see Record at 45a, 148a, which required, among other provisions, that lessee Ger-Beck maintain theft and fire insurance on the lathe for the benefit of lessor GECC “[fjrom the time the Equipment is delivered to the Lessee until it is returned to Lessor.” The lease also specified that “the Equipment shall at all times remain personal property of Lessor.” Upon commencement of this lease and in accordance with its terms, Ger-Beck deposited $26,938.20 with GECC. Additionally, GECC and Ger-Beck executed an addendum to the lease that required Ger-Beck to purchase the lathe upon the lease expiration. The required purchase price equalled Ger-Beck’s deposit under the lease.2 Subsequently, upon its original acceptance of the lathe, Ger-Beck executed a “Lessee’s Certificate of Delivery and Installation” for the benefit of GECC.
Under these facts, the jury had more than enough bases to determine, as it did by answer to special interrogatory, that the transaction between GECC and Ger-Beck was not merely a financing arrangement but also a sale of equipment. Title to the lathe clearly passed to GECC from the manufacturer, and GECC contracted with Ger-Beck for subsequent transfer of that title. GECC paid the purchase price directly to the manufacturer, choosing not to loan Ger-Beck the money to purchase the lathe directly from the manufacturer itself. This was done in order to structure the transaction according to GECC’s choice. Subsequently, GECC entered with Ger-Beck into a lease containing a “guaranteed purchase option” addendum, thereby selling the lathe GECC had acquired from the manufacturer to Ger-Beck. On the facts presented and under the narrow scope of review afforded the district court and now this court, the jury’s determination that the transaction had sales aspects and that GECC was the seller cannot be overturned by a judgment n.o.v.
II.
In examining the jury verdict, the majority properly focuses on N.J.S.A. § 12A:2-102 and rightly states that “[tjhe verdict for the defendant [Ger-Beck] depended on the threshold finding that the transaction between the plaintiff and the defendant was not intended to operate only as a financing transaction.” See Majority Opinion at 1209 (emphasis supplied). Despite (or perhaps because of) the compelling factual predicate for the jury’s finding, demonstrated in Part I, supra, the majority attempts to transform the issue into a question of law by concluding that “the evidence establishes as a matter of New Jersey law that the transaction between GECC and Ger-Beck, while evidenced by an instrument denominated as a lease, was intended only as security for payment of the note.” At 1208. The majority’s analysis misconstrues N.J.S.A. 12A:2-102, however. Indeed, the majority ignores not only the plain language of that section and the comments thereto, but also the interpretation of that provision by the New Jersey Supreme Court and its sister state supreme courts. All of this authority supports the jury’s verdict that the transaction at issue was in part a sale subject to Article Two of New Jersey’s Uniform Commercial Code.
*1213N.J.S.A. 12A:2-102 states in pertinent part that Article Two “does not apply to any transaction which although in the form of an unconditional contract to sell or present sale is intended to operate only as a security transaction.” The New Jersey comment to N.J.S.A. 12A:2-102 explains what is already made explicit by the language of that section: Article Two “covers actual sales transactions in which the seller retains a security interest, since the section excludes those transactions which are intended to operate only as security transactions.” N.J.S.A. 12A:2-102, New Jersey Study Comment 2 (emphasis in original). The Code therefore contemplates a system whereby financing elements may coexist with sales aspects. Article Two is inapplicable only where no sales aspects exist.
The New Jersey Supreme Court endorsed this plain reading of § 2-102 in Associates Discount Corporation v. Palmer, 47 N.J. 183, 219 A.2d 858 (1966). The question in Associates Discount was whether Pennsylvania’s U.C.C. § 2-102, which is identical to New Jersey’s § 2-102, excluded a “bailment lease” from the provisions of Article Two.3 The court found that the “bailment lease” transaction had both security and sales aspects. See id., 219 A.2d at 860. It held, however, that § 2-102 “excludes from Article 2 those dealings designed to operate only as security transactions.” 4 Id. at 861 (emphasis in original); accord Worrell v. Farmers Bank of Delaware, 430 A.2d 469, 471 (Del.1981).
Although Associates Discount dealt with the Pennsylvania Code, its reasoning indicates that the New Jersey Supreme Court would interpret New Jersey’s provision in the same way. The code sections are identical, and the court relied on no Pennsylvania cases in reaching its conclusion. Moreover, the court placed strong emphasis on the official comments to § 2-102 of the Pennsylvania code, which on this matter do not differ in any substantial way from the New Jersey comments quoted above. In fact, Justice Hall stated in his concurring opinion in Associates Discount that “the court is in effect saying that Pennsylvania would so decide and that it is to be the rule in New Jersey, ... as well as laying down an interpretation which may have an effect in all Code jurisdictions in view of the purpose of over-all uniformity.” 219 A.2d at 861-62.5
The New Jersey Supreme Court’s view that the sales aspects of a mixed sale and security transaction are governed by Article Two is consistent with the bulk of authority from other states with the same controlling authority. See, e.g., Steiner v. Mobil Oil Corp., 20 Cal.3d 90, 98 n. 3, 141 Cal.Rptr. 157, 162 n. 3, 569 P.2d 751, 756 n. 3 (1977); Skinner v. Tober Foreign Motors, Inc., 345 Mass. 429, 187 N.E.2d 669, 671 (1963); May Co. v. Trusnik, 54 Ohio App.2d 71, 375 N.E.2d 72 (1977); cf. North Carolina Nat’l Bank v. Holshouser, 38 N.C.App. 165, 247 S.E.2d 645 (1978) (distinguishing Associates Discount on differences in the states’ comments to § 2-102). This rule has been applied when, like the transaction here, a third-party finance com*1214pany is involved. See, e.g., Massey-Ferguson Credit Corp. v. Casaulong, 133 Cal.Rptr. 497, 62 Cal.App.3d 1024 (1976); Citizen’s Natl. Bank of Decatur v. Farmer, 77 Ill.App.3d 56, 32 Ill.Dec. 740, 395 N.E.2d 1121 (1979).
Because Article Two applies to the sales aspects of a mixed sale and security transaction, both Article Two and Article Nine govern. As one commentator has noted, § 2-102 serves to make this joint coverage complementary:
Article 9 of the Code specifically deals with secured transactions, which, when read with § 2-102, means that in the creation of a security interest it is Article 9 that governs and not Article 2. However, Article 2 would be applicable in that transaction to the extent that it governs the original acquisition or transfer of the goods which form the subject matter of the transaction in which there is a security interest.
Squillante, Commercial Code Review: Transactions not within the Uniform Commercial Code (Under Article 2—Sales), Part VI, 76 Comm. L.J. 101, 101 (1971).
The transaction between GECC and Ger-Beck involves the transfer of title to the lathe and therefore has sales aspects which are governed by Article Two. To be sure, the transaction has aspects of a security transaction. The existence of these aspects, however, does not detract from the fact that the transaction also constituted a contractual agreement to pass title for a price at a future time — that is, a “contract for sale” as defined by N.J.S.A. 12A:2-106(1). Ger-Beck now properly attempts to avail itself of its Article Two remedy of revocation of acceptance. Because the lathe was substantially nonconforming, there has been a failure of consideration and Ger-Beck has the right under Article Two to revoke its acceptance.6 N.J.S.A. § 2-608. I believe that the New Jersey Supreme Court would look to Associates Discount and its progeny to find that revocation of acceptance is a proper remedy for the sales aspect of this transaction, i.e., the transfer from GECC to Ger-Beck of the title to the lathe.
III.
Notwithstanding the factual and legal support for the jury’s verdict, discussed supra Sections I and II, the majority concludes that, as a matter of law, Ger-Beck may not avail itself of its Article Two remedy of revocation of acceptance. This legal conclusion is predicated exclusively on Miller, supra, with special emphasis on the second footnote of the trial court’s opinion. The majority’s reliance, however, is misplaced. A plain reading of the Miller case reveals that it does not deal with revocation of acceptance at all but with a different Article Two remedy, that for breach of implied warranty of merchantability.7
The transaction in Miller resembles the one between GECC and Ger-Beck to the extent that a manufacturer sold the equipment (an automobile) to a finance company which subsequently “leased” it to the ultimate consumer. The court denied the ultimate consumer in Miller a remedy against the finance company for breach of implied warranty, see generally N.J.S.A. 12A:2-314, 315. The consumer’s right to revoke acceptance of a substantially non-conforming good under N.J.S.A. 12A:2-608, however, was not at issue in the case. The Miller court therefore treated the issue before it as one concerned only with implied warranty of merchantability; indeed, the evidence in Miller “was submitted to the jury under instructions describing the principles of implied warranty of merchantability,” 461 A.2d at 175.
*1215Moreover, the opinion in Miller focused entirely on the question of whether the finance company in that case was a “merchant” as that term is used, in Article Two, see generally N.J.S.A. 12A:2-104(1), because a merchant is the only seller subject to a claim for breach of an implied warranty of merchantability. See generally N.J.S.A. 12A:2-314, 315. Under the Uniform Commercial Code, “a warranty that the goods shall be merchantible is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind,” N.J.S.A. 12A:2-314(1). All sellers, however, are not merchants. Only those who hold themselves out as having special knowledge of the product they sell, or those who may be assumed to have such knowledge, are deemed to be “merchants” under the U.C.C. See N.J.S.A. 12A:2-104(1); see also N.J.S.A. 12A:2-104, Uniform Commercial Code Comment 2 (“Obviously, this qualification restricts the implied warranty to a much smaller group than everyone who is engaged in business and requires a professional status as to particular kinds of goods.”). In rejecting the claim for breach of implied warranty against the finance company, the Miller court simply noted that the finance company had no special knowledge concerning the product it sold and thus was not a merchant subject to a claim for breach of an implied warranty of merchantability. See 461 A.2d at 176-77.
An examination of the differences between breach of implied warranty and those of revocation of acceptance illuminates the importance of the distinction between the remedies and demonstrates why Miller is inapposite. “The buyer may revoke his acceptance of a lot or commercial unit whose non-conformity substantially impairs its value to him,” N.J.S.A. 12:A2-608(1), if he does so within a reasonable time, N.J.S.A. 12A:2-608(2). Unlike an implied warranty of merchantability, the remedy of revocation of acceptance is available against all sellers, not just merchants. See N.J.S.A. 12A:2-608(2) (requiring notification of “seller”); see also N.J.S.A. 12A:2-103(l)(d) (defining “seller” as one who “sells or contracts to sell goods”). Thus, Miller’s holding and reasoning that a financing company, playing a role in a transaction similar to that here, is not a merchant is of no consequence to this case.
The different remedies also speak to different policy concerns. Two policies for implying warranties against only merchants support the Miller holding. First, buyers rely on merchants’ expertise that the products they purchase are “fit for the ordinary purpose for which such goods are used,” N.J.S.A. § 12A:2-314(2)(c). Implied warranties thus allow a form of reliance damages. As the Miller court emphasized, a buyer does not “rely on the skill and judgment” of a non-merchant finance company when purchasing an automobile. Miller, 461 A.2d at 176; see also A-Leet Leasing Corp. v. Kingshead Corp., 150 N.J.Super. 384, 392, 375 A.2d 1208 (App.Div.), cert. denied 75 N.J. 528, 384 A.2d 508 (1977) (no warranties implied because “lessee, unlike situations in which the lessor is a dealer in motor vehicles, does not rely upon the skill and judgment of the lessor [finance company]”); cf. Cintrone v. Hertz Truck Leasing, 45 N.J. 434, 212 A.2d 769 (1965) (cited in Miller for proposition that warranties are implied where lessor holds himself out as expert). Accordingly, Miller concluded that “[n]either policy nor logic require the warranties of merchantability be imposed” on the non-merchant finance company. Id. 461 A.2d at 177.
Second, implied warranties impose liability on merchants who, because of involvement with the relevant product, are able to alter the product to remedy the possibility of future defects or spread the risk if they continue to recur. See generally 3 Anderson, Uniform Commercial Code If 2-314:4, at 105-06 (1983). A non-merchant independent finance company has no such intimate involvement with the financed product. As Miller noted, the finance company had no “responsibility or opportunity” to “monitor the fitness of the vehicles,” “nor did the lease contemplate such.” 461 A.2d at 176. Instead, “warranty obligations were given directly by the *1216manufacturer through [the dealer] to the ultimate consumers.” Id. This policy concern is also inapplicable to non-merchant finance companies.
Revocation of acceptance, however, presents a different set of concerns that support its wide applicability. Revocation of acceptance under N.J.S.A. 12A:2-608 embraces a substantial performance standard that ameliorates the harsh perfect tender rule found in N.J.S.A. 12A:2-601. Under the perfect tender rule, the buyer may reject an entire shipment “if the goods or the tender of delivery fail in any respect to conform to the contract.” N.J.S.A. 12A:2-601; see A. Farnsworth, Contracts § 8.12, at 595-96 (1984); J. White & R. Summers, Law Under the Uniform Commercial Code § 8-3, at 303-05 (2d ed. 1980). Commentators have noted, however, that because of the prohibitive cost of inspection in advance of contemplated use, § 2-601’s harsh perfect tender rule is a “mere shadow of its formerly robust self.” Peters, Remedies for Breach of Contract Relating to the Sale of Goods under the Uniform Commercial Code: A Roadmap for Article Two, 73 Yale L.J. 199, 206-08 (1963). Rather, commercial practices proceed under § 2-608’s contemplated procedure of acceptance with subsequent revocation for goods whose “nonconformity substantially impairs” the value to the buyer — a significantly less onerous standard. See id. at 206-08; see also Kessler, The Protection of the Consumer Under Modem Sales Law, Part I, 74 Yale L.J. 262, 284-85 n. 114 (1964).
By importing Miller into its analysis of N.J.S.A. 12A:2-608, the majority holds that only those who buy from merchants may revoke their acceptance of a substantially non-conforming good. Application of § 2-608 against only “merchants,” however, produces an anomalous result: unqualified “sellers” are to be governed by the perfect tender rule, while the “merchants” who have expertise in the relevant product are to be governed by the less stringent substantial performance standard. Moreover, application of the revocation of acceptance rule against only “merchants” may force buyers from non-“merchants” to commit significant money, resources and time needed to fully inspect goods before they irrevocably accept them.
Because of the significant differences between the remedy of implied warranties and the remedy of revocation of acceptance, a per curiam affirmance by an intermediate appellate court of a trial court’s decision in the first context cannot be viewed as a harbinger of the decision of the Supreme Court of New Jersey in the second context. I therefore believe that the majority’s reliance on Miller is wholly misplaced. Moreover, I consider the entire case to be of limited precedential value for purposes of a U.C.C. analysis. Nowhere in text does Miller so much as refer to the U.C.C. The single reference that does exist was properly banished as dictum to the second footnote on which the majority so heavily relies.8 The thrust of the opinion’s text is an examination as to whether the finance company is a “merchant” or not, while the footnote in its entirety reads:
Defendant’s brief seems to urge that the court consider defendants a “purchaser,” not a “lessee.” In fact, the court adopts that position, but that is not the problem. The issue is, who is the “seller” for purposes of imposing implied warranties, and on that question it seems clear Z & W and the manufacturer of Alpha Romeos are the true “sellers,” not plaintiff [the finance company]. We are, therefore, willing to hold, notwithstanding the technicalities of the lease-form, that “title” in fact passed from Z & W/Alpha to defendants, with plaintiff merely obtaining a security interest in the vehicle. See N.J.S.A. 12A:1-201(37); Annotation, “UCC Equipment Lease as Security Interest,” 76 A.L.R.3d 11 (1977).
461 A.2d at 176 n. 2. The footnote’s question “who is the ‘seller’ for purposes of imposing implied warranties” is not only a *1217sly misstatement of N.J.S.A. 12A:2-314(a) (imposing implied warranties only “if the seller is a merchant”), it is also unnecessary to the principal warranty analysis of the opinion, which concludes that the finance company is not a “merchant.” The footnote thus is both dictum and an incorrect suggestion that a finance company can only escape liability for breach of implied warranty if it is not a seller. Its lack of reasoning, its irrelevance to the opinion, the different context in which it was made and its inconsistency with Associates Discount all convince me that the majority’s reliance on this footnote in Miller is misplaced.
IV.
I am mindful of the possible unspoken ratio decidendi of the majority’s opinion: a finance company is not thought to be in the business of selling goods and should not be subject to Article Two remedies for sales of goods. “[U]nder Miller, the plaintiff’s status is, as a matter of law, solely that of financier,” concludes the majority. “Consequently, the transaction between the plaintiff and the defendant was, as a matter of law, intended only as a security transaction....” Majority Opinion at 1211. But to look to the general nature of the seller’s business rather than the agreement between the parties is to be ruled by “the tyranny of labels.” Snyder v. Mass., 291 U.S. 97, 114, 54 S.Ct. 330, 335, 78 L.Ed. 674 (1934). For a finance company to avoid the strictures of Article Two, it should simply limit itself to providing finance and not involve itself in the sale of goods.
The real question in this case, however, is not the status of GECC as a finance company. The real question concerns the allocation of risk and potential litigation expenses. Under normal circumstances, GECC would have the same claim for revocation of acceptance against the manufacturer of the lathe as Ger-Beck has presented against GECC. Thus, under normal circumstances, whether Ger-Beck has a claim against GECC or against the manufacturer would be relatively unimportant. Ultimately the manufacturer would have to take back the lathe and return the purchase price. In this case, GECC’s liability to Ger-Beck assumes special importance apparently because the manufacturer is in financial difficulty. What is at issue is whether GECC or Ger-Beck must assume the costs incident to those financial difficulties, the potential litigation expenses in bankruptcy and the potential inability to recover. Our construction of New Jersey’s version of the Uniform Commercial Code therefore concerns an allocation of risk.
Neither Ger-Beck nor GECC serves a function in this transaction that mandates it and not the other to assume the risk and expense incident to the bankruptcy of the manufacturer. I therefore believe that the allocation of this risk is typical of a matter best left to the parties to allocate by contract as they see fit. This may or may not have been the subject of negotiations; nonetheless, the risk was allocated to GECC, which had considerable leverage and used its own standard contract form to memorialize its agreement with Ger-Beck. By injecting itself into the chain of title, GECC assumed the risk that the manufacturer from whom it took title would be unavailable if revocation of acceptance were necessary. We have neither responsibility nor authority to rewrite the contract and its allocation of risk.
V.
In this case, aspects of the transaction that GECC itself structured constituted a sale to Ger-Beck. As the New Jersey Supreme Court has found in interpreting an identical provision of Pennsylvania law, the sales aspect of such a transaction is governed by Article Two. See Associates Discount, supra. Regardless of what a single New Jersey Superior Court case may hold with reference to an implied warranty of merchantability, the separate Article Two remedy was clearly available to Ger-Beck. The lathe which GECC sold to Ger-Beck did not work properly, and this noncomformity substantially impaired the value of the lathe to Ger-Beck. It thus had a right to revoke its acceptance against the *1218seller, GECC, which it did within a reasonable time. The jury verdict should be upheld.

. A jury verdict can be overturned by a judgment n.o.v. only under Fed.R.Civ.P. 50(b) only if "the record is critically deficient of that minimum quantity of evidence from which a jury might reasonably afford relief.” Powell v. J.T. Posey Co., 766 F.2d 131, 133-34 (3d Cir.1985), (quoting Dudley v. South Jersey Metal, Inc., 555 F.2d 96, 101 (3d Cir.1977).

. When at trial the addendum was referred to as "an option to buy," a regional manager of GECC answered, “That’s a misnomer. There was no option. It was guaranteed.” Record at 44a.

. At issue was whether Article Two's statute of limitations applied to an action to cover a deficiency arising under the bailment lease.

. Accordingly, the court held that Article Two and its statute of limitations applied to the sales aspects of the transaction.

. The majority’s attempt to distinguish Associates Discount is unpersuasive. The majority notes the difference in form between the transaction as at issue in Associates Discount and the present case, and states that “[i]t is difficult to see a useful analogy between the intent of the parties to the agreements.” Yet the majority’s holding that Article Two does not apply to Ger-Beck’s arrangement with GECC is based not on the intent of the parties but upon its analysis of GECC’s status as a matter of law. Certainly to the extent that the intent of the parties is a relevant consideration, it weighs in favor of upholding the jury's determination, not of overturning it.
Moreover, courts in other jurisdictions that have followed Associates Discount have not observed the awkward distinction suggested by the majority, but have applied the reasoning of the case to agreements between purchasers and financiers as well as between purchasers and sellers. See, e.g., All-States Leasing Co. v. Ochs, 42 Or.App. 319, 600 P.2d 899, 907 n. 9 (1979).

. In this regard, it should be noted that GECC could in turn revoke against the manufacturer of the lathe because of the substantial impairment of the goods that it as original seller had sold to GECC, the buyer in that transaction. See discussion infra Part IV.

. Indeed, even though Miller deals explicitly with breach of implied warranty of merchantability, the case never cites the U.C.C. and is therefore not clearly a U.C.C. case at all. See infra pages 1216-17.

. Indeed, even the textual matter to which the footnote is appended is merely tangential, set off as it is from the rest of the opinion by parentheses.