Summary of a Recent
Judicial Development in
Commercial Transactions

Ch.12 Debtor Accepts and Fails to Seasonably
Reject Non-Conforming Goods

Eric H. Foy
National AgLaw Center Research Associate

Summary of Decision

In In re Rafter Seven Ranches L.P., 546 F.3d 1194 (10th Cir. 2008), the United States Court of Appeals for the Tenth Circuit affirmed the bankruptcy appellate panel's decision, which rejected debtor's objection to the creditor's claim that debtor was liable to creditor for equipment leases. The court held that the Uniform Commercial Code allowed debtor a reasonable opportunity to inspect and test the used sprinkler systems at issue, but six weeks was an unreasonable period to wait. Debtor accepted one set of sprinklers and failed to seasonably reject two other sets.

Background

Rafter Seven Ranches (debtor) purchased some sprinkler systems for use on its farm property. Id. at 1197. Brown, a private agricultural and equipment lender, financed the purchase of the sprinkler systems. Id. In the financing agreements, Brown made it clear that he was not warranting the sprinklers for any purpose. Id. When the first sprinkler system was delivered and installed in late July, it did not conform to the lease in terms of its serial number or equipment characteristics. Id. Despite the nonconformity, debtor made use of the sprinklers to water its corn fields. Id. Between mid-August and mid-September, two more nonconforming sprinkler units were delivered to debtor. Id. at 1198. Debtor determined that the sprinklers were defective and directed that they not be installed. Id. The equipment was left in the field and never completely assembled. Id.

Six weeks later, debtor sent a letter to Brown informing him that debtor would not be honoring the leases. Id. Brown responded that he was not responsible for the seller's breach of warranty because he did not provide the sprinklers, but simply provided the financing. Id. No payments were ever made under the leases, and Brown filed suit against debtor and seller. Id. at 1199. Brown obtained a default judgment against seller, but Brown's suit against debtor was stayed by debtor's Ch. 12 bankruptcy filing. Id. Brown filed a proof of claim in the bankruptcy court for payment on the leases, which debtor rejected. Id. After a two-day trial, the court held that debtor had accepted the first sprinkler set and failed to seasonably reject the other two sets. Id. Debtor appealed to the bankruptcy appellate panel, which affirmed. Id.

Arguments

Debtor argued that the bankruptcy court and the bankruptcy appellate panel erred in concluding that it had no right to test the sprinklers before debtor was obligated to pay Brown. Id. at 1199

Analysis and Holdings

Under Wyoming Annotated Statute § 34.1-2.A-407, a commercial lessee's promises in a finance agreement become irrevocable and independent upon acceptance of the goods. Id. at 1200. Acceptance occurs after the lessee has an opportunity to inspect the goods and signifies to the lessor or supplier that the goods are conforming or will be retained in spite of their nonconformity, or the lessee fails to effectively reject the goods. Id. (citing Wyoming Annotated Statute § 34.1-2.A-509(b)). An effective rejection of goods must take place within a reasonable time after delivery and the lessor must be seasonably notified. Id. The court held that debtor accepted the first sprinkler set because it retained the set in spite of the set's nonconformity and used it to water debtor's corn fields, further explaining that "[u]se of a nonconforming good constitutes acceptance." Id. at 1201. Although debtor never used the second and third sprinkler sets, debtor failed to effectively reject the sets in a reasonable time. Id.

The case was decided on November 4, 2008.