Union Tank v. NuDevco Partners — Lease Guaranty Agreement Not Covered by the UCC Appellate Court Rules — Chicago Uniform Commercial Code Attorneys Near Oak Brook

When a holding company guaranteed lease that a subsidiary assumed for railcars, and then failed to honor guaranty when subsidiary defaulted on the lease, judgment in favor of railcar supplier was affirmed. The appellate panel found that the holding company’s guaranty was a contract to pay a debt, not a lease for goods or services, and the Uniform Commercial Code did not apply as a result.

In January 2003, Ponderosa Petroleum Company entered into a lease with General Electric Railcar Services Corporation for 47 railcars to carry crude petroleum. Over the next several years, the companies executed several riders to the lease agreement extending the term of the lease agreement. The last extension gave the agreement a termination date of February 2020. In April 2015, Associated Energy Services, a wholly owned subsidiary of NuDevco Partners Holdings, assumed the obligation to make payments under the lease, though Ponderosa remained the party to the lease.

In September 2015, Union Tank acquired the lease, riders, and railcars from General Electric Capital Corporation. That same month, Associated Energy sent a notice of termination of the lease to GE Railcar, citing as a justification that the railcars were approaching the end of their permitted use to haul crude oil. The lease did not authorize termination for this reason. Associated Energy then began to return the railcars to Union Tank, and discontinued rental payments at the end of the month. Union Tank invoked NuDevco Partners’ lease guaranty, but NuDevco refused to honor it.

In March 2016, Union Tank filed a complaint against NuDevco alleging breach of the lease guaranty. At a bench trial, Union Tank presented evidence showing that, prior to returning the railcars to Union Tank, Associated Energy failed to notify Union Tank that it was doing so. As a result, Union Tank incurred transportation and storage costs for the returned cars, as its facilities could not handle the increased inventory of the railcars. After the conclusion of Union Tank’s case in chief, NuDevco moved for a directed verdict, which was denied. NuDevco did not present any evidence, and the trial court found in favor of Union Tank, awarding a total of $1,332,149.00 plus prejudgment interest and attorney fees to be determined. NuDevco then appealed.

On appeal, NuDevco argued that the trial court erred in finding that the Uniform Commercial Code was inapplicable to Union Tank’s cause of action alleging breach of the lease guaranty. The appellate panel disagreed. The panel stated that, though the UCC applies to any agreement that creates a lease, Union Tank was suing NuDevco for the breach of a lease guaranty, which was a contract in and of itself, separate from the lease terms under which Associated Energy was paying Union Tank. Further, the panel stated, the guaranty was not a contract for the lease of goods or services, but, rather, a promise to pay a debt and such contracts are not governed by the UCC.

NuDevco next challenged the introduction of third-party invoices as evidence indicating the costs Union Tank incurred as a result of the returned railcars. The panel noted that the invoices were admitted under the business records exception to the prohibition on hearsay evidence and that the theory behind this exception is that the purpose of business records is to aid the functioning of the business, and, as such, the records must be accurate to be useful. Therefore, there is no incentive to falsify the record. The panel found that the testimony regarding the evaluation and payment of the invoices by Union Tank employees was sufficient to provide a foundation for the admission of the records into evidence. The panel, therefore, affirmed the decision of the circuit court.

You can view the Appellate Court decision here.

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