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SAUER v. XEROX CORP.

August 8, 1996

FRED SAUER, Plaintiff,
v.
XEROX CORPORATION, Defendant.



The opinion of the court was delivered by: LARIMER

 INTRODUCTION

 The present controversy arises from a dispute regarding the rights and obligations of parties to two equipment lease agreements. Plaintiff Fred Sauer's original complaint was filed on September 5, 1995, in the Central District of California. Jurisdiction is based on diversity of citizenship. On September 18, 1995, defendant Xerox Corporation ("Xerox") successfully transferred the action to this Court.

 On November 13, 1995, Sauer filed an amended complaint setting forth thirteen causes of action based on breach of contract, conversion, fraud and anticipatory breach. Sauer now moves for summary judgment on his first cause of action for breach of contract for the nonpayment of rent. Xerox seeks to dismiss this same breach of contract claim as well as Sauer's remaining claims (the second and fourth through thirteenth causes of action), with the exception of his third cause of action for breach of the obligation to pay casualty losses. Xerox also moves to strike Sauer's prayer for punitive damages.

 After argument on the original motions, Sauer separately moved for summary judgment on his third cause of action for breach of contract based on Xerox's alleged failure to pay casualty losses. Xerox then filed a cross-motion for summary judgment on this same claim.

 For the reasons set forth below, Sauer's motions for summary judgment are denied. Xerox's motion to dismiss is granted in part and denied in part. Xerox's motion to strike Sauer's prayer for punitive damages is denied. Finally, Xerox's cross-motion for summary judgment on Sauer's third cause of action is denied.

 BACKGROUND

 a. The User Lease

 In the early 1980's, Xerox researchers developed a manufacturing process for producing photoreceptors needed for its copiers. Xerox purchased equipment for the photoreceptor manufacturing line ("photoreceptor line") and installed it at its Oklahoma City plant. In 1985, as part of that initial installation, Xerox decided to sell and lease back some (Sauer contends all) of the equipment used on the photoreceptor line. Xerox initially entered into a sale-leaseback agreement with a third party, Integrated Equipment Leasing Corporation ("Integrated"), in the fall of 1985. *fn1" Ultimately, Sauer purchased the equipment from Integrated subject to the terms of the "user lease" between Integrated and Xerox. It is this user lease which gives rise to the claims at issue here.

 Sometime in 1989, Xerox purchased an improvement for the photoreceptor line, and this "Upgrade" was sold to Integrated pursuant to another sale-leaseback transaction (the "upgrade lease"). The rent under the user lease was accordingly increased. (Amendment No. 2.) Once again, the upgrade equipment was ultimately sold by Integrated to Sauer subject to the terms of the upgrade lease between Integrated and Xerox.

 The user lease contained an initial term of eight years at a specified rent, followed by two two-year renewal terms exercisable at the option of the lessee, Xerox. The user lease also contained a purchase option exercisable by Xerox at the end of the second renewal period. Because the value of the equipment subject to the lease was expected to decrease over time, the user lease contained a provision setting forth an appraisal process for determining the fair market rental value of the equipment should Xerox exercise its options to renew, as well as a fair market value should Xerox wish to purchase the equipment at the end of the lease.

 Pursuant to this appraisal provision, each party was authorized to designate an independent appraiser, who would then together "mutually agree" as to the value of the equipment. If they could not agree, the two appraisers were required to pick a third independent appraiser to make the final appraisal. If the two appraisers could not agree on a third appraiser, the third appraiser was to be appointed by the American Arbitration Association. The decision of this third appraiser would be "binding and conclusive on the Lessor and the Lessee . . ." (User lease Agreement, Section I (d).)

 The initial eight year term of the user lease expired on December 31, 1993. *fn2" In June of 1993, Xerox exercised its right to renew the user lease and the upgrade lease for a term of two years beginning January 1, 1994 and ending December 31, 1995. This is where the trouble begins.

 b. The Attempts to Establish the Fair Market Rental Value

 The facts surrounding the determination of the fair market rental value for the first renewal period are, with a few notable exceptions, mainly in dispute. It is clear, however, that in April of 1993, Xerox informed Integrated that it would elect to exercise the second renewal period upon the expiration of the first, and that it would likely exercise its option to purchase the equipment at the end of the lease.

 Apparently each side, Xerox and Integrated (Sauer was not yet, at least officially, in the picture) designated an appraiser pursuant to the provisions of the user lease. Xerox designated James McGowan as its appraiser and Integrated designated several different appraisers from a single firm who each visited the Oklahoma plant on different occasions. Xerox and Integrated did not agree with each other's appraisals and the initial term of the user lease expired on December 31, 1993, without any agreement as to the fair market rental value for the first renewal period.

 c. The AAA Appraisal

 When it became clear, in the summer of 1994, that the parties' appraisers could not agree, Xerox contends it sought to have the parties appoint a third appraiser, as set forth in the user lease appraisal provision. Xerox contends Integrated initially agreed to participate in the appointment of a third appraiser, but later disavowed this agreement.

 In May 1995, Xerox requested the American Arbitration Association ("AAA") to appoint the third appraiser, in keeping with the final step of the appraisal provision. Sauer (who in April 1995 became Integrated's successor in interest) vigorously objected to the AAA's intervention, alleging that any attempt to obtain an appraisal through the AAA was improper. Sauer refused to enter into the AAA appraisal process.

 On July 15, 1995, allegedly after considering Sauer's objections, the AAA appointed Charles Land as the third appraiser. On July 20, 1995, he inspected the leased equipment. On that same day, Sauer filed his original complaint in the Central District of California. On July 21, 1995, Sauer sent Xerox a formal notice of default for, among other things, nonpayment of rent during the first renewal period.

 On August 14, 1995, Land issued his first appraisal, in which he determined the fair market value (not the rental value) of the equipment to be $ 993,125. After being informed that a fair market rental value was required, Land issued a revised appraisal setting the fair market rental value at $ 550,000, based on the fair market value of $ 993,125. Xerox apparently pointed out what it believed were some erroneous assumptions by Land (regarding the length of the renewal periods and the residual value of the equipment at the end of the renewal periods) and thus asked him to reconsider the appraisal. Land's third and final report, dated September 8, 1995, set the fair market rental value at $ 275,000, and the residual value of the equipment at $ 200,000 (the purchase option price). Both parties dispute the correctness of this final Land appraisal.

 On November 28, 1995, Sauer told Xerox he was terminating the lease based on the alleged defaults listed in Sauer's earlier notice of default. On December 28, 1995, Xerox sent Sauer a check for $ 602,636.72, representing the back rent as set forth in the final Land appraisal, plus interest at the rate set forth in the user lease for late payments. Xerox denied any wrongdoing and reserved its rights to challenge the final Land appraisal. Sauer continued to disavow the arbitration process altogether; however, he cashed Xerox's check "in mitigation of damages."

 THE MOTIONS

 I. Xerox's Motion to Dismiss/Sauer's Motions for Summary Judgment/Xerox's Cross-Motion for Summary Judgment

 A. Sauer's Second Cause of Action -- Xerox's Allegedly Fraudulent Concealment/Misrepresentation of Information ...


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