No. 81CA1036 No. 81CA1037 No. 81CA1038Colorado Court of Appeals.
Decided March 3, 1983 Rehearing Denied March 31, 1983
Appeal from the District Court of Larimer County Honorable Conrad Ball, Judge
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Banta, Hoyt, Banta, Greene, Hannen Everall, J. Mark Hannen, G. William Beardslee, for H.M.O. Systems, Inc., and F. Parker Fowler, Jr.
Arthur P. Roy, for Choicecare Health Services, Inc., and J. Richard Barnes
Division I.
Opinion by JUDGE STERNBERG.
[1] Plaintiff H.M.O. Systems, Inc., sued defendant Choicecare Health Services, Inc., for damages, alleging breach of a lease and of a contract. Following trial to the court, judgment entered for HMO and damagesPage 637
were awarded for breach of the contract, but not of the lease. HMO appeals the court’s finding that it is not entitled to damages under the lease, and both parties appeal the amount of damages awarded for breach of contract. Choicecare had been placed in receivership in a related action consolidated with this appeal, and HMO also appeals the priority of its damages claim as designated by the receiver. We affirm in part and reverse in part.
[2] The subject of the law suit was two separate contracts entered into in February 1977 between Choicecare and HMO and its predecessors. The first contract, the “Master Equipment Lease,” provided that Choicecare was to lease certain computer hardware for a term of 48 months. It contained an option to purchase. HMO had originally purchased the equipment from Hewlett-Packard, and Choicecare’s monthly rental payments to HMO were equal to the monthly payment on the promissory note executed by HMO to United Bank of Fort Collins to finance the purchase. Choicecare deposited the lease payments directly to an account from which the United Bank automatically collected its payments. The option price was designated as the remaining balance of the lease payments. The lease also made Choicecare responsible for maintenance costs, taxes, risk of loss, and all warranties were disclaimed. [3] The lease included the following remedies upon default: repossession of the equipment, and forfeiture of all lease payments, plus liquidated damages, specified as the entire balance of lease payments plus interest. [4] Contemporaneously with this lease, the parties entered into another agreement whereby Choicecare agreed to pay $15,000 for a non-expiring license to use a computer software system developed by HMO expressly for Choicecare’s claims processing needs. In consideration of Choicecare’s initial involvement and investment in the system, and its agreement to make office space and the computer available to HMO to assist in marketing it to other health maintenance organizations, Choicecare was to receive a royalty for each system sold. [5] Choicecare became insolvent and was placed into receivership by the Insurance Commissioner in January 1980. As a result of its insolvency, Choicecare failed to make the January lease payment, whereupon HMO declared a default and attempted to repossess the equipment. In March of that year, the receivership resumed the lease payments and attempted to exercise the option to purchase the equipment. [6] HMO filed suit under the lease seeking return of the equipment, liquidated damages, and attorney fees. HMO also sought damages for breach of Choicecare’s contract to provide a demonstration model for the computer equipment and software. Choicecare counterclaimed for royalties due under the contract. [7] The trial court found that Choicecare retained the right to exercise its purchase option as a form of redemption and denied HMO’s claim under the liquidated damages clause, finding that payment of the debt by exercise of the option to purchase avoided any basis for liquidated damages. The court found a breach of the second agreement in Choicecare’s inability to provide a demonstration model for future sales, and fixed the amount of damages at $85,000. This amount was subject to set off in the amount of $4,000 for royalties owing at the time of default. [8] Both parties requested that the court amend its findings and judgment, alleging they did not comply with C.R.C.P. 52(a) in that they were not sufficiently detailed to determine the theory for the award or measure of damages. This request was denied. I.
[9] On appeal HMO argues the trial court erred in not applying the default provisions of the lease agreement according to their terms, which would have given it repossession of the equipment or its market value and liquidated damages. We disagree.
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[10] Any transaction, regardless of its form, which is intended to create a security interest is subject to Article 9 of the Uniform Commercial Code Lease Finance, Inc. v. Burger, 40 Colo. App. 107, 575 P.2d 857 (1977); § 4-9-102, C.R.S. 1973. Whether a transaction is characterized as a lease or sale is not controlling, but rather it is the intention of the parties which is controlling, that intention to be determined by the facts of each case. Lease Finance, Inc., supra; see § 4-1-201(37), C.R.S. 1973. In Lease Finance, Inc., supra, the factors examined to determine the character of a transaction included: [11] “(1) Whether the lessee is given an option to purchase the equipment, and, if so, whether the option price is nominal . . . (2) whether the lessee acquires any equity in the equipment . . . (3) whether the lessee is required to bear the entire risk of the loss; or (4) pay all charges and taxes imposed on ownership; (5) whether there is a provision for acceleration of rental payments; (6) whether the property was purchased specifically for lease to this lessee . . . and (7) whether the warranties of merchantability and fitness for a particular purpose are specifically excluded by the lease agreement.” [12] That each of these factors is contained in this master lease agreement leads to the conclusion it was in fact a security agreement. Although the option price was not nominal, it was below the fair market value of the equipment. This fact, and the fact that the price corresponded to the balance due under the note given to United Bank, diminishing as rental payments were made, is indicative of an intent to give Choicecare equity in the property. Aoki v. Shepherd Machinery Co., 665 F.2d 941 (9th Cir. 1982). Thus, the transaction is subject to Article 9 of the Uniform Commercial Code. Accordingly, under § 4-9-506, C.R.S. 1973, the debtor, Choicecare, acquired the right to redeem the equipment at any time before HMO disposed of it. And, Choicecare exercised this right by bringing the payments to date and paying the remaining amount due on the note. [13] The trial court’s remedy recognized the equitable interest in the property that § 4-9-506, C.R.S. 1973, was designed to protect. Although it couched its ruling in pre-U.C.C. language, the court’s treatment of the matter is consistent with the principles of Article 9, and therefore, we affirm those findings and conclusions. See Klipfel v. Neill, 30 Colo. App. 428, 494 P.2d 115 (1972).II.
[14] HMO also asserts error in the trial court’s denial of its request for liquidated damages. We affirm the trial court.
(1979). [17] Here, the liquidated damages clause gave HMO the amount outstanding on the loan plus ten percent interest. The default clause also provided for repossession and/or resale of the equipment with all proceeds accruing to HMO. Looking at these provisions from the time the transaction was entered into, we note that HMO would have received the proceeds of sale, all payments previously made under the lease, and the outstanding balance of the note executed to United Bank plus ten percent. Hence, its enforcement would have resulted in an unconscionable forfeiture, and it was therefore unenforceable. Oldis v. Grosse-Rhode, 35 Colo. App. 46, 528 P.2d 944
(1974).
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[18] The trial court reached the same result although not on these grounds. A correct judgment will not be disturbed on review even if the reason for the decision was wrong. Silverstein v. Sisters of Charity, 43 Colo. App. 446, 614 P.2d 891 (1979).III.
[19] The trial court found that the software contract was breached by Choicecare’s insolvency. Both parties assert error in the award of damages; HMO arguing the amount was insufficient, and Choicecare arguing damages were not proven. Both parties also argue the findings and conclusions were insufficient under C.R.C.P. 52(a).
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allowance of recovery based on developmental costs was therefore error.
[26] To put HMO in the position it would have occupied had the breach not occurred, it should be compensated for loss of access to Choicecare’s computer for the period between the breach and the expiration of the contract. The general measure of damages, therefore, is the loss in value to HMO of access to the computer. Kniffin v. Colorado Western Development Co., supra. Any cost HMO avoided by not having to complete its own performance should be subtracted from this figure. Restatement (Second) of Contracts § 347.IV.
[27] Lastly, HMO argues that the judgment awarded should not have been classified a Class IV claim under § 10-3-507(3), C.R.S. 1973 (1982 Cum. Supp.). Instead, it argues, because the equipment was not owned by Choicecare, it should have been awarded the fair market value of the equipment, which is not subject to classification under § 10-3-507(3), C.R.S. 1973 (1982 Cum. Supp.). We disagree.