Inland Bank and Trust v. Oracle Flexible Packaging, Inc.
Filing
217
MEMORANDUM Opinion and Order written by the Honorable Gary Feinerman on 3/19/2020.Mailed notice.(jlj, )
UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
INLAND BANK AND TRUST,
Plaintiff,
vs.
LL FLEX, LLC,
Defendant.
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17 C 604
Judge Gary Feinerman
MEMORANDUM OPINION AND ORDER
Inland Bank and Trust (“IBT”) brought this diversity suit to collect $709,146.58 in
allegedly unpaid invoices from Oracle Flexible Packaging, Inc. Doc. 102. After the court
denied its Rule 12(b)(2) motion to dismiss, Docs. 39-40 (reported at 2017 WL 3521166 (N.D. Ill.
Aug. 15, 2017)), Oracle answered and asserted a set-off affirmative defense, Doc. 104. The
court then denied IBT’s Rule 12(c) motion for judgment on the defense. Docs. 69-70 (reported
at 2018 WL 1508488 (N.D. Ill. Mar. 27, 2018)). A corporate transaction resulted in the
substitution of LL Flex, LLC for Oracle as the party defendant. Doc. 82. With trial set for June
2020, Doc. 201, the parties cross-move for summary judgment, Docs. 144, 165.
Background
With the parties cross-moving for summary judgment, the court ordinarily would view
the facts in the light most favorable to IBT when considering LL Flex’s motion and in the light
most favorable to LL Flex when considering IBT’s motion. See First State Bank of Monticello v.
Ohio Cas. Ins. Co., 555 F.3d 564, 567 (7th Cir. 2009) (“[B]ecause the district court had crossmotions for summary judgment before it, we construe all facts and inferences therefrom in favor
of the party against whom the motion under consideration is made.”) (internal quotation marks
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omitted). But because the court will grant in part IBT’s motion and deny LL Flex’s motion
except as to a matter (issue preclusion) that rests on uncontested facts, the facts are set forth as
favorably to LL Flex as the record and Local Rule 56.1 permit. See Garofalo v. Vill. of Hazel
Crest, 754 F.3d 428, 430 (7th Cir. 2014). At this juncture, the court must assume the truth of
those facts, but does not vouch for them. See Gates v. Bd. of Educ. of Chicago, 916 F.3d 631,
633 (7th Cir. 2019).
A.
Oracle’s Sale of Alpha Aluminum
Oracle operated an aluminum rolling mill and a flexible laminate plant in North Carolina.
Doc. 190 at p. 4, ¶ 8. Oracle spun off the mill’s assets into a new entity and offered it for sale.
Id. at pp. 4-5, ¶ 9. That entity eventually became Alpha Aluminum, LLC. Ibid.
AluminumSource, LLC purchased Alpha from Oracle in August 2015. Id. at p. 5, ¶ 10.
The sale was memorialized in the Membership Unit Purchase Agreement (the “MUPA”). Id. at
pp. 5-6, ¶ 11. Based on a final calculation of Alpha’s working capital—the accuracy of which
the parties now dispute, id. at pp. 22-25, ¶¶ 39-41—Alpha’s purchase price was increased by
$1.25 million before closing, id. at pp. 5-6, ¶¶ 11-13. To ensure the sale would proceed, Metallic
Conversion Corporation agreed to purchase $1.25 million of inventory from Oracle, and Alpha
guaranteed Metallic’s payment of the $1.25 million. Id. at p. 7, ¶ 14. Oracle delivered the
inventory to Metallic in August 2015, and Metallic paid Oracle as promised. Ibid.
AluminumSource paid Oracle cash for most of Alpha’s purchase price, and Alpha
executed a $1 million promissory note in favor of Oracle (the “Oracle Note”) for the rest. Id. at
p. 7, ¶ 15. The Oracle Note required Alpha to make quarterly interest payments. Ibid.
Because Alpha needed time to establish itself, it entered into the Transition Services
Agreement (the “TSA”) with Oracle under which Oracle would provide specific services for
certain periods. Id. at pp. 7-8, ¶¶ 16-17. Those transition services included the “full time
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services of Jack White, Director of Sales – Metals, in a manner consistent with the normal duties,
responsibilities and authority provided by such position.” Id. at p. 8, ¶ 17. Oracle and Alpha
also entered into a sublease (“Sublease”) requiring Alpha to pay rent, taxes, utilities,
maintenance, and janitorial costs to Oracle for use of the mill. Id. at p. 11, ¶¶ 21-22.
Because Alpha sought to develop a consistent source of third-party revenue, and because
Oracle sought a continued, reliable source of aluminum, the two firms entered into the Product
Supply Agreement (the “PSA”), under which Oracle agreed to purchase from Alpha certain
quantities of aluminum. Id. at pp. 12-13, ¶¶ 24-26. Since BB&T, Alpha’s lender, was not
willing to lend to Alpha if too great a percentage of its accounts receivable was owed by any
single buyer, the PSA provided that, if necessary, Alpha could assign Oracle’s purchase orders to
Metallic for Metallic to fulfill. Id. at pp. 13-14, ¶¶ 27-28. The PSA provided that Metallic
would be a party to the PSA “for purposes of Section 2 only.” Id. at pp. 15-16, ¶ 30; Doc. 16825 at 1. Section 2 reads, in relevant part:
Notwithstanding anything to the contrary herein, from time to time, [Alpha]
may elect to assign, transfer, or delegate its obligations under any Purchase
Order to Metallic. In the event of any such assignment, (i) such Products shall
be manufactured by and sourced only from [Alpha] in accordance with this
Agreement, and (ii) the purchase and sale of, and payment for, such Products
shall be made on the terms and conditions contained in this Agreement as if
Metallic were the “seller” hereunder; provided that any claim by [Oracle]
arising out of this Agreement shall be pursued against [Alpha] only. For the
purposes of any such purchase and sale and without limiting the generality of
the foregoing, (x) all such sales of Products shall count toward the Minimum
Quantities, shall be sold to [Oracle] at the prices set forth herein and shall
meet the quality, delivery and other requirements contained herein, and (y)
[Alpha] shall be deemed to have made all representations, warranties,
covenants, agreements and indemnities under this Agreement relating to any
such sale of Products.
Doc. 190 at pp. 15-16, ¶ 30; Doc. 168-25 at 2.
Section 16 of the PSA concerns set-offs:
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SET-OFF. Without prejudice to any other right or remedy any Party (a
“Wronged Party”) may have, such Wronged Party hereby reserves the right to
set off at any time any amount owing to it by the other Party (the “Breaching
Party”) under (a) the Transition Services Agreement, dated as of the date
hereof, by and between [Oracle] and [Alpha], and (b) the Purchase Order,
dated as of the date hereof, by and among [Oracle], [Alpha] and Metallic,
against any amount payable hereunder by the Wronged Party to the Breaching
Party; provided that the Wronged Party shall deliver written notice to the
Breaching Party of the Wronged Party’s intent to exercise such right and the
Breaching Party shall have three (3) business days after delivery of any such
notice to pay the amount owing to the Wrong[ed] Party prior to any set off.
Doc. 190 at pp. 21-22, ¶ 38; Doc. 168-25 at 6. The PSA’s choice-of-law provision states that the
agreement is governed by North Carolina law. Doc. 194 at ¶ 1; Doc. 168-25 at 10.
B.
Disputes Among Oracle, Alpha, and Metallic
Oracle’s performance under the PSA and TSA fell short from the outset. Its aluminum
orders from Alpha fell below the required quantities, Doc. 190 at pp. 25-26, ¶ 42, and Jack White
did not provide full-time services to Alpha, id. at pp. 28-29, ¶ 46.
In March 2016, Metallic notified Oracle that Alpha had assigned to Metallic certain
Oracle purchase orders. Id. at pp. 30-31, ¶ 48. Pursuant to the assignment, Metallic supplied
aluminum to Oracle and issued invoices totaling $709,146.58. Id. at pp. 30-32, ¶¶ 48, 50. The
record indisputably shows that Alpha assigned those purchase orders to Metallic. Doc. 190 at
pp. 30-31, ¶¶ 47-48. It also indisputably shows that the PSA gave Alpha the right to assign
purchase orders to Metallic; that Metallic informed Oracle that Alpha had done so; that Metallic
provided aluminum to Oracle; and that Metallic issued invoices to Oracle for that aluminum. Id.
at pp. 13-14, ¶ 28, pp. 15-16, ¶ 30, pp. 30-32, ¶¶ 47-50. Although LL Flex contests these
matters, arguing that Alpha did not actually assign purchase orders to Metallic, Doc. 185 at 9-11;
Doc. 190 at pp. 30-32, ¶¶ 47-49, the evidence it cites shows merely that the parties had some
uncertainty about the process for facilitating invoices and handling billing and payment. Doc.
186-1; Doc. 168-1 at 72-73 (285:17-287:19); Doc. 168-3 at 88-89 (346:19-352:8); Doc. 168-4 at
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18 (66:16-67:17). LL Flex adduces no evidence casting doubt on the fact that Alpha indeed
assigned purchase orders to Metallic pursuant to the PSA.
In 2016, Alpha obtained new financing from a firm called Accord Financial Corp. Doc.
190 at p. 33, ¶ 52. The financing agreement had two components: (1) Accord provided Alpha
with a line of credit through a revolving note and secured by Alpha’s assets, including its
inventory; and (2) Alpha transferred its outstanding accounts receivable to Accord for
approximately 85% of their face value. Doc. 190 at pp. 33-34, ¶ 53. Alpha then entered into an
Intercreditor Agreement with Accord and Oracle, in which Alpha agreed to subordinate the
obligations due from Alpha under the Oracle Note to the obligations due from Alpha to Accord.
Id. at pp. 34-35, ¶ 54.
Oracle stopped making payments to Alpha and Metallic in May 2016. Id. at p. 35, ¶ 55.
Ultimately, Oracle and LL Flex owed Alpha for unpaid invoices. Id. at pp. 39-40, ¶ 63. Accord
stopped lending to Alpha, and Alpha ceased operations in July 2016. Ibid. Metallic likewise
went out of business following Oracle’s refusal to pay its invoices. Id. at pp. 40-41, ¶ 64.
On August 26, 2016, IBT—which had made a credit line available to Metallic secured by
a first-priority lien on its business assets, including its accounts receivable, id. at p. 3, ¶ 5—sent
Oracle and LL Flex a notice identifying itself as Metallic’s secured creditor and demanding that
they pay $855,799—$709,146.58 for the aluminum that Metallic shipped to Oracle, plus
$146,651.95 for aluminum that Metallic shipped to LL Flex, id. at pp. 31-32, ¶ 49—due on the
unpaid Metallic invoices. Id. at p. 43, ¶ 68; Doc. 168-68. On September 12, 2016, Oracle
Controller Dave Robertson responded by email, stating that Oracle agreed with the invoice
amounts but asserting that they would not be paid; the reason for the non-payment, which
Robertson had expressed to IBT previously, concerned Oracle’s and LL Flex’s “legal dispute”
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with Alpha. Doc. 190 at pp. 43-44, ¶ 69; Doc. 168-71 (Robertson stating that “we are now in
agreement with the balance shown on our books and your detail,” but that “[t]he payment of
these will be addressed separately”). The parties identify no record evidence suggesting that
Oracle or LL Flex objected to IBT’s payment demand on grounds other than the legal dispute
with Alpha.
In January 2017, IBT sent letters to Oracle and LL Flex reiterating its understanding of
the amount owed on the unpaid Metallic invoices and again demanding payment. Doc. 190 at
pp. 43-44, ¶ 69; Docs. 168-74, 168-75. Shortly thereafter, IBT filed this suit against Oracle
seeking $709,146.58, Doc. 1, and a parallel suit against LL Flex in Illinois state court seeking
$146,651.95, Doc. 190 at p. 44, ¶ 70. In late June, after Oracle merged into LL Flex, Doc. 190 at
p. 1, ¶ 2, LL Flex substituted for Oracle as the party defendant in this case, Doc. 82, resulting in
it being the defendant in both suits.
On August 13, 2019, the Illinois state court entered final judgment in LL Flex’s favor.
Doc. 204-2; Doc. 204-4. Having previously dismissed IBT’s breach of contract claim, the state
court granted LL Flex summary judgment on IBT’s account stated claim, holding that LL Flex’s
refusals to pay the amounts requested by IBT defeated the claim as a matter of law. Doc. 204-2
at 41-42. IBT did not appeal, and the time to appeal has elapsed. Doc. 204 at 2.
D.
The Accord Litigation
In the meantime, following Alpha’s closure, Accord sued Oracle and LL Flex in North
Carolina state court to recover on unpaid Alpha invoices, and Oracle filed a separate lawsuit in
North Carolina state court against Alpha—in which Accord later intervened as a party
defendant—for alleged breaches of the PSA, TSA, and Sublease. Doc. 190 at pp. 41-42, ¶¶ 6566. In the suit brought by Accord, Oracle asserted an affirmative defense claiming the right to
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set off the amounts that Alpha owed Oracle under the PSA, TSA, and Sublease. Id. at p. 41,
¶ 65.
Accord, Oracle, and LL Flex eventually settled. Doc. 190 at pp. 44-45, ¶ 71. The
settlement agreement released:
any and all claims, damages, causes of action, suits, or costs, of whatever
nature, character or description, whether known or unknown, suspected or
unsuspected, anticipated or unanticipated, which they may have or may
hereafter have or claim to have, individually or collectively, in any way
arising out of or related to the issues raised in the [Accord/Oracle and
Oracle/Alpha] Lawsuit[s], including, but not limited to, any and all claims that
were or could have been alleged by either one of them. The parties represent
and warrant that they have not sold, assigned, transferred, hypothecated,
pledged, encumbered, or disposed of, in whole or in part, voluntarily or
involuntarily, any claims, damages, causes of action, suits, or costs that are
released by this paragraph. It is the Parties’ intention that this Agreement
shall be effective as a full and final accord and release, even though they,
individually or collectively, may at some point in the future discover facts in
addition to or different from those which they now know or believe to be true.
Doc. 169-3 at 4; Doc. 190 at pp. 44-45, ¶ 71. The release extended to their claims against “one
another, their respective attorneys, insurers, assignees, transferors, transferees, principals,
partners, officers, members, managers, employees, servants, subsidiaries, parent corporations,
affiliates, successors, investors, stockholders, agents, and representatives.” Doc. 169-3 at 4.
Discussion
IBT brings breach of contract and account stated claims against LL Flex, both seeking
payment from LL Flex of the amounts owed by Oracle under the PSA. Doc. 102 at ¶¶ 38-54.
LL Flex asserts a set-off affirmative defense, alleging that Alpha breached the PSA, TSA,
Sublease, and Oracle Note, that Alpha owes LL Flex amounts exceeding any liability LL Flex
might have to IBT, and that LL Flex may set off those amounts against Alpha’s assignee,
Metallic, and, by extension, against IBT as Metallic’s assignee and secured creditor. Doc. 104 at
pp. 16-18. LL Flex moves for summary judgment on its set-off defense and against IBT’s
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account stated claim, Doc. 144, and IBT moves for summary judgment on both of its claims and
on LL Flex’s defense, Doc. 165.
I.
IBT’s Claims
A.
Account Stated Claim
While the PSA—and thus the breach of contract claim—is governed by North Carolina
law, Doc. 194 at ¶ 1, neither party addresses which State’s law governs the account stated claim,
so Illinois law applies. See Santa’s Best Craft, LLC v. St. Paul Fire & Marine Ins. Co., 611 F.3d
339, 345 (7th Cir. 2010) (holding that if “[n]o party raises a choice of law issue,” the court
“appl[ies] the law of the forum state”). “An ‘account stated’ determines the amount of a
preexisting debt when parties who previously have conducted monetary transactions agree that
there truly is an account representing the transactions between them.” Delta Consulting Grp.,
Inc. v. R. Randle Const., Inc., 554 F.3d 1133, 1137 (7th Cir. 2009). Where a buyer fails to object
within a reasonable time to an account invoice sent by a seller, an account stated is established.
See id. at 1137-38.
IBT alleges that an account stated was formed when Robertson, on Oracle’s behalf, sent
his September 12, 2016 email agreeing with IBT’s August 26, 2016 notice stating that Oracle
had not paid $709,146.58 due on the Metallic invoices. Doc. 102 at ¶¶ 38-48. LL Flex
maintains that the claim is precluded by the Illinois state court’s judgment against IBT in its suit
against LL Flex. Doc. 206. As noted, the state court granted summary judgment to LL Flex on
IBT’s account state claim. In so doing, the court reasoned that LL Flex’s refusal—set forth in
Robertson’s September 12, 2016 email—to pay the Metallic invoices due to outstanding legal
issues concerning Alpha foreclosed the account stated claim under Illinois law:
In … the Patrick Engineering case, … the Illinois Supreme Court made clear
that an account stated requires both an agreement that the account is accurate
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and a promise expressed or implied for payment; further, the Court noted that
there must be meeting of the minds in this regard.
Under the facts presented here, particularly Robertson’s September 12th email and Lempa’s e-mail of September 13th show unequivocally that [LL
Flex] refused to pay because of outstanding legal issues between Oracle and
Alpha and under Patrick there is no account stated.
I would just note that I think counsel for LL Flex stated it well when he said
there can be no implied promise when there’s an expressed refusal to pay, and
I think that’s accurate.
On that basis I’m going to grant LL Flex’s motion for summary judgment.
Doc. 204-2 at 41-42.
The collateral estoppel doctrine, or “issue preclusion,” prohibits a party under certain
circumstances from re-litigating an issue that another court previously decided against it. To
determine whether collateral estoppel applies, a federal court “look[s] to the preclusion law of
the state where the judgment was rendered.” Adams v. Adams, 738 F.3d 861, 865 (7th Cir.
2013); see also Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544 U.S. 280, 293 (2005) (“28
U.S.C. § 1738 … requires the federal court to give the same preclusive effect to a state-court
judgment as another court of that State would give.”) (internal quotation marks omitted). In
Illinois, a court decision adverse to a party on a particular issue in one suit precludes that party
from contesting the same issue in another suit only if “(1) the issue decided in the prior
adjudication is identical with the one presented in the suit in question, (2) there was a final
judgment on the merits in the prior adjudication, and (3) the party against whom estoppel is
asserted was a party or in privity with a party to the prior adjudication.” Nowak v. St. Rita High
Sch., 757 N.E.2d 471, 478 (Ill. 2001); see also Brokaw v. Weaver, 305 F.3d 660, 669 (7th Cir.
2002) (same).
The second and third requirements are plainly satisfied here, as the state court’s decision
is a final judgment on the merits—IBT did not appeal the judgment, see Doctor’s Assocs., Inc. v.
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Distajo, 66 F.3d 438, 449 (7th Cir. 1995) (“The Illinois Supreme Court has held that an Illinois
judgment is not final, and thus not entitled to preclusive effect, until the time for appeal has
expired.”)—and IBT is a party in both this suit and the state court suit. As to the first
requirement, LL Flex correctly argues that because the state court conclusively determined that
Robertson’s refusal to pay Metallic’s LL Flex invoices defeated an essential predicate of IBT’s
account stated claim there, Robertson’s simultaneous refusal to pay Metallic’s Oracle invoices
does the same thing here. Doc. 206 at 4. Although this case concerns the Oracle invoices and
the state court case concerned the LL Flex invoices, Robertson’s refusal to pay the two sets of
invoices were expressed not only simultaneously, but in the same sentence; in fact, Robertson
did not separately reference the two sets of invoices when he refused to pay. IBT therefore is
precluded from relitigating here the issue whether Robertson’s email created an account stated,
which in turn defeats its account stated claim as a matter of law. See Swanson v. Baker &
McKenzie, LLP, 2016 WL 7231610, at *3 (N.D. Ill. Dec. 14, 2016) (holding that minor
differences between the prior and present lawsuits did not defeat collateral estoppel where the
“changed circumstances [were] not material, and therefore [did] not amount to controlling
facts”); Ill. Bell Tel. Co. v. Haines & Co., Inc., 713 F. Supp. 1122, 1124 (N.D. Ill. 1989) (“That
some minor, subsidiary facts are different will not bar the application of collateral estoppel.”).
IBT argues that even if all three requirements of issue preclusion are satisfied, LL Flex’s
failure to object to IBT’s pursuit of concurrent lawsuits waived its issue preclusion defense.
Doc. 207 at 5-6. In support, IBT cites a single, nonprecedential decision, Stulberg v. Intermedics
Orthopedics, Inc., 997 F. Supp. 1060 (N.D. Ill. 1998). See Matheny v. United States, 469 F.3d
1093, 1097 (7th Cir. 2006) (“[D]istrict court opinions do not have precedential authority.”). True
enough, Stulberg holds that “by failing to timely object to separate actions, a defendant is
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deemed to acquiesce in the plaintiff’s simultaneous suits and waives any res judicata or collateral
estoppel defense.” Stulberg, 997 F. Supp. at 1065. But the defendants in Stulberg did far more
than simply proceed with two separate suits; rather, “they willingly accepted the burden of
defending both actions simultaneously” by “oppos[ing] the [plaintiffs’] attempt to halt th[e]
court’s proceedings pending the outcome of arbitration.” Ibid. Here, by contrast, IBT does not
explain when or how LL Flex could have objected to simultaneous litigation—recall that LL
Flex was substituted for Oracle as party defendant in this suit only in late June 2018, nearly
eighteen months after this suit was brought—let alone identify any way in which IBT “willingly
accepted the burden of defending both actions simultaneously” in a manner comparable to what
the Stulberg defendants did. Ibid. Accordingly, even if Stulberg is good law, IBT fails to
demonstrate that LL Flex waived its issue preclusion defense to the account stated claim.
B.
Breach of Contract Claim
IBT’s breach of contract claim—which the state court judgment does not preclude—
alleges that LL Flex is liable for Oracle’s breach of the PSA by refusing to pay the Metallic
invoices. Doc. 102 at ¶¶ 49-54. In arguing that Oracle did not breach, LL Flex maintains that
Alpha did not validly assign accounts to Metallic under the PSA. Doc. 185 at 9-11. Because
that argument fails, IBT is entitled to summary judgment as to liability on the contract claim.
The PSA allowed Alpha to assign Oracle’s aluminum purchase orders to Metallic under
certain circumstances. Doc. 190 at pp. 13-14, ¶ 28. In March 2016, having informed Oracle that
Alpha had made such assignments, Metallic issued invoices to Oracle. Id. at pp. 30-31, ¶ 48.
Oracle paid Metallic for aluminum shipments through May 2016, without questioning whether
payment was due under the PSA, id. at p. 35, ¶ 55; Oracle’s own books indicated amounts owed
to Metallic for delivered product, id. at pp. 38-39, ¶¶ 60-62; and Alpha’s accountant emailed
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Alpha’s equipment lender confirming the arrangement with Metallic, Doc. 194 at ¶ 11. The
undisputed facts thus demonstrate that Oracle had an agreement to purchase aluminum from
Metallic pursuant to assignments from Alpha; that Oracle knew Alpha had assigned orders to
Metallic; that Oracle received invoices for orders from Metallic; and that after Oracle stopped
paying invoices and contested the amounts owed, it did so only on the basis of claimed set-offs
and not on the ground that the charges were somehow invalid under the PSA. No reasonable
jury could find that the aluminum deliveries here did not arise from purchase orders assigned to
Metallic by Alpha pursuant to the PSA.
To support its submission that “Alpha and Metallic did not understand or agree about
what rights Alpha was assigning to Metallic or what rights either side had in payments from
Oracle,” Doc. 194 at ¶ 13, LL Flex cites an email chain between the presidents of Alpha and
Metallic disputing some particulars of their relationship, Doc. 186-2. LL Flex does not identify,
and the court cannot discern, anything in those emails raising a question as to whether Metallic
was actually assigned aluminum orders from Alpha or had the legal right to recover amounts
owed from Oracle. There accordingly is no legitimate dispute that Oracle had an obligation
under the PSA to pay Metallic for the aluminum and that it breached that obligation.
II.
LL Flex’s Affirmative Defense
Although IBT is entitled to summary judgment as to liability on its breach of contract
claim, it must not only prove its damages, but also overcome LL Flex’s affirmative defense. LL
Flex’s defense alleges that Alpha’s breaches of the TSA, PSA, Sublease, and Oracle Note
provide LL Flex with set-off rights exceeding any amount it owes IBT for Oracle’s breach of the
PSA. Doc. 104 at pp. 16-18; Doc. 145 at 6-9; Doc. 185 at 15-30.
Section 9-404 of the Uniform Commercial Code, which North Carolina has adopted,
provides that “[u]nless an account debtor has made an enforceable agreement not to assert
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defenses or claims, … the rights of an assignee are subject to … (1) … any defense or claim in
recoupment arising from the transaction that gave rise to the contract [and] (2) [a]ny other
defense or claim of the account debtor against the assignor which accrues before the account
debtor receives notification of the assignment.” N.C. Gen. Stat. § 25-9-404(a)(1)-(2); see also
810 ILCS 5/9-404(a)(1)-(2). Recoupment defenses are encompassed by § 9-404(a)(1), while setoff defenses fall under § 9-404(a)(2). Compare Recoupment, Black’s Law Dictionary (11th ed.
2019) (“Reduction of a plaintiff’s damages because of a demand by the defendant arising out of
the same transaction.”), with Setoff, Black’s Law Dictionary (11th ed. 2019) (“A defendant’s
counterdemand against the plaintiff, arising out of a transaction independent of the plaintiff’s
claim.”). Section 9-404 further specifies, as to both recoupment and set-off, that “the claim of an
account debtor against an assignor may be asserted against an assignee … only to reduce the
amount the account debtor owes.” N.C. Gen. Stat. § 25-9-404(b); see also 810 ILCS 5/9-404(b).
LL Flex’s affirmative defense alleges that § 9-404 entitles LL Flex (the account debtor) to set off
the money that Alpha (the assignor) owes LL Flex against the sums that LL Flex owes to
Metallic (Alpha’s assignee) and thus to IBT (Metallic’s assignee).
In denying IBT’s Rule 12(c) motion for judgment on LL Flex’s defense, this court held
that IBT had not shown that the PSA waived or otherwise limited the defense. Specifically, the
court rejected IBT’s argument that Section 16 of the PSA worked an implied wavier of Oracle’s
set-off rights, finding nothing in the contract sufficient to overcome significant textual evidence
to the contrary. 2018 WL 1508488, at *2-3. The court also rejected IBT’s argument that
Oracle’s defense was barred by Section 2(b) of the PSA, which limited Oracle and LL Flex’s
ability to pursue claims against entities other than Alpha, as Oracle pursued its set-off rights only
as a defense, not a claim. Id. at *4.
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IBT argues that § 9-404(a)(2)’s accrual requirement for set-off bars LL Flex’s affirmative
defense. IBT observes that set-off under § 9-404(a)(2), unlike recoupment under § 9-404(a)(1),
must “accrue before the account debtor receives a notification of the assignment.” Doc. 166 at
13-14. This is significant, IBT contends, because LL Flex’s defense accrued after June 2016,
while Oracle became aware of the assignment to Metallic of the relevant purchase orders in early
March 2016 at the latest. Ibid. The trouble with this argument is that IBT itself acknowledges
that LL Flex’s defense may be understood as sounding not only in set-off under § 9-404(a)(2),
but also in recoupment under § 9-404(a)(1). Id. at 14-15. While otherwise similar to set-off,
recoupment arises where a defendant seeks to offset obligations arising from the same
transaction that gave rise to the plaintiff’s claim. See In re Eye Ctr.-Pending Matters, 2016 WL
4163928, at *7 (N.C. Super. Ct. July 22, 2016) (“Although all of Dr. Matthews’ Amended
Counterclaims are denominated as claims for set-off, the Court concludes that his counterclaims
for breach of the Employment Agreement and violation of the Wage and Hour Act are in the
nature of recoupment because they arise from the same transaction as CCSEA’s claims … .”).
And as LL Flex argues and IBT does not contest, Alpha’s alleged breaches concern contracts that
arose out of the broader series of transactions that gave rise to the PSA, the basis of IBT’s breach
of contract claim. Doc. 185 at 18. The court will therefore construe LL Flex’s defense as also
sounding in recoupment, which allows it to proceed under § 9-404(a)(1) and thereby avoid § 9404(a)(2)’s accrual requirement.
IBT next argues that Section 2(b) of the PSA waives Oracle’s (and thus LL Flex’s) right
to assert any set-off/recoupment defense as to amounts owed on purchase orders assigned to
Metallic. Doc. 166 at 18-20; Doc. 180 at 6-8. The court considered and rejected that argument
in its Rule 12(c) opinion, explaining: “[A]s IBT itself recognizes, Doc. 65 at 11, Oracle raises
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set-off as a defense, not as a claim. It follows that section 2(b), which limits Metallic’s exposure
to affirmative claims by Oracle, does not speak to section 16’s impact on Oracle’s defense.”
2018 WL 1508488, at *4. Seeking a different result this time, IBT contends that (1) a set-off or
recoupment defense relies on the possibility of a valid underlying claim and (2) certain cases
construe set-off and recoupment defenses as counterclaims. Doc. 166 at 18-19. The cases cited
by IBT do not support the first argument, nor would that argument—even if accurate—overcome
the simple fact that LL Flex is not pressing a set-off claim here. And while certain decisions
might deem LL Flex’s affirmative defense to be a counterclaim under Illinois law, see MCK
Millenium Centre Parking, LLC v. Central Parking Sys., Inc., 2012 WL 1932616, at *8 n.9 (N.D.
Ill. May 29, 2012) (“Arguably, a claim for setoff under Illinois law should be pleaded as a
counterclaim, not an affirmative defense.”), the PSA is governed by North Carolina law, which
does not follow the same approach. See Settlers Edge Holding Co., LLC v. RES-NC Settlers
Edge, LLC, 793 S.E.2d 722, 731-32 (N.C. App. 2016) (allowing a recoupment affirmative
defense to proceed at summary judgment without requiring that it be treated as a claim); In re
Eye Ctr.-Pending Matters, 2016 WL 4163928, at *7 (observing that “a claim for set-off” can be
“asserted as an affirmative defense or counterclaim”). North Carolina law is the appropriate
guide here, as the court’s task is to determine what the parties meant by the term “claims” in
Section 2(b) of the PSA, and it is the law governing that agreement that sheds the most light on
the parties’ intentions.
IBT next contends that Section 16 of the PSA imposes specific requirements regarding
set-off and recoupment under the PSA, and that LL Flex and Oracle failed to meet those
requirements and therefore waived whatever independent rights they might have had under § 9404. Doc. 166 at 21-25; Doc. 180 at 8-11. Once again, the court considered and rejected that
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argument in its Rule 12(c) opinion. As the court explained, IBT’s argument faces a “formidable
obstacle” in Section 16’s qualification that it is “[w]ithout prejudice to any other right or remedy
any Party … may have,” and “[t]he trouble with IBT’s contention … is that the phrase ‘any other
right or remedy’ may plausibly be read to mean any right or remedy—including any set-off
remedies—other than the particular set-off remedy specified in section 16.” 2018 WL 1508488,
at *3 (emphasis and first and second alterations in original); see also Smith v. State Farm Fire &
Cas. Co., 426 S.E.2d 457, 459-60 (N.C. App. 1993) (holding as a matter of contract
interpretation that “any means any”) (internal quotation marks omitted). The extrinsic evidence
cited by IBT, Doc. 190 at pp. 17-22, ¶¶ 33-38, is of no moment because Section 16 is not
ambiguous on this point. See SAS Inst., Inc. v. World Programming Ltd., 874 F.3d 370, 382 (4th
Cir. 2017) (“North Carolina contract law turns to extrinsic evidence only after the contract is
found to be ambiguous. Where, as here, the contractual terms are unambiguous, the analysis
comes to an end … .”) (citations omitted). And IBT’s argument that this reading of Section 16
“creates an absurd result” because it renders the provision’s notice language superfluous and
treats set-off/recoupment rights under the TSA and Purchase Orders differently than those under
the Sublease and Oracle Note, Doc. 166 at 23, fails both because it is not absurd for different
contracts to create distinct rights and obligations and for the reasons set forth in the court’s prior
opinion. 2018 WL 1508488, at *3 (“As it happens, section 16 does add something of its own—
the provision can be understood as a ‘netting provision’ that creates a procedure under which the
parties could privately net offsetting obligations so as to avoid the hassle of making redundant
payments.”) (internal quotation marks omitted).
IBT fares better with its argument that Oracle, by entering into the settlement agreement
in the Accord litigation, released any claimed set-off/recoupment against Alpha as to amounts
16
owed under the TSA, PSA, and Sublease. Doc. 166 at 31-33; Doc. 180 at 14-15. The release,
quoted in full above, is expansive, providing in relevant part that the parties released “any and all
claims, damages, causes of action, suits, or costs, of whatever nature, character of description …
which they may have or may hereafter have or claim to have, individually or collectively, in any
way arising out of or related to the issues raised in the [Accord] Lawsuit[s], including, but not
limited to, any and all claims that were or could have been alleged by either one of them,” Doc.
190 at pp. 44-45, ¶ 71, including claims against “one another, their respective attorneys, insurers,
assignees, transferors, transferees, principals, partners, officers, members, managers, employees,
servants, subsidiaries, parent corporations, affiliates, successors, investors, stockholders, agents,
and representatives,” Doc. 169-3 at 4; Doc. 190 at pp. 44-45, ¶ 71. Because LL Flex’s setoff/recoupment defense turns in part on amounts allegedly owed by Alpha under the TSA, PSA,
and Sublease, those portions of the defense are “in any way … related to the issues raised” in the
Accord lawsuits and thus are covered by the release. See Weaver v. Saint Joseph of the Pines,
Inc., 652 S.E.2d 701, 709-10 (N.C. App. 2007) (“It is immaterial that neither the Release nor the
Mediation Settlement Agreement specifically mentions the claim at issue in this case or that the
possible existence of this claim never arose during the mediation. As our Supreme Court has
held: ‘“[t]he language in a release may be broad enough to cover all demands or rights to
demand, or possible causes of action, a complete discharge of liability from one to another,
whether or not the various demands or claims have been discussed or mentioned, and whether or
not the possible claims are all known.”’”) (quoting Merrimon v. Postal Telegraph-Cable Co.,
176 S.E. 246, 248 (N.C. 1934)). It follows that IBT is entitled to partial summary judgment on
LL Flex’s affirmative defense insofar as it seeks a set-off/recoupment for amounts owed by
Alpha to Oracle under the TSA, PSA, and Sublease.
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Attempting to avoid this result, LL Flex contends that it is not a “transferor” within the
meaning of the release because that term refers, at least in context, only to “a transfer on an
entity level.” Doc. 185 at 30. That reading of “transferor” would render the term superfluous.
Any “transferee” would have received the business’s assets from either one of the parties to the
release (Accord, Oracle, and LL Flex) or from one of their past transferees—all of whom are
covered by other language in the release. Doc. 169-3 at 4 (“[T]he Parties … do hereby release
and forever discharge one another[ and] their respective … transferees … from any and all
claims, damages, causes of action, suits, or costs, of whatever nature, character or description …
which they may have or may hereafter have or claim to have … in any way arising out of or
related to the issues raised in the Lawsuit.”). And LL Flex points to no evidence indicating that
any party to the settlement had itself received “a transfer of substantially all the assets of a
business.” Doc. 185 at 30. Accordingly, to avoid being entirely superfluous, the term
“transferor” must encompass more than transfers on an entity level. See Rota-McLarty v.
Santander Consumer USA, Inc., 700 F.3d 690, 701 (4th Cir. 2012) (“Basic principles of contract
interpretation instruct us to look first to the plain meaning of the contract’s terms, and also to
give meaning to each word used and avoid constructions that render language meaningless,
superfluous, or contradictory.”). Here, the term “transferor” encompasses, at the very least, the
entity—Alpha—that transferred to Accord the very claims the settlement agreement resolved and
released; if “transferor” is to mean anything, it must refer to the direct transferor of the claims the
parties sought to resolve by their agreement. And because LL Flex’s set-off/recoupment defense
is derivative of its claims against Alpha and Metallic, it has accordingly already released any
such defense arising under the TSA, PSA, or Sublease.
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As IBT acknowledges, Doc. 193 at 11, that leaves LL Flex’s defense as it pertains to
amounts that Alpha owes Oracle under the Oracle Note. IBT maintains that this portion of the
defense cannot proceed because Oracle previously committed material breaches of the MUPA,
TSA, and PSA by providing incorrect inventory and working capital estimates prior to the
MUPA, by improperly withholding Jack White’s services, by failing to purchase promised
minimum quantities of aluminum from Alpha, and by unjustifiably stopping payment on
invoices under the PSA. Doc. 166 at 26-31. LL Flex responds that because Alpha “continu[ed]
to perform under the various contracts after Oracle’s purported breaches, Alpha (and by
extension Metallic and IBT) waived the right to repudiate its own obligations.” Doc. 185 at 24.
But IBT’s argument is not that it was excused from its own contractual obligations; rather, it is
that whatever IBT’s contractual obligations might have been, LL Flex still may not benefit from
the harm it (or Oracle) caused to Alpha. In IBT’s telling, Oracle’s breaches caused Alpha’s
failure and thus Oracle’s own damages, which is significant because North Carolina law does not
allow a party “to be enriched to the injury and cost of another, which was induced by [its] own
acts.” Doc. 166 at 26 (quoting Perry v. Norton, 109 S.E. 641, 642 (N.C. Super. Ct. 1921)).
The question whether Oracle’s breaches were responsible for Alpha’s failure cannot be
answered at this juncture given the many genuine factual disputes presented by the summary
judgment record. Did Oracle misstate its capital estimates prior to the MUPA, and were any
misstatements material? Would an infusion of additional cash in December 2015 have salvaged
Alpha’s business? Would more robust services from White have secured sales adequate to
continue Alpha’s operations? Would additional orders in late 2015 have kept Alpha afloat?
Particularly in the absence of evidence substantiating and elaborating on Alpha’s financial
condition at the relevant times, those questions are not amenable to resolution on summary
19
judgment. Cf. Sahadi v. Cont’l Ill. Nat’l Bank & Tr. Co. of Chi., 706 F.2d 193, 196-97 (7th Cir.
1983) (“[T]he determination of ‘materiality’ is a complicated question of fact … especially
unsuited to resolution by summary judgment.”). In its reply brief, IBT’s answer to LL Flex’s
cataloging of these unresolved issues is to assert, without further elaboration, that the combined
effect of Oracle’s breaches—rather than any single breach—indisputably caused Alpha’s
collapse. Doc. 193 at 10. But when construing the facts in the light most favorable to LL Flex—
as the court must at this juncture—that response is not enough to justify summary judgment for
IBT against LL Flex’s affirmative defense as to its set-off rights under the Oracle Note.
To support its own bid for summary judgment on the Oracle Note component of its
affirmative defense, LL Flex argues that its alleged breaches of the MUPA, TSA, and PSA are
irrelevant because they do not pertain to the Oracle Note. Doc. 185 at 22-23; Doc. 192 at 4.
Relatedly, LL Flex adds that “IBT cannot rely on Oracle’s alleged breach of the MUPA as a
basis to avoid setoff for the simple reason that Alpha was not a party to the MUPA.” Doc. 185 at
23-24. But LL Flex itself characterized the array of agreements as interconnected components of
a single transaction in a successful effort to avoid § 9-404(a)(2)’s accrual requirement for set-off
defenses, Doc. 145 at 7; Doc. 185 at 15-16, and it cannot now be heard to suggest that the
agreements should, on second thought, be treated as isolated and separate. See In re Hovis, 356
F.3d 820, 823 (7th Cir. 2004) (“One who argues a position in court, and prevails, rarely is
entitled to switch ground and argue an inconsistent position later, even within the scope of a
single proceeding.”).
Conclusion
IBT’s summary judgment motion is granted as to liability on its breach of contract claim
and as to LL Flex’s affirmative defense insofar as it seeks to set off or recoup from IBT the
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amounts Alpha allegedly owes under the TSA, PSA, and Sublease. IBT’s motion is denied as to
its account stated claim and as to LL Flex’s affirmative defense insofar as it seeks to set off or
recoup the amounts Alpha allegedly owes under the Oracle Note. LL Flex’s summary judgment
motion is granted as to IBT’s account stated claim and otherwise is denied. This case will
proceed to trial as to (1) damages on IBT’s breach of contract claim and (2) the Oracle Note
component of LL Flex’s affirmative defense.
March 19, 2020
__________________________________
United States District Judge
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