InfinaQuest LLC v. DirectBuy Inc et al
Filing
39
OPINION AND ORDER: Court GRANTS 31 Motion for Summary Judgment. Defendants' Counterclaims are DISMISSED and judgment is entered AGAINST InfinaQuest and IN FAVOR of Defendants. Signed by Magistrate Judge Paul R Cherry on 5/5/2014. (tc)
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF INDIANA
HAMMOND DIVISION
INFINAQUEST, LLC,
Plaintiff,
v.
DIRECTBUY, INC. and
BETA FINANCE COMPANY, INC.,
Defendants.
)
)
)
)
)
)
)
)
Cause No. 2:12-CV-222-PRC
OPINION AND ORDER
This matter is before the Court on Defendants’ Motion for Summary Judgment [DE 31], filed
on October 22, 2013. It became fully briefed on December 12, 2013. Both sides in this case were
owed money under contracts they had with a company in Florida called JDB Direct, LLC. This
dispute arose after JDB defaulted on its debts and Defendants collected money that InfinaQuest
claims rightfully belongs to it. InfinaQuest filed its Complaint on June 6, 2012, alleging tortious
interference with contract and conversion.
Both parties orally consented on the record to have this case assigned to a United States
Magistrate Judge to conduct all further proceedings and to order the entry of a final judgment in this
case. Therefore, this Court has jurisdiction to decide this case pursuant to 29 U.S.C. § 636(c).
I. Summary Judgment Standard
The Federal Rules of Civil Procedure mandate that motions for summary judgment be
granted “if the movant shows that there is no genuine dispute as to any material fact and the movant
is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). Rule 56 further requires the entry
of summary judgment, after adequate time for discovery, against a party “who fails to make a
showing sufficient to establish the existence of an element essential to that party’s case, and on
which that party will bear the burden of proof at trial.” Celotex Corp. v. Catrett, 477 U.S. 317, 322
(1986) (citing Fed. R. Civ. P. 56 (c)). “[S]ummary judgment is appropriate—in fact, is
mandated—where there are no disputed issues of material fact and the movant must prevail as a
matter of law. In other words, the record must reveal that no reasonable jury could find for the
non-moving party.” Dempsey v. Atchison, Topeka, & Santa Fe Ry. Co., 16 F.3d 832, 836 (7th Cir.
1994) (citations and quotations omitted).
A party seeking summary judgment bears the initial responsibility of informing the court of
the basis for its motion and identifying those portions of the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the affidavits, if any, that it believes
demonstrate the absence of a genuine issue of material fact. See Celotex, 477 U.S. at 323; Fed. R.
Civ. P. 56(c). The moving party may discharge its initial responsibility by simply “‘showing’—that
is, pointing out to the district court—that there is an absence of evidence to support the nonmoving
party’s case.” Celotex, 477 U.S. at 325. When the nonmoving party would have the burden of proof
at trial, the moving party is not required to support its motion with affidavits or other similar
materials negating the opponent’s claim. Celotex, 477 U.S. at 323, 325; Green v. Whiteco Indus.,
Inc., 17 F.3d 199, 201 n.3 (7th Cir. 1994); Fitzpatrick v. Catholic Bishop of Chi., 916 F.2d 1254,
1256 (7th Cir. 1990). However, the moving party, if it chooses, may support its motion for summary
judgment with affidavits or other materials, and, if the moving party has “produced sufficient
evidence to support a conclusion that there are no genuine issues for trial,” then the burden shifts
to the nonmoving party to show that an issue of material fact exists. Becker v. Tenenbaum-Hill
Assoc., 914 F.2d 107, 110–11 (7th Cir. 1990) (citations omitted); see also Hong v. Children’s Mem’l
Hosp., 993 F.2d 1257, 1261 (7th Cir. 1993).
Once a properly supported motion for summary judgment is made, the non-moving party
2
cannot resist the motion and withstand summary judgment by merely resting on its pleadings. See
Fed. R. Civ. P. 56(e); Donovan v. City of Milwaukee, 17 F.3d 944, 947 (7th Cir. 1994). Rule 56(e)
provides that “[i]f a party fails to properly support an assertion of fact or fails to properly address
another party’s assertion of fact as required by Rule 56(c), the court may . . . consider the fact
undisputed for purposes of the motion [or] grant summary judgment if the motion and supporting
materials—including the facts considered undisputed—show that the movant is entitled to it . . . .”
Fed. R. Civ. P. 56(e)(2), (3); see also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248–50 (1986).
Thus, to demonstrate a genuine issue of fact, the nonmoving party must “do more than simply show
that there is some metaphysical doubt as to the material facts,” but must “come forward with
‘specific facts showing that there is a genuine issue for trial.’” Matsushita Elec. Indus. Co. v. Zenith
Radio Corp., 475 U.S. 574, 586–87 (1986) (quoting Fed. R. Civ. P. 56(e)).
In viewing the facts presented on a motion for summary judgment, a court must construe all
facts in a light most favorable to the non-moving party and draw all legitimate inferences in favor
of that party. See Anderson, 477 U.S. at 255; Srail v. Vill. of Lisle, 588 F.3d 940, 948 (7th Cir.
2009); NLFC, Inc. v. Devcom Mid-Am., Inc., 45 F.3d 231, 234 (7th Cir. 1995). A court’s role is not
to evaluate the weight of the evidence, to judge the credibility of witnesses, or to determine the truth
of the matter, but instead to determine whether there is a genuine issue of triable fact. See Anderson,
477 U.S. at 249–50.
II. Material Facts
A. The Contracts Between Defendants and JDB
Defendant DirectBuy, Inc. is the franchisor of a network of over 100 DirectBuy franchises
throughout the United States and Canada. The franchises sell DirectBuy memberships to consumers
3
enabling those who join to shop for furniture, cabinetry, and the like at wholesale prices. The
business model for setting up franchises is what one might expect: in exchange for fees and a cut
of the franchisee’s income, DirectBuy grants franchisees the right to run a DirectBuy club using
DirectBuy’s showroom design, trademarks, marketing, sales techniques, etc.
On May 29, 2008, JDB Direct, LLC, a Florida-based company, entered into a Franchise
Agreement with DirectBuy, which made JDB a franchisee with the right to operate a DirectBuy club
in Orlando, Florida. That agreement provided in relevant part that JDB would periodically pay
DirectBuy a franchise fee, royalty fees (calculated every week based on new memberships), and fees
for DirectBuy’s lead generation and marketing programs. DirectBuy was in turn authorized to
collect the receivables and to sweep JDB’s merchandise account daily. After collecting funds paid
to JDB, DirectBuy would conduct an internal accounting and return to JDB any amounts it was
entitled to, subject to the application of contractual set off rights. Essentially, money that belonged
to JDB was channeled through DirectBuy, which would take out anything it was owed by JDB
before passing the money to JDB.
At the same time it agreed to the Franchise Agreement with DirectBuy, JDB entered into a
Financing Agreement with Defendant Beta Financing Company, Inc. (Beta).1 Under the Financing
Agreement, JDB would assign the consumer financing contracts of new members to Beta. Beta in
turn would collect the amounts due under the consumer financing contracts and remit to JDB the
portion provided by their Financing Agreement. (There were apparently different ways this was
structured based on the quality of the debt, but this is not important here.)
Both the Franchise Agreement between DirectBuy and JDB and the Financing Agreement
1
Both Beta and DirectBuy are wholly owned subsidiaries of United Consumers Club, Inc.
4
between Beta and JDB included set-off provisions. The set-off provision in the Franchise Agreement
stated that DirectBuy
may apply any payments by you [JDB], or offset any amounts we or
any of our Affiliates owe you, to or against any of your past due
indebtedness for royalties, Marketing and Legislative Fund
contributions or any other indebtedness to us or any of our Affiliates,
notwithstanding any contrary designation by you.
Mot. for Summ. J., Exh. B-1 at 11. Likewise, the set-off provision in the Financing Agreement
between Beta and JDB provided that
Beta shall have the right, at its sole discretion, and Franchisee [JDB]
hereby irrevocably and unconditionally authorizes Beta, on
Franchisee’s behalf, to hold and apply any payments due and owing
to Franchisee with respect to any Contracts and any reserve funds to
any indebtedness of Franchisee for any and all charges, fees or other
amounts due and owing to Beta, DirectBuy or any of their respective
affiliates of whatever nature, including, without limitation, all
charges, fees and other amounts due under this agreement . . . and the
Franchise Agreement [between DirectBuy and JDB]. Franchisee
hereby irrevocably and unconditionally authorizes Beta, on
Franchisee’s behalf, to pay from amounts due to the Franchisee
hereunder, all franchise fees, royalty fees and all other amounts
payable in connection with the Franchise Agreement or in connection
with any other agreement entered into with DirectBuy or any of its
affiliates. The foregoing rights shall survive the termination of this
Agreement.
Mot. for Summ. J., Exh. B-2 at 2.
B. The Receivables Agreements
On March 25, 2010, InfinaQuest Business Capital, LLC (IBC), a wholly owned subsidiary
of InfinaQuest, filed a financing statement with the Florida Secured Transaction Registry, perfecting
security interests granted to IBC in a pair of receivables agreements IBC and JDB had entered into
earlier that same month. The receivables agreements granted IBC a floating security interest in
5
essentially all of JDB’s tangible and intangible property, collectively referred to in the financing
statement as JDB’s “receivables.” JDB also entered into eighteen other receivables agreements, but
these were with InfinaQuest, not IBC. InfinaQuest never filed a financing statement in its own name.
At the time it entered into these agreements, JDB owed Directbuy $365,000 in general bills. That
debt grew to over $1,000,000 by April 30, 2012.
JDB eventually defaulted on the receivables agreements with IBC and InfinaQuest and on
its contracts with DirectBuy (resulting in the Franchise Agreement being terminated). Defendants
managed to collect money from JDB. And though InfinaQuest recouped approximately $400,000
from JDB, it contends that it is still owed $602,217 (as well as interest, attorneys fees, and costs).
JDB could not repay this, and InfinaQuest hence brought this lawsuit against Defendants.
III. Analysis
InfinaQuest’s central claim is that Defendants took money that rightfully belonged to
InfinaQuest under its perfected security interest in JDB’s receivables. Defendants argue that
InfinaQuest does not have a perfected security interest, that—even if it did—it took that interest
subject to Defendants’ set-off rights, and that InfinaQuest’s claims of conversion and tortious
interference with contract fail as a matter of law. The Court begins its analysis with the issue of
whether the security interest of InfinaQuest was taken subject to Defendants’ contractual set-off
rights.
Defendants contend that JDB could only assign an interest in what it actually possessed. And
since it did not own its receivables outright, but rather owned them subject to the contractual set off
by DirectBuy, Defendants argue that any interest granted in JDB’s receivables was taken subject to
the set-off provision. In other words, it was not possible for JDB to give away what it did not have.
6
The disagreement centers on the interpretation of a handful of sections of the Uniform
Commercial Code (UCC), which have been codified without relevant changes in every jurisdiction
relevant to this dispute. Under the UCC, security priority is usually determined by who filed first.
See UCC § 9-322(a)(1). Defendants contend, however, that UCC § 9-404 applies to their set-off
rights.2 See UCC § 9-109(d)(10). Section 9-404(a) provides that
[u]nless an account debtor [on Defendants’ reading, DirectBuy] has
made an enforceable agreement not to assert defenses or claims, and
subject to subsections (b) through (e), the rights of an assignee [on
Defendants’ reading, InfinaQuest] are subject to:
(1)
all terms of the agreement between the account debtor and
assignor and any defense or claim in recoupment arising from
the transaction that gave rise to the contract; and
(2)
any other defense or claim of the account debtor against the
assignor which accrues before the account debtor receives a
notification of the assignment authenticated by the assignor
or the assignee.
UCC § 9-404(a). InfinaQuest contends that this section does not apply to this case, arguing that
Defendants were not account debtors and that InfinaQuest was not an assignee. The Court considers
each argument in turn.
1. “Account Debtor”
The first question is whether Defendants were account debtors. InfinaQuest points out that
“an ‘account debtor’” under the UCC “is basically someone who owes money as a result of a
contractual undertaking.” In re Doctors Hosp. of Hyde Park, Inc., 337 F.3d 951, 953 (7th Cir. 2003).
InfinaQuest argues that, since Defendants did not owe JDB anything, UCC § 9-404 does not apply.
But this is incorrect.
2
DirectBuy’s affiliates such as Beta, can, under the language of the Franchise Agreement, take advantage of
that contract’s set-off provisions and cash flow structure.
7
The relevant definition of “account debtor” is a “person obligated on an account.” UCC §
9-102(a)(3). The Franchise Agreement provided that DirectBuy would collect receivables, perform
a daily sweep of JDB’s merchandise account, do an internal accounting, take out any funds owed
to DirectBuy or its affiliates, and then pass the money to JDB. So long as JDB did not owe
DirectBuy more than DirectBuy owed JDB, DirectBuy was JDB’s consistent debtor under the
Franchise Agreement. Defendants were hence obligated on the account to make payments subject
to the set-off provision.
A pair of cases from the Sixth Circuit provide guidance on the issue as well. In re U.S.
Aeroteam, Inc. involved a contract between U.S. Aeroteam, Inc. and Delphi Automotive Systems,
LLC, which gave Delphi the right to deduct from its payments to Aeroteam any amounts owed to
Delphi by Aeroteam—in other words, a set off. 327 B.R. 852, 870 (Bankr. S.D. Ohio 2005). Like
this case, Aeroteam ended up owing Delphi more than Delphi owed Aeroteam. Id. That court
explained that “Delphi is the account debtor attempting to exercise a right to set-off amounts owed
to” Aeroteam. Id. at 870 n.16. Likewise, the Sixth Circuit Court of Appeals held that a party owed
money under a similar set-off agreement was an account debtor. Nat’l City Bank, Nw. v. Columbian
Mut. Life Ins. Co., 282 F.3d 407, 410 (6th Cir. 2002).
This is consistent with the Seventh Circuit Court of Appeals’ explanation that an account
debtor under UCC § 9-404 “is basically someone who owes money as a result of a contractual
undertaking.” Doctors Hosp. of Hyde Park, 337 F.3d at 953 (emphasis added). The usual case of an
account debtor under § 9-404 is indeed one in which where the account debtor owes money. This
need not always be the case, however, so long as the party in question was—as here—obligated on
an account.
8
UCC § 9-404 appears to contemplate situations in which “account debtors” are in fact net
creditors. UCC § 9-404(b), which does not otherwise apply to this case, provides that the “claim of
an account debtor against an assignor may be asserted against an assignee under subsection (a) only
to reduce the amount the account debtor owes.” UCC § 9-404 (b). This limitation would be
superfluous if “account debtors” could never be net creditors. Defendants are “account debtors”
under UCC § 9-404.
2. “Assignee”
InfinaQuest next contends that it is not an “assignee” under § 9-404. Generally, “the courts
and the UCC have made no distinction between a party with a security interest in a debtor’s accounts
receivable and a party who is an assignee of a debtor’s accounts receivable.” Bank of Waunakee v.
Rochester Cheese Sales, Inc., 906 F.2d 1185, 1190 (7th Cir. 1990) (citations omitted); accord. In
re Otha C. Jean & Assoc., Inc., 152 B.R. 219, 222–23 (Bankr. E.D. Tenn. 1993) (“[A] secured party
with a security interest in accounts or general intangibles is the assignee under [§ 9-404(a)].”);
InfinaQuest admits this but contends that this general rule is inapplicable here. It points out
that § 9-404 applies only when someone takes either a security interest in or complete ownership
of an existing account receivable. See In re Printz, 478 B.R. 876, 887 (Bankr. C.D. Ill. 2012) (citing
First Nat. Bank of Boston v. Thomson Consumer Elecs., Inc., 84 F.3d 397, 398–400 (11th Cir. 1996);
GMAC Comm. Credit, LLC v. Dillard Dep’t Stores, Inc., 198 F.R.D. 402, 407 (S.D.N.Y. 2001)).
InfinaQuest argues that its interest arose under its receivables agreements, which were separate
contracts with JDB executed before any particular account receivable came into existence. It thus
contends that its security interest came into existence before any specific interest belonging to
Defendants did.
9
It argues that the distinction is important because § 9-404(a) protects those with subsequently
created contractual set-off rights only when they have not been given notice or have not given
consent. Id. at 887. This rule makes sense because allowing a contractual set-off right created after
a perfected security interest to take priority would allow an end-run around the contract granting the
security interest. Id.
But this exception is inapplicable here because InfinaQuest did, in fact, take an interest in
an existing account receivable. The recievables agreements between JDB and InfinaQuest
specifically gave InfinaQuest a security interest in (among other things) “all of Debtor’s now owned
or hereafter acquired accounts.” Def. Mot. for Summ. J., Exh. 3 at 3. One of the accounts JDB then
owned was the merchandise account with which DirectBuy had the right to set off its debts after
performing its daily sweep. InfinaQuest thus took its interest in the existing accounts subject to this
pre-existing right of set off.
The Aeroteam case goes further than Printz, explaining that § 9-404(a) applies “when a
contracting party provides a security interest in some or all of its contractual rights to a third party,
referred to as the ‘assignee,’ without the knowledge or consent of the other contracting party.”
Aeroteam, 327 B.R. at 870–71 (citing Nat’l City Bank, 282 F.3d at 409). On this approach, notice
would destroy contractual set offs in every case, regardless of order. The Court disagrees with this
interpretation because it is directly contradicted by the plain text of the statute. Section 9-404(a)
provides simply that assignees take their interest subject to “all terms” of the underlying contract.
The official comment likewise explains that “if the account debtor’s defenses on an assigned claim
arise from the transaction that gave rise to the contract with the assignor, it makes no difference
whether the defense or claim accrues before or after the account debtor is notified of the
10
assignment.” UCC § 404 Official Comment 2.3 The set-off provision is a term of the Franchise
Agreement, and—as an assignee—InfinaQuest took its security interest subject to that provision.
This analysis is consistent with the common law maxim nemo dat quot non habet (no one
can give what he does not have) since JDB’s interest in its account was subject to DirectBuy’s
contractual set off. See Nat’l City Bank, Nw., 282 F.3d at 409 (citing Restatement (Second) of
Contracts § 336 (1981); Septembertide Pub., B.V. v. Stein & Day, Inc., 884 F.2d 675, 682 (2d Cir.
1989)). It is also consistent with UCC § 9-203(b)(2), which provides that “a security interest is
enforceable against the debtor and third parties with respect to the collateral only if . . . the debtor
has rights in the collateral or the power to transfer rights in the collateral to a secured party.” UCC
§ 9-203(b)(2). Summary Judgment is hence warranted on this basis regardless of whether
Defendants are correct in contending that InfinaQuest failed to perfect its security interest.
InfinaQuest’s claims of conversion and tortious interference with contract fail as a matter
of law. For a plaintiff to prevail on a claim of criminal conversion, it must prove that the defendant
exercised unauthorized control over the property of another. See Ind. Code § 35-43-4-3(a). Here, the
property—that is, the money—belonged to Defendants and they exercised control over it pursuant
to the contractual set-off rights. Likewise, for a plaintiff to prevail on a claim of tortious interference
with contract, it must prove, among other things, that the party alleged to have interfered lacked
justification for what it did. Gatto v. St. Richard Sch., Inc., 774 N.E.2d 914, 922 (Ind. Ct. App.
2002). Here, Defendants were justified in their actions because of the contractual set-off provision.
Notice is important in UCC § 9-404, but not in this context. UCC § 9-404(a)(2) states that the rights of an
assignee are subject to “any other defense or claim [i.e., any defense or claim not arising under the contract] of the
account debtor against the assignor which accrues before the account debtor receives a notification of the assignment
authenticated by the assignor or the assignee.” UCC § 9-404 (a)(2). This is inapplicable here since what is at issue is
what the contract provided for, not some other “defense or claim.” Id.
3
11
IV. Conclusion
For these reasons, the Court GRANTS Defendants’ Motion for Summary Judgment [DE 31].
Defendants state in their brief that a grant of summary judgment also nullifies their counterclaims.
The Court thus ORDERS Defendants’ Counterclaims DISMISSED and DIRECTS the Clerk of
Court to enter judgment against InfinaQuest and in favor of Defendants.
SO ORDERED this 5th day of May, 2014.
s/ Paul R. Cherry
MAGISTRATE JUDGE PAUL R. CHERRY
UNITED STATES DISTRICT COURT
cc:
All counsel of record.
12
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?