Big Sky Drilling, Inc. et al v. Center Capital Corporation
Filing
34
Memorandum Opinion and Order granting Center Capital Corporation's Motion for partial summary judgment (Related Doc # 30 , 32 , 33 ). Center Capital is directed to prepare a draft judgment entry setting forth what it claims it is owe d by Big Sky under the terms of the finance agreement, such entry to also reflect that all claims asserted by the counter-claim have been either satisfied by the judgment or are now moot. Signed by Magistrate Judge William H. Baughman, Jr. on 06/15/2011. (S,G)
IN THE UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF OHIO
EASTERN DIVISION
BIG SKY DRILLING, INC., et al.,
Plaintiffs,
v.
CENTER CAPITAL CORPORATION,
Defendant.
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CASE NO. 1:09 CV 2235
MAGISTRATE JUDGE
WILLIAM H. BAUGHMAN, JR.
MEMORANDUM OPINION
& ORDER
Introduction
Before me1 in this diversity action2 involving the disposition of secured collateral for
a finance agreement is defendant and counter-claimant Center Capital Corporation’s3 motion
for partial summary judgment4 against plaintiffs and counter-claim defendants Big Sky
Drilling, Inc.; Robert W. Barr; Laura J. Barr; Big Sky Well Service, Inc.; Meridian Energy
Co.; Big Sky Energy, Inc.; and GB Marketing, Inc. (Big Sky). Big Sky has responded in
opposition to this motion,5 to which Center Capital has filed a reply.6 For the reasons that
follow, Center Capital’s motion will be granted.
1
The parties have consented to my jurisdiction. ECF # 15.
2
ECF # 1.
3
Center Capital Corporation is now known as Webster Capital Finance. ECF # 30.
For ease of reference to the existing file, this entity will be referred to here as Center Capital.
4
Id.
5
ECF # 32.
6
ECF # 33.
Facts
A.
Background facts
The relevant facts are not extensive or complex. In 2007, Big Sky obtained financing
from Center Capital to purchase drilling equipment for use in its business.7 That piece of
equipment served as collateral for the loan, which loan was also guaranteed by the other
defendants.8
Following a default on that loan in 2009, an action was brought in the Ohio courts by
Big Sky seeking to enjoin Center Capital from taking any action under the finance agreement
to repossess the collateral.9 After removal of that action to this Court,10 consent to my
jurisdiction, and Center Capital’s filing of a counter-claim,11 the parties in December 2009
entered into a limited forbearance agreement by which Big Sky was to make certain
agreed-upon payments to Center Capital to satisfy its obligations under the loan and Center
Capital would take possession of the collateral.12 In March 2010 that agreement was
extended by the parties.13
7
See, ECF # 30 at 3.
8
Id.
9
ECF # 1.
10
Id.
11
ECF # 5.
12
ECF # 24.
13
ECF # 26.
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Since that extension, the parties agree that payments have not been made as required
under the terms of the extended forbearance agreement.14 They further acknowledge that
they were unable to agree upon terms for continued repayment of the loan such as would
permit Center Capital to return use of the collateral drilling equipment to Big Sky.15 In that
posture, Center Capital now moves for partial summary judgment to enforce its remedies
against Big Sky under the finance agreement.
B.
Parties’ arguments
Center Capital initially claims that, because the forbearance agreement is no longer,
in effect, it is owed $753, 595.82 under the loan plus interest, attorney’s fees, and costs.16
Big Sky, in its response, states that it has already sold the equipment at issue with the
consent of Center Capital in March, 2011 for $400,000, thus reducing any amount it owes
under the loan.17 It further contends that the sale price was “drastically reduced” from the
equipment’s fair market value because Center Capital failed to properly maintain the
equipment during the time it had control of the equipment under the forbearance agreement.18
Big Sky also argues that Center Capital’s failure to maintain the equipment in proper
14
ECF # 30 at 4; ECF # 32 at 3-4.
15
Id.
16
ECF # 30 at 5-6.
17
ECF # 32 at 4.
18
Id. at 4-5.
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operating condition during the forbearance agreement is why Big Sky ceased making the
payments called for in that agreement.19
In its reply, Center Capital first accepts Big Sky’s point that the equipment has been
sold for $400,000 and thus that any judgment due it under the finance agreement should be
correspondingly reduced.20 However, Center Capital contends that it was not required to
maintain the collateral.21 Moreover, it argues that the equipment “was in significant
disrepair” when Center Capital took control of it under the forbearance agreement, such that
any loss of value should not be attributed to Center Capital nor reduce the amount owed by
Big Sky.22
Analysis
A.
Standards of review
1.
Diversity action
As is well-recognized, a federal court deciding a matter before it under its diversity
jurisdiction is to apply federal law to procedural issues and apply the law of the forum state
to substantive questions.23 When applying the substantive law of the forum state, the federal
19
Id. at 4.
20
ECF # 33 at 2.
21
Id. at 3.
22
Id. at 4.
23
City of Cleveland v. Ameriquest Mortgage Secs., Inc., 615 F.3d 496, 502 (6th Cir.
2010) (citations omitted).
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diversity court must follow the decisions of the state’s highest court when that court has
addressed the relevant issue.24 If that issue has not been directly addressed, the federal
diversity court must anticipate how the relevant state court would act.25 Decisions from
intermediate state appellate courts are viewed as persuasive unless it is shown that the state’s
highest court would decide the matter differently.26
In the particular instance of enforcing a contract in a diversity action, the federal court
will generally enforce the parties’ contractual choice of governing law.27 If there is no
enforceable choice of law in the contract, the federal diversity court employs the choice of
law analysis of the forum state.28
2.
Summary judgment
Summary judgment is appropriate where the court is satisfied “that there is no genuine
issue as to any material fact and that the moving party is entitled to a judgment as a matter
of law.”29 The burden of showing the absence of any such “genuine issue” rests with the
moving party:
24
Id. (citation omitted).
25
Id. (citation omitted).
26
In re Dow Corning Corp., 419 F.3d 543, 549 (6th Cir. 2005) (citation omitted).
27
Savedoff v. Access Group, Inc., 524 F.3d 754, 762 (6th Cir. 2008) (citations
omitted).
28
Montgomery v. Wyeth, 580 F.3d 455, 459 (6th Cir. 2009) (citation omitted).
29
Fed. R. Civ. P. 56(c).
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[A] party seeking summary judgment always bears the initial responsibility of
informing the district court of the basis for its motion, and identifying those
portions of ‘the pleadings, depositions answers to interrogatories, and
admissions on file, together with affidavits, if any,’ which it believes
demonstrates the absence of a genuine issue of material fact.30
A fact is “material” only if its resolution will affect the outcome of the lawsuit.31
Determination of whether a factual issue is “genuine” requires consideration of the applicable
evidentiary standards.32 The court will view the summary judgment motion “in the light most
favorable to the party opposing the motion.”33
Summary judgment should be granted if a party who bears the burden of proof at trial
does not establish an essential element of his case.34 Accordingly, “[t]he mere existence of
a scintilla of evidence in support of the plaintiff’s position will be insufficient; there must be
evidence on which the jury could reasonably find for the plaintiff.”35 Moreover, if the
evidence presented is “merely colorable” and not “significantly probative,” the court may
decide the legal issue and grant summary judgment.36
30
Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986) (citing Fed. R. Civ. P. 56(c)).
31
Anderson v. Liberty Lobby, 477 U.S. 242, 248 (1986).
32
Id. at 252.
33
U.S. v. Diebold, Inc., 369 U.S. 654, 655 (1962).
34
McDonald v. Petree, 409 F.3d 724, 727 (6th Cir. 2005) (citing Celotex Corp., 477
U.S. at 322).
35
Leadbetter v. Gilley, 385 F.3d 683, 689 (6th Cir. 2004) (quoting Anderson, 477 U.S.
at 248-49).
36
Anderson, 477 U.S. at 249-50 (citation omitted).
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Once the moving party has satisfied its burden of proof, the burden then shifts to the
nonmover.37 The nonmoving party may not simply rely on its pleadings, but must “produce
evidence that results in a conflict of material fact to be solved by a jury.”38 “In other words,
the movant can challenge the opposing party to ‘put up or shut up’ on a critical issue.”39
In sum, proper summary judgment analysis entails the threshold inquiry of
determining whether there is the need for a trial – whether, in other words, there are any
genuine factual issues that properly can be resolved only by a finder of fact because they may
reasonably be resolved in favor of either party.40
B.
Application of standard – Center Capital’s summary judgment motion is
well-taken and is granted.
Initially, I observe that there is no dispute here concerning three critical facts. First,
the parties concede that the forbearance agreement has been terminated by Big Sky’s
non-payment, and so that agreement has no effect on the present motion.41 In that same
regard, there is no dispute that the finance agreement42 sets forth the obligations of Big Sky
toward Center Capital, as well as the rights of Center Capital as concerns its remedies.
Finally, there is agreement that the collateral at issue has been sold for $400,000 after being
37
Id. at 256.
38
Cox v. Kentucky Dept. of Transp., 53 F.3d 146, 149 (6th Cir. 1995).
39
BDT Prods. v. Lexmark Int’l, 124 F. App’x 329, 331 (6th Cir. 2005).
40
Anderson, 477 U.S. at 250.
41
See, ECF # 30 at 4; ECF # 32 at 3.
42
See, ECF # 30, Ex. 2.
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in Center Capital’s possession, thus reducing any liability by Big Sky under the finance
agreement by that amount.43
Thus, the remaining issue centers on what obligation, if any, Center Capital had to
maintain the collateral while it had possession of such collateral under the forbearance
agreement. If there was an obligation to maintain, as Big Sky contends, and if Center Capital
failed to discharge that obligation and so diminished the value of the collateral, then such a
finding could reduce the remaining amount Big Sky owes under the finance agreement since
the equipment was sold below the amount financed. If, however, as Center Capital asserts,
its sole obligation under either existing law or the parties’ agreement was simply not to create
an unreasonable risk of harm to the collateral in its possession, then, it contends, it is entitled
to full recovery of the amounts specified in the finance agreement. In particular, it argues:
(1) the collateral was not in working condition when it was turned over to it, (2) it had no
obligation to repair the equipment, and (3) it otherwise complied with the obligation not to
put the collateral at risk of harm.
The core of Big Sky’s argument is that Center Capital “failed to preserve the
equipment [here at issue] in proper operating order, thereby significantly reducing the value
of the equipment and the ability to sell it for an appropriate price.”44 That failure, according
to Big Sky, means that Center Capital breached the duty imposed by Ohio statute on a party
43
ECF # 32 at 4; ECF # 33 at 2.
44
ECF # 32 at 6.
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taking possession of collateral to preserve that collateral.45 That statute further provides that
a debtor may recover damages occasioned by the loss of value in collateral arising from the
failure of a party in possession to use reasonable care in preserving the value of that
collateral.46
Initially, notwithstanding that provision of Ohio law, Center Capital correctly notes
that Connecticut law, not that of Ohio, applies in this case by terms of the parties’ finance
agreement.47 As noted above, this Court generally will give effect to such a choice of law
in a diversity case. Here, in both the finance agreement48 and Connecticut statute,49 a secured
party in possession of collateral is obligated only to exercise reasonable care as to preserving
that collateral.
As the Connecticut Superior Court noted, while this exact section of the Connecticut
statute has not been interpreted by Connecticut courts, since this provision “is the
Connecticut version of the Uniform Commercial Code § 9-207[,] decisions of other
45
Id., citing Ohio Rev. Code § 1309.207.
46
Id.
47
ECF # 33 at 4. See also, ECF # 30, Ex. 2 (finance agreement) at ¶ 8 (“This
Agreement shall be ... governed by and construed in accordance with the laws of the State
of Connecticut ...”).
48
ECF # 30, Ex. 2 at ¶ 4(k). “Lender shall have no duty to ... protect the collateral or
any part thereof beyond exercising reasonable care in the custody of any collateral in the
possession of Lender.”
49
Connecticut General Statutes §42a-9-207. “(a) Except as otherwise provided in
subsection (d) [as concerns chattel paper and promissory notes], a secured party shall use
reasonable care in the custody and preservation of collateral in the secured party’s
possession.”
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jurisdictions’ (sic) interpreting similar statutes may be appropriately considered.” 50 In that
regard, the Official Comment to the Uniform Commercial Code 9-207 notes that this
subsection merely imposes the same duty of care imposed on a pledgee at common law,
which, as set forth in the Restatement on Security § 17, is that which “a reasonable man
would recognize as necessary to prevent his conduct from creating an unreasonable risk of
harm to the pledgor’s chattel.”
In this instance, the undisputed Rule 56 evidence before me establishes first that the
equipment was only in “fair or fair to poor” condition when it was given over to Center
Capital under the forbearance agreement.51 The evaluation of the collateral’s condition
conducted at the request of Center Capital at the beginning of its possession of the drilling
rig at issue, and not disputed by Big Sky, documents multiple problems:
(1)
the rig “shows evidence of severe lack of lubrication” of its moving
parts;
(2)
“[t]he main pullback cables are rusted;”
(3)
“all hydraulic functions were ... not up to specified hydraulic
performance ...[such that] [t]he hydraulic system will require extensive
trouble shooting ...;”
(4)
the “jib boom slew drive is worn out and the hydraulic motor is just
hanging from it’s (sic) hoses;”
(5)
“the casing bales ... [are] showing severe abuse;” and
50
Ancell v. Fleet Bank, N.A., 1996 WL 156103, at *2 (Conn. Super. Ct., March 14,
51
ECF # 33, Ex. 2 (service work order of July 30, 2009).
1996).
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(6)
the “Emergency Stop Switch was rigged so that it could not be
engaged.”52
The evaluation concluded that the rig required $50,000 of repairs for “known deficiencies,”
with additional sums potentially needed “based on hydraulic system trouble shooting and
results.”53
In addition to the undisputed evidence that shows multiple deficiencies in the rig, Big
Sky has offered nothing to contest the Rule 56 evidence in this matter that Center Capital
took possession of the non-working rig54 that was in “fair or fair to poor condition,”55 kept
it “in a secure location,”56 and never operated the rig while it was in its possession.57 As
such, under the applicable standard stated above, I find that Center Capital has established
under both the specific language of the finance agreement and Connecticut law that it
exercised such care over Big Sky’s collateral that a reasonable man would exercise so as to
prevent his conduct from creating an unreasonable risk of harm to that collateral.
Thus, I further find that Center Capital has established its right to enforce the terms
of the finance agreement while Big Sky has not shown that Center Capital is responsible for
any loss of value of that collateral. Specifically, Big Sky has not established that it can claim
52
Id. at 1.
53
Id.
54
ECF # 33, Ex. 1 (affidavit of John Napierkowski) at ¶ 8.
55
Id. at ¶ 11.
56
Id. at ¶ 12.
57
Id. at ¶ 8.
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any damages arising from Center Capital’s conduct while it had possession of the collateral
which might offset the amounts due and owing by Big Sky to Center Capital under the
finance agreement.
Conclusion
Therefore, for the reasons stated above, Center Capital’s motion for partial summary
judgment is granted.
In that regard, Center Capital is directed to prepare a draft judgment entry setting forth
what it claims it is owed by Big Sky under the terms of the finance agreement, such entry to
also reflect that all claims asserted by the counter-claim have been either satisfied by the
judgment or are now moot.
IT IS SO ORDERED.
Dated: June 15, 2011
s/ William H. Baughman, Jr.
United States Magistrate Judge
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