Harley-Davidson Motor Co., Inc. v. Bank of New England Old- Colony, N.A.

• Citation: 897 F.2d 611
• Decision Date: 08 December 1989
• Docket Number: HARLEY-DAVIDSON,ENGLAND--OLD,No. 89-1671,89-1671
• Parties: 10 UCC Rep.Serv.2d 1128 MOTOR CO., INC., and ITT Commercial Finance Corp., Plaintiffs, Appellants, v. BANK OF NEWCOLONY, N.A., Defendant, Appellee. . Heard
• Court: United States Courts of Appeals. United States Court of Appeals (1st Circuit)

Page 611

897 F.2d 611

10 UCC Rep.Serv.2d 1128

HARLEY-DAVIDSON MOTOR CO., INC., and ITT Commercial Finance Corp., Plaintiffs, Appellants, v. BANK OF NEW ENGLAND--OLD COLONY, N.A., Defendant, Appellee.

No. 89-1671.

United States Court of Appeals, First Circuit.

Heard Dec. 8, 1989.

Decided March 6, 1990.

Mark A. Stull with whom Gordon N. Schultz, Schultz & Bednarz, P.A., Boston, Mass., Stephen R. White, and Pucci & Goldin, Inc., Providence, R.I., were on brief, for plaintiffs, appellants.

James E. Purcell with whom Partridge, Snow & Hahn, Providence, R.I., were on brief, for defendant-appellee.

Before CAMPBELL, Chief Judge, BREYER and TORRUELLA, Circuit Judges.

BREYER, Circuit Judge.

A motorcycle manufacturer ("Harley") and a finance company ("ITT") loaned money to a motorcycle dealer ("Clemence") to help finance the dealer's new motorcycle inventory. To guarantee repayment they took and perfected a secured interest in the dealer's entire--new and used cycle--inventory and in all his motorcycle sale proceeds. Subsequently, a bank ("Old Colony") provided the dealer with a line of credit, primarily to help him buy used motorcycles. To guarantee repayment, the bank took and perfected a (junior) secured interest in the dealer's inventory. More importantly, the bank insisted that the dealer leave with it title documentation (which we shall refer to as "certificates") for particular used, and a few new, motorcycles. The bank released these certificates only as the dealer sold the individual cycles and repaid the bank's advances. The dealer went bankrupt.

The motorcycle manufacturer and the finance company brought this diversity action against the bank. They claim that the bank, by holding (as security for its advances) the title certificates of several new motorcycles, intentionally interfered with their senior "security agreement" contracts. They say the bank's practice caused the bankruptcy of the dealer, thereby preventing them from collecting all the money the dealer owed them and causing them to lose profits while they searched for a replacement dealer. They also claim that the bank's practice of holding the title certificates amounted to conversion, either (1) of the certificates themselves or (2) of motorcycle sale proceeds that the dealer consequently paid to the bank rather than to them.

The district court entered judgment for the bank on both sets of claims. The court, without hearing evidence, granted summary judgment for the bank on the conversion claim. 85 B.R. 1. After hearing evidence on the "contract interference" claim, it held for the bank on the ground that the plaintiffs failed to prove that the bank's practices caused the dealer's bankruptcy. The manufacturer and the finance company (Harley and ITT) now appeal. We conclude that the law entitles them to proceed to trial on one aspect of their "conversion" claims, but in all other respects we affirm the district court.

I. Background

To understand the basis for our conclusions, the reader must keep the following factual background in mind:

1. The dealer, Richard J. Clemence, established his Harley-Davidson motorcycle dealership in 1982. The manufacturer, Harley, and the finance company, ITT, financed his acquisition of new motorcycles.

2. Clemence signed written security agreements with both Harley and ITT. The agreements each contain four terms of particular importance here:

a. Each grants the secured party a secured interest in collateral that includes all Clemence's inventory, both new and used cycles, and the proceeds of their sale.

b. Each forbids Clemence (without the secured party's consent) to create another security interest in the collateral.

c. Each requires Clemence to pay back to the secured party the loan on any financed motorcycle immediately (e.g., within 24 hours) after Clemence sells the motorcycle d. Each defines "default" broadly to include Clemence's breaking of his promise not to encumber the collateral; and each permits the secured party to repossess the collateral upon default.

Harley and ITT each perfected its secured interest by filing financing statements with the Rhode Island Secretary of State in March 1982.

3. Subsequently, Old Colony provided Clemence with a line of credit designed to help him buy used motorcycles--old motorcycles that customers would trade in when they bought new ones. As we have said, Old Colony secured repayment in two ways. First, it obtained a secured interest in Clemence's entire inventory of new and used cycles, an interest which it perfected by filing financing statements in September 1983 and December 1984. Old Colony's secured interest was junior to the previously perfected secured interests of Harley and ITT. Second, before making a particular advance (under its line of credit), Old Colony required Clemence to sign a document called "Trust Receipt and Promissory Note," which identified a specific motorcycle, the value of which equalled or exceeded the amount of the advance; and it required Clemence to deposit with it the title certificate for each such identified motorcycle. It returned the title certificate to Clemence only when he repaid the advance. Since Clemence could not sell a motorcycle without delivering the title certificate to the buyer, this practice assured Old Colony that Clemence would likely use any money from the sale of a motorcycle immediately to repay the advance.

4. As a practical matter, Old Colony's "certificate holding" practice did not conflict with Harley's and ITT's collection efforts so long as Old Colony held only used motorcycle certificates. Suppose, for example, that Clemence bought a new motorcycle from Harley for which it owed Harley (or ITT) $7,000. Suppose he sold the cycle for $5,000 cash plus a used (trade-in) cycle worth $6,000. He could pay Harley back the $7000 almost immediately by giving Harley the $5,000 cash he received from the buyer, plus, say, $2,000 that he borrowed from Old Colony on the strength of the used cycle. When Clemence later sold the used cycle, he would simultaneously repay Old Colony.

Suppose, however, that Old Colony loaned money against (and held the certificate for) a new motorcycle that Harley (or ITT) had financed. This could create a financially awkward situation. Suppose, as above, that Clemence bought a new cycle from Harley, for which he owed Harley $7,000. Assume he then borrowed, say, $4500 from Old Colony, using the same new cycle as collateral. And assume, as before, that Clemence sold the new cycle for $5,000 cash plus a used (trade-in) cycle worth $6,000. He would now immediately have to repay Old Colony $4500 to get back the new cycle's title certificate, and he would then have only $500 in cash left to repay Harley its $7000 loan. Even if Clemence could sell the used cycle immediately, or use the cycle to secure a further $6000 advance from Old Colony, he would still end up with $500 less than he needs to repay Harley: the "double financing" of the new cycle has created a financial problem. Harley and ITT say that such financial problems caused Clemence's bankruptcy.

5. From September 1983, when Old Colony provided Clemence with a $50,000 revolving line of credit, through October 1984, when Old Colony increased the line of credit to $75,000, until June 10, 1985, when Clemence filed for bankruptcy, Old Colony issued "trust receipts", and held title certificates, for 53 motorcycles. It returned 41 certificates to Clemence as he repaid the relevant advances. It turned over the remaining 12 certificates to Harley soon after Clemence filed for bankruptcy. Until January 1985 (with one irrelevant exception) it held only used cycle title certificates. Between January and June 1985, however, it took eight certificates for new, Harley- or ITT-financed motorcycles. At any one time it held a maximum of four such certificates, securing an advance to Clemence of $18,666.

II. The Contract Interference Claim

We consider first Harley's and ITT's appeal from the judgment against them on their "contract interference" claim. They focus, almost exclusively, upon the factual linchpin of the district court's decision, namely, its determination that, even if Old Colony improperly "interfered" with the earlier contracts, the interference (the "double financing") did not cause Clemence's bankruptcy (and, consequently, caused the plaintiffs no harm). Although conflicting factual evidence may have made the causation question difficult to decide in the trial court, that very circumstance makes it easier for us to decide the related legal question on appeal. The law permits us to overturn a factual finding such as this one only if it is "clearly erroneous," Fed.R.Civ.P. 52(a), which is to say, only if we are "left with the definite and firm conviction that a mistake has been committed." United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746 (1948). The conflicting evidence prevents us from having any such "firm conviction."

On the one hand, Harley and ITT built a factually strong case. They showed, through Clemence's own testimony, that his decision to file for bankruptcy on June 10, 1985, was "made and concluded on one day." They pointed out that, on that day, Clemence lacked the money he needed to pay ITT about $14,000 he owed it, yet Clemence had just paid Old Colony more than $18,000 for four "double financed" cycles. They produced financial experts who testified that, if only Clemence had not had to pay back this $18,000 at just that time, he could have paid his other current debts and avoided bankruptcy; and, if Old Colony had permitted Clemence to repay its loans on a monthly basis, say $3700 per month, instead of tying the repayment to release of the motorcycle certificates, he would not have had to pay back the $18,000 just then.

On the other hand, the record contains important contrary evidence. Clemence had a fairly large business, with sales of over $1 million per...