Crestmark Bank v. Electrolux Home Prods., Inc.

• Decision Date: 07 January 2016
• Docket Number: Case No. 14-cv-11595
• Parties: Crestmark Bank, Plaintiff, v. Electrolux Home Products, Inc., Defendant.
• Court: U.S. District Court — Eastern District of Michigan

155 F.Supp.3d 723

Crestmark Bank, Plaintiff,

v.Electrolux Home Products, Inc., Defendant.

Case No. 14-cv-11595

United States District Court, E.D. Michigan, Southern Division.

Signed January 7, 2016

Jonathan C. Myers, Jaffe, Raitt, Heuer & Weiss, P.C., Southfield, MI, for Plaintiff.

Gregory H. Wagoner, Toledo, OH, for Defendant.

ORDER DENYING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT [35] AND GRANTING IN PART AND DENYING IN PART PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT [36]

Judith E. Levy, United States District Judge

This matter comes before the Court on cross motions for summary judgment regarding a contract dispute between plaintiff, Crestmark Bank, and defendant, Electrolux Home Products, Inc., and their rights to tools and molding equipment, finished component parts intended for purchase by defendant, and raw materials. This property was located at the facilities of Tarheel Plastics, LLC (“Tarheel”), a manufacturer-supplier for defendant and debtor to plaintiff, that had ceased business operations in early October 2013. Plaintiff asserts that that defendant breached the parties' agreement, while defendant argues that the agreement lacked proper consideration, and, in any event, the terms that were not impossible were fully performed.

At stake is $332,000.00 in an escrow account funded by defendant pursuant to the Accommodation Agreement. Defendant has brought counterclaims for tortious interference with contract, tortious interference with business relations, unfair and deceptive trade practices under North Carolina law, unjust enrichment, conversion, and declaratory relief that Electrolux is entitled to offset the costs of the resins it purchased on Tarheel's behalf. (Answer and Counterclaims, Dkt. 18.)

I. BACKGROUND

A. Electrolux and Tarheel

Tarheel, located in North Carolina, manufactured injection-molded plastic parts for assembly into appliances made by Electrolux beginning in 2008, and continuing until it ceased operations on October 2, 2013. (Rakes Aff., Def. Mot. Ex. 1, Dkt. 38-2 at 1; Lund Dep., Def. Mot. Ex. 6, Dkt. 38-7 at 11.) Suppliers like Tarheel bid for manufacturing projects with Electrolux through a web portal, into which a quote is submitted regarding price, quantity, delivery, and other specifications for a specific project. (Rakes Aff., Dkt. 38-2 at 1-2.) If Electrolux found that quote acceptable, it posted a purchase order, along with terms of sale, for the manufacturer-supplier to accept through the web portal. (Id. at 2.) The terms of such an agreement provided, in part, “Set-off: Buyer [Electrolux] shall be entitled to set off any amount owing at the time from Seller to Buyer or any of its affiliated companies against any amount payable at any time by Buyer or any of its affiliated companies to Seller.” (Terms and Conditions of Sale, Def. Mot. Ex. 2, Dkt. 38-3 at 2.) Tarheel ordered the raw materials, called resins, used to manufacture the parts from Electrolux, and “then from time to time Electrolux offset the costs of the resins ordered by Tarheel against Tarheel's open manufacturing invoices.” (Rakes Decl., Dkt. 38-2 at 2.)

A UCC Financing Statement, filed with the North Carolina Secretary of State on December 28, 2011, recorded the bailment of, and security interest in, specific tools owned by Electrolux and placed into the possession of Tarheel. (Def. Mot., Ex. 4.) A Tooling Agreement, executed on February 8, 2013, between Tarheel and Electrolux describes a different list of tools from that in the 2011 UCC Financing Statement, but similarly makes it clear that Electrolux maintained the ownership of the equipment provided to Tarheel for the manufacture of parts Electrolux would then purchase. (Tooling Agreement, Def. Mem., Ex. 3, Dkt. 38-4.) Tarheel shared this understanding that the equipment and molds belonged to Electrolux during the entire course of the relationship between the two companies. (Scott Dep., Def. Suppl. Mem., Ex. A, Dkt. 55-2 at 4.) The tooling agreement required Electrolux to have “plainly marked” its equipment and barred Tarheel from tampering or removing these markers. (Tooling Agreement, Def. Mem., Ex. 3, Dkt. 38-4 at 1.) Tarheel promised to “not allow the Tooling to become encumbered in any way as a result of any act or omission of Seller [Tarheel].” (Id. at 2.) The agreement also indicates that, even if a court determined that Electrolux had not retained ownership of the tooling, Tarheel “hereby agrees to be deemed to have granted Buyer a security interest giving Buyer all the rights of a secured creditor as to the Tooling under the Uniform Commercial Code as in effect in that jurisdiction.” (Id. )

The relationship between Electrolux and Tarheel was based on a just-in-time manufacturing supply, meaning that there would have been very little time available for Electrolux to change suppliers if one manufacturer ceased operations. (Stones Dep., Def. Mem. Ex. 9, Dkt. 38-10 at 7.) Electrolux projects represented ninety-five percent of Tarheel's business. (Lund Dep., Pl. Mem. Ex. 5, Dkt. 36-2 at 37; but see Scott Dep., Def. Suppl. Mem., Ex. A, Dkt. 55-2 at 9 (estimating that Electrolux accounted for 90% of Tarheel's business).)

Electrolux provides documentation that, when Tarheel ceased operations in early October, Tarheel owed Electrolux $240,450.00 in resin debits, as well as another $211,506.00 in “inventory at Tarheel,” and that Electrolux owed Tarheel $264,901.60 in open invoices for component parts received between June and October of 2013. (Rakes Aff., Def. Mem., Ex. 1 at 8.) A Tarheel minority partner testified that “hundreds of thousands of pounds” of resin filling three storage silos was onsite at Tarheel at the time it ceased operations, although he did not state a value for this material. (Scott Dep., Def. Suppl. Mem., Ex. A, Dkt. 55-2 at 9.)

B. Crestmark and Tarheel

Crestmark was Tarheel's primary lender, holding a line of credit with Tarheel for approximately $1,200,000.00. The earliest evidence of this relationship is a promissory note and security agreement dated November 27, 2012. (Pl. Mem., Ex. 1, Dkt. 36-2 at 1-2; Lund Dep., Pl. Mem. Ex. 5, Dkt. 36-2 at 36-37.) In consideration for the loan, Tarheel

grant[ed] to Crestmark a security interest in all of its assets, now existing or hereafter arising , wherever located included All Accounts, Goods, Inventory, Equipment ,...books and records and supporting obligations for any of the foregoing, and all Proceeds of the foregoing (the “Collateral”), to secure repayment of the Obligations (“Security Interest”).

(Pl. Mem., Ex. 2, Dkt. 36-2 at 6 (emphasis added).) Three individuals, Joseph Nelson, Daniel Scott, and Craig Ward personally guaranteed the loans. (Pl. Mem., Ex. 3 at 28-29.) Crestmark recorded its security interest on November 5, 2012. (UCC Financing Statement, Def. Mot. to Stay, Ex. C, Dkt. 3-3 at 2 (describing the collateral as “[a]ll assets of the Debtor now owned or hereafter acquired and wherever located”).)

The security agreement included the representation that Tarheel “is the owner of all the Collateral and there are no other liens or claims against the Collateral, except the Security Interest of Crestmark or as shown on the Schedule,” and that “[t]he Inventory and Equipment are and shall remain free from all liens, claims, encumbrances, and security interests (except as held by Crestmark, and except as identified on the Schedule).” (Pl. Mem. Ex. 2, Dkt. 36-2 at 8-9.) The agreement excluded from inventory anything that was “subject to any license or other such agreement that limits, conditions, or restricts [Tarheel's] or Crestmark's right to sell or otherwise dispose of such Inventory.” (Id. at 20.) The evidence does not show that a list of Electrolux tooling was appended or otherwise exempted from this lien.

The Crestmark-Tarheel relationship also included acknowledgment by Crestmark of the resins-purchasing offset program—that “[Tarheel] from time to time got these small invoices from Electrolux that would offset against the receivables and it had been fairly small by comparison.” (Lund Dep., Pl. Mem., Ex. 5, Dkt. 36-2 at 38.) However, Crestmark understood the offset program to be “a fairly small number,” and there had been “very few adjustments” in the roughly year and a half in which Crestmark managed the credit line with Tarheel. (Id. at 39.)

On September 30, 2013, Crestmark officials traveled to the Tarheel facility in North Carolina to audit its books and determine if Tarheel should continue or cease operations. (Lund Dep., Pl. Mem. Ex. 5, Dkt. 36-2 at 32-34.) The records documenting the raw-material offset program with Electrolux were missing, apparently taken by the majority owner, Mr. Nelson, when he suddenly left the company. (Id. at 35; see also Scott Dep., Def. Suppl. Mem., Ex. A, Dkt. 55-2 at 9-11 (testifying that Mr. Nelson left Tarheel on September 13, 2013, after the minority partners discovered that he had falsified payroll-tax information and kept information about the offset program with Electrolux off the company's books).) The minority owners of Tarheel, Mr. Scott and Mr. Ward, represented to Crestmark that they were not knowledgeable about the offset program. (Id. at 38.)

The analysis prepared on October 1, 2013 by Crestmark with the minority owners demonstrated that Tarheel could not continue operations. (Id. at 42-43.) The Statement of Accounts prepared by Crestmark and dated October 16, 2013 demonstrates that Electrolux-related companies had past-due balances of $1,109,006.67. (Pl. Mem. Ex. 6, Dkt. 36-2.)¹

A cash-flow projection and analysis created between September 30 and October 1, 2013 demonstrated to Crestmark that Tarheel had a negative cash flow that would continue to grow through the Fall of 2013, and led Crestmark to cease its lending of operating funds and terminate Tarheels operations on October 2, 2013. (Lund Decl., Pl. Suppl. Mem., Ex. 2, Dkt. 56-1 at 23.) There is significant disagreement between the parties regarding the meaning of this cash-flow analysis:...