Equimark Commercial Finance Co. v. C.I.T. Financial Services Corp.

Citation812 F.2d 141
Decision Date02 March 1987
Docket NumberNo. 86-3478,86-3478
PartiesEQUIMARK COMMERCIAL FINANCE COMPANY, Appellant, v. C.I.T. FINANCIAL SERVICES CORPORATION (Formerly Universal C.I.T. Credit Corporation).
CourtUnited States Courts of Appeals. United States Court of Appeals (3rd Circuit)

Jerome M. Libenson (argued), Mark L. Glosser, Mary Anne McKeen, Lampl, Sable, Makoroff & Libenson, Pittsburgh, Pa., for appellant.

George M. Cheever (argued), David M. Aceto, Kirkpatrick & Lockhart, Pittsburgh, Pa., for appellee.

Before GIBBONS, SLOVITER, Circuit Judges, and SCIRICA, * District Judge.

OPINION OF THE COURT

SLOVITER, Circuit Judge.

In this action Equimark Commercial Finance Company (Equimark) seeks to recover a portion of a security account held by C.I.T. Financial Services Corporation (C.I.T.) established under a contract between C.I.T. and Equimark's assignor, United Dealers Corporation (United). The district court gave summary judgment for C.I.T., holding that there was no genuine issue of fact that C.I.T. was entitled to retain the amounts in the account because of various contractual defaults by United, and that C.I.T. did not waive this right. Our review of the grant of summary judgment is plenary. See Maldonado v. Ramirez, 757 F.2d 48, 49 (3d Cir.1985); Kahn v. United States, 753 F.2d 1208, 1210 (3d Cir.1985).

I. Facts

United is a financing subsidiary of Swift Industries, Inc. (Swift), which was engaged along with various of its affiliates in the manufacture and retail sale of precut and prefabricated houses. United offered mortgage loans to Swift's retail customers. In an agreement dated April 12, 1967 ("Portfolio Agreement"), United sold a number of these obligations (so-called "paper") to C.I.T., and in another agreement dated the same day ("Home Financing Agreement"), United promised to give C.I.T. the right of first refusal on its subsequent sale of these obligations under essentially the same terms as the Portfolio Agreement.

Both agreements contained a provision for a "holdback account" which served as collateral for United's obligations, and which contained $516,750.36 at the inception of the agreement. C.I.T. was entitled to retain in that account 5% of the aggregate gross unpaid balance on the paper as to which there was no default and 100% of the unpaid balance on paper that was 90 days overdue or as to which there had been a default by United. At the end of each quarter, C.I.T. was to remit to United the amount by which the holdback account exceeded the amount C.I.T. was entitled to retain. The holdback account was subject to a minimum balance of $100,000 or the aggregate gross unpaid balance then outstanding on the paper, whichever was less.

Paragraph II.D. (3) of the Portfolio Agreement and Paragraph IV.B. (3) of the Home Financing Agreement also provided that:

If for any reason [United] or any of its affiliated corporations is in default to [C.I.T.] ..., then, notwithstanding any other provisions herein or elsewhere [C.I.T.] may retain all monies in said holdback account up to the aggregate gross unpaid balances then outstanding on the paper ..., until all of the paper and all of the outstanding obligations of [United] to [C.I.T.] ... have been fully paid, and [C.I.T.] may, at its option, charge any of said obligations of [United] against the holdback account, and thereafter notify [United] of such charge.

App. at 17-18, 254.

From 1975 through 1977, United breached its obligations under the contracts in various respects: beginning at the end of United's fiscal year ending March 31, 1975, and thereafter, United failed to provide C.I.T. with the requisite financial statements, and those that were received were not certified as required by Paragraph V.H. of the Portfolio Agreement and Paragraph VII.G. of the Home Financing Agreement.

On May 20, 1975, United assigned its interest in the holdback account to Equimark, in violation of Paragraph X of the Portfolio Agreement and Paragraph XII of the Home Financing Agreement. C.I.T. was notified of the assignment in a letter dated December 1, 1976.

On January 17, 1977, Swift and its affiliates, including United, filed a Petition for an Arrangement under Chapter XI of the Bankruptcy Act of 1898. Under Paragraph VII.C. of the Portfolio Agreement and Paragraph IX.C. of the Home Financing Agreement, the filing of the petition constituted at C.I.T.'s option an event of default. C.I.T., a secured creditor, did not participate in the Chapter XI proceedings. On July 21, 1977, a plan for arrangement was confirmed for the Swift companies. Equimark, the assignee, and its parent, Equibank, provided funds for the reorganization and they took a security interest in substantially all the assets of the Swift companies under a master loan agreement.

United also defaulted on the net worth requirement of Paragraph V.G. (1) of the Portfolio Agreement and Paragraph VII.F. (1) of the Home Financing Agreement, since as of March 31, 1977 and continuing thereafter United's net worth has been less than the lesser of $2,300,000 or the contingent liabilities of United and Swift to C.I.T.

Finally, on several occasions in July 1975 and thereafter, C.I.T. requested United to honor its obligations under Paragraph VII.A. of the Portfolio Agreement and Paragraph IX.A. of the Home Financing Agreement to repurchase paper that was 90 days overdue. In each case, United declined to repurchase the delinquent paper, and instead requested C.I.T. to charge the holdback account for the balance due on the paper. In late May or early June, 1977, C.I.T. agreed to assign all future delinquent paper to United and to charge the holdback account for any resulting deficiency, and United agreed to collect the balance due on the delinquent paper and remit the proceeds of collection up to the amount of the deficiency to C.I.T. for recrediting to the holdback account. C.I.T. thereafter assigned several items of delinquent paper to United under the agreement. However, in most of these cases, United either failed to reimburse C.I.T. for the full amount of the delinquency, or failed to remit any of the collection proceeds to C.I.T. Under Paragraphs VII.C. of the Portfolio Agreement and Paragraph IX.C. of the Home Financing Agreement, failure by United to perform its repurchase obligations constituted at C.I.T.'s option an event of default.

Although C.I.T. purchased approximately 388 items of paper under the Home Financing Agreement from June, 1968 through December, 1975, in 1976 C.I.T. purchased only 3 items of paper, and in 1977 C.I.T. purchased no paper from United. C.I.T. also made no disbursements to United from the holdback account in 1977 or any time thereafter. In August, 1977, after emergence from Chapter XI, representatives of United, Swift and C.I.T. met to discuss ways to restore C.I.T.'s level of purchases from United, and to increase the attractiveness of United's loan terms to prospective borrowers. As a result of these negotiations, C.I.T. agreed to accept paper with a longer term and lower interest rate than it had previously accepted. C.I.T. also agreed to reduce from 5% to 3% the amount held back from each purchase. However, the holdback account minimum was increased from $100,000 to $400,000. In a letter dated January 9, 1978 memorializing the agreement, a C.I.T. representative also stated that, "Overall holdback retention ... will remain 5% of the aggregate gross unpaid balances outstanding on all current paper plus 100% of the aggregate gross unpaid balances on all 'non-current paper' as defined in the underlying agreement ... dated April 12, 1967...." App. at 291.

On August 20, 1980, C.I.T. was informed that Equibank and Equimark had foreclosed on all the assets of the Swift companies with the intention of liquidating the assets. Thereafter, C.I.T. received no further financial statements from Swift or United. C.I.T. continued, however, to make purchases from United, and to assign delinquent paper to United for collection under the agreement made in late May or early June, 1977. As of February 22, 1985, the balance in the Regular Holdback Account was $407,797.88, and the balance of the total paper outstanding was $2,636,500.26.

On May 22, 1985, Equimark, as assignee of United, brought the present action to recover the funds in the holdback account to the extent that they exceed the greater of $100,000 or 5% of the total unpaid balance outstanding. C.I.T. moved for summary judgment, claiming a right to retain all amounts in the holdback account as a result of United's...

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