FLEET BUSINESS CREDIT v. ENTERASYS NETWORKS

Decision Date24 June 2004
Docket NumberNo. 1-02-3884.,1-02-3884.
Citation287 Ill.Dec. 652,352 Ill. App.3d 456,816 N.E.2d 619
PartiesFLEET BUSINESS CREDIT, LLC, a Delaware Limited Company, Plaintiff-Appellee, v. ENTERASYS NETWORKS, INC., formerly known as Cabletron Systems, Inc., a Delaware Corporation, Defendant-Appellant.
CourtUnited States Appellate Court of Illinois

816 N.E.2d 619
352 Ill.
App.3d 456
287 Ill.Dec.
652

FLEET BUSINESS CREDIT, LLC, a Delaware Limited Company, Plaintiff-Appellee,
v.
ENTERASYS NETWORKS, INC., formerly known as Cabletron Systems, Inc., a Delaware Corporation, Defendant-Appellant

No. 1-02-3884.

Appellate Court of Illinois, First District, Fourth Division.

June 24, 2004.

Rehearing Denied October 13, 2004.


816 N.E.2d 620
Lord, Bissell & Brook, Chicago (Michael R. Hassan, Hugh C. Griffin, Travis B.
816 N.E.2d 621
Wolfinger and Sarah H. Dearing, of counsel), for Appellant

Sachnoff & Weaver, Ltd., Chicago (James A. Rolfes, of counsel), for Appellee.

Presiding Justice QUINN delivered the opinion of the court:

Defendant, Enterasys Networks, Inc. (Enterasys), formerly known as Cabletron Systems, Inc. (Cabletron), a Delaware corporation, appeals from circuit court orders granting summary judgment and a petition for entry of a damage award in favor of plaintiff, Fleet Business Credit, LLC (Fleet), a Delaware limited liability company. On appeal, Enterasys asserts that section 4.4(b) of a "Referral and Remarketing Agreement" (Remarketing Agreement) that was executed by the parties on March 31, 2000 (as amended on March 2, 2001), is an unenforceable penalty clause and not a recourse provision, as found by the court. For the following reasons, we affirm.

BACKGROUND

Enterasys manufactures and distributes telecommunications and networking equipment. Fleet provides business-related financing to customers of manufacturers like Enterasys. Enterasys sought to stimulate the sales of its products by making retail financing programs available to its customers. Consequently, on March 31, 2000, Enterasys and Fleet entered into the Remarketing Agreement, whereby Fleet agreed to purchase products from Enterasys which then would be leased simultaneously to Enterasys' customers. The Remarketing Agreement sets forth the terms and obligations applicable to all Fleet financing of Enterasys' manufactured or distributed products and requires that Enterasys and Fleet enter into a "Transaction Supplement" each time that Fleet provides financing to a particular Enterasys customer. Under the provisions established by the Remarketing Agreement, the Transaction Supplement, among other things, would identify the customer and products subject to the financing, specify the discount rate applicable to the financing and set forth any recourse provisions, warranties and covenants related to the particular financing.

While negotiating and entering into the Remarketing Agreement, Fleet and Enterasys anticipated that Fleet-financed products might be returned on occasion. Because of Enterasys' quality sales staff, distribution network and product knowledge necessary to remarket any returned equipment to new customers, Fleet insisted on Enterasys' commitment to provide remarketing services. As a result, the Remarketing Agreement included provisions relating to Enterasys' obligations to remarket returned products. Enterasys agreed to: (1) perform "Off-Lease" duties, including taking possession of the Off-Lease products, refurbishing such products and undertaking, on a best efforts basis, to re-lease, rent, lease or sell the products without discriminating against such products in favor of any products owned, managed or remarketed by Enterasys; (2) provide monthly remarketing reports; (3) inform Fleet of prospective lessees, users or purchasers and provide proposed documentation and credit information for Fleet's written approval; (4) deliver promptly to Fleet all documents related to the remarketing of any product; and (5) remit immediately all proceeds of any remarketing, net of sales, use, property, excise, ad valorem or similar taxes to Fleet.

The Remarketing Agreement also addressed concerns raised by Enterasys' plans, announced contemporaneously to the negotiation of the Remarketing Agreement, to change its corporate structure.

816 N.E.2d 622
According to a February 2000 Enterasys press release, Enterasys, which then conducted business as Cabletron, stated that it planned to form four operating affiliate companies, namely, Riverstone Networks, Inc. (Riverstone), Enterasys Networks, Inc. (Enterasys-sub), Aprisma Management Technologies, Inc. (Aprisma), and Global Network Technology Services (Global Network), and had begun a reorganization process under which it planned to sell parts of its business. The press release noted that "the eventual goal is to have four separate, publicly traded companies."

Mark Sullivan, the Fleet vice-president who negotiated the Remarketing Agreement with Enterasys, testified by deposition that he expressed concern to Enterasys representatives regarding the proposed reorganization of Enterasys' corporate structure, stating, "[I] [d]on't know what you guys are going to do here as far as how these companies are going to look, but we're credit-approving a consolidated entity, and our agreement is going to make sure that when you do whatever you do, we're going to have the same credit support that we're approving now."

Joseph Cardona, the Fleet credit officer who reviewed the Enterasys transaction, also noted his concern about the potential effect of the corporate changes contemplated by Enterasys. By deposition, Cardona testified regarding Enterasys' obligation to make Fleet financially whole to the extent of the percentage of agreed-upon recourse. Cardona stated:

"[Fleet's] concern here was that—and it's outlined in one of [Enterasys'] approvals—was that an entity other than [Enterasys], as it existed at the time, would be in a better position to remarket the equipment as well. For example, Enterasys was in a better position because * * * that was the equipment they were manufacturing, remarketing, selling to their customers. * * * So in the event that Enterasys would change its standing and not be Cabletron or be a separate entity, we want to make sure that we had the best party to support the [Remarketing Agreement]."

As a result of Fleet's concerns, the Remarketing Agreement provided that Enterasys would not: (1) cease to support products comparable to the equipment that was the subject of financing contracts between Fleet and Enterasys' customers; (2) sell, transfer or convey a substantial part of its assets; or (3) effect or be party to any merger or consolidation. Further, section 4.3(d) of the Remarketing Agreement states:

"In the event that [Enterasys] creates subsidiaries and either continues to own their stock or allows such subsidiaries to issue their shares to other investors and no longer be subsidiaries, [Enterasys] covenants that each subsidiary shall execute in favor of [Fleet] a guaranty or an assumption of [Enterasys'] obligations under this Agreement and each Transaction Summary, satisfactory in form and content to [Fleet]."

Significantly, in reliance upon Enterasys' remarketing commitments and other representations, and their importance to Fleet's participation in the Enterasys financing program, Fleet also obtained Enterasys' agreement to purchase all "Retail Contracts" entered into by Fleet with Enterasys' customers if Enterasys breached its representations, warranties or covenants. Section 4.4(b) of the Remarketing Agreement, entitled, "Covenant Breach," provides:

"If [Enterasys] is in breach of any representation, warranty or covenant in this Agreement (other than representation, warranty or covenant contained in Section
816 N.E.2d 623
4.2 or in 4.3(d)) or in any Transaction Supplement, and such breach is not cured within thirty days after [Fleet's] notification of such breach, or if [Enterasys] is in breach of any covenant set forth in Section 4.3(d) of this Agreement, [Enterasys] will immediately upon demand by [Fleet] purchase all Retail Contracts entered into by [Fleet] pursuant to this Agreement for their aggregate Unpaid Balances."

Section 1.5 of the Remarketing Agreement states that "`Retail Contracts' shall mean any and all writings evidencing or reflecting: (a) [Fleet's] financing of the retail sale of Products by [Enterasys] to Customers, including leases with nominal purchase options, or (b) [Fleet's] leasing of Products to Customers." The Remarketing Agreement defines an unpaid balance with respect to a Retail Contract as:

"(i) all past due rental payments and other amounts, including late charges, owing on the Retail Contract, plus interest on same from the date the payment was due until it is paid, calculated at the Discount Rate applicable to such Retail Contract, (ii) the present value of the remaining scheduled payments on such Retail Contract, calculated by using the Discount Rate applicable to such Retail Contract, (iii) the present value of the Assumed Residual Value, if any, for the Product subject to such Retail Contract, calculated by using the Discount Rate applicable to such Retail Contract, less any amounts received by [Fleet] as rent after the initial term of such Retail Contract, plus (iv) interest accrued on the Assumed Residual Value, if any, relating to the Product subject to such Retail Contract from and after the time of the expiration of the initial term of such Retail Contract at a rate equal to the Discount Rate, plus (v) any reasonable out-of-pocket expenses, including without limitation legal fees, incurred by [Fleet] in connection with its financing of the Product subject to the Retail Contract or incurred by [Fleet] or paid to Aida in connection with the recovery, storage, testing, maintenance, cleaning, reconditioning, refurbishment or other remarketing and disposition services for such product."

Therefore, under the express language of the Remarketing Agreement, if Enterasys did not provide the remarketing services contracted for, or violated the protections crafted in response to Enterasys' announced corporate reorganization plans, Enterasys, upon demand by Fleet, was required to purchase from Fleet the remaining balances from the financing contracts that Fleet had...

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