In re Delta Mills, Inc., Bankruptcy No. 06-11144 (CSS).
| Decision Date | 17 March 2009 |
| Docket Number | Bankruptcy No. 06-11144 (CSS).,Adversary No. 07-51707 (CSS). |
| Citation | 404 B.R. 95 |
| Parties | In re DELTA MILLS, INC. et al., Debtors. Delta Mills, Inc., Plaintiff/Counter-Defendant, v. GMAC Commercial Finance LLC, Defendant/Counter-Plaintiff. GMAC Commercial Finance LLC, Third-Party Plaintiff, v. William Garrett, William Hardman, and Euler Hermes ACI, Third-Party Defendants. |
| Court | U.S. Bankruptcy Court — District of Delaware |
Mark D. Collins, Jason M. Madron, Richards, Layton & Finger, P.A., Wilmington, DE, and Richard D. Haddad, Erik B Weinick, Otterbourg, Steindler, Houston & Rosen, P.C., New York, NY, for GMAC Commercial Finance LLC.
Bradford J. Sandler, Benesch, Friedlander, Coplan & Aronoff LLP, Wilmington, DE, and Alan D. Halperin, Neal W. Cohen, Halperin Battaglia Raicht, LLP, New York, NY, for Euler Hermes ACI.
Mark E. Felger, Jeffrey R. Waxman, Cozen O'Connor, Wilmington, DE, and Christopher R. Donoho III, Matthew P. Morris, Lisa J. Fried, Matthew J. Galvin, Lovells LLP, New York, NY, for Delta Mills, Inc.
Donna L. Harris, Pinckney & Harris, LLC, Wilmington, DE, for William Garrett and William Hardman.
Before the Court is GMAC Commercial Finance LLC's Motion for Summary Judgment Dismissing the First Amended Complaint. GMAC Commercial Finance LLC ("GMAC") served as the factor for Delta Mills, Inc.'s ("Delta") textile manufacturing business. The First Amended Complaint filed by Delta alleges numerous causes of action based upon GMAC's failure to remit to Delta payment for invoices billed to one of Delta's customers. The invoices at issue were billed to Interamericana Apparel ("Apparel"). Through the factoring arrangement with GMAC, however, Delta only sought approval of, and GMAC only approved, credit for Interamericana Products International ("Products"), an affiliate of Apparel. For each invoice at issue, Delta represented to GMAC that the customer was Products, while addressing the invoice to Apparel, which then paid GMAC.
The Court finds that there is no genuine issue of material fact in dispute. GMAC never approved credit for Apparel and, therefore, never assumed the risk of loss on the invoices at issue. Thus, summary judgment in favor of GMAC on all counts is appropriate.
Delta, the debtor in the underlying Chapter 11 case, was a textile manufacturer with its primary facilities located in South Carolina. GMAC and its predecessors served as Delta's accounts receivable factor for over 20 years. As Delta's factor, GMAC operated as Delta's collections department and agreed to assume the risk of non-payment on those receivables. Prior to May 30, 2006, the factoring relationship between Delta and GMAC was governed by the Factoring Service Agreement — Foreign Accounts Receivable, dated as of July 15, 1986 ("Factoring Agreement") and the related Export Rider Amendment, dated August 1, 1999 ("Rider").
In 2003, one of Delta's customers requested Delta to sell fabric directly to textile finishers in the Dominican Republic. Delta entered discussions with GMAC to provide factoring services for these new customer accounts. Delta and GMAC entered into a Letter Agreement dated September 11, 2003 ("First Letter Agreement"), covering three customers located in the Dominican Republic, including Products, for the period from September 19, 2003 through September 18, 2004. On September 3, 2004, GMAC and Delta executed a second Letter Agreement ("Second Letter Agreement") covering the same three Dominican Republic customers for the period from September 19, 2004 through September 30, 2005. On October 1, 2005, Delta and GMAC executed a third Letter Agreement ("Third Letter Agreement") covering the same three customers plus an additional customer for the period from October 1, 2005 through September 30, 2006. All three Letter Agreements (collectively, the "Letter Agreements") amended the existing Factoring Agreement.2
GMAC obtained third-party credit insurance through Euler Hermes ACI ("Euler Hermes") in order to cover the risk of loss on Delta's accounts receivable under the Letter Agreements. The terms of the credit insurance policy only covered those entities detailed in the Letter Agreements. During the relevant period, Delta's Chief Financial Officer, William Hardman, and Delta's Vice-President of Operations, Donald Walker, were aware GMAC had obtained credit insurance on their Dominican Republic customer accounts and knew GMAC would only assume the risk of loss on foreign customer accounts receivable if GMAC was able to obtain credit insurance.
In September 2003, Delta began shipping goods to Products and selling the receivables to GMAC under the Factoring Agreement and the Letter Agreements. Under a typical sale, Delta would input the terms of each order electronically into GMAC's Electronic Data Interchange System ("EDI System"). Orders were submitted under the customer number of the invoiced party. For example, the GMAC customer number for Products was 4372744. The relevant invoicing data was transmitted electronically via direct input into specific EDI System fields. Neither physical copies of the invoices sent to the customer nor electronic images of said invoices were transmitted to GMAC. Once the order data was submitted, GMAC would either approve the order or recheck the terms. When an order was rechecked, Delta was required to resubmit the order for approval when the order came due for delivery. Even under a recheck no physical copy nor electronic image of the invoice was sent to GMAC. After the order was approved, Delta would ship the goods, along with a physical copy of the invoice, to the customer and the value of the invoice would be deducted from the credit line with GMAC. GMAC would then seek payment from Delta's customer.
The Products account was the subject of frequent communication between Delta and GMAC. GMAC provided a monthly aging report that detailed the status of all outstanding invoices billed to Products. These reports identified the customer as Products. In addition, Delta repeatedly requested credit line increases for the Products account.
Products is one entity in the larger Interamericana organization. The ultimate parent is Interamericana Group Corporation, a holding company. The relevant subsidiary corporations are Products, an enterprise dedicated to textiles manufacturing and Apparel, an enterprise dedicated to sales of the services offered by these companies. Apparel is the "business entity" and the "public face" of the Interamericana organization.
In March 2004, Delta modified its invoicing procedures for billing the Interamericana organization. Specifically, Delta changed the party it invoiced from Products to Apparel. The invoices reflected the same address for Apparel as for Products. However, Delta never advised GMAC of the modified invoicing procedures. Instead, despite this change in customers Delta continued to submit invoices for goods shipped to Apparel under the Products customer number in GMAC's EDI System. Furthermore, Delta continued to submit credit line increases for the Products account, naming the customer as Products, even after Delta switched to billing Apparel for goods shipped to the Interamericana organization.
Thereafter, GMAC continued to collect on Delta's accounts receivable for all invoices transmitted through its EDI System, including those for Products. GMAC was directed to correspond with Leda Gonzalez to coordinate collection of Delta's invoices billed to the Interamericana organization. Ms. Gonzalez's emails identified her as affiliated with Apparel. Furthermore, GMAC received checks for payment of invoices from Apparel.
An Amended and Restated Factoring Agreement ("Second Factoring Agreement") and related Export Receivable Rider to the Amended and Restated Factoring Agreement ("Second Rider") were executed on May 30, 2006. The Second Rider governs "the terms and conditions under which [GMAC] will purchase from [Delta] Receivables arising from [Delta's] sales of goods ... to customers located in the countries outside the United States and Canada." Both the Second Factoring Agreement and the Second Rider require written approval of Delta's customers in order for GMAC to assume the risk of non-payment.3 The Second Factoring Agreement also provides that GMAC's assumption of the credit risk on any account shall immediately terminate if Delta breaches any representation, warranty, or covenant.4 Finally, the Second Factoring Agreement requires Delta to provide either a duplicate invoice or electronically transmit the invoice information, and the invoice must bear the terms of the customer order.5
By 2006, the Interamericana organization was in financial distress. From July 26, 2006 through December 18, 2006, the Interamericana organization failed to pay 142 separate invoices issued by Delta to Apparel-totaling approximately $1.5 million in the aggregate (the "Invoices"). On January 29, 2007, GMAC received an email from the Interamericana organization saying it was "winding down its business." Subsequently, GMAC filed a claim with Euler Hermes under its credit insurance policy. Euler Hermes requested physical copies of the original invoices supporting the claim. Thereafter, Euler Hermes discovered the Invoices reflected sales to Apparel instead of Products, the entity for which it issued credit insurance. Thus, on April 24, 2007, Euler Hermes denied GMAC's claim. After Euler Hermes denied of GMAC's claim, GMAC charged back Delta's account for approximately $1.4 million, ninety percent of the approximately $1.5 million in unpaid Invoices.
Delta filed a chapter 11 bankruptcy petition in October 2006. It filed this adversary proceeding in August 2007 and its First Amended Complaint in early October, asserting claims against GMAC for breach of contract, promissory...
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