KR Enters., Inc. v. Zerteck Inc., s. 20-2069 & 20-2155

• Decision Date: 03 June 2021
• Docket Number: Nos. 20-2069 & 20-2155,s. 20-2069 & 20-2155
• Citation: 999 F.3d 1044
• Parties: KR ENTERPRISES, INC., Plaintiff-Appellee, Cross-Appellant, v. ZERTECK INC., doing business as Boat-N-RV Warehouse, et al., Defendants-Appellants, Cross-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

999 F.3d 1044

KR ENTERPRISES, INC., Plaintiff-Appellee, Cross-Appellant,

v.ZERTECK INC., doing business as Boat-N-RV Warehouse, et al., Defendants-Appellants, Cross-Appellees.

Nos. 20-2069 & 20-2155

United States Court of Appeals, Seventh Circuit.

Argued December 8, 2020

Decided June 3, 2021

Robert J. Palmer, Sean M. Towner, Jeffery A. Johnson, Attorneys, May, Oberfell & Lorber, Mishawaka, IN, for Plaintiff-Appellee.

Gary Lynn Edwards, Attorney, Baker Donelson, Johnson City, TN, Angela Kelver Hall, Brian James Paul, Attorneys, Faegre Drinker Biddle & Reath LLP, Indianapolis, IN, for Defendants-Appellants.

Before Easterbrook, Kanne, and Hamilton, Circuit Judges.

Hamilton, Circuit Judge.

In 2016, a manufacturer of recreational vehicles delivered 21 new RVs to a group of affiliated dealers. Those dealers did not pay before the manufacturer went out of business. The dealers kept the RVs but have refused to pay the manufacturer's secured creditor, which brought this suit to collect the accounts receivable. After the secured creditor assigned its rights to the owner of the manufacturer, the district court held a bench trial and found that the secured creditor's assignee was entitled to payment of the purchase prices, minus some setoffs for warranty and rebate claims that the manufacturer had owed to the dealers on earlier RV sales. See KR Enterprises, Inc. v. Zerteck, Inc. , 461 F. Supp. 3d 825 (N.D. Ind. 2020).

The defendant dealers have appealed, arguing they owe nothing for the RVs they received, at least not to this plaintiff. The secured creditor's assignee has cross-appealed, arguing that the setoffs should not have been allowed and that it is entitled to prejudgment interest. We affirm in all respects.

I. Factual and Procedural History

Evergreen Recreational Vehicles, LLC, manufactured RVs and sold the 21 RVs at issue here in the spring of 2016. Evergreen went out of business in June 2016, a couple of months after delivering those 21 RVs to several legally distinct but affiliated dealers, which all do business under "Boat-N-RV" names.¹ Each dealer regularly purchased RVs from Evergreen. The invoices for the 21 RVs totaled $808,663. The dealers resold at least 20 of them to retail customers but have yet to pay Evergreen or its secured creditor for any of them.

This lawsuit was filed originally in state court by 1st Source Bank, which was the principal lender to Evergreen and had a first-priority blanket security interest in all Evergreen assets, including accounts receivable like the amounts the dealers owed for these 21 RVs. The defendant dealers removed the case to federal court. While the case was pending, 1st Source assigned its rights to KR Enterprises, which had been the principal owner of Evergreen, after KR paid off Evergreen's debt to 1st Source. After the assignment, KR Enterprises was substituted as plaintiff, asserting claims through 1st Source's security interest in the collateral of Evergreen.

Following a bench trial, the district court found that KR Enterprises had standing as a secured party and had proven that the dealers had breached the contracts by failing to pay. The court ruled in favor of the dealers on several other theories of liability. On the breach-of-contract claims, the court allowed the dealers certain setoffs for warranty and rebate claims and denied prejudgment interest on the net amounts the dealers owed. The dealers have appealed, denying all liability. KR Enterprises has cross-appealed on the setoffs and the denial of prejudgment interest.

The district court properly exercised jurisdiction under 28 U.S.C. § 1332(a). Complete diversity of citizenship existed between the parties, and the amount-in-controversy requirement was satisfied in at least two ways. First, plaintiff KR Enterprises offered colorable grounds for holding all the separate defendants jointly and severally liable for the full amount in controversy, even though the district court declined to impose joint and several liability. Second, even when the amounts sought by plaintiff were separated for each of the defendants, the gross invoices to each individual defendant exceeded $75,000 before any discounts for the disputed setoffs for rebate and warranty claims. The parties agree that Indiana law applies, and we exercise appellate jurisdiction under 28 U.S.C. § 1291.

We consider in Part II the defendant dealers’ argument that KR Enterprises does not have proper standing as a secured party. Part III addresses both sides’ challenges to the district court's treatment of the dealers’ claims for warranty repairs and rebates owed on earlier RV sales, as well as the denial of prejudgment interest.

II. Plaintiff's Standing as a Secured Party

In 2009, Evergreen and its lender 1st Source Bank signed an agreement for a secured loan. In exchange for the loan and line of credit, Evergreen granted 1st Source a first-priority blanket security interest in all assets, including accounts receivable. Under the terms, nonpayment resulted in default, and if default continued, 1st Source could "exercise all rights and remedies provided in this Agreement...."

As noted, Evergreen closed its operations in June 2016. It stopped paying 1st Source and went into default. As of November 2016, Evergreen owed 1st Source more than $1 million, leading 1st Source to file this lawsuit to collect the amounts owed by the defendant dealers for the 21 disputed RVs.

In 2018, while this suit was pending, 1st Source assigned its rights as a secured lender to plaintiff KR Enterprises in return for a payment by KR Enterprises that satisfied Evergreen's debt to 1st Source. (KR Enterprises had been the principal owner of Evergreen and its owner, Kelly Rose, had personally guaranteed Evergreen's debt to 1st Source.) Defendants argue that 1st Source and KR Enterprises timed and documented the transaction so clumsily as to wipe out both parties’ security interest in the Evergreen accounts receivable. The district court rejected that audacious theory, and so do we.

Defendants seize on the fact that KR Enterprises made its big payment to 1st Source on the Evergreen account on March 2, 2018, while 1st Source did not execute its General Assignment of its rights as a secured lender until two months later, on May 1, 2018. As defendants see things, after the March 2, 2018 payment, 1st Source recorded the debt owed by Evergreen as zero, effectively wiping out both the debt and the accompanying security interest that allowed it to sue. By May 1, 2018, goes the theory, when 1st Source signed the General Assignment to KR Enterprises, 1st Source no longer had any security interest to assign, making the assignment ineffective.²

Testimony from 1st Source vice president Richard Rozenboom and KR's Kelly Rose made unmistakably clear that KR Enterprises and 1st Source understood and intended that 1st Source gave the General Assignment in exchange for KR Enterprises’ payment of Evergreen's debt to 1st Source. Those parties did not close that exchange at one time at one conference table, but the intent to exchange was clear and perfectly valid.

"Under Indiana law, a determination of whether or not an assignment has been made focuses on the intent of the parties. Any actions or words which show an intention of transferring the [chosen] action to an assignee for valuable consideration are sufficient." Crowel v. Admin. of Veterans’ Affairs , 699 F.2d 347, 352 (7th Cir. 1983) (cleaned up); see also 2A Anderson, U.C.C. § 2-210:24 (3d ed. 2020) ("The intent of the parties to make an assignment is a question of fact to be derived not only from the instrument executed by the parties, but also from the surrounding circumstances.").

In response to the testimony from Rozenboom and Rose explaining that this was all one transaction that took a while to close, the dealers invoke the parol evidence rule, part of every first-year law student's education. Under that rule, the dealers argue, such oral testimony and other documents cannot be used to vary the unambiguous terms of the General Assignment. See, e.g., Amici Resources, LLC v. Alan D. Nelson Living Trust , 49 N.E.3d 1046, 1050 (Ind. App. 2016) (under parol evidence rule, "extrinsic evidence is inadmissible to add to, vary, or explain the terms of a written instrument if the terms of the instrument are clear and unambiguous") (citations omitted).

The correct response to the dealers’ argument is that even where the parol evidence rule might apply to a dispute between the parties to the unambiguous written contract, strangers to that contract are not entitled to invoke the rule. In Amici Resources , for example, the court explained: "the inadmissibility of parole evidence to vary the terms of a written instrument does not apply to a controversy between a third party and one of the parties to the instrument." Id. (citations omitted).

The stranger-to-the-contract exception is well-established in Indiana law. It seems to be litigated most often in disputes over litigation releases but applies to other sorts of contracts as well. See, e.g., State Highway Comm'n v. Wilhite , 218 Ind. 177, 31 N.E.2d 281, 282 (1941) (holding that "the general rule that resort may not be had to parol evidence ... does not apply to others than the parties to the instrument," and permitting extrinsic evidence where injured employee sued a third-party employer not a party to the original release); White v. Woods , 183 Ind. 500, 109 N.E. 761, 763 (1915) ("The relations between two persons who have contracted in writing may be brought in issue collaterally in a suit between others. In such a case the parol evidence rule does not apply. The facts may be proved as they exist, regardless of the oral evidence varying the terms of any writing between the parties.") (quotations omitted); Burns v. Thompson , 91 Ind. 146, 150 (1883) ("[A]side from the question of fraud, while a dispositive instrument can not be varied by parol, so far as the parties to it are concerned, yet, in respect to...