Phd, Inc. v. Coast Business Credit

• Decision Date: 19 March 2001
• Docket Number: No. 1:99CV1382.,1:99CV1382.
• Citation: 147 F.Supp.2d 809
• Parties: PHD, INC., Plaintiff, v. COAST BUSINESS CREDIT, Defendant.
• Court: U.S. District Court — Northern District of Ohio

147 F.Supp.2d 809

PHD, INC., Plaintiff, v. COAST BUSINESS CREDIT, Defendant.

No. 1:99CV1382.

United States District Court, N.D. Ohio, Eastern Division.

March 19, 2001.

M. Colette Gibbons, Michael H. Diamant, Stuart L. Larsen, Kahn, Kleinman, Yanowitz & Arnson, Cleveland, OH, Plaintiff.

John Winship Read, Bruce P. Batista, Vorys, Sater, Seymour & Pease, Cleveland, OH, Peter C. Sheridan, Seong Kim, Christensen, Miller, Fink, Glaser, Weil & Shapiro, Los Angeles, CA, for Defendant.

MEMORANDUM OF OPINION

MANOS, District Judge.

Before this Court are both parties' Motions For Partial Summary Judgment (Docket Nos. 25 and 27). For the following reasons, both motions are GRANTED IN PART AND DENIED IN PART.

I. FACTS

PHD, Inc. ("PHD"), plaintiff, is a national distributor of various houseware and consumer products. This action arises out of its relationship with non-party Kent & Spiegel Direct, Inc. ("Kent"), a manufacturer of such products.

From about April 1996 through about April 1998, the Plaintiff purchased goods from Kent on account for resale to national department stores. In this capacity, the Plaintiff directly dealt with the retailers regarding Kent's products, and would pass Kent's promotional materials on to the retailers. The Plaintiff alleges that pursuant to the purchase orders for Kent's products, it had the right to impose credits on payments to Kent for such things as (1) defective goods returned by consumers, (2) non-defective products returned unsold by the retailers, (3) price reductions required to remain competitive (referred to as "price protection amounts"), and (4) promotional and advertising allowances. The Plaintiff alleges that it routinely took such credits without objection from Kent.

In addition, under separate contracts executed on April 18, 1996 and March 17, 1997, the Plaintiff performed various services for Kent. Such included inventory warehousing and management, shipping, order filling, storage, and handling of consumer claims for defective goods. The Plaintiff refers to these services collectively as the "Fulfillment Services". Under their relationship, therefore, payments flowed in two directions: the Plaintiff paid Kent for the goods to be resold, and Kent separately paid the Plaintiff for performing the Fulfillment Services.

In early 1998, Kent experienced financial difficulties. In its brief, the Plaintiff states that in "May 1998, [Kent] was literally begging PHD to make payment on invoices" for the goods it purchased. (Plaintiff's Memorandum of Law at 6.) The Plaintiff refused because it claimed that it was entitled to reductions in payment for credits allegedly permissible under various provisions of the purchase orders as described above. The Plaintiff refers to such credits collectively as the "recoupment claim". The Plaintiff also refused to pay because it was still owed money for the Fulfillment Services.

On May 21, 1998, Kent filed a petition for Chapter 11 bankruptcy in the Central District of California, where its business was headquartered. One week later, it brought an adversary proceeding in the bankruptcy court against the Plaintiff for collection of the money still owed on the account for the purchases of Kent's products. During the adversary proceeding, the Plaintiff asserted its claims against Kent for recoupment based on purchase order credits, and for setoff based on delinquent payments for the Fulfillment Services. Despite the bankruptcy, the Plaintiff continued to provide the Fulfillment Services on promises of a continued business relationship after Kent reorganized. The alleged promises were never fulfilled because Kent's petition was later amended to a Chapter 7 liquidation. Kent never paid for the post-petition Fulfillment Services.

Coast Business Credit ("Coast"), defendant, is a California bank that loaned over $8 million dollars to Kent. The loan was collateralized by the accounts receivable, including those relating to the Plaintiff's purchases of Kent's products. On February 24, 1999, the Defendant filed a Notice of Exercise of Collection Rights indicating its intent to collect on the accounts receivable. It also filed a Notice of Substitution in which it substituted itself for Kent in the adversary proceeding in the bankruptcy court.

On May 14, 1999, the Plaintiff filed this declaratory judgment action in the Common Pleas Court for Cuyahoga County, Ohio. It generally claims that the total amount Kent owes to the Plaintiff, based on the recoupment claim for purchase order credits as well as money still owed for the Fulfillment Services, exceeds the amount owed to Kent on products purchased by the Plaintiff for resale. Furthermore, the Plaintiff alleges that its claims against Kent are recognizable against Defendant Coast as the secured creditor in Kent's accounts receivable. Accordingly, the Plaintiff owes the Defendant nothing.

On June 3, 1999, the bankruptcy court issued an order abstaining from considering the issues between the parties. The bankruptcy court concluded that Coast was severely undersecured, and that the issues between PHD and Coast arose only under state law:

The adversary matter is a core proceeding wherein all issues concern state law and not federal or bankruptcy law. A civil action filed by PHD, Inc. against Coast Business Credit concerning the very same issues existing in this adversary matter is pending the Court of Common Pleas, Cuyahoga County, Ohio. Coast has heretofore been granted relief from the automatic stay so that it may foreclose upon and act with regard to its collateral as a severely undersecured creditor in this bankruptcy case. This is a related case among third parties not arising under Title 11. It appears that the issues can as readily be resolved in the state court.

(Order dated June 3, 1999 at 1, emphasis added).

On June 9, 1999, the Defendant removed the state court action to this Court pursuant to 28 U.S.C. § 1332 (diversity jurisdiction). It generally alleges that the Plaintiff's claims against Kent may not be applied to reduce the amount recoverable by the Defendant under the accounts receivable.

The Plaintiff admits that it did not pay Kent for $2,539,625.44 worth of goods.¹ However, it claims that Kent owes it (1) $1,112,569.13 for unpaid Fulfillment Services, and (2) $1,624,422.23 on the recoupment claim for purchase order credits. The Plaintiff seeks to setoff these amounts against the Defendant's claim under Kent's accounts receivable. Because the total amount Kent owes the Plaintiff exceeds the amount the Plaintiff owes Kent, the Plaintiff generally alleges that it owes the Defendant nothing.

Only a portion of the amounts sought to be setoff are at issue in the current motions. Specifically, the parties have briefed whether the total amount for unpaid Fulfillment Services should be setoff, as well as a portion of the recoupment claim which the parties refer to as the "MegaDuster claim". The MegaDuster claim comprises $272,916.56 of the recoupment claim.

The facts relating to the MegaDuster claim are as follows. On November 20, 1997, the Plaintiff issued a purchase order to buy MegaDuster products from Kent. The purchase order contained a clause that the purchaser (PHD) had the right to cancel any part of the order not yet shipped by the seller (Kent). The Plaintiff states that it did not have retail orders lined up for these products, and that the purchase order did not require prior authorization for shipment as usual. On the same day this purchase order issued, the Plaintiff allegedly contacted Kent and issued an amended purchase order containing handwritten instructions that prior authorization must be obtained before the Plaintiff would accept any shipments of MegaDusters.

Despite the amended purchase order, Kent began shipping the MegaDusters, and the first portion of the order was received by the Plaintiff on December 5, 1997. Within the next several days, additional shipments were made, and the Plaintiff even made partial payment in excess of $47,000.00. The Plaintiff alleges that it contacted Kent regarding the erroneous shipments, and indicated that the MegaDusters would be held in Kent's inventory at the Plaintiff's warehouse (as was done with other products pursuant to the Fulfillment Services contracts). The Plaintiff further alleges that because it never assented to the shipments of the MegaDusters, there was no contract for their purchase. It claims that it is entitled to setoff $272,919.56 for refunds and storage costs on the MegaDusters.

The Defendant, however, has submitted declarations providing a different version of these events. Specifically, in those declarations former Kent employees deny ever receiving the amended purchase order. They also claim that phone authorization in fact was obtained prior to each shipment of MegaDusters because this was the common course of dealing between the parties. (See Salvato and Nagoshiner Declarations attached to Defendant's Memorandum In Opposition.) Accordingly, there was a contract for the purchase of the MegDusters, and the contract is evidenced by the Plaintiff's partial payment of over $47,000.00.

II. LAW AND ANALYSIS

A. Summary Judgment Standard

Summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c).

The party moving for summary judgment bears the initial burden of production under Rule 56. The burden may be satisfied by presenting affirmative evidence that negates an element of the non-movant's claim or by demonstrating "an absence of evidence to support the non-moving party's case." Celotex Corp. v. Catrett, 477 U.S. 317, 325, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).

If the movant meets this burden, the non-movant must "set forth the specific facts showing...