Pride Hyundai, Inc. v. Chrysler Financial

• Decision Date: 27 May 2004
• Docket Number: No. 03-1905.,03-1905.
• Parties: PRIDE HYUNDAI, INC., Blackstone Subaru, Inc., d/b/a Pride Hyundai of Seekonk, Pride Dodge, Inc., and Pride Chrysler-Plymouth, Inc., Plaintiffs, Appellants, v. CHRYSLER FINANCIAL COMPANY, L.L.C., Defendant, Appellee.
• Court: U.S. Court of Appeals — First Circuit

369 F.3d 603

PRIDE HYUNDAI, INC., Blackstone Subaru, Inc., d/b/a Pride Hyundai of Seekonk, Pride Dodge, Inc., and Pride Chrysler-Plymouth, Inc., Plaintiffs, Appellants, v. CHRYSLER FINANCIAL COMPANY, L.L.C., Defendant, Appellee.

No. 03-1905.

United States Court of Appeals, First Circuit.

Heard March 4, 2004.

Decided May 27, 2004.

COPYRIGHT MATERIAL OMITTED

Preston W. Halperin, with whom Christine L. DeRosa and Shechtman Halperin Savage, LLP were on brief, for appellants.

Jonathan D. Deily, with whom Richard C. Maider and Deily, Mooney & Glastetter, LLP were on brief, for appellee.

Before BOUDIN, Chief Judge, LYNCH, Circuit Judge, and HOWARD, Circuit Judge.

LYNCH, Circuit Judge.

In July 2001, Massachusetts, along with virtually every other state, revised Article Nine of its commercial code. It appears that this is a case of first impression under Massachusetts law as to the revised § 9-204.

Of primary concern here are revisions that altered § 9-204, which deals with the enforceability of dragnet clauses in secured commercial lending agreements. Dragnet clauses purport to secure all of a debtor's obligations to a creditor, regardless of whether those obligations arise prior to, concurrent with, or after the instrument containing the dragnet clause itself. See generally Bruce A. Campbell, Contracts Jurisprudence and Article Nine of the Uniform Commercial Code: The Allowable Scope of Future Advance and All Obligations Clauses in Commercial Security Agreements, 37 Hastings L.J. 1007 (1986). The Official Commentary to the amended § 9-204 explicitly disavowed prior case law that had interpreted dragnet clauses using special interpretive tests, such as whether the obligations created along with the dragnet clause were of the same or similar type or class as other obligations.

Our interpretation of the revised § 9-204 is informed by a second change to Article Nine that was also made by the 2001 amendments. The amendments expanded the definition of good faith required in all contracts under Article Nine to include "the observance of reasonable commercial standards of fair dealing." Mass. Gen. Laws ch. 106, § 9-102(43). It appears that this expansion of the definition of good faith has also not yet been addressed by Massachusetts' highest court.

At stake is whether a commercial lender, Chrysler Financing Company (CFC), violated its contractual obligations or its duty under Mass. Gen. Laws ch. 93A not to engage in unfair and deceptive practices. These claims by the commonly-owned Pride car dealerships, plaintiffs, are primarily premised on CFC's unwillingness to release its first position security interest in Pride's assets. CFC insists that Pride deposit 1.5% of the value of certain outstanding contracts in a non-interest bearing account for the payment of contingent future debts that might arise in conjunction with those contracts. Pride argues that these contingent retail financing debts are not secured and thus that CFC has no right to insist on such a deposit before releasing the security interest. CFC, in turn, contends that these future debts are indeed secured by a dragnet clause in its 1995 and 1996 wholesale financing agreements with Pride, that its actions are reasonable, and thus that there is neither a chapter 93A violation nor a breach of contract.

The district court ruled for CFC on all claims and denied any relief to Pride. Unfortunately, neither party brought the Official Commentary to the 2001 amendments to the district court's attention, instead relying on the now apparently disavowed case law. This court notified the parties of the issue and sought and received additional briefing on the effect of the amendments.

We now affirm. We do so, not surprisingly, on grounds different from the district court. The clear language of the dragnet clause in the wholesale finance agreements secures Pride's contingent retail finance debt to CFC and there is no evidence that application of the dragnet clause was not in good faith or would violate "reasonable commercial standards of fair dealing." Mass Gen. Laws ch. 106, § 9-102(43).

I.

The plaintiffs, Pride Hyundai, Blackstone Subaru, Pride Dodge, and Pride Chrysler-Plymouth (collectively "Pride") are four car dealerships that are owned by Alfredo Dos Anjos. In early 1987 one of the Pride dealerships, Pride Chrysler-Plymouth, entered into a retail financing agreement with the defendant, CFC.

Retail financing agreements facilitate a dealership's financing of its customers' automobile purchases. Customers who purchase cars from a dealership frequently do not pay all of the purchase price up front, but instead finance their purchases using an installment contract with the dealership. These installment contracts allow the customer to pay for an automobile over the course of an extended period of time, lasting up to seven years. Generally, though, dealerships do not have the resources to maintain numerous customer installment contracts for prolonged periods of time, so they seek retail financing agreements with credit companies.

Retail financing agreements allow a dealership to sell, via assignment, numerous installment contracts to a large lender, here CFC, with relatively minimal transaction costs. They do so by setting forth in advance the terms by which the lender will purchase the installment contracts from the dealer. These terms include a formula for the price that the lender will pay for a given installment contract; the formula takes into account factors such as the amount financed in the installment contract and the length of the repayment term. Dealerships typically have retail financing agreements with multiple lenders, in part because these agreements only set the terms for future purchases and do not require the lender to purchase a minimum amount of installment contracts. The market for installment contracts is described in the industry as the retail paper market.

The retail financing agreement between Pride Chrysler-Plymouth and CFC also provided that if a customer paid off the installment contract before maturity or defaulted — either one of which decreases the value of the contract to CFC — then Pride Chrysler-Plymouth would be liable to CFC for a portion of the unrealized purchase price. The parties term these contingent liabilities "charge-backs": the dealership is charged back a portion of the unrealized profit stemming from the installment contracts, thus splitting the risk inherent in the financing between both the lender and the dealership. Although the retail financing contract does not create an interest securing these contingent liabilities, it does provide that the dealership must maintain a minimum reserve balance in an account held by CFC for the purpose of paying these charge-backs. The balance of this charge-back account must be either $1,000 or 1.5% of the value of the installment contracts purchased, whichever is greater. The account is non-interest bearing; once CFC is paid from the charge-back account the final amount it is owed, the balance remaining in the account is returned to Pride Chrysler-Plymouth.

In late 1994, CFC attempted to expand its business relationship with the Pride dealerships beyond the retail financing it had been providing to Pride Chrysler-Plymouth. William Nicolo, a dealer relations manager for CFC, approached Dos Anjos and suggested that CFC enter into retail financing agreements with Dos Anjos's other Pride dealerships. Nicolo also proposed that the Pride dealerships obtain their wholesale inventory financing (also known as floor plan financing) from CFC. In contrast to the retail financing agreements, such wholesale financing agreements provide capital directly to the dealerships so that they can purchase their inventory of automobiles. Dos Anjos testified that he was told by CFC's Zone Manager for Boston, William Harrington, that in exchange for Pride's wholesale financing business, CFC would purchase 100% of the installment contracts generated by Pride's customers. Harrington was apparently responsible for CFC's retail paper business in Boston. Nicolo testified that he, and not Harrington, was centrally involved in the contract negotiations between CFC and Dos Anjos in 1994 and that he had not had discussions with Dos Anjos about how many installment contracts CFC would purchase.

In 1995 and 1996, Dos Anjos transferred both the retail and wholesale financing of the four plaintiff dealerships to CFC in a series of agreements. First, on January 26, 1995, Dos Anjos transferred both the wholesale and retail financing for Blackstone Subaru to CFC. He did the same for the Pride Dodge dealership one month later. A little over a year later, on April 29, 1996, Dos Anjos entered into a retail financing agreement (but not a wholesale financing agreement) with CFC for the Pride Hyundai dealership. On August 29, 1996, four months later, Dos Anjos transferred to CFC the wholesale financing for Pride Chrysler-Plymouth and Pride Hyundai, both of which already had retail financing agreements with CFC.¹ Additionally, at some point unspecified in the record, but prior to 1999, Dos Anjos and CFC also entered into wholesale financing agreements for two other dealerships, Pride Ford and Pride Kia, which are not parties to this action.

The parties agree that each of the retail financing agreements for the dealerships were the same in all material respects. Thus, as best we can tell from the record, a separate charge-back account existed for each of the Pride dealerships. Both parties admit that at least until 2000, CFC did not enforce the requirement that these accounts be maintained at 1.5% of the value of the outstanding installment contracts, which would have been substantially larger than the $1,000 minimum balance.

Unlike the retail financing contracts, each of the wholesale financing contracts — which are all identical — contains a sweeping security provision known as a dragnet clause. This clause...