TRANSAMERICA RENTAL FINANCE v. Rental Experts

• Decision Date: 10 January 1992
• Docket Number: Civ. No. 3-91-130 (WWE).
• Citation: 790 F. Supp. 378
• Parties: TRANSAMERICA RENTAL FINANCE CORPORATION, Plaintiff, v. The RENTAL EXPERTS, et al., Defendants.
• Court: U.S. District Court — District of Connecticut

790 F. Supp. 378

TRANSAMERICA RENTAL FINANCE CORPORATION, Plaintiff, v. The RENTAL EXPERTS, et al., Defendants.

Civ. No. 3-91-130 (WWE).

United States District Court, D. Connecticut.

January 10, 1992.

Frank Sziliagyi and Joseph V. Meaney, Cranmore & Fitzgerald, Hartford, Conn., for plaintiff.

William C. Longa, Zeldes Needle and Cooper, Bridgport, Conn. and Daniel A. Silver, New Britain, Conn., for defendants.

RULING ON PLAINTIFF'S APPLICATION FOR PREJUDGMENT REMEDY

EGINTON, District Judge.

Plaintiff has filed an Application pursuant to Fed.R.Civ.P. 64 seeking a prejudgment remedy against the Defendants. On December 12, 1991, after two days of hearings, Magistrate Judge Arthur H. Latimer recommended the imposition of a preliminary injunction, which this court will now review de novo. Motion papers and the record from the hearings before the Magistrate reveal the following facts:

Plaintiff, Transamerica Rental Finance Corporation "Transamerica", entered into a financing agreement in November, 1989 with Defendant, The Rental Experts "Experts", whereby Transamerica loaned Experts, a rent-to-own company, $1,000,000 in exchange for a security interest in Expert's inventory, receivables, accounts, equipment and property.

A provision of the agreement assigned to Transamerica the leases on two properties Experts used as its showrooms. Under the agreement, Experts could enjoy full use of the showrooms so long as it was not in default. Upon the occurrence of an enumerated event of default, Transamerica could accelerate the indebtedness and pursue any remedy provided in the Uniform Commercial Code, including the right to operate and maintain Experts' business.

By early 1991 Experts was in default under the terms of the agreement, and Transamerica declared due the entire unpaid principal amount of $408,864.26. Transamerica commenced this action to recover that amount, and also to take possession of and operate Experts' rent-to-own business. A restraining order was agreed to by the parties in March, 1991, which prevented Experts and other Defendant-guarantors of the Transamerica loan from disposing of the assets of Experts' business other than in the ordinary course of business. The order also allowed Transamerica to conduct quarterly audits of the business.

Magistrate Latimer conducted a hearing on October 22, 1991, and found that Trans-america was entitled to a prejudgment remedy of $525,000 under Conn.Gen.Stat. § 52-278a et seq., which represented the unpaid principal amount of the loan plus interest and costs. Experts did not object to this finding. At a subsequent hearing on December 19, 1991, Magistrate Latimer recommended that Transamerica be entitled to injunctive relief pursuant to Conn. Gen.Stat. § 42a-9-207 and § 42a-9-503 to secure the prejudgment remedy. The injunction would allow Transamerica to operate and maintain Experts' business, subject to the posting of a $400,000 bond.

Experts now objects to the Magistrate's recommendation of December 19 as being overly broad and contrary to the Second Circuit standard for imposition of a preliminary injunction. For the reasons discussed below, the Magistrate's recommended ruling will be adopted by this court.

DISCUSSION

A. Experts' Business

Transamerica argues that an injunction giving it the right to take possession of Experts' business is the only way its pre-judgment remedy of $525,000 can be protected. Transamerica presented evidence at the hearings before the Magistrate which, Transamerica argues, supports the conclusion that the business is in a steady rate of decline, and that Transamerica's loan collateral is disappearing.

The evidence presented by Transamerica at the hearings, which was in large measure uncontroverted by Experts, establishes that Experts' business has been in serious trouble for some time. In the rent-to-own business, a proprietor purchases appliances and rents them out to customers for two or three year periods. The customers pay rent in monthly installments, and at the end of the rental period have typically paid three to six times the original purchase price of the appliance. If all monthly payments are made, the customer acquires title to the appliance at the end of the period.

A healthy rent-to-own business typically has less than fifteen percent of its outstanding rental contract receivables delinquent, or more than thirty days past due. By contrast, in 1989 between twenty and thirty percent of Experts' receivables were delinquent, and by October, 1991, this figure had soared to fifty percent.

This increase in delinquent receivables was accompanied by a decrease in revenue, from approximately $60,000 per month in late 1989 to between $35,000 and $45,000 per month in the latter half of 1991. Transamerica's national workout manager testified that a decrease in revenue most often indicates that a rent-to-own business is keeping less inventory on hand to rent.

Transamerica values a rent-to-own business by multiplying the monthly income by a factor of 5.5, based on an industry standard designed to take into account inventory and receivables. Based on this valuation, Experts' business had a value of between $190,000 and $240,000 in late 1991.

B. Application of the Standard

Under the Second Circuit test for issuance of a preliminary injunction, the moving party has the burden of establishing: (a) irreparable harm; and (b) either (1) probable success on the merits, or (2) sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly towards the party requesting the preliminary injunctive relief. See Lobo Enterprises, Inc., v. The Tunnel, Inc., 822 F.2d 331, 333 (2d Cir.1987).

Where the requested injunction is mandatory, rather than prohibitive, an injunction should issue only upon a clear showing that the moving party is entitled to the relief requested. See Securities and Exch. Comm. v. Unifund Sal, 910 F.2d 1028, 1039 (2d Cir.1990).

Irreparable Harm

Transamerica must first show that it is likely to suffer irreparable harm if equitable relief is denied before a decision on the merits can be rendered. Magistrate Latimer noted that this court's calendar would dictate that any decision on the merits of this case would likely be at least a year off, and concluded that in the meantime Experts' business — and Transamerica's collateral — could disappear.

Experts is in default under the loan agreement, having made no payment under the agreement for over a year. In the time between the October 22 and December 19 hearings, Experts and the defendant loan-guarantors were ordered to disclose any assets they could be used to secure the $525,000 prejudgment remedy. Experts and the guarantors could produce no such assets, and the record shows that at this time the only collateral for the prejudgment remedy is Experts' business.

The case law applying the Second Circuit test emphasizes that monetary loss alone is insufficient to show irreparable harm. The movant must produce evidence of damage that cannot be rectified by financial compensation. See Borey v. National Union Fire Ins. Co., 934 F.2d 30, 33-34 (2d Cir.1991). The classic example of such harm is the bankruptcy of the moving party. See Tucker Anthony Realty Corp. v. Schlesinger, 888 F.2d 969, 975 (2d Cir. 1989). Here there is no evidence that the failure of Experts to pay Transamerica the $525,000 pre-judgment remedy will result in Transamerica's bankruptcy. Indeed, Transamerica has produced no evidence of the economic consequences of Experts' failure to pay.

Transamerica relies primarily on case law from the First Circuit, which seems to have a more generous view of irreparable harm. The First Circuit has interpreted Supreme Court precedent as allowing a preliminary injunction to enter to protect the plaintiff's damages remedy "when it is shown that the defendant is likely to be insolvent at the...