Summary
finding that defendants were liable to plaintiff but that "[t]riable issues of fact as to the calculation of various damages components still remain, and this must be decided at trial"
Summary of this case from Zamora v. Morphix Co.Opinion
05 Civ. 9163 (CM)(MDF).
July 14, 2006
DECISION AND ORDER GRANTING IN PART AND DENYING IN PART PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT
On March 13, 2001 Virtual Physical Center — Pikesville, LLC, and on October 1, 2001 Virtual Physical Center — Rockville, LLC (referred to collectively as "Virtual Physical"), leased two full-body CT scan machines from Philips Medical Systems North America Corp. ("Philips"), using Citicorp Leasing, Inc. ("Citicorp") to finance the transaction. Kusher Family Limited Partnership and Kusher GP, Inc. (referred to collectively as the "Guarantors") guaranteed the contract. Virtual Physical obtained one scanner for its Pikesville location and one for its Rockville location.
On April 16, 2003, the two Virtual Physical entities assigned their entire interest in the scanners to their successor corporation, Mid-Atlantic Radiology Specialist, LLC, d/b/a Virtual Physical ("MARS").
Sometime between April 2003 and April 2005, MARS discovered, from publicly available information, that the scanners were not as safe as Philips had originally represented to Virtual Physical. As a result, MARS ceased its scanning operations and informed Citicorp that it would no longer make payments on the lease. Citicorp was left to make arrangements for the scanners, which MARS effectively abandoned.
Citicorp sued MARS and both Kusher entities for damages resulting from this fiasco. Citicorp now moves for summary judgment. Defendants demur that they need additional discovery and ask that the motion be denied pursuant to Fed.R.Civ.P. 56(f).
For the reasons explained below, Citicorp's motion for summary judgment as to liability is granted. The matter is referred to Magistrate Judge Mark D. Fox for inquest.
Facts
Virtual Physical's Lease of the Philips Machines
Virtual Physical comprised two separate entities, each in the business of conducting whole-body CT scans for screening purposes. Philips manufactures medical equipment.
After learning of Philips' reputation for manufacturing high quality medical equipment, Virtual Physical sought to purchase one Philips CTVision Secura scanning machine for each of the two Virtual Physical companies. Defs.'s 56.1 St. ¶ 36. According to Philips, the equipment was appropriate for individual whole-body CT scans for screening purposes, was safer and more reliable than other scanning machines, and emitted low levels of radiation.Id. Virtual Physical was also told that the exposure to radiation from one whole-body CT Scan with the equipment at issue was the equivalent of the relatively minor amount of exposure of four chest x-rays. Id. at ¶ 37. Relying upon Philips' representations about the quality of the machines, Virtual Physical bought two machines. Id. at ¶ 38.
Before the essential terms of the agreements with Philips were agreed upon, representatives of Philips secured financing from plaintiff. Id. at ¶ 51. This was the only financing option offered by Philips to Virtual Physical. Id. at ¶ 52.
Virtual Physical Center — Pikesville, LLC entered into a valid Master Lease Agreement with Citicorp on March 13, 2001. Pl.'s 56.1 St. ¶ 1. Virtual Physical Center — Rockville, LLC entered into valid Master Lease Agreement with Citicorp on October 10, 2001. Id. at ¶ 3. Each lease provided for the lease and hire of one Philips Secura CT Scanner, for fifty-seven payments of $14,303.10, totaling $815,276.70 for each machine. Id. Kusher Family Limited Partnership by Kusher GP, Inc. guaranteed all obligations to Citicorp under these two leases. Id. at ¶¶ 2, 4.
The leases disclaim any liability on the part of Citicorp based on the quality of the equipment and specifically declare each to be "a `Finance Lease' as defined by Section 2A-103(g) of the UCC." Leases ¶¶ 4, 17. The leases also make Virtual Physical responsible for returning the equipment to Citicorp, "at such location within the United States as Lessor shall designate."Id. at ¶ 8. Pursuant to a choice of law provision, the leases are to be governed by New York law. Id. at ¶ 21.
On April 16, 2003, the two Virtual Physical entities assigned their remaining interests in their respective scanners to their successor corporation, MARS. Pl.'s 56.1 St. ¶ 5.
Virtual Physical Ceased Its Scanning Operations
In or about August 2004 through April 2005, numerous public reports were released stating that whole-body CT scans could lead to cancer. Hazman Aff. ¶ 14. Other reports quoted Philips representatives as saying that its equipment was not appropriate for whole-body CT scans for screening purposes. Id. One representative specifically explained that he did not agree with prior corporate representations that one scan is the equivalent of four chest x-rays. Id. Fearing potential liability, MARS shut down its scanning operations. Id. at ¶ 15.
In a letter dated April 13, 2005, MARS notified Citicorp that MARS would cease making payments under its two leases and that it would be leaving the two scanners in their current locations, forcing Citicorp to deal with the abandoned equipment. Pl.'s 56.1 St. ¶ 20.
After being informed about defendants' abandonment of the equipment, Citicorp entered into a Use Agreement with Maryland Radiology Associates, LLC (MRA) and the Guarantors on May 11, 2005, by which MRA agreed to pay Citicorp $8,250 per month "for use of the Rockville Equipment at the Rockville Location." Id. at ¶ 23, Pl.'s Ex. J. MRA paid Citicorp under the Use Agreement through the August payment. Id. at ¶ 24, Pl.'s Ex. K. MRA then bought the equipment from Citicorp on September 21, 2005, for $27,500, having its August use-payment credited towards the sale.Id. In total, Citicorp recovered $24,750.00 from the Use Agreement and $27,500 from the sale. Id. at ¶¶ 23-4.
Citicorp did not sell the Pikesville equipment, and claims to have paid $15,000 for the removal, transport and storage of this equipment. Pl.'s 56.1 St. ¶ 29.
The Parties' Claims
In this motion for summary judgment, Citicorp seeks $325,386.94 in damages as a result of MARS' breach of the Rockville Lease and $287,851.70 for its breach of the Pikesville Lease, for a total of $613,238.64. Pl.'s 56.1 St. ¶¶ 29-30. Plaintiff also moves for $22,424.20 in attorneys' fees and costs. Id. at ¶¶ 31-2.
Defendants removed this action, which was originally filed in the Supreme Court of New York, Westchester County, to Federal Court on October 28, 2005. Citicorp filed this motion for summary judgment on March 10, 2006.
Defendants contend that they are entitled to additional discovery before the court rules on the motion. Defendants posit that Citicorp and Philips may have been engaged in a joint venture which, they argue, would make Citicorp jointly liable, along with Philips, for any potential liability for the faulty machines. Defendants also claim that they need additional discovery on damages. They argue that plaintiff has not appeared for a Rule 30(b)(6) deposition and has failed to comply with a request for production of documents.
Discussion
A. Standard of Review
A party is entitled to summary judgment pursuant to Fed.R.Civ.P. 56 when there is no "genuine issue of material fact" and the undisputed facts warrant judgment for the moving party as a matter of law. Fed.R.Civ.P.56(c); Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986). In addressing a motion for summary judgment, "the court must view the evidence in the light most favorable to the party against whom summary judgment is sought and must draw all reasonable inferences in [its] favor."Matsushita Elec. Indus. Co., 475 U.S. 574 (1986). Whether any disputed issue of fact exists is for the Court to determine.Balderman v. United States Veterans Admin., 870 F.2d 57, 60 (2d Cir. 1989). The moving party has the initial burden of demonstrating the absence of a disputed issue of material fact.Celotex v. Catrett, 477 U.S. 317, 323 (1986). Once such a showing has been made, the non-moving party must present "specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e). The party opposing summary judgment "may not rely on conclusory allegations or unsubstantiated speculation" and "must do more than simply show that there is some metaphysical doubt as to the material facts." Scotto v. Almenas, 143 F.3d 105, 114 (2d Cir. 1998);Matsushita Elec. Indus. Co., 475 U.S. at 586 (citations omitted). Moreover, not every disputed factual issue is material in light of the substantive law that governs the case. "Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude summary judgment."Anderson, 477 U.S. at 248.
B. Liability
1. The Leases are Finance Leases
To support a motion for summary judgment following a default under a financing lease, a plaintiff need do no more than show the Court "the lease agreement and proof of nonpayment." Unistar Leasing v. Lipkin, 12 A.D.3d 1166, 1167, 784 N.Y.S.2d 423 (4th Dept. 2004) (citing Preferred Capital v. PBK, Inc., 309 A.D.2d 1168, 1168, 765 N.Y.S.2d 405 (4th Dept. 2003)). The same is true when judgment is sought against a guarantor under a written guaranty. "All that the creditor need prove is an absolute and unconditional guaranty, the underlying debt, and the guarantor's failure to perform under the guarantee." City of New York v. Clarose Cinema Corp., 256 A.D.2d 69, 71, 681 N.Y.S.2d 251 (1st Dept. 1998) (citing BNY Fin. Corp. v. Clare, 172 A.D.2d 203, 568 N.Y.S.2d 65, 67 (1st Dept. 1991) and Chem. Bank v. Geronimo Auto Parts Corp., 225 A.D.2d 461,461-2, 639 N.Y.S.2d 340, (1st Dept. 1996)).
MARS has acknowledged, by signed letter, that as of April 8, 2005, it stopped making lease payments to Citicorp.
Citicorp has produced its leases with Virtual Physical, the assignment of those leases to MARS, and MARS' letter declaring that it would no longer make payments. Pl.'s Ex. C, E, H. Citicorp has also produced the Kusher Partnership's written guaranty and uncontroverted testimony that the Guarantors have failed to make payment in MARS' stead. Pl.'s Ex. F, I ¶ 33.
The Guaranty of Payment expressly states, "Notice of presentment, protest and demand, and of all other matters of which the Undersigned otherwise might be entitled, is waived." As guarantors expressly waived demand, and no evidence of demand exists in the record, the Court assumes that no demand for payment was made.
Though defendants formally deny plaintiff's allegation of their breach, their real argument is that the "alleged breach of the Leases is excused." Pl.'s and Defs.' 56.1 St. ¶ 21. Defendants allege that they were within their rights to withhold payment because the equipment turned out to be harmful, despite Philips' representations to the contrary at the time the leases were executed.
Citicorp claims that because the two leases with Virtual Physical are finance leases, Citicorp is not liable for defects in the leased equipment, thus rendering the alleged defects in the equipment and misrepresentations by Philips irrelevant to defendants' obligation to make payments to Citicorp under the leases. The Court agrees.
When a lessee under a finance lease promises to make payments to the lessor regardless of the quality of the equipment being leased, the lessor is not responsible for the quality of the product. Canon Fin. Serv., Inc. v. Medico Stationary Serv., Inc., 300 A.D.2d 66, 66, 751 N.Y.S.2d 194 (1st Dept. 2002). The purpose of such a lease is to protect the lessor, who acts as a financier and who is removed from "the selection, manufacture and supply of the goods," from being held responsible for the quality of the equipment at issue. UCC § 2A-103(g), Official Commentary. The Second Circuit Court of Appeals has held that a so-called "hell or high water" clause in a finance lease, which makes a lessee's obligation to pay unconditional, is valid.Wells Fargo Bank, N.A. v. BrooksAmerica Mortgage Corp., 419 F.3d 107, 110 (2d. Cir. 2005).
The leases in this case contain such a "hell or high water" clause, which provides, "Lessee's obligation to pay . . . shall be absolute and unconditional." Leases ¶ 2. Citicorp's immunity from responsibility for the quality of the goods survives the assignment of the leases from the two individual Virtual Physical corporations to the successor MARS corporation. U.C.C. § 2A-103(g), Official Commentary.
Citicorp has not provided defendants with documentary evidence of its purchase of the scanners from Philips, and defendants have not had a chance to pursue discovery on this matter. However, technical details about how a party becomes the lessor in a finance lease are ultimately irrelevant, due to the existence of the "hell or high water" clause and the fact that the parties have explicitly agreed that "each Leasing Schedule is a `Finance Lease' as defined by Section 2A-103(g) of the UCC." Leases ¶ 17.
The plain meaning of the contract terms controls. See, e.g., Greenfield v. Phillies Records, Inc., 98 N.Y.2d 562, 569, 780 N.E.2d 166, 170 (NY 2002). Since the plain language of the leases provide that they are finance leases governed by U.C.C. § 2A-103(g), Citicorp is not responsible for the quality of the goods provided and must be paid regardless of the quality of the scanners. The lessee is still free to pursue a claim against the manufacturer of the equipment. Indeed, defendants are doing precisely that, in a separate action against Philips, Virtual Physical Center-Rockville, LLC, et al. v. Philips Medical Sys. No. Amer. Corp., et al., United States District Court, District of Maryland, Case No. CCB-05-CV-3252. It is in that action that their remedy (if any) lies.
Furthermore, even if the leases did not qualify as finance leases under the U.C.C., "It is well-settled that under New York law, parties to a contract may exclude or modify implied warranties so long as the warranty disclaimer is conspicuous and specific." Maltz v. Union Carbide Chem. Plastics Co., Inc., 992 F.Supp. 286, 304 (S.D.N.Y. 1998). In this case, Citicorp expressly and specifically disclaimed liability for the quality of the scanners. Leases ¶¶ 2, 4. Under basic principles of contract law, this suffices to absolve Citicorp of any liability for the condition of the equipment — and forces defendants to make lease payments regardless of the quality of the equipment.
Guarantors, having unconditionally guaranteed the leases, are likewise liable to Citicorp. Pl.'s Ex. F. As one court expressly held in a case where a guarantor unconditionally guaranteed the debtor's payments, "Having undertaken such a broad guarantee `absolutely and unconditionally,' Lofrese waived any defenses and/or counterclaims he might have had." European Amer. Bank v. Lofrese, 182 A.D.2d 67, 73, 586 N.Y.S.2d 816, (2 Dept. 1992);see also, Raven Elevator Corp. v. Finkelstein, 223 A.D.2d 378, 378, 636 N.Y.S.2d 292 (A.D. 1 Dept. 1996), Port Distrib. Corp. v. William Pflaumer, 880 F.Supp. 204, 211 (S.D.N.Y. 1995). Because the Court finds that MARS and therefore Guarantors are liable to Citicorp, it need not address whether the Guarantors would still be liable even if, for whatever reason, MARS were not liable.
2. Discovery Regarding the Citicorp-Philips Relationship is Unnecessary
Defendants argue that Citicorp might have entered into a "joint-venture" with Philips, which, in turn, might make Citicorp liable for the products' deficiencies, pending the outcome of defendants' separate action against Philips. Defendants provide no admissible evidence to support this contention. They cite an article from a health magazine about the fact that Philips was offering financing through Citicorp, and offer an affidavit from one Jonathan Hazman, who negotiated the purchase of the equipment on behalf of Virtual Physical, in which Mr. Hazman states that it "seemed" to him that there was a close connection and prior relationship between Philips and Citicorp. Hazman Aff. ¶ 4. The article is hearsay and proves nothing (even though the author uses the term "joint venture" to refer to the arrangement between Philips and Citicorp). Likewise, Hazman's "impression" (i.e., his conjecture) is contradicted by the plain language of the Leases, which indicate that Citicorp was offering `finance leases' for the purchase of Philips equipment.
Defendants have sought discovery from Citicorp (in the form of document requests and a 30(b)(6) deposition) concerning the nature of its relationship with Philips. By a letter dated February 17, 2006, Citicorp indicated that it did not intend to appear for deposition or respond to defendants' discovery demands as, according to the recollection of plaintiff's counsel, this Court had stated at the initial pre-trial conference held on February 10, 2006, that no discovery was necessary. Defendants, maintaining that this Court had made no such restriction on defendants' right to pursue discovery, moved to compel plaintiff to respond to their document requests and to appear for a deposition. Magistrate Judge Fox, to whom this issue was referred, specifically ordered defendants to make their argument regarding the lack of discovery as a Rule 56(f) motion.
Rule 56(f) provides, "Should it appear from the affidavits of a party opposing the motion that the party cannot for reasons stated present by affidavit facts essential to justify the party's opposition, the court may refuse the application for [summary] judgment or may order a continuance to permit affidavits to be obtained or depositions to be taken or discovery to be had or may make such other order as is just." Fed.R.Civ.P. 56(f). As the language of the rule indicates, only discovery that may reveal facts "essential to justify the party's opposition" will lead a court to deny a motion for summary judgment on Rule 56(f) grounds.
For several reasons I conclude that, in this case, the discovery defendants seek will not reveal facts essential to justify opposition to the motion.
First, assuming arguendo that a joint venture existed between Citicorp and Philips, it would not circumvent the express provisions of the leases which state that the leases are U.C.C. finance leases and that Citicorp takes no responsibility for the condition of the equipment. Therefore, the information defendants seek is irrelevant to Citicorp's breach of contract claim.
The Second Circuit has consistently held that the opponent of a motion for summary judgment who claims to be unable to produce evidence in opposition to the motion must file an affidavit explaining: (1) the nature of the uncompleted discovery; (2) how those facts are reasonably expected to create a genuine issue of material fact; (3) what efforts the affiant has made to obtain those facts; and (4) why those efforts were unsuccessful.Burlington Coat Factory Warehouse Corp. v. Esprit de Corp., 769 F.2d 919, 923 (2d. Cir. 1985). If the information the opponent seeks to discover would not create an issue of material fact, even assuming its truth, then the opponent has not satisfied the second prong of Burlington, and discovery on the matter is properly denied. Hudson River Sloop Clearwater, Inc. v. Dept. of Navy, 891 F.2d 414, 422 (2d. Cir. 1989).
In Unistar Leasing v. Lipkin, plaintiff sought to recover money owed under an equipment finance lease for an ATM machine. The trial court denied plaintiff's motion for summary judgment on the ground that defendant was entitled to additional discovery into the existence of an agency relationship between the plaintiff and a third party. The Appellate Division reversed, explaining, "Defendant's unsubstantiated allegations of . . . the existence of an agency relationship between plaintiff and the Credit Card center are `belied by the express provisions of the lease agreement' and are insufficient to raise a triable issue of fact." 12 A.D.3d 1166, 1167 (4th Dept. 2004) (citation omitted). So too here, defendants' unsubstantiated contention that plaintiff and Philips are or were engaged in a joint venture is insufficient to raise a triable issue of fact. As explained above, finance leases and explicit contractual waivers render a financier not liable for the condition of equipment. Such disclaimers would be superfluous unless they rendered relationships between the lender and the manufacturer of equipment irrelevant.
Additionally, defendants' allegation that a joint venture exists or existed is based on sheer speculation. When a lessor is attempting to recover from a lessee and the lessee's guarantor, "Defendants' `belief that additional discovery might reveal something helpful'" does not automatically defeat plaintiff's motion for summary judgment. Preferred Capital, 309 A.D.2d, 1169 (citing Cooper v. Milton Paper Co., 258 A.D.2d 614, 618, 683 N.Y.S.2d 911 (2nd Dept. 1999)). This belief must be more than mere speculation. Cooper, 258 A.D.2d at 615.
"A court can reject a request for discovery, even if properly and timely made through a Rule 56(f) affidavit, if it deems the request to be based on speculation as to what potentially could be discovered." Paddington Partners v. Bouchard, 34 F.3d 1132, 1138 (2d. Cir. 1994); Nat. Union Fire Ins. Co. of Pitt., Pa. v. The Stroh Cos., Inc., 265 F.3d 97, 117 (2d. Cir. 2001).Paddington Partners holds that, even if party opposing summary judgment satisfies Burlington, summary judgment may still be granted if the Rule 56(f) request is based on pure speculation. The frequently cited Contemporary Mission, Inc. v. United States Postal Service, 648 F.2d 97, 107 (2d. Cir. 1981) states, "A `bare assertion' that the evidence supporting a plaintiff's allegation is in the hands of the defendant is insufficient to justify a denial of a motion for summary judgment under Rule 56(f)." Indeed, the defendants in Contemporary Mission refused to comply with plaintiff's discovery requests, yet plaintiff's Rule 56(f) claim was still denied. Id. at 103-4, 107.
In this case, defendants' conjecture that Citicorp and Philips are or were engaged in a joint venture is speculative at best. Assuming that Citicorp and Philips agreed that Citicorp would have an exclusive right to provide financing for Philips equipment, there is a distinction between such an arrangement and a joint venture. Dinaco, Inc. v. Time Warner, Inc., 346 F.3d 64, 68 (2d Cir. 2003). Defendants offer no evidence that Citicorp and Philips were engaged in any profit-splitting business enterprise, though the sharing of profits (and losses) is one of the hallmarks of a joint venture. Itel Containers Int'l Corp. v. Atlanttrafik Express Serv. Ltd., 909 F.2d 698, 701 (2d. Cir. 1990). The only evidence defendants offer in support of their assertion is the aforementioned hearsay article in which the author (who is neither an employee of Citicorp nor of Philips) uses the term "joint venture." Hazman's "sense" that the two corporations were "close" proves nothing. By contrast, the express provisions of the finance leases at issue (in which Citicorp disclaims liability for the condition of Philips' equipment) are utterly inconsistent with a business enterprise in which Philips and Citicorp were sharing profits and losses. This makes it impossible to conclude that Philips and Citicorp formed a joint venture that imposed on each of them liability for the other's professional missteps. It is, however, completely consistent with a conclusion that Philips was to earn any profits (or suffer losses) arising out of the business of manufacturing and selling its machines, while Citicorp was to earn profits associated with its traditional business, which is lending money.
Therefore, defendants are not entitled to additional discovery. Citicorp's motion for summary judgment on the issue of liability is granted.
C. Damages
Plaintiff correctly notes that the lease agreements in question expressly exempt it from a contracting party's usual obligation to mitigate damages. Citicorp Leasing, Inc. v. United American Funding, Inc., 2005 U.S. Dist. Lexis 15901, at 19-20 (S.D.N.Y. 2005), Leases ¶ 12. This renders the reasonableness of any effort to mitigate irrelevant. However, Citicorp is not seeking damages without mitigation. It claims to have mitigated damages. Once plaintiff decided to try and sell the equipment, it must honestly put any funds attained towards defendants' debt, but the reasonableness of plaintiff's attempt to mitigate is irrelevant.
Nevertheless, even absent any obligation to mitigate damages, Citicorp must still prove the actual amount of damages that it has incurred. Since several (albeit minor) questions of disputed fact exist with regard to Citicorp's damage calculation, defendants must be allowed to investigate any records that might be relevant to these assessments.
Accordingly, plaintiff's motion for summary judgment on the issue of damages is denied.
Conclusion
Since Citicorp is not responsible for the quality of the goods under the leases, and the leases otherwise make Virtual Physical liable to Citicorp, MARS is clearly liable. Based on their guarantee of payment, the Kusher Guarantors are also liable here. MARS and the Guarantors are therefore jointly and severally liable to Citicorp. and this must be decided at trial. Citicorp was under no obligation to mitigate damages, and therefore that cannot figure into the calculation. However, Citicorp is ordered to comply with defendants' discovery requests as those requests pertain to damages. This matter is referred to Magistrate Judge Fox for inquest.
The motion for summary judgment is granted as to liability and denied as to damages and attorney's fees.
This constitutes the decision and order of the Court.