Opinion
No. 02 Civ. 10341 (LAP).
March 16, 2005
OPINION AND ORDER
Plaintiff General Electric Capital Corporation ("GECC") brings the present summary judgment motion against Defendant ePlus, Inc. ("ePlus") on the sole count in the Complaint for breach of warranty. Because issues of material fact remain as to ePlus' alleged breach of warranty, GECC's summary judgment motion is denied.
I. Background
GECC and ePlus were not the original parties to the transaction underlying this case. On October 17, 1995, CLG, Inc., ("CLG") entered into a lease agreement (the "Lease") with Moovies, Inc. ("Moovies"). The Lease provided that Moovies would lease computers, file servers and telephone equipment from CLG, and payment was to be made according to the terms of a series of supplements annexed to the Lease.
Between May 1997 and December 1998, CLG syndicated the debt arising from the supplements and entered into five separate Non-Recourse Promissory Notes (the "Notes") with GECC. The Notes were secured by five Non-Recourse Loan and Security Agreements (the "Security Agreements"). The Notes and Security Agreements encompassed eleven separate Lease supplements and were identical in all respects, except for the specific dates and repayment amounts.
In March 1998, Video Update, Inc., ("VUI") merged with Moovies and acquired Moovies' interest in the leased equipment, becoming liable to CLG and GECC for the lease payments (CLG was subsequently acquired by Defendant ePlus; ePlus assumed all CLG's liabilities). By August of 1999, VUI had defaulted under the terms of the Lease supplements by failing to make payments as they became due. GECC took no action until May 2000, when it sent a letter to VUI demanding payment according to the terms of the supplements. Thereafter, GECC commenced litigation in the Superior Court of the State of North Carolina seeking to enforce the terms of the supplements.
While GECC's suit was pending, on September 18, 2000, VUI filed for Chapter 11 bankruptcy with the United States Bankruptcy Court, District of Delaware. On December 14, 2000, GECC filed a motion under 11 U.S.C. § 365(d)(10) to require VUI to pay post-petition rents on the leased equipment. VUI filed its opposition, contending, among other things, that the lease was not a "true lease" and was instead a disguised security interest. On November 16, 2001, the Honorable Judith Wizmur issued an opinion concluding that the Lease supplements were not, in fact, true leases, but quasi-leases, disguised financing arrangements under the Uniform Commercial Code as adopted by North Carolina.In re: Video Update, Inc., No. 00-3663, slip. op. at 4-13 (Bankr. D. Del., Nov. 16, 2001). GECC appealed the bankruptcy court ruling to the District Court of Delaware, where, on July 30, 2002, the ruling was sustained in its entirety. GECC filed a notice of appeal to the Third Circuit Court of Appeals, but prior to the submission of briefs, VUI and GECC agreed to settle their dispute for $375,000.00.
On Novermber 22, 2002, GECC commenced the present action against ePlus in New York Supreme Court. The sole count in the Complaint, breach of warranty, extends directly from Judge Wizmur's ruling. Unable to recover against VUI as a true lessor, GECC turned to ePlus, alleging that ePlus represented itself to GECC as a true lessor, inappropriately warranting good title to the equipment subject to the Lease. Specifically, GECC believes that ePlus breached the Warranty of Title present in Section 2.1 the "Warranty" of the Security Agreements, which reads:
The Debtor has good title to the Collateral, free and clear in each instance of all security interests, liens, claims and encumbrances whatsoever, and by virtue of Debtor's purchase from the computer software vendor, Debtor has an interest in such software if any, except for the interest of Lessee under the Lease and the lien created by this Agreement. The Debtor has full power and authority to grant a first lien security interest in the Collateral to GE Capital and hereby warrants said title to and said first lien security interest in the Collateral against all claims and demands whatsoever (excepting only in the case of the Equipment, the right and interest of the Lessee under the Lease).
GECC claims $2,632,830.97 in damages and presently moves for summary judgment on the breach of warranty issue.
GECC further claims that ePlus breached Section 2.7 of the Security Agreements, entitled "Retention of Title." That clause reads: "Debtor shall retain title in the Leased Property. The Debtor shall not encumber, sell, allow Lessee to sublease the Equipment. . . . Title in all of the Leased Property shall be retained by Debtor."
However, Section 2.7 does not speak to the issue of whether the warranties contained in the Security Agreements between GECC and ePlus are in fact true lease warranties. Instead, Section 2.7 merely prevents a later equity sale or junior encumbrance of the property subject to the lease. I therefore confine my breach of warranty analysis to Section 2.1 of the Security Agreements.
II. The Standard for Summary Judgment
Pursuant to Rule 56(c) of the Federal Rules of Civil Procedure, summary judgment shall be rendered forthwith if the pleadings, depositions, answers, 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); see Anderson v. Liberty Lobby, 477 U.S. 242, 250 (1986).
The moving party has the initial burden of "informing the district court of the basis for its motion" and identifying the matter that "it believes demonstrate[s] the absence of a material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). In determining whether summary judgment is appropriate, a court must resolve all ambiguities, and draw all reasonable inferences against the moving party. See Matsushita Elec. Industr. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986) (citing United States v. Diebold, Inc., 369 U.S. 654, 655 (1982)).
If the moving party meets its burden, the burden then shifts to the non-moving party to come forward with "specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e). The non-moving party must "do more than simply show there is some metaphysical doubt as to the material facts," Matsushita, 475 U.S. at 586, and the non-moving party may not "rest upon . . . mere allegations or denials," St. Pierre v. Dyer, 208 F.3d 394, 404 (2d Cir. 2000). However, only when it is apparent than no rational finder of fact "could find in favor of the non-moving party because the evidence to support its case is so slight" should summary judgment be granted. Gallo v. Prudential Residential Servs., Ltd., 22 F.3d 1219, 1223 (2d Cir. 1994).
III. Discussion
In a contract dispute, a motion for summary judgment may be granted only where the agreement's language is unambiguous and conveys a definite meaning. See Sayers v. The Rochester Telephone Corp. Supp. Mgmt. Pension Plan, 7 F.3d 1091, 1094 (2d Cir. 1993); Seiden Associates, Inc. v. ANC Holdings, Inc., 959 F.2d 425, 428 (2d Cir 1992). In order to establish an issue of material fact precluding summary judgment, a non-moving party must first show that the contract language is susceptible to different reasonable interpretations and then support the suggested alternate interpretation with relevant extrinsic evidence. Sayers, 7 F.3d at 1094; Seiden, 959 F.2d at 428.
A. Contractual Ambiguity
"Contractual language is unambiguous when it has a definite and precise meaning, unattended by any danger of misconception in the purport of the [contract] itself, and concerning which there is no reasonable basis for a difference of opinion." John Hancock Mutual Life Ins. Co. v. Amerford Int'l. Corp., 22 F.3d 458, 461 (2d Cir. 1994). Conversely, a contract is ambiguous when its language is:
capable of more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement and who is cognizant of the customs, practices, usages and terminology as generally understood in the particular trade or business.Walk-In Medical Centers, Inc. v. Breuer Capital Corp., 818 F.2d 260, 263 (2d Cir. 1987) (citations omitted); see also Int'l. Knitwear Co. Ltd. v. M/V Zim Canada, 1994 U.S. Dist. LEXIS 14180 at *10 (S.D.N.Y. 1994).
GECC urges that Section 2.7 is capable of only one interpretation, that it cannot be read to avoid ePlus' warranty that it held title to the leased property. According to GECC, that ePlus "warrant[ed] said title" can only mean one thing — that ePlus warranted and represented that it owned the leased equipment. To support this notion, GECC cites Nebco Associates v. U.S., a United States Court of Claims case from Nebraska which states that "title" is not an ambiguous term in a contract. 23 Cl. Ct. 635, 646 (1991).
ePlus' interpretation of the Warranty language is naturally different. ePlus argues that the language "good title to the Collateral" is modified by the phrase "except for the interest of the Lessee under the Lease." This language is repeated in the second sentence of the paragraph, in which ePlus warrants title and grants GECC a first lien security interest "against all claims and demands whatsoever (excepting only in the case of the Equipment, the right and interest of the Lessee under the Lease)." Essentially, ePlus contends that it warranted good title to the equipment, subject to the continuing interest of VUI, as the Lessee, in the equipment.
There is no compelling rationale to find GECC's interpretation of the Warranty any more valid than ePlus' interpretation. Both parties are "reasonably intelligent persons . . . cognizant of the the customs, practices, usages and terminology as generally understood" in the finance industry, and they have reached different conclusions as to the meaning of the language at issue. Walk-In Medical Centers, Inc., 818 F.2d at 263. At the very least, Judge Wizmur made clear that it was the "right and interest" of the lessee, VUI, that defeated GECC's true lease argument in the bankruptcy proceeding. In re: Video Update, Inc., No. 00-3663, slip. op. at 11-12 (Bankr. D. Del., Nov. 16, 2001). That VUI's continuing right and interest in the equipment would be referenced in Section 2.1 of the Security Agreements hardly "strains the contract language beyond its reasonable and ordinary meaning." Bethlehem Steel Co. v. Turner Constr. Co., 141 N.E.2d 590, 593 (1957). Consequently, I find that the Warranty is ambiguous, as GECC's interpretation of the Warranty does not offer "a definite and precise meaning, unattended by a danger of misconception." Sayers, 7 F.3d at 1096.
B. Extrinsic Evidence
Ambiguity itself is not enough to preclude summary judgment in a contract action. Mellon Bank, N.A. v. United Bank Corp., 31 F.3d 113, 116 (2d Cir. 1994). "In order for the parties' intent to become an issue of fact barring summary judgment, there must also exist relevant extrinsic evidence of the parties' actual intent." Id. (citing Williams Sons Erectors v. South Carolina Steel, 983 F.2d 1176, 1183-84 (2d Cir. 1993) (ambiguity without the existence of extrinsic evidence presents not an issue of fact, but an issue of law for the court to rule on.)).
ePlus offers extrinsic evidence sufficient to establish an issue of material fact that survives summary judgment. Specifically, ePlus proffers four separate expert reports on the subject of quasi-lease financing arrangements. (Def. App. 58, 72, 84, 90) Collectively, the reports state that the industry understanding is that a representation of `title to the collateral,' as it appears in the Warranty, means that the lessor has not already sold the collateral to a third party — it does not guarantee future court characterization of the transaction between the lessor and lessee as a true lease. (Id. at 59, 75, 91-92)
The experts explain the practice of equity sales in the financing industry, in which the lessor sells the residual value in the equipment to a buyer, who takes the tax benefits, which is commonly accompanied by a true lease or true tax lease warranty. (Id. at 60, 86). ePlus offers two sample warranty clauses which guarantee to a potential investor that a court would sustain the true lease characterization of the transaction. (Id. at 63, 86, 539). ePlus' own draft true lease warranty goes so far as to include the language: "the Leases are `true' leases as defined by the Uniform Commerical Code." Such specificity is clearly absent from the Security Agreements between GECC and ePlus, shedding some light on the original intentions of the parties at the time the contracts were executed.
More persuasive than ePlus' expert reports, however, is GECC's own internal classification system for leases and disguised financing arrangements. John J. McMonagle, a senior risk manager at GECC, testified that GECC practice is to refer to a disguised financing arrangement as a "quasi-lease." (Dep. of John J. McMonagle, taken on October 21, 2003, at 6.) Once GECC finances a lease or a quasi-lease, a record is entered into GECC's Portfolio Management System. Promissory notes for true leases are coded as "MEREG" and promissory notes backed by quasi-leases are coded as "MENQSI." (Id. at 288.) Three of the five notes assigned to GECC by ePlus received MENSQI codes, indicating that GECC itself did not believe it was acquiring only true leases. (Def. [`s] App. at 388, 405, 415.)
GECC offers no response to either ePlus' expert reports or the argument based on the Portfolio Management lease-coding system. On the ambiguity issue, GECC focused exclusively on the argument that the Warranty was plain on its face and that extrinsic evidence need not be considered. Consequently, I find that ePlus has proffered "relevant extrinsic evidence of the parties actual intent," sufficient to create an issue of fact and bar GECC's summary judgment motion. Williams Sons Erectors, 983 F.2d at 1183-84.
C. The Parties' Additional Arguments
In addition to disputing the plain meaning of the Warranty and the consideration of extrinsic evidence, the parties raised a number of issues on this summary judgment motion. The issues discussed included whether: (1) collateral estoppel regarding Judge Wizmur's opinion should apply to ePlus; (2) GECC brought its claim within the statute of limitations; (3) GECC properly relied on the Warranty; (4) GECC suffered any damages as a result of the alleged breach; (5) GECC failed to mitigate; (6) GECC waived its rights under 11 U.S.C. § 365(d)(10); and whether successor liability truly exists between CLG and ePlus. However, having found sufficient grounds to deny GECC's present summary judgment motion on the contract ambiguity discussed above, I need not address these arguments here.
IV. Conclusion
Accordingly, Defendant's motion for summary judgment is granted (Docket No. 19), and the Clerk of the Court shall mark the this action closed and all pending motions denied as moot.
SO ORDERED