InfinaQuest, LLC v. DirectBuy, Inc.

Citations: 18 F. Supp. 3d 959; 83 U.C.C. Rep. Serv. 2d (West) 549; 2014 U.S. Dist. LEXIS 61739; 2014 WL 1779304Docket: Cause No. 2:12-CV-222-PRC

Court: District Court, N.D. Indiana; May 5, 2014; Federal District Court

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Defendants filed a Motion for Summary Judgment on October 22, 2013, which was fully briefed by December 12, 2013. The dispute involves debts owed to both parties by JDB Direct, LLC, which defaulted, leading to claims by InfínaQuest for tortious interference with contract and conversion after Defendants collected funds InfínaQuest asserts are rightfully theirs. InfínaQuest initiated this action on June 6, 2012. Both parties consented to have the case assigned to a United States Magistrate Judge, granting the Court jurisdiction under 28 U.S.C. § 636(c).

The summary judgment standard, per the Federal Rules of Civil Procedure, requires that a motion be granted if there is no genuine dispute regarding any material fact and the movant is entitled to judgment as a matter of law. The moving party must show the absence of evidence supporting the nonmoving party’s case, especially when the nonmoving party holds the burden of proof at trial. If the moving party provides adequate evidence, the burden shifts to the nonmoving party to demonstrate the existence of a material fact issue. A properly supported motion cannot be resisted by simply relying on pleadings; concrete evidence must be presented to counter the motion.

Rule 56(e) states that if a party does not adequately support or address factual assertions as required by Rule 56(c), the court may deem those facts undisputed for the motion or grant summary judgment if the evidence shows the movant is entitled to it. The nonmoving party must present specific facts demonstrating a genuine issue for trial, rather than merely suggesting doubt about material facts. In assessing a summary judgment motion, courts must view facts in the light most favorable to the nonmoving party and draw all reasonable inferences in their favor. The court's function is to determine the existence of a genuine issue of triable fact, not to weigh evidence or judge credibility.

The excerpt also outlines the contractual relationships between DirectBuy, Inc. and JDB Direct, LLC. DirectBuy is a franchisor with over 100 franchises selling memberships for wholesale shopping. On May 29, 2008, JDB entered into a Franchise Agreement with DirectBuy to operate a DirectBuy club in Orlando, Florida, obligating JDB to pay franchise and royalty fees, while DirectBuy could collect receivables and manage JDB’s merchandise account. Concurrently, JDB established a Financing Agreement with Beta Financing Company, Inc., assigning consumer financing contracts to Beta, which would collect payments and remit funds to JDB, subject to varying structures based on debt quality. Both agreements included provisions for set-offs.

The Franchise Agreement's set-off provision allows DirectBuy to apply any payments from JDB against JDB's past due debts, including royalties and contributions, regardless of JDB's designation. Similarly, the Financing Agreement grants Beta the right to apply any payments owed to JDB against its debts to Beta, DirectBuy, or their affiliates, including franchise fees and royalties, with this authority remaining effective after the agreement's termination.

On March 25, 2010, InfinaQuest Business Capital, LLC (IBC) filed a financing statement in Florida to perfect its security interests in receivables agreements with JDB, which granted IBC a floating security interest in JDB's tangible and intangible assets. JDB had also entered into additional receivables agreements with InfinaQuest but without a financing statement filed by InfinaQuest. At the time of these agreements, JDB owed DirectBuy $365,000, a figure that increased to over $1,000,000 by April 30, 2012. Following JDB's default on these agreements and its contracts with DirectBuy, InfinaQuest claims it is owed $602,217, plus interest and fees, after collecting approximately $400,000 from JDB.

InfinaQuest's lawsuit against the Defendants centers on the assertion that they wrongfully took funds that belonged to InfinaQuest under its perfected security interest. The Defendants counter that InfinaQuest lacks a perfected security interest and that any such interest would be subject to their set-off rights. The Court's analysis will focus on whether InfinaQuest's security interest is subordinate to the Defendants' contractual set-off rights.

Defendants assert that JDB could only assign interests in assets it fully owned, arguing that JDB's receivables were subject to DirectBuy's set-off rights, meaning JDB could not transfer what it did not possess. The dispute involves interpretations of specific sections of the Uniform Commercial Code (UCC), particularly regarding security priority and the concept of "account debtors." UCC § 9-822(a)(1) generally establishes that priority is determined by the order of filing, while UCC § 9-404 addresses the rights of assignees concerning defenses and claims against accounts. InfinaQuest argues that this section is inapplicable to their situation, claiming Defendants are not account debtors and InfinaQuest is not an assignee. 

The term "account debtor" is defined under UCC § 9-102(a)(3) as "a person obligated on an account." InfinaQuest contends that since Defendants owe nothing to JDB, UCC § 9-404 should not apply. However, the Franchise Agreement indicates that DirectBuy was responsible for collecting receivables and managing accounts, meaning they were obligated to pay JDB, thus qualifying as an account debtor. Supporting case law from the Sixth Circuit reinforces this interpretation, demonstrating that entities involved in set-off agreements can be considered account debtors. Consequently, Defendants' obligations under the Franchise Agreement affirm their status as account debtors in this context.

An account debtor under UCC § 9-404 typically owes money, but this is not an absolute requirement; the debtor can also be a net creditor if they are obligated on an account. UCC § 9-404(b) clarifies that a claim by an account debtor against an assignor can be asserted against an assignee to reduce the amount owed, implying that account debtors can indeed be net creditors. The defendants are classified as account debtors under this section. InfinaQuest argues it is not an 'assignee' under § 9-404, but case law indicates that there is no distinction between a party holding a security interest in accounts receivable and one who is an assignee. InfinaQuest acknowledges that a secured party is considered an assignee but claims this general rule does not apply in its situation. It contends that its security interest arose from receivables agreements made before any specific account receivable existed, suggesting its interest predates that of the defendants. InfinaQuest argues that under § 9-404(a), those with contractual set-off rights created after a perfected security interest should not take priority without notice or consent. However, the court finds that InfinaQuest did acquire an interest in existing accounts subject to a pre-existing set-off right. The case law cited reinforces that § 9-404(a) applies when a party grants a security interest without the other party's knowledge or consent, but the court disagrees that notice negates set-off rights. Instead, § 9-404(a) allows assignees to take their interest subject to all terms of the underlying contract, including any set-off provisions contained in the Franchise Agreement, thus affirming that InfinaQuest's security interest is subject to those provisions.

JDB’s interest in its account was restricted by DirectBuy’s contractual set-off, aligning with the common law maxim nemo dat quod non habet, which asserts that one cannot give what one does not possess. This principle is supported by UCC § 9-203(b)(2), which mandates that a security interest is enforceable only if the debtor has rights in the collateral or the authority to transfer those rights. As a result, summary judgment is justified regardless of the defendants' claims regarding InfinaQuest's failure to perfect its security interest. InfinaQuest's claims of conversion and tortious interference with contract are legally untenable. To establish criminal conversion, a plaintiff must show unauthorized control over another's property. Here, the money in question belonged to the defendants, who exercised control over it under their contractual set-off rights. Similarly, for tortious interference, a plaintiff must demonstrate that the interfering party lacked justification. In this case, the defendants acted justifiably due to the contractual provision. Consequently, the Court grants the defendants' motion for summary judgment, dismisses their counterclaims, and orders judgment in favor of the defendants against InfinaQuest. Both Beta and DirectBuy, as subsidiaries of United Consumers Club, Inc., can utilize the set-off provisions of the Franchise Agreement. Notice requirements under UCC § 9-404 are irrelevant here, as the matter concerns contractual terms rather than external defenses or claims.