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Callidus Capital Corporation v. FCA Group

United States District Court, E.D. Michigan, Southern Division

March 30, 2018




         Both parties have filed motions for summary judgment, (Dkt. # 69, 71), as well as supplemental briefing at the court's direction. (Dkt. # 76, 78.) The court having reviewed full briefing on both motions, concludes a hearing is unnecessary. See E.D. LR7.1(f)(2). For the reasons discussed herein, the court will grant in part and deny in part each motion for summary judgment.

         I. BACKGROUND

         Harvey Industries, LLC and Harvey Industries Die Casting, LLC (collectively, “Harvey”) was an automotive parts supplier to Defendant FCA Group (“FCA”), formerly known as Chrysler LLC. From 2011-2012 Harvey provided component parts to FCA pursuant to certain purchase orders (“POs”). (Dkt. # 77-4.) In addition to the parts, and pursuant to tooling purchase orders (“TPOs”) issued by FCA, Harvey obtained the tooling necessary to make the component parts. (Dkt. # 77-10.) The term “tooling” in the automotive industry is used to refer to specific tools, dies, molds, and similar items that are custom built and designed for use in the manufacture of specific production parts for specific customers. (Dkt. # 76, Pg. ID 2314.) The tooling at issue was expensive and required advance notice of orders to allow significant time to build it. (Dkt. # 76, Pg. ID 2315; Dkt. # 78, ID 3712.) Harvey purchased the materials for the tooling from third-party vendors. (Id.; Id. at 3713.) At the time, Harvey was the only supplier who possessed the tooling necessary to produce the parts FCA needed. (Id.; Dkt. # 78, Pg. ID 3713.) FCA alleges that under the POs, it was allowed to set off against Harvey's account, meaning that FCA could deduct any costs it incurred as a result of Harvey's failures to perform under the POs from the amount it owed Harvey under the account.

         In August of 2012, FCA became aware that Harvey was struggling financially. (Dkt. # 76, Pg. ID 2315; Id. at 3714.) FCA was concerned that Harvey would not be able to produce parts on time or at all, which would cause FCA to be unable to produce its products on time. To address its financial problems, Harvey obtained financing from Plaintiff Callidus Capital Corporation (“Callidus”) on November 7, 2012. (Id.; Dkt. # 78, Pg. ID 3715.) The financing agreement (“Loan Agreement”) was for a loan of $46 million dollars, which included a $16 million dollar line of credit. (Dkt. # 75-4.) The line of credit was secured by a lien on Harvey's assets, including its accounts receivable present and future. Callidus perfected its lien by filing a UCC financing statement with the State of Michigan on November 9, 2012. (Dkt. # 75-5.) The Loan Agreement was set to expire on November 7, 2013, but on May 30, 2013, Callidus extended the agreement until December 31, 2013. (Dkt. # 78, Pg. ID 3733 n 1.)

         A. The Launch Assistance Agreement

         Despite Callidus's loan, Harvey was not able to fulfill its part production commitments to FCA. In an effort to prevent a shutdown of FCA's production, FCA entered into a contract with Harvey on May 31, 2013 known as the Launch Assistance Agreement (“LAA”). (Dkt. # 77-2.) Under the LAA, FCA would assist Harvey in the production of the component parts by providing certain accommodations to Harvey from the effective date of the LAA, May 21, 2013, until one of three events occurred: (1) an event of default (“Event of Default”) by Harvey; (2) completion of a successful transition of the part production as defined in the LAA; or (3) Dec. 31, 2013. (Id.) Certain written financial requests from Harvey to FCA are considered Events of Default under the LAA. (Dkt. # 77-2, Pg. ID 2405.) Among the accommodations FCA was to provide to Harvey was a loan, which “was subordinate to the Callidus loan and would be forgiven if Harvey met certain performance requirements.” (Dkt. # 78, Pg. ID 3725.) Callidus alleges that FCA's damages or setoffs against Harvey that arose before the LAA were, pursuant to the LAA, subordinated to Callidus's loan. (Dkt. # 76, Pg. ID 2336.)

         Four areas of the LAA are particularly relevant to the present dispute.

         1. FCA's setoffs

         First, the LAA contains provisions regarding FCA's ability to set off damages Prior to entering the LAA, FCA had substantial damages against Harvey for Harvey's nonperformance under the POs. FCA also indicated that its damages would continue to grow and new damages were likely to arise during the course of the LAA. FCA claimed it was entitled to set off its damages against the money FCA owed to Harvey known as “the FCA receivables.” (Dkt. # 76, Pg. ID 2320; Dkt. # 78, 3723.) The LAA limited FCA's ability to set off damages against the receivables. The extent of these limitations is disputed by the parties.

         FCA argues the LAA prohibited it from setting off damages against accounts payable under the terms of the LAA and arising from the delivery of component parts owing as of the effective date of the LAA or during its Term. (Dkt. # 78, Pg. ID 3725.) In contrast, Callidus asserts that FCA was not permitted to set off any damages against the accounts of “the Term” of the LAA regardless of whether FCA deemed them “arisen” under the LAA.

         2. Notice to Callidus

         Second, the LAA identifies Callidus as a third-party beneficiary. (Dkt. # 77-2.) However, the LAA does not require Callidus to extend credit to Harvey or to forbear exercising its rights under its Loan Agreement with Harvey. The LAA requires FCA to give notice to Callidus before making any “Material Setoffs” or “Tooling Setoffs.” (Dkt # 77-2, Pg. ID 2392-2395.) The LAA requires Harvey or FCA to give Callidus notice in the event Harvey agrees to let FCA resource production to alternative suppliers before the occurrence of an Event of Default, or if FCA obtains parts from alternative suppliers. (Dkt # 77-2, Pg. ID 2397.) However, the LAA does not require FCA to give Callidus notice of the occurrence of an Event of Default. (Dkt. # 77-2, Pg. ID 2405.)

         3. Tooling Parts

         Third, the LAA has various provisions governing the possession and ownership of the tooling Harvey ordered, had built, and used to produce FCA parts. Callidus asserts that FCA “obtained the right to take physical possession of the tooling” under the LAA. (Dkt. # 76, Pg. ID 2319; Dkt. # 75-9, Pg. ID 2062.) In contrast, FCA asserts that it owned the tooling and had the right under the general terms of the POs to take possession of the tooling long before the LAA was executed. (Dkt. #78, Pg. ID 3712; Dkt. # 77-9, Pg. ID 2535.)

         4. Resourcing

         Fourth, the LAA prohibited FCA from resourcing production to alternative suppliers, absent an Event of a Default, during the Term of the LAA except upon written notice to Callidus. (Dkt. # 75-9, Pg. ID 2046.) However, the LAA allowed FCA to take actions to “prepare for a resourcing.” Id. Resourcing is when a production company obtains an alternative supplier to provide the same parts as those being actively produced by its current supplier in an effort to transition the source of its parts from its current supplier to the alternative supplier, eventually discontinuing the relationship with the current supplier.

         B. The Alleged “Event of Default”

         Harvey did not meet the performance requirements-Harvey shipped nonconforming parts, untimely parts, and eventually no parts at all. As a result, FCA expedited the shipping of the untimely parts to FCA production plants, ordered inspection and correction of nonconforming parts, and purchased alternative parts from European suppliers at higher costs. (Dkt. # 78, Pg. ID 3734.)

         During this time, both parties were aware that Harvey was planning to move production of several of the parts from its plant at Aiken, South Carolina, to its plant in Nuevo Laredo, Mexico. (Dkt. # 76, Pg. ID 2327.) In conjunction with a financial planner recruited by Callidus (“Farber Financial” a/k/a “Doeren Mayhew”), Harvey developed a plan for the transfer of production. The plan was known as “Project Spearhead.” (Dkt. # 76, Pg. ID 2327; Dkt. # 78, Pg. ID 3735.)

         On October 7, 2013, Harvey emailed to FCA a powerpoint presentation (the Presentation”) regarding Project Spearhead. (Dkt. # 76, Pg. ID 2328; Dkt. # 78, Pg. ID 3739.) Throughout the Presentation there are references to obtaining funding from FCA for Project Spearhead. (Dkt. # 77-16, Pg. ID 2759-64.) The record also contains internal communications between Callidus, Farber Financial, and Harvey regarding their intentions to have FCA fund the Project. (Dkt. # 77-64, Pg. ID 3210; Dkt. # 77-17, Pg. ID 2766.) The Presentation includes a footnote “related to Harvey's proposal that [FCA] contribute certain funds to complete the transfer to Mexico.” (Dkt. # 76, Pg. ID 2328; Dkt. # 77-16, Pg. ID 2764.) FCA considered this footnote to be a written financial request for FCA to help fund Project Spearhead. (Dkt. # 78, Pg. ID 3739.) FCA further concluded that said financial request constituted an Event of Default under the LAA and therefore, determined it was no longer bound by the setoff limitations of the LAA from October 7, 2013 onward. (Dkt. # 76, Pg. ID 2328.)

         C. FCA Cancels its POs to Harvey

         For six weeks following the alleged Event of Default, FCA continued to accept and use parts Harvey produced. Callidus continued to finance Harvey. (Dkt. # 76, Pg. ID 2333.) At some point during this time period, FCA concluded that Project Spearhead was not feasible and that Harvey would not be successful under it. Accordingly, FCA declined to agree to participate in the Project (Dkt. # 78, Pg. ID 3751), and on November 17, 2013, FCA cancelled its POs with Harvey. (Dkt. # 77-97; Dkt. # 76, Pg. ID 2335.)

         FCA demanded that Harvey surrender the tooling established under the original POs. Harvey refused to surrender it. FCA recovered some of the tooling in April of 2014 and the remainder in April 2016. (Dkt. # 78, Pg. 3753) FCA alleges that it sustained additional damages due to Harvey's refusal to surrender the tooling. (Id.) Callidus counters that FCA was allegedly financing the construction of replacement tooling by alternate suppliers long before Harvey's alleged default under the LAA and therefore, cannot claim it as damages for breach of the LAA. (Dkt. # 76, Pg. ID 2335-36.)

         On December 9, 2013, FCA informed Harvey and Callidus that it was not going to pay the outstanding receivables owed to Harvey because the debt was offset by the amount Harvey owed to FCA. (Dkt. # 76, Pg. ID 2333; Dkt. # 75-31.)

         D. Procedural History

         In light of these events, Callidus was successful in an action for receivership over Harvey. (Dkt. # 77-40.) Ultimately the receivership resulted in a sale of Harvey's remaining assets to Callidus. (Dkt. 77-104.) Callidus then filed this action against FCA alleging claims for a declaratory judgment, breach of contract, promissory estoppel, and unjust enrichment. (Dkt. # 16.) Callidus seeks damages in the amount FCA owed Harvey for production parts and tooling and a declaration that FCA may not set off against this amount.

         II. STANDARD

         Summary judgment is proper “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). “In deciding a motion for summary judgment, the court must view the evidence in the light most favorable to the non-moving party, drawing all reasonable inferences in that party's favor.” Sagan v. United States, 342 F.3d 493, 497 (6th Cir. 2003). The movant has the initial burden of showing the absence of a genuine dispute as to a material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). “[T]hat burden may be discharged by showing . . . that there is an absence of evidence to support the nonmoving party's case.” Bennett v. City of Eastpointe, 410 F.3d 810, 817 (6th Cir. 2005) (internal quotation marks omitted).

         The burden then shifts to the nonmovant, who must put forth enough evidence to show that there exists “a genuine issue for trial.” Horton v. Potter, 369 F.3d 906, 909 (6th Cir. 2004) (citation omitted). Summary judgment is not appropriate when “the evidence presents a sufficient disagreement to require submission to a jury.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 243 (1986). In evaluating a summary judgment motion, “the judge's function is not himself to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial . . . credibility judgments and weighing of the evidence are prohibited.” Moran v. Al Basit LLC, 788 F.3d 201, 204 (6th Cir. 2015) (internal quotation marks and citations omitted).


         In simplistic terms, the parties' dispute centers on the fact that FCA owes Harvey money for the parts Harvey produced. But FCA has incurred various damages due to Harvey's performance failures under the POs and the LAA. Whether and to what extent, FCA may set off its damages against the amount it owes to Harvey will in effect determine the amount, if any, Callidus will recoup on its loan to Harvey.

         A. Michigan Law

         This case is before the court under its diversity jurisdiction. Plaintiff is a Canadian corporation. Defendant is a Michigan limited liability company. As such, the court will apply Michigan law in its review of Plaintiff's state law claims.

         1. Contracts

         In Michigan, “[a] party asserting a breach of contract must establish by a preponderance of the evidence that (1) there was a contract (2) which the other party breached (3) thereby resulting in damages to the party claiming breach.” Miller-Davis Co. v. Ahrens Const., Inc., 848 N.W.2d 95, 104 (Mich. 2014). “A valid contract requires five elements: (1) parties competent to contract, (2) a proper subject matter, (3) legal consideration, (4) mutuality of agreement, and (5) mutuality of obligation.” Bank of Am., NA v. First Am. Title Ins. Co., 878 N.W.2d 816, 830 (Mich. 2016). “[T]he damages recoverable for breach of contract are those that arise naturally from the breach or those that were in the contemplation of the parties at the time the contract was made.” Kewin v. Massachusetts Mut. Life Ins. Co., 295 N.W.2d 50, 52-53 (Mich. 1980); see also Lawrence v. Will Darrah & Assocs., Inc., 516 N.W.2d 43, 48 (Mich. 1994).

         When interpreting a contract, the court “is to give effect to the parties' intention at the time they entered into the contract.” Innovation Ventures v. Liquid Mfg., 885 N.W.2d 861, 870 (Mich. 2016) (quoting Miller-Davis Co. v. Ahrens Const., Inc., 848 N.W.2d 95, 102 (Mich. 2014)). The court is to “determine the parties' intent by interpreting the language of the contract according to its plain and ordinary meaning.” Bank of Am., NA v. First Am. Title Ins. Co., 878 N.W.2d 816, 821 (Mich. 2016). This is the proper course because “the law presumes that the parties understand the import of a written contract and had the intention manifested by its terms.” Van Buren Charter Twp. v. Visteon Corp., 904 N.W.2d 192, 199 (Mich. Ct. App. 2017) (quoting Zurich Ins. Co. v. CCR & Co., 576 N.W.2d 392 (Mich. Ct. App. 1997). The court is to “avoid an interpretation that would render any portion of the contract nugatory.” Miller-Davis Co., 848 N.W.2d at 102. To do so, the court should “give effect to every word or phrase as far as practicable.” Barton-Spencer v. Farm Bureau Life Ins. Co. of Michigan, 892 N.W.2d 794, 798 (Mich. 2017) (quoting Klapp v. United Ins. Group Agency, Inc., 663 N.W.2d 447 (Mich. 2003).

         “Absent an ambiguity or internal inconsistency, contractual interpretation begins and ends with the actual words of a written agreement.” Universal Underwriters Ins. Co. v. Kneeland, 628 N.W.2d 491, 494 (Mich. 2001). “A provision is not ambiguous just because ‘reasonable minds can differ regarding' the meaning of the provision.” People v. Gardner, 753 N.W.2d 78, 85 (Mich. 2008) (quoting Lansing Mayor v. Pub. Service Comm., 680 N.W.2d 840 (Mich. 2004). “A contractual term is ambiguous on its face only if it is equally susceptible to more than a single meaning.” Barton-Spencer, 892 N.W.2d at 798. An unambiguous contract is to be enforced as written because it “reflects the parties' intent as a matter of law.” In re Egbert R. Smith Trust, 745 N.W.2d 754 (Mich. 2008).

         Additionally, Michigan has adopted by statute, in large part, the Uniform Commercial Code governing contracts for the sale of goods. Several provisions of the Michigan UCC are relevant to the parties' dispute and will be referenced as they become pertinent to the court's discussion.

         2. Declaratory Judgment

         Plaintiff requests a declaratory judgment that Defendant breached the parties' contract. The Declaratory Judgments Act allows this court “[i]n a case of actual controversy within its jurisdiction, … upon the filing of an appropriate pleading, [to] declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought. Any such declaration shall have the force and effect of a final judgment or decree and shall be reviewable as such.” 28 U.S.C.A. § 2201(a).

         3. Unjust Enrichment

         Under Michigan law, a claim for unjust enrichment is characterized as a claim for breach of a contract implied by law. “There are two kinds of implied contracts; one implied in fact and the other implied in law. The first does not exist, unless the minds of the parties meet, by reason of words or conduct. The second is quasi or constructive, and does not require a meeting of minds, but is imposed by fiction of law, to enable justice to be accomplished, even in [a] case [where] no contract was intended.” Cascaden v. Magryta, 225 N.W. 511, 512 (Mich. 1929); see also City of Detroit v. City of Highland Park, 39 N.W.2d 325, 334 (Mich. 1949) (noting that implied in law contracts are also known as constructive or quasi contracts).

         “Contracts implied in law are not true contracts, but instead are quasi-contracts implied by courts when a party retains money or benefits which in justice and equity belong to another.” PNC Bank, Nat. Ass'n v. Goyette Mech. Co., 88 F.Supp.3d 775, 784 (E.D. Mich. 2015) (emphasis added) (applying Michigan law) (internal quotation and citation omitted). “‘The essential elements of a quasi contractual obligation [one implied in law], upon which a recovery may be had, are the receipt of a benefit by a defendant from a plaintiff, which benefit it is inequitable that the defendant retain.'” Moll v. Wayne Cty., 278-79, 50 N.W.2d 881, 883 (Mich. 1952) (quoting Herrmann v. Gleason, 126 F.2d 936, 940 (6th Cir. 1942) (overruled in part on other grounds by Brown v. State, Dep't of Military Affairs, 191 N.W.2d 347, 351 (Mich. 1971)). A finding of an implied contract in law is a remedy “under the equitable doctrine of unjust enrichment . . . with an implied obligation to pay for benefits received to ensure that exact justice is obtained.” Michigan Educ. Employees Mut. Ins. Co. v. Morris, 596 N.W.2d 142, 151 (Mich. 1999) (internal citations and quotations omitted.) “Restitution may be imposed under the equitable theory of implied contract or quasi-contract to prevent the unjust enrichment of one party at the expense of another.” Hofmann v. Auto Club Ins. Ass'n, 413 N.W.2d 455, 457 (Mich. App. 1987) (citing 66 Am Jur 2d, Restitution & Implied Contracts, §§ 1-3, pp 942-946).

         B. Plaintiff's Motion for Summary Judgment

         Plaintiff asserts it is entitled to full or at least partial summary judgment for four reasons: (1) the LAA prohibits FCA from setting off its damages against the receivables it owes Harvey; (2) FCA failed to give the notice of breach required by Mich. Comp. Laws § 440.2607 and therefore cannot claim any damages that arose before it later gave notice on November 17, 2013; (3) FCA cannot claim the cost of the replacement tooling it ordered as setoff damages; and (4) Callidus's security interest is superior to FCA's setoff rights.

         1. FCA's ability to set off damages

         Both parties agree that the LAA prohibits FCA from setting off any damages against “accounts payable to [Harvey] arising from the delivery of Component Parts owing as of the Effective Date and arising during the Term . . . .” (Dkt. # 75-9, Pg. ID 2043.) (the LAA goes on to list certain exceptions to this command including Allowed Setoffs, Material Setoffs and Tooling Setoffs.) In other words, FCA can set off damages against only those accounts payable to Harvey arising after the Term concluded. Plaintiff asserts that FCA has improperly set off damages against the receivables it owes Harvey from the Term of the LAA. Defendant denies the allegation arguing that Plaintiff has incorrectly defined the Term of the LAA. The following provisions of the LAA referencing “the Term” are relevant to resolving the parties' dispute (“the Term” is emphasized throughout for convenience):

[FCA] shall provide the following accommodations to [Harvey] from the Effective Date (unless otherwise specified herein) to the earliest of (i) the occurrence of an Event of Default by Supplier hereunder; (ii) completion of a Successful Transition (as defined below); or (iii) December 31, 2013 (the “Term”):

(Dkt. # 75-9. Pg. ID 2041-42.) The accommodations that FCA shall provide to Harvey are then listed, in relevant part, as:

(a) [FCA] Loan. [FCA] asserts that, pursuant to the Purchase Orders, as of Effective Date, [FCA] has the right to setoff its accounts owed to [Harvey] for the expenditures, damages and claims identified in Schedule 1.a (collectively, the "Claim Categories"). [FCA] further asserts that the expenditures, damages and claims identified in the Claim Categories will be ongoing and will increase during the Term. The amount of the expenditures, damages and claims in the Claim Categories claimed to have been incurred by [FCA] in the aggregate at any time prior to or during the Term is referred to herein collectively as the "Chrysler Claim").
. . . No. payments of principal or interest concerning the [FCA] Loan shall be due during the Term or payable at any time thereafter unless [Callidus] has received Payment in Full. The balance of the [FCA] Loan, including accrued interest, shall be due and, if [Callidus] has received Payment in Full, payable immediately upon termination of the Term, unless the [FCA] Loan is forgiven pursuant to subsection 1 (b).
. . .
(c) Limitation of Setoffs. For the sole and exclusive benefit of [Callidus], [FCA] shall pay all accounts payable to [Harvey] arising from the delivery of Component Parts owing as of the Effective Date and arising during the Term in accordance with the applicable Purchase Order terms and without setoff, recoupment or other deduction of any kind, except for, in each case, to the extent, on the terms and subject to the limitations, and as defined, below: (a) Allowed Setoffs, (b) Material Setoffs and (c) Tooling Setoffs. (Id. at 2043.)
. . .
(e) Assistance. During the Term, [FCA] shall identify qualified individuals to be retained at the Aiken Facility and the NL Facility (the "Independent Contractors"), to assist [Harvey] in day to day operations related to production of Component Parts, including building a bank of Component Parts, engineering issues related to Component Parts, tooling and quality issues, and the transition of production to the NL Facility. (Id. at 2045.)
. . .
(g) Limitation on Resourcing. Absent an Event of Default, at any time prior to the end of the Term, [FCA] will not resource production under the Purchase Orders to an alternative supplier(s), except, upon written notice to [Callidus], for (i) resourcing to which [Harvey] consents; and (ii) service parts.

(Id. at 2046.)

         Events of Default are defined as,

(a) During the Term, [Harvey] causes a material interruption in production of any Component Part.
(b) [Harvey] terminates access and/or authority for any Independent Contractor, which termination or interruption [FCA] reasonably believes will affect the timely ...

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