Fleet Capital Corp. v. Yamaha Motor Corp., U.S.A.

Full title: FLEET CAPITAL CORPORATION, Plaintiff, v. YAMAHA MOTOR CORPORATION, U.S.A.…

Court: United States District Court, S.D. New York

Date published: Sep 25, 2002

01 Civ. 1047 (AJP) (S.D.N.Y. Sep. 25, 2002)

Opinion

01 Civ. 1047 (AJP)

September 25, 2002

OPINION ORDER

ANDREW J. PECK, United States Magistrate Judge.

Plaintiff Fleet Capital Corporation ("Fleet") brought this action against defendant Yamaha Motor Corporation, U.S.A. ("YMUS") for, inter alia conversion and breach of contract. Fleet holds a senior security interest in all of the assets of Bruedan Corporation ("Bruedan"), a distributor of golf cars under a distribution agreement with YMUS. Bruedan typically would (1) purchase new golf cars from a subsidiary of YMUS, Yamaha Motor Manufacturing Corporation of America ("YMMC"), (2) find golf courses willing to lease the golf cars from YMUS, and (3) sell the golf cars to YMUS, which leased the cars to the golf courses. In 2000, Bruedan's business problems left it heavily indebted to both YMMC and YMUS, and to Fleet. Just prior to its collapse, Bruedan sold over $4 million worth of new golf cars to YMUS. YMUS, however, "paid" Bruedan for these golf cars by: (1) using Bruedan's antecedent debt to YMUS and YMMC to offset the purchase price, and (2) paying the purchase price directly to YMMC in forgiveness of Bruedan's antecedent debt to YMMC.

Fleet asserts that its security interest in Bruedan's golf cars survived their sale to YMUS because Fleet's Security Agreement with Bruedan prohibited sales of inventory in satisfaction of antecedent debt. Fleet thus claims that YMUS converted the cars by refusing to return them to Fleet upon demand. In the alternative, Fleet claims contract rights as assignee of Bruedan's accounts receivable arising from the golf car sales to YMUS. The parties have cross-moved for partial summary judgment with respect to the conversion and contract claims.¹ (Dkt. Nos. 37, 42.)

1 Fleet's Amended Complaint also alleges that Bruedan's sales of golf cars to YMUS were in fact "disguised financing transactions," so that Fleet's security interest survived all such sales. (Dkt. No. 26: Am. Compl. ¶¶ 24-32.) YMUS's summary judgment motion on Fleet's "disguised financing" claims (Dkt. No. 56) is the subject of a separate Order.

The parties have consented to disposition of this action by a Magistrate Judge pursuant to 28 U.S.C. § 63 6(c). (Dkt. No. 31.)

YMMC could have foreclosed on the golf cars in Bruedan's possession pursuant to YMMC's security interest in those cars. Instead, YMUS purchased those golf cars from Bruedan but "paid" by offsetting Bruedan's antecedent debt to YMUS and YMCC. While the transactions are somewhat complicated (and hence this Opinion lengthy), the simple fact is that Yamaha tried to obtain "priority" for its Bruedan debt over Fleet, although Fleet was the senior secured lender. Thus, as a simple matter of equity, Fleet should prevail here.

As set forth more fully below, the Court: (1) grants (on consent) Fleet's motion to amend the complaint to add the Par Fore and Timbercreek transactions (see pages 18-19 below); (2) grants (on consent) Fleet's motion to dismiss YMUS's counterclaims (see page 19 n. 15 below); (3) grants YMUS summary judgment with respect to the Par Fore and Timbercreek transactions (see Point II. A below); (4) grants Fleet's summary judgment motion (and denies YMUS's cross-motion) with respect to Fleet's conversion claim, and awards Fleet conversion damages of $3,930,913 (see Point III below); and (5) grants Fleet's summary judgment motion (and denies YMUS's crossmotion) with respect to Fleet's contract claim, and awards Fleet damages of $3,770,385 for the Unpaid Golf Cars aspect of the contract claim (although Fleet can only have a single recovery on its conversion and contract claims), and $400,538 additional contract damages for the "Additional Obligations" offsets (SEE Point IV below).

FACTS

The Relationships Among Bruedan, YMUS and YMMC

In 1977, pursuant to a dealer agreement (the "Dealer Agreement"), YMUS appointed Bruedan as an authorized, non-exclusive dealer of Yamaha golf cars. (Dkt. No. 63: YMUS Opp. Br. at 2; YMUS Ex. 15; YMUS Fleet Opp. 56.1 Stmt. ¶ 2.)² "Until April 1, 1993, YMUS continued to be the distributor of golf cars to distributors such as Bruedan. As of April 1, 1993, YMUS assigned to YMMC all of its rights under the various dealer agreements and thereafter YMMC was in charge of the Yamaha golf car distribution business, with YMUS in charge of the golf car leasing business." (YMUS Ex. 14: Robinson 12/19/01 Aff. ¶ 4; Fleet Ex. 98.)

2 References to Fleet 56.1 Stmt. are to Dkt. No. 40, Fleet's 12/21/01 Rule 56.1 Stmt. on its summary judgment motion; references to YMUS Opp. 56.1 Stmt. are to Dkt. No. 60, YMUS's 1/25/02 Opposition 56.1 Stmt. on Fleet's summary judgment motion. In contrast, references to YMUS 56.1 Stmt. are to Dkt. No. 61, YMUS's 1/25/02 Rule 56.1 Stmt. on its cross-motion for summary judgment and references to Fleet Opp. 56.1 Stmt. are to Dkt. No. 65, Fleet's 2/7/02 Opposition to 56.1 Stmt. on YMUS's summary judgment cross-motion. The citations usually will be to a "pair" of one party's 56.1 statement and the opposing party's opposition 56.1 statement.

The standard business transaction since 1993 among Bruedan, YMUS, and YMMC can be summarized as follows:

• Bruedan would purchase new Yamaha golf cars from [YMMC], a YMUS subsidiary.

• In many instances, Bruedan would locate a golf course interested in leasing, as opposed to buying, Yamaha brand golf cars and Bruedan would negotiate basic lease terms, using YMUS lease documents.

• Bruedan would attempt to persuade the golf course not only to lease cars from YMUS but also to enter into golf car servicing contracts with Bruedan.

• Bruedan would present a proposed leasing transaction to YMUS for its review.

• If YMUS approved the transaction, YMUS would purchase the golf cars from Bruedan and enter into a lease with the golf course. [Bruedan usually would not be a party to the lease agreement.]

• Bruedan would agree to purchase the golf cars back [from YMUS] when the lease ended [or if the golf course defaulted on the lease] at an agreed upon residual value.

(Dkt. No. 63: YMUS Opp. Br. at 2 (fns. omitted); see Dkt. No. 41: Fleet S.J. Br. at 8-9; YMUS Ex. 14: Robinson 12/19/01 Aff. ¶ 6; YMUS Ex. 43: Robinson 1/15/02 Supp. Aff. ¶¶ 3-4; see also YMUS Ex. 42: Teele 1/15/02 Supp. Aff. ¶¶ 4-6; YMUS Ex. 56: Groves 1/18/02 Supp. Aff. ¶¶ 2-7.)³ Security Interests in Bruedan's Assets

3 Although Fleet's Amended Complaint alleges that the transactions between Bruedan and YMUS were disguised financing transactions (Dkt. No. 26: Am. Compl. ¶¶ 24-32), Fleet assumes for the purposes of this motion only that the transactions were sales. (Dkt. No. 41: Fleet S.J. Br. at 1.)

Prior to 1999, Bruedan financed its purchase of golf cars from YMMC through a "secured floor plan financing arrangement"⁴ provided by Deutsche Financial Services Corporation ("DFS"). (Fleet YMUS Opp. 56.1 Stmt. ¶ 7.) In order to obtain more flexible financing, on May 4, 1999 Bruedan entered into a Loan and Security Agreement with Fleet (the "Loan Agreement") in which Bruedan, as the borrower, granted Fleet, as the lender, a continuing security interest and lien upon, inter alia, Bruedan's golf car inventory, equipment, accounts and general intangibles, "whether now owned or existing or hereafter created, acquired or arising and wheresoever located." (Fleet Ex. 4 § 5.1; Dkt. No. 63: YMUS Opp. Br. at 21 ("YMUS does not deny that Bruedan assigned Fleet an interest in its account receivables and general intangibles and that, as assignee, Fleet possessed a security interest in those assets.")⁵ Fleet duly perfected its security interest granted in the Loan Agreement by filing U.C.C.-1 statements. (Fleet YMUS Opp. 56.1 Stmt. ¶ 5; Dkt. No. 38: McConnell 12/21/01 Aff. ¶ 6.)

4 A "floor plan" line of credit is typically employed to purchase and secure specific inventory assets, such as cars. See Black's Law Dictionary, (7th ed. 1999) ("Floor-plan financing" is a "loan that is secured by merchandise and paid off as the goods are sold. Usu[ally] such a loan is given by a manufacturer to a retailer or other dealer (as a car dealer).").

5 The parties to the Loan Agreement were Fleet, individually, and as administrative and collateral agent for the other financial institutions (collectively, the "Lenders"), and Bruedan Corporation, Mid-Atlantic Equipment Corp., Golf Cars of Florida, Inc., and Eastern Golf Car, Inc. (collectively, the "Borrowers"). (Fleet Ex. 4; Fleet YMUS Opp. 56.1 Stmt. ¶ 4.) For ease of reference, the Lenders will be referred to collectively as "Fleet" and the Borrowers will be referred to collectively as "Bruedan."
The Loan Agreement was modified by Amendment No. 1, dated August 5, 1999, and Amendment No. 2, dated October 1, 1999. (Dkt. No. 38: McConnell 12/21/01 Aff. ¶ 3 n. 3; Fleet Exs. 6, 8; Fleet YMUS Opp. 56.1 Stmt. ¶ 4.) The amendments are not relevant to these summary judgment motions.

Contemporaneously with the execution of the Fleet Loan Agreement, Fleet and DFS (on behalf of itself and as an agent for YMUS) entered into an Intercreditor Agreement in which Fleet granted DFS a priority security interest in Bruedan's assets. (Fleet Ex. 9; see Fleet YMUS Opp. 56.1 Stmt. ¶¶ 7-8; Dkt. No. 38: McConnell 12/21/01 Aff. ¶ 7.) However, by September 1999, Bruedan's loans from DFS were fully paid and the liens granted to DFS were terminated. (Fleet YMUS 56.1 Stmts. ¶ 10 see Dkt. No. 38: McConnell 12/21/01 Aff ¶ 8.)

Because Bruedan was purchasing golf cars from YMMC, on January 27, 2000, Bruedan granted YMMC a purchase money financing lien on the golf cars purchased from YMMC. (Fleet Ex. 13; Dkt. No. 38: McConnell 12/21/01 Aff. ¶ 8.) YMMC's purchase money interest, however, solely secured the cars while in Bruedan's inventory, and did not secure the "proceeds" from Bruedan's sales of those cars. (Fleet YMUS Opp. 56.1 Stmt. ¶ 47; Fleet Ex. 13 ¶ 1 ("The security interest and lien rights of Secured Party in and to the Collateral shall not include or cover in any manner whatsoever proceeds of the Collateral.").) Fleet and YMMC entered into an intercreditor agreement dated as of February 2, 2000 (the "YMMC Intercreditor Agreement") (Fleet Ex. 12; Fleet YMUS Opp. 56.1 Stmt. ¶ 12), in which YMMC took priority in Bruedan's inventory of golf cars purchased from YMMC for which Bruedan had not yet paid YMMC in full, and Fleet took priority in all of Bruedan's other assets, including the proceeds of Bruedan's sale of the golf cars purchased from YMMC. (Fleet Ex. 12.) The YMMC Intercreditor Agreement provides as follows:

Yamaha and [Bruedan] have entered into or may hereafter enter into certain agreements, pursuant to which Yamaha has, or will hereafter, extend credit to [Bruedan] ("Yamaha Loan") for the purpose of providing purchase money financing for [Bruedan's] acquisition of certain inventory.

[Fleet has] extended, and may hereafter extend, various secured credit accommodations to [Bruedan], which credit accommodations are, or will be, secured in part by security interests and liens granted by [Bruedan] to [Fleet] for the benefit of [Fleet], in and to all of [Bruedan's] tangible and intangible assets, both now existing and hereafter acquired (collectively, "Collateral"), including without limitation: (i) all new and used golf cars and other inventory and equipment now owned or hereafter acquired by [Bruedan]; (ii) all leases, chattel paper, general intangibles and contract rights now owned or hereafter acquired by [Bruedan]; and (iii) all proceeds of the assets described in (i) and (ii) above. . . .

The [Fleet] Loans include a revolving line of credit from [Fleet] to [Bruedan], with advances thereon based upon [Bruedan's] eligible inventory and eligible accounts receivable.

Yamaha and [Fleet] wish to establish the relative priorities of the security interests of Yamaha and [Fleet] in and to the Collateral and have entered into this Agreement for such purpose.

. . . .

1. Limitations on Yamaha Collateral and Security Interests. The security interests and lien rights of Yamaha shall be specifically limited to: (i) inventory and equipment financed by Yamaha (the "Yamaha Inventory"), now existing and hereafter acquired and wherever located, with respect to which Yamaha has provided purchase money financing to [Bruedan], and for which Yamaha has not received payment in full from [Bruedan], and (ii) all attachments, accessories, accessions, returns, repossessions, exchanges, substitutions and replacements to such Yamaha Inventory (collectively, "Yamaha Collateral"). The security interests and lien rights of Yamaha in and to the Yamaha Collateral shall not include or cover in any manner whatsoever proceeds of the Yamaha Collateral . The security interests and liens of Yamaha secure with respect to each specific item of Yamaha Collateral only the unpaid purchase price owed to Yamaha with respect to that specific item of Yamaha Collateral. Upon payment of the purchase price attributable to a specific item of Yamaha Collateral, the security interests and lien rights of Yamaha with respect to such item of Yamaha Collateral shall be deemed to be automatically terminated.

2. Relative Priorities: Remedies Against Yamaha Collateral.

(a) Priority of Security Interests of Yamaha In Yamaha Collateral. The security interests and liens of Yamaha in and to the Yamaha Collateral shall constitute senior and superior security interests and liens in and to the Yamaha Collateral, prior in right and entitlement to the security interests and liens of [Fleet] in and to the Yamaha Collateral. Conversely, [Fleet's] security interests and liens in and to the Yamaha Collateral shall constitute junior and inferior security interests and liens in and to the Yamaha Collateral, subject and subordinate to the security interests of Yamaha therein.

(b) Priority of Security Interests of [Fleet] In Other Collateral. Except as specifically stated to the contrary in paragraph 2(a) above, the security interests and liens of [Fleet] in and to the Collateral shall constitute senior and superior security interests and liens in and to all of the Collateral, prior in right and entitlement to the security interests, liens and other rights of Yamaha in and to any Collateral other than the Yamaha Collateral and Yamaha shall assert no security interest in such nonYamaha Collateral.

. . . .

(d) Priorities In Distributions. In the event of any distribution, division, or application (whether partial or complete, voluntary or involuntary, by operation of law or otherwise) of the proceeds of all or any part of the Collateral, such proceeds of each item of Collateral shall be deemed to be the property of [Fleet]. Should Yamaha receive any payment or distribution with respect to the proceeds of Collateral, Yamaha shall receive and hold any such payment or distribution to [Fleet] in exactly the same form received (except for the endorsement or assignment thereof as necessary) if practical, if not, in the cash equivalent, for application to [Bruedan's] obligations which were secured by such Collateral.

(e) Remedies Against Yamaha Collateral. As an express condition to Yamaha's exercise of any Secured Lender Remedies (as hereafter defined) with respect to any of the Yamaha Collateral, Yamaha shall provide [Fleet] a report detailing those items of Yamaha Collateral against which Yamaha intends to exercise such Secured Lender Remedies. For purposes hereof, the term "Secured Lender Remedies" means any action which results in the sale, foreclosure, realization upon, or a liquidation of any of the Yamaha Collateral.

(Fleet Ex. 12, emphasis added.)

Yamaha's Termination of the Bruedan Dealer Agreement, and Bruedan's 2000 Sales to YMUS in Satisfaction of Antecedent Debt

In the first half of 2000, YMMC and Bruedan agreed that for 900 golf cars, "[c]ontrary to prior practice, the cars did not have to be paid for immediately. Rather, they had to be paid for when sold or within 60 days, whichever came first." (YMUS Ex. 43: Robinson 1/15/02 Supp. Aff ¶ 8.) Based on this special arrangement, YMMC shipped 900 cars to Bruedan in June and July 2000. (Id.)

In September 2000, YMMC determined that Bruedan "was having financial difficulties and that it could not then pay for" the golf cars shipped from YMMC to Bruedan on 60-day terms. (YMUS Ex. 25: Teele 12/19/01 Aff. ¶ 6.) YMMC also learned that inter alia: "(1) out of the 900 golf cars, 847 had not been paid for and had an outstanding balance [to YMMC] of about $2.3 million; and (2) 277 of those cars, with unpaid invoices of over $800,000, could not be accounted for and essentially had "disappeared' and presumably had been sold by Bruedan; . . . (YMUS Ex. 42: Teele 1/15/02 Supp. Aff. ¶ 8; see YMUS Ex. 25: Teele 12/19/01 Aff. ¶ 6; YMUS Ex. 43: Robinson 1/15/02 Supp. Aff. ¶ 10.) YMMC deemed Bruedan's transfer of over 250 golf cars to unknown locations without paying for the cars to be a "breach of trust." (YMUS Ex. 25: Teele 12/19/01 Aff. ¶ 6.) With Bruedan's consent, YMMC seized 250 cars that Bruedan had purchased from YMMC and that were in Bruedan's possession and placed them in a secured warehouse. (Id.) "At Bruedan's request, YMMC agreed not to immediately enforce its rights under Bruedan's Dealer Agreement" with respect to the remainder of the cars purchased from YMMC. (Id.)

Yamaha⁶ and Bruedan had numerous discussions in September 2000 "regarding Bruedan's financial situation"; Yamaha "informed Bruedan . . . that it must quickly come current on its accounts with YMMC and YMUS." (YMUS Ex. 25: Teele 12/19/01 Aff. ¶¶ 6-7.) As noted above, in a typical transaction Bruedan would: (1) purchase new golf cars from YMMC, (2) find golf courses willing to lease the cars from YMUS, and (3) sell the cars to YMUS, which would then lease the cars to the golf courses. (YMUS Ex. 14: Robinson 12/19/01 Aff. ¶ 6; YMUS Ex. 43: Robinson 1/15/02 Supp. Aff. ¶¶ 3-4; see page 4 above.) Despite its financial problems, Bruedan proposed going forward with a number of pending sales to YMUS — i.e., Bruedan proposed selling cars to YMUS for which Bruedan had not yet paid YMMC. (YMUS Ex. 25: Teele 12/19/01 Aff. ¶ 7.) Yamaha balked, as YMMC's purchase money security interest only covered the cars while they were in Bruedan's inventory, and Bruedan also had huge outstanding debts to YMUS. Accordingly, Yamaha informed Bruedan that:

6 YMMC and YMUS had overlapping management — for example, James Robinson was both YMMC's Vice President and YMUS' Senior Vice President of Financial Services. (Fleet YMUS Opp. 56.1 Stmt. ¶ 13; Fleet Ex. 45: Robinson Dep. at 8, 35.) Where management was acting on behalf of both YMMC and YMUS, reference will simply be made to "Yamaha."

YMUS would not agree to or complete those pending transactions until and unless Bruedan paid YMMC for all outstanding balances. At that time, Bruedan was also behind on some obligations owed to YMUS. [Teele] further informed Bruedan that if Bruedan did not bring its accounts current, YMUS/YMMC could offset those amounts due with amounts payable from YMUS to Bruedan for any of the pending transactions, when and if those transactions were consummated. Bruedan indicated that it wanted the transactions with YMUS to be completed and was aware that those transactions would only be completed if YMMC invoices were paid, and since Bruedan was unable to pay the invoices, the invoices needed to be paid by offset.

(YMUS Ex. 25: Teele 12/19/01 Aff. ¶ 7; see YMUS Ex. 14: Robinson 12/19/01 Aff. ¶ 23; YMUS Fleet Opp. 56.1 Stmt. ¶ 50.)⁷ Similarly, in discussions with Peter Venter, Bruedan's CEO, on and after October 4, 2000, James Robinson stated that "YMUS would purchase cars from Bruedan on pending lease deals only if the YMMC invoices were paid as part of the process." (YMUS Ex. 43: Robinson 1/15/02 Supp. Aff. ¶ 11.) Bruedan CEO Venter "expressed no objection to YMUS ensuring that unpaid YMMC invoices were paid in connection with completion of any pending lease transactions." (Id.; see also YMUS Fleet Opp. 56.1 Stmt. ¶¶ 51, 55.)⁸

7 YMUS claims that "Bruedan informed Fleet of YMUS's offset notification no later than September 21, 2000." (Dkt. No. 63: YMUS Opp. Br. at 12.) YMUS cites, however, to the deposition of Fleet's John O'Kane, in which he testified that in a September 21, 2000 telephone call, Bruedan informed Fleet that Bruedan had returned over one hundred cars to Yamaha and that "Bruedan had been notified by Yamaha that Yamaha was going to offset receivables." (YMUS Ex. 3: O'Kane Dep. at 67-70.) As a result of that call, Fleet sought the assistance of counsel. (YMUS Ex. 3: O'Kane Dep. at 68.)

8 Moreover, YMUS asserts that under the parties' course of dealing or course of performance, Bruedan would sell golf cars to YMUS and YMUS would "pay" Bruedan for the cars by offsetting Bruedan's antecedent debt to YMUS. (Dkt. No. 63: YMUS Opp. Br. at 3-10.) Fleet largely denies having knowledge or information about these allegations. (YMUS Fleet Opp. 56.1 Stmt. ¶¶ 16-34.)

On October 11, 2000, YMMC notified Bruedan by letter that its golf car dealership was being terminated on 60 days' notice. (Fleet Ex. 17; YMUS Ex. 43: Robinson 1/15/02 Supp. Aff ¶ 12; see also YMUS Ex. 42: Teele 1/15/02 Supp. Aff ¶ 9; YMUS Ex. 14: Robinson 12/19/01 Aff ¶ 23.) Not coincidentally, from early October through mid-December 2000, YMUS purchased over $4 million in new golf cars from Bruedan which YMUS "paid" for by offsetting Bruedan's antecedent debt to YMUS and YMMC.⁹

9 YMUS denies that it delayed the termination of Bruedan's dealership in order to make these late purchases and thus recoup Bruedan's antecedent debt to Yamaha. (Dkt. No. 63: YMUS Opp. Br. at 13.)

The parties agree that Bruedan sold YMUS 929 new golf cars in 26 separate transactions (the "26 Transactions") at a gross retail price of $4,121,638.¹⁰ (Fleet YMUS Opp. 56.1 Stmt. ¶ 18.) The parties further agree that YMUS's offsets also erased $400,538 in various obligations running from YMUS to Bruedan, including parts credits and reserve items (the "Additional Obligations").¹¹ (Fleet YMUS Opp. 56.1 Stmt. ¶¶ 28, 37-38, 50.) YMUS's obligation to Bruedan — encompassing the 26 Transactions and the Additional Obligations — totaled $4,522,177 (the "Total Debt to Bruedan").¹²

10 This Opinion drops the cents from all dollar figures used herein, which is why certain amounts do not "foot."

11 As explained in greater detail below, YMUS asserts that the Additional Obligations were not really "owed" to Bruedan, although YMUS does not dispute that YMUS notified Bruedan by letter that YMUS had eliminated the Additional Obligations by offsetting them against Bruedan's antecedent debt to YMUS. (See Dkt. No. 63: YMUS Opp. Br. at 3 6-39; YMUS Opp. 56.1 Stmt. ¶¶ 37-38, 50.)

12 Fleet asserts that YMUS also agreed to purchase from Bruedan 37 cars in two transactions at a gross retail price of $109,776 (the "Par Fore" and "Timbercreek" Transactions). (Fleet 56.1 Stmt. ¶¶ 19-26.) See Point II.A, below.) By adding the Par Fore and Timbercreek Transactions to the "Total Debt to Bruedan," Fleet arrives at a total debt of $4,631,953. (Fleet 56.1 Stmt. ¶ 28.)

Against YMUS's $4,522,177 obligation to Bruedan, YMUS offset a total of $4,290,860 in Bruedan antecedent debt to YMUS or YMMC (the "Total Offsets"). The Total Offsets were memorialized in a series of YMUS letters to Bruedan dated October 10 through December 12, 2000 (Fleet Exs. 18-26), and are further documented in YMUS's so-called "Set off Binder" (Fleet Ex. 47). Once the offsets were completed as of December 12, 2000, YMUS admitted that it owed Bruedan the difference between the Total YMUS Debt and the Total Offsets, or $231,316. (Fleet Ex. 47 at 149; Fleet Ex. 44: Teele Dep. at 7-9; Fleet YMUS Opp. 56.1 Stmt. ¶ 31.) Thus, at a minimum, Fleet would be entitled to summary judgment for that amount.

YMUS "paid" Bruedan by offsetting Bruedan's antecedent debt to YMMC and YMUS. (YMUS Ex. 42: Teele 1/15/02 Supp. Aff. ¶ 9; Dkt. No. 63: YMUS Opp. Br. at 13.) In other words, Bruedan sold the cars to YMUS and invoiced YMUS for the retail price, but YMUS "paid" for the cars solely through offsets that satisfied Bruedan's antecedent debt to YMMC and YMUS. As detailed below, the Total Offsets can be divided into three categories: (1) $1,682,260 in Bruedan antecedent debt to YMUS (the "YMUS Debt"); (2) $1,550,368 in Bruedan antecedent debt to YMMC that YMMC assigned to YMUS (the "Assigned YMMC Debt"); and (3) $1,058,231 in Bruedan antecedent debt to YMMC that was not assigned, but rather settled via direct payment from YMUS to YMMC (the "Unassigned YMMC Debt"). (See Dkt. No. 78: 8/29/02 Stip., Ans. to Qs. 1 2, (a)-(d).) The Total YMUS Obligations to Bruedan and Total Offsets are summarized as follows:

Total YMUS Obligations to Bruedan:

Less: Total Offsets Against Obligations to Bruedan:

26 Transactions $4,121,638 Add'l Obligations 400,538 Total Obligations to Bruedan $4,522,177

(1) Total YMUS Debt $1,682,260 (2) Assigned YMMC Debt 1,550,368 (3) Unassigned YMMC Debt 1,058,231 Total Offsets $4,290,860

1. Offset of YMUS Debt

Bruedan's total antecedent debt to YMUS broke down as follows: $ 231,316

Past due lease payments 653,566 Recourse obligations ("residuals") 662,774 Service obligations 190,725 Parts owed by Bruedan 175,194 $1,682,260

(Dkt. No. 78: 8/29/02 Stip., p. 2 ¶ a.)

"The parties stipulate that from October 10 through December 12, 2000, YMUS offset the above antecedent YMUS 'debt' . . . against the following YMUS obligations to Bruedan:

Retail car price due Bruedan $1,328,506 Dealer Reserves due Bruedan 160,528 Suspense items due Bruedan 67,762 Parts credits due Bruedan 71,635 Service Reserve due Bruedan 53,828 $1,682,260"

(Dkt. No. 78: 8/29/02 Stip., p. 3 ¶ b.)

2. Offset of Assigned YMMC Debt

"The monies Bruedan "owed' to YMMC, which YMMC assigned to YMUS in October 2000, were $1,550,368, broken down as follows:

$1,548,368 Unpaid golf car invoices 2,000 Single golf car invoice

The $1,550,368 of Bruedan obligations to YMMC, which YMMC assigned to YMUS, were offset from the following amounts YMUS "owed' Bruedan:

Retail car price due Bruedan $1,503,583 Dealer Reserves due Bruedan 44,784 Parts credits due Bruedan 2,000 $1,550,368"

(Dkt. No. 78: 8/29/02 Stip., p. 4 ¶ c.)

3. Offset of Unassigned YMMC Debt

In the final offset, rather than YMMC assigning debt to YMUS, YMUS purchased cars from Bruedan and YMUS "paid" Bruedan by directing the proceeds of the sale to YMMC in satisfaction of Bruedan's antecedent debt to YMMC of $1,058,231. (Dkt. No. 78: 8/29/02 Stip., p. 4 ¶ d; see YMUS Ex. 42: Teele 1/15/02 Supp. Aff. ¶¶ 11-13.) The transaction — in which Bruedan sold 362 new cars to YMUS, and YMUS paid $1,058,231 to YMMC — was effectuated on December 6, 2000, and the agreement and transactions were memorialized by a December 6, 2000 letter to Bruedan. (YMUS Ex. 42: Teele 1/15/02 Supp. Aff. ¶ 13; Fleet Ex. 24; Fleet Ex. 47 at 127-42; Fleet YMUS Opp. 56.1 Stmt. ¶¶ 15, 45-48;YMUS Fleet Opp. 56.1 Stmt. ¶¶ 56-58.)¹³ Fleet's Demand Letter To YMUS, Fleet's Peaceful Possession of Bruedan's Assets, and the Stipulation and Order Conveying Cars from Fleet to YMUS

13 YMUS explains the transaction as follows: "Acting on behalf of YMMC and YMUS, [Teele] entered into an explicit oral agreement with Bruedan personnel" "that if YMUS bought the golf cars from Bruedan, the amounts that ordinarily would be paid to the dealer (Bruedan) would be allocated as follows: (a) first, to pay directly any YMMC unpaid invoices associated with the cars being leased; (b) second, to pay off any residual amounts due; and (c) third, to reflect any service reserve reductions." (YMUS Ex. 42: Teele 1/15/02 Supp. Aff. ¶¶ 12-13.) In other words, the parties orally agreed that YMMC would release the additional 362 cars to Bruedan "only if it was agreed that out of the ensuing dealer funding, YMMC's unpaid invoices, i.e., the invoices for the 362 cars (which totaled $1,058,231.04), would be paid directly by YMUS to YMMC from the dealer funding." (Id. ¶ 13.) The $1,058,231 was a direct payment made pursuant to agreement between YMUS and Bruedan to pay YMMC directly for cars purchased by Bruedan for sale to YMUS." (YMUS Opp. 56.1 Stmt. ¶ 15.)

On or about November 13, 2000, Fleet's counsel faxed a letter (the "November Demand Letter") to YMUS (with a copy to YMMC) notifying YMUS that its offsets were improper and demanding immediate payment to Fleet of amounts due Bruedan. (Fleet Ex. 30.) Because, however, Fleet was under the mistaken impression that YMUS had purchased "chattel paper" from Bruedan (Dkt. No. 38: McConnell 12/21/01 Aff ¶¶ 14, 16), Fleet demanded payment on the chattel paper, and no demand was expressly made for return of the cars "purchased" pursuant to the 26 Transactions:

[YMUS] has purported to set off funds in the aggregate amount of $2,179,267.56 (the "Setoff') due to [Bruedan] arising from [YMUS's] purchase of chattel paper of [Bruedan] (the "Chattel Paper"), against amounts allegedly due and owing to [YMUS] as assignee of [YMMC] and Yamaha Golf-Car Company (together, "Yamaha Manufacturing") from [Bruedan].

Please be advised that the Setoff is ineffective as against [Fleet] and that [YMUS] remains liable to pay the full amount of unpaid purchase price for the Chattel Paper to [Fleet], which aggregates $4,235,279.75 as of October 31, 2000 (the "Amount Due"). . . .

. . . .

Based upon the foregoing, [Fleet's] lien and/or security interest in the Chattel Paper continues and is superior to any interest of [YMUS] as purchaser. until such time as the Amount Due has been paid in full to [Fleet] without deduction of any kind for the alleged Setoffs and any other amount of antecedent debt, including those set forth in the Letters. Any attempt by [YMUS] to set off other amounts against amounts due to [Bruedan] for the purchase of Chattel Paper will similarly be without force or effect against [Fleet].

. . . .

Accordingly, demand is hereby made upon [YMUS] for the immediate payment to [Fleet] of the Amount Due. [YMUS's] failure to do so will result in [Fleet's] commencing legal proceedings against [YMUS] to collect the Amount Due. Nothing contained herein shall constitute a waiver of any contractual, legal or equitable right or remedy available to [Fleet] and Lenders under applicable law, all of which being hereby expressly reserved.

(Fleet Ex. 30, emphasis added.) YMUS did not respond to the November Demand Letter. (Fleet YMUS Opp. 56.1 Stmt. ¶ 58.)

Soon thereafter, due to the outstanding loan balance and the uncured defaults under the Loan Agreement, Bruedan surrendered its assets to Fleet "pursuant to a peaceful possession letter" effective as of November 30, 2000 (the "Peaceful Possession Letter"). (Dkt. No. 38: McConnell 12/21/01 Aff. ¶ 11; Fleet Ex. 31.) Pursuant to the Peaceful Possession Letter, Bruedan granted to Fleet "all rights of possession in and to the Collateral of [Bruedan] to be disposed of in accordance with the Loan Agreement and applicable law and for [Fleet] to credit the net proceeds resulting from any sale or other disposition to the account of [Bruedan] with you." (Fleet Ex. 31 at 1.)

On or about January 10, 2001, Fleet commenced suit in Supreme Court, New York County, "seeking, among other things, a declaration that Fleet had superior rights [in Bruedan's assets] to those of YMUS with respect to the Yamaha brand golf cars in Fleet's possession and to compel the payments due in the" car sale transactions. (Dkt. No. 41: Fleet S.J. Br. at 12.) On February 9, 2001, YMUS removed Fleet's lawsuit to this Court. (Dkt. No. 1: Notice of Removal.)

On January 30, 2001, YMUS notified Fleet that certain golf cars in Fleet's possession were, in fact, owned by YMUS and not subject to Fleet's security interest. (Fleet Ex. 32; see also Fleet Exs. 33-39.) On March 16, 2001, Fleet and YMUS entered into a Stipulation, "so ordered" by the Court (the "Bond Stipulation"), in which Fleet agreed to deliver 1135 golf cars to YMUS, without prejudice to Fleet's rights in this litigation, upon YMUS's filing of a $4 million bond. (Fleet Exs. 40, 42.) The Bond Stipulation divided the 1135 cars (the "Bonded Cars") into categories, including: (1) "New Yamaha Cars," which were the subject of leases or conditional sales agreements between YMUS and golf courses; and (2) 300 "Yamaha Tournament Fleet" golf cars that were "in Fleet's possession, subject to the master lease agreement" between YMUS and Bruedan. (Fleet Ex. 40.) The bond was set at 200% of the stipulated wholesale price of the New Yamaha Cars and the Yamaha Tournament Cars. (Id.) After YMUS filed its bond (Fleet Ex. 42), Fleet surrendered the golf cars to YMUS, at least 417 of which Bruedan originally sold to YMUS pursuant to the Unfunded Transactions at issue here. (Dkt. No. 38: McConnell 12/21/01 Aff. ¶ 18; Fleet Ex. 96; Dkt. No. 41: Fleet S.J. Br. at 15; YMUS Fleet Opp. 56.1 Stmt. ¶¶ 6-7 (Fleet "admits that as of November 30, 2000 Fleet was granted peaceful possession of [Bruedan's] assets, including at least 417 golf cars involved in the Unfunded Transactions that YMUS converted.").)

Fleet claims, and YMUS does not dispute, that as of November 13, 2000, Bruedan owed Fleet a total of $21,796,239, and that as of December 21, 2001, after Fleet had liquidated most of Bruedan's assets, Bruedan's debt to Fleet stood at $14,401,775. (Dkt. No. 38: McConnell 12/21/01 Aff.¶ 11.)

The Parties' Pleadings and Cross-Motions for Summary Judgment

After removal from state court to this Court, Fleet filed an Amended Complaint alleging claims sounding in contract and unjust enrichment (First, Third, and Fourth claims), conversion or replevin (Seventh claim), and "disguised financing" (Second claim), and requesting $4,130,031 in damages, a declaratory judgment (Fifth and Sixth claims), and injunctive relief (Eighth claim). (Dkt. No. 26: Am. Compl.; Fleet Ex. 1.) YMUS's third amended answer asserted counterclaims for conversion and tortious interference with contract and prospective business advantage. (Dkt. No. 25: 3d Am. Answer; Fleet Ex. 2.)

On December 21, 2001, after the close of discovery, Fleet moved for partial summary judgment on its conversion¹⁴ and contract claims, seeking $4,631,953 in damages plus interest (Dkt. No. 37: Fleet 12/21/01 Notice of Motion; Dkt. No. 41: Fleet S.J. Br. at 16-30.) Fleet also moved to dismiss YMUS's defenses and counterclaims. (Dkt. No. 41: Fleet S.J. Br. at 31-35.) Fleet further requested that the amended complaint be conformed to the evidence under Fed.R.Civ.P. 15(b) "to include as damages the Additional YMUS Obligations and amounts due in the" Par Fore and Timbercreek transactions between Bruedan and YMUS. (See Fleet S.J. Br. at 10 n. 3, 30-31; Dkt. No. 39: Newman 12/21/01 Aff ¶ 11 n. 3.) YMUS did not oppose the motion to amend the complaint. (Dkt. No. 63: YMUS Opp. Br. at 1.) Accordingly, the Court hereby grants Fleet's motion to amend the complaint.

14 Fleet's Amended Complaint contains one claim sounding in replevin and no claims sounding strictly in conversion. (Fleet Ex. 1: Seventh claim ¶¶ 47-50.) However, because YMUS treats Fleet's claim as one for conversion (Dkt. No. 63: YMUS Opp. Br. at 21), the Court will do so as well.

Simultaneously, YMUS moved for partial summary judgment dismissing Fleet's Disguised Financing claims (Dkt. No. 42: YMUS 12/21/01 Notice of Motion) — a motion that is the subject of a separate opinion by this Court. Subsequently, YMUS cross-moved for partial summary judgment on Fleet's conversion and contract claims. (Dkt. No. 56: YMUS 1/25/02 Notice of Cross Motion.) YMUS also withdrew its counterclaims, except for its claim to be reimbursed for the cost of the bond filed in March 2001 to obtain release of the golf cars. (Dkt. No. 63: YMUS Opp. Br. at 39.) Accordingly, the Court hereby grants Fleet's motion to dismiss YMUS' counterclaims.¹⁵

15 Because the Court herein grants Fleet summary judgment on its conversion and contract claims for over $4 million, the Court also grants Fleet summary judgment dismissing YMUS's counter-claim for the bond costs for posting its $4 million bond. The March 14, 2001 Bond supported YMUS's undertaking that it would pay to Fleet "such damages and costs not exceeding . . . $4,000,000 . . . that [Fleet] may sustain by reason of the transfer of possession of Yamaha brand golf cars described in the [Bond Stipulation], if the Court shall finally decide that [YMUS] was not entitled to possession of such Yamaha brand golf cars. . . ." (Fleet Ex. 42: 3/14/01 Bond.)

ANALYSIS

I. APPLICABLE LEGAL PRINCIPLES A. Summary Judgment Standard¹⁶

Rule 56(c) of the Federal Rules of Civil Procedure provides that summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to 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 a judgment as a matter of law." Fed.R.Civ.P. 5 6(c); see also, e.g., Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247, 106 S.Ct. 2505, 2509-10 (1986);Weinstock v. Columbia Univ., 224 F.3d 33, 41 (2d Cir. 2000); Lang v. Retirement Living Pub. Co., 949 F.2d 576, 580 (2d Cir. 1991).

The burden of showing that no genuine factual dispute exists rests on the party seeking summary judgment. See, e.g., Adickes v. S.H. Kress Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 1608 (1970); Chambers v. TRM Copy Ctrs. Corp., 43 F.3d 29, 36 (2d Cir. 1994); Gallo v. Prudential Residential Servs. Ltd. P'ship, 22 F.3d 1219, 1223 (2d Cir. 1994). The movant may discharge this burden by demonstrating to the Court that there is an absence of evidence to support the non-moving party's case on an issue on which the non-movant has the burden of proof. See, e.g., Celotex Corp. v. Catrett, 477 U.S. at 323, 106 S.Ct. at 2552-53.

To defeat a summary judgment motion, the non-moving party must do "more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 1356 (1986). Instead, the non-moving party must "set forth specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e); accord, e.g., Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. at 587, 106 S.Ct. at 1356; see also, e.g.,Weinstock v. Columbia Univ., 224 F.3d at 41 (at summary judgment, "[t]he time has come . . . "to put up or shut up'") (citations omitted).

In evaluating the record to determine whether there is a genuine issue as to any material fact, "[t]he evidence of the non-movant is to be believed, and all justifiable inferences are to be drawn in his favor."Anderson v. Liberty Lobby, 477 U.S. at 255, 106 S.Ct. at 2513; accord,e.g., Chambers v. TRM, 43 F.3d at 36; Gallo v. Prudential, 22 F.3d at 1223. The Court draws all inferences in favor of the non-moving party only after determining that such inferences are reasonable, considering all the evidence presented. See, e.g., Apex Oil Co. v. DiMauro, 822 F.2d 246, 252 (2d Cir.), cert. denied, 484 U.S. 977, 108 S.Ct. 489 (1987). "If, as to the issue on which summary judgment is sought, there is any evidence in the record from any source from which a reasonable inference could be drawn in favor of the nonmoving party, summary judgment is improper." Chambers v. TRM, 43 F.3d at 37.

In considering a motion for summary judgment, the Court is not to resolve contested issues of fact, but rather is to determine whether there exists any disputed issue of material fact. See, e.g., Donahue v. Windsor Locks Bd. of Fire Comm'rs, 834 F.2d 54, 58 (2d Cir. 1987); Knight v. United States Fire Ins. Co., 804 F.2d 9, 11 (2d Cir. 1986), cert. denied, 480 U.S. 932, 1907 S.Ct. 1570 (1987). To evaluate a fact's materiality, the substantive law determines which facts are critical and which facts are irrelevant. See, e.g., Anderson v. Liberty Lobby, 477 U.S. at 248, 106 S.Ct. at 2510. While "disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment[,] [f]actual disputes that are irrelevant or unnecessary will not be counted." Anderson v. Liberty Lobby, 477 U.S. at 248, 106 S.Ct. at 2510 (citations omitted); accord,e.g., Knight v. United States Fire Ins. Co., 804 F.2d at 11-12.

"The same standard applies where, as here, the parties filed cross-motions for summary judgment. . . . Moreover, even when both parties move for summary judgment, asserting the absence of any genuine issues of material fact, a court need not enter judgment for either party. Rather, each party's motion must be examined on its own merits, and in each case all reasonable inferences must be drawn against the party whose motion is under consideration." Morales v. Quintel Entint. Inc., 249 F.3d 115, 121 (2d Cir. 2001) (citation omitted); accord, e.g.,Barhold v. Rodriguez, 863 F.2d 233, 236 (2d Cir. 1988); Eastman Machine Co. v. United States, 841 F.2d 469, 473-74 (2d Cir. 1988). In this case, where both parties have cross-moved on the same claims, all factual inferences on a particular issue have been drawn in favor of the party against whom judgment is being entered.

B. Choice of Law

In this diversity action, "[t]he parties' briefs assume that New York law controls, and such 'implied consent . . . is sufficient to establish choice of law.'" Krumme v. WestPoint Stevens Inc., 238 F.3d 133, 138 (2d Cir. 2000) (quoting Tehran-Berkeley Civil Envtl. Eng'rs v. Tippetts-Abbett-McCarthy-Stratton, 888 F.2d 239, 242 (2d Cir. 1989)); see also, e.g., American Fuel Corp. v. Utah Energy Dev. Co., 122 F.3d 130, 134 (2d Cir. 1997) ("Where the parties have agreed to the application of the forum law, their consent concludes the choice of law inquiry."). Similarly, both parties assume that Article 9 of the New York Uniform Commercial Code ("U.C.C.") governs Fleet's and YMMC's security interests in the relevant collateral. (Dkt. No. 41: Fleet S.J. Br. at 16-29; Dkt. No. 63: YMUS Opp. Br. at 19-29.).¹⁷ C. A Secured Party's Conversion and Contract Remedies: Overview

17 See Bank Brussels Lambert v. Credit Lyonnais, 93 Civ. 6876, 2000 WL 174955 at *1 n. 4 (S.D.N.Y. Feb. 15, 2000) ("Citations to the Uniform Commercial Code ("U.C.C.") herein are to the U.C.C. as adopted in New York. The U.C.C. is intended "to make uniform the law among the various jurisdictions,' U.C.C. § 1-102, and the parties cite cases from jurisdictions other than New York, as does the Court.") Although Article 9 of the New York U.C.C. was substantially revised effective July 1, 2001, such revisions do not affect actions commenced prior to that date. N.Y. U.C.C. §§ 9-700-02. All references herein are to the 2000 version of the N.Y. U.C.C. For consistency in this Opinion, all references, including those in quotations, will be to U.C.C., not UCC.

In a nutshell, Fleet claims that: YMUS knew that its subsidiary, YMMC, intended to terminate Bruedan's dealership agreement, and that Bruedan owed over $4 million to YMMC and YMUS; YMMC delayed terminating Bruedan's dealership agreement long enough to permit YMUS to amass more debt to Bruedan than Bruedan owed to YMUS and YMMC; and YMUS "paid" for the Unpaid Golf Cars by setting off the purchase price with amounts Bruedan owed YMUS and YMMC, thus obtaining "priority" for Yamaha's debt over Fleet's prior secured debt, contrary to the terms of the YMMC Intercreditor Agreement. (See Dkt. No. 41: Fleet S.J. Br. at 2.)

A secured lender in Fleet's position typically has two potential claims against a purchaser of secured collateral. United States v. Handy Harman, 750 F.2d 777, 786 (9th Cir. 1984). The first claim involves the goods themselves: "In the case of inventory [i.e., goods] that already has been sold and is no longer in the debtor's possession, so long as the security interest still continues in the inventory, the secured party can maintain an action against the purchaser for repossession or conversion."United States v. Handy Harman, 750 F.2d at 786 (citing U.C.C. § 9-306). As discussed below, Fleet's damages sounding in conversion are limited to the fair market value of the allegedly converted Unpaid Golf Cars. Fleet's conversion claim is discussed in Point III below.

The second claim is independent of the first and sounds in contract: to the extent that the buyer (here, YMUS) has not paid the full price for the collateral, the secured lender, as the assignee of the account receivable created by the credit sale, may sue the buyer to collect the balance due on the account — subject, however, to the buyer's defenses to the extent allowed by U.C.C. § 9-318(1). See, e.g.,United States v. Handy Harman, 750 F.2d at 786 (discussing secured party's conversion and contract remedies); Standard Dyeing Finishing Co. v. Arma Textile Printers Corp., 85 Civ. 5399, 1991 WL 49782 at *7 (S.D.N.Y. Mar. 25, 1991) ("'When an unauthorized disposition of collateral has occurred, a secured party has numerous cumulative remedies at its disposal; it is not forced to elect a single remedy. . . . a creditor may pursue several remedies until the debt is satisfied.'") (citation omitted emphasis in original). As the Official Comment to the U.C.C. explains, "the secured party may repossess the collateral from [the transferee] or in an appropriate case maintain an action for conversion . . . The secured party may claim both proceeds and collateral, but may of course have only one satisfaction." N.Y. U.C.C. § 9-306, Comment 3. Since Fleet's secured interest pursuant to the Loan Agreement covers not only inventory but the proceeds of inventory sales including accounts receivable running in Bruedan's favor (Fleet Ex. 4, § 5.1), Fleet's contract claim includes the receivables on Unpaid Golf Cars as well as on $400,538 in YMUS "Additional Obligations" to Bruedan. (See Dkt. No. 41: Fleet S.J. Br. at 9.) Fleet's contract claim is discussed in Point IV below.

II. PRELIMINARY FACTUAL ISSUE: YMUS'S OBLIGATIONS TO BRUEDAN

The Court will first resolve the threshold issue for both the conversion and contract claims of the amount of YMUS's obligations to Bruedan.

It is undisputed that on October 12, 2000 and December 5, 2000, YMUS (through Yamaha Golf Car Leasing) issued Dealer Funding Notices/Requests by which YMUS entered into 26 separate "Unfunded Transactions" in which YMUS purchased from Bruedan 929 new cars at a gross purchase price of $4,121,638 (the "26 Transactions"). (Fleet YMUS Opp. 56.1 Stmt. ¶¶ 16-18, 27; Fleet Ex. 47 at 40-41, 79-80, 141-42; Fleet Ex. 49.) The parties dispute, however, whether YMUS was obligated to Bruedan pursuant to (A) the Pare Fore and Timbercreek Transactions; and (B) certain "Additional Obligations."

A. The Par Fore (Airways) and Timbercreek Transactions

Fleet asserts, and YMUS denies, that YMUS and Bruedan entered into two additional Unfunded Transactions in which YMUS purchased from Bruedan 37 golf cars at a gross purchase price of $109,776 (the "Par Fore" and "Timbercreek" Transactions). (Dkt. No. 39: Newman 12/21/01 Aff. ¶ 8; Fleet S.J. Br. at 10 n. 3; Fleet YMUS Opp. 56.1 Stmt. ¶¶ 19-28.) Adding the Par Fore and Timbercreek Transactions to the 26 Transactions, Fleet claims Bruedan sold a total of 966 cars to YMUS at a gross purchase price of $4,231,414. (Newman 12/21/01 Aff. ¶¶ 4, 6; Fleet YMUS Opp. 56.1 Stmt. ¶¶ 27-28.) A threshold issue is whether Bruedan and YMUS entered into enforceable sale contracts with respect to the Par Fore and Timbercreek Transactions.

1. Par Fore

Fleet claims that in August 2000, Bruedan sold 21 new golf cars to YMUS that YMUS leased to "Par Fore Golf, LLC d/b/a Airways Golf Course." (Dkt. No. 39: Newman 12/21/01 Aff¶¶ 8-9; Dkt. No. 41: Fleet S.J. Br. at 10 n. 3; Dkt. No. 66: Fleet S.J. Reply Br. at 15-16; Fleet Ex. 49 (N).) Because Bruedan duly invoiced YMUS and delivered the cars to the golf course, Fleet claims that YMUS owes Fleet the invoiced retail price of $83,563. (Fleet S.J. Reply Br. at 15.)

YMUS does not dispute that Bruedan invoiced YMUS for the 21 cars (Dkt. No. 63: YMUS Opp. Br. at 33; YMUS Ex. 53: Groves 1/14/02 Aff ¶ 3) or that Bruedan delivered the cars to the Par Fore golf course (Fleet Ex. 49 (N) at FCC09579; Fleet Ex. 101 at 1). Rather, YMUS has presented evidence that Bruedan invoiced YMUS in advance regarding "proposed" leases, which invoices became due and payable only upon YMUS's acceptance of the lease transaction. (YMUS Ex. 42: Teele 1/15/02 Supp. Aff. ¶ 17; Dkt. No. 63: YMUS Opp. Br. at 33.) YMUS has presented evidence that, although Bruedan delivered the cars to Par Fore and invoiced YMUS in advance, YMUS "did not accept the proposal and thus did not buy the cars in Fall 2000." (YMUS Opp. Br. at 33; YMUS Ex. 53: Groves 1/14/02 Aff. ¶ 3.) YMUS's affidavits are further supported by the fact that the Par Fore Master Lease Agreement and Guaranty of Net Book Value Agreement were not signed by YMUS. (Fleet Ex. 49(N) at FCCO9575-78, FCCO9571-72.) Thus, Fleet has not demonstrated that a sale to YMUS actually occurred.¹⁸

18 In its Reply, Fleet ignores YMUS's allegations regarding the August 2000 transactions, and instead asserts (in an unsworn statement) that in March 2001, just before the Bond Stipulation was executed, YMUS agreed to purchase the 21 Par Fore cars (which remained in Par Fore's possession) as follows: "[YMUS] will agree to pay at such time as paperwork can be concluded the wholesale price of cars ($2,775 per car) to Fleet. This is what Bruedan paid for the cars. In the meantime, we will post a bond for this amount." (Fleet Ex. 101; Dkt. No. 66: Fleet S.J. Reply Br. at 15-16; Fleet Opp. 56.1 Stmt. ¶ 59.) The language of the alleged March 2001 transaction is contingent (Fleet Ex. 101), and since Fleet raised the issue for the first time in its reply brief, YMUS had no opportunity to respond. The Court therefore will not consider Fleet's reply argument See Playboy Enterprises. Inc. v. Dumas, 960 F. Supp. 710, 720 n. 7 (S.D.N.Y. 1997) ("Arguments made for the first time in a reply brief need not be considered by a court."), aff'd, 159 F.3d 1347 (2d Cir. 1998).

YMUS is thus granted summary judgment dismissing Fleet's claims as to the Par Fore golf cars.

2. Timbercreek

Fleet asserts that YMUS owes Fleet $26,212 for sixteen used golf cars sold by Bruedan to YMUS that YMUS, in turn, sold to Timbercreek Golf Club under a conditional sale agreement. (Dkt. No. 66: Fleet Reply Br. at 15; Dkt. No. 39: Newman 12/21/01 Aff. ¶ 10.) Fleet asserts that YMUS never paid for the cars despite Bruedan's delivery of the cars to Timbercreek. (Newman 12/21/01 Aff. ¶ 10; Fleet Ex. 49 (BB).)

YMUS asserts, and Fleet does not dispute, that YMUS leased 12 of the 16 cars to Timbercreek Golf Club in 1996. (Dkt. No. 63: YMUS Opp. Br. at 33; YMUS Ex. 53: Groves 1/14/02 Aff. ¶ 5.) YMUS has presented evidence that when that lease expired in 2000, Bruedan breached its agreement by failing to repurchase the cars from YMUS by paying YMUS the net book value of the cars. (YMUS Opp. Br. at 33; Groves 1/14/02 Aff ¶ 6.) Since Bruedan failed to repurchase the cars, YMUS retained title. (Id.) After Bruedan's dealership agreement with YMUS terminated, YMUS entered into a new dealer agreement with Turf Products, which purchased the 12 cars from YMUS by paying YMUS the net book value of the cars. (Groves 1/14/02 Aff. ¶ 7.) Turf then "added" four other used cars and sold the 16 cars back to YMUS, which then entered into a conditional sale agreement with Timbercreek. (Id.)

Fleet does not assert that Bruedan obtained title to the cars by paying YMUS the net book value of the cars,¹⁹ and thus Fleet can claim neither conversion nor a contractual right to the cars. YMUS thus is granted summary judgment dismissing Fleet's claims as to the Timbercreek golf cars.

19 In Reply, Fleet ignores the question of whether Bruedan obtained title to the cars in 2000 by paying YMUS the net book value, and instead avers (for the first time and in an unsworn statement) that the parties' counsel entered into a separate oral agreement in 2001 for the sale of the Timbercreek cars. Specifically, Fleet argues that just prior to execution of the March 2001 Bond Stipulation, "YMUS' counsel advised Fleet's counsel that YMUS agreed to purchase the 16 Yamaha cars Fleet released to YMUS' representatives and delivered to the Timbercreek Golf Club." (Fleet 2/7/02 Opp. 56.1 Stmt. ¶ 60.) Fleet also references in its reply papers certain ambiguous email correspondence exchanged by the parties' counsel in March 2001. (Fleet Ex. 49BB.) Fleet's reliance on this second, oral agreement should have been raised in Fleet's opening papers, which otherwise contain a detailed account of the alleged Timbercreek transaction in 2000. (Fleet 56.1 Stmt. ¶¶ 23-26.) The Court therefore disregards Fleet's reply argument. See case cited in fn. 18 above.

B. "Additional Obligations" Owed by YMUS to Bruedan

YMUS employed Bruedan's antecedent debt to erase $400,538 in "Additional Obligations" running from YMUS to Bruedan. Specifically, as detailed in YMUS's Setoff Binder, YMUS offset $400,428 in Bruedan antecedent debt to YMUS against the following amounts due Bruedan: $73,635 in "parts credits," $67,762 in "suspense items," $53,828 in "service reserves," and $205,312 in "dealer reserves." (Dkt. No. 41: Fleet S.J. Br. at 10-11; Fleet 56.1 Stmt. ¶¶ 37-44, 50, 52-53, 56; Dkt. No. 63: YMUS Opp. Br. at 36.) YMUS now asserts, however, that for various reasons, YMUS never actually owed Bruedan the $400,538 in Additional Obligations. (Dkt. No. 63: YMUS Opp. Br. at 3 6-39.)

YMUS's disavowal of the $400,538 in Additional Obligations must be rejected. First, it is undisputed that in each of the Setoff Letters (Fleet Exs. 18-26), YMUS asserted that it was offsetting against amounts Bruedan owed to YMUS certain amounts "owed" by YMUS to Bruedan, including the $400,538 in Additional Obligations. (Fleet YMUS Opp. 56.1 Stmts. ¶¶ 37-38, 40, 42, 44, 49-50, 52-53, 56.) Second, once the offsets were completed as of December 12, 2000, YMUS admitted that it still owed Bruedan $231,316. (Fleet Ex. 47 at 149.) Indeed, in both deposition testimony and in its response to Fleet's Rule 56.1 Statement, YMUS admitted that it owed Bruedan $231,316 as of December 12, 2000 when all of the offsets had been effectuated. (Fleet Ex. 44: Teele 9/11/01 Tr. at 7-9; Dkt. No. 60: YMUS Opp. 56.1 Stmt. ¶ 31, citing Fleet Ex. 47 at 149.) Because the $400,538 in Additional Obligations were offset prior to December 12, 2000, YMUS's repeated admission that it owed $231,316 to Bruedan as of December 12, 2000 constituted an implicit admission that the $400,538 in Additional Obligations were, in fact, "owed" to Bruedan.

YMUS has cited no authority for the proposition that a party may offset what it characterizes as its own "obligations" — essentially admit to an account stated — and then later disavow those obligations when it appears that the offsets may be invalid. YMUS is bound by its repeated admissions; the Additional Obligations stand, and thus are included in Fleet's contract claim (Fleet's conversion claim goes only to the value of the 26 Transactions golf cars, not to any "Additional Obligations").

III. FLEET'S CONVERSION CLAIM

"Conversion is any unauthorized exercise of dominion or control over property by one who is not the owner of the property which interferes with and is in defiance of a superior possessory right of another in the property." Meese v. Miller, 79 A.D.2d 237, 242, 436 N.Y.S.2d 496, 500 (4th Dep't 1981.)²⁰ "[A] cause of action for conversion need not allege or prove a tortious taking or even that defendants acted in bad faith."Pokoik v. Gittens, 171 A.D.2d 470, 471, 567 N.Y.S.2d 49, 50 (1st Dep't 1991). "'[T]he fact that the wrongdoer may have acted under misapprehension or mistake is of no consequence, so long as there is such an exercise of dominion as actually causes some real detriment to the rights of the owner.'" Ruffalo v. Coffaro, No. CV-87-1523, 1989 WL 83397 at *3 (E.D.N.Y. July 11, 1989), aff'd, 898 F.2d 137 (2d Cir. 1990); see also, e.g., 2 New York Pattern Jury Instructions-Civil PJI 3:10, comment.

20 Accord, e.g., Schwartz v. Capital Liquidators, Inc., 984 F.2d 53, 54 (2d Cir. 1993); Middle East Banking Co. v. State Street Bank Int'l, 821 F.2d 897, 906 (2d Cir. 1987); Prudential Ins. Co. v. Hilton Hotels Corp., 95 Civ. 5575, 1996 WL 340002 at *10 (S.D.N.Y. June 19, 1996); In re Harvard Knitwear, Inc., 153 B.R. 617, 624 (Bankr. E.D.N.Y. 1993);Caballero v. Anselmo, 720 F. Supp. 1088, 1098 (S.D.N.Y. 1989); Galtieri v Kramer, 232 A.D.2d 369, 369, 648 N.Y.S.2d 144, 145 (2d Dep't 1996); Ahles v. Aztec Enter., Inc., 120 A.D.2d 903, 903-04, 502 N.Y.S.2d 821, 822 (3d Dep't), appeal denied, 68 N.Y.2d 611, 510 N.Y.S.2d 1025 (1986); Peters Griffin Woodward, Inc. v. WCSC, Inc., 88 A.D.2d 883, 883, 452 N.Y.S.2d 599, 600 (1st Dep't 1982); 2 New York Pattern Jury Instructions-Civil PJI 3:10-11 (West Cum. Supp. 2002).

Although U.C.C. Article 9 has no provision dealing with recovery for conversion of collateral subject to a security interest, "precode principles pertaining to such conversions should continue under Article 9, since the code preserves supplementary general principles of law and equity." 95 N.Y. Jur.2d Secured Transactions § 108 (1992) (citing N.Y. U.C.C. § 1-103). The Official Comment to the U.C.C. explains:

In most cases when a debtor makes an unauthorized disposition of collateral, the security interest, under prior law and under this Article, continues in the original collateral in the hands of the purchaser or other transferee. That is to say, since the transferee takes subject to the security interest, the secured party may repossess the collateral from him or in an appropriate case maintain an action for conversion. Subsection (2) [of§ 9-306] codifies this rule. The secured party may claim both proceeds and collateral, but may of course have only one satisfaction.

N.Y. U.C.C. 9-306, Comment 3.

It is undisputed that Fleet held a perfected security interest in Bruedan's inventory, accounts receivable, and general intangibles. (Fleet Ex. 4, § 5.1; see page 5 above.) Fleet's security interest in the Unpaid Golf Cars attached when Bruedan purchased the cars from YMMC and they became part of Bruedan's inventory. See, e.g., Associated Indus. v. Keystone General, Inc., 135 B.R. 275, 278-81 (Bankr. S.D. Ohio 1991) (secured party's interest in goods attached despite fact that debtor had title to the goods for only a few months and sold the goods back to the original seller).

Fleet argues that its Loan Agreement with Bruedan prohibited sales by offset, Fleet's security interest in the Unpaid Golf Cars survived Bruedan's "unauthorized" sales of the Unpaid Golf Cars to YMUS, and YMUS's receipt or retention of such cars constituted conversion under New York law. (Dkt. No. 41: Fleet S.J. Br. at 16-24; Dkt. No. 66: Fleet S.J. Reply Br. at 2-11.)

In response, YMUS offers the following defenses: (1) the sales to YMUS via offset were authorized by the Loan Agreement, and thus Fleet's security interest in the collateral did not survive the sales; (2) Fleet failed to declare a default under the Loan Agreement; (3) Fleet failed properly to make demand upon YMUS for return of the allegedly converted golf cars; (4) Fleet or Bruedan possessed many of the golf cars at the time of Fleet's alleged demand; and (5) even if Fleet's conversion claim had merit, Fleet's calculation of damages is overstated. (Dkt. No. 63: YMUS Opp. S.J. Br. at 16-20.)

A. Fleet's Security Interest in the Collateral Survived YMUS's Purchase of the Collateral Via Offset Since YMUS Was Not a Buyer in the Ordinary Course and the "Offset" Sales Were Prohibited By the Loan Agreement

"To recover judgment on a theory of conversion, the plaintiff must establish title, possession or right to possession, or some property interest in the subject matter which plaintiff claims the defendants converted to their own use and which provides the basis for the lawsuit."Banco Nacional de Cuba v. Sabbatino, 307 F.2d 845, 854 (2d Cir. 1962),cert. denied, 372 U.S. 905, 83 S.Ct. 717 (1963); see also cases cited at page 30 fn.20 above. The threshold issue is whether Fleet's security interest in Bruedan's inventory survived Bruedan's sale of the golf cars to YMUS; if the sale cut off Fleet's interest in the inventory, then Fleet's conversion claim fails.

Under U.C.C. Article 9, a security interest generally "continues in collateral, notwithstanding sale, exchange, or other disposition," § 9-306(2),²¹ and "is effective . . . against purchasers of the collateral," § 9-201. There are several exceptions to this general rule, two of which are relevant here. First, a buyer of collateral will take free of the secured party's interest if the sale "was authorized by the secured party in the security agreement or otherwise. . . ." N.Y. U.C.C. § 9-306(2); see Bank Brussels Lambert v. Credit Lyonnais, 93 Civ. 6876, 2000 WL 174955 at *4 (S.D.N.Y. Feb. 15, 2000). Second, "[a] buyer in ordinary course of business . . . takes free of a security interest created by his seller even though the security interest is perfected. . . ." N.Y. U.C.C. § 9-307(1);²² see 8 HawklandU.C.C. Series § 9-201:2 (2001) ("Section 9-307 protects buyers in ordinary course of business from the reach of the security agreement. . . ."). In other words, a buyer takes free of the security interest in inventory if the sale was either (1) authorized by the secured party, or (2) made to a buyer in the ordinary course of business.²³ See N.Y. U.C.C. § 9-307, Comment 2 ("The limitations which [§ 9-307 re BIOCB] imposes on the persons who may take free of a security interest apply of course only to unauthorized sales by the debtor. If the secured party has authorized the sale in the security agreement or otherwise, the buyer takes free without regard to the limitations of [§ 9-307]. Section 9-306 states the right of a secured party to the proceeds of a sale, authorized or unauthorized."); 8 Hawkland U.C.C. Series § 9-307:2 ("if the disposition was not authorized by the secured party in the security agreement or otherwise, subsection 9-306(2) provides that a security interest will continue in the collateral notwithstanding sale, exchange, or other disposition. In that case, the secured party will be able to look not only to identifiable proceeds but also to the collateral in the hands of the purchaser. Thus, when the disposition is not so authorized, the secured party may reclaim the goods from the purchaser unless the purchaser is able to find protection elsewhere in Article 9, as he or she may in subsection 9-307 (1).").

21 N.Y. U.C.C. § 9-306(2) provides:

§ 9-306. "Proceeds"; Secured Party's Rights on Disposition of Collateral

(2) Except where this Article otherwise provides, a security interest continues in collateral notwithstanding sale, exchange or other disposition thereof unless the disposition was authorized by the secured party in the security agreement or otherwise, and also continues in any identifiable proceeds including collections received by the debtor.

22 N.Y. U.C.C. § 9-307(1) provides:
§ 9-307. Protection of Buyers of Goods
(1) A buyer in ordinary course of business (subsection (9) of Section 1-201) other than a person buying farm products from a person engaged in farming operations takes free of a security interest created by his seller even though the security interest is perfected and even though the buyer knows of its existence.

23 The secured partys interest continues in the identifiable "proceeds" of the sale of the inventory regardless of whether the inventory sale was authorized, so long as the secured party did not waive or otherwise relinquish its interest in the proceeds. N.Y. U.C.C. § 306(2) ("a security interest . . . continues in any identifiable proceeds including collections received by the debtor"); Id., See In re Kerner Printing Co., 178 B.R. 363, 367 (Bankr. S.D.N.Y. 1995); 8 Hawkland U.C.C. Series § 9-306:3 ("Regardless of whether the secured party authorizes disposition of the collateral, the security interest continues in proceeds, unless the secured party also either relinquishes or waives the security interest in the proceeds."). However, Fleet's conversion claim is based solely on Bruedan's inventory, and not the proceeds resulting from the sale of that inventory.

Where "a security interest continues in collateral notwithstanding sale," N.Y. U.C.C. 9-306(2), "the secured creditor may maintain an action for conversion against the transferee." Lake Ontario Prod. Credit Ass'n v. Partnership of Grove, 138 A.D.2d 930, 931, 526 N.Y.S.2d 985, 985-86 (4th Dep't), appeal denied, 72 N.Y.2d 806, 532 N.Y.S.2d 847 (1988); accord, e.g., Hong Kong Shanghai Banking Corp. v. HFH USA Corp., 805 F. Supp. 133, 145 (W.D.N.Y. 1992); Standard Dyeing Finishing Co. v. Arma Textile Printers Corp., 85 Civ. 5399, 1991 WL 49782 at *7 (S.D.N.Y. Mar. 25, 1991) ("an action seeking damages for conversion is a proper remedy for the holder of a security interest . . . to bring against a third party . . . when the debtor . . . has made an unauthorized disposition of the collateral. . . ."); Bank of India v. Weg Myers. P.C. 257 A.D.2d 183, 191, 691 N.Y.S.2d 439, 445 (1st Dep't 1999) (defendant "converted the [insurance] proceeds in its possession to its own benefit and that of its client by knowingly exercising unauthorized dominion and control . . . over property in which the Bank, as a secured creditor, had a superior property interest.").

For the reasons discussed below, Fleet's security interest continued in the golf cars "purchased" by YMUS via offset because the Fleet Loan Agreement authorized sales by Bruedan only to buyers in the ordinary course of business and YMUS was not a buyer in the ordinary course of business. Thus, the fact that YMUS was not a buyer in the ordinary course means that (1) the sale was not authorized, and (2) YMUS cannot satisfy the U.C.C. exception that allows unauthorized sales to buyers in the ordinary course.

1. YMUS Was Not a "Buyer in Ordinary Course of Business"

YMUS does not contend that its offsets satisfied the U.C.C. definition of "buyer in ordinary course of business" ["BIOCB"] (Dkt. No. 63: YMUS Opp. Br. at 19-20), and thus effectively concedes the issue. Nevertheless, because the definition of "buyer in ordinary course" also determines the question of whether the sales were "authorized" under § 9-306, further analysis of the BIOCB issue is necessary.

The U.C.C. definition of "buyer in ordinary course of business" excludes any "transfer . . . in total or partial satisfaction of a money debt." N.Y. U.C.C. § 1-201(9). "By barring a purchaser who takes goods in satisfaction of a debt from ordinary course status, the code requires that a buyer in ordinary course of business give new value for the goods." United States v. Handy Harman, 750 F.2d 777, 781 (9th Cir. 1984). The rationale behind this new value requirement is as follows:

The new value requirement is central to the functioning of the code's system of inventory financing. Inventory is valuable to a merchant only if he can sell it to his customers. If the merchant's inventory financer could foreclose the security interest in the goods after they had been sold, prospective customers would be reluctant to buy the merchandise. Recognizing this, § 9307(1) facilitates sales of inventory by providing that the ordinary buyer of inventory takes the goods free of any security interest, even if he knows that they are subject to a security interest, so long as he does not have actual knowledge that the sale violates the terms of a security agreement. See § 9307(1) and U.C.C. § 9-307 official comment 2 (1977). At the same time, the rule of § 9307(1) is carefully limited to avoid unduly endangering the position of the inventory financer. By incorporating the definition of buyer in ordinary course of business, § 9307(1) permits a buyer of inventory to take the inventory free of a security interest only if he gives some new value in exchange for the inventory. The inventory financer is protected because his security interest in the inventory will attach to the new value, which constitutes "proceeds" of the inventory. See § 9306(2). If the rule were otherwise, and a transferee of inventory who received the goods in satisfaction of a pre-existing debt were permitted to keep them free of security interests, the effect would be to enable an unsecured creditor — the transferee — to bootstrap himself into priority over the secured creditor who looks to the inventory for security. The new value requirement should be strictly construed to preclude the frustration of the code's priority provisions.

United States v. Handy Harman, 750 F.2d at 781-82 (fn. omitted emphasis added).²⁴

24 Accord, e.g., Permian Petroleum Co. v. Petroleos Mexicanos, 934 F.2d 635, 649 (5th Cir. 1991) ("Under section 9.306(b), the inventory financer's security interest in the collateral survives the seller's disposition and also continues in any identifiable proceeds. Section 9.307(a) provides that a purchase cuts off the security interest in the collateral if the purchaser is a BIOCB. In order to be a BIOCB, section 1.201(9) requires the purchaser to give new value. If the purchaser is a BIOCB, the inventory financer is protected to the extent that the security interest continues in the new value as proceeds. If the purchaser gives no new value, section 9.306(b) does not cut off the security interest in the collateral, and the inventory financer continues to be protected by its security interest in the collateral which survives the purchase."); American Furniture Co. v. Extebank, 676 F. Supp. 455, 457 (E.D.N.Y. 1987) ("The new value requirement for buyer in the ordinary course status ensures that the secured party's interest in the collateral will be protected. . . . Were a buyer able to use a pre-existing debt to pay for goods subject to a security interest, he would be able, as an unsecured creditor, to place himself ahead of the secured party. This usurpation would frustrate the intention of Article 9 to protect secured creditors."); General Motors Acceptance Corp. v. O'Connell, No. 7006/90, 1992 WL 400919 (Sup.Ct. Erie Co. Sept. 16, 1992) ("The legislative intent in enacting § 1-201 U.C.C. was to prevent a buyer from using and the seller from accepting some intangible, unreachable method of payment; thus making the security interest worthless and unenforceable. Paying for vehicles by cancellation of an antecedent debt does not meet the obvious purpose of the statute. Were it otherwise, the Code's priority provisions would be meaningless."), aff'd, 198 A.D.2d 835, 605 N.Y.S.2d 1010 (4th Dep't 1993).

In purchasing the golf cars that are the subject of Fleet's conversion claim, YMUS asserted offsets based on antecedent debt due both YMUS and YMMC. Courts have consistently held that purchases offset by antecedent debt do not provide "new value," and thus do not qualify as purchases in the ordinary course of business under U.C.C. § 307(1) that would take free of a security interest See, e.g., American Furniture Co. v. Extebank, 676 F. Supp. at 457 (because buyer purchased goods, "not by giving new value, but by setting off a debt owed it," buyer lacked "buyer in the ordinary course status," and secured party's "interest in the collateral continued pursuant to U.C.C. section 9-306(2)."); General Motors Acceptance Corp. v. O'Connell, 1992 WL 400919; Sherman v. Roger Kresge, Inc., 67 Misc.2d 178, 180, 323 N.Y.S.2d 804, 806 (Sup.Ct. Broome Co. 1971) ("The definition of buyer in the ordinary course of business as found in [N.Y. U.C.C. § 1-201(9)] clearly excludes a transaction by which payment is credited in total or partial satisfaction of a money debt. By paying [debtor] with his check and accepting it back in such partial satisfaction of his account, the defendant[-buyer] may no longer maintain that he is a buyer in the ordinary course of business."),aff'd, 40 A.D.2d 766, 336 N.Y.S.2d 1015 (3d Dep't 1972); see also, e.g.,Amarillo Nat'l Bank v. Komatsu Zenoah Am., Inc., 991 F.2d 273, 276-77 (5th Cir. 1993) (debtor granted bank a security interest in its inventory and then returned goods to supplier in partial satisfaction of pre-existing debt; supplier guilty of conversion because not a buyer in the ordinary course); Permian Petroleum Co. v. Petroleos Mexicanos, 934 F.2d at 649 (defendant "exercised a pre-existing contract credit against its money obligation and gave no new value in exchange for the [goods] in which [secured party] held a perfected security interest. [Defendant] is not a BIOCB for purposes of this transaction because [it] did not engage in "buying" under section 1.201(9)."); Crocker Nat'l Bank v. Ideco Div. of Dresser Indust., Inc., 889 F.2d 1452, 1454 (5th Cir. 1989) (U.C.C. "Section 1.201(9) excludes from the definition of buyer in ordinary course of business' one who receives the property in total or partial satisfaction of a money debt.' [Converting party] received the engines in satisfaction of the money debt [debtor] owed, so this sale does not qualify."), cert. denied, 495 U.S. 919, 110 S.Ct. 1949 (1990); United States v. Handy Harman, 750 F.2d at 782 ("a buyer of goods on credit cannot qualify for ordinary course status under § 1201(9) if he subsequently offsets his promise to pay with a debt that was in existence at the time he bought the goods."); GMAC Bus. Credit. L.L.C. v. Ford Motor Co. (In re H.S.A. II. Inc.), 271 B.R. 534, 541 (Bankr. E.D. Mich. 2002) ("the reason that a security interest does not continue in collateral that is sold to a buyer in ordinary course is that the security interest continues in the proceeds, thus protecting the secured creditor. Here, there are no proceeds to which [secured party's] security interest can attach because no new value was given. The Court therefore concludes that a transfer of property to [buyer-transferee] with an offset by [buyer-transferee] of the purchase price against the amount [buyer-transferee] advanced to [debtor] is a transfer in satisfaction of a money debt."); Associated Indus. v. Keystone General. Inc., 135 B R. 275, 281 (Bankr. S.D. Ohio 1991) (bank's secured interest continued despite sale because, inter alia transfer was in satisfaction of antecedent debt, and thus buyer was not in the ordinary course under the U.C.C.).

2. The Offset Sales to YMUS Were Not "Authorized" By Fleet Under the Loan Agreement or Otherwise

As noted above, the U.C.C. provides that a buyer of inventory will take free of the secured party's interest if the sale "was authorized by the secured party in the security agreement or otherwise. . . ." N.Y. U.C.C. § 9-306(2). YMUS asserts that the Loan Agreement expressly authorized offsets. (Dkt. No. 63: YMUS Opp. Br. at 19-20.) Fleet, relying on the same provisions of the same Loan Agreement, argues that the Agreement expressly prohibited offsets. (Dkt. No. 41: Fleet S.J. Br. at 21-23; Dkt. No. 66: Fleet S.J. Reply Br. at 6-9.) The Court thus must interpret the Loan Agreement.

"Under New York law 'the initial interpretation of a contract is a matter of law for the court to decide.'" Alexander Alexander Servs., Inc. v. These Certain Underwriters at Lloyd's, 136 F.3d 82, 86 (2d Cir. 1998). "Included in this initial interpretation is the threshold question of whether the terms of the contract are ambiguous." Id.;accord, e.g., Cable Sci. Corp. v. Rochdale Vill., Inc., 920 F.2d 147, 151 (2d Cir. 1990). "It is only where the language and the inferences to be drawn from it are unambiguous that a district court may construe the contract as a matter of law and grant summary judgment accordingly."Cable Sci. Corp. v. Rochdale Vill., Inc., 920 F.2d at 151 (emphasis in original). "An ambiguity exists where the terms of a contract could suggest "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.'" Alexander Alexander Servs., Inc. v. These Certain Underwriters at Lloyd's, 136 F.3d at 86 (quoting Lightfoot v. Union Carbide Corp., 110 F.3d 898, 906 (2d Cir. 1997)); accord, e.g.,, Brass v. American Film Tech., Inc., 987 F.2d 142, 149 (2d Cir. 1993). "Straining a contract's language beyond its reasonable and ordinary meaning does not create an ambiguity. Nor may an ambiguity be found where the contract has a definite meaning, and where no reasonable basis exists for a difference of opinion about that meaning." Brass v. American Film Tech., Inc., 987 F.2d at 149 (citation omitted).

The Loan Agreement between Fleet and Bruedan provided that Bruedan would not "[s]ell, lease or otherwise dispose of any of . . . its Properties, . . . to or in favor of any Person, except (i) sales and leases of Inventory . . . in the ordinary course of business. . . ." (Fleet Ex. 4, § 8.2.9.) The Loan Agreement thus prohibits sales other than sales "in the ordinary course of business."

Although the Loan Agreement itself does not define either "sale" or "sale in the ordinary course of business," the Appendix to the Agreement provides that "All other terms contained in the Agreement shall have, when the context so indicates, the meanings provided for by the Code to the extent the same are used or defined therein." (Fleet Ex. 4, App. at 21.) The Agreement defines "Code" as "the Uniform Commercial Code as adopted and in force in the State of New York, as from time to time in effect." (Fleet Ex. 4, App. at 5.)

While the U.C.C. does not define "sale in the ordinary course of business," it does define the phrase "buyer in ordinary course of business." N.Y. U.C.C. § 1-201(9). Given that the U.C.C. defines a "sale" as "the passing of title from the seller to the buyer" for a price, N.Y. U.C.C. § 9-105(1) (incorporating U.C.C. § 2-106 (1)), it is reasonable to conclude that the Loan Agreement's use of the phrase "sale . . . in the ordinary course of business" incorporated by reference the U.C.C.'s definition of "buyer in ordinary course of business."

Other courts have followed this approach:

The security agreement between [debtor] and the [secured party] authorized [debtor] to "sell the Inventory in the ordinary course of business." . . . Because the security agreement uses the code terms "ordinary course of business," we conclude that the security agreement's authorization to sell the collateral has the same effect as [U.C.C.] § 9307(1), permitting a buyer in ordinary course of business to take the collateral free of all security interests created by the seller. Therefore we do not separately consider whether the sale to [defendant-buyer] complies with the authorization in the security agreement, but turn directly to the question whether it falls within § 9307(1).

United States v. Handy Harman, 750 F.2d 777, 781 (9th Cir. 1984) (fn. omitted); accord Kinetics Tech. Int'l. Corp. v. Fourth Nat. Bank, 705 F.2d 396, 400 n. 5 (10th Cir. 1983) (provision in the Bank's security agreement that the debtor "'may sell its inventory in the ordinary course of business' . . . is identical to [U.C.C.] § 9-307 which provides that a "buyer in the ordinary course of business' takes free of a third party's security interest in the goods."); Central Fin. Loan Corp. v. Bank of Illinois, 149 Ill. App.3d 724, 728, 500 N.E.2d 1066, 1069 (Ill.App. 4 Dist. 1986) ("The questions of whether a sale is made "in the ordinary course of business' and whether it is made to a buyer "in the ordinary course of business' are, at least, closely related," referencing U.C.C. definition of BIOCB in § 1-201(9)), appeal denied, 113 Ill.2d 572, 505 N.E.2d 351 (1987); see also Permian Petroleum Co. v. Petroleos Mexicanos, 934 F.2d 635, 651 (5th Cir. 1991) ("In the context of this loan agreement, the word 'sold' reasonably implicates 'buying,' which, under section 1.201(9), does not include a transfer in satisfaction of a pre-existing money debt. 1[S]old' reasonably encompasses only exchanges for new value, not this disposition.").

As noted above, the U.C.C. defines "buyer in ordinary course of business" to exclude any "transfer . . . in total or partial satisfaction of a money debt." N.Y. U.C.C. § 1-201(9); see cases cited at Point III.A.1 above. Accordingly, the Loan Agreement, in prohibiting sales outside "the ordinary course of business," prohibited sales "in total or partial satisfaction of a money debt," such as sales based on offsets. YMUS's purchases from Bruedan based on offsets therefore were not "authorized," and Fleet retained a continuing security interest in the collateral sold. N.Y. U.C.C. § 9-306(2).

YMUS contends, not that the Loan Agreement contained ambiguities, but that the Agreement's "ordinary course of business" language actually authorized the offset sales in question. (Dkt. No. 63: YMUS Opp. Br. at 19-20.) In YMUS's view, because the Agreement referred to "sales" in the ordinary course, while the U.C.C. defines only "buyers" in the ordinary course, the Agreement did not incorporate the U.C.C.'s definition, and the Agreement did not limit authorized sales to U.C.C. "buyers in the ordinary course of business." (Id.) Instead, according to YMUS, the Agreement "authorize[d] any sale that is within the ordinary course of Bruedan's business" as evidenced by Bruedan's actual business practices. (Id. at 20.) Because, according to YMUS, it was the ordinary course of Bruedan's business to allow YMUS and other purchasers to take offsets on sales, the offsets taken in 2000 were "authorized" under the Loan Agreement and YMUS therefore took the inventory free of Fleet's security interest. (Id.)

The Loan Agreement devotes 21 pages to defining virtually every term employed in the Agreement (Fleet Ex. 4, App. A), and then references the U.C.C. to cover "all other terms" (Id. at 21). It defies logic and common sense to argue that the Loan Agreement drafters, rather than referencing the widely-known U.C.C. definition of "buyer in ordinary course," left this key term undefined. Rather than the U.C.C.'s BIOCB definition, which contains objective safeguards to protect the secured creditor from diminution of collateral (such as the prohibition against sales based on antecedent debt), YMUS would relegate Fleet to a virtually meaningless definition that would allow Bruedan to make whatever sales it ordinarily made — effectively stripping the teeth from the Loan Agreement's sales limitation. The Loan Agreement is not ambiguous and the Court finds YMUS's interpretation of it strained and illogical.

Moreover, for the plain language of the Loan Agreement to be modified by the parties' conduct, YMUS cannot merely point to Bruedan's business relations with its customers, such as Bruedan's allegedly regular granting of offsets to YMUS, without regard to whether or not Fleet knew of and authorized the practice. Rather, YMUS must show that the course of dealing or course of performance between Fleet and Bruedan impliedly modified or supplemented the Loan Agreement's prohibition against sales other than in the ordinary course of business, i.e., permiting only sales for new value. See N.Y. U.C.C. § 9-306(2) (buyer of inventory takes free of secured party's interest if the sale "was authorized by the secured party in the security agreement or otherwise. . . .") (emphasis added); C H Farm Serv. Co. v. Farmers Sav. Bank, 449 N.W.2d 866, 871-73 (Iowa 1989) ("we have recognized that the "or otherwise' language in [U.C.C. § 9-306(2)] includes authorization implied from a prior course of dealing between the secured party and the debtor"; secured party "had knowledge of, and acquiesced in, a course of dealing between itself and [debtor] contrary to the terms of the security agreement between them," thus waiving the term); Long Island Trust Co. v. Porta Aluminum Corp., 44A.D.2d 118, 125-26, 354 N.Y.S.2d 134, 142 (2d Dep't 1974); Hempstead Bank v. Andy's Car Rental Sys., Inc., 35 A.D.2d 35, 39, 312 N.Y.S.2d 317, 321 (2d Dep't 1970).²⁵

25 See also Kunststoffwerk Alfred Huber v. R. J. Dick. Inc., 621 F.2d 560, 564 * n. 7 (3d Cir. 1980) (burden of proving course of dealing is placed on party who benefits); J.B.I. Indus., Inc. v. Suchde, 99 Civ. 12435, 2000 WL 1174997 at *7 n. 9 (S.D.N.Y. Aug. 17, 2000) (party asserting course of dealing bears burden of proof); 1 White Summers, Uniform Commercial Code § 3-3 ("courts are likely to impose the burden of proof on the party who seeks to benefit from evidence of course of dealing, trade usage, or course of performance").

According to YMUS, Fleet knew prior to entering into the Loan Agreement that "[i]t was standard practice, when Bruedan sold cars to YMUS, for YMUS to pay part of the invoice amount to DFS, to pay off amounts owed to DFS by Bruedan." (Dkt. No. 63: YMUS Opp. Br. at 20.) Therefore, according to YMUS, "when Fleet authorized Bruedan [in the Loan Agreement] to make sales 'in the ordinary course of [its] business,' it knew that such sales involved offsets." (Id.) YMUS thus seeks to contradict an unambiguous term of the parties' contract based on the parties' alleged understanding at the time of the contract — but it cannot do so as a matter of law.²⁶

26 See. e.g., Lake Ontario Prod. Credit Ass'n v. Partnership of Grove, 138 A.D.2d 930, 931, 526 N.Y.S.2d 985, 986 (4th Dep't) ("It is questionable that plaintiffs acquiescence in prior sales, even if it established a course of dealing between the parties, could vary or waive an express no sale' restriction in the security agreement"), appeal denied, 72 N.Y.2d 806, 532 N.Y.S.2d 847 (1988); Associated Metals Minerals Corp. v. Sharon Steel Corp., 590 F. Supp. 18, 24-25 (S.D.N.Y.) (where contract expressly required payment within 15 days after delivery, no contradictory course of dealing could be given effect), aff'd 742 F.2d 1431 (2d Cir. 1983); 1 Hawkland U.C.C. Series § 2-202:3 (2001) ("Usage of trade and course of dealing involve implied agreements that are made prior to, or contemporaneously with, the written contract, and, therefore, are not permitted to contradict it. Course of performance, however, occurs subsequent to the written contract, and, therefore, may contradict it.").

In any event, YMUS compares apples and oranges. Like YMMC, DFS had a purchase money interest in the specific Bruedan inventory that it financed. Unlike YMMC, however, DFS's interest in the inventory survived the sale of the inventory and extended to the "proceeds". (Compare Fleet Ex. 9 ¶ 1 with Fleet Ex. 12 ¶ 1.) DFS thus had every right to insist on being directly paid a portion of the sales proceeds of the inventory it financed. Since Fleet's security interest in the DFS inventory and accounts receivable was junior to DFS's, Fleet's failure to object to the DFS offsets did not "waive" the later Fleet/Bruedan Loan Agreement's prohibition on offsets, where Fleet had a senior security interest in Bruedan's accounts receivable.

In support of its argument that Fleet knew of and accepted the offsets, YMUS also claims that "Bruedan informed Fleet of YMUS's offset notification no later than September 21, 2000," citing the deposition testimony of Fleet's John O'Kane that in a September 21, 2000 telephone call, Bruedan informed Fleet that Bruedan had returned over one hundred cars to Yamaha and that "Bruedan had been notified by Yamaha that Yamaha was going to offset receivables." (Dkt. No. 63: YMUS Opp. Br. at 12, citing YMUS Ex. 3: O'Kane Tr. at 67-70.) While this proves that Fleet learned from Bruedan that YMUS intended to pay for golf cars by offsetting antecedent debt, it does not prove that Fleet implicitly authorized the offset sales. Indeed, the O'Kane deposition testimony made clear that Fleet's reaction to this call was to seek the advice of counsel (id. at 68) and, after YMUS sent copies of the October offset letters to Fleet (Fleet Exs. 18-23), Fleet sent YMUS the November 13, 2000 Demand Letter stating that offset sales were improper. (Fleet Ex. 30.)

In short, the Loan Agreement prohibits offset sales, and YMUS was not a buyer in the ordinary course of business.²⁷ This Court therefore holds that Fleet's security interest continued in the Bruedan inventory sold to YMUS in satisfaction of antecedent debts.

27 As Professors White and Summers have stated:

The golden rule of Article 9 is stated in 9-201: Except as otherwise provided by this Act a security agreement is effective according to its terms between the parties, against purchasers of the collateral and against creditors. . . . That idea is reiterated in 9-306(2). . . . Thus, in the inevitable conflicts which arise between two innocent parties, the one a perfected secured creditor who has not authorized its debtor to sell and the other a subsequent buyer from the debtor, the perfected secured creditor is usually the winner.

4 White Summers, Uniform Commercial Code § 33-12 (4th ed.).

B. Fleet Had an Immediate Superior Right of Possession to the Golf Cars

In order to make out a prima facie case of conversion, Fleet must prove that inter alia, it had "'an immediate superior right of possession to'" the converted golf cars. Wombles Charters, Inc. v. Orix Credit Alliance, Inc., 97 Civ. 6186, 1999 WL 498224 at *3 (S.D.N.Y. July 14, 1999) (quoting AMF, Inc. v. Algo Distrib., Ltd., 48 A.D.2d 352, 356-57, 369 N.Y.S.2d 460, 464 (2d Dep't 1975)); accord, e.g., Cruickshank Co. v. Sorros, 765 F.2d 20, 25 (2d Cir. 1985) ("It is, of course, basic to the law of conversion that liability runs only to a possessor of a chattel or one who was entitled to immediate possession of the chattel."). YMUS argues that, in order to obtain an "immediate superior right to possession" of collateral, a "secured party must execute on that collateral by declaring a default and exercising its remedies under the security agreement," including acceleration of the debt. (Dkt. No. 63: YMUS Opp. Br. at 18.) In YMUS's view, no conversion of the golf cars could have taken place by November 13, 2000, when Fleet allegedly demanded return of the converted property, as Fleet did not exercise its remedies by taking possession of Bruedan's property until November 30, 2000. (Id.)

YMUS is mistaken. Conversion does not require that plaintiff have legal title in the property, but merely "an immediate superior right to possession" of the property. See, e.g., Pierpoint v. Hoyt, 260 N.Y. 26, 29 (1932) ("It is elementary that the law of conversion is concerned with possession, not with title."). "A very slight interference with the ownership is sufficient to constitute a conversion." Employers' Fire Ins. Co. v. Cotten, 245 N.Y. 102, 105, 156 N.E. 629, 630 (1927). The Loan Agreement provided that "[u]pon the occurrence and during the continuation of an Event of Default, [Fleet] shall have and may exercise from time to time the following rights and remedies: . . . 10.3.2. The right to take immediate possession of the Collateral. . . ." (Fleet Ex. 4, § 10.3.) Further, N.Y. U.C.C. § 9-503 provides that "[u]nless otherwise agreed a secured party has on default the right to take possession of the collateral." YMUS does not dispute that Bruedan was in default under the Loan Agreement by no later than November 3, 2000. (YMUS Opp. Br. at 18; YMUS Ex. 60.)²⁸ Accordingly, by no later than November 3, 2000, Fleet had an immediate right to possession of the collateral that was superior to YMUS's right and sufficient to support a conversion claim.

28 May 31 2000 letter described Bruedan's continuing default in, among other things, failing to provide Fleet with audited financials (Fleet Ex. 97), and Fleet's November 3, 2000 letter to Bruedan stated that "Defaults and Events of Default" had taken place, without describing them (YMUS Ex. 60). Whether or not the defaults described in Fleet's letters were, in fact, valid, Bruedan's offset sales to YMUS qualified as events of default under the Loan Agreement (Fleet Ex. 4, §§ 8.2, 8.2.9, 10.1.3, 10.3.2), according Fleet the right of possession to the Collateral as of the offset dates — October 11-13, 2000 (Fleet Exs. 18-23). See United States v. Fullpail Cattle Sales. Inc., 640 F. Supp. 976, 983 (E.D. Wis. 1986) (debtor's disposition of collateral in violation of the security agreement amounted to default, giving secured party right to immediate possession under U.C.C. § 9-503).

Nothing in either the Loan Agreement or the U.C.C. predicated Fleet's right to possession on a prior acceleration of the debt or exercise of Fleet's other remedies. (Fleet Ex. 4, § 10.3; N.Y. U.C.C. § 9-503.) The law is clear that a secured lender may take possession without declaring a default and, indeed, without notice of any kind. See American Furniture Co. v. Extebank, 676 F. Supp. 455, 457 (E.D.N.Y. 1987) ("After the default, a secured party has the right to take possession of the collateral"; it is irrelevant that the secured party "failed to declare a default; the U.C.C. only requires the existence of a default. See U.C.C. §§ 9-503, 9-504(1)."); Citizens Nat'l Bank v. Osetek, 353 F. Supp. 958, 963 (S.D.N.Y. 1973) ("As holder of a first lien security interest in the mobile homes, the Bank was entitled to obtain possession thereof and, accordingly, had a possessory right sufficient to support this action for conversion."); Bank of India v. Weg Myers. P.C., 257 A.D.2d 183, 191, 691 N.Y.S.2d 439, 445 (1st Dep't 1999) ("The secured party's right to possession of the collateral upon default maybe asserted against a third party in possession . . . Leban Store Fixture Co. v. August Prop., 117 A.D.2d 782, 784, 499 N.Y.S.2d 109, 110 (2d Dep't 1986) ("Upon [debtor's] default, plaintiff obtained an immediate right to possession of the collateral pursuant to U.C.C. 9-503."); Crouse v. First Trust Union Bank, 86 A.D.2d 978, 978, 448 N.Y.S.2d 329, 330 (4th Dep't 1982) (creditor may take and sell automobile under security agreement upon default without notice or hearing); First National Bank v. Merchant's Mutual Ins. Co., 89 Misc.2d 771, 774, 392 N.Y.S.2d 836, 838 (Sup.Ct. Ulster Co. 1977) (Defendant liable for conversion: "The plaintiffs secured interest in the proceeds conferred by Section 9-306 of the Uniform Commercial Code, the security agreement and the debtor's default, gave plaintiff the right to possession of the proceeds."),aff'd, 65 A.D.2d 59, 410 N.Y.S.2d 679 (3d Dep't 1978), rev'd on other grounds, 49 N.Y.2d 725, 426 N.Y.S.2d 267 (1980); Long Island Trust Co. v. Porta Aluminum Corp., 49 A.D.2d 579, 580, 370 N.Y.S.2d 166, 168 (2d Dep't 1975) ("Unless otherwise agreed, a secured party has, on default, the right to take possession of the collateral. This right may be enforced against third parties in possession."); 8 Hawkland U.C.C. Series § 9-503:2 ("Since its language indicates that default is the only prerequisite for repossession, section 9-503 does not require the secured party to give any kind of notice to the debtor before repossession.") (fn. omitted). Because Fleet's interest in the golf cars survived their sale to YMUS, and because Bruedan was in default under the Loan Agreement, Fleet had the right to immediate possession of the golf cars as of no later than November 3, 2000.

C. Fleet Satisfied the Demand Requirement

Under New York law, "'[w]here the original possession is lawful, a conversion does not occur until the defendant refuses to return the property after demand or until he sooner disposes of the property.'"Schwartz v. Capital Liquidators, Inc., 984 F.2d 53, 54 (2d Cir. 1993) (citation omitted) (affirming dismissal of conversion claim because "the defendants had rightful control over [plaintiffs] property by virtue of the contract between them, and there was no evidence at trial that [plaintiff] ever demanded its return"); see In re Computer Eng'g Assocs., Inc., 252 B.R. 253, 276-77 (Bankr. D. Mass. 2000) (applying New York law; dismissing conversion claim because of inter alia, plaintiffs failure to make demand), aff'd in part. rev'd in part on other grounds, 278 B.R. 665 (D. Mass. 2002).²⁹

29 See also, e.g., Schloss v. Danka Bus. Sys. PLC, No. 00-7403, 234 F.3d 1263 (table), 2000 WL 1715262 at *3 n. 2 (2d Cir. 2000) (failure to allege demand and refusal was "a failure fatal to [plaintiffs] conversion claim"); Solomon R. Guggenheim Found. v. Lubell, 77 N.Y.2d 311, 317-18, 567 N.Y.S.2d 623, 626 (1991) (replevin action; "Until demand is made and refused, possession of the stolen property by the good-faith purchaser for value is not considered wrongful."); Tompkins v. Fonda Glove Lining Co. 188 N.Y. 261, 265, 80 N.E. 933, 934 (1907) ("where property comes lawfully into the possession of a party he cannot be charged for a conversion in failing to surrender it to the owner unless a demand therefor is made"); Johnson v. Gumer, 94 A.D.2d 955, 955, 464 N.Y.S.2d 318, 319 (4th Dep't 1983) ("Where the original possession is lawful, a conversion does not occur until the defendant refuses to return the property after demand or until he sooner disposes of the property.");Prosser Keeton on the Law of Torts § 15 at 99 (5th ed. 1984) ("Where there has been no wrongful taking or disposal of the goods, and the defendant has merely come rightfully into possession and then refused to surrender them, demand and refusal are necessary to the existence of the tort.").

Fleet asserts that it properly demanded return of the golf cars by way of its November 13, 2000 Demand Letter (Fleet Ex. 30). (Dkt. No. 41: Fleet S.J. Br. at 12.) However, because Fleet erroneously believed that YMUS was indebted to Bruedan on unfunded "chattel paper" transactions (see pages 15-16 above), Fleet's letter demanded that YMUS pay for "chattel paper" and did not demand return of the golf cars (Fleet Ex. 30). Nevertheless, because of, inter alia, the YMMC Intercreditor Agreement, Yamaha was aware of Fleet's security interest and further aware that while YMMC had a superior security interest in golf cars it sold Bruedan, Fleet had a superior security interest in the proceeds of the sale of those golf cars, and thus that any value to be paid by YMUS for golf cars should go to Fleet, not YMMC. Further, the November Demand Letter put YMUS on notice that Fleet considered the sale of the golf cars without receipt of "new value" to be improper. (Fleet Ex. 30.) On the facts of this case, the demand requirement is satisfied or excused. See Frink America. Inc. v. Champion Road Mach. Ltd., No. 99-9034, 216 F.3d 1072 (table), 2000 WL 754945 at *2-3 (2d Cir. May 24, 2000) (demand requirement excused because defendant was not an innocent purchaser," as it "knew that the [seller's] possession was not lawful, and therefore that its own use and possession was hostile to [plaintiffs] ownership rights."); Employers' Fire Ins. Co. v. Gotten, 245 N.Y. 102, 104-05, 156 N.E. 629, 630 (1927) (no demand required where defendant wrongfully took possession in first instance or, having lawfully acquired possession at outset, became aware thereafter of plaintiffs claim of superior right; purpose of demand requirement is to inform an innocent purchaser of the defect in his title, giving him "'an opportunity to deliver the property to the true owner, before he shall be made liable as a tort-feasor for a wrongful conversion'") (citation omitted).

Moreover, because the sale to YMUS violated the Loan Agreement, and because YMUS cannot qualify as a buyer in the ordinary course of business, the initial transfer of the cars to YMUS based on the offset of antecedent debt could be considered wrongful, thus obviating the need for demand and refusal. In virtually identical circumstances, the Fifth Circuit held that where a transferee attempted to offset an antecedent debt against the purchase price of goods, which offset violated the secured creditors rights to the collateral, the transferee's offsets were "'a clear repudiation of the owner's rights. tantamount to a refusal after demand.'" Permian Petroleum Co. v. Petroleos Mexicanos, 934 F.2d 635, 651 (5th Cir. 1991). Accordingly, the conversion claim did not require formal demand and refusal, and the conversion occurred on the date the debtor received the transferee's letter announcing the offset. Id. at 651-52.

In short, based on the above grounds, the "demand and refusal" requirement was satisfied or was obviated with respect to all of the allegedly converted cars.

D. YMUS Interfered With Fleet's Right of Possession

YMUS argues that as of November 13, 2000, the date of Fleet's Demand Letter, many of the allegedly converted golf cars were not in YMUS's possession or control. (Dkt. No. 63: YMUS Opp. Br. at 18-19.) Specifically, YMUS avers that YMMC shipped 210 cars to Bruedan between October 23 and November 1, 2000, and that Fleet itself possessed hundreds of allegedly converted cars through March 16, 2001, when YMUS obtained the cars by posting a $4 million bond. (Id.) YMUS thus argues that, absent possession at the time of the November 13, 2000 demand, no conversion claim could lie. (Id.)

Fleet's conversion claim arose upon delivery of the relevant cars to YMUS's possession. Cars that Bruedan sold to YMUS but that were delivered directly from Bruedan to thirdparty golf courses in 2000 were in YMUS's "possession" for purposes of conversion:

It is not necessary that one take actual physical possession of property to be guilty of conversion. Any wrongful exercise of dominion by one other than the owner is a conversion. Nor is a wrongful intention to possess the property of another an essential element of a conversion. It is sufficient if the owner has been deprived of his property by the defendant's unauthorized act in assuming dominion and control. No manual taking of the property or application of it to the defendant's own use is required. The exercise of dominion over property to the exclusion of and in defiance of the owner's right is a conversion.

General Elec. Co. v. American Export Isbrandtsen Lines, Inc., 37 A.D.2d 959, 959-60, 327 N.Y.S.2d 93, 95 (2d Dep't 1971) (citations omitted).

Cars transferred to YMUS after March 16, 2001 pursuant to the Bond Stipulation also can form the basis of a conversion claim. By reserving its rights under the Bond Stipulation, Fleet can claim wrongful seizure under process of law. See Smith v. Wayne Weinberger, P.C., 994 F. Supp. 418, 421 (E.D.N.Y. 1998) (conversion claim sustained alleging that defendant "wrongfully invoked the legal process by means of 'deceit and fraud' to obtain a default foreclosure judgment"); Prosser Keeton on the Law of Torts § 15 at 93 (5th ed. 1984) (Conversion "will also lie for an unjustified levy or attachment under legal process, even though possession is not otherwise disturbed, since the interference is equally serious. In all such cases the taking itself is wrongful, and the tort is complete without any demand for the return of the goods.") (fns. omitted); 23 N.Y. Jur.2d Conversion, Action for Recovery of Chattel § 24 at 319 (2001) ("Conversion is an appropriate form of action for the wrongful seizure of goods under legal process. . . . One who applies for or obtains a warrant of seizure and takes possession of the goods of another takes the risk of doing so; this person, if having no right to possess the property, is a trespasser and is liable in conversion to the owner of the goods."). YMUS got the benefit of those cars once Fleet (while reserving its rights) released the cars to YMUS pursuant to the Bond Stipulation.³⁰ E. Conversion Damages

30 An issue, although not raised by either party, is whether conversion of the bonded cars could form the basis of a claim in this action, since YMUS did not gain possession of most of the bonded cars until after March 2001, i.e., after this lawsuit commenced.
Fleet's claim is saved, however, by Rule 15(d) of the Federal Rules of Civil Procedure, which provides, in pertinent part: "Upon motion of a party the court may, upon reasonable notice and upon such terms as are just, permit the party to serve a supplemental pleading setting forth transactions or occurrences or events which have happened since the date of the pleading sought to be supplemented." Fleet amended its complaint on July 25, 2001 (Fleet Ex. 1), well after the delivery of the bonded cars. Although the amended complaint fails to specifically mention the bonded cars, its language is sufficiently general to encompass delivery of the bonded cars to YMUS.
At the commencement of the state lawsuit in January 2001, Fleet did have a claim for conversion as to the cars delivered to YMUS in 2000. Thus, Fleet's lawsuit was not dismissible ab initio. Further, YMUS certainly had notice of the facts relating to the bonded cars as well as Fleet's theory that YMUS's receipt of the bonded cars was wrongful. See Breyette v. Amedore, 205 F.R.D. 416, 418-19 (N.D.N.Y. 2002) (Rule 15(d) specifically permits parties to serve a supplemental pleading regarding conduct subsequent to the complaint. "To hold otherwise would require plaintiffs to file separate actions and then move to consolidate the two actions.").
Accordingly, Fleet's conversion claim is deemed to properly include cars delivered to YMUS pursuant to the 2001 Bond Stipulation.

The parties have starkly different views on the proper measure of damages, although neither party supplied relevant authority. Fleet asserts that it should simply receive the retail invoice price at which YMUS agreed to purchase the converted cars from Bruedan, which Fleet considers to be the "fair market value of the [cars] at the time of conversion."³¹ (See Dkt. No. 41: Fleet S.J. Br. at 2; Dkt. No. 66: Fleet S.J. Reply Br. at 6, 9-10.) YMUS argues that the invoice values would be an inflated measure of damages because: (1) the Bond Stipulation set a maximum value of $2,500 for new cars and between $500 and $2,000 for used cars, (2) on November 13, 2000, which YMUS deems the "date of conversion, many of the cars had already been used for several months, significantly lowering their value, and (3) a portion of the invoice price included payment for Bruedan's future maintenance of the golf cars, which was never actually performed. (Dkt. No. 63: YMUS Opp. Br. at 20 n. 14, 29-30.)

31 Fleet bases the fair market value of the Unpaid Golf Cars on "the retail amounts set forth in the arms-length agreements between YMUS and the golf courses as further evidenced by the Net Book Value columns in each Schedule A annexed to the Recourse Guaranty executed by [Bruedan] in each of the Unfunded Transactions." (Fleet S.J. Br. at 23-24; see also Fleet Reply Br. at 6, 9-10.)

As YMUS acknowledges, conversion "'loss is to be measured as of the time of the conversion.'" Bank of New York v. Amoco Oil Co., 35 F.3d 643, 660 (2d Cir. 1994) (quoting Procter Gamble Dist. Co. v. Lawrence Am. Field Warehousing Corp., 16 N.Y.2d 344, 352, 266 N.Y.S.2d 785, 791 (1965)). In this case, because the sale to YMUS constituted a "wrongful taking," the date of conversion of a particular car was the date of the car's delivery to YMUS (for antecedent debt).

In general, because Article 9 of the U.C.C. does not specifically describe the damages to be awarded in an action thereunder, New York common law principles govern the measure of damages. See, e.g., 95 N.Y. Jur.2d Secured Transactions § 112 (1992); Chemical Bank v. Miller Yacht Sales, 413 A.2d 619, 625 (N.J.Super.Ct. 1980) (applying New York law). "The usual measure of damages for conversion is the value of the property at the time and place of the conversion, plus interest." Fantis Foods, Inc. v. Standard Importing Co., 49 N.Y.2d 317, 326, 425 N.Y.S.2d 783, 786 (1980).³² The question here, however, is whether Fleet should recover the "wholesale" price Bruedan paid YMMC for the cars, the "retail" price YMUS paid Bruedan for the cars, or some other price.

32 Accord, e.g., Iglesias v. United States, 848 F.2d 362, 364 (2d Cir. 1988) ("value of the property at the time and place of the conversion"); Bank Brussels Lambert v. Credit Lyonnais, 93 Civ. 6876, 2000 WL 174955 at *4 (S.D.N.Y. Feb. 15, 2000); East Coast Novelty Co. v. City of New York, 842 F. Supp. 117, 124 (S.D.N.Y. 1994); Standard Dyeing Finishing Co. v. Arma Textile Printers Corp., 85 Civ. 5399, 1991 WL 49782 at *11 (S.D.N.Y. Mar. 25, 1991) ("fair market value"); Roco Carriers. Ltd. v. M/V NURNBERG EXPRESS, 83 Civ. 8905, 1990 WL 270422 at *2 (S.D.N.Y. Sept. 27, 1990); Bhattal v. Grand Hyatt-New York, 563 F. Supp. 277, 281 (S.D.N.Y. 1983) ("fair market value").

"Where the nature of the goods converted is such that they can be readily exchanged in the market place, the measure of damages is the fair market value of the goods at the time of the conversion, which is generally the price at which the goods can be replaced in the market . . . the value of the goods would be determined by the cost to the plaintiff of replacing the goods in the market for [such] goods, not the lower market at which" a dealer in such goods could purchase them.Kielhurn v. Giammarinaro, 148 F. Supp.2d 219, 226 (E.D.N.Y. 2001) (citations omitted).

YMUS's assertion that the Bond Stipulation should determine the measure of Fleet's conversion damages is specious. The Stipulation states that Fleet's release of the collateral "shall not be admissible against [Fleet] for any purpose whatsoever," and, similarly, that YMUS's posting of the bond "shall not be admissible against [YMUS] for any purpose whatsoever." (Fleet Ex. 40 ¶¶ 6-7.) While the parties agreed on the cars' "Wholesale Values" for the purpose of calculating the amount of YMUS's bond (id. ¶ 2: Exs. 2-3), such amounts were not a limitation on Fleet's potential damages.

The Court will employ the retail price that YMUS agreed to pay Bruedan for the goods (with a modification explained below). Conversion is, after all, a "forced sale" of the converted goods. Iglesias v. United States, 848 F.2d 362, 364 (2d Cir. 1988). The Court looks to the sale price that YMUS "paid" Bruedan through the wrongful offsets. Courts have held that such a lost sale price is an acceptable measure of"value" at the time of the conversion. See Toshoku Am., Inc. v. Rhoda Lee, Inc., 212 A.D.2d 455, 455-56, 622 N.Y.S.2d 943, 943-44 (1st Dep't 1995) (defendant wrongly withheld goods that plaintiff had already sold to third party for $98,912.25; court awarded entire sale price for conversion).³³

33 Recent invoice prices are often considered appropriate stand-ins for fair market value. See, e.g., Fujitsu Ltd. v. Federal Exp. Corp., 247 F.3d 423, 434-35 (2d Cir.), cert. denied, 122 S.Ct. 206 (2001);Mitsui Marine Fire Ins. Co. v. Direct Container Line, Inc., 119 F. Supp.2d 412, 417 (S.D.N.Y. 2000) (in maritime case, when "the market price is not proved, as in this case, the invoice price may substitute for the . . . market price."), aff'd, 21 Fed. Appx. 58 (2d Cir. 2001); Datas Indust. Ltd. v. OEC Freight (HK) Ltd., 98 Civ. 6904, 2000 WL 1597843 at *5 (S.D.N.Y. Oct. 25, 2000) (maritime case: "Courts have used the invoice price of the cargo to determine value when the fair market value at destination was uncertain or not proved." Citing cases); New York Marine Managers, Inc. v. M/V "TOPOR-1", 88 Civ. 3682, 1991 WL 29158 at *6 (S.D.N.Y. Feb. 21, 1991) ("A number of courts, including the Second Circuit, have accepted the practical assumption that the invoice cost plus freight represents an appropriate surrogate for the fair market value of the goods in the port of delivery 'when the fair market value is uncertain or not proved.'").
As Judge Martin explained:

Since fair market value is what a willing buyer would pay a willing seller, it is not unreasonable to assume, in the absence of evidence to the contrary, that what the buyer and seller agreed to in this case, as reflected in the invoice, was in fact the fair market value. Here, discovery has been completed and [defendant] offers only speculation to suggest that the fair market value is in fact something other tha[n] the invoice price of the goods. Such speculation is not sufficient to overcome the strong inference that what the parties agreed to as the purchase price was in fact the fair market value of the goods in question.

Datas Industries Ltd. v. OEC Freight (HK). Ltd., 2000 WL 1597843 at *5.

As YMUS rightly points out, however, a portion of Bruedan's retail price included payment for Bruedan's future maintenance of the golf cars (deducted by YMUS as service reserves), which would be improper to award in the absence of Bruedan's actual performance. (Dkt. No. 63: YMUS Opp. S.J. Br. at 29-30.) Based on the parties' stipulation and prior agreements, there is no genuine issue of material fact that the "service reserve" amount was $190,725.³⁴ Accordingly, the Court reduces the $4,121,638 that YMUS "paid" to Bruedan for the 26 Transactions by the $190,725 service reserve, and will award Fleet the balance ($3,930,913) as the conversion damages for the 26 Transactions.

34 The parties stipulated that "in 5 of the 26 Transactions, Bruedan's invoices to YMUS mentioned a deferred service charge, totaling in aggregate $74,062.50," and that "in 9 of the 26 Transactions, YMUS held back a service reserve in the total amount of $190,725, which reserve includes the $74,062.50 deferred service charge reflected on the 5 Bruedan invoices." (Dkt. No. 78: 8/29/02 Stip., p. 4 ¶ 3.) YMUS has presented evidence that pursuant to YMUS and Bruedan's written agreements, YMUS was permitted to offset $75 per car per year as a service reserve on car sales over $4,400, regardless of whether the car sale invoice expressly itemized a deferred service charge. (Dkt. No. 81: YMUS 9/24/02 letter, citing YMUS Ex. 44; see also Dkt. No. 82: Fleet 9/24/02 letter.) Therefore, even though the invoices at issue expressly itemized only $74,062.50 in deferred service charges, YMUS properly offset $190,725.

IV. FLEET'S CONTRACT CLAIM

As assignee of Bruedan's accounts receivable, Fleet also asserts a contract claim against YMUS to collect the full $4,205,201 retail price of the Unpaid Golf Cars as well as $400,538 in YMUS "Additional Obligations" to Bruedan. With respect to the $4,205,201, the Court has already granted Fleet summary judgment as to $3,930,913 on the conversion claim, and the Court ordinarily therefore would not have to reach the contract issue See e.g., Safeco Credit Co. v. United States Bancorp Leasing Fin., 833 F. Supp. 833, 835 n. 5 (D. Or. 1993) (because plaintiff prevailed on contract claim, court need not reach claims for conversion and monies had and received).

However, because Fleet's claim for $400,538 in YMUS's "Additional Obligations" to Bruedan is not included in the conversion claim, the Court must reach the contract claim. Since most of the issues go to both the $4.2 million and $400,000 aspects of Fleet's contract claim, the Court will discuss the contract claim issues in their entirety.

A. YMUS's Offsets Based on Bruedan's Antecedent Debt to YMUS and YMMC

From October through December 2000, YMUS paid down $4,290,860 in obligations running from YMUS to Bruedan (including the Unpaid Golf Cars and the Additional Obligations) by offsetting such obligations against $4,290,860 in Bruedan antecedent debt to YMUS and YMMC. YMUS asserts that the offsets were properly taken under N.Y. U.C.C. § 9-318(1)(a) based on the course of dealing between Bruedan and YMUS and their oral agreements. (Dkt. No. 63: YMUS Opp. S.J. Br. at 21-29.) Fleet argues,inter alia, that (1) all of the offsets (including the offset of antecedent debt held by either YMMC or YMUS) were improper because they did not arise from the same contracts as the accounts receivable; and (2) the offsets of antecedent debt held by YMMC were invalid for the additional reason that they violated the Intercreditor Agreement between Fleet and YMMC. (Dkt. No. 41: Fleet S.J. Br. at 24-30.)

The parties agree that Fleet's contract claim is governed by U.C.C. Article 9 pertaining to secured transactions. See N.Y. U.C.C. §§ 9-101 to 9-507. In particular, § 9-318 addresses assignments of security interests in accounts, stating:

(1) Unless an account debtor has made an enforceable agreement not to assert defenses or claims arising out of a sale as provided in Section 9-206 the rights of an assignee are subject to

(a) all the terms of the contract between the account debtor and assignor and any defense or claim arising therefrom; and

(b) any other defense or claim of the account debtor against the assignor which accrues before the account debtor receives notification of the assignment.

N.Y. U.C.C. § 9-318(1).³⁵

35 Although Article 9 usually refers to a creditor with a security interest as a "secured party," a secured party with a security interest in accounts is the "assignee" under section § 9-318. See, e.g., USBI Co. v. Otha C. Jean Assoc. Inc., 152 B.R. 219, 222-23 (E.D. Tenn. 1993) (noting that "courts have generally applied § 9-318 this way."). Under § 9-318(1)'s terminology, Fleet is the "secured party" and "assignee" of the assigned accounts receivable collateral, Bruedan is the "debtor" and "assignor" of the accounts receivable, and YMUS is the "account debtor" or "obligor" on the accounts receivable. N.Y. U.C.C. §§ 9-105(1), 9-318.

The Official Comment to U.C.C. § 9-318(1) explains:

Subsection (1) makes no substantial change in prior law. An assignee has traditionally been subject to defenses or set-offs existing before an account debtor is notified of the assignment. When the account debtor's defenses on an assigned claim arise from the contract between him and the assignor, it makes no difference whether the breach giving rise to the defense occurs before or after the account debtor is notified of the assignment (paragraph (1)(a)). The account debtor may also have claims against the assignor which arise independently of that contract: an assignee is subject to all such claims which accrue before, and free of all those which accrue after, the account debtor is notified (paragraph (1)(b)).

N.Y. U.C.C. § 9-3 18, Comment 1.

In the context of an assignment, § 9-318 distinguishes between (1) claims and defenses (such as offsets) arising from the assigned contract and (2) other unrelated claims and defenses not arising from the contract. N.Y. U.C.C. § 9-318(1). An account debtor can assert claims and defenses (including offsets) based on the terms of the contract, regardless of whether they arise before or after notification of an assignment. Id. However, subsection (1)(b) limits the assertion of unrelated claims and defenses to those "which accrue before the account debtor receives notification of the assignment." § 9-318(1)(b). Section 9-318(1)(b) thus precludes an account debtor (here, YMUS) from raising against an assignee (here, Fleet) any unrelated claim or defense that accrued after the account debtor was aware of the assignment. See,e.g., Chase Manhattan Bank, N.A. v. State of New York, 40 N.Y.2d 590, 592, 388 N.Y.S.2d 896, 897 (1976) ("an assignee may preclude an account debtor's right to set off' by giving the account debtor "actual notice" of the assignment); Caprara v. Charles Court Assocs., 216 A.D.2d 722, 723, 627 N.Y.S.2d 836, 837 (3d Dep't 1995) (prior to notice of assignment of accounts, assignee takes subject to all defenses and counterclaims, including offsets, that account debtor possessed against assignor);Rosenthal Rosenthal. Inc. v. John Kunstadt, Inc., 106 A.D.2d 277, 277, 482 N.Y.S.2d 287, 288 (1st Dep't 1984) (following notice of assignment, account debtor may not assert offset against assignee arising from a contract unrelated to the contract from which the account receivable arose); Gateway Nat'l Bank v. Saxe. Bacon Bolan, 40 A.D.2d 653, 653, 336 N.Y.S.2d 668, 670 (1st Dep't 1972) (notice of assignment cuts off assignee's liability for "only claims arising independently of the contract between the account debtor and the assignor which accrue after notification"); Central State Bank v. State of New York, 73 Misc.2d 128, 130, 341 N.Y.S.2d 322, 325 (Ct.Cl. 1973) (granting summary judgment for account debtor under § 9-318(1)(b), because account debtor's offset claim arose before it received notice of assignment of unrelated account).³⁶

36 See also, e.g., Artoc Bank Trust. Ltd. v. Apex Oil Co., 975 F.2d 1365, 1368-70 (8th Cir. 1992) (account debtor's offset on different contract rejected because it was made after notification of assignment, and was thus invalid against the assignee); Seattle-First Nat'l Bank v. Oregon Pac. Indus., Inc., 262 Or. 578, 581, 500 P.2d 1033, 1034 (1972) ("The setoff or claim the defendant seeks to assert is an unrelated setoff because it arises out of a breach of a contract not connected with the invoice assigned to the bank. For this reason the defendant can assert the setoff only if it accrued before the defendant was notified of Centralia's assignment to the bank."); 2 Gilmore,Security Interests in Personal Property § 41.4 at 1090-91 (1999) (The U.C.C. "distinguish[es] between what might be called the contract-related and the unrelated defenses and claims. Defenses and claims 'arising' from the contract can be asserted against the assignee whether they 'arise' before or after notification. . . . Under the Code, "any other defense or claim' is available against the assignee only if it 'accrues before . . . notification.'"); Gilmore, The Assignee of Contracts Rights His Precarious Security, 74 Yale L.J. 217, 227-28 (1964).

A threshold issue under § 9-318(1) is thus whether YMUS's offsets accrued before YMUS received notification that Bruedan's accounts receivable had been assigned to Fleet. Fleet asserts that YMUS had actual knowledge of Fleet's secured interest as far back as May 1999, prior to the accrual in 2000 of the claims that YMUS offset. (Dkt. No. 41: Fleet S.J. Br. at 6, 24, 28-30; Fleet 56.1 Stmt. ¶¶ 7-13.) In Fleet's view, such offsets therefore are governed by § 9-318(1)(a), and would be enforceable against Fleet only if each claimed offset arose from the same contract giving rise to the assigned account. (Dkt. No. 41: Fleet S.J. Br. at 28-30.) In its brief opposing Fleet's summary judgment motion, YMUS did not once rely on § 9-318(1)(b), but rather asserted that Fleet's accounts receivable claim should be governed by § 9-3 18 (1)(a). (Dkt. No. 63: YMUS Opp. S.J. Br. at 2 1-39.) YMUS therefore will be deemed to have waived any claim that its offsets should be governed by the provisions of § 9-318(1)(b) allowing offsets on unrelated contracts.

YMUS therefore has the burden of proving that its offsets and Bruedan's assigned accounts receivable arose from the same contracts. See, e.g.,Artoc Bank Trust. Ltd. v. Apex Oil Co., at 1368, 1370. The Court will first address YMUS's offsets based on Bruedan's antecedent debt to YMUS and then address YMUS's offsets based on Bruedan's antecedent debt to YMMC.

1. Offsets of Bruedan's Antecedent Debt to YMUS

As noted above, Bruedan's total antecedent debt to YMUS broke down as follows:

Past due lease payments $ 653,566 Recourse obligations ("residuals") 662,774 Service obligations 190,725 Parts owned by Bruedan 175,194 $1,682,260

(Dkt. No. 78: 8/29/02 Stip., p. 2 ¶ a.)

"The parties stipulate that from October 10 through December 12, 2000, YMUS offset the above antecedent YMUS 'debt' . . . against the following YMUS obligations to Bruedan:

Retail car price due Bruedan $1,328,506 Dealer Reserves due Bruedan 160,528 Suspense items due Bruedan 67,762 Parts credits due Bruedan 71,635 Service Reserve due Bruedan 53,828 $1,682,260"

(Dkt. No. 78: 8/29/02 Stip., p. 3 ¶ b.)

Under N.Y. U.C.C. § 9-318(1)(a), Fleet's "rights [as] an assignee are subject to . . . all the terms of the contract between the account debtor [YMUS] and assignor [Bruedan] and any defense or claim arising therefrom." N.Y. U.C.C. § 9-318(a). The initial question is whether the $1,682,260 in YMUS obligations to Bruedan (including the retail price due on the 26 Transactions) were based on the same "contract" as the offsetting antecedent Bruedan obligations to YMUS, including past due lease payments, residual obligations, service obligations, and payment for parts. See, e.g., Rosenthal Rosenthal, Inc. v. John Kunstadt, Inc., 106 A.D.2d 277, 277, 482 N.Y.S.2d 287, 288 (1st Dep't 1984) (following notice of assignment, account debtor may not assert offset against assignee arising from a contract unrelated to the contract from which the account receivable arose); see also cases cited at pages 58-59 above.

a. YMUS's Dealership Agreement Argument Fails

YMUS attempts to expand the definition of "contract" by arguing that all of the golf car purchases and sales between YMUS and Bruedan were governed by their Dealer Agreement, and that YMUS therefore should be permitted to freely offset any amounts Bruedan owed YMUS against any amount YMUS owed Bruedan. (Dkt. No. 63: YMUS Opp. S.J. Br. at 3, 25.) This has no basis, as each transfer pursuant to a dealership or distributorship agreement is generally held to be a separate contract.See, e.g., ECHO, Inc. v. Whitson Co., 52 F.3d 702, 705 (7th Cir. 1995) ("distributorship agreements and the purchase orders that arise under them are different contracts"); Sharp Elecs. Corp. v. Arkin-Medo, Inc., 86 A.D.2d 817, 817, 452 N.Y.S.2d 589, 590 (1st Dep't 1982) (each shipment pursuant to a purchase order is a separate contract, separate from general distributorship agreement), aff'd, 58 N.Y.2d 986, 461 N.Y.S.2d 1014 (1983).³⁷

37 Courts have held that, where the parties have treated their transactions as a single contract — a so-called "running account" — the assignee of the account will be subject to offsets on the account. See United Cal. Bank v. Eastern Mountain Sports, Inc., 546 F. Supp. 945, 964-65, 977 (D. Mass. 1982) ("the course of dealing between EMS and Snow Lion was to treat the entire EMS-Snow Lion account as a single contract or 'running account.' . . . The evidence shows, moreover, that [secured party/assignee] was aware of the course of dealing. . . . Thus, EMS may offset its claims . . . against . . . unrelated transactions."), aff'd, 705 F.2d 439 (1st Cir. 1983);BarclaysAmerican/Bus. Credit, Inc. v. E E Enters., Inc., 697 S.W.2d 694, 700 n. 3 (Tex.App. 1985) ("evidence indicates that the course of dealing between" account debtor and assignor "was to treat the entire . . . account as a 'running account,'" thus allowing offsets under § 9-318(1)(a)); Ouality Performance Lines v. Yoho Auto., Inc., 609 P.2d 1340, 1341-43 (Utah 1980) (distributor and manufacturer had running account; based on course of performance under U.C.C., distributor was allowed to return goods for offset against debt to manufacturer). There is no evidence here that any of the YMUS-Bruedan dealings were done on a "running account" basis.

Courts also have allowed offsets under § 9-318(1)(a) where separate contracts are so intertwined that they are effectively one agreement. See Harris v. Dial Corp., 954 F.2d 990, 993 (4th Cir. 1992) (two agreements were so intertwined as to be effectively one agreement, so that offsets could thus be taken under U.C.C. § 9-318(1)(a));Maine Farmers Exch., Inc. v. Farm Credit of Maine. A.C.A., 789 A.2d 85, 90-91 (Me. 2002) (parties plainly intended transactions to be a "single contract," thus allowing offsets under § 9-318(1)(a)); see also American Trade Partners, L.P. v. KMart Corp., No. 90-5313, 1992 WL 59153 at *4 (E.D. Pa. Mar. 19, 1992) (for purposes of § 9-318, construing as a single "contract" invoice that referred to terms of purchase order). In this case, Bruedan's obligation to repurchase the cars at the end of the leases (the recourse or residual obligation) might be considered so intertwined with the purchase and lease of the cars as to create one indivisible contract. Here, however, the residual obligations offset relate to the prior lease, but are being offset against the purchase price of the cars on the renewal lease.³⁸ The offset based on the residual obligation cannot, therefore, be defended under the "one contract" rationale.

38 When a particular lease expired, the golf course would often request a renewal, which involved Bruedan selling YMUS new golf cars, and YMUS leasing the new cars to the golf course. Amounts would often be due from Bruedan to YMUS, however, on the old lease for lease payments or residual payments. (Dkt. No. 63: YMUS Opp. S.J. Br. at 5-8.) YMUS would refuse to purchase the new cars and enter into the new lease until Bruedan had paid off these antecedent obligations. (Id.) Thus, YMUS commonly offset these antecedent obligations against the purchase price of the new cars. (Id.) This offset procedure appears to have been followed here when YMUS offset $653,566 in past due lease payments and $662,774 in recourse (residual) obligations against the purchase price of new cars. (Dkt. No. 78: 8/29/02 Stip., p. 2, ¶ 9.) This Court, however, has been cited to no authority that an original lease and a renewal lease are effectively the same contract for the purposes of § 9-318(1)(a). Thus, YMUS cannot employ the "same contract" rationale to support the offset of the antecedent lease payment obligations and residual obligations.

YMUS is foreclosed from arguing that YMUS's obligations to Bruedan and the offsetting Bruedan obligations to YMUS were based on the same contract, based on YMUS's dealership agreement argument.

b. The Service Obligations and Recourse Obligations Were Properly Offset

According to YMUS, it was standard practice for Bruedan to include in the invoice price of new cars a substantial fee for future car maintenance to be performed by Bruedan. (Dkt. No. 63: YMUS Opp. S.J. Br. at 3-5; YMUS Fleet Opp. 56.1 Stmts. ¶¶ 13-20.) YMUS would deduct this service fee from the retail price, and pay Bruedan the fee over the course of the contract as it was performed. (Id.) The $190,725 offset by YMUS therefore arose from the same contracts as the 26 Transactions. (Dkt. No. 63: YMUS Opp. Br. at 29-30; see Dkt No. 78: 8/29/02 Stip., p. 4, ¶ 3.) YMUS therefore is entitled to an offset for the $190,825 in service obligations against YMUS's purchase of Unpaid Golf Cars. (See also pages 55-56 n. 34 above.)

YMUS also asserts that under the October 9, 1990 Amendment to Sales and Service Agreement (Yamaha Golf Car Leasing Program), Bruedan agreed that YMUS could hold back a reserve for the payment of various Bruedan obligations. (YMUS Ex. 40; Dkt. No. 63: YMUS Opp. S.J. Br. at 10; YMUS Ex. 43: Robinson 1/15/02 Supp. Aff. ¶ 7.) In a subsequent YMUS letter dated September 17, 1993, YMUS limited the reserve to paying off Bruedan's past due recourse/residual obligations ("net book value guarantee obligation"). (YMUS Ex. 41.) YMUS therefore properly offset $160,528 in recourse obligations against the same amount in dealer reserves. (See Dkt. No. 78: 8/29/02 Stip. p. 3.)

c. YMUS's Prior "Course of Dealing" Argument Fails

YMUS nevertheless argues that Bruedan and YMUS agreed, through their course of dealing, to allow YMUS to offset antecedent debt against amounts that YMUS owed Bruedan on entirely separate contracts for sales of new cars to YMUS. See Dkt. No. 63: YMUS Opp. S.J. Br. at 21-26.) In YMUS's view, because Bruedan agreed, either implicitly or explicitly, to allow YMUS to assert offsets based on antecedent debt, those offsets "arose from" the contracts assigned by Bruedan to Fleet, and thus constituted valid defenses to Fleet's claims against YMUS under § 9-318(1)(a). (Id.) See, e.g., Commerce Bank, N.A. v. Chrysler Realty Corp., 244 F.3d 777, 780-84 (10th Cir. 2001) (offset allowed against assignee under § 9-318(1)(a) because written agreement between assignor and account debtor allowed assignor to offset amounts owed to or from assignor's affiliate). YMUS must therefore prove that through their course of dealing, the parties agreed that YMUS unilaterally could offset amounts owed Bruedan on any contract against amounts Bruedan owed YMUS on any other contract, and could offset, in essence, the entire purchase price, not just some small amount. YMUS has not offered any evidence that there was a prior course of dealing where YMUS could and did offset the entire purchase price of golf cars with Bruedan debt to YMUS from other transactions.

Moreover, YMUS's course of dealing argument is belied by what YMUS relied on, at the time, to support its offsets. YMUS did not do so as a continuation of a prior and ordinary course of dealing with Bruedan. Rather, at the time of these offsets, Yamaha officers Robinson and Teele specifically discussed with Bruedan and entered into what YMUS itself describes as an explicit oral agreement to offset YMUS's purchase price by Bruedan's antecedent debts to YMUS and YMMC. (YMUS Ex. 42: Teele 1/15/02 Supp. Aff. ¶ 13; see pages 10, 14 n. 13 above.) Such an explicit new oral agreement would not have been necessary if YMUS was permitted to offset the entire purchase price of golf cars because of its prior course of dealing with Bruedan. The Court rejects YMUS's current, litigation-oriented course of dealing argument.

d. Bruedan's Oral Agreement to the Offsets Does Not Supersede Fleet's Senior Secured Rights

Bruedan's eleventh-hour oral agreement to all of the offsets at issue prior to YMUS's purchases by offset (see page 10 above) is not effective as against Fleet's superior secured rights.

Section 9-318(1) describes in detail an assignee's exposure to offsets. The statute provides that once the assignee has given the account debtor notice that the assignor's accounts have been assigned, the assignee is only liable for counterclaims and defenses (including offsets) arising from the assigned claim. The Loan Agreement between Fleet and Bruedan precluded Bruedan from selling inventory except for new value. (Fleet Ex. 4, § 8.2.9.) Yamaha was aware of the Loan Agreement because of, inter alia, the Intercreditor Agreement, in which Yamaha agreed to Fleet's priority in Bruedan's receivables. (See pages 6-8 above.) YMUS's argument would work an effective repeal of § 9-318 (1), and avoid Fleet's protections in the Loan Agreement and Interdebtor Agreement, by claiming a last-minute oral agreement through which offsets of antecedent debt can miraculously "arise" from the present-day sales transaction i.e., YMUS and Bruedan would have essentially contracted to subordinate Fleet's senior creditor position.

Although parties can, of course, contract around the UCC and many of its provisions, N.Y. U.C.C. § 2-303, YMUS and Bruedan are alleged to have essentially contracted to subordinate Fleet's senior creditor position. It is well-settled that "a subordination agreement between two parties to a transaction cannot adversely affect a third party without his or her consent." 8 Hawkland U.C.C. Series § 9-316:1 (2001). As the Official Comment to § 9-316 points out: "Only the person entitled to priority may make [a subordination] agreement: his rights cannot be adversely affected by an agreement to which he is not a party." N.Y. U.C.C. § 9-316, Comment.

YMUS asserts that, because "an assignee never stands in better position than his assignor," Fleet is bound by any agreement Bruedan may make that allows offsets at Fleet's expense. (Dkt. No. 63: YMUS Opp. Br. at 21, citation omitted.) This assignment doctrine — nemo dat qui non habet ³⁹ — is not entirely applicable in the context of § 9-318(1). "[T]he U.C.C. does distinguish finance assignments from general assignments. It recognizes that general assignments confer both the assignor's rights and obligations to the assignee whereas a finance assignment confers only the assignor's rights." GMAC Commercial Credit LLC v. Springs Indus., Inc., 171 F. Supp.2d 209, 214 (S.D.N.Y. 2001) (citing U.C.C. § 2-210(4) and Official Comment 5). Section 9-318 plainly puts the assignee in a better position than the assignor by, for example, limiting counterclaims and defenses to those arising from the assigned contract, § 9-318(1), prohibiting an account debtor from asserting affirmative counterclaims against an assignee, e.g., James Talcott, Inc. v. Brewster Sales Corp., 16 UCC Rep. Serv. 1165, 1975 WL 22856 (Sup.Ct. N.Y. Co. Apr. 4, 1975), and limiting modifications of assigned executory contracts, § 9-318(2). See John D. Calamari Joseph M. Perillo, Contracts § 18-17 at 742-45 (3d ed. 1987) ("doctrine of vesting is an exception to the general rule that the assignee stands in the shoes of the assignor;" the "assignee is not bound by any defense resulting from an agreement reached between the obligor and the assignor . . . after the obligor has notice of the assignment."); 4 Arthur L. Corbin, Corbin on Contracts, § 902 at 615-16 (1951) ("By the first assignment, the right became his, so that at the time of the second assignment, the assignor had no right and could therefore transfer none."). Plainly, Fleet, as assignee, is in a better position than its assignor, and should not have that position undermined by an agreement to which Fleet was not a party and about which it did not have notice.

39 He who hath not cannot give." Black's Law Dictionary (6th ed. 1990).

At the time Bruedan's debt to YMUS arose, all of the parties' contractual agreements prevented such debt from being offset against future YMUS purchases from Bruedan. It would violate equity to allow YMUS, long after Bruedan's debt to it had arisen, to jump ahead of Fleet by simply pressuring Bruedan to "agree" (just prior to Bruedan's collapse) that YMUS could offset Bruedan's antecedent debt against new YMUS purchases. Giving effect to such agreements would invite every junior creditor (despite having notice that the debtor's accounts had been assigned) to similarly pressure debtors into "selling" them inventory in exchange for the satisfaction of antecedent debt; such agreements should be prohibited for the same policy reasons they are prohibited in the conversion context. See, e.g., Franklin v. First Nat. Bank, 848 P.2d 775, 781-82 (Wyo. 1993) ("To permit a general creditor to extinguish a perfected security interest by "purchasing' some of the debtor's inventory in return for canceling the debt owed to it would eviscerate the priorities established by Article 9 and the safeguards accorded inventory financers with perfected security interests. That is why "buying' does not include transfers in satisfaction of a money debt."). Bruedan's last-minute agreements to allow offsets therefore will not be given effect so as to override Fleet's priority.

e. Conclusion

In sum, of the $1,682,260 of YMUS offsets, only the service obligations of $190,725 and the recourse obligations of $160,528, for a total offset of $351,253, can be offset on Fleet's contract claim.

2. YMUS's Offsets Based on Bruedan's Antecedent Debt to YMMC

The issue of whether YMUS properly employed $1,550,368 in "Assigned YMMC Debt" and $1,058,231 in "Unassigned YMMC Debt"⁴⁰ (for a total antecedent Bruedan debt to YMMC of $2,783,794) to offset various YMUS obligations to Bruedan (see Dkt. No. 78: 8/29/02 Stip., p. 4, ¶¶ c-d), can be resolved based on the Intercreditor Agreement between Fleet and YMUS.

40 The December transaction was not technically an offset, as YMUS satisfied its obligations to pay Bruedan for the car purchase by paying YMMC instead. For the sake of simplicity, however, both of the YMUS transactions involving antecedent Bruedan debt to YMMC will be referred to as "offsets."

Under the Intercreditor Agreement, YMMC's priority was limited to the golf cars it sold to Bruedan; Fleet had priority in all other collateral, including the "proceeds" of the golf cars sold by YMMC. (Fleet Ex. 12, ¶¶ 1, 2(a), (b), (d), quoted at pages 6-8 above.) YMMC and YMUS, YMMC's agent and assignee, violated the Intercreditor Agreement by interposing YMMC's junior debt ahead of Fleet's senior interest, as follows: (1) the October transaction, in which YMMC assigned its junior debt to YMUS and YMUS asserted such debt as an offset against Bruedan; and (2) the December transaction, in which YMUS paid down YMMC's junior debt rather than paying Bruedan directly. Although N.Y. U.C.C. § 9-31 8(1)(a) subjects Fleet to "any defense or claim arising" under Bruedan's contracts with Fleet, the statute implicitly limits Fleet's liability to YMUS's valid defenses or claims. Because Yamaha's interposition of YMMC's junior debt in violation of the Intercreditor Agreement could not form the basis for valid "defenses or claims" against Fleet, YMUS's offsets based on those claims are nullified.⁴¹

41 The YMMC offsets must also be rejected on grounds unrelated to the Intercreditor Agreement. YMUS asserts that the offsets of antecedent debt to YMMC were based on both the course of dealing or performance between YMUS and Bruedan and on the parties' oral agreements. To support its course of dealing argument, however, YMUS may not simply rely on past instances of mutual offsets between YMUS and Bruedan, but rather must show that YMUS regularly offset non-mutual debt — i.e., Bruedan's debt to third parties. See 1 Hawkland U.C.C. Series § 1-205:3 (2001) ("Of course, a single act, and indeed a sequence of acts, have probative value only when the previous transaction is sufficiently similar to the present one."). As noted in the section on conversion, prior offset payments to DFS are clearly distinguishable. (See Point III A. 2, above.) The only evidence that YMUS regularly offset antecedent debt to YMMC is a single instance in which Bruedan purchased 300 "Tournament Fleet" cars from YMMC and then, weeks later, sold the same cars to YMUS. (Dkt. No. 63: YMUS Opp. Br. at 8-9.) YMUS touts the fact that, instead of YMUS paying Bruedan for the cars, "YMUS offset the Bruedan invoice amount by the amount Bruedan owed YMMC," and then YMUS paid YMMC directly. (Id. at 9.)
However, as YMUS concedes, in contrast to the normal triangular sale, in which Bruedan purchased cars from YMMC and resold the same cars to YMUS at a 50% markup, the Tournament Cars were bought from YMMC and sold to YMUS at precisely the same price. (Id. at 8 n. 12.) In that situation, it would have been pointless for Bruedan to go through the motions of paying YMMC and then waiting for payment from YMUS. The Tournament Fleet sale is thus so dissimilar from the YMMC offsets at issue, that it provides no support for YMUS's course of dealing argument. Moreover, it is settled law that a single instance cannot establish a course of dealing. See,e.g., General Motors Acceptance Corp. v. Clifton-Fine Cent. School Dist., 85 N.Y.2d 232, 237, 623 N.Y.S.2d 821, 823 (1995) (under U.C.C., single prior incident cannot establish course of dealing waiving assignment rights); Rotuba Extruders v. Ceppos, 46 N.Y.2d 223, 230, 413 N.Y.S.2d 141, 145 (1978) (course of dealing under the U.C.C. cannot be inferred from a single prior transaction); V.J. Gautieri Inc. v. State, 195 A.D.2d 669, 671, 599 N.Y.S.2d 766, 768 (3d Dep't 1993) (single instance of accepting substituted product could not constitute course of dealing under U.C.C.); 4 White Summers, Uniform Commercial Code § 3-3 (4th ed. 2001) ("a single occasion cannot constitute asequence and therefore cannot be a course of dealing") (collecting cases). Any § 9-318(1)(a) argument with respect to the offset of the YMMC debt must therefore rely on the parties' explicit oral agreements at the time of the eleventh-hour transactions, which, as noted above, violate the spirit and policy of § 9-318.

YMUS "does not contest" that "the Intercreditor Agreement acknowledges Fleet's interest in Bruedan's accounts receivables, even where such receivables represent the proceeds of Yamaha golf cars sold." (Dkt. No. 63: YMUS Opp. Br. at 28.) However, YMUS argues that its purchases from Bruedan did not create "proceeds" under the U.C.C. to which Fleet's priority interest could attach. (Id.) The Intercreditor Agreement does not define "proceeds," and the U.C.C. limits proceeds to "whatever is received upon the sale, exchange, collection or other disposition of collateral," quoting N.Y. U.C.C. § 9-306(1).⁴² (See Dkt. No. 63: YMUS Opp. Br. at 28-29, emphasis by YMUS.) Because "[i]n the transactions at issue, due to the offsets, Bruedan did not receive any money from YMUS, . . . no proceeds were created." (Dkt. No. 63: YMUS Opp. Br. at 29.) This argument lacks merit.

42 Section 9-306(1)-(2) provides:

(1) "Proceeds" includes whatever is received upon the sale, exchange. collection or other disposition of collateral or proceeds. . . . Money, checks, deposit accounts, and the like are "cash proceeds". All other proceeds are "non-cash proceeds".

(2) Except where this Article otherwise provides, a security interest continues in collateral notwithstanding sale, exchange or other disposition thereof unless the disposition was authorized by the secured party in the security agreement or and also continues in any identifiable proceeds including collections received by the debtor.

N.Y. U.C.C. § 9-306(1)-(2) (emphasis added).

Bruedan's car sales did result in the receipt of proceeds — albeit "received" by YMMC rather than Bruedan. The definition of "proceeds" includes both cash proceeds and non-cash proceeds such as accounts receivable. N.Y. U.C.C. § 9-306(1) (quoted in fn.42 above). As detailed below, in both the October and December transactions, Bruedan sold cars to YMUS, and YMUS directed the "proceeds" of the sale to YMMC in the form of either cash or accounts receivable from YMUS to YMMC.

"Acting on behalf of YMMC and YMUS, [Teele] entered into an explicit oral agreement with Bruedan personnel" "that if YMUS bought the golf cars from Bruedan, the amounts that ordinarily would be paid to the dealer (Bruedan) would be allocated as follows: (a) first, to pay directly any YMMC unpaid invoices associated with the cars being leased; (b) second, to pay off any residual amounts due; and (c) third, to reflect any service reserve reductions." (YMUS Ex. 42: Teele 1/15/02 Supp. Aff. ¶¶ 12-13.) In other words, the parties orally agreed that YMMC would release 362 cars to Bruedan "only if it was agreed that out of the ensuing dealer funding, YMMC's unpaid invoices, i.e., the invoices for the 362 cars (which totaled $1,058,231.04), would be paid directly by YMUS to YMMC from the dealer funding." (Id. ¶ 13.) The above transaction was effectuated on December 6, 2000, and the agreement and transactions were memorialized by a December 6, 2000 letter from Teele to Bruedan. (YMUS Ex. 42: Teele 1/15/02 Supp. Aff. ¶ 13; Fleet Ex. 24; Fleet Ex. 47 at 127-142.) The $1,058,231 receivable effectively assigned by Bruedan to YMMC was apparently memorialized by a December 5, 2000 YMUS "Accounts Receivable Adjustment Request" to "credit dealer account lease funding" (Fleet Ex. 47 at 132) and a December 5, 2000 YMUS Credit Memo to YMMC for "Repurchase Golf Car Accounts Receivable" (Fleet Ex. 47 at 136).

The October transaction was the mirror image, but effectuated via an assignment of debt from YMMC to YMUS. Nevertheless, the same proceeds in the form of cash or accounts receivable on the car sale were conveyed from YMUS to YMMC. As YMUS explains the transaction:

YMUS decided that it would proceed to fund the pending lease transactions proposed by Bruedan, on the condition that out of the lease proceeds, aside from any "regular" reductions (such as for service reserves or to pay off lease residuals), that the amounts payable to Bruedan be reduced further by $1,548,368.43, the amount of YMMC invoices that were unpaid as to (a) cars going out on lease in the transactions then being funded ($1,000,885.00) and (b) the cars that had disappeared ($547,483.43). To effectuate this, YMMC sold and assigned $1,548,368.43 of unpaid YMMC receivables to YMUS in return for a payment of that amount from YMUS to YMMC.

(YMUS Ex. 42: Teele 1/15/02 Supp. Aff. ¶ 9, emphasis added; see Dkt. No. 63: YMUS Opp. Br. at 13.) Thus, in the October transaction, YMUS allegedly paid YMMC the full amount of the golf car sale. It is irrelevant that Yamaha effectuated this transaction with an assignment from YMMC to YMUS and then a payment from YMUS to YMMC, rather than a simple direction of the proceeds of the golf car sale from YMUS to YMMC. Were it otherwise, junior secured parties could avoid the operation of § 9-306 by simply assigning their antecedent debt, thus contravening the clear objective of the statute. See Metter Banking Co. v. Fisher Foods. Inc., 359 S.E.2d 145, 148 (Ga.App. 1987) (Conversion case: "it is unreasonable to assume the debtor can defeat a perfected prior interest in the sale of his farm products by giving the products themselves to a creditor with a subsequently perfected interest in the products, particularly when that creditor by agreement acknowledges the bank's security interest in the accounts receivable and takes the security interest in those products subject to that prior perfected interest in the sale, or accounts receivable").

YMUS's second argument against deeming as "proceeds" under § 9-306 the cash or receivables transferred from YMUS to YMMC as a result of the Bruedan sale is that § 9-306(2) requires that the proceeds be received by the "debtor," whereas the proceeds of the sale in this case were received by Yamaha.⁴³ There is a split of authority on this issue.

43 YMUS has not expressly asserted this argument, relying instead on the § 9-306(1) argument noted above. (See Dkt. No. 63: YMUS Opp. Br. at 29.) The argument, however, is implied by YMUS and is expressly made in certain of YMUS's cited authorities.

Based on legislative history and a literal construction of § 9-306, a minority of courts have determined that a security interest continues in proceeds from the sale of collateral only if the debtor receives the proceeds. These courts generally construe the phrase "received by the debtor" in U.C.C. § 9-306(2) to modify the phrase "identifiable proceeds" as well as the term "collections."⁴⁴ However, the better reasoned decisions and virtually all treatises hold that a security interest continues in proceeds regardless of whether the debtor or someone other than the debtor receives the proceeds.⁴⁵ See Bank of Oklahoma. N.A. v. The Islands Marina, Ltd., 918 F.2d 1476, 1481 (10th Cir. 1990) ("debtor need not receive the proceeds in order for them to be subject to the security interest"); Leasing Serv. Corp. v. Seafirst Bank, 1 U.C.C. Rep. Serv.2d 548, 1986 WL 213431 (W.D. Wash. May 13, 1986); Am. Nat'l Bank v. Cloud, 201 Cal.App.3d 766, 774-76, 247 Cal.Rptr. 325, 329-30 (1988) ("'proceeds' includes "the account arising when the right to payment is earned under a contract of rights,'" including payments to parties other than the debtor.); Producers Cotton Oil Co. v. AmstarCorp., 197 Cal.App.3d 638, 649-51, 242 Cal.Rptr. 914, 920-21 (1988) ("the crop monies held by [account debtor] as consideration for the purchase of [assignor]'s sugar beets were proceeds within the meaning of section 9306, subdivision (1). The account that was thus created became proceeds regardless of the fact that none of the funds would be paid to [assignor]."); Metter Banking Co. v. Fisher Foods. Inc., 183 Ga. App. 441, 359 S.E.2d 145 (Ga.App. 1987) ("it is unreasonable to assume the debtor can defeat a perfected prior interest in the sale of his farm products by giving the products themselves to a creditor with a subsequently perfected interest in the products, particularly when that creditor by agreement acknowledges the bank's security interest in the accounts receivable and takes the security interest in those products subject to that prior perfected interest in the sale, or accounts receivable") (emphasis in original); First State Bank v. Clark, 635 N.W.2d 29, 30-34 (Iowa 2001); Farnum v. C.J. Merrill. Inc., 264 A.2d 150, 156 (Me. 1970) ("We are satisfied that [§ 9-306 (1)] is to be read: 'Proceeds' include whatever is received by anyone . . ." Thus amount paid by account debtor to insolvency receiver would be "proceeds."); Prod. Credit Ass'n v. Melland, 278 N.W.2d 780, 788-89 (N.D. 1979) (§ 9-306 "proceeds" held to include purchaser of goods who offset sale price based on antecedent debt); Baker Prod. Credit Ass'n v. Long Creek Meat Co., 266 Or. 643, 650-51, 513 P.2d 1129, 1132-33 (1973); 2 Clark, The Law of Secured Transactions Under the Uniform Commercial Code ¶ 10.01 [2] [e] at n. 33 (2d ed. 2001) ("The better rule is that the security interest continues even if the proceeds go to a third party."); 8 Hawkland U.C.C. Series § 9-306:3 (2001) ("Almost all courts deciding the issue have held that the proceeds need not be actually received by the debtor for the security interest to continue. To hold otherwise would, in the opinion of one court, frustrate the Code's priority rules, dry up secured lending, and discourage the commencement of business activity."); 4 White Summers, Uniform Commercial Code § 31-11.5 (4th ed. 2001) ("Does the use of the verb "receive' mean that any proceeds must come into the possession of the debtor? Assume, for example, that collateral is sold in return for chattel paper that never comes into the possession of the debtor, but is instead given directly to a junior creditor. Do these fail to be "proceeds' because they were never "received' by the debtor? We think they are proceeds. We see no good reason to insist that proceeds actually come into the possession of the debtor in order for the original secured creditor's interest to attach to them.").

44 See United States v. Cohoon, 11 U.C.C. Rep. Serv.2d 316, 1990 WL 488915 (E.D.N.C. Feb. 16, 1990); General Elec. Co. Lighting Bus. Group v. Halmar Distribs., Inc., 116 B.R. 328, 334 (Bankr. D. Mass. 1990),rev'd in part on other grounds, 968 F.2d 121 (1st Cir. 1992); First Interstate Bank v. Arizona Agrochem, Co., 731 P.2d 746, 748 (Colo.Ct.App. 1986); Eastern Idaho Prod. Credit Ass'n v. Idaho Gem, Inc., 122 Idaho 946, 950-51, 842 P.2d 282, 286-87 (Idaho 1992); Norfolk Prod. Credit Ass'n v. Bank of Norfolk, 371 N.W.2d 276, 279 (Neb. 1985); see also Scallop Petroleum Co. v. Banque Trad-Credit Lyonnais (France) S.A., 690 F. Supp. 184, 190-91 (S.D.N.Y. 1988).

45 The 2001 amendments to the New York U.C.C. eliminated this issue by simply stating that a security interest attaches to any identifiable proceeds of collateral." N.Y. U.C.C. § 9-315(a)(2) (McKinney's Supp. 2001-02).

As one court explained:

A debtor should not be able to avoid a secured creditor's right to proceeds by directing payment to an unsecured creditor. To rule otherwise would frustrate the Code's priority rules by allowing a creditor who, as here, gets possession of the proceeds prior to the debtor to take priority over an otherwise superior security interest in those proceeds. Such a rule would discourage lending institutions from providing financing. . . .

First State Bank v. Clark 635 N.W.2d 29, 30-34 (Iowa 2001) (citations omitted); accord, e.g., 8 Hawkland U.C.C. Series § 9-306:3 (2001); 4 White Summers, Uniform Commercial Code § 31-11.5 (4th ed. 2001).

The Intercreditor Agreement itself effectively ends this argument by providing that any "proceeds" of the collateral are the property of Fleet, even if such proceeds should come into Yamaha's possession:

(d) Priorities in Distributions. In the event of any distribution, division, or application (whether partial or complete, voluntary or involuntary, by operation of law or otherwise) of the proceeds of all or any part of the Collateral, such proceeds of each item of Collateral shall be deemed to be the property of [Fleet]. Should Yamaha receive any payment or distribution with respect to the proceeds of Collateral, Yamaha shall receive and hold any such payment or distribution to [Fleet]. . . .

(Fleet Ex. 12, ¶ 2(d), emphasis added.) The parties contemplated that the "proceeds" of the collateral to which Fleet had priority included not merely payments or distributions received by Bruedan in a sale or conveyance but also payments or distributions received by others including YMMC Cf., Safeco Credit Co. v. United States Bancorp Leasing Fin., 833 F. Supp. 833, 835 (D. Or. 1993) (junior creditor breached subordination agreement by receiving and refusing to repay proceeds of sale of collateral; parties, however, agreed that sale price represented "proceeds" under the agreement); Conagra. Inc. v. Farmers State Bank, 237 Mich. App. 109, 132-33, 602 N.W.2d 390, 401-02 (1999) (junior creditor violated intercreditor agreement by accepting disaster relief payments, which were held to be "proceeds").

Finally, it is black letter law that "good faith and fair dealing are presumed" in every contract. E.g., Integrated Sales, Inc. v. Maxell Corp. of America, 94 A.D.2d 221, 226, 463 N.Y.S.2d 809, 812 (1st Dep't 1983). "A party's actions may implicate the implied [U.C.C.] covenant of good faith when it acts so directly to impair the value of the contract for another party that it may be assumed that they are inconsistent with the intent of the parties." Bank of China v. Chan, 937 F.2d 780, 789 (2d Cir. 1991). YMMC's actions, and that of its agent and assignee, YMUS, clearly violated that implied covenant. YMMC agreed to subordinate its interest to Fleet in all property of Bruedan except the golf car collateral, and further expressly agreed that Fleet's interest was senior as to the proceeds of that collateral. (Fleet Ex. 12, ¶¶ 1-2.) YMUS and YMMC thus knew that YMMC could have no security interest senior to Fleet in the proceeds of any sale of Bruedan collateral. Interposing YMMC's junior interest ahead of Fleet's senior interest at the time of Bruedan's sales of golf cars to YMUS — sales that ordinarily would result in proceeds going to Bruedan — thus contravened the objective of the Intercreditor Agreement (and the Code), resulting in a breach of the Agreement.

In short, YMMC chose to agree with Fleet that YMMC retained a superior interest solely in the golf car collateral, and YMMC subordinated its interest to Fleet's interest in all remaining property including both the cash and non-cash proceeds of the collateral. When trouble arose, YMMC had the option of seizing its collateral — the golf cars. Yamaha instead chose, for whatever reason, to go forward with sales of the golf cars, thus destroying YMMC's priority interest. Having chosen this path, Yamaha did not have the option of interposing its own interest ahead of Fleet's senior secured interest in the proceeds of the collateral sale.⁴⁶ B. Contractual Damages: Conclusion

46 It is irrelevant whether YMUS ever actually paid YMMC cash for the accounts receivable or whether the cash or accounts receivable qualified as "identifiable" proceeds under § 9-306(2). YMUS's attempt to interpose YMMC's junior debt ahead of Fleet's senior debt violated the Intercreditor Agreement, rendering invalid any offsets based on the junior YMMC debt. Cf., Safeco Credit Co. v. United States Bancorp Leasing Fin., 833 F. Supp. 833, 835 (D. Or. 1993) ("The subordination agreement was breached when defendant exercised a right or claim to the proceeds at a time when plaintiff had a superior right or claim to them. What defendant did with the proceeds after exercising its claim to them is irrelevant.").

On the Unpaid Golf Cars, Fleet is entitled to contract damages of $4,121,638 less $190,725 (service obligations) and less $160,528 (recourse obligations), for a subtotal of $3,770,385. In addition, Fleet is entitled to contract damages of $400,538 for the "Additional Obligations."

CONCLUSION

For the reasons set forth above, the Court: (1) grants (on consent) Fleet's motion to amend the complaint to add the Par Fore and Timbercreek transactions; (2) grants (on consent) Fleet's motion to dismiss YMUS's counterclaims; (3) grants YMUS summary judgment with respect to the Par Fore and Timbercreek transactions; (4) grants Fleet's summary judgment motion (and denies YMUS's cross-motion) with respect to Fleet's conversion claim, and awards Fleet conversion damages of $3,930,913; and (5) grants Fleet's summary judgment motion (and denies YMUS's crossmotion) with respect to Fleet's contract claim, and awards Fleet damages of $3,770,385 for the Unpaid Golf Cars aspect of the contract claim (although Fleet can only have a single recovery on its conversion and contract claims), and $400,538 additional contract damages for the "Additional Obligations."

SO ORDERED.