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H&S Contracting, Inc. v. Kinetic Leasing, Inc.

United States District Court, D. Minnesota

June 8, 2018

H&S Contracting, Inc., et al., Plaintiffs,
v.
Kinetic Leasing, Inc., et al. Defendants.

          REPORT AND RECOMMENDATION

          Honorable Leo I. Brisbois United States Magistrate Judge

         This matter comes before the undersigned United States Magistrate Judge upon Defendant First Bank and Trust's Motion for Summary Judgment, [Docket No. 30]; Defendant Kinetic Leasing, Inc.'s Motion for Summary Judgment, [Docket No. 43]; and upon referral from the Honorable Chief Judge John R. Tunheim. (Order of Reference [Docket No. 68]). A hearing was held on April 9, 2018, after which the motions were taken under advisement. [Docket No. 78].

         For the reasons set forth below, the Court recommends that Defendant First Bank and Trust's Motion for Summary Judgment, [Docket No. 30], be GRANTED in part and DENIED in part, and Defendant Kinetic Leasing, Inc.'s Motion for Summary Judgment, [Docket No. 43], be DENIED.

         I. BACKGROUND

         In 2006, First Bank & Trust (hereafter “FB&T”) began a lending relationship with Concrete Contractors, Inc. (hereafter “CCI”), a South Dakota entity. FB&T extended loans to CCI, and CCI executed a Commercial Security Agreement dated February 9, 2006, which granted First Bank & Trust a security interest in all of CCI's machinery, vehicles, and other equipment to secure “all present and future debts.” (Tetzlaff Aff., [Docket No. 32], at ¶ 3, FB&T Answer, [Docket No. 4], at Ex. A). This February 9, 2006, security agreement provided that CCI would “not sell, offer to sell, license, lease, or otherwise transfer or encumber the Property without [First Bank & Trust's] prior written consent.” (FB&T Answer, [Docket No. 4], at Ex. A). The security agreement further provided that upon any default FB&T was entitled to repossess the collateral to dispose of it to satisfy any secured debt. (Id.). FB&T perfected its security interest in CCI's equipment and other property on February 9, 2006, by filing a UCC financing statement with the South Dakota Secretary of State's Officer, and it thereafter continued to renew this South Dakota filing. (Id. at Ex. B).

         On January 30, 2009, CCI executed a Guaranty in which CCI personally guaranteed all debts and other obligations of a related entity, Syntech, Inc., and this Guaranty provided that it was secured by the February 9, 2006, Security Agreement. (Tetzlaff Aff., [Docket No. 32], at Ex. A). Pursuant to the Guaranty, CCI guaranteed “all present and future debts of” Syntech Inc. (Id.).

         Syntech defaulted on its obligations to FB&T in 2010. (Tetzlaff Aff., [Docket No. 32], at ¶ 6). And, CCI has refused to pay any of the indebtedness owed by Syntech to FB&T. (Id. at ¶ 8).

         On October 1, 2015, CCI sold various pieces of construction equipment[1] to Plaintiff H&S Contracting. (Compl., [Docket No. 1], at ¶ 7). The following day, on October 2, 2015, as part of the same transaction and allegedly as a means to finance the acquisition of the equipment, H&S Contracting sold all of the equipment to Defendant Kinetic Leasing, Inc., (hereafter “Kinetic”) which then leased all of the equipment back to H&S Contracting. (Id. at ¶ 9). As part of the lease consideration, Plaintiff Tracy Hazelton (the sole owner of H&S Contracting) was required to and did personally guarantee the payments due under the Kinetic lease. (Id. at ¶ 12). The equipment was physically transferred from CCI in South Dakota to H&S Contracting in Minnesota, and at least by October 6, 2015, H&S Contracting accepted delivery of the Equipment. (Zimmerli Aff, [Docket No. 33], at Ex. B at 1, Ex. D).

         On May 1, 2016, Plaintiff H&S Contracting notified Defendant Kinetic that it no longer needed the equipment, and H&S Contracting “proposed to sell the equipment and pay off the lease.” (Compl., [Docket No. 1], at ¶ 13). Defendant Kinetic then authorized H&S Contracting to act as its agent in the sale of the Equipment. Plaintiff H&S Contracting contracted with Iron Planet to arrange a sale of one item of equipment, a KPI Crusher, and on or about May 24, 2016, Iron Planet subsequently sold the KPI Crusher for a sale price of $220, 000.00. (Id. at ¶ 15). Pursuant to the agreement between Plaintiff H&S Contracting and Defendant Kinetic, a portion of the sales proceeds were paid to Defendant Kinetic to reduce the balance due from Plaintiff H&S Contracting on the Kinetic lease, and a portion of the proceeds were paid to Plaintiff H&S Contracting. (Id.).

         In September 2016, Plaintiff H&S Contracting contracted with Ritchie Brothers Auctioneers to sell the remaining Equipment. (Id. at ¶ 16). Plaintiff H&S Contracting and Defendant Kinetic entered into an agreement whereby Plaintiff H&S would be the seller of the Equipment, and upon the sale, the proceeds would remit to Defendant Kinetic to be applied again against sums owed by H&S Contracting under the Kinetic lease. (Id. at ¶ 17). The auction was scheduled to take place on September 16, 2016. (Id. at ¶ 18).

         However, on September 15, 2016, Plaintiff H&S Contracting was informed that Defendant FB&T claimed a security interest in the Equipment. (Id. at ¶ 19). Specifically, on September 15, 2016, outside counsel for Ritchie Brothers Auctioneers provided that Ritchie Brothers had been contacted by attorney Kristina M. Schaefer on behalf of FB&T regarding a demand for the proceeds of the sale of the Equipment. (Kinetic Ans., [Docket No. 4], Ex. C).

         As a consequence of FB&T's claim, Ritchie Brothers, in communications with FB&T and Kinetic Leasing, noted that since a demand had been made, it needed “to insure that it [could] provide free and clear title to its buyer at” the auction or it could not proceed with the sale. (Id.). Ritchie Brothers indicated that it would proceed with the sale if “both [FB&T] and Kinetic agree and authorize [Ritchie Brothers] to conduct the auction and further agree that the equipment sold at the auction will be free of their respective liens. Both [FB&T] and Kinetic's liens will attach to the net sales proceeds in their present priority, whatever that priority may turn out to be determined, either by settlement or by court order.” (Id.). Ritchie Brothers' counsel further provided that “by copy of this email to Ms. Schaefer, I would request that both [FB&T] and Kinetic inform me by return email if they are in agreement with this procedure which will allow RBA to conduct the auction as noticed.” (Id.).

         On September 15, 2016, Kristina M. Schaefer, counsel for FB&T responded to Ritchie Brothers' counsel's email providing that FB&T “agrees that the auction can proceed based on the terms outlined herein---specifically, that the net proceeds received at the auction for the five items sold will be held until mutual instructions from [FB&T] and Kinetic or court order awarding the funds.” (Id.). Included in that email was a copy of the email Ritchie Brothers' counsel had sent to Kinetic. (See, Id.).

         Also on September 15, 2016, Al Hintz, President of Kinetic Leasing, responded to Ritchie Brothers' counsel's email. Mr. Hintz wrote as follows:

While we have not had time to consult with our legal counsel yet, I am in agreement with the same terms that Kristina Schaefer had stated as to [FB&T]. Kinetic Leasing, Inc. agrees that the auction can proceed based on the terms outlines herein - specifically, that the net proceeds received at the auction for the five sold items will be held until mutual instruction from [FB&T] and Kinetic or court order awarding the funds.

(Id.).

         Defendants did not inform Plaintiff H&S Contracting of the agreement to continue with the sale and withhold the funds. (Id.). The sale proceeded and the funds were withheld.[2]

         On November 7, 2016, Kinetic's counsel at the time sent a letter to FB&T's counsel before the commencement of the present action regarding the September 15, 2016, emails between the parties. (Letter [Docket No. 49-1]). Kinetic's counsel wrote that it was his understanding that FB&T's position was “the wording in Policar's [Ritchie Brothers'] email” was “tantamount to an agreement between the parties that [FB&T's] lien has priority over Kinetic's and that this language tolls any obligations for [FB&T] to do anything else required by the U.C.C. to perfect its lien.” (Id.). Kinetic's counsel countered that it never had such an understanding because at the time the agreement was entered into it “did not know who had the superior lien and it was under the impression that the statues governing the U.C.C. would decide the prevailing party.” (Id.). Kinetic's counsel further provided in part that

[l]ikewise, Kinetic did not agree to toll any U.C.C. provisions to allow FB&T to perfect its lien in Minnesota. In fact, one could surmise Mr. Policar's statement meant the exact opposite, in that FB&T was bound to maintain its status as only being perfected in South Dakota (“in their present priority . . .”) and was barred from filing anything during the one year period allowed by the U.C.C. to re-perfect in Minnesota. Although, I think Kinetic's understanding is a more reasonable way to interpret Mr. Policar's writing, to wit, the U.C.C. will determine the outcome and FB&T was not precluded from doing whatever was needed to perfect in other states.

(Id.).

         On the basis of the above facts, Plaintiff H&S Contracting alleged a Breach of Contract claim, as well as, a claim of Interference with Contractual Relationships against Defendant Kinetic Leasing. (Compl., [Docket No. 1], at ¶¶ 26-34). Plaintiffs also sought declaratory judgment finding that Defendant FB&T has no claim to the proceeds of the Equipment sale, “and that Kinetic has a claim to the proceeds provided that plaintiffs be appropriately credited in whole against the lease between H&S [Contracting] and Kinetic [Leasing], reducing the amount due under the [Kinetic] lease, and thereby reducing the amount of Hazelton's liability under his personal guarantee of the lease.” (Id. at ¶¶ 35-44, Prayer for Relief).

         On February 27, 2017, Defendant FB&T answered the present Complaint, and it raised crossclaims against Defendant Kinetic, as well as, counterclaims against Plaintiff H&S Contracting. [Docket No. 4]. Defendant FB&T seeks declaratory judgments against Plaintiff H&S Contracting and Defendant Kinetic declaring the respective rights of the parties in the proceeds from the sale of the Equipment at issue. (Id. at ¶¶ 29-43). Defendant FB&T also raises separate counterclaims of conversion against Plaintiff H&S Contracting and similar crossclaims against Defendant Kinetic. (Id. at ¶¶ 44-55). Defendant FB&T does not raise any counterclaims against Plaintiff Hazelton directly.

         On March 1, 2017, Defendant Kinetic answered the present Complaint raising its own crossclaims against Defendant FB&T and counterclaims against Plaintiff H&S Contracting. [Docket No. 6]. Defendant Kinetic raises a crossclaim against Defendant FB&T seeking declaratory judgment that Defendant FB&T has no claim to the equipment or the proceeds of the sale of the Equipment at issue. (Id. at ¶ 76). Defendant Kinetic also raises a counterclaim for Breach of Warranty Title against Plaintiff H&S Contracting. (Id. at ¶¶ 82-85). Defendant Kinetic does not raise any counterclaims against Plaintiff Hazelton directly.

         All of the claims raised by Plaintiff H&S Contracting, as well as, all of the crossclaims and counterclaims raised by Defendants Kinetic and FB&T arise out of the same facts, i.e., the sale of the equipment at issue and who is entitled to the proceeds from that sale. The parties do not dispute these facts.

         On October 9, 2017, Defendant FB&T filed its Motion for Summary Judgment. [Docket No. 30]. Plaintiff H&S Contracting, through counsel, responded to Defendant FB&T's motion. [Docket No. 42].

         On November 10, 2017, Defendant Kinetic filed its own Motion for Summary Judgment. [Docket No. 43]. Plaintiff H&S Contracting did not responded to Defendant Kinetic's Motion for Summary Judgment, and Plaintiff's time to respond has long lapsed.

         On December 8, 2017, Plaintiff Tracy Hazelton filed an affidavit verifying that he had commenced a personal Chapter 7 bankruptcy. (Hazelton Aff. [Docket No. 51]). After Plaintiffs' counsel moved to withdraw, Plaintiff Hazleton acknowledged his support of counsel's withdrawal, indicated that he wished to proceed pro se, and acknowledged that Plaintiff H&S Contracting could not appear in court unless represented by an attorney. (Id.). Plaintiff Hazelton further indicated that he would not appear at the hearing on Defendants' Motions for Summary Judgment; he purported to join Defendant Kinetic's opposition to Defendant FB&T's motion for summary judgment; and he expressly stated that he breached no duty or warranty of title to Defendant Kinetic. (Id.).

         On February 2, 2018, this Court allowed Plaintiffs' counsel to withdraw as counsel of record without substitution. (Order [Docket No. 67]). Plaintiff Hazleton is now proceeding pro se, and there has not been any appearance by substitute counsel made on behalf of Plaintiff H&S Contracting.

         On February 28, 2018, Chief Judge Tunheim referred the present Motions for Summary Judgment, [Docket Nos. 30, 43], to the undersigned for Report and Recommendation. (Order [Docket No. 68]).

         II. STANDARD OF REVIEW

         Rule 56(a) of the Federal Rules of Civil Procedure provides that “[t]he court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” A disputed fact is “material” if it might affect the outcome of the case, and a factual dispute is “genuine” if the evidence is such that a reasonable jury could return a verdict for the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); see also, Get Away Club, Inc. v. Coleman, 969 F.2d 664, 666 (8th Cir. 1992).

         The moving party bears the burden of offering sufficient admissible evidence to establish that there are no genuine issues of material fact and that the movant is entitled to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). When deciding a motion for summary judgment, a court views the evidence before it in the light most favorable to the nonmoving party and all reasonable inferences that may be drawn from the underlying facts in the record must be drawn in the favor of the nonmoving party. Ludwig v. Anderson, 54 F.3d 465, 470 (8th Cir. 1995); Mirax Chem. Prods. Corp. v. First Interstate Commercial Corp., 950 F.2d 566, 569 (8th Cir. 1991). However, the “facts must be viewed in the light most favorable to the nonmoving party only if there is a ‘genuine' dispute as to those facts.” Scott v. Harris, 550 U.S. 372, 380 (2007).

         “[P]ro se litigants are not excused from failing to comply with substantive and procedural law.” Burgs v. Sissel, 745 F.2d 526, 528 (8th Cir. 1984). The claims of a pro se plaintiff cannot survive a motion for summary judgment unless the plaintiff has set forth specific admissible facts demonstrating the existence of a genuine issue for trial. See, Quam v. Minnehaha Cty. Jail, 821 F.2d 522, 522 (8th Cir. 1987).

         III. Motions for Summary Judgment. [Docket Nos. 30, 43].

         Defendant FB&T's Motion for Summary Judgment, [Docket No. 30], asks the Court to enter judgment in favor of FB&T on all declaratory judgment claims; “declaring that FB&T's claim to the proceeds from the September 16, 2016, sale of the Equipment . . . is prior and superior to any claim of H&S contracting, Inc., Tracy A. Hazleton, and Kinetic Leasing, Inc.”; ordering that the proceeds from the September 16, 2016, sale of the Equipment be immediately distributed to FB&T; and “[e]ntering judgment in favor of FB&T and against H&S Contracting, Inc., jointly and severally, in the amount of $550, 000.00 for conversion of the Equipment.”[3]

         Defendant Kinetic's Motion for Summary Judgment, [Docket No. 43], asks the Court to enter “judgement in favor of Kinetic on all declaratory judgment claims and declaring that Kinetic's claim to the proceeds from the May 24, 2016, sale and September 16, 2016, sale of the Equipment is a [sic] superior to the claims of H&S Contracting, Inc. (‘H&S') and [FB&T]”; “[o]rdering that the proceeds from the September 16, 2016, sale of the Equipment . . . be immediately distributed to Kinetic”; entering judgment “in favor of Kinetic on its claim for breach of warranty of title against H&S”; and “[o]rdering that H&S defend Kinetic in the above-captioned matter and pay for all of Kinetic's reasonable attorney's fees and costs incurred in defending itself in this action.”

         A. Proceeds of September 16, 2016, Richie Brothers' Sale

         It is undisputed that at the time CCI sold the Equipment to Plaintiff H&S Contracting, Defendant FB&T had a perfected security interest in the Equipment in South Dakota where the Equipment was physically located before it was sold. (Tetzlaff Aff., [Docket No. 32], at ¶ 3 & Ex. A; FB&T Answer, [Docket No. 4], at Ex. A). This perfected security interest survived the disposition of the Equipment from CCI to Plaintiff H&S Contracting, and it survived the lease back transaction between Plaintiff H&S Contracting and Defendant Kinetic. See, Minn. Stat. § 336.9-315.

         Plaintiff H&S Contracting and Defendant Kinetic, however, argue that FB&T's once-perfected security interest in the Equipment has been retroactively subverted pursuant to the requirements of Minnesota Statute § 336.9-316. They reason that although a security interest perfected in one jurisdiction (South Dakota) remains perfected for one year after a transfer of collateral to a person that becomes a debtor (H&S Contracting) and is located in another jurisdiction (Minnesota), FB&T's security interest in the Equipment became “unperfected and is deemed never to have been perfected as against a purchaser of the collateral for value” because FB&T failed to perfect its security ...


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