Article courtesy of Kevin Braun (Morgan, Lewis & Bockius LLP), Paige Forcier (Morgan, Lewis & Bockius LLP), and Ian Tomesch (Morgan, Lewis & Bockius LLP)
Novi Footwear Int’l Co. Ltd. v. Earth Opco LLC, 638 F. Supp. 3d 83 (D. Mass. 2022)
Novi Footwear International Co. Ltd., a footwear manufacturer (“Seller”), entered into an agreement to source footwear for Earth Opco LLC (“Borrower”), pursuant to which Seller would deliver the products to Borrower, but title would not pass from Seller to Borrower until Seller received payment of the delivered products. In connection therewith, Seller required Borrower post a stand-by letter of credit in connection with any orders.
Second Avenue Capital Partners LLC (“Lender”) later made a loan to Borrower secured by a lien on all of Borrower’s “personal property and interests in such personal property,” including “all Goods, including Equipment, Inventory and Fixtures” and Lender filed a UCC-1 Financing Statement covering all of Borrower’s assets (the “UCC-1”).
A few years later, Seller and Borrower entered into a payment plan letter agreement (the “Letter Agreement”) changing the terms of their agreement, which the court described as “a poster child for imprecise contract drafting,” due to its inconsistent description of Seller’s rights in the products after delivery to Buyer. Borrower did not pay Seller the amounts owed pursuant to the Letter Agreement and began selling the inventory that Seller had already delivered at discounted prices. Around the same time, Lender informed Borrower that Borrower was in default under their credit agreement.
The District Court for the District of Massachusetts found that while Seller alleges it had a quasi-security interest in the products, it failed to perfect such interest as required by the UCC, whereas it is undisputed that Lender perfected its security interest by filing the UCC-1. The court cited controlling precedent stating that a perfected secured lender’s interest takes priority over the claims of an unpaid seller. The court also rejected Seller’s “equitable subordination” argument because, as the court noted, Lender filed its UCC-1 before the Letter Agreement (which created the alleged quasi-consignment relationship) and there is no knowledge exception for consignment in the UCC. Seller also argued that Lender’s security interest was invalid because Seller’s interest in the products made it such that Borrower could not grant an enforceable security interest in them. But the court also rejected that argument, pointing to the fact that Borrower had possession of the products and had other rights in the products, such the right to sell them. Finally, the court rejected Seller’s argument that Lender acted in bad faith, noting that any bad faith on the Lender’s part would only be relevant if Seller attempted to reclaim the products, which it never did. The court also acknowledged that Lender would be irreparably harmed by maintenance of Seller’s injunction, as the collateral securing Lender’s loan was diminishing in value.
For the foregoing reasons, the court granted Lender’s motion for summary judgment and entered a declaratory judgment, declaring that Lender’s interest in the products had priority over that of Seller.
