Recreational vehicle dealers that failed to pay for more than a dozen RVs before their northern Indiana manufacturer called it quits must pay a secured creditor’s assignee for the RVs purchase prices, the 7th Circuit Court of Appeals has ruled.
In 2016, recreational vehicle manufacturer Evergreen Recreational Vehicles delivered 21 new RVs to a group of affiliated dealers. The dealers, however, did not pay for the RVs before the manufacturer went out of business and ultimately kept the RVs.
They refused to pay Evergreen’s secured creditor, KR Enterprises Inc., prompting a suit that eventually made its way to the 7th Circuit Court of Appeals to collect the accounts receivable.
After KR assigned its rights to the owner of the manufacturer, the Indiana Northern District Court held a bench trial and found that the secured creditor’s assignee was entitled to payment of the purchase prices, with the exception of some setoffs for warranty and rebate claims that the manufacturer had owed to the dealers on earlier RV sales.
On appeal, the defendant dealers maintained they owed nothing to KR for the RVs they received. The secured creditor’s assignee cross-appealed, arguing that the setoffs should not have been allowed and that it was entitled to prejudgment interest.
In 2018, while the case at hand was pending, Evergreen’s lender, 1st Source Bank, assigned its rights as a secured lender to KR Enterprises in return for a payment by KR that satisfied Evergreen’s $1 million debt to 1st Source.
“Defendants argue that 1st Source and KR Enterprises timed and documented the transaction so clumsily as to wipe out both parties’ security interest in the Evergreen accounts receivable. The district court rejected that audacious theory, and so do we,” wrote Circuit Judge David Hamilton in affirming the lower court’s decision.
The appellate panel found that the district court did not err by admitting and then crediting the relevant testimony from 1st Source Vice President Richard Rozenboom and Evergreen owner Kelly Rose, or by recognizing that KR paid off the Evergreen loan in return for assignment of 1st Source’s security interest.
“The district court thus correctly found that the parties did not intend to erase the security interest at the heart of the transaction and that the General Assignment transferred a priority security interest in the RVs from 1st Source to KR Enterprises, making KR Enterprises the proper plaintiff here,” Hamilton wrote.
As to the defendants’ argument that Evergreen was the first to breach the relevant contracts at issue, the 7th Circuit found the district court was correct in concluding the solution was to hold the dealers liable for the purchase prices of the RVs but to allow them setoffs for the rebates and warranty payments that Evergreen owed them, effectively netting out the parties’ respective obligations.
Lastly, the 7th Circuit concluded Indiana Code § 26-1-9.1-404 applied to the issue brought by both parties regarding setoffs. Namely, the amounts the dealers owe KR for the unpaid RVs should be offset by the amounts Evergreen still owed the dealers for rebates and warranties, exactly as the district court decided.
The panel also found a legal basis for setoffs for diminished value, but the dealers failed to establish a factual basis for the larger setoffs they seek.
“KR Enterprises disputed the district court’s ruling as to granting setoffs at all but did not dispute the district court’s calculation of the amounts. We affirm both the district court’s refusal to calculate or incorporate setoffs for diminished value and its ultimate calculations of the rebate and warranty setoffs,” Hamilton concluded.
“Finally, because we affirm the setoffs for Evergreen’s breaches on the rebate and warranty claims, we also affirm the district court’s denial of prejudgment interest. KR Enterprises made clear in its briefs and oral argument that it could prevail on the prejudgment interest only if we reversed on the setoffs.”
The case is KR Enterprises, Inc. v. Zerteck Inc., doing business as BOAT-N-RV WAREHOUSE, et al., 20-2069, 20-2155.