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First Guaranty Bank v. Republic Bank, Inc.

United States District Court, D. Utah

September 27, 2019

FIRST GUARANTY BANK, Plaintiff,
v.
REPUBLIC BANK, INC. nka RB PARTNERS, INC., Defendant.

          MEMORADUM DECISION AND ORDER GRANTING IN PART AND DENYING IN PART MOTIONS FOR SUMMARY JUDGMENT

          JILL N. PARRISH DISTRICT JUDGE

         Republic Bank[1] sold a number of equipment leases to First Guaranty Bank by way of two lease purchase contracts. Most of the lessees paid the leases in full, but two of the lessees stopped making payments. First Guaranty sued Republic for breach of contract, breach of the covenant of good faith and fair dealing, and for rescission[2] of the two lease purchase contracts due to either material misrepresentations or mutual mistake. Before the court are (1) Republic’s motion for summary judgment on all claims [Docket 147], (2) First Guaranty’s motion for summary judgment on its claim for rescission due to mutual mistake [Docket 135], and (3) First Guaranty’s motion for summary judgment on its claim for rescission due to material misrepresentations [Docket 155].

         The court GRANTS IN PART and DENIES IN PART Republic’s motion for summary judgment and DENIES First Guaranty’s motions for summary judgment.

         BACKGROUND

         A. Med One finances McKesson’s sale of equipment, software, and services to Pioneer via the Pioneer Sales Agreement. Med One then transfers its rights under the Pioneer Sales Agreement to Republic.

         In December 2011, Pioneer Health Services, Inc, an entity that owned and operated several hospitals, entered into a contract with McKesson Technologies Inc. The contract, entitled the McKesson Master Agreement (McKesson Agreement), detailed many of the terms under which Pioneer would obtain equipment, software, and implementation and maintenance services from McKesson. The equipment and software to be provided by McKesson was called the Paragon Hospital Information System. The McKesson Agreement provided that Pioneer would receive a nontransferable, perpetual license to use the software provided by McKesson.

         Med One Capital Funding, LLC financed Pioneer’s purchase of equipment, software, and services from McKesson. On April 12, 2012, Med One entered into a Conditional Sales Agreement (Pioneer Sales Agreement) with Pioneer. This contract listed Pioneer as the customer and McKesson as the vendor for four separate items:

(1) Paragon Hospital Information System – as described in Contract # 1-18XKQT ($1, 772, 334.00),
(2) Paragon Hospital Information System – as described in Contract # 1-18X8C9PS4A ($132, 000.00),
(3) Software – as described in Contract # 1-18X8C9PS6 ($363, 303.99), and
(4) Paragon Interface Implementation Service - as described in Contract # 1-18X8C9PS6 ($146, 029.56).

         The Pioneer Sales Agreement defined these four items as “Equipment” and required Pioneer to pay for the Equipment by remitting 60 monthly payments to Med One. The first 12 payments were $25, 000 each. The next 48 payments were $54, 594 each. The contract stated that Med One “shall retain title to the Equipment for legal and security purposes” until Pioneer has remitted all 60 monthly payments in full. After all payments had been made, Med One agreed to transfer title to Pioneer.

         At some point after the execution of the Pioneer Sales Agreement, McKesson, Pioneer, and Med One all signed an undated letter addressed to “Whom it may concern” (Letter Agreement). This Letter Agreement referenced the Pioneer Sales Agreement and stated that

rights and obligations associated with the Software, Equipment, and Services are transferred to [Med One] and [Med One] is undertaking to fund the obligations of [Pioneer] under the [McKesson Agreement]. [Pioneer] acknowledges and agrees that in the event of default under the loan, . . . [Med One] may notify McKesson of [Pioneer’s] default and McKesson may terminate all equipment maintenance services and software maintenance services provided by McKesson.

         Med One subsequently sold its right to receive the monthly payments under the Pioneer Sales Agreement to Republic. This transfer was governed by a contract between Med One and Republic entitled the Master Assignment of Leases and Progress Funding Agreement (Med One Assignment Agreement). In this contract, the parties referred to the Pioneer Sales Agreement as a lease. The Med One Assignment Agreement transferred from Med One to Republic the right to receive the monthly payments provided for in the Pioneer Sales Agreement. But Med One retained the right to service the monthly payments due from Pioneer. Republic could terminate Med One in its role of servicer only if Med One violated the Med One Assignment Agreement, became bankrupt, or committed fraud in connection with its servicing duties. The Med One Assignment Agreement also provided that the “rights and obligations of the parties hereunder may not be assigned without the prior written consent of the other party.”

         On April 25, 2012, Med One filed a UCC Financing Statement with the State of Mississippi. The UCC Financing Statement listed both Republic and Med One as secured parties for “Equipment more fully described in the attached Schedule A.” The attached Schedule A consisted of a one-page purchase order, which listed Pioneer as the “Customer, ” McKesson as the “Supplier, ” and Med One as the “Owner.” The four items of “Equipment” listed in the attached purchase order were the same items listed in the Pioneer Sales Agreement: (1) Paragon Hospital Information System – as described in Contract # 1-18XKQT, (2) Paragon Hospital Information System – as described in Contract # 1-18X8C9PS4A, (3) Software – as described in Contract # 1-18X8C9PS6, and (4) Paragon Interface Implementation Service - as described in Contract # 1-18X8C9PS6.

         In January 2013, Pioneer signed a Notice of Delivery and Acceptance, acknowledging receipt of the items listed in the Pioneer Sales Agreement. This document stated that “[t]itle to the Equipment shall at all times remain with [Med One].”

         B. Republic sells a number of leases to First Guaranty, including the Sherman-Grayson lease and the Pioneer “lease.”

         In late 2014 and mid 2015 Republic assigned fifty-three separate leases[3] to First Guaranty by way of two Portfolio Purchase Agreements (Purchase Agreements). The December 24, 2014 Purchase Agreement (First Purchase Agreement) transferred forty-five lease agreements to First Guaranty. One of these leases was for equipment provided to Sherman-Grayson Hospital (Sherman-Grayson lease). About two months before Republic and First Guaranty executed the First Purchase Agreement, Alecto Healthcare Services Sherman, LLC dba WNJ Regional Medical Center (WNJ) released a press release announcing that it had completed the acquisition of Sherman-Grayson Hospital. The May 26, 2015 Purchase Agreement (Second Purchase Agreement) transferred eight additional lease agreements to First Guaranty, including the right to monthly payments described in the Pioneer Sales Agreement.

         The Purchase Agreements required First Guaranty to administer the leases in its own name. The agreements appointed First Guaranty as Republic’s attorney-in-fact for the purpose of collecting the amounts owed under the leases. Republic agreed to allow First Guaranty to use its letterhead to send notices to the lessees informing them that the leases had been sold to First Guaranty and that all future payments should be sent to First Guaranty. Despite these provisions, First Guaranty orally agreed that Med One could continue to administer the payments due under the Pioneer Sales Agreement on a temporary basis.

         Before the parties executed the Purchase Agreements, Republic made documents available to First Guaranty in a digital “data room.” The data room included the Pioneer Sales Agreement and the associated UCC filing and Notice of Delivery and Acceptance. The data room did not include the McKesson Agreement or the Letter Agreement. Indeed, Republic did not have copies of the McKesson Agreement or the Letter Agreement and was not aware of the existence of these documents. The data room also did not include the Med One Assignment Agreement signed by Republic. Employees of First Guaranty inspected the documents in the data room before it entered into the Second Purchase Agreement.

         C. The lessees stop making payments on the Sherman-Grayson and Pioneer leases. First Guaranty sues Republic.

         The majority of the lessees made all of the payments required under the lease agreements acquired by First Guaranty. But two of the lessees stopped making payments. At some point after the First Purchase Agreement was executed, WNJ stopped paying on the Sherman-Grayson lease. First Guaranty eventually accepted a partial, lump-sum payment from WNJ in exchange for the equipment that was the subject of that lease.

         Additionally, on March 30, 2016, Pioneer declared bankruptcy and stopped making payments due under the Pioneer Sales Agreement. The bankruptcy court set a deadline of July 28, 2016 for creditors to file a proof of claim. But Republic did not forward notices to First Guaranty and it was unaware of the bankruptcy proceedings. An employee of First Guaranty, concerned that the Pioneer payments had stopped, arranged to meet with his counterpart at Republic. At the July 27, 2016 meeting, Republic informed First Guaranty of the Pioneer bankruptcy and of the fact that the proof of claim deadline was the next day. First Guaranty missed the claim deadline. But it convinced Med One, which had filed a timely proof of claim, to file an amended claim that incorporated First Guaranty’s claims in the bankruptcy case. Through this procedural mechanism, First Guaranty was eventually able to assert its claims and arguments to the bankruptcy court.

         Med One and First Guaranty brought a motion to compel the bankruptcy trustee to continue to make payments under the Pioneer Sales Agreement during the pendency of the bankruptcy proceedings. They argued that 11 U.S.C. § 365(d)(5), which requires a trustee to make payments on “an unexpired lease of personal property . . ., until such lease is assumed or rejected, ” required the trustee to make the payments. The bankruptcy court disagreed, finding that the Pioneer Sales Agreement was a loan and not a true lease. That court declined to address at that time whether the Pioneer Sales Agreement constituted a secured or unsecured financing transaction.

         First Guaranty sued Republic, asserting three causes of action. First, it alleged that Republic breached several provisions of the Second Purchase Agreement. Second, First Guaranty asserted that it was entitled to rescission of both the First and Second Purchase Agreements based upon material misrepresentations and mutual mistake. Third, it claimed that Republic breached the covenant of good faith and fair dealing attendant to the First and Second Purchase Agreements. Republic now moves for summary judgment on all of the claims asserted by First Guaranty. First Guaranty also moves for summary judgment in its favor on the rescission cause of action. First Guaranty argues that it should prevail as a matter of law on its claims that the First and Second Purchase Agreements should be rescinded due to material misrepresentations and mutual mistake.

         LEGAL STANDARD

         Summary judgment is appropriate when “the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). The movant bears the initial burden of demonstrating the absence of a genuine dispute of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Once the movant has met this burden, the burden then shifts to the nonmoving party to “set forth specific facts showing that there is a genuine issue for trial.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). Summary judgment on a claim is required if the party that bears the burden of proof at trial “fails to make a showing sufficient to establish the existence of an element essential to that party’s case.” Celotex, 477 U.S. at 322.

         ANALYSIS

         I. REPUBLIC’S MOTION FOR SUMMARY JUDGMENT

         A. ...


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