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HONGKONG & SHANGHAI BANKING CORP. v. HFH USA CORP.

October 1, 1992

THE HONGKONG AND SHANGHAI BANKING CORP., LTD. Plaintiff,
v.
HFH USA CORPORATION, Defendant.



The opinion of the court was delivered by: WILLIAM M. SKRETNY

 Before this Court is the motion of the plaintiff Hong Kong and Shanghai Banking Corp., Ltd. ("HSBC") for summary judgment pursuant to Fed.R.Civ.P. 56. HSBC has filed a complaint seeking damages, alleging that the defendant HFH USA Corp. ("HFH") converted property in which HSBC had a perfected first lien security interest.

 This Court has jurisdiction based on diversity of citizenship under 28 U.S.C. § 1332. HSBC is a foreign banking corporation with its principal place of business in Hong Kong. HFH is a corporation organized and existing under the laws of North Carolina. The matter in controversy exceeds $ 50,000.

 HSBC alleges that it loaned funds to Eli Industries (USA), Inc. ("Eli"), secured by a perfected first lien security interest in Eli's present and future inventory. Hugo Finkenrath OHG ("Finkenrath") sold goods to Eli that were included as inventory under HSBC's security agreement with Eli. Plaintiff never received notice of any security interest in these goods claimed by Finkenrath or HFH. On behalf of Finkenrath, HFH took possession of the goods and returned them to Finkenrath in Germany. HSBC notified HFH of its prior perfected security interest in the inventory and demanded either return of the goods or payment of their value to HSBC. The inventory was never returned to HSBC, nor was any payment made. Therefore, HSBC claims that HFH converted these goods, in which HSBC had a superior interest.

 As defenses, HFH asserts that it was acting as an agent for Finkenrath. HFH alleges that Finkenrath had rights in the goods that were superior to those of HSBC, under a title retention agreement between Finkenrath and Eli that was included in the sales contract and that is governed by German law. In the alternative, HFH maintains that if New York's U.C.C. applies, Finkenrath repurchased the goods from Eli as a buyer in the ordinary course of business, and therefore took them free of any prior existing security agreements. Also in the alternative, HFH claims that even if the U.C.C. applies, HSBC's security interest did not attach to the goods, and that at all times Finkenrath had rights in the goods that were superior to those of HSBC.

 HSBC has submitted the following papers in support of its motion for summary judgment: a Notice of Motion for Summary Judgment ("Plaintiff's Motion") with exhibits, including an Affidavit of John LeClair ("LeClair Sept. 7 Aff.") sworn to 9/7/90, a Memorandum of Law in Support of Plaintiff's Motion for Summary Judgment ("Plaintiff's Memo"), a Reply Memorandum ("Plaintiff's Reply"), an Affidavit of John LeClair with exhibits ("LeClair Nov. 13 Aff.") sworn to 11/13/90, a Supplemental Memorandum of Law in Support of Plaintiff's Motion for Summary Judgment ("Plaintiff's Supp. Memo"), and an Affidavit of John LeClair with exhibits ("LeClair Mar. 29 Aff.") sworn to 3/29/91.

 This Court has also heard and considered oral argument of the parties.

 For the reasons stated below, this Court grants summary judgment for HSBC with regard to HFH's liability for conversion, and denies summary judgment with regard to damages.

 FACTS

 In early 1987, Mr. Siegfried Finkenrath, principal shareholder of Finkenrath, was approached by representatives of Eli GmbH, Bendestorf ("Eli Germany"), the parent company of Eli, to discuss the purchase of goods on behalf of Eli (Pollmann Aff., P 2).

 On April 6 and 7, 1987, Werner Schlautmann and Paul Chandra, president and vice president of Eli, attended the Hannover trade show in the Federal Republic of Germany. There, they entered into an oral agreement with Manfred Pollmann, export manager of Finkenrath, wherein Finkenrath agreed to sell goods consisting of "split pillow block housings" and "maintenance free housings" to Eli, for the price of $ 342,744.60 (Pollmann Aff., P 3).

 As a condition of the sale, Eli and Finkenrath agreed that German law would govern the parties' rights and obligations (Pollmann Aff., P 3).

 Following the oral sales agreement, Finkenrath shipped the "split pillow block housings" on July 25, 1987 ("first shipment") to the foreign trade zone ("FTZ") in Buffalo, New York. The exact date of arrival of these goods has not been specified. Under the sales agreement, Eli was to pay the customs duty on the goods. However, Eli never made the required payment; thus goods in the first shipment remained in the warehouse of the FTZ (Pollmann Aff., P 6).

 In November 1987, Eli sought a line of credit from HSBC. On November 30, 1987, Eli signed a security agreement with HSBC, in which it granted the bank a security interest in, among other things:

 . . . all of the personal property and fixtures of the Debtor wherever located and whether now owned or in existence or hereafter acquired or arising, of every kind and description, tangible or intangible, including without limitation, all inventory, equipment, farm products, documents, instruments, chattel paper, accounts, contract rights and general intangibles, such terms having the meanings ascribed by the Uniform Commercial Code.

 This agreement was signed by Werner Schlautmann, president of Eli, and stated that "New York law shall govern this agreement and its construction." A U.C.C.-1 financing statement was filed with the Erie County Clerk on December 21, 1987 (Plaintiff's Supp. Memo, p. 3). On December 5, 1987 HFH, as agent of Finkenrath, sent the second shipment of goods consisting of "maintenance free housings" to Eli ("second shipment"). The goods were again shipped to the FTZ, but this time HFH pre-paid the customs duty, and the goods were delivered to Eli at its place of business in Buffalo, New York (Pollmann Aff., PP 7 and 8). The exact date of arrival of these goods has not been specified. Finkenrath billed Eli $ 160,970.88 for the second shipment (Pollmann Aff., P 7).

 On February 3, 1988, Eli executed a second security agreement for an additional line of credit with HSBC This agreement was identical to the first agreement. There is no indication that the second security agreement was accompanied by the filing of a second U.C.C.-1 financing statement.

 A third shipment of goods, consisting of "maintenance free housings" ("third shipment"), were sent by HFH, as agent of Finkenrath, to Eli on February 10, 1988, under the same terms and conditions as the second shipment. That is, HFH pre-paid the customs duty and delivery was to Eli's place of business (Pollmann Aff., P 11). The exact date of arrival of these goods has not been specified, but the parties do not dispute that goods in the second and third shipments were received by Eli. Finkenrath billed Eli $ 78,803.52 for the third shipment (Pollmann Aff., P 9).

 Shortly after the third shipment left Germany, Finkenrath and HFH learned of Eli's financial problems and of its inability to pay the Bill of Exchange for the first shipment. To avoid having the Bill of Exchange dishonored, Finkenrath paid the Bill of Exchange and sent new drafts to Eli (Pollmann Aff., P 11).

 On or about March 21, 1988, payment of $ 122,008.05 was made by HSBC to Aantek Aandrijvingen Bv, P.O. Box 163, 7240 Ad Lochem, Holland, as beneficiary of the first letter of credit (LeClair Mar. 29 Aff., exh. C).

 After the third shipment was sent, Finkenrath and HFH became aware of HSBC's security interest in Eli's inventory. Each claimed to have obtained a purchase money security agreement in the goods that had been shipped. Finkenrath and HFH entered into security agreements with Eli and filed financing statements on April 18, 1988 with the Erie County Clerk's Office (Pollmann Aff., exh. C). Neither Finkenrath nor HFH notified HSBC of their security interests or filings.

 HSBC issued the second letter of credit to Eli on May 5, 1988 in the amount of $ 169,251.84. Payments pursuant to this letter of credit were made in two drafts, one on July 11, 1988 in the amount of $ 120,309.51, and the other on August 1, 1988 in the amount of $ 17,731.11, *fn1" to Forged and Machined Products Ltd., Suite 1616, Asian House, 1 Hennessy Road, Hong Kong, the beneficiary of the second letter of credit (LeClair Mar. 29 Aff., exh. C).

 In June 1988, Finkenrath and Eli reached an oral agreement that Eli would return the unsold portion of the goods from the second and third shipments to Finkenrath via HFH in Charlotte, North Carolina, and that Finkenrath would reclaim the First Shipment from the FTZ (Pollmann Aff., P 13).

 On August 26, 1988, Eli shipped the goods that remained in its possession to HFH in Charlotte, N.C. for return to Finkenrath. On August 30, 1988, Finkenrath paid the storage charges in the FTZ, arranged shipment to Germany, and thereby reclaimed the goods in the first shipment. Also on August 30, 1988, representatives of Eli and HFH, acting as Finkenrath's agent, executed a written agreement that purported to memorialize the original oral agreement ("return agreement") made between Finkenrath and Eli in June 1988 (Pollmann Aff., P 16).

 Under the return agreement, Finkenrath would retain title to the goods until it was paid in full. Eli would transfer all its remaining goods from the second and third shipments to HFH for return to Finkenrath. The parties' security interests in the goods were to end upon the return of the goods to Finkenrath. However, if any subsequent judicial decree required HFH to return the goods to Eli, the cancellation of the security interests would become null and void (Pollmann Aff., exh. E) The parties do not dispute that the goods in question consisted of inventory to Eli and were therefore contemplated by HSBC's security agreements.

 DISCUSSION

 Federal Rule of Civil Procedure 56(c) provides in pertinent part that summary judgment is warranted where "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." Under the Rule, the moving party has the burden of showing that a genuine issue as to any material fact is absent. Adickes v. S.H. Kress and Co., 398 U.S. 144, 156, 90 S. Ct. 1598, 1608, 26 L. Ed. 2d 142 (1970). However, the evidence and the inferences drawn from the evidence must be "viewed in the light most favorable to the party opposing the motion." 388 U.S. at 158-59, 90 S. Ct. at 1609.

 When a movant makes a showing of the essential elements of its case, sufficient to demonstrate that a factfinder could find in its favor, then its opponent must counter with evidence sufficient to demonstrate that "a reasonable jury could return a verdict" in its favor to defeat the motion. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S. Ct. 2505, 2510, 91 L. Ed. 2d 202 (1986), see also Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S. Ct. 2548, 2552, 91 L. Ed. 2d 265 (1986). However, a summary judgment motion will not be defeated merely on the basis of a "metaphysical doubt" about the facts, Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S. Ct. 1348, 1356, 89 L. Ed. 2d 538 (1986), "or on the basis of conjecture or surmise." Bryant v. Maffucci, 923 F.2d 979, 982, (2d Cir. 1991).

 This Court has specifically noted that "courts should not be reluctant to grant summary judgment in appropriate cases since 'one of the principal purposes of the summary judgment rule is to isolate and dispose of factually unsupported claims.'" Maier-Schule GMC, Inc. v. General Motors Corp., 780 F. Supp. 984, 987 (W.D.N.Y. 1991), quoting Celotex Corp. v. Catrett, 477 U.S. at 323-24, 106 S. Ct. at 2553.

 Under the criteria articulated above, a district court "judge's function is not himself to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial." Anderson, 477 U.S. at 249. . 106 S. Ct. at 2511. 477 U.S. at 249. 106 S. Ct. at 2511.

 The material facts of this controversy are not in dispute. The principal issues that remain are: (1) whether Eli acquired an interest in any of the goods sufficient for HSBC's security interest to attach; and (2) whether New York's U.C.C. governs the existing security interests or whether German law controls, validating the title retention agreement. If the U.C.C. controls, the next issue becomes whether HSBC or Finkenrath/HFH had priority of interest.

 HSBC argues that the written security agreement between HSBC and Eli was sufficient to create a security interest in all the goods shipped by Finkenrath to Eli, according to U.C.C. § 9-203. HSBC argues that the agreement was properly executed, that HSBC gave value to Eli when it issued the two letters of credit, and that Eli obtained rights in all three shipments of goods upon delivery to the destination provided in the sales agreement. With respect to the first shipment, HSBC argues that mere ...


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