The opinion of the court was delivered by: GABRIEL GORENSTEIN, Magistrate Judge
REPORT AND RECOMMENDATION
In this diversity action, plaintiff and counterclaim defendant Rhythm
& Hues, Inc. ("R&H") alleged that defendant The Terminal Marketing
Company, Inc. ("Terminal Marketing") violated its obligations to pay
R&H's suppliers under an equipment financing agreement secured by
various leases. Terminal Marketing did not answer the complaint and R&H
has requested its default. Wells Fargo Bank Minnesota, National
Association ("Wells Fargo"), to whom the leases were allegedly assigned,
intervened. Wells Fargo has counterclaimed against R&H, alleging that
R&H improperly refused to make required lease payments to Wells Fargo,
as assignee. Both R&H and Wells Fargo have now moved for summary judgment on the
issue of the validity of the lease assignments to Wells Fargo. In
addition, Wells Fargo has moved for summary judgment with respect to the
issue of the enforceability of a waiver-of-defenses clause contained in
the leases and R&H has moved for summary judgment on certain of Wells
Fargo's counterclaims. For the reasons set forth below, R&H's motions
should be denied and Wells Fargo's motion should be granted.
The following facts are undisputed, except as otherwise noted:
1. Agreements Between R&H and Terminal Marketing
R&H is a film production studio that specializes in producing visual
effects for motion pictures, television commercials, theme park
attractions, music videos, and computer games. Declaration of Richard
Castaldo and Exhibits in Support of Rhythm & Hues' Opposition to Wells
Fargo's Motion for Partial Summary Judgment, dated November 19, 2001
("Castaldo Decl.") (reproduced as Ex. S to Declaration of Judith Beall in
Opposition to Wells Fargo's Motion for Partial Summary Judgment and in
Support of Rhythm & Hues' Cross-Motion for Summary Judgment, filed
December 18, 2003 (Docket #69) ("Beall Decl.")), ¶ 3. As part of its
business, R&H uses various pieces of highly advanced technical
equipment. Id. ¶ 17. From time to time, R&H has financed the purchase
of such equipment through Terminal Marketing. Id. Under this arrangement
commonly called a "sale and leaseback" Terminal Marketing would order
the equipment selected by R&H from various suppliers and then lease it
back to R&H for an agreed-upon price. Id. ¶ 18. Terminal Marketing
would pay the suppliers and R&H would pay Terminal Marketing. Id.
a. Line of Credit Agreement and Lease No. 3855. In April 2000, R&H and
Terminal Marketing entered into an agreement under which Terminal
Marketing agreed to extend R&H a line of credit for working capital
("Line of Credit Agreement"). Rhythm & Hues' Local Rule 56.1 Statement
of Undisputed Material Facts, filed December 18, 2003 (Docket #68) ("R&H
56.1 I"), ¶ 3; Castaldo Decl. ¶¶ 4-5.*fn1 Under this agreement, R&H was
entitled to exercise up to three "take-downs" on the line of credit for a
total of $1.5 million. R&H 56.11 ¶ 4; Castaldo Decl. ¶ 4, 11; Hughes
Decl. ¶ 10. Payments were due 30 months after each take-down. R&H 56.1
I ¶ 5; Castaldo Decl. ¶ 11; Hughes Decl. ¶ 10. Equipment previously
purchased and owned free and clear by R&H was used as collateral for the
Line of Credit Agreement. R&H 56.1 I ¶ 14; Castaldo Decl. ¶ 5; Hughes
As part of the transaction, R&H executed a number of documents in
April and May 2000, including Lease No. 3855 a standard form agreement
for an equipment lease. R&H 56.1 I ¶¶ 9-13, 18-19, 23; see Lease No.
3855, dated May 9, 2000 ("Lease No. 3855") (reproduced as Ex. A1 to
Declaration of John C. Weidner, filed January 13, 2004 (Docket #70)
("Weidner Decl.")). Lease No. 3855 calls for R&H to pay 30 monthly
rental payments of $57,066.47 to Terminal Marketing. Lease No. 3855 at
1. It states in what is commonly called a "hell or high water" provision that "[R&H's] obligation to pay [Terminal Marketing]
all amounts due hereunder is absolute and unconditional" and that "[R&H]
shall not be entitled to any abatement, reduction, set-off,
counterclaim, defense or deduction with respect" to any of this rent.
Id. ¶ 5. Lease No. 3855 also states that it "may be assigned by
[Terminal Marketing] without notice to [R&H]" and it contains a
waiver-of-defenses provision providing that "[t]he assignee's rights . .
. shall be free from all defenses, setoffs or counterclaims which [R&H]
may be entitled to assert." Id. ¶ 14.
No commencement date is listed on the lease. See id. at 1. R&H claims
that the purpose of Lease No. 3855 was to secure its first take-down on
the Line of Credit Agreement and that the lease was not effective until
it actually made a take-down. R&H 56.1 I ¶¶ 6, 15-17; Castaldo Decl. ¶
13; Hughes Decl. ¶¶ 11-12. R&H further claims that it never took any
take-down or leased any equipment through Terminal Marketing that would
have activated its obligations under Lease No. 3855. R&H 56.1 I ¶¶
24-25; Castaldo Decl. ¶ 14; Hughes Decl. ¶ 13. R&H states that, on May
3, 2001, it cancelled the Line of Credit Agreement with Terminal
Marketing. Castaldo Decl. ¶ 16.
b. The Equipment Financing Agreement and Lease No. 3989. In addition to
the Line of Credit Agreement, R&H and Terminal Marketing entered into an
equipment financing agreement. Id. ¶¶ 17-19. Under this "sale and
leaseback" arrangement, Terminal Marketing agreed to order equipment from
various manufacturers, pay for the equipment, and then lease it to R&H
for agreed-upon monthly payments. Id. ¶ 18.
On June 23, 2000, R&H entered into an agreement with Terminal
Marketing to obtain equipment worth $774,375.00. Id. ¶¶ 19, 21-22.
Coterminously, R&H executed a number of other documents, including Lease No. 3989 a standard form agreement for
an equipment lease. Id. ¶ 19; see Lease No. 3989, dated June 23, 2000
("Lease No. 3989") (reproduced as Ex. A2 to Weidner Decl.). Lease No.
3989 calls for 24 monthly payments of $35,078.00 and contains identical
wording to Lease No. 3855, including the "hell or high water" clause
containing the "absolute and unconditional" language and the
waiver-of-defenses provision providing for assignment "free from all
defenses, setoffs or counterclaims." Lease No. 3989 at 1 & ¶¶ 5, 14.
At the time that Lease No. 3989 was entered into, Terminal Marketing
allegedly told R&H that it was in sound financial condition and that it
would meet its obligations to all equipment suppliers. See Complaint,
filed May 31, 2001 (Docket #1) ("Complaint"), ¶ 10. Notwithstanding
Terminal Marketing's representation, the company was apparently in a dire
financial condition. See id. ¶ 12. Because of this, many of R&H's
suppliers have not been paid and have refused to provide any additional
equipment to R&H. See Castaldo Decl. ¶¶ 23, 26, 29.
2. Securitization Agreement
Wells Fargo is the indenture trustee for the noteholders of a series of
contract-backed and lease-backed notes that were issued by a subsidiary
of Terminal Marketing, Terminal Finance Corporation II ("Terminal
Finance"). Weidner Decl. ¶ 4; Declaration of John Battiloro, dated
December 19, 2001 ("Battiloro Decl.") (reproduced as Ex. U to Beall
Decl.), ¶ 3. According to Wells Fargo, it engaged in a transaction with
Terminal Marketing and Terminal Finance commonly known as a
"securitization." Weidner Decl. ¶¶ 5-6. The securitization arrangement
called for Terminal Marketing to sell to Terminal Finance the right to
payments due from various equipment leases. Id. ¶ 5. Terminal Finance
obtained the money necessary to purchase these rights by obtaining loans
from the noteholders. Id. ¶¶ 5, 9. To secure re-payment from Terminal Finance on these loans, Wells Fargo allegedly was assigned as indenture
trustee for the noteholders the right to payments under the leases.
Id. ¶¶ 6, 9.
This transaction was allegedly effectuated through a series of
agreements. The first was the sale of certain leases from Terminal
Marketing to Terminal Finance by means of lease acquisition agreements.
The second was the assignment of those leases from Terminal Finance to
Wells Fargo by means of indenture agreements. Neither Lease No. 3855 nor
Lease No. 3989 was covered by the original agreements. However, the
agreements contained provisions for the assignment of additional leases.
Wells Fargo does not dispute that the exact manner by which the
assignment of additional leases was to be made under these agreements was
not followed. See, e.g., Wells Fargo's Memorandum of Law in Reply to
Rhythm & Hues' Opposition to Plaintiff's Motion for Partial Summary
Judgment and Opposition to Rhythm & Hues' Cross-Motion for Summary
Judgment on Assignment, filed January 13, 2004 (Docket #74) ("Wells Fargo
Reply Mem."), at 3. Instead, Wells Fargo argues that documents called
"Warehouse Funding Reports" properly effected the assignment of these
additional leases. See, e.g., id. at 4.
Prior to discussing the Warehouse Funding Reports, we will first
consider the lease acquisition agreements and the indenture agreements
and their provisions for the assignment of additional leases.
a. Lease Acquisition Agreements Between Terminal Marketing and
The first lease acquisition agreement was entered into in August 1995.
See Lease Acquisition Agreement, dated August 1, 1995 ("First Lease
Acquisition Agreement") (reproduced as Ex. 3 to Declaration of Aaron
Mowbray, filed July 17, 2002 (Docket #43) ("Mowbray Decl. I") and as Ex.
E to Beall Decl.). Under this agreement, Terminal Finance acquired
Terminal Marketing's interest in certain leases. See id. § 2.02. The agreement also stated
that its terms could "not be changed orally but only by an instrument in
writing signed by the party against which enforcement is sought." Id. §
The agreement provided that when Terminal Marketing entered into
additional leases not contemplated in the agreement, certain steps were
required in order to effect an assignment of those additional leases to
Terminal Finance. First, any additional lease had to be in full force and
effect on the date the lease was to be assigned to Terminal Finance. See
id. §§ 3.01(a)(vi), 3.04(b)(2)(i). Second, the equipment relating to the
lease had to be delivered as of the date of the assignment. See id. §§
3.01(a)(xii), 3.04(b)(2)(i). Third, the agreement provided that any
additional assignment had to be accompanied by the following:
an Amendment to Lease Acquisition Agreement for New
Lease Contracts substantially in the form of Exhibit A
hereto subjecting such Lease Contract to the
provisions hereof and providing with respect to such
. . . Additional Lease Contract, an Amended Lease
Schedule (a copy of which will be delivered to the
Id. § 3.04(b)(2)(iv) (emphasis added). The scored phrase has some
significance because one of R&H's contentions in this case is that the
assignments did not conform to this phrase's requirements. See, e.g.,
Rhythm & Hues' Memorandum of Law in Opposition to Wells' [sic] Fargo's
Motion for Partial Summary Judgment and in Support of Rhythm & Hues'
Cross-Motion for Summary Judgment, dated December 16, 2003 (Docket #80)
("R&H Mem. I"), at 14-17.
"Exhibit A," referenced in the above-quoted section, consisted of a
form stating briefly that the leases identified on an attached schedule
"are hereby sold, assigned, transferred and delivered by [Terminal
Marketing] to [Terminal Finance] in accordance with this Lease
Acquisition Agreement." First Lease Acquisition Agreement, Ex. A. The
attached "amended lease schedule" provided space for information regarding the new
leases thereby assigned. See id.
Terminal Marketing and Terminal Finance entered into a new lease
acquisition agreement in August 2000. See Amended and Restated Lease
Acquisition Agreement, dated August 1, 2000 ("Second Lease Acquisition
Agreement") (reproduced as Ex. 4 to Mowbray Decl. I and as Ex. G to Beall
Decl.).*fn2 Like the First Lease Acquisition Agreement, this agreement
contained an identical provision specifying the requirements for
assigning additional leases to Terminal Finance and an identical "Exhibit
A." See id. § 3.04(b)(2) & Ex. A. The new agreement also contained the
same provision requiring a writing to effect any amendment. See id. §
Both of the agreements contained two signature lines, one for Terminal
Marketing's President and the other for Terminal Finance's President.
See First Lease Acquisition Agreement at 30; Second Lease Acquisition
Agreement at 28. The same individual Sanford Schneiderman signed the
agreements on behalf of both companies. See First Lease Acquisition
Agreement at 30; Second Lease Acquisition Agreement at 28.
b. Indenture Agreements Between Terminal Marketing. Terminal Finance,
and Wells Fargo. On July 1, 1998, Terminal Marketing, Terminal Finance,
and Wells Fargo entered into an indenture agreement under which Terminal
Finance agreed to assign to Wells Fargo all of its rights under the
leases Terminal Marketing had assigned to it under the First Lease
Acquisition Agreement. See Second Amended and Restated Indenture, dated
July 1, 1998 ("Second Indenture Agreement") (reproduced as Ex. 1 to Mowbray Decl. I and
as Ex. I to Beall Decl.), at I.*fn3
The agreement also delineated the
requirements for the assignment of additional leases not originally
covered by the First Lease Acquisition Agreement:
[Terminal Finance] shall comply with the
requirements relating to . . . Additional Lease
Contracts as set forth in the Lease Acquisition
Agreement within the time periods set forth therein.
In addition, each acquisition by [Terminal Finance] of
any Additional Lease Contract . . . is subject to the
satisfaction of the following conditions
precedent . . .:
. . . .
(ii) the delivery by [Terminal Finance] to [Wells
Fargo] and the Noteholders . . . of an Amended Lease
Schedule accompanied by an Amendment to Indenture for
New Lease Contractsand [sic] Amendmentto [sic] Lease
Acquisition Agreement for New Lease Contracts executed
by [Terminal Finance] and [Terminal Marketing], as
Id. § 4.05(a). This same provision was included as part of a later
indenture agreement between Terminal Marketing, Terminal Finance, and
Wells Fargo executed in August 2000. See Third Amended and Restated
Indenture, dated August 1, 2000 ("Third Indenture Agreement") (reproduced
as Ex. 2 to Mowbray Decl. I and as Ex. M to Beall Decl.), § 4.05(a).*fn4
Included as Exhibit B to both Indenture Agreements was a form document
to be utilized for the assignment of additional leases from Terminal
Finance to Wells Fargo. The document captioned "Form of Amendment to
Indenture for New Lease Contracts" stated that it was intended to
comply with section 4.05(a)(ii) of the Indenture ...