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Standard Office Systems of Atlanta v. U.S. Express Leasing, Inc.

2011 WL 223472 (U.S. Dist. Ct. D. N.J. 2011) (Unpublished)

AGREEMENTS; DEFAULT; SET-OFFS —Public policy does not dictate against permitting the set-off of damages such as where there are mutual debts between contracting parties.

A document solution company provided office equipment and document related services to its customers. It entered into a Master Purchase Agreement and Assignment of Leases (MPA) with a financing company. Under the MPA, the company, from time to time, could sell equipment leases or finance agreements to the financing company. All of the lease documentation had to identify the document services company as the owner of the leases.

In one leasing transaction, the document services company asserted that it did not own the equipment, but had only brokered the transaction between the equipment distributor and the customer. On the same day, the financing company purchased the lease. It similarly purchased two more lease agreements with the same customer under which the document services company did not own the equipment, but merely served as a broker for the transaction. The customer ultimately defaulted on the first two leases, and the financing company claimed that it had to repurchase the leases when it discovered during that the document services company did not own the equipment as required by the MPA. The financing company began withholding payments due the document services company on unrelated leases. It also insisted that the document services company repurchase the equipment covered by the defaulting leases. The document services company responded that it believed the MPA did not require it to own the equipment.

The issues were litigated and subject to motion practice. The document services company moved for partial summary judgment because the financing company had withheld payments due from unrelated leases. The financing company defended its action, maintaining the document services company was required to own the equipment under the MPA. In response, the document services company argued that it was permitted to sell brokered agreements under the provision that allowed the sale of finance agreements. The Court disagreed, finding that finance agreements were not synonymous with brokerage agreements. It defined a broker as an agent who acts as an intermediary or negotiator, and a finance agreement as an agreement to raise or provide funds. The Court said that a fair reading of the MPA required the company to own the equipment, as the MPA provisions obligated the document services company to irrevocably transfer an interest in the equipment to the financing company. As a broker, the company would not have an interest in the equipment, but rather would facilitate a third party’s interest in the equipment.

The Court further ruled that the failure of the document services company to own the equipment under the MPA was a material breach, and that it had failed to establish the financing company was aware, at the time the defaulted leases were sold, that the document services company did not own the equipment. The Court held the financing company was under no obligation to investigate the equipment’s ownership.

Lastly, the Court ruled the financing company was entitled to assert a setoff, as mutual debts existed because of the document services company’s material breach; public policy did not dictate against permitting a setoff under those circumstances.

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