Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-3_03-cv-00846/USCOURTS-azd-3_03-cv-00846-0/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1332 Diversity-Breach of Contract

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1 The Court will deny the request for oral argument because the parties have

submitted memoranda thoroughly discussing the law and evidence and the Court

concludes that oral argument will not aid its decisional process. See Mahon v. Credit Bur.

of Placer County, Inc., 171 F.3d 1197, 1200 (9th Cir. 1999); Partridge v. Reich, 141 F.3d 920,

926 (9t h Cir. 1998); Lake at Las Vegas Investors Group, Inc. v. Pacific. Dev. Malibu Corp.,

933 F.2d 724, 729 (9th Cir. 1991), cert denied, 503 U.S. 920 (1992).

WO

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

Mauna Loa Vacation Ownership, L.P., a

Hawaiian limited partnership, and

Stevens, a single man, 

Plaintiff, 

vs.

Accelerated Assets, L.L.C., an Arizona

limited liability company, 

Defendant. 

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No. CV 03-0846-PCT-DGC

ORDER

Pending before the Court are Defendant’s Motion for Summary Judgment (Doc.

#62), Defendant’s Motion for Partial Summary Judgment Re: Characterization of

Transactions as Sales (Doc. #67), Defendant’s Motion for Partial Summary Judgment Re:

Amount Owed on Counterclaim (Doc. #68), Plaintiffs’ Cross Motion Regarding Stevens’

Personal Guaranty, and Certain Unenforceable Penalties (Doc. #72), and Defendant’s

Motion to Strike the Second Declaration of John Stevens (Doc. #94).1

Case 3:03-cv-00846-DGC Document 95 Filed 09/28/05 Page 1 of 13
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Background

The dispute in this case arises from a series of contracts under which Plaintiffs,

sellers of resort timeshares, sold Defendant promissory notes generat ed by sale of the

timeshares and secured by the timeshares. The contracts obligated Plaintiffs to buy back

or replace any non-performing notes. As part of the contracts, Plaintiff John Stevens

personally guaranteed the buy-back and replacement obligations.

On January 9, 2004, Plaintiffs filed an amended complaint seeking a discharge from

the guaranty, excuse of performance, rescission and restitution, and release from p enalties.

Plaint iffs seek this relief on the basis of Defendant’s alleged breach of the contracts. Doc.

#33. Defendant counterclaimed on January 26, 2004, alleging that Plaintiffs breached the

contracts by failing to repurchase or replace non-performing notes and failing to pay the

late fees specified in the contracts. Doc. #34.

Defendant has moved for summary judgment on all of Plaintiffs’ claims and

affirmatively on its own claims. Doc. #62. Plaintiffs oppose summary judgment and have

filed their own motion on the issue of Stevens’ personal guaranty and the enforceability

of the contracts’ late fee provisions. Doc. #72.

Discussion

I. Defendant’s Motion for Summary Judgment.

Defendant argues that Plaintiffs cannot sust ain their breach of contract and breach

of good faith and fair dealing claims because the contracts do not include the servicing

obligations Plaintiffs allege. Defendant also argues that Stevens waived any suret y

defenses by giving an unconditional guaranty and that Plaintiffs are barred as a matter of

law from arguing that Defendant’s actions impaired the value of Plaintiffs’ int erest in the

promissory not es. Defendant ask the Court to enter judgment against Plaintiffs for failing

to comply with their replacement and repurchase obligations under the contracts.

/ /

/ /

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2

 The fifth contract (Ex. 5) does not contain this language, but Plaintiffs have

presented evidence that the same servicing agreement applied. See PSOF ¶¶ 30, 36-40.

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A. Breach of Contract/Breach of Good Faith and Fair Dealing.

Plaintiffs allege that Defendant breached the contract s and the covenant of good

faith and fair dealing by servicing the promissory notes in a fashion t hat increased

Plaintiffs’ risk in the notes and deprived Plaintiffs of the benefits they exp ect ed under the

contracts. Plaintiffs additionally claim that Defendant’s faulty notices regarding delinquent

notes breached the contracts. Defendant argues that Plaintiffs cannot sustain their breach

of contract or good faith and fair dealing claim because the contracts contain no servicing

obligations. The Court will deny Defendant’s motion for summary judgment on these

claims. Plaintiffs have raised issues of fact that must be resolved at trial. 

When construing a contract under Arizona law, the Court is not limited to the four

corners of the document. “[A] court may consider surrounding circumstances, including

negotiation, p rior understandings, and subsequent conduct . . . .” Taylor v. State Farm

Mut. Auto. Ins. Co., 854 P.2d 1134, 1139 (Ariz. 1993). If the Court concludes from this

review of extrinsic evidence that the contract language is “reasonably susceptible to more

than one interpretation,” extrinsic evidence concerning the meaning of the agreement and

the parties’ intent is admissible and may be considered by a jury. Id. at 1144-45.

Considering such evidence in this case, the Court concludes that the contracts in

question are susceptible to the interpretations suggested by both Defendant and Plaintiffs.

To be sure, the contracts say nothing about the servicing agreement claimed by Plaintiffs.

One would think that sophisticated business people, particularly those familiar with the

timeshare business and the importance of note performance, would have included such

terms in the contracts if they had been agreed to by the parties. 

On the other hand, four of the five contracts state that Defendant “shall handle

delinquent accounts.” See DSOF, Exs. 1-4 t o St evens Depo. (Ex. A).2

 The term “handle”

is not defined in the contracts and its meaning is not readily apparent from their face.

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3

 The Court has not read the entire Stevens deposition. The Court is required to

review only those portions of t he evidence cited by the parties. See Carmen v. S.F.

Unified Sch. Dist., 237 F.3d 1026, 1028-29 (9th Cir. 2001); Forsberg v. Pac. N.W. Bell Tel.

Co., 840 F.2d 1409, 1417-18 (9th Cir. 1988). 

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Plaintiffs have p resented evidence that the parties agreed Defendant would service the

accounts and achieve a delinquency rate comparable to Plaintiffs’ experience (3%) and

industry standards (approximately 3.7%). See PSOF ¶ 30. Defendant disputes t his

evidence and asserts that servicing was never discussed or agreed upon by the parties.

See DSOF ¶¶ 18-20. 

Although the Court finds Defendant’s construction of the contacts more plausible,

Plaintiffs have presented the sworn statement of Mr. Stevens that Defendant’s servicing

obligat ion was discussed and agreed to by the parties. Because the Court finds that the

contract s are susceptible to Plaintiffs’ construction, and Plaintiffs have created a question

of fact as to whether their version of events is true, a trial is necessary. The Court cannot

resolve these disputed issues of material fact by summary judgment.

Defendant makes several additional arguments that will be addressed in turn. 

1. Motion to Strike Stevens’ First Affidavit.

Defendant moves to strike the Stevens’ affidavit that provides the basis for

Plaintiffs’ interpretation of the contracts. Defendant claims that the affidavit is a “sham”

because it contradicts Stevens’ prior testimony regarding the same issues. 

“If a p art y who has been examined at length on deposition could raise an issue of

fact simply by submitting an affidavit contradicting his own prior t est imony, this would

greatly diminish t he utility of summary judgment as a procedure for screening out sham

issues of fact.” Kennedy v. Allied Mut. Ins. Co., 952 F.2d 262, 266 (9th Cir. 1991). “This

rule, however, is limit ed to ‘sham’ testimony that flatly contradicts earlier testimony in an

attempt to ‘create’ an issue of fact and avoid summary judgment.” Id. 

The Court has reviewed the portions of the Stevens deposition cited by Defendants

and cannot conclude that the affidavit is a sham.3

 Although it is t rue that Stevens

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answered various quest ions about his discussions with Defendant, and that his answers

do not include his affidavit -made assertion of a specific servicing agreement, it is also true

that he was not directly asked if the parties reached such an agreement. Stevens did testify

that he underst ood Plaintiffs would not “be obligated . . . to repurchase delinquent

accounts that were made delinquent for reasons other than actions of ourselves,” Def.

Obj., Ex. 1 at 92:12-14, an assertion consist ent with the general tenor of his affidavit.

Stevens also noted the ambiguity of the word “handle” during his deposition, but defense

counsel did not pursue Stevens’ understanding of the term. Id. at 90:2-91:2. 

Moreover, the Court cannot conclude that Stevens’ later detailed recollection

regarding the Static Pool Report was a sham. At the dep osit ion, Stevens recognized the

document as one analyzing default rates, see Def. Obj., Ex. 1 at 133:20-134:15, and the Court

cannot conclude that Stevens’ later review of the document did not refresh his recollect ion

of the document’s context and meaning.

Finally, Plaintiffs argue that Stevens’ testimony that he could not recall “indust ry

minimum st andards” for collections belies his affidavit claim that Defendant agreed to

service the notes commensurate with a certain rate. Stevens’ affidavit, however, does not

discuss “minimum industry standard[s],” as was discussed in the deposition. Id. at 79:10-

17. The affidavit describes Stevens’ historical default rate and industry averages. See

PSOF, Ex. 1 ¶ 7. 

The “ sham affidavit” rule “does not automatically dispose of every case in which

a contradictory affidavit is introduced to explain portions of earlier deposition testimony.”

Kennedy, 952 F.2d at 266-67. Rather, the trial court must find t hat the affidavit “flatly

contradicts” earlier testimony and is in fact a sham. Id. ay 266. The Court cannot make that

finding in t his case. The deposition and affidavit subjects, although clearly related, are

sufficient ly different in wording and scope to leave a realistic possibility that the affidavit

simply constitutes a refreshed and more complete statement of Stevens’ recollection. 

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 Plaintiffs have not asserted Article 9 as a basis for their claims in this case.

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The Court accordingly will not strike the affidavit. Defendant will, of course, have

the opportunity to confront St evens with any inconsistencies at trial. The jury will assess

the credibility of Stevens and other witnesses in this case.

2. Article 9 of the UCC.

Defendant argues that Article 9 of t he UCC bars Plaintiffs’ good faith claim because

§ 9-607’s requirement that a transferee of a promissory note act reasonably vis-à-vis a

guarant or of t he note applies only when the transferor is completely excluded from

servicing or collecting on the note, citing Federal Deposit Ins. Corp. v. Ft. Worth Av iation,

806 F.2d 575, 577 (5th Cir. 1986). Defendant contends that Plaintiffs were not completely

excluded from collecting on the notes and that Article 9's “commercially reasonable”

standard therefore does not apply.

T he Court has reviewed UCC § 9-607 and Ft. Worth Aviation and disagrees wit h

Defendant’s characteriz at ion of the reasonableness requirement. To the extent that § 9-607

applies to this case, the Court finds t hat it does not bar Plaintiffs’ claim that Defendant’s

servicing efforts breached the covenant of good faith and fair dealing.4

 UCC comment ary

explains that t he commercially reasonable requirement does apply in cases like this where

the “assignment to the secured party was a ‘t rue’ sale” and “the secured party does have

a right of recourse.” UCC § 9-607 Cmt. 9. The reasonableness requirement applies for the

reasons underlying Plaintiffs’ claim in t his case – “the obligation to proceed in a

commercially reasonable manner arises because the collection process affects the extent

of the seller’s recourse liability . . . .” Id. The substance of Plaintiffs’ claim is that

Defendant’s unreasonable servicing efforts increased Plaint iffs’ recourse obligations under

t he contracts. Ft. Worth Aviation does not stand for the proposition stated by Defendant .

The case holds that the UCC does not impose an obligat ion t o collect receivables, only

that “a secured p art y who undertakes to collect from account debtors must do so in a

commercially reasonable manner.” 806 F.2d at 577.

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Defendant also argues that Article 9 bars recovery because even if Defendant

breached an obligation by unreasonably servicing the notes, any resulting damage to

Plaintiffs would simply reduce Plaintiffs’ repayment and rep urchase obligations under the

contracts and Plaintiffs would remain liable for the balance. See International Harv ester

Co. v. Fuoss, 758 P.2d 649, 651 (Ariz. Ct. App. 1988); FDIC v. Wrapwell Corp., 922 F. Supp.

3d 913, 925 (S.D.N.Y. 1996). The Court finds Defendant’s argument unpersuasive. In

contrast to the parties in International Harvester and Wrapwell who explicitly relied on

the UCC defenses (or t he st at e-law equivalent), Plaintiffs seek a discharge based on

Defendant’s material breach of contract , not based on the reasonableness provisions of

the UCC. Additionally, Defendant has not shown that the reduction in Plaintiffs’ liability

for Defendant’s damaging unreasonableness would not equal the amount owed by

Plaintiffs under the contracts, effectively resulting in a complete discharge.

3. The Covenant of Good Faith’ Intent Requirement. 

Defendant contends that Plaintiffs cannot sustain their breach of good faith claim

because bad faith requires a showing of intentional bad acts, a showing Plaint iffs have not

made in this case. Defendant cites Wells Fargo Bank v. Ariz. Laborers, Teamsters &

Cement Masons Local No. 395 Pension Trust Fund, 38 P.3d 12, 46 (Ariz. 2002). Plaintiffs

contend that Arizona good faith contract law is broader and encompasses Defendant’s

alleged poor servicing in this case.

Arizona law “prohibits a party from doing anything to prevent other p art ies to the

contract from receiving the benefits and ent it lements of the agreement.” Wells Fargo Bank,

38 P.3d 12 at 43 (emphasis added). “This obligation ‘preserves the spirit of the bargain

rather than the letter and guarantees the protection of the parties’ reasonable expectations

. . . .” Bike Fashion Corp. v. Kramer, 46 P.3d 431, 434 (Ariz. Ct. App. 2002). Bike Fashion

further elaborates: 

[A] party can breach the implied covenant of good fait h and fair dealing both

by exercising express discretion in a way inconsistent with a party’s

reasonable expectations and by acting in ways not expressly excluded by the

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contract's terms but which nevertheless bear adversely on the party's

reasonably expected benefits of the bargain.

Id. 

Plaintiffs make clear that they are not asserting a tort claim for bad faith. Plaint iffs

have presented evidence t hat they were deprived of the expected benefit of the contracts

by Defendant’s alleged faulty servicing of t he promissory notes and by Defendant’s failure

to respond when Plaintiffs raised concerns about the servicing. See PSOF ¶¶ 30-47. This

evidence raises questions of fact concerning the parties’ expectations under the contracts

and whether they were breached.

4. Statistical Basis for Plaintiffs’ Default Claim.

Defendant attacks Plaintiffs’ statistical evidence regarding the alleged increase in

Plaintiffs’ default rates, arguing that the evidence does not support Plaintiffs’ claim. T he

Court finds the evidence, construed in Plaintiffs’ favor, sufficient to raise a factual issue.

Defendant asks the Court to adopt its interpretation of the data, something t he Court

cannot do at this st age when all inferences must be drawn in favor of the non-moving

party. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). Whether, as

Defendant argues, there are many possible causes for an increase in default rates or

whether Plaintiffs’ own breach of their recourse obligation affect ed the default rate are

questions of fact for the jury.

B. Did Stevens Waive His Surety Defenses?

Defendant argues that Stevens waived his surety defenses in the contracts.

Stevens claims that he made no such waiver and retains all surety defenses.

The Court has reviewed t he contracts and finds that Stevens did not waive his

surety defenses as a matter of law. Defendant points to the language in the contracts that

Stevens assumed an “absolute, unconditional and continuing guaranty which shall not be

affected by any act or thing . . . .” DSOF ¶ 21. Defendant claims that this language served

to waive all of Stevens’ surety defenses.

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 Defendant argues that MLVO is not a surety or guarantor, but does not clearly

explain the implications of this argument. Plaintiff does not directly respond to the

argument. The parties should address this issue in preparing their proposed final pretrial

order and inform the Court in the proposed order whet her addit ional legal rulings are

required.

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The language cited by Defendant creates an uncondit ional, as opposed to a

conditional, guarantee by Stevens. As explained by Defendant’s own cited case, Joe

Heaston Tractor & Implement Co. v. Securities Acceptance Corp., 243 F.2d 196, 200 (10th

Cir. 1957), the unconditional guaranty allows Defendant to pursue recourse against

Stevens, the guarant or, without first pursuing recourse against MLVO, the primary obligor.

Arizona law requires explicit waiver of suret y defenses beyond the guarantee itself. See

Data Sales Co. v. Diamond Z Mfg., 74 P.3d 268, 272 (Ariz. Ct. App. 2003) (stating that a

waiver must be “effectuated by specific language or by general language indicating that

the secondary obligor waives defenses based on suretyship” (quotation omitted)).

Moreover, “[i]n Ariz ona . . . contracts of guaranty are strictly construed to limit the liability

of the guarantor.” Horizon Resources Bethany v. Cutco Indus., 881 P.2d 1177, 1181 (Ariz.

Ct. App. 1994). The guaranty language cited by Defendant makes no mention of a waiver

of surety defenses. Strictly construing t he language of the guaranty, the Court cannot

conclude that Stevens waived his right to surety defenses as a matter of law.5

C. Availability of Plaintiffs’ Impairment Claim.

Plaintiffs claim that Defendant’s poor servicing caused them significant injuries and

warrant Plaintiffs’ release from their guaranty obligations. Defendant argues that Plaintiffs

suffered no injury because Defendant’s alleged actions did not impair the underlying notes

or their collateral and Plaintiffs can still obtain value through collection of the notes or

foreclosure of the collateral. Defendant cites Restatement (T hird) of Suretyship &

Guaranty § 37 in arguing that Plaintiffs cannot make any impairment claim.

The Restatement provides:

If the obligee acts to increase the secondary obligor’s risk of loss by

increasing it s p ot ential cost of performance . . . the secondary obligor is

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discharged as described in subsections (2) and (3), and the secondary

obligor has a claim against the obligee as described in subsection (4). An act

that increases the secondary obligor's risk of loss by increasing its potential

cost of performance or decreasing its potential ability to cause the principal

obligor to bear the cost of performance is an “impairment of suret y ship

status.”

Restatement (Third) of Suretyship & Guaranty § 37. Plaintiffs’ claim mirrors the

Restatement. Plaintiffs assert that Defendant’s alleged actions increased Plaintiffs’ risk of

loss by increasing their potential cost of performance. Furt hermore, subsections (2) and

(3) make clear that, if Plaintiffs’ claim is valid, they may be released from p erforming the

portion of their obligations caused by Defendant’s bad acts. See id. Plaintiffs have

submitted evidence that they explicitly bargained for a 3% default rate and, because of

Defendant’s actions, ended up with a 20% default rate. Defendant disagrees. A jury will

decide whether Defendant’s actions caused the higher default rate and whether Plaint iff’s

obligations should be reduced accordingly.

Defendant additionally argues that Plaintiffs cannot sustain their claim because they

have not shown that Defendant’s alleged actions affected any particular p romissory note,

citing generally to Restatement (T hird) of Suretyship & Guaranty § 49, International

Harvester Co., 758 P.2d at 649, and FDIC, 922 F. Supp.3d at 925. The Court has reviewed

these authorities and does not conclude that Defendant must prove it s damages for each

particular note rather than globally for the notes as a whole.

D. Defendant’s Motion for Summary Judgment on its Counterclaims.

Defendant moves for summary judgment on its counterclaims, arguing that the

Court should enter judgment against Plaintiffs for shirking their guaranty obligations. The

Court will deny Defendant’s motion. The issues of fact identified above preclude summary

judgment. 

II. Plaintiffs’ Motion for Summary Judgment.

Plaint iffs’ move affirmatively on two of their claims. First, they argue that Stevens

should be discharged from his guaranty as a matter of law because of Defendant’s alleged

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breach of t he cont racts and refusal of Plaintiffs’ tender of performance. Second, they ask

the Court to declare the contracts’ late penalties unenforceable as a matter of law.

A. Stevens’ Discharge.

Plaintiffs argue t hat the Court should discharge Stevens from the guaranty because

Defendant breached the cont racts and refused Plaintiffs’ tender of performance. Issues

of fact preclude summary judgment in favor of Plaintiffs. As discussed above, there are

issues of fact as to whether there was an agreement between Plaintiffs and Defendant

regarding levels of servicing and whether Defendant breached the agreement, and issues

of fact as to whether Defendant gave Plaintiffs adequate notice regarding the defaulted

notes. In addition, although Plaint iffs claim that they tendered performance for their full

obligation, Defendant claims that full performance was not tendered.

B. Enforceability of the Contracts’ Late Penalties.

Plaintiffs ask the Court to declare the contract s’ lat e fee provision unenforceable as

a penalty. Under Arizona law, “parties to a cont ract are not free to provide a penalty for

its breach. . . . Punishment of a promisor for having broken his promise has no justification

on either economic or other ground and a term providing such a penalty is unenforceable

on the grounds of public policy.” Pima Sav. & Loan Ass'n v. Rampello, 812 P.2d 1115,

1118 (Ariz. Ct. App. 1991). Arizona law presumes that “an agreement made in advance of

a breach is a p enalt y [and unenforceable] unless both of two conditions are met.” Id.

First, the amount fixed in the contract must be a reasonable forecast of just compensation

for the harm that is caused by any breach. See Larson-Hegstrom & Associates, Inc. v.

Jeffries, 701 P.2d 587, 591 (Ariz. Ct. App. 1985). Second, the harm must be one t hat is

incapable or very difficult of accurate estimation. See id. “Whether a stipulat ion is for

liquidated damages or a penalty is a question of law for the court.” Pima, 812 P.2d at 1118.

Defendant has failed to overcome t he p resumption that the contract late fee is an

unenforceable penalty. Plaintiffs, in their cross-motion, clearly set forth Defendant’s twofold burden in proving that the late fee is enforceable, citing Larson-Hegstrom, 701 P.2d

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at 591. In resp onse, Defendant provides no evidence or analysis showing that the late fee

was a reasonable forecast of damages or t hat estimating damages would have been difficult

in this case. Defendant asserts that it was required t o hire an extra employee to help collect

on the notes and has incurred other costs as a result of Plaintiffs’ failure t o p erform. The

fact that Defendant may have been damaged in an unspecified amount by Plaintiffs’

alleged breach, however, does not show that $20 per day was a reasonable forecast of

damages that were otherwise difficult to estimate. The Court will grant Plaintiffs summary

judgment on this issue. Defendant has failed to respond to Plaintiffs’ motion with

evidence that the $20 per day late fee is not an unenforceable penalty.

III. Defendant’s Motion Regarding Damages.

The Court will deny Defendant’s motion for summary judgment regarding t he

amount owed on Defendant’s count erclaim. Because Defendant has not met its burden of

showing that it is entitled to summary judgment on its claims, the Court cannot conclude

that Defendant is entitled to damages. Furt hermore, the Court’s determination that the late

fee is unenforceable undercuts a substantial portion of the damages claimed by Defendant

in its motion.

IV. Defendant’s Motion Regarding Sales vs. Loans.

Plaintiffs concede that their contracts with Defendant involved the sale of

promissory notes rather than loans. The Court will grant Defendant’s motion for summary

judgment on this issue.

V. Defendant’s Motion to Strike Stevens’ Second Affidavit.

The Court did not rely on Stevens’ second affidavit in making its summary judgment

rulings and therefore will deny Defendant’s motion as moot.

IT IS ORDERED:

1. Defendant’s Motion for Summary Judgment (Doc. #62) is denied.

2. Defendant’s Motion for Partial Summary Judgment Re: Characterization of

Transactions as Sales (Doc. #67) is granted.

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3. Defendant’s Motion for Partial Summary Judgment Re: Amount Owed on

Counterclaim (Doc. #68) is denied.

4. Plaintiffs’ Cross M otion Regarding Steven’s Personal Guaranty, and Certain

Unenforceable Penalties (Doc. #72) is denied in part and granted in part as set forth above.

5. Defendant’s Motion to Strike the Second Declaration of John Stevens (Doc.

#94) is denied as moot.

6. A Final Pretrial Conference will be set by separate order.

DATED this 28th day of September, 2005.

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