Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_06-cv-04470/USCOURTS-cand-3_06-cv-04470-3/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1441 Petition For Removal--Other Contract

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1

U

nite

d

States District C

o

u

rt

For the Northern District of California

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

Philips Medical Capital, LLC, a

Delaware limited liability company,

 Plaintiff,

 v.

MEDICAL INSIGHTS

DIAGNOSTICS CENTERS, INC., a

California corporation, et al., 

 Defendants.

_____________________________/

and related cross action 

_____________________________/

No. C-06- 4470 JSW (WDB)

REPORT AND

RECOMMENDATION RE

APPLICATIONS FOR WRITS OF

ATTACHMENT AND WRIT OF

POSSESSION

I. INTRODUCTION

Plaintiff Philips Medical Capital (PMC) asserts a claim for breach of

contract against MIDC alleging that MIDC defaulted on its obligation to make

payments for medical equipment, an MRI machine, that MIDC allegedly leased

from PMC. See, Notice of Removal, filed July 21, 2006, attaching Complaint,

filed in state court on April 14, 2006 (“Complaint”). According to plaintiff, PMC

financed the acquisition of the goods which were supplied by a company named

Case 3:06-cv-04470-JSW Document 43 Filed 10/11/06 Page 1 of 47
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1The MRI machine includes multiple pieces of equipment. The evidence supports an

inference that at least some of that equipment was supplied by a nonparty named Vital Works.

Declaration of Ray Crouse in Support of Applications for Writ of Attachment, filed August 4,

2006, (“Crouse Decl.”), at Ex. 2. However, for purposes of these writ applications the parties

treat all equipment and all debt the same without distinguishing among providers. Accordingly,

for purposes of these writs we do not distinguish between equipment provided by Philips

Medical Systems and that provided by Vital Works. 

2Cal.C.C.P. §§483.010 et seq., §§484.090 et seq., §§512.010 et seq.

3The five writ applications are nearly identical. However, where it is necessary to cite a

specific application, we use the name of the party against whom the writ is sought. E.g., “Lynch

Motion” and “MIDC Motion” refer to PMC’s applications for a writ of attachment against Mr.

Lynch and against MIDC respectively.

2

Philips Medical Systems and a company named Vital Works.1 Plaintiff also

asserts claims to enforce “Guaranty” agreements signed by the individual

defendants, who are principals and/or shareholders of MIDC. Id. 

Pursuant to F.R.C.P. 64 and the California Code of Civil Procedure,2 PMC

filed four applications for writs of attachment (one against MIDC and one against

each of the individual defendants

3

) and one application for writ of possession. On

August 8, 2006, the District Court referred these matters to this court for Report

and Recommendation.

On August 18, 2006, defendants filed counterclaims against PMC and 

claims against Philips Medical Systems. See, Amended Counter Complaint and

Third Party Claim for Damages, Restitution, and Injunction ("Counter

Complaint"). Declaration of William T. Webb, Esq., in Support of . . . Opposition

to Application for Right to Attach Order and for Writ of Possession, filed August

30, 2006, (“Webb Decl.”) at Ex. 7. Defendants’ “cross action” contains fifteen

claims, one of which alleges that PMC and PMS fraudulently induced MIDC to

purchase the subject MRI equipment.

On September 20, 2006, the court conducted a hearing in connection with

plaintiff’s Applications for Writs of Attachment against defendants MIDC, Dr.

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4Citations to the Crouse Declaration refer to the declaration filed in support of the Lynch

Motion.

5Cal. C.C.P. §483.010(a) provides for writs of attachment on claims for money, based on

contract, where the amount owed is readily ascertainable and not less than $500. 

3

Williams, Dr. Gronner, and Mr. Lynch and on plaintiff’s Application for Writ of

Possession.

The court makes the following REPORT AND RECOMMENDATION.

II. DISCUSSION

The contract between PMC and MIDC consists of the Master Lease

Agreement and Schedules 1-4. Declaration of Ray Crouse in Support of

Applications for Writ of Attachment, filed August 4, 2006, (“Crouse Decl.”), at

Ex. 1-5.4 The Master Lease Agreement contains a choice of law provision in

which the parties stipulate that Pennsylvania law applies to claims based on the

contract. Crouse Decl., at Ex. 1, ¶20. The parties agree that Pennsylvania law

applies to construction and interpretation of the contract(s) and that California law

applies to the procedural requirements for obtaining writs of attachment and

possession. Transcript, September 20, 2006, hearing.

A. Plaintiff’s Applications for Writs of Attachment

Plaintiff is entitled to a writ of attachment if it demonstrates (1) that the

claim is one that is subject to attachment, (2) that the claim is “probably valid,” (3)

that plaintiff does not seek the writ for a purpose other than recovery on the claim,

and (4) that the amount to be secured by the writ is more than zero. Cal. C.C.P.

§§483.010, 484.010, and 484.090. Defendants do not appear to dispute factors

(1), (3) and (4).5 Defendants argue that plaintiff cannot demonstrate the “probable

validity” of its claim. If plaintiff demonstrates its entitlement to a writ of

attachment then the court also must consider defendants’ claims that specified

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6

“A court’s determinations under the attachment law have no effect on the determination

of any issues in the action, nor may the court’s determination regarding the attachment be given

in evidence or referred to at trial.” Loeb & Loeb, 166 Cal. App. 3d at 1117 citing Cal.C.C.P.

§484.100.

7We recognize that the deadline for providing initial disclosures has not yet passed.

F.R.C.P. 26(a). However, defendants have known since at least April 2005, when PMC’s

collections personnel contacted defendants about their default, that a conflict was imminent.

MIDC could have begun compiling information in its defense at that time. Additionally, once

defendants removed plaintiff’s state court action on July 21, 2006, they had access to processes

that would permit them to seek leave of the Court to conduct discovery before the time specified

in Rule 26(d). E.g., Federal Rules of Civil Procedure 26(d), 30(a)(2)(C), 31(a)(2)(C), 33(a), and

34(b). It does not appear that defendant utilized these processes.

4

property is exempt from attachment. Finally, if the Court grants plaintiff’s request

for a writ of attachment, we must establish the amount of any undertaking that

plaintiff must post. Cal. C.C.P. §484.090.

“A claim has ‘probable validity’ where it is more likely than not that the

plaintiff will obtain a judgment against the defendant on that claim.” Cal. C.C.P.

§481.190. In order to make this determination the court must evaluate the

“relative merits” of the parties’ competing contentions and determine the

“probable outcome of the litigation.” Loeb & Loeb v. Beverly Glen Music, Inc.,

166 Cal.App.3d 1110 (2d Dist 1985). Furthermore, California law requires that

we make these judgments based on evidence. Cal. C.C.P. §§482.040 and 484.030. 

We may not recommend findings based on speculation. This requirement places

us in a awkward position because we are required to make these judgments at a

point in the litigation that precedes substantial discovery. Although we feel

somewhat disabled by the nascent state of the evidence, we note that none of the

judgments we render about the merits at this juncture is final or otherwise will

prejudice defendants' ability to litigate the issues.6 We also feel compelled to note

that it appears that defendants have not been without means or impetus to start

compiling evidence in support of their claims.

7

Before evaluating the relative merits of the parties’ claims, we briefly

describe the parties’ contentions. 

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8References to the UCC throughout are to Pennsylvania’s UCC and not to the Model

UCC.

9

See, note 1.

5

Plaintiff claims that it and MIDC are parties to a contract that constitutes a

“finance lease” under Pennsylvania’s version of the Uniform Commercial Code

(“UCC”).8 The contract consists of the Master Lease Agreement (“MLA”) and

Schedules 1-4. Crouse Decl., at Ex. 1-5. Plaintiff alleges that MIDC ordered

medical equipment from independent entities (“providers” or “suppliers”), Philips

Medical Systems (“PMS”) and Vital Works and that plaintiff simply financed

those transactions. The MLA contains the general provisions of the so-called

“lease,” and each of the four Schedules relates to the acquisition of specific

equipment. Schedule 1 indicates that the equipment obtained under that so-called

lease was provided by Vital Works. The equipment provided under Schedules 2-4

was supplied by PMS.9

MIDC has ceased making payments due under its contract with PMC

claiming, among other things, that the goods were defective and/or did not

perform as expressly warranted. However, under a true “finance lease” MIDC’s

obligation to pay plaintiff would be “absolute and unconditional.” See, UCC,

Division 2A. No warranties relating to the products’ fitness run from plaintiff to

MIDC, and MIDC would be obligated to pay plaintiff under the agreement even if

the equipment were defective. Typically, under a “finance lease,” the provider of

the equipment sells the equipment to the lessor with warranties, and those

warranties run through to the lessee (putatively MIDC). Under this arrangement

MIDC’s only recourse for defective equipment would be against the provider.

Defendants argue that the contract is not in fact a “finance lease” but is a

“security agreement” disguised as a lease. It is possible that the transaction

between PMC and MIDC also constitutes a sales agreement, but defendants assert

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10As we explain infra, at this juncture, it is not necessary for us to resolve this issue.

11Division 2 governs sales; Division 2A governs leases; and Division 9 governs security

agreements. Note that Pennsylvania uses the term “Division,” whereas the Model UCC and

many other states use the term “Article.”

6

that, without discovery, they cannot tell with certainty whether the true seller is

PMC or PMS. Transcript September 20, 2006, hearing.10

Defendants contend that PMC is responsible for implied warranties of

fitness and merchantability either because PMC constitutes the “seller” of the

equipment or because it would be unfair under the facts of this case to enforce the

disclaimers of warranties contained in the agreement. Defendants also contend

that they are not obligated to pay PMC because MIDC never “accepted” the

equipment and/or effectively revoked acceptance of the equipment, thus nullifying

the contract (regardless of whether we construe it as a “lease” or a “security

agreement”). Finally, defendants argue that the contract is voidable as a result of

fraud. See, Counter Complaint. 

1. Is the contract a “finance lease?”

Whether a contract constitutes a “finance lease,” a “sales agreement” or a

“security agreement” is governed by the UCC.11

A “lease” is “ [a] transfer of right to possession and use of goods for a term

in return for consideration, but a sale, including . . . a retention or creation of a

security interest is not a lease.” 13 Pa.C.S. §2A103 (emphasis added). A “finance

lease” is a lease,

with respect to which:

(1) the lessor does not select, manufacture or supply the goods; 

(2) the lessor acquires the goods or the right to possession and use of

the goods in connection with the lease; and 

(3) one of the following occurs:

(i) the lessee receives a copy of the contract by which the

lessor acquired the goods . . . , 

(ii) the lessee’s approval of the contract by which the

lessor acquired the goods . . . is a condition to

effectiveness of the lease contract, 

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7

(iii) the lessee, before signing the lease contract, receives an

accurate and complete statement designating the promises and

warranties, and any disclaimers of warranties, . . . , provided to

the lessor by the person supplying the goods in connection with

or as part of the contract by which the lessor acquired the

goods . . . , or

(iv) . . . the lessor, before the lessee signs the lease contract,

informs the lessee, in writing: (A) of the identity of the person

supplying the goods to the lessor, unless the lessee has selected

that person and directed the lessor to acquire the goods . . .

from that person; (B) that the lessee is entitled under this

division to the promises and warranties, . . . provided to the

lessor by the person supplying the goods . . . ; and (C) that the

lessee may communicate with the person supplying the goods

to the lessor and receive an accurate and complete statement of

those promises and warranties, including any disclaimers and

limitation of them or of remedies.

13 Pa.C.S. §2A103.

It is true that the subject “Schedules” and paragraphs 2, 5, and 19 of the

MLA employ terms that appear to create a “finance lease.” It also is true that at

least one Pennsylvania court has held that this type of language is sufficient to

create a finance lease even where the lessor did not complete all the “formalities”

for doing so. De Lage Landen Fin’l Serv., Inc., v. M.B. Mngmt. Co., 888 A.2d 895

(Pa. Super. 2005).

Nonetheless, we RECOMMEND that the District Court find that plaintiff

has failed to show that it is more likely than not to obtain a judgment that the

MLA and Schedules 1-4 constitute a “finance lease.”

We make this recommendation because the MLA and Schedules 1-4 also

contain language that render them per se a “security agreement” under

Pennsylvania law, and a “security agreement” cannot be a “lease.” 13 Pa.C.S.

§2A103.

//

//

//

//

//

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12The opinion in De Lage contains no indication that the contract therein contained this

type of language. 

13The MLA is attached as Exhibit 1 to the Crouse Declaration and can be found at Exhibit

7 to the Webb Declaration. (Exhibit 7 includes defendants’ Counter Claim. The MLA is

attached as Exhibit 4 to the Counter Claim). Our copy of Exhibit 1 to the Crouse Declaration

is missing the first page of the contract. Accordingly, we refer the District Court to the Webb

Declaration for specific provisions of the MLA.

8

In a section labeled “general definitions” the UCC says the following about

whether a transaction creates a “lease” or a “security interest.”

Determination of lease or security interest. -- Whether a transaction

creates a lease or security interest is determined by the facts of each

case; however:

(i) A transaction creates a security interest if the consideration the

lessee is to pay the lessor for the right to possession and use of the

goods is an obligation for the term of the lease not subject to

termination by the lessee and: . . . . . . 

(D) the lessee has an option to become the owner of the

goods for no additional consideration or nominal

additional consideration upon compliance with the lease

agreement.

13 Pa.C.S. §1201 (emphasis added).

If the factors listed in subparagraph (i) are satisfied the transaction at issue

constitutes a per se “security interest.” In re Pillowtex, Inc., 349 F.3d 711 (3rd

Cir. 2003); In re Murray, 191 B.R. 309 (E.D.Pa. 1996); In re JII Liquidating, Inc.,

341 B.R. 256 (N.D. Ill. 2006). The MLA together with Schedules 1-4 include

terms that render the transaction per se a security agreement under Pennsylvania’s

UCC.12 First, the MLA is not subject to termination. That document states that “a

lease may not be terminated or canceled for any reason whatsoever, except as

expressly provided in the Lease [Schedule],” and the Schedules do not appear to

provide for cancellation. Webb Decl., at Ex. 7 (MLA, attached as Ex 4 to Counter

Claim, at ¶2) and Crouse Decl., at Ex. 1-5.13 Second, the Schedules provide MIDC

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14Defendants argue that the MLA is not a finance lease for three reasons: (1) defendant

has no right to cancel the agreement and has an option to purchase for only $1.00, (2) formalities

of finance lease formation were not followed, and (3) where the supplier and the lessor are

affiliates, whether the contract is a finance lease depends on the facts of the case. 

Because we recommend that the District Court find that the agreement more likely than

not constitutes a security agreement based on the first reason, we do not address defendants’

remaining arguments.

15The UCC is clear, however, that the intent of the parties is not the relevant inquiry for

commercial transactions in this universe. The parties may have intended to create a lease but in

effect created a security agreement. The court is to focus on the economic realities created by

the transaction. 

16The MLA also states generally that the subject equipment is the property of the lessor

but then says, “[n]otwithstanding the preceding sentence, for Leases with a $1.00 purchase

option . . ., Lessee shall be deemed to be the owner thereof solely for the purposes of state and

local sales and use tax.” Webb Decl., at Ex. 7 (MLA) at ¶6. We acknowledge that under §1201

of the UCC the lessee’s assumption of the duty to pay taxes does not necessarily create a security

interest. 13 Pa.C.S. §1201 (“security interest” at (5)(ii)(B)). Nonetheless, this is an additional

factor for the court to consider.

Also note, plaintiff appears to concede that the agreement created a security interest.

Motion at 11.

9

an option to purchase the equipment at the end of the lease for nominal

consideration ($1.00).14 Crouse Decl., at Ex. 2-5.

Other provisions of the MLA strongly suggest that the parties were aware

that they were creating a security interest.

15 Significantly, the MLA states 

Except for any lease where the Lessee has a . . . $1 purchase option, it

is the intent of the parties that each Lease is a true lease under the

UCC, . . . For any Lease where Lessee has a $1.00 purchase option . .

. or if this Agreement or any Lease hereunder is otherwise deemed at

any time to be one intended as a security, then Lessee grants Lessor a

security interest in the [equipment] . . . 

Webb Decl., at Ex. 7 (MLA, attached as Ex 4 to Counter Claim, at ¶15) (emphasis

added). As noted, the Schedules grant MIDC a $1.00 purchase option. Crouse

Decl., at Ex. 2-5.16

Because the parties’ contract includes language that would constitute a per

se “security interest” and because a “security interest” cannot be a “lease,” we

RECOMMEND that the District Court find that plaintiff has failed to demonstrate

the probable validity of its claim that the MLA and Schedules constitute a “finance

lease.” It is more likely that the contract will be deemed a “security agreement”

governed by Division 9 of Pennsylvania’s UCC.

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10

The MLA and Schedules also might constitute a “sales and security

agreement.” PMC contends that the MLA and Schedules amount only to a

“security agreement.” If the Court finds that the contract is not a finance lease,

then it is PMC’s view that the goods were sold by PMS directly to MIDC, and a

set of different documents represent that “sale” transaction (e.g., invoices, order

forms). In contrast, PMS intends to argue that it transferred title to PMC and,

therefore, it was PMC who sold the goods to MIDC. Defendants state that they

are in the dark about the true nature of the agreement between PMS and PMC, and

that without additional discovery (primarily about who held title to the goods at

the time of the “sale”) they cannot say with certainty who should be deemed the

“Seller” of the MRI equipment.

Whether the contract also constitutes a “sales” agreement is potentially

pertinent because, if the MLA and Schedules constitute a “sales and security

agreement,” the contract is governed by both Divisions 2 and 9 of Pennsylvania’s

UCC. If the contract is simply a “security agreement” then it is governed only by

Division 9. Division 9 does not address several of the issues we must resolve

(e.g., what constitutes “acceptance” or “revocation”). However, for current

purposes, we need not determine whether the contract also amounts to a “sales”

agreement because the parties agree that, with respect to commercial transactions,

where the governing Division of the UCC does not address an issue, the issue

becomes a matter of common law and Pennsylvania courts will look to other

Divisions of the UCC to fill in the gaps left by the governing Division. E.g., BeckHummel v. Ski Shawnee, Inc., 902 A.2d 1266, n.12 (PA Super. 2006). The UCC,

therefore, appears to be the appropriate source of guidance regardless of whether

the contract is or is not a “sales” agreement. Neither party has presented authority

to the contrary.

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11

Having concluded that the parties’ transaction is not a “finance lease," we

next consider whether PMC has nonetheless demonstrated the probable validity of

its claim that it is entitled to unconditional payment from MIDC.

2. Does MIDC have an absolute and unconditional obligation

to pay PMC for the goods even if the goods are defective?

Even if the parties’ agreement does not qualify as a “finance lease,” plaintiff

argues that the express terms of the MLA effectively disclaim all warranties of

merchantability and fitness and create an “absolute and unconditional” obligation

by MIDC to pay PMC regardless of whether the products are defective.

The central tenet of the UCC is “freedom of the parties to contract.” See,

Official Comment to 13 Pa.C.S. §2A101 and 13 Pa.C.S. §1102. The UCC is clear

that, subject to specific exceptions, the parties are free to vary the effect of the

UCC by agreement. Id., 13 Pa.C.S. §1102(c) and (d). Thus, even if the contract

does not constitute a “finance lease,” the parties could remain free to agree to

terms that would deliver to plaintiff many of the same benefits that plaintiff would

enjoy as a matter of law under a “finance lease.”

Unless the lessor is comfortable that the transaction will qualify as a

finance lease, the lease agreement should include provisions giving

the lessor the benefits created by the subset of rules applicable to the

transaction that qualifies as a finance lease under this Article. . . . If

a transaction does not qualify as a finance lease, the parties may

achieve the same result by agreement. 

13 Pa.C.S. §2A103 (Comment (g)) (emphasis added).

The UCC also permits a party to disclaim all warranties. Section 2316

states,

(b) Implied warranties of merchantability and fitness – Subject to

subsection (c), to exclude or modify the implied warranty of

merchantability or any part of it the language must mention

merchantability and in case of a writing must be conspicuous, and to

exclude or modify any implied warranty of fitness the exclusion must

be by a writing and conspicuous. Language to exclude all implied

warranties of fitness is sufficient if it states, for example, that “There

are no warranties which extend beyond the description on the face

hereof.”

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17Plaintiff cites Cal. Comm. Code §10214 (legitimacy of warranty disclaimers). The

section of California’s UCC that addresses leases is Article 10. Pennsylvania denominates this

section Division 2A. Of course Pennsylvania, not California law applies. 

12

(c) Implied warranties in general – Notwithstanding subsection (b):

(1) Unless the circumstances indicate otherwise, all implied

warranties are excluded by expressions like “as is,” “with all faults”

or other language which in common understanding calls the attention

of the buyer to the exclusion of the warranties and makes plain that

there is no implied warranty.

13 Pa. C.S. §2316(b) and (c). See also, 13 Pa.C.S. §2A214.17 A contract

provision is “conspicuous” when it is written such that “a reasonable person

against whom it is to operate ought to have noticed it.” Beck-Hummel, 902 A.2d

at 1274 citing 13 Pa.C.S. §1201. The court should consider (1) the disclaimer’s

placement in the document, (2) the size of the print, and (3) whether the disclaimer

is highlighted by being printed in all capital letters or other different type style. Id.

The express terms of the MLA conspicuously disclaim all warranties. 

Paragraph 5 of the MLA reads as follows.

DISCLAIMER OF WARRANTY: LESSEE ACKNOWLEDGES

THAT LESSOR HAS NO EXPERTISE OR SPECIAL

FAMILIARITY ABOUT OR WITH RESPECT TO THE SYSTEM. 

LESSEE AGREES THAT THE SYSTEM LEASED HEREUNDER

IS LEASED “AS-IS” AND . . . THAT LESSOR HAS MADE NO

REPRESENTATION OR WARRANTY WITH RESPECT

THERETO, INCLUDING ANY IMPLIED WARRANTIES OF

MERCHANTABILITY OR FITNESS FOR A PARTICULAR

PURPOSE. LESSOR FURTHER DISCLAIMS ANY LIABILITY

FOR LOSS, DAMAGE OR INJURY TO LESSEE OR THIRD

PARTIES AS A RESULT OF ANY DEFECTS, LATENT OR

OTHERWISE, IN THE SYSTEM . . . WITHOUT LIMITING THE

FOREGOING, LESSEE HEREBY WAIVES ANY WARRANTIES

CONTAINED IN SECTIONS 2A-210, 2A-211, 2A-212 AND 2A213 OF THE APPLICABLE [UCC] AND ANY RIGHT TO DEEM

LESSOR IN DEFAULT PURSUANT THERETO. LESSEE ALSO

AGREES TO WAIVE SUCH WARRANTIES, RIGHTS AND

REMEDIES OR OTHER APPLICABLE LAW WITH RESPECT TO

THE SYSTEM, INCLUDING ITS FREEDOM FROM PATENT OR

COPYRIGHT INFRINGEMENT . . . 

Webb Decl., at Ex. 7 (MLA, attached as Ex 4 to Counter Claim, at ¶5)

(underlining added). This paragraph is titled “DISCLAIMER OF WARRANTY,”

and the title and 3/4 of the paragraph are in capitalized letters such that they stand

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18Defendants also argue a third alternative -- if MIDC accepted the goods, it effectively

revoked that acceptance on June 13, 2006. In our view, plaintiff has demonstrated the probable

validity of its claim that, under the express terms of the contract, once MIDC accepted the goods

it incurred an absolute and unconditional obligation to pay PMC regardless of the condition of

the goods. Therefore, even if MIDC revoked its acceptance of the goods based on their

condition, as it contends, this revocation might be effective as to the supplier (PMS or Vital

Works), but it would not vitiate MIDC’s obligation to pay PMC. Accordingly, we do not

address the relative merits of this contention at this juncture in our analysis.

At the September 20th hearing, defendants’ counsel suggested that the Court should not

enforce PMC’s disclaimers as a matter of equity. However, at this point in the proceedings,

defendants have presented neither authority nor evidence that would support a finding that

defendants are entitled to equitable relief of this nature.

13

out from other provisions of the contract. Paragraph 5 also expressly refers to

“merchantability” and uses the term “as-is.”

Additionally, paragraph 2 reads, 

LESSEE’S OBLIGATION TO MAKE THE PAYMENTS SHALL

BE ABSOLUTE AND UNCONDITIONAL AND IS NOT SUBJECT

TO ANY ABATEMENT, SET-OFF, DEFENSE OR

COUNTERCLAIM FOR ANY REASON WHATSOEVER,

INCLUDING, WITHOUT LIMITATION, ANY PRESENT OR

FUTURE CLAIMS AGAINST THE LESSOR OR THE PROVIDER

OF THE SYSTEM. 

Id., (underlining added).

We RECOMMEND that the District Court find that plaintiff has

demonstrated that, even if the MLA is a security agreement (or a sales and security

agreement), PMC’s claims that it disclaimed all warranties and that MIDC agreed

to incur an “absolute and unconditional” obligation to pay PMC regardless of the

products’ quality or fitness are “probably valid.” 

MIDC can defeat plaintiff’s claim only if defendants demonstrate that (1)

the MLA and Schedules never became effective because MIDC did not “accept”

the goods or (2) that PMC engaged in fraud sufficient to void the contract.18

3. Did plaintiff demonstrate the probable validity of its claim that

MIDC accepted the goods?

Plaintiff claims that MIDC executed a “Delivery and Acceptance

Certificate” with respect to the MRI equipment. E.g., Lynch Motion at 19. PMC

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19Defendants also contend that the November 23th Certificate was signed by someone not

authorized to do so and that MIDC notified PMC on November 30, 2004, that that Certificate

was unauthorized and not legally binding. Williams Decl., at ¶29.

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argues that this document constitutes prima facie evidence that MIDC “accepted”

the goods. We note that the evidence includes copies of “Delivery and

Acceptance Certificates” for goods delivered under Schedules 2 and 3 but none for

goods delivered under Schedules 1 and 4. Crouse Decl., at Ex. 2-5. The

incomplete state of plaintiff’s evidence may not be material, however, because

whether defendant signed a particular document is not the central inquiry under

Pennsylvania’s UCC.

Division 2 of the UCC provides, 

(a) General rule -- Acceptance of goods occurs when the buyer: 

(1) after a reasonable opportunity to inspect the goods signifies to the

seller that the goods are conforming or that he will take or retain them

in spite of their nonconformity; 

(2) fails to make an effective rejection (section 2602(a)), but such

acceptance does not occur until the buyer has had a reasonable

opportunity to inspect them; or

(3) does any act inconsistent with the ownership of the seller; but if

such act is wrongful as against the seller it is an acceptance only if

ratified by him.

13 Pa.C.S. §2606.

Defendants assert that the Certificates do not support a finding that MIDC

accepted the goods because, at the time the Certificates were signed, MIDC had

not had a “reasonable opportunity to inspect” the goods as required by UCC

§2606. Among other things, defendants point out that PMS did not deliver all

parts for the MRI machine until six months after the first Certificate was signed. 

Declaration of Dr. Virgil L. Williams in Support of . . . Opposition to Application

for Right to Attach Order and for Writ of Possession, filed August 30, 2006,

(“Williams Decl.”) at ¶¶28 and 30. Moreover, defendants argue that plaintiff and

PMS “pressured,” “tricked,” and “coerced” MIDC to sign the Acceptance

Certificates before it had a reasonable opportunity to inspect the equipment. Id., at

¶¶28, 29, and 34.19

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20Citing Ford Motor Credit Co., v. Caiazzo, 564 A.2d 931 (Pa. Super. 1989), defendants

argue that it is too early in this litigation to assess whether defendant rejected or revoked

acceptance of the goods within a reasonable time. Transcript, September 20, 2006, hearing. As

the court stated on the record, we realize that we are somewhat disabled by the underdeveloped

state of the evidence. However, we are charged with assessing the relative merits of the parties’

positions at an early juncture in the proceedings and must do so to the best of our ability. We

also remind defendants that our preliminary assessment of the merits of this dispute will play no

role in the adjudicative process that will inform a final judgment. Therefore, defendants suffer

no unfair prejudice as a result of these early assessments. See, n. 6.

15

For purposes of these writ applications we adopt defendants’ premise that

MIDC could not have “accepted” the goods until after such time as the MRI

machine was complete. Defendants have submitted evidence that would support a

finding that the final equipment for the MRI machine was delivered in May 2005. 

Williams Decl., at ¶¶28-30. Accordingly, we must determine whether the

evidence supports a finding that plaintiff will “probably” be able to show that

MIDC had a reasonable opportunity to inspect the goods after May 2005 and that

MIDC in fact accepted the MRI machine.

What constitutes a “reasonable” opportunity to inspect the goods is a factual

inquiry. E.g., 13 Pa.C.S. §1204 (“reasonable time . . . depends on the nature,

purpose and circumstances of [the action to be taken]”). Defendants argue that the

MRI equipment is complex and that that fact supports a conclusion that they

needed a lengthy inspection period. Opposition, at 13-16.20

MIDC became “operational” sometime in 2005. Williams Decl., at ¶2. Dr.

Williams states that MIDC operated without the MRI machine for the first six to

nine months. Id., at ¶33. He also states that PMS tried to cure defects in the goods

for more than 1 1⁄2 years before MIDC rejected the goods or revoked the

acceptances. Williams Decl., ¶¶32 and 39. He further states that the machine

needed certain routine maintenance 3-4 times in less than twelve months. Id., ¶31. 

Based on Dr. Williams’ testimony, we infer that MIDC has been using the

machine on patients for at least one year, perhaps more. MIDC did not formally

try to reject the goods until June 13, 2006, more than one year after the final

equipment was delivered. Furthermore, during those thirteen months, MIDC used

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(and apparently continues to use) the MRI equipment on patients to generate

revenue. Opposition at 2:11-12.

Although there is no strict time limit for what constitutes a reasonable

period to inspect and accept or reject delivered goods, we find it unlikely at best

that a commercial party would be granted thirteen months (May 2005 - June 13,

2006) in which to inspect expensive machinery and/or would be permitted to

continue to routinely use that machinery in its business for thirteen months before

rejecting it as nonconforming. The subject MRI equipment is the center of

defendants’ business and, as they state, the economic survival of their business

depended on it. Webb Decl., at Ex. 4 (Declaration of Nicholas K. Garvey in

Support of Opposition to Plaintiff’s Application for Right to Attach Order and

Application for Writ of Possession, at ¶3). Defendants have asserted that the

equipment has two principal defects. One is that it has never been able to

complete an MRI examination as fast as defendants were led to believe it would. 

The second is that the equipment fails to deliver “cardiac gating” and “other

vascular imaging” that purportedly would have rendered clearer images than

standard MRI machines by taking images between the patient’s heartbeats. 

Williams Decl., at ¶¶17 and 32. Defendants contend that they relied on

representations about the speed of the equipment and its ability to produce clear

vascular images when they formed their business plan and identified a viable

market niche. 

There are two difficulties with these contentions. One arises from the fact

that defendants’ business remains in operation today – with the subject equipment

as its critical component. If the defects really are so financially disabling, how is

it that the business continues to operate? The second difficulty is more directly

on point here: the two alleged defects about which defendants now complain

clearly would have surfaced in the earliest period of use of the equipment. Its

alleged lack of speed would have been obvious from first use. And if the image

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clarity really was so central to defendants’ business plan, one would expect

defendants to have run tests or otherwise to have encountered this problem very

soon after their business became operational. Given the visibility of the two

principal alleged defects, it clearly could not be deemed reasonable to take thirteen

months to complete an inspection that would uncover them.

Defendants seek to counter this line of argument by contending that their

acceptance of the goods was always conditional on assurances from plaintiff that

the defects were curable and would be cured promptly (a prompt cure allegedly

being essential to the survival of the business). It is not clear, from the evidence

before the court at this early juncture, that plaintiff ever acknowledged these

alleged defects or ever assured defendants that the defects would be cured. What

is clear, however, is that thirteen months cannot be deemed “prompt.” Defendants

contend that efforts were made repeatedly to correct these problems with the

equipment – but that, to this day, the problems remain. As we have noted,

defendants also contend that these particular problems gut their business plan and

pose severe threats to the survival of their operations.

The legal question at this juncture is this: in these circumstances, was it

“reasonable” to take thirteen months to “inspect” this equipment for these alleged

defects? Even assuming that the law would extend the period for completing an

“inspection” to include time to try to correct identified defects, we think it

substantially more likely than not that the fully litigated answer to this question

will be “no.” Even for sophisticated goods like these, for defects that are so

obvious and that allegedly pose such grave threats to the viability of the

undertaking, why would reasonable people operating this business take more than

a few months to complete their “inspection” (by observing the plaintiff’s alleged

repeatedly unsuccessful efforts to correct the problems)? Defendants have

proffered no persuasive answer. Instead, we think it is appreciably more likely

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21We also question the contention that PMC “forced” MIDC to accept the goods because

evidence in the record suggests that MIDC was under less economic pressure than MIDC

suggests. First, MIDC was not yet operational when the first equipment was delivered, so MIDC

would not have had to turn away patients if it returned the goods and sought a machine from a

new provider. Williams Decl., at ¶28. Second, Dr. Williams indicates that MIDC had a preestablished relationship with another company that could provide medical equipment, “GE.” If

MIDC was unhappy with PMS and/or PMC, it could have fallen back on its relationship with

GE for new equipment. In fact, Dr. Williams indicates that MIDC looked to GE for equipment

midway through its pre-acquisition interaction with PMS. Williams Decl., at ¶¶3 and 10. 

We acknowledge that evidence submitted by defendants indicates that MIDC’s office

space may have been designed and constructed specifically to accommodate this MRI machine

and that “construction was nearly completed” in October 2004 before delivery of the equipment.

Williams Decl., at ¶¶18 and 30. Defendants do not state that this customized construction would

prevent MIDC from installing other MRI machinery. Based on the evidence, it appears that

PMS and MIDC intended MIDC to be a “show” site, so PMS had input into the interior design

of the office space in order to showcase its product. Id. Therefore, it is unclear whether the

customized construction was a matter of aesthetics, function, or both.

22At the September 20th hearing, defendants’ counsel indicated that MIDC had a

relationship with the law firm of Lanahan & Reilley during this period. Transcript of September

20, 2006, hearing.

18

that the court will find that by keeping the equipment for so long and by

continuing to operate the business around it (even now), defendants “accepted” it. 

We also find it relevant that defendants’ attempted rejection of the goods (or

revocation of acceptance) did not occur until two months after plaintiff filed the

complaint in this action. If PMC and/or PMS had “coerced” MIDC into accepting

the goods we think the notion of rejection or revocation would have arisen before

thirteen months had passed and before plaintiff was compelled to file a complaint

to collect the debt.21 Defendants are sophisticated commercial players, and it

appears that they had access to legal advice during this time.22 In our view,

reasonably sophisticated commercial players who truly felt that they had been

“tricked” and “pressured” into accepting goods that were defective and that were

critical to their business would have made inquiries into their legal rights before

thirteen months had passed.

The evidence demonstrates the probable validity of plaintiff’s claim that

MIDC had a reasonable amount of time to inspect the goods following delivery of

the final equipment in May 2005 and did not make an effective rejection. 

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28 23See also, 13 Pa. C.S. §2602 (“after rejection any exercise of ownership by the buyer

with respect to any commercial unit is wrongful as against the seller”).

19

We also conclude that plaintiff is likely to establish that defendant

“accepted” the equipment on the independent ground that MIDC has acted in a

manner “inconsistent with the ownership of the seller” (regardless of whether the

seller is PMC or PMS). 13 Pa. C.S. §2606(a)(3).23 Despite MIDC’s alleged

dissatisfaction with the goods, MIDC has continued to use the MRI equipment. 

MIDC continued to use the equipment after being contacted by plaintiff’s

collection department, after plaintiff filed this complaint, and, in fact, MIDC

continues to use the MRI machine with patients to this day even though it

contends that it has rejected or revoked acceptance of the goods. Opposition at

2:11-12; Webb Decl., at Ex. 4 (Garvey Decl.). MIDC’s continued use of the MRI

machine is inconsistent with the seller’s ownership rights. If MIDC “rejected” the

goods it was under a duty to reasonably preserve the goods until the seller could

arrange to retake them. 13 Pa.C.S. §2602.

There is an additional reason for rejecting defendants’ contention that

MIDC never “accepted” the goods because PMS continued to try to cure the

alleged defects. This contention speaks to the issue of “revocation,” not

acceptance. The UCC states,

[a]cceptance of goods by the buyer precludes rejection of the goods

accepted and if made with knowledge of a nonconformity cannot be

revoked because of it unless the acceptance was on the reasonable

assumption that the nonconformity would be seasonably cured but

acceptance does not of itself impair any other remedy provided by

this division for nonconformity.

13 Pa.C.S. §2607(b) (emphasis added). 

But whether MIDC effectively revoked acceptance of the goods based on

PMS’s failure to seasonably cure the defects is irrelevant to the question before us. 

The express terms of the parties’ contract provide that any defects and/or problems

with the fitness of the goods are the responsibility of the provider (PMS) and no

such problems relieve MIDC of its obligation to pay plaintiff (PMC) once MIDC

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24Where a buyer accepts goods with knowledge of their nonconformity, the buyer is

responsible for the purchase price regardless of whether the buyer is entitled to damages for the

nonconformity. 13 Pa.C.S. §2607(b) (acceptance does not impair any other remedy for

nonconformity);Beaver Valley Alloy Foundry, Co., v. Therma-Fab, Inc., 814 A.2d 217, 220 (Pa.

Super. 2002).

25Defendants argue that plaintiff’s evidence is not competent. Opposition at 21-22.

However, at this juncture we have relied only on the express terms of the contract and MIDC’s

evidence (i.e., Dr. Williams’ Declaration). As far as we can tell, defendants do not contend that

the contract is a fake or dispute the validity of Dr. Williams’ testimony.

20

accepts the goods.24 Because the express terms of the MLA prevent MIDC from

revoking its obligation to pay plaintiff once the goods are accepted, we do not

address the efficacy of defendant’s effort to revoke at this juncture in our analysis.

We RECOMMEND that the District Court find that plaintiff has shown the

probable validity of its claim that MIDC “accepted” the MRI equipment and that

MIDC did so with knowledge of the equipment’s nonconformity.

We have concluded that plaintiff has established the “probable validity” of

its claim that the parties agreed to terms that include (1) express disclaimers of

warranties by plaintiff, (2) an absolute and unconditional obligation to pay

plaintiff by MIDC, (3) an agreement from MIDC that any recourse it has for

defects or quality will be pursued against the provider (PMS or Vital Works) only,

and that plaintiff has demonstrated the probable validity of its claim that MIDC

“accepted” the goods with knowledge that they were nonconforming.25 If the

District Court adopts these recommendations, plaintiff will have established the

“probable validity” of its claim against MIDC unless MIDC shows that it is likely

to prove that fraud by PMC voids the contract. 

4. Is MIDC likely to prove fraud?

Defendants claim that plaintiff cannot enforce the MLA and Schedules 1-4

because PMC and PMS procured the contract by fraud. According to defendants,

PMC and PMS fraudulently represented to MIDC that PMC and PMS were one

company so that MIDC would not ascribe any significance to the language in the

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26E.g., Boyd v. Rockwood Area School Dist., 2006 WL 2612795 (Pa. Cmwlth).

21

MLA and the Schedules that made MIDC’s obligation to pay PMC absolute once

MIDC accepted the equipment. Defendants further allege that as part of the

alleged conspiracy to defraud MIDC, PMS and PMC agreed that PMS (the

provider) would deliver no warranties to PMC – so PMC would have no

warranties to pass through to MIDC. Thus, the purpose of this alleged scheme

was to leave MIDC with recourse to no one for defective equipment: once MIDC

accepted the equipment, its obligations to PMC would be unconditional, and the

absence of warranties would leave PMS fully protected from any claims MIDC

might try to assert against it. 

Defendants also allege that PMC and PMS sold MIDC equipment they

knew would not perform as represented. They purportedly further conspired to

deliver only part of the equipment for six months in order to conceal that the

equipment would not meet MIDC’s needs and to “pressure,” “coerce,” and “trick”

MIDC to accept the incomplete equipment before it reasonably could inspect it. 

According to defendants, PMC and PMS thereby saddled MIDC with defective

equipment and no legal recourse. This is an engaging set of allegations. The

question at this juncture, however, is how likely is it that defendants will be able to

prove a counterclaim sounding in fraud that would void MIDC’s otherwise

apparently unconditional obligation to PMC?

The elements of a claim for fraudulent misrepresentation in Pennsylvania

are (1) a representation (2) which is material to the transaction at hand (3) made

falsely, with knowledge of its falsity or with recklessness as to whether it was true

or false, (4) with intent to mislead another into relying on it, (5) justifiable reliance

on the misrepresentation, and (6) resulting injury.26

Defendants allege that PMC and/or PMS made two kinds of

misrepresentations. As stated, they allege that PMC and PMS represented that

they were one entity. In addition, defendants allege that PMS misrepresented the

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quality/fitness of the MRI machine. Defendants have submitted no evidence that

anyone from PMC made any representations about the quality or fitness of the

MRI machine. Defendants also have not set forth legal authority for imputing

representations made by PMS to PMC. Because defendants have failed to set

forth a basis for finding PMC (plaintiff) responsible for “quality” representations,

defendants must demonstrate the probable validity of their fraud claim based on

the allegation that PMC and PMS misrepresented that they were “affiliates.”

For reasons we explain below, we RECOMMEND that the District Court

find that defendants have failed to demonstrate the probable validity of their claim

that PMC may not enforce the MLA because the contract was procured by fraud.

Defendants have presented some evidence that agents of PMC and agents of

PMS made representations that implied that the companies were affiliated. 

Plaintiff objects that much of this evidence is inadmissable hearsay. Plaintiff’s

Evidentiary Objections to Declaration of Virgil Williams, filed September 6, 2006. 

We need not reach plaintiff’s evidentiary objection, however, because even if we

conclude that defendants could prove that such misrepresentations were made,

defendants have not satisfied us that they are likely to be able to establish that any

such representations were material or that defendants justifiably relied on them.

(a) Materiality

It is true that one purpose of the protections offered by a true “finance lease”

is to “substitute the supplier of the goods for the lessor as the party responsible

with respect to warranties and the like.” 13 Pa.C.S. §2A101 (Comment). This is

desirable where the lessor is not in the business of selling the goods at issue and so

would have no basis for knowing anything about the quality of the goods. 

Protecting lessors from defect/warranty claims encourages them to finance these

purchases and “greases the wheels of commerce.” There might be circumstances

in which the lessor and provider are so closely connected that the lessor should be

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responsible for “quality” warranties. However, it appears that Pennsylvania’s

legislature did not find it necessary to create any special rule(s) for finance leases

involving affiliates. “No attempt was made to fashion a special rule where the

finance lessor is an affiliate of the supplier of goods; this is to be developed by the

courts, case by case.” 13 Pa.C.S. §2A101 (Comment). Pennsylvania’s legislature

apparently did not believe that there was inherent danger where affiliated

companies perform the separate functions of supplier and lender. This undercuts a

suggestion that an affiliation between such companies is inherently material. 

In addition, at least some courts have rejected the notion that either a real or

perceived joint enterprise between the lessor and the supplier is material to

determining the effect of a contract that functions as a finance lease. Those courts

have upheld disclaimers by the lessor of warranties such as those found in the

MLA. Citicorp Leasing, Inc., v. Kusher Family Ltd. Partnership, 2006 WL

1982757, *6 (S.D.NY 2006) (assuming a joint venture exists, it would not

circumvent express provisions of contract); DeLage, 88 A.2d 895 (faulty

perception that provider and lessor are the same entity does not contravene express

terms of contract). These cases, together with the UCC Comment, suggest that the

mere fact that the supplier and lessor may be affiliates is not necessarily material

to the transaction. 

“A misrepresentation is material if it is of such character that if it had not

been misrepresented, the transaction would not have been consummated.” 

Colaizzi v. Beck, 895 A.2d 36 (Pa.Super. 2006). Defendants contend that MIDC

would not have agreed to the MLA’s terms if it had known that PMC and PMS

were legally separate companies. However, Dr. Williams’ declaration suggests

otherwise. Dr. Williams, MIDC’s president and CEO, states that PMS originally

provided the names of two “finance companies” -- one was an “outside” company

named DVI and the other was PMC, which Dr. Williams believed was an “inhouse” company. Williams Decl., at ¶7. MIDC originally chose to use DVI, the

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27DVI later became insolvent, and MIDC lost its deposit with DVI. Id. 

28The so-called choice could have been nothing more than that PMS presented MIDC

with two options, and when one (DVI) was gone MIDC went with the remaining company. 

29We say “appears” because the parties have presented no evidence about Vital Works,

but suggest that Vital Works is an unrelated entity. 

30Defendants argue that their fraud claim vitiates MIDC’s obligation to pay PMC any of

the money owed under the MLA. MIDC does not explain, however, how this claim saves MIDC

from its obligation to pay for property supplied by Vital Works under Schedule 1, a company

apparently unrelated to PMC and uninvolved in the alleged fraud.

24

outside company. Williams Decl., at ¶8.27 MIDC’s original choice strongly

suggests that MIDC did not truly care whether the finance company was in-house

or outside. Dr. Williams later states that when MIDC finally decided to purchase

the goods, it “indicated a desire to finance the acquisition of the machine through

[PMS].” Williams Decl., at ¶19. But Dr. Williams does not say anything about

why MIDC wanted to finance the machine through the “in-house” company.28

There is no evidence that the fact that MIDC believed PMC to be in-house was

actually important to MIDC (other than an after-the-fact self-serving conclusory

statement to that effect).

In the same vein, Schedule 1 appears to involve a supplier (Vital Works)

that is completely unrelated to PMC.29 As to Schedule 1, MIDC clearly could see

that the supplier and finance company were not affiliates, yet MIDC signed

Schedule 1 and agreed to its terms.30 This further undermines the contention that

it was important to MIDC that the supplier and finance company constitute one

entity.

Finally, the terms of the MLA to which MIDC agreed undermine the notion

that PMC and PMS’ affiliation, or lack thereof, was material to defendants. Nonaffiliation would be material only if it gave PMC some greater protection than

MIDC wanted PMC to have. However, the MLA expressly and clearly disclaims

all warranties by PMC and states that MIDC’s obligation to pay PMC is absolute

and unconditional regardless of defects in the goods. Therefore, even if PMC and

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28 31Recall that even a true seller can disclaim warranties if done expressly and

conspicuously.

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PMS were “affiliated” as MIDC thought, MIDC agreed to the same terms that

would protect an unaffiliated finance company in a true “finance lease.” 

Defendants have not identified any terms that would attach where the lender is

unrelated to the supplier and that are more onerous than the express terms to which

MIDC freely and knowingly agreed. In the real world, the ‘surprising’ news that

PMC and PMS are separate entities does not appear to provide PMC with any

significant protections beyond those to which MIDC expressly agreed to be

bound. This fact undermines the materiality element.

We also note that there is evidence that PMC does not sell any goods and

has no reason to have any specialized knowledge about the MRI machine. Crouse

Decl., at ¶34. This evidence supports an inference that this is not the kind of case

in which the lender might be charged with knowledge about the product’s fitness

and would unfairly31 avoid warranties if the court enforces the lease as written.

(b) Justifiable Reliance

MIDC also has not shown that it will probably prevail on its claim that it

justifiably relied on the alleged “affiliate” misrepresentations.

Provisions in the MLA would lead a reasonable person to question the

alleged misrepresentations. Paragraph 17 states, 

Lessee acknowledges and agrees that Lessee, in executing this

Agreement and each Lease hereunder, it [sic] has relied solely upon

the terms, provisions and conditions contained herein and therein, and

any other statements, warranties, or representations, if any, by the

Provider, or any salesperson, employee, representative or agent of the

Provider, have not been relied upon.

Webb Decl., at Ex. 7 (MLA, attached as Exhibit 4 to Counter Claim) (emphasis

added). Moreover, paragraph 21 -- the last paragraph before the signature lines --

states, in all capital letters,

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LESSEE ACKNOWLEDGES THAT NO PROVIDER NOR ANY

SALESPERSON, EMPLOYEE, REPRESENTATIVE OR AGENT

OF A PROVIDER IS AN AGENT OR REPRESENTATIVE OF

LESSOR, AND THAT NONE OF THE ABOVE IS AUTHORIZED

TO WAIVE OR ALTER ANY TERM, PROVISION OR

CONDITION OF THIS AGREEMENT OR ANY LEASE, OR

MAKE ANY REPRESENTATION WITH RESPECT TO THIS

AGREEMENT, ANY LEASE OR THE SYSTEM ON BEHALF OF

LESSOR.

Id., (emphasis added). Because the terms of the contract expressly indicate that

PMC and PMS are separate entities and that MIDC should not rely on any

representations not contained in the contract, MIDC’s reliance may not be

reasonable. 

Furthermore, because the express terms of the contract provide protections

from warranty claims as extensive as those that would have been provided to an

unaffiliated finance company under a true finance lease, MIDC has not shown that

it was justified in concluding that it was obtaining any benefit [e.g., greater

recourse for warranties] by using an in-house finance company.

For all the reasons stated above, we RECOMMEND that the District Court

find that plaintiff has demonstrated the probable validity of its claim that MIDC is

obligated to pay PMC the amount owed under the MLA and Schedules 1-4. 

Therefore, plaintiff has established its entitlement to a writ of attachment as to

MIDC. We now turn to the merits of its claims against the individual defendants.

5. Claims against individual defendants

Plaintiff has established the probable validity of its claim to enforce the

MLA. However, the individual defendants are not liable pursuant to the MLA and

Schedules 1-4. The individual defendants each signed a “Guaranty” agreement

that purports to obligate that defendant to guarantee MIDC’s obligation under the

MLA up to $450,000.00 plus expenses. Crouse Decl., at Ex. 8-10. Although each

defendant signed a separate agreement, plaintiff does not dispute that the

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32It appears that Pennsylvania distinguishes between “sureties” and “guarantors” and that

the individual defendants may be more aptly termed “sureties.” McIntyre Square Assoc., v.

Evans, 827 A.2d 446, n.7 (Pa. Super. 2003) (a creditor may look to a surety for immediate

payment without first attempting to collect from the principal debtor, but the creditor must seek

payment from the principal before pursuing a guarantor). See also, Crouse Decl., at Ex. 8, 9, and

10 (Section 3: “guarantor” waives right to require PMC to proceed against MIDC first). It is

premature and unnecessary to rule on this issue at this juncture, so we use the term “guarantor”

to maintain consistency with the parties’ papers.

Pennsylvania also distinguishes between “gratuitous (uncompensated) sureties and

sureties who are compensated.” J.F. Walker Co., Inc., v. Excaliber Oil Group, Inc., 792 A.2d

1269 (Pa. Super. 2002). At least in some circumstances, this distinction can affect the surety’s

ability to obtain discharge. Id. The record before us does not permit us to make a finding as to

whether defendants are gratuitous or compensated sureties.

33In support of this argument defendants cite California law. As stated at the outset, the

parties agree that Pennsylvania law applies to the parties’ contract disputes.

27

guarantors32 agreed to be jointly and severally liable for the aggregate guaranty

amount of $450,000.00 plus expenses, including attorneys’ fees. Id. In order to

obtain a writ of attachment against each of the individual defendants, plaintiff

must establish the probable validity of its claim to enforce the Guaranties.

Defendants argue that plaintiff is not entitled to writs of attachment against

the guarantors for three reasons: (1) the Guaranties were obtained based on false

representations and therefore should be discharged, (2) plaintiff has not set forth

specific evidence about any demands for payment it made to the guarantors, and

(3) plaintiff has not established that plaintiff’s claim relates to the individual

defendants’ “trade, business or profession.”

The guarantors claim that plaintiff fraudulently induced them to sign the

guaranties and that they would not have signed the Guaranties if they had known

(1) the truth about the quality of the equipment and (2) that they were contracting

with a financial institution. Williams Decl., at ¶¶43-45; Webb Decl., at Ex. 1

(Gronner Decl., at ¶¶4-80) and Ex. 3 (Lynch Decl., at ¶¶5-9). They argue that

their obligations under the guaranties, therefore, should be discharged. Opposition

at 19.33 As previously stated, defendants have presented no evidence that PMC’s

agents made representations about the “quality” of the goods, and defendants

present no basis for imputing statements about “quality” made by PMS’s agents to

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34The Guaranty document expressly states that the obligations of the guarantor are

“absolute and unconditional, irrespective of any circumstances which might constitute a legal

or equitable defense or discharge of its obligations hereunder or which otherwise limit

enforceability against the Guarantor by Lessor.” Crouse Decl., at Ex. 8-10 (Guaranty at §2).

The document further states, “Guarantor hereby covenants that by its agreement under this

Guaranty it shall not be discharged from its obligations hereunder or under the Lease except by

payment in full of all amounts due.” Id., at Ex. 8-10 (Guaranty at §3) (emphasis added). 

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PMC. Accordingly, we fail to see how these representations can be the basis for

vitiating defendants’ contract with PMC.

Defendants’ contention that they would not have agreed to guarantee

MIDC’s obligation (up to $450,000.00 plus expenses) had they known that PMC

was an independent entity and a financial institution fails essentially for the same

reasons stated in section 4 supra. Defendants state, “I eventually became a

guarantor under far more onerous terms than those to which I agreed to act as

creditor [sic], or to which I would have ever agreed.” Williams Decl., at ¶45;

Lynch Decl., at ¶9; Gronner Decl., at ¶8. However, the so-called onerous terms to

which defendants are bound are completely spelled out in the MLA, Schedules 1-4

and the Guaranty.34 Defendants have not demonstrated that the onerous terms that

attach to a contract involving an unrelated lessor and supplier are more onerous

than the express terms to which the defendants all agreed. Given the full

expression of terms in the MLA, Schedules and Guaranty, and because defendants

have not identified new “hidden” terms that unexpectedly arose when it was

revealed that PMC was a legally separate entity from PMS, we find that the

guarantors’ statements that they committed themselves to more onerous terms than

they expected are inconsistent with the realities of the transaction. Therefore,

defendants have not demonstrated that they are likely to prove that they would not

have signed the Guaranties if they had known PMC’s true status. It follows that

they have not demonstrated the probable validity of their claim for discharge.

The guarantors also seem to argue that plaintiff has not established that it

“demanded” payment from the guarantors. Opposition at 25. The Guaranties

indicate that defendants have waived any precondition that PMC demand payment. 

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Crouse Decl., at Ex. 8-10 (Guaranty at §3) (“Guarantor hereby waives against

Lessor as a precondition for payment hereunder each of the following: any

demand for payment, . . .”). Moreover, PMC’s agent, Mr. Crouse, states generally

that demands were made, and none of the individual defendants denies receiving

such a demand. Crouse Decl., at ¶30.

Finally, in order to attach property of a “natural person” the plaintiff’s claim

must arise out of the individual’s “trade, business, or profession” as opposed to his

personal, family or household use. Cal. C.C.P. §483.010(c). Defendants assert

that plaintiff has not established this requirement. We doubt that defendants

seriously contend that they guaranteed a portion of the acquisition price of MRI

equipment for their personal use. None of the guarantors asserts in his declaration

that he did so. All three defendants are shareholders in MIDC, and Dr. Williams

and Dr. Gronner are physicians in MIDC’s practice. Absent evidence to the

contrary, it is our view that MIDC’s operations clearly constitute “business,” that

the MRI equipment was used and intended to be used only in that business, and

that the Guaranties were sought and given only in connection therewith. Pos-ATraction, Inc., v. Kelly-Springfield Tire Co., 112 F.Supp.2d 1178 (C.D. Cal 2000)

(claim relates to business if is part and parcel of activity which is for purpose of

livelihood or profit on a continuing basis). 

For all the reasons set forth in the preceding pages, we RECOMMEND that

the District Court find that plaintiff has demonstrated the probable validity of its

claims against the guarantors.

6. Secured Amounts, Exemptions and Undertakings

We RECOMMEND that the District Court find that plaintiff is entitled to

writs of attachment against each of the defendants. We must next determine the

amount to be secured by each writ, the validity of defendants’ claimed exemptions

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35Plaintiff also asserts that it is entitled to (1) unknown taxes, fees, and liens, (2) unknown

late fees, and (3) unknown interest. E.g., Lynch Motion at 12. As we understand it, plaintiff

does not seek to add these items to the secured amount at this time. Because plaintiff gives no

basis for valuing these items, we would not recommend increasing the amount secured by the

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and whether and to what extent plaintiff must post an undertaking. Cal. C.C.P.

§§484.090, 489.210 and 489.220.

(a) Amounts to be secured

Plaintiff may secure the amount of defendants’ indebtedness less certain

sums that do not appear to apply here. Cal. C.C.P. §483.015. The Court also may

include in the amount to be secured by the attachment estimated costs and

allowable attorney’s fees. Cal. C.C.P. §482.110.

Plaintiff’s application for writ of attachment against MIDC identifies the

amount to be secured from MIDC as “$2,535,726.04, which includes estimated

costs of $500.00 and estimated attorney fees of $27,427.98.” Mr. Crouse states

that the unpaid balance of Schedules 1-4 is $2,882,798.06. Crouse Decl., at ¶23. 

Plaintiff clarified on the record that the amount owed under the contract is

$2,882,798.06 and that the sum sought in the writ application was reduced (by

$375,000.00) to reflect the estimated value of the MRI equipment. Transcript of

September 20, 2006, hearing. Plaintiff reduced the sum sought on the assumption

that the Court would grant plaintiff’s application for writ of possession. Id. A

writ of attachment for the reduced amount, together with possession of the

equipment, would fully secure defendants’ alleged obligation. Although we

recommend below that the District Court permit MIDC to retain possession of the

goods, we also recommend below that MIDC post an undertaking in the amount

$375,000.00 in order to do so. That undertaking will secure plaintiff’s interest in

the current value of the goods. Therefore, for purposes of the writ of attachment

we recommend that the Court permit plaintiff to attach property of MIDC’s valued

at $2,507,798.06, plus the amount of allowed fees and costs, if any.35

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writ to reflect these items. 

36Accord, Cal. C.C.P. §488.720 (defendant may obtain order releasing attachment to the

extent the attachment is excessive).

31

Plaintiff’s applications for writs of attachment against the guarantors state

that the amount to be secured is “$457,350.00 which includes estimated costs of

$500.00 and estimated attorneys' fees of $6,850.00.” Lynch Motion at 8; Williams

Motion at 8; Gronner Motion at 9. The record thus far made supports an inference

that the individual defendants have guaranteed $450,000.00, plus expenses, and

that the guarantors are jointly and severally liable for that amount. Therefore, we

recommend that the District Court issue writs of attachment against the individual

defendants in the amount $450,000.00, plus allowable expenses, if any. Because

defendants are jointly and severally liable, plaintiff appears to be entitled to writs

of attachment in the full securable amounts as to each of the defendants. 

However, once plaintiff has attached sufficient property to secure defendants’

obligation, plaintiff may not continue to attach property that would unreasonably

exceed the value of the obligation.36

In addition to the principal amounts owed under the relevant contracts,

plaintiff seeks to secure amounts incurred for costs and attorneys’ fees. It is

within the court’s discretion to include in the amount to be secured by the

attachment the estimated costs and allowable attorneys' fees. Cal. C.C.P.

§§482.110 and 483.015. However, plaintiff has failed to adequately support this

request. Plaintiff has proffered no evidence to support its claims for costs or fees. 

At the hearing on September 20, 2006, plaintiff’s counsel indicated that the fee

request reflects a flat rate amount generated by his law firm for different types of

collection cases. The fees do not reflect actual hours spent. Transcript, September

20, 2006, hearing. Moreover, it is unclear whether the fees reflect the fact that

much of the work completed for the four writ applications is redundant. Similarly,

plaintiff has not submitted evidence in support of the charges labeled “costs.”

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28 37California procedure permits defendants to file all claims for exemption even if plaintiff

is not currently trying to attach the property that is the subject of the exemption.

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In our view the fees that plaintiff is entitled to secure via writ of attachment

are only those relating to obtaining the writ(s) (as opposed to those spent on the

litigation generally). The documents in the record before us would support a

finding that plaintiff is entitled to attorneys’ fees in the total amount $10,000.00

(i.e., for work on all four applications). Because the bulk of the legal work was

required to obtain the writ against MIDC and because very little additional work

was necessary to obtain writs against the individuals, we RECOMMEND that the

District Court allocate the majority of these fees to MIDC.

We RECOMMEND that the District Court grant plaintiff’s request for a

writ of attachment against MIDC in the amount $2,507,798.06, which represents

the balance due under the contracts minus the current value of the goods (which

will be secured separately) plus $7,000.00 for attorneys’ fees.

We RECOMMEND that the District Court grant plaintiff’s request for a

writ of attachment against each of the individual defendants in the amount

$450,000.00 for the balance due under the Guaranties plus $3,000.00 for

attorneys’ fees.

(b) Property sought to be attached and claimed

exemptions

Plaintiff’s applications for writs of attachment must identify the property

that plaintiff currently seeks to attach. Cal. C.C.P. §484.090(e). Additionally,

defendants are permitted to claim that certain property is exempt from

attachment.37 Cal. C.C.P. §484.350. If the District Court adopts our

recommendation that it grant plaintiff’s applications for writs of attachment, then

the Court’s order must set forth the extent of all exemptions to which defendants

are entitled. Cal. C.C.P. §484.090(c). 

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MIDC is a corporation and has asserted no exemptions. “All corporate

property for which a method of levy is provided by Article 2 [Cal. C.C.P.

§488.300 et seq.]” is subject to attachment. Cal. C.C.P. §487.010. Plaintiff also

seeks a writ directing the levying officer to take possession of “documentary

evidence in Defendant’s possession of title to property and documentary evidence

in Defendant’s possession of debt owed to Defendant.” MIDC Motion at 7. 

Accordingly, if the District Court adopts our recommendation to grant plaintiff’s

application for writ of attachment as to MIDC, we RECOMMEND that the

District Court’s order authorize plaintiff to attach all property described in

California C.C.P. §487.010 and order MIDC to turn over documentary evidence in

MIDC’s possession or control of title to property and documentary evidence in

MIDC’s possession or control of debt owed to MIDC.

In order to obtain a writ of attachment against a “natural person,” plaintiff’s

identification of the property to be attached “shall be reasonably adequate to

permit the defendant to identify the specific property sought to be attached.” Cal.

C.C.P. §484.020(e). For each natural person defendant plaintiff seeks to attach

and identifies real property located in California by address and description. Cal.

C.C.P. §487.010(c)(1). This property is adequately described. See, Lynch

Motion, Gronner Motion, and Williams Motion, each containing address and lot

description of real property for which attachment is sought. 

In addition to real property, plaintiff seeks to attach money to the extent

authorized by Cal. C.C.P. §487.010. E.g., Lynch Motion at 8. Section

487.010(c)(7) of California’s Code of Civil Procedure permits attachment of 

Money on the premises where a trade, business, or profession is

conducted by the defendant and except for the first one thousand

dollars ($1,000), money located elsewhere than on such premises and

deposit accounts, but if the defendant has more than one deposit

account or has at least one deposit account and money located

elsewhere than on the premises where a trade, business, or profession

is conducted by the defendant, the court, upon application of the

plaintiff, may order that the writ of attachment be levied so that an

aggregate amount of one thousand dollars ($1,000) in the form of

such money and in such accounts remains free of levy.

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38Paraphrasing the language of the authorizing statute, plaintiff seeks to attach:

money of individual Defendant(s) (a) located on the premises where a trade,

business or profession is conducted by Defendant(s), (b) in excess of $1,000

elsewhere than on the premises where a trade, business or profession is conducted

by Defendant(s) and not in deposit accounts, (c) located in a deposit account in

excess of $1,000, (d) in excess of an aggregate amount of $1,000 located in

deposit accounts and in a deposit account and money located elsewhere than on

the premises where a trade, business or profession is conducted by Defendant(s).

E.g., Lynch Motion at 8. We think the articulation in the text states plaintiff’s entitlement more

clearly.

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As we read the statute, plaintiff is entitled to attach:

(1) money on the premises where a trade, business, or profession is

conducted by the defendant, AND

(2) (a) money located elsewhere than on such premises and deposit

accounts in excess of the first one thousand dollars ($1,000.00),

OR

if the defendant has (i) more than one deposit account or (ii) at least

one deposit account and money located elsewhere than on the

premises where a trade, business, or profession is conducted by the

defendant, then

(b) money in deposit accounts and elsewhere than on the premises

where a trade business, or profession is conducted in excess of

an aggregate amount of one thousand dollars ($1,000.00).38

As with MIDC, plaintiff also seeks an order that the levying officer take

“possession of . . . documentary evidence in Defendant’s possession of title to

property and documentary evidence in Defendant’s possession of debt owed to

Defendant.”

Defendants do not argue that they are unable to identify the property

(money) to which plaintiff refers. However, the individual defendants have filed

claims for various exemptions including exemptions for automobiles, home

furnishings and personal effects, jewelry, earnings and bonuses, tools of the trade,

life insurance policies, retirement plans, and the statutory homestead exemption. 

See, Williams Decl., at ¶¶46-53; Webb Decl., at Ex.3 and 6 (Lynch Decl., at ¶10

and Supp. Lynch Decl.); Webb Decl., at Ex. 1 and 5 (Gronner Decl., at ¶9 and

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Supp. Gronner Decl.). See also, Cal. C.C.P. §§487.010, 487.020 and 704.010 et

seq.

Exempt property includes: (1) all property exempt from enforcement of

money judgments, (2) “property which is necessary for the support of a defendant

who is a natural person or the family of such defendant supported in whole or in

part by the defendant,” (3) “earnings” as defined in section 706.011, and (4) all

property not subject to attachment under section 487.010. Cal. C.C.P. §487.020

(emphasis added).

Plaintiff opposes only one of defendants’ claimed exemptions -- that

regarding funds in the individual defendants’ retirement accounts. See, Plaintiff’s

Objection to Claims of Exemption, filed September 6, 2006. Defendants’

retirement plans each appear to constitute “self-employed retirement plans and

individual retirement annuities or accounts” within Cal. C.C.P. §704.115(a)(3). 

Under California law, these types of retirement funds are exempt from attachment

“only to the extent necessary to provide for the support of the [defendant] when

the [defendant] retires and for the support of the spouse and dependents of the

[defendant], taking into account all resources that are likely to be available for the

support of the [defendant] when the [defendant] retires.” Cal. C.C.P. §704.115(e)

(emphasis added). Plaintiff asserts that defendants have ample resources to

support themselves and their dependents in retirement and, thus, that the funds in

defendants’ retirement accounts are not “necessary” for support and should not be

exempt from attachment. 

Whether to exempt an individual’s retirement funds is a fact-specific

inquiry. Recent case law sets forth the relevant factors the Court should consider

in assessing whether to exempt a specific individual’s retirement funds. Courts

consider (1) defendant’s present and anticipated living expenses and income, (2)

age and health of the defendant and his dependents, (3) defendant’s ability to work

and earn a living, (4) defendant’s training, job skills, and education, (5)

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39See, Williams Decl.; and Crouse Decl., at Ex. 12 and 14.

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defendant’s other assets and their liquidity, (6) defendant’s ability to save for

retirement, and (7) any special needs of the defendant and his dependents. In re

Davis, 323 B.R. 732 (9th Cir. BAP 2005). 

Defendants have the burden of establishing that their retirement funds are

necessary to provide support for defendants and their dependents when defendants

retire. Schwartzman v. Wilshinsky, 50 Cal. App. 4th 619 (1996). No defendant

has persuaded us that he qualifies for a complete exemption of his retirement

funds. 

(i) Virgil Williams39

Dr. Williams is a medical doctor who earns approximately $420,000.00 in

gross income per year. He is the President and CEO of MIDC. His wife does not

work outside the home.

Dr. Williams owns a home he values at $1,800,000.00 and on which he has

a $900,000.00 loan and $190,000.00 line of credit — thus, leaving $710,000.00 in

equity. He also owns investment property valued at $600,000.00 on which he has

a $250,000.00 loan leaving $350,000.00 in equity.

Dr. Williams values his retirement funds at $1,200,000.00. He also has

various other assets that he values collectively at $304,000.00: vacant real estate, a

tuition savings plan, an unspecified interest in his mother-in-law’s home, a “time

share,” and various personal property. Finally, Dr. Williams states that he has

1,800,000 shares of MIDC stocks which he says are of “very questionable value,”

and $250,000.00 worth of loans made to MIDC, which he says also are of “very

questionable value.”

In addition to the debt related to his real property, Dr. Williams claims

expenses and debts totaling approximately $540,000.00 (for tax liabilities, credit

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28 40See, Webb Dec., at Ex. 3(Lynch Decl.), and Ex. 6 (Supplemental Lynch Decl.); Crouse

Decl., at Ex. 13 and 14.

37

cards, tuition, car loans, etc.). Thus, total liabilities, including the very large home

mortgage, are roughly $1,845,000.00. 

 Dr. Williams did not disclose his age or that of his wife. Dr. Williams has

three dependents -- a 27 year old son, who is currently in medical school, a 12

year old son, and his 87 year old mother-in-law. He provided no information

about his health or that of any of his dependents. Nor has he identified any special

needs for the Court to consider.

Dr. Williams’ ability to save for retirement appears excellent. He has

substantial liabilities, but they are far exceeded by his assets (some of which are

not liquid). Dr. Williams is currently supporting two children. However, we

presume his 27 year old son will graduate from medical school before too long,

freeing up additional cash. Finally, Dr. Williams already has $1,200,000.00 in

retirement funds and has provided no reason why he would not be able to continue

saving funds at the same rate he has saved in the past. 

Taking into account all resources that are likely to be available when Dr.

Williams retires, we RECOMMEND that the District Court find that the full extent

of Dr. Williams’ retirement funds are not necessary to provide for the support of

Dr. Williams and his dependents when he retires.

(ii) John Lynch40

Mr. Lynch is 59 years old. His wife is 56. Mr. Lynch has one child, a

seventeen year old daughter. Mr. Lynch states that he recently “retired,” but also

describes himself as a “self-employed independent consultant.” According to his

declaration, he earned $88,000.00 over some unspecified recent period. Mr.

Lynch’s financial statement indicates that he earned $83,000.00 in bonuses and

commissions in 2005. There is limited information in Mr. Lynch’s declaration

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about his training, job skills and education, other than that his last job at Agilent

Technologies/Hewlett Packard was as a “Sales Consultant & Representative.” Mr.

Lynch’s spouse also generates income for the family. In 2005, she earned

$71,000.00 working as a “Development Director” at East Bay Agency for

Children. 

In his financial statement, Mr. Lynch states that he has $2,431,000 in assets,

total liabilities of $644,000.00 and, thus, a net worth of $1,786,000.00. These

assets include $988,000.00 in retirement funds. Thus, his net worth, excluding

retirement funds, is $798,000.00. Mr. Lynch states that he will begin drawing on

his retirement account in December, when he is 59.5. Mr. Lynch’s seventeen year

old daughter may attend college.

Mr. Lynch’s family’s income, including his wife’s $71,000.00 annual

salary, slightly outpaces their expenses, and he has a child that may be attending

college. These factors weigh in favor of exempting Mr. Lynch’s retirement funds. 

However, Mr. Lynch has a net worth of $798,000.00 excluding retirement funds,

he continues to work as an independent consultant (and appears to earn over

$80,000.00 annually), his spouse earns roughly $71,000.00, his retirement funds

are $988,000.00 — much greater than the amount plaintiff seeks to attach — and

his spouse has an additional $88,000.00 in an IRA. Mr. Lynch did not identify

any special needs for the Court’s consideration. There is no evidence that he is

not in good health or that he could not, for some other reason, have continued to

work for Agilent/Hewlett Packard or some similar company. Considering his age,

earning ability, and all the resources likely to be available to Mr. Lynch and his

family for retirement, we RECOMMEND that the District Court find that the full

extent of Mr. Lynch’s retirement funds are not necessary to provide for the support

of Mr. Lynch and his dependents when he retires.

//

//

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28 41See, Webb Decl., at Ex. 1(Gronner Decl.), Ex. 2 (Gronner Trust Decl.), and Ex. 5

(Supplemental Gronner Decl.); Crouse Decl., at Ex. 11 and 14.

39

(iii) Arthur Gronner41

Dr. Gronner is a medical doctor who earns approximately $240,000.00 per

year. He also receives about $30,000.00 per year in social security benefits. Thus,

Dr. Gronner’s total yearly income is approximately $270,000.00. Dr. Gronner

does not provide any information about his expenses in his declaration, but he

asserts that he has “no outstanding liabilities other than the personal guarantee in

this case.” 

Dr. Gronner’s largest asset is his personal residence, which he owns

outright, and which is valued at between $1,500,000.00 and $2,000,000.00. He

also has $100,000.00 in “miscellaneous personal property,” 550,000 shares of

MIDC stock, which he characterizes as of “very questionable value,” and has

made $25,000 in loans to MIDC, which he also characterizes as of “very

questionable value.” Finally, he has retirement funds valued at $800,000.00.

Dr. Gronner is 70 years old. He is married, and his wife does not work

outside the home. Dr. Gronner does not state how old his wife is or whether either

of them have any problems with his or her health. Dr. Gronner has no dependents,

and he has not identified any special needs for the Court’s consideration.

 Dr. Gronner currently earns $240,000.00 a year in gross income. His

ability to save for retirement is quite good. Although he is past traditional

retirement age, he did not indicate that he intends to retire in the near future. 

Moreover, Dr. Gronner owns very valuable assets (including a nearly

$2,000,000.00 home that he owns outright), has no liabilities at all, and has no

dependents (other than his spouse). Considering his age, earning ability and all of

the resources likely to be available to Dr. Gronner and his family for retirement,

we RECOMMEND that the District Court find that the full extent of Dr.

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Gronner’s retirement funds are not necessary to provide for the support of Dr.

Gronner and his dependents when he retires.

In a related matter, Dr. Gronner also seeks to shield from attachment real

property held in trust. Plaintiff argues that California Probate Code §18200 makes

the property in a “revocable” trust subject to claims by creditor’s of the settlor. In

California a trust is presumptively revocable unless expressly stated to be

irrevocable. Cal. Probate Code §15400. Defendants have confirmed that the

Gronner Trust is revocable. See, Letter, filed September 25, 2006. Accordingly,

we RECOMMEND that the District Court find that, under California Probate

Code §18200, Dr. Gronner’s interest in the real property that is held in the

Gronner Trust is subject to attachment.

(iv) Recommended exemption amount for

retirement funds

As explained in the preceding paragraphs, each of the individual defendants

is quite comfortable financially, is not likely to need the entire amount of his

retirement funds at the time of retirement, and has significant future earning

potential. However, because of the importance of retirement funds generally, at

this juncture, we judge the amount subject to attachment conservatively. We

RECOMMEND that the District Court find that $150,000.00 (1/3 of the principal

guaranteed amount) from each defendant’s retirement funds is not necessary for

the defendants’ support or that of their dependents when they retire and that the

Court deny the exemption to that extent at this time. In our view, given

defendants’ substantial assets and earning potential, defendants cannot reasonably

argue that the loss of $150,000.00 from their retirement accounts will disable them

from supporting themselves and their dependents at the time of retirement.

We make this recommendation on the assumption that plaintiff will be able

to attach sufficient property to secure defendants’ full obligation ($450,000.00 in

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principal plus $3,000 in attorneys' fees). Based on the evidence, each of the

individual defendant’s has significant accessible assets aside from the retirement

accounts that should more than cover the full obligation. However, because we

have made a conservative recommendation with respect to attachment of the

retirement funds, we further RECOMMEND that the District Court enter this

order without prejudice to plaintiff’s ability to revisit the issue if plaintiff is

otherwise unable to attach sufficient property to cover its anticipated judgment.

(c) Requirement that plaintiff post an undertaking

If the District Court grants plaintiff’s applications for writs of attachment

the Court’s order must state whether plaintiff is required to post an undertaking. 

Cal. C.C.P. §§484.090; 489.210 and 489.220. Under California law the amount of

plaintiff’s undertaking to secure each writ will be $10,000.00 unless defendants

persuade us a larger undertaking is appropriate. Cal. C.C.P. §489.220. 

Defendants have not objected to the presumptive statutory undertaking of

$10,000.00. Therefore, if the District Court adopts our recommendation that it

grant plaintiff’s applications for writs of attachment, we RECOMMEND that the

District Court require plaintiff to post an undertaking in the amount of $10,000.00

for each defendant whose property plaintiff intends to attach prior to issuance of

the writ of attachment. Cal. C.C.P. §489.210.

B. Writ of Possession

Plaintiff is entitled to a writ of possession if the Court finds that (1) plaintiff

establishes the probable validity of its claim to possession of the property, (2)

plaintiff satisfies the undertaking requirements of Cal. C.C.P. §515.010, and (3)

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28 42As with the writ of attachment, the probable validity of plaintiff’s claim is the only

element subject to genuine dispute.

42

there is probable cause to believe the property is located where plaintiff believes it

is.42 Cal. C.C.P. §512.060. See also, Cal. C.C.P. §§511.010 and 512.090.

Although plaintiff’s entitlement to the writ is mandatory if the requisite

showing is made, defendant may “prevent” plaintiff from taking possession of the

goods by posting an undertaking as discussed below. Cal. C.C.P. §515.020.

Plaintiff must establish the probable validity of its claim to possession. We

described above the bases for our conclusion that plaintiff has demonstrated the

probable validity of its claim for payment under the relevant contracts. At this

juncture, we must evaluate whether plaintiff also has a possessory interest in the

goods, and we must evaluate MIDC’s competing claim that it holds a superior

possessory interest in the goods. 

The evidence supports a finding that plaintiff has a right to possession under

the contract (MLA). The express terms of the MLA permit PMC to take

possession of the goods in the event MIDC defaults under the MLA. In the event

of default, PMC (“Lessor”) may

remove and take possession of any or all items of System, without

demand or notice, wherever same may be located, with or without any

court order or pre-taking hearing or other process of law.

Webb Decl., at Ex. 7 (MLA, attached as Ex. 4 to Cross Complaint, at ¶14).

Based on the express terms of the MLA, we RECOMMEND that the

District Court find that, at this juncture, plaintiff has established the probable

validity of its claim to possession of the equipment.

MIDC argues that, even if it accepted the goods, it has effectively revoked

that acceptance. If it effectively revoked the acceptance, MIDC asserts that it has

acquired a security interest in the goods (pursuant to section 2711 of the UCC) for

the amount of any payments MIDC made prior to revocation.

//

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43Defendants contend that their written letters of revocation dated June 13, 2006,

constitute prima facie evidence that MIDC revoked any acceptance of the goods and that the

burden therefore shifts to plaintiff to demonstrate that revocation was ineffective. Transcript

September 20, 2006, hearing; Crouse Decl., at Ex. 18. The query under the UCC is whether

revocation occurred within a reasonable time. Unless it is clear from the face of the letter(s) that

the revocation was made within a reasonable time, the mere existence of the letter does not

respond to this query.

Revocation is MIDC’s defense, and we suspect the burden to establish that defense lies

with MIDC. Nonetheless, even if it is plaintiff’s burden to establish the absence of effective

revocation, as explained infra, we find that the current state of the record supports a finding that

plaintiff has demonstrated the probable validity of its claim that MIDC did not revoke its

acceptance of the goods within a reasonable time and, therefore, that revocation is not effective.

43

Pennsylvania’s UCC says the following about revocation.

(a) Grounds for revocation – The buyer may revoke his acceptance

of a lot or commercial unit whose nonconformity substantially

impairs its value to him if he has accepted it:

(1) on the reasonable assumption that its nonconformity

would be cured and it has not been seasonably cured; or 

(2) without discovery of such nonconformity if his

acceptance was reasonably induced either by the

difficulty of discovery before acceptance or by the

assurances of the seller.

(b) Time and notice of revocation – Revocation of acceptance must

occur within a reasonable time after the buyer discovers or should

have discovered the ground for it and before any substantial change in

condition of the goods which is not caused by their own defects. It is

not effective until the buyer notifies the seller of it.

(c) Rights and duties of revoking buyer – A buyer who so revokes

has the same rights and duties with regard to the goods involved as if

he had rejected them.

13 Pa.C.S. §2608.

The evidence might support an inference that MIDC initially accepted the

equipment “on the reasonable assumption that its nonconformity would be cured

and it has not been seasonably cured.” That kind of finding, however, would not

be sufficient to establish a valid revocation. MIDC also would need to

demonstrate that its revocation occurred within a “reasonable time.” 13 Pa.C.S.

§2608(b). Defendants have not submitted evidence sufficient to show that it is

more likely than not that their effort to revoke was timely.43 

As noted above, MIDC did not “revoke” its acceptance until thirteen months

after receiving the final shipment of equipment. Given the importance of the

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equipment to defendants’ livelihood, we are inclined to the view that a reasonable

commercial party would have revoked acceptance of these kinds of goods long

before thirteen months had passed and the lender filed a complaint for breach of

contract. Moreover, defendant has failed to provide any evidence about the

specific efforts PMS allegedly made to cure the defects. Without knowing when

and how often PMS tried to cure the defects, and what PMS told defendants about

its ability to cure and how long cure would take, we cannot conclude that MIDC’s

conduct was reasonable under the circumstances. Accordingly, we

RECOMMEND that the District Court find that MIDC has not established that it

revoked its acceptance of the goods within a reasonable time and, therefore, has

not established that it is likely to have a security interest in the goods as a result of

revocation.

If the Court permits plaintiff to repossess the MRI equipment, plaintiff must

post an undertaking pursuant to Cal. C.C.P. §515.010. However, MIDC wishes to

retain possession of the goods and may do so if it posts an undertaking as provided

in Cal. C.C.P. §515.020. Plaintiff does not object to MIDC’s request to retain

possession of the goods on the condition that MIDC posts an adequate

undertaking. Transcript September 20, 2006, hearing. The MRI equipment is the

essential basis for generating virtually all of MIDC’s revenue. Webb Decl., at Ex.

4 (Garvey Decl.). Without the MRI machine MIDC is likely to become insolvent. 

We find that it is in both parties’ interests for MIDC to retain possession and a

right to use the goods.

MIDC must, however, post an undertaking adequate to compensate plaintiff

for damages that are “proximately caused by the plaintiff’s failure to gain . . .

possession.” Cal. C.C.P. §515.020(b) (emphasis added). If plaintiff obtains

possession of the goods it will be entitled to sell them in order to recoup some of

its anticipated losses. Plaintiff requests that the undertaking cover the current

market value of the equipment – the amount plaintiff likely will recoup if it

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obtains possession of and sells the equipment. Because defendants intend to

continue using the MRI equipment during the course of the litigation, plaintiff

notes that the machine is likely to depreciate in value during that time as the

technology becomes increasingly dated and as the machine sustains additional

wear and tear. It is possible that as a result of damage, or of changes in market

conditions, the equipment might even become valueless. An undertaking

sufficient to cover the current market value would compensate plaintiff for the loss

of the ability to sell the goods now.

PMC submits evidence from an appraiser about the “forced” liquidation

value of the goods and the “orderly” liquidation value of the goods. Declaration

of William Corwin re: Forced Liquidation and Orderly Liquidation Value of

Equipment, filed August 4, 2006. If PMC conducts an “orderly” sale – one in

which PMC leaves the MRI equipment at MIDC and conducts a sale in place at

that location – the appraiser expects PMC to receive $450,000.00. Corwin Decl.,

at ¶6 and Ex. 1;Transcript, September 20, 2006 hearing. If, on the other hand,

plaintiff must remove the MRI machine from MIDC and sell it after removal, a

“forced liquidation,” the appraiser would expect PMC to net $375,000.00. Id.,

Transcript, September 20, 2006 hearing.

Defendants object to an undertaking sufficient to cover the current market

value of the goods and argue instead that the value to plaintiff of loss of

possession is the lost rental value of the MRI machine. Opposition at 24. 

However, defendants also concede that it would be unrealistic for plaintiff to

remove the equipment and rent it temporarily to another medical facility because

of the complexity of installing and uninstalling this kind of machinery. Id.;

Transcript September 20, 2006, hearing.

Given the infeasibility of temporarily renting equipment of this kind, we

conclude that plaintiff’s likely damages consist of the loss of the ability to sell the

equipment at its current market value. However, plaintiff has not convinced us

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that it would be more likely to conduct an orderly liquidation than a forced

liquidation. Therefore, we find that the appropriate amount of the undertaking is

$375,000.00, the appraised “forced” liquidation value. Plaintiff also asks us to

increase the undertaking to cover any costs plaintiff might incur if it ultimately is

compelled to remove the equipment. Transcript, September 20, 2006, hearing. 

Although California law entitles plaintiff to costs, plaintiff has not submitted

evidence that would enable us to estimate those costs. We cannot, therefore,

recommend an award of costs at this time. 

For the reasons stated, we RECOMMEND that the District Court find that

plaintiff is entitled to a writ of possession. We further RECOMMEND that the

District Court permit MIDC to retain possession of the MRI equipment on the

condition that MIDC posts an undertaking in the amount $375,000.00.

III. Conclusion

For the reasons stated above, we RECOMMEND that:

C the District Court grant plaintiff’s application for a writ of attachment

against MIDC to secure the amount $2,514,798.06,

C the District Court issue a writ of attachment against MIDC that authorizes

the levying officer to attach “all corporate property for which a method of

levy is provided by Article 2 [Cal. C.C.P. §488.300 et seq.]” and to take 

possession of documentary evidence in Defendant’s possession or control of

title to property and documentary evidence in Defendant’s possession or

control of debt owed to Defendant,

C the District Court grant plaintiff’s applications for a writ of attachment

against each of the individual defendants to secure the amount $453,000.00,

C the Court issue a writ of attachment against each of the individual

defendants (1) that permits attachment of the property identified by plaintiff

in the application, and permits the levying officer to take possession of

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documentary evidence in Defendant’s possession or control of title to

property and documentary evidence in Defendant’s possession or control of

debt owed to Defendant, and (2) that grants each of the exemptions asserted

by defendants except that the exemptions for the retirement accounts be

limited to those sums in excess of $150,000.00 for each defendant, and that

the District Court rule that the limitation on retirement funds is made

without prejudice to plaintiff’s right to renew its application to attach

additional retirement funds if plaintiff is unable to secure the full amount of

the obligation, 

C the Court require plaintiff to post four undertakings in the amount

$10,000.00 (one for each defendant against whom plaintiff intends to attach

property), and

C the Court grant plaintiff’s application for a writ of possession but permit

MIDC to retain possession and use of the goods on the condition that MIDC

posts an undertaking in the amount $375,000.00.

See, attached Proposed Order.

IT IS SO REPORTED AND RECOMMENDED.

Dated: October 11, 2006

/s/ Wayne D. Brazil 

WAYNE D. BRAZIL

United States Magistrate Judge

Copies to: 

parties, 

JSW, wdb, stats

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