Court Opinion

ID: 2738568
Source: CourtListenerOpinion
Date Created: 2014-09-30 22:01:29.4315+00
Date Added: 2024-06-11T10:03:56.442870
License: Public Domain

In the

    United States Court of Appeals
                 For the Seventh Circuit
                     ____________________

No. 13-2291
WELLS FARGO EQUIPMENT FINANCE, INC.,
                                                  Plaintiff-Appellant,

                                 v.

TITAN LEASING, INC.; TITAN RAIL, INC.; and TITAN TRANSIT,
INC.,
                                       Defendants-Appellees.
                     ____________________

         Appeal from the United States District Court for the
           Northern District of Illinois, Eastern Division.
            No. 10 C 4804 — Charles R. Norgle, Judge.
                     ____________________

 ARGUED SEPTEMBER 12, 2014 — DECIDED SEPTEMBER 30, 2014
                ____________________

   Before EASTERBROOK, SYKES, and TINDER, Circuit Judges.
    EASTERBROOK, Circuit Judge. Gerdau Ameristeel leased a
railroad locomotive from Titan Rail for use in switching at its
mill in Knoxville, Tennessee. Titan Rail shipped the locomo-
tive in summer 2008, but it was damaged in transit and sent
to Knoxville Locomotive Works for repair. It did not reach
2                                                          No. 13-2291

Gerdau’s plant until summer 2009. Gerdau rejected it, stating
that it needed further modifications and repairs.
    In March 2009, while the locomotive was being repaired,
Titan Rail assigned the lease to Titan Leasing, an affiliated
business, which then used the lease as security for a loan
from Wells Fargo Equipment Finance. The loan is nonre-
course, meaning that Wells Fargo agreed to look for repay-
ment exclusively to the stream of rentals expected from Ger-
dau, but Titan Leasing made several warranties. Breach of a
warranty entitles Wells Fargo to get its money back from Ti-
tan Leasing. Titan Rail and Titan Transit have guaranteed all
of Titan Leasing’s obligations to Wells Fargo.
   The warranties that matter to this appeal are in ¶3(m) of
the security agreement. Here is the language, with the num-
bers in brackets added for reference later:
    As of the date a Lease is assigned to Lender hereunder, the relat-
    ed Equipment has been [1] delivered and [2] accepted by the
    Lessee and the Lessee has acknowledged [3] receipt and [4] ac-
    ceptance of such Equipment. Upon request by Lender, Lessor
    will cause such Equipment to be stamped or otherwise labeled
    reflecting that Lessor is the owner of such Equipment.

In this clause, “Lender” means Wells Fargo, “Lessor” means
Titan Leasing, “Lessee” means Gerdau, and “the date” is
March 6, 2009. On that date, the locomotive was in the hands
of Knoxville Locomotive Works undergoing repairs.
    Gerdau, which rejected the locomotive definitively in Oc-
tober 2009, has never made a payment on the lease. Wells
Fargo has taken control of the locomotive and is attempting
to sell it to recover some of what it loaned Titan Leasing—
which has refused to return one penny. In this suit under the
diversity jurisdiction, Wells Fargo contends that Titan Leas-
No. 13-2291                                                   3

ing is liable for breach of the warranties in ¶3(m) of the secu-
rity agreement. It is unclear whether Titan Leasing is in a
position to repay; it has been dissolved by Illinois’s Secretary
of State. Titan Rail is not in good standing (which apparently
means that it has stopped filing reports and paying taxes),
and Titan Transit’s right to do business in Illinois has been
revoked. But Illinois allows litigation against a corporation
within five years of its dissolution, 805 ILCS 5/12.80, and the
doubtful collectability of a judgment does not affect federal
subject-matter jurisdiction, see Chafin v. Chafin, 133 S. Ct.
1017, 1025 (2013), so we press on.
    The district court granted summary judgment against
Wells Fargo, 2012 U.S. Dist. LEXIS 175397 (N.D. Ill. Dec. 7,
2012), ruling that Titan Leasing had kept its promises. The
district court applied Minnesota law to the interpretation of
the security agreement and Illinois law to the lease, but there
appears to be no difference between the two. The court
looked to the lease, and then to the Uniform Commercial
Code, to see whether the locomotive had been “accepted”
(warranty 2) by March 6, 2009. The lease provides that
“Shipment of Locomotive to Lessee shall constitute Lessee’s
formal acceptance of the Locomotive and Lessee’s acknowl-
edgment that the Locomotive meets the Delivery Specifica-
tions.” Shipment occurred long before March 2009. Moreo-
ver, UCC §2A-515(1), 810 ILCS 5/2A-515(1), says that ac-
ceptance occurs “after the lessee has had a reasonable oppor-
tunity to inspect the goods” and “the lessee fails to make an
effective rejection”. Gerdau had an opportunity to inspect at
the time of shipment, the court concluded—indeed, ¶7(c) of
the lease required Gerdau to inspect before shipment, and
although it is undisputed that Gerdau did not comply with
4                                                 No. 13-2291

this obligation, its failure to inspect did not prevent the lo-
comotive’s “acceptance” under both the lease and the UCC.
    Wells Fargo protests with some force that the district
court should have addressed what “accept” means in the se-
curity agreement, not what it means in the lease or the UCC,
neither of which was incorporated into the security agree-
ment. But there is a more basic problem in the district court’s
decision: it stopped after addressing warranty 2. What about
warranty 1 (that the locomotive had been “delivered” to
Gerdau before March 6, 2009), warranty 3 (that Gerdau had
acknowledged receipt), and warranty 4 (that Gerdau had
acknowledged acceptance)? Titan Leasing treats “ac-
ceptance” as identical to “delivery,” but neither the security
agreement nor the lease creates this equivalence, and the
UCC does not supply an off-the-rack meaning for “delivery”
in commercial leasing.
    Suppose, however, that “delivery” and “acceptance” are
the same, so that the locomotive was both delivered and ac-
cepted when shipped. Warranty 3 provides that Gerdau has
acknowledged the locomotive’s receipt, and warranty 4 that
it has acknowledged the locomotive’s acceptance. Neither
the lease nor the UCC equates “delivery” with “receipt,” and
these sound like different words—the locomotive may have
been “delivered” and “accepted” when shipped, so that
Gerdau bore the risk of loss in transit, but was not “re-
ceived” until it reached Gerdau’s plant. And until Gerdau
acknowledged receipt, warranty 3 had not been fulfilled. No
evidence in the record suggests that Gerdau ever acknowl-
edged receipt of the locomotive. Titan Leasing observes that
¶7(b) of the lease says that shipment constitutes “Lessee’s
acknowledgment that the Locomotive meets the Delivery
No. 13-2291                                                  5

Specifications … and that the Locomotive is suitable for Les-
see’s purpose (‘Final Acceptance’)”, but this sounds different
(if subtly) from the security agreement, which seems to con-
template a joint acknowledgment of receipt and acceptance.
    This is not an exercise in semantic hair-splitting. Para-
graph 3(m) of the security agreement, in connection with
¶3(h), which contains additional warranties, is designed to
ensure that the lessee is satisfied with the locomotive. A sat-
isfied lessee is more likely to pay. Delivery and acceptance
are important steps toward having a satisfied lessee, but re-
ceipt followed by acceptance is more important. By ac-
knowledging receipt and acceptance, the locomotive’s lessee
verifies that the goods conform to the contract after all risks
of transit are over. That enables the lender to advance money
with a good prospect of repayment. Yet after the locomotive
arrived (that is, when receipt occurred, months after Titan
Leasing warranted that this had already happened), Gerdau
rejected it. That’s a lender’s nightmare.
    Let us suppose that ¶7(b) of the lease shows that Gerdau
did acknowledge acceptance, that delivery and acceptance
mean the same thing in the lease, and that the security
agreement tracks the lease in both respects. Still, warranty 3
is unsatisfied; Gerdau did not acknowledge the locomotive’s
receipt. This means that Titan Leasing did not live up to its
warranties. It must repay Wells Fargo. Titan Rail and Titan
Transit must perform their guarantees, if called on to do so.
The judgment of the district court is reversed, and the case is
remanded for the entry of judgment in Wells Fargo’s favor.