This matter is before the Court on Plaintiff's Motion for Summary Judgment, and on the
Cross-motion for Summary Judgment filed by the AG Shareholder Group (the Group). Plaintiff
is the court-appointed Receiver for Associated Grocers of Maine, Inc. (AGME), Defendant P &
L Country Market is a corporation located in Dexter, Maine, and is a former member and
customer of AGME. The Group constitutes approximately 30 other former members and
customers of AGME, which are parties to similar actions commenced by the Receiver.
The parties filed the motions in accordance with the Court's May 3, 2012, Scheduling
Order, by which the Court, after a conference with the parties, authorized discovery and the
filing of the pending motions on the following issue: whether Defendant is entitled to a setoff, in
the amount of the value of Defendant's capital account, against the amount claimed by Plaintiff. 1
1 Because the "issue" is central to the many similar actions involving the Receiver and members of the Group, the Court permitted the members of the Group to participate in the discovery related to the pending motions, and authorized the Group and the Defendant to file joint memoranda in connection with the motions. Factual Background
AGME is a Maine business corporation that distributed grocery-related products to
independent retailers throughout New England. In accordance with its Bylaws, AGME would
enter into Membership Agreements with various retailers. Upon execution of the Membership
Agreement, a retailer would become a customer and shareholder of AGME. After becoming a
member of AGME, a party could purchase product from AGME provided that the member
establish a Capital Account based on a "factor" established by AGME. Typically, the capital
account would be funded to the level of the "factor" through a 1% surcharge that was assessed
on AGME's sales to its members.
Defendant's factor, in the amount of $50,000, was fully funded at the time the dispute
that is the subject of this matter arose. In addition, consistent with the AGME Bylaws,
Defendant also had a balance in the Excess Capital account of $397. According to the AGME
Bylaws, the capital account and the sale of shares were "to ensure the equitable contribution of
needed working capital for the corporation's business operations, and to provide security for the
credit extended to stockholders in the sale of goods."
Concurrent with its execution of the Membership Agreement, Defendant purchased one
share of Class A Voting Common Stock, and two shares of Preferred Class B Stock. Defendant
paid for the Class A Stock upon the execution of the Membership Agreement, and paid for the
Class B Stock through the surcharge assessed on Defendant's purchases. Defendant pledged its
Stock and the book balance of its Capital Account to AGME to secure the credit extended to
AGME.
The AGME Bylaws, which were incorporated by reference into each Member
Agreement, provide that "each stockholder agrees ... that said capital deposits are subject to any
existing subordination agreements the Corporation may have with lending institutions." The
2 Bylaws also state that "[w]hen any stockholder sells his/her stock or otherwise ceases to be
eligible for membership in the Corporation, he/she shall be entitled to be paid the balance in
his/her capital deposit account plus accumulated interest, except that any indebtedness due the
Corporation from him/her shall be set off against said capital deposit account and all stock, and
the balance only, if any, paid him/her."
In September 2005, AGME established a $6,500,000 line of credit with the Bank of
Maine, f/k/a, Savings Bank of Maine (the Bank), and executed a promissory note in that amount.
As security for payment of the note, AGME signed an agreement by which AGME granted the
Bank a security interest in AGME's accounts receivable. In accordance with the parties'
agreement, AGME provided the Bank with monthly reports, which included pertinent
information on AGME's accounts receivable.
Pursuant to its Membership Agreement, Defendant regularly purchased product from
AGME on credit. Defendant has not paid for all of the product that it purchased from AGME.
As alleged and established on this record, the cost of the product for which Defendant has not
paid is $58,500.08.
Discussion
A. Issue Presented
Defendant contends that it is entitled to a credit, in the amount of its capital account book
balance, against the amount that it owes for unpaid product. The Receiver maintains that
Defendant's capital deposits were in the form of equity, and not debt. The Receiver, therefore,
argues that Defendant is not entitled to a set off because all creditors must be paid before equity
owners, and the AGME's assets are insufficient to satisfy all creditors and equity holders. The
Bank asserts that regardless of whether Defendant's capital account is debt or equity, Defendant
3 is not entitled to a set off because Defendant's claim to the balance of its capital account is
subordinate to the Bank's lien on AGME's accounts receivable.
B. Standard of Review
Pursuant to M.R. Civ. P. 56( c), a moving party is entitled to summary judgment "if the
pleadings, depositions, answers to interrogatories, and admissions on file, together with the
affidavits, if any, ... show that there is no genuine issue as to any material fact set forth in those
statements and that [the] party is entitled to a judgment as a matter of law." A party wishing to
avoid summary judgment must present a prima facie case for each element of a claim or defense
that is asserted. See Reliance Nat'llndem. v. Knowles Indus. Svcs., 2005 ME 29, ~ 9, 868 A.2d
220. At this stage, the facts in the summary judgment record are reviewed "in the light most
favorable to the nonmoving party." Lightfoot v. Sch. Admin. Dist. No. 35,2003 ME 24, ~ 6, 816
A .2d 63. A material fact is a fact that has "the potential to affect the outcome of the suit."
Burdzel v. Sobus, 2000 ME 84, ~ 6, 750 A.2d 573. "If material facts are disputed, the dispute
must be resolved through fact-finding." Curtis v. Porter, 2001 ME 158, ~ 7, 784 A.2d 18.
A factual issue is genuine when there is sufficient supporting evidence for the claimed
fact that would "require a fact-finder to choose between competing versions of the truth at trial."
Inkel v. Livingston, 2005 ME 42, ~ 4, 869 A.2d 745. "Neither party may rely on conclusory
allegations or unsubstantiated denials, but must identify specific facts derived from the
pleadings, depositions, answers to interrogatories, admissions and affidavits to demonstrate
either the existence or absence of an issue of fact." Kenny v. Dep't of Human Svcs., 1999 ME
158, ~ 3, 740 A.2d 560 (quoting Vinick v. Comm'r, 110 F.3d 168, 171 (1st Cir. 1997)).
C. Discussion
i. Set-off
4 Defendant's right to set off is largely dependent upon the nature of Defendant's capital
account. If the Court determines that the contribution to the account to be an equity investment,
the Court would likely conclude that Defendant is not entitled to set off. If the Court were
determine that the contribution represented debt to AGME, the Court would have to determine
the nature of the debt (e.g., is it secured or unsecured), and whether any other creditors of
AGME, including the Bank, have priority to the accounts receivable.
The Receiver maintains that Defendant is not entitled to set off the balance of the capital
accounts against their outstanding indebtedness because the capital account constitutes
Defendant's investment in AGME and is not, as Defendant argues, secured debt. In support of
this contention, the Receiver cites the AGME Bylaws and Maine case law. More specifically,
the Receiver points to the provision of the Bylaws that states that the purpose of the purchase of
the stock and the establishment of the capital accounts was "to ensure the equitable contribution
of needed working capital for the corporation's business operations, and to provide security for
the credit extended to stockholders in the sale of goods." The Receiver also notes that to the
extent that Defendant attempts to obtain the return of their capital contribution in accordance
with the Bylaws, Defendant is foreclosed from doing so because Defendant has failed to comply
with the required precondition for the return of the capital ("when any stockholder sells his/her
stock or otherwise ceases to be eligible for membership in the Corporation, he/she shall be
entitled to be paid the balance in his/her capital deposited plus accumulated interest, except that
any indebtedness due toe Corporation from him/her shall be set off against said capital deposit
account and all stock, and the balance only, if any paid him/her.") Because the Receivership
Order prohibits the Receiver from making any such payments to the Defendant, Defendant
cannot now avail itself of this set-off claim. In short, the Receiver maintains that Defendant does
not have a right of set-off under the Bylaws or established Maine law.
5 Defendant contends that because AGME required that members establish a capital
account as security for the members' payment of product, AGME formed a security agreement,
within the scope of 11 M.R.S. § 9-1101 et seq. According to Defendant, because AGME had
possession of the collateral (i.e., the proceeds/credit) pledged as security, 11 M.R.S. § 9-1207
applies. Pursuant to § 9-1207, "a secured party having possession of collateral or control of
collateral ... (a) shall apply money or funds received from the collateral to reduce the secured
obligation, unless remitted to the debtor." Defendant thus argues that before any funds in a
member's capital account is paid to AGME, the funds must first be used to reduce the amount of
the member's account receivable.
Here, the terms of the Bylaws might suggest that the capital account represents an equity
investment in AGME, the record before the Court is not limited to the Bylaws. The record also
includes evidence of the history of AGME's management of the capital accounts, including the
evidence upon which Defendant relies to support its contention that the accounts in fact represent
debt that AGME owes to Defendant. For instance, Defendant notes that AGME routinely
applied capital deposits as a set off against the members' accounts receivable. In addition,
Defendant has provided record evidence of communications between AGME and members,
which communications suggest that AGME, without condition, would credit a member's account
receivable with the balance of the member's capital account. While the Court has not discussed
with specificity the evidence that each party has cited, the Court is convinced that factual issues,
such as those identified herein, must be resolved in order to determine the nature of the capital
accounts and the relationship between the capital accounts and the accounts receivable.
ii. Recoupment
The Receiver also argues that Defendant does not have a right to recoupment. The
defense of "recoupment is a reduction of part of the plaintiff's damages because of a right in the
6 defendant arising out of the same transaction." Cheung v. Wu, 2008 ME 131, ~ 3, 955 A.2d 746
(quoting Mundaca Inv. Corp. v. Emery, 674 A.2d 923, 925 n.4 (Me. 1996)). According to the
Receiver, Defendant's indebtedness arises out of the AGME's sale products, and there is no
other activity as part of that transaction. Thus, the Receiver contends, Defendant is not entitled
to recoupment.
Defendant argues that it can effectively set off the balance in its capital account against
the accounts receivable based on the theory of recoupment. Simply stated, the Court disagrees.
The sale of product for which the Receiver seeks to recover was not part of the same transaction
by which Defendant agreed to make contributions to its capital account. Defendant made the
contributions to its capital account pursuant to its membership agreement, which was executed in
a transaction separate from the delivery of the product that is the subject of the Receiver's action
to collect for unpaid product. Defendant, therefore, is not entitled to the defense or recoupment.
iii. Bank Priority
The Bank argues that regardless of the characterization of the capital accounts (i.e., debt
or equity), summary judgment on the issue is appropriate because the Bank had priority to the
funds in the capital account. The record establishes that in September 2005, AGME executed a
promissory note in favor of the Bank in the principal amount of $6,500,000. As part of the same
transaction, AGME signed a security agreement by which AGME granted the Bank security
interests in AGME's accounts receivable. In accordance with the agreement between AGME
and the Bank, the Bank then opened a line of credit for AGME. Thereafter, in the periodic
reports that AGME was required to provide the Bank, AGME did not indicate that the accounts
receivable were in any way subject to a set off claim. The Bank contends, therefore, that it has
first priority over the accounts regardless of whether Defendant's capital account is debt or
equity.
7 In further support of its contention, the Bank also cites (1) the Member Agreement which
provides that the AGME members understood "that said capital deposits are subject to any
subordination agreements A .G. may have with lending institutions," and (2) the Bylaws which
state, "each stockholder agrees ... that said capital deposits are subject to any ... subordination
agreements the Corporation may have with lending institutions." The Bank and the Receiver
maintain that two credit letters from the Bank to AGME, the first of which letters was issued in
December 2010,2 constitute subordination agreements as contemplated by the Bylaws.
Because the Court has determined that a disputed factual issue precludes the entry of
summary judgment on the debt/equity issue, whether the letters constitute valid, enforceable
subordination agreements potentially is a controlling issue. Furthermore, if the Court concludes
that the letters are valid subordination agreements, the Court must then assess whether the
subordination agreements are enforceable by the Bank against the Defendant (and other similarly
situation AGME members). The issue is thus whether summary judgment is appropriate based
on the Bank's priority claim regardless of whether the members' capital accounts are considered
secured debt as Defendant contends.
As mentioned above, Defendant argues that because the capital accounts are secured
debt, Article 9 of Maine's Uniform Commercial Code (11 M.R.S. § 9-1101 et seq.) governs the
relationship between AGME and its members. Pursuant to 11 M.R.S. § 9-1404(1), AGME's
accounts receivable are subject to Defendant's claim to set off unless Defendant has agreed not
to assert its claim or defense. For the agreement to be enforceable by the Bank, the Bank must
demonstrate that AGME's grant to the Bank of a security interest in AGME's accounts
receivable was "(a) for value, (b) in good faith, (c) without notice of a claim of property or
2 The December 28,2010, letter from the Bank to AGME, as a condition to the extension of additional credit, stated, "Capital Member Deposits shall at all times be subordinate to the payment of the Revolving Credit Facility."
8 possessory rights by others in the accounts receivable; and (d) without notice of any defenses
available to a holder in due course .... " 11 M.R.S. § 9-1403(2).
Upon review of the record evidence, the Court is unconvinced that summary judgment is
appropriate. By way of example, in response to the Receiver's motion, Defendant has submitted
evidence that disputes whether the Bank was aware of the existence of the members' interest in
the accounts and whether AGME had informed the members that the members' interest, and not
the interest of the Bank, was the priority interest. Given the existence of disputed factual issues,
the Court cannot grant summary judgment even assuming that the capital account is a secured
debt and not an equity contribution.
Conclusion
Based on the foregoing analysis,
1. The Court determines that Defendant is not entitled to assert the defense of
recoupment. The Court, therefore, enters summary judgment in favor of the Receiver and
against Defendant on Defendant's defense of recoupment.
2. The Court otherwise denies the Receiver's motion for summary judgment.
3. The Court denies Defendant's cross-motion for summary judgment.
Pursuant to M.R. Civ. P. 79(a), the clerk shall incorporate this Decision and Order into
the docket by reference.
Dated: Jft).J
~nt~red on the Docketo'·I.S/_3 ,.. Op!es sent via Mail- Electronically i:"
9 BCD-CV-11-35 James C. Ebbert v. P & L Country Market et al
BCD-CV-12-28 James C. Ebbert v. Joseph Sleeper & Sons et al
Counsel for Plaintiff James C. Ebbert: Fred W. Bopp, III, Esq. Perkins Thompson, PA One Canal Plaza, Suite 900 P.O. Box 426 Portland, ME 04112
Counsel for Defendant P & L Country Market et al: Joseph Goodman, Esq. The Goodman Law Firm, PA 537 Congress Street P.O. Box 7523 Portland, ME 04112
Counsel for Defendant Joseph Sleeper & Sons et al: George J. Marcus, Esq. Marcus Clegg & Mistretta, PA One Canal Plaza, Suite 600 Portland, ME 04101