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Warren Hill, LLC v. SFR Equities, LLC

United States District Court, E.D. Pennsylvania

July 23, 2019



          BARTLE, J.

         Plaintiff Warren Hill, LLC (“Warren Hill”) has brought this diversity action under Illinois law for breach of contract against defendant SFR Equities, LLC (“SFR”). It also seeks an accounting. Specifically, Warren Hill claims that SFR has breached the “Membership Interest Purchase Agreement” (“MIPA”) governing the sale to SFR of Warren Hill's stake in a company called Vendor Assistance Program, LLC (“VAP”). The amended complaint alleges that SFR has failed to pay the full amount due to Warren Hill and has improperly deducted certain expenses.[1]

         Before the court are cross motions for partial summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure. Warren Hill has moved for summary judgment as to the interpretation of several key provisions of the MIPA related to the purchase price for its ownership interest in VAP. SFR likewise seeks summary judgment with respect to certain provisions of the MIPA concerning the purchase price.


         Under Rule 56 of the Federal Rules of Civil Procedure, summary judgment is appropriate “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a); see also Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). The material facts underlying the issues now before the court are not in dispute. The focus is on the interpretation of §§ 1.2(d) and 1.2(e) of the MIPA.


         We begin the recitation of the undisputed evidence with the stark fact that the State of Illinois does not pay its bills on time. As a result, Illinois established the Vendor Payment Program (“VPP”) in order to ensure that vendors who provide the State with goods and services are promptly compensated despite the State's cash flow deficit. Under the VPP, Illinois approves certain entities as “Qualified Purchasers, ” which may purchase outstanding accounts receivable from the State's vendors. The Qualified Purchasers pay the vendors 90% of the face value of the accounts receivable and do so much more quickly than if the vendors had to wait for the State to send a check. Illinois now owes the Qualified Purchasers, and not the vendors, the value of the accounts receivable. Qualified Purchasers may not subsequently assign accounts receivable to another entity without first providing written notice to the State that the entity is also an approved Qualified Purchaser.

         VAP became a Qualified Purchaser under the VPP in 2011 and since that time has been involved in initiating the purchase of hundred of millions of dollars of accounts receivable from vendors of the State of Illinois. In order to purchase such a sizeable amount of accounts receivable under the VPP, VAP facilitates the creation of Delaware statutory trusts, such as the VAP Funding Master Trust II which has the U.S. National Bank as the trustee.[2] Illinois has approved each trust as a Qualified Purchaser in the VPP in reliance on representations made by VAP that VAP is the manager of the trust and that the trust was formed solely for the purpose of purchasing qualified accounts receivable.

         For VPP to be viable, the Qualified Purchasers such as VAP must of course have money to pay the vendors promptly. In order to obtain the necessary funds, the trust, as a Qualified Purchaser, borrows money from a lending bank, such as Barclays Capital. VAP locates the lending banks and arranges the financing for the trusts it has established to purchase the receivables. David Reape, CEO of VAP, testified in his deposition that VAP's board of managers consents to and approves through resolutions every such lending transaction. Each trust issues trust certificates to the entity or entities which hold the beneficial ownership in the trust.[3] The record contains trust agreements in which signatories are the trustee, the lending bank, VAP as the indemnitor, and the certificate holder. There are also management agreements naming VAP as the manager of the trusts.

         When Illinois finally pays what is due, it pays the trust, as the Qualified Purchaser, and includes a substantial interest penalty. The vendor receives the remaining 10% of what is owed, the loans to the trust from the lending bank are then repaid with interest, and the various fees and expenses related to the management of the trust are satisfied. What is left constitutes the profit which is paid to the trust certificate holder, that is, the entity which holds a beneficial interest in the trust. A profit is possible because the interest penalty paid by Illinois to the trust exceeds the trust's various fees and expenses and the interest the trust pays to the lending banks.

         The trust pays “Trust Fee Income” and “Trust Certificate Income.” Pursuant to the trust agreements, VAP is paid “Trust Fee Income” for tasks performed in its capacity as manager, such as organizing the financing of the trusts with the lending banks and locating the receivables to purchase.

         The “Trust Certificate Income, ” by contrast, is paid to the trust certificate holder. As noted above, each of the trusts has one or more holders of the trust certificates, which represent the beneficial interests in the trust. Under the trust agreements at issue, the entity that holds the trust certificates is entitled to “Trust Certificate Income, ” that is the spread which remains after all related fees and expenses are paid and the bank loan with interest is discharged.

         Warren Hill sold its interest in VAP to SFR pursuant to the MIPA, effective January 1, 2016. Before 2017, VAP received both “Trust Fee Income” as manager of the trusts and “Trust Certificate Income” as certificate holder of the trusts. The VAP Funding Master Trust II in SFR's Exhibit L is an example of such an agreement. It names the U.S. Bank Trust National Association as the “Trustee” and VAP as the “Manager” and “Certificateholder.” The agreement provides that the Trustee shall distribute funds from a particular account in order of priority, with the “Certificateholder” receiving any remaining amounts.

         In 2017, after the sale of Warren Hill's stake in VAP to SFR, the management of VAP created Bluestone Capital Markets (“BCM”) and transferred to BCM the trust certificates that VAP previously held.[4] BCM and VAP share an identical CEO and board of managers as well as nearly identical beneficial owners and ownership percentages. SFR controls one of the six seats on VAP's and BCM's board of managers and owns the largest percent interest in BCM at over 40%. BCM, unlike VAP and the trusts, is not recognized by the State of Illinois as a Qualified Purchaser in the VPP.

         Since 2017, BCM, rather than VAP, has also been named as the certificate holder of newly created trusts. For example, the Series 2017-4 and Series 2017-4B Series Trust Agreements in SFR's Exhibit K list BCM as the “Certificateholder Representative, ” VAP as the primary “Indemnitor, ” Barclays Capital as the “Depositor” (the lender), and U.S Bank Trust National Association as the “Trustee” and “Collateral Agent.” As in the VAP Master Trust II, these trusts provide that the Trustee shall distribute funds in order of priority, with the “Certificateholder Representative” receiving remaining funds after all fees and expenses are paid. BCM now receives trust certificate income directly from the trusts instead of VAP, which no longer holds any trust certificates.

         As noted previously, SFR purchased Warren Hill's interest in VAP pursuant to the MIPA which was effective January 1, 2016. SFR agreed to pay Warren Hill an initial purchase price as well as sums to be calculated based on subsequent events, including an amount equal to 50% of VAP's “Net Income” for the years 2016, 2017, and 2018 under § 1.2(d) of the MIPA and an amount equal to 16.623% of the “Included Reserve ...

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