Legal Updates

FCA Prohibited from Asserting Setoff Rights Under Accommodation Agreement

In Callidus Capital Corp. v. FCA Grp., Case No. 14-10484, 2018 U.S. Dist. LEXIS 54193 (E.D. Mich. filed Mar. 30, 2018), the United States District Court for the Eastern District of Michigan recently prohibited FCA Group f/k/a Chrysler Group, LLC from asserting its setoff rights under an accommodation agreement with its supplier.  Harvey Industries, LLC and Harvey Industries Die Casting, LLC provided automotive component parts to FCA.  When Harvey began struggling financially, it obtained financing from Callidus Capital Corporation.  Unfortunately, Harvey continued to struggle, resulting in FCA entering into a Launch Assistance Agreement with Harvey.  Under the LAA, FCA agreed to provide certain accommodations to Harvey during the “Term” of the agreement: “FCA shall provide the following accommodations to Harvey from the Effective Date . . .  to the earliest of (i) the occurrence of an Event of Default by Supplier hereunder; (ii) completion of a Successful Transition . . .; or (iii) December 31, 2013 (the ‘Term’).”   In exchange, FCA agreed to, among other things, forego its right to setoff damages against accounts payable owing to Harvey arising during the Term. 

On October 7, 2013, Harvey allegedly defaulted under the LAA.  Interpreting the above provision, FCA argued, the “Term” of the agreement ended upon Harvey’s event of default, meaning FCA could exercise its setoff rights.  Callidus, on the other hand, interpreted the agreement differently, claiming that the “Term” of the agreement ended on December 31, 2013.  The issue presented to the court, therefore, was whether the parenthetical reference to the “Term” in the agreement related to and modified all three clauses in the paragraph or related to and modified only the immediate “from the Effective Date . . . to the earliest of . . . (iii) December 31, 2013” clause.  After analyzing several contextual clues, such as the lack of punctuation between “December 31, 2013” and “(the ‘Term’),” the location of the definitional parenthetical in relation to other provisions of the agreement, and the fact that the parties used parenthetical phrases throughout the LAA to refer to or modify an immediately preceding antecedent, the court agreed with Callidus’ interpretation of the agreement and held that the unambiguous language of the agreement indicated that the “Term” began on May 21, 2013 and ended on December 31, 2013, meaning FCA could not assert its setoff rights during that time period.