Prospect ECHN, Inc. v. Winthrop Resources Corporation

569 F.Supp.3d 935

PROSPECT ECHN, INC., Plaintiff,

v.WINTHROP RESOURCES CORPORATION, Defendant.

Case No. 19-cv-586 (SRN/ECW)

United States District Court, D. Minnesota.

Signed September 29, 2021

Filed November 2, 2021

Joshua A. Hasko, Messerli & Kramer PA, 100 S. 5th St., Ste. 1400, Minneapolis, MN 55402; David Dugan, Frank Peretore, and Robert L. Hornby, Chiesa Shahinian & Giantomasi PC, One Boland Dr., West Orange, NJ 07052; and Molly R. Hamilton Cawley, MHC Law, LLC, 460 King St., Ste. 200, Charleston, SC 29403, for Plaintiff.

Geoffrey L. Harrison, Susman Godfrey LLP, 1000 Louisiana St., Ste. 5100, Houston, TX 77002; Glenn Charles Bridgman, Susman Godfrey LLP, Ste. 1400, 1900 Avenue of the Stars, Los Angeles, CA 90067; and Matthew R. McBride and Quin C. Seiler, Winthrop & Weinstine, PA, 225 S. 6th St., Ste. 3500, Minneapolis, MN 55402, for Defendant.

ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT AND MOTION TO EXCLUDE EXPERT TESTIMONY

Unsealed by the Court, November 2, 2021

SUSAN RICHARD NELSON, United States District Judge

This matter is before the Court on Plaintiff's Motion for Summary Judgment [Doc. No. 77], Defendant's Motion for Summary Judgment [Doc. No. 96], and Defendant's Motion to Exclude Expert Testimony from Paul Bent [Doc. No. 102]. For the reasons set forth below, Plaintiff's summary judgment motion is denied, Defendant's summary judgment motion is granted, and Defendant's Motion to Exclude Expert Testimony is denied as moot.

I. BACKGROUND

A. Factual Background

Defendant Winthrop Resources Corporation ("Winthrop") is a Minnesota corporation that leases computers and other electronic equipment to corporate customers. See Winthrop v. Sabert Corp. , 567 F. Supp. 2d 1084, 1086 (D.Minn. 2008).

1. Lease Agreement

In 2007, Plaintiff's predecessors Eastern Connecticut Health Network, Inc., Manchester Memorial Hospital, and Rockville General Hospital (collectively, "ECHN") entered into Lease Agreement Number EA112107 (the "Lease Agreement") with Winthrop. (Bridgman Decl. [Doc. No. 99], Ex. 1 (Nov. 2007 Lease No. EA112107).) Plaintiff Prospect ECHN ("Prospect") is a Connecticut corporation that operates a network of hospitals. (Compl. [Doc. No. 1] ¶ 5.) In 2016, Prospect acquired the rights and obligations held by ECHN pursuant to the Lease Agreement. (Kahn Decl. [Doc. No. 55] ¶ 4; see also Compl. ¶ 10.)

The Lease Agreement governed the leasing and installation of equipment and software, and the provision of technical support services from Winthrop, the lessor, to ECHN, the lessee, in accordance with various "Lease Schedules."¹ (Bridgman Decl., Ex. 1 (Lease Agmt.) at 1.) The Lease Schedules identified the specific equipment, software, and related services that Winthrop provided. (Id. )

The Lease Agreement contains the following pertinent terms:

Term—¶ 1 : The term of this Lease Agreement, as to all Equipment on any particular Lease Schedule, shall commence on the Installation Date for all Equipment on such Lease Schedule and shall continue for an initial period ending that number of months from the Commencement Date as set forth in such Lease Schedule (the "Initial Term") and shall continue from year to year thereafter until terminated. The term of this Lease Agreement as to all Equipment designated on any particular Lease Schedule may be terminated without cause at the end of the Initial Term or any year thereafter by either party mailing written notice of its termination to the other party not less than one-hundred twenty (120) days prior to such termination date.

Return to Lessor—¶ 7 : On the day following the last day of the lease term associated with a Lease Schedule (the "Return Date"), Lessee [ECHN] shall cause and pay for the Equipment on that Lease Schedule to be deinstalled, packed using the manufacturer's standard packing materials and shipped to a location designated in writing by the Lessor (the "Return Location."). If the Equipment on the applicable Lease Schedule is not at the Return Location within ten (10) days of the Return Date, or Lessee [ECHN] fails to deinstall and ship the Equipment on the Return Date, then any written notice of termination delivered by Lessee [ECHN] shall become void, and the Lease Schedule shall continue in accordance with this Lease Agreement....

Ownership of the Equipment—¶ 9 : The Equipment shall, at all times, be the sole and exclusive property of Lessor [Winthrop]. Lessee [ECHN] shall have no right or property interest therein, except for the right to use the Equipment in the normal operation of its business at the Location of Installation, or as otherwise provided herein....

Loss and Damage—¶ 12 : Lessee shall assume and bear the risk of loss, theft and damage (including any governmental requisition, condemnation or confiscation) to the Equipment and all component parts thereof from any and every cause whatsoever, whether or not covered by insurance.... In the event that all or part of the Equipment shall, as a result of any cause whatsoever, become lost, stolen, destroyed or otherwise rendered irreparably unusable or damaged (collectively, the "Loss") then Lessee shall, within ten (10) days after the Loss, fully inform Lessor in writing of such a Loss and shall pay to Lessor the following amounts: (i) the Monthly Lease Charges (and other amounts) due and owing under this Lease Agreement at the time of the Loss, plus (ii) the original cost of the Equipment subject to the Loss multiplied by the "Percent of Original Cost."

Warranties, Disclaimers and Indemnity—¶ 15 : ... THIS LEASE AGREEMENT IS A "FINANCE LEASE" AS THAT TERM IS DEFINED AND USED IN ARTICLE 2A OF THE UNIFORM COMMERCIAL CODE....

Net Lease—¶ 27 : This Lease Agreement is a net lease and Lessee's [ECHN's] obligations to pay all Lease Charges and other amounts payable hereunder shall be absolute and unconditional[.] ...

(Id. ¶¶ 1, 7, 9, 12, 15, 27) (emphasis added).

The italicized language, quoted above in Section 1, is an "evergreen" renewal clause, which provides that the lease does not automatically end after the expiration of the initial term, but renews yearly until it is terminated. (Id. ¶ 1); see also Sabert Corp. , 567 F. Supp. 2d at 1088 (describing identical language in Winthrop lease agreement as an "evergreen" clause, subject to automatic renewal unless terminated).

In addition, the Lease Agreement states that it is governed by Minnesota law, and reflects that it is a fully integrated document, constituting "the entire agreement" between the parties. (Bridgman Decl., Ex. 1 (Lease Agmt.) ¶ 25.)

Winthrop and ECHN signed the Lease Agreement. (Id. at 6.) Although the parties also agreed to certain riders that modified some of the Lease Agreement's provisions, (Bridgman Decl., Ex. 2 (Riders)), none of the modifications affected the provisions of the Lease Agreement relevant to the parties’ dispute.

2. Lease Schedules and the Equipment

In addition to the Lease Agreement, the parties entered into seven Lease Schedules: Schedules B01, B02, 003X, 004X, C01, D01, D02. (Bridgman Decl., Ex. 3 (Lease Schedules).) The Lease Schedules state that they are "issued pursuant to [the] Lease Agreement," and that "[t]he terms of the Lease Agreement ... are a part hereof and are incorporated by reference herein." (See, e.g. , id. at 1.) The Lease Schedules identify the equipment subject to each schedule, the initial term of the schedule, and the monthly lease charge. (See, e.g. , id. at 1–11.) The commencement dates for the Lease Schedules ranged from October 2011 through June 2016, with initial lease periods ranging from four to five years. (Id. at 1, 12, 14, 19, 22, 26, 31; Jan. 22, 2021 Kahn Decl. [Doc. Nos. 92 & 93] ¶ 4.) Winthrop and ECHN signed each of the Lease Schedules. (Bridgman Decl., Ex. 3 (Lease Schedules) at 1, 11–14, 18–19, 21–22, 25, 27, 30–32.)

The equipment subject to the leases included computer software, hardware, and intangible "soft costs" for labor and services. (Jan. 22, 2021 Kahn Decl. ¶ 3, Exs. B–I (Lease Schedules).) Winthrop did not retain title to "soft costs" or to the software licenses, (Dugan Decl. [Doc. No. 81], Ex. A (Gendler Dep.) at 20), and generally placed zero residual value on those two categories of "equipment." (Id. at 54, 137; Dugan Decl., Ex. B (Winthrop Residual Policy) at 1.) As to the value of the hardware equipment at the end of a lease schedule's initial term, sometimes referred to as the equipment's "useful life," for multiple pieces of smaller equipment such as desktop computers or network storage, Winthrop's Rule 30(b)(6) deponent Paul Gendler testified that Winthrop would not analyze the residual value of such equipment at the time of entering into the lease schedule. (Dugan Decl., Ex. A (Gender Dep. at 43–45.) He could not point to any analyses of the residual value of the hardware for any of the Lease Schedules at issue here at the time the agreements were executed. (Id. at 91–95, 103–04, 110, 115, 124–25, 131, 133–34.) Gendler testified that Winthrop's evaluation of a potential lease agreement was credit-driven and based on an "at-risk perspective," involving the length of the term and possibilities for equipment upgrades or changes. (Id. at 40–46.)

Erik Carlsen, a former Winthrop sales representative who dealt with Prospect, testified that the length of the initial term in Winthrop's lease schedules was "always ... based upon the underlying asset's useful life." (Dugan Decl., Ex. L (Carlsen Dep.) at 39–40.) In email communications with Prospect, Carlsen referenced the American Hospital Association's depreciation manual ("AHA Manual") to determine the useful life of the equipment, which estimated a five-year useful life for desktop computers, disk drives, networking equipment, printers, and terminals, along with a three-year useful life for laptops and software. (Dugan Decl., Ex. N (AHA Manual) at 2; id. , Ex. M (Carlsen/Ray emails).) Responding to questions from James Ray, ECHN's Director of Accounting & Taxation, about the useful life of the equipment under a lease schedule,...