InfinaQuest, LLC v. DirectBuy, Inc., 18 F. Supp. 3d 959

Background

JDB Direct, LLC (a DirectBuy franchisee) entered a Franchise Agreement with DirectBuy giving DirectBuy contractual rights to collect JDB’s receipts, sweep a merchandise account, offset debts, and return net amounts to JDB.
JDB also granted receivables/security interests to InfinaQuest (and its subsidiary IBC) in March 2010 covering JDB’s then‑owned and after‑acquired accounts; IBC filed a financing statement; InfinaQuest itself did not file in its own name.
JDB defaulted; DirectBuy (and affiliate Beta) collected funds pursuant to the Franchise Agreement and Beta’s Financing Agreement, both of which contained broad set‑off provisions in favor of DirectBuy/Beta and affiliates.
InfinaQuest sued Defendants for conversion and tortious interference, claiming Defendants improperly retained funds that were subject to InfinaQuest’s perfected security interest.
Defendants moved for summary judgment arguing (1) InfinaQuest’s security interest was not superior because JDB’s receivables were subject to preexisting contractual set‑off rights, and (2) conversion and tortious‑interference claims fail because Defendants acted pursuant to contractual rights.
The court granted summary judgment for Defendants, holding InfinaQuest’s interest was subject to DirectBuy/Beta’s set‑off rights and that conversion and tortious interference claims failed as a matter of law.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether Defendants were “account debtors” under UCC § 9‑404	InfinaQuest: Defendants did not owe JDB money and therefore are not account debtors so § 9‑404 doesn’t apply	Defendants: Franchise Agreement obligated DirectBuy/Beta to collect and remit JDB receipts subject to set‑off, making them account debtors	Held: Defendants are account debtors under § 9‑404 because they were obligated on the account to make payments subject to set‑off
Whether InfinaQuest is an “assignee”/assignee‑type secured party under § 9‑404	InfinaQuest: Its receivables agreements were forward‑looking security interests, not assignments of existing accounts, so § 9‑404 should not defeat its interest	Defendants: A security interest in accounts is treated as an assignment under § 9‑404; InfinaQuest’s interest included existing accounts subject to DirectBuy’s set‑off	Held: InfinaQuest took an interest in existing accounts (including the swept merchandise account) and as an assignee/secured party its rights are subject to the Franchise Agreement’s set‑off term
Whether a later‑created contractual set‑off by DirectBuy/Beta can defeat an earlier security interest	InfinaQuest: Notice and timing can protect a prior secured party; § 9‑404 is not meant to allow set‑offs to defeat prior perfection in all contexts	Defendants: The set‑off was a contractual term of accounts; nemo dat applies—JDB could not transfer what it did not have	Held: The set‑off was a term of the underlying Franchise Agreement; InfinaQuest’s interest is subject to that term; nemo dat and UCC § 9‑203 support this result
Viability of conversion and tortious‑interference claims	InfinaQuest: Defendants wrongfully exercised control over funds belonging to InfinaQuest	Defendants: They lawfully applied contractual set‑offs; their actions were justified	Held: Claims fail as a matter of law because Defendants lawfully exercised contractual set‑off rights and were justified in their conduct

Key Cases Cited

Celotex Corp. v. Catrett, 477 U.S. 317 (summary judgment standard)
In re Doctors Hosp. of Hyde Park, Inc., 337 F.3d 951 (7th Cir. 2003) (definition of “account debtor” under UCC § 9‑404)
Bank of Waunakee v. Rochester Cheese Sales, Inc., 906 F.2d 1185 (7th Cir. 1990) (security interests in accounts treated as assignees under § 9‑404)
Nat’l City Bank, Nw. v. Columbian Mut. Life Ins. Co., 282 F.3d 407 (6th Cir. 2002) (party exercising contractual set‑off characterized as account debtor)
In re U.S. Aeroteam, Inc., 327 B.R. 852 (Bankr. S.D. Ohio 2005) (set‑off clauses and application of § 9‑404 to account debtors)