Lawsuits Involving Factoring Companies

Note: For educational purposes, we have tried to locate some lawsuits involving factoring companies either as plaintiffs or defendants as an educational tool for the general business community. In some cases, these lawsuits show clients behaving badly. In other cases, these lawsuits show factoring companies behaving badly. Finally, these lawsuits show how factoring companies can be dragged into disputes between two other parties, either one or both of which were behaving badly. Although these cases are all part of the public record, we have substituted the phrase, “factoring company” for the actual name of the subject factoring companies.

UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF TENNESSEE
NASHVILLE DIVISION
ORIX FINANCIAL SERVICES, INC.,)
)
Plaintiff,
)
)
v.
) Case No. 3:05-0538
) Judge Echols
factoring company,
)
)
Defendant.
)
MEMORANDUM
Pending before the Court is Plaintiff Orix Financial Services,
Inc.’s (“Orix”) “Motion Voluntary Dismiss [sic]” (Docket Entry
No. 10) to which Defendant (“factoring company”)
has responded in opposition (Docket Entry No. 12) and Plaintiff has
replied (Docket Entry No. 16).
I. FACTUAL BACKGROUND AND SUMMARY OF ARGUMENTS
This diversity action was filed by Orix, a New York
corporation with its principal place of business in Georgia,
against factoring company, a New Mexico corporation with its principal
place of business located there. Orix has filed a single claim
for conversion based upon the following allegations.
Rich Transport Inc., a Waynesboro, Tennessee trucking company,
became indebted to Orix pursuant to leases and notes made and
entered into between Orix and Rich Transport relating to the lease
of tractors and trailers.
To secure the indebtedness, Rich
Transport granted to Orix security interests in Rich Transport’s
accounts receivable. (Docket Entry No. 1 ¶¶ 1, 2, 4-7).

“Factoring” is the practice of selling accounts receivable at
a discount to an entity which then seeks to collect the face value
of the amount due. “For example, after shipping $100,000 worth of
widgets, a widget manufacturer might take the $100,000 in accounts
receivable to a factor. The factor would buy the right to collect
the $100,000. The amount the factor would pay its client (the
manufacturer) depends on the time-value of money, on the likelihood
that the client’s customers will pay for the widgets, and on the
factor’s own profit margin. Thus the factor might pay $50,000 to
the manufacturer for the right to collect $100,000 later.” United
States v. Katora, 981 F.2d 1398, 1400 n.2 (3d Cir. 1992).
2
On July 10, 2002, Rich Transport filed for bankruptcy
protection under Chapter 11 in the United States Bankruptcy Court
for the Middle District of Tennessee. (Id. ¶ 15). Prior to the
filing of the petition, but after Orix had perfected its security
interests in Rich Transport’s accounts receivable, Rich Transport
entered into a factoring agreement with factoring company.
1
(Id. ¶ 10).
Orix contends that the agreement between Rich Transport and
factoring company is junior to the interest it has in Rich Transport’s
accounts receivable and consequently sues factoring company in this Court
for conversion. (Id. ¶¶ 12, 22-24). factoring company, in turn, has
recently filed a Third Party Complaint against Paul E. and Rosanne
Rich, who are Tennessee residents, claiming that they signed the
factoring agreement for Rich Transport and agreed to hold
factoring company harmless and indemnify factoring company for any claims arising
under the factoring agreement which gave rise to Orix’s claim.
As a defense to Orix’s lawsuit, factoring company contends that the
claim for conversion is essentially time-barred under the three
year statute of limitations set forth in T.C.A. § 28-3-105(2).
factoring company asserts that since the alleged conversion occurred prior
to the filing of Rich Transport’s petition in bankruptcy on
July 10, 2002, but suit was not filed in this Court until July 7,
2005, some two years and 362 days later, there is only a three day
period (July 7, 2002 to July 10, 2002) for which it could be liable
on a claim for conversion. (Docket Entry No. 15 at 5).
Orix seeks dismissal without prejudice and indicates that it
intends to refile suit in New Mexico where a claim for conversion
is governed by a four-year statute of limitations. factoring company
argues that if dismissal is granted, it should be with prejudice.
Alternatively, factoring company asserts that if Orix is granted a
dismissal without prejudice, factoring company should be awarded its costs
and fees incurred to date.
II. STANDARD OF REVIEW
Rule 41 of the Federal Rules of Civil Procedure governs
voluntary dismissals of actions. In particular, “rule 41(a)(2)
allows a plaintiff to voluntarily dismiss a claim with permission
of the court if the request is made after the defendant has filed
an answer.” Warfield v. Allied Signal TBS Holdings, Inc., 267 F.3d
538, 541 (6th Cir. 2001).
“Whether dismissal should be granted under the authority of
Rule 41(a)(2) is within the sound discretion of the district
court.” Gover v. Eli Lilly and Co., 33 F.3d 716, 718 (6
th
Cir.
1994). Nevertheless, a Court must exercise its discretion in a way
that protects the nonmovant from unfair treatment. Id. (citing
Ikospentakis v. Thalassic S.S. Agency, 915 F.2d 176, 177 (5th Cir.
1990)).

III. LEGAL ANALYSIS
There are two interrelated issues presented by Orix’s motion
to dismiss. The first is whether dismissal should be granted and,
if so, whether that dismissal should be with or without prejudice.
Assuming dismissal without prejudice is appropriate, the next issue
is whether Defendant should be awarded its costs and attorneys’
fees for having to litigate in this Court in the first place.
As indicated, the Court has discretion in ruling on Rule 41(a)
motions. “Generally, an abuse of discretion is found only where
the defendant would suffer ‘plain legal prejudice’ as a result of
a dismissal without prejudice, as opposed to facing the mere
prospect of a second lawsuit.” Grover, 33 F.3d at 718. In Grover,
the Sixth Circuit indicated that “[i]n determining whether a
defendant will suffer plain legal prejudice, a court should
consider such factors as the defendant’s effort and expense of
preparation for trial, excessive delay and lack of diligence on the
part of the plaintiff in prosecuting the action, insufficient
explanation for the need to take a dismissal, and whether a motion
for summary judgment has been filed by the defendant.” Id.
factoring company has no objection to dismissal with prejudice but
asserts that if Orix is allowed to have this case dismissed without
prejudice, it will suffer “plain legal prejudice.” The basis for
this assertion is that if Orix dismisses and files suit in New
Mexico, factoring company will lose the three year statute of limitations
provided by Tennessee law for claims of conversion.

Whether the loss of a statute of limitations defense
constitutes “plain legal prejudice” is an open question in the
Sixth Circuit. The Courts of Appeals which have addressed the
issue have not reached an accord.
In Bolten v. General Motors Corp., 180 F.2d 379 (7th Cir.
1950), the Seventh Circuit held that it was error to deny a motion
to dismiss without prejudice under Rule 41(a)(2) even in light of
a statute of limitation defense, because “[t]he adjudication on
[the statute of limitations defense] had nothing to do with the
merits of the case and meant nothing more than that the action
could not proceed in the Illinois jurisdiction.” Id. at 382. The
same result was reached by the Eleventh Circuit in McCants v. Ford
Motor Co., 781 F.2d 855, 858-59 (11
th
Cir. 1986).
On the other hand, the Eighth Circuit has held that, as a
general proposition, loss of a statute of limitations defense as a
result of a Rule 41(a)(2) dismissal constitutes clear legal
prejudice. Metropolitan Federal Bank v. W. R. Grace & Co.,
999 F.2d 1257, 1262 (8
th
Cir. 1993). In doing so, the Eighth
Circuit took specific issue with the Eleventh Circuit’s holding in
McCants, writing:
Voluntary dismissal under Rule 41(a)(2) should not be
granted if a party will be prejudiced by the
dismissal, . . . and there is clear legal prejudice where
a Rule 41(a)(2) dismissal is granted in the face of a
valid statute of limitations defense[.] To the extent
the Eleventh Circuit would hold that the loss to the
defendant of a proven, valid statute of limitations
defense does not constitute legal prejudice that would
bar voluntary dismissal, we respectfully disagree. We
would consider it an abuse of discretion for a district
court to find no legal prejudice, and thus to grant
voluntary dismissal, where the nonmoving party has
demonstrated a valid statute of limitations defense to
the claims sought to be dismissed.
Id. at 1262-1263. Like the Eighth Circuit, the Fifth Circuit has
held that dismissal without prejudice under Rule 41(a)(2) is
inappropriate if it would strip the defendant of a potential
statute of limitations defense because loss of the defense is clear
legal prejudice. Phillips v. Illinios Cent. Gulf R.R., 874 F.2d
984, 986-87 (5
th
Cir. 1989). This divergence of opinion seems to
be based upon competing thoughts – the view that the loss of a
statute of limitations defense will only require the defendant to
try the case in another court versus the view that dismissal
deprives the defendant of an absolute defense.
In this particular case, the Court finds that the potential of
a statute of limitations defense for the Defendant should not
preclude dismissal of this action without prejudice for several
reasons. In the first place, this is not a case where it is clear
beyond doubt that Defendant would prevail on its statute of
limitations defense. In fact, while Defendant has indicated that
it intends to file a motion for summary judgment based upon the
statute of limitations defense, it has not done so. Even if such
a motion had been filed, there are important questions of fact and
law which must be decided, along with a determination of whether
there exists a genuine issue of material fact.
Looking solely at the arguments presented in the papers
relating to the Motion for Voluntary Dismissal, this Court cannot
conclude with any certainty that the outcome of a motion based on

Under the “discovery rule,” the cause of action does not
begin to run until the date of the discovery of the conversion
(unlawful taking), or the date when, by the exercise of reasonable
care, Plaintiff should have discovered the wrongful act.
7
a statute of limitations defense is foreordained in Defendant’s
favor.
Defendant asserts that based upon Pero’s Steak and
Spaghetti House v. Lee, 90 S.W.3d 614 (Tenn. 2002), the discovery
rule
2
does not apply to toll the statute of limitations on
Plaintiff’s claim for conversion. However, the Tennessee Supreme
Court in Pero’s was dealing solely with the issue of the discovery
rule in the context of negotiable instruments in the form of
checks: the Court was not dealing with the applicability of the
discovery rule in the context of non-negotiable instruments such as
contracts, debts, or accounts receivable. In fact, the Court
pointed out that “[n]egotiable instruments are intended to
facilitate the rapid flow of commerce by providing certainty in
financial commercial transactions,” id. at 624, and hence “[w]hen
the property converted is a negotiable instrument, the damage is
done, and the tort is complete when the instrument is negotiated,
regardless of the plaintiff’s ignorance of the conversion.” Id. at
623. The same does not necessarily hold true with respect to non-
negotiable instrument.
Second, even if most of Plaintiff’s claim for conversion was
barred by Tennessee’s statute of limitations, it does not
necessarily follow, as Defendant suggests, that a subsequent suit
in a New Mexico court would be barred by the doctrine of res
judicata. In Semtek Int’l, Inc. v. Lockheed Martin Corp., 531 U.S.

497 (2001), the Supreme Court held that a district court’s
dismissal of claims as time-barred is not necessarily the type of
merits decision that has preclusive effect in subsequent
litigation. A federal court’s dismissal with prejudice of a time-
barred claim means that the claim may not be refiled in the court
that dismissed the claim. Cf. id. at 505-506. However, in
determining whether a federal court’s dismissal of a diversity
action on statute of limitations grounds bars refiling in another
court, a court is to look to “the law that would be applied by
state courts in the State in which the federal diversity court
sits.” Id. at 508 (citations ommitted). Hence, the preclusive
effect of
dismissal in this action requires application of
Tennessee law.
Under Tennessee law, dismissal based upon a
procedural ground does not support a claim for res judicata, Boyd
v. Bruce, 2001 WL 1346264 at *5 (Tenn. Ct. App. 2001), and
“statutes of limitations are procedural[.]” Calaway v. Schuker, ___
S.W.3d ___, ___, 2005 WL 3338655 at * 4 (Tenn. 2005).
Finally, in determining “plain legal prejudice,” the Sixth
Circuit has indicated that aside from looking at the explanation
offered by Plaintiff for seeking dismissal, a court should also
consider the defendant’s effort and expense of preparation for
trial, excessive delay and lack of diligence on the part of the
plaintiff in prosecuting the action, and whether a motion for
summary judgment has been filed by the defendant. Grover, 33 F.3d
at 718. Those factors, too, counsel in favor of dismissal without
prejudice in this case.

While Plaintiff waited some time to file this suit, its
request for dismissal does not come late in these proceedings.
Quite the contrary, the motion for voluntary dismissal was filed
about 2½ months after filing of the lawsuit, at a time when the
only substantive Court involvement was the holding of an initial
case management conference by the Magistrate Judge.
Plaintiff’s motion for voluntary dismissal at this early
juncture has also effectively eliminated expenditures by Defendant
in preparation for trial on Plaintiff’s claims. Further, although
promised, Defendant has yet to file a motion for summary judgment.
Obviously all three of these factors weigh heavily in favor of
granting Plaintiff’s request.
Even though this Court concludes that there exists no “plain
legal prejudice,” this does not mean that Plaintiff’s miscue in
filing in this Court should not be without cost. The Sixth Circuit
has indicated that a Court must exercise its discretion in ruling
on a Rule 41(a)(2) motion in a way that protects the nonmovant from
unfair treatment. Grover, 33 F.3d at 718. Likewise, the Rule
itself states that a Court may enter “such terms and conditions as
the court deems proper” in granting a Plaintiff’s motion for
voluntary dismissal.
The Sixth Circuit has observed:
Courts frequently require Plaintiffs to pay defense costs
as a precondition to the granting of a dismissal without
prejudice under Rule 41(a)(2)[.] While attorneys’ fee
awards are generally not permitted when the dismissal is
with prejudice, such awards are permissible on dismissals
without prejudice[.] The reasoning behind this rule is
that a dismissal without prejudice does not preclude the
Plaintiff from initiating the same action again and
causing the Defendant to again begin preparing for
trial[.] While attorneys’ fee awards are not mandatory
when a cause of action is dismissed under Rule 41(a)(2),
they are within the sound discretion of the district
court.
Massey v. City of Ferndale, 1997 WL 330652 at *2 (6
th
Cir.
1997)(citations omitted).
In this case, the Court will exercise its discretion and
condition dismissal without prejudice upon Plaintiff agreeing to
pay the Defendant’s attorneys’ fees and costs necessarily expended
in this Court. The Court will not, however, require Plaintiff to
pay Defendant’s attorneys’ fees for work which can be transferred
to a refiled action. See, Rosenthal v. Bridgestone, 2005 WL
1593906 (N.D. Ohio 2005)(conditioning 41(a)(2) dismissal on
Plaintiff’s agreeing to pay reasonable costs only for work which
could not be transferred to another jurisdiction and requiring
Plaintiff to accept these terms prior to requiring defendant to
file its fee petition).
IV. CONCLUSION
On the basis of the foregoing, Plaintiff’s Motion for
Voluntary Dismissal Without Prejudice (Docket Entry No. 10) will be
granted conditioned upon Plaintiff agreeing to pay Defendant’s
reasonable attorney fees and costs for work that cannot be
transferred to another jurisdiction in which Plaintiff may file
suit. By Friday, February 3, 2006, Plaintiff shall notify the
Court in writing, with a copy to Defendant, whether it agrees to
this condition. If so, the Defendant shall file its fee petition
(for work which cannot be transferred elsewhere) with supporting
documentation, including detailed billing records showing the time
spent and rates charged by Monday, February 13, 2006. The Plaintiff
will then have until Monday, February 20, 2006, to file its
objections to the fee petition. After the Court enters a ruling on
Defendant’s fee request, Plaintiff shall provide the Court with
proof of payment of those fees to Defendant, after which this Court
will enter an Order dismissing this case without prejudice. If
Plaintiff cannot accept the conditions of payment of Defendant’s
costs and attorneys’ fees, Plaintiff’s claims will remain pending
in this Court for trial unless Plaintiff requests dismissal with
prejudice.
An appropriate Order will be entered.
_________________________
ROBERT L. ECHOLS
UNITED STATES DISTRICT JUDGE
Case 3:05-cv-00538 Document 30 Filed 01/27/2006 Page 11 of 11

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