DE: Suppliers' Repurchase Obligations Limited to New Equipment Under Equipment Dealer Statute | Practical Law

DE: Suppliers' Repurchase Obligations Limited to New Equipment Under Equipment Dealer Statute | Practical Law

The Supreme Court of Delaware (DE Supreme Court) held, in Terex Corporation v. Southern Track & Pump, Inc., that equipment suppliers are obligated to repurchase only new, unused, undamaged and complete inventory under the state's Equipment Dealer Contracts Statute. The DE Supreme Court's opinion answered a question certified by the US Court of Appeals for the Third Circuit.

DE: Suppliers' Repurchase Obligations Limited to New Equipment Under Equipment Dealer Statute

by Practical Law Commercial
Published on 22 Jun 2015 • USA (National/Federal)
The Supreme Court of Delaware (DE Supreme Court) held, in Terex Corporation v. Southern Track & Pump, Inc., that equipment suppliers are obligated to repurchase only new, unused, undamaged and complete inventory under the state's Equipment Dealer Contracts Statute. The DE Supreme Court's opinion answered a question certified by the US Court of Appeals for the Third Circuit.
On June 15, 2015, the Supreme Court of Delaware (DE Supreme Court) answered a question on certification from the US Court of Appeals for the Third Circuit in Terex Corporation v. Southern Track & Pump, Inc. (No. 13-4279 (3rd Cir., Dec. 18, 2014)) and held that equipment suppliers are obligated to repurchase only new, unused, undamaged and complete inventory under Delaware's Equipment Contracts Statute and are not required to repurchase any used or incomplete inventory (No. 704, 2014, (Del. June 15, 2015)).

Background

Delaware, like many states, has enacted an equipment dealer contract statute. The statute attempts to address the imbalance of power in transactions between equipment dealers and suppliers. It requires suppliers to repurchase inventory when parties terminate an agreement.
Delaware's statute, relevantly, provides that:
"[w]henever a contract agreement between a dealer and a supplier is terminated by either party, the supplier shall repurchase the dealer's inventory as provided in this subchapter unless the dealer chooses to keep the inventory." (6 Del. C. § 2723(a).)
The statute does not distinguish between new and used equipment:
"[t]he supplier shall repurchase from the dealer within 90 days after termination of the contract agreement all inventory previously purchased from the supplier that remains unsold on the date of termination of the agreement." (6 Del. C. § 2723(a).)

Dispute

Southern Track & Pump, Inc. (Southern Track), a Florida-based equipment dealership that sells and leases construction equipment, entered a distributorship agreement with Terex Corporation (Terex), a Delaware corporation that manufacturers construction equipment. Under the distributorship agreement, which was governed by Delaware law, Southern Track purchased approximately $4 million worth of equipment (about forty pieces in total) from Terex. Southern Track financed the purchase through an agreement with GE Commercial Distribution Finance (GE) that granted GE a security in the subject equipment.
Southern Track had difficulty marketing Terex products and, when its loan obligations became too onerous, terminated the distributorship agreement. In deciding to terminate, Southern Track purportedly assumed that Terex was obligated, under Delaware’s Equipment Dealer Statute, to repurchase all of the inventory that Southern Track did not wish to retain. Terex disagreed, contending that:
  • The statute required a supplier to repurchase only new and unused equipment.
  • A majority of the equipment in the transaction was used because it had entered Southern Track's rental fleet.
After a period of negotiation:
  • Southern Track, under increasing pressure from GE for past-due payments, filed a declaratory judgment action against Terex in the Delaware Superior Court.
  • Terex removed the lawsuit to the United States District Court for the District of Delaware based on diversity jurisdiction.
  • The parties filed cross-motions for summary judgment on the issue of whether a supplier's repurchase obligations under DE's Equipment Contracts Statute Extends to all inventory in a dealer's possession that remains unsold.
The District Court ruled that the repurchase obligations apply to all, not just new and unused, inventory. Terex appealed the judgment to the Third Circuit, which certified the question to the DE Supreme Court.

Outcome

The DE Supreme Court ruled that a supplier's repurchase obligation under the Equipment Dealer Statute is limited to new, unused, undamaged and complete equipment inventory.
The court reasoned that limiting suppliers' repurchase obligations to new inventory:
  • Avoids the need for judicial gap fillers and is consistent with the statutory scheme. The statute provides pricing formulas for new but not used inventory and this omission would be an inconsistent lack of detail if the DE legislature intended the Equipment Dealer Statute to cover used inventory.
  • Is consistent with other similar statutes. The Court compared the Equipment Dealer Statute with:
    • DE's Motor Vehicle Franchise Statute (6 Del. C. § 4901, et seq.), which has a detailed pricing formula for manufacturers that are required to repurchase vehicles from a distributor; and
    • the dealer equipment statutes of other states, from which DE's statute is unique because it does not explicitly deal with used equipment (suggesting the omission is intentional).
  • This reading avoids the Constitutional issues of whether the statute is punitive or presents a taking.

Practical Implications

Parties entering equipment distributorship agreements should research the governing jurisdiction's equipment dealer statute, if one is enacted by the governing jurisdiction, to fully appreciate the terms and risks of the transaction. This decision makes clear that suppliers in distributorship agreements governed by DE law are obligated to repurchase only new inventory.