MCSi, Inc.

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Case 03-80169 Doc1248 Filed 05/11/04 Page 1of7

IN THE UNITED STATES DISTRICT COURT FOR
THE DISTRICT OF MARYLAND, NORTHERN DIVISION

*

MCSI, INC.,
*
Appellant
*
Vv.
* CIVIL NO: WDQ-03-3063
OMNEON VIDEO NETWORKS, INC., BANKRUPTCY NO.: 03-
80169-JS
*
Appellee. *
* * * * * * * *k * * * * k
MEMORANDUM OPINION AND ORDER
On June 3, 2003, MCSi, Inc. ("*MCSi”) filed a voluntary

petition for relief under Chapter 11 of the Bankruptcy Code.

As a result, MCSi was protected from the enforcement of any

liens or judgments against it. See 11U.8.C. § 362 (2004)

(providing automatic stay).

On August 13, 2003, Omneon Video Networks, Inc.

(“Omneon”) filed a Motion for Relief from Stay to Reclaim

Equipment (“Lift Stay Motion”) with the United States

Bankruptcy Court for the District of Maryland. Omneon claimed
that it retained title to equipment that it had delivered to
MCSi, and that it needed the stay lifted in order to repossess
its property.

On October 8, 2003, the Bankruptcy Court determined that

AUTHENTICATED
U.S. GOVERNMENT
INFORMATION

GPO

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Omneon retained title to the equipment and lifted the stay so
that Omneon could repossess. The next day, MCSi filed a
motion with the Bankruptcy Court seeking a stay of the Lift
Stay Order pending appeal. The Bankruptcy Court granted
MCSi’s motion on October 14, 2003.

Pending is MCSi’s appeal of the Bankruptcy Court’s
decision to lift the automatic stay. For the reasons
discussed below, the Bankruptcy Court’s decision lifting the
Stay will be reversed.

BACKGROUND

MCSi supplies and integrates broadcasting and network
technologies. Appellant’s Br. 3. On February 24, 2003, MCSi
and Omneon entered into a purchase agreement, intended to
serve as a master agreement for future purchases of Omneon-
manufactured equipment by MCSi for use in its business. Id.
at 4.

In March 2003, MCSi issued a purchase order to Omneon for
the acquisition of sophisticated video equipment (“the
Equipment”) for installation at the facility of MCSi’s
customer. Id. at 5. The total cost of the Equipment was
approximately $242,000. Id.

Omneon had determined that MCSi was a credit risk.

Hearing Tr. 34. Before delivering the Equipment to MCSi's

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customer, therefore, Omneon required MCSi to enter into a

Product Loan Agreement. Id. at 18-19. The agreement provided

that:

1. Omneon has agreed to loan the products to MCSI.
Omneon shall facilitate the delivery of the products
to [MCSi’s customer]. MCSTI shall be responsible for
shipping charges.

2. Omneon shall loan the products to .. .MCSI fora
term of 30 days commencing on the date of
installation.

3. MCSI shall bear the risk of loss and damage and

shall exercise due care in maintaining the products
during the loan period. MCSI shall not permit any
lien or other encumbrance to be placed on the
products while in their possession. Furthermore,
MCSI shall not modify or alter the products during
the loan period.

4, MCSI acknowledges that the products are to be used
exclusively at [its customer’s facility].
5. If MCSI fails to remit full payment for purchase by

the end of the Term of this loan (30 days after
installation), MCSI shall, at [its] cost and expense
and risk of loss or damage, return the products, in
the same condition as when received... . This
loan shall be discharged when the equipment has been
purchased, invoiced and paid in full.

Product Loan Agreement.

In April 2003, Omneon sent MCSi an invoice for the
Equipment. Omneon Hearing Ex. 3. The invoice provided that
25% of the Equipment’s purchase price was to be paid before

the Equipment was shipped, and the remaining 75% was due upon

Na &

its installation. Id.
On April 18, 2003, MCSi made the initial payment of 25%

of the Equipment’s value, approximately $61,000. Hearing Tr.

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36. The Equipment was then shipped to MCSi’s customer and
installed. Id. at 44.

Omneon sent a letter to MCSi on May 22, 2003, stating
that because the Equipment had been installed, the remaining
75% of the purchase price of the Equipment was due. MCSi’s
Hearing Ex. 4. MCSi filed its bankruptcy petition shortly
thereafter and never remitted the outstanding balance to

Omneon. Appellant’s Br. 7.

STANDARD OF REVIEW
The district court reviews the bankruptcy court’s
findings of fact for clear error and conclusions of law de
novo. Thomas v. GMAC Residential Funding Corporation, 2004
U.S. Dist. LEXIS 7398, *5 (D. Md. 2004) (citing Canal Corp. v.

Finnman (In re Johnson), 960 F.2d 396, 399 (4th Cir. 1992)).

ANALYSIS
Omneon argues that pursuant to the Product Loan
Agreement, it retained title to the Equipment until MCSi paid
the full purchase price. Appellee’s Br. 10. Because MCSi
never paid the full purchase price, Omneon asserts that the
decision lifting the stay should be affirmed, allowing it to

repossess the Equipment. Id. at 20-21. MCSi counters that §

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2-401 of Maryland’s Uniform Commercial Code (UCC) prohibits
the retention of title after delivery, thus Omneon
relinquished its title in the Equipment upon delivery and
should not be permitted to repossess. See generally,
Appellant’s Br.

uce § 2-401(1) provides that “[a]ny retention or
reservation by the seller of the title . . . in goods shipped
or delivered to the buyer is limited in effect toa
reservation of a security interest.” Mp. Copt Ann., Com. Law I §
2-401(1) (2002).7 Where the intent of the parties to an
agreement was to secure the deferred purchase price of goods,
§ 2-401 “operates to give effect to that intent by treating
the outmoded reservation of title as creating a security
interest.” Tilghman Hardware, Ince. v. Larrimore, 331 Md. 390,
403 (1993). “Language expressly granting a security interest
from buyer to seller is not required under these
circumstances.” Id.

The record indicates that Omneon intended to sell the
Equipment to MSCi, using its retention of title in the
Equipment after delivery to secure payment. The Product Loan

Agreement states that the “loan shall be discharged when the

‘A security interest is “an interest in personal property or fixtures
which secures payment or performance of an obligation.” § 1-201(37).

5

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equipment has been purchased, invoiced and paid in full,”
indicating Omneon's expectation that MSCi would purchase, not
just rent, the Equipment. Product Loan Agreement (emphasis
added). Moreover, Dan Marshall, who drafted the Product Loan
Agreement for Omneon, testified that Omneon did not consider
the Product Loan Agreement a lease agreement. Hearing Tr. 30-
31. Marshall testified that “it was [Omneon’s] intent that
(MSCi] exercise an option to purchase, which would ultimately
result in the sale of the product that [Omneon] would get to
recognize as revenue.” Td.

Because Omneon intended to secure the deferred purchase
price of the Equipment with its Product Loan Agreement, it
retained only a security interest after the Equipment’s
delivery. Inasmuch as Omneon did not retain title to the
Equipment, the Bankruptcy Court erred when it concluded that
Omneon’s title in the Equipment was sufficient cause for
lifting the stay.

CONCLUSION

For the reasons discussed above, the Bankruptcy Court’s
decision to lift the automatic stay will be reversed and this
case remanded to the Bankruptcy Court for further proceedings

in accordance with this Memorandum Opinion.

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May 11, 2004 /s/
Date William D. Quarles, Jr.
United States District Judge