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AEL Financial LLC v. City Auto Parts of Durham

August 31, 2009


The opinion of the court was delivered by: Judge Robert M. Dow, Jr.


Before the Court are several motions filed by Plaintiff: (1) a motion to strike Defendants' jury demand, (2) a motion to dismiss Defendants'counterclaims, and (3) a motion to strike Defendants' eight affirmative defenses. For the reasons set forth below, Plaintiff's motion to strike Defendants'jury demand [37] is granted; Plaintiff's motion to dismiss Defendants' counterclaims [40] is granted in part and denied in part, although the dismissals are without prejudice; and Plaintiff's motion to strike Defendants' affirmative defenses [39] is granted in part and denied in part.

Plaintiff, AEL Financial, LLC ("AEL"), filed this lawsuit on June 18, 2008 [1] against Defendants City Auto Parts of Durham, Inc. ("City Auto"), as well as Joseph R. Guarglia, Sr., and Joseph R. Guarglia, Jr. ("the Guarglias") (collectively "Defendants"). The Court has jurisdiction based on diversity of citizenship. 28 U.S.C. § 1332.

AEL' s amended complaint [77] alleges that Defendant City Auto breached a lease for equipment and that the Guarglias breached an accompanying guaranty. Defendants'amended answer [90] includes eleven affirmative defenses, eight counterclaims, and a jury trial demand.

I. Plaintiff's Motion to Strike Defendants' Jury Demand Request

A. Background

AEL leases industrial and commercial equipment to various businesses. (Compl. ¶ 4.) In or around late June 2006, City Auto entered into an agreement with AEL (the "Rental Agreement") and the Guarglias executed an accompanying guaranty. According to AEL, the Rental Agreement was a lease for telecommunications equipment for which City Auto agreed to pay $3,208.87 per month. (Id. ¶ 9-10.) According to Defendants, the Agreement was "a funding agreement in furtherance of" an agreement for telecommunications services (the "Service Agreement") that it entered into with the Third-Party Defendants. (Answer ¶ 9.) The Rental Agreement is captioned: "Capital 4 Financial Services Rental Agreement, a program of AEL Financial, LLC." The text of the Rental Agreement states that it is a "Finance Lease" as defined by Article 2A of the Uniform Commercial Code ("UCC"). (The Rental Agreement hedges on its Article 2A status, as it includes a security interest in the leased equipment and proceeds "[i]f the Rental Agreement is deemed to be a security agreement," which would be governed under Article 9 of the UCC. (Compl. Ex. A. at 1, ¶ 2.)) According to Defendants, they were told, in effect, that making payments under the Rental Agreement was how they were supposed to make payments under the Service Agreement. (Countercl. ¶¶ 42-51.)

After making payments for over a year, City Auto stopped making payments. (Compl. ¶ 11.) Defendants concede that City Auto made payments for over a year and that it still has possession of (and uses) the leased equipment. (Answer ¶¶ 11, 15.) Among their arguments, Defendants state that there was no meeting of the minds with respect to the Rental Agreement. (Answer at 12.) They also deny that the Guarglias are liable on the Guaranty. (Answer ¶ 27.)

AEL' s amended complaint comprises three state law claims: (i) breach of contract, (ii) breach of guaranty, and (iii) replevin. Defendants include in their answer a demand for a jury trial.

B. Validity of the Jury Waiver

The jury waiver that is the subject of Plaintiff's motion to strike is noted in three places in the Rental Agreement, twice in the body of the agreement itself: once on the first page of the document in paragraph 9, once on the second page in paragraph 21. Paragraph 21 is entitled "Choice of Law." It is reproduced in full below:

21. CHOICE OF LAW: This Rental Agreement was made in the State of Illinois (by US having countersigned it in Buffalo Grove, Illinois); and it is to be performed in the State of Illinois be [sic] reason of the Rental Payments YOU are required to pay US in Illinois. This Rental Agreement shall in respects [sic] be interpreted and all transactions subject to this Rental Agreements and all rights liabilities [sic] of the parties under the Rental Agreement shall be determined and governed as to their validity, interpretation, enforcement and effect by the laws of the State of Illinois except for local filing requirements. YOU consent to and agree that non-exclusive personal jurisdiction over YOU and subject matter jurisdiction over the Equipment shall be with the Courts of the State of Illinois or the Federal District Court for the Northwestern [sic] District of Illinois solely at OUR option with respect to any provisions of this Rental Agreement. YOU ALSO AGREE TO WAIVE YOUR RIGHT TO A TRIAL BY JURY. (Compl. Ex. A (emphasis in original).)

The Rental Agreement includes one more jury waiver warning. The Guarglias guaranteed City Auto' s payment under the Rental Agreement ("the Guaranty"). The jury trial waiver in the Guaranty was placed immediately above the Guarglias'signature line. After reciting the terms of the guaranty in plain text, the waiver states, in bolded text: "This guaranty is governed by and constituted in accordance with the laws of the State of Illinois and I consent to non-exclusive personal jurisdiction in any state or federal courts in Illinois and waive trial by jury." (Compl. Ex. A (emphasis in original).)

With regard to the parties'arguments about the validity of the waivers, the Court notes that neither party cites the applicable standard, although some of the arguments do map onto the applicable standard. Plaintiff's motion to strike Defendants'jury demand states that the jury waiver inquiry centers on whether the waiver was "knowing and voluntary." In support of its argument that Defendants'jury waiver was knowing and voluntary, Plaintiff points out that one of the waivers was in capital letters and that the waiver in the Guaranty was positioned at the end of a mere nine lines of text, immediately above the Guarglias'signature line. Defendants' response also argues that the standard for a jury trial waiver is knowing and voluntary, although Defendants disagree with Plaintiff's application of the standard. In support of their arguments- and the appropriateness of the knowing and voluntary standard-Defendants cite cases from this district for the twin propositions that the validity of a jury trial waiver provision is a matter of federal law and that the inquiry demands a searching eye. The cases cited by Plaintiff consider factors such as (i) bargaining power, (ii) whether the waiving party had the opportunity to consult a lawyer, (iii) the conspicuousness of the waiver provision, and (iv) whether there were negotiations over the waiver provision. See, e.g., Whirlpool Fin. Corp. v. Sevaux, 866 F. Supp. 1102, 1105 (N.D. Ill. 1994); In re Reggie Packing Co., 671 F. Supp. 571, 573 (N.D. Ill. 1987); see also Leasing Svc. Corp. v. Crane, 804 F.2d 828, 832-33 (4th Cir. 1986); K.M.C. Co., Inc. v. Irving Trust Co., 757 F.2d 752, 755-56 (6th Cir. 1985); Nat'l Equip. Rental, Ltd. v. Hendrix, 565 F.2d 255, 257-58 (2d Cir. 1977); Heller Fin., Inc. v. Finch-Bayless Equip. Co., 1990 WL 77500 (N.D. Ill. May 31, 1990). Invoking the factors, Defendants contend that the waiver provisions at issue here were "not so conspicuous as to insure a knowing and voluntary waiver * * *. Defendants never saw the waiver provision until this lawsuit was filed, were not aware that the provision existed, and never intended to waive their right to a jury trial * * *."[51, at 9]. Defendants further state that they did not have a lawyer, the text of the provisions was small and "not highlighted," Plaintiff had more "bargaining power," and Defendants did not have an attorney or legal training [id. at 9-10].

Most of the factors cited by Defendants, however, do not bear on the analysis. The Seventh Circuit, in a split from the circuit court cases cited above, has held that when a contract is governed by state law, the validity of a jury trial waiver similarly is governed by state law. IFC Credit Corp. v. United Bus. & Indus. Fed. Credit Union, 512 F.3d 989, 991, 993-94 (7th Cir. 2008). In this case, as in the IFC case, the Rental Agreement is governed by the UCC, which Illinois has adopted.*fn1 As Judge Easterbrook' s opinion in IFC explained, unequal bargaining power and form contracts do not invalidate the plain language of a jury trial waiver. Id. at 992-93 (noting that form contracts are common and enforceable). And the fact that Defendants did not separately negotiate the provision does not alter the jury-trial-waiver analysis: after all, there are many telecommunications firms and "all a customer need do is say no to any given offer and let the competition continue." Id. at 992. What does matter is the plain language of the provisions: Illinois law "honors straightforward terms with understandable meanings."Id. at 992 (citing Nicor, Inc. v. Associated Elec. & Gas Svcs., Ltd., 860 N.E.2d 280, 285-86 (Ill. 2006)).

Unless the UCC specifies otherwise, a lease is enforceable according to its terms. 810 ILCS 5/2A-301. Viewing Defendants' response generously, Defendants seem to be arguing that on the facts of the case the jury trial waiver provisions are unconscionable. Unconscionability of a contractual term provides grounds for non-enforcement under the UCC. 810 ILCS 5/2A-108 ("If the court as a matter of law finds a lease contract or any clause of a lease contract to have been unconscionable at the time it was made, the court may refuse to enforce the lease contract [or provide other specified remedies]."). A priori, however, there is nothing unconscionable about a term waiving the right to a jury trial: "Merchants often prefer professional adjudicators (be they judges or arbitrators) over amateurs." IFC, 512 F.3d at 992.

Defendants do point to specific aspects of the Rental Agreement that, in theory, could be deemed unconscionable. Specifically, Defendants state that the type-face of the Rental Agreement was small, intimating that the jury trial waiver provisions were not conspicuous. If a term is so difficult to find, read, or understand that a person cannot be said to have agreed to it, the term may be procedurally unconscionable. Razor v. Hyundai Motor Am., 854 N.E.2d 607, 622 (Ill. 2006). As Plaintiff points out, though, only in extreme cases will courts invalidate waiver clauses due to their inconspicuous nature. See In re Reggie Packing Co., Inc., 671 F. Supp. 571, 573-74 (N.D. Ill.) (citing Nat'l Equip. Rental, Ltd. v. Hendrix, 565 F.2d 255, 258 (2d Cir. 1977) (waiver 'literally buried' in eleventh paragraph of a 16-clause agreement)); Dreiling v. Peugeot Motors of Am., Inc., 539 F. Supp. 402, 403 (D. Colo. 1982) (waiver located on page 20 of a 22-page standardized form contract); cf. also Frank's Maintenance & Eng'g, Inc. v. C.A. Roberts Co., 408 N.E.2d 403, 410 (Ill. App. Ct. 1980) (considering, as part of the unconscionability analysis, whether terms were "hidden in a maze of fine print"); Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585, 587, 595 (1991) (enforcing a forum selection clause contained on the face of a cruise ticket). Here, the Rental Agreement is a two-page document, and there is at least one jury waiver provision on each page. On the second page, the pertinent text is capitalized and in bold lettering, and it is located directly above where one of the Guarglias initialed the document. The jury waiver in the guaranty on page one of the Rental Agreement is located directly above Defendant Guarglias'signature and, again, is in bold lettering. And while it is true that the text was small, all of the text in the Rental Agreement was small and the jury waiver provisions were made to stick out. They were not smuggled into the document and hidden by larger text. Accordingly, the Court concludes that the jury waiver provisions in the equipment lease and guaranty are not so inconspicuous that they are unconscionable.

As stated above, if a provision cannot be understood it may be found unconscionable on that basis. Notably, Defendants do not contend that they did not understand what it means to waive a jury trial. Rather, they state that they never "saw" the provision at issue. It is axiomatic, however, that contracting parties have a duty to read the contracts they sign. Mt. Zion State Bank & Trust v. Weaver, 589 N.E.2d 983, 986 (Ill. App. Ct. 1992) ("[The] rule that a person signing a contract is under a duty to read it and cannot complain as to misrepresentations as to its contents has long prevailed in this State."); Bien v. Fox Meadow Farms Ltd., 574 N.E.2d 1311, 1315 (Ill. App. Ct. 1991) (a plaintiff who fails to exercise reasonable caution before signing a contract is not entitled to relief). If all that one side in a contract dispute had to do was assert that it had not read an agreement, then there could be no such thing as contract, at least not without a return to formalism in contract that is inconsistent with much of the UCC and modern commerce generally. Cf. Randy E. Barnett, Some Problems with Contract as Promise, 77 CORNELL L. REV. 1022, 1027-28 (1992) (describing the consent theory of contract, which states that a promise should be legally enforceable if it is "made in such a way as to convey to a promise the message that the promisor intends to be legally accountable for nonperformance"); Restatement (Second) of Contracts § 19 (conduct of a party may manifest assent even where unintended). That Defendants did not read the Rental Agreement does not furnish them with a tool for invalidating the jury waiver.

Finally, procedural unconscionability does take into account lack of bargaining power, a factor highlighted by Defendants. Razor, 854 N.E.2d at 622. However, Defendants' argument on this score is both unconvincing and insufficient as a matter of law. The source of Defendants' claimed lack of bargaining power is the fact that the contracts in question were form contracts. That alone is not enough to show a lack of bargaining power. O'Callaghan v. Waller & Beckwith Realty Co., 155 N.E.2d 545, 547 (Ill. 1959). Bargaining power refers to the ability of the parties to alter the price (or other terms) of a contract. Omri Ben-Shahar, A Bargaining Theory of Default Rules, 109 COLUM. L. REV. 396, 404 (2009). Although the contracts involved here were form contracts-indicating the absence of negotiation-Defendants could have walked away from the transaction or made their own offer, as there are many providers of telecommunications services. IFC, 512 F.3d at 992. In short, Defendants have made no showing that Plaintiffs were able to exert bargaining power. In addition, Illinois courts are wary of invalidating agreements based on unequal bargaining power, particularly where, as here, the parties to the contract are not consumers. Razor, 854 N.E.2d at 622-23 (even where consumers were involved, additional factors were needed to tip in favor of unconscionability); Braye v. Archer-Daniels-Midland Co., 676 N.E.2d 1295, 1301 (Ill. 1997) (noting the "general[] reluctan[ce]" of Illinois courts to invalidate a contract based on unequal bargaining power); Williams v. Jo-Carroll Energy, Inc., 890 N.E. 2d 566, 571 (Ill. App. Ct. 2008) (arbitration agreement between dairy farmer and sole provider of electricity was valid).

Regardless of the legal framework for evaluating Defendants'arguments, the arguments fail to pass muster: courts in Illinois generally are reluctant to invalidate contract provisions based on unconscionability, both parties are business entities, the terms of the Rental Agreement are clear and conspicuous, and the jury trial waiver is repeated three times in the Rental Agreement. Plaintiff's motion to strike Defendants' jury demand [29] is granted.

B. Scope of Waiver

Defendants argue that even if the Court grants Plaintiff's motion to strike, "Defendants should still be permitted to have a trial by jury on * * * their claims against (1) Plaintiff for violations of the Illinois Consumer Fraud and Deceptive Business Practices Act; (2) Capital 4 for contractual indemnity; (3) Metropark for negligent misrepresentation; (4) Capital 4 for violations of the Texas Deceptive Trade Practices-Consumer Protection Act; (5) Plaintiff and Capital 4 for civil conspiracy; and (6) Villa-Lobos and Dawson to pierce the corporate veil" [53, at 11].

As a threshold matter, no motion to strike Defendants'jury demand has been brought by the Third-Party Defendants. The only issue before the Court, as Plaintiff's arguments properly anticipate [55, at 12], is the validity of the jury trial waiver with respect to Plaintiff. And because, as discussed below, the Court grants Plaintiff's motion to dismiss Defendants' counterclaims under the Illinois Consumer Fraud and Deceptive Business Practices Act and Plaintiff's motion to dismiss Defendants' civil conspiracy counterclaim-both without prejudice-the Court need not limit the scope of Defendants'jury trial waiver at this time. However, in the event that Defendants successfully re-plead their counterclaims and allege that Plaintiff ...

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