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Lyon Financial Services, Inc. v. AKB Enterprises

May 17, 2010

LYON FINANCIAL SERVICES, INC., PLAINTIFF,
v.
AKB ENTERPRISES, INC., AND KIM BRANCAMP, DEFENDANTS.



The opinion of the court was delivered by: Samuel Der-yeghiayan, District Judge

MEMORANDUM OPINION

This matter is before the court on Plaintiff/Counter-Defendant Lyon Financial Services, Inc.'s (Lyon) motion to dismiss the counterclaim. For the reasons stated below, we grant the motion to dismiss the counterclaim.

BACKGROUND

Lyon d/b/a U.S. Bankcorp Business Equipment Finance Group alleges that in December 2007, it entered into two lease agreements (Lease Agreements) with Defendant/Counter-Plaintiff AKB Enterprises, Inc. d/b/a Sign A Rama (AKB). The Lease Agreements were allegedly designated as Lease Agreement 500-0119550-000 (119 Agreement) and Lease Agreement 500-0131732-000 (131 Agreement). Under the Lease Agreements, Lyon allegedly leased certain equipment (Equipment) to AKB. Lyon contends that Defendant/Counter-Plaintiff Kim Brancamp (Brancamp) also personally guaranteed all of AKB's obligations under the Lease Agreements in order to induce Lyon to enter into the agreements. According to Lyon, AKB made the first 15 of the 60 monthly payments owed to Lyon under the 119 Agreement, but failed to make the payment due on December 16, 2008, or any payments thereafter. According to Lyon, AKB made the first 16 of the 60 monthly payments owed to Lyon under the 131 Agreement, but failed to make the payment due on June 5, 2009, or any payments thereafter.

Lyon includes in its complaint a breach of contract claim brought against AKB premised on the 119 Agreement (Count I), a breach of guaranty claim brought against Brancamp premised on the 119 Agreement (Count II), a breach of contract claim brought against AKB premised on the 131 Agreement (Count III), a breach of guaranty claim brought against Brancamp premised on the 131 Agreement (Count IV), and a detinue claim brought against AKB and Brancamp (Count V). Defendants brought a counterclaim alleging that in May or June 2009, they were having trouble coming up with the necessary funds to make the payments for the Lease Agreements. Defendants contend that AKB contacted Lyon to try to work out a modification or extension. According to Defendants, Denise Anderson (Anderson), a Lyon representative, told AKB to submit an application for modification of the Lease Agreements (Modification Application) and stated that Lyon would take no action with respect to the Lease Agreements pending the decision on the Modification Application. Defendants contend that Anderson made false statements and committed fraud. Defendants include in their counterclaim a breach of implied duty of good faith and fair dealing claim (Count I), a fraud claim (Count II), and a negligent misrepresentation claim (Count III). Lyon now moves to dismiss all claims in the counterclaim.

LEGAL STANDARD

In ruling on a motion to dismiss brought pursuant to Federal Rule of Civil Procedure 12(b)(6) (Rule 12(b)(6)), a court must "accept as true all of the allegations contained in a complaint" and make reasonable inferences in favor of the plaintiff. Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009)(stating that the tenet is "inapplicable to legal conclusions"); Thompson v. Ill. Dep't of Prof'l Regulation, 300 F.3d 750, 753 (7th Cir. 2002). To defeat a Rule 12(b)(6) motion to dismiss, "a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face." Iqbal, 129 S.Ct. at 1949 (internal quotations omitted)(quoting in part Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A complaint that contains factual allegations that are "merely consistent with a defendant's liability . . . stops short of the line between possibility and plausibility of entitlement to relief." Iqbal, 129 S.Ct. at 1949 (internal quotations omitted).

DISCUSSION

I. Choice of Law

The parties disagree as to whether Illinois law or Minnesota law applies in this case. AKB contends that Minnesota law applies, and points to the choice of law provision in the Lease Agreements that provides that Minnesota law will control in disputes concerning the Lease Agreements. (119 Agr. Par. 15); (131 Agr. Par. 15). Lyon contends that Illinois law applies, points out that the Equipment is located in Illinois, and contends that the alleged oral agreement that AKB is seeking to rely on is outside the scope of the Lease Agreements. We agree with Lyon that based on a consideration of relevant factors, Illinois law should apply to the counterclaim. There was no physical location for the new alleged oral contract, and the Equipment is located in Illinois according to the complaint. (Compl. Par. 19); Hinc v. Lime-OSol Co., 382 F.3d 716, 719 (7th Cir. 2004)(explaining factors for Illinois choice of law). However, as will be explained below, the relevant law is substantively the same in many respects in both states, and the ultimate result would be the same with regard to the instant motion, whether Illinois or Minnesota law is applicable.

II. Breach of Implied Duty of Good Faith and Fair Dealing Claim (Count I)

Lyon moves to dismiss the breach of implied duty of good faith and fair dealing claim in the counterclaim. AKB contends that Lyon agreed to a modification of the Lease Agreements, which allowed AKB to stop making payments under the Lease Agreements. AKB alleges that "[o]n or around May or June of 2009, [AKB was] having trouble coming up with all the funds to make payments required by the Lease Agreements." (CC Par. 2). According to AKB, "[i]n an attempt to work out a modification or extension of their lease agreement, [AKB] contacted US Bankcorp and spoke with a representative named Denise Anderson." (CC. Par. 3). AKB claims that Anderson "directed [AKB] to submit an application for modification of the lease agreements, which [AKB] did." (CC Par. 4). AKB contends that Anderson "also informed [AKB] to cease making payments on the lease agreements, and that US Bankcorp would take no action with respect to the lease agreements due to the pending modification." (CC Par. 5). AKB further alleges that it relied on Anderson's statements, ceased making payments, and after submitting an application for a modification of the Lease Agreements, AKB "received no contact from [Lyon] until [AKB] was served with the present lawsuit." (CC Par. 7). AKB contends that Lyon, in making the promise of forbearance and not honoring that promise, breached the implied duty of good faith and fair dealing, also referred to as the implied covenant of good faith and fair dealing.

A. Implied Duty under Illinois Law

Lyon argues that, under Illinois law, AKB cannot prevail on Count I. Under Illinois law, "the covenant of good faith and fair dealing is not an independent source of duties for the parties to a contract." Fox v. Heimann, 872 N.E.2d 126, 134 (Ill. App. Ct. 2007). The covenant is instead " used as a construction aid in determining the intent of the parties where an instrument is susceptible of two conflicting constructions." Id. (agreeing that a "breach of contract claim . . . premised on the assertion that [the defendants] had breached the implied covenant of good faith and fair dealing . . . [is not a] recognized cause of action in Illinois"). Thus, Count I, which AKB premises expressly on an alleged breach of the implied duty of good faith and fair dealing, (CC 9), fails to state a valid claim under Illinois law. We also note that AKB has not ...


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