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Lyon Financial Services, Inc. v. Player

October 1, 2010

LYON FINANCIAL SERVICES, INC. PLAINTIFF,
v.
SHELDON PLAYER, DONNA MALONE, MARK ANSTETT, MACHINE TOOLS DIRECT, INC. AND GEORGE W. FERGUSON, DEFENDANTS.



The opinion of the court was delivered by: Judge Blanche M. Manning

MEMORANDUM AND ORDER

Plaintiff Lyon Financial Services, Inc. contends that it is the victim of a complicated scheme concocted by the defendants involving leases of substandard equipment used during the manufacturing of semiconductors. Before the court are two motions. In the first, two of the defendants, Machine Tools Direct, Inc. and George Ferguson, ask the court to dismiss the fraud claim against them because the complaint identifies no fraudulent statements made by them to Lyon Financial. In the second motion, Lyon Financial seeks a default judgment against defendants Sheldon Player and Donna Malone based upon their failure to timely file an answer or otherwise plead. For the reasons that follow, the motion to dismiss is granted and the motion for a default judgment is denied without prejudice.

BACKGROUND

On March 19, 2007, Charter Capital leased an industrial saw to Equipment Acquisition Resources, a company owned by defendants Sheldon Player and Donna Malone. Under the terms of the lease, Equipment Acquisition Resources was to make monthly payments of $2,737.95 for 36 months to Charter Capital. Six days earlier, on March 13, 2007, Charter Capital had purchased the saw from defendant Machine Tools Direct for $75,000. The invoice for the purchase directed Machine Tools Direct to deliver the saw directly to Equipment Acquisition Resources on March 15, 2007. One day after entering into the lease, Charter Capital assigned the lease to plaintiff Lyon Financial Services, which does business as U.S. Bancorp Manifest Funding Services.

Three more leases of equipment to Equipment Acquisition Resources followed. The second lease occurred on May 25, 2007, when Lyon Financial leased a second industrial saw to Equipment Acquisition Resources, this time for $2,764.50 each month for 36 months. Lyon Financial had purchased the saw from Machine Tools Direct on April 17, 2007 for $75,000. The invoice for the purchase directed Machine Tools Direct to deliver the saw directly to Equipment Acquisition Resources on May 10, 2007.

The third lease occurred on November 16, 2007, when TMN Financial Services leased to Equipment Acquisition Resources a third industrial saw for $5,853.32 a month for 60 months. Equipment Acquisition Resources president Mark Anstett and owner Donna Malone both signed the lease as guarantors. TMN Financial had purchased the saw from Machine Tools Direct on November 8, 2007, for $265,000. The invoice for the purchase directed Machine Tools Direct to deliver the saw directly to Machine Tools Direct on November 16, 2007. TMN Financial immediately assigned the lease to Lyon Financial.

The fourth and final lease occurred on August 8, 2008, when TMN Financial leased to Equipment Acquisition Resources three pieces of equipment: a Laurier Series DS Model 3000 Tester for Rounding; a Laurier Series DS Model 7000 Series Tester for Edging, and a KLC Tencor Model 5107 Analyzer. Under the terms of the lease, Equipment Acquisition Resources agreed to monthly payments of $32,019 for 48 months, and Anstett and Malone again signed as guarantors. TMN Financial had purchased the three items from Machine Tools Direct on August 4, 2008, for a total of $1,197,000. The invoice for the purchases directed Machine Tools Direct to deliver the equipment directly to Equipment Acquisition Resources on August 5, 2008. Again, TMN Financial immediately assigned the lease to Lyon Financial. More than a year later, Lyon Financial sold the fourth lease to CoActiv Capital Parties on October 23, 2009, but CoActive eventually demanded that Lyon Financial repurchase the loan for $900,000 "based on Lyon's alleged misrerpresentations regarding [Equipment Acquisition Resources]'s business model and that the Fourth Lease Equipment was new." Complaint [1-1] ¶ 58.

According to Lyon Financial, Equipment Acquisition Resources failed to make all of the payments required by each of the leases. Specifically, it made only 21 of the 36 payments due under the first lease, 25 of the 36 payments due under the second lease, 21 of the 60 payments due under the third lease, and none of the payments due under the fourth lease. On October 23, 2009, Equipment Acquisition Resources filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code.

Lyon Financial has not sued Equipment Acquisition Resources, presumably because of the automatic stay occasioned by the bankruptcy filing. Instead, it has sued Anstett (Count I) and Malone (Count II) as guarantors of the third and fourth leases. It has also sued Machine Tools Direct, its president, George Ferguson, along with Anstett, Malone, and Player for fraud (Count III). Specifically, the complaint alleges that the defendants defrauded Lyon Financial by selling to it or its assignors equipment that was inferior to the equipment described on the invoices, and then splitting the proceeds of the sale received from Lyon Financial or its assignors.

Defendants Machine Tools Direct and Ferguson have filed a motion to dismiss the claim against them, arguing that (1) except for the second lease, the alleged misrepresentations were made not to Lyon Financial but rather to its assignors, and Lyon Financial cannot bring a claim of fraud on behalf of its assignors, and (2) the allegations fall short of the heightened pleading requirements for claims of fraud under Federal Rule of Civil Procedure 9(b). The other two defendants, Player and Malone, have not filed an answer or any other pleading in response to the complaint. As a result, Lyon Financial seeks a default judgment against them.

ANALYSIS

I. Motion to Dismiss

A. Standard of Review

To succeed on a claim of fraud under Illinois law (which the parties appear to agree governs), a plaintiff must be able to establish each of the following elements: (1) a false statement of material fact; (2) known by the party making the statement to be false; (3) made with the intention of inducing the other party to act; (4) which caused the other party to act in reliance upon the truth of the statement; and (5) damages caused by the other party's reliance upon the false statement. See Thompson's Gas & Elec. Service, Inc. v. BP America Inc., 691 F. Supp. 2d 860,870 (N.D. Ill. 2010). Under Rule 9(b), claims of fraud are subject to heightened pleading requirements, and the allegations of the circumstances of the fraud must include "'the who, what, when, where, ...


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