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Lyon Financial Services, Inc. v. Illinois Paper and Copier Co.

United States Court of Appeals, Seventh Circuit

October 9, 2013

LYON FINANCIAL SERVICES, INC., d/b/a U.S. Bancorp Business Equipment Finance Group, Plaintiff-Appellant,

Argued Dec. 5, 2012.

Debra Devassy Babu, Attorney, Askounis & Darcy, P.C., Chicago, IL, for Plaintiff-Appellant.

Andrew T. Staes, Attorney, Staes & Scallan, Chicago, IL, for Defendant-Appellee.

Before MANION and SYKES, Circuit Judges, and DARROW, District Judge. [*]

Page 756

SYKES, Circuit Judge.

This appeal presents a question with important implications for commercial transactions: When a representation of law is made in a contract, when (if ever) is it actionable? The question arises in the context of a commercial financing arrangement between Illinois Paper and Copier Company, a seller of office equipment, and Lyon Financial Services, Inc., a finance firm based in Minnesota. Under a master contract signed in October 2008 and governed by Minnesota law, Lyon had a right of first refusal to provide lease financing for Illinois Paper's customers. Under the contract Lyon had the option to purchase office equipment supplied by Illinois Paper and lease the equipment to Illinois Paper's customers who were interested in this form of financing. Illinois Paper expressly warranted in the contract that " all lease transactions presented to [Lyon] for review are valid and fully enforceable agreements."

At issue here is a lease of office equipment to the Village of Bensenville, Illinois. Lyon purchased a copy machine from Illinois Paper and leased it to the Village for a term of six years. Under Illinois law, however, the lease was unenforceable; the Illinois Municipal Code provides that municipal equipment leases may not exceed five years. When the Village stopped paying, Lyon sued Illinois Paper for breach of the contractual warranty. Illinois Paper argued that the warranty was a representation of law, not fact, and as such was not actionable in a suit for breach of contract or warranty. The district court agreed and granted Illinois Paper's motion for judgment on the pleadings.

Because Minnesota law applies, we are called on to predict how the Minnesota Supreme Court would answer the central legal question presented here. We find ourselves genuinely uncertain about the answer. In the tort context, Minnesota courts adhere to the maxim that a person may not rely on another's representation of law, so where reliance is an element of a tort claim (as in cases alleging fraud), representations of law are not actionable. The question has not arisen in the contract setting, however. The Minnesota Supreme Court has not addressed the enforceability of representations of law in contract or warranty law. Furthermore, although federal courts have predicted that reliance would be an element of a breach-of-warranty claim in Minnesota, the Minnesota Supreme Court has not grappled with the issue for more than 60 years, and the prevailing understanding of warranty has since changed. In the absence of more recent controlling precedent, the best course is to ask the state supreme court for a definitive resolution of these important questions of state law. We respectfully certify the questions set forth at the end of this opinion to the Minnesota Supreme Court.

I. Background

Illinois Paper, a Delaware corporation based in Bolingbrook, Illinois, sells copy machines and other office equipment. Lyon Financial Services, a Minnesota corporation headquartered in Marshall, Minnesota, is a financial-services firm specializing in business-equipment financing. Lyon is a subsidiary of U.S. Bancorp and does business as U.S. Bancorp Business Equipment Finance Group.

In October 2008 Lyon and Illinois Paper entered into a master agreement providing that Lyon would have the " first right of review" of all of Illinois Paper's " maintenance inclusive transactions" for customers inquiring about lease financing. For a period of 90 days from the date of the contract, Illinois Paper agreed to forward to Lyon any proposed transactions meeting that description and Lyon had the option to provide the financing. In the " Representations and Warranties" section

Page 757

of the agreement, Illinois Paper warranted that " all lease transactions presented [to Lyon] for review are valid and fully enforceable agreements." Any leases financed by Lyon were nonrecourse to Illinois Paper unless Illinois Paper breached the legal enforceability warranty or any of its other warranties in the agreement. Finally, the master contract contains a choice-of-law clause providing that Minnesota law applies.

This case centers on a financing arrangement for office equipment supplied by Illinois Paper to the Village of Bensenville, Illinois, soon after the master contract was executed. It's undisputed that Lyon purchased a copy machine from Illinois Paper and leased it to the Village, but the parties disagree about the precise circumstances under which the transaction was arranged. Lyon insists that the lease agreement was " presented" by Illinois Paper (in the words of the warranty) and was drafted to Illinois Paper's specifications. Illinois Paper contends that the transaction was wholly arranged by Lyon based on its preexisting relationship with the Village. Lyon had financed copier equipment for the Village in the past, through another supplier. Illinois Paper contends that it was brought in only to sign the master agreement and supply the equipment at issue here. Indeed, the master agreement is a U.S. Bank form contract (recall that Lyon is a subsidiary of U.S. Bancorp).[1]

Either way, it's clear that Lyon purchased the copier the Village wanted for a price of $510,658 and in turn leased it to the Village.[2] The lease agreement— signed a week after the master contract was executed in October 2008— listed the Village as the " customer," Lyon as the " owner" of the copier, and Illinois Paper as the " supplier." The Village was required to make monthly payments of $9,500 for 72 months (six years), and Lyon's remedy for nonpayment was repossession of the equipment.

In mid-2010— less than two years into the lease— the Village stopped paying, asserting that the lease was unenforceable under the Illinois Municipal Code, which expressly limits municipal equipment leases to no more than five years. See 65 ILL. COMP. STAT.. 5/11-76-6 (1961). Lyon had no remedy against the Village, so it filed this suit against Illinois Paper for breach of contract. The complaint sought damages for Lyon's lost lease payments— an amount totaling more than $500,000— plus interest, attorney's fees, and costs. Illinois Paper responded with several affirmative defenses and also disputed the claimed amount of damages.[3] It also counterclaimed

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for breach of fiduciary duty and aiding and abetting breach of fiduciary duty. Finally, Illinois Paper filed a third-party complaint against the Village and the official who signed the lease, alleging fraud and breach of contract.

The district court dismissed Illinois Paper's counterclaims and its third-party complaint with prejudice. That left Lyon's claim for breach of contract, which was based on the warranty in the master contract regarding the enforceability of the lease. Both parties moved for judgment on the pleadings. The district court granted Illinois Paper's motion and denied Lyon's cross-motion. The court acknowledged that the Minnesota choice-of-law clause was likely enforceable but analyzed the claim under Illinois law on the assumption that the two states' laws were materially the same. The court then construed Lyon's claim as one for breach of warranty and concluded that Illinois Paper's warranty that the leases were " valid and fully enforceable" was a representation of law. The court explained that reliance is an element of a breach-of-warranty claim under Illinois law, and because no one may reasonably rely on a counterparty's representation of law, the breach-of-warranty claim necessarily failed.

Lyon moved for reconsideration based on the district court's decision to apply Illinois rather than Minnesota law and also challenged the court's decision to treat the alleged breach of contract as a breach of warranty. In the meantime, the district judge assigned to the case died,[4] and the case was administratively transferred to another judge [5] The new judge denied the motion for reconsideration, but this time considered the arguments under Minnesota law. The judge construed the warranty as a representation of law and held that it was not actionable under either a breach-of-warranty or a breach-of-contract theory. The court also held that the promise of enforceability did not function as a guaranty; although Illinois Paper had agreed to " indemnify and hold [Lyon] harmless from any loss or claim resulting from [Illinois Paper's] breach" of the warranties in the master contract, Illinois Paper had not guaranteed fulfillment of the Village's obligations under the lease agreement. The court entered final judgment in favor of Illinois Paper, and this appeal followed.

II. Analysis

We review de novo the district court's decision granting Illinois Paper's motion for judgment on the pleadings, construing the facts and drawing reasonable inferences in favor of Lyon. See ProLink Holdings Corp. v. Fed. Ins. Co., 688 F.3d 828, 830 (7th Cir.2012). The claim arises solely under state law; the case is in federal court based on diversity of citizenship. See 28 U.S.C. ยง 1332. " When sitting in diversity, ‘ our task is to ascertain the substantive content of state law as it either has been determined by the highest court of the state or as it would be by that court if the present case were before it now.’ " Craig v. FedEx Ground Package Sys., Inc., 686 F.3d 423, 426 (7th Cir.2012) (quoting Thomas v. H & R Block E. Enters., Inc., 630 F.3d 659, 663 (7th Cir.2011)).

A. Minnesota Law Applies

The Lyon-Illinois Paper master contract provides that the " [a]greement and performance hereunder shall be governed by the laws of the State of Minnesota." With exceptions not relevant here, Illinois generally enforces contractual ...

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