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Tcfif Inventory Finance, Inc. v. Appliance Distributors, Inc.

United States District Court, N.D. Illinois, Eastern Division

February 28, 2014

APPLIANCE DISTRIBUTORS, INC. d/b/a ADI, et al., Defendants.


JOAN H. LEFKOW, District Judge.

Plaintiff TCF Inventory Finance, Inc. ("TCFIF"), filed an eight-count complaint (dkt. 1) in connection with a loan it made to Appliance Distributors Inc., d/b/a/ ADI ("ADI"), and which various entities and individuals guaranteed. After ADI defaulted on its obligations, TCFIF sought relief from the former owners of ADI, defendants Fredella Prather and Donnie Prather, Jr. (together, "the Prathers"), whom TCFIF asserts guaranteed the loan. TCFIF originally brought this suit not just against the Prathers but also against ADI and the other guarantors of the loan: Prather Services, Inc.; Wade and Rebecca Kundinger (together, "the Kundingers"); Kundinger Holding Company, Inc.; and Sundrop Holding Group, Inc. ( See dkt. 1.) TCFIF voluntarily dismissed suit against the Kundingers (dkt. 14), and the court entered default judgment against all other defendants save the Prathers (dkt. 30). Pending before the court is TCFIF's motion for summary judgment against the Prathers (dkt. 52), the Prathers' cross-motion for summary judgment in their favor (dkt. 60), and the Prathers' motion to strike certain facts asserted by TCFIF (dkt. 74). TCFIF's motion for summary judgment is granted, the Prathers' cross-motion is denied, and their motion to strike is granted in part and denied in part.[1]


Summary judgment obviates the need for a trial where there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(a). A genuine issue of material fact exists if "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). To determine whether any genuine fact issue exists, the court must pierce the pleadings and assess the proof as presented in depositions, answers to interrogatories, admissions, and affidavits that are part of the record. Fed.R.Civ.P. 56(c). In doing so, the court must view the facts in the light most favorable to the non-moving party and draw all reasonable inferences in that party's favor. Scott v. Harris , 550 U.S. 372, 378, 127 S.Ct. 1769, 167 L.Ed.2d 686 (2007). When considering cross-motions for summary judgment, the court must be careful to draw reasonable inferences in the correct direction. See, e.g., Int'l Bhd. of Elec. Workers, Local 176 v. Balmoral Racing Club, Inc. , 293 F.3d 402, 404 (7th Cir. 2002). The court may not weigh conflicting evidence or make credibility determinations. Omnicare, Inc. v. UnitedHealth Grp., Inc. , 629 F.3d 697, 704 (7th Cir. 2011).

If a claim or defense is factually unsupported, it should be disposed of on summary judgment. Celotex Corp. v. Catrett , 477 U.S. 317, 323-24, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The party seeking summary judgment bears the initial burden of proving there is no genuine issue of material fact. Id . at 323. In response, the non-moving party cannot rest on bare pleadings alone but must designate specific material facts showing that there is a genuine issue for trial. Id. at 324; Insolia v. Philip Morris Inc. , 216 F.3d 596, 598 (7th Cir. 2000).


The Prathers are the former owners of ADI, an appliance distribution business they operated for a number of years before selling it to the Kundingers in August 2010. While the Prathers ran ADI, it was financed through a line of credit that the Prathers opened in 2009 with TCFIF pursuant to an inventory security agreement ("the security agreement"). Under the security agreement, TCFIF agreed to provide "floor plan financing, " under which it would finance ADI's acquisition of inventory in its ordinary course of business. In exchange, ADI agreed to make payments to TCFIF as required by the terms of the security agreement.

The Prathers decided to sell ADI in 2010 and identified the Kundingers as potential purchasers. The two couples set a closing date of August 5, 2010. Prior to closing, the Prathers contacted TCFIF about continuing to provide financing to ADI following the sale. After performing a credit review of ADI using projected financials under the Kundingers' ownership, TCFIF notified the Prathers and Kundingers on July 21, 2010 that TCFIF would continue its line of credit to ADI after the sale subject to a litany of requirements. (Dkt. 71, Ex. 1.A.) One of these requirements was that the Prathers execute a personal guaranty of the financing agreement "[w]ithin 3 [w]eeks of [c]losing." ( Id. )

TCFIF and the Prathers began to negotiate the terms of this guaranty, and, in particular, its duration. At the outset, TCFIF requested that the Prathers guarantee liabilities under the security agreement for two years post-sale. The Prathers objected. Fredella Prather sent an email on July 13, 2010, to Mary Alice Warren, a senior corporate credit manager at TCFIF, stating that six months was the most she "would be interested in signing a personal guaranty" because that was the amount of time she and Donnie "will physically be here" at ADI after the sale to assist with the transition. (Dkt. 67, Ex. 4 at 2.) Warren suggested 18 months, which she explained was "based on your six months of hands-on training [at ADI] plus twelve months of phone training" that the Prathers had agreed to provide to the Kundingers.[3] ( Id .) Warren further informed Fredella Prather that TCFIF was "firm on the 18 months" but it could call a special credit committee meeting to discuss the issue. ( Id. at 1.) Warren and Fredella Prather continued their email exchange in July, with Fredella Prather stating that the Prathers' attorney preferred the personal guaranty be limited to 12 months and Warren responding that TCFIF had already "compromised on 18 months" as opposed to 24 months. (Dkt. 61, Ex. 6 at 1.) TCFIF sent the Prathers and Kundingers an updated letter with the requirements for continued financing on August 3, 2010, reflecting which conditions had already been fulfilled. ( See dkt. 67, Ex. 3.) The letter reiterated that within three weeks of closing, the Prathers would need to execute the personal guaranty "limited to $500, 000 and 18 months (limitations are post closing)." ( Id .)

On the date of closing, August 5, 2010, Warren forwarded Fredella Prather and the Kundingers an email she had previously sent Fredella Prather on July 16, 2010 with the documents that the Kundingers would need to sign at closing. These documents included an addendum to the security agreement, a corporate incumbency certificate for ADI, and a corporate incumbency certificate for Prather (but not the guaranty). In the body of the August 5, 2010 email, Warren wrote, "Our Legal Department has not yet reviewed and approved the Personal Guaranty and Debt Sub Agreements which had to be customized for this transaction. I hope to have those documents within the next week." (Dkt. 61, Ex. 8 at 1.)

The Prathers did execute a personal guaranty at the closing, however ("the guaranty"), entered into "[f]or value received and in consideration of any loan or other financial accommodation of any kind heretofore, nor or hereafter made or given by [TCFIF] to [ADI]."[4] ( See dkt. 54, Ex. 1.B ("guaranty") at 1.) It limited the Prathers' liability to "an amount equal to $500, 000.00" and provided that the Prathers' liability "shall not extend to any Liabilities created after February 5, 2012, " i.e. , 18 months past closing. ( Id. ) The last paragraph provides it would "continue in effect for a period of ten (10) years" starting August 5, 2010. ( Id. at 3.) Wade Kundinger also executed an addendum to the security agreement on August 5, 2010, as the new owner of ADI. (Dkt. 54, Ex. 1.A.)

The next day, the lawyer who oversaw the closing sent Warren a letter, stating, "Pursuant to your letter dated August 3, 2010 to Wade & Rebecca Kundinger, Donnie & Fredella Prather, and Appliance Distributors, Inc., enclosed please find the following:... Individual Limited Guaranty (Donnie & Fredella Prather) (original)." (Dkt. 71, Ex. 1.B.) TCFIF confirmed receipt of the signed guaranty in a letter to the Kundingers and the Prathers on September 1, 2010, discussing which financing requirements were still outstanding. The letter states, "Within 3 Weeks of Closing - Execution of new personal guaranty by Donnie and Fredella Prather, limited to $500, 000 and 18 months (limitations are post closing). - Received 8/10/2010, this condition has been fulfilled." (Dkt. 71, Ex. 2.A (emphasis in original).)

Over the course of the fall of 2010, the relationship between the Prathers and Kundingers deteriorated as inconsistencies in ADI's financial records came to light and the Kundingers alleged the Prathers had made misrepresentations regarding ADI during the sale.[5] Rebecca Kundinger emailed Warren on November 2, 2010 that she was meeting with Fredella Prather the next day to review audit sheets. (Dkt. 67, Ex. 8.) Warren responded that she was "so glad to hear that Fredella Prather is back to help figure this out-I was distressed to hear that she & Donnie had gone since their staying on-site for six months had been an important consideration of the credit approval." ( Id. )

ADI did not fare well under the Kundingers' leadership, and TCFIF declared ADI to be in default under the security agreement on July 13, 2011 by way of a letter it sent to Wade Kundinger, copying the Prathers. (Dkt. 67, Ex. 9.) The letter required ADI to fulfill certain conditions to retain its line of credit, including providing TCFIF with "An Amendment to the Individual Guaranty from Donnie and Fredella Prather extending the termination date from 2/5/2012 to 8/5/2013, within 60 days of the date of this letter."[6] ( Id. at 1.) But ADI continued to have problems paying TCFIF and ultimately breached its obligations under the security agreement by failing to make a full and timely payment of the amounts due. Accordingly, TCFIF sent written notice of default to ADI and the Prathers on November 7, 2011, and again on November 16, 2011. (Dkt. 54, Exs. 1.C, 1.D.) The second notice informed them of past due payments of $179, 205.74 and demanded payment of this amount by November 25, 2011. The letter noted that by copying the guarantors, they were "hereby notified of the matters herein and any demand made upon [ADI] is also made upon each guarantor." ( Id. at Ex. 1.D.) But this payment was not made, prompting TCFIF to exercise its contractual right under the security agreement to accelerate all amounts due and owing by ADI. On December 22, 2011, TCFIF sent a notice to Wade Kundinger, copying the Prathers, demanding payment of the whole amount due under the financing agreement, $558, 304.15. (Dkt. 54, Ex. 1.E.) The Prathers and ADI failed to make this payment.

During this period, TCFIF took steps to monitor and protect its security interest while ADI worked to repay TCFIF.[7] But despite sending an employee to ADI's premises to monitor activities, [8] TCFIF discovered that some of ADI's inventory remained unaccounted for when ADI shut down on December 30, 2011. In fact, when ADI closed, the inventory shortfall had increased to $301, 869 from $180, 669.73 on December 16. ( See dkt. 68, Ex. 9 at 1-2.) In January 2012 TCFIF began repossessing inventory from ADI, which it sold through private sale to Pieratt's, another local appliance distributor, or returned to manufacturers. It applied the amounts received from the liquidation of the inventory to the outstanding amount owed by ADI and the Prathers. TCFIF did not notify the Prathers ten days before it disposed of the inventory, even though the guaranty provided, "Any notice of disposition shall be deemed reasonably and properly given if given to the Guarantor at least 10 days before such disposition in accordance with the notice provision below." (Guaranty at 2.)

TCFIF now seeks $264, 260.22 for inventory it was unable to repossess[9] and $5, 628.40 for the deficiency balance for repossessed inventory resold to manufacturers pursuant to repurchase agreements.[10] It also seeks interest, costs, and ...

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