United States District Court, N.D. Illinois, Eastern Division
July 20, 2015
TYPENEX CO-INVESTMENT, LLC, Plaintiff/Counter-Defendant,
SOLAR WIND ENERGY TOWER, INC., Defendant/Counter-Plaintiff, and COLUMBIA STOCK TRANSFER COMPANY, Defendant
[Copyrighted Material Omitted]
Typenex Co-Investment LLC, a Utah limited liability company,
Plaintiff: Jeremy C. Reutzel, LEAD ATTORNEY, PRO HAC VICE,
Bennett Tueller Johnson & Deere, Salt Lake City, UT; Brigman
Harman, PRO HAC VICE, Bennett Tueller Johnson & Deere, Salt
Lake City, UT; Scott L. Warner, Sunghee W Sohn, Francezk
Radelet P.c., Chicago, IL.
Solar Wind Energy Tower Inc, a Nevada corporation, Defendant,
Counter Claimant: Thomas G. Gardiner, LEAD ATTORNEY, Gardiner
Koch Weisberg & Wrona, Chicago, IL; Barry C. Owen, Gardiner
Koch Weisberg Wrona, Chicago, IL; Micah Jon Hughes, Gardiner
Koch Weisber & Wrona, Chicago, IL.
Columbia Stock Transfer Company, Defendant: Barry C. Owen,
Gardiner Koch Weisberg Wrona, Chicago, IL; Micah Jon Hughes,
Gardiner Koch Weisber & Wrona, Chicago, IL.
Columbia Stock Transfer Company, Counter Claimant: Barry C.
Owen, Gardiner Koch Weisberg Wrona, Chicago, IL.
Typenex Co-Investment LLC, a Utah limited liability company,
Counter Defendant: Jeremy C. Reutzel, LEAD ATTORNEY, Brigman
Harman, Bennett Tueller Johnson & Deere, Salt Lake City, UT;
Scott L. Warner, Franczek Radelet PC, Chicago, IL.
Solar Wind Energy Tower Inc, a Nevada corporation, Counter
Claimant: Micah Jon Hughes, Gardiner Koch Weisber & Wrona,
Opinion and Order
Scott Feinerman, United States District Judge.
2013, Solar Wind Energy Tower, Inc. ("SWET" ), gave
Typenex Co-Investment, LLC, a convertible note in exchange
for a $500,000 loan. When SWET refused to convert the debt
into equity, Typenex sued SWET and its transfer agent,
Columbia Stock Transfer Company, for breach of contract.
Docs. 1, 24. SWET answered and counterclaimed, alleging that
Typenex hoodwinked it into the deal. Doc. 27. Typenex moved
to dismiss the counterclaims, Doc. 29, and the court denied
that motion as moot when SWET filed amended counterclaims,
Docs. 39, 43. Typenex now moves to dismiss the amended
counterclaims and to strike SWET's eleventh affirmative
defense, which alleges fraud in the inducement. Doc. 40. The
motion is granted as to the contract counterclaims and denied
as to the fraud counterclaims and affirmative defense.
Rule 12(b)(6) motion, the court must accept the
counterclaims' well-pleaded factual allegations, with all
reasonable inferences drawn in SWET's favor, but not
their legal conclusions. See Smoke Shop, LLC v.
United States, 761 F.3d 779, 785 (7th Cir. 2014). The
court must also consider " documents attached to the
[counterclaims], documents that are critical to the
[counterclaims] and referred to in [them], and information
that is subject to proper judicial notice," along with
additional facts set forth in SWET's brief opposing
dismissal, so long as those additional facts " are
consistent with the pleadings." Phillips v.
Prudential Ins. Co. of Am., 714 F.3d 1017, 1020 (7th
Cir. 2013) (internal quotation marks omitted). The facts are
set forth as favorably to SWET, the non-movant, as those
materials allow. See Meade v. Moraine Valley
Cmty. Coll., 770 F.3d 680, 682 (7th Cir. 2014).
a publicly traded company registered in Nevada that develops
alternative energy technologies. Doc. 39 at ¶ 7. Typenex
is a Utah-based company whose principal
place of business is Illinois. In early 2013, Typenex
approached SWET with an offer of financing. Id. at
¶ ¶ 8-13. SWET was receptive but sought to clarify
the deal's timing. Id. at ¶ 14. Typenex
provided a " Term Sheet," which proposed that SWET
issue Typenex a $550,000 convertible note in exchange for
" [c]ash in the amount of $100,000 ... and $400,000 in
8% secured notes." Doc. 39-1 at 1. The Term Sheet
The notes issued by [Typenex] will be due 12 months from the
Initial Funding Date. The Investor Notes [also called the
" Secured Buyer Notes" or " Buyer Notes"
] will be prepaid based on the following schedule:
o $100,000 6 months after Closing
o $100,000 8 months after Closing
o $100,000 10 months after Closing
o $100,000 12 months after Closing
Ibid. (emphasis added). The same day that Typenex
provided SWET with the Term Sheet, Typenex's agent told
SWET's CEO that Typenex would provide funding pursuant to
this schedule. Doc. 39 at ¶ ¶ 15-16. The next day,
Typenex confirmed by email that " the buyer notes are to
be prepaid based on the schedule outlined in the term
sheet," adding that funding was often provided ahead of
schedule. Id. at ¶ 17.
Term Sheet contained a space for both parties to execute the
document and provided that by signing, the parties "
acknowledg[ed] their mutual consent to the above terms and
their intention to negotiate in good faith the contemplated
transaction." Doc. 39-1 at 4. At the same time, the Term
Sheet stated that it was " prepared for discussion
purposes only ...[,] is an indication of interest only, not
an offer to sell or purchase securities, and is not binding
on the parties pending execution of definitive
agreements." Ibid. Typenex and SWET spent the
next few days discussing the Term Sheet, and executed it on
April 24, 2013. Doc. 39 at ¶ ¶ 18-19. SWET made
clear that it needed to conclude the final agreement by May
13, 2013. Id. at ¶ ¶ 70-71. (The
counterclaims initially put the deadline at May 11,
id. at ¶ 26, but the paragraphs just cited
allege that funding had to be secured by May 13, and in fact
SWET did not conclude the deal until the later date,
id. at ¶ 32.)
then set about drafting the various documents that would
comprise the final agreement. Typenex emailed a partial set
of documents to SWET on May 2, but did not include copies of
the four Buyer Notes, which Typenex said it was still
preparing. Id. at ¶ ¶ 22-23, 27. On the
evening of Friday, May 10, Typenex's counsel sent SWET a
full set of documents, including the Buyer Notes.
Id. at ¶ 28. Typenex's counsel also sent
" redlines showing the changes we made to your last
version," but did not mention any other changes.
Id. at ¶ ¶ 28, 30-31; Doc. 41 at 18. On
May 13, with the deadline looming, SWET executed the
documents and completed the transaction. Doc. 39 at ¶
32. The following day, consistent with the schedule laid out
in the Term Sheet, Typenex made a $100,000 cash payment to
SWET. Id. at ¶ 34.
promising start was not to last. SWET says that it signed the
final agreement relying on the payment schedule set forth in
the Term Sheet. Id. at ¶ 33. According to that
schedule, after six months Typenex was to pay SWET $100,000
on the Buyer Notes. When the time came, however, Typenex paid
only $50,000. Id. at ¶ ¶ 35-36. Two months
after that, the Term Sheet said that SWET would receive
another $100,000, yet Typenex again paid only $50,000.
Id. at ¶ ¶ 39-40. Typenex ended up paying
SWET only $150,000 in the year after the closing, even though
the Term Sheet stated that Typenex would pay $400,000 during
that time. Id. at ¶ ¶ 45-46. SWET informed
Typenex in December 2013 that Typenex was in breach of its
funding obligations, but continued to make interest and
principal payments on the convertible note, totaling
$164,000. Id. at ¶ ¶ 37-38, 48.
part, Typenex argues that it fully complied with the terms of
the final agreement. It reasons as follows:
o Section 2 of each Buyer Note provides that " [u]nless
prepaid, all principal and accrued interest under this Note
is payable in one lump sum on the Buyer Note Maturity
Date." Doc. 39-4 at 1, 8, 15, 22.
o The " Buyer Note Maturity Date" means " the
date that is sixty (60) days following the occurrence of the
Maturity Date (as defined in the Lender Note) under the
Lender Note." Ibid. " Lender Note" is
another term for the " Secured Convertible Promissory
Note" that SWET issued to Typenex.
o The Secured Convertible Promissory Note defines "
Maturity Date" to mean " the date that is thirteen
(13) months after the Initial Installment Date," Doc.
39-3 at p. 29, § 27.27, and " Initial Installment
Date" to mean " the date that is one hundred eighty
(180) calendar days after the later of (i) the Issuance Date,
and (ii) the date the Initial Cash Purchase Price is paid to
[SWET]," id. at p. 14, § 8.
the clauses together, Typenex concludes that the Buyer Notes
did not become payable until about twenty-one months--sixty
days, plus thirteen months, plus 180 days--after
Typenex's initial $100,000 payment. Since the initial
payment occurred on May 14, 2013, Typenex concludes it had no
obligation to make additional payments until February 2015.
Typenex says nothing about how or why the payment schedule
set forth in the Term Sheet did not make it into the final
2014, Typenex instructed Columbia, SWET's transfer agent,
to convert some of the outstanding debt on the convertible
note into equity. Doc. 39 at ¶ 60. Typenex also
attempted to wire SWET $250,000. SWET refused to accept the
wire or to issue the stock, id. at ¶ ¶
61-62, precipitating this suit.
SWET's counterclaims sound in contract and two in tort,
but their gravamen is the same: Typenex did not tell SWET
that the final agreement that Typenex sent to SWET did not
require Typenex to make any payments on the Buyer Notes for
almost two years, even though Typenex assured SWET, first in
the Term Sheet and then orally and by email, that Typenex
would prepay the Buyer Notes based on the schedule in the
Term Sheet. Count I argues that Typenex breached the Term
Sheet by failing to negotiate in good faith, Doc. 39 at
¶ ¶ 65-74; Count II, that Typenex breached the
final agreement executed on May 13, 2013, by failing to make
payments pursuant to the schedule in the Term Sheet,
id. at ¶ ¶ 75-83; Count III, that SWET
committed securities fraud under 15 U.S.C. § 78c and
Rule 10b-5, id. at ¶ ¶ 84-99; and Count
IV, that SWET committed common law fraud, id. at
¶ ¶ 100-111. The parties assume that Illinois law
governs the contract and common law fraud claims, so that is
the law that the court will apply. See McFarland
v. Gen. Am. Life Ins. Co., 149 F.3d 583, 586 (7th Cir.
Breach of the Term Sheet (Count I)
Term Sheet signed on April 24, 2013 set forth starting
parameters and committed SWET and Typenex to " negotiate
in good faith the contemplated transaction." Doc. 39-1
at 4. " An agreement to
negotiate in good faith is a contract" binding on the
parties. Citadel Grp. Ltd. v. Wash. Reg'l Med.
Ctr., 692 F.3d 580, 592 (7th Cir. 2012) (applying
Illinois law, as do all federal decisions cited herein
regarding the state law claims). SWET argues that Typenex
breached its duty to negotiate in good faith by
misrepresenting the payment terms for the Buyer Notes,
charging that " [s]uch acts lack the very basis of
'good faith,' honesty." Doc. 45 at 5.
to tell a negotiating partner about a material change in
payment terms--particularly after giving assurances on the
subject--certainly sounds like bad faith. But agreements to
negotiate in good faith are not freestanding commitments to
perform in good faith generally. See Steven J.
Burton, " Breach of Contract and the Common Law Duty to
Perform in Good Faith," 94 Harv. L.Rev. 369,
372 n.17 (1980) (" The words 'good faith' appear
in a wide variety of ... contexts. Failure to keep different
contexts analytically distinct can result in much
confusion." ). Rather, agreements to negotiate in good
faith are keyed to reaching a later agreement--they are
commitments to work " toward the formation of a
contract." Venture Assocs. Corp. v. Zenith Data Sys.
Corp., 96 F.3d 275, 277 (7th Cir. 1996). The duty to
negotiate in good faith " prevents a party 'from
renouncing the deal, abandoning the negotiations[,] or
insisting on conditions that do not conform to the
preliminary agreement,'" all tactics that prevent an
agreement from even coming into being. Citadel Grp.,
692 F.3d at 592 (quoting Milex Prods., Inc. v. Alra Lab.,
Inc., 237 Ill.App.3d 177, 603 N.E.2d 1226, 1234, 177
Ill.Dec. 852 (Ill. App. 1992)). Consistent with the purpose
of agreements to negotiate in good faith, good-faith
negotiation cases decided by the Seventh Circuit have arisen
only when the negotiation process ground to a halt.
See id. at 582; Trovare Capital Grp.,
LLC, v. Simkins Indus., Inc., 646 F.3d 994 (7th Cir.
2011); Venture Assocs. v. Zenith Data Sys. Corp.,
987 F.2d 429 (7th Cir. 1993); A/S Apothekernes Labs. v.
I.M.C. Chem. Grp., Inc., 873 F.2d 155 (7th Cir. 1989);
Feldman v. Allegheny Int'l, Inc., 850 F.2d 1217
(7th Cir. 1988). SWET does not cite even a single case, in
any jurisdiction, in which a good-faith negotiation clause
was invoked to cure misconduct during the negotiations period
even though a final contract was reached.
already provides remedies for fraud, deceit, and the like in
the context of contract negotiations. See
Restatement (Second) of Contracts § 205, cmt. c
(1981) (" Particular forms of bad faith in bargaining
are the subjects of rules as to capacity to contract, mutual
assent and consideration and of rules as to invalidating
causes such as fraud and duress ...." ). Thus, a
good-faith negotiation clause guards against the risk not of
a bad deal, but of no deal at all. As a prominent contracts
scholar observed, " [f]air dealing has one meaning where
negotiations have resulted in an agreement" and " a
quite different meaning where negotiations have failed to
result in an agreement." E. Allan Farnsworth, "
Precontractual Liability and Preliminary Agreements: Fair
Dealing and Failed Negotiations," 87 Colum.
L.Rev. 217, 269 (1987). Here, Typenex's alleged
deception did not prevent SWET from concluding negotiations.
See id. at 275 (" [T]actics such as
fraud and duress are plainly unfair, but ordinarily induce
rather than obstruct agreement." ). Because Typenex
ultimately reached an agreement with SWET, SWET's remedy
lies outside the good-faith negotiation clause. Count I is
Breach of the Final Agreement (Count II)
next contention is that Typenex breached the final agreement
executed on May 13, 2013, by failing to perform
that agreement in good faith. (Unlike a duty to negotiate in
good faith, a duty to perform in good faith need not be
express and is implied in all contracts. See
Citadel Grp., 692 F.3d at 592; Restatement
(Second) of Contracts § 205.) Typenex responds that
the final agreement specifies that it did not have to pay off
the Buyer Notes until February 2015. " Illinois law
holds that parties to a contract are entitled to enforce the
terms to the letter and an implied covenant of good faith
cannot overrule or modify the express terms of a
contract." Cromeens, Holloman, Sibert, Inc. v. AB
Volvo, 349 F.3d 376, 395-96 (7th Cir. 2003).
does not contest Typenex's interpretation of the Buyer
Notes. Instead, it argues that the prepayment schedule in the
Term Sheet was also part of the final agreement. Doc. 45 at
6-7. This argument cannot be reconciled with the
agreement's integration clause, which states that the
agreement consists only of the Securities Purchase Agreement
and the other " Transaction Documents" :
This [Securities Purchase] Agreement, together with the other
Transaction Documents, constitutes and contains the
entire agreement and understanding between the parties
hereto, and supersedes all prior oral or written
agreements and understandings between Buyer, Company,
their Affiliates and Persons acting on their behalf with
respect to the matters discussed herein and therein, and,
except as specifically set forth herein or therein, neither
Company nor Buyer makes any representation, warranty,
covenant or undertaking with respect to such matters.
Doc. 39-2 at p. 25, § 14.7 (emphasis added). "
Transactions Documents" is defined to mean:
this Agreement, the Note, the Company Security Agreement ...,
the Transfer Agent Letter ..., the Warrants, the Investor
Security Agreement ..., and all other certificates ...,
documents, agreements, resolutions and instruments delivered
to any party under or in connection with this Agreement, as
the same may be amended from time to time.
Id. at p. 3.
expansive, the definition of " Transactions
Documents" does not include the Term Sheet. The Term
Sheet is not listed among the Securities Purchase Agreement,
the Note, or the other named documents. Nor is it a "
document ... delivered under or in connection with this
Agreement" --it cannot be, since it was delivered to
Typenex weeks before the Agreement and other documents were
even completed. Because the integration clause provides that
only the Transaction Documents are part of the final
agreement, and because the Term Sheet is not a Transaction
Document, SWET cannot rely on the Term Sheet to vary the
terms of the deal. See Vigortone AG Prods., Inc.
v. PM AG Prods., Inc., 316 F.3d 641, 644 (7th Cir. 2002)
(" an integration clause prevents a party to a contract
from basing a claim of breach of contract on agreements or
understandings, whether oral or written, that the parties had
reached during the negotiations that eventuated in the
signing of a contract but that they had not written into the
contract itself" ).
argues in the alternative that, if the Term Sheet is not part
of the final agreement, the documents that the parties signed
on May 13, 2013 fail to reflect the agreement they actually
reached. Doc. 45 at 7-8. This is a claim for reformation, not
breach. The court will address reformation below. For now, it
suffices to say that the integration clause requires that
Count II, as presently drafted, be dismissed.
The Fraud Claims (Counts III & IV)
brings fraud claims under both federal securities law and
Illinois common law. To plead a securities fraud claim under
Rule 10b-5, SWET must allege: " (1) a material
misrepresentation or omission by [Typenex]; (2) scienter; (3)
a connection between the misrepresentation or omission and
the purchase or sale of a security; (4) reliance upon the
misrepresentation or omission; (5) economic loss; and (6)
loss causation." Glickenhaus & Co. v. Household
Int'l, Inc., 787 F.3d 408, 414 (7th Cir. 2015). To
plead a common law fraud claim, SWET must allege: " (1)
a false statement of material fact; (2) [Typenex's]
knowledge that the statement was false; (3) [Typenex's]
intent that the statement induce the plaintiff to act; (4)
[SWET's] reliance upon the truth of the statement; and
(5) [SWET's] damages resulting from the reliance on the
statement." Massuda v. Panda Exp, Inc., 759
F.3d 779, 783 (7th Cir. 2014).
the state law fraud claim, Typenex contends that it was
merely expressing a " statement of future intent"
when it told SWET the Notes would be prepaid in accordance
with the Term Sheet. Doc. 41 at 12. True enough, a "
claim for fraud, promissory or otherwise, requires a showing
that, at the time the allegedly fraudulent statement was
made, it was an intentional misrepresentation."
Ass'n Ben. Servs., Inc. v. Caremark RX, Inc.,
493 F.3d 841, 853 (7th Cir. 2007). But whether or not Typenex
intended to keep its promises when it made them is disputed
and would be inappropriate to resolve on a motion to dismiss.
the federal fraud claim, Typenex argues that SWET has not
pleaded sufficient facts to support scienter. Doc. 41 at
12-13 n.8. The point is buried in a footnote, and might be
rejected on that ground alone. See Bakalis v.
Golembeski, 35 F.3d 318, 326 n.8 (7th Cir. 1994)
(holding that an argument " made only in a footnote in
the opening brief and ... not developed fully until the reply
brief" is forfeited). In any event, SWET has met its
burden under the federal securities law to " state with
particularity facts giving rise to a strong inference that
the defendant acted with the required state of mind." 15
U.S.C. § 78u-4(b)(2)(A).
complaint gives rise to a strong inference of scienter "
only if a reasonable person would deem the inference of
scienter cogent and at least as compelling as any opposing
inference one could draw from the facts alleged."
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551
U.S. 308, 324, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007).
Typenex says that the fact that it provided SWET with drafts
of the final documents three days ahead of the May 13 close
date shows that it lacked intent to defraud. No doubt, this
cuts against a finding of fraudulent intent. But the Supreme
Court has made clear that " [t]he inquiry ... is whether
all of the facts alleged, taken collectively, give
rise to a strong inference of scienter, not whether any
individual allegation, scrutinized in isolation, meets that
standard." Id. at 322-23. SWET also alleges
that it told Typenex the timing of the funding was important;
that Typenex twice pledged to abide by the schedule in the
Term Sheet; that Typenex identified some changes in the final
documents but not the omission of the payment schedule; and
that Typenex sent the critical documents to SWET only days
before it knew SWET needed to consummate the deal. These
allegations collectively give rise at the pleading stage to a
strong inference of scienter.
addition to evaluating the counterclaim in its entirety, the
court " must take into account plausible opposing
Id. at 323. Typenex drafted all the relevant
documents and was obviously privy to the negotiations, yet
never explains why, despite its promises, the Term
Sheet's payment schedule was left out of the final
agreement. This leaves somewhat unclear what opposing
inferences Typenex would have the court draw about the
negotiations leading up to the final agreement. Cf.
AnchorBank, FSB v. Hofer, 649 F.3d 610, 617 (7th
Cir. 2011) (" The inference of scienter that is raised
in the complaint remains strong in light of competing,
plausible explanations offered by Hofer ...." )
(emphasis added). After the parties struck a deal in
principle and as the May 13 deadline for a final agreement
was approaching, Typenex changed the payment terms
unilaterally and to its sole benefit, without specifically
mentioning that it was doing so. Perhaps Typenex genuinely
believed that SWET's lawyers would notice the change;
perhaps Typenex intended to make only a tentative promise
about the payment schedule, conveying that no payments could
be guaranteed for two years. But the facts as alleged are
equally if not more consistent with an intent to deceive SWET
into signing an agreement based on the mistaken assumption
that the documents mirrored the preliminary agreement except
where specified. " The inference that the defendant
acted with scienter need not be irrefutable, i.e.,
of the 'smoking-gun' genre, or even the 'most
plausible of competing inferences.'"
Tellabs, 551 U.S. at 324. Whatever innocent
interpretations a reasonable person might draw from
SWET's allegations, they at least give rise to a strong
inference that Typenex acted with the required intent.
as to both claims, Typenex maintains that even if it did act
with fraudulent intent, SWET could not reasonably have relied
on Typenex's false representations, both because the Term
Sheet was nonbinding and because SWET should have read the
final documents it was signing. Doc. 41 at 13-14. Courts have
repeatedly rejected fraud claims that rely on statements
(particularly oral ones) about the contents of a contract
where the party bringing the claim could have seen from the
written documents that those earlier representations were
false. See Kennedy v. Venrock Assocs., 348
F.3d 584, 592 (7th Cir. 2003) (" There is no actionable
fraud without reasonable reliance, and reliance cannot be
reasonable when it presupposes a failure to read clear
language." ); SEC v. Jakubowski, 150 F.3d 675,
681 (7th Cir. 1998) (" Over and again we say that people
claiming to be victims of securities fraud may not claim to
rely on oral statements inconsistent with written documents
(even tedious prospectuses) available to them." );
Northern Tr. Co. v. VIII S. Mich. Assocs., 276
Ill.App.3d 355, 657 N.E.2d 1095, 1103, 212 Ill.Dec. 750 (Ill.
App. 1995) (" [A party] is not justified in relying on
representations outside of or contrary to the contract he or
she signs where the signer is aware of the nature of the
contract and had a full opportunity to read the contract ....
The application of this rule is particularly appropriate
where the parties to the agreement are sophisticated business
persons." ) (internal quotation marks omitted); 319
S. La Salle Corp. v. Lopin, 19 Ill.App.3d 285, 311
N.E.2d 288, 292 (Ill. App. 1974) (" Plaintiffs maintain
... that defendants perpetrated a fraud in concealing the
fact that paragraph 21(e) had not been deleted from the final
draft of the lease. This charge is belied by the
uncontroverted evidence that plaintiffs ... executed the
final draft of the lease while in their attorney's
office, with no representatives of the defendants
present." ); Hurley v. Frontier Ford Motors,
Inc., 12 Ill.App.3d 905, 299 N.E.2d 387, 392 (Ill. App.
1973) (" One is ordinarily not justified in relying on a
misrepresentation as to the terms of a contract he signs when
he has been afforded the opportunity to
read it but through his neglect fails to do so." ). SWET
is a publicly traded company that was assisted by counsel;
even though it needed to secure funding by May 13, it had
three days to review the final documents before executing
them. Had SWET or its lawyers read the final documents sent
by Typenex, Typenex asserts, SWET should have realized that
Typenex had no obligation to pay the Notes until February
there is a catch. SWET contends it could not have discovered
Typenex's fraud by reading the draft documents because
the Buyer Notes did not unambiguously contradict the payment
schedule set forth in the Term Sheet. The Notes state: "
Unless prepaid, all principal and accrued interest
under this Note is payable in one lump sum on the Buyer Note
Maturity Date." Doc. 39-4 at 1, 8, 15, 22 (emphasis
added). The distinction between when the Notes would be
" prepaid" and when the Notes were " due"
also appears in the Term Sheet, Doc. 39-1 at 1 (" The
notes issued by Investor will be due 12 months from the
Initial Funding Date. The Investor Notes will be prepaid
based on the following schedule" ), and in the email
that Typenex sent to SWET, Doc. 39 at ¶ 17 (" the
buyer notes are to be prepaid based on the schedule outlined
in the term sheet" ). Because the Buyer Notes
allowed for prepayment, and because Typenex said in
the Term Sheet, orally, and by email that it would
prepay the Notes on a certain schedule, SWET insists that
" there is no reason that SWET would have learned of
Typenex's 'change of mind' regarding the
prepayment schedule after reading the Buyer Notes." Doc.
45 at 14. Typenex does not reply to this argument, which has
some force. See Assocs. In Adolescent
Psychiatry, S.C. v. Home Life Ins. Co., 941 F.2d 561,
571 (7th Cir. 1991) (" Documents that unambiguously
cover a point control over remembered (or misremembered, or
invented) oral statements. ... 'Unambiguously' is an
important qualification." ); Rowe v. Maremont
Corp., 850 F.2d 1226, 1234 & n.5 (7th Cir. 1988)
(similar). Given all these facts and circumstances, the court
concludes that SWET's reliance cannot be deemed
unreasonable on the pleadings as a matter of law.
might think all this is academic, because the final
agreement's integration clause shows that it was
unreasonable for SWET to rely on Typenex's earlier
representations. That would be wrong, for as the Seventh
Circuit has held, " fraud is a tort, and the parol
evidence rule is not a doctrine of tort law and so an
integration clause does not bar a claim of fraud based on
statements not contained in the contract."
Vigortone, 316 F.3d at 644-45; see also
Extra Equipamentos E Exportacao Ltda. v. Case Corp.,
541 F.3d 719, 723 (7th Cir. 2008) (same). Precisely because
an integration clause does not protect parties from fraud
suits sounding in tort, contract drafters sometimes include
so-called " no-reliance" or " big boy"
clauses (as in " we're big boys and can look after
ourselves" ) as well. A no-reliance clause, by making
clear that neither party has been induced into the contract
by possibly fraudulent, extra-contractual representations,
can be an effective defense to a fraud claim, much as an
integration clause can be a defense to a contract claim.
See Extra Equipamentos, 541 F.3d at 724;
Vigortone, 316 F.3d at 644; Rissman v.
Rissman, 213 F.3d 381, 383 (7th Cir. 2000).
Typenex does not argue that the Agreement contains a
no-reliance clause. It characterizes § 14.7 only as an
integration clause, and invokes that section only to defeat
SWET's contract, not fraud, claims. Doc. 41 at 7; Doc. 47
at 9. Any argument that § 14.7 bars SWET's fraud
claims is therefore forfeited, at least for
purposes of this motion. See Judge v.
Quinn, 612 F.3d 537, 557 (7th Cir. 2010) (" We have
made clear in the past that it is not the obligation of this
court to research and construct legal arguments open to
parties, especially when they are represented by
counsel." ) (internal quotation marks omitted). And even
if Typenex had made the argument, it is not clear that the
law always gives effect to a no-reliance clause, at least
without further factual inquiry that cannot be undertaken at
this stage of the litigation. As Judge Rovner has observed,
" although it may be determinative in many--and perhaps
most--cases, the existence of a non-reliance clause will not
automatically preclude damages for prior oral
statements." Rissman, 213 F.3d at 388 (Rovner,
J., concurring); see also Extra
Equipamentos, 541 F.3d at 725 (" [S]ome courts ...
require, before such a clause can be enforced, an inquiry
into the circumstances of its negotiation .... Whether
Illinois would permit or require such an inquiry we do not
know, but will assume an affirmative answer." ). Thus,
whether SWET reasonably relied on Typenex's statements
about prepayment remains a question of fact, and
Typenex's motion is denied as to Counts III and IV.
now to the issue of reformation: The amended counterclaims do
not mention reformation, leading Typenex to argue that any
such claim has been forfeited. Doc. 47 at 9-10. However, the
Seventh Circuit has long held that " [a] complaint need
not identify legal theories" and that " specifying
an incorrect theory is not a fatal error." Rabe v.
United Air Lines, Inc., 636 F.3d 866, 872 (7th Cir.
2011); see also Ryan v. Ill. Dep't of
Children & Family Servs., 185 F.3d 751, 764 (7th Cir.
1999) (" a plaintiff ... cannot plead herself out of
court by citing to the wrong legal theory or failing to cite
any theory at all" ).
said, SWET's presentation of its reformation claim leaves
much to be desired. In Illinois, reformation requires a
showing by clear and convincing evidence that " (1)
there has been a meeting of the minds resulting in an actual
agreement between the parties; (2) the parties agreed to
reduce their agreement to writing; and (3) at the time the
agreement was reduced to writing and executed, some agreed
upon provision was omitted or one not agreed upon was
inserted either through mutual mistake or through mistake
by one party and fraud by the other." Ind. Ins.
Co. v. Pana Comm. Unit Sch. Dist., 314 F.3d 895, 904
(7th Cir. 2002) (emphasis added); see also Klemp
v. Hergott Grp., Inc., 267 Ill.App.3d 574, 584-85, 641
N.E.2d 957, 204 Ill.Dec. 527 (Ill. App. 1994); Magnus v.
Lutheran Gen. Health Care Sys., 235 Ill.App.3d 173, 601
N.E.2d 907, 914-15, 176 Ill.Dec. 209 (Ill. App. 1992);
Restatement (Second) of Contracts § § 155,
166. Having adequately alleged fraud elsewhere in its
counterclaims, SWET perhaps has alleged sufficient facts to
state a viable reformation counterclaim. However, SWET does
not cite the above-referenced authorities in its brief
opposing dismissal. Instead, it cites two ERISA cases--
Grun v. Pneumo Abex Corp., 163 F.3d 411, 420 (7th
Cir. 1998), and Young v. Verizon's Bell Atlantic Cash
Balance Plan, 667 F.Supp.2d 850, 896-97 (N.D. Ill.
2009)--neither of which discuss or apply Illinois contract
law, and both of which deal only with reformation on the
ground of mutual mistake.
the scanty legal authority SWET provided in its brief and the
reformation claim's complete absence from the
counterclaims, SWET has not laid the proper groundwork for a
reformation claim. But because the fraud claims are
proceeding regardless, because SWET likely could allege
sufficient facts to make out a reformation claim (if it has
not done so already),
and because SWET's counterclaims have been tested by only
one motion to dismiss, the court will give SWET one chance to
amend its counterclaims to add a reformation claim if it
would like. See Runnion ex rel. Runnion v. Girl
Scouts of Greater Chi. & Nw. Ind., 786 F.3d 510, 519
(7th Cir. 2015) (" Ordinarily, ... a plaintiff whose
original complaint has been dismissed under Rule 12(b)(6)
should be given at least one opportunity to try to amend her
complaint before the entire action is dismissed." ). If
it does replead, SWET should make clear whether it is
proceeding under a mutual mistake theory, a
unilateral-mistake-plus-fraud theory, or both, and should
plead facts that satisfy the other elements for reformation
under Illinois law.
The Fraud Affirmative Defense
final matter is SWET's eleventh affirmative defense,
which alleges fraud in the inducement. Doc. 27 at p. 22,
¶ 11 (" Plaintiff made material misrepresentations,
including providing false statements and valuations, to
induce Defendant ... to enter into the contract
documents." ). Typenex argues that this defense does not
state the circumstances of the misrepresentations with
particularity and should be dismissed for failure to comply
with Rule 9(b). Doc. 41 at 14-15.
Affirmative defenses are pleadings and, therefore, are
subject to all pleading requirements of the Federal Rules of
Civil Procedure." Heller Fin., Inc. v. Midwhey
Powder Co., Inc., 883 F.2d 1286, 1294 (7th Cir. 1989).
However, SWET's fraud affirmative defense clearly speaks
to the same fraud alleged in SWET's counterclaims.
Indeed, aside from the particularity argument, both parties
assume that the affirmative defense and Counts III and IV of
the amended counterclaims rise and fall together. Doc. 41 at
15; Doc. 45 at 15. It would serve no purpose to require SWET
to replead the affirmative defense to incorporate facts that
are already part of its counterclaims. The counterclaims have
been pleaded with particularity, and that is enough.
foregoing reasons, Typenex's motion to dismiss is granted
as to Counts I and II of the counterclaims, and denied as to
Counts III and IV of the counterclaims and SWET's
eleventh affirmative defense. SWET has until August 10, 2015
to file amended counterclaims that seek to plead reformation
or other contract-based counterclaims. If SWET repleads,
Typenex will have until August 31, 2015 to answer the fraud
counterclaims (assuming they remain in the same general form)
and to answer or otherwise plead to the contract
counterclaim(s). If SWET does not replead, Typenex shall
answer the fraud counterclaims by August 24, 2015.