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

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

March 23, 2017

LYON FINANCIAL SERVICES, INC. d/b/a, U.S. BANCORP BUSINESS EQUIPMENT FINANCE GROUP, Plaintiff,
v.
ILLINOIS PAPER AND COPIER COMPANY and VILLAGE OF BENSENVILLE, Defendants.

          MEMORANDUM OPINION AND ORDER

          REBECCA R. PALLMEYER, United States District Judge

         In 2008, the Village of Bensenville (“the Village”) decided to replace its copier equipment. Village officials met with a supplier, Illinois Paper and Copier Company (“Illinois Paper”), but did not purchase the equipment directly from Illinois Paper. Instead, the parties arranged a transaction in which Lyon Financial Services, a subsidiary of U.S. Bank (“Lyon”), provided financing. The transaction ultimately consisted of two parts: Lyon purchased more than $500, 000 worth of copier equipment from Illinois Paper pursuant to a contract called the “Partnership Agreement.” Lyon then provided the copier equipment to the Village for 72 monthly payments of $9, 500.00 under a “Value Lease Agreement” (the “Lease Agreement”). Critically, in the Partnership Agreement, Illinois Paper guaranteed to Lyon that the Lease Agreement was “valid and fully enforceable.” But by the end of 2009, the Village declared that the Lease Agreement was unenforceable under relevant provisions of Illinois law. This declaration came after the Village had made only 19 payments on the agreement, but the copiers had lost 95% of their resale value-rendering Lyon unable to mitigate its losses. Lyon sued Illinois Paper in November 2010 for breach of contract. After four years of litigation, Lyon added a count, in the alternative, for breach of contract against the Village.

         This $500, 000 dispute has been thoroughly litigated and has generated rulings from the Seventh Circuit, the Supreme Court of Minnesota, and this court. The parties' final summary judgment motions are before the court. For the reasons below, the court grants the Village's motion for summary judgment, and grants in part Lyon's motion for summary judgment to recover interest from Illinois Paper which exceeded the Village's authority to agree to pay.

         BACKGROUND

         I. Factual background

         The facts and procedural history of this matter are set forth in an earlier summary judgment opinion. See Lyon Fin. Servs., Inc. v. Illinois Paper & Copier Co., No. 10 C 7064, 2016 WL 147654, at *1-10 (N.D. Ill. Jan. 13, 2016). As explained there, the parties dispute the nature of the agreement by which the Village of Bensenville obtained copiers and related equipment. In October 2008, the Village executed a document entitled “Value Lease Agreement” (Village of Bensenville's LR 56.1 Statement of Material Facts (hereinafter “Village SOF”) [237-1], at ¶ 6), which purports to be a lease agreement in which U.S. Bancorp Equipment Finance Group leased copiers to the Village in return for 72 monthly payments of $9, 500.00. (Value Lease Agreement (hereinafter “Lease Agreement”), Ex. 2 to 2d Am. Compl. [219-1], at 1.) The agreement by its terms gives the Village the option to purchase the equipment at the end of the contract term for the equipment's “fair market value.” Id. Lyon Financial Services, the plaintiff in this matter, is a subsidiary of U.S. Bank, and where the agreements refer to U.S. Bank or U.S. Bancorp, Lyon is the party in interest.[1] The Lease Agreement identifies Illinois Paper and Copier Company as the “supplier” of the equipment. (Lease Agreement at 1.)

         During a Special Village Board of Trustees Meeting on October 27, 2008, the Village President and Village Board approved Resolution No. R-165-2008, entitled “A Resolution Authorizing the Execution of an Agreement with Illinois Paper and Copier, Inc. for Certain Photocopier Services.” (See Resolution No. R-165-2008, Ex. 3 to Illinois Paper Statement of Undisputed Facts [233-3].) The same day, Village Manager James Johnson executed the Lease Agreement on behalf of the Village. (Lease Agreement at 1.) Lyon countersigned the Lease Agreement in December 2008. (Lyon Statement of Additional Undisputed Facts (hereinafter “Lyon SOF”) [244 at p. 7], [2] at ¶ 2).

         Just a few days earlier, on October 20, 2008, Lyon and Illinois Paper had entered into an agreement entitled “Partnership Agreement.” (Ex. 1 to 2d Am. Compl. [219-1], at 1.) The Partnership Agreement does not explicitly contemplate the Lease Agreement, but does refer to one or more “lease transactions” that might be presented by Illinois Paper to Lyon (id. at 1), for which Lyon agreed to provide funding. (Id. at 2.) Central to this case, the Partnership Agreement contains the following term:

Representations and Warranties: . . . . You [Illinois Paper] represent and warrant that all lease transactions presented to U.S. Bancorp for review are valid and fully enforceable agreements. . . . You agree to indemnify and hold U.S. Bancorp harmless from any loss or claim resulting from you[r] breach of the foregoing representations and warranties.

         (Partnership Agreement at 2) (emphasis in original). Pursuant to the Partnership Agreement, Lyon purchased copier equipment from Illinois Paper, with a check dated December 12, 2008, for $510, 658.19. (Lyon SOF ¶ 3.) Then, pursuant to the Lease Agreement, the Village received the copier equipment (the record does not disclose, exactly, when or from whom) and began making payments shortly thereafter. Though the Partnership Agreement refers to the possibility that Lyon would present other “lease transactions” to Illinois Paper, it is undisputed that this was the only transaction Illinois Paper engaged in that involved Lyon.

         In September 2009, Village authorities determined that the Village lacked the power, under Illinois law, to have executed the Lease Agreement. (Village SOF ¶ 15.) Who made this determination, or what prompted it, is not disclosed in the record. The Village Board and manager initially believed that 65 ILCS § 5/11-76-6 provided the authority for the transaction. (See Letter from Sean Conway, Counsel for Village of Bensenville, to Troy Kepler, Law Dep't, Lyon Financial Services (Sept. 25, 2009), Ex. B. to Village SOF [237-1 at p. 13], at 1.) The statute, however, only provides authority for lease transactions “not to exceed 5 years . . . ., ” 65 ILCS § 5/11-76-6. Village officials concluded that the 72-month (six-year) term of the Lease Agreement exceeded the Village's authority under Illinois law. Sean Conway, the Village's attorney, notified one of Lyon's attorneys, Troy Kepler, of this opinion in September 2009. (Village SOF ¶ 15.) The attorneys for Lyon and the Village attempted to negotiate a legally enforceable reformation of the Lease Agreement until the following summer, but ultimately, Mr. Conway notified Mr. Kepler on June 1, 2010 that the Village intended to make no further payments after the July 2010 payment. (Village SOF ¶¶ 18-19.) The Village made a total of 19 payments of $9, 500.00 each, but did not make the payment due on August 27, 2010 or any payment thereafter. (Lyon SOF ¶ 6.) On August 25, 2010, Janet King, a Collateral Recovery Specialist at Lyon, notified the Village in a letter addressed to the Village's former manager, James Johnson, of Lyon's intent to recover the equipment (Village SOF ¶ 29), and shortly thereafter Lyon repossessed and resold the equipment for $18, 956.25. (Lyon SOF ¶ 7.) Lyon incurred $4, 296.00 in repossession fees, resulting in a net recovery of just $14, 660.25. (Id.)

         Though the repossession letter from Lyon stated that it would hold the Village responsible for the deficiency under the Lease Agreement (see Village SOF ¶ 29), both Lyon and the Village adopted the position that the agreement was, in fact, unenforceable. (See Village SOF ¶ 30.) Sean Conway, the Village's attorney, confirmed the parties' positions in response to the repossession letter, notifying Ms. King that he had spoken with Lyon's attorney, Mr. Kepler, who represented that Lyon would not seek payment from the Village. (Letter from Sean Conway to Janet King (Sept. 2, 2010), Ex. B to Village SOF [237-1 at p. 21], at 1; see Village SOF ¶ 30.)

         Instead of contesting the Village's refusal to satisfy the obligation, Lyon turned to Illinois Paper, demanding enforcement of Illinois Paper's guarantee that the Lease Agreement with the Village was enforceable. Thus, in a letter dated July 19, 2010, another of Lyon's attorneys, Alex Darcy, demanded that Illinois Paper “repurchase” the Lease Agreement pursuant to the guarantee in the Partnership Agreement. (Letter from Alex Darcy, Counsel for Lyon, to Terry Yormark, President of Illinois Paper, Ex. F to Village SOF [237-1 at p. 40].) Ronald Panter, counsel for Illinois Paper, responded on August 5, 2010 that Illinois Paper would not repurchase the Lease Agreement for several reasons, one of which was that the demand was premature, as Lyon had neither sought nor received any judicial determination that the Lease Agreement was, in fact, unenforceable. (Letter from Ronald Panter to Alex Darcy, Ex. H to Village SOF [237-1 at p. 43], at 2.)

         II. Litigation history

         Lyon filed suit against Illinois Paper on November 2, 2010 for breach of contract. (Compl. [1].) Illinois Paper raised counterclaims of fraud, breach of fiduciary duty, and breach of contract, which Judge Hibbler-the judge initially assigned to this matter-dismissed. (May 4, 2011 Mem. Op. and Order [44].) Illinois Paper then moved for judgment on the pleadings, on the grounds that Illinois Paper's guarantee of the legal enforceability of the Lease Agreement could not form the basis of a breach of contract or breach of warranty claim under Illinois law because it was a representation of law, not fact. (Mot. for J. on Pleadings [45].) Judge Hibbler agreed and granted the motion. Lyon Fin. Servs., Inc. v. Illinois Paper & Copier Co., No. 10 CV 7064, 2012 WL 401493, at *2 (N.D. Ill. Feb. 6, 2012). Lyon appealed that decision, arguing that the court had erred in determining that Illinois law, rather than Minnesota law, applied to the Lease Agreement, and that a representation of law could form the basis of a breach of contract action. The Seventh Circuit agreed with Lyon that Minnesota law governs the Lease Agreement, Lyon Fin. Servs., Inc. v. Illinois Paper & Copier Co., 732 F.3d 755, 758-59 (7th Cir. 2013), but declined to decide whether the representation of law was actionable in breach of contract. Id. at 765-66. Instead, the court certified that question to the Minnesota Supreme Court. Id. at 767. The Minnesota Supreme Court answered in the affirmative, concluding that a representation of legal enforceability can be the basis for a breach of contract claim, even if the injured party did not rely on that representation. Lyon Fin. Servs., Inc. v. Illinois Paper & Copier Co., 848 N.W.2d 539, 545-46 (Minn. 2014). The Seventh Circuit accordingly reversed the judgment on the pleadings and remanded to this court. Lyon Fin. Servs., Inc. v. Illinois Paper & Copier Co., 577 F. App'x 606, 607 (7th Cir. 2014).

         Lyon filed an amended complaint on December 12, 2014, alleging breach of contract against Illinois Paper and, for the first time, breach of contract against the Village in the alternative-if the Lease Agreement was, in fact, enforceable. (Am. Compl. [114], at ¶¶ 17-22.) Illinois Paper raised several affirmative defenses in its Amended Answer: (1) that Lyon's claims were premature because there had been no determination that the Lease Agreement was unenforceable, (2) that the Lease Agreement was enforceable under Illinois law, (3) that the Village is estopped from denying the enforceability of the Lease Agreement, (4) that Lyon is barred from recovery because it caused the breach, and (5) that Lyon purchased the equipment having full knowledge of the facts, barring recovery under the voluntary payment doctrine. (Ill. Paper. Am. Ans., Aff. Defenses, Third Party Claim [115 at p. 7], at ¶¶ 24-29.) Illinois Paper also asserted third-party claims against the Village for “quasi-contract” and unjust enrichment. (Id. ¶¶ 30-34.)

         The Village moved to dismiss Lyon's breach of contract claim and Illinois Paper's claims against it. (Village Mot. to Dismiss [116], at 3.) At a January 28, 2015 hearing on that motion, the court asked counsel for the Village whether Lyon's breach of contract claim was barred by the statute of limitations. (Tr. of Proceedings (Jan. 28, 2015) [164], at 6:23-24.) The Village's counsel responded: “In my opinion, your Honor, I have not raised a statute of limitations because what they are bringing is a contract claim.” (Id. at 6:25-7:2.)[3] The court granted the Village's motion to dismiss Illinois Paper's third-party claims on other grounds: Judge Hibbler had previously dismissed claims made by Illinois Paper against the Village and Illinois Paper had failed to appeal, precluding further claims against the Village. (Order (Jan. 28, 2015) [121], at 1.) The court denied the Village's motion to dismiss Lyon's claim, however. The Village had argued that Lyon's claim against it was inconsistent with its allegations against the Village, but the court concluded that Lyon was permitted to pursue inconsistent litigation positions. (Id.) The court noted, further, that though “Lyon Financial Services, Inc. did not file any claims against the Village prior to the appeal . . . the Village acknowledges that Lyon's claims, if otherwise cognizable, are timely.” (Id.) The court ordered Illinois Paper and the Village to respond to the amended complaint within 21 days. (Id.)

         The Village did not file an answer, instead filing a motion for summary judgment on February 15, 2015 (Village Mot. for Summ. J. [122]), and amending it in July 2015. (Village Am. Mot. for Summ. J. [163].) In the July 2015 amendment, the Village raised a statute of limitations defense for the first time, arguing that Lyon's claim was barred by the four-year Uniform Commercial Code (UCC) statute of limitations on leases, codified at 810 ILCS 5/2A-506. (Village Mem. in Supp. of Mot. for Summ. J [163-1], at 5-6.) Lyon defended the timeliness of its claim, arguing that (1) the Village had waived the defense by failing to raise it, (2) that the Village was estopped from asserting the defense, (3) that the statute of limitations should be equitably tolled during the period the case was on appeal, and (4) that the applicable statute of limitations is the ten-year limitation for contracts, not the UCC statute of limitations for leases. (Lyon Resp. to Village Am. Mot. for Summ. J. [172], at 3.)

         Illinois Paper and Lyon moved for summary judgment as well. Illinois Paper argued that the agreement was enforceable because it was not a lease and therefore not barred by the five-year limitation on the municipal power to lease equipment under 65 ILCS § 5/11-76-6. (Illinois Paper Mot. for Summ J. [142], at 2-3). Illinois Paper alternatively argued that the Lease Agreement could be enforced under 65 ILCS § 5/11-76.1-1, which allows municipalities to purchase or lease property by ordinance where the consideration is paid in annual installments.[4](Id. at 3-9.) Lyon contended, in its motion for summary judgment, that if the Lease Agreement is unenforceable, Lyon is entitled to summary judgment against Illinois Paper on a claim of breach of the guarantee. In the alternative, if the Lease Agreement is enforceable, Lyon urged, it was entitled to summary judgment against the Village for breach of that agreement. (Lyon Resp. to Village Am. Mot. for Summ. J. at 1-2.)

         The court denied these summary judgment motions. Lyon Fin. Servs., Inc. v. Illinois Paper & Copier Co., 10 C 7064, 2016 WL 147654, at *18 (N.D. Ill. Jan. 13, 2016). First, the court found that the enforceability of Illinois Paper's guarantee depended on an unresolved issue of fact. The UCC provides a test for whether an agreement that is in the form of a lease is a true lease or is, in fact, a disguised secured sale transaction. 810 ILCS § 5/1-203. Under that test, the court observed that the Lease Agreement-which provides an option for the Village to purchase at the end of the contract term-may be a secured transaction if the value of the copiers at the end of the term is nominal. Lyon Fin. Servs., Inc., 2016 WL 147654, at *13. Such a result was a genuine possibility, in light of the fact that the copiers had already lost 95% of their value in less than two years. Id. at *13-14. Second, the court was not certain that the Lease Agreement is unenforceable, even if it is deemed a lease. The court noted a statutory provision, 65 ILCS § 5/11-61-3, that the parties did not address. That provision appears to authorize municipalities to lease or purchase goods on an installment contract. Id. at *17. Finally, the court denied the Village's motion for summary judgment on the statute of limitations, on the ground that the Village had waived the defense by failing to raise the argument in an answer, in its motion to dismiss, or in its initial summary judgment motion, and had affirmatively represented to the court that there was no statute of limitations defense available to it. Id. at *17-18.

         The Village moved the court to reconsider its ruling on waiver (Village Mem. in Supp. of R. 59(e) Mot. [198], at 3-11), and without explicitly granting that motion, the court permitted the Village leave to re-plead the statute of limitations in an answer. (Tr. of Proceedings (Jan. 12, 2016) [215], at 4:15-18.) After Lyon filed a second amended complaint, alleging that 65 ILCS § 5/11-61-3 did not authorize the Lease Agreement (2d Am. Compl. [219], at ¶¶ 12-13), the parties have again moved for summary judgment. Illinois Paper again argues that the Lease Agreement is not a “lease transaction” at all under the UCC test. Accordingly, Illinois Paper contends, the transaction does not fall within its guarantee in the Partnership Agreement (Illinois Paper Mot. for Summ. J. (hereinafter “Illinois Paper Br.”) [231], at 1-6), and the lease is enforceable because the Village had authority to enter into it under 65 ILCS § 5/11-61-3, or alternatively, under other provisions of Illinois municipal law. (Id. at 6-14.) Lyon argues that the Lease Agreement is a lease (Lyon Resp. to Paper Mot. for Summ. J & Cross-Mot. (hereinafter “Lyon Br.”) [245], at 4), or that the Partnership Agreement guarantee covers the Lease Agreement regardless of the nature of the agreement. (Id. at 5-10). Lyon contends that the Lease Agreement is unenforceable because the Village had no authority to execute it under Illinois law. (Id. at 11-23.) In the alternative, if the Lease Agreement is enforceable, Lyon requests summary judgment against the Village on its breach of contract claim. (Id. at 23.) The Village, for its part, argues that Lyon should be prevented from pursuing the claim against it by operation of the statute of limitations or other equitable considerations (Village Mem. of Law in Supp. of Summ. J (hereinafter “Village Br.”) [239], at 2-8, 14-21), that the Lease Agreement is unenforceable (id. at 8-13), and, in the alternative, that Lyon's requested damages must be reduced because Lyon failed to mitigate. (Id. at 21-22.)

         For the reasons below, the court finds that the Lease Agreement is a sale under the UCC, but that Illinois Paper's guarantee applies to it because it is the only such agreement to which the Partnership Agreement guarantee could refer. The court concludes, further, that the Lease Agreement is enforceable under 735 ILCS § 5/11-61-3, but only to the extent of the Village's authority to contract. Finally, Lyon's claims against the Village itself are barred by the statute of limitations.

         DISCUSSION

         Summary judgment is appropriate where the movant has demonstrated that there is no genuine dispute of material fact and the moving party is entitled to judgment as a matter of law. Life Plans, Inc. v. Sec. Life of Denver Ins. Co., 800 F.3d 343, 349 (7th Cir. 2015). A dispute over a fact is genuine if a reasonable jury could find for the non-moving party on the evidence before the court. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The non-moving party “must show evidence sufficient to establish every element that is essential to its claim and for which it will bear the burden of proof at trial.” Life Plans, 800 F.3d at 349 (citing Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986)).

         The court concludes that the agreement between the Village and Lyon, titled a “Lease Agreement, ” is, under the Uniform Commercial Code (adopted by Illinois, 810 ILCS § 5/1-101 et seq.), a secured transaction. 810 ILCS § 5/1-203. Nevertheless, Illinois Paper's guarantee in the Partnership Agreement unavoidably covers the Lyon-Village agreement, because the plain intention of the parties was for Illinois Paper to guarantee the Lyon-Village agreement, regardless of the legal nature of that agreement under the UCC. The Lease Agreement is partially unenforceable, but only to the extent that the interest charged by Lyon on the sale exceeded the limits of 65 ILCS § 5/11-61-3. Otherwise, the Village would receive a windfall.

         Finally, the court agrees with the Village that Lyon's claim against the Village is barred by the statute of limitations, despite the Village's lack of diligence in asserting it, because Lyon has had a more than adequate opportunity to respond to the argument, and Lyon is significantly culpable in its delay in filing the claim against the Village.

         I. The Lease Agreement is a secured transaction, but Illinois Paper neverthelessguar ...


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