United States District Court, N.D. Illinois, Eastern Division
AMERICAN GUARDIAN WARRANTY SERVICES, INC., and AMERICAN GUARDIAN FUNDING CORPORATION, Plaintiffs,
JCR-WESLEY CHAPEL, LLC; JESUS ROSARIO; and CYNTHIA ROSARIO, Defendants.
MEMORANDUM OPINION AND ORDER
D. LEINENWEBER, JUDGE.
the Court are Plaintiffs' Motion to Dismiss
Defendants' Counterclaims [ECF No. 34] and Motion for a
Preliminary Injunction [ECF No. 27] . For the reasons stated
herein, the Motions are denied.
litigation revolves around a contractual relationship between
Illinois-based providers of automobile warranty services and
a Florida car dealership. Plaintiff American Guardian
Warranty Services, Inc. ("AGWS") provides
warranty-related services to dealerships, and Plaintiff
American Guardian Funding Corporation ("AGFC")
finances warranty arrangements with car dealerships (referred
to collectively as "American Guardian"). Defendants
are such a dealership, JCR-Wesley Chapel, LLC
(“JCR”), and its two owners, Jesus Rosario
(“Rosario”) and Cynthia Rosario.
entered into a master agreement with AGWS to cover provision
of warranties to JCR customers (“the Dealer
Agreement”). The Dealer Agreement, inter alia,
makes it AGWS's responsibility to investigate,
administer, and approve payment of all claims under American
Guardian contracts sold by JCR. (ECF No. 40 (“Am.
Compl.”) at Ex. A, § V.3(a).) It also obligates
AGWS to secure insurance policies indemnifying JCR or AGWS
against all sums that either may become obligated to pay
according to the terms of such a contract. (Id.
§ V.1.) Under the Dealer Agreement, AGWS files for and
administers reimbursement to JCR for the cost of valid
repairs. (Id. § V.3(c).) In addition, the
Dealer Agreement contains an “Entire Agreement”
clause and a modification clause, the latter requiring any
amendments to the contract to be “supplemented by
writing executed by all parties.” (Id. §
VII.6.) The parties signed the Dealer Agreement on or about
November 7, 2013.
parties executed subsequent addenda to the Dealer Agreement,
referred to as Production Agreements. Specifically, a
December 15, 2015 Production Agreement (the “Production
Agreement”) required JCR to sell a minimum number of
warranty and service contracts (the “American Guardian
contracts”) each month for a five-year period and also
mandated that 95 percent of the warranty and service
contracts it sold during that period be American Guardian
contracts (the “exclusivity” provision). (Am.
Compl. at Ex. E ¶¶ 1, 7.) As part of the funding
deal, the parties also entered into promissory notes to
document advances of funds made to JCR that the latter was
projected to earn through its sale of American Guardian
contracts, including a December 15, 2015 promissory note (the
no small degree of corrosion, the relationship between the
parties broke down. In 2016, JCR ceased selling American
Guardian contracts, and Rosario approached Plaintiffs'
agent, Dave Stewart (“Stewart”), seeking to pay
off JCR's outstanding loan balance under the Promissory
Note. (ECF No. 44 (“Am. Ans.”) ¶ 19, 20,
29.) Instead, Plaintiffs sued for breach of contract in
Illinois state court. After Defendants successfully removed
the case to this Court, Plaintiffs moved for a preliminary
injunction. Defendants counterclaimed for fraud in the
inducement and JCR counterclaimed for breach of contract
against AGWS. Plaintiffs then moved to dismiss these
Plaintiffs' Motion to Dismiss
motion to dismiss under Federal Rule of Civil Procedure
12(b)(6) challenges a complaint for failure to state a claim
upon which relief may be granted. In ruling on such a motion,
the Court accepts as true all well-pleaded facts in the
relevant complaint and draws all reasonable inferences from
those facts in the non-movant's favor. Active
Disposal, Inc. v. City of Darien, 635 F.3d 883, 886 (7th
Cir. 2011); Dixon v. Page, 291 F.3d 485, 486 (7th
Cir. 2002). To survive a Rule 12(b)(6) motion, “the
complaint must contain sufficient factual matter, accepted as
true, to state a claim to relief that is plausible on its
face.” Independent Trust Corp. v. Stewart
Information Servs. Corp., 665 F.3d 930, 934 (7th Cir.
2012) (internal quotation marks omitted); see also,
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). The
allegations in the complaint must “raise a right to
relief above the speculative level.” Bell Atlantic
Corp. v. Twombly, 550 U.S. 544, 555 (2007). A claim has
facial plausibility when the plaintiff pleads factual content
sufficient for the court to draw the reasonable inference
that the defendant is liable for the misconduct alleged.
Iqbal, 556 U.S. at 677-78. The issue is not whether
the claimant will ultimately prevail but whether it is
entitled to offer evidence to support the claims.
AnchorBank, FSB v. Hofer, 649 F.3d 610, 614 (7th
Cir. 2011) (quotation omitted).
of fraud are subject to the Federal Rules' heightened
pleading standard, which requires a plaintiff to “state
with particularity the circumstances constituting fraud or
mistake.” Fed.R.Civ.P. 9(b). This means that the
plaintiff must plead the “who, what, when, where, and
how of the fraud - the first paragraph of any newspaper
story.” Pirelli Armstrong Tire Corp. Retiree Med.
Benefits Tr. v. Walgreen Co., 631 F.3d 436, 441-42 (7th
Cir. 2011) (citations and internal quotation marks omitted).
Rule 9(b) should be applied in view of its underlying
purposes: “(1) to inform the defendants of claims
against them and to enable them to form an adequate defense;
(2) to eliminate the filing of a conclusory complaint as a
pretext for using discovery to uncover wrongs; and (3) to
protect defendants from unfounded charges of fraud which may
injure their reputations.” Fujisawa Pharm. Co.,
Ltd. v. Kapoor, 814 F.Supp. 720, 726 (N.D. Ill. 1993).
The Fraud Counterclaim
their fraudulent inducement counterclaim, Defendants allege
that Stewart, as Plaintiffs' agent, met with Rosario in
the latter's office sometime between October 1, 2013 and
November 7, 2013. (Am. Ans. at Ctrclm. ¶ 9.) At this
meeting, Stewart represented that Plaintiffs would set up for
JCR's benefit an “offshore reinsurance
company” that would allow JCR to both retain the
warranty payments paid by customers with American Guardian
contracts (rather than those payments going to an
unaffiliated insurance company) and earn investment income on
them. (Id. ¶¶ 9-11.) Defendants go on to
allege that “Plaintiffs made this statement to
Defendants on other occasions” during the same
timeframe. (Id. ¶ 12.) They assert that both
Stewart and Plaintiffs knew this statement was false and
offered it to induce Defendants to enter into a business
relationship. (Id. ¶¶ 13-15.) Further,
Defendants allege that Stewart repeated this representation
to Rosario in 2013 and 2014. (Id. ¶ 17.)
claim reasonable reliance on the promise of an
“offshore reinsurance company” and that they
would not have entered into the Dealer Agreement or the later
Production Agreement but for these representations. (Am. Ans.
at Ctrclm. ¶¶ 16, 20.) In early 2016, Defendants
confronted Stewart about the lack of progress on the promised
reinsurance company, and were told that Plaintiffs had simply
been “warehousing” the warranty payments with no
intention of setting up the reinsurance company for JCR's
benefit. (Id. ¶ 18.) At least partly because
Plaintiffs scotched the reinsurance company proposal
(compare, Id. ¶ 19; with, id.
¶ 29), Rosario sought to terminate Defendants'
relationship with Plaintiffs. As damages, Defendants point to
their “lost profits from warranty payments that would
have been retained by a reinsurance company and lost
investment earnings on those warranty payments.”
(Id. ¶ 20.)
exhort the Court to dismiss Defendants' fraud
counterclaim for two reasons. First, Plaintiffs contend that
it fatally lacks the allegations necessary to plead the
substantive elements of fraud. Second, invoking Rule
9(b)'s heightened pleading standard, they cry foul at a
perceived lack of specificity in Defendants' fraud
allegations. For the reasons explored below, the Court finds
neither objection well-taken.
Substantive Fraud Elements
matter of Illinois law, fraudulent inducement is a form of
common-law fraud. See, e.g., Beaton v. SpeedyPC
Software, No. 13 C 8389, 2014 WL 4376219, at *3 (N.D.
Ill. Sept. 2, 2014) (citation omitted). To state a claim for
common- law fraud in Illinois, a complaint must allege that
the defendant “(i) made a false statement of material
fact; (ii) knew or believed the statement to be false; (iii)
intended to and, in fact, did induce the plaintiff to
reasonably rely and act on the statement; and (iv) caused
injury to the plaintiff.” Reger Dev., LLC v.
National City Bank, 592 F.3d 759, 766 (7th Cir. 2010)
(citing Redarowicz v. Ohlendorf, 441 N.E.2d 324, 331
(Ill. 1982)); accord, Connick v. Suzuki Motor Co.,
Ltd., 675 N.E.2d 584, 591 (Ill. 1996). Plaintiffs
contend that Defendants' counterclaim fails to satisfy
the first and third elements.
False Statement of Material Fact
spill considerable ink protesting that representations of
intent regarding future conduct, such as the challenged
statements here, are not actionable as fraud. That is not
entirely true. They are not actionable per se as
fraud in the inducement but may be actionable as promissory
fraud if Defendants adequately allege a “scheme to
defraud.” Association Ben. Servs., Inc. v. Caremark
RX, Inc.,493 F.3d 841, 853 (7th Cir. 2009) (citations
omitted); accord, Continental Bank, N.A. v. Meyer,10 F.3d 1293, 1298 (7th Cir. 1993). A temporal element
demarcates the two causes of action: the “tense”
of a statement determines whether a court views the statement
as invoking promissory fraud (future) or fraud in the
inducement (past or present). Triumph Packaging Grp. v.
Ward,877 F.Supp.2d 629, 645 (N.D. Ill. 2012);
accord, Steinberg v. Chi. Med. Sch.,371 N.E.2d 634,
641 (Ill. 1977). Where a party purports to bring a claim for
fraud in the inducement, courts nevertheless treat the claim