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American Guardian Warranty Services, Inc. v. JCR-Wesley Chapel, LLC

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

May 22, 2017




         Before 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.


         This 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.

         JCR 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.

         The 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 “Promissory Note”).

         After 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 counterclaims.

         II. ANALYSIS

         A. Plaintiffs' Motion to Dismiss

         1. Legal Standard

         A 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).

         Allegations 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).

         2. Discussion

         a. The Fraud Counterclaim

         For 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.)

         Defendants 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.)

         Plaintiffs 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.

         I. Substantive Fraud Elements

         As a 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.

         i. False Statement of Material Fact

         Plaintiffs 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 ...

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