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MAC Funding Corp. v. Mndustries, Inc.

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

May 2, 2018

MAC FUNDING CORPORATION, a Delaware corporation, Plaintiff,
v.
MNDUSTRIES, INC., a Georgia corporation, and MICHAEL E. NANCE II, a Georgia citizen, Defendants. MNDUSTRIES, INC., a Georgia corporation, and MICHAEL E. NANCE II, a Georgia citizen, Third-Party Plaintiffs,
v.
MC MACHINERY SYSTEMS, INC., a Delaware corporation, Third-Party Defendants.

          MEMORANDUM OPINION AND ORDER

          SHARON JOHNSON COLEMAN UNITED STATES DISTRICT JUDGE

         Defendants and third-party plaintiffs, Mndustries, Inc. and Michael E. Nance (collectively “MN”), filed an amended four-count third-party complaint against MC Machinery Systems, Inc. (“MMS”) seeking indemnification for MN's alleged breach of financing contract with MAC Funding Corporation (“MAC Funding”), and alleging breach of express and implied warranty, and fraud. Third-party defendants, MMS, move to dismiss the amended third-party complaint for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6). For the reasons stated herein, the motion is granted.

         Background

         The following facts are gathered from MN's Amended Third-Party Complaint which the Court takes as true for purposes of the instant motion. MN was a sheet metal fabricator that used laser cutting machines to fabricate specified metal goods for its customers. MMS is a subsidiary of Mitsubishi that markets, sells, installs, and services metal fabrication machinery including laser-cutting machines and associated material handling systems. MN previously purchased equipment from MMS. MN had gone through several cycles of laser machine purchases over its period of operations to keep its equipment current.

         In 2014, MMS approached MN to purchase new Mitsubishi laser-cutting machines and the new MMS automated handling system to update MN's production capabilities. MAC Funding Corporation would finance the purchase. MN alleges that MAC Funding is the “captive financing arm” of MMS. MN purchased four new machines from MMS with financing by MAC Funding. The total purchase price for all the equipment exceeded $5 million. The first purchase was executed on July 14, 2014 by Nance on behalf of MN. MMS was to deliver the three other laser cutting machines to MN in September, October, and December of 2015. MN alleges that it spent over $300, 000 to prepare its Georgia facility for the installation of the new laser cutting machines.

         After some delays, which MN attributes to MMS, the first new laser machine was finally operational at MN's facility on February 18, 2016. It was installed without the River System automation that was to accompany the machine. Over the next seven months the four machines and the River System were installed but never functioned at the cutting proficiency, accuracy, and speed that MMS had represented it would.

         MMS representative Rosengren remained on site to work with the machines precision and automation. MMS laser services technician Tracy Marcotte documented in his service report, that the “machine [is] still not cutting good consistently” and that the system had crashed when he arrived on March 29, 2016. All four machines were up and running on March 29, 2016, but MN alleges that problems persisted, causing improper and inconsistent cuts and the cutting head on one of the machines would fall off during use. Marcotte continued to report issues with the machines and make adjustments to try to fix the problems.

         On April 12, 2016, Jim Altenbach and Landon Frick, MMS field service engineers, were on site because of the ongoing issues with the new machines. They documented slow, imprecise, poor, and inconsistent cutting. Altenbach informed Nance that he had resolved the cutting and speed problems. Based on this representation, Nance told MN customers that their overdue orders would be filled shortly. According to MN, Altenbach knew his representations were false because the nozzle he replaced was not the recommended size according to MMS' specifications. Altenbach also knew that MN, through its principal Nance, would rely on the representation.

         Within a few weeks Marcotte was back on site to address additional problems with the machines. The problems persisted, MMS sent additional engineers to address the issues. After seven months the inconsistent cutting issues were resolved with a design modification. MN alleges that this design flaw or defect was hidden by MN. According to MN, its failure to deliver orders to its customers for over seven months caused the company to lose business. MN was forced to cease operations.

         The sales contract between MN and MMS included a warranty that “the Equipment sold hereunder will be free from defects in material and workmanship.” The warranty was for two years from the date of installation at the MN's facility. MN alleges that MMS breached the warranty by providing materially defective equipment, which they repeatedly failed to repair, replace, or refund as required by the sales contract. As a result of the alleged breach of warranty, MN claims to have suffered damages from its continued responsibility for payment for the defective equipment in excess of $5 million and other damages. MN also alleges that MMS breached an implied warranty under the Uniform Commercial Code from the sale of the defective equipment.

         MN further alleges that MMS employees repeatedly represented that the laser machines were not defective and “have at all times performed within published specifications for the machine.” MN relied on these representations that the cause of the problem was not a design defect, but external factors relating to the facility. MN alleges that the representations by MMS employees were knowingly false and misleading. The MMS representatives allegedly were aware that the laser machines were defective.

         Lastly, MN alleges that it is entitled to indemnification from MMS for any damages resulting from the suit filed by MAC Funding against MN for default on the financing contract. MN alleges that MAC Funding is the “admitted captive”, under the full control of MMS. Dkt. 35 at ¶100. Further, MN alleges that MAC Funding and MMS are both owned by Mitsubishi Corporation. Thus, MN is seeking implied indemnity through an alter ego theory liability for MN's failure to pay the financing contracts.

         Legal Standard

         A motion to dismiss brought pursuant to Rule 12(b)(6) challenges the legal sufficiency of the pleading. Rule 8(a) applies to most claims and requires a short and plain statement of the claim upon which relief can be granted. To survive dismissal, the counterclaims must state a facially plausible claim that puts the defending party, the Receiver, on notice of the basis of the claims against it. See Swanson v. Citibank, N.A.,614 F.3d 400, 403-404 (7th Cir. 2010). The Seventh Circuit has explained that “plausibility” means, that “the plaintiff [or counterplaintiff] must give enough details about the subject-matter of the case to present a story that holds together. In other words, the court will ask itself could these things have happened, not did they happen.” Id. at 404 (emphasis in original). In determining the sufficiency of a counterclaim, the Court accepts as true all well-pleaded factual allegations and draws all reasonable inferences in favor of the ...


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