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Lyon Financial Services, Inc. v. Illinois Paper & Copier Co.
Citations: 247 F. Supp. 3d 923; 92 U.C.C. Rep. Serv. 2d (West) 234; 2017 WL 1093149; 2017 U.S. Dist. LEXIS 42072Docket: No. 10 C 7064
Court: District Court, N.D. Illinois; March 23, 2017; Federal District Court
In 2008, the Village of Bensenville sought to replace its copier equipment and engaged Illinois Paper and Copier Company as a supplier. Instead of purchasing directly, the Village entered a financing arrangement with Lyon Financial Services, a U.S. Bank subsidiary. Lyon acquired over $500,000 worth of copier equipment from Illinois Paper under a "Partnership Agreement" and subsequently provided the equipment to the Village through a "Value Lease Agreement," which required 72 monthly payments of $9,500. The Partnership Agreement included a guarantee from Illinois Paper that the Lease Agreement was valid and enforceable. However, by the end of 2009, the Village claimed the Lease Agreement was unenforceable under Illinois law after making only 19 payments, during which the copiers depreciated significantly in value. Lyon filed a lawsuit against Illinois Paper for breach of contract in November 2010 and, after four years, added an alternative breach of contract claim against the Village. The case involved substantial litigation, including rulings from the Seventh Circuit and the Minnesota Supreme Court. The court is currently addressing final summary judgment motions, granting the Village's motion for summary judgment while partially granting Lyon's motion to recover interest exceeding the Village’s payment authority. The background details the nature of the agreements involved and the approval process by the Village's Board of Trustees. The Partnership Agreement includes a term requiring Illinois Paper to represent and warrant that all lease transactions presented to U.S. Bancorp are valid and enforceable. Illinois Paper agrees to indemnify U.S. Bancorp for any losses arising from breaches of these representations. Lyon purchased copier equipment from Illinois Paper on December 12, 2008, for $510,658.19. The Village later received this equipment and began making lease payments. Although the Partnership Agreement suggested more lease transactions might occur, this transaction was the only one with Lyon. In September 2009, Village authorities concluded they lacked the authority to execute the Lease Agreement under Illinois law, specifically citing that the relevant statute allowed leases of no more than five years, while the Lease Agreement was for 72 months. Despite initial beliefs that there was legal authority for the lease, the Village's attorney, Sean Conway, informed Lyon’s attorney that the Village would cease payments after July 2010. The Village made 19 payments of $9,500 each but defaulted on subsequent payments. On August 25, 2010, Lyon notified the Village of its intent to repossess the equipment, which Lyon subsequently did, selling it for $18,956.25 after incurring repossession fees of $4,296. Lyon’s letter indicated it would hold the Village liable for any deficiency, but both parties ultimately agreed that the Lease Agreement was unenforceable. After confirming with Lyon's attorney that no payment would be sought from the Village, Lyon pursued enforcement against Illinois Paper for the guarantee of the Lease Agreement's enforceability. On July 19, 2010, attorney Alex Darcy, representing Lyon, demanded that Illinois Paper repurchase the Lease Agreement based on a guarantee in the Partnership Agreement. Illinois Paper's attorney, Ronald Panter, rejected this demand on August 5, 2010, citing its premature nature since Lyon had not obtained a judicial ruling declaring the Lease Agreement unenforceable. Lyon filed a breach of contract lawsuit against Illinois Paper on November 2, 2010. Illinois Paper responded with counterclaims, including fraud and breach of fiduciary duty, which were dismissed by Judge Hibbler on May 4, 2011. Illinois Paper then sought judgment on the pleadings, arguing that its guarantee regarding the Lease Agreement's enforceability could not support a breach of contract claim under Illinois law, as it was a legal rather than factual representation. Judge Hibbler agreed and granted the motion. Lyon appealed, contending that Minnesota law should apply instead of Illinois law and that a legal representation could be actionable in breach of contract. The Seventh Circuit sided with Lyon regarding the applicable law but declined to rule on the legal representation's actionability, instead certifying the question to the Minnesota Supreme Court. The Minnesota Supreme Court affirmed that a representation concerning legal enforceability could indeed form the basis for a breach of contract claim, regardless of reliance by the injured party. Subsequently, the Seventh Circuit reversed the judgment on the pleadings and remanded the case. Lyon filed an amended complaint on December 12, 2014, alleging breach of contract against Illinois Paper and also against the Village, contingent on the Lease Agreement's enforceability. In its amended answer, Illinois Paper asserted several affirmative defenses, including the premature nature of Lyon's claims, the enforceability of the Lease Agreement under Illinois law, and various defenses against Lyon's recovery based on its knowledge and actions. Additionally, Illinois Paper made third-party claims against the Village for quasi-contract and unjust enrichment. The Village sought to dismiss Lyon’s breach of contract claim and Illinois Paper's claims. During a January 28, 2015 hearing, the court inquired whether Lyon's claim was barred by the statute of limitations, to which the Village's counsel stated no limitation had been raised since it was a contract claim. The court dismissed Illinois Paper's third-party claims due to previous dismissals and lack of appeal. However, it denied the Village’s motion to dismiss Lyon’s claim, allowing Lyon to pursue inconsistent positions. The court noted that although Lyon Financial Services, Inc. had not filed claims against the Village prior to the appeal, it acknowledged Lyon's claims as timely if otherwise valid. The court mandated responses to the amended complaint within 21 days. Subsequently, on February 15, 2015, the Village filed a motion for summary judgment, later amending it in July 2015 to include a statute of limitations defense, claiming Lyon's claim was barred under the four-year UCC statute for leases. Lyon countered by asserting that the Village had waived this defense, was estopped from asserting it, that the statute of limitations should be equitably tolled during the appeal, and that a ten-year limitation for contracts should apply instead of the UCC's four-year limitation. Illinois Paper and Lyon also moved for summary judgment, with Illinois Paper contending the agreement was enforceable and not a lease, thus not subject to a five-year limitation. Alternatively, it argued the Lease Agreement was enforceable under municipal law. Lyon, in its motion, argued for summary judgment against Illinois Paper for breach of guarantee if the Lease Agreement was unenforceable, or against the Village if it was enforceable. The court ultimately denied the summary judgment motions, determining that the enforceability of Illinois Paper's guarantee relied on an unresolved factual issue. The UCC's criteria for distinguishing between a true lease and a secured sale transaction were relevant, with the court noting that the Lease Agreement might be considered a secured transaction if the copiers' value was nominal at the term's end, especially given their steep depreciation. The court expressed uncertainty regarding the enforceability of the Lease Agreement, particularly in light of the statutory provision 65 ILCS 5/11-61-3, which may allow municipalities to lease or purchase goods through installment contracts. The Village's motion for summary judgment on the statute of limitations was denied because the Village had waived this defense by not raising it in previous pleadings and had previously indicated that no statute of limitations defense was available. The court allowed the Village to re-plead this defense after a motion for reconsideration. Following Lyon's second amended complaint arguing that the Lease Agreement was not authorized under the statutory provision, both parties filed for summary judgment again. Illinois Paper contended that the Lease Agreement does not qualify as a lease under UCC standards and is thus enforceable under municipal law. Conversely, Lyon maintained that the Lease Agreement is indeed a lease and is unenforceable due to the Village's lack of authority, while also seeking summary judgment for breach of contract. The Village argued against Lyon's claims on various grounds, including statute of limitations and unenforceability. Ultimately, the court determined that the Lease Agreement is classified as a sale under the UCC and is enforceable under 735 ILCS 5/11-61-3 to the extent of the Village's contractual authority. Additionally, Lyon's claims against the Village were barred by the statute of limitations. Summary judgment is deemed appropriate when there is no genuine dispute of material fact, and the non-moving party must provide sufficient evidence to support its claims. The court determines that the "Lease Agreement" between the Village and Lyon constitutes a secured transaction under Illinois law, specifically referencing the Uniform Commercial Code (810 ILCS 5/1-101 et seq.). Despite this classification, Illinois Paper's guarantee in the Partnership Agreement is deemed to cover the Lyon-Village agreement, reflecting the parties' intent for such coverage. The Lease Agreement is partially unenforceable, specifically regarding interest charges that exceed statutory limits (65 ILCS 5/11-61-3) to prevent an unjust enrichment of the Village. Additionally, the court finds that Lyon's claim against the Village is barred by the statute of limitations, as Lyon had ample opportunity to respond and is significantly at fault for its delay in filing. The court clarifies the distinction between leases and secured transactions under the UCC, emphasizing that intent is irrelevant in this context. A lease can create a security interest if the lessee's payment obligation is non-terminable and meets certain criteria, notably if the lease term matches or exceeds the goods' economic life, or if the lessee has options to renew or purchase at nominal value. Factors concerning the expected value of the leased equipment were previously identified as disputed; however, both parties agree that the copiers would have nominal value at the lease's end. This agreement fulfills the necessary statutory criteria, confirming the transaction's classification as a secured interest. If the Village does not purchase the equipment, it must incur the expenses for relocating it, which Lyon reported as $4,296. After 19 months of use, the equipment’s value significantly decreased, selling for just under $19,000, or less than 5% of the original $510,000 purchase price. Lyon and the Village present multiple arguments for classifying the agreement as a lease. Lyon cites a "non-appropriation" clause in the Lease Agreement, asserting it allows for termination if the Village fails to appropriate funds for monthly payments, thereby suggesting it is not a secured transaction. Lyon requests the court to reevaluate a previous ruling that deemed the non-appropriation clause non-terminable. Additionally, Lyon argues that the initial intent of the parties was to establish a lease and that the agreement qualifies as a "capital lease" or "finance lease" under the Illinois Paper framework. However, the court remains unconvinced, reaffirming that the non-appropriation clause does not constitute a termination clause. It highlights the Illinois Commercial Code's provision that if an agreement allows termination, it cannot be a secured transaction. Lyon's references to past cases do not add new arguments, and the court maintains its position that the clause aims to circumvent Illinois law that restricts municipal leaders from irrevocably binding future successors. The court emphasizes that determining whether an agreement is a secured transaction or a lease under the Uniform Commercial Code relies on objective criteria, rather than the intent of the parties involved. The intent of the parties regarding their agreement is deemed irrelevant in determining its classification as a secured transaction rather than a lease. Objective criteria indicate that the agreement qualifies as a secured transaction, even though the parties may have viewed it as a lease. Illinois law, through 810 ILCS 5/2A-103(1)(j), clearly differentiates between leases and secured transactions, stating that a lease does not involve the retention or creation of a security interest. Lyon cites cases where similar agreements are labeled "capital leases," but Illinois Paper argues that these citations do not alter the legal definition established by the Uniform Commercial Code, particularly in a goods transaction context. While the parties’ intent is not relevant for the lease versus sales contract classification under Illinois law, it is pertinent for interpreting the Partnership Agreement governed by Minnesota law, which emphasizes ascertaining the parties' intentions based on the contract's language and context. Courts may consider contemporaneous contracts to understand intent, and in this case, the Lyon-Illinois Paper agreement is interpreted as a means to ensure the enforceability of the Lyon-Village agreement. It is acknowledged that this was the only transaction involving Illinois Paper as a vendor to Lyon, reinforcing the conclusion that the agreement's intent was to support the existing transaction with the Village. Illinois Paper guaranteed that all lease transactions presented to U.S. Bancorp were valid and enforceable. The transaction involved two agreements, and Illinois Paper is bound by its guarantee that Lyon could enforce the Lease Agreement. Although Illinois Paper argues that Lyon, as the drafter, should adhere to the explicit terms of the Partnership Agreement, the intent of the parties was clear: Illinois Paper cannot evade liability under its guarantee. The lease was clearly identified in the documentation, and it would be unreasonable to interpret "lease transaction" in a way that excludes the only transaction contemplated by the parties. Illinois Paper contends that, as a guarantor, it should only be bound to the specific terms of its obligation. It cites cases where guarantors were not held liable for obligations outside their intent. However, these cases do not apply here, as there was no change in the underlying agreement, and both Lyon and Illinois Paper were aware of the transaction referred to in the Partnership Agreement. In contrast, prior cases involved material changes to agreements without the guarantor's consent. Thus, Illinois Paper remains liable under the guarantee as no modifications to the underlying transaction occurred. The loan agreement between the bank and the company was for one year, and the trial court determined that the county did not guarantee this loan, a finding upheld by the appellate court due to unambiguous terms in the guarantee. In contrast to Kittson County, where the guarantee and loan terms were significantly different, Illinois Paper's guarantee covered all "lease transactions" presented to Lyon, which were the same as the agreement executed with the Village. Kittson County is deemed non-precedential, as unpublished decisions should not be relied upon as legal precedent. Illinois Paper argues that indemnification agreements should be narrowly construed, but relevant case law pertains specifically to construction negligence, which is disfavored in Minnesota law and was prohibited by statute in 1984. The court is not convinced that this narrow construction principle applies outside the construction context. Illinois Paper also cites cases emphasizing that clear and unambiguous contract language governs parties' intent. However, the court finds that the guarantee's subject in the Partnership Agreement lacks clarity, leading to an interpretation that includes the lease transaction as understood by all parties involved. Furthermore, the Village is estopped from denying the Lease Agreement's validity, as Illinois Paper guaranteed its enforceability. The Village, having initially accepted the Lease Agreement, later contended it exceeded its statutory authority after 19 payments, a position that Lyon did not contest for nearly four years into the litigation. Municipalities derive their powers from statutes and can only act within those confines. Municipalities can only enter into contracts as authorized by statute, as established in Petterson v. City of Naperville. Specifically, 65 ILCS 5/11-76-6 allows municipalities to enter into equipment leases up to five years, but the transaction between Lyon and the Village does not qualify as a lease. An alternative statute, 65 ILCS 5/11-61-3, could provide authority for purchasing or leasing property for public purposes, allowing contracts with a maximum duration of 20 years and interest rates not exceeding 9%. The Village meets the population criteria of under 1,000,000. Furthermore, municipal contracts under 5/11-61-3 require ordinance approval as per Bank of Pawnee v. Joslin, which cannot be overruled by the court despite Illinois Paper's objections. Equitable estoppel may prevent a municipality from denying the enforceability of a contract, even if it did not fully comply with statutory requirements. This defense applies if the municipality's actions induced reasonable and detrimental reliance by a private party. If a municipality has accepted benefits from a contract, it is estopped from disputing the contract's validity, even if there was an irregular exercise of authority. Municipalities can enter contracts as long as they possess the authority to do so. A contract is only deemed void ab initio if its subject matter is beyond the municipal powers. In the case discussed, the Village's approval of the Lyon-Village transaction through a unanimous resolution, rather than an ordinance, constituted a procedural irregularity that did not violate due process. The resolution's validity was akin to a similar case where a municipality amended an agreement through an agent without an ordinance, allowing for estoppel to enforce the amendment if certain conditions were satisfied. Here, the Village's actions induced Lyon to enter the agreement, and Lyon relied on it by providing equipment. The Village benefited from this equipment while fulfilling only a portion of its contractual obligations, thus preventing the Village from claiming the absence of an ordinance rendered the contract void. Previous cases where municipalities were not bound involved officials acting outside their authority, which was not the case here. Additionally, the Lease Agreement's interest rate appears to exceed the limits established by statute, with the equipment's purchase cost noted as $510,658.19. The Village agreed to purchase equipment from Lyon via 72 monthly payments of $9,500, totaling $684,000, with Lyon asserting this constitutes a 10.153% interest rate. Illinois Paper acknowledges that if the difference between Lyon's payment and the total Lease Agreement price were classified as interest, Lyon's calculation would be accurate. However, Illinois Paper disputes labeling this difference as "interest," citing case law indicating the Illinois usury statute does not apply to sales. Notably, despite these cases, one ruling references profits from an installment sale as interest, suggesting that transactions characterized as sales may not fall under usury limitations. Additionally, Illinois law (65 ILCS 5/11-61-3) explicitly includes provisions for installment purchases, establishing an interest requirement. Courts interpret statutes based on legislative intent and plain meaning, considering the law's purpose and potential consequences. The statute does not render interest limitations irrelevant for sales contracts, as it anticipates interest in installment agreements and caps it according to the Bond Authorization Act. Thus, if interest is left unstated, it would undermine the statutory cap's effectiveness. The structure of the transaction, identifying Lyon as a seller rather than a lender, does not alter its nature as a financed agreement. Illinois Paper contests the classification of the financial differences in its transaction with Lyon as interest, asserting that this distinction is crucial for the enforcement of the interest cap. The court believes that allowing parties to redefine profits as non-interest would undermine the cap's purpose. Illinois Paper suggests using the Internal Revenue Service's imputed interest rate of 3.14% when no stated interest exists, but the court rejects this, emphasizing that the legislature did not intend for parties to self-determine interest classifications, which could nullify the interest limitation. The court concludes that the interest in the transaction exceeds the statutory limit and must resolve whether the contract is void ab initio, as argued by Lyon, or partially enforceable, as claimed by Illinois Paper. Illinois Paper argues that voiding the contract entirely would be unjust since the Village made 19 payments out of a 72-month lease and nearly fully utilized the equipment's value. The court notes that contracts made by municipalities that violate legal prohibitions are void ab initio, referencing case law that supports this stance, such as Diversified Computer Servs., Inc. v. Town of York, which highlights the necessity for proper fund appropriation. However, municipalities may be estopped from avoiding contracts if the subject matter is within their powers. This distinction allows for the enforcement of certain contracts even if part of the agreement exceeds municipal authority, as established in cases like Stahelin v. Bd. of Ed. Sch. Dist. No. 4, where estoppel was applied to prevent the school board from denying payment for work requested by board members, despite procedural irregularities. The statute mandates school board expenditures be approved at a meeting. The court determined that a school district's contract for additional construction work was valid despite not following this requirement, as the district had the general contracting power and accepted the benefits of the extra work, thus being estopped from refusing payment. The court noted that no Illinois case had directly addressed whether a contract could be enforced if a municipality exceeded its statutory authority in the contract's terms but had authority over the contract's subject matter. A previous unpublished decision ruled a water contract exceeding a forty-year term was ultra vires, but did not consider enforcing it up to the statutory limit due to the plaintiff's failure to raise that argument. The discussion also draws parallels to usury cases, where a borrower subjected to a usurious interest rate is entitled to relief at the legal interest rate, preventing undue windfall. For instance, in Franklin County Building Association v. Cravens, a foreclosure judgment was rendered unenforceable on the entire interest obligation due to usury, but the appellate court reversed part of that decision, enforcing payment at the legal interest rate instead. The analogy suggests that if the Village had the authority to enter into the contract in question, it cannot deny liability for the interest obligation, thus being estopped from contesting the contract up to the legal interest rate of 9%. Cancellation of the principal debt would constitute a windfall for the McCormicks rather than a remedy for their contractual rights. Under Wisconsin law, Illinois Paper is responsible for the unenforceable interest amounting to $21,248.64. The contract remains enforceable against the Village regarding the principal and enforceable 9% interest, adjusted by the nineteen payments already made. The court suggests these amounts to preempt further briefs but allows parties to object if they have valid grounds. The Village's motion to reconsider the previous ruling on the statute of limitations is granted, determining that Lyon’s claim against the Village is time-barred. Initially, the court held that the Village waived its statute of limitations defense concerning Lyon’s breach of contract claim. However, the Village contested the court's finding that Lyon suffered prejudice due to the delay. The court noted that forfeiture of an affirmative defense only occurs if the plaintiff is harmed by the delay. Despite the Village initially disclaiming reliance on the statute of limitations, it has now changed its stance. The court found that Lyon did not demonstrate actual prejudice from the Village's delay, as it had an adequate opportunity to respond effectively to the defense. This contrasts with cases where waiver was found due to a lack of opportunity to respond. Lyon had previously argued against the statute of limitations defense in multiple briefs, indicating no substantive prejudice occurred. Lyon has not demonstrated any prejudice in responding to the Village's defense, allowing the Village to assert it. Lyon's claims of equitable estoppel and equitable tolling regarding the statute of limitations are rejected, as Lyon delayed filing the claim and aligned with the Village's view on the enforceability of the Lease Agreement. The court establishes that the Lease Agreement constitutes a sale of goods, thereby subject to a four-year statute of limitations under the UCC, which bars Lyon's claim since the breach occurred no later than August 27, 2010, and Lyon did not file suit until December 12, 2014. The court declines to award attorneys' fees at this time, noting that the Lease Agreement allows for such fees in the event of a breach, while the Partnership Agreement contains only an indemnification provision. Lyon may recover fees only on claims where it prevails, and the court requests additional briefings regarding the recovery of fees under the Partnership Agreement and the reasonableness of those fees. The Village's motion for summary judgment is granted, while Lyon's motion for summary judgment is partially granted against Illinois Paper, resulting in a judgment of $21,248.64. Illinois Paper's motion is also partially granted, affirming the enforceability of the Lease Agreement up to the statutory interest cap. Lyon's motion to strike a declaration is deemed moot, and a status hearing is scheduled for April 12, 2017, encouraging the parties to settle outstanding issues. Lyon Financial, a Minnesota-based financial services firm, specializes in business-equipment financing and operates as a subsidiary of U.S. Bancorp under the name U.S. Bancorp Business Equipment Finance Group. U.S. Bank became the successor to U.S. Bancorp Equipment Finance, Inc. through a merger on January 1, 2012, and previously succeeded Lyon Financial Services, Inc. in 2011. The court refers to Lyon and its successors collectively as "Lyon." The statute of limitations for breach of a written contract in Illinois is ten years. Municipalities with populations under 500,000 can, by a two-thirds majority vote, acquire property through contracts with payments spread over a maximum of 20 years. Although the Lease Agreement's interpretation is governed by Minnesota law, the Village's authority to enter into it is determined by Illinois law, which Lyon does not dispute. A discrepancy in the lease contract incorrectly naming Illinois Paper as the lessor does not absolve the Village from its obligations under the contract, as they had already benefited from and made payments for 19 months. Lyon and the Village were both given opportunities to respond to this issue. The Village would have paid $9,204.88 per month for a total of $662,751.36 over the lease term, while the contract with Lyon specified a total payment of $684,000. A breach of contract is identified around June 1, 2010, when the Village's counsel indicated to Lyon that no further payments would be made. The Village's written communication made clear that the Lease Agreement was considered unenforceable, stating that the last payment would occur in July 2010. However, the court notes that the specific breach date is not before it, and even if it were determined to be the missed payment in August 2010, the statute of limitations would prevent the claim.