Seventh Circuit Construes Written Contract With Confusing Handwritten Amendment

QUALITY OIL, INCORPORATED v. KELLEY PARTNERS, INCORPORATED, Court of Appeals, 7th Circuit 2011 - Google Scholar:

This is a classic case of contract interpretation. Lawyers often become alarmed when they learn that their clients have made handwritten amendments to their written contracts. Here Quality Oil and Kelley Partners entered into a transaction under which Quality loaned Kelley $150,000. The loan was to be forgiven over a five year period as Kelley purchased certain motor oil products from Quality.

The confusion was created when the clients added a handwritten clause to the Agreement as follows:

"On July 1, 2003, Quality Oil, an Indiana auto-lubricants distributor for Exxon Mobil Corp., and Kelley Partners, an independent operator of automotive quick-lube facilities in Illinois, entered into a "Product Payback Loan and Supply Agreement." Under the Agreement, which by its terms is governed by Indiana law, Quality Oil agreed to loan Kelley Partners $150,000 "at no cost," and Kelley Partners in turn agreed to purchase its motoroil requirements from Quality Oil.^[1] Specifically, in Paragraph 4 of the Agreement, Kelley Partners agreed to

purchase from Quality Oil . . . at least eighty-five percent (85%) of [Kelley Partners'] requirements of motor oils during the term of this Agreement. [Kelley Partners] further agrees to purchase not less than two hundred twenty-five thousand (225,000) gallons of Mobil motor oil and 225,000 Mobil branded filters within 60 months from the date hereof.

Immediately following this language in the typewritten contract is the handwritten notation that is central to Kelley Partners' appeal. It states as follows: "This Supply Agreement will terminate after 225,000 gallons and 225,000 filters of Exxon/Mobil is purchased or 60 months, whichever comes first." The president of Kelley Partners and owner/general manager of Quality Oil initialed this handwritten provision and signed the Agreement in two places."

Quality Oil sued Kelley and the district court entered summary judgment in favor of Quality Oil. The Seventh Circuit affirmed and explained its reasoning as follows:

"The same is true of Kelley Partners' interpretation of the contract at issue here. It would make no commercial sense for Quality Oil to forgive its loan to Kelley Partners after five years regardless of how much motoroil product Kelley Partners purchased. This was a loan and supply contract, after all. Under Paragraph 4 of the Agreement, Kelley Partners bound itself to purchase at least 85% of its motor-oil needs from Quality Oil during the term of the Agreement. Paragraph 6 and Exhibit A imposed a Premature Termination Penalty on any early termination, and Paragraph 7 required that if Kelley Partners sold its business, it was to assign its obligations to its successor or remain liable under the Agreement. Reading the contract as a whole and harmonizing all of its provisions shows that Kelley Partners' literal interpretation of the handwritten provision is commercially absurd."

Kelley argued that the contract expired in 60 months so it had no duty to repay the loan. The Seventh Circuit held that this was incorrect and would make the contract commercially unreasonable.

Comment: cases like this one cause corporate lawyers to tear their hair out - but the Court did an excellent job of deciphering the true meaning of the contract.

Edward X. Clinton, Jr.

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The Necessary Steps To Collect a Business Debt

1. Before selling any goods or rendering a service, make the customer/debtor sign a written agreement, preferably one providing that the customer must pay legal fees if he does not pay.

2. Deliver the goods or service and make sure that the debtor acknowledges the receipt of same.

3. Invoice the debtor.

4. Send a reminder invoice.

5. Send emails or written correspondence to the debtor that support your position that the debtor accepted the goods and/or services.

6. Try to negotiate a resolution with the debtor, including offering a payment plan.

7. Initiate collection action.

By far the most important step is to document the transaction in writing so that the debtor cannot claim that the goods and/or services were not delivered.

Edward X. Clinton, Jr.

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Asset Exchange II, LLC v. First Choice Bank, Illinois Appellate Court

In this recent decision of the Illinois Appellate Court for the First District, the Court rejected a claim by a borrower that the 365/360 interest calculation method violated the Illinois Interest Act. According to the Court, Asset Exchange is a limited liability company owned by "two sophisticated businessmen." On December 14, 2007, Asset Exchange entered into a commercial loan agreement with the Defendant Bank whereby the Bank agreed to loan $1,250,000 to Asset Exchange. The interest rate was 8.25%, computed on a 365/360 basis. The loan states: "'the annual interest rate for this Note is computed on a 365/360 basis; that is by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding.'" Plaintiff claimed that, by using a year of less than 365 days, the Bank was wrongfully using a definition of "year" that was in violation of the Illinois Interest Act and thus charged and received more interest than was due. The Bank moved to dismiss on the ground that the Interest Act does not apply to commercial loans. The trial court agreed and the Appellate Court affirmed. The Appellate Court noted that prior Illinois decisions have held that the Interest Act does not apply to corporations. See Computer Sales Corp. v. Rousonelos Farms, Inc., 190 Ill. App. 3d 388, 392 (1989). The Appellate Court rejected the breach of contract claim because (a) the terms of the Note were unambiguous and (b) the Bank complied with the terms of the Note. Comment: this is a victory for Banks as the 365/360 interest calculation method is commonly used in commercial transactions. Edward X. Clinton, Jr.

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What Statute of Limitations Applies to A Claim That A Mortgage Was Unconscionable?

Estate of Davis v. Wells Fargo Bank, 633 F. 3d 529 - Court of Appeals, 7th Circuit 2011 - Google Scholar



The Seventh Circuit affirmed the dismissal of the plaintiff's claim against Wells Fargo Bank, which took over the servicing of a predatory mortgage loan.



The plaintiff asserted claims for unconscionability and fraud under Illinois law. The Seventh Circuit noted that the fraud and unconscionalbility claims were subject to a five-year statute of limitations. See 735 ILCS 5/13-205.



The dismissal of the fraud claim was affirmed by the Seventh Circuit on the ground that Davis disputed the charges and failed to pay them.



The Court explained: "On appeal, Mrs. Davis contends that the district court erred in not also considering the defendants' demands that she pay her loan, demands that continued even after the defendants knew that the Kankakee County court had ruled that her loan was based in part on Mortgage Express's fraud. We agree that overlooking this allegation was incorrect. Statements made to induce someone to pay a purported debt that they do not actually owe, if made with the requisite knowledge and intent, can support an allegation of fraud. See Hartigan v. E & E Hauling, Inc., 153 Ill.2d 473, 180 Ill.Dec. 271, 607 N.E.2d 165, 175-77 (1992) (allegations that contractor's letter sent to a metropolitan authority contained material misrepresentations as to contractor's compliance with minority business enterprise contract requirements, made for purpose of inducing authority's reliance in paying contract installment, supported allegation of common-law fraud). However, we agree with the district 537*537 court that Davis's fraud claim still fails for a different reason. Even though Mrs. Davis alleged that the defendants attempted to induce her to pay money that they knew she did not owe, Mrs. Davis did not allege that she had relied on the defendants' demands for payment or that she had suffered any damages as a result of those demands. To the contrary, with the help of her attorney, she fought those unjustified demands. Without reliance or damages, Mrs. Davis does not have a viable claim for fraud. We affirm the district court's dismissal of Mrs. Davis's fraud claim."



Comment: Illinois does not recognize attempted fraud. To sue for fraud the aggrieved party must allege damages.



The Breach of Contract claim of unconscionability was barred by the five-year statute of limitations.



The court reasoned: "Under Illinois law, a contract may be found to be unconscionable as a matter of law on either a "procedural" or "substantive" basis, or both. Razor v. Hyundai Motor America, 222 Ill.2d 75, 305 Ill.Dec. 15, 854 N.E.2d 607, 622 (2006). Procedural unconscionability refers to a situation in which a term is so difficult to find, read, or understand that the party could not fairly be said to have been aware she was agreeing to it. Procedural unconscionability also takes into account the party's relative lack of bargaining power. Razor, 305 Ill.Dec. 15, 854 N.E.2d at 622, citing Frank's Maintenance & Engineering, Inc. v. C.A. Roberts Co., 86 Ill.App.3d 980, 42 Ill.Dec. 25, 408 N.E.2d 403, 410 (1980). Substantive unconscionability, on the other hand, refers to contractual terms which are inordinately one-sided in one party's favor. Razor, 305 Ill.Dec. 15, 854 N.E.2d at 622, citing Rosen v. SCIL, LLC, 343 Ill.App.3d 1075, 278 Ill.Dec. 770, 799 N.E.2d 488, 493 (2003).



Mrs. Davis has not shown that the district court erred when it barred consideration of the formation of her mortgage contract in September 1999 on statute of limitations grounds. In this federal lawsuit, Mrs. Davis was not using the doctrine of unconscionability in its most familiar way, as an affirmative defense to bar enforcement of a contract or a particular term of a contract. See, e.g., Razor, 305 Ill.Dec. 15, 854 N.E.2d at 622-24 (holding that exclusion of consequential damages in limited warranty was not enforceable because it was unconscionable). Mrs. Davis instead sought damages from the successors in interest to the original lender. We do not address here whether unconscionability gives rise to a standalone claim for damages under Illinois law, as Mrs. Davis asserts here. We do not address that issue because even if such a claim is cognizable in Illinois, it is clear that such a claim would be barred by the five-year statute of limitations."



Edward X. Clinton, Jr.

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Illinois Court Holds That Judgment Obtained By Unlicensed Bill Collector is Void

LVNV FUNDING, LLC v. Trice, Ill: Appellate Court 2011 - Google Scholar

This case could have a broad ranging impact on the debt collection industry as it holds that an unlicensed bill collection firm's judgment against a debtor is void as a matter of law.

The Court held that the judgment debtor can attack a void judgment under Section 2-1401 without showing diligence. It wrote:"Trice has adequately alleged that before it filed the lawsuit, LVNV had not registered as a collection agency, as required by the Illinois Collection Agency Act (Act) (225 ILCS 425/14, 14b (West 2008)). But Trice did not raise this issue before the trial court entered a final judgment against him on LVNV's complaint. Trice raises the issue only in a section 2-1401 petition for relief from the judgment. Finally, Trice claims that LVNV's failure to register makes the judgment in its favor void, and not merely voidable.

When the trial court enters a void judgment, a party aggrieved by the judgment may attack it in a section 2-1401 motion without showing diligence. "[T]he allegation that the judgment or order is void substitutes for and negates the need to allege a meritorious defense and due diligence." Sarkissian v. Chicago Board of Education, 201 Ill. 2d 95, 104 (2002)."

The Appellate Court then reasoned that because the collection agency had committed a crime in attempting to collect without a license, the judgment was void.

"A party who acts as a collection agency without proper registration commits a Class A misdemeanor and must also pay a civil penalty. 225 ILCS 425/4.5, 14, 14b (West 2008).

Assuming the truth of the allegations in Trice's section 2-1401 motion, that LVNV had not registered as a collection agency before it sued Trice, LVNV committed one crime when it purchased the debt from Citibank (see 225 ILCS 425/3(d) (West 2008)), and it committed a second crime when it filed the complaint. See 225 ILCS 425/14 (West 2008).

Williston states the general rule that applies here:

"When a contracting party is required to have a license to engage in a business and violation of required licensing statute is made a crime, a contract calling for performance in violation of this requirement is illegal and void." 10 Samuel Williston & Richard A. Lord, A Treatise on the Law of Contracts §19.47, at 562 (4th ed. 1993).

The rule follows from the "elementary principle[] of contract law *** that an illegal contract is void ab initio." People v. Caban, 318 Ill. App. 3d 1082, 1089 (2001). In support of the general rule, Williston cites Reilly v. Clyne, 234 P. 35, 37 (Ariz. 1925), for the proposition that "where a statute pronounces a penalty for an act, a contract founded on the act is void.""

Comment: this decision is consistent with the current trend of courts attempting to rein in collection agencies. There have been reports in the press and in the cases of debt collectors attempting to obtain a judgment where the debt collector does not own the debt.

Edward X. Clinton, Jr.

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Greenberger v. GEICO General Ins. Co., 631 F. 3d 392 - Court of Appeals, 7th Circuit 2011 - Google Scholar

Greenberger v. GEICO General Ins. Co., 631 F. 3d 392 - Court of Appeals, 7th Circuit 2011 - Google Scholar

The Seventh Circuit has affirmed the dismissal of a proposed class action by a policyholder against GEICO insurance.

Plaintiff alleged that GEICO had a practice of omitting necessary repairs from auto collision damage estimates and that he was damaged thereby.

The Seventh Circuit summarized the allegations and procedural history as follows:

"Though legally distinct, Greenberger's contract and fraud claims are all premised on the same basic factual allegation: that GEICO systematically omits necessary repairs from its collision-damage estimates in violation of the promise to restore the policyholder's vehicle to its preloss condition. The district court sidestepped the class-certification question, dismissed the statutory consumer-fraud claim, and then entered summary judgment for GEICO on 395*395the breach-of-contract and common-law fraud counts. Greenberger appeals."

The Seventh Circuit affirmed the dismissal of the case in all respects, finding that the fraud claims were really breach of contract claims dressed up as fraud claims.

"We affirm. All of Greenberger's claims are foreclosed by the Illinois Supreme Court's comprehensive decision in Avery v. State Farm Mutual Automobile Insurance Co., 216 Ill.2d 100, 296 Ill.Dec. 448, 835 N.E.2d 801 (2005). Among other important holdings, Averyestablished the common-sense proposition that a policyholder's suit against his insurer for breach of its promise to restore his collision-damaged car to its preloss condition cannot succeed without an examination of the car. Id., 296 Ill.Dec. 448, 835 N.E.2d at 826. Greenberger gave away his car, and without it, he cannot prove that what GEICO paid him was inadequate to restore the car to its preloss condition.

Avery also made clear that fraud claims must contain something more than reformulated allegations of a contractual breach. Id., 296 Ill.Dec. 448, 835 N.E.2d at 844. Greenberger alleges that GEICO never intended to restore his car to its preloss condition and failed to disclose that it regularly breaches this contractual promise. These are breach-of-contractallegations dressed up in the language of fraud. They cannot support statutory or common-law fraud claims."

Comment: this was an attempt to resurrect a type of class action against an auto insurer. In Illinois, these claims do not work. They can be brought on an individual basis, but the plaintiff must retain the car for examination to determine if the insurance company acted appropriately.

Edward X. Clinton, Jr.

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Harvard Law Society of Illinois

Thanks to the Harvard Law Society of Illinois for hosting today's lunch to discuss small firm practice.

Thanks to Daniel Ebner and Stacy Austin, the hosts of today's event.

Edward X. Clinton, Jr.

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