Orix Credit Alliance, Inc. v. Taylor Machine Works, Inc.

• Citation: 125 F.3d 468
• Decision Date: 05 September 1997
• Docket Number: No. 96-3184,96-3184
• Parties: ORIX CREDIT ALLIANCE, INC., Plaintiff-Appellant, v. TAYLOR MACHINE WORKS, INC., and William D. Metts, Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

Page 468

125 F.3d 468

38 Fed.R.Serv.3d 731

ORIX CREDIT ALLIANCE, INC., Plaintiff-Appellant, v. TAYLOR MACHINE WORKS, INC., and William D. Metts Defendants-Appellees.

No. 96-3184.

United States Court of Appeals, Seventh Circuit.

Argued April 22, 1997.

Decided Sept. 5, 1997.

Michael J. O'Rourke, Thomas G. Griffin, Michael C. Moody (argued), Roseanne Loftus, O'Rourke & Griffin, Chicago, IL, for Plaintiff-Appellant.

Aaron T. Shepley, Brian W. Bell (argued), Swanson, Martin & Bell, Chicago, IL, for Defendants-Appellees.

Before COFFEY, KANNE, and ROVNER, Circuit Judges.

KANNE, Circuit Judge.

Orix Credit Alliance, Inc. ("Orix"), an asset-based commercial lender, loaned $400,000 to Gallo Equipment's Florida division ("Gallo Florida"). To facilitate the capital loan, Orix and Gallo Florida asked Taylor Machine Works ("Taylor") to provide appraisals of certain Taylor-manufactured equipment owned by Gallo Florida that would serve as collateral for the loan. Orix also asked Taylor to agree to repurchase the equipment if Gallo Florida should default on the loan. Orix received these assurances in the form of a faxed letter on Taylor letterhead signed by William Metts, the Director of Marketing for Taylor. Gallo Florida subsequently defaulted on the loan, and Orix demanded that Taylor honor its repurchase agreement. Taylor, however, refused to honor that commitment, stating that the faxed letter was forged and that Metts never made such an agreement.

This litigation ensued, with Orix bringing several claims against Taylor and Metts. The claims at issue here primarily involve Orix's breach of contract, fraud, and negligent misrepresentation causes of action. The district court awarded Taylor judgment as a matter of law on Orix's contract and negligent misrepresentation claims, and the jury returned special verdicts absolving Taylor of liability on Orix's fraud claim. Orix now complains that the district court erroneously granted Taylor's judgment as a matter of law on the breach of contract and negligent misrepresentation claims, that it improperly instructed the jury as to the proper legal standard for fraud, that it wrongfully denied its request to add additional claims against Taylor and Metts, and that it erroneously denied its motion for a new trial. We agree with Orix that the district court did not properly instruct the jury on the fraud claim, and thus reverse on that ground. However, we affirm the district court's decision in all other respects.

I. HISTORY

Orix is a commercial lending institution that specializes in providing financing to companies for purchasing new or used equipment (i.e., a purchase money loan) or for working capital purposes (i.e., a capital loan). As an asset-based lender, Orix has a policy of making only secured loans that are based on present collateral or "as is" values. In most cases, the primary collateral for these loans is equipment.

Taylor manufactures and sells forklift equipment. One such piece of equipment is the marina forklift-a highly specialized piece of equipment that is used for lifting boats from water to on-land storage racks. Taylor's marketing division was headed by William Metts, who had been an employee at Taylor for thirty-nine years and the director of marketing for twenty years. Taylor sells much of its equipment through dealers that enjoy exclusive territories. One such dealer was Gallo Equipment.

Gallo Equipment is a dealer of new and used forklifts, and has been a dealer of Taylor-manufactured equipment since 1969. Since 1984, Gallo Equipment's Florida branch has had the exclusive right to sell Taylor-manufactured marina forklifts in Texas and all areas east of the Mississippi River. Gallo Equipment and Gallo Florida also service Taylor-manufactured equipment and sell Taylor parts. In 1991, Gallo Equipment sold $3-4 million in Taylor equipment, making it one of Taylor's top ten producers in the United States. By June of that same year, however, Gallo Equipment and its Florida division fell into serious debt with Taylor, with Gallo Florida owing Taylor more than $1 million--all of which was unsecured.

In early 1991, Gallo Florida sought a capital loan from Orix. Gallo Florida originally wanted a $2 million loan, but Orix felt uncomfortable with that amount and reduced it to $400,000. Robert Spoczynski served as Orix's credit manager for the Gallo Florida transaction. In that capacity, Spoczynski had credit authority up to $250,000, and therefore either Orix's operation manager (Don Pokorny) or its branch manager (Gary Modesto) needed to approve the $400,000 Gallo Florida deal.

In May or June 1991, Orix received Gallo Florida's credit application. Spoczynski and William McMillan--the Orix salesman who originally communicated with Gallo Equipment and Gallo Florida--traveled to Florida to view Gallo Florida's operations and see the forklift trucks that would serve as collateral. Although some of the forklifts were in various states of repair, Ron Gallo, the general manager of Gallo Florida, assured Spoczynski that he could paint the chassis, attach the marina masts, and then sell the equipment like new. Spoczynski also informed Gallo Florida that Orix would need collateral worth one and a half times the value of the loan.

While preparing the loan documents, Spoczynski informed Ron Gallo that he was having trouble verifying the value of the equipment. Ron Gallo assured Spoczynski that this would not be a problem because Gallo Florida had a strong relationship with Taylor--the manufacturer of the equipment--and that he could obtain appraisals from Taylor listing the wholesale values of the equipment. In addition, Ron Gallo told Spoczynski that Taylor would agree to repurchase the agreement from Orix if the loan went into default. Upon Spoczynski's return from Florida, Pokorny and Modesto approved the loan.

Ron Gallo then contacted William Metts so that they could prepare a letter concerning the value of the forklifts that would serve as the collateral. Metts shouldered the responsibility for Taylor's relationship with Gallo Florida and thus was well aware that Gallo Florida was indebted to Taylor for over $1 million in June of 1991. In addition to monitoring the Gallo Florida account, Metts had also provided Gallo Florida with appraisals on Taylor-manufactured equipment, and informed Gallo Florida on the prices of forklifts, discounts, and trade-in values.

Metts provided Ron Gallo with a copy of Taylor letterhead containing Metts's signature and title for Gallo Florida to use when listing the forklifts and their appraised values. Metts, however, did not list any equipment or appraisal values. He knew that Ron Gallo intended to fill in the blank letterhead with the equipment and the appraised values and that the letter would appear as if Metts had written it. At trial, Metts testified that this was the only time he provided a dealer with blank Taylor letterhead with his signature on it. Metts further testified that he never asked for a copy of the letters sent by Ron Gallo using the signed Taylor letterhead.

Ron Gallo, in turn, gave Metts the serial numbers of the Taylor-manufactured marina forklift masts and chassis to be pledged as collateral, and he informed Metts that the machines were either rebuilt or in the process of being rebuilt. Metts then provided Ron Gallo with the retail values of the equipment over the telephone, without ever inspecting the equipment in person. Metts later testified that he understood that Ron Gallo wanted retail values rather than wholesale values for the equipment. The difference between retail and wholesale value can vary from 2% to 20%.

Spoczynski and Ron Gallo then engaged in a string of fax communications regarding the appraisal letter from Taylor. On June 4, 1991, Spoczynski received the first letter from Ron Gallo. The letter, which was on Taylor letterhead and bearing Metts's signature, listed the forklifts, their serial numbers, and their purported wholesale values. In addition, the letter added that "[i]f Gallo fails to meet the loan commitment on the above machines, Tempco [sic] which is a division of Taylor Machines would buy these trucks from Orix." Ron Gallo told Spoczynski that Metts was the most knowledgeable person about the value of the forklifts and that Metts had done such appraisals before. Nonetheless, Spoczynski did not approve of the letter because the listed collateral did not sufficiently cover the loan obligation, the repurchase language was unsatisfactory, and the letter was not signed by an officer or director from Taylor.

In response to Spoczynski's concerns, Ron Gallo sent a second letter to Orix. This letter, also on Taylor letterhead and bearing Metts's signature, added the words "at the above prices" to the repurchase language. Spoczynski again had concerns with this letter due to the insufficient collateral. In addition, Spoczynski asked Ron Gallo why he was faxing the letters rather than someone from Taylor. Ron Gallo replied that Metts was visiting him at the time. Ron Gallo then sent a third letter on June 10, 1991, which added an additional forklift truck to the list of collateral.

Despite the continual revisions, Spoczynski remained unhappy with the content of the appraisal letters. Therefore, Spoczynski prepared a letter himself, faxed it to Ron Gallo, and informed Gallo that the letter was an example of what he needed from Taylor. This draft letter, dated June 4, 1991, included much of the language from the prior letters and added: "TEMTCO ... will buy the above trucks from ORIX Credit Alliance, Inc. for the amount of $505,000.00 U.S. in good funds upon demand." Spoczynski faxed the letter to Gallo Florida and informed Tish Gallo, Ron's sister, that Orix wanted the letter signed by an officer of Taylor rather than the marketing director. Spoczynski testified that Orix wanted an officer's signature, which was the custom and practice at Orix, to alleviate any question of...