Automotive Finance Corp v. Ridge Chrysler Plymouth

• Citation: 219 F.Supp.2d 945
• Decision Date: 13 September 2002
• Docket Number: No. 01 C 8146.,01 C 8146.
• Parties: AUTOMOTIVE FINANCE CORPORATION, Plaintiff, v. RIDGE CHRYSLER PLYMOUTH L.L.C., et al., Defendants.
• Court: U.S. District Court — Northern District of Illinois

219 F.Supp.2d 945

AUTOMOTIVE FINANCE CORPORATION, Plaintiff, v. RIDGE CHRYSLER PLYMOUTH L.L.C., et al., Defendants.

No. 01 C 8146.

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

September 13, 2002.

Daniel P. Hogan, Donald C. Pasulka, Brian Marguez, Ross & Hardies, Chicago, IL, for plaintiff.

Janet Adams Brosnahan, James J. Roche & Associates, Chicago, IL, for defendants.

MEMORANDUM OPINION AND ORDER

SHADUR, Senior District Judge.

Automotive Finance Corporation ("Automotive") has filed a two-count complaint against Ridge Chrysler Plymouth, L.L.C. ("Ridge") and Gerald Gorman ("Gorman"), claiming that Ridge and Gorman have failed to comply with a contractually specified prepayment penalty¹ in violation of Illinois and Indiana law. Because both sides have viewed the issues posed by this case as purely legal rather than factual in nature, each has now filed a Fed.R.Civ.P. ("Rule") 56 summary judgment motion.² But for the reasons set forth in this opinion, each side's motion must be and is denied.

Summary Judgment Standards

Familiar Rule 56 principles impose on any party moving for summary judgment the burden of establishing the lack of a genuine issue of material fact (Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986)). For that purpose this Court must "consider the evidentiary record in the light most favorable to the non-moving party . . . and draw all reasonable inferences in his favor" (Lesch v. Crown Cork & Seal Co., 282 F.3d 467, 471 (7th Cir.2002)). And Pugh v. City of Attica, 259 F.3d 619, 625 (7th Cir.2001) has echoed the teaching of Anderson v. Liberty Lobby Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986):

A genuine issue of triable fact exists only if "the evidence is such that a reasonable jury could return a verdict for the nonmoving party."

Where as here cross-motions for summary judgment are involved, it is thus necessary to adopt a dual perspective. This opinion reflects that approach where appropriate.

Facts

Gorman is the manager of automobile dealership Ridge (A.St.¶¶ 6-7). Automotive, in the business of providing loans to automobile dealers, loaned Ridge $1.45 million pursuant to the Agreement's terms (A.St.¶¶ 3, 9-10). Under those terms Ridge agreed to sell the insurance products of a company called Protective, including vehicle service contracts and Gap policies (R. Add.St.¶¶ 1, 3-4). All money owed to Ridge arising from its sale of Protective products was to be transmitted by Protective directly to Automotive in partial satisfaction of Ridge's principal and interest obligations (id. ¶ 2).

More specifically, Agreement ¶ 5 provided:

Borrower [Ridge] represents that until Lender [Automotive] is paid in full under this Agreement, Borrower has irrevocably directed Protective to pay Lender all moneys owed to Borrower pursuant to the Protective Agreement. The parties agree to apply the $289 payments per Service Contract from Protective to Lender to the principal and interest owed by Borrower to Lender under this Agreement. Except as provided below the parties agree to apply the $92 payment per Gap Policy from Protective to Lender to the principal and interest owed by Borrower to Lender under this Agreement. The parties agree that such monthly payments shall be paid on the 1st of each month.

Agreement ¶ 5 went on to provide what would happen if Ridge failed to sell the required minimum numbers of Protective products in any given month (id.):

During the term of this agreement Borrower shall sell at least 125 Service Contracts per month. If Borrower sells less than 125 but more than 120 Service Contracts during this period, then Borrower shall be allowed to carry the deficiency over to the next month's tally; however, Borrower must make up any deficiency under 125 in the next month before being allowed to apply any Service Contract sold to the new month's requirement. If Borrower fails to sell at least 121 Service Contracts per month, then Borrower shall, within 3 business days following the end of such month, pay Lender $364.00 ($289.00 in lost principal and interest payments plus a $75 fee) for each Service Contract under 125. If the Borrower sells in excess of 125 Service Contracts per month, the contracts over 125 will be carried over to the subsequent month's tally of Service Contracts sold.

During the term of this agreement Borrower shall sell at least 45 Gap Policies per month. If Borrower sells less than 45 but more than 40 Gap Policies during this period, then Borrower shall be allowed to carry the deficiency over to the next month's tally; however, Borrower must make up any deficiency under 45 in the next month before being allowed to apply any Gap Policies sold to the new month's requirement. If Borrower fails to sell at least 41 Gap Policies per month, then Borrower shall, within 3 business days following the end of such month, pay Lender $167.00 ($92.00 in lost principal and interest payments plus a $75 fee) for each Service Contract [sic] under 45. Any Gap Policies Borrower sells in excess of 45 per month will not be included toward principal payments.

In addition to the payments to Automotive described in the two just-quoted paragraphs of the Agreement, Automotive received further payments directly from Protective — $18 for each Gap policy and $121 for each service contract sold by Ridge (R. Add.St.¶¶ 5-7). While Ridge says that it was ignorant of those payments (R. Ans.Mem.4) and Automotive offers no evidence to the contrary, Automotive claims that Ridge should have known that Automotive was receiving additional money from Protective (A.R. Mem.13-14).

Agreement ¶ 1 specified a 36-month term, which began on April 1, 2001 and was scheduled to end on March 31, 2004 (R. St.¶ 10). At the heart of the current dispute is the Agreement ¶ 6 provision, triggered if Ridge were to prepay its loan obligation within the first 12 months:

PREPAYMENT PENALTY. If Borrower, at any time during the first twelve months of this agreement, prepays the balance of the Borrowed Funds, Borrower shall pay as a prepayment penalty an additional 15% on the principal due, unless such prepayment is paid by way of sales of the Service Contracts.

No prepayment penalty whatever would be due, however, if prepayment were to take place even one day after March 31, 2002.

On July 9, 2001 Automotive provided Ridge with a letter indicating the payoff figure for Ridge's obligations under the Agreement (R. St.¶ 20). Automotive stated that Ridge owed $1,479,901.01, comprising a principal balance of $1,286,879.44 and a prepayment penalty of $193,030.57 (id.). On July 20 Ridge paid Automotive $1 million and informed Automotive that it was attempting to verify the proper amount due (id. ¶ 21; A. St. ¶ 21). After receiving that July 20 payment plus an additional payment on August 10, Automotive maintained that Ridge still owed some part of the principal balance plus a prepayment penalty of $189,907.42 (R. St.¶ 22). On September 20 Automotive received Ridge's payment of the amount specified as outstanding principal, but Ridge refused to pay the claimed prepayment penalty (id. ¶¶ 23, 24).

One other facet of the controversy is identified here only briefly because it is concededly in factual dispute and has not been fully fleshed out by the parties' submissions: Ridge's assertion and Automotive's denial that the prepayment penalty was waived in any event because it was Automotive that demanded prepayment of the loan. Because the ensuing analysis is not fully dispositive of the litigation, that issue remains to be addressed together with the question of what actual damages Automotive may be able to prove in lieu of the unenforceable penalty.

Unconditional Guaranty

On the same day the Agreement was executed, Gorman signed an Unconditional Guaranty ("Guaranty," Complaint Ex. C), promising to pay immediately any amount owed by Ridge in the event that Ridge failed to make any payment when due (A.St.¶¶ 14-16):

In case the Debtor [Ridge] shall fail to pay all or any part of the Liabilities when due, whether by acceleration or otherwise, according to the terms thereof, the undersigned will immediately pay the amount due and unpaid by the Debtor in like manner as if such amount constituted the direct and primary obligation of the undersigned.

Gorman also agreed to "pay all costs, expenses, and attorneys' fees incurred by AFC [Automotive] in the enforcement of this guaranty" (id.; A. St. ¶ 17). Gorman too has refused to pay the amount claimed as the prepayment penalty and to pay any costs, expenses and attorneys' fees incurred by Automotive in its attempts to collect that sum (R. St.¶ 24).

Unenforceability of the Prepayment Penalty

If the Agreement's prepayment provision is unenforceable, Automotive's attempt to recover that specified amount is dead in the water. And that is so no matter how unambiguous the contract language providing for the prepayment may be.

To succeed on any breach of contract claim under Illinois law,³ a plaintiff must prove (1) the existence of a valid and enforceable contract, (2) performance by plaintiff, (3) breach by defendant and (4) resultant injury to plaintiff (Henderson-Smith & Assocs., Inc. v. Nahamani Family Serv. Ctr., Inc., 323 Ill.App.3d 15, 27, 256 Ill.Dec. 488, 752 N.E.2d 33, 43 (1st Dist.2001)). Automotive asserts that Ridge's failure to pay the claimed prepayment penalty and accrued interest constitutes a breach (A.Mem.6). But only reasonable prepayment penalties are enforceable (In re LHD Realty Corp., 726 F.2d 327, 330 (7th Cir.1984)). Hence if Agreement's prepayment penalty is unreasonable and is thus not enforceable, Ridge's nonperformance is not a breach.

Ridge invokes the familiar comparison between enforceable liquidated damages provisions and unenforceable penalties to argue that Agreement's 15% prepayment penalty is an unenforceable penalty clause (R. Mem.3-6, R. Ans.Mem.4-5). Automotive counters that a...