ITT Indus. Credit Co. v. DS America, Inc.

Decision Date07 December 1987
Docket NumberNo. 86 C 7446.,86 C 7446.
Citation674 F. Supp. 1330
PartiesITT INDUSTRIAL CREDIT COMPANY, Plaintiff, v. D.S. AMERICA, INC., Defendant.
CourtU.S. District Court — Northern District of Illinois

Alexander Terras, Mark P. Cohen, Epton, Mullin & Druth, Ltd., Chicago, Ill., for plaintiff.

Gerald L. Morel, Nancy E. Sasamoto, Masuda, Funai, Eifert & Mitchell, Ltd., Chicago, Ill., for defendant.


SHADUR, District Judge.

ITT Industrial Credit Company ("ITT") sues D.S. America, Inc. ("D.S. America") to enforce the parties' December 28, 1984 Recourse/Repurchase Agreement (the "Agreement"). As contemplated by the Agreement (though the parties dispute whether the financing transaction next referred to followed the proper form), ITT financed the purchase of printing equipment from D.S. America by Color Company ("ColorComp"). If the Agreement in fact applies, D.S. America is obligated to have provided recourse for ITT for a three-year period in case of ColorComp's default, an event that has come to pass.

Both ITT and D.S. America have moved under Fed.R.Civ.P. ("Rule") 56 for summary judgment on the one-count Complaint.1 For the reasons stated in this memorandum opinion and order, both motions are denied.2

Applicable Standards

Whenever cross-motions for summary judgment are involved, this Court must take a dual perspective: Each movant has the burden of establishing the absence of any genuine issue of material fact on its own motion (Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986)). To determine the existence of any material factual dispute, this Court must (on each motion) draw "only reasonable inferences, not every conceivable inference," in favor of the nonmovant (DeValk Lincoln Mercury, Inc. v. Ford Motor Co., 811 F.2d 326 (7th Cir.1987)). "Materiality" of a dispute depends on the fact being outcome-determinative (Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986)):

Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment.

Once a movant has met its burden of showing no genuine issue, the nonmovant can then establish such an issue only through evidentiary submissions authorized by Rule 56, not merely by contrary allegations in its pleadings (Celotex, 106 S.Ct. at 2553).

As for the applicable law, this opinion will look to Illinois. That need not necessarily have been the case: Only D.S. America is Illinois-based, with ITT having its home office in Missouri and ColorComp being a Texas company. But both litigants have focused on Illinois law—and where (as here) the parties have failed to raise the choice of law issue and have treated the forum's substantive law as controlling, that is viewed as a stipulation as to the applicable law (National Association of Sporting Goods Wholesalers, Inc. v. F.T.L. Marketing Corp., 779 F.2d 1281, 1284-85 (7th Cir. 1985)).3


In 1984 D.S. America, a supplier of lithographic and electronic arts equipment, agreed to sell one of its Model SG-818 Dot Scanners to printing company ColorComp. ColorComp needed financing, so D.S. America referred it to ITT, a commercial finance company, and negotiations ensued.

As a condition of its providing financing, ITT asked D.S. America to underwrite a three-year period of ColorComp's payments if the latter defaulted on its obligations (ITT had originally wanted recourse rights for the full term of ColorComp's obligation —five years—but settled for a shorter term). ITT sent D.S. America the one-page letter-form Agreement, which was signed by D.S. America's Executive Vice President Yoshiaki Satoh ("Satoh") and then dated December 28, 1984, the same day ITT and Colorcomp executed the financing documents.

Under the ITT-drafted form Agreement, the underlying transaction was described as ITT's purchase of the equipment, followed by its lease to ColorComp. Its pertinent provisions (in fact, almost the entire document) read:

In order to induce you ITT to purchase the equipment above described4 and to enter into a Lease Agreement with respect to said equipment between you as Lessor and the above named Lessee ColorComp, the undersigned D.S. America hereby agrees that in the event of any default of the Lease Agreement which shall include: failure by Lessee to make any scheduled rental payment to Lessor within thirty (30) days from the contractual due date, under said lease on the part of Lessee, the undersigned will upon your written request perform one of the following:
1) Purchase of all your interest in the said equipment and your rights as Lessor under the said lease at a price equal to the sum of the entire unpaid lease balance within 60 days of notice of default
2) Furnish to you a new Lessee who will assume responsibility for the remaining rental payments. Said Lessee will be acceptable only at your own sole discretion. Furthermore, all necessary information on said Lessee will be provided to you within 45 days of notice of default. In the event Lessor accepts and acknowledges this new Lessee, all conditions of the initial lease will remain in full force and effect including the recourse provision.
In the event of purchase by us under this agreement the purchase price shall be payable to you in cash upon demand by you and you shall not be required to take possession of the equipment from the Lessee or to deliver the same to the undersigned. Upon payment of the purchase price, the undersigned will, at its own expense, take possession of the said equipment wherever the same may be and it is understood that you shall make NO WARRANTY OR GUARANTY of any kind or nature whatever respecting the condition of said equipment or the state of title thereto.
This Agreement shall commence 12-28, 1984 and be in force for a period of three (3) years.

However, the transaction between ITT and ColorComp was not structured as a lease. Instead ColorComp bought the equipment from D.S. America with funds borrowed from ITT, signing an Installment Note and Security Agreement. Rather than being a titleholder-lessor, then, ITT was a direct lender with a security interest in the collateral—the Scanner and its accessories (Albert Kopczenski "Kopczenski" Dep. Exs. 4, 5). ITT also received personal guaranties on the note from ColorComp owners Gerald and Miriam Fields (collectively "Fields") (Kopczenski Dep. Ex. 6). Satoh Aff. ¶ 7 says D.S. America was not told ITT and ColorComp had entered into the installment loan and security arrangement instead of a finance lease.5

ITT filed UCC financing statements with the State of Texas in December 1984 and with Harris County, Texas on January 21, 1985 (Kopczenski Dep. Ex. 23). Those statements did not describe the Dot Scanner with precision, instead listing numerous pieces of equipment supplied to ColorComp that constitute either components of the Scanner or accessories to the main piece of equipment, the Scanner itself (Joseph Semeraro "Semeraro" Dep. 43).

In August 1985 ITT notified D.S. America that ColorComp was in default of its obligations.6 D.S. America asked for copies of the ITT-ColorComp documentation — assertedly expecting to receive lease transaction documents.7 Kopczenski sent D.S. America's attorney Colin Hara ("Hara") a set of papers including the Installment Note, the Security Agreement and the UCC filings (Kopczenski Dep. Exs. 12, 23).8 D.S. America's response (an October 2 letter from Hara, Kopczenski Dep. Ex. 21) was a refusal to provide recourse per the Agreement because (1) no lease existed between ITT and ColorComp and (2) ITT's UCC filings had failed to secure the Scanner.

Negotiations then ensued between ITT and ColorComp to modify the installment note payment schedule. On November 18, 1985 an extension agreement was signed that (1) suspended payments on the note until April 1986, (2) pushed back the note's due date from December 1989 to October 1990 and (3) called for an extension fee of $26,507 payable in four installments, apparently as interest for the period for which principal payments were suspended (Kopczenski Dep. Ex. 14). That extension was agreed to by Fields, but D.S. America was not asked to consent. As part of the extension ColorComp agreed to a revised UCC filing to make ITT's security interest in the Scanner "clearer" (Kopczenski Dep. 63-64). That revision, which expressly identified the Scanner by its serial number and thus cured the original flaw (Kopczenski Dep. Ex. 18), was filed November 20, 1985.

In 1986 ColorComp again went into default on its payments to ITT. ITT's July 18, 1986 letter to D.S. America again called on the latter to provide recourse under the Agreement (ITT Ex. 7). D.S. America replied on July 22 (id.) by simply referring ITT to its earlier refusal ("The letter of October 2, 1985 addressed to Al Kopczenski ... explains our position in this matter"). ITT then negotiated a second extension with ColorComp, which was signed and agreed to by Fields on July 29, 1986 (Kopczenski Dep. Ex. 16). Under that agreement the payments on the note were lowered by something less than 40% for one year, to be increased thereafter to an amount slightly greater than the original monthly payments, while the ultimate due date was pushed back approximately three months. Again D.S. America was not asked to approve the revision (Mortimer Aff. ¶¶ 4-5).

It turned out that ColorComp was beyond saving. It quickly failed to meet its revised obligations to ITT and went into default once more. It filed for Chapter 11 Bankruptcy Code protection September 26, 1986 (ITT Ex. 8). ITT brought this action October 1, 1986.

Parties' Contentions

Resolution of the current motions turns on three arguments advanced by D.S. America:

1. ITT, by not entering into a lease with ColorComp, failed to satisfy a condition precedent to D.S. America's performance under the Agreement.
2. D.S. America's obligation under the Agreement was

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