Old Nat'l Bank v. Leasing Innovations, Inc.

Decision Date30 March 2013
Docket NumberCase No. 1:11-cv-01539-TWP-DKL
PartiesOLD NATIONAL BANK, Plaintiff, v. LEASING INNOVATIONS, INC., Defendant.
CourtU.S. District Court — Southern District of Indiana
ENTRY ON CHOICE OF LAW

This matter is before the Court on the parties' motions regarding choice of law (Dkts. 37, 38). Plaintiff Old National Bank ("ONB") has filed suit against Defendant Leasing Innovations, Inc. ("Leasing Innovations") seeking recession of a Bill of Sale and Assignment (the "Assignment") due to either mutual mistake of fact, or, alternatively, the nonexistence of the security interest, constituting a complete failure of consideration. Leasing Innovations is a California corporation with business operations in California and Massachusetts. ONB is a national banking association with its principal place of business in Indiana.

On April 10, 2007, Leasing Innovations assigned to ONB, through the Assignment, all of Leasing Innovations' rights as lessor under a lease (the "Equipment Lease") for the manufacturing equipment (the "Equipment") of Wildwood Industries, Inc. ("Wildwood").1 In consideration for the Assignment, ONB paid Leasing Innovations $1,911,950.50.

On March 5, 2009, Wildwood was placed into an involuntary bankruptcy proceeding, wherein it was discovered that Wildwood had participated in a massive fraudulent schemeregarding the Equipment Lease, along with numerous other equipment leases involving multiple financial institutions. The fraudulent scheme revealed that the Equipment which secured ONB's Assignment was never actually manufactured. Subsequently, ONB filed suit against Leasing Innovations seeking either rescission of the contract based upon the mutual mistake of both ONB and Leasing Innovations, or rescission due to failure of consideration. See Dkt. 1 at 3-5.

Unfortunately, the Assignment entered into by ONB and Leasing Innovations did not contain a choice of law provision. Furthermore, the parties disagree on the state law that should govern in this case. Therefore, the parties ask the Court to determine which state's substantive law shall govern this case. For the reasons set forth below, the Court determines that Indiana law shall apply. As such, ONB's motion (Dkt. 37) is GRANTED and Leasing Innovation's motion (Dkt. 38) is DENIED.

I. LEGAL STANDARD

A court in a diversity case must apply the substantive law of the forum in which it sits, including that pertaining to choice of law. West Bend Mut. Ins. Co. v. Arbor Homes LLC, 703 F.3d 1092, 1095 (7th Cir. 2013). Therefore, if the laws of more than one jurisdiction arguably could apply to particular case, federal courts must apply the forum state's choice of law rules. Jean v. Dugan, 20 F.3d 255, 260-61 (7th Cir. 1994) (citing Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496-97 (1941)). Accordingly, the Court will apply Indiana's choice of law rules in making its determination of which state's law governs the substantive issues.

Under Indiana law, "before applying the choice of law analysis all laws must be carefully examined to determine that a conflict actually exists." Loos v. Farmer's Tractor & Implement Co., 738 F. Supp. 323, 324 (S.D. Ind. 1990); see Am. Emp'rs Ins. Co. v. Coachmen Indus., Inc., 838 N.E.2d 1172, 1176 (Ind. Ct. App. 2005). When the laws potentially governing a contractaction do in fact conflict, Indiana courts apply the "most intimate contacts" test to resolve any choice of law issues. Nat'l Union Fire Ins. Co. of Pittsburgh, PA v. Standard Fusee Corp., 940 N.E.2d 810, 815 (Ind. 2010) (citing W.H. Barber Co. v. Hughes, 63 N.E.2d 417, 423 (Ind. 1945)). "[T]he test requires the court to analyze 'all acts of the parties touching the transaction in relation to the several states involved' and apply 'the law of that state with which the facts are in most intimate contact.'" Nucor Corp. v. Aceros y Maquilas de Occidente, S.A. de C.V., 28 F.3d 572, 581 (7th Cir. 1994) (quoting Hughes, 223 N.E.2d at 423).

In assessing the most intimate contacts, Indiana courts apply the factors found in the Restatement (Second) of Conflict of Laws § 188(2). These factors are: 1) the place of contracting; 2) the place of contract negotiation; 3) the place of performance; 4) the location of the subject matter of the contract; and 5) the domicile, residence, nationality, place of incorporation, and place of business of the parties. Am. Emp'rs Ins. Co., 838 N.E.2d at 1177 (citing Restatement (Second) of Conflict of Laws § 188(2) (1971)).

II. DISCUSSION

ONB argues the parties have not chosen which state's law applies for the governing action, and the applicable laws of each state do not conflict with each other, therefore Indiana law should apply. Leasing Innovations concedes the parties have not chosen which state's law applies, but argues that the applicable laws of Illinois and California conflict with the laws of Indiana and therefore either Illinois or California law should apply. A conflict of laws exists only "when a difference in law makes a difference to the outcome." Loos, 738 F. Supp. at 324. Thus the court must determine whether Indiana, Illinois, and California laws would produce differing outcomes with regard to the principles of mutual mistake and failure of consideration.

A. Mutual Mistake

Under Indiana law, to rescind a contract on "mutual mistake," the party looking to rescindmust show: 1) the mistake relates to the essence, or sine qua non, of the agreement; and 2) the parties can be returned to the status quo. Peoples State Bank v. First Sec. Leasing, Inc., No. 1:09-cv-01496-TWP-MJD, 2012 WL 243604, at *4 (S.D. Ind. Jan. 25, 2012) (citing Stainbrook v. Low, 842 N.E.2d 386, 397 (Ind. Ct. App. 2006)). Furthermore, "[a] party may not rescind a contract on the basis of a risk it knew was inherent in the agreement." Id. at *5 (citation omitted).

In Illinois, "[a] mutual mistake results when both parties share a common assumption about a vital existing fact upon which they based their bargain and that assumption is false and because of the mistake, a quite different exchange of values occurs from the exchange of values the parties contemplated." Grun v. Pneumo Abex Corp., 163 F.3d 411, 421 (7th Cir. 1998) (internal quotation and alterations omitted). A party looking to rescind a contract based on mutual mistake must show: 1) that the mistake relates to a material feature of the contract; 2) that it occurred notwithstanding the exercise of reasonable care; 3) that it is of such grave consequence that enforcement of the contract would be unconscionable; and 4) that the other party can be placed in status quo. United States v. Sw. Elec. Coop., Inc., 869 F.2d 310, 314 (7th Cir. 1989).

Finally, in California, rescission by mutual mistake is governed by statute.2 California Civil Code § 1689(b)(1) states in part that a "party to a contract may rescind the contract . . . [i]f the consent of the party rescinding, or of any party jointly contracting with him, was given by mistake." Mistake of fact is defined in California Civil Code § 1577. A mistake of fact is not "the neglect of a legal duty on the part of the person making the mistake," but consists of "[a]n unconscious ignorance or forgetfulness of a fact past or present, material to the contract" or"[b]elief in the present existence of a thing material to the contract, which does not exist, or in the past existence of such a thing, which has not existed." Cal. Civ. Code § 1577. A party seeking rescission must also show "that it would suffer material harm if the agreement were enforced, though that need not be a pecuniary loss." Habitat Trust for Wildlife, Inc. v. City of Rancho Cucamonga, 175 Cal. App. 4th 1306, 1332-33 (Cal. Ct. App. 2009). Finally, California Civil Code § 1691 requires a party seeking rescission to "[r]estore to the other party everything of value which he has received from him under the contract or offer to restore the same upon condition that the other party do likewise, unless the latter is unable or positively refuses to do so." See Sharabianlou v. Karp, 105 Cal. Rptr. 3d 300, 309 (Cal. Ct. App. 2010) (stating that rescission "restores the parties to their former positions by requiring them to return whatever consideration they have received").

For the similarity of the states' laws under mutual mistake, the parties' only dispute is whether there is a substantial difference in determining whether a party bears the risk of mutual mistake. Illinois and California have adopted and apply the Restatement (Second) of Contracts §154 to determine the allocation of risk. Section 154 provides that a party bears the risk of mistake when:

(a) the risk is allocated to him by agreement of the parties, or
(b) he is aware, at the time the contract is made, that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient, or
(c) the risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so.

ONB concedes that Indiana does not follow § 154 when determining whether a party bears a risk of mistake, see Peoples State Bank, 2012 WL 243604, at *5, while both Illinois and California do. See Dkt. 39 at 13. Nevertheless, ONB contends "application of § 154 yields the same result as Indiana law with respect to whether a party bore the risk of mistake regarding the existence ofthe Equipment." Dkt. 39 at 9. Leasing Innovations contends that because Indiana has not adopted § 154 that there is a significant difference in the laws. Specifically, Leasing Innovations argues that the third prong of § 154 "grants courts a level of discretion and flexibility not contemplated by the first two prongs of § 154 or by Indiana case law." Dkt. 46 at 7.

The Court's specific task in determining whether a conflict of laws exists, is not to take a global view of an area of law and pinpoint each difference in application. Instead, the Court must determine whether application of the...

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