Peoples State Bank v. First Sec. Leasing, Inc.
| Decision Date | 25 January 2012 |
| Docket Number | Case No. 1:09-cv-01496-TWP-MJD |
| Parties | THE PEOPLES STATE BANK, Plaintiff, v. FIRST SECURITY LEASING, INC., Defendant. |
| Court | U.S. District Court — Southern District of Indiana |
This matter comes before the Court on Defendant First Security Leasing's ("First Security") Motion for Summary Judgment [Dkt. 74] and Plaintiff The Peoples State Bank's ("Peoples") Cross-Motion for Summary Judgment [Dkt. 82]. Peoples brought this action seeking to rescind the assignment of an equipment lease agreement from First Security to Peoples on the basis of mutual mistake. For the reasons set forth below, both parties' motions are DENIED.
Peoples is a financial institution located and chartered to conduct business in the State of Indiana. First Security is an Arkansas corporation with its principal place of business in Little Rock, Arkansas. First Security provides lease finance products and services to corporations and governmental entities. At the time of the transaction at issue, First Security was a wholly-owned subsidiary of Crews and Associates, Inc. ("Crews"), an Arkansas-based full service investment banking firm. Crews has been one of three to five investment banking brokerage firms with which Peoples has done business since at least 1997, and Peoples has an ongoing business relationship with Crews.
The equipment lease transaction that is the subject of this litigation involves Rental Schedule No. 7 to Master Equipment Lease Agreement No. HGF051005, originally entered into by Leasing Innovations, Inc. ("Leasing Innovations"), as lessor, and Wildwood Industries, Inc. ("Wildwood"), as a lessee, on June 2, 2005 (the "Wildwood Lease"). The subject of and security for the Wildwood Lease was to be new specialized manufacturing equipment with a purchase price of $1,800,000.00. The Wildwood Lease was additionally personally guaranteed by the owners of Wildwood, Toni and Gary Wilder (the "Wilders"). First Security approached Peoples about the availability of the Wildwood Lease for purchase from Leasing Innovations in February 2006.
Because the Wildwood Lease had a one dollar buyout at the conclusion of the lease, Peoples treated the Wildwood Lease as a loan to Wildwood and analyzed it as such. Gregory Hartz ("Hartz"), People's Credit Risk Manager and Vice President who was responsible for assessing loans, conducted People's credit analysis of the Wildwood Lease and participated in the loan approval process. Hartz reviewed Wildwood's 2004 and 2005 financial statements, Wildwood's 2002 and 2003 tax returns, the Wilders' 2005 financial statement, the Wilders' 2002 and 2003 tax returns, the Wilders' May 2005 credit report, internet articles about Wildwood's background and products, and a Dunn & Bradstreet report. Hartz completed Peoples' credit analysis worksheets and spoke with another of Wildwood's lenders regarding Wildwood's business and payment history. After reviewing and analyzing the information, Hartz created a Credit Memo containing the analysis he performed prior to the approval of the Wildwood Lease purchase. Hartz presented the Credit Memo to Peoples' Executive Loan Committee, which approved the loan on March 2, 2006.
The information used in Peoples' loan approval process was provided by First Security, who obtained the information from Wildwood and Leasing Innovations. Peoples knew that First Security was acting as an intermediary broker for the transaction and did not originate the Wildwood Lease. Peoples also knew that any information provided by First Security was created by Wildwood or Leasing Innovations and was not created by First Security. First Security did not represent to Peoples that they conducted any due diligence related to the transaction or that they conducted any independent evaluation of the creditworthiness of Wildwood or the value of the collateral. First Security did not make any warranties or representations regarding the accuracy of the information that it transmitted from Wildwood and Leasing Innovations to Peoples. At no time did Peoples visit the Wildwood facility to inspect the purported collateral.
Peoples ultimately purchased the Wildwood Lease through First Security, who was assigned the lease from Leasing Innovations. Leasing Innovations executed a Bill of Sale and Assignment of the Wildwood Lease to First Security on March 17, 2006, effective March 22, 2006. On March 22, 2006, Peoples wired $1,863,978.08 to First Security, which included $1,807,145.00 for the purchase price of the lease to be remitted to Leasing Innovations, plus the $56,833.08 broker's fee to be retained by First Security. The same day, First Security assigned the Wildwood Lease to Peoples via a Bill of Sale and Assignment of Lease. First Security then transferred the purchase price, minus the broker's fee, to Leasing Innovations on March 23, 2006. As of the date of the transaction, both Peoples and First Security believed that the Wildwood Lease was secured by the manufacturing equipment.
Wildwood made payments to Peoples under the terms of the Wildwood Lease for over two years, through November 1, 2008. Wildwood failed to make its December 1, 2008 payment, thus defaulting under the terms of the lease. On March 5, 2009, Wildwood was placed into an involuntary bankruptcy proceeding. The trustee commenced an investigation into Wildwood's assets and liabilities and discovered that Wildwood had participated in a fraudulent scheme with respect to numerous equipment leases and purchases, including the Wildwood Lease. Representatives of Wildwood conspired with a manufacturer of equipment to obtain financing for equipment that, in actuality, was never manufactured. The manufacturer generated false invoices for the purported purchase price of the equipment and generated corresponding counterfeit serial number tags. Different serial number tags were then repeatedly applied to and removed from the same pieces of equipment at the Wildwood facility when lenders would conduct physical inspections of the equipment. On November 4, 2009, Peoples filed suit against First Security seeking rescission of the purchase of the Wildwood Lease, and First Security removed the matter to this Court on December 7, 2009.
Federal Rule of Civil Procedure 56 provides that summary judgment is appropriate if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Hemsworth v. Quotesmith.Com, Inc., 476 F.3d 487, 489-90 (7th Cir. 2007). In ruling on a motion for summary judgment, the court reviews "the record in the light most favorable to the nonmoving party and draw[s] all reasonable inferences in that party's favor." Zerante v. DeLuca, 555 F.3d 582, 584 (7th Cir. 2009) (citationomitted). However, "[a] party who bears the burden of proof on a particular issue may not rest on its pleadings, but must affirmatively demonstrate, by specific factual allegations, that there is a genuine issue of material fact that requires trial." Hemsworth, 476 F.3d at 490 (citation omitted). "In much the same way that a court is not required to scour the record in search of evidence to defeat a motion for summary judgment, nor is it permitted to conduct a paper trial on the merits of a claim." Ritchie v. Glidden Co., 242 F.3d 713, 723 (7th Cir. 2001) (citation and internal quotations omitted). "[N]either the mere existence of some alleged factual dispute between the parties nor the existence of some metaphysical doubt as to the material facts is sufficient to defeat a motion for summary judgment." Chiaramonte v. Fashion Bed Group, Inc., 129 F.3d 391, 395 (7th Cir.1997) (citations and internal quotations omitted).
Here, the Court is faced with cross-motions for summary judgment. However, these motions are not subject to a unique standard. "In such situations, courts must consider each party's motion individually to determine if that party has satisfied the summary judgment standard." Tippecanoe Assocs., LLC v. OfficeMax North America, Inc., No. 1:07-cv-1660-SEB-JMS, 2009 WL 798745, at *3 (S.D. Ind. March 20, 2009) (citation and internal quotations omitted).
The parties have filed cross motions for summary judgment, both seeking a determination of whether, under these circumstances, Peoples is entitled to the equitable remedy of rescission as a matter of law. First Security argues that Peoples is not entitled to rescission because (1) Peoples cannot prove that a mistake existed; (2) the risk of mistake should be allocated to Peoples; and (3) Peoples cannot show that the parties can be returned to their positions prior to the transaction. Conversely, Peoples argues that it is entitled to rescission as a matter of lawbased upon mutual mistake of fact due to the non-existence of the collateral, which they argue goes to the essence of the parties' agreement, and that the undisputed facts show that all requirements for the remedy of rescission have been met.
The parties agree that Indiana law controls the disposition of this case.1 Rescission based upon mutual mistake falls under the court's equity jurisdiction and is within the discretion of the trial court. Barrington Mgt. Co., Inc. v. Paul E. Draper Family Ltd. P'ship, 695 N.E.2d 135, 141 (Ind. Ct. App. 1998). Under Indiana law "[w]here both parties share a common assumption about a vital fact upon which they based their bargain, and that assumption is false, the transaction may be avoided if because of the mistake a quite different exchange of values occurs from the exchange of values contemplated by the parties." Wilkin v. 1st Source Bank, 548 N.E.2d 170, 172 (Ind. Ct. App. 1990); see also Tracy...
To continue reading
Request your trial