In re First Farmers Fin. Litig.

In Re: FIRST FARMERS FINANCIAL LITIGATION

No. 14-cv-7581

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION

November 10, 2016

Hon. Amy J. St. Eve

MEMORANDUM OPINION AND ORDER

AMY J. ST. EVE, District Court Judge:

The matter before the Court concerns the claims of Patrick Cavanaugh, not individually, but in his capacity as receiver of the Overall Receivership Estate (the "Overall Receiver"), against Defendants Standley Plastics, Inc. ("Standley Plastics") and Steven Standley ("Standley") (collectively, "Defendants"). Defendants have moved for "an order determining the substantive law that applies to Counts One and Two of the [Overall] Receiver's First Amended Complaint." (R. 1174). Specifically, Defendants contend that Florida law governs Counts One and Two, while the Overall Receiver maintains that Missouri law governs Count One.¹ For the following reasons, the Court denies in part Defendants' motion, concluding that Missouri law governs Count One and, based on the agreement of the parties, Florida law governs Count Two.

BACKGROUND²

In the fall of 2013, Standley sought an investment of $13,000,000 for his company now known as Standley Plastics. (R. 1243, Defs.' Answer & Affirmative Defense, at ¶ 8.) Standley engaged a man named Steven Bombola to find investors for a fee. (Id.) Bombola came into contact with Timothy Fisher ("Fisher"), who worked for First Farmers Financial, LLC ("FirstFarmers"),³ and, as a result of Bombola's conversations with Fisher, First Farmers made two wire transfers from a Florida bank account to a Standley Plastics account in a Missouri bank totaling $625,000. (Id. at ¶ 10; Bombola Dep., R. 1250-2, at 40, 57; R. 1250, Pl.'s Resp. Opp., at 5; R. 1260, Defs.' Reply, at 3.) The parties did not execute any written documents in connection with these two transfers. (R. 1243 at ¶ 10.) Standley Plastics used the money immediately to buy new equipment for its plant in Lamar, Missouri. (Id.)

Later, First Farmers and Standley Plastics formally agreed to a $2,000,000 loan (which would include the $625,000 First Farmers had already transferred to Standley Plastics), represented by various related documents, including a promissory note, a security agreement, and a guaranty of payment. (Id. at ¶¶ 13-14; R. 1145-1, Compl., Ex. A-B; R. 1058-1, Standley Aff.) First Farmers sent the documents to Bombola who forwarded them to Standley to be executed. (R. 1243 at ¶ 13; Standley Dep., R. 1250-1, at 91-93, 99; R. 1250-2 at 86-87, 110-11; R. 1250 at 4.) Standley then executed the documents on December 27, 2013, sent them back to Bombola, who in turn sent them to Fisher. (R. 1243 at ¶ 13-14; R. 1250-1 at 91-93, 99; R. 1250-2 at 86-87; R. 1250 at 4.)

During the time in which Fisher, Bombola, and Standley were communicating about the loan and executing it, Standley was in Missouri, Fisher was in California, and Bombola was in either Nevada or California, though Bombola met with Standley a few times in Missouri. (R. 1250-2 at 14, 19, 41-42, 108-11; R. 1250-1 at 43-44; R. 1250 at 4.) Standley Plastics is a Missouri corporation with its principal place of business in that state. (R. 1243 at ¶ 3.) First Farmers was a Florida limited liability company with its principal place of business in Orlando.(R. 1145-1, Ex. B, at 1.)⁴ Finally, the lawyer who drafted the loan documents—William Huseman—is a Florida attorney. (R. 1250 at 5; R. 1260 at 3.)

The promissory note "established a maturity date of February 27, 2014 . . . for the loan." (R. 1243 at ¶ 18.) By that date, Standley Plastics owed a flat fee interest payment of $250,000 along with the principal of the loan. (Id.; R. 1145, Ex. A at ¶¶ 1-3.) The promissory note also imposed a late fee of $100,000 per month. (R. 1145, Ex. A at ¶¶ 3, 7.) Through the guaranty agreement, Standley, in his individual capacity, "guaranteed payment to First Farmers of all of the 'Obligations' of Standley Plastics to First Farmers under the [promissory note]." (Id. at ¶ 19.) In the security agreement, Standley Plastics granted First Farmers a security interest in 7,000,000 shares of Standley Plastic's common stock, all accounts receivable, furniture, equipment, inventory, personal property, as well as other assets. (R. 1058-1 at 3.) While the security and guaranty agreements both contain choice-of-law clauses indicating Florida law governs the two agreements, (id. at 8; R. 1145, Ex. B at ¶ 18), the promissory note contains no such provision.

After Standley executed the loan documents, First Farmers made two additional wire transfers from a Florida account to Standley Plastics' bank account in Missouri, totaling the remaining $1,375,000 of the $2,000,000 loan. (R. 1243 at ¶ 17; R. 1250 at 5; R. 1260 at 3.) Standley Plastics used the money "to buy more equipment for use in [its] Lamar, Missouri plant, and also used the additional funds to generate more revenue." (R. 1243 at ¶ 17.) Neither Standley nor Standley plastics have made any payments to First Farmers. (Id. at ¶¶ 20-21.)

On November 12, 2015, the Overall Receiver filed suit against Defendants, alleging breach of the promissory note ("Count One") and breach of the guaranty agreement ("CountTwo"). (R. 659-1, Compl.). On July 19, 2016, the Overall Receiver filed a motion for leave to file a first amended complaint, (R. 1133), which the Court granted, (R.1141). In the First Amended Complaint, in addition to the two breach of contract claims from the original complaint (Counts One and Two), the Overall Receiver alleged Fraud in the Inducement ("Count Three") and Unjust Enrichment ("Count Four"). (R. 1145.)

Defendants filed the current motion as well as a motion to dismiss Counts Three and Four. (R. 1171, 1174.) On October 13, 2016, the Court denied Defendants' motion to dismiss. (R. 1265.) The Court now grants in part and denies in part Defendants' motion for a determination of choice of law.

LEGAL STANDARD

When asserting diversity jurisdiction over state law claims, federal courts "apply the forum state's choice of law rules to select the applicable state substantive law." McCoy v. Iberdrola Renewables, Inc., 760 F.3d 674, 684 (7th Cir. 2014); see Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941); Cooke v. Jackson Nat'l Ins. Co., No. 15 C 817, 2016 WL 1070829, at *3 (N.D. Ill. Mar. 15, 2016). When applying state law, the task of a federal court is to apply the law as interpreted by the state's highest court, or, where the state's highest court has not addressed a particular issue, to "predict what [that] court will do." Reiser v. Residential Funding Corp., 380 F.3d 1027, 1029 (7th Cir. 2004); see also Edward E. Gillen Co. v. Ins. Co. of the State of Pa., 825 F.3d 816, 818 (7th Cir. 2016).

A choice-of-law analysis is necessary only if the party seeking a choice-of-law determination carries its burden of demonstrating a conflict between the laws of the different jurisdictions in question. See Bridgeview Health Care Ctr., Ltd. v. State Farm Fire & Cas. Co., 10 N.E.3d 902, 905 (Ill. 2014); see also Spitz v. Proven Winners N. Am., LLC, 759 F.3d 724, 729(7th Cir. 2014). Here, the parties do not dispute that the application of Florida law would make a difference in this case.⁵ Where, as here, a choice of law determination is necessary, Illinois courts look to the Restatement (Second) of Conflict of Laws.⁶ See Morris B. Chapman & Assocs., Ltd. v. Kitzman, 739 N.E. 1263, 1269 (Ill. 2000); Bankers Life & Cas. Co. v. Miller, No. 14 CV 3165, 2015 WL 515965, at *2 (N.D. Ill. Feb. 6, 2015); see also Barbara's Sales, Inc. v. Intel Corp., 879 N.E.2d 910, 919 (Ill. 2007); State Farm Mut. Auto Ins. Co. v. Burke, 51 N.E.3d 1082, 1097 (Ill. App. Ct. 2016).

The question of which state's law applies is one for the judge and may involve factual disputes "that the district court must . . . resolve." See Nautilus Ins. Co. v. Reuter, 537 F.3d 733, 742 (7th Cir. 2008); Townsend v. Sears, Roebuck & Co., 879 N.E.2d 893, 898 (Ill. 2007); Curtis v. TransCor Am., LLC, 877 F. Supp. 2d 578, 585-86 (N.D. Ill. 2012). In that way, determining the applicable law is similar to the analysis courts undertake when answering jurisdictional questions. See Nautilus, 537 F.3d at 743.

ANALYSIS

Defendants have two arguments supporting their contention that Florida law governs the promissory note.⁷ First, Defendants assert that the place of payment specified in the contract—Florida—"controls which state's laws apply in the absence of an express contract provision." (R.1175, Mem. Supp. Defs.' Mot., at 4; R. 1260 at 2-5.) Second, Defendants argue that because the promissory note, the guaranty agreement, and the security agreement are all part of the same transaction, and because the security agreement and the guaranty contain a choice-of-law clause specifying that Florida law should control, Florida law governs the promissory note. The Court addresses these arguments in turn.

I. The Place of Repayment

Where the parties have not specified which state's law applies to a particular contract, Illinois courts apply the "most significant contacts" test from Section 188(2) of the Restatement. Auto-Owners Ins. Co. v. Websolv Comput., Inc., 580 F.3d 543, 547 (7th Cir. 2009); Hinc v. Lime-O-Sol Co., 382 F.3d 716, 719 (7th Cir. 2004); see also Safeco Ins. Co. v. Jelen, 886 N.E.2d 555, 580 (Ill. App. Ct. 2008). The relevant contacts under this test include the place of contracting; negotiation; performance; location of the subject matter of the contract; the domicile, residence, place of incorporation, and place of business of the parties. Hinc, 382 F.3d at 719; True Branches, LLC v. 21st Century Techs. Ltd., No. 13-cv-8355, 2014 WL 2767032, at *4 (N.D. Ill. June 17, 2015); Lewitton v. ITA Software, Inc., No. 07 C 4210, 2008 WL 4427512, at *4 (N.D. Ill. Sept. 29, 2008).

Defendants argue that under Section 195 of the Restatement—the section concerning contracts for the repayment of money lent—"the law governing the transaction is the law of the state where...