T-Mobile USA, Inc. v. AU Electronics, Inc. et al
Filing
152
MEMORANDUM Opinion and Order: For the reasons explained above, the Court grants defendants' motion to reform the settlement agreement and reforms the language of the agreement as specified therein. 143 The Court further grants the relief req uested in T-Mobile's motion to enforce the settlement agreement and finds that defendants' notice of repudiation is without force or effect. 124 In light of the Court's enforcement of the settlement agreement, defendants' motio ns to dismiss are denied as moot. [37, 40] Simultaneously with the entry of this opinion, the Court will enter a signed stipulated order for dismissal. Defendants' motion to reclassify documents and defendants' motion for reconsideration are denied as moot. [90, 130] This case is therefore dismissed with prejudice. Civil case terminated. Signed by the Honorable Thomas M. Durkin on 1/23/2014:Mailed notice(srn, )
UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
T-Mobile USA, Inc., a Delaware
corporation,
Plaintiff,
v.
AU Electronics, Inc. d/b/a A-U Electronics,
Inc., an Illinois corporation; Global Mobile
Trading, Inc. d/b/a AU Express Cash 4
Electronics d/b/a A-U Express d/b/a AU,
Inc., an Illinois corporation; Umair Yasin,
individually; and Adnan Vadria,
individually,
Defendants.
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No. 12 C 10046
Judge Thomas M. Durkin
MEMORANDUM OPINION AND ORDER
Plaintiff T-Mobile USA, Inc. (“T-Mobile”) brings this action against
defendants AU Electronics, Inc. (“AU”), Global Mobile Trading, Inc. (“GMT”), Umair
Yasin (“Yasin”), and Adnan Vadria (“Vadria”), alleging that defendants are engaged
in a pattern of unlawful business practices involving the bulk purchase and resale
of T-Mobile cellular phones. 1 On August 20, 2013, the parties signed a settlement
agreement which provides for a complete resolution of the lawsuit. R. 119.
Defendants later notified the Court that they were repudiating the agreement, R.
116, which prompted a dispute between the parties over whether the agreement
Sprint Nextel Corporation and Sprint Communications Company, L.P. sued the
same defendants in Sprint Nextel Corp., et al. v. AU Elecs., Inc., et al., No. 12 C
9095, which is also before this Court. The parties are represented by the same
attorneys in both cases.
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was enforceable. Presently before the Court are T-Mobile’s motion to enforce the
settlement agreement, R. 124, and defendants’ motion to reform the settlement
agreement to include an unintended omission, R. 143. For the reasons explained
below, the Court grants defendants’ motion to reform the settlement agreement,
and further grants T-Mobile’s motion to enforce the settlement agreement.
Background
On December 18, 2012, T-Mobile filed a thirteen-count complaint alleging
that defendants were “defraud[ing] and willfully infring[ing] upon T-Mobile’s
trademark and other rights” through an elaborate “Subsidy Theft and Activation
Fraud Scheme.” R. 1 ¶ 1. According to the complaint, defendants instigated the
scheme by acquiring large quantities of phones from T-Mobile and its authorized
retailers. Id. ¶ 3. Defendants then removed the phones from their original
packaging and sold the phones’ Subscriber Identity Module (“SIM”) cards “for
fraudulent activation on the T-Mobile network through the use of improperly
acquired confidential codes that illegally access T-Mobile’s computers.” Id. With the
SIM cards removed, defendants “ship[ped] the [p]hones overseas, unlocked or to be
unlocked,” to be sold for a substantial profit. Id. As a result of this alleged scheme,
T-Mobile brought numerous claims under federal and state law, including violations
of the Lanham Act, 15 U.S.C. § 1051 et seq., and the Computer Fraud and Abuse
Act, 18 U.S.C. § 1030. R. 1 ¶¶ 97, 128.
Due to the continuing nature of the alleged conduct, the Court ordered
expedited discovery. R. 35. While discovery was ongoing, defendants filed two
2
motions to dismiss the complaint under Federal Rule of Civil Procedure 12(b)(6). R.
37; R. 40. Then, during the week of August 12, 2013, counsel for T-Mobile took
depositions of Vadria and Yasin at the offices of defendants’ counsel. R. 124 at 2-3.
At that point, the parties began discussing the possibility of settlement. 2 Id. at 3.
Settlement discussions continued throughout the week, and on August 16, 2013, the
parties reached an agreement. Id. The settlement agreement was memorialized in
writing, and the parties exchanged notarized signature pages on August 20, 2013.
Id. at 4.
The settlement agreement provides for a complete resolution of the lawsuit
and includes provisions that are highly favorable to all parties. Section 9(A) of the
agreement provides for entry of Final Judgment against defendants in the amount
of $[redacted]. R. 119 at 6. T-Mobile is barred from executing on the Final
Judgment, however, if defendants pay four installments of $[redacted], with each
installment separated by several months:
Defendants stipulate and agree that the amount of the
Final Judgment entered in this Lawsuit in favor of TMobile and against Defendant AU Electronics, Inc. d/b/a
A-U Electronics, Inc., shall be $[redacted] in the form
attached hereto as Exhibit A to Exhibit 1. T-Mobile agrees
not to execute on the Final Judgment provided
Defendants (a) fully and timely comply with all of their
Defendants contend that counsel for T-Mobile ambushed them with direct
communications made outside the presence of their counsel. R. 116 ¶ 3. T-Mobile
denies these allegations and instead claims that the parties discussed settlement
with counsel present during breaks in the testimony. R. 124 at 3. Despite the
conflicting versions of how the settlement process was initiated, there apparently is
no question that the substantive discussions that followed were all with counsel
present. There is no claim by defendants that the settlement agreement should not
be enforced because of the manner in which the settlement discussions began.
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obligations under this Agreement and the Permanent
Injunction; and (b) fully and timely make payment in the
amount of $[redacted] to T-Mobile . . . in four equal
installments of $[redacted] each, paid no later than
January 31, 2014, May 1, 2014, August 1, 2014, December
29, 2014, respectively.
Id. In exchange, defendants are required to cease “any conduct related to . . . the
Subsidy Theft and Activation Fraud Scheme [including] the purchase, sale,
unlocking, reflashing, altering, advertising, soliciting, using, and/or shipping of
any . . . wireless product sold by T-Mobile.” Defendants are also prohibited from
using third parties to engage in such conduct. Id. at 4.
At the center of this dispute is a provision that prohibits the parties from
disclosing T-Mobile’s forbearance in executing on the Final Judgment. Under
Section 9(C) of the agreement:
Any forbearance by T-Mobile in executing on the Final
Judgment shall remain STRICTLY CONFIDENTIAL and
[both T-Mobile and] 3 Defendants are strictly prohibited
from disclosing such forbearance or filing with the Court
any document reflecting such forbearance under all
circumstances except in defense of an action to enforce the
terms of this Agreement. In that event, Defendant(s) may
file a copy of this Agreement with the Court under seal,
pursuant to the applicable Rules of Civil Procedure and
the Local Rules of Court.
Id. The agreement also contains a provision that delayed filing of the stipulation for
entry of Final Judgment and Permanent Injunction for 60 days, until October 21,
2013. R. 124 at 1. The purpose of this provision was to give defendants time to
The bracketed text is added by the Court to include the language specified in
defendants’ motion to reform the settlement agreement. R. 143. For the reasons
explained later in this opinion, defendants’ motion is granted.
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pursue claims against their insurers. See R. 124 at 1 n.1; R. 137 at 11. Specifically,
Section 10 of the agreement provides that:
No earlier than sixty (60) days from the full execution of
this Agreement, or at another time of T-Mobile’s choosing,
T-Mobile will file a Stipulation for the entry of a Final
Judgment and Permanent Injunction against Defendants
in the Lawsuit in substantially the form attached hereto
as Exhibit 1.
R. 119 at 7. As a result of these two provisions, the parties did not immediately
inform the Court that they had executed a settlement agreement on August 20,
2013. To the Court’s knowledge, defendants’ motions to dismiss were still pending
on that date and for some time thereafter.
On September 4, 2012, just two weeks after the settlement agreement had
been signed, an undercover law enforcement agent attempted to sell Yasin five new
cellular phones. R. 142 at 2. According to a report of the incident, Yasin refused to
personally purchase the phones after learning that they were T-Mobile phones. R.
137, Exh. J. Instead, Yasin told the agent that he knew someone who would
purchase the phones, and shortly thereafter, the agent received a call from a phone
number which appeared on AU’s business card. Id. The agent returned the call and
arranged to sell the phones to an individual, later determined to be Sohaib Sakaria,
at a gas station on the north side of Chicago. Id. Later that day, Sakaria arrived at
the gas station on a motorcycle and bought the five T-Mobile phones from the agent
in exchange for $700. Id. After the deal had concluded, a surveillance team
stationed at AU’s corporate offices observed Sakaria drive up on a motorcycle and
enter the building. Id. The next evening, federal agents intercepted a package
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bound for Hong Kong containing the same five T-Mobile phones that were sold to
Sakaria. Id.
Defendants acknowledge this incident and claim that it was designed by law
enforcement to test whether they were complying with the settlement agreement,
which was still unknown to the Court at the time of these events. R. 137 at 7.
Nevertheless, defendants fault the report for omitting “a few critical details.” Id.
For example, defendants claim that Sakaria came to AU and told its employees that
the five phones were “factory unlocked,” “which was consistent with the types of
devices that . . . Sakaria had sold to AU in the past.” Id. at 8. Defendants also point
out that they were charged $500 per phone, which is consistent with the market
price. Id. Additionally, defendants produced a draft invoice which shows that they
marked the phones purchased from Sakaria not as T-Mobile phones, but rather as
Verizon phones. Id. T-Mobile responds by asserting “defendants attempted to
conceal their improper purchase and sale of the [phones] by creating a purchase
order and invoice that [falsely] stated they were Verizon [phones].” R. 142 at 3.
On September 11, 2013, federal and state law enforcement agents executed
search warrants at AU’s offices for alleged violations of 18 U.S.C. §§ 1956(a)(2)(A)
and (h) (money laundering), 2314 (transportation of stolen goods), and 2315 (sale or
receipt of stolen goods). R. 124 at 4; R. 137 at 10. The agents seized all of
defendants’ inventory and records and placed a $9,999,999.00 lien against AU’s
bank account. R. 137 at 10.
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On September 16, 2013, defendants filed a motion to advance a hearing or
decision on the pending motions to dismiss, or in the alternative, for a summary
judgment conference. Sprint Nextel Corp., et al. v. AU Elecs., Inc., et al., No. 12 C
9095, R. 129. 4 In their motion, defendants advised the Court of the September 11,
2013 raid on AU’s offices and accused T-Mobile of instigating it. Id. ¶¶ 1-2.
Defendants then demanded a ruling on the pending motions to dismiss, noting that
the Court had provided “no explanation for why [it] ha[d] chosen to delay in ruling.”
Id. ¶¶ 6, 15. In the alternative, defendants requested an in-chambers hearing to
discuss a potential motion for summary judgment. Id. ¶ 16. Inexplicably, defendants
made no mention of the fact that the parties had already signed a settlement
agreement which had, at least on its face, completely resolved the lawsuit nearly
four weeks earlier.
Defendants’ September 16, 2013 motion to advance a hearing or decision
prompted two filings later that day. First, T-Mobile filed a notice of settlement
which, for the first time, informed the Court that “all parties to this case have
reached a comprehensive settlement.” R. 115 at 1. T-Mobile noted that the
agreement contained a 60-day delay for filing the stipulation for entry of Final
Judgment and Permanent Injunction but explained that it could not “wait any
longer to inform the Court of the parties’ settlement,” given defendants’ filing
earlier that day that “request[ed] the Court to needlessly expend judicial resources
Defendants filed this motion in the related Sprint litigation and incorporated it by
reference into the present case. See Sprint Nextel Corp., et al. v. AU Elecs., Inc., et
al., No. 12 C 9095, R. 129 at 3 n.2.
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on a case that has been settled in all respects.” Id. at 2. Shortly thereafter,
defendants informed the Court that they were repudiating the settlement
agreement due to allegations that T-Mobile had caused or contributed to the
governmental raid on AU’s offices and T-Mobile’s disclosure of “strictly confidential”
terms of the settlement agreement by filing its notice of settlement. R. 116 ¶¶ 4, 7.
In response, the Court held a telephonic status hearing on September 17, 2013. R.
120. The Court heard arguments from all parties and then instructed T-Mobile to
submit a brief explaining why the settlement agreement should be enforced. Id. An
accompanying briefing schedule on the issue was set. Id.
On September 19, 2013, defendants filed a motion for expedited discovery,
asking the Court to compel T-Mobile to produce “any and all communications with
government authorities regarding [d]efendants.” R. 121 at 1. This request was
based on defendants’ allegation that T-Mobile had affirmatively represented during
settlement negotiations that it “had [not] previously communicated or shared
information with law enforcement[,] and to its knowledge, there was no active
investigation of [d]efendants.” Id. ¶ 8. Defendants asserted that they would be
entitled to rescission and repudiation of the settlement agreement if it was shown
that T-Mobile had committed fraud in making these statements. Id. ¶ 12.
The Court granted defendants’ motion in part and ordered T-Mobile to
provide affidavits from individuals who had contact with law enforcement personnel
between August 16, 2013 and September 18, 2013. R. 125. The Court did not
require disclosure of communications predating the settlement agreement, however,
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due in part to an integration clause which provides that “[t]his Agreement expresses
the entire agreement between the [p]arties with respect to the compromise of the
claims described herein.” R. 119 at 11.
In response to the discovery order, T-Mobile produced affidavits from Senior
Corporate Counsel Marian Vetro, Senior Manager of Major Investigations Aran
January, Illinois Division Loss Prevention Manager Marisol Martinez, and attorney
James Baldinger, its counsel in this case. R. 126-129. Although these affidavits
referenced several email communications with law enforcement, each affidavit
maintained that during the relevant dates, T-Mobile’s employees and agents had
“not provided any information to law enforcement regarding [defendants] in this
case, except in response to a request by a member of law enforcement.” R. 126 ¶ 4;
R. 127 ¶ 4; R. 128 ¶ 5; R. 129 ¶ 4. T-Mobile notes that such communications are
expressly permitted by Section 17 of the settlement agreement, which provides that:
T-Mobile shall not disclose Defendants’ information
beyond what is reasonably necessary to investigate and
pursue claims of participation in the Subsidy Theft and
Activation Fraud Scheme, or upon request by a member of
law enforcement.
R. 119 at 11. The Court later expanded the discovery order and required T-Mobile to
produce the emails referenced in the affidavits, which are discussed in greater
depth below. R. 132. However, the Court again declined to allow discovery of
materials which predate the settlement agreement. R. 136.
T-Mobile’s motion to enforce the settlement agreement was fully briefed as of
October 18, 2013. R. 124. On that date, defendants also moved to reform the
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settlement agreement to include an unintended omission regarding whether TMobile is permitted to disclose its forbearance in executing on the Final Judgment.
R. 143.
Legal Standard
“A district court has the inherent or equitable power to enforce a settlement
agreement in a case before it.” Hyde Park Union Church v. Curry, 942 F. Supp. 360,
363 (N.D. Ill. 1996) (citing Wilson v. Wilson, 46 F.3d 660, 664 (7th Cir. 1995)). It is
well-established that a settlement agreement is a contract, Herrnreiter v. Chicago
Hous. Auth., 281 F.3d 634, 636 (7th Cir. 2002), and therefore federal courts look to
state contract law to decide issues regarding the formation, construction, and
enforcement of the agreement, Magallanes v. Ill. Bell Tel. Co., 535 F.3d 582, 584
(7th Cir. 2008). In interpreting a settlement agreement under Illinois law, “‘the
paramount objective is to give effect to the intent of the parties as expressed by the
terms of the agreement.’” Laserage Tech. Corp. v. Laserage Labs., Inc., 972 F.2d 799,
802 (7th Cir. 1992) (quoting Int’l Minerals & Chem. Corp. v. Liberty Mut. Ins. Co.,
168 Ill. App. 3d 361, 370 (1st Dist. 1988)). Illinois follows the objective theory of
intent, meaning that the terms of the agreement depend on “what the parties
express to each other and to the world, not on what they keep to themselves.”
Skycom Corp. v. Telstar Corp., 813 F.2d 810, 814-15 (7th Cir. 1992).
Analysis
The issue before the Court is whether the settlement agreement that the
parties signed on August 20, 2013 is enforceable. As mentioned above, defendants
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have filed a notice of repudiation in which they completely disavow the validity of
the agreement. R. 116. Defendants maintain that the Court should decline to
enforce the agreement because: (1) T-Mobile fraudulently induced them to enter
into the agreement; (2) T-Mobile breached the express terms of the agreement; and
(3) equitable considerations prevent the agreement from being enforced. R. 137. The
Court addresses these arguments in turn.
I.
The Parties Entered into a Valid and Enforceable Settlement
Agreement.
The Court’s first task is to determine whether the parties entered into a valid
and enforceable settlement agreement. See Wilson, 46 F.3d at 666. Under Illinois
law, an agreement is binding and enforceable when there has been “an offer, an
acceptance, and a meeting of the minds as to all material terms.” Seko Worldwide,
LLC v. Four Soft Ltd., 503 F. Supp. 2d 1059, 1060 (N.D. Ill. 2007); see also Pritchett
Asbestos Claims Mgmt. Corp., 332 Ill. App. 3d 890, 896 (5th Dist. 2002). Whether
there was a “meeting of the minds” is determined by the parties’ objective
manifestations of intent, not their secret hopes or wishes. Abbott Labs. v. Alpha
Therapeutic Corp., 164 F.3d 385, 387 (7th Cir. 1999). The agreement must also be
sufficiently definite with respect to its material terms. Seko Worldwide, LLC, 503 F.
Supp. 2d at 1061. “A contract is sufficiently definite with respect to its material
terms and certain to be enforceable if the court is enabled from the terms and
provisions thereof to ascertain what the parties have agreed to do.” Pritchett, 332
Ill. App. 3d at 896.
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The parties here signed the settlement agreement and exchanged notarized
signature pages, which indicates that they accepted the terms of the agreement.
See, e.g., Hubble v. O’Connor, 291 Ill. App. 3d 974, 985 (1st Dist. 1997) (“[W]here
[defendant] signed the agreement in his own name and tendered it to [plaintiffs],
there is no reason in law or logic why he should not be individually bound by its
terms.”). Furthermore, the agreement itself contains numerous provisions which
cautioned the parties that they were entering into a binding agreement to settle the
case. For example, the parties expressly signified their understanding that “the
agreement is a legally enforceable contract that affects [their] rights, duties, and
obligations.” R. 119 at 12. The agreement also encouraged the parties to retain and
consult with counsel before consenting to its terms—indeed, counsel for both TMobile and defendants were present at the settlement negotiations, and the parties
“frequently left the room to engage in private discussions with their counsel.” R. 124
at 3. Moreover, defendants’ counsel himself “printed several drafts of a proposed
agreement, which were marked up and modified as [the attorneys] negotiated each
and every provision.” Id.
The parties also reached a “meeting of the minds” as to all material terms of
the settlement agreement. A material term is an essential provision of a contract
that “is of such nature and importance that the contract would not have been made
without it.” Haisma v. Edgar, 218 Ill. App. 3d 78, 86 (1st Dist. 1991). In the opening
recitals of the agreement, the parties express their “desire to resolve all claims
among and between them in any way arising out of Defendants’ participation in the
12
Subsidy Theft and Activation Fraud Scheme as alleged.” R. 119 at 3. Accordingly,
the agreement provides for a complete resolution of this lawsuit by entry of Final
Judgment against defendants in the amount of $[redacted]. Id. at 7. The agreement
prohibits T-Mobile from executing on the Final Judgment, however, if defendants
pay four installments of $[redacted], each separated by a period of several months.
Id. This amounts to a total of $[redacted], or [redacted]% of the Final Judgment. In
return, defendants are required to cease all conduct related to the Subsidy Theft
and Activation Fraud Scheme. Id. at 4. These are the material terms of the
agreement, without which settlement would not have been reached. Because the
parties agreed on these terms, the Court finds that the parties entered into a valid
and enforceable settlement agreement and that they are bound by its terms.
Without much elaboration, defendants argue that the settlement agreement
is not valid due to a “substantial failure of consideration.” R. 137 at 18.
Consideration is a common law contract principle defined as “a bargained-for
exchange whereby the promisor receives some benefit or the promisee suffers some
detriment.” LKQ Corp. v. Thrasher, 785 F. Supp. 2d 737, 742 (N.D. Ill. 2011). Under
common law, “consideration is relatively easy to show”: as long as a person receives
something of value in exchange for his own promise or detriment, consideration is
adequate. Wagner v. NutraSweet Co., 95 F.3d 527, 532 (7th Cir. 1996).
Here, defendants cannot seriously contend that consideration does not exist
because a plain reading of the settlement agreement reveals a distinct “bargained
for exchange,” i.e., the release of the claims set forth in the lawsuit in exchange for
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monetary payment. See Majkowski v. Am. Int’l Group, Inc., No. 08 C 4842, 2008 WL
5272193, at *3 (N.D. Ill. Dec. 16, 2008) (explaining that a $125,000 payment from
defendant in exchange for a discharge of plaintiff’s claims constituted adequate
consideration). Moreover, the language of the agreement itself provides that
adequate consideration was obtained: “for and in consideration of the mutual
promises and covenants herein contained, the receipt and sufficiency of which is
acknowledged by [the parties, the parties] agree as follows.” R. 119 at 3. In the
simplest of terms, defendants faced a serious lawsuit where [redacted] in damages
were potentially at issue. They effectively settled the lawsuit for $[redacted]. This is
sufficient consideration. 5
Because the parties engaged in a “meeting of the minds” as to all material
terms, the Court finds that the parties entered into a valid and enforceable
settlement agreement. Consequently, the parties are bound by its terms and
provisions.
The Court notes that that neither the 60-day delay for filing the stipulation for
entry of Final Judgment and Permanent Injunction, nor the provision calling for
defendants to make installment payments, renders the settlement agreement
conditional or unenforceable. “An agreement to settle . . . is effective when arrived
at unless the parties have subjected its effectiveness to contingencies,” Lampe v.
O’Toole, 292 Ill. App. 3d 144, 148 (2d Dist. 1997), and here, there is nothing that
would have prevented T-Mobile from filing the stipulation after 60 days. Further, it
is well-established that a requirement of future payment does not render a
settlement agreement invalid. See, e.g., Pinnacle Performance Inc. v. Garbis, No. 12
C 1136, 2013 WL 655202, at *4-*5 (N.D. Ill. Feb. 21, 2013).
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II.
The Court Reforms the Settlement Agreement to Include an
Unintended Omission.
Section 9(C) of the settlement agreement contains a provision that prohibits
defendants from disclosing T-Mobile’s forbearance in executing on the Final
Judgment:
Any forbearance by T-Mobile in executing on the Final
Judgment shall remain STRICTLY CONFIDENTIAL and
Defendants are strictly prohibited from disclosing
forbearance or filing with the Court any document
reflecting such forbearance under all circumstances
except in defense of an action to enforce the terms of this
Agreement. In that event, Defendant(s) may file a copy of
this Agreement with the Court under seal, pursuant to
the applicable Rules of Civil Procedure and the Local
Rules of Court.
R. 119 at 7. Defendants have moved to reform this provision to include an
inadvertent omission. R. 143. Specifically, defendants claim that the parties
specifically agreed that Section 9(C) should prevent both defendants and T-Mobile
from disclosing the terms of the forbearance. Id. ¶ 10. However, due to the “lengthy
settlement negotiations and drafting sessions lasting until 11:00 p.m. that night,”
defendants believe that T-Mobile erroneously omitted this revision. Id.
Reformation is appropriate when “the parties [have] reached an agreement
but, in reducing it to writing, some provision agreed upon was omitted . . . through
mutual mistake.” Edward E. Gillen Co. v. City of Lake Forest, 3 F.3d 192, 197 (7th
Cir. 1992). Reformation changes the contract so that it properly reflects the
agreement originally reached by the parties, provided that “both the mistake and an
actual agreement other than that expressed in writing” are shown. Id. At the
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October 23, 2013 motion hearing, T-Mobile declared that the omission was likely a
scrivener’s error, and in its written response, T-Mobile states that it does not object
to defendants’ request to reform the agreement. R. 147 at 1. As a result, the Court
grants defendants’ motion to reform the settlement agreement. Section 9(C) of the
settlement agreement is therefore reformed to read:
Any forbearance by T-Mobile in executing on the Final
Judgment shall remain STRICTLY CONFIDENTIAL and
both T-Mobile and Defendants are strictly prohibited from
disclosing forbearance or filing with the Court any
document reflecting such forbearance under all
circumstances except in defense of an action to enforce the
terms of this Agreement. In that event, Defendant(s) may
file a copy of this Agreement with the Court under seal,
pursuant to the applicable Rules of Civil Procedure and
the Local Rules of Court.
Accord R. 143 at ¶ 8 (emphasis added).
In light of this result, T-Mobile argues that defendants are judicially
estopped from contesting the validity of the settlement agreement. Judicial estoppel
is an equitable doctrine that “prevents a party from prevailing in one phase of a
case on an argument and then relying on a contradictory argument to prevail in
another phase.” New Hampshire v. Maine, 532 U.S. 742, 749 (2001). T-Mobile points
out that reformation requires the existence of an actual agreement between the
parties. R. 147 at 1. As a consequence of prevailing on their motion to reform, TMobile argues that defendants, in turn, “are judicially estopped from taking a
contrary position in this litigation, and their challenges to the validity of the
[s]ettlement [a]greement must fail as a matter of law.” Id. at 1-2. The Court
disagrees.
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Judicial estoppel is an equitable doctrine that is concerned with fairness to
the parties. Matter of Cassidy, 892 F.2d 637, 642 (7th Cir. 1990). In this case, it
would be exceedingly unfair for defendants to lose their ability to contest the
settlement agreement by pointing out an error made in drafting the agreement.
Further, the Supreme Court has instructed courts to consider prejudice to the
opposing party in deciding whether judicial estoppel has occurred. New Hampshire,
532 U.S. at 749. Here, T-Mobile has expressly stated that reforming the settlement
agreement as defendants suggest would have no bearing on its validity, R. 147 at 1,
and therefore the Court is unable to see how T-Mobile would suffer any prejudice
through defendants’ seemingly-inconsistent positions. Accordingly, defendants are
not judicially estopped from contesting the settlement agreement.
III.
Defendants Were Not Fraudulently Induced to Enter into the
Settlement Agreement.
Defendants argue that they are entitled to rescind the settlement agreement
because T-Mobile fraudulently induced them to enter into the agreement. R. 137 at
11-15. Defendants claim that, during settlement negotiations, counsel for T-Mobile
(1) denied knowledge about any pending law enforcement investigations of
defendants; and (2) denied knowledge of any communications between T-Mobile and
law enforcement regarding defendants. Id. at 3-4. According to defendants, they
reasonably relied on these representations in entering into the settlement
agreement. Id. They also contend, based on the discovery that the Court permitted,
that T-Mobile knowingly misled them by making these statements. Id. at 14.
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Under Illinois law, a party who is fraudulently induced to enter into a
contract is entitled to rescind that contract. See 23-25 Bldg. P’ship v. Testa Produce,
Inc., 381 Ill. App. 3d 751, 758 (1st Dist. 2008). A claim for fraudulent inducement
requires proof of five elements: “(1) a false statement of material fact; (2) known or
believed to be false by the person making it; (3) an intent to induce the other party
to act; (4) action by the other party in reliance on the truth of the statement; and (5)
damage to the other party resulting from such reliance.” Hoseman v. Weinschneider,
322 F.3d 468, 476 (7th Cir. 2003). In addition, the party alleging fraudulent
inducement must establish that his belief in, and reliance on, the statement was
reasonable. Regensburger v. China Adoption Consultants, Ltd., 138 F.3d 1201, 1207
(7th Cir. 1998). Proof of each element of fraudulent inducement must be shown by
clear and convincing evidence. Nat’l Republic Bank of Chicago v. Nat’l Homes
Constr. Corp., 63 Ill. App. 3d 920, 924 (1st Dist. 1978).
For purposes of this opinion, the Court presumes, without deciding, that
counsel for T-Mobile made the representations alleged by defendants. In an email
disclosed pursuant to the Court’s discovery order, T-Mobile’s Illinois Division Loss
Prevention Manager wrote to Detective Sergeant Jim Hennelly of the Cook County
Sheriff’s Department:
I am having the Director of Major Investigations and
Fraud and possibly one of our Legal reps flying [sic] in
next [w]eek. I was made aware there was a meeting
Tuesday at noon, over on Madison. I would like to have
them join us as they will have relevant info for you and
group in regards to AU. Our analyst, Michelle has also
gotten back to me and stated that the IMEI’s and SIM
cards ran, all came from credit mewling [sic]. She also
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stated some of the other IMEI’s ran are from Wal Mart
also, fraud via credit mewling [sic].
R. 137, Exh. B (emphasis added). Although this email was dated August 20, 2013,
the date the settlement agreement was signed, the subject line of the email reads,
“RE: Radio Shack robbery 27 June 13.” Id. Thus, the reference to AU indicates that
T-Mobile likely communicated with law enforcement regarding defendants prior to
the effective date of the settlement, perhaps as early as June 27, 2013. Further, the
email shows that T-Mobile was likely aware that law enforcement was interested in
investigating defendants at that time. Nevertheless, defendants’ fraudulent
inducement claim fails for several reasons.
First, defendants have not shown that the statements were known or
believed to be false by the person making them. According to defendants, the
statements regarding T-Mobile’s interaction with law enforcement were made
during settlement negotiations by Jim Baldinger, counsel for T-Mobile. However,
there is nothing in the record that suggests that Baldinger knew or believed these
representations to be false at the time he made them. To be sure, several employees
in T-Mobile’s loss prevention and investigations divisions communicated with law
enforcement at or near the time the settlement agreement was reached. These
communications suggest that T-Mobile was at least aware of the possibility that law
enforcement was interested in investigating defendants at that time. However, none
of these employees were present during settlement negotiations, and knowledge of
their communications, without more, cannot be imputed to Baldinger. Defendants
point to no evidence suggesting that Baldinger was clued into the investigation
19
prior to the effective date of the settlement. Further, Baldinger affirmatively states
in his affidavit that he did not become aware of the investigation until August 27,
2013, when he was informed that two Assistant United States Attorneys wished to
speak with him regarding defendants. R. 126 ¶ 5. Defendants’ claims to the
contrary are unsupported.
Second, defendants have not demonstrated that they acted in reasonable
reliance upon the statements allegedly made by T-Mobile’s counsel. The settlement
agreement identifies the specific facts that the parties relied upon in entering into
the agreement. Notably, Section 11 states that “[t]he [p]arties expressly
acknowledge and agree that neither T-Mobile nor its counsel presented,
participated in presenting or threatened to present criminal charges against any
[d]efendant to obtain an advantage in this lawsuit.” R. 119 at 7. This clause was
arguably included to satisfy the ethical rule preventing attorneys from engaging in
such conduct. The agreement contains no representation, however, regarding the
status of any investigation of defendants by governmental authorities. Further,
Section 18 of the agreement contains an integration clause stating that the written
agreement “expresses the entire agreement between the [p]arties with respect to
the compromise of the claims described herein.” Id. at 11. It, therefore, would not
have been reasonable for defendants to rely upon the statements that T-Mobile’s
counsel allegedly made, and defendants have not provided clear and convincing
evidence to the contrary.
20
Third, defendants have not alleged any damage resulting from their reliance
on the statements by T-Mobile’s counsel. The settlement agreement states that
defendants are required to pay $[redacted], in four equal installments of $[redacted]
each, beginning on January 31, 2014. R. 119 at 6. Defendants assert that they have
been damaged because the government has frozen AU’s funds and placed a $10
million lien on its bank accounts, and therefore they will default on the agreement
and become immediately liable for the $[redacted] Final Judgment. R. 137 at 19. In
support of this argument, defendants submit a declaration from Vadria stating that
“it is impossible for AU to cause any payments to be made out of [its] bank account.”
Id., Exh. A at ¶ 12.
Defendants’ argument is untenable. Here, the only bank accounts that have
been frozen are AU’s corporate accounts. The bank accounts of the individual
defendants, Yasin and Vadria, have not been frozen, and defendants have made no
showing that they will be unable to satisfy the monetary commitments of the
agreement by using their personal assets. In addition, they agreed that they would
make the payments at the time the agreement was signed. They agreed to an
extended payment plan and bore the risk that at some point in the future they may
be unable to make the payments. As with any agreement, the failure of a party to
fulfill its side of the bargain does not give it the ability to walk away from the
agreement. The party simply has to live with the consequences of the breach.
Therefore, defendants have not established any tangible harm, and their argument
that they cannot make payments is without adequate support. The only other
21
plausible consequence to defendants is their inability to misrepresent the state of
the case to the Court and their insurers, which is something they should not do in
the first place. Accordingly, their argument regarding damage fails.
Finally, and perhaps most significantly, defendants are not entitled to
rescission for fraudulent inducement because they themselves breached the terms of
the settlement agreement. Rescission is an equitable remedy, and its application is
largely left to the discretion of the trial judge. See Nigrelli v. Catholic Bishop of
Chicago, 68 F.3d 477, 477 (7th Cir. 1995). The doctrine of “unclean hands” prohibits
rescission, however, when the party seeking to rescind the agreement has engaged
in misbehavior related to the transaction at issue himself. See Zahl v. Krupa, 365
Ill. App. 3d 653, 658 (2d Dist. 2006). The rationale of this doctrine is to prevent “one
seeking equity from taking advantage of his own wrong.” La Salle Nat’l Bank v.
53rd-Ellis Currency Exch., Inc., 249 Ill. App. 3d 415, 437 (1st Dist. 1993). “In
looking at whether unclean hands are present, the court will look to the intent of
the party, not the effect of its actions, and will only find unclean hands if there has
been fraud or bad faith.” Jaffe Commercial Fin. Co. v. Harris, 119 Ill. App. 3d 136,
140 (1st Dist. 1983); see also Thompson Learning, Inc. v. Olympia Props., LLC, 365
Ill. App. 3d 621, 634 (2d Dist. 2006).
Here, there is enough evidence in the record to demonstrate that defendants
have breached the terms of the settlement agreement. As explained above, the
settlement agreement prohibits defendants from engaging in any conduct related to
the Subsidy Theft and Activation Fraud Scheme, including “the purchase, sale,
22
unlocking, reflashing, altering, advertising, soliciting, using, and/or shipping of
any . . . wireless product sold by T-Mobile.” R. 119 at 4. Defendants are further
prohibited from using third parties to engage in such conduct. Id.
On September 4, 2013, an undercover law enforcement agent attempted to
sell five new phones to Yasin at AU’s corporate offices. R. 137 at 7. Yasin refused to
purchase the phones after learning that they were T-Mobile phones, presumably out
of fear that he might be discovered circumventing the terms of the agreement.
Instead, Yasin directed the agent to Sakaria, obviously in an effort to stay under the
radar and not appear to be directly involved in a prohibited transaction. The report
of the incident reveals that the telephone number provided for Sakaria matched a
telephone number appearing on AU’s business cards. Even more telling, however, is
the fact that after Sakaria purchased the phones from the agent, he immediately
drove to the AU’s corporate offices and entered the same building where Yasin had
met with the agent hours earlier. Defendants admit that they eventually obtained
those phones, and later that evening, the phones were shipped by defendants to
Hong Kong.
Defendants attempt to provide several innocuous explanations regarding this
incident, but none of them are able to surmount the significant evidence against
them. For example, Vadria claims that he was unable to determine whether the
phones were T-Mobile phones because they were received in sealed packages and
because of the manner in which the model number and serial number is designated
on the outside of the package. R. 137, Exh. A. However, in his deposition testimony,
23
Vadria testified that AU employees open every phone box they purchase in order to
ensure that they are purchasing and selling the specific type of phone requested by
their customers. In the end, the evidence shows that defendants knowingly violated
the settlement agreement by utilizing a third party to purchase T-Mobile phones,
and therefore the doctrine of “unclean hands” prevents them from rescinding the
agreement.
Defendants fault the Court for setting an “accelerated briefing schedule” and
“openly admitting that it was limiting [their] rights to discovery because it was
employing a summary procedure to determine whether or not to enforce the instant
[s]ettlement [a]greement.” R. 137 at 11. According to defendants, a decision to
enforce the agreement “absent affording [d]efendants their rights to full discovery
and a full evidentiary hearing would prejudice their legally protected rights and
amount to an abuse of discretion.” Id. at 12. In support of their argument,
defendants cite an opinion issued by the D.C. Circuit in the late 1960s which stands
for the proposition that a summary procedure is ill-suited to situations presenting
complex factual issues. Id. (citing Autera v. Robinson, 419 F.2d 1197, 1200 (D.C.
Cir. 1969)). Autera, however, involved an oral settlement agreement involving
numerous complex issues of fact. Its holding is not applicable to this case.
Here, the Court has afforded defendants adequate discovery to explore their
claims. The parties were given ample opportunity to brief their arguments, and the
Court heard oral argument on many of the issues during several motion hearings.
R. 125, 132, 136, 146. These procedures are by no means summary in nature, and
24
the Court does not find it necessary to order an evidentiary hearing at this stage in
the proceeding. Evidentiary hearings are only necessary to resolve disputed issues
of material fact, none of which are presented here. See EEOC v. Bay Shipbuilding
Corp., 668 F.2d 304, 309-10 (7th Cir. 1981); Fed. R. Civ. P. 78 (“By rule or order, the
court may provide for submitting and determining motions on briefs, without oral
hearings.”). Furthermore, as explained below, any additional evidence that
defendants expect to obtain would ultimately be unhelpful, as defendants
themselves breached the terms of the settlement agreement before seeking
rescission.
Defendants have not satisfied their burden of providing clear and convincing
evidence to support each of the elements of fraudulent inducement. Therefore, they
cannot rescind the settlement agreement on that ground.
IV.
T-Mobile Did Not Breach the Express Terms of the Settlement
Agreement.
Defendants next maintain that they are entitled to rescind the settlement
agreement because T-Mobile breached the express terms of the agreement by: (1)
disclosing information about defendants to law enforcement; and (2) filing its notice
of settlement which disclosed forbearance terms. R. 137 at 15-18. Under a plain
reading of the terms of the agreement, these arguments fail.
A.
T-Mobile’s Disclosures to Law Enforcement
Section 17 of the settlement agreement provides that “T-Mobile may use any
information provided by [d]efendants to investigate and pursue claims against
others.” R. 119 at 10. The agreement further states that “T-Mobile shall not disclose
25
[d]efendants’ information beyond what is reasonably necessary to investigate and
pursue claims of participation in the Subsidy Theft and Activation Fraud Scheme,
or upon request by a member of law enforcement.” Id. at 11. These are the only
limitations placed on T-Mobile with respect to defendants’ “information.”
T-Mobile undoubtedly provided law enforcement with information regarding
defendants after the settlement agreement became effective; however, none of its
disclosures violated the terms of the agreement. On the contrary, the documents
produced to defendants demonstrate that T-Mobile carefully adhered to the
agreement’s conditions governing disclosure to law enforcement. For example, TMobile’s Senior Manager of Major Investigations explained to law enforcement by
email that “any release of materials/etc. related to this matter need[s] to be run by
[T-Mobile’s counsel] in order [to] ensure [T-Mobile] is staying within the guidelines
of settlement.” R. 137, Exh. D. Furthermore, sworn affidavits from employees in TMobile’s loss prevention and investigations departments maintained that they had
“not provided any information to law enforcement regarding [defendants] in this
case, except in response to a request by a member of law enforcement.” R. 126 ¶ 4;
R. 127 ¶ 4; R. 128 ¶ 5; R. 129 ¶ 4.
Defendants fail to identify any information that T-Mobile shared with law
enforcement in violation Section 17 of the settlement agreement. Instead,
defendants concede, as they must, that “it is possible that every bit of information
provided by T-Mobile representatives to law enforcement was entirely responsive to
direct requests by law enforcement.” R. 137 at 17. Furthermore, defendants’ brief is
26
rife with speculation regarding T-Mobile’s disclosures, frequently stating that TMobile “appeared” or “seemed” to violate the settlement agreement. Without more
specific evidence, the Court finds that T-Mobile did not breach Section 17 of the
agreement.
In any event, even if T-Mobile had breached Section 17 of the settlement
agreement, such a breach would not entitle defendants to rescission of the
agreement because it would not constitute a material breach. Illinois courts have
stated that rescission is only appropriate where a “fundamental or material” breach
“defeat[s] the purpose of the settlement agreement or . . . render[s] it unattainable.”
Solar v. Weinberg, 274 Ill. App. 3d 726, 734 (1st Dist. 1995). The Court listed the
material terms of the agreement in Section I above, which include, among other
things, payment by defendants in exchange for a complete resolution of the lawsuit.
The provision of the agreement regarding disclosure of defendants’ information was
not a material term; in other words, it was not of such importance that the
settlement agreement would not have been reached without it. See Haisma, 218 Ill.
App. 3d at 86 (“In order to determine whether a failure of performance constitutes a
material breach permitting rescission of the contract, a court must ask whether the
matter, in respect to which the failure of performance occurs, is of such a nature
and of such importance that the contract would not have been made without it.”). As
a result, any breach of Section 17 would not entitle defendants to rescission.
27
B.
T-Mobile’s Notice of Settlement
Defendants also contend that T-Mobile breached the terms of the settlement
agreement by filing its notice of settlement on September 16, 2013. The Court
disagrees. As mentioned above, Section 9(C) provides that “[a]ny forbearance by TMobile
in
executing
on
the
Final
Judgment
shall
remain
STRICTLY
CONFIDENTIAL and both T-Mobile and Defendants are strictly prohibited from
disclosing forbearance or filing with the Court any document reflecting such
forbearance . . . .” R. 119 at 7. This language refers to T-Mobile’s forbearance in
executing on the Final Judgment, i.e., not pursuing collection of the $[redacted]
Final Judgment and instead accepting $[redacted]. Under Illinois law, “the
paramount objective [in interpreting a settlement agreement] is to give effect to the
intent of the parties as expressed by the terms of the agreement.” Laserage Tech.
Corp., 972 F.2d at 799. Here, there is nothing in the agreement which prohibits TMobile from informing the Court of the fact of settlement. And that is exactly what
T-Mobile did. T-Mobile’s notice of settlement informed the Court that “all parties to
this case have reached a comprehensive settlement, which provides, among other
things, for the case to be resolved by entry of a Final Judgment and Permanent
Injunction.” R. 115 at 1. The notice further refers to the 60-day delay in filing the
stipulation for entry of the Final Judgment and Permanent Injunction. Id. What the
notice does not do, however, is inform the Court that T-Mobile would forego
executing on the Final Judgment in exchange for four payments of $[redacted] each.
Such a disclosure would be expressly prohibited by Section 9(C). Accordingly,
28
because T-Mobile merely informed the Court of the fact that a settlement had been
reached, it did not breach this provision of the agreement. 6
V.
Equitable Considerations Do Not Prevent Enforcement of the
Settlement Agreement.
Finally, defendants argue that the doctrine of commercial frustration
precludes enforcement of the settlement agreement. R. 137 at 18-20. According to
defendants, the primary object of the settlement agreement was the forbearance
agreement by which T-Mobile agreed that it would not collect the $[redacted] Final
Judgment in exchange for $[redacted]. Id. at 19. However, due to the government’s
execution of the search warrant and pending criminal investigation, defendants
maintain that they do not have any money to pay the $[redacted] forbearance and,
thus, are facing the prospect of defaulting on the settlement agreement. Id. As a
result, defendants contend that the agreement is defeated by commercial
frustration of purpose. Id. at 18-20.
“The commercial frustration defense is not to be applied liberally and is only
appropriate if a rigorous two-part test is satisfied.” Blue Cross Blue Shield of Tenn.,
517 F. Supp. 2d at 1059. To satisfy that difficult test, a party must demonstrate
that: “(1) the frustrating event was not reasonably foreseeable; and (2) the value of
counterperformance has been totally or nearly totally lost or destroyed by the
frustrating event.” Id. Defendants cannot meet this demanding test.
For the reasons explained in Section IV-A of this opinion, the Court finds that
even if T-Mobile had breached this provision of the settlement agreement, such a
breach would not entitle defendants to rescind the agreement.
6
29
First, the governmental raid on AU’s corporate offices was not unanticipated
or unforeseeable. Defendants have conceded that it is public knowledge that
companies engaged in the trafficking of phones have been raided by the federal
government. Sprint Nextel Corp., et al. v. AU Elecs., Inc., et al., No. 12 C 9095, R.
129 at 2 n.1. In fact, defendants had this concern in mind when they asked counsel
for T-Mobile during settlement negotiations if he was aware of any pending
investigations against them. R. 137 at 3. Regardless of how T-Mobile’s counsel
answered the question, defendants knew or should have known that T-Mobile did
not have the ability to control or bind law enforcement with respect to a potential
raid. Defendants cannot turn a blind eye to a known risk. See AMPAT/Midwest,
Inc. v. Ill. Tool Works Inc., 896 F.2d 1035, 1042 (7th Cir. 1990). Moreover,
defendants’ participation in a scheme to purchase T-Mobile phones through an
intermediary and send them to Hong Kong put them at increased risk of being the
subject of law enforcement scrutiny.
Second, as described above, the only bank accounts that have been frozen by
the government are AU’s corporate accounts. The bank accounts of the individual
defendants, Yasin and Vadria, have not been frozen, and defendants have made no
showing that they will be unable to satisfy the monetary commitments of the
agreement by using their personal assets. Accordingly, the value of their
counterperformance has not been destroyed, and the doctrine of commercial
frustration does not bar enforcement of the settlement agreement.
30
VI.
T-Mobile is Not Entitled to Recover Fees and Costs Associated with
Defendants’ Attempt to Repudiate the Settlement Agreement.
As a final matter, T-Mobile asserts that defendants and their counsel “should
be ordered to reimburse T-Mobile for the fees and costs associated with having to
address Defendants’ improper attempt to repudiate the Agreement.” R. 124 at 14.
“In order to impose sanctions pursuant to its inherent power, a court must find that
the party acted in bad faith, vexatiously, wantonly, or for oppressive reasons.”
Judson Atkinson Candies, Inc. v. Latini-Hohberger Dhimantec, 529 F.3d 371, 386
(7th Cir. 2008). Further, a court has discretion to impose sanctions under 28 U.S.C.
§ 1927 “when an attorney has acted in an objectively unreasonable manner by
engaging in a serious and studied disregard for the orderly process of justice;
pursued a claim that is without a plausible legal or factual basis and lacking in
justification; or pursue[d] a path that a reasonably careful attorney would have
known, after appropriate inquiry, to be unsound.” Jolly Grp., Ltd. v. Medline Indus.,
Inc., 435 F.3d 717, 720 (7th Cir. 2006) (internal quotations and citations omitted).
The Court declines to impose sanctions on defendants and their counsel for
attempting to repudiate the settlement agreement. It is a close question. The Court
was not pleased to learn for the first time on September 16, 2013 that the case had
settled and a settlement agreement had been signed several weeks earlier.
Significant pending motions to dismiss on this case were being reviewed during this
period, and time was spent on this case that could have been expended on other
pending cases. Defendants’ “request” that the Court expedite its ruling on the
motions to dismiss, without informing the Court that a settlement agreement was
31
signed several weeks earlier, can charitably be described as disingenuous. In the
end, however, the Court does not agree with T-Mobile’s argument that defendants
had absolutely no legal or factual basis to invalidate the agreement, and therefore
the Court declines to award fees and costs to T-Mobile.
Conclusion
For the reasons explained above, the Court grants defendants’ motion to
reform the settlement agreement and reforms the language of the agreement as
specified therein. R. 143. The Court further grants the relief requested in T-Mobile’s
motion to enforce the settlement agreement and finds that defendants’ notice of
repudiation is without force or effect. R. 124. In light of the Court’s enforcement of
the settlement agreement, defendants’ motions to dismiss are denied as moot. R. 37;
R. 40. Simultaneously with the entry of this opinion, the Court will enter a signed
stipulated order of dismissal. This case is therefore dismissed with prejudice.
The Court would add that T-Mobile’s motion to enforce the settlement
agreement has been fully briefed since October 18, 2013, and through no fault of the
parties, the motion has been pending since then. If defendants are unable to make
their first payment on January 31, 2014 as required by the settlement agreement,
the Court encourages, but of course does not require, the parties to enter into a
codicil which extends the due date of this first payment for a short period of time. 7
The Court notes that the January 31, 2014 date has been known to defendants
since August 20, 2013.
7
32
ENTERED:
__________________________
Thomas M. Durkin
United States District Judge
Dated: January 23, 2014
33
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