OLD NATIONAL BANK v. LEASING INNOVATIONS, INC.

Filing 62

ENTRY on Choice of Law - ONB's motion (Dkt. 37 ) is GRANTED and Leasing Innovation's motion (Dkt. 38 ) is DENIED. Signed by Judge Tanya Walton Pratt on 3/30/2013. (TRG)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF INDIANA
INDIANAPOLIS DIVISION

)
)
)
)
)
)
)
)
)

OLD NATIONAL BANK,
Plaintiff,
vs.
LEASING INNOVATIONS, INC.,
Defendant.

Case No. 1:11-cv-01539-TWP-DKL

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 scheme

1

Wildwood is a Delaware corporation with its principal place of business in Illinois.

1

regarding 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 contract

2

action 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 rescind
3

must 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

2

The multi-part standard cited by ONB applies to instances of unilateral mistakes. See Donovan v. RRL Corp., 27
P.3d 702, 716 (Cal. 2001).

4

“[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 of
5

the 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 laws will be “outcome determinative under the facts
of this case.” Carolina Cas. Ins. Co. v. Estate of Studer, 555 F. Supp. 2d 972, 978 (S.D. Ind.
2008). Here, there is no allegation that the contract assigned the allocation of risk to either party.
Therefore, the Court must determine if Indiana’s laws substantially differ from Illinois’ and
California’s application of § 154(b) and (c).
In Indiana, a party bears the risk of mistake when such risk is inherent in the agreement or
the agreement deals with future predictions. Jay Cnty. Rural Elec. Membership Corp. v. Wabash
Valley Power Ass’n, Inc., 692 N.E.2d 905, 912 (Ind. Ct. App. 1998) (citing United States v. Sw.
Elec. Coop. Inc., 869 F.2d 310, 314 (7th Cir. 1989) (holding that “the doctrine of mutual mistake
does not cover an erroneous ‘prediction or judgment as to events to occur in the future’”)). In
Peoples State Bank, this Court held that a basic assumption of a contract is not an inherent risk in
a contract. Peoples State Bank, 2012 WL 243604, at *5. Therefore, when a mistake is made
about a basic assumption on the contract, as alleged here, the mistake cannot be a risk allocated
to a party as an inherent risk of the contract.
As an initial matter, ONB argues that courts applying § 154 would hold similarly, noting
that this Court cited First Merit Bank, N.A. v. Vision Fin. Grp., Inc., No. 04-1497, 2006 WL
2806566 (W.D. Pa. 2006) (applying § 154 for allocation of risk), for support in Peoples State

6

Bank. In First Merit Bank, the parties contracted for an assignment of a lease secured by a third
party’s manufacturing furnace and the contract included an assignment of risk clause. First
Merit Bank, 2006 WL 2806566, at *4. It later came to light that the third party never owned the
furnace, and the owner of the assignment looked to rescind the contract on the basis of mutual
mistake. Id. To begin, The First Merit Bank court determined that the existence of the furnace
was a basic assumption of the agreement, the court then applied § 154, and finally determined
the contract between the parties allocated the risk to the plaintiff under § 154(a). Id. at *5–7. In
short, the First Merit Bank court relied upon the contract itself to determine who bore the risk.
In Peoples State Bank, the court cited First Merit Bank’s conclusion that the existence of
the security interest was a basic assumption of a contract. Peoples State Bank, 2012 WL 243604,
at *6–7. The Peoples court went on to conclude that a basic assumption of the agreement is not
an inherent risk of a contract that could be allocated to the plaintiff. Id. at *7. However, the
holdings in Peoples State Bank and First Merit Bank are not analogous, because First Merit
Bank dealt with an express allocation of risk and did not apply § 154(b) or (c) to determine
whether a mistake about a basic assumption of a contract can serve as a basis for allocating risk.
Therefore, this Court finds ONB’s reliance on Peoples State Bank and First Merit Bank is
misplaced.
The Court’s inquiry, then, is whether Illinois and California courts would hold that a
mistake regarding the non-existence of basic assumption of a contract is not a risk allocated
under § 154(b) or (c). The Court will first address Leasing Innovation’s contention that Indiana
law does not allocate risk on the ground that it is reasonable in the circumstances to do so. In
Louis & Karen Metro Family, LLC v. Lawrenceburg Conservancy Dist., 616 F.3d 618, 622–23
(7th Cir. 2010), the Seventh Circuit applied Indiana law to determine allocation of risk for a

7

mutual mistake. In the case, the government defendants entered into an arrangement to build a
new development where plaintiff’s business was located. To avoid eminent domain proceedings,
the defendants entered into a sales and option contract with the plaintiff. Two months later, the
development arrangement fell through, and the plaintiff sought reformation of the sales and
option contract partially on the basis of mutual mistake. Id. at 620. Because the parties had not
allocated the risk that the development project would fail, the court considered the circumstances
of the contract and legal principles involved to determine who bore the risk. Id. The court found
it probable under the circumstances that Indiana would assign the risk of mutual mistake to the
defendants. However, the court did not characterize the risk as either a failed prediction, as the
defendants argued, or a mistake of present fact, as the plaintiffs argued. Although the law is not
clear, this Seventh Circuit opinion suggests that Indiana law would likely allow for a court to use
discretion in determining whether to allocate risk, as in § 154(c). Because Illinois and California
both apply § 154(c), the Court finds that application of this factor, instead of Indiana law, would
not be outcome determinative.
Finally, the Court finds § 154(b) has no applicability to this case when viewed through
Illinois and California law. Section 154(b) is reserved for instances when “[e]ven though the
mistaken party did not agree to bear the risk, he may have been aware when he made the contract
that his knowledge with respect to the facts to which the mistake relates was limited.”
Restatement (Second) of Contracts § 154, cmt. c. For example, in Grenall v. United of Omaha
Life Ins. Co., 165 Cal. App. 4th 188 (Cal. Ct. App. 2008), the court found that when the parties
entered into a life annuity contract with a mistaken view that the plaintiff was healthy, the risk
was allocated to the plaintiff. The court stated, “[w]e cannot fix the length of our lives or even
the state of our health with certainty, and the parties knew that their expectations in this regard

8

were at best an educated guess.” Id. at 193–94. While the court went on to say “such risks are
an inherent part of life annuity contracts,” suggesting that under Indiana law a similar result
would have been reached, this situation is not analogous to the facts in the current case. Here,
the Court is not faced with a situation in which the parties were aware of the inherent risk of
mistake or recognized their limited knowledge about the facts underlying the agreement.
Therefore, the Court need not hash out the details of whether Indiana, Illinois, or California law
dictates a different result when faced with inherent risks or those identified by § 154(b). The
Court finds that application of Indiana, Illinois, or California law is not outcome determinative.
B. Failure of Consideration
In Indiana, a “complete failure of consideration is grounds for rescission by a nondefaulting party.”

Smeekens v. Bertrand, 311 N.E.2d 431, 435 (Ind. 1974).

A failure of

consideration “excuses the performing party from having to perform, because he’s receiving
nothing in return.” Estate of Luster v. Allstate Ins. Co., 598 F.3d 903, 908 (7th Cir. 2010). In
Illinois, a total failure of consideration warrants rescission. Finke v. Woodard, 462 N.E.2d 13,
16 (Ill. App. Ct. 1984); see TMF Tool Co., Inc. v. Siebengartner, 899 F.2d 584, 587 (7th Cir.
1990). In California, California Civil Code § 1689(b) allows a party to rescind a contract “if the
consideration for the obligation of the rescinding party fails, in whole or in part, through the fault
of the party as to whom he rescinds,” “if the consideration for the obligation of the rescinding
party becomes entirely void from any cause,” or “if the consideration for the obligation of the
rescinding party, before it is rendered to him, fails in a material respect from any cause.”
In this case, ONB alleges its consideration received from Leasing Innovations completely
failed because the consideration, which was secured by the Equipment, did not exist. Further it
argues the laws of each state would recognize the non-existence of the Equipment as a complete

9

failure of consideration. The Court agrees with ONB that, as applied to this set of facts, the
failure of consideration laws of Indiana, Illinois, and California are substantially similar.
However, Leasing Innovation argues that the Assignment’s “no recourse” clause would bar this
claim in Illinois and California.
The Assignment agreement between ONB and Leasing Innovations states “[a]ssignee
[ONB] shall have no recourse against the Assignor [Leasing Innovations] provided that Assignor
is not in breach of any covenant or agreement under this Agreement.” Dkt. 40-10 at 1. In
Illinois, the courts have held that a “no recourse” or “as is” clause means the party has no right to
reimbursement or rescission of a contract, including for failure of consideration. Garofalo Co. v.
St. Mary’s Packing Co., 90 N.E.2d 292, 295 (Ill. App. Ct. 1950). Leasing Innovations cites a
California case holding that a promissory note endorsed “without recourse,” shields an assignor
from liability, Gaetani v. Goss-Geldon West Sheet Metal, 84 Cal. App. 4th 1118, 1128 (Cal. Ct.
App. 2000), and thus argues the same reasoning would apply to the Assignment in this case.
However, Gaetani is a case arising under California’s version of the Uniform Commercial Code
(“UCC”), and is not readily analogous to the current case and the Court has been unable to find
any relevant “no recourse” California cases.
Leasing Innovations further argues Indiana courts have never addressed the “no recourse”
language, and accordingly, this would be a case of first impression on that issue. The Court has
been unable to find any Indiana cases that address the effect on rescission of a contract’s “no
recourse” clause, which supports Leasing Innovations’ contention. However, “the absence of
precedent in Indiana on [this] issue[ ] does not necessarily mean a conflict of law exists.”
Hartford Accident & Indem. Co. v. Dana Corp., 690 N.E.2d 285, 292 (Ind. Ct. App. 1997).
Moreover, the Court notes that Indiana has also adopted the UCC principle followed in Gaetani.

10

See Ind. Code § 26-1-3.1-415(b) (stating that a note signed “without recourse” shields an
endorser from liability).
Ultimately, the Court does not find a substantial difference in the laws of Indiana,
California, and Illinois on this issue. Both Indiana and California follow contract interpretation
guidelines that instruct courts to interpret contracts by determining the intent of the parties at the
time of the contract, guided by the language used to express their rights and duties. First Fed.
Sav. Bank of Ind. V. Key Markets, Inc., 559 N.E.2d 600, 603 (Ind. 1990); see Bank of the West v.
Superior Court, 833 P.2d 545, 552 (Cal. 1992). Given the complete lack of ambiguity in the
Assignment’s “no recourse” clause, the Court finds that courts in each state would reach a
substantially similar conclusion.
IV. CONCLUSION
For the reasons set forth above, the Court finds that, as applied to the facts of this case,
the laws of Indiana, Illinois, and California would not produce a substantially different result. In
absence of a conflict, the Court need not undertake an “intimate contacts” analysis, and will
apply Indiana law.

Accordingly, ONB’s motion (Dkt. 37) is GRANTED and Leasing

Innovation’s motion (Dkt. 38) is DENIED.

SO ORDERED.

________________________
Hon. Tanya Walton Pratt, Judge
United States District Court
Southern District of Indiana

03/30/2013
Date: ____________

11

Distribution:
Christian J. Jorgensen
DRESSLER & PETERS, LLC
[e-mail]
Kenneth D. Peters
DRESSLER PETERS LLC
[e-mail]
Kenneth E. Rubinstein
PRETI FLAHERTY BELIVEAU & PACHIOS, LLP
[e-mail]
Joseph L. Mulvey
RUBIN & LEVIN, PC
[e-mail]
R. Brock Jordan
RUBIN & LEVIN, PC
[e-mail]

12