Lyon Financial Services, Incor v. Illinois Paper and Copier Comp
732 F.3d 755
7th Cir.2013Background
- Illinois Paper (seller) and Lyon Financial (Minnesota financier) executed a master agreement giving Lyon right of first refusal to finance leases; the contract (governed by Minnesota law) included a warranty that “all lease transactions presented [to Lyon] for review are valid and fully enforceable agreements.”
- Lyon purchased a copier from Illinois Paper and leased it to the Village of Bensenville for 72 months; under Illinois law municipal equipment leases are limited to five years, so the six-year lease was unenforceable.
- The Village defaulted; Lyon sought damages from Illinois Paper under the master contract warranty (nonrecourse to Illinois Paper unless warranty breached). Lyon claimed >$500,000 in lost payments.
- Illinois Paper argued the warranty was a representation of law (not fact) and therefore nonactionable; it also raised other defenses and counterclaims which were dismissed earlier in the case.
- The district court granted judgment on the pleadings for Illinois Paper, treating the warranty as a nonactionable legal representation under tort-style reliance principles; on appeal the Seventh Circuit certified unsettled questions to the Minnesota Supreme Court rather than deciding Minnesota law itself.
Issues
| Issue | Plaintiff's Argument (Lyon) | Defendant's Argument (Illinois Paper) | Held |
|---|---|---|---|
| Whether the warranty is a representation of law or fact | It’s a factual warranty that formalities and facts ensuring enforceability exist | It’s a representation of law (legal enforceability is a legal question) | Court: mixed representation but, for this claim, it is a representation of law |
| Whether representations of law are actionable in contract/warranty | Breach-of-contract claim need not require tort-like reliance; warranty should be enforceable as contractual term | Representations of law are not actionable; warranty claims require reliance and thus fail here | Court: unsettled under Minnesota law; not decided — certified questions to MN Supreme Court |
| Whether reliance is an element of breach of express warranty and what type | Reliance is not required in tort sense; if required it is satisfied by contract-like (bargained-for) reliance | Midland and Eighth Circuit precedent suggest warranty requires actual (tort-like) reliance | Court: genuinely uncertain whether Minnesota requires reliance and if so which type; certified to state court |
| If tort-like reliance required, can one party justifiably rely on another’s contractual representation of law; and if not, does breach-of-contract remain available? | Lyon: even if tort-like reliance disallowed, parties may allocate legal-risk by contract so contract remedy should remain | Illinois Paper: tort rule against relying on legal representations should bar warranty and related contract claims | Court: unresolved under Minnesota law; certified to state court for definitive answers |
Key Cases Cited
- Miller v. Osterlund, 191 N.W. 919 (Minn. 1923) (discusses difficulty classifying representations as law or fact)
- Parkside Mobile Estates v. Lee, 270 N.W.2d 758 (Minn. 1978) (seller warranty of legal compliance treated as representation of fact and actionable)
- Northernaire Prods., Inc. v. County of Crow Wing, 244 N.W.2d 279 (Minn. 1976) (statement about zoning law characterized as representation of law and nonactionable in tort)
- Midland Loan Finance Co. v. Madsen, 14 N.W.2d 475 (Minn. 1944) (Minnesota decision suggesting actual reliance is required for warranty recovery)
- Hendricks v. Callahan, 972 F.2d 190 (8th Cir. 1992) (predicting Minnesota would require reliance for breach-of-warranty claims based on Midland)
- CBS Inc. v. Ziff–Davis Publ’g Co., 553 N.E.2d 997 (N.Y. 1990) (express warranties viewed as bargained-for contractual terms; reliance satisfied by formation of the bargain)
- Glorvigen v. Cirrus Design Corp., 816 N.W.2d 572 (Minn. 2012) (explains fundamental differences between tort and contract duties)