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Red Barn Motors, Inc. v. Nextgear Capital, Inc.

United States District Court, S.D. Indiana, Indianapolis Division

March 27, 2017

RED BARN MOTORS, INC., PLATINUM MOTORS, INC., MATTINGLY AUTO SALES, INC., and YOUNG EXECUTIVE MANAGEMENT & CONSULTING SERVICES, INC., individually and on behalf of other members of the general public similarly situated, Plaintiffs,
v.
NEXTGEAR CAPITAL, INC. f/k/a DEALER SERVICES CORPORATION, COX ENTERPRISES, INC., COX AUTOMOTIVE, INC., and JOHN WICK, Defendants.

          ORDER ON DEFENDANTS' MOTION TO DISMISS

          TANYA WALTON PRATT, JUDGE

         This matter is before the Court on a Motion to Dismiss filed pursuant to Federal Rule of Civil Procedure 12(b)(6) by Defendants NextGear Capital, Inc. (“NextGear”), formerly known as Dealer Services Corporation (“DSC”), Cox Enterprises, Inc., Cox Automotive, Inc., and John Wick (“Mr. Wick”) (collectively, “Defendants”) (Filing No. 126). In 2009 and 2011, NextGear entered into agreements with Plaintiffs Red Barn Motors, Inc. (“Red Barn”), Platinum Motors, Inc. (“Platinum Motors”), Mattingly Auto Sales, Inc. (“Mattingly Auto”), and Young Executive Management & Consulting Services, Inc. (“Executive Auto Group”) (collectively, “Plaintiffs”). These agreements provided lines of credit for financing the Plaintiffs' used car dealership operations. After the Plaintiffs discovered that they had been charged fees and interest on money that had not yet actually been loaned, they initiated this litigation, asserting claims for breach of contract, constructive fraud, tortious interference with business relationships, unjust enrichment, violation of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. § 1961 et seq., and RICO conspiracy. The Defendants move to dismiss the Plaintiffs' Amended Complaint on various grounds but primarily on the argument that the terms of the contracts allowed the Defendants to charge fees and interest at the time that they did actually charge fees and interest. For the following reasons, the Court grants in part and denies in part the Motion to Dismiss.

         I. BACKGROUND

         The following facts are not necessarily objectively true, but as required when reviewing a motion to dismiss, the Court accepts as true all factual allegations in the Amended Complaint and draws all inferences in favor of the Plaintiffs. See Bielanski v. County of Kane, 550 F.3d 632, 633 (7th Cir. 2008).

         Defendant NextGear has its principal place of business in Carmel, Indiana, and is a wholly-owned subsidiary of Defendant Cox Automotive. Cox Automotive in turn is a wholly-owned subsidiary of Defendant Cox Enterprises. Cox Automotive is a world leader in vehicle remarketing services and digital marketing and software solutions for automotive dealers and customers. In addition to owning and operating NextGear, Cox Automotive also owns and operates Kelley Blue Book and Autotrader among other companies. Defendant NextGear is an automotive financing company that provides line-of-credit financing to used car dealers that purchase used automobiles from auction companies throughout the United States. NextGear also owns and operates some auction houses. NextGear operates throughout the United States by way of almost two hundred account executives and eighteen regional directors. Defendant Mr. Wick is general counsel and corporate secretary for NextGear. Mr. Wick oversees all corporate, legislative, and litigation matters of NextGear. Mr. Wick also leads NextGear's strategic and corporate development.

         Plaintiffs Red Barn, Platinum Motors, Mattingly Auto, and Executive Auto Group are used car dealerships. Red Barn is a small, family-owned and operated used car dealership in Louisiana. Platinum Motors is located in Chesapeake, Virginia. Mattingly Auto is located in Hardinsburg, Kentucky, and Executive Auto Group is located in Kansas City, Missouri. Each of the Plaintiffs was solicited by NextGear to enter into a contract whereby NextGear would issue a line of credit to the Plaintiffs so that the Plaintiffs could purchase used vehicles at automobile auctions and the vehicles would initially be paid for by NextGear. The Plaintiffs would then later pay NextGear the amount NextGear paid the auction on behalf of the Plaintiffs as well as interest and other fees. Each of the Plaintiffs entered into an agreement with NextGear, specifically called a “Demand Promissory Note and Security Agreement.” These agreements provided to the Plaintiffs a revolving line of credit-commonly referred to as a floorplan agreement-to purchase vehicles at auctions, which would then be resold at their used car dealerships.

         The Plaintiffs describe the typical auction and financing transactions in their Amended Complaint:

Typically, Floorplan Agreements are used by used car dealers in conjunction with vehicle auctions in the following manner: a) a new car dealer receives a trade-in vehicle; b) the new car dealer then provides the trade-in vehicle to an auction company to present to numerous used car dealers at auction on a particular date; c) once a used car dealer's bid is accepted, the used car dealer takes possession of the vehicle; d) on the date of the auction, the used car dealer either pays the auction company directly or employs an automotive financing company (such as a NextGear/DSC) to pay the auction company on that day and provide financing by means of a Floorplan Agreement with the used car dealer for the purchase of the vehicle; e) the new car dealer delivers the title for the vehicle to the auction company; f) the auction company forwards the title to whomever paid it - either the used car dealer that paid the auction company directly, or the automotive financing company that provided financing by means of a Floorplan Agreement. If the title is forwarded to the automotive financing company that provided financing by means of a Floorplan Agreement, the used car dealer pays the automotive financing company fees and interest on the money loaned while the used car dealer attempts to sell the vehicle to a new buyer. Once the used car dealer sells the car to a new buyer, the used car dealer pays off the automotive financing company in full.

(Filing No. 117 at 5.) The Plaintiffs explain NextGear's deviation from this typical model; “NextGear/DSC, however, does not pay the auction houses until NextGear/DSC receives the title to the vehicles purchased, even though NextGear/DSC charges interest and curtailment fees to the Red Barn Plaintiffs under the illusion that NextGear/DSC has already paid the auction house for the vehicles.” Id. It can take as long as eight weeks for NextGear to receive title to a vehicle purchased at an auction, at which point it pays the auction for the vehicle; however, NextGear begins charging interest and fees at the time of the sale at the auction.

         The Plaintiffs allege that the Defendants,

devised a scheme and artifice to defraud the [] Plaintiffs and others similarly situated, and to obtain money and property by means of false and fraudulent pretenses and representations by charging “interest” to the [] Plaintiffs and others similarly situated, on money not lent from NextGear/DSC to the [] Plaintiffs.

(Filing No. 117 at 2).

         In the case of Red Barn, in June or July 2011 at the Oak View Auto Auction in Baton Rouge, Louisiana, Stuart LaBauve (“Mr. LaBauve”), a NextGear account executive, solicited Red Barn through Devon London (“Mr. London”), Red Barn's general manager, to enter into a floorplan agreement. NextGear wanted to provide a revolving line of credit to Red Barn to allow it to purchase used cars at auctions that would then be placed on its sales lot for resale. In June or July 2011, following the initial meeting between Mr. LaBauve and Mr. London, Mr. LaBauve visited Red Barn's business in Denham Springs, Louisiana, to solicit Red Barn through its owner, Donald Richardson, to enter into a floorplan agreement with NextGear.

         On July 27, 2011, Red Barn and NextGear entered into a floorplan agreement, providing a line of credit up to $200, 000.00 to Red Barn. The agreement required payment of interest and other fees as well as any principal amounts paid on behalf of Red Barn. After entering into the agreement, Red Barn occasionally used the floorplan agreement to purchase vehicles at auction in order to sell them at the Red Barn used car lot.

         In June 2012, Red Barn entered into a verbal agreement with multiple automobile auction houses that gave Red Barn up to seven days to decide whether it wanted to use its NextGear line of credit to pay for vehicles purchased at the auctions or whether it would pay for the vehicles using some other method such as cash. Even when Red Barn delayed its decision to use the line of credit provided by NextGear to purchase vehicles from these auctions, NextGear backdated the withdrawal on the line of credit to the date of the purchase at auction, and NextGear charged interest and fees from that backdated date.

         Later in June 2012, Red Barn's general manager discovered transactions in which Red Barn had not used the floorplan agreement to purchase vehicles, so NextGear never actually loaned money to Red Barn for the purchase of those vehicles. However, NextGear charged interest to Red Barn as though NextGear had actually provided the financing for the vehicles.

         Around November 2, 2012, Red Barn purchased a vehicle using the NextGear floorplan agreement. The auction house was unable to obtain title to the vehicle after 180 days, and Red Barn already had paid off its line of credit with NextGear for the purchase of the vehicle. NextGear never paid the auction house for the vehicle, so it voluntarily reimbursed Red Barn all of the interest and fees that it had been collecting from Red Barn over the span of 180 days on the vehicle because the title was never delivered.

         Between August 2011 and March 2013, Red Barn used NextGear's floorplan agreement for 524 transactions. NextGear electronically debited approximately $80, 000.00 in interest from Red Barn's bank account. Much of the money NextGear electronically debited from Red Barn's account was based on money that was never actually loaned to Red Barn for the purchase of vehicles, or NextGear actually loaned the money for a much shorter period of time than the period for which interest and fees were charged.

         During the course of Red Barn's nearly two-year lending relationship with NextGear, Red Barn communicated regularly with Mr. LaBauve of NextGear regarding Red Barn's floorplan agreement through in-person, telephone, and email communications. During all of these communications, NextGear concealed the fact that NextGear did not pay the auction houses for the vehicles purchased until it received the title, but it began charging interest and fees from the date of the auction, sometimes as much as eight weeks earlier, even though no money had been loaned. NextGear also concealed facts regarding the actual interest rates charged. NextGear worked with several auction houses, including some auction houses owned and operated by NextGear, to conceal these facts from Red Barn. The auction houses concealed NextGear's actions, allowing NextGear to continue its course of conduct.

         NextGear intentionally interfered with the valid business relationships held by Red Barn with various auction houses when it “blacklisted[1]” Red Barn with these auction houses. As a result, auction houses prohibited Red Barn from attending and participating in the routine sales of used cars, which further damaged Red Barn financially.

         In March 2013, Red Barn began experiencing financial difficulties, which resulted in an inability to make payments on its floorplan agreement with NextGear. Because of this, in April 2013, NextGear began seizing Red Barn's assets, including vehicles on the Red Barn sales lot. In April 2013, Red Barn employees delivered between eleven and fourteen vehicles to Louisiana First Choice Auto Auction (“First Choice”) with the intent to sell the vehicles and use the proceeds from the sales to pay NextGear on the debt under the floorplan agreement. However, Red Barn was unable to sell the vehicles because First Choice, without Red Barn's knowledge or consent, seized the vehicles and has held the vehicles since the time of seizure. On April 25, 2013, Red Barn filed a Chapter 11 voluntary petition for bankruptcy.

         In the case of Platinum Motors, in the spring of 2011 at the American Auto Auction in Chesapeake, Virginia, a NextGear account executive solicited Nicol Zenia Perry (“Ms. Perry”), Platinum Motors' owner, to execute a floorplan agreement with NextGear. Later, Ms. Perry met with a NextGear representative at a Manheim Auto Auction in Virginia.

         On May 23, 2011, Platinum Motors and NextGear entered into a floorplan agreement, providing a line of credit up to $35, 000.00 to Platinum Motors. Similar to Red Barn's agreement, Platinum Motors' agreement required payment of interest and other fees as well as any principal amounts paid on behalf of Platinum Motors. After entering into the agreement, Platinum Motors occasionally used the floorplan agreement to purchase vehicles at auction in order to sell them at the Platinum Motors used car lot.

         Similar to Red Barn's experience with NextGear, Platinum Motors was charged interest and fees based on the date of the purchase at auction even though payment was not made on Platinum Motors' behalf until NextGear received title from the auction houses-sometimes as long as eight weeks later. Between May 2011 and June 2012, Platinum Motors used NextGear's floorplan agreement for approximately 1, 000 vehicle purchases. NextGear electronically debited interest and fees from Platinum Motors' bank account on each of these transactions. Much of the money NextGear electronically debited was based on money that was never actually loaned, or NextGear actually loaned the money for a much shorter period of time than the period for which interest and fees were charged.

         Throughout Platinum Motors' one-year lending relationship with NextGear, Platinum Motors communicated regularly with NextGear representatives, including account executive Sean Tabb, regarding Platinum Motors' floorplan agreement through in-person, telephone, and email communications. During all of these communications, NextGear concealed the fact that NextGear did not pay the auction houses for the vehicles purchased until it received the title, but it began charging interest and fees from the date of the auction, sometimes as much as eight weeks earlier, even though no money had been loaned. NextGear also concealed facts regarding the actual interest rates charged.

         Like Red Barn, Platinum Motors was blacklisted by NextGear with various auction houses, thereby interfering with the valid business relationships held by Platinum Motors. As a result, auction houses prohibited Platinum Motors from attending and participating in the routine sales of used cars, which further damaged Platinum Motors financially.

         In the case of Mattingly Auto, sometime before February 2009, NextGear account executive Lourdes Givens solicited Barry Mattingly (“Mr. Mattingly”), Mattingly Auto's owner, to execute a floorplan agreement with NextGear. On February 5, 2009, Mattingly Auto and NextGear entered into a floorplan agreement, providing a line of credit up to $100, 000.00 to Mattingly Auto. Similar to the other floorplan agreements in this case, Mattingly Auto's agreement required payment of interest and other fees as well as any principal amounts paid on behalf of Mattingly Auto. After executing the agreement, Mattingly Auto used the line of credit to purchase vehicles at auction in order to sell them at its used car lot in Kentucky.

         Mattingly Auto was charged interest and fees based on the date of the purchase at auction even though payment was not made on Mattingly Auto's behalf until NextGear received title from the auction houses. Between February 2009 and May 2012, Mattingly Auto used NextGear's floorplan agreement for approximately 320 transactions. NextGear electronically debited interest and fees from Mattingly Auto's bank account on each of these transactions. Much of the money NextGear electronically debited was based on money that was never actually loaned, or NextGear actually loaned the money for a much shorter period of time than the period for which interest and fees were charged.

         During Mattingly Auto's more than three-year relationship with NextGear, Mattingly Auto communicated regularly with NextGear representatives, including account executives Lourdes Givens and Mark Holley, regarding Mattingly Auto's floorplan agreement through in-person, telephone, and email communications. NextGear concealed the fact that NextGear did not pay the auction houses for the vehicles purchased until it received the title, but it began charging interest and fees from the date of the auction even though no money had yet been loaned. NextGear also concealed facts regarding the actual interest rates charged.

         Similar to the other plaintiffs, Mattingly Auto was blacklisted by NextGear with auction houses and had its business relationships interrupted, resulting in auction houses prohibiting Mattingly Auto from attending and participating in the routine sales of used cars, which further damaged Mattingly Auto financially.

         In the case of Executive Auto Group, in the summer or fall of 2011, a NextGear account executive solicited Executive Auto Group through its owner, Ronald Jerome Reid (“Mr. Reid”), to execute a floorplan agreement with NextGear. On September 14, 2011, Executive Auto Group and NextGear entered into a floorplan agreement, providing a line of credit up to $25, 000.00 to Executive Auto Group. Similar to the other floorplan agreements in this case, Executive Auto Group's agreement required payment of interest and other fees as well as any principal amounts paid on behalf of Executive Auto Group. Like the other plaintiffs, Executive Auto Group used the line of credit to purchase vehicles at auction in order to sell them at its used car lot in Missouri.

         Like the other plaintiffs in this case, Executive Auto Group was charged interest and fees based on the date of the purchase at auction even though payment was not made on Executive Auto Group's behalf until NextGear received title from the auction houses. Beginning in 2011, Executive Auto Group used NextGear's floorplan agreement to finance approximately seven transactions. NextGear electronically debited interest and fees from Executive Auto Group's bank account on each of these transactions. Much of the money NextGear electronically debited was based on money that was never actually loaned, or NextGear actually loaned the money for a much shorter period of time than the period for which interest and fees were charged.

         During Executive Auto Group's lending relationship with NextGear, Mr. Reid communicated regularly with NextGear representatives regarding the floorplan agreement through in-person, telephone, and email communications. NextGear concealed the fact that NextGear did not pay the auction houses for the vehicles purchased until it received the title, but it began charging interest and fees from the date of the auction even though no money had yet been loaned, and it concealed facts regarding the actual interest rates charged.

         Executive Auto Group also was blacklisted by NextGear with auction houses and had its business relationships interrupted, resulting in auction houses prohibiting Executive Auto Group from attending and participating in the routine sales of used cars, which further damaged Executive Auto Group financially.

         On December 3, 2013, Red Barn filed its Complaint against NextGear and First Choice, asserting claims for breach of contract, unjust enrichment, and conversion and illegal seizure, based on the facts noted above regarding Red Barn (Filing No. 1). On January 8, 2016, the Plaintiffs requested leave to file their Amended Complaint, which was granted. The Plaintiffs' Amended Complaint, filed March 11, 2016, asserts claims for breach of contract, constructive fraud, tortious interference with business relationships, unjust enrichment, violation of RICO, and a RICO conspiracy (Filing No. 117). The Amended Complaint did not include First Choice as a defendant but added Cox Enterprises, Cox Automotive, and Mr. Wick as defendants. The Amended Complaint also added Platinum Motors, Mattingly Auto, and Executive Auto Group as plaintiffs and removed Donald and Barbara Richardson as plaintiffs. The Defendants filed their Motion to Dismiss on April 15, 2016 (Filing No. 126).

         II. LEGAL STANDARD

         Federal Rule of Civil Procedure 12(b)(6) allows a defendant to move to dismiss a complaint that has failed to “state a claim upon which relief can be granted.” Fed.R.Civ.P. 12(b)(6). When deciding a motion to dismiss under Rule 12(b)(6), the court accepts as true all factual allegations in the complaint and draws all inferences in favor of the plaintiff. Bielanski, 550 F.3d at 633. However, courts “are not obliged to accept as true legal conclusions or unsupported conclusions of fact.” Hickey v. O'Bannon, 287 F.3d 656, 658 (7th Cir. 2002).

         The complaint must contain a “short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8(a)(2). In Bell Atlantic Corp. v. Twombly, the Supreme Court explained that the complaint must allege facts that are “enough to raise a right to relief above the speculative level.” 550 U.S. 544, 555 (2007). Although “detailed factual allegations” are not required, mere “labels, ” “conclusions, ” or “formulaic recitation[s] of the elements of a cause of action” are insufficient. Id.; see also Bissessur v. Ind. Univ. Bd. of Trs., 581 F.3d 599, 603 (7th Cir. 2009) (“it is not enough to give a threadbare recitation of the elements of a claim without factual support”). The allegations must “give the defendant fair notice of what the . . . claim is and the grounds upon which it rests.” Twombly, 550 U.S. at 555. Stated differently, the complaint must include “enough facts to state a claim to relief that is plausible on its face.” Hecker v. Deere & Co., 556 F.3d 575, 580 (7th Cir. 2009) (citation and quotation marks omitted). To be facially plausible, the complaint must allow “the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Twombly, 550 U.S. at 556).

[T]he record under 12(b)(6) is limited to the language of the complaint and to those matters of which the court may take judicial notice. The complaint cannot be amended by the briefs filed by the plaintiff in opposition to a motion to dismiss. By the same token, the defendant cannot, in presenting its 12(b)(6) challenge, attempt to refute the complaint or to present a different set of allegations. The attack is on the sufficiency of the complaint, and the defendant cannot set or alter the terms of the dispute, but must demonstrate that the plaintiff's claim, as set forth by the complaint, is without legal consequence.

Gomez v. Illinois State Bd. of Education, 811 F.2d 1030, 1039 (7th Cir. 1987) (citation omitted). However, “[courts] consider documents attached to the complaint as part of the complaint itself. Such documents may permit the court to determine that the plaintiff is not entitled to judgment.” Reger Dev., LLC v. Nat'l City Bank, 592 F.3d 759, 764 (7th Cir. 2010) (citations omitted). Additionally, the court may consider documents that are referred to in the complaint and that are concededly authentic and central to the plaintiff's claim. Santana v. Cook County Bd. of Review, 679 F.3d 614, 619 (7th Cir. 2012). When a party attaches exhibits to its complaint and incorporates the exhibits into the pleadings, if there are contradictions between the exhibits and the complaint, the exhibits generally will control. Bogie v. Rosenberg, 705 F.3d 603, 609 (7th Cir. 2013).

         III. DISCUSSION

         The Defendants have requested dismissal of the Plaintiffs' Amended Complaint on numerous grounds, but their argument for dismissal is premised on their claim that the unambiguous terms of the floorplan agreements allowed the Defendants to charge fees and interest at the time that they did actually charge fees and interest. The Court will address each of the arguments presented by the Defendants in their Motion to Dismiss.

         A. Res Judicata

         The Defendants assert that the Plaintiffs' claims arising from allegations of improper interest-RICO, breach of contract, constructive fraud, and unjust enrichment-are barred by the doctrine of res judicata between NextGear and Platinum Motors, Mattingly Auto, and Executive Auto Group. Citing Hensley v. Jasper Police Dep't, 163 F.Supp.2d 1006, 1021 (S.D. Ind. 2001), the Defendants point out that, under Indiana law, res judicata applies when there has been a judgment on the merits between the same parties and their privies involving the same issue that was or could have been determined in the prior litigation.

         The Defendants explain that NextGear obtained default judgments against Platinum Motors, Mattingly Auto, and Executive Auto Group for their failure to repay financing extended by NextGear pursuant to the parties' floorplan agreements. The Defendants argue that, because these plaintiffs failed to raise the allegedly improper interest charges in the prior litigation under the same floorplan agreements at issue here, they cannot bring claims arising out of those charges now. Default judgments were entered in favor of NextGear and against Platinum Motors, Mattingly Auto, and Executive Auto Group on February 12, 2014, June 6, 2013, April 11, 2013, and January 14, 2015 on NextGear's claims for breach of contract and breach of guaranty in the Hamilton County (Indiana) Superior Court. The Defendants assert that res judicata applies here because there have been judgments on the merits between the same parties and their privies involving the same issue that was or could have been determined in the prior litigation.

         Furthermore, the Defendants argue that a default judgment is a judgment on the merits for purposes of res judicata, citing Eichenberger v. Eichenberger, 743 N.E.2d 370, 374 (Ind.Ct.App. 2001), and “any matter within the issues of the [earlier] case that might have been alleged and proven will be presumed to have been proven and adjudicated.” Stefansson v. Source One Mortg., 2004 U.S. Dist. LEXIS 4458, at *4-5 (S.D. Ind. Jan. 29, 2004). Any affirmative defense or compulsory counterclaim that a party was required to raise in the prior action, but failed to do so, will be deemed proven and adjudicated for res judicata purposes. See id.; Hilliard v. Jacobs, 927 N.E.2d 393, 402 (Ind.Ct.App. 2010). The Plaintiffs' claims against NextGear arising out of allegations of wrongful interest could and should have been determined in the prior actions. Thus, the claims are barred by res judicata.

         In response to this argument, the Plaintiffs assert that the default judgments obtained by NextGear do not constitute a judgment on the merits regarding the claims asserted in this lawsuit. They point out that for claim preclusion to apply, four requirements must be met:

(1) the former judgment must have been rendered by a court of competent jurisdiction; (2) the former judgment must have been rendered on the merits; (3) the matter now in issue was, or could have been, determined in the prior action; and (4) the controversy adjudicated in the former action must ...

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