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

United States Court of Appeals, Seventh Circuit

February 13, 2019

Red Barn Motors, Inc., et al., Plaintiffs-Appellants,
NextGear Capital, Inc., Defendant-Appellee.

          Argued September 7, 2018

          Appeal from the United States District Court for the Southern District of Indiana, Indianapolis Division. No. l:14-cv-01589-TWP-DML - Tanya Walton Pratt, Judge.

          Before WOOD, Chief Judge, and ROVNER and Brennan, Circuit Judges.


         This appeal presents us with only the narrow issue of whether the district court erred in rescinding class certification. The defendant-appellee, NextGear Capital, Inc., formerly known as Dealer Services Corporation, provided lines of credit for financing the operations of used car dealerships. The plaintiffs Red Barn Motors, Inc., Platinum Motors, Inc. and Mattingly Auto Sales, Inc., operated used car dealerships, and were solicited by NextGear to enter into a contract called a Demand Promissory Note and Security Agreement (the "Agreement"), whereby NextGear would issue a line of credit for them to access in purchasing used vehicles at automobile auctions. Those agreements provided the plaintiffs with a revolving line of credit, called a floorplan agreement, to purchase vehicles at the auction which they subsequently would sell at their dealerships.

         In the typical auction and financing transaction, a new car dealer provides a trade-in vehicle to an auction company, which presents the vehicle to used car dealers at an auction. If a used car dealer's bid is accepted, that dealer takes possession of the vehicle. The dealer then either pays the auction company directly or utilizes an automotive financing company such as NextGear, which pays the auction company and provides financing by means of the floorplan agreement to the dealer for repayment. The auction company forwards the title to the entity that paid for the vehicle-either the used car dealer or the financing company. According to the plaintiffs, NextGear deviated from that sequence. It did not pay the auction house at the time that possession was delivered, instead paying only after it received the title to the vehicles purchased. Although it could take as long as eight weeks for NextGear to receive that title and pay the money to the auction company, NextGear nevertheless charged interest and curtailment fees to the plaintiffs from the date of the initial purchase. The plaintiffs brought this action challenging that imposition of interest fees during the period prior to the receipt of title, when NextGear was not yet paying any funds to the auction house. They sought class certification to pursue that challenge on behalf of all other dealers who were subject to the same Agreement with NextGear and were charged such interest.

         Federal Rule of Civil Procedure 23(a) sets forth explicit requirements for a case to proceed as a class action:

(1)the class is so numerous that joinder of all members is impracticable (numerosity);
(2)there are questions of law or fact common to the class (commonality);
(3)the claims or defenses of the representative parties are typical of the claims or defenses of the class (typicality); and
(4) the representative parties will fairly and adequately protect the interests of the class (adequacy of representation).

Chicago Teachers Union, Local No. 1 v. Bd. of Educ. of City of Chicago, 797 F.3d 426, 433 (7th Cir. 2015). In addition, one of the four categories set forth in Federal Rule of Civil Procedure 23(b) must be met in order for a case to proceed as a class action. The plaintiffs in this case assert that the case falls within Rule 23(b)(3) which considers whether "questions of law or fact common to class members predominate over any questions affecting only individual members, and ... a class action is superior to other available methods for fairly and efficiently adjudicating the controversy."

         The plaintiffs' amended complaint included numerous claims including breach of contract, constructive fraud, tortious interference with business relationships, unjust enrichment, RICO violations, and RICO conspiracy. The district court granted class certification as to the breach of contract claim against NextGear and the substantive RICO claim against NextGear, Cox Automotive and John Wick pursuant to Federal Rule of Civil Procedure 23(a). In an extensive 30-page analysis, the court determined that the plaintiffs met all of the requirements of the Rule 23(a) factors-ascertainability, numerosity, commonality, typicality, and adequacy of representation-and that the plaintiffs had also demonstrated under Rule 23(b)(3) that a class action was superior to other methods of adjudication. Accordingly, on June 29, 2017, it granted class status as to those claims.

         Approximately two weeks later, NextGear filed a Motion to Reconsider and/or Modify Class Certification Order. It argued that the court failed to consider evidence and arguments submitted after the initial class certification briefing. Specifically, NextGear maintained that the plaintiffs had asserted for the first time in summary judgment briefing that the floorplan agreements are ambiguous on their face, and that under such a theory courts must resort to extrinsic evidence on a plaintiff-by-plaintiff basis to determine the parties' intent regarding the contract. NextGear argued to the district court that "when ambiguity in a contract has 'open[ed] the door for extrinsic evidence/ then 'liability to the entire class for breach of ...

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