In Their Opinion : Seventh Circuit Court of Appeals Commentary : Lawyer & Attorney Michael E. Rigney : Kelley Drye & Warren Law Firm

LEWITTON v. ITA SOFTWARE (October 28, 2009)

ITA Software offers information technology and services to online travel agents. ITA began the development of a new product that would allow the agents to make reservations and purchase airline tickets online. Derrick Lewitton joined the organization in 2005 to supervise the development and marketing of the new product. In his employment contract, ITA granted Lewitton options to purchase up to 200,000 shares of ITA stock. Up to 150,000 of the options could be forfeited, however, based on a formula that was to be applied during an assessment period after product rollout. The assessment period was scheduled to run from mid-2006 through May 2007, but was to be deferred if the rollout of the new product was delayed. The product development turned into a failure and was scaled back considerably. In fact, it was never rolled out. Lewitton left ITA in mid-2007. Shortly thereafter, he sought to exercise the full amount of his vested options. ITA took the position that most of the options were forfeited as a result of the product failure. Lewitton brought an action for the options. The court granted summary judgment to Lewitton. ITA appeals.

In their opinion, Judges Bauer, Kanne and Evans affirmed. The Court stated that its primary goal was to give effect to the terms of the agreement. If it is unambiguous, the Court noted that it would enforce it as written. The Court agreed with the district court that the "deferred" term in the contract was unambiguous. Since it is not a technical term, it should be given its ordinary meaning -- significantly delayed. The Court found no dispute that the program had been delayed. In fact, the rollout of the new product had never occurred. Under the unambiguous terms of the contract, the assessment period never occurred and the forfeiture provision was never triggered. The Court rejected ITA's position that such a conclusion ignored the principal objective of the contract -- that Lewitton would be rewarded with options if he generated significant revenue. ITA's position relied on extrinsic evidence, which the Court would not allow given the unambiguous nature of the contract.

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RUTH v. TRIUMPH PARTNERSHIPS (August 17, 2009)

Triumph Partnerships purchases defaulted debt. Its sister company, Triumph Asset Services ("TAS"), is a debt collection agency. In early 2006, TAS sent letters out to a number of individuals who owed debts purchased by Triumph. The letter notified the recipient that Triumph had purchased the debt and that TAS was attempting to collect it. Sent with the notice was a separate document from Triumph stating that it collected and could share certain information about the debtor. It also provided an opportunity for the debtor to “opt out,” or instruct Triumph not to share certain information. Alice Ruth was one of the recipients of the letter. Ruth brought a class action against Triumph and TAS, alleging that the mailing violated the Fair Debt Collection Practices Act ("FDCPA") in that it made a false statement in connection with the collection of a debt and threatened to take illegal action. The district court granted summary judgment to the defendants, concluding that Ruth was required to present extrinsic evidence to prove that an unsophisticated debtor would consider the notice a communication in connection with the collection of a debt and would view it as a threat to take illegal action. Ruth appeals.

In their opinion, Judges Ripple, Sykes and Lawrence reversed and remanded. The Court first addressed Triumph's argument that it was not a "debt collector" and therefore not subject to the FDCPA. Citing its recent McKinney decision, the Court rejected that argument. Under McKinney (see my earlier post), the FDCPA status of a party that attempts to collect a debt that it acquired from another party depends on whether the debt was in default at the time it was acquired. Since the debts here were in default at the time they were acquired by Triumph, Triumph is a debt collector. The Court moved to the heart of the matter -- whether the mailing violated the FDCPA as a matter of law. The FDCPA violation has two elements -- the notice had to be sent "in connection with the collection of any debt" and the notice had to be false, misleading or had to threaten to take an illegal action. With respect to the "in connection with" element, the Court concluded, in a matter of first impression, that the standard is an objective one and need not be proven by extrinsic evidence. On the facts of the case, the Court stated that any reasonable fact finder would conclude that the notice was sent in connection with the attempt to collect a debt. With respect to the false/deceptive/illegal action element, the Court stated that Ruth must do more than prove a false statement -- she must prove that the statement would mislead or deceive an unsophisticated consumer. She need not, however, offer extrinsic evidence on that point in every case. Extrinsic evidence is required in those situations where the statement is possibly misleading or deceptive. Here, the Court concluded that a consumer could reach only one reasonable conclusion -- that the defendants claimed a right to disclose certain information. Since the defendants conceded that such a sharing, without consent, would have violated the FDCPA, the notice was an illegal threat as a matter of law. Finally, the Court had to address defendants' bona fide error defense. That defense protects a debt collector from liability when a violation is unintentional, is the result of a bona fide error and occurs notwithstanding the defendant's maintenance of reasonable procedures to avoid the error. That Court concluded that the defense is available for errors of law, if at all, when the debt collector relies on the opinion of an attorney or other expert in the field. Although Triumph claimed it relied on a pamphlet prepared by an attorney, the Court concluded that that was well short of the "reasonable procedures" required by the FDCPA.

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BKCAP, LLC v. CAPTEC FINANCIAL TRUST 2000-1 (July 13, 2009)

Quality Dining, Inc. has several subsidiaries (the "Borrowers") that own franchise restaurants, including Burger Kings, in several states. In 1999, as part of a significant refinancing initiative, the Borrowers obtain $49 million in financing in a total of 34 separate loans. One lender’s form agreement included a penalty for prepayment. At Borrowers’ insistence, the lenders modified the notes to allow a prepayment without penalty after 10 years. The notes included a formula for computing the new penalty. Eight years later, Borrowers prepaid 21 of the notes held by two of the lenders. The parties calculated the prepayment penalty as the difference between a stream of monthly payments through year 10 at the U.S. treasury rate versus at the actual rate. The Borrowers provided notice of prepayment with respect to the remaining notes, which were held by a third lender. Their notice was contingent on the lender accepting the same prepayment penalty formula. When the lender refused to so, the Borrowers filed suit seeking a declaratory judgment that their interpretation of the penalty provision was correct. The district court granted the lender's motion for summary judgment, concluding that the contract language was unambiguous and supported the lender's interpretation. The Borrowers appeal.

In their opinion, Judges Bauer, Sykes and Tinder reversed and remanded. The Court looked to state law to provide the substantive rules for resolving the contract dispute. Here, the contracts were governed by the laws of Michigan, Indiana and Pennsylvania. The Court first applied general rules of contract interpretation consistent in all the jurisdictions. The Court first looked at the plain meaning of the contract language with the goal of determining the intent of the parties. If the language is unambiguous, it would not consider extrinsic evidence. On the other hand, if the language is ambiguous, a trier of fact must examine extrinsic evidence to determine intent. Here. although the Court found the contract language clear, it also found that applying the clear language would produce absurd results. It concluded that the prepayment premium would always be negative, a result obviously not contemplated by these rational business entities. Even clear language can be ambiguous, said the Court, if it does not make economic sense. Both the lender and the Borrowers proposed interpretations that made economic sense. The Court rejected each, however, concluding that neither found support in the actual contract language. The Court concluded that the meaning of the formula is a question of fact to be determined after consideration of extrinsic evidence.

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