Automobile Warranty Services Provider Loses On Motion To Dismiss Dealership's Counterclaims And Request For Preliminary Injunction

In a dispute between providers of automobile warranty services ("Plaintiffs" or "American Guardian") and a Florida car dealership ("Defendants" or "JCR"), an Illinois federal district court recently dealt two blows to the Plaintiffs by refusing to dismiss the Defendants' counterclaims and refusing to grant a requested preliminary injunction. The parties entered into an agreement in which American Guardian would provide warranties to JCR's customers, as well as administer and approve payments for all claims under the American Guardian contracts sold by JCR, secure insurance policies indemnifying the parties against obligations, and administer reimbursement to JCR for the cost of repairs. The agreement contained a modification clause requiring amendments be supplemented by writing, which the parties utilized to make subsequent changes, including adding a production agreement requiring JCR to sell a minimum number of warranty and service contracts monthly for five-years and inserting an exclusivity provision.

The parties' relationship eventually broke down and JCR stopped selling American Guardian contracts, leading American Guardian to file suit. Defendants counterclaimed for fraud in the inducement as well as breach of contract and the duty of good faith and fair dealing. The fraudulent inducement counterclaim was based on an American Guardian agent's alleged representation before the master agreement was signed to JCR's owner that Plaintiffs would establish an "offshore reinsurance company" to allow JCR to retain the warrant payments paid by customers as well as earn investment income. The good faith and fair dealing claim was based on American Guardian's alleged failure to monitor JCR's loss ratio on claims made by its customers on American Guardian contracts. The district court denied Plaintiffs' motion to dismiss on each of these claims.

First, Plaintiffs challenged the fraud counterclaim's sufficiency of pleadings regarding the elements of fraud and the specificity of pleadings in light of Rule 9(b)'s heightened pleading standard. The court rejected Plaintiffs' argument that JCR's allegations regarding false statements were non-actionable as representations of intent regarding future conduct. The court read the claim as one for promissory fraud rather than fraudulent inducement, finding that JCR had sufficiently alleged that American Guardian's agent made a fraudulent promise regarding the formation of a reinsurance company with no...

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