The Seventh Circuit recently vacated a decision by the Southern District of Indiana in which the lower court had rescinded an earlier decision to certify a class action in a suit brought by a group of used car dealerships.
In Red Barn Motors, Inc. v. Nextgear Capital, Inc., No. 18-1409, 2019 U.S. App. LEXIS 4303 (7th Cir. Feb. 13, 2019), the plaintiff dealerships each entered into an agreement under which Nextgear issued a line of credit to finance the purchase of used vehicles at automobile auctions. Typically, when a dealership makes a purchase at an auction, it takes possession of the vehicle and, either directly or through an automotive financing company like Nextgear, immediately submits payment. The auction company will then forward the title to the vehicle to the entity that provided payment. There is generally a delay, of as much as eight weeks, between the time of purchase and when the title is delivered.
The plaintiffs in Red Barn Motors, however, allege that Nextgear does not adhere to the typical arrangement. Rather than paying when the dealership’s bid is accepted, Nextgear waits until it receives the title to issue payment. It also charges the dealerships fees and interest for the period between the purchase and its receipt of the title. Based on this, the plaintiffs filed suit, on behalf of themselves and other similarly situated dealerships, alleging numerous claims, including breach of contract and violation of the Racketeer Influenced and Corrupt Organizations Act (“RICO”).
The district court initially certified a class with regard to the breach of contract and RICO claims. Nextgear then filed a motion to reconsider in which it asserted: (a) the plaintiffs had argued that the finance agreements at issue are ambiguous; and (b) an ambiguity in a written contract allows the court to consider extrinsic evidence – such as testimony regarding the meaning of the contract’s terms – to determine the intent of the parties. Because consideration of extrinsic evidence would require individualized proof, Nextgear argued that common issues did not predominate over questions affecting individual plaintiffs and that the matter could not go forward as a class action. The district court agreed and reversed its decision certifying the class.
The Seventh Circuit vacated the district court’s decision on two grounds. First, it found that the fact that a contract is ambiguous does not necessarily prevent a case from going forward as a class action. Particularly in cases involving a form contract, a uniform interpretation would be expected. Because a determination as to its meaning would apply to all persons who had signed the agreement, issues regarding breach of the contract would be capable of class-wide resolution. Second, the need for extrinsic evidence, by itself, does not make class certification improper. Rather than simply focusing on the introduction of evidence outside of a contract’s terms, the court must consider whether the use of such evidence will result in common answers. In the absence of a specific finding that the use of extrinsic evidence would prevent common issues from predominating over questions affecting individual class members, the Seventh Circuit determined that the district court erred in decertifying the class.
The takeaway from this decision is that a party seeking to challenge class certification based on a breach of contract claim must do more than just establish that the terms of the agreement at issue are capable of differing interpretations. Rather, there must be some showing that this would lead to different results for individual class members.