Contract/Commercial Law : In Their Opinion

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Court Sends Contract Claim Back For Recalculation Of Damages

Posted on August 30, 2010 by Michael Rigney

SUPERL SEQUOIA LIMITED v. THE CARLSON CO. (August 11, 2010)

In preparation for a Martha Stewart promotion, Macy's solicited bids for the furniture required to create the promotion settings and its installation. Carlson Company, a Wisconsin furniture manufacturer, wanted to bid but lacked sufficient capacity. Superl Sequoia, a Hong Kong manufacturer, and Carlson agreed to work together. Sequoia agreed to provide most of the furniture -- Carlson agreed to install the furniture and to fix or replace furniture, as necessary. They also agreed to split the profits 50-50. Sequoia quoted a $3.4 million price to Carlson. Carlson marked up the quote, added its anticipated cost, and submitted a $5 million bid. Macy's accepted the bid, was satisfied with the work, and paid the invoice. Carlson only paid Sequoia $2 million, however, claiming that it spent more on replacements and repairs for late or substandard furniture than it had anticipated. Sequoia brought an action for breach of contract. Judge Crabb (W.D. Wis.) concluded that Sequoia breached the contract because of late and substandard deliveries and that Carlson could recover its replacement and repair costs. She then held a bench trial to calculate those costs. She disregarded the $3.4 million quote, instead demanding that Sequoia provide evidence of its actual costs. At trial, the court first concluded that Sequoia's costs were $2.2 million and that Carlson's were $.4 million -- entitling each to approximately $1.15 million in profit. But the court then added that Carlson was entitled to an additional $1.16 million to cover its extra expenses and entered judgment for Carlson for approximately $10,000. Sequoia appeals.

In their opinion, Chief Judge Easterbrook, Circuit Judge Kanne, and District Judge Kennelly vacated and remanded. The Court first concluded that the district court's calculations of damage amounts were not clearly erroneous. On the other hand, the Court questioned two legal decisions of the trial court. The first was the court's allowance of the $1.16 million in replacement and repair costs to Carlson, which was calculated to include overhead and profit. Although the agreement of the parties was documented in a group of e-mails without a formal contract, the Court concluded that the parties agreed that only Carlson's out-of-pocket repair and replacement costs were recoverable. The second legal decision addressed by the Court was the district court's treatment of the $3.4 million bid. Again interpreting a number of e-mails documenting the agreement with some difficulty, the Court disagreed with that treatment. First, the Court noted that Carlson accepted the quote long before the relevant e-mail exchange. The quote was the basis upon which Sequoia joined the venture -- Carlson cannot retroactively ignore it. Second, the quote was given as a fixed amount -- both the floor and the ceiling on Sequoia's costs. The later e-mails should not be viewed as fundamentally changing the structure of the deal. The Court remanded with instructions to the district court to recalculate the judgment.

Tags: Opinion by Easterbrook, Clear Error, Contract/Commercial Law, Standard of Review

Empty Threat Of Eminent Domain Proceedings Does Not Support Declaratory Relief

Posted on August 24, 2010 by Michael Rigney

ROCK ENERGY COOPERATIVE v. VILLAGE OF ROCKTON (AUGUST 10, 2010)

Rock Energy Cooperative, a Wisconsin-based utility, and the Village of Rockton, Illinois were both interested when Alliant Energy announced its desire to sell certain power transmission assets. Rock Energy submitted a bid. Rockton voters approved a referendum authorizing the Village’s purchase of the assets. Rock Energy and the Village entered into an agreement that addresses a possible sale of the assets by Rock Energy to the Village. Rock Energy then purchased the assets from Alliant. On several occasions between 2007 and 2009, the Village repeated its desire to obtain the assets and even threatened to use the power of eminent domain. Rock Energy brought suit, seeking a declaratory judgment that Rockton violated state law in its referendum process and was not entitled to purchase the assets. Rockton, for its part, brought suit in state court seeking specific performance of the contract. The state court dismissed the suit with prejudice, concluding that the lack of a price term or formula in the agreement precluded an order of specific performance. Judge Kapala (W.D. Ill.) dismissed the suit, holding that Rock Energy lacked standing to challenge the referendum process. He also concluded that a forum selection clause in the agreement made venue improper for any claim Rock Energy was asserting under the agreement. Rock Energy appeals.

In their opinion, Judges Flaum, Rovner, and Wood affirmed. The Supreme Court has held that Article III of the Constitution, particularly in the declaratory judgment context, requires a substantial controversy "of sufficient immediacy and reality" to warrant declaratory relief. The Court applied that principle to both threats to Rock Energy -- eminent domain and the contract. With respect to eminent domain, the Court concluded that the record contained no evidence that such a proceeding was imminent. In fact, to the contrary, the only actions the Village has taken in years are a few letters indicating their interest in condemnation. The Court also noted that the lack of any hardship to Rock Energy would stand in the way of its pre-enforcement challenge. The Court also concluded that the contract claim could not meet the Supreme Court's test. A state court has found the contract unenforceable, it contains a facially valid choice of forum clause, and Rockton has disclaimed its desire to rely on the contract. The case is not appropriate for declaratory relief under either theory.

Tags: Opinion by Wood, Article III, Choice Of Forum, Contract/Commercial Law, Eminent Domain, Ripeness, Standing

Equitable Reformation Is An Available Remedy Under ERISA § 502(a)(3)

Posted on August 23, 2010 by Michael Rigney

YOUNG v. VERIZON'S BELL ATLANTIC CASH BALANCE PLAN (AUGUST 10, 2010)

In 1996, Bell Atlantic replaced its Bell Atlantic Management Pension Plan, a defined annuity pension plan, with the Bell Atlantic Cash Balance Plan. The old pension plan included a lump sum option for certain employees that used an enhanced discount rate. The new Plan contained provision for converting employees' benefits from the pension plan to the new Plan. One key to the conversion was an employee's "transition factor." The transition factor was a multiplier that increased as an employee's age and years of service increased. Unfortunately for Bell Atlantic, the Plan's formula for computing an employee's opening balance contained the transition factor twice. The Plan Summary and all communications to employees described the formula correctly -- using the transition factor only once. The company also recognized the error and corrected it in a 1998 version of the Plan. Cynthia Young retired in 1997 after 32 years of service. After receiving her lump sum benefit, Young sought administrative review. She made two claims: that the company failed to apply the transition factor twice and that the company improperly applied the enhanced discount rate from the earlier pension plan. The company denied Young's claim. Young filed suit pursuant to ERISA § 502(a). The company counterclaimed for equitable reformation to correct the "scrivener's error." Magistrate Judge Denlow (N.D. Ill.) upheld the company's denial of the discount rate claim as not arbitrary and capricious and granted the equitable reformation counterclaim. Young appeals.

In their opinion, Judges Bauer, Flaum, and Tinder affirmed. The Court first addressed both party's statute of limitations arguments. The parties and the Court agreed that Pennsylvania's four-year limitations period applies. At issue was when the claims accrued. The Court concluded that the complaint and counterclaims were both timely. Young's claim did not accrue until she had a "clear repudiation" of her demand, which occurred in 2005. Although the company knew about the drafting mistake in 1997, the Court concluded that its claim for reformation did not accrue at that time. It was not on notice of the need to reform because it had always treated the second transition factor inclusion as a mistake. It paid benefits and communicated with its employees on that basis. It corrected the mistake and no one complained until Young brought suit. On the merits, the Court noted that § 502(a)(3) of ERISA permits "appropriate equitable relief." Although the Court has never addressed the propriety of equitable reformation, other circuits have and have either concluded that it is available or at least not foreclosed. Relying on those cases and the Court's own cases on ambiguous plan language, the Court concluded that equitable reformation is permitted when there is clear and convincing evidence of a scrivener’s error that does not reflect participants' reasonable expectations. The Court found such evidence present here. It relied on the drafting history, the communications and course of dealing between the company and its employees, the plan statements to participants, and the lack of any complaint until Young. The Court then considered and rejected the traditional equitable defenses raised by Young (good faith, unclean hands, and laches). Finally, the Court used principles of contract construction and interpretation, particularly that specific provisions control general provision, to reject Young's enhanced discount rate claim. The Court found that the most reasonable reading of the Plan required the enhanced rate.

Tags: Opinion by Tinder, Benefits, Contract Interpretation, Contract/Commercial Law, ERISA, Equitable Reformation, Scrivener's Error, Statute of Limitations

Bankruptcy Court's Interpretation of Reorganization Plan It Confirmed Receives Deferential Treatment

Posted on August 17, 2010 by Michael Rigney

IN RE: AIRADIGM COMMUNICATIONS, INC. (August 4, 2010)

Airadigm Communications' principal assets when it petitioned for bankruptcy in 1999 were fifteen mobile phone service licenses issued by the FCC. Pursuant to regulation, the FCC revoked the licenses and Airadigm's 2000 reorganization plan treated them as if they were not part of the bankruptcy estate. It did, however, petition for reinstatement of the licenses. The plan provided alternative treatment for the claims of two major creditors (Oneida and Ericsson), depending on whether the licenses were reinstated. Payment of both claims was going to be financed by loans from Telephone and Data Systems, Inc. ("TDS") -- and the claims have since been assigned to TDS. TDS also advanced additional funds directly to Airadigm pursuant to three loans. Each of the loans was to be repaid by collateral surrender. Several years after the reorganization plan was confirmed, the Supreme Court held that the FCC's license revocation rule was invalid. The FCC then denied Airadigm's motion for reinstatement as moot. Airadigm filed a new petition for bankruptcy protection in 2006. The FCC objected, arguing that the 2000 reorganization plan should be modified instead. The parties entered into a stipulation pursuant to which the new petition was recognized. Among other things, the stipulation provided that the 1999 "Allowed Claim(s)" of the FCC, TDS as assignee, and TDS would be allowed in the 2006 bankruptcy. The bankruptcy judge thought the stipulation was unclear and invited the parties to make the intent of the stipulation more clear, but they did not. TDS filed three claims in the 2006 bankruptcy (one each for the direct loans, the Oneida assigned claim, and the Ericsson assigned claim). The FCC objected to them all. The bankruptcy court allowed the claims based on the direct loans and the Ericsson assignment, and disallowed the claim based on the Oneida assignment. Judge Crabb (W.D. Wis.) reversed with respect to the Oneida assignment and allowed all of TDS's claims. The FCC appeals.

In their opinion, Circuit Judges Kanne and Evans and District Judge Dow affirmed in part and reversed in part. The Court first addressed the standard of review. It noted that it would consider matters of law de novo, but that it would grant much deference to the bankruptcy court's interpretation of the 2000 plan. It treated the interpretation of the plan like a court’s interpretation of its own order. On the merits, the Court turned to the claim on the direct loans. First, it concluded that the FCC did not preserve its argument that the claim should be disallowed because the financing arrangement was an asset sale agreement, not a loan. Next, it concluded that the parties' stipulation barred the FCC from proceeding on its argument that the advances should be recharacterized as equity. Although the stipulation was subject to multiple readings, the Court concluded that the best reading, particularly in light of the "last antecedent rule," allowed the FCC to contest only the amount of the loan and the interest calculation. Particularly in light of the FCC's failure to bring forth any extrinsic evidence that supported its interpretation of the stipulation, the Court affirmed the allowance of the direct loans claim. Alternatively, even if the FCC's challenge were allowed, the Court noted that the record did not support a claim for recharacterization. The Court next addressed the Oneida assignment claim. It agreed with the bankruptcy court that the FCC's objection to this claim should be sustained for two reasons. First, it concluded that the bankruptcy court's interpretation of the "thorny" issues presented by the plan and the Supreme Court's decision was not an abuse of discretion. Second, it concluded that TDS was judicially estopped from arguing otherwise. In earlier proceedings, TDS had successfully defeated Oneida's motion to fund its claim. Its later position is diametrically opposed to its successful argument at that time and there is no reasonable justification for their change in position. Finally, with respect to the Ericsson assigned claim, the Court affirmed the allowance of the claim. Unlike the Oneida claim, the 2000 plan did not extinguish Ericsson's rights. In fact, the plan specifically provided that Ericsson retained its liens on terminated licenses. That right survived the 2000 plan and supports a claim in the 2006 bankruptcy.

Tags: Opinion By Dow, Bankruptcy, Contract/Commercial Law, Judicial Estoppel, Last Antecedent Rule, Standard of Review

Court, Not Arbitrator, Decides Contract Formation Question in the Arbitration Context

Posted on August 9, 2010 by Michael Rigney

JANIGA v. QUESTAR CAPITAL CORP. (August 2, 2010)

Alfred Janiga has lived and worked in the United States for over 20 years since his arrival from Poland. However, he still understands very little English. His brother, Weislaw Hessek, operates Hessek Financial Services and is a registered representative of Questar Capital Corp. After much prodding from Hessek, Janiga agreed to open a Questar account. He signed one piece of paper and claims that he never saw any of the documents related to his account. Just above his signature, however, in large letters, was a reference to an arbitration agreement in the contract and an admission that he had received a copy. Janiga was originally content with his investment. In fact, he increased his investment after a few months. After about a year, Janiga filed a complaint against his brother and Questar. His complaint included counts of securities violations, negligence, fraud, and others. The defendants moved to stay the proceedings and order arbitration. Judge Shadur (N.D. Ill.) denied the motions without prejudice until he determined whether a contract had even been formed. The defendants appeal.

In their opinion, Judges Wood, Evans, and Sykes reversed and remanded. The Court first commented on its appellate jurisdiction. Although the decision of the district court was not a final decision, the Federal Arbitration Act allows for an interlocutory appeal of the district court's refusal to stay and order arbitration. The Court turned to the merits -- whether the threshold question of the existence of a contract is a question for the court or the arbitrator. The Supreme Court has distinguished between challenges to the validity of an arbitration agreement and challenges to the validity of a contract. A court decides the former; the arbitrator decides the latter. At the time of the district court’s opinion (and even oral argument), the Supreme Court had not decided which decided the contract formation issue. On June 24, 2010, in the Granite Rock Co. case, the Supreme Court held that a courts, not an arbitrator, should decide issues of contract formation. The district court was therefore correct in not referring that issue to arbitration. The Court did take issue with the lower court's hesitation to decide the issue. The district court focused on issues such as Janiga's language barriers, whether he understood or read or even saw the contract, and whether the contract was valid under state law. But these are enforceability issues, said the Court. The fundamental point is that Janiga signed the contract and both parties performed under it for a year. Janiga clearly intended to open a brokerage account and his admittedly voluntary signature is evidence of his assent to the agreement. Contract formation has been established -- other questions may remain for the arbitrator. The Court was less confident of the resolution of the formation issue with respect to Hessek. If Hessek is an agent of Questar and the claims asserted are within the scope of that agency, he may receive the benefit of the arbitration agreement. Since the district court never addressed that issue, the Court remanded for further consideration.

Tags: Opinion by Wood, Appellate Jurisdiction, Arbitration, Contract Enforceabilty, Contract/Commercial Law, Federal Arbitration Act

Court Applies Ordinary Meaning to Back-Solicitation Clause in the Absence of Parol or Trade Usage Evidence

Posted on August 6, 2010 by Michael Rigney

ALLIANCE 3PL CORP. v. NEW PRIME, INC. (August 2, 2010)

Loders Croklaan USA produces fats and oils used in the food industry. Until 2003, the company dealt directly with trucking companies to transport its product to its customers. One of the companies with whom it had such a relationship was New Prime, Inc. In 2003, Loders retained Alliance 3PL Corp., a transportation management services company, to manage its transportation needs. In turn, Alliance entered into a contract with New Prime to continue transporting Loder's products. The contract contained a back-solicitation clause which prohibited New Prime from soliciting any “traffic” from a company which it first learned about through Alliance. When Loders' contract with Alliance ended, New Prime submitted a successful bid directly to Loders. Alliance brought suit against New Prime for breach of the back-solicitation clause. A jury awarded Alliance $2.2 million in damages. Judge Bucklo (N.D. Ill.) denied New Prime's Rule 50 and 59 motions. New Prime appeals.

In their opinion, Chief Judge Easterbrook and Judges Kanne and Rovner reversed. The basic facts were not in dispute. The parties agreed that New Prime had a relationship with Loders before being retained by Alliance and that the amount of business available to New Prime increased during the Alliance era. The Court noted that the dispute arose regarding the meaning of the word "traffic" in the back-solicitation clause. The district court judge concluded that the word was ambiguous and allowed the jury to decide which meeting to apply. New Prime relied on the ordinary definition of the word in conjunction with the purpose behind the back-solicitation clause to conclude that, since it knew of the company and its general transportation needs before its contract with Alliance, it did not breach the clause. The Court found this position supported by Illinois restrictive covenant law. The Court added that a party that wants to divert from the normal definition of the term can do so with either parol or trade usage evidence -- and Alliance did neither. There is therefore no record support for Alliance's position that "traffic" should be defined as "amount of traffic" in order to hold New Prime liable.

Tags: Opinion by Easterbrook, 59", Ambiguity, Back-Solicitation Clause, Breach of Contract, Contract/Commercial Law, Parol Evidence, Rule, Rule 50, Trade Usage Evidence

The Proper Remedy For Breach Of Purchase Option Is The Difference Between The Option Price And The Property's Value

Posted on August 4, 2010 by Michael Rigney

LOUIS AND KAREN METRO FAMILY, LLC v. LAWRENCEBURG CONSERVANCY DISTRICT (July 29, 2010)

Louis and Karen Metro Family, LLC is a limited liability company owned by Louis and Karen Metro. The company owns a number of parcels of property in Ohio and Indiana. One such parcel sat on a bank of Tanners Creek and was home to a pizza parlor. Because Tanners Creek had a long history of flooding, the City of Lawrenceburg and the Lawrenceburg Conservancy District agreed to jointly build a floodwall along the creek. The District notified Metro Family of its intent to acquire the Tanner Creek property through eminent domain. It offered $417,000 -- the appraised fair market value. Metro Family refused the offer but eventually agreed on the sale of the property for $417,000 plus an irrevocable option to purchase 1.4 acres back for $269,490. The option was exercisable for 18 months after completion of the floodwall. Unfortunately, the floodwall was never built. The City withdrew from the project and the District could not complete it on its own. The District conveyed the Metro Family parcel to the City. The property was converted to highway use. Metro Family brought suit against the City and the District for breach of contract. Magistrate Judge Hussman (S.D. Ind.) concluded that there was a breach but that Metro Family was entitled to no monetary recovery. Instead, he ordered reformation of the contract and gave Metro Family 18 additional months within which to exercise the option. The City and the District appeal. Metro Family cross-appeals.

In their opinion, Judges Cudahy, Wood, and Evans vacated and remanded. The only issue on appeal was the remedy for the breach. In Indiana, reformation of the contract is available when there is a mutual mistake. The Court noted that the problem was not really a mutual mistake but a failure to allocate risk in the event the underlying project was canceled. Nevertheless, the Court believed that an Indiana court would use the mutual mistake concept -- that the parties shared a common assumption regarding a fact that was the essence of the agreement -- to find for Metro Family. Therefore, the Metro Family is entitled to the value of the option. The Court opined that the magistrate judge's reformation approach would have been appropriate if the option parcel was still undeveloped. Since exercising the option is no longer a viable alternative, however, the Court concluded that the next best approach was to compare the option price ($269,490) with the appraised value of the option parcel prior to the construction of the highway. Metro Family is entitled to the excess (if any) of the appraised value over the option price.

Tags: Opinion by Wood, Ambiguity, Contract/Commercial Law, Eminent Domain, Mutual Mistake, Property, Remedy

Accident Is One Occurrence Notwithstanding Independent And Separate Negligent Acts By Multiple Drivers

Posted on July 27, 2010 by Michael Rigney

AUTO-OWNERS INSURANCE CO. v. MUNROE (July 22, 2010)

Joshua Munroe was driving his tractor-trailer northbound on an Illinois highway when he approached three southbound tractor-trailers, all owned by Wayne Wilkins Trucking. The middle truck attempted to pass but was unable to do so successfully. Munroe's truck first struck the middle truck and then collided head on with the trailing truck. Munroe suffered very serious burns and injuries. The southbound trucks were all insured under a single policy issued by Auto-Owners Insurance Company. The policy had a $1 million per occurrence limit and included a combined limit provision which limited its liability to $1 million per occurrence regardless of the number of vehicles involved in the accident. Munroe settled with the insurers for the million dollar limit, less the amount paid in property damage. The insurance company agreed to file a declaratory judgment action -- Munroe reserved the right to seek additional damages if they court ruled that coverage exceeded the million dollars. Judge Baker (C.D. Ill.) granted summary judgment to Auto-Owners. Munroe appeals.

In their opinion, Judges Ripple, Manion, and Sykes affirmed. The Court had no difficulty in first concluding that the insurance policy was not ambiguous and limited coverage to $1 million per occurrence. Only if there were multiple occurrences would the coverage exceed $1 million. Illinois uses the "cause theory" in analyzing the number of occurrences. Under that theory, there must be multiple "separate and intervening human acts" to create multiple occurrences. Here, although Munroe alleged that each of the three drivers was individually and separately negligent, the accident was a single, uninterrupted event without intervening causes. It was thus a single occurrence. The Court also rejected Munroe's argument that the Motor Carriers Act and the MCS-90 endorsement required combined coverage of $2.25 million. The Court was "skeptical" of the argument that the endorsement applied on a per vehicle basis but found it unnecessary to decide that question. By its own terms, the endorsement is triggered only by a final judgment. With no final judgment, the endorsement does not apply.

Tags: Opinion by Manion, Ambiguity, Contract/Commercial Law, Insurance Law, MCS-90, Motor Carriers Act, NNegligence, Occurrence

Parties' Stipulation Retaining A Right To Refile Counterclaim Destroys The Finality Required For Appellate Jurisdiction

Posted on July 23, 2010 by Michael Rigney

INDIA BREWERIES v. MILLER BREWING CO. (July 21, 2010)

India Breweries, Inc. (IBI) is a "virtual brewer." On the one hand, it acquires the rights to brew a beer. On the other hand, it partners with other companies to actually brew and distribute the beer. One of those companies was Mohan Meakin, an Indian brewer with whom it entered into a joint venture to brew and distribute beer in India. IBI then entered into an agreement with Miller Brewing Company pursuant to which it hoped to market Miller's brands in India. The agreement required IBI to get written approval from Miller before it began commercial brewing at any brewery. If the brewing was going to take place with a contract brewer, the agreement required IBI to obtain Miller's approval of its contractual relationship as well. IBI proposed two breweries to Miller. A Miller team visited the breweries and advised IBI that they did not meet Miller's requirements. IBI continued to explore other options with limited success. On a few occasions, it sent Miller equipment lists from potential brewing partners. On each occasion, Miller concluded that the facilities did not meet its requirements. It refused to actually visit and inspect any facility until it received assurances of adequate equipment and specifications. IBI filed suit for breach of contract. It claimed that Miller was required to inspect each brewery it proffered. Miller counterclaimed for fraudulent inducement and negligent misrepresentation. Judge Clevert (E.D. Wis.) granted summary judgment to Miller on IBI's claim but denied summary judgment on the counterclaim. The parties then stipulated to a dismissal without prejudice of the counterclaim, under which Miller agreed not to refile it unless IBI was successful in its appeal. IBI appeals.

In their opinion, Chief Judge Easterbrook and Judges Bauer and Tinder affirmed. The Court first addressed its appellate jurisdiction. It noted that the stipulation of the parties that permitted the refiling of the counterclaim in certain circumstances destroyed the finality of the district court's order. Without finality, there is no appellate jurisdiction. However, because Miller agreed to an unconditional dismissal when pressed at oral argument, the finality requirement is satisfied and the Court proceeded to the merits. On the merits, the Court found for Miller. It rejected IBI's argument that the contract was ambiguous and could be read to require Miller to inspect any brewery it proffered. In fact, the Court found that interpretation "patently unreasonable." First, that requirement would not be rational since it would require Miller to go all the way to India to inspect a brewery that it already knew would not meet its requirements. Second, since Miller could reject a nonaffiliated brewer for any or no reason, requiring inspection in those circumstances would also be irrational. The Court also noted that the contract required Miller's approval of the contractual relationship with nonaffiliated brewers. Since Miller had not yet had an opportunity to review those relationships, it could also reject the brewers on that ground. Finally, although the Court conceded that Wisconsin law implies a duty of good faith in any contractual relationship, it found that Miller did not breach that duty.

Tags: Opinion by Tinder, Ambiguity, Appellate Jurisdiction, Contract/Commercial Law, Good Faith, Jurisdiction

Contingent Fee Obligation Based On "Amount Recovered" Does Not Apply To Losses Avoided

Posted on July 16, 2010 by Michael Rigney

IN RE: SOLIS (July 9, 2010)

Luis Solis hired an attorney to bring a workers' compensation claim after he suffered serious spinal injuries on the job. The attorney settled the claim. Solis was to receive almost $110,000. Unfortunately, the attorney's assistant stole the settlement money (as well as over $1 million in other clients' finds). She later sent him a check for $62,000, representing to him that it was a partial settlement payment. Solis hired a second attorney to recover the unpaid settlement amount. He entered into a contingent fee agreement with the attorney under which he agreed to pay 40% of "any gross amount recovered." The attorney filed suit in state court seeking damages for the unpaid settlement amount as well as a declaration that Solis was entitled to keep the $62,000 he already had. The case settled -- the defendants paid $60,000 and relinquished all claims to the $62,000. Solis filed a bankruptcy petition before the settlement was consummated. The trustee in bankruptcy recovered the settlement amount. Solis’ attorney filed a claim for 40% of both the $60,000 and $62,000. The trustee objected. The bankruptcy court allowed the claim but only with respect to the $60,000 in new money. Judge Reinhard (N.D. Ill.) affirmed. The attorney appeals.

In their opinion, Judges Manion, Williams, and Hamilton affirmed. The Court interpreted the fee agreement under Illinois contract law, which construes contingent fee agreements strictly in favor of the client. The plain language of the contract obligates Solis to pay a contingent fee on any money "recovered." The Court had little difficulty in concluding that the $60,000 was the only money "recovered" by the attorney. Although the attorney may have conferred a benefit on Solis by clarifying his right to keep the $62,000, the contingent fee agreement does not address that situation. The Court assumed that the attorney could have drafted an agreement (in clear and explicit language) that provided a contingent fee for a successful resolution of any claims on the $62,000 -- it simply refused to stretch the definition of "recovered" under the existing agreement.

Tags: Opinion By Hamilton, Attorneys' Fees, Contingent Fee, Contract/Commercial Law

Mortgage Trust Servicer Holds Equitable Title To Mortgage Claim And Is Real Party In Interest

Posted on July 7, 2010 by Michael Rigney

CW CAPITAL ASSET MANAGEMENT v. CHICAGO PROPERTIES (June 29, 2010)

Blockbuster, the movie rental company, has been hurt by increasing competition and changing business models. As a result, it has abandoned some of its stores. One of those stores was leased from Chicago Properties, a commercial landlord. Blockbuster settled the ensuing breach of lease lawsuit for $161,000, although it owed Chicago Properties future rents of $471,000. The mortgage on the property was held in trust as part of a mortgage-backed security. Bank of America is the trustee and CW Capital Asset Management is the servicer. CW Capital has been granted comprehensive power and authority with respect to the management of the trust’s assets. It brought suit under the parties' "Subordination, Non-Disturbance and Attornment Agreement" (the “Agreement”) for the $471,000. Judge Zagel (N.D. Ill) found for the defendants after a bench trial but then dismissed the suit on the grounds that CW Capital, as servicer, was not the real party in interest. CW Capital appeals.

In their opinion, Chief Judge Easterbrook and Judges Posner and Evans reversed with directions (still finding for the defendants but on the merits). The Court first addressed the real party in interest issue. It concluded, based on its review of the law and the documents, that the trust held legal title to the claim but delegated equitable ownership to CW Capital. That was enough to be a real party in interest. Alternatively, even if CW Capital is not a real party in interest, the Court noted that the case should proceed under Rule 17(a)(3) since the trustee ratified CW Capital's suit in the district court. On the merits, the court noted that the Agreement defines the rights of the parties in the event of a default. Here, notwithstanding Blockbuster's breach, Chicago Properties has not defaulted. Since it continues to meet its monthly obligations, the terms of the Agreement relied on by CW Capital have not been triggered. With respect to the claims based on the mortgage itself and the owners' guaranty, the Court concluded that the settlement with Blockbuster was not a violation. Finally, the Court upheld the district court's award of attorney's fees to Blockbuster under a "prevailing party" term of the Agreement. The Court concluded that the fact that Blockbuster did not prevail on an "unimportant" counterclaim did not change its status as a prevailing party under the Agreement. Although the defendants had prevailed in the district court (on the real party in interest dismissal), the Court reversed that dismissal with directions to enter judgment on the merits for the defendants.

Tags: Opinion by Posner, Attorneys' Fees, Breach of Contract, Contract/Commercial Law, Equitable Ownership, Foreclosure, Mortgage, Prevailing Party, Real Party In- Interest

Extrinsic Evidence Is Used To Interpret An Ambiguous Deed

Posted on May 19, 2010 by Michael Rigney

AMERICAN LAND HOLDINGS v. JOBE (May 6, 2010)

Peabody Energy Corporation is engaged in the strip mining of coal in Sullivan County in southwestern Indiana. Unfortunately for them, the owners of 62 acres of farmland right in the middle of the mining area are getting in the way. Peabody owns the coal beneath those 62 acres pursuant to a 1903 deed. Under that deed, the owners of the property transferred ownership of the coal and the right to mine it to Peabody. The deed also granted the use of the surface "as may be necessary" for certain mining operations and granted an option to purchase such surface area "as may be necessary" for the location of railroad tracks and buildings and other operations necessary for carrying on the mining business. Other parts of the deed limit Peabody's use of the surface to mining operations. Peabody brought an action for a declaration that it has a right to strip mine the land and for specific performance of its option to purchase. After a bench trial, the court entered judgment for the defendants. Peabody appeals.

In their opinion, Judges Posner, Rovner, and Tinder affirmed. The Court agreed with the district court that the deed was ambiguous in that it both granted the right to mine all the coal but put significant limits on Peabody's use of the surface. Because the deed is ambiguous, a court is allowed to look to extrinsic evidence to determine its intended meaning. Here, the district court heard evidence that, at the time of the deed, strip mining did not exist in Sullivan County and probably not in the United States. The Court concluded that the district court did not err in relying on that testimony in holding that the deed did not grant a right to strip mine – it only granted the right to mine the coal by underground mining and the right to use the surface for structures and activities related to the underground mining.

Tags: Opinion by Posner, Ambiguity, Contract/Commercial Law, Deed

Management Consulting Services Contract Contains No Implied Duty To Exercise Reasonable Care

Posted on April 27, 2010 by Michael Rigney

NATIONAL INSPECTION & REPAIRS v. GEORGE S. MAY INTERNATIONAL (April 9, 2010)

National Inspection & Repairs (“NIR”) is a trucking company located in Topeka, Kansas. When one of its employees accidentally caused its accounting systems to crash, NIR sought help from George S. May International (" May"), a business consulting firm. The parties entered into a consulting agreement. The agreement required NIR to approve any effort recommended by May. It also prohibited NIR from hiring any May employee for a year after the date of the agreement. May submitted five progress reports over the course of the three-week engagement. Each report was approved by NIR. As soon as the engagement was complete, NIR hired the May project manager as its Controller. NIR alleges that the project manager embezzled hundreds of thousands of dollars from NIR while acting as its Controller. NIR brought a breach of contract action against May. It alleged that May breached the contract by failing to "implement" its duties and for negligently hiring and supervising the project manager. The district court granted summary judgment to May. NIR appeals.

In their opinion, Chief Judge Easterbrook and Judges Kanne and Sykes affirmed. They Court first quickly addressed its appellate jurisdiction. The district court had dismissed without prejudice a claim brought by each of the parties, which made its order non-final. The Court noted its own precedent the lifts the jurisdictional bar when each party agrees at oral argument to treat the dismissals as with prejudice. Here, the parties were not explicit at oral argument. However, they were explicit in post-argument briefing. The Court concluded that that was sufficient to lift the jurisdictional bar. On the merits of the "failed to implement" allegation, the Court noted that NIR cannot prevail because it never pointed to a specific obligation or provision of the agreement that May is alleged to have failed to implement. On the merits of the negligent hiring claim, the Court concluded that it was NIR that in fact breached the contract by hiring the project manager. Finally, the Court addressed NIR's breach of implied warranty and negligence claims. NIR has a tort claim under Kansas law only if there is a violation of a duty imposed by law, as opposed to by agreement. Since Kansas law does not impose any duty on the parties to a consulting services agreement, there is no action for breach of a duty.

Tags: Opinion by Kanne, Breach Of Warranty, Breach of Contract, Contract/Commercial Law, Warranty

Breach Of Contract Damages Must Be Established With Reasonable Certainty

Posted on April 22, 2010 by Michael Rigney

ADVERTISING SPECIALTY INSTITUTE v. HALL-ERICKSON, INC. (April 7, 2010)

Advertising Specialty Institute (ASI) is in the promotional products business. It facilitates transactions between the buyers and sellers of corporate promotional materials. It has an affiliate, ASI Show, which puts on numerous trade shows throughout the year. Hall-Erickson and National Premium Show (NPS) put on The Motivation Show annually at McCormick Place in Chicago. In 2001, The Motivation Show and ASI entered into an agreement to co-sponsor a promotional product event at The Motivation Show. In the agreement, The Motivation Show gave ASI the right of first refusal regarding any other opportunity within the promotional products industry and also agreed that it would not extend the same opportunity to any other association or conference, specifically including by name ASI's close competitor, Promotional Products Association International (PPAI). Notwithstanding this agreement, The Motivation Show agreed to co-locate a show with PPAI. The district court determined that The Motivation Show breached its contract with ASI but, finding that ASI failed to offer sufficient proof of damages, awarded only nominal damages. ASI appeals the damages determination -- defendants cross-appeal the liability determination.

In their opinion, Judges Cudahy, Wood, and Tinder affirmed. The Court concluded that the right of first refusal was clear and unambiguous in the contract and that The Motivation Show violated that provision and breached the contract when it put on the show with PPAI. The Court also affirmed with respect to the damages issue, although it did express its view that the damages case was not as weak as described by the district court. Under Pennsylvania law, damages are not recoverable beyond that which is established with reasonable certainty by the evidence. The Court found portions of the evidence did provide some basis for the claim of damages. However, giving deference to the findings of the District Court, the Court also noted several gaps in the evidence. For example, ASI never introduced evidence of specific companies that either attended the joint show at issue or would have attended an ASI show, it did not introduce evidence of PPAI's own revenue or profits from the show, and it did not produce evidence of what PPAI would have done had it not shared the show with The Motivation Show. Given the ambiguities and gaps in the evidence, the Court found no clear error.

Tags: Opinion by Cudahy, Contract/Commercial Law, Damages, Reasonable Certainty

Without Clear And Convincing Evidence Of A Prior Agreement, Reformation Of An Insurance Policy Is Denied

Posted on March 19, 2010 by Michael Rigney

MILWAUKEE METROPOLITAN SEWERAGE DISTRICT v. AMERICAN INTERNATIONAL SPECIALTY LINES INSURANCE CO. (March 10, 2010)

The Milwaukee Metropolitan Sewerage District ("District") provides wastewater treatment services and performs flood control work in the Milwaukee area. As part of its flood control responsibilities, the District developed a plan to control flooding on the Lincoln Creek. Execution of the plan required the District to purchase a nineteen-acre parcel of land along the Creek. The District decided to procure environmental liability insurance before purchasing the property. The District met in late 1998 with its insurance broker, Sedgwick of Illinois. The District discussed obtaining insurance for property it referred to as "Lincoln Creek" but provided very little information about the actual parcel. Sedgwick contacted Crump Insurance Services of Illinois, a wholesale broker, and inquired about coverage. In February of 1999, the District authorized Sedgwick to obtain insurance for five separate properties, including Lincoln Creek. Each of the properties other than Lincoln Creek was identified with a specific address. Lincoln Creek was not. Crump forwarded the order of insurance to AISLIC. Although AISLIC confirmed that it had bound coverage, it listed only the four properties that had specific addresses. When Crump noticed the absence of Lincoln Creek, it added the parcel to the binder and forwarded it to both Sedgwick and AISLIC. AISLIC objected to the inclusion and stated that it was not including Lincoln Creek as an insured property. After its receipt of the formal application, which included Lincoln Creek, AISLIC again stated that it was not willing to include Lincoln Creek. Crump informed Sedgwick that AISLIC was not including Lincoln Creek both because of the absence of an actual address and because the property was not then owned by the District. AISLIC eventually issued a policy for the four identified properties and a fifth added property. Although the District noticed the absence of Lincoln Creek, Sedgwick told the District that the fifth property was actually a reference to Lincoln Creek. The District proceeded with its purchase and discovered significant environmental contamination. It submitted a claim to AISLIC for over $700,000 for its cleanup of the contamination. AISLIC denied the claim. The District sued AISLIC for reformation of the contract. AISLIC brought a third-party indemnification action against Crump. After a bench trial, the district court granted reformation of the contract, concluding that Crump was AISLIC’s agent and that it was Crump’s failure to obtain necessary that led to the parcel being excluded from coverage. The court entered judgment for the District against AISLIC and for AISLIC against Crump. AISLIC and Crump appeal.

In their opinion, Judges Flaum, Manion, and Wood reversed and remanded the judgment against AISLIC and vacated the judgment against Crump. Applying Wisconsin law, the Court stated that an insurance policy can be reformed to reflect a prior agreement if: a) there is clear and convincing proof of a prior meeting of the minds, and b) the failure of the agreement to reflect the prior agreement results from either a mutual mistake or a mistake by the party seeking reformation combined with some inequitable conduct by the other. Here, the Court found both elements absent. The clearest description of the parcel ever given to AISLIC was its name and that it was located somewhere along several miles of the Creek. The Court found that evidence insufficient to identify the property for which the District sought coverage and that the evidence as a whole failed to amount to clear and convincing evidence of a prior agreement. In addition, the Court found that the evidence supported the proposition that the District knew the parcel was never covered. The District’s agent was well aware that AISLIC required an address before including the parcel and, in fact, refused to include the parcel because it was not owned by the District. Therefore, the District could not satisfy that it was operating under a mistake.

Tags: Opinion by Manion, Contract/Commercial Law, Insurance Law, Mistake Of Fact, Reformation

References To Due Date And Default Provisions In A Demand Note Do Not Make It Ambiguous

Posted on February 22, 2010 by Michael Rigney

REGER DEVELOPMENT v. NATIONAL CITY BANK (January 20, 2010)

Reger Development is an Illinois real estate development company. In 2007, the company opened a $750,000 line of credit with National City Bank. The company signed a promissory note and provided the personal guarantee of its principal, Kevin Reger. In several places, the note makes reference to the fact that it is payable "on demand." The company made its payments in a timely manner for the first year. Nevertheless, the bank asked it to pay down $125,000 of principal. Reger did so. A month later, the bank advised Reger that it was reducing the amount of the line of credit and also wanted to restructure some of the principal and secure it with a mortgage. The bank told Reger that it was possible that they would demand payment of the entire amount if he did not agree to the modifications. Reger brought suit, alleging breach of contract and fraud. The district court dismissed the case for failure to state a claim. Reger appeals.

In their opinion, Judges Flaum, Williams, and Sykes affirmed. The Court noted that Illinois law generally implies a covenant of good faith and fair dealing in a contract. It does not apply, however, to demand notes. Reger argued that general references to due dates and default provisions in the note were inconsistent with a demand instrument. The Court noted the repeated and explicit references in the instrument to National City's right to demand payment at any time. The note is clearly and unambiguously a demand note, concluded the Court. Since it is a demand instrument, the bank's insistence on modifications did not amount to a breach. With respect to the fraud count, the Court focused on the intent element. It stated that Reger must establish that the bank intended to and did induce him. In order to meet that element, Reger asked the court to infer that the bank intentionally drafted ambiguous documents so as to mislead him. The Court had already considered the ambiguity of the document with respect to the breach of contract claim. Not only had it not found it ambiguous, it found it rather straightforward. Reger failed to allege the element of intent with the particularity necessary in a fraud count -- the dismissal of that count is affirmed.

Tags: Opinion by Flaum, Breach of Contract, Civil Procedure, Contract/Commercial Law, Fraud, Pleading With Particularity, Unambiguous

Joint Patent Owners May Contractually Modify Their Statutory Rights

Posted on February 8, 2010 by Michael Rigney

WISCONSIN ALUMNI RESEARCH FOUNDATION v. XENON PHARMACEUTICALS, INC. (January 5, 2010)

Scientists at the University of Wisconsin discovered that suppressing a certain enzyme in the body reduced cholesterol levels. They disclosed their discovery to the Wisconsin Alumni Research Foundation, which manages patents for the University. They assigned all their rights to the Foundation. Xenon Pharmaceuticals was very interested in the same effort. Xenon and the University entered into a series of agreements under which Xenon sponsored various research projects; Xenon and the Foundation entered into an agreement giving Xenon exclusive licensing rights in return for a percentage of fees received; and Xenon entered into a series of agreements directly with the individual researchers to undertake various projects. Xenon and the Foundation filed for and received a joint patent. The relationship soured. Xenon did some related work with a third party and with an individual University scientist with whom it had a consulting agreement. When it filed a patent application covering the results of that work, the Foundation objected. It also licensed the technology covered by both the joint patent and the related patent to Novartis. The Foundation demanded its contractual percentage -- Xenon refused. The Foundation brought suit, claiming that both the Novartis license and the related patent violated the party's agreement. Xenon counterclaimed. In a series of rulings, the court held that Xenon breached the agreement by granting the sublicense to Novartis and that Xenon owed licensing fees to the Foundation. The court refused the Foundation's request for a declaration that the work on the related patent belonged to it and concluded that the Foundation's argument that it had a right to terminate the contract was not developed sufficiently in its briefs. At trial on damages, the jury awarded $1 million, which was reduced on remittitur to $300,000. The parties cross-appealed.

In their opinion, Chief Judge Easterbrook and Judges Bauer and Sykes affirmed in part, reversed in part and remanded. The Court first addressed Xenon's transfer to Novartis. The Court agreed with Xenon that each joint patent holder, under federal law, is allowed to use the patented technology without regard to the rights of the other. However, that right is subject to modification by agreement of the parties. Here, the Foundation conditioned Xenon's right to license the technology on its payment of a fee. Interpreting the terms of their agreement, the Court concluded that Xenon owed the contractual fee upon its receipt of its fee and its failure to remit it was a breach of the agreement. The Court then rejected Xenon's argument that the Foundation presented insufficient evidence to support its damages claim. With respect to the Foundation's right to terminate the agreement, the Court concluded that the lower court was in error when it held that the right to terminate was contingent upon a judicial finding of a breach. The agreement specifically gives the Foundation the right to terminate the agreement upon a breach by Xenon and a failure to remedy the breach within 90 days after written notice. The Foundation considered Xenon's conduct a breach and gave appropriate notice. Even though it filed suit prior to the expiration of the 90 days, it's right to terminate after a failure to cure remains. It need not await a judicial determination. The Court concluded that the Foundation properly terminated the agreement. Finally, the Court addressed the Foundation's claim for a declaration of its ownership of the related technology. The Court concluded that the contractual terms were clear and that the scientist's work, although partially sponsored by Xenon, was owned by the Foundation.

Tags: Opinion by Sykes, Breach of Contract, Contract/Commercial Law, Intellectual Property, Notice

Replacement Of Lamp With Virtually Identical Product Results In No Damages

Posted on February 3, 2010 by Michael Rigney

NIGHTINGALE HOME HEALTHCARE v. ANODYNE THERAPY (December 21, 2009)

Anodyne Therapy manufactures and sells infrared lamps designed to improve circulation. The FDA approved it for that purpose. But Anodyne allegedly marketed the lamps as a treatment for peripheral neuropathy, which the FDA never approved. Nightingale purchased several of the lamps. The FDA sent Anodyne a warning letter about their marketing claims. Several months later, Nightingale stopped using the lamps, returned them to Anodyne with a demand for a refund, but then replaced them with almost identical devices. Nightingale brought a fraud case in state court. Anodyne removed the case to federal court on diversity jurisdiction grounds. Nightingale then added a federal Lanham Act claim. The court granted summary judgment to Anodyne on the Lanham Act claim, and later granted summary judgment to Anodyne on the fraud claim. The court relied on a contractual disclaimer of warranties as well as Nightingale’s failure to establish proof of damages. Nightingale appeals.

In their opinion, Judges Posner, Kanne and Rovner affirmed. On the merits, the Court disagreed with the warranty holding. It concluded that the only contractual limitation of liability related to a breach of warranty claim – not, as here, a fraud claim. The Court agreed with the district court, however, on the damages holding. Nightingale replaced the lamps with a virtually identical product. Both products served the same purpose, performed comparably and carried similar FDA approvals. The replacement of the lamps did not result in any damage to Nightingale.

The lack of any damage not only doomed the case on the merits – it showed that the jurisdictional threshold for diversity jurisdiction was not met. Ordinarily, the Court concluded, the lack of a good faith basis for meeting the threshold would result in a case being dismissed for lack of jurisdiction, even at a late stage of the case. Here, however, the fact that Nightingale added a federal claim after removal brought the case within the court’s federal question jurisdiction. The state claims were covered by supplemental jurisdiction. Even though the federal claim was later dismissed, the court had discretion to retain the state claims.

Tags: Opinion by Posner, Contract/Commercial Law, Damages, Diversity Jurisdiction, Federal Question Jurisdiction, Fraud, Jurisdiction, Limitation Of Liability, Supplemental Jurisdiction

Contract Term Is Ambiguous If It Is Reasonably Susceptible To More Than One Meaning

Posted on January 25, 2010 by Michael Rigney

CURIA v. NELSON (November 20, 2009)

Kenneth Nelson owned two car dealerships -- Auto Plaza and Auto Mall. In 1989, he and Richard Curia entered into an agreement whereby Curia agreed to pay $100,000 for 1000 (of 8180) shares in Auto Plaza and 144 (of 1200) shares in Auto Mall. The agreement also gave Curia three separate options to buy additional stock in both dealerships, up to 100% of each. Curia exercised the first of the options in 1990. A few years later, in 1993, Nelson and Curia modified the agreement, apparently because the total number of shares in the two companies had increased. The 1993 agreement also provided that Curia could purchase additional shares "upon those terms and conditions subsequently agreed upon." A later agreement terminated Curia's rights to acquire any additional Auto Mall stock. In 2005, however, Curia attempted to exercise his options to acquire all of the stock in Auto Plaza. Nelson filed a declaratory judgment action contesting Curia's right. Curia counterclaimed for breach of contract. The court granted summary judgment to Curia. Nelson appeals.

In their opinion, Judges Kanne, Williams and Sykes reversed and remanded. The issue identified by the Court was whether Curia's 1989 options survived the 1993 modification. The Court noted that both Nelson and Curia argued that the 1993 agreement was unambiguous and supported his own interpretation. The parties, however, do not control whether a contract term is ambiguous. It is a question of law for the court. Here, the Court found the 1993 language reasonably susceptible to more than one meaning -- and therefore ambiguous. Both of the interpretations are reasonable readings of the contract language. The ambiguity must be resolved with reference to extrinsic evidence -- not on summary judgment.

Tags: Opinion by Sykes, Ambiguity, Contract Interpretation, Contract/Commercial Law

Techinical Legal Term In Contract Is Given Its Technical Meaning

Posted on January 22, 2010 by Michael Rigney

BANDAK v. ELI LILLY AND COMPANY RETIREMENT PLAN (November 18, 2009)

Stephen Bandak was employed by an Eli Lilly company in England, his native country, from 1978 to 1995. He participated in the company's retirement plan. He was transferred to the United States in 1995. The company told him, upon his enrollment in the U. S. company's plan, that his benefits in that plan would be based on years of employment retroactive to 1978. The plan also provided that benefits would be reduced by the actuarial equivalence of any other benefits under a “qualified defined benefit plan” maintained by an Eli Lilly company. When Bandak retired in 2004, the company took the position that his benefits under the English company's plan were benefits under a qualified defined benefit plan and were thus properly deducted from his U.S. pension benefits. Bandak sued the company under ERISA. Judgment was entered in his favor for both damages and an injunction relating to future benefit payments. The court also concluded that Lilly's position was not substantially justified and awarded attorneys’ fees. Eli Lilly appeals.

In their opinion, Judges Posner, Rovner and Williams affirmed. The Court focused on the language "qualified defined benefit plan" in the plan document. The term is a technical term and it refers to a plan that has been afforded favorable tax treatment by the Internal Revenue Service. The Court concluded that it had no meaning outside that context. The Court applied the presumption that, when a technical legal term is used in the contract, it is given its technical legal meaning. If it had no meaning outside the United States, the English plan was not such a plan and it should not have reduced his benefits. Substantial evidence in the record supported the Court's conclusion. The Court also concurred in the district court's conclusion that the company's position was not justified.

Tags: Opinion by Posner, Benefits, Contract Interpretation, Contract/Commercial Law, ERISA, Technical Contract Term

Author Of Derivative Work Does Not Need Underlying-Work Author's Permission For Copyright

Posted on January 18, 2010 by Michael Rigney

SCHROCK v. LEARNING CURVE INTERNATIONAL (November 5, 2009)

Learning Curve International ("LCI"), a producer and distributor of toys, has a license to market toys based on the "Thomas & Friends" properties. It hired Daniel Schrock to take photographs of those toys for use in promotional materials. LCI paid Schrock more than $400,000 for his effort. Although LCI stopped using Schrock's services in 2003, it continued to use some of his photos. Schrock registered the photos for copyright protection in 2004 and brought an infringement action against LCI and LCI’s licensor. The district court granted summary judgment to the defendants. It ruled that Schrock needed LCI's permission to copyright the photos, which he did not have. Schrock appeals.

In their opinion, Judges Flaum, Williams and Sykes reversed and remanded. The Court first noted that the copying element of an infringement action was not disputed – only whether Schrock had a valid copyright. Then, the Court briefly discussed the subject of derivative works but ended up assuming without deciding that each photo qualified as a derivative work. Next, the Court concluded that the photos met the requisite threshold of originality for copyright protection. That threshold is rather low – and the Court specifically rejected LCI’s argument that the threshold is higher for derivative works. If photographs are distinguishable from the underlying works, they qualify for derivative-work copyright. Schrock’s are and therefore do. In order to be copyrightable, a derivative work must itself not be infringing – that is, the owner of the copyright in the underlying work must have given permission to make the derivative work. The owner need not, however, have given actual permission to copyright the derivative work. The Court specifically rejected dicta in Gracen that suggested otherwise. Although Schrock’s right to copyright his work therefore arises by operation of law without the need for permission, Schrock is entitled to contract away his rights. The Court concluded that the record was insufficient to determine the merits of defendants’ arguments that he did just that. It remanded for further development of the record.

Tags: Opinion by Sykes, Contract/Commercial Law, Copyright, Derivative Work, Intellectual Property, Originality

Unambiguous Contract Terms Are Enforced As Written

Posted on January 15, 2010 by Michael Rigney

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.

Tags: Opinion by Evans, Contract/Commercial Law, Extrinsic Evidence, Unambiguous

Parties' Use Of A Foriegn Technical Legal Term Creates Presumption That It Is Used In Its Technical Legal Sense

Posted on January 14, 2010 by Michael Rigney

SUNSTAR v. ALBERTO-CULVER CO. (October 28, 2009)

Alberto-Culver is a significant domestic producer of hair and skin-care products. In 1980, it transferred Japanese trademark registrations to Sunstar, a Japanese manufacturer of similar products. The deal required Sunstar to transfer the trademarks to Bank One Corporation in trust for 99 years. Bank One, in turn, licensed them back to Sunstar and was obligated to return the marks to Sunstar after the term of years. As trustee, Bank One could stop the use of the mark if it had reasonable grounds to think that Sunstar committed an act that created a danger to the value or validity of the marks. Alberto-Culver and Sunstar referred to the rights granted as a senyoshiyoken, the Japanese legal term describing a license under which the licensee has the exclusive right to use the marks in its geographic area and can sue infringers in its own name. Sunstar paid $10 million for the license. In 1989, Sunstar asked for permission to use a variant of one of the marks. Alberto-Culver refused. Sunstar ended up paying another $10 million for the rights to use the variant. In 1999, Sunstar again asked for permission to use a variation of one of the marks. This time, when Alberto-Culver refused, Sunstar filed suit. The suit sought a declaration that the requested variation was permitted by the license agreement. At trial, the district court refused to instruct the jury on the legal meaning of the term senyoshiyoken, concluding that it was irrelevant. The jury returned a verdict for Alberto-Culver but awarded no damages. The judge enjoined Sunstar from using the variation of the mark, terminated the agreement as a result of Sunstar's breach and ordered the marks returned to Alberto-Culver. Sunstar appeals.

In their opinion, Judges Posner, Manion and Evans vacated and remanded. The Court first disagreed with the lower court's conclusion that Japanese law was irrelevant. The Court stated that if sophisticated contracting parties use a foreign technical legal term in their contract, the presumption is that it is used in its technical legal sense. The issue for the Court, therefore, was whether the holder of the Japanese senyoshiyoken is permitted to use variants of licensed marks. The Court then criticized the general use of expert testimony to prove the content and meaning of foreign law. Noting that such testimony is not permitted when a federal court applies the law of a state or when the court of one state applies the law of another state, the Court expressed a strong preference for secondary materials over the testimony of expert witnesses. On the merits, the Court noted that American law does not consider a change in a mark's typeface or a modest change in the appearance or wording of a mark a material alteration. Japanese law is the same. Particularly here, where the license was for a period of 99 years, it may have even required modest changes in the mark over time to ensure its continued value and validity. The Court concluded that the holder of a Japanese senyoshiyoken is entitled to make minor changes in the mark. Although the Court expressed its temptation to order Alberto-Culver’s claims dismissed with prejudice, it declined to do so. Sunstar had not requested that relief and Alberto-Culver was not afforded an opportunity to respond. It did, however, vacate the judgments and remand the case.

Tags: Opinion by Posner, Contract/Commercial Law, Expert Testimony, Foriegn Law, Senyoshiyoken

Uncertainty About Merits Is Sufficient To Affirm Preliminary Injunction

Posted on December 29, 2009 by Michael Rigney

HOOSIER ENERGY RURAL ELECTRIC COOPERATIVE v. JOHN HANCOCK LIFE INSURANCE COMPANY (September 17, 2009)

Hoosier Energy Rural Electric Cooperative and John Hancock Life Insurance Company entered into a lease-leaseback of a Power Plant in order to take advantage of excess depreciation deductions held by Hoosier. Because the transaction exposed John Hancock to substantial financial risks, Hoosier arranged with Ambac Assurance Corporation to pay to Hancock $120 million upon the occurrence of certain events. One of those events was a reduction in Ambac’s credit rating. If that occurred, Hoosier had 60 days to replace the surety. It did occur. Even with an extension, Hoosier did not replace the surety. John Hancock demanded performance. Ambac was ready and able to perform but Hoosier filed suit and obtained a temporary restraining order and a preliminary injunction. Ambac’s performance would require Hoosier to cover the payment, which would drive Hoosier into bankruptcy. John Hancock appeals.

In their opinion, Chief Judge Easterbrook and Judges Kanne and Wood affirmed. The Court began with the requirements for equitable relief: irreparable injury, a plausible claim on the merits and the balance of equities. The Court accepted the district court’s finding of irreparable injury and proceeded to address the merits. The district court had found merit in two Hoosier arguments: that the transaction was illegal and must be unwound and that Hoosier is at least temporarily excused under the doctrine of "temporary commercial impracticability." The Court disagreed with respect to the first prong. Whether or not the IRS allows the parties to take advantage of the intended tax consequences, the Court believed that the parties were still bound by their contractual obligations. With respect to the second prong, the Court noted that New York courts do not recognize "temporary commercial impracticability." Although they do recognize the defense of impossibility, they take a dim view of it and do not excuse performance when the "impossibility" is the result of financial hardship. If, as Hancock claims, Hoosier had the option to replace the surety, the Court did not believe that an impossibility defense would stand. If, however, as Hoosier claims, it had a duty to replace the surety, an impossibility defense might prevail. The Court found enough uncertainty in the contract and the facts surrounding Hoosier's ability or inability to replace the surety that it concluded that the district court was correct with respect to Hoosier's prospect of prevailing. Finally, the Court required the district court to re-examine the amount of the injunction bonds to protect John Hancock and urged the district court to allow Hancock to realize its surety if Hoosier is not able to replace the surety within a few months.

Tags: Opinion by Easterbrook, Contract/Commercial Law, Federal Tax, Impossibility, preliminary injunction

"In The Open" Exclusion Does Not Apply to Property That Is Outside But Protected From The Elements

Posted on December 23, 2009 by Michael Rigney

TWENHAFEL v. STATE AUTO PROPERTY AND CASUALTY INSURANCE CO. (September 14, 2009)

Roger Twenhafel owns a business that manufactures wood cabinets. He stores some of his wood inventory outdoors. Just before a violent storm hit in late 2006, he covered the inventory with a tarp and secured it with heavy blocks and beams. In spite of this effort, the storm lifted and carried the tarp away. The inventory was damaged. Twenhafel made a claim against State Auto Property and Casualty Insurance Company. The policy covered all losses except those specifically excluded. State Auto denied the claim, relying on an exclusion for rain damage to property "in the open." Twenhafel brought suit for breach of the insurance policy. The district court found that "in the open" was not ambiguous and it meant property that was exposed to the elements with no protection. The court granted summary judgment to Twenhafel and awarded prejudgment interest at 6.98% and postjudgment interest at .96%. State Auto appeals.

In their opinion, Judges Rovner and Evans and District Judge Van Bokkelen affirmed in part, vacated in part and remanded. The interpretation of the insurance contract, started the Court, is a question of law. A court's objective is to give effect to the intention of the parties. Ambiguity exists only if there are multiple reasonable interpretations. Here, the contract covered all losses except those specifically excluded. The relevant exclusion, for property "in the open," is not defined. The Court concluded that the common, unambiguous meaning of that phrase is "exposed to the elements." Since the property was not exposed, the district court correctly granted summary judgment against State Auto on the merits. The Court also affirmed the damage award. Twenhafel was unable to quantify the loss at his deposition, but did so later in an affidavit. State Auto did not object to the affidavit. Finally, the Court vacated the award of prejudgment interest. Although it agreed that prejudgment interest was appropriate, the award exceeded the statutory rate of 5% and was not supportable by any exception.

Tags: Opinion By Van Bokkelen, Ambiguity, Contract Interpretation, Contract/Commercial Law, Insurance Law

Court Will Look To Original Contract Schedule And Surrounding Circumstances In Determining A "Reasonable" Time For Performance

Posted on December 15, 2009 by Michael Rigney

INTERNATIONAL PRODUCTION SPECIALISTS v. SCHWING AMERICA, INC. (SEPTEMBER 2, 2009)

North Shore Sanitary District (NSSD) entered into a contract with Voest-Alpine Industries to build a wastewater treatment plant. Voest-Alpine in turn contracted with Schwing America to supply and install five silos and associated equipment. Schwing in turn agreed to pay International Production Specialists (IPS) almost $700,000 to fabricate and install the five silos. The original schedule provided that the silos were to be delivered by December of 2001, approximately 4 months after Schwing and IPS entered into their agreement. NSSD suspended work on the project prior to the delivery dates. Schwing instructed IPS to continue its fabrication effort with respect to the two silos with the earliest installation dates but to cease any work on the site. NSSD restarted the project two years later -- but changed the physical location of the plant. The change in location resulted in a dispute between Schwing and IPS. In fact, IPS advised Schwing that it would not complete the project. After further negotiations, the project was back on. Schwing advised IPS of a new schedule requiring installation of the first two silos in August of 2004 and the other three in December of 2004. Although IPS completed the installation of the first two silos almost on time, the other three became a problem. When the silos were still not delivered by February of 2005, Schwing terminated the contract and completed the work through other subcontractors at significant cost. IPS sued for breach of contract -- Schwing countersued. After a trial, the court concluded that Schwing both did not breach and was justified in terminating the contract. The court awarded damages of almost $500,000. IPS appeals.

In their opinion (PDF), Judges Flaum, Rovner and Williams affirmed in part and reversed in part. The Court noted that Schwing terminated the contract because of IPS's failure to satisfactorily complete the work within a specified time. If IPS's performance within a particular time was required and its failure destroyed an essential element of the contract, it would be a material breach. Under Wisconsin law, a material breach would release Schwing from its continuing performance. The Court looked to the contract. It concluded that the original agreement contained an expectation for performance within a particular time. Of course, the time frame was eliminated when NSSD put the project on hold. After the project started back up, a layout schedule contained expectations for completing the project. Considering the complexity of the project and the number of subcontractors, the Court concluded that the time frames in the layout schedule were reasonable contractual expectations. Alternatively, the Court stated that the law would imply a reasonable time for performance if the contract is silent. Given the original schedule of delivery and installation as well as the later layout schedule, the Court concluded that the schedule reflected a reasonable time for performance. Therefore, the Court agreed with the district court that IPS materially breached and that Schwing was entitled to damages. The Court also concluded that the district court did not err in its computation of damages, with one exception. At the time of IPS's breach, Schwing still owed approximately $50,000 on the contract. To put Schwing in an equivalent, but no better, position then it would have been without a breach requires it to credit IPS for the $50,000.

Tags: Opinion by Rovner, Contract/Commercial Law, Evidence, Reasonable Time

Significant Control Over And Complete Lack Of Equity In Formation Of Company Result In Piercing Of Its Corporate Veil

Posted on December 14, 2009 by Michael Rigney

LABORERS' PENSION FUND v. LAY-COM, INC. (September 2, 2009)

King & Larsen, Lord & Essex and Lay-Com are all in the development or construction business. Mike King is the owner of King & Larsen. Lord & Essex and Lay-Com are both owned directly or indirectly by members of the Popp family. King & Larsen had a collective bargaining agreement that required it to make contributions to the plaintiff fund. When it ran into financial difficulty, Lord & Essex and Lay-Com came to its rescue. They loaned money and paid some bills. The companies then entered into a complex series of transactions that resulted in the transfer of most of King & Larsen's assets to a new company, M. A. King. The tax and union pension fund liabilities of King & Larsen remained behind, in an otherwise empty shell. The pension fund sued King & Larsen, M. A. King and Mike King for the unpaid contributions. After obtaining default judgments, the funds added Lay-Com, Lord & Essex, the Lay Trust and John Popp as defendants. The district court found Lay-Com, Lord & Essex and the Lay Trust liable on a veil-piercing theory and dismissed John Popp. All parties appeal.

In their opinion, Judges Cudahy, Manion and Tinder affirmed in part and reversed in part. The Court identified the sole issue on appeal as whether it was appropriate to pierce the corporate veil of M. A. King, as successor to King & Larsen, to reach the other defendants. A primary purpose of the corporate structure is to limit liability. An exception to that limitation of liability occurs when a corporation is used as a mere instrumentality of another. The Court stated that the plaintiffs must both demonstrate that there exists a unity of interest in ownership between or among the companies and that honoring the corporate fiction would result in an injustice. A principal factor in addressing the former is whether the companies respected their separateness. A principal factor in addressing the latter is whether the company operates with sufficient capital. Addressing each of the four defendants, the Court concluded that the test was met with respect to Lay-Com. First, Lay-Com exerted substantial control over M.A. King and did not allow it to operate separately. Second, M.A. King was created with not only inadequate capital – it was created with no equity capital. The Court concluded no capital is inadequate as a matter of law. Although the Court found the analysis with respect to Lord & Essex more difficult, it also concluded that Lord and Essex was a important part of the scheme and did not maintain its separateness from M.A. King. The Court concluded that the Lay Trust and John Popp individually played no role in the scheme. It found neither subject to liability under veil-piercing.

Tags: Opinion by Cudahy, Contract/Commercial Law, Corporate Control, ERISA, Piercing the Corporate Veil

State Court Order On Arbitrability Of Claims Has Preclusive Effect In Federal Court When Court Resolved Issue In A Reasoned Opinion

Posted on December 2, 2009 by Michael Rigney

HABER v. BIOMET, INC. (August 20, 2009)

Biomet produces artificial joints. It contracted with Paul Haber to be its distributor in parts of Florida. Their relationship was governed by two contracts -- one made in 1995 and one made in 1999. The 1995 contract contained a forum selection clause favoring an Indiana court. The 1999 contract contained a clause requiring arbitration in Chicago. Biomet came to believe that Haber was in breach of the contracts and brought an action in Indiana state court. In response, Haber filed a complaint in the local federal court to compel arbitration. The federal court dismissed the complaint, concluding that venue for such an action was proper only in Chicago, the selected forum of the arbitration. Haber also moved to compel arbitration in the state court action. The state court compelled arbitration only on claims that arose under the 1999 agreement and ordered Biomet to identify which of its claims arose under that agreement. Haber did not appeal the state court decision -- Haber did appeal the federal court decision.

In their opinion, Judges Posner, Kanne and Wood affirmed. Before addressing the venue issue, the Court addressed res judicata. The Indiana court, although not resolving all matters, concluded that claims under the 1995 agreement were not arbitrable. The Court had to decide whether that ruling was of sufficient finality to be afforded res judicata effect. Indiana requires finality for issue preclusion. The factors a court should look at are whether: the parties were fully heard, the decision was rendered in a reasoned opinion, the order was appealable, and the order was appealed. The Court concluded that the state court’s order was final. The issue was before the court, was decided in a reasoned opinion and was appealable (though not appealed). Having found finality, the Court easily concluded that the order met the next four elements barring relitigation: a court of competent jurisdiction, an issue actually determined, identical parties, and a decision on the merits. The state court ruling was entitled to preclusive effect. The Court also briefly addressed the venue issue. Section 4 of the Federal Arbitration Act requires that, if an arbitration clause selects a forum for arbitration, a motion to compel the arbitration must be brought in a court in the forum selected. The venue decision was thus proper.

Tags: Opinion by Wood, Arbitration, Contract/Commercial Law, Issue Preclusion, Res Judicata, Venue

Benefit Plan Fiduciary Does Not Owe A Fiduciary Duty To Benefit Plan Administrator Under ERISA

Posted on November 24, 2009 by Michael Rigney

SHARP ELECTRONICS CORP. v. METROPOLITAN LIFE INSURANCE CO. (August 18, 2009)

Sandra Rudzinski was an active employee of Sharp Electronics when she began experiencing fatigue and headaches. As a Sharp employee, she participated in its disability plan. Under the plan, Sharp paid short-term benefits during an initial 180-day period and Metropolitan Life Insurance Company ("MetLife") paid long-term benefits. Sharp paid premiums to MetLife on behalf of its employees. Rudzinski received short-term benefits from Sharp and applied for long-term benefits from MetLife. MetLife denied her application, first on the ground that she had a pre-existing disability and later on the ground that she had not completed the 180 days of short-term benefits. Rudzinski sued MetLife under ERISA. During the litigation, MetLife told Rudzinski that MetLife also denied her benefits because Sharp stopped remitting premium payments after her employment ended. She added Sharp as a defendant. She accused Sharp of interfering with her benefits, violating fiduciary duties, and for telling her that she could maintain her benefits by obtaining a conversion policy. Sharp cross-claimed against MetLife, alleging breach of fiduciary duty, equitable estoppel and indemnity. Rudzinski voluntarily dismissed her claim against Sharp and the court entered judgment in her favor in her claim against MetLife, leaving only Sharp's cross-claim. Sharp filed an amended complaint, alleging breach of fiduciary duty under ERISA, indemnification, negligence, negligent inducement, negligent misrepresentation, abuse of process and common-law breach of fiduciary duty. The court granted MetLife's motion to dismiss, concluding that MetLife had not breached a fiduciary duty and that the state law claims were preempted by ERISA. Sharp appeals.

In their opinion, Judges Kanne, Rovner and Wood affirmed with respect to ERISA and vacated and dismissed with respect to the state law claims. In order to recover under its ERISA claim, Sharp had to prove that MetLife owed it a fiduciary duty, that it was involved in fiduciary functions when it told Rudzinski about Sharp's failure to pay premiums, and that it was seeking damages for losses suffered by the plan (as opposed to the company). Although the Court agreed that Sharp and MetLife both occupied fiduciary roles, it concluded that MetLife did not owe a fiduciary duty to Sharp. It also concluded that Sharp's only losses were its fees and expenses in defending the suit brought by Rudzinski, losses not recoverable under ERISA. With respect to the state law claims, the Court disagreed with the district court that they were preempted by ERISA. ERISA does not preempt state law claims that are not related to a benefit plan. Here, Sharp's claims relate to its contractual relationship with MetLife. Even though the subject of that relationship is a benefit plan, claims relating to the contract are not preempted. The Court nevertheless dismissed the state law claims based on the lower court's alternative ruling that it would not exercise its discretion to hear the state law claims, considering that the only federal claim was dismissed.

Tags: Opinion by Wood, Contract/Commercial Law, ERISA, Employee Benefits, Fiduciary Duty, Preemption

A Party Forfeits Its Objection To The Appointment Of An Arbitrator To Fill A Vacancy If It Does Not Raise Its Objection Under Section 5 Of The Federal Arbitration Act

Posted on November 16, 2009 by Michael Rigney

WELLPOINT, INC. V. JOHN HANCOCK LIFE INSURANCE COMPANY (AUGUST 7, 2009)

In 1996, WellPoint and John Hancock Life Insurance Company (Hancock) entered into a complex business transaction. The transaction was documented with a series of contracts, each of which contained an express arbitration clause. A dispute arose. WellPoint and Hancock both demanded arbitration. Pursuant to the arbitration procedure agreed upon, each appointed its own party arbitrator. When the party arbitrator’s could not agree on a third arbitrator, the AAA made the appointment, again as provided in the agreements. After over two years of extensive discovery and procedural disputes, WellPoint's party arbitrator resigned. Hancock objected but the panel, including Hancock's party arbitrator, approved the resignation. Hancock again objected when WellPoint proposed specific names for the vacancy. Hancock's party arbitrator proposed a compromise that WellPoint accepted -- and Hancock supported. Under the proposal, the panel suggested several candidates from which WellPoint could choose. Again, Hancock objected but also agreed that the replacement arbitrator met the prerequisites for service. The panel awarded WellPoint almost $30 million. WellPoint filed a petition to confirm the award -- Hancock cross-petitioned to vacate the award. The district court confirmed the award. Hancock appeals.

In their opinion, Judges Bauer, Ripple and Wood affirmed. The Court rejected Hancock's argument that the panel "exceeded their powers" under § 10(a)(4) of the Federal Arbitration Act when they selected a third arbitrator in a manner not provided for in the agreement. Although the Court conceded that the party's agreements did not provide a process for filling a vacancy, it noted that § 5 of the Act does. Section 5 expressly provides that a district court can appoint an arbitrator in the event of a vacancy were no provision exists in the party's agreement. Given the express remedy in § 5, the Court was unwilling to interpret the act in a way that would allow a party to forgo its § 5 remedy but get the same relief under § 10 after the arbitration is complete -- and it loses. Hancock's failure to avail itself of the remedy under § 5 amounts to a forfeiture of its challenge to the third arbitrator.

Tags: Opinion by Wood, Contract/Commercial Law, FAA, Federal Arbitration Act, Forfeiture

The Third Party Installation Of A Manufacturer's Component Was Not Covered By Its Express Warranty

Posted on November 16, 2009 by Michael Rigney

CARLISLE v. DEERE & COMPANY (August 7, 2009)

Carlisle and his partner operated an excavating business. In 2002, they purchased a used heavy-duty tree grinder called the Beast. The Beast already had a history. It was originally manufactured and purchased in 1999. The original owner replaced the engine with one manufactured by Deere & Co. From the moment Carlisle purchased the Beast, it was anything but. It lacked power, overheated, and generally underperformed. After many inquiries, Carlisle was eventually told to check the Performance Programming Connector (PPC), a component in the Beast's control mechanism. The PPC is also manufactured by Deere but sold separately from its engines. Carlisle discovered that a wire had been installed that limited the engine's rotations. Carlisle cut the wire with immediate effect -- the Beast was again worthy of its name. Carlisle sued Deere for breach of the warranty it inherited when it purchased the Beast. The district court granted summary judgment to Deere. Carlisle appeals.

In their opinion, Judges Kanne, Evans and Dow affirmed. The issue for the Court on appeal was whether the deficiency noted by Carlisle was covered by the warranty. The warranty covered "defective workmanship" but excluded from its coverage components that were not installed by Deere. Because the PPC is meant to be configured in a number of possible ways depending on the use of the engine it controls, it is manufactured and shipped by Deere in an unconfigured state. The Court concluded, therefore, that the unwanted wire could not be considered defective workmanship. Deere could still be liable if it installed, and configured, the PPC. The only admissible evidence in the record supported Deere's contention that it did not. Carlisle attempted to prove otherwise with his statement that the engine installer had told him that Deere configured the wiring. The Court concluded that the statement was classic hearsay and rejected Carlisle's contention that the installer was either authorized to make the statement or was an agent of Deere's under Rule 801(d).

Tags: Opinion by Kanne, Contract/Commercial Law, Hearsay, Warranty

Florida Resident May Not Maintain An Illinois Consumer Fraud And Deceptive Business Practices Act Suit In Illinois Against An Insurance Company With Its Principal Place Of Business In Indiana

Posted on November 12, 2009 by Michael Rigney

CRICHTON v. GOLDEN RULE INSURANCE COMPANY (August 5, 2009)

For almost ten years, John Crichton purchased group health insurance from Golden Rule Insurance Co. He did so as a member of the Federation of American Consumers and Travelers ("Federation"). He filed a class action in 2002, alleging violations of the Illinois Consumer Fraud and Deceptive Business Practices Act ("ICFA"), class allegations under other states’ consumer fraud statutes, RICO and common law fraud. The basis of each of the claims was that Golden Rule failed to disclose, when it sold its insurance, that renewal premiums escalated dramatically. The district court dismissed the claims for failure to state a cause of action. Crichton appeals.

In their opinion, Judges Kanne, Evans and Sykes affirmed. With respect to the ICFA count, the Court relied on the Illinois Supreme Court's decision in Avery. Avery held that a non-resident of Illinois did not have a cause of action under the ICFA unless the transaction at issue occurred primarily and substantially in Illinois. Crichton lives in Florida and Golden Rule has its principal place of business in Indiana. Golden Rule is incorporated in Illinois and maintains an office in Illinois but that is not enough to support an ICFA claim. The Court also agreed with the district court that, to the extent Crichton was asserting a claim under Florida's statute, it failed because Florida does not allow suits against insurers. The Court then held that an element of the common law claim of fraudulent concealment was a duty to disclose. No such duty existed on the part of Golden Rule, either through its relationship with Crichton or its partial disclosures. Finally, the Court concluded that the RICO claim was properly dismissed. A RICO claim must identify the "enterprise." Crichton simply describes the marketing relationship between Golden Rule and the Federation. That relationship is insufficient to amount to an enterprise on which a RICO claim can be based.

Tags: Contract/Commercial Law, Fraud, Opinion, Standing, Sykes"RICO, by

Specific Evidence That A Party Secured A Business Benefit Is Required To Establish Contract Performance - Speculation Is Not Enough

Posted on October 26, 2009 by Michael Rigney

TRADE FINANCE PARTNERS, LLC v. AAR CORP. (July 16, 2009)

Trade Finance Partners ("TFP") is, in essence, a broker that arranges business relationships for its clients. It charges a fee on any business it secures. AAR, an aviation support company, was a TFP client. The companies began working together in late 2004, and entered into a contract in January 2005. The contract allowed TFP to secure business from any "target accounts" which were identified by AAR in a written Request for Information ("RFI"). Just prior to and separate from its relationship with TFP, AAR responded to a Northwest Airlines Request for Proposal for an aircraft maintenance and repair contract. TFP alleges that AAR identified Northwest as a target account, even though they did not complete an RFI. Northwest and TFP did communicate in early 2005. In February, Northwest reissued its Request for Proposal and AAR updated its submission, all without the knowledge or involvement of TFP. Northwest selected AAR for the maintenance contract. TFP filed suit, alleging that its efforts caused Northwest to award the contract to AAR. The district court granted summary judgment to AAR. TFP appeals.

In their opinion, Judges Kanne, Wood and Sykes affirmed. The Court rejected each link in TFP's argument chain: a) the initial overtures between TFP and Northwest related only to a landing gear proposal and are not relevant to the maintenance contract inquiry, b) the record does not support TFP's assertion that there was a “barrier” of some sort between Northwest and AAR before its intervention, c) the record evidence does support the conclusion that Northwest rejected TFP's business model and independently awarded the maintenance contract to AAR, and d) the record does not support TFP's claims that it was responsible for Northwest's visit to AAR's facility or that the visit was relevant to the award of the contract. The Court conceded that it must construe the evidence and its inferences in TFP's favor -- but it found nothing but speculation. The Court also rejected TFP's claims that AAR's failure to complete an RFI was a breach of the contract, that AAR's intention not to fulfill its promise constituted fraud, or that it could recover in quantum meruit.

Tags: Opinion by Kanne, Contract/Commercial Law, Evidence, Fraud, Performance, Quantum Meruit

Clear Contract Language Is Nevertheless Ambiguous And Must Be Interpreted With The Help Of Extrinsic Evidence When Application Of The Clear Language Would Produce An Absurd Result

Posted on October 21, 2009 by Michael Rigney

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.

Tags: Opinion by Tinder, Ambiguity, Contract/Commercial Law, Extrinsic Evidence

City's Project Manager Has No Authority To Orally Modify Written Contract

Posted on October 20, 2009 by Michael Rigney

U.S. NEUROSURGICAL, INC. V. CITY OF CHICAGO (July 9, 2009)

The City of Chicago entered into a contract with Global Health Systems, Inc. ("Global"), the predecessor to U. S. Neurosurgical, Inc. Global agreed to design, install and manage a computer information system. The purpose of the system was to implement case management and billing for the City’s Department of Health. At the time of the contract, the system only processed hand-entered data. Global represented, however, that its system was capable of processing scanned data. The contract provided that Global would assist the City in assessing the scanning function and modify the hardware and software if the City so desired. The City did decide to include a scanning function. The implementation turned out to be much more difficult and costly than anticipated. Global billed the City for the extra work, even though it did not follow the correct contract procedures. When the City refused to pay, U.S. Neurosurgical sued. After a bench trial, the court concluded that the work was required by the contract and denied relief. Alternatively, the court concluded that the extra work was not properly authorized, was not in writing, and did not comply with the contract procedures. U.S. Neurosurgical appeals.

In their opinion, Judges Bauer, Evans and Williams affirmed. The Court stated that any party doing business with a government entity is presumed to know a contract cannot be enforced unless it meets statutory requirements and is authorized by an appropriate official. Here, the City's procurement officer was the only person authorized to approve the contract. The Court rejected the argument that the City delegated such authority to the project manager. In addition, the Court stated that both the contract and a statute prohibited an oral modification. Although the Court conceded that a written contract can be modified orally notwithstanding a contractual prohibition, the same is not true for a statutory prohibition. The Court also rejected U.S. Neurosurgical's claims for relief based on equitable estoppel and account stated.

Tags: Opinion by Bauer, Authority, Contract/Commercial Law, Oral Modification

Declaratory Judgment Act Claim Should Be Dismissed When Plaintiff Does Not Establish That Defendants Could Have Filed A Federal Claim

Posted on September 23, 2009 by Michael Rigney

DEBARTOLO v. HEALTHSOUTH CORPORATION (June 26, 2009)

Hansel DeBartolo was a surgeon and a limited partner in a surgical center in Joliet. The partnership agreement required DeBartolo to certify each year that he earned at least one third of his medical income from Medicare-approved procedures and he performed at least one third of those procedures at the surgical center in Joliet. The purpose of the certification was to qualify for a "safe harbor" in the Anti-Kickback Act, an act that makes criminal certain referral payments to physicians. When DeBartolo was unable to meet his certification obligations, the general partner exercised the contractual right to buy his interest. DeBartolo initiated an action for declaratory relief, claiming that the certification requirements of the partnership agreement violated the Anti-Kickback Act and, thus, were unenforceable. The district court dismissed for failure to state a claim. DeBartolo appeals.

In their opinion, Chief Judge Easterbrook and Judges Ripple and Rovner vacated and remanded. Although both parties agreed that the district court had jurisdiction, the Court engaged in its own jurisdiction analysis. Section 1331 grants the power to hear matters "arising" under federal law. Here, DeBartolo cites the Anti-Kickback Act as a defense to an anticipated contract claim of the defendant. But, the Court said, a federal defense does not satisfy the "arising under" requirement of section 1331. When a party brings an action under the Declaratory Judgment Act, he must establish that the defendants have a claim "arising under" federal law. The Court vacated the dismissal order of the district court and remanded with instructions to dismiss for lack of jurisdiction.

Tags: Opinion by Rovner, Contract/Commercial Law, Declaratory Judgment Act, Jurisdiction

Wilton/Brillhart Abstention Is Not Appropriate When Claims For Non-Declaratory Relief Are Independent Of The Claims For Declaratory Relief

Posted on September 22, 2009 by Michael Rigney

R. R. STREET & CO. v. VULCAN MATERIALS CO. (June 25, 2009)

R. R. Street has been the exclusive distributor for a dry cleaning solvent manufactured by Vulcan since 1961. Street alleges that Vulcan promised, in 1992, to and indemnify and defend Street for claims brought with respect to the solvent. Several lawsuits of that type are now pending against both Street and Vulcan. Several of Vulcan's insurers, including National Union, brought suit in California for a declaration that they are not required to defend Vulcan. National Union is also Street's insurer and has been defending Street in those lawsuits because Vulcan has refused to do so. Street and National Union sued Vulcan for breach of contract, promissory estoppel and indemnity. In addition, they asserted a claim for a declaration that Vulcan must defend and indemnify Street. Vulcan moved to either dismiss or stay the case pending resolution of the California case. The district court dismissed the case pursuant to theWilton/Brillhart doctrine. Vulcan appeals.

In their opinion, Judges Manion, Rovner and Tinder reversed and remanded. The Court noted that the relief provided in the Declaratory Judgment Act is discretionary. In Wilton and Brillhart, the Supreme Court held that district courts had much discretion in deciding whether to even entertain a declaratory judgment action. It is undisputed, the Court continued, that a district court can dismiss a complaint where only declaratory relief is requested. Here, however, plaintiffs seek both declaratory and non-declaratory relief. The Court noted that it had never ruled on that issue -- although several other courts of appeal had. The Fifth Circuit holds that Wilton/Brillhart is inapplicable when a non-frivolous claim for non-declaratory relief is present. The Second, Tenth and Fourth Circuits endorse similar results. The Ninth Circuit, on the other hand, rejects a bright line rule. It first asks whether non-declaratory claims exist that are independent of the declaratory relief requested. Independent claims are those that have a separate basis for jurisdiction and that can be resolved without the declaratory relief. If these independent claims exist, at least in the Ninth Circuit, the district court has almost no discretion to refuse to entertain them. The Court, upon reflection, thought the Ninth Circuit's approach was preferable and adopted a test whereby a district court should first determine whether the non-declaratory claims are independent of the declaratory claims. The Court defined "independent claim" as one which has its own jurisdictional basis and is viable without regard to the declaratory claim. If the non-declaratory claims are independent, Wilton/Brillhart doctrine should not be applied and the court should hear the claims. A court should also retain the declaratory claims for the sake of efficiency. Here, the non-declaratory claims are independent -- the district court would have diversity jurisdiction over the claims and declaratory relief is not a prerequisite for the resolution of the claims. The district court should have retained both the non-declaratory and declaratory claims.

Tags: Opinion by Manion, Wilton/Brillhart Abstention, Contract/Commercial Law, Declaratory Judgment Act, Indemnity, Insurance Law, Promissory Estoppel

Unambiguous Contract Language Is Enforced Without Reference To Extrinsic Evidence Even When Additional Contract Provision Suggests A Different Intent

Posted on September 3, 2009 by Michael Rigney

SMS DEMAG AKTIENGESELLSCHAFT v. MATERIAL SCIENCES CORPORATION (May 8, 2009)

Material Sciences Corp. ("MSC") is a large liquid-coating company. It pre-paints raw material used in commercial and industrial applications. During the 1990s, MSC began working with Terronics Development Corporation ("TDC"), a small research and engineering company that had developed a process for coating materials with a powder-based paint. In 1998, the parties entered into a technology agreement. Under the agreement, TDC assigned certain patents to MSC and MSC promised to purchase equipment and consulting services from TDC. By its terms, the agreement would expire in 2002 but could be renewed. After some initial successes, the technology did not pan out as expected. TDC covered some of its cost overruns by borrowing from MSC against its future profit expectations. The relationship of the parties came to an end in 2002. TDC sought millions in damages and a reassignment of its patents. The district court granted MSC's motion for summary judgment. TDC appeals.

In their opinion, Judges Cudahy, Flaum and Wood affirmed in part, reversed in part and remanded. The court first addressed TDC's damages claims: a) a $250,000 assignment fee, b) $143,000 in consulting services, and c) $1.7 million in fees for the years 2003 – 2006. The Court rejected each: a) the Court found no evidence in the record that MSC had renewed the agreement past 2002 and was liable for the $1.7 in annual fees for those years, b) the Court concluded that TDC had repudiated its obligation to provide consulting services and was therefore not entitled any payment, and c) the Court determined that MSC had credited the amount of the $250,000 assignment against a balance owed on TDC's note. The Court found that the lower court erred, however, in denying TDC the return of its patents. The contract on its face required MSC to return all patents to TDC upon termination of the agreement. Although another section of the contract required MSC to return the patents if MSC terminated the agreement (which it did not), the Court concluded that that provision was not enough to render the contract ambiguous and allow extrinsic evidence of the parties’ intent. The Court remanded because of confusion in the record regarding which patents TDC actually transferred and which patents MSC continued to possess.

Tags: Opinion by Cudahy, Ambiguity, Contract/Commercial Law

Lessee's Failure To Make Advance Royalty Payment Is A Material Breach Of The Lease, Even If No Royalty Payment Is Ultimately Due

Posted on August 7, 2009 by Michael Rigney

ILLINOIS INVESTMENT TRUST NO. 92-7163 v. AMERICAN GRADING CO. (April 8, 2009)

Resource Technology Corp. ("RTC") collected methane gas at landfills and converted the gas into energy. In 1995, RTC entered into a ten-year lease at the McCook landfill. RTC was to install and operate a methane collection and conversion system in exchange for royalties. Although the actual royalties were computed on the sale of electrical energy, the lease required RTC to pay a $100,000 royalty advance at the beginning of each year. RTC entered bankruptcy in 1999. The bankruptcy proceeded for several years. When the 2006 royalty advance payment became due, the trustee did not pay it. A few weeks later the owner of the landfill requested that the trustee refrain from entering the premises. In March of 2006, the trustee entered into a settlement agreement with some of RTC's creditors. Illinois Investment sought an order under the agreement compelling the estate to assume the McCook lease. The lessor objected, asserting that the ten-year lease term had expired. The court ruled that the lease had been extended for a five-year term. The lessor then sent a notice of termination of the lease. The bankruptcy court determined that the lessor validly terminated the lease as a result of RTC's failure to make the royalty payment. Illinois Investment appeals.

In their opinion, Judges Manion, Wood and Williams affirmed. The Court ruled that the failure to pay the advance royalty was a material breach and allowed the lessor to terminate the lease. Even if no royalties were generated during the year, as Illinois Investment argued, the Court concluded that the advance royalty was still required, as security for RTC's performance under the lease.

Tags: Opinion by Wood, Bankruptcy, Contract/Commercial Law

Under Wisconsin Law, A Contract Can Be Formed By Any Manner Showing Agreement, Including Conduct

Posted on July 21, 2009 by Michael Rigney

REMAPP INTERNATIONAL CORP. v. COMFORT KEYBOARD CO. (March 24, 2009)

ReMapp International Corp. ("ReMapp") and Comfort Keyboard Co. ("Comfort") had done business together for several years. ReMapp provided electronic materials, including circuit boards. In 2006, the parties engaged in oral and written communications regarding the purchase of several thousand circuit boards and several thousand microprocessors. When Comfort did not pay for the material, ReMapp brought a breach of contract action. At a bench trial, the court awarded damages for Comfort's failure to pay for the circuit boards. Although the court also found that Comfort had breached the contract with respect to the microprocessors, the court also found that ReMapp had not mitigated its damages and so awarded no damages. Comfort appeals.

In their opinion, Judges Flaum, Williams and Kapala affirmed. The Court cited Wisconsin law for the proposition that contract may be formed in any manner that shows agreement, including the conduct of the parties. The Court determined that the evidence at trial supported the conclusion that the parties had an oral agreement for both the circuit boards and the microprocessors. Because the contract was not in writing and exceeded $500, the Court addressed the Statute of Frauds exceptions relied on below. With respect to the circuit boards, the Court concluded that the evidence supported ReMapp’s argument that they were specially manufactured goods and therefore not subject to the statute. The Court found the issue with respect to the microprocessors moot, because the court below awarded no relief on that issue. Alternatively, it found that the evidence supported the fact that Comfort had received written notice of the order and made no objection within 10 days, therefore taking that contract out of the statute as well.

Tags: Opinion By Kapala, Contract/Commercial Law, Oral Agreement, Statute Of Frauds

Franchise Termination Is Upheld For Good Cause Under Maine Statute When Manufacturer Rebrands The Product

Posted on May 22, 2009 by Michael Rigney

FMS, INC. v. VOLVO CONSTRUCTION EQUIPMENT NORTH AMERICA, INCORPORATED (March 4, 2009)

In 1997, FMS and Samsung entered into a dealer agreement under which FMS was authorized to sell Samsung construction equipment in Maine. The next year, Samsung sold its construction equipment business to Volvo. Volvo acquired the division, the factory, the design, and the franchise relationships -- but not the name. It was only authorized to sell under the Samsung name for three years. Volvo did manufacture and sell equipment under the Samsung name. In short order, however, it redesigned the equipment and rebranded it with the Volvo name. It then terminated the agreements with most of the Samsung dealers. FMS and other dealers brought an action against Volvo, alleging a breach of contract and wrongful termination. The District Court granted summary judgment to Volvo. On appeal, the Seventh Circuit affirmed in large part but reversed with respect to FMS's Maine franchise law claim. The Court held that there was a genuine factual dispute about whether Volvo had "good cause" under the Maine statute to terminate the franchise. On remand, a jury found for FMS. Volvo appeals.

In their opinion, Judges Flaum, Rovner and Sykes reversed and remanded. The court first considered the Maine franchise law. That law requires "good cause" for a manufacturer to terminate a franchisee. A manufacture’s discontinuation of the production of the franchise goods constitutes good cause under the statute. Volvo argued that it's redesign and rebranding of the equipment constituted a discontinuation of the franchise goods. The Court turned its analysis to the statutory definition of “franchise goods.” It found that the definition centered on the grant of a license to use a trademark or trade name. Considering that definition in conjunction with the dealer agreement, which defined the target of the franchise to be “all Samsung construction equipment,” the Court concluded that the contract only covered equipment that was branded Samsung. The Court then addressed whether the contractual inclusion of "later improved or superseding models" in its definition of “product” was enough to include the Volvo equipment. The Court cited the contract interpretation principle that when a contract refers to items “including” other items, the latter must be a subset of the former. It therefore concluded that that phrase included only later models that were branded Samsung. Concluding that the franchise covered only Samsung branded equipment, the Court had little difficulty in finding that Volvo met the good cause requirement when it discontinued the production of Samsung-branded equipment. Volvo is therefore not liable for improper termination under the Maine franchise statute and was entitled to summary judgment in its favor.

Tags: Opinion by Sykes, Contract/Commercial Law, Franchise, Good Cause, State Statute - Other, Termination

A Party's Failure To Provide Notice Of Force Majeure Is Not A Waiver Of Its Right When The Contract Contains A No-Waiver Clause

Posted on May 21, 2009 by Michael Rigney

WISCONSIN ELECTRIC POWER COMPANY v. UNION PACIFIC RAILROAD COMPANY (March 2, 2009)

Wisconsin Electric Power Company (WEPCO) and the Union Pacific Railroad Company (UP) entered into a contract for the transportation of coal from Colorado coal mines to WEPCO during the years 1999 -- 2005. The rate that UP could charge WEPCO depended on whether UP was able to reload its empty railcars with shipments of iron ore destined for a steel mill in Utah. The contract provided that UP could charge the higher rate if "an event of force majeure" prevented it from reloading its rail cars with iron ore. The steel mill was bankrupt when the parties entered into the agreement, though still operating. It shut down in 2001, but did not close for good until 2004. UP declared an "event of force majeure" after the mill’s final closure in 2004. WEPCO sued UP for breach of contract, alleging that it was not liable for the higher rate under the contract and that UP failed to perform its contractual obligation to ship requested tonnage to WEPCO. The District Court granted summary judgment to UP. WEPCO appeals

In their opinion, Judges Posner, Ripple and Rovner affirmed. The Court first rejected WEPCO’s argument that UP waived its rights by not providing the “prompt notice” required by the contract. UP did not assert its rights upon the plant’s first closing. But the contract included a “no waiver” clause, which provided that a party did not waive a right by not insisting upon it. A no-waiver clause can itself be waived, said the Court, but only with clear and convincing evidence. Such evidence was not present in the case. The Court also noted the lack of any evidence that WEPCO was harmed by the late notice. There was no dispute over the existence of the plant’s closing and WEPCO presented no evidence that it could have developed less expensive alternatives had it been put on notice. The Court even noted that WEPCO saved $7 million due to UP’s decision not to give notice of force majeure in 2001.

The Court also rejected WEPCO’s claim that UP’s failure to ship 100% of its requested tonnage was a breach of the agreement. The contract required UP to make “good faith reasonable efforts” to meet WEPCO’s demand. The Court concluded that UP’s decision to ship to other customers, even ones who might be paying more for the shipments, did not constitute a lack of good faith. A lack of good faith requires evidence of lack of diligence, a willful failure to perform, abuse of power, or interference with performance – none of which were presented here.

Tags: Opinion by Posner, Contract/Commercial Law, Evidence, Force Majeure

Contract Of Indefinite Duration Is Terminable At Will In Illinois

Posted on May 19, 2009 by Michael Rigney

A.T.N., INC. v. MCAIRLAID’S VLIESSTOFFE GMBH & CO. (February 25, 2009)

Yossi Azaraf is the sole shareholder of A.T.N. Azaraf became interested in products manufactured by McAirlaid’s Vliesstoffe GmbH & Co. (“McAirlaid’s”) and its related enterprises. After some negotiations, Azaraf and McAirlaid’s entered into an agreement. The agreement provided that Azaraf wished to develop sales of McAirlaid’s in the U.S., would install manufacturing equipment in the U.S., and would use its best efforts to create a market for McAirlaid’s products in the U.S. In return, A.T.N. got the exclusive right to manufacture the products in the U.S. The agreement also provided that A.T.N.’s customers would “remain exclusive” to A.T.N. as long as A.T.N. purchased product from McAirlaid’s. A.T.N. never set up a manufacturing facility in the U.S. but did procure a customer. After about a year, McAirlaid’s notified A.T.N. that it would no longer provide the product. It then notified the customer that it would have to purchase the product directly from McAirlaid’s. A.T.N. brought suit, alleging breach of contract and unjust enrichment. The lower court granted summary judgment to McAirlaid’s. A.T.N. appeals.

In their opinion, Judges Manion, Evans and Tinder affirmed. The Court noted the dispute regarding the meaning of the “remain exclusive” clause but concluded that it need not decide that issue. Under Illinois law, a contract that lacks a duration term is generally terminable at will by either party. The agreement between A.T.N. and McAirlaid’s did lack such a term and is therefore terminable at will. The Court recognized one exception to that general rule – when a contract is terminable upon the occurrence of an event. Here, either party could end the contract simply by not performing. Either party’s non-performance is not the kind of specific event that would bring the contract out of the terminable at will category.

Tags: Opinion by Manion, Contract/Commercial Law, Terminable at Will

Evidence of Contract Negotiations, Even In Absence of Contract, Are Relevant To Claims Based On Quantum Meruit And Unjust Enrichment

Posted on May 18, 2009 by Michael Rigney

LINDQUIST FORD v. MIDDLETON MOTORS (February 25, 2009)

The Hudson brothers owned and operated Middleton Motors, Inc. (“Middleton”), a Ford dealership. The company was experiencing significant financial difficulties and sought assistance from Lindquist Ford, a dealership in a neighboring state. They discussed the possibility that Craig Miller, Lindquist’s manager, could help manage the operation. They also discussed the possibility of a cash infusion from Lindquist. In April 2003, the parties agreed that Miller would begin working at Middleton on a part-time basis and, in fact, he began working at Middleton on April 21. The parties had not yet reached an agreement although there was an understanding that Miller’s compensation would be based on net profits. Further discussions continued regarding a cash infusion by Lindquist and an understanding of Miller’s compensation but an agreement was never reached. Middleton fired Miller almost a year after he started – without any compensation having been paid or any cash infusion by Lindquist. Lindquist brought an action for quantum meruit and unjust enrichment. After a bench trial, the court found for Lindquist on both counts and awarded $152,332 in damages. Middleton appeals.

In their opinion, Chief Judge Easterbrook and Judges Sykes and Tinder reversed and remanded. The Court first noted some confusion in Wisconsin case law on unjust enrichment and quantum meruit and reviewed the fundamentals of the claims. Both quantum meruit and unjust enrichment are quasi-contractual remedies applicable only when there is no enforceable contract. Both are governed by equitable principles in Wisconsin. The elements of unjust enrichment are: a) a benefit to the defendant by the plaintiff, b) appreciation by the defendant of the benefit, and c) retention of the benefit where it would be inequitable to retain it without payment. The measure of damages is the value of the benefit. Quantum meruit, on the other hand, does not require a benefit to be conferred on the defendant and damages are determined by the reasonable value of plaintiff’s services. Its elements are: a) proof that the defendant asked for the services of plaintiff, and b) proof that plaintiff reasonably expected compensation. The Court also discussed the Wisconsin case law regarding implied-in-fact contracts, which are different from quantum meruit and unjust enrichment, because it believed the trial court’s confusion stemmed from it. With respect to the quantum meruit claim, the Court concluded that the district court improperly relied on Wisconsin implied-in-fact contract principles. For example, the court excluded evidence of the contract negotiations, deeming them irrelevant because it was not a contract case. The Court disagreed, holding that, although not a contract case, evidence of the negotiations was relevant to the reasonable expectations of the plaintiff. With respect to the unjust enrichment claim, the lower court did properly identify the elements of the claim but the Court determined that it misapplied the equity element. The lower court looked only at the fact that Miller worked for eleven months without pay. The Court concluded that the inquiry should be much broader – the parties had significant negotiations about their expectations for Miller’s compensation and the need for a cash infusion. Again, much of the relevant evidence was disallowed by the court.

Tags: Opinion by Sykes, Contract/Commercial Law, Evidence, Quantum Meruit, Unjust Enrichment

Complete Absence of Promise Prevents Investor From Converting Securities Action Into a State Law Breach Of Contract Case

Posted on May 18, 2009 by Michael Rigney

KURZ v. FIDELITY MANAGEMENT & RESEARCH CO. (February 23, 2009)

Kurz and Heinzl both invested in portfolios managed by Fidelity Management & Research Co. (“Fidelity”). Apparently, some Fidelity employees placed trades with Jeffries & Co. in return for kickbacks from Jeffries. The SEC initiated a proceeding under the Investment Company Act and the Investment Advisors Act. Fidelity and the SEC entered into a consent decree. Kurz and Heinzl thereafter filed a class-action suit in state court, alleging that the employees’ conduct resulted in a breach of contract by Fidelity. Fidelity removed to federal court on the basis that their failure to disclose the employees’ misconduct was a securities law issue. The district court denied Kurz’ motion to remand and entered judgment for Fidelity. Kurz appeals.

In their opinion, Chief Judge Easterbrook and Judges Sykes and Kendall affirmed. The Court referred to the Securities Litigation Uniform Standards Act of 1998 (the “Act”). The Act generally bars class actions based on state law which allege an omission of a material fact “in connection with the purchase or sale of a covered security. The Court noted that there are exceptions to the bar (like a derivative action) but Kurz did not invoke any exception. Instead, his position was that the claim was a contract claim -- not one for a misrepresentation or omission. The Court agreed that a true action for breach of contract would not be barred by the Act but concluded that Kurz could not maintain an action for breach of contract. The principal reason for his inability to do so was the complete absence of any promise made by Fidelity to Kurz.

Tags: Opinion by Easterbrook, Appellate Procedure, Class Actions, Contract/Commercial Law, Remand, Removal, Securities Law

A Failure To Object To a Statement Of Account Within a Reasonable Time Is Sufficient To Establish Account Stated

Posted on April 16, 2009 by Michael Rigney

DELTA CONSULTING GROUP v. R. RANDLE CONSTRUCTION (February 5, 2009)

R. Randle Construction Company and Ronald Randle (“Randle”) acted as a general contractor on a high school construction project. Disputes and delays resulted in Randle suffering a loss on the project. He retained Delta Consulting Group (“Delta”) to prepare and present a Request for Equitable Adjustment (“REA”). Delta estimated that the cost of their services would be $34,000. Delta prepared and presented an REA for $1.6 million. It was rejected. Delta prepared and submitted a second REA, this one for $1.7 million. Delta and Randle met with the school’s representatives to discuss the REA. Again, the school rejected the REA as unsupported by adequate documentary evidence. Randle met with the school once again, this time without Delta. He was again unsuccessful. Randle paid Delta’s periodic invoices through March 9, 2004, several days after this last meeting. Randle ultimately paid Delta a little more than $60,000 out of $144,000 billed. Randle and the school ultimately settled their dispute for $450,000. In October of 2004, Randle’s auditors sent a letter to Delta asking it to confirm an amount owed to Delta by Randle of $89,000. Delta replied to the letter – correcting the amount to $81,000. Randle did not object. When Delta sought to collect, Randle expressed his dissatisfaction with Delta’s services. Delta sued for the $81,000. Randle counterclaimed for breach of contract, alleging that Delta did not adequately present the REA. The district court granted summary judgment to Delta and awarded prejudgment and postjudgment interest. Randle appeals.

In their opinion, Judges Bauer, Wood and Tinder affirmed on the merits and remanded for recalculation of interest. The Court upheld the district court’s finding of an account stated. An account stated, said the Court, establishes the amount of a debt when two parties agree that an account exists representing the transaction between them. When one party states the amount and the other acquiesces by not objecting within a reasonable time, the amount is acknowledged and an agreement to pay is implied. The lower original estimate of Delta does not affect the outcome. Randle a) did not contract for the estimated amount, b) continued to pay invoices over the estimate, c) asked Delta to stop collection efforts while he tried to resolve the dispute through litigation, and d) asked Delta (through his auditors) to confirm the amount it believed it owed. Delta’s reply to the auditors’ letter and Randle’s failure to object is sufficient to create an account stated. The Court also rejected Randle’s argument that he was not personally liable. He never raised the defense in the district court and, in fact, counterclaimed in both his corporate and individual capacity. The Court concluded he waived any objection. The Court also agreed with the district court that Randle waived his breach of contract counterclaim, relying on the same facts and inferences – that Randle never objected to an invoice, never asked for the return of money, and continued to pay invoices. Finally, the parties agreed that the district court erred in applying Illinois, rather than federal, standards for postjudgment interest. The Court remanded for a recalculation.

Tags: Opinion by Bauer, Account Stated, Contract/Commercial Law, Waiver

Indemnitor Not Liable to Indemnitee For Consequences of Breach of Contract Entered Into Post-Indemnification

Posted on April 2, 2009 by Michael Rigney

HK SYSTEMS v. EATON CORPORATION (January 28, 2009)

IBP owned a large beef-processing plant in Nebraska. It wanted to replace its material handling system at the plant. Alvey and an Eaton Corporation (“Eaton”) subsidiary submitted the successful joint bid. During the contract negotiations, Eaton sold its subsidiary to HK Systems, Inc. (“HK”). The contract of sale contained broad cross-indemnities. A month later, IBP and HK entered into a contract for the purchase of the system. IBP was not satisfied with the speed at which the system operated and sued HK in state court. IBP alleged fraud, based on a system-speed representation made by Eaton before it sold its subsidiary, and breach of contract, based on a system-speed provision of the contract. The suit was settled for $8 million, $5 million from Alvey and $3 million from HK. HK brought this suit against Eaton for indemnification. Eaton argued that HK’s loss had been caused by HK’s own actions, not Eaton’s. The court originally denied summary judgment and judgment as a matter of law. A jury awarded HK $3 million. The court reconsidered the earlier motion for summary judgment and granted it. HK appeals.

In their opinion, Judges Posner, Ripple and Evans affirmed. The Court first noted that there was nothing improper in the district court’s reconsideration of it summary judgment ruling. Eaton had not preserved its argument that HK was responsible for its loss in its motion for judgment as a matter of law. Although the doctrine of the law of the case normally counsels against a judge reconsidering an earlier ruling, the district court does have discretion to do so when it is convinced that its earlier ruling was wrong and no harm will result. Here, the Court observed that the trial judge ruled on the meaning of the indemnification clause, which he considered a question of law. On reconsideration, he ruled that Eaton was not liable for HK’s loss because the contract between HK and IBP was an intervening cause. The Court agreed with the district court’s view on reconsideration, although it preferred framing the issue in terms of responsibility rather than cause. In any multiple factor case, responsibility is determined by reference to policy. Sometimes intervening acts are enough to shield one from liability – other times not. The Court referred to the contract between HK and Eaton. It contained mirror-image indemnification provisions. If Eaton was liable to HK for certain losses due to its representations, then HK was liable to Eaton for the loss it suffered because of its act – signing the contract – that occurred after the sale. The Court found that the district court’s resolution of this dilemma by adopting a narrow reading of the indemnity was consistent with the Court’s earlier decision holding that an indemnity will normally not apply, without explicit language, to a breach of contract claim for a contract entered into after the indemnity. The Court explained the policy reasons for such a holding. A party is typically in control of its contracts and performance. One should not be able to insure or acquire an indemnity to protect against liability for a breach when the one most able to protect against a breach is the very person insured. Here, HK should have made sure that its new subsidiary was capable of performing its contractual obligations to IBP before entering into the agreement. It cannot shift that liability to Eaton.

Tags: Opinion by Posner, Cause, Contract/Commercial Law, Intervening Cause, Judgment on the Pleadings, Law of the Case, Summary Judgment

Change In Corporate Ownership Does Not Breach Non-Assignment Clause in Contract

Posted on March 17, 2009 by Michael Rigney

INEOS POLYMERS v. BASF CATALYSTS (January 13, 2009)

In 1992, Amoco Chemical Company (“Amoco”) and Catalyst Resources, Inc. (“CRI”) entered into a long-term supply agreement for polypropylene catalyst. CRI agreed to build a facility for production of the catalyst – Amoco agreed to fund it over time with its purchase commitments. The contract was quite long and detailed. Article 17 was a Right of First Refusal – it provided that neither CRI nor its parent could dispose of CRI or the plant without first giving Amoco a right to purchase. Article 17 did not apply to a disposition to another company wholly owned by CRI’s parent. Article 19 dealt with assignments. It provided that neither party could assign the agreement without the consent of the other. Article 19 permitted an assignment, without consent, by Amoco to any company owned 50% or more by its parent and by CRI to any company owned 100% by its parent. Both companies underwent significant changes over the following fifteen years. Among the many changes on the Amoco side was its sale by its then parent in 2005 to INEOS US Intermediate Holding Company. The company was renamed INEOS Polymers (“INEOS”). Meanwhile, on the CRI side, the assets were sold in 1993 to Mallinckrodt and sold again in 1998 to Engelhard. On both occasions, Amoco waived its Article 17 right of first refusal. In 2006, BASF acquired Engelhard and renamed it BASF Catalysts (“BASF”). INEOS advised BASF and Engelhard that the transaction triggered its Article 17 right of first refusal. BASF disagreed. INEOS brought an action, alleging breach of contract and tortious interference. The district court dismissed the complaint. It held that the sale of Amoco to INEOS was an assignment to a party not owned 50% or more by Amoco’s parent and thus triggered Article 19. INEOS was, therefore, an impermissible assignee of the contract and could not sue to enforce it. INEOS appeals.

In their opinion, Judges Ripple, Evans and Sykes reversed and remanded. In order to affirm the dismissal, the Court began, it must conclude that the plain and unambiguous meaning of Article 19 is that each party was required to get the other party’s consent to any change in control. That it could not do. First, the general rule is that a change in ownership has no effect on a corporation’s contractual obligations and does not constitute an assignment of those obligations. Second, there is nothing in the contract, contrary to BASF’s argument, that contractually modified the general rule. In fact, quite the contrary: a) Article 19 does not even mention change in ownership, b) Article 17, which does explicitly address changes in ownership, would be rendered moot if Article 19 applied to a change in ownership, and c) the contract treats successors and assigns separately – treating every successor as an assign would be inconsistent. The Court could not conclude that the clear and unambiguous terms of the contract led only to the conclusion reached by the district court. The Court noted also that the course of performance of the parties was inconsistent with the district court’s conclusion. Every prior change in ownership was treated by the parties under Article 17, not Article 19. The dismissal of the complaint was error.

Tags: Opinion by Ripple, Change in Control, Contract Interpretation, Contract/Commercial Law, Right of First Refusal

Federal Jurisdiction Lies For a Suit to Enforce a Settlement Agreement Under the Rehabilitation Act

Posted on February 23, 2009 by Michael Rigney

HOLMES v. POTTER (December 31, 2008)

Robert Holmes was an employee of the United States Postal Service (“USPS”) in Minnesota from 1970 until 1992. He sued the USPS under Title VII of the Civil Rights Act of 1964 (“Title VII”). The case settled in 1994. Shortly thereafter, he returned to the employ of USPS in Indiana. In 2003, Holmes filed a complaint with the EEOC that the USPS failed to accommodate a disability, in violation of the Rehabilitation Act. In mid-2004, Holmes and USPS resolved their dispute at an EEOC mediation. The settlement agreement a) placed Holmes on twenty hours per week administrative leave/twenty hours per week leave-without-pay status through October 2004 and retroactive to January 2003, b) specified his salary, and c) required him to retire or resign in October 2004. Holmes filed this suit to enforce the settlement agreement, complaining that several actions taken by USPS after the settlement violated its terms. The district court granted summary judgment to USPS. Holmes appeals.

In their opinion, Judges Bauer, Williams and Sykes affirmed. Addressing their jurisdiction, the Court noted that a suit to enforce a settlement agreement requires an independent basis for federal jurisdiction. Because this is a suit to enforce a pre-determination settlement enforceable under Title VII, jurisdiction lies. The Court also stated that it would apply Indiana law, not federal law. The settlement of a federal claim is enforced like any other contract under state law. The Court recited some of the Indiana rules of contract construction: a) the goal is to give effect to the parties’ intent, b) extrinsic evidence is not allowed to create an ambiguity, and c) extrinsic evidence is not admissible to vary or add to the terms of an unambiguous contract. Holmes complains that USPS breached the settlement agreement by recalculating his retirement benefit, by improperly calculating the amount of his leave, and by deducting health insurance premiums. In large part, Holmes relied on statements allegedly made to him by the mediator before settlement. The Court concluded that the agreement was unambiguous, that USPS had complied with its requirements, and that none of the conduct Holmes complained of was even addressed in the agreement. There was, therefore, no breach. If Holmes was correct in any of his complaints, the Court advised, his remedy was not in a breach of contract suit.

Tags: Opinion by Williams, Contract Interpretation, Contract/Commercial Law, Enforcement of Settlement, Jurisdiction, Parol Evidence, Unambiguous

Local Girl Scout Council is a "Dealer" Under the Wisconsin Fair Dealership Law and Entitled to Presumption of Irreparable Harm

Posted on February 10, 2009 by Michael Rigney

GIRL SCOUTS OF MANITOU COUNCIL v. GIRL SCOUTS OF THE UNITED STATES OF AMERICA (December 15, 2008)

Juliette Low founded the Girl Scouts of the United States of America (“GSUSA”) in 1912. GSUSA is run by a national council and its board of directors. In its almost 100 years of existence, GSUSA has developed a large network of local girl scout councils. GSUSA first chartered Girl Scouts of Manitou (“Manitou”) as a council in 1950. As of 2005, there were over 300 local councils. Each council has a charter issued by GSUSA that defines the relationship between the two and grants the council the right to maintain scouting throughout its jurisdiction. In 2005, GSUSA announced a plan to consolidate councils. It planned to reduce the number of councils to just over one hundred. Each council would be larger and, GSUSA hoped, more efficient. The plan would have required Manitou to merge 60% of its territory with six other nearby councils and cede 40% of its territory to two other councils. Manitou decided not to go along. It filed suit in February 2008 against GSUSA. It alleged breach of contract, tortious interference and a violation of the Wisconsin Fair Dealership Law. It sought to permanently enjoin GSUSA from altering its territory. The district court denied Manitou’s request for a preliminary injunction without a hearing. The court held that Manitou had failed to demonstrate that it would suffer irreparable harm in the absence of the injunction. Manitou appeals.

In their opinion, Judges Posner, Kanne and Tinder reversed and entered the requested order enjoining GSUSA. The Court led off with the familiar two-phase test for a preliminary injunction. A movant must demonstrate: a) irreparable harm, b) inadequate legal remedy, and c) a likelihood of success. The movant who succeeds in that first phase enters a second phase in which the court balances the injury to the plaintiff, its likelihood of success, the possible injury to the defendant if the injunction issues, and the public interest. The court uses a balancing test in which the greater the plaintiff’s likelihood of success, the less the balance of harm needs to be in its favor. Applying that test, the Court first addressed irreparable harm, the only of the first-phase factors addressed by the district court. The Court disagreed with the court below. It found that Manitou’s loss of jurisdiction would severely affect its ability to generate revenue and harm its goodwill. That harm would not be rectified if a final judgment were entered in its favor and the loss of jurisdiction reversed. The Court also disagreed with the court below on the application of the Wisconsin Fair Dealership Law, under which a “dealer” in Manitou’s circumstances enjoys a statutory presumption of irreparable harm. The Court found that Manitou fit within the statutory definition of “dealer” in the act.

Having found that Manitou established irreparable harm and also noting that the record contained sufficient information to address the rest of the two-phase analysis without remand, the Court proceeded to do so. The Court found that the timing of and difficulty in calculating a damages award established that Manitou’s legal remedies were inadequate. On the likelihood of success factor, the Court noted that it only had to find a “better than negligible” chance of success to satisfy this prong. The Court evaluated only the Wisconsin Fair Dealership Law claim and found that Manitou satisfied that minimal standard.

In addressing the balancing portion of the test, the Court found a “drastic imbalance” in favor of Manitou. The Court noted that the national GSUSA program to consolidate regions was not even scheduled to be completed for a year. Any delay in the Wisconsin part of that plan would not lead to any harm to GSUSA. In addition, any harm to GSUSA could be rectified later. The Court did not feel the need to conduct a deeper analysis of Manitou’s likelihood to succeed given the imbalance of the harm.

Tags: Opinion by Kanne, Contract/Commercial Law, Injunctive Relief, Irreparable Harm, Wisconsin Fair Dealership Law, preliminary injunction

Sales Representative Is Entitled to Commissions on Sales He Did Not Procure If the Contract So Provides

Posted on January 29, 2009 by Michael Rigney

AA SALES v. CONI-SEAL (December 9, 2008)

Gerald Saltzman, owner and sole employee of AA Sales, and Coni-Seal started working together in the early 1980s. Coni-Seal manufactured automotive parts. Saltzman was a sales representative. Early successes led to a written agreement in 1987. The contract provided AA Sales with a 6% commission on sales to approved accounts and with 5 years of post-termination commissions on accounts previously sold by AA Sales. AA and Coni-Seal later agreed to negotiate commissions on an account-by-account basis. In 1994, Coni-Seal approved AA to solicit AutoZone, a large retailer of automotive parts. Shortly thereafter, their relationship began to sour. In 1995, Coni-Seal reassigned several accounts away from AA. In return for releasing the accounts, AA agreed to a monthly fee and a 2% commission on sales to the accounts it released. Coni-Seal authorized a second sales representative for AutoZone in 2003. Coni-Seal began selling to AutoZone in 2004. It paid no commissions to AA on these sales. AA filed suit for breach of contract and violation of the Illinois Sales Representative Act (“ISRA”). The district court granted summary judgment to Coni-Seal. AA appeals.

In their opinion, Judges Cudahy, Flaum and Rovner affirmed in part and reversed in part. The Court agreed with the district court that AA was not responsible for the AutoZone sales but disagreed that that ended the inquiry. The issue for the Court was whether the parties’ contract entitled it to commissions. The Court determined that the contract required Coni-Seal to pay a commission: a) during the life of the contract on all sales to approved accounts, whether AA was responsible for the sale or not, and b) after termination of the contract, only on sales to accounts for which AA was responsible for sales during the life of the contract. The Court proceeded to address the issue of whether Coni-Seal’s sales to AutoZone were “sales to approved accounts.” The parties’ versions of the development of the AutoZone account differed considerably. The Court reversed and remanded for trial.

With respect to AA’s claims on the 1995 oral contract, the Court held that it was not a new contract, but a modification of the termination provisions of the 1987 contract. Since it did not include a term of years to apply to the new post-termination commissions, the Court applied the five year term from the 1987 contract. Since Coni-Seal had already paid the commissions for over ten years, the Court affirmed the district court’s judgment on the 1995 contract.

Tags: Opinion by Cudahy, Breach of Contract, Commissions, Contract/Commercial Law, Illinois Sales Representative Act

Firm is "Debt Collector" Under Fair Debt Collection Practices Act When It Collects For Its Own Account a Debt That Was in Default When Acquired

Posted on December 8, 2008 by Michael Rigney

MCKINNEY v. CADLEWAY PROPERTIES, INC. (November 13, 2008)

Versia McKinney’s sewer backed up in her Chicago home in 1996 and caused substantial damage. McKinney took out a disaster assistance loan of $5200 from the Small Business Administration (“SBA”). At some point, McKinney stopped making payments on the loan. The SBA sold the loan. It eventually was sold to Cadleway Properties, Inc. (“Cadleway”). Cadleway sent McKinney a letter in September 2004. The letter informed McKinney that Cadleway had purchased the debt and that McKinney should make payments to Cadleway. The back of the letter contained a “Validation of Debt Notice” intended to comply with the Fair Debt Collection Practices Act (the “Act”). The notice stated that: a) McKinney owed $4,370.02, b) McKinney had 30 days to tell Cadleway that she disputed the debt, and c) Cadleway would assume the debt was valid if McKinney did not so dispute. At the bottom of the form, McKinney was asked to confirm the amount of the balance as stated by Cadleway or to state what she believed to be the correct balance. McKinney filed an action against Cadleway alleging that the notice letter violated the Act. She only sought statutory damages and attorney’s fees. The court below held that: a) the obligation was a “debt” under the Act, b) Cadleway was a “debt collector” under the Act, and c) the notice letter was confusing on its face to an unsophisticated consumer and therefore in violation of the Act. The court granted summary judgment to McKinney. Cadleway appeals.

In their opinion, Judges Manion (concurring in part and concurring in the judgment), Rovner (concurring in part, dissenting in part), and Sykes reversed and remanded. The Court stated that the purpose of the Act was to protect consumers from deceptive and unfair debt collection practices. It applies only to “debt collectors,” as that term is defined in the Act. The substantive section relevant to McKinney’s complaint is the requirement that a debt collector notify a consumer of her right to dispute the validity of, and receive a verification of, the debt. The Court first addressed Cadleway’s status as a “debt collector.” The majority on that issue (Sykes and Rovner) relied on the language of the Act and the Court’s prior decision in Schlosser to hold that Cadleway was a debt collector. The Court stated that the terms “debt collector” and “creditor” in the Act are mutually exclusive. The determinative factor in deciding which term applies to Cadleway is whether the debt was in default at the time Cadleway acquired it. Since McKinney’s debt was in default, Cadleway was a debt collector. With respect to the notice, the majority on that issue (Sykes and Manion) stated that the Act requires the debt collector to provide an initial communication with certain disclosures to the consumer. The Act requires no particular form but the disclosures must not be confusing to the “unsophisticated consumer.” Normally, the majority noted, the plaintiff would bring forth evidence of confusion. Here, McKinney introduced no extrinsic evidence of confusion. In fact, McKinney testified that she herself was not confused by the notice. The majority conceded that a notice letter could be so clearly confusing on its face that summary judgment could be granted. However, it did not believe that McKinney’s notice was such a case. The Court specifically addressed the balance confirmation request that the district court had found to be confusing. The majority found the notice to be clear. It simply asked McKinney to confirm the amount of the debt or dispute it. The notice complied with the Act. The Court remanded with instructions to enter judgment for Cadleway.

Judge Manion concurred in part and concurred in the judgment. Judge Manion agreed with the Court’s opinion on the validity of the notice letter. He noted that, given the outcome on that issue, the Court need not have resolved the “debt collector” issue. Having done so, however, Judge Manion wrote to express his disagreement with the resolution of that issue. The exclusionary language in the definition of “creditor” and the definition of “debt collector” in the Act refer to a person who collects a debt “for another” or “due another,” respectively. Cadleway was not collecting the debt for another. Cadleway purchased the debt and was collecting it for its own account. Judge Manion conceded that Schlosser held that the person holding the debt was a “debt collector” in similar circumstances. He pointed out, however, that the issue of collecting for another never came up. Judge Manion would not have been found Cadleway to be a “debt collector.”

Judge Rovner also wrote separately, concurring in part and dissenting in part. Judge Rovner concurred with the majority’s resolution of the “debt collector” issue without additional comment. She disagreed with the resolution of the validity of the notice letter, however. Judge Rovner found the letter “clearly confusing” on its face. She focused solely on the balance confirmation request section. Judge Rovner found the paragraph confusing, particularly to a consumer who may believe she owes something but has no records or other way of computing a different amount. The letter implies that the confirmation is obligatory, and also implies that failure to do so will damage one’s credit rating. Under the terms of the Act, the creditor can simply respond that she disputes the debt collector’s proffered total. Judge Rovner found the letter different from, and at least to some degree contrary to, the terms of the Act and therefore a violation of the Act.

Tags: Opinion by Sykes, Concurring Opinion, Consumer Protection Law, Contract/Commercial Law, Dissenting Opinion, Fair Debt Collection Practices Act

Alleged Oral Agreement is Not Enforceable Where Court is Unable to Identify With Specificity the Terms of Performance

Posted on December 4, 2008 by Michael Rigney

BUSINESS SYSTEMS ENGINEERING, INC. v INTERNATIONAL BUSINESS MACHINES CORP. (November 10, 2008)

International Business Machines Corp. (“IBM”) contracted with the Chicago Transit Authority (“CTA”) to install a new computer system. The CTA conditioned IBM’s contract on IBM’s use of “disadvantaged business enterprises” as subcontractors to complete at least 30% of the dollar value of the contract. IBM entered into an agreement with Business Systems Engineering, Inc. (“BSE”) under which BSE would be one of those subcontractors. IBM and BSE first entered into a contract with standard terms and conditions that would generally govern their relationship. The contract described the procedures whereby IBM would identify tasks to be done and authorize BSE to perform those tasks. It specifically limited IBM’s obligation to authorized projects. IBM also was required to submit a schedule to the CTA that described BSE’s involvement in the project. IBM's final schedule listed BSE as being “prepared to provide” $3,624,550 in services. It also stated that IBM and BSE would enter into a formal contract for the work. During the course of the project, IBM “advertised” its needs to one or more of the approved subcontractors. When a subcontractor presented a suitable candidate to perform the work, IBM followed the procedure set forth in the standard terms and conditions by presenting a statement of work and work authorization. These documents described the task and the effort required, described the condition under which the project would be considered completed, and authorized payment for the task. IBM authorized statements of work for BSE totaling approximately $2.2 million. BSE filed suit alleging that IBM breached its contract with BSE by not paying the full $3.6 million listed in the final schedule. The district court dismissed on the ground that the schedule was not binding, but merely a document describing the parties’ anticipated future contracts. BSE amended its complaint by alleging that other documents, in addition to the contract and schedule, “evidence[d] the written agreement.” The court denied IBM’s renewed motion to dismiss but later granted summary judgment to IBM. It found no written contract for $3.6 million, holding that the collection of documents submitted by BSE were too vague and incomplete to establish a binding contract. The court also rejected BSE’s oral contract argument. BSE appeals.

In their opinion, Judges Manion, Wood, and Tinder affirmed. The Court found that the original contract, in conjunction with the work authorizations and purchase orders it contemplated, was the only contractual relationship between the parties. That agreement was clear that IBM was only responsible for services provided in response to statements of work specifically authorized by IBM. The Court rejected BSE’s oral agreement theory as well. The Court noted that the only term of the oral contract alleged by BSE is the $3.6 million price term. For a contract to be enforceable, a court must be able to look at agreed-upon terms to determine the obligations of the parties. The Court found the description of the services to be provided for the $3.6 million in the schedule and proffered e-mail too vague and generic to form the basis of an enforceable agreement.

Tags: Opinion by Manion, Contract/Commercial Law

Res Judicata Bars § 1981 Claim Arising Out of Same Facts as Earlier Dismissed State Court Suit For Breach of Contract

Posted on December 4, 2008 by Michael Rigney

MUHAMMAD v. OLIVER (November 10, 2008)

The Dennis Muhammad Community and Economic Development Corporation (“MDC”) is a Chicago-based minority business enterprise. It entered into a joint venture agreement with CDA Management (“CDAM”). The purpose of the venture was to bid on a contract to install air conditioners in Chicago Housing Authority (“CHA”) buildings. Their bid was successful but the relationship quickly soured. In 2002, MDC sued CDAM and the related non-profit Chicago Dwellings Association (“CDA”). MDC alleged, in a state court action, that the defendants breached the joint venture agreement by not allowing MDC to do the work it had agreed to do. The court granted CDA’s motion to dismiss on the ground that CDA was not a party to the agreement. Later, on MDC’s own motion, the court dismissed MDC’s complaint against CDAM without prejudice. In 2007, MDC brought suit in federal court against CDA, CDAM, and Christine Oliver. Oliver was the CEO of both CDA and CDAM. MDC repeated the same allegations it had made in the earlier state court suit. It added an allegation under § 1981 that the defendants had used MDC as a “minority front” to increase their chances of success on the bid for the CHA contract. The district court dismissed CDA and CDAM on res judicata grounds and dismissed Oliver because she was not a party to the joint venture. MDC appeals.

In their opinion, Judges Cudahy, Posner, and Rovner affirmed. The Court observed that, although the two complaints relied to some extent on different legal theories, they did both arise out of the same facts. When a prior case arising out of the same facts is abandoned after an adverse ruling, as the Court concluded the state court suit was, the judgment generally bars a later suit. When there are multiple defendants, as is here, the bar against one operates as a bar against all, if they arose out of the same facts. The Court found that all three defendants were alleged to be in violation of § 1981 for the identical conduct. The Court concluded that the earlier suit barred the federal complaint against all defendants. The Court also rejected MDC’s argument that there had been a stipulation to reserve all rights upon dismissal. The Court concluded that there was no evidence, or even allegation in the complaint, of such an agreement. Finally, the Court rejected MDC’s claim that the lower court erred by dismissing on res judicata grounds when a) the defendants never raised it and b) it is not one of the FRCP 12(b) defenses that are allowed to be raised by motion . The Court held that the dismissal was proper. The application of res judicata eliminates unnecessary lawsuits. It can be raised by the court on its own motion. Also, when an affirmative defense like res judicata is shown on the face of the complaint, it can be dismissed on motion.

The Court did conclude that the court below erred in dismissing Oliver on the grounds that she was not a party to the joint venture agreement. A claim of tortious interference with contractual rights on account of race does state a cause of action under § 1981. Nevertheless, Oliver is still entitled to dismissal. First, the Court pointed to its prior discussion of res judicata. The dismissal of the state court complaint barred a cause of action against any defendant arising out of the same facts. Oliver’s does. Second, when liability rests on the doctrine of respondeat superior, as it does here, the plaintiff cannot bring an action against the “servant” (Oliver) when judgment has already been entered for the “master” (CDA, CDAM). Third, and most significantly, the Court concluded that the complaint did not actually allege tortious interference on account of race. The Court stated that the allegation that the defendants included MDC to gain a bidding advantage, and then cheated them out of that advantage, did not allege racial discrimination. The Court observed that it was greed, not discrimination, that drove the defendants’ decision. The district court’s result was correct.

Tags: Opinion by Posner, Civil Procedure, Civil Rights, Contract/Commercial Law, Res Judicata, § 1981

Insurer's Duty to Settle in Good Faith Does Not Extend to an Uninsured Policyholder in Illinois

Posted on November 24, 2008 by Michael Rigney

IOWA PHYSICIANS’ CLINIC MEDICAL FOUND. V. PHYSICIANS INSURANCE CO. (October 31, 2008)

Dr. Randall Mullin worked at a clinic in Geneseo, Illinois operated by the Iowa Physicians’ Clinic Medical Foundation under the name Iowa Health Physicians (“IHP”). Dr. Mullin provided anti-malarial therapy to his patient Dennis Goetz. Unfortunately, the treatment was not effective. Goetz contracted malaria and died. Goetz’ wife brought suit against Mullin and IHP. IHP provided malpractice insurance for Mullin through Physicians Insurance Company (“PIC”). PIC covered Mullin’s liability and defense up to $1 million. PIC did not insure IHP, however. Goetz’ widow offered to settle the case for $900,000 on more than one occasion before trial. When the defense’s own expert admitted in a deposition that Mullin’s treatment did not meet the standard of care, Goetz’ widow retracted the offer. At trial, the jury awarded Goetz’ widow $3.5 million in damages. PIC paid $1 million. IHP, under an agreement with Mullin, paid the rest. Mullin and IHP sued PIC in state court. They alleged that PIC breached its duty to settle in good faith. PIC removed the claim to federal court. The district court entered final judgment against IHP on the ground that PIC owed no duty to IHP. Mullin’s case remained pending. IHP appeals.

In their opinion, Judges Kanne, Evans, and Williams affirmed. The Court started with the “well-settled” recognition in Illinois of an insurer’s duty to settle in good faith. The duty arises from the covenant of good faith and fair dealing in an insurance contract. It arises when the insurer controls the litigation and the plaintiff seeks a settlement near the upper limits of the policy. The situation creates a conflict of interest for the insurer. Proceeding to trial presents little risk to the insurer and much risk to the insured. In fact, the Court observed that Mullin made out a good case for PIC’s breach of its duty. The Court had to consider, however, whether the Illinois Supreme Court would extend the duty of good faith to an uninsured policyholder, in addition to the insured himself. IHP argued that its contractual relationship with PIC supported such a duty. The Court pointed out that the Illinois Supreme Court has refused on numerous occasions to extend the insurer’s duty of good faith to contracts in general. Here, IHP could have purchased its own coverage. It chose not to. In addition, PIC did not control IHP’s defense. IHP could have settled the case before trial and limited its liability to Goetz’ widow. The Court concluded that the Illinois Supreme Court would not extend the good faith duty to settle to an uninsured policyholder.

Tags: Opinion by Evans, Contract/Commercial Law, Duty to Settle in Good Faith, Insurance Law

Customer is Not a Third-Party Beneficiary of Bank Employee's Agreement to Be Bound By Bank's Code of Ethics

Posted on October 27, 2008 by Michael Rigney

INTERACTIVE INTELLIGENCE, INC. v. KEYCORP (October 24, 2008)

For seven years, KeyBank provided foreign exchange currency conversion services to Interactive Intelligence, Inc. (“Interactive”). The parties operated without a written contract for three years. They signed a written agreement in 2001, but the agreement was silent on how Interactive was going to compensate KeyBank. Apparently, Interactive believed it paid a service fee on each transaction. In fact, KeyBank charged Interactive a percentage mark-up on each transaction. The amount of the mark-up increased over time. Adam Ravens was the KeyBank employee who managed the Interactive account. Ravens never told Interactive that he was applying a spread. Interactive, on a couple of occasions, was troubled by the difference between the market rates for the transactions and what they were paying KeyBank. They inquired but never received an adequate response. Interactive brought this action against KeyBank to recover more than $2 million in alleged overcharges. The district court granted summary judgment to KeyBank. Interactive appeals.

In their opinion, Judges Ripple, Rovner, and Evans affirmed. The Court first addressed Interactive’s principal argument that it was a third-party beneficiary of a contract between Raven and KeyBank. There was no employment contract between Raven and KeyBank of which Interactive could be a beneficiary. Although Raven did sign a Code of Ethics, which he allegedly breached, the Court observed that it would be against public policy for customers to be considered a third-party beneficiary of an ethics code. The Court was concerned that such an approach would encourage companies to weaken or eliminate codes of conduct. Thus, the district court properly granted summary judgment on this claim. Next, the Court upheld the court below on the negligent supervision, breach of fiduciary duty, and breach of contract claims. The Court held that: a) since Ravens had no duty to Interactive, KeyBank could not have been negligent, b) Ravens had no fiduciary duty to Interactive, and c) the oral contract that left the price term to be negotiated was too vague to be enforceable.

Tags: Opinion by Evans, Contract/Commercial Law, Third Party Beneficiary, Tort

Short Period of Incurring Costs In Reliance on Oral Contract Does Not Meet Indiana's "Unjust and Unconscionable" Test

Posted on October 23, 2008 by Michael Rigney

CLASSIC CHEESECAKE CO. v. JP MORGAN CHASE BANK (October 17, 2008)

Classic Cheesecake Co. (“Classic”) is a bakery that successfully generated some interest from several Las Vegas casinos and hotels in its products. It needed additional capital to fund its expansion. In July of 2004, Classic’s principals made a pitch to Dowling, a vice president at JP Morgan Chase Bank (“Bank”). After receiving documentation, Dowling assured Classic that its loan would be approved, provided that one of its principals repaid an old student loan. Dowling continued to provide assurances to Classic as late as September 19. Meanwhile, as early as August 19, Dowling’s superior at the Bank advised her that he was “still declining” the request for funds. Dowling finally advised Classic on October 12 that the loan was not approved. [These are allegations of the complaint, taken as true.] Classic brought suit under the Equal Credit Opportunity Act (“ECOA”) and for breach of contract under Indiana law. It alleged losses of more than $1 million. The district court resolved the ECOA claim in Classic’s favor (with only modest relief) but dismissed the breach of contract claim. Classic appeals.

In their opinion, Judges Posner, Flaum, and Evans affirmed. The Court first rejected Classic’s attempts to cast the controversy as one of simple promissory estoppel or fraud. It limited Classic to its breach of contract remedy. The Court turned to the Indiana statute of frauds. Although the statute of frauds requires that contracts to lend money be in writing, Indiana courts have created an exception. Oral agreements unenforceable under the statute of frauds will be enforced if a failure to enforce the agreement would create an “unjust and unconscionable injury and loss” that is independent of the benefit of the bargain. The Court’s task was to decide whether the allegations of Classic’s complaint could meet that standard. The task was not an easy one, given the “vague . . . and redundant” nature of the test and the relative dearth of case law. The Court explored some history of the exception to the statute of frauds:

The California Supreme Court’s (Traynor, J.) 1950 decision in Monarco that first allowed promissory estoppel as a defense to the statute of frauds but only if “unconscionable injury or unjust enrichment” would otherwise result
Restatement (Second) of Contracts section 139(1) which allows promissory estoppel as a defense if “injustice” is avoided but which Indiana has not embraced
The only two cases (Madison Tool & Die and Keating) that survived summary judgment under the Indiana formula

The Court noted that Monarco contained an element of unjust enrichment but neither Madison nor Keating did. Each of the cases contained significant “reliance” losses beyond the loss of the contract bargain, but the Court said that simple reliance losses (i.e., promissory estoppel) certainly does not meet the Indiana test. The Court held that the Indiana test, a compromise between the policy behind the statute of frauds and the desire to protect reasonable reliance, requires proof of "enhanced" reliance. The common thread among Monarco, Madison, and Keating was a time factor. In each case, the reliance continued for a longer time (20, 3, and 1.5 years) than the few months at issue for Classic. The Court also observed that Classic’s reliance may not have been totally reasonable. The Court concluded that Classic did not meet the enhanced promissory estoppel test and the complaint was properly dismissed.

Tags: Opinion by Posner, Contract/Commercial Law, Promissory Estoppel

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Seventh Circuit Court of Appeals commentary from Chicago lawyer & attorney Michael E. Rigney of Kelley Drye & Warren Law Firm, offering insights and analysis related to 7th Circuit Court opinions and Illinois federal courts.