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

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.

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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.

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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.

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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.

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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.

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GREEN v. THE UPS HEALTH AND WELFARE PACKAGE (February 10, 2010)

UPS negotiates collective bargaining agreements (CBAs) covering its employees who are members of the International Brotherhood of Teamsters (“IBT”). It actually negotiates with the international union and also directly and separately negotiates with some large locals, including Local 705. Under the 2002-2008 CBA with Local 705, UPS agreed to provide health care to Local 705 retirees. The benefit was outlined in the Summary Plan Description (SPD), which applied to all IBT retirees. The SPD set a monthly contribution for each retiree and provided that, if the cost of coverage exceeded a certain threshold, each retiree would share in the excess cost “by making an additional contribution.” It also stated that additional contributions would not be implemented until after the “current” CBA expired. The cost threshold was exceeded in 2006. In October 2007, UPS issued a Summary of Material Modification (SMM) advising all IBT retirees of that fact and imposing an additional contribution for each retiree effective January 1, 2008. Before implementing the additional contribution, however, UPS agreed with both the international and local unions to delay implementation until their respective CBAs expired. UPS sent a revised SMM to Local 705 retirees in December 2007 advising that increased contributions “well be effective” after the expiration of the “current” CBA. After the Local 705 CBA expired in mid-2008, UPS notified Local 705 retirees that it would implement an additional contribution effective February 2009. Local 705 retirees brought a class action, alleging that the collection of additional contributions violated the Plan and ERISA because a) the retirees were not sharing equally since the international retirees were not yet contributing, and b) the SPD stated that contributions would not be implemented until the expiration of the “current” plan and the Local 705 current plan now expired in 2013. The district court agreed with Local 705 on the first argument but agreed with the Plan on the second – and enjoined further collection of contributions until further order of the court. The retirees and the Plan appeal.

In their opinion, Judges Cudahy, Wood, and Evans affirmed. The Court agreed with the district court that the collection of contributions from Local 705 retirees only controverted the plain language of the Plan and was, therefore, arbitrary and capricious. The Court rejected UPS’ contrary interpretation of the “share equally” language and rejected its plea to consider extrinsic evidence under the doctrine of extrinsic ambiguity. Although the Court was more receptive to the use of the extrinsic ambiguity doctrine with respect to the meaning of “current” in the SPD, it concluded that it need not. Instead, it held that the December 2007 revised SMM modified the SPD and made it clear that the “current” CBA referred to was the 2002 CBA.

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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.

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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.

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

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

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

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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.

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