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

SIERRA CLUB v. KHANJEE HOLDING (US) (August 24, 2011)

Franklin County Power wanted to build a coal power plant in southern Illinois. It applied to the Illinois Environmental Protection Agency for a permit in 2000. The EPA issued the permit. By its terms, the permit would become invalid if construction was not commenced within 18 months. Khanjee Holding became lead developer for the project in 2002. The project was delayed due to collateral disputes. In late 2004, the EPA determined, at least on a preliminary basis, that the permit had expired. Sierra Club filed suit to prevent construction of the power plant. The district court granted the motion for summary judgment and enjoined construction. The Seventh Circuit affirmed (opinion and intheiropinion), concluding that Sierra Club had standing to sue, that the defendants failed to commence construction within the required 18 months, and that the permit had expired. Sierra Club sought penalties and fees in the district court. Judge Gilbert (S.D. Ill.) imposed a $100,000 statutory penalty and awarded attorneys fees and costs. Khanjee appeals.

In their opinion, Seventh Circuit Judges Bauer, Ripple, and Williams affirmed. The Court first addressed Khanjee's challenge to subject matter jurisdiction under the Clean Air Act. It noted that it had decided the jurisdictional issue in the first appeal and that it had become the law of the case. It rejected Khanjee's argument that the doctrine did not appy to subject matter jurisdiction, although it recognized some earlier precedents that suggested as much. On the merits, the Court concluded that Khanjee had waived its constitutional violation claims and was left only with its claim that its relationship with the other original defendants was insufficient to support a penalty. The Court rejected that argument both on the law of the case doctrine and, alternatively, on the merits. Even if, as Khanjee argues, the Claim Air Act citizen suit provision allows an action only against an owner or operator, Khanjee exercised enough control over the project that it can be considered an owner or operator. With respect to the size of the penalty, the Court concluded that the district court considered all the appropriate factors and imposed a reasonable penalty. Finally, the Court found that the district court did not abuse its discretion in awarding fees and costs. It rejected Khanjee’s argument that a court should not award fees to "well-funded" parties.

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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.

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