KR ENTERPRISES, INC., Plaintiff-Appellee, Cross-Appellant, υ. ZERTECK INC., doing business as BOAT-N-RV WAREHOUSE, et al., Defendants-Appellants, Cross-Appellees.
Nos. 20-2069 & 20-2155
United States Court of Appeals For the Seventh Circuit
ARGUED DECEMBER 8, 2020 — DECIDED JUNE 3, 2021
Philip P. Simon, Judge.
Appeals from the United States District Court for the Northern District of Indiana, South Bend Division. No. 3:16-cv-00708-PPS
Before EASTERBROOK, KANNE, and HAMILTON, Circuit Judges.
The defendant dealers have appealed, arguing they owe nothing for the RVs they received, at least not to this plaintiff. The secured creditor‘s assignee has cross-appealed, arguing that the setoffs should not have been allowed and that it is entitled to prejudgment interest. We affirm in all respects.
I. Factual and Procedural History
Evergreen Recreational Vehicles, LLC, manufactured RVs and sold the 21 RVs at issue here in the spring of 2016. Evergreen went out of business in June 2016, a couple of months after delivering those 21 RVs to several legally distinct but affiliated dealers, which all do business under “Boat-N-RV”
This lawsuit was filed originally in state court by 1st Source Bank, which was the principal lender to Evergreen and had a first-priority blanket security interest in all Evergreen assets, including accounts receivable like the amounts the dealers owed for these 21 RVs. The defendant dealers removed the case to federal court. While the case was pending, 1st Source assigned its rights to KR Enterprises, which had been the principal owner of Evergreen, after KR paid off Evergreen‘s debt to 1st Source. After the assignment, KR Enterprises was substituted as plaintiff, asserting claims through 1st Source‘s security interest in the collateral of Evergreen.
Following a bench trial, the district court found that KR Enterprises had standing as a secured party and had proven that the dealers had breached the contracts by failing to pay. The court ruled in favor of the dealers on several other theories of liability. On the breach-of-contract claims, the court allowed the dealers certain setoffs for warranty and rebate claims and denied prejudgment interest on the net amounts the dealers owed. The dealers have appealed, denying all liability. KR Enterprises has cross-appealed on the setoffs and the denial of prejudgment interest.
The district court properly exercised jurisdiction under
We consider in Part II the defendant dealers’ argument that KR Enterprises does not have proper standing as a secured party. Part III addresses both sides’ challenges to the district court‘s treatment of the dealers’ claims for warranty repairs and rebates owed on earlier RV sales, as well as the denial of prejudgment interest.
II. Plaintiff‘s Standing as a Secured Party
In 2009, Evergreen and its lender 1st Source Bank signed an agreement for a secured loan. In exchange for the loan and line of credit, Evergreen granted 1st Source a first-priority blanket security interest in all assets, including accounts receivable. Under the terms, nonpayment resulted in default, and if default continued, 1st Source could “exercise all rights and remedies provided in this Agreement....”
In 2018, while this suit was pending, 1st Source assigned its rights as a secured lender to plaintiff KR Enterprises in return for a payment by KR Enterprises that satisfied Evergreen‘s debt to 1st Source. (KR Enterprises had been the principal owner of Evergreen and its owner, Kelly Rose, had personally guaranteed Evergreen‘s debt to 1st Source.) Defendants argue that 1st Source and KR Enterprises timed and documented the transaction so clumsily as to wipe out both parties’ security interest in the Evergreen accounts receivable. The district court rejected that audacious theory, and so do we.
Defendants seize on the fact that KR Enterprises made its big payment to 1st Source on the Evergreen account on March 2, 2018, while 1st Source did not execute its General Assignment of its rights as a secured lender until two months later, on May 1, 2018. As defendants see things, after the March 2, 2018 payment, 1st Source recorded the debt owed by Evergreen as zero, effectively wiping out both the debt and the accompanying security interest that allowed it to sue. By May 1, 2018, goes the theory, when 1st Source signed the General Assignment to KR Enterprises, 1st Source no longer had any security interest to assign, making the assignment ineffective.2
Testimony from 1st Source vice president Richard Rozenboom and KR‘s Kelly Rose made unmistakably clear that KR Enterprises and 1st Source understood and intended that 1st Source gave the General Assignment in exchange for KR Enterprises’ payment of Evergreen‘s debt to 1st Source. Those parties did not close that exchange at one time at one conference table, but the intent to exchange was clear and perfectly valid.
“Under Indiana law, a determination of whether or not an assignment has been made focuses on the intent of the parties. Any actions or words which show an intention of transferring the [chosen] action to an assignee for valuable consideration are sufficient.” Crowel v. Admin. of Veterans’ Affairs, 699 F.2d 347, 352 (7th Cir. 1983) (cleaned up); see also 2A Anderson, U.C.C. § 2-210:24 (3d ed. 2020) (“The intent of the parties to make an assignment is a question of fact to be derived not only from the instrument executed by the parties, but also from the surrounding circumstances.“).
In response to the testimony from Rozenboom and Rose explaining that this was all one transaction that took a while to close, the dealers invoke the parol evidence
The correct response to the dealers’ argument is that even where the parol evidence rule might apply to a dispute between the parties to the unambiguous written contract, strangers to that contract are not entitled to invoke the rule. In Amici Resources, for example, the court explained: “the inadmissibility of parole evidence to vary the terms of a written instrument does not apply to a controversy between a third party and one of the parties to the instrument.” Id. (citations omitted).
The stranger-to-the-contract exception is well-established in Indiana law. It seems to be litigated most often in disputes over litigation releases but applies to other sorts of contracts as well. See, e.g., State Highway Comm‘n v. Wilhite, 31 N.E.2d 281, 282 (Ind. 1941) (holding that “the general rule that resort may not be had to parol evidence ... does not apply to others than the parties to the instrument,” and permitting extrinsic evidence where injured employee sued a third-party employer not a party to the original release); White v. Woods, 109 N.E. 761, 763 (Ind. 1915) (“The relations between two persons who have contracted in writing may be brought in issue collaterally in a suit between others. In such a case the parol evidence rule does not apply. The facts may be proved as they exist, regardless of the oral evidence varying the terms of any writing between the parties.“) (quotations omitted); Burns v. Thompson, 91 Ind. 146, 150 (Ind. 1883) (“[A]side from the question of fraud, while a dispositive instrument can not be varied by parol, so far as the parties to it are concerned, yet, in respect to strangers, written instruments, usually have no binding force, and the familiar rule against the variation of such instruments by parol evidence applies only to parties and privies, and does not forbid their being attacked and contradicted by parol by strangers to them.“) (citations omitted); Depew v. Burkle, 786 N.E.2d 1144, 1148-49 (Ind. App. 2003) (considering parol evidence about a release of original tortfeasor to determine whether patient also intended to release third-party doctor); Cooper v. Cooper, 730 N.E.2d 212, 216 (Ind. App. 2000) (applying stranger-to-the-contract exception to dispute over land sale and concluding that “the inadmissibility of parol evidence to vary the terms of a written instrument does not apply to a controversy between a third party and one of the parties to the instrument“) (citations omitted).
The dealers respond to the stranger-to-the-contract cases by saying they do not apply if the written contract is unambiguous, citing Evan v. Poe & Assoc., Inc., 873 N.E.2d 92, 103-05 (Ind. App. 2007). This suggested limit would effectively nullify the stranger-to-the-contract exception, of course, since the general rule against parol evidence applies only when the contract is unambiguous. We rejected the dealers’ suggested limit in Deckard v. General Motors Corp., 307 F.3d 556 (7th Cir. 2002):
Indiana already recognizes that parol evidence can be considered if the contract is ambiguous. See, e.g., Huffman [v. Monroe County Community Sch. Corp., 588 N.E.2d 1264, 1267 (Ind. 1992)] (holding that where “contradictory references
cloud the intent of the document parol evidence may be utilized to determine the parties’ true intentions respecting the document‘s application“). The “stranger to the contract” exception is an additional exception to the parol evidence rule. For example, in Wilhite, despite the plain and unambiguous language of the contract, the court held that parol evidence could be used to determine the intent of the parties. Wilhite, 31 N.E.2d at 282. While commentators have criticized the “stranger to the contract” exception to the parol evidence rule, see 13 A.L.R.3d 313, § 2c (arguing that the parol evidence rule should apply both to strangers and to parties), Wilhite, White and Burns have not been overruled in Indiana.
To avoid the stranger-to-the-contract exception, the dealers here cite a case we decided in 1993, some years before Deckard. In McWaters v. Parker, 995 F.2d 1366 (7th Cir. 1993), the parties disputed the scope of a settlement that released one of several joint tortfeasors. We applied Indiana law and affirmed summary judgment enforcing the unambiguous language of the release. Id. at 1370, 1375-76. We declined to look beyond the four corners of the release agreement, finding that “the language of the form clearly demonstrates the existence of adequate consideration and a meeting of the minds.” Id. at 1375. In McWaters, however, we did not address the “stranger-to-the-contract” line of cases, nor did the parties’ briefs even cite those cases. Deckard thus represents our latest application of the “stranger-to-the-contract” exception, in which we expressly rejected the attempt to limit the exception to ambiguous written contracts, for that would be no exception at all.
Complicating matters, however, one decision by the Indiana Court of Appeals noted that it was “not bound by the Seventh Circuit‘s interpretation of Indiana law” in Deckard and instead found McWaters “persuasive.” Evan, 873 N.E.2d at 103-04. In Evan, homeowners had a dispute with their insurance company. They resolved that dispute by signing a settlement agreement that released the homeowners’ claims against the insurance company and its “agents.” The homeowners then sued the insurance agency through which they had purchased the policy, asserting that the agency had been negligent in omitting key information about their prior claims against other insurers, leading to the dispute with the insurer. The Indiana Court of Appeals affirmed summary judgment for the agency based on the release, despite testimony from the homeowners and their attorney that they had not intended to release the negligent agency. The court held: “in the context of a controversy that exists between a third party and one of the parties to the instrument, when a release is unambiguous we need not look at any other evidence to determine the parties’ intent.” Evan, 873 N.E.2d at 104.
Evan and McWaters do not persuade us to depart from our express holding in Deckard. McWaters did not address the “stranger-to-the-contract” issue at all, and we find it difficult to reconcile Evan‘s treatment of this issue with the Indiana Supreme Court cases and other precedents that we relied upon in Deckard. In applying state law, our task is to predict how we think the state supreme court would rule on the issue if it were presented now. We ordinarily give great weight to decisions of intermediate appellate courts, but where one decision by an intermediate court seems to stray from the established course of the state‘s law, especially as written by the state supreme court, we need not follow it. See Luna v. United States, 454 F.3d 631, 636 (7th Cir. 2006) (district court erred by following recent decision of intermediate state court that departed from state supreme court precedent); see generally Anderson v. Gulf Stream Coach, Inc., 662 F.3d 775, 782-83 (7th Cir. 2011) (“In deciding questions of state law, decisions of the state appellate courts control, unless there are persuasive indications that the state supreme court would decide the issue differently.“) (citation omitted); Allstate Ins. v. Menards, Inc., 285 F.3d 630, 637 (7th Cir. 2002) (in absence of prevailing authority from highest state court, federal court can give “great weight to the holdings of the state‘s intermediate appellate courts” but can deviate “when there are persuasive indications that the highest court of the state would decide the case differently from the decision of the intermediate appellate court“). Moreover, releases of joint tortfeasors pose some special problems for the state courts that handle by far the greater volume of tort cases. So we do not decide here that Evan states Indiana law incorrectly for such cases. It is enough to say that its treatment of the release problem should not be extended to a case like this one, involving an assignment of a security interest in exchange for payment of the underlying debt. Applying the Evan approach to this case would effectively nullify Indiana‘s established “stranger-to-the-contract” exception to the parol evidence rule.
The district court did not err by admitting and then crediting the relevant testimony from Rozenboom and Rose and recognizing that KR Enterprises paid off the Evergreen loan in return for assignment of 1st Source‘s security interest. The district court thus correctly found that the parties did not intend to erase the security interest at the heart of the transaction and that the General Assignment transferred a priority security interest in the RVs from 1st Source to KR Enterprises, making KR Enterprises the proper plaintiff here.
III. “Material” Breaches and Setoffs
To avoid paying for the 21 RVs they received, the defendant dealers also argue that Evergreen was the first to breach the relevant contracts. The dealers rely primarily on Evergreen‘s failure to pay the dealers promised rebates and warranty obligations on earlier RV sales. The dealers argue further that Evergreen breached its contracts with them by delivering defective RVs and by shutting down its business, leaving the manufacturer‘s warranty worthless. The dealers contend that all of these actions relieve them of any obligation to pay the purchase prices for the 21 new RVs. The district court rejected these arguments. It concluded that the solution was to hold the dealers liable for the purchase prices of the RVs but to allow them setoffs for the rebates and warranty payments that Evergreen owed them, effectively netting out the parties’ respective obligations. That was the right solution.
A. Voiding the Manufacturer‘s Warranty
In this set of issues, we first address the dealers’ arguments that they are not required to pay for the RVs because they were defective when they were delivered. The dealers say the defective deliveries were the first material breaches and that those breaches excuse them from paying for the RVs at all. We need not address some obvious legal questions posed by this theory, such as what types of defects in a complex product allow a buyer to rescind the sale rather than have the manufacturer repair the product under a warranty. See, e.g., Mathews v. REV Recreation Group, Inc., 931 F.3d 619, 622-24 (7th Cir. 2019) (finding no breach of express
The dealers also argue that Evergreen breached the sales contracts for these 21 RVs by shutting down its business so that it would no longer honor the manufacturer‘s warranty. Again, the dealers’ theory is that those were “first breaches,” relieving the dealers of their obligation to pay the purchase prices. And again, the remedy they seek does not fit the alleged breaches. But the more basic factual problem is that Evergreen‘s failure to honor its manufacturer‘s warranty after its June closure could not have been a “first” breach on RVs delivered in April and May. The dealers breached first by failing to pay.
B. Warranty and Rebate Obligations
As a part of each RV sale, Evergreen promised rebates to dealers and offered a manufacturer‘s warranty in which it agreed to pay the dealers to make covered repairs. In the first quarter of 2016, however, Evergreen failed to pay the defendant dealers rebates and warranty repairs for 45 RVs it had previously sold to them. The total amount that Evergreen owed these dealers was $160,059. Despite these arrearages, in the spring of 2016, the dealers ordered the 21 additional new RVs from Evergreen, with invoices totaling $808,663. In June 2016, the dealers terminated their dealership agreements with Evergreen and instructed their lender not to make any more payments to Evergreen for the RVs that had been delivered.
Both sides overreach in their arguments about the effect of these debts that Evergreen owed on other RVs. The dealers contend that Evergreen‘s failure to make timely payments entitles them to keep (and resell) the 21 new RVs without paying for them. KR Enterprises contends that it has no obligation to give the dealers any credit for the amounts Evergreen owed them. The district court rejected both positions, finding that the rebate and warranty arrearages did not relieve the dealers of their obligations to pay for the 21 new RVs but that they were entitled to setoffs.
The dealers base their position on the theory that the entire account between Evergreen and each dealer was the relevant contract, so that an earlier failure to pay a rebate or a warranty obligation amounted to a first “material” breach of
While we affirm the district court‘s judgment in its entirety, there are two points on which we disagree with its legal analysis. The first was the district court‘s finding that Evergreen‘s failures to pay rebates and warranty obligations were not “material” breaches of the contracts for the sales of the earlier RVs. We disagree. A manufacturer‘s promises to pay its dealers rebates and the costs of warranty repairs easily qualify as material terms of the sales contracts, and such breaches call for remedies. The district court‘s ultimate handling of those debts, however, was exactly right, by allowing the dealers to set those debts off against the amounts they owed Evergreen (and now KR Enterprises).
“Material” is a slippery term in the law in general and in contract law more specifically. It is best to get beyond labels and focus on consequences and remedies, as we try to do here. To explain, courts say in broad terms that a material breach is one that goes to the “heart” of the contract. State v. Int‘l Bus. Machines Corp., 51 N.E.3d 150, 158-59 (Ind. 2016). To determine whether a “failure to perform a contractual duty amounts to a material breach, Indiana has adopted the view of the Restatement (Second) of Contracts, which considers several factors [, including...] the extent to which the injured party will be deprived of the benefit which he reasonably expected....” Dick v. Conseco, Inc., 458 F.3d 573, 578 (7th Cir. 2006); Int‘l Bus. Machines Corp., 51 N.E.3d at 160 (instructing courts to revert to common-law Restatement factors where a contract is silent as to materiality); Restatement (Second) of Contracts § 241 (1981) (listing significant circumstances to determine whether a failure is material).4
Price is of course a material term of a sales contract, and a promised rebate directly affects the price. See, e.g., Adams Apple Dist. Co. v. Papeleras Reunidas, S.A., 773 F.2d 925, 929 (7th Cir. 1985) (applying Illinois law; failure to pay rebates constituted material breach of contract for sale of cigarette rolling papers). Warranties of goods are also material terms, as any new-car buyer can appreciate, and that holds true in sales by manufacturers to dealers, too. See
A manufacturer‘s breach of one warranty or rebate claim would ordinarily seem easy to remedy with a repair or a payment of the amount due, without broader legal consequences for the parties’ relationship. But a manufacturer‘s repeated breaches of warranty or rebate claims could so undermine a dealer‘s confidence in the manufacturer‘s products, promises, or credit that they would “substantially impair the value of the contract” to the dealer. We can assume here for purposes of argument that the combined effects of Evergreen‘s earlier warranty and rebate breaches would have met that standard and given the dealers sufficient cause to terminate any dealership contracts with Evergreen and to refuse delivery or cancel orders they had placed earlier. See, e.g., United States v. Under Seal, 902 F.3d 412, 418 (4th Cir. 2018) (where one party commits a material breach, the non-breaching party may elect to terminate the entire agreement), citing 23 Williston on Contracts § 63:8 (using language of “total” breach). Corbin makes the same point using the language of “material” breach. 10 Corbin on Contracts § 53.4, n.1 (2021) (“When one party to a contract materially breaches the contract, the other party is—if it so chooses—discharged and freed of any obligation to perform and may at that point sue for damages.“).
The problem with the dealers’ position here is not materiality but the remedy they claim for the earlier warranty and rebate breaches. They claim the right to keep the new RVs without paying for them. That‘s ridiculous. The remedy they demand simply does not fit the terms of the breaches and would violate the most basic premise of contract remedies. It would put the dealers in a much better position than if Evergreen had honored all of its warranty and rebate promises. “One of the broad remedial goals of the Uniform Commercial Code is that the aggrieved party be put in as good a position as if the other party had fully performed, but not in a better position.” General Motors Corp. v. Sheets, 818 N.E.2d 49, 54 (Ind. App. 2004);
C. Setoffs
Both sides attack the district court‘s sensible handling of these issues, which was to allow the dealers to set off the amounts Evergreen owed them against the amounts they owed to Evergreen (and thus KR Enterprises) for the 21 disputed RVs. KR Enterprises argues there was no legal basis for any setoffs. The dealers argue that the setoffs were not large enough because they did not account for what the dealers say were diminished values of the new RVs due to the voided manufacturer warranties.
1. Legal Basis for Setoffs
As a preliminary matter, plaintiff KR Enterprises contends there is no legal basis for any setoffs in this case. KR Enterprises argues that the security interest in the 21 RVs was perfected under
Section 9-404 of the Uniform Commercial Code regarding the rights of an assignee provides in relevant part that
the rights of an assignee are subject to: (1) all terms of the agreement ... and any defense or claim in recoupment arising from the transaction that gave rise to the contract; and (2) any other defense or claim of the account debtor against the assignor which accrues....
Courts commonly apply setoffs to settle outstanding debts owed in both directions. See generally Coplay Cement Co. v. Willis & Paul Group, 983 F.2d 1435, 1440 (7th Cir. 1993) (discussing history of setoff doctrine and concluding that setoffs outside of bankruptcy are subsets of permissive counterclaims; holding that since amounts claimed were exceeded by setoff debts, plaintiff subcontractors were entitled to nothing); In re U.S. Aeroteam, Inc., 327 B.R. 852, 865 (S.D. Ohio 2005) (“Generally, courts are in agreement that an assignment of rights can create mutuality for setoff purposes.“), citing Schechter v. ACME Screw Co. (In re Assured Fastener Prods. Corp.), 773 F.2d 105, 107 (7th Cir. 1985) (bankruptcy proceeding; setoffs allowed against assigned receivables).
On this issue, this case is similar to InfinaQuest, LLC, where one party purchased
To avoid the setoffs, KR Enterprises claims that its security interest was perfected under
If
We conclude that
2. No Setoffs for Diminished Value
The district court found “no legal theory for [the dealers‘] claimed entitlement to setoff for diminished value of the RVs due to Evergreen‘s going out of business and the loss of a manufacturer‘s warranty.” This is the second legal point on which we disagree with the district court, but it also does not change the bottom line here. There is a legal basis for setoffs for diminished value, but the dealers failed to establish a factual basis for the larger setoffs they seek here.
We have acknowledged that “impairment of the marketability of an asset reduces its value, since sale value is a dimension of value even when hypothetical.” Transcraft, Inc. v. Galvin, Stalmack, Kirschner & Clark, 39 F.3d 812, 820 (7th Cir. 1994) (concluding that jury should have been asked to estimate how much sale value was diminished by lack of insurance
The district court went on to conclude correctly, though, that even if the dealers’ claims for setoffs for diminished value had a legal basis, their proof was inadequate. The dealers argue that the court improperly “imposed an expert evidentiary standard for diminished value setoffs.” The argument misunderstands the district court‘s decision.
The district court did not require expert evidence. It only noted, fairly, that the dealers “did not present expert testimony on the subject, but merely relied on the testimony of its General Counsel ... who offered nothing more than vague testimony about discounted prices on Evergreen‘s RVs post-closure.” While the district court addressed in its opinion only two of the four lay witnesses put forward by the dealers, it considered the evidence presented and simply viewed it as unpersuasive.5 We cannot disagree with the district court‘s conclusion: “These cobbled-together bits of indefinite anecdotal testimony are an insufficient basis to reasonably determine an appropriate setoff for diminished value.”6
KR Enterprises disputed the district court‘s ruling as to granting setoffs at all but did not dispute the district court‘s calculation of the amounts. We affirm both
Finally, because we affirm the setoffs for Evergreen‘s breaches on the rebate and warranty claims, we also affirm the district court‘s denial of prejudgment interest. KR Enterprises made clear in its briefs and oral argument that it could prevail on the prejudgment interest only if we reversed on the setoffs.
For these reasons, the judgment of the district court is AFFIRMED.