Hicks, Hal D. v. Midwest Transit Inc ( 2007 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 05-4523
HAL D. HICKS,
Cross-Claim Plaintiff-Appellant,
v.
MIDWEST TRANSIT, INC., and DONALD
HOAGLAND, as Interim Receiver of
Midwest Transit, Inc.,
Cross-Claim Defendants-Appellees.
____________
Appeal from the United States District Court
for the Southern District of Illinois.
No. 02 C 4033—G. Patrick Murphy, Chief Judge.
____________
ARGUED NOVEMBER 6, 2006—DECIDED SEPTEMBER 10, 2007
____________
Before POSNER, RIPPLE, and SYKES, Circuit Judges.
SYKES, Circuit Judge. Hal D. Hicks leased 100 mail-
carrying trailers to Midwest Transit, Inc. (“Midwest”)
while he was the president, a director, and a majority
shareholder of the company. Shortly thereafter a re-
ceiver was appointed by an Illinois state court to pro-
tect Midwest from various breaches of fiduciary duties
alleged against Hicks in a shareholders’ derivative lawsuit.
The receiver refused to pay Hicks on the leases, arguing
that they were invalid under the Illinois Director Con-
flict of Interest statute.
2 No. 05-4523
While this litigation was ongoing in state court, Hicks’s
lender filed suit in federal court to foreclose on loans it
made to finance Hicks’s purchase of the trailers. Hicks
cross-claimed against Midwest and the receiver on a
variety of contract law theories. Hicks then settled with
his lender and the cross-claim litigation was stayed
pending the outcome of the state-court litigation. The
district court eventually dismissed most of Hicks’s
claims on summary judgment after concluding he failed
to comply with the requirements of the Illinois Director
Conflict of Interest statute; the parties settled the claim
that survived summary judgment. Hicks now appeals,
and we affirm.
I. Background
This case has a complex procedural history in both state
and federal court. When the events that ultimately led to
this lawsuit began in early 2000, Hicks was president, one
of two directors, and a 50% shareholder of Midwest
Transit, Inc., a closely held company with its principal
place of business in Illinois. Midwest is in the business
of providing mail-carrying trailers to the U.S. Postal
Service. Two other individuals, C. Michael Witters and
Diane Witters, were each 25% stockholders of Midwest;
Diane was also the other director. In January 2000 the
Witters initiated a shareholders’ derivative lawsuit in
Illinois state court to have Hicks removed from office
based on a host of financial misconduct allegations,
including personally purchasing and then leasing postal-
specification trailers to Midwest at inflated rates since
1993. On April 20, 2000, the state court entered a tempo-
rary restraining order prohibiting Midwest from transfer-
ring any money to Hicks other than amounts due on
existing trailer leases.
No. 05-4523 3
Shortly thereafter, on May 31 and July 3, 2000, Hicks
secured two loans from General Electric Capital Business
Asset Funding Corporation (“GE Capital”), a Delaware
corporation with its principal place of business in Wash-
ington, to purchase 100 more postal-specification trailers.
Hicks granted GE Capital a security interest in the
trailers, and Midwest guaranteed the loans in agree-
ments signed by its secretary, who was neither a director
nor a shareholder. The total amount of the loans was
$2,144,600, which broke down to payments of $677 per
trailer per month. For reasons uncertain, the trailers were
titled in Midwest’s name even though Hicks paid for
them.1 Hicks then leased the trailers to Midwest in two
lease agreements dated June 27 and July 7, 2000, again
signed by Midwest’s secretary. Under those leases, Mid-
west agreed to pay Hicks $450 per trailer per month for
three years; Hicks then planned to pay GE Capital the
additional $227 per trailer due on the loans.2 It is undis-
puted that Michael and Diane Witters did not participate
in or approve any of these transactions.
On July 25, 2001, the state court appointed Donald
Hoagland as interim receiver of Midwest based on findings
of misconduct, “including large sums paid to Hicks for
trailers leased by him to the corporation.” Hoagland then
dismissed Hicks from Midwest and ceased paying him
for the 100 trailers still in Midwest’s possession. Hicks
1
Hicks maintained it was a clerical error. Ownership of the
trailers was disputed at least through summer 2002 and was not
formally resolved until the district court granted permission
to transfer title to Hicks on July 2, 2003.
2
Because these trailers generally have a life span much longer
than three years and the leases contained no option for Midwest
to purchase, Hicks could make up for this short-term loss on the
payments in the long-term profits he could reap from owning
the trailers.
4 No. 05-4523
brought a motion in state court in October 2001 to order
Midwest to pay on the leases or return the trailers to
Hicks. Hoagland refused to pay Hicks, arguing both that
the trailers were titled in Midwest’s name and that the
leases violated the Illinois Director Conflict of Interest
statute, 805 ILL. COMP. STAT. 5/8.60, which requires
authorization from a majority of disinterested shareholders
or directors when an interested director seeks to engage in
a business transaction with the corporation. The state
court denied Hicks’s motion on grounds that both title to
the trailers and the legitimacy of the leases remained in
dispute. The court further instructed Hoagland to main-
tain possession of the trailers pending resolution of the
dispute and suggested that Midwest send the
$450 payments directly to GE Capital, which Midwest
did from December 2001 through June 2002. Hicks
failed to make any payments to GE Capital between
July 2001 and February 2002.
On February 8, 2002, GE Capital filed suit in the
Southern District of Illinois against Hicks, Midwest, and
Hoagland seeking to foreclose on the loans, obtain posses-
sion of the trailers, and recover money due.3 Hicks admit-
ted GE Capital’s allegations but cross-claimed against
Midwest and Hoagland on a number of theories arising
out of Midwest’s continued possession of the trailers
and failure to make lease payments to Hicks. Those
claims, all governed by Illinois law, included two counts
of breach of lease, indemnification and contribution,
quantum meruit, conversion, a petition to quiet title, and
tortious interference with a business contract. The district
court exercised supplemental jurisdiction over Hicks’s
3
GE Capital sued Midwest in its capacity as guarantor of Hicks.
GE Capital’s complaint states that Midwest had paid approxi-
mately $90,000 directly to GE Capital as of February 2002.
No. 05-4523 5
cross-claims pursuant to 28 U.S.C. § 1367(a). Hicks
subsequently settled with GE Capital by paying off the
amount due, after which the loans were reinstated.
As the cross-claim litigation continued, the district
court concluded that Hicks had the superior right to
possession of the trailers and on July 3, 2002, ordered
Midwest to return all trailers to Hicks by July 15, 2002.
Midwest was slow in complying and failed to return some
trailers until late August, prompting a motion from
Hicks for contempt damages. The court granted Hicks’s
motion and referred the case to a magistrate judge to
determine the appropriate amount of damages. Contempt
damages were assessed in two phases—the first for costs
resulting from the delay in returning the trailers, for
which Hicks was awarded $48,986.75, and the second
for repairs necessitated by the condition in which the
trailers were returned, for an amount to be determined
with the aid of a special master. On August 8 and Novem-
ber 11, 2003, the magistrate judge entered orders setting
forth how the phase two damages determination would
proceed and stating that “[i]n the event the Court does
not award Hicks damages for items claimed in Hicks’
pending Motion, Hicks reserves the right to seek any
such uncompensated damages to the trailers, costs for
repair or other elements of damage in the underlying
case.” The phase two damages proceedings concluded with
an order entered on March 11, 2004, stating that the
parties had agreed to settle for a lump sum payment of
$100,000.
Soon after this settlement, Hicks submitted discovery
requests to Midwest in an attempt to facilitate a claim for
additional compensation for physical damages to the
trailers based on the reservation of rights language
found in the August 8 and November 11, 2003 orders.
Midwest objected on grounds that further compensation
was precluded by the March 11, 2004 settlement, which
6 No. 05-4523
purported to cover all physical damages. The magistrate
judge agreed and issued another order concluding that
Hicks had settled all claims for physical damages to the
trailers in the March 11 agreement and could pursue no
further discovery.
In the meantime, Hicks filed a motion for summary
judgment on some of his cross-claims. With no objection
from Midwest, the district court granted Hicks’s claim to
quiet title to the trailers. The remaining claims were
then stayed pending resolution of the state-court deriva-
tive suit. Shortly after the state-court litigation concluded
and the stay was lifted, Midwest and Hicks filed cross-
motions for summary judgment on all remaining claims
except quantum meruit. Midwest contended that Hicks’s
leases were invalid under the Illinois Director Conflict of
Interest statute because the Witters did not authorize
either lease and because the leases did not reflect fair
market value. Hicks argued that Hoagland had implicitly
validated the leases by maintaining possession of and
continuing to use the trailers after he was appointed
receiver. Hicks also submitted an affidavit stating that
the fair market value of postal trailers ranges from $360
to $600 a month. On September 1, 2005, the district court
granted summary judgment to Midwest on all claims
except quantum meruit. The court concluded (1) that
Hoagland had not validated the leases by retaining the
trailers because he had continuously challenged their
validity and only maintained possession under the direc-
tion of the state court, and (2) that Hicks had failed to
carry his burden of coming forward with evidence to create
a triable issue of fact on the fairness of the leases
under the Illinois statute.
The parties then agreed to settle the quantum meruit
claim for a lump sum that broke down to $400 per trailer
per month for Midwest’s unpaid use. Hicks now appeals
the summary judgment dismissing his claims for breach
No. 05-4523 7
of lease, indemnification and contribution, conversion,
and tortious interference with a business contract in
hopes of recovering the monetary difference between the
leases and the quantum meruit settlement.4 He also
appeals the district court’s denial of his discovery re-
quest aimed at securing additional recovery for physical
damage to the trailers.
II. Discussion
We review a district court’s entry of summary judgment
de novo, viewing the facts in the light most favorable to the
nonmoving party. Ruffin-Thompkins v. Experian Info.
Solutions, Inc., 422 F.3d 603, 607 (7th Cir. 2005). Sum-
mary judgment is appropriate when “the pleadings,
depositions, answers to interrogatories, and admissions
on file, together with the affidavits, if any, show that
there is no genuine issue as to any material fact and that
the moving party is entitled to judgment as a matter of
law.” FED. R. CIV. P. 56(c). Although the moving party
bears the burden of proving that there is no genuine
issue of material fact and that it is entitled to judgment
as a matter of law, the nonmoving party “retains the
burden of producing enough evidence to support a reason-
able jury verdict in [its] favor.” Ruffin-Thompkins, 422
F.3d at 607.
A. Applicability of the Illinois Statute
Hicks’s first two claims are for breach of lease based on
Illinois contract law. The district court granted summary
4
At this point, there is no distinction in the remaining claims
between Midwest and Hoagland in terms of their liability.
Accordingly, we refer to them interchangeably for that purpose.
8 No. 05-4523
judgment for Midwest on these claims on the basis of the
Illinois Director Conflict of Interest statute, which states
in relevant part:
(a) If a transaction is fair to a corporation at the time
it is authorized, approved, or ratified, the fact that a
director of the corporation is directly or indirectly a
party to the transaction is not grounds for invalidat-
ing the transaction or the director’s vote regarding
the transaction; provided, however, that in a proceed-
ing contesting the validity of such a transaction, the
person asserting validity has the burden of proving
fairness unless:
(1) the material facts of the transaction and the
director’s interest or relationship were disclosed
or known to the board of directors or a committee
of the board and the board or committee autho-
rized, approved or ratified the transaction by the
affirmative votes of a majority of disinterested
directors, even though the disinterested directors
be less than a quorum; or
(2) the material facts of the transaction and the
director’s interest or relationship were disclosed
or known to the shareholders entitled to vote and
they authorized, approved or ratified the transac-
tion without counting the vote of any shareholder
who is an interested director.
805 ILL. COMP. STAT. 5/8.60(a). It is undisputed that
Midwest’s other two shareholders, one of whom was also
the only other director, did not authorize the leases
with Hicks. Rather, at the time Hicks and Midwest
entered into the leases, the Witters had already initiated
their derivative suit challenging Hicks’s authority to
enter into precisely these kinds of leases. According to
the statute, Hicks, as the person asserting the validity
of the leases, has the burden of proving their fairness.
No. 05-4523 9
On appeal, Hicks makes two threshold arguments
challenging the applicability of the statute. First, he claims
the statute can only be used offensively by a corporation
challenging the director accused of profiting from the
interested transaction, i.e., in a derivative lawsuit. We
initially note that Hicks did not make this argument in the
district court, and arguments not raised before the district
court are waived on appeal. See, e.g., Belom v. Nat’l
Futures Ass’n, 284 F.3d 795, 799 (7th Cir. 2002). The
argument is meritless in any event. The statute provides
that “in a proceeding contesting the validity of [an inter-
ested] transaction, the person asserting validity has the
burden of proving fairness,” § 5/8.60(a); the statute does
not limit the proceedings in which it may be invoked, nor
is there any language limiting its applicability to suits
brought by the corporation against the interested director.
Nothing in the statute suggests it is inapplicable as a
defense against the validity of a transaction in the context
of a breach-of-lease claim. Hicks has not identified a single
Illinois case supporting his proposed interpretation of the
statute. Accordingly, we conclude the statute is applicable
as a defense as well as a ground for attacking a transac-
tion.
Hicks alternatively argues that Midwest is bound by the
leases regardless of their validity because Hoagland
kept and continued to use the trailers after his appoint-
ment as receiver. Hicks relies upon Toushin v. Gonsky, 395
N.E.2d 1124, 1130 (Ill. App. Ct. 1979), but the case is
factually distinguishable from this one. The receiver in
Toushin had challenged the validity of two movie theater
leases on the ground that the shareholder who had signed
on behalf of the closely held company lacked sufficient
authority due to a pending action for accounting and
dissolution. While this action was pending, the receiver
retained possession of the theaters without making lease
payments and did not respond to letters from the lessee
10 No. 05-4523
informing him that rent payments were outstanding. Id.
at 1126. The receiver also treated the leases as valid in
reports to the court, which included amounts for rent
due on the leases as unpaid bills. Id. at 1130.
On the foregoing facts, the Illinois appellate court
concluded that “[a]lthough the receiver challenged the
validity of the leases based on [the alleged agent’s] author-
ity to bind [the corporation], the continued possession o[r]
use of the premises was an election to adopt the lease.
Without reaching the merits of the issue of the validity of
the leases, it is clear that rent and other charges have
accrued for the period of the receivership.” Id. (emphasis
added). The court further held that “[i]f the receiver
remains in possession beyond a reasonable time to make
the election [to adopt or challenge a lease made prior to
his appointment], he elects to adopt the lease by implica-
tion, and is bound by its terms.” Id.Toushin thus establishes that under Illinois law, a
receiver’s implied acceptance of a lease may trump the
lease’s invalidity in some circumstances. But the circum-
stances here are very different. In Toushin, the receiver
treated the leases as valid during the time in which he
failed to make payments, and he did not challenge their
validity until a court action was brought to repossess
the theaters. Moreover, the validity of the leases in
Toushin had nothing to do with the underlying litigation
that led to the receiver’s appointment. Here, in contrast,
the challenge to the validity of the leases was not only
in existence when Hoagland took over as receiver, but
Hicks’s practice of entering into insider leases was
actually one of the reasons for the appointment of a
receiver in the first place. See Witters v. Hicks, 780 N.E.2d
713, 720 (Ill. App. Ct. 2002) (listing as a reason for ap-
pointment that “Hicks’ leasing of trailers owned by him
to [Midwest] constituted a conflict of interest as set forth
in section 8.60”).
No. 05-4523 11
Moreover, when Hicks initially challenged Midwest’s
failure to pay the leases, the state court directed Midwest
not to return the trailers and suggested that Midwest
make lease payments directly to GE Capital until owner-
ship of the trailers and the validity of the leases could be
determined. At the October 12, 2001 hearing on Hicks’s
motion, the court specifically noted: “[W]e have the validity
of the leases themselves in controversy. The burden of
proof is on Mr. Hicks to show that these were entered
into fairly, and that is something we’ll take up at trial.”
Accordingly, unlike in the receiver in Toushin, Hoagland
never accepted the validity of the Hicks leases and chal-
lenged them from the moment he learned of their exis-
tence. In addition, at the time of Hoagland’s actions, there
was legitimate confusion regarding whether Hicks or
Midwest was the rightful owner of the trailers, so
Hoagland was under no clear duty to return or pay for
the trailers. This was, as we have noted, one of the
factors cited by the state court in its conclusion that
Midwest should make payments directly to GE Capital
instead of to Hicks. It is abundantly clear that Hoagland
never acted in a manner that would support a conclu-
sion that he adopted the leases by implication.
Hicks also cites Spencer v. World’s Columbian Exposi-
tion, 45 N.E. 250 (Ill. 1896), an early Illinois Supreme
Court case, but that case actually supports the receiver’s
position here. Spencer involved a receiver who had main-
tained possession of leased premises for the final months
of the World’s Columbian Exposition; the Illinois Supreme
Court held that under the circumstances, the receiver
could not subsequently avoid payment by claiming the
lease terms were too high. Id. at 253. However, the court
noted that the receiver’s failure to contest the validity at
the time he maintained possession of the premises was
dispositive:
12 No. 05-4523
[W]e have been referred to no cases holding that,
where the lease or contract is of itself a thing of value
to the creditors, and the receiver, under the order of
the court, takes possession of the premises, and
conducts the business which the insolvent had been
unable to continue, and, without any act of dis-
affirmance or notice that he would not be bound by
the contract, completes the term, and receives profits,
and all the benefits, from such possession and con-
tinuance of the business, the receiver may then repudi-
ate the contract, and pay only on the basis of a quan-
tum meruit.
Id. (emphasis added). Spencer thus stands for the proposi-
tion that a concurrent challenge to the validity of a lease
prevents a receiver’s continued possession from trumping
the invalidity of the lease. The district court properly
rejected Hicks’s argument that Hoagland implicitly
validated the leases.
B. Fairness of the Leases
The remaining question on the validity of the leases
is whether Hicks carried his burden of demonstrating a
genuine issue of material fact as to their fairness. Hicks’s
summary judgment motion attached two leases for compar-
ison, as well as an affidavit from another leasing agent
regarding the fair market value of postal trailers. Hicks
did not develop an argument based on these documents,
however; instead, he repeatedly asserted before the
district court that the only issue it needed to consider
was his argument about the receiver. But Hicks had “the
burden to point to . . . information to show that a genuine
issue of fact exist[s]; the district court ‘need not scour
the record’ to find such evidence.” Ruffin-Thompkins,
422 F.3d at 610 (quoting L.S. Heath & Son, Inc. v. AT&T
Info. Sys., Inc., 9 F.3d 561, 567 (7th Cir. 1993)). We are
No. 05-4523 13
tempted to conclude that Hicks abandoned that task by
not developing an argument about how the documents
he submitted related to his burden of proving fairness. In
an abundance of caution, however, we will evaluate the
limited evidence Hicks submitted.
“Illinois defines ‘fair’ as market value. A transaction is
‘fair’ to a corporation when it receives at least what it
would have obtained following arms’ length bargaining
in competitive markets.” Olsen v. Floit, 219 F.3d 655, 657
(7th Cir. 2000) (citing Shlensky v. S. Parkway Bldg. Corp.,
166 N.E.2d 793 (Ill. 1960)). Hicks submitted three docu-
ments potentially relevant to fairness: an affidavit stat-
ing that the fair market value for a postal trailer ranges
from $360 to $600 per month and two leases Midwest
entered into with other companies after Hoagland was
appointed receiver. The affidavit is too generalized to
raise an issue of fact regarding the fairness of the particu-
lar leases in question in this case. The first of the two
comparison leases, a three-year lease with Rightway
Trucking Co., provided Midwest with trailers at a rate of
$250 per trailer per month, substantially lower than the
Hicks leases.5 The lease also included an option to pur-
chase, which was not available in the Hicks leases. With-
out additional information regarding the comparative
quality or age of the Rightway trailers, which Hicks did
not provide, there is nothing in this lease that would
support a conclusion that Hicks’s $450-per-trailer rate
was fair.
The second lease was between Midwest and XTRA Lease.
It is a short-term lease of an entirely different nature
in which trailers were provided for daily and weekly rates.
5
Rightway Trucking was owned by the Witters. Accordingly,
before entering into this insider transaction, Hoagland ob-
tained the permission of the state court.
14 No. 05-4523
The district court noted during the contempt proceed-
ings that short-term trailer rental rates are often higher
than long-term rates; this explains why Hicks was compen-
sated at a rate of $450 per trailer in the contempt proceed-
ings for the short-term continued possession of his trailers,
but received only $400 per trailer in the quantum meruit
settlement for the long-term use that occurred prior to the
July 2002 order mandating the trailers’ return. Hicks has
not provided any information regarding how the market
value for short-term leases such as those entered into with
XTRA compares with that of the long-term leases entered
into with him. He also has not provided any information
regarding the comparative age and quality of the trailers
XTRA offered.
By contrast, Midwest submitted three long-term leases
it has entered into since returning Hicks’s trailers. Each
lease contains an option to purchase and carries a signifi-
cantly lower rate ($285, $185, and $225 per trailer per
month) than the Hicks leases. Midwest also submitted an
affidavit from its operations manager stating that the
XTRA lease rate was higher than all of Midwest’s other
leases because it was a short-term rate. Finally, Midwest
included a document from the state court containing
its bench trial finding that Hicks had failed to prove that
any trailer leases he entered into with Midwest since
1993 were fair under section 5/8.60. As we have dis-
cussed, Hicks has the burden of proving that a reasonable
jury could find in his favor on the issue of fairness; his
evidence is insufficient to create a genuine factual dispute
regarding the fairness of the leases.
C. Remaining Claims
Hicks’s remaining contract claims are meritless and
require little discussion. His contribution and indemnifica-
tion claims arise out of the language of the leases; because
No. 05-4523 15
the district court correctly concluded that the leases
were invalid, these claims fail as a matter of law. Simi-
larly, there is no legal support for Hicks’s conversion claim
because the state court instructed Midwest to maintain
possession of the trailers, establishing that Hicks did not
have an absolute and unconditional right to possession of
the trailers. The only period in which Midwest maintained
control without permission was the two-month delay in
returning the trailers pursuant to the court’s order, and
Hicks was compensated for all damages resulting from
that delay through the contempt proceedings. Finally,
Hicks’s tortious interference with a contract claim requires
Hicks to show that GE Capital was induced by Midwest’s
behavior to breach its loan agreements with Hicks. But
Hicks—not GE Capital—breached the loan agreements,
so this claim was also properly rejected.
D. Discovery Issue
Hicks’s remaining argument on appeal pertains to his
last-ditch effort to increase his recovery for physical
damage done to the trailers while they were in Midwest’s
possession. Hicks now contends the March 11 agreement
to settle the contempt damages for $100,000 was intended
only “to get the Trailers in a usable condition,” not “to
encompass all damages that Hicks may be entitled to
under industry leasing standards or under the Hicks
Leases.” He further claims his right to secure additional
damages was explicitly preserved by the language of the
earlier orders of the magistrate judge.
Neither of these contentions are supported by the dis-
trict court record. The August 8 order specified that “the
court shall consider and assess the damages incurred by
Hicks as a result of the condition of the trailers when
delivered to Hicks . . . including the costs to complete
repairs, attorney’s fees, loss of use, storage charges, and
16 No. 05-4523
any other damages sought in Hicks’ Motion.” (Emphasis
added.) The magistrate appointed a special master to
assess damages, and the standards by which they were
assessed included applicable Department of Transporta-
tion and Federal Motor Carrier Safety Administration
regulations, as well as “applicable rules and regulations
promulgated by the United States Postal Service for
contractors hauling mail.” This language directly contra-
dicts Hicks’s claim that the damages did not contemplate
industry leasing standards. Further, the damages order
ultimately entered by the court stated that the parties
had “amicably resolve[d] the physical damages to the
trailers” for $100,000, and Hicks submitted a satisfaction
to the court on March 25, 2004, asserting that Midwest
“paid and satisfied the Phase II contempt damages.” These
documents establish that Hicks conclusively settled his
entire claim for compensation for physical damages in the
March 11 settlement. As such, the district court did not
abuse its discretion in denying Hicks’s discovery re-
quests aimed at augmenting his settlement recovery.
AFFIRMED.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—9-10-07