HK Systems Inc v. Eaton Corporation ( 2009 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 07-3596
HK S YSTEMS, INC.,
Plaintiff-Appellant,
v.
E ATON C ORPORATION,
Defendant-Appellee.
Appeal from the United States District Court
for the Eastern District of Wisconsin.
No. 02-C-1103—Lynn Adelman, Judge.
A RGUED S EPTEMBER 3, 2008—D ECIDED JANUARY 28, 2009
Before P OSNER, R IPPLE, and E VANS, Circuit Judges.
P OSNER, Circuit Judge. This is a diversity suit for
breach of contract. The substantive issue, one of Wiscon-
sin law, is the scope of an indemnification clause in a
contract for the sale of a business. The clause required the
seller, defendant Eaton, to indemnify the buyer, plaintiff
HK, for all losses resulting from any “misrepresentation,”
“act or omission,” or “occurrence of a matter . . . relating
to or arising out of the period on or before the Closing
Date.”
2 No. 07-3596
IBP, a large beef processor, wanted to replace the auto-
mated material-handling system in its beef-processing
plant in Nebraska. Eaton-Kenway, a subsidiary of Eaton,
and another company, Alvey, submitted a joint bid in
response to IBP’s request for proposals. IBP liked the
bid and in December 1994 issued a two-sentence letter of
intent to purchase the new system from the joint bidders.
Two months later, while IBP and the joint bidders were
in the midst of negotiations aimed at transforming the bid
into a contract, Eaton sold Eaton-Kenway to HK. The
following month IBP signed a contract with HK for the
material-handling system, with Alvey a subcontractor
of HK. That is the contract that contains the indemnifica-
tion clause. Eaton had nothing to do with the contract
negotiations after it sold Eaton-Kenway to HK.
Three years later, IBP sued HK in Nebraska for fraud
and breach of contract. The fraud claim was that before the
sale of Eaton-Kenway to HK Eaton had misrepresented
to IBP the speed at which the material-handling system
would operate. The breach of contract claim was that the
system did not operate at the speed promised in the
contract. The suit was settled, HK agreeing to pay IBP
$8 million, though Alvey contributed $5 million of that
amount. HK then brought this suit against Eaton for
indemnification.
Eaton moved for summary judgment on the ground that
the loss HK had incurred in settling IBP’s suit had been
caused not by Eaton but by HK’s own actions. The
district judge denied the motion and the case proceeded
to trial. Eaton moved for judgment as a matter of law,
No. 07-3596 3
which the judge denied, and the jury awarded a little
more than $3 million to HK. But Eaton then moved the
judge to reconsider his earlier denial of its motion for
summary judgment, and the judge granted the motion
and dismissed the suit, precipitating this appeal by HK.
The judge’s action in reconsidering his denial of sum-
mary judgment after the jury’s verdict may seem odd;
HK argues that it was improper. Although the standard
for granting summary judgment is the same as the stan-
dard for granting judgment as a matter of law, Klunk v.
County of St. Joseph, 170 F.3d 772, 775 (7th Cir. 1999),
the record compiled in a trial is bound to differ from the
record on which a motion for summary judgment is
based. Even if the motion should have been granted
when made, any evidence properly admitted at trial is
available for consideration if the judge is asked after
the trial to reconsider his earlier denial of the mo-
tion—and if the opposing party has presented a con-
vincing case at trial the inference is that the judge was
right to deny the motion. So an appellate court will gen-
erally refuse to review the denial of a motion for sum-
mary judgment after the case has been tried. Chemetall
GMBH v. ZR Energy, Inc., 320 F.3d 714, 718-19 (7th Cir.
2003). But the justification for refusing fails when the
motion is denied because of a ruling on a pure question
of law rather than on the adequacy of the evidence pre-
sented in opposition to the motion. Id. at 719-20, and cases
cited there. For then if the ruling was erroneous and the
motion should have been granted regardless of the evi-
dence, the trial is an irrelevance. And that is this case.
4 No. 07-3596
But by not preserving, in its motion for judgment as a
matter of law, its argument that HK was the author of its
loss in the suit by IBP—which would have preserved
the argument for appeal—Eaton took a big risk. The
doctrine of law of the case counsels against a judge’s
changing an earlier ruling that he made in the same
case, Agostini v. Felton, 521 U.S. 203, 236 (1997); Christianson
v. Colt Industries Operating Corp., 486 U.S. 800, 816-17 (1988);
Santamarina v. Sears, Roebuck & Co., 466 F.3d 570, 571-72
(7th Cir. 2006), or that his predecessor as presiding
judge had made. Fujisawa Pharmaceutical Co. v. Kapoor,
115 F.3d 1332, 1339 (7th Cir. 1997); In re Engel, 124 F.3d
567, 583-85 (3d Cir. 1997). The doctrine has greater force
in the second type of case—when there is a change of
judges during the litigation and the new judge is asked to
revisit the rulings of his predecessor. Reluctance to
admit one’s own errors discourages casual recon-
sideration of one’s own rulings—but not of another
judge’s rulings. There was no change of judges here.
The doctrine of law of the case was applied to a motion
to reconsider a summary judgment ruling in Fye v.
Oklahoma Corp. Comm’n, 516 F.3d 1217, 1223-24 (10th Cir.
2008), and doubtless in other cases as well. And while
the doctrine obviously does not prevent an appellate
court from correcting a trial judge’s error, e.g., United
States v. Comprehensive Drug Testing, Inc., 513 F.3d 1085,
1101-02 (9th Cir. 2008), Eaton failed as we said to preserve
its challenge to the alleged error (in denying its motion
for summary judgment) in its motion for judgment as a
matter of law. So it had to throw itself on the judge’s
mercy. But the exercise of mercy was within his discre-
No. 07-3596 5
tion. “A judge may reexamine his earlier ruling (or the
ruling of a judge previously assigned to the case, or of a
previous panel if the doctrine is invoked at the appellate
level) if he has a conviction at once strong and reasonable
that the earlier ruling was wrong, and if rescinding it
would not cause undue harm to the party that had bene-
fited from it,” Avitia v. Metropolitan Club of Chicago, Inc., 49
F.3d 1219, 1227 (7th Cir. 1995). These conditions are
satisfied; we’ll see that the judge had a solid basis for
thinking he had erred. And in revisiting the issue of
causation after the trial he was not depriving HK of the
benefit of any of the evidence presented at the trial,
because that evidence did not bear on the judge’s decision.
He had denied summary judgment on the basis of his
reading of the indemnification clause, and in recon-
sidering the denial after the trial he continued to treat
the meaning of the clause as a pure issue of law, unrelated
to anything that had gone on at the trial. He ruled that
the indemnification clause did not make Eaton liable for
any part of the loss that HK had sustained in settling IBP’s
suit, because the contract between HK and IBP was an
“intervening and superseding cause” of the loss that HK
had suffered as a result of being sued by IBP.
This was not the most perspicuous articulation that the
judge could have given of the ground of his decision,
though it is a common formula in Wisconsin cases, see,
e.g., Smith v. Katz, 595 N.W.2d 345, 357 (Wis. 1999), as in
cases in other states. The term “intervening [or supersed-
ing] cause,” like “proximate cause,” “legal cause,” “chain
of causation” (the “chain” that the “intervening cause”
“breaks”), and “but for” cause belongs to an old-fashioned
6 No. 07-3596
tort vocabulary. It would be clearer to speak in terms
of responsibility, because the object of “causal” analysis
in law is merely to determine who shall be responsible
for some untoward event; in this case it is the loss that
HK incurred as a result of the failure of the material-
handling system to perform up to IBP’s expectations—
the failure that gave rise to IBP’s suit against HK.
If a tanker truck spills oil, and a malicious passerby
deliberately drops a lighted match into the resulting
pool, starting a fire that inflicts a loss on a third party, the
victim cannot recover damages from the truck company
even if the spill was caused by the company’s negligence.
The “reason” is said to be that the arson was an “inter-
vening cause” of the loss. Leposki v. Railway Express
Agency, Inc., 297 F.2d 849 (3d Cir. 1962); Giebel v. Richards,
591 N.W.2d 901, 904 (Wis. App. 1999); Stone v. Boston &
Albany R.R., 171 Mass. 536, 536-43 (Mass. 1898); cf.
Scottsdale Ins. Co. v. Subscription Plus, Inc., 299 F.3d 618, 620-
21 (7th Cir. 2002) (Wisconsin law). Yet an “intervening”
criminal act is not always deemed to “break the causal
chain”; a hotel is liable for its negligence that allows
a criminal who is not employed by or otherwise
affiliated with the hotel to commit a crime against
a guest. E.g., Shadday v. Omni Hotels Management Corp., 477
F.3d 511, 512-13 (7th Cir. 2007); Wassell v. Adams, 865
F.2d 849 (7th Cir. 1989). The difference between the two
examples has nothing to do with causation. In both
the loss is attributable to multiple factors (including, in
the oil-spill case, the presence of oxygen in the atmo-
sphere). Without all of them the loss would not have
occurred. But the hotel is held responsible because its
No. 07-3596 7
guests expect it to take reasonable measures to protect
them, while the truck company is excused from responsi-
bility because the probability of a mischief maker’s chanc-
ing on a pool of oil and dropping a lighted match into it
is so slight that imposing liability would not cause the
company to take additional measures to avoid spills. Jutzi-
Johnson v. United States, 263 F.3d 753, 755-56 (7th Cir.
2001). So liability would not enhance safety.
This is a multiple-factor case too, as shown by the
presence of a mirror-image buyer’s indemnification
clause in the contract for the sale of Eaton-Kenway to HK.
Not only was Eaton obligated to indemnify HK for
certain losses (the obligation that is the basis of the
present suit), but HK was required to indemnify Eaton
for losses resulting from “any act or omission of the
Buyer [HK] or any occurrence of a matter with respect to
the Subject Assets or the Subject Business relating to or
arising out of the period after the Closing Date” of the
sale. The loss of which HK is complaining would not
have occurred had it not signed the contract with IBP, an
“act” or “occurrence” that took place after the sale of the
business. But this implies that if HK is entitled to indemni-
fication from Eaton for the loss arising from the settle-
ment of IBP’s suit, Eaton is entitled to be indemnified by
HK for Eaton’s loss—the loss consisting of the judg-
ment entered on the jury verdict in this case.
To break out of this ridiculous circle, the judge con-
strued the indemnification clauses narrowly. In
particular, he ruled that Eaton was required to
indemnify HK only if Eaton’s “act or omission . . . directly
8 No. 07-3596
[gave] rise to a claim against HK.” This condition
had not been satisfied, the judge thought, because HK
should not have signed the contract with IBP without
first making sure that its new acquisition, Eaton-Kenway,
would be able to fulfill the duties that the contract
placed on its new parent. Had the sale not taken
place—had Eaton rather than HK contracted with
IBP—Eaton might have insisted on terms that would
have protected itself from liability if it could not perform
up to IBP’s expectation. It had no opportunity to do this.
That became HK’s opportunity, and it muffed it.
The judge’s allocation of responsibility was in accordance
with the principle, which we expounded in a recent case
also governed by Wisconsin law, though the case
involved a contract of formal insurance rather than an
indemnification clause in an ordinary commercial
contract, that without express language an indemnitor
will not be found to have agreed to indemnify an
indemnitee against the consequences of the breach of a
contract that the latter signs after the indemnity contract or
the formal insurance contract goes into effect. We ex-
plained that “insurance policies are presumed not to
insure against liability for breach of contract. The reason
is the severe ‘moral hazard’ problem to which such in-
surance would often give rise. The term refers to the
incentive that insurance can create to commit the act
insured against, since the cost is shifted to the insurance
company . . . . [S]uppose, having somehow persuaded an
insurance company to insure against liability for breach
of contract, you hire a contractor to build an extension on
your house and after he has completed his work you
No. 07-3596 9
refuse to pay him, and, when he sues, you turn his claim
over to the insurance company.” Krueger Int’l, Inc. v. Royal
Indemnity Co., 481 F.3d 993, 996 (7th Cir. 2007); see also
Farmers Automobile Ins. Ass’n v. St. Paul Mercury Ins. Co.,
482 F.3d 976, 978 (7th Cir. 2007).
This case is the same; HK signed the contract with IBP
after Eaton had promised to indemnify HK. And the
Wisconsin courts have extended from formal insurance
contracts to indemnification clauses the principle that
indemnification is presumed not to extend to the conse-
quences of activity that is in the control of the party
seeking indemnification. Dykstra v. Arthur G. McKee & Co.,
301 N.W.2d 201, 204 (Wis. 1981); Hortman v. Otis Erecting
Co., 322 N.W.2d 482, 486 (Wis. App. 1982); Foskett v. Great
Wolf Resorts, Inc., 518 F.3d 518, 524 (7th Cir. 2008) (Wiscon-
sin law). Thinking that it would be indemnified for any
losses on its contract with IBP, HK had a diminished
incentive to try to minimize its potential liability for
such losses in negotiating the terms of the contract.
HK actually wants us to treat Eaton just like an insur-
ance company. It complains that when it (in effect) ten-
dered the defense of IBP’s suit to Eaton by notifying Eaton
of the suit and offering it an opportunity to participate,
Eaton refused the tender. But that could matter only if
Eaton were contending that HK should not have settled
IBP’s suit for the amount it did, or otherwise com-
plaining about not having controlled the litigation.
Instead it is contending that the indemnification clause
was inapplicable to losses based on a suit that arose
from a contract made after the clause took effect. Even
10 No. 07-3596
insurance companies as we said don’t insure against
breaches of contract, because if they did people would
break their contracts with impunity. HK’s claim is even
weaker because it wants us to rule that Eaton insured it
against liability for breach of a contract that hadn’t been
made yet. For all we know, had Eaton-Kenway not been
sold to HK the contract between Eaton-Kenway/Alvey
and IBP would have looked completely different from
the contract that HK negotiated.
HK argues that “no prudent business relies on an
indemnity to avoid meeting its business commitments.”
True; but armed with an indemnity, a business will take
risks that it would not take had it to bear the entire cost of
its mistakes. HK could promise IBP more than it was
certain that it could deliver because the indemnity cush-
ioned it (it thought) against the full consequences of being
unable to honor its promise. HK unguardedly acknowl-
edged as much in its opening brief in this court when
it said that “the broad indemnity by Eaton was a sub-
stitute for the assessment of risks” by HK.
Remember that the letter of intent that IBP sent Eaton
before the sale of Eaton-Kenway was only two sentences
long; the only term in it was the price term. HK does not
claim that it was an enforceable contract; it was not.
Skycom Corp. v. Telstar Corp., 813 F.2d 810, 814 (7th Cir.
1987) (Wisconsin law). HK itself is emphatic that the
enforceability of the letter of intent is “irrelevant.” In the
unlikely event that it were deemed enforceable, it would
be enforceable only as a contract to continue negotiating,
e.g., Venture Associates Corp. v. Zenith Data Systems Corp.,
No. 07-3596 11
96 F.3d 275, 276-80 (7th Cir. 1996), because it did not
specify Eaton’s performance.
We can imagine a jury’s being told to allocate responsi-
bility for the loss to HK between Eaton—for its alleged
misrepresentations to IBP regarding the speed of the
material-handling system—and HK for failing either to
verify the capabilities of its newly acquired division or
to negotiate a contract that would minimize its liability
in the event that the system did not meet IBP’s high
expectations. Any such division of fault would be likely
to be arbitrary, especially given the mirror-image indemni-
fication clause that would entitle Eaton to complain
that HK’s signing of the contract that gave rise to the
suit and settlement triggered that clause, creating an
endless cross-indemnity loop. HK had the last clear
chance to avoid or limit liability, and it should not be
allowed to shift that liability to its predecessor. In any
event, HK did not ask the jury to make such an alloca-
tion. It wagered double or nothing. It gets nothing.
This is not to say that HK would have no possible
remedy against misrepresentations by Eaton. Suppose
Eaton had grossly exaggerated the value of Eaton-Kenway
to HK, and HK had all unknowingly obtained loans that
it could not repay because it had depleted its assets in
buying what turned out to be a worthless company. In a
suit by lenders against HK, HK would be entitled to
indemnity from Eaton both under the buyer’s indemnifica-
tion clause and as a matter of general tort principles of
indemnity because Eaton would have been the active
tortfeasor. Jones v. General Casualty Co., 582 N.W.2d 110,
12 No. 07-3596
112 (Wis. App. 1998); Merrill Lynch, Pierce, Fenner & Smith,
Inc. v. First National Bank, 774 F.2d 909, 916-19 (8th Cir.
1985); White v. Johns-Manville Corp., 662 F.2d 243, 249-50
(4th Cir. 1981). If, moreover, Eaton was guilty of misrepre-
sentations (or misleading omissions) so well concealed
that no amount of care by HK in negotiating with IBP
could have detected them, and no duty of prudence
required HK to insist on terms in its contract with IBP
that would have prevented IBP from suing for breach of
contract, HK could have sued Eaton for fraud, and issues
of indemnification would have fallen by the wayside.
What HK could not do was treat Eaton’s contractual duty
of indemnification as insuring HK against the conse-
quences of signing a contract that exposed it to a suit
for breach of that contract.
A FFIRMED.
1-28-09