Utica Mutual Insurance v. Vigo Coal Co. ( 2004 )


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  •                              In the
    United States Court of Appeals
    For the Seventh Circuit
    ____________
    Nos. 04-1015, 04-1107
    UTICA MUTUAL INSURANCE COMPANY,
    Plaintiff-Appellant/Cross-Appellee,
    v.
    VIGO COAL COMPANY, INC., WILLIAM L. KOESTER,
    and BETTY L. KOESTER,
    Defendants-Appellees/Cross-Appellants,
    and
    ATLAS MINERALS, INC., WALTER J. PIEPER,
    SUSAN S. PIEPER, and CHARLES W. SCHULTIES,
    Defendants-Appellees.
    ____________
    Appeals from the United States District Court for the
    Southern District of Indiana, Evansville Division.
    No. EV 00-175-C H/H—David F. Hamilton, Judge.
    ____________
    ARGUED OCTOBER 28, 2004—DECIDED DECEMBER 20, 2004
    ____________
    Before POSNER, KANNE, and ROVNER, Circuit Judges.
    POSNER, Circuit Judge. This diversity suit for breach of a
    suretyship contract, decided in favor of the defendants after
    2                                       Nos. 04-1015, 04-1107
    a bench trial, presents questions primarily relating to the
    contract-law doctrine of “novation,” but more broadly to
    principles of contract interpretation; all the questions are
    governed by the common law of Indiana.
    In 1991 defendant Vigo purchased Buck Creek Coal, which
    operated a coal mine and was required by both federal and
    state law to post reclamation bonds as a condition of being
    permitted to operate the mine. 30 U.S.C. § 1259(a); 30 C.F.R.
    § 800.20; Ind. Code § 14-34-6-1. In connection with the pur-
    chase, Vigo, joined by defendant Atlas and by the owners of
    Vigo and Atlas (the Koesters and the Piepers, respectively,
    who are also defendants) and by Buck Creek Coal, signed a
    “General Indemnity Agreement.” In it they agreed to
    indemnify Utica insurance company for any losses that
    Utica might incur from issuing reclamation bonds to the
    Indiana state government on behalf of Buck Creek. The
    following year (1992) another “General Indemnity Agree-
    ment” was signed, identical to the first, except that the only
    signers were defendant Schulties, who had not signed the
    previous agreement, and the Piepers (who, remember, are
    Atlas’s owners). Mr. Pieper signed both individually and as
    president; and because of his having thus signed in his
    official capacity, as it were, as an agent apparently autho-
    rized to bind his principal, the district judge ruled that Atlas
    was bound by the second agreement. E.g., Winkler v. V.G.
    Reed & Sons, Inc., 
    638 N.E.2d 1228
    , 1232-33 (Ind. 1994); City
    of Gary v. Conat, 
    810 N.E.2d 1112
    , 1115-16 (Ind. App. 2004);
    DFS Secured Healthcare Receivables Trust v. Caregivers Great
    Lakes, Inc., 
    384 F.3d 338
    , 343 (7th Cir. 2004) (Indiana law).
    Atlas has not challenged that ruling, even though it appears
    from the 1992 agreement that Pieper actually was signing in
    his capacity as president of Buck Creek, not of Atlas. So
    Atlas is bound; and to simplify our opinion we shall assume
    that Atlas and Schulties were the signers of the second
    Nos. 04-1015, 04-1107                                        3
    agreement and Vigo and Atlas the signers of the first; in
    other words, we’ll ignore not only the district court’s
    unchallenged error but also the companies’ owners. With
    this simplification, the case becomes Utica versus Vigo.
    The surety bonds were later “forfeited”; that is, Buck
    Creek proving unable to fulfill its reclamation obligations,
    the state required the surety, Utica, to do the reclamation.
    Utica then brought this suit, against all the signers of either
    agreement, for reimbursement of the expense—some
    $400,000—of the reclamation.
    The district court concluded that the signers of the 1991
    indemnity agreement were off the hook (except Atlas, since
    it had signed the second agreement as well) because the
    second agreement was a “novation,” that is, a replacement
    of the first agreement, which therefore released the obligors
    in that agreement. SSD Control Technology v. Breakthrough
    Technologies, Inc., 
    685 N.E.2d 1136
    , 1137-38 (Ind. App. 1997);
    Rose Acre Farms, Inc. v. Cone, 
    492 N.E.2d 61
    , 68-69 (Ind. App.
    1986); T & N v. Pennsylvania Ins. Guaranty Ass’n, 
    44 F.3d 174
    ,
    186 (3d Cir. 1994); Restatement (Second) of Contracts § 280,
    comment b (1981, 2004 supp.); 3 E. Allan Farnsworth,
    Farnsworth on Contracts § 11.11, pp. 141-42 (3d ed. 2004); 30
    Williston on Contracts § 76:1 (4th ed. 2004 supp., Richard A.
    Lord ed.). But the judge also turned down these defendants’
    counterclaim, in which they sought to recover the attorneys’
    fees that they had incurred in defending against Utica’s
    claim.
    Unable to recover its entire loss from the signers of the
    1992 agreement (Atlas and Schulties—the latter now
    bankrupt), and seeking therefore to enforce the 1991 agree-
    ment against Vigo, Utica challenges the finding that the
    1992 agreement was a novation.
    The agreement does not describe itself as a novation or a
    substitute, or purport to release the signers of the first
    4                                     Nos. 04-1015, 04-1107
    agreement. The only clue in the agreements themselves that
    the second one might be a novation is that Atlas signed
    both, and if the only purpose of the second was to add an
    indemnitor, namely Schulties, why did Atlas sign it, having
    signed the identical first agreement, unless that wasn’t the
    purpose, and the second agreement replaced rather than sup-
    plemented the first? Additional evidence, that is, evidence
    beyond the two agreements themselves, was presented at
    the trial, and that evidence, together with the anomaly we’ve
    just noted, persuaded the judge that the second agreement
    was indeed a novation.
    That evidence revealed the following. In 1992, Vigo sold
    the coal mine to Atlas and Schulties and they agreed to use
    their best efforts to replace the existing reclamation bonds
    and obtain a release of Vigo’s liability under those bonds.
    They failed to do so, but an insurance agent named Jones
    submitted a “reclamation bonding application” to Utica,
    proposing to “transfer these bonds over and have new
    Indemnity Agreements signed by Chuck Schulties.” There
    was no mention of Vigo. The agent testified that the reason
    Vigo was left off the second agreement was that it and its
    owners, who had signed the 1991 agreement, “had no own-
    ership, they had no control, they were not party to running
    the company.” Asked at trial whether Vigo’s omission from
    the agreement was “confirmatory of the conversations that
    you’d had with [Utica’s Gerald Swarthout, who handled the
    negotiations leading up to the 1992 agreement] that they
    would not be indemnitors,” the agent replied “of course,
    they were selling.”
    Swarthout gave contrary testimony, but the district judge
    disbelieved it, in part because Schulties had (at the time!)
    substantial assets. That fact, together with his substantial
    expertise in coal mining, suggested that an indemnity agree-
    ment signed by him as well as by Atlas would provide suf-
    Nos. 04-1015, 04-1107                                       5
    ficient security to persuade Utica or some other insurance
    company to issue new reclamation bonds to replace those
    that Utica had issued. For although the General Indemnity
    Agreement (whether the 1991 or the 1992 version, since they
    were identical except for the signers) embraced replacement
    bonds, it was terminable by an indemnitor on 20 days’ notice.
    And therefore as part of Vigo’s sale of the coal mine to Atlas
    and Schulties, Atlas and Vigo could have withdrawn from
    the 1991 agreement and Atlas and Schulties, with a net
    worth between them of $7 million, could have persuaded
    Utica or some other insurance company to issue new surety
    bonds that Vigo, having withdrawn from the agreement,
    would not have been a guarantor of. Utica does not deny
    that its bonds could have been replaced in this fashion. Ind.
    Code § 14-34-6-14.6.
    The consequence of replacing the bonds would have been
    to release Vigo. But given Schulties’ financial wherewithal
    and mining expertise, and Vigo’s natural reluctance to re-
    main a guarantor of performance over which, as a result of
    the sale, it would no longer have any control, the judge was
    on solid ground in finding that Utica would have agreed to
    an express novation rather than lose to another insurance
    company a business relationship that yielded it significant
    premiums ($18,000 a year) in exchange for assuming what
    seemed at the time a modest risk. Modest because under-
    ground coal mines (Buck Creek’s mine was an underground
    mine) tend to require less expense to restore the surface
    after the mind is exhausted than strip mines and because
    two substantial-seeming parties, Atlas and Schulties, had
    agreed to indemnify Utica for any loss.
    The judge’s reconstruction of the parties’ deal—his con-
    clusion that they intended the second agreement to substitute
    for rather than supplement the first—is not clearly errone-
    ous. On the contrary, it makes commercial, economic, and
    6                                         Nos. 04-1015, 04-1107
    common sense; and good sense, or such synonyms as
    commercial reasonableness, provides sound guidance for
    interpreting ambiguous contracts, in Indiana as elsewhere.
    Soames v. Young Oil Co., 
    732 N.E.2d 1236
    , 1239 (Ind. App.
    2000); F.E. Gates Co. v. Hydro-Technologies, Inc., 
    722 N.E.2d 898
    , 903 n. 4 (Ind. App. 2000); Beanstalk Group, Inc. v. AM
    General Corp., 
    283 F.3d 856
    , 859-61 (7th Cir. 2002) (Indiana
    law); Morin Building Products Co., Inc. v. Baystone Construction,
    Inc., 
    717 F.2d 413
    , 414-15 (7th Cir. 1983) (ditto); XCO Int’l
    Inc. v. Pacific Scientific Co., 
    369 F.3d 998
    , 1005 (7th Cir. 2004);
    Outlet Embroidery Co. v. Derwent Mills, 
    172 N.E. 462
    , 463 (1930)
    (Cardozo, C.J.). As Judge Boudin explained recently, “Agree-
    ments, especially commercial arrangements, are designed to
    make sense. If one reading produces a plausible result for
    which parties might be expected to bargain, that reading has
    a strong presumption in its favor as against another reading
    producing an unlikely result (e.g., windfall gains, conditions
    that cannot be satisfied, dubious incentives).” National Tax
    Institute, Inc. v. Topnotch at Stowe Resort & Spa, 
    388 F.3d 15
    ,
    19 (1st Cir. 2004).
    The difficult question is whether the district judge was
    entitled to take evidence—to mine underground, as it were—
    rather than to stay on the semantic surface of the two agree-
    ments. A finding of novation is dynamite, as this case
    illustrates. Instead of supplementing a previous contract, it
    wipes it out. Parties that enter into multiple contracts with
    one another want protection against a trial that may convert
    a contract that says nothing about novation or release into
    a release of the obligors under a previous contract. Were it
    not for what we’re calling the dynamite effect of a novation,
    there would be no reason to treat a novation any differently
    from any other contract modification.
    One way to give obligees protection would be to have a
    rule that a novation or release must be explicit; that it can
    Nos. 04-1015, 04-1107                                         7
    never be implied. Indiana rejects that approach, Winkler v.
    V.G. Reed & Sons, 
    Inc., supra
    , 638 N.E.2d at 1233-34; Rose Acre
    Farms, Inc. v. 
    Cone, supra
    , 492 N.E.2d at 69; no jurisdiction,
    to our knowledge, accepts it. See, e.g., Imperial Hotels Corp.
    v. Dore, 
    257 F.3d 615
    , 620-21 (6th Cir. 2001); National Ameri-
    can Ins. Co. v. Hogan, 
    173 F.3d 1097
    , 1107-08 (8th Cir. 1999);
    Capital Nat’l Bank v. Hutchinson, 
    435 F.2d 46
    , 50 (5th Cir.
    1970); Kroll v. Sugar Supply Corp., 
    452 N.E.2d 649
    , 653 (Ill.
    App. 1983). So we can set it to one side. There are three
    alternatives. One, proposed by the Williston treatise, is to
    require that a novation be proved by clear and convincing
    evidence. 30 Williston on Contracts, supra, § 76:42. The cases
    do not support this alternative; Johnston v. Holiday Inns, Inc.,
    
    565 F.2d 790
    , 797 (1st Cir. 1977), rejects it outright. What the
    case law, including Indiana case law, does support is that
    proof of a novation must be “clear and definite” or “clear
    and satisfactory” or words to that effect. State v. Traylor, 
    173 N.E. 461
    , 464 (Ind. App. 1930); Joslyn Mfg. Co. v. Koppers Co.,
    Inc., 
    40 F.3d 750
    , 759-60 (5th Cir. 1994); Meredith v. Rockwell
    Int’l Corp., 
    826 F.2d 463
    , 466 (6th Cir. 1987); Hofer v. Mer-
    chants State Bank, 
    823 F.2d 271
    , 272-73 (8th Cir. 1987) (per
    curiam). We take this to be an appropriate reminder of the
    fell consequences of a finding of novation.
    Another alternative, which would treat the determination
    of novation like other issues of contractual interpretation, is
    that a novation can be implied only if there is an ambiguity
    as to whether the agreement claimed to be a novation really
    is one, rather than merely a supplement to the earlier
    agreement. This approach also has support in Indiana, as in
    other states. Downing v. Dial, 
    426 N.E.2d 416
    , 419 (Ind. App.
    1981); Boswell v. Lyon, 
    401 N.E.2d 735
    , 741 (Ind. App. 1980);
    Calder v. Camp Grove State Bank, 
    892 F.2d 629
    , 631-33 (7th
    Cir. 1990); see also In re Newport Plaza Associates, L.P., 
    985 F.2d 640
    , 644-45 (1st Cir. 1993).
    8                                      Nos. 04-1015, 04-1107
    Still another alternative, supported by the Indiana case of
    Rose Acre Farms, Inc. v. 
    Cone, supra
    , 492 N.E.2d at 68-69, and
    by some cases from other jurisdictions as well, Imperial
    Hotels Corp. v. 
    Dore, supra
    , 257 F.3d at 620-21; United States
    v. Hastings Motor Truck Co., 
    460 F.2d 1159
    , 1161 (8th Cir.
    1972), appears to allow extrinsic evidence to be introduced
    in any novation case, perhaps on the theory (not articulated
    in the cases, however) that the agreement claimed to be a
    novation cannot be interpreted without consideration of the
    meaning of the contract it is alleged to have replaced. This
    cannot be quite right; if the second agreement states “this is
    a novation” or “this is not a novation,” that surely is the end
    of the case; extrinsic evidence will not be allowed.
    Probably what we have described as alternative rules
    come to the same thing, in the following sense: the court can
    always peek at the earlier contract, and if in light of what
    that contract says it is uncertain whether the new contract is
    a novation, then the court can treat the interpretive issue as
    one of fact, that is, can take evidence on it, but always
    bearing in mind the need for the proof of a novation to be
    clear. The earlier contract is a bit of extrinsic evidence that
    is always already in the case, and if it shows that the new
    contract is ambiguous (as to whether it is a novation), the
    door is opened to the presentation of additional extrinsic
    evidence, which may make clear that the new contract really
    was intended to take the place of the old.
    The distinction that we are exploring is the familiar one
    between intrinsic and extrinsic (or patent and latent) am-
    biguity, the former referring to an ambiguity that is apparent
    just from reading the contract itself (the contract in issue,
    and therefore the 1992 General Indemnity Agreement), and
    the latter referring to an ambiguity that becomes apparent
    only when evidence outside the contract, that is, extrinsic
    evidence, is consulted. Adams v. Reinaker, 
    808 N.E.2d 192
    ,
    Nos. 04-1015, 04-1107                                         9
    196-97 (Ind. App. 2004); East v. Estate of East, 
    785 N.E.2d 597
    ,
    601 n. 1 (Ind. App. 2003); United States v. Rand Motors, 
    305 F.3d 770
    , 774-75 (7th Cir. 2002); Rossetto v. Pabst Brewing Co.,
    Inc., 
    217 F.3d 539
    , 542-43 (7th Cir. 2000); PMC, Inc. v.
    Sherwin-Williams Co., 
    151 F.3d 610
    , 614 (7th Cir. 1998). Vigo
    argues that there is an intrinsic ambiguity consisting of
    Atlas’s having signed the second agreement, when it had
    signed the first. If the second just added indemnitor(s) (for
    remember that the terms of the two agreements are identi-
    cal), what was Atlas doing there? One might be tempted to
    answer that it couldn’t hurt to have the indemnitors sign
    multiple agreements, just in case one of the agreements
    turned out to have some defect, but if so why was Vigo left
    off the second?
    This is a genuine puzzle, raising a serious question about
    the meaning of the 1992 agreement, but it is not an intrinsic
    ambiguity. No one reading just the 1992 agreement, the
    agreement contended to be a novation, would attach any
    significance to Atlas’s presence as a signatory. It is only
    when one reads the other agreement, and notices that Atlas
    signed that one too, that the meaning of the second is
    thrown into doubt. That is a bit of evidence extrinsic to the
    second agreement, but it does create an (extrinsic) ambigu-
    ity. And it is not the only evidence that does so—there is
    also Vigo’s sale of the mine to Atlas and Schulties, the un-
    dertaking by the purchasers to obtain Vigo’s release from
    the 1991 indemnity agreement, Schulties’ expertise and fi-
    nancial strength, the insurance agent’s testimony, and the
    unlikelihood that Utica would have refused to release Vigo
    from the earlier agreement because, had it refused, the pur-
    chasers of the coal mine would have turned elsewhere for
    the necessary reclamation bonds.
    But the desirability of allowing such evidence to be pre-
    sented in order to create a full and accurate picture of the
    10                                      Nos. 04-1015, 04-1107
    transaction in suit, and by doing so resolve the interpretive
    question, must be balanced against the danger that the “four
    corners” rule—the hallowed rule of contract law that the
    court must not delve below a contract’s semantic surface in
    interpreting it unless the contract is ambiguous, Thomas v.
    Thomas, 
    577 N.E.2d 216
    , 219-20 (Ind. 1991); Poznic v. Porter
    County Development Corp., 
    779 N.E.2d 1185
    , 1189-90 (Ind.
    App. 2002); Tri-Central High School v. Mason, 
    738 N.E.2d 341
    ,
    344 (Ind. App. 2000); Neuma, Inc. v. AMP, Inc., 
    259 F.3d 864
    ,
    873-74 (7th Cir. 2001); Bourke v. Dun & Bradstreet Corp., 
    159 F.3d 1032
    , 1036 (7th Cir. 1998)—will unravel if extrinsic
    evidence can be used to demonstrate ambiguity. For that is
    the very evidence that the party presenting it would use to
    prove that its interpretation of the contract was correct,
    converting interpretation from a reading exercise by the
    judge to a factual decision by a trier of fact and thus strip-
    ping the parties of protection from the vagaries of a jury.
    (Neither side requested a jury in this case, it is true; but
    either could have.)
    There are two methods of resolving such a conflict. The
    first, which is the older and the more conventional, is based
    on the parol evidence rule—the rule that if a written con-
    tract is “integrated,” parol (i.e., extrinsic) evidence, whether
    oral or written, concerning the negotiations or other back-
    ground to the contract, including preliminary agreements
    and understandings, is inadmissible to contradict the ap-
    parent meaning of the written contract. Franklin v. White, 
    493 N.E.2d 161
    , 165-66 (Ind. 1986); Truck City of Gary, Inc. v.
    Schneider Nat’l Leasing, 
    814 N.E.2d 273
    , 278 (Ind. App. 2004);
    Deckard v. General Motors Corp., 
    307 F.3d 556
    , 563 (7th Cir.
    2002) (Indiana law); In re Yates Development, Inc., 
    256 F.3d 1285
    , 1289-90 (11th Cir. 2001). An “integrated” contract is
    simply one that is intended to be the parties’ complete
    agreement. So what the parol evidence rule amounts to is
    Nos. 04-1015, 04-1107                                           11
    that if the parties want their written contract to be treated as
    the sole basis for interpreting their agreement the court will
    honor their wish—their wish to have any contract dispute
    resolved by application of the “four corners” rule.
    Normally parties demonstrate this wish by including an
    integration clause in the contract, that is, a clause that states
    that the contract reflects the parties’ complete understanding
    of their deal. The omission of the clause (there was none
    here) is not fatal; but when it is omitted a party can ask the
    judge to look at extrinsic evidence, though initially just for
    the limited purpose of deciding whether the contract really
    is integrated. Franklin v. 
    White, supra
    , 493 N.E.2d at 166-67;
    I.C.C. Protective Coatings, Inc. v. A.E. Staley Mfg. Co., 
    695 N.E.2d 1030
    , 1035 (Ind. App. 1998); Betaco, Inc. v. Cessna
    Aircraft Co., 
    103 F.3d 1281
    , 1285-86 (7th Cir. 1996); Cook v.
    Little Caesar Enterprises, Inc., 
    210 F.3d 653
    , 656 (6th Cir. 2000);
    Starter Corp. v. Converse, Inc., 
    170 F.3d 286
    , 295 (2d Cir. 1999).
    This does not mean throwing open the contract to a trial.
    The evidence is presented to the judge for a preliminary
    determination of whether the contract is integrated. Only if
    he decides that it is not integrated does the case go to the
    jury (or the judge in his capacity as the trier of fact in a
    bench trial, as in this case) for a determination, based on
    extrinsic evidence as well as the written contract—based in
    short on all relevant, admissible evidence—of what the con-
    tract really means. Truck City of Gary, Inc. v. Schneider Nat’l
    
    Leasing, supra
    , 814 N.E.2d at 278; Center State Farms v. Campbell
    Soup Co., 
    58 F.3d 1030
    , 1032-33 (4th Cir. 1995); American
    Bridge Co. v. Crawford, 
    31 F.2d 708
    , 710 (3d Cir. 1929); 11
    Williston on Contracts, supra, § 33:19.
    The other method of resolving the tension between the
    interest in admitting all evidence bearing on the meaning of
    a contract and the parties’ desire to avoid a trial in which
    that meaning might be determined by a commercially
    12                                      Nos. 04-1015, 04-1107
    unsophisticated jury or judge is to allow only objective
    evidence to be used to determine the existence of an ambigu-
    ity. Hemenway v. Peabody Coal Co., 
    159 F.3d 255
    , 259 (7th Cir.
    1998) (Indiana law); Matthews v. Sears Pension Plan, 
    144 F.3d 461
    , 467 (7th Cir. 1998); Cole Taylor Bank v. Truck Ins. Ex-
    change, 
    51 F.3d 736
    , 737-38 (7th Cir. 1995); AM Int’l, Inc. v.
    Graphic Management Associates, Inc., 
    44 F.3d 572
    (7th Cir.
    1995); Kerin v. United States Postal Service, 
    116 F.3d 988
    , 992
    n. 2 (2d Cir. 1997); Duquesne Light Co. v. Westinghouse Electric
    Corp., 
    66 F.3d 604
    , 614 (3d Cir. 1995); Carey Canada, Inc. v.
    Columbia Casualty Co., 
    940 F.2d 1548
    , 1557-58 (D.C. Cir.
    1991); Cincinnati Ins. Co. v. River City Construction Co., 
    757 N.E.2d 676
    , 681 (Ill. App. 2001). The idea of a judicial
    screening is retained, but there is an additional screen as
    well: the evidence that the judge uses to decide whether the
    meaning of the contract will have to be determined in a trial
    must be objective in the sense of not depending on the
    credibility of the parties to the contract; the evidence must
    be independently verifiable. The fact that a party testifies
    that although the contract says X he and the other party to
    the contract meant Y flunks the test of objectivity and so is
    inadmissible, whereas under the first approach, the one
    based on the parol evidence rule, a judge would be allowed
    by resolving a swearing contest to decide that the contract
    was not integrated and therefore that its meaning presented
    an issue for trial.
    Under either approach, extrinsic ambiguity was adequately
    demonstrated here. There was no integration clause in the
    1992 agreement (or in the prior one, for that matter, for
    remember that the terms, as distinct from their signatories,
    are identical). And so Judge Hamilton had to consider
    extrinsic evidence in order to decide whether the agreement
    was the complete agreement of the parties. It was not. From
    the sale of the mine and the other circumstances we’ve
    Nos. 04-1015, 04-1107                                         13
    recounted it is apparent that the parties understood the 1992
    agreement to replace rather than supplement the previous
    one.
    Under the “objective evidence” approach, the conclusion
    is the same. The evidence that the 1992 agreement was a
    novation rather than a supplement was objective in the
    sense that we have just explained. The sale of the mine,
    Atlas’s signature on the agreement, the testimony of the
    insurance agent—for he was Utica’s agent, not Vigo’s—and
    the implausibility of supposing that Vigo would have agreed
    to remain bound by the 1991 agreement as a condition of
    being able to sell the mine, were none of them supported
    only by self-serving, unverifiable testimony of a party.
    So the judge’s ruling that there was a novation stands. But
    it is does not follow, as Vigo’s counterclaim charges, that by
    trying to enforce the 1991 agreement against Vigo, Utica
    violated the agreement and is therefore liable for damages for
    breach that consist of the attorneys’ fees that Vigo expended
    in this case. This argument would if accepted make attor-
    neys’ fee shifting the rule in contract cases. Several states do
    allow the award of attorneys’ fees as a matter of course in a
    breach of contract suit. MindGames, Inc. v. Western Publishing
    Co., Inc., 
    218 F.3d 652
    , 654 (7th Cir. 2000) (Arkansas law);
    Flourine On Call, Ltd. v. Fluorogas Ltd., 
    380 F.3d 849
    , 866-67
    (5th Cir. 2004) (Texas law). But most—including Indi-
    ana—do not. Thor Electric, Inc. v. Oberle & Associates, Inc., 
    741 N.E.2d 373
    , 382-83 (Ind. App. 2000); Shumate v. Lycan, 
    675 N.E.2d 749
    , 754-55 (Ind. App. 1997); Osler Institute, Inc. v.
    Forde, 
    386 F.3d 816
    , 818 (7th Cir. 2004) (ditto); Oscar Gruss &
    Son, Inc. v. Hollander, 
    337 F.3d 186
    , 199-200 (2d Cir. 2003); cf.
    J.R. Cousin Industries, Inc. v. Menard, Inc., 
    127 F.3d 580
    , 583
    (7th Cir. 1997). Vigo’s argument confuses a mistaken
    litigating position in a contract case with a breach of the
    contract. A breach of contract is a failure to perform a
    14                                      Nos. 04-1015, 04-1107
    contracted-for undertaking. Utica did not fail to perform
    any of the undertakings that it had agreed to in the 1991 or
    1992 agreements. It merely mistook Vigo’s undertakings.
    There is one more issue. An Indiana statute, recently
    repealed but conceded to be applicable to this case, pro-
    vides, so far as bears on the case, that a “debtor” may not
    “bring an action upon an agreement with a creditor . . . to
    forbear from exercising rights under a prior credit agree-
    ment” unless the agreement “sets forth all the material terms
    and conditions of the agreement” and “is signed by the cre-
    ditor and the debtor.” Ind. Code § 32-2-1.5-5. Many states
    have such statutes, as we noted in Consolidation Services, Inc.
    v. KeyBank Nat’l Ass’n, 
    185 F.3d 817
    , 819-20 (7th Cir. 1999).
    They are a reaction against “lender liability” litigation,
    Whitney Nat’l Bank v. Rockwell, 
    661 So. 2d 1325
    , 1329-31 (La.
    1995), in which borrowers assert “breach of oral agreements
    to lend, to refinance or to forbear from enforcing contractual
    remedies.” 
    Id. at 1329.
    And indeed the Indiana law was not
    really repealed, but merely shifted without substantive
    changes to another chapter of the Indiana Code. See Ind.
    Code §§ 26-2-9-1 et seq.
    Utica argues that the 1992 General Indemnity Agreement,
    if viewed as a novation, is an agreement between a creditor
    (Utica, the releasing party, in the novation aspect of the
    agreement) and a debtor (Vigo, the released party), and
    neither party signed the agreement and the agreement
    doesn’t set forth all the material terms—it doesn’t even set
    forth the key term: that it is a novation.
    Vigo was not suing on the 1992 agreement, but merely
    interposing it as a defense to Utica’s suit on the previous
    agreement. Transportation & Transit Associates, Inc. v. Morrison
    Knudsen Corp., 
    255 F.3d 397
    , 400 (7th Cir. 2001); Able Int’l
    Corp. v. B.P. Chemicals America, Inc., 
    145 F.3d 67
    , 68 (1st Cir.
    Nos. 04-1015, 04-1107                                         15
    1998); Phillips & Arnold, Inc. v. Frederick J. Borgsmiller, Inc.,
    
    462 N.E.2d 924
    , 929 (Ill. App. 1984); 30 Williston on Contracts,
    supra, § 76:40. That in itself is not critical, however, as
    Wabash Grain, Inc. v. Bank One, Crawfordsville, NA, 
    713 N.E.2d 323
    , 326 (Ind. App. 1999) makes clear, though two other
    courts disagree. Brown v. Founders Bank & Trust Co., 
    890 P.2d 855
    , 861-62 (Okla. 1994); Fleming Irrigation, Inc. v. Pioneer
    Bank & Trust Co., 
    661 So. 2d 1035
    , 1039 (La. App. 1995).
    If testimony to oral modifications of credit agreements is
    thought unreliable evidence, it doesn’t matter whether the
    evidence is introduced by the plaintiff or the defendant.
    Nevertheless the statute is not applicable to this case. A
    suretyship contract is not a “credit agreement,” the key term
    in the statute, which defines a creditor (so far as bears on
    this case) as an insurance company that “extend[s] credit
    under a credit agreement with a debtor” and a debtor as one
    who “obtains credit under a credit agreement with a
    creditor,” “seeks a credit agreement with a creditor,” or
    “owes money to a creditor.” Ind. Code §§ 32-3-1.5-2, -3.
    Utica did not lend money to the coal company, or to any
    other entity or individual involved in this case. Nor did it
    extend credit in the sense of committing itself under stated
    conditions to lend money to anyone in the future. Its obli-
    gations ran only to the Indiana state government, the entity
    that had required the posting of reclamation bonds on
    behalf of Blue Creek Coal. If Utica and Vigo come within the
    statute’s reach at all, it is as “debtors” of the state.
    And if despite what we have said the Indiana statute did
    render the 1992 agreement unenforceable (more precisely,
    not “interposable” as a defense), equally it rendered the 1991
    agreement unenforceable, because the “creditor,” Utica, did
    not sign it. Yet Utica sued to enforce the 1991 agreement, and
    prevailed against the signers of it. For that matter, it sued to
    enforce the 1992 agreement as well, and though it gained
    16                                      Nos. 04-1015, 04-1107
    nothing because Schulties declared bankruptcy, it could
    have filed a claim in bankruptcy against him based on the
    agreement (we don’t know whether it did or not). The
    doctrine of “mend the hold” forbids a contract party,
    particularly when it is an insurance company, to change its
    position on the meaning of the contract in the middle of
    litigation over it. National Hame & Chain Co. v. Robertson, 
    161 N.E. 851
    , 853 (Ind. App. 1928); Houben v. Telular Corp., 
    309 F.3d 1028
    , 1036 (7th Cir. 2002); United States v. Newell, 
    239 F.3d 917
    , 922 (7th Cir. 2001); Harbor Ins. Co. v. Continental
    Bank Corp., 
    922 F.2d 357
    , 362-64 (7th Cir. 1990). Which is
    what Utica has done.
    AFFIRMED.
    A true Copy:
    Teste:
    _____________________________
    Clerk of the United States Court of
    Appeals for the Seventh Circuit
    USCA-02-C-0072—12-20-04
    

Document Info

Docket Number: 04-1015, 04-1107

Judges: Posner, Kanne, Rovner

Filed Date: 12/20/2004

Precedential Status: Precedential

Modified Date: 3/1/2024

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