Rexing Quality Eggs v. Rembrandt Enterprises, Inc. ( 2020 )

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 19-2146
REXING QUALITY EGGS,
Plaintiff-Appellant,
v.
REMBRANDT ENTERPRISES, INC.,
Defendant-Appellee.
____________________
Appeal from the United States District Court for the
Southern District of Indiana, Evansville Division.
No. 3:19-cv-00031 — Jane Magnus-Stinson, Chief Judge.
____________________
ARGUED DECEMBER 3, 2019 — DECIDED MARCH 26, 2020
____________________
Before WOOD, Chief Judge, and HAMILTON and SCUDDER,
Circuit Judges.
WOOD, Chief Judge. This case is the second to arise out of
an ill-fated relationship between Rexing Quality Eggs and
Rembrandt Enterprises, Inc. The first case addressed various
claims arising under a contract that the two parties formed at
the outset of their business dealings. Although this case arises
out of the same transaction, this time Rexing, the plaintiff, has
raised tort claims. The question on appeal is whether its effort
2 No. 19-2146
to bring a new action is consistent with Indiana’s prohibition
on claim splitting, under which a plaintiff is forbidden to
bring a case presenting claims that arise out of the same trans-
action or events that underlie claims brought in another law-
suit. We hold that the claim-splitting ban applies here, and so
we affirm the district court’s judgment.
I
Rexing and Rembrandt entered into a contract under
which Rembrandt, a producer of eggs, promised to supply
Rexing, a distributor, with 3,240,000 cage-free eggs every
week for a year. Eight months after the agreement took effect,
Rexing repudiated it, claiming that Rembrandt had breached
its obligations by failing to provide eggs that met the quality
standards specified in the agreement. Rexing refused to ac-
cept any more loads of eggs. In the aftermath, Rexing sued
Rembrandt, seeking a declaration that it was excused from ac-
cepting any more eggs, as well as incidental and consequen-
tial damages for alleged breaches of warranty in the purchase
agreement. Rexing Quality Eggs v. Rembrandt Enterprises, Inc.,
360 F. Supp. 3d 817 (S.D. Ind. 2018) (Rexing I). Rexing sought
$67,261.50 in general damages, $60,204.84 in lost profits, and
$997,650 in start-up costs.
Rembrandt counterclaimed, seeking damages for breach
of contract. After discovery, both parties moved for summary
judgment. The trial court determined that Rexing had unilat-
erally terminated the contract and that the breach was not ex-
cused. At the same time, it ruled that Rembrandt was not en-
titled to summary judgment on the question whether it was
entitled to damages, and it allowed the case to move forward
to trial on that issue. The district court held a trial in Novem-
ber 2019; it resulted in a jury verdict in Rembrandt’s favor and
No. 19-2146 3
an award of $1,522,302.61 in damages against Rexing. Rexing
filed a timely notice of appeal, but on January 2, 2020, it vol-
untarily dismissed the appeal pursuant to Federal Rule of Ap-
pellate Procedure 42(b). It appears that some post-verdict
wrangling over attorney’s fees and costs is still ongoing.
After its partial loss on summary judgment but before the
trial in Rexing I, Rexing brought this action (Rexing II) in state
court, one month after the district court ordered summary
judgment in the first case. This time, Rexing sued Rembrandt
for the torts of conversion and deception. Rexing claimed that
Rembrandt had refused to return reusable shipping materials,
including plastic flats, dividers, and pallets, collectively called
the “EggsCargoSystem.” Rexing had provided the EggsCar-
goSystem to Rembrandt to use in loading eggs for Rexing to
pick up. The original contract called for Rexing to provide
Rembrandt with the materials, but it did not require Rem-
brandt to return the EggsCargoSystem at the termination of
the agreement. Nonetheless, Rexing made three demands that
Rembrandt return the EggsCargoSystem. Rembrandt re-
turned some, but not all, of the materials in November 2018.
In Rexing I, Rexing had sought the value of the EggsCargoSys-
tem as part of the start-up costs that it alleged it incurred in
reliance on the original agreement with Rembrandt. Now, in
Rexing II, Rexing seeks damages for the unreturned materials,
as well as for the loss of the use of the EggsCargoSystem dur-
ing the time that Rembrandt allegedly unlawfully possessed
it.
Taking advantage of the fact that the parties were of di-
verse citizenship (Rembrandt is an Iowa corporation with its
principal place of business in that state, and Rexing is an In-
diana partnership whose only two partners are both citizens
4 No. 19-2146
of Indiana), and the amount in controversy easily exceeded
$75,000, Rembrandt removed Rexing II to federal court and
moved to dismiss the action. 28 U.S.C. §§ 1332(a)(1) & (c),
1441(b). It argued that the claims in Rexing II were barred by
the claim-preclusion branch of res judicata in light of the dis-
trict court’s grant of partial summary judgment in Rexing I,
and it contended that Rexing had improperly split its claims
between the two cases.
The district court granted Rembrandt’s motion to dismiss,
ruling that, while the new case was not barred by claim pre-
clusion, Rexing had impermissibly split its claims. Under In-
diana’s doctrine prohibiting claim splitting, a plaintiff cannot
bring a new lawsuit based upon the same transaction or oc-
currence that underlies claims brought in another lawsuit. Be-
cause Rexing I and Rexing II both centered around the same
controversy, the district court determined that Rexing had im-
permissibly split its claim and dismissed the case. Rexing ap-
peals.
II
Rexing offers three arguments why the rule against claim
splitting should not apply to this case. First, it argues that the
district court applied the wrong test under Indiana law for es-
tablishing claim splitting, and that it would have prevailed
under the proper test. Second, it argues that claim splitting
cannot prevent litigation of facts that were unknown at the
time the original case was filed. Finally, it argues that the rule
against claim splitting does not apply to continuing torts, and
that conversion is a continuing tort under Indiana law. Each
of these arguments fails, as discussed below.
No. 19-2146 5
A
Before addressing Rembrandt’s arguments, we need to
say a word about the law that applies to them. Rexing’s posi-
tion is a bit hard to follow, but it appears to argue that Indiana
law applies because this is a substantive matter and that the
district court deviated from Indiana’s rules; it then expends
considerable time arguing that the district court erroneously
relied on Telamon Corp. v. Charter Oak First Ins. Co., 2016 WL
67297 (S.D. Ind. 2016), aff’d, 850 F.3d 866 (7th Cir. 2017), when
it resolved this issue. Rembrandt responds first that there is
no material difference between Indiana law and federal law,
and that it wins either way.
In fact, the district court approached this issue in the
appropriate way. It first recognized that the law on claim-
splitting is part of the law of res judicata. See Palka v. City of
Chicago, 662 F.3d 428, 437 (7th Cir. 2011); Alvear-Velez v.
Mukasey, 540 F.3d 672, 678 (7th Cir. 2008). It then noted that
when a federal court is considering the effect of an earlier
ruling in a case within its diversity jurisdiction, as Rexing I
was, for purposes of claim preclusion “federal common law
governs the … effect of a dismissal by a federal court sitting
in diversity.” Semtek Int’l Inc. v. Lockheed Martin Corp., 531 U.S.
497, 508 (2001). Nonetheless, the Supreme Court continued,
the content of the federally prescribed rule should be taken
from “the law that would be applied by state courts in the
State in which the federal diversity court sits.” Id. Like the
district court, we see no reason why this approach should not
apply with equal force to the problem of claim-splitting. We
therefore hold that the content of the law governing the effect
of Rexing I comes from Indiana law, which is incorporated as
6 No. 19-2146
the applicable federal common law. Our references below to
Indiana law should be understood in this light.
The rule against claim splitting prohibits a plaintiff from
bringing a new case raising issues arising out of the same
transaction or occurrence as an earlier case, when those issues
could have been raised in the first litigation. Indiana law has
long recognized this prohibition. See MicroVote Gen. Corp. v.
Indiana Election Comm’n, 924 N.E.2d 184, 192 (Ind. Ct. App.
2010) (“[A] party is not allowed to split a cause of action, pur-
suing it in a piecemeal fashion and subjecting a defendant to
needless multiple suits.”); Quimby v. Becovic Mgmt. Grp., Inc.,
946 N.E.2d 30, 34 n.4 (Ind. Ct. App. 2011) (“[M]ultiple legal
theories supporting relief on account of one transaction must
be litigated at one go.”) (quoting Wabash Valley Power Ass’n,
Inc. v. Rural Electrification Admin., 903 F.2d 445, 455 (7th Cir.
1990)).
The district court here applied a two-part test drawn from
Telamon. In that case, another judge from the same district
summarized the governing law as follows: a court should find
that a plaintiff split her claims when “(1) the second claim is
based on the same transaction or occurrence as the first claim
and there is (2) an identity of parties or their privies.” 2016
WL 67297, at *2. (Although it was not clear from the district
court’s citations whether it was looking to federal law or In-
diana law, on appeal we explicitly recognized that the Semtek
approach governs. See Telamon, 850 F.3d at 872–73.) The court
in Rexing II determined that Rexing had merely repackaged
its failed attempt to sue Rembrandt for breach of contract as a
tort case, and that the rule against claim splitting barred the
second action.
No. 19-2146 7
Though acknowledging that Indiana law prohibits claim
splitting, Rexing argues that the district court applied the
wrong test for establishing whether claim splitting had oc-
curred. Rexing points to Indiana cases that have held that “the
test for making [the claim-splitting] determination is whether
identical evidence will support the issues involved in both ac-
tions.” MicroVote, 924 N.E.2d at 192. Referring to this ap-
proach as the “identical evidence test,” Rexing argues that in
Indiana, the rule against claim splitting applies only when
there is no difference between the evidence needed to support
the claims in each of the two actions. Because the elements of
a claim for breach of contract and a claim for deception or con-
version are supported by different facts, Rexing reasons, dif-
ferent evidence is required to substantiate each claim and thus
it did not split its claims across the two cases.
Although Indiana courts do sometimes use the term
“identical evidence,” Rexing overstates the significance of
those words. The rule against claim splitting does not apply
exclusively to cases in which the second claim can be sup-
ported only by exactly the same evidence that supported the
first. The Indiana cases on point show that the “identical evi-
dence” test requires only that “the same general evidence
would be used to adjudicate all of [the] claims.” Hilliard v. Ja-
cobs, 957 N.E.2d 1043, 1047 (Ind. Ct. App. 2011).
There is no meaningful difference between the “identical
evidence” test, so understood, and the test that the district
court applied. We have held as much in earlier cases applying
Indiana’s identical-evidence test. Wabash Valley, 903 F.2d at
456 (observing that identical evidence is “another way of ask-
ing whether the two suits deal with a common occurrence”);
Atkins v. Hancock Cnty. Sheriff’s Merit Bd., 910 F.2d 403, 405 (7th
8 No. 19-2146
Cir. 1990) (“Understood literally, [the identical-evidence] ap-
proach would confine a plea of res judicata to cases in which
the claim in plaintiff’s second suit was identical to the claim
in his first, and would invite piecemeal litigation with a
vengeance. We have not thought that Indiana intended to con-
fine res judicata so narrowly[.]”). Although the Indiana Su-
preme Court has not ruled on this issue directly, it has favor-
ably cited our cases applying the identical-evidence rule. See,
e.g., Erie Ins. Co. v. George, 681 N.E.2d 183, 190 (Ind. 1997) (cit-
ing Wabash Valley, 903 F.2d at 455). Thus, the district court
properly applied Indiana’s law concerning claim splitting,
and Rexing’s argument to the contrary fails.
B
Rexing also urges that the bar on claim splitting does not
apply to this case because the claim in Rexing II arises from
events that occurred after it filed Rexing I. Because Rexing was
unaware that Rembrandt would not return the EggsCargo-
System at the time it filed Rexing I, it argues, the rule against
claim splitting does not apply.
As the district court held, Rexing has not shown that ma-
terial unknown facts were later revealed. Before initiating
Rexing I, Rexing had already formally demanded the return
of the EggsCargoSystem. It again demanded that Rembrandt
return the System the day after filing Rexing I. Additionally,
in its complaint in Rexing I, Rexing sought the recovery of the
cost of the EggsCargoSystem. The conclusion is irresistible
that Rexing knew at the time it filed the first case that the cus-
tody or ownership of the EggsCargoSystem was part of the
dispute between the parties; it thus should have raised any-
thing it had to say about that claim at the time. No material
facts that were unknown at the time Rexing filed Rexing I later
No. 19-2146 9
came to light. Rexing cannot evade the application of the rule
against claim splitting by arguing that it could not have raised
its arguments about the System at the time it filed Rexing I
because the claim was not ripe or the facts were unknown.
C
Finally, Rexing argues that an exception to the rule against
claim splitting should apply to cases of conversion. Pointing
to the American Law Institute’s Restatement (Second) of
Judgments, it argues that “continuing or concurrent
wrong[s]” are exempt and that the tort of conversion is such
a wrong. RESTATEMENT (SECOND) OF JUDGMENTS § 26(1)(e) (ALI
1982); see also Van Bibber v. Norris, 404 N.E.2d 1365, 1380 (Ind.
Ct. App. 1980) (“Conversion is a continuing tort, lasting as
long as the person entitled to the use and possession of his
property is deprived of it.”). We are also unpersuaded by this
argument.
Rexing has not directed our attention to any case law
showing that Indiana has adopted Section 26 of the Restate-
ment. But even if we were to overlook this serious deficit, it
would not help Rexing. Section 26(1)(e) applies only to situa-
tions in which a harm cannot be remedied at one go. The Re-
statement gives nuisance as an example of such a continuing
tort. There, a defendant’s activity on her own land causes on-
going harm to the plaintiff in the use of her land. In such cases,
the plaintiff may be able to sue repeatedly to remedy the con-
tinuing harm as it accrues. Even in such a case, however, “the
plaintiff, to avoid splitting, must claim all damages suffered
[up] to the time of the suit.” RESTATEMENT (SECOND) OF
JUDGMENTS § 26 cmt. h.
10 No. 19-2146
Conversion is not a continuing tort within the meaning of
Section 26(1)(e). Even viewing the facts in the light most fa-
vorable to Rexing, Rembrandt unlawfully appropriated the
EggsCargoSystem only one time. Rexing knew that Rem-
brandt remained in possession of the System at the time it
filed Rexing I; indeed, it had already demanded that the Sys-
tem be returned to it. The fact that Rembrandt continued to
refuse to return the System does not render the conversion a
“continuous” tort in the sense intended by the Restatement
(or in any other sense we normally see). Indiana courts have
dismissed conversion claims on claim-splitting grounds,
demonstrating that Indiana law does not recognize the rule
that Rexing advocates. Hilliard, 957 N.E.2d at 1048. There is no
continuing tort exception to the rule against claim splitting in
cases of conversion.
III
Despite Rexing’s best efforts to paint these proceedings in
a different light, we agree with the district court that they
were logically part of Rexing I and that the attempt to rehash
them in Rexing II was an impermissible effort at claim split-
ting. We therefore AFFIRM the judgment of the district court.