Rail Intermodal Specialists, Inc. v. General Electric Capital Corp. ( 1996 )

Nos. 95-3821/3929
Rail Intermodal Specialists, *
Inc., an Iowa Corporation *
formerly known as CC&P *
Intermodal Corporation, *
*
Appellee/Cross-Appellant, *
* Appeal from the United States
v. * District Court for the
* Northern District of
* Iowa.
General Electric Capital *
Corporation, a New York *
Corporation formerly known *
as General Electric Credit *
Corporation, *
*
Appellant/Cross-Appellee. *
Submitted: June 10, 1996
Filed: December 23, 1996
Before RICHARD S. ARNOLD, Chief Judge,
1
MORRIS SHEPPARD ARNOLD,
Circuit Judge, and ROSENBAUM, District Judge.
MORRIS SHEPPARD ARNOLD, Circuit Judge.
General Electric Capital Corporation ("GECC") appeals from a
judgment entered against it in an action brought by Rail Intermodal
Specialists ("Intermodal") for intentional interference with an
existing contract. GECC asserts that it was entitled to judgment
as a matter of law and asks, in the alternative, for a new trial
due to errors in the district court's instructions to the jury.
1
The Honorable James M. Rosenbaum, United States District
Judge for the District of Minnesota, sitting by designation.
Intermodal cross-appeals from certain evidentiary rulings. The
case, here under our diversity jurisdiction, is governed by Iowa
law. Because we believe that GECC was entitled to judgment as a
matter of law and that the cross-appeal is without merit, we
reverse the judgment of the district court.
I.
The contract at issue in this case was between Intermodal and
a small railroad company called the Chicago Central and Pacific
Railroad ("CC&P"). CC&P came into existence in December of 1985
when GECC lent John E. Haley $75 million to purchase a rail line
from the Illinois Central Gulf Railroad. Mr. Haley, whose primary
work experience was in real estate and property management, had
first ventured into the railroad business the year before when he
bought the Cedar Valley Railroad, also from the Illinois Central
Gulf Railroad.
Intermodal is a company that brokers the placement of trucks
on flatbed railroad cars. The business moves goods by a
combination of trucking and railroad more cheaply than can be done
by either mode by itself. Thomas Hastings, president of
Intermodal, learned of the impending sale of the railroad to
Mr. Haley through the newspaper, and called him to talk about the
possibility of having Intermodal traffic on CC&P. An agreement
between the two companies followed in December of 1985.
The contract at issue here was not the original one but one
signed the following year. While under the first contract
Intermodal paid an amount directly proportional to the volume of
traffic it ran, under the second contract Intermodal paid a fixed
amount of $6,106 a day for a train dedicated only to Intermodal's
traffic. Under this second contract the revenue to the railroad
was therefore the same whether Intermodal ran one car or a large
train. Mr. Haley testified that he liked the new arrangement
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because it relieved him of his concern about not covering his
overhead during days when there were only a few Intermodal cars.
Intermodal, for its part, felt that the contract was potentially
more profitable. The contract contained a provision that allowed
the parties to negotiate a new rate every three months to ensure
that the contract remained "profitable for both parties."
CC&P, under Mr. Haley's stewardship, did not fare well.
Within two years, it had become the paradigm of a business very
much in distress: It had a severe cash flow problem; its accounts
payable were overdue by several hundred thousand dollars; it was
unable to make or adhere to financial projections; and its
important personnel were leaving. The business had persistently
failed to meet the financial performance targets set out in the
loan agreement. By July, 1987, it was losing over $1 million a
month. By that time loan payments had stopped, placing the
business in default to GECC.
By September of 1987, GECC had acted on its prerogative under
the loan agreement to audit the business. The audit report
indicated that $8 million to $10 million would be needed to cover
the cash-flow shortfalls expected to occur in the ensuing four
months. The auditors, noting that the railroad's business
comprised three parts -- coal delivery (called the "lifeblood" of
the business), grain delivery, and Intermodal traffic -- found
serious problems with the coal business. They were impressed with
recent increases in revenues from grain shipments. As far as
Intermodal business was concerned, although volume had recently
risen, real revenue growth had been minimal because of the flat-
rate contract with Intermodal; and the auditors concluded that "a
lot of CCP marketing effort [was] expended in this minimally
profitable area."
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GECC came to believe that CC&P's fundamental difficulty was a
lack of effective management: One auditor noted that "CCP appears
to be a business without a management system infrastructure";
another auditor noted that he had a "[t]otal lack of confidence in
operating management." GECC therefore acted to remove Mr. Haley
from his position as president of CC&P. A deal was eventually
struck and Mr. Haley left the railroad with a settlement. Don
Wood, an independent consultant who had been hired by GECC to look
into the railroad's operation, was installed as the new chief
executive officer. Mr. Wood's compensation was set out in an
employment contract with CC&P negotiated between him and GECC,
which controlled CC&P's corporate board. In addition, as one GECC
executive testified, there was an understanding that the stock
which GECC had received from Mr. Haley would go to Mr. Wood "if he
did something" with regard to the railroad.
Mr. Wood acted immediately to try to stem the sizable losses
from which the business was suffering, and one object of his
attention was the Intermodal contract. Andrew Lloyd, a GECC
employee who was responsible for monitoring the railroad's loan,
had reviewed the contract and scribbled some notes in the margin of
the contract, including one exhorting someone to "do this now" next
to the provision allowing for periodic readjustments of the price
charged to Intermodal. Mr. Wood made his own notes on the same
contract and later met with Intermodal officials to discuss
adjusting the contract pricing. There was disagreement as to what
the contract allowed, mainly with respect to whether, as Intermodal
insisted, the permissible adjustments to the price were limited to
increases of direct variable costs.
More meetings were planned, but in the meantime Mr. Wood sent
a letter to Intermodal; the contents of this letter are not in
dispute, but its meaning very much is. The letter stated that
"[i]n order to restore this service to profitability the Daily
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Train Charge ... will be $16,424 per day," almost three times the
existing price. The letter, as an alternative, offered a
consolidated service to Intermodal that represented a similar
increase in costs, and closed with a request for an immediate
response from Intermodal. According to Mr. Wood and GECC, this
letter represented an attempt to negotiate adjustments in the
pricing of the contract in order to make the contract profitable
for the railroad. Intermodal, which says that the new pricing
would have forced it out of business, contends that the letter
itself constituted a breach of the contract.
After the letter was sent, negotiations between the railroad
and Intermodal broke down. Intermodal halted all payments of any
kind to the railroad, although it did continue to use the
railroad's service. The railroad then filed suit against
Intermodal seeking payment of nearly $1 million; Intermodal
counterclaimed against the railroad for breach of contract. The
parties resolved the lawsuit by executing a mutual release, with no
money changing hands, several months later.
II.
Iowa's law on the tort of interference with contract adheres
closely to the principles outlined in the Restatement (Second) of
Torts § 766 (1979). Under those principles, Intermodal had the
burden to prove not only that the contract was breached, but also
that the breach was intentionally induced by GECC. Intermodal was
obligated to show, in addition, that GECC's conduct was improper.
For the reasons that follow, we hold that there was insufficient
evidence from which a reasonable jury could have inferred that GECC
induced a breach of contract, assuming that there was one, or that
GECC's conduct was improper. We therefore have no occasion to
decide whether there was sufficient evidence to infer a material
breach of contract.
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A.
Intermodal's argument that GECC intentionally induced a breach
of the relevant contract rests heavily on Mr. Lloyd's note written
in the margin next to the adjustment provision of the contract,
which simply directed someone to "do this now." In addition,
Intermodal makes much of the fact that Mr. Wood had strong ties to
GECC, and that stock in the railroad was held out to him by GECC as
compensation "if he did something" with the railroad.
First of all, it is difficult to see how the direction to "do
this now" could have been anything other than an exhortation to
someone to take advantage of the adjustment provision in the
contract and to renegotiate the contract in order to place it on a
profitable footing. This seems to us the only reasonable inference
that the marginal note can support. Similarly, the sole reasonable
inference to be drawn from the comment that Mr. Wood would earn the
stock held out to him only "if he did something" has to be that he
had to succeed in the process of turning the railroad around
generally. To infer that by providing an incentive to Mr. Wood
GECC was prompting him to breach the contract with Intermodal is
unreasonable.
It is important to see that Mr. Wood's interests were the same
as GECC's interests: Each wanted the railroad to survive, because
upon that outcome depended both GECC's hopes of salvaging its
investment and Mr. Wood's hopes of being well compensated (the
stock, of course, would be worthless if the business failed).
Mr. Wood's actions with regard to Intermodal were, of course, done
with the best interests of the railroad in mind, but the fact that
these actions coincidentally promoted the interests of GECC is not
evidence of an intentional inducement to breach a contract on
GECC's part. Whether Mr. Wood believed that the railroad was
breaching the contract one cannot know, although it is at least
conceivable that the railroad was willing to risk a breach (and
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damages) in order to be relieved of its obligations under the
contract. But that is not evidence that GECC induced a breach.
B.
Proving that GECC's conduct was improper is probably the most
difficult of Intermodal's burdens in this case, not least because
of the confusion that surrounds the term "improper." The
Restatement goes on at some length about the care with which the
term was chosen, and identifies and discusses various other
descriptive words that were discarded along the way because they
carried too much baggage (e.g., unreasonable, unfair, undue,
unjust, and inequitable). At any rate, whether an inducement is
improper, the Restatement tells us, depends on the weighing of a
number of matters, namely, the nature of the actor's conduct, the
actor's motive, the interests of the other with which the actor's
conduct interferes, the interest sought to be advanced by the
actor, the balance between the social interests in protecting the
freedom of action of the actor and the contractual interest of the
other, the proximity or remoteness of the actor's conduct to the
interference, and the relations between the parties. See
Restatement (Second) of Torts § 767 (1979). Iowa courts have
faithfully rehearsed these considerations in dealing with cases
like the one before us. See Water Dev. Co. v. Bd. of Water Works,
488 N.W.2d 158, 161-62 (Iowa 1992), and Toney v. Casey's Gen.
Stores, Inc., 460 N.W.2d 849, 853 (Iowa 1990). What is missing, as
always with lists of this sort, is some formula by which to balance
all of the relevant considerations.
We believe that the core of the tort of interference with
contract can be found in cases in which the defendant lures the
plaintiff's employee away, knowing that the employee has a contract
with the plaintiff that he is breaking by going to work for the
defendant. Lumley v. Gye, 2 El. & Bl. 216, 118 Eng. Rep. 749
(Q.B. 1853). Yet even this core has been controversial, since it
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runs counter to the principle that a party breached against can be
adequately compensated in damages for breach of contract. As to
why a victim of a breach of contract should have a remedy in tort
against a third party, various answers have been offered. One
practical explanation is that a breaching servant is effectively
judgment-proof. A desire to see that somebody pays undoubtedly
serves to keep this tort alive today.
Liability has expanded beyond the predatory model most often,
it seems, to cases in which the action taken is independently
tortious. There are cases involving acts of violence, of fraud,
and of defamation. A colorful illustration of the last is the case
of Am. Sur. Co. v. Schottenbauer, 257 F.2d 6 (8th Cir. 1958), in
which an employee brought an action against a workers' compensation
insurer that had pressured the employer to terminate the employee's
work contract. The insurer believed (mistakenly) that an illness
the worker had contracted on the job was extremely serious and
would require expensive treatment. The worker succeeded in his
claim against the insurer for interference with an existing
contract.
The case before us fits neither of these relatively clear
categories since GECC is not a competitor of Intermodal and the
alleged act of interference is not independently tortious. If we
venture beyond these specific instantiations of the tort we
encounter a great deal of ambiguity. The Restatement, in fact,
notes that "[u]nlike other intentional torts such as intentional
injury to person or property, or defamation, this branch of tort
law has not developed a crystallized set of definite rules as to
the existence or nonexistence of a privilege to act in the manner
stated." Restatement (Second) of Torts § 767 comment b.
The Iowa courts, however, have provided us with some guidance,
although the litigants debate strenuously the meaning of the
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relevant case law. In Wilkin Elevator v. Bennett State Bank, 522
N.W.2d 57, 62 (Iowa 1994), the court stated that "to establish
improper interference a showing is required that the actor's
predominant purpose was to injure or destroy the plaintiff's
business." Intermodal argues that this case was an anomaly, that
it inexplicably abandoned the distinction that Iowa courts had long
drawn between the tort of interference with an existing contract
and the tort of interference with a prospective contract. Only the
latter tort, Intermodal argues, involves the higher burden, a
burden that Intermodal concededly could not carry. But the recent
case of Berger v. Cas' Feed Store, Inc., 543 N.W.2d 597, 599 (Iowa
1996), decided after the district court entered judgment in this
case, cited Wilkin Elevator approvingly in circumstances in which
the plaintiff claimed an interference with an existing contract.
The court quoted approvingly the portion of Wilkin Elevator that
had held that the plaintiff there had produced "no evidence of a
predominant purpose of causing injury to the plaintiffs," and held
that "a party does not improperly interfere with another's contract
by exercising its own legal rights in protection of its own
financial interests." Id.
These cases indicate to us that in Iowa the tort of
interference with contract creates, in essence, a cause of action
for unsavory predatory behavior ("predominant purpose to injure or
destroy"), and thus the fact that a defendant was acting to protect
his or her own financial interest is a legal datum relevant to
determining whether he or she was justified in inducing a breach.
Intermodal maintains that GECC had no financial interest in the
contract, but Intermodal itself created an extensive record at
trial aimed at showing that GECC did indeed have such an interest
in order to demonstrate that GECC had the motive to interfere with
the contract. In addition to the audit reports, memos, and minutes
of meetings, there was the marginal note enjoining someone to "do
this now." We think that Intermodal had it right the first time --
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that GECC had an interest in the contract, just as it had an
interest in all aspects of the railroad, as one would expect of a
primary creditor. The awkwardness of Intermodal's argument
derives, we think, from the awkwardness of a tort that is not well
defined.
We believe, for the reasons already stated, that the Supreme
Court of Iowa would not find liability in a case like the instant
one. We think, moreover, that it would find relevant the fifth of
the considerations that the Restatement identifies as pertinent to
cases like ours. The Restatement invites courts to balance the
social interests in protecting a defendant's freedom of action
against a plaintiff's contractual interest. GECC's conduct might
well have benefited society, because, when one considers the
secondary effects of a large bankruptcy, preventing CC&P from
sliding into insolvency could well have produced a net social good.
Intermodal's interests, moreover, were better served by having a
solvent company with which to do business (or with which to
litigate) than an insolvent one. Accordingly, we find that the
evidence was insufficient to support an inference that GECC acted
improperly under Iowa law.
III.
We have considered Intermodal's complaints about certain
evidentiary matters and detect no error in the trial court's
rulings.
IV.
For the reasons indicated, we reverse the district court's
denial of judgment for GECC as a matter of law and remand the case
to the district court with directions to enter judgment for GECC.
RICHARD S. ARNOLD, Chief Judge, concurs in the judgment and
joins Part II. A. of the Court's opinion.
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A true copy.
Attest:
CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.
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