Max Arnold & Sons v. W.L. Hailey & Co

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
File Name: 06a0204p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
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Plaintiff-Appellee, -
MAX ARNOLD & SONS, LLC,
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No. 05-5893
v.
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W.L. HAILEY & COMPANY, INC., -
Defendant-Appellant. -
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Appeal from the United States District Court
for the Middle District of Tennessee at Nashville.
No. 04-00124—Thomas A. Wiseman, Jr., District Judge.
Argued: March 14, 2006
Decided and Filed: June 22, 2006
Before: MARTIN, SILER, and CLAY, Circuit Judges.
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COUNSEL
ARGUED: Robert S. Patterson, BOULT, CUMMINGS, CONNERS & BERRY, Nashville,
Tennessee, for Appellant. Todd E. Panther, TUNE, ENTREKIN & WHITE, Nashville, Tennessee,
for Appellee. ON BRIEF: Robert S. Patterson, Eric W. Smith, BOULT, CUMMINGS, CONNERS
& BERRY, Nashville, Tennessee, for Appellant. Todd E. Panther, Shawn R. Henry, TUNE,
ENTREKIN & WHITE, Nashville, Tennessee, for Appellee.
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OPINION
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CLAY, Circuit Judge. Defendant W.L. Hailey & Co., Inc. appeals the March 9, 2005 order
of the United States District Court for the Middle District of Tennessee denying Defendant’s motion
for judgment on the pleadings and granting Plaintiff Max Arnold & Sons, LLC’s motion for
summary judgment on Plaintiff’s claim of breach of contract. For the following reasons, we
REVERSE the district court’s grant of Plaintiff’s motion for summary judgment, AFFIRM the
district court’s partial grant of Defendant’s motion for summary judgment and partial denial of the
same motion,1 and REMAND the case for further proceedings.
1
While the district court ruled on Defendant’s motion for judgment on the pleadings, as explained, infra, this
Court treats the district court’s decision as one on a motion for summary judgment.
1
No. 05-5893 Max Arnold & Sons v. W.L. Hailey & Co. Page 2
I. BACKGROUND
A. PROCEDURAL HISTORY
On February 17, 2004, Plaintiff filed a complaint against Defendant in the United States
District Court for the Middle District of Tennessee, alleging subject matter jurisdiction based on
diversity of citizenship pursuant to 28 U.S.C. § 1332. Plaintiff alleged that Defendant breached a
guaranty agreement between Plaintiff and Defendant.
On April 2, 2004, Defendant filed an answer. On June 4, 2004, Defendant filed a motion for
judgment on the pleadings pursuant to Federal Rule of Civil Procedure 12(c).
On June 28, 2004, Plaintiff filed a response to Defendant’s motion for judgment on the
pleadings, and Plaintiff filed a motion for summary judgment. Plaintiff submitted two affidavits
with its motion: an affidavit from an officer of Plaintiff, and an affidavit from a former officer of
Defendant. Plaintiff also submitted with its motion a “Statement of Undisputed Material Facts.”
On July 28, 2004, Defendant filed a response to Plaintiff’s “Statement of Undisputed Material
Facts.” Plaintiff submitted one affidavit with its response, from an officer of a subsidiary of
Defendant.
On March 8, 2005, the district court denied Defendant’s motion for judgment on the
pleadings and granted Plaintiff’s motion for summary judgment. On March 21, 2005, Defendant
filed a motion to alter or amend the district court judgment pursuant to Federal Rule of Civil
Procedure 59(e). The district court denied this motion. On May 20, 2005, Defendant timely filed
a notice of appeal.
B. FACTS
Plaintiff is a Kentucky corporation that sells petroleum products. Defendant is a Tennessee
corporation that specializes in the construction of “large underground utility and treatment plant
projects.” (J.A. at 16.) On June 30, 2000, Defendant acquired A.J. Hall Oil Company, Inc. (“A.J.
Hall”), a Tennessee corporation that sells petroleum products in middle Tennessee.
Plaintiff held a Chevron Lubrication Marketer Agreement for an eight-county region in
middle Tennessee. In 2001, A.J. Hall was looking to acquire a small lubricants company with an
existing customer base to increase its lubricants business. A.J. Hall took particular interest in
Plaintiff’s middle Tennessee operations. In 2001, Rusty McDonald (“McDonald”), the president
of A.J. Hall, contacted Phil Russo (“Russo”), vice president of sales and marketing of Plaintiff, to
discuss a possible purchase of Plaintiff’s middle Tennessee operations. During negotiations,
McDonald, Russo, and James Bryant (“Bryant”), corporate secretary and treasurer of Defendant,
executed a memorandum of understanding on September 10, 2001. The memorandum expressed
an understanding that Plaintiff would sell its middle Tennessee operation to A.J. Hall, with the
primary consequence being A.J. Hall’s ability to sell Chevron lubricants in that area.
Chevron, however, was unwilling to completely switch its business from Plaintiff to A.J.
Hall. Chevron had a long history of successful business dealings with Plaintiff, but it had no
experience in dealing with A.J. Hall. Chevron wanted some assurance of consistent performance
in the transition from Plaintiff to A.J. Hall, and Chevron insisted that Plaintiff stay on in a
transitional role. As a result, Plaintiff and A.J. Hall agreed to form a new company, W.L. Hailey
Oil Services, LLC (“Hailey Oil Services”). Plaintiff would have a 30% membership interest in
Hailey Oil Services, and A.J. Hall would have a 70% interest in the company.
On November 27, 2001, Plaintiff and A.J. Hall executed an operating agreement for Hailey
Oil Services. In relevant part, the agreement stated:
No. 05-5893 Max Arnold & Sons v. W.L. Hailey & Co. Page 3
1.1 Definitions.
(c) “Cash Flow” of the Company shall mean the Company’s taxable
income for federal tax purposes, increased by (i) amortization, depreciation and other
noncash charges taken into account in computing taxable income, (ii) any nontaxable
income or proceeds from any refinancing of the Company’s indebtedness (other than
capital contributions) and (iii) the net proceeds from the sale of any of the
Company’s assets, and reduced by (iv) principal payments on Company
indebtedness, (v) any other cash expenditures which have not been deducted in
determining the taxable income of the Company and (vi) any amount that the Board
of Governors determines to be reasonably required to maintain sufficient working
capital and a reasonable reserve for operating expenses. The Cash Flow of the
Company shall be determined separately for each fiscal year and not cumulatively.
...
6.1 Distribution of Cash Flow. Subject to the provisions of the [Tennessee
Limited Liability Company] Act, Cash Flow generated from Company operations
shall be distributed to the Members within 30 days of the end of each calendar
quarter in accordance with the Percentage Interests of the Members, except that, to
the extent Max Arnold’s share of Cash Flow for any of the first four calendar
quarters of operation is less than $33,750, A.J. Hall’s share of Cash Flow shall be
reduced and Max Arnold shall receive Cash Flow equal to $33,750. To the extent
that Cash Flow for any of the first four calendar quarters of operation is less than
$33,750, Max Arnold’s share of Cash Flow for the following calendar quarter(s)
shall be increased until such time that Max Arnold’s share of Cash Flow for each of
the first four calendar quarters of operation is equal to $33,750 per quarter.
...
14.5 Net Equity.
(c) . . . Notwithstanding anything to the contrary herein, the Net Equity
of Max Arnold’s interest shall be equal to One Hundred Thirty-Five Thousand
Dollars ($135,000) less any and all distributions made to Max Arnold pursuant to
Section 6.1.
...
15.1 Purchase. A.J. Hall shall purchase all of the Membership Interest of Max
Arnold and Max Arnold shall sell all of its Membership Interest on the date which
is twelve (12) months from the date of this Agreement if the Company shall hold a
contract from Chevron enabling it to market, sell and distribute Chevron lubricant
products in the Middle Tennessee Area on such date.
15.2 Purchase Price. In exchange for the Membership Interest of Max
Arnold, A.J. Hall shall pay to Max Arnold an amount equal to One Hundred Thirty-
Five Thousand Dollars ($135,000) less all distributions from the Company to Max
Arnold pursuant to Section 6.1.
(J.A. at 21-22, 29, 48.) In short, the operating agreement created two separate obligations to
Plaintiff. Under Section 6.1, Hailey Oil Services was required to pay cash flow distributions to
Plaintiff. Under Sections 15.1 and 15.2, A.J. Hall was required to pay Plaintiff $135,000, less any
cash flow distributions, one year after the execution of the operating agreement, i.e., November 27,
2002, if Hailey Oil Services had a lubricants contract with Chevron at that time.
No. 05-5893 Max Arnold & Sons v. W.L. Hailey & Co. Page 4
On the same day, Plaintiff and Defendant entered into a guaranty agreement. In relevant
part, the guaranty agreement stated:
NOW, THEREFORE, in consideration of the mutual promises and benefits to be
derived by parties hereto from the operation of the business known as W.L. Hailey
Oil Services, LLC, W.L. Hailey Company, Inc. hereby guarantees the prompt and
full payment of any financial obligation which is due and payable to Max Arnold &
Sons, LLC pursuant to that certain Operating Agreement dated the 27th day of
November, 2001, of W.L. Hailey Oil Services, LLC.
By the execution of this Agreement, W.L. Hailey Company, Inc. specifically
guarantees the payment of the distributions of cash flow to Max Arnold & Sons,
LLC, as set forth in Section 6.1 of said Operating Agreement; . . . and the purchase
of the membership interest of Max Arnold & Sons, LLC by A.J. Hall as set forth in
Section 15.2 of the Operating Agreement.
(J.A. at 54-55.) On the same day, Plaintiff and Hailey Oil Services entered into a non-compete
agreement.
On December 1, 2001, Chevron executed a marketing distribution agreement with Hailey
Oil Services. The relationship between the parties seemed to be running smoothly. On March 1,
2002, Hailey Oil Services paid Plaintiff $35,425.70, which included $33,750 for the first calendar
quarter cash flow distribution check under Section 6.1 of the operating agreement, as well as
additional money for equipment and inventory.
After the initial payment, Hailey Oil Services failed to pay Plaintiff cash flow distributions;
however, there is no evidence in the record that Hailey Oil Services generated a positive cash flow
in the remaining three calendar quarters. Moreover, on or about April 25, 2002, Chevron notified
Hailey Oil Services of its intent to cancel the lubricants distribution agreement with Hailey Oil
Services. The cancellation became effective on June 23, 2002. Bryant, now a former officer of
Defendant, stated in an affidavit that A.J. Hall, after receiving Plaintiff’s customer lists pursuant to
the operating agreement for Hailey Oil Services, began selling “off-market brands” to many of
Plaintiff’s former customers who had been purchasing Chevron products.
Plaintiff demanded payment under the operating agreement from both Hailey Oil Services
and A.J. Hall, and both refused to pay. Plaintiff then demanded payment under the guaranty
agreement from Defendant, and Defendant refused to pay. Plaintiff followed with the instant suit.
II. DISCUSSION
A. PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT
1. Standard of Review
This Court reviews the district court’s decision on a motion for summary judgment de novo.
Turner v. City of Taylor, 412 F.3d 629, 637 (6th Cir. 2005) (citation omitted). The moving party
is entitled to summary judgment “if 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 a judgment as a matter of law.” Fed. R. Civ.
P. 56(c). “[T]he burden on the moving party may be discharged by ‘showing’--that is, pointing out
to the district court--that there is an absence of evidence to support the nonmoving party’s case.”
Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986). The Court must view the facts and all of the
inferences drawn therefrom in the light most favorable to the nonmoving party. Matsushita Elec.
Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (citation omitted).
No. 05-5893 Max Arnold & Sons v. W.L. Hailey & Co. Page 5
2. Analysis
The district court erred in granting Plaintiff’s motion for summary judgment. The operating
agreement does not create an obligation of absolute payment from Hailey Oil Services to Plaintiff
under Section 6.1; instead, it only creates an obligation to pay Plaintiff cash flow distributions.
Because Plaintiff has failed to demonstrate that Hailey Oil Services had a positive cash flow for the
remaining three calendar quarters, and because Plaintiff has failed to demonstrate that Hailey Oil
Services had a positive cash flow in any subsequent calendar quarters, Plaintiff has failed to
demonstrate that Hailey Services breached Section 6.1 of the operating agreement. Therefore,
Plaintiff has failed to meet its burden on summary judgment in demonstrating that Defendant should
be held liable under the guaranty agreement.
a. Tennessee Law
A guaranty is “[a] promise to answer for the payment of some debt, or the performance of
some duty, in case of the failure of another who is liable in the first instance.” Black’s Law
Dictionary 712 (7th ed. 1999). Thus, the basic definition of “guaranty” contemplates a failure by
the primary party, a failure for which the guarantor is2 then responsible. Both Plaintiff and Defendant
agree that Tennessee law governs the instant case. Under Tennessee law,
guaranties, by their very nature, are conditional promises to pay because guarantors
promise to pay only on the condition that the principal debtor fails to pay. Likewise,
guaranties, even ones containing a limitation on the guarantor's liability, do not
involve a sum certain because the amount of the guarantor's liability cannot be
determined solely from the instrument itself without reference to an outside source.
Finally, a guaranty is not payable at a definite time or on demand since it is payable
only when the principal debtor defaults.
Guarantor Partners v. Huff, 830 S.W.2d 73, 76 (Tenn. Ct. App. 1992). Thus, the primary party
must default before the guarantor may be held liable.
b. Application to This Case
The district court erred in finding that there was no genuine issue of material fact that Hailey
Oil Services failed to fulfill its obligations under the operating agreement, rendering Defendant
liable to Plaintiff under the guaranty agreement. We agree with the district court that A.J. Hall was
not obligated to purchase Plaintiff’s membership interest in Hailey Oil Services at the lapse of one
year from the execution of the operating agreement, i.e., November 27, 2002, under Sections 15.1
and 15.2. The condition precedent to this purchase, the existence of a contract with Chevron at that
point in time, had not been met.3 We disagree, however, with the district court’s holding that Hailey
Oil Services was obligated to pay Plaintiff under Section 6.1. That Section states:
2
We are unclear as to how the parties arrive at this conclusion. The operating agreement states that Tennessee
law governs that agreement and the rights of the members of that agreement; however, the guaranty agreement does not
contain a choice of law provision. Moreover, Defendant is not a member of the operating agreement. Nevertheless, the
parties’ conclusion is correct. “It is well-established that federal courts sitting in diversity must apply the choice-of-law
rules of the forum state.” Cole v. Mileti, 133 F.3d 433, 437 (6th Cir. 1998) (citation omitted). Under Tennessee law,
if there is no choice of law provision in the agreement, then Tennessee law applies “to transactions bearing an
appropriate relation to this state.” Tenn. Code Ann. §47-1-105(1). The transactions at the heart of the guaranty
agreement, i.e., the operation of Hailey Oil Services, all took place in Tennessee. Therefore, Tennessee law governs the
guaranty agreement.
3
Of course, whether A.J. Hall or Hailey Oil Services exhibited bad faith in its failure to keep the Chevron
contract is an open question.
No. 05-5893 Max Arnold & Sons v. W.L. Hailey & Co. Page 6
Distribution of Cash Flow. Subject to the provisions of the Act, Cash Flow
generated from Company operations shall be distributed to the Members within 30
days of the end of each calendar quarter in accordance with the Percentage Interests
of the Members, except that, to the extent Max Arnold’s share of Cash Flow for any
of the first four calendar quarters of operation is less than $33,750, A.J. Hall’s share
of Cash Flow shall be reduced and Max Arnold shall receive Cash Flow equal to
$33,750. To the extent that Cash Flow for any of the first four calendar quarters of
operation is less than $33,750, Max Arnold’s share of Cash Flow for the following
calendar quarter(s) shall be increased until such time that Max Arnold’s share of
Cash Flow for each of the first four calendar quarters of operation is equal to $33,750
per quarter.
The district court interpreted this Section to mean that Hailey Oil Services was obligated to pay
Plaintiff $33,500 per calendar quarter for the first year:
Section 6.1, in unambiguous language, states that Plaintiff shall receive quarterly
payments in Cash Flow distribution totaling $135,000. There is no condition
precedent to these payments. In fact, the contract states that the quarterly payments
to Plaintiff shall take priority over any cash flow payments to A.J. Hall. These
payments are due to Plaintiff under the express terms of the contract. Thus, under
the Operating Agreement, there is no question that Plaintiff is owed Cash Flow
payments of $135,000.
(J.A. at 61.)
We agree with the district court that “there is no question that Plaintiff is owed Cash Flow
payments of $135,000.” There is a logical disconnect, however, between this statement and the
district court’s order awarding Plaintiff judgment in the amount of $99,574.30, which is $135,000
less the first calendar quarter distribution made by Hailey Oil Services.4 Under Section 6.1, Hailey
Oil Services is obligated to make cash flow distributions to Plaintiff. A condition precedent to these
distributions is that Hailey Oil Services actually must have positive cash flow to distribute. In other
words, Section 6.1 does not guarantee an absolute payment of $33,750 per calendar quarter for the
first four quarters; it only guarantees that Plaintiff will receive cash flow payments of $33,750 per
calendar quarter for the first four quarters if there is sufficient cash flow, or, in the case that Plaintiff
receives less than that amount due to insufficient cash flow, Plaintiff has priority in receiving cash
flow distributions in subsequent quarters. The only way in which Plaintiff can demonstrate that
Hailey Oil Services failed in its obligations under Section 6.1 is if Hailey Oil Services failed to make
cash flow payments as required under that Section.
Section 6.1 contemplates three levels of cash flow. If Hailey Oil Services’ quarterly cash
flow was greater than or equal to $112,500,5 then Plaintiff would take a simple 30% distribution of
that cash flow and A.J. Hall would take 70%. If the quarterly cash flow was between $33,750 and
$112,500, then Plaintiff would take $33,750 and A.J. Hall would take the remainder. If the quarterly
cash flow was less than $33,750, then Plaintiff would take all of it, and the difference between
$33,750 and the actual amount would be paid from the subsequent quarter. Thus, Plaintiff would
have priority payment in the situation where it was paid less than $33,750 for a calendar quarter.
4
This amount is also incorrect, because while Hailey Oil Services actually paid out $35,425.70, only $33,750
was paid pursuant to Section 6.1; the remainder was for inventory and equipment.
5
$33,750 divided by Plaintiff’s 30% membership interest.
No. 05-5893 Max Arnold & Sons v. W.L. Hailey & Co. Page 7
In this case, Hailey Oil Services made the following cash flow distributions to Plaintiff for
the first four calendar quarters: $33,750,6 $0, $0, $0. This distribution would be correct if the cash
flow of Hailey Oil Services was between $33,750 and $112,500 for the first quarter, and $0 or
negative for the remaining three quarters, as well as $0 or negative for any subsequent quarters. In
order to show a breach of Section 6.1, Plaintiff must demonstrate that in fact Hailey Oil Services had
cash flow greater than these amounts in these quarters. Plaintiff has not produced sufficient
evidence to demonstrate that there is no genuine issue of material fact that Hailey Oil Services
generated such cash flow. Plaintiff argues, “The Guaranty Agreement executed by W.L. Hailey is
unconditional and specifically guarantees the money owed to Max Arnold under Section 6.1.” (Pl.
Br. 18.) While we concede that this statement is correct, Plaintiff fails to adequately prove on
summary judgment that in fact Plaintiff is owed any money under Section 6.1.
We emphasize that the structure of Section 6.1 did not guarantee that Plaintiff would
absolutely receive $33,750 per calendar quarter for the first four calendar quarters. The Section
guaranteed that Plaintiff would receive $33,750 per calendar quarter if adequate cash flow was
available. If adequate cash flow was not available, the Section unambiguously gave Plaintiff only
one source of relief: Hailey Oil Services cash flow in subsequent quarters. Absent a factual showing
that Hailey Oil Services wrongfully withheld cash flow from Plaintiff,7 Plaintiff fails to prove that
Hailey Oil Services breached its obligations under Section 6.1. Because Plaintiff fails to make such
a showing to the threshold of proving that there is no genuine issue of material fact, Plaintiff has not
adequately proved a breach on the part of Hailey Oil Services. Because Plaintiff fails to adequately
prove such a breach, Plaintiff also fails to adequately prove that Defendant breached the guaranty
agreement. Plaintiff fails to meet its burden under the summary judgment standard; therefore, the
district court’s decision granting Plaintiff’s motion for summary judgment was error.
B. DEFENDANT’S MOTION FOR SUMMARY JUDGMENT
1. Standard of Review
Defendant originally filed a motion for judgment on the pleadings pursuant to Federal Rule
of Civil Procedure 12(c). That rule, however, states,
If, on a motion for judgment on the pleadings, matters outside the pleadings are
presented to and not excluded by the court, the motion shall be treated as one for
summary judgment and disposed of as provided in Rule 56, and all parties shall be
given reasonable opportunity to present all material made pertinent to such a motion
by Rule 56.
Fed. R. Civ. P. 12(c). In this case, matters outside the pleadings were presented to and not excluded
by the district court; specifically, Plaintiff presented two affidavits and a “Statement of Undisputed
Material Facts,” while Defendant presented one affidavit.
The question then becomes whether this evidence was introduced “on a motion for judgment
on the pleadings,” or on Plaintiff’s summary judgment motion. Plaintiff did not respond to
Defendant’s motion for judgment on the pleadings with a simple response; instead, Plaintiff filed
a motion for summary judgment. Plaintiff’s memorandum in support of the motion was entitled,
6
As stated in note 5, supra, while Hailey Oil Services actually paid out $35,425.70, only $33,750 was paid
pursuant to Section 6.1; the remainder was for inventory and equipment.
7
For example, if Plaintiff proved Hailey Oil Services had cash flow of $20,000 in the second calendar quarter
but paid Plaintiff $0, Plaintiff would be entitled to that $20,000, as well as priority in the next quarter to offset the
shortage of $13,750.
No. 05-5893 Max Arnold & Sons v. W.L. Hailey & Co. Page 8
“Memorandum of Law by [Plaintiff] in Support of its Motion for Summary Judgment and in
Opposition to [Defendant’s] Motion for Judgment on the Pleadings.” (J.A. at 137.) In the
memorandum, Plaintiff referred to the affidavit of Bryant in the parol evidence context; Plaintiff
stated that to the extent the district court found the guaranty agreement to be ambiguous, the district
court could rely on the parol evidence of Bryant’s affidavit. Plaintiff’s reference was made under
the subheading, in relevant part, “The Affidavit of James Bryant Establishes that the Defendant’s
Motion for Judgment on the Pleadings Should be Denied and that [Plaintiff’s] Motion for Summary
Judgment Should be Granted.” We therefore find that Plaintiff in part submitted the affidavit in
connection with Defendant’s motion for judgment on the pleadings. Likewise, Plaintiff submitted
the affidavit of Russo in part to refute a contention made by Defendant in its memorandum in
support of its motion for judgment on the pleadings. As for Plaintiff’s “Statement of Undisputed
Material Facts,” we are uncertain whether Plaintiff submitted this statement in connection with
Defendant’s motion for judgment on the pleadings, inasmuch as Plaintiff does not refer to the
statement in its memorandum. Defendant submitted an affidavit in response to Plaintiff’s motion
for summary judgment, not in its reply to Plaintiff’s response to the motion for judgment on the
pleadings.
At a minimum, Plaintiff presented to the district court two affidavits on Defendant’s motion
for judgment on the pleadings, and the district court did not exclude these affidavits. The question
then becomes whether, under these facts, the district court should have converted Defendant’s 12(c)
motion to a motion for summary judgment. The courts have been imprecise and inconsistent as to
what action of the district court triggers the obligation to convert a motion for judgment on the
pleadings to a motion for summary judgment. Some courts have held that a court may accept and
consider matters outside the pleadings for a motion for judgment on the pleadings, so long as the
court does not “rely” on those matters in its decision on the motion. See, e.g., Alexander v.
Oklahoma, 382 F.3d 1206, 1213-14 (10th Cir. 2004) (analyzing the requirements under Rule
12(b)(6), which has language identical to that in Rule 12(c)); Homart Dev. Co. v. Sigman, 868 F.2d
1556, 1561-62 (11th Cir. 1989). Other courts have held that if a court accepts and “considers” those
matters outside the pleadings, the motion for judgment on the pleadings should be converted to a
motion for summary judgment. See, e.g., Northern Indiana Gun & Outdoor Shows, Inc. v. City of
South Bend, 163 F.3d 449, 453 n.5 (7th Cir. 1998) (noting that while the district court accepted
various documents outside of the pleadings, it did not consider those documents). Still other courts
have found that the mere acceptance of those outside materials is sufficient to trigger the conversion
of a motion for judgment on the pleadings to one for summary judgment. See, e.g., Dempsey v.
Atchison, Topeka, & Santa Fe Ry. Co., 16 F.3d 832, 835-36 (7th Cir. 1994).
In our view, Rule 12(c) requires only one action by the district court for the conversion to
a summary judgment motion to occur: failure to exclude presented outside evidence. We therefore
agree with the third line of cases, as exemplified by Dempsey. This Court has found that the mere
presentation of evidence outside of the pleadings, absent the district court’s rejection of such
evidence, is sufficient to trigger the conversion of a Rule 12(c) motion to a motion for summary
judgment. See Moody v. United States, 774 F.2d 150, 155 n.5 (6th Cir. 1985) (“Although the
government’s motion in Bawgus was for judgment on the pleadings pursuant to Fed. R. Civ. P.
12(c), it is clear that matters outside the pleadings were presented; we, therefore, consider the court’s
decision as if entered on a motion for summary judgment, Fed. R. Civ. P. 56.”). Although we have
found that consideration or reliance on matters outside the pleadings is sufficient to trigger
conversion under Rule 12(c), see, e.g., Thompson v. The Budd Co., 199 F.3d 799, 804 (6th Cir.
1999) (consideration); Swallows v. Barnes & Noble Book Stores, Inc., 128 F.3d 990, 992 (6th Cir.
1997) (reliance), we have never held that consideration or reliance was required under Rule 12(c)
for conversion to a motion for summary judgment. We therefore disagree with those cases that
require the district court to further consider or rely upon these outside matters before the obligation
to convert is triggered; the plain language of Rule 12(c) does not require these additional steps; it
only requires the presentation of matters outside the pleadings and the district court’s failure to
No. 05-5893 Max Arnold & Sons v. W.L. Hailey & Co. Page 9
exclude such matters. See also 5C Charles Alan Wright & Arthur R. Miller, Federal Practice and
Procedure § 1371 (3d ed. 2004) (“[A] district court could consider evidence outside the pleadings
on a motion under Rule 12(c), and, upon acceptance of that material, would regard the motion as
one for summary judgment . . . . The district court remains free to refuse to accept materials outside
the pleadings in order to keep the motion under Rule 12(c) . . . .” (emphasis supplied).).
Because Plaintiff presented matters outside of the pleadings with respect to Defendant’s Rule
12(c) motion, and because the district court did not exclude these matters, the district court should
have converted the Rule 12(c) motion to a motion for summary judgment. This Court therefore
construes the district court’s denial of Defendant’s motion for judgment on the pleadings as a denial
of Defendant’s motion for summary judgment. See United Bhd. of Carpenters and Joiners, Dresden
Local No. 267 v. Ohio Carpenters Health and Welfare Fund, 926 F.2d 550, 558 (6th Cir. 1991) (“As
an appellate court, we are not bound to adhere to the label attached to the trial court’s disposition
of the case and may treat it as a summary judgment.” (citation omitted).) Cf. Downing v. Kunzig,
454 F.2d 1230, 1231 n.2 (6th Cir. 1972) (construing the district court’s grant of a Rule 12(b)(6)
motion as a grant of summary judgment, based on language identical to that in Rule 12(c)).
Because the district court effectively converted Defendant’s motion for judgment on the
pleadings to a motion for summary judgment, it should have given both of the parties notice of such
conversion and provided a “reasonable opportunity to present all material made pertinent to such
a motion.” See Fed. R. Civ. P. 12(c); Harrington v. Painter, 92 Fed. App’x 126, 129 (6th Cir. Dec.
18, 2003) (unpublished decision) (reversing district court’s judgment for failure to provide notice
of conversion under Fed. R. Civ. P. 12(b)(6)). The district court’s failure to give such notice and
opportunity to respond is not reversible error, however, where all parties in fact had a sufficient
opportunity to present pertinent materials. See Lisle v. Metro. Gov’t of Nashville and Davidson
County, 73 Fed. App’x. 782, 790 (6th Cir. July 9, 2003) (unpublished decision). With regard to
Defendant’s Rule 12(c) motion in this case, both parties appear to have had adequate notice of the
conversion and a sufficient opportunity to respond, given their factual submissions (and neither party
has argued otherwise on appeal). Thus, although the district court should have officially notified
the parties of the conversion and their ability to supplement the record, its failure to do so is not a
basis for reversal here.
This Court reviews the district court’s decision on a motion for summary judgment de novo.
Turner, 412 F.3d at 637 (citation omitted). The moving party is entitled to summary judgment “if
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 a judgment as a matter of law.” Fed. R. Civ. P. 56(c). “[T]he burden on the
moving party may be discharged by ‘showing’--that is, pointing out to the district court--that there
is an absence of evidence to support the nonmoving party’s case.” Celotex Corp., 477 U.S. at 325.
The Court must view the facts and all of the inferences drawn therefrom in the light most favorable
to the nonmoving party. Matsushita Elec. Indus. Co., 475 U.S. at 587 (citation omitted).
2. Analysis
a. Subject Matter Jurisdiction
This Court has an independent obligation to determine whether subject matter jurisdiction
exists in a given case. Todd v. Weltman, Weinberg & Reis Co., L.P.A., 434 F.3d 432, 435 (6th Cir.
2006) (citation omitted). Under 28 U.S.C. § 1291, this Court has jurisdiction over the final decisions
of a district court.
Here, the district court made two decisions: it denied Defendant’s motion for summary
judgment, and it granted Plaintiff’s motion for summary judgment. Arguably, this Court only has
No. 05-5893 Max Arnold & Sons v. W.L. Hailey & Co. Page 10
jurisdiction to review the district court’s grant of Plaintiff’s motion, as that was a final decision,
whereas the denial of Defendant’s motion for summary judgment was not a final decision.
While this logic is technically consistent with 28 U.S.C. § 1291, a more flexible approach
may be appropriate in the context of cross motions for summary judgment. The Supreme Court has
stated:
While the application of § 1291 in most cases is plain enough, determining the
finality of a particular judicial order may pose a close question. No verbal formula
yet devised can explain prior finality decisions with unerring accuracy or provide an
utterly reliable guide for the future. We know, of course, that § 1291 does not limit
appellate review to ‘those final judgments which terminate an action . . .,’ Cohen v.
Beneficial Indus. Loan Corp., 337 U.S., at 545 . . ., but rather that the requirement
of finality is to be given a ‘practical rather than a technical construction.’ Id., at
546. . . . The inquiry requires some evaluation of the competing considerations
underlying all questions of finality–‘the inconvenience and costs of piecemeal review
on the one hand and the danger of denying justice by delay on the other.’ Dickinson
v. Petroleum Conversion Corp., 338 U.S. 507, 511 . . . (1950) (footnote omitted).
Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 170-71 (1974). As a practical matter, if both a grant
of a party’s motion for summary judgment and a denial of another party’s motion for summary
judgment are before this Court, and the Court can adequately determine whether the denial was
proper, then this Court should conduct an analysis of the denial. A decision otherwise would be
inconvenient, a waste of judicial resources, and would create piecemeal and unduly splintered
litigation, especially if there is an overlap between the cross motions for summary judgment.
Moreover, several circuits are in accord with this position. See, e.g., Jones-Hamilton Co. v. Beazer
Materials & Servs., Inc., 973 F.2d 688, 694 n.2 (9th Cir. 1992); Sacred Heart Med. Ctr. v. Sullivan,
958 F.2d 537, 543 (3d Cir. 1992); Peyton v. Reynolds Assocs., 955 F.2d 247, 253 (4th Cir. 1992);
Barhold v. Rodriguez, 863 F.2d 233, 237 (2d Cir. 1988). If the record before this Court is adequate
for this Court to review the denial of the summary judgment, this Court should engage in such
review. As explained, infra, the record is adequate for this Court to review the denial of Defendant’s
motion for summary judgment.
b. Celotex and “Pointing Out”
As stated, supra, on a motion for summary judgment, “the burden on the moving party may
be discharged by ‘showing’--that is, pointing out to the district court--that there is an absence of
evidence to support the nonmoving party’s case.” Celotex Corp., 477 U.S. at 325. Specifically,
[A] party seeking summary judgment always bears the initial responsibility of
informing the district court of the basis for its motion, and identifying those portions
of “the pleadings, depositions, answers to interrogatories, and admissions on file,
together with the affidavits, if any,” which it believes demonstrate the absence of a
genuine issue of material fact.
Id. at 323. Thus, a moving party must point out specifically why the nonmoving party fails to
present a genuine issue of material fact as to the nonmoving party’s case.
Defendant in the instant case pointed out the fact that Plaintiff failed to allege or prove a
violation of Sections 15.1 and 15.2 of the operating agreement, as Hailey Oil Services did not have
a contract with Chevron, and such a contract was a condition precedent to payment under those
Sections. In its memorandum in support of its motion for judgment on the pleadings (converted for
this Court’s purposes to a motion for summary judgment), Defendant argued, “[Plaintiff] cannot
show that A.J. Hall defaulted under the Operating Agreement, because it is undisputed that the
No. 05-5893 Max Arnold & Sons v. W.L. Hailey & Co. Page 11
condition precedent to the vesting of A.J. Hall’s payment obligations under the Operating
Agreement, the existence of a contract with Chevron, was not fulfilled.” (J.A. at 121.) We agree
with the district court that there was no evidence of a contract with Chevron, so that A.J. Hall did
not default on its obligations under Sections 15.1 and 15.2. Therefore, summary judgment in favor
of Defendant as to this issue would be proper.
Defendant, however, failed to point out in its motion for judgment on the pleadings
(converted for this Court’s purposes to a motion for summary judgment) any deficiency in Plaintiff’s
claim that A.J. Hall failed to make payments in conformance with Section 6.1 of the operating
agreement, so that Defendant was liable for those payments.8 In paragraph 16 of the complaint,
Plaintiff alleged:
The payment of distributions of cash flow to [Plaintiff], as referenced above in
Paragraph 14A [which references Section 6.1 of the operating agreement], has been
partially satisfied but remains substantially unsatisfied. Specifically, [Plaintiff] was
to receive a quarterly distribution of cash flow in the amount of $33,750.00 for the
first four (4) calendar quarters of operation. [Plaintiff] did receive an initial cash
flow distribution in the amount of $35,425.70 . . . . A.J. Hall failed or refused to
make the remaining three payments due.
(J.A. at 11-12.) Defendant did not respond to this allegation in its motion for judgment on the
pleadings or its memorandum in support of its motion. While Defendant made the general argument
that “[Plaintiff’s] Complaint does not contain the critical allegation that the principal obligor, A.J.
Hall, defaulted in its payment obligations under the Operating Agreement,” Defendant then
explained this general statement: “[Plaintiff] cannot show that A.J. Hall defaulted under the
Operating Agreement, because it is undisputed that the condition precedent to the vesting of A.J.
Hall’s payment obligations under the Operating Agreement, the existence of a contract with
Chevron, was not fulfilled.” (J.A. at 120-21.) The sole focus of Defendant’s argument on its motion
for judgment on the pleadings was on Sections 15.1 and 15.2 of the operating agreement, not Section
6.1. Defendant therefore failed to meet his burden on summary judgment to “point out” this specific
deficiency of Plaintiff’s case.
Defendant may argue that it presented to the district court evidence that supported the fact
that Hailey Oil Services did not generate positive cash flow after the first quarter, so that there was
no breach under Section 6.1; for example, in his affidavit, McDonald implies that Hailey Oil
Services did not have positive cash flow for the second, third, and fourth quarters. Assuming
arguendo that this evidence applies to Defendant’s motion for judgment on the pleadings, which is
questionable as Defendant submitted the affidavit in response to Plaintiff’s motion for summary
judgment, Defendant’s argument would fail. The mere fact that evidence in the record supported
an argument that Defendant failed to make does not correct Defendant’s failure to make said
argument. Otherwise, the district court, on a motion for summary judgment, would have the
responsibility of culling through the record and extrapolating arguments that Defendant could
potentially make; this, however, is not the appropriate allocation of burdens on a motion for
summary judgment. Defendant has the burden to point out to the district court why it should receive
summary judgment, and it failed to do so with respect to Plaintiff’s claim under Section 6.1.
Moreover, the fact that Defendant denied the allegations under paragraph 16 of the complaint
in its answer is also insufficient to meet its burden on summary judgment. When Defendant denied
the allegation, there was then a potential factual dispute as to whether Section 6.1 had been
8
The district court denied Defendant’s motion for judgment on the pleadings (here construed as a motion for
summary judgment) on the basis that Section 6.1 entitled Plaintiff to absolute payments for each quarter. As explained,
supra, this basis was incorrect, but the district court nevertheless was correct in its denial of Defendant’s motion.
No. 05-5893 Max Arnold & Sons v. W.L. Hailey & Co. Page 12
breached. Defendant still had the burden on summary judgment to point out that Plaintiff did not
have any evidence to support Plaintiff’s allegations under that paragraph so as to demonstrate no
genuine issue of material fact as to this claim.
We recognize that this is a somewhat unusual case in that we are reversing the grant of
Plaintiff’s motion for summary judgment because Plaintiff failed to put forth any evidence that
Section 6.1 was breached, yet we are also denying Defendant’s motion for summary judgment
because it failed to point out the lack of evidence as to Plaintiff’s claim under Section 6.1. The
point, however, is that Supreme Court case law mandates this result. Under Celotex, if a plaintiff
put forth a complaint and then provided no evidence for its claim, the defendant should not make
a motion for summary judgment, without pointing out the deficiencies of the plaintiff’s case, and
then expect the court to rule in the defendant’s favor. Celotex places a minimal burden on the
moving party; the moving party need not support its motion for summary judgment with evidence;
instead, it only must point out the deficiencies of the nonmoving party’s case. 477 U.S. at 324-25.
Defendant in the instant case did not even meet this minimal burden, so that this Court must uphold
the district court’s denial of summary judgment as to this claim.
III. CONCLUSION
For the foregoing reasons, we REVERSE the district court’s grant of Plaintiff’s motion for
summary judgment, AFFIRM the district court’s partial grant of Defendant’s motion for summary
judgment and partial denial of the same motion, and REMAND the case for further proceedings
consistent with this opinion.