Northbound Group, Incorporated v. Norvax, Incorporated

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 14-1651
NORTHBOUND GROUP, INC.,
Plaintiff-Appellant.
v.
NORVAX, INC., et al.,
Defendants-Appellees.
____________________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 11 C 6131 — Sidney I. Schenkier, Magistrate Judge.
____________________
ARGUED OCTOBER 30, 2014 — DECIDED JULY 28, 2015
Before WILLIAMS, TINDER, and HAMILTON, Circuit Judges.
HAMILTON, Circuit Judge. Plaintiff Northbound Group,
Inc. sued several defendants on claims arising from the sale
of its business to defendants. The district court dismissed
some claims and later granted summary judgment for de-
fendants on the remainder. Northbound appeals, arguing
only that its breach of contract claim against Norvax, Inc.
should have survived summary judgment. The district court
had diversity jurisdiction under 28 U.S.C. § 1332, and we
have jurisdiction on appeal under 28 U.S.C. § 1291. We af-
2 No. 14-1651
firm because Norvax was not actually a party to the contract
that was allegedly breached, nor is there any basis for hold-
ing Norvax liable for any breach by a subsidiary.
Plaintiff Northbound Group, Inc. generates and sells life
insurance leads. “Leadbot” is the brand name that North-
bound gave this business. Northbound began developing the
Leadbot brand in the late 1990s. It had some success, but
during troubled economic times a decade later, Northbound
eventually found itself out of cash with a frozen line of credit
and revenue that did not support its overhead.
Defendant Norvax, Inc. generates and sells health insur-
ance leads. In the course of commercial dealings between
Northbound and Norvax, the parties discussed the idea of
having Norvax expand into the life insurance leads market
by acquiring Northbound. As 2008 turned to 2009, North-
bound grew eager to close this transaction lest it have to
cease operations entirely. An asset purchase agreement was
executed in February 2009.
The asset purchase agreement was “by and between”
Northbound and Leadbot LLC, which is a subsidiary of
Norvax that was formed to purchase the assets of North-
bound. Under the agreement, Leadbot LLC was obligated to
use the assets it acquired from Northbound in furtherance of
the Leadbot brand. The purchase price was not paid in cash.
Instead Northbound would receive an “earn-out” calculated
as a percentage of the monthly net revenue of Leadbot LLC.
The agreement also contained an Illinois choice-of-law
clause.
Northbound claims that Leadbot LLC and Norvax violat-
ed the asset purchase agreement in various ways that dam-
No. 14-1651 3
aged Northbound. The details are not important here be-
cause this dispute turns on a more fundamental question of
who was bound by the asset purchase agreement. We review
that legal question, and the district court’s grant of summary
judgment more generally, de novo. Wisconsin v. Ho-Chunk Na-
tion, 784 F.3d 1076, 1079 (7th Cir. 2015). 1
In briefing Northbound directed its arguments against
Norvax, and in oral argument Northbound confirmed that it
is not seeking a judgment against Leadbot LLC. According
to Northbound, Leadbot LLC has no assets. Northbound is
seeking a judgment against only Norvax for breach of the
asset purchase agreement. The problem for Northbound is
that Norvax was not a party to that contract.
The core principle of corporate law is that a corporation
is a distinct legal entity, separate from its shareholders, direc-
tors, officers, and affiliated corporations, so that the obliga-
tions of a corporation are not shared by affiliates, officers,
directors, or shareholders. Main Bank of Chicago v. Baker, 427
1 One detail of the district court proceedings deserves mention, how-
ever. As part of the summary judgment briefing on damages, the de-
fendants filed a motion to strike portions of Northbound’s damages evi-
dence. The district court granted that motion in part, but only after or-
dering Northbound not to respond to the motion. While a court may sum-
marily deny a motion without hearing from the non-moving party, sum-
marily granting a motion without hearing from the non-moving party is a
different matter. The record does not indicate why the district court took
this unusual and troubling step, which raises basic issues of fairness and
due process. The district court’s apparent procedural error was harmless,
though. Northbound’s damages evidence would be relevant only if
Northbound could show that its breach of contract claim should have
survived summary judgment, which it has not done.
4 No. 14-1651
N.E.2d 94, 101 (Ill. 1981); Van Dorn Co. v. Future Chemical &
Oil Corp., 753 F.2d 565, 569–70 (7th Cir. 1985) (Illinois law).
“It goes without saying that a contract cannot bind a
nonparty.” EEOC v. Waffle House, Inc., 534 U.S. 279, 294
(2002); see also Phillips v. WellPoint Inc., No. 10-CV-00357-
JPG, 2012 WL 6111405, at *9 (S.D. Ill. Dec. 10, 2012) (“As a
basic principle of contract law, a non-party cannot be held
liable for a breach of contract.”), citing Credit General Ins. Co.
v. Midwest Indemnity Corp., 916 F. Supp. 766, 772 (N.D. Ill.
1996); Ransom v. Glossop, 92 Ill. App. 476, 477 (Ill. App. 1900)
(“If appellant is entitled to damages for breach of contract,
he can not recover them in a suit against appellee because
appellee was not a party to the contract.”).
These are the general rules of corporate and contract law,
but they come with exceptions, of course. Northbound tries
to create one new exception and invokes two established
ones. We find no basis for holding Norvax liable for any al-
leged breach of the contract between Northbound and Lead-
bot LLC, the Norvax subsidiary.
First, the attempt at creating a new exception: North-
bound argues that it may bring a breach of contract claim
against Norvax simply because Norvax was in privity of
contract with Leadbot LLC and Leadbot LLC was party to a
contract with Northbound. In support of this novel proposi-
tion Northbound cites Kaplan v. Shure Brothers, Inc., 266 F.3d
598, 602 (7th Cir. 2001). Kaplan addressed the question of
who might sue for breach, not who might be sued for
breach. We held there that a non-party to a contract was
barred from suing for breach of that contract because he had
not shown that a contracting party had assigned its rights
under the contract to him. We wrote: “Under Illinois law, a
No. 14-1651 5
cause of action based on a contract may be brought only by a
party to that contract, by someone in privity with such a par-
ty, or by an intended third-party beneficiary of the contract.”
Id. at 602 (citations omitted). That rather vanilla statement of
contract law cannot be read to authorize a party to a contract
to sue a non-party for breach of the contract simply because
the non-party has a close relationship with the other party to
the contract who has breached. We decline to read this in-
nocuous statement from Kaplan so expansively that it upsets
the foundations of contract and corporate law.
Northbound also tries to invoke two recognized doc-
trines under which one company can be held liable for an-
other company’s obligations. The first is called “direct partic-
ipant liability.” The Illinois doctrine of direct participant lia-
bility provides that a parent company may be liable for the
alleged wrong of its subsidiary when the “alleged wrong can
seemingly be traced to the parent through the conduit of its
own personnel and management.” Phillips, 2012 WL 6111405,
at *9, quoting Forsythe v. Clark USA, Inc., 864 N.E.2d 227, 235
(Ill. 2007) (recognizing doctrine in negligence case). The For-
sythe case relied on a United States Supreme Court case that
applied the doctrine to hold that a parent could be liable in
tort for pollution if it participated directly in the wrongdo-
ing, see United States v. Bestfoods, 524 U.S. 51, 61–63 (1998),
which in turn relied on a law review article co-authored by
the future Justice Douglas, William O. Douglas & Carrol M.
Shanks, Insulation from Liability Through Subsidiary Corpora-
tions, 39 Yale L.J. 193 (1929). See also Graham v. Bostrom Seat-
ing, Inc., 921 N.E.2d 1222, 1232 (Ill. App. 2010) (applying doc-
trine to products liability case); see generally Refrigeration
Sales Co. v. Mitchell-Jackson, Inc., 770 F.2d 98, 103 (7th Cir.
1985) (applying Illinois law: if corporate officer personally
6 No. 14-1651
engaged in conversion, he could be held personally liable
and could not be protected by role as corporate agent).
The problem is that Illinois courts have applied this theo-
ry of direct participation to torts or violations of statute, not
to breaches of contract. Phillips, the case that Northbound
cites for this theory, held that “the direct participant doctrine
does not authorize the imposition of liability for breach of
contract,” Phillips, 2012 WL 6111405, at *11, and that limit is
consistent with the broader range of case law, including the
cases just cited. The only claim that Northbound pursues on
appeal is one for breach of contract. As a federal court, we
will not revise Illinois doctrine to extend direct participant
liability to breaches of contracts, where parties may choose
which individuals or companies will be bound. Northbound
cannot hold Norvax liable for a breach of contract by Lead-
bot LLC under the direct participant liability theory. See Phil-
lips, at *11 (“The Court will leave it to the Illinois state courts
to determine whether liability under the direct participant
liability theory should be expanded to breach of contract
claims.”); accord, e.g., Boston Fish Market, Inc. v. EMS-USA
Insulated Doors, Inc., No. 12-C-6751, 2013 WL 2421744, at *2–4
(N.D. Ill. June 3, 2013) (declining to extend direct participant
liability doctrine from tort cases to contract cases until Illi-
nois state courts do so).
The second doctrine that Northbound tries to invoke to
hold Norvax liable for alleged breaches by Leadbot LLC is
the alter ego doctrine. Under Illinois law: “Generally, before
the separate corporate identity of one corporation will be
disregarded and treated as the alter ego of another, it must
be shown that it is so controlled and its affairs so conducted
that it is a mere instrumentality of another, and it must fur-
No. 14-1651 7
ther appear that observance of the fiction of separate exist-
ence would, under the circumstances, sanction a fraud or
promote injustice.” Main Bank, 427 N.E.2d at 101. North-
bound argues that Leadbot LLC is an alter ego of Norvax.
In support of its alter ego theory, Northbound cites depo-
sition testimony from the CEO of Norvax that Leadbot LLC
was a brand under the Norvax umbrella. Northbound also
cites affidavits attesting that Norvax paid the purchase price
for Leadbot LLC’s acquisition of Northbound’s assets and for
the salaries of Leadbot LLC employees. And Northbound
says that Norvax assumed certain obligations under the as-
set purchase agreement. 2
These facts may show that Leadbot LLC was a “mere in-
strumentality” of Norvax, the first element of an alter ego
theory. Northbound offers no evidence, however, that re-
specting the separate corporate existence of Norvax would
“sanction a fraud or promote injustice,” which is the second
necessary condition for piercing the corporate veil under Il-
2 Assumption is another established doctrine under which a contract
can be enforced against a non-party. See Arthur Andersen LLP v. Carlisle,
556 U.S. 624, 631 (2009) (“‘[T]raditional principles’ of state law allow a
contract to be enforced by or against nonparties to the contract through
‘assumption, piercing the corporate veil, alter ego, incorporation by ref-
erence, third-party beneficiary theories, waiver and estoppel.’”), quoting
21 R. Lord, Williston on Contracts § 57:19, at 183 (4th ed. 2001). But out-
side of a conclusory mention in the alter ego section of its principal brief,
Northbound hardly mentions the word “assumption,” much less devel-
ops an assumption argument. If Northbound thought it made an as-
sumption argument, then that “argument is perfunctory and undevel-
oped, and is therefore waived.” Argyropoulos v. City of Alton, 539 F.3d
724, 738 (7th Cir. 2008).
8 No. 14-1651
linois law. This showing is especially difficult for a party to
make in a breach of contract action where “courts should
apply even more stringent standards to determine when to
pierce the corporate veil than they would in tort cases.” Tow-
er Investors, LLC v. 111 East Chestnut Consultants, Inc., 864
N.E.2d 927, 941 (Ill. App. 2007), citing 1 W. Fletcher, Cyclo-
pedia of Corporations § 41.85, at 692 (1999).
In this respect, Illinois law aligns with the broadly recog-
nized corporate law principle that “it is a lot harder to hold
investors personally liable in contract disputes than for tort
judgments.” Secon Service System, Inc. v. St. Joseph Bank &
Trust Co., 855 F.2d 406, 413 (7th Cir. 1988). As we explained in
Secon Service:
The reason is simple: contract creditors have
entered into a voluntary arrangement with the
corporation, which gave them an opportunity
to negotiate terms reflecting any enhanced risk
to which doing business with an entity enjoy-
ing limited liability exposed them. If they
wanted guarantees from the investors, they
could have negotiated for them. Tort creditors
had no chance to obtain compensation ex ante
for exposure to increased risk, so to cut off all
liability might encourage excessively risky be-
havior.
Id. at 413–14.
Northbound did not argue its alter ego theory in the dis-
trict court, and in this court its briefing on the theory leaves
much to be desired. We could certainly deem it waived, but
No. 14-1651 9
as we just explained it is meritless. Our rejection of this theo-
ry is not an artifact of the way this case has been litigated.
Northbound argues that it was misled by the district
court’s decision on defendants’ motion to dismiss. In re-
sponse to Norvax’s argument that it was not a party to the
asset purchase agreement, the district court said that North-
bound’s allegations in paragraphs 13 and 14 of the complaint
were sufficient to allege that Norvax was in privity of con-
tract with Leadbot LLC, and thus that Northbound could
proceed against Norvax for breach of contract. Northbound
Group, Inc. v. Norvax, Inc., No. 11-C-6131, 2012 WL 394336, at
*7 (N.D. Ill. Feb. 6, 2012), citing Kaplan v. Shure Brothers, Inc.,
266 F.3d 598, 602 (7th Cir. 2001). On defendants’ motion for
summary judgment, however, the district court found that
Northbound had offered no evidence that would support a
finding that Norvax is liable for breach of a contract to which
it was not a party. Northbound Group, Inc. v. Norvax, Inc., 5 F.
Supp. 3d 956, 972–73 (N.D. Ill. 2013).
Northbound complains that if it had known the district
court would require it to prove more than privity of contract
between Norvax and Leadbot LLC at summary judgment,
then it would have made an alter ego argument to the dis-
trict court, and it asks us to remand so that it may have a
second opportunity to develop evidence to support the theo-
ry. We are not persuaded.
Three circumstances combine to convince us that no such
remand is necessary. First, we have allowed Northbound to
make a new argument on appeal—the alter ego argument—
and we have considered that argument. Second, North-
bound says in its principal brief that there is “ample evi-
dence” in the record supporting its alter ego argument, yet
10 No. 14-1651
Northbound fails to address or even acknowledge the sec-
ond prong of the alter ego doctrine, the need to prevent
fraud or injustice. Third, Northbound offers no details about
what evidence it might reasonably expect to present on re-
mand to support its alter ego argument. Under these circum-
stances, and despite its perfunctory assertion otherwise, we
are confident that Northbound was not deprived of a fair
opportunity to be heard on any theory it might have offered
to hold Norvax liable for Leadbot LLC’s alleged breaches of
contract.
At the summary judgment stage, with a number of other
issues pared away, the district court appears to have focused
more on the startling nature of Northbound’s effort to pierce
the corporate veil based only on Norvax’s privity of contract
with Leadbot LLC, and the court correctly rejected that theo-
ry. Northbound suggests that this was contrary to the “law
of the case,” but we disagree. If a district court makes what
is arguably a mistake of law in allowing a plaintiff to pursue
a claim at an early stage of the case, the plaintiff is not enti-
tled to assume that the district court or especially this court
will follow that same view of the law when the arguable
mistake is pointed out by the other side. The district court
properly granted summary judgment in favor of Norvax on
the claim for breach of contract. 3
3 Northbound also argues that Norvax breached the covenant of
good faith and fair dealing, which is “not an independent source of du-
ties for the parties to a contract.” See Lansing v. Carroll, 868 F. Supp. 2d
753, 761 (N.D. Ill. 2012), quoting Seip v. Rogers Raw Materials Fund, L.P.,
948 N.E.2d 628, 637 (Ill. App. 2011). Under Illinois law, the covenant is
“used as a construction aid in determining the intent of the parties where
an instrument is susceptible of two conflicting constructions.” Fox v.
Heimann, 872 N.E.2d 126, 134 (Ill. App. 2007). Appealing to the covenant
No. 14-1651 11
We must tie up one more loose end. When Northbound
filed this suit, Norvax stopped paying the monthly “earn-
out” that was owed to Northbound under the asset purchase
agreement. The district court denied summary judgment for
Northbound on this claim, finding a genuine issue regarding
the proper amount of the accrued earn-out. The parties then
stipulated that $45,000 was the amount of the withheld earn-
out. The district court entered a stipulated final judgment to
that effect. Norvax then paid that amount to Northbound.
Northbound argues on appeal that it should be relieved
of this stipulation because it agreed to the stipulation only in
the face of an erroneous ruling by the district court on the
evidence it would consider. But that is why parties have the
ability to appeal. Stipulations are made for a reason—to re-
solve disputed issues conclusively, without trial or further
dispute. See River v. Commercial Life Ins. Co., 160 F.3d 1164,
1173 (7th Cir. 1998) (enforcing stipulation to bar argument
on appeal). A party cannot avoid such a stipulation by say-
ing merely that it thought the court was going to err by rul-
ing against it. “To hold anything else would be to reduce
stipulations to mere inconsequential gestures.” Id., quoting
United States v. Sandles, 80 F.3d 1145, 1148 (7th Cir. 1996).
The district court’s judgment is AFFIRMED.
could help Northbound only if it offered some other basis for holding
Norvax liable under the asset purchase agreement to which it was not a
party.