Driveline Systems, LLC v. Arctic Cat, Inc.

In the
United States Court of Appeals
For the Seventh Circuit
No. 18-1424
DRIVELINE SYSTEMS, LLC, an Illinois
limited liability company,
Plaintiff-Appellant/
Counter-Defendant,
v.
ARCTIC CAT, INC., a Minnesota
corporation,
Defendant-Appellee/
Counter-Plaintiff.
Appeal from the United States District Court for the
Northern District of Illinois, Western Division.
No. 3:08-cv-50154 — Frederick J. Kapala, Judge.
ARGUED APRIL 3, 2019 — DECIDED AUGUST 23, 2019
Before WOOD, Chief Judge, and BAUER and ROVNER, Circuit
Judges.
2 No. 18-1424
BAUER, Circuit Judge. Driveline Systems, LLC (“Driveline”)
filed a breach of contract lawsuit against Arctic Cat, Inc.
(“Arctic Cat”) over a supply contract for specially manufac-
tured goods. Counts II-V were resolved against Driveline by
summary judgment. The remaining claim and Arctic Cat’s
countersuit were resolved by a trial on the papers. Driveline
appeals the district court’s grant of summary judgment on
Count II, arguing that there were genuine issues of material
fact which preclude summary judgment.
I. BACKGROUND
In 1999, Driveline’s predecessor in interest, Valley Drive
Systems, Inc., began manufacturing parts for Arctic Cat and, in
May 2002, Driveline assumed control of Valley Drive Systems,
Inc.’s assets. In June 2002, Driveline and Arctic Cat entered
into a contractual agreement where Driveline would provide
specifically-manufactured hubs, axels/half-shafts, outer and
inner tie rods, shift shafts, and steering stops (the “Goods”).
During the pendency of their relationship, Driveline was a
“just-in-time supplier” providing the Goods and taking and
filling orders daily with regular daily deliveries to Arctic Cat.
A. A Deteriorating Relationship
The production of axles/half-shafts constituted the majority
of Arctic Cat’s purchases from Driveline, making up between
60-90 percent of total sales. In August 2007, Arctic Cat con-
tacted Driveline to request a price reduction. At around this
time, Arctic Cat received a bid from a foreign company to
produce the half-shafts for approximately $30/shaft—for a
projected monthly savings of approximately $200,000.00.
Throughout the rest of 2007, Arctic Cat and Driveline negoti-
No. 18-1424 3
ated about the future of Arctic Cat’s half-shaft production
business. An email before December 14, 2007, from Arctic Cat’s
Director of Supply Management, Chuck Hicks, to Driveline’s
Donald DiGiovanni, Jr., says Driveline will not be retaining the
half-shaft business. Driveline disputes this, asserting it only
became aware of the change in production on February 15,
2008, when it received a termination letter from Arctic Cat.
While the above negotiations were ongoing, Driveline and
Arctic Cat’s relationship continued as usual. From January
2007 through February 2008, Arctic Cat paid Driveline between
$12 and $15 million for the Goods. But on January 21, Driveline
halted all shipments to Arctic Cat, citing the ballooning
amount due, $640,986.03, as accounts receivable. On
January 24, 2008, Arctic Cat paid $371,387.27 and Driveline
resumed shipments; a second check for $140,951.31 was issued
on January 28. In early February 2008, Driveline again halted
all shipments to Arctic Cat citing non-payment.
On February 8, 2008, Arctic Cat sent a letter to Driveline
informing them that they were in breach of contract and as
a result, any losses suffered by Arctic Cat would be the
responsibility of Driveline. On the same day, Richard
DiGiovanni of Driveline wrote a letter informing Arctic Cat
that it was in arrears. The letter from Driveline went on to say
that $185,241.60 was due immediately and all further ship-
ments would be paid cash on delivery.
No further deliveries were made and, on February 15, 2008,
Arctic Cat sent Driveline a letter terminating their relationship
and notifying Driveline that they would be seeking reimburse-
ment for any damages suffered as a result of their failure to
4 No. 18-1424
ship the Goods. On February 19, 2008, Arctic Cat sent a letter
to Driveline demanding $540,750.00 for freight costs associated
with Driveline’s failure to deliver the Goods.
B. Proceedings Before the District Court
On July 25, 2008, Driveline filed this lawsuit which was
ultimately amended on February 27, 2015; Arctic Cat filed a
counterclaim on January 13, 2009. Following cross-motions for
summary judgment, the district court granted judgment for
Arctic Cat on Counts II-V of the Revised Second Amended
Complaint (the “Complaint”). Shortly thereafter, the parties
went to trial on the papers, pursuant to Federal Rule of Civil
Procedure 52 on Count I of the Complaint, Arctic Cat’s
Counterclaim, and prevailing party attorney’s fees. The district
court found that Arctic Cat was liable for $182,234.05 on
Count I of the Complaint; Driveline was liable for $163,481.04
on the Counterclaim; and Arctic Cat was due $27,700.50 in
prevailing party attorney’s fees and costs. Ultimately, the
district court entered judgment for Arctic Cat and against
Driveline in the amount of $8,947.49.
Before the Court is Driveline’s appeal from the district
court’s grant of summary judgment as to Count II of the
Complaint. For the reasons that follow, we vacate the district
court’s decision and remand for further proceedings consistent
with this opinion.
II. ANALYSIS
Driveline argues that the district court erred when it
determined that there were no genuine issues of material fact.
They aver that: the parties were unable to agree on even the
No. 18-1424 5
most basic terms of the contract; there is an issue of fact on the
timeliness of Arctic Cat’s payment, the balance of the aged
accounts, and most importantly, which party breached the
contract first.
A. Standard of Decision
As an initial matter, Arctic Cat argues that Driveline is
precluded from appealing the issues decided at summary
judgment because those issues were expressly adjudicated
during the district court’s trial on the papers. If any review is
proper, they argue that it should be under the clearly errone-
ous standard. We disagree.
In JCW Investments, Inc. v. Novelty, Inc., 482 F.3d 910 (7th
Cir. 2007), we reviewed a case with a similar procedural
posture; a copyright issue was resolved at summary judgment
and issues of damages were resolved by a jury. There the court
applied the de novo standard of review to issues resolved at
summary judgment. Id. at 914. In further support of their
argument that the clearly erroneous standard applies, they say
that the district court made further findings of fact during the
trial on the papers. This is not clear from the court’s January 23,
2018, Order, which says: “The facts in the section are derived
from the summary judgment record.” Driveline Sys., LLC v.
Arctic Cat, Inc., No. 1:08-cv-50154, Order *2 (N.D. Ill. Jan. 23,
2018). Moreover, it is unclear from the trial Order what factual
issues were decided at trial and which were carried over from
summary judgment. See Id. Accordingly, we apply the stan-
dard of review consistent with an appeal from a motion for
summary judgment.
6 No. 18-1424
Our review of a grant of summary judgment is de novo and
all reasonable inferences are drawn in favor of the nonmovant.
Valenti v. Lawson, 889 F.3d 427, 429 (7th Cir. 2018). “Summary
judgment is appropriate if there is no genuine dispute as to any
material fact, and the moving party is entitled to judgment as
a matter of law.” Dunderdale v. United Airlines, Inc., 807 F.3d
849, 853 (7th Cir. 2015) (citing Fed. R. Civ. P. 56(a)); see also
Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).
“A genuine issue of material fact exists whenever ‘there is
sufficient evidence favoring the non-moving party for a jury to
return a verdict for that party.’” Aregood v. Givaudan Flavors
Corp., 904 F.3d 475, 482 (7th Cir. 2018), reh'g denied (Oct. 30,
2018) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249
(1986)). The court views the evidence, and draws all reasonable
inferences, in the light most favorable to the nonmoving party.
Id. The court does not “assess the credibility of witnesses,
choose between competing reasonable inferences, or balance
the relative weight of conflicting evidence.” Stokes v. Bd. of
Educ. of the City of Chi., 599 F.3d 617, 619 (7th Cir. 2010).
B. The Supply Contract and Its Terms
In its opinion, the district court acknowledges that it is
tasked with “determining whether there is a genuine issue of
material fact as to who breached first.” Driveline Sys., LLC,
Order *12. Because, under Illinois law, “a material breach of a
contract provision will justify nonperformance by the other
party.” InsureOne Indep. Ins. Agency, LLC v. Hallberg, 976 N.E.2d
1014, 1025 (Ill. App. 2012). In order to determine which party
breached first, the district court had to find as a matter of fact
what the terms of the contract were. Mulliken v. Lewis, 615
No. 18-1424 7
N.E.2d 25, 27 (Ill. App. 1993) (“Whether a contract exists, its
terms, and the intent of the parties are questions of fact for the
trier of fact.”). The relationship between the parties was
governed by a mosaic of agreements. The Supply Contract was
entered into in January 2006 and purported to govern the sale
of the Goods. However, both Driveline’s invoices and Arctic
Cat’s purchase orders (called scheduling agreements) con-
tained conflicting terms. The result was a battle of forms and,
as the district court properly found, no contract was formed
pursuant to § 2-207 of the Uniform Commercial Code (“UCC”
or the “Code”), as codified at 810 Ill. Comp. Stat. § 5/2-207.
Accordingly, § 2-207(3) of the Code controls and the contract
consists of non-conflicting terms, the Code’s supplementary
terms, and the conduct of the parties.
The district court determined that promptness of delivery
was an undisputed material term. The writings of Arctic Cat
explicitly called for timely deliveries and made clear that this
was material to the agreement and their business as a whole.
Driveline does not dispute this assertion, and moreover, the
conduct of the parties during their relationship supports this
conclusion. Next, the district court found that there was no
term discussing promptness of payment, and while Driveline’s
Richard DiGiovanni’s affidavit stated Driveline called for
prompt payment, it was required to do more than make an
unsupported assertion at the put up or shut up stage of
litigation. Johnson v. Cambridge Indus., Inc., 325 F.3d 892, 901
(7th Cir. 2003). The district court correctly found that prompt
payment was not a material term and instead the Code’s gap-
filler provision would control.
8 No. 18-1424
The Code states if time for payment is not specified,
payment should be made within a reasonable time. 810 Ill.
Comp. Stat. 5/2-309. But the district court failed to examine the
parties’ course of dealings to determine what a reasonable time
would be, given the circumstances. Instead, the district court
looked to the balance of the aged accounts receivable and
determined that Arctic Cat was slightly delayed in making
payments and found that slight delay was not sufficient to
forgive Driveline’s subsequent breach. The district court noted
that Driveline excused late payments nearly a dozen times a
year but did not find that any of those late payments were
made after an unreasonable length of time, nor note that any of
the circumstance surround those payments, or what percent-
age of payments were late.
This is the type of a genuine dispute as to a material fact
which should have precluded summary judgment. In order to
find that Arctic Cat’s delay in payment was or was not a
breach, the court would have to first conclude what a reason-
able time was under the circumstances before it concluded
Arctic Cat was not in breach. 810 Ill. Comp. Stat. 5/2-309(1)
§ 1 cmt (requiring a reasonable time be determined in light of:
“good faith and commercial standards […] the contractual
circumstances, usage of trade or course of dealing or perfor-
mance.”).
C. Other Issues of Material Fact Exist
The district court failed to consider the other circumstances
surrounding Driveline’s suspension of shipments, specifically
Arctic Cat’s apparent termination of its half-shaft business.
Other factual ambiguities existed at the time the district court
No. 18-1424 9
granted summary judgment for Arctic Cat, specifically: what
terms of the Code or Supply Contract governed the end of the
parties’ relationship, when Driveline knew it would not be
retaining the half-shaft business, and if any phase-out plan had
been discussed.
These factual issues are material because if the Supply
Contract is silent on the dissolution of the contract, § 2-309 of
the Code would control. Section 2-309 requires that reasonable
notification of termination be provided to the other party. Id.
at § 2-309(3). This is based on “principles of good faith and
sound commercial practice [which] normally call for such
notification of the termination of a going contract relation-
ship[.]” Id. at § 2-309 § 8 cmt. Accordingly, it was necessary to
find what governed the winding down of the Supply Contract
and when Arctic Cat provided notice to Driveline that they
would not be retaining the half-shaft business.
III. CONCLUSION
Because genuine issues of material fact exist, neither party
is entitled to judgment as a matter of law. The district court’s
grant of summary judgment is vacated and the matter is
remanded to the district court for further proceedings consis-
tent with this opinion.