Fidelity & Deposit v. Rotec Industries Inc

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 04-1598
FIDELITY AND DEPOSIT COMPANY OF MARYLAND and
AMERICAN HOME ASSURANCE COMPANY,
Plaintiffs-Appellants,
v.
ROTEC INDUSTRIES, INC.,
Defendant-Appellee.
____________
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 01 C 5829—William J. Hibbler, Judge.
____________
ARGUED NOVEMBER 9, 2004—DECIDED DECEMBER 28, 2004
____________
Before FLAUM, Chief Judge, and CUDAHY and POSNER,
Circuit Judges.
POSNER, Circuit Judge. The appeal in this diversity suit
governed by Illinois law requires us to examine a doctrine
of contract law known as “divisibility.” Rotec, the defen-
dant, had a contract with Guy F. Atkinson Construction
Company relating to China’s damming of the Yangtze
River—the $25 billion “Three Gorges” project that is due to
be completed in 2009. Soon after the contract was signed,
Atkinson declared bankruptcy and, as debtor in possession,
2 No. 04-1598
rejected (with immaterial exceptions) its executory contracts,
pursuant to 11 U.S.C. § 365(a). The plaintiffs, a pair of
insurance companies, bought Atkinson’s contract rights,
including its rights under the contract with Rotec, and then
filed this suit against Rotec for breach of contract. Rotec
argued, and the district judge, granting summary judgment
in its favor, agreed, that the contract was executory, and so,
having been rejected, and thus terminated, by Atkinson,
could not have been acquired by the plaintiffs—there was
nothing to acquire—and so they had no basis for their suit.
But what if, as the plaintiffs argued unsuccessfully to the
district court, the contract was divisible into two parts and
the first, having been fully executed by Atkinson, had not
been rejected when Atkinson rejected its executory con-
tracts? Then it would be as if there were two separate
contracts, one performed, one executory, with only the
second having been rejected in bankruptcy and the first
having passed to the plaintiffs in the sale to them of
Atkinson’s contract rights. Stewart Title Guaranty Co. v. Old
Republic Nat’l Title Ins. Co., 83 F.3d 735, 741-42 (5th Cir. 1996)
(per curiam); Monument Square Associates, Inc. v. Resolution
Trust Corp., 792 F. Supp. 874, 876-77 (D. Mass. 1991); cf. In re
Gardinier, Inc., 831 F.2d 974 (11th Cir. 1987). But is “as if”
enough? The parties assume so, with support in the cases
we’ve cited plus In re Murexco Petroleum, Inc., 15 F.3d 60, 62-
63 (5th Cir. 1994) (per curiam), cases that rely on a dictum
in NLRB v. Bildisco & Bildisco, 465 U.S. 513, 522 n. 6 (1984),
based in turn on some scanty legislative history to section
365(a). And yet divisible contract is not two (or more)
separate contracts; if it’s broken, it’s broken entirely. The
only significance of its divisibility is that the contract price
will be used to determine the value of any partial perfor-
mance of the contract. Kimco Corp. v. Murdoch, Coll &
Lillibridge, Inc., 730 N.E.2d 1143, 1148 (Ill. App. 2000);
No. 04-1598 3
Metropolitan Trust Co. v. Fishman, 55 N.E.2d 837, 839-40 (Ill.
App. 1944); Filet Menu, Inc. v. C.C.L. & G., Inc., 94 Cal. Rptr.
2d 438, 444 (App. 2000); Restatement (Second) of Contracts
§ 240 and comment b (1981). But we’ll allow the parties their
assumption that the plaintiffs should win if there is
divisibility, and save our doubts for a future case.
The first document Rotec and Atkinson signed was a
memorandum of understanding in January 1996. It states
that the Chinese corporation responsible for the Three
Gorges project has requested bids for dam-construction
machinery, that Rotec intends to bid for the contract, that
Atkinson will be a subcontractor of Rotec, that Atkinson and
Rotec possess “complementary technology, products, know-
how . . . [etc.] which, taken together, would allow the Parties
to perform the Project according to the highest international
standards,” and that the parties’ objective is “to cooperate
in preparing a proposal for submission” to the Chinese “to
obtain the award of a contract” and “take all other actions
necessary to performance thereunder, including entering
into . . . Performance Agreement(s) for the performance of
the Project and any other agreements necessary to the
successful performance of the Project.”
The following month the parties signed a supplement
to the memorandum of understanding in which they
“agreed that Atkinson shall be paid a fee by Rotec for the
use of its name by Rotec with respect to the Project.” The fee
was to be between $2 million and $3 million, the exact
amount being left to negotiation between the parties. Rotec
also agreed to pay Atkinson another $1 million for “its
involvement in the Project. Such involvement shall include
providing advice and technical support services under
subcontract to Rotec in connection with Rotec’s performance
under the Contract.”
4 No. 04-1598
Rotec submitted its bid, and in the fall of 1996 won a $30
million contract. Eight months later, Rotec and Atkin-
son signed another supplement to their memorandum of
understanding. This supplement modified the preceding
one by specifying that Atkinson would receive $1 million
(rather than $2 to $3 million) for having permitted its
name to be used in winning the initial $30 million contract
with the Chinese and that if Rotec succeeded in enlarging
the contract to cover an additional $15 million in equipment
sales, Atkinson would receive a 5 percent fee on those sales.
This supplement further states that “Atkinson is keen and
willing to help ROTEC increase the size of the order of
equipment and to participate in the site operations (erection,
and commissioning etc.).”
A few days after the execution of the second supplement,
Rotec sent Atkinson a check for $129,000 in partial pay-
ment of the $1 million fee for the use of Atkinson’s name.
Three weeks later, Atkinson declared bankruptcy and
walked away from the parties’ contract, which by this time
consisted of the memorandum of understanding plus the
two supplements.
Atkinson (which for the sake of simplicity we’ll pretend
is the plaintiff, rather than the insurance companies that
purchased its contract rights) argues that the “Project” to
which its tripartite contract with Rotec refers was just the
preparation of the bid for which it was to receive $1 million
plus 5 percent of any additional orders by the Chinese. And,
the argument continues, that divisible contract segment was
fully performed by Atkinson when the bid was accepted,
thus entitling Atkinson to $1 million plus the 5 percent fee
for subsequent orders—and there were subsequent orders,
as a result of which Atkinson claims to be out not just the $1
million fee for its name (minus the $129,000 that it received)
No. 04-1598 5
but almost $1.3 million more. Rotec ripostes that there was
a single, indivisible contract that required Atkinson to
cooperate with Rotec not only in the preparation of the bid
but also in providing services relating to the construction of
the dam in the event that the bid was accepted, as it was.
Atkinson broke the contract when upon declaring
bankruptcy it withdrew from the dam project, and this
breach excused Rotec from further performance on its
side—that is, from having to complete payment of the $1
million “name” fee and to pay in addition the 5 percent fee
on the additional orders by the Chinese.
Atkinson would nevertheless be entitled to claim compen-
sation in a suit for quantum meruit for the value of the
services that it had rendered to Rotec before the breach,
minus any damages that Rotec suffered from the breach.
Fieldcrest Builders, Inc. v. Antonucci, 724 N.E.2d 49, 60 (Ill.
App. 1999); Evans & Associates, Inc. v. Dyer, 615 N.E.2d 770,
778 (Ill. App. 1993); Micro Data Base Systems, Inc. v. Dharma
Systems, Inc., 148 F.3d 649, 656 (7th Cir. 1998); Kutzin v.
Pirnie, 591 A.2d 932, 937-41 (N.J. 1991); Restatement, supra, §
374(1) and comment a. So whether a great deal turns on a
finding of divisibility is doubtful; that is so in general, and
would be in this case as well were it not for Atkinson’s
rejection of the contract in bankruptcy. If the contract
was divisible, Atkinson was entitled to the contract price for
the divisible portion of its performance that it completed. If
not, it was entitled to the value of its performance and a
court would look to the contract price as a guide to that
value, Mor-Wood Contractors, Inc. v. Ottinger, 562 N.E.2d
1247, 1255 (Ill. App. 1990); Newfield House, Inc. v. Massachu-
setts Dept. of Public Welfare, 651 F.2d 32, 39 (1st Cir. 1981);
Constantino v. American S/T Achilles, 580 F.2d 121, 122-23 (4th
Cir. 1978); Restatement, supra, § 374 comment b; E. Allen
Farnsworth, Contracts § 8.14, p. 560 (4th ed. 2004), especially
in a case such as this in which there is no readily ascertain-
6 No. 04-1598
able market price to which it could look instead. Bausch &
Lomb Inc. v. Bressler, 977 F.2d 720, 730 (2d Cir. 1992).
There is greater definiteness when the contract price
provides not merely a guide, but the definitive specification
of the performing party’s entitlement; that presumably is the
reason for the doctrine of divisibility. But what is really
involved is the exchange of one uncertainty, that of the
value of performance, for another, that of deciding
divisibility—of deciding, that is, whether “both parties have
divided up their performance into units or installments in
such a way that each past performance is the rough compen-
sation for a corresponding past performance by the other
party. The test is whether, had the parties thought of it, they
would be willing to exchange the part performance irrespec-
tive of what transpired subsequently or whether the divi-
sions made are merely for the purpose of requiring periodic
payments as the work progresses.” Trapkus v. Edstrom’s Inc.,
489 N.E.2d 340, 346 (Ill. App. 1986); see also Kimco Corp. v.
Murdoch, Coll & Lillibridge, Inc., supra, 730 N.E.2d at 1148-49.
Maybe on balance the doctrine increases certainty—or
maybe not, when we consider the following language from
the Trapkus opinion: “whether it is proper to regard the
parts of each pair as agreed equivalents will usually depend
on considerations of fairness. This means that the parts of
the pair must be of roughly equivalent value to the injured
party in terms of his expectations with respect to the total
agreed exchange.” 489 N.E.2d at 346; see also Restate-
ment, supra, § 240 comment e; Farnsworth, supra, § 8.13,
pp. 554-55.
Because the application of the doctrine depends on
evidence of “agreed equivalents,” the use of the contract
price to determine entitlements when the contract has
not been fully performed is defensible only when the
No. 04-1598 7
contract itself can be said to specify the price for partial
performance. See 5 Arthur Linton Corbin, Corbin on Con-
tracts § 1111 (1964). That condition will rarely be satisfied.
If an employment contract is for a year and the employee
quits after his first week on the job, it is artificial to suppose
that the contract entitles him to one week’s wages, for had
he insisted in the contract negotiations that he be free to
leave after a week the employer would probably have
refused to hire him at all, or at least at the agreed wage. Id.
The fact that many courts nevertheless treat employment
contracts as divisible probably has less to do with the logic
of the doctrine than with a policy, embodied in state wage-
payment laws, e.g., Cal. Labor Code § 204; Del. Code tit. 19
§ 1102; 820 ILCS 115/3; Ind. Code § 22-2-5-1; Mich. Comp.
Laws § 408.472; N.J. Stat. 34:11-4.2; N.Y. Labor Law § 191;
Ohio Rev. Code § 4113.15; 43 Pa. Cons. Stat. § 260.3; Tex.
Labor Code § 61.011, of protecting wage earners.
Setting the employment cases to one side as inapplicable
to the type of contract involved in the present case, we think
the district judge was correct to hold the contract indivisible.
Atkinson’s argument that the term “project” refers only to
the bid preparation offends language and common sense.
Not that the service rendered by Atkinson at the bidding
stage in lending its prestigious name to Rotec’s proposal
was trivial. At least until its plunge into bankruptcy,
Atkinson was an illustrious dam builder. Founded in 1926,
it had been involved in the construction of the Bonneville
and Grand Coulee dams and of the Guri dam in Venezuela
and in many other major projects, including an under-
ground excavation in New Jersey in which it moved 12
million cubic tons of rock. Its signature on the bid certified
that Rotec was competent to perform the contract if its bid
was accepted. Atkinson also helped Rotec prepare the
proposal.
8 No. 04-1598
But the contract contemplated more. Representations were
made to the Chinese in connection with the bid that implied
that Atkinson would remain active in the performance
phase of the contract should the contract be awarded to
Rotec. The cover letter of the bid is signed by both compa-
nies, states that “Rotec intends to submit to the Three
Gorges Corporation a bid, with Atkinson and Mitsui as
subcontractors,” and concludes by stating that “their”—not
its—“commitment to the Yangtze Three Gorges Project will
be no less than their past commitment to the international
construction field.” The use of the future tense signals an
intention by Atkinson to remain involved in Rotec’s piece of
the dam project after the bid is accepted. Also telling is
Rotec’s agreeing to pay Atkinson $1 million (over and above
the $2 to $3 million “name” fee) for “its involvement in the
Project. Such involvement shall include providing advice
and technical support services under subcontract to Rotec in
connection with Rotec’s performance under the Contract.”
The reference to “Project” is clearly to the performance stage
of Rotec’s contract with the Chinese rather than to the bid-
submission stage.
It is true that the details of Atkinson’s participation at the
performance stage were left undefined. But we do not
understand Atkinson to be arguing that its “commitment”
was so vague that if the day after the bid was accepted
it had told Rotec that it was quitting now and wanted its
$1 million and its 5 percent (if and when additional orders
were submitted to Rotec), that would not have been a
breach. Such a defection would have left Rotec high and
dry, deprived of necessary advice and assistance. It might
have jeopardized Rotec’s relations with the Chinese,
who might think Rotec had deliberately misled them
into believing that Atkinson would participate in the
project. Atkinson’s name was valuable to the Chinese and
hence to Rotec—but only if the name connoted participation
No. 04-1598 9
beyond the bestowal of a Good Housekeeping seal of
approval. And so we are persuaded that “it is impossible to
affirm that [Rotec] would have assented to any part [of the
contract] unless [it] assented to all.” Trapkus v. Edstrom’s Inc.,
supra, 489 N.E.2d at 347; see also Gladstone v. McHenry
Medical Group, 553 N.E.2d 1174, 1179-81 (Ill. App. 1990);
Klubeck v. Division Medical X-Ray, Inc., 439 N.E.2d 506,
510-11 (Ill. App. 1982).
But Atkinson, noting that the district court decided the
case for Rotec on summary judgment, tells us that the
question whether a contract is divisible is one of fact, not
of law, and so there must be a trial. Kel-Keef Enterprises,
Inc. v. Quality Components Corp., 738 N.E.2d 524, 538
(Ill. App. 2000), on which Atkinson relies, so holds, but
Trapkus v. Edstrom’s Inc., supra, 489 N.E.2d at 344-45, leans
the other way, leaving us uncertain what the rule in Illinois
should be taken to be. The cases from other jurisdictions are
split. Compare Equity Control Associates, Ltd. v. Root, 638
N.W.2d 664, 671 (Iowa 2001); Carvel Co. v. Spencer Press, Inc.,
708 A.2d 1033, 1035 (Me. 1998); Magic Valley Radiology
Associates, P.A. v. Professional Business Services, Inc., 808 P.2d
1303, 1312 (Idaho 1991), and Ellison v. Tubb, 749 S.W.2d 650,
651 (Ark. 1988), all of which deem it an issue of fact, with
Estate Landscape & Snow Removal Specialists, Inc. v. Mountain
States Telephone & Telegraph Co., 844 P.2d 322, 328 (Utah
1992); Sisk v. Parker, 469 S.W.2d 727, 732 (Tex. App. 1971);
Morrison v. Circuit City Stores, Inc., 317 F.3d 646, 674-75 (6th
Cir. 2003) (Ohio law), and Harris v. Dial Corp., 954 F.2d 990,
993 n. 2 (4th Cir. 1992) (Arizona law), which deem it one
of law.
None of the cases contains an illuminating discussion
of the choice; and the parties to the present case have
overlooked the decisions of this court that hold, in con-
10 No. 04-1598
formity with decisions of the Supreme Court beginning with
Byrd v. Blue Ridge Rural Electric Cooperative, Inc., 356 U.S. 525
(1958), that in all cases in federal court, including diversity
cases, the allocation of responsibility between judge (“law”)
and jury (“fact”) is governed by federal rather than state
law. Mayer v. Gary Partners & Co., 29 F.3d 330, 333 (7th Cir.
1994); Coplay Cement Co. v. Willis & Paul Group, 983 F.2d
1435, 1438 (7th Cir. 1993); Barron v. Ford Motor Co. of Canada
Ltd., 965 F.2d 195, 199-201 (7th Cir. 1992); Binakonsky v. Ford
Motor Co., 133 F.3d 281, 290 (4th Cir. 1998); Villarini-Garcia
v. Hospital Del Maestro, Inc., 8 F.3d 81, 86 (1st Cir. 1993). The
practical consideration behind these cases is that the
allocation depends on the relative capabilities of judges and
jurors and of trial and appellate courts, and on other factors
specific to a particular court system, including rules of
evidence and procedure, rather than on policies rooted in
substantive state law, which under the Erie doctrine sup-
plies the rules of decision in diversity cases. The line frays,
however, when the procedural rule is generated by a
substantive policy; and it is possible to view the fact-law
distinction in contract cases in that light, as designed to
reduce contractual transaction costs by allowing most
contract disputes to be resolved without a trial. Cf. Harbor
Ins. Co. v. Continental Bank Corp., 922 F.2d 357, 364-65 (7th
Cir. 1990). The rule that the meaning of a written contract is
an issue of law if no evidence besides the contract itself is
presented is such a rule, and a rule determining whether
divisibility is to be deemed a legal or a factual question
could be thought a corollary of that rule.
We need not pursue the matter in this, or perhaps in any,
case, as there is less to the division of authority on the issue
than meets the eye. To spare contracting parties the expense
and uncertainty and other angst of trial, courts endeavor, as
we have just noted, to resolve contract disputes on the basis
No. 04-1598 11
of the language of the contract, supplemented by commer-
cial or common sense—hence as a “question of law,” which
just means that it is to be answered without a trial. When
the courts can’t do this because the language and circum-
stances fail to dispel ambiguity, they say the contract
presents a question of fact, meaning that there has to be a
trial. There is no reason why this approach shouldn’t serve
when the question is whether a contract is divisible. See L.U.
Cattle & Co. v. Wilson, 714 P.2d 1344, 1349 (Colo. App. 1986).
No trial is necessary here in any event, if only because
Atkinson has failed to indicate what if any evidence it might
wish to present at a trial, beyond the documents constituting
the contract, that would bear on the issue of divisibility. All
the pertinent evidence is thus before us and as it supports
only one conclusion—that of indivisibility—there is no
occasion for a trial.
The judgment in Rotec’s favor is
AFFIRMED.
12 No. 04-1598
A true Copy:
Teste:
_____________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—12-28-04