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Havoco of America v. Hilco Inc.

decided: April 13, 1984.

HAVOCO OF AMERICA, LTD., A DELAWARE CORPORATION, PLAINTIFF-APPELLANT,
v.
HILCO, INC., A TENNESSEE CORPORATION, ELMER C. HILL, AND SUMITOMO SHOJI AMERICA, INC., A NEW YORK CORPORATION, DEFENDANTS-APPELLEES



Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. 81 C 419 -- Bernard M. Decker, Judge.

Cummings, Chief Judge, Cudahy, Circuit Judge, and Fairchild, Senior Circuit Judge.

Author: Cudahy

CUDAHY, Circuit Judge.

Plaintiff-Appellant, Havoco of America, Ltd. ("Havoco"), brought a diversity suit against defendants Elmer C. Hill and Hilco, Inc. ("Hilco") and Sumitomo Shoji America, Inc. ("Sumitomo"), alleging fraud and a conspiracy to defraud Havoco in inducing it to assign its coal supply contract with the Tennessee Valley Authority ("TVA") to a third party, R & F Coal Company ("R & F Coal"). Havoco had previously sued R & F Coal for breach of the assignment contract. The district court dismissed Havoco's claims primarily on the grounds that Havoco's current fraud suit was barred by Havoco's prior suit against R & F Coal on the breach of contract claim. The district court's jurisdiction was based on diversity of citizenship, 28 U.S.C. § 1332, and we have jurisdiction pursuant to 28 U.S.C. § 1291. We reverse.

I.

In February 1975, Havoco, a marketer of coal, entered into a contract with the TVA to supply certain amounts of coal to the TVA over a ten-year period. In connection with this coal supply contract, Havoco entered into several related agreements with other parties, including a coal purchase agreement with R & F Coal and an agreement with Sumitomo to provide Havoco with financing for the Havoco-TVA contract.

Havoco's coal supply contract with the TVA provided that either party had the right to demand renegotiation of the price of the coal within six months after execution of the contract. The TVA exercised this right in August 1975. At that time, defendant Hill, who was an officer and director of Havoco, was responsible for conducting the price negotiations with the TVA. Defendant Hilco provided office space, clerical and secretarial assistance and other services to Havoco in connection with the negotiations between Havoco and the TVA.

These negotiations continued unsuccessfully for about six months. At last, in February 1976, Havoco orally agreed to assign its TVA contract to R & F Coal and entered into a written assignment contract on March 19, 1976. Pursuant to this assignment (the "Assignment Contract"), R & F Coal agreed to pay certain sums to Havoco, based on the coal sales which R & F Coal would make to the TVA. In April 1977, R & F Coal and the TVA entered into a short-term coal sales contract, and, in June 1977, a long-term sales contract, which is still in effect.

In 1976, before the Assignment Contract was executed, R & F Coal sued Havoco, Sumitomo and others in the Northern District of Illinois alleging that Havoco had failed to make timely payments to R & F Coal under a prior agreement on invoices totalling more than $2.6 million. Havoco alleges that that lawsuit was a sham, intended to induce Havoco to assign its TVA coal supply contract to R & F Coal.

Also in 1976, M/G Transport Services, Inc. sued Havoco alleging that Havoco had breached a coal transportation contract. Havoco's president, Mr. Van Der Muelen, stated in subsequent deposition testimony that it was during later discovery for this M/G Transport case that he had become aware of meetings in 1976 between Hill, R & F Coal and M/G Transport. The participants at those meetings supposedly discussed buying out Havoco's interest in the TVA coal contract.

On January 10, 1978, Havoco instituted a suit against several defendants, including Hill, Hilco, R & F Coal, and R & F Coal's parent corporations, claiming breach of the Assignment Contract, fraud and deceit, violation of the Sherman Antitrust Act, violation of the Illinois Antitrust Act, unfair competition, breach of fiduciary duties and tortious interference with contractual relations. Havoco of America, Ltd. v. R & F Seaway Coal, Seaway River Terminal, Shell Oil, Hilco, Inc. and Hill, No. 78 C 83 (N.D. Ill.). After dismissal of the federal antitrust claim, the pendent state claims were also dismissed following the guidelines of United Mine Workers v. Gibbs, 383 U.S. 715, 16 L. Ed. 2d 218, 86 S. Ct. 1130 (1966), because there was a lack of diversity between Havoco and Shell. On October 19, 1978, the district court's order dismissing the state law claims against Hill, Hilco and R & F Coal was clarified as being "without prejudice." This court later affirmed the dismissal of the federal antitrust claim. Havoco of America, Ltd. v. Shell Oil Co., 626 F.2d 549 (7th Cir. 1980).

Meanwhile, Havoco filed suit in the District Court for the Eastern District of Tennessee after dismissal in the Northern District of Illinois (of No. 78 C 83) but before the affirmance of that dismissal by the Seventh Circuit. This suit in Tennessee named only R & F Coal as a defendant and alleged that R & F Coal had breached its contractual obligation by failing to pay the royalties or commissions agreed to in the March 19, 1976 Assignment Contract. After transfer to the Northern District of Illinois (No. 79 C 75), this case was eventually dismissed pursuant to a stipulated settlement, dated December 27, 1979, between Havoco and R & F Coal, providing for a payment of $1,966,083.40 by R & F Coal to Havoco and the execution of a covenant not to sue between those parties. In the covenant not to sue, Havoco agreed to give up all claims it might have against R & F Coal for the breach of the Assignment Contract. Havoco, however, expressly reserved any other causes of action it might have against any party other than R & F Coal and its parent corporations.

Finally, on January 27, 1981, Havoco filed the current suit against Hill, Hilco and Sumitomo alleging that the defendants had fraudulently induced Havoco to enter into the Assignment Contract and had conspired with R & F Coal to eliminate Havoco illegally as a major coal supplier to the TVA. Specifically, Havoco alleged that Hill, Sumitomo and R & F Coal made numerous misrepresentations to the TVA during the course of the price negotiations reflecting negatively on Havoco's financial situation, ability to meet the requirements of the contract and desire to remain as a supplier. The TVA apparently concluded that it would be unable to reach a satisfactory agreement with Havoco, allegedly as the result of these misrepresentations. R & F Coal brought the first lawsuit in 1976, tying up Havoco's assets, allegedly in order to put further pressure on Havoco to force it to assign the TVA contract to R & F Coal. Sumitomo allegedly breached its contract with Havoco by failing to provide Havoco with a revolving letter of credit, thereby impairing Havoco's financial viability. Havoco alleged that because of these improper dealings, it was forced to enter into the Assignment Contract, thus losing the opportunity to make substantial profits from the TVA coal supply contract. In addition, Havoco claimed that, after the Assignment Contract was executed, both Hill and Sumitomo became agents of R & F Coal and have received substantial payments from R & F Coal.

Thus, Havoco did not allege that the defendants made misrepresentations to Havoco, which is the more typical situation; instead, it claimed that misrepresentations were made to third parties which frustrated Havoco's ability to conclude a satisfactory agreement with the TVA. By these means, Havoco was allegedly forced to enter into the Assignment Contract due to circumstances which the defendants, in combination with R & F Coal, wrongfully conspired to create. While these circumstances did not, as noted, comprise the usual fraud situation, we have no difficulty in treating these allegations as constituting a claim for fraud by Havoco.

Havoco specifically claimed conspiracy to defraud, tortious interference with contractual relations, common law fraud and deceit, breaches of fiduciary duty by defendants Hill and Sumitomo and breach of contract by Sumitomo. Havoco requested several types of legal and equitable relief, including compensatory damages in the amount of $213.8 million and substantial punitive damages.

Hill and Hilco moved to dismiss the complaint and Sumitomo moved for summary judgment on the ground that Havoco had affirmed the Assignment Contract, and thus waived its fraud claim, by suing R & F Coal and then accepting a settlement payment. The district court granted the motion to dismiss the claims against the defendants except for the breach of contract ...


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