UNITED STATES COURT OF APPEALS FOR THE SEVENTH CIRCUIT
decided: August 25, 1986.
HAVOCO OF AMERICA, LTD., PLAINTIFF-APPELLANT,
HILCO, INC., ELMER C. HILL, AND SUMITOMO SHOJI AMERICAN INC., DEFENDANTS-APPELLEES
Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 81 C 419-Bernard M. Decker, Judge.
Before: Wood, Jr., Easterbrook and Ripple, Circuit Judges.
In 1975, Havoco of America, Ltd. (Havoco) entered into a contract to supply coal to the Tennessee Valley Authority (TVA). It assigned that contract to R & F Coal Company (R & F), in 1976, Since that time, the contract and its assignment have been the subject of five separate lawsuits. In this case, Havoco alleges that the defendants, through a variety of unlawful actions, coerced it to enter into the assignment contract. Havoco seeks damages caused by the defendants' fraud, misrepresentations, breach of fiduciary duty and breach of contract. The district court concluded that in 1976, before Havoco ever entered into the assignment contract, it had full knowledge of the fraud and misrepresentations which form the basis of this complaint. Therefore, the district court held that, when Havoco entered the assignment contract with this knowledge, it waived, as a matter of law, its right to sue for damages.
This court has already considered a similar waiver argument in this case. Havoco of America, Ltd. v. Hilco, 731 F.2d 1282 (7th Cir. 1984). In 1982, the district court had granted the defendants' motion for summary judgment. R. 100. At that time, the district court held that, when Havoco filed suit to enforce the assignment contract with full knowledge of the fraud, it had waived, as a matter of law, any claims for damages based on the fraud. This court reversed that judgment holding that, although Havoco knew of the fraud in 1978 when it brought suit to enforce the assignment contract, genuine issues of fact concerning Havoco's ability to abandon the contract and its intent to waive its claims remained unresolved. Havoco, 731 F.2d at 1294. Relying on the legal framework developed by this court in 1984, we once again hold that genuine issues of material fact remain unresolved. Therefore, we reverse and remand this case to the district court for proceedings consistent with this opinion.
In February 1975, Havoco entered into a long-term contract to supply coal to the TVA. To meet this long-term commitment, Havoco entered into several related agreements. R & F agreed to provide the coal which M/G Transport Services, Inc. (M/G) would deliver to the TVA. Sumitomo Corporation of America (Sumitomo) agreed to post the revolving letter of credit necessary to finance the purchase of the coal. Havoco also hired Hilco, Inc. (Hilco) to provide professional services for Elmer Hill, the Havoco officer who handled the TVA contract. In August 1975, the TVA exercised its right to reopen negotiations on the contract price of the coal. Mr. Hill represented Havoco in the negotiations which continued unsuccessfully for approximately six months.
In late February and March 1976, a series of events and meeting ultimately lead Havoco to assign the contracts to R & F. During a February 20, 1976, meeting between representatives of the TVA, Havoco and R & F, Barry Van Der Meulen, Havoco's president, disclosed to the TVA that Havoco had discussed with R & F the possibility of assigning the contract.*fn1 On March 2, 1976, the TVA informed Havoco that, although it would continue negotiating, it would accept no further coal shipments. Also in early March, Havoco discovered that Sumitomo had failed to post the revolving letter of credit. Without this financing, R & F refused to make future deliveries and, on march 15, 1976, filed suit against Havoco and Sumitomo seeking to recover $2.6 million allegedly owed for coal already delivered.*fn2 R & F obtained a preliminary injunction freezing Havoco's assets. Finally, on March 19, 1976, Havoco agreed to assign the TVA contract to R & F. As consideration, R & F agreed to pay a royalty to Havoco on each ton of coal sold to the TVA. In June 1977, R & F entered into a long-term agreement to deliver coal to the TVA.
R & F's suit against Havoco and Sumitomo was the first of several legal battles over the contract and its assignment. M/G also sued Havoco seeking to recover damages for breach of coal transportation contract.*fn3 In January 1978, Havoco filed suit against Mr. Hill, Hilco and R & F. It claimed that the defendants had violated the Sherman Antitrust Act. The 1978 complaint also contained pendent state claims based on fraud, breach of contract and breach of fiduciary duty. This court affirmed the district court's decision to dismiss the antitrust count and the pendent state claims, Havoco of America, Ltd. v. Shell Oil Co., 626 F.2d 549 (7th Cir. 1980). Havoco then chose to pursue its claim for breach of the assignment contract against R & F in the Eastern District of Tennessee. After the case was transferred to the Northern District of Illinois, the parties agreed to a settlement. Havoco received $1,966,083.40 and executed a covenant not to sue R & F for any claim arising out of the assignment of the contract. Havoco expressly reserved its right to pursue its claims against other parties.
In January 1981, Havoco exercised that right by filing the complaint in this case. Originally, the complaint named only Mr. Hill and Hilco as defendants. However, in November 1981, the plaintiff was granted leave to amend the complaint to include counts against Sumitomo. The amended complaint contains six counts. It includes counts against all of the defendants for: conspiracy to defraud (count I); tortious interference with contractual relations (count III); and common law fraud (count IV). The complaint also contains counts against Mr. Hill and Sumitomo for breach of fiduciary duty (counts II, V) and a count against Sumitomo for breach of contract (count VI). Havoco alleges that the defendants engaged in a variety of illegal acts which ultimately forced Havoco to assign the TVA contract to R & F. Havoco seeks a variety of relief including $213.8 million in lost profits and $10 million in punitive damages.
In 1982, the district court granted the defendants' first motion for summary judgment on all counts except the breach of contract count against Sumitomo (count VI). R. 100. The court concluded that, when Havoco initiated the suit against R & F for breach of the assignment contract, it possessed substantially all the information that it now alleges as a basis for its causes of action for fraud, misrepresentation, and breach of fiduciary duty. Therefore, the court held that, when Havoco settled that lawsuit with R & F, it waived its current claims. Memorandum Opinion and Order at 11. On appeal, we agreed with the district court that there was no issue of material fact concerning Havoco's knowledge. Havoco, 731 F.2d at 1285. However, we also determined that, under Illinois law, knowledge of the fraud alone was not sufficient to constitute waiver as a matter of law. "an additional and essential element is that the injured party intended to affirm the contract and intend to abandon his right to recover damages for loss resulting from the fraud." Lee v. Heights Bank, 112 Ill. App. 3d 987, 446 N.E.2d 248, 254, 68 Ill. Dec. 514 (1983), petition for leave to appeal denied, No 58306 (Ill. Supp. Ct. Oct. 4, 1983); See Havoco, 731 F.2d at 1289-90. Because the record contained no evidence of Havoco's ability to rescind or abandon performance when it learned of the fraud or of the plaintiff's intent to waive its right to sue, we held that Havoco's conduct did not establish waiver as a matter of law. Havoco, 731 F.2d at 1294.
The following remand, the defendants filed a second motion for summary judgment. Rather than focusing on the issues of Havoco's ability to rescind and intent to waive when it brought suit in 1978, the defendants submitted evidence that indicated Havoco knew of the fraud in 1976 before it ever entered into the assignment contract. The district court once again determined that was no issue of material fact as to whether, by March 19, 1976, Havoco "had full knowledge of the predicate cats of the alleged fraud and conspiracy which form the basis of its current complaint."*fn4 R. 178; Memorandum Opinion and Order at 11-12. The district court further concluded that the defendants had established that Havoco intended to abandon its right to sue by proving that Havoco voluntarily executed, affirmed, and performed the written contract of assignment after it had knowledge of the alleged fraud and other wrongdoing. Memorandum Opinion and Order at 14. The court's granted summary judgment on all counts including the breach of contract count against Sumitomo. Although the factual focus is different, the issues in this appeal are the same ones considered by this court in 1984: first, whether Havoco had knowledge of the fraud at the time is assigned the contract to R & F; second, whether Havoco, as a matter of law, waived its claim for fraud and misrepresentation when it assigned the contract.
Havoco argues that the court erroneously resolved factual questions concerning its knowledge of the alleged fraud when it entered into the assignment contract. Mr. Van Der Meulen, its president, filed an affidavit in which he states that he did not have sufficient knowledge of the fraud before the assignment. Upon examination of the record, we agree with the district court. Mr. Van Der Meulen's deposition testimony indicates that, prior to the assignment, he was aware of many of the facts which now form the basis of this complaint. The facts were at least sufficient to make it Havoco's "duty to use ordinary diligence to make further investigations" before it assigned the contract. Eisenberg v. Goldstein, 29 Ill. 2d 617, 195 N.E.2d 184, 186 (1963), cert. denied, 377 U.S. 964, 12 L. Ed. 2d 735, 84 S. Ct. 1645 (1964). Mr. Van Der Meulen's new affidavit, R. 169, does not create a genuine issue of fact. To the extent that this affidavit contradicts, without explanation, his deposition testimony it can be disregarded. Miller v. A. H. Robins Co., 766 F.2d 1102, 1104 (7th Cir. 1985). The remainder of the affidavit merely establishes that the precise extent of the fraud became apparent only after the contract had been assigned. Therefore, we agree with the district court and hold that there is no genuine issue of material fact concerning Havoco's knowledge of the alleged fraud when it assigned the TVA contract. However, our prior opinion in this case make it clear that, under Illinois law, affirmance of a contract with full knowledge of the fraud may not, standing alone, be sufficient to establish waiver.
Even though we fully accept the district court's determination that Havoco, through its president, was fully cognizant of the pertinent facts by the time of the assignment of the contract, we cannot affirm its judgment unless we determine that, as a matter of law, Havoco waived its claims by assigning the contract. In undertaking this inquiry, we must candidly acknowledge, at the outset, that it is difficult to chart a straight analytical course through this area. We have a great deal of sympathy for the earlier panel of this court and for the district court who have already attempted this navigational feat.
Our obligation can be simply stated: As a federal court sitting in diversity, see 28 U.S.C. § 1332, we must apply state law to resolve all substantive questions. Erie Railroad Co. v. Tompkins, 304 U.S. 64, 82 L. Ed. 1188, 58 S. Ct. 817 (1938). Therefore, it is our obligation to determine what approach the Supreme Court of Illinois, if presented with this question today, would take. Williams, McCarthy, Kinley, Rudy & Picha v. Northwestern National Insurance Group, 750 F.2d 619, 624 (7th Cir. 1984); see generally West v. A. T. & T. Co., 311 U.S. 223, 237, 85 L. Ed. 139, 61 S. Ct. 179 (1940): White v. United States, 680 F.2d 1156 (7th Cir. 1982). Moreover, Illinois law does not deal with the issue of waiver in the context of an assignment contract. Nevertheless, the underlying policies are sufficiently clear that we can proceed with some confidence.
First, in the prior appeal, we decided that Illinois would follow the general rule that a "party which continues to perform a partially executed contract, particularly where it would be prejudicial to discontinue performance, does not waive its right to damages for fraud." Havoco, 731 F.2d at 1286. We went on to say that "the question whether the contract is executory or partially performed goes, of course, to the practicability of recision or disaffirmance." Id. at 1287. In short, a plaintiff should not be permitted to recover for self-inflicted injuries while he speculates about the outcome of the contract. Id. We will not apply the principle of waiver by affirmance when attempted recission would be impracticable or cause further injury.
Havoco has argued that a variety of events including Sumitomo's failure to provide the revolving letter of credit, R & F's refusal to deliver coal, the lawsuit filed by R & F in mid-March, the preliminary injunction obtained by R & F in the lawsuit and Mr. Hill's misrepresentations to the TVA made it impossible for it to met the requirements of the TVA contract. Therefore, the assignment was, in Havoco's view, an effort to salvage what could be salvaged from a contract which had been "torpedoed" by the defendants. Rather than constituting a "self-inflicted injury," it constituted, in Havoco's view, a mitigation of injury.
The district court made two observations on this point. First, the court found that Havoco's claim that the defendants' conduct in early March 1976 made it impossible for it to avoid entering into the assignment contract was not relevant because the "dye [sic] was cast," R.178 at 13, on February 20, 1976, when Van Der Meulen orally agreed to assign the contract. Memorandum Opinion and Order at 13-14. At that point, the district court apparently believed, Havoco was free to reject the assignment contract and continue to perform under the TVA contract. Second, the district court noted that it "seriously doubts that it would have been impractical or prejudicial for Havoco to either forego execution of the written contract when it learned of the fraud or disaffirm it shortly thereafter." Id. at 14 n.6. While there certainly is record evidence with supports the "serious doubts" of the district judge, we do not believe that, on this record, the matter can be resolved at summary judgment. There is, at least on this record, a significant factual dispute as to whether Havoco entered the assignment contract as a matter of independent business judgment or because the alleged fraud of the defendants made such an assignment the only available course if any benefit of the original contract was to be preserved.
The earlier panel of this court indicated that the foregoing inquiry would lead an Illinois court "as a corollary" to inquire as to whether the record establishes that Havoco intended to waive its rights.*fn5 It is clear that under Illinois law, waiver can be implied from conduct. Eisenberg, 195 N.E.2d at 187; Havoco, 731 F.2d at 1291. It is also clear that an essential element of waiver is that the injured party intended to affirm the contract and in tended to abandon his right to recover damages. Lee, 446 N.E.2d at 254. "If the intention to waive is implied from conduct, the conduct should speak the intention clearly." Bankers Trust Co. v. Pacific Employers Insurance Co., 282 F.2d 106, 111 (9th Cir. 1960); see Havoco, 731 F.2d at 1291. Intent is a question of fact. Havoco, 731 F.2d at 1293. The district court concluded that "plaintiff's informed decision to consummate the assignment on that date and its subsequent failure to disaffirm the contract unmistakably show an intent to relinquish its claims against defendants based on fraud." Memorandum Opinion and Order at 16. The court's analysis presumes that Havoco had the option not to consummate or subsequently to disaffirm the contract without incurring significant damage. Here, also, we do not believe that the record contains sufficient uncontroverted evidence to sustain such a claim.*fn6
It is clear from the record that, when Havoco entered into the assignment contract, it had knowledge of the facts underlying the complaint in this case. However, the record does not establish, as a matter of law, that Havoco, in assigning the contract, waived its claims for fraud and misrepresentation against the defendants. Accordingly, we reverse and remand this case to the district court for proceedings consistent with the opinion.
REVERSED and REMANDED.