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Havoco of America v. Hilco Inc.

decided: August 25, 1986.

HAVOCO OF AMERICA, LTD., PLAINTIFF-APPELLANT,
v.
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.

Author: Ripple

Before: Wood, Jr., Easterbrook and Ripple, Circuit Judges.

RIPPLE, Judge.

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.

Facts

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's Knowledge

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 ...


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