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Devalk Lincoln Mercury Inc. v. Ford Motor Co.

decided: January 16, 1987.


Appeal from the United States District Court for the Northern District of Illinois, Eastern Division, No. 81 C 4072, James F. Holderman, Judge.

Author: Wood

Before WOOD, Jr., and POSNER, Circuit Judges, and ESCHBACH, Senior Circuit Judge.

WOOD, Jr., Circuit Judge. Plaintiffs Harold DeValk, John Fitzgerald, and DeValk Lincoln Mercury, Inc., ("DLM"), appeal a grant of summary judgment in favor of defendants Ford Motor Company and Ford Leasing Development Company (collectively "Ford").

Plaintiffs DeValk and Fitzgerald were owners and managers of an automobile dealership, DeValk Lincoln Mercury, in Chicago, Illinois. In August 1979, after several months of poor performance, DLM submitted its resignation as a Lincoln-Mercury dealership to Ford. DLM and Ford then entered into negotiations to wind up the dealership's affairs and to transfer DLM's inventory back to Ford pursuant to contractual agreements. Disputes arose during these negotiations. The disputes went unresolved and plaintiffs eventually brought this lawsuit against Ford alleging violations of the Automobile Dealers Day in Court Act, 15 U.S.C. ยงยง 1221 et seq. (1982), breach of contract, breach of fiduciary duty, and fraud. After some of plaintiffs' claims were dismissed, defendants moved for summary judgment on the remaining claims. The district court granted defendants' motion for summary judgment on all the remaining claims. We affirm.


In 1976 three Lincoln-Mercury dealerships served the near northwest side of Chicago, Illinois. In the spring of that year, Ford conducted a marketing study of the area and concluded that, in light of a declining market trend, consideration should be given to eliminating one of the three dealerships at the time ownership changed hands at any one of them. At the time this study was completed, and unaware of its existence, plaintiff DeValk was negotiating with Czarnowski Lincoln-Mercury, one of the three dealerships, to purchase its assets and also was approaching Ford to seek approval to operate a dealership at Czarnowski's geographic location. DeValk also worked at this time as general manager of Czarnowski. In March 1977 Ford approved DLM as a Lincoln-Mercury dealership and executed with DLM standard Lincoln and Mercury Sales and Service Agreements ("Sales Agreements") by which DLM could purchase automobiles, parts, signs, tools, and other items from Ford.

At the time control of the dealership changed hands, Czarnowski Lincoln-Mercury was struggling. It did not have floor plan financing to purchase new automobiles. It could only get parts from Ford on a C.O.D. basis. Czarnowski did not have adequate resources to perform warranty work and its reputation in the community suffered as a result. Moreover, employee morale was low.

In spite of DeValk's efforts as the new owner, the dealership continued to suffer. Throughout 1977 and into 1978, DLM experienced losses. In July 1978, based in part on the amended market study completed in the spring of 1976, Ford informed DeValk it had placed DLM on "delete status." That delete status meant that Ford would not continue a Lincoln-Mercury dealership at DLM's location once DeValk ceased to be the majority owner of the dealership. In late September or early October, DLM hired plaintiff Fitzgerald as general sales manager. Five months later, in February 1979, Fitzgerald purchased a 45% interest in DLM. In February, March, and April, DLM managed to turn a profit. By August, however, DeValk and Fitzgerald decided to terminate the dealership. DLM submitted its resignation to Ford on August 23rd to become effective in October. DLM's resignation letter made no claims against Ford and reserved no rights to pursue any action against Ford. DLM's resignation letter also requested Ford to repurchase DLM's current inventory of automobiles. Ford accepted the resignation on October 1st, and DLM ceased operations on October 11th. In late October Ford took back DLM's inventory of parts and current model automobiles and credited DLM's account for those repurchases. Negotiations ensued over the inventory repurchases and other items, which engendered the disputes eventually giving rise to this lawsuit.


In reviewing a grant of summary judgment we decide whether the legal papers on file "show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). Our review thus takes two steps. We first determine whether there are any genuine issues of material fact. In making this determination, we draw all inferences in the light most favorable to the non-movant. Bartman v. Allis-Chalmers Corp., 799 F.2d 311, 312 (7th Cir. 1986); Rodeo v. Gillman, 787 F.2d 1175 (7th Cir. 1986). But in so doing, we draw only reasonable inferences, not every conceivable inference. Bartman v. Allis-Chalmers Corp., 799 F.2d 311, 312-13 (7th Cir. 1986); Matthews v. Allis-Chalmers, 769 F.2d 1215, 1218 (7th Cir. 1985). If we find that any genuine issues of material fact do exist, then summary judgment was improperly granted and we must reverse. If, however, we find there are no genuine issues of material fact, we then determine as a second step whether summary judgment is correct as a matter of law.


Plaintiffs' contentions for purposes of this appeal can be divided into two categories. One set of claims relates to paragraph 23 of the Sales Agreements between Ford and DLM and the other set relates to paragraphs 21(b) & 21(c). Before examining the two sets of claims themselves, however, we turn to choice of law considerations.

A. Choice of Law

Both sets of claims relevant to this appeal center on the Sales Agreements between Ford and DLM. The Sales Agreements contain a choice of law clause that specifies Michigan's law as the controlling law for construing the provisions of the Sales Agreements. This case, however, was brought in federal court in Illinois, not Michigan. The claims at issue here are based on diversity jurisdiction. Well settled law holds that federal courts resolving diversity claims must apply state law. Erie Railroad Co. v. Tompkins, 304 U.S. 64, 82 L. Ed. 1188, 58 S. Ct. 817 (1938). Moreover, the state law applied by federal courts must be the forum state's law on resolving conflicts of law. Klaxon Co. v. Stentor Electric Manufacturing Co., 313 U.S. 487, 85 L. Ed. 1477, 61 S. Ct. 1020 (1941); Casio, Inc. v. S.M. & R. Co., 755 F.2d 528, 531 (7th Cir. 1985).

In this instance we look to the forum state, Illinois, to determine how its conflict of law principles treat choice of law clauses in contracts. We recently had occasion to make this inquiry with respect to Illinois's law and we noted that "Illinois courts, which have long allowed parties to 'substitute the laws of another place or country,' will enforce the substituted law 'where it is not dangerous, inconvenient, immoral, nor contrary to the public policy of the local [i.e., Illinois] government.'" Sarnoff v. American Home Products Corp., 798 F.2d 1075, 1081 (7th Cir. 1986) (quoting McAllister v. Smith, 17 Ill. 328, 333 (1856)); see also Hofeld v. Nationwide Life Insurance Co., 59 Ill. 2d 522, 322 N.E.2d 454, 458 (1975); Swanberg v. Mutual Benefit Life Insurance Co., 79 Ill. App. 3d 81, 398 N.E.2d 299, 301, 34 Ill. Dec. 624 (1st Dist. 1979).

A federal court sitting in Illinois, therefore, should honor a contractual choice of law clause specifying Michigan law as controlling, unless the applicable Michigan law is dangerous, inconvenient, immoral, or contrary to public policy. As will become apparent in our discussion of the construction of the Sales Agreements, the applicable Michigan law does not fall outside the bounds set by Illinois's conflict of laws principles, and will, therefore, be honored as the parties' choice of law.

B. Paragraph 23 Claims

Among other things, the Sales Agreements between Ford and DLM provide that when Ford or the dealer terminates or fails to renew the dealership, the dealer is entitled to receive certain benefits. These benefits include Ford's willingness to buy back the current inventory of automobiles and parts from the dealer. But in consideration of agreeing to buy back the inventory, the Sales Agreements provide in relevant part of paragraph 23 that the dealer will release Ford from liability except with respect to claims arising under paragraphs 19(f), 21, and 22 of the Sales Agreements:

Upon the Dealer's demand of any such benefits upon any termination or nonrenewal by the Dealer, the Company shall be released from any and all other liability to the Dealer with respect to all relationships and actions between the Dealer and the Company, however claimed to arise, except any liability that the Company may have under subparagraph 19(f) and said paragraphs 21 and 22, and except for such amounts as the Company may have agreed in writing to pay to the Dealer. Simultaneously with the receipt of any benefits so elected or demanded, the Dealer shall execute and deliver to the Company a general release with exceptions, as above described, satisfactory to the Company. (emphasis added)

1. Ambiguity

Plaintiffs argue that paragraph 23's release of liability is ambiguous. Under Michigan law a contractual provision is ambiguous "if the language of a written contract is subject to two or more reasonable interpretations or is inconsistent on its face." Petovello v. Murray, 139 Mich. App. 639, 362 N.W.2d 857, 858 (1984). Plaintiffs argue paragraph 23 is ambiguous because it is subject to at least two interpretations. They contend that the requirement of a written general release by the dealer at the time benefits are received modifies the earlier nebulous release granted by the dealer at the time benefits are demanded. If the initial release is automatic and absolutely effective at the time the dealer makes the demand, plaintiffs ask, why does paragraph 23 discuss the requirement of a written release in the very next sentence? See McIntosh v. Groomes, 227 Mich. 215, 198 N.W. 954, 955 (1924) ("'Every word in the agreement must be taken to have been used for a purpose, and no word should be rejected as mere surplusage if the court can discover any reasonable purpose thereof which can be gathered from the whole instrument.'") (quoting 6 R.C.L. 838).

Such a conundrum, plaintiffs contend, renders paragraph 23 ambiguous and necessarily requires the court to do one of two things. First, it requires the court to construe paragraph 23 against Ford and in favor of DLM. This result follows from the canon of construction, honored in Michigan, that a written agreement is construed against its drafter. Lichnovsky v. Ziebart International Corp., 414 Mich. 228, 324 N.W.2d 732, 738 (1982); Petovello v. Murray, 139 Mich. App. 639, 362 N.W.2d 857, 858 (1984); accord Advance Process Supply Co. v. Litton Industries Credit Corp., 745 F.2d 1076, 1079 (7th Cir. 1984). Or second, it requires the court to resolve factual issues in determining the intent of both DLM and Ford with respect to paragraph 23. Barner v. City of Lansing, 27 Mich. App. 669, 183 N.W.2d 877 (1970). And if factual issues exist, which require resolution, the district court cannot grant summary judgment. Peoples Outfitting Co. v. General Electric Credit Corp., 549 F.2d 42, 46 (7th Cir. 1977).

Defendants contend, on the other hand, and the district judge agreed, that paragraph 23 is unambiguous under Michigan law. They argue that plaintiffs' interpretation of paragraph 23 is unreasonable and that paragraph 23 is not inconsistent on its face. Defendants explain that the initial release is controlling as to any and all liability on Ford's part. It is absolute in its effect. Any subsequent written release executed by the dealer merely memorializes the initial release and reminds the parties of their respective obligations. In reaching this conclusion, defendants and the district judge relied on the only relevant precedent that seems to be available with respect to this particular release clause.*fn1 After this lawsuit was ...

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