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Vigortone AG Products, Inc. v. PM AG Products

November 06, 2002


Appeals from the United States District Court for the Northern District of Illinois, Eastern Division. No. 99 C 7049--Harry D. Leinenweber, Judge.

Before Bauer, Posner, and Ripple, Circuit Judges.

The opinion of the court was delivered by: Posner, Circuit Judge


This diversity suit charges fraud and breach of contract in the sale of a business called Vigortone, a manufacturer of "swine premix," which is a vitamin-and mineral-enriched food supplement for pigs. The fraud claim is governed by Illinois law; the contract claim is governed by Delaware law by virtue of a choice of law provision in the contract.

Vigortone was a subsidiary of an animal-nutrition business called PM AG Products, which sold Vigortone to Provimi, a large manufacturer of agricultural products, including animal food products, for $39.5 million. PM is the defendant. The plaintiff, Vigortone Ag Products, is a Provimi subsidiary that was created to purchase Vigortone. To avoid confusion, we'll call the plaintiff Provimi.

Pigs are raised in stages. Piglets are kept at the sow farm until they weigh 12 pounds, and then they are weaned and shipped to "nurseries." When, having graduated from "weaners" to "feeders," they reach 50 pounds, they are transferred from the nursery to a finishing barn and raised to market weight. Vigortone decided to buy weaners and feeders and resell them to nurseries and other pig growers in the hope that both the sellers of the pigs to Vigortone and the buyers of the pigs from Vigortone would buy their swine premix from Vigortone. This kind of promotion is apparently common in the animal-feed business. By the time Vigortone was sold to Provimi in April of 1998, it had signed seven contracts with pig farms to buy a total of 3 million pigs over a 10-year period at specified prices. But it had made no contracts to sell the pigs, and so it bore the risk of a change in the market price of the animals. That risk passed to Provimi with the seven contracts. The price of pigs fell and as a result Provimi, according to its expert witness, lost $16 or $17 million. Even the lower figure is questionable, because it is based on a price drop most of which occurred months after the closing and therefore after Provimi discovered the contracts and could have hedged against any further decline; for it acknowledges having discovered its exposure "shortly after the closing."

Provimi claims that PM fooled it into thinking that Vigortone had offsetting sale contracts for all the pigs and so bore no risk of price changes in the pig market. The jury agreed and awarded Provimi $12 million in damages for fraud and another $3 million in damages for breach of contract. The district judge thought the awards duplicative and so cut out the $3 million. PM appeals from the judgment against it. Provimi cross-appeals, seeking restoration of the $3 million in breach of contract damages and also additional attorney's fees pursuant to a contract clause that entitles a party that proves a breach to his attorney's fees. The judge awarded Provimi $1 million in attorney's fees in the belief that that was the most that would be consistent with the jury's award of $3 million in contract damages. Provimi argues that the fee award should be more and PM that it should be zero because, PM argues, Provimi failed to prove a breach of contract.

There was clear and convincing evidence (required under Illinois law to prove fraud, Ray v. Winter, 367 N.E.2d 678, 682 (Ill. 1977); Niemoth v. Kohls, 524 N.E.2d 1085, 1094 (Ill. App. 1988); Ronan v. Rittmueller, 434 N.E.2d 38, 42 (Ill. App. 1982)) that during the contract negotiations with Provimi, PM made false statements about the market risk that Vigortone had incurred by buying pigs without entering into offsetting sale contracts in order to hedge against fluctuations in the price of pigs over the life of the pig-purchase contracts. PM said the contracts were part of a pig "pass-through" or pig "placement" program, terms understood in the industry to refer to the brokering (or equivalent) of pigs as a promotional device that does not involve assuming any risk of fluctuations in animal prices. PM even assured Provimi that Vigortone's passthrough program involved absolutely no market risk.

These were oral assurances made before the contract was signed, and PM argues that the integration clause in the contract precludes Provimi's relying on such assurances to establish fraud. The general rule is to the contrary. Schlumberger Technology Corp. v. Swanson, 959 S.W.2d 171, 179 (Tex. 1997); Danann Realty Corp. v. Harris, 157 N.E.2d 597, 598-99 (N.Y. 1959); Lewelling v. Farmers Ins. of Columbus, Inc., 879 F.2d 212, 216 (6th Cir. 1989); UAW-GM Human Resource Center v. KSL Recreation Corp., 579 N.W.2d 411, 418 (Mich. App. 1998); E. Allan Farnsworth, Contracts § 7.4, pp. 442-43 (3d ed. 1999). By virtue of the parol evidence rule, an integration clause prevents a party to a contract from basing a claim of breach of contract on agreements or understandings, whether oral or written, that the parties had reached during the negotiations that eventuated in the signing of a contract but that they had not written into the contract itself. Bidlack v. Wheelabrator Corp., 993 F.2d 603, 608 (7th Cir. 1993); International Marketing, Ltd. v. Archer-Daniels-Midland Co., 192 F.3d 724, 730-31 (7th Cir. 1999); Astor Chauffeured Limousine Co. v. Runnfeldt Investment Corp., 910 F.2d 1540, 1545-46 (7th Cir. 1990); Olympia Hotels Corp. v. Johnson Wax Development Corp., 908 F.2d 1363, 1373 (7th Cir. 1990). But fraud is a tort, and the parol evidence rule is not a doctrine of tort law and so an integration clause does not bar a claim of fraud based on statements not contained in the contract. Doctrine aside, all an integration clause does is limit the evidence available to the parties should a dispute arise over the meaning of the contract. It has nothing to do with whether the contract was induced, or its price jacked up, by fraud.

That is just the general rule, though, and it may not be the rule in Illinois. PM cites Barille v. Sears Roebuck & Co., 682 N.E.2d 118 (Ill. App. 1997), which holds that an integration clause does extinguish a claim of fraud based on precontractual misrepresentations. But Barille contains no discussion of the issue--just a conclusion--and no reference to the general rule. Moreover, another case in Illinois' intermediate appellate court is directly contrary to Barille, though also unreasoned. See Salkeld v. V.R. Business Brokers, 548 N.E.2d 1151, 1157-58 (Ill. App. 1989). There is a dictum to the same effect in another case in the intermediate appellate court. Pecora v. Szabo, 418 N.E.2d 431, 435 (Ill. App. 1981).

When state law on a question is unclear, which is surely the proper characterization here, the best guess is that the state's highest court, should it ever be presented with the issues, will line up with the majority of the states. Wammock v. Celotex Corp., 835 F.2d 818, 820 (11th Cir. 1988); see Amherst Sportswear Co. v. McManus, 876 F.2d 1045, 1048 (1st Cir. 1989); Adkinson v. International Harvester Co., 975 F.2d 208, 215 (5th Cir. 1992); cf. Liberty Mutual Ins. Co. v. Metropolitan Life Ins. Co., 260 F.3d 54, 65 (1st Cir. 2001). And the majority rule is that an integration clause does not bar a fraud claim.

One consequence of the rule is that parties to contracts who do want to head off the possibility of a fraud suit will sometimes insert a "no-reliance" clause into their contract, stating that neither party has relied on any representations made by the other. Rissman v. Rissman, 213 F.3d 381, 383-84 (7th Cir. 2000); First Financial Federal Savings & Loan Ass'n v. E.F. Hutton Mortgage Corp., 834 F.2d 685, 687 (8th Cir. 1987); Landale Enterprises, Inc. v. Berry, 676 F.2d 506, 507-08 (11th Cir. 1982) (per curiam); Danann Realty Corp. v. Harris, supra, 157 N.E.2d at 599, 600; see also Jackvony v. RIHT Financial Corp., 873 F.2d 411, 416-17 (1st Cir. 1989). Since reliance is an element of fraud, the clause, if upheld--and why should it not be upheld, at least when the contract is between sophisticated commercial enterprises--precludes a fraud suit, as the cases we have just cited make clear. So PM describes what we have been calling the integration clause as a no-reliance clause. But it is not. It is a standard integration clause. It contains no reference to reliance. What is more, another provision in the contract, captioned "Disclosure," states that "To the best knowledge of [PM], there is no fact which adversely affects or in the future is likely to adversely affect the Purchased Assets or the Business in any material respect which has not been set forth or referred to in this Agreement or the Schedules hereto." That sounds like a warranty and one PM violated since it knew that the enormous market risk which Vigortone had assumed and was being transferred to Provimi might affect Vigortone's business adversely, yet it failed to disclose the risk in the contract or any of its riders. More to the point, since at the moment we're discussing the fraud charge rather than the breach of contract charge, the existence of such a warranty makes it implausible to suppose that the integration clause was meant to reach representations designed actively to conceal the existence of an undisclosed fact likely to harm Vigortone.

But we must also consider whether Provimi's reliance on PM's representations concerning the absence of market risk was "justifiable," as required for a suit for fraud to succeed. Charles Hester Enterprises, Inc. v. Illinois Founders Ins. Co., 499 N.E.2d 1319, 1323 (Ill. 1986). The term "justifiable reliance" is pretty vague. In an effort to clarify it for the jury, the district judge instructed that reliance is unjustifiable only if reckless, and he further explained that what "reckless" means in this context is, as we said in one of our cases interpreting Illinois fraud law, not that the victim was careless but, worse, that he closed his eyes to a known or obvious risk. Mayer v. Spanel Int'l Ltd., 51 F.3d 670, 676 (7th Cir. 1995). As we put it in another fraud case governed by Illinois law, AMPAT/Midwest, Inc. v. Illinois Tool Works Inc., 896 F.2d 1035, 1042 (7th Cir. 1990), "the potential victim of a fraud may not ignore a manifest danger." See also Melko v. Dionisio, 580 N.E.2d 586, 592 (Ill. App. 1991), citing AMPAT/Midwest approvingly; Schmidt v. Landfield, 169 N.E.2d 229, 231-32 (Ill. 1960); Costello v. Liberty Mutual Ins. Co., 348 N.E.2d 254, 257 (Ill. App. 1976); Mayer v. Spanel International Ltd., supra, 51 F.3d at 675-76 (Illinois law); Dexter Corp. v. Whittaker Corp., 926 F.2d 617, 620 (7th Cir. 1991) (ditto) ("an ostrich can hardly be said to rely on there being no danger in the vicinity"). This incidentally is the general rule, e.g., 2 Fowler V. Harper, Fleming James, Jr. & Oscar S. Gray, The Law of Torts § 7.8, pp. 423-24 (2d ed. 1986), not anything peculiar to Illinois.

Although the jury found that Provimi's reliance had not been reckless, this finding has so little basis in the evidence that, even though appellate review of jury verdicts is highly deferential, Reynolds v. City of Chicago, 296 F.3d 524, 526-27 (7th Cir. 2002), we are compelled to reverse. Six of Vigortone's seven contracts for the purchase of pigs were actually shown to a lawyer who was doing "due diligence" for Provimi before the purchase of Vigortone was signed and who summarized the basic provisions of some of the contracts in a memo to the higher executives of the company; but no contracts for the sale of the pigs, or any other documents indicating that the pig-purchase contracts had been hedged, were shown to Provimi or its agent, since they did not exist. Provimi is charged with its agent's knowledge acquired in the course of the engagement, Booker v. Booker, 70 N.E. 709, 714 (Ill. 1904); ...

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