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SUTTER INSURANCE CO. v. APPLIED SYSTEMS

January 26, 2004.

SUTTER INSURANCE CO., Plaintiff,
v.
APPLIED SYSTEMS, INC., Defendant



The opinion of the court was delivered by: MATHEW KENNELLY, District Judge

MEMORANDUM OPINION AND ORDER

In this case, plaintiff Sutter Insurance Co., a California corporation headquarted near San Francisco, has sued defendant Applied Systems, Inc., an Illinois corporation headquartered in University Park, Illinois, for breach of contract, consumer fraud under Illinois and California statutes, and common law fraud. Applied has counterclaimed for breach of contract. The case is set for a jury trial on February 9, 2004. Applied has moved for summary judgment on Sutler's claims and, if summary judgment is denied, to strike Sutler's jury demand.

Facts

  Sutter sells property insurance in the West Coast region. Applied develops and sells software for use by insurance companies and insurance agencies. In 1999, Sutter began searching for software to replace its existing system. Applied and other software providers sent representatives to Sutler's California offices to promote and demonstrate their products. Applied's presentation concerned its "Diamond System," a comprehensive policy, claims management and billing system designed to interact with third party software applications. Page 2 According to Sutter, Applied's representatives represented that the Diamond System could be implemented immediately "off the shelf," would conform the Sutler's own forms and billing procedures, and would allow Sutter immediately to create new insurance policies and have them rated, underwritten, issued, and billed. Sutter also contends that Applied represented that implementation management services would be included for a flat fee that would cover software licensing, system analysis, specification documentation, and system development, installation, and training, and that the program would be up and running within 180 days after Sutter signed a contract with Applied.

  Sutter contends that it relied on Applied's representations and entered into a System Implementation and Licensing Agreement with Applied in March 2000. The agreement included a paragraph stating that the software would substantially conform to and perform in accordance with specifications listed in the agreement and that all services provided by Applied under the agreement would be performed in a good and workmanlike manner. Agreement ¶ 6(a). The same paragraph included the following disclaimer:
ALL REPRESENTATIONS AND WARRANTIES CLAIMED HEREIN ARE EXPRESSLY IN LIEU OF ANY AND ALL OTHER PREVIOUS REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, WHICH MAY HAVE BEEN SET OUT DURING THE NEGOTIATION OF THIS AGREEMENT. APPLIED SYSTEMS SPECIFICALLY DISCLAIMS ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR USE OR PURPOSE.
Id. The following paragraph of the agreement stated:
No material statements or representations have been made by Applied and upon which [Sutter] has relied in entering into this Agreement that are not contained herein.
Id. ¶ 6(b). Paragraph 1 of the agreement stated that "[t]his Agreement . . . contains the entire Page 3 agreement between the parties, and Applied is not bound by any representations or inducements not set forth herein." Id. ¶ 1. The final paragraph of the agreement stated that
 
EACH PARTY ACKNOWLEDGES THAT IT HAS READ THIS AGREEMENT, UNDERSTANDS IT AND AGREES TO BE BOUND BY ITS TERMS AND FURTHER AGREES THAT IT IS THE COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN THE PARTIES, EXCEPT AS HEREIN CONTEMPLATED TO ADD APPENDICES HERETO, WHICH SUPERSEDES ALL PROPOSALS, ORAL OR WRITTEN AND ALL OTHER COMMUNICATIONS BETWEEN APPLIED AND [SUTTER] RELATING TO THE SUBJECT MATTER OF THIS AGREEMENT.
Id. ¶ 24.

  According to Sutter, the software did not work "off the shelf as represented, and the company experienced numerous and constant problems in operating the system. It claims that it advised Applied of these problems as they arose, but Applied failed to cure them. On May 1, 2001, a telephone conference was held between representatives of Sutter and Applied. Sutler's vice president Diane Kleinecke has stated in an affidavit that during this telephone conference, she advised Applied's representatives that Sutter was canceling the contract and did not want to invest any more time in the Diamond System because it was not meeting Sutler's needs. She advised that Sutter would "run off the homeowner's insurance policies already entered into the system and after that would cease using the system.

  Sutter continued to use the Diamond System for about ten months thereafter but asserts that it did so only to avoid substantial hardship, as it had no other alternative short of 100% "manual" management of the policies, which it says was not feasible. On October 29, 2001, Bill Kleinecke, another Sutter vice president, sent Applied a letter which Sutter characterizes as a written cancellation of the contract; the letter stated that "[i]n follow up to our conversation, I am Page 4 writing to you to reiterate the Sutter Insurance Companies [sic] desire for return compensation. In order to avoid further costs associated with Applied's failure to perform, the Management of Sutter was hoping for a voluntary return of the fees and charges collected." Sutter Rule 56.1 Stmt., Ex. C.

  Sutter contends that due to the defects in Applied's software system, it suffered out of pocket losses as well as lost business opportunities. Its complaint against Applied includes four claims: a claim for breach of the written agreement premised primarily on its allegation that the software did not meet the agreement's specifications; a claim of common law fraud; a claim under the Illinois Consumer Fraud and Unfair Business Practices Act; and a claim under the California Unfair Business Practices Act. Applied has counterclaimed for amounts allegedly due under the agreement that Sutter did not pay. As indicated earlier, Applied has moved for summary judgment on all of Sutler's claims and, if summary judgment is denied as to any of the claims, to strike Sutler's jury demand.

  Motion for summary judgment

  In addressing a motion for summary judgment, the Court construes the record in the light most favorable to the non-moving party; we do not weigh the evidence but rather determine only whether there is a genuine issue for trial. See, e.g., Payne v. Pauley, 337 F.3d 767, 770 (7th Cir 2003); Bennett v. Roberts, 295 F.3d 687, 694 (7th Cir. 2002).

 1. Breach of contract claim

  Applied argues, and Sutter does not dispute, that Sutler's breach of contract claim is subject to the terms of Illinois' version of the Uniform Commercial Code. Under the Code, a buyer of goods must pay at the contract rate for any goods accepted. 810 ILCS 5/2-607(1). A Page 5 buyer that has accepted goods is barred from any remedy for non-conforming goods unless it notifies the seller of the breach within a reasonable time after it discovers or should have discovered the breach. Id. 2-607(3)(a). Relying on a provision of the contract stating that "[a]11 notices given under this Agreement shall be in writing," Agreement ¶ 21, Applied contends that Sutter never gave written notice of its rejection of the Diamond System and thus is barred from seeking damages for breach of contract.

  Sutter contends that it advised Applied of the breach during the May 1, 2001 telephone conference and argues that the contract did not require notices of cancellation or breach to be in writing. First, it says that paragraph 20 of the agreement — the provision on which Sutter, for some reason, thinks Applied is relying for its "written notice only" argument — concerns only requests for mediation of disputes. That is, in fact, what paragraph 20 concerns, but it is clear from Applied's papers that it is relying on paragraph 21, not paragraph 20. Paragraph 21 expressly concerns "[a]ll notices given under this Agreement," not just notices relating to paragraph 20's mediation ...


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