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PHELPS DODGE CORP. v. SCHUMACHER ELECTRIC CORP.

March 8, 2004.

PHELPS DODGE CORPORATION, Plaintiff, V. SCHUMACHER ELECTRIC CORPORATION, Defendant


The opinion of the court was delivered by: WAYNE ANDERSEN, District Judge

MEMORANDUM, OPINION AND ORDER

This matter is before the Court on cross motions for summary judgment of plaintiff, Phelps Dodge Corporation, and defendant, Schumacher Electric Corporation. For the reasons stated below, the Court grants the plaintiff's motion and denies the defendant's motion. The defendant is ordered to pay $372,226.56 plus interest.

Factual Background

  Plaintiff Phelps Dodge Corporation ("Phelps Dodge") has sued defendant Schumacher Electric Corporation ("Schumacher") to enforce a guaranty by a Schumacher officer for payment of any purchases of copper wire by Horning Wire Corporation, a third party. Phelps Dodge operates several mining, manufacturing and distribution businesses and is a large producer of copper. Schumacher is a private, closely held corporation that manufactures and distributes battery charging equipment and transformers, both of which use copper wire as a principal component. Schumacher was founded under the name of Woodward-Schumacher Electric Corporation by Albert Schumacher, who served as the corporation's president and former owner. In 1971, the corporation changed its name from Woodward-Schumacher Electric Corporation to Schumacher Electric Corporation, but the company did not sell its assets or its stock to a different corporation and it continued to honor all pre-existing contracts and liabilities. In short, the corporation changed its name but remained the same entity. Prior to 1968, Schumacher purchased the copper wire that it used to manufacture battery charging equipment and transformers from outside suppliers. In approximately 1968, Albert Schumacher established the Horning Wire Corporation ("Horning") to create a business for his daughter and son-in-law, Carol and John Horning, who became the owners of the new company. Horning transformed copper rod into copper magnet wire, which it then supplied to Schumacher, its primary customer. Horning eliminated Schumacher's reliance on outside intermediary copper suppliers to transform copper rod into wire and allowed Schumacher to meet its production needs more consistently.

  From the incorporation of Horning in 1968 through at least the early 1990's, Schumacher and Horning were closely connected through family ownership, with the exception of a severing of relations during a relatively brief family disagreement between 1988 and 1989. During the early years of Horning, Schumacher included Horning as an associated company in its consolidated financial statements. The two corporations shared additional ties extending to 1990, such as Schumacher sharing employees, executing of favorable lease rates, and agreeing to subordinate a $900,000 loan to Horning in favor of Homing's debt to a third party lender.

  The alleged guaranty at issue in this case originated in the early years of Horning. When Horning was initially established, Schumacher paid Phelps Dodge directly for Horning's purchases of copper rod from Phelps Dodge even though shipments of copper rod were made directly to Horning. Beginning in 1971, Schumacher requested that Phelps Dodge bill Horning directly on an open account for the copper rod that Phelps Dodge supplied to Horning, At the time that this new billing system was being arranged with Phelps Dodge, Lester R. Hochleutner, who was the Vice President and a director at Woodward-Schumacher at the time, sent a letter to T.J. Murphy, an Assistant Secretary at Phelps Dodge.

  Phelps Dodge has produced this letter from its files on Woodward-Schumacher stationery dated June 18, 1971. The letter purports to guaranty payment of any purchases of copper by Horning to Phelps Dodge. The letter, which the parties stipulated was authentic and admissible, states:
In connection with our request to Phelps Dodge, this letter will serve as a guarantee by Woodward-Schumacher Electric Corporation of the payment of any purchases of copper by Horning Wire Corporation of Lake Zurich Illinois from Phelps Dodge Copper Products Corporation.
As a result of this guarantee, we understand it is agreeable with Phelps Dodge to invoice Horning Wire Corporation for copper purchases made directly from them and this arrangement will replace billing to Woodward-Schumacher Electric Corp. with shipment to Horning Wire Corporation.
  The letter did not include an end date to the guaranty or provide for periodic renegotiation on the guaranty. Schumacher represents that no retained copy of the guaranty letter exists in its company files, and there is no record of the letter in the corporate minute book or audited financial statements. Mr. Hockleutner, the author of the letter, is now deceased. Schumacher further represents that no one in its current management has ever been aware of the letter. Phelps Dodge retained the letter in its corporate records system, where it languished without event until around April, 1988, when Ira Schwarzwald joined Phelps Dodge and noticed the letter during a review of company credit files. During the 1990s, Mr. Schwarzwald discussed the letter with Arthur Meile, president of the Phelps Dodge sales company, and Charles Brown, director of the company's treasury operations. The agreed facts indicate that there was some confusion within Phelps Dodge about whether the letter constituted a guaranty that was still valid more than thirty years after it was executed. Throughout this time, no one from Phelps Dodge discussed the guaranty with anyone at Schumacher.

  Horning regularly purchased copper rod from Phelps Dodge on open account from 1971 until December 31, 2000, with purchases ending shortly before Horning was dissolved in 2001. While the exact nature of the sales contract between Phelps Dodge and Horning is unclear during the early years of the company, from 1984 until 2000, Phelps Dodge and Horning entered into an annual sales contract that was renegotiated each year. During the time period that Phelps Dodge sold Horning copper wire, it adjusted Homing's credit line several times without providing notice to Schumacher. For example, in early 1990, Phelps Dodge raised Homing's credit line from $500,000 to $750,000. Phelps Dodge did not inform Schumacher of these changes or of the annual sales contracts.

  On February 9, 2001, Horning made an assignment of its assets for the benefit of its creditors to David Abrams of Abrams & Jossell Consulting, Inc. Homing's assets were liquidated through this assignment, but the proceeds of the liquidation were insufficient to repay Horning's secured creditors. No funds were available to distribute to unsecured trade creditors, including Phelps Dodge. At the time of the liquidation, Horning owed Phelps Dodge $372,226.56 for copper rod received by Horning. Horning does not dispute the reasonableness or amount of Phelps Dodge's invoices.

  On March 2, 2001, Phelps Dodge sent a letter to Schumacher informing the corporation of Homing's outstanding debt, reminding Schumacher of the guaranty letter from Mr. Hochleutner, and demanding payment of $372,226.56 based on the guaranty. Prior to the March 2, 2001 letter, there is no evidence that anyone at Phelps Dodge ever reminded anyone at Schumacher of the guaranty letter or asked anyone at Schumacher to affirm or renew the June 18, 1971 letter.

 Discussion

  Rule 56(c) of the Federal Rules of Civil Procedure provides that a summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, 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). In considering such a motion, the court accepts as true the evidence set forth by the non-moving party and draws all reasonable inferences in favor of the party opposing the motion. Associated Milk Producers, Inc. v. Meadow Gold Dairies, 27 F.3d 268, 270 (7th Cir. 1994). The party seeking summary judgment carries the initial burden of demonstrating an absence of evidence to support the position of the nonmoving party. Doe v. R.R. Donnelley & Sons, Co., 42 F.3d 439, 443 (7th Cir. 1994). The nonmoving party must then set forth specific facts showing a genuine issue of material fact and that the moving party is not entitled to judgment as a matter of law. Anderson v. Liberty Lobby, 477 U.S. 242, 252 (1986). A genuine issue of material fact exists only if the evidence is such that a reasonable jury could only return a verdict in favor of the nonmoving party. Celotex Corp. v. Catrett, 477 U.S. 317, 323-24 (1986).

  The Court has jurisdiction over this dispute by diversity, as the parties are of diverse citizenship and the amount in controversy exceeds the statutory minimum of $75,000. 28 U.S.C. ยง 1332(a) (2003). A federal court exercising diversity jurisdiction applies the choice of law rules of the state in which it sits. Klaxon Co, v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941). The Court applies Illinois substantive law to this case; the parties do not dispute the governing substantive law. See Grundstad v. Ritt, 166 F.3d 867, 870 (7th Cir. 1999); Wood v. Mid-Valley, Inc., 942 F.2d 425, 426 (7th Cir. 1991).

  Under Illinois law, the rules of contract construction apply generally to guaranty contracts. McLean County Bank v. Brokaw, 519 N.E.2d 453, 456 (Ill. 1988). The function of the court is to effectuate, if ascertainable, the intent of the parties to the contract. Ricci v. Reed, 169 Ill. App.3d 1062, 1067 (Ill.App. Ct. 1988). When the guaranty contract is unambiguous, it is given its natural and ordinary meaning, as with any other contract. See Irving Tanning Co. v. Am. Classic, Inc., 736 F. Supp. 161 (N.D.Ill. 1990); Heritage Bank v. Bruti, 489 N.E.2d 1182 (Ill.App. Ct. 1986). A guaranty contract that is unambiguous must be enforced as written, even when the guaranty agreement contains broad statements of guarantor liability. Holden v. Nat'I Blvd. Bank, 596 N.E.2d 47, 53 (Ill.App. Ct. 1992). ...


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