Argued January 17, 2013
Appeals from the United States District Court for the Southern District of Indiana, New Albany Division. Nos. 02 cv 00242, 03 cv 00012- William G. Hussmann, Jr., Magistrate Judge.
Before Manion and Tinder, Circuit Judges, and Lee, District Judge [*]
Lee, District Judge.
In settling two lawsuits, Judson Atkinson Candies, Inc., and Kenray Associates, Inc., entered into an agreement, which required Kenray to pursue its insurer for coverage of Atkinson's claims. But when Kenray's attempts failed, Atkinson sought to invalidate the agreement, alleging that it had been fraudulently induced to enter into it. Because the agreement contained an integration clause, the district court, applying Indiana law, established a bright-line rule, requiring Atkinson to demonstrate that it had been induced by fraud to enter into the integration clause itself, as opposed to the agreement as a whole, in order to circumvent the parol evidence rule. Because Indiana law does not impose such a bright-line rule, we reverse.
Judson Atkinson Candies, Inc., and Atkinson Candy Company (collectively "Atkinson") filed two separate lawsuits in the United States District Court for the Eastern District of Texas against Kenray Associates, Inc., Charles A. McGee, and Kenneth J. McGee (collectively "Kenray"), alleging that Kenray had failed to satisfy certain technology agreements and representations made therein. The cases were subsequently transferred to the United States District Court for the Southern District of Indiana and consolidated for the purposes of trial. For its part, Kenray also initiated a separate action against its insurance carrier, Hoosier Insurance Company, in the Superior Court for Floyd County, Indiana, seeking insurance coverage for Atkinson's claims.
In December 2004, during the pendency of the trial in their consolidated cases, Atkinson and Kenray settled the lawsuits against one another. As part of the settlement, Kenray agreed to the entry of judgments against it and in favor of Atkinson. At the same time, the parties entered into a "Covenant Not To Execute, " whereby Atkinson agreed not to execute on the judgments if Kenray pursued the coverage action against Hoosier and otherwise complied with the terms of the Covenant, even if the Indiana courts eventually found in Hoosier's favor. Kenray also agreed to assign to Atkinson any claims it may have had against its insurance agent. Notably for present purposes, the Covenant contained the following language: "The parties agree this agreement represents the parties' sole agreement."
In Kenray's lawsuit against Hoosier, the Floyd County Superior Court found that no insurance coverage existed for Atkinson's claims and entered judgment in favor of Hoosier in January 2007. On October 3, 2007, the Indiana Court of Appeals upheld the decision, and the Indiana Supreme Court denied transfer on January 17, 2008, effectively ending the coverage litigation. See Kenray Assocs., Inc. v. Hoosier Ins. Co., 874 N.E.2d 406 (Ind.Ct.App. 2007); Kenray Assocs., Inc. v. Hoosier Ins. Co., 891 N.E.2d 36 (Ind. 2008). Meanwhile, in June 2007, Atkinson filed a lawsuit against Kenray's insurance agent asserting Kenray's errors and omissions claims. In March 2010, the insurance agent prevailed on summary judgment.
On January 14, 2011, foreclosed from recovering any funds from Hoosier and Kenray's insurance agent, Atkinson went back to the district court that presided over the original lawsuits between itself and Kenray and filed a motion to set aside the Covenant. Atkinson argued that it was fraudulently induced to enter into the Covenant and only did so based upon representations from Kenray that its insurance agent had confirmed that Kenray had insurance coverage for Atkinson's claims. Atkinson further argued that Kenray's representations were made with the knowledge that, in fact, the insurance agent had advised Kenray that Hoosier would likely deny the claim, and that Kenray intentionally withheld this information from Atkinson.
In response, Kenray argued that because the Covenant contained an integration clause that precluded Atkinson's reliance upon any oral representations made by Kenray prior to its execution, Atkinson's fraudulent inducement claim failed.
On June 29, 2011, the Magistrate Judge, to whose jurisdiction the parties consented, indicated that he would likely deny Atkinson's motion to set aside the Covenant and took it under advisement. In its order, the court held that because the Covenant contained an unambiguous integration clause, parol evidence could not be considered to vary the terms of the agreement. However, the court also held that if Atkinson could demonstrate that there was fraud in the inducement specific to the integration clause, rather than as to the agreement as a whole, then Atkinson might still be able to circumvent the parol evidence rule and prevail on its claim. Because the parties had not addressed this particular issue in their briefs, the court scheduled an evidentiary hearing as to this limited point, concluding, "absent a showing by Atkinson that there was fraud in the inducement of the clause itself, the integration clause will prohibit the court from doing anything other than enforcing the [C]ovenant as written."
Confronted with the court's order, Atkinson moved to cancel the evidentiary hearing. Although it remained steadfast that it had been fraudulently induced to enter into the Covenant as a whole, Atkinson conceded that it could not establish fraudulent inducement as to the integration clause itself. On December 13, 2011, the court denied Atkinson's motion to set aside the Covenant "because Plaintiff is unable to show that there was fraud in the inducement of the ...