November 8, 2016
from the United States District Court for the Central
District of Illinois. Nos. l:13-cv-01391, -01392 - Michael M.
WOOD, Chief Judge, and POSNER and ROVNER, Circuit Judges.
POSNER, Circuit Judge.
plaintiff, Aventine, is a distributor of ethanol, a common
additive to gasoline. The two defendants, affiliated
companies that for the sake of simplicity we'll pretend
are one and call Glacial, manufacture and sell ethanol. The
disputants are of diverse citizenship, and have agreed that
the law applicable to their dispute is that of New York
2009, Aventine bought ethanol from Glacial and distributed
it, but in January of that year the parties executed
"termination agreements." The agreements required
Aventine to pay Glacial $898, 000 (we round to the nearest
$1000) for ethanol that Aventine had received from Glacial
before the termination date specified in the agreements but
had not yet paid for (the parties call the payments that
Aventine was required to make "true-up payments")
and required Glacial to pay Aventine $1, 250, 000 for
commissions that Glacial would have had to pay Aventine for
marketing the ethanol that Aventine had agreed to buy from
it. In addition Glacial agreed to assume Aventine's
leases from Union Tank Car Company of 473 railcars used for
transporting ethanol; trembling on the brim of bankruptcy,
Aventine didn't need railcars any more.
used the railcars between February 23 and April 7 (Aventine
declared bankruptcy on April 7) without reimbursing Aventine
for the lease payments that Aventine owed Union Tank, a sum
exceeding $500, 000, which Aventine could not afford to pay.
When Aventine declared bankruptcy, Glacial owed it some $1,
600, 000 for marketing commissions and railcar leases while
Aventine owed Glacial some $900, 000 for the ethanol it had
bought from Glacial before the termination date specified in
the termination agreements. Netting the two debts would have
resulted in Glacial's paying Aventine $700, 000. But
because, or at least ostensibly because, Aventine either
couldn't or wouldn't pay Glacial any part of the
$900, 000 that Aventine owed it, Glacial refused to pay
Aventine the $700, 000 -or indeed anything, while continuing
to use the railcars Aventine had transferred to it.
Further bypassing Aventine, Glacial made a deal to lease the
railcars from Union Tank. Although the termination agreements
required Glacial if it wanted to use the railcars to secure a
release of Aventine from its Union Tank leases, Glacial
didn't do that and as a result Aventine was required as
part of its bankruptcy plan to make good on what it owed to
Union Tank-to the tune of almost $2.3 million worth of
wasn't the dispute resolved in the bankruptcy proceeding?
Glacial wouldn't have filed a claim in bankruptcy court,
because a claim is a right to payment, 11 U.S.C. §
101(5)(A), and Glacial was a net loser under the termination
agreements. Had it filed a claim Aventine would have
responded with defenses and a counterclaim. See 28 U.S.C.
§ 157(b)(2)(C), (c)(1); Stern v. Marshall, 131
S.Ct. 2594 (2011). Aventine could have initiated an
adversarial proceeding but didn't need to, since its
bankruptcy plan explicitly preserved its cause of action,
along with Glacial's right of setoff.
owed lots of money by Glacial, after going through bankruptcy
Aventine sued it in an Illinois state court (Aventine is a
citizen of Illinois). Glacial removed the suit to federal
district court, which granted summary judgment for Glacial on
the ground that while it would be "unjust" to allow
Glacial "to avoid any liability" to Aventine, the
latter's failure to make the true-up payments "dooms
the Plaintiff[, ] as performance is an essential element of
its claim for breach of contract." But to place all the
onus on Glacial as the district judge did was mistaken, as
both parties had defaulted on the obligations they'd
agreed to in the termination agreements. Aventine had just
happened to sue first-unsurprisingly since it was owed more
by Glacial than it owed Glacial.
district judge ignored the law of New York (which as we said
the parties agree governs their dispute), under which a party
cannot "at the same time treat the contract as broken
and as subsisting/' Strasbourger v. Leerburger,
134 N.E. 834, 835 (N.Y. 1922), which is what Glacial did by
using the railcars while insisting that Aventine cannot sue
for breach of contract. Applying New York law the Second
Circuit has held that a party's "refusal to perform
its end of the bargain" after it has affirmed a contract
by continuing to accept its benefits is
"impermissible." ARP Films, Inc. v. Marvel
Entertainment Group, Inc., 952 F.2d 643, 649 (2d Cir.
1991); see also McDonald's Corp. v. Robert A. Makin,
Inc., 653 F.Supp. 401, 403 (W.D.N.Y. 1986). Or as the
great Judge Cardozo put it, a sales contract kept alive
"remains alive as much for the benefit of the buyer as
for the benefit of the seller. ... The buyer may now insist
that the seller's misconduct shall be cast in the balance
with its own. ... If the defendant never retracted its
unlawful claim of right, the like is true of the plaintiff.
The one as much as the other is chargeable with wrong."
Rubber Trading Co. v. Manhattan Rubber Mfg. Co., 116
N.E. 789, 790 (N.Y. 1917).
argued in the district court that Aventine would suffer no
loss from failing to obtain any damages from Glacial because
as a result of its bankruptcy the creditors of Aventine are
now its owners; they'll take the loss, since if a
corporation sustains a substantial loss, the owners'
stock is worth less. But it doesn't follow that because
the owners of the corporation are hurt, the corporation
isn't. And finally Glacial argues that the value of
Aventine's indemnification claim is zero, because
Aventine's debt to Union Tank (which Glacial promised to
cover) was discharged in the bankruptcy in exchange for stock
that Aventine would otherwise have been forced to give to
another creditor. But Aventine's debt to Union Tank, and
therefore Glacial's liability to Aventine, was sharply
reduced by the bankruptcy. That was enough of a windfall for
Glacial. It's not entitled to more.
judgment of the district court is reversed, and the case
remanded with instructions to net out the difference in the
amounts of money owed by the parties to each other and ...