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Ratajczak v. Beazley Solutions Ltd.

United States Court of Appeals, Seventh Circuit

August 31, 2017

Daniel J. Ratajczak, Jr., et al, Plaintiffs-Appellants,
v.
Beazley Solutions Limited, Defendant-Appellee. Land O'Lakes, Inc., Plaintiff-Appellant, and First Mercury Insurance Company, et al, Intervening Plaintiffs, Cross-Appellees,
v.
Daniel J. Ratajczak, Jr., et al, Defendants-Appellees, Cross-Appellants.

          Argued May 23, 2017

         Appeals from the United States District Court for the Eastern District of Wisconsin. Nos. 13-C-45 & 14-C-1388 - William C. Griesbach, Chief Judge.

          Before Bauer, Easterbrook, and Ripple, Circuit Judges.

          Easterbrook, Circuit Judge.

         Between 2006 and 2012 Packerland Whey Products, Inc., deceived at least one of its customers about the protein content of a product called Whey Protein Concentrate. Whey, the watery part of milk that remains after the removal of curds, is rich in protein. Removing whey's nonprotein components generates a concentrate that can be used in other products. Land O'Lakes, Inc., purchased Packerland's protein concentrate for use in making foods for calves and other young animals.

         Buyers pay for protein. They infer protein levels from measuring nitrogen using the Kjeldahl method. This indirect measure invites adulteration: a seller could add another nitrogen-rich substance and so produce higher scores. Adulteration adds to profits as long as the substitute source of nitrogen is cheaper than whey. Urea, normally used to make fertilizer, is such a substance. Daniel J. Ratajczak, Jr., Scott A. Ratajczak, and Angela Ratajczak, who collectively owned and controlled Packerland, started adding urea to its protein concentrate in 2006. Land O'Lakes suspected that the concentrate was high in nonprotein nitrogen but could not learn why, in part because the Ratajczaks cooked up excuses that Land O'Lakes accepted. Land O'Lakes kept buying Packer-land's protein concentrate, and none of its own customers complained. (In the levels Packerland added to the concentrate, animal-grade urea is safe to eat.)

         The Ratajczaks sold Packerland in May 2012 to Packer-land Whey Intermediary Holding Co., which kept them on as employees-and they kept on adding urea. In November or December 2012 the buyer learned what was going on. The Ratajczaks were soon out of jobs, and litigation began. The buyer threatened suit against the Ratajczaks. They settled for about $10 million in December 2012, before the buyer filed a complaint. Land O'Lakes stopped buying Packerland's product and asserted three claims in federal court: breach of contract, fraud, and violation of the Racketeer Influenced and Corrupt Organizations Act. Each of these claims has bred ancillary insurance litigation. Packerland's insurers refused to defend or indemnify it or the Ratajczaks in the Land O'Lakes suit; the Ratajczaks' personal insurer refused to indemnify them for their settlement with Packerland's buyer.

         The district court dismissed Land O'Lakes's suit and ruled in favor of the insurers. Ratajczak v. Beazley Solutions Ltd., 2016 U.S. Dist. Lexis 189240 (E.D. Wis. Aug. 17, 2016); Land O'Lakes, Inc. v. Ratajczak, 2016 U.S. Dist. Lexis 186706 (E.D. Wis. Aug. 24, 2016). We have three appeals: (1) Land O'Lakes contends that it is entitled to treble damages under RICO and a state-law counterpart (which we do not mention again); (2) the Ratajczaks contend that Packerland's insurers had to defend and indemnify them in Land O'Lakes's suit; (3) the Ratajczaks maintain that their own insurer must indemnify them for much of what they paid to Packerland's buyer in settlement. We tackle the subjects in that order.

         1. At its outset Land O'Lakes's suit had three claims: breach of contract, fraud, and treble damages under 18 U.S.C. §1964, RICO's civil remedies provision. The strongest of these was breach of contract. Land O'Lakes would have been entitled to the difference between the price it paid and the market value of the product Packerland delivered. But the breach-of-contract claim was settled and the fraud claim has been abandoned on appeal, leaving only the RICO claim. The district court granted summary judgment to the Ratajczaks because Land O'Lakes failed to produce evidence of injury. RICO gives plaintiffs the benefit of the doubt in showing loss, see, e.g., Carter v. Berger, 777 F.2d 1173 (7th Cir. 1985), but the district court thought that there is no doubt that could be resolved in Land O'Lakes's favor.

         Consider how a firm in Land O'Lakes's position might show loss. (For this purpose we disregard the contract theory mentioned above, which Land O'Lakes does not invoke with respect to the RICO claim.) Land O'Lakes might contend, for example, that its own customers paid less for an inferior product made using the adulterated concentrate. It might contend that its customers paid the same per pound but bought less. It might contend that its business rivals raised their own prices between 2006 and 2012, but that Land O'Lakes could not do so because its customers thought its baby-animal feed inferior to that of the rivals. It might contend that it has been sued by its customers for selling adulterated animal feed and has incurred costs as a result. It might contend that some customers have threatened suit and that it is likely to incur future costs of defense. It might contend that, although none of its customers has threatened suit, one or more of them is likely to sue unless it offers some (expensive) inducement not to do so. It might contend that it recalled batches of animal feed that contained Packerland's adulterated protein concentrate and replaced them with good product at its own expense. It might contend that it incurred extra costs of testing Packerland's product in an effort to detect the source of the suspiciously high nonprotein ni- trogen. From this extensive menu, Land O'Lakes chose: none of the above.

         Land O'Lakes tells us that it did incur some extra testing costs but concedes that they cannot be quantified. It also notes that the statute of limitations in Wisconsin is still open on potential claims by the customers of animal feed that included Packerland's adulterated protein concentrate. That's true enough, but without any way to estimate the likelihood of such a claim, or the cost if one should be made, damages would be speculative.

         There is a market in retroactive insurance. Once a casualty has occurred, people can buy policies that cover the cost of defending (and if necessary settling or paying) any future claims arising from that casualty. Retroactive insurance spreads the risk of outcomes' variability should claims be made. Land O'Lakes might have bought such a policy but did not, nor did it ask for a price quote. The price of a retroactive policy might help quantify potential loss. But all Land O'Lakes offered to the district court, or us, is lawyers' talk, which is not an adequate way to estimate the existence, let alone the size, of injury. And since treble zero is still zero, Land O'Lakes was doomed to lose its RICO claim.

         2. Packerland had several insurance policies, under which the Ratajczaks were additional insureds. The insurers all refused to defend or indemnify them. Their request for a declaratory judgment gave several reasons, two of which the district court accepted, but we need mention only one. All of the policies base coverage on an "occurrence, " and each defines that word this way: "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." Adulteration of a product is deliberate, not accidental. The Ratajczaks observe that the fraud claim in the Land O'Lakes complaint says that some of Packer-land's statements (those designed to lull Land O'Lakes into continuing to buy) may have been reckless if they were not deliberately false, but this does not move any of the underlying conduct (or its effects) into the "accident" category.

         Wisconsin recognizes that deliberate conduct can have accidental effects that are covered by policies using the definition we have quoted. See Liebovich v. Minnesota Insurance Co.,2008 WI 75 ΒΆ52. Think of speeding: the driver intends to go 80 miles an hour but does not intend to plow into another car, and so a collision still may be called an "accident." But adulteration of a commercial product is not in that category. Packerland set out to fool Land O'Lakes into paying for more protein than its product contained. It achieved exactly that. Neither the behavior nor ...


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