Moran Foods v. Mid-Atlantic Market Development

• Decision Date: 05 February 2007
• Docket Number: No. 05-3735.,No. 05-3656.,05-3656.,05-3735.
• Citation: 476 F.3d 436
• Parties: MORAN FOODS, INC., Plaintiff-Appellant/Cross-Appellee, v. MID-ATLANTIC MARKET DEVELOPMENT COMPANY, LLC, et al., Defendants-Appellees/Cross-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

476 F.3d 436

MORAN FOODS, INC., Plaintiff-Appellant/Cross-Appellee, v. MID-ATLANTIC MARKET DEVELOPMENT COMPANY, LLC, et al., Defendants-Appellees/Cross-Appellants.

No. 05-3656.

No. 05-3735.

United States Court of Appeals, Seventh Circuit.

Argued November 9, 2006.

Decided February 5, 2007.

Michael A. Wilkins (argued), Ice Miller, Indianapolis, IN, for Plaintiff-Appellant.

Robert J. Palmer (argued), May, Oberfell & Lorber, Mishawaka, IN, for Defendants-Appellees.

Before BAUER, POSNER, and FLAUM, Circuit Judges.

POSNER, Circuit Judge.

This is a complicated diversity suit with a federal-law counterclaim. We shall simplify ruthlessly. Moran Foods franchises grocery stores under the name "Save-A-Lot" and sells the stores many of the groceries they need. Mid-Atlantic (and an affiliate that we'll ignore) was one of the franchisees. Mid-Atlantic's stores faltered, and eventually defaulted, leaving it owing Moran a considerable amount of money for groceries bought but not paid for. Mid-Atlantic later declared bankruptcy. Roger Camp, the owner of Mid-Atlantic, and his wife, Susan Camp, had guaranteed the company's debts to Moran. (The various contracts recite that they are governed by Missouri law.) When they refused to honor their guaranties, Moran brought this suit for breach of contract against the two Camps plus Mid-Atlantic. Mid-Atlantic and Susan Camp counterclaimed. Mid-Atlantic claimed that Moran had violated a provision of their contract that required Moran to furnish certain accounting services to Mid-Atlantic. Susan Camp claimed that Moran had violated the Equal Credit Opportunity Act, which so far as relates to this case forbids "any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction ... on the basis of . . . marital status." 15 U.S.C. § 1691(a)(1).

The district judge granted summary judgment to Moran on its breach of contract claim and awarded it damages of $3,006,314 ($1.3 million for the unpaid groceries and the rest for interest at the 22 percent annual rate specified in the contract). The counterclaims were then tried to a jury, which awarded Mid-Atlantic the identical $3,006,314 on its breach of contract claim and (as corrected by the district judge) Susan Camp $21,428.57. Since the award to Mid-Atlantic canceled the debts on which Moran had based its suit, and with it Susan Camp's guaranty of that indebtedness, her damages were limited to guaranties of three debts that Moran might still try to collect because their collection was not yet barred by the judgment in this case or by the statute of limitations. The defendants' cross-appeal challenges the grant of summary judgment to Moran on its breach of contract claim and also asks that Susan Camp be awarded the attorney's fees that she incurred in litigating her claim under the Equal Credit Opportunity Act, plus additional relief under the Act.

Mid-Atlantic's argument that it did not break its contract with Moran, and its argument that Moran's breach entitled Mid-Atlantic to damages exactly equal in amount to the damages that the district judge awarded Moran for Mid-Atlantic's breach, come to the same thing. Essentially Mid-Atlantic is arguing that had it not been for Moran's breach (which by the way is conceded), it would not have run up any debt to Moran. Moran's breach consisted of its unexcused failure to furnish Mid-Atlantic with profit and loss statements for the franchised stores for the last three quarters of 1998. For a fee of $45 a week, Moran had agreed to monitor the financial condition of each of the stores and advise Mid-Atlantic every quarter of their condition. In the last three quarters of 1998 that condition was bad. Mid-Atlantic contends that had it been advised of the parlous state of its stores it would have taken steps to mitigate its losses by changing management or product mix, selling the stores or simply closing them, and as a result it either would have had greater revenues or would have stopped buying groceries from Moran altogether and either way it would have avoided incurring the $1.3 million debt for unpaid groceries and thus the interest on that debt as well.

The problem with this argument is that Mid-Atlantic failed to present any evidence that would have enabled the jury to quantify the loss the company incurred as a result of Moran's failure to provide the three quarterly financial reports. Not that such evidence couldn't have been presented; it just wasn't. It is plausible that had Roger Camp realized how badly the stores were doing, he would have taken steps to cut his losses, and the steps might have been effective—and maybe it was too late to take them nine months later, when he at last discovered the extent of the losses. We are not much impressed by Moran's argument that Camp's opening several additional Save-A-Lot stores after he learned the true condition of the existing ones severs any possible causal connection between Moran's breach and Mid-Atlantic's running up a large debt to Moran. The new stores may have been in better locations and therefore could reasonably have been expected to do better than the existing stores—in fact they did do better, though not by enough to offset the losses on the existing stores, losses that eventually drove Mid-Atlantic under. But all this is speculation. For Mid-Atlantic to be entitled to damages for Moran's breach, it had to present evidence from which a reasonable jury could estimate with reasonable objectivity the loss that the breach inflicted.

Mid-Atlantic should have proceeded in two steps. The first would have been to present evidence of when the missing quarterly reports, if received, would have induced Mid-Atlantic to take actions designed to minimize the losses that the reports revealed. It is not obvious that the first report, showing bad results for the first quarter of 1998, would have precipitated drastic action; but it might have. (The reactions of other Moran franchisees who receive bad news about their financial performance in one quarter would have been helpful evidence on this question.) Suppose the first report would have caused Mid-Atlantic to take action. If so, the second step in proving damages would then have been for Mid-Atlantic to present evidence of the costs and benefits of the most effective action that it could have taken, such as altering management or product mix or selling or closing the stores. Each of those efforts at mitigation of loss would have cost something; and then the question would be how quickly a given effort would have produced a reduction in the stores' costs and how great the reduction would have been. Conceivably the early warning provided by the quarterly reports, had Mid-Atlantic received them, would have enabled it to cut its losses so rapidly and deeply that rather than trying and failing to recoup by opening additional stores, it would have kept current with its obligations to Moran. But there is no evidence to firm up such a conjecture.

In any event it is doubtful that such evidence would have justified damages measured by the debt that Mid-Atlantic incurred to Moran as a result of the failure of the stores. There is a "for want of a nail the kingdom was lost" flavor to Mid-Atlantic's theory of damages. The company's ultimate demise is not plausibly attributable solely to a nine-month delay in the receipt of quarterly profit and loss statements. And only the first statement was delayed nine months; the other two were delayed six and three months respectively. Roger Camp was an experienced operator of grocery stores and surely knew that his Save-A-Lot stores were not doing well, even if he didn't know the details. Knowing that the stores were losing money, he was irresponsible in allowing months to pass without wondering where the quarterly reports were. His lassitude undermines his contention that time was of the essence in avoiding a mounting debt to Moran.

It is hard to believe that for $45 a week Mid-Atlantic had bought an insurance policy, with no cap, against its business losses, however careless the insured was in letting them mount up. Of course there was no formal insurance policy, but because liability for breach of contract is a form of strict liability, a promisor is in effect a guarantor of performance even if he is unable and not merely unwilling to perform his contractual obligations. Zapata Hermanos Sucesores, S.A. v. Hearthside Baking Co., 313 F.3d 385, 389-90 (7th Cir.2002); United States v. Blankenship, 382 F.3d 1110, 1133-34 (11th Cir.2004); see Oliver Wendell Holmes, "The Path of the Law," 10 Harv. L.Rev. 457, 462 (1897). This gives an insurance dimension to many contracts. Winniczek v. Nagelberg, 394 F.3d 505, 508-09 (7th Cir.2005).

Generally—to continue with the insurance analogy (contract as insurance)—the lower the insurance premium the narrower the coverage of the policy. Of course there are some very one-sided contracts, but one thing that a court can look at in determining the scope of any contract, when that scope is unclear from the contractual language, is whether it seems commensurate with the consideration paid by the party seeking to enforce the contract. Rhone-Poulenc Inc. v. International Ins. Co., 71 F.3d 1299, 1303 (7th Cir. 1995); In re Kazmierczak, 24 F.3d 1020, 1022 (7th Cir.1994).

Also helpful in interpreting insurance contracts, including noninsurance contracts that have an insurance dimension, is the notion of "moral hazard." That is the tendency to carelessness if you're fully insured (or, worse, overinsured). Phelps Dodge Corp. v. Schumacher Electric Corp., 415 F.3d 665, 668 (7th Cir.2005); Federal Ins. Co. v. Hartford Steam Boiler Inspection & Ins. Co., 415 F.3d 487, 498-99 (6th Cir.2005). It's why an insurer will not insure your house against fire for more than it's worth, and why an insured has a duty to mitigate his losses, though it is a "duty" not in the sense of giving rise to damages for its...