Amoco Oil Co. v. Ashcraft

Decision Date20 May 1986
Docket NumberNo. 85-2152,85-2152
Citation791 F.2d 519
PartiesAMOCO OIL COMPANY, Plaintiff-Appellee, v. Glyndon R. ASHCRAFT and Carolyn S. Ashcraft, Defendants-Appellants, Charles Bowlby Oil Co., Inc., Charles E. Bowlby, and Dorothy J. Bowlby, Defendants.
CourtU.S. Court of Appeals — Seventh Circuit

J. Lee McNeely, McNeely & Sanders, Shelbyville, Ind., defendants-appellants.

Brian K. Burke, Baker & Daniels, Indianapolis, Ind., plaintiff-appellee.

Before BAUER and POSNER, Circuit Judges, and FAIRCHILD, Senior Circuit judge.

POSNER, Circuit Judge.

Amoco brought this diversity suit to collect a debt of $62,000 from the Charles Bowlby Oil Company. It joined as additional defendants the Ashcrafts, who had guaranteed Bowlby Oil Company's debts, and Mr. and Mrs. Bowlby, who had done likewise. Apparently neither the Bowlby company nor the Bowlbys have any assets, although they remain as parties defendant in the district court. The Ashcrafts counterclaimed against Amoco for fraud and breach of contract. The district judge granted Amoco's motion for summary judgment against the Ashcrafts, and entered judgment in its favor for the full $62,000 and dismissed the counterclaims. He made the judgment final and appealable under Fed.R.Civ.P. 54(b). The Ashcrafts have appealed, raising interesting questions of contract law which the parties agree are governed by the common law of Indiana.

In 1981 Bowlby Oil Company was a franchised wholesaler of Amoco products, mainly home heating oil and gasoline, in Shelby County, Indiana. The company had fallen on evil days, and owed Amoco more than $200,000, though its credit limit was only $100,000. Glyndon Ashcraft, a successful small businessman--the sole owner of a trucking firm that had $5 million in annual sales--bought Bowlby Oil Company for $150,000. A few days after the deal closed, Ashcraft and his wife signed a document entitled "Unlimited Guaranty." (The Bowlbys had signed a similar guaranty when they had received the Amoco franchise in 1975.) In it they "Unconditionally Guarantee[d] Payment When Due ... of any and all indebtedness, including interest thereon, of [Bowlby Oil Company] to [Amoco], howsoever such indebtedness may arise, whether as principal, guarantor, indorser or otherwise, now or hereafter existing ...." According to Mr. Ashcraft's affidavits and deposition, which we must treat as truthful for purposes of deciding whether summary judgment for Amoco was proper, Amoco's local manager, Warrick, had told Ashcraft that he and his wife must sign the guaranty to continue doing business with Amoco and that it was only a guaranty of debts arising out of Ashcraft's operation of the company, not of the preexisting debt of $200,000.

Under Ashcraft's management Bowlby Oil Company managed to reduce its debt to Amoco--at one point to as low as $44,000. But the improvement was temporary. Although Amoco extended fresh credit to Bowlby Oil Company, the company continued to flounder, and after only six months of operation Ashcraft abandoned it, with Bowlby Oil Company owing Amoco $62,000; this suit followed. It seems that Mr. Bowlby had misrepresented the financial health of his company when he sold it to Ashcraft, for he later agreed to return the purchase price in exchange for a release of any claims that Ashcraft might have against him for misrepresentation.

The Ashcrafts make three arguments why it was wrong for the district judge to grant summary judgment for Amoco. The first is that the guaranty is ambiguous and Ashcraft should therefore be allowed to testify to the interpretation that Warrick placed on it. Indiana adheres to the ancient, mysterious, and much-derided distinction between "patent" and "latent" ambiguities in contracts and wills. Ohio Casualty Group of Ins. Cos. v. Gray, 746 F.2d 381, 383 (7th Cir.1984); Hauck v. Second Nat'l Bank, 153 Ind.App. 245, 261-64, 286 N.E.2d 852, 862-64 (1972); see generally Goetz & Scott, The Limits of Expanded Choice: An Analysis of the Interactions Between Express and Implied Contract Terms, 73 Calif.L.Rev. 261, 268 n. 13 (1985); Comment, The Problem of the "Unomitted Spouse" Under Section 2-301 of the Uniform Probate Code, 52 U.Chi.L.Rev. 481, 502 n. 102 (1985), and references cited there. If the ambiguity is patent, oral testimony is inadmissible to eliminate it; if latent, oral testimony is admissible. One might have thought the opposite more sensible: that if the contract was clear on its face--meaning that any ambiguity was latent--there would be no occasion to search for ambiguity, while if the contract was unclear the court would try to gather its meaning from any source it could, including oral testimony.

Some sense can be made out of the "patent-latent" distinction by noting that the concept of "patent" ambiguity is actually used in two different senses: where an ambiguity apparent on the face of the contract, which is to say apparent even to the reader who knows nothing about the background or circumstances of the contract, can be cleared up by a careful reading; and where the contract is (again on its face) so inconsistent, incoherent, or incomplete that the only reasonable inference is that the parties failed to reach agreement, in which event the contract fails for indefiniteness, and is not enforced. See Hauck v. Second Nat'l Bank, supra, 153 Ind.App. at 262-63, 286 N.E.2d at 862. If the contract is clear on its face but does not clearly resolve the specific contingency that has arisen, maybe because no one thought of the contingency when the contract was drafted, the court will admit evidence to show how the parties would have dealt with the contingency had they made specific provision for it.

So the court must first try, without taking any oral testimony, to figure out what the contract means; if it succeeds it will enforce the contract in accordance with that meaning. If the court is unable to do this, oral testimony will be admitted to disambiguate the contract unless it is apparent from the words of the "contract" that the parties had never agreed on its essential terms. See, e.g., English Coal Co. v. Durcholz, 422 N.E.2d 302, 308-09 (Ind.App.1981). The judge followed this procedure here and properly concluded that the language we quoted earlier made the Ashcrafts guarantors of Bowlby Oil Company's preexisting indebtedness to Amoco. The words "now or hereafter existing" admit of no other interpretation. The Ashcrafts find ambiguity in the words "howsoever such indebtedness may arise," arguing that "may arise" could mean something in the future, and only in the future. But bearing in mind that the words that follow are "whether as principal, guarantor, indorser or otherwise, now or hereafter existing," the words "howsoever such indebtedness may arise" must mean that the signers of the guaranty are liable whether Bowlby Oil Company incurs (or incurred) the debt as a principal (i.e., borrower) or in some other capacity (such as a guarantor) and whether it is a preexisting or a future debt. For "may" can refer to modality as well as "time" ( "howsoever" seems in fact to point to modality more clearly than to time); here it refers to both; and it embraces past as well as future. There is no ambiguity--certainly none serious enough to require, or under Indiana law allow, resort to oral testimony.

The Ashcrafts' next argument is that Amoco is estopped to enforce the guaranty by the representation of its agent, Warrick, that the guaranty referred only to debts that Bowlby Oil Company might incur under Ashcraft's management. This argument gains no added cogency by being used as the basis for a counterclaim rather than just as a defense to Amoco's claim, or by being called fraud or misrepresentation rather than estoppel. The argument for estoppel founders on the principle of Indiana law that a misrepresentation about the meaning of a document, as distinct from a misrepresentation of fact, is not actionable. See, e.g., Clem v. Newcastle & Danville R.R., 9 Ind. 488 (1857); Skrypek v. St. Joseph Valley Bank, 469 N.E.2d 774, 779-80 (Ind.App.1984); Plymale v. Upright, 419 N.E.2d 756, 763-65 (Ind.App.1981). The party to whom the misrepresentation is made can protect himself by reading the document, whereas a factual misrepresentation might concern matters to which he lacked equal access. He might not know whether the seller's house has termites but he ought to be able to find out whether the contract of sale contains the express warranties that the seller tells him it contains. It might seem that it would always be cheaper for the defendant to avoid misrepresentations than for the plaintiff to unmask them. This may be true of deliberate misrepresentations; and in such cases--cases of fraud in a strong sense--a more liberal rule is indeed followed. See Restatement (Second) of Contracts Sec. 166 and illustration 3 (1979). But there is no contention that Warrick was deliberately misrepresenting the meaning of the guaranty; he may honestly if foolishly have...

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