Consolidated Bearings Co. v. Ehret-Krohn Corp.

• Decision Date: 20 September 1990
• Docket Number: EHRET-KROHN,No. 89-2779,89-2779
• Parties: 119 Lab.Cas. P 56,718 CONSOLIDATED BEARINGS COMPANY, Plaintiff and Counterdefendant-Appellee, v.CORPORATION, Defendant, Counterplaintiff and Third-Party Plaintiff-Appellant, v. Ralph N. MEERWARTH, Third-Party Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1224

913 F.2d 1224

119 Lab.Cas. P 56,718

CONSOLIDATED BEARINGS COMPANY, Plaintiff and Counterdefendant-Appellee, v. EHRET-KROHN CORPORATION, Defendant, Counterplaintiff and Third-Party Plaintiff-Appellant, v. Ralph N. MEERWARTH, Third-Party Defendant-Appellee.

No. 89-2779.

United States Court of Appeals Seventh Circuit.

Argued June 14, 1990.

Decided Sept. 20, 1990.

A. Benjamin Goldgar, James J. Casey, James T. Otis, Keck, Mahin & Cate, Chicago, Ill., for Consolidated Bearings Co. and Ralph N. Meerwarth.

Cornelius P. Callahan, Mark E. Christensen, Callahan & Ehret, Chicago, Ill., for Ehret-Krohn Corp.

Before POSNER, FLAUM and KANNE, Circuit Judges.

FLAUM, Circuit Judge.

This diversity case arose when the Consolidated Bearings Company ("Consolidated") terminated Ehret-Krohn Corporation's ("Ehret") distributorship in 1982. Ehret refused to return consigned inventory to Consolidated and Consolidated sought replevin. Ehret counterclaimed, alleging that Consolidated wrongfully terminated the contract, fraudulently induced Ehret to enter into the contract in 1973 and to accept a reduced commission schedule after 1975, and owed it commissions for storing the bearings after Consolidated cancelled the contract. ¹ The trial court severed the complaint and counterclaims. A jury denied the replevin complaint; the district judge granted Consolidated's motion for a directed verdict on each counterclaim. Ehret appeals the directed verdicts. We find that the judge should have given two of the counterclaims to the jury and therefore vacate the judgment in part and remand those claims for trial.

I. Facts

Consolidated imports ball bearings from Europe and Asia and sells them in the United States through a network of regional distributors. In June of 1972, Consolidated was seeking a midwest distributor for its bearings, and proposed that Ehret, a representative of various industrial manufacturers, fill that niche. The two companies executed a contract in January, 1973, in which Consolidated agreed to pay Ehret a ten percent commission on sales to aftermarket distributors ² in its territory and a five percent commission on sales to original equipment manufacturers ("OEMs"). The contract provided for an additional five percent payment on shipments made from Ehret's Chicago warehouse. In return, the agreement required Ehret to service and solicit aftermarket and OEM accounts and to file monthly reports of visits to those accounts ("call reports"). The contract renewed automatically each year absent a notice of termination by either party 60 days before the annual expiration date.

Things went well at the beginning. Consolidated's sales in the region increased from approximately $75,000 in 1972 to $155,000 in 1973 and over $400,000 in 1974 and 1975. Consolidated's overall sales and profits increased in equally dramatic fashion. Gross sales rose from $2.8 million in 1972 to almost $8.5 million in 1975; Consolidated's net profits increased from $44,416 in 1972 to $81,152 in 1973 and $315,547 in 1974. Net profits declined slightly to $273,663 in 1975. Ralph Meerwarth, then Consolidated's vice president, received (along with his father) salary increases of over $50,000 in 1974 and almost $8,000 in 1975.

Nevertheless, in June, 1975, Meerwarth phoned John Ehret, president of Ehret-Krohn, and told him that fluctuations in the German deutschemark were contributing to "losses in his company." Meerwarth claimed that, because of these losses, the only way he could survive was to withdraw from the market unless Ehret was willing to accept a temporary reduction in its commissions. He added that he was asking all his distributors to do the same. Ehret agreed to the requested reduction on the condition that Consolidated agree to terminate the contract only for "serious cause." Under the revised commission schedule, Ehret received a ten percent commission on its first $350,000 in sales to aftermarket distributors, and five percent on sales beyond that amount.

The parties operated under the modified contract until 1982. On January 15, 1982, Meerwarth sent Ehret a letter cancelling the contract effective March 19, stating that Ehret had failed to file call reports and to service and solicit OEM accounts. In place of the original contract, Consolidated proposed a new contract under which Ehret would not receive commissions on sales to OEM accounts it failed to service. The parties negotiated the proposed contract, but continued doing business under the terms of the original contract until November, when Consolidated notified Ehret that it was terminating their relationship on November 30 unless Ehret signed the revised contract. During this interval, John Ehret requested that Consolidated restore the commission rate to ten percent; in response, Paul Bederson, Consolidated's vice president for finance told him: "Come off it, John. Ralph was never really going to pay ten percent commission. That was just a titty up front to suck you in."

II. Fraud

Ehret claims fraud largely on the basis of this comment. ³ Consolidated's promise to pay a ten percent commission in 1973, it argues, was part of a scheme to sucker Ehret into the contract and then to pull the rug out once Ehret had made investments that it would have to eat if Consolidated cancelled the contract. Ehret contends that Consolidated accomplished its scheme in 1975 when Meerwarth extorted a fifty percent reduction in the commission schedule.

When reviewing directed verdicts in diversity cases, we use the state's standard of review. Mele v. Sherman Hosp., 838 F.2d 923, 924 (7th Cir.1988). The parties agree that the Illinois standard is set forth in Pedrick v. Peoria & Eastern R.R. Co., 37 Ill.2d 494, 510, 229 N.E.2d 504, 513-14 (1967): "[V]erdicts ought to be directed ... only in those cases in which all of the evidence, when viewed in its aspect most favorable to the opponent, so overwhelmingly favors movant that no contrary verdict based on that evidence could ever stand." See also Kokinis v. Kotrich, 81 Ill.2d 151, 154-55, 40 Ill.Dec. 812, 813-14, 407 N.E.2d 43, 44-45 (1980) (restating Pedrick ). To prove its fraud claims, Ehret had to show that Consolidated knowingly made false statements of material fact with the intent to induce Ehret's actions and that Ehret reasonably relied to its detriment on those statements. Soules v. General Motors Corp., 79 Ill.2d 282, 286, 37 Ill.Dec. 597, 599, 402 N.E.2d 599, 601 (1980). Each of these elements must be proved by clear and convincing evidence. Hofmann v. Hofmann, 94 Ill.2d 205, 222, 68 Ill.Dec. 593, 600, 446 N.E.2d 499, 506 (1983); Niemoth v. Kohls, 171 Ill.App.3d 54, 68, 121 Ill.Dec. 37, 46, 524 N.E.2d 1085, 1094 (1988); Kinsey v. Scott, 124 Ill.App.3d 329, 336, 79 Ill.Dec. 584, 589, 463 N.E.2d 1359, 1364 (1984). ⁴

Ehret's 1973 fraud claim fails to measure up. Meerwarth's agreement to pay a 10 percent commission was not a statement of material fact; it was a promise. Ehret invokes an Illinois rule that holds actionable promises that are "part of a scheme to defraud," General Motors Acceptance Corp. v. Central Nat'l Bank, 773 F.2d 771, 780 (7th Cir.1985) (citing Illinois law), but that exception applies only when the promise is not carried out. See, e.g., Steinberg v. Chicago Medical School, 69 Ill.2d 320, 334, 13 Ill.Dec. 699, 706, 371 N.E.2d 634, 641 (1977) (exception applies to false promises); Willis v. Atkins, 412 Ill. 245, 257-58, 106 N.E.2d 370, 377 (1952) (exception applied to scheme to defraud widow through false promises of marriage); Roda v. Berko, 401 Ill. 335, 341, 81 N.E.2d 912, 915 (1948) (exception applies to deed transferred on basis of false promise). Consolidated paid ten percent commissions for over two years until the contract was modified in 1975. Ehret relies on Bederson's statement that Meerwarth's promise to pay ten percent commissions was "a titty up front" to link the 1973 contract and 1975 modification into a prolonged fraudulent scheme. That statement, however, made ten years after the fact by one who was not even a Consolidated employee in 1972, falls far short of clear and convincing proof that Meerwarth intended to defraud Ehret from the beginning. It is directly contradicted by evidence that Consolidated paid Ehret ten percent commissions for over two years, and continued to pay ten percent on the first $350,000 in sales for the life of the contract. Ehret notes that "at least half a dozen times prior to Meerwarth's phone call in June of 1975 the Deutschemark was at a price as high as it was in June of 1975," Appellant's Brief at 30, but that merely shows that Meerwarth had no need to wait until June, 1975, to spring a trap. Ehret made the necessary capital investments in 1973 when it entered into the contract, and it was vulnerable to opportunistic behavior from that point on. ⁵ Finally, the contract was, before 1975, terminable at will; Ehret took a calculated risk (one that it eliminated in 1975) when it agreed to the original termination provision. Consolidated did not promise a ten percent commission ad infinitum and Ehret could not have reasonably relied on the prospect of receiving that commission rate indefinitely.

The 1975 fraud claim presents more substance. Ehret contends that Meerwarth misrepresented Consolidated's financial status to coerce it to accept a fifty percent reduction in its commissions. Consolidated counters that Meerwarth's statements were merely opinions--"a kind of reverse 'puffing' "--to which businessmen are prone; it also contends that the statements were accurate and that Ehret did not rely on them in entering into the 1975 contract modification. The district court agreed.

Whether or not we also agree, we must reverse the district court's directed verdict. First, we cannot say that a reasonable jury could not have concluded with the requisite certainty that the statements were false assertions of fact. Ehret presented evidence showing that Meerwarth phoned ...