Aps Sports Collectibles, Inc. v. Sports Time, Inc.

• Decision Date: 22 July 2002
• Docket Number: No. 00-2260.,00-2260.
• Citation: 299 F.3d 624
• Parties: APS SPORTS COLLECTIBLES, INC., Plaintiff-Appellant, v. SPORTS TIME, INC., a Corporation, Harlan J. Werner, Michael K. Speakman, Thomas Chen, Patrick Kwan, Lee J. Kolligan, Robert Byer, Bill A. Moller, and Paul Siegal, Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

299 F.3d 624

APS SPORTS COLLECTIBLES, INC., Plaintiff-Appellant, v. SPORTS TIME, INC., a Corporation, Harlan J. Werner, Michael K. Speakman, Thomas Chen, Patrick Kwan, Lee J. Kolligan, Robert Byer, Bill A. Moller, and Paul Siegal, Defendants-Appellees.

No. 00-2260.

United States Court of Appeals, Seventh Circuit.

Argued September 5, 2001.

Decided July 22, 2002.

Douglas N. Dorris (argued), Howerton, Dorris, Stone & Phelps, Marion, IL, for Plaintiff-Appellant.

Kenneth J. Poole, Torrance, CA, John L. Dodd (argued), Tustin, CA, for Defendants-Appellees.

Before CUDAHY, ROVNER, and DIANE P. WOOD, Circuit Judges.

CUDAHY, Circuit Judge.

This is diversity case involving a dispute about money between APS Sports Collectibles, Inc. and Sports Time, Inc. The focus of their controversy is a loan default and a transfer of assets from a now bankrupt corporation, AW Sports, to the defendant. A few months after APS extended a loan to AW Sports, AW Sports was purchased by Sports Time in a stock-for-stock exchange. After various items of its inventory and equipment were transferred to Sports Time, AW Sports entered bankruptcy. APS subsequently filed suit against Sports Time on APS's loan to AW Sports, joining various current and former officers of Sports Time and AW Sports as defendants. The district court dismissed all the counts of APS's complaint except one count of fraudulent transfer under the Illinois Uniform Fraudulent Transfer Act (UFTA), 740 ILCS 160/1 et seq.

After full discovery, the district court granted summary judgment for the noncorporate defendants, and the case against Sports Time proceeded to trial. APS received a favorable jury verdict, and the district court in turn awarded damages in the amount of $266,594. APS now appeals (1) the dismissal of a purported good faith and fair dealing cause of action under Illinois law, (2) the grant of summary judgment for the noncorporate defendants and (3) the method used by the district court to calculate damages. For the reasons discussed below, we affirm.

I.

This case involves three close corporations and various corporate officers and/or shareholders in their individual capacities. The plaintiff, APS Sports Collectibles, Inc. (APS), is an Illinois corporation in the business of distributing magazines and sports collectibles, such as sports trading cards. The defendant, Sports Time, Inc., is a Nevada corporation, which was formed to sell and distribute similar sports collectibles. Another entity that is at the center of this lawsuit is the now defunct company, AW Sports, Inc., which is a California corporation formerly in the business of manufacturing trading cards. APS and AW Sports entered into a loan agreement, providing for a $629,333 loan to AW Sports, essentially secured in part by AW Sports' promise to manufacture and deliver to APS certain trading cards. During the term of the loan agreement, Sports Time purchased all the outstanding stock of AW Sports through an exchange of stock. Thereafter, various officers/shareholders of AW Sports and Sports Time assumed new positions in the two entities. APS has joined as defendants, in their individual capacity, the following officers and/or shareholders: Harlan J. Werner, Michael K. Speakman, Thomas Chen, Patrick Kwan, Lee J. Kolligan, Robert Byer, Bill Moller and Paul Siegal.

During the early 1990s, AW Sports had several attractive licensing agreements with various celebrities and athletes. However, the company was undercapitalized and needed cash to manufacture its merchandise. So, as we have indicated, in August of 1992, APS lent AW Sports $629,333 in exchange for a promise to manufacture and ship to APS a set of 1992 NFL trading cards. Shipments of the finished product that were received and sold by APS were then credited against the outstanding loan. AW Sports had agreed to liquidate the loan in full by April 4, 1993 (i.e., within 150 days). As further security, AW Sports pledged sufficient shares of its corporate stock to represent a controlling interest. At that time, 600 shares of AW Sports were outstanding. However, physical possession of the stock certificates was never gained by APS nor were the certificates placed in escrow,¹ and there is some question whether, in the event of default, AW Sports agreed to convey existing shares of AW Sports, or merely to exercise its right under the corporate charter to issue additional shares of stock sufficient to give APS a controlling interest. As part of the loan agreement, AW Sports agreed that it would "retain through the life of the loan good and clear title to the stock, free of any encumbrance."

On December 2, 1992, while the 150-day repayment period was running, Sports Time entered into an acquisition agreement with AW Sports whereby all outstanding shares of AW Sports would be converted to Sports Time stock in a stock-for-stock exchange. Under the terms of the agreement, all the assets, obligations and debts of AW Sports were transferred to Sports Time. Moreover, the stock purchase agreement between Sports Time and AW Sports explicitly recognized the outstanding debt to APS. An AW Sports financial statement on December 15, 1992, listed a product inventory valued at $350,000 and equipment worth $621,000. This was two weeks before the closing of the acquisition of AW Sports by Sports Time on January 2, 1993.

APS was not informed of Sports Time's acquisition of AW Sports until after the deal was complete. During the course of the 150-day loan repayment period, some of the trading cards that were promised to APS were delivered to it at later dates than those specified in the loan agreement. Once they were delivered to APS, sales were disappointing, and the satisfaction of AW Sports' outstanding debt to APS was delayed. In March of 1993, it became apparent that AW Sports was about to default on its loan. Therefore, a meeting between APS, AW Sports and Sports Time was held in St. Louis. Despite these discussions, the loan went unpaid as of the April 3 due date. On April 19, APS sent a letter to officers of both AW Sports and Sports Time demanding payment of the debt. On May 3, a second letter was sent demanding that an escrow of AW Sports' corporate stock be set up and, further, demanding payment for the overdue loan.

On May 20, only seventeen days after the second letter from APS, AW Sports filed a petition in bankruptcy listing APS as a secured creditor who was owed $629,333. AW's bankruptcy petition listed the value of its inventory at only $16,800 and its equipment at $1,325. These figures represented an approximate $950,000 drop in asset value since AW Sports' December 1992 financial statement. During the five-month period since December, neither Sports Time nor AW Sports made any payment to APS on the outstanding promissory note.

In June of 1993, APS filed this lawsuit against Sports Time and various current and former officers and shareholders of Sports Time and AW Sports. The corporate entity, AW Sports, was protected from being named as a defendant in this litigation by the automatic bankruptcy stay. At the close of discovery, Sports Time and the noncorporate defendants filed a motion for summary judgment, which the district court granted, with the exception of one count under the Illinois Uniform Fraudulent Transfer Act (UFTA), 740 ILCS 160/1 et seq., which APS was required to replead.

In October 1995, the defendants filed for summary judgment on the surviving UFTA claim, while APS requested the district court to reconsider its earlier dismissal of a good faith and fair dealing cause of action. On January 16, the district court granted summary judgment for the individual defendants on the UFTA claim and refused to reconsider the dismissal of the good faith and fair dealing claim. The UFTA claim against Sports Time was then tried to a jury in September of 1996. Although APS received a favorable jury verdict, special interrogatories revealed some confusion by the jury about whether the fraudulent transfer, which it found, involved shares of AW stock rather than the underlying corporate assets.

After a new trial was ordered and the case was transferred to another district court judge, APS renewed its motion to reinstate its good faith and fair dealing claim, which was once again denied. In July of 1997, a jury again returned a verdict for APS. After conducting a hearing on damages, the district court entered a judgment for APS in the amount of $266,594. APS then filed a post-trial motion, arguing that the language of the UFTA required a different approach to calculating damages. The district court denied APS's motion. This appeal followed.

II.

APS presents three issues on appeal: (1) the district court erred when it ruled that Illinois law does not authorize an independent tort action for breach of the duty of good faith and fair dealing; (2) the district court improperly granted summary judgment for the noncorporate defendants and (3) the district court used an incorrect method to calculate damages under the UFTA. Because all of these issues raise questions either of statutory interpretation, or of the propriety of summary judgments, or otherwise of matters of law rather than matters of fact, the standard of review is de novo. See O'Reilly v. Hartford Life & Accident Ins. Co., 272 F.3d 955, 959 (7th Cir.2001) (summary judgment); Tobin for Governor v. Ill. State Bd. of Elections, 268 F.3d 517, 521 (7th Cir. 2001) (motion to dismiss); Hotaling v. Chubb Sovereign Life Ins. Co., 241 F.3d 572, 579 (7th Cir.2001) (interpretation of an Illinois statute). We will discuss each of these issues in order.

A.

According to APS, Illinois law authorizes an independent cause of action for breach of the duty of good faith and fair dealing. However, the cases it cites in support of this notion all involve insurance disputes in which an Illinois court upheld a tort claim, and thus compensatory damages, if an insurer had refused to negotiate settlements in...