Bank v. Truck Ins. Exchange

• Decision Date: 05 April 1995
• Docket Number: No. 94-2492,94-2492
• Citation: 51 F.3d 736
• Parties: Cole Taylor BANK, Plaintiff-Appellee, v. TRUCK INSURANCE EXCHANGE, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 736

51 F.3d 736

Cole Taylor BANK, Plaintiff-Appellee, v. TRUCK INSURANCE EXCHANGE, Defendant-Appellant.

No. 94-2492.

United States Court of Appeals Seventh Circuit.

Argued Feb. 13, 1995.

Decided April 5, 1995.

David C. Roston (argued), John W. Morrison, Daniel H. Fogel, Altheimer & Gray, Chicago, IL, for plaintiff-appellee.

William J. Sneckenberg, Benjamin E. Alba (argued), John W. Billhorn, Sneckenberg & Associates, Chicago, IL, for defendant-appellant.

Before POSNER, Chief Judge, and BAUER and RIPPLE, Circuit Judges.

POSNER, Chief Judge.

We are asked, in this diversity breach of contract case, to decide whether one of the parties waived one of its rights under the contract. Waiver is one of a multitude of contract doctrines that allow oral testimony to modify the terms of an apparently clear written contract. There is no more vexing question in contract law than when a written contract can be rewritten by oral testimony. "Always" is an unsatisfactory answer because it defeats one of the main purposes of written contracts, which is to protect a contracting party against the vagaries of juries. AM International, Inc. v. Graphic Management Associates, Inc., 44 F.3d 572 (7th Cir.1994); Trident Center v. Connecticut General Life Ins. Co., 847 F.2d 564 (9th Cir.1988). "Never" is equally unsatisfactory, because of the acute danger of misinterpretation by a reader ignorant of the contract's commercial setting. In AM International, discussing the doctrine of extrinsic ambiguity, e.g., Isbrandtsen v. North Branch Corp., 150 Vt. 575, 556 A.2d 81, 84 (1988), which allows the use of evidence, oral or written, to show that a seemingly clear contract is ambiguous, we concluded that the law draws the line between "objective" and "subjective" testimony. The former, illustrated by evidence of trade usage, is evidence that is capable of being given by disinterested witnesses. The latter is the self-serving testimony of one of the parties to the contract. Objective testimony can be used to help interpret a written contract even if the contract seems unambiguous; subjective testimony is admissible (if the parties do not agree to its use) only if the contract seems ambiguous. AM International, Inc. v. Graphic Management Associates, Inc., supra, 44 F.3d at 575-76; Carey Canada, Inc. v. Columbia Casualty Co., 940 F.2d 1548, 1557 (D.C.Cir.1991); Mellon Bank, N.A. v. Aetna Business Credit, Inc., 619 F.2d 1001, 1011-13 (3d Cir.1980).

Failure to make this distinction, and to recognize its embodiment even in the law of states that have seemed promiscuously willing to allow parties to avoid the clear import of a written contract--even, indeed, in California, see, e.g., Winet v. Price, 4 Cal.App.4th 1159, 6 Cal.Rptr.2d 554, 558-59, 562 (1992); FPI Development, Inc. v. Nakashima, 231 Cal.App.3d 367, 282 Cal.Rptr. 508, 520-22 (1991); Pacific Gas & Electric Co. v. Zuckerman, 189 Cal.App.3d 1113, 234 Cal.Rptr. 630, 648 (1987); cf. General Motors Corp. v. Superior Court, 12 Cal.App.4th 435, 15 Cal.Rptr.2d 622, 627 n. 3 (1993), where the doctrine of extrinsic ambiguity was expansively interpreted in Pacific Gas & Electric Co. v. G.W. Thomas Drayage & Rigging Co., 69 Cal.2d 33, 69 Cal.Rptr. 561, 442 P.2d 641 (1968); see also C.R. Anthony Co. v. Loretto Mall Partners, 112 N.M. 504, 508-09, 817 P.2d 238, 242-43 (1991)--explains what we respectfully suggest may have been the exaggerated concern expressed by the Ninth Circuit in the Trident case with the doctrine's corrosive effect. We are not in California, moreover, and anyway the California decisions since Trident have declined to endorse that decision's interpretation of California law. ACL Technologies, Inc. v. Northbrook Property & Casualty Ins. Co., 17 Cal.App.4th 1773, 22 Cal.Rptr.2d 206, 218 (1993); Banco Do Brasil, S.A. v. Latian, Inc., 234 Cal.App.3d 973, 285 Cal.Rptr. 870, 893 (1991); FPI Development, Inc. v. Nakashima, supra, 282 Cal.Rptr. at 521 n. 10; cf. Nedlloyd Lines B.V. v. Superior Court, 3 Cal.4th 459, 11 Cal.Rptr.2d 330, 336-37, 834 P.2d 1148, 1154-55 (1992). Not defending what ACL Technologies, Inc. v. Northbrook Property &amp Casualty Ins. Co., supra, 22 Cal.Rptr.2d at 218, aptly termed the " 'deconstructionist' dictum" of Chief Justice Traynor's opinion in Pacific Gas & Electric, yet describing Trident 's characterization of California law as "unfortunate" and "inaccurate," the court in Banco Do Brasil stated that "the courts simply can not permit clear and unambiguous integrated agreements, such as the one before us, to be rendered meaningless by the oral revisionist claims of a party who, at the end of the game, does not care for the result." 285 Cal.Rptr. at 893. For further examples, see Gerdlund v. Electronic Dispensers Int'l, 190 Cal.App.3d 263, 235 Cal.Rptr. 279, 284-85 (1987), and the cases cited there.

What is true is that the doctrine of extrinsic ambiguity, even when confined to situations in which the ambiguity is demonstrated by objective evidence, makes it difficult to decide contract cases on the pleadings; for it is always open to one of the parties to try to present objective evidence that will show that an ostensibly clear contract is unclear when the usages of the trade or other contextual factors are taken into account. But the risk of erroneous interpretations would be very great if parties could not present even unimpeachable evidence that the clarity of the written contract was illusory.

We have to consider whether the contract doctrine of waiver also obeys the objective/subjective distinction. We simplify the facts slightly. Truck Insurance Exchange issued to Accurate Leather and Novelty Company an insurance policy that among other things insured Accurate's property against damage or destruction by fire. Cole Taylor Bank had lent money to Accurate against a credit line of $2.5 million and had secured the loan by means of perfected security interests in Accurate's inventory and other property. An endorsement to the insurance policy that Truck Insurance Exchange had issued to Accurate named Cole Taylor Bank as a "loss payee" and committed the insurance company to "pay any claim for loss or damage jointly to you [Accurate] and the Loss Payee, as interest may appear." As is customary when money is borrowed from a bank, Accurate had a checking account in Cole Taylor Bank.

A fire caused extensive damage to Accurate's inventory, supplies, and other personal property. Truck Insurance Exchange agreed to pay for the damage. It did so by means of a series of checks over a period of several months. The first was for $300,000 and was made payable to Accurate, which deposited it in its account at Cole Taylor Bank. The second, which was for $259,000, likewise. The third was for $47,000. It was made payable to both Accurate and the bank, was endorsed by Russell Cole, a vice-president of the bank (no relation to the "Cole" in the bank's name), and was, like the other checks, deposited in Accurate's checking account at the bank. The fourth check (for $35,000) likewise. The fifth and last check, which was for $12,000, was again made out to Accurate only.

The insurance money deposited in Accurate's account was withdrawn and used for various expenses. In endorsing two of the checks and thus permitting Accurate to withdraw the funds deposited by them without further consent from the bank, Russell Cole understood that the funds were to be used to replace inventory destroyed by the fire. Whether they actually were used for this purpose is unclear.

Sometime after withdrawing the last of the insurance money, Accurate went broke, and as a result defaulted on its loan from the bank. In this suit against the insurance company, the bank contends that by failing to name the bank as a payee in three of the five checks the insurance company violated the "loss payee" clause, of which the bank--all concede--was a third-party beneficiary. Bates & Rogers Construction Corp. v. Greeley & Hansen, 109 Ill.2d 225, 93 Ill.Dec. 369, 373, 486 N.E.2d 902, 906 (1985); 155 Harbor Drive Condominium Ass'n v. Harbor Point, Inc., 209 Ill.App.3d 631, 154 Ill.Dec. 365, 374, 568 N.E.2d 365, 374 (1991). The bank seeks damages equal to the face amount of the three checks (some $571,000). The insurance company acknowledges that it made a mistake in failing to name the bank as an additional payee of the three checks, but argues that the bank had waived compliance with the loss-payee clause. The district judge granted summary judgment for the bank, so in evaluating the insurance company's appeal we must construe the facts as favorably to the insurance company as the record will permit.

The insurance contract was explicit in requiring the insurance company to recognize the bank as a loss payee and to pay claims on the policy in a fashion that would enable the bank to enforce its interest. As there is no doubt that the insurance company violated a clearly stated contractual duty, the question becomes whether the company can use the doctrine of waiver to avoid the duty. Unlike modification of a contract, the efficacy of a waiver of a contractual right is generally not thought to require special tokens of reliability, such as a writing, consideration, reliance, judicial screening (see AM International, Inc. v. Graphic Management Associates, Inc., supra, 44 F.3d at 575), or a heightened standard of proof. See 2 E. Allan Farnsworth, Contracts Sec. 8.5, p. 375 (2d ed. 1990); Wisconsin Knife Works v. National Metal Crafters, 781 F.2d 1280 (7th Cir.1986) (majority and dissenting opinions); Cabinetree of Wisconsin, Inc. v. Kraftmaid Cabinetry, Inc., 50 F.3d 388, 390 (7th Cir.1995). What is more, a waiver of contractual rights can be implied as well as express--implied from words or actions inconsistent with the assertion of those rights. Ryder v. Bank of Hickory Hills, 146 Ill.2d 98, 165 Ill.Dec. 650, 653, 585 N.E.2d 46, 49 (1991); Lavelle v. Dominick's Finer Foods, Inc., 227 Ill.App.3d 764, 169...