Central Soya Co., Inc. v. Epstein Fisheries, Inc.

• Decision Date: 27 April 1982
• Docket Number: No. 81-2494,81-2494
• Parties: 33 UCC Rep.Serv. 1296, 10 Fed. R. Evid. Serv. 553 CENTRAL SOYA COMPANY, INC., Plaintiff-Appellee, v. EPSTEIN FISHERIES, INC., Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 939

676 F.2d 939

33 UCC Rep.Serv. 1296, 10 Fed. R. Evid. Serv. 553

CENTRAL SOYA COMPANY, INC., Plaintiff-Appellee, v. EPSTEIN FISHERIES, INC., Defendant-Appellant.

No. 81-2494.

United States Court of Appeals Seventh Circuit.

Argued April 2, 1982.

Decided April 27, 1982.

Philip C. Jones, Washington, D. C., for defendant-appellant.

William A. Stearns, Quarles & Brady, Milwaukee, Wis., for plaintiff-appellee.

Before CUMMINGS, Chief Judge, POSNER, Circuit Judge, and LEIGHTON, District Judge. ^*

POSNER, Circuit Judge.

This diversity case involves the branch of contract law known as suretyship. The plaintiff, Central Soya Company, Inc., made a contract to sell catfish feed to Aquarium Farms, Inc., and represented that this would be a "complete feed" which would enable the growing of catfish in an aquarium where there would be no natural food. The catfish so grown were destined for the defendant, Epstein Fisheries, Inc. To facilitate this effort to bypass nature, Epstein Fisheries guaranteed Central Soya payment of up to $20,000 for the catfish feed sold to Aquarium Farms. The guaranty recited that it was to remain in effect until all indebtedness arising from the purchase of the feed was paid off by Aquarium Farms and that no settlement, compromise, release, modification, or other disposition of any of that indebtedness would impair the guaranty.

Alas, the catfish did not prosper on their novel diet; they were stunted and deformed. Aquarium Farms complained to Central Soya that the feed was defective, and Central Soya gave Aquarium Farms a check for $50,000 not to sue; thus assuaged, Aquarium Farms agreed to keep buying the feed. At the time of this, the first, settlement, Aquarium Farms owed Central Soya $13,000 for feed already delivered; it is unclear whether this debt was forgiven as part of the settlement.

Delivery of the feed resumed but the catfish still would not grow normally; and Aquarium Farms, claiming that this was because the feed was still defective, stopped buying it and refused to pay for what it had already bought. The unpaid balance was either $11,000 or $24,000, depending on whether the previous indebtedness of $13,000 had been forgiven. Central Soya sued Aquarium Farms for $24,000 and joined Epstein Fisheries, the guarantor, as a codefendant. Aquarium Farms counterclaimed for $65,000 in damages allegedly caused by the defective feed since the first settlement. The dispute between Central Soya and Aquarium Farms was settled before trial by each party dropping its claim against the other. But Epstein Fisheries remained in the case as a defendant and Central Soya, claiming that Aquarium Farms had failed to pay the money it owed for the catfish feed, sought to hold Epstein Fisheries liable under the guaranty for the first $20,000 of Aquarium Farms' indebtedness. The district judge, after a bench trial, found in favor of Central Soya and against Epstein Fisheries, and entered a judgment for $20,000 (plus interest) from which Epstein Fisheries appeals.

Nowhere in the pleadings, briefs (in this court or below), pretrial order, district court's opinion, or any other document in this case is there a statement of what state's law we should be applying in this diversity case. The parties and the district court have treated this as a case governed by general common law, much as if Erie R. R. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), had never been decided. We do not think we could be required by a stipulation of the parties to decide a case according to a body of law that is nowhere in force, and that is what we would be doing if we tried to decide this case under general common law.

Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496-97, 61 S.Ct. 1020, 1021-22, 85 L.Ed. 1477 (1941), directs us in a diversity case to apply the conflict of laws rules of the forum state, in this case Wisconsin. American State Bank v. United States Fidelity & Guar. Co., 331 F.2d 479 (7th Cir. 1964), suggests that a Wisconsin court in a suretyship case such as this would apply the law of the state where the obligation being guaranteed was performed. That would be Nebraska, where Aquarium Farms had its catfish-growing operation. More recent authority, however, suggests the need for a more complex analysis, of rather indeterminate outcome. See, e.g., Lichter v. Fritsch, 77 Wis.2d 178, 252 N.W.2d 360 (1977). But a shortcut leads us to the conclusion that Wisconsin suretyship law governs here. A Wisconsin (or any) state court trying a case in which, as here, the parties did not explicitly indicate which law they thought governed would naturally apply the law of its own state. This is an implicit rule of Wisconsin conflicts law which Klaxon makes binding on a federal court in Wisconsin in a diversity case. We note for future reference that it facilitates appellate review of diversity cases to be told what state's law was applied in the trial court.

Central Soya concedes that despite the broad language of the guaranty, if Aquarium Farms had paid in full whatever it owed Central Soya for catfish feed, Central Soya would have no claim against Epstein Fisheries, the guarantor of that indebtedness. The guaranty is against default and if there is no default the creditor has no claim against the guarantor; suretyship is not double indemnity. At oral argument Central Soya's counsel further conceded that a payment which discharges the guarantor need not be in cash, but could be in kind. So if Aquarium Farms, in payment of its debt to Central Soya, had given Central Soya a piece of land worth at least $24,000, the debt would be fully satisfied and Epstein Fisheries discharged. See Stearns, The Law of Suretyship 193 (5th ed., Elder, 1951).

What Epstein Fisheries claims Aquarium Farms gave Central Soya in payment of its debt was not land but a promise to drop a $65,000 counterclaim. But a promise, too, is a form of payment, and depending on how much it is worth it could fully satisfy a debt. To take an extreme example, if the probability that Aquarium Farms would get a judgment against Central Soya for the full $65,000 had been 100 percent, then an enforceable promise by Aquarium Farms to drop the counterclaim was worth $65,000 to Central Soya, which is a good deal more than Aquarium Farms owed it for the catfish feed. But of course the counterclaim must have been worth less. Otherwise Aquarium Farms would not have agreed to dismiss it in exchange for Central Soya's dismissing a much smaller claim. Aquarium Farms might not have been able to prove liability, or damages as great as $65,000. Suppose that, because of such uncertainties, the expected value of the counterclaim was only $5000; then a promise not to press the counterclaim would not have been full satisfaction of Aquarium Farms' debt to Central Soya.

This analysis suggests that the value of the counterclaim is a factual question to be determined at trial, as the Supreme Court of Wisconsin assumed in Continental Bank & Trust Co. v. Akwa, 58 Wis.2d 376, 206 N.W.2d 174 (1973). The defendants there had guaranteed Akwa-Downey's indebtedness of some $623,000 to the plaintiff. The plaintiff's action against Akwa-Downey was settled by an agreement whereby Akwa-Downey gave the plaintiff a check for $559,000 and also released claims against the plaintiff totaling $180,000. The defendant argued that the indebtedness had been fully satisfied, for although the cash payment was less than the total indebtedness the claims that were released were worth more than the difference. The court disagreed: "Whether the claims released by Akwa-Downey in favor of the plaintiff are of sufficient value to make up the apparent deficiency is a matter to be decided upon trial ...." 58 Wis.2d at 390, 206 N.W.2d at 182. This is not quite a holding that dropping a counterclaim can discharge a guarantor. The...