Checkers Eight Limited Partnership, v. La-Van Hawkins, et al

• Decision Date: 20 February 2001
• Docket Number: No. 00-2704,00-2704
• Citation: 241 F.3d 558
• Parties: (7th Cir. 2001) Checkers Eight Limited Partnership, et al., Plaintiffs-Appellees, v. La-Van Hawkins, et al., Defendants-Appellants
• Court: U.S. Court of Appeals — Seventh Circuit

Page 558

241 F.3d 558 (7th Cir. 2001)

Checkers Eight Limited Partnership, et al., Plaintiffs-Appellees, v. La-Van Hawkins, et al., Defendants-Appellants.

No. 00-2704

In the United States Court of Appeals For the Seventh Circuit

Argued January 24, 2001

Decided February 20, 2001

Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 95 C 7708--John F. Grady, Judge.

Before Flaum, Chief Judge, and Evans and Williams, Circuit Judges.

Flaum, Chief Judge.

Defendants La-Van Hawkins and his associated corporations appeal the amount of damages entered under an agreed order. They claim that a provision requiring them to pay an additional $150,000 if their scheduled payments under the order were tardy is an unenforceable penalty clause. The defendants also argue that plaintiffs Checkers Eight Limited Partnership ("Checkers") and associated persons, partnerships, and corporations waived strict compliance with the payment schedule. For the reasons stated herein, we reverse and remand.

I. Background

The facts underlying this lengthy commercial litigation are complicated and generally not relevant to the legal issues presented in this case and so will receive only a concise summary. In 1995, Checkers, Thomas W. Lonergan, James T. Lonergan, Thomas W. Lonergan Trust No. 1, and Tower Food Services, Inc. (the general partner of Checkers) filed suit against La-Van Hawkins, Hawkins Two, Inc., Hawkins Four, Inc., Hawkins Five, Inc., and Hawkins Eight, Inc. Count I of the amended complaint alleged that the defendants owed money to Checkers under a partnership agreement signed by each of the defendants, and Count II alleged that payments from the defendants were owed to another partnership. The plaintiffs sought $350,747.68 on Count I and $214,597.58 on Count II. The basis of federal jurisdiction was (and is) diversity, since the plaintiffs and the limited partners of Checkers were either citizens of or were incorporated and had their primary places of business in Illinois, New York, or Ohio, while the original defendants were either citizens of or were incorporated and had their primary places of business in Georgia.

The litigation developed with the plaintiffs filing motions for summary judgment. In a June 3, 1997 opinion, the court denied one of these motions but found as substantially uncontroverted facts under Fed.R.Civ.P. 56(d) that the defendants owed at least $181,303.68 on Count I and at least $200,162.58 on Count II. In September, 1997, after being granted leave by the court, the defendants filed a counterclaim seeking reimbursement for expenses the defendants allegedly paid on behalf of the partnerships. The counterclaim stated only that the defendants sought more than $50,000 in damages, but the defendants' documented expenses totaled $1,153,484.85.

In February, 1999, the parties settled the case and had the district court enter an order memorializing their resolution. This order dismissed the defendants' counterclaim with prejudice and provided that if the defendants paid the plaintiffs a total of $250,000 in a timely manner the complaint would be dismissed with prejudice as well. This $250,000 was to be paid in an initial lump sum and then monthly installments, with the installment amounts due near the end of each month from March, 1999 to January, 2000. The order also stated that if the payments were not made in a timely manner, judgment for $400,000 minus any settlement payments would be entered against the defendants who were parties to the original partnership dispute as well as other associated entities,¹ which collectively form the defendants in this case.

The defendants were tardy making some of the payments. The payment of the first late sum, which was due on May 28, 1999 according to the agreed order, was delayed with the permission of the plaintiffs until June 4. However, the defendants did not obtain explicit permission from the plaintiffs for the remaining late payments, the next of which was the September 30 payment, which was made one day late on October 1. The sum due October 30 was not produced until November 9, with the plaintiffs filing a motion for entry of judgment on November 5, which was withdrawn when they received the payment. The monies due on December 31 were also late and the plaintiffs filed a motion to enter judgment for $400,000 in their favor on January 7, 2000. The defendants made this payment on January 11 and paid the last sum on January 20, which was eleven days early. At that point, the defendants had paid $250,000. However, the plaintiffs did not withdraw their motion for entry of judgment under the agreed order and the district court held a hearing. After listening to argument from both sides, the court granted the motion and ordered the defendants to pay an additional $150,000.

II. Discussion

The defendants argue that the extra $150,000 they were required to produce for not making timely payments is an unenforceable penalty clause. They claim that this sum has no relation to the damages caused by the late payments and that these damages are easily estimated by using prevailing interest rates. They further contend that the only purpose of this provision of the order was to secure performance of the contract and that the amount is insensitive to the gravity of their breach. The plaintiffs claim that the provision in question is a perfectly acceptable liquidated damages clause.

We begin by making explicit a few assumptions relied on by the parties. The first of these is that state law, rather than federal, applies to the construction of agreed orders entered by a federal court sitting in diversity. In their briefs, both parties cite only Illinois law and Seventh Circuit and Illinois district court cases interpreting Illinois law. Most of the circuits that have considered the issue have held that questions of the validity or interpretation of an agreed order resolving state law claims are governed by state law, see, e.g., Bamerilease Capital Corp. v. Nearburg, 958 F.2d 150, 152 (6th Cir. 1992); Alumax Mill Prods., Inc. v. Congress Fin. Corp., 912 F.2d 996, 1007 (8th Cir. 1990); White Farm Equip. Co. v. Kupcho, 792 F.2d 526, 529 (5th Cir. 1986). Thus, we will assume with the parties that state law applies, though we need not make a definitive ruling on this question since the issue is not contested. The second assumption is that Illinois law, rather than the law of some other state, applies. Since the parties cite only cases interpreting Illinois law, we will assume that Illinois law governs their dispute. See Coleman v. Ramada Hotel Operating Co., 933 F.2d 470, 473 (7th Cir. 1991). The third premise is that Illinois applies its penalty clause jurisprudence to consensual orders approved by courts. The plaintiffs implicitly assume this in their briefs by arguing only that the provision of the agreed order at issue in this case does not constitute a penalty clause, but at oral argument questioned whether part of a court order could ever be considered a penalty. Even if we were to consider the plaintiffs' late argument that under Illinois law no part of a settlement agreement approved by a court can be a penalty,² they cite no case law to that effect and we previously have found that under Illinois law portions of court-approved agreements can constitute unenforceable penalties. See South Suburban Hous. Ctr. v. Berry, 186 F.3d 851, 856 (7th Cir. 1999).

Having established these preliminary points, we now move to the merits of the penalty clause argument. In interpreting contract provisions that specify damages, Illinois law draws a distinction between liquidated damages, which are enforceable, and penalties, which are not. See Lake River Corp. v. Carborundum Co. 769 F.2d 1284, 1289 (7th Cir. 1985). A clause is a liquidated damages provision if: (1) the actual damages from a breach are difficult to measure at the time the contract was made; and (2) the specified amount of damages is reasonable in light of the anticipated or actual loss caused by the breach. See American Nat'l Bank & Trust Co. of Chicago v. Regional Transp. Auth., 125 F.3d 420, 440 (7th Cir. 1997); Lake River, 769 F.2d at 1289-90. In addition, when the sole purpose of the clause is to secure performance of the contract, the provision is an unenforceable penalty. See American Nat'l Bank & Trust, 125 F.3d at 440; MedPlus Neck & Back Pain Ctr., S.C. v. Noffsinger, 726 N.E.2d 687, 693 (Ill. App. 2000). If the amount of damages is invariant to the gravity of the breach, the clause is probably not a reasonable attempt to estimate actual damages and thus is likely a penalty. See Raffel v. Medallion Kitchens of Minn., Inc., 139 F.3d 1142, 1146 (7th Cir. 1998); Lake River, 769 F.2d at 1290. Whether a provision is a penalty clause is an issue of law that we review de novo. See American Nat'l Bank & Trust, 125 F.3d at 439.

Given these legal principles, the provision of the parties' agreed order requiring the defendants to pay an additional $150,000 if the installments are not paid in a timely fashion is an unenforceable penalty clause. Absent...