ECHO, Inc. v. Whitson Co., Inc.

• Decision Date: 17 April 1995
• Docket Number: No. 94-2538,94-2538
• Parties: 26 UCC Rep.Serv.2d 356 ECHO, INCORPORATED, an Illinois Corporation, Plaintiff-Appellee, v. The WHITSON COMPANY, INC. d/b/a Power Tool Company, a Tennessee Corporation, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 702

52 F.3d 702

26 UCC Rep.Serv.2d 356

ECHO, INCORPORATED, an Illinois Corporation, Plaintiff-Appellee, v. The WHITSON COMPANY, INC. d/b/a Power Tool Company, a

Tennessee Corporation, Defendant-Appellant.

No. 94-2538.

United States Court of Appeals, Seventh Circuit.

Argued Dec. 1, 1994.

Decided April 17, 1995.

Gary D. Santella, Susan M. Rentschler (argued), Masuda, Funai, Eifert & Mitchell, Chicago, IL, for ECHO, Inc.

Michael T. Reid, Halfpenny, Hahn, Roche & Marchese, Chicago, IL (argued), for Whitson Co., Inc.

Before POSNER, Chief Judge, and BRIGHT ^* and KANNE, Circuit Judges.

KANNE, Circuit Judge.

ECHO, Incorporated (ECHO) is an Illinois corporation engaged in the business of manufacturing and selling portable outdoor equipment, such as leaf blowers, trimmers, and chain saws. The Whitson Company, Inc., d/b/a Power Tool Company ("PTC"), is a Tennessee corporation engaged in the business of distributing, wholesaling, and reselling, among other things, portable outdoor equipment. ECHO and PTC entered into a distributorship agreement which provided that PTC was to promote the sale of ECHO products in Tennessee. Under this agreement, PTC would submit purchase orders to ECHO, and ECHO would sell and deliver to PTC the equipment ordered at the price specified in the purchase orders.

The business relationship between ECHO and PTC eventually broke down. At some point ECHO notified PTC of its intent to terminate the Tennessee distributorship because of PTC's lack of sales performance and PTC's reduction in complimentary product lines, reduction in sales staff, reduction in training, and questionable credit rating. PTC challenged ECHO's termination of the distributorship agreement, but to no avail.

Following ECHO's termination of the agreement, however, PTC still owed ECHO for equipment it had previously purchased. In order to enable PTC to pay off its account, ECHO agreed to repurchase PTC's inventory of ECHO products. ECHO applied an inventory credit of over $123,000 to PTC's account, leaving a balance due ECHO in the principal amount of $93,417.21, which PTC admits that it owes. However, PTC refuses to pay this debt because it argues that it has sustained unliquidated damages from ECHO's termination of the distributorship agreement.

ECHO brought suit against PTC in Illinois state court to collect the principal amount of $93,417.21. ECHO also sought to recover service charges (late fees) or, alternatively, prejudgment interest pursuant to the Illinois Interest Act. PTC removed the case to federal court and filed an answer, set-off, and counterclaim. PTC's counterclaim alleges that ECHO breached a separate sales contract, wrongfully terminated the Distributorship Agreement, breached an implied covenant of good faith and fair dealing in terminating the Distributorship Agreement, and breached the repurchase agreement by failing to apply over $2,000 of additional credit. PTC acknowledges that the only reason it has refused to pay the undisputed $93,417.21 it owes ECHO is that it claims it has sustained unliquidated damages in excess of ECHO's claim.

The district court granted ECHO's motion for summary judgment and determined that PTC's counterclaim does not preclude the entry of a final judgment in ECHO's favor because the breaches alleged in PTC's counterclaim do not relate to the same contract or transaction which forms the basis of ECHO's complaint. Pursuant to FED.R.CIV.P. 54(b), the district court directed entry of a final judgment for ECHO in the amount of $93,417.21 plus prejudgment interest in the amount of $7,089.17, for a total judgment of $100,506.68. PTC appeals the district court's grant of summary judgment. PTC's counterclaim remains pending in the district court.

On appeal, PTC argues that its claims and ECHO's claims arise out of the same contract, or at least that the parties dispute material facts on this issue, thereby precluding summary judgment. And because the claims arise out of the same contract, PTC argues, it should not be required to pay the amount awarded to ECHO through summary judgment until the district court disposes of its counterclaim. Such delay would allow PTC to apply its debt to ECHO against any damages it wins from ECHO.

Regardless of our ruling on the issue before us here, however, PTC must wait until the trial on its counterclaim before knowing whether it can satisfy its debt to ECHO with less than the purchase price of the goods it received. It is worth noting that, even if we uphold the district court's grant of summary judgment, PTC might yet achieve a further delay in paying ECHO by moving for a stay of proceedings to enforce judgment pursuant to FED.R.CIV.P. 62(h) until the counterclaim is resolved. This might effect the set-off PTC seeks because, if PTC wins on its counterclaim, the two judgments will become executory simultaneously. The real point is that only the resolution of the counterclaim will ultimately determine how much money each party owes the other. This case merely represents a dispute over how to begin the accounting process.

Standard of Review

A discussion of our standard of review of summary judgments in the context of UCC Sec. 2-717 is particularly important in this case. The district court held that "[w]hether there is more than one contract for purposes of Sec. 2-717 is a question of law." The district court relied on Carlisle Corp. v. Uresco Constr. Materials, Inc., 823 F.Supp. 271, 274 (M.D.Pa.1993), which in turn relied on Hellendall Distributors, Inc. v. S.B. Thomas, Inc., 559 F.Supp. 573, 574 (E.D.Pa.1983), aff'd, 755 F.2d 920 (3rd Cir.1985), for this standard. Hellendall is based on the pronouncement of Sharp Electronics Corp. v. Arkin-Medo, Inc., 86 A.D.2d 817, 452 N.Y.S.2d 589, 590 (1st Dept.1982), aff'd, 58 N.Y.2d 986, 461 N.Y.S.2d 1014, 448 N.E.2d 799 (1983), that breach of an unspecified distributorship agreement does not bar summary judgment against a claim for set-off that alleges the unity of the distributorship agreement and the purchase orders executed under its auspices.

Indeed, where no relevant underlying agreement is presented to the court, it may be for the court to decide whether there is more than one contract for purposes of Sec. 2-717. However, that judgment would be based upon the burden of the non-moving party to rely on more than its pleadings to avoid summary judgment. See FED.R.CIV.P. 56(e). It is a scenario factually distinguishable from the case before us, as we have no dispute that both the underlying distributorship agreement and the purchase orders exist.

The statement that courts will determine whether there is more than one contract remains true only up to a point. We have no more power to interpret contracts in the context of Sec. 2-717 than we do in any other context. That is, we do not have absolute power to say whether the parties' claims arise out of the same contract. We must look to the controlling law, the law of Illinois in this case, ¹ for the parameters of our power to interpret contracts. Within those parameters we may say whether each party's claims arise out of the same contract.

With that caveat in mind, we review the district court's grant of summary judgment de novo. Metalex Corp. v. Uniden Corp. of America, 863 F.2d 1331, 1333 (7th Cir.1988). Contract interpretation is particularly suited to disposition by summary judgment. Id. Summary judgment is appropriate where no genuine issues of material fact exist and the moving party is entitled to judgment as a matter of law. FED.R.CIV.P. 56. Under Illinois law, we must first decide whether the contract is ambiguous. Metalex, 863 F.2d at 1333. If the contract is unambiguous, there is no issue of material fact and the court must determine the contract's meaning as a matter of law. Id. But if the contract is ambiguous, the contract's meaning is a question for the trier of fact. Id. A contract is ambiguous, under Illinois law, only if it is "reasonably and fairly susceptible to more than one meaning." Id. (quoting Lenzi v. Morkin, 116 Ill.App.3d 1014, 72 Ill.Dec. 414, 416, 452 N.E.2d 667, 669 (1983)) (emphasis added), aff'd, 103 Ill.2d 290, 82 Ill.Dec. 644, 469 N.E.2d 178 (1984). A disagreement between the parties as to a contract's meaning does not necessarily render the contract ambiguous. Federal Deposit Ins. Corp. v. W.R. Grace & Co., 877 F.2d 614, 621 (7th Cir.1989), cert. denied, 494 U.S. 1056, 110 S.Ct. 1524, 108 L.Ed.2d 764 (1990).

Whether ECHO's and PTC's Claims Arise from the Same Contract

The Illinois version of the UCC, comporting with common sense, provides that a buyer must pay for the goods it accepts. 810 ILCS 5/2-206(1). It also provides that, upon notifying the seller, the buyer "may deduct all or any part of the damages resulting from any breach of the contract from any part of the price still due under the same contract." 810 ILCS 5/2-717. PTC has accepted goods from ECHO, but has refused to pay under the set-off authority of Sec. 2-717. The question for us is whether the contract that ECHO allegedly breached, the distributorship agreement, and the contract under which PTC owes ECHO, a purchase order pursuant to the distributorship agreement, are the same contract for purposes of Sec. 2-717. See generally, Coplay Cement Co. v. Willis & Paul Group, 983 F.2d 1435, 1439 (7th Cir.1993) (discussing the one contract--multiple contracts issue).

As a general matter in applying Sec. 2-717, we have held under Illinois law that distributorship agreements and the purchase orders that arise under them are different contracts. Schieffelin & Co. v. Valley Liquors, Inc., 823 F.2d 1064 (7th Cir.1987). Therefore, the price of the goods a buyer accepts pursuant to a purchase order is not susceptible to set-off against damages the buyer sustains as a result of a seller's alleged breach of a related distributorship agreement. Id. Schieffelin is based on Rebaque v. Forsythe Racing, Inc., 134 Ill.App.3d 778, 89 Ill.Dec. 595, 480...