Fidelity and Deposit Co. of Md. v. Rotec Indus., 04-1598.

• Decision Date: 28 December 2004
• Docket Number: No. 04-1598.,04-1598.
• Citation: 392 F.3d 944
• Parties: FIDELITY AND DEPOSIT COMPANY OF MARYLAND and AMERICAN HOME ASSURANCE COMPANY, Plaintiffs-Appellants, v. ROTEC INDUSTRIES, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 944

392 F.3d 944

FIDELITY AND DEPOSIT COMPANY OF MARYLAND and AMERICAN HOME ASSURANCE COMPANY, Plaintiffs-Appellants, v. ROTEC INDUSTRIES, INC., Defendant-Appellee.

No. 04-1598.

United States Court of Appeals, Seventh Circuit.

Argued November 9, 2004.

Decided December 28, 2004.

Robert G. Watt, Scott W. Kowalski (argued), Watt, Tieder, Hoffar & Fitzgerald, McLean, VA, for Plaintiffs-Appellants.

Michael Gilman (argued), O'Brien, O'Rourke & Hogan, Chicago, IL, for Defendant-Appellee.

Before FLAUM, Chief Judge, and CUDAHY and POSNER, Circuit Judges.

POSNER, Circuit Judge.

The appeal in this diversity suit governed by Illinois law requires us to examine a doctrine of contract law known as "divisibility." Rotec, the defendant, had a contract with Guy F. Atkinson Construction Company relating to China's damming of the Yangtze River — the $25 billion "Three Gorges" project that is due to be completed in 2009. Soon after the contract was signed, Atkinson declared bankruptcy and, as debtor in possession, rejected (with immaterial exceptions) its executory contracts, pursuant to 11 U.S.C. § 365(a). The plaintiffs, a pair of insurance companies, bought Atkinson's contract rights, including its rights under the contract with Rotec, and then filed this suit against Rotec for breach of contract. Rotec argued, and the district judge, granting summary judgment in its favor, agreed, that the contract was executory, and so, having been rejected, and thus terminated, by Atkinson, could not have been acquired by the plaintiffs — there was nothing to acquire — and so they had no basis for their suit.

But what if, as the plaintiffs argued unsuccessfully to the district court, the contract was divisible into two parts and the first, having been fully executed by Atkinson, had not been rejected when Atkinson rejected its executory contracts? Then it would be as if there were two separate contracts, one performed, one executory, with only the second having been rejected in bankruptcy and the first having passed to the plaintiffs in the sale to them of Atkinson's contract rights. Stewart Title Guaranty Co. v. Old Republic Nat'l Title Ins. Co., 83 F.3d 735, 741-42 (5th Cir.1996) (per curiam); Monument Square Associates, Inc. v. Resolution Trust Corp., 792 F.Supp. 874, 876-77 (D.Mass.1991); cf. In re Gardinier, Inc., 831 F.2d 974 (11th Cir.1987). But is "as if" enough? The parties assume so, with support in the cases we've cited plus In re Murexco Petroleum, Inc., 15 F.3d 60, 62-63 (5th Cir.1994) (per curiam), cases that rely on a dictum in NLRB v. Bildisco & Bildisco, 465 U.S. 513, 522 n. 6, 104 S.Ct. 1188, 79 L.Ed.2d 482 (1984), based in turn on some scanty legislative history to section 365(a). And yet a divisible contract is not two (or more) separate contracts; if it's broken, it's broken entirely. The only significance of its divisibility is that the contract price will be used to determine the value of any partial performance of the contract. Kimco Corp. v. Murdoch, Coll & Lillibridge, Inc., 313 Ill.App.3d 768, 246 Ill.Dec. 678, 730 N.E.2d 1143, 1148 (2000); Metropolitan Trust Co. v. Fishman, 323 Ill.App. 413, 55 N.E.2d 837, 839-40 (1944); Filet Menu, Inc. v. C.C.L. & G., Inc., 79 Cal.App.4th 852, 94 Cal.Rptr.2d 438, 444 (2000); Restatement (Second) of Contracts § 240 and comment b (1981). But we'll allow the parties their assumption that the plaintiffs should win if there is divisibility, and save our doubts for a future case.

The first document Rotec and Atkinson signed was a memorandum of understanding in January 1996. It states that the Chinese corporation responsible for the Three Gorges project has requested bids for dam-construction machinery, that Rotec intends to bid for the contract, that Atkinson will be a subcontractor of Rotec, that Atkinson and Rotec possess "complementary technology, products, know-how ... [etc.] which, taken together, would allow the Parties to perform the Project according to the highest international standards," and that the parties' objective is "to cooperate in preparing a proposal for submission" to the Chinese "to obtain the award of a contract" and "take all other actions necessary to performance thereunder, including entering into ... Performance Agreement(s) for the performance of the Project and any other agreements necessary to the successful performance of the Project."

The following month the parties signed a supplement to the memorandum of understanding in which they "agreed that Atkinson shall be paid a fee by Rotec for the use of its name by Rotec with respect to the Project." The fee was to be between $2 million and $3 million, the exact amount being left to negotiation between the parties. Rotec also agreed to pay Atkinson another $1 million for "its involvement in the Project. Such involvement shall include providing advice and technical support services under subcontract to Rotec in connection with Rotec's performance under the Contract."

Rotec submitted its bid, and in the fall of 1996 won a $30 million contract. Eight months later, Rotec and Atkinson signed another supplement to their memorandum of understanding. This supplement modified the preceding one by specifying that Atkinson would receive $1 million (rather than $2 to $3 million) for having permitted its name to be used in winning the initial $30 million contract with the Chinese and that if Rotec succeeded in enlarging the contract to cover an additional $15 million in equipment sales, Atkinson would receive a 5 percent fee on those sales. This supplement further states that "Atkinson is keen and willing to help ROTEC increase the size of the order of equipment and to participate in the site operations (erection, and commissioning etc.)."

A few days after the execution of the second supplement, Rotec sent Atkinson a check for $129,000 in partial payment of the $1 million fee for the use of Atkinson's name. Three weeks later, Atkinson declared bankruptcy and walked away from the parties' contract, which by this time consisted of the memorandum of understanding plus the two supplements.

Atkinson (which for the sake of simplicity we'll pretend is the plaintiff, rather than the insurance companies that purchased its contract rights) argues that the "Project" to which its tripartite contract with Rotec refers was just the preparation of the bid for which it was to receive $1 million plus 5 percent of any additional orders by the Chinese. And, the argument continues, that divisible contract segment was fully performed by Atkinson when the bid was accepted, thus entitling Atkinson to $1 million plus the 5 percent fee for subsequent orders — and there were subsequent orders, as a result of which Atkinson claims to be out not just the $1 million fee for its name (minus the $129,000 that it received) but almost $1.3 million more. Rotec ripostes that there was a single, indivisible contract that required Atkinson to cooperate with Rotec not only in the preparation of the bid but also in providing services relating to the construction of the dam in the event that the bid was accepted, as it was. Atkinson broke the contract when upon declaring bankruptcy it withdrew from the dam project, and this breach excused Rotec from further performance on its side — that is, from having to complete payment of the $1 million "name" fee and to pay in addition the 5 percent fee on the additional orders by the Chinese.

Atkinson would nevertheless be entitled to claim compensation in a suit for quantum meruit for the value of the services that it had rendered to Rotec before the breach, minus any damages that Rotec suffered from the breach. Fieldcrest Builders, Inc. v. Antonucci, 311 Ill.App.3d 597, 243 Ill.Dec. 740, 724 N.E.2d 49, 60 (1999); Evans & Associates, Inc. v. Dyer, 246 Ill.App.3d 231, 185 Ill.Dec. 900, 615 N.E.2d 770, 778 (1993); Micro Data Base Systems, Inc. v. Dharma Systems, Inc., 148 F.3d 649, 656 (7th Cir.1998); Kutzin v. Pirnie, 124 N.J. 500, 591 A.2d 932, 937-41 (1991); Restatement, supra, § 374(1) and comment a. So whether a great deal turns on a finding of divisibility is doubtful; that is so in general, and would be in this case as well were it not for Atkinson's rejection of the contract in bankruptcy. If the contract was divisible, Atkinson was entitled to the contract price for the divisible portion of its performance that it completed. If not, it was entitled to the value of its performance and a court would look to the contract price as a guide to that value, Mor-Wood Contractors, Inc. v. Ottinger, 205 Ill.App.3d 132, 150 Ill.Dec. 444, 562 N.E.2d 1247, 1255 (1990); Newfield House, Inc. v. Massachusetts Dept. of Public Welfare, 651 F.2d 32, 39 (1st Cir.1981); Constantino v. American S/T Achilles, 580 F.2d 121, 122-23 (4th Cir.1978); Restatement, supra, § 374 comment b; E. Allen Farnsworth, Contracts § 8.14, p. 560 (4th ed.2004), especially in a case such as this in which there is no readily ascertainable market price to which it could look instead. Bausch & Lomb Inc. v. Bressler, 977 F.2d 720, 730 (2d Cir.1992).

There is greater definiteness when the contract price provides not merely a guide, but the definitive specification of the performing party's entitlement; that presumably is the reason for the doctrine of divisibility. But what is really involved is the exchange of one uncertainty, that of the value of performance, for another, that of deciding divisibility — of deciding, that is, whether "both parties have divided up their performance into units or installments in such a way that each past performance is the rough compensation for a corresponding past performance by the other party. The test is whether, had the parties thought of it, they would be willing to exchange the part performance irrespective of what transpired subsequently or whether the divisions made are merely for the purpose of requiring periodic payments as the work progresses." Trapkus v. Edstrom's Inc., 140 Ill.App.3d 720,...