Home Ins. Co. v. Chicago and Northwestern Transp. Co.

• Citation: 56 F.3d 763
• Decision Date: 23 May 1995
• Docket Number: No. 94-3385,94-3385
• Parties: The HOME INSURANCE COMPANY, as Subrogee of the Northeast Illinois Regional Railroad Corporation, d/b/a Metropolitan Rail-Metra, Plaintiff-Appellant, v. The CHICAGO AND NORTHWESTERN TRANSPORTATION COMPANY, Defendant-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

Page 763

56 F.3d 763

The HOME INSURANCE COMPANY, as Subrogee of the Northeast Illinois Regional Railroad Corporation, d/b/a Metropolitan Rail-Metra, Plaintiff-Appellant, v. The CHICAGO AND NORTHWESTERN TRANSPORTATION COMPANY Defendant-Appellee.

No. 94-3385.

United States Court of Appeals, Seventh Circuit.

Argued Jan. 18, 1995.

Decided May 23, 1995.

Gary Kostow, Henry R. Daar, Steven B. Fisher (argued), Kostow & Daar, Chicago, IL, for plaintiff-appellant.

George T. Brugess (argued), Richard A. Haydu, Chicago Northwestern Ry. Co. Law Dept., Chicago, IL, for defendant-appellee.

Before COFFEY and EASTERBROOK, Circuit Judges, and McDADE, District Judge. ^*

COFFEY, Circuit Judge.

In 1990 four freight locomotive engines owned and operated by the Chicago and North Western Transportation Company (CNW) collided with and damaged two commuter passenger cars that CNW had leased from the Northeast Illinois Regional Commuter Railroad Corporation, doing business as Metropolitan Rail-Metra (Metra). Metra's insurer, Home Insurance Company (Home), brought this diversity action as subrogee of Metra against CNW, seeking to recover the replacement value of the destroyed commuter cars. The district court granted summary judgment in favor of CNW, holding that Metra and CNW's lease agreement limited CNW's liability to the casualty value of the destroyed cars. Home appeals, and we affirm.

I. Background

CNW is engaged in the business of providing commuter and freight transportation services by rail in the Chicago metropolitan and suburban areas. In June 1977 CNW and Metra entered into an Equipment Purchase Agreement whereby CNW sold its commuter railroad equipment to Metra at the depreciated book value (casualty value). In an "Equipment Lease" dated six months later, CNW agreed to lease the same equipment back from Metra, and to retain and use the leased equipment "for the purposes of [CNW's] usual business as a Transportation Agency providing Public Transportation Services by rail...." The Equipment Lease also acknowledged that the parties had entered into "a Purchase of Service Agreement dated December 23, 1976, and effective as of July 1, 1975, ¹ covering [CNW's] rail commuter service in the Chicago metropolitan region...."

Under Article X of the Equipment Lease entitled "Railroad Equipment Replacement Responsibility," the parties set forth the extent of CNW's responsibility in the event that any of the leased commuter rail equipment was destroyed during the term of the lease. Section 10.01 of the Lease provides:

If any unit is destroyed, in whole or in part, from any cause whatever prior to the expiration of this Equipment Lease as to such Unit, [CNW] shall, at its option, either (a) repair or rebuild such Unit ..., or (b) pay to [Metra] an amount equal to the depreciated book value (herein called the "Casualty Value") which such would have had on [CNW's] books immediately prior to the destruction of such Unit ..., or (c) replace such Unit....

On January 27, 1990, a CNW freight crew was operating a freight train comprised of four locomotive engines and a number of freight cars at a depot near Crystal Lake, Illinois when the crew lost control of the four locomotive engines (which were coupled together). The freight locomotives traveled without a crew toward McHenry, Illinois until they crashed into two unoccupied commuter railroad cars Metra had leased to CNW. CNW admits that it was negligent in handling the freight locomotives and that its negligence was the proximate cause of the damage to Metra's commuter cars. The cost of replacing the destroyed passenger cars was approximately $1.5 million.

Thereafter, Home, Metra's insurer, paid Metra $1 million for the destroyed cars and brought a subrogation action against CNW in an attempt to recoup its loss. CNW filed an affirmative defense based on Section 10.01 of the Equipment Lease and attempted to credit Metra only the casualty value of the passenger cars, which was $61,000. Home countered that Section 10.01 was inapplicable because its application was limited to accidents caused by CNW's commuter operations, and contended that the section did not set forth the sole remedy available to Metra. The district court granted summary judgment in favor of CNW, holding that Section 10.01 of the Equipment Lease gave CNW the option of paying only the casualty value of the destroyed leased property. The court also noted that "[i]t is difficult to conceive of how the parties to the Equipment Lease could have agreed to Section 10.01 contemplating that it not act as a limitation on CNW's liability for destruction in whole or in part of leased Units."

II. Analysis

We review a grant of summary judgment de novo, Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986), viewing the record and the inferences drawn from it in the light most favorable to the non-moving party. United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S.Ct. 993, 994, 8 L.Ed.2d 176 (1962). We will affirm if there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 2552-53, 91 L.Ed.2d 265 (1986). We apply the forum state's choice of law rules to determine what state's substantive law applies in this diversity action. Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941); S.A. Healy Co. v. Milwaukee Metropolitan Sewerage District, 50 F.3d 476, 478 (7th Cir.1995). CNW and Metra's Equipment Lease provides that the contract shall be construed in accordance with Illinois law. Illinois enforces contractual choice-of-law agreements such as the one contained in the Equipment Lease. See Maher and Associates, Inc. v. Quality Cabinets, 267 Ill.App.3d 69, 203 Ill.Dec. 850, 856, 640 N.E.2d 1000, 1006 (1994). Thus, Illinois law governs this action.

The issue in this case is whether Section 10.01 of the Equipment Lease limits CNW's liability to the casualty value of the destroyed commuter cars. Home argues that Section 10.01 is inapplicable because the Lease concerns "the conduct between Metra and CNW when CNW is providing commuter transportation services." Because the accident was caused by CNW's negligent freight operations, Home's argument continues, it is outside the scope of the parties' agreement. CNW counters that the parties intended to limit CNW's liability to the casualty value.

Whether Section 10.01 applies to limit CNW's liability is a matter of contract interpretation. In construing Section 10.01 and determining the contractual intent, both parties relied mainly on CNW and Metra's two other agreements, the Equipment Purchase Agreement and the Purchase of Service Agreement, and both treated them as if they formed one single contract with the Equipment Lease. Particularly, CNW argues that the Equipment Lease and the other two documents must be read together because they refer to one another and "are dependent upon each other for performance of the mutual obligations contained in the contracts."

As a preliminary matter, we are convinced that the three agreements do not comprise one single contract, and therefore, need not be construed together. Under Illinois law, "where different instruments are executed at the same time between the same parties for the same purpose and in the course of the same transaction, all instruments must be read and construed together" as constituting but one single contract. McKown v. Davis, 118 Ill.App.3d 315, 73 Ill.Dec. 837, 839, 454 N.E.2d 1086, 1088 (1983); see also Bank of Chicago v. Park National Bank, 266 Ill.App.3d 890, 203 Ill.Dec. 915, 922, 640 N.E.2d 1288, 1295 (1994); Jones v. H.S. Weavers Underwriting Agency, 240 Ill.App.3d 574, 181 Ill.Dec. 343, 344, 608 N.E.2d 416, 417 (1992). In the factual situation before us, the three agreements were not executed contemporaneously or entered into in the course of the same transaction: the Equipment Purchase Agreement was dated June 1, 1977, the Equipment Lease was entered into on December 13, 1977, and assuming the accuracy of the dates contained in the Equipment Lease, the Purchase of Service Agreement was dated one year earlier on December 23, 1976 and was effective even earlier than the written contract date, on July 1, 1975. Compare Berkeley Properties, Inc. v. Balcor Pension Investors, II, 227 Ill.App.3d 992, 169 Ill.Dec. 576, 579, 592 N.E.2d 63, 66 (1992) ("When instruments are entered into simultaneously, they must be construed together"); First National Bank of Geneva v. Lively, 211 Ill.App.3d 1, 155 Ill.Dec. 636, 639, 569 N.E.2d 1247, 1250 (1991) (where a settlement agreement was executed contemporaneously with a release and a "mutual release" by the same parties and the agreement referred to the two releases that would be executed as part of the settlement, the three writings formed a single contract); Magnuson v. Schaider, 183 Ill.App.3d 344, 131 Ill.Dec. 753, 762, 538 N.E.2d 1309, 1318 (1989) (in a sale of a tavern, where the parties executed simultaneously four different documents comprising of a stock purchase agreement, a purchase and sale agreement, a promissory note, and a lease of the tavern premises, the documents must be read together as essentially one contract). Moreover, the three documents cover three distinct legal relationships between Metra and CNW with distinct purposes. Although the Equipment Lease does not contain a full-integration clause and does make reference to the existence of the other two agreements, nowhere does it state or even suggest that the parties' obligations depend upon those two documents. Nor does it give any indication that it is meant to be construed with the other two documents as one single contract. Thus, the Equipment Lease, by itself, must be construed as a fully-integrated contract.

We move on, then, to interpret Section 10.01 of the Equipment Lease. In so doing, we must also decide whether...