Professional Service Network v. American Alliance, 00-1018

• Decision Date: 29 January 2001
• Docket Number: No. 00-1018,00-1018
• Citation: 238 F.3d 897
• Parties: (7th Cir. 2001) Professional Service Network, Inc., Plaintiff-Appellee, v. American Alliance Holding Company, Defendant-Appellant
• Court: U.S. Court of Appeals — Seventh Circuit

Page 897

238 F.3d 897 (7th Cir. 2001)

Professional Service Network, Inc., Plaintiff-Appellee, v. American Alliance Holding Company, Defendant-Appellant.

No. 00-1018

In the United States Court of Appeals For the Seventh Circuit

Argued September 8, 2000

Decided January 29, 2001

Appeal from the United States District Court for the Western District of Wisconsin. No. 99-C-381-S--John C. Shabaz, Chief Judge. [Copyrighted Material Omitted] Before Flaum, Chief Judge, and Posner and Rovner, Circuit Judges.

Posner, Circuit Judge.

This diversity suit between two insurance companies comes to us from the grant of summary judgment for the plaintiff, Professional Service Network (PSN), by Chief Judge Shabaz in the district court. The suit is governed, so far as substantive matters are concerned, by Wisconsin law. The appeal, by the defendant, American Alliance Holding Company, presents issues concerning Wisconsin's doctrine of contractual duress and the federal principles governing abstention in favor of a parallel litigation pending in another court; Chief Judge Shabaz had denied Alliance's motion to stay the present suit in favor of a parallel suit filed by Alliance in North Carolina. We begin by trying to unravel the tangle, both substantive and procedural, that is the history of the parties' dispute.

The story begins in February of 1998 when the parties executed an agreement by which PSN bought from Alliance, for $11.2 million subject to post- closing adjustment, all the stock in another insurance company, Century American Insurance Company. The agreement made PSN responsible for calculating the post-closing adjustment. In September of 1998 it notified Alliance that because of a decline in Century's book value, Alliance owed it a refund of $2.7 million of the purchase price. While negotiating over the form in which Alliance would make the refund, the parties got into a squabble over another contract, a risk-management agreement that was Century's principal asset. This squabble eventually went to arbitration, and the arbitrator decided that both parties were at fault and ordered no relief. Another dispute involving Century also brewed up between PSN and Alliance and resulted in a lawsuit between the parties in a North Carolina state court.

Negotiations over the refund to PSN collapsed and Alliance refused to pay. So in January of 1999 PSN sued Alliance for $2.7 million in the Western District of Wisconsin. The case was assigned to Chief Judge Shabaz.

Another provision of the stock purchase agreement by which PSN had acquired Century from Alliance required PSN jointly with Alliance to file with the Internal Revenue Service, by February 16, 1999, an election under section 338(h)(10) of the Internal Revenue Code to treat the stock sale as a sale of assets for tax purposes. The election would save Alliance $5 million in taxes. But it would be effective only if the IRS received notice of the election by the sixteenth; and having been sued by PSN, Alliance worried that PSN might not cooperate in making the deadline. Alliance decided to apply some pressure. Early in February its lawyer phoned PSN's lawyer and told her that PSN would be in breach of the stock purchase agreement if it did not cooperate in the filing of the tax notice. She replied that Alliance's failure to pay the post-closing adjustment excused PSN from performing its remaining obligations under the stock purchase agreement, including the obligation to cooperate in filing the tax notice.

On the tenth, Alliance's lawyer delivered to his opposite number a letter warning her that unless PSN joined in the filing of the tax notice, Alliance would sue for the tax benefit that would be lost. Five days later Alliance filed its answer to PSN's complaint in the Western District of Wisconsin together with a counterclaim. Alliance claimed in the counterclaim that its agreement to pay the post-closing adjustment had been orally modified. The suit was settled the next day, just in time to file the tax notice with the IRS. The parties agreed in the settlement to refer their dispute over the post- closing adjustment to an independent certified public accountant, and PSN agreed to file the tax notice jointly with Alliance; and this was done, so Alliance got its tax benefit. The suit was duly dismissed a few days later by agreement of the parties, and in April the CPA was appointed.

The following month, shortly before the CPA was due to issue his determination of the amount of post-closing adjustment owed PSN by Alliance, Alliance filed a suit against PSN in a North Carolina state court, seeking, among other remedies, rescission of the settlement agreement on the ground that it had been procured by duress. Alliance has tried to get that lawsuit consolidated with the other North Carolina suit.

PSN responded to Alliance's new suit the next month by filing its own new suit in the Western District of Wisconsin against Alliance, seeking enforcement of the settlement agreement; and the case was again assigned to Chief Judge Shabaz. Alliance counterclaimed, seeking relief similar to what it had sought in its North Carolina suit of the previous month. On PSN's motion for summary judgment in the new Western District of Wisconsin case (which is the case before us), the judge rejected the defense of duress, declared the settlement agreement valid, and dismissed Alliance's counterclaims. He had already denied Alliance's motion to stay the case in favor of the North Carolina action. Alliance appeals both the judgment and the denial of the stay.

Alliance argues that it was financially distressed and so had no choice but to settle PSN's first suit the Western District of Wisconsin in order to receive the $5 million tax benefit immediately. Therefore, it argues, PSN obtained the settlement by duress, and so the settlement should be voided. Duress is a basis under the common law of contracts in Wisconsin as elsewhere for rescinding a contract, and a settlement is for this purpose a contract. Wurtz v. Fleischman, 293 N.W.2d 155, 160 (Wis. 1980); Pope v. Ziegler, 377 N.W.2d 201, 203 (Wis. App. 1985); JPM, Inc. v. John Deere Industrial Equipment Co., 94 F.3d 270, 272 (7th Cir. 1996) (Wisconsin law); Selmer Co. v. Blakeslee-Midwest Co., 704 F.2d 924 (7th Cir. 1983) (same); see generally E. Allan Farnsworth, Contracts sec.sec. 416-419 (3d ed. 1999). Duress, understood most concretely, is the situation in which one person obtains a temporary monopoly that it tries to use to obtain a benefit to which it is not entitled. In the famous case of Alaska Packers' Ass'n v. Domenico, 117 Fed. 99 (9th Cir. 1902), seamen on board a ship that was fishing for salmon in Alaskan waters during the short fishing season struck for higher wages. The captain agreed to modify the workers' employment contract to pay them the higher wages that they were demanding, but when the ship returned to port the employers refused to honor the modification and the court refused to enforce it. The captain had acted under duress in agreeing to the modification because, had he not done so, the fishing season would have been ruined, since the strikers had an effective albeit temporary monopoly of the labor supply necessary to continue with the fishing; and it would not have been feasible to sue them as a means of recouping the loss. See also Contempo Design, Inc. v. Chicago & Northeast Illinois District Council of Carpenters, 226 F.3d 535, 550 n. 9 (7th Cir. 2000); Rissman v. Rissman, 213 F.3d 381, 387 (7th Cir. 2000); Oxxford Clothes XX, Inc. v. Expeditors Int'l of Washington, Inc. 127 F.3d 574, 579 (7th Cir. 1997); Austin Instrument, Inc. v. Loral Corp., 272 N.E. 2d 533 (N.Y. 1971).

So we must ask whether PSN had a monopoly-like position vis-a-vis Alliance when it demanded that Alliance settle the case as a condition precedent to PSN's jointly filing the tax notice that Alliance was (we may assume) desperate for. The answer is no. Part of the reason is that unlike the captain of the fishing vessel, Alliance had a legal remedy right at hand. Even if a liquidity crisis would have made its normal remedy, namely fighting the case to judgment, inadequate to stave off disaster, it had only to ask Chief Judge Shabaz for a temporary restraining order or, if time...