Rexing Quality Eggs v. Rembrandt Enters., Inc.

• Decision Date: 26 March 2020
• Docket Number: No. 19-2146,19-2146
• Citation: 953 F.3d 998
• Parties: REXING QUALITY EGGS, Plaintiff-Appellant, v. REMBRANDT ENTERPRISES, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

953 F.3d 998

REXING QUALITY EGGS, Plaintiff-Appellant,

v.REMBRANDT ENTERPRISES, INC., Defendant-Appellee.

No. 19-2146

United States Court of Appeals, Seventh Circuit.

Argued December 3, 2019

Decided March 26, 2020

James D. Johnson, Attorney, Jackson Kelly PLLC, Evansville, IN, for Plaintiff-Appellant.

Alain M. Baudry, Attorney, Matthew R. Veenstra, Attorney, Saul Ewing Arnstein & Lehr LLP, Minneapolis, MN, Dirck H. Stahl, Attorney, Ziemer, Stayman, Weitzel & Shoulders, LLP, Evansville, IN, fro Defendant-Appellee.

Before Wood, Chief Judge, and Hamilton and Scudder, Circuit Judges.

Wood, Chief Judge.

This case is the second to arise out of an ill-fated relationship between Rexing Quality Eggs and Rembrandt Enterprises, Inc. The first case addressed various claims arising under a contract that the two parties formed at the outset of their business dealings. Although this case arises out of the same transaction, this time Rexing, the plaintiff, has raised tort claims. The question on appeal is whether its effort to bring a new action is consistent with Indiana’s prohibition on claim splitting, under which a plaintiff is forbidden to bring a case presenting claims that arise out of the same transaction or events that underlie claims brought in another lawsuit. We hold that the claim-splitting ban applies here, and so we affirm the district court’s judgment.

I

Rexing and Rembrandt entered into a contract under which Rembrandt, a producer of eggs, promised to supply Rexing, a distributor, with 3,240,000 cage-free eggs every week for a year. Eight months after the agreement took effect, Rexing repudiated it, claiming that Rembrandt had breached its obligations by failing to provide eggs that met the quality standards specified in the agreement. Rexing refused to accept any more loads of eggs. In the aftermath, Rexing sued Rembrandt, seeking a declaration that it was excused from accepting any more eggs, as well as incidental and consequential damages for alleged breaches of warranty in the purchase agreement. Rexing Quality Eggs v. Rembrandt Enterprises, Inc. , 360 F. Supp. 3d 817 (S.D. Ind. 2018) ( Rexing I ). Rexing sought $67,261.50 in general damages, $60,204.84 in lost profits, and $997,650 in start-up costs.

Rembrandt counterclaimed, seeking damages for breach of contract. After discovery, both parties moved for summary judgment. The trial court determined that Rexing had unilaterally terminated the contract and that the breach was not excused. At the same time, it ruled that Rembrandt was not entitled to summary judgment on the question whether it was entitled to damages, and it allowed the case to move forward to trial on that issue.

The district court held a trial in November 2019; it resulted in a jury verdict in Rembrandt’s favor and an award of $1,522,302.61 in damages against Rexing. Rexing filed a timely notice of appeal, but on January 2, 2020, it voluntarily dismissed the appeal pursuant to Federal Rule of Appellate Procedure 42(b). It appears that some post-verdict wrangling over attorney’s fees and costs is still ongoing.

After its partial loss on summary judgment but before the trial in Rexing I , Rexing brought this action (Rexing II ) in state court, one month after the district court ordered summary judgment in the first case. This time, Rexing sued Rembrandt for the torts of conversion and deception. Rexing claimed that Rembrandt had refused to return reusable shipping materials, including plastic flats, dividers, and pallets, collectively called the "EggsCargoSystem." Rexing had provided the EggsCargoSystem to Rembrandt to use in loading eggs for Rexing to pick up. The original contract called for Rexing to provide Rembrandt with the materials, but it did not require Rembrandt to return the EggsCargoSystem at the termination of the agreement. Nonetheless, Rexing made three demands that Rembrandt return the EggsCargoSystem. Rembrandt returned some, but not all, of the materials in November 2018. In Rexing I , Rexing had sought the value of the EggsCargoSystem as part of the start-up costs that it alleged it incurred in reliance on the original agreement with Rembrandt. Now, in Rexing II , Rexing seeks damages for the unreturned materials, as well as for the loss of the use of the EggsCargoSystem during the time that Rembrandt allegedly unlawfully possessed it.

Taking advantage of the fact that the parties were of diverse citizenship (Rembrandt is an Iowa corporation with its principal place of business in that state, and Rexing is an Indiana partnership whose only two partners are both citizens of Indiana), and the amount in controversy easily exceeded $75,000, Rembrandt removed Rexing II to federal court and moved to dismiss the action. 28 U.S.C. §§ 1332(a)(1) & (c), 1441(b). It argued that the claims in Rexing II were barred by the claim-preclusion branch of res judicata in light of the district court’s grant of partial summary judgment in Rexing I , and it contended that Rexing had improperly split its claims between the two cases.

The district court granted Rembrandt’s motion to dismiss, ruling that, while the new case was not barred by claim preclusion, Rexing had impermissibly split its claims. Under Indiana’s doctrine prohibiting claim splitting, a plaintiff cannot bring a new lawsuit based upon the same transaction or occurrence that underlies claims brought in another lawsuit. Because Rexing I and Rexing II both centered around the same controversy, the district court determined that Rexing had impermissibly split its claim and dismissed the case. Rexing appeals.

II

Rexing offers three arguments why the rule against claim splitting should not apply to this case. First, it argues that the district court applied the wrong test under Indiana law for establishing claim splitting, and that it would have prevailed under the proper test. Second, it argues that claim splitting cannot prevent litigation of facts that were unknown at the time the original case was filed. Finally, it argues that the rule against claim splitting does not apply to continuing torts, and that conversion is a continuing tort under Indiana law. Each of these arguments fails, as discussed below.

A

Before addressing Rembrandt’s arguments, we need to say a word about the law that applies to them. Rexing’s position is a bit hard to follow, but it appears to argue that Indiana law applies because this is a substantive matter and that the district court deviated from Indiana’s rules; it then expends considerable time arguing that the district court erroneously relied on Telamon Corp. v. Charter Oak Fire Ins. Co. , 2016 WL 67297 (S.D. Ind. 2016), aff’d , 850 F.3d 866 (7th Cir. 2017), when it resolved this issue. Rembrandt responds first that there is no material difference between Indiana law and federal law, and that it wins either way.

In fact, the district court approached this issue in the appropriate way. It first recognized that the law on claim-splitting is part of the law of res judicata . See Palka v. City of Chicago , 662 F.3d 428, 437 (7th Cir. 2011) ; Alvear-Velez v. Mukasey , 540 F.3d 672, 678 (7th Cir. 2008). It then noted that when a federal court is considering the effect of an earlier ruling in a case within its diversity jurisdiction, as Rexing I was, for purposes of claim preclusion "federal common law governs the ... effect of a dismissal by a federal court sitting in diversity." Semtek Int’l Inc. v. Lockheed Martin Corp. , 531 U.S. 497, 508, 121 S.Ct. 1021, 149 L.Ed.2d 32 (2001). Nonetheless, the Supreme Court continued, the content of the federally prescribed rule should be taken from "the law that would be applied by state courts in the State in which the federal diversity court sits." Id. Like the district court, we see no reason why this approach should not apply with equal force to the problem of claim-splitting. We therefore hold that the content of the law governing the effect of Rexing I comes from Indiana law, which is incorporated as the applicable federal common law. Our references below to Indiana law should be understood in this light.

The rule against claim splitting prohibits a plaintiff from bringing a new case raising issues arising out of the same transaction or occurrence as an earlier case, when those issues could have been raised in the first litigation. Indiana law has long recognized this prohibition. See MicroVote Gen. Corp. v. Indiana Election Comm’n , 924 N.E.2d 184, 192 (Ind. Ct. App. 2010) ("[A] party is not allowed to split a cause of action, pursuing it in a piecemeal fashion and subjecting a defendant to needless multiple suits."); Quimby v. Becovic Mgmt. Grp., Inc. , 946 N.E.2d 30, 34 n.4 (Ind. Ct. App. 2011) ("[M]ultiple legal theories supporting relief on account of one transaction must be litigated at one go.") (quoting Wabash Valley Power Ass’n, Inc. v. Rural Electrification Admin. , 903 F.2d 445, 455 (7th Cir. 1990) ).

The district court here applied a two-part test drawn from Telamon . In that case, another judge from the same district summarized the governing law as follows: a court should find that a plaintiff split her claims when "(1) the second claim is based on the same transaction or occurrence as the first claim and there is (2) an identity of parties or their privies." 2016 WL 67297, at *2. (Although it was not clear from the district court’s citations whether it was looking to federal law or Indiana law, on appeal we explicitly recognized that the Semtek approach governs. See Telamon , 850 F.3d at 872–73.) The court in Rexing II determined that Rexing had merely repackaged its failed attempt to sue Rembrandt for breach of contract as a tort case, and that the rule against claim splitting barred the second action.

Though acknowledging that Indiana law prohibits claim splitting, Rexing argues that the district court applied the wrong test for establishing whether claim splitting had occurred. Rexing points to Indiana cases that have held that "the test for making [the...