Xantech Corp. v. Ramco Industries, Inc.

• Decision Date: 04 November 1998
• Docket Number: No. 97-4252,97-4252
• Citation: 159 F.3d 1089
• Parties: XANTECH CORPORATION, Plaintiff-Appellant, v. RAMCO INDUSTRIES, INC. and J. Edward Ramsey, Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1089

159 F.3d 1089

XANTECH CORPORATION, Plaintiff-Appellant, v. RAMCO INDUSTRIES, INC. and J. Edward Ramsey, Defendants-Appellees.

No. 97-4252.

United States Court of Appeals, Seventh Circuit.

Argued June 4, 1998.

Decided Nov. 4, 1998.

Margot F. Reagan, Sean E. Kenyon (argued), Konopa & Murphy, South Bend, IN, for Plaintiff-Appellant.

James R. Byron (argued), Thorne, Grodnik & Ransel, Elkhart, IN, for Defendant-Appellee Ramco Industries, Inc. Alan L. Weldy (argued), Yoder, Ainlay, Ulmer & Buckingham, Goshen, IN, Cassidy C. Fritz, Elkhart, IN, for Defendant-Appellee J. Edward Ramsey.

Before COFFEY, FLAUM, and ROVNER, Circuit Judges.

ILANA DIAMOND ROVNER, Circuit Judge.

After an injunction blocking Xantech Corporation's access to an irrevocable standby letter of credit was dissolved, Xantech filed suit against Ramco Industries, Inc., which had obtained the injunction, and Ramco's president, J. Edward Ramsey, asserting claims for wrongful injunction, malicious prosecution, interference with a contractual relationship, and punitive damages. The district court granted summary judgment in favor of the defendants, reasoning principally that Xantech's claims are barred by the principle of res judicata. Xantech appeals, and we reverse in part.

I.

Early in 1990, Xantech agreed to sell the assets of its lighting division to Ramco's predecessor in interest, Xantech, Inc. (to which we shall refer as Ramco, for convenience). A standby letter of credit issued in favor of Xantech secured a portion of the purchase price. The assets of the lighting division in turn served as collateral securing the letter of credit. The predecessor in interest to the Society National Bank issued the letter of credit. An amended letter of credit was issued in September of 1992.

Late in 1993, Ramsey spoke with Xantech's president, Herb Seymour, and offered to pre-pay the outstanding balance on the purchase provided that Xantech would agree to a reduction in the amount owed. After Seymour agreed to a $45,000 discount, the parties on December 14 signed a written agreement that would bring the transaction to a close. Pursuant to that agreement, Xantech released the security interest it held in some of Ramco's assets.

Shortly thereafter, the deal began to fall apart. Xantech learned that Ramco had sold all of its assets to R.I. Corporation before paying Xantech what it was owed. By late December, Ramco had tendered Xantech a check for the reduced purchase price that the parties had agreed to, but Xantech took the position that Ramco had breached their security agreement by selling its assets and that Xantech consequently was entitled to immediate payment in full of the original, non-discounted purchase price. Eventually, Xantech cashed Ramco's check under a reservation of rights. When Ramco took the position that Xantech had now been paid in full, Seymour attempted to draw an additional $45,000 (the amount by which the purchase price had been reduced) on the letter of credit. Society rebuffed his efforts, however.

On March 15, 1994, Ramco filed suit in the Superior Court of Elkhart County, Indiana, seeking a preliminary injunction barring Society from making payment on the letter of credit. Ramco argued that Xantech's efforts to draw on the letter were fraudulent, in that Xantech already had been paid what it was owed under the revised agreement that the parties had reached in December. The court entered a temporary restraining order that same day, and on March 24 the court entered a preliminary injunction against Society.

Xantech, which Ramco had not named as a party, did not learn of the suit until April, when Society disclosed that the injunction prevented it from honoring Xantech's request to draw on the letter of credit. In May, Xantech intervened in the suit and asked the superior court to vacate the injunction. The court refused that request and ordered that no funds be disbursed to Xantech pending further hearing.

Xantech appealed the adverse ruling on its motion to vacate, and the Indiana appellate court ordered the injunction dissolved. Xantech Corp. v. Ramco Indus., Inc., 643 N.E.2d 918 (Ind.App.1994). The court noted that the fraud Ramco had alleged in support of its request for the injunction related to the 1993 modification of its contract with Xantech, not the issuance of the letter of credit in 1990. Only fraud in the credit transaction itself would support injunctive relief preventing Xantech from drawing on the letter of credit, the court reasoned. Id. at 921. Furthermore Ramco had not established that its remedy at law was inadequate. The harm Ramco faced if Xantech drew upon the letter of credit improperly was solely economic, and it could thus be redressed through an award of damages. Id. at 921-22. In accord with the Court of Appeals' mandate, the superior court dissolved the injunction and Society honored the letter of credit by disbursing more than $48,000 to Xantech.

After Xantech prevailed in its appeal, Ramco filed a cross-claim asserting claims for unjust enrichment, indemnification, and bad faith and/or fraud, and prayed for damages equal to the monies Xantech drew on the letter of credit, together with costs and attorney's fees. Xantech filed an answer seeking dismissal or judgment on the pleadings as well as costs and other appropriate relief pursuant to Indiana Code § 34-1-32-1, on the ground that the cross-claim was "frivolous, unreasonable, or groundless in its entirety." ¹ Xantech subsequently sought, and the Superior Court granted, summary judgment against Ramco on the cross-claim. Ramco subsequently filed a motion to correct errors asking the court to reconsider. Apparently, the court never ruled on that motion. Instead, in June 1996, five months after it filed the motion, Ramco asked the superior court to dismiss the case. The court granted that request.

Shortly thereafter, Xantech filed suit against Ramco and Ramsey in federal court on claims for wrongful injunction, malicious prosecution, interference with a contractual relationship, and punitive damages. Ramsey counterclaimed, alleging that Xantech had breached its December 1993 agreement to discount the purchase price of the lighting division in return for Ramco's immediate payment of the remaining balance. The defendants subsequently asked the district court to grant summary judgment in their favor on Xantech's claims. Among other things, they argued that res judicata barred Xantech from asserting these claims.

The district court agreed that Ramco was entitled to summary judgment. The evident goal of Xantech's complaint is to recover the costs and fees it incurred as a result of Ramco's action in state court, including the injunction that blocked Xantech's access to the letter of credit. Once Xantech had joined that suit as an intervenor, the district court reasoned, the company could have asserted a claim for these damages in that forum. R. 33, Memorandum & Order at 13.

The court acknowledged that Xantech's claim for wrongful injunction did not accrue until the injunction was held improper. Id. at 14. "Unfortunately for Xantech, however, this occurred in the state courts when the injunction was dissolved." Id. Consequently, Xantech could and should have moved to recover its fees and costs at that time by "suing on the bond" that Ramco had been required to post. Id. at 15. It failed to do so. Nor, the court noted parenthetically, had Xantech attempted to demonstrate that injunctive relief was not warranted on the facts of the case, or that Ramco had acted in bad faith in seeking the injunction--two requirements that the court believed Xantech would have to satisfy in order to recover for wrongful injunction and to obtain damages in excess of the bond amount. Id. at 15-16. Accordingly, the court found that any claim for costs arising from the injunction proceedings was barred by the doctrine of res judicata. Id. at 16. This included Xantech's claims for wrongful injunction, as well as the claim for punitive damages. Id.

The court found the claim for malicious prosecution, founded in part upon Ramco's state-court cross-claim against Xantech, likewise barred. Again, the court acknowledged that this type of claim does not accrue until the underlying action has terminated in the claimant's favor. For that reason, a malicious prosecution claim can be and often is asserted in a separate, subsequent lawsuit. Id. at 16-17. "However, the issue before this court is not whether the claim itself can be a separate action, but whether the claim is precluded under the doctrine of res judicata." Id. at 17. In the Elkhart suit, Xantech had sought relief under section 34-1-32-1 of the Indiana Code, which authorizes an award of costs, including attorney's fees, to the prevailing party when the court finds that another party pursued a claim or defense that was frivolous, unreasonable, or groundless or litigated the action in bad faith. The state court had declined to award costs to Xantech pursuant to this provision and made no finding that Ramco had pursued a frivolous claim or litigated in bad faith. Having sought and failed to obtain this relief in the state court, the district court reasoned, Xantech could not make a second attempt at relief on the same grounds through the vehicle of a malicious prosecution claim. Id. at 18.

Alternatively, the court found this claim defective on its merits. Among other elements, a claim for malicious prosecution requires proof that the defendant lacked probable cause to bring the allegedly malicious action. Id. at 18-19. No such proof was forthcoming here. The court noted that Xantech had agreed to accept $45,000 less for Ramco's purchase of the lighting division in exchange for immediate payment of the balance owed. Ramco made that payment, and Xantech had cashed the check. Those circumstances supplied probable cause for Ramco to challenge (via the cross-claim) Xantech's ultimately successful efforts to...