Justia U.S. 7th Circuit Court of Appeals Opinion Summaries

After the corporate office of Steak N Shake restaurants tried to require one of its franchisees to adopt a new policy for menu pricing and promotions, the franchisee sued Steak N Shake in a declaratory judgment action and later filed a motion for a preliminary injunction in order to stop the implementation of the new policy. The franchise, in operation since 1939, is the oldest in the country and previously had the ability to set its own prices. The district court found that in the absence of an injunction, the franchisee would have its franchises terminated and would suffer irreparable harm and granted a preliminary injunction. The Seventh Circuit affirmed. There was sufficient evidence to find, as a threshold matter, that the franchise would suffer irreparable harm if it was forced to implement Steak N Shake’s pricing policy. View "Stuller, Inc. v. Steak N Shake Enter., Inc." on Justia Law

EAR, a seller of manufacturing equipment, defrauded creditors by financing non-existent or grossly overvalued equipment and pledging equipment multiple times to different creditors. After the fraud was discovered, EAR filed for bankruptcy. As Chief Restructuring Officer, Brandt abandoned and auctioned some assets. Five equipment leases granted a secured interest in EAR’s equipment; by amendment, EAR agreed to pay down the leases ($4.6 million) and give Republic a blanket security interest in all its assets. Republic would forebear on its claims against EAR. The amendment had a typographical error, giving Republic a security interest in Republic’s own assets. Republic filed UCC financing statements claiming a blanket lien on EAR’s assets. After the auction, Republic claimed the largest share of the proceeds. The matter is being separately litigated. First Premier, EAR’s largest creditor, is concerned that Republic, is working with Brandt to enlarge Republic’s secured interests. After the auction, EAR filed an action against its auditors for accounting malpractice, then sought to avoid the $4.6 million transfer to Republic. The bankruptcy court approved a settlement to end the EAR-Republic adversary action, continue the other suit, divvy proceeds from those suits, and retroactively modify the Republic lien to correct the typo. First Premier objected. The district court affirmed. The Seventh Circuit affirmed. First Premier was not prejudiced by the settlement. View "First Premier Capital, LLC v. Republic Bank of Chicago" on Justia Law

Joseph purchased the BP franchise in 2006 for $400,000. In 2009, Sasafrasnet purchased BP’s interests in the land and a Dealer Lease and Supply Agreement, becoming lessor and franchisor. The DLSA authorizes Sasafrasnet to terminate if Joseph fails to make payment according to EFT policy, causing a draft to be dishonored as NSF more than once in 12 months; Sasafrasnet is not obligated to extend credit, but did deliver fuel before collecting payment. There were several instances of NSF EFTs; Sasafrasnet began to require payment in advance. Later, Sasafrasnet allowed Joseph to resume paying by EFT within three days of delivery, but established a $2,500 penalty for any NSF and stated that pre-pay would resume if he incurred two more NSFs. There were additional NSFs, so that Joseph had incurred nine for amounts over $20,000 and three for amounts over $45,000. Sasafrasnet gave Joseph 90 days’ notice that it was terminating his franchise, listing the NSFs and failing scores on a mystery shopper inspection as bases for termination. Joseph sued under the Petroleum Marketing Practices Act, 15 U.S.C. 2801. The district court denied a preliminary injunction to prevent the termination. The Seventh Circuit reversed, holding that the statute requires additional findings.View "Joseph v. Sasafrasnet, LLC" on Justia Law

The Directors & Officers Liability policy contains an insured vs. insured exclusion that removes the duty to defend or indemnify for “Loss on account of any Claim ... by or on behalf of any Insured or Company in any capacity.” The allocation clause provides: “If ... Insureds incur an amount consisting of both Loss covered by this Policy and loss not covered … because the Claim includes both covered and uncovered matters, such amount shall be allocated between covered Loss and uncovered loss based upon the relative legal exposures of the parties to covered and uncovered matters.” Five plaintiffs sued SCBI and directors and officers, asserting fraud, civil conspiracy, and violation of the Illinois Consumer Fraud and Deceptive Business Practices Act. The insurer declined to advance defense costs or otherwise indemnify SCBI, citing the exclusion. Two plaintiffs are former directors of SCBI who are insureds; a third is also included in the definition. The district court dismissed, finding no duty to defend or to indemnify. The Seventh Circuit held that the insurer has no duty to defend or indemnify the claims brought by the three insured plaintiffs, but must defend and indemnify with respect to the two non-insured plaintiffs. View "Miller v. St. Paul Mercury Ins. Co." on Justia Law

In 2007, Nelson, a minority shareholder and major creditor of RTI sued CHSWC alleging conspiracy with RTI’s majority shareholders to use RTI’s Chapter 11 bankruptcy to enrich themselves, tortious interference with RTI’s loan contract with Nelson, and abusing the bankruptcy process. The Bankruptcy Court found that RTI’s Chapter 11 petition was not filed in bad faith. The district court dismissed Nelson’s federal suit and remanded state law claims to state court. The Seventh Circuit concluded that because RTI had no assets and had terminated business, the adversary proceeding was moot; reversed the remand of state-law claims; and held that dismissal of the abuse-of-process claim did not require dismissal of state-law claims. On remand the district court dismissed, reasoning that the state law claims were predicated on allegation that RTI’s bankruptcy filing was improper, and finding “undisputed facts” and that partial recharacterization of Nelson’s debt as equity was proper. The Seventh Circuit affirmed, reasoning that nothing of legal significance happened after the last appeal. View "Nelson v. Welch" on Justia Law

When Sears, Roebuck & Co. merged with Kmart in 2005, the company formed as the parent (Sears) inherited directors from both. Crowley also serves on the boards of AutoNation and AutoZone; Reese is also on the board of Jones Apparel. In a derivative action, Sears shareholders claimed that the consolidated business competes with those other firms and that the Clayton Act, 15 U.S.C. 19 (section 8), forbids the interlocking directorships. Delaware usually allows investors to sue derivatively only if, after a demand for action, the board cannot make a disinterested decision. The investors filed suit without first making a demand. The district court refused to dismiss, accepting an assertion that a demand would have been futile and agreeing that section 8 can be enforced through derivative litigation, even though cooperation with a competitor should benefit the investors. The Seventh Circuit reversed, stating that the suit "serves no goal other than to move money from the corporate treasury to the attorneys' coffers," while depriving Sears of directors, freely elected and of benefit to the company. Usually serving on multiple boards demonstrates breadth of experience, which promotes competent and profitable management. The Antitrust Division and the FTC do not see a problem.

Plaintiff owned a rental center and retained defendants, who provide investment banking services to the equipment rental industry, to help him obtain an investor or buyer. Defendants’ advice culminated in sale of a majority of plaintiff’s stock for about $30 million. Defendants billed plaintiff $758,675. Plaintiff paid without complaint but later sued for return of the entire fee on the ground that defendants lacked a brokerage license required by Wis. Stats. 452.01(2)(a), 452.03. The district court dismissed, finding the parties equally at fault. The Seventh Circuit affirmed, declining to definitively answer whether a license was required under the circumstances that a negotiated sale of assets fell through in favor of a sale of stock. Plaintiff is not entitled to relief even if there was a violation. Referring to the classic Highwayman’s Case, the court rejected claims of in pari delicto and unclean hands; plaintiff was not equally at fault. To bar relief, however, is not punishing a victim. Plaintiff did not incur damages and is not entitled to restitution. Plaintiff sought compensation for spotting a violation and incurring expenses to punish the violator, a bounty-hunter or private attorney general theory, not recognized under Wisconsin law. The voluntary-payment doctrine is inapplicable.

Nation left his position as CEO of Spring Air in 2007 with a severance package of $1.2 million to be paid over 15 months provided he did not work for competitors through 2008. Spring Air paid Nation more than $836,000, but in August 2008 ceased making payments due to liquidity problems. Spring Air ultimately filed for bankruptcy. Nation sued defendant, Spring Air's majority shareholder and primary creditor, asserting tortious interference with contract: that defendant used its majority position on Spring Air's board of directors to induce the company to breach his severance agreement. The district court dismissed, finding that defendant was conditionally privileged based on its status as Spring Air's majority shareholder and that Nation had not presented sufficient evidence to overcome the privilege. The Seventh Circuit affirmed. Illinois law recognizes that a corporation's directors, officers, and shareholders are conditionally privileged to interfere with the corporation's contracts. The privilege is an aspect of the business-judgment rule. Nation failed to overcome the privilege with evidence that defendant induced breach for the specific purpose of injuring him or to further its own goals and that it acted against the best interests of the corporation.

BMD was a subcontractor for Industrial, a subcontractor for Walbridge, the general contractor for construction of a factory near Indianapolis. Fidelity was surety for Industrial’s obligations to BMD. The project proceeded for about a year before the manufacturer declared bankruptcy. Walbridge failed to pay Industrial, Industrial failed to pay BMD, and Fidelity refused to pay BMD, which sued Fidelity on the bond. Their subcontract conditioned Industrial's duty to pay on its own receipt of payment. The district court held that the pay-if-paid clause required Industrial to pay BMD only if Industrial received payment from Walbridge, rejecting an argument that it controlled only the timing of Industrial's obligation. The court held that pay-if-paid clauses are valid under public policy and that Fidelity could assert all defenses of its principal. The Sixth Circuit affirmed. The subcontract expressly provides that Industrial's receipt of payment is a condition precedent to its obligation; it could have stated that BMD assumed the risk of the owner’s insolvency, but additional language was not necessary. Pay-if-paid clauses are valid under Indiana law and, under surety law, Fidelity may assert all defenses of its principal. Industrial was never obligated to pay BMD; BMD may not recover on the bond.

Trostel was founded in 1858. By 2007 the founder's relations still owned about 11 percent of its stock. Smith, which owned the rest, decided to acquire remaining shares by freezeout merger. Trostel became Smith's wholly owned subsidiary. Notz, one of the Trostel great-grandchildren, who owned 5.5 percent of the stock, rejected proffered compensation of $11,900 per share (about $7.7 million). The rest of the outside investors accepted. In an appraisal action (Wis. Stat. 180.1330(1)), the district court denied Nost's motion to dismiss for lack of subject matter jurisdiction and concluded that fair value of the stock on the merger date was $11,900 per share. The Seventh Circuit affirmed. Wisconsin's corporate is legislative, not contractual and does not block corporations from availing themselves of diversity jurisdiction.