John Heiman v. Bimbo Foods Bakeries Distribut ( 2018 )

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 17-3366
JOHN HEIMAN and JTE, INC.,
Plaintiffs-Appellants,
v.
BIMBO FOODS BAKERIES DISTRIBUTION CO., f/k/a BESTFOODS
BAKING DISTRIBUTION CO.,
Defendant-Appellee.
____________________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 17 C 4065—Manish S. Shah, Judge.
____________________
ARGUED APRIL 18, 2018 — DECIDED AUGUST 30, 2018
____________________
Before WOOD, Chief Judge, and FLAUM and EASTERBROOK,
Circuit Judges.
WOOD, Chief Judge. From 2000 to 2011, John Heiman, first
individually and later through his company, JTE, Inc., distrib-
uted products for Bimbo Foods Bakeries Distribution Com-
pany throughout suburban Chicago. Bimbo Foods (pro-
nounced “Beembo”) sells baked goods under a number of fa-
miliar brand names, such as Brownberry. The distribution
2 No. 17-3366
agreement between JTE and Bimbo Foods had no fixed dura-
tion, but it could be terminated in the event of a non-curable
or untimely cured breach by one of the parties. The agreement
specified that New York law would govern all claims and dis-
putes. Although the partnership between Bimbo and JTE pro-
ceeded swimmingly for a number of years, it met a calamitous
end.
According to JTE’s complaint, which we must accept as
true for purposes of this appeal, Bimbo Foods began fabricat-
ing curable breaches in the spring of 2008 as part of a scheme
to force JTE out as its distributor. Bimbo Foods employees
filed false reports of poor customer service and out-of-stock
products at stores in JTE’s distribution area. Even more egre-
giously, Bimbo employees would sometimes remove JTE-
delivered products from grocery store shelves, photograph
the empty shelves as “proof” of a breach, and then return the
products to their initial location. On one occasion, in 2008, a
distributor caught a Bimbo Foods manager in the act of fabri-
cating a photograph and reported him. Bimbo assured JTE
that this misconduct would never happen again. Neverthe-
less, unbeknownst to JTE, Bimbo Foods continued these scur-
rilous tactics. Its goal was to force JTE to forfeit its distribution
rights so that Bimbo Foods could install a new distributor that
would take a smaller slice of the proceeds: 18 percent as com-
pared to JTE’s 22 percent. When JTE refused to sell its distri-
bution rights in January 2011, Bimbo Foods breached the dis-
tribution agreement and unilaterally terminated JTE’s agree-
ment, citing the fabricated breaches as cause. Several months
later, in September and October 2011, Bimbo Foods forced JTE
to sell its rights to new distributors.
No. 17-3366 3
Despite the long run-up to its loss of the contract, JTE tells
us that it did not learn about Bimbo Foods’s scheme to fabri-
cate breaches until late 2013 or early 2014. When Heiman and
JTE finally did sue Bimbo Foods in the Northern District of
Illinois on May 30, 2017, they alleged two claims: breach of
contract and tortious interference. The district court never
reached the substance of those claims, however, because
Heiman and JTE ran into two procedural problems. First, in a
decision that Heiman does not contest on appeal, the district
court ruled that Heiman could not sue Bimbo Foods individ-
ually because he was not party to the distribution agreement
and thus was not a “real party in interest,” as required by Fed-
eral Rule of Civil Procedure 17. Only JTE, the court said, could
advance breach-of-contract and tortious-interference claims
based on the distribution agreement. We refer from this point
onward only to JTE, in keeping with this ruling. Second, the
district court found that both claims were stale under the ap-
plicable statutes of limitations and consequently dismissed
JTE’s suit under Federal Rule of Civil Procedure 12(b)(6). On
appeal, JTE contends that the district court applied the wrong
statute of limitations for the breach-of-contract claim and
failed to give it the benefit of the discovery rule for the tor-
tious-interference claim.
I
We begin with JTE’s breach-of-contract claim. Because this
is a diversity suit arising under state law, see 28 U.S.C.
§ 1332(a), our first task is to determine which state supplies
the statute of limitations. Guaranty Tr. Co. of N.Y. v. York, 326
U.S. 99, 107 (1945). There are two possible candidates: Illinois,
the forum state, and New York, the state specified by the
choice-of-law clause in the distribution agreement.
4 No. 17-3366
We look to the choice-of-law rules of the forum state to
determine which state’s law applies. Klaxon Co. v. Stentor Elec.
Mfg. Co., 313 U.S. 487, 496 (1941). While Illinois honors ex-
press choice-of-law provisions in contracts for purposes of de-
termining substantive legal rights, Hartford v. Burns Int’l
Servs., Inc., 172 Ill. App. 3d 184, 187 (1988), Illinois law—un-
like federal law—considers statutes of limitations to be proce-
dural issues governed by the law of the forum. Thomas v.
Guardsmark, Inc., 381 F.3d 701, 707 (7th Cir. 2004); Belleville
Toyota, Inc. v. Toyota Motor Sales, U.S.A., Inc., 199 Ill. 2d 325,
351–52 (2002). Illinois imposes a ten-year statute of limitations
for breach of written contracts, “[e]xcept as provided in Sec-
tion 2-725 of the ‘Uniform Commercial Code,’” which gov-
erns the sale of goods. 735 ILCS 5/13-206; 810 ILCS 5/2-102.
JTE runs into trouble with this exception, which provides that
an “action for breach of any contract for sale [of goods] must
be commenced within 4 years after the cause of action has ac-
crued.” 810 ILCS 5/2-725. The parties agree that JTE’s breach-
of-contract claim accrued no later than the time of the final
sale: October 21, 2011. Thus, if the distribution agreement is a
contract for the sale of goods, then JTE’s case was filed years
too late; but if the distribution agreement is instead a contract
for services, then the case was filed well within the permitted
time.
The parties disagree on how we ought to analyze this
question. JTE argues that while the statute of limitations is
procedural, the question whether the distribution agreement
is a contract for the sale of goods is a substantive question of
contract interpretation that must be resolved under New York
law. In other words, according to JTE, we must look to New
York law to determine whether the contract is a “contract for
sale” for purposes of Illinois law. JTE’s theory is misguided.
No. 17-3366 5
In fact, the Supreme Court case on which JTE relies does not
help it. According to JTE, the Supreme Court in Bank of United
States v. Donnally, 33 U.S. 361 (1834), looked to Kentucky law
to determine the type of agreement before it for purposes of
determining the applicable statute of limitations in Virginia.
But the Court did just the opposite:
If, then, it were admitted, that the promissory
note now in controversy, were a specialty by the
laws of Kentucky, still it would not help the
case, unless it were also a specialty, and recog-
nised as such, by the laws of Virginia; for the
laws of the latter must govern as to the limita-
tion of suits in its own courts, and as to the in-
terpretation of the meaning of the words used
in its own statutes.
Id. at 372–73. Although Donnally is an old case concerning dif-
ferent states and different laws, the Supreme Court’s intuition
remains accurate. The question whether a distribution agree-
ment is a “contract for sale” is not one of contract interpreta-
tion, but one of statutory interpretation. Illinois courts have
interpreted their state’s statute to mean that a contract is a
“contract for sale” subject to the UCC’s four-year limitations
period if the contract “is predominately for goods with ser-
vices being incidental, rather than predominately for services
with goods being incidental.” Zielinski v. Miller, 277 Ill. App.
3d 735, 741 (1995). And Illinois applies its own law in making
that determination, even in the face of an express choice-of-
law provision adopting the substantive law of a different
state. Belleville Toyota, 199 Ill. 2d at 351–52. Issues of contract
interpretation might arise as part of the overarching inquiry—
for example, if it is unclear what one provision means and the
6 No. 17-3366
ambiguity would tip the goods-services balance—but deter-
mining what test to apply is a statutory question, not a con-
tractual one.
Even if JTE could succeed in its attempt to graft New York
law into the statute of limitations inquiry (and it cannot), the
outcome would be no different. Just as Illinois courts do,
courts in New York “look[] to the ‘primary purpose’ test to
determine which statute of limitations applies to the entire
contract.” Cary Oil Co., Inc. v. MG Refining and Mktg., Inc.,
90 F. Supp. 2d 401, 407 (S.D.N.Y. 2000); Levin v. Hoffman Fuel
Co., 462 N.Y.S.2d 195, 196 (App. Div. 1983) (“[T]he test estab-
lished by controlling authority is whether the agreement is
‘predominantly’ one for the sale of goods or for the providing
of services.”).
Under the primary-purpose test, the distribution agree-
ment between JTE and Bimbo Foods easily qualifies as a con-
tract for the sale of goods. We have previously pointed out
that “virtually every jurisdiction that has addressed this is-
sue” has concluded that dealership and distributorship agree-
ments are “predominantly for the sale of goods.” Am. Suzuki
Motor Corp. v. Bill Kummer, Inc., 65 F.3d 1381, 1386 (7th Cir.
1995). Illinois and New York are among these jurisdictions.
See Belleville Toyota, 199 Ill. 2d at 353 (citing New York case
law as persuasive). JTE has not explained how or why its con-
tract with Bimbo Foods is distinguishable from the contract at
issue in Belleville Toyota. True, JTE agreed to provide a signif-
icant amount of services under the Agreement, but as in Belle-
ville Toyota, all of the service provisions are incidental to the
larger purpose of the contract, which is to sell goods to con-
sumers. Id. at 353–54. Because the agreement qualifies as a
“contract for sale” of goods under Illinois law, it is governed
No. 17-3366 7
by the UCC’s four-year statute of limitations and not by the
ten-year period for other written contracts. JTE’s breach-of-
contract claim is untimely.
II
JTE’s tortious-interference claim fares no better. Here, the
battle between the parties is not over the proper limitations
period (they agree that it is five years per 735 ILCS 5/13-205),
but rather over the accrual date. JTE argues that under Illi-
nois’s fraud-discovery rule, its claim did not accrue until it
discovered the full extent of Bimbo Foods’s wrongdoing in
early 2014. See Hermitage Corp. v. Contractors Adjustment Co.,
166 Ill. 2d 72, 77–79 (1995) (explaining that the discovery rule
“delays the commencement of the relevant statute of limita-
tions until the plaintiff knows or reasonably should know that
he has been injured and that his injury was wrongfully
caused” (quoting Jackson Jordan, Inc. v. Leydig, Voit & Mayer,
158 Ill. 2d 240, 249 (1994))). Bimbo Foods responds that be-
cause JTE claims to have known Bimbo’s allegations of breach
were false in 2011, it cannot take refuge in the discovery rule.
Bimbo is correct. Although JTE’s complaint states that it
did not know the extent of Bimbo Foods’s nefarious plan until
early 2014, JTE admits to knowing in 2011 that (1) a district
manager for Bimbo Foods removed products from store
shelves to lodge a false complaint about JTE’s service, (2) JTE
was “substantially perform[ing] its obligations” at the time of
the breach, and (3) all of the breaches alleged by Bimbo were
false. In other words, JTE “is not really disputing that it was
‘aware of the possibility that [it] had been wrongfully in-
jured’” as of the injury date, but is arguing only that “it could
not be sure.” Vector-Springfield Properties, Ltd. v. Central Ill.
8 No. 17-3366
Light Co., Inc., 108 F.3d 806, 809 (7th Cir. 1997) (quoting Her-
mitage, 166 Ill. 2d at 84). This is not enough to take advantage
of the discovery rule. By the time JTE was injured by the no-
tice of breach and forced sale, it knew that Bimbo Foods had
subjected it to “wrongful conduct.” JTE did not know at the
time which precise misdeeds were involved—they could
have been a simple breach of contract, or tortious misconduct,
or something else—but Illinois does not require that sort of
specificity. “[S]ome indication of wrongdoing” is enough to
prevent application of the discovery rule, whose application
is reserved for “cases where the relationship between the in-
jury and the alleged wrongful conduct is obscure.” Newell v.
Newell, 406 Ill. App. 3d 1046, 1051 (2011). Unlike in cases with
more opaque links between injury and wrongful conduct, it
is apparent in this case that JTE “knew or should have known
of the existence of the right to sue the defendant at the time of
the [breach].” Golla v. General Motors Corp., 167 Ill. 2d 353, 365
(1995). JTE should not have “slumber[ed] on [its] rights” until
it determined the exact way in which it was harmed. Nolan v.
Johns-Manville Asbestos, 85 Ill. 2d 161, 171 (1981).
Although not raised by the parties, an additional defect in
JTE’s tortious interference claim also dooms its case: under Il-
linois law, as is true in most states, “a party cannot tortiously
interfere with its own contract,” nor can it tortiously interfere
with any business expectancies created by that contract. Bass
v. SMG, Inc., 328 Ill. App. 3d 492, 503 (2002). As the Illinois
courts have noted, “[t]o allow such claims to be litigated
would invite tort law to absorb contract law.” Id. at 504. Thus,
JTE’s claim for tortious interference fails not only for untime-
liness, but also on its merits.
We AFFIRM the judgment of the district court.