Home Valu Inc v. Pep Boys - Manny Moe ( 2000 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 99-1168
Home Valu, Inc.,
Plaintiff-Appellant,
v.
Pep Boys Manny, Moe and Jack
of Delaware, Inc.,
Defendant-Appellee.
Appeal from the United States District Court
for the Eastern District of Wisconsin.
No. 98-C-531--J.P. Stadtmueller, Chief Judge.
Argued February 14, 2000--Decided May 24, 2000
Before Bauer, Flaum, and Evans, Circuit Judges.
Bauer, Circuit Judge. After a real estate deal
fell apart, Home Valu, Inc. sued Pep Boys
Manny, Moe & Jack of Delaware, Inc. for the torts
of negligent misrepresentation, strict
responsibility misrepresentation, and intentional
misrepresentation. Home Valu also brought a
breach of contract claim. Exercising jurisdiction
over this state law dispute under 28 U.S.C. sec.
1332, the district court dismissed Home Valu’s
complaint for failure to state a claim upon which
relief can be granted. Home Valu appeals. We
affirm.
I. Background
Home Valu operated a retail store under the
name "Drexel" located at 8787 West Brown Deer
Road in Milwaukee, Wisconsin. Drexel sold repair
and home improvement goods. Although its Drexel
store was profitable, Home Valu decided to close
it and sell the property to Pep Boys--then a
rapidly growing retailer of automotive parts and
services--to accommodate Pep Boys’ planned
expansion into Wisconsin.
Home Valu and Pep Boys executed a written
Agreement of Sale on May 15, 1997. The Agreement
gave Pep Boys 180 days to satisfy certain
contingencies, such as obtaining local and state
permits to operate its auto service business and
to verify environmental and other characteristics
of the property. Once the contingencies were met,
the parties were to close within 30 days. The
Agreement provided, however, that if Pep Boys
could not satisfy the contingencies, Pep Boys had
the option of terminating the Agreement, after
giving notice to Home Valu, or the right to waive
the contingencies and finalize without reference
to the contingencies.
About 30 days before the time the Agreement
gave Pep Boys to complete the contingencies, the
parties extended the closing date to December 31,
1997. Then, roughly a month later, the parties
entered into a written Amendment of their
original Agreement of Sale./1 The Amendment
extended the deal’s closing date again, this time
until March 1, 1998.
At some point, Pep Boys experienced a downturn
in revenue. Shortly before it negotiated the
Amendment, Pep Boys’ Chairman and CEO commented
in a written memorandum that "It is definitely
NOT business as usual at Pep Boys. Literally
everything we do is being revalidated--nothing is
sacred." Pep Boys’ CEO also stated that the
company’s 1998 expansion rate would be lower and
that Pep Boys did not know how many new states it
would enter because expansion plans were
undeveloped.
Pep Boys notified Home Valu in mid-February
1998 that it would not purchase the Drexel
property. The contract contained a liquidated
damages clause which limited Pep Boys’ liability
for breach of the contract to $50,000. Pep Boys
invoked the liquidated damages clause and offered
to pay Home Valu $50,000 for the breach. Home
Valu refused the offer.
Home Valu was unhappy with the $50,000 offer
because, shortly after extending the closing date
until March 1, 1998, Home Valu began the
expensive process of closing its Drexel store.
Home Valu spent more than $800,000 closing down
Drexel in preparation for the scheduled March 1,
1998 sale. Rather than accepting $50,000 to
compensate it for $800,000 in expenses, Home Valu
filed suit against Pep Boys in Wisconsin state
court. Pep Boys removed the case to federal
district court and Home Valu filed an amended
complaint. Home Valu’s seven-count amended
complaint alleged two counts of negligent
misrepresentation, two counts of strict
responsibility misrepresentation, two counts of
intentional misrepresentation, and one count of
breach of contract.
Home Valu’s misrepresentation claims can be
divided into two groups. The first group
concerned statements Pep Boys made which induced
Home Valu into executing the Amendment. In these
pre-Amendment statements, Pep Boys repeatedly
assured Home Valu that it would purchase the
property if the closing date were extended to
March 1, 1998. Home Valu claimed that these
statements were false and that when Pep Boys made
them it had no intention of purchasing the
property. Home Valu claimed that Pep Boys made
these false statements for the sole purpose of
inducing Home Valu into executing the Amendment
and that Pep Boys had an economic interest in
extending the closing date. According to Home
Valu, these false statements constituted
negligent, strict responsibility, and intentional
misrepresentations.
The second group of claimed misrepresentations
related to statements that Pep Boys made after
the parties executed the Amendment extending the
purchase date. In these claims, Home Valu said
that it became concerned about whether Pep Boys
would honor its obligation under the Amendment
and proceed with the purchase on March 1, 1998.
As a result of these concerns, Home Valu again
asked Pep Boys about its intent to finalize the
real estate transaction on the scheduled closing
date. In response to these inquiries, Pep Boys
told Home Valu on several occasions that it would
in fact purchase the property on or before the
closing date. According to Home Valu, these
statements were false and Pep Boys knew them to
be false when it made them. Home Valu asserted
that these untrue statements caused it to
continue closing its Drexel store when it would
have abandoned the process and averted
substantial financial losses if it had known that
Pep Boys was not going to consummate the deal.
Based on these facts, Home Valu stated that Pep
Boys had committed the torts of negligent, strict
responsibility, and intentional
misrepresentation.
In its breach of contract claim, Home Valu
first made the simple allegation that Pep Boys
breached the contract by failing to purchase the
property by March 1, 1998. In addition to this
claim, Home Valu alleged that Pep Boys violated
the covenant of good faith and fair dealing. Home
Valu stated that it began closing its Drexel
store because Pep Boys waived the applicable
contingencies and this waiver required Home Valu
to begin shutting down Drexel. Home Valu asserted
that "in exercising its right to require Home
Value to undertake the expensive process of
closing down its profitable Drexel . . . store,
Pep Boys had a continuing duty to act in good
faith and fair dealing and to cooperate with Home
Valu." According to Home Valu, Pep Boys breached
this duty of good faith by repeatedly reassuring
Home Valu that it would purchase the property
even though "Pep Boys knew in 1997 and in January
and February of 1998 that it might not honor its
Agreement to close on the purchase of the
property."
The district court dismissed Home Valu’s
complaint under Federal Rule of Civil Procedure
12(b)(6) for failure to state a claim upon which
relief can be granted. Home Valu now challenges
the district court’s ruling.
II. Analysis
We review the district court’s grant of a
motion to dismiss under Rule 12(b)(6) de novo.
Henderson v. Sheahan, 196 F.3d 839, 845 (7th Cir.
1999). In reviewing a dismissal, we accept all
factual allegations in the plaintiff’s complaint
as true and draw all reasonable inferences in the
plaintiff’s favor. Klug v. Chicago Sch. Reform
Bd. of Trustees, 197 F.3d 853, 858 (7th Cir.
1999). We will affirm only if it appears beyond
a doubt that the plaintiff cannot prove any set
of facts that would entitle it to relief. Conley
v. Gibson, 355 U.S. 41, 45-46 (1957); Frederick
v. Simmons Airlines, 144 F.3d 500, 502 (7th Cir.
1998). Finally, by virtue of the parties’
agreement, we apply Wisconsin tort and contract
law to this dispute. See Harter v. Iowa Grain
Co., Nos. 98-3010 & 98-3817, 2000 WL 426366, at
*15 n.12 (7th Cir. April 21, 2000) (we forego
choice of law analysis when the parties agree on
the law that governs a dispute and there is a
reasonable relation between the dispute and the
forum whose law has been selected).
Because resolution of the issues in this case
depends on Wisconsin law, "we must apply the law
that would be applied in this context by the
Wisconsin Supreme Court." McGeshick v. Choucair,
9 F.3d 1229, 1232 (7th Cir. 1993) (citing Green
v. J.C. Penney Auto Ins. Co., 806 F.2d 759, 761
(7th Cir. 1986)). If the Wisconsin Supreme Court
has not spoken on the issue, we generally treat
decisions by the state’s intermediate appellate
courts as authoritative "unless there is a
compelling reason to doubt that [those] courts
have got the law right." Rekhi v. Wildwood
Indus., 61 F.3d 1313, 1319 (7th Cir. 1995). When
we are faced with two opposing and equally
plausible interpretations of state law, "we
generally choose the narrower interpretation
which restricts liability, rather than the more
expansive interpretation which creates
substantially more liability." Birchler v. Gehl
Co., 88 F.3d 518, 521 (7th Cir. 1996) (citing
Todd v. Societe Bic, S.A., 21 F.3d 1402, 1412
(7th Cir. 1994)).
A. Misrepresentation Claims
The district court dismissed all six of Home
Valu’s misrepresentation claims as barred by
Wisconsin’s economic loss doctrine. The Wisconsin
Supreme Court has followed "the majority of
courts across the country in applying the
economic loss doctrine to commercial
transactions." State Farm Mut. Auto Ins. Co. v.
Ford Motor Co., 592 N.W.2d 201, 208 (Wis. 1999).
Under the economic loss doctrine, Wisconsin law
bars tort claims which seek only "economic
losses" related to a commercial transaction.
Wausau Tile, Inc. v. County Concrete Corp., 593
N.W.2d 445, 451 (Wis. 1999). Wisconsin’s highest
court draws the line between economic and non-
economic loss by emphasizing that economic loss
is damage "which does not cause personal injury
or damage to other property." Daanen & Janssen,
Inc. v. Cedarapids, Inc., 573 N.W.2d 842, 845
(Wis. 1998). In contrast, non-economic damages,
which are recoverable in tort, involve some
"physical harm" or other "unreasonable risk of
injury to person or property." Northridge Co. v.
W.R. Grace and Co., 471 N.W.2d 179, 185 (Wis.
1991).
In reviewing the district court’s dismissal of
Home Valu’s several misrepresentation claims, we
do not write on a clean slate. Rather, we have
previously upheld the dismissal of tort claims
for negligent misrepresentation and strict
responsibility misrepresentation as barred by
Wisconsin’s economic loss doctrine. See Badger
Pharmacal, Inc. v. Colgate-Palmolive Co., 1 F.3d
621, 628 (7th Cir. 1993). In Badger Pharmacal, we
applied Wisconsin law and reasoned that "’tort
law provides no remedy in a case in which the
plaintiff is seeking to recover for a commercial
loss rather than damage to person, property, or
reputation.’" Id. (quoting Midwest Knitting
Mills, Inc. v. United States, 950 F.2d 1295, 1300
(7th Cir. 1991) (also applying Wisconsin law)).
Since our holding in Badger Pharmacal, no
Wisconsin court has ruled to the contrary. We
therefore adhere to our view that the Wisconsin
Supreme Court would not recognize tort claims for
negligent or strict responsibility
misrepresentation "when two corporations, with
the benefit of counsel, negotiate a commercial
transaction at arms length." Badger Pharmacal, 1
F.3d at 627.
Having found that Judge Stadtmueller correctly
dismissed the negligent and strict responsibility
misrepresentation claims, we consider Home Valu’s
two allegations that Pep Boys committed the tort
of intentional misrepresentation. However, this
issue, too, has been addressed before now. In
Cooper Power Systems, Inc. v. Union Carbide
Chems. & Plastics Co., Inc., 123 F.3d 675, 682
(7th Cir. 1997), we noted that this court "has
already predicted that Wisconsin would not allow
a negligence or strict [responsibility]
misrepresentation claim seeking to recover
economic damages. We perceive no basis for
treating . . . [an] intentional misrepresentation
claim any differently." Our decision in Cooper
Power dooms Home Valu’s two claims of intentional
misrepresentation.
Home Valu tries to avoid the economic loss
doctrine and preserve at least one of its tort
claims by citing Douglas-Hanson Co., Inc. v. BF
Goodrich Co., 598 N.W. 262 (Wis. Ct. App. 1999).
In Douglas-Hanson, the Wisconsin Court of Appeals
reviewed a jury verdict in the plaintiff’s favor.
After concluding that the jury had found that the
plaintiff was fraudulently induced to enter a
contract, the court confronted the issue of
"whether the economic loss doctrine prohibits a
plaintiff from recovering tort damages when an
intentional misrepresentation fraudulently
induces a plaintiff to enter a contract." Id. at
268. The court answered this question in the
negative and held that "the economic loss
doctrine does not bar claims for intentional
misrepresentation when the misrepresentation
fraudulently induces a party to enter a
contract." Id. at 270-71. In reaching this
conclusion, the court noted tension with our
decision in Cooper Power, but found that the
"better public policy" was to allow such tort
claims. Id. at 270. Armed with this decision,
Home Valu asserts that Douglas-Hanson saves its
intentional misrepresentation claim that Pep Boys
fraudulently induced it into signing the
Amendment which extended the closing date to
March 1, 1998.
Although we usually treat decisions by state
intermediate appellate courts as authoritative,
Rekhi, 61 F.3d at 1319, we are nevertheless
required to rule as we believe the Supreme Court
of Wisconsin would rule in this context.
McGeshick, 9 F.3d at 1232. In this case, we find
a compelling reason to refrain from following the
Wisconsin Court of Appeals’ decision in Douglas-
Hanson. Specifically, a few weeks after we heard
oral argument in this case, the Supreme Court of
Wisconsin (which had granted a petition to review
the intermediate appellate court’s opinion in
Douglas-Hanson) issued a per curiam statement
that "the court is equally divided on the
question of whether the published decision of the
court of appeals . . . should be affirmed or
reversed." Douglas-Hanson Co., Inc. v. BF
Goodrich Co., 607 N.W.2d 621 (Wis. 2000). While
this evenly divided court resulted in an
affirmance under Wisconsin law, id., Smith v.
State, 163 N.W.2d 8 (Wis. 1968), it did not make
the Wisconsin Court of Appeals’ Douglas-Hanson
decision binding authority of the Wisconsin
Supreme Court. See Neil v. Biggers, 409 U.S. 188,
192 (1972) (an affirmance by an equally divided
court is not entitled to precedential weight);
State ex rel. Thompson v. Jackson, 546 N.W.2d
140, 142 (Wis. 1996) ("a majority of the
participating justices must agree on a particular
point for it to be considered the opinion of the
court").
Because the Wisconsin Supreme Court did not
garner a majority to affirm the Wisconsin Court
of Appeals’ holding that the economic loss
doctrine does not bar claims for intentional
misrepresentation that allege fraudulent
inducement, the issue remains unresolved. And, as
exhibited by the equally divided Wisconsin
Supreme Court, whether the economic loss doctrine
does bar such a tort claim is an issue over which
there is considerable disagreement. Where, as in
this case, we are faced with two equally
plausible interpretations of state law, "we
generally choose the narrower interpretation
which restricts liability, rather than the more
expansive interpretation which creates
substantially more liability." Birchler, 88 F.3d
at 521. We therefore take the approach that is
restrictive of liability and conclude that
Wisconsin’s economic loss doctrine bars Home
Valu’s intentional misrepresentation claim that
it was fraudulently induced into executing the
Amendment. Accordingly, we affirm the district
court’s decision to dismiss Home Valu’s
misrepresentation claims as barred by Wisconsin’s
economic loss doctrine.
B. Breach of Contract Claim
Although it brought only one breach of contract
count in its complaint, Home Valu actually
alleges two separate breaches. Home Valu first
complains that Pep Boys breached the express
terms of the contract when it failed to purchase
the property by March 1, 1998. The district court
denied this claim because the contract’s
liquidated damages clause limited Pep Boys’
liability for breach to $50,000 and Pep Boys had
already offered to pay Home Valu $50,000. Finding
no legal basis for recoverable damages beyond the
$50,000 that Pep Boys had already offered to pay,
Judge Stadtmueller held that Home Valu did not
state a claim upon which relief could be granted.
We agree with the district judge that Home Valu
has no further claim for breach of contract. The
parties bargained for and agreed on a liquidated
damages clause that clearly and unambiguously
limited Pep Boys’ liability for a breach to
$50,000. Pep Boys offered to pay Home Valu
$50,000 for its failure to buy the property and
that money has been placed into an escrow account
pending the outcome of this litigation. In the
event that Pep Boys prevails in this appeal
(which it now has), Home Valu can collect the
$50,000 in liquidated damages from the escrow
account. That fully satisfies the question of
damages for the breach.
Home Valu’s second breach of contract theory
alleges that Pep Boys violated the covenant of
good faith and fair dealing by telling Home Valu
that it would purchase the property even though
Pep Boys knew it would not go through with the
deal. The district court held that the duty of
good faith and fair dealing is an implied
provision of the contract and therefore any
breach of this term simply triggers the
liquidated damages clause. No additional damages
are available, even assuming the correctness of
the claim of violation of fair dealing or good
faith.
It is well-settled that Wisconsin law recognizes
the implied contractual duty of good faith and
fair dealing in commercial contracts. See Market
St. Assocs. Ltd. Partnership v. Frey, 941 F.2d
588, 593-94 (7th Cir. 1991); Hauer v. Union State
Bank of Wautoma, 532 N.W.2d 456, 463-64 (Wis. Ct.
App. 1995). However, the implied covenant "does
not support an independent cause of action for
failure to act in good faith under a contract."
Hauer, 532 N.W.2d at 464. Instead, the duty of
good faith is meant to "give the parties what
they would have stipulated for" at the time of
contracting if they could have foreseen all
future problems of performance. Market St.
Assocs., 941 F.2d at 596. As the district court
pointed out, the requirement of good faith "was
not of a duty independent of the contract, but of
the contract itself." Because a breach of the
duty of good faith is the same as a breach of any
other contract term, Home Valu is entitled to its
contractual liquidated damages, but nothing more.
We affirm the decision of the district court.
FOOTNOTES
/1 The original Agreement of Sale and the subsequent
Amendment collectively govern the parties’
contractual rights. Because these two agreements
work together, we will treat them as one and
refer to them collectively as "the contract."