Linc Equipment Serv v. Signal Medical Serv ( 2003 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 01-3449
LINC EQUIPMENT SERVICES, INC.,
Plaintiff-Appellant,
v.
SIGNAL MEDICAL SERVICES, INC.,
Defendant-Appellee.
____________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 97 C 8049—David H. Coar, Judge.
____________
ARGUED DECEMBER 3, 2002—DECIDED FEBRUARY 5, 2003
____________
Before EASTERBROOK, MANION, and EVANS, Circuit
Judges.
EASTERBROOK, Circuit Judge. Signal Medical leased
from Linc Equipment a mobile magnetic resonance imager
(MRI), an expensive device that had a monthly net rental
in the $30,000 range. (The “net” signifies that Signal
covered expenses, including insurance and taxes, on top
of the $30,000.) Signal promised to return the MRI at the
end of the lease in good condition, less normal wear and
tear. Signal, which like Linc is a merchant in the business
of renting medical equipment, subleased this MRI to a
hospital, which later returned the machine directly to
Linc. Unfortunately, the MRI was left on during transit,
2 No. 01-3449
which damaged the magnet and required the machine to
be taken out of service for 10 months while it was repaired.
The repairs, which cost about $130,000, were paid for by
the insurance carrier. Linc sued in state court both Sig-
nal and the firm that handled the machine’s transporta-
tion; the insurer intervened to make a third-party claim in
subrogation against Signal. This suit was removed to
federal court under the Carmack Amendment, 49 U.S.C.
§14706, applicable because of the interstate transporta-
tion. Signal, the insurer, and the carrier resolved their
differences, leaving only Linc’s claim against Signal for 10
months’ lost rental value. Because the damage to the MRI
likely occurred during transit, the state-law claims are
sufficiently related to the federal-law theory that they
come within the supplemental jurisdiction. See 28 U.S.C.
§1367(a); Stromberg Metal Works, Inc. v. Press Mechanical,
Inc., 77 F.3d 928, 932-33 (7th Cir. 1996).
After the parties agreed to a bench trial, the district
judge tackled damages ahead of the merits. The judge
assumed that Signal is responsible for any harm to the MRI
and held a hearing to explore the question whether it is
liable for consequential damages (repair costs already
having been resolved). As the judge understood Illinois law,
which the parties agree governs, consequential damages
may be awarded only if the signatories “expressly contem-
plated” them. The contract does not in so many words
entitle Linc to consequential damages, and at the eviden-
tiary hearing the persons who negotiated the lease tes-
tified that they had not discussed or thought about this
subject. As a result, the judge concluded, consequential
damages could not have been “expressly contemplated.”
This finding led to judgment on the merits in Signal’s favor.
We doubt that Illinois requires “express contemplation”
of consequential damages—or that, if it does, this phrase
implies a subjective as opposed to an objective inquiry.
Although the district judge and the parties did not mention
No. 01-3449 3
it, Hadley v. Baxendale, 9 Ex. 341, 156 Eng. Rep. 145
(1854), remains the dominant source of law on the recovery
of consequential damages for breach of contract, and we
have held that Illinois follows Hadley’s approach. See, e.g.,
Afram Export Corp. v. Metallurgiki Halyps, S.A., 772 F.2d
1358, 1368-69 (7th Cir. 1985); Evra Corp. v. Swiss Bank
Corp., 673 F.2d 951, 955-59 (7th Cir. 1982). What Hadley
holds is that a consequential loss is compensable only if
“reasonably foreseeable,” not that it must be “expressly
contemplated.” Although the phrase “expressly contem-
plated” crops up in some Illinois cases, that state’s judiciary
has explained that it is used as a synonym for foresee-
ability. See, e.g., Vranas & Associates, Inc. v. Family Pride
Finer Foods, Inc., 147 Ill. App. 3d 995, 1007, 498 N.E.2d
333, 342 (2d Dist. 1986). Signal, which like Linc was a
merchant in the medical-equipment-rental business, rea-
sonably could have foreseen that return of the MRI in bad
condition would cost Linc rental revenue while it was being
repaired. That the lease excluded consequential damages in
an action by Signal, but not in an action by Linc, shows that
the parties must have understood this possibility. We do not
see in Article 2A of the Uniform Commercial Code, which
covers equipment leases, any provision negating Hadley’s
application. Although §530, enacted in Illinois as 810 ILCS
§5/2A-530, permits lessors to recover “incidental damages”
without mentioning “consequential damages”, this does not
imply that consequential damages are forbidden; §532 (810
ILCS §5/2A-532) preserves other remedies.
What is more, it is hard to see why income lost because
of inability to rent a chattel should be classified as “conse-
quential” damages at all. Lost rental value is a direct
outcome of the broken promise and does not depend on the
details of Linc’s business or any idiosyncratic way that
Linc would employ the MRI—things that Signal might not
know and therefore could not consider when deciding how
much care to take with Linc’s machine. To see this, sup-
4 No. 01-3449
pose that Linc wanted to sell rather than rent the MRI
immediately after its return from Signal’s customer. The
selling price of a MRI depends on expected net income
(rental or billings to patients, less costs), plus scrap value
at the end of its economically useful life, all discounted to
present value. Suppose that this MRI in good condition
would have had 60 months of service remaining before
becoming obsolete. The same machine, with the damage
actually sustained, would have had only 50 months’ ser-
vice remaining (deferred for 10 months) and required a
$130,000 capital investment to repair. It therefore would
have sold for less than the same machine in operable
condition. The difference between what the MRI would have
fetched in a sale immediately after its return in damaged
condition, and what it could have been sold for had Signal
kept its promise to return it in good condition, is the real
economic loss caused by transporting the machine with
the magnet on. It fits nicely within standard measures
of damages in contract cases. See generally E. Allan
Farnsworth, III Farnsworth on Contracts §12.9 (2d ed.
1990).
Because the market price of rental equipment capital-
izes the expected rental stream—not only reducing cash
flows to present value but also taking into account the
probability that some months will not fetch rentals, when
machines are between customers or demand is slack—
it would be double counting to award a lessor any-
thing extra for lost rental income. Consider what should
happen if one of Hertz’s customers has an accident and
the car must be taken out of the fleet for a month while
being repaired. Would Hertz recover not only the cost
of repair (say, $1,000) but also the $50 daily rental dur-
ing that month ($50 × 30 = $1,500)? Such a measure fre-
quently would overcompensate the lessor. If the acci-
dent caused the value of the used car to decline by, say,
$1,500 (from $15,000 in good condition to $13,500 with
No. 01-3449 5
repairs pending), Hertz could sell the damaged car for
$13,500, invest an extra $1,500, buy a used car equal in
value to the one it expected to receive at the end of the
rental, and rent that car for $50 per day. Its full loss
would be $1,500 (the difference in resale prices); if Hertz
neglected to cover in the market, and instead claimed a
loss of $2,500, it would be met with the defense that it
had failed to mitigate damages. Just so with Linc. If it
had a ready market for MRI machines, it could have cov-
ered when it learned of the problem and leased out the
newly purchased machine; then its full loss would have
been the difference between the cost of cover and the
amount it could have realized when selling the damaged
machine.
One must consider as well the possibility that MRI
machines have lives that depend on accumulated use
(wear and tear) rather than technological obsolescence.
In that event, taking the machine out of service did not
cost Linc ten months’ rental but only postponed its receipt.
Then damages would be limited to the time value of mon-
ey (that is, to interest on the deferral of income). The
magnet’s rebuilding might even have extended the ma-
chine’s useful life. All of this is captured automatically in
the difference between the sale prices of sound and dam-
aged MRI devices, which makes this calculation preferable
to judicial attempts to determine how likely it was that
a particular machine would have been rented during
these particular months, what its expected useful life may
have been, and so on. Best to take advantage of market
prices that reflect this information, rather than try to
generate the information on the witness stand. We know
that this MRI was sold for $475,000 immediately after the
repairs were completed; such a price for a fully func-
tional MRI, with many future months of rental in store,
strongly implies that $300,000 would be an excessive
award for the loss of 10 months’ use.
6 No. 01-3449
So the district court was right to conclude that Linc is
not entitled to damages measured by the monthly rental
times the number of months required for repair, but
wrong to think that the cost of making repairs sets a cap
on damages. The judgment is vacated, and the case is
remanded for further proceedings consistent with this
opinion.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—2-5-03