JMB Manufacturing, Inc. v. Harrison Manufacturing, LLC. , 799 F.3d 780 ( 2015 )

In the
United States Court of Appeals
For the Seventh Circuit
____________________
Nos. 14-3306 & 14-3315
JMB MANUFACTURING, INC.,
d/b/a SUMMIT FOREST PRODUCTS COMPANY,
Plaintiff/Counterclaim-Defendant-Appellant/Cross-Appellee,
v.
CHILD CRAFT, LLC, et al.,
Defendants-Appellees,
and
HARRISON MANUFACTURING, LLC,
f/k/a CHILD CRAFT, LLC,
Defendant/Counterclaim-Plaintiff-Appellee/Cross-Appellant,
v.
RON BIENIAS,
Counterclaim-Defendant-Appellant/Cross-Appellee.
____________________
Appeals from the United States District Court for the
Southern District of Indiana, New Albany Division.
No. 4:11-cv-00065-TWP-WGH — Tanya Walton Pratt, Judge.
____________________
2 Nos. 14-3306 & 14-3315
ARGUED APRIL 22, 2015 — DECIDED AUGUST 24, 2015
____________________
Before FLAUM, MANION, and HAMILTON, Circuit Judges.
HAMILTON, Circuit Judge. This case presents a merchant’s
creative effort to avoid the limited remedies that contract
law provides for a seller’s delivery of non-conforming goods.
After the seller delivered about $90,000 worth of non-
conforming wood products, the buyer sought recovery from
both the seller and its president personally for tort damages
on a tort theory, that they negligently misrepresented the
quality of the delivered goods.
The district court ruled in favor of the buyer and award-
ed damages of more than $2.7 million on the theory that the
non-conforming goods caused the complete destruction of
the buyer’s business. This damages theory echoed the prov-
erb of Poor Richard’s Almanack (“A little neglect may breed
mischief; for want of a nail, the shoe was lost; for want of a
shoe the horse was lost; for want of a horse the rider was
lost; for want a rider the battle was lost.”), and Shakespeare’s
story of Richard III, where the loss of a horse led in turn to
the loss of a battle, the death of a king, and the loss of a
kingdom. Cf. Hadley v. Baxendale, 9 Exch. 341, 156 Eng. Rep.
145 (1854) (damages for breach of contract limited to conse-
quences reasonably contemplated by both parties when they
made contract).
We reverse the award of damages against the seller and
the seller’s president, but for reasons that do not depend on
the flawed “want of a nail” theory. Under Indiana law, a
buyer who has received non-conforming goods cannot sue a
seller for negligent misrepresentation to avoid the economic
Nos. 14-3306 & 14-3315 3
loss doctrine, which limits the buyer to contract remedies for
purely economic losses. See Indianapolis-Marion County Public
Library v. Charlier Clark & Linard, P.C., 929 N.E.2d 722 (Ind.
2010). Second, there is no basis for transforming the buyer’s
breach of contract claim into a tort claim for negligent mis-
representation to hold the seller’s president personally liable.
See Greg Allen Construction Co., Inc. v. Estelle, 798 N.E.2d 171
(Ind. 2003). In all other respects, we affirm the judgment of
the district court.
I. Factual and Procedural Background
A. The Parties and Their Contracts
Child Craft Industries, an Indiana business run by the
Suvak family since 1911, manufactured furniture for young
children and infants. At the height of its success in the 1990s,
it employed approximately 1,200 workers. After changes in
the industry and a devastating flood in 2008, Child Craft In-
dustries was acquired by defendant and counterclaim-
plaintiff Child Craft, LLC, which is now known as Harrison
Manufacturing, LLC. (Like the district court, we call this
new entity “Child Craft.”) Counterclaim-defendant Ron Bie-
nias is the owner and president of plaintiff and counter-
claim-defendant JMB Manufacturing, Inc., which does busi-
ness as Summit Forest Products Company. (Like the district
court, we call the company “Summit.”)
Before 2008, Child Craft Industries and Bienias had a
long-standing business relationship. After Child Craft as-
sumed control of Child Craft Industries, Child Craft con-
tracted with Summit to supply raw wood components for
Child Craft’s new planned line of high-end baby furniture
4 Nos. 14-3306 & 14-3315
called the “Vogue Line.” Child Craft made clear that it had
specific quality requirements and an inflexible timeline.
Summit did not actually manufacture the wood compo-
nents itself. Instead, it sourced the goods from an Indonesian
manufacturer named P.T. Cita. Beginning in August 2008,
Child Craft contracted with Summit through a series of pur-
chase orders to buy raw wood components for cribs and
“case goods” (such as bureaus and night stands). Child Craft
and Summit understood that Summit would buy the com-
ponents from P.T. Cita and re-sell them to Child Craft. Child
Craft would then finish and assemble the components into
furniture and sell the finished products to retailers.
At Bienias’s request, Child Craft agreed not to have direct
contact with P.T. Cita. Keeping its promise, Child Craft did
not communicate with P.T. Cita, except on one occasion in
September 2008, when Bienias and two Child Craft manag-
ers traveled to Indonesia together to inspect P.T. Cita’s manu-
facturing facilities and to explain Child Craft’s quality speci-
fications.
In late 2008 and early 2009 Child Craft issued several
purchase orders to Summit calling for a variety of case goods
and baby crib components worth about $90,000 in total. Each
purchase order included a detailed list of specifications. For
purposes of the lawsuit, the most relevant item was that the
moisture content of the wood products needed to be be-
tween 6% and 8%. (Furniture made with moist wood is
prone to warp and split.)
A detailed rundown of the back and forth between
Summit and Child Craft is not necessary for these appeals.
Suffice it to say that the goods shipped to Child Craft never
Nos. 14-3306 & 14-3315 5
conformed to its specifications, in spite of Bienias’s assuranc-
es that they would. Among other problems, many of the
wood products had a moisture content well above the de-
sired range of 6% to 8%. Child Craft identified the goods as
defective upon receipt and refused to pay Summit for the
shipments. It also spent considerable time trying to re-work
the products before eventually giving up.
By the end of their relationship in the spring of 2009,
Child Craft had not received any usable cribs from Summit.
As a result, Child Craft was forced to cancel orders it had
received for its products and was never able to sell any fur-
niture in the Vogue Line. Child Craft burned through its re-
maining capital and ceased operations in June 2009.
B. Procedural History
Ironically, in light of the district court’s final judgment,
this suit was filed initially by Summit, invoking the district
court’s diversity jurisdiction under 28 U.S.C. § 1332, against
both Child Craft and its owners for breach of contract and
the tort of conversion based on Child Craft’s refusal to pay
for the wood products shipped pursuant to the 2008–2009
purchase orders. Summit even sought to pierce the corporate
veil to hold Child Craft’s owners personally liable for the al-
leged wrongs.
Child Craft counterclaimed for breach of contract against
Summit and also for the tort of negligent misrepresentation
against both Summit and Bienias. In its breach of contract
counterclaim, Child Craft sought to recover its labor costs for
re-working the defective products and for lost sales. In its
negligent misrepresentation counterclaim, Child Craft al-
leged that it detrimentally relied on Bienias’s representations
6 Nos. 14-3306 & 14-3315
that the delivered goods would and did conform to specifi-
cations. Child Craft sought to recover over $5 million in
compensatory damages—a figure representing the total loss
of its business—plus punitive damages of over $5 million.
For procedural reasons we address below in Part III, the
only claim that went to trial was Child Craft’s counterclaim
for negligent misrepresentation against Bienias personally.
The claim was tried to the court. The judge’s findings of fact
and conclusions of law favored Child Craft, awarding initial-
ly over $4 million in compensatory damages, which the
judge later reduced to just over $2.7 million, against both
Bienias and Summit. Bienias and Summit have appealed the
judgment against them. Child Craft has cross-appealed the
reduction of compensatory damages and the judge’s decision
not to award punitive damages.
II. Child Craft’s Negligent Misrepresentation Counterclaim
Against Bienias
Child Craft’s negligent misrepresentation counterclaim
against Bienias fails as a matter of law because it is barred by
Indiana’s economic loss doctrine.
A. Standard of Review
We review the district court’s factual findings for clear er-
ror and the court’s legal conclusions de novo. See Tax Track
Systems Corp. v. New Investor World, Inc., 478 F.3d 783, 789
(7th Cir. 2007); Mayer v. Gary Partners & Co., 29 F.3d 330, 334
(7th Cir. 1994) (“When federal judges act as triers of fact in
diversity cases, all questions concerning the standard of ap-
pellate review are governed by federal law.”). The decisive
issue here is a legal one.
Nos. 14-3306 & 14-3315 7
B. Indiana’s Economic Loss Doctrine
Indiana substantive law governs this case. Under Indi-
ana’s economic loss doctrine, and subject to certain excep-
tions we discuss below, “there is no liability in tort for pure
economic loss caused unintentionally.” Indianapolis-Marion
County Public Library v. Charlier Clark & Linard, P.C., 929
N.E.2d 722, 736 (Ind. 2010) (“Indianapolis Library”). The rule
reflects the general principle that contract law is better suited
than tort law to address the problem of commercial losses
caused by mere negligence. See Miller v. U.S. Steel Corp, 902
F.2d 573, 574 (7th Cir. 1990); accord, Indianapolis Library, 929
N.E.2d at 729 (favorably citing Miller and discussing its ra-
tionale).
Merchants negotiating a contract can allocate between
themselves the risk of commercial losses flowing from pos-
sible breaches. The economic loss doctrine recognizes this
reality and prevents a commercial party from recovering in
tort for commercial losses it could have protected itself
against through contractual terms such as warranties, in-
demnification, or provisions for remedies. For the classic
discussion of the justification for the economic loss rule, see
Seely v. White Motor Co., 403 P.2d 145, 150–51 (Cal. 1965)
(Traynor, C.J.); see also Wausau Underwriters Ins. Co. v. United
Plastics Group, Inc., 512 F.3d 953, 957–58 (7th Cir. 2008) (col-
lecting cases and discussing rationale); Progressive Ins. Co. v.
General Motors Corp., 749 N.E.2d 484, 488 (Ind. 2001) (discuss-
ing rationale); KB Home Indiana Inc. v. Rockville TBD Corp.,
928 N.E.2d 297, 304 (Ind. App. 2010) (same).
Indiana courts apply the economic loss rule to preclude
recovery in tort for “purely economic loss—pecuniary loss
unaccompanied by any property damage or personal injury
8 Nos. 14-3306 & 14-3315
(other than damage to the product or service provided by
the defendant).” Indianapolis Library, 929 N.E.2d at 730. Here,
the damages sustained by Child Craft were purely economic.
All of its damages flowed from the fact that Summit deliv-
ered non-conforming goods under the purchase orders.
The rationale for the economic loss rule applies squarely
to the facts of this case: in this contract for the sale of goods
by one merchant to another, Child Craft could negotiate the
scope of remedies for non-conforming goods. (In fact, it ne-
gotiated for a term in the contract entitling it to $30 per man-
hour in labor costs for re-working defective products.) Un-
less Child Craft can satisfy an exception to the economic loss
doctrine, the doctrine bars any recovery on the negligent
misrepresentation counterclaim against Bienias.
C. Child Craft’s Arguments for an Exception
Indiana courts recognize several exceptions to the eco-
nomic loss doctrine, but none fits this case. Child Craft’s first
argument for an exception is based on the nature of the
claim it is pursuing. Under Indiana law, negligent misrepre-
sentation can qualify as an exception to the economic loss
rule, but only in limited circumstances.
The key case is U.S. Bank, N.A. v. Integrity Land Title Corp.,
929 N.E.2d 742 (Ind. 2010), where the Indiana Supreme
Court held that the economic loss rule did not bar tort liabil-
ity for commercial losses sustained in connection with a de-
fective title search. There, a title insurance company failed to
discover a foreclosure judgment on real property. It issued a
title commitment to a lender representing that the title
search had not uncovered any judgments against the seller
of the real property. Eventually the plaintiff bank acquired
Nos. 14-3306 & 14-3315 9
the lender’s interest in the real property and was forced to
defend against the holder of the foreclosure judgment. The
Indiana Supreme Court held that the economic loss rule did
not bar the bank’s negligent misrepresentation claim against
the title insurance company even though the bank’s losses
were purely economic. Id. at 749–50.
Two considerations were critical to the court’s decision.
First, the court emphasized that the plaintiff bank and the
defendant title insurance company were not in contractual
privity with one another. See id. at 745 (“Integrity has argued
at every stage of this litigation that it was not in contractual
privity with U.S. Bank. This is a critical point. Were there to
be a contract between Integrity and U.S. Bank, the parties in
all likelihood would be relegated to their contractual reme-
dies.”), citing Indianapolis Library, 929 N.E.2d at 729; see also
id. at 749 n.6 (“we do not adopt the proposition that a tort
claim for negligent misrepresentation may be brought where
the parties are in contractual privity”). Second, the court
emphasized the special factors that apply in the context of
title insurance: “Title searches are frequently required in sit-
uations involving transactions in which the state of the title
must be known accurately or the customer will foreseeably
suffer harm that is both certain and direct.” Id. at 749. Nei-
ther of these considerations applies here.
Child Craft counters that the “privity” factor actually
cuts in its favor. Although there was contractual privity be-
tween it and Summit, Child Craft contends Bienias should
be considered an independent third party, personally liable
for the statements he made about contract performance dur-
ing the life of the contract.
10 Nos. 14-3306 & 14-3315
Indiana law does not support this sweeping assertion. If
it were accepted, it would open new vistas for commercial
litigation freed of the contract law framework that has been
built over the past couple of centuries. Bienias was a corpo-
rate officer and employee of Summit. He made each alleged-
ly negligent misrepresentation about whether the goods
would or did conform to the contract’s specifications in his
capacity as an agent for the corporation. Under Indiana law,
an agent acting within the scope of his authority is not per-
sonally liable in carrying out a contractual obligation of the
principal. See Greg Allen Construction Co. v. Estelle, 798
N.E.2d 171, 173 (Ind. 2003) (“The proper formulation of the
reason Allen is not liable here is that his negligence consisted
solely of his actions within the scope of his authority in neg-
ligently carrying out a contractual obligation of the corpora-
tion as his employer.”). In those circumstances, the plaintiff
is “remitted to [its] contract claim against the principal,” and
it “should not be permitted to expand that breach of contract
into a tort claim against either the principal or its agents by
claiming negligence as the basis of the breach.” Id.
We recognize the possibility that an agent could exceed
his authority by engaging in an intentional wrong (such as
fraud) and thus become personally liable under tort princi-
ples. Cf. Indiana Civil Rights Comm’n v. County Line Park, Inc.,
738 N.E.2d 1044, 1050 (Ind. 2000) (discussing situations
where corporate officer can be held personally liable for torts
of the corporation, including fraud and unlawful intentional
discrimination); Restatement (Second) of Torts § 552, cmt j.
(1977) (discussing differences between fraudulent and negli-
gent misrepresentations). Child Craft has never pursued a
theory of intentional wrongdoing against Bienias. Child
Craft has alleged and proved to the satisfaction of the district
Nos. 14-3306 & 14-3315 11
judge that Bienias was negligent, but only negligent, in fail-
ing to discover that the raw wood components shipped by
P.T. Cita failed to comply with the specifications demanded
by Child Craft.
Child Craft argues that the rule of Greg Allen Construction
does not apply here because Bienias made “affirmative mis-
statements” about whether the goods would conform to the
contract’s specifications. For example, Bienias told Child
Craft that a shipment of cribs was “ready” even though Bie-
nias personally doubted whether the cribs would conform to
the specifications.
There are two problems with this argument. First, even if
Bienias made affirmative misstatements about whether the
goods would or did comply with the contract’s specifica-
tions, he still made them within the scope of his authority as
an agent for Summit. Holding Bienias personally liable for
statements made within the scope of his authority as an
agent to Summit would effectively “make the agent the
promisor when the parties had arranged their affairs to put
the principal, and only the principal, on the line.” See Greg
Allen Construction, 798 N.E.2d at 173. Under Child Craft’s
theory, however, a buyer bringing a breach of contract claim
against a seller would always be able to bootstrap a negli-
gent misrepresentation claim against any corporate employ-
ee who promised that the goods would conform to the con-
tract’s specifications. That view of personal liability would
work a dramatic change in Indiana law of business organiza-
tions and would effectively nullify the economic loss doc-
trine in cases of non-conforming goods.
Second, we have found no Indiana case supporting Child
Craft’s assertion that the economic loss rule should not apply
12 Nos. 14-3306 & 14-3315
because Bienias made “affirmative misstatements” as op-
posed to simply remaining silent about whether the goods
conformed to the contract’s specifications. Even with a silent
delivery of goods, sellers are ordinarily treated as implicitly
representing that the goods meet certain specifications. See
Ind. Code § 26-1-2-314 (Indiana adoption of Uniform Com-
mercial Code provision on implied warranty of merchanta-
bility in sales of goods). In any event, Indiana cases make
clear that the economic loss doctrine applies in cases of ex-
plicit misstatements. See Prairie Production, Inc. v. Agchem Di-
vision-Pennwalt Corp., 514 N.E.2d 1299, 1304–06 (Ind. App.
1987) (economic loss doctrine barred negligent misrepresen-
tation claim where defendant negligently labeled pesticides);
Martin Rispens & Son v. Hall Farms, Inc., 621 N.E.2d 1078,
1090–91 (Ind. 1993) (favorably citing Prairie Production and
holding that economic loss doctrine barred claim for negli-
gent marketing of seeds infected with a disease), abrogated on
other grounds by Hyundai Motor America, Inc. v. Goodin, 822
N.E.2d 947 (Ind. 2005). If Child Craft’s theory were viable,
though, we would expect to see many Indiana cases holding
that the buyer can recover in tort for that type of “affirmative
misstatement.” Child Craft has not cited any such case, and
we have found none.
In a final attempt to take its negligent misrepresentation
counterclaim against Bienias outside the economic loss rule,
Child Craft says that Bienias can be held personally liable for
negligent misrepresentation because he was a “professional
broker,” and that Indiana imposes tort liability on profes-
sional brokers notwithstanding the economic loss doctrine.
We are not persuaded. It is true that Indiana recognizes
an exception to the economic loss rule for certain special re-
Nos. 14-3306 & 14-3315 13
lationships. Integrity Land held that a title insurance compa-
ny could be liable for commercial losses on a negligent mis-
representation theory, and it noted that the economic loss
rule would not necessarily bar tort liability for commercial
losses against lawyers, fiduciaries, and liability insurers. See
929 N.E.2d at 745 (“However, we cautioned that the econom-
ic loss rule admits of certain exceptions for purely commer-
cial loss in several special circumstances.”); see also Indianap-
olis Library, 929 N.E.2d at 736 (“But Indiana courts should
recognize that the [economic loss] rule is a general rule and
be open to appropriate exceptions, such as (for purposes of
illustration only) lawyer malpractice, breach of a duty of care
owed to a plaintiff by a fiduciary, breach of a duty to settle
owed by a liability insurer to the insured, and negligent mis-
statement.”). Child Craft cites no authority, however, for the
proposition that the corporate representative of a merchant
in an ordinary dispute between a seller and a buyer of goods
should be considered in the same vein.
Instead, Child Craft seizes on Bienias’s trial testimony
that he considered himself a “broker.” The district court
placed great emphasis on this testimony as well, describing
Bienias as a “professional advisor” to Child Craft. We defer
as we must to the district court’s factual finding, but even so,
the fact that Bienias considered himself a broker does not es-
tablish that he owed a special duty to Child Craft. This is the
key portion of Bienias’s testimony:
Q: Can you describe for Judge Pratt—
obviously, we have three entities here. We
have Child Craft and then Summit and then
Cita. What were the nature of the contract-
ual relationships among those three?
14 Nos. 14-3306 & 14-3315
A: Well, I acted as the broker, and they
would—and I would sell it to them, and I
would purchase it from Cita.
Q: So you were essentially standing in the
middle?
A: That is correct.
This is far too thin a read to support imposing a special
duty on Bienias. He was simply a commercial supplier, posi-
tioned in the middle between an upstream producer of raw
materials and a downstream manufacturer. Child Craft’s
own manager confirmed as much when he testified:
Mr. Bienias—I heard the name “broker” before.
Mr. Bienias wasn’t a broker, because a broker
typically gets two to four to five percent, a sur-
charge on top of anything you’re procuring.
Mr. Bienias was getting a much greater cut of
that, and Mr. Bienias was actually the supplier of
record. There was never—there wasn’t even an
entry in any of our business systems that refer-
enced P.T. Cita. So, Mr. Bienias was the supplier.
Whether he chose to go to the one supplier, P.T.
Cita, or the other supplier that he had in Indo-
nesia, or some place in Chile, he would have to
tell us that that was going on, but that’s his call,
because we’re buying from him.
(Emphases added.)
True, Bienias had specialized education and a long histo-
ry of experience in the wood processing industry. He holds a
bachelor’s degree in forestry, a master’s degree in wood
technology, and a degree in business, and he has held a vari-
Nos. 14-3306 & 14-3315 15
ety of jobs in the industry, including quality control manag-
er, manufacturing manager, and plant manager for several
furniture manufacturing companies. But that expertise does
not justify imposing a special duty of care on him as an
agent of the seller. Commercial suppliers often know more
about their products than their buyers. That discrepancy
does not transform a garden-variety commercial relationship
into something akin to a lawyer-client, fiduciary, insurer-
insured, or employer-employee relationship. Cf. Integrity
Land, 929 N.E.2d at 745–76; Indianapolis Library, 929 N.E.2d at
736; Jim Barna Log Systems Midwest, Inc. v. General Cas. Ins.
Co. of Wisc., 791 N.E.2d 816, 830 (Ind. App. 2003) (recogniz-
ing negligent misrepresentation claim in the context of em-
ployer-employee relationship). Bienias was not compensated
by Child Craft for supplying information. He was compen-
sated only as an employee and owner of the corporation that
would receive payment under the contracts for the sales of
goods.
The only case the district court cited to support its con-
clusion that Bienias owed a special duty to Summit was Jef-
frey v. Methodist Hospitals, 956 N.E.2d 151 (Ind. App. 2011), an
unfortunate case involving an adoption. The plaintiffs were
a married couple who planned to adopt a child. They asked
a social worker employed by the defendant hospital about a
prospective child’s health. The mother told the social worker
that she would rely on her judgment in deciding whether to
adopt the child. The social worker told her that the child was
healthy and without any abnormalities.
After the parents completed the adoption, they discov-
ered that the child had a large hole in the left side of his
brain, a condition associated with severe neurological defi-
16 Nos. 14-3306 & 14-3315
cits. The parents sued the hospital for negligent misrepresen-
tation, arguing that the social worker as an agent of the hos-
pital owed a special duty to communicate “accurate and
complete information” about the child’s medical status. Id. at
153–54, 156. The court held that the plaintiffs had stated a
viable claim for negligent misrepresentation against the hos-
pital (not the social worker in her individual capacity), rea-
soning that the hospital had “superior knowledge and ex-
pertise with regard to the information its employees gave the
Jeffreys, and it was in the business of supplying information
of that nature.” Id. at 157 (internal quotation marks omitted).
Jeffrey does not support Child Craft’s position here. First,
there was no contract between the plaintiffs and the defend-
ant hospital or the social worker. Unlike Child Craft, the Jef-
freys were not in a position to protect themselves by insist-
ing on warranties or other terms allocating risk among the
parties to a contract.
Second, the special relationship between two prospective
adoptive parents and a social worker employed by a hospital
is simply not comparable to an arm’s-length commercial
transaction between two merchants for the sale of goods.
The parents could not have been reasonably expected to dis-
cover abnormalities with the child. That is why they asked
the hospital’s employee to advise them. Here, by contrast,
Child Craft could have and in fact did send its employees to
inspect P.T. Cita’s manufacturing facilities. If Child Craft did
not have the expertise to inspect the products itself, it could
have paid someone else, perhaps even Bienias, to perform
the inspection. But it did not hire an expert and did not pay
Bienias to supply information.
Nos. 14-3306 & 14-3315 17
At bottom, in commercial settings the tort of negligent
misrepresentation is designed to protect plaintiffs who rea-
sonably rely on advice provided by defendants who are in
the business of supplying that information. That is why In-
diana recognizes the tort in situations involving lawyers, fi-
duciaries, and insurance companies. Bienias was not in the
business of supplying information to Child Craft. He pro-
vided the information about whether the goods would con-
form to the contract’s specifications in connection with a con-
tract for the sale of commercial goods. Cf. Restatement (Sec-
ond) of Torts § 552, cmt. a (1977) (“[O]ne who relies upon
information in connection with a commercial transaction
may reasonably expect to hold the maker to a duty of care
only in circumstances in which the maker was manifestly
aware of the use to which the information was to be put and
intended to supply it for that purpose.”).
Here, one merchant agreed to sell goods to another. Child
Craft’s losses flowed only from the receipt of non-
conforming goods. Indiana’s economic loss rule bars its neg-
ligent misrepresentation counterclaim against Bienias, who
acted and spoke within his authority as an agent to the prin-
cipal.
III. The Entry of Default Against Summit and Summit’s Claims
Against Child Craft
We now turn to the second set of issues in these appeals,
which stem from procedural problems that arose when the
lawyer for Summit and Bienias moved to withdraw just a
few weeks before the trial. That motion triggered a series of
case-management decisions by the district court. These deci-
sions culminated in the district court (1) entering default
against Summit on Child Craft’s breach of contract and neg-
18 Nos. 14-3306 & 14-3315
ligent misrepresentation counterclaims, and (2) dismissing
Summit’s claims against Child Craft. The district court first
dismissed Summit’s claims without prejudice, but the court
eventually refused to reinstate the claims, thereby making
the dismissal with prejudice.
We set out the procedural history below and ultimately
conclude that the district court abused its discretion in refus-
ing to set aside the default on the negligent misrepresenta-
tion counterclaim against Summit. In all other respects, the
district court did not abuse its discretion in managing the
problems posed by counsel’s withdrawal.
A. Procedural History
After discovery and at least one continuance of the trial,
the court set the trial date for June 10, 2013 and warned the
parties that no further continuances would be granted with-
out just cause. On April 22, 2013 Summit filed another mo-
tion to continue the trial date. The court denied the motion
on April 25. On April 27, the lawyer representing Summit
and Bienias moved to withdraw from the case. The district
court denied the motion to withdraw because it did not con-
form to the local rules. The following day, counsel renewed
the motion.
On May 7, the district court held a telephone conference
with counsel, but Summit’s and Bienias’s lawyer did not par-
ticipate. During the call, the district court explained it would
take the motion to withdraw under advisement pending ver-
ification that counsel had advised Summit that it could not
represent itself because it was a corporate entity. See Scandia
Down Corp. v. Euroquilt, Inc., 772 F.2d 1423, 1427 (7th Cir.
1985). The following week, on May 13, the district court held
Nos. 14-3306 & 14-3315 19
another telephone conference and asked the lawyer repre-
senting Summit and Bienias about his pending motion to
withdraw. He told the court that both Summit and Bienias
had consented to his withdrawal, that his clients did not
have the money to go forward, and that he thought Summit
intended to dismiss its claims against Child Craft (or at the
very least to allow them to be dismissed without objection).
The district court granted the motion on May 14 and gave
Summit five days to hire a new lawyer or to show cause why
its claims should not be dismissed and default judgment en-
tered against it on Child Craft’s counterclaims.
Summit did not hire new counsel by the May 19 dead-
line. The final pretrial conference convened the following
day, with Bienias and Summit unrepresented by counsel.
The district court asked whether Summit was going to hire
new counsel and Bienias, appearing pro se, did not give a
clear answer. He seemed to suggest that his decision de-
pended on whether Child Craft would agree to drop its
counterclaims against him and Summit. The district court
patiently explained (again) that a corporation could not pro-
ceed without representation. The court eventually continued
the pretrial conference until May 28, giving Summit one last
opportunity to obtain new counsel. The district judge sug-
gested that Bienias talk things over with his recently-
withdrawn lawyer in the meantime.
At the May 28 telephone conference, Summit and Bienias
again appeared without counsel. The court dismissed Sum-
mit’s claims against Child Craft without prejudice and en-
tered default against Summit on Child Craft’s breach of con-
tract and negligent misrepresentation counterclaims. During
the conference, Bienias orally moved to continue the trial
20 Nos. 14-3306 & 14-3315
date on Child Craft’s remaining negligent misrepresentation
counterclaim against him in his personal capacity, and the
court denied the motion.
On June 5, a little more than a week after default had
been entered, new counsel appeared on behalf of both
Summit and Bienias. The next day the new attorney filed
motions to continue the trial, to set aside the “default judg-
ment” against Summit, and to reinstate Summit’s claims
against Child Craft. The court denied all three motions. In a
written order, the court explained that Summit had failed to
satisfy the standard under Federal Rule of Civil Procedure
60(b) but did not address Rule 55(c). Summit appeals both
decisions.
B. Standard of Review
We first need to sort out a little procedural confusion on
these issues. In its written entry on the May 28, 2013 hearing,
the district court said it had entered “default judgment”
against Summit on the counterclaims against it and that its
claims against Child Craft were dismissed without preju-
dice. But the district court did not actually enter a judgment
of any kind against Summit.
A default judgment would have fully resolved the coun-
terclaims against Summit, including the amount it owed,
and to be final it would have needed to have been certified
as a separate and appealable final judgment under Federal
Rule of Civil Procedure 54(b). Here, no amount of damages
was specified and no separate Rule 54(b) judgment was en-
tered. See generally Sims v. EGA Products, Inc., 475 F.3d 865,
868 (7th Cir. 2007) (explaining difference between default
judgment and entry of default); Home Ins. Co. of Ill. v. Adco
Nos. 14-3306 & 14-3315 21
Oil Co., 154 F.3d 739, 741 (7th Cir. 1998) (noting difference
and its importance in a case against multiple defendants).
When Summit’s new counsel moved to set aside the default
on June 6, the court still had not entered a default judgment
against Summit.
Relief from a truly final default judgment must be sought
under Rule 60(b). See 10A Charles Alan Wright et al., Federal
Practice & Procedure § 2695 (3d ed. 1998). Without a final
judgment, though, Summit’s motion to set aside the default
should have been evaluated under Rule 55(c), not under
Rule 60(b) as the district court did. Under either rule, the dis-
trict court exercises discretion, but the Rule 55(c) standard is
somewhat more lenient. As we explained in Sims, an entry of
default may be set aside for “good cause,” which does not
necessarily require a good excuse for the defendant’s lapse.
475 F.3d at 868; see also Chrysler Credit Corp. v. Macino, 710
F.2d 363, 368 (7th Cir. 1983) (standards are applied more le-
niently before judgment has actually been entered), citing
Breuer Electric Manufacturing Co. v. Toronado Systems of Ameri-
ca, Inc., 687 F.2d 182, 187 (7th Cir. 1982); 10A Wright et al.,
Federal Practice & Procedure § 2696 (“a default entry may be
set aside for reasons that would not be enough to open a de-
fault judgment”). Summit also challenges the district court’s
refusal to reinstate its claims against Child Craft, and that
decision is also reviewed for abuse of discretion. E.g.,
McCormick v. City of Chicago, 230 F.3d 319, 326–27 (7th Cir.
2000).
C. The District Court’s Decisions
We apply a deferential standard of review because the
district court is “the forum best equipped for determining
the appropriate use of default to ensure that litigants who
22 Nos. 14-3306 & 14-3315
are vigorously pursuing their cases are not hindered by
those who are not in an environment of limited judicial re-
sources.” Swaim v. Moltan Co., 73 F.3d 711, 712 (7th Cir. 1996)
(citation and internal quotation marks omitted). The district
court was not required to wait “indefinitely” for Summit to
obtain new counsel. See Scandia Down Corp. v. Euroquilt, Inc.,
772 F.2d 1423, 1427 (7th Cir. 1985). Nor is a corporation enti-
tled to grant itself a continuance by firing or failing to pay its
lawyers.
But even so, the district court abused its discretion in re-
fusing to set aside the entry of default against Summit on the
negligent misrepresentation counterclaim. As best we can
tell, Summit was without a lawyer for no more than about
two weeks before the court acted. The entry of what turned
out to be a multimillion dollar damages award against it,
without regard for the merit of the claim, gives us serious
pause. See Degen v. United States, 517 U.S. 820 (1996) (finding
abuse of discretion in defaulting litigant in $5.5 million civil
suit given availability of lesser sanctions, even where litigant
was fugitive outside the country). And when we consider the
possible prejudice to Child Craft on the other side of the
scale, we see very little. Allowing Summit to present its de-
fense alongside Bienias’s defense would have caused no
prejudice to Child Craft or to the court. That defense would
have involved the same lawyer and the same evidence. As
the district court observed in its entry on damages, the “evi-
dence presented at the damages hearing as to Mr. Bienias
also goes toward Summit,” and the court actually based its
final judgment against Summit on that same evidence.
The best reason supporting the district court’s entry of
default was that there was so little time before trial. But less-
Nos. 14-3306 & 14-3315 23
er sanctions would have been much better suited to address
the two-week gap in representation. For example, the court
could have adjusted and/or enforced deadlines for final trial
preparations to protect Child Craft from unfair delays or
other prejudice without the ultimate sanction of default.
Another option would have been to require Summit’s
prior counsel to continue representing Summit at trial. After
all, that lawyer had filed the case in the first place. He and
his client were obliged to protect the court and Child Craft
from prejudice resulting from problems in his relationship
with his client. See Ind. R. of Prof. Conduct 1.16(c) (“When
ordered to do so by a tribunal, a lawyer shall continue repre-
sentation notwithstanding good cause for terminating the
representation.”); see also, e.g., Burns v. General Motors Corp.,
No. 1:06-cv-00499-DFH-WTL, 2007 WL 4438622 (S.D. Ind.
Nov. 30, 2007) (denying motion to withdraw); Hammond v.
T.J. Litle & Co., 809 F. Supp. 156, 159 (D. Mass 1992) (denying
leave to withdraw: “An attorney who agrees to represent a
client in a court proceeding assumes a responsibility to the
court as well as to the client.”).
Another important factor in our review of the entry of
default against Summit is the strength of its defense on the
merits of the negligent misrepresentation counterclaim.
Summit’s defense on that claim is as strong as Bienias’s de-
fense: the economic loss doctrine simply bars the claim as a
matter of law. A multimillion dollar judgment on a specious
legal theory is too heavy a sanction for a corporation’s two-
week gap in representation, especially when setting aside
the entry of default would not have caused prejudice to the
opposing party or the court’s docket. See Sims, 475 F.3d at
868 (“Damages disproportionate to the wrong afford good
24 Nos. 14-3306 & 14-3315
cause for judicial action [under Rule 55(c)], even though there
is no good excuse for the defendant’s inattention to the
case.”). That is especially true where, as here, Summit’s new
lawyer moved to set aside the entry of default a little more
than a week after the entry of default. We find that the entry
of default against Summit on the negligent misrepresenta-
tion counterclaim and refusal about a week later to set it
aside added up to an abuse of discretion. We will direct the
entry of judgment in favor of Summit on that counterclaim
for the reasons discussed in Part II of this opinion.
The result is different for the district court’s dismissal of
Summit’s own claims for relief against Child Craft and the
relatively minor breach of contract counterclaim against
Summit. Where Summit was the complaining party, the dis-
trict court was entitled to expect Summit to be prepared to
pursue its case and not to keep Child Craft in suspense in
the weeks before trial about whether Summit would be pur-
suing its claims. On Child Craft’s breach of contract counter-
claim against Summit, where the judgment was for $11,000
and Summit has not offered any plausible defense, the dis-
trict court’s decision was not an abuse of discretion.
We REVERSE the district court’s judgment on Child
Craft’s negligent misrepresentation counterclaim against
Ron Bienias and Summit and direct the district court to enter
final judgment in favor of Bienias and Summit on that coun-
terclaim. In all other respects, we AFFIRM the district court’s
judgment. All parties shall bear their own costs on appeal.