Rexing Quality Eggs v. Rembrandt Enterprises, Inc. ( 2020 )


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  •                               In the
    United States Court of Appeals
    For the Seventh Circuit
    ____________________
    No. 19-2146
    REXING QUALITY EGGS,
    Plaintiff-Appellant,
    v.
    REMBRANDT ENTERPRISES, INC.,
    Defendant-Appellee.
    ____________________
    Appeal from the United States District Court for the
    Southern District of Indiana, Evansville Division.
    No. 3:19-cv-00031 — Jane Magnus-Stinson, Chief Judge.
    ____________________
    ARGUED DECEMBER 3, 2019 — DECIDED MARCH 26, 2020
    ____________________
    Before WOOD, Chief Judge, and HAMILTON and SCUDDER,
    Circuit Judges.
    WOOD, Chief Judge. This case is the second to arise out of
    an ill-fated relationship between Rexing Quality Eggs and
    Rembrandt Enterprises, Inc. The first case addressed various
    claims arising under a contract that the two parties formed at
    the outset of their business dealings. Although this case arises
    out of the same transaction, this time Rexing, the plaintiff, has
    raised tort claims. The question on appeal is whether its effort
    2                                                   No. 19-2146
    to bring a new action is consistent with Indiana’s prohibition
    on claim splitting, under which a plaintiff is forbidden to
    bring a case presenting claims that arise out of the same trans-
    action or events that underlie claims brought in another law-
    suit. We hold that the claim-splitting ban applies here, and so
    we affirm the district court’s judgment.
    I
    Rexing and Rembrandt entered into a contract under
    which Rembrandt, a producer of eggs, promised to supply
    Rexing, a distributor, with 3,240,000 cage-free eggs every
    week for a year. Eight months after the agreement took effect,
    Rexing repudiated it, claiming that Rembrandt had breached
    its obligations by failing to provide eggs that met the quality
    standards specified in the agreement. Rexing refused to ac-
    cept any more loads of eggs. In the aftermath, Rexing sued
    Rembrandt, seeking a declaration that it was excused from ac-
    cepting any more eggs, as well as incidental and consequen-
    tial damages for alleged breaches of warranty in the purchase
    agreement. Rexing Quality Eggs v. Rembrandt Enterprises, Inc.,
    
    360 F. Supp. 3d 817
     (S.D. Ind. 2018) (Rexing I). Rexing sought
    $67,261.50 in general damages, $60,204.84 in lost profits, and
    $997,650 in start-up costs.
    Rembrandt counterclaimed, seeking damages for breach
    of contract. After discovery, both parties moved for summary
    judgment. The trial court determined that Rexing had unilat-
    erally terminated the contract and that the breach was not ex-
    cused. At the same time, it ruled that Rembrandt was not en-
    titled to summary judgment on the question whether it was
    entitled to damages, and it allowed the case to move forward
    to trial on that issue. The district court held a trial in Novem-
    ber 2019; it resulted in a jury verdict in Rembrandt’s favor and
    No. 19-2146                                                      3
    an award of $1,522,302.61 in damages against Rexing. Rexing
    filed a timely notice of appeal, but on January 2, 2020, it vol-
    untarily dismissed the appeal pursuant to Federal Rule of Ap-
    pellate Procedure 42(b). It appears that some post-verdict
    wrangling over attorney’s fees and costs is still ongoing.
    After its partial loss on summary judgment but before the
    trial in Rexing I, Rexing brought this action (Rexing II) in state
    court, one month after the district court ordered summary
    judgment in the first case. This time, Rexing sued Rembrandt
    for the torts of conversion and deception. Rexing claimed that
    Rembrandt had refused to return reusable shipping materials,
    including plastic flats, dividers, and pallets, collectively called
    the “EggsCargoSystem.” Rexing had provided the EggsCar-
    goSystem to Rembrandt to use in loading eggs for Rexing to
    pick up. The original contract called for Rexing to provide
    Rembrandt with the materials, but it did not require Rem-
    brandt to return the EggsCargoSystem at the termination of
    the agreement. Nonetheless, Rexing made three demands that
    Rembrandt return the EggsCargoSystem. Rembrandt re-
    turned some, but not all, of the materials in November 2018.
    In Rexing I, Rexing had sought the value of the EggsCargoSys-
    tem as part of the start-up costs that it alleged it incurred in
    reliance on the original agreement with Rembrandt. Now, in
    Rexing II, Rexing seeks damages for the unreturned materials,
    as well as for the loss of the use of the EggsCargoSystem dur-
    ing the time that Rembrandt allegedly unlawfully possessed
    it.
    Taking advantage of the fact that the parties were of di-
    verse citizenship (Rembrandt is an Iowa corporation with its
    principal place of business in that state, and Rexing is an In-
    diana partnership whose only two partners are both citizens
    4                                                    No. 19-2146
    of Indiana), and the amount in controversy easily exceeded
    $75,000, Rembrandt removed Rexing II to federal court and
    moved to dismiss the action. 
    28 U.S.C. §§ 1332
    (a)(1) & (c),
    1441(b). It argued that the claims in Rexing II were barred by
    the claim-preclusion branch of res judicata in light of the dis-
    trict court’s grant of partial summary judgment in Rexing I,
    and it contended that Rexing had improperly split its claims
    between the two cases.
    The district court granted Rembrandt’s motion to dismiss,
    ruling that, while the new case was not barred by claim pre-
    clusion, Rexing had impermissibly split its claims. Under In-
    diana’s doctrine prohibiting claim splitting, a plaintiff cannot
    bring a new lawsuit based upon the same transaction or oc-
    currence that underlies claims brought in another lawsuit. Be-
    cause Rexing I and Rexing II both centered around the same
    controversy, the district court determined that Rexing had im-
    permissibly split its claim and dismissed the case. Rexing ap-
    peals.
    II
    Rexing offers three arguments why the rule against claim
    splitting should not apply to this case. First, it argues that the
    district court applied the wrong test under Indiana law for es-
    tablishing claim splitting, and that it would have prevailed
    under the proper test. Second, it argues that claim splitting
    cannot prevent litigation of facts that were unknown at the
    time the original case was filed. Finally, it argues that the rule
    against claim splitting does not apply to continuing torts, and
    that conversion is a continuing tort under Indiana law. Each
    of these arguments fails, as discussed below.
    No. 19-2146                                                      5
    A
    Before addressing Rembrandt’s arguments, we need to
    say a word about the law that applies to them. Rexing’s posi-
    tion is a bit hard to follow, but it appears to argue that Indiana
    law applies because this is a substantive matter and that the
    district court deviated from Indiana’s rules; it then expends
    considerable time arguing that the district court erroneously
    relied on Telamon Corp. v. Charter Oak First Ins. Co., 
    2016 WL 67297
     (S.D. Ind. 2016), aff’d, 
    850 F.3d 866
     (7th Cir. 2017), when
    it resolved this issue. Rembrandt responds first that there is
    no material difference between Indiana law and federal law,
    and that it wins either way.
    In fact, the district court approached this issue in the
    appropriate way. It first recognized that the law on claim-
    splitting is part of the law of res judicata. See Palka v. City of
    Chicago, 
    662 F.3d 428
    , 437 (7th Cir. 2011); Alvear-Velez v.
    Mukasey, 
    540 F.3d 672
    , 678 (7th Cir. 2008). It then noted that
    when a federal court is considering the effect of an earlier
    ruling in a case within its diversity jurisdiction, as Rexing I
    was, for purposes of claim preclusion “federal common law
    governs the … effect of a dismissal by a federal court sitting
    in diversity.” Semtek Int’l Inc. v. Lockheed Martin Corp., 
    531 U.S. 497
    , 508 (2001). Nonetheless, the Supreme Court continued,
    the content of the federally prescribed rule should be taken
    from “the law that would be applied by state courts in the
    State in which the federal diversity court sits.” 
    Id.
     Like the
    district court, we see no reason why this approach should not
    apply with equal force to the problem of claim-splitting. We
    therefore hold that the content of the law governing the effect
    of Rexing I comes from Indiana law, which is incorporated as
    6                                                   No. 19-2146
    the applicable federal common law. Our references below to
    Indiana law should be understood in this light.
    The rule against claim splitting prohibits a plaintiff from
    bringing a new case raising issues arising out of the same
    transaction or occurrence as an earlier case, when those issues
    could have been raised in the first litigation. Indiana law has
    long recognized this prohibition. See MicroVote Gen. Corp. v.
    Indiana Election Comm’n, 
    924 N.E.2d 184
    , 192 (Ind. Ct. App.
    2010) (“[A] party is not allowed to split a cause of action, pur-
    suing it in a piecemeal fashion and subjecting a defendant to
    needless multiple suits.”); Quimby v. Becovic Mgmt. Grp., Inc.,
    
    946 N.E.2d 30
    , 34 n.4 (Ind. Ct. App. 2011) (“[M]ultiple legal
    theories supporting relief on account of one transaction must
    be litigated at one go.”) (quoting Wabash Valley Power Ass’n,
    Inc. v. Rural Electrification Admin., 
    903 F.2d 445
    , 455 (7th Cir.
    1990)).
    The district court here applied a two-part test drawn from
    Telamon. In that case, another judge from the same district
    summarized the governing law as follows: a court should find
    that a plaintiff split her claims when “(1) the second claim is
    based on the same transaction or occurrence as the first claim
    and there is (2) an identity of parties or their privies.” 
    2016 WL 67297
    , at *2. (Although it was not clear from the district
    court’s citations whether it was looking to federal law or In-
    diana law, on appeal we explicitly recognized that the Semtek
    approach governs. See Telamon, 850 F.3d at 872–73.) The court
    in Rexing II determined that Rexing had merely repackaged
    its failed attempt to sue Rembrandt for breach of contract as a
    tort case, and that the rule against claim splitting barred the
    second action.
    No. 19-2146                                                     7
    Though acknowledging that Indiana law prohibits claim
    splitting, Rexing argues that the district court applied the
    wrong test for establishing whether claim splitting had oc-
    curred. Rexing points to Indiana cases that have held that “the
    test for making [the claim-splitting] determination is whether
    identical evidence will support the issues involved in both ac-
    tions.” MicroVote, 
    924 N.E.2d at 192
    . Referring to this ap-
    proach as the “identical evidence test,” Rexing argues that in
    Indiana, the rule against claim splitting applies only when
    there is no difference between the evidence needed to support
    the claims in each of the two actions. Because the elements of
    a claim for breach of contract and a claim for deception or con-
    version are supported by different facts, Rexing reasons, dif-
    ferent evidence is required to substantiate each claim and thus
    it did not split its claims across the two cases.
    Although Indiana courts do sometimes use the term
    “identical evidence,” Rexing overstates the significance of
    those words. The rule against claim splitting does not apply
    exclusively to cases in which the second claim can be sup-
    ported only by exactly the same evidence that supported the
    first. The Indiana cases on point show that the “identical evi-
    dence” test requires only that “the same general evidence
    would be used to adjudicate all of [the] claims.” Hilliard v. Ja-
    cobs, 
    957 N.E.2d 1043
    , 1047 (Ind. Ct. App. 2011).
    There is no meaningful difference between the “identical
    evidence” test, so understood, and the test that the district
    court applied. We have held as much in earlier cases applying
    Indiana’s identical-evidence test. Wabash Valley, 
    903 F.2d at 456
     (observing that identical evidence is “another way of ask-
    ing whether the two suits deal with a common occurrence”);
    Atkins v. Hancock Cnty. Sheriff’s Merit Bd., 
    910 F.2d 403
    , 405 (7th
    8                                                     No. 19-2146
    Cir. 1990) (“Understood literally, [the identical-evidence] ap-
    proach would confine a plea of res judicata to cases in which
    the claim in plaintiff’s second suit was identical to the claim
    in his first, and would invite piecemeal litigation with a
    vengeance. We have not thought that Indiana intended to con-
    fine res judicata so narrowly[.]”). Although the Indiana Su-
    preme Court has not ruled on this issue directly, it has favor-
    ably cited our cases applying the identical-evidence rule. See,
    e.g., Erie Ins. Co. v. George, 
    681 N.E.2d 183
    , 190 (Ind. 1997) (cit-
    ing Wabash Valley, 
    903 F.2d at 455
    ). Thus, the district court
    properly applied Indiana’s law concerning claim splitting,
    and Rexing’s argument to the contrary fails.
    B
    Rexing also urges that the bar on claim splitting does not
    apply to this case because the claim in Rexing II arises from
    events that occurred after it filed Rexing I. Because Rexing was
    unaware that Rembrandt would not return the EggsCargo-
    System at the time it filed Rexing I, it argues, the rule against
    claim splitting does not apply.
    As the district court held, Rexing has not shown that ma-
    terial unknown facts were later revealed. Before initiating
    Rexing I, Rexing had already formally demanded the return
    of the EggsCargoSystem. It again demanded that Rembrandt
    return the System the day after filing Rexing I. Additionally,
    in its complaint in Rexing I, Rexing sought the recovery of the
    cost of the EggsCargoSystem. The conclusion is irresistible
    that Rexing knew at the time it filed the first case that the cus-
    tody or ownership of the EggsCargoSystem was part of the
    dispute between the parties; it thus should have raised any-
    thing it had to say about that claim at the time. No material
    facts that were unknown at the time Rexing filed Rexing I later
    No. 19-2146                                                    9
    came to light. Rexing cannot evade the application of the rule
    against claim splitting by arguing that it could not have raised
    its arguments about the System at the time it filed Rexing I
    because the claim was not ripe or the facts were unknown.
    C
    Finally, Rexing argues that an exception to the rule against
    claim splitting should apply to cases of conversion. Pointing
    to the American Law Institute’s Restatement (Second) of
    Judgments, it argues that “continuing or concurrent
    wrong[s]” are exempt and that the tort of conversion is such
    a wrong. RESTATEMENT (SECOND) OF JUDGMENTS § 26(1)(e) (ALI
    1982); see also Van Bibber v. Norris, 
    404 N.E.2d 1365
    , 1380 (Ind.
    Ct. App. 1980) (“Conversion is a continuing tort, lasting as
    long as the person entitled to the use and possession of his
    property is deprived of it.”). We are also unpersuaded by this
    argument.
    Rexing has not directed our attention to any case law
    showing that Indiana has adopted Section 26 of the Restate-
    ment. But even if we were to overlook this serious deficit, it
    would not help Rexing. Section 26(1)(e) applies only to situa-
    tions in which a harm cannot be remedied at one go. The Re-
    statement gives nuisance as an example of such a continuing
    tort. There, a defendant’s activity on her own land causes on-
    going harm to the plaintiff in the use of her land. In such cases,
    the plaintiff may be able to sue repeatedly to remedy the con-
    tinuing harm as it accrues. Even in such a case, however, “the
    plaintiff, to avoid splitting, must claim all damages suffered
    [up] to the time of the suit.” RESTATEMENT (SECOND) OF
    JUDGMENTS § 26 cmt. h.
    10                                                 No. 19-2146
    Conversion is not a continuing tort within the meaning of
    Section 26(1)(e). Even viewing the facts in the light most fa-
    vorable to Rexing, Rembrandt unlawfully appropriated the
    EggsCargoSystem only one time. Rexing knew that Rem-
    brandt remained in possession of the System at the time it
    filed Rexing I; indeed, it had already demanded that the Sys-
    tem be returned to it. The fact that Rembrandt continued to
    refuse to return the System does not render the conversion a
    “continuous” tort in the sense intended by the Restatement
    (or in any other sense we normally see). Indiana courts have
    dismissed conversion claims on claim-splitting grounds,
    demonstrating that Indiana law does not recognize the rule
    that Rexing advocates. Hilliard, 957 N.E.2d at 1048. There is no
    continuing tort exception to the rule against claim splitting in
    cases of conversion.
    III
    Despite Rexing’s best efforts to paint these proceedings in
    a different light, we agree with the district court that they
    were logically part of Rexing I and that the attempt to rehash
    them in Rexing II was an impermissible effort at claim split-
    ting. We therefore AFFIRM the judgment of the district court.