In the

United States Court of Appeals

For the Seventh Circuit

Nos. 08-3239 & 08-4038

BKCAP, LLC, GRAYCAP, LLC, AND SWCAP, LLC,

Plaintiffs-Appellants,

v.

CAPTEC FRANCHISE TRUST 2000-1,

Defendant-Appellee.

Appeals from the United States District Court 

for the Northern District of Indiana, South Bend Division.

No. 3:07-cv-00637-CAN—Christopher A. Nuechterlein, Magistrate Judge.

ARGUED APRIL 6, 2009—DECIDED JULY 13, 2009

Before BAUER, SYKES, and TINDER, Circuit Judges.

TINDER, Circuit Judge. This case demonstrates that

even experienced, sophisticated business entities can

encounter difficulty when drafting carefully negotiated

loan documents. Since July 2007, the plaintiffs and the

defendant have been at loggerheads over the meaning

of just a handful of lines out of several hundred in their

five-page, single-spaced Note. Unfortunately, this appeal
2 Nos. 08-3239 & 08-4038

cannot bring their stalemate to an end, and more litigation lies ahead. However, while disputes over the

meaning of language in loan documents can be somewhat dry, this one is more interesting than most such cases.

The plaintiffs, special purpose entities that we refer to

as “Borrowers,” obtained several $1 to 2 million

mortgage finance loans from the defendant, or “Lender.”

Each of the loans required Borrowers to pay off the debt

at around 10% interest over 15 to 20 years. Borrowers

had the right to pay off the loans early, but subject to

a “Prepayment Premium” if they prepaid before ten

years into the loan terms. When Borrowers tried to

prepay the loans after only eight years, the parties disagreed on how to calculate the Prepayment Premium.

Their dispute led to this diversity action, in which the

parties seek a declaratory judgment as to the correct

interpretation of the Prepayment Premium. The district

court granted summary judgment in favor of Lender,

concluding that the unambiguous contract language

supported Lender’s interpretation. We conclude, however, that the contract is ambiguous, making it inappropriate to resolve the meaning of the contract at the summary judgment stage. We therefore remand for a trial on

the question of the parties’ intended meaning of the

Prepayment Premium.

I. Background

Borrowers are wholly owned subsidiaries of “Quality

Dining, Inc.,” which owns several franchise restaurants,

mostly “Chili’s” and “Burger King,” in several states that
Nos. 08-3239 & 08-4038 3

include Indiana, Michigan, and Pennsylvania. In 1999,

Quality Dining decided to refinance a significant portion

of the bank debt associated with operating these restaurants. Borrowers negotiated with “Captec Financial” and

“GE Capital” to obtain approximately $49 million in

mortgage financing to pay down Quality Dining’s bank

debt. The total $49 million consisted of 34 separate loans

of about $1 to 2 million, each secured by one of Quality

Dining’s restaurants. The interest rate was 9.79% for

the “Burger King” loans and 9.94% for the “Chili’s” loans,

and the various loans had terms of either 15 or 20 years.

During the course of negotiations, Borrowers received

Captec Financial’s standard-form Promissory Note for

its “Franchise Loan Program.” The Note allowed Borrowers to pay off their loans early, but only if they paid a

“Prepayment Premium,” defined as: 

equal to the present value (computed at the Reinvestment Rate) of the difference between a stream

of monthly payments necessary to amortize the

outstanding principal balance of this Note at the

Stated Rate and a stream of monthly payments

necessary to amortize the outstanding principal

balance of this Note at the Reinvestment Rate (the

“Differential”). In the event the Differential is less

than zero, the Prepayment Premium shall be

deemed zero. . . . 

Put another way, if interest rates fell and Borrowers

decided to prepay the Note, they would have to pay a

penalty equal to the difference between:

(1) the present value of the stream of monthly

payments provided by the loan’s amortization
4 Nos. 08-3239 & 08-4038

schedule from the date of prepayment, computed at the “Reinvestment Rate”—i.e., the

U.S. Treasury rate at the date of prepayment;

and

(2) the present value of the same stream of

monthly payments computed at the “Stated

Rate”—i.e., the stated interest rate of the loan.

Borrowers were unsatisfied with the standard-form

Prepayment Premium. They wanted the right to prepay

without penalty after the first ten years of the loan

terms. Captec Financial agreed to this modification and

redrafted the Note to define the Prepayment Premium as:

equal to the positive difference between the present value (computed at the Reinvestment Rate) of

the stream of monthly payments of principal and

interest under this Note from the date of the prepayment through the tenth (10 ) anniversary of

th

the First Full Payment Date at the Stated Rate . . .

and the outstanding principal balance of this

Note as of the date of the prepayment (the “Differential”). In the event the Differential is less than

zero, the Prepayment Premium shall be deemed

to be zero. . . . 

The revised Note also required Borrowers to provide

a “Prepayment Notice” at least thirty days before exercising their right to prepay.

In August 1999, Borrowers executed thirty-four of

these Notes, representing eighteen loans originating

with Captec Financial and sixteen originating with GE
Nos. 08-3239 & 08-4038 5

Capital. All of the Notes contained identical language,

including the revised definition of the Prepayment Premium quoted above. Captec Financial assigned five of its

Notes to “Capmark” and the remaining thirteen Notes

to “Captec Trust,” which is “Lender” in this action.

Around June 2007, Borrowers prepaid the sixteen

Notes held by GE Capital and the five Notes held by

Capmark. In accepting Borrowers’ prepayment, both GE

Capital and Capmark calculated the Prepayment

Premium as the difference between the present value of

the stream of monthly payments from the date of prepayment through year 10 computed at the Reinvestment

Rate and at the Stated Rate. This calculation, which compares the present value of the stream of monthly payments computed at the two different rates, is consistent

with the definition of the Prepayment Premium

provided by Captec Financial’s original, standard-form

Note.

Borrowers then sent Lender a Prepayment Notice for

the twelve remaining Notes. (Borrowers had already

prepaid the thirteenth Note held by Lender without

penalty after the restaurant securing that Note was damaged by fire.) However, Borrowers made their notice

contingent on Lender’s acceptance of the formula used

by GE Capital and Capmark to compute the Prepayment

Premium. Lender rejected that formula as inconsistent

with the language of the Notes, which Lender interpreted to provide a significantly higher Prepayment

Premium. By way of illustration, for one of the $1.4 million

loans held by Lender, Borrowers’ formula yielded a
6 Nos. 08-3239 & 08-4038

Prepayment Premium of around $17,000, while Lender’s

formula yielded a Prepayment Premium of around

$100,000. The difference between the parties’ calculations

for the total Prepayment Premium due on all twelve

Notes is about $800,000, an amount worthy of the litigation effort expended here.

Borrowers did not provide another Prepayment Notice

or tender any prepayment amount. Instead, Borrowers

filed suit in Indiana state court seeking a declaratory

judgment that their interpretation of the Prepayment

Premium was correct. Borrowers’ complaint also contained a breach of contract claim for Lender’s refusal

to accept a prepayment computed under Borrowers’

formula. Lender removed the case to federal court

based on diversity jurisdiction, and the parties consented

to conduct the proceedings before a magistrate judge.

See 28 U.S.C. § 636(c). The district court granted Lender’s

motion for summary judgment as to Borrowers’ declaratory judgment claim, concluding that the unambiguous

contract language supported Lender’s interpretation of

the Prepayment Premium. Borrowers appeal. 

II. Analysis

A. Appellate Jurisdiction

We begin by ensuring that we have jurisdiction over

this appeal. Generally, federal courts of appeals are

limited to reviewing the “final decisions” of district courts.

28 U.S.C. § 1291. A decision is “final” for purposes of

§ 1291 if the district court’s order “ends the litigation
Nos. 08-3239 & 08-4038 7

on the merits and leaves nothing for the court to do but

execute the judgment.” Star Ins. Co. v. Risk Mktg. Group

Inc., 561 F.3d 656, 659 (7th Cir. 2009) (quotation omitted).

In contrast, an order that disposes of only one claim in

a multi-count complaint is typically non-final and therefore non-appealable. Ohio-Sealy Mattress Mfg. Co. v.

Duncan, 714 F.2d 740, 743 (7th Cir. 1983).

A potential jurisdictional snag arises in this case

because, although the district court entered a final judgment in favor of Lender and against Borrowers, the

court purported to resolve only one of Borrowers’ two

claims. In its opinion and order accompanying the judgment, the court stated that it was only considering

Lender’s motion for summary judgment “as it pertains

to the Borrower’s [sic] declaratory judgment action.” The

court declined to resolve Borrowers’ breach of contract

claim “because there are issues as to whether that claim

is ripe.”

Although the district court’s failure to address Borrowers’ breach of contract claim gives us pause, we conclude that the court’s order “effectively end[ed] the

litigation and thus constitute[d] a final order for the

purposes of appellate review.” Mostly Memories, Inc. v.

For Your Ease Only, Inc., 526 F.3d 1093, 1097 (7th Cir.

2008). The court entered a final judgment in favor of

Lender that drew no distinction between Borrowers’

two claims, and a docket entry accompanying the

court’s order stated, “Civil Case Terminated.” This

record suggests that the court had “finished with the

case,” Hill v. Potter, 352 F.3d 1142, 1144 (7th Cir. 2003), and
8 Nos. 08-3239 & 08-4038

did not “contemplate[] further activity” on Borrowers’

breach of contract claim, Star Ins. Co., 561 F.3d at 659

(quotation omitted).

Additionally, an examination of Borrowers’ complaint

illustrates that their breach of contract claim cannot

survive the district court’s judgment on their declaratory

judgment claim. Borrowers’ complaint alleged a breach

of contract based on Lender’s “demanding a prepayment premium in excess of that contemplated by the

terms of the . . . Notes, . . . and/or by rejecting Borrowers’

Prepayment Notice and/or its proffered computation of

the prepayment premium.” These allegations establish

that Borrowers’ Prepayment Notice could be effective,

and Lender’s rejection of that notice could be a breach

of contract, only if Borrowers’ interpretation of the Prepayment Premium was correct. Yet the district court

rejected that interpretation as unsupported by the

contract language. In doing so, the court necessarily

rejected Borrowers’ breach of contract claim, leaving no

suggestion that Borrowers might reassert that claim “at

some future date.” Am. Nat’l Bank & Trust Co. v. Equitable

Life Assur. Soc’y of U.S., 406 F.3d 867, 875 (7th Cir. 2005).

Finally, we note that both parties agreed at oral argument that Borrowers’ breach of contract claim hinged on

the success of their declaratory judgment claim, meaning

that the district court’s rejection of the latter ended

the entire suit. We do not, of course, simply accept this

stipulation that appellate jurisdiction exists, since jurisdictional defects are non-waivable. Stevens v. Turner,

222 F.2d 352, 354 (7th Cir. 1955). Still, the parties’ agree-
Nos. 08-3239 & 08-4038 9

ment on this point supports our own conclusion that,

in entering judgment against Borrowers on their declaratory judgment claim, the district court effectively

disposed of Borrowers’ breach of contract claim. See Am.

Family Mut. Ins. Co. v. Jones, 739 F.2d 1259, 1261 n.1 (7th

Cir. 1984) (noting the defendants’ agreement at oral

argument that their counterclaim could not survive the

judgment in favor of the plaintiff’s claim, such that the

district court’s failure to resolve the counterclaim

did not defeat appellate jurisdiction); cf. Laborers’ Pension

Fund v. A & C Envtl., Inc., 301 F.3d 768, 774 n.4 (7th Cir.

2002) (concluding that a judgment that failed to

mention one of two defendants effectively ended the

litigation on the merits, where the plaintiffs stated at oral

argument that their prior voluntary dismissal of that

defendant was with prejudice). The district court’s

decision was final within the meaning of § 1291, and

our appellate jurisdiction is secure.

B. Contract Interpretation

We review de novo the district court’s interpretation of

a contract, including the court’s conclusion that the

contract language was unambiguous. Shelby County State

Bank v. Van Diest Supply Co., 303 F.3d 832, 835 (7th Cir.

2002). In this diversity action, state law provides the

substantive contract principles that guide our analysis.

Under the Notes’ choice-of-law provision, each Note

is governed by the law of the State in which the

restaurant securing the Note is located. Of the twelve

Notes that are the subject of this appeal, seven are
10 Nos. 08-3239 & 08-4038

secured by restaurants in Michigan, four by restaurants

in Indiana, and one by a restaurant in Pennsylvania.

Under general principles of contract interpretation,

which apply in each of the three controlling jurisdictions, courts interpret contracts with the goal of ascertaining the parties’ intent. MPACT Constr. Group, LLC v.

Superior Concrete Constructors, Inc., 802 N.E.2d 901, 906

(Ind. 2004); City of Grosse Pointe Park v. Mich. Mun. Liab. &

Prop. Pool, 702 N.W.2d 106, 113 (Mich. 2005); Ins. Adjustment Bureau v. Allstate Ins. Co., 905 A.2d 462, 468 (Pa.

2006). In the case of a written contract, the court determines the parties’ intent by looking first to the plain

and ordinary meaning of the contract language. USA

Life One Ins. Co. v. Nuckolls, 682 N.E.2d 534, 538 (Ind.

1997); City of Grosse Pointe Park, 702 N.W.2d at 113; Kripp

v. Kripp, 849 A.2d 1159, 1163 (Pa. 2004). If the contract

language is clear and unambiguous, the court interprets

the document as a matter of law without looking to

extrinsic evidence. Automation by Design, Inc. v. Raybestos

Prods. Co., 463 F.3d 749, 753-54 (7th Cir. 2006) (applying

Indiana law); Klapp v. United Ins. Group Agency, Inc., 663

N.W.2d 447, 454 (Mich. 2003); Ins. Adjustment Bureau, 905

A.2d at 468-69. If, however, the contract language

is ambiguous, the trier of fact must examine relevant

extrinsic evidence in order to ascertain the parties’

intent. Automation by Design, 463 F.3d at 753-54; Klapp,

663 N.W.2d at 453-54; Ins. Adjustment Bureau, 905 A.2d

at 468-69.

Beginning with the plain language of the contract in this

case, the Notes define the Prepayment Premium in terms

of a “Differential.” That Differential equals:
Nos. 08-3239 & 08-4038 11

the positive difference between the present value

(computed at the Reinvestment Rate) of the stream

of monthly payments of principal and interest

under this Note from the date of the prepayment

through the tenth (10 ) anniversary of the First

th

Full Payment Date at the Stated Rate . . . and

the outstanding principal balance of this Note as

of the date of the prepayment . . . .

This language is clear in that it plainly identifies the

two variables used to calculate the Differential:

(1) the present value of the stream of monthly

payments that Borrowers were scheduled to

make from the date of prepayment through

year 10 of the loan; and

(2) the outstanding principal balance at the date of

prepayment. 

Unfortunately, we cannot adopt this plain-language

reading of the Prepayment Premium because doing so

“would produce absurd results.” Beanstalk Group, Inc. v.

AM Gen. Corp., 283 F.3d 856, 860 (7th Cir. 2002). As illustrated by calculations that Lender submitted with its

motion for summary judgment, even if the Reinvestment

Rate (i.e., the U.S. Treasury rate) drops substantially, the

first “stream of monthly payments” variable is always

smaller than the second “outstanding principal balance”

variable. Hence, subtracting the two variables yields

a Prepayment Premium that is always negative and

therefore “deemed to be zero” under the contract. That

was not the intent of the parties, who, as rational

business entities, see id., agree that the purpose of the
12 Nos. 08-3239 & 08-4038

Prepayment Premium is to provide some penalty in the

event that Borrowers prepay.

So while the contract language defining the Prepayment Premium is clear, it is nonetheless ambiguous

because it makes no economic sense. Since the literal

application of the text “ ‘would lead to absurd results’ ” and “ ‘thwart the obvious intentions of its drafters,’ ” we cannot rely on the plain language of the contract.

Funeral Fin. Sys. v. United States, 234 F.3d 1015, 1018

(7th Cir. 2000) (quoting Grun v. Pneumo Abex Corp., 163

F.3d 411, 420 (7th Cir. 1998)). Instead, the interpretation

of these Notes requires an examination of extrinsic evidence. See id.

Lender suggests that we may avoid finding an

ambiguity by reading the “stream of monthly payments”

variable to include a final “balloon payment” of the

entire outstanding principal balance at year 10. Under

this reading, the Prepayment Premium becomes the

difference between:

(1) the present value of the stream of monthly

payments from the date of prepayment

through year 10, plus the outstanding

principal balance at year 10; and

(2) the outstanding principal balance at the date

of prepayment. 

Lender argues that including this balloon payment is

necessary in order to produce a positive Prepayment

Premium and avoid an absurd result.

Although Lender’s formula has the virtue of producing

a positive Prepayment Premium, Lender’s concept of a
Nos. 08-3239 & 08-4038 13

“balloon payment” finds no support in the contract

language. The Notes’ plain language defines the first

variable of the Differential as simply the stream of

monthly payments from the date of prepayment through

year 10, with no indication that this stream contains a

final payment of the outstanding principal. As discussed

above, this language is ambiguous because it makes

no economic sense, and we cannot simply ignore the

ambiguity by patching up the contract language with

Lender’s suggested balloon payment term. Cf. Klapp,

663 N.W.2d at 453 (“[C]ourts cannot simply ignore portions of a contract in order to avoid a finding of

ambiguity . . . .”).

We also think that Lender’s reliance on the rule of

interpreting contracts to avoid absurd results is misplaced. Courts apply this rule to reject one party’s strained,

literal reading of contract language in favor of the other

party’s reasonable, commonsense reading. See Beanstalk,

283 F.3d at 859-60 (granting judgment for the defendant

even though the plaintiff’s broad reading of a representation agreement’s terms was literally correct); Dispatch

Automation, Inc. v. Richards, 280 F.3d 1116, 1118-19 (7th Cir.

2002) (rejecting the plaintiff’s contractual interpretation

that made no economic sense and granting judgment for

the defendant); Merheb v. Ill. State Toll Highway Auth., 267

F.3d 710, 713 (7th Cir. 2001) (rejecting an employee’s literal,

“insane” reading of a workplace discipline manual and

granting judgment for the employer); Nuckolls, 682 N.E.2d

at 539-40 (concluding that an insurer’s broad, literal

reading of a coverage exclusion would produce an

absurd result and construing the contract in favor of the
14 Nos. 08-3239 & 08-4038

insured). But here, Lender is trying to avoid the absurdity

of its own literal reading of the contract. Lender cannot

first argue that the plain language of the contract supports

its interpretation of the Prepayment Premium, but then

argue that the absurdity of that same plain-language

interpretation necessitates an additional balloon payment term.

Like Lender, Borrowers argue that they are entitled to

summary judgment without further consideration of

extrinsic evidence. Borrowers acknowledge that the

Notes are ambiguous but cite the rule that courts

construe ambiguities against the drafter, who in this case

was Lender’s predecessor in interest. MPACT Constr.

Group, 802 N.E.2d at 910; Klapp, 663 N.W.2d at 454; Ins.

Adjustment Bureau, 905 A.2d at 468. Borrowers contend

that this rule permits us to conclude as a matter of law

that their interpretation of the Prepayment Premium

is correct.

We question Borrowers’ premise that the rule of construing ambiguities against the drafter gives courts a

license to bypass relevant, extrinsic evidence in favor

of simply declaring judgment for the non-drafter. Borrowers’ argument undoubtedly fails with respect to the

seven Notes in this case governed by Michigan law. The

Michigan Supreme Court has described the rule as a “tiebreaker” to be applied only “if all conventional means of

contract interpretation, including the consideration of

relevant extrinsic evidence, have left the jury unable to

determine what the parties intended their contract to

mean.” Klapp, 663 N.W.2d at 455. Similarly, with respect to
Nos. 08-3239 & 08-4038 15

the single Note governed by Pennsylvania law, the Pennsylvania courts do not construe ambiguous contracts

against the drafter as a matter of law before looking to

extrinsic evidence. Rather, “inquiry should always be

made into the circumstances surrounding the execution

of the document,” and “only when such an inquiry

fails” should courts “conclude the matter against the

party responsible for the ambiguity, the drafter of the

document.” Burns Mfg. Co. v. Boehm, 356 A.2d 763, 767

n.3 (Pa. 1976) (citations omitted); see also Kripp, 849 A.2d

at 1165 (concluding that the trial court properly resolved

an ambiguous agreement through parol evidence of the

parties’ intent rather than “a construction of contractual

terms”); Hutchison v. Sunbeam Coal Corp., 519 A.2d 385,

390 n.5 (Pa. 1986) (“Our first obligation is to examine

the extrinsic evidence and resort to rules of construction

only should that examination prove fruitless.”).

Indiana arguably applies the rule of construing ambiguities against the drafter more liberally, and the Indiana

Supreme Court has occasionally applied the rule without

considering whether extrinsic evidence would clarify the

parties’ intent. See MPACT, 802 N.E.2d at 910 (“When there

is ambiguity in a contract, it is construed against

its drafter.”); Nuckolls, 682 N.E.2d at 538 (“When an

insurance contract contains an ambiguity, it should be

strictly construed against the insurance company.”); Eli

Lilly & Co. v. Home Ins. Co., 482 N.E.2d 467, 470 (Ind.

1985) (holding that insurers’ extrinsic evidence was

inadmissible to clarify an ambiguous coverage provision).

So at least with respect to the four Notes governed by

Indiana law, Borrowers’ argument that they are entitled
16 Nos. 08-3239 & 08-4038

to summary judgment on an ambiguous contract

carries some force. Still, we think that Borrowers can

prevail under the rule of construing ambiguities against

the drafter only if they offer an interpretation of the

Notes that is reasonably consistent with the contract

language. See MPACT, 802 N.E.2d at 910 (concluding

that certain contractual provisions “support both [parties’] arguments” and therefore construing against the

drafter); Showboat Marina Casino P’ship v. Tonn & Blank

Constr., 790 N.E.2d 595, 598-99 (Ind. Ct. App. 2003) (recognizing the non-drafter’s right to sue on a contract

that contained language consistent with both the right to

sue and mandatory arbitration). Unfortunately, Borrowers’ interpretation is inconsistent with the plain language

of the Notes.

As mentioned above, Borrowers’ interpretation defines

the Prepayment Premium as the difference between:

(1) the present value of the stream of monthly

payments from the date of prepayment

through year 10 computed at the Reinvestment

Rate; and

(2) the present value of the same stream of

monthly payments computed at the Stated

Rate of the Note.

To arrive at this formula, Borrowers must make sweeping

changes to the contract language defining the Prepayment Premium, illustrated as follows with the added

word in italics and the deleted language stricken out:

. . . equal to the positive difference between the

present value (computed at the Reinvestment Rate)
Nos. 08-3239 & 08-4038 17

of the stream of monthly payments of principal

and interest under this Note from the date of the

prepayment through the tenth (10 ) anniversary of

th

the First Full Payment Date [and] at the Stated

Rate . . . and the outstanding principal balance of

this Note as of the date of the prepayment (the

“Differential”). . . .

Borrowers’ insertion of an “and” before the “at the Stated

Rate” clause completely changes the second variable used

to calculate the Differential, replacing the “outstanding

principal balance” variable with a new “stream of monthly

payments” variable. Equally problematic, Borrowers’

interpretation omits the “outstanding principal balance”

clause from the contract, rendering that term mere

surplusage. See Klapp, 663 N.W.2d at 453 (“[C]ourts

must . . . give effect to every word, phrase, and clause

in a contract and avoid an interpretation that would

render any part of the contract surplusage or nugatory.”

(quotation omitted)). In short, Borrowers’ interpretation

is unreasonable because it is completely inconsistent

with the contract language, and we cannot adopt this

interpretation under the rule of construing ambiguities

against the drafter. Instead, the meaning of the Prepayment Premium is a question of fact that requires an

examination of relevant extrinsic evidence. See Fresh Cut,

Inc. v. Fazli, 650 N.E.2d 1126, 1133 (Ind. 1995).

III. Conclusion

Because the contract language defining the Prepayment

Premium is ambiguous, resolving the meaning of the
18 Nos. 08-3239 & 08-4038

contract on summary judgment was inappropriate. We

REMAND for a trial on the question of the parties’

intended meaning of the Prepayment Premium. Circuit

Rule 36 shall apply on remand.

7-13-09