02-5251.061 February 1, 2006

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

AMERICAN NATIONAL BANK AND TRUST )

COMPANY OF CHICAGO, as Trustee )

f/b/o Emerald Investments Limited )

Partnership, and EMERALD )

INVESTMENTS LIMITED PARTNERSHIP, )

an Illinois partnership, )

)

Plaintiffs, )

)

 v. ) No. 02 C 5251

) 

ALLMERICA FINANCIAL LIFE )

INSURANCE AND ANNUITY COMPANY, )

 )

Defendant. )

MEMORANDUM OPINION

The court has under advisement Emerald’s motion to compel

responses to deposition questions concerning the decision by

Allmerica to impose the “July transfer restrictions.” Questions

have been put to Allmerica witnesses Michael Reardon and John

Danello concerning communications between them prior to the

issuance of the restrictions. Emerald’s hope is that some of those

communications will show that Allmerica’s motive was only to reduce

its possible damages in this case rather than any concern about

Emerald’s market timing. The parties briefed the motion to compel,

and the court began to examine the deposition transcripts, question

by question, to determine the extent to which there was merit to

Allmerica’s contention that the questions called for privileged
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1/ In our oral ruling of February 8, 2005, we held that Allmerica had the

right to impose the July restrictions. We also held that Emerald would have the

right to challenge Allmerica’s good faith in doing so. (Tr. of February 8, 2005

at 65-66, Ex. A to Allmerica’s Reply Memorandum on Whether Limiting Damages

Constitutes Bad Faith.) 

communications. It appeared that at least some of the questions

were appropriate and that Allmerica’s concept of the privilege was

overly broad. It occurred to us, however, that the questions might

be immaterial. They are based on Emerald’s premise that issuing

the restrictions for the purpose of limiting the period for which

Emerald could claim damages would constitute bad faith.1 We asked

the parties to brief the question of whether a desire by Allmerica

to “limit damages would, in the circumstances of this case viewed

most favorably to Emerald, make out a case of bad faith.” (Order

of September 29, 2005.) If a finding that Allmerica was motivated

solely by a desire to limit damages would not, as a matter of law,

suffice to establish bad faith, then a decision on the motion to

compel responses to the deposition questions would be unnecessary.

Allmerica has attempted to limit its briefing to the

specific question we asked the parties to address. Emerald,

however, has strayed from that subject and has attempted to reopen

our ruling of February 8, 2005 that the July restrictions were

authorized by the annuity contract. Most of Emerald’s argument

concerning the interpretation of the contract is entirely new and

is set forth in its surreply brief. The argument should have been

raised in February 2005, but we will nonetheless address it now.
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This will require a review of why we held the July restrictions

were valid.

We relied on the following two provisions of the annuity

contract:

The Company reserves the right, subject to compliance

with applicable law, to add to, delete from, or

substitute for the shares of a Fund that are held by

the Sub-Accounts or that the Sub-Accounts may

purchase. The Company also reserves the right to

eliminate the shares of any Fund no longer available

for investment or if the Company believes further

investment in the Fund is no longer appropriate for

the purposes of the Sub-Accounts.

. . . 

The Company reserves the right, subject to compliance

with applicable laws, to establish additional

Guarantee Period Accounts and Sub-Accounts and to make

them available to any class or series of contracts as

the Company considers appropriate. Each new SubAccount will invest in a new investment company or in

shares of another open-end investment company. The

Company also reserves the right to eliminate or

combine existing Sub-Accounts and to transfer the

assets of any Sub-Accounts to any other Sub-Accounts.

In the event of any substitution or change, the

Company may, by appropriate notice, make such changes

in this and other contracts as may be necessary or

appropriate to reflect the substitution or change. 

(Ex. D to Allmerica’s Reply Memorandum on Whether Limiting Damages

Constitutes Bad Faith (emphasis added).) We held that the right to

“eliminate” shares contained in the first quoted paragraph, as well

as the right to “eliminate” Sub-Accounts contained in the second

paragraph, necessarily included the right to restrict new
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2/ The right to “delete from” the shares of a Fund that a Sub-Account may

purchase, found in the first paragraph, also appears to authorize the July

restrictions.

investment in any Fund.2 Emerald argues that these provisions only

authorize the elimination of entire Funds and all existing SubAccounts, not the restriction of new investment by particular SubAccounts in Funds that continue to exist. We see nothing in the

contractual language to suport such a limited interpretation. 

With respect to the second quoted paragraph, Emerald argues

in its surreply that Allmerica had no right simply to “eliminate”

Sub-Accounts. It can only “eliminate [a Sub-Account] and transfer”

its assets to some other Sub-Account:

The sentence read in full, does not give Allmerica the

unconditional power to “eliminate . . . existing Subaccounts” as Allmerica claims. Rather, there are two

components, joined by the conjunctive word “and.” The

Company has reserved the right “to eliminate or

combine existing Sub-Accounts and to transfer” those

assets to another Sub-account, presumably, one of the

“same asset class.” See Ex. 3 (Prospectus) at 70.

Allmerica can “eliminate...and transfer.” Or it can

“combine . . . and transfer.” But it may not simply

“eliminate.” The use of the words “and transfer”

(rather than “or”) makes that clear.

(Emerald’s Surreply at 4.) We held in our February 8 ruling that

the language “The company also reserves the right to eliminate . .

. existing Sub-Accounts” gave Allmerica the right to eliminate

Sub-Accounts. We did not consider the argument that Allmerica

would also be required to transfer the assets of an eliminated SubAccount to another Sub-Account, because Emerald had not made that
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argument at the time we ruled. Like many afterthoughts, the

argument hardly merits serious consideration. The contractual

language is in the disjunctive, and Emerald’s conjunctive reading

is gratuitous. Emerald argues that its interpretation is necessary

in order to effectuate the intentions of the parties as reflected

in parol evidence, which we have held--and Emerald itself has

argued in another connection--is superseded by the integrated

contract. We are still of the view that these contractual

provisions did give Allmerica the right to issue the July

restrictions.

* * * *

We turn now to the issue of whether imposing the July

restrictions for the sole purpose of reducing Emerald’s damages

could be found by a jury to constitute bad faith on the part of

Allmerica. We believe it could not. The exercise of an express

contractual right for one’s own benefit, in the circumstances of

this case, could not be found by a jury to constitute bad faith.

Emerald relies on language in Harbor Insurance Co. v. Continental

Bank Corp., 922 F.2d 357, 363 (7th Cir. 1990) that “[a] party who

hokes up a phony defense to the performance of his contractual

duties and then when that defense fails (at some expense to the

other party) tries on another defense for size can properly be said

to be acting in bad faith.” Emerald sees this statement as

applying to Allmerica’s pretending to be motivated by concern for
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other investors when in fact its reason for imposing the July

restrictions was only to limit its own exposure to damages. The

analogy does not work. Harbor Insurance involved insurance

companies that had filed a declaratory judgment action contending

that the directors of the insured bank had been guilty of such

“egregiously wrongful acts” as to bar the bank from seeking

indemnity under the officer and director insurance policies. The

insurers later changed their position to claim that “the directors

were innocent and therefore [the bank] was not exposed to

derivative liability for their wrongdoing,” id. at 362. The Court

of Appeals held that the trial judge had erred in refusing to allow

the bank to place in evidence a copy of the declaratory judgement

complaint, because the bank should have been able to rebut the

insurance companies’ “innocence” defense by introducing their

earlier pleading alleging that the directors had been guilty of

“egregious” misconduct. See id. at 365. The Court further held

that in a new trial the jury should be instructed about the

conditions under which a change in the theory of defense could be

considered evidence of bad faith. Id.

Nothing like the Harbor Insurance situation is involved in

Allmerica’s issuance of the July restrictions. Allmerica has filed

no pleading in which it denies being motivated by a desire to limit

damages, nor is it presently contending that it was so motivated.

It has taken no inconsistent positions in this litigation, as the
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3/ We need hardly say that we express no opinion as to what Allmerica’s

motive actually was. In this opinion, we are merely assuming, for purposes of

argument, that its motive was to limit damages. 

insurers did in Harbor Insurance. Allmerica’s witnesses have

asserted that a desire to curtail market timing was the motivation

for the July restrictions, and they have denied that a desire to

limit Emerald’s damages played any role in the decision to impose

the restrictions. If Emerald were permitted to continue with its

discovery on the subject, conceivably it could turn up evidence

that damages did indeed enter into in the decision. But what then?

Would that alone permit the jury to find that Allmerica had acted

in bad faith when it invoked its contractual right to impose the

restrictions? We do not see that it would. At most, a finding

that Allmerica did consider the matter of damages would show that

Allmerica had acted in its own interest.3

If the July restrictions are valid, they will bar most of

the damages Emerald seeks to collect. The ultimate question is

this: Does the invocation of a express contractual provision for

one’s benefit, to the detriment of the other contracting party,

constitute bad faith? It does not, in the absence of conduct which

would of itself constitute bad faith, such as taking unfair

advantage of an unsuspecting party. See, e.g., Market St. Assocs.

Ltd. P’ship v. Frey, 941 F.2d 588, 597-98 (7th Cir. 1991). 
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The following language from Kham & Nate’s Shoes No. 2, Inc.

v. First Bank of Whiting, 908 F.2d 1351 (7th Cir. 1990), is

instructive:

“Inequitable conduct” in commercial life means breach

plus some advantage-taking, such as the star who

agrees to act in a motion picture and then, after $20

million has been spent, sulks in his dressing room

until the contract has been renegotiated. Firms that

have negotiated contracts are entitled to enforce them

to the letter, even to the great discomfort of their

trading partners, without being mulcted for lack of

“good faith”. Although courts often refer to the

obligation of good faith that exists in every

contractual relation, e.g., UCC § 1-201 . . ., this is

not an invitation to the court to decide whether one

party ought to have exercised privileges expressly

reserved in the document. “Good faith” is a compact

reference to an implied undertaking not to take

opportunistic advantage in a way that could not have

been contemplated at the time of drafting, and which

therefore was not resolved explicitly by the parties.

When the contract is silent, principles of good faith—

such as the UCC’s standard of honesty in fact, UCC §

1-201(19), and the reasonable expectations of the

trade, UCC § 2-103(b) (a principle applicable,

however, only to “merchants”, which Bank is not)—fill

the gap. They do not block use of terms that actually

appear in the contract.

908 F.2d at 1357 (some citations omitted). We think these

observations are applicable to the issue we have framed, and we

will be guided by them. See also Brooklyn Bagel Boys, Inc. v.

Earthgrains Refrigerated Dough Prods., Inc., 212 F.3d 373, 381-82

(7th Cir. 2000).

CONCLUSION

We hold that even if Emerald could show Allmerica’s motive

in issuing the July restrictions was solely to limit Emerald’s
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damages in this case, that would not, as a matter of law, be

sufficient to show bad faith in the issuance of the restrictions.

Accordingly, Emerald’s Motion to Compel Answers to Deposition

Questions Regarding the July Restrictions will be denied as moot.

DATE: February 1, 2006

ENTER: _____________________________________________

John F. Grady, United States District Judge