Court Opinion

ID: 3003804
Source: CourtListenerOpinion
Date Created: 2015-09-24 22:32:08.140093+00
Date Added: 2024-06-11T12:56:30.765440
License: Public Domain

In the

United States Court of Appeals
               For the Seventh Circuit

Nos. 07-2766 & 07-2821

R ICHARD C URIA ,
                                                   Plaintiff-Appellee,
                                  v.

K ENNETH A. N ELSON,
                                               Defendant-Appellant.

             Appeals from the United States District Court
        for the Northern District of Illinois, Western Division.
              No. 05 C 50094—Philip G. Reinhard, Judge.

Nos. 07-2767 & 07-2820

K ENNETH A. N ELSON,
                                                  Plaintiff-Appellant,
                                  v.

R ICHARD C URIA ,
                                                 Defendant-Appellee.

             Appeals from the United States District Court
        for the Northern District of Illinois, Western Division.
              No. 05 C 2585—Philip G. Reinhard, Judge.

  A RGUED O CTOBER 27, 2008—D ECIDED N OVEMBER 20, 2009
2                   Nos. 07-2766, 07-2767, 07-2820 & 07-2821

    Before K ANNE, W ILLIAMS, and S YKES, Circuit Judges.
   S YKES, Circuit Judge. Kenneth Nelson and Richard
Curia dispute the terms of a stock purchase agreement
the two entered into in 1989 and then modified several
times over the next decade. In the 1989 agreement,
Nelson sold Curia a small number of shares in two auto-
mobile dealerships; the contract also gave Curia a series
of options to purchase all remaining shares pursuant to
a defined valuation formula. A 1993 modification of the
agreement contains language suggesting that the parties
terminated Curia’s options and specified instead that
his right to purchase additional shares was left to
future agreement of the parties. Other language in this
and subsequent modifications, however, also suggests
that Curia’s option to purchase additional shares in one
of the dealerships may have survived the 1993 modifica-
tion. The district court granted summary judgment in
Curia’s favor after concluding that the contract and
its modifications, read together, unambiguously gave
Curia the option to purchase the remaining shares in
one of the dealerships.
  We reverse. The contract as modified is reasonably
susceptible to both parties’ interpretation and is there-
fore ambiguous regarding the survival of the options.
Accordingly, extrinsic evidence is required to clarify
what the parties meant, and summary judgment com-
pelling the sale of shares was inappropriate.
Nos. 07-2766, 07-2767, 07-2820 & 07-2821               3

                     I. Background
   In 1989 Kenneth Nelson and Richard Curia entered
into a stock purchase agreement providing that Nelson
would sell Curia a minority block of shares in two auto-
mobile dealerships, Ken Nelson Pontiac-GMC, Inc.
(known as “Auto Plaza”), and Ken Nelson Nissan, Inc.
(known as “Auto Mall”). Prior to the agreement, Nelson
owned all 8,180 shares of outstanding capital stock in
Auto Plaza and all 1,200 shares in Auto Mall. Paragraph 1
of the agreement provided that Curia was to pay Nelson
$100,000 in exchange for 1,000 shares of Auto Plaza and
144 shares of Auto Mall. Paragraph 4 of the agreement,
titled “Options to Purchase Additional Shares,” gave
Curia three options to purchase additional stock in the
two corporations. The first option gave Curia the right
to purchase an additional 1,000 shares of Auto Plaza
and 144 shares of Auto Mall for $100,000. The second
allowed Curia to purchase a 49% stake in both corpora-
tions by acquiring 2,009 shares of Auto Plaza and 300
shares of Auto Mall. The final option gave Curia the
right to acquire all remaining shares in the two corpora-
tions provided he “also offer[ed] to purchase the land
and four buildings of [Auto Plaza].” Rather than specify
a price, Paragraph 4 of the 1989 agreement set forth
a valuation formula for the latter two options.
  Some time passed before Curia could complete the
initial transaction, apparently because he encountered
some difficulty borrowing the funds necessary to make
the initial $100,000 purchase and to exercise the first
$100,000 option. After some delay he secured a $200,000
4                 Nos. 07-2766, 07-2767, 07-2820 & 07-2821

loan, and in 1990 he purchased the shares specified in
the initial transaction and exercised the first of the op-
tions. By this time, however, the number of shares in
the two corporations had changed—Auto Plaza now
had 10,000 outstanding shares and Auto Mall now had
1,500. Nelson transferred 2,000 shares in Auto Plaza
and 300 shares in Auto Mall to Curia.
  In 1993 the parties decided to modify their original
agreement. The reason for the modification is not
entirely clear, although it appears to relate to the change
in the number of shares in the corporations. The
preamble to the 1993 modification offers some addi-
tional explanation. The recitals in the modification agree-
ment state that Nelson and Curia had made a “mutual
mistake . . . in determining the fair market value of
the capital stock [of Auto Plaza and Auto Mall] and in
evaluating the minority interest” the parties had in-
tended. Accordingly, the parties stated their intention
to “modify the [1989 agreement] to reflect the re-evalua-
tion of the minority interest . . . and to correct the
mutual mistake of the parties.” The recitals also lay out
the revised per-share price that should have applied
in 1989 to achieve the intended minority interest. Exhibit A
to the modification shows that the parties calculated
the intended price by applying a revised valuation
formula and then discounting the share price by 30%.
  The 1993 modification also included the following
language in Paragraph 5, titled “Purchase of Additional
Shares”:
    Curia shall have the right to purchase additional
    shares of stock in said corporations upon those terms
Nos. 07-2766, 07-2767, 07-2820 & 07-2821                5

   and conditions subsequently agreed upon by the parties
   hereto. The purchase price for said additional shares
   of stock shall be determined by adding to the total net
   worth of each corporation a figure representing
   the accumulated LIFO (last in first out) reserve and
   dividing the total sum thereof by the number of
   shares of each corporation.
(Emphasis added.) The parties dispute the effect of Para-
graph 5—particularly its first sentence—on the options
contained in the 1989 agreement. Nelson believes the
first sentence rendered the remaining options in the
1989 agreement inoperative. Curia argues that what-
ever that sentence means precisely, the modification
agreement read as a whole makes it clear that the
parties intended to maintain his option to purchase all
remaining shares. The second sentence of Paragraph 5
sets forth a valuation formula for any of the “said addi-
tional shares.” That formula differs from the one ap-
plicable to the options provided for in the 1989 agreement
and matches the formula used in the 1993 modification
to calculate the book value of shares in the two com-
panies as of 1989. Curia maintains that the presence of
this modified valuation formula means that his option
to purchase all remaining shares survived the 1993 modifi-
cation.
  Nelson and Curia entered into two subsequent modi-
fication agreements, one in 1997 and one in 2000. The
district court held, and the parties now agree, that the
1997 agreement—which involved a third party’s pur-
chase of stock—effectively terminated any remaining
6                 Nos. 07-2766, 07-2767, 07-2820 & 07-2821

right that Curia might have possessed to purchase any
additional shares in Auto Mall. The 2000 modification,
entitled “Amendment to Modification Agreements,” was
the last of the parties’ modification agreements.
One evident purpose for this final modification was to
memorialize the parties’ intent with respect to share
transfers in the event that either party died. According to
this last modification, Curia would “immediately pur-
chase” from Nelson 400 shares of stock in Auto Plaza in
the event that Nelson died while the 1989 agreement
and the 1993 modification were still “in force.” The
parties also modified the valuation formula that would
apply should the parties need to calculate “[t]he pur-
chase price of the 400 shares of stock and the remaining
7600 shares of stock.” This valuation formula differed
from both the one stated in the 1993 modification and
the one stated in the 1989 agreement. This modification
further explained that in the event that Curia died first,
Nelson would repurchase Curia’s stock according to
the new formula. Finally, the modification stated that if
Nelson died first, Curia agreed to provide compensation
to Nelson’s relatives and estate “until such time as
Curia purchases all of the remaining shares of Nelson’s
stock.”
  In 2004 the parties began discussing Curia’s buyout of
Nelson’s interest in the corporations. Apparently these
discussions stalled, and in March 2005 Curia notified
Nelson that he was exercising the second option under
the 1989 agreement to acquire the shares necessary to
give him control over 49% of the outstanding capital
Nos. 07-2766, 07-2767, 07-2820 & 07-2821                 7

stock in the corporations. Curia included in this letter
his own calculation as to the number of shares he was
purchasing. He also noted that he was exercising his
option “pursuant to Section 4 of the [1989 agreement] . . .
for the consideration and upon the terms set forth in
the [1989 SPA] and the [1993 modification].” A day after
sending this notice, Curia sent another notice to
Nelson saying that he intended to exercise his option to
purchase all remaining shares in Auto Plaza and Auto
Mall.
  Nelson immediately contested Curia’s right to purchase
the shares, claiming that the options were no longer
valid. In April 2005 Nelson filed a declaratory judgment
against Curia seeking a ruling that Curia did not have
the right to exercise either option. This led to a counter-
suit by Curia claiming Nelson breached the parties’
agreement to sell him the shares pursuant to the 1989
options, as modified by the later agreements. The suits
were consolidated, and in a series of orders, the district
court granted Curia’s motion for summary judgment to
compel the sale of all remaining stock in Auto Plaza,
holding that the 1989 agreement as modified in 1993 and
2000 unambiguously granted Curia the right to exercise
the options specified in Paragraph 4 of the 1989 agree-
ment. Regarding the purchase price for the Auto Plaza
shares, the court concluded that the valuation method
intended by the parties was the one mentioned in the
2000 modification. Although other collateral disputes
remained, the court made findings and entered an
order pursuant to Rule 54(b) of the Federal Rules of Civil
8                   Nos. 07-2766, 07-2767, 07-2820 & 07-2821

Procedure directing entry of a final judgment on these
claims.1

                        II. Discussion
   We review a grant of summary judgment de novo.
Tingstol Vo v. Rainbow Sales, Inc., 218 F.3d 770, 771 (7th
Cir. 2000). The central issue on appeal is whether
Curia’s option to purchase all remaining shares in Auto
Plaza, as provided in the 1989 agreement, survived the
1993 modification. Illinois law applies to this dispute. In
Illinois, as in other states, if a contract is unambiguous,
the court will enforce it as written, without resorting
to extrinsic evidence. See, e.g., Farm Credit Bank v. Whitlock,
581 N.E.2d 664, 667 (Ill. 1991); see also Lewitton v. ITA
Software, Inc., No. 08-3725, 2009 WL 3447425, at *4 (7th

1
   Among the remaining issues in the litigation are, for
example, Curia’s right to certain real estate, personal property,
and the “Ken Nelson” name; liability for an accounting firm’s
bill; certain post-closing indemnification obligations; and
whether Nelson’s wife was entitled to a Cadillac for fifteen
years following the sale of stock. In its Rule 54(b) ruling, the
district court determined that the claim regarding the survival
of Curia’s option to purchase additional shares in the corpora-
tions was independent of any of the remaining claims in the
litigation “with no material overlap between this issue and
any remaining issues.” More specifically, the court held that
“[t]he purchase of the shares is . . . a stand alone issue that
is significant involving several million dollars[,] and the
resolution of this issue on appeal now will materially aid in
the ultimate resolution of the entire action.”
Nos. 07-2766, 07-2767, 07-2820 & 07-2821                      9

Cir. Oct. 28, 2009). Here, no one argues that the contract
as modified is ambiguous. Rather, Nelson and Curia
both claim the contract is unambiguous and we may
interpret and apply it as a matter of law; they disagree
about what it means. It is well established, however,
that a contract is not unambiguous just because both
parties say so, nor is a contract ambiguous simply
because the parties offer different interpretations of its
language. See Cent. Ill. Light Co. v. Home Ins. Co., 821
N.E.2d 206, 214 (Ill. 2004). “[A] contract is not necessarily
unambiguous when, as here, each party insists that the
language unambiguously supports its position. Rather,
whether a contract is ambiguous is a question of law.”
Id. We are therefore not bound by the parties’ mutual
assertion that the contract is unambiguous.
  Accordingly, the threshold question for us is whether
the contract as modified is ambiguous regarding the
continued existence of Curia’s option to purchase addi-
tional shares in Auto Plaza. 2 We think that it is. The
question of contract ambiguity turns largely on whether
the contract language is “reasonably susceptible to more
than one meaning,” Susmano v. Associated Internists of
Chi., Ltd., 422 N.E.2d 879, 882 (Ill. App. Ct. 1981), although
ambiguity may also exist where the language used is
“obscure in meaning through indefiniteness of expres-

2
   As we have noted, the district court held that any continuing
right to purchase additional shares in Auto Mall was effec-
tively terminated by the 1997 agreement. Curia does not chal-
lenge that holding on appeal.
10                 Nos. 07-2766, 07-2767, 07-2820 & 07-2821

sion,” Platt v. Gateway Int’l Motorsports Corp., 813
N.E.2d 279, 283 (Ill. App. Ct. 2004); see also Lewitton,
2009 WL 3447425, at *4 (“A contract is ambiguous if its
terms are indefinite or have a double meaning.”). A
contract is to be “construed as a whole, viewing each
part in light of the others.” Gallagher v. Lenart, 874
N.E.2d 43, 58 (Ill. 2007).
     In construing contracts, to determine their intent, it
     is long established that a construction should be
     adopted, if possible, which ascribes meaning to every
     clause, phrase and word used; which requires nothing
     to be rejected as meaningless, or surplusage; which
     avoids the necessity of supplying any word or phrase
     that is not expressed; and which harmonizes all the
     various parts so that no provision is deemed con-
     flicting with, or repugnant to, or neutralizing of any
     other.
Coney v. Rockford Life Ins. Co., 214 N.E.2d 1, 3 (Ill. App. Ct.
1966). But if the contract is ambiguous, “its construction is
then a question of fact, and parol evidence is admissible to
explain and ascertain what the parties intended.” Farm
Credit Bank, 581 N.E.2d at 667.
  Nelson argues that the 1993 modification rendered
the options in the 1989 agreement inoperative by condi-
tioning all additional stock transfers on the subsequent
agreement of the parties. This is the plain meaning
of Paragraph 5 in the 1993 modification, he claims, and
for support he points to the paragraph’s heading—
“Purchase of Additional Shares”—as well as its first
sentence. That sentence says: “Curia shall have the right
to purchase additional shares of stock in said corpora-
Nos. 07-2766, 07-2767, 07-2820 & 07-2821               11

tions upon those terms and conditions subsequently
agreed upon by the parties hereto.” Nelson argues that
this language is plainly inconsistent with the options
provision in the 1989 agreement, and therefore the
options are no longer a part of the parties’ agreement.
  Curia counters that the contract read as a whole
supports the continued existence of his right to purchase
the remaining shares, irrespective of how the court inter-
prets the first sentence in Paragraph 5. He maintains
that Nelson’s interpretation is unreasonable because
nothing in the contract explicitly purports to terminate
the options whereas several provisions in the 1993 and
2000 modifications suggest that the right to purchase
the remaining shares survived the 1993 modification.
Indeed, he reads the disputed language in Paragraph 5
to unambiguously confirm his right to purchase all re-
maining shares while leaving only nonmaterial terms
to subsequent agreements.
  We cannot agree with the parties’ premise that
the contract is unambiguous on the issue of the
survival of Curia’s options. The contract and its various
modifications reasonably can be read in the manner
urged by Nelson or in the manner urged by Curia. Curia
attacks Nelson’s interpretation on multiple grounds,
and we address his arguments first. Curia maintains
that Paragraph 5 of the 1993 modification contains no
express statement of intent to terminate the options
provision of the 1989 agreement and therefore the
later agreement did not extinguish his options. He also
argues that terminating the options was beyond the
12                 Nos. 07-2766, 07-2767, 07-2820 & 07-2821

scope of the parties’ intent in modifying the 1989 agree-
ment, as evidenced by the recitals to the 1993 modifica-
tion, which list several reasons for the modification but
say nothing about canceling the options. We disagree
that these factors unambiguously establish that the
options survived.
  A contract modification is a “change in one or more
respects which introduces new elements into the details
of the contract and cancels others but leaves the general
purpose and effect undisturbed.” Int’l Bus. Lists, Inc. v.
Am. Tel. & Tel. Co., 147 F.3d 636, 641 (7th Cir. 1998)
(citing Downers Grove Assocs. v. Red Robin Int’l, Inc., 502
N.E.2d 1053, 1060 (Ill. App. Ct. 1986)). Once modified,
an original contract remains in force only to the extent
that it is not modified by the new agreement. “A
modified contract containing a term inconsistent with a
term of an earlier contract between the same parties is
interpreted as including an agreement to rescind the
inconsistent term in the earlier contract.” Schwinder v.
Austin Bank of Chi., 809 N.E.2d 180, 189 (Ill. App. Ct. 2004).
  In this case, although the 1993 modification does not
explicitly cancel the option provisions, Paragraph 5
could reasonably be read in a way that is inherently
inconsistent with the continued existence of those options,
which in turn could mean that the 1993 modification
effectively terminated the options. The first sentence of
Paragraph 5 conditions the purchase of additional shares
on a subsequent agreement between the two parties.
This can fairly be read as incompatible with the con-
tinued operation of the 1989 agreement options, which
Nos. 07-2766, 07-2767, 07-2820 & 07-2821                13

conditioned future share transfers on the previous agree-
ment of the parties. Accordingly, we cannot accept
Curia’s argument that the 1993 modification necessarily
required a more express statement to be understood as
a termination of the 1989 options.
   Curia also argues that Nelson’s interpretation
improperly reads the first sentence of Paragraph 5 in
isolation; he claims that when the contract and its modifi-
cations are read as a whole, Nelson’s interpretation
is unreasonable. To support this alternative argument,
Curia focuses first on the second sentence of Paragraph 5,
which sets a valuation formula for subsequently agreed-
upon share transfers. He argues that it would make
little sense for the parties to agree in 1993 on a
valuation method for additional shares but wait until a
later date to determine the other terms of a share trans-
fer. The district court agreed with this reasoning, con-
cluding that “[i]t defies reason . . . that the parties
would provide a mechanism for determining the pur-
chase price but intend it to kick in only if they subse-
quently agreed on other terms and conditions.”
  We agree that this language casts doubt on Nelson’s
interpretation, but it does not necessarily make it im-
plausible or unreasonable. The serial modifications of
the 1989 agreement at best establish that the parties
continuously revisited and revised their understanding
of the proper method for valuing shares in the corpora-
tions; the valuation formula for additional shares under
the 1989 agreement differs from the formula used in
Paragraph 5 of the 1993 modification, and the 1993
14                Nos. 07-2766, 07-2767, 07-2820 & 07-2821

formula in turn differs from the one in the 2000 modifica-
tion. Indeed, the stated purpose of the 1993 modification
was to correct “a mutual mistake . . . in determining the
fair market value” of Plaza shares. It is not implausible
that the parties agreed in 1993 to eliminate the prior
options and replace them with a different agreement
about subsequent share transfers while at the same
time settling on a valuation formula for those shares that
they believed would accurately reflect book value.
  We also reject Curia’s argument that other language
in the contract, read as a whole, makes Nelson’s inter-
pretation of the modified contract unreasonable. It is
true that several provisions in the 1993 and 2000 modifica-
tions appear to anticipate Curia becoming a majority
shareholder in one or both corporations at some point.
For instance, the 1993 agreement modifies a provision
in the 1989 agreement giving Nelson the right to repur-
chase Curia’s shares under certain circumstances. The
new version of this provision says that Nelson’s right to
repurchase “shall become null and void at the time
Curia becomes a majority stockholder in both of
said corporations.” However, the reference to Curia as
“majority stockholder” can reasonably be understood as
conditioned on subsequent agreement of the parties, as
reflected in the language of the first sentence of Para-
graph 5. In addition, although the 2000 modification
generally refers to the 1989 agreement as being “in force,”
this does not unambiguously indicate that the parties
specifically intended that the options provision of the
1989 agreement remained “in force,” particularly in light
of language in Paragraph 5 of the 1993 modification
Nos. 07-2766, 07-2767, 07-2820 & 07-2821                  15

conditioning additional share purchases on the sub-
sequent agreement of the parties.
  Nor is Nelson’s interpretation of the contract unrea-
sonable based on some sort of fundamental unfairness
to Curia. Illinois law avoids interpretations that render a
contract “inequitable, unusual, or such as reasonable
men would not be likely to enter into.” NutraSweet Co. v.
Am. Nat’l Bank & Trust Co., 635 N.E.2d 440, 444-45 (Ill. App.
Ct. 1994); see also 11 R ICHARD A. L ORD , W ILLISTON ON
C ONTRACTS § 32:11 (4th ed.). We have said that “[o]ne
thing to consider is the consequences of alternative inter-
pretations. Suppose that the result of reading a contract
in a particular way is that one of the parties assumed
enormous risks and got nothing in return; this would
argue against the reading.” Alliance to End Repression v.
City of Chicago, 742 F.2d 1007, 1013 (7th Cir. 1984). This
principle is not implicated here. Nelson’s interpretation
of the modified contract does not compel unreasonable
performance from Curia or create a situation in which
Curia’s performance under the 1989 contract yielded
nothing in return after the modifications. See, e.g., Tishman
Midwest Mgmt. Corp. v. Wayne Jarvis, Ltd., 500 N.E.2d
431, 435 (Ill. App. Ct. 1986) (rejecting interpretation that
would require one party to pay legal fees twice); Camp
v. Hollis, 74 N.E.2d 31, 35 (Ill. App. Ct. 1947) (rejecting
interpretation requiring commission payment even if
the other party played no role in securing a sale).
  At the same time, Curia’s interpretation of the con-
tract and its modifications is also reasonable. As we
have noted, both the 1993 modification and the 2000
16                Nos. 07-2766, 07-2767, 07-2820 & 07-2821

modification contain language at least suggesting a con-
tinued right to purchase the remaining shares in
some form. The language in Paragraph 5 of the 1993
modification can reasonably be understood to preserve
Curia’s “right” to purchase “additional shares” in Auto
Plaza pursuant to the valuation formula stated in that
paragraph, subject to future agreement of the parties on
other non-price terms. Although the 2000 modification
altered the valuation formula, the parties’ shifting agree-
ment on the proper share-valuation method does not
necessarily defeat the continued existence of the options.
  Where, as here, there is more than one reasonable way
to read the parties’ contract, it is not our role to choose
among the competing reasonable interpretations. We
simply cannot tell from the contract documents alone
whether the parties intended the original options to
survive through the 1993 and 2000 modifications. The
contract as modified is ambiguous, and the ambiguity
can only be clarified by reference to extrinsic evidence
of the parties’ intent. Summary judgment compelling
the sale of the remaining shares in Auto Plaza was there-
fore inappropriate. We R EVERSE the district court’s judg-
ment and R EMAND for further proceedings consistent
with this opinion.

                          11-20-09