Court Opinion

ID: 2998704
Source: CourtListenerOpinion
Date Created: 2015-09-24 19:46:24.47966+00
Date Added: 2024-06-11T11:25:19.850167
License: Public Domain

In the
 United States Court of Appeals
               For the Seventh Circuit
                          ____________

No. 05-1488
IN THE MATTER OF:
    KMART CORPORATION,
                                                    Debtor-Appellee
APPEAL OF:
    CAPITAL ONE BANK; CAPITAL ONE, F.S.B.;
    and CAPITAL ONE SERVICES, INC.,
                                                          Appellants
                          ____________
            Appeal from the United States District Court
       for the Northern District of Illinois, Eastern Division.
          No. 03 C 8625—Rebecca R. Pallmeyer, Judge.
                          ____________
   ARGUED OCTOBER 28, 2005—DECIDED JANUARY 4, 2006
                    ____________

 Before EASTERBROOK, MANION, and ROVNER, Circuit
Judges.
  EASTERBROOK, Circuit Judge. One of the many con-
tested matters in Kmart’s bankruptcy was whether the
debtor could assume an executory contract with Capital
One Bank providing for a co-branded credit card. Kmart
wanted to continue the arrangement, while Capital One did
not want its brand to be associated with a bankrupt
retailer. After a trial, Bankruptcy Judge Sonderby held that
Kmart is entitled to assume the contract, and District
Judge Pallmeyer affirmed.
2                                               No. 05-1488

  Capital One contended during the trial that Kmart was in
material breach of its obligations under the agreement. If
true, that would have precluded assumption unless the
shortcoming had been cured and assurances of future
performance given. 11 U.S.C. §365(b)(1). (We cite the
Bankruptcy Code as it was before the 2005 amendments,
which do not apply to this proceeding.) Kmart contended
that it was in compliance and has not relied on the cure-
and-assurance route. Judge Sonderby agreed with Kmart’s
position and allowed it to assume the contract.
  About six months later Capital One ended the co-brand
deal under §9.2(b) of the contract, which permits early
termination in the event of “material breach” by either side.
Capital One contended that, even if Kmart was performing
its duties in September 2003 (when the bankruptcy court
allowed it to assume the contract), it had failed to perform
fully between then and March 2004 (when Capital One sent
the notice of termination). Capital One Bank replaced the
Kmart-brand credit cards with Capital One-brand credit
cards. Kmart responded by filing suit in a Michigan state
court, demanding damages. Kmart adds that by terminat-
ing the contract—rightly or wrongly—Capital One has
made this appeal moot. Why decide whether it can assume
an executory contract, Kmart asks, when decision cannot
affect the parties’ future performance under this contract?
  Still, there is a controversy: Kmart wants damages for
wrongful termination, and that claim is tenable only if
the contract was properly assumed under §365. Knock out
the bankruptcy court’s assumption decision and the claim
for damages disappears, because Kmart never had a right
to Capital One’s future performance. The posture is similar
to that of a case in which a district judge issues a prelimi-
nary injunction secured by a bond, and after the court
dissolves the injunction the parties debate whether the
defendant can recover on the bond. Recovery is proper if the
injunction should not have been issued; a concrete dispute
No. 05-1488                                                 3

about damages preserves a justiciable controversy about
whether the injunction was valid, even though no prospec-
tive relief remains in dispute. See American Can Co. v.
Mansukhani, 742 F.2d 314, 320 (7th Cir. 1984).
  The complication is that Kmart’s suit for damages is a
distinct piece of litigation, in another court. Perhaps it
should not have been; as long as the dispute about assump-
tion was festering in the bankruptcy proceedings, a claim
for damages would have come within the related-dispute
jurisdiction established by 28 U.S.C. §§ 157(c)(1), 1334(b).
But whether or not the damages claim could or should have
been filed in the bankruptcy court, it is not there. This
suggests that we should follow the approach of United
States v. Munsingwear, Inc., 340 U.S. 36 (1950), and vacate
the decision, so that all issues may be litigated in Michigan.
The Court assumed in Munsingwear that, when the only
effect of deciding Case #1 would be to resolve a single issue
in Case #2, then Case #1 is moot and the judgment should
be vacated. As the Court wrote, vacatur “clears the path for
future relitigation of the issues between the parties and
eliminates a judgment, review of which was prevented
through happenstance. When that procedure is followed,
the rights of all parties are preserved”. Id. at 41. Unfortu-
nately, however, the rights of all parties cannot be pre-
served by vacatur—nor could both parties’ entitlements be
preserved by dismissing the appeal while leaving the
bankruptcy judge’s decision in place, as Kmart requests.
Either approach will privilege one side over the other.
  Because federal bankruptcy jurisdiction is exclusive, the
state court in Michigan could not decide whether Kmart
was entitled to assume the contract under §365. Treating
the federal proceedings as moot would leave only two
possibilities. If we were to vacate the bankruptcy court’s
decision, then Kmart’s state-court action also must be
dismissed: there would be no (effective) judicial decision
allowing Kmart to assume the contract, so Capital One’s
4                                                No. 05-1488

decision to walk away could not be breach. That would
permit the unsuccessful party in litigation under §365 to
frustrate the bankruptcy judge’s decision, and the other
party’s rights, by the expedient of refusing to carry out its
side of the bargain: breach would end the §365 proceed-
ing and at the same time prevent later claims for dam-
ages (because the order allowing the contract to be assumed
would have to be vacated once either party definitively
refused to perform). If instead we were to dismiss the
appeal and leave the bankruptcy judge’s decision in force,
by analogy to U.S. Bancorp Mortgage Co. v. Bonner Mall
Partnership, 513 U.S. 18 (1994) (holding that vacatur is
obligatory only if mootness arises from circumstances
beyond the parties’ control), then Capital One will be
stuck with a contract (and must face the prospect of dam-
ages for breach) that may not have been assumed properly.
Neither the rule “breach itself protects the breaching party
from damages, because it requires vacatur of the §365
order” nor the rule “breach ensures victory for the debtor,
because the appeal must be dismissed” is palatable. The
only sensible thing to do is resolve the appeal on the merits;
only then can both sides’ rights be respected.
  Judges cannot resolve moot cases, however prudent
such a step might seem, but as we have observed the
ongoing damages litigation shows that a justiciable contro-
versy remains. Article III permits a federal court to resolve
an issue that might control some other case. Think of the
offensive use of the declaratory-judgment statute, to obtain
a declaration that a claim under some other statute, in
some other court, is preempted by federal law. See, e.g.,
Golden State Transit Corp. v. Los Angeles, 493 U.S. 103
(1989). Or think of insurance-coverage litigation. A sues B
in state court; C, B’s insurer, brings a suit in federal court
seeking a declaratory judgment that the policy does not
cover the events, so that it need not indemnify B, should B
be held liable in the state case. No one supposes that such
No. 05-1488                                                         5

litigation, a staple under the diversity jurisdiction, exceeds
the judicial power under Article III just because the state
court may decide in B’s favor on the merits and make the
federal decision irrelevant. As long as there is a risk that B
will be held liable and that C called on to indemnify, there
is a live controversy that a federal court may resolve.† Just
so here: As long as the Michigan litigation is pending, and
there is a risk that Capital One may be called on to pay
damages for breach of a contact that, it contends, was
not properly assumed in bankruptcy, there is a live contro-
versy in the federal forum.
  When opposing assumption in the bankruptcy court,
Capital One argued that Kmart is in default because it is no
longer a “mass merchandise retailer.” A series of “whereas”
clauses precedes the contract’s main text. One paragraph
reads: “WHEREAS, Kmart owns and operates a chain of
discount retail stores and is a mass merchandise retailer”.
(The next clause reads: “WHEREAS, Capital One is en-
gaged in the business of issuing, managing and servicing
VISA and MasterCard branded credit card accounts”.)
When the contract was signed in May 2000, Kmart had
about 2,200 stores; by February 2003 it was down to 1,514,
and Capital One thinks that this meant that it was no
longer the sort of “mass” retailer that would make a good
partner even though it was still one of the ten largest retail
chains in the nation.

†
  See Premcor USA, Inc. v. American Home Assurance Co., 400
F.3d 532 (7th Cir. 2003); American States Insurance Co. v. Capital
Associates of Jackson County, Inc., 392 F.3d 939 (7th Cir. 2004).
When the insurers’ duty to defend the state case is not at issue,
federal litigation usually should be deferred until the state court
has acted. See Lear Corp. v. Jackson Electric Holdings Ltd., 353
F.3d 580, 583 (7th Cir. 2003); Nationwide Insurance Co. v.
Zavalis, 52 F.3d 689, 692-93 (7th Cir. 1995). Ripeness is not a
problem in our litigation, however; the concern is that it is too late
rather than too soon to adjudicate matters.
6                                                No. 05-1488

   Such “WHEREAS” language divorced from the contract’s
substantive clauses implies that this document was drafted
by someone who used a form book printed on parchment
before the Linotype machine was invented. It does not,
however, show that Kmart’s scale is a promise, as opposed
to a description. It would have been easy to state in one of
the contract’s substantive clauses that failure to operate at
least 2,000 outlets entitled Capital One to walk away.
Section 10.2 of the contract contains a long list of represen-
tations and warranties that Kmart makes to Capital One;
the number of stores that Kmart will operate is not on that
list. Nor does the contract otherwise imply that being a
“mass merchandise retailer” (whatever that might mean) is
a condition that Kmart must satisfy for the contract’s five-
year duration. The “WHEREAS” clause reads as an
identifier—this contract is between Capital One and Kmart
the national chain, rather than Kmart the mom-and-pop
store in Barrow, Alaska, that has flown beneath the
trademark radar. Cf. Atlantic Mutual Insurance Co. v.
Metron Engineering & Construction Co., 83 F.3d 897, 899
(7th Cir. 1996); Walker v. Tucker, 70 Ill. 527 (1873).
  Capital One’s position is that the negotiators had discus-
sions that led it to think that Kmart planned to remain
about the same size, and that Capital One relied on this
when deciding whether to enter the arrangement. But what
the negotiators said to each other is tangential, and what
people in Capital One’s front office thought is irrelevant.
See AM International, Inc. v. Graphic Management Associ-
ates, Inc., 44 F.3d 572, 575 (7th Cir. 1995); Skycom Corp. v.
Telstar Corp., 813 F.2d 810 (7th Cir. 1987). These discus-
sions do not resolve ambiguities in any of the contract’s
substantive terms and so would not be admissible under the
parol evidence rule even if the contract lacked an integra-
tion clause. (Our reference to “the” parol evidence rule
reflects the fact that there is widespread agreement on this
proposition. The contract lacks a choice-of-law clause, and
No. 05-1488                                                7

the parties have not discussed which state’s law would gov-
ern its interpretation—Capital One’s brief cites only one
state case, for the incorrect proposition that state law
supplies the standard of appellate review in federal court,
on which see Mayer v. Gary Partners & Co., 29 F.3d 330
(7th Cir. 1994)—so we do not consider the possibility that
an idiosyncratic version of the parol evidence rule might
apply.) As it happens, however, the contract has a strong
integration clause. Section 13.8 provides, among other
things: “This Agreement . . . constitute[s] the entire agree-
ment between the parties hereto relating to the subject
matter hereof, and all prior negotiations and understand-
ings, whether oral or written, are superseded hereby.”
Words exchanged during the negotiations are among the
matters “superseded” by the written text.
  Capital One contends that it is entitled to rely on the
negotiations notwithstanding the integration clause, and
notwithstanding the lack of any definition (in either the
trade or popular culture) of “mass merchandise retailer”
that would exclude a chain of 1,500 outlets from that
description. But how could a bank with extensive net-
works of contracts benefit from destabilizing the objective
reading of contracts and throwing everything up for grabs?
Large enterprises depend on being able to reduce deals to
writing that top officials may evaluate and approve or reject
without being bound by what subordinates may have said
behind their backs. They seek to insulate their bargains
from hard-to-disprove (and easy-to-fabricate) claims that
someone remembers saying something that might be
pertinent. Getting out of a deal with Kmart a few years
early would come at a very high price indeed to Capital One
and all others who want their contracts to produce certainty
rather than set the stage for swearing contests. We are not
remotely inclined to grant Capital One’s wish to make
integration clauses worthless, however, and it should be
thankful that its lawyers have failed in this effort. See
8                                              No. 05-1488

Bank of America, N.A. v. Moglia, 330 F.3d 942, 946 (7th Cir.
2003).
  Capital One’s second argument is that Kmart failed to
staff the executive committee with “qualified” personnel.
(The parties debate whether this contention was preserved
in the bankruptcy court; to simplify matters, we assume
that all of Capital One’s arguments have been properly
presented and preserved for appellate decision.) Section
2.6(a) of the contract establishes an executive committee to
make decisions about subjects, such as marketing cam-
paigns, that require joint action. During the bankruptcy
Kmart laid off two of the three people it had named to this
committee, and Capital One did not think much of the one
who remained. Yet the contract provides that “[e]ither party
may remove or replace, with or without cause, any member
of the Executive Committee appointed by such party”.
That’s what Kmart did. The contract does not set minimum
qualifications for membership, nor does it set a minimum
number of representatives that Kmart must appoint, other
than what is implied by the provision that “the presence of
one member from Capital One and one member from Kmart
will constitute a quorum”. Kmart took some months to
replace the members it had laid off, but again nothing in
the contract sets a time limit. The executive committee was
to meet “on a regular basis once every year and as may
be necessary from time to time.” That afforded Kmart some
leeway in the timing of appointing replacements to the
committee; Capital One does not contend that a “necessary”
meeting could not be held because of staffing issues.
  Again Capital One wants us to disregard the language
of the contract and go by its subjective belief that Kmart’s
representatives would hold “qualifications” satisfactory
to Capital One, and in particular would be “senior” manag-
ers experienced in credit promotions. The one person who
was on the committee throughout was too young and
inexperienced to satisfy Capital One. What we have
No. 05-1488                                                  9

said about the parol evidence rule and the integration
clause applies equally to this issue. Indeed, Capital One
does not offer any concrete, objective evidence that would be
admissible if the integration clause did not exist; its brief
emphasizes the feelings, thoughts, and suppositions of its
negotiators, not any objectively demonstrable exchanges.
See Rossetto v. Pabst Brewing Co., 217 F.3d 539 (7th Cir.
2000); Bristow v. Drake Street Inc., 41 F.3d 345 (7th Cir.
1994); Olympia Hotels Corp. v. Johnson Wax Development
Corp., 908 F.2d 1363 (7th Cir. 1990).
  As a fallback position, Capital One contends that laying
off the “qualified” committee members and replacing
them (after delay) with less-experienced persons violates
the covenant of good faith and fair dealing that Illinois
reads into all contracts. (Capital One assumes that Illi-
nois supplies the rule of decision, but it does not so
argue—and, as we have mentioned, it does not cite a
single salient state decision.) This doctrine is a rule of
construction, not a stand-alone obligation, see, e.g.,
L.A.P.D., Inc. v. General Electric Corp., 132 F.3d 402 (7th
Cir. 1997) (Illinois law); Continental Bank, N.A. v. Everett,
964 F.2d 701 (7th Cir. 1992) (Illinois law); Northern Trust
Co. v. VIII South Michigan Associates, 276 Ill. App. 3d 355,
367, 657 N.E.2d 1095, 1104 (1st Dist. 1995). There’s no
ambiguity in §2.6 that could be resolved through the norm
of good faith. Capital One does not contend that Kmart
engaged in opportunistic behavior; it is not as if Capital
One had large sunk costs that Kmart sought to exploit
by dragging its heels in replacing two members of the
executive committee or choosing representatives with
insufficient experience in the credit business. No crafty
maneuver was attempted; there was accordingly no role
for a doctrine of good faith to play in reading the contract to
thwart self-serving cleverness. See Market Street Associates
Limited Partnership v. Frey, 941 F.2d 588 (7th Cir. 1991)
(Wisconsin law).
10                                               No. 05-1488

  Finally, Capital One insists that for about six months
during its bankruptcy Kmart just didn’t do anything under
the agreement. Its energies were devoted to other topics,
such as closing money-losing stores and waging a PR
campaign to revive the public’s estimate of the chain’s
stature, products, and prospects. If doing nothing isn’t
a material default, what is?, Capital One asks. But then,
doing nothing is a default only if the contract requires
“something,” and what was the omitted something? Capital
One overstates in saying that Kmart did nothing; as Capital
One concedes, Kmart continued with day-to-day administra-
tion of the credit business. What it did not do for six months
was make any major plans. Yet the principal bargain that
the parties struck was that Capital One would acquire
Kmart’s customer list and the right to use its trademarks in
promoting credit to consumers, to the exclusion of other
financial institutions. Kmart came through with the list
before it entered bankruptcy, cut off other suppliers of
consumer credit, and did not interfere with Capital One’s
ability to use its marks in promoting credit-card distribu-
tion and consumer-credit transactions. Kmart displayed and
distributed required promotional materials and applications
for Capital One’s cards.
  The “somethings” Capital One now tells us Kmart omitted
had to do with joint planning of seasonal promotional
campaigns, such as those centered on Halloween. As far as
we can see, however, nothing in the contract required
Kmart to participate in seasonal or occasional marketing
campaigns. What the contract did require was an annual
planning and coordination exercise (that’s why the execu-
tive committee had to meet at least once a year) and
approval of the annual budget for promotional outlays, see
§2.6(b)(iii) and Exhibit B ¶B(a)(iv); other campaigns were
optional. Kmart took a breather for six months while it
attended to more pressing matters. It had every right to do
so. At the hearing before Judge Sonderby, Capital One
No. 05-1488                                              11

conceded that Kmart still had time, in the contract’s annual
cycle, to make decisions about the annual promotional
budget and plan. It was accordingly not in default and was
entitled to assume the contract.
                                                 AFFIRMED

A true Copy:
      Teste:

                        ________________________________
                        Clerk of the United States Court of
                          Appeals for the Seventh Circuit

                   USCA-02-C-0072—1-4-06