Court Opinion

ID: 2997075
Source: CourtListenerOpinion
Date Created: 2015-09-24 19:33:28.759782+00
Date Added: 2024-06-11T12:11:22.334694
License: Public Domain

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

No. 03-1836
ENERGY PLUS CONSULTING, LLC,
                                         Plaintiff-Appellant,
                             v.

ILLINOIS FUEL COMPANY, LLC
and APPALACHIAN FUELS, LLC,
                                      Defendants-Appellees.

                       ____________
          Appeal from the United States District Court
              for the Southern District of Illinois.
       No. 02-CV-0202-DRH—David R. Herndon, Judge.
                       ____________
    ARGUED OCTOBER 28, 2003—DECIDED JUNE 9, 2004
                   ____________

 Before BAUER, POSNER, and WILLIAMS, Circuit Judges.
  WILLIAMS, Circuit Judge. Energy Plus Consulting, LLC
(“EPC”) sued defendants Illinois Fuel Company, LLC and
Appalachian Fuels, LLC, alleging breach of contract and
seeking $720,000 in damages. The contract provided that if
the defendants failed to release an option in a separate
contract with a third party by a specified date, they would
pay EPC $720,000. The district court, in granting defen-
dants’ motion for summary judgment, found that the
$720,000 provision was an unenforceable penalty clause.
We agree with the district court, and therefore affirm.
2                                                No. 03-1836

                    I. BACKGROUND
   The contract at issue arose from Washington County,
Illinois’ (the “County”) efforts to lease a coal reserve given
to it by Exxon Corporation. In April 2001, the County en-
tered into a contract with EPC (the “Standstill Agreement”)
granting EPC the exclusive right, for eighteen months, to
contract with third parties to develop the reserve. The
County, however, reserved its right to reject third-party
proposals submitted by EPC.
  Consistent with the Standstill Agreement, EPC solicited
several companies potentially interested in exploring the re-
serve, including the defendants, Illinois Fuel Company,
LLC and Appalachian Fuels, LLC (referenced jointly as
“Fuels”). On August 13, 2001, Fuels and EPC signed an
agreement (the “Agreement”) which provided that EPC
would present Fuels to the County as a potential candidate
interested in exploring the reserve. In turn, upon entering
into an option contract with the County providing Fuels an
exclusive right to explore the reserve, Fuels would pay EPC
$100,000. The Agreement also included the following
clause:
    Fuels shall pay to Energy Plus Seven-Hundred
    Twenty-Thousand Dollars ($720,000) upon which-
    ever shall occur first:
    (A.)   the expiration of ninety days from the date of
           execution of the Option, unless Fuels has
           released the Option, or
    (B.)   the execution of a Mining Lease.
The Agreement further specified that if Fuels executed a
mining lease with the County, Fuels would also pay EPC
$720,000 on the date of execution for the next four years.
  On August 13, 2001, following the execution of the
Agreement between Fuels and EPC, Fuels and the County
executed an option contract granting Fuels the exclusive
No. 03-1836                                               3

right to explore and lease the reserve. The option expired
the sooner of February 13, 2002 or the date upon which
Fuels completed its due diligence. After executing the op-
tion contract, Fuels paid EPC $100,000, as required under
the Agreement.
   On November 15, 2001, four days after the expiration of
the ninety-day deadline in the Agreement, EPC and Fuels
amended the Agreement (the “Amendment”), extending the
ninety-day deadline for Fuels to either pay $720,000 or
release the option until December 31, 2001.1 Fuels paid
$50,000 for the extension. The Amendment also stipulated
that Fuels could extend the deadline to February 13, 2002
if Fuels paid EPC another $50,000 by no later than Decem-
ber 31, 2001.
   On January 4, 2002, four days after the deadline to
release the option agreement expired, Fuels notified the
County by letter that it would not exercise the option and
also informed EPC of its decision by telephone. On January
10, 2002, EPC received a copy of the letter advising it of
Fuels’ decision. In response, EPC demanded that Fuels pay
it $720,000 pursuant to the Amendment’s provision which
required the payment if Fuels did not release the option on
or before December 31, 2001. When Fuels refused to pay,
EPC filed this lawsuit in the Circuit Court of Washington
County, Illinois, alleging breach of contract. The case was
removed to the United States District Court for the South-
ern District of Illinois and both parties filed motions for
summary judgment. The district court denied EPC’s motion
but granted summary judgment in favor of Fuels, finding
that the clause calling for the $720,000 payment was an
unenforceable penalty. EPC appeals.

1
   Although the Amendment was executed on November 15, 2001,
it was dated November 11, 2001.
4                                                   No. 03-1836

                       II. ANALYSIS
  We review a district court’s decision to grant summary
judgment de novo, viewing all facts in the light most fa-
vorable to the nonmoving party, and determine whether
there is a genuine issue for trial. Hilt-Dyson v. City of Chi.,
282 F.3d 456, 462 (7th Cir. 2002).
  Whether a contractual provision is a valid liquidated
damages clause or an unenforceable penalty clause is a
question of state law that we review de novo. Checkers
Eight LP v. Hawkins, 241 F.3d 558, 562 (7th Cir. 2001).
Here, Illinois law applies. In Illinois, a liquidated damages
clause is valid and enforceable when: “(1) the actual dam-
ages from a breach are difficult to measure at the time the
contract was made; and (2) the specified amount of damages
is reasonable in light of the anticipated or actual loss
caused by the breach.”2 Id. at 562; see also Lake River Corp.
v. Carborundum Co., 769 F.2d 1284, 1289 (7th Cir. 1985).
Although this test is instructive, we are mindful that there
is no fixed rule applicable to all liquidated damages pro-
visions, as each must be evaluated on its own facts and
circumstances. Grossinger Motorcorp Inc. v. Am. Nat’l Bank
and Trust Co., 607 N.E.2d 1337, 1345 (Ill. App. Ct. 1992).
Further, while “[t]he distinction between a penalty and
liquidated damages is not an easy one to draw,” close cases
will be resolved in favor of finding the disputed clause a
penalty. Lake River Corp., 769 F.2d at 1290.
  The provision of the contract requiring Fuels to pay the
$720,000 that EPC demands is a penalty under Illinois law

2
  Some Illinois courts also include a third prong: “[whether] the
parties intended to agree in advance to the settlement of damages
that might arise from the breach . . . .” See, e.g., Med+Plus Neck
and Back Pain Center v. Noffsinger, 726 N.E.2d 687, 693 (Ill. App.
Ct. 2000). But see Penske Truck Leasing Co. v. Chemetco Inc., 725
N.E.2d 13, 19 (Ill. App. Ct. 2000). The third prong does not
materially alter the analysis here.
No. 03-1836                                                      5

because the clause mandating the payment was not reason-
able at the time of contracting. See Checkers, 241 F.3d at
562. While EPC characterizes the payment in different
ways, no offered rationale withstands this court’s scrutiny
over whether the sum is reasonable.3 In Lake River this
court opined: “When a contract specifies a single sum in
damages for any and all breaches even though it is appar-
ent that all are not of the same gravity, the specification is
not a reasonable effort to estimate damages. . . .” 769 F.2d
at 1290. In Lake River, the court found that a clause that
would have awarded the plaintiff more than its lost profits,
no matter the timing of the breach, was a penalty clause.
Id. at 1291. The court reasoned that enforcing the clause
would have resulted in an award unrelated to the expected
damages as estimated at the time of contracting. Id.; see
also Yockey v. Horn, 880 F.2d 945, 952 (7th Cir. 1989).
Here, Fuels was required to pay EPC $720,000 no matter
when notice of the breach occurred. In other words, whether
Fuels notified EPC on January 1, January 31, or any other
future date that it would not exercise the option, the sum in
damages, $720,000, would remain the same. In the alterna-
tive, if EPC received notice that Fuels released the option
anytime before the ninety days expired, EPC would receive
no money. Lake River made clear that this type of single
sum payment, one that bears no relation to the gravity of
the breach, is unreasonable. 769 F.2d at 1291; see also XCO
Int’l Inc. v. Pacific Scientific Co., No. 03-1683, 2004 WL
1147062, at *6 (7th Cir. May 24, 2004) (noting that the

3
  EPC apparently attempts to avoid the characterization of the
$720,000 as a penalty by arguing that it was either one, or a
combination, of the following: (1) an estimate of the damages it
would incur by taking the coal reserve off the market beyond the
December 31 deadline; (2) a fee for taking the coal reserve off the
market; or (3) the first installment of five payments under the
mining lease.
6                                              No. 03-1836

“element common to most liquidated damages clauses that
get struck down as penalty clauses is that they specify the
same damages regardless of the severity of the breach”);
Checkers, 241 F.3d at 562-63 (holding that a clause requir-
ing a $150,000 payment if the party was late in making
scheduled payments to be a penalty).
   The November 15 Amendment is additional evidence of
this single sum’s unreasonableness. It gave Fuels the option
of purchasing a forty-five day extension beyond December
31 for $50,000. This suggests that, at least as of November
15, the cost of keeping the reserves off the market beyond
December 31 was closer to $50,000. Thus, EPC’s require-
ment of a $720,000 payment, even for notifying EPC one
day after the specified deadline that Fuels would not
exercise the option, is an unenforceable penalty under
Illinois law.
  To avoid this characterization, EPC contends that this
Court’s holding in Scavenger Sale Investors v. Bryant, 288
F.3d 309 (7th Cir. 2002), requires a finding that the
$720,000 is a valid liquidated damages clause. Scavenger,
however, is distinguishable. In Scavenger, we interpreted a
settlement agreement that provided a $600,000 discount
from the amount the defendant actually owed, but required
the defendant to pay the $600,000 if the agreement was
breached. We found that the $600,000 payment was not a
penalty because the original amount owed provided a
benchmark to measure the reasonableness of the sum. Id.
at 312. Unlike the settlement agreement in Scavenger,
there is no benchmark against which to measure the
$720,000 payment. Rather, the $720,000 payment clause
does not bear a nexus to the gravity of the breach and EPC
fails to provide evidence suggesting that the clause was a
reasonable attempt to estimate actual damages.
No. 03-1836                                              7

                  III. CONCLUSION
  For the foregoing reasons, we AFFIRM the district court’s
order granting summary judgment in favor of the
defendants.

A true Copy:
      Teste:

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

                   USCA-02-C-0072—6-9-04