Aventine Renewable Energy, Inc v. Aberdeen Energy, LLC, No. 16-1692 (7th Cir. 2016)

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Aventine bought ethanol from Glacial. In 2009, the parties executed “termination agreements” that required Aventine to pay Glacial $898,000 for ethanol received before the specified termination date and required Glacial to pay Aventine $1,250,000 for commissions it would have owed for marketing the ethanol that Aventine had agreed to buy. Glacial agreed to assume Aventine’s leases and began using 473 Union Tank railcars for transporting ethanol. When Aventine declared bankruptcy, Glacial owed it $1,600,000 for commissions and railcar leases; Aventine owed Glacial $900,000 for ethanol purchased from Glacial before the termination date. Glacial refused to pay Aventine anything, while continuing to use the railcars. Bypassing Aventine, Glacial made a deal with Union Tank, without securing a release of Aventine, as required by the termination agreements. Consequently, Aventine was required by its bankruptcy plan to settle the Union Tank debt, using $2.3 million worth of Aventine stock. After the bankruptcy, Aventine sued Glacial. The district court granted Glacial summary judgment, stating that while it would be “unjust” to allow Glacial “to avoid any liability” to Aventine, the latter’s failure to make payments doomed Aventine’s claims because “performance is an essential element of its claim for breach of contract.” The Seventh Circuit reversed, holding that it was error to place all the onus on Glacial, as both parties had defaulted.

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In the United States Court of Appeals For the Seventh Circuit ____________________ Nos. 16 1690, 1692 AVENTINE RENEWABLE ENERGY, INC., Plaintiff Appellant, v. GLACIAL LAKES ENERGY, LLC, and ABERDEEN ENERGY, LLC, Defendants Appellees. ____________________ Appeals from the United States District Court for the Central District of Illinois. Nos. 1:13 cv 01391, 01392 — Michael M. Mihm, Judge. ____________________ ARGUED NOVEMBER 8, 2016 — DECIDED DECEMBER 14, 2016 ____________________ Before WOOD, Chief Judge, and POSNER and ROVNER, Cir cuit Judges. POSNER, Circuit Judge. The plaintiff, Aventine, is a dis tributor of ethanol, a common additive to gasoline. The two defendants, affiliated companies that for the sake of simplici ty we’ll pretend are one and call Glacial, manufacture and sell ethanol. The disputants are of diverse citizenship, and have agreed that the law applicable to their dispute is that of New York State. 2 Nos. 16 1690, 1692 Until 2009, Aventine bought ethanol from Glacial and distributed it, but in January of that year the parties executed “termination agreements.” The agreements required Aven tine to pay Glacial $898,000 (we round to the nearest $1000) for ethanol that Aventine had received from Glacial before the termination date specified in the agreements but had not yet paid for (the parties call the payments that Aventine was required to make “true up payments”) and required Glacial to pay Aventine $1,250,000 for commissions that Glacial would have had to pay Aventine for marketing the ethanol that Aventine had agreed to buy from it. In addition Glacial agreed to assume Aventine’s leases from Union Tank Car Company of 473 railcars used for transporting ethanol; trembling on the brim of bankruptcy, Aventine didn’t need railcars any more. Glacial used the railcars between February 23 and April 7 (Aventine declared bankruptcy on April 7) without reim bursing Aventine for the lease payments that Aventine owed Union Tank, a sum exceeding $500,000, which Aventine could not afford to pay. When Aventine declared bankrupt cy, Glacial owed it some $1,600,000 for marketing commis sions and railcar leases while Aventine owed Glacial some $900,000 for the ethanol it had bought from Glacial before the termination date specified in the termination agree ments. Netting the two debts would have resulted in Gla cial’s paying Aventine $700,000. But because, or at least os tensibly because, Aventine either couldn’t or wouldn’t pay Glacial any part of the $900,000 that Aventine owed it, Gla cial refused to pay Aventine the $700,000—or indeed any thing, while continuing to use the railcars Aventine had transferred to it. Nos. 16 1690, 1692 3 Further bypassing Aventine, Glacial made a deal to lease the railcars from Union Tank. Although the termination agreements required Glacial if it wanted to use the railcars to secure a release of Aventine from its Union Tank leases, Gla cial didn’t do that and as a result Aventine was required as part of its bankruptcy plan to make good on what it owed to Union Tank—to the tune of almost $2.3 million worth of Av entine stock. Why wasn’t the dispute resolved in the bankruptcy pro ceeding? Glacial wouldn’t have filed a claim in bankruptcy court, because a claim is a right to payment, 11 U.S.C. § 101(5)(A), and Glacial was a net loser under the termina tion agreements. Had it filed a claim Aventine would have responded with defenses and a counterclaim. See 28 U.S.C. § 157(b)(2)(C), (c)(1); Stern v. Marshall, 131 S. Ct. 2594 (2011). Aventine could have initiated an adversarial proceeding but didn’t need to, since its bankruptcy plan explicitly preserved its cause of action, along with Glacial’s right of setoff. Still owed lots of money by Glacial, after going through bankruptcy Aventine sued it in an Illinois state court (Aven tine is a citizen of Illinois). Glacial removed the suit to feder al district court, which granted summary judgment for Gla cial on the ground that while it would be “unjust” to allow Glacial “to avoid any liability” to Aventine, the latter’s fail ure to make the true up payments “dooms the Plaintiff[,] as performance is an essential element of its claim for breach of contract.” But to place all the onus on Glacial as the district judge did was mistaken, as both parties had defaulted on the obligations they’d agreed to in the termination agreements. Aventine had just happened to sue first—unsurprisingly since it was owed more by Glacial than it owed Glacial. 4 Nos. 16 1690, 1692 The district judge ignored the law of New York (which as we said the parties agree governs their dispute), under which a party cannot “at the same time treat the contract as broken and as subsisting,” Strasbourger v. Leerburger, 134 N.E. 834, 835 (N.Y. 1922), which is what Glacial did by using the railcars while insisting that Aventine cannot sue for breach of contract. Applying New York law the Second Cir cuit has held that a party’s “refusal to perform its end of the bargain” after it has affirmed a contract by continuing to ac cept its benefits is “impermissible.” ARP Films, Inc. v. Marvel Entertainment Group, Inc., 952 F.2d 643, 649 (2d Cir. 1991); see also McDonald’s Corp. v. Robert A. Makin, Inc., 653 F. Supp. 401, 403 (W.D.N.Y. 1986). Or as the great Judge Cardozo put it, a sales contract kept alive “remains alive as much for the benefit of the buyer as for the benefit of the seller. … The buyer may now insist that the seller’s misconduct shall be cast in the balance with its own. ... If the defendant never re tracted its unlawful claim of right, the like is true of the plaintiff. The one as much as the other is chargeable with wrong.” Rubber Trading Co. v. Manhattan Rubber Mfg. Co., 116 N.E. 789, 790 (N.Y. 1917). Glacial argued in the district court that Aventine would suffer no loss from failing to obtain any damages from Gla cial because as a result of its bankruptcy the creditors of Av entine are now its owners; they’ll take the loss, since if a cor poration sustains a substantial loss, the owners’ stock is worth less. But it doesn’t follow that because the owners of the corporation are hurt, the corporation isn’t. And finally Glacial argues that the value of Aventine’s indemnification claim is zero, because Aventine’s debt to Union Tank (which Glacial promised to cover) was discharged in the bankruptcy in exchange for stock that Aventine would otherwise have Nos. 16 1690, 1692 5 been forced to give to another creditor. But Aventine’s debt to Union Tank, and therefore Glacial’s liability to Aventine, was sharply reduced by the bankruptcy. That was enough of a windfall for Glacial. It’s not entitled to more. The judgment of the district court is reversed, and the case remanded with instructions to net out the difference in the amounts of money owed by the parties to each other and award the difference to the party to whom it is due.

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