Date: 11-27-2017

Case Style:

Case Number: 17-1133

Judge: Kanne

Court: United States Court of Appeals for the Seventh Circuit on appeal from the Western District of Wisconsin (Dane County)

Plaintiff's Attorney: Sara Gehrig and Regi Jackson, David Moore, Adam Nightingale, Tim Nackowicz

Defendant's Attorney: Al Bianchi, Colleen O'Neil, Carrie Ruzicka, Mary Turke

Description: Betco Corporation purchased the assets
of two bioaugmentation companies from Marilyn and
Malcolm Peacock. The Asset Purchase Agreement included
the sale of equipment at the Peacocks’ Beloit, Wisconsin plant.
Betco asked Malcolm to remain at the Beloit plant after the
sale as president. Eventually, Betco discovered that the Beloit
plant was delivering defective products to customers. It filed
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this suit against the Peacocks and their holding companies for
fraud, negligent misrepresentation, breach of contract, and
breach of the duty of good faith and fair dealing.
After two rounds of summary judgment and a bench trial,
the district court dismissed the entirety of Betco’s suit. Betco
appeals the dismissal of its breach of contract and breach of
the duty of good faith and fair dealing claims. We affirm.
I. BACKGROUND
Malcolm Peacock was the founder of Bio‐Systems Corporation
and Enviro‐Zyme International, LLC (together, Bio‐
Systems). The companies produced biodegradation products
that contained bacteria designed to break down various forms
of waste. Malcolm developed a “wet‐batch” process at Bio‐
Systems’s Beloit plant to produce the bacteria. Customers requested,
and often required, certificates of analysis documenting
the bacteria level in the product at the time of sale.
So Bio‐Systems counted the bacteria in a product before sale
using a spiral plater and “ProtoCOL” counter.
In 2010, Betco Corporation purchased Bio‐Systems’s assets
from Malcolm and Marilyn Peacock and their holding companies,
B. Holdings, Inc. and E. Holdings, LLC, (together, the
Peacocks). Before closing, Betco visited Bio‐Systems’s sites,
spoke with Bio‐Systems’s personnel, and examined Bio‐Systems’s
financial information. At closing, Betco paid the Peacocks
$5 million and placed $500,000 in escrow. The Asset
Purchase Agreement (“the Agreement”) required Betco to
pay out the $500,000 two years after closing if it did not identify
any problems in that time that required using the escrow
funds to fix.
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After closing, Betco asked Malcolm to continue to run the
Beloit plant just as he had before the sale but now as president
of Betco’s newly‐formed Bio‐Systems of Ohio (“Bio‐Ohio”).
Betco instructed Malcolm to focus on sales and profits. Later,
Betco identified problems with the products being shipped
from the Beloit plant. First, though Betco knew before closing
that the bacteria yields were inconsistent at the Beloit plant, it
learned within a year of closing that some products were being
shipped to customers with below‐specification bacteria
counts. A few months later, Betco nonetheless paid out the
escrow funds early in exchange for a 12% discount. Second,
after paying out the escrow, Betco discovered that certificates
of analysis were being re‐used or falsified by the sales team.
It’s unclear to what extent Malcolm concealed the issues
from Betco. According to some former employees, Malcolm
was not receptive when employees questioned Bio‐Ohio’s
methods. Further, one employee testified that Malcolm instructed
him to not speak directly with Betco personnel. But
other employees testified that Malcolm never discouraged
them from communicating with Betco after the sale. In fact,
Malcolm himself suggested that Betco’s Vice President of Research
and Development visit the Beloit plant for a week to
learn more about Bio‐Ohio. The vice president said that he
was busy, so he only made a number of short visits.
In April 2012, Betco sued the Peacocks in federal district
court in Ohio for fraud, negligent misrepresentation, breach
of contract, and breach of the duty of good faith and fair dealing.
The case was transferred to Wisconsin.
There, the court first dismissed Betco’s negligent misrepresentation
and breach of contract claims against the Peacocks,
finding both claims were time‐barred by Section 10.05
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of the Agreement. The court later dismissed Betco’s fraud
claim against the Peacocks and its breach of the duty of good
faith claim against all the defendants except Malcolm. After a
bench trial, the court ruled in Malcolm’s favor on the duty of
good faith claim. The court found that Betco failed to prove
that Malcolm violated the duty of good faith and, further, that
Betco hadn’t shown any cognizable injury from the alleged
violation.
II. ANALYSIS
Betco raises two issues on appeal. First, Betco appeals the
district court’s summary judgment dismissal of its breach of
contract claim. It argues that the court erred in finding that
the claim was time‐barred. Second, Betco appeals the district
court’s judgment on the duty of good faith claim. It argues
that the court erred in finding that Malcolm had not violated
this duty and that Betco failed to prove damages even if he
had violated it.
We address each issue in turn.
A. The dismissal of Betco’s breach of contract claim
We review a grant of summary judgment de novo, construing
the facts in the light most favorable to the nonmovant. See
Consolino v. Towne, 872 F.3d 825, 829 (7th Cir. 2017). But this
court has “long refused to consider arguments that were not
presented to the district court in response to summary judgment
motions.” Laborers’ Int’l Union v. Caruso, 197 F.3d 1195,
1197 (7th Cir. 1999) (quoting Arendt v. Vetta Sports, Inc., 99 F.3d
231, 237 (7th Cir. 1996)). When a party presents an underdeveloped
or conclusory argument below, the party does not
preserve its claim for appeal. C & N Corp. v. Kane, 756 F.3d
1024, 1026 (7th Cir. 2014); United States v. Dunkel, 927 F.2d 955,
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956 (7th Cir. 1991) (“A skeletal ‘argument’, really nothing
more than an assertion, does not preserve a claim.”).
During the summary judgment phase, Betco told the court
that Section 10.05 of the Agreement bars any claim related to
a representation or warranty in the Agreement that is brought
more than one year after closing unless the claim is one for
fraud or intentional misrepresentation. It then went on to say
that its breach of contract claim was not time‐barred.
On appeal, Betco asks that we construe these two statements
as an argument that its breach of contract claim was not
time‐barred because it was a claim for intentional misrepresentation.
In essence, then, Betco wants the substance of its argument
to the district court to prevail over its form. But Betco
did not give the district court any substance. It did not give a
single reason why its breach of contract claim should be interpreted
as one for intentional misrepresentation. In fact, the
district court wrote that “Betco … offered no argument as to
how its breach of contract claim, Count Three … survives Section
10.05 of the [Agreement].” Betco Corp. v. Peacock, No. 14‐
cv‐193‐wmc, 2015 WL 856603, at *13 (W.D. Wis. Feb. 27, 2015)
(emphasis added).
Betco cannot revive a waived claim. It failed to develop
any argument in the district court to explain why its breach of
contract claim should be interpreted as one for intentional
misrepresentation instead. Therefore, we decline to consider
the merits of that argument now.
B. The judgment in Malcolm’s favor on Betco’s breach of the
duty of good faith claim
When hearing an appeal from a bench trial, we review legal
decisions de novo and findings of fact for clear error.
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Spurgin‐Dienst v. United States, 359 F.3d 451, 453 (7th Cir. 2004).
At trial on Betco’s breach of the duty of good faith claim
against Malcolm, the district court used the Agreement, not
Malcolm’s employment contract, as its starting point. Betco
doesn’t contest this on appeal, and we agree that it was
proper. The district court then ruled in Malcolm’s favor, finding
that Malcolm did not breach the duty and that Betco also
failed to prove damages from any alleged breach. On appeal,
Betco doesn’t contest the district court’s factual findings, so we
review the judgment de novo using the district court’s findings
of fact.
Under Wisconsin law, “[e]very contract implies good faith
and fair dealing between the parties to it, and a duty of cooperation
on the part of both parties.” Beidel v. Sideline Software,
Inc., 842 N.W.2d 240, 250 (Wis. 2013) (quoting Chayka v. Santini,
176 N.W.2d 561, 564 n. 7 (Wis. 1970)). This duty is “halfway
between a fiduciary duty (the duty of utmost good faith)
and the duty merely to refrain from active fraud.” Mkt. St. Assocs.,
Ltd. v. Frey, 941 F.2d 588, 595 (7th Cir. 1991). The plaintiff
bears the burden of showing a breach of good faith and fair
dealing. See Zenith Ins. Co. v. Empl’rs Ins. of Wausau, 141 F.3d
300, 308 (7th Cir. 1998) (applying Wisconsin law).
A party may breach its implied duty of good faith when it
follows “the letter but not the spirit of an agreement” because
otherwise parties could “‘accomplish[] exactly what the
agreement of the parties sought to prevent.’” Beidel, 842
N.W.2d at 250–51 (quoting Chayka, 176 N.W.2d at 564). In
other words, the duty of good faith accompanies not just what
the contract says but also what the parties expected to occur.
See Wis. JI‐Civil 3044 (2007); cf. Foseid v. State Bank of Cross
Plains, 541 N.W.2d 203, 212 (Wis. Ct. App. 1995) (“[A] party
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may be liable for breach of the implied contractual covenant
of good faith even though all the terms of the written agreement
may have been fulfilled.”).
We look to what the parties expected from the arrangement
because a plaintiff must offer some evidence that the
party accused of bad faith has actually denied the plaintiff the
intended benefits of the contract. Zenith, 141 F.3d at 308. The
duty of good faith “means that each party to a contract will
not do something which will have the effect of injuring or destroying
the [ability] of the other party to receive the benefits
of the contract.” Wis. JI‐Civil 3044 (2007); see also Metro. Ventures,
LLC v. GEA Assocs., 717 N.W.2d 58, 69 (Wis. 2006) (describing
the duty as a guarantee not to “destroy[] … the right
of the other party to receive the fruits of the contract”) (quoting
Ekstrom v. State, 172 N.W.2d 660, 661 (Wis. 1969)).
To be sure, a party can act in bad faith without injuring or
destroying the other party’s ability to receive the benefits of
the contract. In such a circumstance, the plaintiff can’t succeed
on a claim for breach of the duty of good faith. See Horicon
Foods, Inc. v. Gehl Foods, LLC, No. 15–C–0689, 2016 WL
4926189, at *8 (E.D. Wis. Sept. 15, 2016) (dismissing claim for
the breach of the duty of good faith because plaintiff had not
shown that any alleged breach caused harm); Marine Travelift,
Inc. v. Marine Lift Sys., Inc., No. 10–C–1046, 2013 WL 6255689,
at *17–18 (E.D. Wis. Dec. 4, 2013) (dismissing claim because
the plaintiff failed to show that it suffered any injury as a result
of the defendant’s challenged behavior); Dennehy v. Cousins
Subs Sys., Inc., No. Civ. 02–1772(RHK/JSM, 2003 WL
1955168, at *4 (D. Minn. Apr. 21, 2003) (applying Wisconsin
law to dismiss the claim when the plaintiffs “received exactly
what they bargained for”).
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This is exactly the case here. Malcolm should not have instructed
the plant employees to falsify certificates of analysis
and to ship product with bacteria counts too low to meet specifications.
Still, Betco did not demonstrate that Malcolm’s actions
at Bio‐Ohio destroyed its contractual expectations.
When Betco purchased Bio‐Systems, it expected that Bio‐
Ohio would be profitable and wouldn’t face customer claims
for shipping products with intentionally falsified certificates
of analysis. This is what it received. Moreover, Betco did not
expect that it was purchasing flawless processes.
First, Betco failed to present any evidence that it did not
receive a profitable company free of consumer claims. In fact,
the district court noted that it was “not apparent that any customers
had complained post‐sale about the quality of the
product they received.” Betco Corp. v. Peacock, No. 14‐cv‐193‐
wmc, 2016 WL 7429460, at *10 (W.D. Wis. Dec. 23, 2016). There
was no evidence “that any customers: challenged [Bio‐Ohio’s]
practices; complained of falsified or inaccurate certificates of
analysis; complained about product testing; or raised any issue
regarding inaccurate product specifications.” Id. The district
court gave Betco the opportunity to show that it had
damages “aris[ing] directly out of sales of product with inaccurate
certificates of analysis or of product before acquisition
or post‐acquisition,” and Betco said it was not able to do so.
(Doc. 191, Trial Tr., at 10). We are not persuaded by Betco’s
post‐argument memorandum suggesting that it in fact submitted
evidence on customer‐related damages. The district
court did not rule on the admissibility of that evidence, and it
was not introduced, or even proffered, at trial.
The district court further found that Betco received what
it expected to receive: “a business producing, manufacturing
No. 17‐1133 9
and selling a successful line of products to the satisfaction of
its customer base.” Betco Corp., 2016 WL 7429460, at *10. Betco
does not contest this factual finding. Instead, Betco argues
that it should have been permitted to introduce evidence that
“the company it purchased was … worth far less than what
Betco paid for it.” (Appellant’s Br. at 34.) But, under Wisconsin
law, the relevant inquiry for a breach of good faith is not
whether Betco paid the appropriate price for the company—
as it would be in an action for intentional misrepresentation
or fraud—but whether Betco received the benefits that it expected
when it entered into the contract. It did.
Second, Betco was aware when it entered the contract that
bacteria yields were inconsistent at the Beloit plant. Thus,
Betco knew that it could be acquiring flawed processes, and it
must have expected that it might have to expend funds to
make the bacteria yields consistent. Accordingly, Malcolm’s
actions in producing products with bacteria counts too low to
meet specifications could not have destroyed Betco’s contractual
expectations.
As a final note, Betco’s claim of injury at trial was that, had
it known of the problems with the plant earlier, it would have
sued for a breach of contract before the Agreement’s one‐year
time limit expired or it would have withheld the money retained
in escrow. But, “[i]t is not a breach of the duty of good
faith if a course of action available to [Betco] could have
avoided the harm and the course was not followed.” Wis. JICivil
3044 (2007). Had Betco timely investigated the concerns
of plant employees, it would have discovered the issues
within the one‐year time limit. And if it had not paid out the
escrow money early, it could have withheld it to remedy the
issues.
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Though we do not condone Malcolm’s actions, the parties’
contract compelled the district court’s award of attorney’s fees
to the Peacocks. Under the Agreement, the parties explicitly
agreed that the “prevailing party” would receive attorney’s
fees and costs whenever a party brought an action. See Betco
Corp., 2016 WL 7429460, at *11. The district court concluded
that Betco did not prevail on any of its claims and that the
Peacocks were entitled to the dismissal of every claim. Thus,
the district court properly found that the Peacocks were the
prevailing party entitled to attorney’s fees and costs.

Outcome: Betco failed to develop its argument in the district court
that its breach of contract claim was in fact a claim for intentional
misrepresentation that should have survived the
Agreement’s one‐year time limit. Thus, it waived this claim,
and we decline to hear its merits.
However, Betco did not waive its claim against Malcolm
Peacock for breach of the duty of good faith. But our only inquiry
in analyzing this claim is whether Malcolm acted in a
way that injured or destroyed Betco’s ability to receive the
benefits of the contract. Because Betco proffered no evidence
at trial of consumer complaints, it cannot show that it was deprived
of its contractual expectations. To the contrary, Betco
received a company producing a successful line of products
to the satisfaction of its customers.
For these reasons, we AFFIRM the dismissal of Betco’s
breach of contract claim against the Peacocks, and we also
AFFIRM the judgment in favor of Malcolm Peacock on Betco’s
breach of the duty of good faith and fair dealing claim.

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