In the
United States Court of Appeals
For the Seventh Circuit
____________
Nos. 03-4334 & 04-1153
CINCINNATI INSURANCE COMPANY,
Plaintiff-Appellant,
v.
G. TIMOTHY LEIGHTON,
Defendant-Appellee.
____________
Appeals from the United States District Court
for the Central District of Illinois.
No. 01-1394—John A. Gorman, Magistrate Judge.
____________
ARGUED SEPTEMBER 14, 2004—DECIDED APRIL 8, 2005
____________
Before CUDAHY, ROVNER, and WILLIAMS, Circuit Judges.
ROVNER, Circuit Judge. The Cincinnati Insurance
Company issued a financial responsibility bond guaran-
teeing that Dixie Management Group, Inc., would deliver to
the State of Illinois taxes collected on sales of motor fuel at
Dixie’s truck stops. Cincinnati surrendered the bond
amount to the state after Dixie incurred a substantial tax
liability and declared bankruptcy; Cincinnati then brought
this suit in diversity seeking indemnity from Timothy
Leighton, a former Dixie executive who signed Dixie’s bond
2 Nos. 03-4334 & 04-1153
application as an individual indemnitor for Cincinnati but
was fired from Dixie four years before Cincinnati paid on
the bond. On cross-motions from the parties, a magistrate
judge, presiding by consent, entered judgment as a matter
of law for Leighton, and later denied Cincinnati’s motion to
vacate under Federal Rule of Civil Procedure 60(b). We
affirm both decisions.
I.
Leighton was the corporate secretary and executive
vice president of Dixie, which operated several truck stops
in Illinois. In December 1997, Dixie applied to Cincinnati
for a “Financial Responsibility Bond for a Motor Fuel
Distributor” guaranteeing Dixie’s payment of the fuel taxes
it collected. Illinois will not issue a license to sell fuel with-
out such a bond. Leighton, in his capacity as executive
vice president, signed a “Miscellaneous Bond Application”
on behalf of Dixie. He and the other corporate officers, Mark
and Kathy Beeler, also signed the application as individual
indemnitors. Based on that application, Cincinnati issued
a bond for $40,001, an amount determined by the Illinois
Department of Revenue (“IDOR”). The bond transaction was
brokered by Rodney Brent of Van Gundy Insurance, an
independent agency that represents Cincinnati in central
Illinois.
In the bond application Dixie and its three officers, as
individual indemnitors, requested that Cincinnati become
Dixie’s surety “for any bond, including the extension or re-
newal thereof.” Dixie and the individual indemnitors also
certified their assent to nine paragraphs under the heading
“Indemnity” that identify specific obligations of the parties.
Three of those paragraphs are relevant here. In paragraph
two, Dixie and the individual indemnitors agreed to indem-
nify Cincinnati “from and against any liability, loss, cost,
attorneys’ fees, and expenses whatsoever, including the
Nos. 03-4334 & 04-1153 3
enforcement of this agreement” that Cincinnati “shall at any
time sustain as surety or by reason of having been surety
on this bond or any other bond” issued for Dixie. In para-
graph six, Dixie and the individual indemnitors agreed to
waive “notice of any change, alteration, or extension of any
bond,” and further agreed that their promise to indemnify
Cincinnati extended to “any subsequent bond of any type”
issued for Dixie. Finally, in paragraph eight, Cincinnati
agreed that “this indemnity may be cancelled as to subse-
quent liability by an indemnitor upon ‘Registered Mail’
written notice” to Cincinnati’s home office.
In April 1998, less than four months after issuing the
bond, Cincinnati increased the bond amount to $100,000.
Cincinnati provided IDOR with a “Change Rider” purport-
edly memorializing Dixie’s agreement to the increased
amount. Leighton’s name, again in the capacity of executive
vice president, appears on the signature line for Dixie.
Cincinnati did not require Dixie or the individual indem-
nitors to execute a new bond application prior to issuing the
change rider.
In December 1998, Dixie terminated Leighton under cir-
cumstances not disclosed in the record. The Beelers, who re-
mained with Dixie, barred Leighton from all Dixie property
and refused even to permit him back in the office to retrieve
personal papers. Leighton immediately met with Brent, the
Van Gundy agent, and told Brent that his relationship with
Dixie had been severed; Leighton, however, did not write
Cincinnati to terminate formally his indemnity of Dixie’s
financial responsibility bond.
In the fall of 1999, Cincinnati began the process of re-
newing Dixie’s bond. Cincinnati wrote the Van Gundy agency
in October 1999 requesting updated financial statements for
Dixie, Leighton, and the Beelers; Cincinnati also requested
that a new bond application be executed because it had not
obtained one before increasing the bond amount to
4 Nos. 03-4334 & 04-1153
$100,000. A Van Gundy employee, Ruth Hargis, returned
Cincinnati’s correspondence two weeks later after typing
her own note at the bottom that Leighton no longer worked
for Dixie. The next day, October 26, Cincinnati faxed Hargis
a reply to her note: “It was our understanding that Timothy
Leighton was a partner of Dixie Truckers. Was there a
change in ownership structure? We used Leighton’s finan-
cial status as part of our underwriting consideration for the
bond. Please advise as to the status of the ownership
structure.” Hargis’s answer is not in the record, nor is there
any evidence in the record concerning Cincinnati’s com-
munications with Van Gundy and Dixie during the three
months that followed.
In late January 2000, Dixie and the Beelers executed
the new application and indemnity agreement, which con-
tained identical terms as the 1997 agreement. Mark Beeler
signed in his corporate capacity on behalf of Dixie, and both
he and Kathy Beeler—but not Leighton—signed again as
individual indemnitors. The Beelers, though, still had not
supplied updated financial statements, and Cincinnati in
early February threatened to cancel the bond. A month
later, on March 6, 2000, Cincinnati sent IDOR notice that
it was cancelling the bond effective in 60 days; that action
apparently produced the desired financial statements be-
cause on March 15 Cincinnati notified IDOR that it was
rescinding its cancellation notice.
What Cincinnati did not discover at the time, however, is
that during 1999 Dixie had accrued significant arrears in its
tax payments to the state. In May 2000, IDOR demanded
that Cincinnati surrender the full amount of its bond to
cover unpaid fuel taxes assessed for the period between
November 1999 and March 2000. Cincinnati wrote Dixie
and the Beelers in July, reminding them of their duty to in-
demnify Cincinnati and demanding that they create a cash
reserve sufficient to cover Cincinnati’s anticipated loss on
the bond. IDOR contended that Dixie still owed $504,000,
Nos. 03-4334 & 04-1153 5
and Cincinnati paid IDOR $100,000 in February 2002. By
then Dixie and the Beelers had filed for bankruptcy.
Cincinnati then brought this lawsuit, naming as
defendants the Beelers and Leighton. Cincinnati attached
to its complaint a copy of the original 1997 bond application
bearing Leighton’s signature, along with a copy of the bond
issued for $40,001. The insurance company also attached a
copy of the partially executed April 1998 change rider
bearing the signature of its own representative but no
signature from anyone at Dixie. Cincinnati alleged that
Leighton had executed the change rider, but the company
could not locate in its records a copy of the fully executed
document. Cincinnati claimed that the 1997 agreement, as
amended by the change rider which increased the bond
amount to $100,000, remained in force and demanded that
the Beelers and Leighton indemnify the company for the
bond amount and associated costs. The Beelers, because
of the automatic stay arising from their bankruptcy peti-
tion, see 11 U.S.C. § 362, were promptly dismissed without
prejudice, leaving only Leighton to defend the suit. It is
undisputed that prior to serving Leighton with its lawsuit
Cincinnati had made no effort to seek indemnity from him.
Leighton denied liability. In answering the complaint, he
explained that he lacked “sufficient knowledge to form a
belief” as to whether Dixie had ever executed the change
rider attached to Cincinnati’s complaint. By way of affirma-
tive defense, however, Leighton went further and contended
that Cincinnati had given him “no notice whatsoever” of the
change rider, and thus by trying to increase the bond
amount without his knowledge had released him from the
indemnity agreement.
Leighton later filed what he styled as a motion for
judgment on the pleadings, advancing the affirmative
defense from his complaint and also arguing that the
renewal of the bond agreement in early 2000 acted as a
6 Nos. 03-4334 & 04-1153
novation of the 1997 agreement. Cincinnati had not yet
mentioned the 2000 renewal, so Leighton attached to his
motion a copy of the new agreement and the related
correspondence between Cincinnati and the Van Gundy
agency. Cincinnati moved for summary judgment that same
day. Cincinnati argued that Leighton could not defend that
he lacked notice of the change rider because under para-
graph six of the indemnity section of the 1997 agreement he
had waived notice of changes to the bond. Cincinnati also
argued that Leighton’s only means of securing a release
from his obligation to indemnify the insurance company
was to send written notice of cancellation pursuant to
paragraph eight of the indemnity section; since Leighton
had not done so, Cincinnati argued that it was entitled to
enforcement of the indemnity agreement.
Leighton and Cincinnati then exchanged responses to their
respective motions. In defending against Cincinnati’s motion
for summary judgment, Leighton submitted his affidavit
describing steps he took after his termination to alert
Cincinnati that he no longer worked for Dixie and that he
wished to cancel his liability under the 1997 agreement. Ac-
cording to the uncontroverted affidavit, on the same day he
was fired, Leighton personally informed Van Gundy agent
Brent about his termination. Brent, who represented him-
self to Leighton as an agent of Cincinnati, acknowledged
during their meeting that he knew already from speaking
with Mark Beeler that Leighton had been fired. Several
weeks later, in January 1999, Leighton and Brent spoke
again, and Brent promised to inform Cincinnati that
Leighton had severed his relationship with Dixie. Brent as-
sured Leighton that he was not required to take any further
steps to secure a release from the indemnity agreement. In
his affidavit Leighton also averred that in February 1999 he
telephoned Cincinnati at its home office to discuss his
coverage under Dixie’s directors and officers’ liability policy
but was told that Cincinnati could not discuss the matter
Nos. 03-4334 & 04-1153 7
because Leighton was no longer employed by Dixie. After
that, Leighton said, Brent initiated another meeting in
June 2000, explaining that Cincinnati was trying to collect
unpaid insurance premiums from Dixie and wanted Brent
to get from Leighton whatever helpful information he might
have about Dixie. At that meeting Brent confirmed that he
had told Cincinnati that Leighton no longer worked at Dixie,
and once more assured Leighton that he had done all that
was needed to be released from liability to Cincinnati.
For its part, Cincinnati responded to Leighton’s motion
for judgment on the pleadings by repeating its premise that
Leighton had waived prior notice of the increased bond
amount. Cincinnati also reasserted its position that Leighton’s
only means of ending the indemnity agreement had been to
send written notice to its home office. The insurance com-
pany said little about Leighton’s novation theory, except to
reject it in general terms and contend that a novation would
not release Leighton from liability for unpaid taxes that
accrued in 1999 before the new bond agreement was
executed. Cincinnati also replied to Leighton’s response to
its motion for summary judgment, asserting for the first
time that the bond was increased because IDOR wanted the
higher amount as a condition of licensing Dixie to sell fuel.
Cincinnati repeated its allegation that Dixie agreed to the
change rider, but the insurance company offered no sup-
porting evidence. Nor did Cincinnati produce any evidence
concerning its negotiations with Dixie or the Van Gundy
agency about the increase.
In October 2003 the magistrate judge addressed both
parties’ motions in a single order, denying Cincinnati’s and
granting Leighton’s. In ruling against Cincinnati, the court
reasoned that the evidence at summary judgment was con-
sistent with Leighton’s theory that the renewal of Dixie’s
bond agreement in 2000 had acted as a novation of
Leighton’s promise to indemnify Cincinnati under the 1997
agreement, and thus the insurance company had not es-
8 Nos. 03-4334 & 04-1153
tablished as a matter of law its right to recovery under the
1997 agreement. Then, in granting judgment for Leighton,
the magistrate judge concluded as a matter of law that the
increase in the bond amount to $100,000 was such a ma-
terial change that it could not have been contemplated when
Leighton agreed to the waiver provision in paragraph six of
the indemnity section of the 1997 agreement, and that,
indeed, the increase was so substantial that it altogether
invalidated the indemnity provision of the 1997 agreement.
The court, of course, was still unaware that Leighton’s name
appears on the change rider filed with IDOR in 1998.
Cincinnati timely moved to reconsider under Federal Rule
of Civil Procedure 59. The insurance company disputed the
court’s view that Leighton could not have foreseen the
degree of increase in bond amount effected by the April 1998
change rider when he agreed to the waiver of notice in
paragraph six of the 1997 indemnity section. Cincinnati also
contended that the court had erred in relying on Leighton’s
novation theory to defeat summary judgment because
Leighton never pleaded novation as an affirmative defense
or included a novation argument in his response to
Cincinnati’s motion for summary judgment (rather than in
his own motion for “judgment on the pleadings”). On the
same day it filed its Rule 59 motion, Cincinnati also moved
for leave to amend its complaint. Cincinnati explained that
it had obtained from IDOR a copy of the fully executed
change rider bearing Leighton’s signature. Cincinnati pro-
posed to amend its complaint by substituting this copy of
the change rider for the copy of the partially executed docu-
ment submitted previously. Leighton opposed both motions.
In mid-November 2003, the magistrate judge issued a
brief order denying Cincinnati’s Rule 59 motion, reasoning
that it mostly rehashed arguments already raised and re-
jected. Cincinnati then filed a motion to vacate the judgment
under Federal Rule of Civil Procedure 60(b). Cincinnati ar-
gued that the presence of Leighton’s name on IDOR’s copy
Nos. 03-4334 & 04-1153 9
of the April 1998 change rider refuted Leighton’s contention
that he lacked notice of the increased bond amount. Accord-
ing to Cincinnati, the magistrate judge in granting judg-
ment for Leighton had relied heavily on Leighton’s “pa-
tently false” representation that he was unaware of the
change rider. Cincinnati asserted that it was entitled to
relief because of Leighton’s “fraud, misrepresentation, or
other misconduct,” and also because the company had been
“certainly surprised to discover Defendant Leighton’s signa-
ture on the original Change Rider” obtained from IDOR.
Leighton responded to this motion by noting that Cincinnati
had offered no evidence that Leighton signed the document,
and by arguing that Cincinnati had no excuse for waiting to
obtain the copy from IDOR until after judgment was entered.
The magistrate judge denied Cincinnati’s motions to vacate
and to amend the complaint. While expressing concern
“with what in hindsight appear to be inaccurate assertions
made by Leighton regarding his knowledge,” the court
reasoned that Cincinnati had offered no reason for waiting
until after the entry of judgment to obtain a copy of the
fully executed change rider. The court added, moreover, that
the alternative basis for its ruling—novation—was “wholly
unaffected” by what Cincinnati characterized as “new” evi-
dence. And, the court added, Cincinnati’s motion for leave
to amend was “untimely and futile.”
II.
Cincinnati appeals from both the underlying judgment
and the denial of its Rule 60(b) motion. The parties are in
agreement that Illinois law governs the substantive issues
in this case.
As an initial matter, we must determine the nature of the
grant of judgment as a matter of law in favor of Leighton.
Although the magistrate judge initially accepted Leighton’s
characterization of his motion as one for judgment on the
10 Nos. 03-4334 & 04-1153
pleadings, it is clear to us that the court actually treated it
as a motion for summary judgment. Cincinnati contests this
view and argues that if the court did construe Leighton’s
motion as one for summary judgment then the court should
have apprised Cincinnati of that fact consistent with
Federal Rule of Civil Procedure 12(c). That rule provides
that if “matters outside the pleadings are presented to and
not excluded by the court, the motion shall be treated as one
for summary judgment and disposed of as provided in Rule
56, and all parties shall be given reasonable opportunity to
present all material made pertinent by such a motion by
Rule 56.” See Fed. R. Civ. P. 12(c); Church v. Gen. Motors
Corp., 74 F.3d 795, 798 (7th Cir. 1996).
Leighton’s motion—which the magistrate judge himself
characterized as a summary judgment motion when he later
denied Cincinnati’s Rule 60(b) motion—and Cincinnati’s
opposition plainly discuss matters that are not included in
the pleadings and which the magistrate judge did not ex-
clude from consideration. For example, Leighton’s motion
relies extensively on the attached copy of the 2000 bond
application, which is not even mentioned in either the
complaint or answer, and this newer application underlies
one of the court’s two bases for finding in favor of Leighton.
Furthermore, both Leighton’s brief in support of his motion
and Cincinnati’s response brief discuss correspondence
between Cincinnati and Van Gundy from late 1999 and
early 2000 that first appeared in the record as an attach-
ment to Leighton’s motion. Thus it is apparent that the
parties and the court disregarded its literal title and
addressed the heart of Leighton’s motion, which went well
beyond the pleadings. See Byrne v. Nezhat, 261 F.3d 1075,
1104 n.63 (11th Cir. 2001); Hughes v. Vanderbilt Univ., 215
F.3d 543, 547 (6th Cir. 2000).
Because we conclude that Leighton was really asking for
summary judgment, what matters is whether the magistrate
judge afforded Cincinnati notice and an adequate oppor-
Nos. 03-4334 & 04-1153 11
tunity to respond, consistent with Federal Rule of Civil
Procedure 56. Cincinnati insists it was blindsided, but we
cannot see how. The fact that Cincinnati had filed its own
motion for summary judgment—in which it maintained that
no disputed issues of material fact existed—put it on notice
that summary judgment for either party was a possibility.
See Advantage Consulting Group, Ltd. v. ADT Sec. Sys.,
Inc., 306 F.3d 582, 588 (8th Cir. 2002); Jones v. Union Pac.
R.R. Co., 302 F.3d 735, 740 (7th Cir. 2002); Bridgeway
Corp. v. Citibank, 201 F.3d 134, 140 (2d Cir. 2000);
Goldstein v. Fid. & Guar. Ins. Underwriters, Inc., 86 F.3d
749, 750-51 (7th Cir. 1996); cf. Simpson v. Merch. Recovery
Bureau, Inc., 171 F.3d 546, 549-50 (7th Cir. 1999). More-
over, Cincinnati does not argue that it lacked an adequate
opportunity to respond to Leighton’s novation defense, which
is the only legal issue linked to the 2000 bond renewal that
first surfaced in Leighton’s motion. Instead, Cincinnati
claims it was denied a chance to marshal evidence that
Leighton indeed knew about the change rider. That con-
tention is frivolous. Cincinnati knew when it filed suit that
it didn’t have a copy of the fully executed change rider, and
it knew as soon as Leighton answered the complaint that
the absence of his signature would be at the heart of his
defense. But over the next five months Cincinnati made no
move to obtain a copy with Leighton’s signature and moved
for summary judgment without ever getting one, gambling
that Leighton’s actual knowledge of the rider would prove
immaterial given the waiver provision in paragraph six of
the indemnity section of the 1997 agreement. That gamble,
however, had everything to do with Cincinnati’s own motion
for summary judgment, and nothing to do with its ability to
respond to the novation argument in Leighton’s motion.
We thus turn to the court’s ruling. The magistrate judge
at times seems to suggest that Cincinnati cancelled
Leighton’s indemnity obligation by increasing the bond
amount to $100,000 from $40,001 without telling him. But
12 Nos. 03-4334 & 04-1153
our reading of the court’s decision leads us to conclude that
the magistrate judge actually reasoned that Leighton’s
awareness of the change rider was immaterial because, in
the court’s view, such a significant change in the underlying
agreement was beyond the contemplation of the parties and
could not be waived under paragraph six of the indemnity
section of the 1997 bond aplication. Whichever position the
court intended, however, cannot be reconciled with the
language of the 1997 agreement or the Illinois law that we
must look to in interpreting it.
If the magistrate judge thought the increased bond was
significant because there was no evidence that Leighton
agreed to the change, then the court’s ruling turns on its
willingness to elide paragraph six, in which Leighton waived
“notice of any change, alteration, or extension of any bond.”
Although usually the obligations of a third-party guarantor
are discharged when parties to a contract unilaterally effect
a material change in their own relationship that also affects
the potential liability of the guarantor, a guarantor is free
to give prior consent to such modifications—which Leighton
did by agreeing to paragraph six. See Brzozowski v. North-
ern Trust Co., 618 N.E.2d 405, 410 (Ill. App. Ct. 1993); see
also Reliance Ins. Co. v. Penn Paving, Inc., 734 A.2d 833,
838 (Pa. 1999); Data Sales Co. v. Diamond Z Mfg., 74 P.3d
268, 272 & n.4 (Ariz. Ct. App. 2003) (collecting cases). On
the other hand, if the magistrate judge viewed Leighton’s
waiver in paragraph six as ineffective in view of the size of
the increased bond amount, we find no support for the
proposition that the increase from $40,001 to $100,000 was
so great that it essentially nullified the 1997 agreement; the
court cited no pertinent authority for this conclusion. See
IIT Diversified Credit Corp. v. Kimmel, 508 F. Supp. 140,
143 (N.D. Ill. 1981) (holding guarantor liable despite
dramatic increase in liability because changes fit within the
plain terms of waiver clause); Jacobson v. Devon Bank, 351
N.E.2d 254, 256 (Ill. App. Ct. 1976) (same); see also United
Nos. 03-4334 & 04-1153 13
States v. Stump Home Specialties Mfg., 905 F.2d 1117, 1121
(7th Cir. 1990) (same rule under Indiana law). The waiver
language in paragraph six unambiguously states that
Leighton waived notice of “any change, alteration, or
extension” in the underlying bond, which plainly includes
the 1998 increase in the bond amount. Parties to such a
guaranty contract are entitled to enforce its terms to the
letter—including holding a party to its waiver of the
consent to material alterations that may increase liability.
See Bank One, Springfield v. Roscetti, 723 N.E.2d 755, 764
(Ill. App. Ct. 1999). We have warned parties of the binding
nature of these waiver clauses before. See Stump Homes
Specialties Mfg., 905 F.2d at 1120 (stating that if guaran-
tors had agreed to guaranty agreement’s waiver provision
“without consulting a lawyer and perhaps without even
reading the agreement, that is their tough luck”). Leighton
is presumed to have understood these clear terms when he
signed the agreement. See FDIC v. Rayman, 117 F.3d 994,
998 (7th Cir. 1997). Accordingly, we reject the magistrate
judge’s conclusion that Leighton was released from liability
when the original bond amount was increased to $100,000.1
1
Since we affirm the district court’s judgment on other grounds,
we do not wish to dwell on this point, but we pause to note our
disagreement with our colleague’s assertion that Illinois law is
unresolved on this issue. Illinois courts have clearly and repeat-
edly held that a guarantor is free to waive notice or consent to ma-
terial changes in a guaranty agreement, and that such waivers
must be construed according to their plain terms. In each of the
Illinois cases cited in the concurring opinion, the entity making
the loan or issuing the indemnity agreement made a material
change that increased the guarantor’s liability or risk. In each
case the guarantor had signed a contract with terms permitting
the lender to make changes without providing prior notice or ob-
taining consent. And in each case the court held that the lender
was entitled to rely on the clear terms of the contract allowing it
(continued...)
14 Nos. 03-4334 & 04-1153
Nevertheless, we do agree with the court’s alternate basis
for holding that Leighton’s indemnity obligation under the
1997 agreement was discharged: the renewal of the bond
agreement in 2000 acted as a novation that terminated his
liability. A novation is the substitution of a new obligation
for an existing one, which is thereby extinguished. Faith v.
Martoccio, 316 N.E.2d 164, 167 (Ill. App. Ct. 1974). The four
elements of a novation, which the party establishing the
defense must prove by a preponderance of the evidence, are:
“[1] a previous, valid obligation; [2] a subsequent agreement
of all the parties to the new contract; [3] the extinguishment
of the old contract; and [4] the validity of the new contract.”
Phillips & Arnold, Inc. v. Frederick J. Borgsmiller, Inc., 462
N.E.2d 924, 928 (Ill. App. Ct. 1984). For there to be a
novation, the obligee must assent to the substitution and
agree to release the obligor. Id. at 928-29. The obligee’s assent
need not be express, however, but may be implied from the
circumstances of the transaction or the obligee’s subsequent
behavior. Burnett v. W. Madison State Bank, 31 N.E.2d 776,
780 (Ill. 1941).
Cincinnati does not challenge the validity of the 1997 and
2000 agreements under factors one and four, and instead
1
(...continued)
to make the change. See Roscetti, 723 N.E.2d at 767 (guarantor held
liable despite bank’s discovery and failure to disclose debtor’s
involvement in check-kiting scheme because of provision waiving
bank’s obligation to inform guarantor of debtor’s financial situ-
ation); Brzozowski, 618 N.E.2d at 410 (waiver provision sustained
guarantor’s liability despite debtor’s sale of collateral that, if
retained, would have covered full amount of guaranty); Jacobson,
351 N.E.2d at 256 (guarantor remained liable despite extension of
maturity date of loan because of broad waiver provision). The fact
that the change at issue was not an increase in the principal
amount of obligation is not a critical factor, for in each case the
change was every bit as material as a change in the amount of
principal might be.
Nos. 03-4334 & 04-1153 15
focuses on factors two and three. The insurance company
argues that the express terms of the 1997 agreement pre-
vent the 2000 renewal from acting as a novation. The com-
pany further contends that the record does not establish
conclusively its intention to extinguish the 1997 agreement
and replace it with the 2000 agreement. Finally, Cincinnati
argues that even if a novation took place, Leighton must
still indemnify it against any tax delinquency incurred by
Dixie before the novation took place.
Cincinnati’s first argument—that paragraph six of the in-
demnity section of the1997 agreement forecloses Leighton’s
novation defense—fails. As we have noted, paragraph six
states that Leighton “waives notice of any change, alteration,
or extension of any bond, and agrees that this indemnity
shall cover any subsequent bond of any type for the appli-
cant.” To support its argument, Cincinnati cites to
Champaign Nat’l Bank v. Babcock, 652 N.E.2d 848 (Ill. App.
Ct. 1995), and United States Fid. & Guar. Co. v. Klein Corp.,
558 N.E.2d 1047 (Ill. App. Ct. 1989), two cases in which
Illinois appellate courts held that a second agreement did not
act as a novation because of contract language in the original
agreement. Yet these cases do not help Cincinnati because in
both, unlike this case, the first agreement expressly antici-
pated and rejected the possibility that a subsequent agree-
ment could relieve the guarantor. In Babcock, the agreement
provided that “no release of any person primarily or sec-
ondarily liable . . . shall affect the liability of any of the
undersigned hereunder,” and that the guaranty would
“remain in full force and binding upon the undersigned until
written notice of its discontinuance shall be received by the
Bank.” 652 N.E.2d at 850. In Klein, the agreement provided
that the indemnitor “shall not be relieved of liability
hereunder by any change, addition, substitution, continua-
tion, renewal, extension, successor or new obligation.” 558
N.E.2d at 1051 (emphasis added). By contrast, paragraph six
does not encompass the situation of a release by subsequent
16 Nos. 03-4334 & 04-1153
agreement, as Cincinnati says it does. Rather than speak to
the effect that a subsequent agreement would have on
Leighton’s potential liability as indemnitor under the 1997
agreement, paragraph six addresses the application of the
1997 indemnification term to subsequent bonds, or changes
in the existing bond. Thus the language of the 1997 agree-
ment cited by Cincinnati does not eclipse the possibility of
a release by novation.
We also disagree with Cincinnati’s contention that issues
of fact remain concerning whether it intended to release
Leighton from his indemnity obligation under the 1997
agreement. Cincinnati reminds us that the magistrate judge
purportedly denied its motion for summary judgment not
because the evidence compelled a finding of novation but
because “the circumstances create clear questions” about
whether a novation took place. Yet Cincinnati nowhere il-
luminates what material facts it thinks are at issue or what
contrary conclusion we should draw from the evidence. We
think that the only reasonable construction of the undis-
puted facts consistent with Illinois law is that Leighton was
released as an indemnitor by the creation of a substitute
agreement.
At the time Cincinnati sent the Van Gundy agency a new
bond application for the Beelers to execute in 2000, it knew
that Leighton no longer worked for Dixie. Van Gundy
employee Hargis had said as much in a typed note, and
Cincinnati responded to Hargis in writing, acknowledging
the change. Upon receiving this verification of Leighton’s
departure, Cincinnati expressed concern to Van Gundy:
it had relied on Leighton’s personal financial statement
in issuing the original bond and wanted more information
about the company’s current ownership structure before
renewing the bond. After that Cincinnati insisted upon
updated financial statements from Dixie and the Beelers,
and even gave notice that it was cancelling the bond when
the Beelers dragged their feet. Cincinnati’s actions support
Nos. 03-4334 & 04-1153 17
the inference that it was now looking to only two indem-
nitors instead of three, and so it refused to proceed unless
the Beelers proved with their financial statements that the
two of them could sufficiently indemnify Cincinnati. More-
over, Cincinnati’s behavior after Dixie defaulted on its tax
payments supplies further evidence that it deemed the 2000
bond renewal a release of Leighton. When IDOR moved to
forfeit the bond, Cincinnati inexplicably pursued the Beelers
but not Leighton, raising the obvious inference that the
insurance company understood the 2000 renewal as a nova-
tion of the original agreement.
Cincinnati offered no evidence from anyone involved in
the 2000 renewal process that the new agreement and its
smaller pool of indemnitors was not intended to supplant
the 1997 agreement, and so the only reasonable view of the
undisputed evidence is that the renewal was, as Leighton
argues, a novation. In fact, if the 2000 agreement was not
a substitute for the 1997 agreement, Cincinnati had no rea-
son to require it because the Beelers and Leighton would
have remained liable under the original agreement. See
Utica Mut. Ins. Co. v. Vigo Coal Co., 393 F.3d 707, 713 (7th
Cir. 2004) (holding, under Indiana law, that second indem-
nity contract novated earlier contract, releasing indemnitor
who signed first but not second contract).
Authority from the Supreme Court of Illinois supports our
conclusion that the evidence here shows that the 2000
agreement was a novation. In McLean County Bank v.
Brokaw, 519 N.E.2d 453, 458 (Ill. 1988), a struggling farmer’s
parents signed a series of loan guarantees to cover their
son’s growing debt to a bank. They initially signed a $75,000
guaranty agreement when the son’s debt was $133,000,
then signed a $100,000 agreement when the debt reached
$188,000, and so on. After the amount of guaranty had
reached $250,000, the son defaulted and the bank attempted
to enforce against his parents both their $250,000 guaranty
and the immediately prior guaranty, for $200,000. The court
18 Nos. 03-4334 & 04-1153
held that the $250,000 guaranty agreement had replaced
the $200,000 agreement, per the practice of the parties, and
that the parents’ obligations under the $200,000 agreement
had been extinguished. Like the bank in McLean, Cincinnati
seeks a windfall: the protection of both contracts when the
circumstances indicate that only the most recent is en-
forceable. In McLean, the bank had sought a $300,000
guaranty before the son defaulted, which demonstrated that
it did not truly believe that it was indemnified under both
agreements for a total of $450,000. Here, Cincinnati betrays
the argument that both indemnity agreements remain in
force through its willingness to accept only the Beelers as
indemnitors, and through its behavior after the 2000 agree-
ment came into force.
Finally, Cincinnati argues that if there was a novation
when the bond was renewed in early 2000, Leighton’s “in-
demnity obligations would have remained in effect for claims
and losses, if any, incurred or to be incurred in connection
with bonds executed prior to that date.” In other words,
says Cincinnati, even if the 2000 agreement replaced the
1997 agreement, Leighton remains liable for Cincinnati’s
losses attributable to unpaid taxes that accrued prior to the
novation. Cincinnati cites no authority for this contention,
which runs counter to the definition of a novation, which, by
its terms, discharges preexisting liability: “A novation
occurs when a valid new contract or obligation is created
and a valid existing contract or obligation is extinguished.”
Klein, 558 N.E.2d at 1051; see also Paramount Aviation
Corp. v. Agusta, 178 F.3d 132, 148 (3d Cir. 1999) (“A nova-
tion bars revival of the preexisting duty.”); In re Newport
Plaza Assoc., L.P., 985 F.2d 640, 644 (1st Cir. 1993) (stating
as a general proposition that a novation discharges all the
rights and obligations under the previous agreement); Rose
Acre Farms, Inc. v. Cone, 492 N.E.2d 61 (Ind. Ct. App. 1986)
(holding that employee’s second bonus agreement that
novated original bonus agreement relieved employer of
Nos. 03-4334 & 04-1153 19
preexisting liability under first agreement). When Cincinnati
first made a demand of Leighton, the contract binding
Leighton was no longer effective. Therefore, Cincinnati’s sole
recourse was under the new agreement, to which Leighton
was not a party.
All that remains is Cincinnati’s challenge to the
magistrate judge’s denial of its Rule 59 and 60(b) motions.
Both motions were premised on Cincinnati’s belief that its
eleventh-hour production of the fully executed change rider
apparently bearing Leighton’s signature changed everything
and compelled judgment in its favor. Yet even if Leighton
did sign the change rider—and we note that at oral argu-
ment, his counsel informed us that Leighton continued to
disclaim having done so—this additional fact would have no
bearing on the conclusion that Leighton was entitled to
summary judgment because of a novation. For this reason,
both motions were properly denied. For completeness, how-
ever, we observe that Cincinnati assumes far too much by
asserting that Leighton’s purported signature proves that
he made “patently false and fraudulent statements” about
whether he signed the change rider. Cincinnati offered no
evidence that Leighton committed fraud in asserting that
he did not remember ever signing the change rider. This is
a plausible explanation, given that this litigation began four
years after the change rider was executed and that
Leighton had no access to his office or records during that
time. Cincinnati may speculate to the contrary, but it offered
no evidence that the signature is Leighton’s or that Leighton
lied by saying he did not remember signing the change
rider.
III.
For the foregoing reasons, the orders of the district court
granting judgment for Leighton and denying Cincinnati’s
motion under Rule 60(b) are AFFIRMED.
20 Nos. 03-4334 & 04-1153
WILLIAMS, Circuit Judge, concurring. I readily join the
judgment of the court. In addition to joining the majority’s
discussion of the denial of Cincinnati’s Rule 60(b) motion,
I also join that part of the opinion holding that Leighton’s
obligation to indemnify under the 1997 agreement was dis-
charged because the renewal of the bond agreement in 2000
acted as a novation that terminated his liability. I would
affirm the district court’s judgment as a matter of law in
favor of Leighton on that basis. I thus feel there is no need
to opine whether Illinois would find that language in the in-
demnity agreement could sustain Leighton’s liability after
Cincinnati increased, without notice, the amount of the bond
from $40,001 to $100,000. Cf. Disher v. Info. Res., Inc., 873
F.2d 136, 141 (7th Cir. 1989) (“We are reluctant to opine un-
necessarily on questions of state law.”); Graphic Sales, Inc.
v. Sperry Univac Div., Sperry Corp., 824 F.2d 576, 581 (7th
Cir. 1987) (“As a federal court whose jurisdiction is based on
diversity of citizenship, we are particularly hesitant to
decide unsettled questions of state law unnecessarily.”).
Illinois law remains unresolved on this issue, and al-
though it might ultimately be settled as prescribed by the
majority, Illinois may also decide that general language
such as that agreed to by Leighton does not constitute con-
sent to responsibility for more than double the amount stated
in an agreement. See Reliance Ins. Co. v. Penn Paving, Inc.,
734 A.2d 833, 837-40 (Pa. 1999) (finding surety did not
consent to change in bonding line from $200,000 to $5 million
by agreeing to be responsible for “any said Bond or Bonds,
or any other bonds, which may be already or hereafter exe-
cuted on behalf of the Contractor” and agreeing that “no . . .
change or extension in the terms of any Bond” would release
the signator); Bank of Terrell v. Webb, 341 S.E.2d 258, 259-
60 (Ga. Ct. App. 1986) (signing note stating holder could
“compromise or extend or renew . . . for any period . . . any
indebtedness evidenced thereby” did not constitute consent
to increase in interest rate, reasoning that the language
Nos. 03-4334 & 04-1153 21
“cannot be construed as being a general consent to all
modifications”). Although the majority cites several Illinois
cases, none holds a signator who agreed to be responsible for
a definite amount liable for more than that amount. Cf.
Bank One, Springfield v. Roscetti, 723 N.E.2d 755, 764 (Ill.
App. Ct. 1999) (defendant signed unconditional, unlimited
guaranty); Brzozowski v. Northern Trust Co., 618 N.E.2d
405, 411 (Ill. App. Ct. 1993) (holding plaintiff responsible
for amount explicitly agreed in the guaranty, “$38,000 plus
the interest on such amount and plus all expenses here-
inbefore mentioned”); Jacobson v. Devon Bank, 351 N.E.2d
254, 254-56 (Ill. App. Ct. 1976) (holding that broad language
in a guaranty did not discharge the plaintiff from his
obligations under the guaranty, but not holding guarantor
responsible for more than the amount of the original guar-
anty). Therefore, I respectfully decline to join that part of
the opinion that discusses this issue.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—4-8-05