In the
United States Court of Appeals
For the Seventh Circuit
Nos. 08-3239 & 08-4038
BKCAP, LLC, GRAYCAP, LLC, AND SWCAP, LLC,
Plaintiffs-Appellants,
v.
CAPTEC F RANCHISE T RUST 2000-1,
Defendant-Appellee.
Appeals from the United States District Court
for the Northern District of Indiana, South Bend Division.
No. 3:07-cv-00637-CAN—Christopher A. Nuechterlein, Magistrate Judge.
A RGUED A PRIL 6, 2009—D ECIDED JULY 13, 2009
A MENDED A UGUST 5, 2009
Before B AUER, S YKES, and T INDER, Circuit Judges.
T INDER, Circuit Judge. This case demonstrates that even
experienced, sophisticated business entities can encoun-
ter difficulty when drafting carefully negotiated loan
documents. Since July 2007, the plaintiffs and the defen-
dant have been at loggerheads over the meaning of just a
handful of lines out of several hundred in their five-page,
single-spaced Note. Unfortunately, this appeal cannot
2 Nos. 08-3239 & 08-4038
bring their stalemate to an end, and more litigation lies
ahead. However, while disputes over the meaning of
language in loan documents can be somewhat dry, this
one is more interesting than most such cases.
The plaintiffs, special purpose entities that we refer to
as “Borrowers,” obtained several $1 to 2 million mortgage
finance loans from the defendant, or “Lender.” Each of
the loans required Borrowers to pay off the debt at around
10% interest over 15 to 20 years. Borrowers had the right
to pay off the loans early, but subject to a “Prepayment
Premium” if they prepaid before ten years into the
loan terms. When Borrowers tried to prepay the loans
after only eight years, the parties disagreed on how to
calculate the Prepayment Premium. Their dispute led to
this diversity action, in which the parties seek a declara-
tory judgment as to the correct interpretation of the
Prepayment Premium. The district court granted sum-
mary judgment in favor of Lender, concluding that the
unambiguous contract language supported Lender’s
interpretation. We conclude, however, that the contract
is ambiguous, making it inappropriate to resolve the
meaning of the contract at the summary judgment stage.
We therefore remand for a trial on the question of the
parties’ intended meaning of the Prepayment Premium.
I. Background
Borrowers are wholly owned subsidiaries of “Quality
Dining, Inc.,” which owns several franchise restaurants,
mostly “Chili’s” and “Burger King,” in several states that
include Indiana, Michigan, and Pennsylvania. In 1999,
Nos. 08-3239 & 08-4038 3
Quality Dining decided to refinance a significant portion
of the bank debt associated with operating these restau-
rants. Borrowers negotiated with “Captec Financial” and
“GE Capital” to obtain approximately $49 million in
mortgage financing to pay down Quality Dining’s bank
debt. The total $49 million consisted of 34 separate loans of
about $1 to 2 million, each secured by one of Quality
Dining’s restaurants. The interest rate was 9.79% for the
“Burger King” loans and 9.94% for the “Chili’s” loans, and
the various loans had terms of either 15 or 20 years.
During the course of negotiations, Borrowers received
Captec Financial’s standard-form Promissory Note for its
“Franchise Loan Program.” The Note allowed Borrowers
to pay off their loans early, but only if they paid a “Pre-
payment Premium,” defined as:
equal to the present value (computed at the Rein-
vestment Rate) of the difference between a stream
of monthly payments necessary to amortize the
outstanding principal balance of this Note at the
Stated Rate and a stream of monthly payments
necessary to amortize the outstanding principal
balance of this Note at the Reinvestment Rate (the
“Differential”). In the event the Differential is less
than zero, the Prepayment Premium shall be
deemed zero. . . .
Put another way, if interest rates fell and Borrowers
decided to prepay the Note, they would have to pay a
penalty equal to the difference between:
(1) the present value of the stream of monthly
payments provided by the loan’s amortization
4 Nos. 08-3239 & 08-4038
schedule from the date of prepayment, com-
puted at the “Reinvestment Rate”—i.e., the
U.S. Treasury rate at the date of prepayment;
and
(2) the present value of the same stream of
monthly payments computed at the “Stated
Rate”—i.e., the stated interest rate of the loan.
Borrowers were unsatisfied with the standard-form
Prepayment Premium. They wanted the right to prepay
without penalty after the first ten years of the loan
terms. Captec Financial agreed to this modification and
redrafted the Note to define the Prepayment Premium as:
equal to the positive difference between the pres-
ent value (computed at the Reinvestment Rate) of
the stream of monthly payments of principal and
interest under this Note from the date of the pre-
payment through the tenth (10th ) anniversary of the
First Full Payment Date at the Stated Rate . . . and
the outstanding principal balance of this Note as of
the date of the prepayment (the “Differential”). In
the event the Differential is less than zero, the
Prepayment Premium shall be deemed to be zero.
...
The revised Note also required Borrowers to provide a
“Prepayment Notice” at least thirty days before exercising
their right to prepay.
In August 1999, Borrowers executed thirty-four of these
Notes, representing eighteen loans originating with Captec
Financial and sixteen originating with GE Capital. All of
Nos. 08-3239 & 08-4038 5
the Notes contained identical language, including the
revised definition of the Prepayment Premium quoted
above. Captec Financial assigned five of its Notes to
“Capmark” and the remaining thirteen Notes to “Captec
Trust,” which is “Lender” in this action.
Around June 2007, Borrowers prepaid the sixteen Notes
held by GE Capital and the five Notes held by Capmark. In
accepting Borrowers’ prepayment, both GE Capital and
Capmark calculated the Prepayment Premium as the
difference between the present value of the stream of
monthly payments from the date of prepayment through
year 10 computed at the Reinvestment Rate and at the
Stated Rate. This calculation, which compares the present
value of the stream of monthly payments computed at
the two different rates, is consistent with the definition
of the Prepayment Premium provided by Captec Finan-
cial’s original, standard-form Note.
Borrowers then sent Lender a Prepayment Notice for the
twelve remaining Notes. (Borrowers had already prepaid
the thirteenth Note held by Lender without penalty after
the restaurant securing that Note was damaged by fire.)
However, Borrowers made their notice contingent on
Lender’s acceptance of the formula used by GE Capital
and Capmark to compute the Prepayment Premium.
Lender rejected that formula as inconsistent with the
language of the Notes, which Lender interpreted to
provide a significantly higher Prepayment Premium. By
way of illustration, for one of the $1.4 million loans held
by Lender, Borrowers’ formula yielded a Prepayment
Premium of around $17,000, while Lender’s formula
6 Nos. 08-3239 & 08-4038
yielded a Prepayment Premium of around $100,000. The
difference between the parties’ calculations for the total
Prepayment Premium due on all twelve Notes is about
$800,000, an amount worthy of the litigation effort ex-
pended here.
Borrowers did not provide another Prepayment Notice
or tender any prepayment amount. Instead, Borrowers
filed suit in Indiana state court seeking a declaratory
judgment that their interpretation of the Prepayment
Premium was correct. Borrowers’ complaint also con-
tained a breach of contract claim for Lender’s refusal to
accept a prepayment computed under Borrowers’ formula.
Lender removed the case to federal court based on diver-
sity jurisdiction, and the parties consented to conduct
the proceedings before a magistrate judge. See 28 U.S.C.
§ 636(c). The district court granted Lender’s motion for
summary judgment as to Borrowers’ declaratory judg-
ment claim, concluding that the unambiguous contract
language supported Lender’s interpretation of the Prepay-
ment Premium. Borrowers appeal.
II. Analysis
A. Appellate Jurisdiction
We begin by ensuring that we have jurisdiction over this
appeal. Generally, federal courts of appeals are limited
to reviewing the “final decisions” of district courts. 28
U.S.C. § 1291. A decision is “final” for purposes of § 1291
if the district court’s order “ends the litigation on the
merits and leaves nothing for the court to do but execute
Nos. 08-3239 & 08-4038 7
the judgment.” Star Ins. Co. v. Risk Mktg. Group Inc., 561
F.3d 656, 659 (7th Cir. 2009) (quotation omitted). In con-
trast, an order that disposes of only one claim in a multi-
count complaint is typically non-final and therefore non-
appealable. Ohio-Sealy Mattress Mfg. Co. v. Duncan, 714
F.2d 740, 743 (7th Cir. 1983).
A potential jurisdictional snag arises in this case because,
although the district court entered a final judgment in
favor of Lender and against Borrowers, the court pur-
ported to resolve only one of Borrowers’ two claims. In its
opinion and order accompanying the judgment, the court
stated that it was only considering Lender’s motion for
summary judgment “as it pertains to the Borrower’s [sic]
declaratory judgment action.” The court declined to
resolve Borrowers’ breach of contract claim “because
there are issues as to whether that claim is ripe.”
Although the district court’s failure to address Borrow-
ers’ breach of contract claim gives us pause, we conclude
that the court’s order “effectively end[ed] the litigation
and thus constitute[d] a final order for the purposes of
appellate review.” Mostly Memories, Inc. v. For Your Ease
Only, Inc., 526 F.3d 1093, 1097 (7th Cir. 2008). The court
entered a final judgment in favor of Lender that drew no
distinction between Borrowers’ two claims, and a docket
entry accompanying the court’s order stated, “Civil Case
Terminated.” This record suggests that the court had
“finished with the case,” Hill v. Potter, 352 F.3d 1142, 1144
(7th Cir. 2003), and did not “contemplate[] further activ-
ity” on Borrowers’ breach of contract claim, Star Ins. Co.,
561 F.3d at 659 (quotation omitted).
8 Nos. 08-3239 & 08-4038
Additionally, an examination of Borrowers’ complaint
illustrates that their breach of contract claim cannot
survive the district court’s judgment on their declaratory
judgment claim. Borrowers’ complaint alleged a breach of
contract based on Lender’s “demanding a prepayment
premium in excess of that contemplated by the terms of
the . . . Notes, . . . and/or by rejecting Borrowers’ Prepay-
ment Notice and/or its proffered computation of the
prepayment premium.” These allegations establish that
Borrowers’ Prepayment Notice could be effective, and
Lender’s rejection of that notice could be a breach of
contract, only if Borrowers’ interpretation of the Prepay-
ment Premium was correct. Yet the district court rejected
that interpretation as unsupported by the contract lan-
guage. In doing so, the court necessarily rejected Borrow-
ers’ breach of contract claim, leaving no suggestion that
Borrowers might reassert that claim “at some future
date.” Am. Nat’l Bank & Trust Co. v. Equitable Life Assur.
Soc’y of U.S., 406 F.3d 867, 875 (7th Cir. 2005).
Finally, we note that both parties agreed at oral argu-
ment that Borrowers’ breach of contract claim hinged on
the success of their declaratory judgment claim, meaning
that the district court’s rejection of the latter ended the
entire suit. We do not, of course, simply accept this stipula-
tion that appellate jurisdiction exists, since jurisdictional
defects are non-waivable. Stevens v. Turner, 222 F.2d 352,
354 (7th Cir. 1955). Still, the parties’ agreement on this
point supports our own conclusion that, in entering
judgment against Borrowers on their declaratory judg-
ment claim, the district court effectively disposed of
Borrowers’ breach of contract claim. See Am. Family Mut.
Nos. 08-3239 & 08-4038 9
Ins. Co. v. Jones, 739 F.2d 1259, 1261 n.1 (7th Cir. 1984)
(noting the defendants’ agreement at oral argument that
their counterclaim could not survive the judgment in
favor of the plaintiff’s claim, such that the district court’s
failure to resolve the counterclaim did not defeat
appellate jurisdiction); cf. Laborers’ Pension Fund v. A & C
Envtl., Inc., 301 F.3d 768, 774 n.4 (7th Cir. 2002) (concluding
that a judgment that failed to mention one of two defen-
dants effectively ended the litigation on the merits, where
the plaintiffs stated at oral argument that their prior
voluntary dismissal of that defendant was with preju-
dice). The district court’s decision was final within the
meaning of § 1291, and our appellate jurisdiction is secure.
B. Contract Interpretation
We review de novo the district court’s interpretation of
a contract, including the court’s conclusion that the
contract language was unambiguous. Shelby County State
Bank v. Van Diest Supply Co., 303 F.3d 832, 835 (7th Cir.
2002). In this diversity action, state law provides the
substantive contract principles that guide our analysis, and
federal procedural rules control the process. See Houben
v. Telular Corp., 231 F.3d 1066, 1072 (7th Cir. 2000). Under
the Notes’ choice-of-law provision, each Note is
governed by the law of the State in which the restaurant
securing the Note is located. Of the twelve Notes that
are the subject of this appeal, seven are secured by restau-
rants in Michigan, four by restaurants in Indiana, and
one by a restaurant in Pennsylvania.
10 Nos. 08-3239 & 08-4038
Under the substantive contract principles for each of the
three controlling jurisdictions, the goal of contract inter-
pretation is to ascertain the parties’ intent. MPACT Constr.
Group, LLC v. Superior Concrete Constructors, Inc., 802 N.E.2d
901, 906 (Ind. 2004); City of Grosse Pointe Park v. Mich. Mun.
Liab. & Prop. Pool, 702 N.W.2d 106, 113 (Mich. 2005); Ins.
Adjustment Bureau v. Allstate Ins. Co., 905 A.2d 462, 468 (Pa.
2006). In the case of a written contract, the parties’ intent
is determined by looking first to the plain and ordinary
meaning of the contract language. USA Life One Ins. Co. v.
Nuckolls, 682 N.E.2d 534, 538 (Ind. 1997); City of Grosse
Pointe Park, 702 N.W.2d at 113; Kripp v. Kripp, 849 A.2d
1159, 1163 (Pa. 2004). If the contract language is clear
and unambiguous, the document is interpreted as a matter
of law without looking to extrinsic evidence. Automation
by Design, Inc. v. Raybestos Prods. Co., 463 F.3d 749, 753-54
(7th Cir. 2006) (applying Indiana law); Klapp v. United Ins.
Group Agency, Inc., 663 N.W.2d 447, 454 (Mich. 2003); Ins.
Adjustment Bureau, 905 A.2d at 468-69. If, however, the
contract language is ambiguous, an examination of rele-
vant extrinsic evidence is appropriate in order to
ascertain the parties’ intent. Automation by Design, 463 F.3d
at 753-54; Klapp, 663 N.W.2d at 453-54; Ins. Adjustment
Bureau, 905 A.2d at 468-69.
Beginning with the plain language of the contract in this
case, the Notes define the Prepayment Premium in terms
of a “Differential.” That Differential equals:
the positive difference between the present value
(computed at the Reinvestment Rate) of the stream
of monthly payments of principal and interest
Nos. 08-3239 & 08-4038 11
under this Note from the date of the prepayment
through the tenth (10 th ) anniversary of the First Full
Payment Date at the Stated Rate . . . and the out-
standing principal balance of this Note as of the
date of the prepayment . . . .
This language is clear in that it plainly identifies the two
variables used to calculate the Differential:
(1) the present value of the stream of monthly
payments that Borrowers were scheduled to
make from the date of prepayment through
year 10 of the loan; and
(2) the outstanding principal balance at the date of
prepayment.
Unfortunately, we cannot adopt this plain-language
reading of the Prepayment Premium because doing so
“would produce absurd results.” Beanstalk Group, Inc. v.
AM Gen. Corp., 283 F.3d 856, 860 (7th Cir. 2002). As illus-
trated by calculations that Lender submitted with its
motion for summary judgment, even if the Reinvestment
Rate (i.e., the U.S. Treasury rate) drops substantially, the
first “stream of monthly payments” variable is always
smaller than the second “outstanding principal balance”
variable. Hence, subtracting the two variables yields a
Prepayment Premium that is always negative and there-
fore “deemed to be zero” under the contract. That
was not the intent of the parties, who, as rational business
entities, see id., agree that the purpose of the Prepayment
Premium is to provide some penalty in the event that
Borrowers prepay.
12 Nos. 08-3239 & 08-4038
So while the contract language defining the Prepayment
Premium is clear, it is nonetheless ambiguous because it
makes no economic sense. Since the literal application
of the text “ ‘would lead to absurd results’ ” and “ ‘thwart
the obvious intentions of its drafters,’ ” we cannot rely
on the plain language of the contract. Funeral Fin. Sys. v.
United States, 234 F.3d 1015, 1018 (7th Cir. 2000) (quoting
Grun v. Pneumo Abex Corp., 163 F.3d 411, 420 (7th Cir.
1998)). Instead, the interpretation of these Notes
requires an examination of extrinsic evidence. See id.
Lender suggests that we may avoid finding an
ambiguity by reading the “stream of monthly payments”
variable to include a final “balloon payment” of the entire
outstanding principal balance at year 10. Under this
reading, the Prepayment Premium becomes the difference
between:
(1) the present value of the stream of monthly
payments from the date of prepayment
through year 10, plus the outstanding principal
balance at year 10; and
(2) the outstanding principal balance at the date of
prepayment.
Lender argues that including this balloon payment is
necessary in order to produce a positive Prepayment
Premium and avoid an absurd result.
Although Lender’s formula has the virtue of producing
a positive Prepayment Premium, Lender’s concept of a
“balloon payment” finds no support in the contract
language. The Notes’ plain language defines the first
Nos. 08-3239 & 08-4038 13
variable of the Differential as simply the stream of monthly
payments from the date of prepayment through year 10,
with no indication that this stream contains a final pay-
ment of the outstanding principal. As discussed above, this
language is ambiguous because it makes no economic
sense, and we cannot simply ignore the ambiguity by
patching up the contract language with Lender’s
suggested balloon payment term. Cf. Klapp, 663 N.W.2d at
453 (“[C]ourts cannot simply ignore portions of a
contract in order to avoid a finding of ambiguity . . . .”).
We also think that Lender’s reliance on the rule of
interpreting contracts to avoid absurd results is mis-
placed. Courts apply this rule to reject one party’s strained,
literal reading of contract language in favor of the other
party’s reasonable, commonsense reading. See Beanstalk,
283 F.3d at 859-60 (granting judgment for the defendant
even though the plaintiff’s broad reading of a representa-
tion agreement’s terms was literally correct); Dispatch
Automation, Inc. v. Richards, 280 F.3d 1116, 1118-19 (7th Cir.
2002) (rejecting the plaintiff’s contractual interpretation
that made no economic sense and granting judgment for
the defendant); Merheb v. Ill. State Toll Highway Auth., 267
F.3d 710, 713 (7th Cir. 2001) (rejecting an employee’s literal,
“insane” reading of a workplace discipline manual and
granting judgment for the employer); Nuckolls, 682 N.E.2d
at 539-40 (concluding that an insurer’s broad, literal
reading of a coverage exclusion would produce an absurd
result and construing the contract in favor of the insured).
But here, Lender is trying to avoid the absurdity of its own
literal reading of the contract. Lender cannot first argue
that the plain language of the contract supports its inter-
14 Nos. 08-3239 & 08-4038
pretation of the Prepayment Premium, but then argue that
the absurdity of that same plain-language interpretation
necessitates an additional balloon payment term.
Like Lender, Borrowers argue that they are entitled to
summary judgment without further consideration of
extrinsic evidence. Borrowers acknowledge that the
Notes are ambiguous but cite the rule that courts construe
ambiguities against the drafter, who in this case was
Lender’s predecessor in interest. MPACT Constr. Group, 802
N.E.2d at 910; Klapp, 663 N.W.2d at 454; Ins. Adjustment
Bureau, 905 A.2d at 468. Borrowers contend that this
rule permits us to conclude as a matter of law that their
interpretation of the Prepayment Premium is correct.
We question Borrowers’ premise that the rule of con-
struing ambiguities against the drafter gives courts a
license to bypass relevant, extrinsic evidence in favor of
simply declaring judgment for the non-drafter. Borrowers’
argument undoubtedly fails with respect to the seven
Notes in this case governed by Michigan law. The Michi-
gan Supreme Court has described the rule as a “tie-
breaker” to be applied only “if all conventional means of
contract interpretation, including the consideration of
relevant extrinsic evidence, have left the jury unable to
determine what the parties intended their contract to
mean.” Klapp, 663 N.W.2d at 455. Similarly, with respect
to the single Note governed by Pennsylvania law, the
Pennsylvania courts do not construe ambiguous
contracts against the drafter as a matter of law before
looking to extrinsic evidence. Rather, “inquiry should
always be made into the circumstances surrounding the
Nos. 08-3239 & 08-4038 15
execution of the document,” and “only when such an
inquiry fails” should courts “conclude the matter against
the party responsible for the ambiguity, the drafter of the
document.” Burns Mfg. Co. v. Boehm, 356 A.2d 763, 767 n.3
(Pa. 1976) (citations omitted); see also Kripp, 849 A.2d at
1165 (concluding that the trial court properly resolved
an ambiguous agreement through parol evidence of the
parties’ intent rather than “a construction of contractual
terms”); Hutchison v. Sunbeam Coal Corp., 519 A.2d 385, 390
n.5 (Pa. 1986) (“Our first obligation is to examine the
extrinsic evidence and resort to rules of construction
only should that examination prove fruitless.”).
Indiana arguably applies the rule of construing ambigu-
ities against the drafter more liberally, and the Indiana
Supreme Court has occasionally applied the rule
without considering whether extrinsic evidence would
clarify the parties’ intent. See MPACT, 802 N.E.2d at 910
(“When there is ambiguity in a contract, it is construed
against its drafter.”); Nuckolls, 682 N.E.2d at 538 (“When
an insurance contract contains an ambiguity, it should
be strictly construed against the insurance company.”);
Eli Lilly & Co. v. Home Ins. Co., 482 N.E.2d 467, 470 (Ind.
1985) (holding that insurers’ extrinsic evidence was
inadmissible to clarify an ambiguous coverage provision).
So at least with respect to the four Notes governed by
Indiana law, Borrowers’ argument that they are entitled
to summary judgment on an ambiguous contract carries
some force. Still, we think that Borrowers can prevail
under the rule of construing ambiguities against the drafter
only if they offer an interpretation of the Notes that is
16 Nos. 08-3239 & 08-4038
reasonably consistent with the contract language. See
MPACT, 802 N.E.2d at 910 (concluding that certain con-
tractual provisions “support both [parties’] arguments”
and therefore construing against the drafter); Showboat
Marina Casino P’ship v. Tonn & Blank Constr., 790 N.E.2d
595, 598-99 (Ind. Ct. App. 2003) (recognizing the non-
drafter’s right to sue on a contract that contained language
consistent with both the right to sue and mandatory
arbitration). Unfortunately, Borrowers’ interpretation is
inconsistent with the plain language of the Notes.
As mentioned above, Borrowers’ interpretation defines
the Prepayment Premium as the difference between:
(1) the present value of the stream of monthly
payments from the date of prepayment
through year 10 computed at the Reinvestment
Rate; and
(2) the present value of the same stream of
monthly payments computed at the Stated
Rate of the Note.
To arrive at this formula, Borrowers must make
sweeping changes to the contract language defining the
Prepayment Premium, illustrated as follows with the
added word in italics and the deleted language
stricken out:
. . . equal to the positive difference between the
present value (computed at the Reinvestment Rate)
of the stream of monthly payments of principal
and interest under this Note from the date of the
prepayment through the tenth (10 th ) anniversary of
Nos. 08-3239 & 08-4038 17
the First Full Payment Date [and] at the Stated
Rate . . . and the outstanding principal balance of
this Note as of the date of the prepayment (the
“Differential”). . . .
Borrowers’ insertion of an “and” before the “at the Stated
Rate” clause completely changes the second variable used
to calculate the Differential, replacing the “outstanding
principal balance” variable with a new “stream of monthly
payments” variable. Equally problematic, Borrowers’
interpretation omits the “outstanding principal balance”
clause from the contract, rendering that term mere
surplusage. See Klapp, 663 N.W.2d at 453 (“[C]ourts
must . . . give effect to every word, phrase, and clause in
a contract and avoid an interpretation that would render
any part of the contract surplusage or nugatory.” (quota-
tion omitted)). In short, Borrowers’ interpretation is
unreasonable because it is completely inconsistent with
the contract language, and we cannot adopt this inter-
pretation under the rule of construing ambiguities against
the drafter. Instead, the meaning of the Prepayment
Premium is a question of fact that requires an examina-
tion of relevant extrinsic evidence. See Fresh Cut, Inc. v.
Fazli, 650 N.E.2d 1126, 1133 (Ind. 1995).
III. Conclusion
Because the contract language defining the Prepayment
Premium is ambiguous, resolving the meaning of the
contract on summary judgment was inappropriate. We
R EMAND for a trial on the question of the parties’ intended
18 Nos. 08-3239 & 08-4038
meaning of the Prepayment Premium. Circuit Rule 36
shall apply on remand.
8-5-09