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
Before B AUER, S YKES, and T INDER, Circuit Judges.
T INDER, Circuit Judge. This case demonstrates that
even experienced, sophisticated business entities can
encounter difficulty when drafting carefully negotiated
loan documents. Since July 2007, the plaintiffs and the
defendant 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
2 Nos. 08-3239 & 08-4038
cannot bring their stalemate to an end, and more litiga-
tion lies ahead. However, while disputes over the
meaning of language in loan documents can be some-
what 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 dis-
agreed on how to calculate the Prepayment Premium.
Their dispute led to this diversity action, in which the
parties seek a declaratory judgment as to the correct
interpretation of the Prepayment Premium. The district
court granted summary judgment in favor of Lender,
concluding that the unambiguous contract language
supported Lender’s interpretation. We conclude, how-
ever, that the contract is ambiguous, making it inappro-
priate to resolve the meaning of the contract at the sum-
mary 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
Nos. 08-3239 & 08-4038 3
include Indiana, Michigan, and Pennsylvania. In 1999,
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 Borrow-
ers to pay off their loans early, but only if they paid a
“Prepayment 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 (10 th ) 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 “Differ-
ential”). 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 ex-
ercising 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
Nos. 08-3239 & 08-4038 5
Capital. All of the Notes contained identical language,
including the revised definition of the Prepayment Pre-
mium 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 prepay-
ment through year 10 computed at the Reinvestment
Rate and at the Stated Rate. This calculation, which com-
pares the present value of the stream of monthly pay-
ments computed at the two different rates, is consistent
with the definition of the Prepayment Premium
provided by Captec Financial’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 dam-
aged 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 inter-
preted 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
6 Nos. 08-3239 & 08-4038
Prepayment Premium of around $17,000, while Lender’s
formula 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 litiga-
tion effort expended 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 diversity 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’ declara-
tory judgment claim, concluding that the unambiguous
contract language supported Lender’s interpretation of
the Prepayment 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
Nos. 08-3239 & 08-4038 7
on the merits and leaves nothing for the court to do but
execute the judgment.” Star Ins. Co. v. Risk Mktg. Group
Inc., 561 F.3d 656, 659 (7th Cir. 2009) (quotation omitted).
In contrast, an order that disposes of only one claim in
a multi-count complaint is typically non-final and there-
fore 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 judg-
ment in favor of Lender and against Borrowers, the
court purported to resolve only one of Borrowers’ two
claims. In its opinion and order accompanying the judg-
ment, 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 con-
clude 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
8 Nos. 08-3239 & 08-4038
did not “contemplate[] further activity” on Borrowers’
breach of contract claim, Star Ins. Co., 561 F.3d at 659
(quotation omitted).
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 prepay-
ment premium in excess of that contemplated by the
terms of the . . . Notes, . . . and/or by rejecting Borrowers’
Prepayment 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 Pre-
payment Premium was correct. Yet the district court
rejected that interpretation as unsupported by the
contract language. In doing so, the court necessarily
rejected Borrowers’ 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
stipulation that appellate jurisdiction exists, since juris-
dictional defects are non-waivable. Stevens v. Turner,
222 F.2d 352, 354 (7th Cir. 1955). Still, the parties’ agree-
Nos. 08-3239 & 08-4038 9
ment on this point supports our own conclusion that,
in entering judgment against Borrowers on their declara-
tory judgment claim, the district court effectively
disposed of Borrowers’ breach of contract claim. See Am.
Family Mut. 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 defendants effectively ended the
litigation on the merits, where the plaintiffs stated at oral
argument that their prior voluntary dismissal of that
defendant was with prejudice). 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.
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
10 Nos. 08-3239 & 08-4038
secured by restaurants in Michigan, four by restaurants
in Indiana, and one by a restaurant in Pennsylvania.
Under general principles of contract interpretation,
which apply in each of the three controlling jurisdic-
tions, courts interpret contracts with the goal of ascertain-
ing 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. Adjust-
ment Bureau v. Allstate Ins. Co., 905 A.2d 462, 468 (Pa.
2006). In the case of a written contract, the court deter-
mines the parties’ intent 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 court interprets
the document 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, the trier of fact must examine relevant
extrinsic evidence 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:
Nos. 08-3239 & 08-4038 11
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 the First
Full Payment Date at the Stated Rate . . . and
the outstanding 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
therefore “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
12 Nos. 08-3239 & 08-4038
Prepayment Premium is to provide some penalty in the
event that Borrowers prepay.
So while the contract language defining the Prepay-
ment Premium is clear, it is nonetheless ambiguous
because it makes no economic sense. Since the literal
application of the text “ ‘would lead to absurd re-
sults’ ” and “ ‘thwart the obvious intentions of its draft-
ers,’ ” 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 evi-
dence. 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
Nos. 08-3239 & 08-4038 13
“balloon payment” finds no support in the contract
language. The Notes’ plain language defines the first
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 payment 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 por-
tions 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
14 Nos. 08-3239 & 08-4038
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 interpretation of the Prepayment Premium, but then
argue that the absurdity of that same plain-language
interpretation necessitates an additional balloon pay-
ment 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. Bor-
rowers’ argument undoubtedly fails with respect to the
seven Notes in this case governed by Michigan law. The
Michigan 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
Nos. 08-3239 & 08-4038 15
the single Note governed by Pennsylvania law, the Penn-
sylvania 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 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
16 Nos. 08-3239 & 08-4038
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 reasonably consistent with the contract
language. See MPACT, 802 N.E.2d at 910 (concluding
that certain contractual provisions “support both [par-
ties’] 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) (recog-
nizing the non-drafter’s right to sue on a contract
that contained language consistent with both the right to
sue and mandatory arbitration). Unfortunately, Borrow-
ers’ 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 Prepay-
ment 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)
Nos. 08-3239 & 08-4038 17
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
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.”
(quotation omitted)). In short, Borrowers’ interpretation
is unreasonable because it is completely inconsistent
with the contract language, and we cannot adopt this
interpretation under the rule of construing ambiguities
against the drafter. Instead, the meaning of the Prepay-
ment Premium is a question of fact that requires an
examination 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
18 Nos. 08-3239 & 08-4038
contract on summary judgment was inappropriate. We
R EMAND for a trial on the question of the parties’
intended meaning of the Prepayment Premium. Circuit
Rule 36 shall apply on remand.
7-13-09