District Court too heavy-handed in judgment, 7th Circuit rules

A $2.7 million judgment in a messy dispute between a supplier and a now defunct furniture manufacturer has been overturned by the 7th Circuit Court of Appeals, which called the award “too heavy a sanction.”

Children’s furniture maker Child Craft Industries, which was acquired by Harrison Manufacturing in 2008, contracted with Summit Forest Products Co. to supply raw wood components for a new high-end baby furniture line. However, the goods shipped to Child Craft never conformed to its specifications, which forced the manufacturer to halt production and cancel orders it had received for the new line of furniture. A few months later, Child Craft closed altogether.

Initially, Summit sued Child Craft for breach of contract and the tort of conversion based on Child Craft’s refusal to pay for the wood products. Child Craft responded with a counterclaim for breach of contract against Summit and also for the tort of negligent misrepresentation against Summit and owner Ron Bienias.

When Summit and Bienias lost their counsel about a month before trial and did not enlist a new attorney by deadline, the U.S. District Court for the Southern District of Indiana lost patience and entered a default against Summit on Child Craft’s claims.

The 7th Circuit, reviewing the pair of cases on appeal, found the District Court had overstepped.

“…the district court abused its discretion in refusing to set aside the entry of default against Summit on the negligent misrepresentation counterclaim,” Judge David Hamilton wrote for the court. “As best we can tell, Summit was without a lawyer for no more than about two weeks before the court acted. The entry of what turned out to be multimillion dollar damages award against it, without regard for the merit of the claim, gives us serious pause.”

The Chicago panel noted Indiana’s economic loss doctrine gave Summit and Bienias a strong defense against the negligent misrepresentation counterclaim. Indiana law bars liability in tort for pure economic loss caused unintentionally.

“A multimillion dollar judgment on a specious legal theory is too heavy a sanction for a corporation’s two-week gap in representation, especially when setting aside the entry of default would not have caused prejudice to the opposing party or the court’s docket,” Hamilton wrote.  

The 7th Circuit reversed the judgment on Child Craft’s negligent misrepresentation counterclaim against Bienias and Summit. It directed the District Court to enter final judgment in favor of Bienias and Summit. In addition, it affirmed the District Court’s dismissal of Summit’s claims against Child Craft.

The cases are JMB Manufacturing Inc., d/b/a/ Summit Forest Products Co. v. Child Craft, LLC, et al.,14-3306, and Harrison Manufacturing, LLC, f/k/a Child Craft, LLC v. Ron Bienias, 14-3315.