ANGEL LEARNING, INC. v. HOUGHTON MIFFLIN HARCOURT PUBLISHING COMPANY

Filing 289

ORDER denying 263 Motion for Partial Summary Judgment for the pltf on its claim for fraud and granting 266 Sealed Motion for summary judgment filed by deft-Houghton Mifflin Harcourt Publishing Company. Signed by Judge Larry J. McKinney on 9/14/2011. (CBU)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF INDIANA
INDIANAPOLIS DIVISION

ANGEL LEARNING, INC.,
Plaintiff,
vs.
HOUGHTON MIFFLIN HARCOURT
PUBLISHING COMPANY,
Defendant.

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1:08-cv-1259-LJM-DKL

ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT
This matter comes before the Court on Plaintiff’s, ANGEL Learning, Inc. (“ANGEL”),
motion for Partial Summary Judgment on Its Claim for Fraud [Dkt. No. 263] and
Defendant’s, Houghton Mifflin Harcourt Publishing Company (“HMH”), Motion for Summary
Judgment [Dkt. No. 266]. Both motions concern legal claims ANGEL asserts in its Second
Supplemental Complaint. Dkt. No. 150-1. For the following reasons, the Court DENIES
ANGEL’s motion and GRANTS HMH’s motion.

I. BACKGROUND
This matter has been pending before the Court since September 2008. As a result,
a complete recitation of the factual and procedural background leading to the currently
pending motions would be unwieldy. Accordingly, the Court will recite only those facts and
procedural background directly pertinent to the motions at hand. A more complete
recitation of the facts of this case is available in the Court’s Order issued on August 12,
2010, docket number 248 (“August 12 Order”).

The instant suit is predicated on a contract entered into by the parties (“LMS
Agreement”) that concerns certain software ANGEL was to provide to HMH (“ThinkCentral
2"). On January 9, 2009, HMH sent ANGEL a letter in which HMH purported to terminate
the LMS Agreement due to ANGEL’s alleged breach of warranties contained within the
LMS Agreement (“January 9 Letter”). Dkt. No. 265-2. HMH informed ANGEL that it
disputed ANGEL’s claim that it owed ANGEL any fees. Id. HMH invoked Section 7.8 of
the LMS Agreement, which provides in pertinent part: “To the extent that any payment is
subject to a good faith dispute, it may be paid into escrow pending resolution of the dispute
and while it is in escrow pending such resolution, the other party may not terminate [the
LMS Agreement] based upon that escrowed amount.” Dkt. No. 14-1 at 28. Citing Sections
18.2 and 7.8 of the LMS Agreement, the January 9 Letter asserts that ANGEL was required
to continue to support ThinkCentral 2 until “the later of June 2009 or when HMH
complet[ed] its migration of its learning management system to a new platform.” Dkt. No.
265-2.
ANGEL requested that HMH confirm that it had made the promised deposit, and
HMH’s counsel assured ANGEL that HMH had deposited $2,004,000 into a Bank of
America account (“Bank of America Account”) and provided ANGEL with the account
number and the funding date. Dkt. No. 265-3. ANGEL continued to support ThinkCentral
2. Dkt. No. 265-4. On October 15, 2009, HMH informed ANGEL that on October 14, 2009,
HMH withdrew the $2,004,000 that it had deposited into the Bank of America Account. Dkt.
No. 265-5.

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The Bank of America Account was an existing checking account HMH maintained
that was renamed “Escrow Pursuant to LMS Agreement Section 7.8 prior to the $2,004,000
deposit. Dkt. No. 265-6 at 16. It was never managed by an escrow agent. Id. at 11.
In its August 12 Order, the Court granted ANGEL leave to supplement its Complaint.
Dkt. No. 248. In so doing, ANGEL added legal claims premised on HMH’s alleged fraud
in depositing the disputed fees into the Bank of America Account. Dkt. No. 150-1. ANGEL
moves now for summary judgment on its fraud claim against HMH. Dkt. No. 263. HMH,
in turn, moves for summary judgment on ANGEL’s fraud and promissory estoppel claims
and ANGEL’s request for injunctive relief. Dkt. No. 266.
The Court includes additional facts below as necessary.

II. STANDARD
As stated by the Supreme Court, summary judgment is not a disfavored procedural
shortcut, but rather is an integral part of the federal rules as a whole, which are designed
to secure the just, speedy, and inexpensive determination of every action. See Celotex
Corp. v. Catrett, 477 U.S. 317, 327 (1986). See also United Ass’n of Black Landscapers
v. City of Milwaukee, 916 F.2d 1261, 1267–68 (7th Cir. 1990). Motions for summary
judgment are governed by Federal Rule of Civil Procedure 56(a), which provides in relevant
part:
The court shall grant summary judgment if the movant shows that there is no
genuine dispute as to any material fact and the movant is entitled to
judgment as a matter of law.
Once a party has made a properly-supported motion for summary judgment, the opposing
party may not simply rest upon the pleadings but must instead submit evidentiary materials
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showing that a fact either is or cannot be genuinely disputed. Fed. R. Civ. P. 56(c)(1). A
genuine issue of material fact exists whenever “there is sufficient evidence favoring the
nonmoving party for a jury to return a verdict for that party.” Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 249 (1986). The nonmoving party bears the burden of demonstrating
that such a genuine issue of material fact exists. See Matsushita Elec. Indus. Co. v. Zenith
Radio Corp., 475 U.S. 574, 586–87 (1986); Oliver v. Oshkosh Truck Corp., 96 F.3d 992,
997 (7th Cir. 1996). It is not the duty of the Court to scour the record in search of evidence
to defeat a motion for summary judgment; rather, the nonmoving party bears the
responsibility of identifying applicable evidence. See Bombard v. Ft. Wayne Newspapers,
Inc., 92 F.3d 560, 562 (7th Cir. 1996).
In evaluating a motion for summary judgment, the Court should draw all reasonable
inferences from undisputed facts in favor of the nonmoving party and should view the
disputed evidence in the light most favorable to the nonmoving party. See Estate of Cole
v. Fromm, 94 F.3d 254, 257 (7th Cir. 1996). The mere existence of a factual dispute, by
itself, is not sufficient to bar summary judgment. Only factual disputes that might affect the
outcome of the suit in light of the substantive law will preclude summary judgment. See
Anderson, 477 U.S. at 248; JPM Inc. v. John Deere Indus. Equip. Co., 94 F.3d 270, 273
(7th Cir. 1996). Irrelevant or unnecessary facts do not deter summary judgment, even
when in dispute. See Clifton v. Schafer, 969 F.2d 278, 281 (7th Cir. 1992). If the moving
party does not have the ultimate burden of proof on a claim, it is sufficient for the moving
party to direct the court to the lack of evidence as to an element of that claim. See Green
v. Whiteco Indus., Inc., 17 F.3d 199, 201 & n.3 (7th Cir. 1994). “If the nonmoving party fails
to establish the existence of an element essential to his case, one on which he would bear
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the burden of proof at trial, summary judgment must be granted to the moving party.” Ortiz
v. John O. Butler Co., 94 F.3d 1121, 1124 (7th Cir. 1996).

III. DISCUSSION
Currently pending before the Court are cross motions for summary judgment on
ANGEL’s fraud claim against HMH. HMH also presents arguments for summary judgment
in its favor on two other issues: ANGEL’s promissory estoppel claim and its request for
injunctive relief. The Court will first consider the parties’ arguments addressing the fraud
claim, and then it will turn its attention to the issues remaining in HMH’s summary judgment
motion.
A. FRAUD
In Indiana, common law fraud consists of “(1) a material representation of past or
existing facts which (2) was false (3) was made with knowledge or reckless ignorance of
its falsity (4) was made with intent to deceive (5) was rightfully relied upon by the
complaining party and (6) proximately caused injury to the complaining party.” Am.
Heritage Banco, Inc. v. McNaughton, 879 N.E.2d 1110, 1115 (Ind. Ct. App. 2008).
ANGEL asserts that HMH knowingly misrepresented an existing fact when it stated
that it had deposited $2,004,000 into an escrow account pending the resolution of the
parties’ dispute. Further, ANGEL asserts that it detrimentally relied on HMH’s statements
by ceasing consideration of its option to terminate HMH’s use of ANGEL’s software. HMH,
on the other hand, asserts that ANGEL’s fraud claim must fail as a matter of law because
HMH made no material misstatement of fact and ANGEL suffered no harm because HMH

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had properly terminated the LMS Agreement prior to making the deposit in the Bank of
America Account.
The Court turns first to the question of whether HMH made a material
misrepresentation of a past or existing fact. “[E]xpressions of opinion cannot be the basis
for an action in fraud.” Block v. Lake Mortg. Co., 601 N.E.2d 449, 451 (Ind. Ct. App. 1992).
Additionally, the breach of a promise to act in the future or abstain from some act in the
future will not support a fraud theory. Sees v. Bank One, 839 N.E.2d 154, 164 (Ind. 2005);
Am. Heritage Banco, 879 N.E.2d at 1115 (stating that “actual fraud may not be based on
representations of future conduct, on broken promises, or on representations of existing
intent that are not executed”).
In the instant case, ANGEL alleges that HMH’s statement on January 20, 2009 that
it deposited $2,004,000 into an escrow account pursuant to Section 7.8 of the LMS
Agreement is a material misstatement of fact because HMH actually deposited the funds
into a regular checking account. HMH asserts that, instead of affirmatively misstating a
fact, it simply interpreted the term “escrow” differently than ANGEL. The touchstone for
determining whether HMH did make a material misrepresentation with regard to the deposit
must be Section 7.8 of the LMS Agreement because it is undisputed that the entire purpose
for the deposit was to comply with that contractual provision. As discussed in the August
12 Order, the law of New York applies to the interpretation of the LMS Agreement. Dkt. No.
248 at 12-13. Accordingly, the word “escrow” must be given its plain meaning. See Brooke
Grp. v. JCH Syndicate, 663 N.E.2d 635, 638 (N.Y. 1996) (“The words and phrases used
by the parties must, as in all cases involving contract interpretation, be given their plain
meaning”). “An escrow is a written agreement that imports a legal obligation to deposit an
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instrument or property by the promisor with a third party to be kept by the latter in capacity
of depositary or escrowee until the performance of a condition or the happening of an
event, which then is to be delivered by the escrow agent to the promisee.” Nat’l Union Fire
Ins. Co. v. Proskauer Rose Goetz & Mendelsohn, 634 N.Y.S.2d 609, 614 (N.Y. Sup. Ct.
1994), aff’d 642 N.Y.S.2d (N.Y. App. Div. 1996); see also Blacks Law Dictionary 230
(Pocket Ed. 1996) (defining escrow as “a . . . property delivered by a promisor to a third
party to be held by the third party . . . until the occurrence of a condition at which time the
third party is to hand over the . . . property to the promisee”). Further, “[t]he purpose of an
escrow is to assure the carrying out of an obligation already contracted for an in
furtherance of the obligation the promisor deposits money, goods, or documents to an
escrow agent who agrees to part with it only on a specified condition.” Id. Indeed, Section
7.8 of the LMS Agreement states that payment of funds subject to a good faith dispute into
escrow guarantees that the other party may not terminate the LMS Agreement based upon
the escrowed amount. Dkt. No. 14-1 at § 7.8. Instead of depositing the funds into an
escrow account as definied above, HMH deposited the funds into an account over which
it had unilateral control. Under the plain language of the LMS Agreement, it did not deposit
the funds into “escrow.” Accordingly, when HMH stated that it deposited the funds into the
escrow account pursuant to Section 7.8 of the LMS agreement, it did mischaracterize its
actions. Neither party disputes that such a misstatement is material.
HMH argues that ANGEL has not met its burden of proving that HMH intentionally
misrepresented the nature of its deposit. ANGEL did point the Court to the testimony of
HMH’s 30(b)(6) witness who stated that HMH considered using an escrow account
managed by an agent, but determined such an account was not necessary and, further,
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that HMH had used escrow accounts in other situations, that it does not consider an escrow
account as the same as a checking account, and that it had never heard of an escrow
account that was not managed by an escrow agent. Dkt. No. 281-3 at 3-4, 5-6, 9-10.
Considering the plain and accepted meaning of the term “escrow” and the evidence offered
by ANGEL, the Court concludes that HMH did knowingly misrepresent the nature of the
account into which it deposited the disputed funds with the intent to deceive ANGEL as to
HMH’s adherence to the terms of Section 7.8 of the LMS Agreement. The parties do not
dispute that ANGEL had the right to rely on HMH’s statements regarding the deposit.
Finally, in order to prevail on its fraud claim, ANGEL must prove that it suffered
damages proximately caused by its reliance on HMH’s statement. ANGEL argues that
because of HMH’s statement that it deposited the funds into an escrow account pursuant
to Section 7.8 of the LMS Agreement it ceased consideration of terminating the LMS
agreement and lost the settlement leverage that could have been gained by threatening to
terminate HMH’s use of ThinkCentral 2. Further, ANGEL argues that it was harmed
because of the loss of security in the event the dispute is resolved in its favor. The Court
will address ANGEL’s three distinct damages theories in turn.
First, the Court must address the consequences of its August 12 Order on the
instant motions. In its August 12 Order and subsequent Order on ANGEL’s Motion to
Reconsider [Dkt. No. 262], the Court determined that in its January 20 Letter, HMH properly
terminated the LMS Agreement. Dkt. No. 248 at 16-18. However, the Court left the issue
of whether Section 18.2 of the LMS Agreement was triggered for trial. Id. at 20-22.
Accordingly, the issue of whether, after its receipt of the January 20 letter, ANGEL was
contractually required to continue supporting ThinkCentral 2 remains unresolved. HMH
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argues that because it had already properly terminated the LMS Agreement by the time it
made the statement regarding the deposit, any damages ANGEL predicates on terminating
or threatening to terminate the LMS Agreement fail as a matter of law. The Court agrees
that ANGEL did not detrimentally rely on HMH’s representations to the extent ANGEL
bases its damages on losing the settlement leverage of terminating the LMS Agreement
because the LMS Agreement had already been properly terminated. See Dkt. No. 248 at
16-18.
To the extent that ANGEL’s asserted damages are not predicated on terminating the
LMS Agreement but instead concern ANGEL’s continued support of ThinkCentral 2 without
counter-performance by HMH, the question is more complicated. The Court has left for trial
the question of whether ANGEL had a duty under Section 18.2 of the LMS Agreement to
continue to support the software. However, ANGEL has not put forth any evidence to
indicate that it would have actually terminated its support of ThinkCentral 2, had it not been
for ANGEL’s reliance on HMH’s statements. Instead, ANGEL has indicated that it stopped
considering whether it would terminate its support of the LMS Agreement, and presumably
its support of ThinkCentral 2 in reliance on HMH’s statements regarding its deposit. The
cessation of consideration of termination as a litigation strategy is too attenuated and
speculative for the Court to conclude that it is detrimental reliance sufficient to support
ANGEL’s fraud claim. See Wolcott v. Wise, 130 N.E. 544, 546 (Ind. App. 1921); see also
Lycan v. Walters, 904 F. Supp. 884, 897 (S.D. Ind. 2008) (McKinney, J.) (noting that in
order to support a fraud claim the damage must be proximately caused by the material
misstatement).

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ANGEL’s final asserted item of damage, its loss of security in the event that it wins
its claims in this lawsuit, is also insufficient to support its fraud claim because it does not
relate to any actions ANGEL took in reliance on HMH’s statements. Indeed, if damage
does result from the loss of ANGEL’s security, it would be caused by HMH defaulting on
a judgment in this case, not any fraud. Because ANGEL has not presented evidence of
detrimental reliance proximately caused by HMH’s statements regarding its deposit, it’s
fraud claim fails as a matter of law. See id. Accordingly, ANGEL’s partial Motion for
Summary Judgment is DENIED.
B. PROMISSORY ESTOPPEL
In its Second Supplemental Complaint, ANGEL makes a claim for promissory
estoppel premised on HMH’s deposit in the Bank of America Account. HMH moves for
summary judgment on ANGEL’s promissory estoppel claim, arguing that HMH’s action was
controlled by a written contract and, therefore, not susceptible to a promissory estoppel
theory.
“[A] claim of promissory estoppel will permit recovery only where no contract in fact
exists.” Comentis, Inc. v. Purdue Research Found., 765 F. Supp. 2d 1092, 1098 (N.D. Ind.
2011) (Simon, C.J.) (citing Ind. Bureau of Motor Vehicles v. Ash, Inc., 895 N.E.2d 359, 367
(Ind. Ct. App. 2008)). Indeed, “if the promises cited by [ANGEL] are founded on a valid
written contract between the parties, then the promissory estoppel claim becomes
unwanted surplusage.” Decatur Ventures, LLC v. Stapleton Ventures, Inc., 373 F. Supp.
2d 829, 848 (S.D. Ind. 2005) (Tinder, J.) (citing Meisenhelder v. Zipp Exp., Inc., 788 N.E.2d
924, 932 (Ind. Ct. App. 2003)). ANGEL argues that because the LMS Agreement did not

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obligate HMH to deposit the disputed funds into escrow, the fact that HMH acted pursuant
to the LMS Agreement does not render ANGEL’s promissory estoppel claim futile. ANGEL
cites no authority for its position. The cases are clear that where “there is an express
contract governing the relationship out of which the promise emerged, and no issue of
consideration, there is no gap in the remedial system for promissory estoppel to fill.” AllTech Telecom, Inc. v. Amway Corp., 174 F.3d 862, 869 (7th Cir. 1999). In the instant case,
HMH expressly acted pursuant to an option provided in the LMS Agreement, and its failure
to conform to the terms of the LMS Agreement may constitute a breach of the LMS
Agreement. Accordingly, if there is a remedy for ANGEL to be had, it is in contract, not
equity. Therefore, ANGEL’s promissory estoppel claim fails.
C. INJUNCTIVE RELIEF
ANGEL also seeks an order from the Court requiring HMH to deposit $2,004,000
into a true escrow account pending the resolution of the parties’ dispute. However, HMH
argues that monetary damages are available for all of ANGEL’s claims, negating the
necessity for the extraordinary remedy of an injunction. ANGEL presents no evidence to
rebut HMH’s argument. Accordingly, the Court concludes that ANGEL is not entitled to the
injunctive relief requested in its Second Supplemental Complaint. See Behrens v. Pelletier,
516 U.S. 299, 309 (1996) (noting that on summary judgment “the plaintiff can no longer rest
on the pleadings”).

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IV. CONCLUSION
For the foregoing reasons, the Court DENIES plaintiff, ANGEL Learning, Inc., Motion
for Partial Summary Judgment on its Claim for Fraud [Dkt. No. 263] and GRANTS
defendant’s, Houghton Miffllin Harcourt Publishing Company, Motion for Summary
Judgment [Dkt. No. 266].
IT IS SO ORDERED this 14th day of September, 2011.

________________________________
LARRY J. McKINNEY, JUDGE
United States District Court
Southern District of Indiana

Distribution to:
Sean P. Burke
BARNES & THORNBURG LLP
[e-mail]
Michael T. McNally
ICE MILLER LLP
[e-mail]
Scott E. Murray
BARNES & THORNBURG LLP
[e-mail]
Irwin B. Schwartz
BUSINESS LITIGATION ASSOCIATES, P.C.
[e-mail]
T. Joseph Wendt
BARNES & THORNBURG LLP
[e-mail]

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