                        NOT RECOMMENDED FOR PUBLICATION
                               File Name: 07a0196n.06
                                Filed: March 13, 2007

                                          No. 06-1196

                          UNITED STATES COURT OF APPEALS
                               FOR THE SIXTH CIRCUIT


LIAC, INC.,                         )
                                    )
      Plaintiff-Appellant,          )
                                    )
v.                                  )            ON APPEAL FROM THE UNITED
                                    )            STATES DISTRICT COURT FOR THE
FOUNDERS INSURANCE CO.,             )            EASTERN DISTRICT OF MICHIGAN
                                    )
      Defendant-Appellee.           )
____________________________________)            OPINION




       Before: SILER, MOORE, and GILMAN, Circuit Judges.

       RONALD LEE GILMAN, Circuit Judge. In 2000, LIAC, Inc. and Founders Insurance

Co. signed a Managing General Agency Agreement (MGA Agreement), pursuant to which LIAC

agreed to sell nonstandard automobile insurance policies underwritten and issued by Founders to

Michigan residents. The relationship was short-lived. After Founders notified LIAC in 2001 of its

intent to terminate the Agreement, LIAC filed a complaint in Michigan state court, alleging

fraudulent inducement and breach of contract. Founders removed the case to federal court, after

which it filed a motion for summary judgment. The district court granted the motion as to both of

LIAC’s claims. For the reasons set forth below, we AFFIRM the judgment of the district court as
No. 06-1196
LIAC, Inc. v. Founders
to LIAC’s fraudulent-inducement claim, REVERSE the judgment as to the breach-of-contract claim,

and REMAND the case for further proceedings consistent with this opinion.



                                       I. BACKGROUND

       LIAC is an insurance broker in the state of Michigan that focuses on nonstandard no-fault

automobile insurance policies that are designed for customers with poor driving records who would

not otherwise qualify for standard-rate policies. Founders is an Illinois-based insurance company

that issues such policies as part of its business. These policies typically provide coverage for only

six months. Insurers such as Founders compensate brokers like LIAC by paying commissions based

on the installment payments actually collected on the policies originated by the broker. The so-called

persistency rate—meaning the number of policies paid in full over the six-month term compared to

the total number of policies sold—therefore directly affects a broker’s profitability. Average

persistency rates for nonstandard no-fault insurance range from 30 to 60 percent.

       In early 2000, Founders and LIAC began negotiating an agreement whereby LIAC would sell

Founders’s policies to customers domiciled in Michigan. The parties signed the MGA Agreement

in March of 2000. LIAC agreed to solicit, bind, and service nonstandard automobile policies for

Michigan residents consistent with Founders’s underwriting guidelines. Founders in turn committed

to pay LIAC a commission based upon a percentage of the insurance premiums remitted. Although

the MGA Agreement did not identify LIAC as Founders’s exclusive broker in Michigan, the parties

did agree that Founders would not appoint any other producer or managing general agent in

Michigan at a commission rate equal to or lower than the rate paid to LIAC.


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LIAC, Inc. v. Founders
       Among the key terms in the MGA Agreement was a merger clause, which read as follows:

       Both [Founders] and [LIAC] acknowledge that this Agreement is the entire
       agreement between them relating to their contemplated business transactions and that
       they have not relied upon any promises or representations, oral or written, which
       have not been included in this Agreement. [Founders] and [LIAC] desire that this
       Agreement supersede any prior agreements between them.

Section 26 of the MGA Agreement further provided that, at the request of either party, executives

of Founders and LIAC “shall meet at a mutually convenient place and time to discuss suggestions,

concerns, issues, and the like.” A final term of relevance is the choice-of-law clause, which provided

that “this Agreement shall be governed by Illinois law, without regard to principals [sic] of choice

of law.”

       Almost immediately, the relationship between the parties grew strained. LIAC complained

that Founders was failing to handle the volume of business that LIAC generated in a timely manner,

despite oral representations that it was equipped to do so. This failure allegedly caused the

persistency rates on policies originated by LIAC to drop to between 5 and 20 percent, well below

industry averages. In turn, Founders characterized LIAC as a “demanding, high maintenance

partner” that unreasonably complained about multiple aspects of the relationship. The relationship

deteriorated to the point that, in April of 2001, Founders sent LIAC a letter stating that it intended

to terminate the MGA Agreement as of September 30, 2001, but also that it hoped to negotiate

“another mutually satisfactory Agreement.”

       LIAC filed suit against Founders in the Wayne County (Michigan) Circuit Court in July of

2001. The complaint alleged fraudulent inducement and breach of contract, and sought damages “for

whatever amount in excess of $25,000 [LIAC] is entitled,” along with costs and fees. Founders

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LIAC, Inc. v. Founders
removed the case to the United States District Court for the Eastern District of Michigan in August

of 2001. After discovery, Founders moved for summary judgment.

        In a decision issued in February of 2003, the district court determined that Michigan law

applied to the fraudulent-inducement claim and that Illinois law applied to the breach-of-contract

claim. This choice-of-law determination is undisputed on appeal. The district court then granted

Founders’s motion for summary judgment as to the former claim, but denied it as to the latter. As

part of its decision, however, the district court invited Founders to file a renewed motion for

summary judgment that addressed “in full” LIAC’s argument that allegedly omitted terms in the

MGA Agreement permitted the court to use the doctrine of good faith and fair dealing to construe

the contract in light of the parties’ intent.

        Founders subsequently filed a renewed motion for summary judgment on the

breach-of-contract claim, which the district court granted in March of 2004. LIAC filed a notice of

appeal the following month, but this court dismissed the appeal for lack of jurisdiction because the

district court had not yet ruled on a counterclaim that Founders had raised against LIAC. After the

parties agreed to dismiss the counterclaim by stipulation in December of 2005, LIAC brought this

timely appeal.



                                            II. ANALYSIS

A.      Standard of review

        We review the district court’s grant of summary judgment de novo. Int’l Union v. Cummins,

Inc., 434 F.3d 478, 483 (6th Cir. 2006). Summary judgment is proper where no genuine issue of


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No. 06-1196
LIAC, Inc. v. Founders
material fact exists and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P.

56(c). In considering a motion for summary judgment, the district court must construe the evidence

and draw all reasonable inferences in favor of the nonmoving party. See Matsushita Elec. Indus. Co.

v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). The central issue is “whether the evidence presents

a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party

must prevail as a matter of law.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52 (1986).

B.     Fraudulent inducement

       LIAC contends that the district court erred in granting summary judgment to Founders on

LIAC’s claim of fraudulent inducement. According to LIAC, Founders fraudulently induced LIAC

to enter the MGA Agreement by deliberately concealing facts and misrepresenting Founders’s

ability to handle the volume of business that LIAC expected to generate. The two parties held

meetings in both Illinois and Michigan to negotiate the MGA Agreement. In its complaint, LIAC

alleges that, during these meetings, Founders representatives informed LIAC that Founders was

knowledgeable about Michigan’s no-fault insurance law, that it had sufficient staff and resources to

handle and promptly service the 3,000 policy applications that would be generated each month, and

that it averaged an eight-day turnaround time between the date a customer filled out an application

and the date that policy materials were mailed to the customer.

       LIAC contends that each of the above assertions was false. Further, LIAC alleges that

Founders knew these assertions were false at the time, knew that LIAC would rely on them, and

deliberately used them to induce LIAC to enter the MGA Agreement.



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LIAC, Inc. v. Founders
       Founders denied that it made any false assertions. It argued that LIAC executives had the

opportunity to verify any of Founders’s precontract representations and that LIAC in fact admitted

during discovery that its executives had done so. According to Founders, the merger clause in the

MGA Agreement establishes that LIAC was not relying on any promises or representations not

included in the Agreement.

       The district court, relying on UAW-GM Human Resource Center v. KSL Recreation Corp.,

579 N.W.2d 411 (Mich. Ct. App. 1998), agreed. KSL Recreation held that where the parties to an

agreement include an integration or merger clause in their written contract, “it is conclusive and

parol evidence is not admissible to show that the agreement is not integrated except in cases of fraud

that invalidate the integration clause or where an agreement is obviously incomplete ‘on its face’

and, therefore, parol evidence is necessary for the ‘filling of gaps.’” 579 N.W.2d at 418 (citing 3

Corbin, Contracts § 578). The district court noted that the Michigan Supreme Court had recently

cited KSL Recreation with approval in Archambo v. Lawyers Title Ins. Corp., 646 N.W.2d 170, 177

(Mich. 2002), an opinion discussing the importance of adhering to a written contract.

       After finding that both parties were “sophisticated businessmen,” the district court ruled that

it was unreasonable for LIAC to rely on any representation not included in the MGA Agreement.

LIAC’s fraudulent-inducement claim, according to the district court, was insufficient to “vitiate the

merger clause.”

       Under Michigan law, the tort of fraudulent inducement “occurs where a party materially

misrepresents future conduct under circumstances in which the assertions may reasonably be

expected to be relied upon and are relied upon.” Samuel D. Begola Servs., Inc. v. Wild Bros., 534

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No. 06-1196
LIAC, Inc. v. Founders
N.W.2d 217,219 (Mich. Ct. App. 1995) (citing Kefuss v. Whitley, 189 N.W. 76, 81 (Mich. 1922)).

A contract procured by fraud may be voided by the defrauded party. Begola Servs., 534 N.W.2d at

219. Because fraudulent inducement is a tort claim, not a contract claim, parol evidence is generally

admissible. See KSL Recreation, 579 N.W.2d at 418. But only certain types of fraud serve to void

a contract where the contract contains a merger clause. As the KSL Recreation court explained:

       In other words, while parol evidence is generally admissible to prove fraud, fraud that
       relates solely to an oral agreement that was nullified by a valid merger clause would
       have no effect on the validity of the contract. Thus, when a contract contains a valid
       merger clause, the only fraud that could vitiate the contract is fraud that would
       invalidate the merger clause itself, i.e., fraud relating to the merger clause or fraud
       that invalidates the entire contract including the merger clause.

Id. at 419 (citing 3 Corbin, Contracts § 578).

       The key question regarding contracts that contain a merger clause is whether one party

justifiably relied on the representations of the other where the written agreement not only failed to

include those representations, but clearly stated that by signing the contract the parties were agreeing

that the written document made up their entire agreement. See Star Ins. Co. v. United Commercial

Ins. Agency, Inc., 392 F. Supp. 2d 927, 929-30 (E.D. Mich. 2005) (holding that the counter-plaintiff

insurance company could raise a fraudulent-inducement claim despite the presence of a merger

clause in the disputed contract). Moreover,

       [t]here is an important distinction between (a) representations of fact made by one
       party to another to induce that party to enter into a contract, and (b) collateral
       agreements or understandings between two parties that are not expressed in a written
       contract. It is only the latter that are eviscerated by a merger clause, even if such
       were the product of misrepresentation. It stretches the [KSL Recreation] ruling too
       far to say that any pre-contractual factual misrepresentations made by a party to a
       contract are wiped away by simply including a merger clause in the final contract.


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No. 06-1196
LIAC, Inc. v. Founders
Id. at 928-29.

        The merger clause in the present case accordingly does not preclude consideration of all

extrinsic evidence in reviewing LIAC’s fraudulent-inducement claim. Unfortunately, we cannot

determine from the rather abbreviated discussion by the district court what evidence it considered

in concluding that the claim failed on its merits.

        LIAC opposed Founders’s motion for summary judgment by submitting deposition testimony

from two of LIAC’s executives (Richard Clark and John Wolding) and two of Founders’s senior

employees (Steven Bosey and David Mirza). Bosey, Founders’s vice president of marketing at the

time of the MGA Agreement, testified in his deposition that Founders was “not prepared” for the

nature and volume of LIAC’s business:

        [W]e were not prepared and we did not gear up to handle this business. . . . It was
        a different kind of business so it took longer to — for the underwriters to issue. . . .
        They are not used to it. You know, it just — initially it was — I wouldn’t call it a
        disaster, but it was — you know, we weren’t doing what we were supposed to do.

Bosey also testified that Founders’s president, Dave Lathrup, told LIAC that “[Lathrup] was

committed to a long-term relationship . . . and he actually cited . . . numerous agents in Illinois that

[Founders] had been doing business with for many, many years as an example.”

        LIAC argues on appeal, as it did in the district court below, that Founders misled LIAC’s

executives by representing that Founders was familiar with Michigan’s no-fault insurance law, that

Founders had sufficient staff to service in a timely fashion the volume of business that LIAC

projected it would generate, and that Founders had the physical resources to handle the “rollover”

of LIAC’s existing business from its previous insurer. What is missing from LIAC’s argument on


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No. 06-1196
LIAC, Inc. v. Founders
appeal, however, is a discussion of how Founders’s alleged misrepresentations constitute fraud either

as to the merger clause itself or as to the contract as a whole. LIAC cofounder John Wolding

contended in his deposition testimony that LIAC “didn’t like some of the stuff that was in [the MGA

Agreement],” but that Founders told them it was “just boilerplate” and “had to be done that way.”

Wolding did not identify which sections were identified specifically as concerns to LIAC. Nothing

in the record, in fact, indicates that LIAC ever questioned the presence or purpose of the merger

clause. Wolding further admitted that he signed the MGA Agreement notwithstanding the offending

language. Consequently, we conclude that LIAC has not provided a basis for finding that Founders

fraudulently induced LIAC’s acceptance of the merger clause.

       A closer question is presented as to whether Founders’s alleged misrepresentations constitute

fraud as to the MGA Agreement as a whole. The entire Agreement comprises 13 pages, of which

only five deal with the substantive obligations of the parties. Founders’s duties are set forth with

particular brevity. LIAC’s argument appears to be that Founders induced LIAC to enter an

agreement that was materially different from the contract it expected, based on Founders’s alleged

misrepresentations. Construed in this manner, LIAC’s argument could be understood as going to

the contract as a whole.

       But the record does not support such an interpretation. All of LIAC’s arguments go to the

quality and extent of Founders’s performance, not to the absence of such performance. LIAC never

attempted to meet with Founders to discuss the performance problems, despite LIAC’s right under

the MGA Agreement to have an “executive-level meeting” at which the parties could “discuss

suggestions, concerns, issues, and the like.” Common indicia of fraudulent inducement are also

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LIAC, Inc. v. Founders
absent here: the MGA Agreement is not extremely one-sided, the parties do not have a family

relationship, and LIAC does not allege that its principals were manipulated because of their age or

health conditions. See Tocco v. Tocco, 409 F. Supp. 2d 816, 827 (E.D. Mich. 2005) (determining

that the plaintiff-grandfather demonstrated a strong likelihood of success on his

fraudulent-inducement claim where his grandson “tricked” him into executing a closing document

for the sale of property in exchange for worthless promissory notes).

       LIAC instead admitted that it had read and understood the MGA Agreement before signing.

As the party concerned about Founders’s future performance, LIAC was best suited to demand that

the MGA Agreement include explicit provisions reiterating all of the oral representations that

Founders allegedly made. The lack of such provisions is all the more inexplicable because LIAC

admitted that it had previously experienced difficulties with application-processing time under a

contract with a different financial services company. In sum, LIAC failed to raise a genuine issue

of material fact in support of its claim that Founders fraudulently induced LIAC’s agreement to the

contract as a whole. We therefore affirm the district court’s decision on that claim.

C.     Breach of contract

       LIAC also argues that the district court erred in granting summary judgment to Founders on

LIAC’s breach-of-contract claim. Specifically, LIAC contends that the MGA Agreement is missing

a number of essential terms. It makes this argument despite the merger clause contained in the MGA

Agreement, and claims that these missing terms necessitate consideration of extrinsic evidence in

order to construe the contract in keeping with the parties’ intent at the time it was signed. Most

notably, the MGA Agreement fails to impose any affirmative duty or obligation on Founders to issue

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No. 06-1196
LIAC, Inc. v. Founders
insurance policies, although it explicitly requires LIAC to “solicit, bind, and service” nonstandard

policies and prohibits LIAC itself from underwriting or issuing policies. Founders’s express

obligations under the MGA Agreement are to pay LIAC a commission for “all services rendered and

expenses incurred under this Agreement,” to pay a portion of a processing fee charged against an

insured’s partial payment of the total premium due, and to refrain from appointing “any producer or

managing general agent to solicit business in . . . Michigan at a commission rate equal to or lower

than” that paid to LIAC. The MGA Agreement further requires Founders to provide an adequate

supply of policy forms and endorsements to LIAC.

       But the MGA Agreement fails to set a deadline for Founders to issue policies and mail

invoices. LIAC contends, however, that the parties clearly contemplated that Founders would act

in good faith to meet industry standards in this regard. As a result, LIAC argues that when Founders

did not process applications promptly or mail invoices in time for the insured to pay before the next

premium due date, Founders breached the MGA Agreement.

       Founders’s response rests heavily on the presence of the merger clause in the MGA

Agreement. The merger clause states in no uncertain terms that the MGA Agreement represented

the “entire agreement” between the parties and that it “supersede[d] any prior agreements between

them.” Founders asserts that LIAC’s inability to identify any specific provision of the MGA

Agreement that Founders breached dooms the breach-of-contract claim on appeal. And even if the

merger clause does not bar consideration of extrinsic evidence, Founders reiterates that LIAC’s

executives testified not only that they had the opportunity to verify Founders’s precontract assertions

about staffing levels and familiarity with Michigan insurance law, but that they in fact did so.

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No. 06-1196
LIAC, Inc. v. Founders
Founders’s argument, in other words, is that LIAC got the contract it negotiated for, but is now

seeking to have the courts rewrite the contract on more favorable terms.

       At oral argument, Founders also contended for the first time that we should find that the

parties never had a “meeting of the minds,” thus obviating the contract between them. Founders

forfeited this argument, however, by failing to raise it at any prior point in the proceedings. See

United States v. Boumelhem, 339 F.3d 414, 428 (6th Cir. 2003) (finding that the appellee forfeited

an argument that it had failed to raise below and on which the record was not developed). More to

the point, the argument is specious. Founders was the primary drafter of the MGA Agreement, and

is thus in a poor position to argue its invalidity. See Diversified Energy, Inc. v. Tenn. Valley Auth.,

223 F.3d 328, 339 (6th Cir. 2000) (“It is well-settled that courts are to construe ambiguities against

the drafter of a contract . . . .”). We will accordingly discuss this argument no further.

       The Illinois parol evidence rule “generally precludes evidence of understandings, not

reflected in a writing, reached before or at the time of its execution which would vary or modify its

terms.” J&B Steel Contractors, Inc. v. C. Iber & Sons, Inc., 642 N.E.2d 1215, 1217 (Ill. 1994). If,

however, the written agreement is incomplete and therefore only partially integrated, the parol

evidence rule would not preclude consideration of additional consistent terms. Id. at 1220. Under

Illinois law, which governs LIAC’s breach-of-contract claim, merger or integration clauses generally

operate to supersede all prior agreements. Barille v. Sears, Roebuck & Co., 682 N.E.2d 118, 123 (Ill.

App. Ct. 2002) (“It is well settled under the doctrine of merger and the parol evidence rule that a

written agreement which is complete on its face supersedes all prior agreements on the same subject



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No. 06-1196
LIAC, Inc. v. Founders
matter and bars the introduction of evidence concerning any prior term or agreement of that subject

matter.”)

       A merger clause prevents a court from considering evidence outside the “four corners” of the

contract to construe the contract terms unless one or more of those terms is ambiguous on its face.

Air Safety, Inc. v. Teachers Realty Corp., 706 N.E.2d 882, 885 (Ill. 1999) (“[W]here parties formally

include an integration clause in their contract, they are explicitly manifesting their intention to

protect themselves against misinterpretations which might arise from extrinsic evidence.”). The

Illinois Supreme Court elaborated on this point as follows:

       During contract negotiations, a party may propose terms, conditions, and provisions
       which are ultimately rejected in order to reach a compromise with the other party.
       That other party, of course, may do the same. The integration clause makes clear that
       the negotiations leading to the written contract are not the agreement. Accordingly,
       considering extrinsic evidence of prior negotiations to create an “extrinsic ambiguity”
       where both parties explicitly agree that such evidence will not be considered ignores
       the express intentions of the parties and renders integration clauses null.

Id. (emphasis in original).

       LIAC does not argue that the merger clause is ambiguous or that it was fraudulently induced

to sign the MGA Agreement despite the presence of the clause. In fact, LIAC cofounder Richard

Clark admitted in his deposition testimony that he “vaguely” looked at the MGA Agreement before

he signed it, that he had the opportunity to ask questions about it, and that he agreed with its terms

when he signed it. LIAC nevertheless contends that the contract was not fully integrated, thereby

warranting the consideration of parol evidence that is consistent with the MGA Agreement’s written

terms and provides proof that Founders breached the contract.



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LIAC, Inc. v. Founders
       “The rule in cases not governed by the [UCC] is that only the subject writing may be

considered to determine the integration question.” J&B Steel, 642 N.E.2d at 1218. Here, the MGA

Agreement requires that LIAC sell insurance policies, notify Founders of any claims against a

Founders-issued policy, comply with all applicable laws and regulations, notify Founders of any

violation of a law or regulation, and maintain competent and trained staff and sufficient resources

to meet its contractual obligations. The MGA Agreement further provides for LIAC and Founders

to maintain and reconcile records of transactions involving insurance policies, and for Founders to

pay commissions to LIAC. Section 2.B.i. of the MGA Agreement specifies that it shall be

Founders’s “exclusive duty” to “underwrite, issue, endorse, renew, cancel, rescind, or reinstate

policies of insurance or to adjust claims on any such policies.”

       Among the things that the MGA Agreement does not specify are whether Founders has any

discretion over the timetable for issuing policies or mailing invoices for payment, and whether there

is a minimum or maximum required number of policies that LIAC must sell. LIAC contends that

the MGA Agreement’s silence on these questions must be understood as vesting Founders with

discretion and that, accordingly, the implied covenant of good faith and fair dealing governs

Founders’s contractual performance. In response, Founders reiterates the conclusion of the district

court—namely, that under Illinois law, the covenant of good faith and fair dealing is not an

independent source of duties and does not create a cause of action.

       The Seventh Circuit considered the effect of this covenant in Beraha v. Baxter Health Care

Corp., 956 F.2d 1436, 1443-45 (7th Cir. 1992), a case involving a dispute between a licensor and

its licensee over a medical device. After noting that in Illinois “every contract implies good faith and

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No. 06-1196
LIAC, Inc. v. Founders
fair dealing between the parties to it,” id. at 1443, the Seventh Circuit concluded that the covenant

“guides the construction of explicit terms in an agreement.” Id. Where an agreement “is susceptible

of two conflicting constructions, one which imputes bad faith to one of the parties and the other does

not, the latter construction should be adopted.” Martindell v. Lake Shore Nat’l Bank, 154 N.E.2d

683, 690 (Ill. 1958).

       Founders contends that adopting LIAC’s view of the contract would necessarily impute bad

faith to Founders. We disagree. The explicit terms of the MGA Agreement vest Founders with the

“exclusive duty” of issuing and underwriting insurance policies to Michigan residents who were

solicited by LIAC. But the MGA Agreement does not specify when Founders must issue the policies

or mail the invoices. We should therefore look to the implied covenant of good faith and fair dealing

in order to construe the extent of Founders’s obligations under the MGA Agreement. The covenant

limits Founders’s discretion, such that it “must exercise that discretion reasonably and with proper

motive, and may not do so arbitrarily, capriciously, or in a manner inconsistent with the reasonable

expectations of the parties.” Dayan v. McDonald’s Corp., 466 N.E.2d 958, 972 (Ill. App. Ct. 1984).

       Founders seems to be arguing that it could exercise its “exclusive duty” to issue policies and

mail invoices at whatever pace it saw fit, or not at all. This is contrary to the implied covenant of

good faith and fair dealing under Illinois law. Taking the evidence in the light most favorable to

LIAC, as we are required to do in evaluating Founders’s motion for summary judgment, we conclude

that LIAC has raised a genuine issue of material fact as to whether Founders breached the MGA

Agreement.



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LIAC, Inc. v. Founders
                                     III. CONCLUSION

       For all of the reasons set forth above, we AFFIRM the judgment of the district court as to

LIAC’s fraudulent-inducement claim, REVERSE the judgment as to the breach-of-contract claim,

and REMAND the case for further proceedings consistent with this opinion.




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