## Facts

- Herzog Contracting Corporation acquired assets of a metal-hose business from McGowen Corporation via an asset-purchase agreement, which Herzog assigned to its wholly owned subsidiary, Tru-Flex Metal Hose Corp.
- The asset-purchase agreement required annual payments of $500,000 from Tru-Flex to McGowen.
- Herzog advanced $400,000 to McGowen, and McGowen executed two promissory notes payable to Tru-Flex totaling $400,000 at 11.5% interest plus costs of collection, including reasonable attorney’s fees.
- Herzog treated the $400,000 as a loan evidenced by enforceable notes; McGowen claimed the $400,000 was a partial prepayment of the purchase price and the “loan” form was used to defer taxable income.
- After disputes, Herzog refused to make further payments under the asset-purchase agreement, and McGowen sued Herzog in Indiana state court for breach.
- Tru-Flex assigned the promissory notes to Herzog, and Herzog sued McGowen in federal court to collect on the notes; Herzog conceded it was not a holder in due course.

## Issues

1. Whether the notice of appeal was timely when the district court first entered summary judgment without stating a dollar amount and later entered an amended judgment specifying the amount “nunc pro tunc.”
2. Whether the assignment of the notes from Tru-Flex to Herzog was an improper or collusive device to create diversity jurisdiction under 28 U.S.C. § 1359.
3. Whether, in an action by a non-holder in due course, parol evidence is admissible to show that facially unconditional promissory notes were issued for a limited purpose and were not intended to create an enforceable obligation.

## Decision

- The court held the appeal was timely because the initial judgment was final even without a stated sum where the amount was mechanically computable from the notes and stated interest rate.
- The court held the record did not show a collusive assignment under 28 U.S.C. § 1359; unrebutted affidavits supported legitimate business reasons for the intra-corporate assignment.
- The court reversed summary judgment because the district court improperly excluded parol evidence supporting McGowen’s defense that the notes were limited-purpose instruments not meant to be enforced.
- The case was remanded for further proceedings with parol evidence permitted on intent and purpose of the notes.

## Legal Principles

- A judgment may be final for appellate purposes even if it omits a sum certain, when the amount of relief is mechanically computable from the governing instruments and specified rates.
- Under 28 U.S.C. § 1359, an assignment is not deemed improper or collusive merely because it has the effect of creating diversity; the challenger must produce evidence that the purpose was jurisdictional manipulation rather than a legitimate business transaction.
- A transferee who is not a holder in due course takes a negotiable instrument subject to defenses available on a simple contract.
- Under Indiana law, parol evidence may be admitted against a non-holder in due course to show that an apparently unconditional promissory note was delivered for a special or limited purpose and was not intended to be an enforceable obligation.

## Conclusion

The Seventh Circuit sustained appellate and diversity jurisdiction but reversed the judgment enforcing the notes, holding that Indiana law allows parol evidence—against a non-holder in due course—to prove the notes were limited-purpose instruments not intended to bind the maker, requiring remand for factfinding on the parties’ intent.


Herzog Contracting Corp. v. McGowen Corp., 976 F.2d 1062 (7th Cir. 1992)