243 F.3d 130 (3rd Cir. 2001), 00-5112, Gleason v Norwest Mortgage Inc.

Docket Nº:00-5112
Citation:243 F.3d 130
Case Date:March 09, 2001
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit

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243 F.3d 130 (3rd Cir. 2001)




No. 00-5112

United States Court of Appeals, Third Circuit

March 9, 2001

Argued: October 6, 2000

Appeal from the United States District Court For the District of New Jersey District Judge: Honorable Alfred J. Lechner, Jr. District Judge: Honorable Katharine S. Hayden

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Counsel for Appellant: James W. Dabney (Argued) Katharine E. Smith Pennie & Edmonds, Llp 1155 Avenue of the Americas New York, NY 10036

Counsel for Appellee: Lawrence M. Rolnick (Argued) Michael D. Lichtenstein Lowenstein Sandler, PC 65 Livingston Avenue Roseland, NJ 07068

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Before: Barry, Ambro, and Rosenn, Circuit Judges.

Rosenn, Circuit Judge.

This multi-issue appeal has its origin in the sale of a company subject to an apparently simple "right of first offer." Cristen Gleason ("Gleason") founded U.S. Recognition, Inc. ("USR" or "Company") to develop and sell computer systems and software to search, store, and retrieve real estate listing information. In October 1991, Gleason agreed to sell all of his capital stock in USR to the defendant, Norwest Mortgage, Inc. ("Norwest"), a national mortgage banking company. The sale contract provided that if Norwest decided to sell USR within the first five years after the closing date of this sale, it was obliged first to offer it to Gleason. If Gleason did not accept the offer within thirty days, Norwest was free to sell USR to another buyer on terms substantially similar to those offered to Gleason.

Norwest sold USR to Moore Business Forms, Inc. ("Moore") in 1996. Gleason claims that Norwest neither made him the first offer to buy USR nor sold USR at terms substantially similar to those offered to and accepted by Moore. Gleason moved in a New Jersey state court for a preliminary injunction to restrain Norwest from proceeding with the sale. Norwest removed the action to the United States District Court for the District of New Jersey, where the Court, on October 10, 1996, denied the motion for the injunction. The District Court later granted summary judgment for Norwest and against Gleason. We affirm in part and reverse in part and remand for further proceedings as are consistent with this opinion.


Gleason founded USR in 1984 to develop and sell computer systems and software to store, search, and retrieve real estate listing information. On October 25, 1991, Gleason agreed to sell all of the capital stock in the Company to Norwest for $1.3 million. Gleason remained as President of USR. The stock purchase agreement ("SPA") included provisions requiring Norwest to maintain USR as a separate profit center for at least five years. Particularly pertinent to this appeal, § 9.2 of the SPA specifically provided:

[Norwest] agrees that if it decides to sell USR at any time during the first five years after the Closing Date, it will first offer USR to [Mr. Gleason]. [Mr. Gleason] shall have 30 days to accept the offer, and if not accepted within the 30 days, [Norwest] shall be free to sell USR to anyone else on terms substantially similar to those offered to [Mr. Gleason].

In early 1993, Norwest acquired Boris Systems, Inc. ("Boris"), USR's former competitor. As early as September 1995, Norwest began investigating the sale of Boris and USR as a package. Norwest created an "Offering Memorandum" and other internal and external documents expressing an interest to solicit offers for its USR and Boris subsidiaries. By early 1996, after preliminary discussions with several potential buyers, Norwest's discussions began with Moore. Commencing in May 1996 and through June and July 1996, the negotiations between Norwest and Moore progressed and intensified. On May 15, 1996, Moore wrote Norwest that it "received corporate approval to proceed with... negotiations which will hopefully result in Moore's acquisition of Boris and [USR]." Moore also proposed a price of $11.5 million for both companies and a general outline of a process to "maximize the certainty of closing," including a confidentiality agreement. Id.

On June 11, 1996, Norwest responded through its investment bank to Moore's proposal, stating it wanted to move toward a definitive agreement with Moore, and would be prepared to cease temporarily preparation of a formal auction for Boris and USR if Moore accepted Norwest's counter-proposal terms, viz: 1) $15 million purchase price; 2) Norwest receives participation

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rights for two years on any initiatives relating to the origination of first mortgage loans through any product offerings by Moore; 3) Moore completes its preliminary due diligence process during any two consecutive day period within nine days of June 11, to be performed off USR's premises; 4) Moore enters a definitive agreement with Norwest by June 28, 1996; 5) Moore must not disclose the possible sale of Boris or USR during due diligence; and 6) Moore pays a $1.5 million break-up fee if it fails to close the transaction. On June 26, 1996, Moore wrote Norwest stating it received corporate approval to proceed with negotiations for the acquisition of Boris and USR, and was making a "non-binding proposal" to pay $13.5 million. Moore also proposed other pre- and post-closing procedures.

Gleason first learned about Moore's interest in USR and Boris on June 26, 1996, when Norwest Executive Vice President Mike Keller ("Keller") invited Gleason to dinner and told him that Norwest wanted $14 million for Boris and USR, that Norwest expected to sign an agreement with Moore within a few days, and that the $14 million price was allocated $12 million for Boris and $2 million for USR. Gleason stated that he wanted to buy both companies; Keller was noncommittal.

On July 3, 1996, Moore wrote to Norwest stating that: 1) Moore received corporate approval to proceed with negotiations which hopefully would result in Moore's acquisition of Boris and USR; 2) it would pay $14 million for USR and Boris; 3) it required certain procedures during the pre-closing due diligence process; and 4) the letter was a "non-binding proposal for how Moore... would acquire Boris and [USR]." Norwest responded on July 8, 1996 stating that the proposed terms were acceptable, and that it had assigned resources to assist Moore's pre-diligence process. Moore later produced, at Norwest's request, a "Valuation Estimate Split" attributing $3.5 million of the proposed $14 million purchase price to USR.

On July 19, 1996, Norwest formally offer ed to sell USR's stock to Gleason for $3.5 million, subject to the following terms: 1) Norwest would have a right to participate in any initiatives for mortgage-related transactional services and products offered by USR; 2) a definitive agreement of sale must be entered within thirty days, and Gleason would have to place a "break-up" fee into escrow upon execution; 3) Norwest would provide transitional accounting and human resources services for the balance of 1996 at no charge; 4) Gleason would have thirty days to accept the offer by formal execution of a mutually agreeable definitive stock purchase agreement and by providing evidence that financing acceptable to Norwest was in place; 5) if Gleason accepted the offer, the purchase must close within 15 days from the date of execution of the definitive agreement; and 6) the due diligence process was limited to no more than three days, and must be performed off-site from USR's operations.

Gleason wrote to Norwest on August 14 stating, inter alia, that: 1) he was interested in acquiring USR and Boris; 2) negotiations with financing sources were "encouraging;" 3) the terms Norwest offered were unlikely to be met in the time frame proposed; 4) if the price for USR changed, he was entitled to another opportunity to purchase USR; 5) he had questions about how a Norwest software package called "Win-2" would be administered after USR's sale;1 and 6) he would be interested in a leveraged buyout if negotiations with Moore became difficult.

By August 19, 1996, the day after Norwest's offer to Gleason expired, the price for Boris and USR offered by Moore had

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fallen to $13.5 million. Gleason, by letter dated August 19, 1996, offered Norwest $3.5 million for USR pending clarification of the Win-2 software asset. In that letter, Gleason, explaining that he retained an investment bank (Alex. Brown) to assist in obtaining financing, also offered $13.5 million for USR and Boris. Gleason also asked for more time to negotiate and close a deal. On August 19, Alex. Brown wrote to Norwest requesting: 1) confirmation of the offering price and terms for Boris and USR; and 2) a sample definitive agreement. Norwest did not respond to either the August 19 letters from Gleason and Alex. Brown or the August 14 letter from Gleason. Norwest, however, worked toward executing binding agreements with Moore.

On September 6, 1996, Gleason, moving for a preliminary injunction restraining Norwest from selling USR and Boris, brought a civil action against Norwest in the Superior Court of New Jersey, Passaic County. Norwest removed the action to the United States District Court, and successfully opposed the preliminary injunction. On September 24, 1996, in anticipation of the impending sale of USR and Boris, Norwest caused Boris and USR to execute a cross-licensing agreement confirming that both USR and Boris had full ownership of WIN-2. On September 27, 1996, Norwest and Moore signed two stock purchase agreements, one for Boris and one for USR, but the parties did not close on the transactions. Moore agreed to pay $3.5 million for USR.

Apparently out of a sense of caution, on September 27, 1996, Norwest again offered to sell USR to...

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