Corenswet, Inc. v. Amana Refrigeration, Inc.

• Decision Date: 30 April 1979
• Docket Number: Nos. 77-1538 and 77-3474,s. 77-1538 and 77-3474
• Citation: 594 F.2d 129
• Parties: 26 UCC Rep.Serv. 301 CORENSWET, INC., Plaintiff-Appellee, v. AMANA REFRIGERATION, INC., Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 129

594 F.2d 129

26 UCC Rep.Serv. 301

CORENSWET, INC., Plaintiff-Appellee, v. AMANA REFRIGERATION, INC., Defendant-Appellant.

Nos. 77-1538 and 77-3474.

United States Court of Appeals Fifth Circuit.

April 30, 1979.

Charles M. Lanier, New Orleans, La., John R. Carpenter, Stephen J. Holtman, Cedar Rapids, Iowa, for defendant-appellant in both cases.

Robert E. Barkley, Jr., New Orleans, La., Bernard D. Craig, Jr., Michael B. Shteamer, Kansas City, Mo., for plaintiff-appellee in both cases.

Ruthledge C. Clement, Jr., New Orleans, La., for defendant-appellant in 77-3474.

Sessions, Fishman, Rosenson, Snellings & Boisfontaine, New Orleans, La., Levy & Craig, Kansas City, Mo., for plaintiff-appellee in 77-3474.

Appeals from the United States District Court for the Eastern District of Louisiana.

Before WISDOM, AINSWORTH, and CLARK, Circuit Judges.

WISDOM, Circuit Judge:

Consolidated appeals in this diversity litigation ¹ arise from the termination of a distributorship. Corenswet, Inc. ², headquartered in New Orleans, has been an authorized, exclusive distributor of certain home appliances manufactured by Amana Refrigeration, Inc. ("Amana"). Corenswet sued to prevent Amana from terminating the relationship, on the ground that Amana's attempted termination was arbitrary and capricious. The district court found that the termination was arbitrary and was therefore in breach of the distributorship agreement as well as of the Uniform Commercial Code's general "good faith" principle. Amana challenges the district court's finding that the termination was arbitrary and without cause. We hold that the finding is not clearly erroneous. That is far from settling the dispute. The court issued a preliminary injunction forbidding the termination. No. 77-1538 is Amana's appeal from that ruling.

While that appeal was pending, Amana drew up a new standard form distributorship agreement, which limited the term of distributorships to one year. Corenswet, alone among Amana's distributors, refused to execute the new agreement, which it viewed as an attempt to circumvent the injunction. Amana responded with the contention that Corenswet's refusal to sign constituted just cause for terminating the distributorship. The district court agreed with Amana that Corenswet's refusal to sign the new contract would constitute cause for termination, but ruled that if Corenswet signed Amana could not refuse to renew the agreement at the end of any one-year term without good reason. Amana's appeal from that ruling is No. 77-3474.

The basic question at the heart of these appeals is whether Amana was entitled to terminate the distributorship arbitrarily. Amana assails the district court's interpretation of the contract to forbid an arbitrary termination, as well as the court's alternative rationale that the attempted termination is barred by the Iowa U.C.C.'s "good faith" principle. We hold that an arbitrary termination is permissible under both the contract and the law of Iowa. We reverse the district court's judgments.

I.

The primary facts are not disputed.

The plaintiff, Corenswet, Inc., is an independent wholesale distributor of appliances, dishware, and similar products. Since 1969 Corenswet has been the exclusive distributor of Amana refrigerators, freezers, room air conditioners, and other merchandise in southern Louisiana. Amana is a Delaware corporation domiciled in Iowa. Under the Amana system, products manufactured by Amana are sold to wholesale distributors such as Corenswet and to Amana's factory wholesale branches. The independent distributors and the factory branches then resell the merchandise to retail dealers who, in turn, sell to the public. The first distributorship agreement executed between Amana and Corenswet was of indefinite duration, but terminable by either party at any time "with or without cause" on ten days' notice to the other party. According tothe record, the agreement was modified twice, in 1971 and again in July 1975, before the institution of this lawsuit. The 1975 agreement modified the termination provision to allow termination by either party "at any time for any reason" on ten days' notice.

As is so often the case with franchise and distributorship relationships, the termination clause in the standard form contract was of little interest or concern to the parties so long as things were going well between them. At the hearing before the district court, Corenswet introduced testimony that it understood, in the early 1970's, that the relationship would be a lasting one, a relationship that would continue so long as Corenswet performed satisfactorily. According to Corenswet, it developed an organization for wholesale distribution of Amana merchandise: it hired a manager and salesmen for the line, as well as specially trained repairmen. Corenswet also expanded its physical plant. In all, Corenswet contended, it invested over $1.5 million over the period of 1969 to 1976 in developing the market for Amana products in the southern Louisiana area. The parties stipulated in district court that the annual sales of Amana products in the distributorship area increased from $200,000 in 1969 to over.$2.5 million in 1976. The number of retail outlets selling Amana products in the area increased from six in 1969 to seventy-two in 1976. Corenswet, in short, developed an important new market for Amana products. And Amana became as important to Corenswet as Corenswet became to Amana: sales of Amana products as a percentage of Corenswet's total sales of all products swelled from six percent in 1969 to nearly twenty-six percent in 1976. Over the seven and one-half-year period, Amana representatives repeatedly praised Corenswet for its performance.

At the 1976 mid-year meeting of Amana distributors, however, George Foerstner, Amana's president, informed Corenswet that Amana would soon terminate its relationship with Corenswet because Corenswet was underfinanced. The parties agree that in early 1976 Corenswet had exceeded its credit limit with Amana, and that Amana at that time indicated that it might have to take a security interest in Corenswet's Amana inventory. According to a January communication from Amana, however, the "problem" was viewed by Amana as "a good kind of problem", reflecting, as it did, the growth of Corenswet's sales and hence purchases of Amana products. It is Corenswet's contention that the problem was not a serious one. Amana executives, the record reflects, assured Corenswet at the 1976 mid-year meeting that "satisfactory arrangements would be made" and that, Foerstner's statement notwithstanding, Corenswet would retain its distributorship.

There followed a complicated sequence of negotiations concerning Amana's security for credit extended. Amana sought a security interest in Corenswet's Amana inventory, to which Corenswet agreed. Amana asked also that Corenswet obtain more working capital from its parent corporation, Select Brands, Inc., as well as a bank letter of credit or line of credit. There is ample evidence in the record that Corenswet responded adequately to each Amana request, but that Amana persisted in changing its requirements as quickly as Corenswet could respond to its requests. In September, 1976, Corenswet met in New Orleans with Amana's representative, George Tolbert. Sam Corenswet, the company's president, informed Tolbert that Corenswet was ready and able to meet Amana's latest request: a $500,000 bank letter of credit. Tolbert relayed the information to Foerstner. Within a week Corenswet received a letter, prepared by Tolbert at Foerstner's direction, notifying Corenswet of its decision to terminate the distributorship because Corenswet was "unable to provide us with what we felt to be the minimum guarantees and/or security to sustain a continuing pattern of growth with Amana".

In October 1976 Corenswet filed suit for damages and injunctive relief in state court alleging that Amana had breached the distributorship agreement by terminating it arbitrarily. The reasons given by Amana for the termination, it contended, were pretextual. The state court issued a temporary restraining order barring termination. The TRO was retained in force after Amana removed the case to federal district court.

The district court conducted a three-day hearing on Corenswet's prayer for a preliminary injunction. The court concluded that Amana had indeed acted arbitrarily in deciding to terminate Corenswet. The record reflects that in early 1976, well before the mid-year distributor meeting, Amana began negotiating with another New Orleans concern, George H. Lehleitner & Co., about transferring its area distributorship to Lehleitner. The beginning of Amana's alleged concern over Corenswet's finances corresponded neatly with its Lehleitner negotiations. There was ample evidence in the record, moreover, to support the district court's conclusion that the real factor motivating Foerstner's decision was animosity towards Fred Schoenfeld, the president of Corenswet's parent corporation, Select Brands, Inc. That animosity dated back to 1972, when Schoenfeld's action in protesting to Raytheon Corporation, Amana's parent, aborted Amana's attempt to transfer the distributorship from Corenswet to Corenswet's then Amana sales manager.

The district court ruled that the arbitrary termination was a breach of the distributorship agreement. The court rejected Amana's argument that the termination clause, which permitted either party to terminate the contract "for any reason", permitted termination for any reason be that reason good, bad, or indifferent. Although unwilling to accept Corenswet's position that the term "for any reason" imported a good or just cause limitation, the court ruled that the term means "for some reason, not for no reason . . . for something that appeals to the reason, to the mind, to the judgment, not for something that is arbitrary, capricious or wanton". In the alternative, the...