Bloor v. Falstaff Brewing Corp., s. 555

• Citation: 601 F.2d 609
• Decision Date: 15 May 1979
• Docket Number: Nos. 555,D,558,s. 555
• Parties: 26 UCC Rep.Serv. 281 James BLOOR, as Reorganization Trustee of Balco Properties Corporation, Plaintiff-Appellee and Cross-Appellant, v. FALSTAFF BREWING CORPORATION, Defendant-Appellant and Cross-Appellee. ockets 78-7451, 78-7465.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Page 609

601 F.2d 609 26 UCC Rep.Serv. 281 James BLOOR, as Reorganization Trustee of Balco Properties
Corporation, Plaintiff-Appellee and Cross-Appellant,
v.
FALSTAFF BREWING CORPORATION, Defendant-Appellant and Cross-Appellee. Nos. 555, 558, Dockets 78-7451, 78-7465. United States Court of Appeals,
Second Circuit. Argued March 28, 1979.
Decided May 15, 1979.

Page 610

Robert G. Sugarman, New York City (Weil, Gotshal & Manges, New York City, Joseph H. Weiss, and R. Peyton Gibson, New York City, of counsel), for plaintiff-appellee and cross-appellant.

Lewis A. Kaplan, New York City (Paul, Weiss, Rifkind, Wharton & Garrison, New York City, Andrew Kull, New York City, of counsel), for defendant-appellant and cross-appellee.

Before MOORE, FRIENDLY and MESKILL, Circuit Judges.

FRIENDLY, Circuit Judge:

This action, wherein federal jurisdiction is predicated on diversity of citizenship, 28 U.S.C. § 1332, was brought in the District Court for the Southern District of New York, by James Bloor, Reorganization Trustee of Balco Properties Corporation, formerly named P. Ballantine & Sons (Ballantine), a venerable and once successful brewery based in Newark, N. J. He sought to recover from Falstaff Brewing Corporation (Falstaff) for breach of a contract dated March 31, 1972, wherein Falstaff bought the Ballantine brewing labels, trademarks, accounts receivable, distribution systems and other property except the brewery. The price was $4,000,000 plus a royalty of fifty cents on each barrel of the Ballantine brands sold between April 1, 1972 and March 31, 1978. Although other issues were tried, the appeals concern only two provisions of the contract. These are:

8. Certain Other Covenants of Buyer. (a) After the Closing Date the (Buyer) will use its best efforts to promote and maintain a high volume of sales under the Proprietary Rights.

2(a)(v) (The Buyer will pay a royalty of $.50 per barrel for a period of 6 years), provided, however, that if during the Royalty Period the Buyer substantially discontinues the distribution of beer under the brand name "Ballantine" (except as the result of a restraining order in effect for 30 days issued by a court of competent jurisdiction at the request of a governmental authority), it will pay to the Seller a cash sum equal to the years and fraction thereof remaining in the Royalty Period times $1,100,000, payable in equal monthly installments on the first day of each month commencing with the first month following the month in which such discontinuation occurs . . . .

Bloor claimed that Falstaff had breached the best efforts clause, 8(a), and indeed that its default amounted to the substantial discontinuance that would trigger the liquidated damage clause, 2(a)(v). In an opinion that interestingly traces the history of beer

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back to Domesday Book and beyond, Judge Brieant upheld the first claim and awarded damages but dismissed the second. Falstaff appeals from the former ruling, Bloor from the latter. Both sides also dispute the court's measurement of damages for breach of the best efforts clause.

We shall assume familiarity with Judge Brieant's excellent opinion, 454 F.Supp. 258 (S.D.N.Y.1978), from which we have drawn heavily, and will state only the essentials. Ballantine had been a family owned business, producing low-priced beers primarily for the northeast market, particularly New York, New Jersey, Connecticut and Pennsylvania. Its sales began to decline in 1961, and it lost money from 1965 on. On June 1, 1969, Investors Funding Corporation (IFC), a real estate conglomerate with no experience in brewing, acquired substantially all the stock of Ballantine for $16,290,000. IFC increased advertising expenditures, levelling off in 1971 at $1 million a year. This and other promotional practices, some of dubious legality, led to steady growth in Ballantine's sales despite the increased activities in the northeast of the "nationals" ¹ which have greatly augmented their market shares at the expense of smaller brewers. However, this was a profitless prosperity; there was no month in which Ballantine had earnings and the total loss was $15,500,000 for the 33 months of IFC ownership.

After its acquisition of Ballantine, Falstaff continued the $1 million a year advertising program, IFC's pricing policies, and also its policy of serving smaller accounts not solely through sales to independent distributors, the usual practice in the industry, but by use of its own warehouses and trucks the only change being a shift of the retail distribution system from Newark to North Bergen, N.J., when brewing was concentrated at Falstaff's Rhode Island brewery. However, sales declined and Falstaff claims to have lost $22 million in its Ballantine brand operations from March 31, 1972 to June 1975. Its other activities were also performing indifferently, although with no such losses as were being incurred in the sale of Ballantine products, and it was facing inability to meet payrolls and other debts. In March and April 1975 control of Falstaff passed to Paul Kalmanovitz, a businessman with 40 years experience in the brewing industry. After having first advanced $3 million to enable Falstaff to meet its payrolls and other pressing debts, he later supplied an additional $10 million and made loan guarantees, in return for which he received convertible preferred shares in an amount that endowed him with 35% Of the voting power and became the beneficiary of a...