643 F.3d 35 (1st Cir. 2011), 10-2086, House of Flavors, Inc. v. TFG Michigan, L.P.

Docket Nº:10-2086.
Citation:643 F.3d 35
Opinion Judge:BOUDIN, Circuit Judge.
Party Name:HOUSE OF FLAVORS, INC., Plaintiff, Appellee, v. TFG MICHIGAN, L.P., Defendant, Appellant.
Attorney:Richard F. Ensor with whom Vantus Law Group, P.C., Alexia Pappas and Verrill Dana, LLP were on brief for appellant. Lee H. Bals with whom Marcus, Clegg & Mistretta, P.A. was on brief for appellee.
Judge Panel:Before LYNCH, Chief Judge, TORRUELLA and BOUDIN, Circuit Judges.
Case Date:June 23, 2011
Court:United States Courts of Appeals, Court of Appeals for the First Circuit

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643 F.3d 35 (1st Cir. 2011)

HOUSE OF FLAVORS, INC., Plaintiff, Appellee,


TFG MICHIGAN, L.P., Defendant, Appellant.

No. 10-2086.

United States Court of Appeals, First Circuit.

June 23, 2011

Heard May 2, 2011.

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Richard F. Ensor with whom Vantus Law Group, P.C., Alexia Pappas and Verrill Dana, LLP were on brief for appellant.

Lee H. Bals with whom Marcus, Clegg & Mistretta, P.A. was on brief for appellee.

Before LYNCH, Chief Judge, TORRUELLA and BOUDIN, Circuit Judges.

BOUDIN, Circuit Judge.

Tetra Financial Group, L.P. (" Tetra" ) appeals from a judgment granting House of Flavors, Inc. (" House of Flavors" ) rescission, together with an adjustment payment, of a lease agreement between the parties. Reserving further detail for discussion of the merits, the factual background and proceedings below can be briefly summarized.

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House of Flavors is a company, based in Michigan but with its executive office in Maine, that makes ice cream; its president during the relevant period has been Whit Gallagher. Tetra is a Utah-based limited partnership that specializes in business equipment leasing. In 2005, House of Flavors decided to acquire and install an ice cream hardening system (" the system" ). By coincidence, about this time Gregory Emery, Tetra's national account executive, inquired whether House of Flavors had any projects for which it needed financing.

Tetra drafted a letter of intent, which contemplated that Tetra would finance the acquisition of the system and its very expensive installation costs including further materials costs, that Tetra would hold title to the assembled machine and reap the tax benefits of ownership, and that House of Flavors would have an option at the end of a base period to buy the system or to extend or terminate the lease. During the negotiations with Emery and with Ryan Secrist, Tetra's executive vice president and sales manager, Gallagher insisted that he needed a guaranteed maximum price for the end-of-lease purchase.

Tetra refused to put a fixed price— or at least anything below 20 percent of the total cost of the system as installed— into the lease, saying that to do so could compromise its ability to reap the full tax benefits of ownership. On November 10, 2005, House of Flavors purchased a suitable machine in a Maryland auction for around $105,000 (although the full cost of the system as finally assembled and installed was expected to be much higher), and Gallagher informed Emery of the purchase on November 15, 2005.1

In a conference call with Gallagher on November 18, 2005, Secrist and Emery offered to provide Gallagher with a side letter that would reflect a buyout value of 12 percent of the cost of the system and its installation. Secrist sent a side letter to Gallagher on November 22, 2005, which stated in pertinent part:

Pursuant to our conversation, we have reviewed the list of property expected to be purchased and have estimated an end of term value of ten percent (10%) of its original cost. Please note that this end of term value estimation is not intended to represent a commitment by you, or an obligation by us, to buy or sell the equipment, as the case may be for that, or any other price at the conclusion of the Base (or extended, if applicable) Lease Term.

Shortly after receiving the side letter, Gallagher signed the letter of intent and sent it to Tetra.

In later conversations, Secrist told Gallagher that he could not get a deal approved at Tetra with a ten percent buyout cap, but assured Gallagher that he could get the deal approved at 12 percent. On January 5, 2006, Gallagher told Secrist that he accepted Tetra's revised terms and requested that Tetra begin preparing lease documents. That same day, Tetra sent Gallagher a revised side letter, substantively identical to the first except that it estimated an end-of-term buyout price of 12 percent.

In March 2006, Tetra and House of Flavors executed a Master Lease Agreement, dated January 13, 2006, which provided in pertinent part that ownership of the system as installed would transfer to Tetra,

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and that at the end of the thirty-six month lease term, House of Flavors

shall ... elect one of the following options: (i) purchase [the system and associated equipment] for a price to be agreed upon by both [Tetra] and [House of Flavors], (ii) extend the Lease for twelve (12) additional months ... or (iii) return the [system] to [Tetra] at [House of Flavors'] expense....

No reference to a fixed price or the 12 percent figure appears in the final agreement, but the agreement did provide for payments by House of Flavors during the construction period as Tetra was providing loan funds.

From March to August 2006, Tetra funded the installation of the system in the House of Flavors plant, at a final cost of $1,435,130.36. On August 30, 2006, House of Flavors executed a bill of sale of the system, transferring ownership to Tetra. That same day, the parties executed a lease schedule that incorporated the conditions of the Master Lease Agreement and provided that House of Flavors would make monthly payments during the lease period.

Two years later, in August 2008, Gallagher approached Tetra about buying out the system early, and on August 28, 2008, Tetra informed House of Flavors that the price for acquiring the system would be $571,468.90— around 40 percent of the original cost of the equipment and installation. Confronted with the side letter, Tetra eventually lowered the price to 35 percent and later to 30 percent; but...

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