House of Flavors Inc. v. Tfg Mich., 10–2086.

Citation643 F.3d 35
Decision Date23 June 2011
Docket NumberNo. 10–2086.,10–2086.
PartiesHOUSE OF FLAVORS, INC., Plaintiff, Appellee,v.TFG MICHIGAN, L.P., Defendant, Appellant.
CourtUnited States Courts of Appeals. United States Court of Appeals (1st Circuit)

OPINION TEXT STARTS HERE

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.

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, 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 Gallagher would not agree to more than 12 percent and in February 2009 House of Flavors brought suit in federal district court.

The complaint asserted claims for breach of contract and the covenant of good faith and fair dealing, violation of the Utah Unfair Practices Act, promissory estoppel and fraud. In December 2009, Tetra secured partial summary judgment dismissing all claims save for the last two. While the district judge flatly rejected the claim that there was a contractual agreement for the 12 percent figure, he pointed to the “estimate” in the final side letter as raising a fraud question, noting that fraud might void the lease.2

The district court held a three-day bench trial on April 13–15, 2010, and, on June 17, 2010, filed a decision finding against House of Flavors on the promissory estoppel claim but for it on the fraud claim. On the former, the court rejected the claim that Tetra had promised to sell the system back at the 12 percent figure; on the latter, the court held that Tetra had fraudulently professed to have estimated 12 percent as the price when in fact it had made no estimate whatever.

As an equitable remedy “analogous to rescission,” the district court sought to unwind the transaction by requiring Tetra to transfer title of the system back to House of Flavors. The court asked each side to make a further filing to help the court shape the rescission remedy, although (given their responses) the parties may not have fully understood just what was expected of them. 3 What both sides did understand was that the remedy would entail the transfer of the system back to House of Flavors.

In all events, House of Flavors projected a handsome recovery for itself over and above recapturing title to the system. Tetra, by contrast, argued that a full restoration of benefits was an incalculable objective; but it supplied some figures useful to the district court. In the end, the court devised its own remedy drawing on the filings and scattered figures appeared in a record that had been compiled primarily to decide the merits rather than the remedy.

Ultimately, the court ordered Tetra to convey the system to House of Flavors and pay it $27,097. To arrive at this figure, the court calculated what it thought was the balance due between the parties, assuming that the system passed back to House of Flavors based on the 12 percent purchase price and taking account of what Tetra had been promised, what it had received, and what was needed to compensate House of Flavors for an extra cost it incurred due to Tetra's delaying the exercise of the purchase option. The court's theory and calculation are described in more detail below.

Tetra then filed a motion to reconsider, pointing out that the court's calculations omitted certain payments that House of Flavors had owed under the agreement. If taken into account, Tetra said that these amounts meant that it was still due about $150,000 even if all of the other calculations were accepted. House of Flavors said it was too late for Tetra to offer new evidence, and the district court agreed, denying the motion. This appeal followed.

The rescission remedy. In this court, Tetra first argues that House of Flavors switched theories in mid-course. It notes that House of Flavors' complaint, and initial efforts to litigate the case, urged that Tetra was bound (under contract, promissory estoppel, and related doctrines) to sell the assets for 12 percent. Such a legal commitment was rejected by the district court in its grant of partial summary judgment for Tetra.

Therefore, Tetra asserts, the complaint did not fairly give warning that rescission would be sought and that House of Flavors formally proposed this remedy only six weeks before trial. But the complaint had also charged fraud; rescission is an available remedy, see Mecham v. Benson, 590 P.2d 304, 307–08 (Utah 1979); and the court can award any relief to which the party is entitled, Fed.R.Civ.P. 54(c); United States v. Marin, 651 F.2d 24, 31 (1st Cir.1981); see also Bontkowski v. Smith, 305 F.3d 757, 762 (7th Cir.2002) (Posner, J.).

Of course, when a case evolves in a new direction not fairly foreseeable, a surprised party may be entitled to additional time to prepare. Tetra could have pressed for a delay on this ground, and the judge—who had more or less suggested that remedy—would have been hard put to deny a reasonable request. But Tetra, who knew that the case had changed direction in December 2009, made no...

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