999 v. C.I.T. Corp.

Decision Date18 November 1985
Docket NumberNos. 84-6561,85-6562,s. 84-6561
Citation776 F.2d 866
Parties999, a corporation, Plaintiff/Appellee/Cross-Appellant, v. C.I.T. CORPORATION, a corporation, Defendant/Appellant/Cross-Appellee.
CourtU.S. Court of Appeals — Ninth Circuit

Earl Benjamin, Paul, Hastings, Janofsky & Walker, Los Angeles, Cal., for plaintiff, appellee, cross-appellant.

William A. Masterson, Skadden, Arps, Slate, Meagher & Flom, Los Angeles, Cal., William Hughes Mulligan, New York City, for defendant, appellant, cross-appellee.

On Appeal From the United States District Court for the Central District of California.

Before REINHARDT and BEEZER, Circuit Judges, and NIELSEN, * District Judge.

BEEZER, Circuit Judge:

999, a Nevada corporation with its principal place of business in California, brought this diversity of citizenship suit against C.I.T. Corporation ("CIT"), alleging breach of an agreement to provide financing to 999, resulting in the loss of an opportunity to acquire Bee Cee, a Missouri corporation. CIT appeals from a verdict in favor of 999, and 999 filed a cross-appeal to challenge a remittitur of damages. We affirm.

I BACKGROUND

In 1982, 999, a holding corporation, decided to acquire Bee Cee, a manufacturer of windows and doors, which was in serious financial trouble. The plan was to use Bee Cee as a "captive buyer" to manufacture finished windows and doors from aluminum frames processed by another 999 subsidiary.

999 signed a management contract in January, 1982 taking control of Bee Cee's operations and agreeing to purchase the corporation's stock. To maintain Bee Cee in operation pending conclusion of the acquisition, 999 obtained accomodations with Bee Cee's creditors, including its major suppliers and lenders, by agreeing to guarantees of Bee Cee debt. Unsecured creditors were offered payment of 30 percent in satisfaction of those debts.

Bank of America, 999's principal lender, concerned about the advisability of the Bee Cee acquisition, notified 999 in May, 1982 that its financing would not be renewed. 999 then sought replacement financing sufficient to continue its own credit needs and to complete the acquisition of Bee Cee. 999 entered negotiations with CIT to obtain approximately $6 million in financing, $300,000 of which would be invested in Bee Cee.

On August 2, 1982, CIT obtained from 999 a deposit of $25,000 pursuant to a letter, upon which was handwritten the terms of "proposed financing." In September, 1982, CIT informed 999 that it had added a condition of a $25,000 per month prepayment penalty. 999 demanded that the new condition be dropped. When CIT insisted, 999 renewed efforts to find an alternative lender.

Even without financing from CIT, 999 proceeded with plans to acquire Bee Cee. An affiliate of 999 was created to purchase the assets of Bee Cee at a creditor's foreclosure sale in October, 1982. Although 999 had obtained substitute financing, it would not be forthcoming until December. Without such financing, 999 was unable to stave off Bee Cee's creditors. The day before the foreclosure sale was to occur, unsecured creditors of Bee Cee filed an involuntary bankruptcy petition under Chapter 7 of the Bankruptcy Code. 999 subsequently ceased its efforts to acquire Bee Cee and fulfilled its financial obligations to Bee Cee creditors under its guarantees.

999 then brought this action against CIT. At trial, the jury returned two separate verdicts of $1.9 million each for 999, one for breach of contract and an implied covenant of good faith, and one for negligent misrepresentation. The court allowed 999 to accept only one verdict. On CIT's motion for a new trial, the court conditioned its denial on a remittitur in the amount of $925,000. 999 accepted and judgment was entered.

II CIT'S APPEAL
A. Admissions as to Existence of Agreement

On August 2, 1982, Robert J. Sullivan, regional sales manager for CIT, presented to Marge Penfold, president of 999, a letter calling for 999 to make a deposit with CIT of $25,000 and to submit an application for financing. Upon request by Penfold, Sullivan outlined in handwriting upon the letter the terms of "proposed financing." Penfold then signed the letter.

999 contends that this August 2 letter constituted a binding commitment by CIT to provide financing, conditioned only upon an audit to verify the accuracy of 999's financial statements. CIT denies the letter was an agreement to provide financing, as it was addressed to the lender and signed only by the borrower, 999. Rather CIT claims it was only an agreement by CIT to process and review 999's application for financing.

During pre-trial discovery proceedings, 999 served CIT with a request for an admission that the August 2 letter constituted an agreement. After the magistrate issued an order compelling a response, CIT admitted that it was an agreement although it expressly refused to admit what the terms of the agreement were.

At trial, the district court excluded from evidence a September 23, 1982 letter from 999 counsel, Joel F. McIntyre, written to demand that CIT return the deposit of $25,000, and stating that "there is no agreement of any kind between you and our client." The trial court held the September 23 letter was inadmissible because it was inconsistent with the CIT admission that an agreement did exist. The district court denied CIT's motion to withdraw or amend its response to the request for admission.

Federal Rule of Civil Procedure 36(b) provides that any matter admitted in response to a request for admission is "conclusively established" unless the court permits withdrawal or amendment of the admission. The court may permit withdrawal or amendment of an admission--

when the presentation of the merits of the action will be subserved thereby and the party who obtained the admission fails to satisfy the court that withdrawal or amendment will prejudice him in maintaining his action or defense on the merits.

We review a district court's denial of a motion to withdraw or amend a Rule 36 admission for an abuse of discretion. Trial courts are advised to be cautious in exercising their discretion to permit withdrawal or amendment of an admission. See 8 C. Wright & A. Miller, Federal Practice and Procedure Sec. 2264, at 745 (1970 & Supp.1985).

CIT argues that its motion to withdraw the admission was not untimely, even though made in the middle of the trial. CIT claims that it was surprised by the trial court's decision to exclude the September 23 letter as contradictory to the admission, and thus was not aware until that point in time of the need to have the admission withdrawn. This argument cannot be sustained. At the time of the pre-trial conference, 999 raised its objection to introduction into evidence of the September 23 letter on the express ground that it was inconsistent with CIT's admission of an agreement. CIT was fully aware of this objection and yet it failed to move to withdraw the admission prior to trial.

Still, CIT denies that withdrawal of the admission would have resulted in any prejudice to 999. CIT argues that because 999 was fully aware that CIT contested the existence of any financing agreement, 999 was not placed in the position of suddenly needing to obtain additional evidence to prove this matter. CIT asserts the lack of prejudice is plainly shown by the fact that 999 was placing into evidence other proof of the existence of a financing contract.

Had CIT made this argument while moving for withdrawal of the admission before trial, it would have been more persuasive. Instead CIT's motion was not made until the middle of the trial when 999 had nearly rested its case. Once trial begins, a more restrictive standard is to be applied in permitting a party to withdraw or amend an admission. See Brook Village North Associates v. General Electric Co., 686 F.2d 66, 70-73 (1st Cir.1982). The record shows that 999 had relied heavily on the admission as proof of an agreement. The admission already had been shown to the jury through an enlarged duplicate with no objection made by CIT.

CIT's argument actually centers on the trial court's exclusion of the September 23 letter. In its reply brief, CIT effectively concedes that its admission of an agreement was properly placed before the jury but that the September 23 letter should have been available as well. However, even accepting CIT's narrow interpretation of its admission, saying it only acknowledged an application processing agreement, the September 23 letter contravenes that admission by stating there was "no agreement of any kind." 1 Evidence inconsistent with a Rule 36 admission is properly excluded. Fed.R.Civ.P. 36(b) advisory committee note (1970); Shakman v. Democratic Organization of Cook County, 481 F.Supp. 1315, 1346 n. 35 (N.D.Ill.1979).

It might have been appropriate for the trial court to permit introduction of the September 23 letter subject to a cautionary instruction to the jury that CIT had admitted the existence of some type of agreement. But we cannot conclude that the district court's ruling was such a "clear error of judgment" that it constituted an abuse of discretion. See Ellensburg v. Brockway, Inc., 763 F.2d 1091, 1097 (9th Cir.1985).

B. Instruction on Breach of Implied Covenant

CIT assigns as an error of law the district court's submission to the jury of the claim for breach of an implied covenant of good faith and fair dealing. CIT claims that, under California law, breach of an implied covenant may give rise to a cause of action in tort only in the context of an insurance contract or fiduciary relationship. See Seaman's Direct Buying Service, Inc. v. Standard Oil Co. of California, 36 Cal.3d 752, 768, 686 P.2d 1158, 1166, 206 Cal.Rptr. 354, 362 (1984); Consolidated Data Terminals v. Applied Digital Data Systems, Inc., 708...

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