Northern Heel Corp. v. Compo Industries, Inc.

• Decision Date: 08 March 1988
• Docket Number: 87-1423,Nos. 87-1422,s. 87-1422
• Citation: 851 F.2d 456
• Parties: 26 Fed. R. Evid. Serv. 480 NORTHERN HEEL CORP., et al., Plaintiffs, Appellees, v. COMPO INDUSTRIES, INC., et al., Defendants, Appellants. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 456

851 F.2d 456

26 Fed. R. Evid. Serv. 480

NORTHERN HEEL CORP., et al., Plaintiffs, Appellees, v. COMPO INDUSTRIES, INC., et al., Defendants, Appellants.

Nos. 87-1422, 87-1423.

United States Court of Appeals First Circuit.

Heard March 8, 1988.

Decided June 30, 1988.

John G. Fabiano with whom Cynthia O. Hamilton, Hale and Dorr, Boston, Mass. and Daniel A. Laufer, Manchester, N.H., were on brief for defendants, appellants.

Martin I. Eisenstein with whom Brann & Isaacson, Lewiston, Me., was on brief for plaintiffs, appellees.

Before COFFIN, BREYER and SELYA, Circuit Judges.

SELYA, Circuit Judge.

After defendant-appellant Compo Industries, Inc. (Compo) negotiated a purchase and sale agreement (the Agreement) referable to the assets of plaintiff-appellee Northern Heel Corporation (Noheel), it failed to close and instead invited renegotiation of the sale at a reduced price. ¹ Noheel declined the invitation, insisted that the closing should have gone forward as originally agreed, and brought suit. Compo counterclaimed. Following a two day Rule 65 hearing and a five day bench trial, the United States District Court for the District of New Hampshire found that appellant had cancelled the soiree in bad faith and breached the Agreement. Northern Heel Corp. v. Compo Industries, Inc., No. C82-71 (D.N.H. Mar. 5, 1987) (Noheel I ). The court awarded Noheel damages and counsel fees, and dismissed the counterclaims. On appeal, Compo continues to maintain that it was amply justified in removing the plaintiff from its dance card. We demur. The district judge's determination that defendant improperly stopped the music was, we think, borne out by the record.

We approach our task mindful of the fact that Compo, in its unremitting quest to validate its position, has left no forensic stone unturned. We deal, one by one, with what we perceive to be its central theses. In proceeding in this serial fashion, we discuss the facts (as the district court, supportably, could have found them) in the context of our treatment of defined issues. The substantive law of Massachusetts governs: this is a diversity case, section 18 of the Agreement designates Massachusetts law as controlling, and New Hampshire traditionally defers to the "clearly expressed intention" of the parties as to choice of law in contract cases. See Consolidated Mut. Ins. Co. v. Radio Foods Corp., 108 N.H. 494, 240 A.2d 47, 48-49 (1968).

I. MISREPRESENTATION

Compo's flagship claim is that Noheel breached the Agreement (or, put another way, failed to fulfill express conditions precedent) by misrepresenting a variety of material facts, thereby giving appellant the right to withdraw from the deal. To place the point into historical context, we limn the progress of the parties' negotiations. Noheel, primarily but not exclusively a producer of heels for women's shoes, operated its business from facilities in Dover, New Hampshire and Lewiston, Maine. Compo's subsidiary, Styletek, was a competitor of Noheel. The parties began talking in earnest on August 4, 1981. During the ensuing discussions, appellee (largely through Barry Sansoucie) gave Compo, verbally, considerable information about its business (e.g., gross margins, pricing formulae, manufacturing processes). It also furnished Compo audited financial statements for its fiscal years ended May 31, 1980 and May 31, 1981, respectively (and eventually, before the Agreement was signed, gave Compo a quarterly statement for the period ending August 31, 1981). Compo's representatives toured Noheel's plants. On November 4, Barry Sansoucie supplied voluminous documents to appellant (e.g., price, customer, and vendor lists, salary data, information as to manufacturing costs, summarization of receivables) and, after many hours of discussion, the Agreement was signed on that date. It was drafted by Compo's counsel.

The instrument set a November 9 closing date, soon rescheduled to November 16, 1981 to allow adequate time to take the needed inventory and value the accounts receivable. (Under the Agreement, it was Compo's obligation to take the lead in these matters, subject to Noheel's right of audit.) But appellant's people did not arrive to take inventory on the appointed date, nor did appellant notify Noheel that they would not appear. With silence still reigning, Compo boycotted the scheduled closing. Through counsel, a summit meeting was set for the next day.

At the November 17 meeting, the balloon went up. Compo informed Noheel that the deal was dead because appellee had dealt deceptively. After announcing its withdrawal, Compo sought to renegotiate based on major concessions in the proposed purchase price. This was the first time that appellant told Noheel about any alleged misrepresentations, notwithstanding that Compo claims to have been aware of the critical information as early as November 5. Prior to repudiation, appellant neither requested clarification nor asked appellee to respond to its emerging concerns.

Before turning to specifics, we focus briefly on the contractual context. Compo was to pay Noheel dollar-for-dollar the value of the latter's inventory and accounts receivable as of the closing date, plus $616,000 for what we shall call "machinery and equipment." See infra note 7. But matters were considerably more complicated than appears at first blush. The Agreement was a lawyer's dream and a client's nightmare, bristling with conditions precedent. It included standard language that made the purchaser's obligations subject, at closing, to the truthfulness in all material respects of the seller's representations and warranties as contained in the Agreement. (It is this condition which Compo claims Noheel failed to fulfill, thereby relieving Compo of its obligation to perform.)

A fair reading of the terminology leaves no room to doubt that only material misrepresentations by Noheel would serve to rupture the Agreement, and Compo does not seriously contend otherwise. This understanding comports with Massachusetts law. To excuse repudiation by one party, the other's "breach" must be "total," that is, it must strike at the "essence" of the agreement. See Imper Realty Corp. v. Riss, 358 Mass. 529, 265 N.E.2d 594, 598 (1970); Center Garment Co. v. United Refrigerator Co., 369 Mass. 633, 341 N.E.2d 669, 673 (1976); Bucciero v. Drinkwater, 13 Mass.App. 551, 434 N.E.2d 1315, 1317-18 (1982); see generally 4 Corbin on Contracts Sec. 975, at 918 (1951). Thus, a party can disclaim a contract only when its repudiation rests upon the existence of facts which justify a failure to perform. Nevins v. Ward, 320 Mass. 70, 67 N.E.2d 673, 675 (1946); see Fitch v. Ingalls, 271 Mass. 121, 125, 170 N.E. 833 (1930). Succinctly put, for misrepresentation to warrant repudiation or rescission, the would-be escapee must show that misrepresentation occurred, that it was material, that it induced entry into the contract, and that it was relied upon, justifiably. Yorke v. Taylor, 332 Mass. 368, 124 N.E.2d 912, 914-16 (1955); Benjamin Foster Co. v. Commonwealth, 318 Mass. 190, 61 N.E.2d 147, 152 (1945); Fitch, 271 Mass. at 125, 170 N.E. 833. Neither a "slight" breach nor a nonmaterial misrepresentation permits a party to "throw[ ] the contract over." Center Garment Co., 341 N.E.2d at 673; see also Kaplan v. Suher, 254 Mass. 180, 182-83, 150 N.E. 9 (1926). Therefore, unless Noheel had been guilty of some material misrepresentation, Compo was obliged, under Massachusetts law, to perform.

Before proceeding further, we deal with a stalking horse of sorts. Compo attempts to characterize Noheel's conduct as a series of failures to satisfy conditions precedent, e.g., Appellant's Revised Brief at 12-13, rather than as breaches of contract. While the distinction might be significant in some cases--a topic on which we express no opinion--it is, for several reasons, purely semantic here.

For one thing, the basic condition upon which Compo relies--that Noheel's representations and warranties would be true "on and as of the Closing Date," Agreement Sec. 7.1--is only nominally a condition precedent. We explain briefly. Under Massachusetts law, contracting parties may provide that performance is not required unless and until stipulated conditions precedent have been met. See Howland v. Plymouth, 319 Mass. 321, 65 N.E.2d 535, 537 (1946). A condition is customarily an undertaking on one side to do something (Thing One) which, by its terms, is made a condition to the performance of some corresponding obligation (Thing Two) by the other party, as where the latter agrees to do Thing Two if the former shall carry out Thing One. See Malden Knitting Mills, Inc., v. United States Rubber Co., 301 Mass. 229, 16 N.E.2d 707, 710 (1938); cf. Dr. Seuss [pseud.], The Cat in the Hat 33-54 (Random House ed. 1957) (discussing Thing One and Thing Two). In this case, the supposed condition precedent--the truthfulness at closing of seller's representations and warranties--reads more like a concurrent condition, inasmuch as the corresponding obligations (fulfillment of the condition and performance under the Agreement) all become due on the closing date. See 3A Corbin, supra, Sec. 629, at 19. As the commentator acknowledges, the term "concurrent condition" is merely "an elliptical expression for a condition precedent where performances are due at the same time." Id. at 19 n. 21 (quoting Restatement ). If concurrent, ordinary principles of repudiation and breach control.

For another thing, Compo's refusal to take the inventory, assay the receivables, and go to closing deprived Noheel of the opportunity to demonstrate the fulfillment of the conditions precedent. This conduct on appellant's part, unless justified by some blameworthy behavior attributable to appellee, likely relieved appellee of any duty to fulfill the conditions. See Restatement (Second) Contracts Sec. 245 (1979) (where party's breach by non-performance contributes materially to nonoccurrence of a...