E.B. Harper & Co., Inc. v. Nortek, Inc.
| Decision Date | 13 January 1997 |
| Docket Number | No. 95-3948,95-3948 |
| Citation | 104 F.3d 913 |
| Parties | E.B. HARPER & COMPANY, INCORPORATED, Plaintiff-Appellant, v. NORTEK, INCORPORATED, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Seventh Circuit |
David A. Genelly (argued), John C. Corrigan, Fishman & Merrick, Chicago, IL, for Plaintiff-Appellant.
Robert T. Palmer (argued), Chicago, IL, for Defendant-Appellee.
Before COFFEY, RIPPLE and EVANS, Circuit Judges.
E.B. Harper & Co. ("Harper") is a business finder that charges a fee for introducing its clients to companies interested in buying, selling or merging. Harper introduced Nortek, Inc. to the Bend Millwork Companies and its principals, Arthur A. Pozzi and Randall A. Pozzi. Nortek eventually bought Bend Millwork; as part of the consideration for the acquisition, Nortek agreed to pay the Pozzis yearly "earn-out payments," defined as a percentage of the company's net earnings over a five-year period. Under its fee agreement with Nortek, Harper was entitled to an amount equal to 1% of any earn-out payments disbursed.
The relationship between Nortek and the Pozzis soured when the company failed to make money. The Pozzis then sued Nortek in Oregon state court. They alleged in part that Nortek breached the contracts related to the sale. The complaint attributed the company's lack of profitability to Nortek's breach. The Pozzis prayed for damages in the amount of earn-out payments they would have reaped had the company been profitable. The Oregon jury returned a verdict for the Pozzis, but the parties settled the case while the appeal was pending.
Upon discovering the results of the Oregon litigation, Harper's president, Ernest B. Harper, Jr., wrote to Nortek and requested to be paid a commission equal to 1% of the amount the Oregon jury awarded the Pozzis. When Nortek refused, Harper brought this action in the district court. Harper contended that the Oregon judgment had awarded the Pozzis earn-out payments. In Harper's view, the Oregon judgment establishes, by virtue of collateral estoppel, that Nortek owed the Pozzis earn-out payments and therefore that Harper is entitled to damages equaling 1% of the jury's award on the breach of contract claim. For the reasons set forth in the following opinion, we agree with the district court that collateral estoppel does not apply and accordingly affirm the district court's judgment.
Harper acts as a business finder, a company that researches buyers and sellers of businesses. Harper introduces those buyers and sellers that it hopes will consummate a transaction; it earns a fee only if the introduction results in a sale. Nortek is a conglomerate company, engaged in various construction-related activities through numerous subsidiaries. On October 28, 1985, Harper notified Nortek that it knew of a potential candidate for acquisition, Bend Millwork. As was its practice, Harper proposed to introduce and to reveal details about the company if Nortek agreed to pay Harper "1% of the total considerations involved, payable in cash on closing" should Nortek purchase Bend Millwork. R. 30, Ex. A. Nortek agreed to this arrangement and proceeded to enter into negotiations with Bend Millwork's owners, Arthur and Randall Pozzi.
On March 31, 1986, Nortek purchased Bend Millwork from the Pozzis. The purchase gave rise to five separate contracts: (1) the Bend Millwork Company Stock Purchase Agreement; (2) the Arthur A. Pozzi Employment and Consulting Agreement; (3) the Randall A. Pozzi Employment Agreement; (4) the Arthur A. Pozzi Company Stock Purchase Agreement; and (5) the Bend Millwork Distributorship Agreement. Nortek assumed various duties under these contracts. Under the two employment agreements, for example, Nortek promised to employ the Pozzis in managerial positions. The principal document, the Bend Millwork Stock Purchase Agreement ("Stock Purchase Agreement"), set forth the consideration to be paid by Nortek: cash, promissory notes, common stock in Nortek and "earnout." Earn-out was defined as "payments based upon future earnings"; specifically, the earn-out provision of the contract afforded the Pozzis the
right to receive payments based upon future earnings of [Bend Millwork] as follows: (a) Nortek will pay to the [Pozzis] their pro rata share of an amount equal to 30 percent of the Net Earnings of the Company (as hereinafter defined) which exceed in any year $8,000,000 for each of the years ending December 31, 1986 through 1990 without regard to losses in any prior year during such period; provided that in no event shall the total of such payments exceed $8,000,000 (the "Maximum Earn-out")....
R. 30, Ex. B at p 2.4(a). "Net Earnings of the Company" was defined in the contract and included "the consolidated [pre-tax] net earnings of [Bend Millwork], its subsidiaries and the business of Arthur A. Pozzi Company being acquired simultaneously herewith." R. 30, Ex. B at para. 2.4(b). In addition, the Stock Purchase Agreement proscribed "change to a material extent [in] the nature of the business of" Bend Millwork "[p]rior to the payment to the [Pozzis] of the Maximum Earnout, or December 31, 1990, whichever shall first occur." R. 30, Ex. B at para. 2.4(c).
Upon closing, the consideration due the Pozzis, excluding the continuing earn-out obligation, was valued at approximately $25 million. As a result, Nortek paid Harper 1% of this amount, or $249,065.08, as a finder's commission, due under the Harper-Nortek agreement. In addition, Nortek assured Harper by letter dated June 4, 1986 that, "in the event 'earnout payments' are made to Arthur Pozzi[, Harper] will be entitled to a one percent fee on any additional amounts paid." R. 30, Ex. D. 1 Harper did not receive any additional fee payment. Under Nortek's management, Bend Millwork failed to make a profit. Consequently, claiming insufficient profitability, Nortek failed to make earn-out payments to the Pozzis. Attributing the failure to earn a profit, and the resulting failure to pay earn-out, to contractual breaches (including Nortek's mismanagement of Bend Millwork and its refusal to place the Pozzis in positions of authority), the Pozzis brought a suit against Nortek in Oregon Circuit Court.
The Pozzis' Oregon complaint contained four claims for relief: (1) breach of contract (2) intentional interference with economic relations; (3) fraud and tortious bad faith and unfair dealing; and (4) declaratory judgment. The breach of contract claim alleged initially that Nortek owed to the Pozzis the duty of employing them in managerial positions. Furthermore, the Pozzis alleged, the contracts required that Nortek, because of its failure to employ the Pozzis, either pay the Pozzis the maximum earn-out of $8 million or manage Bend Millwork competently enough to enable the Pozzis to earn the maximum earn-out of $8 million. Therefore, among the breaches claimed by the Pozzis were Nortek's exclusion of the Pozzis from active participation in the management of Bend Millwork and Nortek's failure to manage the company competently enough to enable the Pozzis to earn the maximum $8 million earn-out. The Pozzis further claimed that Nortek changed, to a material extent, the nature of the company's business before paying the maximum earn-out and before December 31, 1990 by expanding Bend Millwork's geographical territory, by failing to employ the Pozzis in managerial positions, by terminating the manufacture of six-panel interior pine doors, by changing the production methods of Bend Millwork and by adding to the product line. The Pozzis alleged that, as a result of these breaches, they had lost income, bonuses, the $8 million earn-out which they would have made had Nortek competently managed Bend Millwork, and other amounts related to various obligations undertaken by Nortek during the sale of Bend Millwork.
Following a trial that lasted six weeks, the jury returned a verdict in favor of the Pozzis for over $20 million, an amount including $8,352,000 for breach of contract. 2 In addition to damages for breach of contract, the jury awarded the Pozzis $4 million on the fraud claim and an additional $10 million in punitive damages; Randall Pozzi, individually, received an additional $28,030 for Nortek's breach of a stock sell-back contract. The court then granted Nortek's motion for judgment n.o.v. with respect to the jury's award of punitive damages. After various post-trial proceedings, the trial court entered a final judgment on the breach of contract claim in the amount of $8,352,000. The total amount of the judgment, including fraud damages, attorney's fees and costs, exceeded $13 million.
Both parties appealed the judgment to the Oregon Court of Appeals. After oral argument but before the issuance of a decision, Nortek and the Pozzis settled their dispute. The settlement agreement also resolved three other lawsuits, related to the Oregon litigation, that the parties had filed against each other. The agreement provided further: R.30, Ex. I at 6 para. 5. The parties intended the agreement to be completely integrated and to "settle their differences ... without an admission of fault or liability." Id. at 2-3 para. E. Pursuant to the agreement, Nortek paid $11.8 million in full settlement of the Oregon judgment and the related litigation. Although the case was settled, the final judgment entered by the trial court was not vacated; the Oregon Court of Appeals instead modified it, as requested, by including as parties the insurance companies with whom Nortek had contracted to provide surety for the appeal bond.
Upon learning of the Oregon litigation and subsequent settlement, Harper's president...
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