Bloor v. Falstaff Brewing Corp., Nos. 555

CourtU.S. Court of Appeals — Second Circuit
Writing for the CourtBefore MOORE, FRIENDLY and MESKILL; FRIENDLY
Citation601 F.2d 609
Parties26 UCC Rep.Serv. 281 James BLOOR, as Reorganization Trustee of Balco Properties Corporation, Plaintiff-Appellee and Cross-Appellant, v. FALSTAFF BREWING CORPORATION, Defendant-Appellant and Cross-Appellee. ockets 78-7451, 78-7465.
Docket NumberNos. 555,D,558
Decision Date15 May 1979

Page 609

601 F.2d 609
26 UCC Rep.Serv. 281
James BLOOR, as Reorganization Trustee of Balco Properties
Corporation, Plaintiff-Appellee and Cross-Appellant,
v.
FALSTAFF BREWING CORPORATION, Defendant-Appellant and Cross-Appellee.
Nos. 555, 558, Dockets 78-7451, 78-7465.
United States Court of Appeals,
Second Circuit.
Argued March 28, 1979.
Decided May 15, 1979.

Page 610

Robert G. Sugarman, New York City (Weil, Gotshal & Manges, New York City, Joseph H. Weiss, and R. Peyton Gibson, New York City, of counsel), for plaintiff-appellee and cross-appellant.

Lewis A. Kaplan, New York City (Paul, Weiss, Rifkind, Wharton & Garrison, New York City, Andrew Kull, New York City, of counsel), for defendant-appellant and cross-appellee.

Before MOORE, FRIENDLY and MESKILL, Circuit Judges.

FRIENDLY, Circuit Judge:

This action, wherein federal jurisdiction is predicated on diversity of citizenship, 28 U.S.C. § 1332, was brought in the District Court for the Southern District of New York, by James Bloor, Reorganization Trustee of Balco Properties Corporation, formerly named P. Ballantine & Sons (Ballantine), a venerable and once successful brewery based in Newark, N. J. He sought to recover from Falstaff Brewing Corporation (Falstaff) for breach of a contract dated March 31, 1972, wherein Falstaff bought the Ballantine brewing labels, trademarks, accounts receivable, distribution systems and other property except the brewery. The price was $4,000,000 plus a royalty of fifty cents on each barrel of the Ballantine brands sold between April 1, 1972 and March 31, 1978. Although other issues were tried, the appeals concern only two provisions of the contract. These are:

8. Certain Other Covenants of Buyer. (a) After the Closing Date the (Buyer) will use its best efforts to promote and maintain a high volume of sales under the Proprietary Rights.

2(a)(v) (The Buyer will pay a royalty of $.50 per barrel for a period of 6 years), provided, however, that if during the Royalty Period the Buyer substantially discontinues the distribution of beer under the brand name "Ballantine" (except as the result of a restraining order in effect for 30 days issued by a court of competent jurisdiction at the request of a governmental authority), it will pay to the Seller a cash sum equal to the years and fraction thereof remaining in the Royalty Period times $1,100,000, payable in equal monthly installments on the first day of each month commencing with the first month following the month in which such discontinuation occurs . . . .

Bloor claimed that Falstaff had breached the best efforts clause, 8(a), and indeed that its default amounted to the substantial discontinuance that would trigger the liquidated damage clause, 2(a)(v). In an opinion that interestingly traces the history of beer

Page 611

back to Domesday Book and beyond, Judge Brieant upheld the first claim and awarded damages but dismissed the second. Falstaff appeals from the former ruling, Bloor from the latter. Both sides also dispute the court's measurement of damages for breach of the best efforts clause.

We shall assume familiarity with Judge Brieant's excellent opinion, 454 F.Supp. 258 (S.D.N.Y.1978), from which we have drawn heavily, and will state only the essentials. Ballantine had been a family owned business, producing low-priced beers primarily for the northeast market, particularly New York, New Jersey, Connecticut and Pennsylvania. Its sales began to decline in 1961, and it lost money from 1965 on. On June 1, 1969, Investors Funding Corporation (IFC), a real estate conglomerate with no experience in brewing, acquired substantially all the stock of Ballantine for $16,290,000. IFC increased advertising expenditures, levelling off in 1971 at $1 million a year. This and other promotional practices, some of dubious legality, led to steady growth in Ballantine's sales despite the increased activities in the northeast of the "nationals" 1 which have greatly augmented their market shares at the expense of smaller brewers. However, this was a profitless prosperity; there was no month in which Ballantine had earnings and the total loss was $15,500,000 for the 33 months of IFC ownership.

After its acquisition of Ballantine, Falstaff continued the $1 million a year advertising program, IFC's pricing policies, and also its policy of serving smaller accounts not solely through sales to independent distributors, the usual practice in the industry, but by use of its own warehouses and trucks the only change being a shift of the retail distribution system from Newark to North Bergen, N.J., when brewing was concentrated at Falstaff's Rhode Island brewery. However, sales declined and Falstaff claims to have lost $22 million in its Ballantine brand operations from March 31, 1972 to June 1975. Its other activities were also performing indifferently, although with no such losses as were being incurred in the sale of Ballantine products, and it was facing inability to meet payrolls and other debts. In March and April 1975 control of Falstaff passed to Paul Kalmanovitz, a businessman with 40 years experience in the brewing industry. After having first advanced $3 million to enable Falstaff to meet its payrolls and other pressing debts, he later supplied an additional $10 million and made loan guarantees, in return for which he received convertible preferred shares in an amount that endowed him with 35% Of the voting power and became the beneficiary of a voting trust that gave him control of the board of directors.

Mr. Kalmanovitz determined to concentrate on making beer and cutting sales costs. He decreased advertising, with the result that the Ballantine advertising budget shrank from $1 million to $115,000 a year. 2 In late 1975 he closed four of Falstaff's six retail distribution centers, including the North Bergen, N.J. depot, which was ultimately replaced by two distributors servicing substantially fewer accounts. He also discontinued various illegal practices that had been used in selling Ballantine products. 3 What happened in terms of sales volume is shown in plaintiff's exhibit 114 J, a chart which we reproduce in the

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margin. 4 With 1974 as a base, Ballantine declined 29.72% In 1975 and 45.81% In 1976 as compared with a 1975 gain of 2.24% And a 1976 loss of 13.08% For all brewers excluding the top 15. Other comparisons are similarly devastating, at least for 1976. 5 Despite the decline in the sale of its own labels as well as Ballantine's, Falstaff, however, made a substantial financial recovery. In 1976 it had net income of $8.7 million and its year-end working capital had increased from $8.6 million to $20.2 million and its cash and certificates of deposit from $2.2 million to $12.1 million.

NOTE: OPINION CONTAINS TABLE OR OTHER DATA THAT IS NOT VIEWABLE

Seizing upon remarks made by the judge during the trial that Falstaff's financial standing in 1975 and thereafter "is probably not relevant" and a footnote in the opinion, 454 F.Supp. at 267 n. 7, 6 appellate counsel for Falstaff contend that the judge read the best efforts clause as requiring Falstaff to maintain Ballantine's volume by any sales methods having a good prospect of increasing or maintaining sales or, at least, to continue lawful methods in use at the time of purchase, no matter what losses they would cause. Starting from this premise, counsel reason that the judge's conclusion was at odds with New York law, stipulated by the contract to be controlling, as last expressed by the Court of Appeals in Feld v. Henry S. Levy & Sons, Inc., 37 N.Y.2d 466, 373 N.Y.S.2d 102, 335 N.E.2d 320 (1975). The court was there dealing with a contract whereby defendant agreed to sell and plaintiff to purchase all bread crumbs produced by defendant at a certain factory. During the term of the agreement defendant ceased producing bread crumbs because production with existing facilities was "very uneconomical", and the plaintiff sued for breach. The case was governed by § 2-306 of the Uniform Commercial Code which provides:

§ 2-306. Output, Requirements and Exclusive Dealings

(1) A term which measures the quantity by the output of the seller or the requirements of the buyer means such actual output or requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimate to...

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    ...sufficient to make the phrase readily understandable); Bloor v. Falstaff Brewing Corp., 454 F. Supp. 258, 266-267 (S.D.N.Y. 1978), aff'd, 601 F.2d 609 (2d Cir. 1979) (stating that "best efforts" under a distribution contract isPage 42measured against the distributor's capabilities and prior......
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    ...8 (Fall 1984). 17. Citing Bloor v. Falstaff Brewing Corp., 454 F.Supp. 258, 266 (S.D.N.Y.1978), aff'd by Bloor v. Falstaff Brewing Corp., 601 F.2d 609 (2d Cir.1979) (Friendly, 18. Having reached this conclusion, the Court observes that two of the sources cited by defendants do not further t......
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  • Baron Financial Corp. v. Natanzon, No. SKG-03-3563.
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    • United States District Courts. 4th Circuit. United States District Court (Maryland)
    • March 21, 2007
    ...8 (Fall 1984). 17. Citing Bloor v. Falstaff Brewing Corp., 454 F.Supp. 258, 266 (S.D.N.Y.1978), aff'd by Bloor v. Falstaff Brewing Corp., 601 F.2d 609 (2d Cir.1979) (Friendly, 18. Having reached this conclusion, the Court observes that two of the sources cited by defendants do not further t......
  • Television Events & Marketing v. Amcon Distrib., No. Civ. 05-00259 ACK/KS.
    • United States
    • United States District Courts. 9th Circuit. United States District Court (Hawaii)
    • April 25, 2006
    ...what efforts are appropriate. However, TBG, Inc.'s reliance on Bloor v. Falstaff Brewing Corp., 454 F.Supp. 258, 266-67, aff'd, 601 F.2d 609 (1979), and Van Valkenburgh v. Hayden Publishing Co., 30 N.Y.2d 34, 330 N.Y.S.2d 329, 281 N.E.2d 142 (1972), is insufficient to dispose of TBG, Inc.'s......
  • First Union v. Steele Software Systems Corp., No. 1061
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    ...necessarily takes its meaning from the circumstances." Bloor v. Falstaff Brewing Corp., 454 F.Supp. 258, 266 (S.D.N.Y.1978), aff'd, 601 F.2d 609 (2d Cir. 1979); see also Triple-A Baseball Club Assocs. v. Northeastern Baseball, Inc., 832 F.2d 214, 225 (1st Cir.1987), cert. denied, 485 U......
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    ...sufficient to make the phrase readily understandable); Bloor v. Falstaff Brewing Corp., 454 F.Supp. 258, 266–267 (S.D.N.Y.1978), aff'd, 601 F.2d 609 (2d Cir.1979) (stating that “best efforts” under a distribution contract is measured against the distributor's capabilities and prior merchand......
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