Carvel Corp. v. Diversified Management Group, Inc.

• Decision Date: 11 April 1991
• Docket Number: D,No. 137,137
• Citation: 930 F.2d 228
• Parties: CARVEL CORPORATION, Plaintiff-Appellee, v. DIVERSIFIED MANAGEMENT GROUP, INC., Defendant-Appellant. ocket 90-7248.
• Court: U.S. Court of Appeals — Second Circuit

Page 228

930 F.2d 228

CARVEL CORPORATION, Plaintiff-Appellee, v. DIVERSIFIED MANAGEMENT GROUP, INC., Defendant-Appellant.

No. 137, Docket 90-7248.

United States Court of Appeals, Second Circuit.

Argued Oct. 16, 1990.

Decided April 11, 1991.

Brendan T. Byrne, Roseland, N.J. (David R. Cosgrove, Robert C. Tyms, Carella, Byrne, Bain, Gilfillan, Cecchi & Stewart, Roseland, N.J., Eric B. Kavier, Yonkers, N.Y., of counsel), for plaintiff-appellee.

Donald W. O'Brien, Jr., Rochester, N.Y. (Woods, Oviatt, Gilman, Sturman & Clarke, Rochester, N.Y., of counsel), for defendant-appellant.

Before OAKES, Chief Judge, PIERCE and WINTER, Circuit Judges.

PIERCE, Senior Circuit Judge:

Defendant-appellant Diversified Management Group, Inc. ("DMG") appeals from a $1,300,000 judgment in favor of plaintiff-appellee Carvel Corporation ("Carvel") on its breach of contract claim entered in the United States District Court for the Southern District of New York (Lee P. Gagliardi, Judge ) after a four-day jury trial. DMG also appeals from a memorandum decision in which the district court denied DMG's motions for judgment notwithstanding the verdict or alternatively for a new trial. The principal questions on appeal are whether the district court erred in refusing DMG's request to charge the jury on the implied duty of good faith under New York law and whether DMG was entitled to judgment n.o.v. because Carvel failed to show that it gave DMG notice and an opportunity to cure before it allegedly terminated the parties' agreement. For the reasons set forth below, we reverse and remand.

BACKGROUND

Carvel is a Delaware corporation in the business of marketing licenses to sell ice cream under its trademarks and trade names. On December 28, 1984, DMG, a Maryland corporation, became a distributor and sub-franchisor for Carvel upon the execution of a Carvel National Area Distributor Agreement and several related agreements.

The distributorship agreement, inter alia, called for DMG to serve as Carvel's distributor in Virginia, Maryland, Delaware, West Virginia and the District of Columbia, to service existing Carvel franchisees within its territory and to seek out new store locations and franchisees. The agreement further provided that DMG would pay Carvel a distributorship fee of $1,745,000 and that DMG would receive commissions on Carvel's sales of ice cream mix and equipment to existing franchisees and a portion of the equipment purchase price paid to Carvel by new franchisees.

DMG paid Carvel $375,000 as a partial down payment on the distributorship fee and financed the balance with three promissory notes in the sums of $200,000, $265,000 and $880,000, executed by DMG on December 28, 1984. Pursuant to the promissory notes and associated note agreements, DMG was to make monthly installment payments on each of the notes, beginning respectively on December 15, 1985, January 1, 1986, and January 1, 1988. According to the district court, "DMG never made these payments, abandoned the distributorship and terminated the distributorship agreement, and Carvel ceased making compensation payments to DMG."

Carvel sued DMG in state court, and in October 1986, the action was removed to federal court on the basis of diversity jurisdiction. Carvel alleged that DMG had failed to comply with certain provisions of In April 1989, Carvel moved for partial summary judgment. Judge Stanton, the district judge to whom the case was initially assigned, granted the motion with respect to DMG's second and third affirmative defenses based on equitable estoppel and waiver, which were dismissed. He denied the motion with respect to certain claims and counterclaims, finding sufficient issues as to material facts to require resolution at trial.

the distributorship agreement as well as the promissory notes and accompanying note agreements. DMG counterclaimed, alleging that Carvel was itself in breach of the agreement in failing to pay compensation to DMG, that Carvel had induced DMG to enter into the agreement by certain false promises and misrepresentations made with the intent to deceive DMG, and that Carvel had demonstrated bad faith in its dealings with DMG.

Thereafter, the case was transferred from Manhattan to White Plains and was reassigned to Judge Gagliardi. A four-day jury trial was held in June 1989. The jury returned a verdict in favor of Carvel on its breach of contract claim, awarding it $1,300,000 in damages, and against DMG on its counterclaims of fraud and breach of contract. Following the entry of judgment, DMG timely moved for judgment notwithstanding the verdict or in the alternative for a new trial, pursuant to Rules 50(b) and 59(a) of the Federal Rules of Civil Procedure. On February 13, 1990, Judge Gagliardi denied the motions. This appeal followed.

DISCUSSION

DMG contends that the district court erred in refusing to give an instruction to the jury that Carvel had a duty to perform in good faith and that this error warrants a new trial. In his opinion denying DMG's post-trial motions, Judge Gagliardi found no error in refusing to give the requested charge, concluding that DMG presented insufficient evidence at trial to warrant the charge and, alternatively, the duty of good faith was encompassed in the court's general instructions on breach of contract and fraud. In our view, DMG was entitled to the requested good faith charge, and we do not believe that the court's breach of contract and fraud instructions sufficiently incorporated the implied covenant of good faith.

The distributorship agreement provides that it shall be construed in accordance with New York law. Under New York law, every contract contains an implied covenant of good faith and fair dealing. Gelder Medical Group v. Webber, 41 N.Y.2d 680, 684, 363 N.E.2d 573, 577, 394 N.Y.S.2d 867, 871 (1977); Van Valkenburgh, Nooger & Neville, Inc. v. Hayden Publishing Co., 30 N.Y.2d 34, 45, 281 N.E.2d 142, 144, 330 N.Y.S.2d 329, 333, cert. denied, 409 U.S. 875, 93 S.Ct. 125, 34 L.Ed.2d 128 (1972); see also Restatement (Second) of Contracts Sec. 205 (1981). This covenant includes "an implied undertaking on the part of each party that he will not intentionally and purposely do anything to prevent the other party from carrying out the agreement on his part." Grad v. Roberts, 14 N.Y.2d 70, 75, 198 N.E.2d 26, 28, 248 N.Y.S.2d 633, 637 (1964).

DMG claims that Carvel, in its dealings with DMG, unjustifiably frustrated DMG's efforts to perform under the distributorship agreement and thus breached the implied duty of good faith. A litigant is entitled to have the jury instructed as to his claims and theories of law if supported by the evidence and brought to the attention of the court. Oliveras v. United States Lines Co., 318 F.2d 890, 892 (2d Cir.1963). "It does not matter that the evidence was minimal or was presented in a piecemeal fashion. All that is necessary is that there be some evidence supporting a party's theory of the case." Hilord Chem. Corp. v. Ricoh Electronics, Inc., 875 F.2d 32, 38 (2d Cir.1989). We believe that DMG presented sufficient evidence to support a charge on the implied duty of good faith.

The evidence presented by DMG purportedly showing Carvel's bad faith included Carvel's rejection of proposed store locations and franchisees, refusal to allow changes in store blueprints to accommodate Having found that DMG was entitled to the requested charge, we must decide whether the district court's refusal to give the charge was prejudicial error. As a general rule, we will not upset a judgment because of an error in jury instructions if the charge actually given was correct and sufficiently covered the essential issues. See Hilord Chem. Corp., 875 F.2d at 39; Oliveras, 318 F.2d at 892. The district court alternatively held that there was no prejudice because "even if there had been sufficient evidence, the refusal to charge was not error insofar as the duty of good faith was encompassed in this court's instructions on breach of contract and fraud."

Maryland Health Department requirements, and apparently abrupt and unexplained decisions to reverse wholesale sales and advertising policies. While the distributorship agreement gave Carvel considerable discretion with regard to advertising, store location, wholesale sales, and other matters, this did not relieve Carvel of its duty to act in good faith. See Cross & Cross Properties, Ltd. v. Everett Allied Co., 886 F.2d 497, 502 (2d Cir.1989) ("Since the duty of good faith and fair dealing is implied in every contract, contracting parties' fields of discretion under a contract are bounded by the parties' mutual obligation to act in good faith.").

In our view, DMG was prejudiced by the court's failure to give the requested instruction on the implied duty of good faith. In particular, we disagree with the district court that the law on the implied duty of good faith was "encompassed" in the court's general instructions on breach of contract and fraud.

The court's general breach of contract charge reads in relevant part as follows:

defendant asserts that plaintiff breached the contract by failing to pay compensation owed defendant under the terms of the agreement; that plaintiff did not abide by the terms of its standard operating procedures with respect to organizational or institutional, or O & I sales; that plaintiff refused approval for sites and licensees in violation of the agreement; and that plaintiff withdrew support for the local advertising program in violation of the agreement.

Now, a breach to be material is material only if it goes to the heart of the contract. The defendant must prove all of the elements of the counterclaim by a preponderance of the evidence as I explained it to you previously. If you find that plaintiff breached the contract in any of the above respects, then the verdict will be for the defendant on its counterclaim.

Nothing in this instruction informed the jury that Carvel was under a duty to...