CPC Intern. Inc. v. McKesson Corp.

CourtUnited States State Supreme Court (New York)
Citation513 N.Y.S.2d 319,134 Misc.2d 834
Decision Date19 February 1987
PartiesCPC INTERNATIONAL INC., Plaintiff, v. McKESSON CORPORATION, Corporation of America, Morgan Stanley & Co. Incorporated, H. Eugene Blattman, Steven M. Brounstein, Defendants.

Proskauer Rose Goetz & Mendelsohn, for plaintiff; Stephen Rackow Kaye, Claire P. Gutekunst, Catherine McGrath, William S. Wells, CPC International Inc., of counsel.

Paul, Weiss, Rifkind, Wharton & Garrison, for defendants; Arthur L. Liman, Stuart Robinowitz, Moses Silverman, Abby L. Jennis, of counsel.

STANLEY L. SKLAR, Justice.

The principal issues raised by plaintiff's motion for summary judgment are: (1) must plaintiff, in order to recover for breach of warranty, establish reliance upon the warranty? (2) does the language of the contract in issue establish, as a matter of law, that certain assumptions attached to the contract were warranted as having been used in creating projections attached to the contract? and (3) is there an absence of genuine material factual issues as to the claimed breach of other warranties? This court answers all three questions in the negative.

Introduction

McKesson Corporation conferred with its financial advisor, Morgan Stanley and Co. about a sale of C.F. Mueller Corporation, a well known pasta manufacturer. McKesson and Morgan Stanley then prepared an offering memorandum which contained financial information and projections.

Eight bidders, including CPC International, Inc., visited Mueller in September, 1983, for a presentation which included a discussion of projections of Mueller's performance. In addition, various planning assumptions were handed out. McKesson, at that time, warned that the projections were only estimates and were grounded upon hypothetical assumptions, and disclaimed any liability with respect to them.

During the negotiation process, CPC, which used the services of its own investment banker, Dillon Read and Co., insisted on and received in the Contract of Purchase various assurances with respect to the projections. On November 9, 1983, CPC signed the contract and thereafter purchased Mueller for $124,300,000.

CPC now sues to recover $61.3 million in compensatory plus punitive damages. The complaint sets forth five causes of action. The first alleges breaches of warranties concerning projections for Mueller's present and future performances given to CPC by McKesson (including by Corporation of America, its subsidiary). The second alleges that McKesson falsely warranted in the contract that there had been no material adverse change in the Mueller business from July 1, 1982 to the closing on December 1, 1983. The third cause of action is asserted against McKesson for common law fraud for knowingly engaging in the misconduct forming the basis of the first and second causes of action. It is also asserted against Morgan Stanley, and against the individual defendants, as executive employees of Mueller and/or McKesson, for aiding and abetting McKesson's alleged fraud and for conspiracy to commit common law fraud. The fourth and fifth causes of action are asserted against all defendants for, respectively, violations of Section 352-c of the Martin Act and of Section 17(a) of the Securities Act of 1933 (15 U.S.C. § 77q), based upon the same facts giving rise to the cause of action for common law fraud.

On an earlier motion, the third cause of action (fraud) was dismissed as against Morgan Stanley and the individual defendants, and the fifth cause of action (violation of Section 17(a) of the Securities Act of 1933) was dismissed as against all defendants (Wallach, J.). The First Department modified that decision by dismissing the fourth cause of action as well. CPC Intern., Inc. v. McKesson Corp., 120 A.D.2d 221, 507 N.Y.S.2d 984 (1986). Issue having been joined since the decision on the earlier motion, CPC now moves for partial summary judgment establishing McKesson's liability on the first cause of action for breach of a contractual warranty; the issue of damages is expressly left for subsequent trial.

The Warranties

The claimed warranties at issue are set forth in the contract at Article 2, entitled "Representations and Warranties of Selling Parties." The parties agreed that "[a]s a material inducement to Buyer to execute and perform its obligations under this agreement, the Selling Parties, jointly and severally, represent and warrant to buyer [the matters thereafter set forth in Sections 2.0 through 2.25]." Section 2.4(d) and Exhibit 2.4(d) describe and set forth projections of income and operating profits for Mueller for the then current fiscal year (FYE 84) and for the two succeeding fiscal years (the "Projections"). Section 2.4(d) states:

"(d) EXHIBIT 2.4(d), sets forth the following projections: (i) the projected income statements of Corporation for the twelve-month periods ending March 31 in each of the years 1984 through 1986, (ii) the projected statement of changes in financial position of Corporation for the twelve-month periods ending March 31 in each of the years 1984 through 1986, (iii) the projected new product development expense of Corporation for the twelve-month periods ending March 31 in each of the years 1984 through 1986, and (iv) the projected operating profit of Corporation (summary SBU) for each of the twelve-month periods ending March 31 in each of the years 1984 through 1986. Selling Parties make no representation or warranty whatsoever concerning the above projections except as specifically set forth in paragraph (e) below."

The following provision, Section 2.4(e), sets forth certain representations and warranties with regard to the projections referred to above. That provision states that:

"The projections referred to in paragraph (d) above (the 'Projections') were generated by Corporation, and reviewed by McKesson Management, to support the operating plan of Corporation for the fiscal years ending March 31, 1984 through 1986. The Projections were generated by Corporation, and reviewed by McKesson management, during the first quarter of the fiscal year ending March 31, 1984, based upon the circumstances existing at that time. McKesson management are using the Projections relating to the fiscal year ending March 31, 1984 to measure the operating performance of Corporation for such fiscal year. The Projections have been prepared using the same general format and accounting principles used in the preparation of the Financial Statements referred to in paragraph (a) above, provided, however, that various assumptions used in the preparation of the Projections, which assumptions are set forth in EXHIBIT 2.4(d), are not applicable to the preparation of historical financial statements such as the Financial Statements."

Section 12.3 states that "[t]his Agreement and all of the exhibits furnished hereunder, constitutes the sole and entire agreement between the parties." Section 6.0 provides that all representations and warranties made in the contract "shall be true in all material respects on and as of the closing date" unless otherwise permitted by the Agreement. Section 10.0 reiterates and expands upon this provision, stating that "all representations, warranties and agreements made by any party in this agreement shall not be deemed to be waived or otherwise affected by any investigation made by the other party hereto, and shall survive the closing." In Section 10.1 McKesson further agrees to indemnify CPC and hold it harmless from all damages suffered "by reason of or resulting from a breach of any representation, warranty or agreement by the selling Parties contained in or made pursuant to this Agreement, or any facts or circumstances constituting such a breach."

CPC now moves for summary judgment, alleging that documents prepared by the McKesson and/or Mueller management prior to closing and...

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