Dunn Appraisal Co. v. Honeywell Information Systems, Inc.

• Decision Date: 10 September 1982
• Docket Number: No. 81-3110,81-3110
• Citation: 687 F.2d 877
• Parties: DUNN APPRAISAL COMPANY, et al., Plaintiffs-Appellees, v. HONEYWELL INFORMATION SYSTEMS INC., et al., Defendants-Appellants.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 877

687 F.2d 877

DUNN APPRAISAL COMPANY, et al., Plaintiffs-Appellees, v. HONEYWELL INFORMATION SYSTEMS INC., et al., Defendants-Appellants.

No. 81-3110.

United States Court of Appeals, Sixth Circuit.

Argued June 24, 1982.

Decided Sept. 10, 1982.

S. Stuart Eilers, David J. Hooker, Thompson, Hine & Flory, Cleveland, Ohio, for defendants-appellants.

Edward I. Stillman, Willard E. Bartel, Miller, Stillman, Callaghan & Bartel, Cleveland, Ohio, Harry J. Lehman, Jones, Day, Reavis & Pogue, Columbus, Ohio, for plaintiffs-appellees.

Before LIVELY, Circuit Judge, WEICK, Senior Circuit Judge and ALLEN, District Judge. ^*

WEICK, Senior Circuit Judge.

This appeal involves a diversity action for fraud and breach of contract in the lease of a computer and related equipment. It is governed by Ohio law. The district court in a bench trial granted judgment for the plaintiff, Dunn Appraisal Company, which we affirm for the reasons hereinafter set forth and stated on its 34 page memorandum opinion.

I

The facts, as found by the trial court, are as follows.

The plaintiffs-appellees are two Ohio corporations: Dunn Appraisal Company and its subsidiary, Systems Information Services, Inc. ("SIS"). Dunn Appraisal is engaged in the automobile damage appraisal business, and its president is Robert M. Dunn. SIS is a computer service bureau in Cleveland, Ohio, providing computer services to various business clients. Its president throughout most of the period in question was James C. Saneholtz. ¹

The defendants-appellants are two Delaware corporations: Honeywell, Inc. and its subsidiary, Honeywell Information Systems, Inc. ("HISI"). HISI manufactures, sells, leases, and services computer equipment. Its corporate headquarters are in Massachusetts, but it maintains a regional sales office in Cleveland, Ohio.

In early 1975, Saneholtz became friends with one of the salesmen in HISI's Cleveland office, Phillip Reimer. At that time, SIS was leasing Honeywell Model 1250 computers from a third party, but Saneholtz was interested in acquiring more modern equipment with additional capabilities, and he turned to his friend and advisor Reimer for advice. At the same time, HISI was preparing to introduce a new line of computers.

On June 9, 1975, Saneholtz met with Reimer and Clark Simpson, a Systems Manager for HISI. At this meeting there was a general discussion of the equipment needs of SIS and the relative merits of the forthcoming Honeywell Models 62/40 and 64/20 computers. Although Saneholtz apparently did not remember this meeting, Simpson testified at the trial that Saneholtz told him and Reimer that SIS had about 400 programs which it was presently using on the 1250 computers in order to service its customers. This was important in deciding which new computer to acquire because the Model 1250 programs could be run on the 64/20 with little or no change, but they would have to be converted considerably in order to be used on the 62/40. Reimer expressed the opinion that the 62/40 was better-suited for what Saneholtz had in mind.

Following this meeting, Simpson privately expressed to Reimer serious reservations about going from a 1250 to a 62/40 because of the conversion problem. Part of Simpson's duties as Systems Manager was to analyze conversion requirements between different computer systems. He estimated that it would take 16 man-hours to convert one program, and that 400 programs would take two to four man-years to convert. He felt that such a massive conversion would not be worth the effort, and that it would be better for SIS to acquire a 64/20 even though that model would not be available as soon as the 62/40.

In any event, it appeared that both models were too expensive for SIS, so the matter was dropped.

By the fall of the year, HISI had not yet made a sale of a 62/40 in the Cleveland market and was anxious to do so. It was therefore willing to give a substantial price concession to the first Cleveland customer for the 62/40. Accordingly, the parties resumed discussions in November, this time with Dunn joining Saneholtz on behalf of SIS, and with Mike Mahoney, HISI's Cleveland Branch Manager, joining Reimer.

In these meetings, Reimer and Mahoney again described the features of the 62/40 and the 64/20, and recommended that the 62/40 was the better choice for SIS. When the question of program conversion came up, Saneholtz testified that he told Reimer and Mahoney that he didn't know the exact number of programs which SIS had, but that it was 300 to 400. Dunn and Saneholtz both testified that Reimer and Mahoney assured them that HISI would convert all of SIS's programs at no charge if they got a 62/40.

Dunn and Saneholtz had little knowledge of computers. Following the discussions with Reimer and Mahoney, Dunn had a telephone conversation with a knowledgeable person who worked for another computer concern, who advised against acquiring a 62/40. This person stressed the difficulty of converting from a 1250 to a 62/40, stating that such a transition was "not a logical step" because the 62/40 was not designed to replace the 1250. Nevertheless, Dunn and Saneholtz chose to rely upon Reimer, whom they knew and trusted. As Saneholtz later testified, Reimer was familiar with SIS's business operations and he (Saneholtz) knew that Reimer had the best interests of SIS at heart. As found by the district court, a relationship of trust and confidence existed between them.

Accordingly on December 2, 1975, Dunn, on behalf of Dunn Appraisal Company, executed a contract with HISI for the lease of a Honeywell Model 62/40 computer and associated equipment. ² Mahoney signed on behalf of HISI. Although the contract specified that HISI would convert only 250 programs, Saneholtz testified that Reimer and Mahoney told him not to worry, that was just put there to satisfy their front office and that they would, in fact, convert all of SIS's programs.

Work on converting the programs began in January 1976, and almost from the very beginning the project was an unmitigated disaster. Although the contract called for a "projected" installation date of March 1, 1976, this was postponed until September at SIS's request because the conversion process was proceeding so slowly. At the end of March, HISI informed SIS that it would not convert all of the programs, but only 250 and SIS was forced to hire an independent contractor to complete the job. Even by the fall of 1976, HISI had not delivered all of its 250 programs, and many of those which were delivered were not correct.

It developed that the 62/40 as installed did not have all of the capabilities it was supposed to have without the purchase of substantial additional accessories. At HISI's request, SIS hired a full-time employee, Robert Fricker, to act as liaison for the conversion effort. Nevertheless, by October 1976, the conversion was such a "botched up mess" that SIS couldn't use either the old machine or the new one to conduct its business with its customers whom it was required to serve.

Finally in December 1976, Dunn Appraisal terminated the agreement.

II

The parties filed actions against each other in the Court of Common Pleas of Cuyahoga County, which were removed to the federal court on the grounds of diversity of citizenship. These were eventually consolidated for trial in the District Court for the Northern District of Ohio, where Dunn Appraisal and SIS filed an amended complaint and HISI filed a counterclaim against SIS. The posture of the case as it went to trial was that Dunn Appraisal and SIS alleged causes of action for breach of contract and fraud against both HISI and its parent, Honeywell, Inc., while HISI counterclaimed against SIS for prior debts relating to the 1250 computer.

The trial was conducted by the court sitting without a jury from May 29 to June 1, 1979. The evidence was sharply conflicting, especially concerning what representations had been made regarding conversion of the programs and who was to blame for the breakdown of the conversion effort. Reimer and Mahoney denied that they had promised to convert all of SIS's programs, and Reimer denied that Simpson had ever advised him against selling a 62/40 to SIS. There was testimony from HISI personnel that at least part of the conversion problems were due to disorganization at SIS.

The trial court chose to credit the testimony of the plaintiffs and their witnesses, and found in favor of plaintiff Dunn Appraisal Company against both Honeywell, Inc. and HISI on the fraud count. ³ This decision was based on a finding that Reimer and Mahoney had made the following material misrepresentations in order to induce Dunn Appraisal to enter into the contract:

1. The Honeywell 62/40 computer was best suited for the SIS operation and its projected business expansion.

2. Delivery and operational installation of the 62/40 equipment could be accomplished by not later than March 1, 1976.

3. Conversion of the 400 model 12/50 programs to the Honeywell 62/40 system could be accomplished with minor modifications and could be completed with little or no disruption to SIS customer services by the operational date of March 1, 1976.

4. Honeywell would convert all 400 programs at its expenses within the allocated time although, for business expediency any written agreement between the parties would reflect a guarantee of only 250 program conversions.

5. The Honeywell model 62/40 had an increased capability over the model 12/50, including communications capability, multi-programming capability, multi-processing capability, terminalized services and virtual memory capability.

6. The model 62/40 would improve SIS efficiency in servicing its customers with an expanded production capacity of approximately 25% to 50% over that of the 12/50 Honeywell system.

7. Transition of SIS employees to the operation of the 62/40 could be accomplished without additional formal training and/or labor costs.

8. Operation and maintenance costs...