Erff v. MarkHon Industries, Inc., 85-1054

• Decision Date: 16 January 1986
• Docket Number: No. 85-1054,85-1054
• Citation: 781 F.2d 613
• Parties: Charles G. ERFF, Plaintiff-Appellant, v. MARKHON INDUSTRIES, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 613

781 F.2d 613

Charles G. ERFF, Plaintiff-Appellant, v. MARKHON INDUSTRIES, INC., Defendant-Appellee.

No. 85-1054.

United States Court of Appeals Seventh Circuit.

Argued Oct. 22, 1985.

Decided Jan. 16, 1986.

Thomas P. Yoder, Livingston Dildine Haynie & Yoder, Fort Wayne, Ind., for plaintiff-appellant.

John D. Walda, Charles W. McNagny, Barrett, Barrett & McNagny, Fort Wayne, Ind., for defendant-appellee.

Before CUMMINGS, Chief Judge, COFFEY, Circuit Judge and FAIRCHILD, Senior Circuit Judge.

COFFEY, Circuit Judge.

The plaintiff appeals the district court's determination that the defendant did not breach a stock option agreement. We affirm.

I.

In June of 1975, the plaintiff, Charles G. Erff, interviewed with Honeywell, Inc. in Wabash, Indiana for the position of marketing director. During his initial interview, Mr. William G. McLaughlin, the manager of the Honeywell facility, informed Erff that McLaughlin and several other individuals had formed a new corporation, MarkHon Industries, ("MarkHon") and planned to purchase the Wabash plant. McLaughlin advised Erff that MarkHon was in the process of obtaining financing for the proposed transaction and that if the transaction was successful, Erff would be hired as the marketing director of MarkHon and he would have an opportunity to purchase shares of common stock in the corporation. Erff returned to Wabash for a second interview on July 17 and 18, received an offer of employment, and became the marketing director of the Honeywell Wabash division on September 1, 1975.

During its negotiations with Honeywell, MarkHon explored several financing options, including a public offering of its stock. Although it drafted several proposed prospectuses before the closing, none were approved by MarkHon's board of directors or formally issued. On November 1, 1975, MarkHon purchased the Wabash facility and Erff became a MarkHon employee. The corporation issued stock on November 10, 1975, and the plaintiff purchased 3,350 shares at the price of $7.00 per share.

On January 20, 1976 the MarkHon board of directors discussed and adopted a stock option plan contained in a draft prospectus dated September 12, 1975:

"Mr. McLaughlin reported that it had come to the attention of the staff that the option contained in the prospectus completed September 12, 1975, by which the present officers of the Corporation were granted an option to purchase Five Thousand Four Hundred Eighty (5,480) shares from the common capital stock of the corporation through September 1, 1980 at Ten Dollars ($10.00) per share had not been included in the minutes of the meeting of the Board. The prospectus was reviewed, and each of the Board members in office at that time acknowledged that the matter had been implicitly approved prior to the September 12, 1975 prospectus. Accordingly, the following resolution was presented:

R ESOVLED T HAT, pursuant to the prospectus presented to stockholders dated September 12, 1975, the Corporation grants stock options to present officers at Ten Dollars ($10.00) per share for Five Thousand Four Hundred Eighty (5,480) shares of the common capital stock of the Corporation, which option shall expire September 1, 1980, each officer holding an option to purchase shares equal to Twenty Percent (20%) of the original shares subscribed for by said officers, as follows: ... Charles R. [sic] Erff, 670 shares."

Sometime during 1976, MarkHon's accountant informed MarkHon that the resolution in the January 20, 1976 corporate minutes did not constitute a stock option plan. On June 21, 1977 the company adopted a revised stock option plan explicitly providing that the stock options terminated at the time the employee ceased employment with the company: "Termination of employment: If the employment of the grantee terminates, otherwise than by death, all rights under option shall lapse."

On July 7, 1978, McLaughlin informed Erff that his job performance had been unsatisfactory and his employment status with MarkHon was terminated. In December of 1978, the plaintiff, through his agent, a Mr. Jones, contacted MarkHon and attempted to exercise his stock option. Both Mr. Erff and Mr. Jones were informed by MarkHon that his right to exercise a stock option terminated simultaneously with the time he left MarkHon's employment. On January 8, 1979, the plaintiff sold 3,345 shares in MarkHon, retaining five shares. On August 20, 1980, shortly before the stock option was to expire, Erff again attempted to exercise his option by tendering a check to MarkHon. The corporation returned the check and once again advised Erff that his option to purchase stock under the stock option plan had terminated when he left MarkHon's employment.

Some two years later, Erff filed suit in the United States District Court for the Southern District of Indiana alleging that in the summer of 1975 he and MarkHon entered into an oral employment agreement. According to Erff's complaint, he agreed to accept employment with MarkHon and to purchase 3,350 shares of MarkHon stock at $7.00 per share and MarkHon granted Erff an option to purchase an additional 670 shares (20 percent of his original subscription) at $10.00 per share. Thus, under Erff's complaint, MarkHon's offer of a stock option was binding because his entering into employment with MarkHon and his purchase of 3,350 shares of MarkHon stock constituted an acceptance of the offer. MarkHon denied offering a stock option to Erff during the June and July employment interviews and argued that the stock option contained in the January 20, 1976 Board resolution was a unilateral offer exercisable only by employees currently working for MarkHon. According to MarkHon, Erff failed to accept this unilateral offer before he left MarkHon's employ.

At trial, Erff asserted that as a goal of his job search in 1975, he sought "an entrepreneurial opportunity ... a significant equity ownership position in a relatively small business." Erff testified that during the June employment interview, McLaughlin had shown him a prospectus stating that 3,350 shares had been reserved for the new marketing director of MarkHon. Erff further contended that McLaughlin had promised him an option to purchase additional shares at a later time. Erff placed in evidence two draft prospectuses, dated July 23, 1975 and September 12, 1975 specifying: "The Company has granted an option to present officers and the future Marketing Director at $10.00 per share for 5,480 shares that will expire September 1, 1980. These options represent 20% of the original stock subscription by these officers." McLaughlin, on the other hand, denied offering to Erff a stock option at the interviews. Moreover, McLaughlin testified that the draft form of the prospectus in existence at the time of Erff's interviews specified: "There is no stock option plan in effect and none is presently under consideration." According to McLaughlin, the July 23 draft prospectus Erff claimed to have received in his June and July 17 and 18 interviews, was prepared on July 23, 1975 following the Board meeting of July 22, 1975.

The district court, after presiding over a bench trial, denied the plaintiff's claim, holding that there was no stock option plan in existence at the time Erff interviewed with McLaughlin in June and July of 1975 because the corporation had not issued stock, there was no paid-in capital, and no stock option plan had been authorized by the board of directors. Additionally, the court found that even if McLaughlin had entered into an oral employment contract with Erff concerning the stock option, under Indiana law the alleged oral agreement made by the corporation's agent, McLaughlin, would have had to have been expressly ratified by the MarkHon board of directors before it became effective. Since the record of the company's board meetings failed to recite any express ratification by the board of an employment contract with Erff providing for a stock option, the court held that Erff failed to prove the existence of a binding oral employment agreement containing a stock option plan between Erff and McLaughlin or Erff and MarkHon.

II.

On appeal, Erff does not challenge the district court's conclusion that a stock option was not offered to him during his employment interview with McLaughlin in June and July of 1975. Rather, Erff contends that he has "consistently raised two distinct theories against MarkHon." (emphasis his). The district judge explicitly rejected his first theory: "That the stock option was offered to him by MarkHon when he interviewed for the position of Marketing Director and upon his acceptance of employment with MarkHon his stock option rights vested and could not thereafter be unilaterally amended to require that he exercise the option prior to the termination of his employment with MarkHon." Erff argues to this court that the trial court failed to address his second theory of recovery: "That the stock option was offered to him on or before September 12, 1975 and, upon Erff's November 5, 1975 purchase of 3,350 shares of MarkHon stock, the option vested and could not be unilaterally amended to require that Erff exercise the option prior to the termination of his employment with MarkHon." In response to the defendant's protest that this "second theory of recovery" was never presented to the trial court, Erff contends that his second theory of recovery "was properly raised in the pre-trial order controlling the trial of this case." Erff cites Hernandez v. Alexander, 671 F.2d 402 (10th Cir.1982) and United States v. Texas, 523 F.Supp. 703 (E.D.Tex.1981) as support for the proposition that "issues raised in a pre-trial order supersede those presented in the original pleadings and govern the trial of the case." Erff reasons that because he raised his second theory of recovery in the pre-trial order, the district erred by "failing to make findings of fact and conclusions of law with respect to the legal...