Fargo Foods, Inc. v. Bernabucci, 980283.

• Decision Date: 25 June 1999
• Docket Number: No. 980283.,980283.
• Citation: 1999 ND 120,596 N.W.2d 38
• Parties: FARGO FOODS, INC., an Oregon Corporation, and Portland Food Products Company, an Oregon Corporation, Plaintiffs, Appellants and Cross-Appellees v. Jack BERNABUCCI, Scott Fridlund, Don Russell, Cloverdale Foods, Inc., a North Dakota Corporation, and Dimension Marketing, Inc., a North Dakota Corporation, Defendants, Appellees and Cross-Appellants
• Court: North Dakota Supreme Court

596 N.W.2d 38

1999 ND 120

FARGO FOODS, INC., an Oregon Corporation, and Portland Food Products Company, an Oregon Corporation, Plaintiffs, Appellants and Cross-Appellees v. Jack BERNABUCCI, Scott Fridlund, Don Russell, Cloverdale Foods, Inc., a North Dakota Corporation, and Dimension Marketing, Inc., a North Dakota Corporation, Defendants, Appellees and Cross-Appellants

No. 980283.

Supreme Court of North Dakota.

June 25, 1999.

David S. Maring (argued), Maring Williams Law Office, Bismarck, and Jeffrey J. Keyes and James J. Long (on brief), Briggs & Morgan, Minneapolis, MN, for plaintiffs, appellants and cross-appellees.

Jon J. Jensen, Pearson, Christensen, Clapp, Fiedler, Fischer & Jensen, Grand Forks, for defendants, appellees and cross-appellants.

VANDE WALLE, Chief Justice.

[¶ 1] Fargo Foods, Inc., (formerly known as American Specialty Foods),¹ and its parent company, Portland Food Products Company, (collectively referred to as sellers) appealed from a judgment dismissing with prejudice their complaint against Jack Bernabucci, Scott Fridlund, Don Russell, Cloverdale Foods, Inc., and Dimension Marketing, Inc. (collectively referred to as purchasers). The purchasers cross-appealed from the dismissal with prejudice of their counterclaim against the sellers. We affirm.

I

[¶ 2] American Specialty Foods operated a large food processing facility in Fargo. Dimension Marketing is a North Dakota corporation, and Fridlund is its sole shareholder and officer. Cloverdale Foods is a large meat processing and distribution company. Russell is the chairman and CEO of Cloverdale. Bernabucci is a director of Cloverdale.

[¶ 3] In 1993, the purchasers and sellers began negotiations for the sale of American Specialty Foods, which had been experiencing financial difficulties. On July 29, 1994, after several offers and counteroffers, the sellers and purchasers entered into an "assets purchase agreement" which designated Dimension Marketing as the "purchaser," and Cloverdale and Russell as "joint obligors." Russell and Fridlund signed the agreement on behalf of Dimension Marketing, and Russell and Bernabucci signed on behalf of Cloverdale. Dimension Marketing agreed to purchase American Specialty Foods' business assets, including land, buildings, related equipment, inventory, and accounts receivable. Dimension Marketing also agreed to assume American Specialty Foods' obligations to suppliers and vendors. The parties agreed to a $8,750,000 purchase price, with $5,000,000 in cash due at closing, $3,000,000 secured by a real estate mortgage, and $750,000 payable in quarterly installments over five years.

[¶ 4] The agreement outlined several representations and warranties by the sellers, including there had been no adverse and material changes in American Specialty Foods' operations since March 31, 1994. The sellers agreed to refrain from engaging in any transaction outside the ordinary course of American Specialty Foods' business and to use best efforts to preserve existing business relations with its suppliers.

[¶ 5] The agreement set an August 22, 1994 closing date for the transaction and provided:

10.1 Termination. This Agreement may be terminated after execution and before the Closing Date only on one of the following grounds:

(a) by mutual written consent of Purchaser and Seller; or

(b) after written notice by either party, which notice must provide the other party reasonable opportunity to cure, if there has in fact been a material misrepresentation in the warranties or representations given by the other party under this Agreement.

In the event of termination by any party as above provided, prompt written notice shall be given to the other party.

[¶ 6] At a meeting on Monday, August 22, 1994, the purchasers refused to close the sale, and they orally indicated the sellers had breached the agreement. According to Russell, the purchasers were unwilling to close the transaction unless the sellers agreed to satisfy trade creditors the purchasers claimed had not been paid in the previous two weeks and to return money the purchasers claimed had been diverted from American Specialty Foods. On August 23, 1994, the parties had another meeting and Russell read a statement indicating the sellers had breached the agreement.

[¶ 7] On August 24, 1994, counsel for the purchasers sent the sellers a letter stating:

Pursuant to paragraph 10.1(b) of the Asset Purchase Agreement, DMI hereby gives notice of termination of the contract arising from material misrepresentations given by the Seller in the Agreement. DMI believes that material breaches have occurred that include but may not be limited to Section 5.6(a)(e)(l )(n), Section 7.2(a) and (d) and Section 8.2.

DMI believes that in the two week period prior to closing, payments to trade creditors were discontinued, thus requiring a greater equity contribution to sustain the business than required at the time of July 29, 1994, Agreement. In addition, DMI believes that $1.8 million dollars, more or less, was diverted to Portland Food Products Company entities and affiliates in blatant disregard of the Purchaser's rights, created under the Asset Purchase Agreement.

DMI's financing commitments remain in place and DMI continues to be ready and able to perform its obligations for payment and the Seller is hereby given an opportunity to cure the default by depositing into the account of ASF, for payment to trade creditors all sums withdrawn or not deposited in ASF account in the ordinary course of business, in the estimated amount of $1.8 million dollars, more or less. Please advise whether the Seller will cure the defaults stated above in a timely manner. If a timely cure is not undertaken, which DMI believes should be no later than 9:00 a.m. Friday, August 26, 1994, DMI will consider the Agreement breached by the Seller and terminated.

On August 24, 1994, counsel for the purchasers sent the sellers another letter stating:

After further review of the conduct of the Seller, in the two week period prior to closing, DMI believes that the Seller has also violated Section 5.6(g) and (m) and Section 7.2(b) and (e).

DMI believes that discontinuing payments to trade creditors was not in the ordinary course of business considering that historically collected account receivables have been applied to trade payables. It appears the funds collected were paid out to PFP or its affiliates and said conduct is detrimental to trade payable vendors. The actions are contrary to customary past practices of the Seller and are outside the ordinary course of business.

The effect of the Seller's action was to severely reduce and impair the working capital necessary to preserve and maintain the business.

[¶ 8] The sellers took no action to cure by August 26 and in September the sellers sold American Specialty Foods to another buyer for $5,250,000, and the company's name was changed to Fargo Foods.

[¶ 9] The sellers sued the purchasers for breach of contract and fraud, and the purchasers counterclaimed for breach of contract and fraud. After a bench trial, the trial court dismissed with prejudice the sellers' complaint, ruling (1) the assets purchase agreement was a binding contract, but the sellers breached material provisions of the agreement and did not cure their breach; and (2) the sellers' allegation of fraud was not supported by clear and convincing evidence. The court also dismissed with prejudice the purchasers' counterclaim, finding it was not supported by the evidence. The sellers appealed, and the purchasers cross-appealed.

II

[¶ 10] We review the trial court's findings of fact under the "clearly erroneous" standard of N.D.R.Civ.P. 52(a). A finding of fact is clearly erroneous if it is induced by an erroneous conception of the law, if there is no evidence to support it, or if, although there is some evidence to support it, on the entire record, a reviewing court is left with a definite and firm conviction a mistake has been made. Schmitz v. Schmitz, 1998 ND 203, ¶ 5, 586 N.W.2d 490. A trial court's conclusions of law are fully reviewable. Edwards v. Edwards, 1997 ND 94, ¶ 4, 563 N.W.2d 394.

III

[¶ 11] The sellers argue the purchasers breached the agreement by failing to comply with the termination provision. The sellers argue the purchasers failed to give timely written notice of the alleged material misrepresentations prior to their refusal to close. The sellers also argue the purchasers' purported notice of termination sought cure of actions that were not a breach of the agreement.

[¶ 12] A provision in a contract allowing termination of the contract under certain conditions will be enforced if the party seeking termination complies with the conditions of the termination provision. See Ray Co., Inc. v. Johnson, 325 N.W.2d 250, 252 (N.D.1982)

; McWithy v. Heart River Sch. Dist., 75 N.D. 744, 749, 32 N.W.2d 886, 889 (1948). A contract cannot be arbitrarily terminated under a provision authorizing termination. McWithy, 75 N.D. at 749, 32 N.W.2d at 889. Other courts also recognize a party seeking to terminate a contract under a termination provision must comply with the requirements of the termination clause. See Bausch & Lomb, Inc. v. Bressler, 977 F.2d 720, 727 (2nd Cir.1992); Filmline (Cross-Country) Prod. v. United Artists, 865 F.2d 513, 518-19 (2nd Cir.1989); Tomsheck v. Doran, 126 Mont. 598, 256 P.2d 538, 543 (1953). See generally 17A Am.Jur.2d Contracts § 559 (1991).

[¶ 13] Our analysis of the termination issue starts with the interpretation of the termination clause. See Ray, 325 N.W.2d at 252-53

. The construction of a written contract to determine its legal effect is a question of law. Pamida, Inc. v. Meide, 526 N.W.2d 487, 490 (N.D.1995). We construe contracts to give effect to the parties' mutual intention at the time of contracting. N.D.C.C. § 9-07-03; Pamida, at 490. The parties' intention must be ascertained from the writing alone, if possible. N.D.C.C. § 9-07-04; Pamida, at 490...