Gary's Implement v. BRIDGEPORT TRACTOR, No. S-03-941

• Citation: 270 Neb. 286,702 N.W.2d 355
• Decision Date: 29 July 2005
• Docket Number: No. S-03-1242., No. S-03-941
• Parties: GARY'S IMPLEMENT, INC., appellee, v. BRIDGEPORT TRACTOR PARTS, INC., formerly known as Gary's Tractor Parts, Inc., appellant.
• Court: Supreme Court of Nebraska

702 N.W.2d 355

270 Neb. 286

GARY'S IMPLEMENT, INC., appellee, v. BRIDGEPORT TRACTOR PARTS, INC., formerly known as Gary's Tractor Parts, Inc., appellant.

Nos. S-03-941, S-03-1242.

Supreme Court of Nebraska.

July 29, 2005.

Jerrold L. Strasheim and Mary Leiter Swick, of Baird, Holm, McEachen, Pedersen, Hamann & Strasheim, L.L.P., and James L. Zimmerman, of Sorensen, Zimmerman & Mickey, P.C., for appellant.

Howard P. Olsen, Jr., and John F. Simmons, of Simmons Olsen Law Firm, P.C., for appellee.

HENDRY, C.J., WRIGHT, CONNOLLY, GERRARD, STEPHAN, McCORMACK, and MILLER-LERMAN, JJ.

MILLER-LERMAN, J.

NATURE OF CASE

This contract case, embodied in cases Nos. S-03-941 and S-03-1242, generally involves one transaction, the sale of a business by appellee, Gary's Implement, Inc. (Seller), to appellant, Bridgeport Tractor Parts, Inc. (Buyer). The transaction was accomplished by execution of several documents on July 15, 1998. The three documents critical to this appeal are labeled: "Agreement," "Promissory Note," and "Non-Competition Agreement." The three documents refer variously to one another. In this lawsuit, Seller generally claimed that Buyer failed to make certain payments due after the sale, and Buyer generally alleged and counterclaimed that Seller improperly competed with it and failed to deliver goodwill and that, therefore, its obligation to make periodic payments to Seller was excused. Buyer sought damages. Buyer did not seek rescission. Buyer's counterclaim was rejected by a jury, Seller's claims were successful before the court, and judgment in favor of Seller in the amounts of $612,225 and $20,000 on the Promissory Note and Non-Competition Agreement, respectively, plus interest, was entered by the district court for Morrill County. Buyer appeals. As explained below, we reverse and vacate, and remand for further proceedings.

SUMMARY OF CASE

The business underlying the transaction involved agricultural equipment, more particularly, Seller's "salvage and used parts business." In summary, the total purchase price of $1,050,000 was allocated and payable as follows: pursuant to the Agreement, $525,000 was allocated to equipment and inventory to be paid at closing; pursuant to the agreements, $500,000 was allocated to the sale of goodwill to be paid pursuant to the Promissory Note over 5 years; and, pursuant to the Non-Competition Agreement, $25,000 was allocated to Seller's agreement to not compete with Buyer, payable over 5 years.

On October 5, 2000, Seller filed a petition against Buyer in the district court for Morrill County. The petition contained two breach of contract "causes of action." In its petition, Seller alleged that Buyer had failed to make the separate payments due in 2000 under the Promissory Note and the Non-Competition Agreement. In its answer, Buyer alleged that its obligation to make these payments had been excused as a result of Seller's violation of the Non-Competition Agreement and Seller's failure to transfer goodwill, the purchase of which was reflected in the Promissory Note. Buyer alleged it had been damaged. Buyer also filed a counterclaim against Seller. In its counterclaim, Buyer alleged that Seller had breached the Non-Competition Agreement and other promises and sought damages therefor. In view of our disposition of the case, we do not comment on Buyer's claims for damages.

A trial was conducted over several days. The issue raised in Buyer's counterclaim as to whether Seller had breached the Non-Competition Agreement was given to the jury, and the issues raised in Seller's petition as to whether Buyer had violated its payment obligations under the Promissory Note and the Non-Competition Agreement were ultimately decided by the court. The parties do not disagree on appeal with the case having been submitted in this fashion.

During the trial, the parties and the court dedicated considerable time to the meaning of the Non-Competition Agreement and, in particular, to the nature of the business activities not subject to the Non-Competition Agreement and therefore reserved to Seller. After concluding that the Non-Competition Agreement was valid, the court instructed the jury on the meaning of the Non-Competition Agreement and submitted to the jury Buyer's counterclaim that alleged Seller had breached the Non-Competition Agreement and that Buyer had been damaged thereby. In its instruction summarizing and paraphrasing the Non-Competition Agreement, the court inserted additional language not found in the Non-Competition Agreement. After being so instructed, the jury rejected Buyer's counterclaim.

Pursuant to the jury's verdict on the counterclaim, on July 22, 2003, the district court entered judgment in favor of Seller on Buyer's counterclaim and in addition found in favor of Seller on its contract claims that alleged that Buyer's failure to make payments violated the Promissory Note and the Non-Competition Agreement. The court entered monetary judgment in favor of Seller on these breach of contract claims. Buyer appeals.

As explained below, we conclude that by virtue of its orders and instructions to the jury, the district court concluded that the Non-Competition Agreement was ambiguous, and we do not disagree with this conclusion. However, because the interpretation of the ambiguous Non-Competition Agreement was a question of fact that should have been determined by the jury, we conclude that the district court committed prejudicial error when it instructed the jury as to the meaning of certain provisions within the ambiguous Non-Competition Agreement. Because of this prejudicial error, judgment based on the verdict on the counterclaim must be reversed and vacated, and Buyer's counterclaim must be properly resubmitted to a jury. Further, it logically follows that the judgment in favor of Seller on its contract claim based on Buyer's failure to make payments under the Non-Competition Agreement must be reversed, and the resolution of this claim must await a proper jury outcome on Buyer's counterclaim.

As explained below, we further determine that in this transaction, the Promissory Note representing the sale of goodwill by Seller is inextricably intertwined with Seller's contractual obligation not to compete as embodied in the Non-Competition Agreement. Thus, the issue of whether the Promissory Note should be enforced as Seller seeks or whether Buyer's payment obligation under the Promissory Note should be excused or reduced by a damage award or setoff must necessarily follow a proper resolution of Buyer's counterclaim alleging that Seller violated the Non-Competition Agreement. We therefore conclude that the district court erred in entering judgment in favor of Seller on its breach of contract claim based on Buyer's failure to make payments under the Promissory Note and that such judgment must be reversed and vacated.

In summary, we reverse and vacate the judgment of the district court entered in favor of Seller on its petition and against Buyer on its counterclaim and remand the causes for further proceedings consistent with this opinion.

STATEMENT OF FACTS

Seller is owned by Gary and Joan Phillips and has been doing business in Bridgeport, Morrill County, Nebraska, since approximately 1970. The record reflects that Seller was engaged in at least two separate businesses, a salvage and used parts yard, and a used whole goods business, sometimes referred to as the "sales business," which sold used tractors, trucks, and farm equipment. On July 15, 1998, Seller entered into the Agreement with Buyer, by which Seller sold its "salvage and used parts business in Morrill County, Nebraska (the `Salvage Business')" to Buyer for a total purchase price of $1,050,000.

The terms of the transaction were carried out in three separate but interrelated documents: the Agreement, the Promissory Note, and the Non-Competition Agreement, all executed on July 15, 1998. The Agreement refers to and incorporates the Promissory Note and the Non-Competition Agreement, both of which are attached as exhibits to the Agreement. The Promissory Note refers to the Agreement. The Non-Competition Agreement refers to the Agreement and the Promissory Note.

Pursuant to the Agreement, Buyer purchased the following assets of the Salvage Business: (1) the equipment, motor vehicles, bookkeeping computer system, and radios used by Seller in the Salvage Business (the equipment); (2) the inventory of the Salvage Business; and (3) all goodwill and other intangible assets of the Salvage Business, including all customer lists and customer names (goodwill). Certain of Seller's assets were specifically excluded from the sale, including all of Seller's assets associated with Seller's business of selling whole used farm equipment and trucks.

Under the provisions of the Agreement, the purchase price for the sale was allocated and was to be paid by Buyer as follows:

(1) $525,000 was allocated to the purchase of Seller's equipment and inventory and was to be paid at the closing.

(2) $500,000 was allocated to the purchase of Seller's goodwill. This sum was to be paid in annual payments of $100,000 plus interest at the rate of 6 percent per annum. The first payment was due 1 year after the closing, with additional payments due on the same day of each subsequent year until paid in full. This amount was evidenced by the Promissory Note. Under the terms of the Promissory Note, Seller was to provide Buyer with "30 days of written notice" to cure any default under the Promissory Note.

(3) $25,000 was allocated to the Non-Competition Agreement to be executed by Seller and the Phillipses. Buyer agreed to pay Seller and the Phillipses $5,000 per year for 5 years, with the first payment due 1 year from the date of the execution of the Non-Competition Agreement, and with each additional payment due on the same day of each subsequent year.

The Non-Competition Agreement provided in pertinent part as follows:

1. [Seller and the

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