Heating & Air Specialists, Inc. v. Jones

• Decision Date: 07 June 1999
• Docket Number: 98-2047,Nos. 98-1809,s. 98-1809
• Citation: 180 F.3d 923
• Parties: , HEATING & AIR SPECIALISTS, INC., d/b/a A/C Service Company, Appellant, v. James JONES, Appellant, v. Lennox Industries, Inc., Appellee. Heating & Air Specialists, Inc., d/b/a A/C Service Company, Appellee, v. Lennox Industries, Inc., Appellant.
• Court: U.S. Court of Appeals — Eighth Circuit

180 F.3d 923, HEATING & AIR SPECIALISTS, INC., d/b/a A/C Service Company, Appellant, v. James JONES, Appellant, v. Lennox Industries, Inc., Appellee.

Heating & Air Specialists, Inc., d/b/a A/C Service Company, Appellee, v. Lennox Industries, Inc., Appellant.

Nos. 98-1809, 98-2047.

United States Court of Appeals, Eighth Circuit.

Submitted Jan. 14, 1999.

Filed June 7, 1999.

Appeals from the United States District Court for the Western District of Arkansas.

BEFORE: WOLLMAN ¹, FLOYD R. GIBSON, Circuit Judges, and TUNHEIM, ² District Judge.

TUNHEIM, J.

Heating and Air Specialists, Inc. ("A/C") brought suit against Lennox Industries, Inc. ("Lennox") alleging breach of contract, violation of the Arkansas Franchise Practices Act, Ark.Code Ann. §§ 4-72-201 et seq. ("AFPA"), and fraud arising from Lennox's decision to terminate A/C's franchise with Lennox. Lennox counterclaimed for amounts allegedly due from the sale of goods to A/C, and joined James Jones ("Jones"), A/C's sole shareholder, as a third party counter-defendant. The district court dismissed A/C's claim under the AFPA on a motion for summary judgment, but permitted the remaining issues to proceed to trial. A/C and Jones appeal from the district court's grant of summary judgment on A/C's claim under the AFPA. They further argue that the district court erred by submitting various instructions to the jury, including an instruction stating that A/C could be liable on Lennox's counterclaim without regard to whether Lennox breached its agreements with A/C, and an instruction regarding Jones's individual liability for A/C's debts that did not require Lennox to prove fraud in order to disregard the corporate entity. A/C and Jones additionally claim that the district court erred in failing to instruct the jury on the issues of promissory estoppel and waiver. Lennox cross-appeals, arguing that the district court erred in submitting A/C's breach of contract claims to the jury. We reverse in part and affirm in part.

I.

A/C, a corporation engaged in marketing heating and air conditioning products, began negotiating with Lennox to become a dealer of Lennox equipment and supplies in 1994. Lennox representatives met with Jones at A/C's office in Van Buren, Arkansas, and made several specific promises to A/C in connection with the proposed dealership. Lennox documented these agreements in a written memorandum to Jones dated September 27, 1994. The agreements include a promise to provide $40,000 for start-up costs, a minimum of 3.5 percent account credit on purchases from Lennox for A/C's advertising costs ("co-op payments"), and an option to sell Lennox products on consignment. Furthermore, Jones testified at trial that sometime in 1994 Lennox representatives verbally offered A/C the option to participate in a "fall stocking program" providing deferred payment due dates in May, June and July for products purchased in the fall.

The parties signed a "dealer agreement" on October 10, 1994, consisting of a standard form contract drafted by Lennox that set forth the terms of its business relationship with its dealers. It stated that it was effective through December 31, 1994, but that either party could terminate the agreement with or without cause upon thirty days' notice. It further stated that the agreement would terminate immediately upon the occurrence of any of several enumerated events, including A/C opening another facility at a location not specified therein. It also contained a choice of law clause, stating that "the laws of the State of Texas shall govern [the agreement's] interpretation." The parties thereafter signed virtually identical contracts effective from January 1, 1995 through December 31, 1995, and January 2, 1996 through December 31, 1997.

At the inception of the parties' business relationship, A/C operated only one location out of its principal office in Van Buren, Arkansas. Sometime in early 1995 Jones decided to open a location in Tulsa, Oklahoma. Although the parties offered conflicting testimony as to whether Lennox initially knew about A/C's entry into the Tulsa market, they agree that ultimately Lennox's district sales manager for both Oklahoma and Arkansas, Francis Franck ("Franck"), became aware of it. Franck met with Jones sometime in 1995 and gave Jones verbal authorization to sell Lennox products in Tulsa, at least on a temporary basis, ³ however, at no time did any of the three dealer agreements between A/C and Lennox ever reflect that A/C had permission to operate a location in Tulsa. Several of Lennox's pre-existing dealers in Tulsa subsequently complained to Lennox about A/C's presence in the Tulsa market.

In September 1995 Lennox terminated Franck's employment and appointed two new district sales managers for Arkansas and Oklahoma. A/C states that its relationship with Lennox deteriorated rapidly following Franck's termination. Jones testified at trial that Lennox promised A/C deferred payment terms under its fall stocking program for 1995, but dishonored those terms by including immediate due dates on invoices to A/C for products purchased under the program.

In the spring of 1996, Lennox's district sales manager over Tulsa decided to terminate A/C's franchise at that location. He testified at trial that among the factors contributing to his decision was A/C's failure to keep its account with Lennox current. On July 3, 1996, Lennox representatives met with Jones at his office in Van Buren and informed him of Lennox's decision to terminate the Tulsa franchise. Lennox documented its decision in a letter to Jones dated July 11, 1996. The letter noted that A/C's location in Tulsa was not a franchise location authorized under the January 2, 1996 dealer agreement between the parties, but did not inform A/C that its delinquent account was a reason for Lennox's decision to terminate the franchise. The letter stated that August 1, 1996 was a "target" date for terminating A/C's purchases from Lennox for the Tulsa location, but stated that Lennox was willing to give A/C more time upon request through September 30, 1996.

On August 9, 1996, Lennox sent A/C a letter terminating its entire franchise. The letter stated that A/C had defaulted on its payment obligations and that for this reason Lennox would terminate the parties' relationship ninety days from the date of the letter if A/C failed to rectify the deficiency within the next ten days. A/C did not pay the outstanding balance on its account within the time specified, and Lennox accordingly terminated the franchise. A/C filed suit against Lennox later the same month.

At trial the district court bifurcated A/C's surviving claims into a breach of contract claim for each franchise location, and a fraud claim for each location. The jury found in favor of Lennox on both fraud claims and in favor of A/C on both breach of contract claims. It awarded A/C zero damages on the "Van Buren breach of contract," and $40,000 on the "Tulsa breach of contract." The jury additionally awarded Lennox $233,236 on its counterclaim for A/C's outstanding account balance, resulting in a net judgment in favor of Lennox of $193,236.

II. Choice of Law

In dismissing A/C's claim under the AFPA on summary judgment, the district court held that under the choice of law rules of Arkansas the substantive laws of Texas governed the parties' relationship. Our review of the district court's determination of state law and its application of the state's choice of law rules is de novo. See Whirlpool Corp. v. Ritter, 929 F.2d 1318, 1321 n. 4 (8th Cir.1991). "Federal district courts apply the choice of law rules of the state in which they sit when jurisdiction is based on diversity of citizenship." Baxter Int'l, Inc. v. Morris, 976 F.2d 1189, 1195 (8th Cir.1992) (citing Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487 (1941)). The district court thus correctly found that the choice of law rules of Arkansas govern the determination of this matter. We disagree, however, with the manner in which the district court applied those rules.

In contract actions raising conflict of laws issues, the Arkansas courts have developed two apparently separate and opposing lines of cases. In Cooper v. Cherokee Village Development Co., the Arkansas Supreme Court noted that courts have applied four tests to determine what law governs a multi-state contract:

The law of the state in which the contract was made; the law of the state in which the contract is to be performed in its most essential features; the law of the state which the parties intended to govern the contract, provided that state has a substantial connection with the contract; and, the law of the state which has the most significant contacts with the matter in dispute (also known as the 'center of gravity' or 'grouping of contacts' theory).

364 S.W.2d 158, 161-62 (Ark.1963) (citing Leflar, Conflict of Laws §§ 124, 125 (1959)). Applying only the first three theories to the case at bar, the Cooper court explicitly refused to adopt the "center of gravity" approach. Id. at 162. The court thus considered only the state of contract execution, the state of performance, and the parties' explicit choice of law in determining that the laws of New York rather than Arkansas governed the contract at issue. The court accordingly upheld the validity of the contract, which was usurious under the laws of Arkansas but enforceable under the laws of New York. In further support of its decision the Cooper court argued, "This court has consistently inclined toward applying the law of the state that will make the contract valid, rather than void." Id. But see Huchingson v. Republic Finance Co., 370 S.W.2d 185, 186 (Ark.1963) (citing Cooper and cautioning that the courts' inclination toward the law that will make the contract valid "is only applicable where ostensibly the law of either state could apply, or where there is doubt as to which properly should apply"); cf. Evans v. Harry Robinson...