Hendricks v. Callahan

Decision Date02 September 1992
Docket NumberNo. 91-3267,91-3267
Citation972 F.2d 190
Parties20 UCC Rep.Serv.2d 25 Kenneth A. HENDRICKS, individually; Dealers Supply Holding Company, Inc., and Kenneth A. Hendricks, assignee; Kenneth A. Hendricks, for the use and benefit of Dealers Supply Holding Company, Inc.; Dealers Supply Holding Company, Inc., Appellants, v. James H. CALLAHAN, Appellee.
CourtU.S. Court of Appeals — Eighth Circuit

Karl W. Leo, Huntsville, Ala., argued (Marla Rakerd Tipping, Minneapolis, Minn., appeared on the brief), for appellants.

Steven E. Rau, St. Paul, Minn., argued (Mark R. Gleeman, appeared on the brief), for appellee.

Before FAGG, Circuit Judge, HENLEY, Senior Circuit Judge, and HANSEN, Circuit Judge.

HENLEY, Senior Circuit Judge.

Appellants, Kenneth A. Hendricks ("Hendricks") and Dealers Supply Holding Company, Inc. ("Dealers Supply"), appeal from the district court's 1 order granting summary judgment on one warranty claim and from its order for judgment on the merits of another warranty claim. We affirm.

I.

This case involves a purchase agreement for the sale of stock. In 1985, Dealers Supply, a company whose sole stockholder is Hendricks, agreed to buy the stock of Callahan Steel Supply, Inc. ("Callahan Steel") from appellee, James H. Callahan ("Callahan"), and the Callahan Steel Supply Profit Sharing Trust. Under this agreement (the "Purchase Agreement"), Callahan made various warranties and promises, three of which are the focus of this appeal.

First, Callahan warranted that Callahan Steel's financial statements "fairly reflect the Corporation's assets, liabilities, equity and results of operations as of March 31, 1985" (the "Financial Statement Warranty"). Second, Callahan warranted that Callahan Steel had "good and marketable title to all properties owned by it, as reflected on the balance sheet, free and clear of all title defects, obligations, liabilities, liens, encumbrances, charges and claims of any kind, except for: ... liens and encumbrances and other matters reflected in the Balance Sheet" (the "Property Warranty"). Third, Callahan promised to "hold the company [Dealers Supply] harmless in and for all liabilities that may inure to the Corporation [Callahan Steel] related to the ABERDEEN DEVELOPMENT CORPORATION, Plaintiff, vs. CALLAHAN STEEL SUPPLY, INC. ET AL, lawsuit now pending in Aberdeen, South Dakota," and promised to "bear all expenses of said litigation" (the "Litigation Indemnity Agreement").

Callahan Steel conducted its business in two locations: Newport, Minnesota and Aberdeen, South Dakota. In Aberdeen, Callahan Steel leased a warehouse from the Aberdeen Development Corp. ("ADC"). In fact, Note 12 of the Financial Statement stated: "The Company [Callahan Steel] leases warehouse and equipment in Aberdeen, South Dakota under an agreement which is cancellable by the Company at any time." When the Purchase Agreement was executed, Callahan Steel was engaged in litigation with ADC, as disclosed in the Litigation Indemnity Agreement, and a mechanic's lien had been placed on the property. It is undisputed that Dealers Supply and Hendricks knew of this lien on the Aberdeen leasehold, even though the lien is not specifically mentioned in the Litigation Indemnity Agreement or the Financial Statement.

In 1987, Hendricks decided to sell Dealers Supply. Certain assets, including the Aberdeen leasehold, were to be sold to A.P.I. Supply Company ("API"). Because the property was still encumbered by the mechanic's lien, and the related litigation was still pending, Dealers Supply was unable to furnish API with clear title. Although Dealers Supply offered to assign the benefit of the Litigation Indemnity Agreement to API, and Callahan was willing to make good on the Litigation Indemnity Agreement, API would not purchase the Aberdeen property without clear title. Callahan refused to settle the litigation or to escrow money to provide clear title, API did not purchase the leasehold, and Dealers Supply did not realize the desired price for the Aberdeen leasehold.

Although Dealers Supply did not sell the Aberdeen leasehold to API, it did sublet the warehouse to API for a time. API eventually left Aberdeen in 1989 and Dealers Supply was unable to relet the property. Because Dealers Supply was no longer actively conducting business, it sought to cancel its Aberdeen lease with ADC. Although Note 12 of the Financial Statement indicated that the Aberdeen lease was "cancellable at any time," the actual lease provisions did not allow Dealers Supply to terminate the lease without liability. Instead, Dealers Supply forfeited a substantial amount of personal property to the lessor in order to cancel and terminate the Aberdeen lease.

Appellants (collectively referred to as "Hendricks") brought this suit against Callahan alleging four counts. The district court ruled in Callahan's favor on all counts, and on appeal Hendricks challenges the district court's rulings on two of those counts. In Count II, Hendricks asserted Callahan breached the Property Warranty and the Litigation Indemnity Agreement by failing to provide clear title to the Aberdeen leasehold. The district court granted Callahan's motion for summary judgment on Count II. In Count III, Hendricks alleged Callahan breached the Financial Statement Warranty because Note 12 of the Financial Statement indicated that the Aberdeen lease was cancellable when, in fact, the lease was not. The district court refused to grant summary judgment on this issue, but after a bench trial ruled that Hendricks had failed to prove his breach of warranty claim.

II.

Hendricks argues the district court erred in finding that Callahan did not breach either the Property Warranty or the Financial Statement Warranty. Essential to the court's rulings is its determination that Minnesota law requires a party alleging a breach of express warranty to have relied on that warranty when making the contract. Before addressing the merits of each warranty claim, we must decide whether Minnesota law requires a purchaser to rely on the warranty to succeed in a breach of warranty claim.

A. The Requirement of Reliance

As the district court correctly noted, "[w]hether tort-like reliance is a necessary element in a claim for a breach of express warranty is a difficult question, at best." The court determined, however, that "the law of Minnesota appears to require some form of reliance" on the part of the buyer as an element for a breach of express warranty claim. In this diversity case, the elements of a breach of warranty claim are a question of Minnesota law. We review a district court's determination of state law de novo. Salve Regina College v. Russell, --- U.S. ----, 111 S.Ct. 1217, 1225, 113 L.Ed.2d 190 (1991).

In concluding that reliance is required, the district court cited only one case, Midland Loan Finance Co. v. Masden, 217 Minn. 267, 14 N.W.2d 475, 481 (1944) ("To enable a party relying upon a breach of express or implied warranty to recover, it must be clear and definite that there was reliance upon the warranties involved."). Hendricks argues that Midland no longer reflects the current law in Minnesota and urges us to hold that the buyer's reliance is irrelevant in a breach of warranty claim. We decline to do so.

Hendricks gives several reasons why we should not follow Midland. First, he argues that because Midland was decided prior to Minnesota's adoption of the Uniform Commercial Code ("UCC"), its discussion of express warranties is no longer valid. In 1966, the UCC became effective in Minnesota. It defines an express warranty as an affirmation "which relates to the goods and becomes the basis of the bargain." Minn.Stat.Ann. § 336.2-313 (1966). This provision replaced § 512.12 of the statutes and omitted the requirement that a buyer "rely" on an express warranty. 2 Hendricks contends the Minnesota legislature has omitted the requirement of reliance in this context and, in effect, overruled Midland.

We need not discuss in detail the subtle differences between "reliance" and "basis of the bargain." The transaction in this case (as well as the transaction in Midland 3) was not a "transaction[ ] in goods" and therefore is not covered by the provisions of the UCC. See Minn.Stat.Ann. § 336.2-102 (1966). Even if we apply the UCC warranty provisions by analogy, we are not convinced Minnesota has completely abandoned the requirement of reliance. Compare Minnesota Code Comment to § 336.2-313, at 280 ("This difference in terminology [between "reliance" and "basis of the bargain"] probably brings about no great change in the results of cases.") with Uniform Commercial Code Comment to § 336.2-313, at 282 ("[N]o particular reliance on such statements [i.e., express warranties] need be shown to weave them into the fabric of the agreement."). See also Wurm v. John Deere Leasing Co., 405 N.W.2d 484, 489 (Minn.Ct.App.1987) (applying § 336.2-313, the court stated "[a]ppellant admitted that he did not rely on the representations in purchasing [the tractor] ..., therefore, the trial court properly granted partial summary judgment on his claims of misrepresentation and breach of an express warranty." (Emphasis added)).

Hendricks also argues that Midland has been overruled sub silentio by recent Minnesota Supreme Court decisions. He relies on Peterson v. Bendix Home Systems, 318 N.W.2d 50 (Minn.1982), for the proposition that the Minnesota Supreme Court no longer requires reliance as an element of a breach of warranty claim. In Peterson, the court stated, "To establish a warranty claim the plaintiff must basically prove: the existence of a warranty, a breach, and a causal link between the breach and the alleged harm." 318 N.W.2d at 52-53. That these are the elements of a breach of warranty claim under the UCC in Minnesota is beyond dispute. See Schweich v. Ziegler, Inc., 463 N.W.2d 722, 730 (Minn.1990); Craft Tool & Die Co. v....

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