Leasco Corporation v. Taussig, 921

• Decision Date: 12 December 1972
• Docket Number: No. 921,Docket 72-1556.,921
• Citation: 473 F.2d 777
• Parties: LEASCO CORPORATION, Plaintiff-Respondent, v. Peter T. TAUSSIG, Defendant-Appellant.
• Court: U.S. Court of Appeals — Second Circuit

473 F.2d 777 (1972)

LEASCO CORPORATION, Plaintiff-Respondent, v. Peter T. TAUSSIG, Defendant-Appellant.

No. 921, Docket 72-1556.

United States Court of Appeals, Second Circuit.

Argued August 18, 1972.

Decided December 12, 1972.

James E. Tolan, New York City (Judith S. Kaye, Joseph C. Kaplan, Olwine, Connelly, Chase, O'Donnell & Weyher, and Fuller, Lawton & Moyles, New York City, on the brief), for defendant-appellant.

Morton L. Ginsberg, New York City (Hoffberg, Margolies & Ginsberg, New York City, on the brief), for plaintiff-respondent.

Before MANSFIELD and TIMBERS, Circuit Judges, and GURFEIN, District Judge.^*

TIMBERS, Circuit Judge:

The essential questions presented on this appeal from a judgment for damages in amount of $669,000, entered in this diversity action in favor of plaintiff Leasco Corporation against defendant Peter T. Taussig, following a 4 day nonjury trial in the Southern District of New York, Harold L. Tyler, District Judge, are the propriety of the district court's rulings that defendant's claim of rescission based on mutual mistake and misrepresentation was without merit; that defendant had breached his agreement to purchase the stock of one of plaintiff's subsidiaries; and that, defendant having failed specifically to perform such agreement, plaintiff was entitled to damages. Finding no error, we affirm.

I. BACKGROUND FACTS

Leasco Corporation (Leasco) is a Delaware corporation with its principal place of business in New York City. Prior to 1969, Leasco had acquired Louis Berger, Inc. (Berger, Inc.), a firm engaged on an international basis in civil engineering and consulting. Louis Berger Associates (Associates), a wholly owned subsidiary of Berger, Inc., also was acquired by Leasco and, together with Berger, Inc., constituted the "Berger division" of Leasco.

In July 1969, Leasco engaged appellant Peter T. Taussig as vice president and counsel to Berger, Inc. Taussig, a citizen of New Jersey, had civil engineering and law degrees and had practiced law — primarily concerned with construction contracts — in New York City for several years. Leasco hired him through the efforts of Frederick A. Jackson, vice president and corporate counsel for Leasco, who had become acquainted with Taussig when they were both associates in the early 1960's in a New York City law firm.

Shortly after joining Berger, Inc., Taussig became involved in the efforts of Berger, Inc. to acquire the assets of McCreary-Koretsky Engineers, Inc. (MKE), a California corporation engaged in civil engineering and consulting work. Leasco and Berger, Inc. were interested in acquiring MKE's assets in order to expand Leasco's "Berger division" and to make it more efficient. In late 1969 and early 1970, Taussig was asked to investigate MKE. He examined the service contracts held by MKE, as well as its balance sheets and income statements.

MKE at that time was facing bankruptcy because of income taxes due the federal government and a major lawsuit brought by one of its clients. A wholly owned subsidiary of Berger, Inc., McCreary-Koretsky International, Inc. (MKI), was able to acquire the contracts and personnel of MKE as part of a reorganization agreement. MKI had been incorporated specifically for the purpose of acquiring the assets of MKE. MKE was to be paid a percentage of the profits made by MKI on the acquired MKE contracts. The reorganization agreement was closed on September 16, 1970, effective as of April 1, 1970.

Taussig became a vice president of MKI. He acted as a liaison executive between MKI, the Berger companies, and Leasco. His task was to keep Leasco informed about MKI's activities, including its financial condition.

In early December 1970, Leasco began to consider divestiture of its entire Berger division. Leasco's management did not like the severe income fluctuations which are characteristic of the civil engineering and consulting business. They also believed that Leasco did not have enough experience effectively to run these businesses.

When Taussig learned that Leasco intended to divest itself of MKI, he offered to purchase it. In late December 1970, Jackson and Taussig discussed the possibility of a sale to Taussig. Taussig estimated that MKI's pre-tax earnings for the fiscal year ending September 30, 1971 would be about $200,000. Jackson suggested that an appropriate sales price would be 10 times these projected pre-tax earnings, or $2,000,000. They then cut this amount in half, to $1,000,000, because, pursuant to the reorganization agreement with MKE, MKI was required to transfer approximately 50% of its profits to MKE. Taussig generally agreed to these price terms, but suggested a package of $625,000 cash combined with a release by Taussig of Leasco's guarantee of an outstanding loan of $375,000 to MKI from The Bank of America. Jackson agreed to these terms.

With the basic terms agreed upon, the parties began to draft a formal agreement. Taussig at the time was no longer formally employed by Berger, Inc. In April 1970, he had informed Mr. Louis Berger, chief executive of the Berger operations, that he would resign on November 2, 1970. His resignation was finally accepted in late December 1970, but he continued to work unofficially for Leasco. He moved into offices at Leasco in New York and worked closely with Jackson. He thus had access to the same financial data and other information concerning MKI as did the officers of Leasco.

On Feburary 26, 1971, an agreement was entered into for the sale of MKI to Taussig. The closing date was to be April 15, but later was changed by mutual consent to May 28. The price for MKI was $625,000, plus Taussig's release of Leasco from its guarantee to The Bank of America of its outstanding loan of $375,000 to MKI. Two days later, in order to increase the working capital of MKI, Taussig authorized an additional loan of $200,000 by The Bank of America to MKI, with a guarantee by Leasco. Later, another $25,000 was loaned by The Bank of America to MKI and guaranteed by Leasco.

On March 12, 1971, Taussig received the February financial statement for MKI. It disclosed a net loss of $4,702. Taussig traveled to San Francisco where the headquarters of MKI were located. There he learned that a design error in the Fruitvale Bridge job, one of MKI's construction projects, had caused a substantial carryback loss which accounted for the income loss reflected in the February financial statement. This error also resulted in net losses for the months of March and April.

In April 1971, Taussig, in conversations with Jackson and others, indicated that he might not go through with the purchase. On May 28, a representative of Leasco attended the closing and tendered to Taussig the stock as required by the contract. Taussig refused to accept the tender or to perform as required under the contract.

On June 8, Leasco commenced this action seeking specific performance or damages. It claimed that Taussig had wrongfully refused to purchase all the shares of MKI. Taussig by way of defense claimed rescission of the agreement on the grounds of mutual mistake and misrepresentation with regard to material facts. On September 21, the district court denied Leasco's motion for summary judgment, but ordered discovery limited to the issue of the meaning of certain contract provisions and to the issue of mitigation of damages.

After a nonjury trial in January 1972, the district court filed an opinion on February 23, 1972 holding that there was no misrepresentation or mutual mistake and that Taussig had breached the agreement without factual or legal justification. The court ordered specific performance by Taussig at a reduced price of $169,000, together with a release by Taussig of Leasco from the $500,000 bank loan guarantee; or, if Taussig should fail to perform, a judgment for damages equal to the sales price plus the amount of the loan guarantee, for a total of $669,000. When Taussig failed to perform, a judgment in amount of $669,000 was entered against him.

II. DEFENDANT'S CLAIM OF RESCISSION

It is undisputed that the contract between Leasco and Taussig was properly executed, and that Leasco made a proper tender of MKI stock on the closing date. Taussig contends here, as he did below, however, that the agreement should be rescinded because the contracting parties were mutually mistaken about a fact material to the agreement or because Leasco negligently misrepresented material facts. These allegedly mistaken or misrepresented facts relate to the projected and actual earnings of MKI.

(A) Alleged Mutual Mistake

When Jackson and Taussig first discussed the sale to Taussig of MKI in late December 1970, Taussig estimated that the projected pre-tax earnings for MKI for fiscal year 1971 would be about $200,000. MKI's budget in fact showed $197,000 as the anticipated pre-tax earnings for MKI. When Taussig examined Leasco's management reports in January 1971, a graph representing MKI's financial condition showed the line for actual earnings through January approaching the line for anticipated earnings to that date. No doubt the $200,000 estimated earnings figure was one of several factors which determined the sales price of MKI. From these circumstances, Taussig argues that a basic assumption of both parties in negotiating the contract was that they were dealing with a company which would earn $200,000 in the fiscal year ending September 30, 1971. MKI in fact lost $12,000 during that fiscal year. Taussig contends therefore that the agreement should be rescinded because both parties were mistaken about this material fact.

The legal concept of "mistake" is similar to the legal concept of "misrepresentation" in that, under each, a party to a contract may be relieved from his obligations if he was unaware of certain material facts. "Mistake", however, is only such error as is made without representation or deception by the other party to the transaction. 13 Williston on Contracts § 1540 ...