Massengale v. TRANSITRON ELECTRONIC CORPORATION

• Decision Date: 13 November 1967
• Docket Number: No. 6919.,6919.
• Citation: 385 F.2d 83
• Parties: John E. MASSENGALE, Trustee, Plaintiff, Appellant, v. TRANSITRON ELECTRONIC CORPORATION, Defendant, Appellee.
• Court: U.S. Court of Appeals — First Circuit

385 F.2d 83 (1967)

John E. MASSENGALE, Trustee, Plaintiff, Appellant, v. TRANSITRON ELECTRONIC CORPORATION, Defendant, Appellee.

No. 6919.

United States Court of Appeals First Circuit.

November 13, 1967.

COPYRIGHT MATERIAL OMITTED

Robert Braucher, Cambridge, Mass., with whom Harold Katz, Boston, Mass., was on the brief, for appellant.

Harold M. Willcox, Boston, Mass., with whom Ann S. Dodge and Herrick, Smith, Donald, Farley & Ketchum, Boston, Mass., were on the brief, for appellee.

Before ALDRICH, Chief Judge, and McENTEE and COFFIN, Circuit Judges.

COFFIN, Circuit Judge.

This is an appeal from a summary judgment entered for appellee in a diversity action in which appellant sought a brokerage fee from a putative buyer of a business who allegedly wrongfully withdrew from a purchase agreement appellant had initiated on behalf of the seller. The purchase agreement obligated the buyer to pay the broker "if and when" the transaction was consummated.

Appellant's assignors were the sole stockholders of McClellan and Burck, Inc. (Burck), a now dissolved New York corporation once engaged in the business of identifying and effecting mergers, acquisitions, sales and financing arrangements for its clients. During the years 1958 through 1961 it undertook some twenty acquisition and merger explorations for a Minnesota firm, Thermo King Corporation (Thermo King). This case arises from events which took place in 1960 when Burck had located two companies interested in acquiring Thermo King — Westinghouse Electric Corporation and appellee, Transitron Electronic Corporation (Transitron), a Delaware corporation having its principal place of business in Massachusetts.

For the purposes of establishing the basis of its compensation and providing a document for use in negotiations between Thermo King and either of the two prospects, Burck sent a letter on July 11, 1960 to Thermo King. According to the terms of this letter, Burck's compensation, "* * * in the event * * * a transaction is consummated with any company where our firm has originated the transaction", was to be computed on the basis of percentages of the sales price with a ceiling of $325,000 and was to be payable at the closing. The assumption was expressed that arrangements would be made for the acquiring company or the combined company to pay the fee, "* * * but in the absence of such an arrangement, the obligation shall be that of Thermo King Corporation." Thermo King noted its agreement with these terms subject to the condition that the acquiring company approve the amount of the fee.

A month later, on August 16, 1960, when negotiations had focussed on Transitron, Burck sent another letter to Thermo King stating its willingness to accept a reduced fee of $300,000 "* * to be due and payable when and if the proposed transaction with Transitron * * * is consummated." Burck noted its understanding that Transitron had approved the amount of its fee and that arrangements had been made with Transitron for payment. The reduction in fee was to apply only to a Transitron transaction.

On October 29, 1960, Thermo King and Transitron entered into an "Agreement and Plan of Reorganization" for the acquisition of all of Thermo King's business subject to its liabilities and in exchange for shares of Transitron stock. Upon transfer of its assets, Thermo King was to be promptly dissolved and the Transitron stock distributed to its shareholders. The mutual undertakings were conditioned on the accuracy of various stated representations and warranties and on the taking of necessary corporate actions (e. g., a vote by Thermo King stockholders adopting the plan). Each party agreed to "use its best efforts" to comply with all conditions. The agreement's clause relating to commissions read as follows:

"Transitron and Thermo King each represents that neither of them has retained any broker or paid or agreed to pay any brokerage fee or commission to any agent or broker for or on account of the transactions herein contemplated, except that Thermo King has agreed to pay a fee of $300,000 to Messrs. McClellan & Burck, Inc. of New York, New York, in the event that the said transactions are consummated, but not otherwise. Such fee shall be paid by Transitron if and when such transactions are effected."

The agreement also provided that it should be "governed by Minnesota law."

On December 19, 1960 Transitron sent Thermo King a notice terminating the agreement on the grounds of a material adverse change in Thermo King's business and the failure of Thermo King to call a stockholders' meeting. On December 22, 1960, Burck wrote Westinghouse in an effort to revive its interest, stating that the transaction had aborted because of a precipitous drop in the market value of Transitron's stock, which eroded Thermo King's price by almost 40 per cent.

On June 30, 1961, Thermo King entered into another "Agreement and Plan of Reorganization", this time with Westinghouse. A clause in the new agreement provided for commissions substantially identical to that in the Transitron agreement except that the fee was stated to be $325,000 and there was no sentence indicating that Westinghouse would pay it. The transaction came to fruition on August 14, 1961 at which time Thermo King paid Burck $325,000.

Several years later this suit was brought to recover the $300,000 fee allegedly earned in the Transitron matter. The complaint alleged that Transitron's December 19, 1960 notice of termination was "* * * without cause or justification but was a wrongful and willful breach of its Agreement with Thermo King and a violation of its obligations to Burck * * *" and that Transitron "* * * wrongfully prevented the effecting and consummation of the transaction." The taking of depositions, sought by appellant to establish the invalidity of the grounds for termination asserted by Transitron, was stayed pending disposition of Transitron's motion for summary judgment.

The district court first faced the choice of law issue and ruled that Massachusetts, the forum state, would honor the contract provision that Minnesota law govern. We agree. Maxwell Shapiro Woolen Co. v. Amerotron Corp., 339 Mass. 252, 257, n. 1, 158 N.E.2d 875 (1959); Restatement (Second) of Conflict of Laws §§ 332(2), 332a and 346 (Tent. Draft No. 6, 1960). On appeal appellee urges upon us that Massachusetts law must nevertheless govern where the question involves a right asserted by a stranger to the contract. The cases cited to us in support of this contention are inapposite and our own research has unearthed no Massachusetts authority directly on point. We feel certain, however, from our reading of such cases as Amerotron that the Massachusetts courts would follow the proposed Restatement rule which allows parties to a contract to stipulate reasonably the governing law not only as to questions of validity but as to the nature and extent of rights and duties as well. Restatement, supra at § 346.¹ And we are confident that to apply the laws of Minnesota in this context, including its recognition of third party beneficiary claims, does not offend substantial Massachusetts public policy. Restatement, supra at § 332(a), comment g.

Applying Minnesota law, the court concluded that the rights of a third party beneficiary are limited strictly by the terms of the contract under which he claims and that Burck's allegations did not bring it within the terms of the Thermo King-Transitron agreement. Accordingly, it granted appellee's motion for summary judgment, reasoning, first, that Transitron's obligation was "derivative from and co-extensive with Thermo King's promise to Burck in the letter of agreement of July 11, 1960 which was conditioned upon consummation without qualification" and, second, that Transitron's own direct undertaking in the commissions clause of its contract was to pay Burck "* * * if and when such transactions are effected."

The court held that Burck's rights were not enlarged beyond the express limitations in the contract by the principle of such cases as Huntley v. Smith, 153 Minn. 297, 190 N.W. 341 (1922) and Flower v. Davidson, 44 Minn. 46, 46 N.W. 308 (1890), which allowed recovery to a broker of a fee contingent on consummation when his seller-principal arbitrarily refused to consummate a transaction. Noting that it knew of no Minnesota case extending this principle to a third party beneficiary, the court refused to extend Huntley and Flower to this case where the buyer allegedly refused to consummate. It reasoned that here, unlike the fact situation in the cited cases, there was no engagement of the broker by Transitron, no rendering of valuable services under such an engagement, and no relationship apart from the Thermo King-Transitron contract. The court further found a significant distinction between a contract requiring, as in Huntley and Flower, only consummation and one, as here, requiring such specified measures as a stockholders' meeting in addition to consummation. It deemed the "best efforts" undertaking of Thermo King and Transitron to be reciprocal only and noted the absence of any such language in the fee agreement between Thermo King and Burck.

As a second and independent ground for decision, the court held that Thermo King's payment to Burck of the $325,000 fee for the Westinghouse transaction discharged any obligation to Burck which Transitron might have had. Its chain of reasoning was (1) that Transitron's only promise was to assume Thermo King's obligation to Burck under the letter of agreement; (2) that Burck had only one fee agreement with Thermo King in the event of a consummated transaction "with any company"; and (3) that therefore Thermo King's payment wiped out the non-severable obligation of both Thermo King and Transitron. As to such cases as Olds v. Mapes-Reeve Construction Co., 177 Mass. 41, 58 N.E. 478 (1900) and Kunkle v. Jaffe, Ohio App., 71 N.E.2d 298, 47 Ohio L.Abst. 77 (1946), holding that a...