Schwartz v. NMS Industries, Inc.

• Decision Date: 18 August 1975
• Docket Number: No. 74-3275,74-3275
• Citation: 517 F.2d 925
• Parties: Harold B. SCHWARTZ, Plaintiff-Appellee, v. NMS INDUSTRIES, INC., Defendant-Appellant, v. Erich ROSENBAUM, Plaintiff-Intervenor-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 925

517 F.2d 925

Harold B. SCHWARTZ, Plaintiff-Appellee, v. NMS INDUSTRIES, INC., Defendant-Appellant, v. Erich ROSENBAUM, Plaintiff-Intervenor-Appellee.

No. 74-3275.

United States Court of Appeals Fifth Circuit.

Aug. 18, 1975.

Logan Ford, Dallas, Tex., for defendant-appellant.

Larry B. Bach, Dallas, Tex., for H. B. Schwartz.

Stanley M. Kaufman, Dallas, Tex., for E. Rosenbaum.

Appeal from the United States District Court for the Northern District of Texas.

Before BROWN, Chief Judge, and GEWIN and THORNBERRY, Circuit Judges.

THORNBERRY, Circuit Judge:

Resolution of this contractual dispute depends upon the proper interpretation under Texas law of the conduct of the parties after execution of a registration agreement in connection with a corporate acquisition. The district court determined that the acquiring company, NMS Industries, Inc., had breached its contractual obligation to the two shareholders of the acquired company, making it liable for substantial damages. NMS now challenges that judgment here. While we affirm the district court's decision on the liability issue, we remand for further findings of fact and conclusions of law on the damages question.

Harold Schwartz and Erich Rosenbaum, the appellees, owned all of the stock of Star Ribbons, Inc., a Texas corporation. NMS Industries, Inc. acquired Star Ribbons through an exchange of stock. In connection with the acquisition agreement, ¹ Schwartz and Rosenbaum executed a registration agreement with NMS on December 19, 1969. That agreement contained the following provision relative to registration of the NMS shares Schwartz and Rosenbaum would receive in exchange for their Star Ribbons stock.

4.(a) NMS agrees that if, in the opinion of its counsel, or Shareholder's aforesaid counsel, any offer, sale or other disposition by a Shareholder of any Shares will require (i) the registration of such Shares under the Act, or (ii) the delivery of a prospectus which complies with Section 10 of the Act, upon receipt at any time within the three (3) year period commencing with the Delivery Date specified in said Agreement, of a written demand from Shareholders who then hold at least 50% of the NMS Common Stock received under the Agreement, it will cause a registration statement with respect to the Shares which Shareholders propose to sell or otherwise dispose of to be filed under the Act. If aforesaid counsel for NMS or any Shareholder is of the opinion that any offer, sale or disposition contemplated by such Shareholder will not require the registration of such Shares under the Act, such counsel shall render such opinion to NMS and such Shareholder and to any broker or dealer acting on his behalf in connection with such offer, sale or disposition. Each Shareholder agrees not to offer more than 25% of his Shares received under the Agreement for such registration during the one (1) year after Delivery Date, nor more than 50% of such Shares for registration during the first two (2) years after such Delivery Date.

It is understood and agreed that NMS shall be required to file only one such Registration Statement pursuant to Section 4(a) hereof.

Pursuant to the agreement for NMS's acquisition of Star Ribbons, Inc., Schwartz and Rosenbaum each received a total of 40,375 shares of unregistered NMS common stock. ² For purposes of the registration provision above, the delivery date of those shares was May 1, 1970. ³

Shortly before the Star Ribbons acquisition, NMS acquired Inland Dynatronics Company by a similar exchange of stock. In early 1970, NMS began to prepare a registration statement in connection with the NMS common stock held by the Inland Dynatronics principals. It offered to allow Schwartz and Rosenbaum to include their stock in this registration. The two orally accepted that offer, but in a letter written in July 1970, they stated that they did not wish to include their shares in that registration. NMS proceeded to file the Inland Dynatronics registration without including the Schwartz-Rosenbaum shares, and the statement became effective August 19, 1971. On August 30, 1971, Schwartz and Rosenbaum made a written demand that NMS register 50% of their shares. The pair then sent another letter dated September 9, 1971 demanding that NMS register all of their shares. NMS refused to honor either demand, and eventually this lawsuit arose.

The district court correctly found that the August 30, 1971 letter demanding registration of 50% of the stock held by Schwartz and Rosenbaum conformed to the terms of Section 4. (a) of the registration agreement. That demand was in writing, made by shareholders holding at least 50% of the NMS stock received under the NMS-Star Ribbons acquisition agreement, and requested registration of the maximum amount of stock permissible at that time under the agreement. NMS admittedly failed to file a registration statement covering the stock within 120 days after the demand. And it failed to use its best efforts to make the registration statement filed effective as soon as practicable as required by Section 4. (b)(ii) of the registration agreement. ⁴ Thus NMS is clearly liable to Schwartz and Rosenbaum for its breach of the registration agreement unless some conduct on their part before or after the August 30, 1971 demand excused NMS from performance of its obligation to register the stock.

NMS first contends that when Schwartz and Rosenbaum orally agreed to have their stock registered with the Inland Dynatronics registration statement, they modified the terms of the original registration agreement. Then NMS contends that the subsequent withdrawal from the Inland Dynatronics registration waived any right to a cost-free registration, discharging NMS. It is clear that under Texas law, the parties to a written agreement may subsequently make oral modifications to that agreement. University State Bank v. Gifford-Hill Concrete Corp., 431 S.W.2d 561 (Tex.Civ.App. Ft. Worth 1968, writ ref'd n. r. e.). But the oral acceptance here did not create any new agreement. NMS only offered to perform its original contractual duty to provide one cost-free registration. ⁵ Nothing in the original registration agreement compelled Schwartz and Rosenbaum to avail themselves of any particular opportunity to register their shares in the three year time period. After the oral acceptance, NMS began to perform its obligations under the original registration agreement.

We agree with the trial court that Schwartz and Rosenbaum did not waive their right to a cost-free registration by withdrawing their acceptance in July 1970. Waiver denotes the intentional relinquishment of a known right or conduct inconsistent with claiming it. United States Fid. & Guar. Co. v. Bimco Iron & Metal Corp., 464 S.W.2d 353 (Tex.1971); Massachusetts Bond. & Ins. Co. v. Orkin Exterminating Co., 416 S.W.2d 396 (Tex.1967). At no time did either Schwartz or Rosenbaum indicate their intention to relinquish their right to one cost-free registration. Their oral acceptance of the offer to be included in the Inland Dynatronics registration indicated an intention to exercise their contractual right at that time. But when NMS acquiesced in the withdrawal of the oral acceptance, the parties returned to their original posture under the registration agreement. When NMS failed to protest the withdrawal Schwartz and Rosenbaum reasonably presumed they still had a right to one cost-free registration under the original registration agreement.

NMS claims that the oral acceptance estops Schwartz and Rosenbaum from subsequently demanding registration of their shares. The essential elements of estoppel are established by showing that the conduct of one party has induced the other party to change his position in reliance on the conduct, and that to allow the first party to later disavow that conduct would cause substantial hardship to the second party. Massachusetts Bond. & Ins. Co. v. Orkin Exterm. Co., 416 S.W.2d 396 (Tex.1967); Graham v. San Antonio Mach. & Supp. Corp., 418 S.W.2d 303 (Tex.Civ.App. San Antonio 1967, writ ref'd n. r. e.). Clearly NMS began to act upon the oral acceptance that Schwartz and Rosenbaum gave. But the other essential element of estoppel is not present here. The advantage to NMS of "piggy-backing" the Schwartz-Rosenbaum shares with the shares of the Inland Dynatronics principals was that it enabled NMS to discharge its obligation to provide a cost-free registration to Schwartz and Rosenbaum at essentially no cost. Since the cost of preparation of a registration statement was approximately $75,000, this was a substantial benefit. NMS lost that potential saving when Schwartz and Rosenbaum refused to be included. But that is not a benefit to which they were contractually entitled under the registration agreement. Thus they suffered no legal detriment when the two subsequently refused to allow NMS to register their shares. NMS did not show that they incurred any additional costs in preparing Inland Dynatronics registration statement as a result of the oral acceptance.

NMS might have been justified in including the Schwartz-Rosenbaum shares in the Inland Dynatronics registration statement. Though entitled under the registration agreement to a written demand for registration, NMS's conduct in proceeding to include the shares in the statement could have been interpreted as a waiver of the written demand requirement. See United States Fid. & Guar. Co. v. Bimco Iron & Metal Corp., 464 S.W.2d 353 (Tex.1971); Massachusetts Bond. & Ins. Co. v. Orkin Exterminating Co., 416 S.W.2d 396 (Tex.1967); Equitable Life Assur. Soc. v. Ellis, 105 Tex. 526, 147 S.W. 1152 (1913). Then NMS might have justifiably refused to give effect to the July 1970 letter refusing to participate in the Inland Dynatronics registration arguing that the waiver of written demand had created an enforceable duty on the part of NMS to...