Targus Group Intern., Inc. v. Sherman

• Decision Date: 05 March 2010
• Docket Number: No. 08-P-113.,08-P-113.
• Citation: 922 N.E.2d 841,76 Mass. App. Ct. 421
• Parties: TARGUS GROUP INTERNATIONAL, INC. v. Howard SHERMAN & others.<SMALL><SUP>1</SUP></SMALL>
• Court: Appeals Court of Massachusetts

922 N.E.2d 841

76 Mass. App. Ct. 421

TARGUS GROUP INTERNATIONAL, INC. v. Howard SHERMAN & others.¹

No. 08-P-113.

Appeals Court of Massachusetts, Suffolk.

Argued November 4, 2008.

Decided March 5, 2010.

Michael B. Keating, Boston (David A. Kluft with him) for the defendants.

Richard D. Batchelder, Jr., Boston (Daniel J. Bennett with him) for the plaintiff.

Present: KATZMANN, SIKORA, & RUBIN, JJ.

SIKORA, J.

The issue of this appeal is the enforceability of a disputed settlement agreement resulting from mediation. The mediation produced an itemized "Agreement in Principle" (AIP or agreement) between the parties. The AIP called for the execution of final settlement documents and mutual releases. Over the ensuing three months the parties exchanged three drafts of final papers. When that drafting process appeared to stall, the plaintiff Targus Group International, Inc. (Targus or company), began suit in the Superior Court against the defendants Howard Sherman, Sean Brosmith, and Scott Oshry (Sherman group or group) for enforcement of the AIP by remedies of damages and specific performance. The Sherman group denied liability and subsequently moved for summary judgment. A Superior Court judge allowed the motion against three ancillary claims by Targus, but denied it upon Targus's claims of breach of the AIP and breach of the covenant of good faith and fair dealing implicit in the AIP. Upon those counts he ordered the entry of summary judgment in favor of Targus pursuant to Mass.R.Civ.P. 56(c), as amended, 436 Mass. 1404 (2002).² By supplemental rulings, the judge ordered payment of compensatory damages from the Sherman group to Targus in the amount of $4,140,770, with substantial prejudgment interest, and specific performance of certain indemnification and release terms. The resulting judgment hinges on the validity of the AIP. "Once again we consider in what circumstances a writing, which by context or by terms contemplates a more formal agreement, may nonetheless serve as a binding contract." Goren v. Royal Invs. Inc., 25 Mass.App.Ct. 137, 138, 516 N.E.2d 173 (1987).

Factual background. The following undisputed facts emerge from the summary judgment record.

1. The parties' business relationship. In 1992 the Sherman group founded Roundhouse, Inc. (Roundhouse). Sherman served as its chief executive officer, and Brosmith and Oshry as vice-presidents. All three were directors and shareholders. Roundhouse dealt in the sale of various consumer goods.³

In 2000 Targus purchased one hundred percent of the stock of Roundhouse in exchange for $79 million in cash and Targus stock. During the next two years, Targus concluded that the Sherman group had not accurately represented Roundhouse's financial condition and resulting stock purchase value, and called upon the group to pay damages for breach of warrantied representations underlying the purchase price. The Sherman group countered that Targus had made certain misrepresentations about its financial condition apparently affecting the value of the Targus stock received by the group as part of the acquisition price for their Roundhouse shares.

2. The mediation process. In June, 2003, the parties agreed to undertake mediation. They executed a detailed agreement with a highly regarded mediator in Boston. An opening session went forward in Boston on August 15, 2003. All principals and their counsel attended. That session did not produce a solution. During the ensuing months, the parties kept open the mediation process as Targus furnished the Sherman group with requested information about the Targus claims.

On July 13, 2004, a second formal mediation session took place in Boston. It extended from the morning until near midnight. Targus appeared in the person of an authorized director, two accounting experts, and counsel; Howard Sherman, an accounting expert, and counsel appeared for the Sherman group. At the conclusion of the session, the mediator drafted the AIP and submitted it to the parties. After inspection, the principals signed it (Sherman for the group; the Targus director for the company); their counsel signed also; and the mediator initialed it. It provided as follows:

"Agreement in Principle

"Targus Mediation

"July 13, 2004

"Howard Sherman, Sean Brosmith, and Scott Oshry ("Sellers") and Targus Group International ("Company") agree in principle to settle all the claims, causes of action and disputes between them arising out of or relating to the acquisition of Roundhouse by the Company on August 31, 2000, on the following terms and conditions:

"1. Sellers retain 3,000,000 Company shares; return the balance of 781,803 shares.

"2. Sellers pay Company $2,500,000.00 as follows:

— $500,000 personal note from Sellers payable within 6 months of settlement and personally guaranteed by sellers;

— $2,000,000 upon a liquidity event for Company, not guaranteed, non-recourse.

"3. Sellers' stock in Company to be pledged and escrowed against the back end payment obligation; pledge to be clean for filing purposes.

"4. Sellers not entitled to Board seat.

"5. Sellers remain passive shareholders, i.e. no communications to Company employees (other than personal communications unrelated to the Company), board or advisors. Sellers shall receive from the Company only audited financial statements so long as they remain shareholders.

"6. Company will look into whether it has sold the CD Projects and Glacier Gear lines of business. As to such, if it has sold the businesses not subject to the non-competes, it will terminate the non-competes as to those lines.

"7. Execution and exchange of final settlement documents and mutual releases in a form satisfactory to counsel, including release of any claims by Sellers for severance under the Roundhouse Option Plan. The releases shall indemnify, defend and hold harmless Sellers from any claims, causes of action, cross-claims or demands arising out of or relating to the Company's filing of any claims against other Roundhouse selling shareholders.

                "/s/  [Howard Sherman]        /s/  [Director William P. Logan]  
                For Selling Shareholders      For Targus
                

"APPROVED AS TO FORM AND CONTENT:

                "/s/  Counsel                     /s/  Counsel         
                Attorneys for Shareholders        Attorneys for Targus
                                                            EDG
                                                        (Mediator)."
                

3. Proposed final documents. On August 11, 2004, counsel for Targus forwarded to counsel for the Sherman Group a draft final settlement agreement. The draft release by Targus recited that Targus "indemnifies [the three members of the Sherman group] . . . from any and all claims . . . arising out of or relating to the acquisition of Roundhouse, Inc. by Targus on August 21, 2000. . . ." A short covering electronic mail message (e-mail) by Targus counsel made no specific reference to the provisions of the draft. By a responsive e-mail of September 8, 2004, Sherman group counsel inquired about term 6: whether Targus had sold its compact disc case business line so as to release the Sherman group from its obligation (apparently under the stock sale agreement of 2000) to refrain from competition in that product. On the same day Targus counsel replied that Targus retained that business (a possible sale had "fallen through") so that the noncompetition covenant would remain in force.

At some point several weeks after the July 13, 2004, mediation session, the Sherman group proposed to Targus that the company offer to all Roundhouse shareholders the option to settle with Targus on the same terms provided to the three members of the group. The parties do not dispute that such a proposal passed between them. However, the record does not tell us the date or the identities of the communicants.⁴

On September 24, 2004, Sherman group counsel forwarded to Targus counsel a responsive draft. The covering e-mail addressed several details about implementation of the AIP. It then proposed that, since the lines of business covered by the noncompetition covenants restricting the Sherman group remained within the control of Targus for divestment, Targus "should" release the covenants. It characterized this point as a "belie[f]" and did not insist upon it as a new term. As to protection for the Sherman group in the event of Targus claims and litigation against other former Roundhouse shareholders for recovery of overpayment, the draft (1) extended the opportunity to all such former shareholders to settle with Targus on terms similar to those provided the Sherman group by the AIP, and (2) maintained Targus's agreement in term 7 of the AIP to indemnify the Sherman group against all liability resulting from Targus claims against such former shareholders (i.e., potential third-party claims by those shareholders against the Sherman group).

On October 14, 2004, Targus counsel forwarded the third draft. The covering e-mail to Sherman group counsel recited the belief that the "current draft accurately reflects [the terms recorded with the mediator], and we believe is ready for execution. Please let me know as soon as possible whether there are any remaining issues. We would like to get the papers signed no later than next week." This draft retained the provision extending the settlement opportunity to former Roundhouse shareholders. It deleted the provision for indemnification of the Sherman group.

When the Sherman group did not respond to the third draft, Targus commenced suit twenty-six days later for specific enforcement of the AIP, including its own duty to indemnify the Sherman group against any claims resulting from Targus action against other former Roundhouse shareholders.

4. Targus's subsequent merger. On November 22, 2005, Targus formally merged with a separate entity known as Targus Acquisition Corp. so as to accomplish the cancellation of all outstanding Targus stock. As of that date the Sherman group had not returned the 781,803 shares of stock, or paid the $500,000...