Taylor Equipment, Inc. v. John Deere Co.

• Decision Date: 26 November 1996
• Docket Number: 95-3000,Nos. 95-2937,s. 95-2937
• Citation: 98 F.3d 1028
• Parties: TAYLOR EQUIPMENT, INC., doing business as Midcon Equipment Company, Plaintiff-Appellee/Cross Appellant, v. JOHN DEERE COMPANY; John Deere Industrial Equipment Company, Defendants-Appellants/Cross Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 1028

98 F.3d 1028

TAYLOR EQUIPMENT, INC., doing business as Midcon Equipment Company, Plaintiff-Appellee/Cross Appellant, v. JOHN DEERE COMPANY; John Deere Industrial Equipment Company, Defendants-Appellants/Cross Appellees.

Nos. 95-2937, 95-3000.

United States Court of Appeals Eighth Circuit.

Submitted June 12, 1996.

Decided Oct. 18, 1996.

Rehearing and Suggestion for Rehearing En Banc Denied Nov. 26, 1996.

Steven M. Johnson, Scelia Suzanne Miner, Johnson & Heidepriem, Yankton, SD, for plaintiff-appellee.

W. Don Brittin, Jr., Randall G. Horstmann, Nyemaster & Goode, Des Moines, IA, William F. Day, Jr., Lynn & Jackson, Sioux Falls, SD, for defendants-appellants.

Before LOKEN, JOHN R. GIBSON, and HANSEN, Circuit Judges.

LOKEN, Circuit Judge.

Deere & Company (formerly John Deere Co.) and its subsidiary, John Deere Industrial Equipment Company (collectively, "Deere"), appeal a judgment in favor of Deere's former industrial equipment dealer, Midcon Equipment Company ("Midcon"). The judgment was entered after a jury found that Deere breached the implied covenant of good faith and fair dealing when it refused to approve Midcon's proposed assignment of its dealership to a willing buyer, forcing Midcon's owners to sell the business to other approved buyers for $1,715,000 less. The dealer contract provided that Midcon could not assign its dealership "without the prior written consent of [Deere]." Because the implied covenant cannot override this express term of the contract, and because there was no proof that Deere failed to exercise "honesty in fact," we reverse.

I. Factual Background.

Deere manufactures construction and industrial equipment which it sells to independent dealers who sell or lease the equipment to end users. Deere dealers buy and sell parts and used equipment and service customer equipment. Because construction and industrial equipment is expensive, Deere provides its dealers "floor plan" financing--the dealer must take title to a piece of equipment, such as a $100,000 road grader, upon its delivery into inventory, but the dealer does not pay Deere until it sells or leases the equipment, and it pays no interest on this credit transaction for the first nine months after delivery. Given this financial stake in its dealers, Deere screens prospective dealers for financial strength and adequate capitalization.

Midcon was a long time Deere dealer in Sioux Falls, South Dakota, and Sioux City, Iowa. This controversy began in 1990 when Deere discovered that Midcon had sold $370,000 in equipment "out of trust" by failing to timely pay Deere after the sales. The dealer contract between Deere and Midcon provided that Deere could terminate immediately for cause (defined to include defaults such as selling equipment out of trust), and that either party could terminate without cause upon one hundred twenty days written notice. Deere notified Midcon's owners, Paul and Cecelia Taylor, that Midcon would be terminated because of these serious defaults. However, in lieu of immediate termination, Deere advised that it would allow Midcon to continue as a dealer in good standing for up to eighteen months while the Taylors attempted to locate a buyer. The contract further provided that it "cannot be assigned by the Dealer without prior written consent of [Deere]."

In the fall of 1991, Midcon entered into an "agreement in principle" to sell nearly all its assets to Interstate Companies of Minnesota, Inc. ("Interstate"). This tentative agreement was subject to a number of contingencies, including Deere's consent to the assignment of Midcon's dealer rights to Interstate. Though Deere had approved Interstate's acquisitions of Deere dealers in Montana and Des Moines, Iowa, in 1987 and 1989, Deere notified Interstate that it would not approve this assignment unless Interstate enhanced its financial strength with additional equity capital. Interstate declined to do so, Deere refused to approve the assignment, and Midcon's sale to Interstate fell through. In 1992, with Deere's approval of the purchasers as successor dealers, the Taylors sold most of Midcon's Sioux Falls assets to Midwest Machinery, Inc. ("Midwest"), and most of the Sioux City assets to Swaney Equipment Co. ("Swaney"), on substantially less favorable terms than Interstate had previously offered.

II. Procedural History.

Midcon then commenced this action, alleging wrongful cancellation under the South Dakota equipment dealer statute, S.D.C.L. §§ 37-5-3 and 4, and breach of the implied covenant of good faith and fair dealing, when Deere refused to approve the assignment to Interstate. Deere counterclaimed, alleging that Midcon had fraudulently obtained government customer discounts.

The district court summarily dismissed Midcon's wrongful cancellation claim because the dealership was not cancelled, but it denied Deere summary judgment on the breach of covenant claim. Prior to trial of that claim, the court severed Deere's fraud counterclaim for separate trial. It also granted Midcon's motion in limine to preclude evidence regarding Midcon's sales out of trust and Deere's intended termination on the ground that this evidence was irrelevant and unfairly prejudicial after dismissal of the wrongful cancellation claim. The court ruled that the sole issue at trial would be whether Deere acted in good faith when it refused to approve assignment of Midcon's contract to Interstate.

Although Deere had not told Paul Taylor why it refused to approve the proposed assignment, ¹ discovery revealed Deere correspondence conditioning approval on Interstate agreeing to enhance its equity capital. At trial, Midcon's theory was that this demand was pretextual--in fact, Deere had forced Midcon to sell its businesses to two "key dealers," Midwest and Swaney, to further Deere's secret plan to "rationalize" its dealer network by eliminating fifty to one hundred small dealers during the 1990's. Deere countered that the refusal was in fact based upon its good faith, rational concern over Interstate's financial ability to expand in this fashion. Midcon responded with evidence that Deere's equity capital demand was unusual and unreasonable. The jury obviously credited Midcon's pretext theory. ²

The jury awarded Midcon $1,715,710 in compensatory damages. The district court awarded $381,240.55 in prejudgment interest and denied Deere's alternative motions for judgment as a matter of law or a new trial. On appeal, Deere argues (1) it is entitled to judgment as a matter of law on Midcon's implied covenant claim; (2) the district court erred in excluding evidence of Midcon's sales out of trust and government discount fraud, and Interstate's subsequent financial woes; (3) error in the jury instruction on "good faith"; and (4) improper damages. In its conditional cross-appeal, Midcon argues that we should reinstate the claim for wrongful cancellation if we reverse the judgment for breach of the implied covenant. Given our interpretation of controlling South Dakota law, ³ we need only address the first and last issues.

III. The Implied Covenant Claim.

The district court concluded that "the South Dakota Supreme Court would impose on [Deere] a duty to act reasonably in deciding whether to consent to a proposed dealership transfer." We review the court's construction of state law de novo. See Pate v. National Fund Raising Consultants, Inc., 20 F.3d 341 (8th Cir.1994). Application of the implied covenant is a matter of contract interpretation, Cambee's Furniture, Inc. v. Doughboy Rec., Inc., 825 F.2d 167, 175 (8th Cir.1987) (applying South Dakota law), a question we also review de novo. Dirks v. Sioux Valley Empire Elec. Ass'n, Inc., 450 N.W.2d 426, 427-28 (S.D.1990).

A.

The Supreme Court of South Dakota recently held that South Dakota law implies a covenant of good faith and fair dealing into every contract. See Garrett v. BankWest, Inc., 459 N.W.2d 833, 841 & n. 7 (S.D.1990). This covenant affords only contract remedies; there is no independent tort for its breach. Moreover, "good faith is not a limitless duty or obligation. The implied obligation must arise from the language used [in the contract] or it must be indispensable to effectuate the intention of the parties." Id. at 841-42 (quotation omitted). The Court in Garrett adopted for all contracts the definition of "good faith" found in South Dakota's uniform commercial code--"honesty in fact in the conduct or transaction concerned." S.D.C.L. § 57A-1-201(19).

Though every contract includes the implied covenant, it does not affect every contract term. The covenant is "a method to fill gaps" in a contract. It has "nothing to do with the enforcement of terms actually negotiated" and therefore cannot "block use of terms that actually appear in the contract." Continental Bank, N.A. v. Everett, 964 F.2d 701, 705 (7th Cir.), cert. denied, 506 U.S. 1035, 113 S.Ct. 816, 121 L.Ed.2d 688 (1992). Where parties have addressed an issue in the contract, "no occasion to divine their intent or supply implied terms arises." Cambee's, 825 F.2d at 175 n. 13.

In Garrett, the Court declined to apply the implied covenant to compel a lender to extend credit when the contract's express terms did not require such action. 459 N.W.2d at 847. Similarly, that Court has refused to "transplant[ ] the covenant of good faith and fair dealing into the foreign soil of the employment-at-will doctrine." Breen v. Dakota Gear & Joint Co., 433 N.W.2d 221, 224 (S.D.1988). A claim that an employee was terminated in bad faith is fundamentally inconsistent with the concept of at-will employment. Therefore, the implied covenant may not be used to restrict the employer's freedom to terminate. See Poff v. Western Nat'l Mut. Ins. Co., 13 F.3d 1189, 1191 (8th Cir.1994) (applying the same principle in Minnesota law).

Applying similar reasoning, many courts have held that the implied covenant may not be applied to limit a clear contractual provision allowing termination...