Tranzact Technologies v. Evergreen Partners

• Citation: 366 F.3d 542
• Decision Date: 28 April 2004
• Docket Number: No. 01-3787.,No. 01-3685.,01-3685.,01-3787.
• Parties: TRANZACT TECHNOLOGIES, LTD., Plaintiff-Appellee, Cross-Appellant, v. EVERGREEN PARTNERS, LTD. and KELLOGG ASSOCIATES, INC., Defendants-Appellants, Cross-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

366 F.3d 542

TRANZACT TECHNOLOGIES, LTD., Plaintiff-Appellee, Cross-Appellant, v. EVERGREEN PARTNERS, LTD. and KELLOGG ASSOCIATES, INC., Defendants-Appellants, Cross-Appellees.

No. 01-3685.

No. 01-3787.

United States Court of Appeals, Seventh Circuit.

Argued September 19, 2003.

Decided April 28, 2004.

Sonya D. Naar (argued), Piper Rudnick, Chicago, IL, for Plaintiff-Appellee.

David Powers Berten, Gregory J. Smith (argued), Competition Law Group, Chicago, IL, for Defendants-Appellants.

Before BAUER, RIPPLE, and WILLIAMS, Circuit Judges.

WILLIAMS, Circuit Judge.

Kellogg Associates and Evergreen Partners ("the advisors") were hired by Tranzact Technologies, Ltd. to perform advisory services for Tranzact. When Tranzact sold some of its assets to another company, the advisors sought payment of an investment banking fee. Tranzact determined that payment was not required, and sought a declaratory judgment in federal court. It also sued the advisors for breach of contract on the ground that the advisors had failed to perform all services required under the agreement. The advisors countersued for breach of contract based on Tranzact's refusal to pay the fee. The district court granted summary judgment to Tranzact on the advisors' claim and also granted summary judgment sua sponte to the advisors on Tranzact's breach of contract claim. Because the agreement between Tranzact and the advisors reveals that the advisors are not entitled to a fee based upon a sale of assets, and because Tranzact has not persuaded us that it has a valid breach of contract claim, we affirm.

I. BACKGROUND

In 1996, Tranzact Technologies, Ltd. engaged Kellogg Associates and Evergreen Partners to perform financial advisory services in connection with a possible sale of or investment in Tranzact. John Lane of Evergreen drafted an agreement, with input from Dan Kellogg of Kellogg Associates and Mike Regan of Tranzact. The agreement was finalized in June 1997. Under its terms, Lane and Kellogg were to receive a $40,000 up-front retainer, and an investment banking fee contingent "upon successful completion of the Transaction." The agreement explained that a transaction could involve either an equity investment or an asset sale. It further stated that if Tranzact entered into a transaction with any party listed on Exhibit A of the agreement, the advisors were entitled to the investment banking fee in the event that the transaction was consummated within one year of termination of the agreement. Tranzact paid the $40,000 retainer, and when the advisors indicated that they would be unable to continue the engagement unless they were paid on an hourly basis, Tranzact paid them over $60,000 in additional fees.

Tranzact terminated the agreement in July 1999. In March 2000, after providing Schneider Logistics (allegedly without the advisors' knowledge) with a "Selling Memorandum" previously prepared by the advisors, Tranzact sold its Freight Payment Services Division to Schneider for $17,500,000. Because Schneider was listed on Exhibit A and because the Schneider transaction occurred within a year after termination of the agreement, the advisors determined that the investment banking fee provision was triggered despite the fact that the advisors were not directly involved in the transaction. They thus requested payment of the investment banking fee, but Tranzact contended that it was not required to pay and sought a declaratory judgment to that effect in federal district court. Tranzact also sued the advisors for breach of contract, claiming that the advisors had been derelict in their duties under the agreement. The advisors countersued, claiming that Tranzact was in breach due to its failure to pay the fee. The district court granted summary judgment to Tranzact on the advisors' claim. It also dismissed Tranzact's breach of contract claim against the advisors sua sponte, ruling that "based on the undisputed evidence in the record[,] the [advisors] satisfied all of [their] contractual obligations...." Both parties appeal.

II. ANALYSIS¹

A. The Investment Banking Fee Provision

The relevant portions of the agreement between Tranzact and the advisors are Section 3, entitled "Transaction," and Section 4, entitled "Fees." Section 3 contains the following language:

A Transaction shall be defined as (1) the sale or other disposition to another corporation, person or business entity (an "investor") of all or a portion of Tranzact's stock or assets, (2) an equity or quasi-equity investment in Tranzact by an investor or (3) a merger, consolidation or other combination of Tranzact with an investor.

Section 4 states in part that:

The Advisors' investment banking fees will be based on the following formula:

0.0% [of the Transaction Value] if the Enterprise Value is below $15,000,000.

0.5% if the Enterprise Value ranges from $15,000,000 to $17,499,999.

1.0% if the Enterprise Value ranges from $17,500,000 to $21,499,999.

2.0% if the Enterprise Value ranges from $21,500,000 to $24,999,999.

2.5% if the Enterprise Value ranges from $25,000,000 to $29,999,999.

3.0% if the Enterprise Value ranges from $30,000,000 to $39,999,999.

4.0% if the Enterprise Value ranges from $40,000,000 to $49,999,999.

5.0% if the Enterprise Value is $50,000,000 or above.

Enterprise Value in this context is the Total Transaction Value divided by the percentage of equity ownership held by an Investor after the Transaction. Total Transaction Value in this context refers to total consideration paid for an equity interest in Tranzact, including any seller financing, plus assumed debt (including bank indebtedness and shareholders and related party notes, but excluding trade and current payables). The fees will be applied as a percentage of the Transaction Value and will be contingent payable upon successful completion of the Transaction. Payment of these fees will be made at the time of closing of the Transaction.

The district court determined that an enforceable contract existed with respect to another portion of Section 4, which required Tranzact to pay a non-refundable $40,000 retainer "for strategic consulting, due diligence items and the completion of a descriptive memorandum." It found, however, that although Tranzact intended to pay and the advisors intended to receive an investment banking fee upon the completion of a qualifying transaction, the terms of Section 4's fee provision are too indefinite to be enforced. Specifically, the court pointed out that although the term Total Transaction Value is defined, the term Transaction Value is not defined, and found this omission to be fatal because the agreement clearly states that the investment banking fee is to be calculated as "a percentage of the Transaction Value."

The district court further determined that even assuming that Transaction Value has the same meaning as Total Transaction Value, fees are not warranted when a Transaction involves a sale of assets. Rather, the fee provision is triggered when an investor obtains equity interest in Tranzact. It noted that if the fee formula were applied in this case the advisors would not be due any fees, because the number zero must be plugged into the equation whenever the formula requires numbers linked to equity. The court declined to provide an alternative formula and instead granted summary judgment to Tranzact. We review the district court's decision de novo, viewing all facts in the light most favorable to the advisors.² See Phelan v. City of Chicago, 347 F.3d 679, 681 (7th Cir.2003).

"In construing a contract, the primary objective is to determine and give effect to the intentions of the parties at the time they entered into the contract." Ancraft Prods. Co. v. Universal Oil Prods. Co., 100 Ill.App.3d 694, 56 Ill.Dec. 390, 427 N.E.2d 585, 588 (1981). The advisors assert that here, the parties' intent to provide an investment banking fee in the event of an asset sale is clear, the term Transaction Value has the same meaning as Total Transaction Value, and the fee formula can easily be adapted to address asset sales (although they concede that as currently written, the formula only addresses equity investments). We agree that Transaction Value and Total Transaction Value may be one and the same. Nevertheless, we are not persuaded that the district court erred in finding that no fees are warranted in this instance.

1. Transaction Value

The term Transaction Value is a key component of the fee formula and is thus material to this agreement. See Goldstick v. ICM Realty, 788 F.2d 456, 461 (7th Cir.1986) (finding price and price formulas essential terms under Illinois law); cf. Delcon Group, Inc. v. N. Trust Corp., 187 Ill.App.3d 635, 135 Ill.Dec. 212, 543 N.E.2d 595, 602 (1989) (loan amounts and loan formulas are essential terms). If its meaning cannot be determined, the contract is unenforceable. See Wagner Excello Foods, Inc. v. Fearn Int'l, Inc., 235 Ill.App.3d 224, 176 Ill.Dec. 258, 601 N.E.2d 956, 960 (1992) ("To be enforceable, a contract must show a manifestation of agreement between the parties and be definite and certain in its terms. When material terms and conditions are not ascertainable, there is no enforceable contract, even if the intent to contract is present.") (citations omitted). To avoid this problem, the advisors argue that its meaning is obvious, claiming that just as the term "price" in everyday language means "total price," and the term "value" means "total value," Transaction Value must mean the same as Total Transaction Value.³

The advisors' analogies are imperfect. For instance, it is not the case that "price" always means "total price"; consider the sales tax often added to the price of a clothing item, or the many add-ons involved in car purchases and plane tickets despite their seemingly firm prices. Moreover, Transaction Value lends itself to many interpretations based on the agreement's language. Section 4 states that Total Transaction...