V'soske v. Barwick

• Decision Date: 08 November 1968
• Docket Number: Dockets 32484/8.,No. 92/6,92/6
• Citation: 404 F.2d 495
• Parties: T. C. V'SOSKE, S. T. V'Soske, K. A. V'Soske, George A. Spater and V'Soske Shops, Inc., Appellants, v. E. T. BARWICK and E. T. Barwick Mills, Inc., Appellees.
• Court: U.S. Court of Appeals — Second Circuit

404 F.2d 495 (1968)

T. C. V'SOSKE, S. T. V'Soske, K. A. V'Soske, George A. Spater and V'Soske Shops, Inc., Appellants, v. E. T. BARWICK and E. T. Barwick Mills, Inc., Appellees.

Nos. 92/6, Dockets 32484/8.

United States Court of Appeals Second Circuit.

Argued October 3, 1968.

Decided November 8, 1968.

Rehearing Denied December 30, 1968.

Certiorari Denied March 24, 1969.

Carl S. Rowe, New York City (Harold L. Warner, Jr., Edward P. Smith, New York City, on the brief, Chadbourne, Parke, Whiteside & Wolff, New York City), for appellants.

Patrick H. Sullivan, New York City (Forbes D. Shaw, T. David Mullen, New York City, on the brief, Whitman, Ransom & Coulson, New York City), for appellees.

Before LUMBARD, Chief Judge, and KAUFMAN and HAYS, Circuit Judges.

Rehearing Denied December 30, 1968 In Banc.

Certiorari Denied March 24, 1969. See 89 S.Ct. 1197.

IRVING R. KAUFMAN, Circuit Judge:

The question for our determination is whether the parties by their correspondence made a binding offer and acceptance to buy and sell a business, so that even in the absence of a formal contract they created a legally enforceable agreement.

Appellants, V'Soske Shops, Inc., and its individual stockholders T. C. V'Soske, S. T. V'Soske, K. A. V'Soske, and George Spater, on June 22, 1964, brought this action against E. T. Barwick Mills, Inc., and its president and majority stockholder E. T. Barwick in the New York State Supreme Court for New York County seeking damages for breach by Barwick of an alleged contract in which he had agreed to purchase the assets and good will of V'Soske Shops, Inc., for a sum equal to its audited net worth plus $700,000.¹ Upon petition of the appellees, the action was removed to the United States District Court for the Southern District of New York because of diversity of citizenship.² A trial before Judge MacMahon without a jury resulted in the judgment dismissing the action on the merits which is the subject of this appeal.

I.

V'Soske Shops is a small Puerto Rican corporation engaged in the manufacture of high quality custom-made rugs. Thad V'Soske manages the business, and his brother S. T. V'Soske is its principal designer. Barwick Mills, a Georgia corporation, is a large manufacturer of tufted carpets; prior to 1964 it did not manufacture custom-made rugs.

In the spring of 1963, Mr. E. T. Barwick hereafter referred to as Barwick became interested in entering the custom-made rug market by acquiring the business of V'Soske Shops. Preliminary negotiations were conducted at an initial meeting between Barwick and the V'Soskes in June of 1963 in Puerto Rico, where Barwick inspected their plant, and in New York the following August, where Barwick met with Spater, a V'Soske stockholder and attorney. At a second meeting in Puerto Rico in early September, discussions turned to the subject of price: the V'Soskes stated that they wanted $4,000,000 for their business, and Barwick responded with a suggestion of $1,500,000. The meeting concluded with Thad V'Soske's statement that they were open to further negotiation, and Barwick's answer that he would think it over.

After Barwick's return, a series of letters were exchanged which appellants claim gave rise to a binding contract for the sale of the V'Soske business. On September 9, 1963, Barwick wrote Thad V'Soske, saying:

"* * * I am prepared to offer you $1,600,000 for the V\'Soske Shops, Inc., subject of course to independent audits concerning the $1,000,000 net worth of the manufacturing entity.

"I should like to suggest that if the transaction is acceptable to you, the initial payment of $1,000,000 for the company and the remaining $600,000 over the next four years in equal payments.

"All phases of operations and management would be along the lines of our conversation.

"After you have had time to consider this proposal, I shall be very glad to hear from you."

After receiving V'Soske's return letter, in which he sought to explain why the past profit of V'Soske Shops had been low, and why higher profits were to be expected in the future, Barwick responded with a letter, dated October 10, setting forth at great length the reasons which he believed justified his last offer, and concluding:

"I am willing, at this time, to increase my offer for a cash settlement for the audited book value of your company plus $700,000 to be paid in five equal annual installments of $140,000 each, with management contracts or arrangements as we discussed on our two visits.

"I think this is as far as I am willing to go, and I should like to know within thirty days whether or not this offer will be accepted because I do not feel I can wait much longer before entering into this type of manufacture, perhaps in closer proximity to my plants in North Georgia."

On October 28, V'Soske wrote Barwick asking that he extend his offer for another thirty days, to which Barwick acceded, stating: "Please let me know as soon as possible your decision." Then on November 29, V'Soske responded:

"We have reviewed your offer carefully and have come to the conclusion that we are willing to sell our business at the price you propose — its audited net worth plus $700,000 — on the following terms:

1. $1,200,000 down, payable within 30 days after an agreement is reached; the balance to be paid in equal monthly installments over a period of four years.

2. Employment contracts will be signed with our five top management people for five years at present rates of compensation (aggregating $74,500.00 annually) for jobs having responsibility equal to their present jobs and at their present location in Puerto Rico, as per verbal agreement.

3. Any brokerage or finder\'s fees, * * * to be paid by you.

4. The scope of the audit to be as outlined below."

There followed a lengthy discussion of the proposed audit, specifying, inter alia, that inventories and fixed assets would be valued at cost, that the rates of depreciation on fixed assets would be as therein specified, that a $93,000 advance made by V'Soske to its Irish affiliate would be valued at face amount, and that the audit would be made by "a nationally recognized firm of certified public accountants comparable to Haskins & Sells the firm which regularly audited the V'Soske books." Throughout this letter, V'Soske emphasized that he wished these methods of valuation to be clearly understood at the outset in order that later disputes be avoided. Then on December 2, Barwick wrote back saying:

"I agree in principle with your outline of evaluation and I see no obstacle in our agreeing inasmuch as I have a high regard for Haskins & Sells * * *. Our overall public accountant is Arthur Anderson whom I am sure you have respect for also and I am sure Arthur Anderson and Haskins & Sells will have no difficulty in reconciling the account."

The letter went on to ask that V'Soske clarify certain points discussed in his last letter. After receiving the requested information, Barwick wrote on December 6:

"As stated in my recent letter I am in accord with your outline for purchase.

"I should like, if it is convenient for you, to visit you on the 19th and 20th of December with Mr. Mel E. Kellar, our Vice President and Treasurer to begin procedures for consummating the purchase."

The parties then began "procedures for consummating the purchase." On December 19 and 20, Barwick accompanied by three of his staff, again visited the V'Soskes in Puerto Rico. During this visit the Barwick group discussed with the partner in charge of the Haskins & Sells office in Puerto Rico the procedure for the 1963 audit, toured the V'Soske plant again, and agreed that the independent audit to determine audited net worth would commence immediately after the end of the year. The audit was begun on January 7, 1964, when Haskins & Sells, together with Arthur Anderson and Barwick's own experts, started the physical inventory of V'Soske Shops; that phase of the audit was subsequently completed to the satisfaction of all the parties.

On January 18, another series of meetings was held between the parties and their representatives in Puerto Rico. During these meetings, a number of points were raised, some of which were resolved without difficulty. Several illustrations of these items follow. Barwick advised V'Soske that for tax and other reasons he wished to effect the acquisition by a purchase of assets rather than stock. After some deliberation, V'Soske agreed, and it was mutually decided the V'Soskes would run their business for Barwick's account as of January 1, 1964, and that all transactions not in the ordinary course of business would thereafter be cleared with Barwick. Also, matters including warranties and security on the deferred purchase price were discussed and apparently settled. Other questions raised at this time, however, became the subject of protracted controversy. Barwick suggested that the contemplated employment contracts should contain a cancellation clause entitling him to cancel these agreements at any time upon the payment of one-half the balance due for the five-year term; and on his side, V'Soske proposed that he be given a $30,000 per year expense account similar to the one he had enjoyed in the past. After long negotiations, both of these terms were finally agreed upon several days before Barwick's repudiation in March. Another problem centered on Barwick's insistence that V'Soske Shops modify its exclusive sales contract with Lord & Adams so as to permit the sale of V'Soske products through Barwick's selling organizations. This matter, first raised at the January meetings, was never resolved. And further, Barwick's accountants raised certain objections to Haskins & Sells accounting procedures which also seem never to have been resolved.

Finally, during February, a draft of the formal written contract was circulated, and the parties met again in early March to discuss the remaining problems and to revise this draft. But upon his return from Puerto Rico,...