Wikoff v. Vanderveld

• Decision Date: 09 May 1990
• Docket Number: 89-1663,Nos. 88-3520,s. 88-3520
• Citation: 897 F.2d 232
• Parties: Barbara W. WIKOFF, Individually and as Executrix of the Estate of John W. Wikoff, Plaintiff-Appellee, v. John VANDERVELD, Jr., Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 232

897 F.2d 232

15 Fed.R.Serv.3d 1194

Barbara W. WIKOFF, Individually and as Executrix of the Estate of John W. Wikoff, Plaintiff-Appellee, v. John VANDERVELD, Jr., Defendant-Appellant.

Nos. 88-3520, 89-1663.

United States Court of Appeals, Seventh Circuit.

Argued Sept. 12, 1989.

Decided March 1, 1990.

As Corrected May 9, 1990.

Michael A. Stick, Ronald Butler, Kevin J. O'Brien, Butler, Rubin, Newcomer, Saltarelli & Boyd, Chicago, Ill., for plaintiff-appellee.

Michael J. Zdeb, Stephen G. Seliger, Joel M. Hellman, Chicago, Ill., for defendant-appellant.

Before CUMMINGS, WOOD, Jr., and COFFEY, Circuit Judges.

COFFEY, Circuit Judge.

Defendant-appellant John Vanderveld, Jr., appeals the judgment of the district court finding him liable to the plaintiff-appellee Barbara Wikoff in the amount of $360,671.95 in Wikoff's action enforcing a personal guaranty executed by Vanderveld at the time his corporation, Vanderveld, Inc. ("VandInc"), purchased Wikoff's business, MSCI, Ltd. ("MSCI"). We reverse and remand for specific factual findings as to the questions of whether Wikoff breached her warranties to VandInc and whether Vanderveld's breach of warranty defense, if any, has been waived.

I.

Barbara Wikoff became the sole owner of MSCI, a manufacturer and distributor of industrial chemicals, in December 1984, when her husband John, the founder of the company, passed away. Because she had little knowledge of MSCI's business, Wikoff sought to sell the company shortly after her husband's death. In late December 1984, Wikoff and her advisers at MSCI entered into preliminary negotiations with VandInc preparatory to purchasing the company through the acquisition of Wikoff's MSCI stock. On January 23, 1985, VandInc submitted a letter of intent to purchase all of Wikoff's MSCI stock contingent upon the receipt of a satisfactory investigation report regarding the financial condition of the company. Pursuant to the condition of VandInc's letter of intent, Vanderveld's son Ronald and William Young conducted an investigation of MSCI on behalf of VandInc during which they had full access to the employees, business records and production schedules in MSCI's principal office and plant in Chicago, Illinois, as well as its production plant in Union City, California. As part of their investigation, Ronald Vanderveld and Young interviewed MSCI employees, reviewed contracts, bids, operating permits and product formulas, and monitored the company's production and marketing operations.

On March 29, 1985, VandInc executed a stock purchase agreement with Wikoff under which Wikoff agreed to sell her MSCI stock to VandInc for $750,000. Wikoff also agreed to allow VandInc to continue its investigation of MSCI and actively participate in the day-to-day management of the company until closing. Further, in Article III of the agreement, Wikoff warranted that MSCI's financial statements were complete and correct and prepared in accordance with generally accepted accounting principles. Further, Wikoff warranted that there had been no material change in MSCI's financial condition, assets and liabilities since September 30, 1984, except as reflected in the financial statements. The agreement also reiterated that VandInc's obligation to purchase Wikoff's stock was conditioned upon VandInc's determination that all of MSCI's liabilities were represented in the financial statements and that no undisclosed or contingent liabilities not previously disclosed to VandInc existed. After signing the stock purchase agreement, Wikoff largely reduced her involvement in the management of MSCI, relinquishing control of the company's day-to-day operations to the agents of VandInc.

On May 13, 1985, the parties agreed to reduce the purchase price of Wikoff's shares from $750,000 to $690,000. Pursuant to this agreement, Wikoff transferred all of her MSCI shares to VandInc and, in return, VandInc executed a promissory note to Wikoff for $690,000. On July 29, 1985, the parties closed the sale of Wikoff's stock pursuant to a "Modification Agreement" amending the stock purchase agreement. Under the terms of the modification agreement the parties further reduced the stock purchase price to $500,000. Specifically, Wikoff agreed to cancel VandInc's May 13 note for $690,000 and, in lieu thereof, receive a cash payment of $300,000 and MSCI's promissory note for $180,000. ¹ The note called for interest of 10 percent per year payable in monthly installments from August 1985 to July 1986. The $180,000 principal amount was due and payable on August 2, 1986. As security for the note, Wikoff received, among others, the personal guaranty of John Vanderveld, under which Vanderveld "severally, unconditionally and irrevocably" guarantied all amounts due under the MSCI note and, further, agreed "to pay all expenses including reasonable attorneys' fees incurred by [Wikoff] in collecting such obligations and enforcing the guarantee."

MSCI made interest payments on the note through June 1986. However, MSCI failed to make the final interest payment due in July 1986 and subsequently defaulted on the $180,000 principal payment due August 2, 1986. According to Vanderveld, MSCI refused to make these payments because it discovered that the operating permit for the company's plant in Union City, California, had expired pursuant to a local ordinance on March 9, 1985, and that the municipality would not grant a new permit until the plant created and implemented, subject to the approval of the Union City Fire Department ("UCFD"), a hazardous materials management plan ("HMMP"). ² In October 1985, John Wright, MSCI's Union City plant manager, submitted a proposed HMMP to UCFD, but the plan was rejected. Although the HMMP was not approved, UCFD allowed MSCI to continue operating the plant until March 1986 when, after a spill of hazardous waste occurred at the facility, the plant was closed for failure to implement a HMMP and operating without a permit. UCFD fire chief Joseph Perry stated in his deposition that, in accordance with UCFD's customary practice, the plant would not have been shut down had no spill occurred despite the fact that MSCI had failed to renew its operating permit. After the shut-down, MSCI solicited bids to create a HMMP to comply with the Union City ordinance. In his brief, Vanderveld alleges that the total cost of obtaining a HMMP was estimated to be in excess of $186,000. However, no HMMP was ever obtained by MSCI.

After MSCI's default, Wikoff made a written demand on Vanderveld to satisfy his guaranty of the note, but Vanderveld refused to honor his obligations thereunder. On September 15, 1986, Wikoff initiated this action seeking to enforce the terms of Vanderveld's guaranty. In his answer, Vanderveld raised the affirmative defense that he was not obligated to honor his guaranty because Wikoff had breached her warranties in the March 29 stock purchase agreement that MSCI's financial statements reflected all liabilities of the company. Specifically, Vanderveld alleged that the financial statements failed to disclose that the local operating permit for MSCI's plant in Union City, California, had expired on March 9, 1985, and that a new permit could not be obtained until the plant created and implemented a HMMP approved by UCFD, the cost of which was in excess of the sum MSCI owed Wikoff under the note and, consequently, the amount for which Vanderveld was liable under his guaranty.

A four-day bench trial commenced on September 19, 1988. The central issue was whether Wikoff had breached her warranties concerning MSCI's financial statements and, if so, whether this breach relieved Vanderveld of his obligation to honor his guaranty. At trial, Vanderveld presented and the trial court certified Gerald DeNicholas, a partner in the accounting firm of DeLoit, Haskins & Sells, as an expert witness. DeNicholas, after reviewing MSCI's financial statements and other documents, testified that under generally accepted accounting principles MSCI's financial statements should have noted the lapse of the Union City plant's operating permit, as well as the requirement of obtaining a HMMP for renewing the permit. It is undisputed that the financial statements failed to make such a disclosure. On October 14, 1988, the district court rendered judgment in favor of Wikoff for $180,000 plus interest and determined that, under the terms of the guaranty, Wikoff was also entitled to an award of costs and attorneys' fees. On October 14, 1988, the district court rendered judgment in favor of Wikoff. In its findings of fact and conclusions of law, the court found that Wikoff's warranty as to the accuracy of MSCI's financial statements "was, if anything, under the circumstances of this case intended as a protection against deliberate concealment of liabilities [which] is not claimed and did not occur." The court further found that the periods of investigation and joint management were Vanderveld's primary safeguards under the stock purchase agreement and that the reason for these safeguards was Wikoff's lack of knowledge and expertise concerning the operation of MSCI. Based on this finding, the court concluded that VandInc had not relied on Wikoff's warranty and, thus, the warranty never became effective. The court also concluded that if a breach of Wikoff's warranty had occurred, it had been waived because MSCI, instead of notifying Wikoff of the lack of a HMMP and ceasing performance on the contract, continued to make interest payments after the lack of a HMMP was discovered, contrary to the past course of dealing between the parties.

On November 28, 1988, the district court entered judgment for Wikoff in the amount of $348,961.19 plus $65.55 per day (principal and interest), and also awarded Wikoff costs of $11,613.71 and attorneys' fees of $110,227.95. This judgment was entered on the docket on November 29, 1988. Because this judgment exceeded the amount to which Wikoff was entitled by...