Peter Denil and Gerald Nardella v. Deboer, Inc.,Et Al - The American Lawyer
The Seventh Circuit has issued a decision interpreting a series of contracts involving the aborted sale of a business.
Ronald DeBoer started a trucking business known as deBoer Transportation in 1967. In 2007, he and the other family members wanted to sell the business and retire. (Given what happened, it appears that DeBoer was not willing to retire or sell the business.)
There were two contracts (a) an employment agreement and (b) a stock-purchase contract.
The employment contract provided that one of the plaintiffs, Peter Denil, would become the CEO of DeBoer. The other plaintiff, Gerald Nardella, would become the Executive Vice President. DeBoer became an Executive Vice President. He held the right to discharge the plaintiffs with or without cause. If the discharge was without cause, plaintiffs would receive additional payments.
The stock-purchase contract called for Denil to buy 4% of DeBoer's stock for $500,000 and for Nardella to buy 2% for $250,000. The closing date was set for April 15, 2009. The parties agreed that the failure to purchase the stock by April 15, 2009, the plaintiffs' employment would be terminated. The parties also agreed that the signing of a buy-sell contract "would be a condition precedent to the obligation to purchase the 4% and 2% interests. The stock-purchase contract contained a clause in which the parties promised to use their best efforts to conclude the buy-sell contract."
The buy-sell contract was never signed. The parties had a dispute about how the purchase price would be allocated among the shareholders.
When April 15, 2009 arrived, the negotiations were stalled. Denil and Nardella refused to purchase the 4% and 2% interests in the company. They also failed to put the $750,000 purchase price into an escrow. DeBoer then fired the plaintiffs and they sued, seeking reinstatement, the opportunity to invest in DeBoer and damages for tortious interference. DeBoer filed a counterclaim. The case was decided under Wisconsin law. The district court entered summary judgment on all claims and the case was appealed to the Seventh Circuit, which affirmed in an opinion by Judge Easterbrook.
Plaintiffs contended that DeBoer did not use "best efforts" to conclude the Buy-Sell Agreement. The Seventh Circuit disagreed. Neither side violate cdd the best efforts clause because both exchanged many proposals. As the court stated: "[Plaintiffs] were free to buy the sock, with or without a buy-sell agreement; they just shoe not to do so. They agreed that they can't complain about the termination of their management positions. Ronald DeBoer wanted to ensure that the new managers' interests were aligned with those other shareholders. Plaintiffs were not entitled to retain the positions without making the investment essential to that end."
The Seventh Circuit also rejected the tortious interference with contract claim and the bad faith claim. "No one interfered with any contract: DeBoer simply enforced the contracts it had negotiated."
There was no lack of good faith because DeBoer did what it was entitled to do under the contract. As the court noted, "'good faith' in contract law means honesty plus refraining from opportunistic conduct that exploits the other side's sunk costs." See Market Street Associates L.P. v. Frey, 941 F.2d 588 (7th Cir. 1991). The court described bad faith - an actor who sulks in his dressing room during a movie production. The conduct is bad faith because the producer has already invested a great deal of money in the production and cannot afford to start with a new actor.
Because DeBoer complied with the terms of the contract, he did breach.
Edward X. Clinton, Jr.
Plaintiffs contended that DeBoer did not use "best efforts" to conclude the Buy-Sell Agreement. The Seventh Circuit disagreed. Neither side violate cdd the best efforts clause because both exchanged many proposals. As the court stated: "[Plaintiffs] were free to buy the sock, with or without a buy-sell agreement; they just shoe not to do so. They agreed that they can't complain about the termination of their management positions. Ronald DeBoer wanted to ensure that the new managers' interests were aligned with those other shareholders. Plaintiffs were not entitled to retain the positions without making the investment essential to that end."
The Seventh Circuit also rejected the tortious interference with contract claim and the bad faith claim. "No one interfered with any contract: DeBoer simply enforced the contracts it had negotiated."
There was no lack of good faith because DeBoer did what it was entitled to do under the contract. As the court noted, "'good faith' in contract law means honesty plus refraining from opportunistic conduct that exploits the other side's sunk costs." See Market Street Associates L.P. v. Frey, 941 F.2d 588 (7th Cir. 1991). The court described bad faith - an actor who sulks in his dressing room during a movie production. The conduct is bad faith because the producer has already invested a great deal of money in the production and cannot afford to start with a new actor.
Because DeBoer complied with the terms of the contract, he did breach.
Edward X. Clinton, Jr.
