ATHR v. Hutchinson CV-93-467-M 10/12/95 UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE

ATHR, Inc., Plaintiff,

v. Civil No. 93-467-M

Hutchinson, Smith, Nolt & Associates, Inc., Defendant.

O R D E R

Plaintiff, ATHR, Inc., brings this action seeking

reformation of an asset purchase and sale agreement (the

"Contract")a damages for defendant's alleged breach, and a

declaration of the parties' respective obligations under the

Contract. Defendant, Hutchinson, Smith, Nolt & Associates, Inc.,

denies breaching the Contract and counterclaims for damages

allegedly sustained as a result of its detrimental reliance upon

material misrepresentations knowingly made by plaintiff and its

agents.

Pending before the court are plaintiff's motion for summary

judgment on Count II (breach of contract) and defendant's motion

for summary judgment on all counts. For the reasons set forth below, plaintiff's motion for partial summary judgment is granted

and defendant's motion for summary judgment is denied.

Background

Plaintiff, ATHR, Inc. ("Seller"), is a closely held New

Hampshire corporation, formerly known as Hutchinson, Smith &

Associates. Harold Rimalover and Andre Turenne are its principal

officers and sole shareholders. Defendant, Hutchinson, Smith,

Nolt & Associates ("Purchaser"), is a New York corporation.

Gregg Nolt is its president and a former employee of Felker Bros.

Corp. ("Felker").

In 1990, Hutchinson, Smith & Associates (the "Company")

acted as the exclusive northeastern sales representative for

Felker, selling stainless and alloy steel pipe and fittings

manufactured and/or distributed by Felker. The Company's

territory, its obligations as a sales representative, and its

commission schedule were outlined by Felker in a "letter of

appointment" dated June 14, 1985.

In 1990, the parties began negotiating the purchase and sale

of the Company's assets. On October 4, 1990, they executed the

2 Contract, by which Purchaser agreed to acquire the assets of the

Company for Three Hundred Thirty-Seven Thousand Dollars

($337,000.00). Seller maintains that initially the full purchase

price (less earnest money and initial cash payments) was to be

evidenced by a single promissory note. Early drafts of the

Contract demonstrate that this was the parties' original

intention. Subsequently, however. Purchaser requested that the

acquisition price be allocated in a manner that provided more

favorable tax treatment. Schedule C of the Contract reflects the

parties' decision to allocate the purchase price as follows: (1)

$150,000.00 for a covenant from Seller not to compete with

Purchaser; (11) $160,000.00 for consulting services to be

rendered by Rimalover and Turenne to Purchaser; (ill) $20,000.00

for earned but unpaid commissions owed to the Company; (iv)

$5,000.00 for the trade name of Hutchinson, Smith & Associates;

(v) $1,000.00 for customer lists; and (vi) $1,000.00 for the

Company's good will.

The parties then divided Purchaser's obligations to pay

Seller into three distinct categories. The first, representing

the payment for commission credit, good will, trade name, and

customer lists, is represented by a promissory note payable in

3 the amount of $27,000.00. Contract, Schedule D. The second,

expressed as consideration for the covenant not to compete, is

set forth in paragraph 3.B. of the Contract, which establishes a

payment schedule under which Purchaser was obligated to pay

Seller $150,000.00, in monthly installments of $1,250.00.

Finally, the third obligation is described in paragraph 3.C. of

the Contract, which sets forth a schedule under which Purchaser

was obligated to pay Seller $160,000.00, in monthly installments

of $1,333.34, as compensation for consulting services to be

rendered by Rimalover and Turenne. Only the $27,000.00

obligation is represented by a promissory note; the remaining

financial obligations are set forth in the Contract.

After the parties signed the Contract, Felker issued to

Purchaser a letter of appointment dated December 5, 1990,

reaffirming its status as its representative for Territory 25.

That letter of appointment is, in all material respects,

identical to the one under which the Company had operated since

1985. Subseguently, Felker divided its operation into a

"manufacturing division" and a "fabricated products division."

On February 24 and December 8, 1992, Felker issued new letters of

appointment to the Company, making it Felker's Territory 25

4 manufacturer's representative for both the manufacturing and

fabricated products divisions, but reducing the commissions to be

paid to the Company. The parties do not appear to dispute the

fact that Purchaser has held a continuous appointment as Felker's

Territory 25 manufacturer's representative since the Contract was

executed on October 4, 1990, and both acknowledge that, in 1992,

Felker reduced the rate at which it paid commissions to the

Company.

By letter dated March 3, 1993, Nolt contacted Turenne and

Rimalover and reguested relief from Purchaser's financial

obligations to Seller:

I respectfully reguest that [Seller] consider providing some relief of debt owed by [Purchaser]. This reguest is the result of lowered commission rates in two (2) new contracts issued by Felker Bros. Corp. for manufactured products and custom fabricated products.

On April 22, 1993, approximately four months after Felker issued

the most recent letter of appointment and after Seller had

apparently refused to grant Purchaser's reguest for relief from

its obligations. Purchaser notified Seller that it considered

Felker's recent letters of appointment to constitute termination

of the initial letter of agreement. Accordingly, Purchaser

5 asserted that, pursuant to paragraph 18 of the Contract, it was

no longer obligated to make any payments for the covenant not to

compete or the consulting services:

As you may know Felker Bros. Corp., hereinafter referred to as Felker, has unilaterally terminated its initial letter of appointment with [Purchaser]. This occurred without wrongful conduct on behalf of [Purchaser].

Pursuant to paragraph 18 of the agreement between [Purchaser] and yourselves, you agreed to forgive any obligation to pay pursuant to the covenant not to compete and/or the advisory and consulting agreement in just this situation. Therefore [Purchaser] no longer owes you any monies on such agreements. [Purchaser] does acknowledge however that since it has accepted another relationship with Felker Bros, as set forth in paragraph 19a of this agreement, it is not entitled to forgiveness of the promissory note. Therefore [Purchaser] shall honor said promissory note. Accordingly a check in the sum of $58.33 being the monthly payment for May of 1993 is enclosed herewith.

Letter of Attorney Richard Herrmann, Jr., dated April 22, 1993.

Shortly after receiving this letter. Seller filed the pending

action against Purchaser.

Applicable Law

I. Standard of Review.

Summary Judgment is appropriate when the record reveals "no

genuine issue of material fact and . . . the moving party is

6 entitled to a judgement as a matter of law." Fed.R.Civ.P. 56(c).

In ruling on the party's motion for summary judgment, the court

must "view the entire record in the light most hospitable to the

party opposing summary judgment, indulging all reasonable

inferences in that party's favor." Griqqs-Rvan v. Smith, 904

F .2d 112, 115 (1st Cir. 1990).

The moving party has the burden of demonstrating the absence

of a genuine issue of material fact for trial. Anderson v.

Liberty Lobby, Inc.,

(1986). If the moving

party carries its burden, the party opposing the motion must set

forth specific facts showing that there remains a genuine issue

for trial, demonstrating "some factual disagreement sufficient to

deflect brevis disposition." Mesnick v. General Electric Co.,

(1st Cir. 1991), cert, denied,

,

(1992). See also Fed.R.Civ.P. 56(e). This burden is discharged

only if the cited disagreement relates to a genuine issue of

material fact. Wynne v. Tufts University School of Medicine,

(1st Cir. 1992), cert, denied,

(1993). "In this context, 'genuine' means that the evidence

about the fact is such that a reasonable jury could resolve the

point in favor of the nonmoving party [and] 'material' means that

7 the fact is one that might affect the outcome of the suit under

the governing law." United States v. One Parcel of Real Property

with Bldgs.,

, 204 (1st Cir. 1992) (citing Anderson

v. Liberty Lobby, Inc.,

(1986)).

II. Contract Interpretation.

A district court sitting in a diversity jurisdiction case

must apply the substantive law of the forum state.1 American

Title Ins. Co. v. East West Financial Corp.,

(1st Cir. 1992) (citing Erie R. Co. v. Tompkins,

(1938)). Under New Hampshire law, the interpretation of a

contract involves mixed guestions of law and fact. While the

interpretation of unambiguous contractual provisions presents a

guestion of law, the interpretation of ambiguous provisions

presents a guestion of fact. And, as the court of appeals for

this circuit has noted, "the general rule [in New Hampshire] is

that whether a contract is clear or ambiguous is a guestion of

law . . . If the contract is deemed ambiguous, then the

intention of the parties is a guestion of fact." In re

Navigation Technology Corp.,

(1st Cir. 1989)

1 The Contract's choice of law provision also supports application of New Hampshire law. Contract, at para. 26. (citations omitted). Nevertheless, in limited circumstances the

court may resolve an ambiguous contract provision, "if, after

considering all of the evidence, including extrinsic evidence not

weighed in construing unambiguous contract language, a rational

finder of fact could resolve the ambiguity in only one way."

McCrorv v. Greenerd Press & Machine, No. 92-179-B, slip op.

(D.N.H. December 17, 1993) (citing Gamble v. Univ. of New

Hampshire,

(1992)).

The New Hampshire Supreme Court has repeatedly held that a

reviewing court should interpret a contract to reflect the

intention of the parties at the time it was made. R. Zoppo Co.

v. Dover,

(1984); Trombly v. Blue Cross/Blue

Shield,

(1980); Erin Food Servs. v. 688

Properties,

(1979) . The intent of the parties

is to be judged objectively. Logic Assocs. v. Time Share Corp.,

(1984), and the contract language is to be

given "a meaning that would be attached to it by a reasonable

person." Kilroe v. Troast,

(1977).

In determining the intent of the parties, the court must

"consider the situation of the parties at the time of their agreement and the object that was intended thereby, together with

all the provisions of their agreement taken as a whole." R.

Zo p p o C o ., 124 N.H. at 671 (citations omitted). However, the

court must be careful to focus upon "objective or external

criteria rather than . . . unmanifested states of mind of the

parties." Tentindo v. Locke Lake Colony Ass'n,

(1980) .

Discussion

The parties agree that the Contract is valid and binding.

They also agree that they regarded the rights represented by the

"letter of appointment" from Felker to be a "material portion of

the value of the assets to be purchased." Contract, at para. 17.

The sole area of disagreement relates to paragraph 18 of the

Contract, which purports to set forth the conditions under which

Purchaser's payment obligations would be forgiven. The final

version of the Contract, as signed by the parties, provides in

part:

17. CHANGED CIRCUMSTANCES: The parties hereto acknowledge that the Felker Bros. Corp. agreement with SELLER, pursuant to a "letter of appointment" dated June 14, 1985, and the rights thereunder, represents a material portion of the value of the assets to be purchased. Accordingly, in the event the territory presently defined in said letter of

10 appointment is materially changed prior to the closing, or Felker Bros. Corp. determines not to extent a "letter of appointment" to PURCHASER, PURCHASER shall have the right to terminate this agreement. In such event, PURCHASER shall give notice of termination of the Agreement to SELLER and any monies paid as a deposit shall be returned to the PURCHASER and neither party shall have any further rights against the other.

18. FORGIVENESS OF NOTE: In the event Felker Bros. Corp. cancels, in total, its "letter of appointment" referred to in Paragraph 17 above, for reasons other than territory mismanagement by the PURCHASER, determined in the sole discretion of Felker Bros. Corp., the SELLER agrees to forgive the balance with respect to the Promissory Note provided in Paragraph 3b hereof then due and any obligation to pay pursuant to the covenant not to compete and/or the advisory and consulting agreement. Notwithstanding the foregoing, PURCHASER shall not be entitled to forgiveness of the Promissory Note if: (a) PURCHASER accepts employment or any other relationship, employment or otherwise, with Felker Bros. Corp. (other than as Manufacturer's Representative for what is currently known as Territory 25 as provided in the current "letter of appointment"); or (b) PURCHASER voluntarily disassociates himself from Felker Bros. Corp.; or (c) violates the conditions of the "letter of appointment." This provision shall survive closing.

Contract, paras. 17 and 18. The parties disagree on two points.

First, they dispute the meaning to be ascribed to the phrase "In

the event Felker Bros. Corp. cancels, in total, its 'letter of

appointment1 referred to in Paragraph 17 above." Purchaser

claims that condition has been met and, therefore, it is entitled

11 to stop making the bulk of its payments under the Contract.

Seller disagrees and argues that by stopping such payments.

Purchaser has breached the Contract.

The parties also disagree with regard to the intended effect

of the second sentence of paragraph 18 and whether it was

purposefully drafted to create a distinction between forgiveness

of the promissory note and forgiveness of Purchaser's financial

obligations arising from the covenant not to compete and

consulting agreement. Purchaser argues that this sentence

accurately reflects the parties' intention. Seller disagrees and

claims that this provision contains a typographical error and/or

an inadvertent omission of material language. It asks the court

to reform the language to reflect what it claims was the parties'

true intention.

I. Did Felker "Cancel, in Total," the Letter of Appointment?

Purchaser contends that when Felker issued new letters of

appointment, each of which "superseded all prior and

contemporaneous . . . agreements," it "cancelled in total" the

original, June 14, 1985, letter of appointment referenced in the

Contract. Accordingly, pursuant to the first sentence of

12 paragraph 18, Purchaser asserts that it is entitled to

forgiveness of its obligations under the covenant not to compete

and the consulting agreement. Consistent with this position,

however, it "acknowledges" that it remains obligated on the

promissory note, pursuant to the provisions of the second

sentence of paragraph 18 which purportedly exempt forgiveness of

the promissory note under certain conditions.

Seller responds by arguing that the parties did not intend

to forgive Purchaser's obligations merely because Felker issued a

new superseding letter of appointment. Instead, it argues that

the parties obviously were concerned about providing Purchaser

relief if, and only if, the Company completely lost its status as

a Felker sales representative.

Seller points to several supporting facts. First, it notes

the distinction between paragraph 17, which was designed to allow

Purchaser to avoid the Contract if Felker should "materially

change" the letter of appointment prior to closing, and paragraph

18, which allows forgiveness of some (or all) of Purchaser's

obligations if, after closing, Felker "cancels, in total, its

letter of appointment." Seller claims that use of the phrase

13 "cancels in total" was purposeful and intended to make

Purchaser's debt forgiveness contingent upon complete

cancellation of Felker's appointment of the Company as a

manufacturer's representative. It also claims that the second

sentence of paragraph 18 was intended to make such a contingency

crystal clear: Purchaser's obligations were not to be forgiven if

it "accept[ed] employment or any other relationship, employment

or otherwise, with Felker." Contract, para. 18. Seller also

points to Purchaser's post-closing conduct in support of its

reading of the disputed phrase.2

2 Seller notes that Purchaser did not assert his alleged right to discontinue his obligations under the consulting agreement and covenant not to compete after Felker issued the first letter of appointment, dated December 5, 1990. And, following Felker's issuance of the letters of appointment in 1992, Purchaser did not immediately assert its claimed right of debt forgiveness; instead, Nolt first sought financial concessions and/or debt restructuring from Seller as "a result of lowered commission rates" to be paid by Felker. April 22, 1993 letter from Nolt to Seller. Purchaser did not claim a right to stop payments on the covenant not to compete and consulting agreement until: (i) after Seller apparently denied Nolt's reguest for some restructuring of Purchaser's obligations; and (ii) more than 14 months after Felker's February 24, 1992, letter of appointment and almost 4 months after the December, 1992, letter of appointment.

From this apparent period of inaction. Seller argues that Purchaser's true understanding of the Contract can be distilled: Purchaser did not truly believe that Felker's new letters of appointment triggered the provisions of paragraph 18, but instead recognized that its financial obligations continued. Seller argues that ultimately Purchaser's reliance upon his alleged

14 However, because the court finds that the disputed language

is not ambiguous, it need not consider such extrinsic evidence in

an effort to resolve any ambiguity.

Viewing the language of the Contract as a whole, considering

the situation of the parties when the contract was formed, and

giving the language of the Contract its common meaning, the court

finds that the phrase "cancels, in total, its letter of

appointment" is not ambiguous. In order for the disputed

language to be "ambiguous," there must be different plausible

interpretations of that language which are consistent with the

parties' objectively manifested intentions. Here, there is

plainly no ambiguity.

The reference in paragraph 18 to the cancellation, in total,

of Felker's "letter of appointment" does not describe the June

14, 1985, letter itself; rather it refers to a generic letter of

appointment (or, more accurately, the business relationship

described by such letters), the parties' concern being that

right to cease payments under the consulting agreement and covenant not to compete is the product of a tortured reading of the Contract, borne of financial hardship and inability to honor the obligations of the Contract.

15 Purchaser not be bound under the Contract if Felker revoked its

status as a sales representative.

The specific document memorializing the relationship between

Felker and the Company is unimportant; the critical asset of the

Company was the agreement with Felker itself. The Contract makes

this clear: "the Felker Bros. Corp. agreement with SELLER, . . .

and the rights thereunder, represents a material portion of the

value of the assets to be purchased." Contract, para. 17

(emphasis added). It is egually clear that, contrary to

Purchaser's thesis, the parties actually anticipated that Felker

would issue subseguent letters of appointment. See Contract,

para 17 (giving Purchaser right to avoid contract if "Felker

Bros. Corp. determines not to extend a 'letter of appointment1 to

[Purchaser]").

In light of this, it is apparent that the parties did not

intend to relieve Purchaser of its financial obligations under

the Contract merely because Felker, as expected, extended new

letters of appointment. And, because the parties do not dispute

that Felker has not "cancelled, in total," its agreement with the

Company (under which the Company acts as an exclusive sales

16 representative in a designated region) , Purchaser is not entitled

to forgiveness of its obligations under the Contract.

Purchaser's reading of the Contract is wholly inconsistent

with its plain and unambiguous language. To interpret the

Contract in the manner advocated by Purchaser would allow it to

retain the entire benefit of its bargain (i.e., acguisition of

the Company's assets, including its relationship with Felker)

while avoiding its obligation to pay for those assets when Felker

issued the anticipated new letters of appointment, either

reaffirming the Company's status a sales representative on the

same terms or modifying slightly the conditions under which it

acted as a sales representative. Such an interpretation of the

Contract would be illogical and unreasonable. Most importantly,

however, it is contrary to the objective manifestation of intent

clearly expressed by the parties. Seller is, therefore, entitled

to judgment as a matter of law with regard to Count II.

II. Reformation.

Seller argues that the second sentence of paragraph 18 is a

vestige of earlier drafts of the Contract, which was

inadvertently not updated when the final version was prepared.

17 Seller claims that both the first and second sentences of

paragraph 18 were intended to relate to the circumstances under

which all of Purchaser's obligations would be forgiven. It

claims that when the purchase price was divided into three

components (i.e., a relatively small promissory note and two

substantial payment schedules) , the language of paragraph 18 was

not properly amended and now makes an unintended distinction

between forgiveness of the promissory note and forgiveness of the

remaining financial obligations. It claims that Purchaser is

relying upon this false distinction to reap a benefit which was

never intended.

In support of its position. Seller points to the language of

an earlier draft of the Contract, which provides:

FORGIVENESS OF NOTE: In the event Felker Brothers Corporation cancels, in total, its "letter of appointment" referred to in paragraph 17 above, . . . the Seller agrees to forgive the balance with respect to the Promissory Note provided in paragraph 3b hereof. Notwithstanding the forgoing, PURCHASER shall not be entitled to forgiveness of the Promissory Note if . . .

Draft of the Contract, dated August 22, 1990, at para. 18. When

this draft was prepared, the parties had planned to evidence

Purchaser's obligation to pay the full $337,000.00 purchase price

in a single promissory note. Accordingly, the first and second

18 sentence were to be interpreted together, specifically outlining

and limiting the circumstances under which all of Purchaser's

obligations would be forgiven. Seller argues that if the

Contract, as executed, were to accurately represent the intention

of the parties, the second sentence of paragraph 18 would have

read as follows:

Notwithstanding the forgoing, PURCHASER shall not be entitled to forgiveness of the Promissory Note and the obligations to pay pursuant to the covenant not to compete and the advisory and consulting agreement if: (a) . . .

Affidavit of Albert Cirone, Esg. (former counsel to Seller), at

para. 10. Seller claims that such language would have prevented

Purchaser from creating the unintended distinction between

forgiveness of the promissory note and forgiveness of the

obligations created by the covenant not to compete and consulting

agreement. Succinctly stated. Seller argues that it never

intended to forgive any of Purchaser's obligations if, despite

termination of the Company's status as Territory 25 sales

representative, it maintained an ongoing relationship with

Felker, voluntarily terminated that relationship, or violated the

terms of the Contract. It claims that the disputed language in

paragraph 18 is the product of a mutual mistake and should.

19 therefore, be reformed. Purchaser maintains that, at best, the

language set forth in paragraph 18 is the product of a unilateral

mistake by Seller. Accordingly, Purchaser argues that

reformation is not a remedy available to Seller.

Absent fraud, reformation of a contract reguires proof of

mutual mistake. Midway Excavators v. Chandler,

(1986). In the case of unilateral mistake, the remedy is

rescission, not reformation. I_d. And, with regard to

reformation, the New Hampshire Supreme Court has stated that:

"The law is well settled in this jurisdiction that reformation may be granted . . . where the instrument fails to express the intention which the parties had in making the contract which it purports to contain" and that "parol evidence of mistake in reduction of the agreement of the parties to writing may be received, not for the purpose of varying the written instrument, but for the purpose of establishing the mistake and correcting the instrument."

McCabe v. Arcidv,

(1993) (guoting Gagnon v.

Pronovost,

(1951)). Moreover, reformation is

appropriate only:

when the evidence is clear and convincing that (1) there was an actual agreement between the parties, (2) there was an agreement to put the agreement in writing and (3) there is a variance between the prior agreement and the writing.

20 Erin Food Servs. v. 688 Properties,

(emphasis in

original) .

Here, the dispute concerns the third requisite element: the

parties vigorously disagree as to whether the final, executed

version of the Contract accurately represents their agreement.

Plainly, this disputed material fact must be resolved by the

trier of fact. Summary judgment is, therefore, unavailable as to

Count I of the complaint. Seller's request for reformation.

Likewise, summary judgment is inappropriate with regard to

Count III of the complaint, by which Seller seeks a declaration

of the parties rights and obligations under the Contract. Until

the question of reformation is resolved, the court cannot

conclusively determine the parties' respective rights and

obligations under the Contract.

Conclusion

For the forgoing reasons. Seller's motion for partial

summary judgment (Count II) (document no. 15) is granted and

Purchaser's motion for summary judgment (document no. 19) is

denied.

21 SO ORDERED.

Steven J. McAuliffe United States District Judqe

October 12, 1995

cc: Benette Pizzimenti, Esq. Mark D. Wiseman, Esq. Frederick B. Galt, Esq.

22