03-3094 & 03-3095 -- Cassandra O
U.S. 10th Circuit Court of Appeals
(October 6, 2004; afternoon docket)
SUMMARY OF ORAL ARGUMENT
Appellants in this case argued that there was no basis for the jury’s award of $ 2.5 million. Appellants’ main complaint was that the district court did not give the jury proper instructions by defining good faith. Appellants’ strongest argument was that Appellees’ financial projections before Appellants purchased the business were different than reality.
Appellees' best argument was that when the parties entered into the contract, the undertaking was supposed to be a win-win situation. Appellees would sell their business and receive an earn-out and Appellants would have the advantage of Appellees’ established business. Appellees contended that Appellants created a win-lose situation when it decided to focus on building a sister boat not designed by Appellees. When Appellants did this, the business went under because the workforce was not trained to build the boat. Thus, Appellees described this as the classic case of breach of the covenant of good faith and fair dealing and urged the court to uphold the jury's verdict.
CASE SUMMARY (prepared at Washburn Law)
PROCEDURAL HISTORY
Genmar Holdings, Inc., (Genmar) appeals a money judgment in favor of Horizon Holdings, LLC and its principals (Horizon) in a civil action for breach of a purchase agreement for an aluminum boat company. The jury awarded Horizon $2.5 million in damages plus attorney’s fees of almost $900,000. Horizon cross-appeals, challenging the District Court’s denial of its contractually negotiated post-judgment interest rate.
FACTS
Horizon was a Junction City manufacturer of aluminum boats. In December 1998, Genmar purchased Horizon for $2.3 million in cash, $2 million in debt assumption, and up to $5.2 million in anticipated “earn-out” compensation. Genmar also offered multi-year employment contracts to Horizon’s president, his daughter, and his son-in-law to remain in management positions with Horizon as a Genmar subsidiary.
The 'earn-out' compensation was calculated assuming that the Horizon subsidiary would achieve certain profit targets. However, those targets were never met. In April 2000, fifteen months after the acquisition, Genmar fired the president, his daughter, and his son-in-law. One year later, Genmar discontinued manufacturing Horizon boats. In June 2002, Genmar closed the Junction City manufacturing facility. Genmar never paid any “earn-out” compensation to Horizon’s principals.
In April 2001, Horizon filed suit, claiming that Genmar fraudulently induced Horizon’s principals to sell the company and then embarked on a course of conduct designed to impair the subsidiary from generating the negotiated earn-out compensation. Horizon contends that Genmar thereby breached the implied covenants of good faith and fair dealing.
ISSUES
- Did the District Court properly instruct the jury concerning implied covenants in the parties’ purchase agreement, on the basis of which the jury found that Genmar breached the contract?
- Did Genmar’s actions amount to bad faith under Delaware law?
- Is Horizon entitled to the rate of post-judgment interest negotiated as a term of the purchase agreement?
ARGUMENTS
» Appellants’ Argument
Genmar contends that insufficient evidence supports the jury’s finding that the purchase agreement was breached. The appellant also questions an instruction that allowed the jury to presume bad faith on a showing that Genmar breached any of four implied duties the court supplied as consistent additional terms of the purchase agreement. Genmar contends that the instruction was erroneous because governing Delaware law requires explicit evidence of bad faith “tantamount to fraud.”
Genmar also challenges the District Court’s denial of its motion for summary judgment based on Horizon’s failure to show its entitlement to damages under Delaware law. Even if Horizon is entitled to damages, Genmar contends that the evidence was insufficient to determine damages. Genmar seeks reversal of the order denying summary judgment, or in the alternative, a new trial to recalculate damages.
» Appellee's Argument and Cross-Appeal
Horizon contends that the evidence presented at trial is more than adequate to support the jury’s determination that Genmar breached the purchase agreement by deliberately impairing realization of the earn-out compensation. Further, the District Court properly instructed the jury on the implied covenant of good faith and fair dealing under Delaware law. Even if the jury instructions were deficient in some way, Horizon argues that the error was harmless.
Horizon’s cross-appeal challenges the District Court’s denial of its contractually negotiated post-judgment interest rate on the grounds that appellee waived its contractual right.
WHY THIS CASE IS INTERESTING
As a general rule, every contract includes an implied covenant of good faith and fair dealing as a matter of law. The central issue in this case is the degree of proof required to establish a breach of the implied covenant. Appellee argues that its evidence is sufficient, while appellant argues that the evidence falls short because it failed to establish that Genmar’s conduct was tantamount to fraud. The challenged jury instruction allowed the jury to find in favor of Horizon if it determined that Genmar’s actions would have been prohibited by the express terms of the agreement if the parties had thought to negotiate with respect to that matter. The jury instruction was largely based on an instruction given by another federal district court in a 2002 case, which held that its instruction was consonant with Delaware law and properly tracked the language of Restatement (Second) of Contracts § 205.
INFORMAL CASE SUMMARY
Please Note: This informal case summary is not intended for official use and does not purport to be exhaustive of the issues or defenses presented by the parties.
Plaintiffs' action for damages arose from defendants' 1998 acquisition of Horizon Marine LC, an aluminum boat manufacturing company. In 2002, defendants closed the company and fired its principles, the original owners. Plaintiffs Horizon Holdings f/k/a "Horizon Marine LC" and Geoffrey Pepper sought damages based on fraud, breach of purchase agreement, and breach of implied covenant of good faith and fair dealings. Plaintiff Cassandra O'Tool, daughter of Plaintiff Pepper, alleged gender discrimination. Plaintiffs Cassandra O'Tool, John O'Tool, and Geoffrey Pepper alleged retaliation and breach of employment contracts.
Before trial, the district court granted summary judgment in favor of defendants on some claims. At the conclusion of trial, the jury returned a verdict in favor of Plaintiffs Horizon Holdings and Geoffrey Pepper on their breach of purchase agreement claim in the amount of $2.5 Million, in favor of Plaintiff Cassandra O'Tool on her breach of employment contract claim in the amount of $63,200, and in favor of Plaintiff John O'Tool on his breach of employment contract claim in the amount of $20,313. On all other claims, the jury found in favor of defendants.
On appeal, defendants argue they are entitled to judgment as a matter of law on the breach of purchase agreement claim because the evidence was insufficient to support the verdict, or, in the alternative, they are entitled to a new trial because the district court erroneously instructed the jury on the breach of implied covenant claim.
On cross-appeal, plaintiffs argue the district court erred in concluding they waived their right to the rate of post-judgment interest set forth in the purchase agreement by failing to preserve their claim for entitlement to such rate in the pretrial order.
