Tranzact Technologie v. Evergreen Partners ( 2004 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
Nos. 01-3685 & 01-3787
TRANZACT TECHNOLOGIES, LTD.,
Plaintiff-Appellee, Cross-Appellant,
v.
EVERGREEN PARTNERS, LTD. and
KELLOGG ASSOCIATES, INC.,
Defendants-Appellants, Cross-Appellees.
____________
Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 00 C 3215—James F. Holderman, Judge.
____________
ARGUED SEPTEMBER 19, 2003—DECIDED APRIL 28, 2004
____________
Before BAUER, RIPPLE, and WILLIAMS, Circuit Judges.
WILLIAMS, Circuit Judge. Kellogg Associates and
Evergreen Partners (“the advisors”) were hired by Tranzact
Technologies, Ltd. to perform advisory services for
Tranzact. When Tranzact sold some of its assets to another
company, the advisors sought payment of an investment
banking fee. Tranzact determined that payment was not
required, and sought a declaratory judgment in federal
court. It also sued the advisors for breach of contract on the
2 Nos. 01-3685 & 01-3787
ground that the advisors had failed to perform all services
required under the agreement. The advisors countersued for
breach of contract based on Tranzact’s refusal to pay the
fee. The district court granted summary judgment to
Tranzact on the advisors’ claim and also granted summary
judgment sua sponte to the advisors on Tranzact’s breach of
contract claim. Because the agreement between Tranzact
and the advisors reveals that the advisors are not entitled
to a fee based upon a sale of assets, and because Tranzact
has not persuaded us that it has a valid breach of contract
claim, we affirm.
I. BACKGROUND
In 1996, Tranzact Technologies, Ltd. engaged Kellogg
Associates and Evergreen Partners to perform financial
advisory services in connection with a possible sale of or
investment in Tranzact. John Lane of Evergreen drafted
an agreement, with input from Dan Kellogg of Kellogg
Associates and Mike Regan of Tranzact. The agreement was
finalized in June 1997. Under its terms, Lane and Kellogg
were to receive a $40,000 up-front retainer, and an invest-
ment banking fee contingent “upon successful completion of
the Transaction.” The agreement explained that a transac-
tion could involve either an equity investment or an asset
sale. It further stated that if Tranzact entered into a
transaction with any party listed on Exhibit A of the
agreement, the advisors were entitled to the investment
banking fee in the event that the transaction was consum-
mated within one year of termination of the agreement.
Tranzact paid the $40,000 retainer, and when the advisors
indicated that they would be unable to continue the en-
gagement unless they were paid on an hourly basis,
Tranzact paid them over $60,000 in additional fees.
Tranzact terminated the agreement in July 1999. In
March 2000, after providing Schneider Logistics (allegedly
Nos. 01-3685 & 01-3787 3
without the advisors’ knowledge) with a “Selling
Memorandum” previously prepared by the advisors,
Tranzact sold its Freight Payment Services Division to
Schneider for $17,500,000. Because Schneider was listed
on Exhibit A and because the Schneider transaction oc-
curred within a year after termination of the agreement,
the advisors determined that the investment banking fee
provision was triggered despite the fact that the advisors
were not directly involved in the transaction. They thus
requested payment of the investment banking fee, but
Tranzact contended that it was not required to pay and
sought a declaratory judgment to that effect in federal
district court. Tranzact also sued the advisors for breach
of contract, claiming that the advisors had been derelict
in their duties under the agreement. The advisors coun-
tersued, claiming that Tranzact was in breach due to its
failure to pay the fee. The district court granted summary
judgment to Tranzact on the advisors’ claim. It also dis-
missed Tranzact’s breach of contract claim against the
advisors sua sponte, ruling that “based on the undisputed
evidence in the record[,] the [advisors] satisfied all of [their]
contractual obligations. . . .” Both parties appeal.
II. ANALYSIS1
A. The Investment Banking Fee Provision
The relevant portions of the agreement between Tranzact
and the advisors are Section 3, entitled “Transaction,” and
Section 4, entitled “Fees.” Section 3 contains the following
language:
A Transaction shall be defined as (1) the sale or
other disposition to another corporation, person or
1
The parties’ contract dispute is governed by Illinois law.
4 Nos. 01-3685 & 01-3787
business entity (an “investor”) of all or a portion of
Tranzact’s stock or assets, (2) an equity or quasi-
equity investment in Tranzact by an investor or (3)
a merger, consolidation or other combination of
Tranzact with an investor.
Section 4 states in part that:
The Advisors’ investment banking fees will be
based on the following formula:
0.0% [of the Transaction Value] if the Enterprise
Value is below $15,000,000.
0.5% if the Enterprise Value ranges from
$15,000,000 to $17,499,999.
1.0% if the Enterprise Value ranges from
$17,500,000 to $21,499,999.
2.0% if the Enterprise Value ranges from
$21,500,000 to $24,999,999.
2.5% if the Enterprise Value ranges from
$25,000,000 to $29,999,999.
3.0% if the Enterprise Value ranges from
$30,000,000 to $39,999,999.
4.0% if the Enterprise Value ranges from
$40,000,000 to $49,999,999.
5.0% if the Enterprise Value is $50,000,000 or
above.
Enterprise Value in this context is the Total
Transaction Value divided by the percentage of
equity ownership held by an Investor after the
Transaction. Total Transaction Value in this con-
text refers to total consideration paid for an equity
interest in Tranzact, including any seller financing,
plus assumed debt (including bank indebtedness
Nos. 01-3685 & 01-3787 5
and shareholders and related party notes, but
excluding trade and current payables). The fees will
be applied as a percentage of the Transaction Value
and will be contingent payable upon successful
completion of the Transaction. Payment of these
fees will be made at the time of closing of the
Transaction.
The district court determined that an enforceable contract
existed with respect to another portion of Section 4, which
required Tranzact to pay a non-refundable $40,000 retainer
“for strategic consulting, due diligence items and the
completion of a descriptive memorandum.” It found,
however, that although Tranzact intended to pay and the
advisors intended to receive an investment banking fee
upon the completion of a qualifying transaction, the terms
of Section 4’s fee provision are too indefinite to be enforced.
Specifically, the court pointed out that although the term
Total Transaction Value is defined, the term Transaction
Value is not defined, and found this omission to be fatal
because the agreement clearly states that the investment
banking fee is to be calculated as “a percentage of the
Transaction Value.”
The district court further determined that even
assuming that Transaction Value has the same meaning as
Total Transaction Value, fees are not warranted when a
Transaction involves a sale of assets. Rather, the fee pro-
vision is triggered when an investor obtains equity interest
in Tranzact. It noted that if the fee formula were applied
in this case the advisors would not be due any fees, because
the number zero must be plugged into the equation when-
ever the formula requires numbers linked to equity. The
court declined to provide an alternative formula and instead
granted summary judgment to Tranzact. We review the
district court’s decision de novo, viewing all facts in the
6 Nos. 01-3685 & 01-3787
light most favorable to the advisors.2 See Phelan v. City of
Chicago, 347 F.3d 679, 681 (7th Cir. 2003).
“In construing a contract, the primary objective is to
determine and give effect to the intentions of the parties
at the time they entered into the contract.” Ancraft Prods.
Co. v. Universal Oil Prods. Co., 427 N.E.2d 585, 588
(Ill. App. Ct. 1981). The advisors assert that here, the
parties’ intent to provide an investment banking fee in the
event of an asset sale is clear, the term Transaction Value
has the same meaning as Total Transaction Value, and the
fee formula can easily be adapted to address asset sales
(although they concede that as currently written, the for-
mula only addresses equity investments). We agree that
Transaction Value and Total Transaction Value may be one
and the same. Nevertheless, we are not persuaded that the
district court erred in finding that no fees are warranted in
this instance.
1. Transaction Value
The term Transaction Value is a key component of the fee
formula and is thus material to this agreement. See
2
Although the district court acknowledged that it was required
to view all facts in the advisors’ favor, it also employed the doc-
trine of contra proferentem, which dictates that ambiguous terms
in a contract be construed against the drafter. See Ancraft Prods.
Co. v. Universal Oil Prods. Co., 427 N.E.2d 585, 588 (Ill. App. Ct.
1981). Although it is not necessarily inappropriate to simul-
taneously apply a favorable standard of review and contra
proferentem, see Phillips v. Lincoln Nat’l Life Ins., 978 F.2d
302, 307, 314 (7th Cir. 1993) (applying both), Illinois courts have
not applied the doctrine when both parties were involved in the
drafting of the agreement, as is the case here (although the
advisors were the primary drafters). See Ancraft, 427 N.E.2d at
588. We therefore decline to apply contra proferentem in this
instance.
Nos. 01-3685 & 01-3787 7
Goldstick v. ICM Realty, 788 F.2d 456, 461 (7th Cir. 1986)
(finding price and price formulas essential terms under
Illinois law); cf. Delcon Group, Inc. v. N. Trust Corp., 543
N.E.2d 595, 602 (Ill. App. Ct. 1989) (loan amounts and loan
formulas are essential terms). If its meaning cannot be
determined, the contract is unenforceable. See Wagner
Excello Foods, Inc. v. Fearn Int’l, Inc., 601 N.E.2d 956, 960
(Ill. App. Ct. 1992) (“To be enforceable, a contract must
show a manifestation of agreement between the parties and
be definite and certain in its terms. When material terms
and conditions are not ascertainable, there is no enforceable
contract, even if the intent to contract is present.”) (cita-
tions omitted). To avoid this problem, the advisors argue
that its meaning is obvious, claiming that just as the term
“price” in everyday language means “total price,” and the
term “value” means “total value,” Transaction Value must
mean the same as Total Transaction Value.3
The advisors’ analogies are imperfect. For instance, it
is not the case that “price” always means “total price”;
consider the sales tax often added to the price of a clothing
item, or the many add-ons involved in car purchases and
plane tickets despite their seemingly firm prices. Moreover,
Transaction Value lends itself to many interpretations
based on the agreement’s language. Section 4 states that
3
The advisors also contend that a court cannot sever this con-
tract, finding that the provision for the $40,000 retainer is en-
forceable, but the provision for the investment banking fee is not.
We agree. Although Illinois law allows severability under certain
circumstances, see Abbott-Interfast Corp. v. Harkabus, 619 N.E.2d
1337, 1343-44 (Ill. App. Ct. 1993) (“The trial court may, in its
discretion, modify a contract so that it comports with the law or
sever unenforceable provisions from a contract.”), this is not one
of those cases. See People ex rel. Foreman v. Vill. of Round Lake
Park, 525 N.E.2d 868, 875 (Ill. App. Ct. 1988) (“Courts which will
enforce a contract with a portion severed generally do so when the
severed portion does not go to the contract’s essence.”).
8 Nos. 01-3685 & 01-3787
Total Transaction Value “refers to total consideration paid
for an equity interest in Tranzact, including any seller
financing, plus assumed debt (including bank indebtedness
and shareholders and related party notes, but excluding
trade and current payables).” Thus, Transaction Value by
itself could arguably mean consideration paid for equity
interest minus seller financing. Alternatively, Transaction
Value might be consideration paid minus assumed debt.
Transaction Value might also be the figure one is left with
after subtracting both seller financing and assumed debt.
And of course, Transaction Value could mean exactly what
the advisors argue: the same thing as Total Transaction
Value, and the omission of the word Total may have been
an unfortunate accident.
Thus, despite the advisors’ insistence that Transaction
Value must mean Total Transaction Value, we find the
term ambiguous. However, the advisors argue persuasively
that if Transaction Value is ambiguous, the district court
should have allowed them to provide extrinsic evidence to
support their proposition that Transaction Value means
Total Transaction Value rather than finding that the term’s
ambiguity rendered the contract unenforceable.4
See Pritchett v. Asbestos Claims Mgmt. Corp., 773 N.E.2d
1277, 1283 (Ill. App. Ct. 2002) (“Extrinsic evidence is ad-
missible to explain the meaning of words in a contract when
there is an ambiguity or the words are susceptible
of different interpretations.”). We therefore assume for
purposes of this analysis that had extrinsic evidence been
4
The advisors do not seek a remand based on the district court’s
refusal to allow extrinsic evidence. See Appellants’ Reply Brief at
5 (“In any event, Appellants have addressed the [Transaction
Value] issue on appeal, and this Court can interpret ‘Transaction
Value’ without remanding.”).
Nos. 01-3685 & 01-3787 9
provided, it would have revealed that Transaction Value
and Total Transaction Value share the same definition.5
2. The Fee Formula
Merely finding that Transaction Value and Total
Transaction Value have the same meaning, however, does
not change the outcome of this case. The problem that the
fee provision poses for the advisors is that the variables in
the fee formula are tied to equity. In this instance, because
the Transaction involved an asset sale, zero must be
plugged into the equation whenever an equity number is
required, and thus no fees are due.6
The advisors complain that the above interpretation of
the fee provision violates the rule that a court must give
effect to all provisions of a contract. Specifically, they argue
that if we find no fees to be due, we would eviscerate
5
We note that this is a questionable assumption, as the advisors
give no hint as to what type of evidence they would have provided
had they been given the opportunity to do so.
6
This is because the key terms in the fee formula are Transaction
Value, Total Transaction Value, and Enterprise Value. We
explained earlier that Transaction Value is the same as Total
Transaction Value for purposes of this case. Total Transaction
Value is defined as “total consideration paid for an equity interest
in Tranzact.” Here, no consideration was paid for an equity
interest because this was an asset sale. Thus, the Transaction
Value and Total Transaction Value are zero. As for Enterprise
Value, this figure is arrived at by dividing Total Transaction
Value by “the percentage of equity ownership held by an Investor
after the Transaction.” Because this was an asset sale, the
investor has no equity ownership, and we have already explained
above that the Total Transaction Value is zero. Thus, to determine
the Enterprise Value in this case, one must divide zero by zero
percent, resulting in an undefined number.
10 Nos. 01-3685 & 01-3787
Section 3, which defines Transaction to include asset sales,
and Section 4, which says that the investment banking
fee will be paid upon “successful completion of the
Transaction.” Moreover, they posit, while it is true that
the fee formula would need to be adapted to address asset
sales, such adaptation is within this court’s power. They
claim that the fee formula can be altered merely by re-
placing “percentage of equity ownership” with “percentage
of company’s assets purchased.”
The advisors are mistaken. It is true that “Illinois
courts . . . apply the principle of construction that a contract
must be interpreted as a whole, giving meaning and effect
to each provision.” Emergency Medical Care, Inc. v. Marion
Memorial Hosp., 94 F.3d 1059, 1061 (7th Cir. 1996); see
Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52,
63 (1995) (finding “that a document should be read to give
effect to all its provisions and to render them consistent
with each other” to be a “cardinal principle of contract
construction”). But our analysis does no violence to this
rule. The fact that Section 3 broadly defines Transaction
does not mean that Section 4 must be interpreted to trigger
investment banking fees in all instances. Section 4 clearly
states that “[t]he fees will be applied as a percentage of the
Transaction Value and will be contingent payable upon
successful completion of the Transaction,” and a court must
interpret a contract based on its plain meaning. See Ancraft
Products Co., 427 N.E.2d at 587 (“If the contract terms are
unambiguous, then the parties’ intent must be determined
solely from the language of the contract.”). Based on the
plain language, fees are provided only as a percentage of
Transaction Value. The Transaction Value in this case is
zero because the formula calls for data involving equity
interest, which is not a factor in asset sales. (Indeed, the
formula does not mention asset sales at all.) The conclusion
we must draw is that the parties did not intend to pay or
Nos. 01-3685 & 01-3787 11
receive fees in the event of an asset sale, but did intend to
pay and receive such fees in the event of equity investment.
The advisors are not allowed to introduce extrinsic
evidence unless the contract’s terms are ambiguous, and
ambiguity does not arise merely because Tranzact and the
advisors cannot agree on the meaning of the fee provision.
See Pritchett, 773 N.E.2d at 1283; see also Bourke v. Dun
& Bradstreet Corp., 159 F.3d 1032, 1039 (7th Cir. 1998)
(deciding that under Illinois law, because the appellees had
provided a reasonable interpretation of the contract but
the appellants had not, “there [wa]s no ambiguity to
construe against the drafter or to clear up by appeal to ex-
trinsic evidence”). Because we find the fee provision to be
unambiguous, and that fees are unwarranted in the event
of an asset sale, our analysis would ordinarily end here. See
Emergency Medical Care, Inc., 94 F.3d at 1061 (“If the
language unambiguously answers the question at issue, the
inquiry is over.”).
For completeness’ sake, however, we note that even if the
parties intended to provide a fee based on an asset sale and
inadvertently left out the proper formula for arriving at
such a fee, the district court was not at liberty to rewrite
the fee provision, and neither are we. The advisors admit
that the parties never discussed with any degree of specific-
ity how fees based on asset sales could be calculated.
Although they put forth a purported expert who provided a
hypothetical formula, the expert acknowledged that there
are numerous ways of computing a fee based on asset sales.
The advisors provide no standard to which this court could
look for reassurance that an alternative formula would
follow industry standards.
Moreover, although the advisors point to Wisconsin
Real Estate Investment Trust v. Weinstein, 781 F.2d 589,
591 (7th Cir. 1986), for the proposition that this court
is authorized to draft a new formula, Weinstein is not rele-
12 Nos. 01-3685 & 01-3787
vant to this case. In Weinstein, we upheld a district court’s
decision to choose between two accounting periods—speci-
fically, contract years or calender years—when the contract
was silent on this point and the parties advocated different
periods. We found the district court’s choice of contract
years to be appropriate in part because “[a]ccounting years
frequently follow contractual relations rather than the
calendar.” Id. at 593; see also Clark v. Gen. Foods Corp., 400
N.E.2d 1027, 1030-31 (Ill. App. Ct. 1980) (enforcing the
contract despite “the lack of an exact figure as to compensa-
tion” because compensation in the industry was “routinely
based” upon an agency’s fee schedule). Here, however, we
know nothing about the propriety of substituting assets for
equity in the current formula, and we are not required to
guess. See Goldstick, 788 F.2d at 461 (“If people want the
courts to enforce their contracts they have to take the time
to fix the terms with reasonable definiteness so that the
courts are not put to an undue burden of figuring out what
the parties would have agreed to had they completed their
negotiations.”); cf. Bd. of Trs. of the Univ. of Ill. v. Ins. Corp.
of Ir., Ltd., 969 F.2d 329, 332 (7th Cir. 1992) (following the
Restatement (Second) of Contracts, Illinois law allows
reformation only when “the intended agreement is certain
enough to accurately rewrite the contract”).
B. Tranzact’s Breach of Contract Claim
Tranzact sought a refund of all monies paid to the
advisors for work conducted under the agreement. However,
the district court determined sua sponte that “all contrac-
tual obligations of the parties have been satisfied under the
Agreement, and no further monies or actions are due by
either side.” Tranzact complains that the district court
acted improperly by denying Tranzact notice and an
opportunity to oppose summary judgment.
Nos. 01-3685 & 01-3787 13
We have cautioned district courts to provide parties with
notice and a fair opportunity to present evidence when they
are considering entering judgment sua sponte. See, e.g., S.
Ill. Riverboat Casino Cruise, Inc. v. Triangle Insulation &
Sheet Metal Co., 302 F.3d 667, 678 (7th Cir. 2002). Never-
theless, a sua sponte judgment may be affirmed if the
complaining party cannot show on appeal that it was
deprived of the opportunity to present a viable claim. Id.(“see[ing] no reason to remand the case because [the
plaintiff] was given a full opportunity to make its argument
on appeal”); see also Bridgeway Corp. v. Citibank, 201 F.3d
134, 139-41 (2d Cir. 2000) (finding no reversible error when
the district court granted judgment sua sponte despite lack
of prior notice); cf. R.J. Corman Derailment Servs., LLC v.
Int’l Union of Operating Eng’rs, Local Union 150, AFL-CIO,
335 F.3d 643, 649-50 (7th Cir. 2003) (reversing sua sponte
judgment because record did not support district court’s
conclusions and plaintiff would have introduced additional
evidence); Aviles v. Cornell Forge Co., 183 F.3d 598, 606
(7th Cir. 1999) (reversing sua sponte judgment because
plaintiff “presented enough evidence” to establish a viable
claim).
Tranzact has failed to show that it has a viable claim
on appeal. In its fact section, Tranzact stated only that
“Defendants failed to perform all services required under
the Agreement,” followed by a string-cite to the record. It
also failed to flesh out the merits of the claim in the page
and a half that it devoted to this issue in its argument
section.7 We therefore affirm the grant of summary judg-
ment in the advisors’ favor.
7
Moreover, our own review of the record casts no doubt on the
district court’s conclusion that the advisors fulfilled all of their
duties as set forth in the agreement.
14 Nos. 01-3685 & 01-3787
III. CONCLUSION
For the foregoing reasons, the district court’s decision is
AFFIRMED.
A true Copy:
Teste:
_____________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—4-28-04