Video Update v. Videoland ( 1999 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________
No. 98-1601
___________
Video Update, Inc., a Minnesota *
corporation, *
*
Appellant, *
* Appeal from the United States
v. * District Court for the
* District of Minnesota
Videoland, Inc., an Indiana *
corporation; Mark Spilker, *
individually, *
*
Appellees. *
___________
Submitted: February 10, 1999
Filed: July 8, 1999
___________
Before McMILLIAN, JOHN R. GIBSON and MURPHY, Circuit Judges.
___________
McMILLIAN, Circuit Judge.
Video Update, Inc. (Video Update) appeals from a final order entered in the
United States District Court1 for the District of Minnesota, granting summary
1
The Honorable Paul Magnuson, Chief Judge, United States District Court for
the District of Minnesota.
judgment in favor of Videoland, Inc. (Videoland), and Videoland’s owner, Mark
Spilker. Video Update, Inc., v. Videoland, Inc., No. 3-96-735 (D. Minn. Jan. 26,
1998). For reversal, Video Update argues that the district court erred in
(1) interpreting the purchase agreement between Video Update and Videoland,
(2) awarding attorney’s fees to Videoland and Spilker, and (3) awarding pre-judgment
interest to Videoland and Spilker. For the reasons stated below, we affirm.
Jurisdiction
Jurisdiction in the district court was proper based upon 28 U.S.C. § 1332.
Jurisdiction in this court is proper based upon 28 U.S.C. § 1291. The notice of appeal
was timely filed pursuant to Fed. R. App. P. 4(a).
Background
The following is a summary of the undisputed facts set forth in the district court's
order. Id. In 1980 Mark Spilker founded Videoland, a video rental business which
owned and operated various stores in Lafayette, Indiana. Video Update and Videoland
entered into negotiations for the sale of Videoland to Video Update which culminated
in a signed purchase agreement in November 1995. Under the purchase agreement,
Video Update agreed to pay Spilker approximately $4 million-- $2 million in cash and
approximately $2 million in unregistered Video Update stock (239,163 shares). The
purchase agreement provided that, if Spilker sold the stock between March 14 and
September 14, 1996, Video Update would guarantee a price of at least $12 per share.
If the stock sold for less than $12, Video Update agreed to pay the difference or the
“deficiency amount,” in cash or additional stock, as set forth in Section 1.3(a)(ii) (the
“deficiency payment provision”) of the purchase agreement.2 In addition, Section
2
Section 1.3(a)(ii) provided:
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6(k) (the “lockup/dribble” provision) of the purchase agreement contained restrictions
on both the amount and timing of Spilker’s sale of stock.3
In January 1996 Video Update notified Spilker that it intended to file a
registration statement with the Securities Exchange Commission in contemplation of
a public offering. In response, Spilker requested that Video Update register his shares
[I]n the event that the aggregate consideration received by
the Sellers in connection with the sale . . . in bona fide
arm’s length transactions of any of the Video Update Shares
. . . during the period commencing March 14, 1996 and
ending September 14, 1996 does not equal or exceed the
amount determined by multiplying the number of Sold
Shares by $12.00 . . . , then Video Update shall, at its sole
option, either, (i) pay the Stockholder by cash, check or wire
an amount equal to, or (ii) issue the Stockholder additional
shares of Common Stock (with the same registration rights
afforded the Video Update Shares as set forth in Section 6
of this Agreement . . .) with an aggregate market value on
the date of issuance equal to: the amount by which the
Contemplated Proceeds exceeds the Sales Proceeds (the
“Deficiency Payment”). Video Update shall deliver the
Deficiency Payment, if any, on or before October 31, 1996.
3
Section 6(k) provided (emphasis added):
It shall be a condition precedent to the obligations of Video
Update to take any action pursuant to this Section that the
Holders (i) agree not to sell, transfer, pledge, hypothecate or
encumber the Video Update Shares held by them for a
period of four (4) months from the date of this Agreement,
and (ii) following the four (4) month anniversary of this
Agreement, agree not to sell or transfer more than 10,000
Video Update Shares in any single business day and not to
sell or transfer more than 25,000 Video Update Shares
within any five (5) business day period.
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so that he could sell them. At Video Update’s request, Spilker executed a “registration
election form” in which he agreed to honor the lockup provision. The Video Update
shares were registered on February 15, 1996. Between March 15, 1996 and May 24,
1996, Spilker sold 239,163 shares of Video Update stock for less than $12.00 per
share. During April and May 1996 he sold 2 blocks of 30,000 shares each within 5
business days.
In August 1996 Video Update filed this action for declaratory judgment pursuant
to 28 U.S.C. § 2201 in federal district court to determine its liabilities under the
purchase agreement. Video Update sought a judicial declaration that Spilker’s
obligation under Section 6(k) of the purchase agreement was an express condition
precedent to Video Update’s obligation to make the deficiency payment, that Spilker
breached the purchase agreement by selling in excess of 25,000 Video Update shares
within a five (5) business day period, in violation of the lockup/dribble provision, and
that Video Update is excused from performance under Section 1.3(a)(ii), and has no
obligation to pay attorney’s fees. Videoland and Spilker filed an answer asserting
affirmative defenses (waiver, disproportionate or extreme forfeiture) and a counterclaim
against Video Update for a deficiency payment in excess of $1.2 million.
The parties filed cross-motions for summary judgment. In January 1998 the
district court granted summary judgment in favor of Videoland and Spilker. The
district court regarded this case as one of contract interpretation and applied Minnesota
law pursuant to a choice-of-law provision in the purchase agreement. The district
court noted that the parties did not dispute that Spilker sold his stock for less than the
$12 per share guarantee or that some of Spilker’s sales of stock exceeded the quantity
and frequency limitations set forth in the lockup/dribble provision. By relying upon the
“condition precedent” language in Section 6(k), Video Update argued that Spilker’s
obligation under the lockup/dribble provision was an express condition precedent to
its obligation to make any deficiency payment under Section 1.3(a)(ii). However, the
district court relied on the phrase “this Section” to conclude that Section 6 referred
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only to stock registration matters and not the deficiency payment which was contained
in Section 1.3(a)(ii). Slip op. at 5. For this reason, the district court rejected Video
Update’s argument that the lockup/dribble provision was a condition precedent to any
deficiency payment.
The district court also reasoned that, because the terms of the contract were
unambiguous, extrinsic evidence regarding the negotiation process was barred by the
parol evidence rule. Id. at 6 (noting that, under Minnesota law, if the terms of a
contract are clear and unambiguous, parol evidence is inadmissible to alter the terms
of the contract, and that an integrated agreement cannot be altered by any prior oral
agreement).
The district court rejected Video Update’s argument that the subsequent conduct
of the parties-- specifically Spilker’s letter about D.H. Blair’s offer4 -- was clear and
convincing evidence that would justify altering the meaning of the purchase agreement.
Id. The district court decided that the letter only showed that Spilker wanted Video
Update to agree that, if he sold his shares to D.H. Blair for less than $12 per share,
Video Update would still pay the deficiency amount.
The district court awarded Videoland and Spilker attorney’s fees and expenses
pursuant to Section 5.2 of the purchase agreement and pre-judgment interest (from
October 31, 1996 at 18%) pursuant to Section 5.4 of the purchase agreement.
4
In April 1996, D.H. Blair (the underwriter of Video Update’s two initial public
offerings and a “market maker” of Video Update stock) approached Spilker with an
offer to purchase all of Spilker’s outstanding Video Update shares. Spilker wrote to
Video Update about this offer and asked Video Update to amend the purchase
agreement to remove the resale limitations and to apply the deficiency payment
provision to the shares that maybe sold to D.H. Blair. Video Update refused to waive
the resale limitations, and Blair's offer fell through.
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In subsequent orders, the district court denied Video Update’s post-judgment
Motion to Alter and Amend the Judgment5 (although the district court noted that Video
Update could pay the deficiency in additional shares of stock pursuant to the purchase
agreement) and reduced the amount of attorney’s fees by 25% (because some entries
for fees were vague and ambiguous, and others appeared unrelated to this litigation),
for a total of $73,080.00. This appeal followed.
Discussion
Contract Interpretation
Video Update argues on appeal that the district court erred in interpreting the
purchase agreement. Specifically, Video Update argues that the district court
erroneously held that the purchase agreement unambiguously provided that compliance
with the lockup/dribble provision is not an express condition precedent to Video
Update's obligations under the deficiency payment provision.
A condition precedent is “any fact except mere lapse of time which must exist
or occur before a duty of immediate performance by the promisor can arise” under the
contract. Carl Bolander & Sons, Inc. v. United Stockyards Corp., 298 Minn. 428, 431,
215 N.W.2d 473, 475 (1974). Video Update argues that compliance with the
lockup/dribble provision is an express condition precedent to Video Update's obligation
to make any deficiency payment under Section 1.3(a)(ii). Video Update argues that
because Spilker’s sales of stock violated the lockup/dribble provision on 7 of 29 days,
5
Video Update disputed several of the charges on Videoland and Spilker's fee
schedule which was supposed to only be attorney’s fees. Video Update also requested
the district court change the date from which interest accrued on its deficiency
payment.
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Spilker breached the purchase agreement. Therefore, Video Update concludes, it is
relieved of its obligation to pay the deficiency payment (a total of $1,220,403.00).
First, Video Update argues that the lockup/dribble provision is an express
condition precedent because it is consistent with the language and structure of the
purchase agreement. The lockup/dribble provision states in pertinent part: “It shall be
a condition precedent to the obligations of Video Update to take any action pursuant
to this Section . . . .”
Second, Video Update argues that the lockup/dribble provision is an express
condition precedent because it is consistent with the course and sequence of events
which were contemplated by the purchase agreement. Spilker would not have been
able to sell his shares until after they had been registered. Video Update argues that
the only obligation on Video Update’s part that arose after Spilker sold his Video
Update shares was Video Update’s obligation to make the deficiency payment.
Third, Video Update argues that its interpretation is consistent with the purpose
of the lockup/dribble provision. Video Update argues that this provision was meant to
protect Video Update from unnecessary increases in the deficiency payment which
might arise from the sale of large quantities of Video Update’s stock by insiders on the
market. By restricting Spilker’s ability to sell large blocks of his Video Update
shares, Video Update would avoid short-term over-reaction by the market which would
drive down the price of Video Update stock. Moreover, Video Update argues that this
provision was also meant to protect other investors from precipitous declines in the
value of their Video Update stock. Not only was Video Update preparing to “go
public,” but it also wanted to keep up the price of its stock to minimize the amount of
any deficiency payment due Spilker.
Finally, Video Update argues that its interpretation of the lockup/dribble
provision is consistent with the parties’ subsequent conduct. In early April 1996,
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before the sale of the first block of 30,000 shares, D.H. Blair (the underwriter of Video
Update’s two initial public offerings and a “market maker” of Video Update stock)
approached Spilker with an offer to purchase all Spilker’s outstanding Video Update
shares. Spilker wrote to Video Update about this offer and asked Video Update to
amend the purchase agreement to remove the resale limitations and to apply the
deficiency payment provision to the shares that may be sold to D.H. Blair. Video
Update refused to waive the resale limitations, and the offer fell through. Video
Update argues that Spilker’s counsel acknowledged that a sale in violation of the
lockup/dribble provision (as the sale to D.H. Blair would have been) could result in a
forfeiture by Spilker of his right to collect on the deficiency payment.
In particular, Video Update argues that it makes no sense to limit the
lockup/dribble provision, which limits the quantity and frequency of sales of stock, to
the registration of shares, as the district court did, instead of Spilker’s sales of shares.
Video Update argues that because the registration of shares would (and did) occur
before Spilker sold any shares, Spilker’s sales of shares in compliance with the
lockup/dribble provision could not have been a condition precedent to Video Update’s
obligation with respect to registration of shares. Video Update argues that the parties
clearly intended that the registration of Spilker’s shares would occur before he sold his
Video Update shares. If Spilker’s shares were not registered, he would not have a
market to sell them.
We hold that the purchase agreement is clear and unambiguous. We need only
look to the written purchase agreement to ascertain the specific terms to which the
parties agreed. We need not consider what the parties intended to be written. See Carl
Bolander & Sons, Inc. v. United Stockyards Corp., 298 Minn. at 431, 215 N.W.2d at
475 (citing Hicks v. Mid-Kansas Oil & Gas Co., 182 Okla. 61, 76 P.2d 269 (1938)).
No express language links Section 6(k) to Section 1.3(a)(ii). The condition precedent
language in Section 6(k) refers to Video Update's obligations "pursuant to this
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Section," that is, Video Update's obligations with respect to the registration of stock
under Section 6(k) and not Spilker's obligations under the lockup/dribble provision.
Because there is no ambiguity in the language of the purchase agreement, and
because the purchase agreement contains a contract integration provision, the parol
evidence rule bars any evidence contradicting these terms of the purchase agreement.
See, e.g., Material Movers, Inc. v. Hill, 316 N.W.2d 13, 17 (Minn. 1982); Norwest
Bank Minnesota v. Midwestern Mach. Co., 481 N.W.2d 875, 881 (Minn. Ct. App.
1992). Compliance with Section 6(k) was not a condition precedent to Video Update’s
obligation to make the deficiency payment.6 Accordingly, we hold that the district
court did not err in its interpretation of the purchase agreement.
Attorney's Fees
Video Update next argues that the district court erred in awarding attorney’s
fees and expenses to Videoland and Spilker. The district court awarded Videoland
and Spilker attorney’s fees and expenses pursuant to Section 5.2 of the purchase
agreement, which provided in part:
Video Update agrees to defend, indemnify and hold
harmless Videoland . . . and Stockholder and their
successors and assigns, from and against any and all
damages, losses and expenses suffered by Sellers resulting
from (i) any breach of warranty or agreement or non-
6
Because this court agrees that the lockup/dribble provision is not a condition
precedent to Video Update’s obligation to make the deficiency payment, we need not
discuss Video Update’s alternative argument based upon the doctrine of
disproportionate or extreme forfeiture under which a condition may be excused when
its non-occurrence or failure would cause extreme forfeiture or disproportionate
forfeiture. Restatement (Second) of Contracts § 229 (1979).
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fulfillment of any obligation on the part of Video Update
under this Agreement . . . .
Video Update maintains that Section 5.2 of the purchase agreement only applies to
third-party claims, not claims between the principals, so it cannot be used to shift
litigation costs in the present case. In addition, Video Update argues that the district
court erroneously included attorney’s fees and expenses in the term “damages” because
Minnesota law requires specific language to shift litigation costs. See Seifert v.
Regents of the University of Minnesota, 505 N.W.2d 83, 87 (Minn. Ct. App. 1993).
In Seifert, the court held that a party is entitled to attorney's fees and costs if the drafted
agreement explicitly states attorney's fees are available. See Id. In the present case,
Section 5.2(i) of the purchase agreement states: “Video Update . . . agrees to . . .
indemnify . . . Videoland . . . and [Spilker] . . . from and against any and all damages,
losses and expenses suffered by Videoland and [Spilker] resulting from (i) any breach
of warranty or agreement or non-fulfillment of any obligation on the part of Video
Update under this Agreement . . . .” This language is not limited to third-party claims.
Video Update’s failure to pay the deficiency payment when it was due on October 31,
1996, constituted a “non-fulfillment of [an] obligation on the part of Video Update.”
Videoland and Spilker suffered damages as a result of Video Update’s breach of the
purchase agreement. We hold that the district court did not err in awarding attorney's
fees and expenses to Videoland and Spilker pursuant to the purchase agreement.
Pre-judgment Interest
Video Update also argues that the district court erred in awarding pre-judgment
interest to Videoland and Spilker pursuant to Section 5.4 of the purchase agreement,
which provided in part that “[a]ny amounts not paid by the Indemnifying Party when
due under this Section shall bear interest from the Due Date thereof until the date paid
at the lower of eighteen percent (18%) per annum or the highest rate allowed by law.”
The district court awarded pre-judgment interest from October 31, 1996, the day that
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the deficiency payment was due pursuant to the purchase agreement. Video Update
argues that Videoland’s claim was not “established” before January 26, 1996, the
date summary judgment was granted, as required by Section 5.4 of the purchase
agreement. We disagree. Minnesota allows pre-judgment interest in the case of a
liquidated claim or a sum certain or "where a claim is unliquidated but ascertainable by
computation or reference to generally recognized standards such as market value and
the claim does not depend upon any contingency." Moosbrugger v. McGraw-Edison
Co., 284 Minn. 143, 160, 170 N.W.2d 72, 82 (1969). Here, the amount of the
deficiency payment, if not a liquidated claim, was ascertainable by computation.
Video Update did not have to wait until the district court granted summary judgment
in order to know the amount of the deficiency payment. Therefore, we hold that the
district court did not err in awarding pre-judgment interest from the date on which the
deficiency payment was due under the purchase agreement.
Conclusion
For the reasons stated, the judgment of the district court is affirmed.
A true copy.
Attest:
CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.
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