Lewis D. Yarborough v. Devilbiss Air Power ( 2003 )


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  •                    United States Court of Appeals
    FOR THE EIGHTH CIRCUIT
    ___________
    No. 02-2693
    ___________
    Lewis D. Yarborough; Robert L.         *
    Williamson,                            *
    *
    Appellants,                *
    * Appeal from the United States
    v.                               * District Court for the Western
    * District of Arkansas.
    DeVilbiss Air Power, Inc.,             *
    *
    Appellee.                  *
    ___________
    Submitted: January 16, 2003
    Filed: March 5, 2003
    ___________
    Before LOKEN and MORRIS SHEPPARD ARNOLD, Circuit Judges, and
    WEBBER,1 District Judge.
    ___________
    MORRIS SHEPPARD ARNOLD, Circuit Judge.
    This is an action by Lewis Yarborough and Robert Williamson to recover on
    various claims related to their sale of the Ex-Cell Manufacturing Company to
    1
    The Honorable E. Richard Webber, United States District Judge for the
    Eastern District of Missouri, sitting by designation.
    DeVilbiss Air Power, Inc. The plaintiffs appeal from the district court’s2 order
    granting summary judgment on their claims for actual fraud, constructive fraud, and
    breach of an implied covenant of good faith and fair dealing. For the reasons
    expressed below, we affirm.
    I.
    We inquire first into the propriety of summary judgment on the claims for
    actual and constructive fraud. The elements of a cause of action for actual fraud
    under Arkansas law, which governs the instant dispute, are a false representation
    (usually of a material fact), knowledge or belief by the defendant that the
    representation is false, intent to induce the plaintiff’s reliance, justifiable reliance by
    the plaintiff, and resulting damage to the plaintiff. See, e.g., Country Corner Food
    & Drug, Inc. v. First State Bank & Trust Co. of Conway, Ark., 
    332 Ark. 645
    , 652, 
    966 S.W.2d 894
    , 897 (1998). A claim for constructive fraud, which lies when there is a
    confidential relationship between the parties, requires proof of all of the elements of
    actual fraud except scienter. See, e.g., Morrison v. Back Yard Burgers, Inc., 
    91 F.3d 1184
    , 1188 (8th Cir. 1996); SEECO, Inc. v. Hales, 
    341 Ark. 673
    , 698, 
    22 S.W.3d 157
    ,
    172-73 (2000).
    We review the district court's grant of summary judgment de novo. Hammond
    v. Northland Counseling Ctr., Inc., 
    218 F.3d 886
    , 891 (8th Cir.2000). Summary
    judgment is appropriate if, after viewing the evidence and all reasonable inferences
    from it in the light most favorable to the nonmoving party, there is no genuine issue
    as to any material fact. See Coonts v. Potts, 
    316 F.3d 745
    , 749 (8th Cir. 2003);
    Fed. R. Civ. P. 56(c). "A case founded on speculation or suspicion is insufficient to
    survive a motion for summary judgment." National Bank of Commerce v. Dow Chem.
    Co., 
    165 F.3d 602
    , 610 (8th Cir. 1999).
    2
    The Honorable Robert T. Dawson, United States District Judge for the
    Western District of Arkansas.
    -2-
    In early December 1995, counsel for DeVilbiss and counsel for
    Mr. Yarborough and Mr. Williamson drafted an agreement for DeVilbiss to purchase
    Ex-Cell. As relevant here, the agreement explicitly provided for yearly "earn-out
    payments" by DeVilbiss to the plaintiffs, the amount of which was to be calculated
    by multiplying the "earn-out factor" (a designated percentage that varied by year) by
    the dollar amount of "net sales" of certain designated products to certain specified
    customers in excess of $85 million.
    Before the parties closed the sale, one of DeVilbiss's competitors approached
    Mr. Yarborough and Mr. Williamson and intimated that it would pay more for Ex-
    Cell than the amount that DeVilbiss had agreed to pay. The plaintiffs brought this
    fact to the attention of Bill Allen, who was president of DeVilbiss at the time.
    Mr. Allen then altered the written agreement to lower the relevant sales threshold
    from $85 million to $65 million, thus providing for earn-out payments when the
    designated net sales were in excess of $65 million. Mr. Allen chose $65 million as
    the relevant threshold because, using an earn-out factor of five percent (which the
    agreement specified for calender year 1996), the new threshold would provide the
    plaintiffs with an additional $1 million in 1996, since relevant sales for 1996 were
    expected to be in excess of $85 million. Soon thereafter, the parties signed the
    agreement and the sale was consummated.
    The plaintiffs, however, contend that additional promises were made. They
    maintain that, before Mr. Allen had the written agreement altered to lower the sales
    threshold, Mr. Allen orally guaranteed that DeVilbiss would provide "earn-out
    payments" of $1 million per year for 1996, 1997, and 1998, regardless of the actual
    amount of the relevant sales. In his deposition, Mr. Allen admitted that he agreed to
    lower the sales threshold in a way that was expected to yield an additional $1 million,
    but denied that he guaranteed that earn-out payments of that amount would actually
    be forthcoming.
    -3-
    In 1996 and 1997, relevant net sales exceeded $85 million and therefore earn-
    out payments exceeded $1 million. In 1998, however, those sales fell short of $85
    million, and DeVilbiss made an earn-out payment of less than $1 million.
    Mr. Yarborough and Mr. Williamson filed suit, claiming that DeVilbiss fraudulently
    induced the sale of the company to DeVilbiss through Mr. Allen's false guarantees
    that they would receive earn-out payments of $ 1 million in 1996, 1997, and 1998
    regardless of the amount of sales. The district court held that the plaintiffs' actual and
    constructive fraud claims failed because, among other things, any reliance on the
    alleged oral guarantee was not reasonable as a matter of law. We agree.
    When a plaintiff claims fraud in the procurement of a contract, Arkansas courts
    frequently submit the issue of justifiable reliance to the jury. See, e.g., Tyson Foods,
    Inc. v. Davis, 
    347 Ark. 568
    , 583-84, 
    66 S.W.3d 568
    , 579-80 (2002). There is,
    however, no wooden rule that the matter of justifiable reliance must go to a jury. See,
    e.g., Woodend v. Southend Racing Corp., 
    337 Ark. 380
    , 385, 989 S.W.2d. 505, 508
    (1999). As we have previously recognized, the reasonableness of a reliance on an
    oral representation under Arkansas law is highly dependent on the specific
    circumstances leading up to the relevant subsequent undertaking. See, e.g., Union
    Nat'l Bank of Little Rock v. Farmers Bank, 
    786 F.2d 881
    , 887 (8th Cir. 1986).
    In the instant case, all the individuals involved were sophisticated businessmen
    represented by experienced counsel, and, moreover, all of the alleged oral
    representations concerned matters that were explicitly addressed in the subsequent
    alteration of the contract. In these circumstances, we believe that it would be
    unreasonable to rely on an oral guarantee when that guarantee was quite obviously
    not included in the subsequent written draft of the contract. We thus do not believe
    that any reasonable jury could find that the plaintiffs' reliance was justifiable. Cf.
    Crowell v. Campbell Soup Co., 
    264 F.3d 756
    , 762-64 (8th Cir. 2001); Martin v.
    American Fam. Mut. Ins. Co., 
    157 F.3d 580
    , 581-82 (8th Cir. 1998) (per curiam);
    -4-
    Plymouth Foam Products, Inc. v. City of Becker, Minn., 
    120 F.3d 153
    , 157 (8th Cir.
    1997); Davidson v. Wilson, 
    973 F.2d 1391
    , 1401 (8th Cir. 1992).
    The facts in Tyson, and in other Arkansas cases permitting the justifiable
    reliance issue to go to the jury, differ significantly from the ones in the instant case.
    In Tyson, for instance, the plaintiff was a farmer, not an experienced businessman
    represented by counsel, whereas Tyson was a large, well-established corporation. See
    
    Tyson, 66 S.W.3d at 573
    . More significantly, a prior draft of the contract in Tyson
    was not explicitly altered after the alleged oral misrepresentation. (The contract in
    Tyson was a standard year-to-year contract that Tyson used with "everybody [they]
    deal[t] with," something of which the farmer was perfectly aware and never
    questioned; the alleged oral misrepresentation concerned how often Tyson intended
    to renew the contract. See id.) We thus do not believe that Tyson, or any other case
    that the plaintiffs point to, demonstrates that summary judgment is inappropriate in
    the instant case.
    Contrary to Mr. Yarborough and Mr. Williamson's assertions, we do not
    believe that granting summary judgment here would mean an end to claims for fraud
    in the procurement of a contract. Most cases recognizing a claim for fraud in the
    procurement do not involve such experienced plaintiffs, representation by competent
    counsel in the transaction, or changes to a written contract subsequent to an alleged
    oral misrepresentation, and we believe that there is a good reason for that.
    II.
    We ask next whether the district court properly granted summary judgment on
    the claim for breach of an implied covenant of good faith and fair dealing. As we
    have already said, the earn-out payment was based only on certain sales to certain
    specified customers. In 1998, DeVilbiss discontinued doing business with Wal-Mart
    (which was a specified customer) and transferred that portion of its business to Sears
    (which was not a specified customer), thus leading to a decrease in the earn-out
    -5-
    payment for 1998. The contract explicitly provides that DeVilbiss "has the right, in
    its sole discretion, to determine the terms and conditions of any and all [relevant
    sales], including the decision to make or not make any such sales." (Emphasis added).
    Mr. Yarborough and Mr. Williamson contend that the contract's implied
    covenant of good faith and fair dealing limits DeVilbiss's discretion and permits it to
    make or not make sales only in good faith. Asserting that the only reason for
    discontinuing sales to Wal-Mart was to decrease the amount of the earn-out payment
    in order to increase the bonus paid to company officers, they contend that this switch
    of customers violated DeVilbiss's implied contractual duty of good faith and fair
    dealing.
    Under Arkansas law, every contract contains an implied covenant of good faith
    and fair dealing. See TCBY Sys., Inc. v. RSP Co., Inc., 
    33 F.3d 925
    , 928-29 (8th Cir.
    1994); see also Richard Short Oil Co. v. Texaco, Inc., 
    799 F.2d 415
    , 421-22 (8th Cir.
    1986); Cantrell-Waind & Assoc. v. Guillaume Motorsports, Inc., 
    62 Ark. App. 66
    , 71-
    72, 
    968 S.W.2d 72
    , 75 (1998). As is the case with the contract's express terms, the
    implied covenant is part of the contract and creates contractual obligations that are
    actionable. See, e.g., 
    Cantrell-Waind, 62 Ark. App. at 72
    , 968 S.W.2d at 74-75.
    We nevertheless do not believe that an action lies in the present case. The
    purpose of an implied covenant is to effectuate the parties' intentions. Cf.
    Countrywide Serv. Corp. v. Sia Ins. Co., 
    235 F.3d 390
    , 393 (8th Cir. 2000)
    (describing Missouri law); Taylor Equip., Inc. v. John Deere Co., 
    98 F.3d 1028
    ,
    1032-33 (8th Cir. 1996) (South Dakota), cert. denied, 
    520 U.S. 1197
    (1997). Where,
    as here, a party has expressly reserved the absolute right "to make or not make any
    such sales," it would contravene the parties' intentions to imply a covenant that
    creates the obligation that the plaintiffs argue for. That is to say, the implied
    covenant of good faith and fair dealing in the contract at issue may have created many
    obligations in addition to the contract's express terms, but restrictions on what or to
    -6-
    whom DeVilbiss might sell simply cannot have been one of them. Cf. Vigoro Indus.,
    Inc. v. Crisp, 
    82 F.3d 785
    , 791 (8th Cir. 1996); Ripplemeyer v. National Grape Coop.
    Ass'n, 
    807 F. Supp. 1439
    , 1451-52 (W.D. Ark. 1992).
    We recognize that under Arkansas law there are circumstances in which the
    implied duty of good faith and fair dealing may create obligations that operate to
    constrain actions that are inherently in a party's control. In Cantrell-Waind, for
    instance, the court held that there was an implied covenant that a seller could not
    delay the date of a real estate closing beyond the time that it actually was willing and
    able to close, simply for the purpose of denying its agent a commission. See Cantrell-
    
    Waind, 62 Ark. App. at 71-72
    , 968 S.W.2d at 74. In that case, however, there was no
    provision in the contract expressly creating an uncontrolled discretion in the seller to
    act in the manner that he had acted.
    When an action complained of "could not have been contemplated at the time
    of [the contract’s] drafting," Kham & Nate's Shoes No. 2, Inc. v. First Bank of
    Whiting, 
    908 F.2d 1351
    , 1357 (7th Cir. 1990), courts will frequently imply such
    obligations as are necessary to carry out the parties' contractual intent. But we
    believe that in no situation can the implied covenant of good faith and fair dealing
    limit the way in which a party exercises its discretion when the aggrieved party has
    specifically disavowed any limitations on that discretion, and the exercise of that
    discretion (and its consequences) are easily foreseeable. We do not think that the
    Arkansas Supreme Court would hold that the covenant of good faith and fair dealing
    creates an implied obligation where the parties have unmistakably expressed their
    respective rights. Cf. Sabetay v. Sterling Drug, Inc., 
    69 N.Y.2d 329
    , 335-36, 
    506 N.E.2d 919
    , 922 (1987). "Where parties have addressed an issue in the contract, 'no
    occasion to divine their intent or supply implied terms arises.' " Taylor 
    Equip., 98 F.3d at 1032
    (quoting Cambee's Furniture, Inc. v. Doughboy Recreational, Inc.,
    
    825 F.2d 167
    , 175 n.13 (8th Cir. 1987)); cf. Vigoro 
    Indus., 82 F.3d at 791
    .
    -7-
    Here, DeVilbiss expressly and unambiguously contracted for absolute power
    over its ability to make sales in order, we think, to foreclose exactly the kind of claim
    that the plaintiffs press in this case. DeVilbiss deserves the benefit of its bargain. We
    affirm the district court's grant of summary judgment on the plaintiffs' claims for
    breach of the implied covenant of good faith and fair dealing.
    III.
    Accordingly, we affirm the judgment of the district court.
    A true copy.
    Attest:
    CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.
    -8-
    

Document Info

Docket Number: 02-2693

Filed Date: 3/5/2003

Precedential Status: Precedential

Modified Date: 10/13/2015

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