Bratt Enterprises, Inc. v. Noble International, Ltd.

No. 05-3701
File Name: 06a0338n.06
Filed: May 12, 2006
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
BRATT ENTERPRISES, INC., )
)
Plaintiff-Appellant, )
) ON APPEAL FROM THE
v. ) UNITED STATES DISTRICT
) COURT FOR THE SOUTHERN
NOBLE INTERNATIONAL, LTD.; ) DISTRICT OF OHIO
SET ENTERPRISES, INC., )
)
Defendants-Appellees. )
Before: MARTIN, NELSON, and COLE, Circuit Judges.
DAVID A. NELSON, Circuit Judge. This appeal presents two issues relating to the
sale of a steel processing business. The first issue is whether the buyer is entitled to
summary judgment on the seller’s claim that a contractual cap on the extent of the buyer’s
assumption of liability for the seller’s accounts payable should be reformed on the ground
that the parties were mistaken as to the likely amount of payables at the time of the sale. The
second issue is whether the buyer is entitled to summary judgment on the seller’s claim that
the buyer miscalculated a performance premium it had contracted to pay. Like the district
court, we conclude that both issues should be resolved in favor of the buyer.
No. 05-3701
Page 2
I
In accordance with an asset purchase agreement dated September 30, 1998, Noble
International, Ltd., through a subsidiary, acquired most of the non-cash assets of H & H Steel
Processing Company, Inc. H & H Steel was in the business of “toll,” or “value-added,” steel
processing, meaning that its customers normally shipped steel to H & H, retained title to the
steel, and paid H & H for its processing services only. But H & H Steel had one customer,
Arvin Sango, Inc., with whom it dealt on a “resale” basis; Arvin Sango sold steel to H & H
and then repurchased it, with an appropriate markup, after it was processed by H & H.
The asset purchase agreement required Noble to assume certain liabilities of H & H
Steel. H & H retained other liabilities, including “accounts payable in excess of $1,200,000.”
According to David Young, H & H Steel’s chief financial officer at the time of the sale, trial
balances generated by H & H on September 29, 1998, indicated that the company’s accounts
payable did not exceed $1.2 million. Because of transactions that had not yet been posted
when H & H Steel generated the trial balances, however, the accounts payable turned out to
be more than $1.8 million.
The asset purchase agreement also required Noble to pay H & H Steel a performance
premium as part of the purchase price. The performance premium was to be “based upon the
gross sales, net of returns and allowances, achieved by [Noble] in its annual operations for
the business currently being conducted by [H & H Steel] and produced by one of [H & H
Steel’s] five existing plants in Ohio and Indiana or [certain other plants].”
No. 05-3701
Page 3
Several disputes arose in connection with the asset purchase agreement. After various
proceedings in federal district court, before an arbitrator, and in this court, two issues
remained to be decided in the district court: (1) whether the asset purchase agreement should
be reformed, on the basis of mutual mistake, to raise the $1,200,000 cap on Noble’s assumed
liability for accounts payable; and (2) whether Noble miscalculated its obligation to H & H
Steel — now called BRATT Enterprises, Inc. — under the performance premium agreement.
With respect to the second issue, BRATT claimed that the cost of steel1 resold by
Noble, and not just the revenue attributable to Noble’s processing services, should be
counted as part of Noble’s “gross sales.” BRATT also claimed that steel processing sales
from plants in Shelbyville, Kentucky and Chicago, Illinois, should have been included in the
performance premium calculation.
Noble moved for summary judgment on both issues. The district court granted
Noble’s motion on the mutual mistake issue, holding that the risk of a mistake as to the
amount of accounts payable should be allocated to BRATT. On the performance premium
issue, the court granted Noble’s motion in part and denied it in part. The court held that
Noble’s “gross sales” did not include the cost of steel resold after processing. The court
1
The phrase “cost of steel,” as used here and elsewhere in this opinion, refers to the
difference between the total amount paid by a “resale” customer to Noble or H & H Steel and the
markup for Noble”s or H & H’s processing services. As we understand the record, that difference
is equal to the amount paid by Noble or H & H for the unprocessed steel.
No. 05-3701
Page 4
found there to be a triable issue, however, as to whether sales from the Shelbyville plant
should be included in the calculation of BRATT’s performance premium.
The parties stipulated to a dismissal of BRATT’s claim with respect to sales from the
Shelbyville plant, whereupon the district court entered final judgment. BRATT filed a timely
appeal.
II
Under Michigan law, which the parties agree is applicable here, a court must ask two
questions when deciding whether a contract should be reformed on the basis of mutual
mistake. See Lenawee County Board of Health v. Messerly, 331 N.W.2d 203, 207 (Mich.
1982). The first question — whether the parties to the contract were mistaken as to a fact in
existence at the time the contract was executed — is a factual one. See id. The second
question — whether a particular mistake warrants rescission or reformation of the contract
— is for the court to answer in its discretion. See id. at 208, 210; Farm Bureau Mutual Ins.
Co. v. Buckallew, 685 N.W.2d 675, 680 (Mich. Ct. App.), vacated on other grounds, 690
N.W.2d 93 (Mich. 2004).
In answering the second question, the court should decide whether “the mistaken
belief relates to a basic assumption of the parties upon which the contract is made, and which
materially affects the agreed performances of the parties.” Lenawee County, 331 N.W.2d at
209. But “[a] court need not grant rescission in every case in which the mutual mistake
No. 05-3701
Page 5
relates to a basic assumption and materially affects the agreed performance . . . .” Id. at 210.
Of particular relevance here is the principle that rescission or reformation “is not available
. . . to relieve a party who has assumed the risk of loss in connection with the mistake.” Id.
at 209-10.
On the record before us, we cannot say as a matter of law that BRATT and Noble
were not mistaken in their understanding as to the amount of BRATT’s accounts payable at
the time of the sale. Both parties relied on trial balances showing accounts payable of about
$1 million. Although they knew there were likely to be unposted payables, the parties
believed that the final figure would not exceed $1.2 million — or so a reasonable fact-finder
could conclude. As we have seen, that belief proved to be mistaken.
We turn, then, to the question whether BRATT assumed the risk of a mistake as to the
amount of accounts payable. The Michigan Supreme Court has adopted § 154 of the
Restatement (Second) of Contracts, which states that
“[a] party bears the risk of a mistake when
(a) the risk is allocated to him by agreement of the parties, or
(b) he is aware, at the time the contract is made, that he has only limited
knowledge with respect to the facts to which the mistake relates but treats his
limited knowledge as sufficient, or
(c) the risk is allocated to him by the court on the ground that it is reasonable
in the circumstances to do so.”
See Lenawee County, 331 N.W.2d at 210 n.12.
No. 05-3701
Page 6
It seems to us that by agreeing to a cap on the accounts payable that would be assumed
by Noble, the parties allocated to BRATT the risk that its payables would exceed the amount
of the cap. The very nature of such a cap is to shift risk from the buyer to the seller, and the
record shows that Noble wanted the cap for exactly that reason. Two of Noble’s officers
testified that Noble was “having trouble ascertaining . . . the specific amount” of accounts
payable and that Noble insisted upon a cap in order to “protect [itself].” There is no evidence
that the cap had any purpose other than to “protect” Noble by shifting risk to BRATT.
We also think that it is reasonable for BRATT to bear the risk of mistake, BRATT
having generated the trial balances on which the parties based their understanding of the
amount of payables and BRATT being in the best position to discover the extent to which
the trial balances were incomplete.
It is true, as BRATT has argued, that enforcement of the $1.2 million cap results in
a windfall of sorts to Noble. The unposted transactions that caused BRATT’s accounts
payable to exceed the cap by some $600,000 were transactions that generated accounts
receivable of about $800,000. Noble stands to retain that $800,000 even as BRATT bears
responsibility for the associated payables. But BRATT, which knew or should have known
that additional payables would be accompanied by additional receivables, agreed to the cap
on accounts payable without negotiating a corresponding cap on the accounts receivable that
were transferred to Noble. In our view, therefore, the windfall to Noble is within the scope
No. 05-3701
Page 7
of the risk assumed by BRATT; reformation is not warranted. See Lenawee County, 331
N.W.2d at 209-10.
III
The performance premium argument that BRATT presented in the district court dealt
mainly with the question whether “gross sales,” as used in the performance premium
agreement, includes the cost of steel that Noble resold to Arvin Sango. BRATT does not
press the Arvin Sango question here, however. BRATT’s argument to this court, rather, is
that “gross sales” includes the steel component of Noble’s sales to Ford Motor Company —
another “resale” customer, like Arvin Sango — from a former H & H Steel plant located in
North Vernon, Indiana.
The district court held that sales to Ford were not “achieved by [Noble] in its annual
operations for the business currently conducted by [H & H Steel].” This holding was based
on the fact that H & H Steel had made no sales to Ford from the North Vernon plant; such
sales occurred only after the plant was acquired by SET Enterprises, Inc.,2 which had a pre-
existing relationship with Ford.
Unlike the district court, we think a reasonable jury could interpret “business currently
conducted by [H & H Steel]” to mean the type of work performed by H & H Steel — i.e.,
2
SET acquired the North Vernon plant when it merged with the Noble subsidiary that
had purchased H & H Steel.
No. 05-3701
Page 8
steel processing — regardless of the identity of the customer for which the work was done.
Given that Noble’s work for Ford at the North Vernon plant involved steel processing
services similar to those previously performed by H & H Steel, we are not persuaded that
Noble is entitled to judgment as a matter of law on the ground relied upon by the district
court.
But we think the logic that led the district court to conclude that the cost of steel
resold to Arvin Sango should be excluded from “gross sales,” as that term is used in the
performance premium agreement, also applies to the cost of steel resold to Ford.
Under the agreement, “gross sales” must be “for the business currently being
conducted by” H & H Steel. H & H Steel was in the business of processing steel, not
wholesaling it. Significantly, H & H “washed out” the cost of steel in its accounting of sales
to its one “resale” customer, Arvin Sango, recognizing as revenue only the payments
attributable to its processing services. Richard Balgenorth, a vice president of Noble and its
chief negotiator in the purchase of H & H Steel, was aware of this accounting practice; in his
words, “only the toll processing revenue was part of the revenue of [H & H Steel,] which
[wa]s consistent with the way that H & H did all of its other business.” Thus, both parties
to the performance premium agreement understood that the “gross sales” generated by H &
H Steel’s “business” did not include sales of steel.3
3
Mr. Balgenorth testified to his understanding that “a hundred percent of the business
being conducted by [H & H Steel] was value-added sales.”
No. 05-3701
Page 9
In keeping with this understanding, Dominic Sarno, the president of H & H Steel
when it was acquired by Noble (and now an officer of SET), declared under penalty of
perjury that the performance premium was to be “calculated without including the cost of any
steel.”4 Mr. Balgenorth testified to the same effect: “[t]here is . . . zero doubt in my mind
that the value-added portion [of “resale” transactions] is what was contemplated . . . . [T]here
was never any contemplation of putting any steel sales in any performance premium
amount.” Were steel sales to have been included, Mr. Balgenorth explained, the sales levels
that triggered BRATT’s right to more than the minimum performance premiums would have
been set much higher.
We think that this evidence, which is uncontradicted in the record, compels a finding
that the steel component of sales to any “resale” customer — whether Arvin Sango or Ford
— falls outside the contractual meaning of “gross sales.” BRATT stresses that Noble (i.e.,
SET) accounts for its “resale” transactions differently than H & H Steel did; SET includes
the cost of steel when recognizing revenue from sales to Ford. But this fact cannot change
the meaning of the performance premium agreement, which was negotiated against the
backdrop of H & H Steel’s business and accounting practices, not SET’s, and which ties
“gross sales” to H & H Steel’s “business.” As used in the performance premium agreement,
4
Mr. Sarno confirmed in his deposition that the performance premium was to be based
“on value-add sales.”
No. 05-3701
Page 10
“gross sales” excludes the steel component of sales to Ford. The judgment in favor of Noble
will be affirmed on that basis.
AFFIRMED.