Opinion
Civil Action No. 03-995.
March 1, 2004
MEMORANDUM
Foodservice Marketing Associates, Inc. ("FMA"), a Pennsylvania corporation that markets and sells products for food manufacturers, brings this diversity action against its former president, Kirk C. O'Keefe, for breach of contract, breach of fiduciary duty, fraud, conversion, and unjust enrichment. FMA alleges that from at least 1995 until his retirement in 2001, O'Keefe procured salary, automobile allowance, and other payments in excess of those agreed to by the company; used company credit cards and checks for personal expenditures; and diverted funds from FMA's investment account to his personal use. O'Keefe has raised a counterclaim for a distribution and a share of corporate dividends that he alleges FMA has improperly withheld from him. O'Keefe has also filed a third-party complaint against two FMA officers, Martin Baker and Keith Swade, claiming that they have failed to comply with the terms of a buyout agreement reached upon O'Keefe's retirement.
Currently pending before the court is FMA's Motion to Compel Partial Settlement, in which FMA asks the court to enforce a partial settlement agreement the parties allegedly reached after the commencement of this suit. FMA maintains that the parties formed a valid settlement agreement through the exchange, in April 2003, of three letters between John Frazier Hunt, counsel for FMA, and W. Gerber Otto, counsel for O'Keefe. Because the court finds that the letters did not create a valid agreement, the motion will be denied.
Although O'Keefe is currently represented by different counsel, he acknowledges that at all times material to the present dispute Otto had the authority to negotiate a settlement on his behalf.
Discussion
A trial court has the authority to enforce a settlement agreement entered into by parties while litigation is pending. Berger v. Grace Line, Inc., 343 F. Supp. 755, 756 (E.D. Pa. 1971). Where the agreement's existence or terms are undisputed, no hearing is necessary before the court acts to enforce it. Tiernan v. Devoe, 923 F.2d 1024, 1031 (3d Cir. 1991). In contrast, where there is a substantial factual dispute as to the existence or terms of a settlement agreement, the court must conduct an evidentiary hearing. See id. To merit a hearing, however, the facts in dispute must be material; where essential issues of fact are lacking, and there is little likelihood that the settlement could be upheld, it is within the court's discretion to forego a hearing. Stewart v. M.D.F., Inc., 83 F.3d 247, 251-52 (8th Cir. 1996). In the present case, the parties are in agreement as to the essential facts. Neither party disputes the authenticity of the three letters, nor suggests that the attorneys did not possess the authority to enter into a settlement on their clients' behalf. Instead, the central dispute concerns a question of law: whether or not the third in a series of three letters exchanged between the parties constitutes a valid acceptance of a settlement offer, forming an enforceable contract. The absence of a material issue of fact persuades the court that no evidentiary hearing is required, and the motion is ripe for review.
There is an issue of fact concerning one term of the alleged settlement agreement. FMA contends that in a telephone conversation Hunt and Otto agreed that the parties would cooperate in assessing a possible setoff for benefits O'Keefe received from investments made on FMA's behalf. Otto insists that he made no such agreement, but rather that he told Hunt he would discuss the possibility with his client, O'Keefe. However, because the court finds that there was no acceptance necessary to create a binding agreement, the setoff issue is not an essential issue of fact.
In diversity cases, where the substantive rights and liabilities of the parties do not derive from federal law, questions regarding the validity of the alleged settlement agreement are determined by state law. See Cooper Labs., Inc. v. Int'l Surplus Lines Ins. Co., 802 F.2d 667, 672 (3d Cir. 1986). Under Pennsylvania choice-of-law principles, the jurisdiction that has the most interest in the problem and is most intimately concerned with the outcome is the forum whose law should be applied. Griffith v. United Air Lines, Inc., 203 A.2d 796, 805-06 (Pa. 1964). FMA is a Pennsylvania corporation with its principal place of business in Pennsylvania; the conduct at issue in this lawsuit allegedly took place while O'Keefe was employed in Pennsylvania as FMA's president. Accordingly, Pennsylvania law controls the question of whether the parties reached a binding agreement.
Under Pennsylvania law, "[t]o constitute a contract, the acceptance of the offer must be absolute and identical with the terms of the offer." Hedden v. Lupinsky, 176 A.2d 406, 408 ( Pa. 1962); accord Mazzella v. Koken, 739 A.2d 531, 536 (Pa. 1999). A reply to an offer which purports to accept it, but instead changes its terms, is not an acceptance but a counter-offer. Yarnall v. Almy, 703 A.2d 535, 539 (Pa.Super. 1997).
At issue are three communications between counsel for FMA (Hunt) and counsel for O'Keefe (Otto): (1) a letter dated April 11, 2003 from Hunt to Otto; (2) a letter dated April 16, 2003, from Otto to Hunt; and (3) a letter dated April 22, 2003, from Hunt to Otto. In the April 11 letter, sent on behalf of FMA, Hunt stated that:
[w]e are prepared to offer in settlement a total amount of $220,810.88 going forward. The payments would be made on a monthly basis in the amount of $2,292.82 or $1.146.41 paid twice a month. This offer of settlement does not include interest payments and . . . would not include a car allowance or any healthcare benefits.
We would restructure the nature of the remaining payments as consulting fees to Mr. O'Keefe. . . . We would also include in a settlement agreement provisions for confidentiality, non-disparagement of the parties and a non-solicitation of former or present employees of FMA nor the business customers of FMA by Mr. O'Keefe.
In short, FMA's offer of $220,810.88 would be made in monthly or bimonthly installments, paid over eight years, and characterized as a consulting fee. Interest payments, along with a car allowance and healthcare benefits, were explicitly not included in the offer, while provisions concerning confidentiality, non-disparagement, and non-solicitation of employees or customers would be included in a settlement agreement. Although not quoted above, the letter also stated that FMA intended to offset from its payment the amount of any benefit that O'Keefe received from investments he made on FMA's behalf with New England Securities or its affiliated companies.
Although the letter does not specify a term, it is clear that the intended term was exactly eight years, based on the amount of the total settlement and the amount of the proposed monthly and bimonthly installments.
Otto replied by letter on April 16, 2003, expressly stating that O'Keefe "does not accept" FMA's April 11 offer. The April 16 letter then proposed a counter-offer:
Mr. O'Keefe would accept the sum of $240,000.00 as a complete settlement for his retirement and stock sales monies. He would not be agreeable to take the money as consulting fees.
Due to the fact that a couple of the Plaintiff's larger expenses that Mr. O'Keefe has agreed to consider paying as interest figured on such expenses[,] Mr. O'Keefe would require 4% interest on the unpaid balance of the monies paid to him.
If the Plaintiff will accept such offer, I would appreciate it if we could be notified by the end of the month otherwise we will proceed accordingly.
O'Keefe's counter-offer was clear: he would accept $240,000.00 classified as consideration for the sale of stock, plus 4% interest. Aside from its overall rejection of the offer presented in the April 11 letter, the April 16 letter did not address the possibility of settlement provisions concerning confidentiality, non-disparagement, and non-solicitation, nor did it address the possibility of a setoff related to the New England Securities investments.
While the letter states only that O'Keefe "would not be agreeable to take the money as consulting fees," both parties appear to agree that the alternative would be to treat the payment as proceeds from the sale of O'Keefe's stock.
The two parties agree that the April 11 letter represented an offer by FMA, and that the April 16 letter represented a counter-offer by O'Keefe. The parties disagree over the proper characterization of the April 22 letter sent on behalf of FMA. If, as FMA contends, it was an acceptance of O'Keefe's April 16 counter-offer, then the parties reached a binding settlement agreement. If, as O'Keefe claims, it represented a new counter-offer, then no such settlement was reached, as neither party claims that there was any subsequent "acceptance" by either side after April 22.
The body of Hunt's April 22 letter reads as follows:
In response to your letter dated April 16, 2003, FMA is prepared to pay $240,000.00 as a complete settlement of Mr. O'Keefe's redemption of stock and retirement benefits. FMA will continue to treat the payments as stock redemption. However, the payment of $240,000.00 over eight years will be without interest. The remainder of the terms of settlement described in my letter dated April 11, 2003 are incorporated herein, including FMA's right to offset the funds that were invested with New England Securities or wire transfers to the extent that FMA did not receive a direct benefit.
I look forward to hearing from you.
From this letter, it is apparent that FMA accepted O'Keefe's proposed figure of $240,000.00 and request to treat the payment as stock sale proceeds, but rejected O'Keefe's demand that FMA pay interest on the $240,000.00. The letter also purported to incorporate terms that had appeared in FMA's previous offer, but not in O'Keefe's counter-offer.
These letters plainly evince that the parties did not achieve a "meeting of the minds" on the issue of payment of interest. O'Keefe demanded the payment of interest at a rate of 4% in his April 16 letter, and FMA rejected O'Keefe's proposal in its April 22 response. FMA even concedes that "there is still an outstanding issue as to what, if any, rate of interest will accrue to defendant during the payment period. . . ." Pl.'s Mem. of Law at 3. FMA attempts to characterize the issue as collateral, insisting that "the core financial terms of principal amount ($240,000) and payment period (8 years) have been established." Id. Pennsylvania law requires agreement on more than merely the "core financial terms" of a contract, however — it requires that the terms of the offer and acceptance be "identical." Hedden, 176 A.2d at 408.
Even if FMA were correct that agreement on core financial terms is sufficient to create a contract (although it cites no case law to support this proposition), it could scarcely characterize the issue of payment of interest as a mere collateral matter in the present case. The total interest at a rate of 4% over eight years amounts to $40,840.89, or 17% of the principal sum of $240,000.00 sought by O'Keefe in his April 16 offer. By declining to pay O'Keefe this considerable amount, FMA's April 22 letter "alter[ed] the terms of the offer in [a] material respect," Thomas A. Armbruster, Inc. v. Barron, 491 A.2d 882, 887 (Pa.Super. 1985), and was thus a counter-offer, not an acceptance.
The Fourth Circuit, applying Maryland law, reached a similar conclusion in Learning Works, Inc. v. Learning Annex, Inc., 830 F.2d 541 (4th Cir. 1987). The defendant in that case sent the plaintiff a letter offering to purchase the plaintiff's assets for $48,000 — $27,000 on closing and $21,000 over three years. Id. at 543. The plaintiff responded with a letter indicating it "accepts the offer," and then stating that the defendant's "offer to pay the $21,000.00 deferred portion of the $48,000.00 purchase price in three annual installments with interest at 8.06% (the federal applicable rate) is accepted." Id. The Fourth Circuit, applying Maryland law, held that the plaintiff's letter did not constitute a valid acceptance. Instead, the court ruled, the plaintiff's addition of a term for payment of interest operated as a rejection of the defendant's offer and a counter-offer. Id.
The facts here differ in only one respect: where the Learning Works plaintiff's purported acceptance added a term regarding the payment of interest, the acceptance of the plaintiff in the present case subtracted a term regarding interest. This distinction is insignificant. In both cases, the difference between the offer and purported acceptance was the existence of an interest provision. The Fourth Circuit's logic in Learning Works applies equally to the present case.
Conclusion
Because the parties' representatives never reached agreement on a material term of the purported settlement, no settlement agreement was ever formed. Accordingly, in an order accompanying this memorandum, FMA's Motion to Compel Partial Settlement will be denied.