Opinion
No. A06-1324.
Filed July 17, 2007.
Appeal from the District Court, Anoka County, File No. C9-03-10945.
Michael S. Ryan, John E. Brandt, Stephen W. Hance, Murnane Brandt, MN (for respondent Julian M. Johnson)
Christopher S. Hayhoe, Felhaber, Larson, Fenlon Vogt, P.A., 220 South Sixth Street, MN and Kay Nord Hunt, Lommen, Abdo, Cole, King Stageberg, P.A., MN (for appellants Patrick W. Menth, Jack M. Lee, and Heritage Millwork, Inc.)
This opinion will be unpublished and may not be cited except as provided by Minn. Stat. § 480A.08, subd. 3 (2006).
UNPUBLISHED OPINION
Appellants challenge the district court's grant of summary judgment which concluded, inter alia, that a letter of intent executed by the parties to settle the underlying lawsuit was a binding agreement, arguing that the parties did not form an enforceable agreement. Because we conclude that the letter of intent is not an enforceable agreement, we reverse and remand.
FACTS
Heritage Millwork, Inc. (Heritage) is a closely-held corporation engaged in the business of custom millwork. Its shareholders are respondent Julian Johnson and appellants Patrick Menth and Jack Lee, who each own 500 shares.
In 2001, the three shareholders entered into a buy-sell agreement to "provide for the purchase by the corporation, or by each stockholder of the other stockholder's corporate interest . . . upon the death, disability, retirement or withdrawal of any stockholder." Paragraph VII of the buy-sell agreement provides that "[i]n the event any non-disabled stockholder desires to sell his corporate interest during his lifetime or upon retirement, he shall be precluded from selling or offering to sell his stock to any other person or institution until he has offered to sell to the corporation or to the remaining stockholders at the price determined under this agreement." It also provided that the corporation has the first option to purchase any shares of stock offered for sale.
In 2003, Johnson, in his own name and on behalf of Heritage, commenced litigation against Menth and Lee, alleging breach of fiduciary duty and requesting equitable relief under Minn. Stat. § 302A.751. Johnson sought, among other things, the dissolution of Heritage, a forced buy-out of his shares of stock, and an order restraining Menth and Lee from dissipating corporate assets. Menth and Lee, in their own names and on behalf of Heritage, asserted a counterclaim against Johnson, alleging breach of fiduciary duty, equitable relief under Minn. Stat. § 302A.751, director-and-officer conflict of interest by Johnson, and usurpation of corporate opportunity.
After several days of trial, Menth and Lee inquired whether Johnson would be interested in purchasing their shares of stock in the corporation to settle the lawsuit. Following communications between the parties, Johnson's attorney forwarded a letter of intent, signed by Johnson, to Menth and Lee for execution.
The letter of intent states that its purpose is to outline the "agreed transaction," which includes, among other things, that Menth and Lee would sell their stock to Johnson, and that "[s]ubject to the terms of the definitive agreement, [Johnson] will purchase the shares at a share price of five thousand six hundred dollars ($5,600.00)." It also states that "[i]f the terms of this letter are acceptable, [Johnson] will instruct counsel to draft a definitive agreement, containing all material terms and conditions to the agreed transaction for execution by all parties."
The letter of intent states:
It is understood that the respective rights and obligations of the parties hereto will be defined in the definitive agreement and to which this letter and all prior discussions will merge; provided, however, that the respective obligations of the parties contained in paragraph 9 [(confidentiality)] hereof will be binding on each of us.
Menth and Lee signed the letter of intent. The day after signing the letter, Johnson's attorney informed the district court that:
We have entered into a letter of intent, as I was telling the Court. We have set a closing of the transaction for February 15th. Under the terms of the letter of intent, at that time we will, upon closing, enter into a stipulation of dismissal of all claims between the parties, subject to the terms of the purchase agreement, and we will then file it, Your Honor.
We would like to leave the matter, quote, open, so to speak, in the event the bottom falls out, which neither one of us anticipate that will happen, but that if we would need to come back in and have you resolve the matter. But like I say, I don't believe that is going to happen.
The parties declined to state the terms of their letter of intent on the record.
Subsequently, Menth and Lee's counsel forwarded a draft stock-purchase agreement and a non-competition, non-solicitation, non-hire, non-interference, and non-disparagement agreement (noncompete agreement). The parties negotiated terms and exchanged "red-lined" drafts of the stock-purchase agreement, the noncompete agreement, and various other documents, including a release agreement, and buy-sell agreement termination.
By letter dated February 14, 2006, Johnson's attorney indicated that he was "ready, willing and able to close the purchase of all of [Menth and Lee's] shares in Heritage Millwork, Inc. as provided for under the letter of intent." Menth and Lee advised Johnson that they would not close on the transaction until the financial reports were completed and approved by them. Johnson responded that he was willing to waive receipt of the reports, but Menth and Lee insisted that the reports be completed to avoid a future lawsuit by Johnson. Menth and Lee's attorney then sent a letter dated that stated, "The letter of intent is not a binding contract. Only the definitive agreement will bind the parties to the transaction in a legally enforceable way."
On March 2, 2006, Johnson filed a motion to enforce the parties' letter of intent, which was supported by the affidavit of Johnson's attorney. The affidavit stated that the letter of intent was a settlement agreement, and that "Johnson would not have agreed to remove the trial from the court's calendar absent the parties' settlement." It also stated that Johnson had waived his right to have the financial statements, had restricted the geographic scope of the noncompete agreement to the area requested by Menth and Lee, and that Johnson was ready, willing, and able to close.
Menth and Lee submitted an affidavit of their attorney which stated:
Although the letter of intent contained the "principal terms" of the "agreed transaction," it did not represent, and it was never understood to constitute, the "definitive agreement" itself. If it in fact contained all the material terms, there would have been no purpose in drafting and negotiating those terms in the stock purchase agreement and in all the exhibits that had to be discussed, negotiated, and agreed upon.
The affidavit provided that after the execution of the letter of intent, the parties engaged in extensive negotiations regarding the geographic scope of the noncompete agreement, but that no agreement was ever reached.
On March 10, pursuant to notice, a special meeting of the board of directors of Heritage was held. During the meeting, Menth moved to have the corporation reject the letter of intent, and the motion was seconded by Lee. The motion passed. Menth and Lee then moved and voted to preserve the valuation of each party's 500 shares at $1.6 million each. That motion passed as well.
Following the hearing, the district court filed its order granting Johnson's motion, concluding that the letter of intent constituted a binding settlement of all claims between the parties and that Menth and Lee had acted in bad faith and ordered them to pay Johnson's attorney fees.
DECISION I.
Menth and Lee argue that the district court erred in granting summary judgment and concluding that the letter of intent was an enforceable agreement. "A motion for summary judgment shall be granted when the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue of material fact and that either party is entitled to a judgment as a matter of law." Fabio v. Bellomo, 504 N.W.2d 758, 761 (Minn. 1993). On appeal from summary judgment, we review de novo whether there are any genuine issues of material fact and whether the district court erred in applying the law. STAR Ctrs., Inc. v. Faegre Benson, L.L.P., 644 N.W.2d 72, 76 (Minn. 2002). In doing so, we view the evidence in the light most favorable to the party against whom summary judgment was granted. Hickman v. SAFECO Ins. Co. of Am., 695 N.W.2d 365, 369 (Minn. 2005).
To survive summary judgment, a party need not show substantial evidence; it needs only to produce sufficient evidence to permit reasonable persons to draw different conclusions. Schroeder v. St. Louis County, 708 N.W.2d 497, 507 (Minn. 2006). And "[w]hen reasonable minds can differ about when the injury was discovered, summary judgment is inappropriate because the issue should be left to the trier of fact." Lake Superior Ctr. Auth. v. Hammel, Green Abrahamson, Inc., 715 N.W.2d 458, 472-73 (Minn.App. 2006).
Initially, Menth and Lee argue that the district court erred as a matter of law by applying a "preponderance of the evidence" standard to a motion for summary judgment. We agree. The district court may not weigh the evidence or make factual determinations on a motion for summary judgment. State by Hatch v. Allina Health Syst., 679 N.W.2d 400, 406 (Minn.App. 2004). But although the court recited the incorrect standard, the material facts here are undisputed. Thus, we review whether the court correctly applied the law to the relevant facts.
Menth and Lee argue that the letter of intent was not intended to be binding. Johnson argues, and the district court concluded, that the letter of intent contains all the material terms of the parties' agreement to settle the lawsuit.
Whether a letter of agreement constitutes an enforceable contract is a question of law that this court determines de novo. Mohrenweiser v. Blomer, 573 N.W.2d 704, 706 (Minn.App. 1998), review denied (Minn. Feb. 14, 1988). Interpretation of settlement agreements is a matter of contract law. Beach v. Anderson, 417 N.W.2d 709, 711 (Minn.App. 1988), review denied (Minn. Mar. 23, 1988). "Settling suits without trial is greatly favored, and such agreements will not lightly be set aside by Minnesota courts." Id. at 711-12, (citing Johnson v. St. Paul Ins. Cos., 305 N.W.2d 571, 573 (Minn. 1981)).
"To constitute a full and enforceable settlement, there must be such a definite offer and acceptance that it can be said that there has been a meeting of the minds on the essential terms of the agreement." Jallen v. Agre, 264 Minn. 369, 373, 119 N.W.2d 739, 743 (1963). Not all terms must be agreed upon, but there must be agreement on the material terms. Hill v. Okay Constr. Co., 312 Minn. 324, 332, 252 N.W.2d 107, 114 (1977) (concluding that contract was not merely "an agreement to agree" where material terms were outlined but time limitations were not included).
If an alleged contract is so uncertain as to any of its essential terms that it cannot be consummated without new and additional stipulations between the parties, it is not a valid agreement. However, an agreement should be upheld where, despite some incompleteness and imperfection of expression, the court can reasonably find the parties' intent by applying the words as the parties must have understood them.
Triple B G, Inc. v. City of Fairmont, 494 N.W.2d 49, 53 (Minn.App. 1992). When an agreement, such as a letter of intent, is not intended to be the complete and final agreement of the parties, it is not enforceable. Lindgren v. Clearwater Nat'l Corp., 517 N.W.2d 574, 574 (Minn. 1994).
Menth and Lee argue that a letter of intent is only a tentative agreement, contingent upon the successful completion of ongoing negotiations. See Empro Mfg. Co. v. Ball-Co Mfg., Inc., 870 F.2d 423, 426 (7th Cir. 1989) (noting that letters of intent often "do no more than set the stage for negotiations on details"). But the label "letter of intent" is not alone determinative of whether the parties intended to be bound or whether the parties seek to negotiate further. Metro Office Parks Co. v. Control Data Corp., 295 Minn. 348, 355, 205 N.W.2d 121, 125 (1973). Rather, we must examine the letter's language to determine if the letter contained all the essential terms necessary for a binding agreement and whether the parties manifested their intent to be bound. See id. (affirming the district court's finding that a letter of intent contained all essential terms necessary for a binding agreement).
We conclude that the letter of intent was conditional upon entering into a definitive agreement and, therefore, is not binding. Three reasons support our conclusion. First, the letter of intent is expressly contingent upon the parties negotiating and executing the definitive agreement. As the letter states, the obligation to "consummate the agreed transaction" is contingent upon, "among other things," ten conditions, including "[t]he execution and delivery of the definitive agreement containing appropriate representations and warranties." While the parties agreed upon a purchase price, the price was also "[s]ubject to the terms of the definitive agreement." The price was also subject to adjustments to be determined by financial statements that had not yet been prepared. These conditions indicate that the parties contemplated further negotiation before they intended to be bound. See Lindgren, 517 N.W.2d at 574 (holding that letter of intent that contemplated entering definitive agreement was unenforceable, despite inclusion in letter of intent of precise sale terms, such as the property's legal description; the purchase price, including the requisite earnest money deposit; the precise terms of the mortgage, including the amount, percentage, and due dates; and a closing deadline); s ee also Lindgren v. Clearwater Nat'l Corp., No. C6-93-1556 (Minn.App. Feb. 1, 2004) (describing terms of letter).
Second, the parties' statements to the court indicate that the letter of intent was not intended to be binding. Specifically, the parties' attorneys stated to the court that they intended to "leave the matter open" in case the "bottom falls out" and they needed to bring the case back to the court to decide. Thus, the contemporaneous statements to the court indicated that there were details of the agreement that needed to be resolved before a final agreement could be reached.
Third, the conduct of the parties following the execution of the letter of intent confirms that they had not formed a binding agreement. Within a week of signing the letter, Johnson forwarded draft agreements, but disagreements over the drafts surfaced almost immediately. For example, the language of the letter of intent contained a noncompete clause that precluded Menth and Lee from competing with Johnson, but was silent as to its geographic scope. After the letter was signed, the parties began negotiating the geographic scope of the noncompete agreement in the draft agreements.
The district court concluded that all the material terms of the noncompete agreement were set forth in the letter of intent. It reasoned that the handwritten amendments to the noncompete clause of the letter indicate that the parties had negotiated and agreed to the terms of the noncompete agreement. We disagree. The handwritten amendments pertain only to the duration of the noncompete agreement and the letter is silent as to the geographic scope of the noncompete. The geographic scope of a noncompete agreement is a material term, and without such term, the agreement is not enforceable. See, e.g., Overholt Crop Ins. Serv. Co. v. Bredeson, 437 N.W.2d 698, 703 (Minn.App. 1989) (noting that enforceability of noncompete agreement is based on reasonableness of terms, including whether the geographic scope is limited to areas necessary to protect party's interests). And the subsequent actions of the parties in negotiating the geographic scope of the agreement indicate that no final agreement had been reached on that topic. See Triple B G, Inc., 494 N.W.2d at 53 (stating that "some incompleteness and imperfection" is permissible, but if the agreement "cannot be consummated without new and additional stipulations between the parties, it is not a valid agreement").
Menth and Lee further argue that because Heritage itself was not a party to the agreement, it was not binding. Menth and Lee point to the board of directors' meeting as evidence of the corporation's intent to reject the agreement. Because we conclude that the agreement was not binding, we need not reach this argument, but repeat the district court's observation that "[i]t is disingenuous to argue that Menth and Lee could sign a document as shareholders but yet reject that same letter as directors of Heritage."
II.
Menth and Lee argue that the district court erred in awarding attorney fees in favor of Johnson. Specifically, Menth and Lee argue that there was no motion for attorney fees and that their due process rights were violated because they had no notice or opportunity to respond. Whether due-process rights were violated is a constitutional question, which this court reviews de novo. Zellman ex rel. M.Z. v. Indep. Sch. Dist. No. 2758, 594 N.W.2d 216, 220 (Minn.App. 1999), review denied (Minn. July 28, 1999).
"Due process requires notice reasonably calculated, under all the circumstances, to apprise interested parties and afford them an opportunity to be heard." Graham v. Itasca County Planning Comm'n, 601 N.W.2d 461, 464 (Minn.App. 1999) (citing Mullane v. Cent. Hanover Bank Trust Co., 339 U.S. 306, 314, 70 S. Ct. 652, 657 (1950)). A district court may not sua sponte exercise authority to grant equitable relief where to do so fails to give a party an opportunity to present evidence that opposes the relief ultimately given. Claussen v. City of Lauderdale, 681 N.W.2d 722, 726 (Minn.App. 2004).
The district court found that Menth and Lee acted in bad faith by "not settling this matter as they had agreed to do in the January 18, 2006 letter," rejecting the settlement at the March 10, 2006 meeting, and setting "a share price that could only work to prejudice Johnson." Menth and Lee argue that at the time of the district's court order, they had no notice that the court was considering sanctions in the form of attorney fees. We agree. Johnson's motion to enforce the settlement did not include a motion for attorney fees. Therefore, Menth and Lee did not have the opportunity to argue against a fee award or demonstrate that their actions were not in bad faith. Accordingly, we reverse the award of attorney fees.