Opinion
Case No. 3:02CV7310
November 7, 2003
ORDER
This is a diversity case arising from the aborted sale of the assets of the plaintiff Stanley Machining, Inc. (SMI) to the defendant Canastota NC Corp. (CNC). Pending is CNC's motion for summary judgment. For the reasons that follow, the motion shall be denied.
SMI is a family owned corporation that was in the machine tool business in Toledo, Ohio. CNC is a New York company that likewise is in the machine tool business. On July 20, 2001, the parties entered into a "Memorandum of Agreement," whereby SMI was to sell its "assets, inventory, intellectual property, and customer base" to CNC for $350,000. Immediately after the date of that agreement and before a formal asset purchase agreement had been negotiated or signed, CNC took possession SMTs plant and began participating actively in the business. It printed new letterhead, contacted customers, referred to its CNC Ohio Division, and otherwise generally held itself out as the proprietor of the company.
After about five weeks, CNC notified SMI that it would not close on the transaction. Shortly thereafter, SMI ceased operations and its assets were sold at auction. SMI sues for breach of contract and resultant damages.
SMI contends that the "Memorandum of Agreement" constituted a binding contract for sale of its assets. CNC contends that the Memorandum was a non-binding and conditional offer to purchase, and not a binding contract. I conclude that however categorized, the Memorandum constituted a contract, and that a jury could find that CNC breached its obligations under the contract.
The Memorandum had a prefatory paragraph, which stated, inter alia, that the "scope of the MOA is to initiate the purchase offer made by CNC to SMI" for SMTs assets. The paragraph concluded, "The purchase offer is contingent on the below conditions". Thereafter followed a list of additional terms, including:
1. The purchase can be made legally and the attorneys of CNC can structure an appropriate business entity.
2. SMI retain all accounts payable [and] accounts receivable,. . . .
3. An audit of the accounting system, financial accounts, and plant physical location does not detect anomalies from the state of the company (SMI) as reviewed by CNC on 17 July 2001.
4. Appropriate due diligence conducted by CNC or it's [sic] agents/appointees doe [sic] not detect anomalies from the state of the company (SMI) as reviewed by CNC on 17 July 2001.
5. CNC or its assigns are not responsible for any liabilities; environmental, financial, or otherwise, incurred by SMI prior to this agreement and after agreement if not agreed to in writing by both parties prior to its incurrence.
6. The cut-off date of the [sic] for accounts receivable, accounts payable, and purchase orders is the date of signing of this agreement. This date is the point at which CNC or its assigns become responsible for these accounts. . . .
CNC contends that between the date the Memorandum was signed and the date it notified SMI that it was not going forward with the transaction, several of the foregoing conditions were not satisfied. Among these were that: no "appropriate business entity" was structured by its attorneys; CNC learned that SMI owed about $450,000 to its vendors; and Key Bank and the City of Toledo had wall to wall liens on SMI's assets.
In addition, CNC concluded that, under Ohio law relating to successor liability, it might be liable for SMI's debts, despite the language to the contrary in the Memorandum. CNC also points to an August 31, 2001, letter from SMI's counsel offering to escrow $50,000 against any liabilities as proof that negotiations were continuing between the parties.
A jury could find, on the basis of the record presently before the court, that either an "appropriate business entity," as that term was used in the Memorandum existed de facto (i.e., as a result of CNC's having taken over the business and holding itself out as its proprietor) or no such entity was sought to be structured prior to CNC's termination of the transaction. CNC has called my attention to nothing in the record that indicates that its counsel undertook to develop an "appropriate business entity." Nor has it shown that such structure would not have been possible.
There is no contention that SMI did not retain all accounts receivable and payable, and remained completely liable on those accounts. Though CNC claims that SMI did not intend to pay its obligations, that contention raises, at most, a material dispute of fact.
The most crucial issue is whether CNC detect anomalies after the signing of the Memorandum. In claiming that it had detected such anomalies (i.e., accounts payable and liens), CNC ignores two undisputed facts: first, it conducted a thorough review of pertinent documents on July 17th, and, second it thereafter learned nothing new that it could not have learned before signing the Memorandum. The liens were matters of public record, and the doctrine of successor liability, to the extent applicable, was a feature of Ohio law long before the Memorandum was signed. There is no contention, and no evidence in the record, moreover, that SMI withheld material information about its financial circumstances.
With regard to the August 31, 2001, letter from SMTs counsel offering to escrow $50,000 in response to CNC's concerns about successor liability, a jury could find that that offer was a gratuitous effort to save the transaction in the face of the prospect of CNC's repudiation of its obligations, rather than evidence of continued negotiation.
I conclude, accordingly, that even if the Memorandum was, as CNC argues, a conditional offer to purchase, CNC has not shown undisputed noncompliance by SMI of any of the conditions contained therein. It has not shown, therefore, that it is entitled to be relieved of its obligations under the Memorandum, or that it is entitled to judgment as a matter of law.
Based on the record presently before the court, a jury could find that the parties had a contract for the sale and purchase of SMTs assets, and that, to the extent that any conditions in that contract existed, no such condition or obligation was breached by SMI. In addition, a reasonable jury could find that CNC had breached its obligations under the contract by not proceeding to finalize the transaction as anticipated in the Memorandum. The jury could find, moreover, that the reasons advanced by CNC for its repudiation of the contract were pretextual, and not its true reasons for deciding to back out of the deal.
In any event, those are issues for the jury; they are not amenable to disposition on defendant's motion for summary judgment.
It is, therefore,
ORDERED THAT the defendant's motion for summary judgment be, and the same hereby is denied.
So ordered.