United States Court of Appeals
For the First Circuit
No. 10-2086
HOUSE OF FLAVORS, INC.,
Plaintiff, Appellee,
v.
TFG MICHIGAN, L.P.,
Defendant, Appellant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MAINE
[Hon. D. Brock Hornby, U.S. District Judge]
Before
Lynch, Chief Judge,
Torruella and Boudin, Circuit Judges.
Richard F. Ensor with whom Vantus Law Group, P.C., Alexia
Pappas and Verrill Dana, LLP were on brief for appellant.
Lee H. Bals with whom Marcus, Clegg & Mistretta, P.A. was on
brief for appellee.
June 23, 2011
BOUDIN, Circuit Judge. Tetra Financial Group, L.P.
("Tetra") appeals from a judgment granting House of Flavors, Inc.
("House of Flavors") rescission, together with an adjustment
payment, of a lease agreement between the parties. Reserving
further detail for discussion of the merits, the factual background
and proceedings below can be briefly summarized.
House of Flavors is a company, based in Michigan but with
its executive office in Maine, that makes ice cream; its president
during the relevant period has been Whit Gallagher. Tetra is a
Utah-based limited partnership that specializes in business
equipment leasing. In 2005, House of Flavors decided to acquire
and install an ice cream hardening system ("the system"). By
coincidence, about this time Gregory Emery, Tetra's national
account executive, inquired whether House of Flavors had any
projects for which it needed financing.
Tetra drafted a letter of intent, which contemplated that
Tetra would finance the acquisition of the system and its very
expensive installation costs including further materials costs,
that Tetra would hold title to the assembled machine and reap the
tax benefits of ownership, and that House of Flavors would have an
option at the end of a base period to buy the system or to extend
or terminate the lease. During the negotiations with Emery and
with Ryan Secrist, Tetra's executive vice president and sales
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manager, Gallagher insisted that he needed a guaranteed maximum
price for the end-of-lease purchase.
Tetra refused to put a fixed price--or at least anything
below 20 percent of the total cost of the system as installed--into
the lease, saying that to do so could compromise its ability to
reap the full tax benefits of ownership. On November 10, 2005,
House of Flavors purchased a suitable machine in a Maryland auction
for around $105,000 (although the full cost of the system as
finally assembled and installed was expected to be much higher),
and Gallagher informed Emery of the purchase on November 15, 2005.1
In a conference call with Gallagher on November 18, 2005,
Secrist and Emery offered to provide Gallagher with a side letter
that would reflect a buyout value of 12 percent of the cost of the
system and its installation. Secrist sent a side letter to
Gallagher on November 22, 2005, which stated in pertinent part:
Pursuant to our conversation, we have reviewed
the list of property expected to be purchased
and have estimated an end of term value of ten
percent (10%) of its original cost. Please
note that this end of term value estimation is
not intended to represent a commitment by you,
or an obligation by us, to buy or sell the
equipment, as the case may be for that, or any
1
The initial letter of intent between the parties contemplated
a loan of around $1.5 million for the system; this turned out to be
very close to the total cost of the system as installed; and,
without very careful wording, the percentage figures exchanged by
the parties treated the total cost as the figure to which the
relevant percentage would be applied in fixing a sale price--if one
were fixed.
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other price at the conclusion of the Base (or
extended, if applicable) Lease Term.
Shortly after receiving the side letter, Gallagher signed the
letter of intent and sent it to Tetra.
In later conversations, Secrist told Gallagher that he
could not get a deal approved at Tetra with a ten percent buyout
cap, but assured Gallagher that he could get the deal approved at
12 percent. On January 5, 2006, Gallagher told Secrist that he
accepted Tetra's revised terms and requested that Tetra begin
preparing lease documents. That same day, Tetra sent Gallagher a
revised side letter, substantively identical to the first except
that it estimated an end-of-term buyout price of 12 percent.
In March 2006, Tetra and House of Flavors executed a
Master Lease Agreement, dated January 13, 2006, which provided in
pertinent part that ownership of the system as installed would
transfer to Tetra, and that at the end of the thirty-six month
lease term, House of Flavors
shall . . . elect one of the following
options: (i) purchase [the system and
associated equipment] for a price to be agreed
upon by both [Tetra] and [House of Flavors],
(ii) extend the Lease for twelve (12)
additional months . . . or (iii) return the
[system] to [Tetra] at [House of Flavors']
expense . . . .
No reference to a fixed price or the 12 percent figure appears in
the final agreement, but the agreement did provide for payments by
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House of Flavors during the construction period as Tetra was
providing loan funds.
From March to August 2006, Tetra funded the installation
of the system in the House of Flavors plant, at a final cost of
$1,435,130.36. On August 30, 2006, House of Flavors executed a
bill of sale of the system, transferring ownership to Tetra. That
same day, the parties executed a lease schedule that incorporated
the conditions of the Master Lease Agreement and provided that
House of Flavors would make monthly payments during the lease
period.
Two years later, in August 2008, Gallagher approached
Tetra about buying out the system early, and on August 28, 2008,
Tetra informed House of Flavors that the price for acquiring the
system would be $571,468.90--around 40 percent of the original cost
of the equipment and installation. Confronted with the side
letter, Tetra eventually lowered the price to 35 percent and later
to 30 percent; but Gallagher would not agree to more than 12
percent and in February 2009 House of Flavors brought suit in
federal district court.
The complaint asserted claims for breach of contract and
the covenant of good faith and fair dealing, violation of the Utah
Unfair Practices Act, promissory estoppel and fraud. In December
2009, Tetra secured partial summary judgment dismissing all claims
save for the last two. While the district judge flatly rejected
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the claim that there was a contractual agreement for the 12 percent
figure, he pointed to the "estimate" in the final side letter as
raising a fraud question, noting that fraud might void the lease.2
The district court held a three-day bench trial on April
13-15, 2010, and, on June 17, 2010, filed a decision finding
against House of Flavors on the promissory estoppel claim but for
it on the fraud claim. On the former, the court rejected the claim
that Tetra had promised to sell the system back at the 12 percent
figure; on the latter, the court held that Tetra had fraudulently
professed to have estimated 12 percent as the price when in fact it
had made no estimate whatever.
As an equitable remedy "analogous to rescission," the
district court sought to unwind the transaction by requiring Tetra
to transfer title of the system back to House of Flavors. The
court asked each side to make a further filing to help the court
shape the rescission remedy, although (given their responses) the
parties may not have fully understood just what was expected of
2
When in March 2010 House of Flavors' final pretrial
memorandum expressly requested rescission as a remedy, Tetra
objected, partly on grounds that the request was untimely, but the
district judge refused the request.
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them.3 What both sides did understand was that the remedy would
entail the transfer of the system back to House of Flavors.
In all events, House of Flavors projected a handsome
recovery for itself over and above recapturing title to the system.
Tetra, by contrast, argued that a full restoration of benefits was
an incalculable objective; but it supplied some figures useful to
the district court. In the end, the court devised its own remedy
drawing on the filings and scattered figures appeared in a record
that had been compiled primarily to decide the merits rather than
the remedy.
Ultimately, the court ordered Tetra to convey the system
to House of Flavors and pay it $27,097. To arrive at this figure,
the court calculated what it thought was the balance due between
the parties, assuming that the system passed back to House of
Flavors based on the 12 percent purchase price and taking account
of what Tetra had been promised, what it had received, and what was
needed to compensate House of Flavors for an extra cost it incurred
3
The district court's request read in relevant part:
If House of Flavors receives the difference between what
it has paid Tetra in lease payments and what Tetra paid
for the equipment as installed, will House of Flavors
have had, in effect, an interest-free loan of some amount
for some period of time? If I do not have evidence in
the record from which to make a determination of this
benefit to House of Flavors, what is the consequence?
Can I reopen the record . . . ? If not, who has the
burden of proof on this issue and what are the
consequences if it has failed to meet that burden?
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due to Tetra's delaying the exercise of the purchase option. The
court's theory and calculation are described in more detail below.
Tetra then filed a motion to reconsider, pointing out
that the court's calculations omitted certain payments that House
of Flavors had owed under the agreement. If taken into account,
Tetra said that these amounts meant that it was still due about
$150,000 even if all of the other calculations were accepted.
House of Flavors said it was too late for Tetra to offer new
evidence, and the district court agreed, denying the motion. This
appeal followed.
The rescission remedy. In this court, Tetra first argues
that House of Flavors switched theories in mid-course. It notes
that House of Flavors' complaint, and initial efforts to litigate
the case, urged that Tetra was bound (under contract, promissory
estoppel, and related doctrines) to sell the assets for 12 percent.
Such a legal commitment was rejected by the district court in its
grant of partial summary judgment for Tetra.
Therefore, Tetra asserts, the complaint did not fairly
give warning that rescission would be sought and that House of
Flavors formally proposed this remedy only six weeks before trial.
But the complaint had also charged fraud; rescission is an
available remedy, see Mecham v. Benson, 590 P.2d 304, 307-08 (Utah
1979); and the court can award any relief to which the party is
entitled, Fed. R. Civ. P. 54(c); United States v. Marin, 651 F.2d
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24, 31 (1st Cir. 1981); see also Bontkowski v. Smith, 305 F.3d 757,
762 (7th Cir. 2002) (Posner, J.).
Of course, when a case evolves in a new direction not
fairly foreseeable, a surprised party may be entitled to additional
time to prepare. Tetra could have pressed for a delay on this
ground, and the judge--who had more or less suggested that remedy--
would have been hard put to deny a reasonable request. But Tetra,
who knew that the case had changed direction in December 2009, made
no such request and cannot now claim unfair surprise.
Tetra's next objection is that for rescission, the Utah
state law requires that the party seeking it act promptly once the
basis is known.4 The requirement rests on the ground that one who,
knowing of a ground for rescission, continues without protest to
enjoy the benefits of a contract "affirms" it and can thereafter
enforce but not disavow it. E.g., Frailey v. McGarry, 211 P.2d
840, 844-45 (Utah 1949); Cont'l Ins. Co. v. Kingston, 114 P.3d
1158, 1161-63 (Utah Ct. App. 2005).
House of Flavors answers that it was prepared to affirm
the contract as it understood it, turning to rescission promptly
once its reading was rejected by the court; but its reading was
pretty clearly wrong from the outset. However, the relief here is
4
The assumption, shared by the parties, that Utah law governed
the fraud claim may or may not be correct; this is a fraud claim,
involving multiple states, and both the applicability and meaning
of the contract's choice of Utah law language might be questioned.
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as much an affirmance of the contract as a rescission: both
theories support recapture of the system by House of Flavors; what
remains is a financial adjustment which--if anything more were due
to a plaintiff--could be justified as a fraud remedy independent of
rescission.
Tetra finally argues that House of Flavors supposedly
engaged in a continued "acceptance of contract benefits" and failed
to "undertake any effort to return the parties to the pre-lease
status quo." See, e.g., Knudsen Music Co. v. Masterson, 240 P.2d
973, 975 (Utah 1952). Again, the pre-lease status quo was
ownership of the system by House of Flavors and to this extent the
outcome was both a return to the status quo ante and also to the
expected outcome of the contract.
Not only was a buy back by House of Flavors one of the
options provided in the contract but it was the rational and
(according to Tetra's own witnesses) the expected outcome. To
dismantle the installed system would sacrifice for both sides the
value of the soft costs of installation. Tetra received continuing
benefits back all along through the scheduled payments; whether it
was over- or underpaid is a question to which we will return.
The merits. Whether Tetra committed fraud is the next
issue raised on appeal but this is primarily a factual issue. See
Integrated Genomics, Inc. v. Gerngross, 636 F.3d 853, 863 (7th Cir.
2011). The district judge heard the witnesses and his factual
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findings are reviewed only for clear error; to the extent legal
objections are made, they are reviewed de novo. LPP Mortg., Ltd.
v. Sugarman, 565 F.3d 28, 31 (1st Cir. 2009).
Here, the fraud claim was that Tetra, when asked for a
fixed buyout price, said that for tax reasons it could not promise
this in the agreement but had itself estimated the buyout price at
12 percent of original cost. Tetra now admits that it never made
any such estimate. When it finally set a buy back figure, it was
almost 40 percent, only grudgingly reduced thereafter and never to
12 percent. So its claim to have made an estimate was false.
The further requisites of a fraud claim are a deceitful
state of mind on one side and reasonable reliance on the other.5
The district judge, after listening to testimony and reviewing the
documents, found that Tetra had behaved dishonestly. The district
judge's assessment is aided by the defendant's admission, the side
letters underscoring the low figure anticipated, and the remarkable
(and still unexplained) spread between the 12 percent estimate and
the 40 percent initially demanded.
As for reasonable reliance, this is Tetra's main target
in its merits discussion. Tetra stresses that Utah law requires
5
These, along with resulting harm, are the requisites for
common law fraud. Restatement (Second) of Torts § 525 (1977). See
Gold Standard, Inc. v. Getty Oil Co., 915 P.2d 1060, 1066-67 (Utah
1996). Accord Francis v. Stinson, 760 A.2d 209, 217 (Me. 2000);
Hord v. Envtl. Research Inst. of Mich., 617 N.W.2d 543, 551 (Mich.
2000).
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proof of fraud by clear and convincing evidence--a common enough
requirement even if Utah law does not govern the fraud claim.
E.g., Flynn v. Korneffel, 547 N.W.2d 249, 254 (Mich. 1996). But
the trial judge was the fact finder and his determination of
reasonable reliance is far from clear error even under the clear
and convincing standard.
A buyout figure in the 12 percent range was of central
importance to House of Flavors. And Tetra's business was financing
and it supplied the 12 percent figure, also explaining why tax
reasons prevented it from being set forth as a formal promise.
House of Flavors could not rely on a promise it did not get; it
could rely on an honest estimate having been made as represented to
it and then choose to judge that the final outcome would not differ
greatly.
Tetra points us to case law that in a variety of contexts
takes a dim view of plaintiffs who claim to rely on alleged oral
promises that are contradicted by written language in the
instrument or contract. See Gold Standard, 915 P.2d at 1068. As
it happens, House of Flavors relied on "estimate" language that was
contained in a written document--the side letter. But anyway, in
Utah, as elsewhere, fraud and reasonable reliance turn on the facts
of the case, Berkeley Bank for Coops. v. Meibos, 607 P.2d 798, 801
(Utah 1980); cf. Youngblood v. Auto-Owners Ins. Co., 158 P.3d 1088,
1096 (Utah 2007), and oral fraud can undermine a written contract.
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In Gold Standard, heavily relied on by Tetra, the court
refused to find reasonable reliance in a fraud case when writings
designed to correct an oral promise were received before any
reliance on the oral statements, which were themselves inconsistent
with prior written obligations. Gold Standard, 915 P.2d at
1067-68. In our own case, Tetra specifically created the
impression that a good faith estimate had been made and never
corrected that representation before House of Flavors acted on it.
Tetra correctly says that even the side letter says that
the 12 percent estimate does not represent "a commitment by [House
of Flavors], or an obligation by [Tetra]." True, a good faith
estimate would not be a commitment, nor the basis for suit if it
merely turned out to be wrong. But the good faith estimate reduces
the risk of one who relies upon it and House of Flavors was exposed
by the fraud to a greater risk than it had reasonably assumed.
Tetra repeats that House of Flavors' initial complaint
emphasized a supposed promise of 12 percent rather than the (non-
existent) estimate of 12 percent. However, the pleadings may be
constructively amended to conform to the evidence, Fed. R. Civ. P.
15(b); Rodriguez v. Doral Mortg. Corp., 57 F.3d 1168, 1172 (1st
Cir. 1995), and Tetra had fair warning from December 2009 onward of
the new direction the case was likely to take.
The payment calculation. The most confusing issue on
appeal concerns Tetra's final claim that even if it is liable, the
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district court erred in ordering it to pay House of Flavors $27,097
and that House of Flavors in fact owes Tetra over $150,000. The
history and handling of this dispute has been outlined earlier in
this decision, but at this point more the district court's
calculation needs to be considered in more detail.
In a nutshell, the court made calculations, based on
testimony and documents, as to what Tetra was owed under the
payment schedule in the agreement and then added to that an imputed
final buy back price at 12 percent; the court then compared that to
what House of Flavors had already paid (adding to that a House of
Flavors payment to a bank6); and the court then concluded that the
latter sum exceeded the former, leaving Tetra owing $27,097 to
House of Flavors.
The district court described this as a rescission remedy,
but the bank payment is closer to damages than rescission.
Further, property fraudulently taken can be recovered on a fraud
theory without invoking rescission, 2 D. Dobbs, Law of Remedies
§ 9.3(4), at 593-94 (2d ed. 1993), and that might also be true of
the 12 percent figure used by the court in its netting out
6
A payment of $13,000 was made by House of Flavors to a bank
in order to keep alive an obligatory letter of credit to protect
Tetra; but the payment itself was needed only because Tetra had
refused to sell back the system at 12 percent at the end of the
original term, requiring an extension of the letter of credit.
Tetra does not quarrel with this adjustment.
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calculation, there being some evidence that due to the fraud House
of Flavors had passed up a competing offer of financing.
Remedy theories are more malleable than one might think.
Notions of remedies in simple cases--rescission of a sale of a lame
horse or damages from a fender-bender--may have to be adjusted in
more complicated cases. Here, the system belongs in House of
Flavors' hands; the question is the fair adjustment of other
payments as between the parties; and whatever the label, House of
Flavors was due ownership of the system; but it still had to pay
back the loan including the residual due for re-transfer.
In its reconsideration motion, Tetra identified payments
that House of Flavors owed under the agreement but which Tetra said
the district court had not included--specifically, initial payments
required to Tetra before construction and while it was underway.
In response, House of Flavors did not deny Tetra's claims but
argued that the figures came too late, and the district court
concurred.
We cannot agree. The trial focused primarily on
liability, not the details of the remedy; neither party completely
understood, or fully responded to, the district court's request for
help in formulating the remedy by itself after the trial. See note
3, above. Nor are the obligations to which Tetra now points "new
evidence" (the lease agreement was in the record). Finally, House
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of Flavors has thus far declined to defend the omission on the
merits.
Thus, although there may be little left to be decided,
it is safest to order a remand so that the district court can take
due account of the additional payments due to Tetra. If House of
Flavors quarrels with the precise figures, that can be sorted out
there. The district judge did a fine job in devising a fair
resolution to this dispute, and the limited correction specified
above will complete that objective.
The judgment is affirmed insofar as it awards House of
Flavors the system but is set aside insofar as it awards House of
Flavors a money payment; and the case is remanded for further
proceedings consistent with this opinion. Each side shall bear its
own costs on this appeal.
It is so ordered.
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