Budget Marketing, Inc. v. Centronics Corporation

927 F.2d 421 (1991)

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Nature of the Case

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Facts

In April 1987, P and D executed a letter of intent outlining the basic terms of a proposed acquisition of P by D. The letter of intent stated that completion of the merger depended on four express conditions: (1) satisfactory completion of an accounting, legal, and business review of P; (2) purchase by P of 'key man' life insurance coverage; (3) avoidance by D of a 'significant cash outlay' for taxes because of BMI's planned change in accounting methods; and (4) execution of a definitive and legally binding agreement between P and D. The letter of intent provided that the transaction was subject to approval by the boards of directors of both corporations and by the P shareholders. It also contained a specific disclaimer: 'This letter shall not be construed as a binding agreement on the part of P or D' It set a target date for a definitive agreement of May 31, 1987. Between January and May 1987, D officials carefully evaluated P. On May 21, the parties executed an addendum to the letter of intent that included changes favorable to D. The D board approved the addendum on May 26, 1987. The addendum changed the target date for the definitive documents to June 30, 1987. D's public relations firm issued a press release about the letter of intent, the directors of P's parent company and P shareholders approved the proposed merger, and D received all documents necessary to complete the legal, business, and accounting review of P. In August, D sent its draft of the final agreement to P. P began taking the steps necessary to meet the conditions imposed by the letter of intent. Eagle, the president and principal shareholder of P borrowed $ 750,000 for P's use that he personally secured. P opened additional branch offices and expanded existing branch operations. P also purchased 'key man' life insurance coverage for Eagle. Eagle kept D informed of P's expansion efforts and the other developments. D did not disclose that it might not complete the deal. In August, a D representative confirmed a planned closing date no later than September 0 during a conversation with an official of Norwest Bank, P's lender. In mid-September, a D executive participated in a meeting with P representatives, an investment banker from R.G. Dickinson, and representatives of Norwest Bank regarding post-closing financing for P. All of those present at the meeting proceeded on the assumption that the deal would close, and D's representative said nothing to the contrary. In October, a D representative discussed with a P official a necessary SEC filing that would have to be completed after closing. Also in October, D's president and chief executive officer, Robert Stein, told Philip Boesel, an investment banker with R.G. Dickinson who had been involved with the planned merger, that D was ready to move toward closing the deal with P. In November 1987, D abruptly halted preparations for the merger. The letter from D stated that the merger would lead to a cash outlay for taxes because of P's change in accounting methods, thereby triggering one of the negative conditions of the letter of intent. P brought this action against D, alleging that it had invested 'hundreds of thousands of dollars' to meet the cash flow requirements of the letter of intent. D removed the case to federal court. D filed a counterclaim alleging negligent misrepresentation concerning an FTC investigation of P and P's financial prospects. The district court granted D's motion for summary judgment, and also granted P's motion for summary judgment on D's counterclaim. Both parties appeal.