Opinion ID: 591166
Heading Depth: 3
Heading Rank: 2

Heading: Delta's Claims Against IH for Breach of Dealer Agreement

Text: 22 Delta asserts that the Dealer Agreement was unlawfully terminated by IH as a result of the transfer by IH of its entire agricultural equipment division--manufacturing facilities, inventory, trade name and other assets--in globo to Case. Delta complains that IH deliberately contracted with Case in a manner calculated to diminish contractual obligations of IH to Delta under the Dealer Agreement, even though Delta was not a party to the Purchase Agreement. 23 The district court found that, although the Dealer Agreement specified several grounds upon which it could be terminated unilaterally by either party or jointly by both parties, that agreement neither expressly provided a fixed term or duration for its performance nor addressed the consequences of a unilateral withdrawal from the agreement by IH, either by ceasing to manufacture agricultural equipment or by disposing entirely of its agricultural equipment business. Relying principally on the provisions of La.Civ.Code Ann. art. 2054, one of several Civil Code articles setting forth rules for interpretation of contracts, the district court first concluded as a matter of law that, absent an express contractual provision for the duration of the Dealer Agreement, that contract should continue for a reasonable period. The district court then found that the period during which IH continued to manufacture agricultural equipment was the reasonable period for purposes of the Dealer Agreement's duration. Stating the obvious--that the Dealer Agreement did not require IH to manufacture agricultural equipment forever--the district court held that when IH ceased manufacturing agricultural equipment, the Dealer Agreement terminated. As such, reasoned the district court, Delta was left with no cause of action against IH for breach of contract when the Dealer Agreement terminated as a result of IH's cessation of manufacturing and selling agricultural equipment pursuant to its sale of that business to Case. 24 Although we do not quarrel with the determination that IH was not obligated to manufacture and distribute farm equipment forever and thus not obligated to maintain Delta as a dealer forever; and also agree that the reasonable period of IH's obligation to maintain Delta as a dealer was until such time as IH might truly terminate its farm implement business, we disagree with the district court's finding that IH did that. We find, to the contrary, that IH did not terminate its farm implement business but that it sold it lock, stock and barrel, as an ongoing business. In so doing, IH caused the termination of Delta's Dealership Agreement, without cause, before the term of that agreement would otherwise have expired, a classic breach of contract. 25 Not surprisingly given the number of IH dealers affected by the transaction between IH and Case, this is not the first dispute concerning that transaction to make its way into court. Other IH dealers have sued on claims essentially identical to Delta's in other jurisdictions. As the contracts considered by the courts in those cases were substantially identical to the Dealer Agreement here, those cases merit discussion. 26 In Groseth International, Inc. v. Tenneco, Inc., 9 a long-time IH dealer in South Dakota suffered the termination of its dealer status as a result of the IH/Case transaction and filed, among other claims, a breach of contract action against IH. The trial court granted summary judgment for IH on that claim, holding that section 2 of the dealer agreement 10 gave IH the right to discontinue production of all lines of agricultural equipment without incurring any liability to Groseth. The Groseth trial court also held that, even absent section 2 of the dealer agreement, the doctrines of frustration of purpose and commercial impracticability would discharge IH from liability under the contract. 27 The South Dakota Supreme Court reversed, holding that the trial court had erred in concluding that section 2 of the dealer agreement authorized IH to discontinue completely all agricultural product lines without liability to Groseth. That supreme court held that even though section 2 stated that the price list could always change, there was an underlying assumption that IH would continue to market some group of agricultural products. Therefore, held that court, IH could not cancel the dealer agreement by operation of section 2 as that section did not contemplate IH's discontinuation of manufacturing and distributing agricultural equipment altogether. 11 28 The South Dakota Supreme Court also held that, as a matter of law, the doctrine of frustration of purpose did not discharge IH from its duty to perform under the dealer agreement. 12 The court then reversed and remanded the case for a trial on the issue of commercial impracticability, holding that there existed material issues of fact on that question. 13 29 In Karl Wendt Farm Equip. Co. v. International Harvester Co., 14 a former IH dealer in Michigan filed suit in federal district court alleging, inter alia, that IH breached its dealer agreement with Wendt. All other claims were disposed of before trial. At trial, the district court permitted IH's defense of impracticability of performance to go to the jury, and the jury returned a verdict of no cause of action on the contract, adverse to Wendt. The district court denied Wendt's motion for J.N.O.V./new trial but ordered a directed verdict in favor of Wendt on IH's defenses of (1) frustration of purpose, (2) the ability of IH to cease production of all product lines under section 2 of the Dealer Agreement, and (3) an implied term limiting the duration of the contract. Wendt appealed the district court's denial of its motion for J.N.O.V./new trial, arguing the invalidity of IH's impracticability defense. IH cross-appealed the district court's directed verdict on the viability of IH's other defenses. 30 The Sixth Circuit held that, under Michigan law, the district court erred in permitting the jury to consider the impracticability defense and that Wendt was entitled to a directed verdict on that issue. 15 The appellate court then addressed IH's assertions on cross-appeal. First, the court agreed with Groseth in holding that frustration of purpose was not available as a defense. 16 Again agreeing with Groseth, the Wendt court also held that section 2 of the dealer agreement did not serve as an alternative means for termination of the contract, especially in light of the existence of specific termination provisions in the contract. 17 31 Finally, the Wendt court addressed IH's assertion that there is an implied term in every dealership agreement giving the manufacturer the freedom to go out of business, and that such an implied term gave IH a defense to the breach of contract action. IH cited the opinion of the district court in the instant case in arguing that the Sixth Circuit should likewise hold that Wendt's dealer agreement automatically terminated when IH ceased manufacturing agricultural equipment. The Sixth Circuit, criticizing the decision of the district court in the instant case, held that IH had no defense under such a theory. The Wendt court stated that the evidence supported the conclusion that at the time the parties contracted, neither IH nor Wendt anticipated that IH would leave the agricultural equipment business completely. That court continued: 32 Implying a term which enables IH to terminate its franchise agreement unilaterally without following the termination conditions of the agreement and without incurring a breach places all the risk on the dealer. Rather, if economic circumstances require that IH leave the market for farm products, it should properly seek to terminate its agreement under the terms of the agreement.... As there is no evidence which suggests that IH sought to terminate its agreement with Wendt by mutual agreement under the terms of the agreement, the district court properly granted a directed verdict for Wendt on this defense. 18 33 We are not bound to follow either Groseth or Wendt, as those cases decided the issues under the laws of South Dakota and Michigan; we are bound here to apply Louisiana law. Furthermore, as the district court in the instant case held that IH had not breached the dealer agreement, it did not address, and hence we do not face, some of the issues decided by Groseth and Wendt--in particular, the defenses of frustration of purpose and impracticability of performance. Nevertheless, we find the opinions in those two cases helpful in our determination whether IH breached the dealer agreement when it sold its agricultural equipment division to Case without ensuring that Delta would be protected to the full extent of its contractual rights. 34 The Sixth Circuit in Wendt suggested that the district court in the instant case erred in holding that the Dealer Agreement terminated by implication when IH ceased personally to manufacture its agricultural equipment. IH construes that language in Wendt to mean that the Dealer Agreement obligated IH to perpetual performance regardless of the circumstances, a conclusion IH argues is unreasonable. IH argues further that, if such is the true meaning of Wendt, that opinion is fundamentally flawed because the Sixth Circuit failed to distinguish between IH's decision to leave the agricultural equipment business altogether (which is not addressed in the dealer agreement) and a decision to terminate Delta or any other individual dealer (which is explicitly addressed in the dealer agreement). 35 We shall not attempt to interpret the true meaning of Wendt's analysis of the district court's opinion in the instant case. Our responsibility here is to review the instant decision from scratch, not to act as a super appellate court in review of the Sixth Circuit's extra-territorial analysis of our trial court's work. Nevertheless, we conclude that it is IH and the district court, not the Sixth Circuit, which have failed to make a fundamental distinction in this case--the distinction between a true business contraction or partial liquidation on the one hand and the outright sale or transfer of an active trade or business on the other. 36 In a true business contraction, an entity completely puts to an end one or more of its business pursuits. Such would be the case had IH discontinued its agricultural equipment business so that such business no longer existed; specifically, so that IH farm implements ceased altogether to be manufactured and sold. Clearly, however, that is not what occurred here; IH did not make a business contraction. Instead, it sold in globo its agricultural equipment manufacturing and distributing business, which continued--albeit under the aegis of Case--without so much as skipping the proverbial heart beat. 37 Under the terms of the Dealer Agreement, Delta could be terminated as a dealer only for cause. The issue whether the reasonable duration of the Dealer Agreement--which specified no term--is only as long as IH remained in the business of manufacturing farm equipment, is simply not material to our decision. As drafted, the Dealer Agreement presents a significantly different question, even though it sounds similar: Given no specified term and given the explicit termination provisions in the Dealer Agreement, does IH's transfer of its agricultural implement manufacturing and distributing business, qua business, with the uninterrupted continuation of the manufacture and distribution of IH farm equipment, constitute cause for the manufacturer of such equipment--whether that be IH or its transferee--to terminate the Dealer Agreement as to Delta? Less an issue than a rhetorical question, the answer is a resounding no! 38 The fact remains that, as a direct result of the sale by IH to Case, Delta has been terminated as a dealer--without cause and through no fault of its own. IH cannot avoid its obligations under the dealer agreement by a sale of the business; because IH's sale caused Delta to be terminated as a dealer in violation of the Dealer Agreement, IH has breached that agreement. 39 Nevertheless, IH argues speciously here as it did in Groseth and Wendt, that section 2 of the dealer agreement allows IH to discontinue its agricultural equipment business without liability to its dealers. IH contends that the holdings of Groseth and Wendt--that section 2 allowed IH to discontinue some, but not all, of its agricultural equipment lines--are illogical. In support of its argument, IH poses a hypothetical example in which IH phases out a different line of agricultural equipment every six months until only one line, for which there is no market in Delta's area, remains. IH asserts that, as far as Delta is concerned, this scenario does not differ from one in which IH discontinues all of its agricultural equipment. That proposition is so ludicrous it will not be dignified with more than a flat rejection. 40 IH also argues that if, under Groseth and Wendt, IH is obligated to continue to manufacture at least one line of agricultural equipment, there is no guidance under the dealer agreement as to which line that must be. IH's arguments so miss the mark that they approach frivolity, failing to recognize (or accept) the distinction between a true termination of the agricultural equipment business (i.e., the cessation of the manufacture of IH agricultural implements by anyone) and the sale of that continuing business to an erstwhile competitor. In the former situation, there would be no more IH agricultural equipment products manufactured by anyone to be distributed to anyone for sale to anyone. In the latter situation, IH products would continue to be manufactured, distributed and sold. It is clearly the latter situation with which we are faced here and which we hold constitutes a breach of the dealer agreement by IH when it results in the loss of dealership by a former dealer who has not breached the Dealer Agreement or otherwise given IH or IH's successor cause to terminate the dealerships. 41 The key inquiry in this case is better understood if we ask not whether IH ceased to manufacture and sell agricultural equipment, but whether IH's agricultural equipment ceased to be manufactured and sold. If only the former had occurred, IH may have been off the hook. But that simply is not what happened, or at least not all that happened. IH farm implements continued to be manufactured and distributed without interruption, so IH remained obligated to Delta. It did not wind down and terminate its manufacture and sale of agricultural equipment; it did not close factories; it did not dispose of land, buildings, machinery, raw materials, inventory, and the like, merely for scrap or salvage value or in some vast going out of business sale. It made a unitary transfer of those and all other elements of its farm implement business. 42 Even if we assume without deciding that the decision of IH to dispose of its agricultural equipment division was for bona fide business purposes, that disposition still did not produce a termination of such business. Irrespective of the tags and labels that IH and Case placed on the asset purchase of that business--whether for tax purposes, labor relations, or other reasons totally irrelevant to this consideration--that transaction was nonetheless a global sale of a going business, qua going business, carrying with it not merely tangible corporeal assets but all intangible, incorporeal attributes of the going business as well--not the least of which was the International Harvester brand name. 43 We hold that IH is responsible to Delta for all damages it suffered as a result of the loss of its dealership and thus its lawful right to sell and service IH equipment and parts in its designated trade area. IH breached the Dealership Agreement by transferring its ongoing farm implement business to Case in a manner that purported to vest Case with the legal right to terminate Delta's farm implement dealership despite the total absence of cause. In so doing IH layed itself open to respond in damages to Delta for any net losses incurred in the event Case should terminate Delta without cause as defined in the Dealer Agreement and without compensating Delta fully for that breach of the Dealer Agreement. Issues of indemnity or contribution between IH and Case for causing IH thus to respond in damages are not before us; but clearly IH is obligated to Delta for its losses not otherwise compensated for by Case. 44