D. BROCK HORNBY, District Judge.
This is a lawsuit over whether a financing company fraudulently induced an ice cream manufacturer to sign an equipment lease by misrepresenting that it had estimated an end-of-term buyout value for the leased equipment and by providing that* value to the ice cream manufacturer to make the offered lease appear commercially competitive. I conducted a bench trial on April 13-15, 2010. These are my findings of fact and conclusions of law.
1. House of Flavors is an ice cream maker, incorporated under Michigan law, with its corporate headquarters in Maine and its manufacturing plant in Michigan. House of Flavors is a subsidiary of Protein Holdings, Inc.
2. At all relevant times, Whitcomb Gallagher was and is the president of House of Flavors and the president and
3. Tetra Financial Group ("Tetra") is a Utah limited partnership in the business of equipment leasing. TFG-Michigan is Tetra's operating entity in Michigan.
4. Scott Scharman was the executive vice president of Tetra in 2005-2006 and is currently its chief executive officer.
5. Ryan Secrist was a senior vice president (sales manager) at Tetra in 2005-2006 and is currently Tetra's executive vice president.
6. Greg Emery was a national account executive (salesman) at Tetra in 2005-2006 and is currently a senior vice president at Tetra.
7. In 2005, House of Flavors had production problems because ice cream containers at the bottom of pallets were compacting due to the ice cream being insufficiently hardened (frozen).
8. As a result, House of Flavors decided to acquire an additional ice cream hardening system to remedy the problem.
9. Coincidentally, in October 2005, Tetra's Emery cold-called Sarah Holmes, vice president of finance at House of Flavors, to inquire whether there were possible projects at House of Flavors that Tetra might finance.
10. Holmes told Emery about the plan to acquire a hardening system and asked Emery about Tetra's ability to structure different kinds of financing deals. Emery said that Tetra could offer financing through either a capital lease with a fixed buyout or an operating lease with end-of-term options to purchase the equipment, extend the lease, or return the equipment.
11. In October 2005, House of Flavors met with its bank and decided that, given the soft costs related to installation of a hardening system, a bank loan (which under its bank term loan agreement was limited to financing of hard assets) was not feasible.
12. Thereafter, House of Flavors sought to finance the project through a lease with either Tetra or another financing company, Orix.
13. On about October 18, 2005, Gallagher began discussing House of Flavors's financing needs with Tetra's Emery. Secrist subsequently joined the negotiations.
14. Gallagher explained that he wanted to develop a long-term business relation with a leasing company.
15. Gallagher told Emery and Secrist that House of Flavors intended to buy the hardening system at the end of any lease.
16. Secrist told Gallagher that for tax reasons Tetra could not put a fixed buyout price into a lease.
17. On October 28, 2005, Tetra sent Gallagher a draft letter of intent to fund House of Flavors's acquisition of a spiral tunnel hardening system for $1,500,000 by means of a five-year operating lease. See Letter of Intent from Whitcomb W. Gallagher to Tetra (Oct. 28, 2005) (Def.'s Ex. 2) ("Letter of Intent").
18. Gallagher called Emery and Secrist to discuss the Letter of Intent and told them that the twenty-percent buyout cap was not acceptable to him and that he needed an agreement about the end-of-term purchase price.
19. Gallagher explained that he previously had an equipment lease in which the buyout price had not been set and that he ended up paying much more than anticipated.
20. In response, Emery and Secrist told Gallagher that the twenty percent figure was a cap, but that most deals with Tetra closed with a buyout in the ten-to-twelve percent range and that Tetra could probably accomplish the same for House of Flavors.
21. In early November 2005, House of Flavors learned that a tri-tray hardening system would be auctioned in Maryland.
22. On November 10, 2005, the chief operating officer of House of Flavors attended the auction in Maryland and purchased the system for $105,000.
23. On November 15, 2005, Gallagher informed Emery that the equipment had been purchased and, at Emery's request, sent him a document detailing three funding scenarios, each of which included both hard costs for the tri-tray system and associated equipment and soft costs for transportation, assembly, and installation of the system in the House of Flavors plant.
24. To prepare for a later conference call with Secrist and Emery, Gallagher created agenda notes reflecting his need for a fixed buyout price. See E-mail from Emery to Gallagher, with Notes (Nov. 15, 2005) (Pl.'s Ex. 6).
25. Gallagher wanted a buyout price from Tetra in order to compare Tetra's financing package with financing offered by Orix.
26. On November 18, 2005, during the scheduled conference call, Gallagher pressed Secrist and Emery about locking down a buyout price and repeated his concerns with the twenty percent cap in Tetra's proposal. Secrist and Emery explained to Gallagher that the twenty percent cap had been included in the Letter of Intent because any number less than twenty percent would preclude Tetra from reaping certain tax advantages.
28. In response to Gallagher's concerns about the end-of-term price, Secrist modified a pre-existing side letter from a different transaction and sent it to Gallagher on November 22, 2005. This letter stated:
Letter from Secrist to Gallagher (Nov. 22, 2005) ("first side letter") (Joint Ex. 2).
29. When Secrist sent the first side letter, he and Emery knew that no one at Tetra had estimated or otherwise calculated an end-of-term value for the leased equipment either by appraising the equipment or by determining Tetra's cost of funds and necessary profit margin.
30. When Gallagher received the first side letter, he was surprised by the estimate at ten percent of cost rather than the twelve percent that he had discussed with Secrist, but he surmised that Tetra had re-run its numbers and had determined that it could offer a better deal.
31. Shortly after receiving the first side letter, Gallagher signed the Letter of Intent and sent it to Tetra.
32. Tetra later told Gallagher that the deal could not go forward without additional security.
33. Gallagher then contacted Orix and asked Orix to put together a new proposal.
34. Thereafter, Gallagher had one or two phone conversations with Secrist in which Secrist told him that he could not get the deal approved with a ten percent
35. On December 22, 2005, Tetra informed House of Flavors by e-mail that the financing had been credit-approved on the condition that House of Flavors provide a security deposit and a letter of credit. Tetra stated that "[a]ll other terms and conditions of the initial proposal will remain the same." E-mail & Attach. from Secrist to wgallagher@proteingroup. com (Dec. 22, 2005) (Joint Ex. 3).
36. Shortly after receiving the revised terms from Tetra, Gallagher—apparently not yet content with the Tetra deal—told Holmes that he would "giv[e] Orix the go[-]ahead." E-mail from Gallagher to Holmes (Dec. 22, 2005) (Def.'s Ex. 31). But House of Flavors's deal with Orix never was submitted for credit approval.
37. On January 5, 2006, Gallagher informed Secrist that House of Flavors accepted Tetra's revised terms and requested that Tetra begin preparing lease documents.
38. Shortly thereafter, also on January 5, 2006, Emery sent Gallagher a revised side letter ("second side letter") from Secrist, identical to the first side letter except that it referred to Tetra's December 22, 2005 e-mail and stated that Tetra estimated an end-of-term value at twelve percent of the equipment's original cost.
39. In fact, as Secrist knew, contrary to the side letter, no one at Tetra had estimated or otherwise calculated an end-of-term value for the leased equipment by January 5, 2006.
40. In March 2006, Tetra and House of Flavors executed a lease, dated January 13, 2006, that provided:
Contrary to the Letter of Intent and the side letters, the lease did not include either a fixed purchase price or a cap on a purchase price. No provision in the lease provided for transfer of ownership to House of Flavors at the end of any extension period. Nevertheless, Secrist and Scharman (Tetra's CEO) testified that, if House of Flavors did not purchase or return the tri-tray system at the end of the base lease term, ownership of the equipment would transfer automatically from Tetra to House of Flavors after eighteen months (a twelve-month extension and a six-month extension).
42. From March to August 2006, Tetra funded the installation of the tri-tray system in the House of Flavors plant at a cost of $1,435,130.36.
43. On August 30, 2006, House of Flavors executed a bill of sale of the tri-tray system, transferring ownership of the equipment to Tetra. See Bill of Sale (Joint Ex. 15).
44. Also on August 30, 2006, House of Flavors and Tetra executed an amended lease schedule that incorporated by reference the terms and conditions of the Master Lease Agreement and provided for a thirty-six month base lease term, total funding of $1,435,130.36, and monthly payments of $43,972.39 (plus tax). Am. & Restated Lease Schedule No. 1 (Def.'s Ex. 11).
45. Holmes prepared financial statements for House of Flavors's internal use reflecting the twelve percent end-of-term value,
46. In August 2008, Gallagher approached Tetra about an early termination of the lease by means of a buyout.
47. To provide Gallagher with a buyout price, Scharman reviewed Tetra's documentation file for the House of Flavors transaction. The file did not include the first or the second side letters about end-of-term value that Secrist had sent Gallagher.
48. On August 28, 2008, Tetra informed House of Flavors that House of Flavors could buy the tri-tray system for $542,958.26, approximately forty percent of the original cost of the equipment. See E-mail
49. Gallagher asked Secrist why Tetra was not offering a price at twelve percent in accordance with the second side letter, and Secrist stated that he did not have the side letter. Gallagher then sent him a copy.
50. When Scharman asked Secrist about the status of the House of Flavors account, Secrist told him that Gallagher was frustrated with the forty percent offer and told Scharman about the side letters.
51. Scharman did not investigate the circumstances that led Secrist to send either the first or the second side letter to Gallagher.
52. Tetra subsequently offered a buyout option at thirty-five percent and later at thirty percent of cost, but Gallagher refused to budge from the twelve percent estimate of the second side letter.
53. On January 30, 2009, House of Flavors notified Tetra of its intention to purchase the equipment at twelve percent of cost pursuant to the side letter of January 5, 2006. Letter from Whitcomb Gallagher to Tetra Re: Master Lease Agreement (Jan. 30, 2009) (Def.'s Ex. 29).
54. Tetra did not formally respond to House of Flavors's January 2009 attempt to exercise the option to buy at twelve percent of cost.
55. In February 2010, House of Flavors incurred additional financing fees of approximately $13,000 to maintain its $502,296 letter of credit as a guaranty on the Tetra lease.
56. As of April 14, 2010, House of Flavors had paid Tetra $1,769,319 pursuant to the lease.
1. House of Flavors is a Maine corporation; Tetra is a Utah limited partnership; more than $75,000 is at stake. Jurisdiction is therefore based on diversity of citizenship. 28 U.S.C. § 1332(a). The lease provides, and the parties agree, that Utah law governs the substantive issues.
2. Under Utah law, to prevail on its fraudulent inducement claim, House of Flavors must show by clear and convincing evidence that Tetra made a representation of a "presently existing material fact," that was false and that Tetra knew to be false (or that it made recklessly, knowing that there was insufficient knowledge upon which to base such a representation), for the purpose of inducing House of Flavors to act upon it; and that House of Flavors, acting reasonably and in ignorance of its falsity, did in fact rely upon it and was thereby induced to act to its injury and damage. Daines v. Vincent, 190 P.3d 1269, 1279 (Utah 2008) (citation omitted).
3. In November 2005, Secrist (and Emery) represented to Gallagher that Tetra typically could close lease-finance deals at buyout prices of between ten and twelve
4. Whether Tetra had in fact run the numbers on the deal and could provide Gallagher with an end-of-term value or buyout price that he could use in valuing the Tetra deal, as compared to that of a competitor, was a then presently existing material fact.
5. Secrist and Emery knew that their assertion was false because they knew that Tetra had not estimated an end-of-term value or buyout price for the House of Flavors deal by either reviewing or appraising the equipment or calculating the cost of funds. Their representation that Tetra had calculated an end-of-term value or buyout price at ten (or twelve) percent of cost was knowingly false.
6. Secrist and Emery knew both that Gallagher wanted to buy the tri-tray system at the end of any lease and that he wanted a solid buyout price from Tetra in order to value the deal and compare it to other offers. Gallagher had told them that he could not agree to a deal without a buyout number. Secrist and Emery told Gallagher that Tetra had estimated the buyout price in order to persuade him to sign a lease with Tetra rather than with a competitor.
At trial, Secrist and Emery testified that Gallagher came up with a twelve percent value on his own and that Gallagher knew that no one had actually appraised the equipment or "estimated" its cost. I find this testimony not credible. Gallagher testified that he understood that to evaluate the transaction, Tetra would analyze the economics of the deal to determine a buyout price that guaranteed Tetra an acceptable profit. Gallagher made clear that he wanted to know that price so that he could value the deal against the competition. Whatever the phrase "estimated an end of term value of ten percent" means in the first side letter, it certainly does not mean that Tetra had done nothing. Rather, at a minimum, the plain language of both side letters states that Tetra had done a calculation of some kind. Tetra's witnesses could not explain why Gallagher would request a financially and legally meaningless estimate. Tetra also could not explain why it would provide such a letter—especially considering that Secrist and Emery knew that if Tetra provided a nominal buyout price, it would probably not be able to maintain its preferred tax treatment of the lease. By contrast, Gallagher convincingly testified that he was worried, given prior experience, that House of Flavors could end up on the hook for more than it bargained for and that he needed a reliable estimate from Tetra of the lease's total cost. Gallagher may have floated the idea that to be competitive, Tetra had to offer a buyout price in the ten-to-twelve percent range. However, I find that the evidence is overwhelming that Secrist and Emery gave Gallagher the fraudulent end-of-term value/price estimate to get him to finance the project with Tetra.
7. Secrist and Emery did not tell Gallagher that Tetra had not actually calculated a buyout price; Gallagher did not know that Secrist had simply recycled an existing side letter in sending the "estimate." In context, the side letter appeared genuine. It referred to a previous conversation and to a list of property to be purchased.
8. As a result of Tetra's fraud, House of Flavors entered into a lease contract by which it has spent, or will have to spend, more money than it otherwise would have if the fraud had not occurred.
9. Tetra argues that as a matter of law, Gallagher could not have reasonably relied on Secrist's and Emery's false oral representations about their estimation of the buyout price given Tetra's later, contradictory written statements both in the side letters and in the lease itself. See Def.'s Post-Trial Br. at 13 (Docket Item 92). Tetra relies on Gold Standard v. Getty Oil Co., 915 P.2d 1060, 1068 (Utah 1996), where the Utah court stated that "a party cannot reasonably rely upon oral statements by the opposing party in light of contrary written information," id. at 1068 (citation omitted). But the Utah court has also held more recently that reasonable reliance on oral representations that conflict with written materials depends on the "facts of the individual case." See Youngblood v. Auto-Owners Ins. Co., 158 P.3d 1088, 1096 (Utah 2007).
I conclude that Gallagher reasonably relied on Secrist's and Emery's oral and written representations that Tetra had calculated an end-of-term value/buyout price based on the information that he had provided.
10. Gallagher relied on the end-of-term value/buyout price provided by Tetra to determine how much the lease would cost House of Flavors and considered the Tetra deal to be a viable option because he could calculate a total cost. He testified credibly that he would not have signed the lease with Tetra without assurances about the final cost of the lease. House of Flavors's internal bookkeeping also reflects that the company had relied on Tetra's representations as to the total cost of the transaction.
11. Tetra argues that House of Flavors has not shown by clear and convincing evidence that it has been injured. Def.'s Post-Trial Br. at 13-14.
12. I therefore conclude that House of Flavors has proven all the elements of fraudulent inducement under Utah law.
13. Under Utah law, the elements of estoppel must be proven by a preponderance of the evidence. See Andreason v. Aetna Cas. & Sur. Co., 848 P.2d 171, 176 (Utah Ct.App.1993).
14. House of Flavors pleaded promissory estoppel, which applies when "a party promises that things will be a given way in the future, knowing at the time of the promise all of the material facts, but is ultimately wrong, and where the other relied on that promise in acting." Youngblood, 158 P.3d at 1092. To prevail on a promissory estoppel claim, a plaintiff must show that "(1) [it] acted with prudence and in reasonable reliance on a promise made by the defendant; (2) the defendant knew that the plaintiff had relied on the promise which the defendant should reasonably expect to induce action or forbearance on the part of the plaintiff or a third person; (3) the defendant was aware of all material facts; and (4) the plaintiff relied on the promise and the reliance resulted in a loss to the plaintiff." Id. (citation omitted).
15. House of Flavors has not shown that Tetra ever promised that it would sell the equipment at a buyout price of twelve percent of cost. Instead, the oral and written commitments and assurances disclaim any such promise to sell. The misrepresentation here concerned not a future fact but a presently existing fact.
16. I conclude therefore that House of Flavors has not proven promissory estoppel.
17. House of Flavors has chosen not to seek money damages and instead seeks equitable relief such as rescission or specific performance. Pl.'s Trial Br. at 1 (Docket Item 65) (rescission); Pl.'s Post-Trial Br. at 4 (Docket Item 93) (specific performance of buyout at twelve percent of cost); Compl. at 9 (Prayer for Relief for Fraud) (Docket Item 1) ("Plaintiff demands. . . such relief and remedy for fraud as the Court may deem to be appropriate. . . and for such other and further relief as the Court may deem just and proper.").
18. The Utah Uniform Commercial Code ("UCC") provides: "Rights and remedies for material misrepresentation or fraud include all rights and remedies available under this chapter [concerning leases] for default." Utah Code Ann. § 70A-2a-505(4) (emphasis added). One of those remedies is that the lessee may "cancel the
19. Tetra argues that principles of rescission would be extremely difficult to apply here because, to unwind the transaction completely, House of Flavors would need to tear out all the equipment that it did not possess prior to the lease and "turn over to [Tetra] all of the benefits House of Flavors enjoyed by virtue of the use of all the equipment." Def.'s Post-Trial Br. at 9. Tetra maintains that fully unwinding the transaction would require "extensive discovery and expert opinion regarding the value of the property and both the nature and the extent of the benefits it conferred on House of Flavors as well as the value of those benefits." Id.
Applying principles of rescission in this case is not so complicated, however, especially given the flexibility of the UCC's remedy provisions. Tetra loaned money— $1,435,130.36—to House of Flavors through a lease financing transaction. The benefit to House of Flavors was the value or cost of borrowing that money. In exchange, House of Flavors conveyed title to the ice cream hardening system to Tetra and paid Tetra a total of $1,769,319 in monthly rental payments for the thirty-six month base term and part of a twelve-month extension period.
The remaining question is how much House of Flavors should recover of the rent or security that it has paid to Tetra. The UCC allows a defrauded party to recover "so much of the rent and security as has been paid and is just under the circumstances." Utah Code Ann. § 70A-2a-508(1)(b). To determine what is just here, I consider that if the remedy were common law rescission, House of Flavors would have to return the loan of $1,435,130 to Tetra and pay Tetra "the fair rental value" or interest on the loan. Dugan, 724 P.2d at 957. House of Flavors has already paid back the principal of the loan in full. The question is thus how much interest House of Flavors should pay on the loan. House of Flavors notes that Gallagher testified that Orix offered a financing package with a 7.67 percent interest rate on December 22, 2005 (with a one dollar end-of-term buyout option) and argues that I should treat the Orix rate as a reasonable market rate of interest. Pl.'s Post-Trial Br. at 7 (Docket Item 93). However, I observe that House of Flavors did not successfully consummate the Orix deal at 7.67 percent. At trial, moreover, Scharman testified that Tetra borrowed money for this transaction from Republic Bank at 9.5 percent interest, a higher amount. It is reasonable to infer from the trial testimony that Tetra, as a leasing company with a regular relationship with a syndicate bank, could borrow on better terms than House of Flavors, which was highly leveraged in 2005-2006. I conclude that 7.67 percent interest, therefore, is too low an interest rate for House of Flavors to pay.
20. Tetra argues that House of Flavors waived any claim to rescission-type relief by retaining the "benefits of the lease after discovering the alleged fraud in August 2008, by declining to assert a rescission claim in its January 2009 complaint, and by failing to bring a claim for rescission until days before trial in March 2010." Def.'s Post-Trial Br. at 4. But in its Complaint, House of Flavors requested all available relief that Utah law provides for fraud. See Compl. at 9 (Prayer for Relief) (demanding "such relief and remedy for fraud as the Court may deem to be appropriate . . . and for such other and further relief as the Court may deem just and proper."). Tetra was therefore on notice that rescission was a possible outcome in this case. Nevertheless, Tetra argues that under Utah law, "a party waives his right to rescind a contract if he remain[s] in possession of the property received by him under the contract" or "if he uses the property which was the subject of the sale after he discover[s] . . . the ground for rescission." Def.'s Post-Trial Br. at 4 (quoting Cont'l Ins. Co. v. Kingston, 114 P.3d 1158, 1161-62 (Utah Ct.App. 2005)). The Utah cases cited by Tetra are not persuasive here, because House of Flavors all along was trying to enforce what it believed the contract to be; if it had succeeded, it would not have sought rescission. This is not a case where House of Flavors's conduct was inconsistent with seeking the alternate remedy of rescission if it could not succeed on its contract claim. Utah case law instructs me to determine whether a party has waived a right to rescission by "consider[ing] all of the relevant facts" and to base my decision upon the "totality of the circumstances." Cont'l Ins. Co., 114 P.3d at 1161 (citation omitted). Here, considering all the facts of the case, I find that House of Flavors never intentionally gave up the right to seek rescission for fraud.
For the reasons discussed herein, it is
1. Judgment shall enter in favor of House of Flavors on its fraud claim.
2. Judgment shall enter against House of Flavors on its promissory estoppel claim.
3. The lease is hereby cancelled.
4. Within thirty (30) days of this Order, Tetra shall:
On direct examination by Tetra, Scharman offered similar testimony.
