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Gritz Harvestore Inc. v. A. O. Smith Harvestore Products Inc.

decided: August 5, 1985.

GRITZ HARVESTORE, INC., PLAINTIFF,
v.
A. O. SMITH HARVESTORE PRODUCTS, INC., DEFENDANT-APPELLEE, V. L. H. GRUETZMACHER, ET AL., THIRD-PARTY DEFENDANT-APPELLANT



Appeal from the United States District Court for the Western District of Wisconsin. No. 82-C-506(c) -- Barbara B. Crabb, Judge.

Cummings, Chief Judge, Eschbach, Circuit Judge, and Swygert, Senior Circuit Judge.

Author: Swygert

SWYGERT, Senior Circuit Judge.

In this diversity action, Gritz Harvestore, Inc. ("Gritz") sued A. O. Smith Harvestore Products, Inc. ("Harvestore") for terminating its dealership. Harvestore counterclaimed against the dealership, Gritz, and its guarantors, Carmen, Elaine, and Jim Gruetzmacher, for the value of goods that had been shipped to Gritz, but that had never been paid for. Carmen and Elaine Gruetzmacher stipulated to a consent judgment. Carmen also agreed to indemnify Jim Gruetzmacher, the appellant in the instant case, for any liability that he might incur to Harvestore. The appellant contested liability and argued that his guaranty was unenforceable. After hearing all of appellant's evidence, the district judge disagreed. She therefore entered judgment against the appellant in the amount of $561,254.72 plus $261.09 per day interest from December 31, 1983, which represents a principal debt of $332,139 plus interest. Jim Gruetzmacher appealed to this court, and we reverse and remand for further proceedings.

I

In 1970 the appellant and his brother Carmen sought a silo dealership from Harvestore. As a condition to receiving the dealership, the brothers were each required to sign an absolute and unconditional personal guaranty in favor of Harvestore for any debts owed Harvestore by the dealership. The brothers executed these guaranties on May 27, 1970. The appellant testified that he only "glanced" at the guaranty before signing it and that he did not retain a copy of it; he claimed he was not aware of any written revocation provision.

On June 12, 1970, Gritz and Harvestore executed a dealership agreement by which Gritz became Harvestore's dealer in a central Wisconsin territory. For a capital investment of $245.00, the appellant received 49% of the stock of Gritz; Carmen, who invested $245.00, as well as land, buildings, and equipment in the dealership, received 49% of the stock; Carmen's attorney received two percent of the stock. The brothers operated the dealership harmoniously for approximately three years. In 1974 the brothers' relationship, however, began to deteriorate. Without consulting the appellant, Carmen exchanged a part of Gritz' market territory of another Harvestore dealership, Fox Harvestore, also located in central Wisconsin. Carmen was the sole owner of Fox Harvestore, a dealership that Harvestore subsequently terminated in 1976. The appellant objected to the exchange, claiming that it reduced Gritz' market potential by three to four percent. The appellant never informed Harvestore, however, about his objections. Harvestore, although aware of the exchange, did not object.

The disagreement between the brothers continued. In 1975, with Harvestore's consent, Carmen involuntarily terminated his brother from his positions as general manager, officer, director, and employee of Gritz. The appellant subsequently commenced a lawsuit against Carmen alleging gross and fraudulent mismanagement and seeking, among other things, to have the Gritz franchise divided between himself and Carmen. In the same year, Harvestore reduced Gritz' credit line to zero. That reduction lasted until 1977, when at Carmen's request, it was reinstated. As a condition to reinstatement, Harvestore requested additional collateral from Gritz and Carmen and Elaine, but not from the appellant. Harvestore also requested additional guaranties from Carmen, Elaine, and the appellant and his wife, LaVon. Harvestore claimed it requested the guaranties because in 1970 it had unintentionally failed to secure additional guaranties from each of the brothers' wives. Carmen and Elaine signed the new guaranties, but the appellant and his wife refused because the appellant believed that these guaranties were new and were meant to replace the 1970 guaranty that was no longer enforceable.

The appellant contacted a lawyer, Gaar Steiner, to help him resolve Harvestore's request for additional guaranties. He forwarded Harvestore's letter requesting the additional guaranties to Steiner, but he threw away the copies of the blank guaranties. Steiner telephoned Harvestore's attorney, David Sullivan, to inform him that neither the appellant nor his wife would execute new guaranties. He also told Sullivan that he thought the appellant's 1970 guaranty was unenforceable because of changed circumstances. Sullivan replied that he was "probably right," but he never specifically agreed that it was unenforceable. Sullivan agreed, but failed, to send Steiner a copy of the 1970 guaranty. Steiner made no effort to follow up his request for a copy of the 1970 guaranty, nor did he attempt to revoke it. During that same year, the appellant's shareholdings in Gritz were involuntarily diluted from 49% to 14%.

In November 1980, after protracted negotiations, Carmen and his brother settled the lawsuit originally brought in 1975. The appellant agreed to surrender all of his stock; in exchange, Carmen agreed to pay his brother approximately $300,000, with the payments to be made in installments. Only $200,000 has been paid thus far. Carmen and Gritz have defaulted on the remaining payments. The appellant also obtained a release from all liability, past and future, for the debts of Gritz. Harvestore was aware of the terms of this settlement.

In January 1981 Harvestore decided to terminate the Gritz franchise. Harvestore informed Gritz by letter dated January 16 that as of April 20, 1981, the franchise would be terminated. As of January 30, 1981, Gritz' outstanding debt with Harvestore was $356,909. In late February Harvestore offered to purchase the Gritz franchise for approximately $1.5 million, including $500,000 for goodwill in the form of a covenant not to compete.

The termination date was subsequently revised to June 30, 1981.*fn1 During June 1981 Carmen entered into an agreement to sell the rights to two-thirds of Gritz' dealership territory to neighboring dealerships. It is unclear from the record when these sales actually were completed.*fn2 Carmen received approximately $500,000 in "blue sky" (value above the actual asset value of the dealership) from both sales. Harvestore was required to and did approve these sales, but it did not condition its approval on the use of the sales proceeds to repay Gritz' outstanding debt to Harvestore. Harvestore involuntarily terminated the remaining one-third of the dealership and assigned it to a new dealer on June 30, 1981 (July 23, 1981). The appellant was never informed about any of these sales of territories, although he may have been aware of the efforts to sell Gritz.

Notwithstanding the fact that Harvestore knew that it was going to terminate the dealership, it continued to sell goods to Gritz on credit through September 1981. The promissory notes for which Jim Gruetzmacher was held liable -- a face amount of $332,139 -- were all executed after the initial termination date of April 30, 1981.*fn3 Apparently, the date of the making of each promissory note corresponded to the date on which Harvestore's products paid for by the note were shipped to Gritz. According to the dates and amounts contained in the notes, Harvestore shipped $137,410 worth of goods to Harvestore between April 30 and June 30, 1981; and it shipped $194,718.07 worth of goods from July 1 to September 1, 1981.*fn4 Thus, even after Harvestore had involuntarily terminated the last one-third of the dealership on June 30, 1981 (July 23, 1981), it continued to ship approximately $195,000 ($130,000) worth of goods to Gritz. More than $100,000 of this debt was incurred after Carmen, on behalf of Gritz, filed suit against Harvestore for wrongful termination of the franchise. Because Gritz was no longer in operation, it is unclear what disposition was made of the goods shipped to Gritz. Carmen has spent the $500,000 "profit" he received from the sale of the dealership; thus, Carmen will not be able to fully indemnify the appellant for any liability he incurs on the 1970 guaranty.

Gritz' outstanding end-of-the-month balances to Harvestore during the relevant period were:

December 1980 $372,739

January 1981 356,909

February 1981 ...


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