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05/04/88 Mbc, Inc., Plaintiffs and v. Space Center Minnesota

May 4, 1988





Development Company, Counterdefendant)

532 N.E.2d 255, 177 Ill. App. 3d 226, 126 Ill. Dec. 570 1988.IL.663

Appeal from the Circuit Court of Cook County; the Hon. James C. Murray, Judge, presiding.


JUSTICE FREEMAN delivered the opinion of the court. RIZZI, J., concurs. JUSTICE McNAMARA, Dissenting.


This litigation arises from the sale of a commercial warehousing business, Crooks Terminal Warehouse, by plaintiff, MBC, Inc. , to defendant Space Center Minnesota, Inc. . The business consisted of three large buildings in and around Chicago used as distribution centers by major food products manufacturers and retailers. After a bench trial, the circuit court of Cook County made written findings of fact and Conclusions of law on which it based its judgment for MBC.

On appeal, SCM contends: (1) the trial court erred in concluding that SCM had waived a condition precedent to its performance by proceeding to close the transaction; and (2) MBC's damages should be reduced due to its failure to exercise reasonable diligence to mitigate damages. MBC cross-appeals, contending that the trial court erred in failing to enter judgment against SCM's corporate parents and that its damages should be increased.

The parties' contract, dated November 10, 1980, provided for the purchase of the assets of the business and a sublease of, and partial purchase option on, the real estate it occupied. The real estate was owned by the Mortimer Development Company, the corporate parent of MBC. The leases and sale were closed on December 31, 1980. SCM suspended part of its performance one month later, stating that it was concerned about large shortages of customer goods. After negotiations failed to resolve the problem, SCM suspended all payments under the contract on March 1, 1981. On March 20, 1981, SCM sent MBC notice of its rescission of the contract, effective March 31, 1981. SCM cited lost goods and the unhappiness of customers whose claims therefor had not been settled by MBC prior to the closing as reasons for the rescission. MBC declined the return of the business, stating that under the lease it was entitled to the return of empty buildings. Thereafter, SCM consolidated into one building the goods remaining after several of its larger customers departed, leased that building from MBC at a higher rental rate than provided in the original sublease and surrendered the two empty buildings to MBC.

On April 2, 1981, MBC filed a forcible entry and detainer action against SCM. The trial court awarded MBC possession of the two empty buildings on July 2, 1981. MBC's amended complaint sought, inter alia, sums owed by SCM under the contract for equipment and a noncompetition covenant and damages for breach of the sublease. SCM's counterclaim sought, inter alia, rescission of the contract on grounds of misrepresentation, failure to disclose, and fraudulent concealment of, material facts regarding claims by warehouse customers for inventory shortages existing before the closing date. The counterclaim also alleged that the misrepresentations and failure to disclose constituted a breach of a condition precedent, thereby relieving SCM of its duty to perform under the contract.

In paragraph 14n of the contract, MBC represented and warranted that to the best of its knowledge there were sufficient goods in the warehouse to satisfy its obligations under existing warehouse receipts and storage contracts except for those situations listed in exhibit G to the contract. It also represented and warranted, inter alia, that: (1) to its knowledge there were no suits pending or threatened in excess of $15,000 against it by any warehouse customers other than the matters listed in exhibit G, which were adequately covered by insurance; and (2) to the best of its knowledge no customers were planning to leave. Paragraph 17a made the truth of both parties' representations/warranties as of the closing date a condition precedent to the closing of the sale and required the exchange of certificates to that effect.

Exhibit G-2 to the contract provided, inter alia, that: (1) shortages in the inventory of Borden Company's products in the alleged amount not in excess of $250,000 had recently arisen; (2) there was an alleged $38,000 shortage in the seafood division of Castle & Cooke's products; and (3) as a result of a November 1, 1980, audit there might be a shortage in the Hoover Company's inventory which MBC had not yet audited.

In paragraph 15f, SCM covenanted that it was to use its best efforts to investigate and inspect MBC's business and property within 21 days of November 10 to determine the accuracy of MBC's representations, warranties and covenants. For that purpose, in paragraph 15f, MBC also gave SCM full access during normal business hours from November 10 to December 31, the closing date, to all of its property, books, contracts and records and agreed to furnish SCM with all information concerning the business which SCM reasonably requested. Paragraph 15f further provided that, if SCM's investigation resulted in findings materially inconsistent with MBC's representations, warranties and covenants, it was to give MBC a detailed, written list of its findings within the 21-day period to allow MBC time to cure any breach prior to closing. Immediately thereafter, paragraph 15f also provided: "This provision shall not limit any remedies . . . available to buyer in the event a breach is found in [MBC's] representations, warranties or covenants . . . after expiration of" the 21-day period.

SCM first contends it did not waive the condition precedent that MBC's representations of the sufficiency of customer goods be true as of the closing date. The findings and Conclusions of the trial court at issue are that: (1) SCM, rather than making a best-efforts investigation of possible shortages of which it was apprised, chose to rely on MBC's volunteering its information concerning the shortages without complete inquiry of MBC's records, customers or insurance carriers; (2) it was a reasonable inference from SCM's conduct that the "announced possible shortages were not material to the bargain until after the transaction was closed"; and (3) SCM waived the subject condition precedent by closing the transaction after being put on notice of possible shortages in customer goods.

SCM cites a plethora of facts allegedly showing the materiality to it of the condition precedent and that it had neither the actual nor constructive knowledge of the truth of MBC's representations necessary for a finding of waiver of the condition. Likewise, MBC cites a plethora of facts allegedly showing that the condition was immaterial to SCM or that it had either the actual or constructive knowledge necessary for a finding of waiver. For the sake of brevity, we will cite and discuss only those facts, as well as the law, which we believe are dispositive of this issue.

SCM does not appeal from the trial court's ruling that MBC committed no fraud in respect of the transaction between the parties. However, we believe the factual findings and the law upon which the trial court relied for that ruling are also relevant to the issue whether SCM waived the subject condition precedent.

In addition to the foregoing factual findings and legal Conclusions, the trial court also found the following with respect to the shortages in customer goods: (1) it was unrefuted that the preclosing shortage in the Borden account never exceeded $250,000 and that MBC did not learn more about any shortages in the Hoover account than it disclosed in exhibit G-2, i.e., that "there may be a shortage" in that account; (2) there was no proof that any shortages in Jewel's or Folgers' account arose from inventories taken prior to closing; (3) one of MBC's inventory clerks was notified of a possible claim by Castle & Cooke for a shortage of 5,000 cases of tuna fish on December 1, 1980; (4) Arthur Klawans, the president of the warehouse under both MBC and SCM informed Roger Carlson, the president and a director of SCM, of the Castle & Cooke's 5,000-case shortage of tuna fish on December 1, 1980, although Carlson denied receiving the call; (5) John Pastor, an employee of the warehouse under both MBC and SCM, informed James Keyes, an employee of SCM, of a possible shortage of as much as 5,000 cases in Castle & Cooke's inventory that might be due to a computer error, but SCM did not investigate the matter further; (6) Keyes admitted that Klawans might have discussed this shortage with him on December 9 and that Pastor did discuss it with him on December 22; (7) Keyes also informed Carlson of this shortage after his Discussion with Pastor but Carlson expressed no concern over it; (8) MBC made its files, inventories, correspondence, worksheets, count sheets and inventory records available to SCM before closing.

Based on these factual findings, which SCM does not contest as against the manifest weight of the evidence, and the evidence underlying them, we conclude the trial court did not err in finding that SCM had waived the subject condition precedent. As the ...

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