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January 31, 1990

CNC SERVICE CENTER, INC., a Wisconsin corporation, Plaintiff
CNC SERVICE CENTER, INC., an Illinois corporation, BEN EVENSON and BANK OF ELMHURST, an Illinois banking corporation, Defendants. BANK OF ELMHURST, Counterplaintiff v. CNC SERVICE CENTER, INC., a Wisconsin corporation, Counterdefendant

Milton I. Shadur, United States District Judge.

The opinion of the court was delivered by: SHADUR


 This contract action arises from a sale of a business gone awry. Wisconsin corporation CNC Service Center, Inc. ("CNC-Wisconsin") has sued Illinois corporation CNC Service Center, Inc. ("CNC-Illinois"), CNC-Illinois' sole shareholder Ben Evenson ("Evenson") and Bank of Elmhurst ("Bank"), holder of a security interest in personal property once belonging to CNC-Illinois and transferred by it to CNC-Wisconsin. Three counts in CNC-Wisconsin's four-count Complaint rely on the following grounds to seek (1) rescission of the October 1, 1987 Asset Purchase Agreement ("Agreement") between CNC-Wisconsin and CNC-Illinois and (2) damages from CNC-Illinois and Evenson:

1. Count I alleges that CNC-Illinois breached its warranty of good title to the assets conveyed under the Agreement because some of those assets had previously been pledged to Bank to secure a $ 50,000 loan.
2. Count II sounds in common law fraud, charging that CNC-Illinois and Evenson made a host of misrepresentations that induced CNC-Wisconsin to enter into the Agreement
3. Count III alleges that Evenson breached the anti-competition clause of the employment contract with CNC-Wisconsin that Evenson entered into as part of the sale-of-business transaction. *fn1"

 CNC-Illinois and Evenson (collectively "Sellers") moved to dismiss the Complaint and requested sanctions against CNC-Wisconsin. Sellers supported their motion with material outside of the pleadings, and this Court's colleague Honorable James Alesia *fn2" therefore ordered (1) that the motion be treated as a Fed.R.Civ.P. ("Rule") 56 summary judgment motion and (2) that the parties file statements under this District Court's General Rule ("GR") 12(l) and 12(m). After briefing was completed on Sellers' summary judgment motion, CNC-Wisconsin filed a cross-motion for summary judgment on its Count I breach-of-warranty-of-title claim.

 On February 24, 1989 Judge Alesia referred this action to Magistrate Bernard Weisberg's calendar, instructing the Magistrate to file a report and recommendation on disposition of the cross-motions for summary judgment. While the motions were under consideration by the Magistrate, Judge Alesia disqualified himself from the case and it was reassigned at random to this Court's calendar. On September 26, 1989 Magistrate Weisberg filed his Report and Recommendation (the "Report") and returned the case to this Court for further proceedings.

 CNC-Wisconsin and Sellers then filed written objections to the Report within the ten-day period provided by 28 U.S.C. ¬ß 636(b)(1)("Section 636(b)(1)"), and each side responded to the other's objections. Because neither side is content with the Report--objections have been made by one litigant or the other to each of its findings--this Court has now resolved all the issues de novo pursuant to Section 636(b)(1):

1. It determines that the Magistrate's findings as to Counts I and III are unobjectionable. Consequently Sellers' motion for summary judgment on both those counts is denied. CNC-Wisconsin's cross-motion for summary judgment on Count I is granted as to liability, but the question of the appropriate remedy requires more attention than summary adjudication can provide.
2. As for Count II's fraud claim, this Court holds that the Magistrate erred in finding that as a matter of law the "as is" clause in the contract prevented CNC-Wisconsin from reasonably relying on certain alleged misrepresentations that would otherwise be barred by that provision. This Court consequently declines to adopt the Magistrate's recommendations as to that claim. Instead Sellers' summary judgment motion is denied. However, in partial accord with the Magistrate's recommendation this Court determines pursuant to Rule 56(d) that there is no substantial controversy as to the unreasonableness of CNC-Wisconsin's reliance on the claimed representations alleged in Complaint paras. 36(k), (l), (m), (n) and (o).


 In April 1987 Jacques Hopkins ("Hopkins"), now the principal of CNC-Wisconsin, approached Evenson and inquired about purchasing the business of CNC-Illinois. CNC-Illinois was engaged in the business of repairing, servicing and distributing punch presses, other machinery parts and a system for retooling industrial tools. Hopkins was in the process of acquiring other related businesses that he felt would work well in conjunction with CNC-Illinois.

 Negotiations resulted in the signing of a detailed Letter of Intent on August 21, 1987. Hopkins and his partner James Cote ("Cote") signed the letter on behalf of a corporation being formed to purchase the assets or stock of CNC-Illinois (CNC-Wisconsin), and Evenson signed on behalf of himself and CNC-Illinois.

 After CNC-Wisconsin had been duly formed under the laws of Wisconsin, its counsel Robert Acri drafted the Agreement. On October 1, 1987 both CNC-Illinois and CNC-Wisconsin executed the Agreement. In accordance with its terms, Evenson contemporaneously entered into an employment contract with CNC-Wisconsin by which he became a vice-president and shareholder of CNC-Wisconsin and under which he committed himself to a covenant not to compete.

 After the closing under the Agreement, CNC-Wisconsin moved the assets newly purchased from CNC-Illinois to Milwaukee and set up a new business there. In the course of getting the business going, Hopkins discovered certain problems with the just acquired assets of CNC-Illinois and, believing himself to have received substantially less than he had bargained for under the Agreement, he instituted this lawsuit on behalf of CNC-Wisconsin seeking rescission of the Agreement and damages.

 Magistrate Weisberg's Report

 Count I: CNC-Illinois' Breach of Warranty of Title

 After logically separating out the two distinct issues that arise under this claim--(a) whether CNC-Wisconsin assumed the underlying bank debt and (b) the effect of CNC-Illinois' promise to sell its assets free and clear of any liens, including Bank's blanket security interest--the Magistrate found:

1. that the Agreement clearly and unambiguously warranted that Sellers would deliver the assets "free and clear of all liens, pledges, charges, claims and encumbrances" (Agreement para. 3.3) and
2. that Sellers' failure to make such free-and-clear delivery was not waived by CNC-Wisconsin's later conduct.

 Interestingly enough, Sellers object to the Report solely on the latter issue of waiver and not on any claimed absence of breach. Because this Court agrees with the substance of the Magistrate's reasoning on this count, this opinion will deal only ...

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