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Miller v. Lesea Broadcasting

July 2, 1996




Appeal from the United States District Court for the Eastern District of Wisconsin. No. 95 C 694 Myron L. Gordon, Judge.

Before POSNER, Chief Judge, and CUDAHY and EASTERBROOK, Circuit Judges.

POSNER, Chief Judge.

ARGUED MAY 28, 1996


John Miller brought this suit in a Wisconsin state court against LeSea Broadcasting to enforce a right of first refusal to buy the Channel 55 television station in Kenosha. The defendant removed the suit to federal district court, basing federal jurisdiction on diversity of citizenship. Wisconsin law governs the substantive issues in the case. On cross-motions for summary judgment, the court held that Miller's right of first refusal entitled him to buy the station, and it ordered LeSea to sell it to him for $2.5 million. The sale has not taken place, although so far as we can tell LeSea's motion for a stay of the order of specific performance pending appeal has yet to be acted on by the district court.

LeSea owns a number of television stations. About half the programs broadcast by the stations are religious in character. ("LeSea" is short for "Lester Sumrall Evangelistic Association.") LeSea hired Miller to be the general manager of its Kenosha station in 1993. Miller drafted, and LeSea agreed to, a clause in the employment contract that entitled Miller, for as long as he was employed by LeSea and for two years after, to "match" any offer to purchase the station "upon the exact terms and conditions as contained in the offer." In January of 1995, Paxson Communications Corporation, a large broadcaster, submitted to LeSea a proposal to buy Channel 55 for $2.5 million through an affiliated entity to be created. LeSea forwarded the proposal to Miller, who asked LeSea to furnish him with the actual offer, if one was made, so that he could decide whether to exercise his right of first refusal. No offer was made. But on March 31, LeSea signed a contract to sell the station, at the same price, to Christian Network, Inc. (CNI), a small religious broadcaster (not to be confused with Pat Robertson's Christian Broadcasting Network) founded by Lowell Paxson -- the chairman of Paxson Communications Corporation. The contract contains a clause in which Paxson (the corporation, not the man) agrees to guarantee CNI's contractual obligations to LeSea. These obligations include not only the payment of the $2.5 million purchase price but also the assumption of a lease and other contracts of Channel 55. Paxson separately agreed with CNI to operate the station. The contract of sale between LeSea and CNI provides that, if a court decides that Miller is entitled to buy the station, LeSea shall pay CNI $75,000 and "defend with due diligence against any effort by John Miller to assert any claim of right to acquire" the station. If the defense fails, and Miller buys the station, LeSea shall have no further liability to CNI except to pay the $75,000.

Miller received a copy of the contract between LeSea and CNI on April 12. The next day he told LeSea that he was exercising his right of first refusal. On May 26, after several back and forth communications, Miller -- having obtained money for a down payment from a broadcasting concern that tentatively agreed to repurchase the station from him for $3 million -- sent LeSea an executed contract for the purchase of the station. It was identical to the contract between LeSea and CNI except that Miller deleted the guaranty clause and LeSea had already, for obvious reasons, deleted the clause requiring it to defend against any effort by Miller to buy the station, and to compensate CNI if the defense failed. On June 1, LeSea notified Miller that by deleting the guaranty clause he had failed to match CNI's terms. Miller had already brought this suit, although he delayed serving LeSea until receiving its letter of June 1. En route to the final judgment from which LeSea appeals, Miller after a brief oral hearing obtained a preliminary injunction against LeSea's selling the station to CNI.

A right of first refusal is the weakest of options; technically it is not an option at all, because it does not require the grantor to offer the property subject to it for sale, ever. Edlin v. Soderstrom, 264 N.W.2d 275, 280 (Wis. 1978); Pincus v. Pabst Brewing Co., 893 F.2d 1544, 1549 (7th Cir. 1990); see generally 3 Corbin on Contracts secs. 11.3-11.4 (rev. ed. 1996). All it entitles the holder to do is to match an offer from a third party should the grantor of the option be minded to accept that offer. It is thus merely a preemptive right, although it becomes an option when the grantor decides to sell on the terms offered by the third party; at that point the holder of the option has the right to buy the property, a right that is a true option. E.g., Bidache, Inc. v. Martin, 899 P.2d 872, 874 (Wyo. 1995).

The principal value of a right of first refusal to the holder, when the holder is a lessee of real estate (and it is in the real estate market that rights of first refusal are chiefly found), is that it enables him to avoid moving costs if he is willing to pay the current market price for the property that he is occupying -- for rarely will a third party's offer significantly exceed that price. Corresponding to the lessee's interest is the managerial position that Miller held in Channel 55. The right of first refusal may have been designed to save him job-relocation costs if the station went on the market. The alternative, a requirement that any purchaser of the station assume Miller's employment contract, might have made the station very difficult to sell.

The cost to the grantor of a right of first refusal is slight, at least if the law requires that, for the holder to be able to exercise the right, the match between his offer and the third party's offer be exact. The requirement of exact matching has social as well as private value. Without it, the right is an impediment to the marketability of property, because it gives the holder of the right a practical power to impede a sale to a third party by refusing to match the third party's offer exactly and then arguing that the discrepancy was immaterial. Cf. Frandsen v. Jensen-Sundquist Agency, Inc., 802 F.2d 941, 946 (7th Cir. 1986). Consistent with insisting on exact matching, some cases say, such as Lehr v. Breakstone, 472 So. 2d 1333, 1335 (Fla. App. 1985), or imply, such as Weber Meadow-View Corp. v. Wilde, 575 P.2d 1053, 1055 (Utah 1978), that the holder of a right of first refusal may not defend a refusal to match a term in the third party's offer on the ground that the term is immaterial. Most cases, however, do not require the matching of immaterial terms, or, what appears to be the same thing, do not let insubstantial variations between the third party's offer and the right holder's offer defeat the right. West Texas Transmission, L.P. v. Enron Corp., 907 F.2d 1554, 1566 (5th Cir. 1990); John D. Stump & Associates, Inc. v. Cunningham Memorial Park, Inc., 419 S.E.2d 699, 705 (W. Va. 1992); Brownies Creek Collieries, Inc. v. Asher Coal Mining Co., 417 S.W.2d 249, 252 (Ky. 1967); Vincent v. Doebert, 539 N.E.2d 856 (Ill. App. 1989); Matson v. Emory, 676 P.2d 1029, 1032 (Wash. App. 1984).

The Wisconsin courts have not taken sides in this conflict; and we shall see that there may be less to the conflict than meets the eye. In arguing for exact matching with no exception for immaterial terms, LeSea cites cases from Wisconsin and elsewhere that insist that the holder not of a right of first refusal but of an option comply exactly with the terms of the option. E.g., Kreutzer v. Lynch, 100 N.W. 887, 888 (Wis. 1904); Christmas v. Turkin, 716 P.2d 59, 60 (Ariz. App. 1986). LeSea also relies on the "mirror image" rule of general contract law: an acceptance to be effective must match the terms of the offer exactly. E.g., Leuchtenberg v. Hoeschler, 72 N.W.2d 758, 760 (Wis. 1955). Once the condition precedent for the right of first refusal -- namely that the seller has decided to sell on the terms in the third party's offer -- is met, the right becomes an option to buy. LeSea characterizes the right holder's matching offer as the acceptance of the third party's offer, and argues that it must therefore match the terms of that offer exactly. LeSea also points out that the right of first refusal that it granted Miller uses the word "exact" -- and was drafted by the recipient of the right, Miller himself, and so should be construed against him.

Since the negotiation and any resulting contract for the sale of the station would be between Miller and LeSea rather than between Miller and the third party, LeSea's invocation of the mirror-image rule is strained. Its invocation of the option rule is more effective, exposing a possible fault line in the cases that allow the holder of a right of first refusal to prevail even if his offer to buy does not exactly match the third party's offer. Although a right of refusal is not an option, it is awfully close, and it is not obvious why it should be treated differently so far as the matching requirement is concerned. The path of reconciliation may lie in noting the difference between terms and conditions stated in the option contract itself (or the contract granting the right of first refusal), and terms and conditions in the third party's offer, which are incorporated into the contract granting the right of first refusal merely by reference, not being foreseen when that contract is signed. We need not pursue this issue. The use of the term "exact" in the contract that created the right of first refusal in this case had the effect of subjecting the contract to the same legal standard that is in force in states that do not recognize a defense of immateriality when the holder of the right of first refusal does not match the third party's offer exactly, but instead treat options and rights of first refusal the same. The defense of immateriality in states that recognize it is merely a default rule. The parties can contract for a stricter standard. Cf. West Texas Transmission, L.P. v. Enron Corp., supra, 907 F.2d at 1562. They did here.

But even the cases (made applicable to this case by the terms of the contract) that appear to take the requirement of exact matching literally, and therefore make no exception for immaterial variations between the right holder's offer and the third party's offer, recognize three exceptions to the requirement, although we cannot find any cases dealing with the first two (they may be too obvious to have been litigated). These exceptions, we may assume, are implicit in the contract granting Miller the right of first refusal, for there is no indication that the contract meant to limit the right more strictly than any state would do. First and most obviously, the grantor of the right can waive exact matching, as LeSea did when it deleted from the contract it sent Miller the clause concerning LeSea's obligations in the event that Miller tried to exercise his right of first refusal. Not only was that clause irrelevant to a contract with Miller himself, but it was a clause that imposed obligations on the seller rather than on the buyer. Second, proper names need not be matched; otherwise Miller would have had to change its name to CNI to be entitled to exercise the option. LeSea did not insist that he do that or even that he obtain his guarantee from Paxson rather than from some other firm that had the financial solidity necessary for an effective guaranty of the buyer's obligations under the contract of sale. Third, the grantor of the option may not act in bad faith, which in this context means may not, for the purpose of discouraging the exercise of the right, procure from the third party terms that the grantor knows are unacceptable to the holder of the right of first refusal. E.g., Oregon RSA No. 6, Inc. v. Castle Rock Cellular of Oregon Limited Partnership, 76 F.3d 1003, 1007 (9th Cir. 1996); West Texas Transmission, L.P. v. Enron Corp., supra, 907 F.2d at 1563; Prince v. Elm Investment Co., 649 P.2d 820, 824-25 (Utah 1982); Brownies Creek Collieries, Inc. v. Asher Coal Mining Co., supra, 417 S.W.2d at 252.

These qualifications are necessary -- though only in states in which immaterality is not a defense to a refusal to match the exact terms offered by the third party -- if rights of first refusal are to have any constraining effect on grantors. They do the work that the defense of immateriality does in the other states. Immaterial terms are likely to give rise to an inference of bad faith and so be excluded by the third qualification. Cf. Prince v. Elm Investment Co., ...

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