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VIGORTONE AG PRODUCTS, INC. v. PM AG PRODUCTS

United States District Court, N.D. Illinois


January 14, 2004.

VIGORTONE AG PRODUCTS, INC., formerly known as Provimi Acquisition Corporation, Plaintiff,
v.
PM AG PRODUCTS, INC., Defendant

The opinion of the court was delivered by: HARRY LEINENWEBER, District Judge

MEMORANDUM OPINION AND ORDER

Plaintiff Vigortone Ag Products, inc. (referred hereinafter as "Provimi") filed this suit against PM Ag Products, Inc. PM Ag") in 1999, asserting, among other things, claims of fraud and breach of contract in connection with sale of Vigortone, Inc., a former subsidiary of PM Ag. Following a trial before this Court, which resulted in a jury verdict against PM Ag for fraud and breach of contract, PM Ag appealed from the judgment against it. The Seventh Circuit reversed the fraud verdict, holding that the jury's finding of justifiable reliance lacked sufficient evidentiary basis, and remanded the case for a new trial on the breach of contract claim. Presently before the Court are the parties' motions in limine to exclude certain evidence at trial. The motions are granted or denied, in whole or in part, as follows: Page 2

I. PLAINTIFF'S MOTIONS IN LIMINE

  1. Provimi's Daubert Motion to Exclude Testimony of Mark J. Hosfield Regarding Provimi's Alleged Mismanagement of the Pig Purchase Contracts and Concerning Hedging. GRANTED for the reasons stated in open court and set forth in separate opinion.

  2. Provimi's Motion In Limine to Preclude Defendant from Presenting Argument or Evidence Regarding Plaintiff's Alleged Failure to Use Futures Contracts to Hedge Purchases of Baby Pigs Under the Pig Purchase Contracts. DENIED. Setting aside the waiver issue, Defendant is entitled to rebut any evidence that Plaintiff enters regarding the availability of hedging as a means of mitigating damages. It is unclear at this point the extent to which Plaintiff intends to present this type of evidence (although one of their experts has opined that using futures contracts as a means of hedging was not a viable mitigation option), Although Defendant does not appear to have articulated this exact theory of mitigation at the first trial, it did plead failure to mitigate as an affirmative defense and certainly the Seventh Circuit Opinion in this case (hereinafter "Seventh Circuit Opinion") put this issue front and center (although the Seventh Circuit was unsure whether the claim had been "forfeited"). This Court's June 19, 2003 ruling also raised the issue of whether Plaintiff would have discounted the price "by the cost of obtaining hedging contracts," Thus, Page 3 Plaintiff cannot claim unfair prejudice or surprise if this issue arises.

  3. Provimi's Motion in Limine Barring PM Ag from Presenting Evidence That Provimi's Damages Expert, Paul F. Charnetzki, Is Connected to the Auditing Irregularities Associated with Andersen, GRANTED, although the Court notes that parties have reached a stipulation that withdraws this motion.

  4. Provimi's (Renewed) Motion in Limine to Exclude Evidence or Argument Concerning the Parties' Previous Arbitration on Accounting Issues. GRANTED IN PART and DENIED IN PART. Motion is granted to the extent it seeks to preclude any evidence directly pertaining to the arbitration proceedings. The Seventh Circuit Opinion, as well as this Court's rulings, have made clear that the arbitration proceedings are inadmissible. The arbitration agreement clearly prohibits mention of the arbitration proceedings in subsequent litigation, except where a party seeks to enforce the award. Plaintiff's claims under Sections 3.4 and 3.21 are not identical to those resolved at arbitration. The Asset Purchase Agreement makes clear that the arbitration was limited to whether the post-closing balance sheet met GAAP standards and did not address warranties set forth elsewhere in the Agreement,

  The arbitration proceeding was also limited to the narrow issues of whether GAAP required the accrual for future losses of the pig contracts and whether the swine inventory was valued Page 4 properly. The arbitrator did not consider whether any warranties were breached.

  The motion is denied to the extent it seeks to preclude all evidence showing that parties had a dispute over the proper purchase price of the company. The motion is over broad and unduly vague and the Court will need context to further decide if any of this evidence is admissible for another purpose.

  5. Provimi's Motion in Limine to Exclude Testimony of Mark Hosfield that Out-of-Pocket Losses Is Not an "Appropriate" Measure of Damages. GRANTED IN PART and DENIED IN PART. Experts may not opine on the appropriate measure of damages, as this is an issue of law already decided by this Court and the Seventh Circuit. However, experts may opine on the proper method of computing those damages, as this is a factual issue within the province of the jury. The Seventh Circuit suggested that the appropriate measure of damages for a breach of warranty is "the difference between the purchasers' reasonable expectations as to the worth of the company, as fairly described in the warranties, and the actual worth of the company as a result of any breach of warranties." This Court adopted this measure in its June 19, 2003 ruling.

  It may be that out-of-pocket losses are one way of computing the "actual worth of the company as a result of any breach." This a matter where the experts can disagree. There is Delaware case law holding that out-of-pocket losses are available in a breach of Page 5 warranty. Moreover, the indemnification provision in Section 9.1 allows out-of-pocket losses for certain breaches, apparently including Sections 3.28 and 3.25.

  6. Provimi's Motion in Limine to Preclude PM Ag from Arguing that the Mere Fact that Five of the Seven Pig Purchase Contracts Are Listed on Schedule 3.9 Discloses the Fact that the Market Risks Inherent in Those Contracts Had Not Been Hedged or Offset. DENIED. Nothing in Seventh Circuit Opinion or this Court's rulings precludes Defendant from making the argument that, the disclosure under Schedule 3.9 amounted to a disclosure of the market risks in these contracts. This is an issue of fact for the jury to decide. The Seventh Circuit Opinion and this Court's ruling discuss the disclosures in Schedule 3.9 in terms of whether Defendant could establish — as a matter of law — that the disclosures precluded justifiable reliance under the former fraud claim,

  7. Provimi's Motion in Limine to Exclude any Evidence Regarding Provimi's Profits on Pre-Mix Sales. GRANTED. This Court and the Seventh Circuit have ruled that pre-mix profits may not be used to offset damages. Evidence of Provimi's actual pre-mix profits is not necessary to show the purpose of the contract and would confuse and mislead the jury.

  8. Provimi's Motion in Limine to Exclude Evidence and Statements Regarding Provimi's Reliance on PM Ag's Warranties. Page 6

  9. Provimi's Motion in Limine to Exclude Testimony of Terrence Quinlan and Laura Zielinski Because it Relates Only to Provimi's Reliance, Which Is Irrelevant to Breach of Warranty Claims. Both of these motions are GRANTED IN PART and DENIED IN PART. The foregoing amends the ruling that was read in open court. Motions are granted pertaining to evidence that goes solely to pre-purchase mitigation because there is no duty to mitigate until a contract has been breached. Motions are also granted as to any specific reference to review by Provimi's attorney, Quinlan, or Laura Zielinski, or Deloitte, that goes solely to establishing Provimi's reliance. Defendant cannot defend against Provimi's Section 3.28 claim by pointing solely to Provimi's purported knowledge of the pig contracts. PM Ag's waiver argument fails. (See below under PM Ag's Motion Regarding the Admissibility of Facts Disclosed to Provimi About the Pig Purchase Contracts for further discussion on PM Ag's waiver claim).

  Motions are denied as to the broader request of all other evidence or statements that go to reliance as overly broad and vague. Defendant may introduce evidence of what facts it disclosed to Provimi to the extent that such evidence relates to either PM Ag's state of knowledge regarding the pig contracts or any disputed issue of fact in this case, including whether PM Ag failed to disclose the market risks of the pig contracts. To the extent that the challenged testimony pertaining to Quinlan or Zielinski goes to Page 7 these issues, PM Ag may be able to introduce such evidence. The Court, however, will need to assess this evidence in the context of the trial to make further rulings.

  II. DEFENDANT'S MOTIONS IN LIMINE

  1. PM Ag's Motion in Limine to Preclude Provimi from Introducing Parol Evidence to Establish a Violation of Section 3.28 of the Asset Purchase Agreement. DENIED. The law of this case clearly holds that Defendant's pre-contract disclosures (or failures to disclose) may amount to a violation of Section 3.28 of the Purchase Agreement, Both this Court's rulings and the Seventh Circuit's opinion contemplate that pre-contractual representations may have been warrantied by Section 3.25, and, therefore the issue of whether the Defendant's pre-contract representations amount to a breach of Section 3.28 is best left for the jury to decide.

  Defendant's new Delaware case does not compel a different outcome for two reasons: (1) the facts of the case and the pertinent contractual provisions made clear that the pre-contractual financial statements were not part of the controlling agreement, and therefore the case is not a contrary ruling of law, and; (2) the decision is by a Delaware trial court, not the Delaware Supreme Court, and thus is not controlling authority.

  2. PM Ag's Motion in Limine to Exclude any Evidence of its Alleged Fraud, Deception, Motive, Intent or any Other State of Mind Evidence. GRANTED IN PART AND DENIED IN PART, Plaintiff may Page 8 introduce evidence that goes to Defendant's knowledge pertaining to warranty sections that refer to seller's knowledge, such as Sections 3.28 and 3.25. However, Plaintiff may not introduce evidence that goes solely to Defendant's purported intent, motive, deception, and so forth.

  3. PM Ag's Motion in Limine Regarding the Admissibility of Facts Disclosed to Plaintiff About the Pig Purchase Contracts. DENIED. Movant's motion is predicated upon New York law, where a buyer apparently may waive the breach of warranty if the seller has informed the buyer, prior to the close of the sale, of sufficient facts to establish a breach and the buyer nonetheless continues with the transaction. Movant does not cite any Delaware law, which controls the breach of contract action here. In addition, the sole Delaware case to cite movant's authority has suggested that this "waiver rule" may not be settled New York law. See In re IBP, Inc. Shareholders Litigation, 789 A.2d 14, 82 (Del.Ch. Jun 18, 2001) at n. 200. Thus, assuming arguendo, that movant has not waived this claim, movant has not shown that Delaware law adopts this purported waiver rule.

  In addition, even if this New York law waiver rule controlled here, movant does not show that it can establish that it disclosed sufficient facts so that the buyer had "full knowledge" that a breach of warranty existed before closing on the agreement, as New York law requires. (Indeed, the Seventh Circuit Opinion Page 9 specifically found that seller's behavior amounted to prima facie fraud, albeit without, sufficient reliance; movant would be hard-pressed to argue now that it affirmatively disclosed the market risks of the pig contracts so that the buyer was fully informed.) Contrary to movant's assertions, Section 3.28 does not necessarily require a factual inquiry into the buyer's knowledge.

  4. PM Ag's Motion in Limine to Exclude the Testimony of Paul Charnetzki, DENIED. Although the movant properly states that the measure for damages pertaining to the breach of warranties claims is "the difference, if any, between plaintiff's reasonable expectations as to the worth of the company and the actual worth as a result of any breach of warranties," Charnetzki's measure of out-of-pocket expenses may be one method to calculate this. Delaware law docs hold that a breach of warranty may entitle a party to out-of-pocket losses. Moreover, Charnetzki's testimony is relevant to the measure of "expenses and losses" specified in the indemnification provision of the agreement, which the Seventh Circuit did not address.

  5. PM Ag's Motion in Limine to Exclude the Testimony of Kevin Dhuyvetter. GRANTED IN PART AND DENIED IN PART. Motion is granted insofar as Plaintiff seeks to use Dhuyvetter's former testimony to argue that Dhuyvetter opined on the reasonableness of Vigortone management decisions to mitigate damages. Dhuyvetter did not opine on this area. Motion is denied insofar as Plaintiff cannot be Page 10 precluded from using Dhuyvetter's former testimony to show that Dhuyvetter opined that the strategy most likely to lead to optimal economic results was to grow the pigs out. If Plaintiff can show that Dhuyvetter is unavailable, the remaining requirements of Rule 804(b)(1) hearsay exception are met. (To show unavailability, it may not be enough for Plaintiff to state solely that Dhuyvetter is beyond subpoena power.)

  Movant's Rule 702 analysis is incorrect, as the Seventh Circuit did not opine on the underlying methods of Dhuyvetter and he was admitted, without opposition, as an expert at the first trial.

  6. PM Ag's Motion in Limine to Preclude Defendant [sic] from Introducing Evidence to Establish a Breach of Sections 3.4 and 3.21 of the Asset Purchase Agreement. DENIED. Plaintiff has not waived the issue of whether certain financial statements listed in Schedule 3.4 were true and complete and prepared according to GAAP, as warrantied by Section 3.4, nor has Plaintiff waived the argument that Section 3.21 warranties pertaining to accounts receivables and notes were breached. The underlying factual issues regarding these warranties have been present throughout this litigation, and Defendant cannot claim to be prejudiced or without notice.

  The doctrines of res judicata and collateral estoppel do not apply, as the arbitration proceedings did not address the identical issues present in Sections 3.4 and 3.21, Specifically, Section 3.4 Page 11 addresses certain financial statements that were not part of the arbitration proceedings, and, moreover, warrants the fairness and completeness of these statements, which are issues the arbitrator die! not reach. Similarly, Section 3.21 warrants generally that all accounts receivables and notes are good and collectible. The arbitrator focused on the narrow issue of how to value the cost of swine inventory, which is separate from the issue that Plaintiff raises regarding the alleged treatment of losses from pig contracts into the account receivables.

  Defendant's pre-closing conversations regarding the purported hiding of losses are relevant to Section 3.25 and 3.28 warranties regarding the seller's knowledge. Thus, the state of Defendant's knowledge is relevant,

  7. PM Ag's Motion in Limine to Exclude Statements Made by PM Ag in Response to Plaintiff's Local Rule 56.1 Statement. GRANTED IN PART AND DENIED IN PART. Motion is denied to the extent it seeks to exclude the admissions of fact in statements Mo. 85 (i.e., that Quinlan read the contracts to determine only if they were assignable) and No. 97 (i.e., that Section 3.28 reads, in part, as listed), Motion is denied because case law establishes that these statements may be entered at trial.

  Motion is granted to the extent that it seeks to exclude the admission in No. 97 as an admission as to the legal effect or Page 12 Interpretation of Section 3.28, Motion to withdraw the admissions is denied. Movant offers no support for this argument.

  8. PM Ag's Motion in Limine to Preclude Provimi from Introducing Evidence that Defendant Failed to Disclose the April 2, 1997 Tai Farms Contract to Establish a Violation of Section 3.9 of the Asset Purchase Agreement, DENIED. The controlling case law cited by movant does not hold that a party is precluded from raising additional factual allegations upon remand, provided that such factual allegations do not purport to create either an entirely new cause of action or revive a cause of action that was previously dismissed. The waiver case law holds only that a party may not assert entirely new claims or arguments that were not asserted in the underlying litigation and/or upon appeal. Here, although Plaintiff is purportedly raising "new" factual allegations regarding the omission of one of the Tai Farm contracts, the factual allegations fail squarely within Plaintiff's longstanding claim of a breach of the contractual provisions of Section 3.9. Thus, Plaintiff is not seeking to resuscitate a newfound claim or argument upon remand. Moreover, the policy implications cited by Plaintiff are persuasive: the purpose of a waiver is to prevent the other party from unfair prejudice due to surprise. Plaintiff asserted the absence of Tai Farms I contract no later than April 9, 2003, and Defendant cannot now be heard to have had no opportunity Page 13 to address the relatively-straightforward issue of whether all Tai Farms contracts were listed on Schedule 3.9.

  9. PM Ag's Motion in Limine to Prohibit any References to the Seventh Circuit's Opinion in this Case, GRANTED. Parties agree that there should be no reference to opinion. The case law cited by movant indicates that it may be reversible error to allow a jury to hear the result of an appellate decision because, among other things, it may preclude the jury from making an independent determination drawn solely from the evidence heard at trial.

  CONCLUSION

  The parties' motions in limine are granted and denied, as set forth above.

  IT IS SO ORDERED.

20040114

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