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Wednesday, July 25, 2012

First Circuit on Promissory Estoppel: Rockwood, You're No Joseph Hoffman

1st CirWe hoped this case might be a more up-to-date version of Hoffman v. Red Owl Stores.  No dice.  Another commercial promissory estoppel claim bites the dust.

After defaulting on a commercial loan, co-founders and sole shareholders of Environamics, Inc. (“Environmanics”), Robert Rockwood (“Rockwood”) and Roxanna Marchosky (“Marchosky”) were thrilled when SKF USA, Inc. (“SKF”) expressed interest in acquiring Environamics.  However, when negotiations fell through leaving Environamics in a bigger hole, Rockwood and Marchosky brought suit in the District Court of New Hampshire claiming that they had relied on SKF’s promise to purchase the company in personally guaranteeing a $3 million loan needed to keep up the day-to-day operations of Envrionamics.  The District Court granted SKF’s motion for summary judgment, so Rockwood and Marchosky appealed to the United States Court of Appeals for the First Circuit, which affirmed

On January 14, 2004, Rockwood and Marchosky (collectively “Appellants”) entered into a $9 million plus royalties “Option Agreement” with SKF that gave SKF “an irrevocable option to purchase all, but not less than all, of the outstanding shares of stock” in Environamics.  The parties also implemented a “Buy-Sell Agreement” that made SKF the “exclusive marketer and reseller” of Environamic’s pumps and related products.  The Option Agreement was to last fifteen months and allowed the parties to negotiate a nine month extension.  After the parties signed the Option and Buy-Sell Agreements, SKF paid Environamics $2 million.  Environamics needed more money to sustain its day-to-day operations.  At SKF's urging, Wells Fargo agreed to extend a $3 million line of credit to Environamics providing Rockwood and Marchosky personally guaranteed the loan.  Rockwood and Marchosky were reluctant to agree to those terms but claim that they did so after receiving assurances that SKF would buy Environamics under the terms of the Option Agreement.

In October 2004, SKF, disappointed in its sales of Environamics products, announced that it would not exercise its option to purchase Environamics.  Rockwood and Marchosky filed suit alleging promissory estoppel in that they took out the Wells Fargo loan in reliance on SKF’s alleged promise to exercise its option.  They survived a first motion for summary judgment based on affidavits alleging that specific promises had induced them to agree to the personal guarantee.  After Rockwood and Marchosky amended their complaint to omit any specific references to such promises, the District Court granted SKF’s second motion for summary judgment.

The First Circuit ruled (oh the irony!) that the doctrine of judicial estoppel now precluded Rockwood and Marchosky’s promissory estoppel claim.  The First Circuit found that the two conditions for judicial estoppel had been met:  (1) Rockwood and Marchosky's two summary judgment affidavits contradicted each other, and (2) Rockwood and Marchosky had convinced the District Court to accept their earlier position.  Having determined that no specific competent evidence suggested that Rockwood and Marchosky had reasonably relied on any SKF promise to buy Environamics on terms other than those of the Option Agreement, the First Circuit affirmed the District Court’s ruling.

[Christina Phillips & JT]

 

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