794 F.3d 772
7th Cir.2015Background
- Trovare Capital Group and a family-owned group of cardboard-box companies (Simkins entities) executed a mostly nonbinding LOI on May 23, 2007, which included a binding Paragraph 14 requiring the Seller to pay a $200,000 breakup fee if the Seller gave written notice terminating negotiations.
- The LOI also set a nonbinding termination date of September 30, 2007, after which neither party would be obligated to continue the sale process.
- Trovare alleged Appellees internally decided to end the deal in August 2007 (pointing to an August 2 email from Simkins’s secretary reporting Simkins’s statement he did not want to proceed) but never gave the required written termination notice; Trovare claimed Appellees then engaged in sham negotiations to avoid the breakup fee.
- Key negotiation disputes centered on (1) scope of buyer/lender due diligence (including customer contact), and (2) whether Phase II environmental studies would be done before an APA and who would bear the risk/costs—each affecting Trovare’s ability to obtain financing.
- After Trovare sued for the breakup fee, the district court held a bench trial and found Appellees negotiated in good faith through September 30, 2007; the Seventh Circuit affirmed, reviewing factual findings for clear error.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Appellees terminated negotiations before Sept. 30, 2007 (triggering the $200,000 breakup fee) | Simkins’s Aug. 2 email shows Appellees decided to end the deal; subsequent communications were sham and lacked Simkins’s authorization | Appellees continued bona fide negotiations after Aug. 2 through authorized agents (Brant, Gadon); no written termination was sent | Court held Appellees did not terminate before Sept. 30; credited witnesses that negotiations continued in good faith |
| Whether Appellees breached the implied covenant of good faith by causing nonoccurrence of the written-notice condition (i.e., intentionally avoiding issuing written termination) | Appellees had complete control over the written-notice condition and acted in bad faith by continuing sham negotiations to avoid the fee | Appellees negotiated in good faith, had plausible business reasons for positions taken, and did not act arbitrarily or capriciously | Court rejected bad-faith claim; found no clear error in district court’s credibility findings and conclusion of good-faith bargaining |
| Whether refusing certain due diligence items was a sham tactic to scuttle financing | Appellees imposed impossible/unreasonable diligence conditions (customer contact, field audits) knowing Trovare could not obtain financing without them | Appellees reasonably resisted invasive requests (competitor concerns, perceived excessiveness); bargaining over diligence was expected under LOI | Court found Appellees’ explanations plausible and credited their testimony; conduct was not clearly shown to be pretextual |
| Whether Appellees’ refusal/delay on Phase II environmental studies was intended to sabotage the deal | Appellees conditioned Phase IIs on financing/APA to avoid remediation liability, thereby preventing financing and killing the deal | Appellees feared massive remediation liability and sought at least conditional financing before ordering costly Phase IIs; their position was plausible | Court found Appellees’ explanation plausible; any doubtful credibility on Phase II testimony did not produce clear error requiring reversal |
Key Cases Cited
- Levenstein v. Salafsky, 414 F.3d 767 (7th Cir. 2005) (bench-trial factual findings reviewed for clear error)
- Carnes Co. v. Stone Creek Mech., Inc., 412 F.3d 845 (7th Cir. 2005) (deference to trial court credibility determinations)
- Trovare Capital Grp., LLC v. Simkins Indus., Inc., 646 F.3d 994 (7th Cir. 2011) (prior opinion reversing summary judgment and remanding for factual issues)
- Seip v. Rogers Raw Materials Fund, L.P., 948 N.E.2d 628 (Ill. App. Ct. 2011) (implied duty of good faith and fair dealing in contracts)
- Midwest Builder Distrib., Inc. v. Lord & Essex, Inc., 891 N.E.2d 1 (Ill. App. Ct. 2007) (implied covenant prevents arbitrary conduct where one party controls a condition precedent)
- Kirkpatrick v. Strosberg, 385 N.E.2d 781 (Ill. App. Ct. 2008) (scope of duty to exercise contractual discretion reasonably)