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EAGLE TRAFFIC CONTROL, INC. v. UNITED RENTALS

United States District Court, E.D. Pennsylvania


February 4, 2004.

EAGLE TRAFFIC CONTROL, INC. and KEYSTONE SIGN SUPPLY, INC., Plaintiffs
v.
UNITED RENTALS, INC., Defendant

The opinion of the court was delivered by: WILLIAM YOHN, JR., District Judge

MEMORANDUM and ORDER

Eagle Traffic Control, Inc. and Keystone Sign Supply, Inc. (collectively, "Eagle Traffic") bring this action against United Rentals, Inc. ("United"), seeking equitable relief and damages allegedly resulting from a breach of contract (count I), conversion of money and goods (count II) and contractual bad faith (count III). Defendant asserts various affirmative defenses, as well as a counterclaim for rescission of the contract. Currently pending before the court are (1) defendant's motion for summary judgment on all counts of plaintiffs' complaint, and (2) plaintiffs' motion for summary judgment on defendant's counterclaim for rescission. For the reasons set forth below, both motions for summary judgment will be denied.

BACKGROUND

  United is in the business of renting and selling equipment of various types, including traffic control devices for construction projects. Eagle Traffic Control and Keystone Sign Supply were in the traffic control device business. Both of these companies were owned by Stacy Chatley. In July 2000, United sent Chatley a letter of intent "to acquire substantially all of the Page 2 assets (the "Assets") of [Eagle Traffic], including the rental inventory, accounts receivable and other current assets, inventory of parts, supplies and equipment held for resale and any business-related equipment and assets owned by [Eagle Traffic]." Def. Ex. E. On July 24, 2000, Chatley executed the letter of intent. Def. Ex. E. On November 10, 2000, United and Eagle Traffic entered into an Asset Purchase Agreement ("the Agreement") and the transaction was completed.

  The main point of disagreement around which this litigation revolves is whether or not the Agreement includes sale and disposition of what the parties call "unbooked inventory." Although the parties do not agree on one clear and concise definition of "unbooked inventory," both United and Eagle Traffic describe it in the following vague terms: material that was costed to a job (or "fully expensed"), not placed on a depreciation schedule, and although returned to Eagle Traffic, not listed as an asset of the company. Compl. ¶ 25; Def. Mot. for Summ. J. 5. Plaintiffs contend the Agreement does not include unbooked inventory, and that United's possession of such items post-closing requires further compensation to Eagle Traffic. United argues in rebuttal that the Agreement does include unbooked inventory and that the monies paid to Eagle Traffic under the Agreement include compensation for such items. The Agreement does not specifically mention "unbooked inventory." The Agreement does clearly state that it "shall be governed by the laws of the Commonwealth of Pennsylvania." Agreement § 10.13.

  STANDARD OF REVIEW

  Either party to a lawsuit may file a motion for summary judgment, and the court will grant it "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." FED. R. CIV. P. 56(c). "Facts that Page 3 could alter the outcome are `material,' and disputes are `genuine' if evidence exists from which a rational person could conclude that the position of the person with the burden of proof on the disputed issue is correct." Ideal Dairy Farms, Inc. v. John Lebatt, LTD., 90 F.3d 737, 743 (3d Cir. 1996) (citation omitted). When a court evaluates a motion for summary judgment, "[t]he evidence of the non-movant is to be believed," Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986), and "all justifiable inferences are to be drawn in [the non-movant's] favor." Id. Additionally, "[s]ummary judgment may not be granted . . . if there is a disagreement over what inferences can be reasonably drawn from the facts even if the facts are undisputed." Ideal Dairy, 90 F.3d at 744 (citation omitted). However, "an inference based upon a speculation or conjecture does not create a material factual dispute sufficient to defeat entry of summary judgment." Robertson v. Allied Signal, Inc., 914 F.2d 360, 382 n.12 (3d Cir. 1990).

  To defeat summary judgment, the non-moving party cannot rest on the pleadings, but rather that party must go beyond the pleadings and present "specific facts showing that there is a genuine issue for trial." FED. R. CIV. P. 56(e). Similarly, the non-moving party cannot rely on unsupported assertions, conclusory allegations, or mere suspicions in attempting to survive a summary judgment motion. Williams v. Borough of W. Chester, 891 F.2d 458, 460 (3d Cir. 1989) (citing Celotex v. Catrett, 477 U.S. 317, 325 (1986)). Further, the non-moving party has the burden of producing evidence to establish prima facie each element of his claim. Celotex, 477 U.S. at 322-23. The non-movant must show more than "[t]he mere existence of a scintilla of evidence" for elements on which he bears the burden of production. Anderson, 477 U.S. at 252. Thus, "[w]here the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no `genuine issue for trial.'" Matsushita Elec. Indus. Co., Ltd. v. Page 4 Zenith Radio Corp., 475 U.S. 574, 587 (1986) (citations omitted).

  DISCUSSION

  Th Asset Purchase Agreement executed by the parties, which resulted in the sale of the assets of Eagle Traffic to United, does not mention "unbooked inventory." Although Eagle Traffic and United reach different conclusions regarding whether or not unbooked inventory is included in the sale, each party contends that the Agreement unambiguously supports its respective position. This is of significant importance while considering a motion for summary judgment since "[u]nder Pennsylvania law, ambiguous writings are interpreted by the fact finder and unambiguous writings are interpreted by the court as a question of law." Mellon Bank, N.A. v. Aetna Business Credit, Inc., 619 F.2d 1001, 1011 n.10 (3d Cir. 1980) (applying Pennsylvania law) (citing Brokers Title Co. v. St. Paul Fire and Marine Ins. Co., 610 F.2d 1174 (3d Cir. 1979)). And whether a contract is clear or ambiguous is a matter of law for the court to decide. Id. at 1011. The Supreme Court of Pennsylvania has explained, "A contract is ambiguous if it is reasonably susceptible of different constructions and capable of being understood in more than one sense." Hutchison v. Sunbeam Coal Corp., 519 A.2d 385, 390 (Pa. 1986) (citations omitted). Hence, the court must look at the words of the Agreement and the alternative interpretations offered by the parties to determine if both are reasonable in light of the circumstances surrounding the formation and completion of the Agreement. If only one suggested meaning is reasonable, then this court will interpret the Agreement as a matter of law. Otherwise, interpretation will be left for a fact finder, making summary judgment inappropriate.

 I. Defendant's Motion for Summary Judgment

 A. Defendant's Initial Position Page 5

  United argues that the $4.75 million it paid Eagle Traffic was in exchange for all of Eagle Traffic's assets, except those explicitly excluded in section 2.5 of the Agreement. Since "unbooked inventory" is not listed in the section delineating "excluded assets," it is impliedly included as an asset purchased under the Agreement. United further supports its position by highlighting certain language actually included in the Agreement. First, United points to the definition of "acquired assets," which includes inter alia "(a) Equipment; (b) Rental Inventory; (c) Sale Inventory; [and] (d) accounts receivable, cash and other current assets whose benefit survives Closing. . . ." Agreement § 1. United then points to the definition of "Equipment" in the Agreement: "[A]ll tangible personal property used in the Business that is not (i) Rental Inventory, (ii) Sale Inventory, (iii) supplies consumed in the Ordinary Course of Business, (iv) office furniture or furnishings, or (v) records of the Business on paper." Agreement § 1. Next, United looks at the definitions of "Rental Inventory" and "Sale Inventory," both of which include as a necessary criterion that the inventory in question be listed on the relevant schedule attached to the Agreement. Agreement § 1. In other words, the Agreement makes clear that something could not be considered Rental Inventory or Sale Inventory for the purposes of the Agreement if it is not listed on the attached schedule specifically delineating such items, even though it might otherwise meet the definition of rental or sale inventory. United is quick to point out that the definition of "Equipment" does not include this criterion. So, the argument goes, if "unbooked inventory" could be classified as "tangible personal property used in the business," which seems appropriate, then unbooked inventory is "Equipment" as defined in the Agreement and therefore included in the sale. This is clearly a reasonable interpretation of the language of the Agreement.

 B. Plaintiff's Position Page 6

  Eagle Traffic argues in opposition that the unbooked inventory "would be addressed in post-Closing adjustments, with a corresponding increase in the purchase price; or viewed as inventory outside the contract, for which payment is now due." Compl. ¶ 32. In response to United's argument that unbooked inventory fits the definition of "Equipment" in the Agreement, Eagle Traffic question why such material is not listed in the corresponding schedule that lists all such items. More specifically, plaintiffs point to section 4.16 ("Tangible Assets") of the Agreement, which explains that schedule 4.16 is a list of "all Equipment of the Sellers as of March 31, 2000 . . . and (iv) all other tangible property of the Sellers used or useable in conjunction with the Business as of March 31, 2000. . . ." Agreement § 4.16 (emphases added). Exclusion of what would classify as "unbooked inventory" from schedule 4.16 indicates, according to plaintiffs, that such items were not included in the Agreement, and hence were not purchased by United. This likewise appears to be a reasonable interpretation of the Agreement.

 C. Defendant's Argument in Response to Plaintiffs

  Defendant points to section 10.14 of the Agreement in response to plaintiffs' argument that anything not listed in schedule 4.16 is not included in the Agreement. Section 10.14 states: "If the provisions of any . . . Schedule . . . to this Agreement are inconsistent with the provisions of this Agreement, the provisions of this Agreement shall prevail." Agreement § 10.14. It is not entirely clear how items listed or not listed in schedule 4.16 could be considered "inconsistent" with the provisions of the Agreement. "Inconsistent" is defined as "so related that both or all cannot be true." WEBSTER'S THIRD NEW INTERNATIONAL DICTIONARY 1144 (1981). A reasonable fact finder could conclude that since "unbooked inventory" is not specifically mentioned in the Agreement, its absence from schedule 4.16 is not inconsistent with the Page 7 provisions of the Agreement. United argues further that the non-compete clause of the Agreement, contained in § 6.2.1, would prohibit plaintiffs from doing anything useful with the unbooked inventory if they retained possession of it under the Agreement. More specifically, plaintiffs could not sell, lease, or rent the unbooked inventory. Agreement § 6.2.1. Despite this reality, plaintiffs could simply hold the unbooked inventory until the expiration of the non-compete clause. Or, as plaintiffs allegedly understood the Agreement to provide, they could work out a new agreement with United for it to purchase the unbooked inventory. Neither § 10.14 nor § 6.2.1 resolves the apparent ambiguity in the Agreement caused by the complete absence of "unbooked inventory" from any provision of the Agreement.

  Since I find the Agreement ambiguous as a matter of law, interpretation of the Agreement must be left for a fact finder. Mellon Bank, 619 F.2d at 1011 n.10. Ultimately, plaintiffs' position may not be sufficiently persuasive to prevail, but it is clear that this should be decided by a fact finder, rather than as a matter of law. Hence, defendant's motion for summary judgment will be denied.*fn1

 II. Plaintiffs Motion for Summary Judgment

  In United's answer to plaintiffs' complaint it asserted a counterclaim for rescission. Page 8 Plaintiffs now contend that the court should grant them summary judgment on this counterclaim because (1) "[t]here are no legal grounds for Defendant to rescind the contract," Pl. Mot. for Summ. J. 2, and (2) "United Rentals cannot restore the Plaintiffs to their pre-Closing position." Pl. Mot. for Summ. J. 4. Both arguments are dependent upon incorrect interpretations of the law on rescission, and therefore must fail.

 A. Legal Grounds for Rescission

  Eagle Traffic cites Johnston v. Johnston, 499 A.2d 1074 ( Pa. Super. 1985), as the controlling law in Pennsylvania on contract rescission. The court in that case held that "there must be a mutual agreement of the parties to rescind" a contract. Id. at 1077. However, as defendant points out, Johnston involved a contract both parties agreed was enforceable. In the instant case, defendant argues that if it is determined that the contract does not include the sale of unbooked inventory (either based on the words of the Agreement itself or extrinsic evidence), then the Agreement was made under a mutual mistake as to what was being sold and what was being bought and is therefore voidable. As the courts in Pennsylvania have continuously held, "`A contract made under a mutual mistake as to an essential fact which formed the inducement to it, may be rescinded on discovery of the mistake, if the parties can be placed in their former position with reference to the subject-matter of it.'" Vrabel v. Scholler, 85 A.2d 858, 860 (Pa. 1952) (quoting Blygh v. Samson, 20 A. 996, 997 (Pa. 1891)). The misunderstanding (if such it is) in the instant case, however, is not properly characterized as a "mutual mistake;" this is not a case "where parties have come to a mutual understanding as to the terms to be embodied in a proposed written contract or conveyance, and the writing executed is at variance with that understanding." Broida v. Travelers' Ins. Co., 175 A. 492, 493-94 (Pa. 1934); see also Page 9 RESTATEMENT (FIRST) OF CONTRACTS § 504 (1932); id. at § 504 cmt. a. Rather, the misunderstanding in the instant case qualifies as a "unilateral mistake," for which rescission is generally not a remedy. See Basler v. Sun Oil Co., 190 A. 718, 722 (Pa. 1937) ("The mistake, to be rectified, must be mutual, existing in the minds of both parties."); Herman v. Stern, 213 A.2d 594, 598 n.5 (Pa. 1965) ("The law is clear that a unilateral mistake will not void a contract.").

  There is an exception to this general rule, however, into which the facts of this case may fit. "[W]hen the non-mistaken party `knows or has reason to know of the unilateral mistake, and if the mistake, as well as the actual intent of the parties is clearly shown, relief will be granted to the same extent as a mutual mistake.'" In re Allegheny Intern., Inc., 954 F.2d 167, 180 (3d Cir. 1992) (quoting Lanci v. Metropolitan Ins. Co., 564 A.2d 972, 974 (1989)). Defendant claims that plaintiffs knew of its belief that unbooked inventory was included in the sale and has produced significant evidence in support of that contention. A reasonable fact finder could find, based on this evidence, that Eagle Traffic knew that United believed the contract to include the sale of the unbooked inventory. Hence, there is a genuine issue of material fact regarding whether rescission is appropriate in this case,*fn2 such that plaintiffs' motion for summary judgment on defendant's counterclaim for rescission will be denied.

 B. Restoration of Plaintiffs to their Pre-Closing Position

  Plaintiffs' other argument in support of their motion for summary judgment on defendant's counterclaim, that defendant cannot put plaintiffs in precisely the same position they were in prior to the execution of the Agreement, also fails at this juncture. First, the Page 10 Pennsylvania courts have explained that the parties need not be placed in exactly the same position, but rather must be returned "as nearly as possible to their original positions with regard to the subject matter of the contract." Keenheel v. Com., Pennsylvania Securities Com'n, 579 A.2d 1358, 1361 (Pa. Commw. 1990). So, even if United has sold certain pieces of equipment unquestionably purchased under the Agreement, United has provided evidence that it has records of such sales and can compensate Eagle Traffic accordingly. Def. Br. in Opp. to Pl. Mot. for Summ. J. Exs. G, H. The remainder of the assets can simply be transferred back to Eagle Traffic, thereby arguably placing plaintiffs in substantially the same position they were in prior to the execution of the Agreement. This is a matter for the fact finder to determine. Further, plaintiffs' argument focuses on defendant's inability to satisfactorily account for, and therefore return, the unbooked inventory. If, however, a fact finder concludes that the unbooked inventory was not included in the Agreement, then rescission of the Agreement could not affect any claim plaintiffs would have regarding the unbooked inventory. Rather, plaintiffs' success in that regard would be dependent on its conversion claim, contained in count II of the complaint. For these reasons, plaintiffs' motion for summary judgment on defendant's counterclaim on this ground will be denied.

  CONCLUSION

  The resolution of plaintiffs' claims and defendant's counterclaims depend primarily on interpretation of an ambiguous Agreement. This task has traditionally been left for a fact finder in Pennsylvania, which makes summary judgment on either of these claims inappropriate. Hence, plaintiffs' motion for summary judgment on defendant's counterclaim will be denied, as will defendant's motion for summary judgment on plaintiffs' claims. An appropriate order Page 11 follows. Page 12

  ORDER

  And now, this ___ day of February, 2004, upon consideration of defendant's motion for summary judgment on plaintiffs' claims and accompanying memorandum of law (Doc. #18), plaintiffs' responses in opposition thereto (Docs. #23, 28, 32), defendant's reply memoranda (Docs. #26, 34), plaintiffs' motion for summary judgment on defendant's counterclaim and accompanying memorandum of law (Doc. #17) and defendant's response in opposition thereto (Doc. #22), it is hereby ORDERED that the defendant's motion for summary judgment is DENIED and plaintiff's motion for summary judgment is DENIED.

  It is further ORDERED that trial is scheduled for April 5, 2004 at 10 a.m.


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