Budget Marketing, Inc. v. Centronics Corporation
927 F.2d 421 (1991)
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Rule of Law:
Oral assurances made subsequent to a non-binding letter of intent can form the basis of a promissory estoppel claim if a party reasonably and detrimentally relies on those assurances, even when the letter of intent contains an express disclaimer of any binding obligations.
Facts:
- In April 1987, Budget Marketing, Inc. (BMI) and Centronics Corporation executed a letter of intent for Centronics to acquire BMI.
- The letter of intent explicitly stated it 'shall not be construed as a binding agreement' and was conditioned on several factors, including the execution of a definitive agreement.
- After the letter was signed, BMI and its president, Charles Eagle, began taking costly steps to meet the letter's conditions, including expanding operations and Eagle personally borrowing $750,000 for BMI's use.
- Throughout the summer and fall of 1987, Centronics officials made numerous oral assurances to BMI and third parties, such as bankers, that the deal would be consummated.
- Centronics officials were aware of the substantial efforts and expenses BMI was undertaking in reliance on the eventual closing of the deal.
- In October 1987, Centronics' president told an investment banker involved in the deal that Centronics was ready to move toward closing.
- In November 1987, Centronics abruptly terminated negotiations, stating that proposed federal tax legislation made the deal 'no longer feasible,' a reason BMI alleged was pretextual.
Procedural Posture:
- Eagle and BMI filed suit against Centronics in an Iowa state district court (trial court).
- Centronics removed the case to the United States District Court for the Southern District of Iowa.
- Centronics filed a counterclaim against BMI alleging negligent misrepresentation.
- The district court granted summary judgment in favor of Centronics on all of BMI's claims.
- The district court also granted summary judgment in favor of BMI on Centronics' counterclaim.
- BMI and Eagle, as appellants, appealed the summary judgment against them to the U.S. Court of Appeals for the Eighth Circuit.
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Issue:
Does a party's oral assurances that a deal will close, made after executing a non-binding letter of intent, create a triable claim for promissory estoppel when the other party relies on those assurances to its detriment?
Opinions:
Majority - Gibson
Yes, a party's oral assurances that a deal will close can create a triable claim for promissory estoppel despite a non-binding letter of intent. The court affirmed the dismissal of BMI's claim for breach of an implied duty to negotiate in good faith, reasoning that the letter's clear and unambiguous disclaimer stating it was not a binding agreement prevented the implication of such a duty. However, the court reversed the summary judgment on the promissory estoppel claim. It found that BMI had presented substantial evidence of Centronics' subsequent oral assurances that the deal would close, BMI's reasonable and detrimental reliance on those promises (e.g., expanding its business), and Centronics' awareness of this reliance. These facts created a genuine issue for a jury to decide whether the elements of promissory estoppel under Iowa law—a clear promise, detrimental reliance, and the need to enforce the promise to avoid injustice—were met. The court also affirmed the dismissal of the negligent misrepresentation claims for both parties, applying a recent Iowa Supreme Court ruling that limits this tort to parties in the business of supplying information, not to parties negotiating a commercial transaction at arm's length.
Analysis:
This decision illustrates a crucial limitation on the effectiveness of non-binding clauses in letters of intent. While the disclaimer successfully defeated a contract-based claim for breach of a duty to negotiate in good faith, it did not shield the party from an equitable claim based on subsequent oral promises. The case establishes that a party's conduct and communications after signing a preliminary agreement can create independent grounds for liability under promissory estoppel. This precedent cautions negotiating parties that they cannot rely solely on a non-binding clause to make representations that induce reliance without facing potential liability for the other party's reliance damages.
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