Hendricks v. Callahan
972 F.2d 190, 1992 WL 173082 (1992)
Rule of Law:
Minnesota law requires a showing of actual reliance by the buyer on an express warranty to succeed in a breach of warranty claim when the transaction does not involve the sale of goods and is therefore not governed by the Uniform Commercial Code (UCC).
Facts:
- In 1985, Dealers Supply Holding Company, Inc., whose sole stockholder was Kenneth A. Hendricks, agreed to purchase all the stock of Callahan Steel Supply, Inc. from James H. Callahan and the Callahan Steel Supply Profit Sharing Trust.
- As part of the Purchase Agreement, Callahan provided a Financial Statement Warranty, a Property Warranty (with exceptions for liens reflected on the balance sheet), and a Litigation Indemnity Agreement to hold Dealers Supply harmless for liabilities related to an ongoing lawsuit with Aberdeen Development Corp. (ADC).
- Callahan Steel leased a warehouse in Aberdeen, South Dakota, from ADC, and Note 12 of its financial statement indicated this lease was 'cancellable by the Company at any time.'
- At the time the Purchase Agreement was executed, a mechanic's lien existed on the Aberdeen leasehold, and litigation with ADC was pending; Hendricks and Dealers Supply were aware of this lien.
- In 1987, Hendricks decided to sell certain Dealers Supply assets, including the Aberdeen leasehold, to A.P.I. Supply Company (API).
- Due to the existing mechanic's lien and pending litigation, Dealers Supply was unable to furnish clear title to API, which consequently refused to purchase the leasehold without it.
- Callahan refused to settle the litigation or escrow money to provide clear title, resulting in API not purchasing the leasehold and Dealers Supply not realizing the desired price for the Aberdeen leasehold.
- In 1989, after API vacated the warehouse, Dealers Supply attempted to cancel its lease with ADC but discovered the lease was not, in fact, cancellable without liability, contrary to the financial statement, leading to the forfeiture of substantial personal property to terminate it.
Procedural Posture:
- Kenneth A. Hendricks and Dealers Supply Holding Company, Inc. (collectively 'Hendricks') sued James H. Callahan in the United States District Court for the District of Minnesota, asserting four counts, including breach of the Property Warranty and Litigation Indemnity Agreement (Count II) and breach of the Financial Statement Warranty (Count III).
- The District Court granted Callahan's motion for summary judgment on Count II, finding that Callahan had not breached the Property Warranty or Litigation Indemnity Agreement.
- The District Court, following a bench trial on Count III, ruled that Hendricks had failed to prove his claim for breach of the Financial Statement Warranty.
- Hendricks and Dealers Supply appealed the District Court's rulings on Count II and Count III to the United States Court of Appeals for the Eighth Circuit.
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Issue:
Does Minnesota law require a purchaser to have relied on an express warranty to succeed in a breach of warranty claim when the transaction does not involve the sale of goods, such as stock, and is therefore not governed by the UCC?
Opinions:
Majority - Henley, Senior Circuit Judge
Yes, Minnesota law requires a purchaser to have relied on an express warranty to succeed in a breach of warranty claim for transactions not involving goods. The court affirmed the district court's determination that Minnesota law requires 'some form of reliance' for a breach of express warranty claim in this context, citing Midland Loan Finance Co. v. Masden (1944) for the proposition that reliance must be 'clear and definite.' The court distinguished this case from those governed by the Uniform Commercial Code (UCC), specifically Minn.Stat.Ann. § 336.2-313, because the transaction involved the sale of stock, not 'goods.' While the UCC uses 'basis of the bargain' instead of 'reliance,' the court noted that even by analogy, Minnesota courts have shown a continued expectation of reliance, and prior Minnesota Supreme Court cases listing elements for breach of warranty under the UCC did not implicitly overrule Midland for non-UCC cases. The court further supported its stance by referencing Alley Construction Co. v. State (1974), a non-UCC case where the Minnesota Supreme Court affirmed jury instructions requiring reliance. Applying this principle to the Property Warranty claim, the court found no breach because Hendricks conceded knowledge of the lien and therefore did not rely on its non-existence. The Property Warranty itself excepted liens reflected on the balance sheet, and Hendricks' knowledge brought the lien within this exception. Callahan's indemnification promise was for liabilities related to the litigation, not an obligation to provide clear title on demand. For the Financial Statement Warranty claim, Hendricks conceded that if reliance was required, the district court's finding of no reliance meant the claim would fail, leading the appellate court to affirm that ruling.
Analysis:
This case is significant for clarifying the distinct requirements for breach of express warranty claims in Minnesota, depending on whether the transaction falls under the Uniform Commercial Code (UCC) for 'goods' or involves other types of assets, such as corporate stock. It firmly establishes that for non-UCC transactions, actual reliance by the buyer on the warranty is a necessary element, distinguishing it from the UCC's 'basis of the bargain' standard. This decision provides critical guidance on the continued applicability of older common law principles in areas not explicitly covered by modern statutory codes and prevents the sub silentio overruling of established precedent without direct legislative or supreme court action. This dual standard means legal analyses must carefully categorize the nature of the transaction to determine the appropriate elements of a breach of warranty claim.
