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Quadrant Healthcom, Inc. v. Clinical Cardiology Publishing Company

A-2530-02T5 (N.J. Super. App. Div. 2004) (Unpublished)

LETTERS OF INTENT; FRAUD; GOOD FAITH — A court analyzes the negotiation history of a proposed stock sale and concludes that the proposed seller did not breach its covenant of good faith and fair dealing despite a letter of intent that required each party to use its best efforts to enter into a stock sale agreement.

A buyer entered into negotiations with a seller to purchase her one hundred percent interest in a company. The parties executed a letter of intent (LOI) which bound them to use their best efforts to enter into a stock purchase agreement. After multiple extensions, the seller still did not execute the agreement. Additionally, the buyer discovered that the seller had possibly transferred a large number of shares to her son. The buyer became concerned that this transfer affected the seller’s ability to contract with the buyer. As a result, the buyer sued to recover the money it spent in anticipation of the sale, claiming that the seller failed to honor the LOI by failing to use her best efforts to consummate the transaction. The buyer also alleged common law fraud, alleging that the seller transferred her shares to her son so that she would not be able to comply with the LOI.

The lower court dismissed the buyer’s claims. It noted that under the terms of the LOI, the seller was precluded from selling or soliciting shares of its stock to a third party. The paragraph did not preclude the transfer of stocks to family members. As to the fraud claim, the Court pointed out that either party had the right to discontinue discussions as long as he or she had used best efforts to close. There was no proof that the son was a shareholder at anytime during the negotiations. Additionally, the Court found that the seller might have sought to transfer a portion of the sale proceeds to her son. Regardless, it held that there was no evidence showing that the seller had sold shares to her son so that she would not be able to comply with the LOI.

On appeal, the Appellate Division pointed out that a material breach of a contract may occur when, during the course of performance, one party fails to perform essential obligations under contract. When a contract calls for a series of acts over a long period of time, a material breach may arise upon a single occurrence or following consistent recurrences which tend to defeat the purpose of the contract. To determine if a material breach has occurred, a court must first look to the language in the agreement. In addition, every contract contains an implied covenant of good faith and fair dealing. This duty may be breached even where there is no breach of the contract’s express terms. The Court held that in this case, the seller did not breach the contract nor her implied covenant of good faith. As noted by the lower court, the LOI did not preclude the transfer of stocks to family members. In addition, the Court noted that during the son’s deposition, he stated that his mother “had total control,” and that at all relevant times, his mother had full and exclusive authority to negotiate with the buyer.

To prove fraud, the buyer had to demonstrate a material misrepresentation of an existing or past fact; the seller’s knowledge of its falsity; the seller’s intent that the buyer rely on it; the buyer’s reasonable reliance on it; and resulting damages. Here, the Court held that the buyer failed to meet its burden of proof. The seller never agreed to negotiate a final agreement or to accept whatever terms and conditions the buyer wanted to impose. Further, the LOI specifically provided that representations were to be embodied in the final agreement. Neither party was forced to come to an agreement as long as it used its best efforts. The Court noted that the buyer had failed to produce any evidence suggesting that if the seller changed her mind about the sale, she did so in bad faith. Therefore, the Appellate Division affirmed the decision of the lower court and dismissed the buyer’s claims.

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