Litigation

District Court Denies Partial Summary Judgment on Breach of Implied Covenant of Good Faith and Fair Dealing Claim

By Morris James LLP

Zwanenberg Food Group (USA) Inc. v. Tyson Refrigerated Processed Meats, Inc., Civ. No. 08-329-LPS (D. Del. Feb. 27, 2009).

United States Magistrate Judge Leonard P. Stark denied Tyson Refrigerated Processed Meats, Inc.'s ('Tyson') motion for partial summary judgment of Zwanenberg Food Group (USA) Inc.'s ('ZFG') contract-based claim that Tyson breached the implied covenant of good faith and fair dealing.

Both Tyson and ZFG are producers and manufacturers of canned meats and other food products. Pursuant to the contract at issue, ZFG purchased from Tyson inventory and equipment used to manufacture canned luncheon meat for private label customers. Wal-Mart Stores, Inc. ('Wal-Mart') was Tyson's largest customer for the goods it produced using the assets that were sold to ZFG. Tyson and ZFG, without the involvement of Wal-Mart, executed an Asset Purchase Agreement ('APA') and the deal closed.

As set out in the APA, ZFG agreed to pay Tyson an additional Transition Payment of $500,000 after closing when certain conditions were met. Those conditions were as follows: (1) ZFG must make a request of Tyson for Transition Services within thirty days of closing and (2) upon request, Tyson must provide Transition Services. The Transition Services, as defined therein, required Tyson to assist ZFG with its first production and to contact Transition Businesses, such as Wal-Mart, to facilitate establishment of ZFG's relationship with the Transition Businesses.

In short, Wal-Mart rejected ZFG as a new vendor. Wal-Mart cited Tyson's failure to collaborate with Wal-Mart in deciding to sell the business to ZFG. Wal-Mart also expressed its dissatisfaction that Tyson failed to notify Wal-Mart of the change of vendor until the 11th hour when Tyson was aware of Wal-Mart's excessive quality check requirements for new vendors. Tyson, thereafter, requested payment for Transition Services and ZFG refused payment.

ZFG filed suit alleging, inter alia, that Tyson breached the implied covenant of good faith and fair dealing because Tyson took weeks to arrange a meeting between ZFG, Tyson and Wal-Mart; a meeting among the parties did not occur until three weeks after the closing; Tyson falsely advised ZFG that Wal-Mart was aware of the sale of the business to ZFG prior to the meeting with Wal-Mart; and Wal-Mart was not advised of the transition until the meeting.

The Court rejected Tyson's argument that ZFG improperly seeks to state a claim for breach of implied covenant based on Tyson's actions prior to contract formation. The Court cited the aforementioned facts finding that there is sufficient post-contractual conduct to support ZFG's claim. The Court also rejected Tyson's argument that ZFG seeks to impose obligations on Tyson that were not contemplated in the APA. The Court found that ZFG does not claim that ZFG's failure to obtain Wal-Mart's business was itself a breach but rather that ZFG claims that its failure to obtain Wal-Mart's business was a consequence of Tyson's breach of the implied covenant in unduly delaying the scheduling of the meeting that ZFG requested. The Court concluded that the allegations in the Complaint are plausible and dismissed Tyson's motion for partial summary judgment.

Full post as published by Delaware Business Litigation Report on March 10, 2009 (boomark / email).