TALLMAN, Circuit Judge:
Oracle Corporation is the second-largest producer of software in the world. In the third quarter of its 2001 fiscal year, Oracle missed its forecasted earnings per share by two cents. Its stock price dropped. A legion of analysts blamed the miss on a late-quarter reaction by several key customers to the unfolding U.S. economic downturn that would become commonly known as the burst of the dot-com bubble. Plaintiffs, several intra-quarter purchasers of Oracle common-stock, brought this securities litigation against Oracle and three of its officers alleging the miss was actually caused by an elaborate scheme to defraud the public about the quality of Oracle products and the revenue gained therefrom. Because Plaintiffs have not developed evidence sufficient to permit a reasonable jury to conclude that their losses were caused by the market's reaction to Defendants' alleged fraud, as opposed to Oracle's poor financial health generally, we affirm the district court's order granting summary judgment in favor of Oracle.
I
Plaintiffs allege that: (1) Defendants violated Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), and Securities Exchange Commission Rule 10b-5; (2) Oracle's Chief Executive Officer Larry Ellison, Chief Financial Officer Jeffrey Henley, and Executive Vice President Edward Sanderson are liable as control persons under Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a); and (3) Henley and Ellison are liable for contemporaneous trading under Section 20A of the Exchange Act, 15 U.S.C. § 78t-1(a). To support these allegations, Plaintiffs claim Defendants made false and misleading statements about a new software product, issued a false and misleading forecast for the third quarter of Oracle's 2001 fiscal year, made false and misleading intra-quarter statements, and fraudulently overstated earnings for the second quarter of the 2001 fiscal year. The following undisputed facts are relevant to those claims.
In May 2000, Oracle released integrated business software called Suite 11i, a suite of programs designed to work together to manage various company activities such as manufacturing, customer relations, sales, and accounting. Traditionally, enterprise resource planning ("ERP") applications performed functions such as accounting, human resources, and manufacturing. Customer relationship management applications ("CRM") performed functions such as managing call centers. Through the late 1990s, businesses that used enterprise applications software could not obtain ERP and CRM applications from the same vendor. Suite 11i was marketed as an innovative product that would combine the two types of applications.
The four quarters of Oracle's 2001 fiscal year were: from June 1 to August 31, 2000 ("1Q01"); from September 1 to November 30, 2000 ("2Q01"); from December 1, 2000, to February 28, 2001 ("3Q01"); and from March 1 to May 31, 2001 ("4Q01"). In 1Q01 and 2Q01, Oracle earned a combined $435 million in revenue from applications licenses. On December 14, 2000, Oracle announced 2Q01 earnings per share ("EPS") of 11 cents and 66% growth in sales of Suite 11i applications. The same day, Oracle issued public guidance for 3Q01 projecting EPS of 12 cents. This guidance was based upon an accounting process that had generated projections that Oracle had met or exceeded for seven consecutive quarters.
Historically, the majority of Oracle's sales were made in the final days of a quarter as customers waited for Oracle to significantly lower prices in an attempt to meet its quarterly projections. This trend was commonly referred to as "the hockey-stick effect" because plotting the quarterly sales on a graph resembled the shape of a hockey-stick — the sharp upswing at the end representing the bulk of quarterly sales.
Oracle generates numerous internal financial reports throughout any given quarter. Relevant to this litigation are intra-quarter reports projecting quarterly EPS — called internal forecasts — and intra-quarter reports aggregating the company's sales revenue at a given point in time — called flash reports. Internal forecasts are an aggregation of the revenue and growth data contained in flash reports. Whereas flash reports take a snapshot of revenue and growth at the time they are produced, internal forecasts are forward-looking and involve a degree of extrapolation based on the judgment and experience of corporate management.
From the beginning of 3Q01 on December 1, 2000, until February 5, 2001, every internal forecast that Oracle produced indicated that the company could fulfill its 3Q01 guidance. However, from February 5, 2001, until the end of the quarter, Oracle's internally projected EPS began to fluctuate. A February 5 internal forecast projected a potential EPS of 11 cents. A February 12 internal forecast returned the quarter's potential EPS to 12 cents. A February 19 internal forecast again lowered the potential EPS to 11 cents. Then, a February 26 internal forecast — prepared two days prior to the end of the quarter — again predicted a potential EPS of 11 cents. While Oracle had exceeded late-quarter internal forecasts in quarters past, the recurring surge in late-quarter sales historically resulting from the hockey-stick effect did not materialize this time.
On March 1, 2001, Oracle preliminarily announced a 3Q01 EPS of 10 cents — a two penny miss. The announcement quoted Ellison as saying,
License growth was strong in the first two months of Q3, and our internal sales forecast looked good up until the last few days of the quarter. However, a substantial number of our customers decided to delay their IT spending based on the economic slowdown in the United States. Sales growth for Oracle products in Europe and Asia Pacific remained strong. The problem is the U.S. economy.
On March 2, 2001, Oracle's stock price dropped from $21.38 to $16.88.
Earlier in the quarter, Ellison and Henley had exercised millions of Oracle stock options. Henley sold one million Oracle shares for a total of $32 million on January 4, 2001. Ellison sold 2.09% of his Oracle holdings between January 22 and January 31, 2001. A substantial amount of the shares sold were acquired through options set to expire in August 2001. In total, Ellison sold a little over 29 million Oracle shares for approximately $895 million. Importantly, these sales predated the first internal forecast indicating a potential EPS lower than the quarterly guidance of 12 cents.
II
The district court originally dismissed Plaintiffs' revised second amended complaint for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6), finding that the allegations did not create a strong inference that intra-quarter statements made by Defendants were known to be false when made. See In re Oracle Corp. Sec. Litig., No. 01-CV-988, 2003 WL 23208956 (N.D.Cal. March 24, 2003). In November 2004 we reversed, holding that the operative complaint met the heightened pleading requirements of the Private Securities Litigation Reform Act ("PSLRA"). See Nursing Home Pension Fund, Local 144 v. Oracle Corp., 380 F.3d 1226 (9th Cir. 2004). Copious discovery ensued.
On September 2, 2008, as a result of Defendants' failure to preserve all its potential evidence, the district court issued an order concluding that Plaintiffs were entitled to adverse inferences with regard to two categories of evidence: Ellison's email files and materials created in the process of writing the book Softwar. As a sanction, the court ruled that Plaintiffs would be entitled to an inference that the spoliated evidence would demonstrate Ellison's knowledge of any material facts that Plaintiffs could otherwise establish.
Despite the absence of the missing Ellison emails and tapes, discovery proceedings in this case produced over 134 deposition days, countless discovery requests and answers, and over 2.1 million pages of documents. As the experienced district judge quipped, the word "voluminous" does not do justice to the record in this case. On October 20, 2008, Defendants moved for summary judgment. Prior to the hearing on summary judgment, Defendants made over eighty evidentiary objections. Plaintiffs never responded to those objections — notwithstanding the passage of four months between the summary judgment hearing and the district court's final order.
On June 19, 2009, the district court made several key evidentiary rulings and granted Defendants' motion for summary judgment. In re Oracle Corp. Sec. Litig., No. 01-CV-988, 2009 WL 1709050 (N.D. Cal. June 19, 2009). The court concluded that Plaintiffs had failed to create a genuine issue of material fact as to (1) whether Oracle's 3Q01 forecast lacked a reasonable basis, (2) whether several intra-quarter statements were false or misleading, (3) whether Plaintiffs' loss was caused by Defendants' misrepresentations regarding Suite 11i, and (4) whether Plaintiffs' loss was caused by Defendants' misrepresentation of 2Q01 earnings. Plaintiffs timely appealed.
III
Not surprisingly, Plaintiffs pursue numerous evidentiary arguments on appeal.
A
We review the district court's exclusion of evidence for an abuse of discretion. United States v. Mitchell, 502 F.3d 931, 964 (9th Cir. 2007). A district court abuses its discretion if it reaches a result that is illogical, implausible, or without support in inferences that may be drawn from facts in the record. United States v. Hinkson, 585 F.3d 1247, 1251 (9th Cir. 2009) (en banc). A district court's ruling on a motion for summary judgment may only be based on admissible evidence. Beyene v. Coleman Sec. Servs., Inc., 854 F.2d 1179, 1181 (9th Cir. 1988) (citing Fed.R.Civ.P. 56(e)).
In this case, prior to the district court's ruling on Defendants' motion for summary judgment, Plaintiffs failed to respond to over eighty evidentiary objections made by Defendants. There is much disagreement between the parties as to whether or not each of these objections had been preemptively addressed by Plaintiffs. Irrespective of that dispute, we conclude the district court did not abuse its discretion on this record.
Plaintiffs, as the parties seeking admission of most of the evidence at issue, bore the burden of proof to show its admissibility. Pfingston v. Ronan Eng'g Co., 284 F.3d 999, 1004 (9th Cir. 2002). Given the overwhelming volume of documents before the district court, once Defendants objected to the evidence Plaintiffs sought to be admitted, the onus was on Plaintiffs to direct the district court's attention to authenticating documents, deposition testimony bearing on attribution, hearsay exceptions and exemptions, or other evidentiary principles under which the evidence in question could be deemed admissible by the district court. Plaintiffs failed to do so. We cannot declare that the district court reached an illogical or implausible result by excluding apparent hearsay or documents without sufficient foundational support as the rules of evidence prescribe, or that the district court otherwise exceeded the permissible bounds of its discretion by failing to comb through the voluminous record searching for evidentiary bases to introduce the evidence at issue. That was Plaintiffs' obligation.
Plaintiffs now urge us to take judicial notice of certain deposition testimony that they claim bears on the propriety of the district court's hearsay rulings. We decline Plaintiffs' invitation. The proper place to call attention to any such testimony was in front of the district court, and furthermore, the content of a deposition is not a clearly established "fact" of which this panel can take notice. See Bias v. Moynihan, 508 F.3d 1212, 1225 (9th Cir. 2007).
It behooves litigants, particularly in a case with a record of this magnitude, to resist the temptation to treat judges as if they were pigs sniffing for truffles. See Downs v. Los Angeles Unified Sch. Dist., 228 F.3d 1003, 1007 n. 1 (9th Cir. 2000) (citing United Stbid." The Customer's position in further discussions with the Buyer on July 14, 2003, was that if the Buyer built the corrugator and it "doesn't perform we [,the Customer,] will not pay the final 30% payment and [the Buyer] will be out roughly another $75K." At this point, Sonnentag did not doubt the Buyer's ability to manufacture the corrugator, but considered the Cascade contract to be "dead in the water." In a July 31, 2003, letter to the Customer's attorney, the Buyer's attorney called upon the Customer to share in the costs of further research and development, especially with regard to the square column application, if the Customer wished to proceed with the project. In a letter dated August 18, 2003, the Customer's attorney advised the Buyer's attorney that the Buyer had repudiated the Cascade contract by failing to provide assurances that it could produce the machine for which the Customer had contracted, and demanded the return of the Customer's down payment. In a letter dated August 27, 2003, the Buyer's attorney advised the Seller's attorney that "Modern is continuing to build the corrugator Cullom contracted to build and will tender it to [the Customer] when completed. Obviously, [the Customer] will not accept the tender." Therefore, the Buyer's attorney argued that the Seller should cooperate with the Buyer to resolve the dispute with the funds left in escrow. In a letter dated September 15, 2003, the Buyer advised the Customer's attorney that "the machine . . . will be available and tendered sometime in late November or the first week in December" and asked for verification that the Customer was willing to accept delivery. No such verification came. As we have stated, the Buyer did not build the machine. The assertion that it was being built was false.
As part of the APA, the Shareholders of the Seller leased real property to the Buyer. The Buyer did not make its rent payments and, in addition, damaged the property. On October 23, 2003, the Shareholders filed an action against the Buyer in Bradley County Circuit Court seeking to recover unpaid rent and property damage. That case was transferred to the trial court and consolidated with this case for trial. The Shareholders prevailed on their claim, and that judgment is not challenged on appeal.
The Buyer and its co-defendants maintain that if this appeal results in a judgment in their favor and against the Seller and its Shareholders, the judgment for unpaid rent and property damage in their opponents' favor would be treated as an offset. We will leave that detail to the trial court or remand.
On September 30, 2003, Sonnentag, as the sole shareholder of both Modern Tennessee and Modern Florida, orchestrated a transfer of all of Modern Tennessee's assets to Modern Florida, leaving Modern Tennessee judgment-proof. His wife loaned Modern Florida $1,950,000. Modern Florida paid Modern Tennessee $1,950,000 for its assets. In turn, Modern Tennessee paid Sonnentag the $1,950,000 that it owed him on a loan he had made to Modern Tennessee to fund the purchase of the Seller's assets. Modern Florida expressly excluded any liability for the Cascade contract and for the lease obligations to the Shareholders.
The Customer filed its complaint in the trial court on February 27, 2004, naming the Seller and the Buyer as defendants. The Buyer filed its answer and then, just a few days later, unbeknownst to the Customer, filed articles of dissolution authorized by the Buyer on September 30, 2003, with the Tennessee Secretary of State. The Buyer continued to defend this action and file pleadings and discovery responses as if it were still in business.
Approximately two years into the litigation, the Customer learned of the dissolution of Modern Tennessee and the transfer of its assets to Modern Florida. The Customer then amended its complaint to add Sonnentag and Modern Florida as parties. The Customer included a claim that the actions of the added defendants were unfair and deceptive and violated the TCPA. The Seller amended its pleadings to conform to the Customer's new allegation. Four days after filing its answer, Modern Florida transferred all of its assets to another entity solely owned and controlled by Sonnentag leaving Modern Florida without assets. The Customer later dismissed without prejudice all aspects of its claim against the Seller except its claim for breach of contract.
In January 2008, before the February 2008 trial, the court granted partial summary judgment in favor of the Customer holding that the Cascade contract was a valid and enforceable contract. It also granted a motion in limine filed by the Customer excluding deposition testimony of Noirot that there was not a contract because of the parties' disagreement about what the Customer was to receive.
When the case came on for trial, the various claims other than the rent and property damage claims of the Shareholders were as follows:
The Customer's claims against Modern Tennessee, Modern Florida and Sonnentag:
Repudiation of the Cascade contract
Breach of the Cascade contract
Tennessee Consumer Protection Act
Tennessee Uniform Fraudulent Transfer Act
Negligent and Fraudulent misrepresentation
The Customer's claims against the Seller and the Shareholders:
Breach of contract
The Seller and Shareholders' claims against Modern Tennessee, Modern Florida and Sonnentag:
Breach of the APA
Indemnification pursuant to APA
Tennessee Consumer Protection Act
Tennessee Uniform Fraudulent Transfer Act
Common law fraud Promissory fraud
The Buyer's claims against the Seller and the Shareholders:
Breach of the APA
Indemnification pursuant to APA
Negligent and Fraudulent Misrepresentation
Tennessee Consumer Protection Act
With respect to the Customer's claims, the court held that both the Seller and the Buyer breached the contract because they did not build the corrugator. However, the court held that the Seller's liability was secondary, as the assignor, and that the Buyer's liability was primary. The court found that the Buyer repudiated the Cascade contract by failing to provide assurances that the machine would "produce[] the quality needed" after the Customer justifiably asked for assurances. Also, the trial court found that the Buyer violated the TCPA by false and deceptive trade practices comprised of (1) fraudulent misrepresentations that the machine would be delivered when in fact the Buyer did not intend to build the machine, (2) fraudulent misrepresentations exaggerating the Seller's culpability, and (3) fraudulent conveyances of all its assets in order to insulate itself from judgment. Further, the court pierced the corporate veil of both Modern Tennessee and Modern Florida and held Sonnentag personally liable for the actions of Modern Tennessee. The court awarded the Customer judgment against Modern Tennessee, Modern Florida, and Sonnentag in the amount of $657,129.51. This amount represents the Customer's down payment of $113,290, trebled to $339,870; prejudgment interest of $54,526.68; and attorney fees of $262,732.83. The court awarded the Customer judgment against the Seller, as a surety, in the amount of $167,816.68, made up of the down payment and prejudgment interest.
The court stated:
[The Buyer] failed to prove its defense of impossibility of performance. Based on the actions of [the Buyer] in affirming the contract and then denying its ability to perform several times over several months and subsequently accusing [the Seller] of fraud and the shell game in moving assets, the court finds [the Buyer] intentionally misrepresented . . . its intentions regarding the contract and therefore violated the Tennessee Consumer Protection Act and is thus liable to [the Customer] for attorney's fees. [The Buyer] is guilty of unfair and deceptive acts.
The court's reasoning was as follows:
A combination of several of the applicable factors mandates piercing of the corporate veil and the holding of Sonnentag personally liable for [the Seller's] and [the Customer's] claims. There is no dispute that Sonnentag is the sole shareholder of both Modern Tennessee and Modern Florida. As the sole shareholder of both corporations, Sonnentag fraudulently and secretly diverted Modern Tennessee's assets to Modern Florida to the detriment of Modern Tennessee's creditors.
Sonnentag consistently failed to maintain an arms-length relationship between Modern Tennessee and Modern Florida. The assets of both were commingled. For example, the money Sonnentag loaned to Modern Tennessee to buy [the Seller] was deposited into Modern Florida's bank account, and Modern Florida paid for [the Seller].
Moreover, Sonnentag testified that, from his perspective, there is no difference between Modern Tennessee and Modern Florida. As Sonnentag stated succinctly, "Modern is Modern." Both companies had the same employees and attorneys. It was an attempt to shield liability and responsibility.
Sonnentag's commingling of the two entities' assets and liabilities as well as his complete disregard for corporate formalities mandates a piercing of the corporate veil and a finding that Sonnentag is personally liable for [the Seller's] indemnification claim.
The court held that the same actions constituted fraudulent transfers of the Buyer's assets and common law fraud toward both the Customer and the Seller.
Based on the reasoning (1) that the Buyer breached the APA when it failed to perform the Cascade contract, (2) that the Buyer committed promissory fraud by misrepresenting its intention to perform the Cascade contract, and (3) then committed unfair and deceptive acts to try to avoid liability or insulate itself from liability, the court held Modern Tennessee, Modern Florida and Sonnentag liable to indemnify the Seller to the extent the Seller satisfies the Customer's judgment of $167,816.68 plus attorney's fees of $189,004.85.
The court held that even though the Seller negligently misrepresented the status of the Cascade contract by failing to disclose that the Customer had declared the project dead until further assurances were received, the misrepresentation was not material, and did not cause any damage to the Buyer. The court based its finding of no damages upon the fact that the Buyer did not build the corrugator. Based upon the same reasoning, the court found that the Seller did not breach the APA.
The court stated with regard to the misrepresentation as follows:
Although Nick Noirot informed Chris Turner on May 30, 2003, that the deal was "dead" and "on hold" until [the Seller] could produce acceptable samples from a corrugator with one drive, Chris Turner did not disclose it to [the Buyer] before the closing of the Asset Purchase Agreement.
[The Seller] had a contractual and fiduciary duty to inform [the Buyer] of any development with the [Cascade] contract, particularly any developments occurring after the parties signed the Asset Purchase Agreement on May 28-29, 2003 and signing the closing documents on June 3, 2003.
[The Buyer] asked [the Seller] for all documents and information relating to the Cascade project. [The Buyer] clearly evidenced a desire to discover all information about this contract as it completed its due diligence before closing on the Asset Purchase Agreement.
The Court finds that [the Seller] did not intentionally mislead [the Buyer] about the status of the Cascade contract. The Court does find that [the Seller] negligently misrepresented the status of the Cascade contract; however, the omission was not material. The cost to correct the defect was insignificant in light of the totality of the circumstances. The complete contract price was over $200,000. But for [the Buyer] deciding the project was underbid, it could have completed the contract. [The Buyer] could have but never did exercise the option to rescind the Asset Purchase Agreement; therefore, [the Buyer] is responsible for and accepted the contract and all damages caused by the breach of the contract. It is therefore liable for damages caused by the breach. [The Seller] was no longer responsible for the Cascade project as between [the Seller] and [the Buyer] but was responsible to [the Customer].
The court entered a final judgment in accord with its findings in its memorandum opinion. The Buyer and its co-defendants, Modern Florida and Sonnentag, filed this timely appeal, challenging the adverse judgment and the trial court's failure to award judgment in favor of Buyer against the Seller and the Shareholders.
III.
Specifically, the Buyer, Modern Florida and Sonnentag raise the following issues which we have shortened and restated to conform to the arguments advanced in their brief.
Whether the trial court erred in finding that the misrepresentation concerning the status of the Cascade contract was not material.
Whether the trial court erred in finding that the Seller and the Shareholders were not liable to the Buyer for its attorney's fees under the escrow agreement and indemnification provision of the APA because of the Seller's failure to disclose the Customer's declaration that the Cascade contract was dead until further assurances were made.
Whether the evidence preponderates against the finding that the Buyer committed promissory fraud.
Whether the trial court erred in holding the Buyer and its co-defendants liable under the TCPA based on actions that happened after the Customer executed the Cascade contract and declared the project dead and the contract in breach.
Whether the trial court erred in piercing the corporate veil of Modern Tennessee and Modern Florida and holding Sonnentag personally liable for the actions of the entities.
The Seller purports to raise an issue as to the trial court's finding of a "fiduciary duty" to the Buyer to disclose "any development" with regard to the Cascade contract. However, the Seller concedes that it had a duty to disclose material developments. Based on our conclusion that the Seller's failure to disclose that the Customer had declared the project dead until a demonstration of quality could be made was a material misrepresentation, we will not reach this inconsequential issue.
IV.
The interpretation of a written contract is a matter of law and not of fact. Wills Wills, L.P. v. Gill , 54 S.W.3d 283, 285 (Tenn. Ct. App. 2001). Therefore, our review of the terms of a contract and the obligations it imposes on the parties is de novo with no presumption of correctness. Id.
V.
The core of the Buyer's argument is that the trial court erred in reading into the Cascade contract an obligation in conflict with the explicit terms of the PA and one that was not even disclosed by the Seller to the Buyer as a point of contention with the Customer. The obligation the Buyer speaks of is the obligation to build a corrugator that will "produce[] the quality needed" by the Customer. The Buyer argues that the error permeated all aspects of the memorandum opinion which formed the basis for the judgment. The Buyer points out, correctly, that even though the court granted partial summary judgment holding that a valid and enforceable contracts exists, it did not identify the key provisions of the contract in either its order granting partial summary judgment or its memorandum opinion.
The Customer argues that the trial court got everything right, even going so far as to argue in support of the recovery by the Seller. The Customer stresses the bad actions of the Buyer and its co-defendants to the point of arguing that this case is not at all about the contracts, but a case about the bad acts of the Buyer and its cohorts. The Seller argues that the trial court erred in finding that it had a fiduciary duty to inform the Buyer of "any development" with the Cascade contract, but otherwise was correct in all respects. The Seller also focuses on the bad acts of the Buyer and its co-defendants.
We agree with the Buyer on several significant points, the first of which is that, even if all the factual findings of the trial court are accepted as true, the terms of the PA did not obligate the Buyer to build either a dual-drive corrugator or a corrugator that would "produce[] the quality needed" by the Customer. It is also clear that the corrugator the Customer expected, and upon which it demanded assurances, was something other than what it was entitled to receive under the Cascade contract. The deal was to build a horizontal corrugator per the Seller's quote "subject to the terms and conditions set forth in" the PA.
One of those "terms and conditions" explicitly speaks to when the obligation to build the corrugator arises: "[The Customer] shall approve [the Seller] prepared project definition form . . . prior to [the Seller] manufacturing [the corrugator]." The trial court found that the Buyer and the Seller breached the Cascade contract by not building a corrugator. It is undisputed that the Customer refused to approve the project definition upon learning that it described a corrugator with one drive rather than two. Therefore, the obligation to build the corrugator never ripened.
The evidence strongly preponderates in favor of a finding that the primary concern of the Customer was not the number of drives employed but, rather, that the machine it would pay for and receive under the PA would produce a product of acceptable quality. In essence this is what the trial court found:
Noirot was personally unfamiliar with the number of drives on corrugators and could not tell by looking at a corrugator how many drives it had. . . . [The Customer] would have bought the corrugator even if it had needed an additional drive as long as it produced the quality needed which [the Seller] said could be accomplished.
The problem with finding a breach by either the Seller or the Buyer based on the failure to build a machine that would produce a certain quality end product is that the PA explicitly negates such an obligation.
[The Customer] acknowledges that [the Seller] has not made and does not make any warranty or representations, either expressed or implied, or any kind whatsoever with respect to the ultimate product which may be obtained from the [corrugator].
The PA also excludes, in all capital letters, any "WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE."
We have very little doubt that the Customer thought it was buying a machine that would produce acceptable quality porch columns. Once the Seller and the Customer joined forces against the Buyer, the Seller essentially stipulated that its deal with the Customer was to produce such a machine. However, the Seller's stipulation after the fact does not bind the Buyer to terms contrary to those in the contract, especially since the Buyer was not told of the Customer's expectations until after the closing. The question becomes whether the explicit terms of the contract were modified. The trial court did not make a specific finding as to whether the terms of the written contract were modified by oral discussions or the course of conduct or dealing between the Customer and the Seller. Regardless, the PA expressly speaks to any such possibility:
This Agreement represents the entire agreement of the parties and supersedes all previous discussions, representations, negotiations and writings. No Amendment to this Agreement is valid unless it is in a written instrument that is signed by authorized representatives to this Agreement. A course of
conduct shall not be deemed an amendment to this Agreement.
We must hold, therefore, that while the Seller was free to make any concession to the Customer it chose while it was the entity responsible for making the corrugator, it was not legally bound, nor could it bind the Buyer, to manufacture a corrugator that would produce columns of a certain quality.
The Seller attempts to distinguish between a warranty or a representation that the machine would produce columns of a certain quality on one hand, and a demand for assurance that the machine would produce acceptable quality samples. The Seller argues "all . . . [the Buyer] had to do was produce samples on a single-drive corrugator that were as good as those previously approved by Cascade." We believe this is a distinction without a difference in the context of this case. The Buyer ran samples on a single drive machine that the Customer did not find acceptable. The Customer then took the position that any risk that the machine would not produce an acceptable end product was on the Buyer; Noirot testified, "I told [Karr] . . . if you build a machine and . . . it doesn't work, it doesn't hit our specs, then I'm not going to pay the last [payment of] 30%."
Since we have acknowledged that the Customer obviously had expectations of receiving a machine that would produce a certain quality product, we think it prudent to address any perceived unfairness in our holding. First, we note that the Customer was not a typical household consumer. It was an established business entity with a certain amount of sophistication. Its agents read the project definition carefully enough to detect that the corrugator being described employed only one drive unit. If it had read the PA as carefully, it would have seen the exclusionary provisions. The law presumes that the Customer did read and understand the PA. See Giles v. Allstate Ins. Co., Inc. , 871 S.W.2d 154, 157 (Tenn. Ct. App. 1993).
Second, and more importantly, the Customer was protected from "disaster" by an escape clause which gave it the ability to cancel the contract, in which event "[w]ork on the balance of the order will be stopped as promptly as reasonably possible" with the obligation only to reimburse the builder of the machine for its costs "plus a reasonable profit on such items." The Seller and the Buyer both acknowledge that since the Customer declared the project "dead," or repudiated as the case may be, before any materials were purchased or any work was done, the Customer is entitled to recover its down payment in its entirety.
The next key question in this case is from whom may the Customer recover its down payment. The answer is both the Seller and the Buyer. Neither the Seller nor the Buyer argue on appeal that there was not a contract with the Customer. The Buyer in fact argues that there was a written contract that protected it from the obligation of building a machine that matched the customer's expectations. The contract of which it took an assignment protected it from the Customer's unjustified expectations under our holding above. The only real argument that the Buyer makes against being held liable to the Customer for the down payment is that the Seller is the party that received the down payment. That is no answer. The same contract that protected the Buyer from the Customer's expectations obligated the Buyer, as the assignee of the Seller's covenants, to reimburse the down payment. The Seller remains liable to the Customer despite the delegation of its performance to the Buyer. See Tenn. Code Ann. § 47-2-210 (1) (2001) ("No delegation of performance relieves the party delegating of any duty to perform or any liability for breach."). There has been no challenge to the award of prejudgment interest tacked onto the amount of the down payment, therefore we will not disturb that part of the trial court's judgment.
It will be helpful in understanding the remainder of our analysis for us to clarify and summarize our holdings to this point. We hold that the trial court erred in finding that the Buyer and the Seller breached the Cascade contract by not building a corrugator. That obligation did not arise because the Customer did not approve the project definition. The Buyer did not repudiate. Rather, the Customer cancelled the contract as it was allowed to do. At that point, the Buyer and the Seller became obligated to refund the Customer's down payment.
The next logical question is whether the Buyer should have been allowed indemnification under the APA and the escrow agreement. This implicates the issue of whether the Seller's misrepresentation was material. The misrepresentation of which we speak is the failure to disclose that the Customer had declared the project "dead" until further assurances were forthcoming. The trial court classified its finding of non-materiality as a conclusion of law. Under the facts of this case, we agree with the trial court's "classification" of this issue. Accordingly, we will review it de novo without a presumption of correctness. Gill , 54 S.W.3d at 285; Abdur'Rahman v. Bredesen , 181 S.W.3d 292, 305 (Tenn. 2005) (standard of review of mixed questions of law and fact is de novo without presumption of correctness).
A concise way of stating the test of materiality is that "[a] misrepresentation is material if it would be likely to induce a reasonable person to manifest his assent, or if the maker knows that it would be likely to induce the recipient to do so." Thoroughbred Motorcars, Inc. v. Draper , No. 01A01-9219-CV-000468, 1993 WL 135436, at *2 (Tenn. Ct. App. W.S., filed April 30, 1993); see also, Patel v. Bayliff , 121 S.W.3d 347, 353 (Tenn. Ct. App. 2003). The primary reason given by the trial court for finding the misrepresentation not to be material is that the Buyer did not exercise its right to terminate and declare the APA null and void by June 15, 2003, the time window given in the APA. The Seller argues in support of the trial court's finding that the breach, or misrepresentation, must be viewed "in the context of [the Seller's] total obligations." Adams TV of Memphis v. Comcorp of Tenn. , 969 S.W.2d 917, 921 (Tenn. Ct. App. 1997). Since the Buyer did not rescind the whole deal, the argument goes, the omission could not have been material in the context of the APA's totality. We are not persuaded. A buyer that is damaged by a breach of contract involving a misrepresentation can elect, as late as after the verdict comes in, between rescission of the contract and recovery of the purchase price, or damages. Goodman v. Jones , No. E2006-02678-COA-R3-CV, 2009 WL 103504 at *9-10 (Tenn. Ct. App. E.S., filed Jan 12, 2009). The Seller's argument, and the trial court's finding, amount to an incorrect election of remedies requirement.
The Buyer points out that terminating the APA after the closing would have been like trying to un-ring a bell. The substance of the Buyer's argument is that it is not fair to test materiality by whether it was willing to scrap the whole deal because of this one problem. One of the trial court's factual findings that indirectly supports the Buyer's position is that there were other things of value that the Buyer acquired that it did not want to lose.
We agree with the Buyer that the misrepresentation was material. It seems apparent to us that any reasonable party in the Buyer's position would want to know before assuming a limited number of obligations that a dispute had arisen concerning one of those obligations. The record in this case fully supports that conclusion. The trial court specifically found that the Buyer "clearly evidenced a desire to discover all information about this contract as it completed its due diligence before closing on [the APA]." The fact that the Seller specifically covenants under the APA not to misrepresent its obligations and that the parties included the indemnification clauses and the escrow agreement to provide relief for misrepresentations supports an interpretation that provides relief for an impairment of the bargain short of something that ruins every aspect of it. We hold, therefore, that the trial court erred in its conclusion that the Seller's failure to disclose problems with the Cascade contract was not material.
Before moving forward to another point, we will deal briefly with the trial court's reasoning that the Seller's omission was not material because all of the problems could have been cured by someone spending a mere $5,000 for a second drive. The Buyer takes issue with the amount, but we hold that the evidence does not preponderate against the finding that the cost of a second drive would have been approximately $5,000. Rather, we hold that the finding was in error because it was a vast oversimplification of a complicated dispute. By the time the Buyer closed, the Customer was not demanding a second drive, but a demonstration that the machine to be built would produce samples of the same quality produced in the earlier demonstration. The Customer's demand included square columns even though the initial demonstration dealt only with round columns. The Customer never approved a project definition. By the time the matter came to a head, the Customer's position was that the Buyer was building the machine subject to the risk the Customer would not pay if the corrugator did not "meet . . . specs." Any reasonable entity in the Buyer's position would have wanted to know that the Customer had declared the project on hold, so as to be able to decide what to do about scenarios such as actually came to pass. We stand by our holding that the Seller's omission was material.
The trial court also held that the Seller could not be liable to the Buyer because the Buyer was not damaged. This finding will not withstand scrutiny under our holdings thus far. At the very least, rather than performing the contract that it assumed with at least some prospect of making a profit or minimizing its loss, the Buyer is now being held liable to refund the down payment. Moreover, the Buyer unknowingly purchased a lawsuit. It is now in a worse position than it would have been had the contract been performed. See GSB Contractors, Inc. v. Hess , 179 S.W.3d 535, 541 (Tenn. Ct. App. 2005) (the proper measure of damages for breach of contract is to place the non-breaching party in the position it would have been in had there not been a breach).
Our holdings (1) that the contract the Buyer assumed did not include the obligation to supply a dual-drive corrugator or a corrugator that would make products of a warranted quality and (2) that the Buyer was damaged by a material misrepresentation of the Seller require that we hold the trial court erred in awarding the Seller indemnification and denying the Buyer indemnification. As the Buyer has pointed out, the trial court's error in enforcing a term that the PA did not include permeated the court's memorandum opinion and resulting judgment. The APA excludes from the Buyer's responsibility any "liability or obligation . . . which arises out of or is based upon any express or implied representation, warranty, agreement or guarantee made by [the] Seller, or alleged to have been made by [the] Seller, or which is imposed or asserted to be imposed by operation of law, in connection with any . . . product sold . . . by . . . [the] Seller on or prior to the Closing Date." The Buyer assumes only the obligations specifically listed and excludes "any other liability or obligation." The Seller and its Shareholders are required to indemnify the Buyer against any loss that results from (1) "any and all liabilities and obligations of [the Seller] . . . of any nature whatsoever . . . except those liabilities and obligations which [the Buyer] specifically assumes," and (2) "any misrepresentation, breach of warranty or nonfulfillment of any agreement or covenant . . . under this Agreement." Also, the escrow fund was created for the recognized purpose of providing security to the Buyer against any losses, damages or expenses, including litigation expenses, "arising out of or resulting from: (a) the breach of any warranty or representation of [the] Seller . . . or (b) any excluded liabilities . . ." We hold that provisions of the APA and the attached escrow agreement required that the Seller and the Shareholders indemnify the Buyer, and not vice-versa, for any losses and expenses, including reasonable attorney fees, incurred in defending against the claim that the Buyer was obligated to build a machine that either had dual-drives or would produce an end product of the Customer's expected quality. We hold that the Buyer's right to indemnification most certainly includes the right to be indemnified against the amount of the down payment and prejudgment interest. We will leave it to the trial court on remand to determine the exact amount of the other elements of indemnification, including reasonable attorney's fees related to the "down payment" aspect of the case versus other aspects.
In view of our previous holdings, it may be that we could skip directly to our conclusion without directly addressing the promissory fraud, the TCPA claims, and the piercing of the corporate veil. We will, nevertheless, work our way through these points with brevity and clarity in mind, rather than exhaustive analysis.
The finding of promissory fraud against the Buyer is premised upon the idea that it never had the intention of building the machine. We disagree. Even if all the trial court's factual findings are correct, its legal conclusion was wrong. The thrust of the Buyer's communications were that it could build the machine that the Seller sold under the express terms of the PA but the Customer would most likely be dissatisfied because it demanded more. There was nothing wrong or inaccurate about those communications. This litigation has proven that the Buyer was correct. Moreover, we have held that in light of the Customer's refusal to approve the project definition, the obligation to build the corrugator was not triggered.
We also hold that the trial court erred in finding the Buyer liable for violations of the TCPA. Given our analysis to this point, the only thing other than defending itself in this litigation that the Buyer did that arguably caused harm to the Customer was in failing to promptly refund the down payment. There is plenty of documentary evidence in the record that the Buyer did actually try to facilitate repayment of the down payment through the Seller and the escrow fund. Since that is the same end result we have reached, we cannot reconcile holding the Buyer liable under the TCPA with our holding that the Seller is ultimately liable for the down payment out of the escrow fund. At most, the Buyer's refusal to refund the down payment out of its pocket was a failure to perform its obligation of refund under the contract. Not every failure to perform a contract is a violation of the TCPA. Hall v. Hamblen , No. M2002-00562-COA-R3-CV, 2004 WL 1838180, at *4 (Tenn. Ct. App. M.S., filed Aug. 16, 2004). Even if the Buyer did misrepresent its true intentions with regard to building the machine, those misrepresentations did not cause a loss to either the Seller or the Customer. Under the TCPA, the "loss of money or property" must be "a result of . . . [the] unfair or deceptive act." Tenn. Code Ann. § 47-18-109(a)(1)(2001); White v. Early , 211 S.W.3d 723, 742 (Tenn. Ct. App. 2006). The Customer paid the money long before the Buyer's representations, and both the Customer and the Seller held to their respective positions after receiving those representations. In other words, the Buyer's alleged misrepresentation did not cause either the Seller or the Customer to do something that had not already been done. We find it interesting, also, that the Customer now so adamantly argues it was harmed by the Buyer's broken promise to build the corrugator, but prior to the litigation was adamantly, through Noirot, warning the Buyer that if it built a corrugator that did not satisfy Noirot, the Customer would not pay.
The final issue we must address is the Buyer's attempt to hide away its assets with the help of Modern Tennessee and Sonnentag. We do not in any way condone these actions. However, the end result is that these actions did not result in any harm to either the Customer or Seller. The Customer will recover its down payment with interest. These funds are available from the escrow fund and ultimately will come out of the Seller's pocket. The Buyer, by placing a portion of the purchase price in escrow, made available liquid funds to satisfy the judgment. The trial court therefore erred in placing personal liability on Sonnentag to satisfy obligations that either did not exist or were satisfiable through funds made available by the Buyer, Modern Tennessee. We will not discuss and do not decide whether, had the trial court been correct in entering a $600,000 plus judgment against Modern Tennessee, the court's analysis would have been correct. We do not render advisory opinions. McIntyre v. Traughber , 884 S.W.2d 134, 137 (Tenn. Ct. App. 1994).
VI.
To summarize, we take these actions with regard to the trial court's judgment: (1) we reverse the judgment against Modern Florida and John Sonnentag; (2) we modify the judgment in favor of the Customer and against Modern Tennessee so as to provide that Modern Tennessee is not liable for breach of contract, promissory fraud or treble damages and attorney's fees under the TCPA, but is liable to the Customer for refund of the down payment in the amount of $113,290 plus prejudgment interest of $54,526.68 for a total of $167,816.68; (3) we modify the judgment in favor of the Customer and against the Seller to provide that Seller is not liable for breach of contract but that Seller is responsible for refund of the down payment plus prejudgment interest for a total of $167,816.68; (4) we reverse the judgment awarding the Seller indemnification and attorney's fees against the Buyer and award Buyer indemnification against the Seller and the Shareholders to include any amount Buyer pays the Customer and such further amount as determined by the trial court on remand; and (5) we affirm the judgment except as modified or reversed herein.
VII.
The judgment of the trial court is reversed in part and modified in part. Those portions of the trial court's judgment not reversed by this opinion are affirmed as modified. Costs on appeal are taxed to appellants Cullom Machine Tool and Die, Inc., nka CMTD, Inc., Heinrich B Dickhut and Karen J. Dickhut. This case is remanded, pursuant to applicable law, for further proceedings consistent with this opinion.