September 8, 2017
from the United States District Court for the Western
District of Wisconsin. No. 14-cv-193-wmc - William M. Conley,
Manion, Kanne, and Hamilton, Circuit Judges.
Corporation purchased the assets of two bioaugmentation
companies from Marilyn and Malcolm Peacock. The Asset
Purchase Agreement included the sale of equipment at the
Peacocks' Beloit, Wisconsin plant. Betco asked Malcolm to
remain at the Beloit plant after the sale as president.
Eventually, Betco discovered that the Beloit plant was
delivering defective products to customers. It filed this
suit against the Peacocks and their holding companies for
fraud, negligent misrepresentation, breach of contract, and
breach of the duty of good faith and fair dealing.
two rounds of summary judgment and a bench trial, the
district court dismissed the entirety of Betco's suit.
Betco appeals the dismissal of its breach of contract and
breach of the duty of good faith and fair dealing claims. We
Peacock was the founder of Bio-Systems Corporation and
Enviro-Zyme International, LLC (together, Bio-Systems). The
companies produced biodegradation products that contained
bacteria designed to break down various forms of waste.
Malcolm developed a "wet-batch" process at
Bio-Systems's Beloit plant to produce the bacteria.
Customers requested, and often required, certificates of
analysis documenting the bacteria level in the product at the
time of sale. So Bio-Systems counted the bacteria in a
product before sale using a spiral plater and
2010, Betco Corporation purchased Bio-Systems's assets
from Malcolm and Marilyn Peacock and their holding companies,
B. Holdings, Inc. and E. Holdings, LLC, (together, the
Peacocks). Before closing, Betco visited Bio-Systems's
sites, spoke with Bio-Systems's personnel, and examined
Bio-Systems's financial information. At closing, Betco
paid the Peacocks $5 million and placed $500, 000 in escrow.
The Asset Purchase Agreement ("the Agreement")
required Betco to pay out the $500, 000 two years after
closing if it did not identify any problems in that time that
required using the escrow funds to fix.
closing, Betco asked Malcolm to continue to run the Beloit
plant just as he had before the sale but now as president of
Betco's newly-formed Bio-Systems of Ohio
("Bio-Ohio"). Betco instructed Malcolm to focus on
sales and profits. Later, Betco identified problems with the
products being shipped from the Beloit plant. First, though
Betco knew before closing that the bacteria yields were
inconsistent at the Beloit plant, it learned within a year of
closing that some products were being shipped to customers
with below-specification bacteria counts. A few months later,
Betco nonetheless paid out the escrow funds early in exchange
for a 12% discount. Second, after paying out the escrow,
Betco discovered that certificates of analysis were being
re-used or falsified by the sales team.
unclear to what extent Malcolm concealed the issues from
Betco. According to some former employees, Malcolm was not
receptive when employees questioned Bio-Ohio's methods.
Further, one employee testified that Malcolm instructed him
to not speak directly with Betco personnel. But other
employees testified that Malcolm never discouraged them from
communicating with Betco after the sale. In fact, Malcolm
himself suggested that Betco's Vice President of Research
and Development visit the Beloit plant for a week to learn
more about Bio-Ohio. The vice president said that he was
busy, so he only made a number of short visits.
April 2012, Betco sued the Peacocks in federal district court
in Ohio for fraud, negligent misrepresentation, breach of
contract, and breach of the duty of good faith and fair
dealing. The case was transferred to Wisconsin.
the court first dismissed Betco's negligent
misrepresentation and breach of contract claims against the
Peacocks, finding both claims were time-barred by Section
10.05 of the Agreement. The court later dismissed Betco's
fraud claim against the Peacocks and its breach of the duty
of good faith claim against all the defendants except
Malcolm. After a bench trial, the court ruled in
Malcolm's favor on the duty of good faith claim. The
court found that Betco failed to prove ...