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Betco Corporation, Ltd. v. Peacock

United States Court of Appeals, Seventh Circuit

November 27, 2017

Betco Corporation, Ltd., Plaintiff-Appellant,
v.
Malcolm D. Peacock, Marilyn Peacock, B. Holdings, Inc., and E. Holdings, LLC, Defendants-Appellees.

          Argued September 8, 2017

         Appeal from the United States District Court for the Western District of Wisconsin. No. 14-cv-193-wmc - William M. Conley, Judge.

          Before Manion, Kanne, and Hamilton, Circuit Judges.

          KANNE, CIRCUIT JUDGE

         Betco 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.

         After 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 affirm.

         I. Background

         Malcolm 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 "ProtoCOL" counter.

         In 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.

         After 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.

         It's 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.

         In 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.

         There, 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 ...


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