UNPUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

PINE STATE CREAMERY COMPANY,
Plaintiff-Appellee,

v.                                                                 No. 98-2441

LAND-O-SUN DAIRIES, INCORPORATED,
Defendant-Appellant.

Appeal from the United States District Court
for the Eastern District of North Carolina, at Raleigh.
Terrence W. Boyle, Chief District Judge.
(CA-96-170-5-BO, BK-93-536-6-ATS, AP-95-165-5-S)

Argued: May 5, 1999

Decided: December 2, 1999

Before ERVIN,* WILKINS, and KING, Circuit Judges.

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Vacated and remanded by unpublished per curiam opinion.

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COUNSEL

ARGUED: Monroe David Bryant, HUGHES & LUCE, L.L.P., Dal-
las, Texas, for Appellant. Lacy Martin Presnell, III, David Warren
Boone, BURNS, DAY & PRESNELL, P.A., Raleigh, North Carolina,
for Appellee. ON BRIEF: James W. Hryekewicz, HUGHES &
_________________________________________________________________
*Judge Ervin heard oral argument in this case but died prior to the
time the decision was filed. The decision is filed by a quorum of the
panel pursuant to 28 U.S.C. § 46(d).
LUCE, L.L.P., Dallas, Texas; Robert E. Fields, III, Bonnie Kay
Donahue, Christine Sandez, WOMBLE, CARLYLE, SANDRIDGE
& RICE, Raleigh, North Carolina, for Appellant.

_________________________________________________________________

Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).

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OPINION

PER CURIAM:

Land-O-Sun Dairies, Inc., appeals the district court's grant of sum-
mary judgment to Pine State Creamery Company in this adversary
proceeding commenced within the context of Pine State's Chapter 11
bankruptcy. In its Amended Complaint, Pine State alleged that Land-
O-Sun breached, without justification, a written agreement to pur-
chase Pine State's Raleigh, North Carolina dairy plant. Because the
conflicting evidence reveals a genuine issue of material fact, i.e., the
materiality of the reason proffered by Land-O-Sun for reneging on the
purchase agreement, we vacate the judgment of the district court and
remand the case for trial.

I.

A.

In August 1995, Flav-O-Rich, Inc., a regional producer and distrib-
utor of dairy products, entered into negotiations with Pine State
(which had been operating in bankruptcy for about two years) for the
purchase of Pine State's dairy plant and certain related assets. On
October 1, 1995, Flav-O-Rich was itself acquired by Land-O-Sun, a
Delaware corporation with its principal place of business in Johnson
City, Tennessee; two days later, Land-O-Sun agreed in principle to
the Pine State deal, for which it proposed to pay in excess of $3 mil-
lion.

                    2
Lawyers for the parties drafted an "Asset Purchase Agreement"
("APA"). Section 1.39 of the APA specified the assets that would be
sold: customer lists and distribution routes; inventories of finished
products; machinery and equipment; goodwill and other intangibles;
intellectual property, such as patents and trademarks; and everything
else used in running Pine State's business, including the processing
plant -- but excluding cash, receivables, utility deposits, real estate,
and all non-business assets. The terms of the APA contemplated that
the deal would close on November 30, 1995.

Articles V and VI of the APA set forth certain warranties and rep-
resentations made by Pine State and Land-O-Sun, respectively, in
connection with the deal. Section 5.3 provided that Pine State's bal-
ance sheet as of September 30, 1995, and monthly earnings state-
ments for the entire year would be attached as a Schedule to the
agreement. These reports were required to "fairly present[ ] the finan-
cial position of [Pine State] and the results of its operations and
changes in its financial position . . . ."

In Section 5.13, Pine State warranted that, dating from September
30, 1995, there had been no "material adverse change in the business,
financial condition, results of operations or assets or liabilities of the
Business . . . ." In return, Land-O-Sun gave its assurances in Section
6.5 that it had "undertaken such investigation as it has deemed neces-
sary to enable it to make an informed and intelligent decision with
respect to this Agreement, and . . . has relied solely upon its own
investigation analysis and . . . upon the representations and warranties
contained in this Agreement . . . ."

Land-O-Sun's obligation to close the deal was subject to the fulfill-
ment of the conditions precedent outlined in Article VIII, including
Section 8.3, providing an escape in the event of"any material adverse
change in the Business"; and Section 8.8, imposing a continuing duty
on Pine State to ensure that its warranties and representations
remained "true and correct in all material respects" as of the closing
date. In addition, Section 10.1(c) permitted Land-O-Sun to terminate
the APA at any time prior to closing, "if there has been a material vio-
lation or breach by [Pine State] of any agreement, representation or
warranty contained in this Agreement which is not curable . . . ."

                     3
B.

Allen Meyer, the Chief Executive Officer of Land-O-Sun, signed
the APA on October 31, 1995; Pine State's president, Ben Kilgore IV,
affixed his signature the following day. At the time of his signing,
Meyer did not have access to Pine State's financial reports for Sep-
tember, which were supposed to have been attached pursuant to Sec-
tion 5.3. Attached instead were Pine State's reports for August; they
had been telecopied to Land-O-Sun's lawyers on October 23 with the
note that Pine State was "currently in the process of closing" Septem-
ber. The August reports showed an operating profit for the month of
about $41,000, and a year-to-date profit of approximately $44,000.

The September reports told a different story. Rather than operating
at a small profit, it was revealed that Pine State had lost more than
$212,000 for the year. Most of the $256,000 loss attributed in Sep-
tember -- over $200,000 -- was the result of accounting and billing
errors that had accumulated over the previous one to three months;
had the August reports been accurate, they would have shown a year-
to-date loss of more than $150,000.

Pine State neglected to forward the September reports to Land-O-
Sun until November 21, when they did so in response to a request by
one of Land-O-Sun's attorneys. On November 27, Loren White,
Land-O-Sun's Chief Financial Officer, flew from Johnson City to
Raleigh at Meyer's request to meet with Pine State's representatives
concerning the company's financial situation. By then, the October
reports were available, and they reflected an operating loss for that
month of an additional $156,000. The next day, Meyer informed Kil-
gore in writing that Land-O-Sun was terminating the APA, based on
"a material adverse change in the business which we thought we were
acquiring." J.A. 514.

Pine State continued to lose money, finishing the year over
$700,000 in the red. On the heels of the failed transaction, Pine State
filed an adversary proceeding in the bankruptcy court against Land-
O-Sun, alleging that Land-O-Sun had breached the APA. Land-O-Sun
answered and filed a counterclaim for misrepresentation. On June 15,
1996, Pine State ceased its operations. It ultimately disposed of its
operating assets for about $400,000.

                    4
Following discovery, Land-O-Sun moved for summary judgment;
that motion was denied by the bankruptcy court on June 11, 1997, and
the case was sent to the district court for a jury trial. At a motions
hearing on November 24, 1997, the district court indicated its belief
that the case presented no triable matter. On December 24, 1997, after
considering memoranda from the parties regarding the materiality of
the information contained in the September and October 1995 finan-
cial reports, the district court entered summary judgment for Pine
State; the court ruled that, as a matter of law, Land-O-Sun had
breached the APA without justification. The district court concomi-
tantly denied Land-O-Sun any relief on its counterclaim.

During the next several months, the district court received evidence
of Pine State's damages. On August 25, 1998, the court denied Land-
O-Sun's motion for reconsideration of its earlier order as to liability,
and it entered summary judgment on behalf of Pine State for approxi-
mately $2.77 million, plus interest and an attorney fee award of fif-
teen percent. Land-O-Sun appeals.

II.

A.

Summary judgment is appropriate only in those cases where the
pleadings and responses to discovery "show that there is no genuine
issue as to any material fact and that the moving party is entitled to
a judgment as a matter of law." Fed. R. Civ. P. 56(c); see Celotex
Corp. v. Catrett, 477 U.S. 317, 323 (1986). We review a district
court's grant of summary judgment de novo. Higgins v. E.I. DuPont
de Nemours & Co., 863 F.2d 1162, 1167 (4th Cir. 1988).

A material fact is one "that might affect the outcome of the suit
under the governing law." Anderson v. Liberty Lobby, Inc., 477 U.S.
242, 248 (1986). A disputed fact presents a genuine issue "if the evi-
dence is such that a reasonable jury could return a verdict for the non-
moving party." Id. In this regard, the party opposing the motion for
summary judgment "is entitled to have the credibility of his evidence
as forecast assumed, his version of all that is in dispute accepted,
[and] all internal conflicts . . . resolved favorably to him." Brewster
of Lynchburg, Inc. v. Dial Corp., 33 F.3d 355, 361 (4th Cir. 1994)

                    5
(quoting Charbonnages de France v. Smith, 597 F.2d 406, 414 (4th
Cir. 1979)) (alterations in original) (internal quotation marks omitted).

B.

1.

Pursuant to the parties' agreement, embodied in Section 13.10 of
the APA, the substantive law of North Carolina governs this dispute.
Under North Carolina law, the materiality of a contractually imposed
obligation -- such that failure to perform the obligation justifies
rescission of the contract -- is a question of fact. Opsahl v. Pinehurst,
Inc., 344 S.E.2d 68, 74 (N.C. Ct. App. 1986) (citing Combined Ins.
Co. of Am. v. McDonald, 243 S.E.2d 817, 820 (N.C. Ct. App. 1978)).
In "appropriate cases," the court may determine materiality as a mat-
ter of law. McDonald, 243 S.E.2d at 820. Consistent with the sum-
mary judgment standard, an "appropriate case" would be one in which
the evidence is so one-sided as to create no genuine issue for a jury
to resolve.

The specific question in this case is whether, at the time the APA
was signed, the parties contemplated that a sudden downturn in Pine
State's profitability would be a material factor in Land-O-Sun's deci-
sion to follow through with the purchase one month later. If this ques-
tion is answered in the affirmative, then it must be concluded that
Land-O-Sun legitimately refused to close the deal for failure of the
condition precedent outlined in Section 8.3 of the APA -- that the
Business shall not have suffered "any material adverse change."
Alternatively, Land-O-Sun could have properly terminated the APA
under Section 10.1(c) because Pine State had warranted in Section
5.13 against "any material adverse change in the business, financial
condition, results of operations or assets or liabilities of the Business
. . . ."1
_________________________________________________________________
1 Pine State contends that the term "Business" should be construed to
mean only the physical processing plant and the customer routes; inas-
much as these assets themselves suffered no material adverse change fol-
lowing the signing of the APA, Pine State maintains that neither Section
8.3 nor Section 10.1(c) could provide Land-O-Sun with a reason to

                     6
Neither Section 8.3 nor Section 10.1(c) define, by example or oth-
erwise, what is meant by a "material" adverse change. To a significant
extent, it can be discerned from the language and structure of the con-
tract itself whether a particular occurrence is material.2 Often, how-
ever, it is necessary to resort to extrinsic evidence to ascertain the
precise intent of the parties. Opsahl, 344 S.E.2d at 74. In North Caro-
lina, "[p]arol evidence generally is admissible to show grounds for
granting or denying rescission even if the written agreement includes
a merger clause." Id. at 75 (citation omitted).3
_________________________________________________________________
rescind the contract. Pine State bases its argument on this Recital in the
preamble to the APA:

          A. Seller owns and operates a dairy processing plant under
          the name "Pine State Creamery" at Raleigh, North Carolina (the
          "Plant") and operates a wholesale dairy distribution system (the
          "Routes") through which dairy products produced at the Plant are
          sold (collectively, the "Business")[.]

We agree that, in a broad sense, the plant and the routes constitute the
Business, but the Recital plainly refers to Pine State's operation of both;
it also mentions the production of goods, placing the plant in the context
of something more than four walls, a floor, and a ceiling. Indeed, a cus-
tomer "route" has little value other than as an outlet for the sale of goods
produced as the result of operations. Under the circumstances, and espe-
cially in light of Section 10.1(c)'s separate reference to "results of opera-
tions . . . of the Business" (which would make little sense if it referred
only to a building or to a path along which customers happened to be
located), we conclude that Pine State's financial activities are fairly
included within the term "Business," as defined by the APA.
2 Indeed, that was primarily the approach taken by the court in
McDonald: "Here, the clear intent of the parties to the contract, as
expressed therein, and the stipulated fact of the defendant's employment
with another company within two days, constituted evidence of the par-
ties' intent that the notice of termination provision not be deemed mate-
rial." McDonald, 243 S.E.2d at 820 (emphasis added). The court
nonetheless noted that its conclusion regarding materiality "was also
amply supported by other evidence before the trial court." Id.
3 The APA contains just this sort of "merger clause" in Section 13.1:

          This Agreement . . . set[s] forth the entire understanding of the
          parties and supersede[s] any and all prior or contemporaneous
          agreements, arrangements and understandings relating to the
          subject matter hereof, and the provisions hereof may not be
          changed, modified, waived or altered except by an agreement in
          writing signed by the parties hereto.

                     7
In accordance with the legal principles expressed above, we now
examine the evidence in this case to determine whether it gives rise
to a genuine issue regarding the materiality of Pine State's continued
profitability in the months prior to the scheduled closing. If no such
genuine issue exists, then the district court correctly identified this
matter as an "appropriate case" for disposition as a matter of law, and
its judgment ought to be affirmed.

2.

The language and structure of the APA indicates that the parties
considered Pine State's profitability to be material to the culmination
of the sale. Section 5.3 provided for the attachment of a Schedule
comprised of Pine State's balance sheet as of September 30, 1995,
along with the company's monthly statements of earnings for the
entire year. By operation of Section 13.6, this Schedule was incorpo-
rated into the parties' agreement.

The financial statements were to be prepared, insofar as possible,
"in accordance with generally accepted accounting principles," so as
to fairly present "the financial position of[Pine State], and the results
of its operations and changes in its financial position . . . ." (emphasis
added). And, as we have already noted, Section 5.13 required Pine
State to warrant that, for the period commencing October 1, 1995,
there had been no significant change for the worse in its financial con-
dition or results of operations.

It is difficult to imagine why the parties would go to the trouble of
integrating Pine State's financial reports into the APA had they not
intended that Land-O-Sun should rely on them in deciding to close
the purchase. Of course, the mere fact of inclusion does not render
every provision, clause, or schedule essential to the underlying agree-
ment, else the concept of materiality would have little meaning.
Nonetheless, where the parties have undertaken not only to include
particular information, but also to ensure its initial accuracy and guar-
antee its ongoing validity, common sense dictates that the information
is quite possibly pertinent to a foundational assumption upon which
the desire to contract is premised.

Our hypothesis is borne out in this case by CEO Meyer's deposi-
tion testimony. By the time of his participation in the Pine State trans-

                     8
action on behalf of Land-O-Sun, Meyer had been personally involved
in thirty-five dairy acquisitions. With regard to the financial reports
referenced in the APA, Meyer stated:

          Any acquisition I've looked at . . . I've either had informa-
          tion given to me or someone may have given me [a] repre-
          sentation, but this [the information contained in financial
          statements] is the . . . financial condition of the company.
          We've always, then, relied on what the representations have
          been in the agreement . . . and you can look at all these
          acquisitions, and I've never had a situation where that hasn't
          been the case.

J.A. 609. According to Meyer, he became alarmed upon learning that
the September 1995 financial reports were inconsistent with his belief
that Pine State was continuing to operate on at least a break-even
basis.

In contrast, Pine State points out that the APA was, after all, noth-
ing more than an agreement to purchase certain of the dairy's assets;
it was not a proposal whereby Land-O-Sun would simply assume Pine
State's management role in an attempt to operate the business as a
going concern. Considering the nature of the transaction at issue, the
argument goes, Land-O-Sun was necessarily far more concerned with
how it would operate its own business using the acquired assets than
with Pine State's bottom line.

To bolster its position, Pine State notes that its losses in 1995 were
similar to those in the years immediately prior, all of which were a
matter of record in the bankruptcy proceedings. Meyer, moreover,
decided to sign the APA before the September 1995 financial reports
were made available, notwithstanding their prominence by specific
mention in Section 5.3. Finally, the deposition testimony of Meyer
and others reveals that Land-O-Sun may not have conducted its "due
diligence" -- pursuant to Section 6.5 of the APA -- in a particularly
diligent manner, perhaps indicating that Land-O-Sun was relatively
unconcerned with how profitably Pine State was operating its busi-
ness.

We cannot agree with Pine State that the ongoing financial results
of its operations were irrelevant to maintaining Land-O-Sun's interest

                    9
in acquiring it; indeed, such a contention belies the plain import of the
language and structure of the APA. Rather, the financial viability of
Pine State was at the essence of the contract -- it is simply a question
of degree regarding the point that Pine State's operating losses would
become "material." Had Pine State operated at a small loss during the
autumn of 1995, that eventuality would surely have been within the
contemplation of Land-O-Sun; it undoubtedly was acquiring Pine
State in the belief that it could turn the dairy's fortunes around. Con-
versely, had Pine State lost millions during the same period, Land-O-
Sun could have readily concluded that the business was a lost cause.

Whether an operating loss of more than $400,000 during a two-
month period amounts to a "material adverse change," however, pre-
sents a considerably closer question. Although such a downturn
appears substantial at first blush, James D. Vick, Pine State's Vice-
President of Finance during the acquisition negotiations, testified at
deposition that his company's business was seasonal. Vick explained
that sales were generally at their highest point during the summer, but
would plunge severely in the autumn.

Under the circumstances, we cannot say that Pine State's operating
losses were material as a matter of law. Instead, the facts of this case
create a genuine issue as to the materiality of Pine State's losses in
September and October 1995 with respect to Land-O-Sun's obliga-
tions under the APA. Far from being an "appropriate case" for sum-
mary disposition, this dispute centers on a question that is properly
submitted for decision by a jury that has been given a full opportunity
to carefully consider and evaluate the conflicting evidence.

III.

In accordance with the foregoing, the judgment of the district court
is vacated, and this case is remanded for trial.

VACATED AND REMANDED

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