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How Oral Agreements Become Legally Binding

Make no mistake, oral agreements -- that is, spoken words – can seal a deal and become legally enforceable in a court of law. The tricky part is substantiating, by admissible testimony and other evidence, who said what. Beginning in 2010, Minnesota-based Vermillion State Bank loaned money to Troje's Trash Pick-up, Inc.  As collateral, Vermillion obtained security interests in Troje's tangible assets such as trucks and in intangible assets such as customer routes.

Barry Shanoff

March 7, 2022

8 Min Read
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“An oral contract is not worth the paper it’s written on.”  That’s an often-quoted remark attributed to film producer Samuel Goldwyn. What he actually said, praising studio executive Joseph Schenck who was known to be steadfastly honorable, was “His verbal contract is worth more than the paper it’s written on.”

Make no mistake, oral agreements -- that is, spoken words – can seal a deal and become legally enforceable in a court of law. The tricky part is substantiating, by admissible testimony and other evidence, who said what. But this merely highlights the most important reason for having a written contract:  to eliminate disputes about what the parties have agreed. 

Then again, a purported oral contract can be thwarted. The Uniform Commercial Code (UCC) comprehensively governs commercial transactions in the United States. While not a federal law, the UCC has been adopted by all 50 states and the District of Columbia, although some states have not embraced each and every element. Under the UCC, a contract for the sale of “goods” for the price of $500 or more cannot be enforced unless the parties put the arrangements in writing. Goods include all tangible, movable things, including animals and crops. The written agreement, showing that a contract has been made, must be signed by the individual or entity that is being held accountable.

Beginning in 2010, Minnesota-based Vermillion State Bank loaned money to Troje's Trash Pick-up, Inc. As collateral, Vermillion obtained security interests in Troje's tangible assets such as trucks and in intangible assets such as customer routes.

Vermillion loaned more money to Troje's, in 2015, in an effort to alleviate the company’s mounting financial problems. Despite this additional funding, Troje's financial situation grew even worse, and in January 2016, the company filed for Chapter 11 bankruptcy. By then, Vermillion had loaned more than $7 million to Troje's and was the company's largest creditor.

To maximize recovery for all creditors, the bankruptcy court appointed a financial consultant to oversee the company’s daily operations. Over the following months, Vermillion continued its financing. Eventually, the consultant realized that the company could not be sustained.  He recommended selling Troje's assets at auction, including its trucks, containers, customer routes and more, and he identified other trash-collection companies as potential buyers.

During the bankruptcy process, several companies offered to buy some or all of the assets. This prompted Vermillion to use a "stalking-horse" bid, which entailed establishing a dummy company, Minnesota Sanitation Company LLC, to increase other bid offers. Only Minnesota Sanitation and Republic Services submitted qualifying bids at the auction.

Two days before the auction, Vermillion's president, John Poepl, contacted the co-owners of Tennis Sanitation, brothers Gregory and William Tennis, to see if they were interested in acquiring Troje's assets.  Poepl’s plan was for Minnesota Sanitation to outbid Republic and turn over the assets to Tennis.  Like most foreclosing lenders, Vermillion wanted to recoup its money and had no desire to run a business.

Expressing interest, the brothers met with Poepl and his son, Vermillion's vice president Matt Poepl, to discuss Troje's assets. Together, they created a rough estimate of the company’s value, individually pricing its commercial accounts, residential accounts, trucks and garbage containers. They ultimately estimated the assets at $9.1 million -- $5.3 million attributable to Troje's customer routes.  The Poepls and the Tennis brothers then negotiated a potential purchase price and initially agreed on $6.1 million.

On the morning of the auction, August 8, 2016, the Poepls, the Tennis brothers and Tennis's accountant participated in two short conference calls. In the first call, the parties discussed the purchase of Troje's assets and whether six natural gas trucks with nearly $1 million dollars of debt on them would be included in the final deal. In the second call, Tennis verbally agreed to purchase the assets for $6.1 million, excluding the natural gas trucks. The parties discussed and understood that Tennis could not perform due diligence because there was no time to inspect the assets before the auction. At the end of this second call, Vermillion asked Tennis for "an email or something saying . . . we want you to bid for us" to confirm that Tennis would pay $6.1 million for the assets.

The auction began at 1:00 p.m. with Republic as the opening bidder. Three minutes after the auction started, Tennis e-mailed a signed letter of intent to Vermillion. The letter of intent was expressly "non-binding" and contained multiple provisions that were not part of the parties' original verbal agreement, including a due diligence provision. After Vermillion received the letter of intent, John called Gregory and reminded him that their agreement did not allow for due diligence. During the call, John asked Gregory to confirm that Tennis still wanted Vermillion to bid on the assets under the terms of their initial deal.  Gregory did so.

Shortly before 4:00 p.m., Vermillion submitted what turned out to be the winning bid: $5.4 million. That evening, the Poepls and the brothers met to discuss transferring Troje's assets over to Tennis. Despite having previously confirmed the deal, Gregory appeared nervous about having agreed to the purchase.

 The parties met the following day with the bankruptcy consultant. Gregory continued to appear uneasy about the situation, but he nevertheless confirmed that he had asked John to bid on Troje's assets for Tennis. The parties discussed the payment and transfer of assets. As the meeting ended, John was growing concerned that Tennis would renege on the agreement, leaving Vermillion as the owner of the assets.  Later that afternoon, his worst fears were realized when William called him and announced Tennis’s withdrawal from their arrangement.

All of a sudden, Vermillion needed to sell Troje's assets. After contacting Republic, the auction runner-up, Vermillion sold the assets to it for $4 million. Republic got a good deal;  Vermillion ended up having to include the natural gas trucks and cover over $1 million in debt on them.

Vermillion subsequently sued Tennis for over $4 million in damages, alleging claims of breach of contract and breach of good faith and fair dealing.  After a four-day trial, the jury returned a unanimous verdict finding that the parties entered an oral contract; that the predominant purpose of that oral contract was for the sale of  Troje’s customer routes, not its physical assets; that Tennis breached the contract; and that as a Vermillion suffered $1.92 million in damages due to the breach.

After the trial judge adopted the jury's verdict and entered judgment for Vermillion, Tennis made post-trial motions based on numerous alleged errors including lack of evidence to support the jury’s findings. The judge denied Tennis's motions. 

An intermediate court of appeals affirmed, concluding, among other findings, that sufficient evidence existed to support the jury's verdict that the parties entered into an enforceable contract.  Consistent with the jury’s finding, the appeals court held that “the customer routes – a non-good – represented the contract's predominant purpose,” and thus the UCC did not apply and a valid contract existed.  The state supreme court granted Tennis's petition for review.  After considering the arguments submitted by the parties, the justices, by a 6-1 margin, upheld the appeals court ruling.

The high court began by addressing the initial question of whether an oral contract, involving both goods and intangible assets, particularly customer routes, is subject to the UCC. If so, the contract would not be enforceable.  The justices rejected Tennis’s claim that the district court should have divided the contract into its component parts and negated the “goods” portion because the contract was not in writing.

Minnesota recognizes the “predominant purpose” test for so-called hybrid contracts – that is, agreements covering both goods and non-goods.  A hybrid transaction is thus classified according to its dominant characteristic.

“When faced with a hybrid contract, we assume that the parties intend to follow through on the entire contract and not just its component parts,” said the majority justices.  “The predominant purpose test furthers the intent of the parties to the contract because it treats the contract as uniform and applies a single set of rules to the entire contract. The bifurcation approach, on the other hand, could defeat the parties' underlying intentions by dividing the contract and making certain portions unenforceable.”

Confirming the jury’s finding, the majority justices independently determined from the evidence that the dominant characteristic of the contract was the sale of non-goods – customer routes, an intangible asset. 

“As Vermillion correctly points out, at the parties' meeting on August 7, the day before the auction, the parties placed a valuation of $9.1 million dollars on Troje's assets as a whole,” the opinion said.  “Of that $9.1 million, the parties attributed a majority ($5.3 million dollars or roughly 58 percent) of the value to Troje's customer routes, a non-good.  *  *   *  Gregory Tennis testified that the relative value of the trucks was only 30 percent, and Tennis's accountant testified that the prospect of revenue from the customer routes was the driving force behind Tennis's interest in the assets. Moreover, the bankruptcy specialist who assessed the value of Troje's assets similarly estimated that the routes comprised 70 to 75 percent of the company's value.

“Vermillion had the burden of proving the oral agreement by a fair preponderance of the evidence," said the majority justices as they concluded their opinion.  “[A]dequate evidence in the record supports the jury's findings of the existence of an oral contract . . . . The testimony detailed multiple meetings and phone calls during which the parties discussed the ultimate deal price and the exclusion of the natural gas trucks. Testimony also described Gregory and William Tennis affirming the parties' agreement and William Tennis instructing John Poepl to have Vermillion bid on Tennis's behalf at auction.”

The lone dissenting justice did not agree that the predominant purpose of the contract was intangible assets.  As he saw it, the transaction, for the most part, covered the sale of goods.  Thus, mere verbal commitments could not be enforced.

Vermillion State Bank v. Tennis Sanitation, LLC,  No. A19-1421, Minn. Sup. Ct., Feb. 2, 2022.

 

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