Betco Corporation, Ltd. v. Peacock et al

Filing 216

Transmission of Notice of Appeal, Docketing Statement, Orders, Judgment and Docket Sheet to Seventh Circuit Court of Appeals re: 214 Notice of Appeal, (Attachments: # 1 Docketing Statement, # 2 Opinion and Order No.: 128, # 3 Opinion and Order No.: 176, # 4 Judgment, # 5 Docket Sheet) (lak)

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF WISCONSIN

BETCO CORPORATION,
Plaintiff,

OPINION & ORDER

v.
14-cv-193-wmc
MALCOLM D. PEACOCK, MARILYN
PEACOCK, B. HOLDINGS, INC. and
E. HOLDINGS, LLC,
Defendants.

In 2010, plaintiff Betco Corporation purchased the assets of defendants B. Holdings,
Inc. and E. Holdings, LLC. Some months after the purchase, Betco allegedly discovered for
the first time that the sole shareholders/members of the two corporate defendants,
individual defendants Malcolm and Marilyn Peacock, had misrepresented the quality and
capabilities of those assets. In April of 2012, Betco brought this lawsuit in the Northern
District of Ohio alleging claims for fraud and breach of contract. That case came within
months of trial before it was suddenly transferred to this court in March of 2014. Shortly
afterward, defendants filed a motion to alter the schedule in light of Betco’s numerous
discovery violations in the Ohio action.

Ultimately, the court declined to impose the

sanctions that defendants requested but did order the parties to finish briefing defendants’
long-dormant summary judgment motion (dkt. #63), which defendants had timely filed in
Ohio but which the Ohio court then stayed. For reasons explained more fully below, the
court will now grant in part and deny in part defendants’ motion for summary judgment.

PRELIMINARY OBJECTIONS
In opposition to defendants’ motion, Betco submitted its own proposed findings of
fact. Defendants responded with myriad objections to those proposed findings, only some
of which are well taken. Although difficult to address in the abstract, the court will briefly
review defendants’ most common objections before setting forth the undisputed facts in
hope of setting some parameters and providing guidance to others who may be providing
less than helpful objections.
First, defendants frequently purport to object that the testimony Betco offers is
inadmissible as “self-serving.”

On the contrary, a self-serving affidavit “is an acceptable

method for a non-moving party to present evidence of disputed material facts,” provided
that “the evidence meets the usual requirements for evidence presented on summary
judgment -- including the requirements that it be based on personal knowledge and that it
set forth specific facts showing that there is a genuine issue for trial.” Payne v. Pauley, 337
F.3d 767, 773 (7th Cir. 2003).

Perhaps these latter, specific requirements are what

defendants claim is missing from Betco’s proposed findings of fact, but providing only a
generic objection is too vague.
Second, defendants object that many of Betco’s proposed findings of fact are “bald
assertions” that carry no weight on summary judgment.

To the extent this assertion

accurately describes a proposed finding, defendants’ objection is well taken. See Drake v.
Minn. Mining & Mfg. Co., 134 F.3d 878, 887 (7th Cir. 1998) (quoting Hadley v. Cnty. of Du
Page, 715 F.2d 1238, 1243 (7th Cir. 1983)) (“Rule 56 demands something more specific
than the bald assertion of the general truth of a particular matter, rather it requires
affidavits that cite specific concrete facts establishing the existence of the truth of the matter
2

asserted.”) Contrary to defendants’ own “bald assertion,” however, some of the proposed
findings to which defendants object constitute specific, concrete facts. (See, e.g., Defs.’ Resp.
PPFOF (dkt. #124) ¶ 15.) So long as these proposed findings of fact are supported by
admissible evidence -- e.g., by affidavit based on personal knowledge -- the court overrules
defendants’ objection.
Third, defendants object that some of the facts Betco proposes are based on Betco’s
own answers to interrogatories. This seems a reasonable objection as a general matter, since
out-of-court statements are inadmissible hearsay when offered by the party who made them,
but the Seventh Circuit recognizes an exception to that rule for well-crafted discovery
responses. For example, in Johnson v. Holder, 700 F.3d 979 (7th Cir. 2012), the Seventh
Circuit held that “a district court ‘may consider answers to interrogatories when reviewing a
motion for summary judgment so long as the content of those interrogatories would be
admissible at trial.’” Id. at 982 (quoting Hardrick v. City of Bolingbrook, 522 F.3d 758, 761
(7th Cir. 2008)). In both Johnson and Hardrick, however, the interrogatories were answered
by an individual party, who was, therefore, answering personally “under oath.” Fed. R. Civ.
P. 33(b)(1)(A), (3). In contrast, the responses Betco wishes to offer, while also made under
oath consistent with Rule 33(b)(3), were made on behalf of Betco as a company, as Rule
33(b)(1)(B) contemplates and as their carefully crafted, paragraph-long subscription notice
emphasizes.
Although it is unclear how well the rationale of Johnson and Hardrick applies to cases
where the answering party is a company, for the present, the court will give Betco the
benefit of the doubt and look to the potential admissibility of the interrogatory responses’
contents. Here, the interrogatories upon which Betco relies were apparently answered by
3

Tony Lyons, Betco’s Chief Financial Officer and Senior Vice President, and Denise
Lennard, Betco’s Senior Vice President of Operations and Human Resources. (See Br. Ex. 2
(dkt. #48-2) ECF 18.)

To the extent that Betco’s support for its proposed facts is an

interrogatory response containing information to which Lyons or Lennard would likely be
capable of testifying at trial, the court has considered those facts in resolving the motion for
summary judgment. See Johnson, 700 F.3d at 982. However, to the extent that Lyons and
Lennard could not obviously offer admissible testimony, the facts will be disregarded.1
Fourth, defendants object that some of Betco’s facts rely solely on affidavits
submitted in 2014, long after the discovery cutoff.

In its previous opinion, the court

instructed Betco to rely only on timely-produced liability evidence or, in the alternative, to
explain why the untimeliness was substantially justified. (Oct. 20, 2014 Opinion & Order
(dkt. #99) 14.) Still, defendants’ generic objection is problematic, because the mere fact
that support is contained in a post-discovery affidavit does not mean the information
contained in it was necessarily:

(1) subject to past discovery and (2) not previously

disclosed. Since neither party offers additional guidance on these points, the court will
exclude evidence to which defendants offered this objection if it appears not to have been
timely-produced and Betco has provided no justification, consistent with the court’s
previous opinion.

As a matter of practice, however, this court would strongly encourage parties not to rely on
statements made in their interrogatory responses as factual support on summary judgment, especially
where, as here, multiple individuals are attesting to answers generally for which none or only some
may have personal knowledge. Not only would such “group” testimony be inadmissible at trial, the
court is under no obligation to hunt among the possible speakers for someone who may have the
necessary knowledge.
1

4

UNDISPUTED FACTS2
I. The Parties
Plaintiff Betco, a corporation with its principal place of business in Toledo, Ohio,
primarily manufactures cleaning chemicals and cleaning equipment. It has been owned by
the Betz family for 63 years and employs approximately 300 people. As of about 1987,
Betco had between $11 million and $13 million in sales. By 2012, Betco’s sales had grown
to over $100 million.
Paul Betz has been Betco’s president and CEO since 1985.
Betco’s Senior Vice President of Operations and Human Resources.

Denise Lennard is
Betco’s controller,

Senior Vice President and Chief Financial Officer, Anthony Lyons, was hired in 1987 and
has served as the CFO for about 21 years. Kurt Bischoff is Betco’s vice president of research
and development. He started with Betco in 1997 as a senior chemist but began work in his
current capacity about nine years ago. Keith Kennedy, who began working for Bio-Ohio3 in
October of 2012, is the de facto general manager of Bio-Ohio; Derek Loverich is the plant
manager at the Beloit plant; and Neil Seeger is the technical manager at the Beloit plant.
Defendants Malcolm and Marilyn Peacock reside in Beloit, Wisconsin, and are the
only two members of defendant E. Holdings, LLC, an Illinois limited liability company
formerly known as Enviro-Zyme International, LLC (“EZI”), and defendant B. Holdings,
Inc., an Illinois corporation formerly known as Bio-Systems Corporation with its principal
place of business in Beloit, Wisconsin (“BSC”).

Consistent with its rulings above, the court finds the following facts, taken from the parties’
submissions, to be material and undisputed unless otherwise noted.
3
“Bio-Ohio” is the name of Betco’s wholly-owned subsidiary, which now owns most of the assets
purchased from E. Holdings, LLC and B. Holdings, Inc.
2

5

At the time relevant to this lawsuit, EZI and BSC (collectively, “Bio-Systems”) were
in the business of producing waste-degradation and odor-control products. The Peacocks
were the owners, operators and managers of EZI and BSC, and Malcolm was in charge of
their affairs at least until the assets of those companies were sold in September of 2010.
II. Purchase of Bio-Systems’ Assets
A. Background
During Betz’s tenure as CEO, Betco has purchased four other businesses. In the
transaction relevant to this case, Betco purchased certain assets of BSC and EZI. The assets
consisted principally of production equipment and related items located in commercial
buildings in Beloit, Wisconsin. The Beloit plant produces various solid, liquid and powder
products that use bacteria as the primary active ingredient, including bacteria like
Pseudomonas and the spore-forming Bacillus.4

The strength of the Beloit products is

measured in terms of bacteria “count” of “Colony Forming Units” or “CFUs.”
Successfully growing various forms of bacteria has an inherent complexity, requiring
control over numerous variables.

For example, bacteria from the Bacillus genus can

transform into the hardy and inert “spore” form, a process known as “sporulation,” which is
a defensive measure usually triggered by an unfavorable condition.

When not in spore

form, Bacillus bacteria are in the “vegetative” state. If bacteria are not in spore form when
placed in a product, the number of bacteria decreases over time. Contamination can also be
harmful to the process of growing bacteria, because contaminants can outcompete the
bacteria by using the same required nutrients or by producing a toxin.

While defendants object to these facts and others that follow, they are undisputed for purposes of
the record before the court on summary judgment. (See Defs.’ Resp. PPFOF (dkt. #124) ¶¶ 13-14.)
4

6

Steven Royko owns and operates a consulting firm called Royko Enterprises, which
primarily represents companies looking to sell their businesses.

Apparently, Royko also

manages Cornerstone Business Services, Inc. (“Cornerstone”), a mergers-and-acquisitions
advisory firm. At some point, defendants, who were looking either to sell Bio-Systems and
its assets or to locate an investor, engaged Royko to represent them.
B. Offer of Sale
On or around May of 2010, Royko cold-called Betco and eventually connected with
a company executive. On his clients’ behalf, Royko inquired whether Betco was interested
in purchasing Bio-Systems. Royko subsequently e-mailed an overview of Bio-Systems, as
well as a Confidentiality Agreement, to Lennard, which she in turn forwarded to Lyons and
Betz. Lyons signed the Confidentiality Agreement, which governed information regarding
the purchase of Bio-Systems. While Betco contends that this agreement restricted its ability
to investigate representations made by Bio-Systems and its agents, it points to no admissible
evidence to support that contention and cites no particular provision(s) of the
Confidentiality Agreement itself. (See Pl.’s Resp. DPFOF (dkt. #124) ¶ 37.)
Either defendants or their agents then provided Betco with information regarding
BSC and EZI, including but not limited to a “Confidential Business Review,” or “CBR.”
(Albert J. Bianchi Decl. Ex. V (dkt. #63-25) [hereinafter CBR].) Malcolm Peacock also
supplied Royko with the information contained in the CBR. Further, Royko discussed all
the representations in the CBR with Peacock.
The CBR contained numerous express representations as to the operations,
profitability and other aspects of BSC and EZI, including that:

7



They were “operating at approximately 50% capacity on one shift.” (Id. at Betco00538.)



Bio-Systems could “increase output for its products from four to eight times by
adding a second shift.” (Id. at Betco-00539.)



The company had “world-class production and service processes.” (Id.)



The company “follows detailed production processes to ensure quality, accuracy and
product safety.” (Id. at Betco-00527.)



Bio-Systems “estimate[d] that the current facilities [could] support a significant
increase in production, revenues and profits.” (Id. at Betco-00528.)



Bio-Systems estimated that the facilities could produce “Powder products at the rate
of 90,000 lbs of 5 billion count every ten days.” (Id.)



Bio-Systems estimated that its facilities could support “Liquid production at 500 gals
of 2 billion count every two days.” (Id.)5
On the other hand, the CBR also included a cautionary note with respect to the

plant’s potential capacity. It read in part that the nature of the business and the method of
growing the bacteria “add[] a significant amount of variability to the potential capacity. As
a result, the reader should be aware that the projections for additional capacity are highlevel estimates. In practice, the actual outputs will vary both above and below the projected
amounts.” It further stated that the graphs representing the capacity were meant “simply to

Betco offered only general citations to the CBR in its entirety in its proposed findings of fact,
rather than citing to individual pages on which the particular representations were made. Rather
than declining to consider any of the specific representations Betco alleges, however, the court has
endeavored to identify the points in the CBR that make representations comparable to those listed
in the proposed findings of fact.
5

8

offer a way of visualizing BIO-SYSTEMS’ estimate of potential increase in manufacturing
capacity that exists at the current facilities.”
C. Due Diligence
Betco personnel principally involved in the purchase process included Lennard,
Lyons, Betz and Bischoff. According to Betco, defendants refused to divulge the identities
of their customers, although defendants object to this as a conclusory assertion and point
out that Betz testified Betco did know who some of defendants’ customers were. (Betz Dep.
(dkt. #63-6) 77:22-23.)
On July 26, 2010, before the purchase took place, Betz e-mailed his management
team with observations and questions regarding the potential deal. In that e-mail, he raised
concerns about Bio-Systems’ technology, because it was “not core to Betco.” On August 2,
Bischoff e-mailed Betz and Lyons. Among other things, Bischoff noted that he would like
to obtain “[t]he name of a qualified 3rd party that can validate the technology at
Biosystems,” as well as “[w]hat Biosystems currently does to insure that only the desired
cultures are present and verify that no pathogenic bacteria are present in finished goods.”
(See Third Decl. of Albert Bianchi, Jr. Ex. G (dkt. #63-10).)
Following a telephone conversation with Malcolm Peacock and others on August 3,
Lyons e-mailed Betco’s management team with answers to some of the questions Betco had
about Bio-Systems. Lyons noted in the e-mail that according to Malcolm, bacteria had not
grown at the Beloit plant every July for the past fifteen to twenty years, which caused
inventory problems for Bio-Systems. Betco was also informed that in growing bacteria at
the Beloit plant, “[y]ields are never consistent.”

9

Betco’s formal due diligence included site visits, conversations with BSC and EZI
personnel, examination of financial information and requests for information.6

While

Bischoff was put in charge of Betco’s due diligence review of all the technical and scientific
aspects of Bio-Systems, Betco employed Dr. Barry King as an expert consultant regarding
Bio-Systems’ bio-remediation processes, because Bischoff did not fully understand some of
Bio-Systems’ technology and processes. For example, Bischoff did not fully understand BioSystems’ “wet batch process involving the use of liquid onto dry grains in order to increase
population and increase yields.” Bischoff also wanted Dr. King to help confirm whether
Bio-Systems’ technology was current.
Initially, Bischoff visited and inspected the Beloit plant and then e-mailed Dr. King
questions. Dr. King confirmed Bischoff’s belief that the valuable technical property Betco
was purchasing consisted of a “unique combination of various microorganisms to produce a
desired effect.” Eventually, Betz agreed to place Dr. King on retainer to inspect the Beloit
plant, concluding that the $2,000 fee was a “small price to pay for some peace of mind.”
Accordingly, on August 24, 2010, Betco and Dr. King entered into a consulting
agreement. Bischoff then created a list of questions for Dr. King regarding the Beloit plant
and Bio-Systems’ processes, introducing the list as follows:
We need to do our due diligence to insure that the technology is
correct and will remain current[,] which is where an expert such
[as] you can assist.
Although Betco intended to ensure that Bio-Systems’ technology was current as part of its
pre-purchase due diligence, Dr. King was never actually directed to inspect the Beloit plant
Betco’s proposed finding of fact also states that its due diligence was “commercially reasonable.”
The court agrees with defendants that this is a legal question, not a factual one. However,
defendants do not object to Betco’s description of the specific due diligence activities in which it
engaged, and so those facts are undisputed for summary judgment purposes.
6

10

or Bio-Systems’ technology. Later, Bischoff could not explain why this was so,7 although
Betz testified that Malcolm Peacock would not permit Betco to bring in a consultant. (See
Betz Dep. (dkt. #63-6) 56:22-57:3.)
During the due diligence process, Malcolm Peacock apparently represented to Betco
that defendants’ products were as advertised on his literature and specification sheets. He
also told Betco that the wet-batch process, about which he was generally secretive, gave the
business an advantage, and confirmed when asked that the plant had significant excess
capacity. After Betco located Dr. King, it further consulted with Malcolm Peacock, who
alleviated Betco’s concerns.
In general, Betco believed it had received true and accurate information from
defendants and placed its trust in Malcolm Peacock. It also interpreted the fact that BSC
and EZI had happy customers as a sign there was nothing wrong with the Beloit plant and
its products.8

Moreover, nothing in the financial statements or underlying documents

defendants produced suggested that Bio-Systems’ products did not meet specification.
Finally, the parties agree that in 2010, depending on the product being
manufactured, the Beloit plant could, in fact, support a significant increase of production,
revenues and profits with respect to individual products. More specifically, it was possible
for the Beloit plant to produce 90,000 pounds of powder product at five billion bacteria
count strength every ten days, and liquid product at a rate of 500 gallons at two billion
count every two days, as contemplated in the CBR.

It was also true that defendants

Two years later, in April of 2012, Bischoff reached out to Dr. King about evaluating the Beloit
plant, admitting Betco had made a mistake by not having him evaluate the plant pre-purchase.
8
For example, Terry Maier, a current customer of Bio-Systems, was also a customer when the
Peacocks owned Bio-Systems. He made several visits to the Beloit plant during that time and found
the facility “impressive.”
7

11

maintained an ISO manual that contained procedures for its employees to follow, including
procedures for employees working in production.
D. The Asset Purchase Agreement
Ultimately, Betco did decide to purchase Bio-Systems, largely because of its
profitability. On September 29, 2010, Betz, along with Malcolm and Marilyn Peacock,
signed an Asset Purchase Agreement on behalf of Betco and Bio-Systems, respectively. The
closing took place the same day.
Under the terms of the Asset Purchase Agreement, Betco agreed to pay $5.5 million,
with $5 million to be paid on the closing date and $500,000 held in escrow in the form of a
promissory note.9 In return, Betco received the production equipment and assets located in
the Beloit plant.
The money in escrow was to be used as necessary for Betco’s indemnification in
accordance with the terms of the Asset Purchase Agreement. If not paid out sooner for
those purposes, the note was to be paid out in full by September 29, 2012. Betco requested
the holdback provision as a means of ensuring it had time to identify and be indemnified
from the escrow account for any problems with its purchase if not satisfactorily addressed.
The parties agree that Betco paid out the escrow money to Malcolm Peacock by September
of 2011, completing the terms of the Asset Purchase Agreement. 10

Betco calculated the purchase price by using a “multiple” of 4.8 times the enterprise’s “Adjusted
Earnings Before Interest, Taxes, Depreciation and Amortization.”
10
Although the parties dispute the extent of Malcolm Peacock’s involvement, he remained employed
by Bio-Ohio in some capacity after the closing. Betco contends that he was employed as President,
while Malcolm Peacock testified that his role was “confusing” and that he was told to focus on sales
and marketing. Betco proposes a number of facts regarding Malcolm Peacock’s allegedly secretive
and overbearing management style, but relies only on its own answers to interrogatories as support.
9

12

III. Post-Closing Alleged Problems with the Beloit Plant
Betco acknowledges that Bio-Systems makes many products, all of which work, and
that it is a solid company with a good future. Betco further acknowledges that Bio-Systems
has value as a company, due to the variety of good products it produces. In fact, BioSystems’ net worth has been continually increasing since Betco’s purchase of its assets,
because Bio-Systems has made money every years since the purchase.
In March of 2011, however, Betco first became aware of alleged issues with products
produced at the Beloit plant, although Kurt Bischoff testified the full “scope of the
problem” was not known at that time. Specifically, Betco learned that some products had
bacteria counts that were lower than the products’ specifications.11
To learn more about the problem, Betco employees Joe Provolish, John Henson,
Brett Hanus and Bischoff visited the Beloit plant in mid-March and spoke with various
employees there, including Derek Loverich and Neil Seeger. Loverich and Seeger told Betco
personnel that:

(1) the Beloit plant’s boiler capacity was insufficient; and (2) product

bacteria counts were “consistently too low due to inadequate fermentation equipment
capability.”

Seeger raised additional concerns with Bischoff as well, including: (3) a

question as to whether the Beloit plant’s smaller fermenters were real fermenters; (4) issues
There is also no suggestion that the signators averring to those answers, Lyons and Lennard, had
personal knowledge of those facts (indeed, it does not appear either actually worked at the Beloit
plant), so those answers will not be considered for summary judgment.
11
Betco also maintains that Malcolm Peacock “concealed” other problems at the plant, including
underpowered boilers, insufficient production and chronic contamination in the six small fermenters,
incorrect piping and contamination in the large fermenter, chronic contamination in the wet-batch
process, and a chronic inability to produce product to specification. (Defs.’ Resp. PPFOF (dkt.
#124) ¶ 96.) To support this proposed fact, however, plaintiff cites only to the deposition testimony
of Beloit plant employee Mindy Walters and, again, Betco’s own answers to interrogatories. The
cited portion of Walters’ deposition refers only to unknown products that were shipped below
specification and there is no indication that Lyons or Lennard had personal knowledge that Malcolm
Peacock concealed any of these other listed problems.

13

with sending out contaminated products; and (5) issues with sending out products with low
bacteria counts. Seeger also advised that there were at least a few times when product was
“under spec” but Malcolm Peacock instructed him to ship it anyway, although Seeger did
not identify any specific products and could remember neither what the count was supposed
to be nor who any of the customers were. (See Neil Seeger Dep. (dkt. #115) 54:9-55:4.)12
After the Beloit visit, Betco established seven follow-up actions to take.

These

included a plan to have a “lab evaluate [the] issue of out of spec finished products – colony
counts are consistently too low but product is shipped anyway.” At the time, however, no
one from Betco raised the issue of low bacteria count with Malcolm Peacock. Indeed, when
Malcolm Peacock met with Betco personnel in Toledo in April of 2011, Betco did not raise
the issue of low bacteria count, even though the parties agree that various unidentified
“concerns” were raised.

Lyons later testified that all the issues from the visit notes,

including low bacteria count, should have been raised with Malcolm Peacock.

More

generally, Lyons conceded that Betco should have brought any breach of warranty or
misrepresentation claims to Malcolm Peacock’s attention within one year of purchase.
Malcolm Peacock began to transition his job responsibilities to others in November
of 2011. Lennard monitored and assisted Bio-Ohio on Betco’s behalf during the transition
period, including by overseeing human resources and operations.

The transition was

complete in the spring of 2012, when Malcolm Peacock’s responsibilities were divided and

Loverich also confirmed that before the purchase took place in the fall of 2010, he was sometimes
instructed to produce product even though it would not meet specifications. He did not know,
however, whether Malcolm Peacock had obtained permission to ship the product at lower
specifications.
12

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transferred to various other individuals, and Bio-Ohio’s management underwent various
reorganizations.
Betco contends that it was only at the beginning of this transition period, well after
Malcolm Peacock had received the $500,000 from escrow in September of 2011, that
defendants’ “misrepresentations began to emerge,” but Betco offers only a series of
conclusory statements as support for its allegations that defendants had engaged in patterns
of deception that tainted the sale. (See Defs.’ Resp. PPFOF (dkt. #124) ¶¶ 84-88.)
Still, in March of 2012, Seeger did provide Betco with a detailed explanation of what
he believed to be various issues with Bio-Systems’ products and operations. Specifically, he
raised a concern about meeting specifications for powder products, because customers were
checking product label claims for actual microbial counts. He also did not believe BioSystems could meet the powder product specifications using the methods employed at the
Beloit plant at the time, and proposed as a solution that they change Bio-Systems’ product
specifications. Seeger also testified that the “wet batch” process used at the Beloit plant did
not actually work and that the six small fermenters in the Beloit plant are “not true
fermenters,” although defendants object to that testimony as expert testimony from a lay
witness.

(See Defs.’ Resp. PPFOF (dkt. #124) ¶¶ 110-112, 118.)

According to Keith

Kennedy, the Beloit plant can only produce between 10 and 20% of the bacteria needed,
although defendants object that his methods of calculating what the plant can produce are
undisclosed and thus unreliable. (Id. at ¶ 121.)
By July 27, Betco had received at least seven written evaluations of Bio-Systems’
products and operations from LexaMed, a technical company that offers laboratory support
and consulting services to the medical device and pharmaceutical industries. According to
15

Robert Reich, president and consultant for LexaMed, there are numerous faults in the
production processes at the Beloit plant that result in contamination and inconsistent
yields, which would in turn make it “difficult, utilizing the existing facility, equipment and
procedures, for the site to significantly increase production capacity.”
PPFOF (dkt. #124) ¶ 114.)

(See Defs.’ Resp.

Defendants again object, stating that nothing in the cited

testimony establishes that Reich tested the same processes used at the Beloit plant, but the
record makes clear that Reich himself was the LexaMed assessor of the Beloit plant and
examined the facility personally.

(See, e.g., Reich Dep. (dkt. #74) 19:8-13 (identifying

report Reich authored after visiting Beloit plant); Reich Dep. Ex. A (dkt. #120-1) (report).)
IV. Litigation
Betco filed this lawsuit in Ohio on April 27, 2012, alleging that defendants made the
following intentional misrepresentations in the course of selling Bio-Systems:


The Beloit plant had significant excess capacity, on the order of 50% or more.



The Beloit plant’s capacity could be easily increased four to eight times by the
addition of a second shift.



The Beloit plant was a state-of-the-art facility, producing world-class levels.



The Beloit plant’s operations incorporated detailed production processes to ensure
quality, accuracy and product safety.



A quality-control technician tested all products to ensure they met specifications.



All product was manufactured to specifications.



The Beloit plant could support a significant increase in production, revenues and
profits.
16



The Beloit plant could produce powder products at the rate of 90,000 pounds of
product at a strength of 5 billion colony-forming unit count every ten days.



No Bio-Systems product had had quality problems in the preceding five years.

Betco also alleged that defendants failed to disclose the following material facts before the
sale of Bio-Systems:


The small fermenters were not true fermenters but were instead jury-rigged
apparatuses that could not properly control environmental conditions.



The Beloit plant had certain quality problems.



The Beloit plant lacked extra capacity.



Defendants were willfully blind to problems in the production process.



Defendants intentionally shipped product to customers, knowing that it did not meet
specification.



Defendants misrepresented the strength of certain shipments of product.



Defendants engaged in other deceptive practices, including mislabeling products for
international shipment and falsifying international shipping documents.
As of Lyons’ deposition on August 8, 2013, Betco had yet to calculate damages it

claimed to have suffered as a result of these alleged acts of deception.

OPINION
Summary judgment is appropriate if the moving party “shows that there is no
genuine dispute as to any material fact and the movant is entitled to judgment as a matter
of law.” Fed. R. Civ. P. 56(a). In ruling on a motion for summary judgment, the court views
all facts and draws all inferences in the light most favorable to the non-moving party.
17

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). “Only disputes over facts that
might affect the outcome of the suit under the governing law will properly preclude the
entry of summary judgment.” Id. at 248.
The party moving for summary judgment bears the initial burden of informing the
district court of the basis for its motion. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986).
Once the initial burden is met, for an issue on which the nonmoving party will bear the
burden of proof at trial, the nonmoving party must “go beyond the pleadings” and
“designate specific facts showing that there is a genuine issue for trial.” Id. at 324 (internal
quotation marks omitted).

It is not sufficient to “simply show that there is some

metaphysical doubt as to the material facts.” Matsushita Elec. Indus. Co. v. Zenith Radio Corp.,
475 U.S. 574, 586 (1986). Rather, the nonmoving party must produce “evidence . . . such
that a reasonable jury could return a verdict for the nonmoving party.” Anderson, 477 U.S.
at 248. If he fails to do so, “[t]he moving party is ‘entitled to a judgment as a matter of
law.’” Celotex, 477 U.S. at 323.
The parties agree that Wisconsin law governs the parties’ claims.

(See Defs.’ Br.

Supp. Summ. J. (dkt. #63-1) 3-4; Pl.’s Br. Opp’n (dkt. #102) 10.) Defendants contend
that each of Betco’s claims fails, either as a matter of law or based on the undisputed facts.
The court addresses each claim in turn.
I. Rescission
In Wisconsin, when a party to a contract discovers an alleged fraud, he may either
affirm the contract and sue for damages, or he may disaffirm and seek restitution. Eklund v.
Koenig & Assocs., Inc., 153 Wis. 2d 374, 380, 451 N.W.2d 150 (Ct. App. 1989). However,

18

“a party may not affirm a contract and later on disaffirm it and ask for rescission.” Beers v.
Atlas Assurance Co., 231 Wis. 361, 285 N.W. 794, 797 (1939). Defendants argue that by
asserting claims for fraud and breach of contract in its first complaint, Betco cannot now
seek to disaffirm that same contract.
In support, defendants point to a line of Wisconsin cases applying this rule,
beginning with Beers. In that case, the plaintiff initially asserted claims against numerous
insurance companies and individuals -- first, to recover for fraud, and later, for breach of
contract. Id. at 794. Later, the plaintiff filed an amended complaint that for the first time
sought judgment for rescission of the contract. Id. at 795. The Wisconsin Supreme Court
held that the plaintiff could not bring an action for equitable rescission after having
previously sought to recover contract damages:
It appears from our prior decisions in this same action that in
the first and second amended complaints the plaintiff
unquestionably attempted to state a cause of action for fraud
and deceit, thereby clearly affirming the contract.
Now the
plaintiff, after having failed to state a cause of action for fraud
and deceit, has abandoned that kind of action and attempts to
state a cause of action based on a contract asserted to be void
for fraud which he has rescinded and which he asks the court to
rescind in equity by finding that under all of the circumstances,
he is entitled to equitable rescission. Such procedure not only
involved an election of inconsistent remedies but also an
election of substantive rights. Under the circumstances, we
think it clear that the plaintiff is precluded from bringing the present
action which is either one based upon legal rescission or one in
equity praying for rescission by the court.
Id. at 798 (emphasis added).
In Schlotthauer v. Krenzelok, 274 Wis. 1, 79 N.W.2d 76 (1956), the Wisconsin
Supreme Court returned to the doctrine articulated in Beers:

19

The reason why a suit at law to recover damages for fraud bars a
subsequent suit for rescission is not because there has been an
election of inconsistent remedies, but rather that the act of
instituting an action at law for damages recognizes the existence
of the contract and affirms it. Once having been so affirmed,
the right to rescind is forever lost.
274 Wis. at 5. In contrast, the court explained that “[t]he commencement of a suit for
rescission for fraud involves merely a choice of procedural remedy and effects no change of
substantive rights which should preclude the injured party from thereafter abandoning such
remedy and affirming the contract by seeking damages for the fraud[.]” Id.
In Stadler v. Rohm, 40 Wis. 2d 328, 161 N.W.2d 906 (1968), the Wisconsin
Supreme Court reaffirmed the holdings of Beers and Schlotthauer,13 but also established a
narrow exception. The plaintiffs in Stadler sued after purchasing a hotel. Among other
things, plaintiffs sought “damages for unspecified defects in the motel.” 40 Wis. 2d at 331.
Five months later, they amended their complaint to seek rescission based on
misrepresentation. Id. The trial court permitted rescission, but the supreme court reversed
under Beers and Schlotthauer, holding that plaintiffs affirmed the contract by commencing
their suit for damages. See id. at 340-41. The court then remanded “for further proceedings
pursuant to [plaintiffs’] original theory of breach of contract.” Id. at 341.
Even so, the supreme court noted in Stadler that a party “is never bound by the
election of a remedy, made in ignorance of substantial facts, which, if known, might proffer
an additional suit.” 40 Wis. 2d at 336-37 (quoting Bank of Lodi v. Washburn Elec. Light &
Power Co., 98 Wis. 547, 550, 74 N.W. 363 (1898)). In analyzing this exception, the court

See Stadler, 40 Wis. 2d at 335 (“This court has restricted the application of the doctrine of election
of remedies in cases where an action in equity precedes an action at law. However, where an action
at law precedes an action in equity the principle that commencement of the first suit may affirm the
contract and preclude the equitable remedy has not been affected.”) (footnote omitted).
13

20

emphasized the importance of considering “whether ‘such ignorance is the result of a failure
to resort to reasonable means of knowledge within [the party’s] reach.’” Id. at 337 (quoting
Thoen v. Harnstrom, 98 Wis. 231, 233, 73 N.W. 1011 (1898)); see also, e.g., Gaugert v. Duve,
217 Wis. 2d 164, 172-75, 579 N.W.2d 746 (Ct. App. 1998) (discussing rule of Stadler).
Under the current state of Wisconsin law, Betco’s claim for rescission would appear
barred. Indeed, Betco may have tacitly conceded the point by amending its complaint to
remove the rescission claim.

(See 3d Am. Compl. (dkt. #96).)

Yet, despite that

amendment, Betco purports to reserve its right to elect rescission as a remedy in the event it
prevails on a claim of misrepresentation. While this remedy may well be unavailable under
Wisconsin law, as described above, the equitable remedy of rescission also does not appear
appropriate on the record before this court for a number of reasons. Given the significant
passage of time between the purchase and Betco’s attempt to rescind that purchase, to say
nothing of the additional passage of time until this court could order actual rescission,
restoring both parties to the position they would have occupied had the sale never occurred
seems wholly unrealistic. See Schnuth v. Harrison, 44 Wis. 2d 326, 339, 171 N.W.2d 370
(1969) (“The effect of a rescission of a contract is to restore the parties to the position they
would have occupied had no contract ever been made.”). Ultimately, however, the court
need not (and will not) decide this equitable question until it has a more complete record at
the close of evidence on liability.

21

II. One-Year Time Bar
Defendants also contend that the text of the Asset Purchase Agreement bars any
claims Betco has for negligent misrepresentation, breach of contract and the breach of the
duty of good faith and fair dealing. That agreement states in relevant part:
10.05 Limitations on Indemnification.
(a) Notwithstanding any investigation made by or on behalf of
any of the parties hereto or the results of any such investigation
and notwithstanding the participation of such party in the
Closing, other than fraud or intentional misrepresentation, (i)
the representations and warranties contained in this Agreement,
except for the representations and warranties contained in
Sections 4.01, 4.03, 4.04, 4.05, 4.10, 4.11, 5.01 and 5.02, shall
survive the Closing for one year from the Closing Date, and (ii)
the representations and warranties contained in Sections 4.01,
4.03, 4.04, 4.05, 4.11, 5.01 and 5.02 shall survive indefinitely;
provided, however, that notwithstanding any provision in this
Agreement or the Seller Related Documents to the contrary,
with respect to any specific representation or warranty under
which any Buyer Indemnified Party shall have made a claim for
indemnification hereunder prior to the expiration date of the
applicable survival term specified above and as to which such
claim has not been completely and finally resolved prior to such
expiration date, such representation or warranty shall survive for
the period of time beyond such expiration date sufficient to
resolve, completely and finally, the claim relating to such
representation or warranty.
(Mot. for Summ. J. Ex. D (dkt. #63-7) Betco-00031-32 [hereinafter “APA”].)
In subsection (e) of the same article, the APA states in relevant part:
(e) After the Closing, the rights set forth in this Article X shall
be each party’s sole and exclusive remedies against the other
parties hereto for misrepresentations or breaches of covenants
contained in this Agreement and the Related Documents.
Notwithstanding the foregoing, nothing herein shall prevent any
of Indemnified Party (sic) from bringing an action based upon
allegations of fraud or other intentional breach of an obligation
of or with respect to any party in connection with this
Agreement and the Related Documents.
22

(Id. at Betco-00032.)
The parties appear to agree that this language serves to bar any claims Betco has for
breach of the provisions of the APA itself.

(See Pl.’s Br. Opp’n (dkt. #102) 15 (“This

language may effectively bar claims, other than fraud or intentional misrepresentation,
brought against the Peacocks for breach of one of the specific representations or warranties
contained in the terms of the APA.”).) Betco nevertheless contends that its claims survive
because they are “premised on the covenant of good faith and fair dealing,” rather than on
the specific provisions of the APA. (Id.) According to Betco, the implied covenant of good
faith and fair dealing is also broad enough to encompass a duty to refrain from making
material misrepresentations, meaning the claim for negligent misrepresentation likewise
survives the APA’s limiting language.
As a preliminary matter, Betco has offered no argument as to how its breach of
contract claim, Count Three in the third amended complaint, survives Section 10.05 of the
APA.

The claim specifically alleges that defendants breached: (1) the warranty of legal

compliance, contained at Section 4.09 (3d Am. Compl. (dkt. #96) ¶ 59); (2) the warranty
that all items processed or delivered by defendants conformed to all applicable contractual
commitments and express and implied warranties, contained at Section 4.19 (id. at ¶ 60);
and (3) the warranty that all representations and warranties in Article IV of the APA
(including those listed above) were true (id. at ¶ 61). Each of these alleged breaches falls
within the scope of the limiting language of the APA as “representations and warranties
contained in this agreement,” and they do not survive as one of the exceptions enumerated
in Section 10.05(a)(ii). Instead, those warranties survived only one year after the closing
date – that is, until September 29, 2011. Since Betco did not bring this lawsuit until April
23

27, 2012, defendants are entitled to summary judgment on Betco’s breach of contract
claim.
Betco’s other claims are not expressly barred by the language of Section 10.05 of the
APA, which limits remedies “for misrepresentations or breaches of covenants contained in this
Agreement and the Related Documents,”14 as well as “representations and warranties” that are
“contained in this Agreement.” (APA at Betco-00031-00032 (emphasis added).) Based on the
plain language of Section 10.05, the one-year time limit applies only to claims arising
directly from a breach of, or a misrepresentation within, the APA. See Rosplock v. Rosplock,
217 Wis. 2d 22, 31, 577 N.W.2d 32 (Ct. App. 1998) (court may not rewrite a clear and
unambiguous contract).
Betco’s remaining claims do not seem to fall within the ambit of this language. The
claim for negligent misrepresentation is premised on the same alleged misrepresentations as
the claim for fraud. (See 3d Am. Compl. (dkt. #96) ¶ 52.) The claim for breach of the
covenant of good faith and fair dealing likewise arises from that same general pattern of
misrepresentation. (Id. at ¶ 68; see also Pl.’s Br. Opp’n (dkt. #102) 16.) Most importantly,
for the most part, those alleged misrepresentations do not appear in the APA, but instead
were allegedly made (1) in the CBR or (2) directly by Malcolm Peacock.15

“Related Documents” is defined as including both “Buyer Related Documents” and “Seller Related
Documents.” (APA at Betco-00030.) “Seller Related Documents” is further defined as including
“this Agreement, the Disclosure Schedule, the Closing Agreements or any schedules, certificates or
other documents delivered or to be delivered by or on behalf of Seller or the Shareholders pursuant
to the terms of this Agreement or otherwise referenced or incorporated in this Agreement.” (Id. at
Betco-00029.) “Buyer Related Documents” is defined in the same manner, except that it includes
any documents delivered by or on behalf of the buyer, not the seller. (Id. at Betco-00030.)
15
A possible exception is Section 4.19, “Product Warranty,” which warrants that “Each item
processed or delivered by Seller has been in conformity with all applicable contractual commitments
and all express and implied warranties, and Seller has no Liability (and there is no Basis for any
present or future action, suit, proceeding, hearing, investigation, charge, complaint, claim, or demand
14

24

Defendants also point to no provision in the APA warranting, for example, that: the
Beloit plant had a certain amount of unused capacity; it incorporated careful, detailed
production processes during which products were assessed by a quality control technician;
the facility was state of the art; the plant could support a four-to-eight-times increase in
production; and so on. Nor do the defendants demonstrate that the CBR is a “Related
Document,” at least as the term is defined in the APA. In particular, defendants point to
nothing in the record suggesting that either party delivered the CBR “pursuant to the terms
of” the APA, or that the CBR is “otherwise referenced or incorporated” into the APA.
Accordingly, the court will not apply the one-year time bar to Betco’s claims for negligent
misrepresentation or breach of the covenant of good faith and fair dealing at this time.
There is, of course, another response to plaintiff’s circumvention of Section 10.05
with respect to alleged misrepresentations not contained in the APA. Specifically, the APA
also contains an integration clause in Section 13.08 that purports to “supersede any prior
understandings, agreements or representations by or between the parties, written or oral,
which may have related to the subject matter hereof in any way.” (APA at Betco-00036.)
Curiously, defendants do not argue that this provision precludes plaintiff’s remaining
misrepresentation claims under Wisconsin law, and this court declines to hold as much
without giving plaintiff an opportunity to respond.16

against any of them giving rise to any Liability) for replacement or repair thereof or other damages in
connection therewith[.]” (Mot. for Summ. J. Ex. D (dkt. #63-7) Betco-00017.) Since no party has
argued on summary judgment that this covers Malcolm Peacock’s alleged representation that all
product was manufactured to particular specifications, however, this issue is not currently ripe for
consideration.
16
Of course, even if effective, the integration clause would not necessarily preclude plaintiff’s
remaining claims for misrepresentation. Compare Grube v. Daun, 173 Wis. 2d 30, 59-60, 496
N.W.2d 106 (Ct. App. 1992) (“tort disclaimers in contracts will not be honored unless the

25

III. Breach of Duty of Good Faith and Fair Dealing
Defendants also argue that the claim for breach of the duty of good faith and fair
dealing fails as a matter of law, because Betco has produced no evidence that defendants
violated that duty in the performance of the APA.

Rather, they argue Betco’s claim is

premised entirely on defendants’ pre-sale conduct in allegedly misrepresenting the quality of
BSC and EZI. (See 3d Am. Compl. (dkt. #96) ¶ 68 (premising claim on “tortious and
wrongful conduct set forth above”).)
This court has previously recognized that the covenant of good faith and fair dealing
“extends only to the performance or enforcement of a contract and not to precontractual
negotiations.”

Terranova v. Terranova, 883 F. Supp. 1273, 1277 n.2 (W.D. Wis. 1995)

(dismissing breach of duty of good faith claim based on pre-contract negotiations sua sponte);
see also Market St. Assocs. Ltd. P’ship v. Frey, 941 F.2d 588, 594 (7th Cir. 1991) (“Before the
contract is signed, the parties confront each other with a natural wariness. Neither expects
the other to be particularly forthcoming, and therefore there is no deception when one is
not.”). But see Harley-Davidson Motor Co., Inc. v. PowerSports, Inc., 319 F.3d 973, 986 (7th
Cir. 2003) (“a duty not to defraud other contracting parties arises as part of the duty to
bargain in good faith and fair dealing”); Budgetel Inns, Inc. v. Micros Sys., Inc., 8 F. Supp. 2d

disclaimer is specific as to the tort it wishes to disclaim”; as-is clause did not bar claims of negligence
and misrepresentation), with Peterson v. Cornerstone Prop. Dev., LLC, 2006 WI App 132, ¶ 37, 294
Wis. 2d 800, 720 N.W.2d 716 (integration clauses expressly stated that contract was “entire
agreement,” seller had made “no representations” other than those in contract, and buyer had not
relied on any other representation served to disclaim right to rely on any alleged fraudulent
misrepresentations); see also C & M Hardware, LLC v. True Value Co., 2013 WI App 84, ¶ 20, 348
Wis. 2d 761, 833 N.W.2d 872 (distinguishing Peterson because integration clause did not disclaim
liability for misrepresentation); Gebhardt v. Bosben, 2010 WI App 100, ¶¶ 51-54, 327 Wis. 2d 799,
788 N.W.2d 384 (discussing Peterson). Nor, obviously, would it bar a claim for breach of the duty of
good faith and fair dealing in carrying out the terms of the APA.

26

1137, 1147 (E.D. Wis. 1998) (noting that a “duty of good faith and fair dealing exists both
with respect to the creation and performance of a contract”).
The Wisconsin Court of Appeals, too, has indicated that “the general requirement of
good faith under [Wis. Stat. § 401.203] applies only to the performance or enforcement of
a contract,” meaning that “it does not impose a duty of good faith in the negotiation and
formation of contracts.”17

Hauer v. Union State Bank of Wautoma, 192 Wis. 2d 576, 596,

532 N.W.2d 456 (Ct. App. 1995); see also Metro. Ventures, LLC v. GEA Assocs., 2006 WI 71,
¶ 22 n.9, 291 Wis. 2d 393, 717 N.W.2d 58 (“[G]ood faith has nothing to do with contract
formation. It is about the parties’ performance in a contract setting.”).
Overall, Wisconsin case law does not support an independent claim for breach of the
covenant of good faith and fair dealing based on pre-contract activity. Certainly, this is
consistent with cases like Terranova, Market Street Associates, Hauer and Metropolitan Ventures.
It is also consistent with the fact that Wisconsin, like many other states, does not recognize
a separate, non-contractual claim for a breach of the duty of good faith and fair dealing even
post-formation. To the extent Harley-Davidson and Budgetel Inns recognize a duty of good
faith and fair dealing pre-formation, it appears to be no more than the duty that gives rise to
claims for intentional and negligent misrepresentation. Indeed, in both Harley-Davidson and
Budgetel Inns, the courts’ recognition of a pre-formation duty of good faith arose specifically
in the context of fraud. Harley-Davidson, 319 F.3d at 986 (discussing “duty not to defraud
other contracting parties” during bargaining); Budgetel Inns, 8 F. Supp. 2d at 1147
(discussing fraud in the inducement).

Post-formation, however, “the role of implied

That statutory section has since been renumbered, and the covenant of good faith and fair dealing
now appears at Wis. Stat. § 401.304.
17

27

conditions – and with it the scope and bite of the good-faith doctrine – grows.” Market
Street Assocs., 941 F.2d at 596. Thus, following contract formation, a party may bring a
specific claim for breach of the duty of good faith and fair dealing that does not depend on
intentional or negligent misrepresentation.
Here, the only discernible post-formation misconduct that Betco alleges is a pattern
of concealing the alleged deficiencies of the Beloit plant. (See 3d Am. Compl. (dkt. #96)
¶¶ 29-34.) Given that Betco had just one year to determine and raise problems with that
plant and two years to withhold some or all of the $500,000 in escrow to address those
problems, a trier of fact might reasonably find that a deliberate practice of concealment
would frustrate the substance of the APA, if not its explicit terms. See Foseid v. State Bank of
Cross Plains, 197 Wis. 2d 772, 796, 541 N.W.2d 203 (Ct. App. 1995) (noting that “a party
may be liable for breach of the implied contractual covenant of good faith even though all
the terms of the written agreement may have been fulfilled”).
The problem then is not with Betco’s theory, but with its failure to present
admissible evidence that Malcolm Peacock engaged in this kind of concealment. Certainly,
Betco proposes a number of facts related to Malcolm Peacock’s secretive management style,
but it then relies almost entirely on its own interrogatory responses to support those facts.
As defendants point out, there is no evidence in the record that Lyons and Lennard (the
only two people aside from counsel involved in answering the interrogatories) have any
personal knowledge about Malcolm Peacock’s alleged concealment, other than their general
assertions that he was not forthcoming. (See Defs.’ Resp. PPFOF (dkt. #124) ¶¶ 84-102,
106.) Plus, most of the proposed facts also fail due to their conclusory nature. (See id. at
¶¶ 84-88.) Such bare assertions without supporting evidence cannot create a dispute of fact
28

at summary judgment. SMS Demag Aktiengesellschaft v. Material Scis. Corp., 565 F.3d 365,
371 (7th Cir. 2009).
The one exception is Proposed Fact 95, which offers the deposition testimony of
various employees at the Beloit plant to support the proposition that Malcolm Peacock on
one occasion informed them not to speak to Lennard or let her into the building. This is a
slender reed indeed from which to infer that Malcolm Peacock had adopted a deliberate
pattern of behavior to conceal the Beloit plant’s flaws from the new owners. See E.E.O.C. v.
Sears, Roebuck & Co., 233 F.3d 432, 437 (7th Cir. 2000) (“merely a scintilla of evidence” is
not enough to meet a party’s burden of proof).

Still, Betco has provided other

circumstantial evidence, albeit all disputed, that Malcolm Peacock stayed on as President on
site at the Beloit plant until the escrowed sum was paid out. This opportunity and motive
for concealment; Malcolm Peacock’s alleged general demeanor; and the one specific instance
of concealment of which Betco has produced evidence might be enough for the trier of fact
to reasonably find that Malcolm Peacock breached his duty of good faith and fair dealing. 18
The court thus concludes that while this evidence is insufficient to allow a reasonable trier
of fact to find for Betco on its good faith and fair dealing claims against Marilyn Peacock,
BSC or EZI, the claim against Malcolm Peacock survives for the present.

Accordingly,

defendants are entitled to summary judgment on Betco’s claims for breach of the covenant
of good faith and fair dealing, except as pled against Malcolm Peacock, on which the court
will reserve.

Of course, this assumes the duty of good faith extends to Malcolm Peacock individually, which is
yet another legal issue not briefed by the parties.
18

29

IV. Evidence of Fraudulent and Negligent Misrepresentation
To succeed on its fraudulent misrepresentation claim, Betco must prove the following
five elements:
(1) the defendant made a factual representation; (2) which
was untrue; (3) the defendant either made the
representation knowing it was untrue or made it recklessly
without caring whether it was true or false; (4) the
defendant made the representation with intent to defraud
and to induce another to act upon it; and (5) the plaintiff
believed the statement to be true and relied on it to his/her
detriment.
Kaloti Enters., Inc. v. Kellogg Sales Co., 2005 WI 111, ¶ 12, 283 Wis. 2d 555, 699 N.W.2d
205 (quoting Ramsden v. Farm Credit Servs. of N. Cent. Wis. ACA, 223 Wis. 2d 704, 718-19,
590 N.W.2d 1 (Ct. App. 1998)).

The claim for negligent misrepresentation likewise

requires a factual representation that is untrue and upon which the plaintiff relied to his
detriment, but requires only that the defendant be negligent in making the representation.
Malzewski v. Rapkin, 2006 WI App 183, ¶ 20, 296 Wis. 2d 98, 723 N.W.2d 156.
A claim for fraudulent misrepresentation can also arise from a failure to disclose a
material fact. Kaloti, 2005 WI 111, ¶ 13. Before a party can be held liable for a failure to
disclose, however, he must be under a duty to disclose. Id. Ordinarily, “there is no duty to
disclose in an arm’s-length transaction.” Id. at ¶ 15. The exception to that general rule
arises when:
(1) the fact is material to the transaction; (2) the party with
knowledge of that fact knows that the other party is about to
enter into the transaction under a mistake as to the fact; (3) the
fact is peculiarly and exclusively within the knowledge of one
party, and the mistaken party could not reasonably be expected
to discover it; and (4) on account of the objective circumstances,
the mistaken party would reasonably expect disclosure of the
fact.
30

Id. at ¶ 20. When those requirements are met, the law treats the failure to disclose a fact
“as equivalent to a representation of the nonexistence of the fact.” Id. at ¶ 13 (quoting
Hennig v. Ahearn, 230 Wis. 2d 149, 165, 601 N.W.2d 14 (Ct. App. 1999)).
The principal dispute in the present motion for summary judgment is whether Betco
has advanced admissible evidence that defendants actually made any untrue representations,
whether negligently or intentionally, in inducing Betco to enter into the APA. Some of the
identified “misrepresentations” that Betco pled are apparently true: for instance, the parties
agree that the Beloit plant was in fact capable of producing 90,000 pounds of powder
product at five billion bacteria count strength every ten days and liquid product at a rate of
500 gallons at two billion count every two days. (See Pl.’s Resp. DPFOF (dkt. #124) ¶¶ 6970.) Defendants also undisputedly maintained detailed production processes at the Beloit
plant. (Id. at ¶ 76.) And the court can find no evidence in the record to suggest that it was
untrue that defendants maintained a quality-control technician to inspect products.
Accordingly, defendants are entitled to summary judgment with respect to those alleged
misrepresentations.
On the other hand, plaintiff has produced at least some evidence that other
representations defendants made were misleading. For instance, the notion that the plant
could support a significant increase in production at the time of sale could be false given the
opinion of plaintiff’s expert Reich, who inspected the plant and assessed its processes in
2012.19

Likewise, a reasonable trier of fact could infer that Malcolm Peacock’s

representations that Bio-Systems’ products were “as advertised” on the specification sheets

The court disagrees that this is a fact related to “future events,” because the challenged
representation is that the Beloit plant as it existed at the time could support such increases.
19

31

and had never had quality-control issues were false in light of the testimony of Loverich and
Seeger, who were aware of below-spec products and were instructed to ship them to
customers anyway. Although Betco has by no means produced overwhelming evidence, the
court concludes that summary judgment on the misrepresentation claims related to the
Beloit plant’s production capacity and the quality of its products20 would be improper on
this record.
Defendants also argue that no reasonable trier of fact could find Betco’s reliance on
Peacock’s general representations was justifiable, based on the fact that it failed to follow
through with its due diligence by having Dr. King inspect the plant. However, this, too,
presents a fact question, given that Betco did perform site visits, conduct conversations with
BSC and EZI personnel, examine financial information and submit requests for information.
A reasonable trier of fact could find that Betco was justified in relying on the information it
obtained from defendants despite its incomplete due diligence, particularly given that BSC
and EZI appeared to operate profitably and produce satisfied customers.
Defendants further argue that no reasonable trier of fact could find for Betco on the
theory that they fraudulently failed to disclose material facts, because any such omissions
took place as part of an arms-length transaction (in which they had no duty to disclose).
Kaloti, 2005 WI 111, ¶ 15.

Betco does not attempt to respond to this argument, and

“[f]ailure to respond to an argument . . . results in waiver.” Bonte v. U.S. Bank, N.A., 624
F.3d 461, 466 (7th Cir. 2010). Accordingly, defendants are entitled to summary judgment
on any claims for fraudulent omissions.

20

This means that claims remain under ¶¶ 41(a), (b), (c), (f) and (g) of the amended complaint.

32

Finally, defendants contend that no reasonable trier of fact could find Betco suffered
monetary damages to a reasonable certainty.

Defendants’ original motion based this

argument entirely on Betco’s tardiness in submitting its required damages disclosures, but
the court previously rejected the draconian measure of dismissing nearly all Betco’s claims
as a discovery sanction. In their reply, defendants seize on the new damages information
provided by Betco and argue that it is still too vague and conclusory for a factfinder to
conclude that Betco had suffered damages “to a reasonable certainty.”
“It is well-settled that new arguments cannot be made for the first time in reply.”
Gold v. Wolpert, 876 F.2d 1327, 1331 n.6 (7th Cir. 1989). “This goes for new facts too.”
Id. On the other hand, at the time defendants filed their opening brief, they did not yet
have the damages information that they now contend is too speculative and conclusory to
support a verdict. Still, the court is hesitant to grant summary judgment on these grounds
without the benefit of a response from Betco, which has not yet had the opportunity to
come forward with all of its damages evidence in response to defendants’ contentions.
Accordingly, the court will give Betco 21 days to file a response addressing only defendants’
new argument that Betco’s damages evidence is too speculative to permit a trier of fact to
find in its favor. No reply will be allowed unless invited by the court.
Finally, the court previously granted defendants relief from the dispositive motion
deadline pending resolution of this summary judgment motion. Should defendants wish to
file an additional motion for summary judgment on the remaining claims in this lawsuit,
they may have until March 20, 2015, to do so. In addition to any other issues they may
wish to raise, the court is particularly interested in the parties addressing:

33



Whether the integration clause contained in Section 13.08 of the APA precludes
consideration of Betco’s claims of misrepresentation that remain for trial;



Whether any of the remaining misrepresentations are not actionable because they are
forward-looking, constitute “puffery” or are unreasonably vague; and



Whether the duty of good faith and fair dealing that arises out of the dealings
between Betco, EZI and BSC extends to Malcolm Peacock, individually.

ORDER
IT IS ORDERED that:
1. Defendants’ motion for summary judgment (dkt. #63) is GRANTED IN PART
and DENIED IN PART, consistent with the opinion above.
2. Plaintiff Betco Corporation has until March 20, 2015, to file a response only
addressing defendants’ newly-raised damages argument.
3. Defendants may file an additional motion for summary judgment on or before
March 20, 2015. Plaintiff may have 14 days to respond; no reply will be allowed
unless invited by the court.
Entered this 27th day of February, 2015.
BY THE COURT:
/s/
________________________________________
WILLIAM M. CONLEY
District Judge

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