## Facts

- Kenneth Hendricks, through his wholly owned company (Dealers Supply Holding Company, Inc.), purchased all stock of Callahan Steel Supply, Inc. from James Callahan and a related trust.
- A key company asset was a leased warehouse in Aberdeen, South Dakota, where the company conducted much of its business and whose value was reflected in the stock price.
- At the time of contracting, Hendricks knew the warehouse lease was the subject of ongoing litigation in South Dakota and that, until the litigation was resolved, the leasehold was encumbered by a lien.
- The stock-purchase agreement included three express promises by Callahan:
  - A **financial statement warranty** that the corporation’s financial statements “fairly reflect” its assets, liabilities, equity, and results of operations as of a stated date.
  - A **property warranty** that the corporation had good and marketable title to its properties “as reflected on the balance sheet,” free of liens and encumbrances except those “reflected in the balance sheet.”
  - A **litigation indemnity** requiring Callahan to hold the buyer harmless from liabilities related to the identified Aberdeen litigation and to bear the expenses of that litigation.
- Callahan’s financial statement did not expressly refer to the lien, though a footnote stated the warehouse lease was cancellable at any time; the materials did not state that cancellation would be without penalty.
- After closing, Hendricks attempted to sell the acquired company’s stock to a third party. The prospective purchaser learned of the lien and refused to proceed.
- Hendricks then chose to cancel the warehouse lease and paid a substantial cancellation penalty.
- Hendricks brought a federal diversity action under Minnesota law seeking to recover the penalty and related losses, claiming Callahan breached the financial statement warranty, the property warranty, and the litigation indemnity.
- The district court entered judgment for Callahan (including summary judgment on the financial statement warranty claim), and Hendricks appealed.

## Issues

1. Under Minnesota law, could Hendricks recover for breach of Callahan’s express warranties where Hendricks knew of the warehouse lien and litigation when he purchased the stock?
2. Did the financial statement warranty and property warranty cover the warehouse lien such that the lack of an express lien reference in the financial statement or balance sheet amounted to a breach?
3. Did the litigation indemnity for liabilities and expenses “related to” the identified Aberdeen lawsuit require Callahan to reimburse Hendricks for a lease-cancellation penalty incurred as part of Hendricks’s post-sale business decision?

## Decision

- The Eighth Circuit affirmed the district court in full.
- The court affirmed summary judgment for Callahan on the financial statement warranty claim.
- The court affirmed judgment for Callahan on the property warranty claim.
- The court affirmed rejection of Hendricks’s claim for reimbursement under the litigation indemnity for the lease-cancellation penalty.

## Legal Principles

- Under Minnesota law, a plaintiff asserting breach of an express warranty in a transaction of this type must show legally sufficient reliance; knowledge of the complained-of condition at the time of contracting can defeat a warranty-based recovery.
- Financial statements are evaluated as a whole; explanatory footnotes and the parties’ shared knowledge may bear on whether a statement “fairly reflects” the company’s condition under the contract’s standard.
- A general “free and clear” property warranty is construed together with its exceptions and with the agreement’s overall allocation of known risks; a buyer cannot treat a known lien tied to disclosed litigation as a hidden defect simply because it was not listed in the balance sheet.
- Indemnity provisions are interpreted by their text and context; an agreement to hold a buyer harmless for liabilities and expenses related to identified litigation does not necessarily extend to voluntary, post-closing business actions taken to facilitate a resale.
- Contract interpretation favors giving effect to the parties’ negotiated risk allocation; courts generally do not rewrite specific litigation-risk provisions into broader guarantees of business outcomes.

## Conclusion

The Eighth Circuit held that, because Hendricks knew of the warehouse lien and pending Aberdeen litigation when he bought the stock, he could not recover on theories that the warranties were breached by nondisclosure or that the indemnity shifted all later economic consequences of the litigation; the indemnity covered litigation liabilities and expenses, not Hendricks’s voluntary lease-cancellation penalty, so judgment for Callahan was affirmed.


Hendricks v. Callahan, 972 F.2d 190 (1992)