Hendricks v. Callahan

Kenneth Hendricks (plaintiff) bought a company’s stock from James Callahan (defendant). The stock reflected the value of a leased warehouse where the company conducted much of its business. Hendricks knew that the warehouse was the subject of ongoing litigation and that until that litigation was resolved, the warehouse was encumbered by a lien. The sale contract contained Callahan’s express warranties that: (1) his financial statement, which did not refer to the lien, was accurate (the financial warranty); (2) his property was unencumbered, except as listed in the financial statement (the property warranty); and (3) Hendricks would be held harmless for any liability arising from the warehouse litigation (the litigation warranty). Hendricks subsequently tried to sell the stock to a third party who backed away from the deal when it learned of the lien’s existence. Although a footnote to Callahan’s financial statement noted that the lease was cancellable at any time, the statement itself lacked any language enabling Hendricks to cancel the lease without penalty. Hendricks brought a federal diversity action against Callahan to recover the substantial penalty he paid to cancel the lease, alleging that Callahan breached all three warranties. Minnesota law applied to the case. The district court entered judgment for Callahan, and Hendricks appealed to the Eighth Circuit.