Herzog Contracting Corporation v. McGowen Corporation

Herzog Contracting Corporation (Herzog) (plaintiff) purchased the assets of a metal-hose corporation from McGowen Corporation (McGowen) (defendant) under an asset-purchase agreement. Herzog assigned the asset-purchase agreement to Tru-Flex, Herzog’s subsidiary. The agreement required annual payments of $500,000 from Tru-Flex to McGowen. Herzog paid $400,000 to McGowen, and McGowen executed two promissory notes in favor of Tru-Flex that totaled $400,000. Herzog claimed that Herzog had loaned McGowen the $400,000 and that the notes were McGowen’s promise to repay the loan. McGowen claimed that the $400,000 was a partial prepayment under the asset-purchase agreement and that the purpose of the notes was to allow McGowen to postpone the realization of taxable income on the $400,000 to the following year by making the payment look like a loan. Herzog failed to pay under the asset-purchase agreement. Tru-Flex assigned the promissory notes to Herzog, and Herzog sued McGowen to enforce the notes. Herzog conceded to not being a holder in due course of the notes. The district court refused to admit parol evidence as to the intent of the notes, holding that the notes were clear and unambiguous and therefore enforceable, even if the parties never intended for the notes to be presented for payment. The district court granted summary judgment in favor of Herzog. McGowen appealed.