The opinion of the court was delivered by: TENNEY
This action is brought by Baldt Corporation ("Baldt"), a Delaware corporation, to recover the principal and interest allegedly due and owing on several notes issued by Tabet Manufacturing Company, Inc. ("Tabet"), a Virginia corporation. On July 7, 1971, Baldt sold its Palmer Electric and Manufacturing Division ("Palmer"), located in Saugus, Massachusetts, to Tabet, thereby giving rise to the obligations which are the subject of the controversy herein. This action, originally commenced in the Supreme Court of the State of New York through service on Tabet of a summons and motion for summary judgment in lieu of complaint pursuant to Section 3213 of the New York Civil Practice Law and Rules, was removed by defendant Tabet to the District Court for the Southern District of New York on the basis of diversity of citizenship, 28 U.S.C. § 1332. The case was tried to the Court without a jury.
Baldt had acquired Palmer for approximately $2 million cash in October of 1969. Palmer is a manufacturer of shipboard electrical enclosures which are used to shield and protect electrical components from exposure to the elements at sea. Tabet and Palmer were at that time the prime competitors in this field.
Tabet wrote to Baldt in April of 1970 evidencing an interest in the purchase of Palmer, and preliminary negotiations followed. These negotiations produced no immediate result.
Palmer's business had been deteriorating steadily when, in the fall of 1970, Baldt made the corporate decision to sell Palmer to any buyer. Baldt originally sought to recoup its $2 million investment, but realized that this was not possible in light of the deteriorating state of the business of Palmer and subsequently revalued the business at $600,000. This revalued figure was made public early in 1971.
The negotiations between Baldt and Tabet appear to have resumed on a serious note when Mr. James Hollyer, then Executive Vice President of Baldt, flew to Norfolk, Virginia on July 1, 1971, to meet with Mike Tabet, the President, and Hughes Burton, the Vice President and General Manager, of Tabet. Tabet was primarily interested in purchasing the machinery, equipment, and inventory of Palmer, as it had no intention of continuing the business in Massachusetts. The parties concluded a tentative Purchase and Sales Agreement ("Agreement") on this date at a price of $425,000, with Baldt to retain the land and buildings. The Agreement specified a $300,000 cash payment, with the balance of $125,000 to be paid in eight notes of $15,625 each.
Baldt was unwilling to dispose of Palmer's assets alone. Therefore, the Agreement included a provision for the assumption by Tabet of certain liabilities of Palmer. The Agreement had been negotiated in light of the May 31, 1971 balance sheet of Palmer, but was to be based on the June 30, 1971 closing figures. The relevant portion of the Agreement which embodies these features, Paragraph 2.3, reads as follows:
"2.3 The Palmer Assets generally described in Section 1 of this Agreement and the Palmer Liabilities generally described in Section 2 of this Agreement of Palmer and subject to the sale and assumption agreements and pursuant to the terms hereof are and will be set forth on a balance sheet of Palmer dated as at May 31, 1971, with such changes therein as shall occur subsequent to such date in the ordinary course of business, and the Seller shall sell, transfer, assign and deliver to the Company [Tabet], and the Company shall purchase, acquire and accept all of such assets as the same shall exist on the Closing Date other than the expressly excluded assets and shall assume all of such liabilities as the same shall exist on the Closing Date other than those expressly excluded liabilities. In the event that the 'Cash' and 'Accounts Receivable' of Palmer transferred to the Company do not equal or exceed the 'Accounts Payable' of Palmer as at June 30, 1971, then the difference between the 'Accounts Payable' of Palmer and the 'Cash' and 'Accounts Receivable' of Palmer as at such date shall be deducted from the principal amount due under the Notes in inverse order of their maturity. Such account shall be maintained in a manner consistent with that employed in the preparation of the May 31, 1971 balance sheet."
The last two notes in the eight note series were made subject to set-off as provided in the Agreement. They were also made non-negotiable so that no third-party interest would be involved in the event of a set-off.
The parties met subsequently on July 6, 1971, in New York. Present at this meeting were Mr. Vincent Mastracco, Tabet's counsel, Mr. Ernest H. Lorch, Baldt's counsel, Mr. Burton, and Mr. Hollyer. Various changes in the documents were requested and made. Paragraph 2.3 of the Agreement was discussed at length and with apparent specificity, though no change was made in the Paragraph from the draft to the final form. Various other provisions were also discussed.
The meeting lasted approximately two and one-half hours. At its conclusion, the parties retired for a final review of the documents and for finalization of financing.
On July 7, the parties reconvened in New York to close the sale. Mr. Burton raised several questions concerning the various line entries on the May 31 balance sheet. Specifically, he wanted to have these entries broken down into their constituent elements so that he might know the exact composition of each. Mr. Hollyer explained these elements in some detail. The parties then reviewed and signed all documents and delivered the appropriate cash and notes. The sale was closed, as scheduled, on July 7, 1971.
The notes due on August 15, 1971, November 15, 1971, February 15, 1972, May 15, 1972, and August 15, 1972, were paid in full as was provided in the Agreement and are not the subject of the controversy herein.
Tabet, by letter dated November 15, 1972, submitted a check in the amount of $5,538.02 to Baldt. This check was purported to be in full and final payment of the notes due on November 15, 1972, February 15, 1973, and March 15, 1973.
Tabet explained this action by noting a variety of payments made on behalf of Baldt and attempted to justify the set-off by citing Paragraph 2.3. Tabet's reasoning, in essence, was that these payments were properly included within the term "Accounts Payable" as used in Paragraph 2.3 and, as such, caused an excess of "Accounts Payable" over "Cash" and "Accounts Receivable", thereby giving rise to the claimed set-off. Baldt contended that the charges did not fall within the bounds of the term "Accounts Payable" as it was used in Paragraph 2.3.
In response, Baldt's counsel, Mr. Lorch, wrote to Tabet on December 11, 1972, stating that Baldt considered the purported set-off to be improper and considered the note due on November 15, 1972, to be in default. Demand was made that the default be cured within five business days and the acceleration clause in the notes was cited. Finally, it was pointed out that the note due on November 15, 1972 contained no provision for set-off, as did the final two notes. In a follow-up letter, dated December 28, 1972, Baldt's counsel noted that the default on the November 15, 1972 note had not been cured and declared the remaining two notes to be immediately due and owing in accordance with the terms ...