Court Opinion

ID: 71621
Source: CourtListenerOpinion
Date Created: 2010-04-26 07:20:39+00
Date Added: 2024-06-11T14:58:48.019522
License: Public Domain

United States Court of Appeals,

                          Eleventh Circuit.

                             No. 96-6736.

 FOLSOM METAL PRODUCTS, INC., an Alabama Corporation, Plaintiff-
Counter-Defendant-Appellee,

  RBOP Tools International Inc., Texas Corporation, Intervenor-
Plaintiff-Appellee,

                                  v.

 TORUS EQUIPMENT COMPANY, Defendant-Counter-Claimant-Appellant.

                            May 29, 1997.

Appeal from the United States District Court for the Northern
District of Alabama. (No. CV 94-L-988-S SHL), Seybourn H. Lynne,
Judge.

Before BIRCH and CARNES, Circuit Judges, and GODBOLD, Senior
Circuit Judge.

     GODBOLD, Senior Circuit Judge:

     Torus Equipment Inc. owned all rights to a complex machine

used to guard against accidents in certain types of oil drilling,

known as a rotating blowout preventer ("RBOP").        In 1990 Torus

entered into an agreement with Seal-Tech Division of Folsom Metal

Products, Inc., to sell to it "all proprietary rights" to the RBOP.

The sale took place.    After numerous succeeding events the parties

disagreed over Seal-Tech's obligations.     Seal-Tech filed this suit

seeking a declaratory judgment, and Torus counterclaimed.       RBOP

Tools International, Inc., a successor in interest to Seal-Tech,

intervened.    The district court granted summary judgment to Seal-

Tech and RBOP Tools and denied Torus's motion for partial summary

judgment.     We hold that the summary judgments were improvidently

entered and vacate and remand for further proceedings.

                                  I.
      "Proprietary rights" were described in the Torus/Seal-Tech

agreement   to     include   specifications,        tools,    machines,       trade

secrets,    information      and   expertise     relating     to     design    and

manufacture of RBOP's, and improvements in existence or that might

be developed in the future.          Seal-Tech agreed to pay $50,000 up

front (when it received funding for its production of a prototype).

A royalty of $50,000 was to be paid in ten equal installments of

$5,000, each payment to become due upon Seal-Tech's sale or rental

of each of the first ten RBOP's that it sold or leased.               Also Seal-

Tech agreed to pay for a period of ten years an additional annual

royalty determined by a formula derived from its gross receipts

from sale or rental of RBOP's and its net profits thereon, up to 5%

of gross.

      Seal-Tech    also   agreed    to   purchase    from    Torus    designated

products required in the manufacture or repairs of RBOP's that

Seal-Tech sold or rented. The agreement noted that Seal-Tech might

require technical assistance and training, which was to be supplied

by Torus at prescribed per diem rate plus travel expenses.                     Both

parties agreed that know-how and trade secrets would be kept in

confidence, divulged only with written consent of Seal-Tech. Torus

agreed that it and its shareholders, officers or directors would

not compete in any activity regarding RBOP's.            Seal-Tech agreed to

be   responsible    for   product    liability      arising    from    any     RBOP

manufactured or repaired by it and to indemnify Torus against such

claims.

      The agreement contained the following default provision:

                                   ARTICLE 10
                       Default and Remedies

     10.1 Material default by either party may include, but is not
     limited to:

          (a) SELLER fails to maintain confidentiality of the RBOP
     and Technical Know-How and Trade Secrets as provided in
     ARTICLE 7 or breaches another provision of ARTICLE 7;

          (b) Either party ceases to do business, becomes
     commercially insolvent, or is placed in receivership, or is
     declared by a competent court to be insolvent or bankrupt.
     Provided however, in the event SELLER encountering any of such
     occurances [sic], it is expressley [sic] agreed that such
     occurrance [sic] shall not relieve PURCHASER of its obligation
     to pay the portion of the purchase price for the Technical
     Know-How, Trade Secrets and the Trademark "ROTATING BLOWOUT
     PREVENTER" and "RBOP" (together with the goodwill associated
     with such marks) represented by the one-half (1/2) of the New
     Profit of the Net Profit Percentage as set forth in ARTICLE 3,
     sub paragraph 3.1(b) hereof;

          (c) failure to pay the money due SELLER pursuant to the
     terms of this Agreement; and

          (d) SELLER is in breach of any of its representations or
     warranties hereunder.

     With respect to assignment, paragraph 13.3 provided:

     13.3 Assignment.   PURCHASER and SELLER are each expressly
     authorized to transfer their respective rights, title and
     interest hereunder by way of an assignment or otherwise, as
     either party deems appropriate, in connection with a sale of
     their respective business or substantially all of their
     respective assets, or otherwise.

The agreement also provided that if Seal-Tech failed to pay the up

front $50,000 or the succeeding $50,000 royalty, it would transfer

back to Torus any rights obtained under the agreement, and any

monies paid would serve as liquidated damages toward the $100,000.

                               II.

     In subsequent agreements with Torus and others Seal-Tech was

variously described as "Seal-Tech Products Division, Folsom Metal

Products, Inc.," and as "Folsom Metal Products, Inc. d/b/a Seal-

Tech."   For simplicity we will refer to "Folsom," but it must be
kept in mind that the original agreement was in the name of "Seal-

Tech, a division of Folsom Metal Products, Inc."

     A dispute arose between Torus and Folsom concerning the method

of calculating the annual royalty payments to be made to Torus over

ten years.      Torus sued Folsom for an accounting and for unpaid

royalties.       In 1993 they entered into a settlement agreement

whereby Folsom's obligation for the original $100,000 ($50,000 up

front and $50,000 royalties) was recognized.                Also, Folsom agreed

to pay $110,000 more ($35,000 up front and $75,000 in eighteen

monthly installments).          Folsom's ten year obligation to pay an

additional      annual    royalty    was   recognized       but    the   method    of

computing was changed to basically 5% of Folsom's RBOP sales and

rentals.

     A   year    later,    in   February    1994,    Folsom       entered   into   an

agreement with Big D Rental & Sales Ltd., a Canadian entity,

pursuant to which Big D agreed to purchase for $2,400,000, the

entire interests of Folsom in RBOP's, inventory, intangibles, and

miscellaneous assets, as well as "any other assets of [Folsom]

necessary to operate the Business as a going concern."                       "[T]he

Business" was defined to mean the business presently carried on by

Folsom   under      the   tradename   and    style     of   Seal-Tech       and,   in

particular the design, manufacture, sale and rental of RBOP's.

Included     were     equipment,      tools,     accessories,         manufactured

materials, work in progress, contracts relating to rental, supply

and manufacture of RBOP's, and drawing and equipment relating to

production.       Folsom    agreed    to   use   its   best       efforts   to   make

available to Big D the services of its employees "integral to
operation      of   the   Business."              Folsom         agreed   to    manufacture

additional RBOP's if ordered by Big D, on a cost-plus basis, and

agreed    to   assist     in    completing        a    working         prototype   of     next

generation      RBOP's.         Folsom       represented           that   there    were    no

royalties,      license        fees,      liens       or    charges,       or    any    other

encumbrances in favor of any third party.

     By an attached letter Folsom set out that the assets being

sold "are those related exclusively to our RBOP business and do not

include   assets     used      in    our    other      lines      of    business   such    as

pipe-threading," and office equipment and furniture and general use

items such as fork lifts.                The letter recognized that Folsom was

granting to Big D the right to use the tradename "Seal-Tech" in

connection with the RBOP business.

     A schedule attached to the Folsom-Big D agreement listed

nineteen RBOP's owned by Folsom and to be transferred to Big D and

described the location of each. Another attachment stated that the

total    purchase     price     of       $2,400,000        was    allocated     $50,000    to

intangibles,        $200,000        to     inventory        of      parts,      $50,000    to

miscellaneous items, and $2,100,000 to the RBOP units owned by

Folsom.     The purchase price was payable $150,000 in cash and a

promissory note for $2,200,000 payable in monthly installments of

principal and interest for seven years.1                     The agreement recognized

that some RBOP's were "in the field under lease" and provided for

apportionment of rental revenue upon closing.

     Shortly after the Folsom-Big D agreement was made, Big D

     1
      The discrepancy between $2,400,000 and the total of
$2,350,000 is not clearly explained.
organized a wholly owned subsidiary, Big D Alabama Acquisition

Corp., an Alabama corporation, which stepped into Big D's shoes.

This was done in order that the transaction would be consummated by

an Alabama purchaser to ensure the enforceability of the agreement

under Alabama law.        Shortly thereafter Big D Alabama transferred

its rights to another entity that Big D controlled, RBOP Tools

International, Inc. a Texas corporation.

     Once the agreements between Folsom and Big D were in effect

Folsom    took   the   position    that   its   obligations      to    Torus    for

royalties to be paid on receipts from sales and leases of RBOP's

would be satisfied by paying to Torus a royalty of 5% of the

$2,100,000 Folsom and Big D had agreed upon as the purchase price

of Folsom-owned RBOP units sold to Big D, payable as and when

Folsom received payments from Big D.                Folsom tendered to Torus

$8,750, which was 5% of payments Big D had already made.                   Torus

refused    the   offer.     Folsom    then     filed    this   suit    seeking    a

declaratory judgment that it was only obligated to pay 5% of the

$2,100,000 allocated to sale of its RBOP's to Big D, as payments

were received, and that neither Folsom nor Big D had any further

obligations to Torus.

     Torus answered and counterclaimed.                It alleged that it had

sold to Seal-Tech the going business consisting of its entire RBOP

business.     It sought a declaratory judgment that the agreement

between it and Folsom had not been terminated. Alternatively Torus

asserted    that   Folsom   had    committed    a   material     breach   of    the

agreement between them by selling and transferring the entire

business    of   the   Seal-Tech    division    and    ceasing    to   engage    in
business relating to RBOP's.

       In a four-line order the district court held that the contract

provisions in the record were clear and unambiguous and pursuant

thereto the motions for summary judgment by Folsom and RBOP Tools

were       granted.   In   an   eight-line   order   the   court   entered   a

declaratory judgment that Folsom was only required to pay Torus 5%

of the $2,100,000 allocated by it and Big D to the purchase price

of RBOP units acquired by Big D, as payments were received from

RBOP Tools, and that there were no further contract obligations

owed to Torus by Big D, RBOP Tools or any other successor in

interest to the RBOP units.

                                     III.

       Folsom's position is simple.         It agreed to pay 5% royalty on

its sale or lease of RBOP units.        It sold all its units to Big D in

one plenary sale for $2,100,000, and it offers to pay 5% thereof as

royalty, as payments are received from Big D's successor.             It has

no more units to sell or lease, therefore it has no obligation to

Torus.       This position was accepted by the district court.

           It is certain that the agreement between Torus and Folsom is

not clear and unambiguous.        It is not clear whether Folsom agreed

to continue in the business of selling and leasing RBOP's and

whether it has defaulted by its transaction with Big D. 2            Article

10 describes a material default to include either party's ceasing

to do business.       The series of agreements refer repeatedly to what

Torus sold and Folsom bought as Torus's RBOP business, and what

       2
      Folsom's characterization that it just purchased assets of
Torus and not Torus's "Business" of selling and leasing RBOP's is
untenable.
Folsom resold as its RBOP business.    In his deposition the sole

stockholder of Folsom acknowledged that Folsom is not currently

engaged in any business.   Yet despite Article 10, paragraph 13.3

seems to authorize a sale by either party of its "respective

business."

     Apart from the possibility of default and its consequences as

provided by the agreement itself, the issues may be viewed through

the lens of impossibility of performance.   It is not unambiguously

clear whether Torus had a valid expectation of a ten year royalty

on lease proceeds and whether Folsom had made that expectation

unattainable by making a plenary sale of all leasable units and

walking away from the RBOP business.        Without using the term

"impossibility" Folsom is in effect invoking impossibility as a

defense to Torus's counterclaim (as well as using it affirmatively

as a basis for summary judgment in its favor).    But impossibility

cannot be invoked by a party who has made performance infeasible

through its own actions.   Restatement (Second) of Contracts § 261

(1979).   Arguably Torus's expectation or possibility of receiving

royalties for ten years on leases is a basic assumption of the

contract that has been made unattainable by Folsom's actions in

selling out and abandoning "the Business."      See id.;   see also

Gulf, Mobile and Ohio R.R. v. Illinois Cent. R.R.,    225 F.2d 816

(5th Cir.1955) (GM & O's abandonment of use of Illinois Central's

track did not terminate its duty to pay rent under its contract

with Illinois Central).

     Since the district court held Folsom liable for only 5% as

received from RBOP Tools, it did not address whether RBOP Tools, as
successor to Folsom, is liable to Torus.    We have, therefore, not

addressed the issue of successorship liability.    That too is for

the district court to consider on remand.

     The summary judgments in favor of Folsom and RBOP Tools are

REVERSED and the case is REMANDED to the district court for further

proceedings not inconsistent with this opinion.