245 F.2d 633 (8th Cir. 1957), 15622, Western Oil & Fuel Co. v. Kemp

Docket Nº:15622, 15623.
Citation:245 F.2d 633
Party Name:WESTERN OIL & FUEL COMPANY, a Delaware Corporation, Appellant, v. Orval L. KEMP, Webb Oil Company of Duluth, a Minnesota corporation, and Lake Superior Refining Company, a Wisconsin corporation, Appellees. Orval L. KEMP, Webb Oil Company of Duluth, a Minnesota corporation, and Lake Superior Refining Company, a Wisconsin corporation, Appellants, v.
Case Date:June 25, 1957
Court:United States Courts of Appeals, Court of Appeals for the Eighth Circuit

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245 F.2d 633 (8th Cir. 1957)

WESTERN OIL & FUEL COMPANY, a Delaware Corporation, Appellant,


Orval L. KEMP, Webb Oil Company of Duluth, a Minnesota corporation, and Lake Superior Refining Company, a Wisconsin corporation, Appellees.

Orval L. KEMP, Webb Oil Company of Duluth, a Minnesota corporation, and Lake Superior Refining Company, a Wisconsin corporation, Appellants,


WESTERN OIL & FUEL COMPANY, a Delaware corporation, Appellee.

Nos. 15622, 15623.

United States Court of Appeals, Eighth Circuit.

June 25, 1957

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Daniel H. Mundt, Duluth, Minn. (Thomas M. McCabe and McCabe, Van Evera, Donovan & Mundt, Duluth, Minn.,

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on the brief), for Western Oil & Fuel Co.

Ray G. Palmer, Duluth, Minn. (Palmer, Hood, Crassweller & McCarthy, Duluth, Minn., on the brief), for Orval L. Kemp and others.

Before JOHNSEN, VOGEL and VAN OOSTERHOUT, Circuit Judges.

VOGEL, Circuit Judge.

Western Oil and Fuel Company, plaintiff, instituted this action against Orval L. Kemp and Marian J. Kemp, his wife, doing business as Webb Oil Company of Duluth, for breach of contracts and Webb Oil Company of Duluth, a Minnesota corporation, and Lake Superior Refining Company, a Wisconsin corporation, for inducing the breach of and interfering with the same contracts. The case was tried in the United States District Court for the District of Minnesota before the court without a jury. Memorandum decision, findings of fact and conclusions of law were issued wherein the action was dismissed as to Marian J. Kemp and the plaintiff had judgment against the remaining defendants. Excepting for the fact that no question appears as to the propriety of the dismissal of the action as to Marian J. Kemp, all parties appealed, so that here all are appellants as well as appellees. For clarity, then, the parties, when not referred to by name, shall be designated as plaintiff and defendants.

A detailed statement of the facts is essential to an understanding of the problems involved. For some years Kemp and one Harry K. Webb were business partners operating under the name of Webb Oil Company of Duluth. Webb desired to sell his interests and Kemp wished to buy. In March, 1953, Kemp contracted the plaintiff, Western Oil, his long-time supplier of petroleum products, for the purposes of obtaining a loan to purchase Webb's interest in the partnership. Western Oil was not in the business of loaning money, but was greatly interested in retaining Kemp's business and becoming his exclusive supplier of petroleum products. Western Oil ultimately agreed to a loan of $103, 000 to Kemp so that Kemp could buy out Webb and become sole owner of the partnership. In addition to executing certain notes and mortgages as security for the loan, Kemp agreed with Western that he would purchase for seven years a specified quantity of gasoline and fuel oil at posted price on specified terms. Three such purchasing agreements for seven years beginning on June 30, 1953, were executed. Excepting for amounts and types of products involved, the agreements are identical. 1 These agreements had a provision

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for cancellation by either party on the second or any subsequent anniversary of the contracts, provided that the buyer, Webb Oil, had paid all its indebtedness of every kind and description owed to the seller. The notes, which went hand in hand with the other instruments, contained the provision:

'Makers reserve the right, on the second anniversary date or any subsequent anniversary date hereof, to prepay this note in full. Makers will give thirty (30) days written notice of their intent to exercise this right.'

Thus, what we have is a mutually advantageous and promising arrangement whereby Kemp received the necessary funds to buy out his partner and gained a dependable source of supply for

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his business and Western in return gained a sure and substantial customer for its products.

The agreement to lend money and sell products by Western Oil and the agreement by Kemp to buy the products were, as found by the trial court, interdependent.

All proceeded well between the parties until the fall of 1953 when Kemp became uneasy over growing competition, the high cost of staying in business and the need to expand. He suggested to Western Oil that he sell out to them and go to work in a managerial capacity. Talks were had between Kemp and representatives of Western but no final understanding was reached. Kemp then began negotiations with a competitor of Western Oil's, Lake Superior Refining Company. These negotiations culminated in a contract on March 11, 1954, between Superior and Kemp whereby Kemp agreed to organize a Minnesota corporation to be known as the Webb Oil Company of Duluth. Superior agreed to buy into the newly organized corporation to the extent of 80% of its stock. Kemp was to own 20%. It was further agreed that Kemp was to be employed as general manager of the new corporation at a salary of $12, 000 a year for a term of five years with additional compensation in the form of bonuses, the amount defendant upon earnings of the corporation. In was provided in the original contract that an exclusive purchasing agreement was to be executed between Webb Oil and Superior, whereby Webb Oil was to purchase all of its products from Superior. Such exclusive purchasing agreement was never executed but Webb Oil did purchase all its products from Superior after August, 1954, as originally intended. Purchases from Western by Webb Oil began to decrease after May 8, 1954, and of course ceased altogether when Superior became Webb Oil's sole supplier.

This action was started by Western on December 3, 1954. On May 25, 1955, subsequent to the commencement of the action, Kemp and Webb Oil, the corporation, without admitting the validity of the purchasing agreements, notified Western Oil of their intention to pay all indebtedness due Western Oil on the second anniversary of the agreements, June 30, 1955, and gave notice of intention to cancel in accordance with the provisions therefor in the purchasing agreements. All indebtedness owing from Kemp to Western was paid on the second anniversary of the purchasing agreements, June 30, 1955. The trial court made lengthy and detailed findings of fact. Among them, the court found, in substance, that the agreements to loan money and sell petroleum products by Western and the agreements to purchase these products by Kemp and the other covenants between the parties were interdependent; that Kemp, owning an established business, had the implied obligation to continue it in the usual manner until the contracts were cancelled and his indebtedness paid; that Kemp never ceased to have petroleum requirements; that Kemp's negotiations with Superior were at all times a continuing and conscious subterfuge by which he could breach his contracts with Western; that he did not act in good faith; that failure to purchase his requirements from Western breached the June 30, 1953, agreements; and that both Webb Oil and Superior intentionally induced the breach of contracts.

In finding for the plaintiff against all defendants excepting Marian J. Kemp, the trial court held that the measure of damages was to be determined by the liquidated damage provision of the purchase agreements (see Footnote No. 1) and that as the purchase contracts were cancelled and simultaneously all indebtedness paid to Western, the damages resulting from the breach were to be limited to damages occurring up to June 30, 1955. At 1/4 cent per gallon, the court awarded plaintiff $15, 161.64, found to be the damage resulting naturally and proximately from the breach of contracts.

Disposition of this case must be made with reference to the law of the

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State of Minnesota. Erie Railroad v. Tompkins, 1938, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188.

On defendants' appeal, they would have us first determine that there was no breach of contract by Kemp because the petroleum purchase agreements with Western were what are commonly called 'requirement contracts'. Under requirement contracts, a buyer does not breach his contract when requirements for supplies diminish or when he ceases to have requirements by reason of his going out of business. It is true that Kemp's need for fuel from Western diminished, but it was for a reason not within accepted standards of business conduct. Kemp did not cease doing business in good faith; indeed, he did not cease doing business at all except in a most technical sense. The court specifically found that his petroleum requirements never ceased. There was not a good-faith cessation as most cases require. Webb Oil's express purpose was to destroy Western's contracts with Kemp and enter into an exclusive purchasing contract with Superior. Kemp merely used Webb Oil as his new alter ego, but it was clearly 'business as usual'. Where a contract such as these is made between business men it is pre-supposed that there will be a continuance of the well-established business. Pittsburgh Plate Glass Co. v. Paine & Nixon Co., 1931, 182 Minn. 159, 234 N.W. 453, 457. Certainly it was tacitly understood that Kemp would continue in his business, at least for a period of two years and until his indebtedness was paid off. Taking minimal standards of conduct in requirement contract cases which only impose an obligation to act in good faith, Kemp has failed to satisfy these standards. See In re United Cigar Stores Co. of America, 1934, 2 Cir., 72 F.2d 673, 675.

Defendants' other allegations of error relate to findings of fact and conclusions of law; specifically findings of fact No. 25, No. 27, No. 28 and No. 29 and conclusions of law No. 4, No. 7 and No. 8.

Finding of fact No. 25 and conclusion of law No. 4 determined that Kemp did not cease...

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