435 F.3d 455 (3rd Cir. 2006), 04-3589, Berg Chilling Systems, Inc. v. Hull Corp.

Docket Nº:04-3589.
Citation:435 F.3d 455
Party Name:BERG CHILLING SYSTEMS, INC., Appellant v. HULL CORPORATION; SP Industries, Inc.
Case Date:January 31, 2006
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit

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435 F.3d 455 (3rd Cir. 2006)




No. 04-3589.

United States Court of Appeals, Third Circuit.

January 31, 2006.

Argued Sept. 26, 2005.

Argued September 26, 2005


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JOHN J. SOROKO (Argued) PATRICK J. LOFTUS JAMES H. STEIGERWALD Duane Morris LLP, Counsel for Appellant

MICHAEL O. ADELMAN (Argued) MICHAEL P. DALY KATHRYN E. BISORDI Drinker Biddle & Reath LLP, Counsel for Appellees SP Industries, Inc.

Before: ALITO, AMBRO, and LOURIE[*], Circuit Judges


ALITO, Circuit Judge:

Berg Chilling Systems ("Berg") appeals a judgment entered by the United States District Court for the Eastern District of Pennsylvania. In the earlier proceedings, Berg sought a judgment rendering SP Industries ("SPI") liable for breach of contract, most recently based on the theory that SPI assumed liability when it purchased the assets of an entire division of the Hull Corporation ("Hull"), the original party to the contract. Because we find that SPI did not assume Hull's contractual liability to Berg under any of the exceptions to the traditional corporate rule of successor nonliability, we affirm.


The tangled history of this case began in 1995, when Berg, a Canadian corporation, contracted with a Chinese company, Hua Du Meat Products Company ("Huadu"), to provide an industrial food freeze-drying system (the "Huadu Contract"). The system included several components that Berg planned to acquire from subcontractors and suppliers. One of these subcontractors was Hull, a Pennsylvania entity, with whom Berg eventually contracted to design, engineer, manufacture, test, and modify two freeze dryers. The purchase agreement between Berg and Hull (the "Purchase Agreement") stipulated that the two freeze dryers conform to particular "through-put" specifications, an industry term referring to the dryers' ability to process a certain volume of food at a high quality level within a 24-hour period.

All did not go according to plan. Initially, various logistical and timing issues plagued the manufacture and delivery of the freeze dryers before they were eventually installed at Huadu's facility in China in April 1997, and prepared for trial runs. Then, the freeze dryers failed a preliminary test administered by a Hull service technician, leading Huadu to send a list of concerns to Berg, which then forwarded the list to Hull. The Hull technician supervising the testing left China without running any performance tests. These tests would have held the freeze dryers to even more stringent standards than did the failed start-up test, and satisfaction of the performance tests was required by the Huadu Contract. Frustrated by Hull's apparent lack of cooperation, Huadu threatened to cancel the contract; Berg, in turn, threatened to sue Hull.

In an effort to salvage the project and persuade Huadu not to terminate the contract, representatives of Berg and Hull traveled to China in October 1997 to negotiate a compromise. The result was an agreement among Huadu, Berg, and Hull, modifying certain terms in the original contract (the "Modified Agreement"). The Modified Agreement provided, among other things, that Berg and Hull would arrange, at their own cost, modifications to

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the freeze dryers so they would meet the through-put requirements of the original Huadu contract. It also obligated Hull to perform technical work, assembly work, testing work, and production work on the freeze dryers according to engineering plans prepared by a Hull engineer. March 1998 was set as the date by which modifications would be completed and Huadu would grant final acceptance.

Meanwhile, in August 1997, Hull began negotiating a business deal with SPI, a Delaware corporation with its principal place of business in New Jersey. The transaction, structured as an asset purchase agreement, proposed to sell to SPI all assets, properties, rights, and businesses related to Hull's Food, Drug and Chemical ("FDC") Division. Hull's FDC Division included its freeze dryer production capacity, and consequently its rights and obligations under the Modified Agreement and the Purchase Agreement. At the time of contract negotiations, Hull had at least two other Divisions: the Emission Monitoring Systems Division and the Vacuum Components Division.

Hull and SPI entered into an asset purchase agreement dated August 25, 1997 ("Asset Purchase Agreement" or "APA"), which closed approximately one week after Huadu, Berg, and Hull signed the Modified Agreement. SPI's President and CEO, Jack Partridge, indicated that SPI specifically intended to acquire Hull's FDC Division as an ongoing business. See Berg Chilling Sys., Inc. v. Hull Corp., No. 00-5075, 2003 WL 21362805, at *4 (E.D. Pa. June 10, 2003) (hereinafter Berg I). SPI planned to combine the newly-acquired FDC Division with its own VirTis Division, which manufactured freeze dryers for research; indeed, a public release by SPI referenced a "merger agreement between the FDC division of Hull and the VirTis division of SP Industries." (A1042).

Several particular provisions of the APA are relevant to our discussion. The first is a list of purchase assets, detailed in Article 1.2, which included "all contracts and agreements, including, without limitation, sales orders and sales contracts." (A962-965). The second provision at issue is Section 7.8, entitled Product Warranties, which states that:

Purchaser will, as appropriate, agree to repair (at the Real Estate or as necessary, at the location of the customer) or accept returns of products of the Business shipped by [Hull] on and prior to the Closing Date ... which are defective or which fail to conform to the customer's order in accordance with the following provisions (but [SPI] does not hereby assume any liability to any third party claimant. ...)

(A986). Third, the APA's choice of law provision, set forth in Section 10.6, stated that the "agreement shall be governed and controlled as to validity, enforcement, interpretation, construction, effect and in all other respects by the internal laws of the State of New Jersey applicable to contracts made in that State." (A994). Finally, the purchase price of the contract indicated in Section 3.1 was fixed as the sum of six million dollars cash and the aggregate book amount of assumed liabilities. (A966).

As the APA's closing date approached, the remaining work on the freeze dryers for Berg was a cause of concern for all parties. After the asset transfer, it would have been impossible for Hull to complete its obligations under the Modified Agreement because Hull retained neither the personnel nor the capacity for the required work. Hull and SPI resolved the issue by simultaneously entering into a "side letter agreement" in which they agreed that SPI would complete the remaining design modifications and repairs to the freeze dryers,

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and that Hull would reimburse SPI for a portion of its expenses. Berg Chilling, 369 F.3d at 750. The letter provided that "[e]xcept as amended hereby, the terms and provisions of the Asset Purchase Agreement shall remain in full force and effect." (A1098). Both Hull and SPI considered SPI's efforts to fix the freeze dryers to be warranty work, as defined and covered by Section 7.8 of the APA, and the side letter agreement made no changes to that section. Meanwhile, Berg attempted to assuage its own concerns about the project by sending a letter to Hull, inquiring about "the transfer of liabilities, and specifically who will be carrying the full financial responsibility for this project." (A1045). Hull responded by indicating that "[i]f Hull's freeze drying division should be transferred to another entity, Hull's responsibility will of course be assumed by the successor." (A1043). At the time Hull made this representation, the APA was still under negotiation, and there was no guarantee that any asset transfer would ultimately take place. There is no indication that Hull ever informed SPI about its assurances to Berg, and Berg did not discuss the matter directly with SPI after the asset transfer was complete.

After the APA closed, SPI renamed Hull's former FDC Division "Hull Company Division," and marketing materials called the Hull Company Division the "continuation" of Hull. (A725-27, 737-39). Key former employees of Hull, including the major players in the Huadu Contract, remained involved in the project. SPI named Lewis Hull, Hull's chairman, as honorary chairman of the Hull Company Division, and employed John Hull as a consultant to the Huadu project. Both men lacked any power to legally bind SPI. Others, including Hull's chief engineer, continued to perform design and engineering work on the Huadu Project pursuant to the Modified Agreement. The Division's first order of business was to complete the remaining work on the Huadu freeze dryers to bring them into compliance with the contract.1

SPI's efforts to bring the freeze dryers up to performance standards were ultimately unsuccessful. Consequently, Huadu filed an international arbitration action against Berg for breach of contract in March, 1999, pursuant to its rights under the Huadu Contract, as modified by the Modified Agreement. Berg requested that Hull participate in a joint defense in the proceedings, but Hull refused to do so. Although the arbitrators found that the only deficiency in the freeze-drying system was the freeze dryers themselves, they found that Berg bore full responsibility to Huadu, and deemed Hull's liability to be outside the scope of arbitration. Berg Chilling Sys. v. Hull Corp., 369 F.3d 745, 752 (3d Cir. 2004)...

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