F. & M. SCHAEFER CORP. v. Electronic Data Systems Corp.

• Decision Date: 28 March 1977
• Docket Number: No. 76 Civ. 3982.,76 Civ. 3982.
• Citation: 430 F. Supp. 988
• Parties: The F. & M. SCHAEFER CORPORATION and the F. & M. Schaefer Brewing Co., Plaintiffs, v. ELECTRONIC DATA SYSTEMS CORPORATION and E. D. Systems Corporation, Defendants.
• Court: U.S. District Court — Southern District of New York

430 F. Supp. 988

The F. & M. SCHAEFER CORPORATION and the F. & M. Schaefer Brewing Co., Plaintiffs, v. ELECTRONIC DATA SYSTEMS CORPORATION and E. D. Systems Corporation, Defendants.

No. 76 Civ. 3982.

United States District Court, S. D. New York.

March 28, 1977.

Thomas K. Christo, Boston, Mass., for plaintiffs.

Kaye, Scholer, Fierman, Hays & Handler by Sheldon J. Oliensis, Milton Sherman, New York City, Hughes, Luce, Hennessy, Smith & Castle by Phillip N. Smith, Jr., Thomas W. Luce, III, Dallas, Tex., for defendants.

MOTION FOR REPLEVIN

MOTLEY, District Judge.

Findings of Fact and Conclusions of Law

On September 7, 1976 the F. & M. Schaefer Corporation (Schaefer) filed this action against Electronic Data Systems Corporation (EDS) alleging breach of contract and a cause of action for rescission of another contract based on EDS' alleged fraudulent misrepresentations. Schaefer prays for $45 million compensatory damages plus punitive damages. EDS answered the complaint on November 11, 1976 and asserted numerous counterclaims against Schaefer.¹

On this same day, EDS filed its motion for replevin of Schaefer's data processing system alleging that it had previously developed this system and had turned the system over to Schaefer in stages during 1975 and 1976 pursuant to agreement. Schaefer filed a reply to the motion for replevin on November 15, 1976.

The court held hearings on the replevin motion on March 7, 8, 9, 10, 14, 15, and 16, 1977 and now makes its findings of fact and conclusions of law with respect thereto.

In 1969 EDS and Schaefer entered into a contract for the development and supply of data processing services. The term of the contract was seven years. Under Phase 1 of this agreement, which was to end in 1972, Schaefer turned over its old data processing system, and while EDS ran this old card system for Schaefer, EDS developed a more sophisticated, more modern and much faster tape system to meet Schaefer's data processing needs. Under Phase 2 of the contract EDS was to run the newly developed system for Schaefer until May of 1976.

Phase 1 was essentially completed by the end of 1972, but by this time Schaefer was in severe financial difficulty and requested EDS to defer certain required payments for two years, approximately $1,507,000 in development costs and approximately $35,000 in monthly service charges. The result was a new 1973 agreement governing Phase 2 which (although not explicitly) superseded the 1969 agreement.

Under the 1973 contract the following changes, in essence, were made:

1. The original term of the contract would be extended for one and one-half years until the end of December, 1977, as opposed to May, 1976, the original termination date under the 1969 contract.

2. Monthly payments under the 1969 contract were reduced for 1973 and 1974, and these deferred charges were to be recovered by increased monthly payments in 1975 through 1977.

3. Services performed by EDS were to be reduced.

Under the 1973 contract Schaefer could cancel the contract, which by that time was for the running of the data processing system by EDS, and elect to operate its data processing system prior to the December 1977 termination date.

In order to terminate, two conditions had to be met: First, Schaefer had to pay a cancellation fee which was, in essence, the balance of all the deferred payments which otherwise would have been paid in monthly instalments to December, 1977. Second, Schaefer and EDS had to enter into a termination agreement concerning Schaefer's use of the system developed by EDS.

In its main suit Schaefer claims that EDS did not adhere to the contract, and that the system which EDS developed was faulty and caused great damage to Schaefer. Schaefer also claims that EDS fraudulently induced Schaefer to enter into the 1973 agreement. Schaefer seeks rescission of this agreement.

The court finds that Schaefer did turn over its old system to EDS around 1969. During Phase 1 of the 1969 contract, EDS did develop another system which was different from the one turned over by Schaefer.

Around 1974 Schaefer expressed an interest in cancelling the 1973 agreement and running its own data processing system. In 1975, in accordance with Task Order C of the 1973 contract, EDS did, in fact, begin turning over the new system to Schaefer. The turnover was accomplished in stages so that no continuity would be lost in Schaefer's data processing needs and so that the EDS personnel would have time to train Schaefer's personnel in the operation of the new system. In addition, EDS compiled additional documentation in 1976 which Schaefer had requested.

The turnover was completed in August, 1976. No company other than Schaefer and EDS was responsible for any portion of Schaefer's data processing system.²

During the period of time during which EDS was turning the system over to Schaefer, its agents met with Schaefer's agents. Throughout the course of the several meetings Schaefer's agents asserted on numerous occasions that Schaefer fully intended to pay the cancellation fee of $1,200,933.68 which Schaefer was obligated to pay as a condition of early cancellation under Task Order C and a sliding buy-out schedule which had been agreed upon by the parties, and any monthly charges due.

The court finds that EDS would not have turned over its system if it did not fully expect the payment of the amount of approximately $1,300,000. The court further finds that by early 1976 Schaefer had no intention of paying this cancellation fee, although officers of Schaefer did assure EDS to the contrary. Schaefer's intention was to receive from EDS all necessary materials and instructions for the system and to have its own newly trained personnel run the system and then institute suit against EDS.

In support of its motion for replevin, EDS says that it has a superior possessory right to the system under the 1973 contract because that contract imposed two conditions on Schaefer for early turnover of the system. Schaefer has met neither of these conditions.

First, the court finds that Schaefer has not met the condition that it pay a cancellation fee of approximately $1,300,000 to EDS.

Second, the court finds that Schaefer did not enter into, nor was it willing to enter into the termination agreement specified under paragraph 6 of the 1973 contract regarding confidentiality.

The court, therefore, finds that EDS has made out a prima facie case for replevin.

Under Fuentes v. Shevin, 407 U.S. 67, 92 S.Ct. 1983, 32 L.Ed.2d 556 (1972), this court is obligated to provide Schaefer with a full and fair hearing before granting EDS's replevin motion. One aspect of this is that Schaefer is entitled to present any good faith defense to the claim of EDS that it has a superior possessory right to the system. We now turn to Schaefer's defenses.

Schaefer claims that the system which EDS turned over to it in 1976 was the same system which Schaefer turned over to EDS in 1969. If EDS did, indeed, turn over the very same system which it had received from Schaefer in 1969, Schaefer would have a good defense to the replevin action.

The court finds from the evidence adduced upon the hearing of the motion for replevin that this is not a good faith defense. The testimony of Schaefer's own personnel leads to the inescapable conclusion that the EDS system is substantially different from Schaefer's old system. Schaefer's own employee, Kenneth Koleman, qualified by Schaefer as an expert, pointed out that the EDS system was a tape system, while the old Schaefer system was a card operated system. From Koleman's description of both systems, the court finds that the tape system developed by EDS is a faster system; that Schaefer's old card system is now obsolete and is not capable of being operated on today's computers without substantial adaptations. The EDS system, the court finds, is a more sophisticated system, in that it uses the language of present day computers as opposed to the language employed with the card system.

Even if the EDS system is no improvement over the old Schaefer system in terms of ultimate reliability and accuracy; even if the EDS system was not worth the millions that Schaefer paid for it; even if the EDS system is peppered with errors (determinations which the court finds unnecessary to reach at this time), the fact remains that the EDS system is not the same one which Schaefer had given to EDS in 1969 and that the EDS system is different in that it is more sophisticated, more modern and faster.

Schaefer says that a defense to EDS's claim for approximately $1,300,000 cancellation fee is that the EDS system was faulty, costing Schaefer over forty-five million dollars in damages. Therefore, Schaefer argues, the $1.3 million claim is more than offset by Schaefer's claims on the merits. This being true, Schaefer continues, the...