Sil-Flo, Inc. v. SFHC, Inc., SIL-FL
| Citation | 917 F.2d 1507 |
| Decision Date | 30 October 1990 |
| Docket Number | 88-2492 and N,88-2475,88-2456,SIL-FL,INCORPORATED,INC,Nos. 88-2455,s. 88-2455 |
| Parties | RICO Bus.Disp.Guide 7607 , a Delaware corporation, Plaintiff-Appellant and Cross-Appellee, John J. Ceparano, Plaintiff and Cross-Appellee, v. SFHC, INCORPORATED and Paul Doughty, Defendants-Appellees and Cross-Appellants, Harold Doughty, Almer E. Ellison, and Rod Fancher, Defendants and Cross-Appellants. NORD, Plaintiff-Appellant, v. NOBLE MATERIALS, INCORPORATED, Riley Jo McCarty, Paul Doughty, and J.R. Fancher, Defendants-Appellees. o. 89-6017. |
| Court | United States Courts of Appeals. United States Court of Appeals (10th Circuit) |
John A. Claro of Claro & Johnson, Oklahoma City, Okl. and Ronald J. Offenkrantz of Spitzer & Offenkrantz, New York City (Sarah C. Spencer, of Claro & Johnson, on the brief), for plaintiffs-appellants and cross-appellees Sil-Flo, Inc., Nord Sil-Flo, Inc., and John J. Ceparano.
Phil Olsen, Altus, Oklahoma and Michael Paul Rogalin, Oklahoma City, Okl., for defendants-appellees and cross-appellants SFHC, Inc. and Paul Doughty.
Paul Tobin, Oklahoma City, for appellee and cross-appellant Rod Fancher, cross-appellants Harold Doughty and Almer E. Ellison, and appellees Noble Materials, Inc. and Riley Jo McCarty.
These related appeals arise out of two actions filed in the District Court for the Western District of Oklahoma. In the first action (hereinafter referred to as "Sil-Flo I"), Sil-Flo, Inc., a Delaware corporation engaged in the production of perlite products, and its owner, John Ceparano, brought suit against SFHC, Inc. and its ownership for breach of contract, trade secret violations and corporate mismanagement. In the second action (hereinafter referred to as "Sil-Flo II"), Nord Sil-Flo, Inc., the successor to Sil-Flo, Inc., sued Noble Materials and other parties for breach of fiduciary duty, misappropriation of trade secrets and civil conspiracy. Sil-Flo, Inc. and the defendants in Sil-Flo I now appeal various rulings in that case. In addition, Nord Sil-Flo, Inc. appeals the dismissal of the Sil-Flo II case on the grounds of res judicata and collateral estoppel. We affirm.
On February 18, 1989, John J. Ceparano, the sole shareholder and owner of Sil-Flo, Inc., agreed to sell the corporation to SFHC, Inc., a holding company formed for this purpose. The purchase agreement provided that Ceparano would transfer all of the stock in the corporation to SFHC in exchange for consideration valued at $1,792,000. The consideration consisted of $300,000 in cash and interests in real property, the extinguishment of a $92,000 debt Ceparano owed to Sil-Flo, Inc. and SFHC's execution of a two-year promissory note to Ceparano for $1,400,000. The Sil-Flo, Inc. stock was to be held in escrow pending SFHC's payment of the consideration and fulfillment of other obligations under the purchase agreement. The purchase agreement also provided that, after SFHC acquired Sil-Flo, Inc., it would release Ceparano from further liability on certain listed obligations within two years, operate the corporation in the ordinary course of business, keep current Sil-Flo, Inc.'s obligations to third parties, and not transfer the corporation's assets or stock without Ceparano's written consent. The agreement was to be construed in accordance with New York law.
In a letter dated June 10, 1985, Ceparano wrote Paul Doughty, president of SFHC, informing him that SFHC was in default of its obligations under the purchase agreement and promissory note. Ceparano requested that SFHC relinquish its interest in Sil-Flo, Inc. and rescind the purchase agreement by executing the bottom of the letter. Doughty signed the letter, and control of the corporation was returned to Ceparano. Thereafter, Ceparano began negotiations with various third parties to attempt to sell the corporation. In September 1986, Ceparano sold the corporation to Nord Resources.
On September 16, 1985, after rescission of the purchase agreement, Ceparano and Sil-Flo, Inc. commenced the Sil-Flo I action in the Western District of Oklahoma. The complaint set forth six claims for relief. In the first claim, Sil-Flo, Inc. alleged that defendants Rod Fancher, Almer Ellison, and Paul and Harold Doughty (principals of SFHC) had conspired to remove certain perlite processing equipment from Sil-Flo, Inc.'s corporate headquarters. The company requested replevin of the equipment and an injunction against the use or disclosure of proprietary information concerning the operation of the equipment. In the second claim, Ceparano sought injunctive relief against the above defendants and Dan Love to restrain them from intentionally interfering with Sil-Flo, Inc.'s business relations. In the third claim, both Sil-Flo, Inc. and Ceparano requested an accounting of Sil-Flo, Inc.'s assets, damages and other relief relating to the defendants' alleged fraudulent transactions. The fourth cause of action was for damages to Sil-Flo, Inc. for the defendants' intentional interference with business relations. The fifth claim, brought by Ceparano, was for damages against each defendant for breach of contract, investment fraud and breach of fiduciary duty. Finally, in the sixth claim, Sil-Flo, Inc. and Ceparano alleged violations of the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. Sec. 1962.
After answering the complaint, the defendants moved to dismiss the intentional interference with business relations and RICO claims. The court denied the motion to dismiss the intentional interference claim; however, it dismissed the RICO claim because the plaintiffs failed to plead adequately a pattern of racketeering activity, after having amended the complaint and supplemented it with a RICO case statement.
On December 23, 1986, the defendants in Sil-Flo I moved for leave to file a compulsory counterclaim against Sil-Flo, Inc. for monies loaned. They asserted that they were unable to file the counterclaim before the September 15, 1986 scheduling order deadline because they had not discovered the facts underlying the counterclaim and because Ceparano had sold Sil-Flo, Inc. to Nord Resources. On April 27, 1987, the court denied this motion. It found that, since the defendants had filed an analogous counterclaim in state court in July 1986, 1 they were aware of the facts relevant to the counterclaim before the filing deadline. It saw no connection between Ceparano's sale of the corporation and the defendants' delay in filing the counterclaim. The court later reaffirmed its ruling on the defendants' motion for reconsideration.
On August 18, 1987, the plaintiffs moved to reopen discovery on a limited basis so they could question several defendants about the transfer of the perlite processing machinery to Noble Materials. They alleged that further discovery was necessary because "the issue surrounding Noble Materials' use of Sil-Flo, Inc.'s proprietary process arose suddenly during the days immediately preceding the discovery cutoff date in the case at bar" and they were unable to employ an expert to investigate the technical aspects of this issue. R.Supp.Vol. XXI, Doc. 229 at 1. The court denied this motion, and the case proceeded to trial.
The jury rendered its verdict on March 6, 1988. It found in favor of Ceparano on his claims against SFHC for breach of contract and breach of the implied covenant of good faith and fair dealing, and against defendants Paul Doughty and Fancher for tortious interference with contract. It likewise held for Sil-Flo, Inc. on its claim against defendants Paul Doughty and Fancher for breach of fiduciary duty. The jury ruled in favor of defendants Harold Doughty, Almer Ellison and Dan Love on the claims against them. On August 17, 1988, the court denied defendant Fancher's motion for judgment notwithstanding the verdict or for new trial.
While the Sil-Flo I action was pending, the Nord Sil-Flo Corporation ("Nord"), the successor to Sil-Flo, Inc., commenced the Sil-Flo II action in federal district court for the Northern District of Texas. Nord named as defendants Noble Materials, Inc., Riley Jo McCarty, Rod Fancher and Paul Doughty. Nord alleged claims of breach of fiduciary duty, misappropriation and civil conspiracy arising out of many of the same events alleged in Sil-Flo I. The defendants moved to transfer the case to the Western District of Oklahoma, where the Sil-Flo I case was being heard. The motion to transfer was granted and all discovery deadlines were stayed pending further direction from the district court for the Western District of Oklahoma. On December 16, 1988, that district court granted the defendants' motion to dismiss the Sil-Flo II case on the grounds of res judicata and collateral estoppel.
The parties to the Sil-Flo I and Sil-Flo II cases now appeal. In Appeal No. 88-2455, Sil-Flo, Inc. contests the district court's rulings on choice of law, jury instructions, the exclusion of evidence, the reopening of discovery and the dismissal of its racketeering claim in Sil-Flo I. In Cross-Appeal Nos. 88-2456, 88-2475, and 88-2492, the defendants challenge the court's admission of expert testimony, its dismissal of a counterclaim, and its decision not to grant judgment n.o.v. or a new trial in Sil-Flo I. Finally, in Appeal No. 89-6017, Nord appeals the district court's dismissal of Sil-Flo II on the grounds of res judicata and collateral estoppel. We discuss these issues below.
Sil-Flo, Inc.'s first contention in this appeal is that the district court erred in applying Oklahoma, and not Texas, trade secret law in Sil-Flo I. Mitchell v. State Farm Fire & Casualty Co., 902 F.2d 790, 792 (10th Cir.1990) (citations...
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