Aggrow Oils v. Nat'L Union Fire Ins., Pitts., Pa, A3-99-26.

• Decision Date: 14 July 2003
• Docket Number: No. A3-99-26.,No. A3-00-42.,A3-99-26.,A3-00-42.
• Parties: AGGROW OILS, L.L.C., Plaintiff, v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA; Ibberson Engineering, Inc., and Anderson International Corporation, Defendants. T.E. Ibberson Company, Plaintiff, v. Anderson International Corp., Defendant.
• Court: U.S. District Court — District of North Dakota

276 F.Supp.2d 999

AGGROW OILS, L.L.C., Plaintiff, v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA; Ibberson Engineering, Inc., and Anderson International Corporation, Defendants.

T.E. Ibberson Company, Plaintiff, v. Anderson International Corp., Defendant.

No. A3-99-26.

No. A3-00-42.

United States District Court, D. North Dakota, Southeastern Division.

July 14, 2003.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Craig Robert Campbell, Gunhus Grinnell Klinger Swenson & Guy, Moorhead, MN, for plaintiff.

Maurice G. McCormick, Vogel Weir Hunke & McCormick Ltd, Fargo, ND, Philip L. Bruner, Faegre & Benson, Marvin T. Fabyanske, Patrick J. Lee-O'Halloran, Fabyanske Westra & Hart PA, Minneapolis, MN, for defendant/cross-defendant, National Union Fire Insurance Company of Pittsburgh, PA.

Maurice G. McCormick, Vogel Weir Hunke & McCormick Ltd, Fargo, ND, Marvin T. Fabyanske, Patrick J. Lee-O'Halloran, Fabyanske Westra & Hart PA, Minneapolis, MN, for defendant/cross-claimant/cross-defendant, Ibberson Engineering, Inc.

Ronald H. McLean, Serkland, Lundberg, Erickson, Marcil & McLean, Ltd., Fargo, ND, Gregory V. Mersol, Thomas J. Piatak, Baker & Hostetler LLP, Cleveland, OH, for defendant/cross-defendant/cross-claimant, Anderson International Corp.

MEMORANDUM AND ORDER

WEBB, District Judge.

I. Introduction

The path that leads to this Order is a long and winding one. In 1996, AgGrow Oils, L.L.C. ("AgGrow") was formed for the purpose of building and operating an oilseed processing plant in Carrington, North Dakota. To that end, AgGrow entered into a contract with T.E. Ibberson Company ("Ibberson") on May 22, 1997, whereby Ibberson agreed to design and build the plant for a guaranteed maximum price of $7,758,281.00. The contract between AgGrow and Ibberson contemplated that Ibberson would purchase oilseed extraction equipment from Anderson International Corporation ("Anderson"), and the contract recited¹ the performance guarantees from Anderson that the completed plant would process 200 tons per day of five different types of oilseeds, with five to eight percent residual oil in the expeller cake.² The obligations of Ibberson to AgGrow under their contract were guaranteed by a performance bond from National Union Fire Insurance Company ("National"). The plant was completed in January 1998, but it performed at a lesser rate of efficiency than was set forth in the performance guarantees. After several unsuccessful modifications by Ibberson and Anderson, AgGrow eventually ceased operation in January 1999, and it sold the plant in May 1999.

The failure of the plant spawned three separate actions. First, in February 1999, AgGrow sued National, Anderson, and Ibberson Engineering, a wholly-owned subsidiary of Ibberson that performed design and engineering services for the plant. AgGrow seeks relief under the bond as well as damages for bad faith from National. AgGrow's suit against Ibberson Engineering is for negligence. AgGrow alleges breach of warranty and negligence against Anderson. Ibberson Engineering cross claimed against Anderson for indemnity as to any liability to AgGrow. Anderson also cross claimed against Ibberson and National as to any liability to AgGrow.

The second action was Ibberson's arbitration proceeding against AgGrow pursuant to the mandatory arbitration provisions in their contract. AgGrow counterclaimed against Ibberson for damages. Third, Ibberson sued Anderson in the District of Minnesota for indemnity of any liability to AgGrow. That case was transferred to this Court and consolidated with AgGrow's case.

Shortly after AgGrow filed its case in this Court, National moved for a stay. Following a hearing, the Court determined that, contrary to National's position, a mandatory arbitration provision in AgGrow's contract with Ibberson did not encompass claims against National, and it denied the motion for a mandatory stay. The Court also denied a discretionary stay, in part because it understood that there was no arbitration pending between Ibberson and AgGrow. An appeal followed. The Eighth Circuit remanded the case to this Court to consider whether or not a discretionary stay was appropriate because, in fact, there was pending arbitration between Ibberson and AgGrow. See AgGrow Oils, L.L.C. v. National Union Fire Ins. Co., 242 F.3d 777, 783 (8th Cir. 2001).

Before the Court could take action pursuant to the Eighth Circuit mandate, the parties agreed to a global resolution of all issues and actions (save AgGrow's bad faith claim against National) by a panel of Special Masters pursuant to Rule 53 of the Federal Rules of Civil Procedure. The Special Masters, who are Jonathan H. Morgan, Allen L. Overcash, and United States Magistrate Judge Karen K. Klein, presided over nine days of testimony and evidence presentation. Thereafter, they issued a Report of the Special Masters, which contained their Findings of Fact and Conclusions of Law. (Doc. # 151.)

In short, the Masters concluded that: AgGrow was not responsible for any of the plant's failings; Ibberson, as prime contractor, assumed entire contractual responsibility for the deficient plant, and it is liable for breach of contract and breach of warranty damages for costs of corrective work and lost revenue and profits in the amount of $2,578,840.53; Ibberson is entitled to indemnity from Anderson in the amount of $900,794.20, the extent of Anderson's fault for the plant's failure; and National Union is jointly and severally liable with Ibberson for costs of corrective work in the amount of $1,138,950.53.

Each of the parties have submitted objections to the Report of the Special Masters. AgGrow asserts that National should be jointly and severally liable with Ibberson for all damages, including lost revenue and profits. Ibberson³ disputes the Masters' determination of the extent of its obligations to AgGrow under its contract; it contends that the Masters erred in finding that Ibberson was responsible for the entire project, including any of Anderson's failings. Anderson claims that the Masters incorrectly determined that it was under a duty to cooperate in implementing performance guarantees. In any event, argues Anderson, Ibberson has no right of indemnity against it. National contends that it is not liable at all because its obligation to perform pursuant to the bond was not triggered. Both Ibberson and Anderson complain that AgGrow is at least somewhat responsible for the failed plant. Ibberson and Anderson also object to the measure of damages.

On April 11, 2003, the Court heard oral argument on these objections. The Court has given lengthy consideration to the memoranda submitted and arguments presented by the parties. Based upon the memoranda and arguments along with a review of the entire file, the Court modifies the Report in three respects, but otherwise, the Court adopts the Report in its entirety, as explained below.

II. Analysis

The Court was initially of the view that it was to reverse the Masters' findings of fact that were clearly erroneous. Upon further research and upon closer examination of Rule 53(e) of the Federal Rules of Civil Procedure, the Court determines that the Masters' findings of fact are not reviewable at all because the parties stipulated to their finality. (Doc. # 94, ¶ 4.) Rule 53(e)(2) provides:

In an action to be tried without a jury the court shall accept the master's findings of fact unless clearly erroneous. . . . The court after hearing may adopt the report or may modify it or may reject it in whole or in part or may receive further evidence or may recommit it with instructions.

Rule 52(e)(3) sets forth the effect of a master's report in jury actions. Then, Rule 53(e)(4) provides:

The effect of a master's report is the same whether or not the parties have consented to the reference; but, when the parties stipulate that a master's findings of fact shall be final, only questions of law arising upon the report shall thereafter be considered.

Reading 53(e)(2) together and consistently with 53(e)(4) reveals that, as a general rule, a court considers a master's findings of fact under a clearly erroneous standard. An exception to this general rule occurs when the parties stipulate to the master's findings of fact; in such case, the Court may only review conclusions of law. See Gilbane Bldg. Co. v. Fed. Reserve Bank of Richmond, 80 F.3d 895, 902 (4th Cir.1996) ("[S]pecial master's factual conclusions normally are reviewable for clear error. But they are unreviewable if the parties so stipulate . . . ." (citations omitted)); see also 9A Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 2614 (1995) (explaining that a clearly erroneous standard of review applies only in the absence of a stipulation regarding the finality of factual findings). Accordingly, the Court's review is only of the Masters' conclusions of law, and this review is de novo. United States v. Lothridge, 324 F.3d 599, 601 (8th Cir.2003).

The Court has already observed in an earlier order in this case that there is no question that the plant failed to meet its expectations. The overarching question resolved by the Masters was where the responsibility lies for this failure. Thus, the Court's review is most easily organized according to the Masters' determination of responsibility as to each party.

A. AgGrow's Responsibility

Both Ibberson and Anderson challenge the Masters' conclusion that AgGrow bore no responsibility for the plant's deficient performance. In order for the performance guarantees to be activated, Anderson required that seed received by AgGrow for processing meet certain specifications. Ibberson and Anderson contend that the seed never met these specifications, contrary to the finding of the Masters (Report, Findings of Fact ¶ 23 ("The Special Masters find that the Anderson Hivex expander and Anderson expellers did not perform adequately to produce the...