American Standard Credit, Inc. v. National Cement Co.

Decision Date20 April 1981
Docket NumberNo. 78-2231,78-2231
Citation643 F.2d 248
Parties31 UCC Rep.Serv. 229 AMERICAN STANDARD CREDIT, INC., Plaintiff-Appellee, v. NATIONAL CEMENT CO., Defendant-Appellee, Programming and Systems, Inc., Defendant-Appellant, International Computer Corp., et al., Defendants.
CourtU.S. Court of Appeals — Fifth Circuit

Richard F. Ogle, Birmingham, Ala., for defendant-appellant.

Bradley, Arant, Rose & White, John H. Morrow, Donald M. James, Birmingham, Ala., for American Standard Credit.

Thomas, Taliaferro, Forman, Burr & Murray, John D. Clements, Eric L. Carlton, Birmingham, Ala., for Nat. Cement Co.

Appeal from the United States District Court for the Northern District of Alabama.

Before TUTTLE, RANDALL and TATE, Circuit Judges.

RANDALL, Circuit Judge:

In this complicated diversity case from Alabama, we attempt to resolve the competing claims of various parties to an expensive piece of coal mining equipment specifically, a WABCO 333FT tractor-scraper, serial number 31811, that was sold more than once by the same dealer. Because we find that one of the district court's key factual findings is clearly erroneous, we must reverse its judgment; but because the district court did not make findings on certain other crucial issues of fact, we must remand for further proceedings consistent with this opinion.

I. FACTUAL BACKGROUND
A. The Parties Involved in the Dispute

The companies that are either directly or indirectly involved in this litigation are many; they share many principals, and some control others in varying degrees. Yet it is essential to keep clearly in mind which actors are which, and the extent to which the various corporations' identities are distinct from each other.

The first company is Programming and Systems, Inc. ("PSI"), a New York corporation with its principal offices in New York City. PSI's principal business involved data processing and vocational education. Prior to February 14, 1974, PSI owned 1,142,911 of 1,533,892 outstanding shares (73.5%) of International Computer Corporation ("ICC"), a Delaware corporation whose principal offices were shared with PSI in New York City.

Next in our cast of characters is a trio of Alabama corporations, all of whose principal offices were in Alabama. The first was Vulcan Machinery Co., Inc. ("Vulcan"), a retail dealer in mining equipment. The president and majority stockholder of Vulcan was Charles S. Pettyjohn, Jr. Pettyjohn was also the president and majority stockholder of ISCO, Inc. ("ISCO"), which owned various coal leases in the southeastern United States. The third company was Vulcan Energy Resources Corp. ("VERCO"), which carried out the actual mining operations on the leases owned by ISCO. As of February 1974, Pettyjohn and Joseph Needle each owned some 38.3% of VERCO's stock; other individuals owned some 5.71% of VERCO's stock; the balance consisted of "treasury contingent shares" owned by the corporation itself.

The next line of companies had at its head National Cement Co., Inc. ("National Cement"), another Alabama corporation with its principal place of business in Alabama. National Cement was heavily dependent upon coal as an energy source for its cement plant in Ragland, Alabama. In hopes of ensuring a steady supply of coal for this plant, National Cement created a wholly owned subsidiary named N C Mining Co., Inc. ("N C Mining"), an Alabama corporation with its principal place of business in Alabama.

By an agreement dated January 24, 1975, N C Mining and ISCO formed a joint venture named NATISCO. Pettyjohn was named NATISCO's chief operating officer.

The plaintiff in this suit is American Standard Credit, Inc. ("ASCI"), a Delaware corporation whose principal place of business was in Peoria, Illinois as of the time of trial, and in Pittsburgh, Pennsylvania during the events that gave rise to this litigation. ASCI is a wholly owned subsidiary of American Standard, Inc.; the bulk of ASCI's business relates to financing the sales of heavy mining equipment produced by a division of American Standard, Inc. known as Westinghouse Air Brake Company ("WABCO"). Vulcan was WABCO's franchisee for Alabama. Because WABCO was from time to time a creditor of Vulcan, WABCO obtained and exercised a contractual right to name one member of Vulcan's board of directors; thus, WABCO's manager of domestic credit, B. L. Zimmerman, was a member of Vulcan's board of directors at the time of the events that gave rise to this litigation.

Last among the dramatis personae is Invesco International Corp. of Alabama No. 2 ("Invesco"), another Alabama corporation with its principal place of business in Alabama. Invesco was also engaged in mining production activities.

B. The 1974 Agreements Between PSI, ICC, VERCO, ISCO, and Pettyjohn

As noted above, prior to February 13, 1974, PSI owned 1,142,911 of 1,533,892 outstanding shares of ICC stock. On that date, PSI and Joseph Needle agreed (ASCI exh. 26) that Needle would purchase 1,025,000 of those shares for $850,000, to be paid in 36 monthly installments. Some of PSI's remaining holdings in ICC stock were to go to the promoter of the deal as a "finders fee," with the balance to be retained by PSI as an investment.

On March 8, 1974, ICC and the stockholders of VERCO entered into a "Reorganization Agreement" (ASCI exh. 27), through which the VERCO stockholders transferred all their VERCO stock to ICC. Thus, VERCO became a wholly owned subsidiary of ICC. In return, the former VERCO stockholders (chiefly Needle and Pettyjohn) were granted the right to receive authorized-but-unissued ICC stock from ICC; the precise amount of stock was keyed to VERCO's net earnings over a five-and-one-half year period, but the earnings themselves were to be used to purchase PSI's holdings in ICC stock pursuant to the February 13, 1974, agreement between Needle and PSI. Pettyjohn was given the day-to-day control of VERCO. The end result of the Reorganization Agreement, assuming that VERCO's profits lived up to the parties' expectations, was that the former VERCO stockholders would end up owning a majority of the stock of ICC.

The success of this "earn-out" depended on VERCO's profitability as a coal mining operation, which in turn depended on ICC's being able to supply VERCO with certain heavy mining equipment. Accordingly, PSI, ICC, VERCO, Vulcan, ISCO, and Pettyjohn entered into a "Guaranty Agreement" (ASCI exh. 27) dated March 20, 1974. Under the terms of this Guaranty Agreement, PSI agreed to guarantee the obligations of ICC in connection with ICC's purchase or lease-purchase of coal mining equipment for VERCO. In return, ICC agreed to pay PSI 3% annually on the aggregate principal amount of PSI's outstanding guarantees of ICC's obligations. 1

ICC and the former VERCO stockholders also made certain agreements in PSI's favor in an amendment, dated March 19, 1974, to the Reorganization Agreement dated March 8, 1974. Pettyjohn personally guaranteed that VERCO would have adequate working capital; as security for this promise, Pettyjohn agreed to pledge his two ranches in Florida. Needle transferred to ICC 2 his rights under the February 13 agreement to purchase 1,025,000 shares of ICC stock from PSI; if ICC did not have sufficient earnings to make the installments due under the February 13 agreement, Pettyjohn and Needle agreed to provide ICC with those funds. Needle also agreed to give Pettyjohn his proxy for any ICC shares held in Needle's name for so long as Pettyjohn was personally obligated to ensure that VERCO had adequate working capital. PSI was given the right to designate a majority of ICC's board of directors until both (1) ICC had finished making the installment payments on the 1,025,000 shares of ICC stock it was obligated to purchase from PSI under the February 13 agreement; and (2) PSI's guarantees on behalf of VERCO were either terminated or VERCO's net worth was equal to or greater than the aggregate unpaid amount of PSI's guarantees. PSI was also given the right to name the directors of Pettyjohn's other two companies, Vulcan and ISCO, in the event that Pettyjohn defaulted on any of his obligations under the Reorganization Agreement as amended or other agreements executed pursuant thereto.

The last part of the deal was an "Indemnity and Collateral Agreement" (ASCI exh. 27) between PSI, ICC, VERCO, ISCO, and Pettyjohn, also dated March 20, 1974. That agreement defined "debt" to mean all sums of money then or thereafter payable by PSI in connection with its guarantee of the obligations of ICC or VERCO. ICC, VERCO, ISCO, and Pettyjohn agreed to indemnify PSI against such debt; to secure their obligation to indemnify PSI from such debt, ICC, VERCO, ISCO, and Pettyjohn granted PSI a security interest in certain property. Included in the description of the collateral subject to the security interest was all after-acquired equipment of ICC, VERCO, and ISCO. On April 30, 1974, PSI filed with the Alabama Secretary of State a financing statement (ASCI exh. 6) listing ISCO's after-acquired equipment as collateral.

C. PSI's Dealings with Scraper 31811

In October 1974, VERCO wished to obtain a WABCO 333FT scraper for use in its mining operations near Curry, Alabama, at the so-called "Curry pit." For a number of reasons chief among them VERCO's immediate need for the equipment and the high interest rates prevailing at the time PSI decided to purchase a WABCO scraper outright, rather than guaranteeing ICC's purchase of a scraper, as would have been the case had the transaction been structured so as to fall within the terms of the Guaranty Agreement. Accordingly, PSI purchased a new WABCO 333FT scraper, serial number 31811 ("Scraper 31811" or simply "the Scraper"), from Vulcan on October 16, 1974. (See PSI exh. 20.) PSI wired payment to Vulcan in the amount of $243,547.25. The actual purchase price was $248,517.60, but PSI retained 2% of that amount as a commission from Vulcan on the sale (tr. 682-83). PSI took an...

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