Arkansas Rice Growers Co-op. Ass'n v. Alchemy Industries, Inc.
| Citation | 797 F.2d 565 |
| Decision Date | 21 July 1986 |
| Docket Number | No. 85-1257,85-1257 |
| Parties | ARKANSAS RICE GROWERS COOPERATIVE ASSOCIATION, a corporation, d/b/a Riceland Foods, Appellees, v. ALCHEMY INDUSTRIES, INC.; Norman Pitt, Inc.; Sol Balkin; Janelle Balkin; Seymour DiMatoff; Eleanor DiMatoff; Robert Kahan; Dorothy E. Kahan; Stanley Fleishman; Doris Fleishman; Ben Margolis; Valerie Margolis; Florence Ain; Milton London, M.D.; Leah London; Murray J. Goldberg; Genevieve Goldberg; Meyer Zeiler, M.D.; Floria Zeiler; James Ryan; Judith Ryan; Eddie Allee; Leta Allee; Robert Brock; Marjorie Brock and Norman Pitt, Individually, Appellants. |
| Court | United States Courts of Appeals. United States Court of Appeals (8th Circuit) |
Benjamin Margolis, Los Angeles, Cal., for appellants.
Billy S. Clark, Little Rock, Ark., for appellees.
Before LAY, Chief Judge, FLOYD R. GIBSON, Senior Circuit Judge, and ROSS, Circuit Judge.
This is a complex contract action relating to the construction of an experimental plant in Stuttgart, Arkansas, for the combustion of rice hulls in a pollution-free manner with the production of steam and a commercially valuable ash as by-products. The basic issue in this appeal is whether the district court 1 erred in holding Alchemy Industries, Inc. (Alchemy) and Norman Pitt, Inc. (Pitt, Inc.) responsible for the inability of the plant to work properly and in holding the individual defendants liable under a guarantee contract. We affirm the district court's finding that Alchemy and Pitt, Inc. are liable to Riceland for breach of contract, but reverse the finding of liability against the individual defendants for lack of personal jurisdiction.
Alchemy possessed the rights to a new process for the combustion of rice hulls that had been developed by Norman Pitt and his company, Norman Pitt, Inc. In 1972, Alchemy and Arkansas Rice Growers Cooperative Association, d/b/a Riceland Foods (Riceland) entered into a contract for the construction of a factory in Stuttgart that would burn rice hulls and a separate but related contract regarding the marketing of the ash by-product. The construction contract provided that Alchemy should enter into a contract with Pitt, Inc. under which Pitt, Inc. would provide Riceland with "the necessary engineering plant layout and equipment design and the onsite engineering supervision and start up engineering services necessary for the construction of a hull by-product facility capable of reducing a minimum of 7 1/2 tons of rice hulls per hour to an ash and producing a minimum of 48 million BTU's per hour of steam at 200 pounds pressure." The contract further provided that Riceland would construct the facility at its sole expense and would operate the facility in accordance with the instructions and procedures provided by Alchemy. Under the ash marketing agreement, Riceland granted to Alchemy the exclusive right to obtain all ash produced at the Stuttgart facility and agreed to burn the rice hulls according to the directions of Alchemy.
After Pitt, Inc. furnished Riceland with plans for the design of the facility, Riceland, acting as its own general contractor, began construction of the facility in August 1974. The facility was completed in December 1975, and Riceland commenced operation of the plant. Although the plant was designed to operate every day on a twenty-four hour basis, it never performed as anticipated by the parties. The plant was repeatedly shut down because of a build up of hulls in the furnace and an inability to comply with state air pollution control standards. Although the plant was intended to operate on rice hulls alone, the desired consistency of the ash could not be achieved without the use of fuel oil in addition to hulls. After unsuccessfully attempting to operate the plant for three years, Riceland closed the plant in September 1978.
Riceland filed suit against Alchemy and Pitt, Inc. in 1978 for breach of contract and negligent design, claiming $3,017,500.00 in damages. Riceland also brought suit against certain individuals (the "individual defendants") 2, who Riceland contended had personally guaranteed the construction contract, for failure to honor the guarantee. Alchemy counterclaimed, contending that Riceland had breached both the construction and the marketing contract, resulting in damages in excess of ten million dollars. After trial to the district court, the court made extensive findings of fact in two separate opinions. In its opinion on liability, the district court determined that Alchemy and Pitt, Inc. had breached the construction contract and that the individual defendants had given Riceland personal guarantees that were still in effect. The district court found against Alchemy on its counterclaim. In its memorandum opinion on damages, the district court allowed Riceland to recover the construction costs of the plant, less certain deductions for items not attributable to Alchemy and Pitt, Inc., but did not allow Riceland to recover the costs of operating the plant. Alchemy, Pitt, Inc., and the individual defendants (referred to collectively as the "defendants") appeal.
We will not attempt here to detail the extensive evidence set forth by the district court. Instead, we initially analyze the district court's conclusion that Alchemy and Pitt, Inc. breached the construction contract and then determine whether the evidence supports the district court's findings and conclusions on this issue. We thereafter take up (1) the determination of damages attributable to Alchemy and Pitt, Inc., and (2) the liability of the individual defendants. 3
Pursuant to the express terms of the contracts, California law governs all questions of state law. It is well settled that the construction and legal effect of a contract are questions of law subject to de novo review. E.g., Osborne v. Cal-Am Financial Corp., 80 Cal.App.3d 259, 267, 145 Cal.Rptr. 584, 589 (1978). To the extent that the meaning of the contract depends on disputed extrinsic evidence, however, it constitutes a finding of fact, LaCount v. Hensel Phelps Construction Co., 79 Cal.App.3d 754, 770, 145 Cal.Rptr. 244, 253 (1978), subject to review on appeal under the clearly erroneous rule, Fed.R.Civ.P. 52(a). District court findings as to what the parties said or did must also be accepted on appeal unless clearly errorneous. InterPetrol Bermuda Ltd. v. Kaiser Aluminum International Co., 719 F.2d 992, 998 (9th Cir.1983). With these standards of review in mind, we turn to the findings and conclusions of the district court.
The district court's findings regarding the liability of Alchemy and Pitt, Inc. for breach of the construction contract can be summarized as follows. Alchemy and Pitt, Inc. were obligated under the construction contract to provide Riceland with the design for the construction of a plant capable of achieving the performance criteria on a sustained basis, without the need for any fuel other than the rice hulls. 4 The trial court found that the facility never had the ability to achieve the performance criteria on a sustained basis and could not produce an ash satisfactory to Alchemy without the use of fuel oil in addition to the rice hulls because of the faulty and inadequate design provided by Pitt, Inc. According to the district court, the primary reason that the plant could not operate as warranted was that the furnace system, for which Pitt, Inc. admits responsibility, could not support combustion at a temperature low enough to produce quality ash without the aid of fuel oil when the outside temperature fell below fifty degrees Fahrenheit.
The district court recognized that not all of the plant's problems were attributable to Alchemy and Pitt, Inc. Most notably, much of the equipment supplied by Polutrol, Inc., (Polutrol) the company selected by Riceland to supply the boilers and the air pollution control system, was inadequately designed and poorly manufactured. The parties agree, and the district court found, that the air pollution control system supplied by Polutrol did not allow the facility to operate in compliance with the state air pollution control regulations as required by the construction contract. Moreover, Polutrol failed to take the abrasive quality of the ash into account when manufacturing the boilers, and the boilers thus deteriorated and were in need of replacement at the time Riceland permanently shut down the plant. The district court determined, however, that although Alchemy and Pitt, Inc. were not responsible for the damage or loss caused by the defective Polutrol equipment, the evidence established that Pitt, Inc.'s design would not have produced a plant capable of achieving the performance criteria even had the Polutrol equipment not been defective. As to the non-erosion problems caused by the boilers, such as the difficulty of controlling the water levels in the boilers and its system-wide repercussions, the district court found that Alchemy and Pitt, Inc. were responsible. The court explained that because Pitt, Inc. had approved the water-tube boiler design suggested by Polutrol, the water-tube boilers had become a part of Pitt, Inc.'s design.
The district court also found against Alchemy on its counterclaim for breach of contract against Riceland. Alchemy had urged at trial that Riceland had breached both the construction contract and the marketing contract because Riceland closed down the plant and thus did not pay Alchemy royalties for the use of Pitt, Inc.'s process as promised in the construction contract or provide Alchemy with the ash as provided in the marketing agreement. Moreover, Alchemy asserted, the failure of the plant to operate as anticipated was due to the defective equipment provided by Polutrol for which Alchemy claimed Riceland was responsible. In rejecting Alchemy's counterclaim, the district court relied on the findings it had made in connection with Riceland's claim...
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