Atchison Casting Corp. v. Dofasco, Inc.

Decision Date30 June 1995
Docket NumberNo. 93-2447-JWL.,93-2447-JWL.
Citation889 F. Supp. 1445
PartiesATCHISON CASTING CORPORATION, Plaintiff, v. DOFASCO, INC., Defendant.
CourtU.S. District Court — District of Kansas

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Don M. Bradley, Joseph Rebein, Kelly W. Schemenauer, Daniel L. McClain, M. Kevin Underhill, Shook, Hardy & Bacon, Kansas City, MO, John T. Bullock, Shook, Hardy & Bacon, Overland Park, KS, Stephan M.L. Cohen, Choate, Hall & Stewart, Boston, MA, Charles F. Scott, Tory, Tory, DesLauries & Binnington, Toronto-Dominion Centre Toronto Canada, for Atchison Casting Corp.

Charles W. Hess, Mark A. Jess, Smith, Gill, Fisher & Butts, William G. Levi, Curtis E. Woods, Jan P. Helder, Jr., David S. Ladwig, Timothy J. Kuester, Sonnenschein, Nath & Rosenthal, Kansas City, MO, for Dofasco Inc.

MEMORANDUM AND ORDER

LUNGSTRUM, District Judge.

I. INTRODUCTION

This matter is currently before the court on cross-motions for summary judgment (Docs. # 72 & # 78) and on plaintiff's motion to amend to clarify the pretrial order (Doc. # 102). The parties' dispute arises out of the Atchison Casting Corporation's ("Atchison") purchase of certain assets of Dofasco, Inc.'s ("Dofasco") steel foundry in Ontario, Canada. Atchison has sued Dofasco on breach of contract and misrepresentation theories based on Dofasco's actions and representations with respect to the negotiations for the sale of, as well as the subsequent performance of, the parties' contract. Dofasco has in turn counterclaimed on similar theories of breach of an implied covenant of good faith and fair dealing and misrepresentation. For the reasons set forth fully below, both summary judgment motions are granted in part and denied in part and plaintiff's motion to amend is denied.

II. FACTUAL BACKGROUND

The following facts are uncontroverted for purposes of this motion. The plaintiff, Atchison, manufactures large, complex steel castings for use in the locomotive, mass transit and other commercial markets out of its principal manufacturing facilities in Atchison Kansas and St. Joseph, Missouri. One of Atchison's most important product lines is locomotive trucks, also known as under carriages, which are the frames that surround and support the wheels, axles, brakes and motors of the locomotive and upon which the body or superstructure rests. Locomotive trucks are manufactured using patterns that create a mold into which molten steel is poured. Ultimately the trucks are machined, painted, fitted with various parts, and shipped to Atchison's customers who make locomotives.

Atchison traditionally has been the leading North American manufacturer of locomotive trucks, supplying three locomotive builders: General Motors (since 1938), General Electric Transportation Division ("GETS") (since 1973) and Morrison Knudsen (since 1993). Locomotive trucks have historically accounted for one-third or more of Atchison's sales. To a lesser extent, Atchison also manufactures mass transit trucks for subway, commuter and passenger rail cars. Atchison averages approximately $64 million in sales each year.

The defendant, Dofasco, is a Canadian corporation located in Hamilton, Ontario that has been in the steel industry since 1912. It owned and operated a foundry there where it manufactured steel castings, including single piece castings for locomotive and mass transit trucks, for the railroad industry. Dofasco's primary focus is the manufacture and sale of flat-rolled steel. The Hamilton foundry operations were only a minor part of the company's overall steel operations in Ontario.

In April of 1992, after having suffered annual losses there for a number of years, Dofasco decided to cease operation of the Hamilton foundry. The decision was made as part of Dofasco's overall business strategy to downsize its steel operations and become more profitable and efficient by concentrating on its core business, the modern portion of its flat-rolled steel operations. Beginning on April 22, 1992, Dofasco made internal and public announcements that it planned to cease operation of the Hamilton foundry in an effort to inform foundry employees and United States and Canadian customers of Dofasco's intent to exit the foundry business.

Shortly after Dofasco announced that it intended to cease its foundry operations, it received inquiries from numerous entities interested in purchasing either selected portions of the foundry assets or the entire foundry. Both Atchison and Naco, Inc. ("Naco") expressed interest in the foundry. Dofasco initially did not consider offers to sell the entire foundry as a "going concern." Dofasco's president at the time, Bill Wallace, was concerned that Dofasco's industry reputation could be tarnished if the foundry was sold as a "going concern" and subsequently failed or if the salaries of Dofasco foundry employees were significantly reduced.

In June of 1992, Atchison wrote to Dofasco and proposed a purchase and sale of a portion of the foundry assets, namely technology, know-how, and related assets for diesel trucks and rapid transit trucks. It offered a purchase price of $2.17 million cash at closing or $1.3 million cash at closing with certain royalty payments for five years (for a total consideration up to $2.8 million). The letter also contained a provision that Dofasco not pursue discussions with other potential buyers for 90 days. In a second proposal dated June 15, 1992, Atchison increased the offer to $2.0 million cash at closing and royalty payments for a period of five years up to $1 million, for total consideration up to $3 million. Atchison's offer was not accepted.

In late June 1992 Dofasco determined it would attempt to sell substantially all the assets of the foundry to a single purchaser. Thereafter, several parties, including Naco and Atchison, signed confidentiality agreements and began reviewing the foundry's operations and assets to determine whether to enter into substantive negotiations to buy the foundry.

As part of this process, Andy Mikalauskas, the manager of the foundry, provided Atchison with various written materials in order for Atchison to evaluate whether to make a proposal. Dofasco provided a projection for the foundry for November 1, 1992 through December 31, 1993 which forecast that the foundry would earn $4.8 million of pre-tax income during that period.

Naco, Atchison and Racine Steel Castings ("Racine") emerged as the three principal bidders for the foundry. Racine bid $3.5 million, Naco bid roughly $6 million and Atchison bid $10 million for the entire foundry.1 All bids were subject to due diligence. Upon receipt of the various proposals, Mr. Mikalauskas advised Naco and Racine that their proposals were not competitive and gave them the opportunity to increase their price. The companies were either unable or unwilling to submit higher bids. Naco expressed skepticism that the higher price offered by Atchison would stand after due diligence was completed. In a letter to Mr. Mikalauskas dated August 4, 1992 Naco indicated:

We are somewhat surprised that our bid is so far below those of other companies. As you know, we have spent more time reviewing your operations and probably understand your business better than any of the other companies ... When the other companies begin to perform their due diligence, they may come to the same conclusion we have reached. We are skeptical that the initial indication of values you have received will hold to the final closing ... We still have a strong interest in Dofasco Steel Foundry and would be pleased to have further discussions with you.

Because Atchison's bid was significantly higher than any other bid, on August 17, 1992, Dofasco entered into a letter of intent with Atchison for substantially all of the foundry assets. The agreement stated that completion of the transaction was subject to, among other things, due diligence by Atchison and that there be no material changes in business or assets. It further provided:

The foregoing is not intended to be taken as a legally binding offer to purchase the assets ... but simply to record the parties' intentions in this regard and this letter and its acceptance will not create any legal obligations except as provided under "Purchase and Sale Agreement" and "Confidentiality".

After Atchison and Dofasco entered into the letter of intent, Dofasco issued a notice to its foundry employees which stated:

Both parties are now working towards meeting a target sale closing of no later than October 31, 1992. However, it is important to understand that we are at an early stage in our discussions, and while we are optimistic of achieving a successful conclusion, the sale is not final at this point.

David Belluck, an Atchison director, Mr. Hugh Aiken, the president of Atchison, and an executive staff oversaw the due diligence of the foundry. In late August of 1992, Mr. Belluck and Mr. Aiken met with Mr. Mikalauskas and offered him a position with Atchison if the company was successful in acquiring the foundry. Dofasco was aware of this offer. From August until late September, Atchison conducted extensive due diligence of the Dofasco foundry.

As part of its due diligence inspection, Atchison visited the foundry at various times, as well as some of the foundry's customers. Holland Hitch, a key foundry customer that provided about 20% of all foundry sales in 1992, indicated that it had replaced its production with a French company and could not commit to resume its business with Dofasco. Atchison estimated the foundry would need to invest $1.5 million in capital improvements to keep the Holland Hitch business.

On September 25, 1991, Mr. Belluck faxed Dofasco a letter which indicated that Atchison's due diligence had "identified a number of factors that are different than the assumptions in the initial material" including: a loss of customers and price declines due to shutdown, the lack of potential for manpower savings, the...

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