Avco Corp., Textron v. Interstate Southwest
| Decision Date | 01 November 2007 |
| Docket Number | No. 14-05-00860-CV.,14-05-00860-CV. |
| Parties | AVCO CORPORATION, TEXTRON LYCOMING RECIPROCATING ENGINE DIVISION OF AVCO CORPORATION, Appellant, v. INTERSTATE SOUTHWEST, LTD., Appellee. |
| Court | Texas Court of Appeals |
Jack G. Carnegie, James Harmon Hall II, Scott Wagner Cowan, Houston, Miguel A. Estrada, Washington, DC, Theodore J. Boutrous Jr., William Thomson, Los Angeles, CA, for appellant.
Harold H. Walker Jr., Martin E. Rose, Steven Dominic Sanfelippo, Dallas, Roger D. Townsend, Houston, for appellee.
Panel consists of Justices ANDERSON, GUZMAN, and Senior Justice HUDSON.*
In this commercial dispute, we are asked to determine questions regarding standing and capacity, the proper scope of declaratory relief, and the application of the express-negligence rule, as well as traditional sufficiency challenges to certain evidence. The appellant, an aircraft engine manufacturer, contracted with a forging company for the production of crankshaft forgings made to the manufacturer's specifications.1 After a series of crankshaft failures, an affiliate of the forging company sued the engine manufacturer, alleging that the manufacturer wrongfully concealed information about the failures, fraudulently induced the forging company to extend the contract, and obtained the execution of a contract extension by deception. The affiliate also sought a ruling that the manufacturer was not entitled to contractual indemnity. The jury found in favor of the affiliate on its fraud claims and awarded it damages for increased insurance premiums and fees for expert witnesses, together with attorneys' fees, costs, and more than $86 million in exemplary damages. We conclude that the affiliate has standing to assert the claims at issue, but the evidence is legally insufficient to support the actual damages awarded. We therefore reverse and render judgment that the affiliate take nothing, but we affirm the trial court's conclusion that the contractual indemnity provision at issue is unenforceable under both Texas and Pennsylvania law. We remand solely for the determination of the appropriate amount of attorneys' fees and costs, if any, to award to either party in light of our rulings on the dispositive issues.
Appellant Textron Lycoming Reciprocating Engine Division of AVCO Corporation ("Lycoming") manufactures aircraft engines, but does not manufacture all of the component parts. On May 4, 1995, Lycoming entered into a Master Supply Agreement ("MSA") to obtain crankshaft forgings from Wisconsin corporation Interstate Forging Industries, Inc. ("IFI").2 The forgings were to be made to Lycoming's specifications, and the MSA provides that IFI "will not delegate or subcontract any of the work or duties to be performed hereunder without the prior written consent" of Lycoming.3
The MSA also includes asymmetrical indemnification provisions. Section 5.3, paragraph 1 of the MSA provides:
Buyer [Lycoming] shall indemnify, reimburse, and hold Seller [IFI] harmless, its subsidiaries and affiliates and their respective officers, directors and employees from and against any and all losses, liabilities, claims, costs, demands, judgements [sic], penalties, fines, interest expenses or monetary damages of any kind (including, without limitation, court costs, reasonable fees, expense[s] and disbursements of attorneys and consultants) (collectively "Damages") asserted against, imposed upon or incurred by Seller, as a result of claims or lawsuits by third parties, (including any such claim or lawsuit for personal injury or property damage) where liability is based solely on a defect in design and/or a defect in the warnings and instructions provided by Buyer without any negligence on the part of Seller.
(emphasis added). The second paragraph of section 5.3 requires IFI to indemnify Lycoming for such "Damages":
asserted against, imposed upon or incurred by Buyer [Lycoming], whether or not involving liability to any third party, resulting from or arising out of any claim, lawsuit ... recall, retrofit or government investigation or proceeding against Buyer relating to performance or defects (including without limitation, manufacturing defects), or the breach of any express or implied warranty for any Products manufactured by Seller [IFI] pursuant to this Agreement, except to the extent that such Damages are directly caused by the negligence of the Buyer.
(emphasis added).
Before producing any crankshaft forgings, IFI executed an "Assignment and Assumption Agreement" ("Assignment Agreement") in October 1996 to accomplish three stated purposes. First, IFI assigned all the assets of its "Interstate Southwest division" to Interstate Southwest, Ltd. ("ISW"). The assigned assets included the physical plant in Navasota, Texas where the crankshaft forgings were to be produced. According to ISW, IFI's contract with Lycoming was also assigned to ISW. In exchange for its assets, IFI received a 98% partnership interest in ISW. IFI did not obtain Lycoming's consent to the transfer or inform Lycoming of the arrangement, and Lycoming contends it had no knowledge of the Assignment Agreement between IFI and ISW until this suit was filed.
Second, the Assignment Agreement designated ISW the "true and lawful attorney" for IFI with "full power of substitution, for [IFI] ... in its name and stead or otherwise...." It similarly authorized ISW to "prosecute in the name of [IFI] or otherwise ... any and all proceedings ... which [ISW] may deem proper in order to collect, assert or enforce any claim, right or title of any Division Assets, and do all other acts and things in relation thereto as [ISW] ... shall deem desirable...."
Third, the Assignment Agreement required ISW to indemnify IFI. Under this provision, ISW "assumes, holds [IFI] harmless from, and agrees to pay and satisfy and fulfill, the Division Liabilities." ISW further agreed "absolutely and unconditionally to defend, indemnify and hold [IFI] harmless from all claims arising directly or indirectly from or with respect to the Division Liabilities, against or with respect to [ISW] or [IFI], or both, and to satisfy and pay same...."
On the same day that it executed this agreement, IFI assigned its partnership interest in ISW to ISW's limited partner, a Delaware corporation known as ISW Texas Corporation. IFI owns that company. ISW's general partner, Texas Steel Corporation, is wholly owned by Citation Corporation ("Citation"), as is IFI. Thus, both IFI and ISW are affiliated with Citation. Ed Buker, Citation's Chief Executive Officer, is also the chairman of both IFI and ISW.
Lycoming received the first shipment of crankshaft forgings on March 4, 1997. On November 16, 1998, Lycoming issued an engineering change order requiring the vanadium content of the forgings to be "controlled" to 0.07% to 0.11%. The change order further provided, "This material modification ensures a 2nd tempering temperature of 1100° F or higher (at least 100° F higher than the 1st tempering temperature) for 5 hours to meet the engineering drawing hardness requirements ...." (capitalization normalized).
Beginning the following month, forgings were manufactured in a different furnace that was generally operated manually rather than by using the temperature controls outside of the furnace.
Beginning in 1999, a number of crankshaft failures occurred. In some instances, the cause of the failure is undisputed. For example, on July 27, 1999, Lycoming notified IFI of an engine failure due to the forging facility's failure to heat-treat the crankshaft forgings.4 Similar failures followed. On May 15, 2000, Lycoming wrote IFI regarding 54 crankshaft forgings that lacked heat treatment; the consequences of this "quality escape" included two in-flight failures.5 Lycoming wrote that IFI "must recognize [its] liability" and asked that IFI notify its insurance carrier of the problem. Lycoming further opined that the defects were caused by "inadequate process controls to ensure proper heat treatment."
IFI subsequently reached a settlement with Lycoming regarding these failures. As part of this settlement, the parties agreed to a change in the forging process. Specifically, Lycoming accepted IFI's offer to "build press-tooling or hammer-tooling to put the parts on the press...."6
Other engine failures occurred for which the cause was not readily apparent, and Lycoming instructed its employee, Dr. Yoon Kim, to investigate. The crankshafts at issue have six crankpins, and the failures that are the basis of this litigation generally originated below the outer nitride casing of the crankshaft near or between the fifth and sixth crankpins.
On June 28, 2000, a Lycoming engine failed after approximately 100 hours of service. In his report dated July 27, 2000, Dr. Kim concluded that a connecting rod bearing had failed, and the resulting stresses caused a subsurface fracture to the crankshaft between the fifth and sixth crankpins. On May 31, 2000, a crankshaft failed in a Lycoming engine after 262 hours of service, but the report on that failure, which occurred in Australia, was not completed until September 21, 2000. A surface fracture was observed on this crankshaft, and this failure was also attributed to a bearing failure. A third failure occurred on August 29, 2000. In his report dated October 25, 2000, Dr. Kim attributed the surface fracture in front of the sixth crankpin to the shifting of a bearing. In each of these three failures, the crankshaft forgings had been heat-treated.
IFI was not immediately informed of the failure of these heat-treated crankshafts....
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