Farm-Fuel Products Corp. v. Grain Processing Corp.

• Decision Date: 21 September 1988
• Docket Number: No. 86-1115,FARM-FUEL,86-1115
• Citation: 429 N.W.2d 153
• Parties: PRODUCTS CORP., Appellee, v. GRAIN PROCESSING CORPORATION, Appellant. BEAVER VALLEY CANNING CO., Delmar A. Nelson, Robert W. Sackett, Appellants, v. GRAIN PROCESSING CORPORATION, Appellee.
• Court: Iowa Supreme Court

Page 153

429 N.W.2d 153

FARM-FUEL PRODUCTS CORP., Appellee, v. GRAIN PROCESSING CORPORATION, Appellant.

BEAVER VALLEY CANNING CO., Delmar A. Nelson, Robert W. Sackett, Appellants, v. GRAIN PROCESSING CORPORATION, Appellee.

No. 86-1115.

Supreme Court of Iowa.

Sept. 21, 1988.

Rehearing Denied Oct. 13, 1988.

Henry A. Harmon and Mark J. Wiedenfeld, Des Moines, for Grain processing corp.

Maurice B. Nieland, Sioux City, and Thomas S. Reavely, Des Moines, for Farm-Fuel Products Corp., Beaver Valley Canning Co., Delmar A. Nelson, and Robert W. Sackett.

Considered by McGIVERIN, C.J., and LARSON, SCHULTZ, LAVORATO, and ANDREASEN, JJ.

LARSON, Justice.

The plaintiff, Farm-Fuel Products Corp., retained a firm called ACR Process Corp. to design a distillery for the production of corn alcohol (ethanol). The plant failed, and Farm-Fuel sued ACR and Grain Processing Corporation (GPC), as well as others, on theories of negligence and breach of warranty. GPC appealed a judgment rendered against it, and the three stockholders of Farm-Fuel filed a separate appeal from the court's dismissal of their individual suit against GPC. We affirm on both appeals.

The oil crisis of the mid-1970s caused a rush toward alternative energy sources, including gasohol (a ten percent ethanol and ninety percent gasoline mixture) as an alternative to straight gasoline. GPC, one of the world's largest manufacturers of corn alcohol, had been a producer of ethanol for several years; in fact it had been among the world's largest producers. But there was a problem with using ethanol in internal combustion engines because it ordinarily contained about five percent water. John Chambers, a well-known expert in the alcohol industry, invented and patented a method of removing water residue by using unleaded gasoline. When used as a motor fuel, of course, traces of gasoline left in the ethanol would not be a problem. Chambers and other family members formed the ACR Corporation for the purpose of marketing this technology. ACR, as it turned out, was long on ethanol technology but short on capital.

ACR and GPC entered into the "licensing" agreement (which Farm-Fuel characterized as a joint venture agreement) which lies at the heart of this case. Under this agreement, the parties pooled their experience, technology, know-how and patent rights "for the purpose of developing and marketing an energy responsible process for the conversion of renewable resources to liquid motor fuel." Under this contract, ACR and GPC agreed to market their technology to other manufacturers in exchange for a royalty to be paid to GPC and ACR.

A group of Iowa residents from the Spencer area also saw the potential for corn ethanol as a motor fuel additive, and they formed a corporation called Farm-Fuel Products Corporation for the purpose of building a distillery. Farm-Fuel contracted with ACR to design and oversee the construction of a relatively small plant in an abandoned pea cannery in Storm Lake. The purpose was to ferment and distill high moisture corn into ethanol, using the Chambers (or ACR) process.

The plant began operation but immediately encountered problems. These problems included defects in its mash cooler, distillation columns, and evaporators. The plant struggled, then closed. Testimony, perhaps, to an inability of northerners to build and operate a "still."

When the project failed, Farm-Fuel sued ACR and other defendants, including GPC, on theories of negligence and breach of warranty. The jury rejected Farm-Fuel's negligence claim but returned a substantial verdict on its breach of warranty claim. GPC appealed, asserting that the court erred: (1) in refusing to direct a verdict against Farm-Fuel based on insufficiency of the evidence of a joint venture between ACR and GPC; (2) in refusing to direct a verdict against Farm-Fuel on the breach of warranty issues; (3) in its instructions; (4) in its rulings on evidence; and (5) in refusing to grant a new trial based on Farm-Fuel's alleged misrepresentation to the court concerning a settlement with the defendants other than GPC. The separate appeal of Farm-Fuel's shareholders raises the issues of the court's refusal to allow an amendment to their petition and its directing a verdict against them on their individual suit against the defendants.

Because ACR was a corporation with limited assets, Farm-Fuel looked primarily to GPC for compensation, claiming it was liable for the acts of ACR on the theory of joint venture.

An appeal based on sufficiency of the evidence in a law action raises only one question: whether there is substantial evidence to support the finding. Iowa R.App.P. 14(f)(1). In making that determination, we construe the evidence in the light most favorable to the judgment. See Adam v. Mt. Pleasant Bank & Trust Co., 387 N.W.2d 771, 773 (Iowa 1986); Murray v. Conrad, 346 N.W.2d 814, 817 (Iowa 1984).

I. Sufficiency of the Evidence of Joint Venture.

We discussed joint ventures in Brewer v. Central Construction Co., 241 Iowa 799, 806, 43 N.W.2d 131, 136 (1950):

A joint venture is defined as an association of two or more persons to carry out a single business enterprise for profit; also as a common undertaking in which two or more combined their property, money, efforts, skill or knowledge.

As a general rule, a joint venture is characterized by a joint proprietary interest in the subject matter, a mutual right to control, a right to share in the profits and a duty to share the losses.

(Emphasis added.)

In Pay-N-Taket, Inc. v. Crooks, 259 Iowa 719, 724, 145 N.W.2d 621, 625 (1966), we said this about joint ventures:

A partnership or joint adventure, a limited partnership, is usually a contract where two or more persons place their money, labor and skill in some business to be carried on by the partnership, with an agreement to divide the profits and share the losses.

The parties to this appeal have identified five indicia which they have characterized as the "elements" of a joint venture. They are:

(1) a common undertaking;

(2) a joint proprietary interest in the subject matter;

(3) a mutual right to control;

(4) a right to share in the profits; and

(5) a duty to share the losses.

It might be argued that these five factors are not "elements" in the sense that they must all be proven in every case. It could be argued they are only "character[istic]" of a joint venture, e.g., Brewer, 241 Iowa at 806, 43 N.W.2d at 136. In any event, the court here considered them to be elements and instructed the jury that they must all be proven in order to establish a joint venture. The plaintiff did not complain. GPC asserts that no substantial evidence supports any of the "elements" while Farm-Fuel counters that they are all established by substantial evidence.

In deciding whether a joint venture agreement exists, we have said that "no particular form of expression or formality of execution is necessary. It need not be expressed but may be implied in whole or in part from the conduct of the parties." Pay-N-Taket, Inc., 259 Iowa at 724, 145 N.W.2d at 625. Even the criteria for a joint venture might vary from case to case. See 46 Am.Jur.2d Joint Venture § 1, at 22 (1969) ("[D]espite the general acceptance of the criteria listed above, it has been said that courts have not laid down any very certain definition of what constitutes a joint venture, nor have they established a very fixed or certain boundary thereof, contenting themselves in determining whether the facts of a particular case constitute the relationship of joint venture.").

Whether there was substantial evidence of a joint venture is the most troublesome issue in this case. There is strong evidence to support both sides of the argument. GPC concedes that it had a joint venture with ACR for some purposes, but it claims that the development of the Farm-Fuel plant was not among them. It contends that it consistently and expressly disavowed any interest in the development of such plants because they were too small to be economically feasible. Farm-Fuel counters, with some persuasion, that the scope of the joint venture was a fact issue and that the jury's finding is supported by substantial evidence. We will set out only portions of the evidence which support the jury's findings. (The trial of this case lasted approximately nine weeks, producing hundreds of exhibits and thousands of pages of transcript.)

On January 5, 1978, representatives of GPC and ACR met to discuss the potential of a joint development of their respective alcohol technology. According to the notes of the meeting, a representative of ACR suggested that GPC and ACR build the first alcohol plant and that "the first group with a successful plant will make a handsome profit." Among the objectives of the two corporations, it was suggested, would be to "[p]ossibly have a joint venture for gasohol--[a] separate corporation which would then license others."

These notes also proposed the drafting of a letter of intent by GPC and ACR and, "if successful, then enter into joint venture which would provide for parties' objectives." Suggesting a prominent role for GPC, the notes show that "GPC seeking controlling interest, be able to run show, [but] not opposed to have Rob [principal of ACR] involved in management."

On the following day, GPC and ACR executed a "Confidential Disclosure Agreement" by which the parties agreed to the exchange and confidentiality of "technical information and business information relating to the manufacture, use and sale of alcohol and alcohol-gasoline mixtures (gasohol)." One stated reason for the exchange of technology was the parties' intent to make a joint application to the United States Department of Agriculture for a guaranteed loan for the construction of a gasohol pilot plant.

On January 31, 1979, GPC and ACR signed one of the pivotal documents in this case, the licensing agreement for combining "their respective Know-How and experience for the...