Hexion Specialty Chemicals, Inc. v. Oak-Bark Corp., 7:09-CV-105-D

• Decision Date: 02 September 2011
• Docket Number: No. 7:09-CV-105-D,7:09-CV-105-D
• Court: U.S. District Court — Eastern District of North Carolina
• Parties: HEXION SPECIALTY CHEMICALS, INC., Plaintiff, v. OAK-BARK CORPORATION, Defendant.

HEXION SPECIALTY CHEMICALS, INC., Plaintiff,

v.OAK-BARK CORPORATION, Defendant.

No. 7:09-CV-105-D

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF NORTH CAROLINA SOUTHERN DIVISION

Dated: September 2, 2011

ORDER

On July 1,2009, Hexion Speciality Chemicals, Inc. ("plaintiff" or "Hexion") sued Oak-Bark Corporation ("defendant" or "Oak-Bark") alleging breach of warranty concerning a 2006 asset purchase agreement ("APA") in which Hexion purchased most of the assets and operations of Oak-Bark's chemical manufacturing plant in Columbus County, North Carolina. Hexion contends that Oak-Bark breached certain warranties in the APA concerning (1) wastewater treatment; (2) the level of combustible dust at the plant; and (3) one of the plant's ammonia storage tanks. Hexion seeks approximately $2.7 million in damages. On September 20,2010, the parties filed cross-motions for summary judgment [D.E. 51,54], Oak-Bark seeks summary judgment on Hexion's warranty claims [D.E. 51], and Hexion seeks partial summary judgment as to liability on the warranty claims [D.E. 54]. On October 12,2010, Hexion and Oak-Bark filed responses [D.E.63,64]. On October 22 and 25,2010, Hexion and Oak-Bark replied [D.E. 69,72]. As explained below, the court grants Oak-Bark's motion for summary judgment and denies Hexion's motion for partial summary judgment.

I.

Summary judgment is proper when "the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a); Celotex Corp. v. Catrett, 477 U.S. 317,322 (1986); Anderson v. Liberty Lobby. Inc., 477 U.S. 242,247-48 (1986). The moving party bears the initial burden of demonstrating the absence of a genuine issue of material fact. Celotex, 477 U.S. at 325. After the moving party has met this burden, the nonmoving party "must come forward with specific facts showing that there is a genuine issue for trial." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574,587 (1986) (emphasis and quotation omitted). A genuine dispute about a material fact exists "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson, 477 U.S. at 248. The court views the evidence and the inferences drawn therefrom in the light most favorable to the nonmoving party. Scott v. Harris, 550 U.S. 372,378 (2007). When considering cross-motions for summary judgment, a court evaluates each motion using the standard set forth above. See, e.g., United States v. Bergbauer, 602 F.3d 569, 574 (4th Cir. 2010); Simmons v. Prudential Ins. Co. of Am., 564 F. Supp. 2d 515, 520 (E.D.N.C. 2008).

Hexion and Oak-Bark are competitors in the chemical manufacturing industry. On November 21, 2006, Hexion agreed to purchase most of the assets and operations at Oak-Bark's chemical manufacturing plant located in Columbus County, North Carolina (hereinafter "plant"). At the plant, Oak-Bark and the preceding owner, Wright Chemical Corporation, produced various chemicals, including formaldehyde, hexamine, and ketone. After the sale, Oak-Bark retained assets and operations on the site, leaving Oak-Bark and Hexion to coexist at the plant. See PI.'s Mem. Supp. Mot. Summ. J. [D.E. 55], App. D Ex. 4 ("APA") §§ 2.1 & 2.2; Def.'s Mem. Supp. Mot. Summ. J. [D.E. 52] 3. The sale was consummated with a detailed asset purchase agreement, in which Oak-Bark agreed to place $3 million of the purchase money in an escrow account for a period of 3 years. See APA § 11.5. The purpose of the escrow account was to provide indemnification to Hexion for any damages suffered as a result of, inter alia, "any breach of any representation or warranty made by [Oak-Bark] in [the APA] ... or any other certificate, document, writing or instrument delivered by [Oak-Bark] pursuant to [the APA]." Id §11.2(a).

After the sale, Hexion encountered various problems in the plant. On March 12, 2009, Hexion demanded indemnification pursuant to section 11.2 of the APA. Oak-Bark refused indemnification, and Hexion filed this action on July 1, 2009, alleging breach of warranty. See Compl. [D.E. 1], On October 2,2009, this court entered a scheduling order [D.E. 19]. On January 19,2010, Hexion (with Oak-Barks's consent and this court's approval) filed an amended complaint [D.E. 24]. Hexion's amended complaint describes three specific breaches. See Am. Compl. ¶¶ 10-30; PI.'s Mem. Supp. Mot. Summ. J. 3.¹

Hexion's first claim relates to the treatment of the plant's wastewater, which is a byproduct of the plant's chemical manufacturing process. Hexion contends in its amended complaint that:

10. A publicly owned treatment works wastewater facility ("POTW Wastewater Facility" as defined in the Agreement) supports the operation of the Business.

11. Oak-Bark was responsible for the design of the POTW Wastewater Facility.

12. Since acquiring the Business, Hexion has received notices from Columbus County that the POTW Wastewater Facility has had persistent ammonia and biological oxygen demand violations since it began operation. These violations indicate that the POTW Wastewater Facility is under-designed and as a result, sustained operation of the POTW Wastewater Facility at its maximum design capacity will result in failure to comply with the relevant NPDES permits.

13. Though Hexion has modified its operations to address the violations, Hexion has had to pay over $13,000 in fines related to the POTW Wastewater Facility.

14. Hexion has also incurred substantial costs associated with engineering modifications to its production processes and for offsite disposal of wastewater necessitated by the faulty design of the POTW Wastewater Facility.

15. Hexion must also modify the hexamine stripper to resolve the issue with the POTW Wastewater Facility which will require a substantial expenditure.

16. Oak-Bark has therefore breached the representations and warranties contained in §§ 3.17(a), 3.22(a), 3.22(c), 3.22(i), and 3.22(k) of the Agreement.

Am. Compl. 10-16. Hexion seeks $1.5 million in damages. Seeid. ¶ 17.

Second, Hexion seeks damages caused by alleged warranty breaches relating to combustible dust, a byproduct of producing hexamine at the plant. See id. ¶¶ 18-22. The parties agree that producing hexamine leads to dust that can become explosive when suspended in the air at a high enough concentration. Hexion claims that Oak-Bark breached two specific warranty provisions concerning combustible dust, both of which caused Hexion to spend $448,493 in repairing the plant to reduce the combustible dust risk. Id ¶ 22.

Initially, Hexion cites APA section 3.22(g). Id ¶ 19. In section 3.22(g), Oak-Bark affirmed that it had "delivered to Buyer true and complete copies and results of any reports, studies, analyses, tests, or monitoring possessed or initiated by Seller or on behalf of Seller pertaining to Hazardous Materials or Hazardous Activities, in, on, or under the Facilities ...." APA § 3.22(g). Hexion claims that Oak-Bark failed to provide a copy of a January 5,2000 report that the Fike Corporation (hereinafter "the 2000 Fike Report") completed for Oak-Bark's predecessor Wright Chemical Corporation. Wright Chemical Corporation obtained the 2000 Fike Report in conjunction with purchasing Blue Tech, Inc. equipment from WW Sly Manufacturing Company to be used at the plant. See Def.'s Mem. Opp'n Mot. Summ. J. [D.E. 64], Ex. 30 ("2000 Fike Report"). The 2000 Fike Report states that hexamine production creates a dust explosion hazard. See id. Hexion claims that Oak-Bark's failure to tender the 2000 Fike Report in 2006 violated section 3.22(g). See Am. Compl.¶ 21.

Hexion also argues that the level of combustible dust mat it encountered when it began operating the plant in November 2006 "violated the general duty clause of the Occupational Safety and Health Act, 29 U.S.C. § 654, and requirements regarding general safety and maintenance of a clean workplace, 29 C.F.R. §1910.22(a)(1)." Id ¶ 20. Hexion alleges that Oak-Bark's conduct violated APA sections 3.17(a), 3.22(a), 3.22(c), 3.22(g), and 3.22(i). See id ¶ 21. Hexion claims that it "has incurred substantial expenditures, amounting to approximately $448,493, in order to address the explosion hazard associated with the hexamine operations and to bring the Facility intocompliance with applicable legal requirements." Id ¶ 22.

Finally, Hexion alleges that "one of the ammonia storage tanks on the Facility lacked mechanical integrity" on the closing date. Id ¶ 23. The amended complaint then states:

24. As a result of this condition, Hexion had to inspect, test and repair the ammonia storage tank.

25. Hexion also had to obtain a variance to otherwise applicable legal requirements, which variance authorized Hexion to continue to use the tank while it evaluated and pursued repairs.

26. Due to the inherently dangerous nature of the ammonia stored in the tank, the presence of the tank in mechanically deficient condition amounts to a Hazardous Activity.

27. The lack of mechanical integrity associated with the tank is also a violation of Occupational Safety and Health Administration regulations related to process safety management of highly hazardous chemicals, 29 C.F.R. 1910.119.

28. By conveying a mechanically deficient ammonia storage tank to Hexion, Oak-Bark has breached the representations and warranties continued in §§ 3.10(a), 3.10(b), 3.17(a), 3.22(a), 3.22(c), and 3.22(i) of the Agreement.

29. Hexion has incurred costs, amounting to approximately $60,000, associated with necessary mechanical integrity testing, to effect temporary repairs, and to secure a variance to allow operation of the ammonia storage tank though March 31,2010.

30. Hexion will also have to replace the ammonia storage tank at a cost of in excess of approximately $700,000.

Id ¶¶24-30.

Oak-Bark seeks summary judgment on Hexion's breach of warranty claims in the amended complaint, and Hexion seeks summary judgment as to liability on the breach of warranty claims. Oak-Bark also seeks...