In re JGB Industries, Inc.
| Decision Date | 01 May 1997 |
| Docket Number | Bankruptcy No. 95-33716-T,Adversary No. 96-3046. |
| Court | United States Bankruptcy Courts. Fourth Circuit. U.S. Bankruptcy Court — Eastern District of Virginia |
| Parties | In re JGB INDUSTRIES, INC., t/a Baker Equipment Engineering Co. and Baker Equipment Leasing Co., Debtor. JGB INDUSTRIES, INC., t/a Baker Equipment Engineering Co. and Baker Equipment Leasing Co., Plaintiff, v. SIMON-TELELECT, INC., Defendant. |
Kevin R. Huennekens, Daniel A. Gecker, James L. Banks, Jr., Maloney Barr & Huennekens, Richmond, VA, for Debtor.
Thomas K. Berg, Popham Haik Schnobrich & Kaufman, Minneapolis, MN, David D. Hopper, Mezzullo & McCandlish, Richmond, VA, Co-Counsel for Simon-Telelect, Inc.
From January 14 through 17, 1997, the court held a trial on the debtor's amended complaint for injunctive and other relief. Having taken the matter under advisement, and for the reasons set forth in this memorandum opinion, the court (1) will dismiss the amended complaint filed by the debtor, (2) will enter a judgment declaring that the debtor is not a distributor of products, parts, or service in any territory for Simon-Telelect, Inc., and (3) will deny the request for a permanent injunction included in the counterclaim filed by Simon-Telelect, Inc.
Simon-Telelect, Inc., is a Delaware corporation with its principal place of business in Watertown, South Dakota. As the successor to Tel-E-Lect, Inc., Telelect manufactures a brand of digger derricks and aerial devices which can be attached to vehicles used in the electric power and telephone industries. The debtor is a Virginia corporation which assembles utility trucks by mounting derricks and aerial devices on chassis with custom bodies.
At some time during the mid-1940s, the two companies orally agreed that the debtor would serve as the sole distributor of Telelect products in Virginia, West Virginia, the District of Columbia, Maryland, and North Carolina. By 1975, however, both the debtor and another Telelect distributor (Altec) had begun manufacturing their own lines of digger derricks and aerial devices. Finding this to have caused a "serious conflict of business interests," Telelect severed its relationship with both companies by letters dated August 25, 1975. Pursuant to the "terms of separation" imposed by Telelect, the debtor retained the right to sell replacement parts through December 31, 1975, and the right to promote and to sell Telelect products through October 31, 1975. Telelect, however, reaffirmed its right to establish new distributor outlets in the debtor's territory as of September 1, 1975.
Upon receipt of the August 25, 1975, letter, the debtor contacted Telelect in the hope of reaching a settlement. In return for the debtor ceasing to manufacture the competing line of derricks and aerial devices, and in light of the debtor's efforts to improve its organizational structure and its sales force, Telelect agreed in November 1975 to reappoint the debtor as a distributor both in its old territory and in the states previously serviced by Altec. Less than a year later, however, Telelect unilaterally rescinded the authority for the debtor to operate in eastern Kentucky and eastern Tennessee.
Throughout this period, only an unsigned general policy statement issued and revised by Telelect had governed the parties' business relationship. Telelect, however, concluded that a binding contract with the debtor was needed. In a letter to the debtor dated October 6, 1976, Telelect stated:
In the absence of a formal distributor agreement, we desire this transmittal to serve the purpose of territory and term identification for the immediate time until the Agreement reaches you.
Effective immediately:
Over the course of the next several months, the parties exchanged revised drafts of the form of agreement which Telelect had forwarded to the debtor. In the end, however, they could not agree on all the terms. The subject eventually was dropped with no written contract ever executed.
Nevertheless, by letters dated September 23, 1977, and November 1, 1978, the debtor shared with Telelect its intent to extend their relationship for another year. Although Telelect never replied to these overtures specifically, the parties continued to conduct business as they had in the past. For each sale made, the debtor would submit a written purchase order to Telelect which included design specifications for the equipment requested, a preferred delivery date, and the price as listed in a guide supplied and occasionally revised by Telelect. Telelect, in turn, would acknowledge receipt of the order and would invoice the debtor on the later of the date the product was completed or the "due date" specified in the purchase order. The debtor then would engage a carrier to ship the equipment from the Telelect facility in Watertown.
This arrangement proceeded smoothly until 1990, when the debtor began to experience both operational and financial troubles. Notwithstanding a series of structural reorganizations, design errors and inventory control problems continued to plague the debtor, and delays in delivery became more and more frequent. The financial repercussions were significant. The debtor posted losses in excess of $680,000 for fiscal year 1990, $580,000 for fiscal year 1991, and $3.5 million for fiscal year 1992.
To make matters worse, Congress in 1992 had enacted the Energy Policy Act in an effort to de-regulate the utility market. The prospect of heightened competition persuaded many electric and other power companies to defer orders until the impact of the new law could be assessed. This decision rippled throughout the industry and caused both distributors and suppliers to witness a dramatic drop in revenue. Telelect and the debtor were hit particularly hard. Telelect equipment, with its reputation for premium quality and a high price tag, began to rapidly lose market share to more modest products with a lower cost.
During the second half of 1993, Telelect and the debtor took significant steps to remedy both their respective and their common crises. In September of that year, the debtor engaged a general management consulting firm named Princeton Associates to perform a "diagnostic" on the company. Six weeks later, Princeton reported that the debtor needed to implement a long-term purchasing schedule, to provide its employees with more detailed assembly instructions, and to market its repair and service business more aggressively. After reviewing the findings, the debtor decided to employ members of the Princeton team on an interim basis so that they could implement the recommended changes directly.
Meanwhile, Telelect had developed a plan to spread its losses and to regain the lost market share. In addition to introducing a less expensive line of equipment, Telelect announced a revised factory assistance program. In the past, if a lower price had been required to draw a customer away from a competitor, the distributor had negotiated with Telelect informally for a factory discount. Under the new policy, Telelect warned that a factory discount would be provided only if the distributor squeezed its own profit margin and offered the customer one as well.
During a meeting with distributors in March 1994, Telelect pushed the concept of joint discounts even harder and suggested that direct purchases from Watertown would be offered to a customer whose dealer did not participate. When some of the distributors complained, Telelect reminded them that profits historically had come on the back end with parts and service, not from the front end sale. Telelect also predicted that, although the distributors would net less from each individual sale, the overall volume of sales would increase if higher discounts were provided and if Telelect could call on the customers in tandem with each distributor.
The debtor remained concerned. In November 1993, after Telelect had announced a customary 4% increase in the price of its digger derricks and aerial devices, its profit margin for assembled vehicles dropped to almost zero. With the Princeton team having had insufficient time to generate additional income from the parts and services program, the debtor's cash flow ground to a halt. As a consequence, the debtor began to have trouble meeting the 30-day term on which Telelect sold its equipment.
Back in September 1993, Telelect had declined to serve as "the debtor's bank" or to extend the 30-day credit term to 75 days. Nevertheless, with the no end in sight to the strain on its finances, the debtor returned to...
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