Invest Almaz v. Temple-Island Foreset Products

Decision Date08 November 2000
Docket NumberNo. 00-1340,TEMPLE-INLAND,00-1340
Citation243 F.3d 57
Parties(1st Cir. 2001) INVEST ALMAZ, Plaintiff, Appellant, v.FOREST PRODUCTS CORPORATION, Defendant, Appellee. Heard
CourtU.S. Court of Appeals — First Circuit


[Hon. James R. Muirhead, U.S. Magistrate Judge]

[Copyrighted Material Omitted]

[Copyrighted Material Omitted] Mark H. Alcott, with whom John F. Baughman and Paul, Weiss, Rifkind, Wharton & Garrison, were on brief, for appellant.

Russell F. Hilliard, with whom Charles W. Grau and Upton, Sanders & Smith, were on brief, for appellees.

Before Boudin, Circuit Judge, Bownes, Senior Circuit Judge, and Stahl, Circuit Judge.

STAHL, Circuit Judge.

Plaintiff-appellant Invest Almaz appeals from adverse rulings of the district court regarding claims arising out of a failed attempt to purchase manufacturing equipment from defendant-appellee Temple-Inland Forest Products Corporation ("Temple-Inland"). Invest Almaz contends that the district court abused its discretion by failing to order restitution of funds retained by Temple-Inland after the deal collapsed and by erroneously granting Temple-Inland's motion for judgment as a matter of law on Invest Almaz's fraud claims. Invest Almaz also contends that the jury was not properly instructed on a claim that, in the course of these events, Temple-Inland aided and abetted Invest Almaz's joint venture partner, Pathex International Ltd. ("Pathex"), in breaching its fiduciary duty to Invest Almaz. We affirm.


Invest Almaz, a subsidiary of a Russian company engaged in diamond mining, was formed for the purpose of investing the pensions and savings of the parent company's employees. In early 1993, Invest Almaz became interested in developing a plant to manufacture oriented strand board ("OSB"), a wood and wafer resin board used as a construction material. Invest Almaz's intent was to build housing for the parent company's retired employees and also to sell OSB for needed hard currency in the export market. After considering the possibility of building a new plant for this purpose, Invest Almaz came to the conclusion that it would be more cost-effective to purchase the equipment from an existing plant in North America and have it transported back to Russia.

With this in mind, Invest Almaz entered into discussions with Pathex,1 a Canadian corporation with expertise in the field, regarding the formation of a joint venture to effectuate these plans. Under the arrangement contemplated by the parties, Pathex would select and procure suitable equipment from an existing plant, transport it to Russia, reconstruct and upgrade the equipment once transported, and maintain it thereafter. Invest Almaz would provide the capital, as well as the land, labor and materials in Russia. During these negotiations, Pathex allegedly represented that acquiring suitable OSB manufacturing equipment would cost more than $17 million.2

Unbeknownst to Invest Almaz, Pathex was at this time already engaged in negotiating an option to purchase a Claremont, New Hampshire OSB plant from Temple-Inland (a Delaware corporation) for $5 million. The plant was complete and operational, although it had been closed since 1988 because it could not compete with newer plants in the North American market. The option was structured to allow Pathex access to the plant and the site prior to deciding whether to go forward with the transaction. In addition, the option gave Pathex the choice of purchasing the entire facility, including real estate,3 or only the equipment and buildings.4 Although the option agreement was finalized on August 5, 1993 -- before the joint-venture agreement between Invest Almaz and Pathex was signed -- its contents were never disclosed to Invest Almaz.

In late September 1993, representatives from Invest Almaz traveled to Canada to finalize the joint-venture agreement with Pathex. Pathex arranged with Temple-Inland for Invest Almaz's representatives to tour the Claremont OSB plant during their stay, and Vladimir Semkin and Viktor Tikhov, both engineers employed by Invest Almaz, were shown the facility by Temple-Inland employee Earl Taylor. Semkin and Tikhov were given written information about the plant and afforded considerable opportunity to inspect the plant's equipment and ask questions of Taylor, although Invest Almaz later came to believe that the information it obtained about the equipment was not entirely accurate, candid or complete.

Invest Almaz formally entered into the joint-venture agreement with Pathex on October 4, 1993. The agreement detailed the respective obligations of Invest Almaz and Pathex, requiring Invest Almaz to contribute in excess of $21 million in "investments and services" to the overall project and Pathex to contribute a little less than half that amount, all in services. The agreement also established a schedule for Invest Almaz's payments. Although the agreement did not specifically identify Temple-Inland's facility as the source of the equipment that would be purchased by the joint venture, Invest Almaz's officials testified that they understood this to be the case, and there is no evidence in the record that any other facility was under consideration at the time.

While the final negotiations with Invest Almaz were taking place, Pathex exercised its right under the option agreement to inspect the Claremont plant, making a number of visits with its own personnel, commissioning a professional appraisal of the plant and requesting two assessments from an environmental consultant, Aries Engineering ("Aries"). The appraisal, received by Pathex in December 1993, revealed, among other things, that the property and buildings were assessed for tax purposes at $1.6 million. The environmental assessments, received in March and May 1994, indicated that, while in operation and subsequent to its closure, the plant had run afoul of environmental regulations, including those governing wastewater discharges and hazardous materials storage. The Aries report noted the presence of lead and other potentially hazardous substances in site soils and sediments, petroleum-related contamination in the groundwater, and contaminant stains on cement at various locations in the facility. Invest Almaz never received copies of any of these documents from Pathex, nor was it informed of the information they contained.

In March 1994, Pathex, through a subsidiary, exercised its option to purchase the equipment at the Claremont plant. Because of the environmental problems identified by Aries, Pathex decided not to acquire the real estate. The Asset Purchase Agreement Pathex and Temple-Inland executed provided for $2 million to be paid at the closing and the remaining $3 million to be remitted in the form of a non-recourse promissory note,5 payable in three installments. The parties also executed a Security Agreement, giving Temple-Inland a security interest in the equipment. Invest Almaz was not informed by Pathex of the terms of the Asset Purchase Agreement or the Security Agreement.

Invest Almaz almost immediately failed to meet the schedule of payments laid out in the joint-venture agreement,6 although it did eventually transfer over $6 million to Pathex pursuant to that agreement. Of this amount, Pathex paid approximately $2.3 million to Temple-Inland and used the remainder for other purposes.7 The bulk of the funds paid to Temple-Inland went towards the $2 million down payment required by the Asset Purchase Agreement. Subsequently, and in part as a result of Invest Almaz's inability to make its own payments to the joint venture, Pathex failed to make the three installments required by the Agreement. After negotiating a series of extensions with Temple-Inland -- and paying Temple-Inland a further $300,000 in delinquency payments -- Pathex defaulted on the debt.8

The Security Agreement gave Temple-Inland the right to foreclose on the equipment to satisfy the debt in the event of a default by Pathex. The Agreement also specified that, in the event of foreclosure, Temple-Inland would have to account to Pathex for any surplus resulting from the sale, while Pathex would be responsible for any deficiency. Temple-Inland chose not to foreclose, however. Instead, Temple-Inland and Pathex negotiated a "Mutual Release and Cancellation of Debt" (the "Mutual Release"). Under the Mutual Release, Pathex's $3 million debt was cancelled, and Temple-Inland regained title to the purchased assets. Temple-Inland also was allowed to retain the $2.3 million in payments already made by Pathex. In addition, each party gave up any claims it might have had against the other arising out of the Asset Purchase Agreement and associated documents. The Mutual Release was executed by Pathex on December 13, 1994. Although Invest Almaz was informed at the time that Pathex was "terminating" the project, Invest Almaz was not involved in the discussions concerning the Mutual Release and was never informed of its terms.

In late 1996, attorneys representing Invest Almaz contacted Pathex in an effort to determine what had become of the funds Invest Almaz contributed to the joint venture. Shortly thereafter, however, Pathex filed for bankruptcy. Invest Almaz commenced the present action against Temple-Inland in August 1997, filing a complaint that initially included only an unjust enrichment count. The complaint was amended in October 1997 to include an allegation that Temple-Inland had aided and abetted Pathex in breaching a fiduciary duty to Invest Almaz. Nearly two years later, in June 1999, Invest Almaz was allowed to amend its complaint once again, this time to add a fraudulent concealment count.

The fraud and aiding and abetting claims were tried to a jury while the unjust enrichment count was tried to the court. The trial took place in December 1999, before Magistrate Judge James Muirhead.9 At...

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