McDermott v. Middle East Carpet Co., Associated
| Decision Date | 06 March 1987 |
| Docket Number | No. 86-8125,86-8125 |
| Parties | Lewis J. McDERMOTT, III and Criterion Mills, Inc., Plaintiffs-Appellants, v. MIDDLE EAST CARPET COMPANY, ASSOCIATED, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Eleventh Circuit |
John T. Avrett, Dalton, Ga., for plaintiffs-appellants.
Kirk W. Watkins, Atlanta, Ga., for defendant-appellee.
Appeal from the United States District Court for the Northern District of Georgia.
Before FAY and JOHNSON, Circuit Judges, and HENDERSON, Senior Circuit Judge.
This appeal challenges the propriety of damages awarded in a contract dispute. The parties were involved in the construction of a carpet factory in Egypt. Criterion Mills, Inc. (hereinafter CMI) and Lewis J. McDermott, III brought suit against the Middle East Carpet Company (hereinafter MECCA) seeking damages for breach of contract, restitution of funds paid as a bonus, reimbursement of losses sustained from the resale of raw materials, and a declaration of the fair market value of an equity interest in MECCA. MECCA counterclaimed, seeking damages for neglect of corporate duty and breach of contract. The District Court for the Northern District of Georgia adopted a special master's recommendation awarding CMI $9,964.00 for losses sustained by the resale of manufacturing materials, but denying all the other claims advanced by CMI and McDermott. Regarding MECCA's counterclaim, the district court adopted the special master's recommendations awarding $845,194.40 for lost profits, $20,000 for misappropriated funds, $21,000 in interest, and $35,302.00 for the loss of investment return on the value of certain raw materials which sat idle for eight months. CMI and McDermott argue on appeal that (1) the evidence was too speculative for an award of lost income; (2) the district court applied an inappropriate rate of interest; and (3) the court erroneously declined to declare a MECCA equity interest in favor of McDermott. For the reasons that follow, we affirm the district court's order with respect to lost profits and the refusal to declare an equity interest, but modify the portion of the order awarding interest and reverse the award for loss of investment return with respect to the funds used to purchase raw materials.
In the early seventies, several members of the Royal Family of Kuwait pondered the possibility of establishing a tufted carpet 1 factory in the Middle East. In accordance After discussing the contingent enterprise with El Farra, McDermott met several times with Sheikh Ali. On January 28, 1976, the two gentlemen reached an agreement concerning the construction of a carpet manufacturing plant under McDermott's supervision and management. According to the terms of the contract signed by McDermott on behalf of CMI and Sheikh Ali on behalf of MECCA, CMI was obligated to supervise the construction of the facility, prepare specifications, purchase machinery and raw materials, and assist in marketing and sales.
with this objective, the Kuwaiti businessmen formed MECCA, a Kuwaiti limited liability Company. Sheikh Ali Sabah Al-Salem Al-Sabah of the Royal Family (hereinafter Sheikh Ali) retained the services of Mahmoud El Farra (hereinafter El Farra) to conduct a feasibility study of the proposed business venture. In order to gather information about the production of tufted carpet, El Farra contacted McDermott, an experienced businessman in the carpet industry. At the time, McDermott was serving as the chief executive officer and Chairman of the Board of Directors of CMI--a manufacturer of tufted carpet in Cartersville, Georgia.
Simultaneous with the execution of the management agreement, McDermott subscribed to ten percent of the shares of MECCA stock. These shares were financed through and pledged as security to the Kuwait Financial Center (hereinafter KFC). McDermott owed approximately $400,000 in principal to the KFC. $120,000 of this amount was to be paid from advances by MECCA to McDermott. The remaining principal plus interest was to be paid from McDermott's personal funds.
MECCA officials chose Alexandria, Egypt for the location of the factory. Egypt was perceived as an ideal location because of a promising Middle East market and the ready availability of raw materials produced from petroleum. MECCA's proposed manufacturing facility was to be the first privately owned tufted carpet plant in Egypt. The facility was also designed for the production of woven carpets and tapestries.
McDermott was placed on the MECCA Board of Directors and named assistant managing director for the Alexandria facility. McDermott selected and ordered the equipment necessary for the production of finished goods. The prevalent standard of measurement in the Middle East was and remains the metric system. Fully cognizant of this fact, McDermott ordered a finishing machine necessary for attaching secondary backing 2 to tufted carpet specifically designed to produce carpet in four and five meter widths.
Construction of the plant began after a Kuwaiti contractor was selected in February of 1977 to erect the building. McDermott ordered the needed raw materials, including primary and secondary jute backing. 3 These goods were inadvertently ordered in twelve foot widths. McDermott did not realize at the time that he had purchased raw materials that were incompatible with the finishing machinery components.
Lacking adequate technical and production expertise, CMI and McDermott employed an international carpet consulting firm to assist in the commencement of operations. Despite the efforts of all involved, the progress at the plant fell behind schedule. Delays caused by construction, customs, credit, voltage fluctuations 4 and Dissatisfied with the status of progress, MECCA officials terminated the consulting firm's contract and called for the comencement of production within sixty days. After determining that it was impossible to meet this deadline, McDermott suspended his managerial duties and left Egypt on July 14, 1978. Upon return to the United States, McDermott appropriated $20,000.00 from a MECCA account for his personal use.
inadequate capital 5 postponed the projected date of completion from the fall of 1977 to August, 1978.
In August of 1978, MECCA officials learned that the finishing machine equipped with a four and five meter laminating section 6 could not operate with twelve foot raw materials. In order to remedy the situation, MECCA was faced with the choice of ordering four meter primary and secondary backing or obtaining a twelve foot laminating section. MECCA officials chose to do both. The new laminating section and the four meter raw materials arrived shortly before May, 1979. Consequently, McDermott's oversight in ordering incompatible goods and machinery caused an eight-month delay in the production of tufted carpet.
After commencement of the tufted carpet operations, MECCA suffered diminishing net losses in 1979, 1980 and 1981. In early February of 1982, the entire plant was destroyed by fire. MECCA rebuilt the plant in October of 1982 after receiving an $11,700,000 insurance settlement. After the new factory was reconstructed, the operation became profitable.
In a letter dated December 15, 1979, legal counsel for MECCA informed CMI that MECCA was requesting reimbursement of over two million dollars for losses and expenses allegedly caused by CMI's breach of the management agreement. MECCA sent CMI a demand for arbitration dated March 14, 1981. In a complaint filed June 1, 1981 in the United States District Court for the Northern District of Georgia, McDermott and CMI sought a restraining order enjoining MECCA from initiating arbitration proceedings in Kuwait.
Although MECCA was served with a summons and a copy of CMI's complaint by certified mail, MECCA failed to respond within the time permitted by law. Pursuant to Fed.R.Civ.P. 55(b), the district court entered default judgment in favor of CMI and McDermott and enjoined arbitration proceedings on November 4, 1981. Because of a defect in service, the district court set aside the default judgment on January 29, 1982 and ordered McDermott and CMI to serve MECCA through diplomatic channels.
While McDermott and CMI were in the process of perfecting service, the Kuwaiti Court ruled that the issues raised by MECCA's allegations were nonarbitrable. MECCA was properly served through diplomatic channels on May 2, 1983. MECCA filed a timely answer and counterclaim on July 1, 1983. Both parties amended their pleadings.
The amended complaint filed on behalf of CMI and McDermott sought a declaration of an equity interest in MECCA, reimbursement for a bonus paid by CMI to the project manager, reimbursement for losses incurred in the disposal of yarn ordered for MECCA and paid for by CMI, payment of $120,000 in advances specified by the The issues were joined, discovery was completed and the case was referred on January 10, 1985 to a United States Magistrate as special master pursuant to Fed.R.Civ.P. 53. The special master was instructed to identify the issues in the case and prepare findings of fact and conclusions of law. An evidentiary hearing was conducted from May 28, 1985 to June 7, 1985. After considering the testimony of sixteen witnesses and reviewing approximately 650 exhibits, the special master filed a report in accordance with Fed.R.Civ.P. 53(e). The special master found that McDermott waived the advances specified in the management agreement, was not entitled to any salary, 7 and acted as a volunteer in paying the project manager's bonus.
management agreement, and payment of salary allegedly owed by MECCA to McDermott. MECCA's amended counterclaim sought damages imposed individually against McDermott and vicariously against CMI for alleged violations of corporate duties as well as damages for breach of contract by CMI.
The special master recommended that MECCA recover a total...
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Commonly Used Experts
...had ever reached. He then based his lost profit estimates on that hypothetical increased share. In McDermott v. Middle East Carpet Co. , 811 F. 2d 1422 (11th Cir. 1987), the plaintiffs brought a breach of contract action stemming from a construction contract, and defendant filed a countercl......
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Commonly Used Experts
...had ever reached. He then based his lost profit estimates on that hypothetical increased share. In McDermott v. Middle East Carpet Co. , 811 F. 2d 1422 (11th Cir. 1987), the plaintiffs brought a breach of contract action stemming from a construction contract, and defendant filed a countercl......
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Commonly Used Experts
...had ever reached. He then based his lost profit estimates on that hypothetical increased share. In McDermott v. Middle East Carpet Co. , 811 F. 2d 1422 (11th Cir. 1987), the plaintiffs brought a breach of contract action stemming from a construction contract, and defendant filed a countercl......
-
Commonly Used Experts
...had ever reached. He then based his lost profit estimates on that hypothetical increased share. In McDermott v. Middle East Carpet Co. , 811 F. 2d 1422 (11th Cir. 1987), the plaintiffs brought a breach of contract action stemming from a construction contract, and defendant filed a countercl......