Mid-America Tire, Inc. v. PTZ Trading Ltd.

• Decision Date: 05 June 2002
• Docket Number: No. 2001-0020.,2001-0020.
• Citation: 95 Ohio St.3d 367,768 NE 2d 619
• Parties: MID-AMERICA TIRE, INC. ET AL., APPELLANTS AND CROSS-APPELLEES, v. PTZ TRADING LTD. ET AL., APPELLEES AND CROSS-APPELLANTS.
• Court: Ohio Supreme Court

95 Ohio St.3d 367

768 NE 2d 619

MID-AMERICA TIRE, INC. ET AL., APPELLANTS AND CROSS-APPELLEES, v. PTZ TRADING LTD. ET AL., APPELLEES AND CROSS-APPELLANTS.

No. 2001-0020.

Supreme Court of Ohio.

Submitted January 8, 2002.

Decided June 5, 2002.

Wood & Lamping, L.L.P., Eric C. Holzapfel, James D. Houston and Catherine S. Neal, for appellants and cross-appellees.

McCullough, Campbell & Lane, Carl D. Liggio, Paul S. Turner and Bart Rinn, for appellees and cross-appellants.

ALICE ROBIE RESNICK, J.

I FACTS

A Overview

{¶ 1} These appeals arise out of an action brought in the Clermont County Court of Common Pleas to enjoin payment under a letter of credit ("LC") on the basis of fraud in the underlying transaction. The underlying transaction involved extensive overseas negotiations toward an agreement to import blemished Michelin tires for sale in the United States. A blemished or "blem" tire is one that is cosmetically but not operationally affected by a surface imperfection.

{¶ 2} The gravamen of the fraud claim is that the overseas seller's agents made certain false promises and representations concerning the sale of more lucrative summer tires in order to induce the American buyers to purchase and open an LC securing the purchase of less lucrative mud and snow tires, many of which could not legally be imported or sold in the United States. The buyers claim that they discovered the fraud after the LC was issued and instructed the seller not to ship the tires, but the seller went ahead with shipment anyway and presented its invoice and shipping documents for payment under the supporting LC. The buyers then instituted this action pursuant to R.C. 1305.08(B), alleging that honoring the LC in this case would facilitate and consummate the seller's fraud.

B Parties and Participants

{¶ 3} Given the multilateral nature of the negotiations and arrangements in this case, it is beneficial to provide a working list of the various parties and key participants and their relationships to one another and the transactions at hand. {¶ 4} The American parties and participants are as follows:

{¶ 5} (1) Plaintiff-appellant and cross-appellee, Mid-America Tire, Inc. ("Mid-America"), is an Ohio corporation doing business as a tire wholesaler. Mid-America provided the financing for the purchase of the tires in this case and was the named applicant by whose order and for whose account the LC was issued.

{¶ 6} (2) Arthur Hine is the president of Mid-America and signatory to the LC application.

{¶ 7} (3) Plaintiff-appellant and cross-appellee, Jenco Marketing, Inc. ("Jenco"), is a Tennessee corporation doing business as a tire wholesaler. Jenco formed a joint venture with Mid-America to purchase the tires at issue.

{¶ 8} (4) Fred Alvin "F.A." Jenkins is the owner of Jenco and also acted as Mid-America's agent in the underlying negotiations.

{¶ 9} (5) Paul Chappell is an independent tire broker who resides in Irvine, California. Chappell works as an independent contractor for Tire Network, Inc., a company owned by his wife, and acted throughout most of the negotiations as an agent for Jenco.

{¶ 10} (6) First National Bank of Chicago ("First National"), on behalf of NBD Bank Michigan, is the issuer of the LC in this case. First National was a defendant below, but is not a party to this appeal.

{¶ 11} The European parties and participants are as follows:

{¶ 12} (1) Defendant-appellee and cross-appellant, PTZ Trading Ltd. ("PTZ"), is an offshore import and export company established in Guernsey, Channel Islands. PTZ is the seller in the underlying transaction and the beneficiary under the LC.

{¶ 13} (2) Gary Corby is an independent tire broker operating as Corby International, a trading name of Corby Tyres (Wholesale) Ltd., in Wales, United Kingdom. Corby was the initiator of the underlying negotiations. The trial court's findings with regard to Corby's status as PTZ's agent form the subject of PTZ's cross-appeal.

{¶ 14} (3) John Evans is the owner of Transcontinental Tyre Company located in Wolverhampton, England, and PTZ's admitted agent in the underlying negotiations.

{¶ 15} (4) Aloysius Sievers is a German tire broker to whom PTZ owed money from a previous transaction unconnected to this case. Sievers, also an admitted agent for PTZ, procured and shipped the subject tires on behalf of PTZ, and signed and presented the draft for payment under the LC. {¶ 16} (5) Patrick Doumerc is the son of the proprietor of Doumerc SA, a French company that is authorized to sell Michelin overstock or surplus tires worldwide. Doumerc is the person from whom Sievers procured the mud and snow tires for sale to Jenco and Mid-America.

{¶ 17} (6) Barclays Bank PLC in St. Peter Port, Guernsey, is the bank to which Sievers presented the invoice and shipping documents for payment under the supporting LC. Barclays Bank was a defendant below, but is not a party to this appeal.

C Events Leading to the Issuance of the LC

{¶ 18} In October 1998, Corby approached Evans about obtaining large quantities of Michelin winter tires. Evans contacted Sievers, to whom PTZ owed money. Evans knew that Sievers had a relationship with a sole distributor of Michelin surplus tires out of France. Eventually, an arrangement was worked out under which Sievers would buy the tires from Doumerc's warehouse in France and Evans would sell them on behalf of PTZ through Corby to an American purchaser.

{¶ 19} Meanwhile, Corby contacted Chappell in California and asked whether he was interested in importing Michelin tires on the gray market for sale in the United States. "Gray imports" are tires that are imported without the knowledge or approval of a manufacturer into a market that the manufacturer serves, at a greatly reduced price. Corby told Chappell that he had a large client who negotiated an arrangement directly with Michelin to handle all of its overstock blem tires from France and who could offer 50,000 to 70,000 Michelin tires per quarter at 40 to 60 percent below the United States market price on an exclusive and ongoing basis. Chappell contacted Jenkins in Tennessee, who called Hine in Ohio, and it was arranged that Jenco and Mid-America would pursue the deal through Chappell.

{¶ 20} On October 28, 1998, Corby faxed Chappell a list of Michelin mud and snow tires that were immediately available for shipment and Chappell forwarded the list to Jenkins. The list was arranged in columns for quantity, size, pattern, and other designations applicable to the European market with which Chappell and Jenkins were unfamiliar. In particular, many of the tires on the list bore the designation "DA/2C." Chappell and Jenkins understood that DA meant "defective appearance," a European marking for a blem, but they were not familiar with the "/2C" portion of the designation. When they asked for clarification, Corby told Chappell that "DA/2C" means the same thing as "DA," but since all of the listed tires are not warehoused at a single location, "/2C" is used merely to indicate that those blemished tires are located in a different warehouse. {¶ 21} Chappell also asked Corby whether he could procure and offer summer or "highway" tires, along with the winter tires. Chappell, Jenkins, and Hine had no interest in purchasing strictly snow tires, as it was already too late in the season to market them profitably. However, they would have an interest in buying both winter and highway tires and marketing them together as a package deal.

{¶ 22} Corby told Chappell that 50,000 to 70,000 highway tires would be made available on a quarterly basis at 40 to 60 percent below the United States market price. However, when Chappell received another list of available tires from Corby on November 11, 1998, he complained to Corby that this list contained no summer tires and nowhere near 50,000 units. Corby responded that Michelin was anxious to get rid of these tires first, as the market for snow tires in Europe was coming to a close, that a list of summer highway tires would be made available over the next few weeks, and that Chappell and appellants would not have an opportunity to procure the highway tires unless they first agreed to purchase the snow tires. Corby explained that Michelin does not list available summer tires in the mid-month of a quarter. Instead, it waits for these tires to accumulate in a warehouse and then puts out the list at the end of the month. Thus, a list of summer tires would be available over the next few weeks.

{¶ 23} In a transmission dated November 13, 1998, Corby wrote to Chappell:

{¶ 24} "The situation is as I explained yesterday, there are no summer tyres available at all but, if, and a very big if, this deal goes ahead we will get all surplus stocks at the end [of] each qu[arter] from now on, but if this deal does not go, then I know we can kiss any future offers good buy [sic]."

{¶ 25} On November 20, 1998, Corby faxed Chappell a list of summer tires available for immediate shipment, but the listed units were not priced, were composed of many small "odd ball sizes" unmarketable in the United States, and did not approach the 50- to 70,000-range in aggregate quantity. In his cover letter, Corby assured Chappell that "I have of course been in contact with Michelin regarding the list of summer tyres" and "they have confirmed that in the next three/four weeks we have exclusive to us the new list of Michelin summer tyres, quantity unknown as yet, but they believe to be anything from 50,000/70,000 tyres, which would not be too bad for Jan sales." The letter also stated that Michelin was offering the tires at "the price of $1.50 per tyre more than the M & S tyres * * * based on taking the whole lot."

{¶ 26} On November 23, 1998, Corby faxed the following letter to Jenkins:

{¶ 27} "Subject: Michelin Tyre Programme.

{¶ 28} "Dear F.A {¶ 29} "I would just like to confirm our current position with the Off-Shore marketing company that have been authorised to...