Minnesota Power v. Armco, Inc.
| Decision Date | 09 July 1991 |
| Docket Number | No. 90-5404,90-5404 |
| Citation | 937 F.2d 1363 |
| Parties | MINNESOTA POWER, Appellee, v. ARMCO, INC., Appellant. |
| Court | U.S. Court of Appeals — Eighth Circuit |
Kevin P. Hughes, New York City, for appellant. Dianne Rella also appeared on the brief.
Samuel L. Hanson, Minneapolis, Minn., for appellee. Gregory J. Stenmore and Kathleen Erickson, Minneapolis, Minn., and Thomas A. Micheletti and Douglas W. Peterson, Duluth, Minn., also appeared on the brief.
Before LAY, Chief Judge, FAGG and BOWMAN, Circuit Judges.
In 1978, Minnesota Power entered into two Electric Service Agreements with Reserve Mining Company ("Reserve"), a Minnesota corporation, to supply electricity to Reserve's taconite facilities in Babbitt and Silver Bay, Minnesota. At the time Reserve entered into the contracts it was owned equally by Armco, Inc. and Republic Steel Corporation ("Republic"). In 1982, Armco and Republic restructured Reserve into a partnership. Armco formed First Taconite in 1979, as a subsidiary corporation, to hold its partnership interest in Reserve. Prior to its bankruptcy in 1986, Reserve attempted to cancel its contract with Minnesota Power by sending cancellation notices effective November 9, 1990, for the Babbitt contract and June 1, 1991, for the Silver Bay contract. The total unpaid charges plus interest due under the agreements through March 1990, plus the present value of Reserve's future obligation, was $19,830,422.01. Minnesota Power brought suit against Armco for breach of contract asserting that Reserve was the alter ego of Armco . Minnesota Power also claimed First Taconite was the alter ego of Armco, thus making Armco a partner in Reserve. The district court 1 made findings of fact and conclusions of law and found that (1) from 1978 through 1982, Reserve was the alter ego of Armco and Armco was therefore bound to perform the agreements; (2) from 1982 through 1986, First Taconite was the alter ego of Armco and Armco was therefore a partner in Reserve and was bound to perform the agreements. The district court held that Armco was liable to Minnesota Power for breach of contract and entered judgment in the amount of $19,915,211.00 with post-judgment interest.
On appeal, Armco argues the district court erred by (1) failing to apply Minnesota law regarding the "consensual creditor rule"; (2) imposing an affirmative duty of disclosure on Armco contrary to Minnesota law; and (3) making certain factual findings relating to the alleged misrepresentation of the restructuring of Reserve. We affirm.
In 1976, Reserve was owned equally by Armco and Republic. 2 Reserve was classified as a "cost company" for income tax purposes and operated for the ultimate benefit of Armco and Republic. A cost company was treated essentially like a partnership and Armco and Republic possessed all of Reserve's economic interests and gains from its resources. Reserve's entire production was sold to Armco and Republic at cost. They also paid all of Reserve's capital costs and advanced all of its cash requirements. Effective July 1, 1977, the Internal Revenue Service revoked its ruling allowing cost companies and after a grace period taxed them as ordinary corporations. Reserve's cost company status was terminated effective August 1, 1979.
In 1979, Armco created First Taconite as a wholly owned subsidiary to hold its share of Reserve. Republic-Reserve, Inc., a wholly owned subsidiary of Republic, and First Taconite entered into a partnership agreement named "Reserve Partnership" and each partner assigned all of its Reserve assets to the partnership.
In 1982, Reserve and Minnesota Power began negotiating a transaction to construct a connecting transmission line between Taconite Harbor, Minnesota and Reserve's facility at Silver Bay to enhance the service provided by Minnesota Power. Reserve was required to pay almost $6,000,000 in "contribution in aid of construction" ("CIAC") under the agreements for the cost of the tie-line construction and related facilities in a lump sum upon completion of the construction. Reserve proposed deferring payment over a period of years and D.D. Gustafson, Controller of Reserve, met with Arend Sandbulte, then Executive Vice President of Minnesota Power, to discuss the matter. Gustafson emphasized Armco's financial strength and its responsibility for Reserve. The district court found that Gustafson did not inform Sandbulte of the restructuring or of the formation of Reserve Partnership. Minnesota Power's CIAC proposal contained a paragraph asking if Armco was the ultimate security in the transaction and asking for clarification if that understanding was wrong. 3 Reserve never responded to that request but submitted its own proposal. The two parties eventually reached agreement but nothing further was said about Armco as security.
Republic-Reserve and First Taconite eventually amended the partnership agreement and renamed the partnership "Reserve Mining Company." 4 Although Armco
and Republic disclosed Reserve's reorganization to other creditors, they did not notify Minnesota Power. 5
Armco challenges certain findings of the district court relating to the alter ego theory. Although substantial evidence exists to support the district court's finding that Reserve was the alter ego of Armco at the time Reserve entered into the contract with Minnesota Power, there can be little question that upon restructuring Reserve in 1979, Armco became a partner through First Taconite in the newly formed Reserve Partnership. Armco created First Taconite, a corporation, solely to hold Reserve assets on behalf of Armco. The district court's finding that First Taconite was simply a "paper" corporation serving as Armco's alter ego is subject to little dispute. Thus, under basic principles of partnership law, Armco was liable for the debts of Reserve at the time of the contract breach.
The district court found the operating characteristics of First Taconite as a partner in Reserve Partnership were as follows:
(a) Directors and Officers. All directors and officers of First Taconite were appointed by Armco and were full time employees of Armco. The Board of Directors of First Taconite did not conduct any actual meetings until August of 1986, when it decided to place Reserve Partnership in bankruptcy. Prior to August of 1986, all actions by the directors of First Taconite were taken by consent action without a meeting.
(b) Financing. Armco provided the financing for all of the operations of First Taconite. The initial capital contribution of $500, made on behalf of First Taconite to start up Reserve Partnership, was actually advanced by Armco since First Taconite had zero funds. The annual fees paid to the State of Minnesota for First Taconite's registration as a foreign corporation, together with license fee and annual report charges, were paid by Armco. Prior to its bankruptcy proceeding, First Taconite did not pay any expenditure. All expenditures incurred by First Taconite were paid by Armco. To file bankruptcy, First Taconite obtained a loan from Armco to cover the filing costs and fees. First Taconite was never provided with funds to repay that loan or any other loan from Armco.
(c) Employees. First Taconite had no employees. All actions taken in the name of First Taconite were taken by employees of Armco, who were paid solely by Armco. While Armco assessed a monthly administrative charge to the intercompany account at First Taconite for services rendered by Armco employees to First Taconite, and for other costs advanced on its behalf, First Taconite never paid that monthly charge, was never provided capital funds with which to pay such a charge and was never requested to pay the charge.
(d) Office. First Taconite had no address or office location. While certain First Taconite files were maintained in the offices of Armco, there was no lease agreement or any identification within the Armco building of the presence of First Taconite. First Taconite's initial letterhead was entitled "First Taconite Company, % Armco, Inc." and this was the official address for its bank account.
(e) Property. Outside of its $1,000 cash balance in its bank account, First Taconite had no other property, offices, facilities, furniture or equipment. First Taconite did not have any storage facilities, processing plants or plants of any kind.
(f) Bank Account. Armco controlled First Taconite's bank account. The selection of the Chase Manhattan Bank for the account was a result of Armco's practice of having its subsidiaries' accounts where it banked. First Taconite's bank account never had an ending daily balance in excess of $1,000. First Taconite was not provided with sufficient cash to pay operating expenses and was never permitted to control even the (g) Business Purpose. First Taconite had no business purpose except to act as nominee of Armco to hold the partnership interest in Reserve Partnership. First Taconite did not become a party to either the Ore Agreements or Unequal Take Agreements. It was ignored by Armco and Republic, who continued as the direct parties to those Agreements. Pellets produced by Reserve Partnership were not delivered to First Taconite, but were delivered directly to Armco facilities. All pellets were priced pursuant to the Ore Sales Agreement between Armco, Republic and Reserve Partnership. First Taconite did not become a party to that Agreement. First Taconite did not borrow any money or enter into contracts with any third parties.
$1,000 in cash which Armco placed in its account.
(h) Corporate Action. First Taconite could not take any action without the consent of Armco.
(i) Environmental Permits. First Taconite was not named on any environmental permits for Reserve. The permits continued to be in the names of Armco, Republic and Reserve.
32. Under the Restated Partnership Agreement, the business of Reserve Partnership was conducted by...
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