Rajala v. Allied Corp.

• Decision Date: 30 October 1986
• Docket Number: No. 82-2282-K.,82-2282-K.
• Parties: Eric C. RAJALA, Trustee in Bankruptcy for General Poly Corporation, Plaintiff, v. ALLIED CORPORATION, Defendant.
• Court: U.S. District Court — District of Kansas

66 B.R. 582 (1986)

Eric C. RAJALA, Trustee in Bankruptcy for General Poly Corporation, Plaintiff, v. ALLIED CORPORATION, Defendant.

No. 82-2282-K.

United States District Court, D. Kansas.

October 30, 1986.

COPYRIGHT MATERIAL OMITTED

Ronald L. Holt, Stinson, Mag & Fizzell, Kansas City, Mo., for plaintiff.

W. Dennis Cross, Morrison, Hecker, Curtis, Kuder & Parrish, Kansas City, Mo., for defendant.

MEMORANDUM AND ORDER

PATRICK F. KELLY, District Judge.

This case is before the court on defendant's motion for summary judgment. This action is brought by the trustee in bankruptcy, Eric C. Rajala, for General Poly Corporation, against Allied Corporation for breach of contract, breach of fiduciary duty, conversion, and fraud. For the reasons set forth herein, defendant's motion for summary judgment will be denied, except as to Count XIII, alleging an overall scheme to defraud.

The facts in this lawsuit are largely disputed. In 1978, Clayton A. Walker and Hans H. Traver developed plans to form the company which later became General Poly. Their plan was to form a company which would engage in the business of converting high density polyethylene (HDPE) into film and film products such as plastic milk bottles, large drums, pails, housewares, and storage containers. Conversion of "film grade" HDPE into film and film products is accomplished by a method known as "extrusion". Special extrusion equipment is needed for this process. Some HDPE has a higher molecular weight than other HDPE and is referred to as high molecular weight high density polyethylene (HMWHD). Film products made from prime HMWHD film grade resins have significant strength advantages over products made from ordinary HDPE or from traditional low density polyethylene resins. Also, due to its strength advantages, thinner film can be produced from HMWHD resins, offering a producer of bags and film the potential for more profit.

At the time that Walker and Traver began making plans for General Poly, Walker was the principal shareholder of Vinylplex, a company engaged in the manufacture and sale of plastic pipe. Mr. Traver was the principal shareholder of PeruPlast, a company in Lima, Peru, engaged in the manufacture and sale of various plastic products, including HMWHD film and bags.

In and prior to 1978, HMWHD film grade resin was widely used in Japan, western European countries, and South America for the production of film and bags, but such HMWHD products had not penetrated the market in the United States as there were no companies in the United States which were producing and selling commercial quantities of prime HMWHD film grade resin. At that time, a German chemical company known as Hoechst, A.G. was producing an HMWHD film grade resin which was regarded as the industry standard. During 1978 through 1980, Hoechst, A.G. imported only limited quantities of its 9255F HMWHD film grade resin into the United States. This resin was being sold in the United States at a premium price due in part to higher costs of the raw materials for the resin in Europe and the absence of any other prime HMWHD film grade resin in commercial quantities in the United States. Therefore, for General Poly to buy resin exclusively from European suppliers would have been too costly, so General Poly sought to find a domestic company which could develop and produce a resin equal in quality to that produced in Europe.

In 1978, Allied Corporation began studying the possibility of producing film grade HMWHD resin in the United States. Allied is a New York corporation which is, and at all relevant times was, a manufacturer and supplier of HDPE resin. In order for Allied to successfully develop the HMWHD resin, it needed access to state of the art, specialized extrusion equipment and experienced extrusion operators. In 1978, Allied did not have this specialized equipment, which was extremely costly, nor did it have any right of access to any such equipment in any location in the United States.

In October of 1978, a representative of Allied met with General Poly's promoters. Allied informed the promoters it was engaged in a film development program and was pursuing development and commercial production of an HMWHD film grade resin. General Poly's promoters advised Allied of their tentative plans to establish a film and bag plant in the Kansas City, Missouri area, which would be dedicated to the production of HMWHD film and bags, and they stated they were seeking a domestic supply of resin. At that time it was arranged that the General Poly promoters would later meet with Allied's Pat Snell, who headed the HMWHD film development program, regarding the status of that program and Allied's progress in development of an HMWHD film grade resin. A few days later, Allied tentatively indicated to Traver that Allied could furnish Traver with a "developmental resin" for Traver to evaluate at his PeruPlast Plant. An Allied interoffice memorandum reporting on this meeting stated it would be a "great benefit" for Allied to be "in on the ground floor" with the planned General Poly operation, and that the "only concern at the moment was whether or not . . . Allied could put together a suitable sample for the Lima, Peru operation to get this thing started." When Allied's Pat Snell received a copy of this memorandum, he added a handwritten note stating that the developmental resin which Allied could send to Traver's PeruPlast Plant was a commercial HMWHD film grade resin produced and sold in Europe by a Belgian company named Solvay et Cie.

On January 10, 1979, Walker and Traver met with several of Allied's representatives. According to plaintiff, Walker and Traver told the Allied representatives that they needed to have a domestic supply of HMWHD film grade resin equivalent to or better than the industry leader, Hoechst 9255F, and that they would not form the proposed film and bag company without obtaining such a source. They also indicated the proposed company would need to have financial assistance from Allied. Walker requested that Allied either purchase some of the bonds or guarantee the bond issue. Traver indicated that General Poly would provide technical assistance to Allied by evaluating Allied's experimental HMWHD film grade resins at the Peru-Plast Plant, which had the needed specialized extrusion equipment and experienced operators. Traver and Walker indicated their proposed plant could be in operation toward the end of 1979. According to plaintiff, Allied's representatives stated that Allied was already at work on an HMWHD film grade resin development program, that Allied possessed the necessary catalyst, and that it only needed to tinker with the catalyst in order to perfect the resin. Allied stated it needed access to the specialized extrusion line design for HMWHD film, which Allied did not have. Allied further stated that with the availability of the PeruPlast Plant, Allied's timing for completion of the development program would coincide with the promoters' timing for the commencement of manufacturing operations toward the end of 1979, and that Allied could then have a prime HMWHD film grade resin available in commercial quantities for the proposed General Poly Plant. As to offering financial assistance, Allied stated that rather than backing the bond issue it could provide financial assistance to the proposed General Poly operation in the form of extended credit terms.

The parties concluded their meeting by agreeing to commence a joint development program, under which General Poly would provide extrusion technology and assistance to Allied in the evaluation and perfection of its planned HMWHD film grade resin, and Allied, in exchange, would agree to supply General Poly with prime HMWHD film grade resin of a quality and performance equal to or better than the then industry standard — Hoechst 9255F — at the time General Poly commenced manufacturing operations toward the end of 1979, with such resin being provided at a favorable price below the prevailing Hoechst price and on extended trade credit terms.

Plaintiff alleges that in a later phone conversation between Walker and an Allied representative, Allied agreed to provide 90-day credit terms, and perhaps more. According to Walker, Allied also stated that the HMWHD film grade resin would be priced to General Poly at a price within one to two cents of prevailing prices of Allied's existing injection molding grade resins.

On January 23, 1979, Allied wrote a letter to Walker confirming the parties' joint cooperation agreement. The letter stated Allied wanted General Poly's promoters to evaluate Allied's new resins as they were developed at the PeruPlast Plant in Lima, Peru, and further, that Allied would be forwarding to Walker "a secrecy agreement required to ensure the confidentiality of our joint effort."

A draft of the proposed secrecy agreement between the parties was prepared by Allied's law department and forwarded to Walker on February 14, 1979. Plaintiff claims this agreement was intended only as a partial memorialization of the parties' January agreement. When Walker received the written document, he made a few changes, including the addition of a provision stating that General Poly would have the first right to purchase any new HDPE film grade resin produced by Allied on a semi-commercial or commercial scale, up to 80% of General Poly's monthly requirements, for a period of three years following the commercial or semi-commercial production of the resin by Allied. According to plaintiff, Walker added the right of purchase provision so there would be some reference in the written secrecy and joint cooperation agreement to the parties' January oral agreement that Allied would supply General Poly with an HMWHD film grade resin at the time General Poly began operations at the end of 1979 and thereafter. Plaintiff alleges this reference was needed to provide assurance to the underwriters handling General Poly's bond...