Sanford v. Ahlstrom Machinery Holdings Inc.

• Decision Date: 10 December 1999
• Docket Number: No. 98-2036,98-2036
• Citation: 198 F.3d 415
• Parties: (3rd Cir. 1999) SANFORD INVESTMENT COMPANY, INC., APPELLANT v. AHLSTROM MACHINERY HOLDINGS, INC
• Court: U.S. Court of Appeals — Third Circuit

Page 415

198 F.3d 415 (3rd Cir. 1999)

SANFORD INVESTMENT COMPANY, INC., APPELLANT v. AHLSTROM MACHINERY HOLDINGS, INC.

No. 98-2036

U.S. Court of Appeals, Third Circuit

Argued November 5, 1999

Filed December 10, 1999

On Appeal from the United States District Court for the Eastern District of Pennsylvania (D.C. Civ. No. 97-07978) District Judge: Honorable Edmund V. Ludwig

Peter F. Marvin (argued) Justin K. Miller Toll, Ebby, Langer & Marvin Two Logan Square 18th Floor Philadelphia, Pa. 19103 Attorneys for Appellant

Jeffrey G. Weil (argued) Michael S. Doluisio Dechert, Price & Rhoads 1717 Arch Street 4000 Bell Atlantic Tower Philadelphia, Pa. 19103 Attorney for Appellee

Before: Becker, Chief Judge, and Greenberg and Cudahy,^* Circuit Judges

OPINION OF THE COURT

Greenberg, Circuit Judge.

I. INTRODUCTION

This matter is before this court on an appeal from an order for summary judgment in this diversity of citizenship commercial litigation dispute. The litigation stems from a series of business relationships formed to finance, construct and operate a waste paper recycling facility in Sanford, West Virginia (the "Project"). The owner/developer of the project was American Power Recyclers, L.P., later known as American Fiber Resources, Limited Partnership (the "Partnership"). The Partnership included two general partners and two limited partners. The general partners were American Power Corporation ("APC"), the predecessor-in-interest to the plaintiff, Sanford Investment Company, Inc., and Adirondack G.P. Inc. ("AGP"). AGP is related to Ahlstrom Kamyr, Inc., the predecessor-in-interest to defendant Ahlstrom Machinery Holdings, Inc. We refer to the Ahlstrom entitites simply as "Ahlstrom" although the contracting party was Ahlstrom Kamyr, Inc. and the party to the litigation is Ahlstrom Machinery Holdings, Inc. The limited partners were Adirondack Recycle, L.P. ("ARLP"), a company related to Ahlstrom, and American Power Investors ("API"), a company related to APC. We will refer to the appellant Sanford and its predecessor-in-interest APC as "American" but it should not be confused with American Fiber Resources, i.e., the Partnership.

On November 2, 1993, the Partnership entered into a contract with Ahlstrom referred to as the "EPC/Initial Operation and Performance Testing Agreement" ("EPC contract"). The EPC contract provided that Ahlstrom would develop, construct and initially operate the Project. In return, the Partnership agreed to pay Ahlstrom an amount designated as the "Base Fee" during the initial operation of the Project. A different paragraph of the EPC contract provided that the Partnership would pay Ahlstrom a "Bonus Fee" under certain conditions. The Base Fee and the Bonus Fee were distinct payments under the EPC contract calculated in different ways. Moreover, the Bonus Fee, unlike the Base Fee, was conditional. The EPC contract provided the circumstances in which Ahlstrom was to receive the Base Fee, which is at issue in this lawsuit.

After the execution of the EPC contract, Ahlstrom and American negotiated a division of the Base Fee that they memorialized in a Letter Agreement dated December 29, 1993 (the "1993 Letter Agreement"). The 1993 Letter Agreement provides that

25% of the base fee payable to [Ahlstrom] under Phase II of the EPC/Initial Operation and Performance Testing Agreement shall be payable by [Ahlstrom] to [American].

American predicates this action on Ahlstrom's purported obligation to remit this 25% payment as set forth in the 1993 Letter Agreement. American contends that Ahlstrom breached the contract as of January 31, 1996, by failing to remit payments of that portion of the Base Fee due under the 1993 Letter Agreement.

The background surrounding this breach of contract case was complicated by three agreements entered into following the execution of the foregoing basic agreements. In 1995, the Partnership sought additional funding from the County Commission of Marion County, West Virginia ("Marion County"). Marion County contemplated obtaining the additional funding through the issuance of tax-free industrial development bonds.

A problem with the funding arose, however, because American was in default of its obligation under a Cash Shortfall Funding Agreement (the "CSF Agreement") dated February 13, 1995. Apparently, Marion County would not approve the additional funding unless American satisfied its obligations under the CSF Agreement.

To cure its default under the CSF Agreement and clear the way for the additional funding, American sought a loan from one of its affiliates, the Conduit and Foundation Corporation ("Conduit" or "C&F "). It was contemplated that the loan would be funded by monies due and owing to Conduit from Kamtech, Inc. ("Kamtech"), an affiliate of Ahlstrom that Ahlstrom hired to construct the Project.

The plan called for Conduit to loan American the funds owed to it by Kamtech so that American could meet its obligation under the CSF Agreement and thus permit the Partnership to receive additional funds from Marion County. In order for Conduit to loan the funds due from Kamtech to American the approval of Conduit's surety, National Union Fire Insurance Company of Pittsburgh, Pennsylvania, was required.

The arrangements among the parties arising from these circumstances were evidenced in three documents executed in December 1995. The parties refer to the first document as the "Bonus Fee Agreement" and the second document which accompanied the first as the "Bonus Fee Assignment." The final agreement was the "Surety Loan Agreement." The Bonus Fee Agreement and Bonus Fee Assignment were executed on December 20, 1995, and the Surety Loan Agreement was executed on December 26, 1995. The parties to this litigation dispute the legal effect of these agreements, in particular language found in the Surety Loan Agreement. Because the terms of the three contracts are central to the outcome of the appeal, we set forth their relevant provisions in some detail.

Each member of the Partnership signed the Bonus Fee Agreement: (1) AGP (Ahlstrom's affiliate); (2) American; (3) ARLP (Ahlstrom's affiliate); and (4) API (American's affiliate). Among other things, the Bonus Fee Agreement provided for an "assignment" of 24% of the Bonus Fee due to Ahlstrom under the EPC contract to American or its affiliate. Paragraph 4 states in pertinent part:

Assignment of 24% of the Bonus Fee to APC. AGP shall cause its Affiliate, [Ahlstrom], to deliver to [American] or its designee upon the closing of the Bond Offering an Assignment . . . through which [Ahlstrom] assigns, sells and transfers to [American] or its designee, the right to receive twenty-four percent (24%) of [Ahlstrom's] Bonus Fee under paragraph 13.3 of the EPC Contract, as amended (the `Bonus Fee'), when earned. . . . AGP acknowledges that APC has designated The Conduit and Foundation Corporation (`C&F ') [an affiliate of American] as its designee under this paragraph 4.

....

[O]nce the amount of the Bonus Fee has been finally determined in accordance with the EPC Contract, [American] shall have the right thereafter to assert a claim for its 24% of such Bonus Fee directly against [the Partnership and original signatory to the EPC Contract] and the payment of such amount to C&F or National Union (as defined below) shall not be subject to offset against the obligations of [American]. Nothing in this Agreement is intended to, nor shall, give [American] or its designee or any of their Affiliates any additional rights or obligations under the EPC Contract, including, but not limited to, any rights as a third party beneficiary to the EPC Contract, except as they may currently possess as a General or Limited Partner and except for the right to enforce payment of the 24% of the Bonus Fee assigned to [American] as hereinabove provided.

App. at 112-13 (second emphasis added). With respect to National Union's rights under the Bonus Fee Agreement, section 8(k) provides:

Limitation on Rights of Others. No person or entity other that the parties hereto shall have any legal or equitable right or interest, remedy or claim under or in respect of this Agreement; provided, however, that it is acknowledged that C&F and its surety, National Union . . . are creditor and/or donee third party beneficiaries in respect of the rights of [American] to receive the 24% of the Bonus Fee assigned to it pursuant to paragraph 4 hereof and to enforce the payment of said amount against [the Partnership] as hereinabove provided.

App. at 115.

The second agreement, the Bonus Fee Assignment, was executed by Ahlstrom as assignor and Conduit as assignee and designee of American in the form that accompanied the Bonus Fee Agreement. The Bonus Fee Assignment effectuates the assignment of Ahlstrom's interest in 24% of the Bonus Fee provided under the EPC contract to Conduit as American's designee. The Assignment provides in relevant part:

1. Assignor [Ahlstrom] hereby assigns, sells and transfers to Assignee [Conduit], and Assignee hereby accepts the assignment of, the right to receive . . . twenty-four percent (24%) of Assignor's Bonus Fee under . . . the EPC Contract, . . . when earned.

App. at 120. The provisions in the Bonus Fee Assignment that follow the foregoing quoted language reiterate again American's right (as Conduit's affiliate) to assert a claim against the Partnership to collect its portion of the Bonus Fee provided in the EPC Contract assigned to it under this assignment. The next paragraph then provides the following:

4. Assignee [Conduit] hereby irrevocably directs that any amounts otherwise payable to it with respect to the 24% of the Bonus Fee assigned to it hereby shall be paid directly to [National Union], and Assignor [Ahlstrom] hereby agrees to so pay any such amounts that it shall receive from AFR. . . . It is acknowledged that [National Union] is a creditor and/or donee third party beneficiary in respect of the right to receive...