Summit Petroleum Corp. of Indiana v. Ingersoll-Rand Financial Corp.
| Decision Date | 06 July 1990 |
| Docket Number | No. 89-5862,INGERSOLL-RAND,89-5862 |
| Parties | 12 UCC Rep.Serv.2d 566 SUMMIT PETROLEUM CORPORATION OF INDIANA; and B & J Oil Co., Inc., Plaintiffs-Appellees, v.FINANCIAL CORP.; and Myron Jones, Defendants-Appellants. |
| Court | U.S. Court of Appeals — Sixth Circuit |
H. Eugene Harmon, Philip I. Huddleston (argued), Huddleston Brothers, Bowling Green, Ky., for plaintiffs-appellees.
Franklin D. Drake (argued), Mapother & Mapother, Louisville, Ky., for defendants-appellants.
Before GUY and RYAN, Circuit Judges, and ENGEL, Senior Circuit Judge.
In this diversity action concerning the sale of collateral securing a commercial debt, defendants Ingersoll-Rand Financial Corporation (IRFC) and Myron Jones appeal from a judgment entered by the district court following a one-day bench trial. The district court, applying Kentucky law, determined that the defendants unlawfully sold a drilling rig by failing to provide notice or a right of redemption to plaintiff Summit Petroleum Corporation of Indiana (Summit), and awarded damages of $303,244 in favor of Summit and its successor in interest, B & J Oil Co., Inc. (B & J). We affirm the judgment in its entirety against defendant IRFC, but reverse with respect to defendant Jones.
Collins Petroleum Corporation (Collins Petroleum) purchased the Ingersoll-Rand drilling rig underlying this dispute in 1982. IRFC provided the financing for the rig, and C.G. Collins personally guaranteed the debt resulting from the purchase. In 1984, Collins Petroleum placed a junior lien on the rig in favor of Citizens Union Bank of Lexington, Kentucky. Collins Petroleum subsequently encountered financial difficulties and, by 1985, fell behind in its payments to IRFC. Consequently, in February of 1986, IRFC declared Collins Petroleum in default and accelerated the balance due on the rig. IRFC then filed suit against both Collins Petroleum and guarantor C.G. Collins in United States district court seeking repossession and the balance due on the rig. 1
IRFC and Collins Petroleum ultimately resolved the lawsuit by negotiating an agreement that was entered as an order and reduced to a judgment. Under the terms of the agreement, IRFC received a $105,008.40 judgment plus interest and attorney fees against Collins Petroleum and C.G. Collins. In exchange, Collins Petroleum obtained an entitlement to immediate possession of the rig. Collins Petroleum's continued possession of the rig was conditioned upon adherence to a payment schedule of $21,990 up front, followed by three monthly installments of $5,000, followed by a final balloon payment of $76,359.05. Satisfaction of the requisite payments entitled Collins Petroleum to full release of IRFC's lien on the rig, whereas failure to meet the payment deadlines gave IRFC the right to immediate execution on the unpaid balance.
On May 1, 1986, Summit signed a separate agreement to purchase the drilling rig from Collins Petroleum. The purchase agreement required Summit to fulfill Collins Petroleum's payment obligations to IRFC. According to the terms of the purchase agreement, Summit was to make all payments directly to IRFC, rather than to Collins Petroleum. The document signed by Summit and Collins Petroleum further provided that "[a]ll terms and conditions of this Purchase Agreement will be enforced upon unconditional release of the Second Mortgage of Citizens Union Bank of Lexington, Kentucky." According to C.G. Collins, Collins Petroleum could not afford to pay off the rig, so the company agreed to sell its interest in the rig to Summit as a favor to Summit President Louis Judd.
Summit made the initial lump-sum payment to IRFC through a Summit attorney who coincidentally served as counsel for Collins Petroleum. IRFC, unaware of the actual source of the money, accepted and deposited the payment. Summit subsequently tendered the first of the three $5,000 installment payments directly to IRFC, but IRFC refused to deposit the payment. Instead, IRFC demanded a copy of the purchase agreement between Collins Petroleum and Summit, which Judd, the president of Summit, promptly sent to defendant Jones, IRFC's representative. Jones informed Judd that IRFC did not consent to the purchase, but would agree to a transfer and assumption of the Collins Petroleum debt by Summit provided Summit's credit was acceptable. When Summit failed to supply a sufficient number of personal guarantees to IRFC, 2 IRFC refused to acknowledge payments from Summit as satisfaction of Collins Petroleum's obligation. As a result, neither Collins Petroleum nor Summit made any further payments to IRFC, thereby leaving a substantial portion of the agreed judgment debt unpaid.
On August 5, 1986, defendant Jones repossessed the rig on behalf of IRFC at Judd's place of business. According to the district court's findings, however, Jones promised Judd that Summit could obtain the rig by paying off the balance due under the agreed judgment. Before releasing the rig to Jones, Judd cleaned and fueled it. For several weeks following repossession, Judd and one of his associates, Ernest Breeding, repeatedly called Jones to negotiate the return of the rig to Summit. On August 15, 1986, Breeding informed Jones that Summit had the $83,000 necessary to pay off the balance on the rig; Jones expressed no reservations or concerns. When Judd called Jones on August 20, 1986, however, Jones demanded an additional $10,000 on behalf of IRFC. While Judd attempted to line up $10,000 in additional financing, IRFC sold the drilling rig for $90,000 without providing any notice of the impending sale to Judd or to anyone else at Summit.
On September 2, 1986, Summit and its successor in interest, B & J, filed suit against IRFC and Jones in the Adair County, Kentucky, Circuit Court. The defendants promptly removed the action, and the plaintiffs thereafter amended their complaint. The amended complaint, which set forth claims for fraudulent inducement and tortious interference with business opportunities, demanded compensatory and punitive damages. Before the case proceeded to trial, the defendants unsuccessfully moved for summary judgment.
The district court conducted a one-day bench trial on January 17, 1989. After receiving post-trial briefs, the court issued findings of fact and conclusions of law as contemplated by Federal Rule of Civil Procedure 52(a). Specifically, the district court ruled that Collins Petroleum, as a debtor under Kentucky law, could freely transfer its interest in the drilling rig to Summit, and that such a transfer took place pursuant to the May 1, 1986, purchase agreement between Collins Petroleum and Summit. Once Summit obtained Collins Petroleum's interest in the rig, thereby becoming a debtor vis-a-vis IRFC, Summit was entitled to reasonable notice of any sale of the drilling rig as well as a right to redeem the rig prior to sale. IRFC's failure to provide Summit with either notice of the sale or its right of redemption, according to the district court, entitled Summit to compensatory damages of $303,244. 3 Therefore, the district court entered judgment in favor of the plaintiffs for that amount. This appeal followed.
The defendants identify four assignments of error for consideration on appeal. 4 First, they assert that the purchase agreement between Summit and Collins Petroleum contained a condition precedent that was not fulfilled, thereby preventing the contractual transfer of Collins Petroleum's interest in the drilling rig to Summit. Second, the defendants claim the status of creditor beneficiaries to the purchase agreement with the authority to block the transfer by enforcing the condition precedent. Third, they challenge the damage figures established by the district court. Finally, defendant Jones argues that he should have been dismissed as a party defendant. We shall address the first two arguments in tandem and the additional arguments in turn. Our review is circumscribed by Rule 52(a), which dictates that "[f]indings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous[.]" Fed.R.Civ.P. 52(a); see also Anderson v. Bessemer City, North Carolina, 470 U.S. 564, 573-74, 105 S.Ct. 1504, 1511, 84 L.Ed.2d 518 (1985).
Under Kentucky law, a debtor may transfer "rights in collateral ... notwithstanding a provision in the security agreement prohibiting any transfer or making the transfer constitute a default." Ky.Rev.Stat.Ann. Sec. 355.9-311 (Baldwin 1983). Therefore, Collins Petroleum clearly had the power to transfer its interest in the drilling rig to Summit over IRFC's objection. Moreover, a "debtor" is defined by Kentucky law as "the owner of the collateral...." 5 Id. Sec. 355.9-105(1)(d). Thus, if Collins Petroleum transferred its interest in the drilling rig to Summit, Summit became a debtor entitled to "reasonable notification" of the proposed sale of the drilling rig, see id. Sec. 355.9-504(3), and to "redeem the collateral by tendering fulfillment of all obligations secured by the collateral" as well as the creditor's related expenses. See id. Sec. 355.9-506. These established principles, which formed the basis of the district court's ruling in favor of the plaintiffs, are not contested by the defendants on appeal. Instead, the defendants interpose a single justification for depriving Summit of notice and an opportunity to redeem the rig: they assert that Summit never attained the status of a debtor because Collins Petroleum never transferred an interest in the rig to Summit. This argument is predicated entirely upon the clause in the May 1, 1986, purchase agreement between Collins Petroleum and Summit that "[a]ll terms and conditions of this Purchase Agreement will be enforced upon unconditional release of the Second Mortgage of Citizens Union Bank of Lexington, Kentucky." (Emphasis added). The defendants claim that this clause...
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