YPSILANTI COMMUNITY UTILITIES v. MEADWESTVACO AIR SYSTEMS, LLC

• Decision Date: 23 December 2009
• Docket Number: Case No. 07-CV-15280.
• Citation: 678 F. Supp.2d 553
• Parties: The YPSILANTI COMMUNITY UTILITIES AUTHORITY and the Christman Company, Plaintiffs, v. MEADWESTVACO AIR SYSTEMS, LLC, MeadWestvaco Corporation and Bioclimatic Air Systems, LLC, Defendants.
• Court: U.S. District Court — Eastern District of Michigan

678 F.Supp.2d 553

The YPSILANTI COMMUNITY UTILITIES AUTHORITY and the Christman Company, Plaintiffs, v. MEADWESTVACO AIR SYSTEMS, LLC, MeadWestvaco Corporation and Bioclimatic Air Systems, LLC, Defendants.

Case No. 07-CV-15280.

United States District Court, E.D. Michigan, Southern Division.

December 23, 2009.

Thomas E. Daniels, Laura A. Rickloff, Pear, Sperling, Ypsilanti, MI, Cynthia M. York, Karl V. Fink, Pear, Sperling, Ann Arbor, MI, for Plaintiffs.

Michael G. Vartanian, Dickinson Wright, Ann Arbor, MI, Robert F. Magill, Jr., Magill and Rumsey, Ann Arbor, MI, for Defendants.

OPINION AND ORDER (1) DENYING DEFENDANT MEADWESTVACO CORPORATION'S MOTION FOR SUMMARY JUDGMENT PURSUANT TO FEDERAL RULE OF CIVIL PROCEDURE 56 AND (2) DENYING DEFENDANT BIOCLIMATIC AIR SYSTEMS, LLC'S F/K/A MEADWESTVACO AIR SYSTEMS, LLC'S MOTION FOR SUMMARY JUDGMENT PURSUANT TO FEDERAL RULE OF CIVIL PROCEDURE 56

PAUL D. BORMAN, District Judge.

Now before the Court are Defendant Meadwestvaco Corporation's ("MWV") and Defendant Bioclimatic Air Systems, LLC's f/k/a Meadwestvaco Air Systems, LLC's ("BAS") Motions for Summary Judgment pursuant to Federal Rule of Civil Procedure 56. A hearing was held on December 10, 2009. For the following reasons, the Court DENIES MWV's Motion for Summary Judgment and DENIES BAS' Motion for Summary Judgment.

I. BACKGROUND

This case involves Ypsilanti Community Utilities Authority's ("YCUA") purchase from Meadwestvaco Air Systems, LLC ("MWVAS") of an air purification system designed to control odor at the YCUA wastewater treatment plant in Ypsilanti, Michigan. The original contracting parties were MWVAS (a joint venture between MWV and Bioclimatic, Inc.) and YCUA (through its general contractor, the Christman Company ("Christman")). YCUA asserts in its Third Amended Complaint (1) that the equipment has never performed to specification; (2) that it entered into the contract with MWVAS based upon the fraudulent representations of both MWV and MWVAS that they were one and the same corporate entity and that the contract guarantees were backed by the financial and technological strength of MWV; (3) that had YCUA known, when it signed the contract in January 2005, that MWV was withdrawing from MWVAS, it would not have signed the contract; (4) that when it learned of MWV's withdrawal from the joint venture, it had already taken partial delivery of the equipment under the contract, begun installation and was committed to the technology; (5) that BAS has been financially and technologically unable to meet its obligations under the contract; and (6) that both BAS and MWV are liable to it for damages incurred as a result of the failure of the equipment to perform.¹

BAS responds in its motion for summary judgment (1) that it has fully performed all of its obligations under the contract and is not liable to YCUA for breach; (2) that it did not fraudulently induce YCUA to enter into the contract because it had no duty to disclose to YCUA MWV's plans to withdraw from MWVAS; (3) that YCUA's claim is barred by the economic loss doctrine and by the statute of frauds; and (4) that any alleged misrepresentations were not material to YCUA, which continued with performance of the contract even after learning of MWV's withdrawal from the LLC, without seeking continuing guarantees from MWV.

MWV responds in its motion for summary judgment (1) that it was not a party to the contract at issue, that MWVAS was not the alter ego of MWV and that it is therefore not liable on the contract; (2) that MWV never promised to guarantee performance of the MWVAS/YCUA contract and that such a claim is barred by the statute of frauds; and (3) that MWV never made false claims about its financial involvement in MWVAS and had no duty to disclose to YCUA its plan to withdraw from MWVAS.

A. The Formation and Operation of MWVAS

MWVAS was a joint venture limited liability company created by Defendant MWV and Bioclimatic, Inc., a predecessor in interest to BAS, that was formed on June 27, 2002 "for the purpose of manufacturing and marketing corrosion protection systems and air purification equipment . . . to industrial, commercial, and institutional markets." (MWV Mot. Ex. 1, Art. III, §§ 3.1, 3.2.) MWV had experience with odor control, originating in the paper industry, utilizing carbon activation, and Bioclimatic, Inc. had experience with odor control utilizing air ionization systems. (MWV Mot. Ex. 3, Day Dep. 41:1-8; Pls.'s Ex. 27, Allbaugh Dep. 46:16-48:18; 78:20-79:16.)²

The management committee of the LLC was comprised of four managers, three selected by MWV and one selected by Bioclimatic, Inc. (MWV Mot. Ex. 1, Art. V, § 5.1(c).) MWV and Bioclimatic, Inc. held 75% and 25% interests in MWVAS respectively. (Id. § 1.24.) The management committee, controlled by MWV, had "complete and exclusive control of the management of the LLC's business and affairs. . . ." (Id. § 5.2.) Under a related Service Agreement, MWV was responsible for supervision and management of MWVAS and was responsible for hiring, firing and training employees and for maintaining the books and records of MWVAS and for preparing operating plans and budgets. (MWV Mot. Ex. 5 §§ 2B, 2D, 2E). Thus, while the LLC maintained separate accounting records, financial statements, profit and loss statements (MWV Mot. Ex. 6, Ryan Dep. 14:6-11; MWV Mot. Ex. 7, Pohlmann Dep. 60:1-4), MWV was the entity responsible for preparing these records on behalf of the LLC. (Pls.'s Ex. 12.) Also, under the Service Agreement, MWV was to be reimbursed for any costs associated with operating MWVAS only to the extent not in excess of the budget and only for salaries, benefits and travel expenses of certain MWV employees. (MWV Mot. Ex. 5 § 7.) As a result, MWV provided services and incurred costs on behalf of MWVAS that were never reimbursed by the LLC. For example, attorneys provided legal assistance and advice to MWVAS, including in relation to the YCUA contract, that were not necessarily charged back to MWVAS. (Pls.'s Ex. 31, Pohlmann Dep. 11:4-12:4; Pls.'s Ex. 34, Ryan Dep. 22:14-25.) Also, in many instances, former employees of MWV who provided services for MWVAS continued to be paid by MWV. These expenses were supposed to have been charged back to MWVAS, although no documentation to substantiate such cross charges, which would have been generated by MWV, has been offered. (Pls.'s Ex. 31, Pohlmann Dep. 12:19-13:2; MWV Mot. Ex. 7, Pohlmann Dep. 66:13-23.)

At the time that the LLC's contract with YCUA was signed in January 2005, significant salaries and benefits were paid by MWV on behalf of MWVAS, and certain amounts due to MWV from MWVAS at the end of 2004 were assumed by MWV. (Pls.'s Ex. 12, p. 8.) Losses incurred in 2004 were allocated 96% to MWV and 4% to Bioclimatic. (Id.) The LLC agreement specified the contributions made by both of the parties; Bioclimatic, Inc. contributed its entire business (MWV Mot. Ex. 1, Schedule C) and MWV contributed its Corrosion Technology Business. (Id. Schedule B.) Additionally, the LLC assumed $364,996.98 in liabilities from Bioclimatic, Inc. (Id. Ex. A.)

Throughout the existence of the LLC, MWV maintained insurance on the LLC, at no cost to MWVAS. (Pls.'s Ex. 34, Ryan Dep. 18:15-19:16; Pls.'s Ex. 8, Meadwestvaco Corporation Certificate of Insurance (listing MWVAS as an additional insured)). MWV also hosted and paid all costs associated with the MWVAS website. (Pls.'s Ex. 34, Ryan Dep. 51:1-11.) MWV also paid the costs associated with its corporate controller's review of contracts entered into by MWVAS. (Id. 92:15-93:5.) On March 3, 2004, MWV filed a Trademark/Service Mark Application, through its corporate attorney, for the rights to the Mark "Meadwestvaco Air Systems" and to the Meadwestvaco Air Systems logo. (Pls.'s Ex. 21A.) The legend "LLC" does not appear anywhere on the Trademark Application or the associated logo. When announcing its joint venture with Bioclimatic, Inc. in a press release, MWV stated that MWVAS would operate "as part of MeadWestvaco's Specialty Chemicals Division." (Id. Ex. 22.)

B. Negotiation of the Contract Between YCUA and MWVAS

In 2004, YCUA was engaged in an expansion of its Ypsilanti Township wastewater treatment plant, increasing plant capacity by 17 million gallons per day at an approximate total project cost of $110 million dollars. (Compl. ¶ 8.) Christman was the general contractor on the project. (Compl. ¶ 9.) As part of the construction project, a YCUA Plant Expansion Project Team ("the Project Team"), comprised of YCUA employees and outside consultants, studied and considered various odor control methods. (Compl. ¶ 10.) As originally designed, the odor control system on the project was a "biofilter" system. (Pls.'s Ex. 36, Thomas Aff. ¶ 3.) After construction began, YCUA learned of a new odor control system, "air-ionization," that promised equal performance at a lower cost. (Id.) The Project Team studied the air-ionization system to decide whether plans should be changed to utilize air ionization rather than the biofilter system. (MWV Mot. Ex. 19.) In the process of investigating the proposal to change technologies, the Project Team considered at least two different companies that offered the "air ionization" technology, MWVAS and another company called Bentax North America, Inc. ("Bentax"). (Id.)

YCUA's first contact with MWVAS was at a March 11, 2004 meeting with Steve Zitin, who had been the majority shareholder of Bioclimatic, Inc. before the formation of MWVAS and who was employed at the time of the meeting with YCUA by MWV. (BAS Mot. Ex. 2, Zitin Dep. 5:25-6:5; Pls.'s Ex. 33, Zitin Dep. 18:20-19:11.) The meeting was attended by: Tom Allbaugh (an engineering consultant from Tetra Tech, hired by YCUA to consult on the expansion project, and Project Team member), Jim Grau (Project Team member), Perry Thomas (Project Team member), Walt Zimmerman (from Climate technologies) and Mr. Zitin. (Pls.'s Ex. 1.) At that...