The opinion
Opinions of the United
2004 Decisions States Court of Appeals
for the Third Circuit
5-25-2004
Berg Chilling Sys v. Hull Corp
Precedential or Non-Precedential: Precedential
Docket No. 03-2977
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PRECEDENTIAL v.
UNITED STATES COURT OF HULL CORPORATION;
APPEALS SP INDUSTRIES, INC.,
FOR THE THIRD CIRCUIT d/b/a Hull Company,
Defendants/Third-Party
Nos. 03-2977 and 03-3020 Plaintiffs
v.
BERG CHILLING SYSTEMS, INC.;
ACCEPTANCE INSURANCE VICARB, INC., ALFA LAVAL, INC.
COMPANY ALFA LAVAL VICARB, JOHN L.
HULL,
v. LEWIS W. HULL,
HULL CORPORATION; Third Party Defendants
SP INDUSTRIES, INC.,
d/b/a Hull Company, SP INDUSTRIES, INC.,
Defendants/Third-Party Appellant in No. 03-3020
Plaintiffs
v. On Appeal from the United States
District Court
VICARB, INC., ALFA LAVAL, INC. for the Eastern District of Pennsylvania
ALFA LAVAL VICARB, JOHN L. (D.C. Civ. No. 00-05075)
HULL, Honorable Berle M. Schiller,
LEWIS W. HULL, District Judge
Third Party Defendants
Argued April 21, 2004
BERG CHILLING
SYSTEMS, INC., BEFORE: SCIRICA, Chief Judge, and
ROSENN and GREENBERG,
Appellant in No. 03-2977 Circuit Judges
(Filed: May 25, 2004)
BERG CHILLING SYSTEMS, INC.;
ACCEPTANCE INSURANCE John J. Soroko (argued)
COMPANY Patrick J. Loftus
James H. Steigerwald
Duane M orris case, which has an unusual international
1650 Market Street character as it implicates entities from
One Liberty Place, 37th Floor four countries on three continents,
Philadelphia, PA 19103-7396 though not all as parties, arises from the
failure of a freeze drying system to
Attorneys for Appellant-Appellee perform to specifications. Though there
Berg Chilling Systems, Inc. were many factual disputes at the trial,
the basic circumstances of the case are
Michael O. Adelman (argued) clear and we set forth the facts in the
Rebecca S. Rimmer light most supportive of the district
Michael P. Daly court’s result. 1
Drinker, Biddle & Reath
One Logan Square The origin of the case may be
18th & Cherry Streets traced to March 30, 1995, when Berg, a
One Logan Square Canadian Corporation,2 entered into a
Philadelphia, PA 19103-6996 contract with a Chinese Company named
Huadu Meat Products Company
Attorneys for Appellee-Appellant SP (“Huadu”)3 to supply the food freeze
Industries, Inc. drying system (“Equipment Contract”) at
a cost of $2,800,000 in United States
OPINION OF THE COURT
1
Certain of the various orders and
determinations to which we make
reference have not been appealed. The
GREENBERG, Circuit Judge.
parties’ attorneys took some of the
I. FACTUAL AND PROCEDURAL actions and wrote certain correspondence
HISTORY that we attribute to the parties.
This matter comes on before this 2
Berg’s principal place of business is
court on appeals by Berg Chilling in Toronto, Ontario.
Systems, Inc. (“Berg”) and SP Industries,
3
Inc. (“SPI”) from an order for judgment At various points in the record
entered by the district court on June 11, reference is made to other Chinese
2003, following a four-day bench trial in corporate entities related to Huadu, such
this breach of contract action. The as the China National Overseas Trading
district court set forth its opinion in Berg Corporation and the Beijing World Trade
Chilling Systems, Inc. v. Hull Corp., No. Corporation. For simplicity’s sake we
Civ. A. 00-5075, 2003 WL 21362805 will refer to the entities collectively as
(E.D. Pa. June 10, 2003) (“Berg”). The Huadu. We also note that Huadu
sometimes is referred to as Hua Du.
2
dollars. The freeze drying system specifications.6 On April 20, 1995, Berg
contained several components which formally agreed to purchase two freeze
Berg intended to acquire from dryers from Hull for the Huadu freeze
subcontractors and suppliers. Thus, prior drying system (“Purchase Order”).
to entering into the Equipment Contract, Under this Purchase Order, Hull assumed
Berg ascertained which manufacturers responsibility for the design,
would produce the system’s various manufacture, start-up and testing of the
component parts.4 freeze dryers.7 The freeze dryers were
Berg approached the Hull 6
Corporation (“Hull”), a Pennsylvania At trial Donald Berggren, the
entity, 5 and asked it to produce the freeze president of Berg testified:
dryers, a critical component for the
system. In the weeks prior to signing the We would send preliminary
Equipment Contract with Huadu, Berg specifications off to Hull.
was in constant contact with Hull They would work up a
regarding the freezer dryers’ technical quotation or specification –
a specification based on the
information that they
received. We would take
4
Berg manufactured one component of it, forward it off to our
the freeze drying system, the blast customer, Huadu, and –
freezers. According to the arbitration and then they would come
award we describe below, Huadu dealt back to us and ask more
with a Canadian company to acquire the questions on what we had
freeze drying system in order to take previously supplied. We
advantage of financing for the purchase then took that information,
available through the Export forwarded it back, and so it
Development Corporation of Canada. was a back-and-forth
Thus, in the transaction Berg largely was process of negotiation.
a facilitator for financing and a
coordinator for the supply of other JA at 77.
companies’ products. This unusual role
7
in no way diminished Berg’s The Purchase Order incorporated the
responsibility to Huadu. specifications of the freeze dryers set
forth in the Equipment Contract between
5
Hull has its principal place of Berg and Huadu. That contract provided,
business in Pennsylvania. Hull should “[o]nce the units are mounted in place by
not be confused with the Hull Company the end user, under supervision by the
which we describe below. Hull is not Hull Service Engineer, Hull Corporation
participating in this appeal. will send a qualified engineer to check
3
required to be able to process a specified China the damaged freeze dryer was
volume of food at a high quality level repaired at Huadu’s facility in Beijing.
within a 24-hour period or, in industry The equipment then was installed and
terms, to meet the “through-put” prepared for trial runs.
specifications.
In April 1997, at the direction of a
After confirming the delivery date Hull service technician, preliminary
with Hull, Berg entered into an amended testing began on the freeze drying
agreement with Huadu specifying a system. This testing revealed several
delivery date of June 15, 1996, for the deficiencies in the freeze drying
freeze drying apparatus. Nevertheless, equipment which led Huadu in early May
the freeze dryers were not shipped until 1997 to send a list of concerns regarding
October 1996 because one of their the functioning of the machinery to Berg
component parts was not available. which, in turn, forwarded the list to Hull.
Once Hull completed manufacturing the Hull then responded to those concerns.
freeze dryers, their shipping to China Nevertheless the Hull service technician
was delayed further when the vessel on returned to the United States prior to
which they were to be shipped failed on conducting performance tests on the
the way to pick up the equipment at the machinery as required by the Equipment
port in Camden, New Jersey. Berg, who Contract, an action leading Huadu to
was responsible for shipping the freeze refuse to accept the freeze drying system.
dryers, then made arrangements for their
transportation on trucks across North According to Berg, during the
America to Vancouver, British early summer of 1997 Hull refused to
Columbia, for shipment by sea to China. cooperate with Berg and Huadu in
Unfortunately, one of the trucks, while addressing the problems with the freeze
en route to Vancouver, was involved in dryers.9 Huadu obviously was
an accident in which one of the freeze
dryers was damaged.8 Berg did not
repair the damaged freeze dryer prior to 9
Berg’s president testified at trial:
its shipment by sea to China. Rather,
after the freeze dryers were shipped to
We were having a very
tough time obtaining
out the systems, start up the units and cooperation [from Hull].
provide on site training for a total of 20 They didn’t seem to be
days.” JA at 854. interested in working with
us on the project. They –
8
The principle of Murphy’s Law seems they were very
to have been at work here: what can go uncooperative, and at this
wrong will go wrong. time, we felt that in order
4
dissatisfied and thus threatened to send While Hull, Berg and Huadu were
the equipment back and cancel the addressing the problems with the freeze
contract. As a result of Hull’s perceived dryers, Hull, on August 27, 1997, entered
lack of cooperation during that time into an Asset Purchase Agreement with
period, Berg threatened to sue it. In late SP Industries, Inc. (“SPI”), a New Jersey
August, however, Berg and Hull began Corporation,11 providing for SPI to
negotiating a compromise to solve the acquire Hull’s Food, Drug & Chemical
difficulties with the machinery. These Division (“FDC division”) which had
negotiations culminated in the signing of designed and manufactured the freeze
a modified agreement on October 8, dryers for the Huadu project. Article 1.2
1997, among Huadu, Berg and Hull of the Asset Purchase Agreement
designed to address the deficiencies in between Hull and SPI listed the
the Hull freeze dryers (“Modified purchased assets, which included “all
Agreement”). 10 The Modified contracts and agreements, including,
Agreement set forth performance-level without limitation, sales orders and sales
goals for the freeze dryers and the contracts.” 12 JA at 1825-26. Under
required quality level of the product, Section 7.8, entitled Product Warranties,
providing that “through a cooperative the agreement provided that “[p]urchaser
effort, Hull and Berg will ensure” that does not hereby assume any liability to
these standards would be met. JA at any third party claimant.” 13 JA at 1849.
1074. It established the end of March Section 10.6 of the Asset Purchase
1998 as the date by which the Agreement stated, “[t]his agreement shall
modifications would be completed and be governed and controlled as to validity,
final acceptance would take place. JA at enforcement, interpretation, construction,
1074.
11
SPI has its principal place of
business in New Jersey.
to satisfy our customer’s
12
concerns, that we were Section 1.3 of the Asset Purchase
going to have to be looking Agreement listed assets excluded from
at performing some of the the agreement. The freeze dryers related
modifications or changes to to the Equipment Contract were not
the equipment to try to among these excluded assets.
bring it to specification.
13
However, Berg’s president testified
JA at 139. at trial that prior to the signing of the
Asset Purchase Agreement Hull’s
10
Berg’s president testified that its president informed Berg that any new
threat to sue Hull became moot after the entity would assume the liabilities of the
signing of the Modified Agreement. entity being purchased.
5
effect and in all other respects by the hereby, the terms and provisions of the
internal laws of the State of New Jersey Asset Purchase Agreement shall remain
applicable to contracts made in that in full force and effect.” JA at 1890.
State.” JA at 1857.
Hull and SPI made various public
Hull and SPI closed on the sale statements after signing the Asset
provided for by the Asset Purchase Purchase Agreement to the end that the
Agreement on October 15, 1997, exactly transaction constituted a merger of SPI
one week after Huadu, Hull and Berg and Hull’s FDC division. Moreover,
had signed the Modified Agreement. At Lewis Hull, president of the Hull
the closing on the Asset Purchase Corporation, sent a letter to Berg after
Agreement, as a result of concerns that the Asset Purchase Agreement was
SPI raised about the costs of the signed, but before the closing, stating
remaining work on the Huadu freeze that “[i]f Hull’s freeze drying division
dryers, SPI and Hull entered into a side should be transferred to another entity,
letter agreement relating to the Huadu Hull’s responsibility will of course be
project.14 The side letter agreement, assumed by the successor.” JA at 1020.
which the parties signed on the same day
as the closing on the Asset Purchase After the closing, the FDC
Agreement, provided that SPI would division of the Hull Corporation began
complete any needed design operating as a wholly-owned subsidiary
modifications and repairs to the freeze of SPI under the name Hull Company.
dryers. While SPI agreed to pay the out- Although SPI through the Hull Company
of-pocket costs for the repairs, Hull made various modifications to the freeze
agreed to reimburse SPI for a portion of dryers from late 1997 into early 1998, the
its expenses.15 The side letter agreement dryers, at least during this period and at
provided that, “[e]xcept as amended all times material to this litigation, did
not meet the specifications contained in
14
the Modified Agreement. Huadu, which
Hull at no time during the seems to have been quite
negotiations and closing with SPI accommodating, agreed, however, to
informed SPI that Berg had threatened to extend the date set forth in the Modified
file suit against it in connection with the Agreement for acceptance of the freeze
Huadu project. dryers until April 27, 1998. When it
15 became clear that the freeze dryers would
Hull agreed to reimburse all of SPI’s
not satisfy the specifications by that date,
out-of-pocket costs, including payments
SPI directly requested another extension
to suppliers and travel costs, while SPI
from Huadu. Huadu granted the request,
agree to absorb the normal payroll
giving SPI until May 20, 1998, to
expenses of the employees working to fix
complete modification and testing of the
the freeze dryers.
6
freeze dryers with the understanding that neither Berg nor SPI made an attempt to
this would be the final extension. fix these problems or conduct
performance tests prior to the May 20,
On May 13, 1998, Huadu sent a 1998 deadline. After it received this
facsimile to Berg with a carbon copy to letter from Huadu, SPI notified Berg for
the Hull Corporation listing the freeze the first time that, under Section 7.8 of
dryers’ remaining problems. The the Asset Purchase Agreement between
facsimile concluded that because the SPI and Hull, SPI had not assumed any
freeze dryers still had “fatal liability for any work done by Hull or
weakness[es]” that prevented them from SPI pursuant to the Equipment Contract
meeting the through-put requirements for or the Modified Agreement.
freeze drying food at the contracted
quality level, they were “not In an effort to salvage the
acceptable.” 16 JA at 1113. Nevertheless, situation after Huadu refused to accept
the equipment, Berg hired Walter Pebley,
who had relevant expertise, to go to
16 China and evaluate the problems with the
In a communication dated May 5,
freeze dryers. The evidence at the trial
1998, Huadu had informed Berg and the
indicated that from June to December
Hull Corporation that if the freeze dryers
1998, “there was a letter writing
did not satisfy the specifications and
campaign between [Berg] and Huadu, as
could not be accepted, “we will claim for
[Berg] tried to get Hull back in to do the
returning of goods and for our loss
necessary changes that they felt were
caused by failure of this project.” JA at
required to show that the equipment
1106. Section 8.8 of the Equipment
could work.” JA at 189-91. When
Contract provided:
Huadu refused to give Hull another
opportunity to repair the equipment, Berg
If due to the Seller’s
sent a letter to Huadu in March 1999
responsibility the
purporting to end any obligation under
performance tests cannot
the various contracts.
reach one or several items
of guarantee figures in
Pursuant to Section 11.2 of the
Appendix No. 4 after three
Equipment Contract, Huadu, on March
repeated performance tests,
29, 1999, filed a request for arbitration of
and in case no other mutual
agreement can be reached,
then the Buyer shall have
the right to terminate the equipment item as other
Contract partially or wise agree [sic].
wholly, relative to the
value of defective JA at 786.
7
its claims against Berg with the any damage award, as well
Arbitration Institute of the Stockholm, as its legal and other costs.
Sweden, Chamber of Commerce. Huadu You are further put on
did not attempt to make either Hull or notice that Berg will rely
SPI a party to the arbitration.17 But after on Hull’s refusal to defend
it learned about the institution of the the Claimants’ allegations
arbitration proceedings, Berg notified as precluding it from
John Hull, the former vice chairman of subsequently raising any
the Hull Corporation and a consultant to such defence to the
the new Hull Company. Berg wanted allegations in any action
Hull to participate in the proceedings and commenced by Berg
thus it sent a letter dated May 24, 2000, against Hull in the event
to John Hull informing “Hull” that it was Berg is unsuccessful in
obligated “to participate in the arbitration defending the arbitration.
and defend its equipment given that it is
a party to the Modified Agreement.” JA JA at 1182.
at 1181. Berg requested Hull to engage
in a joint defense of Huadu’s claims. JA The arbitration proceedings went
at 194. The Berg letter stated that Hull forward in Stockholm for approximately
had refused to be added as a party to the one year before, on March 8, 2000, Berg
arbitration or to cooperate in the defense formally objected to the proceedings on
of the arbitration. JA at 1182. As a the basis of its assertion that the Hull
result, Berg informed Hull: Corporation was a necessary and proper
party to the arbitration. However, the
Accordingly, you arbitration proceedings continued
are hereby put on notice without any participation from Hull or
that in the event Berg is SPI. 18 On December 7, 2000, the
unsuccessful in defending
the arbitration Berg will be
looking to Hull, and any 18
Berg formally informed SPI of the
successor company to Hull,
arbitration by letter dated October 3,
for full contribution and
2000, in which it stated that the letter, as
indemnity with respect to
well as the previous letter of May 24,
2000, to John Hull, “constitutes written
notice of the Arbitration Proceeding.”
17
This omission is understandable as JA at 1179. The letter further stated that
Huadu’s contract providing for “Berg Chilling hereby requests that you
arbitration was solely with Berg so there come in and defend the Arbitration
was no way that Huadu could join Hull Proceeding. Should you not do so, you
or SPI in the arbitration. will be bound in any action brought
8
Arbitration Institute issued its award in and SPI in the district court, asserting
favor of Huadu and against Berg for claims for breach of contract, breach of
$2,494,034.84, a sum that includes express warranty, breach of implied
interest. warranty, and indemnity and
contribution. Hull then filed a cross-
The arbitrators found that due to claim against SPI for indemnity or
the inability of the Hull freeze dryers to contribution. SPI responded by filing a
function as required by the specifications counter-cross-claim against the Hull
of the Equipment Contract and Modified Corporation for breach of representation
Agreement, Huadu was entitled to a and warranty and breach of the
refund of the portion of the purchase indemnification and defense provisions
price in the Equipment Contract for the of the Asset Purchase Agreement
freeze dryers but that Berg, upon between SPI and Hull.19
payment, could reclaim them. Although
the arbitrators recognized that the After the conclusion of the
remainder of the freeze drying system arbitration proceedings and prior to trial
was functional and the only deficiency in the district court, Berg and Huadu on
was in the Hull-manufactured freeze June 10, 2002, entered into a Settlement
dryers, it found that “Berg Chilling bears Contract resolving all claims between
full responsibility towards [Huadu] for them. In the Settlement Contract Berg
any breaches of contract with relation to
the Hull equipment. It is outside the
scope of this arbitration to determine 19
SPI also filed a third-party complaint
whether and to what extent Hull shall
against the Hull Corporation’s corporate
answer for such breaches in relation to
officers John Hull and Lewis Hull for
Berg Chilling.” JA at 1206-07. In
breach of contract, fraud and
defending itself in the arbitration Berg
misrepresentation. John Hull and Lewis
incurred legal fees, including expert
Hull then filed a counterclaim against
witness fees and costs, of $454,115.26.
SPI, maintaining that SPI had a duty to
defend and/or indemnify them in this
At the time the arbitration
litigation. The district court entered
proceedings between Huadu and Berg
judgment in favor of John Hull and
were pending, Berg, on October 6, 2000,
Lewis Hull on SPI’s third-party
brought suit against the Hull Corporation
complaint against them and entered
judgment in favor of SPI and against
John Hull and Lewis Hull on John Hull
against you by Berg Chilling as to any and Lewis Hulls’ third-party complaint
determination of fact made in the against SPI. These dispositions are not at
Arbitration Proceeding common to the issue on this appeal and thus we do not
two litigations.” JA at 1179. make further reference to them.
9
agreed to pay Huadu $1,000,000 and to appeal.20 The court further found that
permit Huadu to retain ownership of the under the terms of the Asset Purchase
freeze dryers which Huadu and Berg Agreement between SPI and Hull, SPI
agreed in their then current condition assumed Hull’s responsibilities for the
were valued at $650,000. W e refer to freeze dryers pursuant to the Purchase
this $650,000 as an “Equipment Credit.” Order, the Equipment Contract and the
Thus, Berg and Huadu valued the Modified Agreement.
settlement at $1,650,000. The Settlement
Contract provided that in the event that Concluding that Berg, Hull and
Berg was successful in this litigation, it SPI were equally at fault for the breach
would retain the first $1,650,000 of the of the various agreements to Huadu, the
award, Huadu would be entitled to the court apportioned the $1,000,000
next $350,000, and Berg and Huadu damages from the Settlement Contract
would share equally in any recovery in equally but separately among Berg, Hull
excess of $2,000,000. The $1,650,000 and SPI.21 The court, however, did not
figure clearly was predicated on the hold Hull and SPI jointly and severally
payment that Berg made to Huadu in a liable to Berg. Moreover, the court
combination of cash and the waiver of declined to grant Berg damages
any claim by Berg to reclaim the predicated on the $650,000 Equipment
equipment. Credit for the freeze dryers which Huadu
had retained pursuant to the Settlement
The litigation in the district court Contract because, in the court’s view,
proceeded to trial on January 13, 2003, Berg had not established the value of the
where the court at the bench trial heard equipment and did not demonstrate what
four days of testimony. In its its costs would have been to retrieve the
Memorandum and Order of June 11, equipment or find a purchaser for it if
2003, the district court issued its findings Huadu had not retained it.
of fact and conclusions of law. The court
determined that the award issued on 20
December 7, 2000, by the Arbitration Berg does assert that the court’s
Institute was not binding on Hull because ruling with respect to vouching in was
Berg failed to vouch it in properly. It erroneous but indicates that it became
further held that SPI was not equitably or moot when the court later found “that
judicially estopped from arguing that it SPI and Hull had committed a breach of
did not assume any liability to Berg for contract.” Berg br. at 52.
the freeze dryers sold to Huadu. Berg 21
The court entered separate judgments
does not challenge these findings on this
in favor of Berg and against Hull and SPI
for $333,333. Thus, the court left Berg
with the loss for the remaining $333,334
paid on the Settlement Contract.
10
The district court rejected Berg’s
claim for attorneys’ fees and expert
witness fees in the arbitration II. DISCUSSION
proceedings, finding that “[w]hile
ordinarily Berg Chilling might be entitled A. STANDARDS OF REVIEW
to recover such fees, in this case such an
award would be unconscionable.” Berg, We exercise plenary review over
2003 W L 21362805, at *11. In support the district court’s legal determinations.
of this conclusion the court explained Shire US Inc. v. Barr Labs. Inc., 329
that Berg had not represented Hull and F.3d 348, 352 (3d Cir. 2003). Our
SPIs’ interests adequately in the standard of review is plenary with
arbitration proceedings. The court also respect to whether the district court
stated that “since Berg Chilling was applied the appropriate measure of
equally liable with the Defendants contract damages in a legal sense. Scully
herein, each must bear its own costs and v. US WATS, Inc., 238 F.3d 497, 507
counsel fees.” Id. The court further (3d Cir. 2001) (citing William B. Tanner
found that the Hull Corporation had not Co. v. WIOO, Inc., 528 F.2d 262, 271
breached certain portions of the Asset (3d Cir. 1975)). We review the factual
Purchase Agreement with SPI by failing determinations of the district court under
to inform SPI of Berg’s threat of a clearly erroneous standard. Medtronic
litigation during the summer of 1997. Ave, Inc. v. Advanced Cardiovascular
Additionally, it rejected SPI’s claim for Sys., Inc., 247 F.3d 44, 53 (3d Cir.
indemnification against Hull. These 2001). A finding of fact is clearly
appeals followed.22 In our opinion we erroneous when it is “completely devoid
deal with the specific issues advanced by of minimum evidentiary support
the parties. The Hull Corporation is not displaying some hue of credibility or
participating in this appeal. 23 bears no rational relationship to the
supportive evidentiary data.” Kool,
22
Mann, Coffee & Co. v. Coffey, 300 F.3d
The district court exercised diversity 340, 353 (3d Cir. 2002) (quoting Hoots
jurisdiction pursuant to 28 U.S.C. § 1332 v. Pennsylvania, 703 F.2d 722, 725 (3d
and we have jurisdiction under 28 U.S.C. Cir. 1983)).
§ 1291.
23
It appears that the Hull Corporation
is in financial distress and thus, B. FAULT AND THE EQUAL
according to Berg, the judgment against
it is not collectible. We are aware,
however, that Hull is seeking insurance against it would be satisfied. See Berg
indemnification and consequently it is Chilling Sys. Inc. v. Hull Corp., 70 Fed.
possible that ultimately a judgment Appx. 620 (3d Cir. 2003).
11
APPORTIONMENT OF dryers and modification thereto.” Id. In
DAMAGES AMONG BERG, support of this finding, the court cited the
HULL AND SPI testimony of Donald Berggren, the
president of Berg. At the trial, Berggren
Berg challenges the district testified as to the process of negotiation
court’s action in allocating damages to it. with Huadu and Hull prior to Berg
The court found that under S.J. Groves & entering into the contract with Huadu to
Sons Co. v. Warner Co., 576 F.2d 524, provide the freeze drying system,
527-58 (3d Cir. 1978), it had the indicating that “[w]e would send
authority to apportion damages according preliminary specifications off to Hull.”
to the relative fault of the three parties, JA at 77.
Berg, Hull and SPI. We conclude,
however, that it had no basis on which to Though it is unclear from the
find Berg at fault for the breach of the foregoing portion of Berggren’s
Equipment Contract and Modified testimony whether Huadu or Berg
Agreement, and thus the court erred in developed the specifications, review of
apportioning any damages to Berg. his testimony as a whole makes it clear
that Berg did not develop the
The court found that Berg, Hull specifications for the freeze dryers, but
and SPI were equally at fault for the merely forwarded the specifications
breach of contract in failing to make a requested by Huadu to Hull during the
timely shipment of a working freeze negotiations.25 On direct examination,
drying system to Huadu. In finding that Berggren was asked “[i]n the back and
Berg was partly to blame for the breach forth that you described with Huadu, did
of contract the court rejected Berg’s Berg Chilling provide technical input on
argument that it was a mere the freeze dryers.” JA at 82. He
“middleman” between Huadu and Hull. 24 responded “[w]e weren’t capable of
Berg, 2003 WL 21362805, at *11. The
court found that Berg was responsible for
the late shipment of the machinery and 25
Berggren testified, “Huadu read
the damage to one of the freeze dryers
through the quote, and there was usually
during shipment. The court further
generated more – more questions. Every
emphasized that, “[m]ore importantly,
time we’d send off technical
Berg Chilling, like Hull Corporation and
specifications, it generated more
SPI, took part in the design and/or
questions that we would in turn send off
approval of the design of the freeze
to the various suppliers that – that we
had.” JA at 81. Berggren’s testimony is
corroborated by the testimony of Wayne
24
In essence this conclusion rejected Hinton, the sales manager at Berg who
the view of the Arbitration Institute. worked on the Huadu project.
12
providing technical input. We relied on Indeed, the court recognized that “SPI
Hull for that.” JA at 82. performed all work under the Modified
Agreement, including the flawed
Berg maintains that the finding by engineering of the modified freeze-
the district court that Berg “took part in dryers, the unsuccessful preliminary
the design and/or approval of the design testing of the equipment, and the start-up
of the freeze dryers and modification activities at the Huadu facility.” Berg,
thereto,” was clearly erroneous. We 2003 WL 21362805, at *11.
agree. Neither the court nor SPI points
to evidence supporting a conclusion that Berg disputes the district court’s
Berg played any role other than relaying findings as to its culpability for the
information back and forth between breach of the Equipment Contract with
Huadu and Hull regarding the Huadu in other respects as well. The
specifications of the freeze dryers. In court found that Berg was partially
arguing that we should affirm the district responsible for the breach of contract
court on this point SPI cites to the because it delivered the freeze dryers late
portion of the trial transcript on which to China and one of the dryers was
the district court relied. However, as damaged while being transported to
stated above, Berggren made clear that Vancouver for shipment. While we
Berg did not approve the design of the agree that Berg’s late shipment of the
freeze dryers in the sense of judging its machinery qualified as a breach of
efficacy, but only forwarded the contract, this approximately one-month
specifications requested by its customer, delay was not the reason that Huadu
Huadu, to its supplier, Hull, and ultimately refused to accept the
attempted to put together an agreement equipment. The record is clear that
relying on other entities’ capabilities. All Hull’s difficulty in obtaining a
of the testimony at the trial established component of the freeze dryers caused
that Hull designed the freeze dryers and most of the delay prior to shipment.
attempted to install them successfully in Furthermore, any delay prior to the
China. Furthermore, after the closing of
the Asset Purchase Agreement, SPI
performed all of the obligations of Hull
initial failure of the freeze dryers, Berg
under the M odified Agreement. 26
offered to “provide on-site labor to make
the necessary refrigeration piping
changes to accommodate the new
26
In its brief, SPI cites to a memo condensers.” JA at 2015. But SPI did
written by Berg’s president to John Hull not offer evidence that any Berg
of the Hull Corporation dated September personnel ever undertook any design or
29, 1997. As a means of reaching a modification work pursuant to the
compromise solution in the face of the Modified Agreement.
13
signing of the Modified Agreement to conclude that the factual findings of
which extended the deadlines for the the district court with respect to Berg’s
completion of the project is irrelevant fault for the breach of the Equipment
because Huadu did not refuse to accept Contract and the Modified Agreement
the freeze drying machinery in May 1998 lack evidentiary support and thus are
on account of the late delivery in 1997. clearly erroneous.
Rather, it refused to accept the
equipment because, even after the We recognize that, as the
various modifications, the freeze dryers Arbitration Institute found, while Berg
failed to perform to specifications. was certainly liable to Huadu as a
Therefore, any breach of the delivery signatory to the Equipment Contract and
dates by Berg set forth in the original Modified Agreement for the failure of
Equipment Contract should not have the freeze dryers to function as required
been a basis for finding Berg in any way by those agreements, such liability was
responsible for the failure of the freeze imposed merely because it did not
drying apparatus to function properly. comply with the contract. But Berg’s
liability differs in nature from that of
Moreover there is no evidence Hull which was culpable because of its
that the damage during the accident technological failures and which as
while the equipment was being between Berg and Hull was responsible
transported to Vancouver caused the for the freeze dryers not functioning as
problems with the freeze dryers. In fact, required by the specifications in the
only one of the freeze dryers was Equipment Contract. Moreover, if, on
involved in the accident but the record the remand we are ordering, SPI is held
clearly shows that the freeze dryer liable on a theory that it is Hull’s
problems related to both dryers. Thus, successor SPI will be in the same
Huadu declined to accept the freeze position as Hull. Overall, therefore, it is
dryers because neither could satisfy the clear that among Berg, Hull and SPI no
through-put requirements in the damages should have been assessed
Equipment Contract by reason of a against Berg. Thus, the district court
design defect in both pieces of clearly erred in apportioning any
machinery. Clearly, the design of the
freeze dryers by Hull rather than the
accident was the cause of the
freeze dryers related to design defects
equipment’s failure to function as
rather than the accident. The court stated
promised.27 Overall, we are constrained
that “[w]ithout remedying the problem
associated with the diameter of the pipe,
the freeze dryers could not have met the
27
The district court implicitly through-put requirements.” Berg, 2003
recognized that the deficiency with the WL 21362805, at *7.
14
damages to Berg. We therefore will Purchaser will, as
reverse the judgment of the district court appropriate, agree to repair
to the extent that it allocated any (at the Real Estate or as
damages to Berg and will remand the necessary, at the location
case to the district court with instructions of the customer) or accept
that it vacate that portion of its order for returns of products of the
judgment holding Berg responsible for Business shipped by Seller
Huadu’s damages.28 on and prior to the Closing
Date . . . which are
defective or which fail to
conform to the customer’s
C. THE LIABILITY AND order in accordance with
INDEMNIFICATION TERMS the following provisions
OF THE ASSET PURCHASE (but Purchaser does not
AGREEMENT hereby assume any liability
to any third party claimant.
1. Liability . . .)
The next issue we deal with JA at 1848-49 (emphasis added). The
concerns SPI’s challenge to the order for district court concluded that Section 7.8
judgment assessing damages against it of the Asset Purchase Agreement,
pursuant to the Asset Purchase entitled Product Warranties, did not
Agreement. Section 7.8 of the Asset apply because Huadu never accepted the
Purchase Agreement states that: freeze dryers and therefore any work SPI
did was not warranty work governed by
Section 7.8. The court stated:
28
We realize that the order for
At various points
judgment in terms did not hold Berg at
during the trial and in
fault but in substance it did exactly that
related briefing, certain
as the court only assessed against Hull
parties have referred to the
and SPI two-thirds of the $1,000,000
work performed on the
paid pursuant to the Settlement Contract
Huadu Project as
by Berg to Huadu. In fact, the entire
‘warranty’ work. Because
$1,000,000 plus, as will be seen,
‘warranty’ work would
$650,000 for the Equipment Credit,
have begun only after
should be assessed against Hull.
Huadu’s final acceptance
Whether these also should have been
of the freeze dryers (Ex. P-
assessed against SPI will have to await
20, Section 7.4) and final
determination on the remand with respect
acceptance never actually
to its possible successor liability.
15
occurred, no ‘warranty’ no inconsistency between Sections 7.8
work was performed. SPI and 1.2(i) of the agreement. Even
argues that the work assuming that the Equipment Contract
performed after the closing and M odified Agreement constitute
of the Asset Purchase purchased assets under the Asset
Agreement is warranty Purchase Agreement, it does not follow
work within the meaning of that SPI could not limit its liability to
Section 7.8 of the Asset third parties with respect to those assets.
Purchase Agreement. Furthermore, the district court’s analysis
Section 7.8, however, is is flawed because in interpreting the
inconsistent with Section Asset Purchase Agreement it looked to
1.2(i) and the side letter Section 7.4 of the Equipment Contract
(Ex. P-186), and, therefore, between Huadu and Berg. That
does not support SPI’s provision specifies that if the freeze
contentions. dryers satisfy the requirements set forth
in that agreement, “[t]his shall be the
Berg, 2003 WL 21362805, at *10 n.10. Acceptance of the Equipment by the
Section 1.2 lists the purchased assets, and Buyer and shall be considered [the] start
subsection (i) includes, in relevant part, of the warranty period.” JA at 782.
“all contracts and agreements.” 29 JA at Therefore, the court concluded that the
1825-26. warranty period on the freeze dryers had
not started because Huadu never
We reject the district court’s “accepted” them and as a result Section
interpretation of the Asset Purchase 7.8 of the Asset Purchase Agreement
Agreement as it is clearly erroneous. See could not apply.
Medtronic, 247 F.3d at 53 n.2.30 There is
The district court did not address
29
the obvious differences between the
The district court concluded that Asset Purchase Agreement and the
Section 1.2 of the Asset Purchase Equipment Contract. For purposes of
Agreement was unambiguous and determining whether SPI assumed
therefore the agreement between Berg liability for the Huadu Project, it was
and Hull to provide two freeze dryers to irrelevant whether Huadu had “accepted”
Huadu qualified as a purchased asset. the freeze dryers in accordance with
Furthermore, Section 1.3 did not list the
Huadu Equipment Contract or Modified
Agreement as excluded assets.
In light of our result we need not
30
SPI regards the Section 7.8 issue as consider this contention as the district
being a matter of contractual court’s conclusions cannot survive even
construction subject to plenary review. deferential review.
16
Section 7.4 of the Equipment Contract. extent that it imposes liability on SPI.31
The relevant provision was Section 7.8
of the Asset Purchase Agreement which In considering this point we have
made clear that the limitation of liability not overlooked Berg’s contention “that
to third parties applied to “products of any purported disclaimer of liability
the Business shipped by Seller on and under Section 7.8 would [not] be binding
prior to the Closing Date.” JA at 1848- on non-parties to the Hull-SPI
49. It is undisputed that the freeze dryers Agreement, such as Berg.” Berg’s reply
were shipped to Huadu prior to the br. at 24. Rather, we reject that argument
closing of the Asset Purchase Agreement for if, as is the case, Berg seeks to
on October 15, 1997. Therefore, Section impose liability on SPI on the basis of
7.8 of the Asset Purchase Agreement the Asset Purchase Agreement it cannot
clearly applies to the dispute between pick and choose which of its provisions
SPI and third-party claimant Berg. are applicable. Thus, the exculpatory
language of Section 7.8 binds Berg.
Nevertheless the district court
held that because “SPI acquired the Hull Our conclusion, however, does
Purchase Order and Modified not necessarily free SPI from liability on
Agreement” it was “liable for the work it a different theory inasmuch as the district
performed under those contracts.” JA at court explained that “[b]ecause SPI’s
24 n.13. Clearly this conclusion was liability is established on this [i.e.
incorrect as the plain language of the contractual] basis, it is not necessary to
Asset Purchase Agreement precludes a reach Berg Chilling’s arguments related
finding of liability against SPI and in to successor liability under the de facto
favor of Berg on the basis articulated by merger and continuation doctrines.”
the district court, i.e. that SPI assumed Berg, 2003 WL 21362805, at *10 n.13.
Hull’s responsibilities by entering into On appeal, Berg renews its argument that
the Asset Purchase Agreement. even if SPI is not liable under the terms
Moreover, the fact that SPI did not of the Asset Purchase Agreement, it
adequately modify the equipment does should be held liable under these
not matter as Hull shipped the equipment alternate theories. In view of the
before the Hull-SPI closing date and thus
SPI could not be liable to Berg under the
Asset Purchase Agreement. 31
Berg maintains that Section 7.8 is
Accordingly, we will reverse the
void as against public policy. Inasmuch
judgment of the district court to the
as the district court incorrectly
interpreted that provision it never
reached this issue. On remand, the
district court should address Berg’s
argument in the first instance.
17
circumstance that the district court did . . .
not address the applicability of successor
liability under the de facto merger and (c) the failure to
continuation doctrines, we will remand discharge when due any
this claim to the district court for an liability or obligation of
analysis of SPI’s possible liability on the Seller other than the
applicability of these doctrines.32 Assumed Liabilities, or any
claim against Purchaser
2. Indemnification with respect to any such
liability or obligation or
SPI challenges the district court’s alleged liability or
refusal to grant it indemnification from obligation;
Hull. Section 8.2 of the Asset Purchase
Agreement provides as follows: (d) any claims by
parties other than
8.2 Indemnification Purchaser to the extent
Obligations of Seller. caused by acts or omissions
Subject to Section 8.3 of Seller on or prior to the
hereof, Seller shall defend, Closing Date, including,
indemnify, save and keep without limitation, claims
harmless Purchaser, its for Damages which arise or
Affiliates and their arose out of Seller’s
respective successors and operation of the Business
permitted assigns . . . or by virtue of Seller’s
against and from all ownership of the Purchased
Damages sustained or Assets on or prior to the
incurred by any of them Closing Date[.]
resulting from or arising
out of or by virtue of:
JA at 1852.33 Section 8.5 of the Asset
32
The district court also should
33
determine whether to apply New Jersey The execution of the side letter
or Pennsylvania law to Berg’s successor agreement between Hull and SPI in
liability claims against SPI, though it relation to the Huadu Project did not alter
may not need to make a choice if the law SPI’s rights under the Asset Purchase
of the states is the same or the result Agreement as that letter provided that:
would be the same under either state’s
law. Except as amended hereby,
18
Purchase Agreement sets forth a
procedure by which SPI is required to
notify Hull of any third-party claim
under this Article VIII shall
lodged against SPI. As required by this
relieve it of such
provision, after receiving a copy of the
obligations to the extent
summons and complaint in this action,
they exist. If an
SPI on November 9, 2000, wrote a letter
Indemnified Party is
to Hull stating:
entitled to indemnification
against a Third Party
Pursuant to Section 8.5 of
Claim, and the
the Agreement34
Indemnifying Party fails to
accept a tender of, or
the terms and provisions of assume, the defense of a
the Asset Purchase Third Party Claim pursuant
Agreement shall remain in to this Section 8.5 . . . the
full force and effect, it Indemnified Party shall
being understood that the have the right, without
execution of this letter prejudice to its right to
agreement, and any actions indemnification hereunder,
taken pursuant hereto, shall in its discretion exercised
in no way limit, or in good faith and upon
otherwise constitute a advice of counsel, to
waiver of any of the rights contest, defend and litigate
to which Purchaser is such Third Party Claim . . .
entitled pursuant to the . If, pursuant to this
Asset Purchase Agreement Section 8.5, the
including, without Indemnified Party so
limitation, those provided contests, defends, litigates
for under Article VIII or settles a Third Party
thereof. Claim for which it is
entitled to indemnification
JA at 1890. hereunder as hereinabove
provided, the Indemnified
34
Section 8.5 of the Asset Purchase Party shall be reimbursed
Agreement provides, in pertinent part: by the Indemnifying Party
for the reasonable
No failure by an attorneys’ fees and other
Indemnifying Party to expenses of defending,
acknowledge in writing its contesting, litigating and/or
indemnification obligations settling the Third Party
19
you are hereby put on *12. The court relied on Section 8.2(d)
notice of the above of the Asset Purchase Agreement, which
captioned matter. provided for indemnification by Hull for
Purchaser hereby tenders actions brought by third parties related to
the defense of the above conduct “prior to the Closing Date.” JA
captioned matter to Seller at 1852. Therefore, the district court
together with Purchaser’s concluded that the actions taken by SPI
demand for in attempting to repair the freeze dryers
indemnification. Pursuant after the closing of the Asset Purchase
to Section 8.5 of the Agreement were not subject to the
Agreement, please indemnification provision of that
acknowledge your agreement.
indemnification and
defense obligations The district court reached its
promptly and in writing. conclusion as a consequence of its
misinterpretation of Section 7.8, which,
JA at 1184. Hull responded on as explained above, expressly provided
December 5, 2000, that “it does not have that SPI “does not hereby assume any
an obligation to tender a defense on liability to any third party claimant” for
behalf of SP Industries, Inc.” in this any items shipped prior to the closing of
matter. JA at 1185. the Asset Purchase Agreement. JA at
1849. Under Section 8.2(c) Hull was
The district court rejected SPI’s obligated to defend and indemnify SPI as
indemnification claim, stating that “SPI’s to any “liability or obligation of Seller.”
argument is unpersuasive because SPI is JA at 1852. Therefore, pursuant to
liable . . . for its own post-closing Section 7.8, the Huadu freeze dryers
conduct.” Berg, 2003 WL 21362805, at qualified as a “liability or obligation” of
Hull. We do not see why SPI’s inability
to overcome Hull’s earlier failure to
produce a system complying with the
Claim[s] which are
specifications of the Equipment Contract
incurred from time to time,
should impair SPI’s indemnification
forthwith following the
claim. In this regard we point out that
presentation to the
SPI’s inability to modify the equipment
Indemnifying Party of
to comply with the specifications was at
itemized bills for said
most a contractual failure. We see no
attorneys’ fees and other
reason why Hull and SPI should not have
expenses.
been free to place the losses from the
failure as between themselves as they
JA at 1854.
saw fit and that is what they did in
20
Section 7.8. this action.” Berg, 2003 WL 21362805,
at *10. However, in its prior opinion the
Accordingly, we will reverse the court only held that as to any claims
order for judgment entered by the district between Hull and SPI related to the
court against SPI and in favor of Hull Asset Purchase Agreement the choice of
denying SPI’s indemnification claim and law provision in that agreement
will remand SPI’s indemnification claim providing that New Jersey law applies
to the district court with instructions to governed. Berg Chilling Sys., Inc. v.
grant judgment in favor of SPI and Hull Corp., No. CIV. A. 00-5075, 2002
against Hull on this claim. The district WL 31681955, at *5 (E.D. Pa. Nov. 26,
court then must make an award pursuant 2002). Therefore, rather than addressing
to Section 8.5 of the Asset Purchase whether Berg’s indemnification claim
Agreement in favor of SPI and against against both Hull and SPI also should be
Hull as to SPI’s “reasonable attorneys’ governed by New Jersey law, the district
fees and other expenses of defending, court merely assumed that it should be.35
contesting, [and] litigating,” this action. On remand the district court must
JA at 1854. address Berg’s indemnification claim
against SPI in the first instance, though
D. BERG’S INDEMNIFICATION 35
In any event, there is no conflict
CLAIM AGAINST HULL AND
between Pennsylvania or New Jersey law
SPI
with respect to the indemnification issue.
See Duall Bldg. Restoration, Inc. v. 1143
1. Indemnification
East Jersey Ave. Assoc., Inc., 652 A.2d
1225, 1233-34 (N.J. Super. Ct. App. Div.
The district court did not directly
1995) (affirming trial court holding that
address Berg’s claim for indemnification
paint manufacturer had duty to indemnify
against Hull and SPI, although by finding
builder who used manufacturer’s paint
that Berg was partially at fault for the
on a building when the paint peeled off);
breach of contract to Huadu, it implicitly
Moscatiello v. Pittsburgh Contractors
rejected it. Therefore, the district court
Equip. Co., 595 A.2d 1198, 1201-02 (Pa.
did not analyze whether Pennsylvania or
Super. Ct. 1991) (affirming decision that
New Jersey law applies to this claim. At
seller of concrete paving equipment was
the beginning of the breach of contract
entitled to indemnification for damage
section of its opinion, the district court
award in underlying breach of contract
indicated that “[i]n a previous
action from manufacturer of machinery
memorandum addressing the parties’
because seller was “mere conduit”). In
motions for summary judgment, I
fact Duall cited Moscatiello and followed
determined that New Jersey law governs
it.
21
based on our analysis of both 2. Attorneys’ fees and costs
Pennsylvania and New Jersey law, we
hold that Berg is entitled to Berg sought to recover its
indemnification against Hull as the attorneys’ fees and expert witness fees
manufacturer of the freeze drying from Hull and SPI in connection with the
equipment. As explained earlier, Berg defense of the arbitration proceedings in
primarily served as the distributor of the Sweden. The district court rejected this
equipment and negotiated the agreement claim, stating that:
with Huadu. Hull designed the freeze
dryers and shouldered the responsibility While ordinarily Berg
to install them. Furthermore, under the Chilling might be entitled
Equipment Contract and the Modified to recover such fees, in this
Agreement, Hull was required to conduct case such an award would
testing to ascertain the functionality of be unconscionable. As
the equipment. discussed above, Berg
Chilling did not adequately
The determination of the viability represent the interests of
of Berg’s claim for indemnification from Hull Corporation, or, by
SPI must await the conclusions of the extension, SPI, and for this
district court on remand. If the district reason it cannot recover its
court decides that SPI is liable as a fees. Moreover, since Berg
successor to Hull under the de facto Chilling was equally liable
merger or continuation doctrines, the with the Defendants herein,
court then will have to analyze whether each must bear its own
Berg is entitled to common law costs and counsel fees.
indemnification from SPI. However, if
the district court rejects the successor Berg, 2003 WL 21362805, at *11. The
liability claim then there will be no basis district court previously had noted that in
upon which Berg can assert an the arbitration proceedings Berg offered
indemnification claim against SPI the testimony of its expert, Walter
because Section 7.8 of the Asset Pebley, that the freeze dryers “could
Purchase Agreement negates the produce quality product but at
possibility of SPI assuming Hull’s significantly lower through-puts.” JA at
liability by reason of the failure of the 519-20; see also JA at 489 (stating that
freeze dryers which had been shipped to he testified at the arbitration proceeding
Huadu. 36 that “the equipment would function but
not at the through-put rates in the
36
In any event, under Section 8.2 of the
Asset Purchase Agreement SPI would be entitled to indemnification from Hull.
22
contract specifications”). The court contractual provision providing for
characterized this as testimony offered by attorneys’ fees, Berg cannot prevail on
Berg “that the freeze dryers were this claim.
improperly designed.” Berg, 2003 WL
21362805, at *8. The court then As with Berg’s indemnification
concluded that “[s]uch testimony did not claim against Hull and SPI, the district
represent the interests of Hull court did not state whether it was
Corporation.” applying Pennsylvania or New Jersey law
on the attorneys’ fees and costs issue. In
Berg argues that the adequacy of their briefs in this court neither Berg nor
its representation efforts in the arbitration SPI directly addresses which law should
are irrelevant in determining whether it is apply. However, Berg relies solely upon
entitled to attorneys’ fees. Inasmuch as Pennsylvania law in arguing for
Berg was not primarily the cause of attorneys’ fees and costs while SPI points
Huadu suffering damage and Hull and to both New Jersey and Pennsylvania law
SPI did not overcome the equipment’s on the indemnification issue. See Fleck
deficiencies as contemplated by the v. KDI Sylvan Pools, Inc., 981 F.2d 107,
Modified Agreement, Berg contends that 117 (3d Cir. 1992) (finding that under
the district court should have awarded it Pennsylvania law “an indemnitee may
all damages flowing from that failure, recover attorney’s fees and costs incurred
including reasonable attorneys’ fees and in defense of the liability indemnified
costs. Berg further maintains that the against from the indemnitor”); McAdam
court’s rejection of Berg’s claims was v. Dean Witter Reynolds, Inc., 896 F.2d
anomalous because “[t]he court 750, 777 (3d Cir. 1990) (finding that
disallowed as part of Berg’s damages its New Jersey law requires a stronger
litigation expenses in the Arbitration showing than other states in order to
based on the very same testimony which overcome the presumption in New Jersey
the court itself later found to be true and that “attorneys’ fees are not a recoverable
conclusive and the basis for holding item of damages”).
defendants liable in the instant case!”
Berg’s br. at 55. Berg stresses that due Inasmuch as the district court
to the clear defects in the freeze dryers, it based its denial of attorneys’ fees in part
defended the machinery at the arbitration on its finding the Berg was partially at
“as best we could.” JA at 200. fault for the breach of the Equipment
Contract and M odified Agreement with
SPI counters that because the Huadu, we must remand this claim to
district court found Berg to be at fault in that court for further consideration in
part, it was not entitled to attorneys’ fees light of our rejection of this finding.
and costs. SPI argues, alternatively, that First, the court should address whether
in the absence of a relevant statutory or Pennsylvania or New Jersey law applies
23
to Berg’s claim for attorneys’ fees and the arbitration proceedings.
costs incurred in the arbitration
proceedings, though the choice may not The district court found that Berg
be necessary if the court concludes that was not entitled to attorneys’ fees
they are the same or that regardless of because it failed to represent Hull and
which state’s law applies its result would SPIs’ interests adequately in the
be the same. The court also should arbitration.37 We reject this basis for
address the issue of successor liability denying Berg’s claim for attorneys’ fees.
with respect to SPI to determine whether Berg’s entitlement vel non for attorneys’
it might have any liability for attorneys’ fees from Hull and SPI is grounded on its
fees if Berg is entitled to them under claim for indemnification. If Berg is
either Pennsylvania or New Jersey law. entitled to indemnification from Hull,
As stated above, if SPI is not liable as a SPI or both, then the district court must
successor to Hull under either the de analyze whether, under New Jersey or
facto merger or continuation doctrines, Pennsylvania law, such indemnification
then Section 7.8 of the Asset Purchase includes the attorneys’ fees and expert
Agreement bars any liability against it, witness fees incurred by Berg in the
including liability for attorneys’ fees and arbitration proceedings. Any
costs. consideration of the adequacy of Berg’s
representation of Hull and SPI in the
As for the claim of attorneys’ fees arbitration proceedings is irrelevant.
against Hull (and SPI should the district
court find it liable as a successor to
Hull), the district court erred in stating 37
We question the district court’s
that “since Berg Chilling was equally
conclusion that inasmuch as Berg’s
liable with the Defendants herein, each
testimony was “that the freeze dryers
must bear its own costs and counsel
were improperly designed [the]
fees.” Berg, 2003 WL 21362805, at *11.
testimony did not represent the interests
Berg had not brought a motion for
of Hull Corporation.” While the court’s
attorneys’ fees incurred in the present
view of the testimony may be accurate,
action. Rather, it sought attorneys’ fees
we do not believe that the viability of an
and costs from the arbitration
indemnification claim for fees and costs
proceedings which arose out of the
should depend on the indemnitee
dispute involving the freeze drying
disregarding the facts in the applicable
equipment. As explained above, if on
proceeding. In short, if, as clearly was
remand the district court determines that
the case, Hull improperly designed the
either Hull or SPI has a duty to
equipment then Berg was not required to
indemnify Berg, such indemnification
fabricate a defense in the arbitration
should include the reasonable attorneys’
proceedings to justify its claim for
fees and expert witness fees incurred in
indemnification.
24
Moreover, it is significant that whether they were reasonable and to
even though Hull and SPI had received issue an appropriate award.
notice of the arbitration proceedings,
both stood on the sidelines during them
requiring Berg to defend the equipment.38
Now Hull and SPI have engaged in E. JOINT AND SEVERAL
Monday morning quarterbacking in LIABILITY
assailing the defense provided by Berg.
The record clearly shows that given the Berg maintains that the district
circumstances in which it found itself court erred in failing to hold Hull and
Berg defended the deficient machinery as SPI jointly and severally liable for the
best it could. The district court should $333,000 each party was required to pay
not have rewarded Hull and SPI for their to Berg. In its Memorandum and Order,
lack of participation in the arbitration the district court stated that “Berg
proceedings. Chilling has not provided any persuasive
authority for holding defendants jointly
SPI further contends that the and severally liable in a breach of
attorneys’ fees and costs which Berg contract action when the plaintiff has
expended were unreasonable. If the also been shown to have been at fault.” 39
machinery was as deficient as Berg Berg, 2003 WL 21362805, at *11 n.16.
claimed before the district court, then, in Therefore, the district court entered
SPI’s view, Berg spent an unreasonable judgment in favor of Berg and against
amount of money defending machinery Hull in the amount of $333,333 and in
that according to Berg was indefensible. favor of Berg and against SPI for the
Should the district court find that Berg is same amount.
entitled to attorneys’ fees, it must
determine the appropriate amount to We need not address this issue at
award. The district court should conduct this time because we hold that under
a thorough analysis of the attorneys’ fees Section 7.8 of the Asset Purchase
and costs expended by Berg in the Agreement SPI is not liable for the
arbitration proceeding to determine defective freeze drying machinery and
the issue of joint and several or only
several liability ultimately may not be
38
material in this case. As stated above, on
However, at one point SPI did write remand the district court must address
a letter to Berg putting forth various Berg’s claim that SPI is liable as a
arguments that it should use in defending successor to Hull under the de facto
the freeze dryers during the arbitration
proceedings. Berg’s president testified at
39
trial that Berg did in fact assert some of As explained above, the district court
these defenses in the arbitration. erred in finding Berg partially at fault.
25
merger and continuation doctrines. If, $650,000. The court rejected Berg’s
after conducting this analysis the court claim for damages predicated on the
finds that SPI is liable, it should make $650,000 Equipment Credit, stating that
detailed findings of fact and conclusions Berg “has not established that this
of law as to whether SPI and Hull should amount accurately reflects the value of
be held jointly and severally liable.40 On the equipment. In addition, even if the
the other hand, if the district court finds $650,000 figure were accurate, it does
that SPI is not liable to Berg as a not take into account the costs Berg
successor to Hull under either the de Chilling would have incurred in
facto merger or continuation doctrines, retrieving the equipment and/or finding
then SPI would have no liability and the another purchaser for the equipment.”
issue of joint and several liability would Berg, 2003 WL 21362805, at *11.
be moot.
Berg maintains that this finding
was clearly erroneous. In support of this
argument, Berg contends that the best
F. THE EQUIPM ENT CREDIT evidence of the value of the equipment
was the $650,000 value agreed to by it
As stated above, when Berg and Huadu in their arms-length
entered into a Settlement Contract with negotiation. Berg contends that Huadu
Huadu, in addition to making a payment had an incentive to set the lowest
of $1,000,000, it agreed to permit Huadu possible value for the equipment because
to retain the freeze drying equipment. In it was entitled to receive additional
the Settlement Contract Berg and Huadu moneys from Berg only if Berg was
agreed that in their current condition the successful in this action and made a
freeze dryers should be valued at recovery in excess of $1,650,000, a
figure representing Berg’s payment to it
in cash and Huadu’s right to retain the
40 equipment. Thus, if the value had been
In denying Berg’s claim that SPI and
less Huadu would have been more likely
Hull should be held jointly and severally
to share in a recovery in this action as its
liable the district court did not address
threshold for participation would have
whether Pennsylvania or New Jersey law
been reduced pro tanto. Berg further
applies. Furthermore, the court did not
argues that because the freeze dryers
analyze the prevailing case law or
were purchased from Hull for
explain the reasons for denying relief to
$1,150,000, and they could produce
Berg. On remand it will have an
quality product at lower through-puts,
opportunity to conduct such an analysis
$650,000 was a reasonable value for the
and reach a conclusion in accordance
equipment. Finally, Berg points to the
with our instructions if the issue is
fact that neither Hull nor SPI offered any
germane and its resolution is necessary.
26
evidence to refute the $650,000 figure i.e. damages in the amount of the agreed
and that their position at trial was that the valuation of the equipment, then
equipment complied with the contract damages were established with precision.
specifications.
We have not lost sight of the
As might be expected, SPI reality that it undoubtedly would have
contends that the district court’s denial of been expensive for Berg to recover the
the $650,000 claim for damages was not equipment, a point SPI advances. 41
clearly erroneous. It argues that Berg Nevertheless we think that it would
failed to proffer sufficient evidence as to prove too much to deny Berg a recovery
the value of the equipment and as a result by reason of that circumstance. After all,
the district court correctly declined to any time that an entity makes a payment
engage in “guess work.” SPI’s br. at 49. in kind it relieves itself of expenses
relating to the item involved. For
We recognize that damages must example, if an entity settles a dispute by
be proven to a reasonable degree of conveying real estate the entity will
certainty, Pugh v. Holmes, 405 A.2d 897, relieve itself of expenses for taxes,
909-10 (Pa. 1979); William B. Tanner maintenance and insurance. But still it is
Co., 528 F.2d at 271-72, though absolute fair to say that the value of the real estate
precision is not required. Bigelow v. reflects the amount of the settlement.
RKO Radio Pictures Inc., 327 U.S. 251, Thus, we will not deny Berg the
264, 66 S.Ct. 574, 579-80 (1946). $650,000 recovery on the theory that it
Considering the governing legal saved money by leaving the equipment
principles and the evidence presented at with Huadu.42
trial, we conclude that the district court’s
denial of the $650,000 in damages was 41
clearly erroneous. While it is true that SPI contends that except for Huadu’s
Berg did not supply evidence with retention of the equipment Berg would
respect to the value of the equipment “have been contractually required to
apart from the figure it negotiated with remove the freeze dryers from Huadu’s
Huadu for the Settlement Contract, still facilities.” SPI’s br. at 49. SPI,
in the unusual circumstances here in however, does not refer to the contractual
which it was clearly in Huadu’s interest provision that imposes this duty. But
to value the equipment at the lowest even if it is correct our result would be
possible value in order to enhance its the same.
chances of sharing in a possible district 42
Berg points out that Huadu and Berg
court recovery in this case the district
were aware that Berg avoided costs by
court should have had confidence in that
not having to take possession of the
figure. Furthermore, if the methodology
equipment and this factor “presumably
for computation of damages is accepted,
[was] considered by [them] in their arms-
27
Overall, we are satisfied that III. CONCLUSION
inasmuch as there was no valid reason to
reject the claim for damages predicated We will reverse the order of the
on the value of the equipment, the district district court entered June 11, 2003, to
court’s decision rejecting damages the extent that we have explained and
predicated on the Equipment Credit was will remand the matter to the district
“completely devoid of minimum court for further proceedings. The court
evidentiary support displaying some hue erred in finding Berg equally at fault
of credibility or bears no rational with Hull and SPI and indeed at fault at
relationship to the supportive evidentiary all. We therefore will remand this case
data.” Kool, 300 F.3d at 353 (citation for the district court to vacate that
omitted). Thus, we will reverse it.43 portion of its decision holding Berg
equally at fault for Huadu’s damages or
at fault at all. Inasmuch as the district
length negotiations in which they arrived court’s denial of attorneys’ fees to Berg
at the market value of $650,000.” Berg’s was based in part on its faulty finding
br. at 62. that Berg was partially culpable for the
43 defective freeze dryers, we must remand
Actually there is another possible
that claim as well for further
basis to reject Berg’s claim. Berg asserts
consideration in light of our opinion.
that it had “rights to [the] equipment”
and relinquished them to Huadu as a
The district court also erred in its
portion of the settlement. See, e.g.,
interpretation of Section 7.8 of the Asset
Berg’s reply br. at 43. It squarely bases
this right on its “payment of the
[arbitration] award.” Berg’s br. at 3.
While it is true that under the arbitration settlement was reached the parties’ rights
award if Berg had paid Huadu the cash under the arbitration award were
awarded it could have taken the freeze superseded. Viewed from this
dryers back, this recapture merely would perspective by giving up the equipment
have lessened the value of Huadu’s Berg suffered no damage and thus, other
recovery. Yet when Berg settled by than for its expenses its damages were
paying the $1,000,000 and allowing only $1,000,000 not $1,650,000. But we
Huadu to retain the equipment, it is not make no ruling on this point for while
clear that it gave up anything it had a SPI contends that Berg did not show that
right to reclaim as it appears that Huadu it was entitled to the $650,000 in
had paid 97% of the purchase price damages related to the Equipment Credit,
specified in the Equipment Contract and SPI predicates this contention on a theory
thus we do not understand why Berg relating to the possible value of the
under the contract could have reclaimed equipment and not on the theory we
the equipment. Of course, once the advance.
28
Purchase Agreement between Hull and should enter judgment in favor of SPI
SPI, and as a result incorrectly held SPI and against Hull on SPI’s
liable for breach of the Equipment indemnification claim. The district court
Contract and M odified Agreement. 44 in entering the judgment should
Under Section 7.8 of the Asset Purchase determine the reasonable attorneys’ fees
Agreement, SPI did not agree to assume and costs which SPI expended in
any liability as to third-party claimants defending this litigation and issue an
such as Berg for any machinery shipped award pursuant to Section 8.5 of the
prior to the closing of the agreement. Asset Purchase Agreement in its favor
Because the district court made this and against Hull.
finding, it did not address Berg’s claims
that SPI was liable as a successor to Hull We also find that Berg is entitled
under the de facto merger and to indemnification from Hull and we will
continuation doctrines. Accordingly, we reverse the order for judgment to the
will remand this matter for the court to extent that it denied that claim and will
consider SPI’s successor liability on remand the matter to the district court to
these theories and, if it is liable, also to enter a judgment for indemnification.
consider Berg’s claim that Hull and SPI But Berg’s claim for indemnification
should be held jointly and severally liable from SPI must await the determination of
to it. the district court on remand on Berg’s
successor liability arguments under the
The court also erred in denying de facto merger and continuation
SPI’s claim for indemnification from doctrines. Finally, we will reverse the
Hull and we accordingly will reverse the judgment to the extent that it denied Berg
order for judgment to the extent it did so. recovery of damages based on the
Under Section 8.2(c) of the Asset $650,000 Equipment Credit and will
Purchase Agreement, Hull was obligated reverse the order of the district court to
to defend and indemnify SPI as to any the extent that it denied these damages.
“liability or obligation of Seller.” On
remand, the district court should vacate As between themselves Berg and
the order denying indemnification and SPI shall bear their own costs on this
appeal but costs shall be taxed in favor of
each of them against the Hull
44 Corporation.
Berg maintains that Section 7.8 is
void as against public policy. Inasmuch
as the district court incorrectly
interpreted that provision it never
reached this issue. On remand, the
district court should address Berg’s
argument.
29