Petition for Writ of Certiorari — Explosives Corp. of America v. Garlam Enterprises Corp.
Supreme Court brief1987
Ask Donna
What actually matters in this document.
Text
87-204.
No. ° r . Supreme Court. U.S,
ik
a. zx = 4 = 5
2 7 y > ~ I
t a mene Same 8 :
IN THE AUG 3 A987
Supreme Court of the UnitedoStatessic. sn |
CLERK
October Term, 1987
EXPLOSIVES CORPORATION OF AMERICA.
GENERAL INSURANCE COMPANY OF AMERICA.
RocKCOR. INC..
Petitioners,
V.
GARLAM ENTERPRISES CORPORATION
AND FEDERAL INSURANCE COMPANY. INC..
Respondents.
PETITION FOR WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
STUART G. OLES
Counsel of Record, and
ARTHUR D. McGARRY
DOUGLAS S. OLES
OLES. MORRISON. RINKER.
STANISLAW & ASHBAUGH
3300 Columbiz. Seafirst Center
701 Fifth Avenue
Seattle, WA 98104
(206) 623-3427
SALVADOR ANTONETTI
FIDDLER. GONZALEZ & RODRIGUEZ
G.P.O. Box 3507
San Juan, Puerto Rico 00936
(819) 753-3113
July 31, 1987 Attorneys for Petitioners
aBCD Legal Printers. Seattie. Washington
QUESTIONS PRESENTED
1. Does Rule 25(c), Fed. R. Civ. P., require that a nonparty
who finances or controls litigation (involving a contract to
which he is also not party) be substituted and held liable to
pay any adverse judgment?
2. If a subcontractor is terminated for default, does it
become liable not only for the reasonable cost of performing
the task contemplated by its subcontract, but also the cost
of performing a much larger and longer task?
LIST OF PARTIES
Petitioners are Explosives Corporation of America, Gen-
e~al Insurance Company of America, and Rockcor, Inc., all
Washington corporations.
Safeco Corporation wholly owns General Insurance Com-
pany of America. Olin Corporation wholly owns Rockcor. Inc.
As developed infra, Explosives Corporation of America has
been dissolved.
Respondents are Garlam Enterprises Corporation and
Federal Insurance Company, Inc., its surety.
il
TABLE OF CONTENTS
Questions eampnbeth. o> cvcvin: eee ee i
ie ae alls... ee i
inidaeis Babee. 0 ee 1
Stadion... oot ae A 1
Statutory Provisions and Court Rules Involved.....---2
Statement of the Came... x eee eR ys 3
1. Rockcor Was Substituted Under Civil Rule 25(c)
Because It Financed and Controlled Explo’s
ee We er
9. The Terminated Subcontractor Was Charged With
the Prime Contractor's Costs of Completing 4
Much Larger and Longer Task Than the Original
Pn NT A I a Sciatcan- ge 2 ¥
Reasons for Granting ee WE. 53 ee eee
1. By Requiring Substitution of a Nonparty Under
Civil Rule 25(c) Because It Financed and Controlled
Explo's Litigation, the First Circuit's Decision
Conflicts With Decisions of This Court and of
Cakes Chee Oe 7
A. The First Circuit Confused Collateral Estoppel
With Successor Liability Under Rule 25(c),
el. BO ee Goat
B. The First Circuit's Opinion Conflicts With
Decisions of the Supreme Court. of Other
Circuit Courts, and With Long-Established
Rules of Successor Liability ... . o
4
11
ili
TABLE OF CONTENTS, cont.
Page
C. The First Circuit Misapplies a Procedural
Substitution Rule (Civil Rule 25(c)) by Using
It to Impose Substantive Liability on Any
Parent Corporation That Finances or Controls
Litigation of its Subsidiary.................. 12
D. The First Circuit's Opinion Improperly Penal-
izes Recourse to the Courts and Prosecution of
Claims for the Benefit of Creditors of Insolvent
ara cg a LG og taal 13
2. Charging Explo With Costs of Work Beyond the
Scope of Its Subcontract Conflicts With Decisions
of This Court, and of Other Circuit Courts, and
Represents a Departure from the Accepted and
Usual Course of Judicial Proceedings............ 14
RI fost IA er a | iain
APPENDIX
Opinion of the First Circuit (April 30, 1987)... . .. 1-62
Judgment of the First Circuit (April 30. 1987) 63-65
First Circuit Order Denying Rehearing
as gn ew ws 66-68
General Condition 4.3(c)-(e) in Garlam's
Prime Contract............ Ree . 69-70
Subcontract Between Garlam and Explo
Contractors (excerpts) . . .
iv
TABLE OF CONTENTS, cont.
Page
Garlam’s Complaint Against Puerto Rico Highway
Authority (excerpts from certified translation) .. 77-79
Findings & Conclusions (March 30, 1977).....-- 80-123
Order of October 20, 1977 (excerpts)......-.-- 124-127
Order of October 29, 1979 ....-------------7> 128-135
Testimony of Garlam Engineer Cordero (excerpts). . 136-137
Report of Special Master (April 24, 1980)...... 138-199
Exhibit SM 2 to Report of Special Master... .. 200-201
Opinion and Order (November 16, ee). .:...-; 202-250
Judgment (November 16, 1982).....------- 251-252
Memorandum Opinion and Order
(November 16, 1982)....------------- 000? 253-279
Opinion and Order (August i. Pepeowenes 280-308
Opinion and Order (March 6, 1986)........---- 309-348
TABLE OF AUTHORITIES
Cases Page
Alman v. Danin, 801 F.2d 1 (1st Cir. 1986).......... 10
American Surety Co. v. United States, 317 F.2d 652
See Se eae a eee 14
Dayton v. Peck, Stow & Wilcox Co., 739 F.2d 690
Ra Es ss a ees Se ee} 8
Drier v. Tarpon Oil Co., 522 F.2d 199 (5th Cir.
|. RSI a! Se” Sage aerial ot, Sani MNP neem ites ll
Explosives Corp. of America v. Garlam Ent. Corp., 817
Fae ee Ge ee ee ees l
Gee v. Tenneco, Inc., 615 F.2d 857 (9th Cir. 1980)... ... 8
General Battery Corp. v. Globe-Union, Inc., 100 F.R.D.
Re I oo i i ee 12
General Foods Corp. v. Massachusetts Dept. of Public
Health, 648 F.2d 784 (1st Cir. 1981).............. 10
Golden State Bottling Co. v. NLRB, 414 U.S. 168
CUS ees eee a he ee ee oe 8,11
In the Matter of Covington Grain Co . 638 F.2d 1357
(ous Car. BOGS). rr So ee eee 12
Kreager v. General Electric Co., 497 F.2d 468 (2nd
Se MO 2 oe ka See S a pa ee eee ee ee 10
Leannais v. Cincinnati, Inc., 565 F.2d 437 (7th Cir.
__ BSRAIRES eg ttre rh ce tora hare Aiarers, Cate can ee oh 8
Minnesota Min. & Mfg. Co. v. Eco Chem, Inc., 757
ef oe FR eres 10-11
Montana v. United States, 440 U.S. 147 (1979)....._..10
vi
TABLE OF AUTHORITIES, cont.
Cases Page
| Pan American Match, Inc. v. Sears, Roebuck & Co.,
454 F.2d 871 (lst Cir. 1972). cert. denied 409 U.S.
602 (i37Te).. 2... %. Me ke ry | FP 10
Panther Pumps & Equipment v. Hydrocraft, Inc., 566
F.2d 8 (7th Cir. 1977) cert. denied sub nom. Beck v.
Morrison Pump Co., 435 U.S. 1013 (1978). . 10
Peterick v. State, 22 Wn.App. 163, 589 P.2d 250 (1977). 8
R. J. Engstrom Corp. v. Interceptor Corp., 555 F.2d
377 (10th Cir. 1977). 25s es 4,8,12
Steffen v. United States, 213 F.2d 266 (6th Cir.
1954)... | es Oe Fs 14
United States v. Axman, 234 U.S. 36 (1913)...... 14
United States v. California Bridge & Construction Co.,
245 U.S. 337 (1917) | | ) 14
Statutes and Court Rules
28 U.S.C. § 1254(1) (1948). 3 eae ate l
Wash. Rev. Code § 23A.28.250 (1974) 2.12
Rule 25(c), Fed. R. Civ. P..... .......-h,2.4,5.7 passim
Rule 17(b), Fed. R. Civ. P. | a 3.12
Other Authorities
6A FLETCHER CYCLOPEDIA OF THE LAW OF PRIVATE
CORPORATIONS § 2821 (Perm. Ed. 1981) 9
vil
TABLE OF AUTHORITIES, cont.
Other Authorities (cont.) Page
McBRIDE & TOUHEY, GOVERNMENT CONTRACTS.
33.80 (1984 Ed.) 15
1B MOORE'S FEDERAL PRACTICE & PROCEDURE
* 0.411[10] (1984 & Supp. 1986-87) 10
RESTATEMENT OF AGENCY. SECOND. § 14M (1958) 9
RESTATEMENT OF CONTRACTS. § 346 (1932) 15
C. WRIGHT & A. MILLER & M. KANE. 7C FEDERAL
PRACTICE & PROCEDURE. § 1958 (2d ed. 1986) ll
IN THE
Supreme Court of the United States
October Term, 1987
EXPLOSIVES CORPORATION OF AMERICA.
GENERAL INSURANCE COMPANY OF AMERICA.
ROcKCOR, INC..
Petitioners,
Vv.
GARLAM ENTERPRISES CORPORATION
AND FEDERAL INSURANCE COMPANY. INC..
Respondents.
PETITION FOR WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT :
OPINION BELOW
The First Circuit’s Opinion, reported at 817 F.2d 894 (1st
Cir. 1987), appears in the Appendix (*‘A.’’) to this petition at
pp. 1-62.
JURISDICTION
The First Circuit's Opinion and Judgment were entered
April 30, 1987. A Petition for Rehearing and Request for
Hearing En Banc was denied by order dated June 3, 1987.
This petition was filed within ninety days thereafter. The
Court's jurisdiction is invoked under 28 U.S.C. $1254(1).
STATUTORY PROVISIONS AND
COURT RULES INVOLVED
Revised Code of Washington § 23A.28.250:
Survival of remedy after dissolution. The dissolution
of a corporation either: (1) By the issuance of a certificate
of dissolution by the secretary of state, or (2) by a decree
of court, or (3) by expiration of its period of duration shall
not take away or impair any remedy available to or
against such corporation, its directors, officers, or share-
holders, for any right or claim existing, or any liability
incurred, prior to such dissolution if action or other
proceeding thereon is commenced within two years after
the date of such dissolution. The directors of any such
corporation shall hold title to the property of the corpora-
tion as trustees for the benefit of its creditors and share-
holders. Any such action or proceeding by or against the
corporation may be prosecuted or defended by the cor-
poration in its corporate name. The shareholders, direc-
tors, and officers shall have power to take such corporate
or other action as shall be appropriate to protect such
remedy, right, or claim.
Rule 25ic), Fed. R. Civ. P.:
(c) Transfer of Interest. In case of any transfer of
interest, the action may be continued by or against the
original party, unless the court upon motion directs the
person to whom the interest is transferred to be sub-
stituted in the action or joined with the original party.
Service of the motion shall be made as provided in sub-
division (a) of this rule.
(b) Capacity to Sue or be Sued. The capacity of an
Rule 17(b), Fed. R. Civ. P:
(6) Capacity to Sue or be Sued. The capacity of an
individual, other than one acting in a representative
capacity, to sue or be sued shall be determined by the law
of his domicile. The capacity of a corporation to sue or
be sued shall be determined by the law under which it was
organized. In all other cases capacity to sue or be sued
shall be determined by the law of the state in which the
district court is held, except (1) that a partnership or other
unincorporated association, which has no such capacity
by the law of such state, may sue or be sued in its com-
mon name for the purpose of enforcing for or against it
a substantive right existing under the Constitution or
1aws of the United States, and (2) that the capacity of a
receiver appointed by a court of the United States to sue
or be sued in a court of the United States is governed by
Title 28, U.S.C. §§ 754 and 959(a).
STATEMENT OF THE CASE
The following facts are undisputed or established by the
district court and affirmed by the circuit court of appeals.
The case arises from a 1971 subcontract for rock blasting
involved in constructing a freeway for the Puerto Rico High-
way Authority (‘‘Highway Authority”). Explo' was the sub-
contractor, and Garlam Enterprises Corporation (‘‘Garlam’’)
was the prime contractor. General Insurance Company of
America (“‘General Insurance’’) bonded Explo’s performance
to Garlam for $1,230,000.
' The original subcontract was executed by Garlam and “Explo
Contractors, a Division of Explosives Corporation of America’’
(A. 71). In 1973, Explosives Corporation of America merged into
Excoa, Inc., which in turn became insolvent and dissolved in 1976.
For convenience, we refer to these Rockcor, Inc. subsidiaries col-
lectively as ‘‘Explo."’” The circuit court has referred to them
collectively as Explo-Excoa.
1. Rockcor Was Substituted Under Civil Rule 25(c)
Because It Financed and Controlled Explo’s Litigation.
Garlam terminated Explo's subcontract for default. Explo
sued in federal court (diversity of citizenship jurisdiction) for
breach of contract, and Garlam counterclaimed for costs to
complete Explo’s subcontract work.
Meanwhile, Explo became insolvent. Its main creditor was
its Washington parent corporation, Rockcor, Inc. (““Rockcor’’).
In 1976 Rockcor foreclosed its security interests, and thereby
took an assignment of Explo’s assets, including the affirma-
tive claim against Garlam. (Rockcor was also indirectly in-
terested in the litigation because it was indemnitor to General
Insurance of Explo’s bond.) Subsequently, after a bifurcated
trial, the district court ruled that Explo was liable for the
reasonable excess costs of completing its subcontract.
Garlam perceived that the amount of its damages might
exceed the limits of Explo’s bond. Thus, in 1977, it moved to
join Rockcor as an alter ego codefendant with Explo. In 1979,
joinder was denied because Rockcor and Explo ‘‘were separate
and distinct corporate entities” (A. 128-29). In 1985, the trial
court reiterated that ‘‘evidence of corporate disregard has not
been presented in this case”’ (A. 302).
Garlam also moved to substitute Rockcor for Explo under
Rule 25(c), Fed. R. Civ. P., because Rockcor had acquired assets
from Explo (including its claim against Garlam) when Explo
dissolved in 1976. The district court denied substitution be-
cause no facts established any of the four traditional grounds
(see, e.g., R. J. Engstrom Corp. v. Interceptor Corp., 555 F.2d
277, 281-282 (10th Cir. 1977)) for successor liability under Civil
Rule 25(c).’
2 First, Rockcor never expressly or impliedly assumed liability for
Garlam’s counterclaim against Explo (A. 291). Second, there was
no allegation of any merger or consolidation between Explo and
Rockcor (A. 293). Third, when Explo dissolved in 1976, its name
(see next page)
On appeal, the circuit court acknowledged ‘‘the fact that
Rockcor was a separate entity from Explo-Excoa and that
Rockcor did not assume Explo-Excoa's liabilities’. A. 49.
Further, it concluded ‘‘that the district court did not make
any clearly erroneous findings of fact’’. A. 4. Thus, Garlam
did not establish Rockcor’s alter ego liability or any of the
four fact situations in which successors have traditionally been
substituted under Rule 25(c), Fed. R. Civ. P.
Nonetheless, the circuit court reversed the trial court.
holding that Rockcor must be substituted for Explo under
Rule 25(c), Fed. R. Civ. P., because Rockcor after 1976 financed
and controlled Explo’s litigation. The circuit court cited and
relied upon collateral estoppel cases: “It has long been the rule
that a nonparty who controls the litigation is bound by the
judgment.” A. 53.
2. The Terminated Subcontractor Was Charged With the
Prime Contractor’s Costs of Completing a Much Larger
and Longer Task Than the Original Subcontract.
After terminating Explo’s subcontract, Garlam completed
rock blasting. Due to the project owner's design errors and
other causes not attributed to Explo,‘ Garlam had to complete
(continued from previous page)
and operations were discontinued, and Rockcor was not a ‘‘mere
continuation” of Explo (A. 296-98). Fourth. Explo’s residual
assets were not transferred to Rockcor for any fraudulent purpose
(A. 307-8).
’ Pertinently, one of those findings was that when Rockcor
acquired Explo’s “interest in and to the lawsuit,’’ Rockcor took
only the asset, to wit, the net recovery against Garlam, and did
not assume any liability to Garlam(A. 290-91). This was
supported by Rockcor’s chairman's uncontroverted testimony
which the circuit court acknowledged was the only testimony on
the issue (A. 44).
‘ The record below confirms that Explo was not responsible for any
project delay or overrun in the quantities of rock blasting (A.
177-87).
a much larger and longer task than the one originally
subcontracted to Explo. The rock blasting quantity overran
both the Highway Authority's estimate (1,507,000) and
Garlam’s (2,000,000) to 2,996,368 cubic meters (A. 165).
Contract time increased from 600 to 2,152 days (A. 149).
Exple pointed out that it should receive credit (as an offset
against Garlam’s damage award) for an increased unit price
(above its original $0.51 per cubic meter) as to blasting
materially beyond the quantities and time period of its
subcontract. Citing unchallenged federal case authority,
Explo argued that it could not be charged with costs of
completing a materially larger contract.
Explo also pointed to subcontract provisions that
guaranteed a renegotiated unit price for excess quantities of
rock blasting.° Despite these guarantees incorporated by
> Article I of Explo’s sub-contract provided that the ‘‘general and
special conditions” of Garlam’s prime contract are “hereby made
a part of this Agreement” (A. 74). General Condition 4.3 guaran-
teed renegotiated unit prices for any work that overran by more
than 25 percent ‘‘in dollars or in extent” (A. 69-70). It is un-
disputed that the quantities, costs, and duration of rock blasting
on the Puerto Rico project all overran by considerably more than
25 percent. Nonetheless, no unit price adjustment was used in
calculating Garlam’'s recovery against Explo. In addition, Article
XVII(d) in Explo’s subcontract provided that “. . .the Contractor
shall be bound to the subcontractor. . . by all the obligations that
the Owner assumes toward the Contractor... and by all [prime
contract] provisions affording remedies and redress."’ A. 76.
Article VII in Explo’s subcontract further recites "'[t]hat the
Subcontractor shall be bound by any changes or alterations
ordered by the Owner in the work under this Agreement in the
General Contract, specifications, general and special provisions,
and/or plans, or in the amount or character of said work or any
part thereof, to the same extent that the Contractor is bound
thereby, the payments to the Subcontractor to be adjusted
accordingly.” A. 75.
4
reference into the subcontract from provisions in the prime
contract, the court of appeals simply stated that ‘‘[t]here was
.. .no such provision in Explo’s contract.’’ A. 16.
REASONS FOR GRANTING THE WRIT
1. By Requiring Substitution of a Nonparty Under Civil Rule
25(c) Because Ii Financed and Controlled Explo’s Litiga-
tion, the First Circuit’s Decision Conflicts With Decisions
of This Court and of Other Circuits.
A. The First Circuit Confused Collateral Estoppel With
Successor Liability Under Rule 25(c), Fed. R. Civ. P.
Rule 25(c), Fed. R. Civ. P., pertinently provides:
In case of any transfer of interest, the action may be
continued by or against the original party, unless the court
upon motion directs the person to whom the interest is
transferred to be substituted in the action or joined with
the original party.
Parent corporations have sometimes been substituted
under Rule 25(c) for their subsidiaries where evidence demon-
strated a disregard for the corporate separation between them
(i.e., alter ego liability). In four limited factual situations,
courts have also allowed substitution to facilitate collection
against assets that have been transferred from a judgment
debtor to a third party.®
® The First Circuit has itself recently reiterated the rule that a
purchaser of corporate assets is only liable for obligations of the
transferor in four limited fact situations:
(1) when the purchasing corporation expressly or im-
pliedly agreed to assume the selling corporation's liability;
(2) when the transaction amounts to a consolidation or merg-
er of the purchaser and seller corporations; (3) when the
(see next page)
As emphasized previousiy, the trial court found no factual
basis for substitution of parties under Rule 25(c), Fed. R.
Civ. P. There was no evidence of disregard for the corporate
separation between Rockcor and Explo (hence, no alter ego
liability),’ and there were none of the four fact situations in
which federal courts have traditionally found a “‘transfer of
interest.'’ See note 2, supra at p.4.
Now, while expressly accepting the trial court’s factual
findings (A. 4, 44), the First Circuit has conceived a new and
unprecedented standard for substituting parties under Rule
25(c), Fed. R. Civ. P. It has ordered substitution based* upon
(continued from previous page)
purchaser corporation is merely a continuation of the seller
corporation; or (4) when the transaction is entered into
fraudulently to escape liability for such obligations.
Dayton v. Peck, Stow & Wilcox Co., 739 F.2d 690, 692 (1st Cir.
1984). The U. S. Supreme Court and various circuit courts have
confirmed that these are the only factual circumstances in which
a transfer of assets amounts to a transfer of interest (the stan-
dard for substitution of nonparties under Civil Rule 25(c)). See
Golden State Bottling Co. v. NLRB, 414 U.S. 168, 182 n.5 (1973);
Gee v. Tenneco, Inc., 615 F.2d 857, 863 (9th Cir. 1980); Leannais
uv. Cincinnati, Inc., 565 F.2d 437, 439 (7th Cir. 1977); R. J.
Enstrom Corp. v. Interceptor Corp., 555 F.2d 277, 281-82 (10th
Cir. 1977).
In Peterick v. State, 22 Wn. App. 163, 184-85, 589 P.2d 250.
264-65 (1977), another court also found that Rockcor was not
an alter ego of Explo.
* After requiring that Rockcor be substituted for Explo based on
‘‘Rockor’s [sic] ownership of Explo-Excoa and its financing and
control of the litigation,”’ the First Circuit offers ‘‘another rea-
son why Rockor [sic] is liable for the amount of the judgment
against Explo”’:
The contract between Explo and Garlam contained the fol-
lowing clause: “It is mutually agreed that this Agreement
shall bind the heirs, executors, administrators, successors.
holding companies and assigns of the parties hereto.” It
(see next page)
Seve tly, WR
a finding “that Rockcor controlled the litigation at least since
it took over Excoa’s [Explo’s] assets on October 29, 1976.”’
A. 47. Applying what it calls the ‘‘underlying legal principle
that a participating nonparty is bound by the judgment”’
(A. 51), the circuit court concludes that Rockcor could not
finance or control Explo’s defense without assuming liability
for any adverse judgment that might be entered against
Explo. Under this reasoning, Rockcor could only have avoided
(continued from previous page)
cannot be doubted that Rockor [sic] was a successor to
Explo. It also is evident that Rockor [sic], which owned all
of the outstanding stock of Explo at the commencement of
the action, was a holding company of Explo at the time the
contract was executed.
A. 58-59. This is plain and egregious error under established law
and undisputed facts.
The First Circuit assumes that Rockcor was bound by a
subcontract to which it was not a party. The rock blasting
subcontract was executed only by Garlam and Explo (A. 6-7),
and there was no evidence that Rockcor agreed to be bound by
the signature of its subsidiary. The district court expressly
found that ‘‘Rockcor is not an ‘assignee’ of the subcontract and
is not liable in such capacity for Explo’s breach.”’ (A. 293.)
Subsidiaries do not automatically have authority to act as
agents for other corporations that control their stock.
RESTATEMENT OF AGENCY. SECOND. § 14M at 79 (1958). In
our case, no court has ever found (nor any party testified) that
Explo had either actual or apparent authority to bind Rockcor
for any purpose.
It is also circular reasoning for the First Circuit to recite that
Rockcor is a “‘successor to Explo,”’ because that conclusion rests
on the theory that mere participation in a lawsuit creates suc-
cessor liability.
Meanwhile, noting that a holding company” is ‘‘a corpora-
tion organized to hold the stock of another or other corpora-
tions,” (6A FLETCHER CYCLOPEDIA OF THE LAW OF PRIVATE
CORPORATIONS 2821 (Perm. Ed. 1981)), the trial court expressly
found that Rockcor was not a ‘holding company”’. A. 293.
10
liability by allowing Garlam to take a default judgment
against the insolvent Explo (and against Explo’s surety, to
which Rockcor was obligated as indemnitor).
This inequitable and unique application of Rule 25{c) is
based on a fundamental misunderstanding of the authorities
on which the First Circuit relies. Although it is true that
nonparties who participate in litigation may be ‘“‘bound”’ by
the resulting judgment, they are bound only in the sense of
being precluded from relitigation of issues under principles
of collateral estoppel.
Of the eight cases and two texts cited by the First Cir-
cuit, most deal only with collateral estoppel and contain no
reference to Rule 25 or successor liability. The remaining
authorities actually confirm that successor liability is only
imposed on participating nonparties in special circumstances
that are absent in our case, e.g., alter ego control, bad faith,
or fraudulent diversion of assets.'° We are aware of no case
® Montana v. United States, 440 U.S. 147 (1979) (fed. govt. col-
laterally estopped from relitigating issues decided in lawsuit
financed by govt.); General Foods Corp. v. Massachusetts Dept.
of Public Health, 648 F.2d 784, 789 (1st Cir. 1981) (corporation
estopped from relitigating issues previously decided in lawsuit
by its trade association); Kreager v. General Electric Co. 497 F.2d
468, 471 (2d Cir. 1974) (shareholder estopped from pursuing
claims previously litigated by his corporation); Pan American
Match, Inc. v. Sears, Roebuck & Co., 454 F.2d 871, 874 (1st Cir.
1972), cert. denied 409 U.S. 892 (1972) (plaintiff who lost case
against Puerto Rico subsidiary was estopped from relitigating
same issues against defendant’s parent corporation); J. MOORE.
J. LUCAS, T. CURRIER, 1B MOORE'S FEDERAL PRACTICE &
PROCEDURE. ¢ 0.411{10] at 477-78 (1984 & Supp. 1986-87)
(controlling stockholders are sometimes bound by judgments
against their corporations under rules of res judicata and
collateral estoppel).
‘© Alman v. Danin, 801 F.2d 1, 4 (1st Cir. 1986) (shareholders liable
for corporate debt on alter ego theory because they disregarded
the corporate entity); Minnesota Min. & Mfg. Co. v. Eco Chem.
(see next page)
Pee Bittle Pin elt ST Ne >
11
anywhere that holds that a nonparty’s control of litigation
imposes on the nonparty a duty to pay an adverse judgment.
The First Circuit's decision conflicts with all its own cited
authorities by requiring Rule 25(c) substitution of a nonparty
based on participation in the lawsuit of a subsidiary
corporation.
B. The First Circuit's Opinion Conflicts With Decisions
of the Supreme Court, of Other Circuit Courts, and
With Long-Established Rules of Successor Liability.
The holding that ownership and control by a parent of
litigation of a subsidiary allows, or even requires,'' imposition
of successor liability, is flatly at odds with decisions of this
Court in Golden State Bottling Co., supra, and of other circuits
(continued from previous page)
Inc., 757 F.2d 1256, 1262 (Fed. Cir. 1985) (successor liability was
appropriate where judgment debtor gratuitously transferred its
assets to an alter ego corporation to avoid creditor); Panther
Pumps & Equipment v. Hydrocraft. Inc., 566 F.2d 8 (7th Cir.
1977), cert. denied sub nom. Beck v. Morrison Pump Co., Inc., 435
U.S. 1013 (1978) (Rule 25(c) substitution was appropriate where
judgment debtor gratuitously transferred its assets to an alter
ego corporation in fraudulent effort to escape liability); Drier v.
Tarpon Oil Co., 522 F.2d 199 (5th Cir. 1975) (corporate president
personally liable for company securities violation based on federal
statute); C. WRIGHT & A. MILLER & M. KANE. 7C FEDERAL
PRACTICE & PROCEDURE, 1958 at 559-60 (2d ed. 1986).
In all cited cases, substitution of parties or successor liability
was based on special facts such as disregard of corporate entities
or gratuitous asset transfers to evade creditors (which facts are
absent in our case). In no case did the courts hold that nonparties
could be substituted for parties based on financing or control of
the litigation.
The circuit court’s statement at A. 44 (‘We recognize that a
substitution decision is within the discretion of the district court
but find that its legal analysis was erroneous."’) suggests a
mandatory substitution when control by a nonparty is present.
12
in R. J. Engstrom Corp., supra, Gee, supra, Leannais, supra,
and with the long-established rule that mere acquisition of a
corporation's assets does not make the acquirer liable for its
debts.
C. The First Circuit Misapplies a Procedural Substitution
Rule (Civil Rule 25(c)) by Using It to Impose Substantive
Liability on Any Parent Corporation That Finances or
Controls Litigation of its Subsidiary.
Rule 25(c), Fed. R. Civ. P., is procedural only and does not
affect the substantive rights of the parties which are deter-
mined by state law. E.g., In the Matter of Covington Grain
Co., 638 F.2d 1357, 1361 (5th Cir. 1981); General Battery Corp.
v. Globe-Union, Inc., 100 F.R.D. 252, 261 (D.C. Del. 1982).
Because Explosives Corporation, Excoa, and Rockcor were
all incorporated in Washington, its laws govern their capacity
to sue or be sued. Rule 17(b), Fed. R. Civ. P.
The applicable Washington statute, RCW 23A.28.250,
pertinently provides:
Any such action or proceeding by or against the
(dissolved] corporation may be prosecuted or defended by
the corporation in its corporate name. The shareholders,
directors, and officers shall have power to take such
corporate or other action as shall be appropriate to protect
such remedy, right, or claim.
The trial court thus found that Rockcor was entitled to
finance the lawsuit in Explo’s name without assuming any
direct liability to Garlam:
Having acquired all of Excoa’s interest in this action
Rockcor, as sole stockholder of a dissolved corporation,
could, however, assume the costs and control of the
litigation in order to protect Excoa’s interest. See RCWA
23A.28.250.
ee ee ee
Ah Ne ti a eh Nl A i
13
(Emphasis added; A. 293-94). In other words, Rockcor had
express statutory authority to carry on litigation in the name
of its dissolved subsidiaries, and no cited case has previously
held that the exercise of this right requires substitution for
the judgment debtor under Rule 25(c), Fed. R. Civ. P.
Notwithstanding, the First Circuit substituted Rockcor
as judgment debtor precisely on the ground that it had fi-
nanced and controlled the litigation! The result is to trans-
form Rule 25(c) from one of procedure into one substantively
imposing successor liability upon any parent corporation
financing and/or controlling litigation of an insolvent
subsidiary. As now developed, the inequitable consequences
of such a new interpretation are substantial.
D. The First Circuit's Opinion Improperly Penalizes
Recourse to the Courts and Prosecution of Claims for
the Benefit of Creditors of Insolvent Parties.
The circuit court's error is illustrated by considering its
logical implications for the shareholders and creditors of
corporate litigants. If participation in the lawsuit rendered
Rockcor liable for Explo's debts to Garlam, then any corporate
officer or shareholder risks personal liability by participating
in its company’s litigation. Banks who take security in their
borrowers’ legal claims would risk assuming liability for
potential counterclaims against the borrowers. Insurers who
participate in the defense of their insureds would be subject
to liability in excess of policy limits (even as the circuit court
has imposed liability exceeding the bond amount that Rockcor
guaranteed). Defending its reasoning as a “two-way street”
(A. 60), the Court in fact deviates from a well-worn path of
established jurisprudence.
None of the cited cases hold that a nonparty who finances
litigation is thereby liable for damages assessed against the
assisted party. No case allows substitution of a nonparty
under Rule 25(c), Fed. R. Civ. P., based on financing or control
14
of litigation. Participating nonparties may be “bound” by
collateral estoppel, but they do not thereby become liable for
damages awarded among the parties. If the circuit court's
decision stands, it will effectively bar corporate creditors,
officers, shareholders, and maybe even lawyers, from assisting
their companies in litigation, for fear of incurring personal
liability if there is an adverse money judgment.
2. Charging Explo with Costs of Work Beyond the Scope
of Its Subcontract Conflicts With Decisions of this
Court, and of Other Circuit Courts, and Represents a
Departure from the Accepted and Usual Course of
Judicial Proceedings.
As already developed, Explo subcontracted to blast
between 1,509,000 and 2,000,000 cubic meters of rock, over
a period of 600 days, for $0.51 per cubic meter. Following its
default, it was charged with the cost of blasting almost twice
as much rock, over a period three times longer, but with no
credit for a unit price increase.
On two grounds, review is appropriate. First, the damage
award is inconsistent with decisions of the Supreme Court and
of other circuits holding that a terminated contractor may
not be charged with costs of completing work that differs
materially (in terms, conditions, or quantity) from the ter- .
minated contract. E.g., United States v. Axman, 234 US. 36,
42-43 (1913); United States v. California Bridge & Construction
.Co., 245 U.S. 337, 344-345 (1917); American Surety Co. v.
United States, 317 F.2d 652, 656-657 (8th Cir. 1963); Steffen
uv. United States, 213 F.2d 12 266, 271-272 (6th Cir. 1954);'"
‘2 These cases arise in the context of federal procurement law, which
is largely the fount of construction law in the United States.
They are strictly analogous because they well illustrate the com-
mon law damage measure in cases where contractors do not
complete performance, which is limited by “the reasonable
(see next page)
“time i eal
15
see also McBRIDE & TOUHEY, GOVERNMENT CONTRACTS,
§ 33.80 at 33-107 (1984 ed.) (‘Should there be a material
variation between the original contract and the relet contract,
the liability of the defaulted contractor for excess costs is
discharged or extinguished. Anything in the relet contract
which causes a substantial increase in price is a material
variation. ’’).
Second, the circuit court deyarts from the accepted and
usual course of judicial proceedings by refusing to enforce or
even recognize a subcontract term that was expressly incor-
porated by reference from Garlam's prime contract (A. 16).
This clause guaranteed a renegotiated unit price for any work
that overran by more than 25 percent ‘‘in dollars or in extent."
See note 5, supra at p.6.
With respect, we submit that the circuit court's objec-
tively inaccurate denial represents an unacceptable departure
from the accepted and usual course of judicial proceedings.
CONCLUSION
The writ should be granted because this petition raises
an important question concerning the proper application of
the Federal Rules of Civil Procedure, for which this Court has
ultimate responsibility.
The circuit court’s unique interpretation of Rule 25(c),
Fed. R. Civ. P., presents this Court with an issue of first
impression. To our knowledge, never before has any circuit
(or district) court held that control and management of an
insolvent subsidiary’s litigation constitutes a sufficient
(continued from previous page)
cost of construction and completion in accordance with the
contract” (emphasis added) (RESTATEMENT OF CONTRACTS. 346
(1932)).
16
‘‘transfer of interest’’ under Rule 25(c) so as to substitute the
parent as liable party for an adverse award. The circuit court's
new standard for Rule 25(c) substitution conflicts with both
decisions of this and other circuit courts, and with the long
established rule that a transferee of corporate assets does not
assume liability for the transferor’s debts.
Perhaps most significantly, the circuit court's new substi-
tution standard would punish creditors, shareholders, officers,
and maybe even lawyers, who control or defend an insolvent
subsidiary in litigation, with personal liability for an adverse
judgment. Such an unprecedented and inequitable restriction
upon access to the federal courts and prosecution of claims
therein deserves review by this Court.
This Court is also asked to review the decision that Explo
should receive credit for no more than its subcontract unit
price, even for quantities and duration of work far beyond its
original agreement. As developed above, and to be blunt, the
circuit court was just plain wrong. Review is justified because
that error conflicts with unchallenged decisions of this Court
and of other circuits, and represents a departure from the
accepted and usual course of judicial proceedings.
DATED this 3lst day of July, 1987.
Respectfully submitted,
STUART G. OLES
Counsel of Record, and
ARTHUR D. McGARRY
DOUGLAS S. OLES
OLES. MORRISON, RINKER,.
STANISLAW & ASHBAUGH
SALVADOR ANTONETTI
FIDDLER, GONZALEZ & RODRIGUEZ
Counsel for Petitioners
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
No. 86-1303
EXPLOSIVES CORPORATION OF AMERICA,
et al.,
Plaintiffs, Appellants,
¥.
GARLAM ENTERPRISES CORPORATION,
et al.,
Defendants, Appellees.
No. 86-1362
EXPLOSIVES CORPORATION OF AMERICA,
Plaintiffs, Appellees,
Vv.
GARLAM ENTERPRISES CORPROATION,
Defendant, Appellant.
No. 86-1650
EXPLOSIVES CORPORATION OF AMERICA,
et al.,
Plaintiffs, Appellants,
¥.
GARLAM ENTERPRISES CORPORATICN,
et al.,
Defendants, Appellees.
ate
APPEALS FROM THE UNITED STATES
DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. W.A. Bootle,* Senior U.S. District
Judge ]
{[Hon. Carmen C. Cerezo, U.S. District
Judge ]
* Of the Middle District of Georgia,
sitting by designation.
BOWNES, Circuit Judge. This appeal
stems from a contract between Garlam
Enterprises Corporation (Garlam) and
Explosives Corporation of America
(Explo). On January 3, 1972, Explo sued
Garlam for breach of contract. Garlam
filed an answer and brought a counter-
Claim alleging breach of contract by
Explo. After two jury-waived trials, one
on liability and one on damages, Explo
was found liable to Garlam in the amount
«$e
of $2,423,177.)/ Explo has appealed the
liability finding, the damages award, and
the award of post-judgment interest. It
also claims that the adjudications made
by the Superior Court of Puerto Rico in a
suit brought by Garlam against the Puerto
Rico Highway Authority were binding on
Garlam and the district court and require
a reversal of the judgment. Garlam has
appealed from a denial of its motion to
substitute Rockor, Inc., for Explo as the
defendant-appellant in the contract
action. Garlam also appeals the district
court's refusal to award it attorney's
fees, costs and prejudgment interest.
i/ Judge Bootle heard and decided the
liability phase of the case. Judge
Cerezo has decided all of the other
issues.
oy
I. CONTRACT LIABILITY
A. The Findings and Evidence
The district court made extensive and
detailed findings of fact which we have
reviewed pursuant to the command of
Federal Rule of Civil Procedure 52:
"Findings of fact, whether based on oral
or documentary evidence, shall not be
set aside unless clearly erroneous, and
due regard shall be given to the opportu-
nity of the trial court to judge of the
credibility of the witnesses." Based on
our examination of the trial transcript,
depositions and exhibits, we conclude
that the district court did not make any
clearly erroneous findings of fact. Our
summary of the evidence and findings fol-
lows.
Garlam was the successful low bidder
for the construction of one section of a
highway in Puerto Rico running from San
ree iii |
atin
Juan to Ponce. It entered into a con-
tract with the Puerto Rico Highway
Authority to do the work for an estimated
total price of $13,489,412.39. The con-
tract was advertised and bid as a series
of forty-one different work items. Garlam
submitted a separate bid price for each.
Garlam's total bid was calculated by mul-
tiplying each work unit price by the
estimated quantities of work to be done
and then adding up the amounts for each
of the forty-one work items. The esti-
mated quantities of work were supplied by
the Highway Authority.
Two work items are of special signif-
icance. Item 4, entitled Unclassified
Excavations, required, inter alia, the
mass blasting of rock wherever found.
Garlam's bid was $2.03 per cubic meter on
an estimated quantity of 4,680,000 cubic
meters of material to be excavated.
aie
Garlam had to excavate the material from
the job site and deposit it in designated
embankment areas as fill. Item 35 cov-
ered presplitting, which is a procedure
for limiting the effects of rock blasting
to a restricted area. Garlam's bid price
for this work was $1.40 per lineal foot
on an estimated quantity of 300,000 lin-
eal feet; the total bid price was
$420,000.
After a period of negotiations
between Raymond Garffer, president of
Garlam, John W. Goode, division general
manager for Explo, and Hugh E. Oswald,
general counsel for Explo, a contract was
executed on April 28, 1971. An amendment
to the contract executed May 5, 1971,
stated that Explo would begin work "on
May 12, 1971, for a total of four hundred
eighty-nine (489) calendar days and shall
terminate said work September 22, 1972."
ee
<P
The contract stated that "time was of the
essence."
The contract provided that Explo
would perform all the mass blasting nec-
essary under Item 4 of the prime contract
between Garlam and the Highway Authority
at a unit price of .51 cents per cubic
meter of material. Explo also agreed to
do the presplitting required under
Item 35 of the prime contract at the rate
of .70 cents per lineal foot. The unit
price clause of the contract contained
the following provision: "Blasted rock
fragments shall average up to a maximum
of 15 inches in size." This language was
the result of negotiations between
Garffer, Goode and Oswald. The words "up
to a maximum" were inserted at the insis-
tence of Garffer; the word "average" came
from Goode. Oswald drafted the composite
clause. Garffer testified that he
=@-
expected that ninety to ninety-five per-
cent of the blasted material would be
less than fifteen inches in size. He
acknowledged that inevitably some large
boulders would be produced, but antici-
pated that they would be reduced in size
bv secondary blasting. Garffer also tes-
tified that when he first met with Albert
Teller and John Goode, who were in charge
of Explo's field operations in Puerto
Rico, he asked them if they could give
him an average product four to six inches
in size and they assured him that they
could.
Immediately after the contract was
executed on April 28, 1971, Garlam
instructed Explo to begin blasting.
Explo, however, did not start until early
in June. After the first few blasting
shots, Garlam informed Explo that the
rock fragments were too large and con-
ERE EEE OOOO ee
aQe
trary to the contract specifications.
Explo did not challenge Garlam's inter-
pretation of the contract until
September 22, 1971, when it stated in a
letter to Garlam that the _ rock-size
clause meant "an average maximum" of fif-
teen inches.
Explo had blasted very little rock of
any size by September of 1971 and had
received no payments from Garlam for what
blasting it had done. Explo retained the
law firm of DeGarmo, Liedy [sic], Oles
and Morrison of Seattle. They contracted
for the services of Arner [sic] W.
Erickson, a civil engineer, who had con-
siderable experience in highway
construction and blasting operations.
Erickson came to Puerto Rico on
September 5, 1971, to investigate the
aide
situation. He met with Garffer of Garlam
the next day and inspected the job site.
Erickson's testimony included state-
ments to the following effect: He did
not attempt to resolve the controversy
over the rock size. He saw blasted rocks
ranging in size from six and seven feet
down to one foot. Garlam had good rea-
sons for wanting rocks less than fifteen
inches in size; the blasted material
would be easier to handle and move and it
was more suitable for use as fill in the
embankment. Large boulders could not be
used for fill.
Erickson returned to Seattle before
September 11. He advised Explo to
replace some of its personnel in Puerto
Rico and to increase the amount of equip-
ment it was using. Explo replaced the
two men in Puerto Rico in charge of its
operations, Teller and Goode, with
eij-
Messrs. Cronin and Herrera. Cronin and
Herrera arrived sometime in late
September. Beginning in October, the
quantity and quality of the blasting
material produced by Explo improved.
Garlam had continuously insisted that the
rock blasted should not exceed fifteen
inches in size, but Explo regularly and
consistently exceeded that size.
In the morning of November 3, 1971,
Garffer met with Attorney Oles and W.E.
Johnson of Explo. Johnson had been hired
by Explo to manage all its Puerto Rico
jobs2/ from October of 1971 to March,
1972. Oles informed Garffer that, unless
its price for mass blasting was raised to
.82 cents per cubic yard and its
presplitting increased by some negotiated
amount, Explo would be forced to leave
2/ Explo had two other jobs in Puerto
Rico in addition to the one for Garlam.
o13@
the project. Garffer told them that he
would think it over and give them his
decision that afternoon. Garffer told
Oles and Johnson in the afternoon of
November 3 that he would not renegotiate
the contract prices. Oles then informed
Garffer orally that Explo terminated the
contract. This oral termination was con-
firmed in a letter dated November 9.
The reason advanced by Explo for its
slow progress on the job was that Garlam
had no available written work schedule
and that Explo, therefore, was unable to
properly program its blasting activities.
Garlam followed the critical path method
in scheduling its work. It provided the
Highway Authority with its work sched-
ules, which under the prime contract had
to be programmed on a weekly and daily
schedule. Copies of the critical path
schedules were available to Explo in
«13
Garlam's construction-site office. One
of Garlam's supervisors met daily with
Explo and advised it of the work sched-
ule. Explo was also advised of the
weekly work schedule that Garlam was fol-
lowing.
Under the contract, there were to be
partial payments to Explo for its produc-
tion at the agreed unit price within ten
days after Garlam had been paid by the
Highway Authority for that particular
work. Garlam made no payments to Explo,
although it had received payments from
the Highway Authority for work done by
Explo. Garlam made no payments to Explo
for two reasons. First, it felt that
payment was not warranted because of the
great number of rocks in excess of fif-
teen inches. In connection with this,
there was some discussion of reducing the
payments by fifty percent because of the
oté-
oversized blasted fragments, but no
agreement was reached. The second reason
for Garlam's failure to make any payments
was that Explo owed it money for the use
of Garlam's equipment, personnel, and
other services. The amount due Garlam
from Explo was greater than any payments
due Explo for blasting.
The critical findings of the district
court can be stated as follows. Explo
"passively" accepted Garlam's interpreta-
tion of the rock-size clause in the
contract until September 22, 1971. The
Ciause was a composite drafting by both
Explo and Garlam with the final language
drafted by Attorney Oswald of Explo.
"During the six months period that Explo
was working on the project, it did not
comply with the interpretation of Garlam
as to the maximum rock size although
Garlam continuously insisted that Explo
otBa
produce material not exceeding 15 inches
in size."
Despite the contract provisions and
Garlam's instructions, Explo unnecessar-
ily delayed starting its work = and
continued to show slow progress in car-
rying out the blasting. Explo's slowness
was not attributable to Gariam which had
the right under the contract "to direct
the work of Explo from day to day and
coordinate Explo's work with its own and
that of other subcontractors."
Explo abandoned the contract on
November 3, 1971.
B. Conclusions of Law of the
District Court
We turn next to the pertinent conclu-
sions of law of the district court. The
conclusions are indented and followed by
our comments.
-16-
A. The contract is te -.e
interpreted under Puerto Rico law. There
is no dispute as to this.
B. Explo was not a third-party
beneficiary of the prime contract and
"any alleged violations of the prime con-
tract by Garlam would not justify Explo's
failure to perform the subcontract or its
abandonment of the project."
Explo seems to argue that it had a
right of renegotiation because the prime
contract provided for equitable
renegotiation of unit prices if the
actual work quantities differed substan-
tially from the Highway Authority's
estimate. There was, however, no such
provision in Explo's contract and the
district court's ruling was correct.
Moreover, there was no evidence before
the district court that Explo's produc-
tion was affected in any way by the work
eet
AF
quantity estimates of the Highway
Authority. The difficulties between
Explo and Garlam stemmed from three fac-
tors: oversize rock fragments, low
quantity of material blasted, and slow
work progress.
C. The subcontract between the
parties does not have a termi-
mation or rescission clause
that will permit Explo to
rescind or cancel the subcon-
SEeeece Wate Geriam .... . If
Explo is entitled to terminate
the agreement .. . the author-
ization to do so is to be found
not in the subcontract but in
some other source.
This is a correct reading of the con-
tract.
D. It is not necessary to decide
whether under Puerto Rico law sub-
stantial nonpayment excuses
performance because "the evidence
fails to establish any substantial
non-payment."
«46-
This finding of fact is not clearly erro-
,
neous.
F. The language contained in
the unit price clause is ambig-
uous and therefore it is
necessary to apply the rules of
interpretation contained in the
Civil Code of Puerto Rico.
Title 31 § 3478 of that code
reads as follows:
The interpretation of
obscure stipulations of a -
contract must not favor
the party occasioning the
obscurity.
The language of the unit price ;
clause was finally drafted by
Mr. Hugo E. Oswald, Jr., then
general counsel for Explo, in
the negotiations of the subcon-
tract. While both Garlam and
Explo contributed some of the
complicating words, the final
drafting was actually done by
Mr. Oswald. We conclude as a
matter of law that the obscu-
rity of the language must be
charged to Explo and that the
correct interpretation of the
unit price clause is that the
material to be produced must be
generally within the range of
15 inches or less. We conclude
that otherwise Garlam cculd not 3
comply with other requirements
of the prime contract which
required it to dispose of the
LD ine Sani CARs eras Re eet ABBAS S Theta ERB a wan be a pGib ait
Tania Sate ARE a
0 OL
at9~
rock fragments to _ construct
compaction layers of approxi-
mately 6 inches in the
embankments and 24 inches in
the rock fills. The interpre-
tation of the clause suggested
by Explo creates an absurd sit-
uation which this court
rejects. Its suggested inter-
pretation is inconsistent with
its explicit contractual obli-
gation to blast "secondary
boulders that may appear after
a blasting operation, 9
required by the contractor."
Therefore, in the determination
of the amount of work done by
Explo, consideration should be
given to the contractual
requirement that Explo produce
material which finally could
not exceed 15 inches as a maxi-
mum size and that such other
larger boulders had to be bro-
ken down by secondary blasting
if they exceeded this maximum
of 15 inches.
Explo objects strenuously to this
mixed finding of law and fact. Whether
the “obscurity” of the language should be
charged to Explo is a close question, but
we think that Oswald, as a lawyer, should
have been aware that the rock-size clause
was ambiguous and thus we agree with the
=20-
district court that the responsibility
for its language lay with him. Even, how-
ever, if we accept the clause as a joint
production, the evidence establishes that
Explo knew and understood that rocks in
excess of fifteen inches were to be the
exception rather than the rule from the
time the contract was being negotiated to
its dissolution by Explo on November 3,
1971. Explo's field managers, Teller and
Goode, told Garffer during contract nego-
tiations that Explo could produce rocks
averaging four to six inches in size.
Explo did not urge its version of the
meaning of the clause until September 22,
1971. #£And, after the new personnel
arrived on the job in October, the size
of the rock fragments diminished appre-
ciably. We interpret the contract
provision as did the district court.
.
A es aie ei PO IR TY eRe aT eS
re
3
G. As a consequence of this
breach by Explo, Explo is obli-
gated to pay to Garlam the
actual and necessary additional
costs reasonably incurred by
Garlam in order to complete the
work required by Explo by the
subcontract. As above indi-
cated, the question whether or
not any delay penalty is
Chargeable against Explo and if
so, how much, is to be deter-
mined by evidence adduced in
the second trial. The question
cf interest on any amounts
credited to or chargeable
against Explo is likewise to be
determined by evidence adduced
‘at the second trial. All costs
of this first trial are taxed
against Explo.
This ruling follows logically from
the previous ones.
II. DAMAGES
By stipulation of the parties, the
damages issue was referred to a master.
The master held a two-day hearing at
which a great number of exhibits of con-
siderable size and complexity were
introduced. His detailed and extensive
=BQ—
report was issued about six months after
the hearing.3/ The master awarded damages
to Garlam in the amount of $2,423,177.
The findings and rulings of the master
were subsequently adopted by the district
court.
We agree with the district court that
the master applied the correct legal
principles in making his findings, which
were supported by the evidence and not
clearly erroneous. We rule specifically
that Garlam carried its burden of proof
on damages. There is no basis in the
contract or the evidence for finding that
Explo was entitled to an equitable price
increase. Nor are we impressed with
Explo's argument that Garlam failed to
3/ The master actually rendered two
reports: a preliminary draft dated
March 19, 1980, submitted to the parties
for their comments and recommendations;
and a final report dated April 24 and
filed on April 29, 1980.
ee
~29
mitigate its damages and, hence, is pre-
cluded from recovering. This overlooks
the fact that, after Explo breached its
contract, Garlam was under time _ con-
straints in its prime contract with the
Highway Authority to complete the
blasting within a comparatively short
time.4/ The measure of damages was, as
the district court found, "the actual and
necessary additional costs reasonably
incurred by Garlam in order to complete
the work required by Explo by the subcon-
tract." The amount arrived at by the
master reflected accurately the applica-
tion of this damages formula.
4/ Explo had agreed to do the work by
September 22, 1972.
-24-
IIl. THE SUIT IN PUERTO RICO
SUPERIOR COURT BY GARLAM
AGAINST THE HIGHWAY
AUTHORITY
We now turn to Explo's claim that the
adjudications in Garlam's Puerto Rico
Superior Court suit against the Highway
Authority were binding on Garlam and the
district court and require a reversal of
the judgment against Explo.
Initially we note that we can find
nothing in the record to indicate whether
the Superior Court judgment, which is
dated June 15, 1982, has been appealed.
Nor have we found any definitive record
of when the Superior Court action was
commenced. We will, however, for pur-
poses of our analysis accept Explo's
representation that the suit was filed
prior to the start of the hearing on dam-
ages before the master.
beep eS ort ia sat arch
“ thy <se
=2S=
We agree with Explo that a judgment
of the Commonwealth court is entitled to
full faith and credit by a federal court.
We also agree that the collateral
estoppel doctrine of issue preclusion
would prevent a party from denying or
relitigating in federal court issues
already decided by the Superior Court of
Puerto Rico. The question is whether,
under the circumstances here, the rulings
and findings of the Superior Court in the
case of Garlam v. The Highway Authority
require a reversal of the judgment in
this case. We find that they do not for
several reasons.
The first is a matter of chronology.
The Superior Court judgment did not issue
until June 6, 1982. It, therefore, post-
dated the liability verdict of March 30,
1977, in this case by more than five
years. It also postdated the master's
-26-
report of April 29, 1980, by more than
two years. And, although the Superior
Court judgment did precede the opinion
and judgment of the district court of
November 16, 1982, adopting the master's
findings and rulings, the Superior Court
judgment was not called to the district
court's attention until November 24,
1982.
Under this chronology, we rule that
the Superior Court judgment could have no
effect on the liability rulings and find-
ings made in this case. We agree with
the district court that Explo's tardy
invocation of the Superior Court judgment
precludes it from using the judgment for
an attack on the damages awarded Garlam.
Explo knew about the Superior Court
action from at least the date of the
hearing before the master on damages,
October 29-31, 1979. It questioned and
Os eS Le ee mere ee Snr ee
Se ey eee ee
an,
ye
cross-examined Highway Authority wit-
nesses about the Commonwealth court
action, referred to the pleadings, and
introduced in evidence part of the pro-
ceedings in the Superior Court. It is
fair to assume that Explo followed the
progress of the Superior Court action
closely. We think it was inexcusable for
Explo to wait until after the district
court's opinion and judgment on damages
before raising the issue of the effect of
the Superior Court case on this litiga-
tion. The doctrine of laches applies to
such conduct.
We are also troubled by Explo's fail-
ure to at least attempt to intervene in
the Superior Court action. The comments
of the district court are pertinent:
Explo has_ not explained
either why it never’ sought
intervention in the
Commonwealth case or why it did
not request joinder of the
ers
Superior Court case to avoid the judgment
~26-
claim against Garlam for the
equitable unit price reduction
it could have allegedly derived
from Garlam's contract with the
PRHA. The record shows that
the Superior Court case was
known and monitored by Explo
throughout the years. Explo
continuously referred to the
pleadings filed in that case
and even submitted part of the
Superior Court's record as evi-
dence for the Special Master to
consider in his determination
of damages. Explo's argument
that it was not necessary for
it to intervene in the Superior
Court action because that case
dealt with other matters is
self-defeating. The Puerto
Rico Rules of Civil Procedure
allowed Explo to appear in that
action to plead precisely the
third-party beneficiary status
theory that it has now
attempted to introduce in this
case. Likewise, it could have
joined as a party in the two
actions. Instead, it adopted a
wait and see attitude and never
formally raised this new theory
of equitable price reduction in
this litigation or in the one
before the Superior Court.
In addition to the procedural barri-
to Explo's attempt to use
-29-
against it, there are also substantive
grounds precluding the application of the
doctrine of issue preclusion. We note
first that the findings and rulings of
the Superior Court do not’ discuss
blasting or Explo's role in the highway
construction. The Superior Court found
that the Highway Authority owed Garlam
$2,466,316.73 based upon the following
specific findings:
a) Deposit of 385,803.71
cubic meters of borrowed
material agreed upon at
$2.95 per cubic meter
(Finding of Fact No. 3) $1,138,120.94
b) Difference owed on over-
cuts and miscellaneous
cuts -328,008.20 cubic
meters at $.92- (Finding
of Fact No. 4) 294,407.54
c) Asphalt provided -
553.645 tons at $25.88
(Fact No. 5) 46,305.57
dad) Compacted material -
2,196,093.62 cubic meters
at $.30, less $7,274.43
granted by summary judg-
e)
f)
-30-
ment of March 12/78
(Fact No. 6) 651,553.66
Excavation of material
for benchings 137,794.92
cubic meters at $2.03 -
(Fact No. 7) 279,722.67
Commercial profit and
administrative expenses
on work performed through
force account
(Fact No. 8) 56,206.35
Total to be paid $2,466, 316.73
Explo's argument can best be stated in
its own words:
In Superior Court, Garlam
blamed the owner for cost over-
runs and collected millions of
dollars based (in part) on
faulty design. Meanwhile, in
federal court, Garlam charged
Explo for the entire cost over-
run on rock blasting and denied
that design errors existed.
Garlam refused to credit Explo
with the same kind of equitable
price adjustment which Garlam
obtained for part of its own
work from the owner. In short,
Garlam wants Explo to reimburse
costs which the Superior Court
has attributed to the Highway
Authority.
—_ ne:
a%%
Explo's Brief for Nos. 1303 and 1650 at
46. This is a misreading of both the
Superior Court decision and the master's
findings and rulings on damages. The
Superior Court based its decision on the
prime contract between the Highway
Authority and Garlam in light of subse-
quent events that related to those two
parties alone: the Highway Authority's
issuing of thirty extra work orders and
mine change orders; its failure to pay
Garlam the agreed price for excavating,
moving, and depositing of borrowed mate-
rial; and its failure to pay Garlam
anything for certain work items per-
formed. The basis of the master's
decision on damages was the extra cost
incurred by Garlam due to Explo's breach
of its blasting contract. These were two
separate lawsuits and the issues in both
were different. In short, there can be
a%%-
no issue preclusion because there is no
identity of issues in the two cases.
In this connection, we point out that
if Garlam were recovering twice for the
same items of work, it would have been to
the Highway Authority's advantage to
invoke the doctrine of collateral
estoppel as to those items for which
Garlam was seeking recovery against both
Explo in federal court and the Highway
Authority in the Superior Court. The
Highway Authority was fully aware of the
suit by Explo and Garlam's counterclaim.
The Authority's resident engineer testi-
fied at the federal trial on liability
and the general counsel for the
Department of Public Works testified at
the federal trial on damages and intro-
duced excerpts from the Superior Court
trial. Although the Highway Authority
FR re ee Ra Fy TN gee eee a nt Pe
Le eee
athe
might possibly have overlooked some dou-
ble pay items, it does not seem likely.
For all the foregoing reasons, we
rule that the doctrine of collateral
estoppel cannot be invoked in this case
and that the rulings and findings of the
Superior Court case have no effect on the
judgment rendered in the case before us.
IV. INTEREST COMPUTATION
On May 19, 1986, the district court
ordered that interest on damages be com-
puted einen to 28 U.S.C. § 1961 from
November 16, 1982, the date of the
court's judgment awarding damages’ to
Garlam. Explo appeals the date of inter-
est accrual, arguing that interest should
only be awarded from March 6, 1986, the
date of the district court's judgment
after which these appeals were filed.
= 7 =
A. Procedural History
The case was brought in the United
States District Court on January 3, 1972.
On November 28, 1979, Garlam appealed
from the dismissal of its third-party
complaint against Rockor. On
December 10, 1979, this court stated:
"Since it does not appear on the papers
before us that the district court certi-
fied this dismissal as final pursuant to
Rule 54(b) of the Federal Rules of Civil
Procedure, we lack jurisdiction over this
appeal." On November 16, 1982, the dis-
trict court entered a judgment against
Explo on its complaint and for Garlam on
its counterclaim. On March 15, 1983,
Explo filed a notice of appeal. On
May 9, 1983, this court dismissed the
appeal holding: "It appearing that the
notice of appeal was filed while a motion
to substitute parties was pending, we
nih<
view the judgment below as not a final
judgment." On August 16, 1985, Garlam
filed a notice of appeal from the judg-
ment of November 16, 1982,2/ and the
district court's order of August 8, 1975,
denying Garlam's motion ‘to substitute
Rockor for Explo. On August 26, 1985,
the district court granted Explo's motion
to have the proceedings continue in that
court because Explo had a pending motion
for postjudgment relief. On October 10,
1985, this court dismissed Garlam's
appeal. The memorandum and order reads:
In 1983, Garlam Enterprises
Corporation ("Garlam") argued
to this court that an order
entered by the district court
in November, 1982, was not a
final order because it did not
adjudicate all of the claims
against all of the parties.
This court agreed, noted that
S/ Garlam appealed from the denial of
prejudgment interest, costs and
attorney's fees, and the order to pay
one-half of the master's fees.
1
against all of the parties.
This court agreed, noted that
proceedings were still pending
in the district courts [sic],
and dismissed without prejudice
an appeal filed by Explosives
Corporation of America
("Explo").
Now, Garlam argues to this
court that the November 1982
order was a final judgment, and
that a Motion for
Reconsideration filed recently
by Explo is therefore untimely.
This court's prior order, how-
ever, reflects the law of the
case and is binding precedent
upon Garlam at this stage of
the litigation. United States
v. DeJesus, 752 F.2d 640, 642
{lst Cir. 1985) (per curiam).
Alternatively, Garlam
requests that this court take
jurisdiction over this appeal
even though a motion for post-
judgment relief is pending in
the district court. We decline
to do so for two reasons.
First, it appears that no
final judgment has been entered
in this matter. Adjudication
of Garlam's motion for substi-
tution of parties in and of
itself does not constitute
entry of a final judgment. See
Fed.R.Civ.P. 58.1/ Second, the
instant notice of appeal is, in
any event, premature because of
Explo's pending motion for
Py >
post-judgment relief. That
motion tolls the running of the
appeal period. FRA.
4(a)(4). The district court
explained this to Garlam, and
informed Garlam that it should
file a new notice of appeal
after that court ruled on
Explo's motion.
The appeal is dismissed for
lack of jurisdiction, without
prejudice to timely filing of
new notices of appeal.
[Emphasis added. ]
1. We draw this to the atten-
tion of the parties and the
district court so that this
matter can be clarified or cor-
rected without causing the
parties further unnecessary
delay.
On March 6, 1986, the district court
entered an order that was "[fJor purposes
of an appeal .. . a Final Judgment." On
March 24, 1986, Explo filed a notice of
appeal, and on March 31, 1986, Garlam
followed suit. It is from these notices
that the current appeals stem.
=36-
On May 19, 1986, the district court
decided that interest should run from the
date of its judgment issued November 16,
1982. It based its ruling on the fact
that using the date of its March 6, 1986,
judgment would "deprive Garlam of its
statutory right to obtain interest on the
November 16, 1982, judgment [and] would
defeat the purposes of [28 U.S.C.] sec-
tion 1961." The ccurt stated that it had
followed the requirements of Rules 58 and
79(a) of the Federal Rules of Civil
Procedure for making its November 16,
1982, judgment final with respect to
interest accruing, even if the same judg-
ment was not "final" for the purposes of
appeal.
B. The Date for Accruing Interest
"Interest shall be allowed on any
money judgment in a civil case recovered
in a district court. Pet? Se Such inter-
| Mle eectesinite ats» Mabieardalpiith woe ee
-39-
est shall be calculated from the date of
the entry of the judgment." 28 U.S.C.
§ 1961 (Supp. 1987) emphasis added).
A judgment "includes a decree and any
order from which an appeal lies." Fed.
R. Civ. P. 54(a). It is clear from this
court's prior dismissals that the
November 1982 judgment was not final
because other issues remained to be
resolved.
The district court never made a Rule
54(b)&/ determination as to the November
6/ Federal Rule of Civil Procedure
54(b) provides:
(b) Judgment Upon Multiple Claims or
Involving Multiple Parties. When more
than one claim for relief is presented
in an action, whether as a claim, coun-
terclaim, cross-claim, or third-party
claim, or when multiple parties are
involved, the court “ay direct the entry
of a final judgment as to one or more
but fewer than all of the claims or par-
ties only upon an express determination
that there is no just reason for delay
(See next page.)
-40-
1982, judgment nor did Garlam ask for
one. Moreover, the district court's order
of August 8, 1985--allowing the proceed-
ings to continue in that court despite a
pending notice of appeal--suggests that
the judgment of November 16, 1982, was
not intended to be final.
There is merit to the district
court's opinion on interest and there is
precedent for awarding interest from the
date of judgment on liability and dam-
ages. See Turner v. Japan Lines, Ltd.,
(Continued from previous page. )
and upon an express direction for the
entry of judgment. In the absence of
such determination and direction, any
order or other form of decision, however
designated, which adjudicates fewer than
all the claims or the rights and liabil-
ities of fewer than all the parties
shall not terminate the action as to any
of the claims or parties, and the order
or other form of decision is subject to
revision at any time before the entry of
judgment adjudicating all the claims and
the rights and liabilities of all the
parties.
|
-41-
702 F.2d 752 (9th Cir. 1983), which held
that interest should be computed from the
initial assessment of damages where there
was a delay between that date and the
date of entry of final judgment. Turner
expressly rejected the holding in Hooxs
v. Washington Sheraton Corp., 642 F.2d
614, 616 (D.C. Cir. 1980), which confined
the application of 28 U.S.C. § 1961 to a
final judgment as defined in Rule 54(b).
For several reasons, we believe it would
be inappropriate to allow postjudgment
interest to begin running before entry of
final judgment in this case.
First, Garlam never sought a Rule
54(b) determination even though it had
been aierted to the problem by our order
of December 10, 1979. Second, Garlam
argued that the November 16, 1982, judg-
ment was not final when Explo attempted
to appeal the liability part of the judg-
-42=-
ment. If the judgment was not final for
liability purposes, it could not be final
on damages. Third, we dismissed appeals
on December 10, 1979, May 9, 1983, and
October 10, 1985, on the same grounds:
that there was no final judgment from
which an appeal could be taken. We do
not deem it advisable at this stage of
the proceedings to decide that final
judgment meant one thing for appeal and
another for the computation of interest.
It is, of course, not without signifi-
cance that the district court failed to
make a Rule 54(b) determination as to its
judgment of November 16, 1982.
For the foregoing reasons, interest
pursuant to 28 U.S.C. § 1961 must be
recomputed starting March 6, 1986.
cere AN Se To TS EE
a43-
V. THE SUBSTITUTION ISSUE
Garlam appeals the denial of its
motion to amend the pleadings so as to
add Rockor, Inc. (Rockor), as a defendant
to its counterclaim and the denial of its
motion to substitute Rockor for Explo.
Since we conclude that substitution
should have been allowed, we focus on
that.
Federal Rule of Civil Procedure 25(c)
provides in pertinent part:
({c) Transfer of Interest.
In case of any transfer of
interest, the action may be con-
tinued by or against the
original party, unless the court
upon motion directs the person
to whom the interest is trans-
ferred to be substituted in the
action or joined with the origi-
nal party.
The basic question is whether Rockor
should be held liable for the damages
awarded Garlam against Explo. Despite
the fact that Explo's interest in the
ry?" merase hog TEP TSF ES Wee
«@4-
lawsuit was transferred to Rockor, the
district court decided against substitu-
tion on the ground that liability should
not be imposed on Rockor for the debts of
its predecessor. We recognize that a
substitution decision is within the dis-
cretion of the district court but find
that its legal analysis was erroneous.
The resolution of this issue turns on
the relationship between Rockor, Explo,
and Excoa, a corporation with which Explo
merged, and Rockor's role in the litiga-
tion. The record on this issue consists
of stipulated exhibits and the deposition
of George S. Sutherland, chairman of the
board of Rockor. There is no dispute
over the facts, only the conclusions to
be drawn from them. In 1959, Rocket
we TN,
ee ee ae ER
-45-
Research Corporation (Rockor)// _ was
incorporated in the State of Washington
for the research, development, and manu-
facture of rocket engines and
propellants. Sutherland started working
for Rockor in 1960 and became its chief
executive officer. In May 1966,
Explosives Corporation of America (Explo)
was incorporated to research, develop,
and manufacture explosives. Rockor was
Explo's sole stockholder; it owed [sic]
92% of the stock. Sutherland became
chairman of the board of Explo. One of
Explo's requirements under its contract
with Garlam was that it obtain a surety
and performance bond in the amount of 1.2
million dollars. The bond was obtained
from the General Insurance Company of
V/ On March 15, 1977, Rocket Research
Corporation changed its name to Rockor,
Inc.
-46-
America after Rockor agreed to indemnify
the bonding company if Explo failed to
perform. Rockor had full knowledge of
the lawsuit since it started; it filed
yearly status reports on the litigation
with the S.E.C.
In early 1973, Excoa, Inc., was
incorporated for manufacturing explosives
and chemicals. Rockor was the _ sole
stockholder and owner of Excoa and
Sutherland was chairman of Excoa's board
of directors from its formaticn until its
dissolution. Explo was merged into Excoa
on April 27, 1973, with Excoa assuming
all of Explo's debts and liabilities. One
of the purposes of the merger was to
increase Rockor's ownership of Explo's
stock from 92% to 100%. On October 29, q
19°76, Rockor, as the principal creditor
of Excoa, took over most of Excoa's
assets; Excoa owed Rockor approximately
a
ROR ney aes
meee ~ meee ve
a oe eee.
CT Ve ae ae ime Sh PR Ee cE EE SCE RT Sr Se IR Pe Ne a ee
-47-
$5,600,000. The bill of sale from Excoa
to Rockor included all of Excoa's inter-
est in the lawsuit between Explo and
Garlam. There was no limitation on the
extent of Rockor's participation in the
lawsuit. Excoa was subsequently dis-
solved for tax purposes and not for any
reason connected with the litigation.
Attorney Oles has represented Explo,
Excoa, Rockor, and the General Insurance
Company (bonding company) since the start
of the lawsuit. Since at least 1976,
Rockor has financed the litigation
directly.
It can be fairly inferred from the
foregoing facts that Rockor has con-
trolled the litigation at least since it
took over Excoa's assets on October 29,
1976.
The pertinent procedural history of
the substitution issue must also be
-48-
recounted. On September 9, 1977, after
the liability judgment but before the
hearing and award in damages, Garlam
moved to substitute Rockor for Explo.
This motion was never ruled on directly.
Apparently at the suggestion of the
court, Garlam filed a motion on
November 10, 1977, asking that Rockor be
added as a defendant to the counterclaim.
On November 6, 1982, former Chief Judge
Pesquera reversed a prior ruling he had
made and denied the motion for lack of in
personam jurisdiction over Rockor. Judge
Cerezo reaffirmed the jurisdictional dis-
missal of Rockor as an additional party
but stated that she would consider a
motion for substitution under Federal
Rule of Civil Procedure 25(c). Such a
motion was filed by Garlam on
December 15, 1982. On August 7, 1985,
-49-
the district court denied the motion to
substitute Rockor for Explo.
The district court's opinion focuses
on the fact that Rockor was a separate
entity from Explo-Excoa and that Rockor
did not assume Explo-Excoa's liabilities.
The cases on which it relied involved the
question of whether a successor corpora~
tion could be sued in the first instance
and held liable for the acts or failure
to act of its predecessor. With due
respect, we think that the court's focus
was misdirected; it should have been on
the relationship between Rockor = and
Explo-Excoa and the role Rockor played in
the litigation.
In Montana v. United States, 440 U.S.
147 (1979), the Court discussed the
effect of the related doctrines of col-
lateral estoppel and res judicata on a
nonparty who controls the litigation. It
«f=
held that the interests advanced by these
doctrines "are similarly implicated when
nonparties assume control over litigation
in which they have a direct financial or
proprietary interest and then seek to
redetermine issues previously resolved."
aa. mt. O54. The Court then quoted
Souffront v. Compaqnie des Sucries, 217
U.S. 475, 486-87 (1910):
"[One who prosecutes or defends
a suit in the name of another to
establish and protect his own
right, or who assists in the
prosecution or defense of an
action in aid of some interest
of his own ... is as much
bound . . . as he would be if he
had been a party to the record."
We recently applied this principle to
hold the two shareholders of a corpora-
tion, who were officers and members of
the board of directors, liable for unpaid
contributions of the corporation to an
employee benefits plan. Alman v. Danin,
801 F.2d 1 (lst Cir. 1986). We stressed
_ Os ay
aS t=
that the individuals "held ultimate and
complete control over the litigation
strategy the now defunct corporation pur-
sued" and that "both men had an economic
stake in the outcome of the trial and
were, of course, in a position to know
everything that occurred." Id. at 5.
Rockor was in essentially the same posi-
tion vis-a-vis Explo-Excoa as were the
two shareholders in Alman and, like them,
had complete control over the litigation.
We realize that in Alman the action was
brought directly against the individuals
and the question of substitution under
Rule 25(c) was not involved.
The underlying legal principle that a
participating nonparty is bound by the
judgment does not, however, depend upon
the procedural stance of the case. In
Panther Pumps & Equipment Co., Inc. v.
Hydrocraft, Inc., 566 F.2d 8 (7th Cir.
~52-
1977), cert. denied sub nom. Beck v.
Morrison Pump Co., Inc., 435 U.S. 1013
(1978), the Court held that Rule 25(c)
could be invoked to substitute a succes-
sor in interest who had obtained the
assets of the corporation against whom
judgment had been rendered. It defined
successor as "one who succeeds or takes
the place of another." Id. at 24. It
quoted Moore's Federal Practice:
Rule 25 has application
only to actions pending in the
district courts. But this
should not preclude substitution
after judgment has been rendered
in the district court * * * for
the purpose of subsequent pro-
ceedings to enforce * * * a
judgment. [3B Moore's Federal
Practice 7 25.03[1], at 25-101
(2d ed. 1977), footnote omitted]
Id. at 23. The facts in Minnesota Mining
and Manufacturing Company _v. Eco Chem,
Inc., 757 F.2d 1256 (Fed. Cir. 1985),
have some similarity to the facts in the
instant case. Suit was brought by 3M
«$3
against Eco Chem, Inc., 4a corporation
owned and controlled by Stephanie and
George Rynne. A default judgment was
obtained against Eco Chem. After suit
had been commenced, the Rynnes formed a
Georgia corporation, ECL, and the share-
holders of Eco Chem exchanged their stock
for ECL shares and all of Eco Chem's
assets were transferred to ECL, making
Eco Chem completely judgment proof. The
court found that ECL was properly joined
as a party "because it succeeded to the
assets from which 3M may satisfy its
judgment." Id. at 1264.
It has long been the rule that a
nonparty who controls the litigation is
bound by the judgment. "The reason would
be that the non-party would have the
power to determine what evidence and
arguments should be offered in the liti-
gation and, if appropriate, the appeal."
-54-
General Foods Corporation Vv.
Massachusetts Department of Public
Health, 648 F.2d 784, 789 (lst Cir.
1981). See also Drier v. Tarpon Oil
Company, 522 F.2d 199 (Sth Cir. 1975)
(president of corporation held liable
because of privity and as a controlling
person under 15 U.S.C. § 770 [sic]);
Kreager v. General Electric Company, 497
F.2d 468, 471 (2d Cir. [sic]) (sole
Shareholder of corporation bound by dis-
missal of first action brought in the
name of his corporation), cert. denied,
419 U.S. 861 (1974); Pan American Match,
Inc. v. Sears, Roebuck & Co., 454 F.2d
871, 874 (lst Cir. [sic]}) (subsidiary
corporation sufficiently identified with
its parent company to represent the legal
rights of the parent), cert. denied, 409
U.S. 892 (1972); 1B J. Moore, J. Lucas, &
T. Currier, Moore's Federal Practice and
ae Te
-55-
Procedure § 0.411[10] at 477-78 (1984 &
Supp. 1986-87).
We agree with the district court that
there is no problem of in personam juris-
diction. There are two reasons. First,
once in personam jurisdiction has been
found over the original party, it exists
over the substituted party despite its
lack of contacts with the forum if the
substituted party had an opportunity to
challenge its joinder or substitution.
Minnesota Min. & Mfg. Co. v. Eco Chem,
Inc., 757 F.2d at 1262-63. See 7C C.
Wrigh , A. Miller & M. Kane, Federal
Practice and Procedure § 1958 at 559-60
(2d ed. 1986). Here, Rocko. controlled
Explo's successful challenge to the sub-
stitution motion.
The second reason is that the minimum
contacts necessary for in persoriam juris-
diction were intertwined with Rockor's
a!
role in the litigation. "In judging min-
imum contacts, a court properly focuses
on 'the relationship among the defendant,
the forum, and the litigation.' Shaffer
v. Heitner, 433 U.S. 186, 204 (1977)."
Keeton v. Hustler Magazine, Inc., 465
U.S. 770, 775 (1984). When substitution
was first sought, Rockor had succeeded to
Explo-Excoa's interest in the suit, was
financing the litigation and had agreed
to indemnify the bonding company in the
event of a judgment against Explo.
Because it availed itself of Puerto Rico
as the forum in the hope of obtaining a
judgment that would inure to its benefit
and was obviously aware of the nature and
progress of the case, Rockor had suffi-
cient contacts with Puerto Rico to meet
the fourteenth amendment due _. process
Te eT ee ee ee =
-57-
requirements. Keeton v. Hustler Magazine,
Inc., 465 U.S. at 775-76.
There can be little doubt that, at
least from the time it acquired
Explo-Excoa's interest in the lawsuit,
Rockor was the real party in interest.
Federal Rule of Civil Procedure 17(a)
requires that "[e]very action shall be
prosecuted in the name of the real party
in interest." Rule 25(c) is, in effect,
the continuation of Rule 17.
Subdivision (c) of Rule 25
deals with transfers of interest
during the course of the action.
The situation with which it is
concerned may be compared and
contrasted to that obtaining
where a transfer of interest
such as by an assignment takes
place prior to the commencement
of the action. In the latter
situation Rule 17 controls and
requires that the action shall
be prosecuted in the name of the
real party. But where the
transfer of interest takes place
during the course of the action,
Rule 25(c) controls and provides
that the action may be continued
by or against the original party
-58-
whose interest has been trans-
ferred, unless the court, upon
motion, directs that the person
to whom the interest has been
transferred be substituted in
the action, or joined with the
original party.
3B J. Moore, & J. Kennedy, Moore's
Federal Practice § 25.08 at 25-77,. 78
(1987) (footnotes omitted). Substitution
may be ordered after judgment has been
rendered in the district court for the
purpose of subsequent proceedings to
enforce judgment. Id. § 25.03 at 25-27.
In addition to Rockor's ownership of
Explo-Excoa and its financing and control
of the litigation, there is another rea-
son why Rockor is liable for the amount
of the judgment against Explo. The con-
tract between Explo and Garlam contained
the following clause: "It is mutually
agreed that this Agreement shall bind the
heirs, executors, administrators, succes-
sors, holding companies and assigns of
-59-
the parties hereto." It cannot be
doubted that Rockor was a successor to
Explo. It also is evident that Rockor,
which owned all of the outstanding stock
of Explo at the commencement of the
action, was a holding company of Explo at
the time the contract was executed.
For the following reasons, we hold
that Rockor is liable for the full amount
of the judgment against Explo and must be
substituted for Explo as the defendant to
Garlam's counterclaim: Rockor from the
beginning was the controlling stockholder
of Explo-Excoa; it succeeded to
Explo-Excoa's interest in the lawsuit;
after the merger of Explo into Excoa and
Excoa's dissolution, Rockor became the
real party in interest, indeed the only
party in interest; Rockor financed and
controlled the litigation; and Rockor is
bound under the contract between Explo
and Garlam as Explo's successor and a
holding company of Explo.
Under these facts and the applicable
legal principles, Rockor could not limit
its litigation liability to the amount
for which it agreed to indemnify the
bonding company. Litigation is a two-way
street. Once it is entered it must be
travelled the full length; except for
settlement or bankruptcy, there is no
escape route. If Garlam had been found
liable, the full amount of the judgment
would have gone directly to Rockor. 1G,
therefore, must pay the full amount of
the judgment against Explo.
VI. GARLAM'S APPEAL ON ATTORNEY'S FEES,
COSTS, AND PREJUDGMENT INTEREST
In its opinion adopting the master's
report on damages, the district court
found "that Explo has not conducted the
«$i=
litigation in an obstinate manner and
that imposition of pre-judgment interest,
costs and attorney's fees is not Susti-
fied." This decision was within the
discretion of the district court and we
find no reason for disturbing it.
SUMMARY
We affirm the judgment of the dis-
trict court on liability and damages. We
reverse the order of the district court
as to the date from which interest shall
be computed. We reverse the order of the
district court on the motion for substi-
tution and order that Rockor be
substituted for Explo as defendant to the
counterclaim. We affirm the order of the
district court denying Garlam attorney's
fees, costs, and prejudgment interest.
a
Affirmed in part, reversed in part,
remanded.
Costs awarded to Garlam on these
appeals.
72397
Ee ee ee ee
-63-
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
No. 86-1303
EXPLOSIVES CORPORATION OF AMERICA,
ot al.;
Plaintiffs, Appellants,
Vv.
GARLAM ENTERPRISES CORPORATION,
et al.,
Defendants, Appellees.
No. 86-1362
EXPLOSIVES CORPORATION OF AMERICA,
Plaintiffs, Appellees,
7s
GARLAM ENTERPRISES CORPROATION,
Defendant, Appellant.
No. 86-1650
EXPLOSIVES CORPORATION OF AMERICA,
et al.,
Plaintiffs, Appellants,
Vv.
GARLAM ENTERPRISES CORPORATION,
et al.,
Defendants, Appellees.
-64-
JUDGMENT
Entered: April 30, 1987
These causes came on to be heard on
appeals from the United States District
Court for the District of Puerto Rico,
and were argued by counsel.
Upon consideration whereof, It is now
here ordered, adjudged and decreed as
follows: The judgment of the district
court on liability and damages is
affirmed. The order of the district
court as to the date from which interest
shall be computed is reversed and the
cause is remanded to the district court
for redetermination of the interest in
accordance with this opinion filed this
day. The order of the district court on
the motion for substitution is reversed
and the cause is remanded to the district
court with instruction that Rockor be
3
3
‘
;
:
-65-
substituted for Explo as defendant to the
counterclaim. The order of the district
court denying Garlam attorney's fees,
costs and prejudgment interest is
affirmed.
Costs awarded to Garlam on these
appeals.
By the Court:
Francis P. Scigliano
Clerk
[cc: Messrs. Cles and Cordero ]
72395
Sl
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
No. 86-1303
EXPLOSIVES CORPORATION OF AMERICA,
et al.,
Plaintiffs, Appellants,
Vv.
GARLAM ENTERPRISES CORPORATION,
et al.,
Defendants, Appellees.
No. 86-1362
EXPLOSIVES CORPORATION OF AMERICA,
Plaintiffs, Appellees,
Vv.
GARLAM ENTERPRISES CORPROATION,
Defendant, Appellant.
No. 86-1650
EXPLOSIVES CORPORATION OF AMERICA,
et al.,
Plaintiffs, Appellants,
Vv.
GARLAM ENTERPRISES CORPORATION,
oe Ai.,
Defendants, Appellees.
~~ So
Before
CAMPBELL, Chief Judge,
Coffin, Bownes, Breyer,
Torruella, and Selya,
Circuit Judges
ORDER OF COURT
Entered: June 3, 1987
The panel of judges that rendered the
decision in these cases having voted to
deny the petition for rehearing and the
suggestion for the holding of a rehearing
en banc having been carefully considered
by the judges of the Court in regular
active service and a majority of said
judges not having voted to order that the
appeal be heard or reheard by the Court
en banc,
-68-
It is ordered that the petition for
rehearing and the suggestion for
rehearing en banc be denied.
By the Court,
Francis P. Scigliano
Clerk
[cc: Messrs. Oles and Cordero]
72396
-69-
GENERAL CONDITION 4.3
IN GARLAM'S PRIME CONTRACT
4.3 INCREASED OR DECREASED QUAN-
TITIES OF WORK .
c) It is mutually agreed that, if
demand is made by either party, overruns
or underruns of more than 25% of the
total cost, individually, of one or more
major items, calculated from the original
proposal quantities and the original con-
tract unit prices, shall require a
negotiated change of unit price which
shall be covered by a supplemental agree-
ment by the Director and the Contractor,
setting forth the necessity for the
change and the adjustment of unit prices
agreed upon a [sic] satisfactory to both
parties.
da) It is mutually agreed, that, if
demand is made by either party, overruns
«FH~
or underruns in any or all items result-
ing in a sum total change of more than
25% of the total cost of the contract,
calculated from the original proposal
quantities and the original contract unit
price, shall required [sic] a supplemen-
tal agreement signed by the Director and
the Contractor setting forth the neces-
sity for the change and the adjustment of
unit prices agreed upon as satisfactory
to both parties.
e) The contract does not obligate
the Contractor to perform at original
contract unit prices, overruns or under-
runs generating a total in dollars or in
extent of more than 25% of the original
contract.
72746
aTi@-
GARLAM ENTERPRISES CORPORATION
GENERAL CONTRACTORS
SUBCONTRACT AGREEMENT
WITH
EXPLO CONTRACTORS
EXCOA Building
Issaquah, Washington 98027
DATED: April 28, 1971
72747
oFi<
SUBCONTRACT AGREEMENT
This AGREEMENT made this 28th day of
April, 1971 by and between GARLAM
ENTERPRISES CORPORATION, hereinafter
referred to as the "Contractor", and
EXPLO CONTRACTORS, a division of
Explosives Corporation of America which
in turn is a subsidiary of Rocket
Research Corporation, hereinafter
referred to as the "Subcontractor", who
is to operate in Puerto Rico under
licensed authority of the Commonwealth
Government and duly authorized to do work
in the Commonwealth of Puerto Rico.
WITNESSETH
WHEREAS, the Contractor has hereto-
fore entered into a contract, hereinafter
referred to as the "General Contract,
dated January 22, 1971 with the Puerto
-73-
Rico Highways Authority, hereinafter
referred to as the "Owner", for the con-
struction of Project AC 52 (R)12(70) of
the San Juan-Ponce Highway known as "La
Palma-Cerro de los Cielos" Section in the
Municipality of Salinas, Puerto Rico,
which general contract includes the fol-
lowing work to be done under this
Agreement: All labor, materials, fuels,
lubricants, equipment and services
required to complete the work described
in Article XVI (c) of this Agreement, in
accordance with all applicable plans and
specifications prepared by the Architects
of the Owner.
NOW THEREFORE, in consideration of
the covenants and agreements hereinafter
contained and the payments to be made as
hereinafter provided, the Contractor and
oFaa
the Subcontractor do hereby mutually
agree as follows:
ARTICLE I - PERFORMANCE AND
SCOPE OF THE WORK
That the Subcontractor shall furnish
all materials, supplies, equipment and
required services and furnish all labor
required, except as otherwise herein pro-
vided, for the completion of the said
work in accordance with all applicable
provisions of the General Contract, the
specifications, addenda, general and spe-
Cial conditions and the accompanying
drawings, all of which documents are
hereinafter called the "Contract Docu-
ments" and are hereby made a part of this
Agreement; and under the direction and to
the satisfaction of the Owner's engineer
or other authorized representative in
Charge of said work. The Subcontractor
ai i rin
~FS-
acknowledges that he has examined and
understands and accepts the requirements
of the contract documents applicable to.
this Agreement.
ARTICLE VII - CHANGE ORDERS
IN GENERAL CONTRACT
That the Subcontractor shall be bound
by any changes or alterations ordered by
the Owner in the work under this Agree-
ment in the General Contract,
SPECia\
specifications, general and -epecitie’pro-
visions, and/or plans, or in the amount
or character of said work or any part
thereof, to the same extent that the
Contractor is bound thereby, the payments
to the Subcontractor to be adjusted
accordingly.
=Fo
ARTICLE XVII - SPECIAL PROVISIONS
IT IS MUTUALLY AGREED:
d. That the Contractor shall be
bound to the Subcontractor in all appli-
cable respects, by all the obligations
that the Owner assumes toward the
Contractor under Contract Documents and
by all provisions affording remedies and
redress to the Contractor from the Owner,
but only to the extent to which Sub-
contractor, by this agreement, may be a
participant therein.
72747
oFJo
CERTIFIED TRANSLATION
IN THE SUPERIOR COURT OF PUERTO RICO
SAN JUAN SECTION
GARLAM ENTERPRISES
CORPORATION,
CIVIL NO.
76-1431
Plaintiff,
vs.
RE:
PUERTO RICO HIGHWAY
AUTHORITY, CIVIL ACTION
Defendant.
ee ee ee ee ee ee ee ee ee ee See ee”
COMPLAINT
TO THE HONORABLE COURT:
Comes now plaintiff through
undersigned counsel and respectfully
alleges and prays:
"FIRST CAUSE OF ACTION"
8. Paragraph 4.3 of the general
conditions of the contract provides that
if the project results in a change
greater than 25 per cent of the total
=F§-
cost of the contract calculated on the
basis of the original conditions con-
tained in the bid and of the unit prices
of the original contract which the
Authority claimed from the contractor,
the Authority would be obliged to
renegotiate the total price of the con-
tract. Pursuant to this clause, Garlam
requested the Authority on different
occasions to renegotiate the price of the
contract and the Authority has refused.
9. The original contract between
the parties provided for a total cost of
$13,489,412.39. Within this price bid by
Garlam, there was included a profit of
15% for a total of $1,759,488.58, thus
the total cost for the work without
including the contractor's profit was
$11,729,923.81. Due to the extra work
orders and the change orders and to the
increase in the number of items, the
5 ate ll ce os i gs se atau, wy oan eda
i Se es
@79-
total cost of the work was $23,002,285.60
and the Authority, to this date, has paid
the contractor the sum of $19,499,579.76.
10. Since the increment in the oper-
ation was greater than 25% Garlam
required from the Authority that the con-
tract be renegotiated and the Authority
has unlawfully and arbitrarily refused.
San Juan, Puerto Rico, this 12th day
of March, 1975.
CELESTINO MORALES, JR.
72444
:
:
-80-
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
EXPLOSIVES CORPORATION
OF AMERICA,
Plaintiff and third
party defendant CIVIL 1-72
vs.
GARLAM ENTERPRISES
CORPORATION and FEDERAL
INSURANCE COMPANY
party plaintiffs
vs.
GENERAL INSURANCE
COMPANY OF NORTH
AMERICA
Third party
)
)
)
)
)
)
)
)
)
)
.
Defendants and third )
)
)
)
)
)
)
)
)
Gefendants )
)
BOOTLE, Senior District Judge://
This case involves the interpretation
of a subcontract under which the plain-
1/Senior District Judge of the Middle
District of Georgia sitting by designa-
tion.
-8i1-
tiff Explosives Corporation of America
(Explo) agreed with the defendant Garlam
Enterprises Corporation (Garlam) to exe-
cute certain rock work required by a
prime contract between Garlam and the
Puerto Rico Highway Authority (Highway
Authority). Trial on the merits was with
the consent of the parties divided into
two separate trials, this first trial
having for its purpose the determination
of the issue of liability, a further
trial, if appropriate, to be held on the
issue of damages (see order of Judge
Pesquera of May 30, 1974.) The first
trial was held in San Juan January 26-30,
1976, by the court without a jury. After
a protracted delay in securing a tran-
script of the evidence and the allowance
of ample time for briefing the case as to
the issue of liability is now ripe for
decision. The court is indebted to coun-
Pe re ae oe a
o82<
sel for both| sides for thorough and
exhaustive written arguments and briefs
and for compliance with the court's
request for proposed findings of fact and
conclusions of law and the court now
enters its findings and conclusions.
FINDINGS OF FACT
: Some time during the month of
December 1970, the Highway Authority
requested bids for the construction of
one portion of a Siennens leading from the
city of San Juan, Puerto Rico, to the
city of Ponce in the southern part of the
island, which portion was designated as
Project Number AC-52(R)12(70) Las Palmas
Cerro de los Cielos (Project). Garlam
was the lowest bidder with an estimated
total cost of $13,489,412.39. The con-
tract required work on a unit price basis
on 38 items based on estimates made by
-83-
the Highway Authority and the designers
Tippetts-Abbett-McCarthy-Stratton (TAMS).
The other three items were small items on
a lump sum basse.
y Among the items of work required
by the contract, Item 4, under the title
of Unclassified Excavations, was the most
important item and Garlam made a bid of
$2.03 per cubic meter for an estimated
quantity of 4.680.000 cubic meters for a
total bid price on that single item of
$9,070,040.00. This item required among
other things, the blasting of rock wher-
ever found.
3. In addition, Item 35 of the Bid
Proposal required of Garlam the pre-
splitting of the rock face for which
Garlam agreed to a bid price of $1.40 per
lineal foot on an approximate quantity of
ai
-84-
300,000 lineal feet for a total bid price
in that single item of $420,000.00.
4. Some time during the month of
April 1971, Explo and Garlam conducted
negotiations which matured into a con-
tract executed on April 28, 1971, which
was executed again on May 5, 1971, by
virtue of which Explo agreed to perform
all the mass-blasting necessary under
Item 4 of the Bid Schedule at a unit
price of 51 cents per cubic meter and
agreed further to perform the
pre-splitting required under Item 35 of
the Bid Schedule at the rate of 70 cents
per lineal foot.
5. Immediately after the execution
of the contract, Garlam instructed Explo
to commence work and to continue with the
pre-splitting and blasting in certain
stations which Garlam had already worked
on since March 1971. Explo for one rea-
-85-
son or another was not able to start
until the beginning of June 1971.
6. Immediately after the first few
shots, Garlam took the position that the
material produced by the blasting was not
in accordance with the requirements of
the subcontract and objected to the size
of the material that was produced by
Explo.
ve At the beginning of September
1971, Explo had produced very little
material and the parent company con-
tracted the services of the law firm of
DeGarmo, Leedy, Oles and Morrison, and
they in turn retained Mr. Aner W.
Erickson, who came to Puerto Rico on the
Sth of September for the purposes of
examining the slow production of Explo,
the controversy with respect to the size
of the rock that had to be produced by
Explo and an alleged lack of payment on
-86-
the part of Garlam to Explo for certain
work performed. Mr. Erickson made a
report which was not presented in evi-
dence but in his testimony summarized
some of his findings and recommendations,
and he advised Explo to change some of
the administrative and operational per-
sonnel and to increase the amount of
equipment in use.
8. These recommendations of
Mr. Erickson were substantially carried
out and the amount of production
increased although the material produced
was not within what Garlam felt the sub-
contract required.
9. On November 3, 1971, Explo
advised Garlam that it was going to aban-
don the project and in fact did so and on
November 9, 1971, Explo confirmed in
writing its abandonment of the project.
=@7-
10. The filing of this action by
Explo followed in which Explo named as
defendants Garlam and its bonding conm-
pany, Federal Insurance Company. Then
Garlam counterclaimed, claiming the
breach of the agreement and named as a
third party defendant Explo's bonding
company General Insurance Company of
America. In its counterclaim, Garlam
alleges that as a result of Explo's
breach of the agreement, Garlam was obli-
gated to spend substantial amounts of
money to complete the work required by
the subcontract, claiming also liquidated
damages for delay allegedly caused by
Explo, plus amounts necessarily expended
in correcting work done by Explo, and in
making secondary blastings in order to
achieve proper contour as required by
plans and specifications, and expenses
incurred because of Explo's failure to
-88-
split and break rocks and boulders into
units of 15" or less.
11. The controversy between the par-
ties started in connection with the
interpretation of a unit price clause
included in the agreement which reads as
follows:
"Blasted rock fragments shall
average up to a maximum of fif-
teen inches in size."
Garlam's position was that the rock
fragments could not exceed 15" generally
although it conceded that an occasional
large boulder would result from any
explosion but argued that under the pro-
visions of the contract Explo had to make
a secondary blast of such large boulders
in order to reduce them to the maximum
size permitted by the agreement. Explo
on the other hand suggested in letter
dated September 22, 1971, that what the
clause meant was "an average maximum." It
-89-
was not until September 22, 1971, that
for the first time Explo suggested this
interpretation of this agreement. Prior
to this time it had passively admitted
the interpretation of Garlam. For
instance, in a letter dated July 27,
1971, from Explo's Mr. Albert E. Teller,
director of land operations to Garlam
Enterprises, Attention: Ing Marco
Delgado, the statement is made "during
the same time period as above you agreed
to advance the progress of the job by not
holding us to the 15 inch section of the
contract. This agreement was made so
that you could load the muck piles with
scrapers." The quoted language recog-
nizes the existence and validity of the
15 inch requirement and states at least
one of the reasons for its existence.
The quoted language's suggestion that
that requirement had been waived, even
te Mie nb ahi ha
-90-
temporarily, is not supported by the evi-
dence.
12. During the six month period that
Explo was working the project, it did not
comply with the interpretation of Garlam
as to the maximum rock size although
Garlam continuously insisted that Explo
produce material not exceeding 15 inches
in size.
13. The language quoted above was a
composite drafting made by Mr. John W.
Goode, a division general manager of
Explo, and Mr. Hugh E. Oswald, general
counsel for Explo, together with
Mr. Raymond W. Garffer, president of
Garlam. We find that the words "up to a
maximum" were inserted at the insistence
of Mr. Garffer and the word "average"
originated with and was suggested by
Mr. Goode, and Mr. Oswald took together
=9i-
the set of words and drafted the language
which appears in the subcontract.
14. Explo has alleged in the conm-
plaint a number of minor violations of
the prime contract allegedly committed by
Garlam but we find that no evidence has
been presented to substantially prove
these violations. We further conclude
that if these alleged violations had
occurred they would not have justified
Explo in abandoning the project.
15. The subcontract was negotiated
by the parties and it was not a form con-
tract. Time was made of the essence of
the agreement because the prime contract
did require from the contractor perform-
ance of all the work within a specified
number of days. An amendment to the sub-
contract executed May 5, 1971, stipulated
that Explo would begin work "on May 12,
1971 for a total of four hundred eighty-
=92-
nine (489) calendar days, and shall
terminate said work September 22, 1972."
16. The subcontract between the par-
ties provided for partial payments to
Explo in accordance with their production
at the agreed unit price within ten days
after Garlam had been paid by the Highway
Authority for that particular work. This
payment provision related both to
blasting and pre-splitting.
17. The Highway Authority made pay-
ments to Garlam in the manner shown in
Exhibit G and such exhibit shows that
Garlam at no time prior to November 3,
1971 when Explo abandoned the project was
actually indebted to Explo except during
the month of August 1971, at which time
Explo was already indebted to Garlam in a
larger amount for certain rental payments
and other services which Garlam had ren-
dered to Explo for which Explo had not
o93-
paid. It must be noted that this compu-
tation, Defendant's Exhibit G, is made on
the basis of a deduction of 50% from
amounts otherwise due for.blasting on
account of the oversize of the blasted
fragments. While the evidence shows that
there was some discussion between the
parties with respect to such 50% dis-
count, the evidence fails to show that
there was any firmed up agreement or
novation with respect thereto. We find
as a fact, however, that under the cir-
cumstances due to the oversize of the
rock fragments, the suggestion of an
allowance of only 50% by Garlam was not
an unreasonable one, and constituted a
good faith gesture on its part. This
finding shall in no sense be controlling
or binding during the second trial of
this case in which the issue of damages
will be primarily and directly involved.
See
We find further that if at any time prior
to Explo's abandonment of the project
Garlam was indebted to Explo in any
amount, it was in such smaller amount in
comparison to the totality of the agree-
ment contemplating payments to Explo of
at least $1,230,000 that such non- pay-
ment was inconsequential. This is
particularly true in view of total credit
advances (Garlam to Explo of $10,998.91),
in view of outstanding bills due by Explo
to other suppliers, and in view of
Explo's failure to comply with the size
requirements of the subcontract.
18. We find that the initial person-
nel of Explo on this project were not
very proficient in blasting techniques
and that many erratic decisions were made
by them until at least the beginning of
October 1971 when proficient personnel
-95-
were brought to Puerto Rico to perform
the work required by the subcontract.
19. Explo contended that Garlam had
no available progress schedule or written
schedule of work, and that therefore it
was unable to program its activities and
that this accounted for its slowness. We
find as a matter of fact that Garlam had
provided the Highway Authority with the
necessary C.P.M. (critical path method)
schedules and under the specification and
the prime contract, the work had to be
programmed from week to week and from day
to day. We find and conclude further
that under the subcontract, Garlam was
entitled to direct the work of Explo from
day to day and coordinate Explo's work
with its own and with that of other sub-
contractors. See Article II a and b of
subcontract.
-96-
20. Some questions have been raised
by Explo as to the sufficiency and pro-
priety of the equipment of Garlam but the
evidence fails to show the truth of the
allegations or the relevancy of the alle-
gations concerning the issues before the
court in this first trial.
CONCLUSIONS OF LAW
A. The subcontract between the par-
ties was negotiated, executed, performed
partly and intended to be performed
totally in Puerto Rico. It was executed
by a Puerto Rico company and a company
organized under the laws of the State of
Washington authorized to do business in
Puerto Rico and payment under the agree-
ment was to be made in Puerto Rico. We
conclude therefore that as a matter of
law, the interpretation of this agreement
~9Fs
must be made under the provisions of the
laws of Puerto Rico.
B. We conclude as a matter of law,
that Explo was not a third party benefi-
ciary to the prime contract between the
Highway Authority and Garlam, and if any
violation of the prime contract occurred,
it was a matter to be argued and decided
by and between the prime contractor and
the Highway Authority. The court there-
fore holds that any of the alleged
violations of the prime contract by
Garlam would not justify Explo's failure
to perform the subcontract or its aban-
donment of the project.
Cc. The subcontract between the
parties does not have a termination or
rescission clause that will permit Explo
to rescind or cancel the subcontract with
Garlam. There is no language in the
agreement permitting termination, cancel-
ea ne tn ae
OG Teo tae Ee
SOE ee ee nT ee Eee TT en eee Ne Oe
-98-
lation or recision other than the
language permitting Garlam to terminate
in the event of certain violations on the
part of Explo. If Explo is entitled to
terminate the agreement for any reason
whatsoever the authorization to do is to
be found not in the subcontract but in
some other source.
D. Garlam contends that under the
laws of Puerto Rico Explo would have no
right to rescind the subcontract or to
abandon the project, even assuming
Garlam's non-payment or withholding of
substantial sums earned by and due to
Explo and that under such circumstances,
Explo's sole redress would be to perform
according to Garlam's interpretation of
the contract and then demand extra com-
pensation plus interest, citing Article
1051 of the Civil Code of Puerto Rico (31
LPR. AS SESS) Explo, on the other
-99-
hand, stoutly disputes that the law of
Puerto Rico is so different from the law
applicable generally in the United States
and insists that Puerto Rican law recog-
nizes that substantial non payment
excuses performance, citing Article 1077
of the Civil Code of Puerto Rico (31
L.P.R.A. 3052) and the cases Federal Land
Bank Vv. Echeandia, 48 FF 311;
Municipality of Ponce v. Vidal Vilaret,
6S: F.RR. 356 (1945); Fabregas v.
Mayaguez L.P. & Ice Co., 43 P.R.R. 197
(1932); Diaz Torres v. Rivera, 96 P.R.R.
548, 555-556 (1968); Perez v. Sampedro,
86 P.R.R. 498 (1962); Portela v. Porto
Rican American Tobacco Co., 4 P.R.R. 55
(1903); and Felix A. Rodriguez, Inc. v.
Bristol Myers Co., 281 F. Supp. 643 (D.
Puerto Rico, 1968).
We need not choose between these
sharply conflicting views under Puerto
-100-
Rican law because in the case at bar the
evidence fails to establish any substan-
tial non-payment.
E. Explo no doubt has rendered some
work under the subcontract and Garlam so
acknowledges. This first trial does not
require from the court any determination
as to what amount of payment must be made
to Explo, if any. Under the consent
order for these bifurcated trials, the
determination as to the amount if any,
payable to Explo or to be deducted from
whatever judgment may be finally rendered
in connection with the total amount of
damages payable to Garlam, should be made
by the trial court during the second
trial which will relate to the issue of
damages. It is recognized that Explo
will be entitled in the second trial to
-101-
prove, if it can, substantial performance
on its part in which event
"The true measure of recovery is
the sum stipulated in the con-
tract less the damages sustained
by its failure strictly to per-
form."
13 Am. Jur. 2d Building and
Construction Contracts § 80,
p. 82 (1964), and 66 Am. Jur. 2d
Restitution and Implied
Contracts § 72, p. 1016 (1973).
Doubtless this same principle of law
should be applied in determining the
amount of credit, if any, to which Explo
is entitled against any larger damage
award which may be made in favor of
Garlam. No findings are made as to the
amount of damages, if any, that may be
chargeable to Explo due to the lateness
in the completion of the work. Such mat-
ter should be decided by the trial court
in the second portion of this case. We
conclude as a matter of law, however,
that the measure of the amount of monies
-102-
for which Explo is entitled to be cred-
ited in exchange for the work done by it
should be on the basis of the agreement
of the parties as evidenced by the sub-
contract, that is to say at the rate of
51 cents per cubic meter of blasted rock
and 70 cents per line foot of pre- split-
ting. We conclude as a matter of law
that tne measure of payment should not be
on the basis of value or quantum meruit.
See 66 Am.Jur.2d Restitution and Implied
Contracts § 73, =. IGA, and United
States v. Western Casualty and Surety
Co., 498 F.2d 335 (9th Cir. 1974).
Ts The language contained in the
unit price clause is ambiguous and there-
fore it is necessary to apply the rules
of interpretation contained in the Civil
Code of Puerto Rico. Title 31 § 3478 of
that code reads as follows:
-103~
"The interpretation of obscure
stipulations of a contract must
not favor the party occasioning
the obscurity."
The language of the unit price clause was
finally drafted by Mr. Hugo E. Oswald.
Jr., then general counsel for Explo, in
the negotiations of the subcontract.
While both Garlam and Explo contributed
some of the complicating words, the final
drafting was actually done by Mr. Oswald.
We conclude as a matter of law that the
obscurity of the language must be charged
to Explo and that the correct interpreta-
tion of the unit price clause is that the
material to be produced must be generally
within the range of 15 inches or less. We
conclude that otherwise Garlam could not
comply with other requirements of the
prime contract which required it to dis-
pose of the rock fragments to construct
compaction layers of approximately 6
-104-
inches in the embankments and 24 inches
in the rock fills. The interpretation of
the clause suggested by Explo creates an
absurd situation which this court
rejects. Its suggested interpretation is
inconsistent with its explicit contrac-
tual obligation to blast "secondary
boulders that may appear after a blasting
operation, if required by the contrac-
tor." Therefore, in the determination of
the amount of work done by Explo, consid-
eration should be given to the
contractual requirement that Explo pro-
duce material which finally could not
exceed 15 inches as a maximum size and
that such other larger boulders had to be
broken down by secondary blasting if they
exceeded this maximum of 15 inches.
G. As a consequence of this breach
by Explo, Explo is obligated to pay to
Garlam the actual and necessary addi-
-105-
tional costs reasonably incurred by
Garlam in order to complete the work
required of Explo by the subcontract. As
above indicated, the question whether or
not any delay penalty is chargeable
against Explo and if so, how much, is to
be determined by evidence adduced in the
second trial. The question of interest
on any amounts credited to or chargeable
against Explo is likewise to be deter-
mined by evidence adduced at the second
trial. All costs of this first trial are
taxed against Explo.
H. Garlam's counterclaim prays for
judgment against Explo and General
Insurance Company of America in the
amount of $4,120,000. As an affirmative
defense, General Insurance Company of
America asserts that any liability it may
have in relation to the project which is
the subject of this litigation arises out
-106-
of a payment and performance bond in the
amount of $1,230,000 and that said sum is
the maximum amount of any liability it
may have. Garlam contends, on the other
hand, that General Insurance Company of
America's liability is not limited to the
penal sum named in the bond on that Explo
is entitled to judgment against said
bonding company for any amount it may be
entitled to recover against Explo, even
though said amount may be in excess of
$1,230,000. Judicial restraint dictates
that this particular question be deferred
for the second trial. It need not be
decided then unless Garlam enjoys a
recovery against Explo in a net amount
exceeding $1,230,000.
-107-
DISCUSSION
ADDITIONAL FINDINGS OF FACT AND
CONCLUSIONS OF LAW LESS
FORMALLY STATED
When Explo Entitled to
Receive Payments
Under Article XIV "Basis and Scope of
Payment," the subcontract provides:
the
Payment shall be made to the
subcontractor for work hereunder
actually performed and completed
as measured and certified by the
owner's engineer, in strict
accordance with payments made to
the contractor for this work and
materials and within ten (10)
days after receipt by contractor
of payment from the owner for
such work and materials, at the
unit prices hereinafter speci-
fied.
Under Article XV "Partial Payments,"
subcontract continues:
Partial payments for the work
performed under this agreement
shall be made by the contractor
as and when payments therefore
[sic] are made to the contractor
by the owner, and will equal the
value of the work done by the
subcontractor according to the
engineer's estimate at the unit
prices hereinafter specified, or
a Eee Ae ss ee ED
: -108-
at a proportionate part of the
lump sum price for the
subcontractor's work, less the
sum of previous payments and
less a percentage equal to the
percentage retained by the owner
provided that if the subcontrac-
tor is indebted to the
contractor or anyone else for
cash advances, supplies, mate-
rial, equipment rental, or other
proper charges against the work,
the amount of such indebtedness
may be deducted from any payment
or payments made under this pro-
vision; Wg y Rta For
clarification, basis of payment
of the owner is monthly certifi-
cations approved by the
inspectors and engineers repre-
senting the owner on the
project, less ten (10) percent
withheld until final liquidation
of project. In turn, the con-
tractor will pay the
subcontractor for the amount of
work certified and in turn will
retain ten (10) percent of the
amount certified, paying the
balance to the subcontractor
within ten (10) days after
receipt of payment by the owner
of certification to the contrac-
tor.
Thus, according to the terms of the
subcontract, Explo was entitled to
receive partial payments only "according
-109-
to the [owner's] engineer's estimate at
the unit prices hereinafter specified, or
at a proportionate part of the lump sum
price for the subcontractor's work" and
was entitled to receive such partial pay-
ments only "as and when payments
therefore [sic] are made to the contrac-
tor by the owner" and "if... the
subcontractor is indebted to the contrac-
tor or anyone else for cash advances,
supplies, material, equipment rental, or
other proper charges against the work,
the amount of such indebtedness may be
deducted from any payment or payments
made under this provision." Insisting
upon the terms of this contract, Garlam
contends that prior to Explo's abandon-
ment of the project, Garlam was indebted
to Explo only during August 1971 and that
when that payment was due, Explo was
already indebted to Garlam in a larger
es
A
ay
e
/
-110-
amount for rental payments and other
services and was also indebted to other
suppliers for proper charges against the
work. These specific contentions of
Garlam are shown in figures from an
account's point of view in Defendant's
Exhibit G, page 1 of which is captioned
"Explo Contractors--Breakdown of Work
Performed Before Default on 11-3-71."
Explo's contrary contentions are summa-
rized in Plaintiff's Exhibit 15 which was
prepared by Explo's witness, Mr. Aner
Erickson in which he shows considerable
discrepancies between Explo's invoice
claims and his adjusted claims, his fig-
ures being generally much smaller than
the figures reflected on the invoices.
For instance, whereas Explo's invoice for
services through June 30, 1971 claimed
22,630 cubic meters blasted,
Mr. Erickson's adjusted claim is 16,500;
-11i-
the invoice for services through
August 17, 1971 claimed 107,034 cubic
meters whereas Mr. Erickson's adjusted
figure was 64,200; the invoiced claim for
services through September 30, 1971, was
159,880 cubic meters whereas
Mr. Erickson's adjusted figure is
117,110; and the invoice figure for serv-
ices through October 30, 1971 was 169,000
cubic meters whereas Mr. Erickson's
adjusted figure is 136,800 cubic meters.
All figures on Plaintiff's Exhibit 15 are
cumulative and whereas for the entire
period Explo had prepared invoices for
169,000 cubic meters blasted and for
20,000 lineal feet of pre-splitting,
Mr. Erickson says the cumulative figure
should have been 136,800 cubic feet of
blasting and 11,733 lineal feet of
pre-splitting. The net result of
Plaintiff's Exhibit 15 is an assertion by
-112-
Explo that prior to its withdrawal from
the job, it had earned a total of
$59,184.08 after giving credit for
amounts paid or advanced to Explo by
Garlam by way of rental equipment, etc.,
totalling $10,998.91, about which latter
figure there is no dispute. Plaintiff's
Exhibit 15, however, does not take into
consideration or answer Garlam's conten-
tion that no amounts were due Explo until
"after receipt by contractor of payment
from the owner" nor does it take into
account debts owed by Explo to other sup-
pliers. And of course Plaintiff's
Exhibit 15 assumes that its blasted rock
fragments satisfied the size requirements
of the subcontract so as to entitle it to
payment, and full payment, for all its
blasting operations.
We find as a fact that even if at any
time prior to Explo's abandonment of the
-113-
project it was entitled to receive any
payment from Garlam beyond the $10,998.91
in advanced credits the amount of any
such additional entitlement was insub-
stantial and the non-payment of the same
would not constitute cause for Explo's
abandonment of the project or cause for
Explo's attempt to rescind the subcon-
tract. See U.S. v. Southern Constr. Co.,
293 F.2d 493, 498 (6th Cir. 1961) and
Guerini Stone Co. Vv. SP * Carlin
Construction Co., 248 U.S. 334, 63 L.Ed.
275 (1919) [sic].
Interpretation of
"Blasted Rock Fragments Shall Average
up to a Maximum-of 15 Inches in Size"
While the unit bid prices for the
subcontract were negotiated between Explo
and Garlam prior to the execution of the
formal subcontract agreement, it was
-114-
mutually understood that such price nego-
tiations were tentative only and that
there would be no binding agreement until
a formal contract was agreed upon and
signed. For instance, Explo's letter to
Garlam dated April 2, 1971, signed for
Explo by John W. Goode, general manager,
and quoting the unit prices, concluded
with this paragraph:
"This letter is not intended to
become a binding agreement
between us. Any such agreement
will be evidenced by a formal
contract mutually agreeable to
both parties."
Although the prime contract permitted
Garlam to use, under certain conditions,
rock larger than 15 inches in its great-
est dimension (even up to approximately 4
feet in a limited and prescribed manner)
it did not require the use of such sizes
and nothing prevented Garlam from
-115-
requiring of its subcontractor smaller
sizes.
Explo solicited of Garlam the subcon-
tract, representing itself as possessing
expertise in the field of blasting and
knowledge as to improved techniques.
During the negotiations leading up to the
subcontract Explo's representative,
Mr. Teller, represented to Mr. Garffer,
Garlam's president, that Explo could give
"a 4 to 6 #=inch ~»product."
Garlam
Transcript p. 343. Garlam relied upon
these representations and was willing to
settle for a product with a maximum
dimension at its greatest length of 15
inches. (He realized, of course, there
would not be 109% minus 15-inch product
but was sticking to a requirement of
"minus 15, because 90 to 95% of the mate-
rial had to be minus 15 inches, which
would be an average of 8 inches.")
-116-
Transcript p. 324. Thus, Garlam would
not have objected to something like 5%
erratics but throughout the negotiations,
its president Mr. Garffer was adamant in
his insistence upon a maximum of 15
inches. He never wavered in that insis-
tence.
Significant is the fact that Explo's
negotiator, general counsel Mr. Goode,
well knew of Mr. Garffer's insistence.
Mr. Goode claims that during the negotia-
tions he had some discussion with
Mr. Delgado, an employee of Garlem, out
of the presence of Mr. Garffer and the
other negotiators, concerning "how we
might be able to work around that clause
(the 15 inch maximum) in the field, and
how to accomplish the job," and while he
does not claim any modification of the
subcontract, he claims that he "thought"
he reached some understanding on the side
-117-
with Mr. Delgado. Goode deposition,
Se. 22,23, 24. Mr. Goode's testimony in
this regard is in sharp conflict with the
testimony of Mr. Delgado from whom
Explo's counsel was never able to obtain
any admission with respect to any side
conference or agreements between
Mr. Delgado and Mr. Goode. Transcript p.
458,459. Significant also is Mr. Goode's
testimony with respect to his claimed
side conferences with Mr. Delgado that
"We didn't want to carry the argument to
Mr. Garffer any more than necessary. We
wanted to get through with the negotia-
tions and eventually with the word
average, that was what I decided to
accept finally in the final contract."
Mr. Good obviously knew that Mr. Delgado
was without authority to act in the prem-
ises contrary to the wishes and
determination of Mr. Garffer who was com-
-118-
pletely in charge for Garlam in the
negotiation of the subcontract. Mr. Goode
knew further of Mr. Garffer's insistence
upon the limitation of 15 inches as a
maximum. This brings into play a princi-
ple of law codified in Georgia at Title
20 § 703 under the subject of Contracts
as follows:
"Intention of one party known to
the other.--The intention of the
parties may differ among them-
selves. In such case, the
meaning placed on the contract
by one party, and known to be
thus understood by the other
party, at the time, shall be
held as the true meaning."
See also the case of Peninsular Naval
Stores Co. v. Parrish, 13 Ga. App. 779
(1913) [sic] applying this principle.
In interpreting the contract language
in dispute, there are certain fundamental
rules to guide us.
" 'T) ascertain the intent of
the parties is the fundamental
rule in the construction of
-119-
agreements (Chesapeake & 0.
Canal Co. v. Hill, 15 Wall. 94,
21 L.Ed. 64); and in such con-
struction courts lock to the
language employed, the subject-
matter, and the surrounding cir-
cumstances. They are never shut
out from the same light which
the parties enjoyed when the
contract was executed, and in
that view they are entitled to
place themselves in the same
situation which the parties who
made the contract occupied, so
as to view the circumstances as
they viewed them, and so to
judge of the meaning of words
and of the correct application
of the language to the things
described.’ "
Town of Ashland v. Newman, 163
Va. 500, 175 S.E. 724, 726, 176
S.E. 470.
[3,4] It is a universal canon
of construction that every word
and phrase in a contract should
be given a meaning and signifi-
cation according to its
importance in the context of the
contract. Courts are not war-
ranted in reading out of a
contract words or phrases placed
there by the contracting parties
unless they cannot be rationally
fitted into the scheme of the
agreement between the parties.
Vitagraph Inc., v. American
Theatre Co., 77 Utah 71, 291 P.
303; La Lumia Vv. Northern
-120-
California Packing Co., Cal.
App., 172 P.2ad 94; Maryland
Casualty Co. v. Morrison, 10
Cit., iba Fae la.
Basler v. Warren, 159 F.2d 41,
43 (10th Cir. 1947).
Thus, first of all we are to seek to
ascertain the intent of the parties. We
are to consider the subject matter of the
agreement, the circumstances which sur-
rounded the parties and the language
which they used, insofar as possible
giving adequate consideration to each and
every word. Applying these principles,
the language itself leans heavily toward
the intepretation advocated by Garlam.
The words "up to a maximum of 15 inches"
are hard to explain away. They cry out
for recognition. Explo would have us
erase both "up to" and "maximum of" and
read the subcontract as if it said only
"Shall average . . . 15 inches." While
obviously there is some uncertainty and
-121-
vagueness to be attributed to the word
"average", there is no room for doubt as
to the exact meaning of "up to a maximum
of 15 inches." The word "average" was
selected by Explo and Explo is chargeable
with its vagueness. Under the language
used, the size might "average" or range
from any minimum size Explo desires, but
only "up to a maximum of 15 inches."
We find that the evidence does not
establish any of the alleged breaches of
the contract by Garlam as contended for
by Explo and we find that the real reason
for the abandonment of the project by
Explo was not any breach or failure of
performance on the part of Garlam, but
was Explo's decision to abandon what for
it was proving to be an unprofitable con-
tract.
-122-
CONCLUSION
Liability is accordingly hereby fixed
upon Explosives Corporation of America
and upon General Insurance Company of
America in accordance with the findings
of fact and conclusions of law above
expressed.
This 30th day of March, 1977.
W. A. Bootle
Senior U.S. District
Judge
VERDICT
On the issue of liability the court
hereby finds in favor of Garlam
Enterprises Corporation and Federal
Insurance Company against Explosives
Corporation of America and General
lnsurance Company of America in accor-
-123-
dance with findings of fact and
conclusions of law of even date.
This 30th day of March, 1977.
W. A. Bootle
Senior U.S. District
Judge
72517
-124-
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
EXPLOSIVES CORPORATION
OF AMERICA,
Plaintiff and Third
Party Defendant CIVIL NO.
1-72
vs.
GARLAM ENTERPRISES
CORPORATION and FEDERAL
INSURANCE COMPANY
Party Plaintiffs
vs.
GENERAL INSURANCE
COMPANY OF NORTH
AMERICA
Third Party
)
)
)
)
)
)
)
)
)
Defendants and Third )
)
)
)
)
)
)
)
Defendants )
)
ORDER
This matter came before the Court for
a hearing on several pending motions.
After considering briefs and other docu-
ments filed by the parties and hearing
-125-
oral arguments by counsel, it is hereby
ORDERED :
1. Motions for Partial Summary Judgment
on the Issue of the Extent of the
Surety's Liability.
The motion of Garlam Enterprises
Corporation for partial summary judgment
is denied. The motion of General
Insurance Company of North America is
granted.
The Payment and Performance Bond
issued by General Insurance Company of
North America indicates a penal sum of
$1,230,000. The general rule is that the
maximum liability of a surety is the
penal sum named on the bond. As an
exception to the rule, a surety may be
liable for a sum in excess of the penal
sum when it undertakes to complete the
project upon the default of the princi-
pal. Barrientos v. Govt. of the Capital,
-126-
97 PRR 539, 556-7 (1969): 17 Am. Jur. 2d,
Contractor's Bond, § 131.
It does not matter whether the con-
tract under which the surety's principal
is bound is a lump sum or a unit price
contract; the principle is the same. A
surety binds itself (except in particular
circumstances not present here) only to
pay up to the penal sum in case its prin-
cipal defaults. The premium paid by the
principal is calculated on the basis of
the penal sum and the decision of the
surety on whether to issue the bond up to
that amount usually depends on the finan-
cial capability of the principal.
In this case, Garlam Enterprises
Corporation and Explosive Corporation of
America estimated, on the bande of infor-
mation given by the owner, the amount of
work involved. General Insurance Company
of North America took the figure supplied
-127-
by it and issued the bond for a specific
amount. Its liability is limited to that
amount.
It is so ordered.
San Juan, Puerto Rico, October 20,
1977.
U.S. DISTRICT JUDGE
72739
ae a ee
-128-
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
EXPLOSIVES CORPORATION
OF AMERICA
Plaintiff and Third
Party Defendant
vs.
GARLAM ENTERPRISES
CORPORATION and FEDERAL
INSURANCE COMPANY
CIVIL NO. 1-72
Defendants and
Third Party
Plaintiffs
vs.
GENERAL INSURANCE
COMPANY OF NORTH
AMERICA and ROCKOR,
INC.
Third Party
Defendants
ORDER
On July 22, 1979, this Court issued a
Memorandum and Order denying ROCKOR's
motion to dismiss the third amended com-
plaint. ROCKOR had contended that
-129-
dismissal was mandated insofar as said
amended complaint brought ROCKOR as a
party hereto, and we lacked jurisdiction
against said party insofar as it was not
"doing business" in Puerto Rico under
International Shoe v. Washington, 326 US
[sic] 310 (1945). After recognizing that
ROCKOR and Explosives Corporation of
America (EXPLO, plaintiff herein), were
separate and distinct corporate
entities,// we held that by acquiring
EXPLO's claim as alleged creditor in this
case and electing to exercise said claim,
ROCKOR had "conducted activities within
the forum state" and thus’ submitted
itself to the jurisdiction of this court.
i/ The basic facts as to the perti-
nent chronology of events and the
corporate relationship between the par-
ties contained in our Memorandum and
Order of July 22, are adopted herein.
PRD So enn CANCE ROS SNA is OS Fe eee ee
-130-
ROCKOR has now filed a motion for
reconsideration and/or certification
wherein they contend, inter alia, that
our ruling should be reconsidered inas-
much as subjecting ROCKOR to the
jurisdiction of this Court would go
against the basic postu--lates [sic] of
International Shoe, supra, and constitute
a denial of due process. Defendant and
Third Party Plaintiff Garlam Enterprises
(Garlam) has opposed said motion on vari-
ous grounds. For the reasons to follow,
we agree with ROCKOR and accordingly dis-
miss this action as to said Third Party
Defendant.
Generally, a determination of whether
a federal court may assert jurisdiction
over a corporation under state law as
expressed in International Shoe, supra,
progeny is approached in terms of whether
said defendant's local activities consti-
-131-
tute "doing business". See 4 Wright &
Miller S-1069. Puerto Rico's long-arm
statute, Rule 4.7 of the local Rules of
Civil Procedure, was intended to expand
the thrust of jurisdiction to its fuil
constitutional limit. Ramon Vela, Inc. v.
Sagner, 382 F. Supp 478 (D.C.P.R. 1974).
It is nevertheless an undisputed fact in
the instant case that third party defen-
dant ROCKOR is not "doing business" in
the conventional sense within the geo-
graphical boundaries of Puerto Rico
inasmuch as it has had no office, con-
ducted no sales or lucrative ventures,
Signed no contracts or otherwise employed
its business resources directly or indi-
rectly as a corporate entity in this
island. Assertion of local jurisdiction
could only befall if the agreement by
which Explosives Corporation of America's
assets were conveyed to ROCKOR's prede-
-132-
cessor Rocket Research Corporation
(including EXPLO's cl« ». against Garlam)
constituted "doing business" as expressed
above. (There is no question that the
transfer of assets from EXCOA to ROCKOR
occurred outside of Puerto Rico.)
As in Schenin v. Micro Copper Corp.,
272 F. Supp. 523 (SDNY 1967), the instant
case does not concern a statutory merger
between EXCOA and ROCKOR, but an acquisi-
tion of the former's assets by the
latter. Accordingly, ROCKOR's liability
vel non to Garlam would depend on the
applicable law and facts but has no
bearing on whether jurisdiction may be
asserted over ROCKOR in this forum.
Garlam must present whatever claim it
alleges in the appropriate forum. As
stated in Schenin, supra, at 526:
"Whether or not plaintiff could
sue [defendant] directly - for
example, on a third party bene-
-133-
ficiary theory - would depend on
the applicable law, but he could
sue [defendant] only where it
could be found".
As in said case, Garland has presented us
with no set of facts that would establish
a basis to impute to ROCKOR, for juris-
dictional purposes, activities of EXPLO
or EXCOA in Puerto Rico.
Garlam alleges that initial negotia-
tions subject of this litigation were
undertaken by ROCKOR and that ROCKOR
approved the contract object of this suit
before it was executed inasmuch as ROCKOR
was financing this operation and is
financing this litigation. These
unsuported [sic] allegations fall flat on
the face of the facts established by
ROCKOR in support of its motion. Garlam
has been unable to produce sufficient
evidence of ROCKOR's direct involvement
in the local controversy so as to "do
-134-
business" in Puerto Rico. As noted
above, mere acquisition of assets is not
enough to submit a foreign corporation to
local jurisdictional statutes. Likewise,
mere supervisory endeavors of a subsidi-
ary or wholly owned company by a parert
is insufficient to assert jurisdiction
over the parent company. Cf. W. Clay
Jackson Enterprises v. Greyhound Leasing
431 F Supp 1229 (D.C.P.R. 1979) (total
control over subsidiary by parent company
coupled with identity of members of
boards and abundance of "instances
evincive of close control of subsidiary
by parent" was enough to subject parent
to jurisdiction under the local long-arm
statute). Furthermore, any subsequent
inherence in this litigation by ROCKOR
has no bearing on the jurisdictional
issue before us. Dragor Shipping Corp. v.
-135-
Union Tank Car Co., 361 F2d 43 (9 Cir.
1966)
Wherefore, in view of the fact that
we now find that third party defendant
ROCKOR was not "doing business" in Puerto
Rico as understood under International
Shoe, supra, and that said party is oth-
erwise not subject to jurisdiction under
Puerto Rico Rules of Civil Procedure 4.7,
it is now hereby
ORDERED that ROCKOR's motion for
reconsideration be and the same is hereby
GRANTED and the instant case is hereby
dismissed as to said third party defen-
dant.
Judgment shall be entered
accordingly.
SO ORDERED.
San Juan, Puerto Rico, October 29,
i973.
HERNAN PESQUERA
U.S. DISTRICT JUDGE
Tata
-136-
EXCERPTS OF TESTIMONY
FROM GARLAM ENGINEER, MR. CORDERO
Mr. Cordero, I call your attention to
Exhibit 10, please.
Yes.
What does that exhibit represent?
This exhibit shows an estimate of
rock excavation.
Who prepared that document,
Mr. Cordero?
This document was prepared in engi-
neer DaSilva's office in order to
make an estimate of the amount of
additional burrow [sic] material that
had to be obtained, this information
was supplied by the designers of the
project.
Do you recall, Mr. Cordero, when was
this document prepared, more or less?
Garlam notified the Highway Authority
that it was going to need some burrow
[sic] material on November of 1972,
and then the first extra work order
for burrow [sic] was made in April,
no, in June of 1973, which means that
this was prepared, I am almost sure
that this was prepared at a meeting
held in engineer DaSilva's office
around March of 1973 between the
-137-
designers, the resident engineer and
Garlam.
And what does this figure of
1,507,000 supposed to mean or refer
to?
This was what the designer and the
other persons present therein under-
stood was sound rock.
Mr. Cordero, is 1,507,000 units, or
1,507,000 yards, or what is it sup-
posed to be?
These are cubic meters.
72445
-138-
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
EXPLOSIVES CORPORATION "
OF AMERICA
PLLA OES, AE TAD DIRE
Plaintiff and
Third Party .
Defendant,
vs.
GARLAM ENTERPRISES
CORPORATION AND FEDERAL " CIVIL NO. 1-72
INSURANCE COMPANY,
Defendant and
Third Party
Plaintiffs, ”
vs.
GENERAL INSURANCE .
COMPANY OF NORTH
AMERICA AND ROCKOR, n
INC.
Third Party
Defendants
REPORT OF SPECIAL MASTER
TO THE HONORABLE COURT:
The undersigned Special Master by
designation, respectfully submits’ the
-139-
following report under Rule 53 of the
Rules of Civil Procedure.
By Order of October 20, 1977, the
Court determined the appointment of a
Special Master. By Stipulation dated
October 31, 1978, the parties agreed that
the undersigned be appointed Special
Master. On September 10, 1979, the Court
issued an Order of Reference, hereby
marked as Document "A", The Order
(Paragraph II) required the Special
Master to hold a session within 20 days
to docket further hearings to receive
testimony and evidence. Said session was
held on September 27 by Order submitted
on September 18, 1979 (Document "B"). The
Special Master designated Mr. Fernando
Altamirano as Reporter. A transcript of
the proceedings of said session is
included as Document i On
September 27, 1979 the Special Master
-140-
designated October 29, 1979 for the pur-
pose of commencing the hearings,
Document "D".
Parties as per Order of the Master,
filed Memorandum of their respective
positions in connection with the matters
set forth in the Order of Reference.
Hearings were held on October 28, 30
and 31. The transcript of said proceed-
ings are included as Document "E". By
Order of the Master, both parties filed
Post-Trial Memorandum, Reply eters,
Motions and Memorandums, designated as
"Documents F from Garlam" and "Documents
E from Explo."
At the hearings various Exhibits were
received in evidence and are included as
part of this Report, that is, Garlam
Enterprises Corporation exhibits marked
-141-
with numbers and Explosives Corporation
of America exhibits marked with letters.
Final Analysis and Informal Notes by
Special Master are also included, marked
as SM.
In compliance with the September 10,
1979 Order of Reference by Honorable
Hernan Pesquera, Judge of the U.S.
District Court, on March 19, 1980 the
Special Master submitted to the parties
the required Draft Preliminary Report,
requiring their comments and recommenda-
tions.
Replies for both parties were
received on time, submitting their recom-
mendations and further commenting on the
other party submittal.
Special Master analized [sic] the
documentations submitted by both parties
as “Eatin ——— eee ee ee ee eee ee me a ae
ss ee ae as «
-142-
and discussed same in Special Master
Final Analysis, presented as exhibits.
Without taking into consideration the
Garlam opinion of prejudice and partial-
ity, Special Master deems important to
emphasize’ that ail conclusions reported
are based on specific facts, discussed
thoroughly and openly, considering only
the documents-information presented | in
the proceedings, obviously complementing
the study, as any responsible profes-
sional will do, with technical
publications on the subject matter. The
Special Master did not receive any testi-
mony outside the hearings, being
personally responsible for all analyses,
calculation and drafting of details and
report.
As to the indication by Garlam of
mathematical errors in the Draft Report,
as shown in Special Master Final
-143-
Analysis, some are due to errors in
typing which did not affect the results,
and others are due to errors in Garlam
previous Motions.
STATEMENT OF FACTS
This case came before the Special
Master by designation, to determine the
amounts, if any, which may be due by
Explosives Corporation of America to
Garlam Enterprises Corporation, under the
findings previously made by the Honorable
Judge William Bootle on March 30, 1977.
In addition to this requirement, the
Honorable Court outlined 18 particular
‘tems of facts to be specifically exanm-
ined.
This case came before the Court upon
the filing of a complaint by Explosives
Corporation of America (Explo) on
January 3, 1972 claiming payment for the
-144-
value of certain pre-splitting and
blasting work done on a portion of the
San Juan-Ponce (Las Americas Expressway),
Project La Palma Cerro de los Cielos, as
a Subcontractor of Garlam Enterprises
Corporation (Garlam), Prime Contractor
Project No. AC-52-R-(12)-70.
Garlam subcontracted with Explo for
the pre-splitting and blasting of rock,
at the rate of 70 cents per lineal feet
and 51 cents per cubic meter, respec~
tively, under subcontract dated April 28,
1971.
The Prime Contract showed
pre-splitting as an item of rock
(Item 35), but blasting was included as
part of Item 4 entitled "Unclassified
Excavations."
Explo performed under the Subcontract
from about June 11 to November 3, 1971,
when it abandoned the project. Garlam
-145-
completed the work required by the
Subcontractor.
Upon the filing of the complaint,
Garlam answered denying the allegations
and claiming instead that Explo breached
the contract and counterclaimed against
Explo and its Surety.
By Order of the Court, the case was
divided into two trials; one to determine
liability and a second trial to determine
the amount of damages.
Judge W.A. Bootle, Senior Judge,
District Court of March, Georgia by des-
ignation, heard the first trial and ruled
on March 30, 1977, that Explo was liable
for damages to Garlam (Exhibit A).
In accordance with the instructions
of the Honorable Court, the undersigned
deems it necessary, as a preamble, to
discuss and analize [sic] the case and
wih neat ll
-146-
then proceed with the determination as
outlined in the Order of Reference.
GENERAL DESCRIPTION OF THE DEVELOPMENT OF
CONSTRUCTION PROJECT
On January 22, 1971 Garlam contracted
with the Highway Authority the construc~
tion of Project AC-52-R(12)-70 for the
amount of $13,489,412.39, to be con-
structed in 600 consecutive calendar
days.
According to contract documents the
original project covers 41 construction
items of which the following are consid-
ered the main or principal items related
to the case.
-147-
UNIT
ITEM PRICE AMOUNT PAID
4 4,468,000 cu mt Unclassified
Excavations $2.03 $9,070.040
5 46,880 cu at Unclassified
Excavations
for Structures $5.73 $ 268,622
35 300,000 In ft Presplitting $1.40 $ 420,000
As presented by Explo during the pro-
ceedings, Civil Case 76-1431- Garlam vs.
Highway Authority, the development of the
project reflected that the scope of the
project, specially the construction cost,
was markely [sic] increased including
excavation, earth work and specially,
construction time.
The 41 original construction items
were increased to 98 items, 30 work
orders and 9 change orders were approved,
construction time was increased 1552 cal-
endar days to June 8, 1975 and the
project was liquidated by the Highway
Authority for $19,499,579.16, that is 31%
over original contract cost. Neverthe-
-148-
less, Garlam per Motion dated August 10,
1979, is demanding from the Highway
Authority over $15.8 millions, in addi-
tion to interest and lawyer's fees, in
which $4.5 millions are included to cover
for compensation for completion of the
project ahead of time, that is a bonus of
$2,300 per each calendar day, 1959 days
over contract time and extensions
approved by the Highway Authority.
Material worked by Garlam amounted to
6.04 millions cubic meters and after con-
sidering a swell factor of 20% it
amounted to a compaction figure of 7.25
millions cubic meters, as compared to the
original 4.468 millions cubic meters of
Unclassified Excavations figured in the
original contract, as a balanced project.
On this token, the following compara-
ble figures should be emphasized:
-149-
CONTRACT TIME, calendar days
Original Contract 600
Definite Project
Authorized by
Highway Authority 2152
CONSTRUCTION COST, dollars
Original Contract $13,489,412.00
Definite Project
Authorized by
Highway Authority $19,499,579.00
Demanded by Garlam,
in addition to $15,828,831.00
Total demanded
final cost $35,328,410.00
MATERIAL WORKED, EXCAVATORS - COMPACTION,
Original Contract as
a balanced project 4,468,000 cu mts
Definite Project
Liquidation by
Highway Authority 5,054,338 cu mts
Demanded by Garlam 6,042,027 cu mts
Add 20% for
swell factor 7,250,432 cu mts
-150-
RELATION OF EXPLO SUBCONTRACTORS TO PRIME
CONTRACT - SUBCONTRACT
Explo was subcontracted to do all
presplitting-drilling and blasting,
"including the protection of his work
that may be require [sic] to make the
various operations subcontracted for to
fit it to be received by the Contractor
in accordance with other operations of
work performed on the Project."
Presplitting was contracted at $0.70
per ln ft compared to $1.40 per ln ft in
Prime Contract, and mass blasting for
rock excavation at $0.51 per cubic meter,
which is part of the $2.03 per cubic
meter agreed to in Prime Contract for
Unclassified Excavations.
Article XVI of the Subcontract
required that the locations indicated to
the Subcontractor for mass blasting be
surveyed before and after blasting. "All
-151-
blasting locations will be indicated to
Subcontractor by the Contractor who in
turn will take a survey of cross sections
in the bank before blasting as well as
after cleaning the blasted material and
after any excavations of dirt witdi solid
rock is found, where bulldozing and rip-
ping are not effective."
"Payment shall be made to the
Subcontractor for work hereunder actually
performed and completed as measured and
certified by the Owner's Engineer he
(Article XIV)." [sic] "Partial Payments
for the work performed under this agree-
ment shall be made by the Contractor as
and when payments therefore [sic] are
made to the Contractor according to the
Engineer's estimate, at the unit prices
hereinafter specified . ." (Article XV).
Blasting is included in Item 4 of the
Prime Contract as Unclassified
ee ee ee ee ee eR
-152-
Excavations which is the term used to
cover ripping and removal of the overbur-
den, after cleaning and grubbing with
heavy equipment to the hard rock-blasting
the rock, dozing and cleaning the blasted
material with heavy equipment and finally
transporting same to the fill sites.
Complementing the process,stake out sur-~
veying is done by the Contractor and
Engineer on the hard rock so as direct
presplitting and the blasting process.
Explo Subcontractor, blasting and
presplitting phase, was completely subor-
dinated to the construction process
established by the Prime Contractor of
cleaning-grubbing-ripping and removal of
overburden-cleaning and grubbing to hard
rock-staked out surveying. After
presplitting and blasting the Prime
Contractor must do the dozing = and
cleaning of the blasted material and
-153-
final surveying of cross sections for
partial payments.
RESPONSIBILITY OF SPECIAL MASTER TO REACH
A CONCLUSION AS TO THE ORDER OR REFERENCE
During the proceedings of the case,
Explo continuously stressed that the bur-
den of proof is upon the party asserting
the damages to prove with a reasonable
degree of certainty, upon failure to do
so, the action be dismissed.
As to Garlam, his position was summa-
rized on Reply Memorandum, November 16,
1979.
"AS a consequence, they (Explo)
did what Judge Bootle concluded
to be, the breach of the con-
tract, because “it was an
unprofitable contract."
"But Explo made another mistake.
After they breached the con-
-154-
tract, they forget about Puerto
Rico and permitted the comple-
tion of the contract without any
kind of supervision on their
part. That is the reason that
they can present no evidence.
And that is the reason why, they
cannot inform the Special Master
whether the calculation of
Garlam are right or wrong."
It was clearly proved that Explo
breached the contract as Subcontractor to
Garlam and as permitted by Article XII
Contractor's Right to Take Over
Subcontractor Work, Garlam continued with
the Work and complete it with its own
forces.
This same Article XII states that
neither by the taking over of the work
nor by its completion in accordance with
the terms of this provision shall the
-155-
Contractor forfeit its right to recover
damages from the Subcontractor or from
Subcontractor's Surety for failure to
complete or for the delay in such comple-
tion.
On the consideration of proof of
damages, the Courts have sus-
tained that when a contract is
breached, the wrongdoer is not
exonerated for his misconduct
merely because the determination
of the amount of damages sus-
tained may be somewhat
speculative, nevertheless the
damages to be recoverable degree
of certainty, the Courts mean
that it must be shown with a
reasonable degree of certainty
that the complaining party has
actually suffered damages. It
has no reference to the amount
-156-
of damages suffered and the fact
that the amount of damages must
be estimated, does not prevent
their recovery.
Determination of damages for
breach of a contract is an inex-
act science and the amount
reached by whatever method used
will never be more than approxi-
mation. This impossibility of
precise determination is gener-
ally recognized and the Courts
do not require mathematical cer-
tainty. Recognizing the
evidential difficulties inherent
in fixing damages toc inflexible
monetary terms, Courts adjust
themselves to the exigencies of
the business world.
-157-
If a reasonable probability of
damage can be Clearly estab-
lished, uncertainty as to the
amount, will not preclude recov-
ery. The amount may be
approximate if a reasonable
basis of computation is
afforded.
Difficulty of ascertainment is
not to be confused with the
right to recovery, nor does it
exonerate the defendant from his
misconduct. The defendant who
has wrongfully broken a contract
should not be permitted to reap
advantages from his own wrong-
doing insisting on proof which
by reason of his breach is unob-
tainable.
-158-
The most elementary conceptions
of justice and public policy
requires that the wrongdoer
shall bear the risk of uncer-
tainty which his wrong act has
created.
The undersigned, in order to reach
the following determinations and taking
into consideration that the necessary
technical information that would permit
exact engineering conclusions was not
made available to him by either party,
went into an intensive evaluation of all
documents - information and analysis sub-
mitted by the parties in the proceedings
and conducted an in depth of all material
included in both court cases presented in
the proceedings Explo vs. Garlam and
Garlam vs. Highway Authority, finally
performing an extensive research on tech-
nical books and publications related to
-159-
subject matter.
A. THE QUANTITIES OR ROCK DRILLED AND
SHOT (MASS-BLASTING AND
PRE-SPLITTING) WITHIN THE ORIGINAL
CONTRACT LIMITS ON THE PROJECT WHICH
IS THE SUBJECT OF THIS ACTION
As stated in the following documents
in Explo.vs. Garlam Case and Garlam vs.
Highway Authority, Garlam, for the last
three (3) years, has continuously assert-
ed that the amount of rock drilled and
blasted by Explo and afterwards by Garlam
on behalf of Explo amounts to 2,936,972
cubic meters or more.
After submittal of the production
figures in the Capo Report, at the
Special Master proceedings, Garlam has
Changed his position as to the amount of
rock blasted by Explo and by Garlam on
behalf of Explo to be credited to Explo,
in which undoubtedly the amount of rock
removed b
This text is long and has been trimmed here. Open the source document for the complete record.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.