# Petition for Writ of Certiorari — Explosives Corp. of America v. Garlam Enterprises Corp. > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385019_0723%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition for Writ of Certiorari - **Published:** January 1, 1987 - **Citation:** 484 U.S. 925 ## 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 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 Americ [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385019_0723%3A1. Public record. Not legal advice.