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ARC Welding Supply Co., Inc. v. American Welding & Gas, Inc.

United States District Court, S.D. Indiana, Evansville Division

September 12, 2017

ARC WELDING SUPPLY CO., INC. An Illinois Corporation, CHARLES R. MCCORMICK, Plaintiffs,
AMERICAN WELDING & GAS, INC. A North Carolina Corporation, Defendant.



         In October 2014, Defendant, American Welding & Gas, Inc. (“AWG”), entered into an Asset Purchase Agreement (“APA” or “Agreement”) with the Plaintiffs herein, ARC Welding Supply Co. (“ARC”) and Charles McCormick (collectively “Plaintiffs”). After the parties were unable to come to terms with the amount, if any, owed for the purchase of Plaintiffs' asset cylinders, Plaintiffs filed a Complaint alleging that AWG breached the terms of the Agreement, and owes them monetary damages. AWG, in turn, filed a counterclaim for (1) breach of contract, (2) unjust enrichment, (3) breach of warranty, (4) fraud, (5) negligent misrepresentation, and (6) breach of good faith and fair dealing. The parties now move for summary judgment. For the reasons that follow, the court GRANTS in part and DENIES in part Defendant's Cross Motion for Summary Judgment, DENIES Plaintiffs' Motion for Summary Judgment, and GRANTS Plaintiffs' Motion for Summary Judgment on Defendant's Counterclaims.

         I. Background

         Prior to October 1, 2014, ARC was a distributor of compressed gases and welding supplies in Vincennes, Indiana. ARC is, and has always been, owned entirely by Plaintiff Charles (“Buck”) McCormick. (Filing No. 31, Affidavit of Charles McCormick (“McCormick Aff.”) ¶¶ 5-6). On October 1, 2014, ARC sold substantially all of its assets to Defendant American Welding & Gas (“AWG”), which took over ARC's Vincennes operation. (Id. at ¶¶ 10-14). In total, AWG paid ARC and McCormick over $1, 500, 000 for ARC's assets. (Filing No. 47-1, Deposition of Charles McCormick (“McCormick Dep.”) at 8-9, and Ex. 1 thereto). AWG also hired McCormick to manage its Vincennes location, which he did for the following year. (Id. at 9-10).

         A. The Purchase and Audit of Asset Cylinders

         One of the primary assets AWG purchased from ARC was its stock of “asset cylinders.” (Filing No. 47-2, Affidavit of Ron Adkins (“Adkins Aff.”) ¶ 7). A company like AWG or ARC makes its money by renting these cylinders to businesses who need compressed gas for use in their operations. (Id.). For example, a restaurant or convenience store may rent carbon dioxide cylinders from AWG for its soda fountains and have them refilled on a regular basis by AWG. (Id.).

         Accordingly, when AWG and ARC were negotiating the sale of ARC's assets to AWG, a critical fact was the number of asset cylinders that would be transferred. (Id. ¶ 8; McCormick Dep. at 11-12, 16). McCormick represented that ARC owned, and would transfer, “approximately 6, 500” asset cylinders to AWG as part of the deal. (McCormick Dep. at 11; Filing No. 47-3, APA, Art. 2, § 2.1(f) and Schedule 1.1(a)). The purchase price was set, in part, on that representation. (McCormick Dep. at 11). At the time of the closing, however, the parties did not know the precise count of cylinders ARC would transfer because many cylinders were “out in the field” with customers. Consequently, pursuant to the APA, AWG held back $150, 000-known as the “Cylinder Deferred Payment”- for 180 days to protect against a marginal shortage of up to 1, 200 cylinders (1, 200 x $125 = $150, 000). (APA, Art. 2, § 2.1(f)). In AWG's experience, this 1, 200 cylinder cushion was more than sufficient to protect against any shortage that might occur, and Plaintiffs said and did nothing to dissuade AWG of this belief. (Adkins Aff. 13).

         AWG conducted the cylinder audit between October 1, 2014 and May 22, 2015. (Id. ¶ 15). The audit was supervised by Ron Adkins, AWG's President and Chief Executive Officer at the time. (Id. at ¶¶ 1, 16; McCormick Dep. at 39). The audit started with an in person physical count of the “dock stock” by AWG employees Rick Hersick and Fred Seminik. (Adkins Aff. ¶ 17; McCormick Dep. at 28-29). The “dock stock” consisted of the cylinders on-site at the Vincennes facility that AWG purchased from ARC. (Id.). That count yielded 1, 553 cylinders. (Adkins Aff. ¶ 17).

         AWG then audited the cylinders that were out “in the field” with the 1, 233 customers whose accounts were transferred from ARC to AWG. (Id. ¶ 18). To do this, AWG first reviewed each customer's payment history. (Id.). If the records showed the customer consistently paid rent on a certain number of cylinders, and there were not a large number of exchanges, AWG provided full credit for that number and would generally not visit the customer to confirm the count. (Id.). If, however, there were a large number of cylinder exchanges or abnormalities in the records provided by ARC, AWG would perform a physical audit whereby an AWG representative would actually visit the customer's location, meet with the customer, locate the cylinders, and record the number on cylinder reconciliation forms, which the customer would then confirm by signing. (Id.).

         Some of the cylinders transferred from ARC to AWG were “in the field” pursuant to 99-year leases with customers. (Id. at ¶ 19). In those situations, AWG would send a letter to the customer seeking verification of the count listed in ARC's records. (Id.). Many of the customers provided the verification, and when that was done, AWG would provide full credit to ARC. (Id.). If there was a discrepancy between the records and the customers' count, or if the customer did not respond, AWG would follow up and often would perform an in-person audit.[1] (Id.).

         After October 1, 2014, AWG started sending monthly cylinder rent bills to all of the customers it acquired from ARC. (Id. ¶ 23). These billings revealed that a significant percentage of ARC's customers were “no rent” customers, meaning the customers did not actually pay rent to ARC on the ARC-owned cylinders they were using, but instead only paid to have them refilled. (Id.). Under the APA, ARC's “no rent” cylinders were not considered “asset cylinders” to be included in the count unless those cylinders were retrieved. (APA, Art. 1, § 1.1(a) and Art. 2, § 2.1(f)).

         The APA provided that settlement of the Cylinder Deferred Payment was to occur on or before April 15, 2015. (APA, Art. 2, § 2.1(f)). Adkins informed McCormick that the audit was taking longer than anticipated. (McCormick Dep. at 25). Adkins told McCormick that it looked like the count was going to come up short of the 6, 500 cylinders, but that AWG wanted to continue counting in order to find every available cylinder. (Adkins Aff. ¶ 30). The parties dispute[2] whether McCormick orally consented to the continued audit and resulting delay in settlement. Adkins testified that McCormick consented. (Id. ¶ 32). McCormick says he did not. (McCormick Dep. at 25).

         AWG finished the audit on May 22, 2015. (Adkins Aff. ¶ 33). It tallied up the “in the field” count on a 29-page spreadsheet that listed the count for each and every one of the 1, 233 customers. (Id.). In sum, AWG's audit represented that ARC owned and transferred 4, 663 asset cylinders to AWG-1, 837 cylinders short of the 6, 500 promised in the APA. (Id.).

         B. Dispute Over Cylinder Audit

         Immediately before the parties entered into the APA, McCormick claims he gave AWG documentation showing ARC owned somewhere between 6, 000 and 6, 700 asset cylinders. (See McCormick Dep. at 18).

         After learning of the cylinder deficiency claimed by AWG, McCormick instructed Plaintiffs' accountant, Elisha Sterling, to contact AWG on June 9, 2015 and discuss the dispute. (Filing No. 47-7, Deposition of Elisha Sterling at 9-10). Sterling relayed to AWG that McCormick “says there may be a shortage” but believed that “a shortage of 1, 837 is unlikely.” (Id. at 13; Adkins Aff. ¶¶ 37-38).

         After AWG's audit, 16 cylinders were discovered at Landree Mine which were not counted. (McCormick Dep. at 45-16). Beyond that, Plaintiffs admit that they have no evidence that the counts at any of the 1, 232 other customers were flawed.

Q: Do you know of any other examples other than the Landree Mine of situations where additional cylinders were found at a customer after May of 2015?
A: No.

(Id. at 46).

         C. The Purchase and Audit of Receivables

         AWG also purchased ARC's accounts receivables as part of the October 1, 2014 sale of assets. (APA, Art. 2, § 2.1(a)). The parties agreed to defer 20% of the payment for receivables for 100 days, so that determinations could be made as to precisely which receivables were performing, and thus being purchased, and which were not. (Id.).

         There is no dispute over receivables. AWG admits it owes ARC $43, 859.48 due to the post-closing reconciliation of receivables.

         II. Discussion

         There are three motions before the court. The first of these is Plaintiffs' Motion for Summary Judgment on their breach of contract (the APA) and attorneys' fees claims. They seek three specific damage awards for AWG's alleged breach of the APA: (1) the receivables holdback of $43, 859.48; (2) the entire $150, 000 Cylinder Deferred Payment; and (3) attorneys' fees. The second is Plaintiffs' Motion for Summary Judgment on Defendant's Counterclaims. This motion does not address all six counterclaims; instead, it addresses Counts II, IV, V, and VI of AWG's Counterclaim for unjust enrichment, fraud, negligent misrepresentation, and breach of the duty of good faith and fair dealing. Lastly, AWG filed a Cross-Motion for Summary Judgment on Plaintiffs' breach of contract and attorneys' fees claims and on Counts I and III of its Counterclaim for breach of contract and breach of warranty. AWG asks the court to award it $79, 625 in damages for the asset cylinder shortfall (offset by the $43, 859.48 it owes Plaintiffs on the receivables). The court begins with Plaintiffs' breach of contract claim.

         A. Breach of Contract

         As this is a diversity case filed in the State of Indiana, Indiana rules of contract interpretation control. Hinc v. Lime-O-Sol Co., 382 F.3d 716, 719 (7th Cir. 2004). Under Indiana law, the interpretation of a contract is a question of law for the court. AM General LLC v. Armour, 46 N.E.3d 436, 440 (Ind. 2015). In interpreting an unambiguous contract, the court must give effect to the intentions of the parties as expressed in the four corners of the document. Id. “Clear, plain, unambiguous terms are conclusive of that intent.” Art Country Squire, L.L.C. v. Inland Mortg. Corp., 745 N.E.2d 885, 889 (Ind.Ct.App. 2001). The meaning of a contract is to be determined from an examination of all of its provisions, not merely from a review of individual words, phrases, or paragraphs read in isolation. Id.

         A “contract term is not ambiguous merely because the parties disagree about the term's meaning.” Roy A. Miller & Sons, Inc. v. Industrial Hardwoods Corp., 775 N.E.2d 1168, 1173 (Ind.Ct.App. 2002). Rather, a contract is ambiguous if its terms are susceptible to more than one reasonable interpretation. Trustees of Indiana Univ. v. Cohen, 910 N.E.2d 251, 257 (Ind.Ct.App. 2009). Ambiguous terms must be resolved by a trier of fact. Arrotin Plastic Materials of Ind. v. Wilmington Paper Corp., 865 N.E.2d 1039, 1041 (Ind.Ct.App. 2007).

         1. Plaintiffs' ...

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