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Interstate Equipment Co. v. Esco Corporation

United States District Court, W.D. North Carolina, Statesville Division

July 17, 2014

INTERSTATE EQUIPMENT COMPANY, Plaintiff,
v.
ESCO CORPORATION, Defendant.

FINDINGS OF FACT & CONCLUSIONS OF LAW

RICHARD L. VOORHEES, District Judge.

THIS MATTER is before the Court to render factual findings and legal conclusions following a bench trial held in November 2012 to resolve a dispute concerning the dissolution of a dealer - supplier relationship between Plaintiff Interstate Equipment Company ("IEC") and Defendant ESCO Corporation ("ESCO") and governed in part by the North Carolina Farm Machinery Franchise Act (the "Act"), N.C. GEN. STAT. § 66-180, et seq .[1]

I. Factual Findings

1. Plaintiff Interstate Equipment Company ("IEC") is a North Carolina Corporation with a principal place of business in Statesville, N.C.

2. Defendant ESCO Corporation ("ESCO") is an Oregon corporation with its principal place of business in Portland Oregon.

3. ESCO is an independent developer and manufacturer of highly engineered wear and replacement products and services for mining, construction, wood processing, rock crushing, dredging and other industrial industries. ESCO manufactures ground engaging tools, buckets, blades, dredge cutterheads, truck bodies, wear solutions and other consumable products. ESCO also develops high-performance products for industrial applications such as conveying and scrap recycling. Products include hammer and impact crusher wear parts, conveying chains and wire rope fittings.

4. Well prior to 2000, ESCO and IEC entered into a distribution relationship, whereby ESCO sold its products to IEC, and IEC sold those products to customers in some of the industries listed above. During the term of IEC's relationship with ESCO, IEC maintained an operating location in Columbia, South Carolina, as well as two operating locations in North Carolina.

5. On or about October 16, 2000, ESCO and IEC signed a "Dealer Sales and Service Agreement" ("Agreement") memorializing the distribution relationship between ESCO and IEC for North Carolina and South Carolina. (Agreement). IEC was authorized to deal in ESCO wear parts across North and South Carolina with one exception; IEC was not authorized to sell crusher wear parts to Vulcan Materials properties in South Carolina. (Agreement, Suppl. A).

6. Under the Agreement, IEC was required to "Maintain adequate replacement parts inventories and service capabilities as required to provide such services." (Tr. 17; Agreement, § 2.2, ¶ 4). Supplement "A" to the Agreement further explained:

"Dealer agrees that it will maintain a sufficient inventory to service the market and which will be adequate to support the agreed upon sales volume objective. The inventory level shall be established in conjunction with the annual ESCO/Dealer Marketing Plan. The inventory level will be reviewed annually by ESCO and may be adjusted at that time, by mutual agreement, in response to changes in the sales volume objective."

(Agreement, Suppl. A). Supplement A provided that the "Dealer and ESCO will mutually establish, on an annual basis, a forecasted sales volume objective within the Territory" and that the "sales volume objective shall be established with the annual ESCO/Dealer Marketing Plan" and likewise subject to adjustment by mutual agreement "in response to changes in the market conditions within the Territory." Id. There was no established minimum or maximum inventory level.

7. Mr. Edward E. (or "Gene") Barkley ("Barkley") testified on behalf of IEC. Mr. Barkley was the IEC Parts Manager for approximately twenty years. (Tr. 10, 74). In his last five years with IEC, Barkley served the dual role of General Parts and Service Manager for IEC. (Tr. 74). Prior to assuming the Parts Manager role, Barkley worked in the service department performing repairs/maintenance on equipment within the Carolinas, and occasionally in Virginia, Georgia, and Tennessee. (Tr. 74).

8. Mr. Dave Poer ("Poer") testified on behalf of ESCO. Poer currently serves as General Sales Manager for Eastern North America at ESCO and is responsible for oversight of sales to customers within that region, including IEC prior to termination of the Agreement.[2] (Tr. 188-89).

9. The rationale behind Dealers like IEC maintaining an inventory of replacement parts was for the convenience of the customer, namely, to enable IEC to be in a position to provide replacement parts to its customers in a timely manner, thereby maximizing sales.[3] (Tr. 62-63, 80).

10. ESCO offered programs to its dealers to assist in the management of inventory levels and to promote the fiscal responsibility of its dealers, including an Annual Return Policy and a Swap or Conversion Exchange Policy.

11. IEC had the ability to request, subject to ESCO's permission, the return of ESCO products not previously used or sold in accordance with ESCO's Parts Return Policy. (Agreement, § 14). ESCO's Annual Return Policy provided dealers the opportunity at year's end to return four percent of their "qualified purchases" made within the previous two years (or twenty-four months) to ESCO.

12. Under the Annual Return Policy, "qualified parts" did not include parts that were made to order or made per a manufacturer's specifications. (Tr. 223). According to ESCO, crusher manganese parts are made to order and, therefore, are not qualified parts. Another example of a part that does not fall into the "qualified parts" category is: dragline bucket. (Tr. 223). Obsolete parts are not "qualified parts" for purposes of the ESCO Annual Return Policy.

13. IEC did not regularly take advantage of the ESCO Annual Return Policy but had, in fact, successfully returned parts in physical condition similar to the parts shown in Plaintiff's Exhibits 18A through X to ESCO in the past.[4] (Tr. 222-23, 36-37). According to Defendant, IEC returned no parts in 2007; but returned up to $16, 000 worth of parts to ESCO in 2009.

14. ESCO also offered its dealers a Swap or Conversion Exchange Program ("Swap Program") during the introduction period of new products. The Swap Program permitted the dealer to benefit from a one-to-one swap of an older part for a newer model/version of the same replacement/repair part. (Tr. 224). ESCO would allow the dealer to send back the old part in exchange for purchasing the newer part.

15. IEC did not always take advantage of the Swap Program and explained that if its customer had equipment that required the older model part, IEC needed to have the older replacement part on hand.

16. According to ESCO, IEC routinely asked to "roll" accounts receivable with ESCO in order to postpone payment for ESCO parts.[5]

17. During the relevant time period, IEC's President and sole shareholder was Frank Eller.

18. On or about June 7, 1994, Mr. Eller executed a document entitled Durable Power of Attorney ("POA") in favor of Attorney Douglas G. Eisele.[6] (Pl.'s Exh.12). The document was filed on the public record in Iredell County on July 17, 2012. Since the bench trial, the POA has been revoked as of May 7, 2013, by Mr. Eller, whose ability to manage his personal business and financial affairs is in some doubt.[7]

19. The parties stipulated that Mr. Eller was incapacitated and unable to testify. (Tr. 175-76). Mr. Eisele, in his role as designated POA in Mr. Eller's behalf, testified[8] that Mr. Eller had been receiving inpatient care at either a hospital or rehabilitation center since May 2, 2012, and that Mr. Eisele had since invoked the authority and assumed the responsibilities granted to him under the January 7, 199 Power of Attorney. (Pl.'s Exh. 12) (Tr. 178).

20. Dating back to October 31, 2002, IEC had a Line of Credit (up to three million dollars) with Piedmont Bank, a Division of Yadkin Valley Bank and Trust Company, to be used in the operation of IEC. In connection with the Line of Credit, IEC executed and delivered to Piedmont Bank a Promissory Note ("Note"). (Pl.'s Exh. 9/Attachment 1). As security for the Note, IEC executed and delivered to Piedmont Bank a Security Agreement granting to Piedmont Bank a security interest in all of IEC's furniture, fixtures, inventory, equipment, and accounts receivable. (Pl.'s Exh. 9/Attachment 2). Piedmont Bank recorded its security interest in the office of the Secretary of State for North Carolina by filing a UCC Financing Statement (No. 20090013488G). (Pl.'s Exh. 9/Attachment 3). As a result, Piedmont Bank held a secured interest and first lien on IEC's assets. (Tr. 164-66).

21. Mr. Eller was required to sign a Personal Guaranty on the IEC Line of Credit at the time the loan was originated. (Pl.'s Exh. 9/Attachment 4; Tr. 172-73).

22. Mr. Eller was also required to sign a personal guarantee on the renewal of IEC's line of credit on January 18, 2010. (Tr. 166-67). The 2010 guarantee was requested in the ordinary course of Piedmont Bank's business, which adhered to a policy requiring the bank to refresh and re-record UCC filings periodically (every ten years). (Tr. 172-73).

23. On August 18, 2010, ESCO notified IEC in writing that it was terminating the Agreement and the distribution relationship between ESCO and IEC, effective December 1, 2010 "with respect to IEC's North Carolina operations only."[9] (Pl.'s Exh. 2) (hereinafter "Notice").

24. After termination of the distribution relationship in North Carolina, ESCO continued to do business with IEC in South Carolina. IEC closed its South Carolina operations in April 2011.[10]

25. Initially, IEC contended that ESCO was without "good cause" to terminate the Agreement.[11] ESCO had to demonstrate good cause only as grounds to terminate the Agreement immediately and without providing IEC a notice or termination period. (Agreement, § 13.1). This aspect of the litigation has been rendered moot as adequate statutory notice of ESCO's decision to terminate (partially) the Agreement was provided to IEC. IEC's First Cause of Action alleging wrongful termination in violation of North Carolina law was voluntarily dismissed with prejudice on June 2012 pursuant to FED. R. CIV. P. 41(a)(1)(A)(ii).

26. The remaining dispute stems from IEC's decision making regarding its Inventory of ESCO product specifically, both the makeup and extent of Inventory in existence upon notification that ESCO would terminate the Agreement, and the degree to which ESCO is obligated to repurchase Inventory from IEC under North Carolina law and the Agreement.

27. ESCO's Notice provided IEC "ninety days to wind up its ESCO product business in North Carolina" (a 90-day Termination Period). (Notice, at 1.) The Notice explained that IEC's request to repurchase Inventory should be made in writing, should include a list of parts for which repurchase is requested, and that an ESCO representative would inspect the Inventory prior to acceptance for repurchase within sixty (60) days after receipt of IEC's request for repurchase.

28. With reference to ESCO product in IEC's possession, the Notice stated:

In the event that any ESCO machinery, industrial equipment, outdoor power equipment, attachments or spare parts (collectively referred to as "Inventory"), or specialized repair tools, remain unsold as of December 1, 2010, ESCO will repurchase those items from IEC, subject to the following limitations: ESCO will pay... 75% of the current net price of all new, unused, and undamaged repair and superseded parts ....

This offer to repurchase does not extend to:

(1) A repair part with a limited storage life or otherwise subject to deterioration; or
(2) A single repair part that is priced as a set of two or more; or
(3) A repair part that, because of its condition, is not resalable as a new part without repackaging or reconditioning; or
(4) Any repair part that is not in new, unused and undamaged condition; or
(5) Any item of Inventory for which IEC does not hold title free of all claims, liens and encumbrances (except for any security interest ESCO may hold); or
(6) Any Inventory, repair parts or specialized tools that IEC orders after this notice of termination; or
(7) Any Inventory purchased more than 36 months prior to this notice of termination; or
(8) Any Inventory or specialized tools that IEC purchased from a source other than ESCO.

(Notice, at 1-2; see also § 66-184(b)) (emphases added).

29. The majority (if not all) of IEC Inventory consisted of wear parts (or other parts) as opposed to machinery, equipment, or attachments. (Tr. 23-24). The term "wear parts" refers to a part on any type of equipment that actually comes into contact with the product/commodity or the ground such that it is subject to wear/being worn out and periodically in need of replacement. (Tr. 8)

30. After a certain amount of use, a "wear part" may be replaced with a "repair part." For purposes of this case, the term "wear part" is synonymous with "repair part" or "replacement part." 31. Some of the parts in inventory were manufactured and purchased more than ten years ago and some of the parts are no longer in use within the industry. (Tr. 32, 99).

32. As of the hearing date, IEC had moved its remaining inventory to its Statesville location, including Inventory brought from IEC's South Carolina facility. (Tr. 91).

33. On December 23, 2010, ESCO sent IEC a letter offering to repurchase certain items of IEC's Inventory. By this time, IEC's Inventory only consisted of ESCO wear, repair and replacement parts - no machinery, equipment, attachments, or specialized repair tools. When ESCO offered to repurchase certain items of the IEC Inventory in December 2010, ESCO was not aware of the lien held by Piedmont Bank. (Tr. 224).

34. In an email dated January 4, 2011 from ESCO District Manager Roger Long to Mr. Eller, with a copy to IEC Parts Manager Gene Barkley ("Barkley"), ESCO proposed a January 6, 2011 meeting to discuss the details of the dealer inventory return.[12] (Def.'s Exh. 21). According to ESCO, a meeting was held on or around January 6, 2011 to discuss the return of inventory. (Def.'s Exh. 23I, Tr. 124-26). However, ESCO never participated in a physical inventory at IEC's Statesville facility with Barkley. (Tr. 92-93, 225-26).

35. IEC has not returned any inventory to ESCO. (Pl.'s Exh. 20). The ESCO offer to repurchase was for a portion of IEC Inventory in the range of approximately $291, 000 as opposed to authorizing the return and repurchase of all of the IEC Inventory which IEC valued at approximately $700, 000.

36. Piedmont Bank had an interest in IEC's Inventory through April 2012.

37. On April 20, 2012, via execution of a document entitled, "Assignment of Interest in Promissory Note, Security Agreement, Financing Statement and Guaranty" ("Assignment"), Piedmont Bank assigned the IEC Note, Security Agreement, and UCC Financing Statement documenting its secured interest in the IEC assets to Mr. Eller individually or personally . (Pl.'s Exh. 9, at 3 and Exh. 11; Tr. 170-71, 174). The Assignment stated its purpose "to vest in Eller such rights as Piedmont ...


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