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December 1, 1970

EMOR, INC., and Delcalo, Inc., Plaintiffs and Counterdefendants,
CYPRUS MINES CORPORATION, Defendant and Counterclaimant, v. ALUMINUM COMPANY OF AMERICA, Counterdefendant

Marsh, Chief Judge.

The opinion of the court was delivered by: MARSH

OPINION AND ORDER (December 1, 1970)

MARSH, Chief Judge.

 This diversity ex-contractu case was tried non-jury. The stipulations of the parties were made part of the evidence. The Pennsylvania conflict of laws rules apply. Klaxon Co. v. Stentor Co., 313 U.S. 487, 61 S. Ct. 1020, 85 L. Ed. 1477 (1941). The contracts to be construed are a Sales Agreement (PX 110) and a Letter Agreement (PX 146) which involved a sale by plaintiffs and counterdefendants, Emor, Inc. and Delcalo, Inc., of the assets and business of Rome Cable Corporation (Rome) to the defendant and counterclaimant, Cyprus Mines Corporation (Cyprus). Emor, Inc. and Delcalo, Inc. are wholly owned subsidiaries of the Aluminum Company of America (Alcoa) which guaranteed the performance of the Sales Agreement.

 Emor, Inc. and Delcalo, Inc. are Delaware corporations, having their principal places of business in Pennsylvania. Emor, Inc. is the new name of Rome which was a Delaware corporation having its principal place of business in Rome, New York. Cyprus is a New York corporation having its principal place of business in California. Alcoa is a Pennsylvania corporation having its principal place of business in Pennsylvania.

 The last acts which put the contracts in force occurred in Pennsylvania on October 2, 1967, when Rome and Alcoa accepted Cyprus' written offer to buy Rome's assets, which contract became the Sales Agreement, and on October 31, 1967, when counsel for the parties signed the Letter Agreement. The closing was held in Pittsburgh on October 31, 1967, at which time the assets of Rome were transferred to Cyprus. In addition, it appears that Pennsylvania has the most significant contacts with the matters in dispute and was the center of gravity. Frankel v. Johns-Manville Corporation, 257 F.2d 508, 510-511 (3d Cir. 1958); Seneca Falls Machine Company v. McBeth, 368 F.2d 915 (3d Cir. 1966). Since the Sales Agreement and the Letter Agreement were made and to be performed in Pennsylvania, and that state was the center of gravity, the law of Pennsylvania applies to the interpretation and application of these agreements. The parties agree with this conclusion (see Stipulation of May 12, 1970, p. 3, item 10).

 Hereinafter, for convenience, we will treat Alcoa as the seller of the assets of Rome to Cyprus.

 The controversy involves the determination of the total purchase price which Cyprus is obligated to pay for the assets and business of Rome pursuant to the Sales Agreement and the Letter Agreement. The court finds that the total purchase price is $42,362,741 and the balance due Alcoa's subsidiaries is $1,261,520.

 Although the contract documents were prepared by experts after lengthy investigation, reflection and discussion, the problems of interpretation presented are fraught with difficulty in the light of the unusual circumstances of the sale, extensive evidence presented, meticulous trial preparation and massive argumentation.


 In 1964, the Supreme Court of the United States held that Alcoa was in violation of Section 7 of the Clayton Act and ordered Alcoa to divest itself of the assets and business of Rome, 377 U.S. 271, 84 S. Ct. 1283, 12 L. Ed. 2d 314. On April 27, 1966, Judge Brennan of the United States District Court for the Northern District of New York entered final judgment (PX 36) providing for such divestiture. This judgment substantially followed the consent judgment entered by the District Court in Rhode Island in the anti-trust case of United States v. Kaiser Aluminum & Chemical Corporation, Civil Action No. 2795, which ordered Kaiser (a competitor of Alcoa) to divest itself of Kaiser's Bristol, Rhode Island wire and cable plant (a competitor of Rome). Under the terms of the final judgment, Alcoa was ordered to sell the assets and business of Rome to such purchaser as would be approved by the Court and at a price which was to be "no less than the total of" several described amounts, two of which (and the ones relevant in this case) were as follows:


"(a) The adjusted book value of the land, plant and equipment of the Plants as of the date of sale, said adjusted book value being $16,238,000 as of December 31, 1964;


"(b) The book value as of date of sale of all raw materials, operating supplies, work in process, finished goods, plant inventories and finished goods inventories as the same appears on the books of Rome Cable before deducting reserves for lifo, except, however, that said book value shall be adjusted to include aluminum, copper and steel content at market value as of date of sale".

 Cyprus began an extensive, broad and thorough investigation of the possible acquisition of Rome in June, 1967, which included a review of Rome's accounting principles and practices, various financial analyses, market studies, studies of Rome's plant and equipment and their relative competitive efficiency, a review of sources of raw materials used in the manufacture of aluminum, steel and copper products, a review of Rome's employee benefit contracts and labor contracts, and the pertinent provisions of Judge Brennan's final judgment and the underlying evidence.

 Cyprus was aware that other companies were also investigating the possible acquisition of Rome, and in early August, 1967, learned that Alcoa had received offers from two other companies at or above the minimum upset price provided in the final judgment. At the request of Cyprus, Alcoa agreed to make no other commitment for the sale of Rome until the Cyprus Board of Directors had acted on the matter.

 Prior to August 25, 1967, Cyprus learned from Alcoa that the upset price calculations were in the range of $42,000,000 to $44,000,000. *fn1" Cyprus itself prepared an upset price calculation as of June 30, 1967 (PX 85, pp. 36, 37) showing an approximate total purchase price of $43,325,000 which was submitted to its Board of Directors. On August 18, 1967, the Cyprus Board authorized the acquisition of Rome "on the terms specified in the final judgment of the United States District Court for the Northern District of New York under date of April 27, 1966" in the anti-trust case.

 It was the intention of Cyprus to purchase the assets and business of Rome as a going concern for a singular lump sum purchase price (PX 126) to be computed according to the provisions set forth in the Sales Agreement. Cyprus did not concern itself with whether the various assets of Rome were worth any particular amount. Many assets such as patents, trade secrets, licenses, leases, trademarks, customer lists and good will of Rome were not individually valued. Cyprus was principally concerned with the anticipated earnings of Rome in relation to the total approximate purchase price and other benefits that were expected to accrue, such as: the total approximate purchase price being at a low earnings multiple; the tax benefit which would accrue as a result of obtaining United States income against which to apply what would otherwise be excess foreign tax credits; the increase in the earnings per share of Cyprus stock which would result from Rome's earnings; the anticipated increase in return on total Cyprus capital; the opportunity to use Rome as a market for Cyprus' copper produced on the Island of Cyprus and copper produced in the United States by Pima Mining Company of which Cyprus owned a 50% interest; *fn2" the opportunity for forward integration of the copper industry; the opportunity to enter the aluminum business; the anticipated rapid growth in the insulated wire and cable market; and the anticipated total purchase price being realistic. Cyprus did not purchase the individual assets of Rome as part of a liquidation sale; it treated the purchase price of Rome as a lump sum consideration.

 On the other hand, the sale of Rome was not an arm's length transaction. Alcoa in 1959 paid a total purchase price for Old Rome as a going business, which was some $13,000,000 more than the book value of Old Rome's assets. In 1966, after materially increasing Rome's profit making ability, Alcoa was compelled to sell Rome as a going concern by the divestiture order at a minimum upset price fixed by Court formulas. Alcoa's trading position was thus handicapped in its bona fide efforts to sell Rome at the best price possible (Tr., pp. 279-280).

 On August 25, 1967, Cyprus prepared and transmitted to Alcoa six executed copies of the Agreement of Sale. The Agreement was executed on behalf of Rome on October 2, 1967. The Agreement was duly submitted to the Justice Department which decided not to object. In early October the petition for approval of the sale to Cyprus was filed on behalf of Rome and Alcoa with the District Court for the Northern District of New York, to which the Sales Agreement was attached as an exhibit. Alcoa sent a draft of the petition to Cyprus. Officials of Alcoa and Cyprus attended the hearing in Utica, New York, and testified. On October 25, 1967, Judge Brennan entered an Order in which he approved of the sale (PX 131).

 Under the provisions of the Sales Agreement the closing would have been held on December 31, 1967. However, Cyprus had requested an acceleration of the closing date to October 31, 1967, and Alcoa agreed.

 The closing was held at the offices of Alcoa in Pittsburgh on October 31, 1967, at which time the assets and business of Rome were transferred to Cyprus.

 The Sales Agreement provided that as soon after the closing date "as a balance sheet and related information as of the Closing Date shall become available," and "as soon as the report of Lybrand referred to in Paragraph 2(b) above shall become available", the purchase price was to be calculated and an appropriate adjustment was to be made by the parties (PX 110, paragraph 4). After the closing by invoice letter dated December 12, 1967 (PX 162), Alcoa submitted to Cyprus its calculation of the purchase price. By agreement, the parties dispensed with the Lybrand inventory letter. Thereafter, certain adjustments were made therein as a result of negotiations and of proceedings in this case (PX 422).

 The purchase price calculated by Alcoa (including Rome's cash assets and Cyprus' pro rata share of property taxes) and including all adjustments was $44,686,068.

 Of this purchase price, Cyprus paid on October 31, 1967, as a tentative purchase price, $41,101,221 (consisting of a cash payment of $40,500,000 and a credit of $601,221 for the cash assets retained by Emor).

 The balance of the purchase price claimed by Alcoa to be due from Cyprus is $3,584,847 (PX 422).

 By its counterclaim, Cyprus contends that it has overpaid. Cyprus' calculation of the purchase price was $38,178,260. Since it has already paid $41,101,221, Cyprus claims it is entitled to recover from Alcoa $2,922,961 on its counterclaim. The items comprising the purchase price which Cyprus disputes are as follows: A. The market value of the copper content of Rome's inventories as of October 31, 1967; $ 4,109,317 B. The unamortized excess consideration paid by Alcoa in 1959 for the assets and business of Old Rome as of October 31, 1967; 1,890,295 C. The adjustment to the overhead burden which was used in valuing Rome's inventories as of October 31, 1967; 319,275 D. The inclusion in the expensed items inventory of items other than eleven specific categories of items; and 111,000 E. The book value of Rome's land and plant at Collegeville, Pennsylvania. 78,000


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