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Moffatt Enterprises Inc. v. Borden

as amended february 20 1987.: December 22, 1986.


Appeal from the United States District Court for the Western District of Pennsylvania (Pittsburgh), D.C. Civil No. 82-2536.

Author: Mansmann

WEIS, MANSMANN, and HUNTER, Circuit Judges.


MANSMANN, Circuit Judge.

The Moffatt brothers -- Eugene, Raymond, Robert, and Sidney -- and their corporation, Moffatt Enterprises, Inc., appeal from an order granting summary judgment in favor of the defendant, Borden, Inc. ("Borden").

The plaintiffs marketed a urea-formaldehyde foam insulation called Insulspray through a series of yearly distributor agreements with Borden. These agreements contained a release of claims and permitted the parties to terminate their venture upon six months' notice, or not re renew the distributorship at the end of the one-year terms. In their complaint, the plaintiffs allege, inter alia, that Borden fraudulently induced them individually to enter into the distributorship agreements when Borden knew of defects in Insulspray which would render the product unmarketable. Additionally, the corporate plaintiff averred that Borden's alleged misrepresentation about Insulspray caused them to purchase unnecessary and expensive equipment.

The district court concluded that any harm to the plaintiffs derived from the defendant's refusal to renew the distributor agreement -- a permissible action under the contract's terms. The court then held that the alleged injuries were solely to the corporate plaintiff and that, therefore, the Moffatts as a matter of law lacked standing individually to sue. The court decided, moreover, that the release of claims provision protected Borden from liability, even assuming the truth of the plaintiffs' allegations of fraud and misrepresentation.

We find that the individual plaintiffs have produced evidence to establish claims grounded in fraudulent inducement to enter into the distributorship agreements. We further determine that the corporate plaintiff has presented evidentiary support for its claims of alleged fraud and misrepresentation which caused it to purchase some unnecessary equipment. Finally, we hold that on proof of fraud the plaintiffs may avoid the release provision of the distributorship agreements into which Borden allegedly fraudulently induced them to enter. Moreover, the Moffatts' status as shareholders in Moffatt Enterprises, Inc. does not in itself preclude their individual causes of action. Since the plaintiffs have presented evidence which a jury may find clear and convincing to support a claim of fraud and similarly preponderant evidence which can demonstrate their action for misrepresentation, material issues of fact remain for trial. We will, therefore, reverse the order of the district court which granted summary judgment in favor of Borden.



The district court assumed the following facts in ruling upon Borden's motion for summary judgment.

From 1975 to 1978 Borden manufactured and sold Insulspray, a patented urea-formaldehyde foam insulation product. Insulspray is composed of a urea-formaldehyde resin and a surfactant, which a foaming gun mixes and propels into a wall cavity where the mixture hardens.

In March of 1975, Eugene Moffatt contacted Borden to obtain urea-formaldehyde foam insulation, then a new product to the American marketplace, for his home. Eugene learned from Roy Wendt, a Borden salesman, that Borden did not have a distributor for its insulation product, Insulspray, in Eugene's area. Several meetings and telephone conversations were subsequently held regarding the possibility of Eugene becoming an Insulspray dealer. In May, Eugene and Raymond Moffatt met with Wendt and other Borden employees at its laboratory in Bainbridge, New York. There Borden personnel demonstrated Insulspray to Eugene and Raymond and assured them that if was non-toxic and resisted significant shrinkage.

In the fall of 1975, Eugene, Raymond, and Robert Moffatt formed a partnership, Moffatt Enterprises, to distribute Insulspray to authorized dealers in New Castle, Pennsylvania. The partnership, in turn, established Thermal Acoustics, a business which installed Insulspray.

On October 31, 1975, the Moffatts entered into the first in a series of distributor contracts with Borden. The agreement provided in relevant part:

11. Product and Distribution Policy Changes -- The Manufacturer [Borden] reserves the right from time to time, in its absolute discretion, without thereby incurring any liability to the Distributor with respect to any purchase order theretofore placed by the Distributor, or otherwise, to discontinue or to limit its production of any product, to terminate or limit deliveries of any product the production of which is so discontinued or limited, to alter the design or construction of any product, to add new and additional products to its lines, to substitute such altered products for the prior products in filling orders, and to change its sales and distribution policies.

16. No Liability for Termination or Nonrenewal -- Neither the Manufacturer nor the Distributor shall, by reason of the termination or nonrenewal of the Distributor's distributorship of said product, be liable to the other for compensation, reimbursement or damages on account of expenditures, investments, leases or commitments in connection with the business or good will of the Manufacturer or the Distributor, or otherwise.

18. Release of Claims -- In consideration of the execution of this agreement by the Manufacturer, and of such sales of said products as the Manufacturer may make to the Distributor within the term hereof, the Distributor hereby releases the Manufacturer from all claims, demands, contracts, and liabilities, if any there be, as of the date of the execution of this agreement by the Distributor.

As business grew, Sidney Moffatt quit his job at the Lockley Manufacturing Company to work full-time for Moffatt Enterprises in 1976. Eugene, Raymond, and Robert, however, maintained their positions at the Packard Electric Company. Throughout 1976 the plaintiffs received written materials from Borden attesting to the safety and effectiveness of Insulspray.

In January of 1977, Borden created a separate department of its Adhesives and Chemicals Division under General Manager David Sullivan to sell Insulspray. Borden inaugurated a major marketing program one month later with a meeting for Insulspray distributors, including Eugene and Raymond Moffatt, at Amelia Island, Florida. There, Robert Gutheil, then a vice-president in Borden's Adhesives and Chemicals Division, allegedly labeled Insulspray "as safe as the air one breathes and the water one drinks." Borden officials also reported that Borden had thoroughly tested Insulspray and had received no customer complaints.

However, the Consumer Product Safety Commission previously had received several reports of formaldehyde fumes and illness in homes insulated with Insulspray.*fn1 Borden also was facing two lawsuits over Insulspray. Internal Borden memoranda, moreover, had acknowledged the off-gassing problem in 1975.

At the Amelia Island distributors' meeting in 1977, Sullivan and Gutheil told Eugene and Raymond Moffatt that they would henceforth have to work full-time as Insulspray distributors. Sullivan and Gutheil reassured the Moffatts of Insulspray's safety and effectiveness. The Moffatts thereafter resigned from the Packard Electric Company to form Moffatt Enterprises, Inc.*fn2 Also at Borden's behest, they later established Insulattic, Inc. to fabricate cellulosic insulation for attics. Borden officials orally assured the plaintiffs that it would renew their distributor agreement every year.

In 1977, the plaintiffs purchased $578,000 worth of material from Borden -- over $500,000 more than in 1976. At the same time, the defendant continued to receive health-related complaints about Insulspray without informing the plaintiffs. Borden also witnessed a dramatic downturn in Insulspray's profitability throughout 1977. The defendant concealed its losses from its distributors, however, at sales meetings in the fall of 1977 and in early 1978. Toward the 1978 year's end, the plaintiffs' sales of Insulspray like those in the industry at large, had significantly declined.

In the fall of 1978, Borden had privately decided to withdraw Insulspray from the market. Nonetheless, Borden representatives urged the plaintiffs at a meeting in Columbus, Ohio to enlarge their distribution area into North Carolina. The plaintiffs aver that in direct reliance on these representations, the corporate ...

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