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Prime Finish, LLC v. ITW Deltar IPAC

United States District Court, E.D. Kentucky, Central Division, Lexington

May 5, 2017

ITW DELTAR IPAC, Defendant. and CAMEO, LLC, Intervenor Plaintiff,


          Gregory F. Van Tatenhove United States District Judge

         The instant action was brought before federal court in 2008 after Defendant ITW Deltar IPAC removed the claims of Plaintiff Prime Finish, LLC, from Bourbon Circuit Court. The dispute arises out of a relatively uncomplicated “Product Supply Agreement” from May 26, 2005, whereby Prime Finish promised to paint interior automotive parts for ITW Deltar and ITW Deltar agreed to provide car parts to be painted throughout a forty-eight month term. Prime Finish specializes in painting and finishing plastic parts and ITW supplies car manufacturers with these finished parts. Prime Finish underwent significant expansion to fulfill the volume of painting required by ITW. Installation of this new and rather expensive paint line was only possible due to a sizable capital investment by Cameo, LLC. Prime Finish then began painting car parts for ITW Deltar and paying a royalty to Cameo for parts painted on the Cameo line but, as in all contract disputes, something went wrong.

         Eventually, ITW terminated the “Product Supply Agreement” before the forty-eight month term had expired after complaining of Prime's alleged insolvency and quality standard issues with the painted materials. Prime then sued ITW for breach of contract and damages including the early termination penalty that had been agreed to in the Product Supply Agreement. Cameo intervened, arguing that any early termination penalty or other award paid to Prime was actually owed to Cameo. Roughly during this same time, Prime and ITW entered into a mutual settlement and release agreement and Judge Coffman granted summary judgment for ITW against Cameo holding that Cameo lacked standing to sue. In the first of two appeals, the Sixth Circuit reversed the district court's ruling and found that Cameo did have standing to sue as an intended creditor beneficiary of the supply agreement.

         Following the Sixth Circuit's ruling, counsel for Cameo withdrew. Cameo then missed Court deadlines, was ordered to show cause for why the action should not be dismissed, and upon an unsatisfactory response the action was dismissed with prejudice by Judge Coffman. Following Judge Coffman's retirement, the case was reassigned to Judge Van Tatenhove who, upon a motion for reconsideration, denied the motion and upheld the dismissal. Following a subsequent appeal, reversal, and remand by the Sixth Circuit, Cameo filed amended intervening complaints. Now, on the eve of trial and nearly twelve years since the product supply agreement was signed, ITW Deltar has filed a Motion for Partial Summary Judgment on Cameo's Claim for Actual Damages in Addition to Liquidated Damages [R. 129] and a Motion for Partial Summary Judgment on Calculation of Liquidated Damages [R. 130]. After thoroughly reviewing the Product Supply Agreement, attached affidavits, the record, and relevant case law, the Court orders as follows: Defendant ITW Deltar IPAC's Motion for Partial Summary Judgment [R. 129] is DENIED and the Defendant's Motion for Partial Summary Judgment [R. 130] is GRANTED in PART and DENIED in PART.


         There are many uncontested facts in this case. The Sixth Circuit has already determined that Cameo has standing to sue as an “intended creditor beneficiary of the supply agreement.” [R. 59 at 7.] But, the Court of Appeals refused to analyze what relief, if any, Cameo is entitled to based upon the Supply Agreement. [Id. at 13.] Initially, Cameo and Prime entered into a “Production Service Agreement” in which Cameo agreed to fund a new paint line for Prime and Prime agreed to pay a 7% royalty to Cameo for all parts that were painted on the Cameo line. [R. 129-2 at 2-3.] The agreement further instructed that “[a]ll ITW projects will be, by default, quoted to run on the new line…” [R. 129-2 at 2.] On May 26, 2005, the very next day, Prime and ITW entered into a “Product Supply Agreement” that had a four year term that “shall commence on June 1st 2005, and shall continue for forty-eight months (48) following the start of production (expected to be January 1, 2006).” [R. 129-4 at 2.]

         The Product Supply Agreement establishes the parameters of the business relationship between Prime and ITW. In the agreement, Prime notifies ITW that “Seller will be required to add an additional paint line to its current facility” and that “Buyer [ITW] desires that Seller increase its capacity in order to fully meet Buyer's requirements and is willing to enter into this output agreement in order for Seller to commit to the installation of an additional paint line…” [R. 129-4 at 2.] The contract did not set exact numbers regarding the number of parts to be painted, but “Exhibit A” to the contract provides an “Estimated Minimum Annual Revenue” that sets revenue for 2006 at $1.186m and the following three years of the four year agreement to yield $2.885m in minimum annual revenue. [R. 129-4 at 4.]

         The day that production began is contested, but both parties agree that ITW terminated the supply agreement on August 1, 2008. [R. 129-5.] On August 1, 2008, Doug Marciniak, the Vice President and General Manager of ITW Deltar Body & Interior, sent a letter to Prime where he “terminate[d] the Agreement under Sections 3.3 and 3.4 of the Product Supply Agreement.” Mr. Marciniak believed that “[u]nder Section 3.3, an event of default has occurred because Prime Finish is insolvent. An event of default has also occurred under Section 3.4 because Prime Finish repeatedly and continually failed to meet the Quality Standard defined by the Boundary Limits, despite ITW's written notice more than four months ago and ITW's exhaustive and costly efforts to help Prime Finish remedy such problems.” [Id.] While the parties agree this termination letter was sent by ITW to Prime Finish, Cameo argues that the termination was not justified. [See R. 133 at 4-5.]

         In the Product Supply Agreement “Section 3: Termination” allows for early termination of the forty-eight month contract term upon a number of different events of default. [R. 129-4.] While the contract allows for early termination in certain circumstances, “Exhibit B” to the contract provides for a “Penalty for Early Termination of Contract” which states, “[i]f ITW Deltar terminates its contract early, for any reason other than outlined in the exception below, ITW Deltar will pay the following termination penalty.” [Id. at 4.] The sliding scale in Exhibit B provides for decreasing penalties over each consecutive six-month period in the following manner:

Month range where contract is terminated








Damages in Millions ($USD)








[R. 129-4 at 4.]

         This lawsuit began in 2008 when Prime brought suit against ITW for breach of the Product Supply Agreement. Cameo's initial intervening complaint was filed in 2009 and sought a “Penalty Payment” of $375, 000 for early termination of the contract from ITW Deltar. [R. 12-2 at 3.] In May, 2010, Prime and ITW entered into a “Mutual Settlement and Release” agreement where ITW paid Prime $50, 000 and Prime released all claims related to this case. [R. 129-6.] Cameo also entered into a “Settlement Agreement, Release and Covenant Not to Sue” with Prime Finish but “[t]his Release recognizes that Cameo continues with its lawsuit against ITW pursuant to Cameo's claim of a right to recover any early termination penalty sum from ITW under the terms of the Prime Finish - ITW Product Supply Agreement and its Exhibit B, which was and is hereby assigned to Cameo.” [R. 133-2 at 3.] The Court then dismissed all claims against ITW, but as discussed above, the Sixth Circuit reversed and remanded after determining that Cameo had standing to sue. [See R. 59.]

         In April, 2016, Cameo filed a “First Amended Intervening Complaint” that sought damages due to ITW's breach of the Prime Finish and ITW agreements. [R. 95] Cameo maintained that it was “entitled to recover the ‘penalty' pursuant to those agreements as liquidated damages for ITW's breach of those agreements.” [R. 95 at 2.] But, Cameo also states that the Settlement Agreement between Cameo and Prime Finish [R. 133-2] provided an “independent basis to recover the early termination penalty, separate and apart from its status as an intended beneficiary of the ITW/Prime Finish agreements…” [R. 95 at 2.] In addition to the early termination penalty, Cameo alleges damages from ITW's breach that include “lost profits, and expenditures incurred by Cameo in installing a paint line and equipment in Prime Finish's factory for use on ITW's products.” [R. 95 at 1-2.] The Court allowed for Cameo to file a “Second Amended Intervening Complaint by Cameo, LLC” which modified the demand by seeking recovery of a $500, 000 early termination penalty instead of the originally requested $375, 000. [R. 102-2.]

         In ITW's Motion for Partial Summary Judgment, the Defendant attached Cameo's discovery responses which specifically enumerate the damages sought by Plaintiff. Those damages include: (1) $500, 000, plus interest for the early termination penalty, (2) $846, 193, plus interest for lost royalties of 7% on the invoice price of painted parts as a result of the early termination, (3) $381, 604, plus interest, for lost sales commission of 3% on the invoiced parts, and (4) $1, 079, 772, plus interest, as ITW's alleged breach led to default on a loan that was secured by the paint-line asset and that default resulted in legal possession of the paint line being taken by Cameo's creditor resulting in loss of use of the asset. [R. 129-1 at 4, R. 129-7 at 10.]



         When sitting in diversity, a federal court applies the substantive law of the state in which it sits. Hayes v. Equitable Energy Resources Co., 266 F.3d 560, 566 (6th Cir. 2001) (citing Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941)). However, when considering summary judgment arguments, a federal court applies the standards of Federal Rule of Civil Procedure 56 rather than Kentucky's summary judgment standard as expressed in Steelvest, Inc. v. Scansteel Serv. Ctr. Inc., 807 S.W.2d 476 (Ky. 1991). See Gafford v. Gen. Elec. Co., 997 F.2d 150, 165 (6th Cir. 1993). Under Rule 56, summary judgment is appropriate where the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. See Fed. R. Civ. P. 56. A fact's materiality is determined by the substantive law, and a dispute is genuine if “the evidence is such that a reasonable jury could return a verdict for the non-moving party.” Anderson v. Liberty Lobby, 477 U.S. 242, 248 (1986).

         Summary judgment is inappropriate where there is a genuine conflict “in the evidence, with affirmative support on both sides, and where the question is which witness to believe.” Dawson v. Dorman, 528 F. App'x 450, 452 (6th Cir. 2013). “Credibility determinations, the weighing of the evidence, and the drawing of legitimate inferences from the facts are jury functions, not those of a judge. . . . The evidence of the non-movant is to be believed, and all justifiable inferences are to be drawn in his favor.” Morales v. American Honda Motor Co., Inc., 71 F.3d 531, 535 (6th Cir. 1995) (quoting Liberty Lobby, 477 U.S. at 255). The Court is under no duty to “search the entire record to establish that it is bereft of a genuine issue of material fact.” In re Morris, 260 F.3d 654, 655 (6th Cir. 2001). Rather, “the nonmoving party has an affirmative duty to direct the court's attention to those specific portions of the record upon which it seeks to rely to create a genuine issue of material fact.” Id.


         Defendant ITW seeks partial summary judgment, in two separate motions, on what are essentially the nature and size of Plaintiff's demand for damages. First, ITW contends that upon early termination of the Supply Agreement, the sole remedy available to Defendant are the liquidated early termination damages as delineated in Exhibit B to the Product Supply Agreement signed by Prime Finish and ITW. [See R. 129-1 at 2.] ITW makes clear that “why” the Supply Agreement was terminated early is a disputed factual matter but that the issue of “what kind of damages Cameo may recover is a pure issue of law.” [Id.] Cameo argues that the Early Termination Penalty “is not a true liquidated damages provision, so the case law holding that a liquidated damages provision constitutes a party's sole remedy for breach of contract does not apply.” [R. 133 at 7.] Instead, Cameo argues that Kentucky law requires true liquidated damages provisions to be triggered following a party's breach. Plaintiff believes that since the early termination penalty can be awarded without the Defendant's breach, the penalty cannot be a liquidated damages provision. [Id. at 8-9.] Cameo further argues that the contract is ambiguous as to whether the parties intended the early termination penalty to “constitute a limit on damages in the event of breach.” [R. 133 at 14.]

         ITW also contends that the “start of production” date that establishes the commencement of the forty-eight month term of the agreement, as well as calculations for the penalty assessed under Exhibit B, should be measured by the start of “any work under the contract” and that this work began in July 2005. [R. 130-1 at 1-2.] Pursuant to these findings, ITW argues that early termination of the contract occurred 37 months later in August, 2008, resulting in a maximum early termination penalty of $125, 000. [Id.] Plaintiff Cameo disagrees and asserts that the start of production was in September 2006 because the agreement considered “start of production” to denote production on the newly installed Cameo paint line or that, in the alternative, “start of production is an ambiguous term”. [R 134 at 6-8.]



         ITW believes that Cameo's possible recovery should be solely based upon the Exhibit B penalty which serves as a provision for liquidated damages. [See R. 129.] Most relevant is the product supply agreement's section on Termination and Exhibit B itself, which provides a penalty for early termination of the contract. “Section 3: Termination” of the Product Supply Agreement states, in part:

Earlier termination may only occur upon the following events of default . . .
3. The other party ceases to do business, makes a composition or assignment for the benefit of its creditors, makes a general arrangement with its creditors concerning any extension or forgiveness of any of its secured debt, becomes bankrupt or insolvent, suffers or seeks the appointment of a receiver to the whole or any material part of its business, takes any action to liquidate or wind up the whole or any material part of its business, is found subject to any provisions of any bankruptcy code concerning involuntary bankruptcy or similar proceeding, or suffers a material adverse change in its financial position such that payments hereunder may be affected or delayed by a creditor or administrator of the business of the other party.
4. Seller fails to meet the Quality Standards defined by the Boundary Limits agreed between the parties, after notice from Buyer, and after Buyer and Seller have taken all reasonable steps required to resolve the breach, and fails to cure such default within ...

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