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Swift Industries Inc. v. Botany Industries Inc.

August 14, 1972


Author: Becker

Before ADAMS and GIBBONS, Circuit Judges, and BECKER, District Judge.


EDWARD R. BECKER, District Judge.


This is a commercial arbitration case. It comes before us on cross appeals from the judgment of the District Court for the Western District of Pennsylvania*fn1 confirming in part and vacating in part the Award of an arbitrator in a dispute concerning the contractual obligations of Botany Industries, Inc. ("Botany")*fn2 to Swift Industries, Inc. ("Swift"). The dispute arose out of an Agreement for Exchange of Stock and Plan of Reorganization ("Agreement") dated as of August 10, 1961, among Swift, Botany and the stockholders of Swift pursuant to which, on October 2, 1961, Botany transferred to Swift the shares of two corporations, Allegheny Mortgage Company ("Allegheny") and Lincoln Homes Company ("Lincoln") in exchange for stock in Swift.*fn3 Prior to the acquisition of Allegheny and Lincoln stock by Botany, Allegheny and Lincoln had been wholly- owned subsidiaries of Premier Corporation of America ("Premier"), a subsidiary of Botany.*fn4 During the period that Allegheny and Lincoln were owned by Premier, they were included in Premier's consolidated federal income tax return.*fn5

Among the many provisions of the Agreement were warranties from Botany to Swift to the effect that there were no income taxes due the government from Allegheny and Lincoln such as are the precipitating factor in this litigation. Section 12.02 of the Agreement also contains provisions for payment by Botany to Swift in the event of a breach of that warranty. In pertinent part, ยง 12.02 provides that should Lincoln, Allegheny, or Swift suffer any loss resulting from liabilities of Lincoln or Allegheny for taxes attributable to ownership of property or operation of their business for any taxable period ended prior to the closing date under the Agreement (other than as provided for in certain schedules appended to the Agreement), Botany is obligated to:

"pay Swift in cash an amount equal to all losses, liabilities and expenses incurred or suffered by Lincoln, Allegheny or Swift..."

by reason thereof (emphasis added).

On October 24, 1968, Premier notified Allegheny and Lincoln that the District Director of Internal Revenue in New York City had issued a letter and report (consisting of some 140 pages and 59 schedules) adjusting the income tax liability of Premier and its subsidiaries for the years 1959-62 and determining that there were deficiencies which, with interest to September 15, 1971, totaled some $8,402,670.*fn6 Premier also advised Lincoln and Allegheny that under the applicable tax regulations, Premier and each of its subsidiaries were jointly and severally liable for the entire consolidated tax liability for each year that they were included in the consolidated return. The potential liability of Allegheny and Lincoln (including interest) for the years 1960 and 1961 was calculated to be $6,033,480. Swift viewed this situation with alarm, since the potential claim exceeded the combined net worth of Allegheny and Lincoln and approximated the consolidated net worth of Swift itself. Prior to the receipt of notification of the Premier tax letter and report, Swift had embarked upon a program of corporate growth through mergers and other transactions, but the balance sheet notation required by its auditors of the possible tax liability impaired its growth program and Swift's ability to borrow.

The claims asserted by the Internal Revenue Service ("IRS") were at once disputed by Premier and Botany. On November 4, 1968, Swift notified Botany that it deemed Botany responsible for taxes or liabilities together with all expenses incurred or suffered by Allegheny, Lincoln, or Swift in connection therewith. However, on December 5, 1968, Botany, through counsel, disclaimed liability. In another development, on November 26, 1968, seven former subsidiaries of Premier (which by this time was insolvent) entered into an agreement to apportion among themselves any ultimate income tax liability and the costs of the tax litigation ("Sharing Agreement"). On February 6, 1970, the District Director in New York issued to Premier a so-called 90-day letter, or statutory notice of deficiency. This notice was contested by Premier and the parties to the Sharing Agreement by appeal to the Tax Court of the United States. The tax litigation is still pending in the Tax Court and it is presently uncertain as to how or when it will terminate.

The foregoing recital is obviously the stuff of which lawsuits are made. The lawsuit which emerged was shaped by the Agreement, which had provided that disputes arising therefrom be adjudicated in the forum of commercial arbitration governed by the rules of the American Arbitration Association (AAA). In accordance with those rules, Swift filed a Demand for Arbitration with the AAA. In addition to asking for a declaration that Botany was liable to pay any taxes, penalties, and interest that might be determined to be due at the conclusion of the tax deficiency proceedings, Swift also requested that Botany undertake and pay the cost of defense of the deficiency proceedings. After much preliminary skirmishing,*fn7 the arbitration finally got underway. Botany zealously argued that it was not responsible for any deficiency. During the course of the arbitration proceedings, Swift advanced the contention that only the delivery by Botany to Swift of a cash or surety bond protecting Swift against the possible tax deficiency would afford complete relief to all parties.*fn8

On June 30, 1970, the arbitrator entered his award, which consisted of five lettered paragraphs. The arbitrator's first finding (Paragraph A) was that Botany was liable to Swift for the federal tax deficiencies of Lincoln and Allegheny for the years 1960 and 1961. That finding is no longer a subject of dispute between the parties and the judgment of the District Court confirming it is not before us.*fn9 Paragraph B of the award provided that Botany should deliver to Swift the sum of $6,000,000 or, in lieu thereof, a surety bond, to protect Allegheny, Lincoln, and Swift against the tax liability as finally determined. Paragraph C required Botany to reimburse Swift in the sum of approximately $100,000 for its counsel fees and expenses to that date. This sum included fees and expenses incurred in connection with both the tax deficiency proceedings and the commercial arbitration proceedings.

The provisions of paragraphs B and C of the Award, providing for payment of $6 million cash or the surety bond and for the payment of all counsel fees, are in bitter dispute and constitute the sinews of this appeal. On January 21, 1971, the District Court, acting on Swift's petition to confirm the Award and Botany's motion to vacate it, entered its judgment in which it confirmed paragraph C (as to fees) but vacated paragraph B in its entirety on the grounds that the award of a bond was improper because: (1) relief was not specifically requested in the prayer of the original arbitration demand; and (2) the Agreement did not specify that a bond could be awarded for a breach of warranty. Swift's motion to amend the Opinion, Order and Judgment was denied.

While we will perforce come to grips with the questions raised by the appeal from the award of counsel fees, the preeminent question before us relates to the propriety of the award of the bond, viewed in either of its aspects: (1) as a $6 million cash bond; or (2) as a surety bond. Swift maintains that even though award of a bond was not expressly contemplated in the Agreement, it was authorized by Rule 42 of the Commercial Arbitration Rules which the parties adopted by virtue of the arbitration clause of the Agreement. Rule 42 authorizes the arbitrator to grant "any remedy or relief which he deems just and equitable and within the scope of the agreement of the parties." Botany, on the other hand, argues that the award failed to draw its essence from the Agreement and went beyond the scope of the submission; Botany also contends that the award was completely irrational.

The conflicting contentions of the parties require us to apply to the commercial arbitration field those principles enunciated in a labor arbitration context by the Supreme Court in the case of United Steelworkers of America v. Enterprise Wheel & Car Corp., 363 U.S. 593, 80 S. Ct. 1358, 4 L. Ed. 2d 1424 (1960), and by this Court in Ludwig Honold Mfg. Co. v. Fletcher, 405 F.2d 1123 (3d Cir. 1969). Although we decide the case on a different basis than the District Court, we affirm.*fn10


We turn first to an exegesis of Enterprise and Honold and of the general principles of law governing the matter before us. Enterprise is the leading Supreme Court case enunciating the general principles that govern the disputes as to the authority of the arbitrator to fashion relief, which is the threshold question in this case. Although Enterprise is a labor arbitration case, its principles have been generally applied to the commercial arbitration field as well, keynoted by the oft quoted words of Mr. Justice Douglas, who delivered the Opinion of the Court:

"When an arbitrator is commissioned to interpret and apply the collective bargaining agreement, he is to bring his informed judgment to bear in order to reach a fair solution of a problem. This is especially true when it comes to formulating remedies. There the need is for flexibility in meeting a wide variety of situations. The draftsmen may never have thought of what specific remedy should be awarded to meet a particular contingency. Nevertheless, an arbitrator is confined to interpretation and application of the collective bargaining agreement; he does not sit to dispense his own brand of industrial justice. He may of course look for guidance from many sources, yet his award is legitimate only so long as it draws its essence from the collective bargaining agreement. When the arbitrator's words manifest an infidelity to this obligation, courts have no choice but to refuse enforcement of the award." (emphasis added.)

In the Honold case, which followed in the wake of Enterprise, resolution of the issues made it necessary for this Court to elucidate upon the general principles announced in Enterprise, and thus to define still more sharply the general principles governing the scope of federal judicial review of an arbitrator's award. Judge Aldisert did so, inter alia, in the following terms:

"[A] labor arbitrator's award does 'draw its essence from the collective bargaining agreement' if the interpretation can in any rational way be derived from the agreement, viewed in the light of its language, its context, and any other indicia of the parties' intention; only where there is a manifest disregard of the agreement, totally unsupported by principles of contract construction and the law of the shop, may a reviewing court disturb the award."*fn11

Honold was, like Enterprise, a labor arbitration case; however, in his discussion of the scope of federal judicial review of an arbitrator's award, Judge Aldisert did not limit himself to labor arbitration cases, drawing upon precedent in the commercial arbitration field as well:

"Although we are quick to recognize that cases involving commercial arbitration disputes under the Federal Arbitration Act are not controlling authority, an examination of ...

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