July 17, 2019
Volume 3 Issue 4
Lawsuits Waged Over Royal Manufacturing Sale
Axel, the Swedish grease maker, alleges that former Royal executives defrauded it by misrepresenting or concealing numerous core facts about the business, including the capacity of its grease factories, the quality of products that they make and relationships with key customers.
Royal’s former officials denied practically all allegations. They also contend that Axel lost its right to take damages from an escrow account because it filed a notice that intended to do so two days beyond a deadline.
The civil suits are ongoing in Tulsa County District Court between Axel and Royal’s longtime principal owner and operator William R. Mallory Jr. and a partnership and limited liability corporations of his, including KLM Group LP.
Axel and Royal’s former owners agreed to their transaction in February of 2018, and according to the lawsuits, the price was $46 million. As part of the deal, $7 million of that amount was put into an escrow account managed by a local firm, Waco Title Co. Of the escrowed amount, $2 million was set aside for the reconciliation of products that were in inventory at that time, and the rest was to indemnify Axel against any seller obligations that might arise after the sale.
The escrow agreement provided that Royal’s former owners could collect half of the escrowed funds six months after the account was created and could collect the remaining amount after 24 months. The transaction closed on March 26, 2018.
The litigation began in December, when Mallory and Royal’s other former owners filed a civil lawsuit asking that Waco be forced to turn over $2.5 million – the first half of disbursement from the escrow account. The suit stated that Waco had refused to give those funds to Mallory and his partners after Axel filed notice on Sept. 25 that it would contest that disbursement on grounds that the former owners had breached their obligations in the deal. The plaintiffs denied Axel’s claims and argued that in any event it had filed its notice two days after the deadline to do so.
Mallory and the fellow plaintiffs in that suit asked that Waco be ordered to release the $2.5 million and reserved the right to seek the remaining escrow funds in March 2021.
The following month Axel filed a countersuit accusing Mallory and James Gott, former vice president of Royal who continued to work for the business after the transaction closed, of “pervasive misrepresentations” that Axel alleged had caused millions of dollars in damages, “far exceeding the amount of money set aside in [the] escrow account ….”
Among the deceptions that Axel alleged were that the combined manufacturing capacity of its grease plants in Tulsa and Shertz, Texas, was nearly 18.5 million pounds per year less than the 48.5 million pounds per year that Royal claimed; failure to admit that the company had produced and sold products that failed to meet industry specifications; and misrepresentations of crucial customer relationships.
“After the closing, on approximately May 1, 2018, Axel received a customer complaint that informed Axel the purchaser had received a batch of grease with its drop point roughly 100 degrees below the stated specification,” the suit stated. “The customer had received this batch when it was manufactured by and under control of” Royal’s former owners.
Axel said it conducted a limited investigation which found that since the closing date, “the quality of at least 484 batches had been changed by [Royal’s former owners] so that they no longer met the industry standards, though the [former owners] claimed the batch did in fact meet the required standards. Axel found out that often chemicals and base oils were substituted with other cheaper chemicals to cut costs.”
Axel also claimed that the defendants in its case concealed a souring relationship with Royal’s largest customer, Total Specialities USA Inc., a subsidiary of French energy giant Total. According to Axel’s suit, that account provided Royal with $2.4 million in annual gross profits.
While the former owners maintained during negotiations that the relationship was solid and that Total had no complaints, Axel said Total was unhappy with delivery delays, pricing and product quality. Axel said Total had received notices that its products violated weights and measures requirements for minimum fill levels and that one of Total’s customers filed a $150,000 warranty claim because equipment damage sustained due to a grease not meeting required standards. Axel said Royal’s former owners delayed reimbursing Total for the claim until after the transaction closed and that Total decided to take its business elsewhere.
The suit said that Gott advised afterward that he was not surprised by Total’s decision. Axel said it subsequently terminated Gott’s employment.
Axel’s countersuit seeks $20 million in damages that it claims to have suffered because of the breaches by all defendants; $20 million in damages because of breaches by Mallory and three of his partnerships and limited liability corporations; and $20 million in damages from Gott’s alleged deceit.
The defendants in Axel’s suit filed a response in March refuting practically all of Axel’s allegations, including those against Gott. “The arguments are riddled with bombastic storytelling of falsehoods derived for the sole purpose of prejudicing KLM [the entity formerly known as Royal] in the mind of the court and jury,” the response stated.
The response denied any misrepresentations and stated that Axel representatives were at Royal facilities on a daily basis for more than 12 months leading up to the transaction “so that Axel acquired actual daily working knowledge about all material customer information.”
The former owners allowed that their business sometimes produced off-spec products but insisted that this was unavoidable given the nature of its equipment and that they advised Axel of the low but numerical risk of such events.
The response contends that Axel has no right to the settlement it seeks for a number of reasons, including its refusal to allow the former owners “to mitigate damages on certain items where KLM has agreed to take responsibility for certain items.” The response also states that the Total account was lost because of Axel’s negligence.
It said that Axel has not produced at the 48.5 million pounds per year level of capacity advised for the transaction because it has failed to follow the former owners’ written operating instructions. Moreover, “Axel’s customers have not and have never demanded 48.5 million pounds of grease product. As such, even if [the former owners’] written formula was defective in a manner that would prevent Axel from producing 48.5 million pounds of grease … Axel has no damages because it lost no sales.”
Axel told Lube Report that it discontinued activities not in line with the company’s values as soon as they came to light.