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Grubb v. DPX Enterprises.

No. 22-5073. 10/30/2023. N.D.Okla. Judge Hartz. Employment Agreement—Implied Duty of Good Faith and Fair Dealing—Breach of Contract—Partnership—Tort Claims.

October 30, 2023

DXP Enterprises, Inc. (DPX) sells industrial pumps and pumping equipment. Grubb executed an employment agreement (agreement) with DXP to lead the development and production of horizontal pumps. The agreement stated that the parties intended to create a new company to produce the pumps and that Grubb would own 10% of the new company. The agreement further provided that if the project were successful, Grubb had the right to require DXP to buy his ownership stake at a price based on the new company’s gross revenue. The project was successful, and Grubb notified DXP that he wanted to sell his ownership stake in accordance with the agreement. DXP then informed Grubb that it had never formed the new company, so there was nothing for it to purchase under the agreement. Grubb sued DXP, asserting claims for breach of contract, actual and constructive fraud, conversion, breach of fiduciary duty, and unjust enrichment, and sought a declaratory judgment. He also alleged that the employment agreement had created a general partnership between Grubb and DXP. The district court determined that although the contract showed the parties’ intent to form a new company, it did not require a new company to be formed. The court also determined that formation of the new company was a necessary precondition for the exercise of the sale-right provision, and because no new company had been formed, DXP had no contractual obligation under the provision. It further held that even if the contract had required the new company’s formation, Grubb’s breach-of-contract claim would have accrued when the new company should have been formed in 2008, so his claim would be barred by Oklahoma’s five-year statute of limitations. The court also rejected Grubb’s partnership claim, ruling that no facts supported the theory. On cross-motions for summary judgment, the district court granted summary judgment in favor of DXP on all claims.

On appeal, Grubb argued that even if the creation of the new company was a condition precedent, the implied duty of good faith and fair dealing required DXP to attempt to satisfy the condition. He asserted that there were no impediments to DXP creating a separate entity at any time, so DXP breached the employment agreement by not creating the new company. Here, the contract’s recital that the parties intended to create a new company expressed only an intent and was not a binding provision. But while there was no express contractual commitment to create a new company, DXP may still breach the agreement by denying Grubb the benefit of the sale-right provision through its bad faith failure to adhere to the parties’ mutual intention to form the new company. Further, there is substantial evidence that DXP acted in bad faith in refusing to create the company once the horizontal pump endeavor had become sufficiently profitable and Grubb wished to invoke the sale-right provision, and this evidence would support a jury finding that DXP acted in bad faith in that its reason for not forming the new company was to avoid paying Grubb what he was owed under the employment contract. And because the failure of the condition precedent resulted from DXP’s bad faith attempt to avoid its payment obligation to Grubb, the breach of contract claim did not accrue until DXP refused to pay Grubb under the sale-right provision. Accordingly, since Grubb filed suit shortly after the refusal to pay, his claim is not barred by the statute of limitations.

Grubb also contended that the district court erred in dismissing his partnership claims because he formed a partnership with DXP in 2008. Here, the employment agreement did not create a partnership, and there is no evidence that Grubb and DXP’s relationship was a business for profit. The district court thus did not err in finding that no partnership had been formed, and it properly granted summary judgment in favor of DXP on Grubb’s partnership claims.

Grubb further argued that the district court erred in granting summary judgment on his tort claims for conversion, breach of fiduciary duty, unjust enrichment, and constructive fraud. Grubb’s claims for conversion and breach of fiduciary duty rely on the existence of a general partnership between the parties, so these claims fail because no partnership was formed. In addition, the unjust enrichment claim fails under Oklahoma law because a party is not entitled to pursue an unjust enrichment claim when it has an adequate remedy at law for breach of contract. As to the constructive fraud claim, Grubb failed to show that DXP had a duty to disclose that no company had been created. And even if DXP had promised to create a company, the remedy for breaking a promise is a claim for breach of contract. Therefore, the district court properly granted summary judgment to DXP on Grubb’s tort claims.

The grant of summary judgment in favor of DXP was reversed in part and the case was remanded for further proceedings.

Official US Court of Appeals for the Tenth Circuit proceedings can be found at the US Court of Appeals for the Tenth Circuit website.

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