Opinion
Civil Action No. H-04-3637.
February 14, 2006
MEMORANDUM AND OPINION
Comex International ("Comex"), a salvage company located in Texas, contracted to purchase the abandoned contents of a container owned by Norfolk Southern Railway ("Norfolk") for $350. The bid solicitation stated that Norfolk would move the container freight free to any point on the Norfolk Southern Railway, but Norfolk determined, after contracting with Comex, that it was not economically feasible to move the container. Norfolk notified Comex of this change in July 2003. Comex failed to make alternate unloading and transportation arrangements for the container's contents. Norfolk disposed of the contents in October 2003 without notifying Comex. In March 2004, seven and one-half months after receiving notice that it needed to unload the container in Chicago and transport the contents, Comex had located a prospective buyer but learned that the contents were gone. Comex sued Norfolk for breach of contract, seeking lost profits in an amount up to $304,985.70. Norfolk moved for partial summary judgment that Comex's damages are limited to either the amount Comex paid for the tubes ($350) or the amount Comex paid for the tubes plus the reasonable cost of unloading the container and transporting the tubes to Houston ($3,400). Based on the motion and response; the parties' submissions; and the applicable law, this court grants Norfolk's motion. The reasons are stated below.
I. Background
In May 2003, Norfolk determined that the contents of a rail container that had been left unclaimed in Norfolk's Chicago rail yard was abandoned by its owner. Norfolk made this determination after attempting to contact the owner of the contents and learning that the company was in bankruptcy. The contents consisted of 10,298 boxes of medical-grade tracheal tubes. Norfolk owned the container.
After declaring the contents abandoned, Norfolk sent bid solicitations to various salvage companies, with samples of the tubes in the container. The bid solicitation provided in relevant part that the "[c]ontainer will be moved freight free to any point on the Norfolk Southern to effect disposition. . . ." The bid solicitation also stated that "[u]nloading after purchase and delivery must occur within a time frame not to exceed 7 days."
Comex was the only bidder and only bid $350 for the contents of the container. Norfolk followed its policy of accepting the highest bid. Three days later, Comex sent a $350 check, purchasing the contents.
Comex requested shipping to New Orleans, the point on the Norfolk line closest to Houston. The cost of shipping the container by rail significantly exceeded the $350 purchase amount. In July 2003, M.R. Taylor, Regional Supervisor of Norfolk, whose office was in Elkhart, Indiana, told Charlie Wilson, President of Comex, that Norfolk would not provide the free rail shipment. For the purpose of this motion, Norfolk agrees that this decision breached Norfolk's contractual obligation to move the container free of charge to effect disposition. (Norfolk subsequently changed its policy and no longer makes such offers.) The parties also agree that Comex did not withdraw its purchase. Comex understood that it had to unload the contents from the container in Norfolk's Chicago yard and ship the contents. Comex was aware that it would cost approximately $3,400 to unload the tubes and transport them from Chicago to Houston. (Docket Entry No. 23, Ex. G, Wilson Dep. at 83, 91, 97).
Between July and September 2003, Taylor and Wilson had four or five conversations about the container contents, the need for Comex to arrange for the container to be unloaded and the tubes shipped, and Comex's efforts to find a buyer. (Docket Entry No. 25, Taylor Dep. at 91:3-9; Docket Entry No. 23, Ex. G, Wilson Dep. at 91:7-19). Taylor testified that in July 2003, he told Wilson that Comex had to unload the container within a "reasonable amount of time." Taylor did not recall whether he specified the contractual time of seven days after delivery. Taylor testified in his deposition as follows:
Q. Okay. Let's go back again to the solicitation and the fourth bulleted point. We talked about this briefly before. But it says, unloading after purchase and delivery must occur within a time frame no to exceed seven days.
So because the load had not ever been delivered to Comex, the clock never started ticking on the deadline to unload the container, right?
A. Well, I think at this point the container needed to be unloaded in Chicago.
Q. Okay. Because you guys would — because Norfolk Southern wouldn't move it as it offered to do in the bid solicitation, right?
A. Correct.
Q. Okay. So if it had never been delivered to Comex according to the bid solicitation at least, then the clock didn't start ticking for unloading, right?
A. No. After I told him that I couldn't move it, it would need to be unloaded in Chicago after seven days.
Q. Okay. So did he agree to do that within seven days?
A. I don't recall.
Q. Did you tell him he had to unload it within seven days?
A. I'm sure I told him that he had to unload it within a reasonable amount of time.
Q. Okay. But you don't recall ever telling him that that reasonable amount of time so far as Norfolk Southern was concerned was seven days?
A. I don't recall. I don't recall.
(Docket Entry No. 25, Taylor Dep. at 89:15-90:22).
In a later conversation that same month, Taylor testified that he called Wilson to see when the container would be unloaded and said that it "needed to be unloaded as soon as possible," because Taylor was receiving pressure to have the container available for other uses. (Docket Entry No. 25, Taylor Dep. at 90, 92). Taylor testified that he told Wilson on July 22, 2003 that the container "needed to be unloaded as soon as possible [because he] was getting pressure from intermodal to get the container unloaded." (Docket Entry No. 25, Taylor Dep. at 92:9-15). Taylor testified that "[u]sually containers or boxcars are emptied within a week after they're purchased." (Docket Entry No. 25, Taylor Dep. at 121:5-7). Taylor did not demand that Comex pay storage fees. ( Id.). Taylor recommended that Wilson use GT Enterprises to unload the tubes out of the container and transport them. (Docket Entry No. 25, Wilson Dep. at 105:18-20). Comex did not have any transport company even do an estimate until January 2004. ( Id. at 107:5-11).
Wilson at Comex testified that he did not recall Taylor specifically asking that the container be unloaded in the Chicago yard, but understood that "eventually" Comex had to do so. Comex understood in July 2003 that it owned the container contents and that title had passed as soon as Norfolk cashed the $350 check. Wilson testified that Taylor did not ask for storage fees, speculating that Norfolk was making a "concession `cause they didn't do the free move." (Docket Entry No. 25, Wilson Dep. at 91, 97). In the months after July 2003, Wilson did not make any arrangements for unloading and transporting the container contents. Instead, he searched for a buyer.
From September 2003 to November 2003, Taylor was on leave of absence due to an injury. In October 2003, without notifying Comex, Norfolk discarded the contents of the container. Clifford Creech, a Norfolk Manager in charge of prevention and field services, testified that he "dumped the contents [of the container] because [he] couldn't get it picked up and based on [the fact that] it was taking up space on our lot which is accruing storage charges and I disposed of a lading that at best case was worth $350." (Docket Entry No. 25, Creech Dep. at 53:20-24). Creech explained that he decided to proceed because "Mr. Wilson would have been contacted several times and had not made any effort to remove [the container]." ( Id.).
Norfolk does not know the exact date that it discarded the container contents, but believes that it was sometime in October of 2003. (Docket Entry No. 23, p. 4).
In January 2004, Wilson called Taylor, who had returned from his medical leave, to report on his efforts to find a possible purchaser for the tubes. Taylor did not know that the container contents had been discarded during his medical leave. In March 2004, Jae Ryu, representing a prospective purchaser, traveled from San Francisco to Chicago to inspect the container contents. When Ryu arrived in Chicago, he learned that the contents had been discarded two months earlier. Taylor, who had been on medical leave when Creech had decided to dispose of the contents, and Wilson, learned about it at that time as well.
Comex sued Norfolk for breach of contract; Norfolk removed from state to federal court on the basis of diversity jurisdiction. Comex alleges that its $350 investment would have paid off handsomely because Ryu's principal was willing to offer between $180,000 and $200,000 for the container contents once Ryu had inspected and confirmed that the tubes in the container were consistent with the samples he had received. Comex seeks lost profits in an amount up to $304,985.70, which allegedly resulted from Norfolk's breach of its contractual agreement to ship the container to New Orleans in July 2003.
Norfolk has moved for partial summary judgment that Comex's damages are limited to either the amount Comex paid for the tubes ($350) or the amount Comex paid for the tubes plus the reasonable cost of unloading the container and transporting the tubes to Houston ($3,400). For the purpose of this motion, Norfolk has assumed that it breached the contract when it refused to ship the container to a place on the Norfolk lines and instead required Comex to unload the container in Chicago and transport the contents. Norfolk asserts that, as a matter of law, Comex's evidence of lost profits is too speculative for recovery. Norfolk also asserts that based on the undisputed facts, Comex failed to mitigate damages resulting from Norfolk's breach of its agreement to ship the container when Comex failed to arrange alternative transportation from July 2003 and March 2004. Both arguments are addressed below.
II. The Applicable Legal Standards
A. Summary Judgment
Summary judgment is appropriate if no genuine issue of material fact exists and the moving party is entitled to judgment as a matter of law. See FED. R. CIV. P. 56. Under Rule 56(c), the moving party bears the initial burden of "informing the district court of the basis for its motion, and identifying those portions of [the record] which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986); Stahl v. Novartis Pharms. Corp., 283 F.3d 254, 263 (5th Cir. 2002). If the burden of proof at trial lies with the nonmoving party, the movant may either (1) submit evidentiary documents that negate the existence of some material element of the opponent's claim or defense, or (2) if the crucial issue is one on which the opponent will bear the ultimate burden of proof at trial, demonstrate the evidence in the record insufficiently supports an essential element or claim. Celotex, 477 U.S. at 330. The party moving for summary judgment must demonstrate the absence of a genuine issue of material fact, but need not negate the elements of the nonmovant's case. Bourdeaux v. Swift Transp. Co., Inc., 402 F.3d 536, 540 (5th Cir. 2005). "An issue is material if its resolution could affect the outcome of the action." Weeks Marine, Inc. v. Fireman's Fund Ins. Co., 340 F.3d 233, 235 (5th Cir. 2003) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)). If the moving party fails to meet its initial burden, the motion for summary judgment must be denied, regardless of the nonmovant's response. Baton Rouge Oil Chem. Workers Union v. ExxonMobil Corp., 289 F.3d 373, 375 (5th Cir. 2002).
When the moving party has met its Rule 56(c) burden, the nonmoving party cannot survive a motion for summary judgment by resting on the mere allegations of its pleadings. The nonmovant must identify specific evidence in the record and articulate the manner in which that evidence supports that party's claim. Johnson v. Deep E. Texas Reg'l Narcotics Trafficking Task Force, 379 F.3d 293, 305 (5th Cir. 2004). The nonmovant must do more than show that there is some metaphysical doubt as to the material facts. Armstrong v. Am. Home Shield Corp., 333 F.3d 566, 568 (5th Cir. 2003).
In deciding a summary judgment motion, the court draws all reasonable inferences in the light most favorable to the nonmoving party. Calbillo v. Cavender Oldsmobile, Inc., 288 F.3d 721, 725 (5th Cir. 2002); Anderson, 477 U.S. at 255. "Rule 56 ` mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial.'" Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994) (quoting Celotex, 477 U.S. at 322).
B. The Applicable Law
In a diversity action, a federal court applies the choice-of-law rules of the forum state. Smith v. Waste Mgmt., Inc., 407 F.3d 381, 384 n. 1 (5th Cir. 2005) (citing Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941). In construing a contract, Texas courts apply the law of the forum with the "most significant relationship" to the contract in question. RESTATEMENT (SECOND) OF CONFLICT OF LAWS § 6; Mayo v. Hartford Life Ins. Co., 354 F.3d 400, 403 (5th Cir. 2004); Access Telecom, Inc. v. MCI Telecomms. Corp., 197 F.3d 694, 707 (5th Cir. 1999). Under this test, courts look at the quality, rather than the quantity, of the parties' contacts with a particular jurisdiction. Jackson v. W. Telemktg. Corp. Outbound, 245 F.3d 518, 523 (5th Cir. 2001). Texas courts examine the section 6 principles by looking to specific contacts or "factors" listed in the Restatement (Second) of Conflict of Laws § 188 to determine which law governs. See Mayo, 354 F.3d at 404; Minnesota Min. Mfg. Co. v. Nishika, Ltd., 953 S.W.2d 733, 735-36 (Tex. 1997). The relevant factors are:
(a) the place of contracting;
(b) the place of negotiation of the contract;
(c) the place of performance;
(d) the location of the subject matter of the contract; and
(e) the domicil, residence, nationality, place of incorporation and place of business of the parties.
RESTATEMENT (SECOND) OF CONFLICT OF LAWS § 188(2) (1971). In this case, the contract was entered into in Illinois and was to be performed in Illinois. The tubes were located in Chicago, Illinois. Illinois has the most significant relationship to the contract in question. Comex disputes that Illinois law applies, but its response to the motion analyzes the legal issues under Illinois law. Because this breach of contract action arises from a contract for the sale of goods, the Illinois Uniform Commercial Code appears to apply. 810 ILCS 5/2-102 (West 2002).
III. Damages
A. The Evidence of the Value of the Container Contents
Norfolk argues that the evidence as to the value of the tubes is too speculative to allow recovery for the lost profits Comex seeks. "Once the plaintiff proves injury, broad latitude is allowed in quantifying damages, especially when the defendant's own conduct impedes quantification." Haslund v. Simon Property Group, Inc., 378 F.3d 653, 658 (7th Cir. 2004). A plaintiff "need only prove its damages with reasonable certainty, not with mathematical precision." R.E. Davis Chem. Corp. v. Diasonics, Inc., 924 F.2d 709, 712 (7th Cir. 1991) (citing UCC 1-106 cmt. 1). The general measure of damages in contract cases is the "expectancy or `benefit of the bargain' measure." TexPar Energy, Inc. v. Murphy Oil USA, Inc., 45 F.3d 1111, 1113 (7th Cir. 1995); Mercantile Holdings, Inc. v. Keeshin, 633 N.E.2d 805, 808 (Ill.App. 1993); 810 ILCS 5/1-106. Injured parties may recover lost profits, under the Illinois UCC, when other measures of damages would not put them in as good a position as if the contract had been performed. See In re S.N.A. Nut Co., 247 B.R. 7, 19-20 (Bankr. N.D. Ill. 2000).
Jae Ryu testified in his deposition and affidavit that his principal was prepared to offer Comex between $180,000 and $200,000 for the tubes once inspection confirmed that the samples matched the container contents. Ryu testified that his offer would not have been affected if the tubes had been stored in poor conditions. (Docket Entry No. 25, Ryu Aff. at 1; Ryu Dep. at 55:17-20). The record shows that the samples had been in excellent condition even after prolonged storage. The summary judgment record does not permit this court to conclude that, as a matter of law, Comex could not prove the value of the container contents with sufficient specificity to recover. Continental Sand Gravel, Inc. v. K K Sand Gravel, Inc., 755 F.2d 87, 92 (7th Cir. 1985).
B. Comex's Duty to Mitigate
Norfolk argues that Comex, by waiting so long to unload the tubes from Norfolk's container and to transport them from the Chicago rail yard, failed to mitigate damages resulting from Norfolk's breach of its obligation to ship the container to New Orleans. It is a long-settled rule that "the party injured by a breach must nevertheless take all reasonable steps to minimize the consequent damage." Ricketts v. Adamson, 483 U.S. 1, 22 (1987). Illinois law requires a seller to take "reasonable measures to mitigate the damages recoverable" when a contract is breached. Kallman v. Radioshack Corp., 315 F.3d 731, 740 (7th Cir. 2002). The Illinois UCC requires that damages be "minimized." 810 ILCS 5/1-106 cmt. 1. Section 350 of the Restatement (Second) of Contracts, which Illinois courts have followed, provides:
As a general rule, a party cannot recover damages for loss that he could have avoided by reasonable efforts. Once a party has reason to know that performance by the other party will not be forthcoming, he is . . . expected to take such affirmative steps as are appropriate in the circumstances to avoid loss by making substitute arrangements or otherwise. . . . The amount of loss that he could have reasonably avoided by . . . making substitute arrangements or otherwise is simply subtracted from the amount that would otherwise have been recoverable as damages. RESTATEMENT (SECOND) OF CONTRACTS § 350; see also St. George Chicago, Inc. v. George J. Murges Assocs., Ltd., 695 N.E.2d 503, 509 (Ill.App. 1998). In Illinois, failure to mitigate damages is an affirmative defense. Ellis v. Sheahan, 412 F.3d 754, 756 (7th Cir. 2005). Norfolk pleaded failure to mitigate as an affirmative defense in its answer and Norfolk has the burden of proof on this issue. (Docket Entry No. 4, p. 4).
Comex does not dispute that it had a duty to mitigate its damages but argues that the summary judgment evidence shows that it took reasonable steps to "cut its losses." Comex agrees that after July 2003, it had title to the container contents and had to arrange to unload the container and transport the contents. Comex does not assert that it would have been prohibitively expensive or difficult to do so. There is no evidence that it was difficult to make arrangements for unloading and transporting the container contents from Chicago to Houston. The evidence shows that Comex would have had to pay $3,400 to unload the tubes from Norfolk's container and have them transported to Houston. Even if Norfolk had not breached the contract and had shipped the container to New Orleans, Comex would have had to pay to have the container unloaded in New Orleans and the contents shipped to Houston. Those costs are not identified in the record. Comex's actual mitigation cost is less than $3,400; it is the difference between that amount and the amount Comex would have had to pay even if Norfolk had fully performed the contract. Comex cannot — and does not — assert that it was unreasonably difficult to arrange or pay for unloading and transporting the contents of the containers. The issue is whether Comex had an obligation to do so before Norfolk discarded the contents.
Norfolk asserts that Comex was unreasonable in failing to make any arrangements to unload the container and shipping the contents from June 2003 to March 2004. Comex responds by emphasizing that Norfolk did not set a deadline for Comex to unload the container and did not at any time warn Comex that its delay would result in the contents being discarded.
Under the Illinois UCC and Illinois case law, a reasonable time for taking action may be fixed by the parties if it is not "manifestly unreasonable." If the parties do not agree, a "reasonable time for taking any action depends on the "nature, purpose and circumstances of such action." 810 ILCS 5/1-204. Illinois law provides that if a contract does not specify the time for performance, the law implies a reasonable time, based on what the surrounding circumstances reveals as to the parties' intention. A reasonable time for performance is "such time as is necessary to do conveniently what the contract requires." See, e.g., Erie Casein Co. v. Anric Corp., 577 N.E.2d 892 (Ill.App. 1991); Yale Dev. Co. v. Aurora Pizza Hut, Inc., 420 N.E.2d 823, 826 (Ill.App. 1981).
Under the contract, Comex was obligated to unload the container within seven days after "delivery." Comex argues that the seven-day deadline imposed by the contract did not begin to run because Norfolk did not "deliver" the container contents. (Docket Entry No. 25, p. 6). Comex's argument is unpersuasive. Norfolk did deliver the container and contents to Comex in the Chicago rail yard in July 2003, when it cashed Comex's $350 check and passed title to the contents to Comex. "[Taylor] told us that we won the bid and to send him the check, and . . . once they receive the check and cash the check, that's — that's usually when the title — title changes hands." (Docket Entry No. 23, Ex. G, Wilson Dep. at 92:19-22). Comex understood in July 2003 that it owned the tubes and did not own the container; that Norfolk was not going to transport the tubes; and that Comex had the choice of demanding its $350 check back or arranging to unload the container contents in the Chicago rail yard and transport it to Houston. When Norfolk told Comex that it would not ship the container to New Orleans, Comex delivered the contents to Comex in Chicago.
Comex's better argument for asserting that the seven-day contractual deadline did not apply is that Norfolk orally waived or modified it. Wilson, Comex's president, testified that Comex did not impose a deadline for removing the container contents. Taylor, Norfolk's regional supervisor, testified that in early July 2003 he told Wilson to remove the contents within a reasonable time, and later that same month emphasized that it needed to be done soon. (Docket Entry No. 25, Taylor Dep. at 90, 92). Taking the evidence in the light most favorable to Comex, this court agrees that the seven-day provision did not limit the amount of time Comex had to arrange to unload and transport the container contents.
Comex understood after July 2003 that it had to unload the contents and ship them to Houston. (Docket Entry No. 25, Wilson Dep. at 91, 97). Comex could conveniently have arranged to transport the container contents to Houston at anytime after July 2003, when it learned that Norfolk would not ship the container to New Orleans and decided that it would nonetheless retain ownership of the contents. In October 2003, Creech decided to dispose of the contents because Wilson had been contacted several times and the contents had not been removed. At that time, Comex still had made no such arrangements. As late as March 2004, seven and one-half months after being told that Norfolk would not ship the container to New Orleans, Comex still had not arranged to unload and transport the container contents. Comex's delay was unreasonable, as a matter of law.
Although Comex did not receive any demand from Norfolk to pay storage fees, it was unreasonable for Comex to assume that Norfolk would continue to store the tubes in its container for an indefinite period, free of charge, particularly after it received only $350 for the contents. Comex points to the fact that before Norfolk declared the goods abandoned and solicited bids, the container had been in the Chicago rail yard for approximately one and one-half years. The record shows that the container "was in storage for a year and a half under charges." (Docket Entry No. 25, Creech Dep. at 28). Norfolk was charging for the storage before the owner of the product abandoned it, after which Norfolk "immediately started the salvage process" by soliciting bids. ( Id.).
Comex had an obligation to mitigate its damages by arranging alternative transportation within a reasonable time after learning that Norfolk would not provide rail transport of the container to New Orleans. Comex failed to do so. Comex's breach of its duty to mitigate limits the damages it may recover. Comex's claimed $200,000 lost profit from the disposal of the tubes it paid $350 to acquire was not proximately caused by Norfolk's failure to ship the container to New Orleans. Rather, the loss could have been prevented had Comex arranged alternative transportation of the tubes it had purchased within a reasonable time and had not left them sitting inside Norfolk's container and in Norfolk's rail yard for months.
IV. Conclusion
Norfolk's motion for partial summary judgment is granted.