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holding that contract for purchase of a computer system was a sale of goods, with rendition of services such as design, construction, manufacturing and installation incidental
Summary of this case from Artistry v. TanzerOpinion
8:98CV480
August, 2000
MEMORANDUM AND ORDER
Before the Court are the defendant's motions for partial summary judgment on the plaintiff's fraud and negligent misrepresentation claims (filings 152 302) and the defendant's motion for partial summary judgment on the fourth cause of action in its counterclaim (filing 314). In support of its motions the defendant has filed multiple indices of evidence (filings 153, 303 315) and submitted supporting and reply briefs. In opposition to the motions, the plaintiff has also filed multiple indices of evidence (filings 221, 333 346) and submitted opposition and sur-reply briefs. The plaintiff has also filed three objections to attorney affidavits contained in the defendant's indices of evidence (filings 173, 336, 345). On July 11, 2000, the Court heard oral arguments on the motions. After careful consideration of the evidence and arguments presented, the motions for partial summary judgment (filings 152, 302 314) will be granted, and the plaintiff's objections to the attorney affidavits (filings 173, 336 and 345) will be sustained and stricken from the defendant's indices of evidence.
I. Factual Overview
This lawsuit arose out of a project for the installation of an Automated Material Handling System ("AMHS") at IBP's Dakota City, Nebraska, beef processing facility.
Allegedly, the AMHS designed and installed by HK did not perform in accordance with contract requirements. HK informed IBP that in order to make the AMHS perform as IBP wanted, IBP would need to pay HK several million dollars above the original contract price. IBP refused, and HK walked off the job. IBP hired third parties to repair and replace software and equipment.
On March 19, 1999, IBP filed an amended complaint, alleging the following claims for relief: (1) breach of contract; (2) breach of express warranty; (3) breach of implied warranty of fitness for a particular purpose; (4) breach of implied warranty of merchantability; (5) negligent misrepresentation; (6) fraud in the inducement/ fraudulent misrepresentation; and (7) violation of the Uniform Deceptive Trade Practices Act. IBP has asserted these claims based on contract, tort, and statutory theories of recovery. IBP seeks to recover the direct damages of the increased operational costs for the AMHS, the direct costs of repairing the AMHS, and the lost profits IBP has incurred as a result of the AMHS' failure to meet all of the performance and reliability requirements, including the contracted throughput rates.
On May 4, 1999, the defendant filed its answer to the first amended complaint, affirmative defenses and counterclaims (filing 36). The defendant alleged four counterclaims: (1) breach of contract and breach of the covenant of good faith and fair dealing; (2) negligent misrepresentation; (3) fraudulent misrepresentation; and (4) an unpaid invoice in the amount of $87,367.01 for work performed by Western Atlas. HK seeks judgment on its four counterclaims against IBP in the amount of $1,737,102.01, plus interest, and compensatory, incidental and consequential damages to be determined at trial.
II. Standard of Review
A court ruling on a motion for summary judgment must view all the facts in the light most favorable to the nonmoving party and give the nonmoving party the benefit of all reasonable inferences that the court can draw from the facts. Fed.R.Civ.P. 56(b)(c). The moving party bears the responsibility to identify those portions of the record which illustrate the lack of a genuine issue of material fact. If a moving party carries this burden to show the nonexistence of a material fact, the nonmoving party must go beyond the pleadings to the evidence and specify facts establishing a genuine issue of material fact for trial.
III. Discussion A. Fraud Claim, Count VI
In support of its motion for partial summary judgment on the plaintiff's fraud claim (filing 152), the defendant advances two arguments. First, the defendant contends that in pleading its fraud claim, the plaintiff has failed to comply with Rule 9(b) of the Federal Rules of Civil Procedure which require that all averments of fraud must be stated with particularity. The Court has reviewed the amended complaint and finds that the plaintiff's fraud claim is pled with sufficient particularity to satisfy Rule 9(b).
Secondly, HK argues that it is entitled to partial summary judgment because neither the pleadings nor the evidence submitted by the plaintiff establishes a claim for fraud. In order to maintain an action for fraudulent misrepresentation, a plaintiff must allege and prove the following elements: (1) that a representation was made; (2) that the representation was false; (3) that when made, the representation was known to be false or made recklessly without knowledge of its truth and as a positive assertion; (4) that it was made with the intention that the plaintiff should rely upon it; (5) that the plaintiff reasonably did so rely; and (6) that the plaintiff suffered damage as a result. Four R Cattle Co. v. Mullins, 253 Neb. 133, 570 N.W.2d 813 (1997).
The Court has studied the pertinent evidence, principally consisting of the amended complaint (filing 33 at ¶), the March 15, 1995, project proposal, the contract documents, and Rule 30(b)(6) depositions of IBP personnel. Following its review the evidence, the Court finds that the defendant has carried its burden of showing the nonexistence of a genuine issue of material fact and of establishing that, as a matter of law, neither the plaintiff's pleadings nor its indices of evidence support a claim for fraud.
The Court concludes the plaintiff has not pled or proved the essential elements of a fraud claim. Although the plaintiff argues that genuine issues of material fact exist whether HK made positive statements of fact which HK knew or should have known to be false, the plaintiff fails to direct the Court to a false representation of material fact made by HK upon which IBP reasonably relied to its detriment. As the defendant aptly argues, the representations advanced by IBP either predate the written contract and are barred by the parol evidence rule, or the representations constitute expressions of opinion or sale pitches and not statements of material fact upon which IBP has shown that it reasonably relied. Because under Rule 56, the plaintiff may not rest on mere allegations of the existence of material facts, the Court concludes that summary judgment is appropriate on the fraud claim. The Court sustains the plaintiff's objection to the Affidavit of John C. Hines and the affidavit will be stricken from the defendant's index of evidence.
B. Negligent Misrepresentation Claim
In Gibb v. Citicorp Mortgage, Inc., 246 Neb. 355, 518 N.W.2d 910 (1994), the Supreme Court of Nebraska adopted the definition of the negligent misrepresentation cause of action found in Section 552 of the Restatement (Second) of Torts. Section 552 reads in pertinent part:
(1) One who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused by them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information.
. . . .
Id. at pp. 126-27.
Liability for negligent misrepresentation is "based on the failure of the actor to exercise reasonable care or competence in supplying correct information."Gibb, 246 Neb. at 370, 518 N.W.2d at 921 (citing § 552, comment a).
In its amended complaint, IBP alleges that HK negligently misrepresented that the resources it was providing to the AMHS project were sufficient and capable to insure successful completion of the project no later than the week of April 28, 1997, if IBP would pay HK the sum of $900,000.00. IBP further alleges that it reasonably relied on false or reckless representation when it paid HK the sum of $871,153.00. As a result of such reliance, IBP claims that is has suffered and continues to suffer damages in excess of $15,000,000.00 (filing 33 at ¶¶ 48-53).
HK contends that IBP has failed to establish three requisite elements of negligent misrepresentation, namely (1) justifiable reliance by IBP; (2) information for the guidance of others in their business transactions; and (3) causation. After reviewing the amended complaint and evidence, the Court finds that the only misrepresentation alleged by IBP is HK's promise to devote the resources necessary to complete the project by a date certain. Likewise, the damages IBP claims were caused by the alleged negligent misrepresentation are identical to the damages IBP claims were caused by the alleged breach of contract. Because IBP has failed to either allege a misrepresentation that is separate and distinct from the defendant's legal duty under the contract or any special damages caused by the misrepresentation that are unrecoverable as contract damages, the Court finds the plaintiff's negligent misrepresentation claim to be wholly duplicative of its breach of contract claim. Cf Mobile Data Shred, Inc., v. United Bank of Switzerland, 2000 WL 351516 (S.D.N.Y. April 15, 2000) (dismissing plaintiff's fraudulent misrepresentation claim, because plaintiff failed to demonstrate a legal duty separate and distinct from defendant's contract obligations; a misrepresentation collateral or extraneous to the contract; or special damages under a breach of contract theory). Accordingly, the Court shall grant summary judgment on this claim. The Court sustains the plaintiff's objection to the Affidavit of Julie Cornwell and the affidavit will be stricken from the defendant's index of evidence.
C. Counterclaim — Fourth Cause of Action Breach of Contract
The defendant's fourth cause of action in its counterclaim is a breach of contract claim against IBP's for failure to pay an invoice in the amount of $87,376.01 for service performed by Western Atlas, Inc. at IBP's plant located in Emporia, Kansas. The permissive counterclaim is unrelated to the contract or transaction on which the plaintiff has brought suit. The claim is founded on a mature, undisputed debt for a liquidated amount. During oral argument, IBP counsel conceded that Western Atlas satisfactorily performed the work at the Kansas plant, that HK invoiced IBP for work in November 1997, and that IBP has not to date paid HK the amounts due and owing for the work performed by Western Atlas.
Under Nebraska law IBP is not entitled to a claim of set-off or a defense of recoupment on the permissive counterclaim. A setoff is disallowed where, as in this case, the plaintiff has failed to plead set-off in its reply to the defendant's counterclaim (filing 47) as required by Sections 25-811 and 25-812 of the Nebraska Revised Statutes. County of Cherry v. Tetherow, 8 Neb. App. 773, 776, 601 N.W.2d 804, 806 (1999) ( citing Kracl v. Loseke, 236 Neb. 290, 461, N.W.2d 67 (1990)). Moreover, the Nebraska Supreme Court has declared that a claim is "not a subject for recoupment unless it grows out of the very same transaction with furnishes the plaintiff's cause of action. . . ." M D Masonry, Inc. v. Universal Surety Co., 572 N.W.2d 408, 413-414 (Neb.Ct.App. 1997) ( quoting Ed Miller Sons, Inc. v. Earl, 243 Neb. 708, 718, 502 N.W.2d 444, 452 (1993)). Because there are no material facts in dispute and the plaintiff cannot raise a claim of set-off or a defense of recoupment, the Court shall grant summary judgment on the defendant's fourth cause of action in its counterclaim.
IT IS HEREBY ORDERED:
1) The defendant's motion for partial summary judgment on the plaintiff's fraud claim (filing 152) is granted;
The plaintiff's objection to the Affidavit of John C. Hines (filing 173) contained in the defendant's index of evidence (filing 153) is sustained, and the Clerk will strike the affidavit from the defendant's index of evidence (filing 153);
The defendant's motion for partial summary judgment on the plaintiff's negligent misrepresentation claim (filing 302) is granted;
The plaintiff's objection to the Affidavit of Julie Cornwell (filing 345) contained in the defendant's index of evidence (filing 303) is sustained, and the Clerk will strike the affidavit from the defendant's index of evidence (filing 303);
The defendant's motion for partial summary judgment on its fourth cause of action in its counterclaim (filing 314) is granted; and
The plaintiff's objection to the Affidavit of Robert Slovek (filing 336) contained in the defendant's index of evidence (filing 315) is sustained and the Clerk will strike the affidavit from the defendant's index of evidence (filing 315).
MEMORANDUM AND ORDER
This matter is before the Court on plaintiff's motion for partial summary judgment on the applicability of the Uniform Commercial Code and for attorney fees (Filing No. 310). Plaintiff ("IBP") entered into a contract with the defendant ("HK") wherein HK agreed to design, provide, deliver and install an Automated Material Handling System ("AMHS") for IBP in Dakota City, Nebraska. IBP contends that the Uniform Commercial Code is applicable to this case while HK argues that Nebraska common law applies. A hearing was conducted on July 11, 2000, wherein the parties presented argument. I have also reviewed the record, briefs of the parties, the evidence (Filing No. 311) and the relevant case law.
Standard of Review
Summary judgment is proper if there are no disputed issues of material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). The court must view the evidence and the inferences which may be reasonably drawn from the evidence in the light most favorable to the nonmoving party. Enterprise Bank v. Magna Bank, 92 F.3d 743, 747 (8th Cir. 1996).
Furthermore, the court's function is not to weigh the evidence, but merely to determine whether there is sufficient evidence favoring the nonmovant for a finder of fact to return a verdict in that party's favor. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986). Essentially, the court performs the threshold inquiry of determining whether a trial is necessary. Id. at 250.
If the moving party meets the initial burden of establishing the nonexistence of a genuine issue, then the burden shifts to the opposing party to produce evidence of the existence of a genuine issue for trial. Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986). The nonmoving party may not rest upon mere allegations or denials, but must set forth specific facts showing that there is a genuine issue for trial. Anderson, 477 U.S. at 256; Krenik v. County of LaSueur, 47 F.3d 953, 957 (8th Cir. 1995). Generally, a genuine issue of material fact exists when there is sufficient evidence favoring the party opposing the motion for a jury to return a verdict for that party. Anderson, 477 U.S. at 248.
In a case such as this, if there exists no issue of fact with regard to the contract language, the court should decide the question of which law applies as a matter of law. BMC Industries, Inc. v. Barth Industries, Inc., 160 F.3d 1322, 1331 (11th Cir. 1998).
Analysis
I must determine whether this contract between IBP and HK is one that is predominantly for goods or for services. The Eighth Circuit has given guidance in this regard. In the case of Bonebrake v. Cox, 499 F.2d 951 (8th Cir. 1974), the parties had entered into a contract for the sale and installation of bowling equipment. One of the issues faced by the court was whether the Uniform Commercial Code applied to transactions involving substantial services and installation of the bowling equipment. The court found that the UCC applied. The court stated:
[T]he `things' sold are all items of tangible property, normally in the flow of commerce, portable at the time of the contract. They are not the less `goods' within the definition of the act because service may play a role in their ultimate use. The Code contains no such exception.Id. at 958. The Eighth Circuit then set forth a test that has been adopted and followed by numerous other jurisdictions:
The test for inclusion or exclusion is not whether they are mixed, but, granting that they are mixed whether their predominant factor, their thrust, their purpose, reasonably stated, is the rendition of service, with goods incidentally involved (e.g., contract with artist for painting) or is it a transaction of sale, with labor incidentally involved (e.g., installation of a water heater in a bathroom.Id. at 960.
A number of courts have identified factors to be considered when determining what is the "predominant factor" of the contract. The primary factors to be analyzed include (1) whether the goods are movable; (2) the price allocation in the contract between goods and services; and (3) the contract language itself.
First, I must determine whether the items in question were "movable." Movability is judged at the time the contract was made or the goods identified. It matters not that the goods might ultimately end up as part of the realty. See, Bonebrake, 499 F.2d 951, 958 n. 12; BMC Industries, Inc. v. Barth Industries, Inc., 160 F.3d 1322, 1330 (11th Cir. 1998); Cambridge Plating Co., Inc. v. NAPCO, Inc., 991 F.2d 21, 24 (1st Cir. 1993); Hammond v. Streeter, 225 Neb. 491, 495, 406 N.W.2d 633, 635 (1987). Thus, if the goods were movable at the time of their identification to the contract for the sale, then they fall within the definition of "goods" under the UCC. The Eighth Circuit has found that component parts that are movable at the time of identification to the contract for sale constitute goods under the UCC. Dakota Gasification Co. v. Pascoe Building Systems, 91 F.3d 1094, 1097 (8th Cir. 1996).
In the case at hand, the items of equipment listed in Exhibits A and B (discussed hereinafter) were clearly identifiable and movable at the time the contract was entered into. For example, goods that were movable include palletizers, SRV's/AGV's, conveyors, accumulation lanes, software, and hardware. In addition, the parties delineated approximately 75 pages of equipment that would be utilized for this project. (Exhibit A, pages 10161500-10161625). I find that the goods in this contract were clearly identifiable and movable.
The second factor to be considered involves how the costs are allocated with regard to goods and services. In our case no evidence was offered at the summary judgment hearing on the allocation of costs to goods and services. The materials submitted to the Court do not contain a contract price. However, HK's brief states that the contract price was $14.3 million, and that this amount was not allocated between goods and services. At least one court has held that when costs do not specify a cost for services or when costs of goods exceed services, the contract is more likely one for goods for determining the applicability of the UCC. BMC, 160 F.3d at 1330. See also, Triangle Underwriters, Inc. v. Honeywell, Inc., 604 F.2d 737, 743 (2nd Cir. 1979) (stating that a bill that does not include services indicates a contract for goods). In at least one case the court distinguished between "labor" and "professional services." Micro Data Base Systems, Inc. v. Dharma Systems, Inc., 148 F.3d 649, 655 (7th Cir. 1998). In Micro Data Base, a case where the software buyer was purchasing custom software from the seller, the Court stated:
Although the contract recites that half the total contract price is for Dharma's "professional services," these were not services to be rendered to MDBS but merely the labor to be expended by Dharma in the "manufacture" of the "good" from existing software. It is no different than if MDBS were buying an automobile from Dharma, and Dharma invoiced MDBS $20,000 for the car and $1,000 for labor involved in customizing it for MDBS's special needs. It would still be the sale of a good within the meaning of the UCC. We doubt that it should even be called a "hybrid" sale, for this would imply that every sale of goods is actually a hybrid sale, since labor is service and labor is an input into the manufacture of every good.Id. at 655. Section 5.5 of Exhibit B, Construction Agreement dated March 23, 1995, requires the contractor to prepare a schedule of values allocated to various portions of the project. But no such document was offered at the summary judgment hearing. I find that the contract price was intended to cover both goods and services and that the contract does not separate costs for goods and services.
The next factor that this Court must consider is the language of the contract itself. BMC Industries Inc., 160 F.3d at 1330. As stated in BMC Industries, Inc.:
Although courts generally have not found any single factor determinative in classifying a hybrid contract as one for goods or services, courts find several aspects of a contract particularly significant. First, the language of the contract itself provides insight into whether the parties believed the goods or services were the more important element of their agreement. Contractual language that refers to the transaction as a "purchase," for example, or identifies the parties as the "buyer" and "seller," indicates that the transaction is for goods rather than services. See Bonebrake, 499 F.2d at 958 (stating that language referring to "equipment" is peculiar to goods rather than services); Bailey v. Montgomery Ward Co., 690 P.2d 1280, 1282 (Colo.Ct.App. 1984) (holding that a contract that identifies the transaction as a "purchase" and one of the parties as the "customer" signals a transaction in goods); Meeker v. Hamilton Grain Elevator Co., 442 N.E.2d 921, 923 (Ill.App.Ct. 1982) (stating that a contract that calls the parties "seller" and "purchaser" indicates a contract for goods).Id. at 1330.
In the present case, Exhibit A, HK Systems Proposal dated March 15, 1995, and Exhibit B the Construction Agreement dated March 23, 1995, were submitted in support of plaintiff's motion for summary judgment. The following references and examples support an argument that the contract was meant to be one for goods. Exhibit B refers to bills for "materials and equipment" and the license agreement for the software refers to "buyer and seller." Exhibit A lists products; refers to "onsite assembly"; uses the language "furnish and deliver equipment and services for each subsystem," "product system," and "equipment and services"; refers to "standard products," "equipment"; lists work items that include "vehicles, rails, power rail and shock absorbers"; refers to vehicle subsystem equipment, a carousel, palletizers and depalletizer equipment, conveyor subsystems, including devices and units, delivery of equipment and services, a manager of equipment installation, warranty service, seller and buyer, warranty for software and hardware, and so forth. Additionally, the contract contains numerous lists of equipment that will be used on the project. (See Exhibit A, documents 10161 — 459, 460, 468, 469, 470, 473, 479, 480, 482, 483, 484, 485, 486, 489, 632, 673, 685, and 10161716-741).
In support of HK's argument that this is a service contract, Exhibits A and B use the following language. For example, Exhibit B uses the term "contractor." (See Exhibit B, sections 2.3; 5.1; and 7.0). Exhibit A talks of managers and engineers; there are sections concerned with the testing of the programs; and there is use of the language "services, design, construction, manufacturing, and installation." (See Exhibit A, 10161 — 461, 491, 492, 493, 494, 495, 496, 497, 629, and 631.) I find that the Construction Agreement contains language to support arguments for both IBP and HK. As I indicated during oral argument, I am not overly concerned with an analysis of form over substance; however, the language referring to products is more specific and substantial than is the language referring to services. I find that this factor weighs more heavily in finding that the primary purpose of the contract is for the sale of goods, and I so conclude.
I have done an exhaustive review of the case law. It appears that the trend is to apply the UCC in hybrid cases such as the one before me. See Cambridge Plating Co., Inc. v. NAPCO, Inc., 991 F.2d 21, 24 (1st Cir. 1993) ("In our view, Massachusetts law is consistent with the general trend to view such mixed contracts as governed by the UCC" ); United States v. City of Twin Falls, Idaho, 806 F.2d 862, 871 (9th Cir. 1986); United States v. Haas Haynie Corp, 577 F.2d 568, 572 n. 2 (9th Cir. 1978) ("The modern trend is to apply Article 2 to such mixed sales/services contracts.").
Numerous hybrid cases have concluded that the UCC is applicable, even where labor/services seems to be an integral part of the contract. See, e.g., BMC Industries, Inc., 160 F.3d at 1331. BMC involved a contract for the design, manufacture, and installation of equipment to automate an eyeglass lens manufacturer's production line. The Court found the contract to be predominately a transaction in goods under the UCC, even though there was a substantial time requirement to design this "first-of-its-kind machinery." Id. The court concluded that just because the machine was specially designed, it was not excluded from UCC coverage.
Likewise, the court held in a case where "the purpose of the City's contract with Envirotech was to purchase and install equipment which would separate and dispose of sludge produced in the secondary treatment of waste water," that the predominant factor and purpose of the contract was for the sale of goods. City of Twin Falls, Idaho, 806 F.2d at 871. See also, Murphy v. Spelts-Schultz Lumber Co., 240 Neb. 275, 284, 481 N.W.2d 422, 429 (1992) (where court held that contract for design services for trusses that was part of a contract for the purchase and sale of all building materials for construction of plaintiff's new home were goods under the UCC, where design services not specifically paid for separately). Another court has held that a contract for the design and installation of a wastewater treatment system is a good within the meaning of the UCC. Cambridge Plating Co., Inc., 991 F.2d at 24. ("It follows inexorably that, if the "rendition of services" is not at the heart of a mixed contract, the UCC does govern.") Id. Finally, custom software has been held to be a "good," within the meaning of the UCC. Micro Data base Systems, Inc., 148 F.3d 649, at 654. See also, Triangle Underwriters, Inc. v. Honeywell, Inc., 604 F.2d 737, 742-43 (2nd Cir. 1979) (where compensation limited to hardware/software, and not for services prior, during or subsequent to installation, it is a sale of goods under the UCC).
The predominant purpose of this contract was to purchase a computer system, the Automated Material Handling System, that would handle, store, and move boxed beef. Use of the equipment and software was essential to this purpose. The services provided to IBP were incidental to this primary purpose. Based on the findings set forth herein, I conclude that the agreement between IBP and HK was one primarily for goods, and therefore, the UCC shall apply in this case.
Attorney Fees
IBP's motion also requests attorney fees pursuant to Fed.R.Civ.P. 37(c). During the July 11, 2000, hearing, I ruled from the bench that attorney fees would not be awarded if IBP prevailed on the motion for summary judgment. After reviewing the facts and the case law, I conclude that HK did have a reasonable basis for arguing that the UCC did not apply, and that it could have reasonably believed that it could prevail on this issue. See Comeaux v. Brown Williamson Tobacco Co., 915 F.2d 1264, 1275 (9th Cir. 1990); United States v. Article of Drug, 428 F. Supp. 278, 281 (E.D.Tenn. 1976). Accordingly, attorney fees will not be granted to IBP.
IT IS THEREFORE, ORDERED, ADJUDGED AND DECREED:
1. That IBP's motion for partial summary judgment as to the applicability of the UCC (Filing No. 310) should be and hereby is granted;
2. That IBP's motion for attorney fees (Filing No. 310) should be and hereby is denied.