Opinion
No. 1:00CV35-T.
December 14, 2000
MEMORANDUM AND RECOMMENDATION
THIS MATTER is before the court upon defendants' Motion for Summary Judgment and plaintiff's Motion to Amend. For the reasons discussed below, the undersigned finds that defendants are entitled to entry of judgment on the issue of consequential damages as a matter of law, but that genuine issues of material fact remain on all other claims asserted by plaintiff. As to plaintiff's Motion to Amend its complaint, which was filed on the last day of discovery, it will be denied based on futility. Having considered carefully defendants' Motion for Summary Judgment and plaintiff's Motion to Amend and reviewed the pleadings, the undersigned enters the following findings, conclusions, and recommendation.
FINDINGS AND CONCLUSIONS
I. Background
The respective parties have presented very different factual settings that led to the institution of this lawsuit. The undersigned has attempted to synthesize those positions herein, but has resolved all areas of dispute in a light most favorable to the party resisting summary judgment.
At all times relevant to this action, plaintiff was a corporate resident of the State of New York and operated a textile mill in Marion, North Carolina. Defendants are engaged in the business of finishing textiles manufactured by others, such as plaintiff; they maintain an office in New York; and they operate a finishing facility in South Carolina, where the goods at issue were shipped. The record is not clear as to whether defendants are also engaged in the business of manufacturing apparel from their finished fabric.
At issue is plaintiff's manufacture of "rip-stop fabric" for use, primarily, in the manufacture of military apparel. One of the requirements of the military is that a fiber that eliminates static be incorporated into the fabric — a requirement which the court assumes is intended to avoid static ignition of volatile materials handled by the military. To meet that requirement, a carbon fiber is manufactured by DuPont for use by the textile industry. With success, plaintiff has incorporated the fiber into its rip-stop fabric and defendants, with success, have finished this fabric in two patterns for the military — woodlands camouflage and desert camouflage. As one would conclude, the "woodlands" print contains dark colors, while the "desert" print contains light colors.
Plaintiff and defendants developed a course of trading over the years that, by all accounts, was quite amicable. Defendants had a standing order for 40,000 yards of rip-stop fabric per week, with millions of yards successfully being sold. This relationship appears from the pleadings to have been so amicable that the parties began to forego the standard use of purchase orders and contracts of sale in 1998. Plaintiff further describes in its response that the relationship was so good that it not only allowed defendants' representatives to tour its facility, but also taught them how to manufacture their own rip-stop fabric based only on an oral promise from defendants that they only intended to supplement the product it received from plaintiff.
This amicable relationship began to break down in February 1999, when defendants purportedly received a "contaminated" shipment. Although a great deal of discussion in the pleadings is devoted to the differences between the words "contamination" and "defective," suffice it to say that defendants believed they received defective fabric. Defendants allege that when they attempted to print a desert camouflage pattern, the black carbon fiber would show through on the lighter colors, which they believed would be a unacceptable defect to the military contractors. Defendants voiced this concern to plaintiff (although plaintiff disputes the manner in which it was expressed) and continued to receive shipments of the allegedly defective rip-stop fabric throughout Spring 1999. Defendants, however, refused to pay for what they believed were defective goods and offered to keep the fabric in its inventory for use in finishing future "woodland" camouflage orders, wherein the flaw would be covered, as such orders came due.
In its response, plaintiff paints a very different picture. Defendants dispute the legitimacy of that picture, arguing that a good deal of it was manufactured to circumvent summary judgment. Plaintiff, however, is the party resisting summary judgment, and its picture is based upon sworn testimony, albeit, in part, from an errata sheet attached to a deposition. Plaintiff attempts to portray defendants as opportunists, who took advantage of plaintiff's trust and strategically manipulated plaintiff's inventory in a manner to put it out of business.
Although there is substantial evidence to the contrary, plaintiff contends that there was, in fact, no defect in the rip-stop fabric it produced. Plaintiff first points to the "grading sheets" inspectors issued after inspecting every yard of fabric that left its mill. All of those sheets indicated that the fabric was "first quality." Plaintiff also points to the grading sheets of defendants' inspectors. All of those sheets indicated equal quality upon receipt. There is no clear evidence as to whether the alleged carbon-fiber defect could have been patently detected upon receipt of the raw fabric or could only be detected after finishing — a latent defect.
Plaintiff contends that the defective fabric scenario was manufactured by defendants as either pretext to end the relationship in favor of its in-house fabric or to reduce end-of-the-fiscal-year inventory in June 1999 so that a bonus could be paid to defendants' executives. In any event, it is plaintiff's thesis that defendants knew that plaintiff was a marginal operation and that withholding payment would result in the closure of plaintiff's operations. Defendants dispute this version of events and point to plaintiff's own admission of defect and issuance of a "credit" to defendants for return of the goods in the summer of 1999.
It is undisputed that the contract price for the fabric was $3.30 per yard and that plaintiff, once it retook possession of the fabric, was able to resell it to Raytex at the price of $3.05 per yard, a loss of $90,000. It is plaintiff's contention, however, that it is entitled to recover incidental and consequential damages, totaling some $7,000,000, in addition to the actual damages of $90,000, for the alleged breach.
II. Standard
On a motion for summary judgment, the moving party has the burden of production to show that there are no genuine issues for trial. Upon the moving party's meeting that burden, the non moving party has the burden of persuasion to establish that there is a genuine issue for trial.
When the moving party has carried its burden under Rule 56(c), its opponent must do more than simply show that there is some metaphysical doubt as to the material facts. In the language of the Rule, the nonmoving party must come forward with "specific facts showing that there is a genuine issue for trial." Where the record taken as a whole could not lead a rational trier of fact to find for the nonmoving [sic] party, there is no "genuine issue for trial."Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87 (1986) (citations omitted; emphasis in the original) (quoting Fed.R.Civ.P. 56). There must be more than just a factual dispute; the fact in question must be material and readily identifiable by the substantive law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986).
By reviewing substantive law, the court may determine what matters constitute material facts. Id. "Only disputes over facts that might affect the outcome of the suit under governing law will properly preclude the entry of summary judgment," Id. at 248. A dispute about a material fact is "genuine" only if the evidence is such that "a reasonable jury could return a verdict for the nonmoving party." Id.
[T]he court is obliged to credit the factual asseverations contained in the material before it which favor the party resisting summary judgment and to draw inferences favorable to that party if the inferences are reasonable (however improbable they may seem).Cole v. Cole, 633 F.2d 1083, 1092 (4th Cir. 1980). Affidavits filed in support of defendants' Motion for Summary Judgment are to be used to determine whether issues of fact exist, not to decide the issues themselves. United States ex rel. Jones v. Rundle, 453 F.2d 147 (3d Cir. 1971). When resolution of issues of fact depends upon a determination of credibility, summary judgment is improper. Davis v. Zahradnick, 600 F.2d 458 (4th Cir. 1979).
III. Discussion
A. Choice of Laws
In its responsive brief, plaintiff argues that its sales contract contains a choice-of-law provision, dictating that disputes will be resolved under the law of the State of New York. Plaintiff points to a similar provision in defendants' purchase order, which applies New York law to arbitration. Defendants contend that there is no binding choice-of-law provision, but that New York and North Carolina law are identical on the issues now before the court. Inasmuch as plaintiff sent with each disputed shipment of fabric a sales contract containing a New York choice-of-law provision, New York law is applicable to this dispute. But for such provision, the court would find that North Carolina law would be applicable, inasmuch as it is the jurisdiction with the most significant interest in and relation to this particular dispute. Brink's Ltd. v. South African Airways, 93 F.3d 1022 (2nd Cir. 1996), cert. denied, 519 U.S. 1116 (1997). Applying New York law, the resolution of this dispute is exclusively governed by the Uniform Commercial Code, inasmuch as the dispute involves the sale of goods between merchants. N.Y.U.C.C. § 2-102
B. Remedies Available Under the Uniform Commercial Code
The remedies available under any interested state's version of the Uniform Commercial Code do not differ: a seller of goods is entitled to seek damages actually caused by and incidental to a wrongful nonacceptance or repudiation of goods. N.Y.U.C.C. § 2-708; N.C. Gen. Stat. 25-2-708. Only a buyer may seek, in limited circumstances, consequential damages.
In relevant part, the New York version of the UCC, Section 2-708, provides the rule of law for this case, as follows:
(1) Subject to subsection (2) and to the provisions of this Article with respect to proof of market price (Section 2-723), the measure of damages for non-acceptance or repudiation by the buyer is the difference between the market price at the time and place for tender and the unpaid contract price together with any incidental damages provided in this Article (Section 2-710), but less expenses saved in consequence of the buyer's breach.
(2) If the measure of damages provided in subsection (1) is inadequate to put the seller in as good a position as performance would have done then the measure of damages is the profit (including reasonable overhead) which the seller would have made from full performance by the buyer, together with any incidental damages provided in this Article (Section 2-710), due allowance for costs reasonably incurred and due credit for payments or proceeds of resale.
N.Y.U.C.C. § 2-708. It would appear that plaintiff would only be entitled to recover incidental damages if it could first prove that the damages afforded under subsection one were inadequate. Absolutely no provision is made in New York law for recovery of consequential damages to a seller.
As to the scope of a remedy for incidental damages, it appears that courts persuasively interpreting the law of New York have determined that certain interest charges are recoverable:
In Neri v. Retail Marine Corp., 30 N.Y.2d 393, 334 N.Y.S.2d 165 (1972), where the Court of Appeals applied as the proper measure of damages to the seller his loss of profit under § 2-708, it allowed finance charges as part of the "incidental damages" provided for in § 2-710. See also Frostifresh Corp. v. Reynoso, 54 Misc.2d 119, 281 N.Y.S.2d 964 (1967). The court reasoned that the purpose of the Commercial Code was "to put the seller in as good a position as performance would have done," § 2-708(2). The significance of the decision for our purposes is that the Court of Appeals did not limit the scope of "incidental damages" to include only the activities enumerated ins 2-710 such as transportation, care and custody of the goods. It apparently gave a broad meaning to "reasonable charges, expenses or commissions incurred", reimbursement of which was necessary to make the plaintiff whole.
Since we are interpreting New York law, we must attempt to harmonize our result with a fair reading of Neri, supra. In so doing, we hold that "incidental expenses" in the U.C.C. include financing charges incurred incidental to the breach, as distinguished from consequential damages resulting from relations with third parties.Intermeat, Inc. v. American Poultry, Inc., 575 F.2d 1017, 1024 (2nd Cir. 1978).
Finally, as to consequential damages, relevant New York case law has, time and again, rejected sellers' claims under the UCC for consequential damages. Associated Metals Mineral Corp. v. Sharon Steel Corp., 590 F. Supp. 18, 21 (S.D.N.Y.), aff'd, 742 F.2d 1431 (2nd Cir. 1983); andPetroleo Brasiliero, S.A. Petrobas v. Ameropan Oil Corp., 372 F. Supp. 503, 508 (E.D.N.Y. 1974). In Knic Knac Agencies v. Masterpiece Apparel, Ltd., 1999 WL 156379 (S.D.N.Y. 1999), the similarities to this case are striking. Like this case, Knic Knac involved the sale of apparel, where plaintiffs sought, in addition to recovery of actual and incidental damages, consequential damages from the "extreme financial" distress allegedly caused by defendants' breach, which included layoffs of workers and factory closings. While finding that the interest charges sought as consequential damages were better characterized as incidental damages under Intermeat, supra, and, therefore, preserved, the Knic Knac court rejected plaintiffs' claim for consequential damages. Id., at 14.
Having considered prevailing New York case law, the undersigned concludes that plaintiff's claim for consequential damages is not viable. The undersigned, therefore, will recommend that summary judgment be granted in favor of defendants on such issue.
C. Cause of Action for Wrongful Nonacceptance or Repudiation By Buyer
The evidentiary materials presented reveal that the parties had an "installment contract," governed by Section 2-612 of the New York UCC. An installment contract is "one which requires or authorizes the delivery of goods in separate lots to be separately accepted. . . ." N.Y.U.C.C. § 2-612. In this case, the undisputed evidence is that plaintiff shipped rip-stop fabric to defendants on a weekly basis, in 40,000-yard lots, for the same price, which defendants inspected upon receipt. Inasmuch as there existed among the parties an installment contract, these were not "single delivery contracts," and the "perfect-tender rule," found in Section 2-601, has no application.
Under the UCC, a buyer may reject an installment only if the requirements of Sections 2-612(2) or (3) are satisfied. Section 2-612 (2) provides that a "buyer may reject any installment which is non-conforming if the non-conformity substantially impairs the value of that installment and cannot be cured." N.Y.U.C.C. § 2-612(3), provides that "whenever non-conformity or default with respect to one or more installments substantially impairs the value of the whole contract there is a breach of the whole." Even if the court were to assume that defendants perceived a defect in the carbon fiber element of the fabric, the issue of "[w]hether goods conform to contract terms is a question of fact" for the jury. Hubbard v. UTZ Quality Foods, Inc., 903 F. Supp. 444, 451 (W.D.N.Y. 1995).
If plaintiff can show that defendants' repudiation or nonacceptance was wrongful, it would then be entitled to "recover damages for nonacceptance [found in Section 2-708, discussed above] or in a proper case the price." Plaintiff has presented the following scenarios which allow this case to proceed forward on the issue of wrongful repudiation.
1. Non-Substantial Defects
Plaintiff next argues that even if the fabric contained a defect, it may be deemed non-substantial in nature. The buyer may reject an installment under Section 2-612 only if the defect substantially impairs the value of the installment. Where a sales contract contains specific quality standards, "the seller's failure to satisfy one of the specifically enumerated standards is a 'substantial impairment.'"Hubbard, supra, at 451.
Plaintiff has argued that no specific quality standards were set forth in the agreement. Even if no quality standards were set out in the agreement, the court finds that the code would imply one based on the parties' course of dealing. Inasmuch as it may be reasonably inferred that plaintiff knew it was supplying goods that had to meet military specifications, a reasonable standard for quality of the goods would be that any defect in manufacture by plaintiff did not reduce the value of the product as finished by defendants. Under New York law, a seller may establish that its goods were not substantially defective, Texpor Traders, Inc. v. Trust Co. Bank, 720 F. Supp. 1100, 1110 (S.D.N.Y. 1989), which plaintiff argues it intends to do at trial through proffered expert testimony.
Plaintiff has presented evidence which tends to show that the defect was not substantial. Defendants have presented evidence of a defect which impaired the value of the goods delivered. Inasmuch as a genuine issue of material fact exists on that point, summary judgment is not appropriate.
2. Ineffective Rejection of the Goods
Plaintiff also argues that defendants' rejection of the goods was ineffective because it was not made within a reasonable time. N.Y.U.C.C. § 2-602(1). After rejection, "any exercise of ownership by the buyer" is "wrongful." N.Y.U.C.C. § 2-602(2)(a). Read in a light most favorable to plaintiff, the factual averments indicate that defendants continued to exercise custody and control over the goods, even though they had purportedly rejected the goods based on defect and refused to pay the agreed-upon price.
Once goods have been rejected, the buyer must follow the seller's instructions or resell the goods. N.Y.U.C.C. § 2603(1). Continued control over rejected goods and continued acceptance of nonconforming shipments is evidence of improper rejection of goods under New York law.See HyosungAmerica, Inc. v. Sumagh Textile Co., 137 F.3d 75 (2d Cir. 1998). Plaintiff argues that defendants' unconditional acceptance of fabric shipments from Marion after February 25, 1999, (the date it initially indicated one 40,000-yard shipment of fabric was defective due to alleged contamination) may amount to acquiescence in receiving nonconforming goods. N.Y.U.C.C. § 2-208(1). Plaintiff's and defendants' evidence on this point differs sharply. Genuine issues of material fact also exist on this issue.
3. Untimely Rejection
Plaintiff next argues that defendants did not reject the subsequent shipments within a reasonable time, as required by Section 2-602(1). A "reasonable time" under the code is dependent upon "the nature, purpose and circumstances" of the case and is generally a question of fact. N.Y.U.C.C. § 1-204(2). The UCC further provides that when an action is to be taken within a reasonable time, "any time which is not manifestly unreasonable may be fixed by agreement" of the parties. N.Y.U.C.C. § 1-204(1).
The sales contract, which plaintiff argues was not countered by a purchase order or objection, provides that notice of a patent defect must be provided to plaintiff within 15 days after invoice date, and notice of latent defects must be given 60 days after invoice date. Defendants counter that all of the sales contracts contained in Exhibit 3 of Plaintiff's Response refer to and incorporate defendants' Purchase Order 75-566; Barry Grimm, the Vice-President of Sales for plaintiff, who sent the sales contracts, indisputably confirmed that each of the sales contracts at issue in this complaint referred to and were subject to the terms and conditions contained in Delta Mills Purchase Order 75-566.13; and the uncontested testimony of Billy Eason, Director of Operations for defendants, also confirms that plaintiff's sales contracts were subject to the terms and conditions of Delta Mills Purchase Order 75-566.
Plaintiff argues that defendants rejected the fabric shipments subsequent to February 1999 for a patent defect, because none of the March through May 1999 shipments was ever graded or inspected upon receipt, and defendants' June 11, 1999, rejection of those shipments, therefore, was outside the time frame mandated by the sales contracts. Section 2-606 provides that failure to reject is acceptance of goods, and plaintiff argues it is entitled to recover at the contract rate for such accepted goods. N.Y.U.C.C. § 2-607(1).
Plaintiff further argues that acceptance also occurs when the buyer, "after a reasonable opportunity to inspect the goods signifies to the seller that the goods are conforming or that he will take or retain them in spite of their non-conformity." N.Y.U.C.C. § 2-606(1). The acceptance of goods precludes their subsequent rejection. N.Y.U.C.C. § 2-607(2). "Once accepted, return of the goods can only be made by way of revocation of acceptance," which is governed by Section 2-608. If the buyer accepts goods with knowledge of a nonconformity, he cannot revoke his acceptance because of the nonconformity "unless his acceptance was on the reasonable assumption that the non-conformity would be seasonably cured." N.Y.U.C.C. § 2-607(2). If the buyer unconditionally accepts goods which he knows are in some way defective, he is precluded from revoking his acceptance of those goods. Lenkay Sani Products Corp. v. Benitez, 47 A.D.2d 524, 382 N.Y.S.2d 572, 573-74 (2d Dep't. 1975).
Defendants have, of course, interposed a different theory — one in which the goods were seasonably rejected as defective. Further, defendants have presented evidence that they attempted to reach an accommodation with plaintiff whereby the goods were to be paid for at the contract price as orders were filled for "woodland" camouflage, which would mask the defect. Inasmuch as differing facts are presented, summary judgment is inappropriate.
Review of all the material presented to the court reveals that genuine issues of material fact remain as to whether defendant's nonacceptance or repudiation was wrongful. The undersigned will, therefore, recommend that such claim proceed to trial and that defendants' Motion for Summary Judgment on such claim be denied.
D. Proposed Amendment of Complaint to Allege Bad Faith
On the last day of discovery, which coincided with the motions filing deadline, plaintiff filed the instant Motion to Amend, in which it attempts for the first time to contend that defendants acted in bad faith in the underlying commercial transaction.
In rejecting goods, the New York UCC requires, as it does in every transaction, that both the buyer and seller act in good faith. N.Y.U.C.C. § 1-203. Plaintiff provides the following forecast of evidence that, it contends, could lead a reasonable jury to determine that defendants' rejection of the fabric was not made in good faith:
1. the fabric was never found to be contaminated;
2. the fabric passed all written specifications and criteria imposed by the United States government for military camouflage clothing; and
3. defendants' customer was never given the opportunity of either waiving the defect or inspecting the finished fabric to determine if it was, in fact, defective.
It is plaintiff's contention that evidence of bad faith would allow it to seek consequential damages, which were discussed above.
Plaintiff's cites the court to Long Island Lighting Co. v. Transamerica Delaval, Inc., 646 F. Supp. 1442, 1458 (S.D.N.Y. 1986), in support of its proposition that a defendant may be estopped from asserting a contractual limitation of consequential damages if bad faith is alleged. Close review of that case reveals that the plaintiff asserting the claim was the buyer, and, of course, only a buyer of goods has the right under the UCC to seek consequential damages. Whether New York, North Carolina, or, for that matter, South Carolina law is applied, there is no circumstance where a seller of goods has the ability under the UCC to seek consequential damages from a buyer.
Rule 15(a), Federal Rules of Civil Procedure, governs plaintiff's Motion to Amend. The above review of plaintiff's proposed amendments reveals that they are not in conformity with the requirements of Rule 15 (a), Federal Rules of Civil Procedure, for they do not appear to be made in good faith, in that they would not entitle plaintiff to any relief under prevailing case law:
Rule 15(a) of the Federal Rules of Civil Procedure provides that when a party seeks leave to amend a complaint "leave shall be freely given when justice so requires." Foman v. Davis, 371 U.S. 178, 182, 9 L.Ed. 2d 222, 83 S.Ct. 227 (1962), mandates a liberal reading of the rule's direction for "free" allowance: motions to amend are to be granted in the absence of a "declared reason" "such as undue delay, bad faith or dilatory motive. . . . repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party futility of amendment, etc." In Davis v. Piper Aircraft Corp., 615 F.2d 606, 613 (4th Cir. 1980), we noted that under Foman a lack of prejudice would alone ordinarily warrant granting leave to amend and that mere delay absent any resulting prejudice or evidence of dilatoriness was not sufficient justification for denial.Ward Electronics Service, Inc. v. First Commercial Bank, 819 F.2d 496, 497 (4th Cir. 1987). In accordance with such decision, the undersigned is compelled to recommend that plaintiff's Motion to Amend be denied.
E. Claim for Attorney's Fees
Plaintiff also seeks attorney's fees as a remedy provided under its sales contract. It is undisputed that Paragraph 7 of defendants' Purchase Order 75-566 excluded "any provisions of the seller's acknowledgment which conflict with, or which are in addition to, the conditions of this purchase order."
Such provision, therefore, is governed by Section 2-207(2)(a) of the New York UCC, which limits acceptance to the terms of the purchase order. To read an attorney's fee provision into the contract would, therefore, violate Section 2-207(2)(a). As discussed above, the only competent evidence of record unequivocally shows that all the parties agreed that the disputed shipments would "over apply" and be subject to defendants' Purchase Order 75-566. All of the sales contracts contained in Exhibit 3 of Plaintiff's Response refer to and incorporate Purchase Order 75-566, and Barry Grimm indisputably confirmed that each of the sales contracts at issue in this complaint referred to and were subject to the terms and conditions contained in Delta Mills Purchase Order 75-566. The undersigned, therefore, will further recommend that plaintiff's claim for attorney's fees be dismissed and summary judgment granted on this issue.
RECOMMENDATION
IT IS, THEREFORE, RESPECTFULLY RECOMMENDED that defendants' Motion for Summary Judgment be ALLOWED in part and DENIED in part, as follows:
(1) plaintiff's claim for consequential damages be DISMISSED with prejudice and defendants be GRANTED summary judgment on such issue;
(2) plaintiff's claim for attorney's fees be DISMISSED with prejudice and defendants be GRANTED summary judgment on such issue; and
(3) plaintiff's claim for wrongful nonacceptance and repudiation under the UCC be resolved at trial, inasmuch as genuine issues of material fact remain as to this claim, and that damages be limited in accordance with Section 2-708(1), N.Y.U.C.C., unless plaintiff can show that they are inadequate, and, in that case, damages as provided by Section 2| 708(2), N.Y.U.C.C. The undersigned further recommends that New York law provides that interest charges are recoverable under Section 2-708(2) if attributable to the alleged breach. Intermeat, supra.IT IS FURTHER RECOMMENDED that plaintiff's Motion to Amend be DENIED for the reasons discussed above.
The parties are hereby advised that, pursuant to 28, United States Code, Section 636(b)(1)(C), written objections to the findings of fact, conclusions of law, and recommendation contained herein must be filed within ten (10) days of service of same. Failure to file objections to this Memorandum and Recommendation with the district court will preclude the parties from raising such objections on appeal. Thomas v. Arn, 474 U.S. 140 (1985), reh'g denied, 474 U.S. 1111 (1986); United States v. Schronce, 727 F.2d 91 (4th Cir.), cert. denied, 467 U.S. 1208 (1984).
This Memorandum and Recommendation is entered in response to defendants' Motion for Summary Judgment (#19) and plaintiff's Motion to Amend (#21).