holding letter attempting to terminate insufficient where it invited further negotiationSummary of this case from Vinson Minerals, Ltd. v. XTO Energy, Inc.
Civil Action No. 3:02-CV-1573-B.
November 8, 2004
Before the Court are the Motion of Plaintiff-Counterdefendant Gatt Trading, Inc. ("Gatt") for Partial Summary Judgment and the Motion of Defendant-Counterplaintiff Sears, Roebuck and Co. ("Sears") for Summary Judgment, both filed on November 12, 2003. Having reviewed the pleadings and evidence on file, the Court GRANTS Gatt's Motion in Part and DENIES it in part and GRANTS Sears' Motion in part and DENIES it in part, for the reasons that follow.
I. BACKGROUND FACTS
A. Gatt and Sears Enter into the Agreement for the Purchase of Salvaged Footwear.
Although the parties' business relationship began in 1995, Gatt and Sears entered into the contract at issue in this lawsuit ("the Agreement") on November 13, 1998. See (Agreement 8; G MSJ 2-3; S MSJ 2). The Plaintiff, Gatt, purchases salvaged footwear from manufacturers and retail sellers for resale to distributors and retail operations, usually for sale in third world countries. (GMSJ 2; S Resp. 1). The contract at issue in the present lawsuit ("the Agreement"), covered Gatt's purchase of salvaged footwear from Defendant Sears. Pursuant to the Agreement, Gatt had the exclusive right and obligation to purchase from Sears all "Merchandise," defined in the Agreement as worn, defective, damaged or irregular pairs of Sears' footwear, including sample footwear, at $3.37/pair. (Agreement §§ 1.1, 1.3, 5). Gatt also had a right of first offer under the Agreement to purchase all excess unworn Seasonal Footwear ("ESF), which the Agreement excluded from the definition of Merchandise. (Agreement §§ 1.1, 5).
There are documents, including the Agreement and certain correspondence between Gatt and Sears, that both parties have included in their Appendices. The Court will therefore only reference the original documents as a matter of clarity and efficiency.
This price included both a base price of $3.20/pair and a fee of $0.07/pair for processing the shoes at Sears' central return center ("CRC fee"). (Agreement § 1.3).
Specifically, the Agreement provided that the "definition of Merchandise shall not include [ESF], defined as unworn Merchandise in salable condition that has been distributed to Sears retail stores at any time during the preceding eleven (11) months) . . . With respect to the Seasonal Footwear [sic], Buyer [Gatt] shall have a right of first offer as described in Section 5." (Agreement § 5).
Although the "Initial Term" of the Agreement was three years, from January 1, 1999 through December 31, 2001, (Agreement § 6.1), the contract contained an automatic annual renewal provision, section 6.1, unless either party gave notice of termination at least 60 days before the "Initial or Renewal Term expired." (Agreement § 6.1, emphasis added). Gatt had the further right, notwithstanding this provision, to extend the Agreement ("Extension Option") under Section 6.2, provided (1) Gatt was not in breach of the Agreement, and (2) Gatt extended the Agreement on "substantially the same or better terms and conditions" as Sears was able to obtain from a third party. (Agreement § 6.2). B. Sears Enters into a Settlement and Credits Gatt for Commingled Shipments.
Both the automatic renewal provision in section 6.1 and the extension option in section 6.2 indicate that the parties contemplated the possibility of continued renewal of the Agreement.
It is undisputed that throughout 1999 and 2000, Sears commingled ESF and Merchandise in its Merchandise shipments to Gatt, and that Gatt did not complain about this violation of the Agreement until some time in the year 2000. (G MSJ 5-6; G App. 176-77 (Evans Dep.); 192-92 (Glinsky Dep.); 250, 299 (Schlachter Dep.), 389-90, 462-63; 591-92, 894; Horn Decl. ¶ 3; S Conf. App. 313). According to Gatt, Merchandise is a more valuable product than ESF because "it consist[s] of current styles of footwear which retail customers desired, and [ESF is] old, out-of-style footwear which Sears had been unable to sell through its retail channels for up to 11 months." (G MSJ 5; G App. 247 (Horn Dep.), 319 (Parks Dep.), 466 (Schlacter),1106-07 (Shlacter Aff.)). Sears admits that, during 1999 and 2000, it did not consider itself obligated to separate Merchandise from ESF in its shipments to Gatt (although it later admitted this was a mistake). (S Resp. 3; Horn Decl. P 3; S Conf. App. 313). In 2000, Sears estimated that approximately 70% of its Merchandise shipments under the Agreement was actually ESF. (G MSJ 5-6; G App. 176-77 (Evans Dep.); 192-92 (Glinsky Dep.); 250, 299 (Schlachter Dep.), 389-90, 462-63; 591-92, 894).
The fact that Gatt had purchased all ESF Sears offered it prior to entering into the Agreement (S MSJ 2), is irrelevant because it is undisputed that the Agreement period began in 1999 under a new and separate contract. Moreover, Sears proposed separating the two types of footwear in the Agreement. (S MSJ 3; S Resp. 2; M. Schlachter Dep. 79-80; S App. 536-37; Horn Decl. ¶ 3, S App. 313). Sears also admits that it did not attempt to separate the two types of footwear in 1999 and 2000 because it mistakenly believed it was not obligated to do so. (S Resp. 3; Horn Decl. ¶ 3, S App. 313).
Some time in 2000, Gatt notified Sears that the Merchandise shipments Sears was delivering also contained ESF, in violation of the Agreement, and asked Sears to remedy the problem. (G MSJ 6; G App. 176-77 (Evans Dep.), 195-96 (Glinsky Dep.), 251-52, 256-59 (Horn Dep.), 387-88 (Schlachter), 648-51, 874-93). After several months went by in which Sears allegedly failed to respond to Gatt's complaints, (G MSJ 7; G App. 879-93), Gatt withheld payments on invoices due under the Agreement for deliveries in 2000. (G MSJ 7; G App. 143-45; 256-59; 269-70; 648-51; 652-53; 874-93, 1101-02). The two companies resolved the dispute regarding the nonconforming shipments by entering into a Settlement Agreement and Release on March 30, 2001 (the "Settlement Agreement"). Under the Settlement Agreement, Sears gave Gatt a credit of $1,530,000 against its unpaid invoices in 2000 (S MSJ 3; Ex. 2, S App. 1329; G. App. 586-90). The Settlement Agreement also reduced Gatt's purchase price for all Merchandise delivered after March 2001 from $3.27/pair to $2.86/pair for the "the remainder of the Term under the Agreement." (Settlement Agreement; G MSJ 7; G App. 258-60, 304-05, 587-88, 634-35; S MSJ 3; Ex. 2 §§ 2, 5, 7, S App. 1330-31). Furthermore, Sears waived the CRC processing fees for the remainder of the Term. (G MSJ 7; G App. 581-82, 588; Glinski Decl. Pp 8, 11; S App. 371; Ex. 35, S App. 1377, Ex. 2, S App. 1329).
C. Sears Continues to Commingle ESF and Merchandise After the Settlement.
After entering into the Settlement Agreement, the parties continued to experience issues involving commingled shipments, and Gatt notified Sears that new Merchandise shipments also contained ESF. (G MSJ 8; G App. 149 (Evans Dep.), 203-04, 209-12, 215-20, 222-29 (Glinsky Dep.); 271-72 (Horn Dep.); 393, 414-17 (Horn Dep.); 633, 725-27, 745-48, 750-53, 900, 901, 904-12, 916, 917-32; 999-1000, 1003-06, 1106-08 (Schlachter Dep.); Conf. App. 137-38; S MSJ 4; Glinkski Decl. ¶ 3, S App. 369). In response to Gatt's notification, Sears provided Gatt with a credit of $1.81/pair for each pair of ESF commingled in the loads of Merchandise delivered to Gatt. Id.
Because of Sears' agreement to credit Gatt for the commingled ESF, Gatt contends that it "accepted Sears' deliveries of shipments of Merchandise containing [ESF], on the condition and with the expectation that Sears would issue credits to Gatt for the ESF delivered with the Merchandise." (G MSJ 9; G App. 203-12, 215-20, 222-23 (Glinsky Dep.); 414, 418-21 (Schlachter Dep.); 750-53, 900, 904-12, 1106-08; 111 (Def. First RFA Resp.)). Sears repeatedly agreed to issue credits of $1.81 per pair of ESF included in its later shipments of Merchandise to Gatt. (G MSJ 9; G App. 203-12, 215-20, 222-23 (Glinsky Dep.); 414, 418-21 (Schlachter Dep.); 750-53, 900, 904-12, 1107). A problem arose in October 2001 when Gatt complained of commingled ESF in two shipments, Release No. 7326-7329 ("Shipment 1") and 7331-7341 ("Shipment 2"), and Sears never issued any credits. (G MSJ 10; G App. 725-27, 913, 1008-11, 1107-08, 1111; Conf. App. 137-38). Sears contends that Gatt failed to properly identify which shipments contained ESF, however, and also failed to request a specific credit amount, despite several requests from Sears. (S MSJ 4; Glinski Decl. ¶ 5 Ex. A, S Conf. App. 370, 380).
D. The October 16th Letter — Sears Informs Gatt of the Third Party Bids.
In early October 2001, Sears informed Gatt that it would no longer separate Merchandise from ESF sold for resale, effective January 1, 2002. (G MSJ 12; G App. 150-54 (Glinsky Dep.); 300-02 (Horn Dep.); 430-37 (Schlachter Dep.), October 16th Letter; 868; Conf. App. 570-72 (Valstad Dep.)). Gatt contends that, as a condition of continuing their business relationship, Sears required Gatt to purchase a combined mixture of ESF and Merchandise and required Gatt to sign a new sales agreement for the year 2002, rather than extend the existing agreement as provided for under section 6.2. (October 16th Letter; Agreement § 6.1; G MSJ 12; G App. 164-71 (Evans Dep.); 300 (Horn Dep.); 582, 624-32 ("October 19th Letter")).
Specifically, Sears stated, "After careful consideration, and lessons learned from our lengthy discussions and eventual settlement last year, effective January 1, 2002, Sears will no longer separate the [Merchandise] from the [ESF] sold for resale." ( Id.).
On October 16, 2001, Sears sent Gatt a letter ("October 16th Letter"), reaffirming Sears' decision combine Merchandise and ESF in 2002, and relaying Gatt information regarding third party offers it had solicited in an on-line auction for purchases of a combination of Merchandise and ESF. (October 16th Letter; October 19th Letter; G MSJ 12; G App. 442 (Schlachter Dep.); S MSJ 6; Horn Decl. ¶ 11; S Conf. App. 315, Ex. A., S Conf. App. 315, 332; Horn Decl. ¶ 15, S Conf. App. 316). Sears also attached a new Sales Agreement ("Proposed Agreement") to the letter, inviting Gatt to review it, "[i]n view of [Gatt's] contractual right in [the Agreement] to extend on substantially the same or better terms and conditions as Sears is able to obtain from another party." (October 16th Letter).
E. Gatt Begins Withholding Payments of Sears' Invoices Under the Agreement.
After receipt of the October 16th letter, Gatt construed Sears' actions in soliciting bids for a blend of footwear and in asking Gatt to sign a new agreement rather than allowing it to extend the current one per section 6.2 as Sears' anticipatory repudiation of its obligations under the Agreement in 2002 and breach of section 6.2 of the Initial Term of the Agreement. (G MSJ 13, 15; G App. 168, 170-71 (Evans Dep.); 283-87 (Horn Dep.); 446, 464-65 (Schlachter Dep.); 492-93 (Segura), 725-27, 787, 868; 1025-28 (Schlachter Dep.), 1109 (Schlachter Aff.); Conf. App. 137-38 (Plaintiff's Am. R. 26 Discl.); S MSJ 7). Thus, in response to Sears' actions, on or about October 18, 2001, Gatt began withholding payments due on invoices for Merchandise shipped under the Agreement "in suspension of its performance" under the Agreement in an effort to "off-set its losses from Sears' anticipatory repudiation and breach of the Agreement." ( Id.). F. The October 23rd Letter — Gatt Agrees to Pay $3.77/pair for a Blend of ESF and Merchandise in 2002.
Gatt replied to the October 16th letter a week later, on October 23, 2001, ("October 23rd Letter"), stating, "Although we continue to believe that Sears has not conducted itself in accordance with the [the Agreement], Gatt Trading Inc. hereby agrees to pay $3.77 per pair for the shoes identified in your October 16, 2001 letter." (October 23rd Letter). Sears responded the same day, informing Gatt that, in order to continue doing business with Sears, Gatt had to sign a new sales agreement, and cited to the sales agreement Sears proposed in the on-line auction for third-party bids. (G MSJ 14; G App. 443 (Schlachter Dep.), 518 (Stein Dep.), S MSJ 6; Horn Decl. ¶ 15, S Conf. App. 316; Ex. 11, S App. 1334). G. The October 26th Letter — Gatt Notifies Sears of Its Renewal Per the Extension Option in Section 6.2 of the Agreement.
Specifically, in Sears' Response, the Defendant points to the following "terms and conditions" contained in the proposed 2002 contract that Sears claims at least one third party bidder had agreed to which Gatt never agreed to:
1. Changes in packing specifications (Horn Decl. ¶ 17(a), S App. 317; Pl. Third Adm. 45, 53, S. App. 260, 262);
2. Change in payment terms from 45 days down to 30 days (Horn Decl. ¶ 17(b), S App. 317);
3. New provision requiring payment of interest on unpaid balances after 30 days ( Id.);
4. Change in the amount of the standby letter of credit from $150,000 to $200,000 (Horn Dec. ¶ 17 (d), S App. 317; Pl. Third Adm. 47,55, S App. 261, 262);
5. Elimination of the audit provisions (Horn Decl. ¶ 17(e), S App. 317, Pl. Third Adm. 49, 57, S App. 261-62);
6. Changes in the buyer's geographic restrictions (Horn Dec. ¶ 17(F), Sears App. 317; Pl. Third Adm. 50, 59, Sears App. 261-62;
7. Removal of the Extension Option (Horn Decl. ¶ 17(g), S App. 317; Pl. Third Adm. 51, 59, S App. 261-62).
On October 26, 2001 Gatt sent Sears a letter ("October 26th Letter"), informing Sears that it was renewing the Agreement per the Extension Option and that it "expect[ed] Sears to abide by the terms of the Agreement." (October 26th Letter; Agreement § 6.2).
H. The October 31st Letter — Sears Attempts to Terminate the Agreement.
Five days later, on October 31, 2001, Sears replied with a letter entitled "Termination of Sales Agreement Dated November 13, 1998." (October 31st Letter). Gatt responded, agreeing to match the price and condition terms without consenting to sign a new agreement. (S MSJ 6; S App. 1522, 1694). Because Gatt agreed only to match the price and composition terms, Sears "concluded that [Gatt] had not offered `substantially the same or better terms and conditions' as Sears had obtained from [the highest bidding third parties], and it declined to sell the 2002 footwear to [Gatt]." (S MSJ 7; Horn Decl. ¶ 18, S Conf. App. 317).
Gatt's counsel also sent Sears a letter on November 5, 2001, stating that Sears' October 31 letter was conditional, and therefore did not constitute sufficient notice of termination. (November 5th Letter; G MSJ 15; G App. 519, 800-01). Specifically, Sears' October 31st Letter stated that Sears would terminate the Agreement "unless in the interim, Sears chooses to extend, pursuant to section 6.2," and the letter further instructed Gatt that it had until November 5, 2001 to advise Sears as to whether it would sign the new Agreement Sears had proposed. (October 31st Letter).
I. Gatt and Sears Continue Under the Agreement Through the End of 2001.
The parties continued doing business with one another, and according to Gatt, Sears continued to deliver commingled shipments from September through December 2001. (G MSJ 16; G App. 149 (Evans Dep.); 203-04, 209-12, 217-19, 224-29, 271-72 (Glinsky Dep.); 393 (Schlachter Dep.); 633, 725-27, 745-48, 753, 900, 901, 904, 908, 916, 917-31; 1003 (Schlachter Dep.); Conf. App. 137-38 (Plaintiff's Am. R. 26 Discl.)). Gatt had withheld payment for invoices since October 18, 2001, and on November 28, 2001, Gatt received notice from Sears that its account was past due in the amount of $90, 701.72. (G MSJ 16; G App. 531-32 (Stein Dep.); 811-14). Sears informed Gatt that the Agreement would terminate on December 28, 2001, pursuant to section 6.3 (as Sears considered Gatt to be in breach for nonpayment), unless payment in that amount was made. (G MSJ 16; G App. 526-29 (Stein Dep.); 810; S MSJ 7; Ex. 110, 111, S App. 1696-97). On December 13, 2001, Gatt paid Sears the amount on the invoice, in what it deemed an attempt to "protect its rights under the Agreement." (G MSJ 16; G App. 531-32 (Stein Dep.), 811-14). One day later, Sears offered Gatt 200,000 pairs of ESF per Gatt's right of first offer under the Agreement. (Agreement § 5; G MSJ 16; G App. 407 (Schlachter Dep.); 533-34 (Stein Dep.); 741-42, 815-18). While Gatt chose not to accept Sears' offer, Gatt notified Sears that it's offer of ESF "reaffirmed Gatt's view that the Agreement remained in effect for 2002 . . ." (December 28th Letter; G MSJ 16; G App. 743-44).
On December 7, 2001, Gatt filed a lawsuit against Sears in the Eastern District of Texas, claiming anticipatory breach and breach of the Agreement, and seeking declaratory judgment." ( See generally, Compl.). The case was later transferred to the Northern District of Texas, and Gatt filed its latest complaint in October 2003.
J. January 2002 — Sears Makes a Conditional Offer of Merchandise Accumulated Under the Initial Term of the Agreement.
Sears' responded to Gatt's letter of December 28th on January 4, 2002 ("January 4th Letter"), stating that it wished to "dispel any confusion," and was making available 84, 815 pairs of Merchandise that had accumulated in Sears' return centers under the Agreement, on the condition that Gatt fully satisfy the unpaid invoices, that Gatt owed, totaling over one million dollars. (January 4th Letter; G MSJ 17; G App. 538-39 (Stein Dep.); 819-20; S MSJ 8; Ex. 57, 113, S App. 1353, 1705). Sears also informed Gatt in that letter that the Agreement had expired on January 1, 2002, in accordance with Sears' letter of October 31st. ( Id.). Gatt refused to pay the amount Sears quoted, and Sears in turn refused to allow Gatt to take delivery of the Merchandise. (G MSJ 17, G App. 821-22, 949-51; S MSJ 8; Ex. 240, S App. 1747; Pl. Am. Second Interrog. Ex. A., S App. 292).
K. The Parties' Claims Against Each Other.
Gatt is the Plaintiff in this lawsuit, alleging various counts for breach of contract based on numerous alleged violations of the Agreement by Sears along with overcharging and billing errors (Counts 1,2,3,5,6,7, and 8). Gatt also included a claim for breach of warranty for delivery of non-conforming goods (Count 5), a request for declaratory judgment as to the parties rights under the contract (Count 4), a claim for Sears' "failure to give adequate assurances and repudiation and/or anticipatory repudiation" (Count 9) and attorneys' fees. Sears counterclaims for breach of contract, as well as its attorneys' fees.
Gatt maintains that it paid in full all invoices issued by Sears that were due before October 18, 2001, minus credits for commingled ESF and allegedly erroneous prices and CRC fees in the invoices. (G MSJ 17, G App. 821-22, 949-51). Sears alleges that Gatt owes Sears $565,307.92 for Merchandise and an additional $827, 317 for ESF, for a total of $1,3888,624.92. (S MSJ 7; Pl. Am. First Interrog. 11 Ex. B, S App. 288, 294; Pl. Second Adm. 1, 4-9, S App. 102-04; Second Req. Adm. Ex. B, S App. 100; 2001 W/D Shipments, S App. 468).
Both parties move for summary judgment. Gatt seeks partial summary judgment on Counts 1, 2, 5 and 9, regarding its warranty and breach of contract claims and its declaratory judgment claim. Gatt is specifically seeking: (1) summary judgment on the existence of a contract in 2001 and 2002, including a warranty for goods delivered in 2001, (2) a declaratory judgment regarding Sears' obligations under the Agreement, and (3) summary judgment against Sears for breach of warranty, and breach and/or repudiation of the contract for those counts, and (4) damages for breach of warranty under Count 5, as well as summary judgment on its affirmative defenses of offset and suspension of performance under the Uniform Commercial Code ("UCC"). Sears seeks summary judgment against Gatt on all of Gatt's claims and defenses in this case and additionally seeks summary judgment in the amount of $1,388,624.92 in damages from unpaid invoices as well as its attorneys' fees. The Court will address each of these claims below.
Both parties have objected to various affidavits and evidence that the other has submitted with their respective briefing in support of the motions for summary judgment or responses thereto. Because the Court has found it unnecessary to rely upon the great majority of the challenged testimony, it declines at this time to consider each of the objections and instead addresses specific objections to those portions of the disputed evidence the Court regards as relevant to the resolution of particular summary judgment issues. The remainder of the parties' respective objections are DENIED as moot.
II. ANALYSISA. Legal Standard.
Under Rule 56(c) of the Federal Rules of Civil Procedure, summary judgment is appropriate when the pleadings and record evidence show that no genuine issue of material fact exists and that, as a matter of law, the movant is entitled to judgment. Hart v. Hairston, 343 F.3d 762, 764 (5th Cir. 2003). In a motion for summary judgment, the burden is on the movant to prove that no genuine issue of material fact exists. Provident Life Accident Ins. Co. v. Goel, 274 F.3d 984, 991 (5th Cir. 2001). To determine whether a genuine issue exists for trial, the court must view all of the evidence in the light most favorable to the non-movant, and the evidence must be sufficient such that a reasonable jury could return a verdict for the non-movant. See Chaplin v. NationsCredit Corp., 307 F.3d 368, 371-72 (5th Cir. 2002).
While the Fifth Circuit has not set a rule regarding the procedural propriety of a partial motion for summary judgment, numerous Courts have held that a district court may grant summary judgment on specific issues without granting summary judgment as to the entire cause of action in order to narrow the issues presented at trial. See, Welsh v. Rockmaster Equip., 47 F. Supp.2d 818, 820 (E.D. Tex. 1999) (finding that disposing of some and not all matters via summary judgment would "be of aid to the court and the parties" and would "define, identify, and narrow the issues remaining before proceeding to a trial . . ."); see also Sebastian Int'l, Inc. v. Russolillo, 151 F. Supp. 2d 1215, 1217 (C.D. Cal. 2001); In re Seaspan Int'l Ltd., 172 F. Supp. 2d 1314, 1320 (W.D. Wash 2001).
The parties agree that there is an enforceable choice-of-law clause in the Agreement designating that Illinois law govern this dispute. (Agreement § 11; S. Resp. 16, fn. 4, G MSJ 19); see also, e.g., Resolution Trust Corp. v. Northpark Joint Venture, 958 F.2d 1313, 1318 (5th Cir. 1992). Because the Agreement is a contract for the sale of goods, UCC Article 2 will govern the rights and obligations of the parties under the Agreement. See 810 ILL. COMP. STAT. ANN. 5/2-102 (West 2003).
B. Count 5 of Gatt's Complaint, Alleging Breach of Warranty and Breach of Contract for Sears' Alleged Shipments of Non-conforming Goods.
1. Gatt's Breach of Contract Claim Fails As a Matter of Law Because Gatt Accepted the Nonconforming Goods.
In Count 5 of its Second Amended Complaint ("Complaint"), Gatt alleges that Sears breached the Agreement and breached its express warranty in the Agreement by delivering non-conforming goods in two separate Merchandise shipments. (Compl. 25-27; Agreement §§ 1, 5). Sears moves for summary judgment on Gatt's breach of contract claim in Count 5, correctly pointing out that, under Illinois law, a buyer's acceptance of goods, even if wholly non-conforming, destroys its ability to reject them and sue for non-performance. See Quaker Alloy Casting Co. v. Gulfco Indus., Inc., 686 F. Supp. 1319, 1335 (N.D. Ill. 1988); see also 810 ILL. COMP. STAT. 5/2-607, 5/2-711, 5/2-714. Gatt admits accepting the Merchandise shipments at issue (G MSJ 23). Thus, Sears' motion for summary judgment is GRANTED in its favor on Gatt's breach of contract claim in Count 5, and the Court next addresses Gatt's claim for breach of warranty based on the same facts.
2. Sears' Delivery of Non-conforming Goods Was a Breach of its Express Warranty.
The remainder of Count 5 alleges that Sears breached the express warranty in the Agreement to deliver Merchandise-only shipments. (Compl. 25-27; Agreement §§ 1, 5). Gatt has moved for summary judgment in its favor on the entirety of its breach of warranty claim, and Sears has moved for summary judgment against Gatt on this claim. There are three separate issues the Court must address in analyzing Gatt's breach of warranty claim: (1) whether the shipments at issue contained non-conforming goods as a matter of law, (2) whether Gatt's notice to Sears regarding the non-conformity was sufficient, and (3) whether Gatt's damages for its breach of warranty claim in Count 5 are established as a matter of law. The Court addresses each issue in turn.
a. Shipments 1 and 2 Contained a Blend of ESF and Merchandise as a matter of law.
First, Gatt contends that the evidence establishes, as a matter of law, that the shipments at issue contained a blend of ESF and Merchandise. Sears, on the other hand, contends that Gatt's evidence on this point is insufficient even to survive summary judgment. In the fall of 2001, Sears delivered the two shipments in question — Shipment 1 and Shipment 2. In the Agreement, Sears makes an express promise to sell and deliver only Merchandise, as defined in the Agreement. (Agreement §§ 1. 5). This description of the goods, made a part of the basis of the bargain of the Agreement, creating an express warranty that the goods Sears delivered would conform to that description. See id; see also 810 Ill. Comp. Stat. Ann. 5/2-313(1)(b) ("Any description of the goods which is made a part of the basis of the bargain creates an express warranty that the goods shall conform to the description."); Leighton Indus., Inc. V. Callier Steel Pipe Tube, Inc., 1991 WL 18413, at *4 (N.D. Ill. 1991).
Sears contends, without introducing any evidence that the shipments at issue contained only Merchandise, that Gatt has introduced insufficient evidence to establish that the shipments at issue contained ESF. (S Resp. 17). Sears does not dispute, however, that Gatt received the shipments (G MSJ 23; S Resp. 16). Nor does Sears introduce any evidence to controvert the evidence showing that Sears has was never truly effective in separating the ESF out of the shipments of Merchandise. (G Reply 1; G App. 149 (Schlachter Dep.); 271-75, 279-83 (Horn Dep.); 898-99).
Gatt has introduced sufficient summary judgment evidence to support its assertion that the shipments were non-conforming, in the form of affidavit, written correspondence and email correspondence. (G App. 393, 633, 725-27, 745-48, 900-01, 904, 908, 911, 917-32, 999-1000, 1003, Conf. App. 137-38). Gatt also specifically identified for Sears two separate CRC locations that were particular problems, noting percentages of ESF and Merchandise in the shipments from those locations (G. App. 746). Sears admits that it received Gatt's email correspondence pertaining to the shipments, and, aside from making tenuous hearsay allegations, fails to introduce any controverting evidence. (S Resp. 17). While Sears has introduced evidence that Gatt did not provide Sears with the specific number of ESF pairs commingled with Merchandise in the shipments, Sears has not introduced any evidence indicating that the shipments did not contain ESF. Moreover, all of the uncontroverted evidence indicates that Sears would have relied on whatever statistics Gatt had given it, as it had in the past, in reimbursing Gatt for the commingled shipments. (Glinsky Decl. ¶ 3, S Conf. App. 369).
Sears may not simply attack the credibility of Gatt's evidence without making some factual showing regarding its attempts to separate ESF from merchandise or verify that the shipments were not commingled — as the non-movant, Sears must demonstrate the existence of a genuine dispute. See Bose Corp. V. Consumers Union of U.S., 466 U.S. 485, 512 (1984) (stating that discredited testimony alone is normally not a sufficient basis for drawing a contrary conclusion); see also Fed.R.Civ.P. 56(e) advisory committee's notes (amended 1963); see also Moore v. United Parcel Serv., (N.D. Tex. 2004), slip opinion (holding that the Court "may not make credibility determinations or weigh the evidence in ruling on motions for summary judgment.") (citations omitted). The Court finds that Gatt has established, as a matter of law, that the shipments at issue contained ESF. Next, the Court turns to whether Gatt gave Sears sufficient notice of nonconformity.
b. Gatt's Notice of Sears' Breach of Warranty by Delivering Nonconforming Goods Was Sufficient as a Matter of Law.
Sears also contends that Gatt failed to comply with U.C.C. § 2-607's requirement of prompt notification of nonconformity of goods. 810 ILL. COMP. STAT. 5/2-607(3)(a). Section 2-607 strips buyers who fail to notify sellers of a breach within a reasonable period of time of all remedies. 810 ILL. COMP. STAT. § 5/2-607 (3)(a). Generally, a buyer must contact the seller directly and inform it of the problems incurred with a particular product purchased by the buyer. Maldonado v. Creative Woodworking Concepts, Inc., 694 N.E.2d 1021, 1025 (Ill.App.Ct. 1998) (citations omitted). The buyer's notice must be sufficient to give the seller actual knowledge of the products purchased by the buyer. Connick v. Suzuki Motor Co., 675 N.E.2d 584, 590 (Ill. 1996). It is undisputed that Gatt repeatedly informed Sears that previous shipments of Merchandise contained ESF. (G Reply 6; S Resp. 17). Furthermore, Sears acknowledged notice of the ESF violations by crediting Gatt for the ESF commingled in the first 18 shipments after the Settlement. (G App. 209-12, 217-19, 224-29, 410-13, 416-17, 633, 745-48, 750, 753, 900-01, 904, 908, 916, 917-32, 1107, 1111). Finally, Sears admits that, before the March 2001 Settlement Agreement, it had not always (or perhaps ever) separated the ESF from the Merchandise because it was mistaken regarding its obligation to do so under the Agreement. (S Resp. 3; Horn Decl. ¶ 3, S App. 313). As for the shipments at issue, Gatt informed Sears that the Merchandise shipments contained ESF. (G App. 393, 633, 725-27, 745-48, 900-01, 904, 908, 911, 917-32, 999-1000, 1003, Conf. App. 137-38).
The parties acknowledge that the notice must sufficiently inform Sears of problems with the transaction. They disagree, however, on whether the entire course of conduct regarding Merchandise shipments under the Agreement constitutes a transaction or whether each individual shipment is a separate transaction. Sears contends that each shipment was a separate transaction and that Gatt's notification of nonconformity regarding Shipments 1 and 2 specifically, was insufficient. (S Resp. 18). Gatt, on the other hand, asserts that all shipments together constitute one transaction. The parties' accounts of the facts do not materially differ. Thus, the Court decides whether Gatt's notice was sufficient as a matter of law. See Palmco Corp. V. Am. Airlines, Inc., 983 F.2d 681 (5th Cir. 1993) ("We decide, rather than remand, the issue of whether [the buyer] gave proper notice to [the seller], because the issue is a matter of law based upon the undisputed facts of this case.").
Under the Agreement, Sears promised to sell its entire production of Merchandise in return for Gatt's promise to purchase the entire quantity of Merchandise — thus forming an output contract. (Agreement § 1); Cohen v. Wood Bros. Steel Stamping Co., 529 N.E.2d 1068, 1070-71 (Ill.App.Ct. 1998) (recognizing the validity of an output contract); 810 ILL. COMP. STAT. § 5/2-306(1) (2003); Sencon Sys., Inc., 1986 WL 10989, at *2 (N.D. Ill. 1986). Sears contends that because the Agreement contemplated separate installments, Gatt was required to give notice of nonconformity as to each, but nothing in the Agreement indicates it was severable into separate contracts, ( see generally (Agreement)), and none of the cases Sears cites support that assertion. In Sencon, the district court for the Northern District of Illinois noted that under UCC section 2-612, installment contracts are "treated as a single contract requiring or authorizing the delivery of goods in separate lots, rather than a series of contracts, each covering a single lot." Sencon, 1986 WL 10989, at *2 (emphasis added).
Further insight into the issue may be derived from Comment 4 to UCC section 607 notes, pertaining to the notice requirement for a breach of warranty, which the Illinois Supreme Court has affirmed under Illinois law. Connick, 675 N.E.2d at 590; see also Custom Automated Mach. V. Penda Corp., 537 F. Supp. 77, 84(N.D. Ill. 1982) (noting that the UCC does not require notification in any particular words); Rush-Presbyterian-St. Luke's Med. Cntr. V. Gould, Inc., 1995 WL 340967, *14 (N.D. Ill. 1995). Comment 4 states that "[t]he content of the notification need merely be sufficient to let the seller know that the transaction is still troublesome and must be watched." ( Id.). The evidentiary support Gatt has provided, along with the parties' ongoing communications and performance regarding Sears' repeated deliveries of Merchandise commingled with ESF, establishes that Gatt gave Sears sufficient notice, as a matter of law, of the ongoing and widespread problems with Sears delivery of Merchandise commingled with ESF. (G App. at 203-12, 215-20, 222-23 (Glinsky Dep.); 414-17, 417-21 (Schlachter Dep.); 586-90, 745-48, 750-53, 900, 904-32; 1106-08, 1111 (Schlachter Aff.)). Thus, under the statute, Gatt's notices provided Sears with sufficient notice of its breach of warranty under the Agreement by delivering nonconforming goods. Finally, the Court will address the last issue pertaining to Gatt's Count 5 breach of warranty claim — whether Gatt has established its damages resulting from Sears' breach as a matter of law.
c. Gatt Suffered Damages as a Result of Sears' Nonconforming Shipment.
The Court has determined, as a matter of law, that Sears breached its expressed warranty to deliver Merchandise only shipments by commingling ESF with Merchandise and that Gatt's notice of Sears' breach was sufficient. The last element of Gatt's Count 5 for breach of warranty is damages. Sears, moving for summary judgment against Gatt's claim for damages, contends that Gatt's evidence on this element is insufficient, and that Gatt instead received a "windfall." (S MSJ 38). Sears has not, however, introduced any evidence to controvert the evidence proffered by Gatt that, beginning with the Settlement Agreement, Sears consistently gave Gatt credits for the commingled ESF in 2001 at the price of approximately $1.81/pair. Under the UCC, Gatt may recover damages for any non-conformity of tender (ESF contained in the Merchandise shipments) resulting in the ordinary course of events from the Sears' breach (here breaching its express warranty by delivering commingled shipments) determined in any reasonable manner. See ILL. COMP. STAT. 5/2-714. Gatt has proposed a damages amount calculated by the difference in value between Merchandise and ESF, which the Court finds is reasonable as a matter of law. See ILL. COMP. STAT. 5/2-714; (G App. 416-18 (Schlachter Dep.); 652-53).
As Gatt points out in its Reply, the price at which Gatt sold the footwear in question is irrelevant, as the measure of damages for breach of warranty is determined by the difference in value, and Gatt is not seeking lost profits on its breach of warranty claims in Count 5. (G Reply 7; 810 Ill. Comp. Stat. Ann. 5/2-714). There is, however, a genuine issue of material fact regarding the number of pairs of ESF commingled with the Merchandise shipments at issue. Thus, the amount of damages Gatt is owed for Sears breach of warranty by delivering non-conforming goods will be left for trial. Gatt's motion for summary judgment as to its damages for Sears' breach of warranty is DENIED, and Sears' motion against Gatt's claim for damages is likewise DENIED.
Contrary to Sears' assertion, the audit provision of the Agreement is inapplicable to this situation. The provision pertains to Sears' count of the number of pairs of "footwear" for each shipment. Gatt is not contending that Sears incorrectly counted the total number of pairs sent. Rather, Gatt alleges that Sears delivered nonconforming goods because the composition of the footwear was in breach.
For the reasons discussed, Sears' motion for summary judgment against Gatt on Gatt's breach of contract claim in Count 5 of its Complaint for breach of contract is GRANTED. Gatt's motion for summary judgment on its breach of warranty claim in Count 5 is GRANTED in part and DENIED in part. The Court finds that Gatt has established, as a matter of law, that Sears' breached its express warranty in the Agreement to deliver Merchandise-only shipments and that Gatt's notification to Sears of the seller's breach was sufficient. Genuine issues of material fact remain, however, as to the appropriate amount of Gatt's damages, and that issue is left for trial.
The remaining issues center on the effect of certain events, beginning with Sear's October 16th Letter. The following issues remain: (1) Gatt's motion for summary judgment in its favor on its claim that Sears breached the Agreement by refusing to sell Merchandise to Gatt in 2002 at $2.86/pair (Count 1), (2) Gatt's motion for summary judgment in its favor on its claim that Sears breached the Extension Option in section 6.2 of the Agreement (Count 2), (3) Gatt's motion for summary judgment on its request for declaratory judgment regarding the parties rights and obligations under the contract (Count 4), Gatt's motion for summary judgment on its claim that Sears' repudiated its obligations under the Agreement (Count 9), (4) Sears' motion for summary judgment against the remainder of Gatt's claims (Counts 1-4, and 6-9) and affirmative defenses, and (5) Sears' motion for summary judgment on its claim against Gatt to recover for unpaid invoices. The Court finds that the factual background of the events from October 16, 2001 through January 4, 2002 are materially undisputed, thus rendering it a matter of contract interpretation for the Court to determine the effect of the parties actions under the Agreement beginning on October 16, 2001, and the resulting obligations remaining under the Agreement.
C. Counts 1, 2 and 4 of Gatt's Complaint, Alleging: Breach of Contract by Sears for Refusal to Sell Merchandise to Gatt in 2002 at $2.86/pair (Count 1) and Breach of the Agreement's Section 6.2 Extension Option (Count 2), and Requesting Declaratory Judgment as to the Parties Obligations Under the Agreement (Count 4). 1. The October 16th Letter Did Not Effectively Terminate the Agreement.
Gatt moves for summary judgment in Counts 1, 2, 4, and 9, asserting that Sears did not effectively terminate the agreement but in fact repudiated its obligations thereunder via its purported termination attempts and refusal to provide adequate assurances of performance. Because of Sears' purportedly ineffective termination efforts, Gatt contends that the Agreement automatically renewed under the automatic extension option in section 6.1, or, alternatively, was extended by Gatt under Section 6.2, thus rendering Sears' refusal to perform under the Agreement in 2002 an automatic repudiation.
Sears contends that its letter to Gatt on October 16, 2001 was intended to serve as notice of termination of the Agreement (S Resp. 27; October 16th Letter). The letter does not, however, contain the word "terminate." Id. Instead, the letter states that Sears obtained the third-party bids presented in the letter "as part of [Sears'] due diligence prior to contract renewal." An effective notice of termination must be clear and unequivocal, because under the UCC, "ambiguous conduct and language intended to signal contract termination will be deemed not to have terminated the contract." Accu-Weather, Inc. v. Prospect Comm., Inc., 644 A.2d 1251, 1254 (Pa.Super.Ct. 1994) (citations omitted) (interpreting UCC provision under Pennsylvania law); see also Morris Silverman Mgmt. Corp. V. Western Union Fin. Serv., Inc., 284 F. Supp.2d 964, 974 (N.D. Ill. 2003) ("[T]o be effective, a notice terminating a contract must be "clear and unequivocal.") (interpreting UCC provision under New Jersey law); Todd v. Corp. Life Ins. Co., 1990 WL 16430, at *4 (N.D. Ill. 1990), aff'd in part, rev'd in part on other grounds, 945 F.2d 204, 208 (7th Cir. 1991) ("[N]otice to terminate a contract under an express provision must be clear and unequivocal.").
Sears' October 16th Letter also invites further negotiation by Gatt, making any attempt therein to terminate ineffective. Morris Silverman Mgmt., 284 F. Supp.2d at 974; Todd, 1990 WL 16430, at *3-4; Accu-Weather, 644 A.2d at 1255; Stovall v. Pub. Paper Co., 584 P.2d 1375, 1380 (Or. 1978) (notice of termination was insufficient where it mixed words of termination with words of compromise, negotiation and present obligation. Moreover, the terms Sears offered to negotiate were not open to unilateral change by Sears under the Agreement. See generally, (Agreement). Thus, the October 16th letter was, as a matter of law, ineffective to terminate the Agreement. See, e.g., Morris Silverman Mgmt., 284 F. Supp.2d at 974; Todd, 1990 WL 16430, at *3-4; Accu-Weather, 644 A.2d at 1255; Stovall, 584 P.2d at 1380.
b. The October 31, 2001 Letter Did Not Effectively Terminate the Agreement.
Sears next contends that, if the Court finds the October 16th Letter to be insufficient notice of termination, that its October 31, 2001 letter ("October 31st Letter") effectively terminated the Agreement. Sears entitled the October 31st Letter "Termination of Sales Agreement Dated November 13, 1998." In that letter, however, Sears requested that Gatt sign a new agreement, in direct contravention of section 6.2 of the Agreement, which provides that the existing Agreement shall remain in place and be extended. (Agreement § 6.2; October 31st Letter). Additionally, the October 31st letter invites negotiation, stating "In the event that you do not accept all the terms and conditions contained in the Agreement, please indicate in writing which terms are acceptable, and which are unacceptable." (October 31st Letter). Sears, in fact, admits that the October 31st Letter was a "conditional" notice of termination. (S MSJ 11). As discussed above, however, the law requires that any notice of termination be "clear, unequivocal and unambiguous." Morris Silverman Mgmt., 284 F. Supp.2d at 974. Moreover, section 6.2 of the Agreement specifically provides that the term of the existing Agreement shall be extended, not that a new Agreement will be unilaterally mandated by Sears. (October 31st Letter). The ambiguity of the language and circumstances surrounding the October 31st letter make it ineffective to terminate the Agreement as a matter of law.
In sum, the Court finds, as a matter of law, that Sears did not give Gatt effective notice of termination. Because the Court has found Sears' notice to be ineffective, the Court finds, as a matter of law, that the Agreement automatically renewed for a one-year period pursuant to section 6.1 of the Agreement. (Agreement § 6.1, "After expiration fo the Initial Term, this Agreement shall automatically renew for a one-year period . . ."). The Court finds, however, that there is a genuine issue of material fact as to the price at which Sears was obligated to sell Merchandise to Gatt under the Renewal Term in 2002. In the Settlement Agreement, Sears agreed to lower the purchase price of Merchandise to $2.86/pair for the "Remainder of the Term." A genuine factual dispute remains as to the price the contract would have automatically renewed at for the 2002 Renewal Term. The next issue is Gatt's motion for summary judgment on its claim that the Agreement automatically renewed under Section 6.1, or, in the alternative, was properly extended by Gatt per section 6.2, and that Sears breached that section of the Agreement by requiring Gatt to sign a new agreement for a changed composition of goods rather than extend the current Agreement, and by refusing to sell Gatt Merchandise under the Agreement in 2002 (Counts 1 and 2).
2. The Evidence Establishes Sears' Breach of Section 6.2 as a Matter of Law.
Although the Court has determined that Sears did not properly terminate the Agreement, and that the Agreement automatically renewed for 2002 under section 6.2, out of an abundance of caution, the Court will also analyze the effect of the parties actions Sears' attempt to terminate the Agreement had been effective. Under the terms of the Agreement, Gatt had the right to extend the Agreement for 2002. Sears argues that, Gatt nevertheless failed to extend the Agreement per section 6.2 because (1) Gatt failed to offer the same or better terms or conditions as Sears received from third party buyers, and (2) Gatt was in breach, and therefore could not extend the agreement. (S MSJ 12; S MSJ 12, 17). The Court next examines these two assertions by Sears.
a. Gatt's Obligation to Match Third Party Bids Was Never Triggered Because Sears Failed to Obtain Bids for Merchandise Only as Required by the Agreement.
Assuming, arguendo, that Gatt was obligated to exercise its right to extend after Sears purported termination, the first issue is whether Gatt's obligation to match the third party bids under section 6.2 was triggered by Sears' October 16th Letter. Sears contends that although it never presented Gatt with any third party bids for Merchandise only,(S Resp. 36), it was within its rights to add new terms and change the composition of the goods under the Agreement because it was the "master of conditions" and could require whatever terms and conditions were "commercially reasonable, imposed in good faith, and not specifically designed to defeat the preemptive rights" of Gatt. (S MSJ 16 (quoting West Tex. Transmission, L.P. v. Enron Corp., 907 F.2d 1554, 1563 (5th Cir. 1990)). There are two flaws in Sears' argument. First, the West Tex. Transmission case cited by Sears specifically dealt with a right of first refusal, which may have be applicable to ESF under the Agreement, but cannot be stretched to apply to the parties' contract for the sale of Merchandise. Id. Gatt was obligated to purchase all of the Merchandise under the Agreement. Second, the terms and conditions Sears sought to change appear to be specifically designed to defeat Gatt's preemptive right to renew the contract for Merchandise only with right of first offer on ESF. See West Tex. Transmission, 907 F.2d at 1563.
Moreover, Sears' October letters attempted to require Gatt to match more than the "terms and conditions" under the Agreement. While Sears is correct that parties may restrict the phrase "terms and conditions" if they wish to do so, West Tex. Transmission, 907 F.2d at 1564, the Agreement was clearly drafted so that the terms and conditions regarding the purchase of merchandise clearly were limited to price, quantity, delivery terms, and payment terms. (Agreement §§ 1, 5, 6.2). The phrase "terms and conditions," as used in sections 1, 5 and 6.2 of the Agreement, defines price, quantity, delivery terms and payment terms. (Agreement §§ 1, 5, 6.2). In the Agreement, the "promises and covenants" contained throughout the Agreement are separate from the "terms and conditions" contained within section 1.1 regarding the "Purchase of Merchandise," and Merchandise is explicitly defined to exclude ESF. ( Id. § 1.1). The "terms and conditions," as defined in the Agreement, are contained entirely within Section 1 of the Agreement, and include (1) the quantity of Merchandise specified in section 1.1, (2) the delivery terms in section 1.2, and (3) the price and payment terms in section 1.3. See (id. § 1).
The Agreement specifically provides:
NOW, THEREFORE, in consideration of the promises and covenants herein contained, and for other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Purchase and Sale
1.1 Purchase of Merchandise. Subject to the terms and conditions set forth herein, Sears hereby agrees to sell [Gatt], from time to time, and Buyer hereby agrees to purchase and take delivery from Sears, from time to time, pairs of worn, defective, damaged or irregular footwear and sample footwear (collectively referred to as "Merchandise").
(Agreement §§ 1, 1.1).
Sections 5 and 6.2 use the phrase "terms and conditions" in the same manner to indicated the same terms and conditions — delivery, price and payment terms. ( Id. §§ 5, 6.2).
The Court finds as follows: (1) Sears was obligated under the Agreement to present Gatt a third party offer for a composition of goods existing of Merchandise only in order to trigger any obligation by Gatt to extend the Agreement, (2) none of the cases Sears cites allow a party to change the composition of the goods offered in an output contract as part of the ability to modify the terms and conditions, (S MSJ 17-19), (3) "Merchandise" is defined under the Agreement to exclude ESF, as Sears requested, (Agreement § 1.1) giving Gatt the right of first offer, but not the obligation to purchase ESF. ( Id. §§ 1, 5). Thus, Gatt's obligation to offer substantially the same or better terms than a third party was never triggered. Moreover, given the Court's interpretation of the Agreement, if the third party offers had been valid (which they were not), Gatt's agreement to meet the price term would have automatically extended the the Agreement. The next issue regarding the Extension Option is whether Gatt was in breach of the Agreement at the time it would have otherwise renewed.
Contrary to Sears' assertion, Gatt did not waive its right to claim breach by offering to match the bids presented by the third party buyers. Gatt agreed in its October 18th letter (although purportedly under economic duress), to extend the Agreement at the price of $3.77/pair and for the new blend of ESF and Merchandise. (G App. 440-41, 622-23, 754-55). Gatt's October 23rd acceptance of the $3.77 further confirmed the extension, although Gatt now contends that both offers were under alleged duress. (G App. 776-84). Sears cannot now claim waiver when it rejected and/or breached Gatt's agreement to meet these terms. Moreover, Gatt filed its predecessor lawsuit on November 1, 2001, asserting in the alternative, that it was entitled to enforce its right to purchase Sears' footwear, even at $3.77/pair. (G Resp. 19).
b. Whether Gatt Was In Breach of the Agreement.
Sears also contends that the Agreement could not have renewed under the Extension Option because Gatt was in breach of the Agreement for non-payment of invoices owed Sears. In order determine this issue, it is necessary to address Gatt's affirmative defense of offset. Gatt claims that it was entitled to suspend performance and offset its damages caused by Sears' October 16th and October 31st Letters repudiating the Agreement. Gatt asserts that Sears' October 16th Letter (and later its October 31st Letter) was an "overt communication of intention demonstrating a clear determination not to perform under the Agreement, thus constituting repudiation of the Agreement by Sears. 810 Ill. Comp. Stat. § 5/2-610 cmt. 2. The Court next addresses whether Sears' conduct constituted repudiation and whether Gatt was entitled to withhold payment on invoices in order to offset its losses as a result of Sears' purported repudiation. The Court will then address the issues of whether Gatt was in breach for non-payment and whether the Agreement would have renewed, had Sears' termination been effective, per section 6.2.
Sears also asserts in its Response that Gatt was in breach for failing to pay four invoices — all dated May 1, 2001, until December 1, 2001. (S Resp. 38; Luna Decl. §§ 3-6 Ex. A, D, S App. 1322; Luna Decl. Ex. A., S App. 20-23; Pl. Supp. Fifth Interrog. 2 Ex. A., S App. 7-8, 10-11). Sears' assertion on this point fails for a number of reasons. First, the total combined amount of the four invoices is $263.07. (Agreement § 1.3.1; Settlement Agreement). This amount, which represented less than .03% of the approximately $850,000 Gatt paid Sears from January 2001 to October 16, 2001, is de minimus, and is ignored by this Court as immaterial. See Pacini v. Regopoulas, 665 N.E.2d 493, 497-98 (Ill.Ct.App. 1996) (holding that .004% difference should be ignored as de minimus amount). Second, is a genuine dispute as to whether the invoices were ever even received by Gatt, and if they were, the Court has determined, infra, that Gatt had the right to offset its damages in response to Sears' repudiation in October. See, e.g., (Luna Decl. ¶¶ 4, 5 Ex. B, C, S App. 18, 24-103; G Reply 19; G App. 725-27).
D. Sears Breached the Agreement by Repudiating its Obligations (Counts 1, 2 and 9).
The Court next turns to the effect of Sears' actions in repudiating its obligations under the Agreement in 2002 and afterward under UCC sections 2-610 and 2-609. The answer to this question will determine the outcome of Gatt's partial motion for summary judgment in its favor on its claims that Sears breached the Extension Option (Count 2), and breached and/or repudiated the Agreement by refusing sell Merchandise at $2.86/pair in 2002 (Count 1), and repudiated and/or anticipatorily repudiated the agreement by failure to give adequate assurances and repudiating its obligations (Count 9). Determination of the issue also resolves Sears' motion for summary judgment on Gatt's affirmative defense of offset.
1. Sears' Anticipatory Repudiation is Established as a Matter of Law, and the Agreement Automatically Renewed Under Section 6.1.
Under section 6.1 of the Agreement, the "Initial Term" of the Agreement expired on December 31, 2001. (Agreement § 6.1). The same section provides that the Agreement "shall automatically renew unless terminated." ( Id.). Although anticipatory repudiation is usually a question of fact, courts may make the determination as a matter of law where there can be only one reasonable interpretation of the statement giving rise to the repudiation. See Louis Dreyfus Corp. v. J.B. Brown, 709 F.2d 898, 900 (5th Cir. 1983). Sears' letter of October 16th required Gatt to submit bids attempting to match third party bids for a changed composition of goods — a combination of ESF and Merchandise. (October 16th Letter). Furthermore, Sears asked Gatt in the letter to review a new sales agreement rather than extend the existing one. ( Id.). These two facts alone provided Gatt with a "clear indication" that Sears did not intend to perform under the Agreement for the year 2002. Louis Dreyfus Corp., 709 F.2d at 900.
Gatt's letters of October 18th, 26th and November 5th, 2001 sought adequate assurances of Sears' intent to perform under the Agreement in 2002, and Sears failed to provide any such assurance. (October 18th Letter; G App. 744-75, October 26th Letter; November 5th Letter; 1108 (Schlachter Aff.)). Moreover, Sears confirmed via its October 31st Letter that it would not offer Gatt's exclusive right to purchase Merchandise under the Agreement in 2002. (G App. 300 (Horn Dep.), October 16th Letter; October 31st Letter). The Court finds that Sears' actions constituted repudiation of the Agreement as a matter of law. The next issue is whether Gatt was entitled to withhold its payments, offsetting its damages in response to Sears' repudiation of the Agreement.
2. Gatt Was Substantially Impaired by Sears' Breach, and Was Thus Entitled to Offset its Damages in Response to Sears' Breach of Warranty and, Anticipatory Repudiation, and Repudiation of the Agreement.
The Court next addresses whether Gatt was entitled to withhold payment to offset Sears' breach or whether Gatt's failure to pay constituted breach of the Agreement, preventing Gatt from extending the Agreement under section 6.2.
Under the UCC, a party's failure to provide adequate assurance of due performance within 30 days of receiving a justifiable demand automatically constitutes repudiation. 810 Ill. Comp. Stat. Ann. 5/2-609(4). See AMF v. McDonald's Corp., 536 F.2d 1167, 1171 (7th Cir. 1976). Under UCC § 2-727, "any language which reasonably indicates the buyer's reason for holding up his payment is sufficient." 810 ILL. COMP. STAT. ANN. 5/2-717 cmt. 2; see also Sencon Sys., Inc., 1986 WL 10989, at *3. Sears anticipatory repudiation indicated that Gatt would lose all of its rights under the Agreement in 2002, and indeed it ultimately did. Sears also breached its express warranty by delivering non-conforming goods, causing an as-yet undetermined amount of damages. Gatt was not required to explicitly state that it was withholding payment as an offset or deduction of damages. Id.; see also Intervale Steel Corp. v. Borg Beck Div., 578 F. Supp. 1081, 1088 (E.D. Mich. 1984); Adam Metal Supply, Inc. v. Electrodex, Inc., 386 So.2d 1316, 1318 (Fla.Dist.Ct.App. 1980) (holding that buyer's notice of nonconformity entitled buyer to deduct damages under Section 2-717). Gatt provided Sears with sufficient notice and had a sensible basis for withholding payment. The Court finds that Sears repudiated, thus Gatt was entitled to offset its damages from Sears' repudiation. See Ill. Comp. Stat. Ann. 5/2-610. Cosden Oil Chem Co. V. Aktiengesellschaft, 736 F.2d 1064, 1074 (5th Cir. 1984) (affirming jury finding that order divided into four shipments constituted one contract, and that buyer was entitled to offset its damages because of seller's anticipatory repudiation); PC Com, Inc. V. Proteon, Inc., 906 F. Supp. 894, 903-04 (S.D.N.Y. 1995) (holding that buyer is entitled to suspend performance and withhold payment against damages caused by seller's repudiation) ; Barclays American/Business Credit, Inc. v. E E Inter., Inc., 697 S.W.2d 694, 701-02 (Tex.App.-Dallas 1985, no writ).
Gatt claims damages in 2001 resulting from Sears' breaches in excess of $2 million (Pl. Orig. Compl., G App. 964)), and thus contends that it was entitled and had a sensible basis to offset the entire $1,288,800.00 Sears seeks in unpaid invoices from 2001.
In sum, the Court finds, as a matter of law, that Gatt was entitled to withhold payment to offset its damages. Thus, Gatt was not in breach for failure to pay Sears' invoices, and, had the Agreement not automatically renewed, per section 6.1, Gatt properly extended it for 2002 pursuant to section 6.2. Because the Court has found that Gatt had existing rights for 2002, Sears' undisputed refusal to perform under the contract in 2002 constitutes repudiation as a matter of law. 810 ILL. COMP. STAT. ANN. 5/2 cmt. 1 ("Anticipatory repudiation centers upon an overt communication of intention or an action which renders performance impossible or demonstrates a clear, determination not to continue with performance."), cmt. 2; see Hessler v. Crystal Lake Chrysler-Plymouth, Inc., 788 N.E.2d 405, 415-16 (Ill.App.Ct. 2003). Therefore, Gatt's motion for summary judgment on its claims against Sears for breach of the extension option in section 6.2 (Count 2) and for breach of the Agreement for failure to sell Merchandise to Gatt in 2002 are GRANTED as to Sears' liability for breach. Sears' motion for summary judgment against Gatt's claims in Counts 1, 2, 3 and 9 are DENIED. The Court next turns to Gatt's claim for declaratory judgment in Count 4.
In Count 3, Gatt alleges and alternative claim for breach and/or repudiation for failure to sell Gatt Merchandise at $3.77/pair.
E. Gatt's Declaratory Judgment Claim (Count 4)is Procedurally Proper.
Sears moves for summary judgment on Count 4 of Gatt's Complaint, its declaratory judgment claim, insisting that is improper because of its redundancy to its breach of contract claim and thus fails as a matter of law. The case Sears cites to support its position, Newton v. State Farm Fire and Cas. Co., 138 F.R.D. 76, 79 (E.D. Va. 1991), is unpersuasive. First, the Newton court determined that a declaratory judgment would not "clarify the legal rights or obligations in question," as the plaintiff was asking for clarification of factual disputes. Id. at 79. This case presents an entirely different issue, because there is very little dispute (if any) between the parties regarding the facts. The parties' legal disputes concern the Initial Term of the Agreement and the parties obligations thereunder, and the existence of the Agreement in 2002 going forward. Second, there is ample support within this circuit for granting a declaratory judgment claim in a similar context. In Welsh, the court for the Eastern District of Texas narrowed the issues for trial by ruling on the portion of the plaintiffs' complaint seeking summary judgment, stating that [d]eclaratory judgments can dispose of an entire controversy, or be of aid to the court in identifying, narrowing, and defining the issues and controversies remaining between the parties as to any remaining claims before the court . . ." 47 F. Supp.2d at 820. The Court finds that a declaratory judgment of the undisputed facts, as well as certain of the parties rights and obligations under the Agreement would narrow the issues for trial.
Thus, based upon the facts set forth in Section I, the Court finds as follows:
1. Sears delivered non-conforming Goods to Gatt in Shipments 1 and 2. Supra at 15.
2. Sears' delivery of non-conforming goods to Gatt in Shipments 1 and 2 was a breach of Sears' express warranty in the Agreement to deliver Merchandise-only shipments as defined in the Agreement. Id.
3. Sears failed to give credits to Gatt for some amount of ESF commingled in Shipments 1 and 2. (The issue of how many pairs Gatt received is left for trial). Id. at 4-5.
4. Gatt is entitled to some amount of damages for Sears' delivery of non-conforming goods in Shipments 1 and 2. (The amount of damages is an issue left for trial). Id. at 18.
5. Gatt was entitled to offset its damages for Sears' delivery of non-conforming goods against amounts due to Sears under the Agreement. Id. at 28-29.
6. Gatt's offset of its damages for Sears' delivery of non-conforming goods against amounts due Sears was not a breach of the Agreement by Gatt. Id.
7. Sears' failure to respond to Gatt's request for adequate assurances was a repudiation of the Agreement. Id.
8. Sears' letter of October 16, 2001 was a repudiation of the Agreement. Id. at 23-24, 28.
9. Sears letter of October 31, 2001 was a repudiation of the Agreement. Id.
10. Gatt was entitled to offset its damages for Sears' repudiation against amounts due under the Agreement. Id. at 28-29.
11. Gatt was entitled to suspend its performance under the Agreement in response to Sears' repudiation of the Agreement. Id. at 28-29.
12. Neither Sears' October 16, 2001 letter nor its October 31, 2001 letter did not effectively terminate the Agreement and was ineffective as a matter of law. 20-22.
13. The Agreement automatically renewed for the year 2002. Id. at 27.
14. Sears breached the Agreement for 2002 by failing to sell Merchandise to Gatt in 2002. Id. at 29.
15. Sears breached the Agreement by failing to provide Gatt with a right of first offer on ESF in 2002. Id.
16. Sears did not present a third party offer for Merchandise only to Gatt for 2002. Id. at 23-24.
17. Because Sears did not present Gatt with a third party offer for Merchandise only for 2002, under Section 6.2 of the Agreement, Gatt was not required to match any third party offer for commingled Merchandise and ESF presented by Sears in order for Gatt to extend the Agreement for 2002. Id.
18. Gatt was not "in breach" of the Agreement when it attempted to extend the Agreement for 2002. Id. at 29.
19. If the Agreement had not automatically renewed, Gatt's attempt would have successfully extended the Agreement for 2002 under Section 6.2. Id. at 25.F. Fact Issues Remain Regarding Count 6 of Gatt's Claims.
In Count 6 of its Complaint, Gatt alleges that Sears breached the Agreement in 2001 by refusing to allow Gatt to pick up the Merchandise, accumulated under the Initial Term of the Agreement, that Sears offered in the January 4th Letter. (Compl. 27, 28). Sears moves for summary judgment on this count, contending that as the seller, it was entitled to stop delivery of goods because Gatt's failure to pay resulted in breach. See (Sears MSJ 39); 810 ILL. COMP. STAT. ANN. § 5/2-612(3), 705(1). The Court has determined that while Gatt's offset was not a breach of the Agreement, genuine issues of material fact remain as to Count 6 of Gatt's complaint, and Sears' motion for summary judgment on this Count is DENIED. The Court will next address Sears motion for summary judgment in its favor on Gatt's claim in Count 7 for breach of the duty of good faith and fair dealing.
G. There is no Independent Cause of Action Under Illinois Law for Breach of the Duty of Good Faith and Fair Dealing (Count 7).
Sears moves for summary judgment on Gatt's claims in Count 7 for Breach of the Duty of Good Faith and Fair Dealing, correctly pointing out that there is no such independent cause of action under Illinois law. (Sears MSJ 40) (citing Echo, Inc. v. Whitson Co., 121 F.3d 1099, 1105-1106 (7th Cir. 1997); 810 Ill. Comp. Stat. Ann. 5/1-203. Sears' motion for summary judgment on Count 7 of Gatt's Complaint is therefore GRANTED, and the Court turns to Sears motion for summary judgment in its favor on Gatt's Count 8, for alleged overcharge of Merchandise by Sears in 2001. H. Fact Issues Remain as to Count 8 — Gatt's Claim for Overcharge of Merchandise in 2001.
In Count 8, Gatt claims that Sears breached the Agreement by overcharging Gatt on Merchandise shipments via billing errors and inclusion of CRC fees. (Compl. 29). Sears moves for summary judgment against Gatt on this claim. The Court finds genuine issues of material fact remain as to whether Gatt was charged more than $2.86/pair and/or CRC fees on shipments after the Settlement Agreement, which provided that all shipments for the remainder of the term would be charged to Gatt at a rate of $2.86/pair without CRC fees for the remainder of the Term. Cf. (G Resp. 35; Santiago Affidavit, G Supp. App. 485-87; S MSJ 40-41). Therefore, Sears' motion for summary judgment against Gatt is DENIED as to Count 8 of Gatt's Complaint, and the Court will next address Sears' motion for summary judgment in its favor on Gatt's claims for lost profits.
I. A Genuine Issue of Material Fact Exists as to Gatt's Claims for Lost Profits, Counts 1-3, 6, 7 and 9.
Sears moves for summary judgment on Gatt's claims for lost profits in Counts 1-3, 6, 7 and 9. (S MSJ 24-25). Under Illinois law, Gatt is only entitled to lost profits if it introduces competent evidence that its profits may be calculated with "reasonable certainty." See Midland Hotel Corp. v. Reuben H. Donnelley Corp., 515 N.E.2d 61, 66 (Ill. 1987). The Court notes Sears' pending Motion to Exclude the Expert Testimony of Professor Gregory Crespi, and finds, notwithstanding the information Sears seeks to exclude, that Gatt has introduced evidence sufficient to create a genuine issue of material fact regarding its claims for lost profits. Sears' Motion for Summary Judgment on this issue is therefore DENIED. The next issue is Sears' pending motion for summary judgment on its Counterclaim for unpaid invoices. J. Sears is Not Entitled to Summary Judgment on Its Counterclaim.
Sears moves for summary judgment on its counterclaim for unpaid invoices to Gatt for Merchandise delivered in 2001 in the amount of $1,388,624.92. Sears is not entitled to summary judgment on its counterclaim because, as discussed above, Gatt was entitled to an offset and to suspend its performance under the Agreement as a result of Sears' anticipatory repudiation of its future performance under the Agreement, and repudiation in 2002 by refusing to perform under the Agreement. See Sencon, 1986 WL 10989, at *3 (denying seller's motion for summary judgment on counterclaim for unpaid invoices in light of buyer's UCC 2-717 setoff claim). Additionally, there is a genuine issue of material fact regarding the amount of unpaid invoices Gatt owes Sears — including Gatt's damages for Sears' breach of warranty, repudiation, and possible overcharge. Cf. (S MSJ 42; G Resp. 37; G App. 491, 725-27, 913, 1107-08, 1111) (Conf. G App. 137-38 (Plaintiff's Am. R. 26 Discl.). Therefore Sears' motion for summary judgment on its counterclaim is DENIED, and the issue is left for trial. The last issue the Court will address is Sears' motion for summary judgment as to all of Gatt's affirmative defenses.
K. Sears is Not Entitled to Summary Judgment on Gatt's Defenses.
Sears also moves for summary judgment on Gatt's affirmative defenses. The Court has previously addressed certain of Gatt's defenses, including its affirmative defense of offset. On the final page of Sears' summary judgment motion, Sears makes the broad assertion that "for the reasons stated above," Gatt has no evidence to support "several additional defenses," without so much as listing for the Court the defenses on which it seeks summary judgment. (S MSJ 50). Regarding Gatt's "several additional defenses," Sears bears the burden of pointing out the absence of evidence supporting them. Latimer v. Smithkline French Lab., 919 F.2d 301, 303 (5th Cir. 1990) (The party seeking summary judgment has the initial responsibility of informing the court of the basis for the motion and identifying those parts of the record that it believes demonstrate the absence of a genuine issue of material fact.). Sears fails to identify, which, if any, essential elements of Gatt's affirmative defenses were lacking. See Marshall v. Housing Auth. of City of Taylor, 866 F. Supp. 999, 1002 (W.D. Tex. 1994). Viewing the evidence as the parties has presented it, the Court finds that Gatt has introduced sufficient evidence to support its defenses to present genuine issues of material fact. Sears' motion for summary judgment on Gatt's affirmative defenses is DENIED.
For the reasons set forth in this order, it is ORDERED that Gatt's Motion for Partial Summary Judgment be, and it is hereby, GRANTED in part and DENIED in part. It is further ordered that Sears' Motion for Summary Judgment be, and it is hereby, GRANTED in part and DENIED in part. Specifically, the Court GRANTS Gatt's Motion for Partial Summary Judgment with respect its following claims against Sears:
• Gatt's claim that Sears breached the Agreement by refusal to sell Merchandise to Gatt in 2002 (Count 1)
• Gatt's claim that Sears breached section the Extension Option in section 6.2 of the Agreement and refused to honor the Extension Option in section 6.2 (Count 2)
• Portions of Gatt's claims for declaratory judgment as set out supra (Count 4)
• Gatt's claim that Sears breached its express warranty in the Agreement to deliver Merchandise-only shipments (Count 5)
• Gatt's claims that Sears both anticipatorily repudiated the Agreement and Repudiated the Agreement (Count 9)
Specifically, the Court GRANTS Sears' Motion for Summary Judgment with respect to the following claims against it:
• Gatt's claim for breach of contract in Count 5 of Gatt's Complaint for delivery of non-conforming goods
• Gatt's claim in Count 7 for breach of the duty of good faith and fair dealing
The Court otherwise DENIES the remainder of the parties' motions for summary judgment and leaves any issues not resolved for determination at trial. All other relief not set out herein is expressly DENIED, and the following claims thus remain for resolution:
• The entirety of Sears' counterclaim against Gatt for unpaid invoices
• Gatt's claim for damages for breach of warranty in Count 5
• Gatt's claims for lost profits in Counts 1-3, 6-7 and 9
• Gatt's claim for breach of contract by overcharging and billing errors in Count 6
• The price at which Sears was obligated to sell Merchandise to Gatt under the Renewal Term of the Agreement in 2002
• Gatt's alternative claim for breach of contract for refusal to sell merchandise at $3.37/pair in 2002 in Count 3