Firwood Manufacturing Company, Inc. v. General Tire, Inc.

Citations: 96 F.3d 163; 30 U.C.C. Rep. Serv. 2d (West) 789; 1996 U.S. App. LEXIS 24226; 1996 WL 520041Docket: 95-1969

Court: Court of Appeals for the Sixth Circuit; September 16, 1996; Federal Appellate Court

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Defendant General Tire, Inc. appeals a District Court ruling that denied its motions for judgment as a matter of law, a new trial, and remittitur after a jury awarded Firwood Manufacturing Company, Inc. $187,513 in damages and $100,476 in interest for breach of contract. General Tire contends that Firwood failed to prove damages as required under Michigan law, claims the jury received erroneous instructions regarding contract formation, and argues that interest is a consequential damage not entitled to recovery. The court affirmed the liability award but reversed the interest award. The case centers on a contract where General Tire allegedly agreed to purchase fifty-five post-cure inflators from Firwood. Firwood's offer, communicated through a letter on October 9, 1989, stipulated pricing based on the purchase of fifty-five units by the end of 1990. Thomas Kane, Firwood's representative, testified that this letter constituted an offer, which was orally accepted by General Tire's Senior Buyer, James Headley. Following this, General Tire issued two purchase orders reflecting the agreed price and commitment to buy fifty-five units, prompting Firwood to begin ordering necessary parts. Subsequently, General Tire released additional purchase orders consistent with the minimum purchase agreement.

In February 1990, James Headley, a Senior Buyer at General Tire, sent Firwood a letter of intent to purchase approximately fifty-five Firwood Model 1225 Post Cure Inflators (PCIs) over the next fifteen months, confirming previous purchases of six units. The planned purchase allocations included specific quantities for the Mayfield, Barrie, and Charlotte plants, adhering to the pricing outlined in Firwood's earlier offer. In March 1990, Firwood agreed to a modification concerning valve types for the PCIs designated for the Barrie plant, contingent on General Tire paying an additional $150 per unit and permitting the use of a different valve type for the Mayfield units.

By April 1990, General Tire had acquired twenty-two PCIs, but subsequently closed its Barrie plant. On April 11, 1991, Firwood reminded General Tire of its commitment to purchase the remaining fifty-five PCIs, detailing their production status. Upon learning of General Tire's intention not to fulfill the order, Firwood sought alternative buyers, ultimately selling the remaining units at a lower price than initially contracted. During this process, Firwood also repurposed parts from the unfinished PCIs for other orders, despite the PCIs being custom-made for General Tire.

After a jury trial, Firwood was awarded $287,989 in damages, including $187,513 for the difference between the resale price and the contract price, along with $100,476 in interest. General Tire's subsequent motions for judgment, a new trial, or remittitur were denied by the District Court, prompting an appeal. General Tire contested the jury instruction that allowed the February letter of intent to be construed as acceptance of Firwood’s offer, arguing that it contained new terms not part of the original agreement. Additionally, General Tire challenged Firwood's proof of damages, asserting that the resale of non-contractual parts and the timing of the resales hindered entitlement to damages, and argued against the entitlement to interest, characterizing it as consequential rather than incidental damages.

General Tire contends that the offer made on October 9 did not include a guaranteed minimum purchase of fifty-five PCIs but served merely as a sliding-scale price guide. General accepted this offer orally that day, signifying agreement to the price schedule rather than a minimum purchase requirement. General Tire disputes the validity of a subsequent February letter of intent that purportedly committed it to purchasing fifty-five PCIs, claiming it violates Michigan case law that prohibits conflicting terms after an oral agreement. The District Court's denial of General Tire's motion for a new trial is reviewed for abuse of discretion, with established case law indicating a party cannot obtain a new trial based solely on jury instruction deficiencies unless the instructions mislead or fail to adequately convey the law. The jury was instructed that an offer invites acceptance in any reasonable manner, and acceptance can occur via a letter of intent, even if it introduces different terms, unless explicitly conditional on agreement to those new terms. The instruction did not mislead the jury regarding General Tire's acceptance of the October 9 offer through the letter of intent. Evidence was presented that the offer letter anticipated acceptance via a letter of intent, and testimony indicated that General Tire had agreed to a minimum purchase. Thus, the jury could reasonably determine that the letter of intent constituted acceptance. General Tire also argued that the District Court erred in denying its motion for judgment as a matter of law, asserting that Firwood failed to prove damages as required under Michigan law, which allows sellers to recover the difference between the contract price and resale price, alongside incidental expenses, when a buyer breaches.

Resale of goods under Mich. Comp. Laws Ann. 440.2706(1, 2) may occur at public or private sale, including through contracts to sell, and can be executed as a unit or in parcels. The sale must be commercially reasonable in all aspects, including method, time, and place, and must be reasonably associated with the broken contract, though goods do not need to be in existence or identified prior to breach. General Tire contends that Firwood cannot recover damages under this section because Firwood failed to reasonably identify the goods as the thirty-three PCIs sold included parts not originally part of the contract. Additionally, there are concerns regarding the commercial reasonableness of a resale occurring three years post-breach.

The question arises whether a seller can substitute fungible goods during resale. The reasoning from case law, specifically Servbest Foods, supports that sellers may substitute fungible goods as long as the resale remains commercially reasonable. The court in Servbest allowed recovery when different meat was sold post-breach, emphasizing that altered goods do not impact the sales price. The Second Circuit echoed this in Apex Oil, permitting recovery for different heating oil sold after breach, noting the resold items remained reasonably identified to the contract.

Firwood is not precluded from recovery simply because the sold PCIs contained different parts, as the parts were fungible and the PCIs were essentially the same. However, Apex Oil highlighted the importance of timely resale, especially when substituting goods, cautioning against delays that could affect the resale price and potentially inflate damages. The principle that a resale should occur as soon as practicable is particularly stringent in cases involving substituted goods to avoid manipulation of the resale process.

The court analyzed the commercial reasonableness of Firwood's resale of PCIs three years after a breach, referencing Apex Oil and McMillan v. Meuser Material. It noted that a significant delay in resale may render the transaction unrepresentative of market value, as seen in Apex Oil's findings regarding a six-week resale delay. However, it acknowledged that if no reasonable market existed at the time of breach, a delay could be justified. Factors such as the nature of the goods and market conditions influence what constitutes a reasonable time for resale. The court found that Firwood's three-year delay was not commercially unreasonable given the lack of a market for specialized PCIs and Firwood's good faith efforts to find buyers. Consequently, the jury was not required to deem the resale commercially unreasonable.

The court also addressed General Tire's remittitur motion regarding the interest component of the damages awarded. General Tire contended that sellers cannot claim interest damages under the U.C.C. as these are considered consequential rather than incidental damages. The District Court denied the motion, determining that interest on the lost use of money is a commercially reasonable charge resulting from the breach, consistent with Michigan law and supported by precedent from Bulk Oil (U.S.A. Inc. v. Sun Oil Trading Co.). Thus, the District Court's interpretation of "commercially reasonable charges" was upheld, allowing Firwood to recover interest related to the breach.

The District Court determined that the lost use of money is akin to interest paid on a loan that would not have been necessary but for a breach of contract. This perspective aligns with the ruling in Bulk Oil, which classified interest payments as incidental damages, allowing Firwood to recover its lost use of money due to General Tire's breach. Bulk Oil drew support from cases such as Neri v. Retail Marine Corp., which affirmed that incidental damages can include interest payments if they are foreseeable and commercially reasonable. In Neri, the court reversed a prior decision denying a boat dealer reimbursement for various incidental expenses, thereby broadening the interpretation of incidental damages. Similarly, Intermeat, Inc. v. American Poultry, Inc. upheld that a seller could recover financing charges related to a breach, emphasizing a wide interpretation of "incidental damages."

Conversely, Michigan courts, as demonstrated in S.C. Gray, Inc. v. Ford Motor Co., have a narrower definition of incidental damages, categorizing interest payments on loans as consequential damages, which cannot be recovered by sellers. The court in Sullivan Indus., Inc. v. Double Seal Glass Co., Inc. reiterated that interest paid on loans for business maintenance falls under consequential damages. The District Court attempted to differentiate the Michigan cases from Firwood's claim by asserting that those cases involved interest on loans for business maintenance, while Firwood's claim was for lost use of money. However, the court cited Petroleo Brasileiro, S.A. Petrobras v. Ameropan Oil Corp. to argue that lost use of funds is relevant to the buyer-seller transaction, suggesting no valid distinction can be made regarding the applicability of S.C. Gray and Sullivan Indus. to Firwood's claims.

The District Court failed to justify the distinction between two transactions regarding their classification within the buyer-seller framework, and the authors argue that no such distinction exists. The involvement of third parties, such as banks, is noted in both cases—whether related to a seller’s interest payments or the lost use of funds. The authors assert that the existence of third parties should not create a difference in classification. They further align with the Seventh Circuit's interpretation that lost use of funds is a consequential damage, not incidental, referencing Afram Export Corp. v. Metallurgiki Halyps, S.A., which ruled similarly regarding interest claims. Firwood's arguments against the denial of General Tire's remittitur motion cite Commonwealth Edison Co. v. Decker Coal Co. for the proposition that lost use of funds qualifies as incidental damages. However, this stance is rejected based on its conflict with Afram Export and the absence of supportive case law. Firwood also contends that the U.C.C. allows courts to consider common law principles to justify interest awards as incidental damages. Michigan's U.C.C. states that common law and equity principles can supplement its provisions unless explicitly displaced.

The District Court appears to have accepted Firwood's argument regarding the application of Mich. Comp. Laws Ann. 440.1103, which states that common law can supplement the Uniform Commercial Code (U.C.C.) unless specifically displaced. In this context, the court examined the distinction between incidental and consequential damages, ultimately determining that interest on lost use of money is consequential and therefore not recoverable under Mich. Comp. Laws Ann. 440.2706, which permits only incidental damages. The court found that Michigan common law provided no additional clarification on incidental damages as defined in Mich. Comp. Laws Ann. 440.2710, and the cases cited by Firwood did not support its position. Although Michigan recognizes the doctrine of awarding interest as part of damages, the court concluded that sellers cannot claim compensation for loss of funds as incidental damages. However, Firwood is entitled to statutory interest from the date of filing under Mich. Comp. Laws Ann. 600.6013, distinct from prejudgment interest that is considered as an element of damages. The District Court's ruling is affirmed except for the aspect concerning interest as damages, which is vacated, and the case is remanded for calculation of prejudgment interest. Judge Wellford concurs in part but expresses a differing interpretation regarding the recovery of interest as incidental damages versus consequential damages, referencing the case Afram Export Corp. v. Metallurgiki Halyps.

The distinction between incidental and consequential damages remains ambiguous. The district judge categorized the damages as consequential, a view that is likely disagreed upon. Buyers are not accountable for the seller's financial arrangements; however, sellers will incur interest costs between contract breach and cover sale. The buyer, who is better positioned to mitigate this expense, should bear the risk. Therefore, sellers can recover additional interest expenses as incidental damages, as supported by several cases, including Bulk Oil (U.S.A. Inc. v. Sun Oil Trading Co.) and Hofmann v. Stoller. In the Afram case, the seller's claim centered on the loss of use of borrowed funds rather than extra interest expenses, entitling the seller to out-of-pocket interest directly linked to the breach. Under Wisconsin law, Afram is also entitled to statutory interest from breach to judgment, which effectively includes the claimed interest expense.

The case aligns with Commonwealth Edison Co. v. Decker Coal Co., which allows sellers to recover prejudgment interest as incidental damages. Bulk Oil noted that New York statutory interest compensates sellers for the use of money due to buyer breaches. Other cases, like Ernst Steel Corp. and Intermeat, Inc., support the recovery of financing charges as incidental damages under the U.C.C. under New York law. In Michigan, two cases are discussed: Sullivan Industries, which allows recovery for interest incurred due to a breach, and S.C. Gray, which classified interest on borrowed capital as consequential damages. Ultimately, Sullivan Industries supports the notion that interest incurred due to additional borrowings from a breach is recoverable, in addition to prejudgment interest.

The writer expresses uncertainty about the allowance of "incurred" or additional interest in the context of statutory interest benefits for Firwood. However, they agree with the majority that statutory interest should be calculated for Firwood. The writer suggests remanding the issue of additional interest to the district court to determine if the plaintiff has proven a right to any interest "incurred and paid," or any incidental interest or finance charges permissible under Michigan's U.C.C. Importantly, the plaintiff cannot receive both incidental and statutory interest during the same period. The writer notes that this determination is a legal matter, not one for a jury. They compare different statutory measures for sellers and buyers regarding damages, highlighting that sellers can claim damages as the difference between market and unpaid contract prices plus incidental damages, while buyers can claim the difference between market and contract prices plus incidental and consequential damages. The excerpt critiques the Second Circuit's broad definition of incidental damages, arguing that it conflates them with consequential damages. The writer references the Bulk Oil case, which affirmed that sellers could recover post-breach interest payments if deemed commercially reasonable and foreseeable. In contrast, buyers seeking incidental damages do not need to prove foreseeability, only that the charges were commercially reasonable.