Steel Dynamics Columbus, LLC v. Altech Environment USA Corp.

Citation: 273 F. Supp. 3d 627Docket: NO. 1:14-CV-124-DMB-DAS

Court: District Court, N.D. Mississippi; March 31, 2017; Federal District Court

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In August 2010, Steel Dynamics Columbus, LLC (previously Severs-tal Columbus, LLC) entered into a contract with Altech Environment USA Corp. to acquire two continuous emissions monitoring units (CEMS) for its steel plant in Columbus, Mississippi, as mandated by the Mississippi Department of Environmental Quality (MDEQ) under a Title V permit. Following installation in 2011, Steel encountered numerous operational issues with the CEMS over three years and subsequently filed a lawsuit against Altech, claiming defects in the units. Steel seeks damages for the CEMS cost, expenses related to their attempted operation, a fine from MDEQ, and attorney's fees. 

The court conducted a three-day bench trial addressing claims of negligence, breach of contract, breach of warranties, and contractual indemnification. During the trial, after Steel presented its case, the court granted Altech a judgment on Steel's contractual indemnity claim but deferred ruling on Altech's motion regarding the remaining claims until after all evidence was presented. 

Steel initiated the lawsuit in the Circuit Court of Lowndes County, Mississippi, on June 30, 2014, which was removed to federal court on August 4, 2014, based on diversity jurisdiction. Steel's amended complaint, filed on October 14, 2014, included various claims against Altech. Altech subsequently sought partial summary judgment to limit the recoverable damages, which the court denied without prejudice, preferring to evaluate damages after the trial. 

The bench trial took place from June 20 to June 23, 2016, concluding with Steel opting not to present a rebuttal after Altech's case. The court allowed for the record to remain open for seven days post-trial for both parties to submit proposed findings of fact and conclusions of law. 

Steel's operations involve melting scrap metal in an electric arc furnace, releasing pollutants regulated under the Clean Air Act. The Title V permit necessitated the installation of CEMS to monitor emissions of Nitrogen Oxides, Carbon Monoxide, Volatile Organic Compounds, and Sulfur Dioxide.

In May 2010, Steel sought bids for Continuous Emissions Monitoring Systems (CEMS) required by the Michigan Department of Environmental Quality (MDEQ). Altech, an Illinois company, submitted a proposal on August 10, 2010, detailing its CEMS designed to monitor pollutants under Steel's Title V permit. The proposal included a Data Acquisition System (DAS) computer equipped with necessary software, and specified that the CEMS would measure pollutants within required concentration ranges. Altech claimed its systems were particularly suited for emissions monitoring from arc furnaces. 

The proposal outlined a testing schedule, including a "7-Day Drift Test" shortly after Equipment Startup and a comprehensive "Relative Accuracy Test Audit (RATA)" within a year, as mandated by the Title V permit. It also included a one-year maintenance contract that entailed quarterly maintenance, startup support, RATA testing, and regulatory approval services. Installation requirements indicated that the CEMS should be mounted in a temperature-controlled room supplied by Steel. 

On August 17, 2010, Steel placed an order for two CEMS, totaling $447,610.20, referencing Altech’s proposal and including a one-year maintenance contract, the DAS computer, and a quality assurance plan. Altech understood this order was for compliance with the Title V permit. The purchase terms included a warranty for good quality and defect-free design, while disclaiming all implied warranties, including those of merchantability and fitness for a particular purpose. Remedies for breach were limited to repair or replacement at Altech's discretion, and all damages were capped at the purchase price, excluding indemnity, with incidental and consequential damages explicitly excluded.

The first Continuous Emission Monitoring System (CEMS) was installed between January 25 and January 27, 2011, with Altech providing the necessary DAS computer and software. By June 2011, Altech developed an operating manual for Steel detailing maintenance requirements for the CEMS. The second CEMS was installed on July 22, 2011. Both systems consisted of three key components: a probe assembly for airflow sampling, a flow monitor for total airflow measurement, and an analyzer for pollutant concentration measurement.

During the first CEMS installation, Steel supplied inaccurate configuration data, requiring updates by mid-March 2011. Subsequent service visits revealed unresolved issues, with an Altech engineer noting incomplete service due to needed computer changes. By mid-October 2011, the second CEMS was unable to measure SO2 or NO, the DAS computer was malfunctioning, and all temperature controllers in the first CEMS needed replacement. Similar issues persisted throughout 2011.

In 2012, ongoing problems with both CEMS and their shared DAS computer led to multiple service visits, with the systems generating thousands of alarms daily. By June, Steel acquired a new computer and planned to install updated software. Altech engineers conducted nine additional service visits that year, managing to calibrate the CEMS temporarily, but issues reappeared post-visit. By April, calibration failures and repeatability problems were prevalent. The first CEMS passed part of a 7-Day Drift Test by late August, but the second CEMS remained unstable. An Altech engineer indicated that resolving the second CEMS issues required specific software repairs that were not evidenced to have been completed. On August 21, 2012, Steel's vice president communicated ongoing critical issues, highlighting a prolonged failure to achieve accurate and reliable performance from the systems.

In 2013, Steel employees and Altech engineers faced persistent issues with analyzers, temperature controllers, and computer systems. On January 10, Contec informed Altech of significant database problems for 2011 and 2012. By January 30, Steel was alerted to corruption in the DAS computer, described as "faulty" by Altech's technical support manager, Mark Chamberlin, on February 5. In response, Altech sent a replacement computer to Steel in late March, but this new system encountered the same issues. By June 12, the new software was reported to be causing malfunctions with the CEMS analyzers. As 2013 progressed, both CEMS produced inaccurate data, and a Required Annual Performance Test (RATA) could not be scheduled, missing Altech's revised deadline by nearly a year. On December 5, Altech notified Steel that warranties for both CEMS had expired, prompting Steel's engineering lead, Bryan Vogel, to request a discussion about the non-functionality of the system. 

On June 28, MDEQ issued a Notice of Violation to Steel for two infractions regarding its Title V Permit, citing the CEMS's inability to operate effectively and failures to report malfunctions. Following discussions with MDEQ, Steel engaged a different vendor to conduct an ambient air test on the Altech CEMS, which revealed significant failures, particularly with the NOx measurement. Consequently, Steel abandoned the Altech CEMS, viewing the ambient air test results as a failure. Subsequently, Steel negotiated a $135,000 fine with MDEQ and agreed to hire a third party for monthly emissions testing until a functioning CEMS was installed. Steel claims liability against Altech on three grounds: negligence, breach of implied warranties, and breach of contract, with both parties acknowledging the applicability of Mississippi's Uniform Commercial Code.

Negligence claims require four elements: duty, breach, factual and proximate cause, and damage, as established in Duckworth v. Warren. A breach of contract alone does not constitute a tort unless it involves a duty of care recognized by tort law, which must be independent of the contract. The case of Montgomery v. Citi-Mortgage clarifies that the failure to exercise reasonable care in fulfilling a contract can breach a tort duty. CitiMortgage was required to exercise due care in processing requests related to mortgage modifications. However, Steel has not alleged any carelessness in CitiMortgage's performance, leading to the dismissal of his negligence claim.

Regarding breach of implied warranties, Altech contends that Steel's claims are barred by the Terms of the contract, which explicitly disallow such claims. Mississippi law upholds the validity of contracts, barring modifications absent fraud or mistake, although contract provisions that violate state law are unenforceable. In this case, two Mississippi statutes address the limitations on liability under implied warranties. Section 11-7-18, which was amended shortly before Steel's purchase order, applies only to consumer sales, which does not pertain to Steel as a non-consumer. Consequently, Steel's reliance on 75-2-719(4) to invalidate the warranty disclaimer fails, as this provision excludes sales between merchants from its limitations.

In Massey-Ferguson, Inc. v. Evans, the Mississippi Supreme Court allowed a buyer of farm equipment to pursue consequential damages for breach of implied warranty, despite contract terms excluding such damages and the sale being "as is." The court cited two statutes, 75-2-719(4) and 11-7-18, noting that both prohibit limiting remedies. However, it was unclear whether the court indicated that 75-2-719(4) alone prohibited disclaimers of implied warranties, as 11-7-18 explicitly prohibits such disclaimers. After amendments, 11-7-18 applies solely to consumer sales, making Massey-Ferguson less relevant to non-consumer transactions. The Mississippi Supreme Court has not ruled against implied warranty disclaimers based solely on 75-2-719(4). Lower court cases, such as J.L. Teel Co. v. Houston United Sales, Inc. and Little v. V. G Welding Supply, Inc., focused on the pre-amended 11-7-18 without reference to 75-2-719(4). 

In determining how the Mississippi Supreme Court might rule on whether 75-2-719(4) renders unenforceable contract terms barring implied warranty claims in non-consumer sales, this Court must look at precedent from Mississippi's intermediate appellate courts. Notably, cases like Settlemires v. Jones and Murray v. Blackwell reference 75-2-719(4) in relation to consumer sales and imply that the statute may not apply to non-consumer sales. Murray, in particular, focused solely on 11-7-18 regarding implied warranty disclaimers for used vehicles, suggesting that 75-2-719(4) does not cover such disclaimers in non-consumer contexts. Consequently, the guidance from these intermediate appellate court decisions supports the conclusion that 75-2-719(4) does not prohibit implied warranty disclaimers in non-consumer transactions.

The Court must determine whether Mississippi's statute 75-2-719(4) barred implied warranty disclaimers in non-consumer sales at the time the contract was formed. In diversity cases, federal courts apply state statutory construction rules. Under Mississippi law, the objective is to discern the legislature's intent, beginning with the plain meaning of terms. If the meaning is clear, it should be applied; if ambiguous, statutory construction principles are invoked to interpret the language reasonably and consistently. The term "remedies" is not defined in the relevant statute or the definitions section of Mississippi's U.C.C., necessitating a review of its ordinary meaning as defined by Black's Law Dictionary. "Remedy" encompasses both the actions taken to enforce rights and the relief sought. The distinction between rights and remedies indicates that "remedies" in 75-2-719(4) refers to the means of addressing breaches of implied warranties, which should not be limited by the seller. Additionally, any interpretation that diminishes the effect of statutory amendments is unacceptable. The 2010 amendment to section 11-7-18 clarified that prohibitions on contract terms barring implied warranty claims apply strictly to consumer sales, reinforcing the non-consumer context of 75-2-719(4).

Steel contends that Section 75-2-719(4) allows for implied warranties in most non-consumer sales, particularly between merchants dealing with computer-related products and services. He argues that the amendment in Section 11-7-18 primarily targets such transactions, suggesting that it rendered the previous statute ineffective in those contexts. However, the court cannot interpret the two statutes as being interchangeable without undermining their distinct language and the specific intent of the amendment in 11-7-18. The court references FDA v. Brown & Williamson Tobacco Corp. to highlight that legislative context can refine statutory meanings over time. It clarifies that Section 75-2-719(4) pertains only to the disclaimer of remedies for breaches of implied warranties, not the disclaimer of liability itself. The court finds no compelling evidence suggesting that the Mississippi Supreme Court would interpret the statute otherwise, concluding that Steel's implied warranty claims are invalidated by the Terms and must be dismissed.

Altech is accused of breaching its contractual warranty to Steel in two primary ways: (1) by delivering Continuous Emissions Monitoring Systems (CEMS) that were never operational, and (2) by supplying CEMS that did not meet the express warranty of being of good quality, free from defects, and suitable for their intended purpose. Steel ordered the CEMS for monitoring emissions from its Columbus, Mississippi steel plant to comply with a Title V permit issued by MDEQ. Altech was aware of this specified purpose and initially proposed that the CEMS were suited to monitor emissions from arc furnaces.

The CEMS experienced persistent malfunctions from installation, including issues with measuring NOx, a regulated pollutant, and frequent computer failures. Although Altech made ongoing efforts to remedy these issues, including providing replacement parts and repair services under warranty, the problems were never adequately resolved. It took over two years for either CEMS to pass a 7-Day Drift Test, and even then, they continued to malfunction. In nearly three years, the first CEMS only once produced sufficient data for a 7-Day Drift Test, while the second CEMS performed adequately only four times, never exceeding nineteen days.

While Steel had initially installed the CEMS improperly and provided Altech with inaccurate data, these issues did not significantly contribute to the recurring malfunctions, particularly those related to the analyzers and the computer. The inaccurate configuration data was corrected shortly after installation, and expert testimony indicated that it did not cause ongoing problems. Consequently, the court determined that the CEMS were unsuitable for their intended purpose of monitoring pollutants per the Title V permit, leading to a breach of warranty by Altech.

Steel is seeking financial compensation amounting to $424,270.20 in direct damages, $307,704.97 in consequential damages, and $259,024.93 in incidental damages. Altech contends that Steel cannot recover any damages due to a failure to notify Altech of the breach.

Section 75-2-607(3)(a) of the Mississippi U.C.C. mandates that a buyer must notify the seller of any breach within a reasonable time after discovering it, or risk being barred from remedies. Notice does not need to articulate a specific claim for damages but should reflect the buyer's reasonable efforts to communicate dissatisfaction. For non-consumer buyers, notice must indicate that the transaction involves a breach through the buyer's overall conduct. The purpose of the notice requirement is to prevent bad faith in commerce, encourage mitigation and resolution, and allow the seller to gather evidence while it is still fresh.

In this case, two communications from Steel to Altech serve as timely and adequate notice of breach: an August 21, 2012, email expressing ongoing critical issues with the system's performance, and a January 25, 2013, email indicating that Steel may need to discuss ending the warranty period due to the lack of a usable system. Both emails effectively communicated Steel's dissatisfaction and alerted Altech that the CEMS transaction was perceived by Steel as a breach of warranty regarding the system's compliance capabilities.

Altech contends that Steel's recoverable damages are restricted by three clauses in their Terms: one limits remedies for breach of warranty to repair or replacement at Altech's discretion, another caps damages at the purchase price of the CEMS, and the third excludes consequential and incidental damages. 

1. **Limitation to Purchase Price**: Steel's recoverable damages amount to $83,320.27, which is under the CEMS purchase price of $447,610.20; thus, the clause limiting damages to the purchase price is not relevant.

2. **Limitation to Repair and/or Replacement**: The express warranty serves as an exclusive limited warranty allowing only for repair or replacement if Steel notifies Altech within a specific timeframe. Steel argues this limitation is invalid as the warranty failed its essential purpose. Under Mississippi U.C.C. § 75-2-719(2), if a limited remedy fails, remedies may be sought as provided by the code. The warranty assumes that the warrantor will fulfill it, and failure to provide conforming goods within a reasonable time indicates the warranty's failure. Despite over three years of attempts by Altech to resolve issues, the CEMS continued to malfunction and did not meet the specifications for monitoring pollutants, thus failing to deliver what was contracted. Case law supports this view, indicating that if the seller cannot provide conforming goods in a reasonable time, the exclusive warranty does not limit the buyer's remedies.

3. **Preclusion of Consequential and Incidental Damages**: Altech argues that the limitation on consequential and incidental damages applies here. However, the court interprets the contract as a whole, concluding that this limitation is also predicated on the warrantor fulfilling their obligations. Therefore, since Altech did not fulfill its warranty, the limitation on consequential and incidental damages does not apply.

The legal document addresses the application of Alabama's Uniform Commercial Code (U.C.C.), which parallels Mississippi’s U.C.C., in cases involving warranties and consequential damages. It highlights that if an exclusive repair-or-replace warranty fails to meet its essential purpose, the limitations on consequential and incidental damages also become ineffective under U.C.C. § 75-2-719(2). The burden is on the plaintiff to demonstrate damages with reasonable certainty, as established in relevant case law, including the necessity for accurate and reliable evidence.

In the case at hand, Steel accepted the CEMS (Continuous Emissions Monitoring Systems) and did not revoke this acceptance. When a warranty fails, the U.C.C. provides remedies for breach of warranty under § 75-2-714(2) and (3). The measure of damages is based on the difference in value between the accepted goods and their warranted value at the time of acceptance, unless special circumstances indicate otherwise. Steel failed to provide evidence regarding the CEMS' value at acceptance, and merely malfunctioning goods does not suffice for a refund; proof of worthlessness is required, as indicated by precedent cases. 

Steel's reliance on the Fedders case is noted, which stipulates that a seller may reasonably refuse to replace a malfunctioning unit if there is insufficient evidence linking the malfunction to all components. Since there is no evidence that other components of the CEMS, aside from the DAS software, contributed to the malfunctions, it is uncertain whether the CEMS were indeed worthless.

If the malfunctions of the Continuous Emissions Monitoring Systems (CEMS) were due to a single defective, easily replaceable component, the units would still hold significant value. Despite acknowledging that the CEMS were not fit for their intended purpose, Steel did not provide evidence explaining the causes of the analyzer malfunctions or how the DAS computer malfunctions affected the CEMS' value. This evidence is crucial because the CEMS consist of subsystems that can be reconfigured. Under Miss. Code Ann. § 75-2-714(2), Steel did not demonstrate a reasonably certain difference in value between the CEMS as accepted and as warranted, thus precluding recovery of direct damages for Altech’s breach of warranty.

Regarding incidental and consequential damages, § 75-2-714(3) allows for such damages if an exclusive contractual remedy fails. Since the limited warranty failed, Steel may pursue other remedies under the Code. Consequential damages include losses related to the seller's knowledge of specific requirements at the time of contracting, as per § 75-2-715(2)(a). Steel claims consequential damages for an MDEQ fine and attorney’s fees related to the MDEQ.

To recover damages for breach of contract, Steel must connect the damages directly to the breach and demonstrate their definiteness. Steel's representative admitted that they could not determine how much of the MDEQ penalty was attributable to the failure of operational CEMS versus other violations. Although Steel's attorney claimed that only the failure to operate CEMS would typically result in fines, this testimony was not provided in court, and even if it were, it would not sufficiently prove that other violations did not influence the total fine. Furthermore, Steel self-reported multiple minor violations, indicating that these could have contributed to regulatory actions. Ultimately, Steel did not establish how MDEQ assessed the fine considering other violations, which included failing to report CEMS malfunctions—an aspect not attributable to Altech.

The Notice of Violation cites Steel’s Title V permit, indicating that an operational upset of the Continuous Emissions Monitoring System (CEMS) could serve as an affirmative defense against enforcement actions if supported by proper evidence. However, Steel failed to establish a connection between the MDEQ fine and Altech's breach, resulting in the dismissal of Steel's damages claim for the fine and associated attorney’s fees. Incidental damages, which must be commercially reasonable and preventable losses, were also scrutinized. Steel presented evidence for purchasing replacement CEMS but failed to provide cost details for recovery as incidental damages. Steel claimed $259,024.43 in other reasonable expenses incident to Altech’s breach, contested by Altech, which asserted a maximum of $56,138.55. Steel is entitled to recover $14,700 for third-party emissions testing directly tied to the malfunctioning CEMS, $30,513.89 for costs incurred in addressing CEMS malfunctions, and $38,006.38 for Altech’s failed warranty-covered remedial efforts. Three invoices related to training and additional equipment were excluded from damages, as Steel did not demonstrate they were defect-related.

Exclusions from Steel's claims include $202 for two micron filters and $96 and $224 for particulate and coalescing filters, respectively, as these were deemed maintenance items related to the operating environment rather than CEMS defects. Additional exclusions involve expenses for housing the OEMS, such as insulation, refrigeration, concrete pads, and wiring, which were necessary for the replacement OEMS as per Altech's proposal. Invoices for calibration gases are also excluded; although OEMS malfunctions can waste calibration gas, Steel improperly connected calibration gas bottles, leading to leaks. Steel acknowledged that it would still need to purchase calibration gas regardless of any alleged breach by Altech.

Steel's amended complaint includes claims for contractual indemnity, negligence, breach of implied warranty of merchantability, breach of implied warranty of fitness for a particular purpose, and breach of contractual warranty. The contractual indemnity claim was dismissed with prejudice following Altech’s motion for judgment. The court granted the motion in part, dismissing Steel’s negligence and warranty claims with prejudice, but awarded Steel $83,320.27 on its contractual warranty claim. A final judgment will be issued separately.

The plaintiff, originally Severstal, changed its name to Steel Dynamics Columbus, LLC, and successfully requested an amendment to reflect this change in court documents. The court addressed jurisdictional concerns regarding diversity under 28 U.S.C. § 1332 and allowed Altech to amend its notice of removal to establish jurisdiction. Steel's breach of contract claim includes both a contractual warranty and a contractual indemnity claim, with no jury trial demand made prior to or after removal.

Steel's contractual indemnity claim was dismissed due to a lack of evidence supporting allegations of property damage or personal injury, any claims related to such damage, or a clear intent for the indemnity provision to cover the fines imposed by MDEQ. The Court found Steel's argument that regulatory penalties under the Clean Air Act qualify as third-party claims to be insufficient. The indemnity provisions specifically required a finding of Altech's negligence, which was not established given that Steel's negligence claim also failed.

The trial transcript indicated discrepancies in maintenance requirements for the CEMS, with conflicting testimonies regarding the frequency of filter checks outlined in the operating manual. Altech's proposal included standard terms that were negotiated, and any warranty breaches were subject to a twelve-month notice period after startup or eighteen months after delivery, although a longer notice period was referenced in the proposal. Altech notified Steel in December 2013 that warranties had expired based on the two-year period from alleged startup dates.

The express warranty was found to have failed its essential purpose, limiting Altech’s liability to the purchase price and excluding liability for special, indirect, or consequential damages. Additionally, Altech did not contest the authenticity of Steel's exhibit concerning CEMS-related expenses during the trial. Steel's express warranty claim relied solely on the Terms, which disclaimed any express warranties aside from those explicitly stated.

Steel's express warranty claim, referencing Mississippi's Uniform Commercial Code, does not support assertions outside the contract's terms. Steel's breach of express warranty is intertwined with its breach of contract claim, focusing on Altech's alleged failure in quality control and staffing an inexperienced engineer during the second CEMS startup. However, Steel failed to provide concrete evidence of specific lapses in the engineer's duties or deficiencies in Altech's quality control processes, relying instead on a vague email that did not substantiate any relevant issues. Consequently, Steel did not prove a breach of duty. The document also notes that Mississippi statutes, including Section 75-2-719(4) and Section 11-7-18, are limited to sales of goods and have not been retroactively applied following amendments. Courts in Mississippi adhere to a rule of prospective operation for statutes unless explicitly stated otherwise. Therefore, the court will apply the version of the law in effect at the time of the contract. Steel's citation of prior cases, such as Patches Farms and Wells, is deemed inapplicable as they address different legal contexts. Additionally, Steel's claim for breach of contractual indemnity was dismissed during the trial.

The conclusion is supported by the referenced prior proposal in the purchase order, which is relevant to the interpretation of the parties' agreement. A course of dealing between the parties can clarify specific terms and supplement the agreement, as established in case law. The document indicates that the prior terms defined the parties' rights along with the executed purchase order. Testimony from Steel's corporate representative, Anna Chappell, revealed that Steel was partly responsible for installation problems, including improper mounting of the Continuous Emissions Monitoring Systems (CEMS) and providing inaccurate data to Altech. Some maintenance issues, such as the improper connection of calibration gas bottles, did not result in damage to the CEMS or analyzers. 

Witness Church claimed there was a third configuration change but admitted to a lack of knowledge regarding it, and his suggestion that Altech’s data was inaccurate was deemed incredible. His testimony attempted to attribute all CEMS issues, particularly with the computer, to Steel, but was not credible. Delays in resolving Data Acquisition System (DAS) issues were acknowledged, with Church indicating that such problems could be linked to external interference. An expert for Altech concluded that the recurring software issues were Altech's responsibility and that problems with a key analyzer component were partially maintenance-related. Chamberlin admitted at trial that the issues were recurring and not solely maintenance issues. The malfunctions in the shipped computer likely stemmed from defective software installed by Altech, with the cause of analyzer issues remaining uncertain but possibly related to software defects. The document cites relevant legal principles regarding notice and the expectations of good faith in commercial dealings.

Early warning allows the seller to promptly investigate claims, address defects, minimize damages, and potentially assert claims against third parties. This case differs from C.R. Daniels, Inc. v. Yazoo Mfg. Co., where the buyer's vague notifications about product issues and minimal returns did not indicate a breach of contract, leaving the seller unaware of the buyer's concerns. Steel contends that the CEMS were worthless but acknowledges reusing components valued at $23,340 from those CEMS in new operational systems. Steel did not designate Capíes as an expert witness, and any opinion he might offer regarding MDEQ's considerations in determining the fine would be deemed improper lay opinion, per United States v. Riddle. Under § 75-2-712(1), a buyer may cover by making reasonable purchases to substitute for undelivered goods. Steel's request for an additional fifty cents in findings appears to stem from an arithmetic error. While Steel presented various purchase orders related to incidental expenses, it indicated that only a list of invoices pertains to the additional CEMS expenses incurred beyond the initial purchase.