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Associated Hardware Supply Co. v. Big Wheel Distributing Co.


decided as amended february 3 1966.: December 27, 1965.


Staley and Freedman, Circuit Judges, and Cohen, District Judge.

Author: Staley

STALEY, Circuit Judge.

This appeal raises several complex questions involving the Uniform Commercial Code as adopted in Pennsylvania, 12A Purdon's Pa.Stat.Ann. § 1-101 et seq., and the Federal Rules of Civil Procedure, 28 U.S.C. Due to the peculiar substantive issues presented and because the appeals are from both the entry of summary judgment and an order denying a motion to amend the pleadings and for "reconsideration" of the court's order granting summary judgment, the facts must be recited at some length.

During the latter part of 1961, Irvin Molever began to entertain the idea of opening a discount house retail business in Wheeling, West Virginia. At that time he came in contact with Ernest Berez, a long-time friend and Vice-President of the Associated Hardware Supply Company, a Pennsylvania corporation and wholesaler of hardware, household goods and other merchandise. Molever incorporated his business in West Virginia under the name of The Big Wheel Distributing Company, and as its representative attempted to negotiate a contract with Associated. Several meetings between the representatives of both corporations were held in the early months of 1962. The primary topic of discussion at these meetings was the method of pricing to be used. Big Wheel insisted that the prices be computed on a cost plus ten percent basis for shipments from Associated's warehouse and cost plus five percent for direct factory shipments. Associated maintained that it could not price goods on this basis because its IBM billing system was geared to discount pricing. Big Wheel alleges that at this time it was told by Associated that the dealer-catalogue less 11% method was equal to the cost plus method it desired. These discussions culminated in an exchange of letters between the parties; the letter from Associated on February 9, 1962,*fn1 confirmed an offer made at one of these meetings; the reply from Big Wheel on February 24*fn2 impliedly agreed to some of the confirmation but explicitly rejected the method of pricing contained therein. However, either sometime prior to or shortly after sending its letter of February 24, Big Wheel placed an order with Associated for a large quantity of goods which was included in the store's inventory when it opened on March 5. The price paid for the original shipment and for every shipment received thereafter for the next two years was computed on a dealer catalogue less eleven percent basis.

Sales made during this period were not without complaint. As early as August, 1962, Big Wheel began to doubt that the prices it was paying were the equivalent of cost plus 10% on warehouse shipments and cost plus 5% on direct factory shipments. By the following March, at least one of Big Wheel's officers was certain that the prices charged by Associated were considerably higher than cost plus ten percent. These objections were communicated to Associated, which allegedly assured Big Wheel that the prices paid would average out to cost plus 10%.

In spite of its objections to the pricing method, Big Wheel continued to order, receive and pay for merchandise on a dealer catalogue less eleven percent basis until March of 1964. From March through June of 1964, Big Wheel placed orders and received the goods but refused to pay for the merchandise received. In July, Associated commenced this action by filing a complaint in foreign attachment in the Court of Common Pleas of Allegheny County, Pennsylvania, claiming that it was due $40,185.62 under its contract of sale, which it maintained was embodied in its letter of February 9. See footnote 1, supra.

Big Wheel's petition for removal under 28 U.S.C. § 1441 was granted, and it filed an answer and counterclaims. In its answer Big Wheel alleged: (1) that it was not liable on any contract because the goods were improperly priced and because Exhibit A of the complaint (February 9 letter) had never been signed by any representative of the defendant;*fn3 (2) that the price basis to which the defendant had agreed was fraudulently induced by plaintiff's material misrepresentation that dealer catalogue less 11% was equal to cost plus 10% on warehouse shipments and cost plus 5% on factory shipments. In its counterclaims Big Wheel alleged that it was entitled to recover for breach of contract in several particulars and for the fraudulent inducement of all previously executed sales between the parties.

Prior to the completion of discovery, Associated moved for summary judgment on the complaint and for dismissal of the counterclaims. After a hearing, the district court on January 7, 1965, entered summary judgment for Associated in the amount of $40,185.62 and dismissed the counterclaims. On January 18, Big Wheel moved for leave to file an amended answer and counterclaims and for reconsideration of the court's earlier order for entry of judgment. The district court's order denying this motion and its summary judgment have both been appealed.

The first matter to be resolved is whether a contract existed and, if so, on what terms. The parties agree that the proper substantive law governing these determinations is embodied in the Sales Article of the Uniform Commercial Code (1957 ed.) as adopted in Pennsylvania, 12A Purdon's Pa.Stat.Ann. § 2-101 et seq. (hereinafter referred to as "UCC").

Two questions involving the interpretation and application of the Code were raised in the district court and argued here. The first of these concerns the Sales Article's statute of frauds, UCC § 2-201. It has been argued that the goods sold between March and June, 1964, were personalty, the price of which exceeded $500.00, and must be represented by a writing. This issue is readily resolved by either of two subsections of UCC § 2-201. First, it is not disputed that the goods have been received and accepted by the defendant. This being so, the transaction is clearly without the statute of frauds, UCC § 2-201(3) (c). Even if this were not so, it is also admitted that Big Wheel received invoices for the sales in question which contained the letterhead of Associated, the quantity and price terms. Because it is clear that the parties are "merchants" within the meaning of the Code, UCC § 2-104(1), and since no written objections to the invoices were sent within ten days of their receipt, the statute of frauds is satisfied. UCC § 2-201(2).*fn4

The second and perhaps more difficult question is whether the March-June, 1964, sales or any of the sales between the parties are represented by corresponding confirmatory memoranda or other writing "intended by the parties as a final expression of their agreement." UCC § 2-202. Although this problem is more directly related to the defenses and counterclaims of Big Wheel insofar as whether evidence of prior oral agreements is admissible, the parol evidence rule is a substantive rule of contracts,*fn5 and consequently, will be discussed here.

Appellant contends, and we agree, that the intent of the parties that a writing be a final expression of their agreement is normally a question for the jury. However, we also believe that where a question of law is presented, it may be properly disposed of on summary judgment. The question presented here is not whether the parties intended either the invoices or the letter of February 9 as a final expression of their agreement,*fn6 but rather, if, in fact, the parol evidence rule is applicable.

Prior to the adoption of the Code in Pennsylvania, the limitations of the parol evidence rule had been clearly enunciated. The landmark case of Gianni v. R. Russell & Co., 281 Pa. 320, 126 A. 791 (1924), established the scope of the rule. Perhaps the present state of the law was most succinctly expressed in Universal Film Exchanges, Inc. v. Viking Theatre Corp., 400 Pa. 27, 35, 161 A.2d 610, 616 (1960), affirming per curiam on the opinion of the trial court:

"Ever since the leading case of Gianni v. R. Russell & Co., Inc. * * * it has been well settled law in Pennsylvania that:

"'"Where parties, without any fraud or mistake, have deliberately put their engagements in writing, the law declares the writing to be not only the best, but the only, evidence of their agreement:" * * * "all preliminary negotiations, conversations and verbal agreements are merged in and superseded by the subsequent written contract * * * and ' unless fraud, accident, or mistake be averred, the writing constitutes the agreement between the parties, and its terms cannot be added to nor subtracted from by parol evidence.'"'" (Emphasis supplied.)

See also International Milling Co. v. Hachmeister, Inc., 380 Pa. 407, 110 A.2d 186 (1955). The Code parol evidence rule, UCC § 2-202, contains no prefatory clause such as "in the absence of fraud, accident or mistake." Associated maintains that the absence of such a clause precludes the application of the exceptions found in the well settled law of Pennsylvania. Absent some overriding rule of interpretation, the position taken by appellee might well be correct since the parties have cited and our independent research has disclosed no case, either in Pennsylvania or in any other Code jurisdiction which has decided this issue. Willier & Hart, Uniform Commercial Code Reporter-Digest (1965). However, the Code itself contains a rule which compels a contrary result. UCC § 1-103 states that "unless displaced by the particular provisions of this Act, the principles of law and equity, including the law merchant and the law relative to * * * fraud [and] misrepresentation * * * shall supplement its provisions." See In the Matter of Kravitz, 278 F.2d 820, 822 (3 Cir. 1960). Thus, it is clear that the Pennsylvania exceptions would apply and testimony of prior oral agreements would be admissible.

Since the parol evidence rule, under the circumstances here, does not apply, and, as we later demonstrate, the counterclaim was improperly dismissed, we think the entry of summary judgment on the principal claim was untimely. Under the guidelines established by Rule 56(d), the district court can properly determine which issues involve disputed facts and those which do not. After issuing an appropriate order, it may proceed to trial on the issues involving factual disputes. See 6 Moore's Federal Practice para. 56.20[1] et seq. We believe that the district court properly found that there were no genuine issues of material fact relating to the complaint or the defense that no contract existed. An examination of the pleadings, the interrogatories, answers thereto, exhibits and record of the hearing on the motion for summary judgment discloses the following undisputed facts: (1) that for a period of more than two years, the parties engaged in the sale and purchase of goods from each other; (2) that the price of the goods sold was computed on a catalogue-less-11% basis; (3) that the sales commenced shortly after defendant was in receipt of a written confirmatory offer from the plaintiff (letter of February 9); (4) that the parties have engaged in a course of dealing substantially consistent with the terms of the confirmed offer in that the large orders contemplated were made aggregating over $800,000 during a two-year period, that defendant was required to pay freight charges indicating that the shipments were made F.O.B. Pittsburgh, that the price paid was dealer catalogue less 11%, that the officers of plaintiff visited the defendant's store frequently and made available some merchandising services, that an initial order was made and paid less the preferential 11% discount, and finally, that Irving Molever considered himself personally bound on Big Wheel's obligations; (5) that several of defendant's counterclaims may readily be founded on the letter of February 9; (6) that the goods sold to the defendant between March and June, 1964, were received and accepted; (7) that the defendant has sold most of the goods delivered during that time period; (8) that the prices for the goods accepted and received between March and June, 1964, were computed in a manner similar to all previous sales; (9) that the defendant has not paid for the goods received and accepted between March and June, 1964; (10) that defendant was aware as early as August, 1962, that the prices it was paying were higher than they would have been if computed on a cost-plus basis; and (11) that although the defendant had objected to the computation of prices, it continued to purchase large quantities of goods from the plaintiff and continued to pay prices computed on that basis.

The enumerated facts above and the absence of any other disputed facts, when considered in light of the weight the Code attaches to a course of dealing, UCC § 2-208(1), and its liberal policy regarding formation of contracts of sale, UCC § 2-204(1), support the conclusion that a contract existed on the terms alleged in the complaint. Needless to say, this conclusion also disposes of the allegation by the defendant that no contract existed.

Although we agree that there were no genuine issues of material fact as to the contract, we are just as certain that the district court committed error in granting summary judgment on the issue of fraud, as raised in both the answer and counterclaim, and on the remaining counterclaims. At the outset, it should be pointed out that fraud, as alleged here, is not truly a defense which will defeat the theory of recovery on which the plaintiff has sued, but rather, is in the nature of a counterclaim or setoff. This is so because the fraud alleged here is fraud in the inducement. It does not render the transaction void, but only voidable. Traditionally, a person so defrauded has recourse against the fraudulent party through either of two courses of action. He may rescind the transaction -- tendering back what he has received and suing for what he has parted with -- or he may affirm the transaction and maintain an action in deceit. McCormick, Damages § 121. "An action in trespass for deceit to recover damages for material misrepresentations inducing the making of a contract is founded on fraud or moral wrong, and is not based on the contract." 16 P.L.E. Fraud § 21 at 410. The Code, although also making damages available in an action for rescission, UCC § 2-721, does not otherwise change the traditional theory of election of remedies. In this case rescission is out of the question since the defendant has admitted that it has sold the goods. Thus, fraud, as alleged here, is an independent action, the recovery for which may be set off against or may even exceed the amounts due and owing under the contract. See Sixsmith v. Martsolf, 413 Pa. 150, 196 A.2d 662 (1964).

The error of the district court may be pinpointed from its refusal to consider the allegations of fraud "as anything more than normal commercial 'puffing' which could not have misled an astute trader such as defendant's negotiator, Mr. Molever." This statement is irreconcilable with the accepted principle that

"* * * In ruling on the motion [for summary judgment in an action based on a complex scheme of fraud], the court should remember that the movant has the burden of demonstrating clearly the absence of any genuine issue of material fact, that the court should not draw factual inferences in favor of the moving party, and should not resolve a genuine issue of credibility." 6 Moore's Federal Practice para. 56.17 [27] at 2215-2216.

This is the accepted rule in this circuit. Sarnoff v. Ciaglia, 165 F.2d 167 (C.A.3, 1947); see also United States v. Gill, 156 F. Supp. 955 (W.D.Pa., 1957). This principle is particularly apt where intent is a substantive element of the cause of action because intent is generally to be inferred from the facts and conduct of the parties.

With all deference to the district court, the result reached would not appear to be so palpably incorrect had it reasoned that reliance on the representations (even if proved) was lacking as a matter of law. Had the allegations and the record supporting them been confined solely to the question of fraud prior to the initial sale, the discovery as early as August, 1962, that dealer catalogue less 11% was not equal to cost plus 10%, may have negated the element of reliance as a matter of law. See Restatement Second, Torts §§ 541, 541A, 542 (Tent.Draft No. 10, 1964). However, the other representations that appear on the record and the suspension of discovery prevent this court from making any such adjudication. These matters and doubtless other complex issues of fact (which may appear on the completion of discovery) and credibility will undoubtedly require resolution by the trier of fact. Similar fact issues are presented by the remaining counterclaims.

Thus far we have dealt only with the appeal from the entry of summary judgment. The denial of the motion to amend and for reconsideration of the order granting summary judgment*fn7 requires but brief comment. Because the order sought to be reconsidered is herein vacated, we need only reiterate what was said by the Supreme Court in Foman v. Davis, 371 U.S. 178, 182, 83 S. Ct. 227, 230, 9 L. Ed. 2d 222 (1962): "Rule 15(a) declares that leave to amend 'shall be freely given when justice so requires'; this mandate is to be heeded."

The orders of the district court will be vacated and the cause remanded for disposition not inconsistent with this opinion.

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