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In re Merritt Logan

filed: April 23, 1990.

IN RE: MERRITT LOGAN, INC., DEBTOR-IN-POSSESSION; MERRITT LOGAN, INC. D/B/A RANCOCAS THRIFTWAY
v.
FLEMING COMPANIES, INC.; FLEMING FOODS OF PENNSYLVANIA, INC.; HUSSMAN REFRIGERATION, INC. AND ENGINEERING & REFRIGERATION, INC., ENGINEERING AND REFRIGERATION, INC., APPELLANT AT NO. 89-1522; IN RE: MERRITT LOGAN, INC., DEBTOR-IN-POSSESSION; MERRITT LOGAN, INC. D/B/A RANCOCAS THRIFTWAY V. FLEMING COMPANIES, INC.; FLEMING FOODS OF PENNSYLVANIA, INC.; HUSSMAN REFRIGERATION, INC.; AND ENGINEERING & REFRIGERATION, INC., HUSSMAN REFRIGERATION, INC., APPELLANT AT NO. 89-1523; IN RE: MERRITT LOGAN, INC., DEBTOR-IN-POSSESSION; MERRITT LOGAN, INC. D/B/A RANCOCAS THRIFTWAY V. FLEMING COMPANIES, INC.; FLEMING FOODS OF PENNSYLVANIA, INC.; HUSSMAN REFRIGERATION, INC.; AND ENGINEERING & REFRIGERATION, INC., MERRITT LOGAN, INC., APPELLANT AT NO. 89-1524; IN RE: MERRITT LOGAN, INC., DEBTOR-IN-POSSESSION; MERRITT LOGAN, INC. D/B/A RANCOCAS THRIFTWAY V. FLEMING COMPANIES, INC.; FLEMING FOODS OF PENNSYLVANIA, INC.; HUSSMAN REFRIGERATION, INC.; AND ENGINEERING & REFRIGERATION, INC., FLEMING COMPANIES, INC. AND FLEMING FOODS OF PENNSYLVANIA, INC., APPELLANTS AT NO. 89-1525



On Appeal from the United States District Court for the Eastern District of Pennsylvania, D.C. Civil Action No. 87-2644.

Hutchinson, Cowen and Rosenn, Circuit Judges.

Author: Hutchinson

Opinion OF THE COURT

HUTCHINSON, Circuit Judge.

I.

In these consolidated appeals, the defendants, the seller, installer and manufacturer of a commercial refrigeration system, appeal separate money judgments that the United States District Court for the Eastern District of Pennsylvania entered in favor of the plaintiff, Merritt Logan, Inc. (Merritt Logan). Merritt Logan cross-appeals challenging several issues that the district court decided in favor of the defendants.

This action arose out of the failure of the refrigeration system that Merritt Logan, then the operator of a neighborhood grocery store in Philadelphia, purchased for use in its new venture, a supermarket in Willingboro, New Jersey. The damages awarded Merritt Logan included the cost of replacement and/or installation of the failed refrigeration system as well as the lost profits and spoiled product the jury found were a consequence of the system's failure. The damages awarded totalled $1,550,000. Of this total $1,000,000 was attributed to lost profits arising from the direct seller's breach of warranty. The district judge entered judgment, jointly and severally, against defendants, Fleming Companies, Inc. and Fleming Foods of Pennsylvania, Inc. (collectively referred to as "Fleming"), for this $1,000,000 award.

The jury awarded Merritt Logan damages totaling $550,000 on a negligence theory against two of the defendants: Engineering & Refrigeration, Inc. (E & R), the installer of the refrigeration system, and Hussmann Refrigeration, Inc. (Hussmann), the manufacturer of the system. Of this $550,000 total, the jury awarded Merritt Logan $400,000 for replacement and/or installation of the refrigeration system, $100,000 for spoiled product and $50,000 for lost profits. With regard to this $550,000 award, the jury found Hussmann was seventy percent negligent and E & R was thirty percent negligent. The district court entered judgments against these two defendants consistent with the jury's findings.

Fleming, E & R and Hussmann make various arguments concerning the damages awarded for lost profits. They say, under the applicable New Jersey law, lost profits are speculative and cannot be recovered because the supermarket was a new business. They also say that the evidence does not show with reasonable certainty that Merritt Logan would have had any profits. Hussmann and E & R also contend that the district court erred in instructing the jury on the lost profits issue and in various rulings on the admission of evidence concerning those losses.

E & R and Hussmann additionally contend that the damages awarded against them, jointly and severally, for replacement and/or installation of the failed system, lost product and lost profit, are economic losses not recoverable in negligence, since this case arose in a commercial context. According to the defendants, under New Jersey law, these damages can only be recovered in a claim for breach of warranty under the Uniform Commercial Code (U.C.C.).

Fleming also contends the district court erred in denying its motion for judgment notwithstanding the verdict on Merritt Logan's breach of warranty claim because the evidence was insufficient to show that Fleming was the seller of the refrigeration system to Merritt Logan under the U.C.C.

Fleming, E & R and Hussmann all argue that the district court erred in denying the motions they made for a mistrial when they learned, during trial, that Merritt Logan's cash register tapes and a letter concerning Merritt Logan's financing arrangements had not been produced when requested during discovery.

Finally, Hussmann argues that the $400,000 awarded for replacement and/or installation of the failed refrigeration system was excessive because it cost Merritt Logan substantially less for the actual purchase and installation of the system and that the evidence as to lost product was insufficient to support an award of $100,000.

In its cross-appeal, Merritt Logan challenges the district court's refusal to award pre-judgment interest on Merritt Logan's claims for breach of warranty. Merritt Logan says its claim for breach of the implied covenant of good faith and fair dealing should have been submitted to the jury. It also appeals the district court's entry of judgment notwithstanding the verdict, which set aside $200,000 in damages that the jury awarded Merritt Logan as a result of Fleming's premature demand for repayment of an inventory loan.

Both Merritt Logan and Fleming contend we should amend the judgment to impose the $1,000,000 award for lost profits against all defendants jointly and severally.

We will affirm the judgment of the district court in part and vacate and remand in part for the following reasons with respect to each issue:

We do not believe the Supreme Court of New Jersey would follow or strictly apply to Merritt Logan's supermarket the so-called "new business rule" that provides that an award to a new business for lost profits is prohibited as an award of speculative damages. This supermarket had operated for about one and one-half years, and Mr. Merritt Logan (Mr. Logan), the principal shareholder of Merritt Logan, had extensive experience in the retail food business, albeit not as the manager of a supermarket. Moreover, we do not believe the New Jersey Supreme Court would apply the new business rule as a per se rule. We believe the New Jersey Supreme Court would allow damages for lost profits if these damages are proved with reasonable certainty. We also hold that the evidence in this case was sufficient to show with reasonable certainty that the supermarket would have earned the lost profits the jury awarded but for the problems with the refrigeration system.

We reject E & R's related attack on the portion of the jury charge that connected Merritt Logan's operation of its neighborhood grocery store to the supermarket for the purpose of applying the new business rule. Reading the charge as a whole we do not think the reference was misleading in light of the circumstances of the case, our prediction as to New Jersey's relaxation of the new business rule and the evidence of Mr. Logan's long and varied experience in the grocery business.

E & R and Hussmann's arguments on the admission of evidence fail to convince us that they are entitled to a new trial. We see no abuse of discretion by the district judge in admitting the challenged testimony.

Although we hold that the district court erred in submitting Merritt Logan's negligence claim against Hussmann to the jury, we conclude that the award against Hussmann is proper under a breach of warranty theory.*fn1 Accordingly, we uphold the jury's total damage award on this alternate theory.

Fleming's argument that Hussmann was the only seller under the U.C.C., and thus Fleming is not liable for breach of warranty under the code, overlooks the fact that all sellers who participate in distributing a product to a consumer are liable for breach of warranty. We therefore reject Fleming's argument that it was not a seller as defined in the U.C.C.

With regard to the late production issues, Fleming, E & R and Hussmann fail to tell us what was in the cash register tapes that Merritt Logan brought to trial after having failed to produce them during discovery. Accordingly, we are unable to conclude that the district court erred in denying a mistrial on that basis. The defendants have likewise failed to explain how they would have been helped if they had the letter from the government lending agency about Merritt Logan's working capital requirements any earlier. Moreover, no one moved for a continuance when the tapes and the letter appeared. Under these circumstances, the district court did not abuse its discretion in denying the motions for a mistrial based on the late production of documents.

Hussmann's argument that the jury's award for "replacement and/or installation" of the refrigeration system is limited to the amount Merritt Logan actually paid to purchase and install the refrigeration system is also without merit. There is evidence to support the jury's finding that it would have cost Merritt Logan $400,000 to replace the defective system with one that functioned properly. Moreover, no one objected to the wording of the special interrogatory that allowed the jury to consider replacement cost. The record also shows that the evidence was sufficient to support the jury's award of $100,000 against Hussmann and E & R for losses resulting from spoiled food products.

Turning to Merritt Logan's cross-appeal, we reject Merritt Logan's argument that the district court erred in denying its motion to assess prejudgment interest on its $1,000,000 judgment against Fleming for breach of warranty. New Jersey Court Rule 4:42-11(b), which Merritt Logan relies on, is limited to tort and products liability-type actions. The rule does not provide any basis for awarding Merritt Logan prejudgment interest on the jury's award against Fleming for breach of warranty. Finally, we summarily reject Merritt Logan's arguments that the district court erred in not submitting its breach of implied covenant claim to the jury and in granting judgment notwithstanding the verdict on its $200,000 award against Fleming for prematurely demanding repayment of an inventory loan.

With regard to the $1,000,000 award for lost profits, we believe the district court erred in entering judgment for this amount only against Fleming. Accordingly, we will remand this issue to the district court with instructions to amend the judgment to provide for joint and several liability against Fleming, Hussmann and E & R on this $1,000,000 award.

II.

A.

Merritt Logan is a Pennsylvania corporation organized in 1970 with its principal place of business in Philadelphia. Its principal shareholder is Mr. Logan, a businessman.

Since 1970, Merritt Logan has owned a grocery store in North Philadelphia known as Morris' Market. In 1983, Merritt Logan began to look for a second store. In the course of this search, Mr. Logan met Joseph Gilchrist (Gilchrist), an individual who had surveyed a location in Willingboro, New Jersey, for a potential purchase that never materialized. Gilchrist's survey forecasted that the Willingboro site could achieve weekly sales of $130,500 in 1985.

Utilizing Gilchrist's survey and information from Mr. Logan, Fleming prepared a pro forma operating statement that set forth anticipated revenues, expenses and profits for the proposed store. See Joint Appendix (App.) at 1440a-47a, 2894a-99a. Mr. Logan entered into a contract with Fleming licensing the store to operate under Fleming's "Thriftway" banner. Fleming agreed to supply food products to the store and to provide inventory financing. Merritt Logan also obtained financing through the New Jersey Economic Development Authority (EDA) for purchase and renovation of the building, purchase of equipment and working capital.

Merritt Logan initially decided to purchase a refrigeration system for the store directly from Hussmann, the manufacturer of the system. However, Fleming offered to guarantee Merritt Logan's payment in return for which Fleming would receive a four or five percent commission from Hussmann and Merritt Logan would receive a discount on the purchase price. Merritt Logan accepted Fleming's offer, restructured the transaction, and purchased the Hussmann system through Fleming. Fleming sent a purchase order to Hussmann and an invoice to Merritt Logan. Hussmann delivered the equipment directly to Merritt Logan. Merritt Logan also contracted with Fleming to have E & R install the system.

Merritt Logan opened the "Rancocas Thriftway" on November 9, 1985. Sales for the first week of operation totaled $174,000. Shortly thereafter, Merritt Logan began to have trouble with the refrigeration system. There were four breakdowns of the system during the store's first three months of operation. During the ensuing months, there were more breakdowns, and customers returned numerous items of spoiled food. These problems cut deeply into Merritt Logan's sales.

One week after the store opened, Fleming demanded repayment of $94,000 towards Fleming's inventory loan totalling $240,000. Fleming made this demand even though the $94,000 was not due for another three years. When Merritt Logan refused to repay the inventory loan, Fleming responded by canceling delivery of some products and threatening to terminate shipments altogether. Merritt Logan eventually paid Fleming $30,000 of the $94,000 that Fleming demanded.

Fleming subsequently terminated Merritt Logan's credit status and forced Merritt Logan to pay cash for all deliveries. In October, 1986, Fleming terminated all its agreements with Merritt Logan, thereby precluding Merritt Logan from continuing to operate as a Thriftway and depriving Merritt Logan of its major grocery supplier and advertiser. In May, 1987, the Rancocas Thriftway was forced to close and Merritt Logan filed for bankruptcy in the United States Bankruptcy Court for the Eastern District of Pennsylvania.

B.

Merritt Logan instituted this action against the defendants in the bankruptcy court. The case was removed from the bankruptcy court to the United States District Court for the Eastern District of Pennsylvania. Merritt Logan claimed that the defective refrigeration system, lack of credit, lack of supplies and loss of the Fleming-owned Thriftway trade name caused the failure of its business. The defendants generally contended that under-capitalization of the business from the outset and Mr. Logan's mismanagement of the store caused its failure. At trial, Merritt Logan proceeded against all defendants under theories of strict liability, negligence, breach of contract and breach of warranty for supplying a defective refrigeration system. Merritt Logan also asserted claims against Fleming for breach of an implied covenant of good faith and fair dealing and for business coercion based upon its early demand for repayment of $94,000 on the inventory loan. Fleming brought a cross-claim against Hussmann and E & R, asserting they were responsible for any damages resulting from the defective refrigeration system.

Beginning in November, 1988, the case was tried to a jury. In December, 1988, the jury rendered a verdict on special interrogatories. It awarded Merritt Logan a total of $1,750,000. See Special Interrogatories to the Jury (Special Interrogatories), No. 13. The jury's principal findings were: (1) Hussmann negligently designed the refrigeration system; (2) E & R negligently installed the refrigeration system ; (3) in this regard, Hussmann was seventy per cent negligent and E & R was thirty per cent negligent; (4) the refrigeration system failed to operate in accord with the terms, conditions and/or warranties of sale; (5) as a result of the defective refrigeration system, Merritt Logan suffered a total of $1,550,000 in damages, consisting of $100,000 for spoiled food products, $400,000 for repair and/or replacement of the refrigeration system, and $1,050,000 for lost profits;*fn2 (6) Fleming breached the terms of its inventory loan to Merritt Logan by prematurely demanding repayment of $94,000 before it was due; and (7) as a result of the breach of the loan agreement, Merritt Logan suffered $200,000 in damages.

The district court molded the verdict and entered judgment against Fleming in the amount of $1,200,000, against Hussmann in the amount of $385,000 and against E & R in the amount of $165,000.*fn3 See App. at 45a. The court also awarded judgment in the amount of $1,000,000 in favor of Fleming and against Hussmann and E & R, jointly and severally, on Fleming's cross-claim. All of the defendants filed motions for judgment notwithstanding the verdict and, in the alternative, for a new trial. Merritt Logan filed a motion for assessment of prejudgment interest. The court denied defendants' post-trial motions with respect to the jury's award for damages caused by the defective refrigeration system. However, with respect to Fleming's motion concerning breach of the loan agreement, the district court concluded that there was insufficient evidence to support the jury's damage award of $200,000. The court therefore granted judgment notwithstanding the verdict as to that part of the jury's damage award. Accordingly, in an order dated May 23, 1989, the district court reduced the judgment against Fleming from $1,200,000 to $1,000,000. The court granted Merritt Logan's motion for prejudgment interest on its tort claim but denied prejudgment interest on its breach of contract claims. The court also amended the judgment against Hussmann and E & R to impose joint and several liability upon them in the amount of $550,000 with judgment against Hussmann for its pro rata share of $385,000 and judgment against E & R for its $165,000 pro rata share. E & R, Hussmann and Fleming appealed to this Court and Merritt Logan cross-appealed, all raising numerous issues.

III.

The district court had subject matter jurisdiction over this case pursuant to 28 U.S.C.A. § 1334(b) (West Supp. 1989) because it originated in a bankruptcy proceeding under Title 11 of the United States Code. All parties concede that New Jersey provides the controlling substantive law. Since the contracts involved were to be performed in New Jersey and the damages Merritt Logan suffered were all related to its New Jersey store, we see no reason to question the parties' choice of law. This Court has appellate jurisdiction under 28 U.S.C.A. § 1291 (West Supp. 1989) over the final judgment of the district court.

Our scope of review varies with respect to the individual issues the various parties raise. Therefore, we will separately set forth the applicable standard of review at ...


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