Court Opinion

ID: 222469
Source: CourtListenerOpinion
Date Created: 2011-08-03 23:14:59+00
Date Added: 2024-06-11T17:28:54.686961
License: Public Domain

Case: 10-10665     Document: 00511560791         Page: 1     Date Filed: 08/03/2011

            IN THE UNITED STATES COURT OF APPEALS
                     FOR THE FIFTH CIRCUIT  United States Court of Appeals
                                                     Fifth Circuit

                                                                            FILED
                                                                           August 3, 2011

                                       No. 10-10665                        Lyle W. Cayce
                                                                                Clerk

THE BARRINGTON GROUP, LIMITED, INC.,

                                                  Plaintiff-Appellee,
v.

CLASSIC CRUISE HOLDINGS S DE RL, doing business as Regent Seven
Seas Cruises,

                                                  Defendant-Appellant.

                   Appeal from the United States District Court
                  for the Northern District of Texas (Dallas Div.)
                              USDC 3:08-cv-01813-B

Before WIENER, CLEMENT, and ELROD, Circuit Judges.
PER CURIAM:*
        At issue in this appeal is whether the district court correctly concluded
that Plaintiff-Appellee The Barrington Group, Limited, Inc. (Barrington) acted
in a commercially reasonable manner, as required by the Uniform Commercial
Code (U.C.C.), when it decided to continue the manufacture of goods ordered,
and subsequently cancelled, by Defendant-Appellant Classic Cruise Holdings
(Classic Cruise). We AFFIRM.

        *
         Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR.
R. 47.5.4.
   Case: 10-10665     Document: 00511560791        Page: 2    Date Filed: 08/03/2011

                                     No. 10-10665

      This case involves a contract dispute.           Regent Seven Seas Cruises
(Regent), now owned by Classic Cruise,1 had placed a number of orders with
Barrington for the purchase of various gift and promotional items for its cruise
ship passengers.      Subsequently, Classic Cruise contacted Barrington and
cancelled two orders, Invoice Nos. 80107 and 80109, indicating that it had a
problem with the price. Barrington proceeded to complete the manufacture of
the goods listed in those two invoices and sued Classic Cruise for breach of
contract. After a bench trial, the district court held that Barrington had acted
in a commercially reasonable manner under the U.C.C. and entered judgment
for Barrington for the full contract price plus interest. This appeal followed.
                                           I.
      Barrington is a Dallas-based company selling custom leather goods that
are embroidered, engraved, or embossed with the customer’s company logo for
the corporate gift market.        David Gowdey is the CEO and co-founder of
Barrington. Barrington’s leather goods are manufactured by a separately owned
Chinese company called Barrington Handicrafts Co. at a facility in Xiamen,
China.    Ben Briggs manages the day-to-day operations of this facility.
Barrington obtains non-leather gift items, such as crystal pieces, clothing, and
watches, from third parties located in the United States and China. Barrington
commonly uses a Chinese company called Convergent Sourcing to procure non-
leather goods from various other third parties.
      Over the years, Regent had used Barrington to provide it with gifts and
promotional items for its cruise ship customers. After Classic Cruise bought
Regent, it reviewed its outstanding orders with Barrington and decided that the
price for the ordered gifts was too high. Classic Cruise accepted three invoices
and paid Barrington in full upon delivery, but on September 26, 2008, Classic

      1
        On or about January 31, 2008, Classic Cruise purchased Regent and began operating
cruises under the Regent brand name.

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                                  No. 10-10665

Cruise, via e-mail, informed Barrington that it would be cancelling two orders,
Invoice Nos. 80107 and 80109, set for delivery in December. Upon receiving this
e-mail, Barrington arranged for a meeting with Classic Cruise. Barrington’s
CEO, Gowdey, attended a meeting with representatives from Classic Cruise on
October 2, 2008 in Florida. On October 8, 2008, Classic Cruise confirmed that
the “decision makers” were “firm on cancelling all pending orders.” On October
10, 2008, Barrington filed the instant lawsuit.
      At trial, Gowdey testified that many of the items in Invoice Nos. 80107 and
80109 needed to be shipped out of China by October 26, 2008, in order to be set
for their delivery dates in December. He also testified that due to a Chinese
holiday, the schedule for getting the items ready by October 26, 2008 was
compressed. He testified that many of the items in the two invoices could not be
cancelled, that he would have cancelled the items if he could have done so, and
that he did cancel items when possible. Classic Cruise objected to the testimony,
contending that it was based on hearsay, namely, statements made by lower-
level employees to Gowdey about the existence of third-party contracts, and
whether Barrington could cancel them.         The district court overruled the
objections, stating that the court was admitting the statements as “information
acted upon” and not for the truth of the matter asserted. On cross-examination,
Classic Cruise elicited testimony from Gowdey that he did not have personal
knowledge of the third-party contracts, only that he had relied on statements by
his employees. One of those employees was Phillip Wright. Wright testified that
he was responsible for ordering the goods listed in the two invoices at issue, and
that he ordered many of those goods from third parties. In addition to testimony
from Gowdey and Wright with respect to the items listed in the two invoices, the
district court reviewed a number of e-mails, including correspondence from
Briggs that also supported Gowdey’s testimony regarding the third-party
contracts.

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                                   No. 10-10665

      After the bench trial, the district court issued its Findings of Fact and
Conclusions of Law. The district court found that the goods at issue were
“specially manufactured,” and that, at the time of cancellation, the goods were
in “various stages of manufacture or assembly,” and were “incomplete goods” as
described by Section 2.704(b) of the Texas Business and Commerce Code. The
district court also found that, at the time of repudiation, “Barrington had
incurred contractual obligations to third parties for the manufacture,
procurement, or assembly of the goods at issue” because “Gowdey’s testimony on
Barrington’s obligations to third parties [is] credible,” and that “[o]ther evidence,
such as correspondence with Briggs and the testimony of Wright, also supports
this conclusion.” In its conclusions of law, the district court held that, given the
compressed time-line for delivery, Barrington’s contractual obligations to various
manufacturers, the specially manufactured goods involved, and the inability of
Barrington to cancel some items, it was commercially reasonable for Barrington
to continue its manufacture of the goods in the two invoices and sue for contract
price. The district court also held that “Barrington was not required to breach
its contracts with third parties to meet the standard for commercially reasonable
behavior in this case.”
                                         II.
      Section 2-704(b) of the U.C.C., adopted as Tex. Bus. & Com. Code Ann.
§ 2.704, determines the appropriate damages calculation for incomplete goods.
That section states that a seller may “in the exercise of reasonable commercial
judgment for the purposes of avoiding loss and of effective realization,” either (i)
complete the manufacture and bring an action for the price under § 2.709, or (ii)
“cease manufacture and resell for scrap or salvage value or proceed in any other
reasonable manner,” receiving damages under § 2.708. Tex. Bus. & Com. Code
Ann. § 2.704 (Vernon 1968); James J. White & Robert S. Summers, Uniform
Commercial Code § 7–15 (6th ed. 2010).

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                                   No. 10-10665

      Whether the seller should complete the manufacture depends on the
exercise of the seller’s reasonable commercial judgment. See Foxco Indus. Ltd.
v. Fabric World, Inc., 595 F.2d 976, 983 (5th Cir. 1979). The burden of proving
that a seller’s actions were unreasonable is on the buyer. U.C.C. § 2-704 cmt. 2.
The question of the seller’s reasonable judgment is evaluated “on the basis of the
facts of the particular case as they appeared at the time he made his decision,
rather than by an after-the-fact determination of whether those acts increased
or decreased the damages claimed.” 12 Am. Jur. 2d Proof of Facts 2d § 179
(1977). Here, after a bench trial, the district court held that, based on its factual
findings, Barrington acted in a commercially reasonable manner when it decided
to complete manufacture of goods ordered by Classic Cruise. We review a
district court’s findings of fact following a bench trial under a clearly erroneous
standard, giving “due regard to the trial court’s opportunity to judge the
witnesses’ credibility.” Fed. R. Civ. P. 52(a)(6). We review de novo a district
court’s conclusions based on such findings of fact.        See French v. Allstate
Indemnity Corp., 637 F.3d 571, 577 (5th Cir. 2011).
      The district court identified a number of reasons supporting its holding
that Barrington acted in a commercially reasonable manner. The district court
noted that “the evidence showed a compressed time-line for delivery; that
Barrington had contractual obligations to various manufacturers; that the goods
were specially manufactured and have no standard market or resale value; and
that the goods would be of little or no value after the cruise ships sailed. The
evidence further showed that Barrington cancelled some items, but was unable
to cancel others.”
      Classic Cruise contends that the district court erred in concluding that
Barrington acted in a commercially reasonable manner because it relied in part
on a factual finding that Barrington had incurred contractual obligations to third
parties. Because that factual finding was based in part on testimony from

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                                         No. 10-10665

Gowdey, Classic Cruise contends that this finding was erroneous. Classic Cruise
argues that because Gowdey admitted at trial that he had no personal
knowledge of the third-party contracts, and because Barrington did not submit
into evidence any third-party contract involving the goods at issue, Gowdey’s
testimony was based on inadmissible hearsay.2 Therefore, according to Classic
Cruise, because the district court’s conclusion that Barrington acted in a
commercially reasonable manner is based in part on inadmissible hearsay, we
should vacate the district court’s order. We disagree.
       The district court’s factual finding that Barrington had “incurred
contractual obligations to third parties” for the manufacture of the goods at issue
was not clearly erroneous. To the extent that Classic Cruise argues that the
district court relied on inadmissible hearsay, that assertion is incorrect. The
district court admitted statements made to Gowdey for a non-hearsay

       2
         Classic Cruise also asserts that the district court applied the wrong legal standard in
determining whether Barrington acted in a commercially reasonable manner under the U.C.C.
Classic Cruise contends that under Lakewood Pipe of Texas, Inc. v. Conveying Techniques, Inc.,
814 S.W.2d 553, 556 n.2 (Tex. App.—Houston [1st Dist.] 1991, no writ), the manufacture of
goods should be completed only if, at the time of cancellation, the exercise of reasonable
commercial judgment would indicate that the completed goods can be readily resold at a price
that meets or exceeds the costs of completion. This is an incorrect reading of Lakewood. As
an initial matter, in Lakewood, because the seller ceased manufacture of the incomplete goods
upon cancellation by the buyer, the issue of whether the seller acted in a commercially
reasonable manner by completing manufacture of the goods was not before the court. See id.
at 555. Indeed, the Lakewood court expressly stated that Tex. Bus. & Com. Code Ann. §
2.708(b) applies “to all cases in which the seller properly discontinues manufacture of goods
because of buyer’s breach.” Id. at 556. Here, Barrington reasonably decided to complete
manufacture of the goods, so § 2.708(b) is inapplicable. Moreover, the footnote in Lakewood
that Classic Cruise cites to, aside from being dicta, merely states that if the seller can mitigate
damages by completing manufacture and reselling the product, then the seller should do so,
and if he cannot resell the goods, he should cease manufacture. See id. at 556 n.2. This
statement does not necessarily mean that cessation is always commercially reasonable where
the seller would be unable to resell the goods or that completion is commercially reasonably
only if the goods can be resold. See Foxco, 595 F.2d at 983 (holding that seller acted in a
commercially reasonable manner by completing production of a specialized good where resale
was not possible). Moreover, in Lakewood, the seller was in control of the manufacturing
process; many of the goods here were manufactured by third parties.

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                                  No. 10-10665

purpose—to show the effect of those statements on Gowdey and his decision to
complete the manufacture of the items in the two invoices. See, e.g., Fed. R.
Evid. 801; Curtis Lumber Co. v. La. Pacific Corp., 618 F.3d 762, 783 n.18 (8th
Cir. 2010); United States v. Smalls, 605 F.3d 765, 786 n.18 (10th Cir. 2010). As
the district court stated, this was “information acted upon” and not admitted for
the truth of the matter asserted. As CEO, Gowdey could reasonably rely and act
on information that his employees provided to him regarding third-party
contracts when deciding whether it was commercially reasonable to complete
manufacture of the incomplete goods at the time of the repudiation by Classic
Cruise. Gowdey was not required to ask his employees for hard copies of the
third-party contracts before making such a decision, especially where there is no
indication in the record that his employees were not telling the truth.
      In addition to Gowdey’s testimony, there was direct evidence presented at
trial of the existence of the third-party contracts. Wright testified that he had
personal knowledge of the third-party contracts and was in charge of ordering
the items in the two relevant invoices. Moreover, the district court also relied
upon the correspondence with Briggs—correspondence that supported the
district court’s conclusion that Barrington had incurred contractual obligations
to third parties. Therefore, the district court’s factual finding as to the third-
party contracts was not error, much less clear error. Because Classic Cruise has
failed to show that the district court’s conclusion that Barrington acted in a
commercially reasonable manner was based on clearly erroneous factual
findings, we AFFIRM.

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