Court Opinion

ID: 9487618
Source: CourtListenerOpinion
Date Created: 2023-08-05 12:22:00.520596+00
Date Added: 2024-06-11T17:52:23.455154
License: Public Domain

CUDAHY, Circuit Judge,
dissenting.
Texas may, in the view of its boosters as well as its detractors, be “different,” but it is certainly not as “different” as the majority opinion would have it. The basic error of the majority is to confuse the cost consequences of a resolution of a commercial dispute as having a binding (collateral estoppel) effect on a third party with the quite different question whether that resolution is evidence of loss for which the third party may be liable in whole or in part. Here the settlement which Kaiser made with Midwest and the money it paid pursuant to the settlement was surely its “loss.” There is no earthly *1153reason under the Code or under Texas law why Kaiser may not seek to recover its loss, or some reasonable part of it, from a party it claims is responsible for it. Nothing has been cited which should exclude such losses from the rather capacious category of “consequential damages.”
Of course, the Code (Tex.Bus. & Comm. Code § 2.607) provides for “vouching in.” Under this procedure, the allegedly liable third party may be made a party to the underlying law suit and will be bound by the judgment in that proceeding. See Alphonse M. Squillante and John R. Fonseca, Williston on Sales (4th ed. 1974) § 22-10 (“Once [a] third party has been successfully vouched in, he becomes bound in any subsequent litigation between himself and the defendant by any finding of fact, as well as for the measure of damages awarded by the court.”). And that procedure, according to CGM Valve Co. v. Gulfstream Steel Corp., 596 S.W.2d 161 (Tex.Civ.App. — Houston [1st Dist.] 1980, writ ref. n.r.e.), requires the entry of judgment. That point is sensible enough, an application of the long-accepted principle that collateral estoppel does not apply to issues not “actually litigated.” But the majority has cited nothing suggesting that “vouching in” is a mandatory procedure, which must be pursued or any claim for the loss forfeited.1 The prevailing view of the authorities is distinctly to the contrary. “Of course, this procedural device [vouching in or impleader] is not mandatory and, where available, is not a prerequisite to a recovery the defendant may have over against the third party defendant.” Squillante and Fonseca, supra, § 22-10. This much is clear from the Code’s use of permissive language in setting out the vouching in procedure. Tex.Bus.Code. § 2.607(5)(a) (“Where the buyer is sued for breach of a warranty or other obligation for which his seller is answerable over he may give the seller written notice of the litigation.”) (emphasis added).
The Texas legislature, in enacting Tex.Bus. Code §§ 2.607 (vouching in) and 2.715 (consequential damages), adopted §§ 2-607 and 2-715 of the Uniform Commercial Code without modification. And the UCC itself (especially § 1-102), as our cases recognize, by its own terms calls for uniform construction among adopting jurisdictions. See Northrop Corp. v. Litronic Industries, 29 F.3d 1173, 1178 (7th Cir.1994). To that end, cases from other jurisdictions allow defendants who have suffered judgments or who have settled with injured plaintiffs, but who have not taken advantage of the vouching in procedure of § 2-607(5), to recover the judgment paid or their settlement costs from the responsible party, as consequential damages. See City Welding & Manufacturing Co. v. Gidley-Esehenheimer Corp., 16 Mass.App.Ct. 372, 451 N.E.2d 734 (1983) (where manufacturer’s breach of warranty caused buyer to suffer judgment, failure to notify manufacturer no bar to buyer’s suit); Nezperce Storage Co. v. Zenner, 105 Idaho 464, 670 P.2d 871 (1983) (purchaser of wheat for resale may recover losses sustained in reimbursing customers for damages they suffered for planting defective seed); Step-Saver Data Systems, Inc. v. Wyse Technology, 912 F.2d 643 (3d Cir.1990) (re-seller of allegedly defective computer equipment, in suit against manufacturer, may recover settlement costs and monies reasonably expended in effort to maintain customers’ goodwill without resorting to § 2-607(5) — though manufacturer can defend in such action by arguing that computers were not defective or that settlement expenses were unreasonable). Cf. Neville Chem. Co. v. Union Carbide Corp., 422 F.2d 1205 (3d Cir.) (where purchaser sued supplier to recover damages for money paid to settle claims against it, it was error to instruct the jury that — if the supplier had notice of the claims — -the supplier bore the burden of showing that the settlements were unreasonable), cert. denied, 400 U.S. 826, 91 S.Ct. 51, 27 L.Ed.2d 55 (1970).
In these circumstances, the settling party cannot of course expect the manufacturer to be bound by the settlement. Both the exis-*1154tenee of the defect, and, if the product is defective, the amount of damages the original buyer would have reasonably suffered on account of the defect (i.e. the reasonableness of the settlement and attorneys’ fees — a function of the original buyer’s duty to mitigate damages) are up for grabs in the second litigation. There is nothing terribly complicated about this principle. It is a basic proposition of contract law, and one from which there is no reason to imagine that either the UCC or Texas law would stray:
The party in breach is liable for the amount of any judgment against the injured party together with his reasonable expenditures in the litigation, if the party in breach had reason to foresee such expenditures as the probable result of his breach at the time he made the contract. ... A failure to notify the party in breach in advance of the litigation may prevent the result of the litigation from being conclusive as to him. But to the extent that the injured party’s loss resulting from the litigation is reasonable, the fact that the party in breach was not notified does not prevent the inclusion of that loss in the damages assessed against him. In furtherance of the policy favoring private settlement of disputes, the injured party is also allowed to recover the reasonable amount of any settlement made to avoid litigation, together with the costs of settlement. .
Restatement (Second) of Contracts § 351, comment c (1981).
The majority has attempted to distinguish the cases and other authorities I have cited, making distinctions which are without relevance to the issue before us. Thus, Nezperce Storage Co. v. Zenner, 105 Idaho 464, 670 P.2d 871, is said to involve reimbursement of customers of the buyer, who then looked to the seller (Zenner) for compensation. The reimbursement made to customers is, of course, an agreed payment — indistinguishable for present purposes from a “settlement.” Step-Saver Data Systems, Inc. v. Wyse Technology, 912 F.2d 643, is said to involve “recovery of actual commercial losses” — again agreed amounts impossible to distinguish from a settlement of litigation. City Welding & Manufacturing Co. v. Gidley-Eschenheimer Corp., 451 N.E.2d 734, concerned a judgment admitted as evidence of consequential damages. This is quite different from attempting to derive collateral es-toppel effect from such a judgment. As the Restatement (Second) of Contracts § 351, comment c (1981), supra, makes clear, for purposes of establishing evidence of the loss sustained by the injured party, a judgment and a reasonable settlement are treated in exactly the same way. Only if the loss is to be regarded as conclusive and binding (as a matter of collateral estoppel) is it essential that the loss be established by judgment.
Here, Kaiser is not claiming that PPG is bound by Kaiser’s settlement. Kaiser merely asserts that the settlement is evidence of Kaiser’s loss resulting from PPG’s manufacture of defective paint. The majority’s requirement that the underlying lawsuit be litigated to judgment to justify any claim against the ultimately liable party obviously has the very unfortunate effect of chilling any otherwise desirable effort to settle. I therefore respectfully dissent.

. It in any case appears that in federal court the vouching in procedures of UCC § 2-607(5) would be supplanted by the impleader provisions of Federal Rule of Civil Procedure 14. See 6 Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure, § 1446 ("Although state law governs whether a substantive right to relief exists, federal law determines whether that right may be asserted by way of impleader.").