Court Opinion

ID: 1006207
Source: CourtListenerOpinion
Date Created: 2013-07-04 19:07:48.161074+00
Date Added: 2024-06-11T15:24:16.339523
License: Public Domain

UNPUBLISHED

UNITED STATES COURT OF APPEALS
                FOR THE FOURTH CIRCUIT

PHOENIX COLOR CORPORATION, a            
Delaware corporation,
                  Plaintiff-Appellee,
                 v.                               No. 00-2515

KRAUSE AMERICA, INCORPORATED,
             Defendant-Appellant.
                                        
PHOENIX COLOR CORPORATION, a            
Delaware corporation,
                 Plaintiff-Appellant,
                 v.                               No. 00-2544

KRAUSE AMERICA, INCORPORATED,
              Defendant-Appellee.
                                        
           Appeals from the United States District Court
            for the District of Maryland, at Baltimore.
            Frederic N. Smalkin, Chief District Judge.
                           (CA-99-71-S)

                      Argued: November 2, 2001

                      Decided: December 27, 2001

     Before WILKINSON, Chief Judge, and WILLIAMS and
                  MOTZ, Circuit Judges.

Affirmed by unpublished per curiam opinion.
2             PHOENIX COLOR CORP. v. KRAUSE AMERICA
                             COUNSEL

ARGUED: Robert P. O’Brien, NILES, BARTON & WILMER, Bal-
timore, Maryland, for Appellant. George Faulkner Ritchie, IV,
PIPER, MARBURY, RUDNICK & WOLFE, L.L.P., Baltimore,
Maryland, for Appellee. ON BRIEF: Eric A. Frechtel, NILES, BAR-
TON & WILMER, Baltimore, Maryland; John W. Hogan, HOGAN
& RINI, P.C., New Haven, Connecticut, for Appellant. James D.
Mathias, PIPER, MARBURY, RUDNICK & WOLFE, L.L.P., Balti-
more, Maryland, for Appellee.

Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).

                             OPINION

PER CURIAM:

   Phoenix Color Corporation filed suit against Krause America, Inc.,
from which it purchased eight technologically advanced printing
plate-making machines. Phoenix Color asserted claims for breach of
warranty and breach of contract based on alleged defects in the first
three machines. The district court awarded Phoenix Color
$1,899,257.00 in damages as a result of pre-trial orders and the jury’s
findings, but refused to grant prejudgment interest. Krause America
appeals and Phoenix Color cross-appeals. For the reasons that follow,
we affirm the judgment of the district court.

                                  I.

   Phoenix Color Corporation is a manufacturer in the high resolution
printing industry. It produces books and book components, including
book jackets, paperback covers, and pre-printed case covers. The pro-
duction process begins in the pre-press department with the creation
of images on printing plates. The plates are then mounted onto a
printing press to generate repeat impressions of the plated image.
               PHOENIX COLOR CORP. v. KRAUSE AMERICA                    3
Until recently, such plates were prepared through the use of film. The
advent of computer-to-plate ("CTP") technology, however, has ren-
dered film unnecessary in the production of printing plates. The tech-
nology uses computer-guided lasers, allowing printers to burn images
directly from computer files onto the plates. This reduces press down
time and improves image quality over that produced with film.

   This diversity action arises out of Phoenix Color’s purchase of
eight CTP plate-making machines from Krause America, Inc. in
October 1997, for a price of approximately $3.5 million. As a result
of alleged chronic failures and defects in the first three such machines
Krause America installed at Phoenix Color’s facilities ("CTP 1, 2, and
3"), as well as Krause America’s refusal to take back the machines,
Phoenix Color filed suit in the Circuit Court of Maryland for Wash-
ington County. It asserted claims for breach of warranty and breach
of contract. Krause America removed the case to the United States
District Court for the District of Maryland. It also filed counterclaims
for breach of contract and anticipatory breach of contract based on
Phoenix Color’s failure to pay the full price for previously installed
CTP machines and its refusal to accept future deliveries on order.
After extensive discovery, the parties filed cross-motions for sum-
mary judgment.

   On January 3, 2000, the district court granted Phoenix Color partial
summary judgment. In relevant part, the court first held that Phoenix
Color did not make an effective rejection of CTP 1, 2, or 3 under § 2-
602 of the Connecticut version of the Uniform Commercial Code
("U.C.C.").1 Second, the court determined that Phoenix Color failed
to provide timely notice necessary to revoke its acceptance of CTP 1,
2, and 3 under § 2-608. Third, the court concluded that defects in CTP
1, 2, and 3 resulted in breach of the implied warranty of merchanta-
bility under § 2-314. Fourth, the court held that the parties had entered
into an installment contract under § 2-612 for the sale of eight CTP
machines. Fifth, the court concluded that the jury would have to
decide whether the problems with CTP 1, 2, and 3 so substantially
  1
    The contracts provide that the substantive law of Connecticut governs
this dispute. Connecticut has adopted the U.C.C., see Conn. Gen. Stat.
§ 42a-1-101 et seq., which controls this case because it involves the sale
of goods. For the sake of convenience, we cite to the U.C.C.
4              PHOENIX COLOR CORP. v. KRAUSE AMERICA
impaired the value of the entire contract as to constitute breach of the
whole contract, justifying Phoenix Color’s cancellation of the remain-
ing orders for five machines. Finally, the court held that Phoenix
Color did not violate the U.C.C.’s obligation of good faith and was
not conspiring with the substitute supplier it eventually engaged.

   In response to Phoenix Color’s motion for reconsideration, the dis-
trict court held that Phoenix Color had properly revoked acceptance
of CTP 1, 2, and 3. The court further amended its ruling in response
to Krause America’s request for further reconsideration, holding that
CTP 1 was not part of the installment contract and that the jury would
have to decide whether the final two machines ordered by Phoenix
Color ("CTP 7 and 8") were part of the installment contract. The court
also granted Phoenix Color’s motion in limine to preclude the intro-
duction of evidence of its contracts with a substitute supplier of CTP
equipment.

   After a seven-day trial, the jury determined that CTP 7 was part of
the installment contract, but that CTP 8 was not. The jury also found
that the defective performance of CTP 2 and 3 substantially impaired
the value of the entire contract. As a result of its pre-trial orders and
the jury’s findings, the district court awarded Phoenix Color damages
in the amount of $1,899,257.00, but refused to grant Phoenix Color
prejudgment interest. The court also denied Phoenix Color’s post-trial
motion for judgment as a matter of law on the jury’s exclusion of
CTP 8 from the installment contract.

   Krause America appeals various pre-trial orders and the final judg-
ment. Phoenix Color cross-appeals the exclusion of CTP 8 from the
installment contract and the denial of prejudgment interest.

                                   II.

                                   A.

  Krause America first appeals the district court’s determination as
a matter of law that the CTP contracts signed by Phoenix Color and
Krause America in October 1997 constituted an installment contract
under § 2-612.2 Krause America observes that the parties executed a
    2
   We decline to address Phoenix Color’s alternative argument that
defects in CTP 1, 2, and 3 constituted an anticipatory repudiation of the
               PHOENIX COLOR CORP. v. KRAUSE AMERICA                      5
total of ten separate contracts for three different models of the Krause
America CTP machine to be delivered to plants in six different states,
and only five of these contracts were executed in October 1997.
Krause America further submits that each contract consisted of an
independent set of documents and was separately negotiated by the
parties, and that the district court ignored the "singleness of the docu-
ment and the negotiation" requirement of Comment 3 to § 2-612.
Finally, Krause America asserts that the court incorrectly resorted to
modification of contract principles in holding both that CTP 1 was not
part of the installment contract, and that the jury would have to deter-
mine whether CTP 7 and 8 were part of the installment contract.3

  We disagree. An installment contract "is one which requires or
authorizes the delivery of goods in separate lots to be separately
accepted." § 2-612(1). The court below reasoned that

     although there were eight separate specification sheets and
     quote forms, all of them grew out of a common set of nego-
     tiations, and all were executed in October, 1997, as a pack-
     age deal. Under these circumstances, it is clear to the Court
     that common and commercial sense require this contract to
     be considered as an installment contract under Section 2-
     612. This is, in fact, precisely the sort of situation to which

contract under § 2-610. This contention was made below and summarily
rejected by the district court, but on appeal it was merely raised at oral
argument without having been briefed. We therefore think it the better
course not to entertain it.
   3
     Krause America also claims that there is an open question as to
whether CTP 5 and 6 are part of the installment contract. This is because
the district court did not explicitly state that the contracts for those two
machines were part of the installment contract. We do not agree. Krause
America is correct that the district court did not mention CTP 5 and 6 by
name in its order of June 14, 2000. But we agree with Phoenix Color that
the court clearly intended to include all LS 110C model machines
ordered by Phoenix Color in the installment contract. Because CTP 5 and
6 are machines of that model, we find no merit in Krause America’s con-
tention. Indeed, Krause America makes this argument for the first time
on appeal. It did not question the court’s ruling after June 14, 2000, and
it went to trial without raising this objection.
6              PHOENIX COLOR CORP. v. KRAUSE AMERICA
    Section 2-612 was intended to apply, viz., where a seller
    makes a series of deliveries over a period of time and the
    cumulation of non-conformities so impairs the value of the
    continuing relationship as to justify the buyer’s excuse from
    continuing to be required to buy under the contract.

The district court was correct in so holding. Comment 1 to § 2-612
states that "[t]he definition of an installment contract" includes "in-
stallment deliveries tacitly authorized by the circumstances or by the
option of either party." After reviewing the record, we agree that an
installment contract existed under the "circumstances" of this case.
The first purchase order signed by the parties expressly stated that
Phoenix Color was agreeing "to allow KRAUSE AMERICA to sup-
ply all CTP systems to all [of its] facilities predicated upon [the] suc-
cess of [the] 1st installation." The record further reveals that: (1) the
parties negotiated with the common understanding that Krause Amer-
ica would be Phoenix Color’s sole supplier; (2) Krause America
extended price discounts because Phoenix Color was purchasing all
of its CTP machines from Krause America; (3) the delivery schedule
was set out in advance; (4) the model and design specifications of the
machines were similar; (5) those specifications arose from the parties’
recognition of Phoenix Color’s particular needs; and (6) when Phoe-
nix Color’s needs changed, the parties responded by modifying their
agreement. When something looks like an installment contract and
walks like an installment contract, we find ourselves unable to con-
clude that it is not.

   Krause America’s arguments to the contrary are unpersuasive. We
do not read Comment 3 to § 2-612 as imposing a strict "singleness of
the document and the negotiation" requirement as a necessary condi-
tion for the existence of an installment contract. This is because Com-
ment 3 explicitly addresses itself to the question of whether clauses
in contracts such as "‘each delivery is a separate contract’" should be
given "their legalistically literal effect," and concludes that they
should not. But because such a clause is not at issue here, nothing in
Comment 3 is dispositive of the relevant inquiry in this case.

  As the district court correctly observed, the separate paperwork and
purchase documents completed by the parties for the various
machines did not preclude the formation of an installment contract
                PHOENIX COLOR CORP. v. KRAUSE AMERICA                       7
because § 2-612’s definition of "contract" is quite expansive. It is
defined to mean "the total legal obligation which results from the par-
ties’ agreement as affected by this title and any other applicable rules
of law." § 1-201(11). The parties’ "agreement" is in turn defined to
mean "the bargain of the parties in fact as found in their language or
by implication from other circumstances including course of dealing
or usage of trade or course of performance." § 1-201(3). Nowhere in
these definitions is there a requirement of a single document or nego-
tiation. And other courts agree that § 2-612 does not impose such a
severe restriction. See, e.g., Cassidy Podell Lynch, Inc. v. Snyder-
General Corp., 944 F.2d 1131, 1146-47 (3d Cir. 1991) (holding that
twenty-three purchase orders "made up a single installment contract").

   In addition, even limiting our focus to Comment 3, it states that not
only the "singleness of the document and the negotiation," but also
the "sense of the situation" should "prevail over any uncommercial
and legalistic interpretation." The "sense of the situation" in this case
causes us to conclude that the parties created and later modified an
installment contract.

   Krause America fails to cite any legal authority for the proposition
that an installment contract cannot be modified under § 2-209. Other
courts have held that it can be modified. See, e.g., Midwest Mobile
Diagnostic Imaging, L.L.C. v. Dynamics Corp. of Am., 965 F. Supp.
1003, 1012 (W.D. Mich. 1997); Traynor v. Walters, 342 F. Supp. 455,
457, 461 (M.D. Pa. 1972). Because we see no reason in logic or law
why an installment contract cannot be modified, we reject Krause
America’s contention.4
  4
    In addition to its substantive objections to the district court’s decision
on the installment contract issue, Krause America argues that the court
improperly raised and decided the question sua sponte. Krause America
submits that it was procedurally prejudiced by the summary judgment
ruling because it was not provided with notice and an opportunity to
present an opposition. See Bridgeway Corp. v. Citibank, 201 F.3d 134,
139 (2d Cir. 2000). But Krause America was given the opportunity to
voice its objections and present evidence concerning the ruling in both
its motion for reconsideration and its request for further reconsideration,
as a result of which the district court modified its ruling in partial agree-
ment with Krause America’s position.
8             PHOENIX COLOR CORP. v. KRAUSE AMERICA
                                  B.

   Krause America next asserts that the district court erred in ruling
as a matter of law that Phoenix Color made an effective revocation
of acceptance of CTP 1, 2, and 3 under § 2-608. Krause America
invokes Solar Kinetics Corp. v. Joseph T. Ryerson & Son, Inc., 488
F. Supp. 1237 (D. Conn. 1980), for the proposition that in order to be
effective, a notice of revocation must identify the particular noncon-
formities in the goods that substantially impair their value to the
buyer. Krause America submits that Phoenix Color’s failure to pro-
vide such notice is fatal to its claim.

   We do not agree. The district court correctly found that Phoenix
Color’s August 26, 1998 letter to the president of Krause America
constituted an effective revocation of acceptance under § 2-608. The
letter stated that "we would like you to remove all machines currently
on our premises." These words were understood by Krause America
to be a notice of revocation of acceptance. The very next day, Krause
America’s president sent Phoenix Color’s chairman a response stating
that "[a]fter consulting at length with KRAUSE’s counsel, I wish to
inform you that PHOENIX has asserted no legal basis for revoking
it’s [sic] acceptance of KRAUSE machines already shipped to PHOE-
NIX . . . ."

   Krause America is correct that Phoenix Color did not identify in its
August 26 letter the specific nonconformities that substantially
impaired the value of the machines. But under the circumstances of
this case, we do not think that the Solar Kinetics decision required
Phoenix Color to do that in order to effect a valid revocation of accep-
tance under Connecticut law. As discussed below, the record contains
numerous statements from Krause America’s own service personnel
documenting the existence of defects. Thus, Krause America had
actual notice of exactly what was wrong with the machines it sold to
Phoenix Color.

   In Solar Kinetics, by contrast, the seller did not have anywhere
near the notice that Krause America had. The court in that case found
that the first time some form of notice was given, the buyer merely
complained that the aluminum at issue was "‘not meeting specifica-
tions,’" voiced only general concerns about "‘reflectivity,’" and "en-
              PHOENIX COLOR CORP. v. KRAUSE AMERICA                   9
couraged the defendant to make some tests of its own." The buyer did
not "purport to revoke his acceptance or offer to return the alumi-
num." 488 F. Supp. at 1247. The court further found that the only
other time notice was allegedly given, the buyer relied upon an
alleged nonconformity that the jury subsequently found was not a
nonconformity. Id. at 1249. In short, Solar Kinetics was a case in
which "a buyer in litigation [was not allowed] to justify his earlier
attempted revocation by reference to defects in the goods which he
only discovered after the supposed revocation." Id. at 1246; see also
id. at 1249. Thus, that decision is not controlling here.

                                  C.

   Krause America also claims that the court erred in holding as a
matter of law that Phoenix Color made a justifiable revocation of
acceptance of CTP 1, 2, and 3 under § 2-608, entitling it to a return
of the purchase price paid for those machines under § 2-711. Krause
America argues that the extensive productivity of CTP 1, 2, and 3
contradicts the court’s ruling that nonconformities substantially
impaired their value to Phoenix Color.

  Based on the record before us, we disagree. In relevant part, § 2-
608(1) provides that "[t]he buyer may revoke his acceptance of a lot
or commercial unit whose nonconformity substantially impairs its
value to him." Applying this section, the district court did not mince
words in announcing its factual findings:

    The record is replete with overwhelming evidence that the
    delivered presses suffered from design defects that caused
    extraordinary amounts of down time, that required almost
    constant attention from both plaintiff’s and defendants’ per-
    sonnel, and that rendered them unmerchantable. Indeed, the
    record contains numerous statements from defendants’ per-
    sonnel as to design and/or manufacturing defects in the
    presses. Defendants’ evidence adduced in opposition is
    entirely too weak for any reasonable fact-finder to find in its
    favor.

The court reiterated that "[t]here is no question, in light of Krause
documents admitting that the machines experienced continuing diffi-
10             PHOENIX COLOR CORP. v. KRAUSE AMERICA
culties due at least in part to design and manufacturing defects, as
amply chronicled in the record, that the machines did not conform to
the contract."

   We have reviewed the same record, and we conclude that the evi-
dence of substantial impairment found by the district court is in fact
there.5 As one example among many, Krause America’s own head
service technician confirmed the existence of "a combination of both
design, and manufacturing faults, which while not major, routinely
require the attention of a technician." Numerous service reports, tele-
phone calls, and on-site repair efforts document the multitude of
mechanical problems with the machines. The down time that resulted
ultimately required rerouting of Phoenix Color’s pre-press work from
CTP to traditional film-based plate-making. We therefore have no
doubt that the district court was correct in holding as a matter of law
that nonconformities substantially impaired the value of CTP 1, 2, and
3 to Phoenix Color.6
  5
     Our review of the record also leaves us in agreement with the court’s
conclusion that Phoenix Color notified Krause America of its revocation
"within a reasonable time after discovery of the defects that were latent
and after Krause’s failure to cure defects that were patent." We therefore
do not perceive any problem with the timeliness of Phoenix Color’s
revocation under § 2-608(2).
   6
     Krause America’s final argument is that the district court made an
evidentiary error when it disregarded documentary evidence that Phoenix
Color entered into contracts with an alternative supplier of CTP equip-
ment in August 1998 before it wrote to Krause America on August 26,
1998. Krause America reasons that these contracts are directly relevant
to the issue of substantial impairment because they suggest that the rea-
son Phoenix Color canceled its contracts with Krause America was based
on something other than the performance of the machines. But the court
found insufficient evidence upon which any reasonable fact-finder could
conclude that Phoenix Color acted in bad faith, or that it was conspiring
with its substitute supplier. And nothing in the record persuades us other-
wise. In addition, the evidence of motivation Krause America sought to
introduce is irrelevant to the dispositive inquiries under §§ 2-608 and 2-
612 — namely, whether nonconformities with respect to CTP 1, 2, and
3 substantially impaired the value of those machines and the contract as
a whole. Thus, the court did not abuse its discretion in excluding evi-
dence of Phoenix Color’s contracts with an alternative supplier. See Gen.
Elec. Co. v. Joiner, 522 U.S. 136, 141-42 (1997).
                PHOENIX COLOR CORP. v. KRAUSE AMERICA                        11
                                      D.

   In its cross-appeal, Phoenix Color argues that substantial evidence
does not exist to support the jury’s exclusion of CTP 8 from the
installment contract between it and Krause America. Phoenix Color
submits that the trial testimony was undisputed that the parties had
agreed to have Krause America become the sole provider of CTP
equipment to Phoenix Color pending a successful installation of CTP
1, and that the parties later modified the installment contract to
include CTP 8 in response to Phoenix Color’s reexamination of its
needs. Phoenix Color contends that Krause America did not present
any credible evidence on which the jury could have excluded CTP 8
from the installment contract.

   We disagree. As the court below found, CTP 8 was a different,
larger model than CTP 1-6. In addition, the court accepted Krause
America’s contention that CTP 8 would be used for somewhat differ-
ent purposes than CTP 1-6. Finally, Phoenix Color ordered CTP 8 in
March 1998, some five months after the date the court found to be the
time the installment contract was formed. In view of this evidence, we
are unable to conclude that the court erred in refusing to hold as a
matter of law that CTP 8 was part of the installment contract.7

                                      E.

   The final question before us is Phoenix Color’s claim that the dis-
trict court abused its discretion in failing to award prejudgment inter-
est on the liquidated amounts to which Phoenix Color is entitled.
Phoenix Color argues that it was unjustly denied use of the money it
paid to Krause America for defective machinery from December 16,
1998 through October 25, 2000, the date of final judgment. Phoenix
Color submits that the district court misconstrued Connecticut law in
  7
   It is true that the jury found that CTP 7, the same model CTP machine
as CTP 8, was part of the installment contract. But as the district court
noted, "at most, the Plaintiff has pointed to an inconsistent special ver-
dict." And as the qualification "at most" indicates, it is not at all clear that
the verdict was inconsistent. For example, the parties entered into the
contract for CTP 7 approximately two months before Phoenix Color
ordered CTP 8.
12              PHOENIX COLOR CORP. v. KRAUSE AMERICA
holding that a legitimate dispute between the parties allowed it to
deny the motion for interest.

   We are not persuaded. Conn. Gen. Stat. § 37-3a provides that pre-
judgment interest at a rate of ten percent a year "may be recovered
and allowed in civil actions . . . as damages for the detention of
money after it becomes payable." The statute does not state that inter-
est shall be recovered and allowed. The awarding of prejudgment
interest therefore lies within the discretion of the trial court. Prime
Mgmt. Co. v. Steinegger, 904 F.2d 811, 817 (2d Cir. 1990); Northrop
v. Allstate Ins. Co., 720 A.2d 879, 884-85 (Conn. 1998).

   The district court denied Phoenix Color prejudgment interest
because "there was a live viable dispute here. . . . I don’t think Krause
was unjustly enriched by having this money, which after all was
. . . voluntarily paid against future deliveries." The court was also
concerned not to "make it more the rule than the exception to award
prejudgment interest in cases where there was a contract dispute and
some money had been paid on account." In view of these plainly
legitimate reasons, as well as "the trial court’s broad discretion in
determining whether the money due the plaintiff was wrongfully
detained," Blakeslee Arpaia Chapman, Inc. v. EI Constructors, Inc.,
687 A.2d 506, 523 (Conn. 1997), we are unable to say that the district
court abused its discretion in denying Phoenix Color prejudgment
interest.

                                   III.

     For the foregoing reasons, the judgment of the district court is

                                                           AFFIRMED.