Court Opinion

ID: 37786
Source: CourtListenerOpinion
Date Created: 2010-04-25 19:58:20+00
Date Added: 2024-06-11T17:15:47.247150
License: Public Domain

United States Court of Appeals
                                                                     Fifth Circuit
                                                                   F I L E D
                    UNITED STATES COURT OF APPEALS
                             FIFTH CIRCUIT                        February 22, 2005

                                                                Charles R. Fulbruge III
                                                                        Clerk
                               No. 04-20245

                       A.O. SMITH CORPORATION,

                                                     Plaintiff-Appellee,

                                  versus

                  ELBI S.P.A.; ELBI OF AMERICA, INC.

                                                Defendants-Appellants.

          Appeal from the United States District Court
                for the Southern District of Texas
                          (4:02-CV-1871)

Before WIENER, BARKSDALE, and DENNIS, Circuit Judges.

PER CURIAM:*

     Elbi S.p.A. and Elbi of America, Inc. (collectively, Elbi)

appeal the denial of judgment as a of matter of law (JMOL),

claiming insufficient evidence for breach of contract concerning

Elbi’s sale of water tanks to A.O. Smith Corporation.           (The breach

of express warranty finding against Elbi is not at issue.)                The

evidence was   sufficient   for    a   reasonable   jury   to   find    Smith

properly revoked its acceptance of the tanks when it found they

were defective.    AFFIRMED.

     *
       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this opinion should not be published and is not precedent except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.
                                     I.

      Smith began negotiating with Elbi in 1999 to buy overflow

thermal    expansion   tanks   for   use   in   residential    water   heater

systems.    Smith intended to sell these tanks under its own label.

In   researching   expansion-tank     options,    Smith   tested   those   of

several companies.       Smith cut open tanks that failed a non-

destructive pressure-test to examine the interiors and ascertain

why the tanks did not hold air.

      Accordingly, in the course of negotiations with Elbi, Smith

tested sample tanks to ensure they held pressure.             Because Elbi’s

tanks passed that test, Smith decided destructive testing was

unnecessary. (Smith performed such testing after it had contracted

with Elbi and the tanks began failing in the field.)

      Elbi’s product catalog contained a provision warranting the

tanks would be free from material and workmanship defects for five

years, and Elbi provided other literature to Smith on its warranty

procedures.     Smith expressed interest in entering the thermal-

expansion-tank wholesale market in the United States, and its sales

team discussed the possibility of future large volume purchases

from Elbi.      After testing the Elbi product and reviewing the

product literature, Smith purchased 14,400 tanks from Elbi.

      Smith began selling those tanks to its customers in September

1999.     In June 2001, however, Smith began receiving reports from

its customers of leaking and rusting tanks.         Customers in Arizona,

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particularly, complained of faulty tanks and demanded replacements;

in the end, approximately 500 Elbi tanks had to be replaced in

Arizona.   Smith submitted several of the Arizona tanks to Elbi of

America in Houston to send to Elbi’s Italian factory for testing

and warranty service.        In addition, Smith performed its own in-

house testing to ascertain the source of the problem.                    It was

discovered   that   the     tanks’    interior   coating,     an     epoxy-based

substance, had been defectively applied, allowing water to leak

between the lining and the tank and corrode the tank.

     Elbi initially honored its warranty by issuing credits to

Smith for several defective tanks. Elbi stopped doing so, however,

once it became aware of the volume of defective tanks.               Although it

offered to replace the approximate 500 tanks from Arizona, Elbi

refused to replace the entire purchase or issue credits because it

did not believe all 14,400 tanks were defective.              Smith engaged a

service agent to replace the faulty tanks with those of another

company.

     By its 20 September 2001 letter to Elbi, Smith expressly

revoked acceptance of the entire order.                Post-revocation, Smith

ceased   selling    those    tanks,    except    for    75   which    were   sold

inadvertently. Smith continued to store the tanks in its warehouse

upon Elbi’s refusing to accept their return.

                                       3
     Invoking   diversity   jurisdiction,   Smith   filed   this   action

against Elbi, claiming breach of contract and of warranty under the

Texas Uniform Commercial Code (UCC).      Elbi counterclaimed.

     At the close of Smith’s case in chief, Elbi moved for JMOL

under Fed. R. Civ. P. 50(a)(1) against the breach of contract and

of warranty claims, asserting, inter alia, that Smith’s purported

revocation of acceptance was invalid for two reasons:              it was

untimely because Smith did not reasonably inspect the tanks before

revocation; and Smith continued selling the tanks after the 20

September 2001 revocation letter.      JMOL was denied.     Elbi renewed

its JMOL motions at the close of all the evidence; they were again

denied.

     The jury found in favor of Smith for breach of both express

warranty and contract, awarding $138,000 for each claim.              (It

awarded Elbi $45,000 for each of two counterclaims:            negligent

misrepresentation and detrimental reliance.)        Because breach of

contract and of warranty remedies are mutually exclusive, the

district court required Smith to elect remedies.      (It required the

same of Elbi for its two awards.   They are not at issue on appeal.)

Smith elected breach of contract because it allowed an award of

attorney’s fees, which the jury set at $155,000.

     Post-trial, Elbi moved for JMOL (Rule 50(b)) and new trial.

In seeking JMOL, Elbi claimed, inter alia, insufficient evidence

for a reasonable jury to find breach of contract, either by Elbi’s

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repudiation or by Smith’s revocation. In seeking a new trial, Elbi

contended:     the evidence was insufficient to warrant the jury

instruction on repudiation (by Elbi’s not fulfilling its warranty);

and this instruction resulted in an unjust outcome at trial.                      The

motions were denied.

                                        II.

     As noted, Elbi does not appeal the breach of express warranty

finding. Instead, it seeks to have the judgment based on breach of

contract vacated and to have judgment entered for Smith based on

breach of warranty.     Should this occur, Smith will not be entitled

to the awarded attorney’s fees.          (Elbi does not dispute such fees

being awarded if there is breach of contract.)

     Texas law forbids conflating breach of warranty and breach of

contract:     “Under    the    [UCC],    breach      of    contract    damages    are

available    for    failure    to    perform,       but    not   for   delivery   of

nonconforming      goods....        [There    is]    a    definitive   distinction

between failure to conform and failure to deliver”.                       Ellis v.

Precision Engine Rebuilders, Inc., 68 S.W.3d 894, 897 (Tex. App.

— Houston [1st Dist.] 2002, no pet.).                 Thus, breach of contract

damages are not available when a buyer accepts non-conforming

goods.      In that instance, breach of warranty is the remedy.

See Southwestern Bell Telephone Co. v. FDP Corp., 811 S.W.2d 572,

576 (Tex. 1991).

                                         5
     Breach of contract remedies are available, however, to a buyer

who, inter alia, properly revokes acceptance.       Selectouch Corp. v.

Perfect Starch, Inc., 111 S.W.3d 830, 834 (Tex. App. — Dallas 2003,

no pet.).     Section 2.608 of the UCC describes the conditions

necessary for revocation:

            (a) The buyer may revoke his acceptance of a
            lot or commercial unit whose non-conformity
            substantially impairs its value to him if he
            has accepted it ...

            (2) without discovery of such non-conformity
            if his acceptance was reasonably induced
            either by the difficulty of discovery before
            acceptance or by the seller's assurances.

            (b) Revocation of acceptance must occur
            within a reasonable time after the buyer
            discovers or should have discovered the ground
            for it....

            (c) A buyer who so revokes has the same
            rights and duties with regard to the goods
            involved as if he had rejected them.

TEX. BUS. & COM. CODE ANN. § 2.608 (Vernon 1994).    “Unlike a claim of

warranty that seeks a fix for defective goods or damages, a

revocation seeks to put the buyer in the same position as if he had

rejected the goods at the time of delivery.”    Neal v. SMC Corp., 99
S.W.3d 813, 816 (Tex. App. — Dallas 2003, no pet.).

     A JMOL denial is reviewed de novo.         E.g., Echeverria v.

Chevron USA Inc., 391 F.3d 607, 610 (5th Cir. 2004).           We must

affirm unless “there is no legally sufficient evidentiary basis for

a reasonable jury[’s]” verdict.       FED. R. CIV. P. 50(a)(1); e.g.,

                                  6
Lane v. R.A. Sims, Jr., Inc., 241 F.3d 439, 445 (5th Cir. 2001).

For such de novo review, we “review all of the evidence in the

record ... [but] may not make credibility determinations or weigh

the evidence”. Reeves v. Sanderson Plumbing Prods., Inc., 530 U.S.
133, 150 (2000) (citations omitted).          Likewise, “the evidence, as

well as all reasonable inferences from it, are viewed in the light

most favorable to the verdict”.           Lane, 241 F.3d at 445.

      In contending it did not breach its contract with Smith, Elbi

maintains:     Smith’s 20 September 2001 revocation was invalid

because, post-revocation, Smith continued to sell the Elbi tanks;

and the revocation was untimely because it occurred more than a

reasonable time after Smith should have discovered the grounds for

it.     In the alternative, Elbi contends there was no evidence

adduced at trial for breach of contract based on Elbi’s repudiating

its agreement with Smith.        Elbi maintains any evidence showing

breach of warranty may not, as a matter of law, be used to support

a repudiation claim because breach of warranty and breach of

contract are legally distinct claims.

      Smith   responds   that   the   evidence     was   sufficient   for   a

reasonable jury to find revocation by Smith and repudiation by

Elbi.    For revocation, Smith maintains that, because the tanks’

defect was latent, only destructive testing would have allowed

Smith to discover the grounds for revocation before the tanks began

failing in the field.      For repudiation, Smith maintains Elbi’s

                                      7
warranty was a term of the contract between the parties, and Elbi

repudiated that contract when it refused to honor its warranty. In

sum, Smith contends the evidence was sufficient for a reasonable

jury    to   find   breach     of   contract     (allowing    Smith   to   recover

attorney’s fees).         (Because there was sufficient evidence for a

reasonable jury to find Smith properly revoked acceptance of the

tanks, we need not reach the repudiation issue.)

                                          A.

       For the first of its two bases for challenging the revocation,

Elbi    maintains    it   is    invalid       because,   following    Smith’s   20

September 2001 letter, Smith sold 75 of the 14,400 Elbi tanks.

Smith responds that those sales were “de minimus” and “inadvertent”

and do not invalidate its revocation.

       Generally, a buyer revoking goods must discontinue their use

or sale; but “continued use of non-conforming goods does not, in

all cases, waive the revocation of acceptance”.                   Deere & Co. v.

Johnson, 271 F.3d 613, 619 (5th Cir. 2001) (applying Mississippi

UCC).    The Texas UCC states:          a buyer who revokes acceptance of

non-conforming goods “has a security interest in goods in his

possession or control for any payments made on their price and any

expenses     reasonably      incurred      in    their   inspection,       receipt,

transportation, care and custody and may hold such goods and resell

them in like manner as an aggrieved seller.”                 TEX. BUS. & COMM. CODE

                                          8
ANN. §    2.711(c) (referring to TEX. BUS & COMM. CODE ANN. § 2.706).

There is no dispute Smith paid for the Elbi tanks it received.

      As the Fourth Circuit noted:         “Post-revocation use will not

invariably cancel revocation. The issue is determined on a case by

case basis, with the reasonableness of post-revocation use being

the   underlying   consideration,        taken    in   conjunction    with   a

consideration of all the other elements necessary to effect a

justifiable   revocation”.     Bellsouth         Telesensor   v.   Information

Systems & Networks Corp., 65 F.3d 166 (Table), 1995 WL 520978 at *6

(4th Cir. 1995) (holding a “de minimus” use of revoked goods did

not invalidate revocation of entire batch).            “[C]ontinued use [of

revoked goods] will not necessarily undo a claimed revocation,

particularly where the seller, after being notified of the buyer’s

revocation, does not respond or contact the buyer to arrange for

return of the goods....” 14 WILLISTON       ON    CONTRACTS § 40:30 (4th ed.

2000) (The combined jury instruction/interrogatory for breach of

contract described when revocation is proper and stated:                   “[A]

buyer’s attempted revocation of its acceptance of goods is rendered

invalid   where,   following   the   attempted      revocation,     the   buyer

continues to sell such goods to third parties”.)

      Smith notified Elbi of its revocation in the 20 September 2001

letter and stopped selling the Elbi tanks, except for 75 of them.

There was sufficient evidence for a reasonable jury to decide that

                                     9
the inadvertent de minimus sale of 75 tanks after the September

letter did not invalidate the revocation.

                                    B.

     In claiming the revocation was untimely, Elbi maintains Smith

should   have    physically   tested     the   tanks   upon   receipt    and,

therefore, should have found the defect in the interior coating

before selling the tanks. Accordingly, Elbi contends: contrary to

UCC § 2.608, Smith’s 2001 revocation was not made “within a

reasonable time” after it should have discovered the defects.

Smith responds:     its visual inspection of the tanks upon receipt

was reasonable testing; it was not obliged to destroy new products

to discover latent defects; and, because visual inspection could

not identify the problem with the interior coating, its 2001

revocation was timely because it revoked promptly after it learned

from its customers of the tanks’ latent defects.

     “[W]hether the buyer has complied with the requirements of §

2-608 in giving adequate notice of revocation of acceptance is a

question for the trier of fact.”           Delhomme Industries, Inc. v.

Houston Beechcraft, Inc., 735 F.2d 177, 181 (5th Cir. 1984).

Again, revocation must occur “within a reasonable time after the

buyer discovers or should have discovered the ground for it”.            TEX.

BUS. & COM. CODE ANN. § 2.608(b).      “The words ‘reasonable time’ as

used in section 2.608(b) in and of themselves express the existence

of a fact.”     Purnell v. Guaranty Bank, 624 S.W.2d 357, 359           (Tex.

                                    10
App. — Dallas 1981, writ ref’d n.r.e.).           Accordingly, it was for

the   jury   to   decide:   whether    Smith    acted   reasonably    in   not

conducting destructive testing; and whether its             revocation was

timely because visual inspection alone could not reveal the latent

defect.

      Smith adduced evidence that it did not conduct destructive

testing upon receipt of the new Elbi inventory because:              the Elbi

tanks had already passed the pressure test administered before the

contract was made; and Smith knew of no other needed test that

called for cutting open the new tanks.         According to Smith, because

prior testing did not reveal the defect, it timely revoked when it

notified Elbi of the defect within a reasonable time after Smith

discovered it.

      Viewing the evidence in the requisite light most favorable to

the verdict, there was sufficient evidence for a reasonable jury to

find Smith:       (1) reasonably decided not to conduct destructive

testing; and (2) revoked acceptance within a reasonable time after

discovering the latent defect via its customers.

                                  III.

      For the foregoing reasons, the judgment is

                                                              AFFIRMED.

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