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XEO Int'l, Ltd. v. Fantasia Distribution, Inc.

COURT OF APPEAL OF THE STATE OF CALIFORNIA FOURTH APPELLATE DISTRICT DIVISION THREE
Nov 6, 2018
No. G054615 (Cal. Ct. App. Nov. 6, 2018)

Opinion

G054615

11-06-2018

XEO INTERNATIONAL, LTD., Plaintiff, Cross-defendant and Respondent, v. FANTASIA DISTRIBUTION, INC., Defendant, Cross-complainant and Appellant.

James W. Denison for Defendant, Cross-complainant and Appellant. Law Offices of Howard S. Fisher, and Howard S. Fisher and Alexander J. Fisher for Plaintiff, Cross-defendant and Respondent.


NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Super. Ct. No. 30-2014-00739867) OPINION Appeal from a judgment of the Superior Court of Orange County, Michael Brenner, Judge. (Retired Judge of the Orange Super. Ct. assigned by the Chief Justice pursuant to art. VI, § 6 of the Cal. Const. ) Affirmed. James W. Denison for Defendant, Cross-complainant and Appellant. Law Offices of Howard S. Fisher, and Howard S. Fisher and Alexander J. Fisher for Plaintiff, Cross-defendant and Respondent.

In this case stemming from a soured business relationship, defendant Fantasia Distribution, Inc. (Fantasia), appeals from a judgment entered in favor of plaintiff XEO International, Ltd. (XEO). Fantasia argues the trial court, as the trier of fact, committed multiple errors in evaluating XEO's breach of contract cause of action. It claims the court failed to apply the proper law, drew conclusions which lack evidentiary support, wrongfully awarded certain damages, and unwarrantedly rejected its contention that the contract at issue was void because XEO's was not qualified to do business in California at the time it filed suit and at the time it entered into the contract with Fantasia. Fantasia also contends the court's written statement of decision concerning its cross-complaint was inadequate because it lacked any analysis to support its conclusions. We disagree in all respects and, therefore, affirm the judgment.

FACTS

The business relationship between Germany-based XEO and Anaheim, California-based Fantasia started in early 2013 at a trade show in Las Vegas, Nevada. Among the products XEO showcased at the show was an electronic hookah (e-hookah), an electronic smoking device "that resembled part of a hookah pipe." Being a distributor of hookah tobacco products, Fantasia expressed interest in purchasing some of the e-hookahs from XEO. It hoped to develop flavors similar to those it already marketed as part of its traditional hookah tobacco products.

To effectuate the first purchase, Fantasia sent XEO a written purchase order. It indicated the quantity of each flavor it wished to purchase, the agreed upon price per unit, and a total price. No additional terms or conditions were specified in the order. Fantasia also provided XEO with artwork to use on the labels and packaging for the product.

XEO responded with an invoice, confirming the amount ordered and the cost. It also initiated the manufacturing of the e-hookahs and their components (e.g., batteries), which took place in China.

Although an agreement containing general terms applicable to the parties' relationship was discussed, it was not executed due to disagreement over certain terms. The parties nevertheless appear to have come to an oral agreement concerning payment. Fantasia was to pay in three equal installments: the first upon confirmation of the order by XEO, the second after XEO provided notification that the items were ready to ship, and the third within 30 days after receiving the items.

In the few months following the first purchase, the parties communicated concerning development of additional product flavors and other logistical matters. Despite delays in the manufacturing of the e-hookahs for the first order, Fantasia made additional purchases using written orders. XEO agreed to ship the orders in batches as the items were produced in order to get them to Fantasia as soon as possible.

Anticipating it would need to order between one and three million more items within the year to satisfy demand, Fantasia inquired whether XEO could offer a discounted price applicable to all future orders. XEO responded positively, providing pricing information for various quantities. However, it also indicated Fantasia would need to purchase all items at once in order to get the volume discount; it could not aggregate multiple orders.

Soon enough, the e-hookah market started to boom and both XEO and Fantasia became aware of products made by others who were potentially infringing on XEO's United States patent. Fantasia urged XEO to take enforcement action so Fantasia could remain competitive in the market. XEO assured Fantasia it was working to determine if there was infringement, and said it was in the process of securing a patent in China in hopes of further reducing copycat products.

The parties arranged to meet in person on August 30, 2013, at Fantasia's Anaheim headquarters to discuss their business relationship and future product details. Among the topics discussed at the meeting were: product defects and quality assurance, payment terms, future order management, distributor exclusivity, and patent enforcement.

A few days after the August 30th meeting, and following e-mail exchanges concerning product component availability, Fantasia placed two separate orders for one and one-half million items each. These purchase orders, designated as purchase order Nos. 855 and 869, were consistent with past practice, including the desired amounts for each flavor, the price per unit, and the total price. Based on a volume discount to which the parties agreed, the total price for each order was approximately $4 million.

A week later, Fantasia's legal counsel sent an e-mail to XEO "memorializ[ing] the points the parties addressed" during the August 30th meeting. One of the items listed was "Fantasia-XEO terms that were discussed, to be included in a further written agreement." Among the terms were an exclusive distributorship for Fantasia of XEO's e-hookah product, a clarification of payment timing, liquidated damages for late deliveries, and XEO's enforcement of its patent. The latter term stated that "XEO will have cease and desist letters out to infringers within 30 days of our meeting," and if enforcement is not successful, "XEO will give Fantasia a price break to ensure Fantasia is competitive with infringers . . . ."

XEO's e-mail response indicated it would be "manifest[ing] those points in an agreement," a draft of which it would send within the week. It also stated it had selected legal counsel to enforce the United States patent, and assured Fantasia he was "already on it," with enforcement expected to occur "this month."

The following day, XEO sent a draft distribution agreement to Fantasia "for discussion" and invited Fantasia to "comment freely." The draft included provisions related to the topics discussed at the August 30th meeting. In the accompanying e-mail, XEO also specified two additional terms to incorporate in the next version of the agreement. Fantasia did not respond, and never thereafter did it communicate with XEO about the draft distribution agreement.

The parties' business relationship deteriorated in the months thereafter. From Fantasia's perspective, (1) XEO did not timely issue cease and desist letters to patent infringers as it believed XEO agreed to do, and (2) shipments were arriving late. Due to the former, Fantasia continuously asked for a lower per unit price to remain competitive in the market. From XEO's perspective, Fantasia was consistently late with payments and was doing anything it could simply to get a lower price.

In the end, XEO ceased shipments to Fantasia after Fantasia stopped paying for products in accordance with the agreed upon schedule. As of that time, Fantasia had received most of its purchase order No. 855 of one and one-half million units, but none of its purchase order No. 869 for the same amount.

XEO filed the instant suit alleging breach of contract, fraud, and a common count for goods received. Among the approximately $4 million in damages it sought were the outstanding balance due by Fantasia on goods allegedly received but not paid for, unpaid shipping costs, costs incurred for preordered packaging materials, and costs associated with components preordered by XEO to fulfil purchase order No. 869 for which the completed units were never manufactured. XEO also sought punitive damages.

Fantasia filed a cross-complaint for intentional and negligent misrepresentation, as well as unfair business practices. Its primary allegations concerned XEO's failure timely to enforce its design patent against infringers, or offer a reduced interim price. Fantasia claimed it relied on XEO's representations concerning such matters in deciding to place two large volume orders and it would not have done so otherwise.

Following discovery and various pretrial motions, the case proceeded to a bench trial, with the judge sitting as the fact finder. Both parties presented a variety of written evidence and oral testimony.

Regarding the outstanding balance for delivered products under purchase order No. 855, Fantasia took the position that it should not pay the price per unit set forth in the purchase order. According to Fantasia, the order was subject to the oral agreement reached by the parties at the August 30th meeting that Fantasia would receive a lower price if XEO failed to send cease and desist letters to infringers within 30 days of the meeting. It also argued it should not pay for any of the components that were allocable to items ordered, but never received.

XEO claimed there was no oral agreement modifying the purchase price from that indicated in the two purchase orders. Rather, at the August 30th meeting, the parties simply engaged in preliminary negotiations concerning terms that would be part of a larger written agreement—an agreement which never came to fruition. XEO also argued the cost of components it preordered was an incidental damage for which Fantasia should be responsible because the components were unique to Fantasia's product and could not be otherwise used by XEO.

The court found in favor of XEO on its breach of contract claim, agreed with XEO on the applicable price per unit, and denied Fantasia any recovery on its cross-complaint. It awarded XEO approximately $587,000 in damages, but denied XEO's request for punitive damages. Included in the award were (1) the outstanding balance due on delivered items; (2) the cost of preordered packaging materials for the final portion of purchase order No. 855 for which the completed units were never manufactured; and (3) unpaid shipping charges.

In its written statement of decision, the court explained that the only contract it found to exist was the one embodied by Fantasia's two $4 million purchase orders (Nos. 855 and 869) and the corresponding invoices from XEO. The evidence did not demonstrate a "meeting of the minds" regarding patent enforcement or a reduced interim price. While the court acknowledged the parties discussed those issues and others at the August 30th meeting, it found "[t]hose discussions did not result in an agreement, or a contract."

Following entry of judgment and unsuccessful motions for a new trial and to set aside the judgment, Fantasia timely appealed.

DISCUSSION

Fantasia argues the court erred with respect to both XEO's complaint and Fantasia's cross-complaint. Regarding the former, the claimed errors include: (1) the failure to apply the California Uniform Commercial Code; (2) a lack of substantial evidence to support the court's conclusion concerning patent enforcement and interim pricing; (3) a wrongful award of damages for preordered packaging materials; and (4) the rejection of Fantasia's voidability defense which was grounded in XEO's failure to qualify to do business in California at the time it filed suit and at the time it entered into the contract with Fantasia. As for its cross-complaint, Fantasia contends the court's statement of decision was inadequate because it did not provide any analysis concerning its conclusion that there was no evidence of intentional or negligent misrepresentation.

Voidability

Prior to trial, Fantasia unsuccessfully moved for summary adjudication on XEO's breach of contract cause of action. Among its arguments was that the alleged contract should be declared void under Revenue and Taxation Code section 23304.1, which makes contracts entered into in California by certain foreign business entities voidable under specified circumstances. (Id., § 23304.1, subd. (b).) The trial court rejected Fantasia's position. Fantasia claims this was error, but it fails to demonstrate as much.

Revenue and Taxation Code section 23304.1, subdivision (b), which falls within a part of the code concerning the state corporation franchise tax, provides: "If a foreign taxpayer that neither is qualified to do business nor has an account number from the Franchise Tax Board, fails to file a tax return required under this part, any contract made in this state by that taxpayer during the [year for which the taxpayer has failed to file a return] shall . . . be voidable at the request of any party to the contract other than the taxpayer." (Italics added.) Importantly, Revenue and Taxation Code section 23304.5 provides, inter alia: "If the court finds that the contract is voidable under Section 23304.1, the court shall order the contract to be rescinded. However, in no event shall the court order rescission of a taxpayer's contract unless the taxpayer receives full restitution of the benefits proved by the taxpayer under the contract." (Italics added.)

"Initially, the moving party [on a motion for summary judgment or summary adjudication] bears a burden of production to make a prima facie showing of the nonexistence of any genuine issue of material fact." (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 845.) Fantasia's motion for summary adjudication failed to meet its initial burden on its voidability claim for at least two reasons. First, Revenue and Taxation Code section 23304.1 applies, by its terms, only to contracts made in the state of California. In its motion for summary adjudication, Fantasia failed to submit any evidence, or argument, that its purchase order No. 855 (for which damages were ultimately awarded), and the acceptance of the purchase order by XEO, constituted a contract "made in this state." Second, even if the contract had been made in California, Fantasia failed to demonstrate the absence of a triable issue of fact regarding the "full restitution" due XEO upon rescission, as required by Revenue and Taxation Code section 23304.5.

Revenue and Taxation Code section 23304.1 has a more limited reach than Revenue and Taxation Code section 23101 or Corporations Code section 2105. Revenue and Taxation Code section 23101 defines "'[d]oing business'" as "actively engaging in any transaction for the purpose of financial or pecuniary gain or profit." (Id., subd. (a).) "[A] taxpayer is doing business in this state for a taxable year if any of the following conditions has been satisfied." "Sales . . . of the taxpayer in this state exceed the lesser of five hundred thousand dollars ($500,000) or 25 percent of the taxpayer's total sales. . . . [S]ales in this state shall be determined using the rules for assigning sales under Section 25135 . . . ." (Id., subd. (b)(2).) Revenue and Taxation Code section 25135, in turn, provides that "[S]ales of tangible personal property are in this state if: [¶] (1) The property is delivered or shipped to a purchaser, . . . within this state regardless of the f.o.b. point or other conditions of the sale." (Id., subd. (a)(1).) Under these provisions, it appears that XEO's sales to Fantasia constituted "doing business" in California. But the voidability provisions in Revenue and Taxation Code section 23304.1 apply only to contracts "made in this state . . . ." Thus, a foreign taxpayer may be required to qualify to do intrastate business in California (Corp. Code, § 2105) and to file tax returns, and a failure to do so subjects the foreign taxpayer to forfeiture of its right to do business (Rev. & Tax. Code, §§ 23301, 23301.5). But the voidability statute, Revenue and Taxation Code section 23304.1 applies only to those contracts "made in this state." XEO qualified to do intrastate business during the pendency of Fantasia's motion for summary adjudication. Fantasia's voidability argument depends, however, on the application of Revenue and Taxation Code section 23304.1.

First, as to the place of contract formation, California Uniform Commercial Code section 2206, subdivision (1)(b), provides: "Unless otherwise unambiguously indicated by the language or circumstances." "An order or other offer to buy goods for prompt or current shipment shall be construed as inviting acceptance either by a prompt promise to ship or by the prompt or current shipment of conforming . . . goods." Here, the evidence was uncontradicted that XEO's personnel responded to Fantasia's purchase orders by creating a confirming invoice in Germany and by arranging for the shipment of the goods from the place of manufacture in China. Thus, under section 2206 the offer to purchase, embodied in purchase order No. 855, was accepted in Germany, not California. The law is well settled that "the place where the last act is performed which is necessary to render the contract obligatory, is the place where the contract is made." (Ivey v. Kern County Land Co. (1896) 115 Cal. 196, 201.) Here, the last act to make the contract obligatory was XEO's acceptance of the purchase order in Germany. Thus, the contract formed by XEO's acceptance of purchase order No. 855 was not made in California, and Revenue and Taxation Code sections 23304.1 and 23304.5 are inapplicable.

All further statutory references are to the California Uniform Commercial Code unless otherwise stated.

Even if the contract had been made in California, the face of Fantasia's motion for summary adjudication failed to show the absence of a triable issue of fact as to the amount of "full restitution" that would be owed to XEO upon rescission of the contract. Fantasia argues it could have purchased e-hookahs on the open market for less than the specified price under purchase order No. 855, and that it had already paid "full restitution" by overpaying XEO for the units it had received. But even if this theory were viable, there is no evidence that the open market purchases would have been for identical goods, and nowhere does Fantasia ever calculate the amount of the purported overpayment.

Having lost its motion for summary adjudication, Fantasia did not pursue at trial its claim for voidability under Revenue and Taxation Code sections 23304.1 and 23304.5, apparently abandoning the issue. On appeal, however, as to the voidability issue, Fantasia tellingly closes the argument in its opening brief by saying: "Fantasia submits that, if the case is remanded to the trial court to determine whether the contract should be declared void, the trial court should be further directed to determine whether XEO has already received the full restitutionary value of the goods and services it alleges it provided." Thus, Fantasia has acknowledged the existence of a triable issue of fact, and, accordingly, summary adjudication was properly denied even if the contract had been made in California.

California Uniform Commercial Code

Noting the lack of citation to the California Uniform Commercial Code in the trial court's statement of decision, Fantasia argues the court erred by declining to apply it. The record, however, reveals no such refusal.

Division 2 of the California Uniform Commercial Code (§ 2101 et seq.) applies to transactions for the sale of goods. (§ 2102.) It embodies the modern view of contracts. "Under traditional common law, no contract was reached if the terms of the offer and the acceptance varied. . . . [Citation.] This 'mirror image' rule of offer and acceptance was plainly both unfair and unrealistic in the commercial context. 'The fact that the parties did intend a contract to be formed and both had a reasonable commercial understanding that the deal was closed, [was] ignored.'" (Steiner v. Mobil Oil Corp. (1977) 20 Cal.3d 90, 99 (Steiner).) The modern approach rejects the mirror image rule and instead "inquires as to whether the parties intended to complete an agreement." (Ibid.) If the parties' actions objectively demonstrate something beyond inconclusive negotiations, a fact finder may conclude the parties reached a contractual agreement notwithstanding that gaps in the agreement may need to be filled. (§ 2204, subd. (3); Steiner, at p. 104 & fn. 7; Hebberd-Kulow Enterprises, Inc. v. Kelomar, Inc. (2013) 218 Cal.App.4th 272, 281.)

Because "[a] contract for a sale of goods may be made in any manner sufficient to show agreement" (§ 2204, subd. (1)), and because the parties need not concur on all material terms (Steiner, supra, 20 Cal.3d. at pp. 104-105), a court's initial analysis is twofold. First, "the court must find some basis for concluding that the parties engaged in a process of offer and acceptance, rather than inconclusive negotiations." (Id. at p. 104.) "'The more terms the parties leave open, the less likely it is that they have intended to conclude a binding agreement.'" (Id. at p. 106, fn. 8.) "Second, [if terms are missing,] the court must find that it possesses sufficient information about the parties' incomplete transaction to apply the provisions of the California Uniform Commercial Code which fill in the gaps in parties' contract[]." (Id. at p. 104.)

Here, it was undisputed the California Uniform Commercial Code applied to the subject contract dispute, and the court expressed a strong interest in understanding the parties' relative positions. In response to comments from Fantasia during trial, the court implored the parties to provide a list of the specific statutes they believed to be relevant. Both did so.

Although the court's statement of decision does not cite specific provisions of the California Uniform Commercial Code, the analysis is consistent with its standards and supplies the required "legal basis for [the court's] decision . . . ." (Code Civ. Proc., § 632.) Consistent with the first analytical step, the court looked to the parties' past dealings, the testimony concerning the August 30th meeting, the parties' communications following that meeting, the two $4 million purchase orders, which were confirmed by XEO's invoices, and other surrounding circumstances to determine whether, and to what extent, XEO and Fantasia came to an agreement. Based on this evidence, the court found the two large purchase orders and related invoices constituted the only contracts because they demonstrated the requisite agreement. In contrast, it concluded the parties did not agree on any of the matters discussed at the August 30th meeting, including patent enforcement and a reduced interim price. It expressly found "there was no meeting of the minds"—i.e., the parties discussions concerning those matters were simply "inconclusive negotiations." (Steiner, supra, 20 Cal.3d. at p. 104.)

Upon request of any party in a nonjury trial, the court is required to issue "a statement of decision explaining the factual and legal basis for its decision as to each of the principal controverted issues . . . ." (Code Civ. Proc., § 632.) The statement of decision must cover the material factual issues in dispute; pure questions of law need not be included. (Southern Cal. Gas Co. v. City of Vernon (1995) 41 Cal.App.4th 209, 220-221; Earp v. Earp (1991) 231 Cal.App.3d 1008, 1012.) It is adequate if "'"it fairly discloses the court's determination as to the ultimate facts and material issues in the case."'" (Ermoian v. Desert Hospital (2007) 152 Cal.App.4th, 475, 500.)

Because the court found there was no agreement concerning the terms on which Fantasia's arguments hinge—patent enforcement and interim price—there was nothing further for the court to analyze. Lack of accord precluded those terms from being either a standalone agreement, subject to "gap filling" by the court, or additional terms applicable to the two $4 million orders.

Sufficiency of the Evidence

In connection with its California Uniform Commercial Code argument, Fantasia contends the court could not have concluded from the evidence that the only contracts or agreements between the parties were the two large purchases. It urges de novo review of this issue, which it characterizes as a question of law because, according to it, the relevant facts were undisputed. We disagree on all points.

Whether parties have reached a contractual agreement, and on what terms, are questions for the fact-finder when there are conflicting versions of their discussions because credibility must be assessed. (Kawasho Internat., U.S.A., Inc. v. Lakewood Pipe Service, Inc. (1983) 152 Cal.App.3d 785, 791.) Such was the case here. Though there was undisputed documentary evidence, witnesses on both sides gave their respective versions of what transpired at the August 30th meeting, as well as during prior and subsequent phone conversations. The trial court's finding, therefore, was one of fact, and Fantasia's assertion is a challenge to the sufficiency of the evidence supporting the finding. Accordingly, we review the record for substantial evidence. (Ibid.)

Among the evidence which was substantial enough to support the court's finding is the following: (1) XEO's president testified that the matters discussed at the August 30th meeting were part of a bigger picture focus on the future of XEO and Fantasia's business relationship; (2) he stated the parties did not come to any particular agreement at the meeting, but rather the matters discussed were to be incorporated into a draft distribution agreement that would be subject to further discussion and comment by the parties; (3) the post-meeting e-mail from Fantasia's legal counsel listed "terms that were discussed" and that would "be included in a further written agreement"; (4) XEO sent Fantasia a draft distribution agreement which touched on most of the matters discussed at the August 30th meeting; (5) Fantasia never responded to the draft agreement and never discussed it with anyone at XEO; and (6) Fantasia's executive director, who was at the August 30th meeting, testified Fantasia did not agree to many of the details included in the draft agreement, including those concerning patent enforcement and distribution exclusivity.

While there was evidence pointing in Fantasia's favor, and another trier-of-fact might have reached a different conclusion, it is not within our province to second-guess the court's weighing of the evidence when its findings are supported by substantial evidence. (SFPP v. Burlington Northern & Santa Fe Ry. Co. (2004) 121 Cal.App.4th 452, 461-462; Kawasho Internat., U.S.A., Inc. v. Lakewood Pipe Service, Inc., supra, 152 Cal.App.3d at p. 791.)

Damages for Preordered Packaging Materials

Fantasia asserts the court improperly awarded roughly $75,000 in damages relating to packaging materials that XEO preordered under purchase order No. 855 for units which ultimately were never manufactured because of the parties' disputes. It claims the evidence showed XEO destroyed the materials and, therefore, the court was required to deny reimbursement under section 2709, subdivision (2). Alternatively, Fantasia argues the court should have imposed consequences for spoliation of evidence.

Section 2709 provides a remedy for an aggrieved seller to recover the agreed price when a buyer of goods fails to pay the price as it becomes due. The remedy applies to goods that have been accepted by the buyer (id., subd. (1)(a)) and to goods "identified to the contract if the seller is unable after reasonable effort to resell them at a reasonable price" (id., subd. (1)(b), italics added). Section 2709, subdivision (2) provides: "Where the seller sues for the price he must hold for the buyer any goods which have been identified to the contract and are still in his control . . . ." (Italics added.)

Here is the full text of section 2709. "(1) When the buyer fails to pay the price as it becomes due the seller may recover, together with any incidental damages under the next section, the price. [¶] (a) Of goods accepted or of conforming goods lost or damaged within a commercially reasonable time after risk of their loss has passed to the buyer; and [¶] (b) Of goods identified to the contract if the seller is unable after reasonable effort to resell them at a reasonable price or the circumstances reasonably indicate that such effort will be unavailing. [¶] (2) Where the seller sues for the price he must hold for the buyer any goods which have been identified to the contract and are still in his control except that if resale becomes possible he may resell them at any time prior to the collection of the judgment. The net proceeds of any such resale must be credited to the buyer and payment of the judgment entitles him to any goods not resold. [¶] (3) After the buyer has wrongfully rejected or revoked acceptance of the goods or has failed to make a payment due or has repudiated (Section 2610), a seller who is held not entitled to the price under this section shall nevertheless be awarded damages for nonacceptance under the preceding section."

Thus, the requirement that goods be held for the buyer when suing for the price applies only to goods which have been "identified to the contract." Identification of goods to a contract is a term of art under the California Uniform Commercial Code. "In the absence of explicit agreement identification occurs [¶] . . . [¶] (b) If the contract is for the sale of future goods . . . when goods are shipped, marked or otherwise designated by the seller as goods to which the contract refers." (§ 2501, subd. (1)(b), italics added.)

First, the "goods to which the contract refers" are described in purchase order No. 855 as "E-Hookah[s]," not merely the packaging materials for the e-hookahs. Second, Fantasia does not cite any evidence that XEO somehow designated the packaging materials as goods identified to the contract. (See § 2704.) Section 2704 distinguishes between conforming (finished) goods (id., subd. (1)(a) and goods merely "intended for the particular contract, even though those goods are unfinished" (id., subd. (1)(b).) As to conforming (finished) goods in the possession of the seller, the seller may unilaterally identify those goods to the contract, thereby allowing an action for the price under section 2709, with the concomitant obligation to hold the finished goods for the buyer. Here, however, the packaging materials in XEO's possession were unfinished goods which, under section 2704, subdivision (1)(b), allowed XEO to treat the packaging materials as the subject of resale under section 2706. Alternatively, as discussed below, where resale is not possible, XEO was entitled to recover damages under section 2708.

Thus, unlike the finished goods accepted by Fantasia, the packaging materials were neither "identified to the contract," nor accepted by Fantasia. Accordingly, an action for the price under Section 2709 was not available with respect to these materials, and the obligation to hold these materials for the buyer under section 2709, subdivision (2), did not arise.

The evidence was undisputed that the packaging materials, described as "stickers, labels, boxes, liquids" had either Fantasia's name or one of Fantasia's trademarks on them. Thus, they were "not resuable in any way," except, of course, by Fantasia. XEO was unable to "use them or sell them to anybody else." Accordingly, XEO offered to sell the packaging materials to Fantasia, but "there was no interest in helping [XEO] to . . . mitigate the damages."

Because of Fantasia's repudiation, and the packaging materials not being identified to the contract, XEO could not sue for the price. And in the absence of a market for the packaging materials, XEO could not resell the goods. But XEO was nevertheless entitled to recover damages under section 2708. Section 2708, subdivision (1), generally allows the aggrieved seller to recover the difference between the market price and the contract price. Here, there was no market, and no contract price for the packaging materials as separate components. Under these conditions, section 2708, subdivision (2) is properly invoked. (Bead Chain Mfg. Co. v. Saxton Products, Inc. (Conn. 1981) 183 Conn. 266, 277 [439 A.2d 314, 320] ["[A] seller of uncompleted components whose market is composed solely of the buyer in breach cannot adequately measure his damages in any other way" than under § 2708, subd. (2)].) That statute provides: "If the measure of damages provided in subdivision (1) [i.e., difference between market price and contract price] is inadequate to put the seller in as good a position as performance would have done then the measure of damages is the profit (including reasonable overhead) which the seller would have made from full performance by the buyer . . . ." (§ 2708, subd. (2).) This is precisely what XEO did. It invoiced Fantasia for the actual cost of the materials "with our profit." Fantasia has not cited any evidence to challenge either the actual cost of the packaging materials or the amount of the markup. Thus, substantial evidence supports the damages awarded XEO for the packaging materials.

As to Fantasia's spoliation argument, whether a party has destroyed evidence and, if so, what inference to draw as a result, are both matters left to the trier-of-fact. (Evid. Code, § 413; Cedars-Sinai Medical Center v. Superior Court (1998) 18 Cal.4th 1, 11-12.) Thus, we apply a substantial evidence standard of review.

XEO presented evidence concerning the materials at issue—evidence which Fantasia did not rebut. XEO's president explained that the materials consisted of 11 palettes of custom packaging imprinted with Fantasia's trademarked name and flavors, pictures of which were provided to Fantasia during discovery. It preordered them in order to get a better price and facilitate completion of manufacturing and shipment of the finished products as soon as possible, as Fantasia requested. He further related that because Fantasia was the only one who could use such packaging, XEO attempted to sell it to Fantasia after the parties ceased performing under the purchase order contracts. Fantasia rejected the offer. Thereafter, XEO photographed the materials and destroyed them in order to avoid paying storage fees. XEO also introduced a written invoice specifying the amount of each type of material and the associated costs.

The court considered the above evidence and decided it did not warrant an inference unfavorable to XEO. Substantial evidence supports the court's implied finding that XEO simply made the best of a bad circumstance in a commercially reasonable way. Moreover, it is unclear how Fantasia could have used 11 palettes of custom packaging as evidence in support of its defense. Thus, substantial evidence supports the court's finding that XEO was entitled to damages concerning the packaging materials despite XEO's admission it had destroyed the physical items.

Intentional and Negligent Misrepresentation

The court found in favor of XEO on Fantasia's cross-claims concerning intentional and negligent misrepresentation. Fantasia does not argue there is insufficient evidence to support that conclusion, but instead asserts the court's statement of decision on these issues is fatally flawed because it is too conclusory.

"A trial court's statement of decision must explain 'the factual and legal basis for its decision as to each of the principal controverted issues at trial.' [Citation.] It will be deemed adequate 'if it fairly discloses the determinations as to the ultimate facts and material issues in the case.'" (Altavion, Inc. v. Konica Minolta Systems Laboratory Inc. (2014) 226 Cal.App.4th 26, 45.) "[T]he term 'ultimate fact' generally refers to a core fact, such as an essential element of a claim. [Citation.] Ultimate facts are distinguished from evidentiary facts and from legal conclusions." (Central Valley General Hospital v. Smith (2008) 162 Cal.App.4th 501, 513.)

The court's statement of decision addressed both intentional and negligent representation. As to the former, it expressly stated, "The Court did not find any evidence of intentional misrepresentation." Though there was no elaborate analysis, this adequately disclosed the court's determination concerning ultimate facts key to Fantasia's claim—whether there was a misrepresentation by XEO, and, if so, whether it was done with the intent to deceive Fantasia. (Central Valley General Hospital v. Smith, supra, 162 Cal.App.4th at p. 513.) Contrary to Fantasia's assertion, the court was not required to address each piece of Fantasia's proffered evidence or each element of the cause of action. (Republic Indemnity Co. v. Empire Builders Corp. (1985) 167 Cal.App.3d 1163, 1167 ["A statement of ultimate, not evidentiary, facts is all that has ever been required"]; Altavion, Inc. v. Konica Minolta Systems Laboratory Inc., supra, 226 Cal.App.4th at p. 45.)

Concerning negligent misrepresentation, the written decision states "there was no evidence to support this claim." Given the court's conclusion that there was a lack of evidence, such a statement was sufficient. While the court certainly could have elaborated further concerning the specific types of evidence that were lacking (e.g., representation, falsity, reliance), it was not obligated to do so. And, even if we were to find error, Fantasia does not demonstrate such error would be reversible under the circumstances. (See Cal. Const., art. VI, § 13 ["[n]o judgment shall be set aside, or new trial granted, in any cause, . . . for any error as to any matter of procedure, unless, after an examination of the entire cause, including the evidence, the court shall be of the opinion that the error complained of has resulted in a miscarriage of justice"]; Hellman v. La Cumbre Golf & Country Club (1992) 6 Cal.App.4th 1224, 1230 [inadequate statement of decision subject to harmless error standard]; Century Surety Co. v. Polisso (2006) 139 Cal.App.4th 922, 963 ["[n]or will this court act as counsel for appellant by furnishing a legal argument as to how the trial court's ruling was prejudicial"].)

DISPOSITION

The judgment is affirmed. Respondent is entitled to its costs on appeal.

IKOLA, J. WE CONCUR: FYBEL, ACTING P. J. THOMPSON, J.


Summaries of

XEO Int'l, Ltd. v. Fantasia Distribution, Inc.

COURT OF APPEAL OF THE STATE OF CALIFORNIA FOURTH APPELLATE DISTRICT DIVISION THREE
Nov 6, 2018
No. G054615 (Cal. Ct. App. Nov. 6, 2018)
Case details for

XEO Int'l, Ltd. v. Fantasia Distribution, Inc.

Case Details

Full title:XEO INTERNATIONAL, LTD., Plaintiff, Cross-defendant and Respondent, v…

Court:COURT OF APPEAL OF THE STATE OF CALIFORNIA FOURTH APPELLATE DISTRICT DIVISION THREE

Date published: Nov 6, 2018

Citations

No. G054615 (Cal. Ct. App. Nov. 6, 2018)

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