Opinion
No. 3-859 / 03-0354.
Filed December 24, 2003.
Appeal from the Iowa District Court for Polk County, D.J. Stovall, Judge.
Defendant appeals the district court's ruling challenging its finding classifying defendant as a lost volume seller but not awarding damages for lost profits. REVERSED AND REMANDED WITH DIRECTION.
Christopher Jannes of Davis, Brown, Koehn, Shors Roberts, P.C., Des Moines, for appellant.
Michael Sellers of Sellers Law Office, West Des Moines, for appellee.
Heard by Vogel, P.J., and Hecht and Vaitheswaran, JJ.
Cedar Forest Products Company appeals the district court's ruling challenging its finding classifying the company as a lost volume seller but not awarding damages for lost profits. As the district court fashioned an equitable remedy not contemplated under the Illinois statute, we reverse and remand with directions.
Background Facts.
Cedar Forest Products Company (CFP) manufactures pre-cut building packages for shelters, pavilions, gazebos, and other structures typically utilized in park, camp, and recreational facilities. The Jewish Federation of Greater Des Moines (Jewish Federation) contracted with CFP for the manufacture of a 3,500 square foot building with unique and customized schematics. With the signing of the Purchase and Sales Agreement, Jewish Federation sent CFP a deposit of $53,605. Shortly thereafter, it prematurely sent the remaining balance of $160,813 for a total contract price of $214,418. After a series of redesign discussions and change orders, Jewish Federation informed CFP it was rescinding the contract and requested return of all monies paid. CFP returned $160,530.54, but retained $53,887.46 as lost profits it would have made had Jewish Federation not breached the contract.
Jewish Federation filed an action for return of the remaining $53,887.46 claiming there had been no meeting of the minds and the agreement was merely a quote based on preliminary schematic drawings. CFP counterclaimed alleging breach of contract. Both parties filed motions for summary judgment. At the hearing, the district court found the agreement was a completely integrated contract which Jewish Federation had breached. The only issues at trial were whether CFP was a lost volume seller and what measure of damages, if any, should be awarded due to the breach of Jewish Federation. The district court found that CFP was a lost volume seller but, fashioning an equitable remedy, determined it was only entitled to an award of $13,470.17 for incidental damages. The court further limited CFP's award of attorney fees and costs. CFP appeals.
Scope of Review.
Our scope of review is for correction of errors at law. Iowa R. App. P. 6.4.
Discussion.
CFP agrees with the district court's finding that it is a lost volume seller but disagrees with the court's subsequent application of the law regarding the damages. CFP argues that because it is a lost volume seller it is entitled to damages for lost profits under 810 Illinois Compiled Statutes 5/2-708(2) (2001). Jewish Federation, while not directly addressing the relevant code sections, contends the incidental damages award is more than adequate under the circumstances.
Pursuant to the contract, Illinois law governs this litigation.
Jewish Federation asserts that the agreement was merely an estimate and that it was the prevailing party at trial. Because no cross-appeal was taken, these issues are not properly before us.
In anticipation of the building project, CFP purchased cedar paneling, insulation, floor plywood and cedar timber. It had not begun to assemble the building when Jewish Federation breached the contract. After the breach, CFP was able to resell the purchased items to other customers for the same price as called for in the Jewish Federation contract.
While the district court found CFP qualified as a lost volume seller, the court reasoned, [I]t would be unjust to allow [CFP] to recoup lost profits in a situation here where it has not even begun to partially assemble component parts into a specialty item. . . . [T]his Court does not believe that the lost volume seller theory was intended to apply to sellers who were in the process of preparing to assemble a specialty item.
(Emphasis added). Accordingly, the district court awarded CFP $13,470.17 in incidental damages rather than allowing lost profits as anticipated under 810 Illinois Compiled Statutes 5/2-708(2).
The primary issue on appeal is the proper measure of damages for a lost volume seller under these particular circumstances. The Illinois Commercial Code, like the Uniform Commercial Code (UCC), provides for liberal administration such that "the aggrieved party may be put in as good a position as if the other party had fully performed. . . ." 810 Ill. Comp. Stat. 5/1-106(1). According to the Illinois Code, [T]he measure of damages for non-acceptance or repudiation by the buyer is the difference between the market price at the time and place for tender and the unpaid contract price together with any incidental damages provided in this Article (Section 2-710), but less expenses saved in consequence of the buyer's breach.
Id. 5/2-708(1). However, if this amount 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, together with any incidental damages provided in this Article (Section 2-710), due allowance for costs reasonably incurred and due credit for payments or proceeds of resale.
Id. 5/2-708(2).
To resolve this issue, we look to case law construing the Illinois statute or similar statutory law in other jurisdictions. In R.E. Davis Chem. Corp. v. Diasonics, Inc., 826 F.2d 678 (N.D. Ill. 1987), the court used lost profits as the measure of damages pursuant to 810 Illinois Compiled Statutes 5/2-708(2) after the buyer repudiated. For the seller to recover lost profits, the court reasoned that the seller must establish that 1) it had the capacity to make the sale to the buyer as well as the sale to the resale buyer and 2) it would have been profitable for it to make both sales. R.E. Davis Chem. Corp., 826 F.2d at 684. Applying this test to the present case, the record reflects CFP was capable of manufacturing the building for Jewish Federation as well as its numerous other customers and it would have been profitable to do so.
Jewish Federation argues that CFP had not begun to assemble the purchased items into the contracted for building at the time of breach, therefore incidental damages were sufficient. However, this position is not supported by case law. Lost profits may be awarded on items yet to be manufactured. See City of Louisville v. Rockwell Mfg. Co., 482 F.2d 159, 165-66 (6th Cir. 1973) (allowing lost profit award on not yet manufactured parking meters); Anchorage Centennial Dev. Co. v. Van Wormer Rodrigues, Inc., 443 P.2d 596, 599 (Alaska 1968) (holding that lost profit damages extends to items not yet produced); Kvassay v. Murray, 808 P.2d 896, 433 (Kan. Ct. App. 1991) (allowing for lost profit damages for items to be manufactured because the goal is to place seller in as good of a position as if the buyer had not breached); Paramount Lithographic Plate Serv., Inc. v. Hughes Printing Co., 22 U.C.C. Rep. Serv. 1129 (Ct. of Common Pleas of Pa. 1977) (applying lost profit damages under UCC § 2-708(2) to a breach of contract for the sale of goods not yet manufactured in light of § 1-106(1) stating that the aggrieved party may be put in as good a position as if the other party had fully performed).
The rationale for these holdings appears to be that a lost volume seller can handle a certain number of sales during the year and when one negotiated sale is lost, the seller simply cannot recoup that anticipated profit. Instead, the seller is one sale short of normal capacity. See R.E. Davis Chem. Corp., 826 F.2d at 683 (defining a lost volume seller as "one that has a predictable and finite number of customers and that has the capacity either to sell to all new buyers or to make the one additional sale represented by the resale after the breach"). So to put the seller in the position he would have been but for the breach, the Illinois statute provides the seller a remedy which includes the anticipated profit as well as incidental expenses and costs incurred. Therefore, the district court erred in its application of Illinois law. As a lost volume seller, CFP is entitled to its lost profits of $53,887.46 pursuant to 810 Illinois Compiled Statutes 5/2-708(2) which includes the incidental damages of $13,470.17 awarded by the district court. See id. (determining that when a "breach effectively cost[s] the seller a `profit,' . . . the seller can only be made whole by awarding it damages in the amount of its `lost profit' under 2-708(2)."). As such, we reverse the damage portion of the district court ruling by increasing the award to CFP by an additional $40,417.29.
The statutory language in 810 Illinois Compiled Statutes 5/2-708(2) providing for lost profits, "together with . . . due credit for payments or proceeds of resale" does not apply to a lost volume seller. Teradyne, Inc. v. Teledyne Indus., Inc., 676 F.2d 865, 868 (1st Cir. 1982)); Famous Knitwear Corp. v. Drug Fair, Inc., 493 F.2d 251, 254 n. 7 (4th Cir. 1974); Snyder v. Herbert Greenbaum Assoc., Inc., 380 A.2d 618, 625-26 (Md. Ct. Spec. App. 1977); National Controls, Inc. v. Commodore Bus. Mach., Inc., 209 Cal.Rptr. 636, 643 (Cal. Ct. App. 1985) (citing Neri v. Retail Marine Corp., 285 N.E.2d 311, 314 n. 2 (N.Y. 1985).
CFP next argues the district court's failure to award lost profits resulted in an improper reduction in the amount of attorney fees and costs awarded. The district court awarded CFP $5,000 in attorney fees and $801.98 in costs, reduced from a requested amount of $38,120.27 in attorney fees and costs. The award of attorney fees and costs is based on the contract language allowing the prevailing party to recoup reasonable attorney fees and costs. As the district court found, CFP was the prevailing party. However, because we reverse the district court by substantially increasing the amount of damages allowed under the statute, we agree with CFP that its award of attorney fees should be substantially increased. We remand for the district court to reconsider the award of reasonable attorney fees in light of the superior prevailing position CFP is in following this decision.