Appeal from a judgment of the United States District Court for the Eastern District of New York (Joseph M. McLaughlin, Judge), entered after a jury trial, awarding plaintiff $432,365.04 in damages for breach of contract and fraud. The questions on appeal are whether a transaction that took place six weeks after the breach of contract could properly be used to calculate resale damages under Section 2-706 of the Uniform Commercial Code, where the goods identified to the contract were sold the day after the breach, and whether the fraud verdict was supported by legally sufficient evidence.
Timbers, Winter and Altimari, Circuit Judges.
This diversity case, arising out of an acrimonious commercial dispute, presents the question whether a sale of goods six weeks after a breach of contract may properly be used to calculate resale damages under Section 2-706 of the Uniform Commercial Code, where goods originally identified to the broken contract were sold on the day following the breach. Defendants The Belcher Company of New York, Inc. and Belcher New Jersey, Inc. (together "Belcher") appeal from a judgment, entered after a jury trial before Judge McLaughlin, awarding plaintiff Apex Oil Company ("Apex") $432,365.04 in damages for breach of contract and fraud in connection with an uncompleted transaction for heating oil. Belcher claims that the district court improperly allowed Apex to recover resale damages and that Apex failed to prove its fraud claim by clear and convincing evidence. We agree and reverse.
Apex buys, sells, refines and transports petroleum products of various sorts, including No. 2 heating oil, commonly known as home heating oil. Belcher also buys and sells petroleum products, including No. 2 heating oil. In February 1982, both firms were trading futures contracts for No. 2 heating oil on the New York Mercantile Exchange ("Merc"). In particular, both were trading Merc contracts for February 1982 No. 2 heating oil -- i.e., contracts for the delivery of that commodity in New York Harbor during that delivery month in accordance with the Merc's rules. As a result of that trading, Apex was short 315 contracts, and Belcher was long by the same amount. Being "short" one contract for oil means that the trader has contracted to deliver one thousand barrels at some point in the future, and being "long" means just the opposite -- that the trader has contracted to purchase that amount of oil. If a contract is not liquidated before the close of trading, the short trader must deliver the oil to a long trader (the exchange matches shorts with longs) in strict compliance with Merc rules or suffer stiff penalties, including disciplinary proceedings and fines. A short trader may, however, meet its obligations by entering into an "exchange for physicals" ("EFP") transaction with a long trader. An EFP allows a short trader to substitute for the delivery of oil under the terms of a futures contract the delivery of oil at a different place and time.
Apex was matched with Belcher by the Merc, and thus became bound to produce 315,000 barrels of No. 2 heating oil meeting Merc specifications in New York Harbor. Those specifications required that oil delivered in New York Harbor have a sulfur content no higher than 0.20%. Apex asked Belcher whether Belcher would take delivery of 190,000 barrels of oil in Boston Harbor in satisfaction of 190 contracts, and Belcher agreed. At trial, the parties did not dispute that, under this EFP, Apex promised it would deliver the No. 2 heating oil for the same price as that in the original contract -- 89.70 cents per gallon -- and that the oil would be lifted from the vessel Bordeaux. The parties did dispute, and vigorously so, the requisite maximum sulfur content. At trial, Belcher sought to prove that the oil had to meet the New York standard of 0.20%, while Apex asserted that the oil had to meet only the specifications for Boston Harbor of not more than 0.30% sulfur.
The Bordeaux arrived in Boston Harbor on February 9, 1982, and on the next day began discharging its cargo of No. 2 heating oil at Belcher New England, Inc.'s terminal in Revere, Massachusetts. Later in the evening of February 10, after fifty or sixty thousand barrels had been offloaded, an independent petroleum inspector told Belcher that tests showed the oil on board the Bordeaux contained 0.28% sulfur, in excess of the New York Harbor specification. Belcher nevertheless continued to lift oil from the ship until eleven o'clock the next morning, February 11, when 141,535 barrels had been pumped into Belcher's terminal. After pumping had stopped, a second test indicated that the oil contained 0.22% sulfur -- a figure within the accepted range of tolerance for oil containing 0.20% sulfur. (Apex did not learn of the second test until shortly before trial.) Nevertheless, Belcher refused to resume pumping, claiming that the oil did not conform to specifications.
After Belcher ordered the Bordeaux to leave its terminal, Apex immediately contacted Cities Service. Apex was scheduled to deliver heating oil to Cities Service later in the month and accordingly asked if it could satisfy that obligation by immediately delivering the oil on the Bordeaux. Cities Service agreed, and that oil was delivered to Cities Service in Boston Harbor on February 12, one day after the oil had been rejected by Belcher. Apex did not give notice to Belcher that the oil had been delivered to Cities Service.
Meanwhile, Belcher and Apex continued to quarrel over the portion of the oil delivered by the Bordeaux. Belcher repeatedly informed Apex, orally and by telex, that the oil was unsuitable and would have to be sold at a loss because of its high sulfur content. Belcher also claimed, falsely, that it was incurring various expenses because the oil was unusable. In fact, however, Belcher had already sold the oil in the ordinary course of business. Belcher nevertheless refused to pay Apex the contract price of $5,322,200.27 for the oil it had accepted, and it demanded that Apex produce the remaining 48,000 barrels of oil owing under the contract. On February 17, Apex agreed to tender the 48,000 barrels if Belcher would both make partial payment for the oil actually accepted and agree to negotiate as to the price ultimately to be paid for that oil. Belcher agreed and sent Apex a check for $5,034,997.12, a sum reflecting a discount of five cents per gallon from the contract price. However, the check contained an endorsement stating that "the acceptance and negotiation of this check constitutes full payment and final settlement of all claims" against Belcher. Apex refused the check, and the parties returned to square one. Apex demanded full payment; Belcher demanded that Apex either negotiate the check or remove the discharged oil (which had actually been sold) and replace it with 190,000 barrels of conforming product. Apex chose to take the oil and replace it, and on February 23 told Belcher that the 142,000 barrels of discharged oil would be removed on board the Mersault on February 25.
By then, however, Belcher had sold the 142,000 barrels and did not have an equivalent amount of No. 2 oil in its entire Boston terminal. Instead of admitting that it did not have the oil, Belcher told Apex that a dock for the Mersault was unavailable. Belcher also demanded that Apex either remove the oil and pay terminalling and storage fees, or accept payment for the oil at a discount of five cents per gallon. Apex refused to do either. On the next day, Belcher and Apex finally reached a settlement under which Belcher agreed to pay for the oil discharged from the Bordeaux at a discount of 2.5 cents per gallon. The settlement agreement also resolved an unrelated dispute between an Apex subsidiary and a subsidiary of Belcher's parent firm, The Coastal Corporation. It is this agreement that Apex now claims was procured by fraud.
After the settlement, Apex repeatedly contacted Belcher to ascertain when, where and how Belcher would accept delivery of the remaining 48,000 barrels. On March 5, Belcher informed Apex that it considered its obligations under the original contract to have been extinguished, and that it did not "desire to purchase such a volume [the 48,000 barrels] at the offered price." Apex responded by claiming that the settlement did not extinguish Belcher's obligation to accept the 48,000 barrels. In addition, Apex stated that unless Belcher accepted the oil by March 20, Apex would identify 48,000 barrels of No. 2 oil to the breached contract and sell the oil to a third party. When Belcher again refused to take the oil, Apex sold 48,000 barrels to Gill & Duffus Company. This oil was sold for delivery in April at a price of 76.25 cents per gallon, 13.45 cents per gallon below the Belcher contract price.
On October 7, 1982, Apex brought this suit in the Eastern District, asserting breach of contract and fraud. The breach-of-contract claim in Apex's amended complaint contended that Belcher had breached the EFP, not in February, but in March, when Belcher had refused to take delivery of the 48,000 barrels still owing under the contract. The amended complaint further alleged that "at the time of the breach of the Contract by Belcher the market price of the product was $.7625 per gallon," the price brought by the resale to Gill & Duffus on March 23. Amended Complaint paras. 25-26. In turn, the fraud claim asserted that Belcher had made various misrepresentations -- that the Bordeaux oil was unfit, and unusable by Belcher; and that consequently Belcher was suffering extensive damages and wanted the oil removed -- upon which Apex had relied when it had agreed to settle as to the 142,000 barrels lifted from the Bordeaux. Apex asserted that as a result of the alleged fraud it had suffered damages of 2.5 cents per gallon, the discount agreed upon in the settlement.
The case went to trial before Judge McLaughlin and a jury between February 3 and February 13, 1986. As it had alleged in its pleadings, Apex asserted that its breach-of-contract claim was based on an alleged breach occurring after February 11, 1982, the day Belcher rejected the oil on board the Bordeaux. Judge McLaughlin, however, rejected this theory as a matter of law. His view of the case was that Belcher's rejection of the Bordeaux oil occurred under one of two circumstances: (i) either the oil conformed to the sulfur specification, in which case Belcher breached; or (ii) the oil did not conform, in which case Apex breached. Judge McLaughlin reasoned that, if Belcher breached on February 11, then it could not have breached thereafter. If on the other hand Apex breached, then, Judge McLaughlin reasoned, only under the doctrine of cure, see N.Y.U.C.C. § 2-508 (McKinney 1964), could Belcher be deemed to have breached. Apex, however, waived the cure theory by expressly disavowing it (perhaps because it presumes a breach by Apex). Instead, Apex argued that, regardless of whether the Bordeaux oil had conformed, Belcher's refusal throughout February and March 1982 to accept delivery of 48,000 barrels of conforming oil, which Belcher was then still demanding, had constituted a breach of contract. Judge McLaughlin rejected this argument, which he viewed as simply "an attempt to reintroduce the cure doctrine."
In a general verdict, the jury awarded Apex $283,752.94 on the breach-of-contract claim, and $148,612.10 on the fraud claim, for a total of $432,365.04. With the addition of prejudgment interest, the judgment came to $588,566.29.
Belcher appeals from this verdict. Apex has not taken a cross-appeal from Judge McLaughlin's dismissal of its post-February 11 breach theories, however. The parties agree, therefore, that as the case comes to us, the verdict concerning the breach can be upheld only on the theory that, if Belcher breached the contract, it did so only on February 11, 1982,*fn1 and that the oil sold to Gill & Duffus on March 23 was identified to the broken contract.
The Uniform Commercial Code, adopted by New York in 1964, provides various remedies to sellers for default by buyers. An aggrieved seller may, for example, withhold delivery of goods, cancel the contract, recover the unpaid price of accepted goods, or recover damages for nonaccepted or repudiated goods based on their market price. See generally N.Y.U.C.C. § 2-703 (McKinney 1964). In addition, a seller may, as Apex seeks to do, fix its damages by reselling the goods and recovering from the buyer the difference between the resale price and the contract price. Specifically, Section 2-706 of the Code provides in pertinent part:
(1) Under the conditions stated in Section 2-703 on seller's remedies, the seller may resell the goods concerned or the undelivered balance thereof. Where the resale is made in good faith and in a commercially reasonable manner the seller may recover the difference between the resale price and the contract price together with any incidental damages allowed under the provisions of this Article (Section 2-710), but less expenses saved in consequence of the buyer's breach.
(2) Except as otherwise provided in subsection (3) or unless otherwise agreed resale may be at public or private sale including sale by way of one or more contracts to sell or of identification to an existing contract of the seller. Sale may be as a unit or in parcels and at any time and place and on any terms but every aspect of the sale including the method, manner, time, place and terms must be commercially reasonable. The resale must be reasonably identified as referring to the broken contract, but it is not necessary that the goods be in existence or that any or all of them have been identified to the contract before the breach.
(3) Where the resale is at private sale the seller must give the buyer reasonable notification of his intention to resell.
Id. § 2-706 (emphasis added).
Belcher's principal argument on appeal is that the district court erred as a matter of law in allowing Apex to recover resale damages under Section 2-706. Specifically, Belcher contends that the heating oil Apex sold to Gill & Duffus in late March of 1982 was not identified to the broken contract. According to Belcher, the oil identified to the contract was the oil aboard the Bordeaux -- oil which Apex had sold to Cities Service on the day after the breach. In response, Apex argues that, because heating oil is a fungible commodity, the oil sold to Gill & Duffus was "reasonably identified" to the contract even though it was not the same oil that had been on board the Bordeaux. We agree with Apex that, at least with respect to fungible goods, identification for the purposes of a resale transaction does not necessarily require that the resold goods be the exact goods that were rejected or repudiated. Nonetheless, we conclude that as a matter of law the oil sold to Gill & Duffus in March was not reasonably identified to the contract breached on February 11, and that the resale was not commercially reasonable.
Resolving the instant dispute requires us to survey various provisions of the Uniform Commercial Code. The first such provision is Section 2-501, which defines "identification" and states in pertinent part:
(1) The buyer obtains a special property and an insurable interest in goods by identification of existing goods as goods to which the contract refers even though the goods so identified are non-conforming and he has an option to return or reject them. Such identification can be made at any time and in any manner explicitly agreed to by the parties. In the absence of explicit agreement identification occurs
(a) when the contract is made if it is for the sale of goods already existing and identified;
(b) if the contract is for the sale of future goods other than those described in paragraph (c) [crops and livestock], when goods are shipped, marked or otherwise designated by the seller as goods to which the contract refers ;
Id. § 2-501 (emphasis added). The Bordeaux oil was unquestionably identified to the contract under Section 2-501 (b), and Apex does not assert otherwise. Nevertheless, Apex argues that Section 2-501 "has no application in the context of the Section 2-706 resale remedy," because Section 2-501 defines identification only for the purpose of establishing the point at which a buyer "obtains a special property and an insurable interest in goods." N.Y.U.C.C. § 2-501. This argument has a facial plausibility but ignores Section 2-103, which contains various definitions, and an index of other definitions, of terms used throughout Article 2 of the Code. With regard to "identification," Section 2-103(2) provides that the "definition applying to this Article " is set forth in Section 2-501. Id. § 2-103 (emphasis added).
Section 2-501 thus informs us that the Bordeaux oil was identified to the contract. It does not end our inquiry, however, because it does not exclude as a matter of law the possibility that a seller may identify goods to a contract, but then substitute, for the identified goods, identical goods that are then identified to the contract. The Third Circuit recognized such a possibility in Martin Marietta Corp. v. New Jersey National Bank, 612 F.2d 745 (3d Cir. 1979). In that case, plaintiff Martin Marietta agreed to buy 50,000 tons of sand from Hollander Sand Associates. Martin Marietta subsequently placed signs reading "Property of Martin Marietta" on piles of sand at Hollander's plant. Because Hollander did not object to the signs, the court held that identification had occurred. Id. at 749-50. Yet Hollander's creditor argued that the identification had been negated because Hollander had nevertheless sold some of the identified sand to customers other than Marietta. Id. at 750. The court rejected this argument, relying upon Official Comment 5 to Section 2-501:
We feel this argument does not overcome the facts in this case. As already noted: "Undivided shares in an identified fungible bulk . . . can be sold. The mere making of a contract with reference to an undivided share in an identified bulk is enough." UCC § 2-501, comment 5. Although this passage deals with goods that exist when the contract is made, it demonstrates that treating fungibles as did Hollander here is consistent with an intent on the part of Hollander to identify or designate the goods. The crux of the passage is that if the seller removes some of the fungibles and later replaces them, that should not undercut the policy favoring identification, probably because such conduct is quite natural with fungibles and cannot be taken as an intent to negate the buyer's interest in the goods. In short, sale and replacement of the sand here does not overcome either the facts or the policy favoring identification.
Thus, Martin Marietta and Official Comment 5 suggest that, at least where fungible goods are concerned, a seller is not irrevocably bound to an identification once made. However, Martin Marietta and Comment 5 were not concerned with resales and thus do not inform us as to what constitutes "reasonable" identification under Section 2-706. The parties nevertheless argue that this issue is resolved by the Code's various provisions governing sellers' remedies. In particular, Belcher relies upon Section 2-706's statement that "the seller may resell the goods concerned," N.Y.U.C.C. § 2-706(1) (emphasis added), and upon Section 2-704, which states that "an aggrieved seller . . . may . . . identify to the contract conforming goods not already identified if at the time he learned of the breach they are in his possession or control." Id. § 2-704(1) (emphasis added). According to Belcher, these statements absolutely foreclose the possibility of reidentification for the purpose of a resale. Apex, on the other hand, points to Section 2-706's statement that "it is not necessary that the goods be in existence or that any or all of them have been identified to the contract before the breach." Id. § 2-706(2). According to Apex, this language shows that "the relevant inquiry to be made under Section 2-706 is whether the resale transaction is reasonably identified to the breached contract and not whether the goods resold were originally identified to that contract." Apex Br. at 25.
None of the cited provisions are dispositive. First, Section 2-706(1)'s reference to reselling "the goods concerned" is unhelpful because those goods are the goods identified to the contract, but which goods are so identified is the question to be answered in the instant case. Second, as to Section 2-704, the fact that an aggrieved seller may identify goods "not already identified" does not mean that the seller may not identify goods as substitutes for previously identified goods. Rather, Section 2-704 appears to deal simply with the situation described in Section 2-706(2) above, where the goods are not yet in existence or have not yet been identified to the contract. Belcher thus can draw no comfort from either Section 2-704 or Section 2-706(1). Third, at the same time, however, Section 2- 706(2)'s reference to nonexistent and nonidentified goods does not mean, as Apex suggests, that the original (prebreach) identification of goods is wholly irrelevant. Rather, the provision regarding nonexistent and nonidentified goods deals with the special ...