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October 19, 1995

UTZ QUALITY FOODS, INC., Defendant. UTZ QUALITY FOODS, INC., Counter-Claimant, v. DANIEL HUBBARD, Counter-Defendant.

The opinion of the court was delivered by: LARIMER

 This is a breach-of-contract action brought by Daniel Hubbard ("Hubbard") against UTZ Quality Foods, Inc. ("UTZ"). Hubbard is a Bath, New York potato farmer and UTZ is a Pennsylvania corporation that purchases potatoes for processing into potato chips.

 On April 20, 1992, Hubbard executed a written contract to supply UTZ with a quantity of potatoes. The contract, a two-page, form-contract prepared by UTZ, required that the potatoes comply with certain quality standards. Hubbard claims that he was ready and able to deliver the required shipments of potatoes but that UTZ wrongfully and without basis rejected his potatoes. Hubbard contends that the sample potatoes provided to UTZ complied with all the quality requirements and, therefore, he complied with all terms of the contract. Hubbard claims that UTZ breached the contract and claims damages for the full contract price, $ 68,750.

 UTZ denies Hubbard's allegations. UTZ contends that the potatoes supplied by Hubbard did not meet the quality requirements of the contract and, therefore, they were properly rejected. UTZ filed a counterclaim against Hubbard contending that he breached the contract by failing to provide the potatoes required by contract.

 The case was tried to the Court for 5 days. The Court took testimony from 13 witnesses and received numerous documents and deposition testimony in evidence. This decision constitutes my findings of fact and conclusions of law pursuant to Fed. R. Civ. P. 52.


 April 20, 1992 Potato Contract.

 On April 20, 1992, Hubbard signed the two-page contract prepared by UTZ for farmers who produced potatoes for UTZ. UTZ is a large food processor in Hanover, Pennsylvania whose principal products are potato chips and other snack foods. The contract required Hubbard, beginning "approximately September 5, 1992" to ship 11,000 hundred-weight of Norwis (657) new chipping potatoes. Hubbard was to ship 2,000 to 4,000 hundred-weight per week with schedules to be arranged with UTZ. The price was $ 6.25 per hundred-weight, F.O.B. New York.

 The contract provided that the potatoes must meet certain quality standards. The buyer, UTZ, was entitled to reject the potatoes if they failed to do so. The potatoes had to meet United States Department of Agriculture ("USDA") standards for No. 1 white chipping potatoes. They had to have a minimum size and be free from bruising, rotting and odors which made them inappropriate for use in the processing of potato chips.

 The principal standard at issue in this lawsuit is the color standard. UTZ did not want dark potato chips but white or light ones and, therefore, the potatoes had to be the whitest or lightest possible color. The specific paragraph in the contract relating to color reads as follows:

"Color" shall be at least # 1 or # 2 on the 1978 Snack Food Association "Fry Color Chart."

 The Fry Color Chart is a color chart prepared by the Potato Chip/Snack Food Association which has five color designations. Color designation No. 1 is the best or lightest and the chart contains a visual depiction of potato chips with that color. The last color designation, No. 5, is the darkest reading. The contract required that the chips produced from Hubbard's potatoes must at least meet the No. 2 color designation.

 Claims of the Parties.

 In a nutshell, this lawsuit revolves around the color of the potato chips processed from potatoes submitted by Hubbard to UTZ. UTZ rejected all of the submitted potatoes claiming that they did not meet the required "color" standard. UTZ claims that the samples were too dark and did not meet UTZ' standards for producing white or light chips. Hubbard, on the other hand, contends that UTZ was arbitrary in its refusal to accept his potatoes and that his potatoes substantially complied with the color requirement. Hubbard contends in his pleadings that UTZ' rejection was motivated by concerns about price, not by quality. Hubbard alleges that after rejecting his potatoes, UTZ obtained similar potatoes from other sources at prices below his contract price.

 The ultimate factual issue in this case is whether the potato chips made from Hubbard's potatoes failed to meet the color specifications of the contract. In other words, was UTZ' rejection of the installments proper.

 In large part, this case turns on matters of law relating to the rights of a buyer, such as UTZ, to reject a seller's goods that are deemed to be non-conforming. The facts and the rights and obligations of the parties must be analyzed pursuant to the New York Uniform Commercial Code ("UCC").

 Before discussing the principal issue, whether UTZ wrongfully rejected Hubbard's potatoes, I will deal with several other issues raised by the parties at trial. Some are material, some are not. Based on the evidence and the reasonable inferences from that evidence, I find the following facts.

 Rejection of Hubbard's Potatoes.

 Thereafter, on October 1, 1992, Hubbard sent an entire truck load of potatoes to UTZ for processing under the contract. This installment consisted of 425-450 one-hundred-pound bags. Hubbard did not accompany this shipment to Pennsylvania but he was advised by telephone that none of the potatoes would be accepted due to their poor color.

 Hubbard requested that UTZ put the reasons for this rejection in writing and Smith did so in a letter dated October 1, 1992 (Ex. 404).

 Smith stated in that letter that the load had been rejected because the color (a No. 3 color designation) was unacceptable under the contract. Smith attached a photograph of the potato chips which had been processed and he returned a sample bag of those processed chips.

 Smith told Hubbard that he did not intend to cancel the entire contract but told Smith that more tests should be run on Hubbard's other fields to see if the contract could be filled with crop from those fields.

 About a week later, on October 7, Hubbard and his brother prepared a 1,000 pound load of potatoes and drove it to UTZ' facility in Pennsylvania to see if the potatoes would pass muster. Hubbard watched the chips go through UTZ' lines, and he made a video tape of some of the process. On that tape, Hubbard is heard to say that when he saw the chips being processed, they looked "better" than he thought they would. Once again, the chips were rejected, this time by an UTZ employee Kim R. DeGroft. DeGroft had been employed by UTZ for 16 years and in 1991 he was a "lead" person or supervisor in the Potato Department. He recalled that when these chips were processed, Hubbard commented that they should have been sold to Wise, a company that routinely accepted darker chips for processing. DeGroft testified that he had been inspecting potatoes for 5-6 years, and he believed Hubbard's lot was in the No. 3 color range.

 Hubbard testified that he became quite upset at this rejection, because he believed that the chips looked good enough to meet the No. 1 or No. 2 color designation. He insisted that UTZ perform an Agtron instrument reading on the chips. Although he was not allowed to witness the test, it was reported to Hubbard that the Agtron reading was 54.2, which was in the No. 3 color category, but just below the 55 designation which would have qualified as a No. 2 designation.

 After Hubbard returned from Pennsylvania, on October 8, 1992, he had a telephone conversation with Smith during which Smith told him that based on the samples, it did not appear that Hubbard's potatoes "would work" because they did not meet the contract specifications. Smith, however, told Hubbard that he could send additional samples and shipments to Pennsylvania for inspection. Smith, however, refused to arrange for the transportation but directed Hubbard to do so. Hubbard refused saying that was not the "custom" and that in the past UTZ had always sent trucks to the fields for delivery of the product. There was apparently some dispute between Smith and Hubbard as to whether Hubbard was in default on charges to certain trucking companies for other, unrelated shipments.

 After October 7, Hubbard never delivered, or caused to be delivered, any other shipments of potatoes for ...

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