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April 23, 1999


The opinion of the court was delivered by: Trager, District Judge.


This is an action for monies owed for goods sold and delivered on an open account. In addition, plaintiff seeks to recover on two separate personal guaranties. Plaintiff has moved for summary judgment against all three defendants.


Plaintiff, Siemans Energy and Automation Inc. ("Siemans"), manufactures electrical products. Defendant, Coleman Electrical Supply Co., Inc. ("Coleman"), purchased and distributed electrical supplies. Coleman was owned and operated by two, now feuding, brothers William and Stanley Coleman. It appears that, since at least the onset of this action, Coleman has ceased to exist.

In order to induce Siemans to advance Coleman electrical products on an open account, William and Stanley both signed separate personal guaranties dated October 15, 1996. Each individual guaranty ensured all sums advanced by Siemans up to $75,000, plus interest, attorney's fees and costs of collection. Thereafter, Siemans began shipping electrical supplies to Coleman.

In 1998, after losing one of its major clients, Coleman began experiencing financial difficulties and started to fall behind in payments on its outstanding bills. In an attempt to lessen its debt, Coleman offered to return some of the unpaid goods to Siemans for resale. Siemans refused the returns and demanded payment of the outstanding debt along with payment on the personal guaranties. When defendants failed to pay, Siemans commenced this action. In its complaint, Siemans seeks $311,984.37 from defendant Coleman, the amount owed for goods shipped, $75,000 from defendant William, and $75,000 from defendant Stanley pursuant to their personal guaranties.

Defendant Coleman and defendant William assert two major defenses. First, they argue that Siemans had a duty to mitigate its damages and failed to do so. See Def. Mem. in Opp. to Pl. Mot. for Sum. J., p. 4. Second, they contend that Siemans violated the distribution agreement's covenant of good faith by engaging in "selective and disparate" pricing methods. Id. at p. 7. In addition, defendant Stanley claims that summary judgment is not warranted against him because Siemans' moving papers are insufficient, and more importantly, because there are material questions of fact pertaining to an alleged conspiracy by Siemans and William to defraud Stanley or that this question at least warrants further discovery.



Defendants Coleman and William submit one joint opposition to summary judgment. Defendants first contend that Siemans had a duty to mitigate defendants' damages by accepting Coleman's offer to return the unsold goods. Siemans counters that the inventory which Coleman offered to return was subject to the financing lien of Coleman's secured lender, CIT, and that, therefore, if Siemans had accepted the inventory it would have subjected itself to the possibility of an action for conversion by CIT. See Decl. of Douglas J. Kramer in Reply to Def. Opp. to Pl. Mot. for Sum. J., citing Aff. of Kenny Kirsh, dated 1/21/99.

Since the present case concerns the sale of goods, the duty to mitigate question is governed by § 2-709 of the Uniform Commercial Code ("U.C.C."). See N.Y. U.C.C. § 2-709 (McKinney's 1999). Specifically, § 2-709(1)(a) provides, in pertinent part, that "[w]hen the buyer fails to pay the price as it becomes due the seller may recover, together with any incidental damages . . . the price of goods accepted." Id. Clearly, since it is undisputed that Coleman accepted the goods shipped by Siemans, Siemans has the right to seek the amount due under the contract. While § 2-709(1)(b) provides that a seller may recover the price "of goods identified to the contract if the seller is unable after reasonable effort to resell them at a reasonable price," this section applies only to goods that have been identified but not actually shipped or accepted. Id. at § 2-709(1)(b). Thus, § 2-709(1)(b) is not applicable in this case, and there is no obligation under § 2-709 on the part of the seller to accept a return of previously accepted goods.

The distinction between subdivisions (a) and (b) of § 2-709, with respect to the duty to mitigate, is clearly displayed in Industrial Molded Plastic Products, Inc. v. J. Gross & Son Inc., 263 Pa.Super. 515, 398 A.2d 695 (1979), a case concerning a buyer who purchased 5,000,000 clothing clips from a manufacturer, but wrongfully failed to take possession of or pay for 4,228,000 of the clips. Because, in that case, the buyer had repeatedly given assurances that it intended to accept the clips, the court held that the clips had been deemed accepted. The Pennsylvania Superior Court, interpreting U.C.C. § 2-709(1)(a), held that although a duty exists to mitigate when dealing with goods that have merely been identified, "a seller of goods is [] entitled to recover the contract price due for goods accepted by the buyer." Id. at 522, 398 A.2d at 699 (emphasis added). Specifically, the court held that, "[u]nder the code, a buyer's acceptance of goods occurs, inter alia, when, after a reasonable opportunity to inspect the goods, the buyer fails to make an effective rejection of them. To preserve his rights, the seller is only obligated to tender the goods in accordance with the terms of the contract. The seller is under no obligation to resell accepted goods in order to maintain his action for price." Id. at 522, 398 A.2d at 699 (citations omitted) (emphasis added). Furthermore, in Unlaub Co., Inc., v. Sexton, 568 F.2d 72 (8th Cir. 1977), a case involving a contract for the sale of coal screen units, the Eighth Circuit, also interpreting U.C.C. § 2-709(1)(a), held that once the coal screen units had been accepted, the seller was entitled to recover the unpaid balance of the contract price and was "under no obligation to attempt a resale of accepted goods." Id. at 76 n. 3.

Attempting to prove Siemans did, indeed, have some sort of duty to mitigate — the source of which is unspecified — Coleman relies on Banker v. Nighswander, Martin and Mitchell, 37 F.3d 866 (2d Cir. 1994). In that case, the plaintiff hired defendant law firm to advise and represent it in its efforts to collect a debt owed on a promissory note. After the United States District Court for the Southern District of New Hampshire granted summary judgment to the debtors on the promissory note, plaintiff brought suit in the United States District Court for the District of Vermont, alleging that the law firm's advice concerning collection on the $350,000 note amounted to legal malpractice. Defendants argued that plaintiff had a duty to mitigate his damages by filing an appeal of the New Hampshire district court's decision. The Second Circuit, however, applying New Hampshire common law, construed the duty to mitigate to attach only in situations where the plaintiff could have avoided losses by "reasonable effort without undue risk, expense or humiliation," and found that the plaintiff was under no duty to mitigate his damages by retaining counsel, at his own expense, to file an appeal. See Banker, 37 F.3d at 872 (quoting Emery v. Caledonia Sand & Gravel Co., 117 N.H. 441, 448, 374 A.2d 929, 934 (1977)). Thus, it would appear that Banker supports not Coleman's, but Siemans', position. Here, had Siemans accepted the return of goods which were subject to a perfected security interest, Siemans would have opened itself up to liability for conversion, clearly an undue risk.*fn1 Case law is full of stilts by secured creditors against manufacturers and suppliers for wrongly converting the creditors' collateral. In those cases, the manufacturers accepted returned goods upon which the secured creditors had obtained liens. See, e.g., Hong Kong and Shanghai Banking Corp., Ltd., v. HFH USA Corp., 805 F. Supp. 133 (W.D.N.Y. 1992); W.N. Provenzo, Inc., v. Monahan & Co., Inc., (In re Monahan & Co., Ltd.), 29 B.R. 579 (Bankr.D.Mass. 1983); NationsBank of D.C., N.A. v. Blier (In re Creative Goldsmiths of Washington, D.C.), 178 B.R. 87 (Bankr.D.Md. 1995).

Furthermore, as noted, defendants have not cited, nor has research disclosed, any common law case holding that, in the absence of a prior agreement, a manufacturer is under a duty to mitigate its losses by accepting a return from its distributor of goods which have already been sold and delivered. To the contrary, Reforestacion Cafetalera Agro — Industrial S.A. v. Campesino Food Corp., 97 Civ. 5553, 1999 WL 4964 (S.D.N.Y. Jan. 6, 1999), explicitly held, without relying on the U.C.C., that a coffee seller is under no duty to mitigate its damages by accepting from a buyer the return of coffee that had been sold, delivered, and accepted. Accordingly, Siemans' duty to mitigate its damages did not involve an obligation to accept the return of already shipped products. As Coleman ...

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