Leadertex, Inc. v. Morganton Dyeing & Finishing Corp.

• Decision Date: 28 September 1995
• Docket Number: No. 1170,D,1170
• Citation: 67 F.3d 20
• Parties: LEADERTEX, INC., Plaintiff-Counter-Defendant-Appellee, v. MORGANTON DYEING & FINISHING CORP., Defendant-Counter-Claimant-Appellant, Does 1 Through 25, Inclusive, Defendants. ocket 94-7949.
• Court: U.S. Court of Appeals — Second Circuit

Page 20

67 F.3d 20

LEADERTEX, INC., Plaintiff-Counter-Defendant-Appellee, v. MORGANTON DYEING & FINISHING CORP.,

Defendant-Counter-Claimant-Appellant,

Does 1 Through 25, Inclusive, Defendants.

No. 1170, Docket 94-7949.

United States Court of Appeals,

Second Circuit.

Argued Feb. 6, 1995.

Decided Sept. 28, 1995.

Donald L. Kreindler, New York City (David P. Lennon, Kreindler & Relkin, P.C., of counsel), for Appellant Morganton Dyeing & Finishing Corp.

William C. Kratenstein, New York City (Becker Ross Stone DeStefano & Klein; Morgan D. Bottehsazan, Great Neck, New York, of counsel), for Appellee Leadertex, Inc.

Before: KEARSE, CARDAMONE, and MAHONEY, Circuit Judges.

CARDAMONE, Circuit Judge:

Before us is an order from the Southern District of New York (Duffy, J.) that denied a belated motion to compel arbitration. Defendant had made the motion after plaintiff brought suit against it for breach of contract, breach of warranty, negligence, conversion, replevin, and defamation. We must decide whether the party seeking to enforce arbitration has in this case waived that right.

Defendant Morganton Dyeing & Finishing Corp. (Morganton) initially sought arbitration eight months after plaintiff's action was commenced, and seven months after successfully removing the case into federal court. Plaintiff Leadertex, Inc. during those same months suffered a substantial fall-off of its fabric-converting business because, pending adjudication, nearly its entire stock of inventory languished in Morganton's warehouse. Judge Duffy attributed this business injury to Morganton's delay in seeking to compel arbitration. He therefore concluded that as a result of its tardiness in seeking to compel arbitration, Morganton had waived its right to that forum for relief. For the reasons given below, we affirm.

BACKGROUND

I Business Dealings Between the Parties

Plaintiff Leadertex, Inc. is a small family-owned New York corporation in the textile converting business. It purchases raw fabrics, known in the business as "greige goods," which it arranges to have dyed and finished, and then sells the finished goods to various garment manufacturers. Defendant Morganton, a North Carolina corporation licensed and qualified to do business in the state of New York, is a fabric dyer. It is one of the dye houses that does commission dyeing and finishing work for Leadertex.

The business dealings between Morganton and Leadertex date back to 1987. Under a long-standing arrangement between them, Morganton warehoused large quantities of fabrics imported by Leadertex, pending instructions either to ship the greige goods to other processing companies for finishing, or to dye and finish, per specification, certain fabrics itself and to ship the finished goods to Leadertex customers. Morganton generally provided warehousing without charge. Such an arrangement is standard in the fabric converting industry.

As goods were delivered to Morganton, it would offer its standard "Quotation and Contract for Dyeing and Finishing," setting forth the current prices for its services. When Morganton received specific processing orders for any of the fabrics, it would send a "Supplement to Quotation and Contract," listing the current price for the processes requested. Morganton delivered approximately 19 "contract" forms and 81 "supplemental contract" forms to Leadertex during their course of dealings. Although Leadertex never signed any of these forms, it continuously dealt with Morganton in accordance with the contract terms.

Each of Morganton's contract forms contains arbitration and lien provisions that are A dispute arose concerning defective goods. It climaxed in early 1993 when Leadertex customers returned substantial orders of fabric as being of unacceptable quality. As a consequence, Leadertex refused to pay Morganton processing charges for goods it alleged were defectively dyed. Morganton insisted that most of the defects in the finished goods were due to the substandard quality of the greige goods supplied it by Leadertex. On a number of occasions from late 1991 through early 1993, Morganton wrote Leadertex to complain of receiving fabric from Leadertex's foreign suppliers with various defects, including improper bleaching, creases, holes, mildew, spots, dirt, burns, and foreign yarn. The letters asserted that Morganton would process this fabric "totally at [Leadertex's] risk." The record does not make clear whether any of the letters referred to the same goods ultimately rejected by Leadertex customers.

                standard in the finishing industry.  The lien provision permits Morganton to hold its customer's goods as security for non-payment of invoices for dyeing and finishing work it has performed.  The broadly worded arbitration clause provides:  "Any controversy or claim arising under or in relation to this order or contract, or any modification thereof, shall be settled by arbitration."   The contracts also state that they are offered "subject to all the terms and conditions [contained in the Quotation and Contract], including the provisions for arbitration " (emphasis added), and the supplemental contracts contain almost identical language incorporating the arbitration clause
                

When Leadertex refused to pay the disputed invoices, Morganton exercised its bailee's lien and refused to release any fabric on Leadertex's orders. On April 20, 1993 Morganton's attorneys sent a letter advising Leadertex that they had been retained to enforce the unpaid invoices. Leadertex filed the instant suit in state court shortly thereafter.

II History of the Litigation

A. Procedural Account

We turn now to an account of the legal proceedings that have thus far ensued. On May 1, 1993 Leadertex commenced an action against Morganton in the New York Supreme Court, County of New York, for breach of contract, negligence, and breach of warranty. The complaint alleged that Leadertex had suffered $953,000 in lost sales due to defectively dyed goods, plus unspecified loss of business and other consequential damages. One month later on June 3, 1993 Morganton had the case removed to federal court in the Southern District of New York where it filed a counterclaim for $231,156.40 in unpaid dyeing charges.

In July 1993 plaintiff sought leave to file an amended complaint asserting replevin and conversion claims with respect to 102,050 yards of greige goods and 131,200 yards of finished goods held in Morganton's warehouse. The amended complaint also added charges against unnamed defendants (Does "1" through "25") in relation to a newly-included defamation claim. The defamation claim was based on slanderous statements Morganton allegedly had made in February 1993, when a representative of Jones New York, one of the Leadertex customers that had rejected defective finished fabric, visited the Morganton plant in North Carolina, supposedly "to examine the goods and resolve the quality dispute." In the course of that representative's inspection visit, according to Leadertex's amended complaint, Morganton made a statement to the effect that

Leadertex is dishonest in their conduct of business, incompetent and incapable to supply manufacturers with goods conforming in color and quality with that requested by its customers, and that Leadertex is in practice of selling goods defective in quality, and that Leadertex willingly and with intent to defraud Jones New York shipped them defective, non-conforming goods.

The amended complaint was entered by leave of court on September 13, 1993. In its answer to the amended complaint, filed November 1, 1993, Morganton raised numerous affirmative defenses, including defenses based on disclaimers and exculpatory provisions contained in its standard contract Meanwhile, at a scheduling conference held in October 1993, a trial ready date was set for March 14, 1994, and the parties were ordered to conclude discovery by February 4, 1994. Morganton vigorously pursued discovery, submitting multiple prolix interrogatories and demands for document production, and scheduling depositions. Leadertex evaded discovery with almost equally energetic foot-dragging, producing only a handful of the documents requested, giving late and unresponsive answers to interrogatories or none at all, and failing to produce witnesses for scheduled depositions. Discovery was nonetheless completed.

forms. At that point--six months after defendant's suit had been commenced against it--Morganton had not asserted a defense based on the contractual right to compel arbitration.

In December 1993 Leadertex moved for partial summary judgment on its replevin claim for greige goods in Morganton's possession, asserting that the finished goods also retained by Morganton were of more than sufficient value to serve as security for the disputed invoices. Leadertex declared its business existence was threatened by the detention of goods representing the bulk of its inventory: it was experiencing severe cash flow problems, was unable to fill customer orders, and had seen its December sales drop more than 90 percent from the previous year, from $522,000 to $36,000. Leadertex alleged Morganton's action in detaining almost its entire stock was designed to "crush" it. Morganton responded to plaintiff's summary judgment motion in early January 1994 with a cross-motion to compel arbitration of all plaintiff's causes of action pending before the trial court.

B. District Court Ruling

By a memorandum and order issued August 17, 1994 Judge Duffy granted plaintiff's motion for partial summary judgment for replevin of its greige goods. The district court rejected Morganton's claim that the contractual lien granted it the right to retain the goods as security, finding that a provision allowing a merchant to hold disproportionately more security than was due amounted to a material alteration of the contract. Under New York law, new terms in a written confirmation can become part of the parties' agreement unless they ...