Mitsui & Co. (USA) Inc. v. Hudson Tank Terminals Corp.

• Decision Date: 07 May 1986
• Docket Number: D,No. 529,529
• Citation: 790 F.2d 226
• Parties: , 1 UCC Rep.Serv.2d 1220 MITSUI & COMPANY (USA) INCORPORATED, Plaintiff, Geismar & Company Incorporated, Plaintiff-Intervenor-Appellant, v. HUDSON TANK TERMINALS CORPORATION, Defendant-Appellee. ocket 85-7588.
• Court: U.S. Court of Appeals — Second Circuit

Page 226

790 F.2d 226

54 USLW 2593, 1 UCC Rep.Serv.2d 1220

MITSUI & COMPANY (USA) INCORPORATED, Plaintiff Geismar & Company Incorporated, Plaintiff-Intervenor-Appellant, v. HUDSON TANK TERMINALS CORPORATION, Defendant-Appellee.

No. 529, Docket 85-7588.

United States Court of Appeals Second Circuit.

Argued Dec. 2, 1985.

Decided May 7, 1986.

Robert B. Davidson, New York City (Nancy Nelson, Baker & McKenzie, New York City, of counsel), for plaintiff-intervenor-appellant.

Kenneth R. Feit, New York City (Tell, Cheser & Breitbart, New York City, of counsel), for defendant-appellee.

Before FRIENDLY, ^* CARDAMONE, and WINTER, Circuit Judges.

CARDAMONE, Circuit Judge:

This appeal deals with rights of action against a bailee under Uniform Commercial Code (U.C.C.) Sec. 2-722 (1978). Goods held by a bailee were damaged through its negligence, causing injury both to the seller and buyer of the goods. The seller settled its damage claim against the bailee. The novel question presented is whether U.C.C. Sec. 2-722 now precludes recovery by the buyer for its damages against the bailee. The district court concluded that the buyer lacked standing to sue. While in our view the buyer--as well as the seller--has a right of action to sue, the statute does not permit both to recover for the same loss. In this case, therefore, the value of granting to the buyer a right of action is not worth much thanks since the seller has already settled with the bailee for the maximum damages allowed by the storage contract. Yet, to permit a double recovery against a bailee who has limited its potential loss by agreement would do even less to advance the affairs of business under the Commercial Code. Hence, we affirm.

Geismar & Co., Inc. (Geismar or buyer) appeals from a judgment of the United States District Court for the Southern District of New York (Stewart, J.) entered on June 21, 1985. After the trial of the action the court granted the motion of Hudson Tank Terminals Corporation (Hudson or bailee) for a directed verdict. The district court found Hudson to have been negligent, but dismissed Geismar's claim in its entirety because under these circumstances it ruled that Sec. 2-722 extinguished Hudson's right of action.

I

Mitsui & Company (U.S.A.), Inc. (Mitsui or bailor or seller) imported 200 metric tons of Paraguayan tung oil that it planned to resell to Geismar. The S.S. Mormacargo (Mormacargo), which transported the tung oil from Paraguay to New York, also carried 600 metric tons of castor oil. On November 4, Hudson contracted with Manhattan Oil Transport of New York to furnish a barge, the Star Craft, to transport to Hudson's storage tanks the tung oil discharged from the Mormacargo. Prior to the transfer and according to industry practice, samples of the tung and castor oils were taken from the Mormacargo's holding tanks. Sample results indicated that the material met American Standards Testing and Materials Specification D-12-75 for Raw Tung Oil (ASTM standards), but failed the beta test. This meant that although the tung oil was uncontaminated when received by Hudson, it was in an isomerized or hardened state, reducing its resale value. The chemical analysis of the castor oil sample revealed no contamination.

On November 6 the tung oil was pumped into a storage tank at Hudson's Weehawken, New Jersey tank farm. Various samples of the oil taken compared favorably with the amount originally sampled from the Mormacargo. Hudson's records for November 6 indicate that the tung oil was transferred from the account of Mitsui to Geismar. Despite the transfer, Hudson issued Mitsui a non-negotiable warehouse receipt for the oil on November 10, 1978. The entire shipment was listed on Geismar's account until November 14, 1978 when Geismar notified Hudson that it rejected the shipment because the oil was in beta condition and therefore not in conformity with the original contract specifications. See U.C.C. Sec. 2-601. An additional sample of the oil was taken on December 1, 1978 after the oil had been transferred to a tank with more efficient heating coils. This test confirmed the previous results, that is, the oil met ASTM standards but did not pass the beta test.

Because the oil was in beta condition upon arrival in New York, Mitsui's original contract of sale with Geismar was rescinded. Mitsui's insurers, Toplis and Harding, put the oil up for open bidding. Geismar submitted the successful bid on January 31, 1979--confirmed by letter on February 2nd. Geismar received direct confirmation of the purchase from Mitsui by telex on February 5, 1979, and eight days later received additional written confirmation from Mitsui. The subsequent contract described the oil as "Beta Tung Oil quality as it is." On January 31, 1979 Geismar resold the oil by contracts it entered into with two customers, Empire State Varnish Company (Empire) and McClosky Varnish Company (McClosky).

Mitsui directed Hudson by letter dated February 5, 1979 to release 100 metric tons of the tung oil to Geismar. The same letter also indicated that the entire 200 metric tons of tung oil had been sold to Geismar. Hudson's book entries for the Geismar and Mitsui accounts show transfers on February 9 and 16, 1979. Mitsui never transferred to Geismar the warehouse receipt it had received from Hudson. On February 9, 1979 Empire received the tung oil it had purchased from Geismar. Tests conducted at the end of the pumping process revealed for the first time that the oil had become contaminated. Empire thereafter immediately rejected delivery. Additional tests of the Empire sample later revealed that the oil was 25 to 30 percent soluble in alcohol, suggesting castor oil contamination. On February 15, 1979 at Geismar's request the remaining tung oil at Hudson's storage facility was chemically analyzed, confirming that it also was contaminated.

Based on the results of the February 15th test, Geismar recalled its February 16th shipment of tung oil to McClosky. This shipment was returned to Hudson's storage tank and credited to Mitsui's account. On February 16 Geismar notified Mitsui that it was rejecting the entire parcel of beta tung oil it had purchased on February 5, because of the contamination. Although Empire did not demand fulfillment of the beta tung oil contracts, McClosky insisted upon performance. Geismar covered the McClosky contracts at a cost which did not exceed the original average contract price, due to the declining market for tung oil during this period. Thus, Geismar incurred no losses on the cover and never paid Mitsui for the contaminated oil. Mitsui, not Geismar, paid Hudson for the storage of the oil. This remaining oil was later sold for salvage.

In February 1980 Geismar commenced an arbitration proceeding against Mitsui before the American Arbitration Association in San Francisco pursuant to the terms of their agreement. Geismar alleged that Mitsui breached its contract for the delivery of beta tung oil. Mitsui filed a cross-demand for arbitration against Geismar for its failure to accept delivery of the oil in an "as is" condition. After commencement of the arbitration, Mitsui filed suit in April 1980 against Hudson in district court. Mitsui sought, among other damages, indemnification for any losses it might sustain in arbitration. The terms of the written contract of storage specifically provided that the respective rights of the parties shall be determined in accordance with the laws of the State of New Jersey. On July 7, 1981 after two days of hearings the arbitrators declined to award damages either to Geismar or Mitsui.

The district court then granted Geismar leave to intervene in the pending action between Mitsui and Hudson. Subsequently, Mitsui settled its claim with Hudson without prejudice to the rights of Geismar. At trial, counsel stipulated that Mitsui and Hudson settled for $18,777, the maximum damages permitted by the Hudson-Mitsui storage contract. The warehouse receipt issued to Mitsui provided that Hudson's liability was limited to a sum equivalent to 50 times the base storage rate or any other higher value declared by the depositor. ¹ No higher value had been declared. Geismar continued to press its claim in the district court seeking recovery of consequential damages resulting from its inability to fulfill resale contracts for the oil purchased from Mitsui. Geismar's complaint alleged that its damages were caused by Hudson's negligence in failing to store the oil in a proper manner, which resulted in its mixture with castor oil.

II

The primary issue we address on appeal is whether U.C.C. Sec. 2-722 allows only one right of action on behalf of both the seller Mitsui and the buyer Geismar within the factual context of this case. Hudson argues that Sec. 2-722 allows but a single right of action on behalf of both buyer and seller. Thus, because it settled with Mitsui, Hudson contends that Geismar can no longer maintain a separate, distinct claim based upon the same damage to the same parcel of oil which was the basis of Mitsui's claim against Hudson. Geismar counters that the U.C.C.'s remedies are to be liberally construed under Sec. 1-106 and that the district court's restrictive interpretation of Sec. 2-722 is inconsistent with that direction. It contends that Sec. 2-722 affords both buyer and seller individual and separate remedies for the loss.

Both parties agree that Sec. 2-722 controls. As a preliminary matter, we accept the district court's factual findings that the oil was undamaged as of December 1, 1978, when it was put in Hudson's possession, but 25 to 30 percent contaminated as of February 9, 1979. Therefore, the contamination of the oil occurred at some point within the time period from December 1 to February 9. The district court made no specific finding as to the exact date of contamination.

Our analysis begins with Sec. 2-722:

Where a third party so deals with goods which have been identified to a contract for...