Meyertech Corp., In re

Decision Date14 October 1987
Docket NumberNo. 87-1006,87-1006
Citation831 F.2d 410
Parties18 Collier Bankr.Cas.2d 34, Bankr. L. Rep. P 72,032, 5 UCC Rep.Serv.2d 354 In re MEYERTECH CORP., Debtor. SOUTHEASTERN SPRINKLER COMPANY, INC., Appellant, v. MEYERTECH CORP.
CourtU.S. Court of Appeals — Third Circuit

Joan A. Yue (argued), Pepper, Hamilton & Scheetz, Philadelphia, Pa. (Ben G. Leaphart, Love, Thornton, Arnold & Thomason, Greenville, S.C., of counsel), for appellant.

John C. Fenningham (argued), Corr, Stevens & Fenningham, Trevose, Pa., Joseph R. Livesey (argued), Philadelphia, Pa., for appellee.

Before SEITZ and MANSMANN, Circuit Judges, and BISSELL, District Judge. *

OPINION OF THE COURT

MANSMANN, Circuit Judge.

This appeal arises from a decision of the district court which affirmed in part and vacated and remanded in part a judgment of a bankruptcy court 57 B.R. 606 (1986), in an adversary proceeding entered in favor of the debtor.

At the outset of our review, we decide that despite the presence of a partial remand, the district court's order was a final order ripe for appellate adjudication.

Second, we hold that the district court, sitting in appellate review of the bankruptcy court's findings of fact, properly applied the clearly erroneous standard defined by Bankr.Rule 8013 since the matter before it was a core proceeding within the meaning of 28 U.S.C. Sec. 157(b)(2) (1984).

Third, we agree with the district court's affirmance of the bankruptcy judge's finding that the appellant's request for damages under the total cost theory was inappropriate since an alternate and reliable means of assessment was available to compensate for the losses suffered as a result of the breach of warranty of merchantability.

We find, however, that the portion of the district court order vacating the award and remanding to the bankruptcy court was improper. The court erred in failing to note that the Rules of Civil Procedure applicable to bankruptcy proceedings provide that an issue not raised by the pleadings which has nonetheless been tried by consent of the parties shall be treated as if it had in fact been raised by the pleadings. We find this procedural mandate to be applicable, and, therefore, we will remand to the district court for reinstatement of the bankruptcy court's award in favor of the debtor.

I.

Southeastern Sprinkler Company, Inc. ("Southeastern"), is engaged in the business of designing and installing industrial sprinkler systems. Southeastern was involved in an ongoing business relationship with Meyertech Corporation, a supplier of sprinkler system equipment. In the course of its dealings, Meyertech approached Southeastern to solicit orders for a recently developed sprinkler system fitting. Meyertech represented that its new product had been approved and accepted by industry organizations and associations.

Southeastern purchased Meyertech's fittings and incorporated them in sprinkler systems in a number of their construction projects. Sometime after the newly installed systems were activated, Southeastern began receiving complaints from general contractors and owners of the projects about water damage apparently caused by leaks in the sprinkler system. Initially unable to determine the cause of the leaking, Southeastern limited its response to repair of the water-damaged ceilings, as per its contractual responsibility.

Investigation of the origin of the leak revealed it to be the area of the fittings supplied by Meyertech. Accordingly, Southeastern informed Meyertech and requested its assistance in remedying the problem. Meyertech acknowledged that the leakage was caused by the composition of the gaskets, a component of the fittings supplied, which could be corrected by replacement. Meyertech supplied Southeastern with new gaskets to remedy the problem.

Southeastern then set to the task of removing and replacing the previously installed gaskets. Southeastern accomplished this replacement in conjunction with repairing the ceilings damaged by the leaking fittings.

Subsequently, on August 28, 1981, Meyertech petitioned for reorganization under Chapter 11 of the Bankruptcy Code. In response, Southeastern filed a proof of claim in the amount of $273,627 for the losses incurred in construction projects where Meyertech's product was utilized as a component of the Southeastern sprinkler system installation.

Meyertech filed an objection to the proof of claim and, referring to its scheduling of a disputed claim of $103,000 to Southeastern, denied any obligation owing to Southeastern. In its objection, Meyertech additionally alleged that Southeastern owed $43,032.22 on an open account for goods sold and delivered, i.e., the replacement fittings. The filing of this objection commenced an adversary proceeding as provided by Bankr.Rules 3007 and 7001.

Thereafter, the parties entered into a stipulation acknowledging a potential liability by Meyertech to Southeastern in the amount of $103,000, setoff by the $43,032.32 owed as an account receivable. The provisions of the stipulation were viewed by the parties as capping the extent of the bankrupt estate's obligation to Southeastern.

The parties also recognized the possibility that Southeastern may have a products liability claim against Meyertech's insurance carrier for recovery of all or part of a judgment against Meyertech. With an eye towards this possibility, Southeastern filed an action against Meyertech in the federal district court in South Carolina, Southeastern's situs of incorporation. Counsel for the parties subsequently agreed that Southeastern would pursue its claim in the form of an adversary proceeding in bankruptcy court and the South Carolina action was withdrawn. Southeastern then filed a complaint in the bankruptcy court which characterized its losses as required compensation for parties who suffered loss of use and damage to their property as a result of the leakage and the cost to replace the defective fittings and gaskets. In its answer, Meyertech generally denied the allegations set forth in Southeastern's complaint.

The adversary proceeding was thereafter tried in the bankruptcy court, resulting in an opinion and order finding a breach of implied warranty of merchantability on the part of Meyertech. The bankruptcy judge, however, disallowed Southeastern's theory of recovery based upon the total cost method 1 and, instead, awarded damages in the amount of $11,912.50, representing the cost of replacing the leaking fittings. The bankruptcy judge then offset the amount listed by Meyertech as an account receivable from Southeastern, resulting in a judgment of $31,119.82 in favor of Meyertech.

Southeastern filed a notice of appeal to the district court urging vacation of the award to Meyertech. Contending the matter was not a core proceeding as defined by 28 U.S.C. Sec. 157(b)(2), the creditor requested the district court to render additional findings of fact consistent with its de novo power of review of non-core matters.

The district court denied the request for de novo review, affirmed the bankruptcy court's finding that Southeastern's total cost theory as the proper measure of damages to be applied was improper, and, accordingly, found damages were correctly assessed on the cost of replacement theory. However, the district judge remanded for reconsideration and clarification the propriety of the favorable award to Meyertech based upon application of the setoff. This appeal followed.

In regard to our standard of review of this matter, we review the district court's determination regarding the proper measure of damages for a breach of warranty of merchantability of goods sold and delivered and found to be unfit for their intended use. As a corollary we examine the standard of review employed by the district court in its review of the bankruptcy judge's decision on the issue of the measure of damages. This requires interpretation and application of legal precepts implicating an exercise of our power of plenary review.

Analysis of the portion of the district court's order vacating the award in favor of the debtor-appellee and remanding to the bankruptcy judge requires a determination that this activity was procedurally proper, a legal question also mandating plenary review.

II.

A threshold concern is the jurisdiction of this court to entertain this appeal. Section 158(d) of title 28 authorizes courts of appeals to hear appeals from final judgments entered by the district court in their appellate capacity. 2 At issue is whether the requisite of finality has been satisfied in this matter in light of the portion of the district court opinion remanding the matter to the bankruptcy judge for clarification of the setoff issue.

In the context of bankruptcy cases, the definition of a final order is less than crystalline. Analysis of finality in these proceedings differs from litigation in an ordinary civil matter. In bankruptcy matters we have consistently considered finality in a more pragmatic and less technical sense than in other matters and the concept, for purposes of appellate jurisdiction, should be viewed functionally. Matter of Marin Oil, Inc., 689 F.2d 445 (3d Cir.1982), In Re Amatex, 755 F.2d 1034 (3d Cir.1985).

In Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98 (3d Cir.1981), we enunciated a finding of finality in bankruptcy matters when "nothing remains for the district court to do." Also, Cox Broadcasting Corp. v. Cohn, 420 U.S. 469, 95 S.Ct. 1029, 43 L.Ed.2d 328 (1975).

The application of this less stringent definition of finality in bankruptcy cases is not without limitation. In a recent case involving a district court's partial remand to a bankruptcy judge, we qualified our assumption of the pragmatic approach and referred to the traditional attitude of general reluctance to adopt an expansive interpretation of finality. In Re Brown, 803 F.2d 120 (3d Cir.1986). In Brown we found that a district court...

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