BRC Rubber & Plastics, Inc. v. Cont'l Carbon Co.

• Decision Date: 25 November 2020
• Docket Number: No. 20-1011,20-1011
• Citation: 981 F.3d 618
• Parties: BRC RUBBER & PLASTICS, INC., Plaintiff-Appellee, v. CONTINENTAL CARBON COMPANY, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

981 F.3d 618

BRC RUBBER & PLASTICS, INC., Plaintiff-Appellee,

v.CONTINENTAL CARBON COMPANY, Defendant-Appellant.

No. 20-1011

United States Court of Appeals, Seventh Circuit.

Argued October 2, 2020

Decided November 25, 2020

Thomas M. Kimbrough, Attorney, Michael C. Ross, Attorney, Michael H. Michmerhuizen, Attorney, Barrett & McNagny LLP, Fort Wayne, IN, for Plaintiff-Appellee

Matthew J. Elliott, Attorney, Douglas Dormire Powers, Attorney, Beckman Lawson, LLP, Fort Wayne, IN, for Defendant-Appellant

Before Ripple, Kanne, and Hamilton, Circuit Judges.

Hamilton, Circuit Judge.

This appeal presents two classic contract issues under Article 2 of the Uniform Commercial Code: (1) whether a seller of goods repudiated a supply contract by failing to give adequate assurance of its performance under § 2-609, and (2) whether the buyer acted reasonably in "covering" to replace the breaching seller's goods under § 2-712. The product was carbon black, used to manufacture rubber products. After a bench trial, the district court ordered seller Continental Carbon Company to pay damages to buyer BRC Rubber & Plastics, Inc. The court resolved sharply disputed factual issues, finding that Continental had repudiated the parties’ supply contract and that BRC acted reasonably in buying carbon black from different suppliers for the remaining years of the contract. The court also awarded prejudgment interest to BRC for the cost of the "cover," i.e., replacing the lost supply at higher prices. BRC Rubber & Plastics, Inc. v. Continental Carbon Co. , 2019 WL 3985900 (N.D. Ind. Aug. 22, 2019).

In this third, and we hope final, appeal in this case, we affirm. The district court's factual findings are not clearly erroneous. The court properly applied U.C.C. § 2-609 to find that the seller gave the buyer reasonable grounds for doubting that it would perform and that the seller then repudiated by failing to provide adequate assurance that it would continue to perform. The court then properly applied U.C.C. § 2-712 to find that the buyer's cover was commercially reasonable. Finally, the court did not err in awarding prejudgment interest.

I. Standards for Appellate Review

We review the trial court's conclusions of law de novo, but we review its findings of fact and applications of law to findings of fact only for clear error. See Metavante Corp. v. Emigrant Savings Bank , 619 F.3d 748, 758–59 (7th Cir. 2010). "A finding of fact is clearly erroneous only when the reviewing court is left with the definite and firm conviction that a mistake has been committed." Gaffney v. Riverboat Services of Indiana, Inc. , 451 F.3d 424, 447 (7th Cir. 2006), quoting Carnes Co. v. Stone Creek Mechanical, Inc. , 412 F.3d 845, 847 (7th Cir. 2005). The appellate court "must affirm if the district court's account of the evidence is plausible" when viewed in light of the entire record. Advertising Specialty Inst. v. Hall-Erickson, Inc. , 601 F.3d 683, 688 (7th Cir. 2010).

Appellate courts owe deference to a trial court's determination of the credibility of witnesses. Anderson v. City of Bessemer , 470 U.S. 564, 575, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985) ("[W]hen a trial judge's finding is based on his decision to credit the testimony of one of two or more witnesses ... that finding, if not internally inconsistent, can virtually never be clear error."). Continental urges us to give less deference to factual findings here because of the extent of documentary evidence in this case. In Anderson , however, the Supreme Court rejected just this argument. Id. ("This is so even when the district court's findings do not rest on credibility determinations, but are based instead on physical or documentary evidence or inferences from other facts.").

II. Repudiation of a Sales Contract under U.C.C. § 2-609

A. Section 2-609

BRC's claims arise under Indiana law, and the district court had jurisdiction under 28 U.S.C. § 1332. Indiana has adopted the Uniform Commercial Code. Section 2-609 on adequate assurance appears in Indiana Code § 26-1-2-609.¹

Under § 2-609, a party who has reasonable grounds for insecurity about the other's performance may request "adequate assurance" that the other will perform. The worried party may treat the other's failure to provide timely and adequate assurance as a repudiation of the contract. Whether the grounds for insecurity are reasonable and whether assurances are reasonable are matters of fact to be determined under all the circumstances. See AMF, Inc. v. McDonald's Corp. , 536 F.2d 1167, 1170 (7th Cir. 1976) ; U.C.C. § 2-609, cmt. 3; 4 Anderson U.C.C. § 2-609:16 (3d ed. 2019).

Critical to the district court's and our resolution of this case, § 2-609(2) provides: "Between merchants the reasonableness of grounds for insecurity and the adequacy of any assurance offered shall be determined according to commercial standards." See also Wildwood Industries, Inc. v. Genuine Machine Design, Inc. , 587 F. Supp. 2d 1035, 1047 (N.D. Ind. 2008) (Indiana law does not "suggest what form adequate assurance should take other than that the form be commercially reasonable."). The failure to give adequate assurance may be treated as a repudiation. U.C.C. § 2-609(4).

Section 2-609 addresses the problem that arises when one party to a contract has reasonable concerns about another party's ability or intent to fulfill its promises before performance is actually due. As comment 1 explains: "The section rests on the recognition of the fact that the essential purpose of a contract between commercial men [sic] is actual performance and they do not bargain merely for a promise, or for a promise plus the right to win a lawsuit and that a continuing sense of reliance and security that the promised performance will be forthcoming when due, is an important feature of the bargain." U.C.C. § 2-609, cmt. 1.

Section 2-609 was a significant and pragmatic innovation in the U.C.C. Professor Karl Llewellyn and other legal realists were pushing against more formalist legal rules for anticipatory repudiation that acknowledged a breach only after it had actually occurred, even if the breach had appeared inevitable or probable long before the date performance was due. See, e.g., Lowe v. Harwood , 139 Mass. 133, 29 N.E. 538, 539 (1885) (Holmes, J.) (despite doubts about plaintiff's ability to pay money owed under contract, the "degree of [plaintiff's] ability at any moment before he was called on to pay was no concern of the defendant's"). Section 2-609 was intended to protect the "essential purpose of the bargain ... performance itself." Larry T. Garvin, Adequate Assurance of Performance: Of Risk, Duress, and Cognition , 69 U. Colo. L. Rev. 71, 93 (1988) (discussing Llewellyn's comments urging codification of adequate assurance).² Indeed, "the point of a forward contract is the continued sense of reliance and security it gives the promisee. Loss of security thus deprives the promisee of much of the benefit of its bargain.... [An insecure buyer] cannot be certain that it will have the supplied goods for its own manufacturing or inventory." Id . (quotations and citations omitted).

The district court's factual findings trace here the kind of story for which § 2-609 was designed: a seller of goods tried to take advantage of a tight market to force a price increase on the buyer despite their long-term contract. When the buyer resisted the price increase, the seller threatened to stop supplying the buyer at all. The buyer then asked for "adequate assurance" under § 2-609, did not receive it, and so chose to treat the contract as repudiated.

B. The Parties and Their Contract

Plaintiff BRC Rubber & Plastics, Inc. designs and manufactures rubber and plastic products, primarily for the automotive industry. Defendant Continental Carbon Company manufactures carbon black, an ingredient in many rubber products.

Before 2010, BRC bought all the carbon black it needed from Continental but without having a long-term supply contract. In 2009, BRC solicited bids from several suppliers of carbon black, seeking a long-term contract to ensure continuity of supply. Carbon black is a critical component in BRC's products. Because each supplier's products perform a little differently, BRC sought a single supplier of carbon black to help make its products’ qualities as consistent as possible.

In late 2009, BRC and Continental signed a five-year contract to run from January 1, 2010 to December 31, 2014. Continental agreed to supply BRC with "approximately 1.8 million pounds of prime furnace black annually" taken in "approximately equal monthly quantities." The price of carbon black consists of a baseline price and so-called "feedstock" adjustments for the fluctuating prices of oil and natural gas.

The contract listed baseline prices for three types of carbon black, grades N339, N550, and N762, which were "to remain firm throughout the term of this agreement." The contract also included instructions for calculating the feedstock adjustments each month. The parties’ dispute here focuses on the baseline prices in their contract.

In 2010, the first year under the contract, BRC bought 2.6 million pounds of carbon black from Continental. In the first four months of 2011, BRC bought about 1.3 million pounds, putting it on pace to buy about 3.9 million pounds that year.

C. BRC's Grounds for Insecurity

In April 2011, supplies of carbon black were tight. Continental tried to use market shortages to impose an increase in the baseline prices for to BRC. Continental agrees for purposes of appeal that its actions gave BRC reasonable grounds for insecurity under § 2-609. The dispute is whether Continental provided adequate assurance in response to BRC's demand. We summarize the district court's detailed findings of fact about how the problem arose, which is relevant to the adequacy of the assurance that Continental later provided.

Thomas Moccia was at the center of the effort. He was Continental's vice president of marketing and development. He instru...