Cargill, Inc. v. Boag Cold Storage Warehouse, Inc.

• Decision Date: 01 February 1996
• Docket Number: No. 93-2547,93-2547
• Citation: 71 F.3d 545
• Parties: 28 UCC Rep.Serv.2d 38, 43 Fed. R. Evid. Serv. 515 CARGILL, INC., Plaintiff-Appellee, v. BOAG COLD STORAGE WAREHOUSE, INC., Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 545

71 F.3d 545

28 UCC Rep.Serv.2d 38, 43 Fed. R. Evid. Serv. 515

CARGILL, INC., Plaintiff-Appellee, v. BOAG COLD STORAGE WAREHOUSE, INC., Defendant-Appellant.

No. 93-2547.

United States Court of Appeals Sixth Circuit.

Argued Feb. 3, 1995.

Decided Dec. 6, 1995.

Rehearing and Suggestion for Rehearing En Banc Denied Feb. 1, 1996.

Stuart H. Teger (argued and briefed), Honigman, Miller, Schwartz & Cohn, Detroit, MI, for Plaintiff-Appellee.

David Berkal, Morrison, Mahoney & Miller, Southfield, MI, John F. Horvath (argued and briefed), Susan L. Troxell (briefed), Horvath & Lieber, Chicago, IL, for Defendant-Appellant.

Before: NELSON and NORRIS, Circuit Judges; BELL, District Judge. ^*

DAVID A. NELSON, Circuit Judge.

This is an appeal from a judgment entered on a verdict for the plaintiff in a diversity action governed by Michigan law.

The action was brought by the producer of a premium brand of frozen turkeys. Two grocery distributors that had purchased turkeys of this brand from the plaintiff arranged to have the birds stored at a warehouse operated by the defendant. After allegedly allowing some of the turkeys to thaw, and without telling anyone what had happened, the warehouse company was said to have refrozen the birds and released them for sale to the public. The turkeys had become spoiled, it turned out, and a costly recall of the product ensued. The producer, which bore the cost of the recall and claimed a significant loss of business, sued the warehouse company for negligence.

The threshold question that we are asked to decide is whether the warehouse operator, with which only the grocery distributors had entered into contracts, owed a duty of care to the producer that owned the brand name in question. If we conclude that Michigan courts would recognize such a duty, we must decide whether the plaintiff's claim is barred either by Michigan's "economic loss doctrine" or by Sec. 2-722 of the Uniform Commercial Code (Mich. Comp. Laws 440.2722). We must further decide whether the plaintiff is subject to limitation-of-damages provisions that were contained in warehouse receipts issued to the distributors; whether the district court should have directed a verdict for the defendant because of an alleged failure of proof on the issue of negligence; whether the amount awarded by the jury as damages so exceeded the damages proved at trial that a new trial should have been granted on this issue; and whether the defendant is entitled to a new trial because of the admission of an exhibit asserted to constitute impermissible hearsay.

Resolving each of these questions in favor of the plaintiff, we shall affirm the judgment.

I

The plaintiff, Cargill, Inc., grows and processes turkeys that are distributed under various brand names. Cargill employs the name "Honeysuckle White" for its top line.

The defendant, Boag Cold Storage Warehouse, Inc., operates a warehouse facility in Detroit, Michigan. Two of Cargill's biggest customers in Detroit--Borman's, Inc., and Foodland Distributors--used the Boag warehouse to store Honeysuckle White turkeys purchased from Cargill. Although Cargill had no contractual relationship with Boag, Cargill was instructed to ship the turkeys to Boag for storage until the customer needed them. The birds would then be trucked to a distribution center for transshipment to retail stores.

A week before Thanksgiving Day in 1991, two retail purchasers of 12-14 pound Honeysuckle White brand turkeys complained that the birds smelled bad. The purchases were made at stores serviced by Foodland. All of the 12-14 pound Honeysuckle White turkeys from these stores were then returned to Foodland's distribution center. Cargill promptly confirmed widespread spoilage among turkeys at the distribution center, and Cargill's quality assurance director attributed the problem to the birds' having been thawed and refrozen.

Cargill's records showed that the turkeys in question had been sold not to Foodland, but to Borman. It was at Borman's direction that Cargill had shipped these particular birds to Boag in mid-May of 1991. Boag ultimately released Borman's birds to Foodland by mistake, it appears.

Upon further investigation, Cargill personnel found several cases of spoiled turkeys at a store supplied by Borman. These turkeys, released to the correct buyer, had the same production codes as the spoiled turkeys found at Foodland.

Boag's records indicated that all the turkeys with suspect production codes had either been released to Borman or were still in the warehouse. Upon a search of the warehouse, however, Cargill found no turkeys with these production codes. None of the turkeys remaining at the warehouse were spoiled. Because Cargill could not be certain where all the turkeys from code-groups containing spoiled birds had gone, it was forced to issue a general recall throughout the Detroit area for all Honeysuckle White turkeys in the 12-14 pound category.

The publicity attendant upon the recall had an adverse effect on retail sales of the categories of Honeysuckle White turkeys that remained in stores. Because it was just before Thanksgiving, retailers had large inventories. Cargill took back the excess inventory, repackaged some of the birds as Grade A rather than premium, and sold them in other markets. Sales of Honeysuckle White turkeys in the Detroit area remained depressed long after the 1991 Thanksgiving season, according to Cargill.

In January of 1992 Cargill brought suit against Boag in the United States District Court for the Eastern District of Michigan. The claim set forth in the complaint sounded in tort, not contract. Some months after it filed the complaint, Cargill came to terms with the distributors on the handling of costs connected with the recall. In this connection Cargill took, or became entitled to take, assignments of "all claims and causes of action that [Foodland or Borman] may have against any third party in connection with the Turkey Recall, including, without limitation, any claim it may have against Boag Cold Storage Warehouse, Inc." Notwithstanding the assignments, Cargill never amended its complaint to assert a derivative claim as assignee.

At different times during the course of the proceedings Boag moved to dismiss the complaint for failure to state a claim of negligence; to strike the tort claim because Cargill had relinquished its interest in the turkeys; and to limit Cargill's recovery in accordance with limitation-of-damages provisions in the warehouse receipts that Boag had issued to Foodland and Borman. The district court (Zatkoff, J.) denied each of these motions and also denied motions for judgment at the time of trial. The jury ultimately returned a verdict for Cargill in the principal sum of $820,980.96. The court entered judgment on the verdict, denying requests for judgment n.o.v. and for a new trial, and this appeal followed.

II

Although Cargill was a stranger to the contracts under which Boag became a bailee of the frozen turkeys, this circumstance would not necessarily preclude Michigan courts from concluding that Boag owed Cargill a duty to exercise care in performing its contractual responsibilities. See Clark v. Dalman, 379 Mich. 251, 150 N.W.2d 755 (1967), where it was held that a stranger to a contract for the repair of a water tank could go to the jury on a claim that he had been injured because of the repairman's negligent failure to comply with one of the provisions of the contract; Williams v. Polgar, 391 Mich. 6, 215 N.W.2d 149 (1974), where a title abstractor's negligence in performing a contract with a landowner was held to give rise to a tort action on the part of the landowner's grantee; and Crews v. General Motors Corp., 400 Mich. 208, 253 N.W.2d 617 (1977), where the breach of a manufacturer's contractual obligation to make reasonable repairs was held to give rise to a tort action on the part of an injured employee of a purchaser of the manufacturer's product. As the Michigan Court of Appeals declared in National Sand, Inc. v. Nagle Construction, Inc., 182 Mich.App. 327, 331, 451 N.W.2d 618, 620 (1990), "a plaintiff may maintain an action in tort where he is injured by the defendant's negligent performance of contract even where there is no privity between the parties." (Emphasis in original.)

Although Michigan courts have cited a number of different factors that may give rise to a duty on the part of a contracting party toward a stranger to the contract, the factor that probably proves decisive more often than any other is the foreseeability of harm to the plaintiff if the contract is not executed with due care. See, e.g., Roberts v. Pinkins, 171 Mich.App. 648, 430 N.W.2d 808 (1988), where a defendant's failure to prevent the abandonment of a building he had allegedly contracted to "care for and manage" was held not to give rise to a cause of action on the part of a woman who was forced into the abandoned building at gunpoint and criminally assaulted there. "[W]e do not believe," said the court of appeals, "that use of the building by the plaintiff's attacker was foreseeable under the instant circumstances." 171 Mich.App. at 654, 430 N.W.2d at 811. In cases such as Clark v. Dalman, Williams v. Polgar, and Crews v. General Motors Corp., by contrast, "recovery was permitted ... by those whose relationship to the action taken under the contract was reasonably foreseeable." Commercial Union Ins. Co. v. Medical Protective Co., 426 Mich. 109, 124 n. 5, 393 N.W.2d 479, 485 n. 5 (1986) (emphasis supplied).

Cargill argues persuasively that when Boag allowed the thawed and refrozen turkeys to continue in the stream of commerce, it was readily foreseeable that the brand name affixed to the product would suffer, the manufacturer's reputation would be damaged, and the manufacturer would have to take steps to mitigate the damage. And Cargill was readily identifiable as a person likely to be injured, Boag having received turkeys bearing the...