Carnation Co. v. Olivet Egg Ranch

• Decision Date: 20 August 1986
• Citation: Carnation Co. v. Olivet Egg Ranch, 189 Cal.App.3d 809, 229 Cal.Rptr. 261 (Cal. App. 1986)
• Parties: , 55 USLW 2135, 1 UCC Rep.Serv.2d 1531 CARNATION COMPANY, Plaintiff, Cross-Defendant and Respondent, v. OLIVET EGG RANCH, et al., Defendants, Cross-Complainants, and Appellants. A010176, Civ. 49195.
• Court: California Court of Appeals

Page 261

229 Cal.Rptr. 261

189 Cal.App.3d 809, 55 USLW 2135, 1 UCC Rep.Serv.2d 1531

CARNATION COMPANY, Plaintiff, Cross-Defendant and Respondent, v.OLIVET EGG RANCH, et al., Defendants, Cross-Complainants, and Appellants.

A010176, Civ. 49195.

Court of Appeal, First District, Division 2, California.

Aug. 20, 1986.

Paul H. Dawes, Charles P. McCarthy, James Goldberg, Thelen, Marrin, Johnson & Bridges, San Francisco, for plaintiff, cross-defendant and respondentCarnation Co.

Eric L. Henrikson, Henrikson & Gee, Oakland, for defendants, cross-complainants and appellants Olivet Egg Ranch, et al.

KLINE, Presiding Judge.

Olivet Egg Ranch ("Olivet"), a limited partnership, and Harold J. Kristal("Kristal"), and various co-venturers with Kristal (hereinafter collectively referred to as "appellants"), appeal following jury trial on claims of fraud and breach of various warranties arising out of Olivet's purchase and use of chicken feed produced by the Albers Milling Division of the Carnation Company("Albers").

We must, at the outset, address the question of mootness.Several weeks after oral argument before this court, when this appeal had been submitted for decision, counsel for all parties joined in a self-styled "motion for order vacating submission; or alternatively, to defer further consideration of submitted appeal."The motion was made upon the ground that the parties had entered into a tentative settlement agreement.Thereafter, the parties notified the court that all necessary approvals had been obtained and the settlement agreement had been executed.

In light of this disposition of the dispute between the parties, we have determined to treat the parties' motion as one for dismissal of the appeal and hereby grant the motion as to six of the eight issues raised by appellants.

The two remaining issues are: (1) whether the injured party or the breaching party bears the burden of proving the adequacy or inadequacy of efforts to mitigate consequential damages under California Commercial Code section 2715(2)(a) and (2) whether cross-demands for money must be mutual and due from the same person to the same person in order to qualify as offsetting claims under Code of Civil Procedure section 431.70.The former issue presents a question of first impression in California, about which courts in other jurisdictions are almost evenly divided.The latter is one on which there is a surprising dearth of helpful authority.

It is established that "[i]f an action involves a matter of continuing public interest and the issue is likely to recur, a court may exercise an inherent discretion to resolve that issue, even though an event occurring during its pendency would normally render the matter moot.(In re William M.(1970)3 Cal.3d 16, 23-24[89 Cal.Rptr. 33, 473 P.2d 737] ...;Di Giorgio Fruit Corp. v. Dept. of Employment(1961)56 Cal.2d 54, 58[13 Cal.Rptr. 663, 362 P.2d 487] ...;American Civil Liberties Union v. Board of Education(1961)55 Cal.2d 167, 181-182[10 Cal.Rptr. 647, 359 P.2d 45] ...)."(Liberty Mut. Ins. Co. v. Fales(1973)8 Cal.3d 712, 715, 716[106 Cal.Rptr. 21, 505 P.2d 21];Green v. Superior Court(1974)10 Cal.3d 616, 622, fn. 6[111 Cal.Rptr. 704, 517 P.2d 1168].)Due to the likelihood the legal questions earlier described will arise again, and the manner in which prompt resolution of these questions will facilitate commercial transactions in this state, we find that these issues involve matters of continuing public interest and on this basis proceed to decide them.¹

FACTS

The facts pertinent to the issues we decide are as follows.Appellant Kristal through the Olivet Egg Ranch Limited Partnership and a network of other partnerships and joint ventures, controlled and managed an egg producing operation in Northern California.

For approximately five years, Olivet or its predecessors in interest purchased chicken feed from Albers, which operated a mill in Santa Rosa.After unsuccessfully seeking payment of its bills, Carnation advised appellantsthey would no longer be allowed to purchase on credit.Appellants executed a note for the $606,382 balance owed to Carnation.When appellants defaulted on the note Carnation commenced this litigation.Appellants cross-complained on various theories, ² all premised on their assertion that the feed sold them was "misformulated, mis-produced and nutritionally substandard" and, therefore, breached a variety of express and implied warranties made to appellants by Carnation and its employees.Appellants alleged that the feed's nutritional deficiencies had caused a decrease in Olivet's egg production revenues and sought to offset such losses against the amount due Carnation on the note.

After lengthy pretrial discovery, jury trial commenced in October 1979.Because the execution and terms of the note were uncontested, appellants proceeded as if plaintiffs and presented their case first.At the conclusion of Olivet's case Carnation successfully moved for non-suit as to the loss of goodwill portion of Olivet's damage claim.The court granted a non-suit on goodwill damages as to the breach of warranty causes of action only on the theory appellants had not met their burden of proving, under California Commercial Code section 2715, that they had made reasonable efforts to mitigate the damages flowing from the loss of their retail egg marketing accounts.

At the close of evidence Carnation was granted a directed verdict as to a portion of the damages suffered by Olivet's predecessor in interest in 1970.

The jury found that Carnation had breached its warranties and damaged Olivet in the amount of $225,000, but that the claim of fraudulent misrepresentation had not been established.

Separate judgments for both parties were entered and Olivet moved for a new trial on various grounds.Carnation petitioned for an award of attorney's fees and a determination of the interest due on its note.The court denied the motion for new trial, granted a motion to vacate the two previously entered judgments and ordered nunc pro tunc entry of the net judgment after verdict.This appeal followed.

I.

Burden of Proof Under California Commercial Code Section 2715(2)(a)

The non-suit as to the $309,000 loss in goodwill appellants claimed due to their inability to service their egg marketing accounts ³ was granted upon the theory that California Commercial Code section 2715(2)(a) places on the aggrieved party the burden of showing it took reasonable steps to mitigate its consequential damages.⁴In granting non-suit the court necessarily determined that, as a matter of law, Olivet failed to present evidence sufficient to meet its burden.It will be necessary to consider whether Olivet presented evidence sufficient to withstand non-suit on this issue only if we first determine that the court's imposition of the burden on Olivet was legally correct.Olivet could not be penalized for failing to meet a burden which actually rested with Carnation.Thus, we are squarely faced with a question of first impression in California: which party bears the burden of proving the adequacy or inadequacy of efforts to mitigate consequential damages under California Commercial Code section 2715(2)(a)?

Section 2715(2)(a), which was adopted without change from the Uniform Commercial Code(UCC), simply declares that "[c]onsequential damages resulting from the seller's breach include ... [a]ny loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise."⁵

The official comment to the parallel provision of the UCC does not shed much light on allocation of the burden of proof.Paragraph 2 of the pertinent UCC Comment provides in material part that: "The 'tacit agreement' test for the recovery of consequential damages is rejected.Although the older rule at common law which made the seller liable for all consequential damages of which he had 'reason to know' in advance is followed, the liberality of that rule is modified by refusing to permit recovery unless the buyer could not reasonably have prevented the loss by cover or otherwise.Subparagraph (2)[of the statute] carries forward the provision of the prior uniform statutory provision as to consequential damages resulting from breach of warranty, but modifies the rule by requiring first that the buyer attempt to minimize his damages in good faith, either by cover or otherwise."(Italics added.)This comment does not demonstrate, as respondent asserts, that section 2715(2)(a) was intended to act as "a restraint on the liberality of the common law."

Paragraph 4 of the UCC comment makes specific reference ⁶ to the UCC's section on the liberal administration of remedies, ⁷ indicating that the right to consequential damages should be broadly, not narrowly, construed.Furthermore, while paragraph 4 states that "[t]he burden of proving the extent of loss incurred by way of consequential damage is on the buyer ...," this statement does not determine the allocation of the burden of proof on the mitigation issue.It is entirely possible for the injured party to bear the burden of proving the extent of consequential damages while the breaching party has the duty of proving those items which limit the award of consequential damages.

The UCC's failure to allocate unambiguously the burden of proving mitigation has resulted in conflicting interpretations among those jurisdictions that have considered the question.⁸Unfortunately, these cases are of little value to us since they do not analyze the problem nor explain why the burden should rest with one party or the other.By and large the cases merely state the unembellished conclusion that one or the other party has the burden of proof on this issue.

Paragraph 3 of the California Code Comment to section 2715 provides that "[t]he consequential damages provided for in subdivis...