DESIGN PLUS STORE FIXTURES v. Citro Corp.

• Decision Date: 15 December 1998
• Docket Number: No. COA98-29.,COA98-29.
• Citation: 131 NC App. 581,508 S.E.2d 825
• Parties: DESIGN PLUS STORE FIXTURES, INC., Plaintiff, v. CITRO CORPORATION and Anthony Citro, Defendants. CITRO CORPORATION and Anthony Citro, Third Party Plaintiffs, v. DECOLAM, INC. (formerly known as Woodtek, a division of Cra-Gen, Inc.), Third Party Defendant.
• Court: North Carolina Court of Appeals

508 S.E.2d 825

131 NC App. 581

DESIGN PLUS STORE FIXTURES, INC., Plaintiff, v. CITRO CORPORATION and Anthony Citro, Defendants.

CITRO CORPORATION and Anthony Citro, Third Party Plaintiffs, v. DECOLAM, INC. (formerly known as Woodtek, a division of Cra-Gen, Inc.), Third Party Defendant.

No. COA98-29.

Court of Appeals of North Carolina.

December 15, 1998.

Cecil M. Curtis, Charlotte, for plaintiff-appellant.

No brief filed for defendant-appellee.

James, McElroy, & Diehl, P.A., by Lawrence W. Hewitt and Fred B. Monroe, Charlotte, for third party defendant-appellant.

JOHN C. MARTIN, Judge.

Plaintiff, Design Plus Store Fixtures, Inc., (Design), entered into a contract with defendant, Citro Corporation (Citro), to buy display tables in three installments to be delivered to Design's primary customer, Springmaid, in Oregon, Kansas, and New Mexico. Citro sub-contracted with the third party defendant, Decolam, Inc., (Decolam), to "edge-tape" and bore holes in the parts according to plaintiff's specifications and a pattern approved by Citro.

The tables for the first two orders were delivered late, and a number of non-conformities made the tables impossible to assemble. When Design notified Citro of the defects, Citro offered no cure. Despite the non-conformities, Design eventually re-drilled the holes and assembled the tables. Design consummated the sale to Springmaid with the understanding that the tables would ultimately be replaced. Design covered the cost of the replacement tables, and refused to pay Citro for the defective tables. After Design provided replacement tables to Springmaid, Design gave the defective tables to charity. Design canceled the New Mexico installment after the table parts were cut and before they were bored or taped.

Design sued for expenses incurred due to Citro's breach. Citro counterclaimed for breach of contract and unjust enrichment, and filed a third party complaint against Decolam for breach of warranties and contract. The trial court found that Design had accepted the goods and awarded Citro $19,404.00 as damages for Design's breach of contract, less $18,420.17, which the court offset as Design's damages occasioned by Citro's breach of warranty. The trial court also awarded Citro $9,404.64 as damages for Design's anticipatory repudiation of the New Mexico installment, and awarded Citro $7,407.84 for Decolam's breach of subcontract and breach of warranty. Plaintiff Design and third party defendant Decolam appeal.

I. Plaintiff's Assignments of Error

Design contends it never accepted the Oregon and Kansas orders despite its repair, continued use, and ultimate discarding of the defective tables. In addition, Design argues that the first two non-conforming installments delivered by Citro substantially impaired the value of the whole contract; thus, Design contends it did not anticipatorily repudiate the contract and was entitled to immediately cancel the last installment, the New Mexico order. We reject Design's first contention, but find merit in the second.

A. Acceptance of Oregon and Kansas Installments

Design's transaction with Citro is governed by the Uniform Commercial Code (Code), N.C.Gen.Stat. §§ 25-2-102, 25-2-105 (1995). Specifically, this is an installment contract subject to the provisions of G.S. § 25-2-612(1) (1995) ("An `installment contract' is one which requires or authorizes the delivery of goods in separate lots to be separately accepted ...").

Initially, Design properly rejected the tables by providing reasonable notice of the nonconformity to Citro. Rejection of an installment, under section 2-612, is appropriate only if "the nonconformity substantially impairs the value of that installment...." N.C.Gen.Stat. § 25-2-612(2) (1995). A proper rejection also requires (1) rejection within a reasonable time after delivery or tender, and (2) seasonable notice to seller. N.C.Gen. Stat. § 25-2-602 (1995); HPS, Inc. v. All Wood Turning Corp., 21 N.C.App. 321, 204 S.E.2d 188 (1974). The trial court found that the non-conformities "made it impossible to properly assemble the table," and that this constituted a substantial impairment, justifying rejection of the installments. The trial court also noted that Design "arguably communicated a valid intent to reject the goods to [Citro]." Design notified Citro of significant non-conformities on 10 November 1993; and after Citro made no offer to cure the defects, Design refused to pay for the defective tables on 21 November 1993. Thus, Design's actions after discovery of the non-conformities were consistent with a rightful rejection of the tables. Nevertheless, the trial court concluded that Design had accepted the tables by actions "inconsistent with [Citro's] ownership," including: consummating the sale of the tables to Springmaid with concessions, and "failure to replace the Oregon tables for eleven months and the Kansas tables for nineteen months, and the Plaintiff's disposal of the tables after their replacement without notifying or attempting to obtain the consent" of Citro.

"Acceptance of goods occurs when the buyer ... does any act inconsistent with the seller's ownership; but if such act is wrongful against the seller, it is an acceptance only if ratified by him." N.C.Gen.Stat. § 25-2-606(1)(c) (1995). "Acts inconsistent with the seller's ownership" can best be understood in light of the buyer's statutory options and duties with respect to rightfully rejected non-conforming goods. The buyer's options and duties upon rejection are described in G.S. §§ 25-2-602 to -604 (1995). For most buyers, there is a general duty to hold goods with reasonable care "for a time sufficient to permit the seller to remove them." N.C.Gen. Stat. § 25-2-602(2)(b) (1995). Merchant buyers have a more specific duty when the seller has no agent or place of business in the market of rejection:

a merchant buyer is under a duty after rejection of goods in his possession or control to follow any reasonable instructions received from the seller with respect to the goods and in the absence of such instructions to make reasonable efforts to sell them for the seller's account if they are perishable or threaten to decline in value speedily.

N.C.Gen.Stat. § 25-2-603(1) (1995). In this case, Design is a merchant dealing in tables, G.S. § 25-2-104(1) ("`Merchant' means a person who deals in goods of the kind ..."); and Citro had no place of business or agent in the markets of rejection, Oregon and Kansas. In addition, the tables are not "perishables" such that "the value of the goods is threatened and the seller's instructions do not arrive in time to prevent serious loss." N.C.Gen.Stat. § 25-2-603(1) Official U.C.C. Comment 1 (1995). Thus Design's duty, upon rejection, was to follow Citro's reasonable instructions with respect to Citro's tables. However, no instructions from Citro were forthcoming.

Absent such instructions, the statute presents three options for a buyer who has given reasonable notification rejecting non-conforming goods: (1) store the rejected goods on the seller's account, (2) re-ship them to seller, or (3) resell them on the seller's account with reimbursement for expenses incurred in caring for and selling them. N.C.Gen.Stat. § 25-2-604 (1995). These potential courses of action are "intended to be not exhaustive but merely illustrative." N.C.Gen.Stat. § 25-2-604 Official U.C.C. Comment 1 (1995).

The basic purpose of this section is twofold: on the one hand it aims at reducing the stake in dispute and on the other at avoiding the pinning of a technical "acceptance" on a buyer who has taken steps towards realization on or preservation of the goods in good faith.

N.C.Gen.Stat. § 25-2-604 Official U.C.C. Comment (1995); see generally, Frank's Maintenance & Engineering, Inc., v. C.A. Roberts Co., 86 Ill.App.3d 980, 987, 42 Ill.Dec. 25, 408 N.E.2d 403, 408 (1980)

("In determining whether a buyer has so wrongfully exercised ownership over goods as to be barred from rejecting them, court must apply rule of reasonableness.")

A merchant buyer in possession of rejected goods, and without instructions from the seller, is in the somewhat difficult position of having a choice of reasonable options but no clear affirmative duties with respect to those goods, G.S. § 25-2-604; yet, the buyer must avoid acts "inconsistent with the seller's ownership" in order to avoid accepting the non-conforming goods. N.C.Gen. Stat. § 25-2-606(1)(c) (1995). The issue is whether Design's actions constitute good faith steps toward "realization on or preservation of the goods," on the one hand, or "acts inconsistent with ownership" on the other. Compare, N.C.Gen.Stat. § 25-2-604 Official U.C.C. Comment (1995) and N.C.Gen.Stat. § 25-2-606(1)(c) (1995). Whether actions taken with respect to rejected non-conforming goods, beyond those suggested by statute, are "inconsistent with the seller's ownership," depends on the circumstances and the buyer's steps towards realization on or preservation of the goods in good faith.

The repair and continued use of the non-conforming, rejected goods constitutes a reasonable good faith effort to preserve the goods while mitigating damages. Accord Hajoca Corp. v. Brooks, 249 N.C. 10, 15, 105 S.E.2d 123, 127-28 (1958)

(retention and use of defective machine by purchaser did not waive rejection because "purchaser does not waive his right to rescind the contract for breach of warranty `where the retention was at the instance and request of the seller and for the benefit of the seller in his endeavors to remedy the defective machine so that it would properly perform the functions for which it was warranted and sold.'") (citation omitted); Davis v. Colonial Mobile Homes, 28 N.C.App. 13, 18, 220 S.E.2d 802, 805 (1975),

disc. review denied, 289 N.C. 613, 223 S.E.2d 391 (1976) ("The fact that plaintiff stayed in the unit after allegedly revoking or rejecting the unit does not alone necessarily vitiate any of the buyer's rights."); Romy...