Hydrite Chemical Co. v. Calumet Lubricants Co.

• Citation: 47 F.3d 887
• Decision Date: 14 February 1995
• Docket Number: Nos. 94-2058,94-2224,s. 94-2058
• Parties: 25 UCC Rep.Serv.2d 723 HYDRITE CHEMICAL COMPANY, Affiliated Chemical Group, and National Union Fire Insurance Company of Pittsburgh, Pennsylvania, Plaintiffs-Appellants, Cross-Appellees, v. CALUMET LUBRICANTS COMPANY and United States Fidelity and Guaranty Company, Defendants-Appellees, Cross-Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

Page 887

47 F.3d 887

25 UCC Rep.Serv.2d 723

HYDRITE CHEMICAL COMPANY, Affiliated Chemical Group, and National Union Fire Insurance Company of Pittsburgh, Pennsylvania Plaintiffs-Appellants, Cross-Appellees, v. CALUMET LUBRICANTS COMPANY and United States Fidelity and Guaranty Company, Defendants-Appellees, Cross-Appellants.

Nos. 94-2058, 94-2224.

United States Court of Appeals Seventh Circuit.

Argued Oct. 24, 1994.

Decided Feb. 14, 1995.

Peter C. Karegeannes (argued), Christopher H. Kallaher, Quarles & Brady, Milwaukee, WI, for Hydrite Chemical Co., Affiliated Chemical Group and National Union Fire Ins. Co. of Pittsburgh, PA.

Ned J. Czajkowski, Russell A. Klingaman (argued), Hinshaw & Culbertson, Milwaukee, WI, for Calumet Lubricants Co., and U.S. Fidelity and Guar. Co.

Before POSNER, Chief Judge, BAUER, Circuit Judge, and WILL, District Judge. ^*

POSNER, Chief Judge.

Before us are cross-appeals in a diversity breach of warranty suit arising out of the sale by Calumet Lubricants Company, the principal defendant, of a white mineral oil to Hydrite Chemical Company, the principal plaintiff. Hydrite resold the oil to George A. Hormel Company, the manufacturer of Spam, the well-known luncheon meat. (So the chain of distribution was Calumet--Hydrite--Hormel.) Hormel used the oil as a lubricant and anti-rust agent in the machinery with which it makes Spam. According to Hormel, the oil made the Spam stink. Hormel withdrew millions of pounds of Spam from the market and sued Hydrite for breach of warranty. Hydrite should have impleaded Calumet, since it believed the stink had been caused by Calumet's oil; but it did not. Instead it merely defended against Hormel's suit. Eventually the parties settled. Hydrite paid Hormel $2.25 million and received in exchange both the usual release and an assignment of any claims that Hormel might have against Calumet arising from the sale of the smelly oil. Hydrite then brought this suit, both in its own right and as Hormel's assignee, against Calumet. (There are other facts and other parties, but nothing else that bears on the appeals.) In its own right Hydrite seeks to recover the $2.25 million expense of the settlement as consequential damages of Calumet's alleged breach of warranty. The parties agreed that the applicable state law deemed Calumet to have issued an identical warranty to Hormel and to Hydrite, notwithstanding the lack of privity between Calumet and Hormel, Housing & Redevelopment Authority v. Agassiz Construction, Inc., 476 N.W.2d 781, 785-86 (Minn.App.1991); SCM Corp. v. Deltak Corp., 702 F.Supp. 1428, 1432-33 (D.Minn.1988), so that if it breached its warranty to one it breached it to the other. Whatever the law may be in Texas on whether the cost of a settlement can be recovered as consequential damages for breach of warranty, see Kaiser Aluminum & Chemical Sales, Inc. v. PPG Industries, Inc., 42 F.3d 1147, 1149-52 (7th Cir.1994), we do not understand Calumet to be arguing that the law of Minnesota, which governs the substantive issues in this suit, bars such recovery.

The district judge separated the trial into liability and damages phases. The liability phase was submitted to the jury in the form of a special verdict that asked (again we simplify) whether Calumet had breached its warranty that the white mineral oil it sold Hydrite was odorless, tasteless, and suitable for use involving "incidental food contact" in meat establishments, and if "yes" (and the jury answered "yes"), whether the breach of warranty had "cause[d] damage to either of [Hydrite or Hormel]," to which the jury answered "yes" to Hydrite and "no" to Hormel.

Just before the trial on damages began, the judge ruled that the jury's answer to the question about damage to Hormel would bar Hydrite from asking the jury to award it any part of the $2.25 million that it had paid Hormel to settle Hormel's suit against it. So the subject was not mentioned in Hydrite's opening statement to the jury in the trial on damages. Shortly after that trial began, however, the judge reversed himself and allowed Hydrite to introduce evidence in support of its contention that the amount it had paid in the settlement represented damages for which Calumet was liable. But the judge sustained objections to questions put by Hydrite's lawyer to officials of Hormel designed to elicit both the amount of money originally demanded by Hormel in settlement of its claims against Hydrite and statements made by these officials in support of the demand. Hydrite wanted to present this evidence in order to show that the amount for which it had settled with Hormel was reasonable. The judge excluded the evidence as being hearsay and, in any event, confusing and redundant.

The damages case went to the jury with a verdict form that so far as bears on these appeals asked the jury to determine damages under three headings: "Increased cost and lost management time"--under which the jury wrote $30,000; "Past lost profits"--$43,000; and "Settlement amount and expenses related to settlement"--$128,000. The judge, on Calumet's motion, set aside the $128,000 award on the ground that obviously the jury had added together the $40,000 in attorney's fees that Hydrite had incurred to settle Hormel's case against it and the $88,000 that Hydrite had incurred to store the defective white mineral oil that Hormel had returned to it. The judge's view was that the jury's decision not to award Hydrite any part of the settlement amount (the $2.25 million) precluded, as a matter of logic, any award of expenses incurred by Hydrite incidental to the settlement.

Hydrite appeals, seeking a new trial on damages. It argues that the judge erred in failing to take (unspecified) steps to ameliorate what it contends was the disastrous effect on the jury of forbidding the mention of the settlement in Hydrite's opening statement and then in forbidding Hydrite to put before the jury evidence of the amount and supporting rationale of Hormel's settlement demands. Hydrite also complains about the judge's striking the $128,000 in settlement expenses from the jury's award. It argues that the judge was not entitled to identify that amount with the expenses incidental to the settlement. In support of this argument Hydrite cites only cases decided by the courts of Wisconsin. But in federal trials, issues pertaining to the control of the jury are, with immaterial exceptions, governed by federal procedural law. Mayer v. Gary Partners & Co., 29 F.3d 330 (7th Cir.1994); AM Int'l, Inc. v. Graphic Management Associates, Inc., 44 F.3d 572, 576-77 (7th Cir.1995). By failing to point us to any doctrine of federal law that forbade the judge to use his common sense to figure out what the jury must have thought it was doing, Hydrite has forfeited its challenge to the judge's action. We note that the Mayer decision was rendered two months before Hydrite filed its reply brief and that the principle of the decision was not new. See references cited at 29 F.3d at 334-35.

Calumet cross-appeals, arguing that there was no actionable breach of warranty because Hydrite should upon inspection of the white mineral oil when it was delivered have discovered the bad smell, rejected the delivery, and incurred no loss, or at least no loss for which it has sought damages.

This litigation has been marred by a number of procedural errors. The first, as we have noted already, was Hydrite's--its failure when sued by Hormel to bring Calumet into the case as a third-party defendant. Such a procedure not only is authorized by Rule 14(a) of the Federal Rules of Civil Procedure, but under the rubric of "voucher to defend" (sometimes called "vouching in") is expressly contemplated by the Uniform Commercial Code in a case in which an intermediate seller, sued for breach of warranty, wants to shift liability to its seller. UCC Sec. 2-607(5)(a). That is this case. Hydrite's lawyer told us at argument that the reason Calumet was not impleaded was that Hydrite was concerned that if Calumet was in the picture Hormel would escalate its demands against Hydrite. We find this concern difficult to fathom. Had all three parties to the dispute been in the same case, the question whether a settlement by one with one of the others was reasonable would have been unlikely to arise, and there would have been no occasion for one of the parties to assign its claims to another, which produced the confusing situation in which Hydrite came before the jury pressing both its own claims and (as assignee) those of Hormel.

A recent decision by this court appears to hold that Texas law requires a party in Hydrite's position to vouch in its seller; it may not bring an independent suit. Kaiser Aluminum & Chemical Sales, Inc. v. PPG Industries, Inc., supra, at 1149-52. There is no suggestion that this is the rule in Minnesota; and there are doubts, unnecessary to resolve in this case, whether a rule of state law requiring impleader in a particular class of cases binds the federal courts, given that the procedure in cases brought in federal court, including diversity cases, is governed by federal rather than state law. The only point that we need to make here is that Hydrite would have made life easier for everyone, notably itself, had it followed the vouching-in route.

The second procedural bobble was Hydrite's too, in basing its challenge to the judge's interpretation of the jury's verdict on the wrong body of law, namely state rather than federal; we have already discussed this. The next error, for which we shall not attempt to apportion guilt, was to bifurcate the trial at the point where it was bifurcated. Bifurcation is a common procedural device, and although its advantages in economizing on court time are occasionally questioned, most recently in William M. Landes, "Sequential Versus Unitary Trials: An Economic Analysis," 22 J.Legal Stud. 99 (1993), district judges have express authority to employ it in appropriate cases, ...