Palmco Corp. v. American Airlines, Inc.

• Decision Date: 22 February 1993
• Docket Number: No. 91-1848,91-1848
• Parties: 22 UCC Rep.Serv.2d 495 PALMCO CORPORATION, Plaintiff-Appellee, Cross-Appellant, v. AMERICAN AIRLINES, INC., Defendant-Appellant, Cross-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 681

983 F.2d 681

22 UCC Rep.Serv.2d 495

PALMCO CORPORATION, Plaintiff-Appellee, Cross-Appellant, v. AMERICAN AIRLINES, INC., Defendant-Appellant, Cross-Appellee.

No. 91-1848.

United States Court of Appeals Fifth Circuit.

Feb. 22, 1993.

Rehearing Denied May 20, 1993.

William G. Whitehill, Cynthia C. Hollingsworth, Beth E. McAllister, Gardere & Wynne, Dallas, TX, for defendant-appellant.

Bryan Kent Ford, Rachel J. Doyle, Ford & Doyle, Dallas, TX, for plaintiff-appellee.

Appeals from the United States District Court for the Northern District of Texas.

Before GOLDBERG, SMITH, and EMILIO M. GARZA, Circuit Judges.

EMILIO M. GARZA, Circuit Judge:

In this case involving a breach of contract for knives, spoons, and forks ("flatware"), Palmco Corporation claimed that American Airlines did not pay for delivered flatware. American counterclaimed, asserting that Palmco breached the contract by failing to deliver the flatware timely, by failing to make certain deliveries, and by refusing to deliver certain flatware orders unless American agreed to a price increase. The magistrate judge awarded $112,410 in cover damages to American, but held that Palmco was entitled to an offset of $62,870 against these damages for unpaid-for, delivered flatware. The magistrate judge also limited attorneys' fees to 60% of the amount each party recovered as damages. Palmco and American appeal the magistrate judge's assessment of damages and attorneys' fees. We affirm in part, and reverse in part.

I

Palmco contracted to supply American with flatware for its inflight meal service for the period between September 1, 1987 and August 31, 1988. The contract set the prices for the flatware, and also contained a liquidated damages clause in case Palmco made untimely deliveries. Palmco's deliveries were late during the duration of the contract. In addition, Palmco failed to deliver certain orders. American repeatedly explained to Palmco that the late deliveries were causing an inventory shortage. Also, because of Palmco's non-deliveries, American had to place spot orders with other flatware suppliers to ensure an adequate flatware inventory for the summer months. ¹ The price American paid for flatware under these spot orders was substantially higher than the contract price with Palmco.

In April 1988, Palmco refused to deliver the remaining flatware orders unless American agreed to an approximately 25% price increase. American attempted to purchase flatware from other suppliers, but determined that none could meet American's demand at the time Palmco's deliveries were due. American therefore agreed to the price increase for the remaining flatware orders.

In July 1988, American notified Palmco that it was setting off its damages for Palmco's late and non-deliveries against its outstanding account balance, pursuant to Tex.Bus. & Com.Code § 2.717 (Tex.U.C.C.) (Vernon 1968). In response, Palmco refused to deliver American's remaining orders--30,000 dozen knives.

Palmco filed suit against American for its failure to pay for the flatware American had received, as well as the 30,000 dozen knives Palmco did not deliver to American. ² Palmco also sought damages for fraud. American counterclaimed, asserting that Palmco had breached the contract. American sought damages for late and non-deliveries, duress damages for the 25% price increase, and recovery for fraud. By consent of the parties, the case was transferred to a magistrate judge for hearing and determination, pursuant to 28 U.S.C. § 636(c)(1) (1988).

In his findings of fact and conclusions of law, the magistrate judge found the parties' fraud claims to be without merit. The magistrate judge awarded American $112,410 in cover damages, but declined to award liquidated damages, based upon the conclusion that Texas law prohibits the recovery of both cover and liquidated damages. ³ As for Palmco, the magistrate judge awarded Palmco $62,870--as an offset against American's damage award--for unpaid-for, delivered flatware. However, the magistrate judge determined that American was not obligated to pay Palmco for the 30,000 dozen knives still in Palmco's possession when American allegedly cancelled the contract. The magistrate judge also found that the agreement to purchase flatware at the 25% price increase was made under duress, and was therefore void. As for attorneys' fees, the magistrate judge awarded each party 60% of the amount each party recovered in damages.

American appeals the magistrate judge's assessment of damages and attorneys' fees, contending that: (1) it is entitled to recover both its cover and liquidated damages; (2) it is entitled to receive additional duress damages resulting from the 25% price increase; (3) it is entitled to additional attorneys' fees based on any additional recovery; and (4) the magistrate judge erred in awarding attorneys' fees to Palmco.

Palmco cross-appeals, claiming that: (1) American was barred from recovery on its contract claims because of its failure to give notice of Palmco's breach; (2) the magistrate judge erred in not requiring American to purchase the 30,000 dozen knives retained by Palmco; and (3) the magistrate judge erred in not awarding Palmco additional attorneys' fees based upon American's post-suit but pre-trial payment of $42,134 for unpaid-for, delivered flatware.

II

A

Palmco argues that American failed to give proper notice of Palmco's breach of contract for untimely deliveries. Under Texas law, a buyer, upon accepting tender, must notify the seller of any breach "within a reasonable time after he discovers any breach ... or be barred from any remedy." Tex.Bus. & Com.Code Ann. § 2.607(c) (Tex.U.C.C.) (Vernon 1968); see also City of Marshall, Texas v. Bryant Air Conditioning, 650 F.2d 724, 727 (5th Cir.1981) ("Texas law requires notification by the buyer to the seller that a breach ... has occurred, so that the seller has an opportunity to cure the breach."). In Eastern Air Lines, Inc. v. McDonnell Douglas Corp., 532 F.2d 957 (5th Cir.1976), we outlined a framework for determining whether proper notice has been given under § 2.607.

The magistrate judge did not make a finding whether American gave Palmco proper notice under § 2.607. ⁴ Rather, the magistrate judge opined that our decision in Eastern Air Lines was "inapposite [to the case before it] ... [because] in [Eastern Air Lines] that case the contract at issue was silent as to liquidated damages." Record on Appeal, vol. 2, at 479. Thus, we must determine initially whether the magistrate judge erred, as a matter of law, in not applying the notice requirement under § 2.607. We review questions of law de novo. Zimmerman v. H.E. Butt Grocery Co., 932 F.2d 469, 471 (5th Cir.), cert. denied, --- U.S. ----, 112 S.Ct. 591, 116 L.Ed.2d 615 (1991). Because no Texas decision holds that the notice requirement under § 2.607 does not apply where the contract contains a liquidated damages clause, ⁵ the magistrate judge clearly erred in not applying the notice requirement under § 2.607. ⁶

We decide, rather than remand, the issue of whether American gave proper notice to Palmco, because the issue is a matter of law based upon the undisputed facts of this case. See Carroll Instrument Co. v. B.W.B. Controls, 677 S.W.2d 654, 657 (Tex.App.--Houston [1st Dist.] 1984, no writ) (providing notice may become a question of law, "where there is no room for ordinary minds to differ as to the proper conclusions to be drawn from the evidence"). Palmco argues that American's notice of Palmco's breach of contract for late deliveries was inadequate. ⁷ The first breach--for late deliveries--about which American complained occurred on February 3, 1988. Six weeks later, American wrote a letter to Palmco, stating that its performance under the contract was unacceptable, and that American intended to hold Palmco to the terms of the contract. See Palmco's Record Excerpt 6. Palmco does not dispute that this letter--dated April 11, 1988--was timely. Rather, Palmco claims that the letter was inadequate because it did not inform Palmco that its late deliveries constituted a breach of contract. The last paragraph of the letter states:

For at least the past five months you have consistently failed to meet your delivery date obligations. As we have made clear this is totally unacceptable to American Airlines. We insist that you fulfill all of your contractual obligations.

Record Excerpts for Palmco at tab. 6. This language, though not explicit, nevertheless sufficed to inform Palmco that its late deliveries constituted a breach of contract. Consequently, we find that American gave timely and adequate notice of breach. ⁸

B

Palmco next argues that the magistrate judge erred in concluding, as a matter of law, that American was not obligated to pay for the 30,000 dozen knives in Palmco's possession when American allegedly cancelled the contract. We review questions of law de novo. See H.E. Butt, 932 F.2d at 471.

Paragraph VIII of the contract obligated American to buy any "inventory in transit and in process" at the time of American's cancellation of the contract. Record Excerpts for American at tab. 12. The parties do not dispute that the 30,000 dozen knives were in transit when the contract was cancelled. See Brief for Palmco at 26; Reply Brief for American at 20-22. American, however, contends that it is not obligated to pay for the knives, because Palmco initially breached the contract by failing to deliver the knives. If Palmco breached the contract by failing to deliver the knives, then American had the statutory right to cancel the contract and pursue cover damages. See Tex.Bus. & Com.Code Ann. § 2.711(a)(1) (Tex.U.C.C.) (Vernon 1968).

Palmco does not deny that it failed to deliver the knives. Nevertheless, Palmco maintains that it did not breach the contract by failing to deliver the knives. Palmco argues that it rightfully withheld delivery of the knives because American failed to respond to Palmco's...