R.E. Davis Chemical Corp. v. Diasonics, Inc.

• Decision Date: 10 September 1987
• Docket Number: No. 86-2875,86-2875
• Parties: 4 UCC Rep.Serv.2d 369 R.E. DAVIS CHEMICAL CORPORATION, an Illinois corporation, Plaintiff-Appellee, v. DIASONICS, INC., a California corporation, Defendant Third Party Plaintiff- Appellant, v. Glen D. DOBBIN and Galdino Valvassori, Third Party Defendants.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 678

826 F.2d 678

4 UCC Rep.Serv.2d 369

R.E. DAVIS CHEMICAL CORPORATION, an Illinois corporation, Plaintiff-Appellee, v. DIASONICS, INC., a California corporation, Defendant Third

Party Plaintiff- Appellant, v. Glen D. DOBBIN and Galdino Valvassori, Third Party Defendants.

No. 86-2875.

United States Court of Appeals Seventh Circuit.

Argued April 24, 1987.

Decided Aug. 13, 1987.

Rehearing and Rehearing En Banc Denied Sept. 10, 1987.

George M. Hoffman, Neal Gerber & Eisenberg, Chicago, Ill., for third-party defendant-appellant.

Erwin I. Katz, Chicago, Ill., for third-party defendant-appellee.

Sherwin J. Malkin, Sherwin J. Malkin, Ltd., Chicago, Ill., for plaintiff-appellee.

Before BAUER, Chief Circuit Judge, CUDAHY and FLAUM, Circuit Judges.

CUDAHY, Circuit Judge.

Diasonics, Inc. appeals from the orders of the district court denying its motion for summary judgment and granting R.E. Davis Chemical Corp.'s summary judgment motion. Diasonics also appeals from the order dismissing its third-party complaint against Dr. Glen D. Dobbin and Dr. Galdino Valvassori. We affirm the dismissal of the third-party complaint, reverse the grant of summary judgment in favor of Davis and remand for further proceedings.

I.

Diasonics is a California corporation engaged in the business of manufacturing and selling medical diagnostic equipment. Davis is an Illinois corporation that contracted to purchase a piece of medical diagnostic equipment from Diasonics. On or about February 23, 1984, Davis and Diasonics entered into a written contract under which Davis agreed to purchase the equipment. Pursuant to this agreement, Davis paid Diasonics a $300,000 deposit on February 29, 1984. Prior to entering into its agreement with Diasonics, Davis had contracted with Dobbin and Valvassori to establish a medical facility where the equipment was to be used. Dobbin and Valvassori subsequently breached their contract with Davis. Davis then breached its contract with Diasonics; it refused to take delivery of the equipment or to pay the balance due under the agreement. Diasonics later resold the equipment to a third party for the same price at which it was to be sold to Davis.

Davis sued Diasonics, asking for restitution of its $300,000 down payment under section 2-718(2) of the Uniform Commercial Code (the "UCC" or the "Code"). Ill.Rev.Stat. ch. 26, para. 2-718(2) (1985). ¹ Diasonics counterclaimed. Diasonics did not deny that Davis was entitled to recover its $300,000 deposit less $500 as provided in section 2-718(2)(b). However, Diasonics claimed that it was entitled to an offset under section 2-718(3). Diasonics alleged that it was a "lost volume seller," and, as such, it lost the profit from one sale when Davis breached its contract. Diasonics' position was that, in order to be put in as good a position as it would have been in had Davis performed, it was entitled to recover its lost profit on its contract with Davis under section 2-708(2) of the UCC. Ill.Rev.Stat. ch. 26, para. 2-708(2) (1985). Section 2-708 provides:

Sec. 2-708. Seller's Damages for Non-acceptance or Repudiation

(1) Subject to subsection (2) and to the provisions of this Article with respect to proof of market price (Section 2-723), the measure of damages for non-acceptance or repudiation by the buyer is the difference between the market price at the time and place for tender and the unpaid contract price together with any incidental damages provided in this Article (Section 2-710), but less expenses saved in consequence of the buyer's breach.

(2) If the measure of damages provided in subsection (1) is inadequate to put the seller in as good a position as performance would have done then the measure of damages is the profit (including reasonable overhead) which the seller would have made from full performance by the buyer, together with any incidental damages provided in this Article (Section 2-710), due allowance for costs reasonably incurred and due credit for payments or proceeds of resale.

Diasonics subsequently filed a third-party complaint against Dobbin and Valvassori, alleging that they tortiously interfered with its contract with Davis. Diasonics claimed that the doctors knew of the contract between Davis and Diasonics and also knew that, if they breached their contract with Davis, Davis would have no use for the equipment it had agreed to buy from Diasonics.

The district court dismissed Diasonics' third-party complaint for failure to state a claim upon which relief could be granted, finding that the complaint did not allege that the doctors intended to induce Davis to breach its contract with Diasonics. The court also entered summary judgment for Davis. The court held that lost volume sellers were not entitled to recover damages under 2-708(2) but rather were limited to recovering the difference between the resale price and the contract price along with incidental damages under section 2-706(1). Ill.Rev.Stat. ch. 26, para. 2-706(1) (1985). Section 2-706(1) provides:

Sec. 2-706. Seller's Resale Including Contract for Resale

(1) Under the conditions stated in Section 2-703 on seller's remedies, the seller may resell the goods concerned or the undelivered balance thereof. Where the resale is made in good faith and in a commercially reasonable manner the seller may recover the difference between the resale price and the contract price together with any incidental damages allowed under the provisions of this Article (Section 2-710), but less expenses saved in consequence of the buyer's breach.

Davis was awarded $322,656, which represented Davis' down payment plus prejudgment interest less Diasonics' incidental damages. Diasonics appeals the district court's decision respecting its measure of damages as well as the dismissal of its third-party complaint.

II.

We consider first Diasonics' claim that the district court erred in holding that Diasonics was limited to the measure of damages provided in 2-706 and could not recover lost profits as a lost volume seller under 2-708(2). Surprisingly, given its importance, this issue has never been addressed by an Illinois court, nor, apparently, by any other court construing Illinois law. Thus, we must attempt to predict how the Illinois Supreme Court would resolve this issue if it were presented to it. Courts applying the laws of other states have unanimously adopted the position that a lost volume seller can recover its lost profits under 2-708(2). ² Contrary to the result reached by the district court, we conclude that the Illinois Supreme Court would follow these other cases and would allow a lost volume seller to recover its lost profit under 2-708(2).

We begin our analysis with 2-718(2) and (3). ³ Under 2-718(2)(b), Davis is entitled to the return of its down payment less $500. Davis' right to restitution, however, is qualified under 2-718(3)(a) to the extent that Diasonics can establish a right to recover damages under any other provision of Article 2 of the UCC. Article 2 contains four provisions that concern the recovery of a seller's general damages (as opposed to its incidental or consequential damages): 2-706 (contract price less resale price); 2-708(1) (contract price less market price); 2-708(2) (profit); and 2-709 (price). The problem we face here is determining whether Diasonics' damages should be measured under 2-706 or 2-708(2). ⁴ To answer this question, we need to engage in a detailed look at the language and structure of these various damage provisions.

The Code does not provide a great deal of guidance as to when a particular damage remedy is appropriate. The damage remedies provided under the Code are catalogued in section 2-703, but this section does not indicate that there is any hierarchy among the remedies. ⁵ One method of approaching the damage sections is to conclude that 2-708 is relegated to a role inferior to that of 2-706 and 2-709 and that one can turn to 2-708 only after one has concluded that neither 2-706 nor 2-709 is applicable. ⁶ Under this interpretation of the relationship between 2-706 and 2-708, if the goods have been resold, the seller can sue to recover damages measured by the difference between the contract price and the resale price under 2-706. The seller can turn to 2-708 only if it resells in a commercially unreasonable manner or if it cannot resell but an action for the price is inappropriate under 2-709. The district court adopted this reading of the Code's damage remedies and, accordingly, limited Diasonics to the measure of damages provided in 2-706 because it resold the equipment in a commercially reasonable manner.

The district court's interpretation of 2-706 and 2-708, however, creates its own problems of statutory construction. There is some suggestion in the Code that the "fact that plaintiff resold the goods [in a commercially reasonable manner] does not compel him to use the resale remedy of Sec. 2-706 rather than the damage remedy of Sec. 2-708." Harris, A Radical Restatement of the Law of Seller's Damages: Sales Act and Commercial Code Results Compared, 18 Stan.L.Rev. 66, 101 n. 174 (1965) (emphasis in original). Official comment 1 to 2-703, which catalogues the remedies available to a seller, states that these "remedies are essentially cumulative in nature" and that "[w]hether the pursuit of one remedy bars another depends entirely on the facts of the individual case." See also State of New York, Report of the Law Revision Comm'n for 1956, 396-97 (1956). ⁷

Those courts that found that a lost volume seller can recover its lost profits under 2-708(2) implicitly rejected the position adopted by the district court; those courts started with the assumption that 2-708 applied to a lost volume seller without considering whether the seller was limited to the remedy provided under 2-706. None of those courts even suggested that a seller who resold goods in a commercially reasonable manner was limited to the damage formula provided under 2-706....