S & R Metals, Inc. v. C. Itoh & Co. (America), Inc., 87-5548
| Decision Date | 21 October 1988 |
| Docket Number | No. 87-5548,87-5548 |
| Citation | 859 F.2d 814 |
| Parties | 7 UCC Rep.Serv.2d 61 S & R METALS, INC., Plaintiff-Appellee, v. C. ITOH & CO. (AMERICA), INC., Defendant-Appellant. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Carlos Solis, Kindel & Anderson, Los Angeles, Cal., for defendant-appellant.
Douglas L. Carden and John C. Gorman, Shapiro, Posell & Close, Los Angeles, Cal., for plaintiff-appellee.
Appeal from the United States District Court for the Central District of California.
Before HUG, BEEZER and KOZINSKI, Circuit Judges.
C. Itoh & Co. (America), Inc. ("C. Itoh") appeals the judgment of the district court in favor of the plaintiff S & R Metals, Inc. ("S & R"). The district court held that S & R is entitled to revoke its acceptance of steel delivered under contract by C. Itoh. The court determined that S & R may return that steel to C. Itoh and C. Itoh is liable for damages, interest, and costs in the aggregate amount of $1,646,969.
C. Itoh is a steel trading company that buys and sells steel in bulk. S & R is a steel service center that buys steel in bulk and resells it in smaller amounts to manufacturers and others. In 1984, C. Itoh contracted to sell to S & R 5,500 metric tons of steel. The steel was to be conveyed in coils of varying widths and thicknesses, and it was all to be "commercial quality SAE 1010 milled edge" hot rolled steel. The steel was delivered to S & R at Long Beach Harbor in July, 1984 in 644 coils. S & R then transported the steel to its facility at its own expense. The parties do not dispute that S & R accepted delivery of the steel.
On December 21, 1984, S & R notified C. Itoh that S & R revoked acceptance of the steel that remained in S & R's inventory. S & R had sold about 35% of the steel it had received from C. Itoh. An S & R customer complained that steel sold by S & R failed to conform to the requirements for commercial quality SAE 1010 hot rolled steel. S & R traced the steel back to the C. Itoh shipment and confirmed its failure to conform. S & R stopped selling the C. Itoh steel, contacted C. Itoh, and then formally revoked acceptance.
The district court found that commercial quality SAE 1010 hot rolled steel must pass a "bend test" according to industry custom. This test requires that "the steel will bend flat upon itself in any direction at room temperature without visible cracks along the bend." Performing the bend test destroys or substantially harms the coil of steel being tested, and is expensive. The court found that it is not customary for a steel buyer to perform the bend test upon receipt of a delivery, and that a tendency of steel to fail the test is a latent defect not visible to the eye. Moreover, the court found that some of S & R's customers could use the steel in such a way as not to discover that the steel would fail the bend test. Steel that fails the bend test is not accepted as commercial quality SAE 1010 steel and is not usable for most ordinary purposes.
The steel about which S & R's customers complained was 14 gauge plain steel. Of the 5,500 metric tons of steel in the contested transaction, 1,360 tons are 14-gauge plain steel. Approximately half the coils of this type of steel failed the bend test. Neither From these findings of fact, the district court concluded that C. Itoh breached the sales contract by delivering nonconforming steel, that S & R accepted the delivery, and that S & R was entitled to revoke its acceptance of and return to C. Itoh all the C. Itoh steel that remained in its possession. The court awarded damages to S & R for the price of the remainder of the steel, the cost of shipping it from Long Beach Harbor to S & R's facility, the customary fee for storage of the steel, and interest at 7% on all of these elements from the date of revocation.
party presented substantial evidence as to whether the remaining steel would pass the bend test. C. Itoh tested a few samples of 7-gauge steel which passed the test. S & R tested a few samples of various gauges which failed the test. The court found, however, that the samples were neither sufficiently numerous nor sufficiently random to provide for a conclusion about whether the steel other than 14-gauge plain steel satisfied the SAE 1010 commercial quality specifications. As for the 14-gauge steel, the court found that it failed the specifications.
Jurisdiction in the district court is based on the parties' diversity of citizenship and the amount in controversy, which is in excess of $10,000. 28 U.S.C. Sec. 1332 (1982). Our jurisdiction over this appeal from the district court's final order is proper pursuant to 28 U.S.C. Sec. 1291. Notice of appeal was timely filed. Fed.R.App.P. 4(a)(1).
We review the district court's findings of fact under the clearly erroneous standard. Fed.R.Civ.P. 52(a); Roadway Express v. Jossy, 853 F.2d 736, 738 (9th Cir.1988). "[W]e must accept the ... court's findings of fact unless we are left with the definite and firm conviction that a mistake has been committed." Id. at 738. We review the district court's construction and application of state law de novo. Churchill v. F/V Fjord (In re McLinn), 739 F.2d 1395 (9th Cir.1984) (en banc).
The substantive law of California governs this case. See Fiorito Bros. v. Fruehauf Corp., 747 F.2d 1309, 1312 (9th Cir.1984). "Our independent determination of state law should be based upon recognized sources that are available to the parties and that may be argued and contested before the district court as well as before the appellate court." Id. (quoting In re McLinn, 739 F.2d at 1400). We are bound by the law announced by the state's highest court. In the absence of such express guidance, we must interpret and apply the law as we predict the state's highest court would interpret and apply it. Fiorito Bros., 747 F.2d at 1314.
The material findings of fact are supported by evidence in the record and are not clearly erroneous. There is ample evidence that the steel was warranted to satisfy the requirements for Commercial Quality SAE 1010 steel, and that these requirements include passing the bend test. There is also evidence that a substantial portion of the 14-gauge steel failed this test and that this failure reflects a substantial defect. A breach of warranty is clear. We will not upset these findings.
Because S & R accepted the steel, its remedy lies in Cal.Com.Code Sec. 2608 (West 1964), entitled "Revocation of Acceptance in Whole or in Part." That section states the following:
(1) The buyer may revoke his acceptance of a lot or commercial unit whose nonconformity substantially impairs its value to him if he has accepted it
(a) On the reasonable assumption that its nonconformity would be cured and it has not been seasonably cured; or
(b) Without discovery of such nonconformity if his acceptance was reasonably induced either by the difficulty of discovery before acceptance or by the seller's assurances.
(2) Revocation of acceptance must occur within a reasonable time after the buyer discovers or should have discovered the ground for it and before any substantial change in condition of the goods which is not caused by their own defects. It is not effective until the buyer notifies the seller of it.
(3) A buyer who so revokes has the same rights and duties with regard to the goods involved as if he had rejected them.
S & R has satisfied the elements of section 2608. The court found that the defect in the 14-gauge steel substantially impaired its value to S & R. Moreover, if S & R had tested the remainder of the steel in order to determine whether it is also defective, the test would have substantially reduced the value of that steel. Yet, without performing the test, S & R cannot be confident that the quality of the remainder of steel is sufficiently high to allow its sale to S & R's customers. The court found that the defect was not discovered before acceptance because it is latent and difficult to discover and that revocation was within a reasonable time of discovery of the defect. S & R received the customer complaint regarding the C. Itoh steel on or about December 12, 1984. The parties exchanged samples, inspected the steel, and engaged in limited negotiations. Notice of revocation was dated December 21, 1984, only nine days after discovery.
Section 2608 states that if the elements required for revocation are satisfied, then the "buyer may revoke his acceptance of a lot or commercial unit." Cal.Com.Code Sec. 2608(1)...
To continue reading
Request your trial
-
McCalden v. California Library Ass'n
...guides us in the analysis of § 51.7 as an indication of what the California courts might do in this case. See S & R Metals, Inc. v. C. Itoh & Co., 859 F.2d 814, 816 (9th Cir.1988) (in absence of express guidance, federal court must apply state law as it predicts state's highest court The Ca......
-
Katz v. Children's Hosp. of Orange County, 92-56393
...interpret and apply the law as we predict the state's highest court would interpret and apply it.' " (quoting S & R Metals, Inc. v. C. Itoh & Co., 859 F.2d 814, 816 (9th Cir.1988) (citing Fiorito Bros. v. Fruehauf Corp., 747 F.2d 1309, 1314 (9th Cir.1984))); see also DeSoto v. Yellow Freigh......
-
In re Enron Corp., Bankruptcy No. 01-16034 (MG).
...the aggrieved party is put in as good a position as if the other party had fully performed. See, e.g., S & R Metals, Inc. v. C. Itoh & Co. (Am.), Inc., 859 F.2d 814, 818 (9th Cir.1988) (referencing Cal.Com. Code § 1106); Allapattah, Servs., Inc. v. Exxon Corp., 61 F.Supp.2d 1326, 1330 (S.D.......
-
McCalden v. California Library Ass'n
...us in the analysis of Sec. 51.7 as an indication of what the California courts might do in this case. See S & R Metals, Inc. v. C. Itoh & Co., 859 F.2d 814, 816 (9th Cir.1988) (in absence of express guidance, federal court must apply state law as it predicts state's highest court The Califo......