Unique Systems, Inc. v. Zotos Intern., Inc., s. 79-2066

• Decision Date: 17 June 1980
• Docket Number: 80-1013 and 80-1122,Nos. 79-2066,s. 79-2066
• Citation: 622 F.2d 373
• Parties: 28 UCC Rep.Serv. 1340 UNIQUE SYSTEMS, INC., and Duane F. Lilja, Plaintiffs-Appellees and Cross-Appellants, v. ZOTOS INTERNATIONAL, INC., Defendant-Appellant and Cross-Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 373

622 F.2d 373

28 UCC Rep.Serv. 1340

UNIQUE SYSTEMS, INC., and Duane F. Lilja Plaintiffs-Appellees and Cross-Appellants, v. ZOTOS INTERNATIONAL, INC., Defendant-Appellant and Cross-Appellee.

Nos. 79-2066, 80-1013 and 80-1122.

United States Court of Appeals Eighth Circuit.

Submitted April 14, 1980.

Decided May 23, 1980.

Rehearing and Rehearing En Banc Denied June 17, 1980.

Harold D. Field, Jr., Leonard, Street & Deinard, Minneapolis, Minn., argued, and Nancy C. Dreher, Minneapolis, Minn., on brief, for defendant-appellant and cross-appellee.

Robert J. Hennessey, Larkin, Hoffman, Daly & Lindgren, Minneapolis, Minn., for plaintiffs-appellees and cross-appellants.

Before HEANEY and ARNOLD, Circuit Judges, and SACHS, ^* District Judge.

ARNOLD, Circuit Judge.

This appeal arises out of a contract dispute between plaintiffs, Unique Systems, Inc. (Unique), and Duane F. Lilja (Lilja), and defendant Zotos International, Inc. (Zotos). Zotos appeals a judgment entered on November 29, 1979, for $398,760.00 in favor of plaintiffs. Zotos also appeals an order dated February 7, 1980, wherein the judgment was modified by changing its date of entry to November 30, 1978, nunc pro tunc. Unique and Lilja appeal the denial of recovery of lost profits for the third and fourth year of the contract and the denial of prejudgment interest. We affirm.

This case was originally brought in the District Court of Hennepin County, Minnesota, and was removed by Zotos to the United States District Court for the District of Minnesota. The case was tried before the Honorable Robert G. Renner, United States Magistrate (now United States District Judge), pursuant to a stipulation and order of reference providing for Magistrate Renner to serve as master, with direct appeal, if any, to this Court. On November 30, 1978, Magistrate Renner issued his Findings of Fact and Conclusions of Law, a Recommended Order for Judgment, and a Memorandum Opinion. United States District Judge Miles W. Lord adopted this Order on the same day, and judgment was entered accordingly. After cross-motions for amendments had been made, on March 5, 1979, the Magistrate issued an Order for Amended Findings and Conclusions, an Amended Recommended Order and another Memorandum Opinion. This Recommended Order was adopted by Judge Lord on March 9, 1979.

Zotos filed a notice of appeal on April 2, 1979. Unique and Lilja filed a notice of cross-appeal on April 11, 1979. On May 15, 1979, while the appeal and cross-appeal were pending, this Court decided Duryea v. Third Northwestern National Bank, 602 F.2d 809 (8th Cir. 1979). In Duryea the Court determined that an order of reference to a magistrate could not properly provide for direct appeal to this Court, and that a district court's judgment entered on the magistrate's recommended findings was deficient if it failed to indicate that the court had considered and adopted the magistrate's conclusions of law. After counsel for plaintiffs and defendant advised the Court that the Order of Reference used in this case was substantially identical to that found to be defective in Duryea, this Court entered an Order remanding for reconsideration in light of Duryea. After a hearing and submission of briefs, Judge Lord issued an Order wherein he confirmed, without change, the Magistrate's Conclusions. On November 29, 1979, a new judgment was entered against Zotos in the same amount as the first judgment. Notices of Appeal and Cross-Appeal were again filed.

On December 3, 1979, counsel for plaintiffs wrote a letter to Judge Lord requesting that he amend the second judgment nunc pro tunc so as to make it effective November 30, 1978, the date of Magistrate Renner's first Recommended Order. Zotos opposed the request by letter of December 6, 1979. By Order of January 18, 1980, this Court remanded the appeal from the second judgment for the limited purpose of permitting Judge Lord to rule on the letter request and thereby determine "what interest on the judgment petitioner is entitled to" (Designated Record (D.R.) 1038). On February 7, 1980, Judge Lord issued an order changing the date of entry of the second judgment from November 29, 1979, to November 30, 1978, nunc pro tunc. Zotos now appeals that action.

I. Facts

The contract which is the subject of this case was signed January 30, 1974, and amended by letter on February 21, 1974. Lilja is the holder of a patent on a multi-station hair-spray system intended for use in beauty salons. Zotos is a major manufacturer and distributor of "soft goods" (shampoos, permanents, and setting lotions) to the professional beauty field. Neither party had experience in the manufacture of hair-spray systems or any other type of beauty-salon equipment.

Under the contract Lilja and Unique Systems, Inc., were to develop, manufacture, and place in inventory hair-spray systems. Zotos was to purchase the systems for resale through its nationwide system of wholesale distributors. The original contract of January 30, 1974, set up a timetable for Lilja to stock the systems and Zotos to pay for them. The contract obligated Zotos to buy 15,000 systems over a period of two years with the option to buy at least 7,500 systems in each of years three and four. In the contract as amended the parties agreed that actual stocking and distribution of the systems would commence with "month one," defined as a "mutually agreed date in the year 1974."

These changes in the agreement were made at Zotos's instigation. Zotos feared that the current oil shortage would make it impossible to obtain a sufficient supply of alcohol needed for the manufacturer of the liquid spray Zotos was required to develop and supply for the systems. Lilja agreed to the changes in schedule. At the time, February of 1974, both parties were confident that "month one" could be set before the end of the year.

At the time the contract was signed, Lilja's hair-spray system was still in the design and development stage. During 1974 Lilja made several design changes which were approved by Zotos. During that year several unanticipated delays occurred, some of which were the fault of Lilja, some the fault of Zotos, and some the fault of third parties. By January of 1975 month one still had not been set, and neither party to the agreement had completed the steps necessary to market the system.

In a series of letters and telephone conversations during early 1975, Lilja repeatedly told Zotos that he was ready to set a schedule for marketing the systems and was ready for Zotos to "place an order." He also suggested some changes in the number of systems in the initial order and in the place of initial distribution. Other companies had introduced similar hair-spray systems into the market by this time, and Zotos began to fear a softening of the market. Zotos also began expressing fears about the mechanical viability of the system. In conversations with Lilja, Zotos's representatives insisted that the company would not place an order for any systems until they had seen a demonstration of finished sample components.

Lilja's reaction to Zotos's waivering commitment was to continue to insist that Zotos "place an order" for the initial purchase of systems. The parties agreed to meet in July of 1975 at Zotos's main offices in Darien, Connecticut, to discuss all problems. At that meeting, Lilja demonstrated the system, which was by this time complete except for a prototype bottle holder made partially of wood. The demonstration was successful except for a minor problem with a dripping needle. Zotos's representatives agreed orally that the system as demonstrated met the warranty requirements of the contract, but they refused to put their agreement in writing unless Lilja would agree to a market test of completed systems. Written proposals and counter-proposals were made, but no agreement was reached. Lilja met with Zotos's personnel again in Chicago on August 3. Zotos again insisted on a test market. In light of Zotos's refusal to proceed without the market test period, Lilja considered the contract repudiated. He so notified Zotos and filed suit soon after.

II. The Issue of Repudiation

Appellant's major contention on appeal is that the trial court erred in finding that Zotos repudiated the contract. We disagree. After a careful review of the record, including the transcript of the 23-day trial, we have concluded that the District Court's findings are supported by substantial evidence and are not clearly erroneous. We also conclude that it applied the correct legal standard to the facts.

In its Conclusions of Law the Court held:

The defendant's actions in refusing to honor its contractual obligations constitute a breach of the contract and a repudiation of the contract between the parties.

There is ample evidence that as early as September of 1974 Zotos had decided not to comply with the contract as written. In the ensuing months Zotos's actions bore out this intention. Ralph Evans, President of Zotos, refused to authorize the purchase of capping equipment necessary for filling the bottles of liquid fixative. Zotos's representatives communicated to Lilja Zotos's insistence upon a demonstration of the finished sample components, although this was not required by the contract. Whether these acts in early 1975 amount to a repudiation of the contract, we need not decide, because on July 25 and 26, 1975, and again on August 3, after a successful demonstration of the system, Zotos unequivocally refused to perform. At these meetings, Ralph Evans, President of Zotos, made it clear that Zotos would not set "month one" or agree to purchase any systems until an extensive market test could be conducted in the field. Zotos's obligation to continue with the contract would be conditioned upon its approval of the market-test results, a requirement found nowhere in the contract.

The rights of the aggrieved party after a repudiation are controlled by Minn.Stat. § 336.2-610. ¹...