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Rembrandt Enterprises, Inc. v. Dahmes Stainless Inc.

United States District Court, N.D. Iowa, Western Division

September 7, 2017

REMBRANDT ENTERPRISES, INC., Plaintiff,
v.
DAHMES STAINLESS, INC., Defendant.

          ORDER ON MOTIONS FOR SUMMARY JUDGMENT

          LEONARD T. STRAND, CHIEF JUDGE

         I. INTRODUCTION

         Presently before me are cross motions for summary judgment. Doc. Nos. 53 and 54. The motions are fully submitted and I find that no oral argument is necessary.

         II. HISTORY

         Plaintiff Rembrandt Enterprises, Inc. (Rembrandt), a large scale producer of eggs, filed this action on December 9, 2015. Doc. No. 1. Rembrandt primarily requests declaratory relief regarding its purchase contract with defendant Dahmes Stainless, Inc. (Dahmes). Rembrandt also requests restitution and an accounting of Dahmes' expenses. Id., at 4.

         Dahmes, a manufacturer of industrial products, filed its answer on April 1, 2016. Doc. No. 14. Dahmes also filed a counterclaim against Rembrandt, alleging two counts of breach of contract.[1] Doc. No. 14 at 12-15. Dahmes also filed a motion to strike a portion of the complaint, arguing that it contained a description of an offer to compromise. Doc. No. 16. The Honorable C.J. Williams, Chief United States Magistrate Judge, found it appropriate to seal the relevant documents rather than striking them. Doc. No. 29. Dahmes then filed a supplemental answer. Doc. No. 31. The parties also stipulated to a protective order. Doc. No. 17.

         The parties filed cross motions for summary judgment on March 3, 2017. Doc. Nos. 53 and 54. Rembrandt filed a resistance to Dahmes' motion for summary judgment on April 7, 2017. Doc. No. 69. On that same date, Dahmes filed a resistance to Rembrandt's motion for summary judgment. Doc. No. 70. Each party then filed reply materials. Doc. Nos. 71, 72, 73.

         Throughout the pendency of the case, the parties have engaged in numerous discovery disputes (See Doc. Nos. 40, 49) and several disputes regarding the sealed information (See Doc. No. 66).

         III. FINDINGS OF FACT

         As noted above, Rembrandt is a large scale producer of eggs and egg products, with several different facilities in Iowa and Minnesota. In approximately 2014, Rembrandt sought to expand its business and provide egg products to cereal producer Kellogg.[2] The exact details regarding Rembrandt's and Kellogg's relationship are disputed. In short, Rembrandt alleges it had assurances that it could become Kellogg's sole egg product supplier because Kellogg's relationship with its past supplier had soured. Dahmes posits that Rembrandt was merely hoping that if it substantially increased its output capacity it could secure a larger share of Kellogg's business. Regardless, it is undisputed that Rembrandt took steps to comply with Kellogg's corporate requirements and to become a more significant supplier for Kellogg. Rembrandt began the undertakings necessary to build a new egg processing plant near an existing facility in Thompson, Iowa. Rembrandt's plan for the new site was for a large scale facility, with a construction budget of over $100 million dollars.

         As part of the new and expanded Thompson facility, Rembrandt entered into an agreement (Doc. No. 53-3 at 18) with Dahmes for an industrial egg dryer.[3] Rembrandt and Dahmes signed the purchase agreement on November 20, 2014. The purchase price was $8.5 million dollars, subject to adjustment for change orders. Following subsequent change orders, the actual price turned out to be $8.99 million. A down payment of $2.5 million was due at signing and additional progress payments were scheduled throughout the contract term.

         Per its terms, the agreement is governed by Minnesota law. It required Dahmes to install the dryer with an initial completion date of December 1, 2015, and a final operation-ready completion date of January 1, 2016. Rembrandt contends those dates were included in the agreement to allow it to begin its proposed relationship with Kellogg. Dahmes states that it was largely unaware of why Rembrandt was building a new facility or how it was financing the project.

         The agreement contained financial penalties for missed deadlines. The agreement also contained several confidentiality requirements that have been previously discussed in the course of this case. Because of the scale of the project, Dahmes was required to coordinate installation with the Rembrandt's general contractor. Rembrandt broke ground on its Thompson facility in the fall of 2014. The parties dispute whether the specific location of the dryer's installation was necessarily included in the agreement (i.e., was the agreement to provide a dryer for the Thompson facility or was the agreement to provide a dryer that Rembrandt merely intended to have installed at the Thompson facility).

         Highly Pathogenic Avian Influenza (Avian Flu) is an aggressive illness fatal to domestic poultry. In the spring of 2015, an epidemic of Avian Flu hit the Midwestern United States. The outbreak was notorious and engendered a large amount of media coverage and government intervention. While six Rembrandt facilities were affected by the Avian Flu, the Thompson facility was not. Ultimately, Rembrandt was forced to eliminate over a million birds, which cut its production capacity by over 50%.

         The causes of the Avian Flu outbreak are disputed. Rembrandt asserts that it took appropriate precautionary measures to avoid the outbreak and spread of an Avian Flu type illness. Dahmes contends that Rembrandt increased its risk by having an “inline” production model in which eggs are hatched, raised, and processed in the same location. Dahmes posits that if these operations were kept separate, the impact of an Avian Flu outbreak could have been limited.

         As a result of its lost capacity, Rembrandt declared a force majeure to its buyers and began distributing eggs and egg products on a pro rata basis. Rembrandt also limited access to its Thompson facility to reduce the risk of an Avian Flu infection. Egg prices went up and Rembrandt lost its opportunity to supply eggs to Kellogg at the quantities that Rembrandt had hoped.[4] Rembrandt contends it lost other business and profits as a result of the Avian Flu outbreak and the market repercussions the outbreak caused. Dahmes contends that Rembrandt's problems were partly self-inflicted, such as being unable to provide cage-free eggs requested by one of its biggest customers, General Mills. Dahmes argues that Rembrandt had already missed opportunities with Kellogg prior to the Avian Flu outbreak and that Rembrandt had failed to achieve its objectives with Kellogg as early as late 2014. Finally, Dahmes contends that Rembrandt was largely compensated for the damages from the Avian Flu outbreak by insurance and government payments.

         In May 2015, Rembrandt told its contractors, including Dahmes, of a temporary halt on the new Thompson facility. The parties agree that on October 22, 2015, Rembrandt informed Dahmes that the expansion was not happening. Dahmes told Rembrandt that this constituted a breach of contract. In January 2016, Rembrandt's board voted to formally scuttle the construction project and write off the costs occurred. Rembrandt's exact financial situation at the time, along with the reason the board decided to scuttle the project, are disputed by the parties.

         Prior to the alleged breach, Rembrandt had paid Dahmes $4.31 million, although it appears that $546, 000 was subsequently returned to Rembrandt per the parties' agreement. Dahmes presented Rembrandt with a one page accounting summary of its alleged damages, which purported to itemize claims for lost profits of $2.4 million, $329, 000 in alleged costs incurred for suspending work in process, and actual expenses allegedly incurred of $992, 000.

         Other relevant facts are discussed below.

         IV. SUMMARY JUDGMENT STANDARDS

         Any party may move for summary judgment regarding all or any part of the claims asserted in a case. Fed.R.Civ.P. 56(a). Summary judgment is appropriate when “the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show that there is no genuine issue of material fact and that the moving party is entitled to a judgment as a matter of law.” Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).

         A material fact is one that “‘might affect the outcome of the suit under the governing law.'” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). Thus, “the substantive law will identify which facts are material.” Id. Facts that are “critical” under the substantive law are material, while facts that are “irrelevant or unnecessary” are not. Id.

         An issue of material fact is genuine if it has a real basis in the record, Hartnagel v. Norman, 953 F.2d 394, 395 (8th Cir. 1992) (citing Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87 (1986)), or when “‘a reasonable jury could return a verdict for the nonmoving party' on the question.” Woods v. DaimlerChrysler Corp., 409 F.3d 984, 990 (8th Cir. 2005) (quoting Anderson, 477 U.S. at 248). Evidence that only provides “some metaphysical doubt as to the material facts, ” Matsushita, 475 U.S. at 586, or evidence that is “merely colorable” or “not significantly probative, ” Anderson, 477 U.S. at 249-50, does not make an issue of material fact genuine.

         As such, a genuine issue of material fact requires “sufficient evidence supporting the claimed factual dispute” so as to “require a jury or judge to resolve the parties' differing versions of the truth at trial.” Anderson, 477 U.S. at 248-49. The party moving for entry of summary judgment bears “the initial responsibility of informing the court of the basis for its motion and identifying those portions of the record which show a lack of a genuine issue.” Hartnagel, 953 F.2d at 395 (citing Celotex, 477 U.S. at 323). Once the moving party has met this burden, the nonmoving party must go beyond the pleadings and by depositions, affidavits, or otherwise, designate specific facts showing that there is a genuine issue for trial. Mosley v. City of Northwoods, 415 F.3d 908, 910 (8th Cir. 2005). The nonmovant must show an alleged issue of fact is genuine and material as it relates to the substantive law. If a party fails to make a sufficient showing of an essential element of a claim or defense with respect to which that party has the burden of proof, then the opposing party is entitled to judgment as a matter of law. Celotex, 477 U.S. at 322.

         In determining if a genuine issue of material fact is present, I must view the evidence in the light most favorable to the nonmoving party. Matsushita, 475 U.S. at 587-88. Further, I must give the nonmoving party the benefit of all reasonable inferences that can be drawn from the facts. Id. However, “because we view the facts in the light most favorable to the nonmoving party, we do not weigh the evidence or attempt to determine the credibility of the witnesses.” Kammueller v. Loomis, Fargo & Co., 383 F.3d 779, 784 (8th Cir. 2004). Instead, “the court's function is to determine whether a dispute about a material fact is genuine.” Quick v. Donaldson Co., Inc., 90 F.3d 1372, 1376-77 (8th Cir. 1996).

         On cross motions for summary judgment, the “court must rule on each party's motion on an individual and separate basis, determining, for each side, whether a judgment may be entered in accordance with the Rule 56 standard.” 10A Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure § 2720 (3d ed. 1998). When the parties seek summary judgment on some of the same issues, I may consider all the parties' arguments as to each issue, keeping in mind the separate inferences that are to be drawn from each motion. See Wright v. Keokuk Cnty. Health Ctr., 399 F.Supp.2d 938, 946 (S.D. Iowa 2005).

         V. ANALYSIS

         In its motion for summary judgment, Rembrandt makes three arguments. First, that it is entitled to summary judgment on its declaratory judgment claim based on the doctrine of frustration of purpose. Second, Rembrandt is entitled to summary judgment on Dahmes' breach of contract counterclaim. Finally, Rembrandt argues that it is entitled to summary judgment on Dahmes' counterclaim for lost profits.

         Dahmes requests that the court “enter an Order in Dahmes' favor granting Dahmes' Motion for Summary Judgment and dismissing Rembrandt's Complaint. . .” Doc. No. 54 at 2. Dahmes then goes onto request a trial on the issue of its damages. Accordingly, then, it seems Dahmes is requesting summary judgment on Rembrandt's declaratory judgment claim and in favor of its breach of contract counterclaim.

         A. Breach of Contract

         At the outset, the parties agree that they entered into a contract and that Rembrandt breached that contract. Their dispute is whether the breach is excusable. As noted above, when considering cross motions for summary judgment, I must consider the issues individually to preserve the proper deference to the non-moving party. In this instance, the parties raise wholly separate rationales in support of their respective motions. Accordingly, I will consider the motions separately.

         1. Frustration of Purpose

         a. Rembrandt's Argument

         Rembrandt's motion for summary judgment is rooted in the doctrine of frustration of purpose. As set out in Rembrandt's brief:

         The defense of frustration of purpose applies where: (1) The party's principal purpose in making the contract is frustrated; (2) without that party's fault; (3) by the occurrence of an event, the non-occurrence of which was a basic assumption on which the contract was made. City of Savage v. Formanek, 459 N.W.2d 173, 176 (Minn.Ct.App. 1990) (internal citation omitted).

Because all three elements are indisputably present, Rembrandt is entitled to judgment as a matter of law on its declaratory judgment claim that it was entitled to terminate the Agreement, and on Dahmes' counterclaim that Rembrandt terminated the Agreement without cause.

Doc. No. 53-1 at 14.

         Rembrandt states that the principal purpose of the agreement with Dahmes was to “supply equipment for the egg processing facility under construction at Rembrandt's location in Thompson, Iowa.” Id. Rembrandt then makes its argument regarding each frustration of purpose element. Regarding the purpose of the contract, Rembrandt argues:

         The principal purpose of the contract “[m]ust be so completely the basis of the contract that, as both parties understand, without it the transaction would make little sense.” City of Savage, 459 N.W.2d at 176 (quoting Restatement (Second) of Contracts § 265 cmt. a (1981)). However, it is only the purpose of the party seeking to be excused from the contract that must be frustrated for the doctrine to apply. Little Canada Charity Bingo Hall Ass'n v. Movers Warehouse, Inc., 498 N.W.2d 22, 25 (Minn.Ct.App. 1993). In other words, the lynchpin is Rembrandt's purpose, not Dahmes' purpose. In determining the principal purpose of a contract, a court may consider both extrinsic evidence and the surrounding circumstances. Pieper, Inc. v. Land O'Lakes Farmland Feed, LLC, 390 F.3d 1062, 1066 (8th Cir. 2004). . .

         Rembrandt's principal purpose is expressly stated in Article I of the Agreement: to obtain a yellow egg dryer that will be “install[ed] . . . at Rembrandt's location in Thompson, Iowa” where Rembrandt was building a new egg processing plant. (SOF ¶ 19.) The Agreement's requirement that the dryer be “fully installed” and “produc[ing] saleable and acceptable product . . . no later than January 1, 2016” provides further evidence of this specific purpose, since the deadline was necessary for Rembrandt to begin processing Kellogg's dried egg volume at the Thompson facility. (SOF ¶ 20.) . . .

In [City of Savage v. Formanek, 459 N.W.2d 173, 176 (Minn.Ct.App. 1990)] the Minnesota Court of Appeals held that the principal purpose of the defendant landowners in entering an assessment agreement with the City of Savage to lay sewer lines was to “enable industrial development” on their property. 459 N.W.2d at 176. The court found this to be the principal purpose based on the fact that the landowners “would have little use for sewer and water on a parcel of land they have held for 31 years if they could not sell or develop it.” Id. at 176. Here, it is undisputed that Rembrandt had no use for a dryer capable of drying over 12, 000 pounds of whole eggs per hour unless it was installed in a facility capable of producing and processing such an enormous volume of liquid eggs. (SOF ¶ 16.) Consequently, without the planned Thompson facility to make use of the yellow dryer, the Agreement “would make little sense.” See Formanek, 459 N.W.2d at 176.

Id. at 14-16.

         Regarding frustration, Rembrandt argues that its purpose was thwarted by the Avian Flu outbreak:

Under Minnesota law, a party's principal purpose is frustrated when a change in circumstances leaves it with “no commercial reason” to follow through on the agreement. Pieper, 390 F.3d at 1066; accord Formanek, 459 N.W.2d at 166 (rejecting argument that the purpose of the contract must become impossible to constitute frustration). In this case, it did become impossible for Rembrandt to achieve its principal purpose in entering the Agreement--obtaining a large yellow dryer for the new Thompson facility--because the 2015 HPAI outbreak forced Rembrandt to terminate construction of the Thompson facility. The changes wrought by HPAI made a new factory unjustifiable, making it unlikely it could ever open its doors even if was built. . .
There was no point in continuing construction, however, because HPAI had caused such a massive drop in demand for dried egg products that the new facility would likely never have opened its doors. (SOF ¶ 56.) Nor would Rembrandt's lenders have permitted such capital expenditures by Rembrandt; they slashed Rembrandt's capital expenditure budget from $365 million over five years to no more than $35 million in 2016 and $20 million annually thereafter. (SOF ¶ 58.)
The cancellation of the Thompson facility project, which frustrated Rembrandt's principal purpose of obtaining a dryer for the facility, is similar to the frustration in both Orix and Formanek.

Id. at 16-17.

Regarding the second element, Rembrandt argues that “a party is not at fault for the frustration of a contract's principal purpose if it did not cause the frustrating event. See Formanek, 459 N.W.2d at 177.” Id. at 18. Rembrandt states that the Avian Flu outbreak frustrated its ability to ...

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