The "Cardinal" Rule: No "More Than Four" Year Statute of Limitations Period Under UCC 2-725 Without Specific Time Reference

Cardinal Health 301, Inc. v. Tyco Electronics Corp., (2008) 169 Cal. Ap. 4th 116, 87 Cal. Rptr. 3d 5.

Cardinal Health manufactured medicine-dispensing cabinets for use in hospitals. When these suffered repeated malfunctions, Cardinal sued the suppliers of the defective component.

First Key Issue: Statute of Limitations Under UCC 2-725-- Four Years or More?
Applying California's version of UCC 2-725, the court ruled that the statute of limitations for breach of warranty causes of action is four years from the date of tender. Cardinal argued for more than four years, based UCC 2-725(2), which allows for a greater warranty period if the "warranty explicitly extends to future performance"--in which case the accrual date is triggered when the breach is, or should have been, discovered. Cardinal's warranty stated that the defective part would function for "50,000 cycles." This wasn't good enough to extend the limitations period beyond four years. The "more than four" warranty extension only applies if the warranty "refers to a specific time period."

Second Key Issue: No Privity Required For Implied Warranty Claim When There Are Direct Dealings
Cardinal claimed that the successor in interest to the manufacturer of the defective component was also liable for breach of implied warranty. The successor asserted the defense of "lack of privity" because it had no contract with Cardinal. Under express warranty claims no privity is required. However, under California law, vertical privity is required for a breach of implied warranty claim--unless an exception applies. Applying the rule of US Roofing, Inc. v. Credit Alliance Corp., (1991) 228 Cal. App. 3d 1431, 279 Cal. Rptr. 533, the Court held that no contract privity was required when there are "direct dealings." Since the successor adopted the same designs, used the same manufacturing tools, and continued to manufacture the parts in the same manner as the initial supplier, and the parties understood that "things would be business as usual," the court found sufficient evidence of direct dealings to establish liability for breach of implied warranty.

The opinion covers a number of other important areas. Bottom line for us:
(1) No "more than four" years for breach of express warranty without a specific reference to time.
(2) There may be liability for breach of implied warranty, without express contract privity, when there are "direct dealings" between buyer and seller.

Excluding Lost Profits and Consequential Damages Under UCC 2-719: Too Much of a Good Thing?

Whittlestone, Inc. v. Handi-Craft Company 2008 WL 4963053 (USDC, N. D. Ca. Nov. 19, 2008)

Buyers and sellers often limit the damages recoverable for breach contract in sale of goods cases. Under UCC 2-709(3) such limitations are enforceable, with exceptions for unconscionability. If the exclusionary language is too broadly written, it could be interpreted to preclude direct liability on the contract, not merely consequential damages.

Seller Whittlestone entered a 20 year contract to supply Handi-Craft with products. Buyer Handi-Craft was required to purchase a minimum amount each year. Buyer terminated the contract early. Seller filed suit, claiming the termination was a breach of contract. Buyer asked for damages under the contract, including the value of the lost minimum amount of sales over the remaining term of the contract.

Oops. Buyer's and seller's contract provided that in the event of "termination due to a material breach," "neither party shall be liable to the other for compensation, reimbursement, or damages because of the loss of anticipated sales...." The court enforced this literally against seller, finding that seller could not sue for direct lost sales to the breaching buyer. The court struck the language in the complaint damages for "the lost value of the twenty year contract..., lost profits, consequential damages."

This result is not within the typical spirit of consequential damage limitations, which are generally intended to eliminate liability for lost sales to third parties, not lost direct contract sales between the parties. On the other hand, because of the long term, the parties may have specifically contemplated this when the agreement was drafted.

Moral of the story: be careful about a limitation on "lost sales" that is so broad you don't have any direct damages left under the contract.

Sun-Dried Tomatoes, Anyone? Seller Recovery on Buyer Breach: Damages Based on A Lost-Volume Seller Theory UCC 2-702(2)

Culinary Farms, Inc. v. Mooney, 2008 WL 4889621 (Cal. App 3 Distr. Nov. 13, 2008) (Not Officially Published- Non Citable)

This case concerned the appropriate measure of damages where a buyer failed to complete the purchase of sun-dried tomatoes. Although the seller was able to recover possession and resell the tomatoes, it claimed damages as a “lost-volume seller” under Section 2708(2) of the Commercial Code.

A lost-volume seller is one who can establish that the buyer’s breach meant a lost sale that was not recouped by a resale of the product to another buyer, because the seller would have sold product to the other buyer in any event. Under these circumstances, the seller is allowed to recover its lost profits under Commercial Code Section 2708(2), because the seller would not otherwise be able to recover the economic damages suffered when the buyer refused to purchase.

In this case the defaulting buyer asserted that although the seller may have been a lost-volume seller for dried tomatoes generally, the particular product at issue was California sun-dried tomatoes, and the seller was not a lost-volume seller of this type of tomatoes. This was a good theory, and may have worked, but unfortunately for the seller, the facts got in the way. The court found that the breaching seller had not actually proved its contention, and in fact cited the defendant’s own deposition testimony against the defendant.

Unsecured Creditor's Levy on Deposit Account Defeats Prior Secured Creditor--UCC 9-332(b)

In a reported case of first impression under California law, the California Court of Appeal, First District, Division 5 ruled that an unsecured creditor's garnishment or levy on funds in a deposit account will defeat the prior secured creditor. Orix Financial Services, Inc. v. Kovacs, 83 Cal. Rptr. 3d 900, 08 Cal. Daily Op. Serv. 12,845 (Sept. 30, 2008).

The debtor defaulted on $1.5 million in secured debt held by Orix. Kovacs independently obtained a judgment against the same debtor for about $150,000. Kovacs was an unsecured creditor. In traditional analysis of creditors' priorities, Orix's claim was superior to Kovaks. However, Kovacs obtained a writ of execution and levied on the debtor's deposit accounts. The deposit account holders paid the funds to Kovacs. The prior secured creditor Orix sued the unsecured creditor Kovacs for unjust enrichment and imposition of a constructive trust.

The court of appeal ruled that the unsecured creditor was entitled to keep the money as a "transferee" under California's version of UCC 9-332(b) (California Comm. Code 9332(b)), which states:
"A transferee of funds from a deposit account takes the funds free of a security interest in the deposit account unless the transferee acts in collusion with the debtor in violating the rights of the secured party."

The term "transferee" is not defined. However, considering the underlying commercial policy favoring certainty in routine deposit account transactions--most of which involve transfers to unsecured creditors--the court ruled that the levying creditor should fall within the definition of "transferee" within UCC 9-332(b).

UCC Warranty Limitations--New Article in Orange County Lawyer Magazine

Our blogger Gregory E. Robinson published an article in the October 2008 edition of Orange County Lawyer Magazine, the official publication of the Orange County [California] Bar Association. "Beyond the Battle of the Forms--UCC Warranty Limitations: 'How to Make 'Em and How To Break 'Em," Vol. 50, N0. 10, Orange County Lawyer, page 18 (October 2008). The article discussed common situations in which express and implied warranties arise (UCC Sections 2-213, 2-314, 2-315). Sellers' exclusions and limitations of warranties are also considered (UCC 2-306) along with buyers' strategies to defeat these restrictions. Buyers' strategies include omission of these limits or exclusions from the contract (Section 2-207), subsequent dealings between the parties giving rise to new obligations, and failure of an essential purpose. (UCC 2-719). We have added a link to the article. Copies can be ordered from the Orange County Bar Association website, http://www.ocbar.org/ or from Robinson & Robinson, LLP.

Implied and Express Warranty Claims: Duck Feet Have No Class

The Central District of California recently denied class certification in a lawsuit alleging breach of express warranty and implied warrant of merchantability. Gable v. Land Rover of North America, 2008 WL 4441960 (C. D. Cal. Sept. 29, 2008)--not reported in F. Supp. 2d. Plaintiff claimed that Land Rovers sold in Michigan in 2005 and 2006 had a defective "toe-out" condition in the rear tires, causing the vehicles to be "duck-footed." The court found that many different circumstances can cause duck-footed misalignments. Without "individual inquiry" there was no way to determine whether the duck-footedness was caused by the manufacturer or driver. The court also noted that plaintiff had not shown that even a majority of the class vehicles experienced the defect. These two factors caused the judge, Andrew J. Guilford, to rule that the plaintiff had "no class." The opinion noted that courts often split over the issue of class certification involving defects that can be caused by the manufacturer or owner. (See Sammuel-Bassett v. Kia Motors America, Inc., 212 F.R.D. 271, 282 (E.D. Pa. 2002) [class certification granted in premature brake wear case]; Kia Motors America Corp. v. Yvonne Butler, No. 3D05-11455 (Florida Third District Court of Appeals, 2008) [class certification denied in case involving the exact same claims.]) Maybe the Ninth Circuit will have to determine whether duck feet have no class.

Statute of Limitations—Student Loans—6 years under Section 3-118

When enforcing or defending an action on a promissory note, remember that the UCC may specify a longer statue of limitations. A student borrower tried to block enforcement of her student loans by asserting the basic 4-year statute of limitations for breach of written contracts (California Code of Civil Procedure Section 337)*. She appealed the judgment against her and lost. In an unpublished decision, the California Court of Appeal, Section District (Los Angeles) found that the 6-year statute of limitations of Ca. Comm. Code Section 3118 (UCC 3-118) applied. The promissory notes were considered “negotiable instruments” covered by the longer statute of limitations. Under Section 3-106, reference to the “disclosure statement” in the notes did not make them “conditional” and therefore non-negotiable. Education Resources Institute v. Yokoyama, 2008 WL 3906834 (Aug. 26, 2008).

(*with thanks to Anonymous for correcting our mistaken reference to the Civil Code.)