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Servbest Foods, Inc. v. Emessee Indus.





APPEAL from the Circuit Court of Cook County; the Hon. WILLIAM B. KANE, Judge, presiding.


Emessee Industries, Inc. (hereinafter Emessee), brings this appeal from a $76,478.96 judgment in favor of Servbest Foods, Inc. (hereinafter Servbest), by the circuit court of Cook County and from various orders of the trial court ordering production and imposing discovery sanctions upon Emessee. On appeal, Emessee contends that the trial court erred: (1) in granting Servbest contract damages as provided by section 2-706 of the Uniform Commercial Code (hereinafter Code) (Ill. Rev. Stat. 1973, ch. 26, par. 2-706); (2) in granting storage costs and prejudgment interest; and (3) in striking Emessee's affirmative defenses as a sanction for its noncompliance with certain discovery orders. We affirm.

The principal facts in this suit are undisputed. Servbest (as seller) and Emessee (as buyer) entered into a contract on January 23, 1974, for the sale of 200,000 pounds of 50% lean navel trimmings *fn1 to be delivered by Servbest to Emessee on February 22, 1974. Under the terms of the contract, delivery of the meat to Emessee would be effected by the transmission of invoices and warehouse receipts. On a practical basis such a transfer required that meat held in cold storage in Servbest's account would be transferred on paper to Emessee's account. The contract further provided that payment of the $105,000 contract price, calculated at a rate of 52 1/2 cents per pound, was due on February 22, 1974, upon delivery of the meat as indicated above.

It is undisputed that on February 22, 1974, Servbest had 200,000 pounds of navel trimmings in cold storage in lot 19700, *fn2 which conformed to the contract, and that the appropriate invoices and warehouse receipts representing such meat were delivered to Emessee on that date. It is also undisputed that Emessee made no payment of the contract price, or any portion thereof, on February 22, 1974, as required by the terms of the contract. Moreover, attempts by representatives of Servbest to contact Emessee's president, Martin Skolnik (hereinafter Skolnik), subsequent to that date in order to demand payment were futile. Such demand was made, however, to David Lanski, a representative of Emessee. On May 3, 1974, the meat was redelivered to Servbest. A letter acknowledging the redelivery was sent by Emessee to Servbest. In the letter Emessee stated that it considered the Servbest-Emessee contract and Servbest's invoice cancelled.

On July 17, 1974, Servbest filed suit against Emessee, alleging a breach of contract by nonpayment of the contract price. The complaint further alleged a mitigating resale of 200,000 pounds of navel trimmings on June 12, 1974, to a bona fide purchaser at 20 1/4 cents per pound. Emessee's answer denied the breach and alleged two alternative affirmative defenses: (1) that Servbest cancelled the contract, relieving Emessee of any further obligations thereunder, including payment (Ill. Rev. Stat. 1973, ch. 26, par. 2-703); and (2) that Servbest accepted a contract with a Silver Skillet Foods Company (hereinafter Silver Skillet) in accord and satisfaction of Emessee's obligations under the Servbest-Emessee contract.

On January 24, 1975, Servbest made a number of production requests of Emessee pursuant to Supreme Court Rule. (Ill. Rev. Stat. 1973, ch. 110A, par. 214.) When Emessee failed to comply with these requests for approximately one year, Servbest moved to compel production and for attorney's fees and costs (Ill. Rev. Stat. 1973, ch. 110A, par. 219(a)). The court ordered Emessee to produce the requested documents or file an objection to the production requests. Emessee responded by generally objecting to all of Servbest's requests. It should be noted that our review is limited to a request, by Servbest, for the production of all documents reflecting loans "made, secured, received or guaranteed by Emessee during 1974." On August 27, 1976, after hearing full argument on the issues, the trial court ordered Emessee to produce the loan documents by September 15, 1976. The court reserved ruling upon Servbest's motion for costs and attorney's fees.

Subsequently, Emessee moved to vacate the August 27, 1976, order, asserting that the relevancy of the documents had not been established. Emessee filed a memorandum in support of its motion, to which it attached the affidavit of Martin Skolnik, Emessee's president. In the affidavit, Skolnik described his fear that disclosure of the requested loan documents would endanger Emessee's business. On October 5, 1976, the trial court, after a full hearing, denied Emessee's motion to vacate and set a November 1, 1976, compliance date.

In the next few months Emessee apparently made several offers to Servbest for partial compliance. *fn3 These offers were rejected and on December 6, 1976, when Emessee had still failed to comply, Servbest moved for an order holding Emessee in contempt and for attorney's fees and costs. In the December 20, 1976, hearing on Servbest's motion for contempt, Emessee sought to introduce the testimony of Skolnik as to the damage which could be suffered by Emessee if the loan documents were produced, but was denied leave to do so by the court. However, the trial court did offer to review the loan documents in camera and thereafter determine whether they should be turned over to Servbest. Emessee rejected this offer. The court orally cited Emessee for contempt but reserved ruling on the sanction to be imposed.

In the December 23, 1976, hearing on the issue of sanctions, Emessee was allowed to file an affidavit by Skolnik relating an incident in which Servbest's president, Kentor, made disparaging and derogatory remarks about Skolnik to an official of a bank where Emessee had a business relationship. In the affidavit, Skolnik went on to express the fear that disclosure of Emessee's loan documents would result in Kentor further damaging its reputation in the business community, which would consequently undermine its ability to obtain future financing. The trial court awarded attorney's fees but rejected Servbest's suggestion that a fine or imprisonment might be a feasible sanction in this case. Rather, the court determined that it would impose a sanction against the pleadings. This ruling, the court explained, was the result of Emessee's refusal to produce the pertinent documents for in camera inspection. The court further noted that Emessee could have sought a protective order to avoid impairment of its status and reputation within the business community.

On January 3, 1977, in a last attempt to avoid contempt, Emessee offered to unconditionally produce all of its loan documents reflecting the period from the date of the purchase order to the date of redelivery. As this offer did not reflect full compliance, the trial court refused it on January 5, 1977, and ordered that both of Emessee's affirmative defenses should be stricken. Emessee appeals from the August 27, 1976, October 5, 1976, December 20, 1976, December 23, 1976, and January 5, 1977, orders of the trial court.

Because Emessee's affirmative defenses had been stricken, the sole issue at the trial was Servbest's entitlement to damages. Servbest introduced alternative methods *fn4 of valuing its contract damages. Servbest sought either the deficiency between the contract price and the amount recovered upon the sale of the meat identified to the contract or the deficiency between the contract price and the amount recovered upon the sale of the first 200,000 pounds of navel trimmings meeting the contract specifications which were sold after the redelivery of the meat by Emessee on May 3, 1974.

Servbest alleged the second alternative as a possible basis for calculating damages because navel trimmings are a fungible good as defined by the Code (Ill. Rev. Stat. 1973, ch. 26, par. 1-201(17)). In further support for this alternative, Kentor testified that it was Servbest's standard practice to ship meat on the basis of its storage-expiration date. Consequently, Kentor concluded, it was only natural that the first 200,000 pounds of navel trimmings sold subsequent to the breach was meat which had the nearest expiration date rather than the meat from lot 19700. Emessee objected to the admissibility of any resale other than those asserted in the complaint or in Servbest's answer to Emessee's interrogatories.

In order to prove incidental damages, Servbest introduced a storage invoice for the storage of 287,550 pounds of meat in lot number 19700. It also claimed prejudgment interest on the total contract price from the date of the breach until the first mitigating resale and then pro rata until the entry of judgment.

Lanski and Kentor testified at trial as to whether Servbest gave Emessee notice of its intent to mitigate its damages after the breach by the resale of the 200,000 pounds of navel trimmings. Kentor and Lanski both testified as to a May 3, 1974, conversation that they had; however, the substance of that conversation was disputed. Lanski's version was that he informed Kentor of the impending redelivery of the navel trimmings and suggested that a requirements contract between Silver Skillet, a corporation in which Lanski was president, and Servbest at the same 52 1/2 cents-per-pound rate allowed Emessee would help remedy Servbest's profit loss from the Servbest-Emessee contract.

Kentor, while acknowledging the Silver Skillet contract, denied that the Silver Skillet contract in any way affected Emessee's obligations to Servbest. Rather, Kentor stated he informed Lanski that Servbest would take whatever recourse was available under the law against Emessee and that he would resell the meat and hold Emessee liable for his losses. Emessee alleged that Kentor was impeached concerning the alleged notice to Emessee by his deposition, which failed to mention any notice given Emessee of Servbest's intent to resell. The trial court, however, ruled that this did not constitute impeachment. At the close of its defense, Emessee requested leave to submit an affirmative defense of lack of notice, but this was denied by the trial court. The trial court did, however, allow Servbest to amend its complaint by deleting the reference as to the date on which the resale was to have occurred in order to comply with the proof adduced at trial.

On March 3, 1978, the trial court, sitting without a jury, entered judgment for Servbest and awarded damages of $64,782.20. This judgment included $1,455.70 in prejudgment interest from February 22, 1974, until June 6, 1974, and $727.00 in storage costs, plus court costs. The trial court specifically found that the meat at issue was fungible and allowed Servbest to calculate damages upon the first sales after the May 3, 1974, breach, which totaled 200,000 pounds of navel trimmings. On March 30, 1978, Servbest filed a timely post-trial motion seeking a modification of the judgment to include prejudgment interests for the period from June 6, 1974, until March 3, 1978. The trial court granted that motion and awarded an additional $11,696.76 in damages to Servbest for a total award of $76,478.96. Emessee filed a timely appeal.

I. 2-706 Damages

• 1 A seller's rights upon the breach of a buyer are outlined in section 2-703 of the Code. (Ill. Rev. Stat. 1973, ch. 26, par. 2-703.) Under this section, a seller may cancel the contract, eliminating any further need of performance by the seller, and additionally may seek damages based upon resale (section 2-706), market price (section 2-708), or contract price (section 2-709) (Ill. Rev. Stat. 1973, ch. 26, pars. 2-706, 2-708, 2-709). The resale remedy afforded by section 2-706, under which Servbest sought and was awarded damages, grants a seller the right to resell and hold the buyer for the difference between the contract price and the resale price, together with any incidental damages, but less any saved costs. (Ill. Rev. Stat. 1973, ch. 26, par. 2-706(1); Alco Standard Corp. v. F. & B. Manufacturing Co. (1970), 132 Ill. App.2d 24, 265 N.E.2d 507, aff'd in part, rev'd in part (1972), 51 Ill.2d 186, 281 N.E.2d 652.) Section 2-706 provides in pertinent part that:

"(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 ...

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