Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Official citation and/or docket number and footnotes (if any) for this case available with purchase.

Learn more about what you receive with purchase of this case.

SCHWARTZ v. MICHIGAN POWER MANAGEMENT CO.

United States District Court, Northern District of Illinois, E.D


April 7, 1983

FRANK J. SCHWARTZ AND CHICAGO POWER MANAGEMENT, INC., PLAINTIFFS AND COUNTERDEFENDANTS,
v.
MICHIGAN POWER MANAGEMENT COMPANY, DEFENDANT AND COUNTERPLAINTIFF.

The opinion of the court was delivered by: Shadur, District Judge.

MEMORANDUM OPINION AND ORDER

Chicago Power Management, Inc. and its major principal Frank J. Schwartz*fn1 bring this diversity action against Michigan Power Management Company ("Michigan Power"). Schwartz's three-count Second Amended Complaint (the "Complaint") focuses on Michigan Power's asserted failure to obtain the approval of Underwriters Laboratories, Inc. ("UL"), a standard testing laboratory, for the electrical power management systems Schwartz purchased pursuant to a "Dealer Agreement" (the "Agreement") with Michigan Power:

    1. Count I claims UL approval was an
  unsatisfied condition precedent to the Agreement.

    2. Count II asserts Michigan Power breached the
  Agreement by failing to secure UL approval and to
  offer Schwartz its new products under the
  Agreement's right of first refusal provision.

    3. Count III charges Michigan Power induced
  Schwartz to enter into the Agreement through
  various misrepresentations, including its
  statement that UL approval would be procured for
  all its present products.*fn2

In turn, Michigan Power has filed a counterclaim, asserting Schwartz's failure to perform his Agreement undertakings.

Schwartz has filed two summary judgment motions under Fed.R.Civ.P. ("Rule") 56, one as to all three Complaint counts and the other as to the counterclaim. For the reasons stated in this memorandum opinion and order, both motions are denied.

Facts*fn3

On August 10, 1980 Michigan Power placed an ad in Chicago newspapers, offering to sell energy management electrical equipment. In response to the ad Schwartz called Michigan Power for further details. Michigan Power then mailed Schwartz some brochures describing the equipment.

Over the next several days Schwartz explored with Michigan Power President Carson B. Ashworth ("Ashworth") the possibility of serving as Michigan Power's dealer in the Chicago territory. During the negotiations Schwartz asked whether Michigan Power's energy systems had been listed by UL. Ashworth qualified his "no" answer by saying Michigan Power had already initiated and would continue to pursue the UL listing process. Ashworth Dep. 10.

On August 21, 1980 Schwartz and Ashworth signed the four-section Agreement at Michigan Power's office in Michigan (Agreement's provisions are cited "Section ___ " in this opinion):

    1. Section I appointed Schwartz as Michigan
  Power's exclusive Chicago-area*fn4 dealer "for
  the purpose of selling the MPM-8000 Power
  Management Systems" (the "Systems").

    2. Section II called for the sale of 50
  Systems.

    3. Section III identified the various kinds of
  assistance Michigan Power was to provide
  Schwartz.

    4. Section IV primarily specified Schwartz's
  responsibilities and rights:

      (a) Section IV(1) obligated Schwartz to
    "advertise, promote, and sell the . . .
    MPM-8000 Power Management Systems in his
    exclusive territories."

      (b) Section IV(2) required Schwartz to
    "[h]ire and train salesmen to sell the
    manufacturers [sic] energy systems."

      (c) Section IV(5)*fn5 obligated Schwartz to
    order another 20 Systems

    within one year after the Agreement's effective
    date. If Schwartz failed to do so, Michigan
    Power could appoint another dealer in the
    territories.

      (d) Section IV(6), the interpretation of
    which is debated vigorously by the
    parties,*fn6 reads:

    It is expressly understood that U.L.
    (Underwriters Laboratory) approval is in
    process and manufacturer is responsible for any
    and all modifications (at their [sic] expense)
    required to obtain and maintain such approval
    on all present and future power management
    systems manufactured by MPM to be marketed in
    the Chicago territory.

      (e) Section IV(7) entitles Schwartz to sell
    any of Michigan Power's "new energy savings
    products" marketed in the "commercial business
    marketplace." It also confers on Schwartz the
    right of first refusal as to any other new
    Michigan Power product.

      (f) Section IV(8) schedules prompt payment
    for the first 50 Systems: (1) an immediate down
    payment of $20,000; (2) an additional $23,000
    on or before August 28, 1980; and (3) the
    balance the week of September 15, 1980 — the
    time contemplated for shipment of the goods.

      (g) Section IV(9) called for F.O.B. delivery
    from Michigan Power's factory in Anchorville,
    Michigan, requiring Schwartz to reimburse
    Michigan Power for its freight prepayments.

Initial relations between the parties proceeded smoothly. Schwartz paid the last installment by September 20, 1980, when the 50 Systems were shipped to him. Though some sets were apparently damaged in transit, Michigan Power promptly repaired them to Schwartz's satisfaction.*fn7

But the honeymoon ended abruptly when Michigan Power began to experience difficulties in obtaining UL certification. Schwartz and Michigan Power hotly contest the extent to which the absence of UL approval hampered Schwartz's efforts to market the Systems. Electrical codes of the various political divisions in Schwartz's Chicago territory generally prohibit the installation of electrical appliances (such as the System) that lack approval by UL, any other nationally recognized testing laboratory or the governmental unit's own electrical department. While not mandated by any jurisdiction, UL listing may operate in practice as an absolute marketing prerequisite. That however is a factual issue that need not be confronted at this juncture.

Michigan Power's exceedingly frustrating quest for UL certification is chronicled at length in the Ashworth and Martin depositions and their accompanying exhibits — voluminous correspondence between Michigan Power and UL and between Michigan Power and IBN, manufacturer of the System. Only the significant developments in the ongoing saga (enough to negate summary judgment) will be touched on here:

1. On August 6, 1980 (before running the newspaper advertisement that attracted Schwartz's attention) Michigan Power General Manager John R. Schoenbeck ("Schoenbeck") telephoned a UL representative, apprising him of Michigan Power's interest in securing UL listing of the System. In an August 8 follow-up letter, Schoenbeck requested a UL application form. Ashworth Dep.Ex. 1.

2. Michigan Power promptly forwarded the completed application and a sample System, which UL received September 23 and October 24, respectively. Ashworth Dep.Ex. 7, 12.

3. In a November 26 letter to Schoenbeck, UL project engineer Cecil L. Norman ("Norman") acknowledged the sample had passed the heating tests. But he also indicated the System would have to be modified in certain respects, the most important of which entailed adapting the unit's stepdown transformer to conform to UL's Class 2 specifications. Ashworth Dep.Ex. 13.

4. Schoenbeck immediately wrote to IBN engineer Michael Martin ("Martin"),*fn8 asking him to make the required changes as soon as possible. Ashworth Dep.Ex. 14. Then Ashworth himself gave Martin written authorization to perform the modifications, insisting on expeditious action. Ashworth Dep.Ex. 15.

5. By mid-December Michigan Power had completed every required alteration but one: installation of a Class 2 transformer that was either UL-listed or capable of meeting UL's standards. As to that remaining obstacle to UL approval, Michigan Power found itself ensnarled in a catch-22 position, as an exasperated Schoenbeck pointed out to Norman in a December 18 letter (Ashworth Dep.Ex. 16, copied verbatim):

  I must admit that I am in a quandry of sorts, as
  I.B.N. Research & Development informs me that
  there isn't a current U.L. listed Class II
  transformer available anywhere! In addition, if
  one were to be found, it wouldn't meet U.L.
  specifications anymore. This is due to a recent
  correspondence you had with the manufacturer and
  told him that the specs for evaluation on Class
  II transformers were going to be changed anyway.
  Thus, any model sent with a transformer meeting
  specification would be held up because the new
  specifications have not been written.

6. Over the next two months Michigan Power and IBN searched frantically for a UL-sanctioned Class 2 transformer, but to no avail. In a February 24, 1981 letter Schoenbeck informed Norman the "step down transformer recognized for Class II specifications is unattainable for our unit requirements." Ashworth Dep.Ex. 21.*fn9 Unwilling to concede defeat, however, Schoenbeck suggested the use of a UL-listed Edwards 88 series transformer ("Edwards 88 transformer"), which had greater power capabilities. Ashworth Dep.Ex. 21.

7. Norman was unenthusiastic as to that alternative. In a March 5 letter he indicated the use of such a transformer would necessitate wholesale changes in the design of the System's terminal (Ashworth Dep.Ex. 22, copied verbatim):

  This is in reply to your letter of February 24,
  1981. The Edwards 88 Series transformer is Listed
  as a power transformer. If such a transformer is
  employed, we are unable to waive the requirements
  for the terminal construction and spacings. The
  requirements for the terminal construction may be
  found in Par. 13.11 through 13.17 of our UL873
  Standard. The spacing requirements are those
  found in Table 26.1 of the UL873 Standard. Also,
  the unit will need to be marked to indicate that
  all wiring connections must be Class 1.

  We hope these comments will be of some help to
  you in making the necessary corrections to your
  unit in order that you may provide us with a
  revised unit. We will continue to hold this
  Project on an inactive status for three weeks
  from the date of this letter.

8. Michigan Power apparently discarded the Edwards 88 alternative, perhaps because the required changes were technically infeasible or because UL never gave Michigan Power the specifications for the necessary changes. Ashworth Dep. 24.*fn10 Throughout the summer and fall of 1981 Michigan Power resumed its search for a suitable Class 2 transformer. At the recommendation of UL engineer Yertz (who temporarily replaced Norman on the System project), Michigan Power redesigned the System so that two UL-listed Class 2 transformers (apparently Michigan Power had finally found a real — though smaller — live one) could be substituted for the large transformer originally incorporated in the unit. But that possible solution was scuttled when Norman returned to the project. Ashworth Dep.Ex. 37 at 2.

9. Sometime in August UL further compounded Michigan Power's problems by identifying other potential deficiencies, those relating to System's fuses and paneling. Undaunted, Michigan Power sought to address each successive problem perceived by UL.*fn11 Martin Dep. 13; Fritz Dep. 10.

10. UL's December 10, 1981 letter announced its final test results. It found the System had performed unacceptably in several different tests, and it therefore refused to list the product. Michigan Power was justifiably enraged by UL's decision for at least three reasons:

    (a) UL had evaluated the System under proposed
  UL standards drafted only a month earlier,
  despite its previously having acquiesced in
  Michigan Power's efforts to conform the System to
  the prevailing UL standards.

    (b) Most of the tests that produced
  unsatisfactory results could have been — but were
  not — performed back in November 1980.

    (c) Only one test was given on both occasions
  — the flammability test — and that yielded
  inconsistent results: System's flammability was
  first found acceptable, then unacceptable.

11. Like Sisyphus, Michigan Power again pushed up the UL hill by resubmitting a revised version of the System sometime during the first few months of 1982. Ashworth Dep.Ex. 40.

12. No UL-Michigan Power correspondence has been furnished this Court to illuminate what happened during the remaining months of 1982. What scanty evidence is available suggests Michigan Power continued to alter the System to comport with UL's new Class 2 specifications. Ashworth Dep. 34. In addition a February 2, 1983 letter from UL to Michigan Power — the only recent correspondence included in the record — confirms Michigan Power is bloody but unbowed in its UL certification battle.*fn12

In sum the evidence (construed in the light most favorable to Michigan Power) establishes that Michigan Power:

    1. sought UL listing for the System
  aggressively and in good faith;

    2. performed in a timely manner every
  modification requested by UL; and

    3. defrayed all expenses incident to the
  listing process.

That forms the context in which Schwartz's summary judgment motions must be assayed.

Summary Judgment on the Complaint

In his almost impenetrable memoranda Schwartz advances five grounds for summary judgment, all of which supposedly establish Michigan Power's unconditional promise of UL listing.*fn13 Each of the first three contentions predicates that obligation on Section IV(6), characterizing it alternatively as a condition precedent, contractual duty and express warranty. Schwartz's last two arguments invoke implied warranty theories of merchantability and fitness for the particular purpose.*fn14 All five assertions are wholly unconvincing for summary judgment purposes, regardless of whether Michigan or Illinois law supplies the rule for decision.*fn15

All three contract theories of recovery rest on a reading of Section IV(6) that, though possible, is scarcely compelled by its language. Whatever canons of contract interpretation are employed, that provision simply cannot be contorted into an unqualified guaranty of UL certification. It is at least ambiguous in that respect.*fn16 And if Schwartz drafted Section IV(6) (as Ashworth testified), any arguable ambiguity would have to be resolved against Schwartz.*fn17

Under the circumstances, it is surely a permissible reading of Section IV(6) that it merely (1) affirms Michigan Power's representation that the UL listing process had been initiated and (2) obligates Michigan Power to perform any modification needed to secure UL approval. When viewed in the light most favorable to Michigan Power, the record plainly confirms both the validity of Michigan Power's representation and its good faith and timely efforts to conform the System to UL specifications. So much, then, for Schwartz's breach of contract claims.

As for Schwartz's implied warranty theories, both rest on a bizarre proposition: Because the System cannot be marketed in the Chicagoland area (the supposed "ordinary purpose" for which Schwartz purchased the product) without UL certification, Michigan Power impliedly warranted the System would pass UL inspection. That argument is marred by numerous flaws:

    1. Neither species of implied warranty directly
  guarantees extrinsic conditions (such as UL
  approval) conducive to the marketability of the
  goods. Both warranty concepts extend only to the
  goods' intrinsic quality, ensuring their fitness
  for either their "ordinary purposes" (UCC §
  2-314(2)) or the buyer's "particular purpose" (UCC
  § 2-315). In either case the term "purpose" refers
  to the product's end use. Concededly Schwartz
  intended his purchased Systems to be used for their
  ordinary purpose — energy management. And Schwartz
  has never demonstrated (or even alleged) that any
  of his 50 Systems was deficient in those
  terms.*fn18

    2. Even were Schwartz's resale objective
  treated as the relevant "purpose," there is a
  disputed fact issue as to the System's fitness
  for that purpose — whether Michigan Power's
  inability to obtain UL listing substantially
  impaired the System's marketability in the Chicago
  territory.

    3. Schwartz and Michigan Power themselves
  negated any implied warranty that the Systems
  sold to Schwartz (in their unmodified state) were
  of sufficient quality to receive UL
  certification. Section IV(6) expressly recognized
  the possibility of modifying the System to secure
  UL approval.

    4. Arguably Section IV(6)'s disclaimer might
  not vitiate any implied warranty as to the
  System's adaptability to UL specifications. But
  at least one factual issue would defeat summary
  judgment on that implied warranty theory: whether
  Schwartz "assumed the risk" of the System's basic
  incompatibility with UL requirements.
  See, e.g., Ruggeri v. Minnesota Mining &
  Manufacturing Co., 63 Ill. App.3d 525, 530, 20
  Ill.Dec. 467, 470, 380 N.E.2d 445, 448 (5th Dist.
  1978) (recognizing assumption of risk defense to
  implied warranty claim).

Schwartz's melange of arguments is without merit.*fn19 His summary judgment motion on the Complaint counts must be denied.

Motion for Summary Judgment on Counterclaim

As will be recalled, Michigan Power's counterclaim challenges Schwartz's refusal to discharge various of his Agreement duties — most notably, to order additional System units. Schwartz now contends Michigan Power's failure to obtain UL listing operated as a contractual breach that relieved him of his own contractual responsibilities. In the summary judgment context that argument must be given short shrift, for it relies on the same arguments found unsuccessful on Schwartz's other summary judgment motion.

Conclusion

At the very least, genuine issues of material fact abound to defeat Schwartz's motions for summary judgment. Both motions are denied.


Buy This Entire Record For $7.95

Official citation and/or docket number and footnotes (if any) for this case available with purchase.

Learn more about what you receive with purchase of this case.