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REFRIGERATION SALES CO. v. MITCHELL-JACKSON

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


November 18, 1983

REFRIGERATION SALES CO., INC., PLAINTIFF.
v.
MITCHELL-JACKSON, INC., ET AL., DEFENDANTS.

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

MEMORANDUM OPINION AND ORDER

Refrigeration Sales Co. ("Refrigeration") has brought this two-count diversity action against Mitchell-Jackson, Inc. ("Mitchell-Jackson") and its President Alfred L. Jackson ("Jackson"), seeking damages for loss of and damage to goods and equipment stored in Mitchell-Jackson's warehouse. Count I alleges Mitchell-Jackson is liable for conversion of the goods and equipment, while Count II alleges Jackson is liable for conversion both in his individual capacity and as alter ego of Mitchell-Jackson. Defendants now move for summary judgment under Fed.R.Civ.P. ("Rule") 56. For the reasons stated in this memorandum opinion and order, defendants' motion is granted.

Facts*fn1

From before 1960 to 1979 Refrigeration, headquartered in New York, stored goods and equipment (for convenience in reference and because the usage conforms to the UCC and the documents in this case, this opinion will simply use the collective term "goods") at Mitchell-Jackson's warehouse in Chicago (so the goods were more readily available for sale in this area). Each time Mitchell-Jackson received goods from Refrigeration, it issued a non-negotiable warehouse receipt ("Receipt") on the reverse of which were listed the "Terms and Conditions" of the bailment. Receipt § 10(b), its only relevant provision, reads:

  Claims by the depositor must be presented in
  writing within a reasonable time, and in no event
  longer than 60 days after delivery of the goods.
  No action may be maintained by the depositor
  against the warehouseman for loss or damage to
  goods covered hereunder unless commenced within
  12 months next after date of delivery by the
  warehouseman.

Dissatisfied with the service it was receiving from Mitchell-Jackson, Refrigeration sent a July 3, 1979 certified letter to Mitchell-Jackson ordering it to ship all of Refrigeration's goods then in storage to another warehouse. When Mitchell-Jackson complied in October and December 1979,*fn2 Refrigeration's employee William Hughes ("Hughes") discovered Mitchell-Jackson claimed to have been storing less of Refrigeration's goods than it should have been holding according to Refrigeration's records. Hughes also examined a portion of the goods actually delivered by Mitchell-Jackson to the other warehouse, and he found them unsaleable because of their rusty and dirty condition.

Jackson (Mitchell-Jackson's president, chief executive officer and manager) has testified he discovered a discrepancy between Refrigeration's books and Mitchell-Jackson's about September 1977 (Jackson Dep. 110-11). Jackson neither ordered a physical inventory nor adjusted Refrigeration's bills to conform to Refrigeration's records (id. 114). Neither side has offered an explanation of the discrepancy.*fn3

Refrigeration failed to comply with Receipt § 10(b)'s timetable in both respects:

    1. It did not present a written claim for the
  value of the lost and damaged goods to
  Mitchell-Jackson within 60 days of the final
  delivery by Mitchell-Jackson.

    2. It did not file a lawsuit against
  Mitchell-Jackson within a year of the final
  delivery date.

Instead it filed this lawsuit in October 1981, nearly two years after the final delivery date.

Issues and the Applicable Law

Defendants' motion for summary judgment is based on two independent arguments, either of which would cause defendants to prevail:

    1. Refrigeration's two-fold noncompliance with
  Receipt § 10(b)'s timetable is fatal to its claim.

    2. In any event Refrigeration's evidence is
  incapable of establishing vital elements of the
  tort of conversion for each type of damages
  claimed.

Both sides agree this Court must look to Illinois law for its rules of decision, though they reach that destination by differing routes. Defendants contend an Illinois court would choose Illinois law because Illinois was the place of performance of the contract (citing Southwest Forest Industries v. Sharfstein, 482 F.2d 915, 919 (7th Cir. 1972), a case of doubtful current significance given the apparent movement of Illinois law toward the "most significant relationship" test in contract as well as tort cases). Refrigeration, rejecting the contract characterization in favor of its tort theory of recovery, retorts an Illinois court would choose Illinois law because Illinois has the most significant relationship with the occurrence and parties (citing Ingersoll v. Klein, 46 Ill.2d 42, 48, 262 N.E.2d 593, 596 (1970)).

Receipt § 10(b)

Defendants naturally rely on the literal language of Receipt § 10(b). Because Refrigeration plainly has not met either timetable if it applies, Refrigeration can defeat defendants' contention only by showing the limitations provisions are either inapplicable or unenforceable.

Enforceability poses the easier issue, for the Illinois statute governing limitations provisions in bailment contracts, Ill.Rev.Stat. ch. 26, § 7-204(3) (identical to UCC § 7-204(3)),*fn4 says such provisions are enforceable if reasonable. Defendants point to cases upholding as reasonable time periods shorter than those in Receipt § 10(b). See, e.g., Strom International, Ltd. v. Spar Warehouse & Distributors, Inc., 69 Ill. App.3d 696, 26 Ill.Dec. 484, 388 N.E.2d 108 (1st Dist. 1979) (upholding nine-month limitation of actions). As in Strom International, 69 Ill. App.3d at 702, 26 Ill.Dec. at 488, 388 N.E.2d at 112 there is nothing in the nature of Refrigeration's stored goods that requires a longer limitations period.

Understandably Refrigeration does not contest the reasonableness of Receipt § 10(b). Instead it denies the statute's applicability here for three reasons:

    1. If given the opportunity, Illinois courts
  would read into Section 7-204(3) and Receipt
  § 10(b) an exception for conversion actions.

    2. Jackson is liable in his individual capacity
  as a tortfeasor and was not a party to the
  Receipt.

    3. Defendants are estopped to assert the
  limitations provision.

None of those arguments withstands analysis.

As to its first contention, Refrigeration points out the only courts considering the question have found warehouse receipt limitations provisions do not apply to conversion actions. William Iselin & Company v. Milton Feinberg, Inc., 92 A.D.2d 495, 459 N.Y.S.2d 87 (1983); Continental Metals Corp. v. Municipal Warehouse Co., 112 Misc.2d 923, 447 N.Y.S.2d 849 (Sup.Ct.Spec.Term 1982), aff'd on the trial court's opinion, 92 A.D.2d 477, 459 N.Y.S.2d 406 (1983). Those cases are really but a single authority, for both rested on the lower court decision in Continental Metals (447 N.Y.S.2d at 851), which asserted the culpable nature of conversion and analogized a converting warehouse to a thief (the warehouse had explained the goods must have been stolen by one of its employees).

That analogy between conversion and theft is not persuasive in light of Refrigeration's theory of liability. As in Continental Metals, Refrigeration urges the mere fact the warehoused goods are missing establishes conversion by the warehouseman.*fn5 When a plaintiff thus asks that conversion be presumed from the mere unexplained disappearance of the goods, any policy considerations that might preclude the bailee from taking advantage of the contractual limitations provision are absent. After all, a bailee found liable for presumed (or "res ipsa"*fn6) conversion is no more morally culpable than one found liable for negligence.

But even Refrigeration's transformation of "res ipsa" conversion (which involves no element of intent) into intentional theft (which of course is directly predicated on intent) is not enough to make it succeed. This is so because Section 7-204(2) (permitting contractual limitations of damages) excepts conversion to the warehouseman's own use while Section 7-204(3) does not (emphasis added):

  (2) Damages may be limited by a term in the
  warehouse receipt or storage agreement limiting
  the amount of liability in case of loss or
  damage, and setting forth a specific liability
  per article or item, or value per unit of weight,
  beyond which the warehouseman shall not be
  liable; provided, however, that such liability
  may on written request of the bailor at the time
  of signing such storage agreement or within a
  reasonable time after receipt of the warehouse
  receipt be increased on part or all of the goods
  thereunder, in which event increased rates may be
  charged based on such increased valuation, but
  that no such increase shall be permitted contrary
  to a lawful limitation of liability contained in
  the warehouseman's tariff, if any. No such
  limitation is effective with respect to the
  warehouseman's liability for conversion to his own
  use.

  (3) Reasonable provisions as to the time and
  manner of presenting claims and instituting

  actions based on the bailment may be included in
  the warehouse receipt or tariff.

Plainly the General Assembly (following the UCC draftsmen) specifically considered the subject of conversion actions against warehousemen in enacting the statute. It inserted a specific exception for conversion into Section 7-204(2). Under established principles of statutory construction*fn7 as well as plain common sense, the legislature's omission of a like exception from Section 7-204(3) must be viewed as intentional.

When the legislative branch has thus dealt with the matter, it does violence to our governmental division of functions — and thus violates established Illinois legal principles — to create a judicial exception as did Continental Metals. Judge Silverman, dissenting in that case, explained the policy considerations that justify inserting a conversion exception into Section 7-204(2) while refusing to do so in Section 7-204(3) (459 N.Y.S.2d at 407):

  The statutory difference between the two
  provisions reflects the difference in policy
  considerations applicable to the two situations.
  The warehouseman, who knows that if he converts
  $100,000 worth of property he will only be liable
  for $50, would be encouraged to convert. But a
  warehouseman who would be liable for the full
  amount will not be encouraged to convert because
  the bailor would have to sue him within one year
  and 60 days after presentation of the claim; the
  bailor after all is perfectly free to, and in the
  vast majority of cases will actually, sue within
  that period. The shortened statute of limitation
  merely serves the purpose of all statutes of
  limitations — putting disputes to rest and
  requiring suits to be brought while the evidence is
  fresh and available.

Refrigeration argues Section 7-204(3) implicitly contains a conversion exception because it is limited in its operation to claims and actions "on the bailment." Conversion, it says, is a tort action and therefore is not "on the bailment." That contention cannot prevail over the discussion just completed. When the General Assembly has demonstrated it knows how to create a specific exception for conversion actions, it strains the principles of statutory construction to indulge a forced reading to imply such an exception elsewhere, where the legislature has not done so. But even apart from that obvious answer Refrigeration's reply must fail:

    1. Refrigeration and Mitchell-Jackson stand in
  a bailor-bailee relationship. This action
  pertains to the bailed goods and is grounded on
  that relationship. In ordinary English that
  suffices to render the action one "on the
  bailment."

    2. Even were that not so, the kind of exception
  Refrigeration urges would tend to swallow up the
  rule — to render Section 7-204(3) entirely
  ineffectual. Refrigeration's "res ipsa" conversion
  is a concept so broad as to permit any contractual
  action on a bailment to be pleaded and proved as a
  so-called conversion action.

This discussion has been prolonged both because of the paucity of direct precedent and because Refrigeration's position is flawed in a number of ways. In sum the argument for giving Receipt § 10(b) other than its normal and literal reading cannot prevail.

As for Refrigeration's second response, that Jackson cannot avail himself of Receipt § 10(b), it is clearly bankrupt under Refrigeration's alter ego theory of liability: If Jackson stands in the shoes of Mitchell-Jackson, he stands in both shoes, with the benefits as well as the burdens of the corporation's position. And on the alternative theory of his individual liability for tortious conduct, Illinois law rejects Refrigeration's assertions. Thus Hyman v. 230 South Franklin Corp., 7 Ill. App.2d 15, 128 N.E.2d 629 (1st Dist. 1955) (abst. op. only) permitted an agent managing rental property to invoke an exculpatory clause in the governing lease, though literally applicable only to the lessor.*fn8 Wholly apart from that authority, Refrigeration is simply wrong on the facts. Its proof, even on the most favorable inferences, does not establish Jackson's individual involvement in the conversion. If he has potential tort liability it must be vicarious, and Release § 10(b) stands squarely in the path.

Finally as to Release § 10(b), Refrigeration claims defendants are estopped to rely on its provisions because they intentionally deceived Refrigeration by not informing it sooner of the missing inventories. Refrigeration relies on the Illinois law of estoppel as outlined in Strom International, 69 Ill. App.3d at 703, 26 Ill.Dec. at 489, 388 N.E.2d at 113 (citations omitted):

  Estoppel applies if: (1) defendant has made some
  misrepresentation or concealment of a material
  fact; (2) defendant had knowledge, either actual
  or implied, that the representations were untrue
  at the time they were made; (3) plaintiff was
  unaware of the untruth of the representations
  both at the time made and the time they were
  acted upon; (4) defendant either intended or
  expected his representations or conduct to be
  acted upon; (5) plaintiff did in fact rely upon
  or act upon the representations or conduct; and
  (6) plaintiff has acted on the basis of the
  representations or conduct such that he would be
  prejudiced if defendant is not estopped. . . .
  Waiver applies if defendant's conduct indicates
  that it is intentionally relinquishing a known
  right. . . . If there is no dispute in the
  material facts of a case and only one inference
  is possible, the question of whether the facts
  prove estoppel or waiver becomes a question of
  law.

To state that argument is to demonstrate its poverty. Defendants' alleged deception ceased to operate in 1979 when Refrigeration inspected its goods, and far more than the requisite one-year period passed from Refrigeration's discovery until it commenced this action. Thus the essential element of detrimental reliance is absent: Refrigeration knew of the untruth of defendants' representations for more than one year preceding its filing of this action (the very period during which Refrigeration claims it failed to act, to its detriment, in reliance on the misrepresentations). As stated in the estoppel principles approved in Sabath v. Morris Handler Co., 102 Ill. App.2d 218, 226, 243 N.E.2d 723, 727 (1st Dist. 1968):

  [I]f the inducement for delay has ceased to
  operate sufficiently before the expiration of the
  limitation period so as to afford the plaintiffs
  ample time within such period to commence their
  action, then estoppel is not available.

All three of Refrigeration's arguments have fallen. Receipt § 10(b) must be enforced in accordance with its literal terms.

Elements of Conversion

As already stated, Refrigeration's position is that conversion can be presumed from the disappearance of (or even damage to) its bailed goods. That stance was compelled by Refrigeration's lack of evidence (and the lack of any basis for inferring) defendants had intentionally appropriated Refrigeration's goods to their own gain.*fn9 Because Receipt § 10(b) has been held enforceable and applicable here, it has been unnecessary to rule definitively on the validity of Refrigeration's theory of liability under Illinois law.

It may however be appropriate to comment briefly on a major point of difference between Refrigeration and defendants: the distinction between "conversion" and "conversion to one's own use." Refrigeration alleged (Amended Complaint ¶ 30) defendants converted the goods "to [their] own use." It concedes it did so to track the language of the conversion exception to Section 7-204(2). Nonetheless it maintains "conversion" is no different from "conversion to one's own use." See Lipman v. Petersen, 223 Kan. 483, 575 P.2d 19, 21 (1978) (reading the Kansas enactment of the UCC in light of the prior Kansas statute).

Defendants respond not all conversion is "to one's own use." They say Refrigeration, to establish conversion to defendants' "own use," must show there has been a conversion and defendants acquired the goods for their own benefit.

Defendants have the better of that exchange for three reasons:

    1. Lipman, relied upon by Refrigeration, does not
  defend or discuss its conclusion that "conversion"
  and "conversion to one's own use" are equivalent.
  That case provides no persuasive support for the
  notion Illinois courts would similarly ignore the
  difference in meaning normally attributable to a
  difference in language.

    2. One source cited by both Lipman and
  defendants, 8 Am.Jur.2d Bailments § 121, at 853 (2d
  ed. 1980) (emphasis added), distinguishes between
  the two types of conversion in a manner consistent
  with defendants' position:

    For example, whenever a person entrusted with
    the goods of another puts them into the hands
    of a third person without orders, it is
    apparently the settled rule that such a
    delivery to an unauthorized person is as much a
    conversion as a sale of the property or an
    appropriation of it to the bailee's own use would
    be. . . .

See also id. § 118, at 848.

    3. As this opinion's earlier discussion of
  Sections 7-204(2) and 7-204(3) demonstrates,
  Refrigeration's argued-for universal conversion
  exception to the latter section would permit
  plaintiffs to circumvent the statute entirely by
  alleging conversion rather than breach of the
  bailment contract. That possibility is obviated
  by requiring plaintiffs, in order to invoke a
  conversion exception, to allege not just
  conversion but conversion to the defendant's "own
  use."

Both in plain English and for the added reasons just sketched, "conversion to one's own use" contains an additional element "conversion" alone does not. There is no hint Refrigeration could establish that element even were Receipt § 10(b) inapplicable.*fn10

Conclusion

There is no genuine issue of material fact, and defendants are entitled to a judgment as a matter of law. Their motion for summary judgment is granted, and this action is dismissed.


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