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Quality Croutons, Inc. v. George Weston Bakeries

February 12, 2008

QUALITY CROUTONS, INC., PLAINTIFF,
v.
GEORGE WESTON BAKERIES, INC., AND ARNOLD FOODS CO., DEFENDANTS.



The opinion of the court was delivered by: Judge Blanche M. Manning

MEMORANDUM AND ORDER

Crouton connoisseurs are a finicky lot. For years they were content buying croutons packed in non-resealable packaging. But suddenly in 2003 they wanted their croutons only in resealable packaging. In their search for resealable packaging, they abandoned their former brands in droves, including the croutons packaged and sold by the parties to this case.

Plaintiff Quality Croutons, Inc. packaged croutons for sale by defendant Arnold Foods Co. (wholly owned by defendant George Weston Bakeries, Inc.) beginning in 2002. Arnold Foods' sale of croutons began faltering a year later, and so it asked Quality Croutons to switch over to resealable packaging. When Quality Croutons balked, Arnold Foods took its business elsewhere.

Quality Croutons sued Arnold Foods and George Weston Bakeries--which the court will refer to collectively as Arnold Foods-alleging breach of an oral contract, breach of the duty to negotiate a contract in good faith, promissory estoppel, and unjust enrichment. The gist of Quality Croutons' claims is that Arnold Foods had agreed to buy all of its output of croutons-at least 739,290 cases annually-for a minimum of three years, but failed to do so. The defendants have moved for summary judgment on all counts, and Quality Croutons filed a cross-motion for summary judgment on its claim that the defendants failed to negotiate in good faith as well as a motion for leave to file revised supplemental statements of facts and exhibits. Quality Croutons' motion for leave is granted and, for the reasons that follow, Quality Croutons' motion for summary judgment is denied, while the defendants' motion is granted.

BACKGROUND

Quality Croutons has manufactured croutons*fn1 in Chicago since 1987. It packaged them in bulk for use primarily by restaurants such as McDonald's, Pizza Hut, Denny's and Wendy's. In 2001, it began selling its bulk-packaged croutons to Arnold Foods, which used to produce its own croutons but had started outsourcing the work to companies like Quality Croutons. The following year, Arnold Foods became interested in buying croutons in "bag-in-box" retail packaging from Quality Croutons for sale to consumers. Quality Croutons was interested but faced a significant obstacle-it did not own equipment capable of producing bag-in-box packaging. Arnold Foods offered a solution-it sold to Quality Croutons packaging equipment it no longer needed that was capable of packaging bag-in-box croutons.

To facilitate the equipment sale, the parties entered into a Contract of Sale of Used Equipment on March 26, 2003. Under the contract, Quality Croutons agreed to pay $607,000 plus 3% interest per year, payable in the form of a $0.1766 discount off the price of each of the first 3,696,200 cases of croutons that Arnold Foods purchased each year. The contract also provided that: "Nothing in the Agreement shall obligate [Arnold Foods] to purchase any Product from [Quality Croutons]." Response to Arnold Foods' Statements of Undisputed Facts, Docket # 107, Ex. 7, at 1. In the event that Arnold Foods stopped buying croutons from Quality Croutons, the contract provided that Quality Croutons would be required to repay the remainder of the purchase price with interest in monthly installments, to be paid in full by the five-year anniversary of the equipment sale.

Although not included in the equipment purchase contract, Quality Croutons president David Moore contends that he also obtained from Arnold Foods an oral promise to continue using bag-in-box packaging for at least three years, as opposed to switching to resealable packaging. Arnold Foods disputes that contention, pointing out that the equipment purchase contract specifically states that it does not obligate Arnold Foods to purchase any croutons.

With the new equipment and new leased facilities to house it, Quality Croutons began producing bag-in-box croutons for Arnold Foods in July 2003. The parties never entered into a written contract for Arnold Foods' purchases of croutons from Quality Croutons. However, on March 26, 2003, Ron Guttenberg, an executive with Arnold Foods, sent a letter agreement to David Moore of Quality Croutons. The letter agreement read as follows:

This letter will confirm the interest of Arnold Foods Company, Inc. ("Arnold") to enter into a Co-Pack Agreement with Quality Croutons ("Quality"), expressly conditioned upon Arnold and Quality entering a written agreement, signed by both parties, containing the terms and conditions by which Quality will produce certain products for Arnold. It is Arnold's intention to include in any final contract that Quality will be the exclusive supplier of Arnold branded croutons to the extent of Arnold's orders and Quality Croutons' capacity to manufacture such product. Arnold will agree to a three year term for the Agreement.

This Letter Agreement is signed with the express understanding and acknowledgment that except for the parties [sic] agreement to negotiate a contract in good faith to incorporate the terms herein, it is not based on any other agreement between the parties and nothing herein is intended to be binding or contractual nature or intended to impose any other obligations whatsoever.

Exhibits to Defendants' Statement of Undisputed Facts, Docket # 97, at Exhibit L. Although the parties exchanged several draft co-pack agreements, none were signed. In the absence of a written agreement, Arnold Foods submitted individual purchase orders for each shipment of croutons it bought.

The sale of croutons by Quality Croutons to Arnold Foods continued unremarkably until late 2003, when the low-carb diet craze drove Unilever-one of Arnold Foods' biggest customers-out of the crouton business. With the loss of Unilever's business, Arnold Foods' need for croutons dropped dramatically, as did its purchase orders to Quality Croutons. To help shield Quality Croutons from the financial impact of the loss of Unilever's business, Arnold Foods voluntarily increased the price it paid to Quality Croutons, shifted business from other suppliers to Quality Croutons, and forgave the entire $607,000 that Quality Croutons owed for the used packaging equipment.

Meanwhile, Arnold Foods researched the crouton market and discovered that more than half of the croutons sold were in resealable packaging rather than bag-in-box. It also discovered that while sales of bag-in-box croutons were dropping, the sale of croutons in resealable packaging was growing. Arnold Foods shared its research with Quality Croutons and, in August 2004, decided to switch to resealable packaging by the end of the year. But Quality Croutons determined that converting its equipment to produce resealable packaging would cost it more than $1 million, a cost it refused to shoulder alone. Upon learning that Quality Croutons would not convert to resealable packaging, on September 14, 2004, Arnold Foods notified Quality Croutons that its purchases would stop by December of 2004. In response, Quality Croutons immediately stopped producing croutons for Arnold Foods, and Arnold Foods began to obtain its croutons elsewhere.

Quality Croutons contends that it had a three-year contract through mid-2006 to provide all of the croutons Arnold Foods needed (a minimum of 739,290 cases a year) but that Arnold Foods breached that contract by terminating it prematurely in 2004. Specifically, in its complaint Quality Croutons alleges the following claims against Arnold Foods: (1) breach of an oral contract to buy a minimum of 739,290 cases of croutons from Quality Croutons each year for at least three years (Count I); (2) breach of an oral contract to purchase of all its croutons from Quality Croutons for at least three years (Count II); (3) promissory estoppel based upon Arnold Foods' alleged promise to buy a minimum of 739,290 cases of croutons from Quality Croutons each year for at least three years (Count III); (4) promissory estoppel based upon Arnold Foods' alleged promise to purchase all of its croutons from Quality Croutons for at least three years (Count IV); (5) promissory estoppel based upon an alleged promise not to switch from bag in box packaging for at least three years (Count V); (6) breach of the terms of the letter agreement, specifically, the duty to negotiate a supply contract in good faith (Count VI); and (7) unjust enrichment (Count VII).

The parties have filed cross-motions for summary judgment. Arnold Foods seeks summary judgment on all seven counts of Quality Croutons' complaint. Quality Croutons, in turn, seeks summary judgment on Count VI, that Arnold Foods failed to negotiate a supply contract with it in good faith.

ANALYSIS

I. Summary Judgment ...


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