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Union Tank Car Co. v. NuDevco Partners Holdings, LLC

Court of Appeals of Illinois, First District, Second Division

January 15, 2019

UNION TANK CAR COMPANY, Plaintiff-Appellee and Cross-Appellant,
NUDEVCO PARTNERS HOLDINGS, LLC, Defendant-Appellant and Cross-Appellee.

          Appeal from the Circuit Court of Cook County, Illinois. No. 16 L 2559 Honorable Diane M. Shelley, Judge Presiding.

          PRESIDING JUSTICE MASON delivered the judgment of the court, with opinion. Justices Lavin and Pucinski concurred in the judgment and opinion.



         ¶ 1 Following a 2017 bench trial, plaintiff-appellee, Union Tank Car Company (Union Tank), was awarded $1.27 million in damages as a result of the breach of a lease guaranty by defendant-appellant, NuDevco Partners Holdings, LLC (NuDevco). On appeal, NuDevco challenges the verdict, claiming the trial court erred by (i) concluding that Union Tank's cause of action was not governed by the Uniform Commercial Code (UCC) (810 ILCS 5/1-101 et seq. (West 2016)), (ii) awarding Union Tank damages when Union Tank failed to satisfy the UCC's condition precedent to the recovery of damages, (iii) awarding damages to Union Tank for anticipated blasting and future storage costs, and (iv) admitting certain evidence, which, in turn, influenced the amount of damages.

         ¶ 2 Union Tank cross-appeals from the trial court's refusal to award the present value of lost future rent under the lease and the trial court's deduction of $10, 000 from Union Tank's petition for attorney fees.

         ¶ 3 For the reasons that follow, we affirm in part and vacate in part.

         ¶ 4 BACKGROUND

         ¶ 5 In January 2003, Ponderosa Petroleum Company (Ponderosa) entered into a lease with General Electric Railcar Services Corporation (GE Railcar) for 47 railcars to carry crude petroleum. In the ensuing years, the parties executed numerous riders providing for lease terms ending between May 2017 and February 2020. On April 1, 2015, Associated Energy Services, LLC (Associated Energy) assumed the obligation to make payments under the lease, although Ponderosa remained a party to the lease.

         ¶ 6 Associated Energy is a wholly owned subsidiary of NuDevco. On March 3, 2015, NuDevco executed a guaranty in favor of GE Railcar to pay Associated Energy's obligations under the lease. The terms of the guaranty provided that NuDevco would

"absolutely, irrevocably and unconditionally guarantee the full and prompt payment when due of all the obligations *** due under the Leases, including, but not limited to, rent, service charges, freight, railroad charges, *** [and] cleaning charges *** together with all other sums which may or shall become due and payable pursuant to the provisions of the Leases, including, without limitation, any damages resulting from the Lessee's failure to perform its obligations thereunder."

         The guaranty further provided that NuDevco would reimburse Union Tank for all costs it incurred in enforcing the guaranty, including reasonable attorney fees.

         ¶ 7 In September 2015, Union Tank acquired the lease, riders, and railcars from General Electric Capital Corporation, which owned or controlled (directly or indirectly) all of the interest in GE Railcar.

         ¶ 8 On September 1, 2015, Associated Energy sent a notice of termination of the lease to GE Railcar citing as justification that the cars were approaching the end of their permitted use to haul crude oil. No provision of the lease authorized termination for this reason. At the same time, Associated Energy also began returning the railcars to Union Tank. Associated Energy discontinued rental payments as of September 30, 2015, and returned all the leased cars to Union Tank by December 2015. Union Tank then invoked the guaranty, but NuDevco refused to honor it.

         ¶ 9 On March 10, 2016, Union Tank filed a complaint against NuDevco alleging breach of the guaranty. The complaint alleged that the reason given for Associated Energy's termination of the lease was not valid per the lease terms and NuDevco's refusal to comply with Union Tank's demand for payment was a material breach of the guaranty.

         ¶ 10 At the bench trial, Union Tank presented evidence that Associated Energy sent all of the leased railcars to a Union Tank facility in Evanston, Wyoming, without first informing Union Tank. Because that facility was unable to process that number of cars, Union Tank transferred 39 of the 47 railcars to a facility in Kansas, 2 of the cars to a facility in Texas, and kept only 6 in Wyoming. The cars were cleaned at those locations, at a cost of $137, 690.09, of which Associated Energy paid only $60, 710. Union Tank also incurred costs (known as "freight") in moving the railcars from Wyoming to Kansas and Texas and "switching" charges in connection with transporting the cars. A switching charge is incurred when a car is transported from a main line railroad and "switched" to storage by way of a short-line railroad or privately held yard.

         ¶ 11 Union Tank had to pay to store the cars after their return, as it had excess inventory of those specific railcars and could not market them to new customers. (Union Tank had insufficient yard space to store the cars on its own and generally shipped excess inventory to third-party railyards.) Union Tank again incurred freight and switching charges in shipping the cars from where they were cleaned to where they were ultimately stored. Through the date of trial, Union Tank incurred $192, 975.80 in freight costs, $9605 in switching costs, and $41, 315.30 in storage charges.

         ¶ 12 As evidence to support these incurred costs, Union Tank introduced invoices that it received from third parties. While none of the third parties generating the invoices were called to testify, Frederick Koenig, a 40-year Union Tank employee currently serving as Union Tank's director of fleet repair, testified that Union Tank receives freight invoices through an Internet portal or via e-mail in the ordinary course of its business. A Union Tank employee then signs the invoice, whereupon it is routed to the accounts payable department, which generates payment by check or electronically. William Constantino, the general manager of Union Tank's leasing business unit, testified that he receives similar invoices for storage, switching, and cleaning charges, which are checked for accuracy and then sent to him for countersignature if above a certain amount. According to Constantino, he receives these invoices during the normal and typical course of his business activity anytime Union Tank has ...

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