Brisbin v. Superior Valve Co.

Opinions of the United

2005 Decisions States Court of Appeals

for the Third Circuit

2-14-2005

Brisbin v. Superior Valve Co

Precedential or Non-Precedential: Precedential

Docket No. 03-1793

Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_2005

Recommended Citation

"Brisbin v. Superior Valve Co" (2005). 2005 Decisions. Paper 1507.

http://digitalcommons.law.villanova.edu/thirdcircuit_2005/1507

This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova

University School of Law Digital Repository. It has been accepted for inclusion in 2005 Decisions by an authorized administrator of Villanova

University School of Law Digital Repository. For more information, please contact Benjamin.Carlson@law.villanova.edu.

PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 03-1793

KIRK BRISBIN,

d/b/a

Specialty Manufacturing

v.

SUPERIOR VALVE COMPANY;

SHERWOOD; HARSCO CORPORATION;

TAYLOR-WHARTON GAS EQUIPMENT

DIVISION

Harsco Corporation, Sherwood;

Taylor-Wharton Gas Equipment

Division,

Appellants

No. 03-1851

KIRK BRISBIN,

d/b/a Specialty Manufacturing,

Appellant

v.

SUPERIOR VALVE COMPANY;

SHERWOOD; HARSCO CORPORATION;

TAYLOR-WHARTON GAS EQUIPMENT

DIVISION

Appeal from the United States District Court

for the Western District of Pennsylvania

(D.C. Civil Action No. 99-cv-01902)

Magistrate Judge: Honorable Francis X. Caiazza

Argued March 24, 2004

Before: ROTH, AMBRO, and CHERTOFF, Circuit Judges

(Opinion filed February 14, 2005)

Melissa H. Maxman, Esq.

Duane M orris

1650 Market Street

One Liberty Place, 37 th Floor

Philadelphia, PA 19103-7396

Samuel Goldblatt, Esq.

Nixon Peabody LLP

2

1600 Main Place Tower

Buffalo, NY 14202

David H. Tennant, Esq. (Argued)

Nixon Peabody LLP

P.O. Box 31051

Clinton Square

Rochester, NY 14603

Counsel for Appellants/Cross-Appellee

George E. McGrann, Esq. (Argued)

Sarah E. Diedrich, Esq.

Schnader, Harrison, Segal & Lewis

120 Fifth Avenue

Fifth Avenue Place, Suite 2700

Pittsburgh, PA 15222

Counsel for Appellee/Cross-Appellant

OPINION OF THE COURT

AM BRO, Circuit Judge

This dispute arises out of a long-term supply

relationship gone bad. The plaintiff is Kirk Brisbin, an

individual doing business as Specialty Manufacturing

3

(“Specialty”)1 . Superior Valve Company (“Superior”), one of

the named defendants, was acquired by defendant Harsco

Corporation in the fall of 1998. After a bench trial, judgment

ultimately was entered in favor of Specialty in the amount of

$746,675. On appeal, we review the Magistrate Judge’s

conclusions regarding adequate assurance and damage issues.

We affirm in part, reverse in part and remand for further

proceedings.

I. Factual Background and Procedural History

In 1997 Brisbin and Superior began negotiating long-

term supply contracts whereby Specialty would sell Superior

certain industrial goods. The result was two separate

contracts in May 1998.2 The first was for the sale of brass

valves (hereinafter referred to as the “1065 valves”). The

second contract was for the sale of two-inch, three-inch, four-

inch and five-inch brass shell castings (hereinafter referred to

generally as “shells”).

1

Thus this opinion refers to Brisbin and Specialty

interchangeably.

2

Specialty also alleges the existence of a third contract

for the production of an item referred to as in-line valves. As

this issue is unrelated to the other issues on appeal, the

underlying facts are discussed separately in Part III.C. below.

4

The performance of both contracts was subject to

certain quality control standards. Before Specialty could

manufacture either the 1065 valves or any of the shells on a

full-time basis, it had to receive approval from Superior. The

initial step in the approval process was known as First Article

Inspection (“FAI”). Stated briefly, FAI would test whether

the material and dimensions of the item met requirements.

Upon FAI approval, Specialty would begin a trial-production

run of 100 pieces. Superior would then conduct tests to

evaluate the consistency of the pieces. Only after Superior’s

approval of the samples from the trial-production run could

Specialty begin full-time production.

According to a memorandum written by Ed

Wingenroth, Superior’s Director of Quality Assurance,

Superior gave FAI approval to Specialty for the 3" shells on

January 25, 1999. Superior then ordered a 100-piece trial-

production run. Specialty completed the order in March. But

because the shells were manufactured in South Korea,3

Superior did not receive them until the beginning of June.

Brisbin testified that Wingenroth tested the trial-production

shells in April (in South Korea) prior to shipment. Superior,

3

Specialty is not a manufacturing company. Its primary

value consisted of Brisbin’s relationship with several South

Korean manufacturers. With Superior’s express permission,

Specialty subcontracted the actual production of the 1065 valves

and the shells.

5

however, conducted additional testing in late July. Several

Superior employees testified that this testing uncovered

problems with the bronze alloy with which the shells were

made.

For the 1065 valves, Wingenroth gave FAI approval in

a letter written May 27, 1999. Superior claims that it never

authorized Wingenroth to give FAI approval because the

valve samples did not meet testing requirements. Yet

Superior asked Specialty to begin the 100-piece trial-

production run for the 1065 valves in early June.

Specialty could not complete this trial-production run.

According to Brisbin, his South Korean manufacturers were

unable to source six of the required component parts for the

1065 valves. In a June 21 letter, Brisbin formally requested

that Superior supply these component parts. Superior

previously had supplied a limited number of component parts,

enabling Specialty to manufacture samples and thus

facilitating the FAI approval process. Superior, however,

decided not to supply the components for the trial-production

run.4 Specialty apparently was not informed of this decision.

Beginning in late June and continuing through July,

4

The apparent reason for this decision was that, because

Specialty was responsible for finding its own supplier for the

components, testing would have to be redone.

6

Brisbin was frustrated with what he perceived as Superior’s

dilatory tactics.

Well, I had spent over two years now of my

time, considerable expense to my family, my

business, and I was just not getting any direction

. . . . At that point management clearly was not

supporting the programs. I was having trouble

having correspondence returned . . . . As of

June, I will say late June, there was just starting

to become a total collapse of effort and support

in showing good faith toward the programs.

The one person at Superior with whom Brisbin corresponded

was Joe Kilmer, the Director of Purchasing. But Brisbin

testified that, while Kilmer was helpful in the sense that he

actually returned calls, he did not facilitate Brisbin’s repeated

attempts to get feedback on the 1065 valves and 3" shells

projects.

At the end of July, Brisbin spoke with Kenneth Miller

— Vice President and General Manager of a division of

Harsco Corporation — concerning the projects’ status. As a

result, Brisbin and various Superior employees held a

conference call on August 2. According to Brisbin, Superior

told him for the first time that the FAI approvals for both the

3" shells and the 1065 valves were either missing or did not

exist. He was also informed that Superior would require

7

additional testing.5 For the 1065 valves, a Superior engineer

allegedly informed Brisbin on the call that the project was a

low priority and would not receive any attention for several

weeks. Despite Brisbin’s repeated requests, Superior never

supplied Specialty with any of the test results for either the

1065 valves or the shells demonstrating product

nonconformance or the specific requirements Specialty would

have to meet in order to be reapproved.

Brisbin memorialized his frustrations with Superior in

an August 5 fax to Miller. It contained the following

statements:

• Additionally, I am now hearing my programs have not

passed first article inspections, when I have signed

documents from your Quality Control Manager at the

time saying they are . . . .

• I can not . . . continue to pour my money . . . into these

programs, having never asked Superior Valve

Company to pay one penny, if your employees are

going to continue to deny, stall, fabricate, lose

documents, lose samples, deny documents exist, issue

5

It is unclear whether the “additional testing” meant

retesting according to the previously established quality control

standards or implementing additional standards and tests. The

distinction, however, does not affect the resolution of this case.

8

incorrect purchase orders, change requirements, etc.

• I require these three invoices be paid to me, and that I

receive this check of $112,868 in its entirety, before

the close of business on Thursday, 19 August 1999, in

my office in Texas.

• I want very much for these programs to go forward, but

I must have, after two years, your company come

forward and finally illustrate its good faith and pay the

tooling and molding costs in as much [sic] as they

continue to find reason to stall these programs.

• I would certainly expect . . . some sort of preliminary

agreement be signed by me agreeing with the reason

the payment is being made, and to show clearly what

my obligations are for this payment.

Brisbin received two responses to his August 5 fax. In

an August 11 letter, Superior formally rescinded the FAI

approvals given by Ed Wingenroth for the 3" shells and the

1065 valves. The letter informed Brisbin that “a review of

inspection documents shows that some required tests were not

performed, and some dimensions were in nonconformance to

[e]ngineering specifications.” In an August 12 fax, Miller

accused Brisbin of “attempting to establish a breach of

contract” and denied that Superior was obligated to make any

payments, but suggested that the parties arrange another

conference call.

9

As a result, another conference call took place on

August 17. In a fax that same day, Brisbin wrote:

• I am certainly interested in these programs and only

wish they move forward as originally intended.

• However, understand Specialty Manufacturing

believes, and has overwhelming documentation to

support, our belief, that our products have already been

fully test[ed] and approved.

• If additional testing and approvals are now required by

Superior Valve Company — I understand. If this is the

case, however, Specialty Manufacturing needs these

new requirements in writing, and as soon as possible,

and would expect Superior Valve Company to [bear]

the additional costs incurred by Specialty

Manufacturing in complying with these new

conditions.

• In view of the delays in moving forward . . .[,] I

believe it is time for Superior Valve Company to now

absorb these startup costs. As earlier stated to you, we

request this immediately be discussed and agreed upon.

I will discuss different options or arrangements than

previously required, but this very importantly needs to

be resolved, and soon.

Miller responded with a short fax to Brisbin disagreeing with

10

his characterization of the phone conversation.

On September 1, Brisbin faxed to Miller a final attempt

to reconcile the situation. After summarizing the past

communications between the two companies, Brisbin stated:

If Superior Valve . . . has any last minute ideas

which would allow these programs to move

forward, I would certainly listen, as I always

have. Up to this point, however, I have not seen

an expressed interest for these programs[’]

forward movement by management . . . .

The only response to this fax was a September 8 letter by

Irene Ratajczak, a “Senior Administrative Assistant” at

Superior, declaring its intention to refer “this matter over to

our legal department.”

Brisbin subsequently filed suit in the Western District

of Pennsylvania seeking damages for breach of contract.

Specifically, he requested lost profits from the two written

contracts and the purported oral contract. With the consent of

the parties, the matter was assigned to a magistrate judge for

trial.

After conducting a bench trial, the District Court’s

Chief Magistrate Judge entered judgment for Specialty in the

amount of $758,875 (subsequently reduced to $746,675). He

11

concluded that Specialty possessed reasonable grounds for

insecurity under § 2-609 of the Uniform Commercial Code

and made reasonable requests for adequate assurance. The

Magistrate Judge also held that Superior’s failure to provide

any assurance of future performance and its decision to

disengage from the relationship materially breached the

supply contracts.

For damages, the Magistrate Judge awarded Specialty

its lost profits for the 1065 valves and shells contracts. He

calculated profits for the 1065 valves on the basis of (1) three

full years of production (2) at the original quantity estimate in

the contract (3) at the profit rate of $2.15 per valve. He based

profits for the shells contract on (1) five full years of

production (2) for each model (i.e., the 2" shells, the 3" shells,

et al.) (3) at the quantities and prices listed in the attachment

to the contract. Finally, the Magistrate Judge held that the

evidence was insufficient to award lost profit damages for the

in-line valves project, but awarded reliance damages instead.

Shortly thereafter, Superior filed a Federal Rule of

Civil Procedure 52(b) motion to amend certain findings of

fact and the damages award. In February 2003 the M agistrate

Judge affirmed his findings and, with a small exception, the

damages award. Upon submission of Specialty’s calculations,

however, the Magistrate Judge denied Specialty’s request for

prejudgment interest.

12

Both sides timely appealed. We have jurisdiction

under 28 U.S.C. § 1291.

II. Standard of Review

We review findings of fact for clear error and exercise

plenary review over conclusions of law or the application of

legal precepts to the facts. In re Cellnet Data Sys., Inc., 327

F.3d 242, 244 (3d Cir. 2003). “A factual finding is clearly

erroneous when ‘the reviewing court on the entire evidence is

left with the definite and firm conviction that a mistake has

been committed.’” Id. (quoting United States v. United States

Gypsum Co., 333 U.S. 364, 395 (1948)). “If the district

court’s account of the evidence is plausible in light of the

record viewed in its entirety, the court of appeals may not

reverse it even though convinced that had it been sitting as the

trier of fact, it would have weighed the evidence differently.”

Anderson v. City of Bessemer, 470 U.S. 564, 573-74 (1985).

III. Analysis

Superior attacks the Magistrate Judge’s conclusion that

Specialty’s grounds for insecurity and requests for adequate

assurance were reasonable. It also challenges his damages

calculation.

Specialty raises two issues on cross-appeal. First, it

argues that lost profits, not just reliance damages, are

13

recoverable for the in-line valves project. Second, it claims it

is entitled to prejudgment interest on the damages awarded in

its favor.

We address each argument in turn.

A. Insecurity and Adequate Assurance

1. Applicable Legal Standards

We have found no Pennsylvania cases discussing

whether a trial court’s conclusions on adequate assurance

under 13 Pa. Cons. Stat. § 2609 (U.C.C. § 2-609) are findings

of fact or conclusions of law. Courts and commentary

discussing § 2-609 have concluded that these issues are

generally questions of fact, but may sometimes be decided as

a matter of law. See U.C.C. § 2-609, cmts. 3, 4; BAII

Banking Corp. v. UPG, Inc., 985 F.2d 685, 702 (2d Cir. 1993)

(“It is generally a question of fact whether a buyer has

reasonable grounds for insecurity under § 2-609. There are

circumstances, however, where this issue may be resolved as

a matter of law.” (citations omitted)); AMF v. McDonald’s

Corp., 536 F.2d 1167, 1170 (7th Cir. 1976) (“Whether in a

specific case a buyer has reasonable grounds for insecurity is

a question of fact.”); Trust Co. for USL, Inc. v. Wien Air

Alaska, Inc., No. 96-15222, 1997 U.S. App. LEXIS 11958 at

*3 (9th Cir. May 20, 1997) (“The district court found that

‘while . . . what constitutes adequate grounds for insecurity is

14

often a factual question, conduct may be sufficiently extreme

as to be capable of decision as a matter of law.’ We agree.”)

Lance Int’l Ltd. v. Menominee Paper Co., No. 98-2229, 1999

U.S. Dist. LEXIS 10370 at *17 (E.D. Pa. July 9, 1999) (“[A]

question of fact is presented as to whether the request for

adequate assurances was proper and reasonable under the

circumstances.”); Personnel Data Sys. v. Grand Casinos, No.

97-4896, 1998 U.S. Dist. LEXIS 11587 at *17 (E.D. Pa. July

30, 1998) (“[A] demand for adequate assurances under the

UCC presents an issue of fact that cannot be decided on

summary judgment.”). For a court of appeals sitting in review

of a district court, the inquiry of whether conduct was so

egregious (or, conversely, so innocuous) as to allow a

conclusion on adequate assurance as a matter of law is

functionally the same as whether a district court’s finding of

fact was clearly erroneous. As the cases cited above suggest,

we may not overturn the Magistrate Judge’s conclusions

unless the evidence reasonably supports only one conclusion.

Turning to the merits, Pennsylvania’s Uniform

Commercial Code provides that when “reasonable grounds

for insecurity arise with respect to the performance of either

party the other may in writing demand adequate assurance of

due performance.” 13 Pa. Cons. Stat. § 2609(a). Failure to

provide such assurance within a “reasonable time not

exceeding 30 days” constitutes repudiation of the contract.

Id. § 2609(d).

15

What constitutes “reasonable” grounds and “adequate”

assurance is to be defined by commercial, not legal, standards.

Id. § 2609(b). Comment 3 to § 2-609 of the U.C.C. provides

that the grounds for insecurity “need not arise from or be

directly related to the contract in question,” and Comment 4

states that “repeated delinquencies must be viewed as

cumulative.” Further, Comment 4 indicates that what

constitutes adequate assurance will vary depending on the

circumstances and that the requested assurance need not be

due under the contract. “W hat constitutes ‘adequate

assurance’ is to be determined by factual conditions; [a party]

must exercise good faith and observe commercial standards;

his satisfaction must be based upon reason and must not be

arbitrary or capricious.” Cinicola v. Scharffenberger, 248

F.3d 110, 120 n.10 (3d Cir. 2001) (quoting Richmond Leasing

Co. v. Capital Bank, N.A., 762 F.2d 1303, 1309-10 (5th Cir.

1985)). 6

2. Analysis

On appeal, Superior challenges the Magistrate Judge’s

adequate assurance findings on three grounds: (1) Specialty

could not be insecure because any project delays were its own

fault, i.e., Specialty’s inability to source the six internal

6

Although Cinicola involved the interpretation of a

federal bankruptcy statute, 11 U.S.C. § 365(b), the language of

the statute borrows the concept of U.C.C. § 2-609.

16

components for the 1065 valves and the quality control

problems with both the 3" shells and the 1065 valves;

(2) Specialty’s request for payment of $112,868 was

unreasonable because no contractual right to this payment

existed; and (3) the Magistrate Judge erroneously interpreted

internal Superior documents and improperly relied on this

evidence in making his findings. The Magistrate Judge’s

findings, however, are fully supported by the factual record.

As to Superior’s first challenge, we agree with the

Magistrate Judge that Specialty’s ability to manufacture the

1065 valves and shells in accordance with Superior’s quality

control standards is irrelevant. This inquiry pertains to the

damages calculation, but it has no bearing on whether, in

August 1999, Specialty had reasonable grounds to feel

insecure about Superior’s commitment to these projects.

As detailed above, a variety of evidence supports the

Magistrate Judge’s decision that Specialty had reasonable

grounds to feel insecure. The 100-piece trial-production run

for the 3" shells had been delivered to Superior by the late

spring of 1999. Even assuming there were problems with the

brass alloy used to manufacture the shells, the additional

testing by Superior did not begin until a month and a half after

their arrival. As for to the 1065 valves, even assuming the

FAI approval was unwarranted, the record indicates (and

Superior does not dispute) that Wingenroth had authority to

give this approval. As such, Brisbin’s reliance on

17

Wingenroth’s authority was reasonable. Superior’s argument

also ignores that it asked Specialty to start the 100-piece trial-

production run with knowledge that testing had not been

completed. And while Superior may not have been obligated

to supply the six component parts for the valve, it should have

informed Specialty of its decision not to do so.

By June 1999, over a year had gone by since the

contracts had been signed. Yet Specialty had not begun full-

time production on any item. The record also indicates that,

despite numerous attempts, Brisbin received little to no

feedback on the status of these projects for at least a month

and a half. When he finally received feedback during the

August 2 conference call, he was told for the first time that

Superior had either never given certain approvals or had lost

them and that it would require additional testing.7 From

Specialty’s perspective, Superior reversed its position on the

FAI approvals after two months of silence and without any

explanation as to why. (Brisbin’s repeated requests for the

test results demonstrating noncompliance and the proper

quality control protocols also went unanswered.) In this

context, reasonable grounds existed for Specialty to feel

insecure about Superior’s commitment to the projects.

7

It appears ironic that the August 2 conference call was

initiated largely in response to Brisbin’s repeated pleas for a

status update on the projects. Absent his plea, we wonder when

(or if) Superior would have informed Specialty of any problems.

18

The record also supports the Magistrate Judge’s

finding that Specialty’s requests for adequate assurance of

Superior’s performance were reasonable. Admittedly, the

tone of Brisbin’s August 5 fax was strident and Specialty had

no right under the contract to recover the $112,868 Brisbin

demanded as one means of assuring Superior’s performance.8

But we analyze a request for adequate assurance in a practical

way, and such a request need not be tied to a contractual right.

See U.C.C. § 2-609, cmts. 3, 4. In light of Superior’s dilatory

behavior and its reversal of position, Specialty had good cause

to doubt Superior’s commitment to the projects. Further,

Specialty was in a vulnerable position because it could not

begin recouping startup costs until Superior had given all

approvals. As such, we conclude Specialty’s decision to ask

for assurance of Superior’s performance in this manner was

reasonable, notwithstanding the lack of a contractual right to

demand or receive the $112,868.9

8

The contract was structured so that startup costs were

incorporated into the unit price of the items.

9

Superior argues that Specialty was requesting payment

of the $112,868 without any corresponding price concession —

i.e., to be paid twice for tooling and machinery costs. Brisbin’s

statements in the August 5 fax — that he “certainly” expected

payment to be accompanied by an agreement detailing why “the

payment is being made” and what his “obligations are for this

payment” — indicate otherwise.

19

Further, Brisbin’s August 17 fax indicates a

willingness to entertain alternative forms of assurance in lieu

of immediate payment of the $112,868. Even his September

1 letter demonstrates a continued interest in reaching an

amicable solution. Despite these entreaties, Superior neither

presented a single counterproposal nor gave any indication

that it was willing and able to perform its obligations under

the contract in good faith. Instead, Superior decided to cease

all communications and referred the matter to its legal

department.

Lastly, we turn to Superior’s claim that the Magistrate

Judge erroneously interpreted and improperly relied on

internal Superior documents. The evidence in question was

generated by Superior employees in August 1999, after the

August 2 conference call. A handwritten note by Jon Carter,

a purchasing manager for Superior, at an August 4 meeting

states: “Create enough issues to eliminate the interest.”

Another handwritten note from this meeting, this time by Joe

Kilmer (Superior’s purchasing director), instructs:

“Disengage/Discontinue.” A third note, written by Kilmer on

August 5, advises that the agreements signed by Superior

were “not adequate” and needed “to be rewritten.” Finally, an

August 10 e-mail (this one by Bill Recktenwald, an employee

in Superior’s engineering department) states that, after

additional testing, the 1065 valves and shells projects may not

be “appealing . . . from a cost savings standpoint.”

20

The Magistrate Judge relied on this evidence, in part,

in concluding that Superior’s severance of its relationship

with Specialty “did not comport to standards of good faith and

fair dealing.” On appeal, Superior raises two objections.

Concerning the Carter and Kilmer notes, Superior argues that

they are ambiguous and that the Magistrate Judge interpreted

them in a way contrary to both Carter and Kilmer’s testimony.

As for the documentary evidence, Superior claims that the

Magistrate Judge’s reliance on this evidence was improper

because Specialty had no knowledge of these items at the

time.

First, the decision finding not credible the testimony of

Carter and Kilmer should be overruled only if clearly

erroneous. See Anderson, 470 U.S. at 574 (“Where there are

two permissible views of the evidence, the factfinder’s choice

between them cannot be clearly erroneous. This is so even

when the district court’s findings do not rest on credibility

determinations, but are based instead on physical or

documentary evidence or inferences from other facts.”

(internal citation omitted)); Scully v. US WATS, Inc., 238

F.3d 497, 506 (3d Cir. 2001) (stating that the “credibility of

witnesses is quintessentially the province of the trial court, not

the appellate court” (internal citation omitted)); Palazzo v.

Corio, 232 F.3d 38, 44 (2d Cir. 2000) (“The weighing of the

evidence is a matter for the trier of fact, not the court of

appeals, and the ‘clearly erroneous’ standard of review is a

deferential one. The mere presence of evidence to support an

21

inference contrary to that drawn by the trier of fact does not

mean that the factual findings were clearly erroneous.”). As

previously discussed, the evidence supports the conclusion

that Superior was engaging in dilatory behavior. Therefore,

the Magistrate Judge hardly erred in disregarding Carter and

Kilmer’s self-serving testimony and interpreting their

handwritten notes as evidence of Superior’s bad faith.

Further, the M agistrate Judge did not improperly rely

on the documentary evidence to make adequate assurance

findings. As Superior suggests, a § 2-609 analysis must be

based on the facts and circumstances known at the time

adequate assurance is requested. If a party had no knowledge

of certain facts, it follows that the reason for insecurity (and

the decision to ask for adequate assurance) was not based on

those facts. But as previously discussed, Specialty’s grounds

for insecurity and requests for adequate assurance were

reasonable based upon the information it had at the time.

Such a conclusion does not depend on the documentary

evidence to which Superior objects, and the Magistrate Judge

did not rely on the evidence for this purpose. He merely cited

this evidence to support an entirely separate conclusion —

that Superior breached the contracts by failing to respond to

the requests for adequate assurance and by disengaging from

its relationship with Specialty.

22

B. Lost Profits for the 1065 Valves and Shells Contracts

The Magistrate Judge awarded Specialty lost profits

for both the 1065 valves and shells contracts. Superior raises

a number of challenges to this award on appeal. We agree

that certain conclusions of the M agistrate Judge were in error,

and we remand in order to afford him the opportunity to make

additional findings based on the record made at the bench

trial.

1. Applicable Legal Standards

Lost profits may be recovered under Pennsylvania law

if (1) “there is . . . evidence to establish the damages with

reasonable certainty,” (2) the damages “were the proximate

consequence of the wrong,” and (3) the damages “were

reasonably foreseeable.” Advent Sys. Ltd. v. Unisys Corp.,

925 F.2d 670, 680 (3d Cir. 1991) (citing Delahanty v. First

Pa. Bank, N.A., 464 A.2d 1243, 1258 (Pa. Super. Ct. 1983)).

“Proof of damages need not be mathematically precise, but

the evidence must establish the fact ‘with a fair degree of

probability.’” Id. at 680 (quoting Exton Drive-In, Inc. v.

Home Indemnity Co., 261 A.2d 319, 324 (Pa. 1969)). Lost

profits, however, “cannot be recovered where they are merely

speculative,” Delahanty, 464 A.2d at 1258, and Pennsylvania

courts are reluctant to award them when a business venture is

23

not established. Id. at 1258-59.10 A plaintiff bears the burden

of establishing lost profits. Id. at 1257.

2. Duration of the Contracts and Length of Production

To calculate lost profits, the Magistrate Judge

multiplied the estimated profit for each individual item for a

year of full-time production by the total length of the contract

(i.e., three years for the 1065 valves contract and five years

for the shells contract). But as of the date of Superior’s

breach (approximately fifteen months into the contracts),

Specialty had not begun full-time production on either the

1065 valves or any of the shells. Undeterred, the Magistrate

Judge concluded that, under Pennsylvania law, it would be

reasonable to extend the contracts beyond their expiration

dates to allow Specialty to receive its “full expectation

interest.” This decision to calculate damages on the basis of

three and five years of full-time production erred as a matter

of law.

In support of the Magistrate Judge’s conclusion,

10

Typically courts are reluctant to award lost profits to

untested businesses because of the difficulty in estimating future

sales. Due to the quantity estimates and long-term nature of the

contracts in this case, that is not a problem. Yet Specialty faced

its own uncertainty — its subcontractors had no prior experience

manufacturing either the 1065 valves or the shells.

24

Specialty argues that, because development costs were

incorporated into unit prices and would be recouped over the

life of the contracts, they make economic sense only if they

continue for three and five years of production. Yet this is not

how they are written. The 1065 valves contract states that the

“agreement is effective for a term beginning May 28, 1998,

and ending May 27, 2001.” The shells contract contains

identical language, but expires on May 27, 2003. The

contracts neither provide for development time nor guarantee

a minimum period of full-time production. Sympathy aside, it

is axiomatic that a court may not rewrite the clear provisions

of a contract to make it more reasonable or to protect a party

against an unwelcome result. See Sultan Chemists, Inc. v.

EPA, 281 F.3d 73, 80 (3d Cir. 2002); State Farm Mut. Auto.

Ins. Co. v. Coviello, 233 F.3d 710, 717 (3d Cir. 2000)

(discussing Pennsylvania law); Selko v. Home Ins. Co., 139

F.3d 146, 151-52 (3d Cir. 1998) (same).

Even more damaging to Brisbin is that at trial he had

the burden of producing evidence to establish the date full-

time production would have begun for each project in order to

recover lost profits for the valves and shells. Delahanty, 464

A.2d at 1258. This is obviously a difficult task inasmuch as

Brisbin had to peg a date from seemingly indeterminate facts.

We nonetheless remand to allow the Magistrate Judge the

opportunity to make findings on this issue. He must do so

solely based on the evidence presented at the bench trial, as

Brisbin does not get a chance to supplement the record (his

25

opportunity having come and gone by the trial’s end). In any

event, if the Magistrate Judge determines on remand that

Brisbin established the date full-time production would have

begun for each project, he may only recover lost profits for

the valves and shells from that date through May 27, 2001 and

May 27, 2003, respectively.

3. Failure to Source Component Parts for the 1065

Valves

Specialty did not establish that its subcontractor even

was capable of manufacturing the 1065 valves. Its contract

with Superior states, and Specialty does not dispute, that it

was required to supply “fully manufactured, assembled, and

tested” 1065 valves. The record also shows that Specialty’s

South Korean subcontractor never found a supplier for six of

the roughly thirty component parts.

Specialty alleges that Superior agreed to supply these

components in the fall of 1998. But the only evidence of this

is a single statement made by Brisbin.11 Neither a written

contract nor other documentary evidence exists. Even

11

Brisbin testified on direct examination: “I believe there

was a couple [of components] . . . that [the South Korean

manufacturer was] not able to source at that time without a great

deal of costs and time. So Superior offered to supply

approximately five or six of the internal components.”

26

assuming Brisbin’s testimony is credited, such an agreement

would be unenforceable under the Statute of Frauds. See 13

Pa. Cons. Stat. § 2201 (requiring an agreement for the sale of

goods over $500 to be in writing). Thus we do not know

when, or even if, Specialty could have begun manufacturing

the 1065 valves. Again, this is an issue the Magistrate Judge

is best qualified to resolve on remand.

4. Quality Control Problems with the 1065 Valves

In awarding lost profits, the Magistrate Judge did not

consider whether the prototype 1065 valves supplied by

Specialty satisfied Superior’s quality control requirements.

This should have been determined. Whether the FAI approval

was improperly given, while irrelevant to the adequate

assurance inquiry, is relevant to damages. To recover lost

profits under Pennsylvania law, Specialty must establish to a

reasonable certainty when and if the valves would meet

specifications. Advent Sys., 925 F.2d at 680. Neither

Specialty nor its subcontractor had experience manufacturing

the valves, so we do not have a course of performance upon

which to rely. Therefore, Specialty had to present other

evidence of substantial compliance with the contract

requirements before lost profits could be recoverable.

The M agistrate Judge made no findings on the matter,

stating in a footnote: “It would be remiss for this court to fail

to consider Superior Shell’s responsibility to deliver a safe

27

product to market. In that respect, the need to conduct further

testing was not only reasonable but apparently necessary.”

For Specialty to recover lost profits for the 1065 valves, on

remand the Magistrate Judge must find that Speciality

introduced evidence establishing when (if ever) the valves

could have met Superior’s quality control requirements

(assuming Superior worked with Speciality in good faith).

5. Annual Quantity Term for the 1065 Valves

The Magistrate Judge also erred in calculating

damages for the 1065 valves based on an annual production

figure of 25,000 valves. The contract states that Superior

“agrees to purchase all of its requirements for Valves from

Specialty.” Exhibit A to the contract states the “Annual

Usage” is 25,000. Yet this figure is an estimate of expected

requirements, not a minimum takings obligation. Under

Pennsylvania law, the quantity term for a requirements

contract is the “actual . . . requirements as may occur in good

faith, except that no quantity unreasonably disproportionate to

any stated estimate . . . may be tendered or demanded.”

13 Pa. Cons. Stat. § 2306(a). “In a requirements contract,

‘[t]he seller assumes the risk of all good faith variations in the

buyer’s requirements, even to the extent of a determination to

discontinue the business.’” U&W Indus. Supply, Inc. v.

Martin Marietta Alumina, Inc., 34 F.3d 180, 188 (3d Cir.

1994) (citation omitted). But a “buyer purchasing less than its

forecasts may still be found in breach if it acted in bad faith.”

28

Reilly Foam Corp. v. Rubbermaid Corp., 206 F. Supp. 2d 643,

657 (E.D. Pa. 2002) (citing James J. White & Robert S.

Summers, Uniform Commercial Code § 3-9, at 141 (5th ed.

2000)).

Once again, the M agistrate Judge awarded lost profits

without making the requisite findings. The uncontroverted

testimony at trial was that Superior revised the annual

estimate for 1065 valves downward from 25,000 to

8,000–10,000. While the Magistrate Judge concluded

Superior acted in bad faith in canceling the contracts, no such

finding was made regarding the downward estimate. Indeed,

neither the Magistrate Judge nor the parties have even

discussed the issue. This too should be addressed on remand.

6. Profits Lost on the Shells Contract

The Magistrate Judge erred in awarding lost profits for

all of the shells when only the 3" shells had received FAI

approval. The record indicates, and Specialty does not

dispute, that separate FAI approvals were required for 2", 3",

4" and 5" shells. Prior to August 1999 Specialty had

submitted no shell size for approval other than the 3" shells.

In fact, Specialty missed a self-imposed deadline to provide

sample 4" shells by late June 1999. Further, Brisbin testified

that he initially anticipated between one and two years to get

the subcontractors up to speed, receive necessary approvals

and begin full-time production for all four shell sizes. While

29

the Magistrate Judge found that samples for the other shell

sizes were being produced in August, there are no findings

(and perhaps little to nothing in the record to allow findings)

(1) when these samples would have been completed, (2) how

long FAI approval should have taken, (3) how long a trial-

production run and approval would have taken, and,

ultimately, (4) when Specialty could have begun full-time

production.

In addition, it is unclear whether the shells satisfied

quality control requirements. As stated previously, Superior

employees testified that additional testing uncovered

problems with the brass alloy used for all shell sizes. Because

this problem was common to all the shells, Superior argues

that lost profits cannot be awarded. The Magistrate Judge

noted, however, that a different Superior employee testified

on cross-examination that the sample 3" shells actually passed

the required tests. The Magistrate Judge concluded:

On the basis of this record the court cannot

make a finding that the samples provided by

Specialty did not meet the applicable standards

and the quality requirements of Superior Valve.

Parenthetically, the court need not and will not

proceed onto a protracted analysis of that

question because it found that Superior Valve

had materially breached the contract . . . and

because it failed to provide the Plaintiff with

30

adequate assurance of performance.

Analyzing the first sentence of this statement, we

conclude that the Magistrate Judge never made a factual

finding one way or the other. From the second sentence it

appears that the Magistrate Judge applied the incorrect legal

standard for awarding lost profits. Specialty must prove

damages to a reasonable certainty. Advent Sys., 925 F.2d at

680. As with the 1065 valves, because neither Specialty nor

its subcontractors had experience manufacturing the shells,

substantial compliance with the contract requirements cannot

be presumed through a course of performance. Specialty had

the burden of demonstrating that the prototype shells were

conforming and, if not, when any deficiencies could have

been rectified. On remand, the Magistrate Judge needs to

make (if possible) appropriate findings if, upon

reconsideration, lost profits are to be awarded.

C. The In-Line Valves Project

On cross-appeal, Specialty argues that it is entitled to

lost profits based on the existence of an in-line valves

contract. The Magistrate Judge concluded that the parties

intended to enter into a contract, that the writing requirement

for the Statute of Frauds was satisfied, but that lost profits

were not recoverable because no agreement had been reached

as to price, quantity and duration. Accordingly, he awarded

Specialty only reliance damages.

31

We first conclude that the Magistrate Judge’s finding

that Superior and Specialty intended to contract is clearly

erroneous. As a written contract was executed for both the

1065 valves and the shells projects, the parties’ course of

dealings indicates that contractual intent was formalized in a

written document. The record also indicates that the parties

were in the final stages of negotiating the in-line valves

contract, but that they had reached no firm agreement. In a

letter dated August 3, 1999, Brisbin wrote that the in-line

valves “program has not been officially granted [to] Specialty

Manufacturing and we do not have currently a long-term

contract agreement for this program.” Further, Brisbin

testified that, in June 1999, he began “requesting information”

on the status of the in-line valves project because he had been

told a long-term agreement “would be forthcoming.” He also

“repeatedly asked [Joe Kilmer] about getting my [in-line]

check valve contract, and he said, ‘They’re still evaluating

it.’” On cross-examination, Brisbin admitted that a draft

agreement had not yet been exchanged between the parties

and that the two sides were only working toward a final

contract.

Even assuming Superior and Specialty intended to

agree, no contract was formed. A contract with open terms

will “not fail for indefiniteness if . . . there is a reasonably

certain basis for giving an appropriate remedy.” 13 Pa. Cons.

Stat. § 2204(c). The Magistrate Judge concluded, however,

that there was no “meeting of the minds” as to price, quantity

32

and contract duration. Thus, no contract was formed as a

matter of law. Yellow Run Coal Co. v. Alma-Elly-Yv Mines,

Ltd., 426 A.2d 1152, 1154 (Pa. Super. Ct. 1981) (stating that,

“[t]o be enforceable, a contract must . . . represent a meeting

of the parties’ minds on the essential terms of their

agreement”); see also Black’s Law Dictionary 224 (6th ed.

1991) (defining a contract as an “agreement between the

parties that gives each a legal duty to the other and also the

right to seek a remedy for the breach of those duties”).

Specialty points to evidence in the record — including

price quotes, quantity estimates and duration ranges — to

argue that these essential terms are ascertainable. But as

discussed above, the evidence in the record establishes that

the parties were still negotiating a final agreement.

Accordingly, we agree with the Magistrate Judge’s finding

that no final agreement was reached as to price, quantity and

duration of a putative in-line valves contract. 12

12

The Magistrate Judge held in the alternative (that is,

assuming the lack of an in-line valves contract) that Specialty

could recover as reliance damages its development and start-up

expenses for the in-line valves project under a promissory

estoppel theory. See, e.g., GMH Assocs., Inc. v. Prudential

Realty Group, 752 A.2d 889, 904 (Pa. Super. Ct. 2000)

(recognizing reliance damages for promissory estoppel). The

record establishes, and Superior does not dispute, that Specialty

began development of and incurred expenses for the in-line

33

D. Prejudgment Interest

Specialty also challenges the Magistrate Judge’s

decision to exclude prejudgment interest from the damages

award. The Pennsylvania Supreme Court has stated that “the

right to interest upon money owing upon contract is a legal

right . . . [which] begins at the time payment is withheld after

it has been the duty of the debtor to make such payment.”

Fernandez v. Levin, 548 A.2d 1191, 1193 (Pa. 1988)

(citations omitted); see also Somerset Cmty. Hosp. v. Mitchell

& Assocs., Inc., 685 A.2d 141, 148 (Pa. Super. Ct. 1996) (“It

is well established that in contract cases . . . prejudgment

interest is awardable as of right.”). Prejudgment interest “is a

right which arises upon breach or discontinuance of the

contract provided the damages are then ascertainable by

computation and even though a bona fide dispute exists as to

the amount of the indebtedness.” Palmgreen v. Palmer’s

Garage, Inc., 117 A.2d 721, 722-23 (Pa. 1955) (citations

omitted).

Based on this standard, the Magistrate Judge declined

to award prejudgment interest, concluding there was

insufficient evidence to determine when the right to payment

accrued. Initially, we note the inconsistency in the Magistrate

Judge’s decision. If the record does not establish the date on

valves project in reliance on promises and requests made by

Superior.

34

which the right to payment would accrue (i.e., when full-time

production would have begun), how could he conclude that

Specialty had established lost profits to a reasonable

certainty?

As set out above, the M agistrate Judge should award

lost profits on remand only if he makes findings as to when

production for the 1065 valves and the shells would have

begun. If those findings can be made, prejudgment interest

may be calculated based on prorated monthly production

figures (derived from findings as to annual production

amounts). But if no lost profits are awarded, Specialty would

be entitled to prejudgment interest only on its reliance

damages beginning on the date of contract repudiation. See

Fernandez, 548 A.2d at 1193 (concluding a party is entitled to

prejudgment interest from the date the right to payment

accrues).

* * * * *

In this context, the decision of the M agistrate Judge is

affirmed in part and reversed in part, and this case is

remanded for further proceedings consistent with this opinion.

35