creative int'l llc v sheila paper corp - opening brief

8/22/2019 Creative Int'l LLC v Sheila Paper Corp - Opening Brief

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Arizona Court of Appeals

Division One

Creative International, L.L.C., an

Arizona limited liability company,

Plaintiff,

vs.

Sheila Paper Corp., d.b.a Newbrook

Paper, a New Jersey corporation,

Defendant.

1- CA-CV 12-0192

APPELLANTS OPENING

BRIEF

ONAPPEAL FROM THEMARICOPACOUNTY SUPERIORCOURT

HON.EILEEN S.WILLETT,JUDGE

SUPERIORCOURT CASENUMBER: CV2008-000172

Law Offices of

Donald W. Hudspeth, P.C.

3030 N. Central Ave., Suite 111

Phoenix, Arizona 85012-2713

(602) 956-9201

Brian K. Stanley, of counsel

Rita J. Bustos

Attorneys for Defendant-AppellantSheila Paper Corporation

June 18, 2012

Reversed and remanded by unpublished opinion

http://azcourts.gov/Portals/0/OpinionFiles/Div1/2013/1%20CA-CV%2012-0192.pdf


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Creative Intl v Sheila Paper: Appellants Opening Brief p. i

Arizona Court of AppealsDivision One

Creative International, L.L.C., Plaintiff-Appellee,

- vs. -

Sheila Paper Corp.,Defendant-Appellant.

No. 1 CA-CV 12-0192

APPELLANTS OPENING BRIEF

CONTENTS

TABLE OF AUTHORITIES CITED........................................... iii

I. STATEMENT OF THE CASE ....................................................... 1

II. STATEMENT OF FACTS ............................................................... 2

III. QUESTIONS PRESENTED.............................................................. 8

IV. ARGUMENT

A. Appellees Complaint.

1. Standard of Review:De Novo ........................................ 11

2. Creative Did Not Have Any Buyers for the GlossPaper at the Time of Contracting With Sheila;Therefore Sheila Could Not Have Foreseen thatShipping Matte Paper Would Cause Creative theSpecial Damages Creative Claimed in Conse-

quence of Its Subsequent Contracts with Trans-continental and Hiney. .................................................... 12

3. Consequential Damages Must Also Be Denied

Creative Because Creative Could Easily HavePrevented the Claimed Damage. .................................... 17


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Creative Intl v Sheila Paper: Appellants Opening Brief p. ii

4. Creative Failed to Establish That the Claimed LostProfits Were Proximate Damages within the

Meaning of A.R.S. 47-2714 (B). ................................. 19

a. Lost profits on subsequent sale of the Paper. ...... 22

b. Lost profits from other future (non-)sales. .......... 23

5. Creative Failed to Establish its Lost-Profits Claimwith Reasonable Certainty .............................................. 29

B. Appellants Counterclaim.

1. Standard of Review:De Novo........................................... 31

2. Creative Clearly Accepted the Paper within the

Meaning of U.C.C. Article 2.. ........................................ 32

3. Under A.R.S. 47-2607, A Buyer Who AcceptsGoods, Even Non-Conforming Goods, Must Payat the Contract Rate for the Goods Accepted. ................ 33

4. More Arithmetic: Diminuend, Subtrahend, andOrder of Operations. ....................................................... 33

C. Trial Courts Verdicts.

1. Standard of Review: Substantial Evidence. .................... 37

2. On Defendants Counterclaim. ....................................... 37

3. On Plaintiffs Complaint. ............................................... 40

V. CONCLUSION ..................................................................................40

APPENDICES .................................................................. following 41

A. Relevant StatutesB. Trial Exhibits Cited

CERTIFICATES .............................................. following Appendix B


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Creative Intl v Sheila Paper: Appellants Opening Brief p. iii

TABLE OF AUTHORITIES CITED

Cases

Altfillisch Construction Co. v. Torgerson Construction Corp., 120 ARIZ.438,586

P.2D 999 (App. Div. 2 1978) .......................................................................................... 14

Bockman Printing & Services, Inc. v. Baldwin-Gregg, Inc., 213 ILL.APP.3D 516,572N.E.2D 1094 (1991) ....................................................................................................... 29

Coastal Aviation, Inc. v. Commander Aircraft Co., 937 F.SUPP. 1051 (S.D.N.Y. 1996) ....... 29

Custom Harvesting Oregon, Inc. v. Smith Truck & Tractor, Inc., 75 OR.APP. 274, 706

P.2D 186 (1985) ............................................................................................................. 20

Enterprise Leasing Co. v. Ehmke, 1068, 197ARIZ.144,3P.3D 1064 (App. Div. 1 1999) ...... 11

Flagstaff Affordable Housing L.P. v. Design Alliance, Inc., 223 ARIZ.320,223P.3D

664(2010) ................................................................................................................ 13, 14

Godwin v. Farmers Insurance Co. of America, 129 ARIZ.416,419,631P.2D 571

(App. Div. 1 1981) ......................................................................................................... 37Hadley v. Baxendale, 9 EXCH. 341, 156 ENG.REP. 145 (1854) .................................. 13, 14

Halliburton Co. v. Eastern Cement Corp., 672 SO.2D 844 (Fla. App. 1996) ................... 29Higgins v. Arizona Savings & Loan Assn, 90 ARIZ. 55, 365 P.2D 476 ............................ 13In re Estate of Zee, ____ARIZ. ____ , 265 P.3D 439 (2011)............................................ 32

In re Indian Palms Associates, Ltd., 61 F.3D 197 (3d Cir. 1995) ..................................... 31Industrial Graphics, Inc. v. Asahi Corp., 485 F.SUPP. 793 (D.Minn. 1980) .................... 21Jorgensen Co. v. Tesmer Mfg. Co., 10 ARIZ.APP. 445, 459 P.2D 533 (Div. 1 1969)........ 29

Lewis v. Mobil Oil Corporation, 438 F.2D 500 (8th Cir. 1971)........................................ 19McAlister v. Citibank (Arizona) N.A., 171 ARIZ.207,829P.2D 1253 (App. Div. 1 1992) ...... 14McDowell v. Davis, 104 ARIZ.69,448P.2D 869 (1968)................................................... 20

Morey v. Brown Milling Company, 220 GA.APP. 256, 469 S.E.2D 387 (1996) ................ 30

Murphy v. National Iron & Metal Co., 71 ARIZ

.323,

227

P.2

D219 (1951) ..................... 32Nyquist v. Randall, 819 F.2D 1014 (11th Cir. 1987) .......................................................... 15

Ocean West Contractors, Inc. v. Halec Constr. Co., 123 ARIZ.470,600P.2D 1102 (1979) ... 40Ohoud Establishment v. Tri-State Contracting, 523 F.SUPP. 249 (D.N.J. 1981) .............. 27

Pace v. Sagebrush Sales Co., 114 ARIZ.271,560P.2D 789 (1977)............................ 32, 33

Rancho Pescado, Inc. v. Northwestern Mutual Life Ins. Co., 140 ARIZ. 174, 680 P.2D

1235 (App. Div. 1 1984) ................................................................................................ 29

Schuldes v. National Surety Corp., 27 ARIZ.APP.611,557P.2D 543 (1976) ................... 29

SDR Assoc. v. ARG Enterprises., Inc., 170 ARIZ.1,821P.2D 268 (App. Div. 2 1991) .... 11Stallworth Timber Co. v. Triad Building Supply, Inc., 968 F.SUPP. 279, (D.V.I. 1997) ......... 31

Sullivan Industries, Inc., v. Double Seal Glass Co., Inc., 192 MICH.APP. 333, 480

N.W.2D 623 (Mich. App. 1991) .................................................................................... 31Winter v. Coor, 144 ARIZ.56,695P.2D 1094 (1985) ....................................................... 41

Woliansky v. Miller, 135 ARIZ.444,661P.2D 1145 (App. Div. 2 1983) .......................... 14Yancy v. Jeffreys, 39 ARIZ. 563, 8 P.2D 774 (1932) .......................................................... 32


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Creative Intl v Sheila Paper: Appellants Opening Brief p. iv

StatutesA.R.S. 12-341.01 (A) ..................................................................................................... 40

A.R.S. 12-2101 ................................................................................................................. 2

A.R.S. 44-1201(A) ......................................................................................................... 34

A.R.S. 47-2207 (B) .................................................................................................. 34, 40

A.R.S. 47-2313 (B)(1) .................................................................................................... 19A.R.S. 47-2513 (A) ........................................................................................................ 17

A.R.S. 47-2606 (A)(3)....................................................................................... 32, 33, 36

A.R.S. 47-2607 ..................................................................................................... 7, 33, 36

A.R.S. 47-2709 ............................................................................................................... 33

A.R.S. 47-2714 ................................................................................................... 12, 13, 19

A.R.S. 47-2714 (B) ............................................................................................ 10, 19, 20

A.R.S. 47-2714 (C) .......................................................................................................... 9

A.R.S. 47-2715 ............................................................................................................... 12

A.R.S. 47-2715 (B)(1) .................................................................................... 9, 13, 17, 18

A.R.S. 47-2717 .......................................................................................................... 36-40

RulesA.R.Civ.A.P. 21(c) ............................................................................................................ 40

A.R.Evid. 201 .................................................................................................................... 31

Encyclopedia, Treatise25 C.J.S.Damages 2 (1966) .......................................................................................... 16

11 S. Williston, CONTRACTS 1353 (Jaeger 3d ed. 1968) ................................................ 19

Other AuthoritiesComm. on Uniform State Laws, Official Comments, U.C.C. 2-607 Comment 3 ......... 33

Comm. on Uniform State Laws, Official Comments, U.C.C. 2-715 Comment 1 ......... 13WEBSTERSNEW WORLD DICTIONARY(3rdcollege ed., 1991) ......................................... 14

http://www.nber.org/cycles.html#navDiv=6 [National Bureau of Econ. Research] ........ 31

http://en.wikipedia.org/wiki/Dick_Whittington#Dick_Whittington_-_Stage_character ................... 17


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Creative Intl v Sheila Paper: Appellants Opening Brief p. 1

Arizona Court of AppealsDivision One

Creative International, L.L.C., Plaintiff-Appellee,

- vs. -

Sheila Paper Corp., Defendant-Appellant.

No. 1 CA-CV 12-0192

I. STATEMENT OF THE CASE.

Plaintiff-Counterdefendant-Appellee Creative International, L.L.C.,an Arizona limited liability company (Creative) brought suit against

Defendant-Counterclaimant-Appellant Sheila Paper Corp., d.b.a. Newbrook

Paper, a New Jersey corporation (Sheila) in Maricopa County Superior

Court, alleging breach of a contract for the sale of goods made on or about

December 7, 2007. C.I. 1.1 Creative agreed to purchase approximately

$86,000 worth of gloss-finish paper from Sheila. (RT 1 at 30). However,

Sheila accidentally shipped matte rather than gloss paper, and Creative

accepted these goods. (RT 1 at 42-43; accident conceded at RT 1 6:19).

Creative re-sold all the matte paper and brought suit claiming incidental and

consequential damages caused by Sheilas shipment of non-conforming

goods. RT 1 at 98; C.I. 1. Sheila counterclaimed for the contract price, no

part of which had been paid by Creative. C.I. 5.

1. This brief will use the following abbreviations: C.I. for the clerks index

of record on appeal; Exh. for trial exhibits; RT 1 for the court reporters

transcript of proceedings Day 1, July 12, 2011; and RT 2 for the court

reporters transcript of proceedings Day 2, July 13, 2011. All statutes cited

are reproduced (in section-number order) in Appendix A, and all trial

exhibits referred to are reproduced in Appendix B.


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After denial of Sheilas motion for summary judgment (C.I. 11 and

23) a two-day bench trial ensued. C.I. 53 and 54. In its verdict, the Court

found in favor of Plaintiff on Plaintiffs Complaint for breach of contract,

awarding Plaintiff damages in the amount of $17,858.40. On Defendants

Counterclaim against Plaintiff, the Court found in favor of the Plaintiff on

all claims. C.I. 55.

After entry of formal judgment, Sheila filed a timely motion for a new

trial on November 23, 2011. C.I. 68-74. That motion was denied by the

court in a formal written order entered on February 3, 2012. C.I. 79. On

February 10, 2012, Sheila filed timely notice of appeal from both the

judgment and the order denying its motion for a new trial. C.I. 82. This

Court has jurisdiction over Sheilas appeal from the superior courts

judgment and from the denial of its motion for new trial pursuant to A.R.S.

12-2101(B) and (F)(1).

II. STATEMENT OF FACTS.

Sheila is in the business of selling seconds or job lot paper. RT 1

at 132:17-21. Creative is a paper house, buying and reselling paper,

hopefully at a profit. RT 1 at 24:13-19. On or around December 7, 2007,

Marty Minison (Minison), a salesperson with Sheila, called Art Desautels

(Desautels), president of Creative, offering to sell Creative approximately

5 truckloads of #4 coated web gloss paper (the Paper) at a price of $41.90

per cwt.2 RT 1 at 25:16-20. After two or three phone calls between the

parties (RT 1 at 27:5-7), Creative sent Sheila a purchase order (Exh. 1)

2. Cwt is the standard commercial abbreviation for hundredweight, a unit

of weight equal to 100 avoirdupois pounds.


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detailing the sale proposed per the phone conversation. RT 1 at 28-29.

Subsequently, Sheila advised Creative that the weight of the Paper was

207,214 lbs., prompting Creative to send a revised purchase order (Exh. 18),

reflecting the revised weight and purchase price (at the same rate of

$41.90/cwt.) of $86,822.67. RT 1 at 30:3-4.

It is undisputed that when Creative and Sheila made this contract,

Creative did not have any particular contract or arrangement for the resale

of the Paper and did not know whether, to whom or at what price it would

be able to re-sell the Paper. RT 1 at 36:3-6, 38:7-12, 38:21-24, 68:7-10,

68:17-25, 69:1-5, and 167:15-25. At the time of contracting, therefore,

Creative did not have any particular requirements [or] needs pertaining to

or resulting from any contract to sell all or part of the Paper to any particular

customer or customers. A fortiori, Creative could not have made any such

particular requirement or need known to Sheila.

It was agreed that the paper would be shipped directly from the mill

to Creatives chosen warehouse, Midwest. RT 1 at 30:25-31:1-3. After

confirming that Sheila had shipped the Paper, Creative began soliciting

prospective customers in an effort to re-sell it. RT 1 at 38:7-24. For that

purpose, it contacted Transcontinental Printing (Transcontinental) and

Hiney Printing Company (Hiney), and eventually entered into contracts

with these two buyers. RT 1 at 21-25 and 38:14-16. The Transcontinental

purchase order, dated December 17, 2007, indicates a purchase of

approximately 140,000 pounds at 49.50/cwt. for a total price of $69,300. RT

1 at 39:11-23 and Exh. 23. Transcontinental received 144,295 pounds of

paper for a total projected price of $71,426.03. RT 1 at 48. The Hiney purchase


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order, dated December 27, 2007 (Exh. 24), shows a purchase of 43,808 lbs. at

47.75/cwt. for a total sale of $20,918.32. RT 1 at 49:10-19. The remaining

18,769 pounds of the Paper were not sold until after Hiney had rejected the

matte paper shipped to it and Creative had retrieved it. RT 1 at 50:8-10.

Neither party is certain exactly when the Paper was received at the

warehouse Creative had designated as the place of delivery, but it was on or

about December 26, 2007. RT 1 at 31:22-23 and 78:7-19. It was also on or

about this date that Sheila sent five invoices to Creative reflecting the five

truckloads of Paper shipped, at an exact shipped weight of 206,872 pounds

and a final price of $86,679.37. RT 1 at 69:24-25, 70-71 and 72:17-24;

Exhs. 2, 3, 4, and 50. Sometime after the Paper was delivered, Sheilas

salesman Martin Minison received notice from other customers who had

been sold paper from the same wholesale batch that some of the paper they

were receiving was matte and not gloss. RT 1 at 169-170 and RT2 at 24-25.

Minison promptly called Creatives president Arthur Desautels, informing

him of the potential that the Paper was matte. RT 1 at 42:3-8. Creative had

already shipped most of the Paper out, without inspecting it or, indeed, even

reading the labels affixed to the paper rolls (RT 1 at 74:12-75:21; Exh. 11

and 34) to Transcontinental and Hiney. RT 1 at 42:9-12, 23 and 43:1-2.

Desautels called Transcontinental and Hiney who confirmed their receipt of

matte paper. RT 1 at 43:13-25, 44:1-12 and 76:1-17. Desautels did not get

any samples of the paper and did not know how many paper rolls wereactually checked. RT 1 at 76:15-17.

Creative negotiated with Transcontinental, which agreed to keep the

matte paper at a discount, paying $41.95/cwt. RT 1 at 44:5-25, 45, and 80:9-


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17. There is some discrepancy as to what the precise discounted rate was.

RT 1 at 80-91. But it is undisputed that Transcontinental actually paid

$60,531.84, excluding taxes. RT 1 at 49. This was $10,894.28 less than the

price under the original Creative-Transcontinental contract which as, as

previously noted, was made not only after the Creative-Sheila contract of

sale had been made but even after Sheila had shipped the Paper. RT 1 at

49:2-5. Hiney could not use the paper and rejected it; Creative retrieved the

paper from Hiney, incurring additional shipping charges and warehouse fees

in the total amount of $1,801.51. RT 1 at 54:7-10, RT 2 at 48:6-9.

While Creative was negotiating with Transcontinental and Hiney over

the failure of the paper Creative sold them to conform to the gloss

description, Sheila was trying to negotiate with Creative regarding the same

failure of the Paper as sold by Sheila, in hopes of arriving at an amicable

compromise. Around April 9, 2008, after speaking with Sheila president

Jay Minsky, Minison called Desautels, offering him a discount of $6/cwt. if

Creative would keep the Paper and pay the discounted price. RT 1 at 96:10-

23. Creative refused the discount. On January 10, 2008, Sheila offered to

pick up all of the remaining paper from Creative at no charge and issue a

credit against its account. RT 1 at 98:4-14. Creative refused to return the

paper and refused to pay Sheila anything for the delivered and accepted

Paper. RT 1 at 98:13-14 and 150:7-10.

During these negotiations, Creative neither asked Sheila to fix the

problem nor proposed any settlement. RT 1 at 161:10-18. After refusing

Sheilas discounts, refusing to pay Sheila for the Paper, and neither

accepting nor proposing a compromise solution, Creative filed the present


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lawsuit on January 22, 2008. C.I. 1. On or around February 1, 2008,

Creative sold the Paper returned from Hiney plus the remaining 18,769

pounds of the Paper to Semper Exeter Paper Co. for $39.50/cwt. for a total

of $24,858.93. RT 1 at 50:5-15, 98:15-18, 101:9-15 and RT2 at 48:4.

Semper Exeter promptly paid Creative for the paper. RT 1 at 102:3-8 and

Exh. 14. A full six weeks after Transcontinental and Hiney received the

matte paper, they sent complaint e-mails to Creative; the Hiney e-mail

details their displeasure with the stock mix-up but states that Hiney is still

doing business with Creative. RT 1 at 105:21 106:10; Exh. 11. The

Transcontinental e-mail also details irritation with the stock mix-up, reports

that Transcontinental had been obliged to discount its price to its customer

whose job had been printed on the matte paper, asks Creative for a discount

and also asks Creative to understand that until we are compensated for the

lost revenue with this customer, we will not be forwarding any new orders

to Creative. Exh. 12.

As a final effort to show good faith, Minison sent Desautels an e-mail

asking if there was anything Sheila could do to resolve the issue amicably;

again Creative refused. Exh. 10 and RT1 at 91:7-25 and 92:1-2.

In total, Creative obtained $85,390.77 by reselling the Paper, for

which it has never paid. RT 2 at 49:22. Nonetheless, Creative contends it is

entitled to additional damages namely, incidental damages of $1,801.51

(extra shipping and storage costs) and consequential damages consisting of

lost profits. Creative claims profits lost not only on the resales of portions

of the Paper that it negotiated, after confirming Sheila had shipped the

Paper, with Transcontinental and Hiney, but profits it contends it would


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have derived from business it probably would have done with Trans-

continental and Hiney but for its shipment to them of matte paper when

gloss had been ordered, which in turn resulted from Sheilas shipment to it

of matte paper when gloss had been ordered. Direct or general

damages, e.g., the difference in market price, at the time and place specified

for delivery, between the specified quantity of gloss paper and a like

quantity of matte paper, formed no part of Creatives proof.

Sheila counterclaimed, simply seeking the contract price for the

accepted Paper, with interest. In its closing, Creative argued that its lost

profits and incidental damages amounted to $85,874.54. RT 2 at 49:7.

Despite the testimony of its president, owner, founder and sole witness Art

Desautels to the effect that the $86,000+ price invoiced by Sheila would be

the fair amount to offset against Creatives damages (RT 1 at 64:18-65:3),

Creatives attorneys argued for a lesser amount. Noting that Creative had

resold the Paper for $85,390, and that Desautels had testified to an average

gross (profit) margin of 10% on Creatives resales, they argued that the

reasonable price for the matte paper that Creative actually sold was $77,500,

which is simply taking the price that [Creative] sold it for, [and] reducing it

by ten percent. 3 RT 2 at 49:18-50:9. They concluded by submitting that

the court should award [Creative] on [its] claim, $85,874.54 and should

3. Even leaving U.C.C. 2-607 (1), A.R.S. 47-2607 (A), out of account, thisargument was not only a way of counting the claimed lost profit on the

resale to Transcontinental which Creatives attorneys had separately

chalked up over again, but it was also arithmetically inept. The correct

answer to the question, What is the wholesale price of goods with a resale

price of $85,390, assuming a 10% margin? is $77,627. 77,627+7,763 =

85,390, but 77,500+7,750 = 85,250.


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award Sheila $77,500 on its counterclaim (RT 2 at 50:10-13), equivalent to

a net judgment of $8,374.54 in favor of Creative.

Mysteriously, the trial courts verdict was for $17,858.40 to PlaintiffCreative on its Complaint, while on the Counterclaim of Defendant Sheila,

the court found in favor of the Plaintiff on all claims. C.I. 55

III. QUESTIONS PRESENTED.

1. Under the Uniform Commercial Code as adopted in Arizona,4if thebuyer of goods contends that the sellers shipment of goods that did

not conform to the contract description:5

a. caused buyer to breach a contract it subsequently made to resellthe goods to another buyer under the same description,

b. which breach caused damage to its relationship with saidsecondary buyer resulting in a period (hereinafter, the no-sales

period) during which the secondary buyer made no further

purchases from the first buyer,

and the (first) buyer claims as damages for the first sellers breach of

implied warranty the profits the (first) buyer estimates it would

otherwise have made (a.) on its resale of the goods to secondary

buyer and (b.) on other prospective sales to the secondary buyer

during the no-sales period, are such claimed lost profits damages

4. A.R.S. Title 47, 47-1101 et seq. All Title 47 sections and other statutes

cited are reproduced (in section-number order) in Appendix A.

5. This and all subsequent Questions assume that the first sellers shipment of

non-conforming goods was inadvertent and not the result of malice or other

improper motive.


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collateral damages within the meaning of U.C.C. 2-714 (3),

A.R.S. 47-2714 (C) and U.C.C. 2-715 (2)(a), A.R.S. 47-2715

(B)(1)?

2. Assuming Question No. 1 above is answered in the affirmative,would the first buyers contract to sell the goods to the secondary

buyer under the original contract description constitute a particular

requirement [or] need of the first buyer within the meaning of said

sub-section?

3. Assuming Question No. 2 above is answered in the affirmative, mustthis particular need of the first buyer have been made known to its

seller at the time the first contract of sale was made, in order for such

lost-profits damages to be recoverable as consequential damages?

4. Assuming Question No. 3 above is answered in the affirmative,would the requirement that the first seller be made aware of this

particular need at the time of contracting be satisfied if the first seller

knew that the first buyer is a merchant in goods of such sort, and so

was (presumably) purchasing the goods with a view to reselling them

at a profit?

More particularly, would such knowledge on first sellers part

constitute sufficient notice as to profits the first buyer would lose:

a. in consequence of its (first buyers) resale of the goods to thesecondary buyer under the original contract description?

b. in consequence of its (first buyers) lack of sales to the secondarybuyer during the no-sale period?


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5. Assuming Question No. 1 above is answered in the negative, are thelost profits damages first buyer claims as resulting from first

sellers breach of the implied warranty that the goods would conform

to the contract description direct or general damages governed

by U.C.C. 2-714 (2), A.R.S. 47-2714 (B)?

6. Assuming Question No. 5 above is answered in the affirmative, arethe first buyers claimed lost-profits damages proximate damages

within the meaning of, and recoverable under, U.C.C. 2-714 (2),

A.R.S. 47-2714 (B)?

More particularly, were the profits the first buyer was to lose:

a. in consequence of its (first buyers) resale of the goods to thesecondary buyer under the original contract description, and

b. in consequence of its (first buyers) lack of sales to the secondarybuyer during the no-sale period

proximate damages within the meaning of said sub-section?

7. To the extent that Question No. 4 and/or Question No. 6 above maybe answered in the affirmative, would the facts that the non-

conformity of the goods was readily ascertainable and that first buyer

made no inspection of the goods before shipping them to the

secondary buyer render the lost-profits damages claimed by the first

buyer unrecoverable?

8. To the extent that Question No. 4 and/or Question No. 6 above maybe answered in the affirmative (and Question No. 7 above is

answered in the negative), would first buyer be required to establish


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both causation and amount of its lost-profits damages with

reasonable certainty?

9. Under the U.C.C. as adopted in Arizona, if a buyer accepts goodseven though they do not conform to the contract description, must he

pay for such goods at the contract rate?

Appellant Sheila Paper Corp. would answer Questions Nos. 1, 2 , 3,

5, 7, 8 and 9 in the affirmative, and Questions Nos. 4 (both sub-parts) and 6

(both sub-parts) in the negative.

IV. ARGUMENT.

A. Appellees Complaint.

1. Standard of Review: De Novo.

Whether the trial court applied the correct measure of damages is a

mixed question of fact and law reviewedde novo. SDR Associates v. ARG

Enterprises., Inc., 170 ARIZ.1,2,821P.2D 268, 269 (App. Div. 2 1991). In

such a case, this Court is not constrained by the legal conclusions from

facts found or inferred in the judgment of the trial court nor by findings of

the trial court in mixed questions of law and fact. Enterprise Leasing

Co. v. Ehmke, 1068, 197 ARIZ. 144, 148 11, 3 P.3D 1064 (App. Div. 1

1999).


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2. Creative Did Not Have Any Buyers for the GlossPaper at the Time of Contracting With Sheila;

Therefore Sheila Could Not Have Foreseen thatShipping Matte Paper Would Cause Creative the

Special Damages Creative Claimed in Consequenceof Its Subsequent Contracts with Transcontinentaland Hiney.

Our analysis must begin with the applicable statutes:

A.R.S. 47-2714 (U.C.C. 2-714).

Buyers damages for breach in regard to accepted goods.

A. Where the buyer has accepted goods and given notification

(subsection C of section 47-2607) he may recover as damages for anynon-conformity of tender the loss resulting in the ordinary course of

events from the sellers breach as determined in any manner which is

reasonable.

B. The measure of damages for breach of warranty is the difference at the

time and place of acceptance between the value of the goods accepted

and the value they would have had if they had been as warranted,

unless special circumstances show proximate damages of a different

amount.

C. In a proper case any incidental and consequential damages under

section 47-2715 may also be recovered.

A.R.S. 47-2715 (U.C.C. 2-715).

Buyers incidental and consequential damages.

A. Incidental damages resulting from the sellers breach include expenses

reasonably incurred in inspection, receipt, transportation and care and

custody of goods rightfully rejected, any commercially reasonable

charges, expenses or commissions in connection with effecting cover

and any other reasonable expense incident to the delay or other breach.

B. Consequential damages resulting from the sellers breach include:

1. Any loss resulting from general or particular requirements and

needs of which the seller at the time of contracting had reason to

know and which could not reasonably be prevented by cover or


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otherwise; and

2. Injury to person or property proximately resulting from any

breach of warranty.

Official Comment 3 on 2-715 (2)(a) provides this observation

concerning the words needs of which the seller at the time of contracting

had reason to know: The particular needs of the buyer must generally be

made known to the seller, while general needs must rarely be made known.

For more detail concerning the application of this phrase, as well as the

U.C.C. 2-714 stricture that consequential damages may be assessed only

in a proper case, we must turn to case law.

The requirement that special circumstances exposing the buyer to loss

in the event of breach, or in the words of 2-715 (2)(a) buyers particular

requirements and needs, must be made known to the seller by the buyer at

the time of contracting in order for consequential damages flowing from

such special circumstances to be recoverable by the buyer in the event of

breach has a long history in Anglo-American contract law, tracing back (atleast) toHadley v. Baxendale, 9 EXCH. 341, 156 ENG.REP. 145 (1854) the

rule of which case, somewhat surprisingly, was not expressly adopted as the

law of Arizona until the 1961 decision in Higgins v. Arizona Savings &

Loan Assn, 90 ARIZ. 55, 63-64, 365 P.2D 476, 482-83. But as recently as

2010, our Supreme Court has seen fit to refer toHadley v. Baxendale in the

course of maintaining the adequacy of common law contract remedies in the

case then under review, on grounds they allow recovery of other

damages reasonably foreseeable to the parties upon entering the contract.

Flagstaff Affordable Housing L.P. v. Design Alliance, Inc., 223 ARIZ.320,

32526,223P.3D 664(2010).


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In the interim, Arizona appellate courts had cited Hadley v.

Baxendale in denying consequential damages for breach of contract where

the claimants special circumstances had not been made known to the other

contracting party when the contract was made. Woliansky v. Miller, 135

ARIZ. 444, 446, 661 P.2D 1145 (App. Div. 2 1983) and Altfillisch

Construction Co. v. Torgerson Construction Corp., 120 ARIZ.438,440,586

P.2D 999 (App. Div. 2 1978); cf. McAlister v. Citibank (Arizona) N.A., 171

ARIZ. 207, 212, 829 P.2D 1253 (App. Div. 1 1992) (applying Hadley but

holding that even though the defendant in fact did have sufficient notice of

plaintiffs special circumstances, this exception does not apply here

when the plaintiff could procure the loan from another source).

Given Arizona courts record of endorsement of the rule ofHadley v.

Baxendale, including the Supreme Courts recent reference to it as an

appropriate gauge of reasonable foreseeability in the contract setting

(Flagstaff Affordable Housing, supra), it is not easy to explain the trial

courts apparent disregard of that rule in this case. It could scarcely be

denied that any requirements and needs of Creative arising out of or in

connection with its contracts with Transcontinental and Hiney, including its

need to supply them with gloss paper, and moreover the need to fulfill

these two future customer orders accurately in order to preserve future

income streams to be derived from these customers, were particular

requirements,6

while it is undisputed that Creative did not even solicit these

6. From WEBSTERSNEW WORLD DICTIONARY(3rd

college ed., 1991):

general 1 of, for, or from the whole or all; not particular or local [a

general anesthetic, the general welfare] 2 of, for, or applying to a whole

genus, kind, class, order, or race [the general classifications of matter] 3


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orders until after confirming the Paper had been shipped pursuant to the

Sheila-Creative contract. Transcontinental and Hiney ordered the paper for

particular printing jobs, the parameters of which determined the kinds and

quantities of paper, ink, personnel and equipment needed to complete each

job. And any other future Transcontinental and/or Hiney orders as well as

the revenue (and a fortiori any future profits) that Creative might derive

from such orders would obviously depend upon the future particularities

of the businesses of Transcontinental, Hiney and Creative.

To the extent it can be coherently classified, Creatives argument to

the trial court was essentially that its claimed lost profits were not special or

consequential damages at all, but merely part of its U.C.C. 2-714 (1) loss

resulting in the ordinary course of events from the sellers breach as

determined in any manner which is reasonable. But if circumstances

surrounding but extrinsic to the transaction, such as the nature of the

buyers business, buyers business plans or expectations, or contracts the

buyer has or may sooner or later make are somehow incorporated into the

2-714 (1) ordinary course of events, any distinction between general and

special damages would be obliterated. Clearly, the 2-714 (a) ordinary

course of events is meant to express a general standard, referring to loss

which could ordinarily be expected to result from the breach itself. See

Nyquist v. Randall, 819 F.2D 1014, 1017 (11th Cir. 1987) (U.C.C. 2-714

existing or occurring extensively; common; widespread[a general unrest]

SYN COMMON, UNIVERSAL

particular 1 of or belonging to a single, definite person, part, group, or

thing; not general; distinct 2 apart from any other; regarded separately;

specific [to want a particular color] 3 out of the ordinary; unusual;

noteworthy; special [noparticularreason for going] SYN SPECIAL


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(1) plainly applies to so called direct damages. The ordinary course of

events does not include special leasing arrangements or other contracts at a

premium that the buyer may have).7

Creative argued that Sheila knew that Creative is a paper merchant,

and was buying approximately 100 tons of paper with a view to reselling

such merchandise at a profit. This much Sheila concedes. But then

Creative argued that therefore it was, at the time the Sheila-Creative

contract was made, foreseeable that Creative would succeed in selling the

paper at a profit. Because it may be foreseen that a merchant will try,

however, is it therefore also foreseeable that the merchant will succeed? Ifso, what is the measure of such foreseeable success? It is surely

foreseeable that if the merchant makes a sale at all, he will make as much

profit on the sale as he can but how much might that be? Pity the pet shop

that sold Dick Whittington8 his cat, had the animal proved unseaworthy!

7. Cf. 25 C.J.S.Damages 2 (1966):

Direct damages are such as result from an act without the intervention ofany intermediate controlling or self-efficient cause. Direct damages

include all such injurious consequences as proceed from, or have direct

causal connection with, such consequences. Consequential damages

are such as are not produced without the concurrence of some other event

attributable to the same origin or cause; such damage, loss, or injury as

does not flow directly and immediately from the act of the party, but only

from the consequences or results of such act.

8. 14th

c. London merchant who became immensely wealthy and was elected

Lord Mayor four times. According to a folk tale that is probably not true, as ayoung man he was so poor that the only thing he owned was a cat. He

gamely consigned the cat to a merchant ship trading into North Africa, where

the King of Barbary, whose land had no cats and whose palace and capital

were overrun by mice, paid a huge sum of money for the cat, the proceeds of

which sale formed the foundation of Whittingtons fortune. Seehttp://en.wikipedia.org/wiki/Dick_Whittington#Dick_Whittington_-_Stage_character.


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What is too preposterous to relate in this solemn tribunal without

feeling deeply embarrassed for the persons involved, Creative contended

not only that the particular contracts it would make to resell portions of the

Paper to Transcontinental and to Hiney, and the profit Creative expected to

make on each sale, were foreseeable to Sheila when it sold the Paper to

Creative, but that the nature and extent of Creatives future relationships

with these customers, and profitable sales Creative would make to each by

virtue of such relationships, months and years into the future, should these

relationships remain unimpaired, were also foreseeable (C.I. 75 at 6:18)

and worse, such contention was apparently found persuasive by the trial

court.

3. Consequential Damages Must Also Be DeniedCreative Because Creative Could Easily Have

Prevented the Claimed Damage.

U.C.C. 2-715 (2), A.R.S. 47-2715 (B), where other conditions are

satisfied, allows recovery of consequential damages which could not

reasonably be prevented by cover or otherwise. Creative claims it lost both

immediate and prospective future profits because Sheila shipped it matte

paper. But it was Creative that accepted the matte paper by re-selling it to

its own customers, to whom it had agreed to ship gloss paper. Creative was

not a puppet controlled by Sheila. It was an independent and effective

paper merchant that had been in the paper industry for more than forty

years. RT 1 at 24:20-21. And the fact that the paper delivered to the

designated warehouse was matte and not gloss was clearly shown by the

labels affixed to the rolls of paper delivered. RT 1 at 74:12-75:21; Exh. 11

and 34. Under U.C.C. 2-513 (1), A.R.S. 47-2513 (A), before accepting


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tendered goods a buyer has a right of inspection to ensure conformity.

Creative did not have to accept the matte paper, and having accepted it

Creative did not have to ship it to Transcontinental and Hiney in disregard

of the terms of its contracts with those customers.

Creative claims that it did not take possession of the paper until its

truckers picked the rolls of paper up at the warehouse, at which point the

paper was already on its way to Creatives customers Transcontinental and

Hiney. But nothing Sheila did compelled Creative to conduct its business in

this way. Creative elected, undoubtedly on the basis of its own economic

calculations, to sell large quantities of paper of which it had not made even

the most cursory and superficial inspection.

Creative offered no evidence of its own efforts to cover by

obtaining gloss paper for Transcontinental and/or Hiney from other sources,

even though it might reasonably have charged the costs of such an operation

to Sheila by virtue of Sheilas breach of contract. In fact, Creative offered

no evidence of any attempt on its part to mitigate the effects of Sheilas

mistake.

The U.C.C. 2-715 (2) exclusion of recovery for consequential

damages which could reasonably be prevented by buyer has been said to be

a codification of the broader principle that [d]amages which the plaintiff

might have avoided with reasonable effort without undue risk, expense, or

humiliation are either not caused by the defendants wrong or need not have

been, and, therefore, are not to be charged against him. The principle has

wide application and frequently involves the establishment of a standard of

reasonable conduct. Lewis v. Mobil Oil Corporation, 438 F.2D 500, 508


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(8th Cir. 1971) (quoting 11 S. Williston, CONTRACTS 1353 (Jaeger 3d ed.

1968)).

4. Creative Failed to Establish That the Claimed LostProfits Were Proximate Damages Recoverableunder A.R.S. 47-2714 (B).

Mention of the non-conformity of the goods delivered and accepted

is really a shorthand allusion to a three-step analysis under the U.C.C.

Under 2-313 (2)(b), A.R.S. 47-2313 (B)(2) , [a]ny description of the

goods which is made part of the basis of the bargain creates an express

warranty that the goods shall conform to the description. First, Sheila has

not denied that the description of the paper to be sold as gloss, meaning

coated paper with a gloss finish, formed part of the basis of its bargain with

Creative. Second, Sheila concedes that, through accident, it actually

delivered matte-finish paper instead. Third, Sheila admits that it thereby

breached the warranty implied by virtue of U.C.C. 2-313 (2)(b).

The goods having been accepted, the damages buyer Creative may

recover for this breach of warranty are governed by U.C.C. 2-714 (2),

A.R.S. 47-2714 (B):

The measure of damages for breach of warranty is the difference at the time

and place of acceptance between the value of the goods accepted and the

value they would have had if they had been as warranted, unless special

circumstances show proximate damages of a different amount.

Creative did not offer evidence of the difference in value of gloss paper vs.

matte paper at the time and place of acceptance. Therefore, it could be

awarded damages only if, and to the extent, that it established special

circumstances showing proximate damages of a different amount.
http://www.law.cornell.edu/ucc/search/display.html?terms=warrant&url=/ucc/2/article2.htm#Goodshttp://www.law.cornell.edu/ucc/search/display.html?terms=warrant&url=/ucc/2/article2.htm#Goods


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When 2-714 (2) speaks of proximate damages, it undoubtedly

means damage of which the breach of warranty was the proximate cause.

Our supreme court has defined the proximate cause of a claimants loss or

injury as that which, in a natural and continuous sequence, unbroken by

any efficient intervening cause, produces an injury, and without which the

injury would not have occurred. McDowell v. Davis, 104 ARIZ.69,71,448

P.2D 869, 871 (1968). Before that analysis became relevant, however, it

would be necessary for Creative to establish special circumstances. When

the Sheila-Creative contract was made and when the Paper was shipped by

Sheila, no special circumstance pertaining to or involving any particular sale

of all or part of the Paper, to Transcontinental or to Hiney or to any other

buyer, existed. Sheila maintains that no circumstance arising after the

contract of sale has been made and after seller has performed can properly

be considered a 2-714 (2) special circumstance, and in that connection

would re-emphasize that when it contracted with Creative, Creative had no

contract with Transcontinental or with Hiney. Cf. Custom HarvestingOregon, Inc. v. Smith Truck & Tractor, Inc., 75 OR.APP. 274, 706 P.2D 186,

191 (1985) (harvesting service claimed lost profits on harvesting jobs it

could not complete because defects rendered combines unusable; held, lost

profits would be disallowed as to jobs for which plaintiff failed to prove

that there was a binding agreement for the work).

As for the circumstances that Creative was a paper merchant and thatSheila must be held to have known that Creative was buying the Paper in

the hope of reselling it at a profit (if such be held to have been the

circumstances), Sheila would ask, Whats special about that? Anytime a

business firm purchases goods, it is presumably doing so with a view to


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promoting some business purpose, and thus in the end contributing in some

way toward achieving the goal of making the firm profitable. Whether it

involves buyers inventory, supplies or equipment, every business-to-

business sale of goods is attended by a risk that, if the buyer does not

receive exactly what it bargained for, its business plans may be upset and

thus its business prospects impaired to a greater or lesser extent. This

universal characteristic of commercial sales transactions cannot constitute

special circumstances within the meaning of Article 2 of the Code.

Assuming arguendo that a showing of special circumstances was

made, the question of proximate causation would be reached. Here it

becomes necessary to discuss the chain of causation which, Creative

contends, links the breach of warranty with its claimed damages. Appellant

Sheila would first observe, however, that it discusses both the links and

their purported causal connections hypothetically. Most if not all were

never proven properly, and are really nothing more than speculative

conjectures. Appellant Sheila addresses Creatives failure to establish

proximate causation in this section of its brief and the uncertainty of

Creatives proof of a loss and its amount in the following section, but asks

the Court to recognize that the two issues a interrelated, since the

requirement that a party claiming lost profits damages establish its loss with

reasonable certainty applies to both causation and amount of loss.9

9. See Industrial Graphics, Inc. v. Asahi Corp., 485 F.SUPP. 793, 805

(D.Minn. 1980) (applying Minn. U.C.C.) (on claim for lost profits, it was

incumbent upon plaintiffs to prove to a reasonable certainty that they are

entitled to such damages, including that the damages sustained were the

result of the breach). On reasonable certainty requirement generally, see

Part IV.A.5, pp. 29-31, below.


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a. Lost profits on subsequent sales of (portionsof) the Paper.

Now Creative contends that Sheilas undertaking to ship gloss paper

caused Creative to assume it would receive gloss paper, and on the strength

of that assumption to solicit orders for gloss paper from Transcontinental

and Hiney, and as a result of such solicitation to receive orders and enter

into contracts to sell gloss paper to Transcontinental and to Hiney. All these

developments were results of Sheilas warranty, not of its breach. The

breach occurred when Creative tendered matte paper, rather than gloss, at

the agreed time and place of delivery. Creative contends that Sheilas

tender of matte paper caused Creative to accept the goods tendered and its

acceptance of such goods caused it to ship matte paper where it had agreed

to ship gloss.

But here there are obviously efficient intervening causes. See Part

IV.A.3, at pp. 18-20, above. Creative did not have to accept the matte

paper, and having accepted it Creative did not have to ship it to Trans-continental and Hiney in disregard of the terms of its contracts with those

customers.

Let us assume, for purposes of the present analysis, that the patent

negligence Creative displayed, in accepting and shipping paper that no

agent or representative of Creative had ever so much as glanced at, were not

intervening causes. Creative contends further, that its shipment of mattepaper put it in breach of its contracts with Transcontinental and Hiney, and

that breach caused Hiney to reject the paper and Transcontinental to demand

a discount. The discount it reasonably gave Transcontinental cost it


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$10,894. RT 1 at 48-49. The difference between a reasonable estimate of

what it would have been able to sell the remaining paper for, had it been

gloss-finish, and what it actually sold the remaining matte paper for, is

$5,100. RT 1 at 51-53. Creative also incurred additional shipping and

storage costs of $1,801 (RT 2 at 48:6-9).

For the moment forcing ourselves to accept the assumptions further

that we have up to this point a natural and continuous sequence of cause and

effect, unbroken by any intervening cause, from Sheilas tender of non-

conforming goods to Creatives damages just recited, Creative would have

total 2-714 (2) proximate damages of $16,175. Assuming further

Creatives right to offset these damages against the contract price for the

accepted goods (see Part IV.B.4, pp. 33-37, below), as of approximately

February 14, 2008 (Exh. 14, p. 2) Creative would have owed Sheila

$86,679.37 - 16,175 = $ 70,504.37.

b. Lost profits from other future (non-)sales.

But Creatives demands in the trial court went much further. Based

on past invoices and applying what he said was his firms average margin,

Creatives president and sole witness Desautels estimated that Creative had

made profits on its sales to Hiney of about $800 to 850 a month during

2006-2007. RT 1 at 59-61. He stated that Hiney never gave Creative

another order after February, 2008 (RT 1 at 59:25-60:5), and multiplying an

average monthly figure of $833 per month times 24 months because it

seemed like a reasonable amount of time, he said the product is $19,992.

RT 1 at 61. He also testified to receiving an email from a Hiney

representative in February, 2005. RT 1 at 58-59, Exh. 11.


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In this interesting document (Exh. 11), the Hiney representative says

he can't believe that something as simple as READ THE LABEL would

keep me from getting the stock the mill said they had on the floor,

confirming that the labeling on the rolls of paper shipped by Sheila plainly

disclosed that they consisted of matte-finish paper and also revealing that he

thought Creative to be a paper mill and that it had the gloss paper which it

offered to him on the floor, i.e., in inventory. He goes on to say:

The only reason I did not charge you back andam still doing business with

you is that this is the first time there has been any issues with your

shipments, and realize that you can't control if a tow motor operator or CSR

at the mill can't read a computer screen, or a label and know what they havein stock and are shipping out on a truck. (Emphasis supplied.)

On the strength of this evidence, Creative argued that Sheilas December,

2007 tender of matte paper in place of gloss had caused Creative to suffer

additional lost profits damages of $19, 992.

Asked to explain Creatives relationship with Transcontinental as

of January, 2008 or December, 2007, Desautels answered:[W]e acted somewhat as a safety valve, if you would. We did have small or

trying to get established small pieces of business. But essentially, if they

needed something quickly, they would call on someone like us to help them

to obtain paper if they couldnt get it anywhere else. Perhaps give them a

competitive edge, if we could offer them paper that was more cost effective

than the regular sources. That type of relationship. RT 1 at 61:8-62:10.

Desautels further testified that he expected Transcontinental to purchase

in [his] estimation, four truck[load]s a month from Creative in 2008,

representing approximately $80,000 in sales and $8,000 in profits monthly.

He also said, We [Creative] didnt do business with them [Trans

continental] for about a six-month period beginning in January, 2008. RT


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1 at 62-63. On the strength of this evidence, Creative argued that Sheilas

December, 2007 tender of matte paper in place of gloss had caused Creative

to suffer additional lost profits damages of $48,000.

For purposes of this analysis Creatives case was so sketchy that we

need to flesh out links in the chain of causation that Creative simply

assumed sub silentio. As to Hiney, it is assumed that, but for Sheilas

December, 2007 non-conforming tender, Creative would have continued to

make sales to Hiney yielding Creative an average profit of $833 per month

from February, 2008 through January, 2010. Nothing other than Desaultels

testimony as to the average monthly profits in 2006 and 2007, and the lack

of further orders from Hiney after February, 2008 was offered in support of

this contention, except Exhibit 11. But in that exhibit, a communication

from an evidently responsible representative of Hiney10 to Desaultels, the

Hiney representative expresses displeasure over the stock mix-up and

exasperation that it evidently resulted from the failure of Creative personnel

to even READ THE LABEL on the rolls shipped, but explicitly states I

[Hiney] did not charge you [Creative] back and am still doing business with

you a statement which would certainly tend to vitiate Creativespost hoc,

ergo propter hoc assumption, which is, with or without the exhibit, an

obvious logical fallacy, anyway.

Creative failed to offer any evidence showing that Hiney had paper-

stock needs during the February, 2008 January, 2010 period that Creative

could have fulfilled by selling paper with a 10% mark-up, and also failed to

offer any evidence showing that Hiney would have filled those needs by

10. He was our customer at Hiney Printing. RT 1 at 58:15-16.


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purchasing paper from Creative but for Sheilas December, 2007 tender to

Creative of matte paper where gloss paper had been ordered. Indeed, on the

but for Sheilas non-conforming tender issue, the only relevant evidence

(Exh. 11) tends to disprove the proposition Creative should have been trying

to prove.

Turning to Transcontinental, Creatives case includes the tacit

assumptions that, but for Sheilas December, 2007 non-conforming tender,

Creative would have made sales to Transcontinental yielding Creative a

profit of $8,000 per month for the first six months of 2008. The sole basis

was the testimony of Art Desaultels, who said, when asked to characterize

Creatives relationship with Transcontinental, we acted somewhat as a

safety valve . We [were] trying to get established small pieces of

business. [I]f they needed something quickly, they would call on

someone like us to help them to obtain paper if they couldnt get it

anywhere else. He further said he would have expected Transcontinental

to give Creative business generating $8,000 a month in profits during the

first six months of 2008, but in fact Creative did no business with Trans-

continental during that period. Exhibit 12 is a communication from a Trans-

continental representative to John Buckingham of Creative, in which Trans-

continental complains that it had to go back and significantly discount the

job to our customer and asks Buckingham to "further understand that until

we are compensated for the lost revenue with this customer. we will not beforwarding any new orders to you." The mentions of having to discount

the job and of being compensated for the lost revenue are obviously


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references to the discount of $10,894 Transcontinental demanded and was

given on its purchase of most of the Paper. RT 1 48:13-49:5.

Creative failed to offer any evidence tending to show that Trans-continental needed [anything] quickly during the first six months of 2008,

or that, if it had, that Creative is the someone like Creative upon whom

Transcontinental would have called, if they couldnt get it anywhere else,

or that there was ever a time when Transcontinental couldnt get it

anywhere else. Creative also failed to offer any evidence that if Trans-

continental did have such a need and couldnt get the paper anywhere else it

would have chosen Creative among all someones like Creative to buy the

paper from but for Sheilas December, 2007 tender to Creative of matte

paper where gloss paper had been ordered. The document offered (Exh. 12)

does not evidence causation, because its reference to not forwarding any

new orders until Transcontinental had been compensated refers to the

discount of slightly less than $11,000 that Transcontinental demanded and

was given. And if that is not what Exhibit 12 refers to, Creative offered no

evidence tending to show whether or not Transcontinental was

compensated for the lost revenue, or if it was, when and how, or if it was

not, whether or not providing such compensation would have cost Creative

more than the $48,000 it is claiming in lost profits.

Even assuming, however, that all these imaginary links in the chains

of causation Creative needed to forge were replaced with links of iron, the

question ofproximate causation would remain.

In Ohoud Establishment v. Tri-State Contracting, 523 F.SUPP. 249

(D.N.J. 1981) the court was confronted by a fact-pattern and lost profits


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claims very similar to that presented by this case. Granting summary

judgment to the parties defending against the lost-profits claims, the court

said:

The claimants argue that the issues herein presented must be resolved

by a jury, and such argument presents a tempting method to avoid grappling

with this difficult issue. But the issue of foreseeability is not always one

which necessitates resolution by the fact finder. Although not authoritative,

POORRICHARDS ALMANAC (1758) is illustrative:

For want of a nail the shoe was lost;

For want of a shoe the horse was lost;

And for want of a horse the rider was lost;

For the want of a rider the battle was lost;For the want of a battle the kingdom was lost;

And all for the want of a horseshoe-nail.

The court would have little difficulty in submitting the loss of the shoe,

the horse, and probably the rider to a jury if caused by the sale of a defective

nail or the failure to deliver the nail as agreed. The loss of the battle creates a

doubtful question, but the loss of the kingdom is so remote as to bar its

submission to a jury.

It is the loss of their respective kingdoms that the claimants seek herein.

They do not seek damages arising from the defects in the direct sale or any

specific or potential resale [of the goods that proved defective]. They seek

damages for the loss of other future sales not yet in existence with the same and

other customers.

* * *

If the manufacturer of the nail becomes responsible for the loss of the

kingdom, then we may not have any more nails. 523 F.SUPP. at 255, 257.

True, here Creative only seeks damages for the loss of other future

sales not yet in existence with the same customers, and no others. And

also true, the Ohoud Establishmentcourt was here discussing foreseeability

rather than proximate damages. But at least one court has citedOhoud

Establishment(and quoted its colorful want of a nail analogy) in denying


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lost-profits recovery on proximate causation grounds. Halliburton Co. v.

Eastern Cement Corp., 672 SO.2D 844, 846-847 (Fla. App. 1996).

5. Creative Failed to Establish its Lost-Profits Claimwith Reasonable Certainty

Lost-profit damages must be proven with reasonable certainty.

Jorgensen Co. v. Tesmer Mfg. Co., 10 ARIZ.APP. 445, 451-52, 459 P.2D 533,

539-540 (Div. 1 1969) (merchant reselling farm equipment counterclaimed

for lost profits damages resulting from defects in equipment delivered; held,

neither fact nor amount of lost profits damages established by adequateevidence. On its counterclaim defendant had the burden of proving the

amount of its damages with reasonable certainty. All we have in this regard

is an estimate made by defendants president. *** Conjecture or speculation

cannot provide the basis for such damages.) See also Rancho Pescado,

Inc. v. Northwestern Mutual Life Ins. Co., 140 ARIZ. 174, 184, 680 P.2D

1235, 1245, (App. Div. 1 1984) (judgment n.o.v. disallowing plaintiffs

claim for lost profits sustained; deficiencies and gaps in plaintiffs evidence

as to probability and amount of profits led appellate court to view the

evidence as a whole as amounting to nothing more than conjecture and

speculation); and Schuldes v. National Surety Corp., 27 ARIZ.APP. 611,

616,557P.2D 543, 548 (1976) (no damages can be allowed for the loss of

profits which are determined to be uncertain, contingent, conjectural, or

speculative). Coastal Aviation, Inc. v. Commander Aircraft Co., 937 F.

SUPP. 1051, 1064 (S.D.N.Y. 1996) (applying New York law); Bockman

Printing & Services, Inc. v. Baldwin-Gregg, Inc., 213 ILL.APP.3D 516,527-

28,572N.E.2D 1094, 1102 (1991);Morey v. Brown Milling Company, 220


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GA.APP. 256, 469 S.E.2D 387, 391 (1996) (It is well settled that there can

be no recovery on a claim for loss of expected profits except where such

loss can be shown with reasonable certainty.)

Apart from 11 invoices reflecting Creatives sales to Hiney in 2006

and 2007 and the highly ambiguous Exhibit 11, Creative offered nothing but

post hoc, ergo propter hoc reasoning based solely on the opinions, estimates

and expectations of its president. No contracts, agreements or even

informal understandings were alluded to, but only vague relationships

inferred from undocumented or spottily documented past dealings. The

projected business Creative claims it lost (even assuming Sheilas

December, 2007 non-conforming tender would be the proximate cause of

the loss) was purely a matter of conjecture and speculation.

One of the most glaring deficiencies of Desaultels testimony about his

estimations and expectations is the complete absence of any recognition that

the period beginning with December, 2007 and running through 2009, during

which Creatives claimed lost profits were purportedly incurred, corresponds

almost precisely with the Great Recession of 2008-2009. The gross domestic

product of the United States contracted by more than 11%, and print

advertising revenues (print advertising forming the basis for the bulk of

Creatives business see RT 1 at 6:25-7:6) fell by almost 18%. Unfortunately,

such detailed facts were never developed on the record now before the Court.

However, Sheila asks the Court to take judicial notice that, as the National

Bureau of Economic Research has reported, there was a business contraction

(or recession) in the United States beginning in December, 2007 and ending

in June 2009 the longest such contraction since the Great Depression of 1929-


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1933. http://www.nber.org/cycles.html#navDiv=6.11 Cf. Sullivan

Industries, Inc., v. Double Seal Glass Co., Inc., 192 MICH.APP. 333, 480

N.W.2D 623, 632 (Mich. App. 1991) (proof of lost profits damages was

defective because plaintiff presented no evidence from which the court

could distinguish sales lost because of the recession in the early 1980s from

sales lost because of sealant failure). To sustain a damage award for lost

profits, there must be sufficient proof that the lost profits were proximately

caused by the defaulters breach. Where the loss cannot be allocated

between those caused by the breach and those resulting from some other

cause, the entire claim may be rejected. Stallworth Timber Company v.

Triad Building Supply, Inc., 968 F.SUPP. 279, 283 (D.V.I. 1997).

B. Appellants Counterclaim.

1. Standard of Review: De Novo.

To the extent it is controlled by the interpretation and application of

the U.C.C. as adopted in Arizona, the disposition of Sheilas breach of

contract claim involves only questions of law, the applicable standard for

the review of which is the de novo standard, since our appellate courts

11. Under the federal analog to A.R.Evid. 201, it has been held that judicial

notice may be taken at any stage of a proceeding, even on appeal. In reIndian Palms Associates, Ltd., 61 F.3D 197, 205 (3d Cir. 1995). Sheila

would submit that the fact of which notice is requested qualifies both under

R. 201 (b)(1) because it is generally known in Maricopa County and under

R. 201 (b)(2) because it can be readily determined from a source (the

National Bureau of Economic Research) whose accuracy cannot reasonably

be questioned.


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review de novo questions of law, including the interpretation of statutes.

In re Estate of Zee, ____ARIZ. ____ , 8, 265 P.3D 439,___ (2011).

2. Creative Clearly Accepted the Paper within theMeaning of U.C.C. Article 2.

It is undisputed that, after the Paper had been received at the

warehouse designated for delivery by Creative, Creative sold all the Paper

in two lots: the first, of 144,295 pounds, to Transcontinental and the second,

consisting of the remaining 62,934 pounds, to Semper Exeter, and that

Creative issued invoices for and received payment on account of these sales.

Creatives acts of re-selling the Paper for its own account clearly constituted

conduct inconsistent with Sheilas continuing ownership of the Paper. Cf.

Pace v. Sagebrush Sales Co., 114 ARIZ.271,273,560P.2D 789, 791 (1977);

Murphy v. National Iron & Metal Co., 71 ARIZ. 323, 328, 227 P.2D 219

(1951) (after performing actions constituting acceptance of goods, buyer

was in no position to refuse to pay in accordance with the terms of the

contract.); Yancy v. Jeffreys, 39 ARIZ. 563, 566, 8 P.2D 774, 777 (1932)

(buyer who retains the goods sold cannot refuse to carry out his part of the

agreement, although he may recover the damages caused him by the breach

on the part of the seller).

Under U.C.C. 2-606 (1)(c), A.R.S. 47-2606 (A)(3), acceptance

of goods occurs when the buyer does any act inconsistent with the

sellers ownership. Hence, it is clear as a matter of law that Creative

accepted the Paper for U.C.C. purposes. In fact, Creative conceded its

acceptance of the goods in its response to Sheilas Motion for Summary

Judgment. C.I. 14 at 5:1.


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3. Under A.R.S. 47-2607, A Buyer Who AcceptsGoods, Even Non-Conforming Goods, Must Pay

at the Contract Rate for the Goods Accepted.

One effect of U.C.C. 2-606 acceptance is declared in the

unambiguous language of U.C.C. 2-607 (1), A.R.S. 47-2607: Effect of

Acceptance: (A) The buyer must pay at the contract rate for any goods

accepted. This requirement is echoed in Official Comment 1 on U.C.C.

2-607, which states once the buyer accepts tender the seller acquires a right

to its price on the contract terms. See also A.R.S. 47-2709 (When the

buyer fails to pay the price as it becomes due the seller may recover the

price of any goods accepted .); Pace v. Sagebrush Sales Co., 114

Ariz. 271, 273, 560 P.2d. 789, 791 (1977).

4. More Arithmetic: Diminuend, Subtrahend, andOrder of Operations.

The only limitation on buyers obligation to pay at the contract rate

for accepted goods is buyers option to deduct damages from the price.Under U.C.C. 2-717, A.R.S. 47-2717, a buyer upon notifying the seller

of his intention to do so may deduct all or any part of the damages resulting

from any breach of the contract from any part of the price still due under the

same contract. The burden of establishing the right to legal setoff as

contemplated in 2-717 is on the buyer. Amerisourcebergen Corporation

v. Dialysist West, Inc., 465 F.3D 946, 950 (9th Cir. 2006) (applying Arizona

law). Hence, the buyer must establish that (1.) he notified the seller of his

intention to deduct damages from the price due under the contract; and (2.)

he has damages, resulting from sellers breach of the same contract, to

deduct.


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Here, it is undisputed that the goods, though accepted, did not

conform to the contract description. Creative claims damages allegedly

resulting from such non-conformity. But as to fulfillment by Creative of the

notification requirement of 2-717, there was a total failure of proof. Not

one word of testimony nor one line of any documentary exhibit reflects any

attempt on the part of Creative to notify Sheila that Creative intended to

deduct any damages from the never-paid purchase price for the 206,000+

pounds of paper that Creative received and resold.

The presence vel non of 2-717 notification is significant only as it

bears on the question of when Creatives obligation to pay Sheila the

contract price became a liquidated debt. If Creative did not have a right to

deduct the damages claimed as resulting from the breach of the Sheila-

Creative contract from the payment due under the terms of that contract, it

would still have had the right to pursue its claim for damages. It would

simply have been legally bound to satisfy its liquidated debt for the contract

amount due, while remaining free to pursue its unliquidated damages claim

in whatever available forum it might choose. Apart from the answer given

to the if-and-when-liquidated question, and the sequellae of that answer,12 it

would not matter at what point in time whatever damages Creative may

have, if any, are subtracted from the purchase price it owes.

12. Principally, the accrual of pre-judgment interest. Sheila contends

that its invoices became part of the contract pursuant to U.C.C. 2-707 (2), A.R.S

47-2207 (B). This would establish a contract rate of 1% per month, or 18% per

annum. RT 1 at 141-44 and Exhs. 2, 3, 4 and 50, Condition of Sale 4. In the

absence of a contract rate, Arizonas implicit rate on liquidated indebtedness, in

2007-08 set by A.R.S. 44-1201(A) at 10% per annum, would apply.


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Leaving the issue of 2-717 notification to one side and assuming

arguendo that the issue of 2-717 deduction is therefore reached, we

observe first that subtraction is what deduction is all about. To perform an

operation of subtraction, two given quantities or operands are required and

their order is significant. The first operand, called the diminuend, is the

number which is subtracted from, and the second operand, called the

subtrahend, is the number subtracted. The operation of subtraction yields

a number called the difference. The significance of the order of the

operands (i.e., identification of each given number as diminuend or

subtrahend) is that interchanging diminuend and subtrahend inverts the sign

of the difference.

Appellant Sheila has presumed to provide this short lesson in

arithmetic not because it fears that the Courts elementary education may

have been deficient, but because sleight-of-hand with regard to the

operation of subtraction and identification of its two operands is the trick to

which Appellee Creative resorted in making its argument on 2-607 to the

trial court. The Commissioners on Uniform State Laws did not aim to

provide the American business community with the same kind of two

equations in two unknowns merriment that may be derived from the trial

courts verdicts in this case (see below, p. 42 n. 14). In 2-717, the

deduction, if applicable, means subtraction of the damages resulting from

sellers breach of the contract of sale from any part of the price still dueunder the same contract. Since Creative never made any payment, the last

expression may be simplified by omitting the words any part of still.

The price due under the sales contract is the diminuend, and the amount of


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damages resulting from any breach of the same contract including, for

example, damages resulting from a breach of the implied-in-law warranty

that the goods will conform to the contract description is the subtrahend.

The first operand is a function of the contract of sale, and the second

operand is a function of the claimed breach of that contract.

In simpler terms, assuming both the existence of damages and the

right of Creative to deduct them, the figure that such damages are to be

deductedfrom is, incontestably, the contract price of $86,679.37. That is

the obvious and inescapable result of applying U.C.C. 2-606 (1)(c) and

2-607 (1) to the undisputed facts of this case. The amount, if any, to be

subtracted from this figure is then determined with reference to the damages

of buyer Creative.

Though Creative made several attempts to establish, through

argument rather than evidence, a lesser fair value for the accepted goods,

it addressed 2-607 only with the specious argument that, where 2-717

deduction is applicable, breach-of-warranty damages are to be subtracted

from the contract price twice once before and once in the course of the

2-717 deduction operation. In other words, Creative argued that breach-of-

warranty damages should be deducted (where otherwise permitted by 2-

717) as the 2-717 subtrahend after having been subtracted from the

contract price in determining the 2-717 diminuend. C.I. 75 at 10:21-11:5.

Creative never produced any evidence of a prevailing or market price

for matte paper at the time and place of the goods acceptance that was less

than the Sheila-Creative contract price. Nor, it must be said, did Creative

ever come close to overcoming the testimony of its own president to the


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effect that the $86,000+ contract price is the fair amount to be credited to

Sheila on account of its sale of the Paper to Creative. RT 1 at 64:18-65:3.

C. Trial Courts Verdicts.

1. Standard of Review: Substantial Evidence.

Godwin v. Farmers Insurance Co. of America, 129 ARIZ. 416, 419,

631P.2D 571 (App. Div. 1 1981). Ordinarily, after fully analyzing the trial-

court treatment of the claims presented in both Complaint and

Counterclaim, it would be unnecessary if not inappropriate to discuss

separately the verdicts on Complaint and Counterclaim upon which the

judgment appealed from was based. The peculiarity of the verdicts

announced in this case, however, makes such discussion necessary.

2. On Defendants Counterclaim.

Of course, the substantial evidence standard of review applies only

to so much of a verdict as may remain after errors of law are corrected.

The only way to make any sense of these verdicts is to assume that

the trier of fact meant to allow Plaintiff an offset against the Counterclaim

in an amount exceeding the amount that would otherwise have been

awarded Defendant on the Counterclaim, resulting in a net verdict for $0 on

the Counterclaim, which the trial court described, somewhat inartfully,13 as

a finding in favor of Plaintiff on all claims [stated in Defendants

13. Since on any (plausible) view of the facts the court must have meant to

award to Sheila, or rather credit Sheila with, something in excess of

$75,000, at least, on account the claims stated in its Counterclaim (i.e., for

supplying the 206,000 pounds of paper Plaintiff successfully resold), it was

inappropriate to use this claimant-takes-nothing form of verdict.


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Counterclaim]. C.I. 55. Then the trier of fact (one must surmise)

subtracted the amount credited to Defendant from the amount that would

otherwise have been awarded Plaintiff to arrive at a verdict for Plaintiff in

the amount of $17,858.40, presumably representing the remaining portion of

Plaintiffs damages after subtracting the amount applied Defendants

Counterclaim damages.

One problem, of course, is that the presence of two amounts that

would otherwise have been (two unknowns, in other words) in this

explanation of the verdicts makes it mathematically impossible to ascertain

what the trier of fact really meant to award on Complaint and

Counterclaim before any netting out, since the set of all number pairs whose

difference is 17,858.40 has an infinite number of members.14

Taking the (presumed) subtracting Plaintiffs damages approach as

an implicit finding for Plaintiff on the issue of Plaintiffs U.C.C. 2-717

right of offset, such finding is not supported by substantial evidence. In

fact, it is not supported by any evidence, since Plaintiff presented no

evidence to show its satisfaction of the 2-717 notification requirement.

See Part IV.B.4 at pp. 37-38, above.

Presuming the amount the trier of fact really meant to subtract as

Plaintiffs damages from the amount that would otherwise have been

awarded Defendant on its Counterclaim (even though all we know about

14. For instance, the trier of fact might have felt that but for its breach

Defendant should have received $999,982,140.60 while on account of the

breach Plaintiff was entitled to $999,999,999.00. The suggestion may seem

facetious, but actually it accords well with Plaintiffs Who cares about the

evidence? The skys the limit! attempt to justify these verdicts. See C.I. 75

at 8:10-10:9.


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this figure, on the explanation of the two verdicts given above, is that it is

$17,858.40 more than the amount the trier of fact really meant to award

Defendant on its Counterclaim) to be the amount Plaintiff asked for in its

closing, viz., $85,874.54, it would follow that the amount the trier of fact

really meant as the diminuend of this operation (the amount from which

Plaintiffs damages were subtracted) was equal to or less than $85,874.40.

That would make the verdict contrary to law, since it is clear as a matter of

law that Defendant should have been awarded $86,679.37 (exclusive of pre-

trial interest) on its Counterclaim. See Parts IV.B.2 and Part IV.B.3 at pp

35-37, above.

Presuming the amount that the trier of fact really meant to award

Plaintiff Creative on its Complaint (even though all we know about this

figure, on the explanation of the two verdicts given above, is that it is

$17,858.40 more than the amount the trier of fact really meant to award

Defendant Sheila on its Counterclaim) to be the amount Plai

creative int'l llc v sheila paper corp - opening brief

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