Foster Poultry Farms, Inc. v. XL Insurance et al

Filing 133

MEMORANDUM OF DECISION signed by Senior Judge William B. Shubb on 2/11/2016: For the reasons stated herein, the court hereby finds for Foster on its breach of contract claim and finds that Foster suffered Loss in the amount of $2,706,398.00 cov ered by the Policy. This matter is set for oral argument on 4/4/2016 at 01:30 PM in Courtroom 5 (WBS) before Senior Judge William B. Shubb for the limited purpose of allowing the parties to address the remaining issues of: (1) whether Foster is e ntitled to prejudgment interest; (2) how the $2 million retention under the Policy should be treated; (3) whether defendant is entitled to any offset from Foster's settlement with Orkin; and, if so, (4) the amount of such offset. IT IS SO ORDERED. (See document for further details.) (Kirksey Smith, K)

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UNITED STATES DISTRICT COURT

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EASTERN DISTRICT OF CALIFORNIA

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----oo0oo---FOSTER POULTRY FARMS, INC.,

Civ. No. 1:14-953 WBS SAB

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Plaintiff,

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v.

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MEMORANDUM OF DECISION

CERTAIN UNDERWRITERS AT
LLOYD’S, LONDON,

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Defendant.

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----oo0oo----

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After conducting a four-day bench trial, hearing

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extended closing arguments, and considering the parties’ post-

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trial briefing, the court finds in favor of plaintiff Foster

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Poultry Farms, Inc. (“Foster”) on its breach of contract claim in

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the amount of $2,706,398.00.

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court’s findings of fact and conclusions of law pursuant to

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Federal Rule of Civil Procedure 52(a).

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I.

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This memorandum constitutes the

Factual and Procedural Background
Foster is a poultry producer with its largest chicken

processing plant in Livingston, California.
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The Livingston

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facility is comprised of two processing areas (“Plant 1” and

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“Plant 2”) that share a common packaging floor.

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Certain Underwriters at Lloyd’s, London, issued a product

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contamination insurance policy to Foster that was effective May

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25, 2013 to May 25, 2014 (the “Policy”).

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The Policy is governed by New York law.

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Defendant

(Ex. 1 (“Policy”).)

On October 7, 2013, the United States Department of

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Agriculture Food Safety and Inspection Service (“USDA” or “FSIS”)

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issued a Public Health Alert after 278 illnesses had been

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reported due to a continuing salmonella outbreak.

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The Public Health Alert warned consumers that “consumption of

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Foster Farms brand chicken and other brand chicken produced by

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Foster Farms plants [were] the likely source of this outbreak of

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Salmonella Heidelberg infections.”

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the Public Health Alert significantly affected Foster’s

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reputation and sales, but Foster does not claim coverage for any

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losses sustained as a result of the Public Health Alert in this

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action.

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(Id.)

(Ex. 261.)

It is undisputed that

On January 8, 2014, the FSIS issued a Notice of

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Suspension (“NOS”) that suspended the assignment of its

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inspectors at the Livingston facility and withheld marks of

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inspection for chicken produced there.

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FSIS issued the NOS because of “egregious insanitary conditions

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observed . . . whereby products produced at [the] facility may

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have been rendered adulterated in violation of the Poultry

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Products Inspection Act.”

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the FSIS denied Foster’s request to apply marks of inspection to

(Id. at 1.)

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(Ex. 4 (“NOS”).)

The

As a result of the NOS,

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1.3 million pounds of chicken produced at the Livingston facility

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on January 7 and 8, 2014.

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After the FSIS approved Foster’s Verification Plan in

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response to the NOS, the FSIS verbally placed the NOS in abeyance

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on January 10, 2014 and sent a written “Notice of Suspension Held

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in Abeyance” (“Abeyance Notice”) on January 13.

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operations in Plant 2 on January 11 and 12 and completed two full

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production shifts.

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voluntarily ceased operations at the Livingston facility and did

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Foster resumed

Late in the morning on January 12, Foster

not resume operations until January 22, 2014.

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Foster submitted a coverage claim with defendant for

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over $12 million in losses purportedly incurred as a result of

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the NOS.

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Contamination and Government Recall provisions, but defendant

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denied Foster coverage under both provisions.

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instituted this action for declaratory relief and breach of the

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insurance contract.

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Foster claimed coverage under the Policy’s Accidental

Foster then

The parties filed cross-motions for summary judgment on

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Foster’s declaratory relief claim to resolve whether Foster was

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entitled to coverage under the Policy.

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granting Foster’s motion for summary judgment and denying

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defendant’s motion for summary judgment, which is herein

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incorporated by reference, the court found that Foster was

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entitled to coverage as a matter of law.

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Order (Docket No. 117).)

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8, 2014 NOS and the conditions described in it constituted an

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Insured Event under the Accidental Contamination provision.

In its Amended Order

(Jan. 20, 2016 Am.

The court first held that the January

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(Id. at 9:6-16:14.)

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Foster’s destruction of the 1.3 million pounds of chicken as a

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result of the NOS constituted an Insured Event under the

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Government Recall provision.

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Alternatively, the court concluded that

(Id. at 16:15-22:27.)

The parties proceeded to a bench trial before the

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undersigned to determine Foster’s loss under the Policy.

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the court already found that Foster is entitled to coverage under

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the Policy, it is entitled to judgment in its favor on its breach

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of contract claim if it sustained loss covered by the Policy.

Because

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The Policy defines “Loss” the same for the Accidental

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Contamination and Government Recall provisions, and Foster is

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seeking the same damages under either coverage provision.

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Because the January 8, 2014 NOS essentially resulted in a single

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Insured Event entitling Foster to damages under either coverage

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provision and Foster seeks the same damages under either

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provision, the court need not distinguish between the Accidental

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Contamination and Government Recall provisions for purposes of

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these findings of fact and conclusions of law.

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II.

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Analysis
A.

The “Insured Event”
A pivotal dispute between the parties is whether the

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Insured Event extends for the entire duration the Livingston

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facility was not processing chicken from January 8 to 22.

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contends there was a single shutdown from January 8 to 22 and

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that this entire period constitutes the Insured Event.

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Defendant, on the other hand, argues that if the Insured Event

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was the initial shutdown mandated by the NOS as the court found

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Foster

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at summary judgment, the second voluntary shutdown Foster elected

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to impose is not part of that Insured Event.

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1.

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The USDA issued the five-page NOS to Foster on January

The NOS and Abeyance Notice

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assignment of inspectors at the Livingston facility.

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also 9 C.F.R. § 500.1(c) (“A ‘suspension’ is an interruption in

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the assignment of program employees to all or part of an

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establishment.”).

(NOS); see

As the grounds for the NOS, the USDA stated:

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This action is initiated based on egregious insanitary
conditions observed in your establishment whereby
products produced at your facility may have been
rendered adulterated in violation of the Poultry
Products Inspection Act (PPIA) . . . . This is
evidenced by findings of an infestation of live
cockroaches in and around your production areas, that
created insanitary conditions, and demonstrate that
your firm failed to maintain an effective pest control
program and other sanitary controls to assure that
wholesome, unadulterated meat and poultry products are
produced at your facility.
(NOS at 1.)

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The USDA informed Foster in the NOS that FSIS

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inspection personnel had found “live cockroaches at the hand wash

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sink directly across from Inspection Station 7, line 2” while

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slaughter operations were in progress.

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further memorialized four occasions on which the USDA had issued

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notices of noncompliance based on its discovery of live

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cockroaches in production areas.

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FSIS found live cockroaches (1) on January 7, 2014 “during

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production on a grey plastic tub that is a direct product contact

(Id. at 2.)

The NOS

(See id. (indicating that the

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surface”; (2) on December 28, 2013 “during production to the left

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of the faucet of Inspection Station 7”; (3) on November 4, 2013

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“during production next to the sanitizer dispenser box, which is

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located on the wall next to the ice machine”; and (4) on

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September 14, 2013 “during production on the floor between the

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liver tumbler/belt wall”).)

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In the NOS, the USDA informed Foster that the

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“suspension will remain in effect until such time as you provide

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adequate written assurances of corrective and preventative

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measures to assure that meat and poultry products will be

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produced under sanitary conditions in accordance with the Poultry

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Products Inspection Act and the regulations promulgated there

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under.”

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suspension in abeyance and allow the establishment to operate

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under the conditions agreed to by FSIS and the establishment.”).

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Foster “submitted [its] first response” to the NOS via

(Id. at 4); see also 9 C.F.R. § 500.5 (“FSIS may hold a

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email that same day.

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evaluation” of Foster’s “first submittal,” the Alameda District

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Office of the USDA (“ADO”) determined that “additional

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information and clarification was needed in order to determine

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regulatory compliance.”

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Foster on January 8 and 9 to “discuss the items of concern.”

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(Id.)

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(Ex. 9 at 1.)

(Id.)

After a “thorough review and

The ADO had conference calls with

On January 10, Foster submitted its “second response

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via email to the NOS” to address the ADO’s concerns and inquires.

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(See id. at 1-3.)

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Foster “to discuss the remaining items that required

The ADO had a further conference call with

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clarification,” and Foster “provided an addendum to [its] second

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submittal” that same day.

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(Id. at 3.)

On January 10, the ADO verbally notified Foster that it

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would hold the NOS in abeyance.

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11, Foster resumed operations in Plant 2 and ran two full

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production shifts and started a third shift early Sunday morning

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on January 12.

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employees found two dead or dying cockroaches in a production

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area of Plant 2.

The following day, on January

During the time Plant 2 was in production, Foster

Specifically, at 11:27 p.m. on January 11,

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Foster employees sighted a cockroach “in the pinning area behind

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the hock nicker” and, at 12:38 a.m. on January 12, Foster

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employees sighted a cockroach on the “evisceration wall between

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the evisceration and chiller.”

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hours later, at 10:37 a.m., Foster’s plant manager at the

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Livingston facility, Ronald O’Bara, decided to “temporarily cease

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operations.”

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(Ex. 27 at 1.)

Approximately ten

(Id.)

That same day, O’Bara notified the ADO District

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Manager, Dr. Yudhbir Sharma, in writing of the two sightings in

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the production area of Plant 2 and of Foster’s decision to

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temporarily cease operations.

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informed Dr. Sharma that “the corrective actions” taken in

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response to the sightings “were sufficient to maintain sanitary

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conditions.”

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produced was safe for sale and consumption:

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In that same letter, O’Bara

He assured Dr. Sharma that the chicken

All sightings reported as part of the Internal Pest
Control Management Program did not pose a risk to
product for the following reasons:

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●

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(Id.)

(Id.)

Plant 2 was monitored continuously throughout
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the production shifts.

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Sightings were identified on non-food contact
sites.

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Corrective actions were immediately implemented
to ensure containment within the specific area.

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(Id. at 2.)

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million pounds of chicken produced on January 11 and 12 for sale

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and that Foster sold it.

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It is undisputed that the USDA approved the 1.25

In the detailed Abeyance Notice dated January 13, the
USDA stated, “On January 12, 2014, your plant management notified

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the ADO of your intent to voluntarily stop operations to

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implement further interventions.”

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3.)

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USDA informed Foster:

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As the grounds for holding the NOS in Abeyance, however, the

Based on your written and verbal commitments provided
on January 8, 2014, through January 10, 2014, in
response to the NOS, the ADO has determined that your
establishment has provided adequate corrective actions
to address the noncompliance identified in the NOS.
Therefore, we have decided to hold the Notice of
Suspension in Abeyance to afford your establishment
the opportunity to implement your proffered corrective
actions and preventative measures.
This confirms the
verbal notification provided to you on January 10,
2014, by the FSIS Alameda District Office.

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(Ex. 9 (“Abeyance Notice”) at

(Id.)
2.

The Insured Event Does Not Include the Second
Voluntary Shutdown

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It is undisputed that when the USDA sent the

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Abeyance Notice on January 13, it knew Foster had found two dead

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or dying cockroaches in a production area and had chosen to cease

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its operations.

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grounds for placing the suspension in abeyance on the “written

Nonetheless, the USDA expressly limited its

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and verbal commitments provided on January 8, 2014, through

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January 10, 2014, in response to the NOS.”

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added).)

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in its Abeyance Notice directly after it recognized that Foster

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had notified it of Foster’s “intent to voluntarily stop

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operations to implement further interventions” on January 12.

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(Id. (emphasis added).)

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closure on January 12 or any further interventions as grounds for

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holding the NOS in abeyance.

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(Id. (emphasis

Significantly, the USDA referenced the January 10 date

The USDA did not identify the voluntary

None of the evidence at trial establishes that the

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USDA’s decision to place the NOS in abeyance was dependent on or

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influenced by Foster’s decision to voluntarily cease operations

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on January 12.

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rely on Foster’s decision to voluntarily cease operations or

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complete any “further interventions” communicated on January 12

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when deciding that Foster’s Verification Plan was sufficient to

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place the NOS in abeyance.

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processing chicken upon the USDA’s verbal abeyance of the NOS.

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The court therefore finds that the USDA did not

Foster was thus entitled to begin

Despite the written correspondence showing that the

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USDA issued the Abeyance Notice with knowledge of the two

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cockroaches found in a production area on January 12, Foster

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claims the USDA employees had orally informed Foster that it

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would be shut down if the USDA found another cockroach.

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head of quality control and health and safety, Dr. Robert

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O’Connor, testified that after operations ceased on January 12,

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he called Dr. Sharma for directions.

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Dr. Sharma orally warned him that if the USDA found a live, dead,

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Foster’s

According to Dr. O’Connor,

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or dying cockroach in a production area, the USDA would suspend

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Foster’s operations.

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Abreu, an inspector for the ADO, told him on January 11 that the

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USDA would shut Foster down if the USDA found a cockroach, even

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if it was outside of a production area.

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O’Bara also testified that Dr. Gregory

As a threshold matter and as the court made clear to

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counsel at trial, the court cannot consider these hearsay

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statements for the truth of the matters asserted.

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Evid. 801(c).

See Fed. R.

Given the weight Foster sought to attribute to

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these undocumented conversations at trial,1 it is surprising that

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Foster did not at least attempt to secure the testimony of Dr.

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Sharma or Dr. Abreu for trial.

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Nonetheless, even if the court considers these oral

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statements when evaluating Foster’s state of mind and what it

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believed the USDA would do upon finding another cockroach, Foster

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has not met its burden of showing that the USDA would have

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actually shut it down or that Foster actually believed the USDA

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would shut it down if it found one more cockroach, especially if

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that cockroach was not in a production area.

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As previously discussed, the USDA knew Foster had found

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two cockroaches in a production area on January 12 and

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nonetheless approved that chicken for sale and issued the

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Abeyance Notice.

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would not place any significance on cockroaches reported to it

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but would suspend the facility immediately if its inspectors, not

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Foster, found a single cockroach.

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It is not reasonable to infer that the USDA

In its post-trial briefing, Foster seems to distance
itself or cease relying on this testimony.
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The evidence at trial also revealed that Foster and the

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USDA understood that the “seek and destroy” method memorialized

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in Foster’s lengthy Verification Plan would cause cockroaches to

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come out of their harborages and would not achieve immediate

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success.

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O’Bara was that that Foster understood its proposed remediations

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in the Verification Plan would take two to three weeks.

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consistent with the Verification Plan, which represented that

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Foster would apply “comprehensive treatments” for two weeks,

The uncontroverted evidence from Dr. O’Connor and

This is

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inspect “Insect Monitoring Devices” for two weeks, and

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“continuously monitor Plant 1 and 2 for the next three weeks.”

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(Ex. 208 at FOSTER 0020105.)

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the USDA thoroughly reviewed and approved a Verification Plan

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that it knew would cause cockroaches to come out of their

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harborages and would require two to three weeks to implement, but

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then changed course one day later and decided that a single

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cockroach sighting required an immediate closure of the facility.

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The court is also not persuaded that Foster was able to determine

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that a plan it believed would take two to three weeks was

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entirely failing on only its second day of implementation.

It strains reason to believe that

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The Verification Plan also stated, “The action

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threshold was modified so that identification of one cockroach on

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an Insect Monitoring device in a production area will require

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corrective actions.”

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considered the action threshold significant in approving the

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Verification Plan because the Abeyance Notice memorialized that

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the “FSIS required clarification on the threshold for escalation

(Id.)

The court infers that the USDA

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and treatment.”

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the USDA approved, that the sighting of a single cockroach in a

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production area would “require corrective actions.”

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FOSTER 0020105.)

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Notice even remotely suggests that the “corrective action” Foster

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or the USDA anticipated was the complete closure of the facility.

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To the contrary, the Verification Plan explains that if the pest

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control operator found a cockroach on an insect monitoring

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device, the area “will be re-inspected and treated as

(NOS at 3.)

Foster therefore represented, and

(Ex. 208 at

Nothing in the Verification Plan or Abeyance

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appropriate” and the “treatments will be documented on service

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reports and reviewed with plant management at the time of

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service.”

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USDA was thus aware of the possibility that cockroaches would be

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found in a production area and agreed to a plan that treated the

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area with insecticide upon finding a cockroach without any

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suggestion that a plant shutdown would be required.

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(Ex. 208 at FOSTER 0020109 (emphasis omitted).)

The

It is also undisputed that the cockroaches found on

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January 12 were dead or dying.

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statement that the USDA would treat dead or dying cockroaches the

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same as live cockroaches is inconsistent with the USDA’s repeated

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reference to “live” cockroaches in the NOS.

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attribute some significance to the fact that a cockroach is

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alive, it seems unlikely that they would repeatedly refer to the

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finding of “live” cockroaches in the NOS.

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Dr. Sharma’s alleged oral

If the USDA did not

(See NOS at 1-2.)

Furthermore, the controlling regulations, which ensure

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that the USDA comports with due process in suspending a facility,

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do not empower a single USDA employee to abandon the procedures

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outlined in the regulations and make rogue decisions as to

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whether a facility can remain open.

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can suspend a facility without notice, see 9 C.F.R. § 500.3, it

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is required to give prompt written notice to the facility that

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includes particular information.

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takes a withholding action or imposes a suspension, the

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establishment will be notified orally and, as promptly as

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circumstances permit, in writing.

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(1) State the effective date of the action(s), (2) Describe the

For example, while the USDA

See id. § 500.5(a) (“If FSIS

The written notification will:

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reasons for the action(s), (3) Identify the products or processes

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affected by the action(s), (4) Provide the establishment an

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opportunity to present immediate and corrective action and

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further planned preventive action; and (5) Advise the

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establishment that it may appeal the action as provided in §§

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306.5 and 381.35 of this chapter.”).)

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Moreover, while the USDA may take a lesser regulatory

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control action because of “[i]nsanitary conditions or practices,”

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id. § 500.2, it can suspend a facility without prior notice based

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on insanitary conditions only if the “[s]anitary conditions are

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such that products in the establishment are or would be rendered

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adulterated.”

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company as sophisticated as Foster would accept without challenge

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the decisions of one or two USDA employees outside the scope of

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their authority and inconsistent with controlling regulations.

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Id. § 500.3.

The court does not believe that a

Nor is Foster’s effort to paint its decision to cease

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operations on January 12 as mandated by threats from the USDA

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consistent with the numerous and repeated statements it made on

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January 12 and the following weeks emphasizing that its decision

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to close the facility was “voluntary.”

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memorandum to employees on January 12, Foster indicated it had

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“voluntarily and temporarily put operations at [the] Livingston

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[facility] . . . on hold” and that it was “choosing to dedicate

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additional time” to its preventative plan.

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placed the same emphasis on the voluntariness of its decision in

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a press release and notices to its customers.

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at 2-3; see also Ex. 212 at 4 (email from Ron Foster on January

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For example, in its

(Ex. 212.)

Foster

(Ex. 209; Ex. 211

16 addressing the “self-imposed shutdown”).)

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The evidence also does not persuade the court that the

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USDA believed the two cockroaches found in the production area on

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January 12 in Plant 2 resulted or would result in adulterated

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chicken.

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actions were sufficient to maintain sanitary conditions,” (Ex. 27

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at 1), the USDA necessarily agreed because it issued its marks of

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inspection for all chicken produced on January 11 and 12 despite

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the presence of cockroaches.

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Secretary shall refuse to render inspection to any establishment

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whose premises, facilities, or equipment, or the operation

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thereof, fail to meet the requirements of this section.”).

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disingenuous for Foster to argue that the sighting of the two

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cockroaches in the production area was of such grave concern and

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mandated an immediate closure of the facility when Foster assured

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the USDA that the chicken was not affected by the cockroaches and

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should be approved for sale.

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Not only did Foster assure the USDA that “corrective

See 21 U.S.C. § 456(b) (“The

It is

The court therefore finds that the USDA did not require

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Foster to cease operations after it placed the NOS in abeyance on

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January 10 and Foster could not have reasonably believed that it

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was required under the NOS to cease operations in light of the

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two cockroaches found on January 12 or the ongoing cockroach

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infestation.

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shutdown imposed by the NOS and does not include the second

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shutdown that Foster voluntarily imposed.

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3.

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The Insured Event is thus limited to the first

The Second Voluntary Shutdown Does Not Come Within
the Accidental Contamination Coverage Provision

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Foster also argues that the voluntary closure to

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“employ more effective pest control measures” nonetheless

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constitutes “the Insured Event of Accidental Contamination”

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because the same unsanitary conditions that gave rise to the NOS

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continued to persist.

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Event beyond the terms of the Policy.

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This argument seeks to broaden the Insured

The Policy defines Accidental Contamination as an

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“error” in the production, processing, or preparation of any

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Insured Products “provided that” their use or consumption “has

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led to or would lead to bodily injury, sickness, disease or

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death.”

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strongly disagreed about what the Policy required Foster to show

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to establish that the consumption of chicken “would lead to”

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bodily injury or sickness.

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interpretation, the court concluded that “[t]he Policy must [] be

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interpreted to require a showing of something less than an

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absolute certainty of bodily injury or sickness from eating the

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erroneously produced chicken.”

(Policy § 4.A.)

At summary judgment, the parties

As a matter of contract

(Jan. 20, 2016 Am. Order at 12:4-

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7.)

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court held that “erroneously produced chicken ‘would lead to’

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bodily injury or sickness if the government determines the

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chicken cannot be sold because it may cause bodily injury or

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sickness or the plaintiff shows that bodily injury or sickness is

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likely or reasonably probable as a result of consumption.”

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at 13:18-23.)

After discussing possible reasonable interpretations, the

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(Id.

The FSIS’s finding “that the ‘egregious insanitary
conditions’ resulted in the production of chicken that was

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‘prepared, packaged, or held under insanitary conditions whereby

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it may have become contaminated with filth, or whereby it may

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have been rendered injurious to health’” was therefore crucial to

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the court’s determination that the NOS constituted an Insured

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Event.

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finding, Foster could not have shown that the chicken subject to the

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NOS “would lead to” bodily injury or sickness.

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(Id. at 12:15-19 (quoting NOS at 1, 3).)2

Absent that

Foster cannot, however, extract the explicit finding

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made in the NOS and subsequently apply it simply because the

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cockroach infestation continued to exist.

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evidence at trial was that the USDA determined that the

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Verification Plan provided adequate assurances to the USDA that

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The undisputed

Although in the NOS the FSIS repeatedly stated that the
chicken “may have become” contaminated, the controlling
regulations actually mirrored the Policy’s requirement of a
finding that products “are or would be rendered adulterated.”
See 9 C.F.R. § 500.3 (“Sanitary conditions are such that products
in the establishment are or would be rendered adulterated.”).
This only strengthens the court’s conclusion at summary judgment
that the finding in the NOS satisfied the Policy’s Accidental
Contamination requirement that “the use of consumption of such
Insured Products has led to or would to” bodily injury or
sickness. (Policy § 4.A.)
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1

the chicken produced would not lead to bodily injury or sickness.

2

Foster did not put forth a single piece of evidence from which

3

the court could find that the chicken produced after the NOS was

4

placed in abeyance “would lead to” bodily injury or sickness.

5

Although it argues it had “the understanding that FSIS had

6

determined that any chicken processed under such unsanitary

7

conditions would be deemed ‘adulterated’ and unfit for human

8

consumption,” the USDA’s approval of the chicken produced on

9

January 12 despite its knowledge of the cockroaches in the

10

production area defeats this argument.

11

Foster actually believed the chicken produced after the NOS was

12

held in abeyance was adulterated is belied by Foster’s assurances

13

to the USDA that the chicken produced on January 12 was safe for

14

consumption.

15

Any suggestion that

Foster’s invocation of public policy is also misplaced.

16

Foster argues that it should not have been forced to process

17

chicken unless and until the FSIS reinstated the NOS in order for

18

coverage to be triggered.

19

concern with the fact that it assured the USDA that the chicken

20

produced on January 12 under the very “unsanitary conditions” it

21

claims required immediate closure was safe to sell.

22

accord Ex. 30 (January 12 memorandum notifying its employees of

23

the voluntary shutdown and assuring them that “[n]o product,

24

packaging or line was in any way affected”).

25

believed that the chicken it produced on January 12 was

26

“adulterated” because of the cockroach infestation, it would have

27

violated federal law when it assured the USDA the chicken was

Foster neglects to reconcile this

28
17

(Ex. 27;

If Foster truly

1

safe and then sold it to the public.

2

458(a)(2)(A) (“No person shall . . . sell . . . any poultry

3

products which are capable of use as human food and are

4

adulterated or misbranded at the time of such sale . . . .”); see

5

also 21 U.S.C § 453(g)(4) (defining “adulterated” to include

6

product that has been “prepared, packed, or held under insanitary

7

conditions whereby it may have become contaminated with filth, or

8

whereby it may have been rendered injurious to health”).

9

See 21 U.S.C. §

Foster has not and cannot argue that preventative

10

measures taken to avoid the risk of an Insured Event are covered

11

under the Policy.

12

strong public policy against an insurance agreement like the one

13

in this case that covers certain events, but does not cover costs

14

incurred to prevent those very events.

15

Techs. Mktg., Inc. v. Verint Sys., Ltd., Civ. No. 1:15-2457 GHW,

16

2016 WL 344977, at *7 (S.D.N.Y. Jan. 27, 2016) (“Where an

17

agreement is unambiguous, as it is here, its reasonableness is

18

beside the mark.

19

plainly agreed to, [a]bsent some violation of law or

20

transgression of a strong public policy, the parties to a

21

contract are basically free to make whatever agreement they wish,

22

no matter how unwise it might appear to a third party.” (internal

23

citation and quotation marks omitted)).3

Nor has Foster cited authority articulating a

See generally Int’l

Although plaintiff may regret the terms that it

Even assuming that the

24
3

25
26
27
28

In the order granting Foster’s motion for summary
judgment, the court relied on public policy when interpreting the
language of the Policy and rejecting defendant’s argument that a
product must first be put into commerce and injure someone before
triggering coverage. (See Jan. 20, 2016 Am. Order at 11:1412:3.) The court did so in the context of interpreting what the
plaintiff had to show in order to prove that a product “would
18

1

closure to fumigate was in the best interest of the public or a

2

good business decision, public policy cannot be used to re-write

3

the terms of a policy under the circumstances of this case.

4

Accordingly, because there was no evidence that chicken

5

produced after the NOS was placed in abeyance would lead to

6

bodily injury or sickness, the court finds that the second

7

voluntary closure was not an Insured Event of Accidental

8

Contamination.

9

B.

10

Loss Under the Policy
Under New York law, “the insured has the burden of

11

proving that the claimed loss falls within the scope of the

12

policy.”

13

Supp. 2d 243, 257 (S.D.N.Y. 2013).

14

plaintiff must put forth credible evidence and cannot rely on

15

mere speculation, conjecture, or unfounded assumptions.

16

Atl. Cas. Ins. Co. v. Value Waterproofing, Inc., 918 F.
To carry this burden,

In this case, both parties sought to prove the

17

coverable loss under the Policy through expert witnesses.

18

hearing the testimony of both experts, the court finds that in

19

general defendant’s expert, Michael Diliberto III, provided more

20

credible and reliable calculations and analyses of the claimed

21

losses in this case.

22

accepted accounting principles (GAAP), which provide a tangible

23

means for understanding and evaluating the principles and methods

24

he utilized.

25

of any covered Loss the Underwriters shall apply standard

26
27
28

After

For example, Diliberto relied on generally

(Cf. Policy § 7.G(iv) (“[I]n determining the amount

lead to” bodily injury or sickness. There was no credible
evidence at trial that Foster or the USDA thought the chicken
produced after the NOS was placed in abeyance “would lead to”
bodily injury or sickness.
19

1

accounting principles as recognized by the relevant regulatory

2

authorities in the Insured’s jurisdiction.”).)

3

Ned S. Barnes, on the other hand, indicated that he utilized only

4

“commonly accepted accounting principles,” which are not as

5

defined as GAAP and thus give the court less confidence in or

6

understanding of the basis for his opinions.

7

Foster’s expert

(Ex. 271 at 5.)

The testimony at trial also revealed that Barnes almost

8

entirely accepted the calculations Foster’s Chief Financial

9

Officer provided him and did not meaningfully test the

10

reliability of her calculations.

11

discovery that the parties hotly disputed whether losses incurred

12

from the second shutdown were covered under the Policy, and

13

Diliberto explicitly addressed this issue and provided

14

alternative calculations that excluded those losses in his expert

15

report, Foster never requested Barnes to offer alternative

16

calculations based on this significant distinction.

17

these reasons and after observing both experts testify during

18

trial, the court gives greater weight to the calculations and

19

opinions proffered by Diliberto.

20

While it became clear during

For all of

Foster is entitled to seek only those losses covered by

21

the Policy, which the Policy defines in relevant part as

22

“reasonable and necessary expenses incurred by the Insured . . .

23

and which arise solely and directly out of [the] Insured Event.”

24

(Policy § 2.)

25

exclusion of all else.”

26

http://www.merriam-webster.com (last visited Feb. 2, 2016).

27

Directly means “in a direct manner” and “in immediate physical

“Solely” means “without another” and “to the
Merriam–Webster Online Dictionary,

28
20

1
2

contact.”

Id.
Although the court has found that the Insured Event

3

concluded when the NOS was placed in abeyance, Foster argues that

4

it is still entitled to recover losses sustained during the

5

second shutdown because the second shutdown itself arose solely

6

and directly out of the Insured Event.

7

address this argument and then consider the specific losses

8

Foster seeks.

9
10
11

1.

The court will first

The Second Voluntary Shutdown Did Not Arise Solely
and Directly Out of the Insured Event

To be covered under the Policy, Foster’s decision to

12

voluntarily cease operations on January 12 must arise “solely and

13

directly” out of “the NOS and the conditions described in it.”

14

(Jan. 20, 2016 Am. Order at 16:9-11 (emphasis added).)

15

attempts to suggest that any losses would be covered if they

16

arose solely and directly out of the “NOS or the unsanitary

17

conditions of the Facility described therein.”

18

Brief at 8:5-6 (emphasis added).)

19

Amended Order makes clear that, absent the FSIS’s finding in the

20

NOS that the chicken would lead to bodily injury or sickness, the

21

unsanitary conditions described in the NOS could not have

22

amounted to Accidental Contamination under the Policy.

23

20, 2016 Am. Order at 11:5-13:22.)

24

simply extract the unsanitary conditions described in the NOS and

25

broadly treat the cockroach infestation as the Insured Event.

Foster

(Pl.’s Post-Tr.

The court’s January 20, 2016

(See Jan.

Foster therefore cannot

26

For the reasons previously discussed, the NOS did not

27

require Foster to cease operations on January 12 and the FSIS’s

28
21

1

Notice of Abeyance was not dependent on Foster’s decision to

2

voluntarily cease operations.

3

place the NOS in abeyance conditioned upon Foster’s commitment to

4

undertake any efforts, such as fumigation, that were not

5

identified in the Verification Plan.

6

the Abeyance Notice required Foster to cease operations on

7

January 12, it is hard to imagine how Foster’s voluntary and

8

independent decision to cease operations can be considered to

9

have arisen solely and directly out of the Insured Event.

10

Nor was the FSIS’s decision to

Because neither the NOS nor

Foster nonetheless argues that its voluntary shutdown

11

and the fumigation “were necessary to . . . comply with the

12

federal regulations, as required and directed by the FSIS in the

13

NOS.”

14

the USDA reminded Foster of its independent responsibility to

15

ensure that its facility complied with sanitary regulations:

16

You are reminded that as an operator of a federally
inspected facility, you are expected to comply with
FSIS regulations and to take appropriate actions to
prevent the production or shipment of contaminated or
adulterated
product.
The
regulations
require
establishments to take appropriate action(s) when
either the establishment or FSIS identifies regulatory
non-compliance or that the plant’s sanitation, HACCP
or other systems may be ineffective.

17
18
19
20
21

(Pl.’s Post-Trial Br. at 10:5-7.)

In the Abeyance Notice,

22

(Abeyance Notice at 4 (emphasis added).)

This warning simply

23

reiterates the existing regulations that governed Foster as an

24

operator of a federally inspected facility.

25

Foster acknowledges that it is governed by the Poultry

26

Products Inspection Act, which requires that Foster maintain its

27

facilities “in accordance with such sanitary practices, as are

28

required by regulations promulgated by the Secretary for the
22

1

purpose of preventing the entry into or flow or movement in

2

commerce or burdensome effect upon commerce, of poultry products

3

which are adulterated.”

4

458(a)(2)(A) (“No person shall . . . sell . . . any poultry

5

products which are capable of use as human food and are

6

adulterated or misbranded at the time of such sale . . . .”).

7

Even in the absence of the NOS, Foster was required to maintain

8

its facility in a sanitary condition and was prohibited from

9

selling chicken it believed was adulterated.

21 U.S.C. § 456(a); see also 21 U.S.C. §

That the NOS

10

reminded Foster of its obligation to comply with existing laws

11

and regulations that governed it regardless of the NOS cannot

12

establish that Foster’s decision to cease operations arose solely

13

and directly out of the NOS.

14

Although the NOS was undoubtedly a factor leading to

15

Foster’s decision to voluntarily cease operations, additional

16

evidence at trial confirmed that it was not the sole factor.

17

example, there was substantial testimony from which the court

18

infers that, by January 12, Foster realized the infestation was

19

much worse than it originally believed and that its pest control

20

operator, Orkin, was not performing adequately.

21

trial showed that Foster was concerned about the possibility of

22

another government shutdown if the USDA discovered the extent of

23

the infestation.

24

receiving media attention, the evidence at trial showed that at

25

the time it decided to voluntarily cease operations, Foster was

26

still recovering from the damage it suffered as a result of the

27

unrelated Public Health Alert from October 7, 2013.

For

The evidence at

Not only was the NOS and cockroach infestation

28
23

The court

1

finds that Foster made the deliberate and calculated business

2

decision to voluntarily cease operations in an effort to repair

3

and preserve its brand.

4

This business decision is reflected in Foster’s

5

numerous press releases and communications that repeatedly

6

emphasized that its decision was “voluntary” and that Foster was

7

“choosing to dedicate additional time to ensuring its

8

preventative plan is fully realized with the most effective

9

technology and treatments available.”

(Ex. 209 (emphasis

10

added).)

11

conscious effort to emphasize Foster’s family values in the hopes

12

of saving and rebuilding the brand’s image.

13

(“Foster Farms President Ron Foster said, ‘On behalf of my

14

family, I made a commitment to making this right . . . . Foster

15

Farms is a company that strives for excellence.’”); Ex. 211 at 2

16

(“On behalf of the company and the thousands of good, dedicated

17

people in our Central Valley workforce, I want to assure you that

18

we are fully committed to making this right.”).)

19

These communications with the public also reflect a

(See, e.g., id.

Foster’s communications to its employees, customers,

20

and public during the second shutdown also show that Foster was

21

striving to do more than what the government required.

22

example, Foster explained it was ceasing operations to “further

23

expand our USDA-approved safe manufacturing procedures and

24

monitoring systems” and was using the time to “properly implement

25

new measures” to ensure “the most stringent and effective

26

treatment protocols in place.”

27

2 (providing the same explanation in the January 12 press release

For

(Ex. 212; accord Exs. 209, 211 at

28
24

1

to the public and notices to customers).)

2

Foster’s Senior Vice President of Human Resources explained that,

3

“[o]ut of an abundance of caution,” Foster decided to “initiate[]

4

an intense remediation” to ensure the “facility would exceed

5

sanitary standards approved by the USDA.”

6

(emphasis added).)

7

compelled to shut down and engage in significantly more extreme

8

methods in response to the NOS when it repeatedly emphasized that

9

it was choosing to go above and beyond what was required.

10

In a January 13 email,

(Ex. 212 at 3

It is hard to believe that Foster felt

There was also evidence and suggestions from both sides

11

that it was not simply the two cockroaches found on January 12

12

that led to the voluntary closure, but the “many” other

13

cockroaches found that day that were not reported to the USDA.

14

The testimony gave rise to the inference that Foster elected to

15

voluntarily shut down before the government or the public

16

realized the extent of the infestation at the Livingston

17

facility.

18

While the NOS and Notice of Abeyance were undoubtedly

19

looming over Foster when it decided to cease operations on

20

January 12, the court finds that its concern for doing the least

21

damage to its brand while eradicating the facility-wide

22

infestation was the key consideration leading to its decision to

23

voluntarily cease operations.

24

carried its burden of proving that the second shutdown arose

25

solely and directly out of the NOS and conditions described in

26

it.

27

2.

Accordingly, Foster has not

Items of Loss Foster Seeks Under the Policy

28
25

1

Foster seeks loss under the Policy for “Recall

2

Expenses,” “Loss of Gross Profit,” and “Increased Cost of

3

Working.”

The court will address each category of loss in turn.

4
5
6
7
8
9
10
11
12
13
14
15
16

a.

Recall Expenses

The Policy provides coverage for Recall Expenses, which
it defines in relevant part as:
The following costs and expenses reasonably and
necessarily incurred by the Insured arising solely and
directly out of an Insured Event for the purpose of or
in connection with recalling, withdrawing, reworking,
destroying or replacing Contaminated Products:
i) expenses of communications including . . . public
relations specialist;
ii) transportation costs in recalling and / or
withdrawing Contaminated Products;
vii) costs incurred by the Insured for the physical
examination,
reworking,
relabeling,
and
/
or
destruction and disposal of Contaminated Products,
including the destruction and disposal of packaging
and labeling materials that cannot be reused.

17
18

(Policy § 4.Q.)

Foster seeks and defendant does not dispute the

19

award of Recall Expenses in the amount of $11,733 in landfill

20

fees to dispose of the chicken produced on January 7 and 8 and

21

$7,500 in trucking fees to move that chicken to the landfill.

22

Foster also seeks $74,791 in public relations (“PR”)

23

expenses and introduced the itemized invoice from its PR firm.

24

The invoice describes the numerous tasks the firm completed in

25

response to the “LIVINGSTON PLANT SHUTDOWN: JANUARY 8-22, 2014.”

26

(Ex. 100.)

27

the firm charged the lump sum of $74,791 for those hours without

28

attributing the time spent to the tasks described in the invoice

While the invoice reflects a total of 443.5 hours,

26

1

or indicating when the discrete tasks were completed.

2

therefore impossible for the court to distinguish the PR expenses

3

that arose solely and directly out of the Insured Event from

4

those that were incurred, at least in part, from the second

5

shutdown.

6

directly out of the first shutdown and the remaining $59,833 are

7

attributable to the second shutdown, which he calculated “based

8

on a pro-rata share of the monthly invoice.”

9

The amount Diliberto attributes to the first shut down is

10
11

It is

Diliberto opines that only $14,958 arose solely and

(Ex. 267 at 5.)

approximately 20% of the total PR expenses.
The court does not doubt that Foster would have

12

continued to incur PR expenses after the NOS was held in abeyance

13

even if Foster never voluntarily ceased operations because the

14

public concern over the NOS would have continued past the

15

Abeyance Notice.

16

attributing 20% of the total PR expenses may be a low estimate,

17

Diliberto was the only witness who undertook to isolate PR

18

expenses that arose solely and directly out of the Insured Event.

19

Neither Foster nor its expert attempted to distinguish which

20

charges arose solely and directly out of the Insured Event or

21

requested the PR firm to delineate tasks between the Insured

22

Event and voluntary shutdown.

23

proof and the only evidence before the court is that the PR

24

expenses arising solely and directly out of the Insured Event are

25

limited to $14,958, the court will award Foster that amount.

26
27

b.

Nonetheless, while the court believes

Because Foster has the burden of

Loss of Gross Profit

“Loss of Gross Profit” under the Policy includes the

28
27

1

loss “incurred as a result of an actual and ascertainable

2

reduction in the Insured’s sales revenue caused solely and

3

directly by an Insured Event.”

4

Loss of Gross Profit, the Policy provides:

(Policy § 4.J.)

In calculating

5
6
7
8
9
10
11
12
13
14
15
16

iii) Loss of Gross Profit shall be assessed by the
Underwriters based on an analysis of the profits
generated by the Contaminated Products, and other
Insured Products, which lost sales as a direct result
of the Insured Event, during each month of the twelve
months prior to the Insured Event, and taking into
account:a) the reasonable projection of the future
probability of such Contaminated Products and other
affected Insured Products had no Insured Event
occurred, and
b) all material changes in market conditions of
any nature whatsoever, including but not limited to
changes in population, consumer tastes, seasonal
variations and competitive environment, which would
have affected the future marketing of and profits
generated by the Contaminated Products or other
affected Insured Products.

17
18
19

iv) in determining the amount of any covered Loss the
Underwriters
shall
apply
standard
accounting
principles as recognized by the relevant regulatory
authorities in the Insured’s jurisdiction.

20
21

(Id. § 7.G(iii)-(iv).)

22

1.

Destroyed Chicken

23

It is undisputed that Foster’s inability to sell the

24

1.3 million pounds of chicken that the USDA refused to approve

25

for sale arose solely and directly out of the Insured Event.

26

loss attributed to this chicken is $536,352 for the chicken sent

27

to the landfill; $504,434 for the chicken processed in the

28

rendering plant; and $6,914 for rendered chicken that had to be
28

The

1

sent to the landfill.

2

claimed values, he excluded them from his calculations because he

3

did not believe they came within any of the Policy’s definitions

4

of Loss.

5

the court agrees that it would be reasonable to conclude that the

6

cost of the 1.3 million pounds of chicken is an element of

7

“revenue that would have been reasonably projected” under the

8

Policy’s definition of Loss of Gross Profit.

9

therefore award Foster $1,047,7004 in loss of gross profit based

While Diliberto does not dispute those

(See Ex. 267 at 9.)

However, defendant concedes and

The court will

10

on the 1.3 million pounds of chicken that did not receive the

11

USDA’s marks of inspection pursuant to the NOS.

12

2.

13

Downgraded Product

According to the evidence at trial, Foster produces

14

organic and conventional chicken and is able to sell organic

15

chicken at a higher profit margin.

16

was not processing chicken in January, Foster elected to process

17

organic chicken as conventional chicken.

18

While the Livingston facility

The reason Foster elected to process organic chicken as

19

conventional chicken while the Livingston facility was not

20

operating was not entirely clear at trial.

21

testified that only the Livingston facility was certified to

22

process organic chicken, thus organic chicken processed at the

23

Cherry and Belgravia facilities could not be certified as

24

organic.

Dr. O’Connor

Other testimony suggested that processing organic

25
26
27
28

4

Although Diliberto’s trial exhibit and defendant’s
post-trial briefing indicates the amount is $1,047,650 (see Ex.
298; Def.’s Resp. Post-Trial Br. at 5:11), the court based the
total on the amounts itemized in Diliberto’s expert report, (see
Ex. 267 at 9).
29

1

chicken is a slower process and requires that the organic chicken

2

be entirely segregated from conventional chicken during

3

processing.

4

organic would have decreased production, witnesses explained that

5

Foster comingled the organic and conventional chicken in order to

6

process the greatest quantity of chicken in the shortest amount

7

of time.

8

Financial Officer, Caryn Doyle, explained for the first time that

9

Foster might have had to euthanize birds if it slowed down

10

Because processing organic chicken for sale as

When called as a rebuttal witness, Foster’s Chief

production in order to process organic chicken.

11

Despite the apparently inconsistent reasons provided,

12

none of the evidence suggested that it was an unreasonable

13

business decision to process the organic chicken as conventional

14

chicken or that doing so did not mitigate Foster’s damages.

15

the lost revenue from processing and selling organic chicken as

16

conventional chicken arose solely and directly out of the Insured

17

Event, the court finds that the revenue lost from doing so would

18

be recoverable as a loss of gross profit under the Policy.

19

Barnes opined that downgrading the organic chicken and processing

20

it as conventional chicken caused Foster to lose $866,381 in lost

21

revenue, which he calculated based on the difference between the

22

sales value of the product had it been produced as organic and

23

the actual sales value for conventional chicken.

If

24

The court cannot determine from the evidence presented

25

at trial, however, what amount of organic chicken was downgraded

26

to conventional solely and directly as a result of the Insured

27

Event.

Not only is it possible that all or most of the chicken

28
30

1

was downgraded during the second shutdown, Barnes also indicates

2

that “Foster incurred similar losses on downgraded organic

3

product at the Livingston facility in the period after the

4

facility resumed operation.”

5

that, with the exception of $3,726 arising solely and directly

6

out of the Insured Event, the remainder of the claimed loss is

7

attributable to the second shutdown “based on the overall

8

duration of the shutdown” and thus is not covered under the

9

Policy.

(Ex. 267 at 5.)

(Ex. 271 at 9.)

Diliberto opined

Because Foster did not submit any

10

evidence challenging this allocation, the court will award

11

plaintiff only $3,726 for its claimed loss of gross profit

12

resulting from downgrading its organic chicken.

13

3.

14

Unfilled Orders

Barnes opines that as a result of both shutdowns,

15

Foster was unable to fill a substantial number of firm orders for

16

chicken.

17

believes Barnes’ calculations significantly overestimate the loss

18

of gross profit from unfilled orders, which were primarily based

19

on additional labor savings that Barnes did not consider in his

20

calculations.

21

Diliberto calculates that the loss of gross revenue from unfilled

22

orders is $1,276,397 and attributes $346,164 of that amount as

23

arising solely and directly out of the Insured Event, with the

24

remainder attributable at least in part to the second shutdown.

25

Because the court finds that Diliberto’s calculations are more

26

reliable, the court will award plaintiff $346,164 in loss of

27

gross profit based on unfilled orders.

Diliberto explained at trial and in his report why he

(See id. at 12-13.)

28
31

After these adjustments,

1
2

4.

Customer Claims and Credits

Foster also seeks loss of gross profit in the amount of

3

$264,569 for customer credits and claims resulting from the

4

shutdowns.

5

customer claims, but opined that only $54,241 arose solely and

6

directly out of the Insured Event, with the remaining

7

attributable at least in part to the second shutdown.

8

not undermine the accuracy of this allocation.

9

therefore award Foster $54,241 in loss of gross profit for

10
11
12

Diliberto accepted the claimed valuation of the

Foster did

The court will

customer claims and credits.
5.

Sales Ads

Foster seeks $42,804 in loss of gross profit

13

attributable to the incremental volume of sales that Foster

14

expected to achieve from a number of specific ad programs that it

15

had booked, but had to cancel because of the shutdowns.

16

Vice President of Retail Sales, Kevin Mooney, explained at trial

17

that Foster canceled these promotional ads because it could not

18

supply the necessary product without the ability to process at

19

the Livingston facility.

20

established that Foster canceled ads because of its limited

21

ability to process chicken as a result of the shutdowns, there

22

was no testimony or evidence showing that the necessity to cancel

23

those ads arose solely and directly out of the Insured Event and

24

not the second shutdown.

25

calculation, but opines that these losses were not covered

26

because there was no documentation showing that the cancelled ads

27

were related to the shutdowns or when these ads were created or

Foster’s

While Mooney’s testimony sufficiently

Diliberto does not dispute the claim

28
32

1

cancelled.

2

issue, the court cannot award it loss of gross profit

3

attributable to any canceled ads.

Because plaintiff did not carry its burden on this

4

6.

5

Commodity Sales

Foster also seeks $512,082 for loss of gross profit

6

incurred as result of certain birds that would have been utilized

7

to fill customer orders but were redirected to the commodity

8

market.

9

to sell chicken on the commodity market is consistent with the

(Ex. 270 at 15.)

A loss of gross profit based on having

10

undisputed evidence at trial that chicken sold on the commodity

11

market is sold for significantly less per pound than chicken sold

12

on the retail market.

13

109:17-18.)

14

excluded these losses because he did not believe there were

15

adequate records to support them, and the court finds this

16

testimony credible.

17

(See Jan. 13-14, 2016 Tr. at 14:14-18,

Diliberto explained at trial that he nonetheless

Moreover, Mooney repeatedly testified that Foster

18

resorts to the commodity market only when it has “excess product”

19

that it otherwise could not sell on the retail market.

20

11:1-12, 14:7-13.)

21

the leading problems from both shutdowns was that Foster was not

22

able to process enough chicken and had to short customers.

(Id. at

Mooney also explained, however, that one of

23

Although he referred to potential excess product, none

24

of Mooney’s testimony is consistent with commodity sales arising

25

solely and directly out of the Insured Event.

26

that Foster had a “surplus” of chicken after losing the Ralphs

27

business, the sales to Ralphs were not that substantial and

28
33

While he testified

1

Mooney explained that Foster offered discounts “to move the

2

product and avoid it going to the commodity market.”

3

42:13-18 (emphasis added).)

4

continued to offer discounts in January and early February of

5

2014 because it was still trying to move the excess product it

6

had after Kroger canceled its business because of the Public

7

Health Alert in October 2013 without giving Foster the customary

8

12-week cancellation time.

9

(Id. at

He also testified that Foster

(Id. at 26:17-23, 41:7-14.)

Not only is it inconsistent for Foster to have incurred

10

significant losses from having to sell excess chicken on the

11

commodity market at the same time it was having to short

12

customers, the evidence suggests that any excess Foster had was a

13

result of canceled orders from the earlier Public Health Alert,

14

not the Insured Event.

15

burden to show that any commodity sales resulted in an “actual

16

and ascertainable” loss of gross profit that arose solely and

17

directly out of the Insured Event.

18

7.

Foster has thus failed to carry its

(See Policy § 4.J.)

Winco’s Early Exit

19

Foster also seeks over $1 million as a result of

20

Winco’s alleged decision to cease ordering certain chicken

21

products sooner than it had agreed because of the NOS.

22

Foster, who handled Foster’s account with Winco, testified that

23

Winco had decided before the Insured Event to discontinue its

24

“ValBest” line of product with Foster, in part due to the

25

packaging format Foster offered.

26

however, that Winco had agreed to a 12-week exit of the business

27

before the NOS.

Jonathan

Jonathan Foster testified,

Mooney explained that the dynamics of the live

28
34

1

chicken business require about a 12-week lead time before Foster

2

can fulfill a significant new business or withdraw a contracted

3

business, and thus it was standard for customers to commit to a

4

12-week exit of the business.

5

16:4, 17:7-17:12.)

6

(Jan. 13-14, 2016 Tr. at 15:21-

Despite Jonathan Foster’s credible testimony that Winco

7

had previously committed to a 12-week exit, he testified that

8

when the NOS was issued on January 8, Winco’s representative

9

informed him that it would no longer commit to the 12-week exit

10

and would cease doing business with Foster within 10 days.

11

Ex. 274 at 2 (Jan. 9, 2014 email) (“[W]e will be moving forward

12

with the transition to Sanderson Farms . . . . In light of the

13

last days events we feel that it is imperative that we do so as

14

quickly as possible and plan on making that change effective

15

1/19.”).)

16

intent to provide a 12-week exit and then retracting that

17

commitment in light of the NOS, the court finds it more likely

18

than not that Foster’s loss of 9 weeks of committed sales from

19

Winco arose solely and directly out of the Insured Event.

20

(See

Based on Winco’s non-hearsay statements evidencing its

While Diliberto does not dispute the total pounds

21

attributable to Winco’s early exit, he contends that the profit

22

margin used to calculate the loss was inflated.

23

however, Doyle testified in rebuttal that the reduced variable

24

margin that Diliberto relied on accounted for a credit Foster

25

applied to the Winco account in period 13.5

At trial,

The credit was for

26
27
28

5

Foster does not account for its sales by month, but
utilizes 13 periods per year. Period 13 thus included the credit
issued in December.
35

1

chicken Winco destroyed after the Public Health Alert and not for

2

discounted pricing of chicken sold in December 2013 or January

3

2014.

4

calculating Foster’s actual variable margins artificially lowered

5

the resulting variable margin.

6

Doyle explained that considering that credit in

The court finds Doyle’s undisputed testimony on this

7

question credible.

8

also consistent with Diliberto’s report, which notes that

9

Foster’s prices were about 23% lower for period 13 than the

A substantial credit to Winco in period 13 is

10

prices Barnes used in his calculations and the actual variable

11

margin for that period showed a net loss of 14.74%.

12

14.)

13

13 as he computes the standard variable margin as a loss of

14

$245,113 in period 13, versus standard variable margins as gains

15

of $295,017 in period 11, $270,524 in period 12, and $329,506 in

16

period 1 of 2014.

17

(showing Foster’s calculation of the loss of gross profit on the

18

Winco claim).)

19

calculation of the loss of gross profit from Winco’s early exit

20

is not reliable and

21

profit that Barnes calculated of $1,107,550 based on Winco’s

22

early exit.

23
24

(Ex. 267 at

His schedules are also consistent with a credit in period

(Ex. 269 at Schedule 11; see also Ex. 51

The court therefore finds that Diliberto’s

will award plaintiff the loss of gross

8.

Kroger Business

Plaintiff also seeks $2,577,625 in loss of gross profit

25

attributable to its loss of sales to the Kroger “banners.”

26

undisputed evidence at trial was that the Kroger banners of Food

27

4 Less, Foods Co, and Fry’s ceased ordering chicken from Foster

28
36

The

1

after the Public Health Alert and had not resumed orders before

2

the Insured Event.

3

“shutdowns and cockroach infestation,” those stores would have

4

resumed doing business again with Foster.

5

submitted in support of this claim is far too speculative and

6

cannot sustain its burden of proving its loss by a preponderance

7

of the evidence.

Foster nonetheless contends that, absent the

The evidence Foster

8

In response to the “tremendous” media coverage from the

9

Public Health Alert and the significant impact it had on Foster’s

10

business, Mooney met “with every single customer numerous times”

11

in the months following the Public Health Alert trying to regain

12

lost business.

13

the NOS was issued on January 8, Mooney was actually visiting

14

Kroger’s headquarters in Cincinnati, Ohio, and gave a “two-hour

15

presentation . . . about the success of [Foster’s] brand at

16

Ralphs, the reintroduction at Ralphs and also the progress that

17

[Foster] was making in the plants regarding salmonella.”

18

28:19-23.)

19

during that time, which were headquartered in Compton,

20

California, and “retain[ed] independent decision-making” from

21

Kroger.

22

(Jan. 13-14, 2016 Tr. at 23:7-9, 25:17.)

When

(Id. at

Mooney was also meeting with Food 4 Less and Foods Co

(Id. at 21:21-24, 27:25-28:15.)
Mooney testified that before the issuance of the NOS,

23

he had been making “positive inroads” toward regaining Food 4

24

Less, Foods Co, and Fry’s and was “optimistic” they would start

25

purchasing from Foster again.

26

Foster had been making “good progress at Ralphs” with the limited

27

return of some products in December and that the return to Ralphs

(Id. at 31:22-32:-13.)

28
37

He thought

1

“was leading hopefully to other good things.”

2

All of Mooney’s beliefs about the prospect of regaining these

3

Kroger banners was based on what he was “hoping” or “expecting.”

4

(See id. at 31:22-25, 32:11-13, 34:5-7, 47:6-19.)

5

(Id. at 34:5-7.)

The court does not question that Mooney genuinely hoped

6

and even expected Kroger to return.

7

to hold these beliefs to effectively do his job and convince

8

Kroger that it should return to Foster.

9

no evidence elevating Mooney’s beliefs to anything more than mere

As a good salesman, he had

Foster, however, offered

10

conjecture.

11

the brand he represented cannot carry Foster’s burden to prove it

12

was more likely than not that Food 4 Less’s, Foods Co’s, and

13

Fry’s decisions not to return arose solely and directly out of

14

the Insured Event.

15

His optimism about the success of his efforts and

If Kroger really intended to return to Foster, the

16

court also would have expected Mooney to be discussing pricing

17

and quantities at the January 8 meeting in Cincinnati, not simply

18

making a presentation about all the efforts Foster had undergone

19

to address the salmonella problem.

20

testimony that a 12-week lead time is usually necessary for

21

“significant new business,” it is also reasonable to infer that

22

Kroger would have indicated its intent to return well in advance

23

of even placing its first order.6

In light of Mooney’s own

(See id. at 15:21-16:4.)

24
6

25
26
27
28

Mooney testified that he did not take Foods Co and Food
4 Less out of Foster’s sales forecasting, thus lead time might
not have been necessary for those companies. He also testified,
however, that he left them in the forecasting because he was
“optimistic [Foster was] going to regain that business,” not
because either company indicated it was going to start placing
orders. (Id. at 75:7-24.) At most, Kroger informed him that
38

1

Given what was at stake in this case, the court is

2

surprised and frankly unimpressed that Foster did not call a

3

single representative from Kroger to shed light on Kroger’s

4

actual intentions.

5

business with Foster because of the Public Health Alert and it is

6

just as likely that it had not and would not have regained faith

7

in Foster even in the absence of the Insured Event.

8

cannot carry its burden to prove “actual and ascertainable” loss

9

by a preponderance of the evidence with speculation and optimism.

It is undisputed that Kroger ceased doing

A plaintiff

10

Accordingly, because Foster has failed to carry its burden of

11

showing that any loss of gross profit from Fry’s, Food 4 Less,

12

and Foods Co arose solely and directly out of the Insured Event,

13

Foster is not entitled to recover any of that loss under the

14

Policy.

15

Unlike the other Kroger banners, Ralphs had started

16

placing limited orders in December 2013 and January 2014 before

17

the Insured Event.

18

were not yet regular or predictable and Mooney’s optimistic

19

expectations as to what Ralphs would have done in the future are

20

similarly speculative.

21

ceased ordering from Foster immediately after the NOS, (id. at

22

30:10-16, 30:21-31:3, 34:3-5), he also testified that Kroger

23

pulled Ralphs because Foster could not assure Kroger that it

24

would not short Ralphs, (see id. at 29:17-22 (“And that was one

25

of the biggest issues with Kroger, was by not having Livingston

26
27
28

(See id. at 30:8-9.)

Nonetheless, its orders

Although Mooney testified that Ralphs

“the rest of the business was still yet to be determined,” (id.
at 75:17), and the evidence was that Foods Co and Food 4 Less
made their own independent decisions at that time, (id. at 21:2124, 27:25-28:15).
39

1

on board, we couldn’t promise Kroger that we wouldn’t short

2

Ralphs, because we needed to treat all of the customers fairly.

3

And when they heard that, they kind of blew up, and that’s why

4

they pulled us again from Ralphs.”)).

5

it was difficult for him to differentiate between the loss of

6

sales due to the NOS versus the second shutdown because the

7

customers were “just concerned about the media and the fact that

8

we had to short orders and then redirect orders.”

9

40:10.)

He further testified that

(Id. at 39:22-

The court finds it unlikely that Kroger’s concerns about

10

Ralphs being shorted would have been as significant if Foster had

11

not imposed the longer voluntary shutdown.

12

sporadic orders before the Insured Event, Mooney’s optimistic but

13

speculative beliefs about future orders, and Kroger’s concerns

14

about Ralphs being shorted, the court cannot find that any loss

15

of gross profit from Ralphs arose solely and directly out of the

16

Insured Event.

17
18

9.

In light of Ralphs’

Albertsons Business

Foster also seeks a loss of gross profits in the amount

19

of $8,170 based on lost sales to Albertsons.

20

limited evidence and testimony about Albertsons at trial, but

21

Jonathan Foster testified that Albertsons ceased purchasing

22

organic birds from Foster as a result of the “NOS and Facility

23

shutdown.”

24

is insufficient because it fails to identify any loss arising

25

solely and directly out of the Insured Event, as opposed to the

26

voluntary shutdown.

27

also explained that Albertsons “ultimately changed its supplier

There was very

(Pl.’s Post-Trial Br. at 21:18-19.)

This testimony

From his review of the records, Diliberto

28
40

1

of organic fresh chicken later in 2014 after the Livingston

2

shutdowns” and thus was still ordering right after the NOS.

3

268 at 11.)

4

carried its burden to show that Albertsons’ decision to cease

5

ordering organic chicken from Foster arose solely and directly

6

out of any limited ability Foster had to process organic chicken

7

during the relatively short Insured Event.

8

(Ex.

The court therefore finds that Foster has not

10.

Incremental Labor Costs

9

Foster next seeks over $3 million for incremental labor

10

costs incurred to process and package as much product as possible

11

at the Cherry and Belgravia facilities during both the Insured

12

Event and the second shutdown.

13

incremental labor costs can constitute a loss of gross profit

14

under the Policy because they cause “an actual and ascertainable

15

reduction in the Insured’s sales revenue.”7

16

The court agrees with Foster that

(Policy § 4.J.)

As a threshold matter, Foster is not entitled to a

17

majority of its claimed incremental labor costs because they were

18

incurred as a result of the second shutdown and did not arise

19

solely and directly out of the Insured Event.

Even after setting

20
7

21
22
23
24
25
26
27
28

The incremental labor costs might logically seem to
come under “Increased Costs of Working,” which are the
“reasonable and necessary costs, excess of the ordinary cost of
conducting business had the Insured Event not happened . . . .”
(Policy § 4.F.) Among the limitations the Policy places on
“Increased Costs of Working,” however, the Policy requires that
such labor costs result in “additional expense of subcontracting
the manufacturing of Insured Products to a third party during the
restoration of the property.” (Id. § 4.F(iii) (emphasis added).)
Although the testimony at trial revealed that there was not a
third party Foster could have used that was within a
geographically feasible range to have mitigated Foster’s losses,
the court cannot simply ignore this express and unambiguous
limitation in the Policy.
41

1

aside the sum attributable to the second shutdown, the parties

2

dispute the proper calculation of the incremental labor costs on

3

numerous grounds.

4

opinions of both experts on this issue, the court finds that

5

Diliberto provided the most credible and reliable calculation of

6

incremental labor costs and will therefore award plaintiff loss

7

of gross profit attributable to incremental labor costs in the

8

amount of $11,457, which is broken down as $4,638 for incremental

9

overtime labor by Foster employees at Belgravia and $6,819 for

After considering the testimony at trial and

10

incremental overtime labor by USDA employees that Foster

11

compensated at all three facilities.

12

c.

(See Ex. 267 at

18.)

Increased Cost of Working

13

As “Increased Cost of Working,” the Policy covers:

14

The following reasonable and necessary costs, excess
of the ordinary costs of conducting business had the
Insured Event not happened, to restore only the
Insured’s
property(ies)
where
the
Insured
Event
happened in order to resume operations and which are
devoted exclusively to the purpose of reducing Loss:
(i) cleaning and /or repairing machinery and property;
. . . .

15
16
17
18
19

(Policy § 4.F(iii).)

20

for remediation and clean-up expenses and supplies, Diliberto

21

testified and explained at trial how most of these costs were

22

incurred during the second shutdown.

23

also Ex. 71 (detailing remediation services provided after the

24

Insured Event).)

25

only $19,309 arose solely and directly out of the Insured Event,

26

and plaintiff did not produce any evidence to dispute this

Although Foster seeks substantial losses

(See Ex. 267 at 18-20; see

Of those costs requested, Diliberto opined that

27
28
42

1

allocation or sufficiently undermine the credibility of

2

Diliberto’s reasons for excluding the remainder.

3

In his report, Diliberto excluded all pest control and

4

fumigation costs because he did not have a “clear understanding

5

of them” and correctly opined that most of the costs were

6

incurred during the voluntary shutdown.

7

this assessment for all of the invoices, except the invoice of

8

$82,060 for Buzz Off Bugs Pest Control (“Buzz Off”).

9

8-9)

10

The court agrees with

(Ex. 75 at

The testimony at trial was that Buzz Off was providing

11

services in response to the Insured Event and the invoice from

12

that company itemized services by day.

13

Buzz Off and Orkin as the service team in its Verification Plan.

14

Even if Foster did not voluntarily cease operations and implement

15

remediation efforts greater than what the USDA found sufficient

16

to assure the USDA that the chicken was not adulterated, Foster

17

would have still continued to incur pest control services under

18

the Verification Plan approved in the Abeyance Notice.

19

evidence also showed that a separate pest control company was

20

employed to fumigate the facility.

21

likely than not that the invoice from Buzz Off did not include

22

costs that went above and beyond the Verification Plan.

23

has thus carried its burden of proving that the remediation costs

24

of $82,060, (Ex. 75 at 8-9), billed by Buzz Off arose solely and

25

directly out of the Insured Event.

26
27

Foster also identified

The

Thus the court finds it more

Foster

Foster also seeks $46,744 in increased costs of
utilities at Livingston and laboratory fees of $48,884.

28
43

Not only

1

does Diliberto attribute all of these costs to the second

2

shutdown, (see Ex. 267 at 20), the court was not persuaded that

3

any of these costs were in “excess of the ordinary costs of

4

conducting business had the Insured Event not happened,”

5

§ 4.F).

6

Cost of Working, such as security costs incurred at Livingston,

7

the court adopts Diliberto’s assessments as to why those costs

8

are not recoverable under the Policy.

9

(Policy

With the remaining losses Foster attributes to Increased

The court will therefore award Foster $101,369 in

10

“Increased Cost of Working” for supplies and pest control

11

services that arose solely and directly out of the Insured Event.

12

III.

Conclusion

13

For the reasons stated herein, the court hereby finds

14

for Foster on its breach of contract claim and finds that Foster

15

suffered Loss in the amount of $2,706,398.00 covered by the

16

Policy.

17

This matter is set for oral argument on April 4, 2016

18

at 1:30 p.m. for the limited purpose of allowing the parties to

19

address the remaining issues of (1) whether Foster is entitled to

20

prejudgment interest; (2) how the $2 million retention under the

21

Policy should be treated; (3) whether defendant is entitled to

22

any offset from Foster’s settlement with Orkin; and, if so, (4)

23

the amount of such offset.

24
25

IT IS SO ORDERED.
Dated:

February 11, 2016

26
27
28
44