Miller v. Normatec

Filing 46

Judge Richard G. Stearns: ORDER entered granting 23 Motion for Summary Judgment; denying 28 Motion for Summary Judgment (RGS, law3)

UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS
CIVIL ACTION NO. 11-10240-RGS
GEORGE MILLER, CHAPTER 7 TRUSTEE
FOR THE ESTATE OF ACT ELECTRONICS, INC.
v.
NORMATEC

MEMORANDUM AND ORDER ON PARTIES’ CROSS MOTIONS
FOR SUMMARY JUDGMENT
August 27, 2012
STEARNS, D.J.
George Miller, the Chapter 7 Trustee in bankruptcy for Act Electronics, Inc.
(ACT), seeks the turnover of property of the ACT estate pursuant to 11 U.S.C. § 542(b)
and breach of contract against defendant

NormaTec.

The dispute arose from

NormaTec’s failure to pay for medical devices that it ordered from ACT. The case was
transferred from the Bankruptcy Court for the District of Delaware on February 14,
2011. After discovery, the parties brought cross-motions for summary judgment on the
breach of contract claim. A hearing on the motions was held on August 8, 2012.
BACKGROUND
The material facts, in the light most reciprocally favorable to the respective
nonmoving party, are as follows. Under a Manufacturing Agreement entered on

September 1, 2004, ACT agreed to sell, and NormaTec to buy, certain medical products
known as pneumatic compression devices (PCD). Reply to Pl.’s L.R. 56.1 Response
to Def.’s Statement of Facts (Reply SOF); Agreement, Ex. A (Dkt #30).

The

Agreement contained the following pertinent terms. All products were to be shipped
FOB ACT’s “shipping dock and freight collect.” Agreement ¶ 1. Payment was to be
made “thirty (30) days net from the receipt of invoice”; overdue payments were to
“carry a 1.5% per month, 18% per annum interest charge.” Id. ¶ 2. NormaTec was to
provide the equipment described in attachment D to the Agreement to enable ACT to
assemble the PCDs according to specification.1 For its part, ACT warranted
that its manufacturing will conform to FDA Good Manufacturing Practices
and that all products . . . will conform to PCD Standards and will be free
of defects in workmanship for a period of one year from the date of first
shipment to a NormaTec customer/user. [ACT’s] obligation for defects
under this warrant will be limited to correction of any such defects;
provided the product is being used within the applicable specifications and
test parameters.
Id. ¶ 13.1. In the event of an alleged defect, the warranty provided that:

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The amount and type of equipment belonging to NormaTec still in ACT’s
possession is disputed, but the parties agree that ACT retains at least some. ACT
points to a provision in the Agreement that permits it to “retain possession of all Buyerfurnished equipment as long as there are amounts due from Buyer to Manufacturer that
are outstanding. On Buyer’s request, if and when no such amounts are outstanding,
Manufacturer will promptly return to Buyer any and all Buyer-furnished equipment so
requested, at Buyer’s cost.” Id. ¶ 6.1.
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(a) If [NormaTec] gives [ACT] notice of a defect during the applicable
warranty period, [ACT] will, at its option, [1] repair the defective item, [2]
replace the defective item or [3] issue a full or partial credit for the
defective item.
Id. ¶ 13.2. Notice was to be given according to a defined procedure.
All Notices or other communications in connection with this Agreement
(“Notices”) will be in writing and delivered personally, sent by facsimile
to the intended party’s fax number set forth on the signature page to this
Agreement, or sent by certified U.S. mail, return receipt requested, and
mailed to the intended party’s address set forth on the signature page to
this Agreement . . . .
Id. ¶ 11. Of particular relevance was the stipulation set out in the Agreement that
“[ACT] will not have any liability of any kind under this Agreement unless [NormaTec]
gives [ACT] written notice within 30 days after the date [NormaTec] knows of its
claim.” Id. ¶ 14.
Finally, the Agreement contained a similar thirty-day notice period in the event
either party sought termination.
18.1 This Agreement will become effective as of the Effective Date and
will continue for a period of twelve (12) months, after which it will
automatically renew for successive twelve (12) month additional terms,
unless either party provides written notice of termination to the other at
least ninety (90) days in advance of the expiration of the then current 12month term, or until otherwise terminated pursuant to terms hereof.
18.2 Either party may, by written notice, terminate this Agreement if the
other party materially breaches this Agreement. However, no right of
termination for breach will exist until thirty (30) days after the defaulting
party is notified in writing of the material breach and has failed to cure or
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give adequate assurances of performance within that thirty (30) day period.
18.3 All payment obligations and other amounts owed by [NormaTec] to
[ACT] will survive any termination or expiration of this Agreement. The
provisions of Sections . . . 13.3, 14 . . . will survive any termination or
expiration of this Agreement.
Id. ¶ 18.
On November 21, 2008, ACT filed a voluntary petition for relief under Chapter
7 of the United States Bankruptcy Code.

Miller was appointed the Trustee in

bankruptcy. After NormaTec refused to pay for the PCD devices that ACT had
delivered prior to September of 2008, Miller brought this lawsuit seeking collection of
the $220,764.96 alleged to be outstanding. Pl.’s 56.1 SOF ¶ 10. At issue are three
NormaTec purchase orders, two issued in June of 2008 and another originating in April
of 2008.2
DISCUSSION
Summary judgment is appropriate when “the movant shows that there is no
genuine dispute as to any material fact and the movant is entitled to judgment as a matter
of law.” Fed. R. Civ. P. 56(a). “A ‘genuine’ issue is one that could be resolved in favor

2

The parties agree on little other than that the June purchase orders superseded
the April purchase order, and that the unit cost of the PCD was $680.64. See Reply
SOF ¶ 7. The parties dispute the number of PCDs actually delivered by ACT to
NormaTec, but they agree that it was less than the total number of PCDs ordered. See
id. ¶ 5-6.
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of either party, and a ‘material fact’ is one that has the potential of affecting the outcome
of the case.” Calero-Cerezo v. U.S. Dep’t of Justice, 355 F.3d 6, 19 (1st Cir. 2004),
citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-250 (1986). A party seeking
summary judgment bears the initial burden of demonstrating that there is no genuine
issue as to a material fact. See Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986). To
oppose the motion successfully, the non-moving party “may not rest upon the mere
allegations or denials of his pleading. . . .” Anderson, 477 U.S. at 256. Rather, the
non-movant must submit “‘sufficient evidence supporting the claimed factual dispute’
to require a choice between ‘the parties’ differing versions of the truth at trial.’”
LeBlanc v. Great Am. Ins. Co., 6 F.3d 836, 841 (1st Cir.1993), quoting Hahn v.
Sargent, 523 F.2d 461, 464 (1st Cir. 1975). On cross-motions for summary judgment,
“the court must consider each motion separately, drawing inferences against each
movant in turn.” Reich v. John Alden Life Ins. Co., 126 F.3d 1, 6 (1st Cir. 1997).
Breach of Contract3

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It is not clear from the record whether the contract is one solely for the sale of
goods, or whether the “predominant factor, thrust, or purpose” of the contract is the
rendition of services, and thus not within the scope of the Uniform Commercial Code
(UCC). White v. Peabody Constr. Co., 386 Mass. 121, 132 (1982). Although both
parties cite to the UCC in their briefs, it appears that ACT’s obligations included the
provision of services, namely the assembly of the PCDs. Regardless of whether the
UCC or common law governs, a written contract exists, and thus, its terms control. See
Mass. Gen. Laws ch. 106, § 1-102(3) (“The effect of provisions of this chapter may be
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To establish a breach of contract, a plaintiff has the burden of proving the failure
of the defaulting party to conform to one or more of the contract’s material terms. A
term is material when it involves “an essential and inducing feature” of the contract.
Buchholz v. Green Bros. Co., 272 Mass. 49, 52 (1930). See also Lease-It, Inc. v.
Mass. Port Auth., 33 Mass. App. Ct. 391, 396 (1992). “[A] material breach by one
party excuses the other party from further performance under the contract,” id. at 397,
and “[o]nce relieved from performance, the injured party is not liable for further
damages incurred by the party in material breach.” Id. (citations omitted).
Though questions of materiality are usually to be determined by the trier
of fact, . . . the rule is not universal. As is true of virtually any factual
question, if the materiality question admits of only one reasonable answer
(because the evidence on the point is either undisputed or sufficiently
lopsided), then the court must intervene and address what is ordinarily a
factual question as a question of law.
Gibson v. City of Cranston, 37 F.3d 731, 736 (1st Cir. 1994).4
The Trustee alleges that NormaTec failed to pay for PCDs delivered by ACT (and

varied by agreement, except as otherwise provided in this chapter and except that the
obligations of good faith, diligence, reasonableness and care prescribed by this chapter
may not be disclaimed by agreement but the parties may by agreement determine the
standards by which the performance of such obligations is to be measured if such
standards are not manifestly unreasonable.”).
4

If applicable, the UCC, like the common law, stipulates that the tender of the
goods by the seller “entitles the seller to acceptance of the goods and to payment
according to the contract.” Mass. Gen. Laws ch. 106 § 2-507(1).
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accepted) prior to September of 2008, and that neither ACT’s subsequent bankruptcy
petition nor ACT’s failure to fulfill the balance of any outstanding purchase orders
excuses NormaTec’s failure to pay. With regard to NormaTec’s reliance on a breach
of warranty by ACT, the Trustee notes that NormaTec never provided ACT with the
thirty-day notice of a product defect required by the warranty. See Agreement ¶ 14.
NormaTec, for its part, does not dispute the fact that it did not pay for a significant
number of the delivered devices. Rather, NormaTec maintains that it did give ACT
sufficient notice of the defective product claim and, as a result, was excused from
making further payments.
As a factual matter, NormaTec alleges that after it was contacted by the Trustee
about the overdue payments, its counsel emailed the Trustee on December 4, 2008,
complaining that the PCD devices failed to conform to the warranty. ACT responds that
the email is not part of the summary judgment record as it (1) is not authenticated, (2)
was produced after the close of discovery, and (3) cannot be found among the Trustee’s
(or ACT’s) files. All of this is somewhat beside the point.5 Even were the court to
assume that the email is authentic (it does not), it would not amount to a proper written

5

The Trustee submits a sworn affidavit averring that he never received the email,
nor could it be found in a forensic search of his and ACT’s computer databases
(illustrating the wisdom of the Agreement’s stipulation that notices were to be given in
writing). See Dkt # 45.
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notice under the terms of the Agreement. See Paterson-Leitch Co., Inc. v. Mass. Mun.
Wholesale Elec. Co., 840 F.2d 985, 991-992 (1st Cir. 1988) (“This court has repeatedly
declined invitations to alter the provisions of commercial compacts negotiated at arm’s
length. . . . These truths are particularly self-evident in a case like this one, where none
of the parties were babes in the wood, the mechanics of the dual notice provision and
the indicated time parameters appear to have been reasonable, and the requisite form of
claim was not an unduly complicated one.”). At most the email would show that as of
December 4, 2008, NormaTec knew that it had a potential warranty claim against ACT.
Yet, no written notice of the claim in the form required by the Agreement was
forthcoming to the Trustee within thirty days after the email was allegedly sent.6
In the alternative, NormaTec argues that ACT’s failure to deliver the remaining
balance of the devices materially impaired the contract as a whole and excused it from
further performance (that is, payment for the goods received), citing Mass. Gen. Laws
ch. 106 § 2-612(2)-(3). Even assuming the UCC governs, it gives NormaTec no relief.
See id. (“(2) The buyer may reject any installment which is non-conforming if the
non-conformity substantially impairs the value of that installment and cannot be cured
6

At the hearing, NormaTec’s counsel argued that a written notice that the goods
were defective would have been futile because of ACT’s bankruptcy. The court is
unaware of any provision of the Bankruptcy Code that excuses a debtor of a bankrupt
estate from complying with its contractual obligations without the express permission
of the Bankruptcy Court or the Trustee.
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or if the non-conformity is a defect in the required documents; but if the non-conformity
does not fall within subsection (3) and the seller gives adequate assurance of its cure the
buyer must accept that installment. (3) . . . [T]he aggrieved party reinstates the contract
if he accepts a non-conforming installment without seasonably notifying of cancellation
or if he brings an action with respect only to past installments or demands performance
as to future installments.”) (emphasis added).
More fundamentally, the UCC does not alter the explicit terms of the contract. If
NormaTec believed that the failure to deliver the entire lot of PCDs was a material
breach of the Agreement, it was required to give ACT written notice and an opportunity
to cure the breach, neither of which it did. See Agreement ¶ 18.2.7
In what can only be characterized as an inspired flight of fantasy, NormaTec
argues that it had no duty under the contract to notify ACT of its “affirmative defenses”
in future litigation, and because its claim here is in the nature of a “recoupment,” it is
not a true “claim” under the contract (for which notice was required), but rather an
inchoate affirmative defense (for which no timely notice was due). The argument is

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In its motion, NormaTec states that “[a]s soon as it became clear to NormaTec
that it would not be receiving the PCDs from ACT, it took actions consistent with
[Mass Gen. Laws ch] 106 § 2-711, cancelled that contract and covered by obtaining
the devices from another seller.” Def.’s Mot. at 7. There is nothing in the record,
however, that indicates that NormaTec cancelled the contract pursuant to the square
corners of the Agreement as it was obligated to do.
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groundless. See Wright & Miller, Fed. Practice & Procedure, § 1401 (3d ed. 2012)
(“Recoupment is the right of defendant to have plaintiff’s monetary claim reduced by
reason of some claim defendant has against plaintiff arising out of the very contract
giving rise to plaintiff’s claim.”). NormaTec’s reliance on United Structures of Am.,
Inc. v. G.R.G. Eng’g, S.E., 9 F.3d 996 (1st Cir. 1993), as support for its position is
puzzling as that case is inapplicable on its face.8 It is true that recoupment “is ‘in the
nature of a defense’ and is intended to ‘permit . . . judgment to be rendered that does
justice in view of the one transaction as a whole.’” Id. at 999. However, in a civil
action, like this one, “the counterclaim performs the function of recoupment” – here,
NormaTec forfeited the opportunity to assert a counterclaim by failing to comply with
the notice provision of the Agreement. See Kelly v. Deutsche Bank Nat’l Trust Co., 789
F. Supp. 2d 262, 266 n.7 (D. Mass. 2011).9 A party cannot remain silent about
allegedly defective goods in contradiction to the terms of a written agreement, and then

8

In United Structures, the Court posited whether the Miller Act permits
recoupment where a defendant-general contractor was not in privity with a plaintiffsupplier (it does). No notice provision was at issue in United Structures, as the parties
were not in privity with one another.
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“The doctrine of recoupment, however, remains viable in bankruptcy law,
where all actions are equitable in nature.” Id. See also In re Grand Wireless, Inc.,
2007 WL 1557461, *2 (D. Mass. May 29, 2007) (“Even though an equitable doctrine,
recoupment is construed narrowly in keeping with the general policy not to prefer one
creditor over another in bankruptcy.”).
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belatedly attempt to avoid its payment obligation by restyling its legal claim as an
equitable defense.10 See Agreement ¶ 13.2.
ORDER
For the foregoing reasons, the Trustee’s motion for summary judgment is
ALLOWED. NormaTec’s motion for summary judgment is DENIED. The Trustee will
submit to the court, within fourteen (14) days of the date of this Order, a statement of
the damages he seeks (based on the number of devices that he can prove were
delivered). The parties will also jointly provide, within fourteen (14) days of this Order,
a list of any equipment that belongs to NormaTec that remains in ACT’s possession.
Within twenty-eight (28) days of the date of this Order, the parties will submit a joint
proposal for a mechanism to determine the sum due and owing to ACT’s estate.
SO ORDERED.

10

The court recognizes that there is no dispute that ACT failed to fill the entire
purchase order and that NormaTec is obligated to pay only for those goods that it
received. Cf. Celi v. Trustees of Pipefitters Local 537 Pension Plan, 2011 WL
5926669, *6 (D. Mass. Nov. 28, 2011) (“[T]he First Circuit has recognized a creditor’s
right to recoup pre-bankruptcy petition overpayments from post-petition obligations to
a debtor. In this Circuit, recovery of overpayments constitute transactions in the
‘nature of recoupment,’ unaffected by bankruptcy proceedings, if the debt owed to the
creditor arises out of the ‘same transaction’ as the debt the creditor owes the debtor.”)
(citations omitted). See also In re Holyoke Nursing Home, Inc., 372 F.3d 1, 5 (1st Cir.
2004) (finding it inequitable to permit nursing home to “retain the windfall” of
overpayments Medicare made to the nursing home).
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/s/ Richard G. Stearns
________________________________
UNITED STATES DISTRICT JUDGE

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