KDH DEFENSE SYSTEMS, INC. v. EAGLE INDUSTRIES UNLIMITED, INC.

Filing 101

MEMORANDUM OPINION AND ORDER Signed by JUDGE CATHERINE C. EAGLES on 06/18/2013 as set out herein. ORDERED that Defendant's Motion for Judgment as a Matter of Law or, Alternatively, a New Trial, (Doc. 85 ), is DENIED. (Taylor, Abby)

IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF NORTH CAROLINA

KDH DEFENSE SYSTEMS, INC.,
Plaintiff,
v.
EAGLE INDUSTRIES UNLIMITED,
INC.,
Defendant.

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1:11-CV-843

MEMORANDUM OPINION AND ORDER
Catherine C. Eagles, District Judge.
After a four-day trial in January 2013, a jury found that defendant Eagle Industries
Unlimited, Inc., breached a contract to buy large-sized bulletproof panel inserts from plaintiff
KDH Defense Systems, Inc., for use in military vests and awarded damages to KDH. (Doc. 82.)
This matter is before the court on Eagle’s Motion for Judgment as a Matter of Law or,
Alternatively, a New Trial. (Doc. 85.) Finding no error in its jury instructions or evidentiary
rulings meriting a new trial and concluding that Eagle is not entitled to judgment as a matter of
law on either of the two issues it identifies, the Court will deny the motion.
Viewed in the light most favorable to the plaintiff, the evidence showed that Eagle
needed over 12,000 panel inserts in relatively short order to fulfill a military contract for
bulletproof vests, that Eagle was having issues with its subcontractor for these inserts because
the subcontractor’s inserts failed important quality tests, and that Eagle would suffer a severe
financial penalty if the vests were not delivered to the military on time. Eagle sent KDH a
written request for a quote (“RFQ”) on two different factual scenarios; the uncertainty related to

whether the military would refuse to accept all inserts made by the original subcontractor
(Scenario Two) or just the ones from the failed lots (Scenario One). Scenario Two called for a
total of 12,505 inserts of varying sizes, including 3884 large-size inserts. KDH responded with
written quotes for the requested number of inserts in each scenario.
The parties negotiated and orally agreed on a reduced price. Over the next few weeks,
KDH and Eagle had many oral and e-mail conversations about the purchase and sale of the panel
inserts, none of which mentioned any changes to the numbers. KDH worked with Eagle to get
military approval for the use of its inserts in the vests, and Eagle kept KDH informed of its
discussions and negotiations with the military and its original subcontractor so that KDH could
begin making the inserts immediately once the problems were resolved.
Eagle orally authorized KDH to begin production on Scenario One in late January and
sent a purchase order shortly thereafter. The purchase order for Scenario One stated a bigger
number of inserts than was on the RFQ, so KDH called Eagle about the number. Eagle
confirmed to KDH that the bigger number was a mistake. KDH produced the smaller number,
which was the same number that was in the original RFQ. There is no dispute about the
Scenario One contract.
Two weeks later, the remaining issues with the military and the subcontractor were
clarified, and Eagle orally told KDH to start manufacturing the inserts for Scenario Two. KDH
began work immediately. A few days later KDH received a written purchase order from Eagle
listing 1192 fewer large-size inserts than KDH had requested in the Scenario Two RFQ. As
before, KDH called Eagle to point out the error. Eagle was slow to answer but eventually
admitted it had made a mistake in the RFQ and no longer wanted the bigger number of large-size

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inserts. By this time, KDH had already completed manufacture of the other sizes and had begun
manufacture of the large inserts.
The jury found that Eagle and KDH entered into a contract for panel inserts that included
the 1192 large-size units at issue, that the inserts were specially manufactured goods, the
production of which substantially began before Eagle repudiated the contract, and that Eagle
breached the contract. (Doc. 82 at 1-2.) It awarded KDH $112,268.76 in damages for the 548
inserts actually manufactured and no damages for the remaining 644 inserts that it did not
manufacture. (Id. at 2-3.)
“A judgment as a matter of law is proper ‘when, without weighing the credibility of the
evidence, there can be but one reasonable conclusion as to the proper judgment.’” PBM Prods.,
LLC v. Mead Johnson & Co., 639 F.3d 111, 120 (4th Cir. 2011) (quoting Singer v. Dungan, 45
F.3d 823, 826 (4th Cir. 1995)). A new trial should be ordered when the verdict “is against the
clear weight of the evidence, is based on false evidence, or will result in a miscarriage of
justice.” The Cincinnati Ins. Co. v. Dynamic Dev. Grp., LLC, 336 F. Supp. 2d 552, 561
(M.D.N.C. 2004) (citing Atlas Food Sys. & Serv., Inc. v. Crane Nat’l Vendors, Inc., 99 F.3d 587,
594 (4th Cir. 1996)), aff’d, 154 F. App’x 378 (4th Cir. 2005).
I.

“Specially Manufactured Goods” Exception to the Statute of Frauds
The jury found that there was an oral contract between KDH and Eagle which included

the 1192 inserts at issue and that the contract was enforceable because it satisfied the “specially
manufactured goods” exception to the statute of frauds. (Doc. 82 at 1.) That exception applies if
the disputed goods
are to be specially manufactured for the buyer and are not suitable for sale to
others in the ordinary course of the seller’s business and the seller, before notice
of repudiation is received and under circumstances which reasonably indicate that

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the goods are for the buyer, has made either a substantial beginning of their
manufacture or commitments for their procurement.
N.C. Gen. Stat. § 25-2-201(3)(a). Several of the grounds on which Eagle moves for judgment as
a matter of law or for a new trial concern the specially manufactured goods exception.
A. Exclusion of Evidence of Specially Manufactured Fabric
Eagle contends that a new trial is required because the Court improperly excluded
evidence that the fabric used to manufacture the inserts was not specially manufactured.
However, the pertinent issue was not whether the fabric was a specially manufactured good but
(1) whether the vest inserts were specially manufactured goods and (2) whether a combination of
acquiring, spreading, and cutting the fabric constituted a substantial beginning of the special
manufacture of the vests. KDH did not advance a theory that the vests were specially
manufactured because the component fabric was specially manufactured, so the relevance, if
any, of evidence showing that the fabric was not specially manufactured was substantially
outweighed by its potential to confuse the jury. It was therefore appropriate to exclude the
evidence pursuant to Federal Rule of Evidence 403.
B. Jury Instruction on Repudiation
The Court instructed the jury that a “‘repudiation’ occurs when the buyer clearly informs
the seller that it will not comply with the terms of the original agreement, or otherwise informs
the seller it will not buy the disputed goods.” (Doc. 80 at 10.) Eagle contends that a new trial is
necessary because the reference to an “original agreement” incorrectly presupposes that at the
time of repudiation the buyer acknowledged or understood that the seller was alleging the
existence of an oral contract. (See Doc. 86 at 12.)
The “original agreement” referenced in the instruction is more naturally read not as an
agreement that the buyer knew the seller was alleging, but as an agreement found to exist by the
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jury before reaching this issue. Indeed, the jury could only reach this issue after finding that
there was an oral contract between the parties. The question for the jury, then, as instructed by
the Court, was whether Eagle clearly informed KDH that it would not comply with the terms of
the original agreement found to exist by the jury or otherwise informed KDH it would not buy
the inserts covered by the oral contract found to exist by the jury.
Moreover, there is nothing in the instruction requiring or assuming that the buyer knew
the seller was alleging the existence of a contract. Pursuant to the instruction, the jury could find
that Eagle repudiated an oral agreement by clearly informing KDH it would not do or buy
something it was contractually obligated to do or buy, regardless of whether Eagle knew at the
time that KDH believed there was a binding contract. Eagle has failed to identify an error in the
instruction, much less one that establishes that the verdict will result in a miscarriage of justice.
C. Jury Instruction on Substantial Beginning
The Court instructed the jury to decide whether KDH made a substantial beginning of
“the manufacture of the entire order of inserts.” (Doc. 80 at 10.) Eagle contends that a new trial
is warranted because the partial production of an order cannot trigger the specially manufactured
goods exception for the entire order. On Eagle’s view, the Court should have limited its
specially manufactured goods instruction to the 548 inserts actually produced and should have
precluded damages for the 644 inserts that KDH never started making.
The cases in other jurisdictions go both ways on this issue, and there is no definitive case
from the North Carolina courts. Compare Zhejiang Rongyao Chem. Co. v. Pfizer Inc., No. 115744 (PGS), 2012 WL 4442725, at *5 (D.N.J. Sept. 21, 2012) (denying motion to dismiss after
finding that plaintiff’s spending millions of dollars designing, building, and supplying a plant to
manufacture pharmaceutical product for defendant and getting necessary regulatory and

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governmental approvals constituted a substantial beginning, even though it had not begun to
physically produce the product), and R.M. Schultz & Assocs., Inc. v. Nynex Computer Servs. Co.,
No. 93 C 386, 1994 WL 124884, at *7 (N.D. Ill. Apr. 11, 1994) (denying summary judgment for
defendant after finding that plaintiff’s production of twenty-three units of one type of electronics
system and five units of another was sufficient to constitute a substantial beginning of an oral
contract for 100 of the first type of system and five of the second), and Perlmuter Printing Co. v.
Strome, Inc., 436 F. Supp. 409, 414 (N.D. Ohio 1976) (holding that printing of 62 percent of
alleged quantity of flyers ordered constituted a substantial beginning for the entire alleged
quantity), with Automated Cutting Techs., Inc. v. BJS N. Am. E, Inc., No. 5:10-CV-208-REW,
2012 WL 2872823, at *5 (E.D. Ky. July 12, 2012) (finding that completion during the first year
of a five-year contract of 30 percent of an expressly stipulated initial quantity did not qualify as a
substantial beginning as to goods to be manufactured in the second through fifth years of the
contract), and EMSG Sys. Div., Inc. v. Miltope Corp., No. 5:97-CV-493-BO(2), 1998 WL
1095078, at *4 (E.D.N.C. Oct. 19, 1998) (holding that the special manufacture of 1000 circuitboard sets did not remove from the statute of frauds any additional sets not manufactured), and
Epprecht v. IBM Corp., No. 82-2577, 1983 WL 160571, at *393 (E.D. Pa. May 25, 1983)
(holding that production of 7000 specially manufactured parts removed those parts only from the
statute of frauds, not 43,000 other parts at issue for which there was no evidence of any
substantial beginning), and Vision Sys., Inc. v. EMC Corp., No. 034305BLS, 2005 WL 705107,
at *6 (Mass. Super. Feb. 28, 2005) (concluding that production of 1247 units removed those
units from the statute of frauds, but that there was no substantial beginning and therefore no
enforceable contract for 5653 units not manufactured); see also Chambers Steel Engraving Corp.
v. Tambrands, Inc., 895 F.2d 858, 860-61 (1st Cir. 1990) (affirming district court’s holding that

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manufacture of a prototype embossing machine did not constitute a substantial beginning of
contract for manufacture of twenty to thirty machines).
At trial, the Court was of the view that the cases authorizing recovery on the contract as a
whole are better reasoned. The Court remains so convinced. In addition, the evidence in this
case particularly supports the instruction given by the Court. There was evidence that when
Eagle orally told KDH to begin Scenario Two, it did not mention any change in the numbers
needed and that it thereafter failed to clearly and promptly communicate with KDH over the
changed number of large-size inserts. The jury could reasonably have concluded this delay in
repudiation was caused by Eagle’s desire to insure KDH made all the inserts Eagle urgently
needed while at the same time attempting to avoid responsibility for the full number of large-size
inserts it had originally ordered. If the jury accepted that view of the facts, which it apparently
did, it would have been justified in finding that KDH had made a substantial beginning of the
contract as a whole.
Even if the Court is wrong, however, the error is harmless because the jury awarded
KDH damages only on the 548 inserts it actually produced. (See Doc. 82 at 2-3.) It is difficult
to see why Eagle should get a new trial on the 644 inserts when the jury already ruled in its favor
on that aspect of the case.
D. Judgment as a Matter of Law on Substantial Beginning
Eagle further contends that it is entitled to judgment as a matter of law because KDH did
not substantially begin manufacture of the inserts at issue before Eagle repudiated. On Eagle’s
view, because the Court found post-trial in an order concerning pre-trial interest that Eagle
breached the contract on February 17, 2011, (Doc. 83 at 1), any repudiation necessarily occurred
on February 17, which was before KDH did any work on the large-sized inserts.

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First, when Eagle repudiated and when KDH substantially began manufacture of the
inserts were matters of fact left for the jury, and the jury did not find specific dates on which
Eagle breached or repudiated. (See Doc. 82.) The Court’s finding on breach for pre-trial interest
purposes is not the same question.
At any rate, Eagle is incorrect that repudiation and breach necessarily occurred at the
same time. There was sufficient evidence for the jury to find that breach occurred on February
17, when Eagle attempted to unilaterally modify the terms of the contract by issuing a purchase
order for 1192 fewer inserts than called for by the contract, and that repudiation occurred
sometime thereafter, when Eagle finally clearly informed KDH that it did not need and would
not buy those 1192 contracted-for inserts. Eagle had orally asked KDH to begin making the
Scenario Two inserts and had not mentioned any possibility that the numbers would be different
from those in the RFQ. Eagle had a history of making mistakes in numbers in purchase orders to
KDH, see supra p. 2, and KDH had been given no reason to think that the number was anything
different from the number in the RFQ, which the parties had been discussing for several weeks.
Eagle’s argument is therefore unavailing, and Eagle is not entitled to judgment as a matter of
law.
II.

Judgment as a Matter of Law on Breach
Eagle also contends that it is entitled to judgment as a matter of law on the issue of

breach by nonperformance. Specifically, Eagle contends that Eagle could not breach by
nonperformance until and unless KDH delivered the inserts in question, which it has still not
done.
Tender of delivery “is a condition to the buyer’s duty to accept the goods” and “entitles
the seller to acceptance of the goods and to payment according to the contract.” N.C. Gen. Stat.

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§ 25-2-507(1). The requirement of tender is not considered in a vacuum; as the comments note,
it is to be read within the framework of the other sections which bear upon delivery and payment.
N.C. Gen. Stat. § 25-2-507 cmt. 1. Tender does not necessarily require that the seller put the
goods in the possession of the buyer, Allied Semi-Conductors Int’l, Ltd. v. Pulsar Components
Int’l, Inc., 907 F. Supp. 618, 624-25 (E.D.N.Y. 1995) (citing N.Y. U.C.C. Law §§ 2-503 cmt. 1,
2-507(1); Hawkland Uniform Commercial Code Series § 2-503:2); instead, it “contemplates an
offer coupled with a present ability to fulfill all the conditions resting on the tendering party and
must be followed by actual performance if the other party shows himself ready to proceed,” N.C.
Gen. Stat. § 25-2-503 cmt. 1 (emphasis added).
It is undisputed that KDH actually made the 548 panel inserts for which damages were
awarded and that KDH told Eagle it had made the inserts. Eagle’s subsequent efforts to ascertain
whether the military could find a use for these inserts provide strong circumstantial evidence that
Eagle knew KDH was ready and willing to deliver those inserts. The evidence at trial was clear
that Eagle would have rejected the inserts had they been physically delivered. Thus, Eagle’s
argument would require KDH to engage in a futile formality; the obstacle to physical delivery of
the inserts was Eagle’s unwillingness to proceed with acceptance, not KDH’s inability or
unwillingness to deliver. The evidence was sufficient to establish that KDH satisfied the tender
requirement for these inserts.
Eagle’s argument is perhaps more compelling with regard to the 644 inserts KDH never
manufactured. See 18 Williston on Contracts § 52:6 (4th ed.) (“There can be no tender of
delivery where the goods to be sold do not yet exist, as where they are in the process of being
manufactured, or are not available for the buyer to take possession of them.” (footnote omitted)).
However, the jury did not award KDH any damages for these unproduced inserts. Either the jury

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found that Eagle breached the contract by nonperformance only with respect to the 548 inserts
that KDH manufactured and more clearly tendered to Eagle, or the jury found that Eagle’s
breach with respect to the 644 unproduced inserts resulted in no damages. In either case, the
jury’s consideration of the issue as to the unfinished inserts did not result in a verdict against
Eagle so there is no need to set aside the verdict.
III.

Evidence That Eagle Failed to Disclose the Error in Number
Finally, Eagle moves for a new trial on the basis that the Court should not have allowed

KDH to present evidence and to argue that Eagle failed to disclose an error it made when
requesting a quote from KDH for a greater number of inserts than it in fact needed. Whether any
delay in notifying KDH of the discrepancy was inadvertent or intentional was relevant to
whether Eagle believed there was a contract for the bigger quantity, which in turn is relevant to
whether that contract actually existed—the central issue in the trial. Moreover, the evidence was
also highly probative of the credibility of Eagle’s witnesses and, as noted supra, to the question
of when Eagle repudiated, its motive for delaying repudiation, and whether there had been a
substantial beginning. The probative value of the evidence was not substantially outweighed by
any potential for prejudice.
IV.

Conclusion
Under Eagle’s view of the facts, KDH had no obligation to make the inserts up until the

point that Eagle sent the written purchase order and KDH accepted it. Thus, under Eagle’s view
of the facts, KDH would have been within its rights to refuse to make any of the Scenario Two
inserts—some 9500—when Eagle unilaterally reduced the number it wanted. A jury could have
accepted this view. But it was also reasonable for the jury to find that there was an oral contract
for specially manufactured goods. By the time Eagle sent a written purchase order, it had only a

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couple months to get the inserts inspected, place the inserts in the vests, finish the sewing,
package the vests, and ship them to the military. Had KDH decided not to accept the purchase
order in view of the reduced numbers, Eagle would have been up a creek without a paddle and
would likely have defaulted on its contract with the military.1 The jury was on firm ground in its
decision that there was a binding oral contract which Eagle breached, and its resolution of the
factual dispute is entitled to respect.
It is therefore ORDERED that Defendant’s Motion for Judgment as a Matter of Law or,
Alternatively, a New Trial, (Doc. 85), is DENIED.
This the 18th day of June, 2013.

__________________________________
UNITED STATES DISTRICT JUDGE

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One wonders what Eagle’s position would have been about the existence of an oral
contract if KDH had refused to make any of the Scenario Two inserts and had taken the position
that Eagle took throughout this litigation. The jury would have been well within its rights to
suspect that Eagle would have taken the opposite position from the one it took in this litigation,
even though the material facts would have been the same.

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