Babcock & Wilcox Co. v. Cormetech, Inc.

McKEAGUE, J., delivered the opinion in which KETHLEDGE, J., joined in part and in the result, and GRIFFIN, J., joined in part. KETHLEDGE, J. (pp. 764-65), delivered a separate opinion concurring in part and in the judgment. GRIFFIN, J. (pp. 765-67), delivered a separate opinion concurring in part and dissenting in part.

OPINION

McKEAGUE, Circuit Judge.

After completion of discovery and dis-positive motion briefing, the district court issued an opinion explaining why defendant was entitled to summary judgment on both of plaintiffs contract claims. As to the first claim, for breach of performance warranty in relation to the sale of a power plant emissions-control catalyst, the court sustained defendant seller’s statute of limitations defense, holding that plaintiff filed its claim at least ten months after the limitations period had expired. As to the second claim, for enforcement of contractual indemnity, the court held there was insufficient evidence to support a reasonable jury finding that plaintiffs losses resulted from a “defect” in the catalyst or “omission” in defendant seller’s performance. On appeal, plaintiff contends the court erred by failing to view the record in the light most favorable to the nonmovant. We agree. For the reasons explained below, we vacate the district court’s ruling and remand for further proceedings.

I. BACKGROUND

Plaintiff Babcock & Wilcox Company (“B&W”) is a Delaware corporation having its principal place of business in Ohio. B&W is in the business of designing, manufacturing, and constructing power generation facilities and emissions control equipment and services for power companies such as Kansas City Power & Light Company (“KCP&L”). In December 2005, B&W entered into a contract to design and construct a Selective Catalyst Reduction (“SCR”) system to control emissions at one of KCP&L’s coal-burning power stations in La Cygne, Kansas. B&W issued a purchase order to defendant Cormetech, Inc. to obtain catalyst modules to be used in the SCR. Cormetech is a Delaware corporation with its principal place of business in North Carolina. Cormetech guaranteed that the catalyst it supplied would perform under the specified conditions for 24,000 operating hours before needing replacement.

KCP&L began operating the SCR at the La Cygne plant in April 2007. In June 2007, B&W conducted an initial performance test, after approximately 1200-1500 hours of operation. The results revealed that the rate of “ammonia slip” was higher than expected, meaning that more ammonia was being emitted from the SCR than expected, albeit still within the guaranteed limits. This finding indicated that the catalyst could be subject to accelerated deactivation. B&W advised Cormetech by letter dated August 21, 2007, just four months after commencement of operation, that initial performance test results gave “reason to believe that the catalyst will not reach the end of life guarantees.” R. 114-13, Rohner Letter 8/21/07, Page ID 4864. B&W invited Cormetech to cooperate with B&W “to determine the reasons for this advanced deactivation.” Id. Cormetech responded immediately, observed that higher levels of “ammonia slip” were “measured (and corrected),” and confirmed that its investigation of the possible cause was continuing. R. 114-8, Schirmer Letter 8/31/07, Page ID 4821.

Cormetech continued testing the catalyst and next communicated its preliminary findings to B&W in October 2007, after 3000 hours of operation. Cormetech’s report indicated that the catalyst was continuing to operate “above the performance threshold, but below the design deactivation curve.” R. 114-9, Cormetech Letter 10/8/07, Page ID 4825-27. The measured loss of catalytic potential reportedly correlated with elevated concentrations of calcium oxide and phosphorous pentoxide found on the surface of some catalyst elements. The letter recommended continued monitoring and testing of catalyst performance and requested additional operational data for analysis.

Cormetech continued to conduct interim testing, as documented in Cormetech’s performance test report, showing the collection of catalyst element samples in September 2007, November 2007, and May 2008, as well as inspection of the SCR reactor in April 2008. In December 2007, Cormetech informed B&W that its November 2007 lab test results were inconclusive: elevated levels of calcium and phosphorous were still evident, but “the rate of accumulation appearfed] to have slowed.” R. 114— 10, Cormetech Letter 12/17/07, Page ID 4829. Cormetech advised that further testing was indicated. Throughout this period, Cormetech never informed B&W “that any of the interim testing demonstrated that the catalyst was at the end of its catalytic life guarantees.” R. 115-18, Chitwood Aff. at ¶ 23, Page ID 5117. Instead, Cormetech assured B&W that it remained confident that the operational life warranty could be met.

Only in August 2008 was it made clear to B&W that Cormetech’s corrective efforts would fall short. According to Project Manager Chitwood, B&W received “preliminary notice” of the full performance guarantee testing results by email on or about September 3, 2008. Formal notice came later by letter on September 26, 2008. This letter from KCP&L advised in pertinent part “that the SCR does not meet the warranties and Performance Guarantees specified in the Contract.” R. 114-12, Cheatum Letter 9/26/08, Page ID 4860. The letter further advised that it was B&W’s obligation under the contract “to conduct a root cause evaluation and generate a corrective action plan with KCP&L and catalyst manufacturer to determine mutually agreeable repairs or modifications to achieve the Performance Guarantee.” Id.

B&W and Cormetech then undertook a root cause evaluation to determine why the catalyst failed to meet its expected life term. On February 7, 2009, B&W issued its Root Cause Analysis, summarizing its findings and conclusions. The Root Cause Analysis identified seven factors that contributed to the early deactivation of the catalyst, none of which was attributable to Cormetech: (1) burning fuels outside the specified range; (2) subjecting the catalyst to higher than specified ash loads; (3) failing to activate sonic horns that would have prevented ash buildup; (4) presence of severe tube leaks diming operation; (5) continued operation of the SCR without removal of accumulated ash, after a shutdown on August 4, 2007; (6) continued operation of the SCR without removal of accumulated ash, after an outage on August 31, 2007, until April 2008; and (7) poor combustion, which led to increased ash loading and possible phosphorous poisoning.

After KCP&L determined in 2008 that the catalyst was at the end of its useful life, it contracted directly with Cormetech to obtain a replacement catalyst. The replacement catalyst also failed before the end of its expected life. Ultimately, the problem that caused the early deactivation of both the original and replacement catalyst appears to have been remedied by replacement of the cyclone burners in the power station’s furnace. KCP&L asserted a claim against B&W based on the unsatisfactory performance of the SCR, which resulted in a $8.5 million meditation settlement.

B&W commenced this action against Cormetech in federal court based on the parties’ diversity of citizenship on August 8, 2012. The original complaint was dismissed without prejudice pursuant to the parties’ tolling agreement while B&W pursued mediation with KCP&L. After those efforts resulted in the settlement, B&W reinstituted the action on March 6, 2014, within the agreed tolling period, claiming recovery of the settlement amount from Cormetech based on breaeh-of-warranty and contractual indemnity theories. The parties completed discovery, Cormetech moved for summary judgment, and the district court granted the motion, finding no triable fact issue on either of B&W’s claims. The court held the breach-of-warranty claim was time-barred and the indemnification claim failed for lack of evidence that B&W’s losses resulted from a defect in goods or services purchased from Cormetech.

II. ANALYSIS

A. Standard of Review

The summary judgment ruling is reviewed de novo. Smith v. Perkins Bd. of Educ., 708 F.3d 821, 825 (6th Cir. 2013). Under Rule 56, summary judgment shall be granted “if 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). The reviewing court must view the evidence in the light most favorable to the non-moving party and draw all reasonable inferences in its favor. Smith, 708 F.3d at 825. Not just any alleged factual dispute between the parties will defeat an otherwise properly supported motion for summary judgment; the dispute must present a genuine issue of material fact. A dispute is “genuine” only if based on evidence upon which a reasonable jury could return a verdict in favor of the non-moving party. Id. A mere scintilla of evidence or some metaphysical doubt as to a material fact is insufficient to forestall summary judgment. Sierra Club v. ICG Hazard, LLC, 781 F.3d 281, 284 (6th Cir. 2015). “A factual dispute concerns a ‘material’ fact only if its resolution might affect the outcome of the suit under the governing substantive law” — in this case, Ohio law. Crouch v. Honeywell Int’l, Inc., 720 F.3d 333, 338 (6th Cir. 2013).

B. Breach of Warranty Claim

B&W’s first claim alleges that Cor-metech expressly warranted that the catalyst furnished to B&W for the La Cygne Power Plant would operate “for a period not less than 36 months from initial operation or 24,000 of SCR system operating hours, whichever comes first.” R. 1, Complaint at ¶ 19, Page ID 4-5. The claim further alleges that B&W learned on August 5, 2008 that the Cormetech catalyst had reached the end of its useful life after no more than 14 months of operation, in breach of the performance warranty. Id. at ¶¶ 20-21. The district court held this claim was for enforcement of a performance warranty in a contract for the sale of “a good,” governed by Chapter 2 of the Uniform Commercial Code and is subject to the statute of limitations codified at Ohio R.C. § 1302.98. This conclusion is not contested on appeal.

The relevant statute provides in pertinent part:

(A) An action for breach of any contract for sale must be commenced within four years after the cause of action has accrued. By the original agreement the parties may reduce the period of limitation to not less than one year but may not extend it.

(B) A cause of action accrues when the breach occurs, regardless of the aggrieved party’s lack of knowledge of the breach. A breach of warranty occurs when tender of delivery is made, except that where a warranty explicitly extends to future performance of the goods and discovery of the breach must await the time of such performance, the cause of action accrues when the breach is or should have been discovered.

(Emphasis added). Thus, the breach-of-warranty claim is subject to a four-year period of limitation, which began to run when B&W discovered or should have discovered that the warranty was breached.

The district court concluded as a matter of law that B&W should have discovered the performance warranty breach by October 2007 at the latest, when Cormetech informed B&W that test results showed a “higher than expected loss of catalytic potential.” R. 114-9, Cormetech Ltr. 10/8/07 at 8, Page ID 4827. By then, the district court concluded, B&W “should have known that the catalyst would not meet its end of life guarantees.” See R. 121, Opinion at 17-19, Page ID 5190-92. Because B&W did not commence action on the breach-of-warranty claim until August 2012, the claim was held to be time-barred, as the four-year limitations period had expired in October 2011.

There is no dispute that KCP&L, B&W, and Cormetech all knew there was a problem with operation of the SCR at the La Cygne Power Plant right from the beginning. Yet, B&W maintains it did not know the catalyst performance warranty would be breached until September 2008, when it received notice of the results of Cormetech’s performance warranty testing, showing the catalyst was at the end of its operational life. At this point, B&W acknowledges, it had discovered that' Cor-meteeh’s performance warranty would inevitably be breached, even though the catalyst remained functional and in service for a total of 17,000 hours and was not replaced by Cormetech until March 2009. B&W thus contends that the four-year period of limitation began to run at this point and its original complaint, filed on August 3, 2012, was timely filed.

In rejecting this position, the district court placed heavy emphasis on B&W’s August 21, 2007 letter to Cormetech acknowledging that it had “reason to believe that the catalyst will not reach the end of life guarantees.” -However, this communication does not and could not reflect discovery that the future-performance warranty was or would inevitably be breached. Viewing the letter in light of the parties’ contract and ensuing course of conduct, its import is clear. B&W was putting its contractual business partner, the catalyst manufacturer, on notice of a manifest problem as early as possible so that Cormetech could undertake its contractual responsibility to do exactly what it did: investigate, monitor, test, identify the problem, and take appropriate corrective action to prevent the potential performance breach. In rejecting this eminently reasonable construction of the letter, the district court appears to have viewed the evidence in the light most favorable to the movant Cormetech, rather than the non-movant B&W.

The district court also rejected B&W’s contention that Cormetech’s October 2007 correspondence justified its delay in deducing that the performance warranty would be breached. True, Cormetech’s letter confirmed the earlier finding of “higher than expected loss of catalytic potential,” but it did not advise that the catalyst was approaching the end of its useful life. Instead, it recommended continued monitoring and various testing approaches, in furtherance of correcting the problem and meeting the performance warranty.

It had become evident, after six months of operation, that unless effective corrective action was identified and taken, the catalyst would not meet its 24,000-hour operational life warranty. Yet, Cormetech had undertaken its contractual responsibility to monitor performance and identify what corrective “repairs or modifications” were necessary “to achieve Performance Guarantee.” See R. 114-6, Catalyst Performance Guarantee Remedy Language Art. 2.1, Page ID 4812. In other words, in October 2007, the catalyst was not operating as expected, but had not yet experienced “catalyst life failure,” such as would have triggered B&W’s and Cormetech’s contractual duty to “conduct a root cause failure evaluation” and develop “a corrective action plan.” Id. at Art. 2.1, 3.2, Page ID 4812, 4815.

Still, Cormetech was actively investigating and attempting to identify appropriate corrective action to meet the catalyst’s op-' erational life guarantee. This understanding is substantiated by Jason Chitwood, B&W Project Manager, who attested that between the time of the initial performance guarantee testing in June 2007 and the full performance guarantee testing in August 2008, the SCR reactor continued to be “fully functional.” R. 115-18, Chitwood Aff. at ¶¶ 19-24, Page ID 5113, 5116-17.

Inasmuch as the October 2007 letter showed that the problem persisted, but that the cause remained indeterminate, and that Cormetech was cooperating in good faith to help ensure the success of the contract, it would make little sense for the court to construe the letter most adver-sarily as putting B&W on notice of the need to institute or' threaten litigation to protect its rights. Again, the district court appears to have given the benefit of reasonable inferences to Cormetech rather than to B&W.

The district court also cited the report of B&W’s own expert, Dr. Stephen Niksa, dated July 27, 2015, as support for the proposition that B&W should have known in August or October 2007 that the catalyst would not meet its end of life guarantees. The Niksa report is not oriented toward ascertaining what B&W knew and when. Rather, Niksa was hired by B&W to render expert opinions, as a chemical engineer, on the technical basis for B&W’s claims that Cormetech breached the contractual warranty and indemnity provisions. R. 114-17, Niksa Report at 1, Page ID 4900. Hence, Niksa’s report is oriented toward showing what Cormetech knew and when, for purposes of evaluating the suitability of Cormetech’s design of the catalyst for its intended purpose. To explain his opinions on Cormetech’s liability, Niksa referred to the testing results collected during the investigation of the catalyst’s performance deficiencies. The district court quoted some of these references accurately, but out of context. That is, the district court took advantage of Niksa’s hindsight in 2015, to conclude as a matter of law that B&W “should have known,” in the Fall of 2007, not that the performance warranty was breached, but that it likely would be breached at some indeterminate future date.

Yet, a breach-of-performance-warranty claim accrues under Ohio R.C. § 1302.98(B) when the breach of the warranty — not the possibility or likelihood of breach — was or should have been discovered. Even with the benefit of crystal clear hindsight, it is beyond peradventure that no breach of the performance warranty had occurred in October 2007. The catalyst continued to be operational for more than a year thereafter. Again, in October 2007, there simply was no breach that could or should have been discovered by B&W. Suffice it to say that the district court’s reliance on the Niksa report to conclude there was no genuine dispute as to when B&W discovered or should have discovered the performance warranty breach is far from persuasive.

To support its determination of B&W’s claim accrual, the district court cited one case, Miles v. Kohli & Kaliher Assoc., Ltd., 917 F.2d 235, 239, 256 (6th Cir. 1990). Miles is clearly distinguishable. In Miles, the court addressed several wrongful death claims by estates of motorists who lost their fives when a bridge collapsed. United States Steel Corporation (“US Steel”) was one of several defendants who played a role in the bridge construction. US Steel had fabricated the “bridge kit,” consisting of interlocking sections of corrugated steel plates designed for assembling into an arch and culvert. Id. at 288. Defendant Paulding County used the kit to construct the culvert. Two years after completion, inspection of the culvert raised questions. The US Steel project manager identified signs of “prior subsidence of the backfill” and advised the County that it could lead to collapse of the structure. Id. at 239. He recommended close monitoring and, if continued movement of the arch was observed, then replacement of the backfill material around the culvert.

Unfortunately, the County did not maintain close monitoring and the culvert collapsed before repairs could be made. The County sued US Steel for tortious breach of express warranty but the court held that the County should have discovered the breach of that warranty when the US Steel project manager “correctly identified the nature of the problem and communicated his findings to the appropriate County authority.” Id. at 256 (emphasis added). The County’s claim was asserted more than four years after this accrual date and was held to be time-barred.

Here, in contrast, Cormetech, the party that undertook investigation of the problem, cannot be said, as a matter of law, to have correctly identified and communicated the nature of the catalyst problem in such a way as to make it apparent to B&W in the Fall of 2007 that the performance warranty was or inevitably would be breached. Rather, the evidence shows that Cormetech’s testing results and corrective investigations remained inconclusive during the period August 2007 to August 2008. Cormetech did not advise B&W that the operational fife warranty would not be met despite its efforts; instead, it continued to assure B&W that its corrective measures could prevent a breach ... until August or September 2008. Only then did Corme-tech’s Performance Test Report disclose that “[a] Catalyst action is required to maintain the design performance level of the SCR.” R. 114-11, Performance Test Report at 20, Page ID 4851. And at that time, and KCP&L gave B&W notice that this amounted to a “catalyst fife failure” under the terms of the performance warranty that necessitated a corrective action plan.

Cormetech has the burden of establishing its statute of limitations defense, see Lutz v. Chesapeake Appalachia, L.L.C., 717 F.3d 459, 464 (6th Cir. 2013), but has failed to show that there is no genuine dispute about the date of accrual of the breach-of-performance-warranty. This conclusion is supported by other rulings relied on by B&W. See, e.g., Controlled Environments Const., Inc. v. Key Industrial Refrigeration Co., 266 Neb. 927, 670 N.W.2d 771, 782-85 (2003) (addressing diseovery-of-breach accrual for breach of future-performance warranty under UCC and holding that ambiguity in the record made out question of fact requiring reversal of summary judgment ruling); Anderson v. Crestliner, Inc., 564 N.W.2d 218, 222-23 (Minn. Ct. App. 1997) (reversing lower court’s dismissal and holding future-performance warranty breach did not occur when defect was first discovered, but when defendant manufacturer advised plaintiff that it would not honor warranty). The case law cited by Cormetech is plainly inapposite; none of the cases cited deal with “discovery” accrual of a claim for breach of a future-performance warranty under the UCC statute of limitations.

Accordingly, viewing the record in the light most favorable to B&W and giving B&W the benefit of all reasonable inferences, it is apparent, for the reasons set forth above, that there are at least genuine fact questions concerning when B&W should be deemed to have discovered that Cormetech was in breach of the operational life warranty. In emphasizing evidence of B&W’s knowledge of a problem with the catalyst in the Fall of 2007, and disregarding evidence tending to explain why B&W reasonably did not consider such knowledge notice that the performance warranty was or necessarily would be breached, the district court overstepped its bounds. It impermissibly engaged in “weighing the evidence” and assessing “the truth of the matter.” See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). The award of summary judgment on the breach-of-warranty claim must therefore be vacated.

C. Indemnity Claim

In its second claim, B&W seeks enforcement of Cormetech’s contractual promise to indemnify B&W against all losses arising out of any defect in the goods or services, i.e., the $3.5 million loss B&W sustained in settling the matter with KCP&L. The district court granted Cor-metech summary judgment on this claim based on its holding that B&W had presented insufficient evidence that Corme-tech committed “any act or omission” that would support indemnification. Rather, the court observed that B&W’s Root Cause Failure Evaluation showed the early deactivation of the catalyst was due to “operating issues at KCP&L’s plant.” R. 121, Opinion at 22-23,. Page ID 5195-96. Indeed, the court noted that the Root Cause Report, prepared by B&W’s Project Manager Jason Chitwood on February 27, 2009, identified “seven factors that contributed to the early deactivation of the catalyst, none of which is attributable to Cormetech.” Id. at 5, Page ID 5178.

However, B&W cited other evidence of Cormetech’s fault. First, in his 2015 deposition, Chitwood affirmed the conclusions reached in the Root Cause Report. When asked if he believed there was any other contributing factor he could attribute to Cormetech, Chitwood implied that Corme-tech may have been at fault for not accounting for the potential for phosphorous poisoning in its design of the catalyst, but he conceded that he “didn’t know how they formulate it.” R. 115-6, Chitwood Dep. at 187, Page ID 5086.

In addition, Mark Low testified in deposition that poor combustion at the La Cygne Power Plant resulted in increased ash loading and the presence of gaseous phosphorous, which contributed to early deactivation. This was consistent with the seventh contributing factor identified by Chitwood in the Root Cause Report, but Low said the impact of phosphorous poisoning received more focus only after the even larger replacement catalyst provided by Cormetech to KCP&L in March 2009 deactivated almost as quickly as the first. This led Low to believe that Cormetech’s design or “formulation” of the catalyst “probably wasn’t optimum for the conditions that were specified.” R. 115-14, Low Dep. at 99-101, Page ID 5064. Asked to quantify the relative contributions of KCP&L’s operation mistakes and Corme-tech’s alleged design defect, Low offered that the design defect may have been 95% responsible for the early deactivation.

John Monacelli, another B&W employee, also testified in deposition that gaseous phosphorous played a significant contributing role in the deactivation of the catalyst, a factor Cormetech did not anticipate.

The district court dismissed all three of these sources as unreliable statements by B&W employees who “reasoned backwards from the fact that the catalyst failed earlier than expected to engage in rank speculation that the catalyst may not have been formulated properly.” R. 121, Opinion at 23, Page ID 5196. Further, the court noted that their speculation was “entirely negated” by the testimony of B&Ws own expert Stephen Niksa. Id. at 24, Page ID 5197. The court noted that Niksa’s report corroborated their “speculation” by concluding that phosphorous poisoning was the cause of the early deactivation and that Cormetech’s failure to recognize this potential was an oversight. In his deposition, however, Niksa was unable to identify a defect in the catalyst and the court viewed Niksa’s testimony as contradicting his report.

The deposition testimony of Chitwood, Low, and Monacelli stating their opinions about Cormetech’s failure to formulate a suitable catalyst, albeit not compelling, is some evidence. Granted, their opinions are not well supported and are informed by hindsight that compromises the value of their assessment of what Cormetech ought to have known and done in 2006-07, when the catalyst design was formulated. Still, the district court’s outright dismissal of their opinions as nothing but “rank speculation” is unwarranted at this stage.

Moreover, their opinions are buttressed by the evidence principally relied on by B&W to make out its “omission” case, the report of engineering expert Dr. Stephen Niksa:

By failing to properly account for the potential for P poisoning in its catalyst design for the La Cygne SCR, despite a clear warning in the remarkably high LOI [loss on ignition] levels from this furnace, Cormetech installed catalyst that was unfit for this SCR, and therefore had no chance to meet contract specifications.

R. 114-17, Niksa Report at 13, Page ID 4912. Based on his report, B&W contends that even though Cormetech’s catalyst proposal and management plan recognized the potential for chemical deactivation by calcium and phosphorous, and even though B&W’s specifications signaled a high potential for phosphorous poisoning, Corme-tech accounted only for the calcium masking potential and not for the phosphorous poisoning potential. This failure to account for the potential phosphorous poisoning is said to represent an omission that resulted in the installation of an unfit catalyst and was the reason for its premature deactivation. Id. at 10-13, Page ID 4909-12.

Right or wrong, Niksa’s technical opinion facially represents strong support for B&W’s claim. But the district court effectively disregarded the conclusion reached in Niksa’s report as undermined by his own deposition testimony given two months later. Again, the district court’s manifest error is in having viewed B&W’s evidence with a skeptical eye rather than an accepting eye. The court engaged in a weighing of the evidence that is impermissible at the summary judgment stage. The district court has identified weaknesses in B&Ws case, but we cannot agree that B&W’s evidence amounts to no more than a mere scintilla or a mere showing of “metaphysical doubt.” On viewing the evidence in the light most favorable to B&W, as we must, we cannot but conclude that there is a genuine issue for the fact finder as to whether Cormetech’s failure to anticipate the risk of phosphorous poisoning when it designed the catalyst was a cognizable “omission” warranting indemnification under the contract.

Accordingly, the district court’s award of summary judgment to Cormetech on the indemnity claim must also be vacated.

III. CONCLUSION

In sum, both of B&W’s claims of error are sustained. The summary judgment rulings on both of its claims against Corme-tech are VACATED and the case is REMANDED to the district court for further proceedings not inconsistent with this opinion.