ARC Welding Supply, Co. Inc. v. American Welding & Gas, Inc.

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 18-1546
ARC WELDING SUPPLY CO, INC., et al.,
Plaintiffs-Appellants,
v.
AMERICAN WELDING & GAS, INC.,
Defendant-Appellee.
____________________
Appeal from the United States District Court for the
Southern District of Indiana, Evansville Division.
No. 3:16-cv-00173-RLY-MPB — Richard L. Young, Judge.
____________________
ARGUED SEPTEMBER 26, 2018 — DECIDED FEBRUARY 14, 2019
____________________
Before EASTERBROOK, ROVNER, and ST. EVE, Circuit Judges.
ROVNER, Circuit Judge. This case arises from an Asset Pur-
chase Agreement (the “Agreement”) entered into in October
2014 between the plaintiffs, ARC Welding Supply Co. and its
owner Charles McCormick (collectively “ARC”), and the de-
fendant American Welding & Gas, Inc. (“American”). ARC
was a distributor of compressed gases and welding supplies
in Vincennes, Indiana, and sold substantially all of its assets
to American including its stock of asset cylinders. ARC filed
2 No. 18-1546
a complaint alleging that American breached the terms of the
Agreement for the purchase of the asset cylinders, and Amer-
ican filed a counterclaim for breach of contract. Following a
bench trial, the district court entered judgment in favor of
American and awarded damages in the amount of $33,765.52
plus interest, and ARC now appeals.
We take the facts in this case directly from the finding of
facts set forth by the district court following the bench trial.
As part of the Agreement, American paid ARC $1,534,796.06
for ARC’s assets, of which the primary assets were its asset
cylinders. Asset cylinders could vary in type and cost. For in-
stance, some cylinders are designed to hold compressed gas,
and others hold compressed liquids, and the cost can vary
from as low as $30 per cylinder to as high as $1,200 per cylin-
der. Businesses can profit from cylinders such as these by
renting them to businesses in need of compressed gas for use
in their operations, including restaurants or convenience
stores which rent carbon dioxide cylinders for soda fountains
that must then be refilled on a regular basis. As a result, a crit-
ical factor in determining the appropriate price for the sale of
ARC’s assets was the number of asset cylinders that could be
transferred. The sales price was based in part on McCormick’s
representation that there would be approximately 6,500 cyl-
inders. The parties could not ascertain a precise count of the
cylinders that would be transferred because many cylinders
were “out in the field” with customers, and therefore the
Agreement provided that American would hold back
$150,000—known as the Cylinder Deferred Payment—for 180
days to protect against a marginal shortage of up to 1,200 cyl-
inders, at a valuation of $125 per cylinder. In American’s ex-
perience, a 1,200-cylinder cushion was more than sufficient to
No. 18-1546 3
protect against any shortage that might occur, and ARC did
nothing to dissuade American from that belief.
The contract required American to engage in an audit to
count and verify the number of asset cylinders in the posses-
sion of ARC and its customers that would be transferred un-
der the contract. American conducted the audit between De-
cember 2014 and May 22, 2015. The audit started with a per-
sonal physical count of the “dock stock,” encompassing the
cylinders on-site at the Vincennes facility, which yielded
1,553. American then audited the cylinders in the field with
the 1,233 customers whose accounts were transferred from
ARC to American. To audit those remote accounts, American
first reviewed each customer’s payment history, and if the
records revealed that the customer consistently paid rent on a
certain number of cylinders and did not include a large num-
ber of exchanges, then American provided full credit for that
number of cylinders and would generally not visit that cus-
tomer to confirm the count. Where the records indicated a
large number of cylinder exchanges or abnormalities in the
records provided by ARC, American would perform a physi-
cal audit where an American representative would visit the
customer’s location, meet with the customer, locate the cylin-
ders, record the number on cylinder reconciliation forms, and
obtain the customer’s signature confirming that information.
The audit also included cylinders that were in the field
pursuant to 99-year leases with customers. For those ac-
counts, American would send a letter to customers seeking
verification of the count listed in the records, and if the cus-
tomer verified that count, then American provided full credit
to ARC. If there was a discrepancy in the count, or if the cus-
tomer failed to respond, American would follow up and often
4 No. 18-1546
conduct an in-person audit. One further adjustment to the cyl-
inder amount was required. Following its acquisition of the
asset cylinders, American began sending monthly cylinder
rent bills to the customers it acquired from ARC. It subse-
quently learned that a significant percentage of ARC’s cus-
tomers were no-rent customers, who paid only to have cylin-
ders refilled but did not pay rent to ARC on the ARC-owned
cylinders they were using. Such no-rent cylinders were not
considered asset cylinders under the Agreement unless re-
trieved.
According to the Agreement, settlement of the Cylinder
Deferred Payment was to occur on or before April 15, 2015.
Ron Adkins, American’s President and Chief Executive Of-
ficer, informed McCormick that the audit was taking longer
than anticipated, that the count was coming up shorter than
anticipated, and that it wanted to continue counting in order
to find every available cylinder. The continuation of the audit
was mutually beneficial, in that the more cylinders included
in the final count, the more American could earn and the
smaller ARC’s shortfall would be. The district court found
that McCormick extended the deadline and therefore that
American, in finishing the audit on May 22, 2015, did not miss
the contractual deadline for completing the audit and propos-
ing a “settlement” of the Cylinder Deferred Payment. The re-
sults of the audit revealed that ARC owned and transferred
4,663 asset cylinders to American, 1,837 cylinders short of the
6,500 promised in the Agreement. Following that audit, ARC
claimed that 16 uncounted cylinders were discovered at
Landree Mine, and American stipulated to provide a 16-cyl-
inder credit to ARC. Beyond that number, ARC has provided
no affirmative proof that the cylinder count as to any of the
customers was flawed.
No. 18-1546 5
ARC argued to the district court that American breached
the contract because it did not complete the audit within the
180-day period, and that American as a result owed the
$150,000 amount allocated as a holdback for the Cylinder De-
ferred Payment. The district court rejected that argument on
two independent grounds. First, the court held that American
did not miss the deadline for proposing a settlement, because
McCormick extended that deadline through at least May 28,
2015, at which point American had completed its audit and
proposed the settlement of the Cylinder Deferred Payment.
Second, the court held that the deadline ensured that, if ARC
delivered enough cylinders to warrant recovery of some or all
of the Cylinder Deferred Payment, ARC would receive pay-
ment by that deadline. The court held that if less than 5,300
cylinders were delivered, they would not be entitled to any of
the $150,000 payment. Because only 4,663 cylinders were de-
livered, the court held that regardless of the deadline, the fail-
ure to deliver more than 5,300 cylinders meant that they were
never entitled to receive any portion of the $150,000 Cylinder
Deferred Payment. The court therefore rejected ARC’s claim
for damages for breach of contract.
Based on that same reasoning, the court granted Ameri-
can’s counterclaim for breach of contract. Because the audit
reflected that ARC owned only 4,663 cylinders, and because
American stipulated to count the cylinders at Landree Mine,
the court held that American was entitled to retain the entire
$150,000 Cylinder Deferred Payment and to recover $125 for
each cylinder it failed to receive under the threshold of 5,300
covered by that Cylinder Deferred Payment contingency for
a total of $77,625. From that amount, the district court sub-
tracted the $43,859.48 that American admitted it owed in con-
6 No. 18-1546
nection with the settlement of the accounts receivable and en-
tered judgment in favor of American in the amount of
$33,765.52 plus interest.
ARC now appeals the court’s decision. In an appeal from
a bench trial, we review the district court’s findings of fact for
clear error, and its conclusions of law de novo. Rain v. Rolls-
Royce Corp., 626 F.3d 372, 379 (7th Cir. 2010). “Under Indiana
state law, the court’s goal in interpreting a contract is to ‘give
effect to the parties’ intent as reasonably manifested by the
language of the agreement.’” Id., quoting Reuille v. E.E. Bran-
denberger Constr., Inc., 888 N.E.2d 770, 771 (Ind. 2008). Unless
terms of a contract are ambiguous, the court will give the
terms their ordinary and plain meaning. Id. The district court
met that standard in this case, interpreting the contract con-
sistent with the plain and ordinary meaning of the words.
ARC argues that the district court erred in determining
that McCormick extended the deadline for the completion of
the audit. According to ARC, the Agreement could not be ex-
tended by McCormick because it was fundamentally a con-
tract for the sale of goods and the Uniform Commercial Code
(UCC) prohibits the oral modification of such contracts, and
because the parol evidence rule forbids oral modification of
contracts such as the Agreement that are totally integrated
and expressly prohibit oral modifications. It further argues
that American breached the contract by failing to tender a ver-
ified count within the required time period.
American contests both the applicability of the UCC to the
Agreement, and the argument that an oral modification was
prohibited. But we need not address those issues at all. The
district court based its judgment on two separate grounds.
No. 18-1546 7
The first related to whether the deadline for the audit was ex-
tended by McCormick on behalf of ARC. The second basis,
however, was independent of whether the deadline was ex-
tended. Recognizing the structure of the contract, the court
held that the purpose of the deadline was to ensure timely
payment to ARC if more than 5,300 cylinders were delivered,
but because the audit at no time revealed more than 5,300 cyl-
inders, the court held that ARC was entitled to no recovery
and the Cylinder Deferred Payment provisions were not
owed.
ARC does little to contest the latter basis for the district
court’s judgment, and it is controlling here. The contract pro-
visions at issue, Article 2, § 2.1(f) of the Agreement, provides
in relevant part:
Asset Cylinders. The Asset Cylinders in the pos-
session of Seller and in possession of customers
shall be counted and verified as part of the in-
ventory under Section 2.1(e) above. The base
number of Asset Cylinders is 6,500 units. The
parties agree that the Asset Cylinders will not
be verified to the satisfaction of the Purchaser
prior to Closing, therefore, $150,000.00 of the
Purchase Price shall be deferred for 180 days
(the “Cylinder Deferred Payment”). After the
180 [-day] cylinder reconciliation period, any
shortage of Asset Cylinders shall be charged at
the rate of $125.00 per unit against the Cylinder
Deferred Payment, and any excess of Asset Cyl-
inders will be added at the rate of $125.00 per
unit to the Cylinder Deferred Payment. The bal-
ance of the Cylinder Deferred Payment, if any,
8 No. 18-1546
shall be paid to the Seller plus interest at 4% per
annum from the Effective Date to date of settle-
ment. Settlement of the Cylinder Deferred Pay-
ment shall take place not more than fifteen (15)
days following the end of the cylinder reconcil-
iation period. …
First, ARC asserts that the language of that provision re-
quires the audit to be completed within 180 days, and that the
entire $150,000 Cylinder Deferred Payment is owed to it if
American fails to complete the audit by that deadline. That
reads language into the provision that is not there. The provi-
sion sets forth the 180-day period for the audit, but it never
contemplates as a consequence for exceeding that time pe-
riod, forfeiture of the entire $150,000 Cylinder Deferred Pay-
ment. The damage to ARC for the failure to complete the au-
dit in the 180 days is the delay in its receipt of any funds owed
to it of that $150,000 Cylinder Deferred Payment. Therefore,
if the ultimate audit had yielded an asset cylinder count that
exceeded 5,300, then ARC could claim that American owed it
damages for the delay beyond that 180 days in paying it the
amount owed, likely in the form of interest. See Checkers Eight
Ltd. P'ship v. Hawkins, 241 F.3d 558, 562 (7th Cir. 2001)
(“[a]bsent exceptional circumstances, actual damages caused
by monetary payments being late are not difficult to measure
because interest rates can be used to estimate the time value
of money.”); Farah, LLC v. Architura, Corp., 952 N.E. 2d 328,
337 (Ind. Ct. App. 2011) (“A party’s recovery for breach of
contract is limited to the loss actually suffered, and the party
may not be placed in a better position than he or she would
have enjoyed if the breach had not occurred.”). Nothing in
that provision, however, indicates that the failure to comply
will result in a forfeiture of the entire $150,000 amount.
No. 18-1546 9
Throughout the provision, the $150,000 amount is charac-
terized as a deferred payment for the total number of cylin-
ders produced. It does not purport to be a liquidated damages
provision for failure to comply with the timeliness require-
ment of the audit, although ARC would have the court treat
it as such. “Liquidated damages refers to ’a specific sum of
money that has been expressly stipulated by the parties to a
contract as the amount of damages to be recovered by one
party for a breach of the agreement by the other, whether it
exceeds or falls short of actual damages.” Officer v. Chase Ins.
Life & Annuity Co., 541 F.3d 713, 716 (7th Cir. 2008), quoting
Time Warner Entm’t Co. v. Whiteman, 802 N.E.2d 886, 893 (Ind.
2004). Typically, a liquidated damages clause provides for the
forfeiture of a specified sum of money upon breach without
proof of damages. Time Warner, 802 N.E.2d at 893. The lan-
guage in the contract in this case does not allocate any amount
to be forfeited for the failure to complete the audit in the spec-
ified time. ARC has pointed to no evidence to call into ques-
tion the court’s conclusion that “the purpose of the deadline
was to ensure that if Plaintiffs delivered enough cylinders to
warrant recovery of some or all of the Cylinder Deferred Pay-
ment, they would receive payment by that deadline,” and that
if they produced fewer than 5,300 cylinders, they would not
be entitled to any of the $150,000 deferred payment. The audit
reflected a significant shortfall in the 6,500-cylinder amount
envisioned in the Agreement, and the 4,663 cylinders ac-
counted for was far below the 5,300 threshold that would trig-
ger the Cylinder Deferred Payment. Because ARC was not en-
titled to any of the Cylinder Deferred Payment in that it pro-
vided less than the 5,300 cylinders, it could not have been
damaged by the delay in completing the audit. When zero
10 No. 18-1546
dollars are owed, the failure to pay it earlier is without conse-
quence.
ARC asserts that reading the provision as entitling it only
to damages related to the delay would allow American to
reap a windfall, because it could choose to never complete the
audit and would not have to pay the $150,000 Cylinder De-
ferred Payment. That argument is meritless. The issue as to
the appropriate damages if American entirely failed to con-
duct the audit at all is distinct from the issue of the damages
that would be appropriate if there was merely a delay in com-
pleting the audit, and nothing in the contract remotely sug-
gests that American could choose to forego the audit entirely
and retain the $150,000 amount. There is no argument here
that American did not act in good faith in its adherence to the
audit requirement of the contract.
ARC maintains, however, that the audit requirement of
the contract was not met because American never physically
inspected and counted each asset cylinder. ARC insists that
absent such physical inspection of each of the approximately
6,500 alleged asset cylinders, American failed to complete the
audit mandated by the contract. But nothing in the contract
purports to limit the audit to physical inspections. The con-
tract requires only that the “[t]he Asset Cylinders in the pos-
session of Seller and in possession of customers shall be
counted and verified as part of the inventory under Section
2.1(e).” The manner in which those asset cylinders shall be
counted and verified is not specified, and no requirement of
physical verification is included. The means of counting the
asset cylinders set forth by the district court reflected a rea-
sonable means of ascertaining a trustworthy count entirely
No. 18-1546 11
consistent with the “count and verify” requirement. For in-
stance, American physically counted the asset cylinders at the
Vincennes site, and credited ARC with the full amount of as-
set cylinders it claimed for each customer in the field where
the pattern of payments and exchanges corroborated those
numbers. Where a large number of exchanges or record ab-
normalities raised questions as to the proper count, physical
verification of the asset cylinders was conducted. American,
then, credited the records provided by ARC, and confirmed
the numbers where the validity of those records was ques-
tionable. Nothing in the contract precludes that approach as a
means of counting and verifying the asset cylinders in the
possession of the Seller and the customers, and in fact, the re-
liance on and acceptance of ARC’s records would presumably
benefit ARC. Other than the 16 cylinders in the mine, which
American credited, ARC has identified no instance in which
the numbers reached were inaccurate. The court’s finding that
the audit was completed on May 22, 2015, was consistent with
the record and certainly was not clearly erroneous.
Even given the court’s determination that the audit was
valid, ARC argues that the court erred in awarding damages
to American. First, ARC asserts that the damage award is im-
proper because ARC never promised to deliver a certain num-
ber of cylinders but rather pledged only to transfer all of the
cylinders in its possession which was expected to total ap-
proximately 6,500. Under this reasoning, a shortfall, no matter
how substantial between that 6,500 number and the actual
number transferred, would not entitle American to any com-
pensation. The language of the contract, however, supports
the district court’s contrary interpretation. The contract pro-
vides for payments to be made based on the degree to which
the asset cylinder count deviated from 6,500 providing that
12 No. 18-1546
“any shortage of Asset Cylinders shall be charged at the rate
of $125.00 per unit against the Cylinder Deferred Payment,
and any excess of Asset Cylinders will be added at the rate of
$125.00 per unit to the Cylinder Deferred Payment.” The
shortfall in this case was so substantial that it exceeded the
$150,000 held in reserve as a Cylinder Deferred Payment. The
district court did not err in holding that the contract contem-
plated the payment of $125 to American for each asset cylin-
der below that 6,500 number, first in the form of a credit to the
Cylinder Deferred Payment and then, when that source was
depleted, in the form of damages payable from ARC to Amer-
ican. Nor is there any support for ARC’s bald contention that
the $150,000 Cylinder Deferred Payment was a liquidated
damages provision which limited American’s recovery to re-
tention of that $150,000 amount. Nothing in the contractual
language supports that argument. See Officer, 541 F.3d at 716.
Finally, ARC claims that the district court erred in basing
its damage award on a $125 valuation for the cylinders. ARC
asserts that the valuation cannot be proper because if all 6,500
asset cylinders were valued at $125, the total of $812,500
would greatly exceed the contract price for all of ARC’s fixed
assets and asset cylinders of $603,905. As ARC recognizes,
however, asset cylinders can vary in value from $30 to $1,200
each, and therefore the value of the asset cylinders which
ARC failed to provide would depend on the cylinder type.
The parties to the contract determined that the cylinders
should be valued at $125, with that amount deducted from
the Cylinder Deferred Payment for a shortfall or added to the
Cylinder Deferred Payment if the asset cylinder number ex-
ceeded 6,500. The court did not err in using the valuation for
the cylinders that the parties themselves deemed the proper
number.
No. 18-1546 13
The decision of the district court is AFFIRMED.