PSC Metals, Inc. v. S. Recycling, LLC

371 F.Supp.3d 443

PSC METALS, INC., Plaintiff/Counter-Defendant,

v.SOUTHERN RECYCLING, LLC, Defendant/Counter-Plaintiff.

Case No. 3:17-cv-01088

United States District Court, M.D. Tennessee, Nashville Division.

Signed March 4, 2019

Filed March 6, 2019

Andrew A. Warth, Taylor J. Askew, W. Travis Parham, Waller Lansden Dortch & Davis, LLP, Nashville, TN, for Plaintiff/Counter-Defendant.

James C. Bradshaw, III, Wyatt, Tarrant & Combs (Nashville Office), Elizabeth O. Gonser, Meredith L. Eason, Steven Allen Riley, Riley, Warnock & Jacobson, Nashville, TN, for Defendant/Counter-Plaintiff.

REDACTED MEMORANDUM & ORDER

ALETA A. TRAUGER, United States District Judge

On August 28, 2017, the court granted summary judgment in favor of PSC Metals, Inc. ("PSC") for breach of contract and denied summary judgment on counterclaims brought by Southern Recycling, LLC ("Southern"). (Docket No. 143.) The only outstanding issue in this case is the amount of damages, if any, to which PSC is entitled. During a telephone conference on January 4, 2019, the parties agreed that the forward progress of the case requires resolution of whether, as a matter of law, PSC may recover expectancy damages for Southern's breach of the parties' "Non-Binding Letter of Intent" ("LOI"). The court ordered the parties to submit supplemental briefing on the issue. (Docket No. 153.) On January 23, 2019, PSC filed its Brief supporting its entitlement to such damages. (Docket No. 155.) Southern filed a Response on February 6, 2019, (Docket No. 159), to which PSC filed a Reply on February 15, 2019 (Docket No. 162). For the reasons set forth herein, the court finds that PSC may not recover expectancy damages for Southern's breach of the LOI.

BACKGROUND

PSC and Southern are scrap metal recycling companies. On December 9, 2015, they entered into a Confidentiality and Non-Disclosure Agreement ("NDA") as part of discussions regarding PSC's potential purchase of Southern's Nashville assets and business operations. (Docket No. 9-1.) The discussions continued through 2016 and, on January 20, 2017, the parties signed the LOI. (Docket No. 9-2.) Although non-binding with regard to the terms and structure of the potential acquisition, the LOI included a binding exclusivity provision that granted PSC exclusive negotiating rights with Southern.

[redacted]

On March 7, 2017, Southern's president, John Fellonneau, received an inquiry regarding Southern's Nashville assets and business operations from an interested third party, Ferrous Processing and Trading ("FPT"). Like Southern and PSC, FPT is a scrap metal recycling company in the Nashville area. The inquiry came via telephone from William Sulak, FPT's Southeast Regional Director. Sometime following the March 7 call, Sulak arranged a meeting for himself, Fellonneau, and FPT's president, Dave Dobronos, to take place during an April industry convention in New Orleans. Meanwhile, negotiations between Southern and PSC continued pursuant to the terms of the LOI. On April 20, 2017, PSC provided a draft Asset Purchase Agreement ("APA") to Southern.

One week later, on April 27, 2017, the men met in the cocktail lounge of an unidentified New Orleans restaurant. Dobronos raised the possibility of Southern's selling its Nashville assets to FPT. Fellonneau responded that Southern was not for sale unless someone was willing to pay $ 30 million. The matter was not discussed further at the meeting. On May 10, 2017, Southern provided PSC with a response to its April 20 draft APA and requested a draft from PSC of other deal-related documents. On May 21, 2017, the exclusivity period expired. Two days later, Sulak phoned Fellonneau to again express FPT's interest in Southern's Nashville assets. [redacted] The following day, Fellonneau notified Southern's Board of Managers of FTP's inquiry.

Southern subsequently denied a request from PSC for an extension of the exclusivity period. But Southern continued to engage in negotiations with PSC, including a face-to-face meeting on May 30, 2017, followed by other discussions. (Docket No. 29-1 (First Declaration of Kevin Lewis).) On June 9, 2017, Southern contacted FPT to discuss due diligence requirements for a proposed asset purchase. Later that month, Southern provided FPT with high level terms for a potential deal. On July 7, 2017, Southern suspended discussions with PSC via email. The email stated that Southern had "received an indication of interest in our Nashville assets from another party indicating a superior price as well as more favorable terms." (Docket No. 75-6.) Ultimately, no deal was reached with FPT, and Southern decided not to sell its Nashville assets.

On July 26, 2017, PSC filed suit for breach of contract, promissory estoppel, and breach of the duty of good faith and fair dealing. On April 5, 2018, Southern filed its Answer and Counterclaim against PSC (Docket No. 91), alleging that PSC breached the NDA and LOI prior to Southern's alleged breach of the LOI. On April 13, 2018, PSC filed a Motion for Partial Summary Judgment, seeking judgment that Southern breached the LOI in the April 27, 2017 meeting with FPT. (Docket No. 94). On July 25, 2018, PSC moved for summary judgment on Southern's counterclaim. (Docket No. 132.) The court granted PSC's motions on August 27, 2018, finding that Southern breached the LOI's exclusivity provision and waived its right to assert a first material breach by PSC. (Docket No. 142.)

PSC now seeks approximately $ 90,000 in reliance damages and approximately $ 21.6 million in expectancy damages. (Docket No. 151-1 at 2–5.) Its alleged expectancy damages are based in part on a calculation of the value of Southern's Nashville business. (Id. at 3). [redacted] (Id. at 2.) Southern asserts that only reliance damages are available as a matter of law.

ANALYSIS

Whether PSC may recover expectancy damages for Southern's breach of the exclusivity provision presents a novel issue of law. "Courts and scholars have quibbled about the appropriate measure of damages when a contract to negotiate has been breached. In the opinion of some, damages should be limited to the sums spent in reliance on the broken promise. In the opinion of others, expectancy damages may be available." Butler v. Balolia , 736 F.3d 609, 615–16 (1st Cir. 2013) (internal citations omitted); see also Fairbrook Leasing, Inc. v. Mesaba Aviation, Inc. , 519 F.3d 421, 429 (8th Cir. 2008) (Whether to "categorically preclude[e] benefit-of-the-bargain damages for all breaches of binding preliminary agreements ... is a difficult, largely unsettled question of remedies."). "[T]he choice of the proper measure of damages is a question of law to be decided by the court." BancorpSouth Bank, Inc. v. Hatchel , 223 S.W.3d 223, 228 (Tenn. Ct. App. 2006). However, no Tennessee court has weighed in on the availability of expectancy damages for beach of a preliminary agreement. "When resolving an issue of state law," a federal court must "look to the final decisions of that state's highest court, and if there is no decision directly on point, then [it] must make an Erie guess¹ to determine how that court, if presented with the issue, would resolve it." In re Fair Fin. Co. , 834 F.3d 651, 671 (6th Cir. 2016) (quoting Conlin v. Mortg. Elec. Registration Sys., Inc. , 714 F.3d 355, 358–59 (6th Cir. 2013) ). The inquiry before the court is therefore whether the Tennessee Supreme Court would allow expectancy damages for breach of a non-binding letter of intent's binding exclusivity provision.

As a general matter, "[e]xpectancy damages are recoverable when they are actually foreseen or are reasonably foreseeable, are caused by the breach of the other party, and are proven with reasonable certainty." § 12:5. Damages—Expectation damages, 22 Tenn. Prac. Contract Law and Practice § 12:5. The role of foreseeability in the context of expectancy damages can be traced back to the seminal contract law case of Hadley v. Baxendale , 156 Eng. Rep. 145 (1854). In Hadley , a grist mill was forced to suspend operations because of a broken shaft. Id. A mill employee took the shaft—for which the mill had no replacement—to a carrier for shipment to an engineering company, which needed the broken shaft in order to build a new one. Id. The employee did not explain to the carrier that the shaft was critical to the mill's functioning. Id. The carrier, without good reason, delayed shipment of the shaft for several days; as a result, the mill was shut down for longer than expected and incurred significant lost profits. Id. The court did not find the carrier liable for the mill's lost profits because the carrier did not know, and should not have reasonably known, that delay in delivering the shaft would cause the mill's entire operation to shut down. Id. The court held that recovery is only allowed for damages "as may fairly and reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as a probable result of the breach of it." Id. The rule from Hadley has been adopted in Tennessee. See, e.g., Wills Elec. Co. v. Mirsaidi , No. M2000-02477-COA-R3CV, 2001 WL 1589119, at *4 (Tenn. Ct. App. Dec. 13, 2001) (citing Turner v. Benson , 672 S.W.2d 752 (Tenn. 1984) ).

Thus, "foreseeability is the touchstone of contract damages" in Tennessee. Metro. Gov't of Nashville & Davidson Cty., Tenn. v. State St. Bank & Tr. Co. , 187 F. App'x 511, 514 (6th Cir. 2006). Tennessee courts "permit the recovery of damages that are the normal and foreseeable result of a breach of contract." Nat'l Door & Hardware Installers, Inc. v. Mirsaidi , No. M2013-00386-COA-R3CV, 2014 WL 3002007, at *5 (Tenn. Ct. App. June 30, 2014) (quoting Wilson v. Dealy , 222 Tenn. 196, 434 S.W.2d 835, 838 (1968) ). Damages are a foreseeable result of a breach if they "may be reasonably supposed to have entered into the contemplation of the parties." BVT Lebanon Shopping Ctr., Ltd. v. Wal-Mart Stores, Inc. , 48 S.W.3d 132, 136 (Tenn. 2001) (quoting Simmons v....