Transit Wireless, LLC v. Fiber-Span, Inc. (In re Fiber-Span, Inc.)

40 F.4th 79

IN RE: FIBER-SPAN, INC., Debtor

Transit Wireless, LLC

v.Fiber-Span, Inc.; Allegheny Casualty Company

Allegheny Casualty Company, Appellant in No. 21-1712

Daniel E. Straffi, Chapter 7 Trustee for Fiber-Span, Inc., Appellant in No. 21-1713

Transit Wireless, LLC, Appellant in No. 21-1806

Nos.: 21-1712

21-1713

& 21-1806

United States Court of Appeals, Third Circuit.

Argued January 19, 2022

Filed: July 5, 2022

Scott J. Freedman, Benjamin W. Spang [ARGUED], Dilworth Paxson, 457 Haddonfield Road – Suite 700, Cherry Hill, NJ 08002, Counsel for Daniel E. Straffi, Chapter 7, Trustee for Fiber-Span, Inc.

Michael D. Malloy, Finestein & Malloy, 6 Commerce Drive – Suite 304, Cranford, NJ 07016, Michael E. Norton [ARGUED], Hand Baldachin & Associates, 1740 Broadway – 15^th Floor, New York, NY 10019, Counsel for Transit Wireless, LLC

Adam P. Friedman, Chiesa Shahinian & Giantomasi, One Boland Drive, West Orange, NJ 07024, Michael Grohs [ARGUED], Saiber, 18 Columbia Turnpike – Suite 200, Florham Park, NJ 07932, Counsel for Allegheny Casualty Company

Before: JORDAN, RESTREPO, and PORTER, Circuit Judges

OPINION OF THE COURT

JORDAN, Circuit Judge.

Everyone, it seems, wants access to the internet and phone service all the time and everywhere, even when underground. This case is about an unsuccessful effort to meet that demand in New York City.

Transit Wireless, LLC, secured a contract to bring telecommunications services to New York City's subway system. As part of that project, Transit subcontracted with Fiber-Span, Inc., to develop remote fiber nodes (the "Nodes") to amplify telecommunication signals in the first six subway stations to receive such services. The subcontract imposed on Fiber-Span responsibility for an extensive set of technical requirements and rigorous testing of the Nodes. Fiber-Span also agreed to subsidize certain developmental costs in the hopes of being selected as the contractor for the project's remaining 271 subway stations. In exchange, Transit agreed that, if Fiber-Span was not selected to supply Nodes for the remaining stations, Transit would reimburse those front-loaded costs. To close the deal, Fiber-Span obtained from Allegheny Casualty Company a performance bond in favor of Transit.

Strains in the relationship between Transit and Fiber-Span soon began to show, particularly when Transit raised technical concerns about the Nodes. In response, Fiber-Span retrofitted the Nodes, which addressed Transit's initial concerns but created other problems. Transit asserted that Fiber-Span remained in breach of contract after the retrofitting, but it nevertheless took the network live, even as the parties' relationship devolved from strained to broken. Transit insisted that Fiber-Span replace the retrofitted Nodes, while Fiber-Span said it would do so only after it was awarded a contract to supply them to the remaining subway stations. Those competing positions hardened over the course of a year. Although it became clear that Fiber-Span would not replace the Nodes, Transit continued to use them for two more years. Eventually, Transit sued both Fiber-Span and Allegheny in New York state court for the full value of the contract and more. Fiber-Span later filed for bankruptcy in the District of New Jersey, and the state claims ended up in the Bankruptcy Court there.

The Bankruptcy Court and, on appeal, the District Court came to different conclusions on a series of issues: namely, acceptance of the Nodes, breach of contract, resulting damages, and liability on the bond. We reach yet a third and somewhat different set of conclusions. In our view, Transit's decision to keep using the Nodes was consistent with the acceptance of non-conforming goods. And while Fiber-Span indeed breached the contract, the damages it owes must reflect the difference in value between what Transit received and what it was promised, which is less than what the Bankruptcy Court and District Court awarded. Consistent with the reasoning of both those courts, however, we hold that Transit was not required to compensate Fiber-Span for not selecting it to provide Nodes for the remaining subway stations. Finally, we conclude that Transit's claim to the payment on the performance bond is time-barred, so Allegheny is not liable. We will thus affirm in part, vacate in part, and remand to the District Court with instructions to remand to the Bankruptcy Court to recalculate damages.

I. BACKGROUND

To untangle the several arguments and issues before us, a detailed factual recitation is required.

A. The Purchase Agreement

In 2007, Transit was awarded an exclusive license by the Metropolitan Transportation Authority and the New York City Transit Authority (collectively, the "MTA/NYCTA")¹ to bring telecommunications services to 277 New York City subway stations (the "License"). Under the License, Transit would, in turn, sell network access to telecommunications carriers to allow voice and data services to be delivered to their customers. Although Transit helped design and develop the network's engineering protocols and technical specifications, it was not capable of designing or manufacturing the network's equipment. It therefore decided to subcontract that work to others.

The project was broken into two stages: the first six stations (the "Initial Build") and the remaining 271 subway stations (the "Full Build"). Transit selected Fiber-Span to develop, manufacture, and supply seventeen Nodes for the Initial Build. Their contract contemplated an extensive set of technical requirements, which included a testing and payment plan (the "Purchase Agreement") that incorporated by reference requirements laid out in the License. The parties ultimately settled on a purchase price of $704,382, which was later amended to $680,997. Fiber-Span agreed to obtain a performance bond to guarantee its work. And, in the hopes of being selected for the Full Build, it also agreed to cover certain research, development, and engineering costs of the project. In exchange, Transit promised that, if Fiber-Span was not selected for the Full Build, Transit would pay Fiber-Span $450,000, a sum they called the "initial build compensation" ("IBC"). Payment of the IBC, however, was contingent upon specified conditions being met, one of which was that the Nodes had to meet all quality requirements in the Purchase Agreement.

The Purchase Agreement required, among other things, that the Nodes operate properly in an ambient temperature of -25°C to 55°C; that power consumption be limited to a maximum of 395 watts; and that the Nodes have an ingress protection rating of "IP66."² Fiber-Span elsewhere warranted that the Nodes would be "free from defects" and conform with the Purchase Agreement's specifications until the later of twenty-seven months after being delivered to Transit or twenty-four months after being put into operation (the "Warranty Provision"). (J.A. at 406.) It also guaranteed that any non-conforming Nodes would be repaired or replaced at Fiber-Span's cost for approximately twenty years, including any "de-installation and re-installation charges" (the "Repair and Support Provisions"). (J.A. at 406.)

Transit and Fiber-Span executed the Purchase Agreement on October 12, 2010. The parties agreed that New York state law would govern "any transactions or disputes arising [there]under[ ]." (J.A. at 417.) Simultaneous with its execution of the Purchase Agreement, Transit issued an order to purchase sixteen Nodes at a price of $704,382. For reasons not apparent on the record, it issued an amended purchase order in January 2011 that increased the number of Nodes to seventeen and decreased the total purchase price to $680,997.

B. The Performance Bond

Soon after the initial purchase order, Allegheny Casualty Company issued a bond for $704,382, guaranteeing Fiber-Span's performance (the "Bond"). It was never changed to reflect the amended and lower price. The Bond included a two-year limitations period, requiring that "[a]ny suit ... be instituted [by Transit] before the expiration of two (2) years from the date on which final payment under the [Purchase Agreement] falls due." (J.A. at 162.)

C. The Initial Build

Payment for the Initial Build under the Purchase Agreement was based on the passing of seven milestones: (1) "10% of Purchase Order value with order"; (2) "10% of Purchase Order value on delivery of critical components to [Fiber-Span for use in making the Nodes]"; (3) "10% of Purchase Order value on [Fiber-Span] carrying out successful pre-testing"; (4) "5% of Purchase Order value on passing FCC tests"; (5) "5% of Purchase Order value on passing interoperability testing"; (6) "40% of Purchase Order value on delivery ... after successfully passing all required tests"; and (7) "20% of Purchase Order value on successful commissioning and [Nodes] ready for commercial service or 3 months after delivery of [Nodes] to [Transit,] whichever is the earlier." (J.A. at 16, 58, 398.) With the exception of Milestone 7, all payments were to be made "on or about the 45th day from the day of receipt of a Correct Invoice[.]" (J.A. at 399.)

Milestones 1 and 2 were satisfied without difficulty, but when testing of the Nodes for Milestone 3 was underway, Transit raised an issue regarding the Nodes' excessive heat output and resulting high surface temperatures.³ It sent a letter to Fiber-Span on February 28, 2011, stating that "protection would need to be incorporated" if the Nodes' external surface temperature exceeded 60°C. (J.A. at 72, 744.) Fiber-Span responded that it was "in [the] process of incorporating [an] engineering improvement" to address the surface temperature issue, and that it would "retrospectively deploy this solution to the 17 [Nodes] being delivered." (J.A. at 64, 749.) In the interim, however, Fiber-Span planned to retrofit the Nodes with fans for cooling and shields to protect the fans from environmental contaminants such as dust or liquids.

Despite Transit's concerns, Fiber-Span passed the...