Union Tank Car Co. v. Nudevco Partners Holdings, LLC

2019 IL App (1st) 172858

123 N.E.3d 1177

429 Ill.Dec. 118

UNION TANK CAR COMPANY, Plaintiff-Appellee and Cross-Appellant,

v.NUDEVCO PARTNERS HOLDINGS, LLC, Defendant-Appellant and Cross-Appellee.

No. 1-17-2858

Appellate Court of Illinois, First District, SECOND DIVISION.

January 15, 2019

Duane Morris LLP, of Chicago (Paul E. Chronis and Elinor H. Murárová, of counsel), for appellant.

DLA Piper LLC, of Chicago (Thomas F. Geselbracht and Eric M. Roberts, of counsel), for appellee.

PRESIDING JUSTICE MASON delivered the judgment of the court, with opinion.

¶ 1 Following a 2017 bench trial, plaintiff-appellee, Union Tank Car Company (Union Tank), was awarded $1.27 million in damages as a result of the breach of a lease guaranty by defendant-appellant, NuDevco Partners Holdings, LLC (NuDevco). On appeal, NuDevco challenges the verdict, claiming the trial court erred by (i) concluding that Union Tank's cause of action was not governed by the Uniform Commercial Code (UCC) ( 810 ILCS 5/1-101 et seq . (West 2016) ), (ii) awarding Union Tank damages when Union Tank failed to satisfy the UCC's condition precedent to the recovery of damages, (iii) awarding damages to Union Tank for anticipated blasting and future storage costs, and (iv) admitting certain evidence, which, in turn, influenced the amount of damages.

¶ 2 Union Tank cross-appeals from the trial court's refusal to award the present value of lost future rent under the lease and the trial court's deduction of $10,000 from Union Tank's petition for attorney fees.

¶ 3 For the reasons that follow, we affirm in part and vacate in part.

¶ 4 BACKGROUND

¶ 5 In January 2003, Ponderosa Petroleum Company (Ponderosa) entered into a lease with General Electric Railcar Services Corporation (GE Railcar) for 47 railcars to carry crude petroleum. In the ensuing years, the parties executed numerous riders providing for lease terms ending between May 2017 and February 2020. On April 1, 2015, Associated Energy Services, LLC (Associated Energy) assumed the obligation to make payments under the lease, although Ponderosa remained a party to the lease.

¶ 6 Associated Energy is a wholly owned subsidiary of NuDevco. On March 3, 2015, NuDevco executed a guaranty in favor of GE Railcar to pay Associated Energy's obligations under the lease. The terms of the guaranty provided that NuDevco would

"absolutely, irrevocably and unconditionally guarantee the full and prompt payment when due of all the obligations * * * due under the Leases, including, but not limited to, rent, service charges, freight, railroad charges, * * * [and] cleaning charges * * * together with all other sums which may or shall become due and payable pursuant to the provisions of the Leases, including, without limitation, any damages resulting from the Lessee's failure to perform its obligations thereunder."

The guaranty further provided that NuDevco would reimburse Union Tank for all costs it incurred in enforcing the guaranty, including reasonable attorney fees.

¶ 7 In September 2015, Union Tank acquired the lease, riders, and railcars from General Electric Capital Corporation, which owned or controlled (directly or indirectly) all of the interest in GE Railcar.

¶ 8 On September 1, 2015, Associated Energy sent a notice of termination of the lease to GE Railcar citing as justification that the cars were approaching the end of their permitted use to haul crude oil. No provision of the lease authorized termination for this reason. At the same time, Associated Energy also began returning the railcars to Union Tank. Associated Energy discontinued rental payments as of September 30, 2015, and returned all the leased cars to Union Tank by December 2015. Union Tank then invoked the guaranty, but NuDevco refused to honor it.

¶ 9 On March 10, 2016, Union Tank filed a complaint against NuDevco alleging breach of the guaranty. The complaint alleged that the reason given for Associated Energy's termination of the lease was not valid per the lease terms and NuDevco's refusal to comply with Union Tank's demand for payment was a material breach of the guaranty.

¶ 10 At the bench trial, Union Tank presented evidence that Associated Energy sent all of the leased railcars to a Union Tank facility in Evanston, Wyoming, without first informing Union Tank. Because that facility was unable to process that number of cars, Union Tank transferred 39 of the 47 railcars to a facility in Kansas, 2 of the cars to a facility in Texas, and kept only 6 in Wyoming. The cars were cleaned at those locations, at a cost of $137,690.09, of which Associated Energy paid only $60,710. Union Tank also incurred costs (known as "freight") in moving the railcars from Wyoming to Kansas and Texas and "switching" charges in connection with transporting the cars. A switching charge is incurred when a car is transported from a main line railroad and "switched" to storage by way of a short-line railroad or privately held yard.

¶ 11 Union Tank had to pay to store the cars after their return, as it had excess inventory of those specific railcars and could not market them to new customers. (Union Tank had insufficient yard space to store the cars on its own and generally shipped excess inventory to third-party railyards.) Union Tank again incurred freight and switching charges in shipping the cars from where they were cleaned to where they were ultimately stored. Through the date of trial, Union Tank incurred $192,975.80 in freight costs, $9605 in switching costs, and $41,315.30 in storage charges.

¶ 12 As evidence to support these incurred costs, Union Tank introduced invoices that it received from third parties. While none of the third parties generating the invoices were called to testify, Frederick Koenig, a 40-year Union Tank employee currently serving as Union Tank's director of fleet repair, testified that Union Tank receives freight invoices through an Internet portal or via e-mail in the ordinary course of its business. A Union Tank employee then signs the invoice, whereupon it is routed to the accounts payable department, which generates payment by check or electronically. William Constantino, the general manager of Union Tank's leasing business unit, testified that he receives similar invoices for storage, switching, and cleaning charges, which are checked for accuracy and then sent to him for countersignature if above a certain amount. According to Constantino, he receives these invoices during the normal and typical course of his business activity anytime Union Tank has idle equipment in storage. Finally, Union Tank's controller and vice president for the leasing business unit, James Murauskis, testified that, after the invoices (for cleaning, freight, storage, or switching) are routed to accounts payable, the invoices are paid.

¶ 13 Murauskis's testimony regarding payment was based on a spreadsheet Union Tank generated in the course of its business. That spreadsheet listed the bills associated with the 47 railcars Associated Energy returned and linked each invoice to the authorization for payment by wire transfer through Bank of America. NuDevco objected to Murauskis's testimony on this issue given that the payment confirmation pages from Bank of America were not introduced at trial.

¶ 14 In addition to the costs incurred as of the date of trial, Union Tank also sought $97,215.90 in storage costs for the remainder of the lease terms. In support of these costs, Constantino testified that in the beginning of 2016, shortly after Associated Energy returned the leased cars, Union Tank had 3000 DOT-111 cars (the type leased by Associated Energy) in storage and not leased to customers. But by the end of 2016 and at the time of trial, Union Tank had leased only 550 DOT-111 cars to new lessees while the number of cars in storage had increased to 6000. (The remainder of Union Tank's DOT-111 inventory—approximately 16,000 cars—was leased.) Constantino testified that the pace of leasing these cars was not increasing. While Constantino nevertheless expected to eventually re-lease the 47 cars Associated Energy returned, he admitted that he could not make a final determination as to the fate of the cars until they are brought to the repair shop and Union Tank undertakes an economic evaluation of their condition.

¶ 15 Finally, the evidence at trial revealed that before it could lease the 47 railcars to other customers, Union Tank would need to "blast" the interior of the cars to remove the residue from the prior service, namely, crude oil. Union Tank introduced evidence that the railcars would necessarily be used to transport something other than crude oil, as they no longer complied with governmental regulations for the transport of crude petroleum. Based on the size of the cars, blasting would cost Union Tank $109,930; however, blasting had not occurred as of the date of trial, given that the cars had not yet been reassigned to transport a different commodity.

¶ 16 Following the conclusion of Union Tank's case in chief, NuDevco moved for a directed verdict, which was denied after briefing. NuDevco did not present any evidence, and on May 18, 2017, the trial court found in favor of Union Tank, awarding it $192,975.80 in freight costs, $207,510.18 in cleaning costs, $41,315.30 in past due storage costs, $97,214.90 in future storage costs, $109,930 in "anticipated future blasting," and $743,912.90 in past due rent, amounting to a total of $1,332,149, plus prejudgment interest and attorney fees to be determined. The trial court did not award damages for the present value of future rent because the lease did not contain a rent acceleration clause.

¶ 17 Union Tank filed its attorney fee petition, and while that petition was pending, NuDevco moved for reconsideration of the trial court's judgment, which was denied.

¶ 18 On December 21, 2017, the court issued its order on the fee petition and other miscellaneous relief, granting Union Tank attorney fees in the amount of $255,139.66, which was $10,000 less...