320 F. 2d 645 - Pacific States Steel Corporation v. Isaacson Iron Works

This is a diversity action between corporations. Appellee is incorporated in and has its principal place of business within the State of Washington. Appellants are incorporated in and have their principal place of business within the State of California. The matter in controversy exceeds exclusive of costs and interest, the sum of $10,000. 28 U.S.C. § 1332. Jurisdiction on appeal rests on 28 U.S.C. § 1291.

This also involves a cross-appeal. Plaintiff below, Isaacson Iron Works (here both appellee and appellant) will be referred to as "plaintiff" or "Isaacson." Pacific States Steel Corporation and American Forge Company (here both appellees and appellants) will be referred to jointly as "defendants," and individually as "Pacific" or "Forge," respectively.1

Plaintiff sued in Count I on an open book account, and in Count II on an account stated.2 Defendants counterclaimed for an offset, charging defective merchandise was delivered.

It seems clear (and it was stipulated between the parties) that California law applied.

Plaintiff forged, fabricated and manufactured steel. Defendant Forge manufactured and processed steel. From 1952 on, plaintiff sold some $886,000 worth of steel to Forge, up to January 1958. In 1955, an analysis of this account, made by plaintiff, disclosed a higher proportion of rejections by defendants of plaintiff's products, as allegedly defective, than claimed by other customers. In November 1955, Isaacson refused to sell to defendants a particular type of steel (known as C-1040) except on a "without recourse" basis. Just what the two parties believe "without recourse" means will be hereafter developed.

The dispute here involves six purchase orders; three for "C-1040 type" steel, and three for non 1040 or "alloy" steel.3 The latter type was not sold on a "without recourse" basis.

(a) That the C-1040 steel purchases here involved were by defendants from plaintiff on the specific term: "subject to acceptance without recourse based on ultrasonic inspection by Isaacson." The trial court found that such purchases were so made, and made with the additional understanding that defendants waived any and all right to any and all claims for defective merchandise, except "pipe or slag." (Finding 11.) The plaintiff disputes this exception, claiming the C-1040 steel was sold "as is."

"Pipe" is steel with holes or bubbles in it. "Slag" is foreign material found within steel.

Forge did not use the steel delivered to it immediately. In certain instances, when attempting to later put this delivered steel to use, it allegedly discovered the steel to be of non-forging quality, and useless save for scrap.

(b) That plaintiff's ledger sheets (Ex. 1) constituted an open book account; that defendants became indebted to plaintiff for items furnished from November 1, 1957 to January 30, 1958 (save the last six items dated December 31, 1958); that the unpaid balance was $13,023.77; that this had been demanded and was unpaid. (Findings 5, 6 and 7.)

(c) That there was no account stated between plaintiff and Defendant Forge on April 31, 1957, for $56,449.77, or on January 31, 1958, in the sum of $28,402.75. (Findings 8 and 9.)

(d) That defendant Forge was entitled to an offset in the sum of $323.73 for authorized expenditures. (Defendant's Purchase Order 1929; Plaintiff's Invoice 9403. Finding 10.)

(e) That defendants were entitled to an offset of $5,101.38 for C-1040 steel purchased (P.O. S-893; Plaintiff's Inv. 9868(b)) because of "pipe" in said steel. (Finding 12.)

(f) That defendants were not entitled to offsets with respect to:

  (1) Defendants' P.O. S-744    Plaintiff's Inv. KK7434-A
  (2)      "      " "  S-745        "        "   KK7435
  (3)      "      " "  S-5110       "        "   LL4011-B
  (4)      "      " "  S-4508       "        "   LL9401

(Findings 13-16, inclusive.)

(g) That plaintiff was not entitled to interest from January 30, 1958 to date of judgment on the portion of the book account not offset by defendants' counterclaim.4

The Conclusions of Law awarded plaintiff $13,023.77, less $5,425.13 or $7,598.64 net.

Appellant Forge raises the following questions:

1. Was there an open book account?

2. Does the plaintiff rely on so-called "disputed" or "undisputed" items of the account?

3. Did the court err in casting the burden of proof on defendants with respect to "disputed" items, requiring them to be raised by counterclaim?

4. Was the ultrasonic inspection of the C-1040 items (and proof thereof) a condition precedent to recovery on such items?

5. Was there error in the court failing to find upon the chemical specifications for the C-1040 steel?

6. Was there error in failing to find on Purchase Order S-745, in the sum of $1,900.51, in view of the special agreement to settle this dispute?

Appellant Forge raises four other general "basic questions" as to the findings (whether they are clearly erroneous, sufficiently explicit, binding on this court if based on documentary evidence, binding on this court if erroneous in law, and finally a fifth: "the effect of plaintiff's failure to produce [certain] key witnesses").

Plaintiff Isaacson agrees upon the six legal questions above presented, but prefers to frame them in different language.5 It also raises a different basic question: "How can a seller, after experiencing an inordinately large amount and number of claims from a buyer, protect himself from such unjustified claims if the buyer is not bound by the terms of an agreement between the parties calculated to prevent this very abuse?"

Defendant Forge first recognizes the force and validity of Rule 52(a) of the Federal Rules of Civil Procedure. That general rule is inapplicable, however (urges Forge), (a) if the reviewing court, on the entire evidence, is left with the definite and firm conviction that a mistake has been committed; (b) where the finding largely rests on documentary evidence; (c) where the finding is induced by an erroneous view of the law. These are all sound legal principles, and we reaffirm them. The problem is whether they are, singly or jointly, here controlling.

An open book account, urges Forge, did not exist here, because the ledger sheets do not set forth "the requisite of the history of the transaction," or "a detailed statement"; hence, are allegedly fatally defective.

The extent of what need and need not be shown on an open book account is largely, as in so many evidentiary matters, a matter of degree, the determination of which is a matter lying within the judicial discretion of the trial judge.

California Code of Civil Procedure, Section 337a, was admittedly added in 1959,6 and was not retroactive in effect, but both parties agree it merely codifies the pre-existing case law of California on the subject. Agreeing on the law, Forge urges there was "insufficient history of the transaction," no "detailed statement," nothing to show the "nature of the transaction." It quotes from Tillson v. Peters, 1940, 41 Cal.App.2d 671, 107 P.2d 434, with partisan emphasis (its own italics underscored):

"The books contain no history of the transaction of the leasing of the ranch under which the installments of rental were paid. Neither the nature or amount of the original indebtedness, nor any unpaid installments of rental were entered in the books. The book entries did not purport to record the nature of the transaction, nor the debits and credits of the respective parties."

Plaintiff Isaacson, with the same partisan assurance, urges that its ledger cards "meet every requirement of that Code section," and specify the detail.7

The trial court thought, as we think, that the alleged open book account was a sufficiently "detailed statement, kept in a book, in the nature of debit and credit," (to quote Wright v. Loaiza, 1918, 177 Cal. 605, 171 P. 311), a case heavily relied upon by each side. And see the peculiar facts of Tillson v. Peters, supra, 41 Cal. App. at 677 and 678, 107 P.2d at 437 and 438. Further, we think the record here discloses such facts that an open book account could well have been implied from the conduct of the parties: that they had agreed that their various transactions "should be the subject of an account between them." Cf. Warda v. Schmidt, 1956, 146 Cal.App.2d 234, 303 P.2d 762. See also Costello v. Bank of America, N.T. & S.A., 9 Cir. 1957, 246 F.2d 807, 812; Parker v. Shell Oil Co., 1946, 29 Cal.2d 503, 507, 175 P.2d 838; Millet v. Bradbury, 1895, 109 Cal. 170, 41 P. 865.

We cannot see our way clear to hold on this issue the trial court was clearly erroneous, nor that it did utilize any erroneous theory of law, nor are we left with any firm or definite conviction that a mistake was committed by the trier of fact. The finding there was an open book account is not clearly erroneous.

C. Was There a Mistake Made by the Court as to the So-Called "Disputed Items"?

We think not, nor do we think it necessary to discuss this phase of the appeal in great detail. Paragraphs five and six of the first count of the first amended complaint plead an open book account. The defendant Forge urges two certain amendments (one made by order of court, Trans. pp. 365-6, line 20; Trans. p. 361, lines 14-16, upon motion of plaintiff unopposed by defendants; the second made upon stipulation of the parties, Trans. p. 315, lines 2-25) "did not erase the controlling effect of earlier pleaded language."8

By such reasoning, defendants urge, so we understand, that the pleading of the open book account was defective and improperly sustained as to the burden of proof — that plaintiff established an open book account for so-called "undisputed items," but not for "disputed items." Defendants emphasize certain testimony that Edenholm (credit manager for Isaacson) "let slip" that the "disputed items" were not paid or settled, yet in the next breath, defendants quote his contrary testimony. This conflict is one of fact and credibility, for the trier of facts to decide. From Edenholm's testimony that he made entries on the ledger cards only when authorized by Mr. Isaacson, defendants maintain the entries in the account were "tentative" only, and that the monthly statements sent by plaintiff to defendant Forge could not be considered "demands" — thus sustaining there was no demand for the payment of the undisputed items appearing on the open book account.

Although appellants purport to quote in their brief all the relevant evidence on the subject of the open book account,9 appellee points out ten "salient points" in the evidence omitted by appellants.10 Some one or more of these points, at least, are salient and material.

We agree with appellee that the finding an open book account existed, and the amount of it, is, despite some contrary evidence, fully, fairly and amply sustained by the evidence, and no improper shifting of the burden of proof was permitted.

D. Were the Findings in Error With Respect to the Two C-1040 Steel Orders for Which Plaintiff Recovered? I. e., Was an Ultrasonic Inspection, and Proof Thereof, a Condition Precedent to Plaintiff's Recovery?

We hold the findings were not in error, that the performance of any particular kind of an ultrasonic test was not a condition precedent; that even if we were to find that some ultrasonic test, as determined and established by the seller, was a condition precedent, that condition precedent had been complied with — i. e., that there was sufficient substantial proof of such tests.

Though interspersed with argument, we quote as a fair summary of the record, in the margin, a portion of plaintiff's brief on the subject.11 The best that may be said for defendants' argument here is that it is based on negative factors (that Hargis did not testify as to ultrasonic tests; that Dahl, who performed the tests, was not called to testify; that Rodgers was not present when the tests were made, etc., etc.) This may attack the convincing effectiveness of the existing positive testimony that such tests were made, but it does not destroy it. Defendants' statement "there is no evidence of any [ultrasonic] inspection" simply is not a correct statement of fact.

E. Was There Error in the Court's Failing to Find Upon the Chemical Specifications of C-1040 Steel?

Defendants claim Finding 13 is in error (relating to Debit Memo 502, Def's Ex. D-3, and P.O. S-744, Def's Ex. R) for $3,135.02.

Here defendants-appellants' position is stated as follows:

"Defendants contend that Isaacson so greatly exceeded the chemistry requirements of the P.O., the steel supplied having a carbon content of .51 to .52, rather than .40 to .45 as ordered, that the steel was worthless except for scrap purposes and indeed was not C-1040 steel.

"The Court, however, was of the view that the `without recourse' proviso precluded Forge from showing any defects in steel other than such as might be discovered by an ultrasonics inspection, to-wit, `pipe' or slag, notwithstanding the fact the Court expressly recognized that an ultrasonics inspection would not show chemistry deficiencies or excesses and notwithstanding the further fact that nothing done by Forge could alter the chemical content of the steel as furnished by plaintiff. Thus, the Court stated that the `non-recourse' language would permit defendants only to go into that aspect of defects which would have been shown by ultrasonic tests. Since the ultrasonic tests would not have disclosed chemistry, the Court opined any complaint as to chemistry was precluded by the `no recourse' language: that with regard to chemistry, that is just what the `no recourse' meant; as to chemistry, the `without recourse' provision is a limitation (p. 1081, line 12 to p. 1087, line 12.)" Appellants' Brief, pp. 39-40. (Emphasis by appellants.)

We find no merit in this because we find no condition precedent existed, other than ultrasonic inspection. We need not consider the plaintiff's argument as to the number and effect of heat operations applied to the steel after delivery,12 or the integrity of the tests.13 The evidence was conflicting as to the chemical nature of the steel delivered. We will not disturb the trial court's determination.

Finding 15, covering the C-1040 steel item of $817.09, which the court would not allow as an offset, is next attacked.

This finding by defendants' specific admission (Opening Br. p. 45) rests on disputed evidence. To quote defendants' expert witness' testimony in detail, and next characterize the contradictory testimony of plaintiff's witness as "weak," actually graphically portrays the weakness of defendants-appellants' position on this point.

F. We come to the sixth question — the findings of the court14 that defendants had failed to prove their right to offsets with respect to alloy steel (Debit Memo 503; P.O. S-745 for $1,900.57; and Debit Memo 201, P.O. S-5408 for $1,746.02 — Def's Exs. D-2, AA, D-5 and AD, respectively).

On the first of these items — the rejected billet was returned to Isaacson because of cracks. Tests were made to determine their cause. Hargis (for plaintiff) reported the acid-etched macro-sample produced a picture which indicated a great number of bursts originating from the center as well as the outside, which indicated a "tremendous thermal condition must have occurred" — i. e., blaming the condition found on the heating procedures used by Forge. Forge insisted it had placed the 12' to 15' long, 24" square billet, only five feet into the furnace; i. e., that the crack outside the portion not put in the furnace must have been due to an inherent defect in the steel.

On September 18, 1957, there was an oral agreement that plaintiff was to make another "macro-etch" towards the tonghold; and if it showed the same defect as the first macro-etch, this would substantiate Forge's position, and if it showed no defect, it would support Isaacson's position.

This oral agreement, says Forge, was confirmed by a letter dated October 29, 1957 (Defendants' Exhibit 1). This letter is self-explanatory, and reads:

"On September 18, 1957, Ed Rodgers and the writer visited you, Jerry Thorp, Walt Riddle and Claude Roberts at Niles. During the discussion about subject billet, it was agreed that we were to make another macro etch towards the tong hold. If this second etch (beyond zone subject to any heat) were in the same condition as original picture submitted with our letter of 9/9/57, then Isaacson Iron Works would acknowledge your claim; but if not, then American Forge Company would withdraw the claim (Debit 503).

"In our letter of 9/9/57 we stated that the original macro etch was taken in that portion `just beyond the point where the furnace door was' which is in error, rather the macro was 18" away from tonghold. The second macro etch is taken in the center of the tonghold (photo enclosed) and shows good material." (Emphasis appellants'.)

"It is conclusive," says Forge, "that if the earlier picture in reality * * * had been taken of a `cut' or sample from the unheated portion, i. e., toward the tonghold a portion * * * [of] the defect would have been shown to have existed in the unheated portion of the billet." This assumes, of course, that the billet was of sufficient length to possess an unheated portion. The length of the billet was thus critical.

Isaacson's answer to this is set forth in the margin.15 It points out that while two macro-etch photos were placed in evidence, three were testified to and about.

Suffice it to say, we must conclude there was a conflict in the evidence from which the trier of fact made a determination. His findings are supported by substantial and ample evidence, which we are not authorized to disturb.

G. With respect to Finding 16, no comment is required by this court to find support for it. Appellants agree "the witnesses on both sides did not take too positive a position as to the cause of the crack." Defendant-appellant Forge did not carry its burden of proof raised by its counterclaim.

As to all questions raised by defendants-appellants Pacific and Forge, the judgment of the court below is affirmed.

Three specifications of error are relied on by plaintiff-appellant, which are presented in the following questions:

1. "Is Isaacson entitled to an award of interest from the date that payment was due until date of Judgment, on that portion of Isaacson's claim not offset by Forge's counterclaim?"

2. "Were `pipe or slag' exceptions to Forge's waiver of all right to any claims for defective merchandise, when ordering C-1040 steel in 1956 on terms of `subject to acceptance without recourse'?"

3. "Was there an account stated between Plaintiff and Defendant American Forge Co. on April 30, 1957, and was there an account stated between Plaintiff and Defendant American Forge Co. on January 31, 1958?"

The court below found the open book account sued on in Count I was $13,023.77; that this amount was "ascertainable and certain," but that the amount of the claimed offset was in dispute — though claimed at the same figure, $13,023.77.

We think the offset was as "ascertainable and certain," and to the same effect and degree, as the amount claimed on the open book account. Appellant Isaacson characterizes his open book account as "ascertainable"; the offset as "unascertainable." We think one as certain — and as ascertainable (subject to the wisdom of the trial court in allowing or disallowing each item of either) as the other.

When a contract is sued upon and an offset claimed, then one may well refer to the sum due under the contract as liquidated, and the offset as unliquidated. Hansen v. Covell, 1933, 218 Cal. 622, 24 P.2d 772, 89 A.L.R. 670. The parties to a contract have ascertained and specified the amount to be claimed when they enter into it — not so with a running open book account.

The trial judge relied upon 1 Cal.Jur. 2 — "Accounts and Accounting," sec. 40, p. 363:

"With respect to the allowance of interest, accounts ordinarily draw interest only from the day on which they are settled and a balance is ascertained. The provision of the Civil Code [note] that every person who is entitled to recover damages that are certain or capable of being made certain by calculation, the right to which is vested in him upon a particular date, may also recover interest thereon from that date, has no application to actions to recover upon an open book or mutual account that was never settled or balanced, or to the items of the account as they become due, even though the claim be for goods sold and delivered." (Emphasis appellants'.) Defendants-appellees correctly point out that the cases cited by Isaacson are contract cases, not open book account cases.

The trial court also cited Arocena v. Sawyer, 1923, 60 Cal.App. 581, 593, 213 P. 523; Sea v. Lorden, 1918, 37 Cal. App. 444, 445, 174 P. 85; and Heald v. Hendy, 1891, 89 Cal. 632, 635, 27 P. 67, which are all open book account cases. And see the dicta in Lineman v. Schmid, 1948, 32 Cal.2d 204, 209-211, 195 P.2d 408, 4 A.L.R.2d 1380.

We hold the trial judge correctly cited the California law here controlling.

This without recourse agreement, urges Isaacson, means Forge was required to accept whatever was shipped to it, as steel — "without recourse."

If that had been the intent of the parties, why add the provision calling for an ultrasonic inspection? To agree to accept steel, without recourse, still requires the manufacturer to deliver steel, and not a substitute therefor — not pure slag, for example. Isaacson's "absolute" argument would render the dealings illusory. Isaacson recognizes this when it states it did not intend to ship material containing pipe or slag; or steel of a non-forging quality. The conduct of the parties16 indicates Isaacson adopted, as it should have, a lesser position than a right to ship Forge anything it desired to ship — whether forgeable steel or non-forgeable steel.

Further, the written expression of Isaacson's understanding of the meaning of the term "without recourse" — and particularly the one sentence most emphasized by plaintiff-appellant Isaacson in Plaintiff's Exhibit 11, clearly discloses it was "every bit of hazard connected with their use [referring to "torching," "and several other major factors entering into proper handling"] was yours"; meaning Forge's use of the steel.17 To hold that Isaacson had no duty other than to deliver whatever conglomorate it desired, calling it marketable steel, would, as we stated, render the contract totally illusory. See Mattei v. Hooper, 51 Cal.2d 119, 330 P.2d 625 (1958).

We are satisfied that reason, the law, and some evidence (although the latter is in conflict), establishes the correctness of Finding 12.

C. We find no error in the lower court's finding there was no "account stated," (Count II) but rather that an open book account was kept and rendered.

As to all questions raised by plaintiff-appellant Isaacson, the judgment of the court below is affirmed.

Thus, the judgment below is affirmed in all respects.