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Stern Oil Co., Inc. v. Brown

Supreme Court of South Dakota

February 14, 2018

STERN OIL COMPANY, INC., Plaintiff and Appellant,
v.
JAMES R. BROWN d/b/a EXXON GOODE TO GO and FREEWAY MOBIL, Defendants and Appellees,

          ARGUED ON NOVEMBER 8, 2017

         APPEAL FROM THE CIRCUIT COURT OF THE SECOND JUDICIAL CIRCUIT MINNEHAHA COUNTY, SOUTH DAKOTA THE HONORABLE LAWRENCE E. LONG Judge

          MICHAEL D. BORNITZ KENT R. CUTLER KIMBERLY R. WASSINK of Cutler Law Firm, LLP Sioux Falls, South Dakota Attorneys for plaintiff and appellant.

          RONALD A. PARSONS, JR. of Johnson, Janklow, Abdallah & Reiter, LLP Attorneys for defendants and appellees.

          MATTHEW S. MCCAULLEY LISA M. PROSTROLLO JON HANSEN of Redstone Law Firm, LLP Sioux Falls, South Dakota Attorneys for defendants and appellees.

          JENSEN, Justice

         [¶1.] This is the second appeal to this Court from a breach of contract action by Stern Oil Company, Inc. (Stern Oil) against James R. Brown (Brown). In Stern Oil Co., Inc. v. Brown (Stern Oil I), 2012 S.D. 56, 817 N.W.2d 395, Brown appealed a judgment awarding Stern Oil over eight years of lost profits exceeding $900, 000. This Court reversed and remanded, determining the circuit court erred in granting summary judgment in favor of Stern Oil on its breach of contract claims against Brown and by denying Brown's fraud claims against Stern Oil. On remand, a jury found in favor of Stern Oil on the breach of contract and fraud claims and awarded $260, 464 in damages. Stern Oil appeals that award, raising three issues for our review. Brown raises one issue by notice of review. We reverse and remand.

         Background

         [¶2.] Stern Oil is a fuel and petroleum distributor based in Freeman operated by Scott and Staci Stern and Scott's father, Gillas. The business supplies fuel at locations across the Midwest. Brown is a businessman from Gettysburg. Brown operates two convenience stores in North Sioux City, South Dakota: Goode to Go and Freeway Mobil.

         [¶3.] In 2005, Brown and Stern Oil entered into two ten-year Motor Fuel Supply Agreements (MFSAs) for Stern Oil to supply ExxonMobil branded fuel to Brown to sell at his two convenience stores. The MFSAs required Stern Oil to sell and deliver up to a contractually determined "Maximum Annual Volume" of fuel to Brown. Brown was obligated to purchase at least 75% of that amount annually. Approximately a year and a half into the ten-year agreements, Brown stopped purchasing fuel from Stern Oil.

         [¶4.] Stern Oil sued Brown for breach of contract. Brown counterclaimed and asserted that Stern Oil fraudulently induced him to enter into the MFSAs by verbally guaranteeing Brown a five-cent profit on each gallon of fuel sold at his convenience stores. Brown also asserted defenses to the validity of the MFSAs. The circuit court granted Stern Oil's motion for summary judgment on its claims for breach of contract and on Brown's fraud claims. The parties waived a jury on the issue of damages, and the case proceeded to a bench trial in October 2009 and January 2010. The circuit court awarded Stern Oil lost profits in the amount of $925, 317. Brown appealed and this Court reversed in Stern Oil I, determining that genuine issues of material fact existed on Stern Oil's breach of contract claim and Brown's fraud claims. 2012 S.D. 56, ¶ 23, 817 N.W.2d at 403-04.

         [¶5.] On remand to the circuit court, the matter proceeded to a jury trial on liability and damages. The jury found that Brown breached the MFSAs and rejected Brown's fraud claims and other contract defenses. The jury awarded Stern Oil lost profit damages in the amount of $260, 464. Following the trial, Stern Oil moved for recovery of prejudgment interest. Stern Oil also moved for costs and attorney's fees under the terms of the MFSAs requiring the "non-prevailing party" to pay attorney's fees and costs to the "prevailing party." The circuit court determined that Stern Oil was not the prevailing party and denied attorney's fees or costs to either party. The circuit court entered a judgment on the jury's verdict and for prejudgment interest of $143, 708.77 on the damage award.

         [¶6.] Stern Oil appeals the circuit court's judgment, raising three issues, which we reorder and restate as follows:

1. Whether the circuit court erred in instructing the jury that Stern Oil's damages had to be foreseeable to Brown.
2. Whether the circuit court erred by excluding Stern Oil's lost profit evidence.
3. Whether the circuit court erred in determining that Stern Oil was not a prevailing party entitled to attorney's fees and costs.

         [¶7.] Brown's notice of review challenges the circuit court's award of prejudgment interest. Brown asks this Court to consider whether prejudgment interest was erroneously calculated.

         Analysis

         1. Whether the circuit court erred in instructing the jury that Stern Oil's damages had to be foreseeable to Brown.

         [¶8.] Stern Oil objected to the following damage instructions at trial:

Instruction No. 30: The measure of damages for a breach of contract is the amount which will compensate the aggrieved party for all determent legally caused by the breach, or which, in the ordinary course of things, would be likely to result from the breach. Damages for a breach of contract which are not clearly ascertainable in both their nature and origin are unrecoverable. Consequential damages must be reasonably foreseeable by the breaching party at the time of contracting. If consequential damages were not reasonably foreseeable, then they are not recoverable.
Instruction No. 30A: Consequential damages are damages that do not arise within the scope of the buyer-seller transaction, but rather stem from losses incurred by the non-breaching party in its dealings, often with third parties, which were a proximate result of the breach, and which were reasonably foreseeable by the breaching party at the time of contracting.

         [¶9.] Stern Oil claims it was reversible error for the circuit court to give these instructions. It argues that lost profits resulting from an immediate payment discount given by ExxonMobil were recoverable as direct damages and not as consequential damages, and as such, the damages were not subject to a foreseeability requirement. Brown contends that any profits arising from the discount received from ExxonMobil were consequential to the breach of the MFSAs because they were based upon a third-party contractual agreement between Stern Oil and ExxonMobil. Brown was not a party to that agreement and claimed he was not aware of its terms. He maintains the jury was properly instructed. In the alternative, Brown claims that if an error occurred, it was harmless.

         [¶10.] In its complaint and at trial, Stern Oil asked for damages in the form of lost profits caused by Brown's breach of the MFSAs. Stern Oil presented evidence showing that there were three sources of profit that Stern Oil would have earned under the MFSAs. These sources of profit included: a 1.5-cent markup per gallon above the price paid by Stern Oil; profit earned by Stern Oil for transporting the fuel to Brown's convenience stores; and a 1.25% discount Stern Oil received from ExxonMobil for immediate payment on fuel Stern Oil purchased from ExxonMobil.

         [¶11.] At trial, Scott Stern (Stern) testified that the 1.25% prompt-payment discount received from ExxonMobil is a part of the total profit Stern Oil receives under the MFSAs. Stern stated that when Stern Oil takes ExxonMobil fuel from a terminal, ExxonMobil debits Stern Oil's bank account for the cost of the fuel the next business day. Thereafter, Stern oil receives a 1.25% credit off the purchase price of the fuel. Stern also testified that Stern Oil is not given an option regarding the terms of the discount and that ExxonMobil has been providing Stern Oil with the prompt-payment discount for at least 15 years. Stern claimed that Stern Oil relies on the 1.25% discount to set the amount of its markup on fuel and freight charges.

         [¶12.] The jury awarded lost profit damages to Stern Oil as follows: (1) $176, 152 for gasoline; (2) $0 for diesel fuel; (3) $61, 653 for freight; (4) $0 for the Stern Oil discount of 1.25%; and (5) $22, 659 for BIP contract damages.[1] Stern Oil claims that the jury did not award lost profits from the 1.25% fuel discount because the circuit court erroneously instructed the jury on its lost profit claim.

         [¶13.] A trial court has discretion in the wording and arrangement of its jury instructions, and therefore we generally review a trial court's decision to grant or deny a particular instruction under the abuse of discretion standard. However, no court has discretion to give incorrect, misleading, conflicting, or confusing instructions. Karst v. Shur-Co., 2016 S.D. 35, ¶ 8, 878 N.W.2d 604, 609 (quoting Vetter v. Cam Wal Elec. Coop., Inc., 2006 S.D. 21, ¶ 10, 711 N.W.2d 612, 615). "Therefore, 'when the question is whether a jury was properly instructed overall, that issue becomes a question of law reviewable de novo.'" Id. (quoting Vetter, 2006 S.D. 21, ¶ 10, 711 N.W.2d at 615).

         [¶14.] The Uniform Commercial Code (UCC), codified at SDCL Title 57A, applies to transactions in goods. SDCL 57A-2-102. Fuel sold under the MFSAs qualifies as "goods" under the UCC definition, SDCL 57A-2-105(1), and both parties acknowledge that the UCC applies to this transaction. Under Title 57A, a seller's damages for breach of contract after nonacceptance or repudiation are generally measured by "the difference between the market price at the time and place for tender and the unpaid contract price[.]" SDCL 57A-2-708(1); Vanderwerff Implement, Inc. v. McCance, 1997 S.D. 32, ¶ 11, 561 N.W.2d 24, 25-26. Subsection (2) of SDCL 57A-2-708 provides an alternative measure of damages to a seller for nonacceptance or repudiation of a contract. Under subsection (2), if the contract/market price remedy is "inadequate to put the seller in as good a ...


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