Kerry Bodenhamer Farms, LLC v. Nature’s Pearl Corp., 2018 NCBC 83.
STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE SUPERIOR COURT DIVISION DAVIE COUNTY 16 CVS 217
KERRY BODENHAMER FARMS, LLC,
Plaintiff,
v. ORDER AND OPINION ON MOTIONS FOR SUMMARY JUDGMENT NATURE’S PEARL CORPORATION; JERRY SMITH; and LE BLEU CORPORATION,
Defendants.
1. Over the last ten years, Plaintiff Kerry Bodenhamer Farms, LLC (“KB
Farms”) has sold hundreds of tons of muscadine grapes to Defendant Nature’s Pearl
Corporation. This dispute concerns a single shipment of grapes during the 2014
harvest. KB Farms contends that Nature’s Pearl improperly refused to pay for the
grapes. Nature’s Pearl says they were fermented and thus unusable. Each accuses
the other of breaching the governing contract (with KB Farms asserting that Nature’s
Pearl’s owner, Jerry Smith, and an affiliate, Le Bleu Corporation, should also be
liable for Nature’s Pearl’s alleged breach).
2. The parties’ motions for summary judgment are pending. For the following
reasons, the Court GRANTS Defendants’ motion and GRANTS in part and
DENIES in part Plaintiff’s motion.
Wyche, P.A., by Wade S. Kolb III, Matthew T. Richardson, and Eric B. Amstutz, and Brooks, Pierce, McLendon, Humphrey & Leonard, LLP, by Kearns Davis and Jessica Thaller-Moran, for Plaintiff Kerry Bodenhamer Farms, LLC. Nelson Mullins Riley & Scarborough, LLP, by G. Gray Wilson and Lorin J. Lapidus, for Defendants Nature’s Pearl Corporation, Jerry Smith, and Le Bleu Corporation.
Conrad, Judge. I. BACKGROUND
3. The Court does not make findings of fact in ruling on motions for summary
judgment. The following background, describing the evidence and noting relevant
disputes, is therefore intended only to provide context for the Court’s analysis and
ruling.
4. Nature’s Pearl sells juices, nutritional supplements, and similar products
made from muscadine grapes. (Compl. ¶ 7, ECF No. 1; Answer ¶ 7, ECF No. 3.) KB
Farms is one of its grape suppliers. (See Compl. ¶¶ 12–14; Answer ¶¶ 12–14.) From
2008 through 2011, the two companies did business subject to yearly oral agreements
in which Nature’s Pearl purchased KB Farms’ grape harvests, paying a fixed price
per ton. (See Compl. ¶¶ 12–14; Answer ¶¶ 12–14; Countercl. ¶ 6.)
5. In January 2012, Nature’s Pearl and KB Farms executed a written contract
(“Agreement”). Nature’s Pearl obtained “the sole and exclusive right to purchase all
of [KB Farms’] muscadine grapes (‘whole grapes’) on an annual basis” for 20 years.
(Compl. Ex. A [“Agreement”] ¶¶ 1, 8.) In return, it agreed to pay $700 per ton for the
2012 harvest, with future years’ prices to be determined by “market conditions.”
(Agreement ¶ 2.) The Agreement was signed by each company’s owner and
principal—Jerry Smith for Nature’s Pearl, and Kerry Bodenhamer for KB Farms.
(See Agreement p.5.) 6. Grapes are, of course, perishable. The Agreement required KB Farms to
ship all grapes “in refrigerated trucks” on “the same day that they [were] harvested.”
(Agreement ¶ 5.) So long as the grapes were of “good quality,” Nature’s Pearl was
required to purchase them, though it reserved the right to “make the sole
determination as to the quality of the product at the time of processing the whole
grapes” and also “the right to reject any whole grapes” it determined “to be unusable.”
(Agreement ¶ 4.)
Specifically, [Nature’s Pearl] will reject all whole grapes that it determines to be spoiled, rotten, molded, fermented or do not meet a minimum of 15 bri[x] sugar content at the time of processing. If [Nature’s Pearl] rejects any whole grapes pursuant to the terms and conditions of this Agreement, it will immediately notify [KB Farms], and [KB Farms] shall have the right to come to [Nature’s Pearl’s] place of business to inspect the rejected whole grapes, pay to ship the rejected whole grapes back to its facility or authorize [Nature’s Pearl] to dispose of the whole grapes.
(Agreement ¶ 4.) (The term “brix” is a metric for sugar content.) The Agreement also
allowed Nature’s Pearl to terminate the contract upon determining that KB Farms
“failed to supply whole grapes of suitable quality.” (Agreement ¶ 11.)
7. The 2012 and 2013 harvests passed without incident. (See Compl. ¶ 26;
Answer ¶ 26.) Not so for the 2014 harvest. Nature’s Pearl alleges that KB Farms
delivered a load of fermented, unusable grapes in September 2014. (See Countercl.
¶¶ 13–14.) KB Farms denies the allegation, calling it a pretext for Defendants’ later
efforts to renegotiate the terms of their bargain, and also claims that Nature’s Pearl
improperly refused to pay for the shipment. (See Pl.’s Reply to Countercl. ¶¶ 10–11,
ECF No. 7; see generally Compl. ¶¶ 32–52.) 8. Some facts are undisputed. KB Farms picked the grapes at issue on
September 6 and shipped them on September 8. (See Dep. K. Bodenhamer 116:3–8,
ECF No. 74.5.) Nature’s Pearl inspected the grapes, did not reject them, and then
pressed them into juice on the day of delivery. (See Dep. A. Smith 41:6–8, 68:10–17,
71:9–10;1 Aff. A. Smith ¶ 4, ECF No. 74.2.) Just over a month later, Jerry Smith sent
KB Farms a letter refusing to pay for the shipment on the ground that the grapes
“were approximately 18 brix and tested 0.70 alcohol.” (Compl. Ex. B.)
9. According to Nature’s Pearl, the grapes were fermented at the time of
delivery. Achan Smith, Jerry’s son and the supervisor in charge of processing grapes
at Nature’s Pearl, testified that the grapes’ “general appearance and odor” upon
delivery suggested that “something was amiss.” (Aff. A. Smith. ¶¶ 1, 5.) The grapes
“had a different smell than all the rest,” an “alcohol smell.” (Dep. A. Smith 40:3–6;
see also Dep. A. Smith 64:14–18, 85:14–22.) Achan Smith further testified that Kerry
Bodenhamer admitted the shipment contained grapes that “seem[ed] to ripen quicker
than the others.” (Dep. A Smith 39:6–11; see also Dep. D. Bodenhamer 62:15–25,
ECF No. 74.8.)
10. Nature’s Pearl asserts that it was unable to confirm that the grapes were
fermented until it pressed them and pasteurized the juice. At that point, Achan
Smith smelled “alcohol” again. (Dep. A. Smith 64:14–18.) He states that he tried to
salvage the juice by blending it with “good” juice from a different shipment but was
unable to reduce the alcohol content below the legal threshold for non-alcoholic
1 Excerpts of Achan Smith’s deposition testimony appear in exhibits located at ECF Nos. 69.1,
74.11, and 76.7. beverages. (Dep. A. Smith 64:11–68:3; see also Aff. S. Mitchell ¶ 2, ECF No. 74.4; Aff.
R. Fouts ¶ 3, ECF No. 74.3.)
11. KB Farms sees things differently. It points to evidence that the grapes were
not fermented at the time of delivery. Kerry Bodenhamer recalls, for example, that
Achan Smith characterized the grapes as “rough” but said nothing about
fermentation or an alcohol smell. (Dep. K. Bodenhamer 140:15–19.) KB Farms also
insists that the time for inspection and rejection under the Agreement was upon
delivery, not after the grapes were processed. When Bodenhamer asked whether
Nature’s Pearl would reject the shipment, the answer from Achan Smith was no. (See
Dep. A. Smith 68:10–17, 71:9–10; Dep. D. Bodenhamer 62:4–7.) According to KB
Farms, Nature’s Pearl was not free to change its mind, particularly after processing
the grapes and blending their juice with juice from another shipment (which, it
suggests, came from another vineyard). (See Dep. K. Bodenhamer 139:10–140:4; Br.
in Supp. of Pl.’s Mot. Summary J. 4 [“Pl.’s Br. in Supp.”], ECF No. 68.)
12. Nearly a year of uncertainty ensued. Nature’s Pearl threatened to
terminate the Agreement, prompting unsuccessful negotiations to amend its terms.
(See Compl. Exs. C–P.) By June 2015, the parties’ relationship reached the breaking
point. Jerry Smith gave written notice of termination “for [KB Farms’] failure to
provide suitable grapes for processing.” (Compl. Ex. H.) KB Farms refused to
recognize the termination, stating its intent to deliver the 2015 harvest, which
Nature’s Pearl turned away. (See Compl. ¶ 48, Ex. N.) In October 2015, Smith sent
KB Farms “a check for the bad grapes” from the bank account of Le Bleu Corporation, another company owned by Smith. (Compl. Ex. M.) KB Farms rejected the check.
(Compl. Ex. O; Dep. J. Smith 105:8–12.2)
13. KB Farms filed this action in May 2016, asserting claims against Nature’s
Pearl for breach of contract, tortious breach of contract, breach of the implied
covenant of good faith and fair dealing, and unfair or deceptive trade practices. KB
Farms also asserted those claims, along with an additional claim for tortious
interference with contract, against Jerry Smith and Le Bleu. KB Farms alleged that
Smith and Le Bleu should be liable for Nature’s Pearl’s debts in part because of their
participation in the alleged breach, including Smith’s use of Le Bleu to pay for grapes
purchased by Nature’s Pearl. In response, Nature’s Pearl filed counterclaims for
breach of contract, breach of the implied covenant of good faith and fair dealing, and
breach of the implied warranties of merchantability and fitness for a particular
purpose.
14. Defendants moved for judgment on the pleadings on some but not all of KB
Farms’ claims. The Court granted the motion in part, dismissing the claims for
tortious breach, unfair trade practices, and tortious interference. Kerry Bodenhamer
Farms, LLC v. Nature’s Pearl Corp, 2017 NCBC LEXIS 27, at *27 (N.C. Super. Ct.
March 27, 2017). The Court also concluded that Jerry Smith and Le Bleu were not
parties to the Agreement and therefore could not have breached it or the implied
covenant of good faith and fair dealing. The Court allowed the claims against Smith
and Le Bleu to proceed to the extent they “rested on a theory of veil piercing,” though
2Excerpts of Jerry Smith’s deposition testimony appear in exhibits located at ECF Nos. 74.7, 76.6, and 79.2. noting that, “[i]n the event discovery demonstrates that KB Farms’ veil-piercing
theory lacks substance, Smith and Le Bleu remain[ed] free to challenge it on
summary judgment.” Id. at *15.
15. Discovery is now complete, and each side has moved for summary judgment.
(ECF Nos. 67, 70.) The motions have been fully briefed, and the Court held a hearing
on May 24, 2018, at which all parties were represented by counsel.
II. LEGAL STANDARD
16. Summary judgment is appropriate “if the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the affidavits, if any, show that
there is no genuine issue as to any material fact and that any party is entitled to a
judgment as a matter of law.” N.C. R. Civ. P. 56(c). In deciding a motion for summary
judgment, the Court views the evidence “in the light most favorable to the
nonmov[ant],” taking the non-movant’s evidence as true and drawing inferences in
its favor. Furr v. K-Mart Corp., 142 N.C. App. 325, 327, 543 S.E.2d 166, 168 (2001).
17. The moving party “bears the initial burden of demonstrating the absence of
a genuine issue of material fact.” Liberty Mut. Ins. Co. v. Pennington, 356 N.C. 571,
579, 573 S.E.2d 118, 124 (2002). If the moving party carries this burden, the
responding party “may not rest upon the mere allegations or denials of his pleading,”
N.C. R. Civ. P. 56(e), but must instead “come forward with specific facts establishing
the presence of a genuine factual dispute for trial,” Liberty Mut. Ins. Co., 356 N.C. at
579, 573 S.E.2d at 124. A “genuine issue” exists when “‘it is supported by substantial
evidence,’ which is that amount of relevant evidence necessary to persuade a reasonable mind to accept a conclusion.” Id. at 579, 573 S.E.2d at 124 (quoting DeWitt
v. Eveready Battery Co., 355 N.C. 672, 681, 565 S.E.2d 140, 146 (2002)) (internal
citation omitted).
III. DEFENDANTS’ MOTION
18. Defendants’ motion for summary judgment comes in two parts. Jerry Smith
and Le Bleu seek summary judgment on all remaining claims against them. They
argue that discovery has confirmed their earlier contentions: that there is no basis to
pierce the corporate veil and hold them liable for Nature’s Pearl’s alleged breach of
contract. (See Br. in Supp. of Defs.’ Mot. for Summary J. 6–8 [“Defs.’ Op. Br.”], ECF
No. 71.) Nature’s Pearl, by contrast, seeks only partial summary judgment, arguing
that the law does not recognize an independent cause of action for breach of the
implied covenant of good faith and fair dealing. (See Defs.’ Op. Br. 4–6.) The Court
begins with Smith and Le Bleu.
A. Piercing the Corporate Veil
19. As the Court explained in its previous Order and Opinion, “[d]isregarding
the corporate form is not to be done lightly.” Green v. Freeman, 367 N.C. 136, 145,
749 S.E.2d 262, 270 (2013). It is a “drastic remedy,” reserved only for “an extreme
case where necessary to serve the ends of justice.” Dorton v. Dorton, 77 N.C. App.
667, 672, 336 S.E.2d 415, 419 (1985).
20. The test for piercing the corporate veil is often referred to as the
instrumentality rule. That is, a person or entity “exercis[ing] actual control over
another, operating the latter as a mere instrumentality or tool, is liable for the torts of the corporation thus controlled.” Glenn v. Wagner, 313 N.C. 450, 454, 329 S.E.2d
326, 330 (1985). The plaintiff must show “domination and control of the corporate
entity,” “the use of that domination and control to perpetrate a fraud or wrong,” and
“the proximate causation of the wrong complained of by the domination and control.”
Atl. Tobacco Co. v. Honeycutt, 101 N.C. App. 160, 164, 398 S.E.2d 641, 643 (1990).
21. The second element is dispositive here. Even assuming KB Farms has
provided sufficient evidence that Smith or Le Bleu controlled Nature’s Pearl, it has
neither alleged nor shown the use of that control to perpetrate a fraud or wrong. KB
Farms’ only theory is that Smith and Le Bleu “interjected themselves into the
contractual relationship between Nature’s Pearl and KB Farms” and “depriv[ed] KB
Farms of the benefits of the Agreement for which it bargained.” (Br. in Opp’n to Defs.’
Mot. for Summary J. 11–12 [“Pl.’s Opp’n”], ECF No. 75.) This is not enough.
22. Our Court of Appeals has rejected the argument that a breach of contract,
“in itself, can amount to a wrongdoing to meet the second element of the
[instrumentality] test.” Best Cartage, Inc. v. Stonewall Packaging, LLC, 219 N.C.
App. 429, 440, 727 S.E.2d 291, 300 (2012). This rule derives from one of the essential
differences between contract and tort actions: contracts are voluntary, consensual
arrangements, and torts are not. The party seeking relief in a contract case has
chosen its business partner (e.g., a subsidiary instead of a parent) and agreed to the
terms of the arrangement (including allocating risk). If the party wishes to be able
to hold a parent corporation or other controlling person liable for another entity’s
breach, it can negotiate for additional security as part of the deal, through a guarantee, for example. When it forgoes these protections, the risk of loss may be
greater, but that alone is not a sufficient reason to disturb the parties’ bargain by
permitting a greater recovery through equity than the contract itself permits. For
these reasons, “courts usually apply more stringent standards to piercing the
corporate veil in contract cases than they do in tort cases.” 1 William M. Fletcher,
Fletcher Cyclopedia of the Law of Private Corporations § 41.85; see also, e.g., Cascade
Energy & Metals Corp. v. Banks, 896 F.2d 1557, 1577 (10th Cir. 1990).
23. Thus, our courts have pierced the veil in a case for breach of contract only
where the evidence revealed other compelling factors apart from the breach itself.
There must be some indicia of fraudulent or inequitable conduct: a showing, for
example, that the puppet entity was created for the purpose of entering into the
relevant contract or used as a means to unjustly insulate another from liability. See
Best Cartage, 219 N.C. App. at 440, 727 S.E.2d at 300–01; see also S. Shores Realty
Servs. v. Miller, 796 S.E.2d 340, 352–54 (N.C. Ct. App. 2017) (concluding plaintiff met
second element where individual defendant created 30 or 40 LLCs to manage
individual rental properties and intentionally “disregard[ed] the contractual
obligation to return . . . rental deposits”); E. Mkt. St. Square, Inc. v. Tycorp Pizza IV,
Inc., 175 N.C. App. 628, 637, 625 S.E.2d 191, 199 (2006) (concluding plaintiff met
second element where individual defendant created a shell corporation to shield
himself from liability under contract at issue); Insight Health Corp. v. Marquis
Diagnostic Imaging of N.C., LLC, 2018 NCBC LEXIS 56, at *5 (N.C. Super. Ct. June
5, 2018) (individual manager defendants caused LLC to cease operations and then transferred cash and assets to themselves or other entities they controlled rather
than pro rata to creditors as required by statute).
24. KB Farms cites no contrary, controlling precedent. (See Pl.’s Opp’n 10–11.)
The only case it cites is a nonbinding decision by a federal district court, decided
nearly twenty years before Best Cartage. See Dassault Falcon Jet Corp. v. Oberflex,
Inc., 909 F. Supp. 345, 350 (M.D.N.C. 1995). But even Dassault requires more than
an ordinary breach of contract. The alleged conduct must “show an ulterior purpose
to benefit the person in control in a way not possible or legal without misuse of the
controlled corporation.” Id. (emphasis added). That standard was met in Dassault
in part because, after the dispute between the plaintiff and the defendant arose, the
plaintiff sold all its puppet’s assets, leaving only a shell corporation. See id. at 351.
25. There are no similar allegations or evidence here. KB Farms has neither
alleged nor shown that Nature’s Pearl was created for the purpose of entering into
the Agreement. To the contrary, the complaint acknowledges that Nature’s Pearl and
Le Bleu are both bona fide, ongoing businesses with substantial operations and
products. (See Compl. ¶ 7.) KB Farms argues that Le Bleu had an informal
arrangement to purchase Nature’s Pearl’s grapes at cost, thereby depriving Nature’s
Pearl of profits, but the evidence it points to shows that profits increased from 2011
to 2016. (See Dep. J. Smith 170:13–15.) The evidence, even viewed in a light
favorable to KB Farms, does not show that Smith or Le Bleu authorized fraudulent
transactions to deplete Nature’s Pearl’s assets. Absent some indicia of fraudulent or
inequitable conduct, the mere allegation of a breach of contract is not a basis to disturb the allocation of risk negotiated by the parties by disregarding the corporate
form. Summary judgment is appropriate.
26. In its opposition brief, KB Farms insists that Le Bleu should be liable for
any breach on two theories unrelated to veil piercing (that Le Bleu assumed Nature’s
Pearl’s contractual obligations or that Le Blue is a third-party beneficiary). (See Pl.’s
Opp’n 13–14.) Neither is properly before the Court. In its previous Order & Opinion,
the Court permitted the claims against Le Bleu to proceed only “to the extent” they
“rest on a theory of veil piercing.” Kerry Bodenhamer Farms, 2017 NCBC LEXIS 27,
at *15. Furthermore, as Defendants correctly observe, KB Farms did not plead these
theories in its complaint, and a motion for summary judgment is not an appropriate
vehicle to introduce them.
27. For these reasons, the Court grants Defendants’ motion for summary
judgment as to the claims asserted against Jerry Smith and Le Bleu for breach of
contract and breach of the implied covenant of good faith and fair dealing. No claims
against Smith and Le Bleu remain, and they are dismissed from this action.
B. Implied Covenant of Good Faith and Fair Dealing
28. Nature’s Pearl moves for summary judgment only as to the claim for breach
of the implied covenant of good faith and fair dealing. The argument is a narrow,
legal one: Nature’s Pearl contends that there is no independent cause of action for
breach of the implied covenant.
29. This dispute is not over whether the Agreement between KB Farms and
Nature’s Pearl carries an implied covenant of good faith and fair dealing. It clearly does. The Agreement is a “transaction[] in goods” subject to Article 2 of the Uniform
Commercial Code (“UCC”). N.C. Gen. Stat. § 25-2-102; see also id. § 25-2-105(1)
(definition of “Goods” includes “growing crops”). And “[e]very contract” governed by
Article 2 “imposes an obligation of good faith in its performance and enforcement.”
Id. § 25-1-304; see also Westpoint Stevens, Inc. v. Panda-Rosemary Corp., 1999 NCBC
LEXIS 11, at *27 (N.C. Super. Ct. Dec. 16, 1999).
30. The question is whether section 25-1-304, by imposing a duty to act in good
faith, also gives rise to an independent cause of action for its breach. Although North
Carolina courts have not addressed this question, courts in many other States,
interpreting identical UCC provisions, have done so. “[T]he vast majority of courts
having considered the issue conclude that breach of the obligation of good faith
imposed by force of the U.C.C. does not give rise to an independent cause of action.”
Doyle v. Fleetwood Homes of Va., Inc., 650 F. Supp. 2d 535, 540 (S.D. W. Va. 2009)
(collecting cases; applying West Virginia’s UCC).
31. The reasons are twofold. First, the UCC’s Official Comment expressly states
that the obligation of good faith “does not support an independent cause of action of
failure to perform or enforce in good faith.” N.C. Gen. Stat. § 25-1-304 cmt. 1. Rather,
“a failure to perform or enforce, in good faith, a specific duty or obligation under the
contract, constitutes a breach of that contract or makes unavailable, under the
particular circumstances, a remedial right or power.” Id. This language is clear and
direct: a breach of the implied covenant does not give rise to a separate cause of action
under the UCC, but it may support an action for breach of contract. See, e.g., Pain Center of SE Ind. LLC v. Origin Healthcare Solutions LLC, 893 F.3d 454, 462 (7th
Cir. 2018) (applying Indiana’s UCC); Smith v. JPMorgan Chase Bank, N.A., 2017
U.S. App. LEXIS 21101, at *2–3 (5th Cir. Oct. 25, 2017) (applying Texas’s UCC);
Doyle, 650 F. Supp. 2d at 539.
32. Second, the UCC’s “covenant of good faith and fair dealing is not an
independent source of duties for the parties to a contract.” Baxter Healthcare Corp.
v. O.R. Concepts, Inc., 69 F.3d 785, 792 (7th Cir. 1995) (applying Illinois’s UCC). The
“obligation to perform or enforce in good faith extends only to the rights and duties
resulting from” the contract itself. Doyle, 650 F. Supp. 2d at 541 (citation omitted).
Put another way, the covenant of good faith “is not an undertaking that can be
breached apart from those terms.” Autry Petroleum Co. v. BP Prods. N. Am., Inc.,
2009 U.S. App. LEXIS 13978, at *6 (11th Cir. June 6, 2009) (applying Georgia’s UCC).
33. The Court sees no reason to depart from this widely accepted rule. In
construing other UCC provisions, our appellate courts have held that the statutory
text “should be read in conjunction with the Official Comments.” S. Utils., Inc. v.
Jerry Mandel Mach. Corp., 71 N.C. App. 188, 190, 321 S.E.2d 508, 509 (1984). They
“are by far the most useful aids to interpretation and construction,” id. at 190, 321
S.E.2d at 510, and deserve “substantial weight.” Rentenbach Constructors, Inc. v. CM
P’ship, 181 N.C. App. 268, 271, 639 S.E.2d 16, 18–19 (2007) (quoting Parsons v.
Jefferson-Pilot Corp., 333 N.C. 420, 425, 426 S.E.2d 685, 689 (1993)). Furthermore,
the General Assembly directed our courts to construe the code with an eye toward “mak[ing] uniform the law among the various jurisdictions.” N.C. Gen. Stat. 25-1-
103(a)(3).
34. Accordingly, the Court holds that section 25-1-304 does not create an
independent cause of action for breach of the implied covenant of good faith and fair
dealing. Nature’s Pearl is entitled to summary judgment. It bears noting that the
claim for breach of contract, which Nature’s Pearl has not challenged, will proceed to
trial. KB Farms may rely on the obligation of good faith imposed by the UCC in
seeking to prove its claim for breach of contract at trial.
IV. PLAINTIFF’S MOTION
35. All of Nature’s Pearl’s counterclaims rest on the essential allegation that the
grapes delivered by KB Farms on September 8, 2014 were fermented. (See Countercl.
¶ 18; see also Countercl. ¶¶ 17–19, 26–30, 33–35.) These grapes, Nature’s Pearl
contends, did not conform to the Agreement. (See Agreement ¶¶ 4, 5.) It further
alleges that fermented grapes are not suitable for juice and nutraceutical products,
thereby breaching the implied warranties of merchantability and fitness for a
particular purpose. (See Countercl. ¶¶ 27–28, 34.)
36. KB Farms argues that the undisputed facts require summary judgment. It
contends that the express terms of the Agreement provide the exclusive means for
Nature’s Pearl to accept or reject whole grapes, thereby disclaiming the right to
revoke acceptance and any implied warranties. The evidence, it contends, shows that
Nature’s Pearl accepted the grapes, processed them, and blended their juice with juice
from another shipment. (See Pl.’s Br. in Supp. 2.) Because Nature’s Pearl inspected and accepted the grapes, KB Farms argues, it is beside the point whether they were
fermented at the time of delivery. (See Pl.’s Br. in Supp. 3, 6.)
37. This dispute raises two issues. The first is whether Nature’s Pearl was
entitled to revoke its acceptance of the grapes under the UCC. The second is whether
the parties’ Agreement disclaims the implied warranties of merchantability and
fitness for a particular purpose.
A. Revocation of Acceptance
38. In any transaction for goods, the expectation is that the seller will deliver,
and the buyer will accept, goods that conform to the contract. It doesn’t always work
out that way. Under the UCC, the onus is on the buyer to make an initial inspection.
See N.C. Gen. Stat. § 25-2-606. If the goods conform to the contract, the buyer is
obliged to accept and pay for them. See id. § 25-2-301. If the goods fail to conform,
the buyer may choose to accept or reject them (or accept part and reject the rest). See
id. § 25-2-601. That choice—acceptance or rejection—triggers other rights and duties
for both buyer and seller. See, e.g., id. §§ 603, 604.
39. Acceptance is not necessarily final. “The buyer may revoke his acceptance”
in limited circumstances, including where acceptance was made “without discovery
of [the] nonconformity” and also “reasonably induced either by the difficulty of
discovery before acceptance or by the seller’s assurances.” Id. § 25-2-608(1)(b); accord
Roy Burt Enters., Inc. v. Marsh, 328 N.C. 262, 264, 400 S.E.2d 425, 427 (1990).
Revocation “must occur within a reasonable time after the buyer discovers or should have discovered the ground for it and before any substantial change in the condition
of the goods which is not caused by their own defects.” N.C. Gen. Stat. § 25-2-608(2).
40. It is undisputed that Nature’s Pearl accepted the grapes delivered by KB
Farms on September 8, 2014. (See Dep. A. Smith 71:14–16; Dep. J. Smith 104:21–
105:1; Defs.’ Br. in Opp’n to Pl.’s Mot. for Summary J. 13 [“Defs.’ Opp’n”], ECF No.
74; Pl.’s Reply Br. in Supp. of Mot. for Summary J. 1 [“Pl.’s Reply Br.”], ECF No. 78.)
Nature’s Pearl contends that it timely and properly revoked its acceptance after
testing the grapes’ fermentation level. (See Defs.’ Opp’n 13.) KB Farms, by contrast,
contends that Nature’s Pearl’s refusal to pay for the grapes was an untimely rejection.
41. The threshold question is whether Nature’s Pearl bargained away its
revocation rights. With few exceptions, the UCC permits parties the freedom to vary
its provisions “by agreement.” N.C. Gen. Stat. § 25-1-302(a). This includes the
provisions governing acceptance, rejection, and revocation. See, e.g., Business
Commc’ns, Inc. v. Ki Networks, Inc., 157 N.C. App. 710, 712–13, 580 S.E.2d 77, 78–
79 (2003).
42. KB Farms points to paragraph 4 of the Agreement, which states, in part,
that Nature’s Pearl “shall make the sole determination as to the quality of the product
at the time of processing the whole grapes” and “shall have the right to reject any
whole grapes” that it determines to be unusable. (Agreement ¶ 4.) KB Farms
interprets this language—particularly the repeated references to “whole grapes”—to
eliminate Nature’s Pearl’s “right to revoke acceptance” after processing the grapes.
(Pl.’s Reply Br. 3–4.) KB Farms also contends that allowing Nature’s Pearl to revoke acceptance after delivery would render superfluous the need for it to reject fermented
grapes upon delivery. (See Pl.’s Reply Br. 3–5.)
43. The Court disagrees. To the extent paragraph 4 modifies the UCC’s default
rules, it does so only with respect to the rules for rejecting grapes. Absent from
paragraph 4 is any reference to the rules for revoking acceptance once given. It would
not be reasonable to construe the parties’ silence to demonstrate a shared intent to
eliminate the right of revocation altogether.
44. Nor does the existence of a right to revoke create an inconsistency or render
superfluous paragraph 4. The premise of KB Farms’ argument is that it was feasible
to test grapes for fermentation at the time of delivery (a fact Nature’s Pearl vigorously
contests) and that the Agreement required Nature’s Pearl to do so. (See Pl.’s Reply
Br. 5 & n.3.) Assuming KB Farms is correct, though, section 25-2-608 would never
come into play. The statute permits revocation only when a buyer accepts goods
before learning of the defect because the defect is too difficult to discover. See N.C.
Gen. Stat. § 25-2-608(2). If Nature’s Pearl could have discovered fermentation by
inspecting the grapes before acceptance, then it was required to reject them at that
time, and could not revoke its acceptance later, under both the statute and the
Agreement. The right to revoke becomes operative only if Nature’s Pearl could not
have reasonably discovered the fermentation until after acceptance. In that
circumstance, the right to revoke supplements but does not displace or render
superfluous the right to reject. 45. In short, paragraph 4 is fully consistent with the existence of a right to
revoke under section 25-2-608. KB Farms’ argument that Nature’s Pearl should have
tested the grapes for fermentation upon delivery has no bearing on the proper
interpretation of the Agreement but is instead more aptly characterized as a factual
dispute about whether Nature’s Pearl can satisfy the preconditions for revocation.
That dispute is one for the jury.
46. The parties also have factual disputes about section 25-2-608’s other
requirements. One requirement is that revocation must occur “before any substantial
change in condition of the goods which is not caused by their own defects.” N.C. Gen.
Stat. § 25-2-608. The purpose of this section “is for the protection of sellers where the
buyer allows the goods to deteriorate, creating the risk that the alleged defect was
caused or aggravated by the buyer’s action or inaction.” Roy Burt, 328 N.C. at 264,
400 S.E.2d at 427.
47. KB Farms argues that Nature’s Pearl cannot satisfy this requirement
because it pressed the grapes, processed them, and bottled the juice before attempting
to revoke its acceptance. (See Pl.’s Reply Br. 6–7.) It contends that these actions
resulted in a substantial change in the grapes’ condition as a matter of law, citing
authority from other jurisdictions in support. (See Pl.’s Reply Br. 7.)
48. Our Supreme Court, however, has not construed section 25-2-608 in this
fashion. In Roy Burt, a farmer claimed that fertilizer purchased from the defendant
damaged his crops and land. The farmer attempted to revoke his acceptance long
after spreading the fertilizer on his fields. Although the fertilizer was absorbed into the soil and fully consumed, the Supreme Court held that there was a genuine issue
of fact concerning whether these circumstances constituted a “substantial change in
the condition of the fertilizer.” Roy Burt, 328 N.C. at 264, 400 S.E.2d at 427. The
Court based this decision on evidence that the seller “contemplated that the buyer
would use the fertilizer,” that the defect “could not be discovered without difficulty
except by spreading the fertilizer,” and that spreading the fertilizer did not cause or
aggravate the defect. Id. at 264–65, 400 S.E.2d at 427–28.
49. Here, Nature’s Pearl has forecast evidence showing that the grapes were
riper grapes smelling of alcohol; that KB Farms shipped them two days after
harvesting; and that Nature’s Pearl stopped the fermentation process shortly after
delivery by pasteurizing the juice. (Dep. D. Bodenhamer 62:15–25; Aff. A. Smith ¶ 5;
Dep. R. Ghaedian 191:9–13, ECF No. 74.9.) Nature’s Pearl has also forecast evidence,
through its expert’s testimony, that it could not have discovered the fermentation by
inspecting the grapes upon delivery. (Dep. R. Ghaedian 167:3–5, 170:1–173:9; see
also Dep. A. Smith 86:5–8.) Viewed in the light most favorable to Nature’s Pearl, the
evidence tends to show that KB Farms knew Nature’s Pearl would use the grapes to
make juice, that the grapes were fermented at the time of delivery, and that Nature’s
Pearl’s conduct did not cause or aggravate the fermentation, all of which is sufficient
to establish a genuine issue of material fact under Roy Burt. See also W.A. Davis
Realty, Inc. v. Wakelon Agri-Products, Inc., 84 N.C. App. 97, 97, 351 S.E.2d 816, 818
(1987). 50. Section 2-25-608 also requires that the nonconformity “substantially
impair[]” the goods’ value to the buyer. KB Farms argues that Nature’s Pearl cannot
meet this element as a matter of law because it sold the juice to another merchant in
California. (See Pl.’s Reply Br. 7–8; Dep. K. Bodenhamer 192:25–193:6.) Again, there
are genuine factual disputes. Nature’s Pearl points to evidence that the elevated
alcohol content cost it a substantial amount of money. (See Dep. J. Smith 105:1–10,
106:1–12, 107:6–15; see also Aff. A. Smith ¶ 6.)
51. Finally, revocation is not effective until the buyer gives notice. See N.C.
Gen. Stat. § 2-25-608(2). KB Farms argues that Nature’s Pearl failed to give
reasonable notice because its letter did not mention revocation. (See Pl.’s Reply Br.
8–9.) But “[f]ormal notice” is not required. Roy Burt, 328 N.C. at 264, 400 S.E.2d at
427. And reasonableness is typically a question for the jury. See Warren v. Guttanit,
Inc., 69 N.C. App. 103, 110, 317 S.E.2d 5, 11 (1984). Nature’s Pearl provides evidence
showing that it was dissatisfied with the product’s alcohol content and that it stated
its refusal to pay. This is sufficient, at a minimum, to reach the jury. See Roy Burt,
328 N.C. at 264, 400 S.E.2d at 427; Warren, 69 N.C. App. at 109–11, 317 S.E.2d at
10–11.
52. Implicit in all of KB Farms’ arguments is a concern that it is easy for buyers
to gin up false or “stale” claims related to perishable agricultural products. (Pl.’s
Reply Br. 4.) The concerns are fair. Spoilage and decay are not just expected, but
inevitable. The right to revoke acceptance, though, is not “unfettered,” as KB Farms
contends. (Pl.’s Reply Br. 5.) Section 25-2-608 includes elements designed to prevent revocation based on nothing more than a change of heart, and Nature’s Pearl must
convince a jury that it satisfied these preconditions.
53. At this stage, the evidence forecast by Nature’s Pearl is sufficient to create
a jury question. The motion for summary judgment as to the counterclaim for breach
of contract is denied.
B. Implied Warranties
54. Under the UCC, every contract for a transaction in goods carries implied
warranties that the goods shall be merchantable and fit for the particular purpose for
which the goods are required. See N.C. Gen. Stat. §§ 25-2-314, -315. Both warranties
may be excluded or modified, but any disclaimer must be in writing and conspicuous.
Id. § 25-2-315. These requirements are met when the contract states, for example,
that the goods are provided “as is” and marked with bold, italics, or similar
distinction. See id. § 25-2-316(3)(a); see also Tyson v. Ciba-Geigy Corp., 82 N.C. App.
626, 631, 347 S.E.2d 473, 477 (1986); Billings v. Joseph Harris Co., 27 N.C. App. 689,
693, 220 S.E.2d 361, 365 (1975).
55. The Agreement does not include a disclaimer of implied warranties, much
less the type of conspicuous disclaimer required by the UCC. Nature’s Pearl did not
agree to take KB Farms’ grapes “as is” or “with all faults.” N.C. Gen. Stat. § 25-2-
316(3). To the contrary, it agreed to purchase only grapes of “good quality.”
56. KB Farms insists that its “grapes were not subject to any implied warranty”
because the terms of the Agreement “are wholly inconsistent with the implied warranties.” (Pl.’s Br. in Supp. 6.) Even if that were true, inconsistency alone is
insufficient to disclaim implied warranties under section 25-2-316. The disclaimer
must be conspicuous. Here, even KB Farms concedes that the Agreement does “not
explicitly disclaim[] implied warranties.” (Pl.’s Br. in Supp. 6.)
57. KB Farms also argues that Nature’s Pearl cannot prove a breach of any
implied warranty as a matter of law because it blended the purportedly bad batch of
juice with juice from a different vendor before testing for alcohol content. (Pl.’s Reply
Br. 10.) The evidence, though, is conflicting at best. As noted above, Nature’s Pearl
has provided some evidence tending to show that the grapes were fermented at the
time of delivery. (See, e.g., Dep. A. Smith 39:6–11, 40:3–6, ECF No. 74.11; see also
Dep. A. Smith 64:14–18, 85:14–22; Aff. A. Smith. ¶¶ 1, 5; Dep. D. Bodenhamer 62:15–
25.) Its witnesses have also testified that no grapes or juice from other vendors was
present during the relevant timeframe. (See Dep. C. Smith 26:8–16, ECF No. 69.2;
see also Dep. A. Smith 55:22, 77:17–19, 78:1–3; Aff. A. Smith ¶ 1.)
58. Viewing this evidence in a light most favorable to Nature’s Pearl, the Court
cannot conclude as a matter of law that KB Farms did not breach the implied
warranties of merchantability and fitness for a particular purpose. The Court
therefore denies the motion for summary judgment as to the counterclaims for breach
of the implied warranties.
C. Implied Covenant of Good Faith and Fair Dealing
59. Nature’s Pearl also asserts a counterclaim for breach of the implied covenant
of good faith and fair dealing. As discussed above, the UCC does not recognize an independent cause of action for breach of the implied covenant. Nature’s Pearl
argued as much in its briefing and at the hearing. (See Defs.’ Opp’n 10 n.2.) The
Court therefore grants KB Farms’ motion for summary judgment as to the claim for
V. CONCLUSION
60. For these reasons, the Court ORDERS as follows:
a. KB Farms’ motion for summary judgment is GRANTED in part.
Nature’s Pearl’s counterclaim for breach of the implied covenant of good
faith and fair dealing is DISMISSED with prejudice. Except as stated,
KB Farms’ motion is DENIED.
b. Defendants’ motion for partial summary judgment is GRANTED. The
claims for breach of contract against Jerry Smith and Le Bleu are
DISMISSED, and the claims for breach of the implied covenant of good
faith and fair dealing against Nature’s Pearl, Jerry Smith, and Le Bleu
are DISMISSED, each with prejudice.
c. KB Farms’ claim for breach of contract against Nature’s Pearl shall
proceed to trial.
d. Nature’s Pearl’s counterclaims for breach of contract, breach of the
implied warranty of fitness for a particular purpose, and breach of the
implied warranty of merchantability against KB Farms shall proceed to
trial. This the 15th day of August, 2018.
/s/ Adam M. Conrad Adam M. Conrad Special Superior Court Judge for Complex Business Cases