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Apex LLC v. Sharing World

May 31, 2012


Appeals from a judgment and order of the Superior Court of Orange County, David T. McEachen, Judge. (Super. Ct. No. 30-2009-00317686)

The opinion of the court was delivered by: Fybel, J.

Filed 5/31/12; received for posting 6/5/12



Reversed and remanded with directions.


Between February 2008 and January 2009, Apex LLC (Apex), a commodities merchandiser, entered into 12 contracts to sell a total of about 19,000 tons of cottonseed to Sharing World, Inc., doing business as Felix & Sons, Inc. (collectively, Sharing World), a broker/trader in animal feed. Apex later sued Sharing World, alleging it failed to accept and pay for 14,625 tons of the cottonseed, which were to be delivered between October 2008 and August 2009. As damages, Apex sought the difference between the contract prices and the price at which Apex resold the cottonseed in August 2009.

After a bench trial, the trial court found there was no mutual assent for lack of certain contract terms, the contracts were subject to an oral condition precedent that was not fulfilled, Apex did not resell the cottonseed in a commercially reasonable manner, and Apex could not recover damages because it did not present evidence of its cost basis in the cottonseed. Judgment was entered in favor of Sharing World.

Apex appeals from the judgment, and we reverse.*fn1 The trial court's finding of lack of mutual assent is erroneous under the California Uniform Commercial Code, which provides "gap fillers" to cover the terms left open by the parties' oral agreement. In addition, Apex confirmed each sale of cottonseed with a confirmatory writing, called a sales contract. Although Sharing World did not sign any of these sales contracts, the requirement of a writing under the California Uniform Commercial Code was satisfied because Apex and Sharing World are both merchants and Sharing World never objected to any of the sales contracts. The condition precedent asserted by Sharing World was unenforceable as a matter of law because it was inconsistent with the parties' final expression of their agreement on quantity and price reflected in the sales contracts and because the parties certainly would have included the condition precedent in the writing if they intended it to be part of their agreement.

Substantial evidence did not support the trial court's finding that Apex failed to resell the cottonseed in a commercially reasonable manner. Between October 2008, when Sharing World first refused to accept tender of the cottonseed, and August 2009, when Apex resold the balance of the contracts, Apex engaged in extensive negotiations with Sharing World to resolve the matter, offered to rewrite the contracts, and several times offered to resell the cottonseed. The trial court's finding that Apex intentionally and unreasonably waited for the price of cottonseed to drop before reselling is not a reasonable inference from this evidence, particularly because the contracts called for delivery of cottonseed over a period of time right up to the date of resale. Whether Apex unreasonably delayed in reselling the cottonseed must be determined on a contract-by-contract, shipment-by-shipment basis, which the trial court did not do. We remand only for further proceedings on that issue.

Finally, the trial court's finding on the issue of damages is erroneous under the California Uniform Commercial Code. The trial court found that Apex failed to present evidence of its cost basis in the resold cottonseed, yet, under the relevant measures of a seller's damages under the code, the seller is not required to present evidence of its cost basis in the goods.

Sharing World appeals from a portion of the statement of decision and judgment denying it recovery of attorney fees. However, after Sharing World filed its notice of appeal, the trial court granted its motion for attorney fees. In any case, we reverse the order granting Sharing World's motion for attorney fees because we are reversing the underlying judgment.


Once cotton is harvested, cotton gins are used to separate the cottonseed from the lint, and the cottonseed is sold for cattle feed and other uses. Apex, a commodities merchandiser, purchases large quantities of cottonseed and resells the seed to buyers around the world. Between 2002 and 2008, Apex purchased between 250,000 and 400,000 tons of cottonseed each year. At any one time, Apex's position in the cottonseed market might be "long" (Apex bought more than it sold) or "short" (Apex sold more than it bought). Apex takes title and possession of the cottonseed it purchases and stores the cottonseed while finding and entering into contracts with buyers.

Sharing World purchases feed exports, including cottonseed, and resells them to customers (primarily dairy farmers) in South Korea. Sharing World, Inc., also does business as Felix & Sons, Inc., which changed its name in 2007 to Kyung Sik Seo (Seo), also known as Felix, is the president of Sharing World, Inc., and Felix & Sons, Inc.

Once a customer places an order with Sharing World, it finds a feed seller to fill the order. In 2002, Seo started purchasing cottonseed from Apex on behalf of Sharing World. He placed orders with Apex through James Patterson, a commodities broker and one of Apex's founders. On receiving an order from a customer in South Korea, Seo would contact Patterson and ask him to quote a price for a specified quantity of cottonseed for delivery within a specified timeframe. Patterson would make Seo an offer and give him 24 hours to confirm acceptance. Seo reached an agreement with his South Korean customer before confirming acceptance and reaching an agreement with Apex. Sometimes Seo would make counteroffers. If Seo confirmed acceptance of the offer, Patterson would generate a written sales contract stating the quantity of cottonseed purchased in tons, the price, and the shipment period.

Each sales contract incorporated the rules of the National Cottonseed Products Association, Inc. (NCPA) and had various terms on the back side. Sharing World, and other Apex customers, normally did not sign the contract because, under the NCPA rules, the contract would be considered binding if the customer did not object to it within four days.

At the time for shipment, Apex would transport the cottonseed in containers to the designated port for shipment according to the shipping instructions. While the containers were at port, Apex would generate a settlement sheet and an invoice with the weight and settlement amount.

In addition to the sales contracts, Apex had Sharing World submit credit applications every so often beginning in September 2002, when it submitted a credit application under the name Felix & Sons, Inc. Apex accepted the application and set a $10,000 credit limit, which was increased over the years. In 2008, Sharing World submitted an application asking for a $500,000 credit limit. Apex accepted the application but set the credit limit at $100,000.

Patterson testified that he discussed with Seo the manner in which Sharing World conducted its business and that he knew Sharing World would not ship to customers in South Korea without letters of credit from them. Patterson testified: "We had discussions many . . . times about his L/C's, but I didn't sell to his customer . . . . I only sell to [Seo]. What he does with it, I don't care. It doesn't matter to me." Patterson testified that Seo never told him, "I don't have contracts with you until I tell you to ship."

Between February 13, 2008 and January 16, 2009, Apex and Sharing World entered into 12 contracts for the purchase of a total of 19,375 tons of cottonseed. In each case, Apex offered to sell Sharing World a certain quantity of cottonseed at a particular price for shipment within an identified period of time. Sharing World accepted each offer, after which Apex sent Sharing World a written sales contract. Each of the 12 contracts had a different quantity and price, ranging from $230 to $334 per ton, and a different shipment time period between October 2008 and August 2009. Although Sharing World did not sign any of the 12 written sales contracts, it voiced no objections to their terms.

The cottonseed market became quite volatile during the middle months of 2008, when cottonseed traded at record highs reaching $400 per ton, and thereafter dropped precipitously over the next four to five months. The drop in price of cottonseed made the 12 contracts less attractive to Sharing World's customers. Sharing World declined to accept delivery of a total of 14,625 tons out of the 19,375 tons of the cottonseed covered by the 12 contracts because it had not received letters of credit from its South Korean customers. Seo testified at trial he had no liability to accept delivery from and pay Apex for cottonseed until he had issued a shipping number to Apex for customers in South Korea, and he would not issue a shipping number until he received a letter of credit from Sharing World's customer. Starting in November 2008, Apex elected to extend the shipping dates and, over the next several months, made offers to "roll" the contracts into future periods or "wash"*fn2 them.

Ultimately, on August 14, 2009, Patterson notified Seo by e-mail, pursuant to NCPA Trading Rules, rules 50 and 51, that Apex was electing to wash the portion of the 12 contracts that had been due to ship by that day at the day's market price of $200 per ton. Six days later, Seo notified Apex that he did not accept the NCPA Trading Rules and rejected the wash. On September 1, 2009, Patterson notified Seo by e-mail, pursuant to NCPA Trading Rules, rules 50 and 51, that Apex was electing to wash the remaining 40 unshipped containers of cottonseed at $200 per ton. The next day, Seo responded by e-mail, reiterating he did not accept the NCPA Trading Rules and rejecting the wash.

The difference between the contract prices for the cottonseed and the amount Apex received in washing the unshipped cottonseed was $1,778,500.


Apex's first amended complaint against Sharing World asserted causes of action for breach of written contract, breach of oral contract, account stated, open book account, and breach of third party beneficiary contract. A bench trial was conducted over two days in March 2011.

The trial court found in favor of Sharing World, and issued a statement of decision making five important findings, as follows:

1. The agreements for the sale of cottonseed were subject to the condition precedent that "Defendants had no obligation to take delivery of cottonseed unless and until the Korean customers on whose behalf Defendant was acting issued a letter of credit."

2. There was no mutual assent between the parties because they failed to agree to essential contract terms, including the applicability of the NCPA Trading Rules, the time of performance, and payment conditions.

3. If the NCPA Trading Rules did apply to the transactions, Apex violated rule 50 by failing promptly to elect its remedy. "[D]uring the time of this delay," the trial court found, "Apex watched and watched as the price of cottonseed declined--thereby failing to mitigate its alleged damages."

4. Apex failed to establish the basis for its calculation of damages.

5. Sharing World rejected Apex's claims when Apex notified it of its intent to wash the contracts, and "[a]t no time have Defendants accepted or acquiesced ...

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