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DC Farms, LLC v. Conagra Foods Lamb Weston, Inc.

Court of Appeals of Washington, Division 3

January 30, 2014

DC Farms, LLC, Appellant,
v.
Conagra Foods Lamb Weston, Inc., Respondent

Oral Argument June 12, 2013.

Appeal from Benton Superior Court. Docket No: 11-2-00759-3. Date filed: 06/18/2012. Judge signing: Honorable Craig J Matheson.

Jed W. Morris, Trevor R. Pincock, and Laura J. Black (of Lukins & Annis PS ), for appellant.

Gregory J. Arpin and Gerald Kobluk (of Paine Hamblen LLP ), for respondent.

AUTHOR: Laurel H. Siddoway, A.C.J. WE CONCUR: Stephen M. Brown, J., Teresa C. Kulik, J.

OPINION

Page 544

Siddoway, A.C.J.

[179 Wn.App. 208] ¶ 1 The trial court resolved this contract dispute on summary judgment, concluding that a food processor was excused from providing a contractually required notice of default and opportunity to cure because a farmer's breach was incurable. This was error. The processor was required to honor the notice-and-cure provision despite its belief that the breach could not be cured. It could and did seek summary judgment that the farmer suffered no damage because it was incapable of curing the breach, but a genuine issue of fact exists as to whether the farmer remained able to substantially perform.

Page 545

[179 Wn.App. 209] ¶ 2 We reverse the trial court's dismissal of the farmer's claims and remand for entry of partial summary judgment in the farmer's favor and trial of the remaining issues.

FACTS AND PROCEDURAL BACKGROUND

¶ 3 DC Farms LLC grows potatoes and other crops in and around Blackfoot, Idaho. Conagra Foods Lamb Weston Inc. is a processor of frozen potato products with offices in Benton County. This appeal arises out of DC Farms's action for breach of contract and related claims brought after Lamb Weston claimed to terminate and then refused to perform under a " Strategic Potato Supply Agreement" entered into between the parties.

¶ 4 The Strategic Potato Supply Agreement created what representatives of both parties referred to as a " joint venture" or " joint venture partnership" between the two.[1] This is one of three types of contracts that Lamb Weston representatives testified to using to acquire potatoes for processing, the others being " grower storage" and " field delivery" contracts. Clerk's Papers (CP) at 223. Lamb Weston executives testified that among characteristics they look for before offering a joint venture arrangement to a [179 Wn.App. 210] farmer is whether the farmer owns or controls ground, whether the farmer has " [t]he ability to farm and basically a proven record of some sort that they can grow potatoes," whether there is " a definite interest on [the farmer's] part to go into a partnership arrangement," and the presence of " [s]uccession," meaning that a farmer can be expected to be in the business for a long period of time. CP at 237-38.

¶ 5 Under Lamb Weston's joint venture arrangement, the farmer commits to growing potatoes on some of his or her farm ground with the specific acreage designated by the agreement, and to grow the crop under Lamb Weston's specifications and supervision as to some matters and under comanagement as to others. The farmer benefits by, among other things, having a solid buyer who is contractually obligated to pay expenses, purchase the potatoes according to a set schedule, and split the profits. Lamb Weston benefits by, among other things, locking in a source of supply that is grown under its preferred farming practices.

¶ 6 The DC Farms-Lamb Weston agreement was entered into in February 2009 and designated 1,300 acres of farm ground owned by DC Farms to be farmed for the joint venture. The agreement covered the 2009 crop year and provided for automatic renewal for crop years thereafter, subject to Lamb Weston's right to serve a notice of nonrenewal by the October 1 preceding the next crop year.

¶ 7 Lamb Weston exercised its supervisory or comanagement authority over cultivation of the 2009 crop, providing or participating in direction on farming techniques, fertilizer application, harvest time and order, and storage requirements. Before harvest, Lamb Weston inspected the eight cellars that would be used to store the joint venture potatoes, identified any action it required to be taken before the cellars could be used, and then, according to DC Farms, required DC Farms to seal the cellars until harvest. According

Page 546

to David Cooper, one of the two managing members of DC Farms (his brother-in-law, Doug Case, is the other), he [179 Wn.App. 211] and Mr. Case " didn't always agree with [Lamb Weston's] instruction, and following the instruction cost DC time and financial loss, but DC complied." CP at 118. DC Farms's employees harvested the 2009 crop and unloaded the potatoes into the eight cellars inspected and approved by Lamb Weston.

¶ 8 On October 23, Lamb Weston's employees began removing potatoes from the cellars for delivery to Lamb Weston's plant. Two days into the work, Lamb Weston was notified by its transport contractor that its hog operator [2] had found a broken light bulb in DC Farms's cellar 7 while filling a truck with potatoes. At Lamb Weston's instruction, DC Farms's employees removed three or four truckloads of potatoes from cellar 7 and disposed of them in the corner of a field, due to the risk they had been contaminated with glass.

¶ 9 Two days later, a Lamb Weston employee working a potato processing line at Lamb Weston's facilities reported finding what he first thought was a plastic bag on the line; it turned out to be a broken light bulb within a Tuff-Skin membrane. Farmers generally use light bulbs covered in a membrane called Tuff-Skin in potato storage areas since the membrane will contain pieces of glass in the event the bulb breaks. Lamb Weston employees had noted that DC Farms used Tuff-Skin bulbs when they originally inspected and approved its cellars.

¶ 10 Having discovered the Tuff-Skin sack, Lamb Weston tracked and then disposed of all potatoes then on its processing line. No other glass was found in the potatoes then being processed. Lamb Weston was able to determine that the Tuff-Skin sack discovered on the processing line came from the same cellar at DC Farms--cellar 7--where the broken light bulb had been found two days earlier.

[179 Wn.App. 212] ¶ 11 The next day, Lamb Weston sent two employees, Todd McBride and Tommy Brown, to conduct a several-hour inspection of the eight cellars in which the joint venture potatoes grown by DC Farms were stored. Mr. McBride and Mr. Brown were accompanied during the inspection by Mr. Case. The parties have markedly different versions of what was learned during that inspection.

¶ 12 Mr. McBride's internal Lamb Weston report, prepared immediately after the inspection, included a map of the light fixtures in each of the eight cellars, showing that a total of 30 light bulbs were broken or missing from five of the eight cellars. His report stated that he and Mr. Brown had " discovered the root cause of broken light bulbs in the DC Farms storages," explaining:

David Cooper, questioned separately two piler operators who filled the storages. Both piler operators stated that, one of the pipe layers was throwing potatoes which were breaking lights during the filling process.

CP at 474. Mr. Brown's internal report stated that the act " enabled ... broken light bulbs to detach from element and tumble into the potato pile" and that despite their Tuff-Skin membranes, " [o]nce the plastic wrap detaches from the element there is a hole the size of standard light bulb element exposed, allowing glass particles to escape." Id. He reported that he, Mr. Brown, and Mr. Case " noted potato matter on several of the lighting fixtures" in the cellars, confirming the report of intentional postharvest breakage. Id. He reported as further confirmation that he had reviewed storage inspection forms for each cellar and " there were no reported missing or broken lights during pre-harvest inspections." Id. His report concluded, " It is highly likely that glass fragments are present below light fixtures and spread toward the piler (storage entrance) at each of the broken fixture locations." Id.

¶ 13 For their part, Mr. Cooper and Mr. Case deny that information obtained from the inspection supports Mr. [179 Wn.App. 213] McBride's internal report. They claim that the broken or missing light bulbs counted and mapped by Mr. McBride and Mr. Brown had, to the best

Page 547

of their knowledge, been broken or missing before harvest and even before Lamb Weston's inspection and approval of the cellars. Mr. Cooper and Mr. Case both testified that replacement bulbs had been ordered and were supposed to be installed before harvest but were not installed because Lamb Weston directed them to stay out of the cellars following inspection. Mr. Case claims that in the inspection following discovery of the broken bulb in cellar 7, he spoke with Mr. McBride and Mr. Brown about the fact that the breakage observed might not be new and Mr. McBride even took several broken light bulb bases with DC Farms's permission, representing that Lamb Weston would inspect them to determine whether the breaks were new or old.

¶ 14 As to the alleged malicious mischief by DC Farms employees, Mr. Cooper contends he never told anyone that DC Farms's employees admitted breaking lights by throwing potatoes at them. He testified that he spoke with the three employees responsible for unloading the joint venture potatoes into the eight cellars and each denied any intentional breaking of lights. Two stated that they might have inadvertently broken lights with their backs or the piler but that they cleaned up any broken glass, as required by work rules. Those two employees added that " if anyone was throwing potatoes" it would have been the third employee, Emmanuel Granados, CP at 119, prompting Mr. Cooper to speak again with Mr. Granados, who again denied throwing any potatoes at light fixtures. Mr. Cooper contends that all he reported to Mr. Case was the speculation of the two employees, denied by Mr. Granados, and Mr. Case contends that this is what he repeated to Mr. McBride or Mr. Brown. Mr. Case and Mr. Cooper contend (and Mr. McBride agrees, although Mr. Brown does not) that Mr. Cooper never spoke directly to Mr. McBride or Mr. Brown about what he was told by the employees.

[179 Wn.App. 214] ¶ 15 Mr. Case contends that while accompanying Mr. McBride and Mr. Brown on their inspection, they saw what Mr. McBride would later characterize as potato matter on some of the light fixtures. But according to Mr. Case, while he and the Lamb Weston representatives assumed that what they saw on the fixtures was or might be potato matter, " it was impossible to tell if the matter was from a potato, dirt, or something else," " [t]here was also no way to determine how long the matter had been on the fixture," and Mr. McBride and Mr. Brown did not take any samples of the matter. CP at 625.

¶ 16 Following the inspection, all removal and processing of the joint venture crop was put on hold by Lamb Weston. Several weeks later, in mid-November, Lamb Weston representatives met with Mr. Cooper and Mr. Case and told them the remaining joint venture potatoes would not be processed and that Lamb Weston was terminating the parties' agreement. On November 19, Lamb Weston representatives delivered an undated letter formally notifying DC Farms that it was " exercis[ing] its rights ... to terminate [the] agreement," " due to DC Farms' negligence and/or misconduct in the supervision and storage of potatoes in the DC Farms potato storage sheds, which resulted in pervasive glass contamination and other potential issues." CP at 41. It also notified DC Farms that it had incurred financial losses for which it expected to be compensated by DC Farms.

¶ 17 Despite Lamb Weston's informal and formal notice of termination, DC Farms sought to preserve the relationship, offering to run all the joint venture potatoes through additional inspections or to substitute potatoes from its other operations. Lamb Weston rejected both proposals.

¶ 18 Although Lamb Weston had not served notice of nonrenewal of the parties' agreement before October 1, it refused to recognize any joint venture arrangement for DC Farms's 2010 crop. It refused to pay DC Farms's operating loan from U.S. Bank and refused to pay outstanding crop expenses for the 2009 season, both of which DC Farms [179 Wn.App. 215] contends were required by the parties' agreement. In February 2010, it did make a $243,860.54 payment, representing the $345,142.33 price for potatoes delivered before termination of the agreement, ...


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