Hornell Brewing Co. v. Spry
174 Misc. 2d 451, 664 NYS2d 698 (1997)
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Rule of Law:
Under UCC § 2-609, a party with reasonable grounds for insecurity may demand adequate assurance of due performance. If new grounds for insecurity arise after a prior assurance has been given, a party is entitled to demand further assurances, and the failure to provide them constitutes a repudiation of the contract.
Facts:
- In early 1993, Hornell Brewing Co., Inc. (Hornell) entered into an oral agreement granting Stephen A. Spry the exclusive right to distribute its 'Arizona' brand beverages in Canada.
- Throughout 1993 and early 1994, Spry consistently failed to make timely payments, accumulating arrears over $100,000 and having a $31,000 check returned for insufficient funds.
- In March 1994, Spry informed Hornell he was securing a $1.5 million line of credit to stabilize their business relationship, but this financing never materialized.
- On April 15, 1994, Spry connected Hornell's chairman with Richard Worthy of Metro Factors, Inc., a factoring company that Hornell's chairman believed was a traditional lending institution.
- Following this call, Hornell sent a letter agreeing to extend up to $300,000 in credit on 14-day terms once Spry's outstanding balance of $79,316.24 was paid.
- On May 9, 1994, Metro Factors paid Spry's arrears in full. Immediately thereafter, Spry placed a new order for $390,000 to $450,000, substantially exceeding the $300,000 credit limit discussed.
- Around the same time, Hornell learned from its sales manager that Spry's Canadian operation was a sham, with no warehouse, staff, or delivery trucks.
- On May 10, 1994, Hornell demanded that Spry provide a letter confirming his line of credit or a personal guarantee before it would ship the new order. Spry failed to respond to this demand.
Procedural Posture:
- Plaintiff Hornell Brewing Co., Inc. filed a declaratory judgment action against defendants Stephen A. Spry and Arizona Tea Products Ltd. in a New York trial court.
- Hornell sought a declaration that it had lawfully terminated the parties' distributorship agreement.
- The case was adjudicated in a trial before the court.
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Issue:
Under UCC § 2-609, does a seller have reasonable grounds to demand further adequate assurance of performance from a buyer, and terminate the contract upon failure to receive it, when the buyer cures a past-due account but then immediately places an order exceeding a previously discussed credit limit and is discovered to be operating a sham business?
Opinions:
Majority - Louise Gruner Gans, J.
Yes. A seller has reasonable grounds to demand further assurance of performance under UCC § 2-609 if, after a buyer cures a past default, new circumstances create fresh grounds for insecurity. The buyer's subsequent failure to provide such assurance constitutes a repudiation, entitling the seller to terminate the contract. The court reasoned that while Spry's payment on May 9th may have cured the past-due account, his immediate placement of an order far exceeding the proposed credit limit, combined with Hornell's discovery that Spry's business was a sham, created new and more acute grounds for insecurity. These changed circumstances justified Hornell's May 10th demand for documented proof of a credit line. Spry's complete failure to respond to this commercially reasonable demand was a repudiation under UCC § 2-609(4), permitting Hornell to suspend its own performance and terminate the distributorship agreement.
Analysis:
This case provides a crucial clarification of UCC § 2-609, establishing that the right to demand adequate assurance is not a one-time event. It demonstrates that curing a past default does not immunize a party from future scrutiny if their subsequent actions create new or different grounds for insecurity. The ruling emphasizes that the assessment of 'reasonable grounds for insecurity' is a fluid, fact-based inquiry judged by commercial standards. This precedent strengthens the position of performing parties by allowing them to make successive demands for assurance as circumstances evolve, preventing unreliable parties from using a single cure to lock in a contract they remain incapable of performing.
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