Pittsburgh-Des Moines Steel Co. v. Brookhaven Manor Water Co.
532 F.2d 572 (1976)
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Rule of Law:
Under Uniform Commercial Code § 2-609, a party does not have reasonable grounds for insecurity to demand adequate assurance of performance if the other party's financial condition has not materially changed since contracting. A demand for assurance is improper if it seeks performance beyond the scope of the original contract, such as requiring a personal guarantee or an escrow account that was not part of the initial agreement.
Facts:
- On July 24, 1968, Pittsburgh-Des Moines Steel Company (PDM) proposed to build a water tank for Brookhaven Manor Water Company (Brookhaven) for $175,000.
- Brookhaven rejected PDM's initial payment terms, which required progress payments.
- On November 26, 1968, the parties signed a revised contract stipulating that 100% of the payment was due within 30 days after the tank was completed, tested, and accepted.
- In December 1968, a PDM manager learned that Brookhaven was negotiating for a loan to finance the project.
- On January 3, 1969, PDM demanded in writing that Brookhaven's potential lender hold the full $175,000 contract price in escrow, and stated it was holding the order 'in abeyance' until it received such notification.
- The contract contained no provision for escrow financing.
- On March 19, 1969, PDM sent another letter demanding that Brookhaven's president, Irving Betke, provide his personal guarantee for the full contract price and stated it would not begin fabrication until the guarantee was received.
- Betke provided his personal financial statement but refused to provide the personal guarantee, and PDM subsequently took no further steps to perform the contract.
Procedural Posture:
- Pittsburgh-Des Moines Steel Co. (PDM) sued Brookhaven Manor Water Co. (Brookhaven) in federal district court for repudiation of contract.
- Brookhaven filed a counterclaim against PDM for breach of contract.
- The case was tried before a jury, which returned a verdict in favor of PDM.
- The district court granted Brookhaven's motion for judgment notwithstanding the verdict (JNOV), reversing the jury's decision.
- The district court entered judgment for Brookhaven on its counterclaim and, after a separate hearing, awarded it $25,895.00 in damages.
- PDM, as appellant, appealed the district court's judgment to the U.S. Court of Appeals for the Seventh Circuit.
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Issue:
Does a seller have reasonable grounds for insecurity under UCC § 2-609 to demand performance assurances beyond the contract's terms, such as an escrow account or personal guarantee, merely because the buyer has not yet secured financing for a payment that is not due for several months?
Opinions:
Majority - Pell, Circuit Judge.
No. A seller's demand for performance assurance under UCC § 2-609 is unjustified when it is not predicated on reasonable grounds for insecurity and seeks to impose terms beyond those in the contract. The court first determined the contract for a specially manufactured water tank was a contract for the sale of 'goods' under the UCC, making § 2-609 applicable. However, PDM lacked the necessary 'reasonable grounds for insecurity' to invoke the statute. The record showed no change in Brookhaven's financial condition or ability to pay after the contract was signed. The fact that Brookhaven had not yet secured a loan for a payment not due for several months was not an objective basis for insecurity, as it is commercially reasonable to avoid incurring interest on funds before they are needed. PDM's demands for an escrow account or a personal guarantee were not requests for 'assurance' but attempts to rewrite the contract to include security terms that had been implicitly waived when PDM agreed to full payment after completion. Because PDM's demands were improper and it suspended performance, PDM, not Brookhaven, anticipatorily repudiated the contract under UCC § 2-610.
Concurring - Cummings, Circuit Judge
No. While PDM may have had reasonable grounds for insecurity, its demands for assurance were improper. This opinion disagrees with the majority's conclusion that PDM had no reasonable grounds for insecurity. The failure of an expected loan to materialize could provide a prudent businessperson with reasonable grounds to question the other party's ability to perform, making this a question of fact for a jury. However, the outcome is correct because PDM's subsequent demands were impermissible as a matter of law. UCC § 2-609 allows a party to demand 'adequate assurance of due performance,' not to redraft the contract. PDM's demands for a personal guarantee, escrow financing, or an equity interest in Brookhaven were significant alterations to the contract, not mere assurances. Therefore, PDM's demands exceeded what is commercially adequate under the statute, constituting a repudiation.
Analysis:
This case provides a critical interpretation of UCC § 2-609, clarifying that 'reasonable grounds for insecurity' must arise from objective, post-contracting events that change the expectation of performance, not from a party's subjective doubts or a re-evaluation of business risks assumed at the time of contracting. It establishes that § 2-609 cannot be used as a tool to impose new terms or gain a better bargain than the one originally negotiated. The decision creates a clear distinction between a permissible demand for 'adequate assurance,' which confirms the original deal, and an impermissible demand for new contractual obligations, which constitutes a repudiation. Future cases will look to this analysis to evaluate the reasonableness of both the grounds for insecurity and the nature of the assurance demanded.
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