JIM D. PAPPAS, Bankruptcy Judge.
Plaintiff Tyson Fresh Meats, Inc. ("Tyson") sued chapter 11 debtor, Defendant Hollifield Ranches, Inc. ("Hollifield"), to recover the damages its suffered as a result of Hollifield's breach of a cattle feeding contract. Hollifield, defended, and in turn, asserted a counterclaim alleging that it was Tyson that breached the parties' agreement. In particular, Hollifield claims that Tyson failed in performing its contractual duty to manage the cattle market risks associated with the parties' agreement in a reasonable and customary manner.
The Court conducted a trial in the adversary proceeding on August 22 and 23, 2013. The parties thereafter submitted closing arguments. Dkt. Nos. 75, 77, 80, and 81. This Memorandum constitutes the Court's findings of fact, and conclusions of law. Rule 7052.
Prior to the commencement of Hollifield's chapter 11 case, the parties entered into a contract entitled "Tyson Fresh Meats Cattle Feeding Agreement with Double H Cattle Co." (the "Contract").
The Contract obligated Hollifield to locate and purchase cattle for placement into a Tyson grower program it referred to as the "Pioneer Model." Under this arrangement, when Hollifield identified acceptable cattle, Tyson would advance funds to, or reimburse Hollifield for, the purchase of the cattle, which would be kept and cared for at Hollifield's facilities. Tyson would then pay Hollifield all amounts required to fund the "grow" and feed expenses incurred in fattening the cattle, although Tyson would charge Hollifield agreed interest on the amounts so advanced. Hollifield's primary responsibility under the Contract was to select the particular cattle, and to feed and care for them until they reached an "acceptable finished weight[,] and [to deliver them to Tyson's] Pasco, W[ashington] Plant for slaughter." Exh. 101 at 1. As consideration for its participation in this arrangement, Hollifield guaranteed that Tyson would receive a fifteen dollar profit per head.
Tyson provided Hollifield periodic and regular reports concerning the expenses being incurred for the groups or "lots" of cattle placed in the program, and when the animals were delivered by Hollifield to Tyson, Tyson provided Hollifield with a final accounting the parties used to determine their entitlements and liabilities as to each lot. Included in the final accounting were Tyson's calculations for the amount of profit or loss incurred on each lot due to the risk management measures employed by Tyson using a technique known as a "hedge."
Exh. 101 at 2-3. As can be seen, if the purchase and sale prices, and the grow costs incurred concerning a particular lot of cattle under the Contract, are similar to those in Example 1, the result is that Tyson owes money to Hollifield. Example 2 reflects a situation where, after the accounting, Hollifield is obligated to pay Tyson.
Even though the profitability of this venture, for Hollifield, could be dramatically affected by the risk management techniques employed, the Contract calls for the risk management to be solely Tyson's responsibility. The relevant paragraph of the Contract provides:
Exh. 101 at 2.
The risk management provision in the Contract was expressly negotiated by the parties. Hollifield had initially sought out contract opportunities with Tyson. Based upon his expressed interest, in February 2010, Mr. Brandenburg and another Tyson representative, Larry Roberts, met with Mr. Hollifield at the Boise airport. After discussing Hollifield's interest in participation in the Pioneer Model program, at that meeting, Mr. Brandenburg specifically quizzed Mr. Hollifield concerning whether he would want to be responsible for performing any necessary risk management to protect Hollifield during its participation in the program. In response, Mr. Hollifield made it clear that he wanted Tyson to be solely responsible for the risk management decisions under the Contract because he did not want the distraction of having to manage the risk, and because he wanted Tyson's "people" to make those decisions.
The parties dispute whether the Tyson representatives disclosed to Mr. Hollifield at the meeting that Tyson's risk management strategies under the Pioneer Model were to be conservative, and that the only risk management technique Tyson would employ was the purchase of short hedges for cattle enrolled in the program. Mr. Hollifield alleges that this was not disclosed to him. Tyson contends that, through the statements of its agents, Mr. Hollifield was indeed told about Tyson's approach to risk management practices, and that, as an alternative to Tyson's methods, Mr. Hollifield was offered the option of managing his own risk under the Contract. The Court finds the testimony of Mr. Brandenburg on this topic was cogent and convincing, and represents a more complete account of the parties' meeting at the airport. The Court finds, as a matter of disputed fact, that Mr. Hollifield was told that Tyson would use only short hedges on each lot of cattle placed in the program, and despite such knowledge, that Mr. Hollifield elected to delegate risk management solely to Tyson.
Having reached their deal and executed the Contract, Hollifield began the process of identifying cattle for placement in the Tyson program, some of which were his own cattle, and others acquired from third parties. As cattle were purchased by Hollifield for Tyson under the Contract, Mr. Hollifield would submit a form to Tyson containing his calculations of the expected grow costs for the cattle, and his projections of income to be received from the cattle at slaughter. In particular, these reports identified what Mr. Hollifield estimated were to be the "breakeven" calculations for each lot of cattle, or in other words, his projections of the necessary income at sale required to pay for his estimated costs of acquiring and growing that lot of cattle, along with a built-in profit for Hollifield. This calculation was a significant one, since one of the ways that Hollifield profited from this enterprise was based on its ability to meet its expense projections. Exhibits 112-149 contain, among other information, the breakeven calculations provided to Tyson by Hollifield for the lots of cattle enrolled in the program.
The reports submitted to Tyson were also important for another reason. When they were received, Tyson would use the information in them to place a short hedge on the cattle in that particular lot that would, effectively, lock in a return to the parties at or above the breakeven point provided by Hollifield. Thus, in theory, by using this technique, whether the market price for the finished cattle went up or down in relation to the acquisition price and grow costs, if Hollifield met its breakeven grow cost projections, it would make a profit on each particular lot under the Contract. If the market price for cattle declined prior to slaughter, the hedge protected the parties. But, of course, if Hollifield could not meet the breakeven projections, and if the market price for cattle increased, because of the short hedge, Hollifield stood to lose money on the arrangement.
During its course of performance under the Contract, Hollifield enrolled, grew, and delivered to Tyson, over 12,000 head of cattle, divided into lots. See Exhibit 204. While Hollifield's participation in the program was, for a time, profitable, the market price for cattle later began to move. Because of this, Tyson alleged that several lots of the cattle enrolled in the program and eventually delivered by Hollifield to Tyson resulted in a loss for Hollifield under the terms of the Contract. More precisely, as detailed in Exhibit 157, and using the calculations required by the Contract, Tyson alleges that Hollifield owes Tyson a total of $958,442.43.
Hollifield does not dispute the accuracy of the Tyson's calculations in Exhibit 157. However, Hollifield alleges that it suffered unnecessary losses under the Contract because Tyson breached it duty to perform proper risk management. Hollifield therefore asserts it is not indebted to Tyson, and indeed, that Tyson owes Hollifield breach of contract damages for losses its suffered as a result of its inadequate risk management decisions.
More precisely, during the term of the Contract, the market price for cattle generally increased, indeed, during some periods, precipitously. During this time, as he received Tyson's weekly reports of activities on its accounts, Mr. Hollifield noticed that Hollifield was incurring consistent losses as the combined result of these market shifts and the short hedges placed on the cattle by Tyson. See, e.g., Exh. 151. Mr. Hollifield testified that he contacted Mr. Brandenburg via telephone in January 2011 to report his concern on at least one occasion. Mr. Hollifield testified that in this conversation he asked Mr. Brandenburg if Tyson was doing risk management as required under the Contract. Mr. Hollifield apparently made it clear to Mr. Brandenburg that he was not happy with Tyson's decision to use only short hedges to manage risk, especially in the face of a rising cattle market. Mr. Brandenburg's reaction to Mr. Hollifield's concern was to offer, if Mr. Hollifield so chose, to "pick up" the cattle from Hollifield, and as the Court understands this remark, to effectively terminate the parties' relationship. Importantly, however, it is undisputed that Mr. Hollifield never requested, orally or in writing, that Tyson use other risk management techniques. Mr. Hollifield also did not elect to end Hollifield's participation under the Contract.
On September 9, 2010, Hollifield filed a chapter 11 petition. Bankr. No. 10-41613-JDP, Dkt. No. 1. On December 27, 2010, at the joint request of Hollifield and Tyson, the Court approved Hollifield's assumption of the Contract as an executory contract. Bankr. Dkt. No. 158. Later, when the parties' relationship disintegrated, Hollifield and Tyson jointly moved to reject the Contract, a motion the Court granted on March 16, 2012. Bankr. Dkt. No. 451.
Tyson filed a complaint against Hollifield commencing this adversary proceeding on March 9, 2012. Adv. No. 12-08030-JDP, Dkt. No. 1. It alleged that Hollifield had breached the Contract, and requested that the Court determine the amount of its damages, and that it declare the award to Tyson constitutes an administrative expense payable in full under the terms of Hollifield's confirmed chapter 11 plan.
Hollifield filed a counterclaim alleging that Tyson had breached the Contract based upon its failure to properly manage the risk of the cattle market as required by the agreement. Adv. Dkt. No. 6. Due to Tyson's breach, Hollifield argued it was excused from performance of the Contract, and that it did not owe Tyson any amounts. Further, Hollifield claimed it was entitled to recover substantial money damages from Tyson.
At the trial, the parties focused their presentations on whether Tyson's use of only short hedges for risk management was "reasonable and customary" as required by the Contract. On this topic, Tyson offered the testimony of Dwight Bibbs, Tyson's Vice President of Risk Management and Procurement, the person charged with placing the hedges, to explain Tyson's approach to risk management in this case. Mr. Bibbs, Tyson's experienced risk manager, testified that after a short hedge was placed on a lot of cattle enrolled in the program by Hollifield, Tyson's practice was not to continually monitor the hedge. He stated that Tyson would only receive notice of the outcome of the hedge upon the sale of the cattle. As to whether this approach to risk management was the "reasonable and customary use of hedging practices," the Court heard the opinions of two other witnesses.
First, Mr. Hollifield, a long-time cattleman, opined that Tyson's approach to risk management was sub-par based upon his own significant experience in managing risk in the cattle marketplace for his own operations. Instead of using only short hedges, Mr. Hollifield believed that reason and prudence required Tyson to also purchase "options"
Tyson presented an expert, Dr. James Mintert, to testify about this issue. Dr. Mintert's credentials are impressive, and his testimony was logical and persuasive. As someone who both teaches agribusiness risk management at a large university, and who has been personally involved in cattle enterprises, Dr. Mintert's education, background and experience in studying, writing about, and actually engaging in risk management in the cattle market nationwide was substantial and impressive. Dr. Mintert offered his expert opinion that, under these facts, Tyson employed reasonable and customary risk management by placing short hedges on all of the cattle placed into the program.
In particular, although Dr. Mintert acknowledged that options could have been employed by Tyson in tandem with the short hedges, he pointed out that options were expensive to purchase, and Hollifield would be required to pay that cost under the Contract. In addition, based upon his review of the cattle market during the pendency of the Contract, he opined that there would not likely have been any significant benefit to Hollifield had options been purchased. Dr. Mintert testified that, as Tyson did with the Hollifield cattle, using only short hedges was a justifiable, conservative approach to risk management, that it was the same course employed by many cattle companies that he was aware of under similar circumstances, and that many of those companies had succeeded in the market over the long-term employing such technique. Dr. Mintert stated that, in his expert opinion, Tyson had employed a risk management technique that was both reasonable and customary in its dealings with Hollifield.
Familiar Idaho legal principles control the outcome in this case.
"A contract must be interpreted according to the plain meaning of the words used if the language is clear and unambiguous." Hill v. Am. Family Mut. Ins. Co., 249 P.3d 812, 815 (Idaho 2011). In interpreting a contract, a court must construe it "to give effect to the intention of the parties," Wing v. Martin, 688 P.2d 1172, 1178 (Idaho 1984), and "must consider it as a whole and give meaning to all provisions of the writing to the extent possible." Idaho Power Co. v. Cogeneration, 9 P.3d 1204, 1214 (Idaho 2000). "If, however, the contract is determined to be ambiguous, the interpretation of the document is a question of fact which focuses upon the intent of the parties." McKay v. Boise Project Bd. of Control, 111 P.3d 148, 156 (Idaho 2005) (quoting Albee v. Judy, 31 P.3d 248, 252 (Idaho 2001)) (internal quotations omitted). A contract is ambiguous if it is "reasonably subject to conflicting interpretation." McKay, 31 P.3d at 156 (quoting Bondy v. Levy, 829 P.2d 1342, 1345 (Idaho 1992)).
In order to establish a claim for breach of contract, the plaintiff must prove "(a) the existence of a contract, (b) breach of the contract, (c) the breach caused damages, and (d) the amount of those damages." Mosell Equities, LLC v. Berryhill & Co., Inc., 297 P.3d 232, 241 (Idaho 2013) (citing O'Dell v. Basabe, 810 P.2d 1082, 1099 (Idaho 1991)). A breach of contract may be a material breach, also known as total breach, or a partial breach. Enterprise, Inc. v. Nampa City, 536 P.2d 729, 735 (Idaho 1975). A material breach of contract occurs as the result of "`a non-performance of [a] duty that is so material and important as to justify the [non-breaching party] in regarding the whole transaction as at an end.'" Id. (quoting 4 CORBIN ON CONTRACTS § 946 at 809 (1951)). Put simply, a material breach is one that violates the "fundamental purpose" of the contract and excuses the non-breaching party from performing under the contract. J.P. Stravens Planning Assocs., Inc. v. City of Wallace, 928 P.2d 46, 49 (Idaho Ct. App. 1996); see also State v. Chacon, 198 P.3d 749, 752 (Idaho Ct. App. 2008) ("If a breach of contract is material, the other party's performance is excused.").
There is no dispute that a contract existed between Tyson and Hollifield, and that Exhibit 101 is a true and correct copy of the Contract. In this case, the parties dispute the meaning of the Contract, and indeed focus on a single sentence:
Ech. 101 at 2.
Although the risk management provision of the Contract could have been more artfully drafted, the Court finds it is not ambiguous, and that the Contract's plain language must be enforced. Considering the Contract as a whole, and endeavoring to assign the words used the effect the parties intended, the Court concludes this provision was meant by the parties to task Tyson with sole responsibility for management of the market risks attendant to the parties' cattle transactions, which duty would be satisfied by Tyson's employment of "reasonable and customary" hedging practices.
The terms of the Contract selected for use by the parties in the Contract should be given their ordinary meaning. "Reasonable" should be understood to refer to practices that are "fair, proper, or moderate under the circumstances." BLACK'S LAW DICTIONARY 1379 (9th ed. 2009). When used in a contract, the term "reasonable" is understood to be an unambiguous reference to an objective industry or market standard. See Ergon-West Virginia, Inc. v. Dynegy Mktg. & Trade, 706 F.3d 419, 425 (5th Cir. 2013) ("The word `reasonable' is not ambiguous. When it modifies other terms in a contract—reasonable time, reasonable value—it is used by the parties to designate that specific time, value, or dispatch that would be thought satisfactory to the offeror by a reasonable man in the position of the offeree . . . [it] is a question of fact that must be answered by looking to the circumstances of the case, including the nature of the proposed contract, the purposes of the parties, the course of dealings between them, and any relevant usage of trade.") (quotation marks and citations omitted); see also Missouri v. Jenkins by Agyei, 491 U.S. 274, 286 (1989) (addressing what is a "reasonable" attorney fee, stating "we have consistently looked to the marketplace as our guide to what is `reasonable.'"); Lickley v. Max Herbold, Inc., 984 P.2d 697, 700-01 (Idaho 1999) (applying the open market rate for potatoes to supply the "reasonable" price left out of the contract by the parties to the agreement); D.R. Curtis, Co. v. Matthews, 653 P.2d 1188, 1191 (Idaho Ct. App. 1982) (looking to the wheat market price at the time of contracting to supply a "reasonable" price for the parties' contract that failed to set a price). Similarly, "customary" in this context refers to the "custom and usage" in the industry, and is understood to mean the "[g]eneral rules and practices that have become the norm through unvarying habit and common use." BLACK'S LAW DICTIONARY 442 (9th ed. 2009); see also Nordstrom v. Diamond Int'l Corp., 710 P.2d 628, 631 (Idaho Ct. App. 1985) (noting the general rule that "the custom and practice of a trade become part of a contract between parties within that trade having knowledge of the custom, unless the contrary appears [in the contract]."). Importantly, regardless of Tyson's decisions about risk management, if Hollifield so requested during the pendency of the Contract, the parties were obliged to "mutually agree" to the use of different hedging practices.
Hollifield argues that the risk management provision of the Contract is ambiguous, and in interpreting its terms, the Court must construe its terms against the drafter—Tyson. Hollifield cites the Court to Jensen v. Seigel Mobile Homes Grp., 668 P.2d 65, 72 (1983) for this proposition. Under its reading of the risk management provision, Hollifield could "request different hedging practices" only if it wanted Tyson to employ practices that were not reasonable and not customary. This explains why, Mr. Hollifield insists, he never requested that Tyson use different risk management practices, like options, and why, despite never having asked Tyson to change its practices, Hollifield bears no responsibility for any resulting losses.
Hollifield's interpretation of the relevant provisions of the Contract is too strained to accept. Hollifield's reading assumes that the purpose of this provision in the Contract is, in effect, to allow Hollifield to gamble its potential for profits through use of nontraditional (i.e. unreasonable or non-customary) risk management methods. This reading further assumes that Hollifield and Tyson would be able to "mutually agree" to Hollifield's wagers, without explaining why it would ever be in Tyson's interest to do so. Because this scenario is so doubtful, Hollifield's efforts to create an ambiguity in the Contract where none otherwise exists is unpersuasive. Put another way, the Court declines to construe the Contract solely to enable Hollifield to enhance its risk of loss.
The Court concludes that the risk management provision of the Contract at issue here is not "reasonably subject to conflicting interpretation," and therefore, the Court must give ordinary meaning to the plain language of the Contract.
Employing a plain meaning approach to interpreting the Contract, the Court must now determine whether either party breached the Contract; whether that breach caused damages; and the amount of those damages. Mosell Equities, LLC, 297 P.3d at 241.
Tyson argues that Hollifield breached the Contract, and it is entitled to recover $958,442.43 in damages, as calculated in Exhibit 157. As noted above, there is no dispute that a contract was formed, nor is there any dispute about of the amount Tyson may recover due to Hollifield's non-payment. However, Hollifield argues that it is excused from performing under the Contract, and thus paying the sum it admits would otherwise be due, because Tyson breached its duty under the Contract to manage "market risks through the reasonable and customary use of hedging practices," as the Contract provides.
On this record, and in particular, based upon Dr. Mintert's expert opinion that Tyson's use of only a short hedge in this setting was consistent with reasonable and customary hedging practices in the cattle industry, the Court concludes Tyson fulfilled its contractual obligations to manage the cattle market risks and therefore Tyson did not breach the Contract. Dr. Mintert explained that, although the exclusive use of short hedges by Tyson was indeed "conservative," its strategy was reasonable under these facts, and a course that is customary in the cattle industry. This conclusion makes sense to the Court. After all, at his request, Tyson was managing risk for Hollifield, so the use of conservative techniques would seem appropriate.
Mr. Hollifield's testimony on this subject, although indicative of his own risk management philosophies, did not address what risk management techniques should be regarded as "reasonable and customary" in the industry as a whole.
In short, Hollifield's evidence and testimony fails to show Tyson breached the Contract in its hedging practices. In addition, while the Court greatly respects Mr. Hollifield's personal experience in his own ventures, the proof did not demonstrate that his standards for appropriate risk management represent industry standards.
In sum, Hollifield breached the Contract, and according to its terms, Hollifield is indebted to Tyson. Hollifield's counter-claim fails because Hollifield did not prove that Tyson failed to employ reasonable and customary risk management practices.
The Court concludes that Tyson is entitled to a judgment against Hollifield for $958,442.43, which sum is deemed to constitute an allowed administrative expense for purposes of § 503(b) and payment under Hollifield's confirmed chapter 11 plan. Counsel for Tyson shall submit an appropriate form of judgment consistent with this Memorandum. Counsel for Hollifield will approve the form of the judgment.
