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Date: 02-28-2000

Case Style: Shade Foods, Inc. v. Innovative Products Sales and Marketing Inc., et al.

Case Number: 970035

Judge: Paul Alvarado

Court: Superior Court, San Francisco County, California

Plaintiff's Attorney: Joseph A. Hearst, Pillsbury, Madison & Sutro, Costa Mesa, California, and Reginald D. Steer, Pillsbury Madison & Sutro, San Francisco, California, for Shade Foods, Inc.

Defendant's Attorney: David A. Fike of Emerich, Pedreira & Fike for Innovative Products Sales & Marketing, Inc.; Cheryl A. Orr, of Musick, Peeler & Garrett, and Richard S. Gilardi, of Lynch, Gilardi & Grummer, San Francisco, California, and Harry W.R. Chamberlain II, of Ginsburg, Stephan, Oringher & Richman, for Royal Insurance Company of America; Susan H. Handelman of Ropers, Majeski, Kohn & Bentley, for Northbrook National Insurance Company.

Description: Negligence - Breach of Contract - Breach of Warranty - Breach of Implied Covenant of Good Faith and Fair Dealing - Shade is a wholesale food manufacturer that makes ingredients for larger food-product companies. According to Shade's Senior Vice-president, General Mills is "by far" its largest customer and accounts for a "very large percentage" of its total sales. In cooperation with General Mills, Shade developed a process for manufacturing nut clusters composed mainly of diced almonds and congealed syrup with small portions of walnuts and pecans. Shade began manufacturing this product at a plant in Kansas in the late 1980's for use in a General Mills breakfast cereal called "Clusters." In 1993 and 1994, it sold about $12 million of the product to General Mills under a standard purchase order.

Shade initially purchased processed almonds from various suppliers in California for manufacture of nut clusters. In 1992 and 1993, Skip Petitt, an almond processor in Madera, California, made a bid for this business by forming IPS and installing equipment in his plant for roasting and dicing almonds to the specifications required for the product. Shade ultimately entered into an agreement with IPS for the supply of processed almonds during a three-year period beginning in October 1993. During the first months of the agreement, Shade ordered a relatively modest supply of almonds, but it began increasing its orders in 1994 and purchased its entire supply of almonds from IPS in March 1994. In 1994, Shade was insured by a commercial general liability policy issued by Royal with limits of $2 million per occurrence. IPS was insured by a package policy issued by Northbrook that provided general liability coverage with a $1 million limit per occurrence and property coverage for "stock" with a $3 million limit. The Northbrook liability insurance policy contained a vendor's endorsement that named Shade as an additional insured.

On April 5, 1994, General Mills notified Shade that wood had been found in the nut clusters used in its boxed cereals. Shade itself did not use wood in proximity to the facilities used to manufacture the product and suspected that the processed almonds supplied by IPS were the source of the problem. Upon manually inspecting 80,000 pounds of diced almonds from IPS, it found 295 pieces of wood splinters, weighing about a quarter of a pound. Many of the pieces were potentially injurious to consumers, being sharply pointed and one-fourth inch to two or three inches long. Shade identified a possible source of the contamination in a "bin lifter" at the IPS plant which dumped loads of almonds on wooden pallets into a hopper that fed a conveyor belt.

General Mills shut down its production of Clusters cereal, shipped its supply of nut clusters back to Shade, and destroyed its entire stock of contaminated boxes of cereal. Shade was unable to find any use for the contaminated nut clusters, but it was able to mitigate its losses on its stock of diced almonds by grinding the almonds into powder and selling them as almond paste. General Mills presented Shade with a claim that was ultimately reduced to the precise figure of $1,347,932.20. About $1 million of this sum represented the value of cereal it was compelled to destroy.

Upon learning of the wood contamination, both IPS and Shade promptly submitted claims to Northbrook and Royal, respectively. Royal appointed counsel to represent Shade and issued a coverage letter dated October 12, 1994, that appeared to offer coverage of $1 million, but, three months later, it informed Shade that it would pay for only 5 or 10 percent of the General Mills claim, or at most $150,000, representing its estimate of Shade's potential exposure to liability to General Mills. Northbrook denied liability insurance coverage in separate letters to IPS and Shade dated July 5, 1994, and August 5, 1994, respectively.

Though it never reconsidered its denial of coverage to IPS, Northbrook entered into negotiations with Shade for a period of months and made a highly conditional offer of $1 million in settlement of the General Mills claim in June of 1995. Meanwhile, Shade paid the full amount of the General Mills claim and calculated that its total losses caused by the wood contamination amounted to $2,454,557.70. On June 1, 1995, Shade brought an action for damages against IPS, Northbrook and Royal. With the agreement of the parties, the court divided the trial into two phases and submitted special verdicts to the jury after each phase. The first phase concerned the liability of the insureds, Shade and IPS, for the losses resulting from the almond contamination; the second phase concerned the liability of the insurers to the insureds.

Outcome: At the conclusion of the first phase, the jury found IPS liable to Shade and found Shade liable to General Mills. The verdict determined that the total damages suffered by Shade amounted to $2,146,640.60. After the second phase, the jury found that IPS had suffered business losses as a result of Northbrook's breach in the amount of $816,000 and made three separate awards of punitive damages against Northbrook and Royal. The final judgment involved a complex series of awards which may be divided into awards entered against Northbrook and against Royal. Against Northbrook: (1) $1,761,226.58 jointly to IPS and Shade as compensatory damages, consisting of $1 million for liability insurance coverage and $761,226.58 for property insurance coverage, plus interest; (2) $813,394 to IPS as compensatory damages for business losses, plus interest; (3) $2 million to IPS in punitive damages; (4) $445,950.47 to Shade as damages for attorney fees and expenses, plus interest; and (5) $3 million to Shade in punitive damages. Against Royal: (1) $1,054,419.50 to Shade as compensatory damages for liability insurance coverage, plus interest; (2) $447,637.28 to Shade as damages for attorney fees and expenses, plus interest; and (3) $8 million to Shade in punitive damages. Total award: $17,076,677

Plaintiff's Experts: Unknown

Defendant's Experts: Unknown

Comments: Northbrook and Royal appealed. The Court of Appeals of California, First District Division One reversed the judgments for punitive damages and modified a portion of the judgment pursuant to the other-insurance clause in the policies but otherwise affirmed. See: ___ Cal.Rptr.2d ___, ___ P.2d ___, ___ Cal.App.4th ___ (2000). Note: The above date reflects the appellate court decision date, not the original trial date. Reported by JAB.

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