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Integrity Bio-Fuels, LLC v. Musket Corporation

United States District Court, S.D. Indiana, Indianapolis Division

March 27, 2015

INTEGRITY BIO-FUELS, LLC, Counter Defendant.



This matter comes before us on the parties' motions for partial summary judgment. Plaintiff Integrity Bio-Fuels, LLC filed a Motion for Partial Summary Judgment on August 15, 2014 [Dkt. No. 60] to which Defendant Musket Corporation has responded [Dkt. No. 72]. Likewise, Defendant Musket filed a Motion for Partial Summary Judgment on August 15, 2014 [Dkt. No. 64] to which Plaintiff Integrity responded [Dkt. No. 73]. For the following reasons, we DENY both parties' motions for partial summary judgment.

Background and Material Facts at Issue

Integrity brought this action on April 12, 2013, in the Shelby County Circuit Court, seeking recovery for Musket's alleged breach of contract and payment for biofuel delivered by Integrity to Musket, among other theories of relief. On May 10, 2013, Musket removed the case to this Court based on diversity jurisdiction, and followed with its Answer and Counterclaim ("Counterclaim") on May 28, 2013, opposing Integrity's claims in its Complaint and seeking recovery under its own breach of contract, breach of warranty, and negligence theories. The parties agree that a contract between them existed and they agree as to its terms.

Integrity is a fuel manufacturer with a plant located in Morristown, Indiana. [Dkt. Nos. 61 at 2, 65 at 1.] One of the fuels that Integrity manufactures is biodiesel. [Dkt. No. 65 at 1.] In 2012, the primary purchaser of Integrity's biodiesel was Musket. [ Id. ] Musket is the fuel supplier for Love's Travel Stops & Country Stores, with which it shares a common ownership. [ Id.; Dkt. No. 61 at 2.]

The Contract.

Integrity and Musket began their business dealings around 2010 or 2011. [John Whittington Deposition ("Whittington Dep.) at 22.] Contracts between the parties were reached through the use of a third-party broker, Progressive Fuels Limited, and would usually last one to three months and cover the sale of up to one million gallons of B100. [ Id. at 25-28.] The parties have had at least seven agreements for Integrity to sell 2, 520, 000 gallons B100 to Musket. [Dkt. No. 73 at 2 (citing Dkt. Nos. 73-2 through 73-8).] Up until June 2012, the parties did not have any serious disagreements or issues between them and had a generally positive working relationship throughout their numerous contracts and millions of gallons of fuel exchanged. [Michael Whitney Deposition ("Whitney Dep.") at 35; Musket's Resp. to Requests for Admissions at 5 (No. 23).]

On or about March 19, 2012, Integrity and Musket again entered into a contract for the sale of biodiesel (the "Contract"). [Compl. at ¶¶ 6, 23; Counterclaim at ¶¶ 11, 31.] Under the terms of the Contract, Musket was to purchase one million gallons of B100 biodiesel to be sold and picked up in installments from Integrity for $4.99 per gallon between the dates of April 1, 2012 and June 30, 2012. [Compl. at Ex. A; Musket RFA Resp. at 1 (No. 1).] The parties agree that the Contract is an installment contract. Integrity contends that the contract was formalized in a written trade confirmation; however, Musket alleges that the trade confirmation does not reflect all of the terms agreed to by the parties. [Dkt. No. 62-3; Musket RFA Resp. at 2 (No. 3).] The B100 was to be provided with 2012 Code D4 biodiesel RINs (renewable identification numbers) attached. [Compl. at Ex. A.] From April 1 through June 3, 2012, Musket purchased approximately 550, 000 gallons of biodiesel from Integrity, which was valued at approximately $2.7 to $2.8 million.[1] [Compl. at ¶ 11; Whittington Dep. at 56-57; Dkt. Nos. 62-6, 62-7.]

Sale and Purchase of Certified B100.

When Musket purchased biodiesel from Integrity, the biodiesel was picked up by Gemini trucks at Integrity's plant in Morristown. [Whitney Dep. at 16-17.] Deliveries or pickups under the Contract were handled through a scheduler using email. [Taylor Dawson Deposition ("Dawson Dep.") at 40-41.] The fuel was delivered by Gemini to tanks located at Love's stores, and title passed to Love's upon the blending of the product in an underground tank at the Love's store. [Whitney Dep. at 43-44.] Love's blended biodiesel with diesel which it sold to customers. [ Id.; Brian Kernke Deposition ("Kernke Dep.") at 39.]

To be marketable as B100, biodiesel must meet all of the specifications of ASTM D6751. [Craig Hatfield Deposition ("Hatfield Dep.") at 9-10, 14-16, 43; Kernke Dep. at 14, 56-57, 214; Dawson Dep. at 48-49, 65-69; Whittington Dep. at 28, 49, 62-63).] Fuel must also meet the specifications of ASTM D6751 to be eligible for RINs and tax credits. [Dawson Dep. at 65.]

One of the specifications under ASTM D6751 is that the B100 pass the cold soak filtration test (CSFT). [Whittington Dep. at 27-28; Hatfield Dep. at 15, 46.] A CSFT "is a good indicator for contaminants in the fuel" and is a "specification that has to be passed [for fuel] to be D6751 compliant." [Kernke Dep. at 57.] Integrity's quality control program has been managed by Craig Hatfield since 2011. [Hatfield Dep. at 5-6.] The object of Integrity's quality plan is to follow ASTM D6751. [ Id. at 15.] When a tank of biodiesel has been fully processed and ready for sale, it is certified by Integrity. [ Id. at 38, 56.] For each batch of biodiesel that is certified by Integrity, Integrity maintains custody of a sample, referred to as a "retain." [ Id. at 72-75.]

Love's Customer Complaints.

Around May 23, 2012, Love's started receiving complaints from drivers who had fueled at Love's stores regarding plugging of fuel injectors and fuel filters and other similar engine problems. [Kernke Dep. at 31-33, 36-37, 52, Ex. 16.] The majority of these complaints were from customers who purchased fuel at five Midwestern Love's stores: Whiteland, Indiana; St. Paul, Indiana; Bellville, Indiana; Richmond, Indiana; and Jeffersonville, Ohio. [Musket Resp. to RFA at 3 (No. 8).] Upon receiving a number of these complaints, the shared Quality Department for Musket, Love's, and Gemini, headed by Brian Kernke, undertook an investigation to determine the cause of the complaints. [Kernke Dep. at 37.] The investigation revealed that as many as seven suppliers had shipped B100 to the affected Love's stores. [ Id. at Ex. 16.]

Kernke had been hired by Musket Corporation in May 2006 and has worked in the biodiesel department since 2006. [Kernke Dep. at 8-9.] Since 2007, Kernke has worked exclusively in quality and biodiesel vetting, which involves testing the fuel of new suppliers. [ Id. at 12.] Kernke's current title is the General Manager of Fuel Quality. [ Id. at 15.] Kernke has responsibility for the quality of fuel at all of Love's approximately 310 nationwide stores. [ Id. at 15.]

Kernke investigated the complaints coming from Love's customers and prepared a spreadsheet using the Kepner Tregoe (KT) analysis method.[2] [Kernke Dep. at 34-35, Ex. 16.] Based on his investigation, Kernke believes that the consumer complaints experienced by Love's customers were caused by calcium carboxylate salts caused by bad production from Integrity biodiesel that could have been related to the feed stock used. [ Id. at 53.] Kernke could not identify the root cause of the bad fuel received from Integrity without additional testing. [ Id. at 53-54.]

As part of Kernke's investigation, Integrity sent retains from three batches of biodiesel (a batch is that which is held in a tank by Integrity [Kernke Dep. at 157-58])[3] to an independent third party laboratory called Intertek. [Hatfield Dep. at 75.] Intertek tested the samples from Integrity according to the standards of ASTM D6751. The results of the tests were reported to Integrity and shared by Craig Hatfield with Love's in an email dated Monday, June 11, 2012. [Kernke Dep. at Ex. 19.] The results of the testing done by Intertek Labs showed that two of the three sampled retains of the Integrity biodiesel failed the CSFT. [Hatfield Dep. at 75; Herrell Dep. at 78; Kernke Dep. at 148-49, Ex. 26.] As a result of two of the three samples failing the cold soak filtration test, Musket contends that "67% of the product sold by Integrity was not the agreed product under the Contract." [Dkt. No. 65 at 16.] Integrity disagrees. It contends that the two tested loads "accounted for just 49, 051 gallons of biodiesel, or 4.9% of the Contract or 2.5% of all biodiesel sold to Musket by Integrity." [Dkt. No. 73 at 8 (citing Dkt. No. 73-10 (List of Musket Sales)); Dkt. No. 73-14 (Bill of Lading from Integrity Biofuels dated June 4, 2012).]. Integrity contends that other than the two samples that failed the cold soak filtration test, "Musket has not presented a single piece of evidence showing that any other load received from Integrity contained biodiesel that failed to conform to B100 standards." [Dkt. No. 73 at 8.]

Integrity Plant Shut Down and Improper Certification.

Around May 25, 2012, Integrity experienced a spike in the CSFT times on one of the batches of its biodiesel. [Hatfield Dep. at 53.] The batch of biodiesel with the high CSFT times during processing was certified by Integrity on May 26, 2012 and sold to Musket. [ Id. at 54-56.] Hatfield, Integrity's quality control manager since 2011, testified that the batch was incorrectly certified based on samples that had been recirculated through filters when the bulk of the tank had not been recirculated through the filters. [ Id. at 78-79, 5-6.] Because the samples had been recirculated through the filters when the rest of the tank had not, those samples were not representative of that batch. The samples should have been taken from the tank, at the top, middle, and bottom. [ Id. at 78-79.] Hatfield believed that if the samples had been done properly, they would not have passed the internal cold soak filtration test and the batch could have been reworked. [ Id. at 79.]

On June 4, 2012, Integrity's plant manager, Guy Herrell, notified several Musket employees that Musket would not be able to pick up biodiesel from Integrity's plant because a portion of Integrity's B100 needed to be re-washed and re-filtered, resulting in a temporary shut-down of Integrity's facility. [Herrell Dep. at 48.] That same day, Mr. Herrell sent an email to Taylor Dawson and Michael Whitney at Musket stating:

Michael and Taylor,

I wanted to inform you that we hit a slug of bad oil in our process and we have shut down the plant trying to get this material in our system cleaned up. According to our records and retains we did not have any bad oil leave the plant. Our quality system is designed for us to catch such a mishap if or when it does arise. We have been working diligently all weekend with extra staff trying different lab tests to resolve the issue. The Biodiesel reacted great, but for some reason it came out a little hazy. We have been working in the lab with various bio wash techniques to find out which method will get this product back to a prestine [sic] shape that Integrity Biofuels standards are set on. Again, I assure you that we will not let any product that does not meet our personal quality standards leave this facility. Because of those high standards I have to regretfully tell you that we are out of product at this time. Once we get back on track I will be the first to let you know. Sorry for the interruption and I hope that we can resolve this quickly.

[ Id. at 47-48, Ex. 6.] Integrity contends that these issues related to a minor haze in the fuel (none of which had left the plant) and not any failed cold-soak tests. [ Id. at 46.] According to Integrity, emails informing Musket that it could not pick up product were typical in the parties' relationship, as Integrity was periodically unable to meet a pick-up request from Musket due to Integrity's small production scale. [Dawson Dep. at 43.]

Musket contends that when Integrity shut down its plant for the slug of bad oil, there was no way to predict when production would resume. [Whittington Dep. at 36; Herrell Dep. at 50-51; Hatfield Dep. at 65-66.] Integrity disputes this fact. Integrity claims that it never provided Musket with any reason to believe that Integrity's plant would be shut down for any material period of time. [Dkt. No. 73 at 6.] Specifically, when Herrell informed Musket about the plant shutting down, he stated his belief that the plant issue would be resolved quickly, and in fact, Integrity was back to producing biodiesel within a week after the shutdown. [ Id. (citing Dkt. No. 62).]


According to Integrity, the Love's customer complaints were allegedly caused by particulates in Integrity's B100, causing the fuel to fail a cold-soak filtration test, a test used to determine fuel's risk of filter/injector plugging under extremely cold conditions [Dkt. No. 61 at 4 (citing Dawson Dep. at 53, 60)], [4] which were unrelated to the June 2012 issue at Integrity's facility because none of the hazy fuel failed any CSFTs or left the plant. [Dkt. No. 61 at 4, n.3 (citing Guy Herrell Deposition ("Herrell Dep.") at 46).] Musket disagrees, for three reasons: (1) Integrity admitted fuel quality problems in late May and early June of 2012 as described by Craig Hatfield [Hatfield Dep. at 53-55, 57-62, 78-79]; (2) the Intertek lab results showing the Integrity fuel sold to Musket at this time failed the cold soak filtration test [ Id. at 72-75; Kernke Dep. at Ex. 26]; and (3) the corroborative testimony of Love's Fuel Quality Manager, Brian Kernke, based on his investigation of the complaints contradicts Integrity's position [Kernke Dep. at 12, 34, 35, 53, 56-57, Exs. 16, 18, and 19; Kernke Aff. at ¶¶ 1-30]. [Dkt. No. 72 at 1-2.]

Integrity notes that Kernke's spreadsheet indicates other potential causes for the Love's customer complaints. [Dkt. No. 61 at 5 (citing Kernke Dep. at 34-35, 204-05, Ex. 16).] Kernke testified that he did not have any of the other suppliers' retains of either biodiesel or diesel (whose products were commingled with Integrity's) tested by a third party laboratory. [Kernke Dep. at 60-62, 91, 166-68, 204-05, 236-37.] It is Kernke's opinion (which is shared by Musket's third party laboratory, Afton Labs) that the presence of excessive metals (specifically, calcium carboxylate salts) in the subject fuel was the mechanical cause of Love's customer complaints in the relevant timeframe. [Kernke Dep. at 52, 163; Afton Chemical Report.] During his deposition, Kernke was asked to compare the results from Intertek's (a Musket-approved lab) metals content testing concerning Integrity's fuel retains, with the metals content testing performed by Iowa Central on certain Love's customers' end user fuel. [Kernke Dep. at 148-52, 144-46, 158-59, Ex. 26.] In every case, the metals content of Integrity's retains were within specifications, whereas the end user's fuel had metals content which failed the specification. [ Id. at 150-52, 145-46, Ex. 26.] Musket discounts the significance of this comparison because "[t]he fuel purchased by the Love's customers who provided their samples to Iowa Central may have come from different batches, so that the conclusions that Integrity is trying to assert cannot be drawn by comparing these two results." [Dkt. No. 76 at 7 (citing Kernke Dep. at 152-54, 159-60).]

Kernke's analysis pointed to Integrity even prior to receiving the lab results from Intertek. [Kernke Dep. at 55-56, Ex. 18.] Upon receiving the results from Intertek, Musket claims that it knew for sure that Integrity fuel was the problem causing the customer complaints because two of the three loads were off-spec. [ Id. at 56, Ex. 18.] As a result of receiving off-spec fuel from Integrity, Musket suspended their blending operations and lost the opportunity to blend the cheaper biodiesel into its diesel fuel. [Whitney Dep. at 83-84.]

"Integrity unequivocally disputes the fact that its biodiesel was the cause of the customer complaints that were received by Musket's sister company Love's." [Dkt. No. 73 at 7.] Integrity contends that Musket "has failed to produce any fuel samples, contaminated or damaged engine parts, or direct evidence tending to prove Love's customers were damaged by Integrity's biodiesel. Musket, at best, has established only that Integrity was one of the many suppliers who delivered biodiesel to the Love's locations that received customer complaints." [Dkt. No. 73 at 7.]

None of the three Love's stores affected most significantly had filters in place in their biodiesel blending mechanisms - which was a requirement of Kernke's quality control protocols. [Kernke Dep. at 82.] Kernke characterized the lack of filters as a "serious problem." [Kernke Dep. at 82-83, Ex. 22.] However, Kernke also explained that the Love's filters "are a redundant safeguard of the filters that should be in place at Integrity during load out." [Dkt. No. 72 at 14 (Kernke Aff. at ¶¶ 31-33).] Moreover, "[t]he lack of filters at any store would not contribute to any fuel quality problems, and would not be needed if the fuel from Integrity met the controlling ASTM standard." [Dkt. No. 72 at 14 (citing Kernke Aff. at ¶ 34).] Neither the Love's entities nor any third party laboratory has retained the affected engine parts relative to this matter, preventing any further testing on materials or fuel therein. [Kernke Dep. at 65; Funk Dep. at 60-61; LeBlanc Dep. at 13-15.]

The Parties' Response to B100 Testing and Integrity's Shut Down.

According to Musket, Integrity's sale of off-spec fuel destroyed the faith that Musket had in Integrity's quality procedures. [Dawson Dep. at 156.] On June 4, 2012, Kernke sent an email to Guy Herrell stating that the use of Integrity's product was suspended and terminating pickups of B100 from Integrity due to Musket's suspicion that Integrity's biodiesel was involved with the complaints they had. [Herrell Dep. at 59; Dawson Dep. at 75-76.] After this June 4, 2012, email, Musket did not pick up any more fuel from Integrity, did not attempt to schedule any more pick-ups from Integrity's Morristown facility, did not request any assurances of Integrity's performance pursuant to the Contract, nor did Musket ask for any other security for performance from Integrity with regard to its obligations under the Contract. [Whitney Dep. at 63; Musket Resp. to RFA at 3 (No. 12); Dawson Dep. at 89.] Around June 11, 2012 Herrell (with Integrity) had a communication with Whitney (with Musket). Herrell was told that Musket would never pick up Integrity's product again, and that Musket has a zero tolerance policy. [Herrell Dep. at 60.]

Integrity contends that it attempted to honor its contractual obligations with Musket by calling Musket employees several times from June through September of 2012 and requesting that fuel be picked up. [Dkt. No. 61 at 7 (citing Whitney Dep. at 52-53; Herrell Dep. at 60-62; Kernke Dep. at 77-81).] Integrity's owner, John Whittington, made multiple calls himself, speaking with several Musket and Love's employees about resolving the outstanding issues and finishing the remainder of the Contract. [Whittington Dep. at 51-53.] Musket disputes the suggestion that Integrity made calls to Musket in the month of June asking for loads of biodiesel to be picked up because none of the cited evidence supports a call in June. [Dkt. No. 72 at 2.] Mr. Dawson described a voicemail from Mr. Whittington to Mr. Whitney in August 2012, which was the first time Integrity offered to sell biodiesel to Musket to satisfy the Contract. [ Id. (citing Dawson Dep.; Compl. at ¶ 18; Answer at ¶ 8; Whitney Dep. at 17-22).] Whittington testified that in August he offered to buy back the two loads associated with the failed test results. [ Id. (citing Whittington Dep. at 63).] As a result, Musket contends that Integrity did not attempt to honor the Contract in June and "did not offer to remedy the breach until on or about August 18, 2012, over two months after the breach had occurred." [ Id. at 3 (citing Dkt. No. 65 at 20).]

According to Integrity, Musket still owes Integrity for between 37, 500 and 62, 7506 gallons of biodiesel it picked up prior to June 4, 2012, but has yet to submit payment. [Dkt. No. 62-6 (Invoice from Integrity dated 9-20-12).] After the June 4, 2012 plant shutdown, Musket claims that Integrity did not have any certified biodiesel until June 21, 2012. [Dkt. No. 65 at 7 (citing Integrity Answer to Interrogatory No. 15; Herrell Dep. at 59, 65-69).] Integrity disputes this fact as alleged by Musket. Integrity contends that it had biodiesel available for pickup on June 10, 2012. [Dkt. No. 73 at 6 (citing Integrity Answers to Intrrog. at 9-10).] Integrity does not certify its biodiesel until just before its delivery to a buyer. In this case, that did not occur until June 21, 2012, because Musket was the sole purchaser of B100 from Integrity, and Integrity was unable to find a new ...

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