1005-00005 · Nexford Industrial Holdings · Correspondence/Client

demand-response-strategy-letter.docx DOCUMENT Litigation

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CALDERWOOD & HARKNESS LLP Attorneys at Law

200 South Wacker Drive, Suite 4400 Chicago, Illinois 60606 Tel: (312) 555-8200

August 25, 2022

VIA EMAIL AND FIRST CLASS MAIL

ATTORNEY-CLIENT PRIVILEGED AND CONFIDENTIAL

Deborah Whitfield, Esq. General Counsel Nexford Industrial Holdings Inc. 4200 West Lakeshore Industrial Parkway, Suite 300 Waukegan, Illinois 60085

Re: Analysis of Demand Letter from Blackwood Stein & Associates LLP on Behalf of Cardinal Peak Industries; Recommended Defense Strategy

Matter No.: 1005-00005

MSA Reference: MSA-NIH-CPI-2020-001

Dear Ms. Whitfield:

I. Introduction and Purpose of Letter

Calderwood & Harkness LLP ("C&H" or the "Firm") was formally engaged by Nexford Industrial Holdings Inc. ("Nexford" or the "Company") on August 22, 2022 to provide legal representation in connection with the defense of claims asserted by Cardinal Peak Industries ("Cardinal Peak" or "Plaintiff") arising from the Master Supply Agreement dated January 15, 2020, bearing reference number MSA-NIH-CPI-2020-001 (the "MSA"). We appreciate the trust Nexford has placed in this Firm, and we write to provide our initial analysis and recommended litigation strategy.

As you are aware, on August 8, 2022, Cardinal Peak filed its Complaint in the Circuit Court of Cook County, Illinois, County Department, Law Division, bearing Case No. 2022-L-008471 (the "Complaint"). The Complaint formalizes claims that were first articulated in a demand letter dated June 10, 2022, transmitted by Blackwood Stein & Associates LLP ("Blackwood Stein"), located at 717 Seventeenth Street, Suite 2200, Denver, Colorado 80202, on behalf of Cardinal Peak. The demand was principally authored by Garrett Blackwood, a named partner at Blackwood Stein who also serves as lead litigation counsel in the now-filed action.

We have reviewed in detail the June 10, 2022 demand letter (the "Demand Letter"), the Complaint, the MSA and its exhibits, and the July 5, 2022 response you transmitted on behalf of Nexford rejecting the demand and asserting contract-based defenses. Your July 5 response was well-founded and correctly identified the principal contractual deficiencies in Cardinal Peak's position, including Cardinal Peak's failure to satisfy the conditions precedent under Section 7.4 of the MSA and its deviation from the surcharge calculation methodology set forth in Exhibit C to the MSA.

The purpose of this letter is threefold: (1) to provide a comprehensive analysis of the Demand Letter and the Complaint in light of the MSA's governing provisions; (2) to outline Nexford's three principal defenses and assess the Company's overall litigation exposure; and (3) to recommend a defense strategy and set forth the immediate action items necessary to position Nexford for a successful outcome, whether through dispositive motion practice, mediation, or trial. This letter also addresses necessary stakeholder notifications, expert retention, litigation budgeting, and a preliminary risk assessment.

We note at the outset that, based on our analysis, Nexford possesses strong, contract-grounded defenses that substantially reduce, and in large part eliminate, the claimed liability. As detailed below, we believe that Nexford's maximum additional exposure, above the $1.68 million already paid during the disputed period, is approximately $210,000 — a fraction of the $4.73 million Cardinal Peak demands.

II. Summary of Cardinal Peak's Demand

On June 10, 2022, Blackwood Stein & Associates LLP transmitted the Demand Letter to Nexford on behalf of its client, Cardinal Peak Industries, a limited liability company organized under the laws of the State of Colorado, with its principal place of business at 1580 Ridgeline Boulevard, Pueblo, Colorado 81001. The Demand Letter was signed by Garrett Blackwood and addressed to your attention as General Counsel of Nexford.

The Demand Letter asserts that Cardinal Peak is owed the sum of $4,730,000 (the "Claimed Amount") representing unpaid raw-material surcharges allegedly due under the MSA. The dispute covers the fifteen-month period from March 2021 through May 2022. However, it is important to note that the surcharges for one of those months — April 2021 — were paid in full by Nexford. Accordingly, the actual number of months in which surcharges remain in dispute is fourteen (14).

Cardinal Peak asserts that it invoiced total surcharges of $6,410,000 across the fifteen-month period. Nexford paid $1,680,000 on surcharges that the Company accepted as properly documented and calculated during that same period. Cardinal Peak claims an unpaid balance of $4,730,000, representing the arithmetic difference between the total invoiced surcharges ($6.41 million) and the payments received ($1.68 million).

The Demand Letter alleges breach of contract under the MSA and threatens additional claims for unjust enrichment. More specifically, the Demand Letter contends that the surcharges at issue relate to scrap, energy, and alloy components that Cardinal Peak claims were contractually authorized pass-through costs under Section 7.4 of the MSA. Cardinal Peak's position, as articulated in the Demand Letter, is that Nexford was obligated to pay all surcharges as invoiced and that Nexford's refusal to do so constitutes a material breach of the MSA.

The Demand Letter identifies the following key Cardinal Peak personnel as having been involved in the surcharge invoicing and dispute: Frank Delacroix, President and Chief Executive Officer; Natalie Gunderson, Vice President of Sales and Commercial; Patricia Morrow, General Counsel; and Harold Briggs, Controller. Ms. Gunderson and Mr. Briggs appear to have been the primary contacts responsible for generating and transmitting the Surcharge Notices at issue, while Ms. Morrow supervised the legal aspects of the demand prior to the engagement of outside counsel.

The Demand Letter demanded payment within thirty (30) days and indicated that Cardinal Peak would pursue litigation if the matter was not resolved. As noted above, your July 5, 2022 response on behalf of Nexford rejected the demand in its entirety and outlined Nexford's contractual defenses. Cardinal Peak did not respond substantively to your letter and instead filed the Complaint approximately one month later.

III. Overview of the Complaint

Cardinal Peak's Complaint, filed on August 8, 2022 in the Circuit Court of Cook County, Illinois, County Department, Law Division, as Case No. 2022-L-008471, asserts three causes of action:

Count I — Breach of Contract. Cardinal Peak alleges that Nexford breached its obligations under the MSA by failing to pay surcharges properly invoiced under Section 7.4 of the MSA.

Count II — Unjust Enrichment. Cardinal Peak alleges, in the alternative, that Nexford was unjustly enriched by receiving steel products at below-market cost while refusing to pay the raw-material surcharges that reflected Cardinal Peak's actual input costs.

Count III — Account Stated. Cardinal Peak alleges that Nexford's partial payments on certain surcharge invoices, combined with its failure to timely dispute the remaining invoiced amounts, gave rise to an account stated between the parties.

The Complaint seeks damages in the amount of $4,730,000, plus prejudgment interest at the statutory rate, attorneys' fees to the extent recoverable under contract or statute, and costs of suit.

Venue was selected as Cook County, Illinois, which is consistent with the forum selection and governing law provisions of MSA Section 14.3, which designates Illinois law as the governing law of the agreement. We do not anticipate a basis for challenging venue at this time.

Plaintiff's counsel of record is Garrett Blackwood and Megan Hsu, both of Blackwood Stein & Associates LLP. Based on our review of Blackwood Stein's litigation history, Mr. Blackwood is an experienced commercial litigator with a focus on supply chain and procurement disputes. Ms. Hsu appears to be a mid-level associate who will likely handle the day-to-day discovery and briefing responsibilities.

IV. Analysis of the Master Supply Agreement — Key Provisions

The MSA is the foundational document governing the parties' commercial relationship and the surcharge obligations at issue. Our analysis of Cardinal Peak's claims necessarily begins with a careful examination of the MSA's relevant provisions.

A. Background of the MSA

The MSA, bearing reference number MSA-NIH-CPI-2020-001, was executed on January 15, 2020, between Nexford Industrial Holdings Inc. (designated as "Buyer") and Cardinal Peak Industries (designated as "Seller"). The MSA establishes a framework supply arrangement for the purchase and sale of steel products, with detailed provisions governing pricing, surcharges, delivery, quality specifications, and dispute resolution.

The term of the MSA is three years, commencing on January 15, 2020 and expiring on January 14, 2023, subject to automatic renewal for successive one-year periods unless either party provides written notice of termination no fewer than 180 days prior to the expiration of the then-current term. As of the date of this letter, the MSA remains in effect and has not been terminated by either party.

Nexford Industrial Holdings Inc. is a Delaware corporation headquartered in Waukegan, Illinois. The Company is a precision metal fabricator and manufacturer of engineered components serving the automotive, heavy equipment, and infrastructure sectors. Nexford's annual revenue for fiscal year 2022 is approximately $287 million. Nexford is a portfolio company of Marlowe Asset Management Bluff Capital Partners, LP, a private equity firm that holds a majority ownership interest in the Company.

Cardinal Peak Industries is a limited liability company organized under the laws of the State of Colorado, with its principal place of business in Pueblo, Colorado. Cardinal Peak is a regional steel producer and distributor, with annual revenue for fiscal year 2022 of approximately $415 million. Cardinal Peak supplies hot-rolled and cold-rolled steel coil products to industrial fabricators and manufacturers throughout the Midwest and Mountain West regions.

The products covered by the MSA are hot-rolled coil ("HRC") and cold-rolled coil ("CRC"). The MSA establishes the following base pricing, which was set at the time of execution in January 2020 and is subject to quarterly adjustment pursuant to Section 7.2:

The estimated annual volumes under the MSA are approximately 18,000 tons of HRC and 6,500 tons of CRC, for a total of approximately 24,500 tons per year. At the stated base prices, this translates to an estimated annual spend of approximately $15.97 million, broken down as follows:

These figures provide essential context for evaluating the magnitude of Cardinal Peak's surcharge claims relative to the overall commercial relationship. The $4.73 million in disputed surcharges represents approximately 29.6% of Nexford's estimated annual base spend, which is an extraordinary figure that itself underscores the implausibility of Cardinal Peak's surcharge calculations.

B. Surcharge Clause — Section 7.4

Section 7.4 of the MSA is the central provision at issue in this dispute. It permits the Seller to pass through to the Buyer documented raw-material surcharges for scrap, energy, and alloy components incurred during the applicable invoice period. This surcharge mechanism is a common feature of long-term steel supply agreements and is intended to allocate commodity price risk between buyer and seller during periods of price volatility.

Critically, however, Section 7.4 does not grant Cardinal Peak an unconditional right to impose surcharges. The right to collect surcharges is subject to two express conditions precedent set forth in Section 7.4(a):

(a) The Seller must deliver to the Buyer a Surcharge Notice accompanied by supporting documentation no later than fifteen (15) business days after the end of the applicable month; and

(b) The surcharge components must be calculated in accordance with the methodology set forth in Exhibit C (Surcharge Methodology) to the MSA.

These are not mere procedural formalities — they are conditions precedent to Cardinal Peak's right to collect surcharges. Under well-established Illinois contract law, the failure to satisfy a condition precedent extinguishes the obligor's duty to perform. See, e.g., Gallagher v. Lenart, 226 Ill. 2d 208, 232 (2007) (holding that where a contract makes a party's obligation expressly conditional, the condition must be strictly satisfied). Accordingly, Cardinal Peak's failure to deliver timely Surcharge Notices with compliant calculations should, as a matter of law, bar its right to recover the improperly invoiced surcharges.

C. Exhibit C — Surcharge Methodology

Exhibit C to the MSA prescribes the specific methodology for calculating raw-material surcharges. The methodology is designed to provide an objective, verifiable, and transparent basis for surcharge calculations by tying them to published market indices rather than to the Seller's internal cost accounting.

Exhibit C specifies that surcharges are to be calculated using two published benchmarks:

(i) The Ferrous Scrap Index, as reported by Platts/SPI (S&P Global Platts, Steel Products intelligence); and

(ii) The Industrial Energy Cost Index, as published by the relevant governmental or industry reporting body.

The MSA establishes the following contractual baselines against which actual index values are to be measured:

Under Exhibit C, the surcharge for any given month is computed as the difference between the actual published index value for the applicable component and the contractual baseline, applied to the tonnage of product delivered during the relevant period. This methodology ensures that surcharges reflect only actual, verifiable increases in raw-material costs above the baseline levels that were incorporated into the MSA's base pricing.

Cardinal Peak's deviation from this methodology is a central element of Nexford's defense. As detailed in Section V.B below, Cardinal Peak did not use the published Ferrous Scrap Index or the Industrial Energy Cost Index in calculating its surcharges for the disputed period. Instead, Cardinal Peak employed an internal "blended cost" metric that incorporated Cardinal Peak's own proprietary cost data — including costs and allocations that are not contemplated by, and are not consistent with, the Exhibit C methodology. This substitution of internal cost data for published indices is a direct and material breach of the MSA's surcharge provisions.

D. Section 7.4(c) — 12% Surcharge Cap

Section 7.4(c) of the MSA establishes a cap on the aggregate monthly surcharge that may be imposed by the Seller. Specifically, the provision states that the aggregate monthly surcharge may not exceed twelve percent (12%) of the applicable Base Price for the relevant product category without the prior written consent of the Buyer.

Applying the 12% cap to the MSA's base prices yields the following maximum permissible monthly surcharges:

It is undisputed that Nexford never provided prior written consent to Cardinal Peak to exceed the 12% surcharge cap during the disputed period, or at any other time during the term of the MSA. Any surcharge amounts invoiced by Cardinal Peak that exceed these per-ton caps are, by the express terms of the MSA, contractually unenforceable. The cap provision is not subject to waiver by conduct or course of dealing — it requires affirmative "prior written consent," which was never given.

E. Section 7.4(d) — Dispute Procedure

Section 7.4(d) of the MSA establishes a specific procedure for disputing surcharges. The provision requires that the Buyer notify the Seller of any disputed surcharge within thirty (30) calendar days of receipt of the applicable Surcharge Notice. If a dispute cannot be resolved at the operational level, unresolved disputes escalate to the senior officers of the respective parties, and thereafter to mediation under Section 14.3 of the MSA.

Based on our review of the correspondence between the parties, Nexford consistently and timely disputed the surcharges at issue during the disputed period. Your office and Russell Okonkwo (Vice President, Procurement) exchanged multiple communications with Cardinal Peak's Natalie Gunderson and Harold Briggs objecting to surcharge calculations and requesting supporting documentation tied to the published indices. These contemporaneous disputes are critical to Nexford's defense, as they demonstrate that Nexford never acquiesced to the improperly calculated surcharges.

F. Section 14.3 — Dispute Resolution

Section 14.3 of the MSA establishes a mandatory mediation requirement as a precondition to litigation. The provision requires that disputes arising under the MSA be submitted to mediation in Chicago, Illinois before either party may initiate litigation. The MSA further specifies that Illinois law governs the interpretation and enforcement of the agreement.

We note that Cardinal Peak filed the Complaint without first pursuing mediation as required by Section 14.3. This failure to comply with the mandatory mediation provision may constitute a procedural defense and could provide a basis for seeking a stay of the litigation pending completion of the mediation process. We discuss the strategic implications of this defense in greater detail in Section VIII.E below.

V. Nexford's Three Principal Defenses

Based on our review of the MSA, the Demand Letter, the Complaint, and the documentary record available to date, Nexford possesses three principal defenses that, individually and collectively, substantially reduce and effectively eliminate the claimed $4.73 million in damages. We summarize each defense below, together with the supporting legal authority and recommended evidentiary development.

A. Defense One: Late Surcharge Notices ($2.18 Million)

Cardinal Peak failed to deliver compliant Surcharge Notices within the fifteen (15) business-day deadline prescribed by Section 7.4(a) of the MSA for seven (7) of the fourteen (14) disputed months. These late notices account for approximately $2,180,000 of the total claimed amount of $4,730,000.

Under Illinois law, when a contract expressly conditions one party's right to performance upon the satisfaction of a specified requirement — such as timely notice — that requirement constitutes a condition precedent to the right. The failure to satisfy a condition precedent excuses the other party's duty to perform, and the non-performing party cannot recover on the underlying obligation. See Gallagher v. Lenart, 226 Ill. 2d 208, 232 (2007); Ragan v. Columbia Mut. Ins. Co., 183 Ill. App. 3d 116, 121 (4th Dist. 1989) (holding that strict compliance with notice provisions is required where the contract makes timely notice an express condition).

Section 7.4(a) uses mandatory language — the Seller "must" deliver the Surcharge Notice "no later than fifteen (15) business days" after the end of the applicable month. This language unambiguously establishes timely delivery of the Surcharge Notice as a condition precedent to Cardinal Peak's right to collect surcharges. For the seven months in which Cardinal Peak failed to meet this deadline, its right to collect the associated surcharges should be deemed waived as a matter of law.

Recommended Action: We recommend compiling a detailed month-by-month chronology of the actual receipt dates of each Surcharge Notice, measured against the fifteen-business-day deadline for each applicable month. Russell Okonkwo, Vice President of Procurement, is likely to have the most comprehensive records of receipt dates, including email timestamps, courier tracking information, and internal date stamps applied by the Nexford procurement team upon receipt of incoming correspondence from Cardinal Peak. We request that Mr. Okonkwo be directed to compile these records at the earliest opportunity and make them available to C&H for review.

B. Defense Two: Deviation from Exhibit C Methodology ($1.47 Million)

As discussed in Section IV.C above, the MSA's Exhibit C prescribes that surcharges are to be calculated using the published Ferrous Scrap Index (Platts/SPI) and the Industrial Energy Cost Index, measured against contractual baselines of $340/ton for scrap and $48/ton for energy. Cardinal Peak did not follow this methodology.

Instead, Cardinal Peak calculated its surcharges using an internal "blended cost" metric that incorporated Cardinal Peak's own proprietary cost data, including internal allocations, overhead factors, and cost inputs that are not contemplated by Exhibit C. The blended cost methodology consistently produced surcharge figures that exceeded the amounts that would have resulted from a proper application of the published indices and contractual baselines.

This deviation from Exhibit C accounts for approximately $1,470,000 of the overstatement in Cardinal Peak's surcharge invoices. In other words, if the surcharges for the disputed period are recalculated using the published indices and the contractual baselines as required by Exhibit C — rather than Cardinal Peak's internal blended cost metric — the resulting surcharge figures are approximately $1.47 million lower than the amounts Cardinal Peak invoiced.

Nexford's position is clear and well-supported by the plain language of the MSA: surcharges are only payable to the extent they are calculated in accordance with Exhibit C. Cardinal Peak's decision to substitute its own internal cost data for the published indices specified in Exhibit C is a direct breach of Section 7.4(a)(b), and any surcharge amounts attributable to this deviation are not owed by Nexford.

Recommended Action: We strongly recommend the early retention of a qualified damages consultant or forensic accountant to perform an independent recalculation of the surcharges for all fourteen disputed months using the published indices and the contractual baselines. This recalculation will be essential both for dispositive motion practice and for settlement negotiations, as it will provide a quantified, expert-supported basis for Nexford's position.

We have identified Meridian Bridge Consulting LLC as a potential expert for this engagement. Dr. Anita Rosenthal, CPA, ABV, is a partner at Meridian Bridge with extensive experience in commercial damages analysis in the metals and industrial sectors. Dr. Rosenthal's office is located at 311 South Michigan Avenue, Suite 1500, Chicago, Illinois 60604. We will provide her curriculum vitae and engagement terms for your review upon authorization to proceed.

C. Defense Three: Surcharge Cap Exceedances ($1.08 Million)

For four (4) of the fourteen (14) disputed months, the surcharges invoiced by Cardinal Peak exceeded the 12% cap imposed by Section 7.4(c) of the MSA. The aggregate amount by which the invoiced surcharges exceeded the applicable caps during these four months totals approximately $1,080,000.

As detailed in Section IV.D above, the 12% cap is an express contractual limitation on the Seller's right to impose surcharges. Surcharges exceeding 12% of the applicable Base Price are permissible only with the "prior written consent" of the Buyer. It is undisputed that Nexford never provided such consent — not in writing, not orally, and not by any course of conduct that could reasonably be interpreted as consent.

The absence of written consent is a binary factual question that does not require expert analysis or complex evidentiary development. Either Cardinal Peak can produce a written consent from Nexford authorizing surcharges in excess of the 12% cap, or it cannot. We are confident that no such consent exists.

Accordingly, the $1,080,000 in excess surcharges above the 12% cap is not payable under the MSA, and Cardinal Peak's claim for recovery of these amounts should be dismissed.

D. Overlap and Net Exposure Assessment

We note that some overlap exists among the three defense categories described above. For example, a given month in which Cardinal Peak delivered a late Surcharge Notice may also be a month in which the surcharge calculation deviated from Exhibit C methodology and exceeded the 12% cap. In such cases, the full surcharge amount for that month may be subject to multiple, independent defenses.

To avoid double-counting the defensive offsets, we have performed a preliminary reconciliation analysis that accounts for the overlap among the three categories. After applying all three defenses — late notice, methodology deviation, and cap exceedance — Nexford's calculated maximum additional obligation above the $1.68 million already paid during the disputed period is approximately $210,000.

The following table summarizes the defense analysis:

Nexford's primary litigation position is therefore as follows: after proper application of the MSA's surcharge provisions, Nexford owes at most an additional $210,000 beyond the $1.68 million already paid, and even this amount may be subject to further reduction upon completion of the expert recalculation. Moreover, as discussed in Section VII below, Nexford has a colorable counterclaim asserting that even the $210,000 figure overstates Nexford's obligation, and that the $1.68 million already paid may itself include an overpayment.

VI. Analysis of Cardinal Peak's Specific Claims

We turn now to an analysis of each of the three causes of action asserted in Cardinal Peak's Complaint, together with our recommended defensive approach for each count.

A. Breach of Contract (Count I)

Cardinal Peak's breach of contract claim rests on the straightforward assertion that Nexford was contractually obligated to pay all surcharges as invoiced by Cardinal Peak, and that Nexford's failure to do so constitutes a material breach of the MSA. Cardinal Peak characterizes Nexford's refusal to pay the disputed surcharges as a unilateral and unjustified withholding of amounts owed under the parties' agreement.

Our defense turns Cardinal Peak's argument on its head. It is not Nexford that breached the MSA, but Cardinal Peak — by failing to satisfy the conditions precedent in Section 7.4(a) (timely delivery of Surcharge Notices with compliant calculations) and by deviating from the Exhibit C methodology (substituting internal blended cost data for the contractually specified published indices).

Under Illinois law, a party that has itself breached a condition precedent to the other party's obligation cannot maintain a breach of contract action to enforce that obligation. Cardinal Peak's surcharge claims are only cognizable to the extent they were properly invoiced — that is, timely noticed and correctly calculated in accordance with Exhibit C. For the months in which Cardinal Peak failed to satisfy one or both of these requirements, its right to recover is extinguished.

Additionally, Cardinal Peak's failure to comply with the Exhibit C methodology means that its surcharge calculations are, at minimum, unreliable and, at maximum, contractually void. The MSA does not authorize the Seller to impose surcharges based on whatever cost metric it deems appropriate — it authorizes surcharges only to the extent calculated in accordance with the specific methodology prescribed in Exhibit C. Cardinal Peak's departure from this methodology deprives its invoices of contractual force.

We anticipate filing a robust Answer to Count I, supported by affirmative defenses grounded in the conditions precedent doctrine, Cardinal Peak's own breach, and the surcharge cap provisions. To the extent discovery confirms the factual predicates we have outlined above, we will also consider filing a motion for summary judgment on this count.

B. Unjust Enrichment (Count II)

Cardinal Peak's unjust enrichment claim alleges that Nexford was unjustly enriched by receiving steel products at below-market cost while refusing to pay the raw-material surcharges that purportedly reflected Cardinal Peak's actual input costs during a period of significant commodity price increases. This is a common fallback theory in commercial disputes where the plaintiff is uncertain of the enforceability of the contractual claim.

Under Illinois law, however, a claim for unjust enrichment is generally unavailable where an express contract governs the same subject matter as the disputed obligation. See HPI Health Care Servs., Inc. v. Mt. Vernon Hosp., Inc., 131 Ill. 2d 145, 160 (1989) ("[W]here there is a specific contract which governs the relationship of the parties, the doctrine of unjust enrichment has no application."); Guinn v. Hoskins Chevrolet, 361 Ill. App. 3d 575, 604 (1st Dist. 2005) (same).

Here, the MSA expressly governs the pricing, surcharge, and payment obligations between Nexford and Cardinal Peak. The MSA sets forth base prices, a detailed surcharge mechanism with specific calculation methodology, caps, and notice requirements, and a comprehensive payment framework. There is no gap in the contractual architecture that would justify resort to an equitable theory of recovery.

Cardinal Peak's unjust enrichment claim is, in substance, an attempt to circumvent the MSA's surcharge conditions by recharacterizing its failed contractual claim as a quasi-contractual one. Illinois courts have consistently rejected this approach. We believe the unjust enrichment claim is subject to dismissal as a matter of law, either on a motion to dismiss under Section 2-615 of the Illinois Code of Civil Procedure or, at latest, on summary judgment. We recommend addressing this count at the earliest procedurally appropriate stage.

C. Account Stated (Count III)

Cardinal Peak's account stated theory appears to rest on the contention that Nexford's partial payments on certain surcharge invoices — totaling $1.68 million — constituted an acknowledgment of the full invoiced amounts, thereby giving rise to an account stated between the parties.

Under Illinois law, an account stated requires: (1) a statement of the balance due, rendered by one party to the other; (2) express or implied assent by the party receiving the statement that the balance is correct; and (3) a promise, express or implied, by the debtor to pay the stated amount. See Dreyer Med. Clinic, S.C. v. Corral, 227 Ill. App. 3d 221, 228 (2d Dist. 1992).

Nexford's defense to this count is straightforward: Nexford consistently and timely disputed the surcharge amounts invoiced by Cardinal Peak and did not assent to the full invoiced amounts. Nexford's partial payments were expressly made on a contested basis, reflecting only those surcharge components that Nexford determined were properly calculated and documented in accordance with the MSA. Under Illinois law, partial payment accompanied by an express dispute of the remaining balance negates the account stated theory, because the essential element of assent is absent. See, e.g., In re Marriage of Berberet, 2012 IL App (4th) 110749, ¶ 37 (noting that an account stated requires mutual agreement to the balance).

The contemporaneous correspondence between Nexford and Cardinal Peak — including your July 5, 2022 letter and the procurement team's ongoing objections — will provide strong evidentiary support for this defense. We anticipate that this count, like Count II, is subject to dismissal or summary judgment.

VII. Recommended Counterclaim

Based on our analysis, we recommend that Nexford file a counterclaim against Cardinal Peak asserting the following claims:

Counterclaim Count I — Breach of Contract. Cardinal Peak breached the MSA by: (a) failing to deliver timely Surcharge Notices as required by Section 7.4(a); (b) calculating surcharges using an internal blended cost metric rather than the Exhibit C methodology; and (c) invoicing surcharges in excess of the 12% cap without obtaining the required prior written consent from Nexford. These breaches caused Nexford to incur costs and administrative burdens associated with reviewing, disputing, and defending against improperly calculated surcharges.

Counterclaim Count II — Declaratory Judgment. Nexford seeks a declaratory judgment that it has no further surcharge obligations to Cardinal Peak beyond the amounts already paid during the disputed period, and that any surcharges not properly noticed and calculated in accordance with the MSA are void and unenforceable.

Counterclaim Count III — Overpayment Refund. Upon completion of the independent expert recalculation, Nexford may be able to demonstrate that it overpaid surcharges during the disputed period — even after accounting for the $1.68 million already paid. Our preliminary analysis suggests that Nexford may be entitled to a refund of approximately $210,000, representing the difference between the amounts actually paid and the amounts properly owed under the MSA when the published indices and contractual baselines are correctly applied. Nexford seeks recovery of this overpayment.

The filing of a counterclaim serves multiple strategic purposes. First, it shifts the litigation dynamic by placing Cardinal Peak on the defensive. Second, it establishes a framework for settlement negotiations in which Nexford's position is that not only does it owe nothing further, but that it is owed a refund. Third, the declaratory judgment count will provide certainty regarding the parties' ongoing surcharge obligations for the remainder of the MSA term.

VIII. Recommended Next Steps and Timeline

We set forth below the immediate action items and projected timeline for the defense of this matter.

A. Immediate Actions

Answer and Affirmative Defenses. Nexford's Answer and Affirmative Defenses must be filed by September 19, 2022, which is within the applicable response deadline under the Illinois Code of Civil Procedure. We will prepare and file the Answer asserting the following affirmative defenses:

1. Waiver / Failure of Condition Precedent — Cardinal Peak's failure to deliver timely Surcharge Notices constitutes a failure of a condition precedent to Nexford's payment obligation, thereby waiving Cardinal Peak's right to collect the associated surcharges.

2. Breach by Cardinal Peak of Exhibit C Methodology — Cardinal Peak's use of an internal blended cost metric, rather than the published indices specified in Exhibit C, constitutes a breach of the MSA that excuses Nexford's obligation to pay the improperly calculated surcharges.

3. Surcharge Cap Defense Under Section 7.4(c) — Cardinal Peak invoiced surcharges in excess of the 12% cap without obtaining the required prior written consent from Nexford, and the excess amounts are therefore not payable.

4. Failure to Mitigate — To the extent Cardinal Peak claims damages based on lost revenue, Cardinal Peak failed to mitigate its damages by, among other things, failing to provide timely and compliant Surcharge Notices and failing to recalculate surcharges using the proper methodology when Nexford raised objections.

5. Failure to Comply with Mandatory Mediation — Cardinal Peak filed the Complaint without first completing the mandatory mediation required by MSA Section 14.3.

Litigation Hold. A litigation hold notice was issued to Nexford on August 23, 2022, directing the preservation of all documents and electronically stored information potentially relevant to this dispute. We request that you confirm that all relevant personnel — and particularly the following individuals — have received and acknowledged the hold:

• Russell Okonkwo, Vice President, Procurement

• Lydia Tran, Chief Financial Officer

• Martin Schaeffer, Chief Executive Officer

It is essential that no documents related to the Cardinal Peak supply relationship, surcharge invoices, procurement communications, or payment records be altered, deleted, or destroyed. Failure to preserve evidence can result in severe sanctions, including adverse inference instructions. We request written confirmation from each of the above individuals that they have reviewed and will comply with the litigation hold.

B. Counterclaim Filing

We anticipate filing the counterclaim within approximately fourteen (14) days after the Answer, with a target date in early October 2022. The brief interval between the Answer and the counterclaim filing will allow us to finalize the counterclaim allegations based on any additional documentary evidence compiled by the Nexford team in the intervening period.

C. Discovery Preparation

Vigorous discovery preparation should begin immediately. We request that Nexford begin compiling the following categories of documents and information:

1. Surcharge Notices — All Surcharge Notices received from Cardinal Peak during the period March 2021 through May 2022, together with date-stamped evidence of receipt (including email timestamps, courier or delivery tracking records, and any internal date stamps or log entries applied by Nexford personnel upon receipt).

2. Internal Surcharge Review Logs — All internal logs, memoranda, worksheets, or spreadsheets maintained by Russell Okonkwo and the procurement team reflecting Nexford's review and analysis of the Surcharge Notices received from Cardinal Peak, including any notations regarding timeliness, calculation methodology, or discrepancies.

3. Correspondence — All correspondence between Nexford and Cardinal Peak (including but not limited to emails, letters, and text messages) relating to surcharge disputes, surcharge calculations, requests for supporting documentation, and any other communications regarding the surcharge provisions of the MSA.

4. Payment Records — All records documenting the $1.68 million in payments made by Nexford on surcharges during the disputed period, including wire transfer confirmations, check copies, remittance advices, and any accompanying communications indicating that payments were made on a disputed or partial basis.

We request that these materials be compiled and transmitted to C&H no later than September 9, 2022, to allow adequate time for review and incorporation into the Answer, the counterclaim, and our preliminary discovery strategy.

D. Expert Retention

As discussed in Section V.B above, we strongly recommend the early retention of a damages consultant to perform an independent surcharge recalculation using the published Ferrous Scrap Index and Industrial Energy Cost Index values for the disputed period, applied against the contractual baselines set forth in Exhibit C.

Meridian Bridge Consulting LLC has been identified as a qualified candidate for this engagement. Dr. Anita Rosenthal, CPA, ABV, is a partner at Meridian Bridge with over twenty years of experience in commercial damages analysis, including engagements in the metals, manufacturing, and industrial supply sectors. Dr. Rosenthal's office is located at 311 South Michigan Avenue, Suite 1500, Chicago, Illinois 60604. Meridian Bridge is a well-respected consulting firm that has provided expert testimony in commercial litigation matters in both state and federal courts throughout the Seventh Circuit.

Early expert retention will allow us to: (1) quantify the methodology deviation defense with precision; (2) develop a credible damages model for Nexford's counterclaim; and (3) establish a well-supported settlement valuation for use in mediation. We request your authorization to contact Meridian Bridge to discuss engagement terms and scope of work.

E. Mediation Considerations

As noted above, MSA Section 14.3 requires mandatory mediation in Chicago, Illinois as a precondition to litigation. Cardinal Peak filed the Complaint without first completing — or even initiating — the mediation process. This failure may provide a basis for Nexford to seek a stay of the litigation pending completion of mediation, which would have the practical effect of delaying Cardinal Peak's prosecution of its claims while Nexford develops its factual record.

However, we recommend exercising strategic judgment regarding the timing of any motion to compel mediation or stay litigation. While the procedural defense is available, there are advantages to reserving this argument and pursuing mediation at a later stage — specifically, after discovery has been initiated and Nexford's factual record has been strengthened through the compilation of Surcharge Notice receipt records and the completion of the expert recalculation. Entering mediation with a robust factual and expert record will significantly enhance Nexford's bargaining position and increase the likelihood of a favorable resolution.

Our current recommendation is to assert the failure to mediate as an affirmative defense in the Answer but to defer any motion to compel mediation until we have assessed the discovery landscape and determined the optimal timing for mediation. We will revisit this recommendation with you as the case progresses.

IX. Stakeholder Notifications

The Cardinal Peak litigation triggers notification obligations to several of Nexford's key stakeholders. We address each below.

A. Marlowe Asset Management Bluff Capital Partners, LP

Marlowe Asset Management Bluff Capital Partners, LP is Nexford's majority owner and private equity sponsor. The general partner of Marlowe Asset Management Bluff Capital Partners is Marlowe Asset Management Bluff Capital Management LLC, whose Managing Partner is Conrad Yeung. Diana Calloway serves as a Principal at Marlowe Asset Management Bluff and as a Board Observer on Nexford's board of directors.

As the controlling equity holder, Marlowe Asset Management Bluff should be promptly informed of the litigation and the defense strategy outlined in this letter. We recommend coordinating with Diana Calloway regarding litigation oversight, settlement authority parameters, and any reporting requirements under Marlowe Asset Management Bluff's limited partnership agreement or Nexford's stockholders' agreement. Private equity sponsors typically require advance notice and consent before a portfolio company enters into settlement agreements above a specified threshold, and we would like to confirm those parameters at the outset of this engagement.

We suggest that a brief telephonic update be scheduled with Ms. Calloway and Mr. Yeung, at your convenience, to discuss the key elements of our defense strategy and Nexford's exposure assessment.

B. Ridgecrest National Bank, N.A.

Nexford maintains a $45 million revolving credit facility with Ridgecrest National Bank, N.A., pursuant to a credit agreement dated March 12, 2021 (the "Credit Agreement"). The Credit Agreement contains a litigation notice requirement under Section 6.03(b), which obligates Nexford to notify the lender of certain litigation events.

Additionally, the Credit Agreement requires that settlements exceeding $1.0 million require notice to Ridgecrest National Bank. The Relationship Manager for Nexford's account is Karen Whitmore, located at Ridgecrest's offices at 120 North LaSalle Street, Chicago, Illinois 60602.

At this stage, the filing of the Complaint — asserting claims of $4.73 million — may itself trigger a reporting obligation under Section 6.03(b) of the Credit Agreement, depending on the specific materiality thresholds and reporting requirements set forth therein. We recommend that you review the Credit Agreement's litigation notice provisions promptly and provide notice to Ridgecrest National Bank if required. If you would like, C&H can review the relevant Credit Agreement provisions and advise on the notice obligation.

We note that timely compliance with the Credit Agreement's notice requirements is important to avoid any assertion by Ridgecrest that Nexford has breached its covenants, which could have implications for the availability of the revolving credit facility.

C. Hargrove Kellner CPAs LLP

Hargrove Kellner CPAs LLP serves as Nexford's external auditors. The Engagement Partner is Steven Margolis, and the firm's offices are located at 500 West Monroe Street, Suite 3100, Chicago, Illinois 60661.

The Cardinal Peak dispute may require contingent liability disclosure in Nexford's financial statements, depending on the materiality assessment conducted in accordance with ASC 450-20 (formerly FAS 5). While we believe the ultimate liability exposure is substantially less than the $4.73 million claimed, the existence of the litigation and the asserted claim amount should be communicated to Hargrove Kellner so that Mr. Margolis and his team can evaluate the appropriate accounting treatment and disclosure requirements.

We recommend notifying Hargrove Kellner of the litigation and providing them with a copy of this letter (subject to preservation of attorney-client privilege) or a separate summary of the dispute for their assessment. Lydia Tran, as CFO, may wish to coordinate directly with Mr. Margolis on this matter.

X. Budget and Fee Estimate

Pursuant to the engagement letter dated August 22, 2022, we provide the following estimated budget for the defense of this matter:

These estimates are based on the scope of the matter as currently understood and are subject to revision as the case develops. Factors that could affect the budget include the volume and complexity of discovery, the number and nature of depositions, the scope of expert work, and the extent of pre-trial motion practice.

The applicable billing rates for the C&H team assigned to this matter are as follows:

We anticipate that a vigorous defense — including early expert retention, well-supported motion practice, and a thoroughly prepared mediation presentation — will position Nexford for a favorable resolution at a cost significantly below the $4.73 million demanded by Cardinal Peak. Given the strength of Nexford's three principal defenses, we believe that a settlement in the range of significantly less than 50% of the claimed amount is a realistic target, and that the litigation may ultimately be resolved at or near Nexford's calculated maximum exposure of approximately $210,000.

We will provide monthly billing statements and periodic budget updates throughout the engagement. Should the scope of the matter change materially, we will notify you promptly and revise the fee estimate accordingly.

XI. Preliminary Risk Assessment

We provide below a candid preliminary assessment of the strengths and risks of Nexford's position.

Overall Assessment: Nexford possesses strong contract-based defenses that are well-grounded in the express language of the MSA and supported by established Illinois law on conditions precedent, contract interpretation, and unjust enrichment. We believe Nexford's position is significantly stronger than Cardinal Peak's, and that the claimed exposure of $4.73 million substantially overstates the amounts, if any, owed by Nexford.

Defense-by-Defense Assessment:

Late-Notice Defense ($2.18 million). This is the most straightforward of the three defenses and is the one most likely to be sustained in full on summary judgment. It is, however, fact-dependent — its success is contingent on Nexford's ability to document the actual receipt dates of the Surcharge Notices for each disputed month. If the procurement team maintained date-stamped records of receipt (as we expect), this defense should be highly effective. If receipt dates are uncertain or undocumented for some months, the defense may be weakened for those periods.

Methodology Deviation Defense ($1.47 million). This defense requires expert analysis to quantify the overstatement resulting from Cardinal Peak's use of the blended cost metric. The underlying legal theory, however, is well-supported by the clear and unambiguous language of Exhibit C, which specifies the published indices and contractual baselines that must be used. Courts routinely enforce contractual calculation methodologies as written, and Cardinal Peak's unilateral substitution of a different methodology should not be upheld. We rate this defense as strong, with moderate complexity.

Cap Exceedance Defense ($1.08 million). This is the most legally straightforward of the three defenses. The 12% cap is an express contractual limitation, and the absence of prior written consent from Nexford is a binary question — either the consent exists or it does not. We are confident that no such consent was given. This defense should be sustained in full.

Risk Factors:

• Course of Dealing / Waiver Argument. Cardinal Peak may argue that Nexford waived strict compliance with the Surcharge Notice deadlines through a prior course of dealing. In particular, Cardinal Peak may point to the fact that Nexford paid the April 2021 surcharge in full — even though the April 2021 Surcharge Notice may have been delivered late or may have deviated from Exhibit C methodology. If Cardinal Peak can establish a pattern of acceptance or payment despite non-compliance, it may argue that Nexford is estopped from asserting the late-notice defense for subsequent months. To counter this argument, we must demonstrate that Nexford consistently objected to the untimely and non-compliant Surcharge Notices and that any payment on the April 2021 surcharge was not an acquiescence to Cardinal Peak's practices but rather reflected the particular circumstances of that month (e.g., the April 2021 surcharge may have been calculated correctly even if noticed late). Detailed records of Nexford's contemporaneous objections will be essential to rebut this argument.

• Unjust Enrichment Claim. While we assess the unjust enrichment claim as weak given the existence of the express contract, we note that some Illinois courts have allowed unjust enrichment claims to proceed alongside breach of contract claims in the early stages of litigation when pleaded in the alternative. The claim is unlikely to survive summary judgment, but it may survive a motion to dismiss at the pleading stage. This is a manageable risk.

• Credibility of Nexford's Dispute History. The strength of several of Nexford's defenses — particularly the late-notice defense and the account stated defense — depends on demonstrating that Nexford consistently and contemporaneously disputed the surcharge invoices. If the documentary record reveals periods of silence or delayed objection, Cardinal Peak may attempt to characterize Nexford's after-the-fact defenses as pretextual. For this reason, the compilation of a complete and chronological record of all dispute correspondence is a high priority.

Notwithstanding these risk factors, our overall assessment is that Nexford's litigation position is strong and that the Company is well-positioned to achieve a favorable outcome through vigorous defense, either in settlement negotiations or at trial.

XII. Conclusion and Request for Action

We are confident that the defenses outlined in this letter provide Nexford with a robust foundation for contesting Cardinal Peak's claims and achieving a resolution that reflects the parties' actual contractual obligations. The strength of Nexford's position — grounded in the express language of the MSA and supported by well-established Illinois law — should enable the Company to limit its exposure to a fraction of the $4.73 million demanded by Cardinal Peak.

To ensure that we can proceed efficiently and meet the applicable litigation deadlines, we respectfully request the following actions from Nexford at the earliest opportunity:

1. Confirm Receipt. Please confirm receipt of this letter and the enclosed documents.

2. Schedule Strategy Meeting. We request that you coordinate an in-person or telephonic meeting to discuss the defense strategy outlined herein, preferably during the week of August 29, 2022. Participants should include yourself, Martin Schaeffer (CEO), Lydia Tran (CFO), Russell Okonkwo (VP, Procurement), and the C&H litigation team.

3. Compile Documentary Evidence. Please direct Russell Okonkwo and Lydia Tran to begin compiling the documentary evidence outlined in Section VIII.C above, including all Surcharge Notices with receipt dates, internal surcharge review logs, correspondence with Cardinal Peak, and payment records. We request that these materials be transmitted to C&H no later than September 9, 2022.

4. Authorize Filing of Answer and Counterclaim. Please provide authorization for C&H to proceed with the preparation and filing of the Answer and Affirmative Defenses (due September 19, 2022) and to initiate preparation of the counterclaim for filing in early October 2022.

5. Authorize Expert Retention. Please provide authorization for C&H to contact Meridian Bridge Consulting LLC (Dr. Anita Rosenthal, CPA, ABV) regarding engagement terms and scope of work for the independent surcharge recalculation.

We look forward to discussing this matter with you in greater detail and to working closely with the Nexford team to bring this dispute to a successful resolution. Please do not hesitate to contact me directly at (312) 555-8217 or by email at panand@calderwoodharkness.com if you have any questions or wish to discuss any aspect of this letter in advance of our meeting.

Very truly yours,

CALDERWOOD & HARKNESS LLP

By: ________

Priya Anand Partner 200 South Wacker Drive, Suite 4400 Chicago, Illinois 60606 Tel: (312) 555-8217

Email: panand@calderwoodharkness.com

cc: Martin Schaeffer, Chief Executive Officer, Nexford Industrial Holdings Inc. Douglas Carmichael, Partner, Calderwood & Harkness LLP Simone Laroche, Senior Associate, Calderwood & Harkness LLP

Enclosures:

1. Copy of Demand Letter from Blackwood Stein & Associates LLP on Behalf of Cardinal Peak Industries, dated June 10, 2022

2. Copy of Complaint, Cardinal Peak Industries v. Nexford Industrial Holdings Inc., Circuit Court of Cook County, Illinois, County Department, Law Division, Case No. 2022-L-008471, filed August 8, 2022

This letter and its contents are protected by the attorney-client privilege and constitute confidential attorney work product. This communication is intended solely for the use of the addressee and other authorized recipients. Any unauthorized review, use, disclosure, or distribution is strictly prohibited. If you have received this communication in error, please notify Calderwood & Harkness LLP immediately and destroy all copies of this communication.

Product	Base Price (2020)
Hot-Rolled Coil (HRC)	$620/ton
Cold-Rolled Coil (CRC)	$740/ton
Product	Volume (tons)	Base Price	Estimated Annual Spend
HRC	18,000	$620/ton	$11,160,000
CRC	6,500	$740/ton	$4,810,000
Total	24,500	$15,970,000
Component	Contractual Baseline
Scrap Cost	$340/ton
Energy Cost	$48/ton
Product	Base Price	12% Cap	Maximum Surcharge/Ton
HRC	$620/ton	12%	$74.40/ton
CRC	$740/ton	12%	$88.80/ton
Category	Claimed Amount	Defense	Net Reduction
Late Surcharge Notices	$2,180,000	Condition precedent failure	$2,180,000
Methodology Deviation	$1,470,000	Non-compliance with Exhibit C	$1,470,000
Cap Exceedances	$1,080,000	No written consent under §7.4(c)	$1,080,000
Overlap Adjustment	Eliminate double-counting	($210,000)
Total Net Reduction	$4,520,000
Claimed Amount	$4,730,000
Net Exposure	$210,000
Phase	Estimated Fee Range
Defense through mediation	$200,000 – $275,000
Defense through trial	$350,000 – $500,000
Timekeeper	Role	Hourly Rate

Priya Anand	Partner	$895/hr
Douglas Carmichael	Partner	$875/hr
Simone Laroche	Senior Associate	$585/hr
Jeffrey Park	Associate	$435/hr
Paralegal Support	Paralegal	$275/hr

CALDERWOOD & HARKNESS LLP Attorneys at Law
200 South Wacker Drive, Suite 4400 Chicago, Illinois 60606 Tel: (312) 555-8200 | Fax: (312) 555-8201 www.calderwoodharkness.com
August 25, 2022
VIA EMAIL AND FIRST CLASS MAIL
ATTORNEY-CLIENT PRIVILEGED AND CONFIDENTIAL
Deborah Whitfield, Esq. General Counsel Nexford Industrial Holdings Inc. 4200 West Lakeshore Industrial Parkway, Suite 300 Waukegan, Illinois 60085
Re: Analysis of Demand Letter from Blackwood Stein & Associates LLP on Behalf of Cardinal Peak Industries; Recommended Defense Strategy
Matter No.: 1005-00005
MSA Reference: MSA-NIH-CPI-2020-001
Dear Ms. Whitfield:
I. Introduction and Purpose of Letter
Calderwood & Harkness LLP ("C&H" or the "Firm") was formally engaged by Nexford Industrial Holdings Inc. ("Nexford" or the "Company") on August 22, 2022 to provide legal representation in connection with the defense of claims asserted by Cardinal Peak Industries ("Cardinal Peak" or "Plaintiff") arising from the Master Supply Agreement dated January 15, 2020, bearing reference number MSA-NIH-CPI-2020-001 (the "MSA"). We appreciate the trust Nexford has placed in this Firm, and we write to provide our initial analysis and recommended litigation strategy.
As you are aware, on August 8, 2022, Cardinal Peak filed its Complaint in the Circuit Court of Cook County, Illinois, County Department, Law Division, bearing Case No. 2022-L-008471 (the "Complaint"). The Complaint formalizes claims that were first articulated in a demand letter dated June 10, 2022, transmitted by Blackwood Stein & Associates LLP ("Blackwood Stein"), located at 717 Seventeenth Street, Suite 2200, Denver, Colorado 80202, on behalf of Cardinal Peak. The demand was principally authored by Garrett Blackwood, a named partner at Blackwood Stein who also serves as lead litigation counsel in the now-filed action.
We have reviewed in detail the June 10, 2022 demand letter (the "Demand Letter"), the Complaint, the MSA and its exhibits, and the July 5, 2022 response you transmitted on behalf of Nexford rejecting the demand and asserting contract-based defenses. Your July 5 response was well-founded and correctly identified the principal contractual deficiencies in Cardinal Peak's position, including Cardinal Peak's failure to satisfy the conditions precedent under Section 7.4 of the MSA and its deviation from the surcharge calculation methodology set forth in Exhibit C to the MSA.
The purpose of this letter is threefold: (1) to provide a comprehensive analysis of the Demand Letter and the Complaint in light of the MSA's governing provisions; (2) to outline Nexford's three principal defenses and assess the Company's overall litigation exposure; and (3) to recommend a defense strategy and set forth the immediate action items necessary to position Nexford for a successful outcome, whether through dispositive motion practice, mediation, or trial. This letter also addresses necessary stakeholder notifications, expert retention, litigation budgeting, and a preliminary risk assessment.
We note at the outset that, based on our analysis, Nexford possesses strong, contract-grounded defenses that substantially reduce, and in large part eliminate, the claimed liability. As detailed below, we believe that Nexford's maximum additional exposure, above the $1.68 million already paid during the disputed period, is approximately $210,000 — a fraction of the $4.73 million Cardinal Peak demands.
II. Summary of Cardinal Peak's Demand
On June 10, 2022, Blackwood Stein & Associates LLP transmitted the Demand Letter to Nexford on behalf of its client, Cardinal Peak Industries, a limited liability company organized under the laws of the State of Colorado, with its principal place of business at 1580 Ridgeline Boulevard, Pueblo, Colorado 81001. The Demand Letter was signed by Garrett Blackwood and addressed to your attention as General Counsel of Nexford.
The Demand Letter asserts that Cardinal Peak is owed the sum of $4,730,000 (the "Claimed Amount") representing unpaid raw-material surcharges allegedly due under the MSA. The dispute covers the fifteen-month period from March 2021 through May 2022. However, it is important to note that the surcharges for one of those months — April 2021 — were paid in full by Nexford. Accordingly, the actual number of months in which surcharges remain in dispute is fourteen (14).
Cardinal Peak asserts that it invoiced total surcharges of $6,410,000 across the fifteen-month period. Nexford paid $1,680,000 on surcharges that the Company accepted as properly documented and calculated during that same period. Cardinal Peak claims an unpaid balance of $4,730,000, representing the arithmetic difference between the total invoiced surcharges ($6.41 million) and the payments received ($1.68 million).
The Demand Letter alleges breach of contract under the MSA and threatens additional claims for unjust enrichment. More specifically, the Demand Letter contends that the surcharges at issue relate to scrap, energy, and alloy components that Cardinal Peak claims were contractually authorized pass-through costs under Section 7.4 of the MSA. Cardinal Peak's position, as articulated in the Demand Letter, is that Nexford was obligated to pay all surcharges as invoiced and that Nexford's refusal to do so constitutes a material breach of the MSA.
The Demand Letter identifies the following key Cardinal Peak personnel as having been involved in the surcharge invoicing and dispute: Frank Delacroix, President and Chief Executive Officer; Natalie Gunderson, Vice President of Sales and Commercial; Patricia Morrow, General Counsel; and Harold Briggs, Controller. Ms. Gunderson and Mr. Briggs appear to have been the primary contacts responsible for generating and transmitting the Surcharge Notices at issue, while Ms. Morrow supervised the legal aspects of the demand prior to the engagement of outside counsel.
The Demand Letter demanded payment within thirty (30) days and indicated that Cardinal Peak would pursue litigation if the matter was not resolved. As noted above, your July 5, 2022 response on behalf of Nexford rejected the demand in its entirety and outlined Nexford's contractual defenses. Cardinal Peak did not respond substantively to your letter and instead filed the Complaint approximately one month later.
III. Overview of the Complaint
Cardinal Peak's Complaint, filed on August 8, 2022 in the Circuit Court of Cook County, Illinois, County Department, Law Division, as Case No. 2022-L-008471, asserts three causes of action:
Count I — Breach of Contract. Cardinal Peak alleges that Nexford breached its obligations under the MSA by failing to pay surcharges properly invoiced under Section 7.4 of the MSA.
Count II — Unjust Enrichment. Cardinal Peak alleges, in the alternative, that Nexford was unjustly enriched by receiving steel products at below-market cost while refusing to pay the raw-material surcharges that reflected Cardinal Peak's actual input costs.
Count III — Account Stated. Cardinal Peak alleges that Nexford's partial payments on certain surcharge invoices, combined with its failure to timely dispute the remaining invoiced amounts, gave rise to an account stated between the parties.
The Complaint seeks damages in the amount of $4,730,000, plus prejudgment interest at the statutory rate, attorneys' fees to the extent recoverable under contract or statute, and costs of suit.
Venue was selected as Cook County, Illinois, which is consistent with the forum selection and governing law provisions of MSA Section 14.3, which designates Illinois law as the governing law of the agreement. We do not anticipate a basis for challenging venue at this time.
Plaintiff's counsel of record is Garrett Blackwood and Megan Hsu, both of Blackwood Stein & Associates LLP. Based on our review of Blackwood Stein's litigation history, Mr. Blackwood is an experienced commercial litigator with a focus on supply chain and procurement disputes. Ms. Hsu appears to be a mid-level associate who will likely handle the day-to-day discovery and briefing responsibilities.
IV. Analysis of the Master Supply Agreement — Key Provisions
The MSA is the foundational document governing the parties' commercial relationship and the surcharge obligations at issue. Our analysis of Cardinal Peak's claims necessarily begins with a careful examination of the MSA's relevant provisions.
A. Background of the MSA
The MSA, bearing reference number MSA-NIH-CPI-2020-001, was executed on January 15, 2020, between Nexford Industrial Holdings Inc. (designated as "Buyer") and Cardinal Peak Industries (designated as "Seller"). The MSA establishes a framework supply arrangement for the purchase and sale of steel products, with detailed provisions governing pricing, surcharges, delivery, quality specifications, and dispute resolution.
The term of the MSA is three years, commencing on January 15, 2020 and expiring on January 14, 2023, subject to automatic renewal for successive one-year periods unless either party provides written notice of termination no fewer than 180 days prior to the expiration of the then-current term. As of the date of this letter, the MSA remains in effect and has not been terminated by either party.
Nexford Industrial Holdings Inc. is a Delaware corporation headquartered in Waukegan, Illinois. The Company is a precision metal fabricator and manufacturer of engineered components serving the automotive, heavy equipment, and infrastructure sectors. Nexford's annual revenue for fiscal year 2022 is approximately $287 million. Nexford is a portfolio company of Marlowe Asset Management Bluff Capital Partners, LP, a private equity firm that holds a majority ownership interest in the Company.
Cardinal Peak Industries is a limited liability company organized under the laws of the State of Colorado, with its principal place of business in Pueblo, Colorado. Cardinal Peak is a regional steel producer and distributor, with annual revenue for fiscal year 2022 of approximately $415 million. Cardinal Peak supplies hot-rolled and cold-rolled steel coil products to industrial fabricators and manufacturers throughout the Midwest and Mountain West regions.
The products covered by the MSA are hot-rolled coil ("HRC") and cold-rolled coil ("CRC"). The MSA establishes the following base pricing, which was set at the time of execution in January 2020 and is subject to quarterly adjustment pursuant to Section 7.2:
The estimated annual volumes under the MSA are approximately 18,000 tons of HRC and 6,500 tons of CRC, for a total of approximately 24,500 tons per year. At the stated base prices, this translates to an estimated annual spend of approximately $15.97 million, broken down as follows:
These figures provide essential context for evaluating the magnitude of Cardinal Peak's surcharge claims relative to the overall commercial relationship. The $4.73 million in disputed surcharges represents approximately 29.6% of Nexford's estimated annual base spend, which is an extraordinary figure that itself underscores the implausibility of Cardinal Peak's surcharge calculations.
B. Surcharge Clause — Section 7.4
Section 7.4 of the MSA is the central provision at issue in this dispute. It permits the Seller to pass through to the Buyer documented raw-material surcharges for scrap, energy, and alloy components incurred during the applicable invoice period. This surcharge mechanism is a common feature of long-term steel supply agreements and is intended to allocate commodity price risk between buyer and seller during periods of price volatility.
Critically, however, Section 7.4 does not grant Cardinal Peak an unconditional right to impose surcharges. The right to collect surcharges is subject to two express conditions precedent set forth in Section 7.4(a):
(a) The Seller must deliver to the Buyer a Surcharge Notice accompanied by supporting documentation no later than fifteen (15) business days after the end of the applicable month; and
(b) The surcharge components must be calculated in accordance with the methodology set forth in Exhibit C (Surcharge Methodology) to the MSA.
These are not mere procedural formalities — they are conditions precedent to Cardinal Peak's right to collect surcharges. Under well-established Illinois contract law, the failure to satisfy a condition precedent extinguishes the obligor's duty to perform. See, e.g., Gallagher v. Lenart, 226 Ill. 2d 208, 232 (2007) (holding that where a contract makes a party's obligation expressly conditional, the condition must be strictly satisfied). Accordingly, Cardinal Peak's failure to deliver timely Surcharge Notices with compliant calculations should, as a matter of law, bar its right to recover the improperly invoiced surcharges.
C. Exhibit C — Surcharge Methodology
Exhibit C to the MSA prescribes the specific methodology for calculating raw-material surcharges. The methodology is designed to provide an objective, verifiable, and transparent basis for surcharge calculations by tying them to published market indices rather than to the Seller's internal cost accounting.
Exhibit C specifies that surcharges are to be calculated using two published benchmarks:
(i) The Ferrous Scrap Index, as reported by Platts/SPI (S&P Global Platts, Steel Products intelligence); and
(ii) The Industrial Energy Cost Index, as published by the relevant governmental or industry reporting body.
The MSA establishes the following contractual baselines against which actual index values are to be measured:
Under Exhibit C, the surcharge for any given month is computed as the difference between the actual published index value for the applicable component and the contractual baseline, applied to the tonnage of product delivered during the relevant period. This methodology ensures that surcharges reflect only actual, verifiable increases in raw-material costs above the baseline levels that were incorporated into the MSA's base pricing.
Cardinal Peak's deviation from this methodology is a central element of Nexford's defense. As detailed in Section V.B below, Cardinal Peak did not use the published Ferrous Scrap Index or the Industrial Energy Cost Index in calculating its surcharges for the disputed period. Instead, Cardinal Peak employed an internal "blended cost" metric that incorporated Cardinal Peak's own proprietary cost data — including costs and allocations that are not contemplated by, and are not consistent with, the Exhibit C methodology. This substitution of internal cost data for published indices is a direct and material breach of the MSA's surcharge provisions.
D. Section 7.4(c) — 12% Surcharge Cap
Section 7.4(c) of the MSA establishes a cap on the aggregate monthly surcharge that may be imposed by the Seller. Specifically, the provision states that the aggregate monthly surcharge may not exceed twelve percent (12%) of the applicable Base Price for the relevant product category without the prior written consent of the Buyer.
Applying the 12% cap to the MSA's base prices yields the following maximum permissible monthly surcharges:
It is undisputed that Nexford never provided prior written consent to Cardinal Peak to exceed the 12% surcharge cap during the disputed period, or at any other time during the term of the MSA. Any surcharge amounts invoiced by Cardinal Peak that exceed these per-ton caps are, by the express terms of the MSA, contractually unenforceable. The cap provision is not subject to waiver by conduct or course of dealing — it requires affirmative "prior written consent," which was never given.
E. Section 7.4(d) — Dispute Procedure
Section 7.4(d) of the MSA establishes a specific procedure for disputing surcharges. The provision requires that the Buyer notify the Seller of any disputed surcharge within thirty (30) calendar days of receipt of the applicable Surcharge Notice. If a dispute cannot be resolved at the operational level, unresolved disputes escalate to the senior officers of the respective parties, and thereafter to mediation under Section 14.3 of the MSA.
Based on our review of the correspondence between the parties, Nexford consistently and timely disputed the surcharges at issue during the disputed period. Your office and Russell Okonkwo (Vice President, Procurement) exchanged multiple communications with Cardinal Peak's Natalie Gunderson and Harold Briggs objecting to surcharge calculations and requesting supporting documentation tied to the published indices. These contemporaneous disputes are critical to Nexford's defense, as they demonstrate that Nexford never acquiesced to the improperly calculated surcharges.
F. Section 14.3 — Dispute Resolution
Section 14.3 of the MSA establishes a mandatory mediation requirement as a precondition to litigation. The provision requires that disputes arising under the MSA be submitted to mediation in Chicago, Illinois before either party may initiate litigation. The MSA further specifies that Illinois law governs the interpretation and enforcement of the agreement.
We note that Cardinal Peak filed the Complaint without first pursuing mediation as required by Section 14.3. This failure to comply with the mandatory mediation provision may constitute a procedural defense and could provide a basis for seeking a stay of the litigation pending completion of the mediation process. We discuss the strategic implications of this defense in greater detail in Section VIII.E below.
V. Nexford's Three Principal Defenses
Based on our review of the MSA, the Demand Letter, the Complaint, and the documentary record available to date, Nexford possesses three principal defenses that, individually and collectively, substantially reduce and effectively eliminate the claimed $4.73 million in damages. We summarize each defense below, together with the supporting legal authority and recommended evidentiary development.
A. Defense One: Late Surcharge Notices ($2.18 Million)
Cardinal Peak failed to deliver compliant Surcharge Notices within the fifteen (15) business-day deadline prescribed by Section 7.4(a) of the MSA for seven (7) of the fourteen (14) disputed months. These late notices account for approximately $2,180,000 of the total claimed amount of $4,730,000.
Under Illinois law, when a contract expressly conditions one party's right to performance upon the satisfaction of a specified requirement — such as timely notice — that requirement constitutes a condition precedent to the right. The failure to satisfy a condition precedent excuses the other party's duty to perform, and the non-performing party cannot recover on the underlying obligation. See Gallagher v. Lenart, 226 Ill. 2d 208, 232 (2007); Ragan v. Columbia Mut. Ins. Co., 183 Ill. App. 3d 116, 121 (4th Dist. 1989) (holding that strict compliance with notice provisions is required where the contract makes timely notice an express condition).
Section 7.4(a) uses mandatory language — the Seller "must" deliver the Surcharge Notice "no later than fifteen (15) business days" after the end of the applicable month. This language unambiguously establishes timely delivery of the Surcharge Notice as a condition precedent to Cardinal Peak's right to collect surcharges. For the seven months in which Cardinal Peak failed to meet this deadline, its right to collect the associated surcharges should be deemed waived as a matter of law.
Recommended Action: We recommend compiling a detailed month-by-month chronology of the actual receipt dates of each Surcharge Notice, measured against the fifteen-business-day deadline for each applicable month. Russell Okonkwo, Vice President of Procurement, is likely to have the most comprehensive records of receipt dates, including email timestamps, courier tracking information, and internal date stamps applied by the Nexford procurement team upon receipt of incoming correspondence from Cardinal Peak. We request that Mr. Okonkwo be directed to compile these records at the earliest opportunity and make them available to C&H for review.
B. Defense Two: Deviation from Exhibit C Methodology ($1.47 Million)
As discussed in Section IV.C above, the MSA's Exhibit C prescribes that surcharges are to be calculated using the published Ferrous Scrap Index (Platts/SPI) and the Industrial Energy Cost Index, measured against contractual baselines of $340/ton for scrap and $48/ton for energy. Cardinal Peak did not follow this methodology.
Instead, Cardinal Peak calculated its surcharges using an internal "blended cost" metric that incorporated Cardinal Peak's own proprietary cost data, including internal allocations, overhead factors, and cost inputs that are not contemplated by Exhibit C. The blended cost methodology consistently produced surcharge figures that exceeded the amounts that would have resulted from a proper application of the published indices and contractual baselines.
This deviation from Exhibit C accounts for approximately $1,470,000 of the overstatement in Cardinal Peak's surcharge invoices. In other words, if the surcharges for the disputed period are recalculated using the published indices and the contractual baselines as required by Exhibit C — rather than Cardinal Peak's internal blended cost metric — the resulting surcharge figures are approximately $1.47 million lower than the amounts Cardinal Peak invoiced.
Nexford's position is clear and well-supported by the plain language of the MSA: surcharges are only payable to the extent they are calculated in accordance with Exhibit C. Cardinal Peak's decision to substitute its own internal cost data for the published indices specified in Exhibit C is a direct breach of Section 7.4(a)(b), and any surcharge amounts attributable to this deviation are not owed by Nexford.
Recommended Action: We strongly recommend the early retention of a qualified damages consultant or forensic accountant to perform an independent recalculation of the surcharges for all fourteen disputed months using the published indices and the contractual baselines. This recalculation will be essential both for dispositive motion practice and for settlement negotiations, as it will provide a quantified, expert-supported basis for Nexford's position.
We have identified Meridian Bridge Consulting LLC as a potential expert for this engagement. Dr. Anita Rosenthal, CPA, ABV, is a partner at Meridian Bridge with extensive experience in commercial damages analysis in the metals and industrial sectors. Dr. Rosenthal's office is located at 311 South Michigan Avenue, Suite 1500, Chicago, Illinois 60604. We will provide her curriculum vitae and engagement terms for your review upon authorization to proceed.
C. Defense Three: Surcharge Cap Exceedances ($1.08 Million)
For four (4) of the fourteen (14) disputed months, the surcharges invoiced by Cardinal Peak exceeded the 12% cap imposed by Section 7.4(c) of the MSA. The aggregate amount by which the invoiced surcharges exceeded the applicable caps during these four months totals approximately $1,080,000.
As detailed in Section IV.D above, the 12% cap is an express contractual limitation on the Seller's right to impose surcharges. Surcharges exceeding 12% of the applicable Base Price are permissible only with the "prior written consent" of the Buyer. It is undisputed that Nexford never provided such consent — not in writing, not orally, and not by any course of conduct that could reasonably be interpreted as consent.
The absence of written consent is a binary factual question that does not require expert analysis or complex evidentiary development. Either Cardinal Peak can produce a written consent from Nexford authorizing surcharges in excess of the 12% cap, or it cannot. We are confident that no such consent exists.
Accordingly, the $1,080,000 in excess surcharges above the 12% cap is not payable under the MSA, and Cardinal Peak's claim for recovery of these amounts should be dismissed.
D. Overlap and Net Exposure Assessment
We note that some overlap exists among the three defense categories described above. For example, a given month in which Cardinal Peak delivered a late Surcharge Notice may also be a month in which the surcharge calculation deviated from Exhibit C methodology and exceeded the 12% cap. In such cases, the full surcharge amount for that month may be subject to multiple, independent defenses.
To avoid double-counting the defensive offsets, we have performed a preliminary reconciliation analysis that accounts for the overlap among the three categories. After applying all three defenses — late notice, methodology deviation, and cap exceedance — Nexford's calculated maximum additional obligation above the $1.68 million already paid during the disputed period is approximately $210,000.
The following table summarizes the defense analysis:
Nexford's primary litigation position is therefore as follows: after proper application of the MSA's surcharge provisions, Nexford owes at most an additional $210,000 beyond the $1.68 million already paid, and even this amount may be subject to further reduction upon completion of the expert recalculation. Moreover, as discussed in Section VII below, Nexford has a colorable counterclaim asserting that even the $210,000 figure overstates Nexford's obligation, and that the $1.68 million already paid may itself include an overpayment.
VI. Analysis of Cardinal Peak's Specific Claims
We turn now to an analysis of each of the three causes of action asserted in Cardinal Peak's Complaint, together with our recommended defensive approach for each count.
A. Breach of Contract (Count I)
Cardinal Peak's breach of contract claim rests on the straightforward assertion that Nexford was contractually obligated to pay all surcharges as invoiced by Cardinal Peak, and that Nexford's failure to do so constitutes a material breach of the MSA. Cardinal Peak characterizes Nexford's refusal to pay the disputed surcharges as a unilateral and unjustified withholding of amounts owed under the parties' agreement.
Our defense turns Cardinal Peak's argument on its head. It is not Nexford that breached the MSA, but Cardinal Peak — by failing to satisfy the conditions precedent in Section 7.4(a) (timely delivery of Surcharge Notices with compliant calculations) and by deviating from the Exhibit C methodology (substituting internal blended cost data for the contractually specified published indices).
Under Illinois law, a party that has itself breached a condition precedent to the other party's obligation cannot maintain a breach of contract action to enforce that obligation. Cardinal Peak's surcharge claims are only cognizable to the extent they were properly invoiced — that is, timely noticed and correctly calculated in accordance with Exhibit C. For the months in which Cardinal Peak failed to satisfy one or both of these requirements, its right to recover is extinguished.
Additionally, Cardinal Peak's failure to comply with the Exhibit C methodology means that its surcharge calculations are, at minimum, unreliable and, at maximum, contractually void. The MSA does not authorize the Seller to impose surcharges based on whatever cost metric it deems appropriate — it authorizes surcharges only to the extent calculated in accordance with the specific methodology prescribed in Exhibit C. Cardinal Peak's departure from this methodology deprives its invoices of contractual force.
We anticipate filing a robust Answer to Count I, supported by affirmative defenses grounded in the conditions precedent doctrine, Cardinal Peak's own breach, and the surcharge cap provisions. To the extent discovery confirms the factual predicates we have outlined above, we will also consider filing a motion for summary judgment on this count.
B. Unjust Enrichment (Count II)
Cardinal Peak's unjust enrichment claim alleges that Nexford was unjustly enriched by receiving steel products at below-market cost while refusing to pay the raw-material surcharges that purportedly reflected Cardinal Peak's actual input costs during a period of significant commodity price increases. This is a common fallback theory in commercial disputes where the plaintiff is uncertain of the enforceability of the contractual claim.
Under Illinois law, however, a claim for unjust enrichment is generally unavailable where an express contract governs the same subject matter as the disputed obligation. See HPI Health Care Servs., Inc. v. Mt. Vernon Hosp., Inc., 131 Ill. 2d 145, 160 (1989) ("[W]here there is a specific contract which governs the relationship of the parties, the doctrine of unjust enrichment has no application."); Guinn v. Hoskins Chevrolet, 361 Ill. App. 3d 575, 604 (1st Dist. 2005) (same).
Here, the MSA expressly governs the pricing, surcharge, and payment obligations between Nexford and Cardinal Peak. The MSA sets forth base prices, a detailed surcharge mechanism with specific calculation methodology, caps, and notice requirements, and a comprehensive payment framework. There is no gap in the contractual architecture that would justify resort to an equitable theory of recovery.
Cardinal Peak's unjust enrichment claim is, in substance, an attempt to circumvent the MSA's surcharge conditions by recharacterizing its failed contractual claim as a quasi-contractual one. Illinois courts have consistently rejected this approach. We believe the unjust enrichment claim is subject to dismissal as a matter of law, either on a motion to dismiss under Section 2-615 of the Illinois Code of Civil Procedure or, at latest, on summary judgment. We recommend addressing this count at the earliest procedurally appropriate stage.
C. Account Stated (Count III)
Cardinal Peak's account stated theory appears to rest on the contention that Nexford's partial payments on certain surcharge invoices — totaling $1.68 million — constituted an acknowledgment of the full invoiced amounts, thereby giving rise to an account stated between the parties.
Under Illinois law, an account stated requires: (1) a statement of the balance due, rendered by one party to the other; (2) express or implied assent by the party receiving the statement that the balance is correct; and (3) a promise, express or implied, by the debtor to pay the stated amount. See Dreyer Med. Clinic, S.C. v. Corral, 227 Ill. App. 3d 221, 228 (2d Dist. 1992).
Nexford's defense to this count is straightforward: Nexford consistently and timely disputed the surcharge amounts invoiced by Cardinal Peak and did not assent to the full invoiced amounts. Nexford's partial payments were expressly made on a contested basis, reflecting only those surcharge components that Nexford determined were properly calculated and documented in accordance with the MSA. Under Illinois law, partial payment accompanied by an express dispute of the remaining balance negates the account stated theory, because the essential element of assent is absent. See, e.g., In re Marriage of Berberet, 2012 IL App (4th) 110749, ¶ 37 (noting that an account stated requires mutual agreement to the balance).
The contemporaneous correspondence between Nexford and Cardinal Peak — including your July 5, 2022 letter and the procurement team's ongoing objections — will provide strong evidentiary support for this defense. We anticipate that this count, like Count II, is subject to dismissal or summary judgment.
VII. Recommended Counterclaim
Based on our analysis, we recommend that Nexford file a counterclaim against Cardinal Peak asserting the following claims:
Counterclaim Count I — Breach of Contract. Cardinal Peak breached the MSA by: (a) failing to deliver timely Surcharge Notices as required by Section 7.4(a); (b) calculating surcharges using an internal blended cost metric rather than the Exhibit C methodology; and (c) invoicing surcharges in excess of the 12% cap without obtaining the required prior written consent from Nexford. These breaches caused Nexford to incur costs and administrative burdens associated with reviewing, disputing, and defending against improperly calculated surcharges.
Counterclaim Count II — Declaratory Judgment. Nexford seeks a declaratory judgment that it has no further surcharge obligations to Cardinal Peak beyond the amounts already paid during the disputed period, and that any surcharges not properly noticed and calculated in accordance with the MSA are void and unenforceable.
Counterclaim Count III — Overpayment Refund. Upon completion of the independent expert recalculation, Nexford may be able to demonstrate that it overpaid surcharges during the disputed period — even after accounting for the $1.68 million already paid. Our preliminary analysis suggests that Nexford may be entitled to a refund of approximately $210,000, representing the difference between the amounts actually paid and the amounts properly owed under the MSA when the published indices and contractual baselines are correctly applied. Nexford seeks recovery of this overpayment.
The filing of a counterclaim serves multiple strategic purposes. First, it shifts the litigation dynamic by placing Cardinal Peak on the defensive. Second, it establishes a framework for settlement negotiations in which Nexford's position is that not only does it owe nothing further, but that it is owed a refund. Third, the declaratory judgment count will provide certainty regarding the parties' ongoing surcharge obligations for the remainder of the MSA term.
VIII. Recommended Next Steps and Timeline
We set forth below the immediate action items and projected timeline for the defense of this matter.
A. Immediate Actions
Answer and Affirmative Defenses. Nexford's Answer and Affirmative Defenses must be filed by September 19, 2022, which is within the applicable response deadline under the Illinois Code of Civil Procedure. We will prepare and file the Answer asserting the following affirmative defenses:
1. Waiver / Failure of Condition Precedent — Cardinal Peak's failure to deliver timely Surcharge Notices constitutes a failure of a condition precedent to Nexford's payment obligation, thereby waiving Cardinal Peak's right to collect the associated surcharges.
2. Breach by Cardinal Peak of Exhibit C Methodology — Cardinal Peak's use of an internal blended cost metric, rather than the published indices specified in Exhibit C, constitutes a breach of the MSA that excuses Nexford's obligation to pay the improperly calculated surcharges.
3. Surcharge Cap Defense Under Section 7.4(c) — Cardinal Peak invoiced surcharges in excess of the 12% cap without obtaining the required prior written consent from Nexford, and the excess amounts are therefore not payable.
4. Failure to Mitigate — To the extent Cardinal Peak claims damages based on lost revenue, Cardinal Peak failed to mitigate its damages by, among other things, failing to provide timely and compliant Surcharge Notices and failing to recalculate surcharges using the proper methodology when Nexford raised objections.
5. Failure to Comply with Mandatory Mediation — Cardinal Peak filed the Complaint without first completing the mandatory mediation required by MSA Section 14.3.
Litigation Hold. A litigation hold notice was issued to Nexford on August 23, 2022, directing the preservation of all documents and electronically stored information potentially relevant to this dispute. We request that you confirm that all relevant personnel — and particularly the following individuals — have received and acknowledged the hold:
• Russell Okonkwo, Vice President, Procurement
• Lydia Tran, Chief Financial Officer
• Martin Schaeffer, Chief Executive Officer
It is essential that no documents related to the Cardinal Peak supply relationship, surcharge invoices, procurement communications, or payment records be altered, deleted, or destroyed. Failure to preserve evidence can result in severe sanctions, including adverse inference instructions. We request written confirmation from each of the above individuals that they have reviewed and will comply with the litigation hold.
B. Counterclaim Filing
We anticipate filing the counterclaim within approximately fourteen (14) days after the Answer, with a target date in early October 2022. The brief interval between the Answer and the counterclaim filing will allow us to finalize the counterclaim allegations based on any additional documentary evidence compiled by the Nexford team in the intervening period.
C. Discovery Preparation
Vigorous discovery preparation should begin immediately. We request that Nexford begin compiling the following categories of documents and information:
1. Surcharge Notices — All Surcharge Notices received from Cardinal Peak during the period March 2021 through May 2022, together with date-stamped evidence of receipt (including email timestamps, courier or delivery tracking records, and any internal date stamps or log entries applied by Nexford personnel upon receipt).
2. Internal Surcharge Review Logs — All internal logs, memoranda, worksheets, or spreadsheets maintained by Russell Okonkwo and the procurement team reflecting Nexford's review and analysis of the Surcharge Notices received from Cardinal Peak, including any notations regarding timeliness, calculation methodology, or discrepancies.
3. Correspondence — All correspondence between Nexford and Cardinal Peak (including but not limited to emails, letters, and text messages) relating to surcharge disputes, surcharge calculations, requests for supporting documentation, and any other communications regarding the surcharge provisions of the MSA.
4. Payment Records — All records documenting the $1.68 million in payments made by Nexford on surcharges during the disputed period, including wire transfer confirmations, check copies, remittance advices, and any accompanying communications indicating that payments were made on a disputed or partial basis.
We request that these materials be compiled and transmitted to C&H no later than September 9, 2022, to allow adequate time for review and incorporation into the Answer, the counterclaim, and our preliminary discovery strategy.
D. Expert Retention
As discussed in Section V.B above, we strongly recommend the early retention of a damages consultant to perform an independent surcharge recalculation using the published Ferrous Scrap Index and Industrial Energy Cost Index values for the disputed period, applied against the contractual baselines set forth in Exhibit C.
Meridian Bridge Consulting LLC has been identified as a qualified candidate for this engagement. Dr. Anita Rosenthal, CPA, ABV, is a partner at Meridian Bridge with over twenty years of experience in commercial damages analysis, including engagements in the metals, manufacturing, and industrial supply sectors. Dr. Rosenthal's office is located at 311 South Michigan Avenue, Suite 1500, Chicago, Illinois 60604. Meridian Bridge is a well-respected consulting firm that has provided expert testimony in commercial litigation matters in both state and federal courts throughout the Seventh Circuit.
Early expert retention will allow us to: (1) quantify the methodology deviation defense with precision; (2) develop a credible damages model for Nexford's counterclaim; and (3) establish a well-supported settlement valuation for use in mediation. We request your authorization to contact Meridian Bridge to discuss engagement terms and scope of work.
E. Mediation Considerations
As noted above, MSA Section 14.3 requires mandatory mediation in Chicago, Illinois as a precondition to litigation. Cardinal Peak filed the Complaint without first completing — or even initiating — the mediation process. This failure may provide a basis for Nexford to seek a stay of the litigation pending completion of mediation, which would have the practical effect of delaying Cardinal Peak's prosecution of its claims while Nexford develops its factual record.
However, we recommend exercising strategic judgment regarding the timing of any motion to compel mediation or stay litigation. While the procedural defense is available, there are advantages to reserving this argument and pursuing mediation at a later stage — specifically, after discovery has been initiated and Nexford's factual record has been strengthened through the compilation of Surcharge Notice receipt records and the completion of the expert recalculation. Entering mediation with a robust factual and expert record will significantly enhance Nexford's bargaining position and increase the likelihood of a favorable resolution.
Our current recommendation is to assert the failure to mediate as an affirmative defense in the Answer but to defer any motion to compel mediation until we have assessed the discovery landscape and determined the optimal timing for mediation. We will revisit this recommendation with you as the case progresses.
IX. Stakeholder Notifications
The Cardinal Peak litigation triggers notification obligations to several of Nexford's key stakeholders. We address each below.
A. Marlowe Asset Management Bluff Capital Partners, LP
Marlowe Asset Management Bluff Capital Partners, LP is Nexford's majority owner and private equity sponsor. The general partner of Marlowe Asset Management Bluff Capital Partners is Marlowe Asset Management Bluff Capital Management LLC, whose Managing Partner is Conrad Yeung. Diana Calloway serves as a Principal at Marlowe Asset Management Bluff and as a Board Observer on Nexford's board of directors.
As the controlling equity holder, Marlowe Asset Management Bluff should be promptly informed of the litigation and the defense strategy outlined in this letter. We recommend coordinating with Diana Calloway regarding litigation oversight, settlement authority parameters, and any reporting requirements under Marlowe Asset Management Bluff's limited partnership agreement or Nexford's stockholders' agreement. Private equity sponsors typically require advance notice and consent before a portfolio company enters into settlement agreements above a specified threshold, and we would like to confirm those parameters at the outset of this engagement.
We suggest that a brief telephonic update be scheduled with Ms. Calloway and Mr. Yeung, at your convenience, to discuss the key elements of our defense strategy and Nexford's exposure assessment.
B. Ridgecrest National Bank, N.A.
Nexford maintains a $45 million revolving credit facility with Ridgecrest National Bank, N.A., pursuant to a credit agreement dated March 12, 2021 (the "Credit Agreement"). The Credit Agreement contains a litigation notice requirement under Section 6.03(b), which obligates Nexford to notify the lender of certain litigation events.
Additionally, the Credit Agreement requires that settlements exceeding $1.0 million require notice to Ridgecrest National Bank. The Relationship Manager for Nexford's account is Karen Whitmore, located at Ridgecrest's offices at 120 North LaSalle Street, Chicago, Illinois 60602.
At this stage, the filing of the Complaint — asserting claims of $4.73 million — may itself trigger a reporting obligation under Section 6.03(b) of the Credit Agreement, depending on the specific materiality thresholds and reporting requirements set forth therein. We recommend that you review the Credit Agreement's litigation notice provisions promptly and provide notice to Ridgecrest National Bank if required. If you would like, C&H can review the relevant Credit Agreement provisions and advise on the notice obligation.
We note that timely compliance with the Credit Agreement's notice requirements is important to avoid any assertion by Ridgecrest that Nexford has breached its covenants, which could have implications for the availability of the revolving credit facility.
C. Hargrove Kellner CPAs LLP
Hargrove Kellner CPAs LLP serves as Nexford's external auditors. The Engagement Partner is Steven Margolis, and the firm's offices are located at 500 West Monroe Street, Suite 3100, Chicago, Illinois 60661.
The Cardinal Peak dispute may require contingent liability disclosure in Nexford's financial statements, depending on the materiality assessment conducted in accordance with ASC 450-20 (formerly FAS 5). While we believe the ultimate liability exposure is substantially less than the $4.73 million claimed, the existence of the litigation and the asserted claim amount should be communicated to Hargrove Kellner so that Mr. Margolis and his team can evaluate the appropriate accounting treatment and disclosure requirements.
We recommend notifying Hargrove Kellner of the litigation and providing them with a copy of this letter (subject to preservation of attorney-client privilege) or a separate summary of the dispute for their assessment. Lydia Tran, as CFO, may wish to coordinate directly with Mr. Margolis on this matter.
X. Budget and Fee Estimate
Pursuant to the engagement letter dated August 22, 2022, we provide the following estimated budget for the defense of this matter:
These estimates are based on the scope of the matter as currently understood and are subject to revision as the case develops. Factors that could affect the budget include the volume and complexity of discovery, the number and nature of depositions, the scope of expert work, and the extent of pre-trial motion practice.
The applicable billing rates for the C&H team assigned to this matter are as follows:
We anticipate that a vigorous defense — including early expert retention, well-supported motion practice, and a thoroughly prepared mediation presentation — will position Nexford for a favorable resolution at a cost significantly below the $4.73 million demanded by Cardinal Peak. Given the strength of Nexford's three principal defenses, we believe that a settlement in the range of significantly less than 50% of the claimed amount is a realistic target, and that the litigation may ultimately be resolved at or near Nexford's calculated maximum exposure of approximately $210,000.
We will provide monthly billing statements and periodic budget updates throughout the engagement. Should the scope of the matter change materially, we will notify you promptly and revise the fee estimate accordingly.
XI. Preliminary Risk Assessment
We provide below a candid preliminary assessment of the strengths and risks of Nexford's position.
Overall Assessment: Nexford possesses strong contract-based defenses that are well-grounded in the express language of the MSA and supported by established Illinois law on conditions precedent, contract interpretation, and unjust enrichment. We believe Nexford's position is significantly stronger than Cardinal Peak's, and that the claimed exposure of $4.73 million substantially overstates the amounts, if any, owed by Nexford.
Defense-by-Defense Assessment:
Late-Notice Defense ($2.18 million). This is the most straightforward of the three defenses and is the one most likely to be sustained in full on summary judgment. It is, however, fact-dependent — its success is contingent on Nexford's ability to document the actual receipt dates of the Surcharge Notices for each disputed month. If the procurement team maintained date-stamped records of receipt (as we expect), this defense should be highly effective. If receipt dates are uncertain or undocumented for some months, the defense may be weakened for those periods.
Methodology Deviation Defense ($1.47 million). This defense requires expert analysis to quantify the overstatement resulting from Cardinal Peak's use of the blended cost metric. The underlying legal theory, however, is well-supported by the clear and unambiguous language of Exhibit C, which specifies the published indices and contractual baselines that must be used. Courts routinely enforce contractual calculation methodologies as written, and Cardinal Peak's unilateral substitution of a different methodology should not be upheld. We rate this defense as strong, with moderate complexity.
Cap Exceedance Defense ($1.08 million). This is the most legally straightforward of the three defenses. The 12% cap is an express contractual limitation, and the absence of prior written consent from Nexford is a binary question — either the consent exists or it does not. We are confident that no such consent was given. This defense should be sustained in full.
Risk Factors:
• Course of Dealing / Waiver Argument. Cardinal Peak may argue that Nexford waived strict compliance with the Surcharge Notice deadlines through a prior course of dealing. In particular, Cardinal Peak may point to the fact that Nexford paid the April 2021 surcharge in full — even though the April 2021 Surcharge Notice may have been delivered late or may have deviated from Exhibit C methodology. If Cardinal Peak can establish a pattern of acceptance or payment despite non-compliance, it may argue that Nexford is estopped from asserting the late-notice defense for subsequent months. To counter this argument, we must demonstrate that Nexford consistently objected to the untimely and non-compliant Surcharge Notices and that any payment on the April 2021 surcharge was not an acquiescence to Cardinal Peak's practices but rather reflected the particular circumstances of that month (e.g., the April 2021 surcharge may have been calculated correctly even if noticed late). Detailed records of Nexford's contemporaneous objections will be essential to rebut this argument.
• Unjust Enrichment Claim. While we assess the unjust enrichment claim as weak given the existence of the express contract, we note that some Illinois courts have allowed unjust enrichment claims to proceed alongside breach of contract claims in the early stages of litigation when pleaded in the alternative. The claim is unlikely to survive summary judgment, but it may survive a motion to dismiss at the pleading stage. This is a manageable risk.
• Credibility of Nexford's Dispute History. The strength of several of Nexford's defenses — particularly the late-notice defense and the account stated defense — depends on demonstrating that Nexford consistently and contemporaneously disputed the surcharge invoices. If the documentary record reveals periods of silence or delayed objection, Cardinal Peak may attempt to characterize Nexford's after-the-fact defenses as pretextual. For this reason, the compilation of a complete and chronological record of all dispute correspondence is a high priority.
Notwithstanding these risk factors, our overall assessment is that Nexford's litigation position is strong and that the Company is well-positioned to achieve a favorable outcome through vigorous defense, either in settlement negotiations or at trial.
XII. Conclusion and Request for Action
We are confident that the defenses outlined in this letter provide Nexford with a robust foundation for contesting Cardinal Peak's claims and achieving a resolution that reflects the parties' actual contractual obligations. The strength of Nexford's position — grounded in the express language of the MSA and supported by well-established Illinois law — should enable the Company to limit its exposure to a fraction of the $4.73 million demanded by Cardinal Peak.
To ensure that we can proceed efficiently and meet the applicable litigation deadlines, we respectfully request the following actions from Nexford at the earliest opportunity:
1. Confirm Receipt. Please confirm receipt of this letter and the enclosed documents.
2. Schedule Strategy Meeting. We request that you coordinate an in-person or telephonic meeting to discuss the defense strategy outlined herein, preferably during the week of August 29, 2022. Participants should include yourself, Martin Schaeffer (CEO), Lydia Tran (CFO), Russell Okonkwo (VP, Procurement), and the C&H litigation team.
3. Compile Documentary Evidence. Please direct Russell Okonkwo and Lydia Tran to begin compiling the documentary evidence outlined in Section VIII.C above, including all Surcharge Notices with receipt dates, internal surcharge review logs, correspondence with Cardinal Peak, and payment records. We request that these materials be transmitted to C&H no later than September 9, 2022.
4. Authorize Filing of Answer and Counterclaim. Please provide authorization for C&H to proceed with the preparation and filing of the Answer and Affirmative Defenses (due September 19, 2022) and to initiate preparation of the counterclaim for filing in early October 2022.
5. Authorize Expert Retention. Please provide authorization for C&H to contact Meridian Bridge Consulting LLC (Dr. Anita Rosenthal, CPA, ABV) regarding engagement terms and scope of work for the independent surcharge recalculation.
We look forward to discussing this matter with you in greater detail and to working closely with the Nexford team to bring this dispute to a successful resolution. Please do not hesitate to contact me directly at (312) 555-8217 or by email at panand@calderwoodharkness.com if you have any questions or wish to discuss any aspect of this letter in advance of our meeting.
Very truly yours,
CALDERWOOD & HARKNESS LLP
By: ________
Priya Anand Partner 200 South Wacker Drive, Suite 4400 Chicago, Illinois 60606 Tel: (312) 555-8217
Email: panand@calderwoodharkness.com
cc: Martin Schaeffer, Chief Executive Officer, Nexford Industrial Holdings Inc. Douglas Carmichael, Partner, Calderwood & Harkness LLP Simone Laroche, Senior Associate, Calderwood & Harkness LLP
Enclosures:
1. Copy of Demand Letter from Blackwood Stein & Associates LLP on Behalf of Cardinal Peak Industries, dated June 10, 2022
2. Copy of Complaint, Cardinal Peak Industries v. Nexford Industrial Holdings Inc., Circuit Court of Cook County, Illinois, County Department, Law Division, Case No. 2022-L-008471, filed August 8, 2022
This letter and its contents are protected by the attorney-client privilege and constitute confidential attorney work product. This communication is intended solely for the use of the addressee and other authorized recipients. Any unauthorized review, use, disclosure, or distribution is strictly prohibited. If you have received this communication in error, please notify Calderwood & Harkness LLP immediately and destroy all copies of this communication.
Product | Base Price (2020)
Hot-Rolled Coil (HRC) | $620/ton
Cold-Rolled Coil (CRC) | $740/ton
Product | Volume (tons) | Base Price | Estimated Annual Spend
HRC | 18,000 | $620/ton | $11,160,000
CRC | 6,500 | $740/ton | $4,810,000
Total | 24,500 | $15,970,000
Component | Contractual Baseline
Scrap Cost | $340/ton
Energy Cost | $48/ton
Product | Base Price | 12% Cap | Maximum Surcharge/Ton
HRC | $620/ton | 12% | $74.40/ton
CRC | $740/ton | 12% | $88.80/ton
Category | Claimed Amount | Defense | Net Reduction
Late Surcharge Notices | $2,180,000 | Condition precedent failure | $2,180,000
Methodology Deviation | $1,470,000 | Non-compliance with Exhibit C | $1,470,000
Cap Exceedances | $1,080,000 | No written consent under §7.4(c) | $1,080,000
Overlap Adjustment | Eliminate double-counting | ($210,000)
Total Net Reduction | $4,520,000
Claimed Amount | $4,730,000
Net Exposure | $210,000
Phase | Estimated Fee Range
Defense through mediation | $200,000 – $275,000
Defense through trial | $350,000 – $500,000
Timekeeper | Role | Hourly Rate
Priya Anand | Partner | $895/hr
Douglas Carmichael | Partner | $875/hr
Simone Laroche | Senior Associate | $585/hr
Jeffrey Park | Associate | $435/hr
Paralegal Support | Paralegal | $275/hr

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