REBUTTAL EXPERT REPORT OF DR. ANITA ROSENTHAL, CPA, ABV
CIRCUIT COURT OF COOK COUNTY, ILLINOIS COUNTY DEPARTMENT, LAW DIVISION
CARDINAL PEAK INDUSTRIES, Plaintiff,
v.
NEXFORD INDUSTRIAL HOLDINGS INC., Defendant.
Case No. 2022-L-008471
Prepared by:
Dr. Anita Rosenthal, CPA, ABV Meridian Bridge Consulting LLC 311 South Michigan Avenue, Suite 1500 Chicago, Illinois 60604 Telephone: (312) 555-0184
Email: arosenthal@meridianbridgeconsulting.com
Prepared on Behalf of Defendant Nexford Industrial Holdings Inc.
Submitted Through Counsel:
Calderwood & Harkness LLP 200 South Wacker Drive, Suite 4400 Chicago, Illinois 60606
Attn: James R. Falkner, Partner
March 15, 2023
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I. INTRODUCTION AND QUALIFICATIONS
A. Identity and Professional Background
1. My name is Dr. Anita Rosenthal. I am a Certified Public Accountant licensed in the State of Illinois (License No. 065-032781) and hold the Accredited in Business Valuation ("ABV") credential issued by the American Institute of Certified Public Accountants ("AICPA"). I am the Lead Consultant at Meridian Bridge Consulting LLC ("Meridian Bridge"), a Chicago-based advisory firm specializing in commercial damages quantification, business valuation, and forensic accounting.
2. I have been retained by Calderwood & Harkness LLP on behalf of Defendant Nexford Industrial Holdings Inc. ("Nexford" or "Defendant") pursuant to a retention letter dated December 12, 2022, to provide expert analysis and opinions regarding the damages claimed by Plaintiff Cardinal Peak Industries ("CPI" or "Plaintiff") in this litigation. The purpose of this report is to rebut CPI's claimed surcharge damages of approximately $4.73 million.
3. I have over twenty-two years of professional experience in the fields of commercial damages quantification, contract dispute analysis, and pricing and cost analysis in the industrial and manufacturing sectors. My practice has concentrated heavily on disputes arising from supply agreements, procurement contracts, and pricing mechanisms in the metals, heavy manufacturing, and industrial distribution industries. Over the course of my career, I have been retained as an expert or consulting analyst in more than seventy-five commercial litigation matters involving damages quantification or financial analysis.
4. I hold a Ph.D. in Accounting from the University of Illinois at Urbana-Champaign, a Master of Science in Finance from Northwestern University's Kellogg School of Management, and a Bachelor of Science in Economics, magna cum laude, from the University of Michigan. I earned my CPA licensure in 2003 and obtained the ABV credential from the AICPA in 2007.
5. I have been qualified as an expert witness and have provided testimony in deposition or at trial in approximately thirty-one matters in federal and state courts, as well as in domestic and international arbitration proceedings. A detailed summary of my educational background, professional experience, publications, and prior testimony history is set forth in my curriculum vitae, which is attached as Appendix A to this report.
6. My compensation for this engagement, and that of my firm, is discussed in Section X of this report. My compensation is not contingent upon the outcome of this litigation or the substance of the opinions I express.
B. Scope of Engagement
7. I have been retained to analyze and rebut the damages claimed by CPI in the amount of $4.73 million in allegedly unpaid raw-material surcharges under the Master Supply Agreement identified as MSA-NIH-CPI-2020-001, dated January 15, 2020 (the "MSA"). The claimed surcharges relate to the period from March 2021 through May 2022, a span of fifteen calendar months, of which fourteen months are in dispute. The surcharge for April 2021 was paid in full by Nexford and is not at issue in this litigation.
8. Specifically, I was tasked with performing the following analyses:
(1) Evaluating CPI's surcharge calculations against the contractual methodology prescribed in Exhibit C ("Surcharge Methodology") of the MSA;
(2) Determining whether CPI complied with the notice requirements set forth in Section 7.4(a) of the MSA, which requires delivery of Surcharge Notices with supporting documentation no later than fifteen (15) business days after the end of the applicable month;
(3) Assessing CPI's compliance with the 12% surcharge cap provision set forth in Section 7.4(c) of the MSA, which limits the aggregate monthly surcharge to 12% of the applicable Base Price absent prior written consent of the Buyer; and
(4) Calculating Nexford's maximum additional exposure, if any, after accounting for the contractual defenses identified in items (1) through (3) above.
9. This report constitutes a rebuttal to the damages claimed by CPI. As of the date of this report, CPI's affirmative expert damages report had not yet been submitted. I understand from counsel that CPI has retained Dr. Theodore Voss of Pinnacle Economics Group LLC as its damages expert and that his report is anticipated in approximately April 2023. Because CPI's expert report was not available at the time of this submission, my rebuttal analysis addresses CPI's claimed surcharge amounts as set forth in the Complaint filed August 8, 2022, CPI's discovery responses, and the underlying surcharge invoices produced in this litigation. I reserve the right to supplement or amend this report upon receipt of Dr. Voss's report or any additional discovery materials, as discussed further in Section IX.C below.
C. Materials Reviewed
10. In preparing this report, I reviewed and relied upon the following materials:
(a) Master Supply Agreement MSA-NIH-CPI-2020-001, dated January 15, 2020, executed by Nexford Industrial Holdings Inc. and Cardinal Peak Industries, including all exhibits and schedules (particularly Exhibit C — Surcharge Methodology) (Bates Nos. CPI-000001 through CPI-000089);
(b) All fourteen (14) disputed surcharge invoices issued by CPI for the period March 2021 through May 2022, excluding the April 2021 invoice which was paid in full and is not in dispute (Bates Nos. CPI-001200 through CPI-001438);
(c) Surcharge Notices and supporting documentation delivered by CPI in connection with each of the disputed invoices, including email transmissions, certified mail receipts, and accompanying calculation worksheets (Bates Nos. CPI-001440 through CPI-002187);
(d) Published Ferrous Scrap Index data, as reported by Bramwell Industries ("Platts/SPI"), for the period March 2021 through May 2022 (sourced from Platts SteelBenchmarker subscription service);
(e) Published Industrial Energy Cost Index data for the period March 2021 through May 2022 (sourced from the U.S. Bureau of Labor Statistics Producer Price Index for Industrial Electric Power, Series ID WPU0543);
(f) CPI's internal surcharge computation worksheets and "blended cost" methodology documentation produced in discovery (Bates Nos. CPI-003010 through CPI-003489);
(g) Nexford's payment records for surcharges paid during the disputed period, reflecting total payments of $1.68 million (Bates Nos. NIH-005001 through NIH-005234);
(h) Deposition transcript of Natalie Gunderson, CPI Vice President, Sales & Commercial, dated January 18, 2023;
(i) Deposition transcript of Russell Okonkwo, Nexford Vice President, Procurement, dated February 7, 2023;
(j) CPI's Responses to Nexford's First Set of Interrogatories, dated November 4, 2022;
(k) CPI's Responses to Nexford's First Set of Requests for Production, dated November 4, 2022;
(l) Financial records from Hargrove Kellner CPAs LLP (Nexford's independent auditors; engagement partner Steven Margolis), relevant to payment history and surcharge accrual analysis (Bates Nos. NIH-006100 through NIH-006328);
(m) CPI's Complaint filed August 8, 2022, and all supporting exhibits; and
(n) Such other documents, data sources, and records as are identified in the comprehensive materials list attached as Appendix C to this report.
A complete list of all materials reviewed, cross-referenced with Bates number ranges where applicable, is provided in Appendix C.
D. Summary of Opinions
11. Based on my review of the materials identified above, my professional training and experience, and the analysis set forth in detail in this report, I have formed the following opinions, each of which is expressed to a reasonable degree of professional certainty:
Opinion 1: Cardinal Peak's claimed unpaid surcharges of $4.73 million are substantially overstated.
Opinion 2: Three independently sufficient categories of contractual non-compliance by CPI reduce or eliminate CPI's valid claim:
(a) Late Surcharge Notices: CPI failed to deliver timely Surcharge Notices in 7 of the 14 disputed months, resulting in the disallowance of approximately $2.18 million in surcharges for which the condition precedent of Section 7.4(a) was not satisfied.
(b) Deviation from Exhibit C Methodology: CPI used an internal "blended cost" metric rather than the published indices required by Exhibit C, resulting in an overstatement of approximately $1.47 million across all 14 disputed months.
(c) Exceedance of the 12% Surcharge Cap: CPI exceeded the 12% surcharge cap of Section 7.4(c) in 4 months without obtaining Nexford's prior written consent, resulting in excess surcharges of approximately $1.08 million.
Opinion 3: After reconciling all three categories and accounting for overlap among them to avoid double-counting, Nexford's maximum additional obligation beyond the $1.68 million already paid is approximately $0.21 million.
Opinion 4: Under a strict reading of all three contractual provisions, Nexford may in fact have no additional obligation and may have overpaid. At most, Nexford owes a de minimis additional amount.
12. The detailed analysis supporting each of these opinions is presented in Sections IV through IX of this report. Supporting tables and data are provided in Appendices B and D.
II. BACKGROUND: THE MASTER SUPPLY AGREEMENT AND SURCHARGE FRAMEWORK
A. Overview of the MSA
13. The Master Supply Agreement MSA-NIH-CPI-2020-001 (the "MSA") was executed on January 15, 2020, between Nexford Industrial Holdings Inc., as Buyer, and Cardinal Peak Industries, as Seller. The MSA governs the purchase and sale of flat-rolled steel products, specifically hot-rolled coil ("HRC") and cold-rolled coil ("CRC"), for use in Nexford's manufacturing operations at its facilities in Joliet, Illinois, and Gary, Indiana.
14. The MSA has a three-year initial term, running from January 15, 2020, through January 14, 2023, with automatic one-year renewal periods absent written termination notice delivered by either party at least one hundred eighty (180) days prior to the end of the then-current term. As of the date of this report, the MSA remains in effect.
15. Under the MSA, the base pricing for the covered products was established as follows:
• Hot-Rolled Coil (HRC): $620 per ton (2020 base price)
• Cold-Rolled Coil (CRC): $740 per ton (2020 base price)
These base prices are subject to quarterly adjustment pursuant to Section 7.2 of the MSA, which provides for price modifications tied to specified market benchmarks. The quarterly adjustment mechanism is not at issue in this dispute.
16. The MSA contemplated estimated annual volumes and associated spend as follows:
17. The surcharge mechanism set forth in Section 7.4 of the MSA was designed to allow CPI, as Seller, to pass through documented increases in certain raw-material input costs — specifically scrap, energy, and alloy costs — that exceeded agreed-upon baseline levels. The surcharge provisions reflect the parties' negotiated allocation of commodity price risk: CPI bears the risk up to the baseline levels embedded in the base prices, while cost increases above those baselines may be passed through to Nexford, subject to the conditions and limitations discussed below.
B. Section 7.4 — Surcharge Clause
18. Section 7.4 of the MSA, titled "Raw-Material Surcharges," is the central provision at issue in this dispute. It provides, in pertinent part:
"Seller may pass through documented raw-material surcharges, including scrap, energy, and alloy surcharges, incurred during the applicable invoice period, provided that (a) Seller delivers to Buyer a Surcharge Notice with supporting documentation no later than fifteen (15) business days after the end of the applicable month, and (b) the surcharge components are calculated in accordance with the methodology set forth in Exhibit C (Surcharge Methodology)."
19. The language of Section 7.4 is carefully structured. The operative word "provided that" introduces two express conditions precedent that must be satisfied before CPI is entitled to collect surcharges from Nexford. First, CPI must deliver a Surcharge Notice with supporting documentation within the specified timeframe — no later than fifteen (15) business days after the end of the applicable month. Second, the surcharge components must be calculated in accordance with the methodology set forth in Exhibit C. Both conditions are conjunctive; satisfaction of one does not excuse non-compliance with the other. Both must be met for CPI to trigger the contractual right to collect a surcharge for any given month.
20. The fifteen-business-day notice requirement serves an important commercial purpose. It ensures that Nexford receives timely information about surcharge claims, enabling the procurement and finance teams to verify the calculations, accrue the appropriate liabilities in Nexford's financial records, and plan cash flows accordingly. The timeliness requirement is not a mere formality; it is a material term of the agreement that was specifically negotiated between the parties' respective commercial teams.
C. Exhibit C — Surcharge Methodology
21. Exhibit C to the MSA, titled "Surcharge Methodology," prescribes the specific method by which surcharges are to be calculated. The methodology is designed to provide an objective, verifiable, and reproducible basis for surcharge computations by tying the calculations to publicly available market data rather than to either party's proprietary cost figures.
22. Under Exhibit C, surcharges must be calculated using two published indices:
(a) The Ferrous Scrap Index, as reported by Bramwell Industries ("Platts/SPI"). This index is widely recognized in the steel industry as the standard benchmark for ferrous scrap pricing in the United States.
(b) The Industrial Energy Cost Index, which tracks changes in industrial energy costs relevant to steel production processes. For purposes of this analysis, the applicable index data was sourced from the U.S. Bureau of Labor Statistics Producer Price Index for Industrial Electric Power.
23. Exhibit C establishes the following baseline cost levels:
• Baseline Scrap Cost: $340 per ton
• Baseline Energy Cost: $48 per ton
24. The surcharge for any given month is calculated as the incremental cost above these baselines, as measured by the published indices, applied to the actual tonnage of each product category shipped during the applicable month. To illustrate: if the Ferrous Scrap Index for a given month reflects a scrap cost of $390 per ton, the scrap surcharge component would be $50 per ton ($390 − $340 = $50), applied to the tons shipped. Similarly, if the Industrial Energy Cost Index reflects an energy cost of $56 per ton, the energy surcharge component would be $8 per ton ($56 − $48 = $8), applied to the tons shipped.
25. Critically, Exhibit C does not authorize the use of internal, proprietary, or "blended" cost metrics in place of the specified published indices. The decision to anchor the surcharge calculation to published indices was a deliberate contractual choice, intended to ensure transparency, verifiability, and mutual accountability. As I discuss in Section V below, CPI departed from this methodology during the disputed period, instead employing an internal blended cost approach that systematically overstated the surcharges owed.
D. Section 7.4(c) — Cap Provision
26. Section 7.4(c) of the MSA establishes a ceiling on the aggregate monthly surcharge that CPI may impose. The provision states:
"In no event shall the aggregate monthly surcharge exceed 12% of the applicable Base Price for the relevant product category without prior written consent of Buyer."
27. The 12% cap operates as a risk-management mechanism, protecting Nexford against the possibility that raw-material cost spikes could produce surcharges so large as to fundamentally alter the economics of the supply arrangement. The cap reflects a negotiated balance: CPI is permitted to pass through documented cost increases, but only up to a defined threshold beyond which Nexford's explicit written consent is required.
28. Applying the 12% cap to the base prices under the MSA yields the following maximum permissible surcharges:
29. Any surcharge exceeding $74.40 per ton for HRC or $88.80 per ton for CRC requires Nexford's prior written consent. The provision uses the phrase "prior written consent," indicating that the consent must be obtained before the surcharge is imposed — not after the fact and not through course of dealing or implied acquiescence. As I detail in Section VI, CPI exceeded the 12% cap in four of the fourteen disputed months without obtaining or even requesting Nexford's prior written consent.
E. Section 7.4(d) — Dispute Procedure
30. Section 7.4(d) of the MSA establishes the procedure for disputing surcharges. Under this provision, Buyer must notify Seller of disputed surcharges within thirty (30) calendar days of receipt of the applicable Surcharge Notice. Unresolved disputes are escalated first to senior officers of the respective parties, and then, if still unresolved, to mediation under Section 14.3 of the MSA.
31. Nexford timely disputed all fourteen contested surcharge invoices within the thirty-day window prescribed by Section 7.4(d). The dispute notices were transmitted by Russell Okonkwo, Nexford's Vice President of Procurement, to CPI's designated commercial contact. CPI has not contended in this litigation that Nexford failed to comply with the dispute procedure. Accordingly, Nexford's contractual right to challenge the surcharges has been preserved at all times relevant to this dispute.
III. CARDINAL PEAK'S CLAIMED DAMAGES
A. Summary of CPI's Claim
32. CPI's damage claim in this litigation is straightforward in its assertion, if not in its merits. CPI alleges that it properly invoiced Nexford for raw-material surcharges totaling approximately $6.41 million during the period from March 2021 through May 2022. During this fifteen-month period, Nexford paid $1.68 million in surcharges, representing partial payments on surcharge invoices that Nexford accepted as properly calculated and timely submitted. The surcharge for April 2021 was paid in full and is not in dispute. The remaining fourteen months — March 2021, and May 2021 through May 2022 — are the subject of this litigation.
33. CPI claims that the difference between the total surcharges invoiced ($6.41 million) and the amount paid by Nexford ($1.68 million) represents an unpaid balance of $4.73 million that is owed by Nexford.
34. The following table summarizes the arithmetic of CPI's claim:
35. As I demonstrate in the following sections of this report, CPI's claim assumes — incorrectly — that all of the surcharges it invoiced were properly calculated, timely noticed, and within the contractual cap. Each of these assumptions is contradicted by the documentary evidence and the terms of the MSA itself.
B. CPI's Three Causes of Action
36. CPI's Complaint, filed August 8, 2022, asserts three causes of action:
Count I: Breach of Contract. CPI alleges that Nexford breached the MSA by failing to pay surcharges that were purportedly properly invoiced under Section 7.4. CPI seeks $4.73 million in damages, plus prejudgment interest.
Count II: Unjust Enrichment. As an alternative theory, CPI alleges that Nexford was unjustly enriched by receiving the benefit of below-market pricing without paying the full surcharge amounts. CPI contends that it would be inequitable to permit Nexford to retain this benefit.
Count III: Account Stated. CPI alleges that the surcharge invoices constitute an account stated, and that Nexford's failure to timely object to certain invoices constitutes acceptance of the amounts invoiced.
37. My analysis addresses the damages quantification underlying all three counts. Regardless of the legal theory under which CPI proceeds, the fundamental question is the same: what amount, if any, is properly owed by Nexford under the contractual framework governing surcharges? As I demonstrate below, the answer is that Nexford's maximum additional obligation is approximately $0.21 million — a small fraction of CPI's $4.73 million claim. I note that with respect to Count III, the documentary record confirms that Nexford timely disputed every contested surcharge invoice within the 30-day window prescribed by Section 7.4(d), undermining CPI's account-stated theory.
IV. ANALYSIS CATEGORY 1: LATE SURCHARGE NOTICES ($2.18 MILLION)
A. Contractual Requirement
38. As discussed in Section II.B above, Section 7.4(a) of the MSA requires CPI to deliver a Surcharge Notice with supporting documentation to Nexford no later than fifteen (15) business days after the end of the applicable month. This requirement is an express condition precedent to CPI's right to collect surcharges. If CPI fails to satisfy the notice deadline for a given month, CPI has not triggered the contractual right to collect the surcharge for that month, and the surcharge is not due and payable.
39. The fifteen-business-day deadline is measured from the last calendar day of the applicable month. For example, for the March 2021 surcharge, the applicable month ends on March 31, 2021, and the fifteenth business day thereafter falls on April 22, 2021 (accounting for weekends and assuming no intervening holidays). CPI was required to deliver the March 2021 Surcharge Notice on or before April 22, 2021.
40. The contractual language admits of no ambiguity. CPI's surcharge right is conditioned upon timely delivery of the Surcharge Notice. This is not a covenant or a mere procedural preference; it is a condition precedent that defines the scope of CPI's entitlement.
B. Methodology for Timeliness Analysis
41. For each of the fourteen disputed months, I performed the following analysis to determine whether CPI complied with the fifteen-business-day notice requirement:
(a) I identified the last calendar day of the applicable month (e.g., March 31, 2021, for the March 2021 surcharge).
(b) I calculated the fifteenth business day following that date, accounting for weekends and federal holidays observed during the relevant period. I applied the standard federal holiday calendar, which is the conventional approach absent a contractual specification of a different holiday schedule.
(c) I determined the actual delivery date of CPI's Surcharge Notice for each month. Delivery dates were established using CPI's own transmission records, including email timestamps (where the notice was delivered by email), certified mail receipts (where the notice was delivered by U.S. mail), and CPI's internal correspondence logs produced in discovery.
(d) I cross-referenced CPI's transmission records against Nexford's receipt logs, which were maintained by Russell Okonkwo's procurement team. In each instance, the delivery dates reflected in CPI's records were consistent with Nexford's receipt logs, with minor variations of one business day attributable to mail transit time for notices sent by certified mail.
(e) For each month, I compared the actual delivery date against the contractual deadline and determined whether the notice was timely or late.
42. The results of this analysis are summarized below and presented in detail in Table 1 of Appendix B.
C. Findings — Month-by-Month Analysis
43. My analysis revealed that seven (7) of the fourteen (14) disputed months had Surcharge Notices that were delivered after the fifteen-business-day deadline. The following table identifies the late-notice months, the applicable deadline, the actual delivery date, and the number of business days by which the notice was late:
44. The pattern of late notices is notable. In every instance, CPI's Surcharge Notice was delivered between five and nine business days beyond the contractual deadline. This was not a matter of marginal or borderline compliance; in each case, the notice was delivered well after the deadline had passed.
45. The late-notice pattern is consistent with testimony provided by CPI's own witness. At her deposition on January 18, 2023, Natalie Gunderson, CPI's Vice President of Sales & Commercial, acknowledged that CPI's internal processes for compiling surcharge documentation experienced delays during the March 2021 through May 2022 period. Specifically, Ms. Gunderson testified:
"Q: Were you aware that certain Surcharge Notices were sent to Nexford after the fifteen-business-day deadline?
A: I was aware that there were some delays in getting the notices out. We had staffing changes in our cost accounting group, and the process of pulling together all the supporting documentation took longer than it should have for some of those months."
(Gunderson Dep. Tr. 87:14–22.)
46. Ms. Gunderson further testified that she was personally aware that CPI's notices were late for "at least several" of the disputed months, though she could not recall the specific months at the time of her deposition. (Gunderson Dep. Tr. 88:3–9.)
47. CPI's responses to Nexford's First Set of Interrogatories did not dispute the delivery dates established by the documentary record. Rather, CPI contended that late delivery of Surcharge Notices should be excused under a theory of "substantial compliance," arguing that the notices were delivered within a reasonable time and that Nexford suffered no prejudice from the delay. However, the MSA contains no "substantial compliance" exception or "reasonable time" alternative to the fifteen-business-day deadline. The contract specifies "no later than fifteen (15) business days," and the parties' agreement must be enforced as written.
D. Quantification
48. The total surcharges invoiced by CPI for the seven late-notice months is approximately $2.18 million. Because CPI failed to satisfy the condition precedent in Section 7.4(a) for these seven months, the surcharges invoiced for these months are not collectible under the MSA.
49. It bears emphasis that Nexford did not waive its right to challenge the timeliness of these notices. To the contrary, Nexford timely disputed each of the late notices within the thirty-day window prescribed by Section 7.4(d). Russell Okonkwo's procurement team identified the late notices, flagged the timeliness issue, and transmitted dispute notices to CPI within the contractual timeframe. CPI has not contended that Nexford failed to timely dispute any of the late-notice surcharges.
50. Accordingly, $2.18 million of CPI's claimed damages is attributable to surcharges for months in which the contractual notice deadline was not met, and these amounts should be disallowed in their entirety.
V. ANALYSIS CATEGORY 2: DEVIATION FROM EXHIBIT C SURCHARGE METHODOLOGY ($1.47 MILLION)
A. Contractual Requirement
51. Section 7.4(b) of the MSA requires that surcharge components be "calculated in accordance with the methodology set forth in Exhibit C." As described in Section II.C above, Exhibit C mandates the use of two published indices — the Ferrous Scrap Index (Platts/SPI) and the Industrial Energy Cost Index — applied against agreed baseline costs of $340 per ton for scrap and $48 per ton for energy. The surcharge for any given month is the incremental cost above these baselines, multiplied by the actual tonnage shipped.
52. Compliance with the Exhibit C methodology is the second condition precedent established by Section 7.4. Even where a Surcharge Notice is timely delivered, the surcharge amounts invoiced must be calculated in accordance with Exhibit C in order for CPI to have a contractual right to collect them.
B. CPI's Actual Methodology
53. Discovery in this case revealed that CPI did not follow the Exhibit C methodology during the disputed period. Instead, CPI used an internal "blended cost" metric that combined the following components into a single composite figure:
(a) CPI's proprietary scrap procurement costs, reflecting the actual prices paid by CPI's purchasing department for various grades of ferrous scrap from CPI's network of scrap dealers and recyclers;
(b) CPI's internal energy cost allocations, reflecting the costs allocated by CPI's finance department to its steelmaking operations based on CPI's actual utility bills and internal allocation methodologies; and
(c) Alloy surcharges, reflecting the cost of various alloying elements used in CPI's production processes, bundled into the same composite figure.
54. The blended cost metric is fundamentally different from the methodology prescribed by Exhibit C. Exhibit C requires the use of published market indices applied to contractual baselines. The blended cost metric, by contrast, relies on CPI's proprietary cost data — data that is not available to Nexford for independent verification and that reflects CPI's particular procurement practices, supplier relationships, and internal cost allocation decisions rather than broad market conditions.
55. The discovery record provides ample documentation of CPI's departure from Exhibit C. CPI's internal surcharge computation worksheets (Bates Nos. CPI-003010 through CPI-003489) reflect the blended cost methodology applied across all fourteen disputed months. These worksheets contain formulas and data inputs that bear no relationship to the published Ferrous Scrap Index or the Industrial Energy Cost Index. Instead, the worksheets reference CPI's internal cost accounts, vendor-specific pricing, and allocation keys that are unique to CPI's operations.
56. Natalie Gunderson provided illuminating testimony on this point at her January 18, 2023 deposition. When questioned about the methodology used to calculate the surcharges, Ms. Gunderson testified:
"Q: Did CPI use the published Ferrous Scrap Index, as reported by Platts, to calculate the surcharges invoiced to Nexford during the period March 2021 through May 2022?
A: We transitioned to what we call a blended cost approach around the first quarter of 2021. The blended cost approach combines our actual scrap costs, energy costs, and alloy costs into a single surcharge figure. We found it to be more reflective of our actual cost experience.
Q: Was the Exhibit C methodology used at any point during the disputed period?
A: No, we applied the blended cost approach for the entire period.
Q: Did CPI seek or obtain Nexford's consent to deviate from the Exhibit C methodology?
A: I don't believe we specifically asked Nexford for consent to change the methodology. The blended cost approach was adopted across multiple customer contracts for internal efficiency."
(Gunderson Dep. Tr. 112:5–113:2.)
57. Ms. Gunderson's testimony confirms three critical points: (a) CPI consciously abandoned the Exhibit C methodology in favor of its proprietary blended cost approach; (b) this change was implemented unilaterally, without Nexford's knowledge or consent; and (c) the change was motivated by CPI's internal administrative convenience — "internal efficiency" — rather than by any contractual authorization or mutual agreement.
58. The MSA does not permit CPI to substitute its internal cost metrics for the published indices specified in Exhibit C. There is no provision in the MSA allowing either party to unilaterally modify the surcharge methodology, and there is no evidence that the parties ever agreed, formally or informally, to amend the Exhibit C methodology. CPI's unilateral decision to adopt the blended cost approach was a departure from the contract.
C. Recalculation Using Correct Methodology
59. In order to quantify the impact of CPI's methodology deviation, I independently recalculated the surcharge for each of the fourteen disputed months using the methodology prescribed by Exhibit C. My recalculation followed these steps:
(a) For each month, I obtained the published Ferrous Scrap Index value (Platts/SPI) and the Industrial Energy Cost Index value from the sources identified in Section I.C above. The monthly index data is set forth in Appendix D.
(b) I calculated the scrap surcharge component as the difference between the published Ferrous Scrap Index value and the contractual baseline of $340 per ton. Where the index value was below $340 per ton, the scrap surcharge component was zero.
(c) I calculated the energy surcharge component as the difference between the published Industrial Energy Cost Index value and the contractual baseline of $48 per ton. Where the index value was below $48 per ton, the energy surcharge component was zero.
(d) I summed the scrap and energy surcharge components to arrive at the total per-ton surcharge for each product category for each month.
(e) I multiplied the total per-ton surcharge by the actual tonnage shipped for each product category in the applicable month, as reflected in CPI's shipping records and Nexford's receiving records produced in discovery.
(f) I compared the correctly calculated surcharge amount for each month against the surcharge amount invoiced by CPI.
60. My recalculation revealed that in every one of the fourteen disputed months, CPI's blended cost methodology overstated the surcharge relative to the correctly calculated Exhibit C amount. This is a significant and consistent finding. The overstatement ranged from approximately $52,000 in the smallest month to approximately $168,000 in the largest month.
61. The systematic overstatement is attributable to several factors inherent in CPI's blended cost approach:
(a) CPI's proprietary scrap procurement costs were consistently higher than the published Ferrous Scrap Index during the disputed period, likely reflecting CPI's specific supplier mix, premium grades of scrap purchased, and regional pricing differentials that are not captured by the national index. Whatever the reason, the contract specifies the published index, not CPI's actual costs.
(b) CPI's internal energy cost allocations were consistently higher than the published Industrial Energy Cost Index, likely reflecting overhead allocations, facility-specific energy consumption patterns, and other cost elements that are properly borne by CPI as part of its overall cost structure rather than passed through as surcharges.
(c) CPI's blended cost figure included alloy surcharge components that, in certain months, appear to encompass alloying elements and cost categories beyond those contemplated by the MSA's surcharge provisions. Section 7.4 permits surcharges for "scrap, energy, and alloy surcharges," but the alloy component of CPI's blended cost included costs that go beyond what is properly characterized as an "alloy surcharge" under the MSA.
D. Quantification
62. The total overstatement attributable to CPI's methodology deviation across all fourteen disputed months is approximately $1.47 million. This figure represents the cumulative difference between the surcharges invoiced by CPI (using the blended cost approach) and the correctly calculated surcharges under the Exhibit C methodology.
63. The following table summarizes the overstatement on a month-by-month basis. A more detailed version, including index values, baseline calculations, and product-category breakdowns, is provided in Table 2 of Appendix B.
Note: Figures rounded to the nearest $1,000. Total CPI invoiced surcharges of $5.41 million shown above represent the sum for 14 disputed months; the total of $6.41 million cited elsewhere in this report includes the undisputed April 2021 invoice of approximately $1.00 million. Minor rounding differences exist. The methodology deviation total of approximately $1.47 million cited in the text reflects unrounded figures.
64. It is important to note that the $1.47 million methodology-deviation figure applies across all fourteen disputed months, including the seven months also affected by late notices (addressed in Section IV). The overlap between these two categories is addressed in Section VII, where I perform the reconciliation necessary to avoid double-counting.
VI. ANALYSIS CATEGORY 3: EXCEEDANCE OF THE 12% SURCHARGE CAP ($1.08 MILLION)
A. Contractual Requirement
65. As discussed in Section II.D above, Section 7.4(c) of the MSA provides that the aggregate monthly surcharge may not exceed 12% of the applicable Base Price for the relevant product category without the prior written consent of Buyer. The applicable caps are:
• HRC: 12% × $620/ton = $74.40/ton
• CRC: 12% × $740/ton = $88.80/ton
66. The 12% cap is an absolute ceiling. The contract does not provide for automatic exceptions, market-based overrides, or force majeure-type excuses for cap exceedances. The only mechanism for exceeding the cap is the "prior written consent of Buyer." Absent that consent, any surcharge in excess of the cap is contractually unauthorized and not collectible.
B. Analysis of Cap Compliance
67. For each of the fourteen disputed months, I calculated the per-ton surcharge invoiced by CPI for each product category and compared it against the applicable 12% cap. My analysis proceeded as follows:
(a) For each month, I obtained the total surcharge amount invoiced by CPI for each product category (HRC and CRC) from the surcharge invoices produced in discovery.
(b) I divided the surcharge amount for each product category by the actual tonnage shipped for that category in the applicable month to arrive at the per-ton surcharge.
(c) I compared the per-ton surcharge against the applicable cap ($74.40/ton for HRC; $88.80/ton for CRC).
(d) Where the per-ton surcharge exceeded the applicable cap, I calculated the excess amount (i.e., the difference between the actual per-ton surcharge and the cap, multiplied by the tonnage shipped).
68. My analysis identified four (4) months in which the surcharges invoiced by CPI exceeded the 12% cap for one or both product categories. These four months — September 2021, November 2021, January 2022, and March 2022 — represent periods of particularly elevated raw-material costs during which CPI's surcharge calculations (already inflated by the blended cost methodology discussed in Section V) pushed the per-ton surcharges well above the contractual ceiling.
69. In none of these four months did Nexford provide prior written consent to exceed the 12% cap. The record is clear on this point. Russell Okonkwo testified at his February 7, 2023 deposition:
"Q: Did Nexford at any time during the period March 2021 through May 2022 provide Cardinal Peak with written consent to exceed the 12% surcharge cap under Section 7.4(c)?
A: No. We did not. And to my knowledge, Cardinal Peak never asked for that consent.
Q: Were you or anyone on your team ever presented with a request from Cardinal Peak for written consent to exceed the 12% cap?
A: No. We were never asked."
(Okonkwo Dep. Tr. 64:11–22.)
70. CPI's own records, produced in discovery, contain no written consent requests, no drafts of consent requests, and no correspondence in which consent to exceed the 12% cap was discussed, requested, or provided. The absence of any such documentation is consistent with Mr. Okonkwo's testimony and confirms that the contractual prerequisite for exceeding the cap was never satisfied.
C. Quantification
71. The total surcharge amounts invoiced by CPI in excess of the 12% cap during the four affected months is approximately $1.08 million. This figure represents only the excess above the cap — that is, the difference between the surcharges CPI actually invoiced and the maximum surcharges permissible under the 12% cap — and not the entire surcharge amounts for those months.
72. The following table summarizes the cap exceedances:
Note: The figures above reflect CPI's invoiced per-ton surcharges, which were calculated using the blended cost methodology. When the correct Exhibit C methodology is applied and the cap is then tested, additional excess amounts are identified for certain months. The total cap exceedance across all affected months, accounting for both the raw invoiced amounts and the recalculated amounts, totals approximately $1.08 million. A complete analysis is presented in Table 3 of Appendix B, which includes the additional excess identified when both the methodology correction and the cap are applied in sequence.
73. Some of the four cap-exceedance months also overlap with the late-notice months and/or the methodology-deviation months. The interaction of these overlapping categories is addressed in the reconciliation analysis in Section VII below.
VII. RECONCILIATION AND OVERLAP ANALYSIS
A. Overlap Among the Three Categories
74. The three defense categories identified in Sections IV, V, and VI — late surcharge notices, deviation from the Exhibit C methodology, and exceedance of the 12% surcharge cap — are not entirely mutually exclusive. Certain months are affected by more than one category. For example, a month in which CPI delivered a late Surcharge Notice and used the incorrect blended cost methodology and exceeded the 12% cap presents an overlap that must be addressed to avoid double-counting in the quantification of Nexford's defenses.
75. A simple arithmetic addition of the three category totals would yield $2.18 million + $1.47 million + $1.08 million = $4.73 million — a figure that coincidentally equals CPI's entire claimed unpaid balance. However, this sum overstates the aggregate defense because it counts the same dollars more than once for months affected by multiple categories. A proper reconciliation is therefore necessary.
76. To facilitate the reconciliation, I prepared a detailed month-by-month matrix identifying which of the three categories apply to each of the fourteen disputed months. This matrix is presented in Table 4 of Appendix B. The following summary table identifies the overlap structure:
77. As the table above illustrates, the methodology deviation applies to all fourteen months. Seven of those months also have late notices. Four months (which are among the seven non-late-notice months and do not overlap with the late-notice months, except as noted) also have cap exceedances. No month is affected by all three categories simultaneously, as the four cap-exceedance months (September 2021, November 2021, January 2022, and March 2022) were all timely-noticed months.