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MEMORANDUM
September 22, 2022
I. EXECUTIVE SUMMARY
The purpose of this memorandum is to provide Nexford Industrial Holdings Inc. ("Nexford" or the "Company") and its private equity sponsor, Marlowe Asset Management Bluff Capital Partners, LP ("Marlowe Asset Management Bluff"), with a comprehensive litigation strategy and phased budget for the defense of the surcharge dispute initiated by Cardinal Peak Industries ("Cardinal Peak") in the Circuit Court of Cook County, Illinois.
On August 8, 2022, Cardinal Peak filed a three-count Complaint (the "Complaint") asserting the following causes of action against Nexford: (1) Breach of Contract; (2) Unjust Enrichment; and (3) Account Stated. Cardinal Peak alleges that Nexford failed to pay $4.73 million in raw-material surcharges purportedly owed under the parties' Master Supply Agreement (MSA-NIH-CPI-2020-001, dated January 15, 2020) (the "MSA"). The disputed surcharges relate to a fifteen-month period from March 2021 through May 2022, during which Cardinal Peak invoiced Nexford a total of $6.41 million in surcharges, of which Nexford paid $1.68 million on invoices it accepted as contractually compliant.
Calderwood & Harkness LLP ("Calderwood & Harkness" or the "Firm") was engaged on August 22, 2022 to represent Nexford in this matter. We filed Nexford's Answer and Affirmative Defenses on September 19, 2022, within the time allowed by the Illinois Code of Civil Procedure.
After a thorough review of the MSA, the surcharge invoices and supporting documentation, the parties' correspondence, and internal records provided by Nexford's procurement and finance teams, it is our assessment that Nexford has strong contractual defenses under MSA Section 7.4 that rest on three independent grounds. These grounds — which we detail in Section III below — individually and collectively substantially reduce or eliminate Cardinal Peak's claimed liability. Specifically:
• Late Surcharge Notices (Section 7.4(a) non-compliance): Approximately $2.18 million of the claimed surcharges were invoiced outside the contractual notice deadline.
• Deviation from Exhibit C Methodology: Approximately $1.47 million of the claimed surcharges were calculated using an unauthorized internal "blended cost" metric rather than the contractually mandated published indices.
• Surcharge Cap Exceedance (Section 7.4(c) non-compliance): Approximately $1.08 million of the claimed surcharges exceeded the contractual 12% cap without Nexford's prior written consent.
After applying these defenses and accounting for overlap among the categories, Nexford's maximum realistic additional exposure is approximately $0.21 million beyond the $1.68 million already paid. Our primary litigation position is that Nexford owes nothing further and, in fact, may have a claim for overpayment.
Our recommended strategy is as follows:
1. Mount an aggressive defense on the merits of all three claims.
2. File a counterclaim against Cardinal Peak for breach of contract and declaratory relief on or about October 3, 2022.
3. Retain a damages expert promptly to quantify the impact of Cardinal Peak's contractual non-compliance.
4. Position the case for favorable resolution at mandatory mediation under MSA Section 14.3, which must precede trial.
5. If mediation does not yield an acceptable resolution, be fully prepared for trial.
Our overall assessment is that Nexford occupies a favorable defense posture. The estimated budget for this matter is $200,000–$275,000 through mediation and $350,000–$500,000 through trial (inclusive of costs), as detailed in Section VI below.
We request client direction on the recommended counterclaim filing and expert retention by no later than September 30, 2022, to maintain the momentum of our defense strategy.
II. BACKGROUND AND FACTUAL SUMMARY
A. The Parties
Nexford Industrial Holdings Inc. Nexford is a Delaware corporation headquartered at 4200 West Lakeshore Industrial Parkway, Suite 300, Waukegan, Illinois 60085. Nexford is engaged in precision metal fabrication and the manufacture of engineered components serving the automotive, heavy equipment, and infrastructure sectors. Nexford reported fiscal year 2022 revenue of approximately $287 million. Since its acquisition by Marlowe Asset Management Bluff Capital Partners, LP, Nexford has operated as a portfolio company of the Marlowe Asset Management Bluff fund. Nexford is governed by a board of directors that includes designees of Marlowe Asset Management Bluff, and the Company's senior management team is led by Martin Schaeffer, Chief Executive Officer, and includes Deborah Whitfield, General Counsel, Lydia Tran, Chief Financial Officer, and Russell Okonkwo, Vice President of Procurement. Mr. Okonkwo is the senior Nexford executive with direct responsibility for the Cardinal Peak supply relationship and is the principal point of contact for the procurement of steel products under the MSA.
Cardinal Peak Industries. Cardinal Peak is a Colorado limited liability company headquartered at 1580 Ridgeline Boulevard, Pueblo, Colorado 81001. Cardinal Peak is a regional steel producer and distributor with operations focused on the production of hot-rolled coil, cold-rolled coil, and other flat-rolled steel products. Cardinal Peak reported fiscal year 2022 revenue of approximately $415 million. Cardinal Peak is represented in this litigation by Blackwood Stein & Associates LLP, with Garrett Blackwood serving as lead partner on the matter.
Marlowe Asset Management Bluff Capital Partners, LP. Marlowe Asset Management Bluff is a private equity fund and the majority owner of Nexford. The general partner of Marlowe Asset Management Bluff is Marlowe Asset Management Bluff Capital Management LLC. The Managing Partner of the fund is Conrad Yeung. Diana Calloway is a Principal at Marlowe Asset Management Bluff and serves as Board Observer at Nexford. In that capacity, Ms. Calloway maintains oversight of significant matters affecting the Company, including material litigation.
B. The Master Supply Agreement
The contractual framework underlying this dispute is the Master Supply Agreement between Cardinal Peak and Nexford (MSA-NIH-CPI-2020-001), which was executed on January 15, 2020 (the "MSA"). The MSA established the terms and conditions for Cardinal Peak's supply of flat-rolled steel products to Nexford over a three-year initial term, running from January 15, 2020 through January 14, 2023. The MSA provides for automatic one-year renewal periods unless either party delivers a written notice of termination at least 180 days prior to the expiration of the then-current term.
Products and Pricing. Under the MSA, Cardinal Peak agreed to supply Nexford with two principal product categories: hot-rolled coil ("HRC") and cold-rolled coil ("CRC"). The base prices established in the MSA were $620 per ton for HRC and $740 per ton for CRC. These base prices, which reflected market conditions prevailing in early 2020, were subject to quarterly adjustment pursuant to the pricing mechanism set forth in Section 7.2 of the MSA.
Volume. The MSA contemplated estimated annual volumes of approximately 18,000 tons of HRC and 6,500 tons of CRC, for a total estimated annual volume of approximately 24,500 tons. Based on the base prices, the estimated annual spend under the MSA was approximately $15.97 million, comprising approximately $11.16 million for HRC and approximately $4.81 million for CRC.
Surcharge Clause — Section 7.4. The provision at the center of this dispute is Section 7.4 of the MSA, which governs the pass-through of raw-material surcharges. Section 7.4 permits Cardinal Peak, as Seller, to pass through documented raw-material surcharges related to scrap, energy, and alloy costs, but only subject to three specific conditions:
Section 7.4(a) — Notice Requirement: Cardinal Peak must deliver a Surcharge Notice, accompanied by supporting documentation, to Nexford no later than fifteen (15) business days after the end of the applicable month to which the surcharge relates. This notice requirement is designed to ensure that Nexford can timely evaluate and, if appropriate, dispute the surcharge before it becomes embedded in the billing cycle.
Exhibit C — Surcharge Methodology: The surcharge calculations must be performed in accordance with the Surcharge Methodology set forth in Exhibit C to the MSA. Exhibit C is prescriptive: it requires that surcharge calculations use the published Ferrous Scrap Index (as reported by Platts/SPI) and the Industrial Energy Cost Index, applied against a baseline scrap cost of $340 per ton and a baseline energy cost of $48 per ton. The use of these specified, independently published indices was a negotiated term intended to provide transparency and objectivity to the surcharge adjustment process.
Section 7.4(c) — Cap Provision: The aggregate monthly surcharge imposed by Cardinal Peak cannot exceed 12% of the applicable Base Price without the Buyer's prior written consent. This cap was negotiated to protect Nexford from disproportionate cost pass-throughs that could undermine the economic assumptions underlying the MSA's pricing structure.
Dispute Resolution. Section 7.4(d) of the MSA provides that the Buyer (Nexford) must dispute any surcharge within thirty (30) calendar days of receipt of the Surcharge Notice. If the dispute is not resolved at the operational level, it is to be escalated to the senior officers of each party. If the senior officers are unable to resolve the dispute, the matter is to be submitted to mandatory mediation under Section 14.3 of the MSA. Section 14.3 specifies that mediation shall take place in Chicago, Illinois, and that the MSA is governed by the laws of the State of Illinois. Only after mediation has been attempted and has not resulted in a resolution may either party pursue litigation.
C. The Surcharge Dispute
The dispute at issue arises from surcharges invoiced by Cardinal Peak over a fifteen-month period from March 2021 through May 2022. Of these fifteen months, fourteen are in dispute; the surcharge for April 2021 was paid in full by Nexford and is not at issue.
During the disputed period, Cardinal Peak invoiced Nexford a total of $6.41 million in raw-material surcharges. As commodity markets — particularly scrap steel and energy — experienced significant price volatility and upward pressure during 2021 and into 2022, Cardinal Peak's surcharge invoices increased substantially relative to historical levels. Nexford's procurement team, led by Mr. Okonkwo, evaluated each surcharge invoice against the requirements of Section 7.4 and Exhibit C. Where invoices were found to be compliant, Nexford paid them. Where invoices failed to meet one or more of the contractual conditions, Nexford disputed the surcharges within the thirty-day window provided by Section 7.4(d) and withheld payment.
In total, Nexford paid $1.68 million in surcharges during the disputed period, representing partial payments on those invoices or portions of invoices that Nexford's team determined were in compliance with the MSA's requirements. Each partial payment was accompanied by a remittance notation or cover letter expressly designating the payment as relating to accepted, compliant surcharge amounts and reserving all rights with respect to the disputed portions.
Cardinal Peak claims an unpaid balance of $4.73 million ($6.41 million invoiced less $1.68 million paid). Cardinal Peak has also claimed entitlement to prejudgment interest, though the amount was not specified in the Complaint.
D. Procedural History to Date
The procedural history of this matter is summarized below:
• June 10, 2022: Cardinal Peak's outside counsel, Blackwood Stein & Associates LLP (Garrett Blackwood, lead partner), transmitted a formal demand letter to Nexford's General Counsel, Deborah Whitfield, demanding payment of $4.73 million in allegedly unpaid surcharges.
• July 5, 2022: Deborah Whitfield, on behalf of Nexford, responded to the demand letter, rejecting the demand in its entirety and articulating Nexford's contractual defenses under Section 7.4 of the MSA. Ms. Whitfield's response also noted Nexford's willingness to engage in the mandatory mediation process contemplated by Section 14.3, although Nexford maintained that it had no obligation to pay disputed surcharges that failed to meet contractual requirements.
• August 8, 2022: Cardinal Peak filed its Complaint in the Circuit Court of Cook County, Illinois, County Department, Law Division, assigned Case No. 2022-L-008471. The Complaint asserts three counts: Breach of Contract (Count I), Unjust Enrichment (Count II), and Account Stated (Count III).
• August 22, 2022: Calderwood & Harkness was engaged by Nexford to serve as defense counsel. The matter was opened as Calderwood & Harkness Matter No. 1005-00005.
• August 23, 2022: Calderwood & Harkness issued a comprehensive litigation hold notice to Nexford, directing the preservation of all documents and electronically stored information potentially relevant to the dispute.
• September 19, 2022: Calderwood & Harkness filed the Answer and Affirmative Defenses on behalf of Nexford, denying Cardinal Peak's material allegations and asserting multiple affirmative defenses, including failure of condition precedent, contractual non-compliance, and the surcharge cap limitation.
The case is currently in the early pleading stage. No discovery schedule has been set, and no initial case management conference has yet been scheduled by the court.
III. ANALYSIS OF CLAIMS AND DEFENSES
A. Cardinal Peak's Claims
1. Breach of Contract (Count I). In Count I, Cardinal Peak alleges that Nexford breached the MSA by failing to pay $4.73 million in surcharges that were purportedly "properly invoiced" under Section 7.4 of the MSA. Cardinal Peak contends that it delivered Surcharge Notices for each month in the disputed period, that the surcharges were calculated in accordance with the MSA, and that Nexford's failure to pay constitutes a material breach.
Under Illinois law, a breach of contract claim requires the plaintiff to establish: (i) the existence of a valid and enforceable contract; (ii) performance by the plaintiff (or a sufficient tender of performance); (iii) breach by the defendant; and (iv) damages resulting from the breach. See Gallagher Corp. v. Russ, 309 Ill. App. 3d 192, 199 (1st Dist. 1999). Critically, Cardinal Peak bears the burden of proving that the surcharges were validly invoiced in full compliance with the contractual requirements of Section 7.4 — including the notice timeline of Section 7.4(a), the Exhibit C methodology, and the 12% cap of Section 7.4(c). As detailed below, Cardinal Peak's own non-compliance with these requirements significantly undermines its breach of contract claim.
Assessment: This is Cardinal Peak's strongest claim and the one on which the case will likely turn. However, Cardinal Peak's failure to comply with the notice, methodology, and cap provisions of the MSA provides Nexford with substantial defenses that, if credited by the court, eliminate the vast majority — if not all — of the claimed liability. The breach of contract claim should be vigorously defended.
2. Unjust Enrichment (Count II). In Count II, Cardinal Peak alleges that Nexford was unjustly enriched by receiving steel products at prices that did not reflect Cardinal Peak's true raw-material costs during the disputed period. Cardinal Peak contends that, even if the contractual surcharge mechanism does not support its claim, equity requires that Nexford pay for the increased costs Cardinal Peak incurred.
Assessment: This claim is weak under Illinois law. It is well established in Illinois that a claim for unjust enrichment cannot stand where an express written contract governs the subject matter at issue between the parties. See Guinn v. Hoskins Chevrolet, 361 Ill. App. 3d 575, 604 (1st Dist. 2005); Canel & Hale, Ltd. v. Tobin, 304 Ill. App. 3d 906, 913 (1st Dist. 1999) ("Where the parties' relationship is governed by a contract, a claim for unjust enrichment is not available."). Here, the MSA expressly and comprehensively governs the pricing and surcharge mechanisms for the steel products at issue. Cardinal Peak's attempt to circumvent the contractual requirements it failed to satisfy by recasting its claim as an unjust enrichment cause of action should not be permitted.
We recommend challenging Count II through motion practice. The question is one of timing: we may seek to dismiss Count II through an early motion under Section 2-615 of the Illinois Code of Civil Procedure, or we may reserve this argument for summary judgment, where the factual record demonstrating the existence and applicability of the MSA will be fully developed. We recommend further discussion with the client on the preferred approach, weighing the benefits of early narrowing of issues against the costs of additional motion practice.
3. Account Stated (Count III). In Count III, Cardinal Peak alleges that Nexford's partial payments and the parties' course of dealing during the disputed period constitute an implied agreement on the account balance. Under Illinois law, an account stated arises when there has been a prior relationship of debtor and creditor, and the parties agree, either expressly or impliedly, upon the balance due. See Meyers Parking System, Inc. v. Evanston Ins. Co., 2015 IL App (1st) 143655, ¶ 18.
Assessment: This claim is vulnerable to challenge. For an account stated to exist, the debtor must have assented to the correctness of the account. Here, Nexford consistently disputed Cardinal Peak's surcharges within the thirty-day period specified by Section 7.4(d) of the MSA. Each dispute was communicated in writing and identified specific bases for Nexford's objections. Moreover, Nexford's partial payments were expressly designated as payments on accepted, compliant invoices — not as acknowledgment of the full claimed balance. Nexford's course of conduct demonstrates the opposite of assent: it reflects systematic and documented disagreement with Cardinal Peak's surcharge calculations. We believe this claim is susceptible to disposition at summary judgment, if not earlier.
B. Nexford's Affirmative Defenses
Nexford's defensive posture rests on three independent grounds, each rooted in the clear language of Section 7.4 and Exhibit C of the MSA. We address each in turn.
1. Waiver / Failure of Condition Precedent — Late Surcharge Notices ($2.18 Million). Cardinal Peak failed to deliver compliant Surcharge Notices within the fifteen-business-day deadline mandated by Section 7.4(a) for seven of the fourteen disputed months. In these months, Cardinal Peak delivered its notices anywhere from three to twenty-seven business days late. The late notices account for approximately $2.18 million of the total claimed amount.
Under Illinois law, compliance with a contractual notice provision that establishes a prerequisite to the exercise of a contractual right is treated as a condition precedent. The failure to timely perform a condition precedent excuses the other party's obligation to perform the related duty. See MidAmerica Bank, FSB v. Charter One Bank, FSB, 232 Ill. 2d 560, 569 (2009); Restatement (Second) of Contracts § 225. Cardinal Peak's failure to deliver timely notices constitutes a failure of the condition precedent to Nexford's obligation to pay those surcharges.
Additionally, to the extent Cardinal Peak argues that the notice deadline is not a strict condition, Nexford may alternatively argue waiver: by failing to comply with the notice requirement, Cardinal Peak waived its right to collect the surcharges for those months.
Strength of Defense: Strong. The delivery dates of Cardinal Peak's Surcharge Notices should be readily verifiable through correspondence records, email timestamps, and mail receipts. Our preliminary review of the available records — including emails between Mr. Okonkwo and his counterparts at Cardinal Peak — supports Nexford's position that the notices for these seven months were delivered outside the contractual window. We anticipate that discovery will further corroborate this timeline.
Potential Cardinal Peak Response: Cardinal Peak is likely to argue substantial compliance, contending that minor delays in notice delivery should not relieve Nexford of its payment obligation. Cardinal Peak may also argue that Nexford's continued acceptance of products during the disputed period constitutes a waiver of strict compliance with the notice timeline. We believe these arguments can be effectively rebutted, but they do introduce a degree of litigation risk, particularly with respect to the months where the delay was only a few days. This risk is addressed in Section V below.
2. Deviation from Exhibit C Methodology ($1.47 Million). Our review of Cardinal Peak's surcharge calculations reveals that, for a significant number of the disputed months, Cardinal Peak departed from the Surcharge Methodology prescribed by Exhibit C to the MSA. Rather than using the published Ferrous Scrap Index (as reported by Platts/SPI) and the Industrial Energy Cost Index — as expressly required by Exhibit C — Cardinal Peak used an internal "blended cost" metric that appears to incorporate proprietary cost data, including certain costs that fall outside the scope of the permitted surcharge categories.
This methodology deviation resulted in surcharges that were, on average, materially higher than what would have been calculated under the contractually mandated indices. Our preliminary analysis indicates that the deviation inflated surcharges by approximately $1.47 million across the disputed period.
Exhibit C is clear and prescriptive: it identifies the specific indices to be used, the specific baseline costs against which those indices are to be measured, and the formula for computing the resulting surcharge. The "blended cost" metric used by Cardinal Peak is not referenced in Exhibit C, was not agreed to by Nexford, and is not a permitted alternative under the MSA.
Strength of Defense: Strong. The contractual language is unambiguous. However, quantifying the precise dollar impact of the methodology deviation requires expert analysis — comparing what Cardinal Peak invoiced against what it would have invoiced had it used the correct indices for each month. This is the primary reason we recommend early retention of a damages expert, as discussed in Section IV below.
Potential Cardinal Peak Response: Cardinal Peak may argue that the "blended cost" metric more accurately reflects its actual raw-material costs, and that the Exhibit C methodology was intended to be illustrative rather than mandatory. We do not find this argument persuasive in light of the specific and detailed language of Exhibit C, but it is an argument that Cardinal Peak's counsel is likely to advance.
3. Surcharge Cap Exceedance ($1.08 Million). Section 7.4(c) of the MSA provides that the aggregate monthly surcharge cannot exceed 12% of the applicable Base Price without the Buyer's prior written consent. For four months during the disputed period, Cardinal Peak's surcharges exceeded the 12% cap. The aggregate amount of surcharges invoiced in excess of the cap for those four months totals approximately $1.08 million. At no time did Cardinal Peak obtain Nexford's prior written consent to exceed the cap for any of these months.
Strength of Defense: Strong. The cap provision is an unambiguous contractual limitation. It is a bright-line rule: surcharges either fall below the 12% threshold or they do not. Our preliminary review indicates that no written consent was given, and Mr. Okonkwo has confirmed that he did not authorize cap exceedances orally or in writing. However, a comprehensive document review — which will be completed during the discovery phase — is necessary to confirm that no written communication could be construed as consent. This is a standard precaution, and we do not anticipate that any such communication exists.
Potential Cardinal Peak Response: Cardinal Peak may argue that Nexford's acceptance of product deliveries during the months in question constitutes implied consent, or that oral communications between the parties' representatives should be treated as equivalent to written consent. Under the MSA, however, modifications to written provisions generally require written consent, and the "prior written consent" language of Section 7.4(c) is specific and deliberate. We believe this defense will withstand scrutiny.
4. Overlap and Net Exposure Analysis. It is important to note that the three defense categories described above are not entirely additive, as some overlap exists. Certain months implicate more than one defense ground — for example, a surcharge invoice may have been both late and calculated using the wrong methodology. When the three defenses are applied on a month-by-month basis, accounting for overlap, the resulting analysis shows that Nexford's calculated maximum additional obligation is approximately $0.21 million beyond the $1.68 million already paid.
In other words, even under the most conservative application of Nexford's defenses, the vast majority of the claimed $4.73 million is not owed. Nexford's primary litigation position is that it owes nothing further. In the alternative, its maximum realistic additional exposure is $0.21 million — and there is an argument that the $1.68 million already paid may include an overpayment of approximately $0.21 million, depending on the precise allocation of accepted surcharges to compliant months.
We are preparing a detailed surcharge-by-surcharge analysis spreadsheet that catalogs each of the fourteen disputed monthly invoices, including notice delivery dates, methodology used, cap compliance, amounts invoiced, amounts paid, and applicable defense categories. This spreadsheet will serve as a core analytical tool throughout the litigation.
C. Counterclaim Strategy
Recommendation: We recommend that Nexford file a counterclaim against Cardinal Peak asserting two counts: (1) breach of contract; and (2) declaratory judgment.
Breach of Contract Counterclaim. Cardinal Peak breached the MSA by failing to comply with the Exhibit C Surcharge Methodology and the Section 7.4 notice requirements. These breaches are not merely defensive in nature — they caused Nexford to incur substantial costs in investigating and disputing non-compliant invoices, diverting the time and attention of Nexford's procurement and finance personnel from their ordinary responsibilities. Furthermore, to the extent that the $1.68 million already paid by Nexford includes payments on surcharges that were in excess of what would have been properly calculated under Exhibit C, Nexford may have a claim for recovery of the overpayment. Our preliminary analysis suggests that this overpayment claim may amount to approximately $0.21 million, though the precise figure will be refined as our surcharge-by-surcharge analysis progresses and expert analysis is completed.
Declaratory Judgment Counterclaim. We recommend that Nexford seek a declaratory judgment from the court establishing that Nexford's surcharge obligations under the MSA are limited by the conditions set forth in Section 7.4, including: (i) the fifteen-business-day notice deadline of Section 7.4(a); (ii) the Exhibit C Surcharge Methodology requirements; and (iii) the 12% cap provision of Section 7.4(c). A declaratory judgment on these points would not only resolve the current dispute but would also establish the interpretive framework for any future surcharges during the remaining term of the MSA (which, absent termination, extends through January 14, 2023, and potentially beyond through automatic renewal).
Tactical Value. Beyond its substantive merits, the counterclaim serves important tactical objectives. Filing a counterclaim signals confidence in Nexford's position and demonstrates that Nexford is not merely defending but is actively asserting its own rights. The counterclaim shifts the negotiation dynamic by putting Cardinal Peak on defense as well, creating settlement leverage and increasing Cardinal Peak's own litigation costs and risk assessment. Moreover, the existence of a pending counterclaim makes it more difficult for Cardinal Peak to characterize the case to the court as a simple collection matter.
Target Filing Date: We recommend filing the counterclaim on or about October 3, 2022, following receipt of client authorization. A draft of the counterclaim will be circulated for client review in advance of filing.
IV. LITIGATION STRATEGY — PHASED APPROACH
We have organized the anticipated litigation into four phases, each with defined objectives, key activities, and budget estimates. The phased approach allows the client and Marlowe Asset Management Bluff to manage costs and make informed decisions at each stage of the proceeding, including whether to proceed to the next phase or pursue settlement.
Phase 1: Pleadings and Early Motions (September – November 2022)
Objectives: Complete the pleading stage, establish Nexford's defensive and offensive posture, and engage in preliminary case management activities.
Key Activities:
• Answer and Affirmative Defenses: Filed on September 19, 2022. This task is complete. Nexford's Answer denies Cardinal Peak's material allegations and asserts affirmative defenses including failure of condition precedent, contractual non-compliance, waiver, and payment/offset.
• File Counterclaim: We will file the counterclaim for breach of contract and declaratory relief on or about October 3, 2022, subject to client approval. The counterclaim will assert Cardinal Peak's breaches of the MSA's surcharge provisions and seek both damages (including the $0.21 million potential overpayment) and a declaratory judgment interpreting Section 7.4.
• Respond to Anticipated Motion to Dismiss Counterclaim: We anticipate that Cardinal Peak, through Blackwood Stein & Associates, may move to dismiss the counterclaim, likely arguing that Nexford's counterclaim merely restates its affirmative defenses and does not state an independent claim. We will prepare an opposition brief demonstrating that the counterclaim asserts distinct causes of action — particularly the overpayment claim and the declaratory judgment claim — that are not coextensive with the affirmative defenses.
• Motion Practice on Unjust Enrichment (Count II): We will evaluate the advisability of filing an early motion to dismiss Count II (Unjust Enrichment) under Section 2-615 of the Illinois Code of Civil Procedure, arguing that the claim is barred as a matter of law by the existence of the MSA. Alternatively, this argument may be reserved for summary judgment. We will make a recommendation to the client after assessing the likely reaction of the assigned judge and the strategic implications of early motion practice.
• Initial Case Management: We will participate in the initial meet-and-confer with Blackwood Stein regarding the discovery schedule and any proposed case management order. Our objective at this stage is to establish a discovery schedule that allows sufficient time for thorough discovery and expert analysis before the mandatory mediation.
Estimated Phase 1 Budget: $35,000 – $50,000
Phase 2: Discovery (December 2022 – April 2023)
Objectives: Develop the factual record necessary to support Nexford's defenses and counterclaim, retain and engage a damages expert, and build the analytical foundation for mediation and, if necessary, trial.
Key Activities:
Written discovery. We will serve Nexford's first set of interrogatories and document requests on Cardinal Peak, targeting the following categories of information:
• Surcharge calculation methodology and supporting worksheets for each month of the disputed period, including all inputs, formulas, and data sources used by Cardinal Peak;
• Records documenting the dates and methods of delivery of Surcharge Notices to Nexford for each month;
• Internal communications within Cardinal Peak regarding the decision to use the "blended cost" metric rather than the published Ferrous Scrap Index and Industrial Energy Cost Index mandated by Exhibit C;
• All correspondence between Cardinal Peak and Nexford regarding the disputed surcharges, including responses to Nexford's dispute notices under Section 7.4(d);
• Any communications or documentation relating to requests for, or grants of, Nexford's consent to exceed the 12% surcharge cap;
• Financial records and accounting entries reflecting the surcharges at issue, including any reserves or adjustments taken by Cardinal Peak in its financial statements.
We anticipate that these requests will be served in early December 2022. We will simultaneously prepare Nexford to respond to Cardinal Peak's anticipated written discovery. This will require close coordination with Russell Okonkwo (VP, Procurement) and Lydia Tran (CFO), who are the Nexford personnel with the most direct knowledge of the surcharge calculations, dispute communications, and payment records. We will work with these individuals early in the process to identify and organize responsive documents and to prepare them for the discovery process.
Depositions. We anticipate the following depositions will be necessary:
• Natalie Gunderson, Vice President of Sales & Commercial, Cardinal Peak Industries. Ms. Gunderson is the key witness on Cardinal Peak's side with respect to the surcharge calculation methodology, the timing of Surcharge Notice delivery, and the commercial negotiations between the parties. Her deposition will be critical for establishing Cardinal Peak's knowledge of its own non-compliance with the MSA's requirements.
• Harold Briggs, Controller, Cardinal Peak Industries. Depending on the information obtained through written discovery, it may be necessary to depose Mr. Briggs regarding the financial records underlying the surcharge calculations and the derivation of the "blended cost" metric. We will make a final determination on this deposition after reviewing Cardinal Peak's document production.
• Russell Okonkwo, VP of Procurement, Nexford (Defensive Deposition). We fully expect that Cardinal Peak's counsel will seek to depose Mr. Okonkwo, who was the principal Nexford contact for the surcharge process. We will thoroughly prepare Mr. Okonkwo for his deposition, including review of relevant documents, practice sessions, and preparation of a deposition outline.
• Frank Delacroix, CEO, Cardinal Peak Industries. Depending on what emerges from document discovery and other depositions, we may seek to depose Mr. Delacroix on Cardinal Peak's corporate-level decision-making regarding the surcharge methodology and the decision to pursue litigation. This deposition is not certain at this stage and will be evaluated as discovery progresses.
Document Review. We will conduct a thorough review and analysis of Cardinal Peak's document production, with particular focus on surcharge computation worksheets, internal pricing records, communications regarding the "blended cost" metric, and any evidence bearing on the notice timeline. In parallel, we will prepare a detailed surcharge-by-surcharge analysis spreadsheet cataloging each of the fourteen disputed monthly invoices, tracking the following fields: month; notice delivery date; notice deadline; days late (if any); methodology used; applicable index values (published and blended); base price; surcharge invoiced; 12% cap amount; cap exceeded (yes/no); amount invoiced above cap; amount paid by Nexford; defense category(ies) applicable; and remaining disputed amount. This spreadsheet will be the central analytical document for the litigation and will be refined as additional discovery is obtained.
Expert Retention and Reports. Early retention of a damages and accounting expert is a critical component of the defense strategy. The methodology deviation defense, in particular, requires expert analysis to precisely quantify the difference between what Cardinal Peak invoiced using its "blended cost" metric and what it would have invoiced under the contractually mandated published indices. Additionally, the expert will be asked to address the interplay among the three defense categories and to calculate Nexford's net exposure after application of all defenses.
We recommend retaining Meridian Bridge Consulting LLC for this engagement. The lead expert would be Dr. Anita Rosenthal, CPA, ABV, who is based in Chicago and has extensive experience in commercial disputes involving contract damages, pricing mechanisms, and financial analysis. Dr. Rosenthal has been qualified as an expert in numerous state and federal court proceedings and has particular experience with supply contract disputes in the manufacturing sector.
Dr. Rosenthal's initial scope of work will include: (i) analysis of Cardinal Peak's surcharge calculations for each month of the disputed period; (ii) recalculation of surcharges using the Exhibit C methodology and published index data; (iii) quantification of the variance attributable to the methodology deviation; (iv) assessment of cap compliance for each month; and (v) preparation of a comprehensive report suitable for use at mediation and, if necessary, at trial.
We anticipate that Cardinal Peak will retain its own damages expert to counter Nexford's analysis. Dr. Rosenthal's credibility and methodology will need to withstand scrutiny, and her report will be prepared accordingly.
We will circulate a proposed retention letter and engagement terms for client review and approval promptly upon receiving authorization to proceed.
Estimated Phase 2 Budget: $100,000 – $140,000 (inclusive of expert fees for Meridian Bridge Consulting LLC)
Phase 3: Mediation (May – August 2023)
Objectives: Leverage the completed discovery and expert analysis to achieve a favorable resolution at mandatory mediation, consistent with Section 14.3 of the MSA.
Key Activities:
• Mandatory Mediation Requirement: Section 14.3 of the MSA requires the parties to participate in mediation in Chicago, Illinois before either party may proceed to trial. Compliance with this provision is a contractual prerequisite to the continuation of litigation and must be satisfied.
• discovery Completion Before Mediation: Our strategy is to complete the core discovery activities and expert analysis described in Phase 2 before entering mediation. This timing is deliberate: the strength of Nexford's position at mediation will be maximized when we can present Cardinal Peak with the fully developed factual and expert record demonstrating the weaknesses of its claims and the strength of Nexford's defenses. Entering mediation without this record would diminish our leverage.
• Mediator Selection: We recommend selecting a mediator with substantial experience in commercial supply contract disputes, ideally a retired judge or former practitioner with familiarity with the dynamics of long-term supply agreements and pricing mechanisms. We suggest considering mediators affiliated with the Great Lakes Dispute Resolution Center in Chicago, which maintains a roster of experienced neutrals. We will propose specific candidates for client consideration.
• Mediation Brief: We will prepare a comprehensive mediation brief presenting Nexford's defenses, the expert analysis, and a persuasive narrative of the case. The brief will be accompanied by the surcharge-by-surcharge analysis spreadsheet and key excerpts from the documentary record. The brief will be crafted both to persuade the mediator of the merit of Nexford's position and to educate Cardinal Peak's decision-makers regarding the significant risks they face if the case proceeds to trial.
• Settlement Range Analysis: Prior to mediation, we will prepare a confidential settlement range analysis for review and approval by Nexford's management and Marlowe Asset Management Bluff. This analysis will take into account Nexford's defense assessment, the probability-weighted exposure at trial, anticipated litigation costs through trial, and any strategic considerations identified by the client and sponsor. Settlement authority will need to be formally obtained from Marlowe Asset Management Bluff and Nexford's board in advance of the mediation session.
• Assessment: Mediation provides the best opportunity for a cost-effective resolution of this dispute. Nexford's strong defensive position — supported by contractual language, documentary evidence, and expert analysis — should enable a settlement at a significant discount to the $4.73 million claimed by Cardinal Peak. Our assessment of the most likely settlement range is discussed in Section V below.
Estimated Phase 3 Budget (Incremental): $30,000 – $45,000 (includes mediation brief preparation, mediator fees, and attendance at mediation session)
Phase 4: Summary Judgment and Trial Preparation (If Mediation Fails) (Estimated Timeline: Fall 2023)
Objectives: If mediation does not produce an acceptable resolution, prepare the case for dispositive motions and trial.
Key Activities:
• Motion for Partial Summary Judgment: We will file a motion for partial summary judgment on at least the following grounds: (i) dismissal of the unjust enrichment claim (Count II) as barred by the express contract; and (ii) entry of judgment in Nexford's favor on the surcharge cap defense (Section 7.4(c)), to the extent the undisputed facts establish that no written consent was obtained. Additional summary judgment arguments may be available depending on the discovery record.
• Trial Preparation: If the case proceeds to trial, we will prepare comprehensive trial exhibits, witness outlines, direct and cross-examination materials, and expert testimony presentations. We will also prepare opening and closing statements, jury instructions (if applicable, though we expect a bench trial given the nature of the claims), and motions in limine.
• Trial: We estimate that trial, if necessary, would require 3 to 5 days before the court sitting as a bench trial. The case involves contract interpretation, documentary evidence, and expert testimony — all of which are well suited to a bench trial. We do not anticipate a jury demand from either party, given the commercial nature of the dispute.
Estimated Phase 4 Budget (Incremental): $150,000 – $225,000
V. RISK ASSESSMENT
We have assessed the range of possible outcomes in this matter and assign probability-weighted estimates to each scenario as set forth below. These assessments are based on our evaluation of the strength of the claims and defenses, the applicable law, the likely composition of the factual record, and our experience with similar commercial disputes in Cook County.
A. Best Case
Nexford prevails on all three defenses — late notices, methodology deviation, and surcharge cap exceedance — and the counterclaim succeeds. Cardinal Peak recovers nothing beyond what Nexford has already paid, and Nexford recovers its claimed overpayment of approximately $0.21 million. Cardinal Peak's unjust enrichment and account stated claims are dismissed, and the court enters judgment in Nexford's favor.
Probability Assessment: 20–25%
This outcome, while supported by the contractual language and available evidence, requires Nexford to prevail on each defense without significant erosion. The late-notice defense, while strong, is the most susceptible to challenge through substantial compliance or waiver arguments, which introduces some uncertainty. The methodology deviation defense requires favorable expert testimony. Achieving a complete defense victory across all fronts is achievable but should be viewed as the favorable end of the range.
B. Most Likely Case
Nexford prevails on most of its defenses, and the case settles at mediation. The settlement range we project is approximately 30%–50% of the claimed amount, yielding a settlement payment by Nexford in the range of $1.4 million to $2.4 million (inclusive of the $1.68 million already paid, the net additional payment would be approximately $0 to $0.72 million).
Several factors favor settlement:
• The cost of continued litigation through trial for both parties, including attorney fees, expert costs, and management distraction;
• Cardinal Peak's own exposure on Nexford's counterclaim, which creates risk for Cardinal Peak and increases its incentive to resolve the matter;
• Uncertainty regarding the trial outcome on the late-notice defense, particularly if the court is inclined to apply a substantial compliance standard;
• The weakness of the unjust enrichment claim (Count II) and the account stated claim (Count III), which, if dismissed or significantly narrowed through pre-trial motion practice, reduces Cardinal Peak's leverage;
• The ongoing commercial relationship between the parties under the MSA, which creates an incentive for both sides to avoid a protracted adversarial proceeding.
Probability Assessment: 55–60%
This is the scenario we view as most likely and the outcome we are optimizing for through our recommended strategy. A well-prepared mediation, supported by expert analysis and a complete factual record, should enable Nexford to achieve a resolution at the favorable end of this range.
C. Worst Case
The court finds Nexford's defenses partially meritorious but limits their scope. For example, the court could apply a substantial compliance standard to the notice defense (reducing the $2.18 million component), or credit Cardinal Peak's argument that the "blended cost" methodology was a reasonable interpretation of Exhibit C (reducing the $1.47 million component). In this scenario, Nexford is liable for a larger portion of the claimed surcharges plus some amount of prejudgment interest.
Maximum Realistic Adverse Outcome: Approximately $3.0 million to $3.5 million (after partial credit for defenses), plus potential prejudgment interest. Given that Nexford has already paid $1.68 million, the incremental exposure in this scenario would be approximately $1.32 million to $1.82 million, plus interest.
Probability Assessment: 15–20%
While we assess this as a relatively low-probability outcome, it is not negligible, and the client should be aware of this downside exposure when making litigation and settlement decisions.
D. Key Risk Factors
The following specific risk factors should be considered in evaluating the overall litigation risk:
Late-Notice Defense ($2.18 Million). This is Nexford's single largest defense and is analytically strong, but it faces two potential challenges. First, Cardinal Peak will likely argue substantial compliance, contending that the notice delays were de minimis in some months and did not prejudice Nexford. Under Illinois law, courts have sometimes excused technical non-compliance with notice provisions where the non-compliance was minor and did not cause prejudice to the other party. Second, Cardinal Peak may argue that Nexford's continued acceptance of steel deliveries during the disputed period constitutes a waiver of strict compliance with the notice timeline. We believe both arguments can be effectively countered — particularly by demonstrating that the delays were not uniformly minor, and that Nexford's consistent written disputes refute any inference of waiver — but these arguments introduce genuine litigation risk.
Methodology Deviation Defense ($1.47 Million). This defense depends on expert testimony to quantify the financial impact of the deviation. In any "battle of the experts" scenario, the court's assessment of the competing expert analyses creates uncertainty. Additionally, if Cardinal Peak can produce evidence that the "blended cost" metric was discussed or implicitly accepted by Nexford during the course of the commercial relationship, this could weaken the defense. We are not aware of any such evidence at this time, but comprehensive document discovery will be necessary to confirm this.
Surcharge Cap Defense ($1.08 Million). This is a straightforward and strong defense, but it depends on demonstrating that no written consent was given by Nexford to exceed the 12% cap during the four months at issue. Our preliminary review supports this conclusion, but we need to complete a comprehensive document review — including emails, text messages, and any other written communications between the parties — to ensure that no communication could be construed as written consent. We do not anticipate that any such communication exists, but this is a matter that warrants thorough investigation.
Prejudgment Interest. Cardinal Peak has claimed entitlement to prejudgment interest, though the amount was not specified in the Complaint. Under Illinois law, prejudgment interest is available in breach of contract actions at the statutory rate. Cardinal Peak has estimated this amount at approximately $0.38 million in connection with its full $4.73 million principal claim. Even if Nexford substantially reduces the principal through its defenses, some amount of prejudgment interest may be awarded on whatever amount is ultimately found due, if any. Prejudgment interest should be factored into the settlement analysis.
Ridgecrest National Bank Credit Facility. Under Section 6.03(b) of Nexford's $45 million revolving credit facility with Ridgecrest National Bank (dated March 12, 2021), settlements exceeding $1.0 million require notice to the bank. The relationship manager at Ridgecrest is Karen Whitmore. This notice requirement must be factored into any settlement analysis and will require coordination with Nexford's finance team. We note that there is no current obligation to notify Ridgecrest of the existence of the litigation itself, though the credit agreement's litigation reporting provisions (typically contained in the quarterly compliance certificate) should be reviewed to confirm.
VI. BUDGET SUMMARY
A. Estimated Budget Through Mediation
B. Estimated Budget Through Trial (If Mediation Fails)
C. Billing Rates
The following billing rates apply to the Calderwood & Harkness timekeepers assigned to this matter:
These rates are consistent with the engagement terms agreed upon at the commencement of the representation. Any changes to the staffing of the matter or the applicable billing rates will be communicated in advance.
D. Budget Assumptions and Caveats
The budget estimates set forth above are based on the following assumptions and are subject to the following caveats:
• The budget assumes a normal course of discovery without extended motion practice over discovery disputes, sanctions proceedings, or other ancillary litigation activity. If Cardinal Peak adopts an obstructive posture in discovery, additional costs may be incurred.
• Expert fees for Meridian Bridge Consulting LLC (Dr. Anita Rosenthal) are estimated at $10,000 – $15,000 for the initial engagement phase and are included in the costs line in the budget table above. Expert fees may increase if the scope of the engagement expands — for example, if Dr. Rosenthal is required to prepare a formal rebuttal to Cardinal Peak's expert report or to testify at deposition or trial.
• The budget will be revised and updated if significant unexpected developments arise, including but not limited to: the joinder of additional parties, the filing of amended or supplemental claims, extended or contested depositions, or appeals from interlocutory rulings.
• Monthly invoices will be submitted in accordance with Calderwood & Harkness's standard billing practices. We recommend quarterly budget reviews to ensure alignment between actual and projected spending and to enable the client and Marlowe Asset Management Bluff to make informed decisions regarding the continued prosecution of the defense.
VII. COORDINATION WITH STAKEHOLDERS
Effective coordination among Nexford's management, Marlowe Asset Management Bluff, and Calderwood & Harkness is essential to the successful execution of the litigation strategy. The following protocols are recommended.
A. Nexford Management
Regular Reporting. Calderwood & Harkness will provide regular status updates to Deborah Whitfield (General Counsel) and Martin Schaeffer (CEO) on at least a quarterly basis, or more frequently as warranted by material developments in the case. These updates will cover the status of discovery, any motion practice, significant rulings, deposition summaries, and any other matters bearing on the litigation strategy or budget.
Fact Witnesses and Document Custodians. Russell Okonkwo (VP, Procurement) and Lydia Tran (CFO) will serve as primary fact witnesses and document custodians for this matter. Their active cooperation is essential throughout the discovery process, including the collection and review of responsive documents, the preparation of interrogatory responses, and the preparation for depositions. We will schedule introductory working sessions with Mr. Okonkwo and Ms. Tran in the near term to initiate the factual development process.
External Auditors. Nexford's external auditors, Hargrove Kellner CPAs LLP (engagement partner Steven Margolis), may need to provide certain financial records relevant to the dispute, particularly any workpapers relating to the Company's assessment of the surcharge liability for financial reporting purposes. We will coordinate with Ms. Tran regarding any requests directed to Hargrove Kellner.
B. Marlowe Asset Management Bluff Capital Partners
Diana Calloway, in her capacity as Board Observer and principal at Marlowe Asset Management Bluff, will be kept informed of major developments in the litigation and will be consulted on litigation strategy and settlement authority. We recognize Marlowe Asset Management Bluff's interest, as majority owner, in the financial and strategic implications of this matter, and we will ensure that Ms. Calloway has the information she needs to advise the fund's leadership.
Settlement authority will need to be formally obtained from both Marlowe Asset Management Bluff and Nexford's board of directors in advance of any mediation session. We recommend that the process of defining settlement parameters begin well before the mediation date to ensure that Nexford's representatives at mediation have the authority to negotiate effectively and, if appropriate, to reach a resolution on the day of the mediation.
Conrad Yeung, Managing Partner of Marlowe Asset Management Bluff, will be informed of major developments as appropriate through Diana Calloway. Direct communication between Calderwood & Harkness and Mr. Yeung will be coordinated through Ms. Calloway unless a different arrangement is preferred.
C. Ridgecrest National Bank
As noted in Section V.D above, Section 6.03(b) of Nexford's $45 million revolving credit facility with Ridgecrest National Bank (dated March 12, 2021) requires notice to the bank of settlements exceeding $1.0 million. The relationship manager at Ridgecrest is Karen Whitmore. At the appropriate time — specifically, if and when a settlement at or above the $1.0 million threshold becomes a possibility — settlement notice will be coordinated with Nexford's finance team, including Ms. Tran.
At this time, there is no obligation to notify Ridgecrest National Bank of the existence of the litigation itself. However, we recommend that the credit agreement's litigation reporting provisions be reviewed to confirm this assessment. Many credit agreements require disclosure of material litigation in quarterly or annual compliance certificates, and any such obligation should be identified and complied with. We will coordinate with Ms. Whitfield and Ms. Tran on this point.
VIII. RECOMMENDATIONS AND NEXT STEPS
Based on the foregoing analysis, Calderwood & Harkness recommends the following immediate and near-term actions:
1. File Counterclaim. Nexford should authorize the filing of a counterclaim against Cardinal Peak, targeting a filing date on or about October 3, 2022. The counterclaim will assert breach of contract by Cardinal Peak for its failure to comply with the MSA's Surcharge Methodology (Exhibit C) and notice requirements (Section 7.4(a)), and will seek declaratory relief interpreting Section 7.4 and recovery of the estimated $0.21 million overpayment. A draft of the counterclaim will be circulated for client review prior to filing.
2. Retain Damages Expert. Nexford should authorize the retention of Meridian Bridge Consulting LLC, with Dr. Anita Rosenthal serving as the lead expert, to commence analysis of the surcharge calculations and quantify the impact of Cardinal Peak's contractual deviations. A proposed retention letter and engagement terms will be circulated for client approval promptly. Early retention is critical to ensure that the expert's analysis is completed before the mediation, which we expect to occur in the May – August 2023 timeframe.
3. Commence discovery. Calderwood & Harkness will serve Nexford's first set of interrogatories and document requests on Cardinal Peak in early December 2022, following the initial case management conference and establishment of a discovery schedule.
4. Prepare Surcharge Analysis. The Calderwood & Harkness team will compile a detailed month-by-month analysis of all fourteen disputed surcharge invoices, documenting the factual and contractual basis for each defense category. This analysis will serve as the foundation for the expert engagement, the mediation brief, and, if necessary, the trial presentation.
5. Quarterly Reporting. We will establish a regular cadence of quarterly status reports to the client and Marlowe Asset Management Bluff, supplemented by ad hoc communications as warranted by material developments.
6. Settlement Positioning. While we will pursue an aggressive defense of Nexford's interests, we will remain attentive to early resolution opportunities. The mandatory mediation requirement under Section 14.3 provides a natural and contractually mandated forum for settlement discussions once discovery is substantially complete. We will monitor the landscape for opportunities to engage in productive settlement discussions at any stage of the proceedings.
7. Authorization Request — Settlement Parameters. We recommend that Nexford's board of directors and Marlowe Asset Management Bluff begin considering settlement authority parameters in advance of the mediation planning process. Defining these parameters early will enable Nexford's mediation team to negotiate effectively and to respond to settlement proposals in real time during the mediation session. We will provide a detailed settlement range analysis to inform this process as the case develops.
We request client direction on the recommended counterclaim filing (Item 1) and expert retention (Item 2) by no later than September 30, 2022.