March 12, 2010
TRICO EQUIPMENT, INC., PLAINTIFF-RESPONDENT,
S.D. WALKER, INC. AND STEVEN D. CATALANO, DEFENDANTS-APPELLANTS.
On appeal from the Superior Court of New Jersey, Chancery Division, Atlantic County, Docket No. C-180-86.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Submitted December 8, 2009
Before Judges Parrillo and Ashrafi.
Defendants S.D. Walker, Inc. and Steven D. Catalano appeal from a judgment after a bench trial in favor of plaintiff for $44,708 on its breach of contract claims. We affirm.
S.D. Walker, Inc. ("Walker") operates a campground in central New Jersey. Catalano is the sole shareholder, president, and operating officer of Walker. Plaintiff Trico Equipment, Inc. ("Trico") is in the business of selling heavy machinery and equipment.
On June 14, 2006, Trico and Walker executed a bill of sale for a new Case loader backhoe at the price of $69,900 plus sales tax of $4,194. The bill of sale indicated that a deposit of $11,836 was paid by check and also contained a notation "rentals and damages paid in full." In the memo portion of the deposit check issued by Walker, Catalano wrote, "This is full down payment & all sums due to Trico for all previous rentals and machine damage except dozer." Testimony at trial indicated that Walker owed money to Trico for past transactions and that Trico agreed to include those debts as part of the sales agreement for the new Case backhoe. Trico delivered the backhoe to Walker on June 14, 2006.
Paragraph fourteen of the bill of sale provided that, within fourteen days, "purchaser shall arrange financing or shall finance this purchase through seller's sources." That paragraph further gave Trico the option to cancel the sale if financing was not arranged and obligated Walker to return the equipment in that event, paying $200 per day rental for the time it kept the equipment.
On June 20, Walker and Trico executed a Retail Installment Sale Contract and Security Agreement ("installment contract") on a form provided by CNH Capital, which was Trico's financing source for Case equipment. The installment contract listed a cash sale price of $69,900 with a down payment of $7,000. It provided for monthly payments of $1,550.73 over sixty months at an interest rate of 8.9%. The installment contract also listed additional charges of $4,194.00 sales tax, $350.00 administrative fee, $4,319.82 physical damage insurance, and $3,145.50 liability insurance. These charges, and the finance charge over sixty months, resulted in a total contract price of $100,081.58. Catalano signed a personal guarantee for Walker's obligations under the installment contract.
The installment contract provided for assignment of the contract from Trico to CNH Capital America LLC. It also included two insurance addendums for "Physical Damage Insurance" and "Equipment Liability Insurance." Catalano signed both addendums on behalf of Walker. The liability insurance addendum stated, "Buyer requests that Seller/Assignee finance the premium for liability insurance" and listed CNH Capital as the insurer.
Catalano testified that inclusion of liability insurance for the backhoe was a vital part of the transaction.
In May 2006, before the parties' entered into the sales and installment agreements, the Trico sales coordinator had been notified that CNH Capital was no longer offering liability insurance as part of its financing agreements. On July 13, 2006, about four weeks after Walker took delivery of the backhoe and began using it, Trico notified Walker that liability insurance was not available through CNH Capital. Trico requested authorization to remove the liability insurance premium from the installment contract and to recalculate the payment schedule. Catalano did not authorize the change. Trico then sent a new contract to Catalano, which he did not sign.
Walker did not make any monthly payments for the backhoe. In October and again in November 2006, Catalano requested refund of its deposit. On October 27, 2006, Trico requested that Walker agree to the original contract with a reduction in price for the liability insurance or, alternatively, that it agree to rent the backhoe for $2,200 per month. Catalano did not agree to either of these alternatives. Throughout these communications, Walker retained the backhoe and continued to use it but made no installment payments.
Trico filed a complaint in the Chancery Division on December 19, 2006, seeking equitable remedies and damages. In addition to claiming defendants' default for non-payment, Trico contended that the parties had mistakenly believed liability insurance was available through CNH Capital, and that the contract should be rescinded or reformed because of the mutual mistake.
On July 11, 2007, the Chancery Division entered an order for interim relief, prohibiting defendants from further use of the backhoe and authorizing Trico to repossess it. Trico took possession of the backhoe on July 25, 2007. After inspection, Trico claimed that damage to the machine required repairs at a cost of $4,530.65. On August 15, 2007, Trico resold the backhoe to another buyer for $45,000.
In September 2007, defendants filed a counterclaim against Trico alleging negligent misrepresentation in offering liability insurance while knowing it was not available, and also breach of the covenant of good faith and fair dealing in failing to refund Walker's deposit money.
The court conducted a bench trial in April 2008. Two employees of Trico testified to establish its claims and its defense to the counterclaims. Part of their testimony was that Walker's initial deposit payment of $11,836.85 was for both a down payment on the new backhoe and settlement of outstanding debts. Trico claimed that $7,000 of that amount was for down payment on the backhoe, as reflected on the installment contract executed by Walker on June 20, 2006.
In addition to Catalano, Jason Pancoast, a landscaper and excavator working with Walker, testified for defendants. Pancoast testified that the insurance was an integral component of the purchase, and that he told representatives of Trico that Walker was not interested in purchasing the machine without the liability insurance. Pancoast further testified that $69,900 was a high price for the machine but that the price reflected the insurance and financing. He estimated that the machine itself, without the insurance or financing, was worth about $52,000.
Catalano also testified that liability insurance was an integral part of the deal. He admitted, however, that Walker used the machine for thirteen months without the liability insurance it expected from CNH Capital. He also testified that Pancoast had named Walker as an additional insured on his general contractor's policy. Nevertheless, Catalano maintained that Pancoast's policy was not the same kind of coverage as Walker's own liability coverage would have been, and he felt that Walker had not been completely covered. During the thirteen months that Walker kept and used the backhoe, no liability claims arose.
The trial judge put detailed oral findings and conclusions on the record on May 5, 2008. He found that the bill of sale and the installment contract comprised the contract between the parties. He also made credibility findings, essentially to the effect that the two witnesses for Trico were credible and that Catalano's testimony lacked credibility in significant parts. Based on those credibility findings and the terms of the installment contract, he found that the deposit paid in June was $7,000, not the full $11,836.85 claimed by defendants.
The court further found that Trico breached the contract by failing to provide liability insurance but that the breach was not material to performance of the remainder of the contract. While the court said that references in the installment contract to liability insurance could be viewed a misrepresentation, defendants had not proven intentional withholding of information by Trico that CNH Capital was no longer willing to provide liability insurance. Rather, the misrepresentation was either inadvertent or caused by Trico's negligence. As a result of these findings, the court rejected defendants' counterclaims.
After finding that Walker breached the contract by failing to make installment payments, the judge calculated Trico's damages, starting with the cash price of the backhoe, $69,900. To that was added sales tax of $4,194. The judge then subtracted the $7,000 down payment and the $45,000 resale proceeds recovered by Trico, but he credited Trico for $2,939 in repair costs. The judge calculated pre-judgment interest of $7,685, based on the contract rate of 8.9%, applied to different amounts before and after resale of the machine. Under a specific term of the contract, he granted Trico $11,989 in attorney's fees. The total of these sums and deductions was $44,708, which amount was awarded to Trico against Walker for its breach of contract and against Catalano personally based on his guarantee of Walker's obligations under the contract.
Defendants filed a timely notice of appeal from the court's judgment of May 5, 2008.
Primarily, defendants argue that the trial judge erred in finding that Trico's failure to obtain liability insurance was not a material breach of the contract. They also claim that the court erred in excusing Trico from its failure to mitigate its damages by canceling the contract earlier and taking possession of the backhoe when Catalano rejected Trico's proposals for modification of the contract beginning in July 2006.*fn1
With respect to materiality of Trico's breach in failing to obtain liability insurance, we note that "a material breach by either party to a bilateral contract excuses the other party from rendering any further contractual performance." Magnet Res., Inc. v. Summit MRI, Inc., 318 N.J. Super. 275, 285 (App. Div. 1998) (citing Nolan v. Lee Ho, 120 N.J. 465, 472 (1990)). If a contract has not been materially breached, the contract is not cancelled, but the aggrieved party may be entitled to recover damages for the breach. See Murphy v. Implicito, 392 N.J. Super. 245, 265 (App. Div. 2007); Miller v. Mills Constr., Inc., 352 F.3d 1166, 1172 (8th Cir. 2003).
"A breach is material if it goes to the 'essence' of the contract." Linan-Faye Constr. Co. v. Hous. Auth., 995 F. Supp. 520, 523 (D.N.J. 1998); see Ross Sys. v. Linden Dari-Delite, Inc., 35 N.J. 329, 341 (1961); Neptune Research & Dev., Inc. v. Teknics Indus. Sys. Inc., 235 N.J. Super. 522, 532 (App. Div. 1989); Gen. Motors Corp. v. New A.C. Chevrolet, 263 F.3d 296, 315 (3d Cir. 2001).
The Restatement (Second) of Contracts § 241 (1981) states:
In determining whether a failure to render or to offer performance is material, the following circumstances are significant:
(a) the extent to which the injured party will be deprived of the benefit which he reasonably expected;
(b) the extent to which the injured party can be adequately compensated for the part of that benefit of which he will be deprived;
(c) the extent to which the party failing to perform or to offer to perform will suffer forfeiture;
(d) the likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurances;
(e) the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing.
In this case, the trial court considered the following issues: "What other performance has occurred? Is the failure to comply willful or not? How serious are the consequences of the failure to comply? What are the relative hardships that attach to the failure to comply?" The court relied heavily on Walker's conduct in continuing to use the backhoe for thirteen months without liability insurance. It concluded that defendants' actions contradicted their claim at trial that liability insurance from CNH Capital was an integral part of the transaction and they would not have purchased the backhoe without it. The court reasoned that defendants could have obtained other insurance and sought a credit for the cost. Or, they could have returned the backhoe and, if Trico refused to refund the deposit, sued Trico for that deposit less a fair amount for their use of the backhoe before returning it. Defendants' failure to take any of these steps was important evidence of their view regarding the aspects of the transaction that were material terms of the contract.
Whether a breach is material is a question of fact. Murphy, supra, 392 N.J. Super. at 265; Magnet Res., supra, 318 N.J. Super. at 286. In reviewing a trial court's findings of fact, we will only determine "whether the findings made could reasonably have been reached on sufficient or substantial credible evidence present in the record, considering the proof as a whole." Quality Guaranteed Roofing, Inc. v. Hoffmann-La Roche, Inc., 302 N.J. Super. 163, 166 (App. Div. 1997). See Rova Farms Resort, Inc. v. Investors Ins. Co. of Am., 65 N.J. 474, 484 (1974); Brunson v. Affinity Fed. Credit Union, 199 N.J. 381, 397 (2009).
In this case, there was sufficient, credible evidence for the trial court to find that Trico's breach in failing to obtain insurance was not material to the contract as a whole. Defendants had other insurance available through Pancoast, and the greater part of the purchase price was for the machine rather than for liability insurance.
Furthermore, even if Trico's breach were material and excused defendants from performance, Trico would still have been entitled to damages for Walker's continued use of the machine. See Kutzin v. Pirnie, 124 N.J. 500, 517 (1991) (a breaching party may recover the amount of the deposit in excess of the non-breaching party's damages); Van Es v. Honeyleaf Properties, Inc., 253 N.J. Super. 566, 568 (App. Div. 1992) (same); Magnet, supra, 318 N.J. Super. at 286 n.5; Restatement (Second) of Contracts § 374 (1981) (Restitution in Favor of Party in Breach). We find no error in the trial court's decision to award Trico damages despite its breach.
Defendants contend that the trial court erred in failing to credit $11,836.85 for the deposit they paid as noted on the bill of sale. The trial court's finding that $7,000 of the initial payment was a deposit for the backhoe and the remainder for settlement of defendants' prior debt to Trico is supported by testimony in the record that the trial court found to be credible, as well as a specific term of the installment contract signed by defendants.
Defendants further contend that Trico failed to mitigate its damages because it had the right under paragraph fourteen of the bill of sale to terminate the contract earlier, repossess the backhoe, and resell it to another buyer. The trial court reasonably found that Trico was not required to terminate the contract earlier than the filing of its lawsuit in December 2006, and that it had mitigated its damages by reselling the machine within one month of recovering it. Trico's damages were due to defendants' continued use of the machine without payment and resulting physical damage to the machine. Defendants did not prove failure to mitigate damages.
Finally, recovery of attorney's fees for breach was expressly a term of the contract, and defendants have not made any argument contesting the reasonableness of the fees awarded to Trico.