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Cit Communications Finance Corporation v. Microbilt Corporation


January 25, 2011


On appeal from Superior Court of New Jersey, Law Division, Morris County, Docket No. L-419-08.

Per curiam.


Submitted October 5, 2010

Before Judges Payne and Koblitz.

Defendant, MicroBilt Corporation, appeals from a verdict, following a bench trial, in the amount of $128,435.91 entered in favor of plaintiff, CIT Communications Finance Corporation, in a collection action seeking past-due lease payments for telecommunications equipment, late charges and counsel fees.


The trial record discloses that the parties entered into a five-year agreement, dated October 30, 2001, for the lease of Definity Prologix Solutions telecommunications equipment that CIT, a finance company, had purchased for the sum of $309,372.20. The lease provided for monthly payments in the amount of $5,298.44, with a $10,596.88 total advance lease payment.*fn1 Additionally, the lease provided for payment of a five-percent late charge if any payment was delayed more than ten days after its due date.

Paragraph 8 of the lease specified as a default event any failure "to pay any Lease Payment or any other payment within 10 days of its due date." Paragraph 9 provided that in the event of a default, "[y]ou agree to pay all our costs in enforcing our rights against you, including reasonable attorneys' fees."

Paragraph 12 of the lease, which MicroBilt's trial counsel conceded was the focus of the litigation,*fn2 stated:


If no Default exists under this Lease, you will have the option at the end of the original or any renewal term to purchase all (but not less than all) of the Equipment at the Purchase Option price shown on Page 1 of this Lease plus any additional taxes. . . .

[Y]ou must give us at least 30 days written notice before the end of the original term that you will purchase the Equipment or that you will deliver the Equipment to us. If you do not give such written notice or if you do not purchase or deliver the Equipment in accordance with the terms and conditions of this Lease, this Lease will automatically renew for successive three month periods and thereafter renew for successive one month terms until you deliver the Equipment to us. During such renewal(s) the Lease Payments will remain the same. . . . If the Fair Market Value Purchase Option has been selected, we will use our reasonable judgment to determine the Equipment's fair market value. If you do not agree with our determination of the Equipment's fair market value, the fair market value (on a rental basis) will be determined at your expense by an independent appraiser selected by us.

MicroBilt selected the fair market value purchase option.

Paragraph 3 of the lease stated in relevant part: "Unless this Lease is renewed or you purchase the Equipment in accordance with this Lease, at the end of this Lease you will immediately deliver the Equipment to us . . . to [sic] any place in the United States that we tell you."

In 2003, MicroBilt defaulted in its lease payments. Thereafter, on August 6, 2003, CIT and MicroBilt entered into a forbearance agreement that provided:

CIT agrees to forebear from exercising its remedies available under the Lease until September 2006 (the "Forbearance Period") in exchange for the following payments to be made by MicroBilt: $6,500.00 per month from February 2003 until April 2004 and $5,000 per month from May 2004 until September 2006. Once all of these payments have been made, MicroBilt will have the option either to purchase the Equipment for its fair market value or return it to CIT at its own expense. . . .

This agreement is without prejudice to and made with full reservation of CIT's rights under the Lease. . . . If any payment is not received by its due date under this agreement, CIT may, without prior notice to MicroBilt, exercise its rights under the Lease. Should CIT need to exercise its remedies as a result of MicroBilt's default, the amounts owing to CIT may increase as a result of additional interest, late charges and attorneys' fees.

The parties stipulated that the initial term of the lease expired on October 15, 2006 and, at that time, MicroBilt was current in all of its lease obligations. The following additional stipulations were presented to the trial judge:

Six, defendant did not give plaintiff at least 30 days written notice of its intention to exercise the fair market value purchase option prior to the expiration of the initial term in October 2006.

Seven, defendant did not purchase the lease equipment or return the lease equipment to plaintiff at the expiration of the initial term on October 15, 2006.

Number eight, defendant made no lease payment to plaintiff after the expiration of the initial term, other than one lease payment in the amount of $5,000.

Number nine, the lease equipment was returned to plaintiff in May 2008.

Number 13. Nineteen months elapsed between the end of the initial term and May 2008, the date that the telephone system was returned to plaintiff.

Although it was stipulated that MicroBilt never gave the thirty-day written notice of its intent to exercise the fair market value purchase option specified in the lease, Franklin Levin, general counsel for MicroBilt, testified at trial that he made "several" phone calls to CIT in October, November and December 2006. However, on cross-examination, it was revealed that Levin had no written documents or phone records to support his claim, and he could not identify to whom he had spoken. Further, he admitted that his calls were not made for the purpose of exercising the fair market value option, but only to determine what the purchase price would be.

In early 2007, discussions as to fair market value occurred between Jeremy Galton, CIT's Director of Investment Recovery, and Levin and, later in the year, between Levin and CIT's retained counsel. During the early period, CIT demanded $123,798.80 as the purchase price, and in April 2007, MicroBilt offered $15,887.01, which was the average of two independent appraisals obtained by it. Although discussions continued to October 2007, no agreement was reached. CIT took the position that, in order for MicroBilt to exercise the fair market value purchase price option, it had to cure its default in monthly lease payments, which had accrued as the result of the automatic renewal provisions of paragraph twelve of the lease and had been invoiced on a monthly basis. By e-mail dated October 31, 2007, Levin rejected CIT's final demand of $42,000, stating that he had approval to offer $35,000. The e-mail concluded by acknowledging that the $35,000 figure had been rejected by CIT and stating: "[P]lease immediately notify me of an address as to where CIT wants the phone switch equipment shipped to so that MicroBilt may return same."

CIT did not respond to MicroBilt's request, but instead filed suit on February 7, 2008. In its complaint, CIT claimed breach of contract, unlawful possession of the telecommunications equipment by MicroBilt and unjust enrichment.

MicroBilt answered and filed a counterclaim in which it asserted a breach of contract by CIT, breach of the covenant of good faith and fair dealing, and violation of the Fair Debt Collection Act. Additionally, it claimed that CIT's cause of action for unlawful possession constituted a frivolous pleading in light of MicroBilt's offer to return the equipment and its unfulfilled request for a designation of where the equipment should be delivered.

On March 19, 2008, CIT provided a delivery address for the equipment, and it was returned on May 15, 2008.

Following trial, the judge rendered an oral opinion in CIT's favor. The judge found that, in October through December 2007 after the initial term of the lease had passed, MicroBilt, while retaining the telecommunications equipment, had failed to exercise its purchase option, but instead had merely engaged in a casual attempt to find out what the purchase price would have been. Thereafter, CIT, while under no duty to negotiate with MicroBilt, did so. As a result, MicroBilt retained possession of the equipment for nineteen months without tendering the required lease payments of $5,000 per month. Thus, the judge found a breach of contract on the part of MicroBilt, which failed to purchase or return the equipment or pay for its rental. Accordingly, the judge found for CIT in the amount of $5,000 per month plus a five percent late charge for a total of nineteen months, less the one month during which payment was made, for a total of $94,750 plus counsel fees. Following the submission of certifications of service by CIT's initial attorneys and substituted trial counsel, the judge awarded counsel fees in the amount of $33,685.91. This appeal followed.


Appellate counsel for MicroBilt commences its argument on appeal by stating that "[t]he trial court, the attorneys and the witnesses at trial all focused on the wrong document. This court must look at the [m]odification to determine the relative rights of the parties before making an adjudication of the legal consequences that flow from the parties' agreement." MicroBilt then argues that the terms of the modification or forbearance agreement entered by the parties in August 2003 superseded paragraph 12 of the initial lease agreement, eliminating the automatic renewal provisions found in that paragraph and limiting the options at the end of the lease's term to purchase of the equipment at fair market value or its return. Because the automatic renewal provisions of paragraph 12 were eliminated in the forbearance agreement, MicroBilt argues, following the termination of the lease in October 2008, its obligation to make lease payments ceased.

We decline to consider this and associated arguments by MicroBilt that depend on the superseding effect of the forbearance agreement and the elimination both of the option for automatic renewal and the duty to make lease payments. These arguments have been raised for the first time on appeal and were not presented to the trial judge. Nieder v. Royal Indem. Ins. Co., 62 N.J. 229, 234 (1973). Indeed, at trial, counsel for MicroBilt took an opposite position, assuring the trial judge that both parties agreed that the judge's attention should be focused on the proper interpretation of paragraph 12. The retention of new counsel does not provide MicroBilt with license to defend the action on an entirely new theory at the appellate level.

We note further, in connection with paragraph 12, that the parties stipulated at trial to the fact that at the time that the lease expired on October 15, 2006, MicroBilt was current in all of its lease obligations. Accordingly, there was no legal impediment to automatic renewal pursuant to that paragraph, the parties having stipulated that MicroBilt was not in default at the lease's end. Nothing in the forbearance agreement precluded lease renewal, and in fact, that agreement stated that it was made "without prejudice to and made with full reservation of CIT's rights under the lease."


We do agree with MicroBilt, however, that the trial court was mistaken in its calculation of damages because it considered the entire eighteen-month period during which lease payments were withheld. In our view, CIT's failure to furnish MicroBilt with an address to which the equipment could be delivered pursuant to MicroBilt's October 31, 2007 request tolled damages until such time as the address was furnished on March 19, 2008. Ward v. Merrimack Mut. Fire Ins. Co., 332 N.J. Super. 515, 522 (App. Div. 2000) ("A party to a contract may not avail itself of a condition precedent where by its own conduct it has rendered compliance therewith impossible.") (citing Creek Ranch, Inc. v. N.J. Turnpike Auth., 75 N.J. 421, 432 (1978)). We therefore remand the matter for a recalculation of damages. At that time, the judge may consider whether a further credit is required as the result of MicroBilt's payment of $10,596.88 at the inception of the lease.


MicroBilt next argues that CIT breached its covenant of good faith and fair dealing in connection with its negotiations for the purchase of the equipment after the lease's expiration in October 2006. We do not find that position to have been supported by the evidence.

The duty of good faith and fair dealing requires that a party to a contract "refrain from doing 'anything which will have the effect of destroying or injuring the right of the other party to receive' the benefits of the contract." Brunswick Hills Racquet Club, Inc. v. Route 18 Shopping Ctr. Assocs., 182 N.J. 210, 224-25 (2001) (quoting Palisades Props., Inc. v. Brunetti, 44 N.J. 117, 130 (1965)). "The party claiming a breach of the covenant of good faith and fair dealing 'must provide evidence sufficient to support a conclusion that the party alleged to have acted in bad faith has engaged in some conduct that denied the benefit of the bargain originally intended by the parties.'" Id. at 225 (quoting 23 Williston on Contracts § 63:22, 513-14 (Lord ed. 2002)).

As an initial matter, the parties stipulated at the inception of the trial that MicroBilt did not give CIT written notice of its intent to exercise the fair market value purchase option at least thirty days before the expiration of the initial term of the lease in October 2006 as paragraph 12 of the lease required. As a consequence, as the judge found, CIT had no obligation to engage in purchase price negotiations with MicroBilt, a condition precedent to such negotiations not having been met. It was entitled to the benefit of the written notice provision, having done nothing to suggest that it was waived.

Compare Dries v. Trenton Oil Co., Inc., 17 N.J. Super. 591, 593 (App. Div. 1952) (finding a factual issue as to waiver of a sixty-day written notice requirement when the lessee approached the lessor three months before the lease expired to negotiate a renewal and an agreement was reached).

Thereafter, MicroBilt engaged, through Levin, in three months of what the judge termed "casual" attempts to determine the purchase price for the equipment. We find the judge's characterization of Levin's conduct to have adequate support in the record. Rova Farms Resort, Inc. v. Investors Ins. Co., 65 N.J. 474, 484 (1974). As Levin admitted on cross-examination, the calls that he made during this period were not for the purpose of exercising the fair market value option, but only to ascertain what CIT proposed the purchase price to be.

Negotiations regarding price occurred later between Levin and CIT's counsel, resulting in a reduction in CIT's demand from $123,789.80 to $42,000. However, no evidence in the record establishes that CIT's final offer was unreasonable, that it failed to reflect the value of the equipment leased to MicroBilt, or that it was formulated in bad faith. "Proof of 'bad motive or intention' is vital to an action for breach of the covenant." Brunswick, supra, 182 N.J. at 225 (quoting Wilson v. Amerada Hess Corp., 168 N.J. 236, 251 (2001)). That evidence is lacking here. According to Levin, MicroBilt demanded pursuant to paragraph 12 that CIT provide a list of three independent appraisers qualified to determine fair market value. CIT failed to do so, but as Levin concedes, its position was based upon the fact that MicroBilt was in default on its lease payment obligation, and thus it was not entitled under the lease to purchase the equipment at issue. We find no evidence of bad faith in this position, which was fully and consistently conveyed to MicroBilt and supported by the lease's terms.

MicroBilt argues "[w]hat is even more outrageous is that CIT sought to impose onerous, extraordinary rental payments for the period in which it acted completely unreasonably and breached the terms of the parties' agreement." However, we have determined that CIT was entitled by paragraph 12 of the lease to automatically renew the lease at least until MicroBilt declared its intent to return the equipment on October 31, 2007 and unsuccessfully sought an address to which return could be made. We have previously found that CIT is not entitled to damages for the period from October 31, 2007 to March 19, 2008. We thus find it unnecessary to determine whether its failure to provide an address during this period constituted a breach of the duty of good faith and fair dealing.


In its final arguments, MicroBilt asserts that CIT was not entitled to counsel fees because MicroBilt was not in default on its lease obligations. We have held to the contrary earlier in this opinion and therefore reject this argument.

MicroBilt then claims that the trial court erred in allowing CIT a virtually full counsel fee award when CIT had failed to comply with RPC 1.5 and with Rule 4:42-99(c) by certifying "how much had been paid to the attorney," and "what provision, if any, has been made for the payment of fees to the attorney in the future." While that portion of the rule appears to address the issue of what part of the fee shall be awarded to the client and what part shall be remitted by the client to the attorney, Morrison v. Morrison, 93 N.J. Super. 96, 105-06 (Ch. Div. 1966), we do not regard a contractual fee award as a device to provide a windfall to a successful claimant. For that reason, and in light of the withdrawal of CIT's initial counsel from the litigation under circumstances that have not been disclosed to us, we direct the trial court on remand, to ascertain the amount of fees and costs paid to and owing to CIT's attorneys, and to adjust the fee award if an overpayment to CIT exists.

Affirmed in part, reversed in part and remanded for further proceedings in light of this opinion.

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