Opinion
C.A. No. 00C-10-153 SCD
Submitted July 11, 2003.
Decided July 14, 2003.
Verdict After Bench Trial — for PLAINTIFFS.
Joseph J. Longobardi, III, Esquire, of Wilmington, Delaware for plaintiffs
Karl Johnson and Karen Johnson, John J. Thompson, Esquire, of Levine Thompson, Wilmington, Delaware for defendants Eric's Chop Shop, Inc., James Edward Cathell, and Jason Eric Cathell.
OPINION
This case arises out of the sale of a motorcycle parts and repair business. After a two day, non-jury trial, followed by submissions of authorities and argument, the following are my conclusions of fact and rulings of law.
Findings of Fact
The plaintiffs, Karl and Karen Johnson ("Karl," "Karen" or the "Johnsons") owned and operated K K Cycle, a proprietorship. Karen was most involved in the daily operation of K K Cycle, while Karl maintained full time employment at Chrysler Corporation.
Defendant James Edward Cathell, III ("Ed") is a master machinist employed by the University of Delaware. He first met the Johnsons in 1993. Though employed full time by the University, he worked on a part time basis at K K Cycle as a mechanic. Ed's love of motorcycles kept him working, off and on, for the Johnsons from 1993 until around 1999. Ed also had his eye on a classic motorcycle, in serious disrepair, that Karl kept at the shop. Ed, and the other employees at K K Cycle, were close to the Johnsons, almost like family.
Ed's brother, defendant Jason Eric Cathell ("Eric"), would visit K K Cycle occasionally but had no relationship with the business. The testimony from former K K employees was that Eric was hardly known to them until the events leading to this litigation transpired.
Opening in early 1994, K K Cycle began to grow and thrive through the mid to late 1990's. Karen and Karl had established good relationships with suppliers and Karl, by all accounts, had amassed a large selection of used and classic motorcycle parts.
Mark Englebach ("Englebach") a mechanic, testified regarding Karl's used part selection. Englebach worked for the Johnsons from 1994 through 1997. Even after he left K K Cycle, he continued to visit the Johnsons which is a testament to the family atmosphere of K K Cycle.
Englebach said that Karl had an extensive collection of used parts. Englebach stated that over the course of four years, he had packed and unpacked the boxes of used parts so often that he could recognize them easily.
In 1999 there were personal circumstances which took Karen away from the business. As a result, the business activity at K K Cycle was significantly reduced. In late 1999, conversations arose among Ed, Eric and the Johnsons regarding purchase of the business. The facts surrounding the agreement of purchase are what bring the parties before this Court.
The evidence is clear that a value of K K Cycle was agreed upon, $120,000. This value was fashioned in two parts; the first $60,000.00 was to purchase the business itself; the second $60,000.00 was for the agreed value of K K Cycle's inventory. As to the business, 72 monthly payments of $998.25 were to be made if and until a private loan was secured for the balance of the purchase, or until fully paid. It was also contemplated that the $60,000.00 for the inventory was to paid through a private loan.
On February 25, 2000, the Delaware Secretary of State issued a form certificate of incorporation to Eric's Chop Shop, Inc. Eric intended to do business as a corporation apparently in order to limit his personal liability. He testified that he was the President of the corporation. However, the corporation never properly elected directors, established by-laws, held meetings, or followed any of the other required basic statutory corporate formalities.
Eric paid the Johnsons $5,000 in cash, as a down payment for the business on or about February 28, 2000. The money for the down payment was secured by Eric's brother Ed, from a credit card. Eric assumed possession of K K Cycle and began running the business immediately after this payment. On March 2, 2000, a business license was issued to Eric's Chop Shop, Inc. Eric continued to order inventory from suppliers under the K K Cycle moniker.
This practice was necessary because the suppliers with which K K Cycle had established a relationship required a solid credit history and an ability to purchase a large volume of parts. Neither Eric's Chop Shop, Inc. nor Eric Cathell met the requisite standards.
Though operating the shop, Eric remained unable to secure a loan to cover the purchase of the business. Shortly after assuming possession he made an agreed monthly payment on the business of $998.25 with money provided by his parents. The difficulty in precisely determining the time and amount of payments arises from the fact that some payments were paid in cash, a large check bounced, and regular records were not kept. It is conceded by the Johnsons that an additional $1,996.50 payment was received in cash sometime in July in satisfaction of a bounced check. Therefore, I conclude from the evidence presented at trial, particularly the documents, that in addition to the down payment, the Johnsons received three payments of $998.25.
Ed Cathell has at all times relevant to this case maintained full time employment with the University of Delaware. I accept his testimony that he did not believe that the business would be successful; that he paid the down payment because he had an "ulterior motive" — securing the old motorcycle that he had been eyeing for years. In fact, two days after Eric assumed control, Ed took the motorcycle, received title, and had the motorcycle delivered to his home.
Ed worked part time as master mechanic at the shop, all the while maintaining his employment with the University of Delaware. Eric, however, devoted his full time and attention to the business and was truly the manager of ongoing operations for the shop.
In order to memorialize the terms and conditions of the sale of the business, the Johnsons sought the help of an attorney on March 7, 2000. Documents were prepared and presented to Eric sometime after their completion on March 9, 2000. The documents have effective dates of March 15, so it is reasonable to infer that execution on or before that date was contemplated.
The signature block requires signature by Eric's Chop Shop, Inc., by its President, as well as by Ed and Eric Cathell, individually. The documents prepared by the attorney were never signed. Eric said he would not sign the documents because they did not accurately reflect the agreement. Eric did not offer alternate documents; he continued to operate the shop causing fear and anxiety for the Johnsons.
On August 1, 2000, feeling pressure because of the failure to secure written documentation of the sale and the failure to receive regular payments, the Johnsons pressed Eric for a written agreement. The handwritten document marked "Exhibit 1" is the product of that concern. It is was signed by Eric and the Johnsons and reflects the terms and conditions of the earlier agreement. Relieved, the Johnsons began to press Eric for back payments.
In September 2000, Eric determined that the business was failing and had to be abandoned. With the help of others, he loaded up various vehicles and transported motorcycles and parts away from the business to both his own home, and that of his brother Ed. The Johnsons, whose residence is adjacent to the business, watched as Eric and his friends loaded property from the business. Karl eventually shut off the power to the store. The police were called by Eric, and removal of property was stopped. It never resumed. The plaintiff's have offered into evidence photographs taken the day after the abandonment of the business which reflected its condition. Karl Johnson has testified that the value of the property left behind at the shop was $10,000.
Ed Cathell indicated that the pole barn on his property was the only place with enough room to store items removed from the shop, and he did so as a favor to his brother.
Mr. Johnson's testimony regarding the photographs of the shop taken after it had been abandoned evidenced his obvious disbelief about the state of the business he and Karen Johnson spent six years building, and witnessed destroyed in little more than seven months.
The testimony of former K K Cycle mechanic Englebach, supported Karl's valuation of the property left by Eric. Englebach testified that most of the inventory had been removed from the business when he described that the quantity of parts in Ed Cathell's shed were so great that he couldn't walk in the shed, but had to walk on the parts.
Analysis and Discussion
Before the Court are several issues. First, does there exist a binding contract. Second, who are the parties to the contract, if any. Third, was the contract breached, and finally, what are the net damages for breach; is set-off appropriate.The Contract and the Parties; Statute of Frauds
From the outset the Court recognizes two separate aspects to the agreement of sale of K K Cycle. First, the agreement for the sale of the business, and second, an agreement for the sale of the inventory.
There is an additional agreement with respect to the rent that was owed on the property for the period in which defendant's operated the shop. The plaintiffs however, have not made a claim for back rent, and hence the Court will not address it.
The Statute of Frauds, Title 6, ¶ 2714 of the Delaware Code states:
(a) No action shall be brought to charge any person upon any agreement made upon consideration of marriage, or upon any contract or sale of lands, tenements, or hereditaments, or any interest in them, or upon any agreement that is not to be performed within the space of one year from the making thereof, or to charge any person to answer for the debt, default, or miscarriage, of another . . . unless the contract is reduced to writing, or some memorandum, or notes thereof, are signed by the party to be charged. . .
DEL. CODE ANN. tit. 6, ¶ 2714(a) (1999).
Further, Title 6, ¶ 2-201, of the Delaware Code states:
(1) Except as otherwise provided in this section a contract for the sale of goods for the price of $500.00 or more is not enforceable by way of action or defense unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought. . .
Under either ¶ 2714 or ¶ 2-201, the August 2000 writing outlines the inventory and property sold, the price, and the parties thereto, adequately enough for this Court to fashion a remedy for breach.
Ultimately, I find that there was a binding contract, based on an oral agreement in February 2000, the course of conduct between the parties, and as evidenced by the document signed by Eric on August 1, 2000.
The Corporate Shield
To be sure, Eric attempted to conduct business in the name of Eric's Chop Shop, Inc. But that fact alone does not define his contractual obligation. While he testified that he signed the contract as President of Eric's Chop Shop, Inc., the document does not reflect that he was signing in that capacity. The Johnsons testified, persuasively, that they did not intend to enter into the relationship with the corporation alone. The Johnson's intent is reflected in the documents prepared by their attorney and presented to Eric Cathell in March.
Eric's Chop Shop, Inc. had a Delaware business license, was listed as the customer on electric bills, and maintained a bank account.
I conclude that the contract for the sale of K K Cycle, was between defendant Eric Cathell and the Johnsons. Ed Cathell was not a party to the sale; he had an ulterior motive for supplying the $5,000.00 down payment, and critically, his signature is not on the handwritten agreement.
The contract was ultimately breached in September, 2000. The fact of the breach is undisputed. A substantial amount of inventory from the business was removed from the shop, and the building and business were abandoned.
Damages
Eric agreed to purchase the business for $60,000.00. He made a $5,000.00 down payment. Under the clear terms of the note, he agreed to pay $55,000 plus interest at a rate of 9.25%, for a period of 72 months in installments of $998.25. Three of the payments were made. The period began in February, and ended in September when Eric breached the contract. The Court finds that the first payment was made in March, and the final two payments were made in July. Therefore, the net present value of the $55,000.00 balance at the time of the breach in September, given one payment in March and two in July, is $53,086.00.
As structured, this interest rate is compound and will be discounted as such.
A portion of each of the payments (totaling $1,087.75) was interest.
Next, Eric agreed to purchase K K Cycle's inventory for $60,000.00. Eric has not made any payments towards this purchase.
Finally, the plaintiffs bear the burden of proving their claim, but it falls to the defendant to prove any set off to which he may be entitled. The evidence offered by the plaintiff Karl Johnson is the only testimony sufficiently specific to be probative on the issue of set-off. He testified that he retained property valued at $10,000. Therefore, the verdict is reduced accordingly.
Judgment for Plaintiffs, and against defendant Jason Eric Cathell in the amount of $103,086.00, with prejudgment interest at the contract rate of nine and a quarter percent (9.25%) commencing October 1, 2000.
Del Code Ann. tit. 6 ¶ 2301(a) (1999); see also Rollins Environmental Services, Inc. v. WSMW Industries, Inc., 426 A.2d 1363 (Del.Super. 1980).
IT IS SO ORDERED.