Opinion
NO. 2008-EQ-142
07-01-2013
Precision Truck Body Equipment Company, Inc. And David Ellis v. Candia Trailers and Snow Equipment, Inc., Jeffrey Goff, and Suzanne Goff
ORDER
This case is a breach of contract action. On June 24, 2011, this Court (McNamara, J.) ruled in favor of Petitioners (Precision Truck Body Equipment Company, Inc. and David Ellis) on their breach of contract claim, finding that the three agreements which were the basis of the agreement were severable and awarding restitution in the amount of $60,714.28. Petitioner David Ellis ("Petitioner") solely appealed, and the Supreme Court disagreed with this Court's analysis, finding the contract was not severable and vacating the award. The case is now on remand, and the parties agree the only issue this Court must determine is the appropriate remedy in light of the Supreme Court's ruling. Petitioner asserts, as he did in the underlying action, that the appropriate remedy is rescission and restitution of the underlying contract. Respondents argue that the record following appeal does not entitle Petitioner to any remedy. For the reasons discussed herein, based on the record and the parties' arguments, Petitioner remains entitled to recover $60,714.28 in restitution, but that remedy is based on Respondents' breach of the entire sale contract.
I
The facts are set forth in the Supreme Court's opinion and are restated briefly here. In 2006, Respondent Jeffrey Goff ("Goff") sold Precision Truck Body Equipment Company, Inc. ("Precision") to Petitioner. The transaction involved three documents: an Asset Purchase Agreement ("APA"); a Non-Compete Agreement ("NCA"); and an Inventory Purchase Agreement and Option ("IPA"); all three together ("Sale Contract"). The IPA obligated Petitioner to buy Precision's remaining inventory at cost by June 1, 2007. If Petitioner failed to fulfill this agreement, Respondents would be relieved of their obligations under the NCA. Pursuant to the NCA, Petitioner paid Respondents $340,000 in exchange for their promise not to compete with Precision once Petitioner owned it. The NCA would endure for seven years, or 84 months, if Petitioner fulfilled the IPA. If Petitioner did not purchase the inventory after 15 months, on June 1, 2007, both parties would be relieved of their obligations under the NCA. Petitioner failed to purchase the inventory by June 1, 2007, and the NCA terminated. However, Petitioner discovered that Respondents never complied with the terms of the NCA prior to its termination in June 2007.
Under the APA, Petitioner agreed to pay $20,000 for Precisions assets, including its goodwill, i.e. the businesses name, telephone numbers, customer lists, working agreements, advertising materials, etc. The APA also contained a consulting agreement and tenancy agreements, which provided that Petitioner would operate Precision at its existing premises for 90 days after closing, during which Goff would work there as a full-time consultant.
Petitioner brought suit for breach of contract in 2008. On February 28, 2011— over three years after the inception of the lawsuit—Petitioner filed a pleading seeking rescission of the NCA only and requesting restitution of the $340,000 recited as consideration for the NCA. Petitioner made this request pursuant to the terms of [the NCA], which stated that each party agreed that the other "would suffer irreparable harm and would not have adequate remed[ies] at law for the material breach of [the NCA], even though some damages may be provable" Ellis, 164 N.H. at 460. Respondents objected, but Petitioner withdrew his claim of money damages and waived his right to a jury trial. Eventually, this Court held a bench trial at which, the parties only addressed the issue of the breach of the NCA and its valuation.
In its June 24, 2011 Order, this Court found that the three transactions comprising the Sale Contract were severable and granted Petitioner's request for rescission of the NCA to a limited monetary extent. On appeal, the Supreme Court affirmed the finding of a breach of the NCA but held that the NCA was not severable from the IPA and APA. Ellis, 164 N.H. at 462-63. In so ruling, the Court found that the NCA could not be rescinded without rescinding the IPA and APA as well. Id. Because this Court found that the transactions were severable, in finding that Respondents materially breached the NCA, it did not consider whether Respondents materially breached the APA or the IPA, and it never valued those portions of the Sale Contract.
On remand, Respondents explain that Ellis is not entitled to restitution for the entire contract. They assert that had this Court considered the entire Sale Contract at trial, they would have presented evidence that Petitioner ruined Precision's business himself and that the business would have failed even if Respondents had abided by the NCA. Respondents also argue that the Court does not have all the evidence it needs to properly value the entire Sale Contract. Because the Court is missing evidence regarding Petitioner's responsibility for Precision's failure, Respondents assert the Court cannot consider whether their breach of the NCA constitutes a material breach of the Sale Contract as a whole. Further, because Petitioner, on remand, has indicated that he refuses to conduct a new trial and believes the record is sufficient to identify the proper remedy, Respondent asserts there is no appropriate remedy.
As an illustration, Respondents explain that under the terms of the APA, they sold Petitioner an option to purchase a particular line of vehicles but Petitioner allowed that option to lapse without ever using it, thereby wasting one of Precision's assets and making it impossible for the Court to return this asset to Respondents if it awarded rescission. Additionally, pursuant to the sale contract, Goff agreed to train Petitioner. Goff did train Petitioner in Precision's business and this training has a monetary value. Finally, Respondents explain that Petitioner received, as part of the NCA, Precision's customer list, comprising names and phone numbers of Precision's customers. Respondents assert that Petitioner sold this list. Respondents argue that even if the Court were to find that they materially breached the NCA, the value of the option, the training Goff provided, and the customer list must be considered and must offset the cost of the breach. Because none of this evidence is part of the formal record of this case, the Court cannot consider it in evaluating the appropriate remedy on remand. Although Petitioner disputes that he sold Precision's customer list, the Court need not decide whether Respondents' allegations are accurate because this evidence does not impact the Court's final disposition of the case.
Nonetheless, Petitioner argues that because this Court found Respondents materially breached the NCA—which this Court and the Supreme Court found was the core portion of the Sale Contract—then this Court's finding regarding breach must apply the entire Sale Contract. Petitioner seeks the equitable remedy of rescission and restitution. The Court agrees with Petitioner to a limited extent.
II
Whether a breach of contract is material is a question of fact. Ellis, 164 N.H. at 466.
[F]or a breach of contract to be material, it must "go to the root" or "essence" of the agreement between the parties, or be "one which touches the fundamental purpose of the contract and defeats the object of the parties in entering into the contract." A breach is "material" if a party fails to perform a substantial part of the contract or one or more of its essential terms or conditions, the breach substantially defeats the contract's purpose, or the breach is such that upon a reasonable interpretation of the contract, the parties considered the breach as vital to the existence of the contract.Id. (alteration and emphasis in original) (quoting 23 WILLISTON ON CONTRACTS § 63:3, at 438-39 (4th ed.)).
As the Supreme Court explained in Ellis, both parties testified that they perceived the APA, IPA, and NCA to be one agreement, and that "[r]ead in the light of the circumstances under which the documents were made, the APA, IPA, and NCA were intended as an entire, indivisible agreement." 164 N.H. at 464 (quotation omitted). The NCA specifically stated that Petitioner "would not acquire the business without Goff's covenant not to compete." Id. And as the Supreme Court noted, "the evidence supported the court's finding that, regardless of the number of breaches, Goff's actions went to the heart of the transaction and constituted a material breach." Id. at 468. Based on the underlying record, a material breach of the NCA constitutes a material breach of the entire Sale Contract. Nonetheless, that finding hardly resolves this case. The parties still dispute the appropriate remedy, with Petitioner seeking rescission and restitution of all funds paid under the sales contract, and Respondents arguing that no remedy is appropriate.
III
"Rescission is an equitable remedy, the granting of which is always a matter within the sound discretion of the trial court, depending upon the circumstances of each particular case." E. Derry Fire Precinct v. Nadeau, 155 N.H. 429, 431 (2007). The common-law rule is that no contract can be rescinded unless both parties can be restored to the condition they were in before the contract was made. See, e.g., Record v. Rochester Trust Co., 89 N.H. 1, 8 (1937); Barber v. Somers, 102 N.H. 38, 43 (1959). It is a remedy that restores the injured party to the position occupied before the transaction and rests upon the relative equities of the parties as the trial court determines them. Ellis, 164 N.H. at 462. If the parties cannot be restored to the status quo, the party seeking restitution must seek damages instead. Id. Even where the subject matter of the exchange was destroyed through no fault of the plaintiff, the plaintiff "may be required to compensate the other party for the deterioration of the subject matter, or to pay for its use, or to compensate the other for expenses incurred while holding the subject matter sought to be regained as well as to account for losses." 66 AM. JUR. 2D Restitution and Implied Contracts § 15 (2013); see Record, 89 N.H. at 8 ("The right of rescission when restoration is impossible must be supported by urgent reasons."). In other words, for the Court to award complete rescission, it must find that it can return the parties to the status quo, and if it cannot, the failure to provide the status quo must be through no fault of Petitioner's.
Respondents argue that rescission is not the appropriate remedy in this case because they cannot be put back in the position they were in before they contracted with Petitioner. It is doubtless true that the parties cannot be put in status quo with respect to the entire contract. The parties agree that the business deteriorated after the sale in 2007 and Ellis never tendered Precision to Respondents. Ellis has never claimed that the violation of the NCA was responsible for the Precision's failure . More importantly, Ellis sold the assets of Precision shortly after the trial in this case.
In ruling on Petitioner's Motion to Reconsider this Court's June 24, 2011 order, this Court noted:
Plaintiffs were able to introduce evidence of only approximately 8 incidents where Goff breached the non-compete. Plaintiff did not attempt to quantify the dollar amount of losses incurred from breach of the non- compete, but the evidence at trial suggested that most of the transactions involved damage amounts in the [$] 3000 range or less"July 19, 2011 Order.
Respondents contend had the Court considered the entirety of the Sale Contract at trial that they would have presented evidence that Precision failed due to Petitioner's poor business practices. But this fact is irrelevant, because Petitioner did not offer to return Precision to Respondents. In fact, Petitioner has sold the subject matter of the original contract to a third party, making it impossible for the Court to return the parties to a position with any semblance of the status quo. See DAN B. DOBBS, LAW OF REMEDIES, DAMAGES - EQUITY - RESTITUTION § 4.8 (2d Ed. 1993) (explaining that where plaintiff is required to tender the benefit received, the tender must also be made in good faith and with the present ability to make it good).
Although the agreements comprise one contract, and the parties cannot be completely restored to the status quo, the Court is not bereft of power to remedy the Respondents' breach. Equity will not tolerate a wrong without a remedy. Unity Tel. Co. v. Design Serv. Co., 179 A.2d 804, 811 (Me. 1962); King v. City of Bloomington, 159 N.E.2d 563, 571 (Ind. 1959). The Restatement (Second) Contracts§ 384 explains the availability of partial restitution when rescission is not available:
(1) Except as stated in Subsection (2), a party will not be granted restitution unlessThe Restatement contains the following illustration:
(a) he returns or offers to return, conditional on restitution, any interest in property that he has received in exchange in substantially as good condition as when it was received by him . . .
. . .
(2) The requirement stated in Subsection (1) does not apply to property
. . .
(b) that either could not from the time of receipt have been returned or has been used or disposed of without knowledge of the grounds for restitution if justice requires that compensation be accepted in its place and the payment of such compensation can be assured, or
A contracts to lease a plow and a tractor to B, to be used together. The price is stated to be $ 200 for the plow and $ 500 for the tractor, and B pays the full $ 700 in advance. A delivers the plow but fails to deliver the tractor. B can offer to return the plow and get restitution of $ 700. Because the prices are apportioned, B can also keep the plow and get restitution of $ 500.RESTATEMENT (SECOND) CONTRACTS § 384, illus. 7 (emphasis added).
In this case, the parties agreed to a specific and separate value for each part of the Sale Contract, which was based in part on Petitioner's obligation under the IPA. Based on the value of the NCA, this Court valued the breach of the NCA in determining Petitioner's award. As the Supreme Court noted:
Having found that the NCA was severable from the IPA and APA, the court calculated a restitution award for breach of the NCA by dividing its total value, $340,000, by its intended duration of seven years, or eighty-four months. Multiplying the monthly value by the number of months during which Goff owed Ellis an obligation not to compete, i.e., until June 2007, the court awarded Ellis the resulting amount, $60,714.28.Ellis, 164 N.H. at 461. The Supreme Court did not comment upon this calculation, finding only that the award was improper because the NCA was not a separate contract, and ordering this Court to determine what remedy is appropriate.
Because this Court has found that Respondents' breach of the NCA is a material breach of the entire Sale Contract and the contractual provisions provided for apportioned prices, $60,714.28 in restitution for the 15 months Goff was paid not to compete, and nonetheless competed, remains the proper remedy. Petitioner did not tender the other assets of Precision, and in fact sold them, presumably benefiting thereby. He did not perform under the asset purchase agreement. While Respondent can be said to be in status quo because he did not comply with the NCA during the months it was in force, Petitioner can also be said to be in status quo because he received consideration for selling the assets of Precision, and did not perform under the APA.
This case is thus directly akin to the Restatement illustration above; Petitioner contracted for a benefit—the NCA—that he did not receive, but received the other benefits he was entitled to under the contract. The individual provisions of the overall contract were separately valued. Thus, in order to determine the proper restitution amount, the Court need not consider the entire Sale Contract transaction, value of Precision, or whose fault Precision's failed business was. Petitioner is not at fault for Respondents' failure to fulfill the terms of the NCA, and even if Petitioner's bad business practices caused Precision's failure, this "fault" does not limit Petitioner's right to recover partial restitution for the value of the transaction from which he received no benefit; the NCA. See RESTATEMENT (SECOND) CONTRACTS § 384, illus. 7.
Although a party who is deprived of the remedy of rescission is generally entitled to damages, there appears to be no dispute in this case that Petitioner has no damages. Ellis, 164 N.H. at 462. Both parties apparently agree that Precision did not succeed after the sale, but Petitioner has never argued that Precision failed because Respondents violated the terms of the NCA, nor could he. See ftnt.2, supra.
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Neither party has ever challenged the Court's methodology in valuing the portion of the NCA that Goff did not comply with, so this Court's prior valuation of the NCA therefore remains unchanged. Therefore, the Court finds that Petitioner is entitled to partial restitution for Respondents' failure to fulfill the NCA portion of the Sale Contract or $60,714.28.
SO ORDERED
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Richard B. McNamara
Presiding Justice