K & J's Trucking, Inc. v. Michael W. Seay

ca04-189

ARKANSAS COURT OF APPEALS
NOT DESIGNATED FOR PUBLICATION

DIVISION III

CA04-189

January 12, 2005

K & J's TRUCKING, INC. AN APPEAL FROM WASHINGTON

APPELLANT COUNTY CIRCUIT COURT

[CIV01-1627-2]

V. HON. KIM M. SMITH, JUDGE

MICHAEL W. SEAY AFFIRMED

APPELLEE

Wendell L. Griffen, Judge

K & J's Trucking, Inc., appeals from an order dismissing its claims for contractual damages against Michael Seay, appellee. Appellant sued for damages due to appellee's failure to return appellant's signs, vehicle permit numbers, and other items bearing appellant's identification. Appellant also sued for reimbursement of money due on a returned check, damage to a van, storage fees, lien costs, attorney's fees, and late charges. The trial court found that the allegations regarding the items bearing appellant's identification were based upon an unenforceable penalty clause, and that because appellee was entitled to certain set-offs, he was not liable to appellant for other expenses claimed. We affirm.

The parties in this case executed a written contract on February 15, 1995, whereby appellee provided tractors, trailers, and drivers to transport vehicles to appellant's customers. Appellee was to be paid a percentage of the revenue received by appellant. As part of this process, appellant provided State permit numbers and signs bearing its name for appellee to place on his trucks. Appellee subcontracted with his drivers. A driver who fulfilled a five-year contract with appellee was given the vehicle as a bonus at the end of the driver's contract with appellee.

Whenever appellee's lease on a vehicle ended, his expenses and obligations with appellant were reconciled on a final settlement statement, which was prepared by appellant's employee, Cammy Nelson. Because appellee had several vehicles, when one of his vehicles went "off lease," Nelson would forward any balance due to appellant to another truck owned by appellee.

In May 1999, one of appellee's drivers delivered a load of vehicles to Arrow Speed Enterprises (Arrow Speed) in California. Arrow Speed paid $500 each for eight vehicles, but refused to pay for the damaged van. Appellee's driver collected a $4,000 check for the delivery, which was given to appellant. Arrow Speed's check was later returned for insufficient funds; appellant maintains that Arrow Speed stopped payment on the check due to the damaged van.

This damage was never claimed on appellant's or appellee's insurance. It is disputed whether appellant or appellee decided not to file an insurance claim, but it is clear that appellee had the vehicle repaired for $2,362.27, and that the vehicle was subsequently sold for $2,000. Appellant was required to pay $1,250 to have the van released so that it could be sold. Appellant debited appellee for the $4,000 check that was returned for insufficient funds as well as the $1,250 that it paid to release the van, but subsequently credited appellee the same amount. However, Nelson testified that although she credited appellee for the $2,000 payment, appellant received from the sale of the van, never received payment for that amount.

Appellee thereafter delivered a second load of vehicles to Arrow Speed for appellant, which included the repaired van. This time, appellant required payment by cashier's check. Arrow Speed refused to pay by cashier's check, and appellee did not deliver the vehicles. The testimony is in dispute as to who made the actual decision to place the vehicles into storage, but it is clear that appellant knew the vehicles were being stored. Appellant obtained liens on the vehicles. Arrow Speed subsequently brought suit against appellant to effect delivery of the vehicles. Appellant claimed that it incurred approximately $9,500 in attorney's fees in defending this suit.

On August 8, 2001, appellee transferred ownership of truck number 682 to Sam Young. Later that month, load #35635, driven by Young on behalf of appellant, was abandoned by Young in Oklahoma. The evidence did not show when the breakdown occurred, but the record of the dispatches for Young for August are dated August 10, August 17, and August 23, all of which occurred after appellee transferred ownership of the truck to Young. It is undisputed that appellee did not immediately report the breakdown to appellant. Appellant seeks to recover $2,250 that it was charged in late fees because the load was delivered late.

Appellee's contract with appellant ended on August 31, 2001, when appellee terminated the contract. It is disputed whether appellee informed appellant regarding the transfer of the truck to Young, but it is undisputed that appellee did not return the signs and permits that were given to appellee to use for truck #682.

Appellee thereafter filed a complaint against appellant, alleging that appellant had not paid him pursuant to the terms of the contract. Appellant answered and filed a counterclaim. Count I alleged that appellee owed appellant $41,000 for failing to return the signs, permit numbers, and other identification. Count II alleged that appellee owed appellant $10,882.39 for liability insurance and fuel and mileage taxes. Count III alleged that appellee owed appellant $820,108.65 due to the use of an incorrect percentage figure used to calculate appellee's share of the revenue derived from appellant's use of appellee's vehicles.

At appellee's request, the trial court subsequently nonsuited his complaint. The trial court also dismissed Count III of appellant's counter-complaint. A bench trial on the remaining claims was held on September 11, 2003. Appellant moved to have the pleadings conform to the evidence regarding Count II, presumably to include the evidence concerning the fees and costs that are the subject of this appeal and that were not originally included in appellant's complaint. The trial judge orally noted that the contract itself stated that the liquidated damages clause was a "severe penalty." The judge further observed that appellant was claiming $35,000 in damages under this provision, and stated that at the rate of $200 per day, he could not see any proportion to the damages. He further noted that although no damages had been shown, it was appellee's responsibility under the contract to return the items bearing appellant's identification.

In addition, the trial judge found that the testimony presented by both parties was not "totally candid." He noted that Lola Goff, appellee's dispatcher, testified that she never served as a dispatcher for Young, but the evidence showed that she dispatched him three times in August 2002. The court found that a preponderance of the evidence showed that Young was not appellee's driver at the time he delivered the last three loads for appellant, because appellee had transferred the vehicle prior to that time.

With regard to appellant's other claim, the trial judge found that appellee was entitled to a setoff for the $4,000 that was debited against him for the check that was returned from Arrow Speed. He further found that it was appellant's decision to require a cashier's check, and to store the vehicles, because it made no sense that Arrow Speed would reject all of the vehicles. The trial judge concluded that appellee never agreed to pay for storage or attorney's fees or to place the liens on the vehicles. He found the total that appellant was claiming was actually $16,979.32, that appellee was entitled to a $4,000 offset and was not liable for the remainder of the costs alleged, and therefore, that appellant could not prevailon its counterclaim.

On November 12, 2003, the trial judge entered an order of dismissal, finding that the provision in the contract concerning the return of signs, permit numbers, and other identifications was an unenforceable penalty provision. He further found that Young was not a driver for appellee at the time the contract expired, which meant that appellee was not obligated to return the items to appellant.

In addition, the judge found that appellee was not indebted to appellant for the cost of Speed Arrow's returned check, for storage fees, for attorney's fees, or for the cost of placing liens upon vehicles. Finally, the judge found that the set-offs for those amounts prevented appellant from obtaining judgment against appellee. Thus, he dismissed Counts I & II of appellant's counterclaim. Appellant thereafter filed a motion for findings of fact and conclusions of law on Count II, asserting that the trial court erroneously interpreted the contract, and that appellant was entitled to recovery for those fees.

The trial judge subsequently entered the requested findings of fact, reiterating its findings from the September 12, 2003 order, and specifically stating that the liquidated damages provision was a penalty provision, that appellee was entitled to a set-off in the amount of $4,000 from appellant because he completed the delivery of the eight vehicles to Arrow Speed, and that appellee did not bear that expense of the storage because the decision to store was made by appellant. The judge further stated there was no evidence that appellee was liable for any litigation or attorney's fees with respect to the storage of the vehicles. Appellant appeals from the September 12, 2003 order and from the order making specific findings of fact.

I. Compensatory Damages

Appellant first argues that the trial court erred in finding that it was not entitled to recover for the $4,000 returned check, attorney's fees, storage fees, damage to the Astro van, lien costs, or late charges for the breakdown in Oklahoma. Appellant claims this sum represents the negative balance owed by appellee once Ms. Nelson had calculated his final settlement on the last truck he owned.

When a case is tried by a circuit court sitting without a jury, our inquiry on appeal is whether the findings are clearly erroneous, or clearly against the preponderance of the evidence. See Buck v. Gillham, 80 Ark. App. 375, 96 S.W.3d 750 (2003). A finding is clearly erroneous when, although there is evidence to support it, we are left with a definite and firm conviction that a mistake was made. Tygart v. Kohler, 82 Ark. App. 380, 109 S.W.3d 147 (2003).

The general laws regarding contract interpretation are well-settled. We are to interpret a contract according to the plain and ordinary meaning of the language used. Phi Kappa Tau Hous. Corp. v. Wengert, 350 Ark. 335, 86 S.W.3d 856 (2002). The intention of the parties is to be gathered from the context of the entire agreement, so that all of the parts of the contract harmonize. Boatmen's Arkansas, Inc. v. Farmer, 66 Ark. App. 240, 989 S.W.2d 577 (1999).

In short, we agree that appellee is not obligated to pay for the $4,000 check returned by Arrow Speed or the costs associated with the second load delivered to Arrow Speed, that appellee is not responsible for returning the tags and permits to appellant, and that appellee is not responsible for the late charges incurred as a result of the breakdown of truck #682 in Oklahoma.

A. Contractual Provisions

Appellant maintains that the following portions of the contract entitle it to recover the fees:

3. Compensation

For the full and proper performance of each trip made by the Contractor under the terms of this Agreement, K & J's agrees to pay the contractor with such exceptions for compensation as agreed to between K & J's and the Contractor and specifically provided for on K & J's pre-numbered trip record issued to the Contractor or Contractor's sub-contracted driver for each trip, as described below.

A. An amount equal to 80% of the revenue derived by K & J's Trucking, Inc. Broker from transportation of freight by said equipment covered by this agreement. Subject to the following adjustments:

. . .

5. Settlements

Settlements shall be made after each trip and after submission by the Contractor by mail or personal delivery of those documents showing full and proper performance of this Agreement as to each trip. The required documents shall include clean original delivery receipts, bills of lading, drivers logs, vehicle inspection reports and other evidence of proper performance or delivery as may be required by the Interstate Commerce Commission or Department of Transportation. K & J's shall make payment of each of these settlements after the completion of the above stipulations, and per Interstate Commerce Commission regulations. Computations of the percentage described above shall be made only at K &J's designated office.

. . .

7. Use, Possession and Control

The Contractor recognizes that K & J's business of providing motor carrier transportation services to the public is subject to regulation by the Federal Government through the Interstate Commerce Commission and the Department of Transportation and by various state and local governments. The Contractor shall have the responsibility to K & J's of satisfying these regulatory requirements, subject at all times to verification by the Carrier, by:

. . .

d. It is further agreed that the Contractor will assume all liabilities incurred by the Contractor, the Contractor's representatives, casual or permanent, in the performance of the Contractor's obligation to K & J's.

. . .

14. Default or Breakdowns

In the event that the Contractor is unable to effect delivery of a shipment because of mechanical failure of equipment, driver illness, default, or abandonment, or for any other reason otherwise subjects K & J's to liabilities to shippers or governmental agencies on account of the acts or omissions of the Contractor en route, the Contractor expressly agrees that K & J's shall have the right to complete performance using the same or other equipment, and hold the Contractor liable for the cost thereof and for any other damages. The Contractor hereby waves any recourse against K & J's for such action and agrees to reimburse K & J's for any costs and expenses arising out of the completion of such trip, and to pay K & J's any damages for which K & J's may be liable to shipper arising out of such breach of Contract by Contractor.

. . .

18. Accidents

To enable K & J's to comply with the requirements of governmental agencies and K & J's insurers, the Contractor and/or Contractor's driver agrees to notify K & J's promptly of any accident involving the Contractor's vehicle.

19. Insurance

E. Cargo Damage or Loss: Contractor shall be liable for the first One Thousand and 00/100 Dollars ($1,000.00) of damage to Cargo due to collision or upset.

. . .

24. Waiver

Waiver of any one of the terms or provisions of the Agreement by K & J's shall not be deemed a waiver of that term or provision at any future time or times.

. . .

B. Returned Check

Appellant first argues that appellee is liable for the $4,000 check upon which Arrow Speed stopped payment, pursuant to Paragraph 7(d) of the parties' contract.1 Appellee counters that Paragraph 7(d) does not ensure that appellant's clients honor their contractual responsibilities to appellant by making him responsible for collecting appellant's debts. He further argues that Paragraph 3 does not obligate him to pay if a client of appellant's does not pay, because Paragraph 3 does not allow appellant to make adjustments for monies that it is unable to collect on its clients' accounts.

The question, then, is whether the $4,000 returned check is a liability that was incurred by appellee pursuant to Paragraph 7(d). We hold that it is not. We agree with thetrial court that the $4,000 check is merely a "hot check" rather than an uncollected account and should not be construed as damages due to Arrow Speed's rejection of the damaged van. According to Cammy Nelson, Arrow Speed did not pay for the van and thus, the $4,000 check represented payment for the eight additional vehicles that were delivered and accepted. Appellant maintained that payment was stopped on the check because of the damage to the van. However, the bank's notation on the check shows that it was returned for insufficient funds. The only evidence that payment on the check was "stopped" due to the damage on the van is that of appellant's witnesses.

In short, the $4,000 check was given in exchange for the eight vehicles that appellee's driver delivered in acceptable condition. The driver thereafter collected the check for those vehicles and forwarded the check to appellant. Thus, appellee fulfilled his obligations under the contract with respect to the eight vans that were delivered. We hold that appellee has no liability where his driver delivered the vehicles that were not rejected and promptly collected payment therefor. Nor do we find any contractual provision that obligates appellee to pay for "hot checks" issued by appellant's clients.

C. Storage Charges, Lien Fees, and Attorney's Fees

Appellant also claims that appellee is liable for costs associated with the second delivery to Arrow Speed. Because Arrow Speed refused to pay by cashier's check, the vehicles on this load, which included the repaired Astro van, were placed into storage. Appellant obtained liens on the vehicles. Arrow Speed rejected the Astro van because it did not approve of the repairs. Arrow Speed eventually sued appellant for nondelivery. There was contradictory testimony from appellee and Clifford Riggins, Jr., K & J's president, regarding whether appellee was contractually liable for non-collection of this account, for the damage to the Astro van, for storage costs, for lien costs, and for attorney's fees.

According to appellant, pursuant to Paragraphs 5 and 7.d., appellee is liable for all liabilities in the performance of his obligations and therefore, is liable for these fees. Appellant further asserts that the cost for storing the vehicles, for filing the liens, and for attorney's fees were all reasonable and necessary for collection of the revenue from which appellee's percentage is paid.

Appellee maintains it was appellant's decision to require payment by cashier's check, to store the vehicles, and to obtain the liens. Further, appellee argues it was not his responsibility to determine whether the load should be delivered, placed in storage, or returned to its place of origin, because the contract for delivery was between appellant and Arrow Speed.

Appellee would be liable for the fees related to the nondelivery of the second load if it was his fault that the second load was not delivered, but that is not the case. The testimony did not establish that Arrow Speed refused the second load because it included the repaired van. Rather, Arrow Speed rejected only the repaired van and refused to pay by cashier's check. Riggins testified that the buyer was willing to accept the load except for the van.

Further, the requirement to pay by cashier's check was clearly appellant's requirement. Although Riggins testified that he and appellee mutually decided to store the vehicles, the trial court made a specific finding of fact that the decision to store the load was appellant's. Riggins also testified that appellee agreed to pay any legal costs that arose out of the decision to store the load (in other words, to not deliver the load), but the trial court apparently did not believe this testimony. Further, it is also clear that the decision to obtain liens on the vehicles was appellant's.

Thus, while it was appellee's responsibility to obtain payment upon delivery, he cannot be held liable under the contract for nondelivery and related expenses simply because the buyer refused to pay in the form that appellant required, where he was otherwise not at fault. Therefore, we hold that the trial court did not err in holding that appellee was not liablefor the costs incurred with the nondelivery of the second load to Speed Arrow.

D. Damage to the Van

Appellant also argues that appellee is liable for the damage to the van, pursuant to Paragraphs 5, 7.d., and 19.E. It asserts that appellee's liability for the damage to the van is not limited to $1,000 because appellee failed to report the damage to the van, and then attempted to repair the van and deliver it. Appellee maintains the issue is moot because he repaired the van and it has since been sold. He further maintains that none of the provisions cited by appellant subject him to greater than $1,000 in damages for damage to the cargo.

We do not agree that the issue is moot simply because the van has been sold. Rather, the issue is whether appellant sustained an ascertainable loss that obligates appellee pursuant to the contract.

Paragraph 19.E seems to limit appellee's liability damages to the first $1,000 of damages. Appellant maintains that appellee is liable for more than $1,000 because he did not file the claim on his insurance and because he repaired the van. We have found no contractual provision to support appellant's claim. However, even if appellant's claim is valid, we are unable to ascertain the precise amount of damages for which appellant claims entitlement due to the fact that the van was damaged. The record is clear that appellee paid to have the van repaired and that appellant did not reimburse appellee for that cost. The van was subsequently sold for $2,000, according to Nelson, and appellee never received payment for that amount. Appellant paid $1,250 to have the van released so that appellee could have the van repaired; this amount was later charged, then debited to appellee's account.

Thus, there is no evidence indicating that appellant suffered a loss as a result of this transaction. There was no testimony indicating the amount that appellant would have received had Arrow Speed accepted the van on the first or second delivery. The only evidence demonstrates that appellee spent $2,362.27 to repair the van, when his liability would haveotherwise been no greater than $1,000. Appellant spent $1,250 to have the van released, but received $2,000 from the sale of the van. On these facts, we cannot ascertain where appellant has suffered any loss. Accordingly, we hold that appellee is not liable for damage to the van.

E. Late Charges

Appellant's final claim for recovery is for compensatory damages in late fees incurred as the result of a load abandoned in Oklahoma, which resulted in a late charge in the amount of $2,250. Appellant asserts that appellee is liable for these charges pursuant to paragraph 14. The trial court found that appellee was not liable for the late charges because Young was not appellee's driver at the time that the breakdown occurred.

We cannot say the trial court's finding was clearly erroneous. On August 8, 2001, appellee transferred ownership of truck #682 to Sam Young. The evidence did not show when the breakdown of this load occurred, but the record of the dispatches for Young for August are dated August 10, August 17, and August 23, all of which occurred after appellee transferred ownership of the truck to Young. Further, it is clear that appellant knew that the truck had been turned over to Young, because it sent certified letters to appellee and Young, dated November 6, 2001, indicating that the permits and license plates to truck #682 had not been returned. The letter indicated that Charles Henslin, who handles permits for appellant, had spoken with Young during the first part of September and that Young indicated the plates and permits "had just been sent." On these facts, we affirm the trial court's finding that Young was driving for appellant rather than appellee when the breakdown occurred and therefore, that appellee is not liable for the late fees incurred as a result of the breakdown.

II. Penalty Provision

Appellant's second claim is that the trial court erred in not enforcing the liquidated damages clause. The clause, found in part Paragraph 12 of the contract provides:

12. Vehicle Identification

a. K & J's will furnish signs, State permit numbers, and other identification as may be required of K & J's by public authority. The Contractor agrees that such identification shall be immediately removed and returned upon termination of this agreement. Contractor shall have five (5) working days to return said permit and plate or pay a Two Hundred and 00/100 Dollar ($200.00) per day penalty to K & J's.

b. K & J's suggests [C]ontractor should have [C]ontractor's name[,] address[,] and phone number on equipment.

The standard for determining whether a liquidated damages clause may be enforced is as follows:

A contract will be construed as properly stipulating for liquidated damages where, from a prospective view of the contract, it appears (1) that the parties contemplated that damages would flow from a failure to perform the contract; (2) that such damages would be indeterminate or difficult to ascertain; and (3) that the sum bears some reasonable proportion to the damages which the parties contemplated might flow from a failure to perform the contract. Where the sum agreed upon bears no reasonable relationship to the damages which likely would result following a breach, the amount agreed upon will be held to be a penalty. If a stipulation is for a penalty, rather than liquidated damages, it cannot be enforced in the courts of the state of Arkansas. In determining whether a provision in a contract is for a penalty or for liquidated damages, generally, the intention of the parties will control. Whether the parties intended a provision of a contract to be a penalty or a stipulation for liquidated damages is a question of fact. The mere fact that the words "liquidated damages" are used is not controlling. Nor is use of the word "penal" controlling, but it must be considered in determining the intention of the parties to the contract. Additionally, the court must look at the language of the contract, the subject of the contract and its surroundings, the ease or difficulty of measuring the breach in damages, and the sum stipulated.

Johnson v. Jones, 33 Ark. App. 149, 152, 807 S.W.2d 39, 41-42 (1991) (internal citations omitted); see also McNamara v. Bohn, 69 Ark. App. 337, 13 S.W.3d 185 (2000).

The damages in this case were assessed by appellant from September 1, 2001, the day after appellee terminated his contract, until March 31, 2002, the day the permits expired, minus a five-day grace period, as provided under Paragraph 12. Appellant originally alleged that appellee owed $41,000 in damages under the liquidated damages clause, but reduced that claim to $35,000 ($200 x 175 days).

Appellant seems to argue that the trial court erroneously found that the liquidated damages provision was an unenforceable penalty clause simply because the contract indicated that it was a penalty. Appellant further argues that the trial court did not understand the enormity of the potential liability it could incur due to the failure to return signs, permits, and other items of identification, and that once the duty to return these items is ignored, it may forever lose any opportunity to recover the items.

Riggins testified that the clause was included to account for damages from drivers charging tires or gas on appellant's account or for transportation taxes that might be imposed based on the permits and signs on the trucks. He stated that on one occasion, a driver was allowed to charge $350 in merchandise on one of appellant's accounts simply because appellant's signs were on the truck. Riggins also testified that in the past, appellant had incurred legal fees to prove that a truck that was subject to suit no longer belonged to it.

The determination of whether a provision in a contract reflects a penalty or a stipulation for liquidated damages is a question of fact. See Johnson v. Jones, supra. We believe the trial court did not err in determining that the clause at issue was an unenforceable penalty clause. First, the trial court did not find that the clause was a penalty simply because that word was used in the contract. Instead, the trial court first properly noted that the contract stated the $200 per day charge was a penalty, thus providing an indication of the parties' intent. However, the court also found that the damages that Riggins described would not be difficult to ascertain and that the sum of $200 per day bore no reasonable relationship to the damages the parties contemplated might flow from the breach.

Second, the trial court was correct in determining that the type of damages contemplated would not be difficult to discern. Transportation taxes incurred are vehicle specific and would be a matter of public record. Unauthorized charges on appellant's corporate accounts would likewise be easily discernable, as would any legal fees incurred to establish that a vehicle did not belong to appellant.

Third, the trial court did not err in finding that the sum of $200 per day bore no reasonable relationship to the damages the parties contemplated might flow from the breach. Although the trial court noted that damages over a 300-day period would result in an excessive $60,000 penalty, the court also noted that appellant was suing for $35,000. Thus, it is apparent that the court made its finding based on what it deemed an excessive rate of $200 per day and not the hypothetical sum of $60,000.

Finally, while appellant was not required to prove that it suffered specific damages as a result of appellee's failure to return the signs and permit, it was appellant's burden to provide evidence upon which the court could determine that the sum of $200 was reasonable. The only testimony provided by appellant in this respect was Riggins's testimony that on a single occasion a driver was allowed to charge $350 on one of appellant's credit accounts. Given that the only testimony before the court was the testimony concerning the one-time charge of $350, the trial court's finding that the sum of $200 per day bore no reasonable relationship to the damages that might be incurred was not clearly erroneous.

Affirmed.

Crabtree and Baker, JJ., agree.

1 Appellant also asserts that appellee is liable under Paragraph 3.A, on the ground that appellee is not entitled to a $4,000 offset because "uncollected accounts" are not revenue under the contract. While we do not fully understand this argument, we agree that appellee is not entitled to an offset of $4,000, because he has already been credited with this amount on his account and because he has not requested affirmative relief. However, we still affirm because we believe that appellant cannot recover on any of its claims and thus, has not shown that it is entitled to any relief from appellee.