Vineyard Brands v. Oak Knoll Cellar

NOTICE:  This opinion is subject to motions for reargument under V.R.A.P. 40
as well as formal revision before publication in the Vermont Reports.
Readers are requested to notify the Reporter of Decisions, Vermont Supreme
Court, 111 State Street, Montpelier, Vermont 05602 of any errors in order
that corrections may be made before this opinion goes to press.


                                No. 87-325


Vineyard Brands, Inc.                        Supreme Court

     v.                                      On Appeal From
                                             Windsor Superior Court
Oak Knoll Cellar d/b/a
Rutherford Hill Winery                       June Term, 1988


Silvio T. Valente, J.

John C. Holme, Jr. of Dakin & Holme, Chester, and John R. Shuman, Jr. of
  Ware & Freidenrich, Palo Alto, California, for plaintiff-appellant

James F. Carroll and Timothy L. Taylor of Kelley, Meub, Powers & English,
  Ltd., Middlebury, for defendant-appellee


PRESENT:  Allen, C.J., Peck, Gibson, and Dooley, JJ., and Springer, D.J.
      (Ret.), Specially Assigned


     ALLEN, C.J.  This case arose after defendant Rutherford Hill Winery
terminated its marketing contract with plaintiff Vineyard Brands, Inc.
Plaintiff brought suit, claiming breach of contract and, in the alternative,
that the contract had been terminated without reasonable notice.  Defendant
counterclaimed, seeking, among other things, amounts owed by plaintiff on
account.  The case was tried before a jury, which brought in a verdict in
favor of plaintiff for $98,792 and, on the counterclaim, in favor of defend-
ant for $132,716.03 plus interest in the amount of $54,481.22.  Plaintiff
appeals the ensuing judgment, and defendant cross-appeals.  We affirm.
     Rutherford Hill is a California winemaker and distributor.  In 1977,
the parties reached a contractual agreement, renewable annually, under which
Vineyard Brands marketed and distributed Rutherford Hill wines in approxi-
mately sixteen eastern and central states.  In essence, plaintiff solicited
orders for the wine, while defendant arranged for direct shipments, accom-
panied by bills of lading, to the purchasers.  Purchasers paid plaintiff for
the wine and plaintiff had forty-five days from the date of shipment to pay
defendant these amounts less a 12% commission.  Defendant sent invoices to
plaintiff that included a "service charge" provision, that established an
18% annual interest rate on past-due amounts.
     In 1982, defendant sent plaintiff a letter proposing a modification of
the parties' agreement.  Under the proposal, certain performance standards
would be established and, if plaintiff met those standards, defendant would
continue the existing marketing arrangement through 1990.  A key portion of
the testimony at trial focused on that offer and the question of whether
plaintiff had ever effectively accepted the offer.
     On July 1, 1985, defendant terminated the contract.  Plaintiff then
filed suit in Windsor Superior Court, seeking $942,588.97 in lost profits
over the period starting with the date of termination and ending on December
31, 1990, the date that the contract would expire if the claimed modifica-
tion of the contract were effective.  In the alternative, plaintiff re-
quested $78,204 in damages for defendant's alleged failure to provide
adequate notice of termination.  Defendant counterclaimed for amounts owed
on wine already delivered, totaling $132,716.56, and for an unspecified
amount of interest.  Defendant also sought damages on grounds of conversion,
breach of fiduciary duty, and breach of contract. (FN1) The parties agreed that,
because the contract had been entered into in California, California law
should apply.
     At trial, defendant submitted into evidence its computation of interest
on the amounts owed by plaintiff based on the 18% annual interest rate
provided for in the invoices.  At the end of the fourth day of the five-day
trial, plaintiff filed a supplemental trial brief, arguing that the 18%
annual interest rate was usurious under California law.  The court ruled
that it would not instruct the jury on the usury issue.
     Defendant asked the court to charge the jury on the law of agency,
fiduciary duty, and breach of fiduciary duty.  Defendant also requested a
jury instruction to the effect that, under California law, an offer speci-
fying a particular manner of acceptance must be accepted in that manner.
The court refused both of these requests.
                                    I.
     On appeal, plaintiff does not contest the trial court's judgment with
respect to the bulk of the damages awarded, but instead argues that defend-
ant's interest rate is usurious and that the court erred in refusing to
charge the jury on the law of usury.  Defendant argues in response that
plaintiff waived the usury issue by raising it too late in the proceedings.
     Usury is an affirmative defense.  See Dyer v. Lincoln, 11 Vt. 300, 301
(1839).  "In pleading to a preceding pleading, a party shall affirmatively
set forth and establish . . . any . . . matter constituting an avoidance or
affirmative defense."  V.R.C.P. 8(c).  Generally, an affirmative defense
cannot be maintained either at trial or on appeal unless it was specifically
raised in the pleadings.  Brouha v. Postman, 145 Vt. 449, 452, 491 A.2d 1038, 1040 (1985).  Here, defendant observes that plaintiff raised the
usury claim for the first time, not in the pleadings, but in a supplemental
trial brief filed at the conclusion of the fourth day of a five-day trial,
after each party had presented its case in chief. (FN2)
     Under the circumstances of this case, however, we conclude that it
would be manifestly unfair to hold that plaintiff's claim was waived.  In
its own pleadings, defendant failed to request the 18% service charge on
amounts owed by plaintiff; it was this service charge that would subse-
quently provide the basis for plaintiff's usury claim.  The record reveals
that defendant requested only a principal amount of $134,274.56 and "a sum
as yet unspecified for interest and consequential damages."  "A complaint is
sufficient if it gives fair notice of the claim and the grounds upon which
it rests."  Mintz v. Matalon, 148 Vt. 442, 444, 535 A.2d 783, 785 (1987).
Defendant's request for "unspecified" interest in its counterclaim did not
meet this standard.  A generalized request for interest cannot be equated
with a claim for recovery of a specific rate of interest.  Defendant's
generalized request is all the more inadequate because it calls for a
recovery of interest, rather than the "time-price differential" indicated on
its invoices to plaintiff.  It was on the fourth day of trial that defendant
submitted into evidence its computation of interest based on an 18% rate.
Plaintiff's trial brief on the usury issue promptly followed.  At an in-
chambers conference on the following day, the final day of trial, the court
took up the usury issue with counsel.  At no time did the court or defend-
ant's counsel object to the usury issue on the ground that it was not
raised in the pleadings.  The court's only concern was plaintiff's comp-
liance with V.R.C.P. 44.1(a), which requires a party to give notice of
foreign law it intends to raise.  Counsel for defendant conceded that it had
notice -- indeed it stipulated -- that California law would apply.
     On these facts, we hold that plaintiff's failure to plead usury does
not constitute a waiver of the defense.  See Garrett v. City of Hamtramck,
503 F.2d 1236, 1245 (6th Cir. 1974) (failure to affirmatively plead defense
of laches in regard to certain persons' claims held not a waiver of the
defense where complaint did not specifically seek relief for such persons).
                                    II.
     The invoices sent to plaintiff by defendant provided that payment was
due within forty-five days from the date of shipment and included the
following statement:  "A service charge of 1.5% per month will be added as a
time-price differential on amounts past due."  Plaintiff claims that
enforcement of that provision would violate California's law on usury.
Defendant concedes that California law governs the dispute, but maintains
that the service charge is not usurious.
     Under Article XV, { 1 of the California Constitution, a "rate of
interest [f]or any loan or forbearance of any money" may not exceed 5% over
the prevailing federal discount rate. (FN3) The parties stipulated that the
applicable federal discount rate in this case is 8% per annum.  As the 18%
rate specified on the invoices exceeds the 13% rate thus permitted by the
California Constitution, the remaining question is whether defendant's
imposition of an 18% service charge on amounts due after forty-five days
from shipment constitutes, in California, a "rate of interest [f]or any loan
or forbearance of any money."
     Any doubt as to the resolution of this question was put to rest by the
California Supreme Court's recent decision in Southwest Concrete Products v.
Gosh Construction Corp., 51 Cal. 3d 701, 798 P.2d 1247, 274 Cal. Rptr. 404
(1990). (FN4) The court, construing a commercial sales contract provision which
charged late payment interest of 18% per year if payments were not made
within a specified period, held that it was not subject to California's
usury law.  Id. at ---, 798 P.2d  at 1252, 274 Cal. Rptr.  at 409.  The court
based its conclusion on two grounds.  First, the interest provision fell
within the exemption for a "credit" sale, as opposed to a "cash" sale,
because the buyer and seller did not exchange the goods and payment at the
same time.  The buyer had a certain number of days within which to make
payments, and only after failure to do so would interest accrue.  Id. at
___, 798 P.2d  at 1251-52, 274 Cal. Rptr.  at 408-09.  Second, the interest
provision fell within the rule "that a transaction that was not usurious at
its inception cannot become usurious by virtue of the debtor's voluntary
default."  Id. at ---, 798 P.2d  at 1252, 274 Cal. Rptr.  at 409. Interest
accrued only upon the buyer's failure to make timely payment.
     The analysis in Southwest Concrete Products compels the conclusion that
the "service charge" provision in this case was also exempt from
California's usury law.  The provision involved a "credit" as opposed to
"cash" sale because payment was not due immediately, but rather forty-five
days from the date of shipment.  Further, the provision falls within the
rule that a debtor's voluntary default cannot transform a nonusurious
transaction into a usurious one.  It was plaintiff's failure to make timely
payment that caused the interest to accrue.  Accordingly, the judgment below
with respect to interest on defendant's recovery is affirmed.
                                   III.
     In its cross-appeal, defendant begins by challenging the trial court's
refusal to instruct the jury on California law regarding offer and accept-
ance.  In that jurisdiction, "[i]f a proposal prescribes any conditions
concerning the communication of its acceptance, the proposer is not bound
unless they are conformed to."  Cal. Civ. Code { 1582 (West 1982).  Defend-
ant maintains that the omission of an instruction on this point was erron-
eous and prejudicial.
     Essential to plaintiff's breach of contract claim was the assertion
that the parties' original marketing contract -- which was a renewable,
year-to-year contract --  had been modified to extend through 1990.  Absent
this claimed modification, plaintiff would be forced to rely on its alter-
native theory of recovery:  defendant's alleged failure to give reasonable
notice of the termination.
     In 1982, defendant sent plaintiff a letter suggesting that if plaintiff
agreed to meet certain prescribed performance standards, then defendant
would continue the existing marketing arrangement through 1990.  The letter
concluded with the following language:  "What do you think of that proposal?
I would like a written reply so that we each know we are in accord in what
we have agreed."  Plaintiff's written response stated only that:  "Your
offer seems interesting and Charlie and I are discussing ways of meeting
your goals.  He will talk to you about it when he sees you in May."
     At trial, defendant attempted to establish that plaintiff had never
accepted the offer to modify the contract because the requested "written
reply" was never made.  Plaintiff, on the other hand, asserted that it had
effectively accepted the offer by continuing its marketing representation of
Rutherford Hill.
     The jury brought in a verdict for plaintiff, awarding damages in the
amount of $98,792.  Because it was a general verdict, it is difficult to
ascertain the theory of recovery on which plaintiff prevailed.  Only if
plaintiff were awarded damages on the breach of contract claim can defendant
claim prejudice because of the allegedly erroneous jury instructions.  If,
on the other hand, plaintiff's recovery was based only on defendant's
claimed failure to give reasonable notice of termination, then any error
relating to the contract modification instructions would be irrelevant.
     Defendant maintains that the magnitude of the award alone indicates
that it was based, at least in part, on breach of contract.  Defendant
observes that plaintiff initially requested damages in the amount of $78,204
under the lack of reasonable notice theory and that the evidence of damages
actually presented at trial would limit recovery on this theory to $73,074.
Hence, defendant contends, a portion of the $98,792 award must have been
attributable to the breach of contract theory.  Because it is arguable that
the requested jury instruction on the California offer and acceptance sta-
tute could have negated the claim that a long-term contract existed,
defendant urges that the omission of the instruction was prejudicial.
     "General verdicts should be construed to give them effect, if that can
reasonably be done."  Larmay v. VanEtten, 129 Vt. 368, 374, 278 A.2d 736,
740 (1971).  Furthermore, if a jury verdict appears to be justified under
"'any reasonable view of the evidence, it must stand.'"  Claude G. Dern
Electric, Inc. v. Bernstein, 144 Vt. 423, 426, 479 A.2d 136, 138 (1984)
(quoting Crawford v. State Highway Board, 130 Vt. 18, 25, 285 A.2d 760, 764
(1971)).
     Here, although the jury's award of $98,792 exceeded the $73,074 re-
quested by plaintiff as damages on the reasonable notice claim, it does not
necessarily follow that the award was based upon plaintiff's contract mod-
ification argument.  The evidence presented at trial established that two
months remained on the existing term of the parties' year-to-year contract
when defendant terminated the relationship.  Based on this and other evi-
dence, the jury could have awarded lost profit damages to plaintiff for
these two months.  If the jury then concluded that plaintiff would have been
due six-months' notice of termination beginning at the end of the contract
year, and if lost profits damages for this period of time (the $73,074) were
added to those calculated for the two months remaining on the contract, then
the total would approximate the damages figure actually awarded.
     Because the verdict is justifiable under this view of the evidence,
defendant has failed to establish that it was prejudiced by the trial
court's refusal to instruct the jury on offer and acceptance under
California law.  If defendant had desired assurances regarding the theory of
recovery, interrogatories could have been requested.  V.R.C.P. 48(b).
Accordingly, defendant's assignment of error on this ground need not be
considered further.
                                    IV.
     Defendant also argues that the trial court erred in refusing to in-
struct the jury on the law of fiduciary duty. (FN5) We disagree.
     Defendant's third count in the counterclaim, entitled "Breach of
Fiduciary Duty," stated the following:  "In converting Rutherford Hill's
monies to its own use, Vineyard Brands has breached its obligation of good
faith, loyalty and honesty required by its fiduciary obligation to
Rutherford Hill."  Defendant requested damages of $134,274.56, the amount
plaintiff allegedly owed defendant on account, plus interest, as well as
consequential and punitive damages.
     At a bench conference on the fourth day of trial, counsel for plaintiff
made an oral motion for a directed verdict on defendant's claim of breach of
fiduciary duty and request for punitive damages, arguing that there had been
"a total failure of proof that there was ever any fiduciary duty owed by
Vineyard Brands to Rutherford Hill."  The court stated that "we're going to
grant your motion for a directed verdict; that is, . . . the court does not
believe that the evidence in this case warrants a punitive damages claim."
Although the directed verdict ruling was not appealed, the parties dispute
the scope of the ruling.  Defendant argues that the court addressed only the
request for punitive damages.  Plaintiff contends that the ruling disposed
of the entire breach of fiduciary duty claim.
     During rebuttal testimony in the waning minutes of the trial, a witness
for defendant was asked how much it cost Rutherford Hill to produce a case
of wine.  Plaintiff's counsel objected on the ground that the question was
beyond the scope of rebuttal; the court agreed but allowed the testimony in
an exercise of its discretion. (FN6) Defendant's witness testified regarding
production costs and went on to estimate how much Rutherford Hill lost on
each case of unsold wine.  At the charge conference, defendant stated
explicitly for the first time that it sought damages for lost profits under
the breach of fiduciary duty theory.  Without stating its reasons, the court
refused to instruct the jury on the law of fiduciary duty.  We find no
error in this respect.
     Even assuming that the trial court's directed verdict ruling left some
portion of defendant's fiduciary duty count intact, the only type of damages
arguably recoverable -- once the punitive damages claim was out of the case
-- would be for lost profits and related costs.  Lost profits, however, are
special damages.  See Anchorage Asphalt Paving Co. v. Lewis, 629 P.2d 65, 70
(Alaska 1981); Safeco Title Insurance Co. v. Reynolds, 452 So. 2d 45, 49
(Fla. Dist. Ct. App. 1984); and Stanford v. Owens, 265 S.E.2d 617, 624 (N.C.
App. 1980).  Under V.R.C.P. 9(g), items of special damage "shall be speci-
fically stated" in the pleading.  Because defendant's counterclaim included
no specific statement concerning lost profits or other related costs, no
such damages were recoverable.
     The purpose of the parallel federal rule, Fed. R. Civ. P. 9(g), on
which the Vermont rule is based, is to:
          protect defendant against being surprised at trial by
          the extent and character of plaintiff's claim.  A
          specific statement of special damages in the complaint
          will put defendant on notice and permit him to employ
          the discovery procedures to maximum advantage in
          preparing his defense to the claim for special damages.

5 C. Wright & A. Miller, Federal Practice and Procedure { 1310, at 444
(1969) [hereinafter Wright & Miller].  Defendant argues that plaintiff was
put on notice of the full extent of the breach of fiduciary duty claim and
that the counterclaim constituted adequate notice pleading under V.R.C.P.
8(a).  We observe that the pleading made no reference whatsoever to lost
profits or related costs.  In fact, the "Breach of Fiduciary Duty" count of
the counterclaim was couched specifically in the language of conversion,
alleging that the fiduciary duty had been breached by plaintiff's conversion
of defendant's monies, i.e., the $132,716.03 owed on account.  Rule 9(g),
moreover, stands as an exception to the permissive pleading policies of Rule
8.  Id. { 1311, at 447..
     Finally, defendant contends that the trial court should have given the
requested jury charge on the basis of V.R.C.P. 15(b), which provides that
"[w]hen issues not raised by the pleadings are tried by express or implied
consent of the parties, they shall be treated in all respects as if they had
been raised in the pleadings."  Defendant points out that testimony regard-
ing lost profits was admitted at trial and that plaintiff's objection to the
testimony was not made on the ground of inadequate pleadings.  Citing
Lemnah v. American Breeders Service, Inc., 144 Vt. 568, 482 A.2d 700 (1984),
defendant argues that the issue was tried by implied consent.
     In Lemnah, this Court considered a breach of contract case in which the
defendant relied upon a contractual provision allowing termination without
notice if the plaintiff did not make timely payments.  The plaintiff argued
that the provision had been waived through the defendant's consistent
acceptance of late payments.  The defendant countered with the proposition
that waiver must be affirmatively pleaded.  We noted that the plaintiff had
introduced evidence of waiver at trial without an objection from the
defendant as to its relevance and that the defendant had not raised the
issue of the adequacy of the pleadings until after the plaintiff had rested
his case.  We invoked Rule 15(b) and held that the defendant had relin-
quished any challenge based on inadequacy of the pleadings.  Id. at 577-78,
482 A.2d  at 706.
     Closer examination of Lemnah, however, reveals that our holding was
largely based on the notice pleading concepts of Rule 8(a), which we have
already noted are inapplicable here.  The opinion explicitly relies upon the
rule and refers repeatedly to the fact that the defendant had notice of the
plaintiff's theory of the case.  Under the particular circumstances present
in Lemnah, we implied that the defendant could not have known plaintiff's
theory of the case without also knowing that waiver would be argued.  Id. at
577-78, 482 A.2d  at 705-06.
     Here, in contrast, at the point that the objectionable testimony was
offered, plaintiff had received no notice whatsoever that defendant claimed
lost profits or related damages.  When these alleged damages were finally
brought to the court's attention at the subsequent charge conference,
plaintiff's counsel said, "That's the first time I've heard any of that,"
and the court immediately refused to instruct the jury regarding such
damages.  In fact, it appears that plaintiff's counsel reasonably believed
that the breach of fiduciary duty claim itself was no longer at issue
because of the court's earlier directed verdict ruling.
     With respect to Fed. R. Civ. P. 15(b), the Ninth Circuit has stated
that:
          While it is true that a party's failure to object to
          evidence regarding an unpleaded issue may be evidence of
          implied consent to a trial of the issue, it must appear
          that the party understood the evidence was introduced to
          prove the unpleaded issue.

Campbell v. Board of Trustees of the Leland Stanford Junior University, 817 F.2d 499, 506 (9th Cir. 1987); see also Niedland v. United States, 338 F.2d 254, 258 (3d Cir. 1964) (non-objecting party must be fairly apprised that
the evidence went to the unpleaded issue); 5 Wright & Miller { 1493, at 462
("Implied consent . . . seems to depend on whether the parties recognized
that an issue not presented by the pleadings entered the case at trial.").
     Consistent with our adherence to principles of fair notice, see Lemnah,
144 Vt. at 577, 482 A.2d  at 705, we adopt the rule stated in Campbell.  In
the instant case, it does not appear that plaintiff understood that the
testimony at issue was introduced to prove a claim for lost profits.  We
hold that the question was not tried by consent.  Therefore, the provisions
of Rule 15(b) cannot cure defendant's failure to plead special damages and
recovery on those items is barred. (FN7) See 5 Wright & Miller { 1312, at 451.
It follows that, because defendant could recover neither lost profits nor
punitive damages under its breach of fiduciary duty theory, the trial court
did not err in refusing to instruct the jury on that theory.
     Affirmed.



                                        For the Court:



                                        Chief Justice





FN1.    Defendant also filed a third party complaint against Robert Haas,
the president of Vineyard Brands, Inc., alleging conversion and breach of
fiduciary duty.  The trial court granted a pretrial motion, filed by
plaintiff and Haas, for partial summary judgment on the conversion counts
brought against them.  At the charge conference, the court dismissed the
remaining claim against Haas.

FN2.    On the third day of trial, the parties filed with the court the
following stipulation:  "The parties hereto, by and through their counsel,
hereby stipulate that the federal discount rate that applies in this case is
8%."  The transcript itself does not clarify the context in which this
document was filed.  Nevertheless, the only possible relevance of the
federal discount rate in this case is to the usury claim.  California's
state constitution provides that interest rates may not exceed the
prevailing federal discount rate by more than five percent.  Cal. Const.
art. XV, { 1.  The record, of course, contains no objection to the injection
of the issue at this point in the trial, since it was introduced by
stipulation.  The stipulation suggests that the usury issue may have been
tried by consent; if so, any waiver under Rule 8(c) would be negated.  See
V.R.C.P. 15(b).  Because we decide that Rule 8(c) does not control in this
case for other reasons, however, we do not reach the question of consent.

FN3.    Certain types of institutional lenders are exempt from the
restrictions.  The exemptions do not apply here.

FN4.    The parties stipulated that this Court's decision should await the
decision in Southwest Concrete Products, which was issued on November 1,
1990.

FN5.    Defendant also requests a remand for the purpose of pursuing its
breach of fiduciary duty claim against third-party defendant Haas.  This
claim, however, was dismissed by the trial court, and defendant does not
appeal that ruling.

FN6.    Plaintiff urges that the trial court abused its discretion in this
regard, but we find it unnecessary to resolve this issue.

FN7.    Defendant also argues that, if plaintiff had made a proper objection
to the evidence of lost profits, then defendant would have had an
opportunity to amend its pleadings.  We observe that a party to litigation
may seek leave to make such an amendment at any time, without limitations
based on the actions or inactions of the opposing party.  V.R.C.P. 15(b).