Metalcraft, Inc. v. Pratt

ADKINS, Judge. The principal question in this case involves the proper measure of damages for breach of warranty of title to personal property. There are subsidiary issues involving the manner in which the trial judge computed and applied those damages. Yet another issue deals with a judgment for attorney’s fees purportedly entered pursuant to the provisions of a confessed judgment note.

The damages issues were raised by way of defense to an action on the note. To put all the issues in context, we summarize the facts and the proceedings below. In 1977 appellant and cross-appellee Metalcraft, Inc. purchased the marine hardware casting business of appellee and cross-appellant Benjamin H. Pratt. The purchase price was $100,000, part of which was paid in cash, with the balance of $70,500 to be paid in installments pursuant to Metalcraft’s promissory note in that principal amount. 1 Both contract of sale and promissory note contained provisions for confession of judgment upon Metalcraft’s default, and for payment of “a reasonable attorney’s fee ...” in that event.

In the contract of sale, Pratt warranted that he was “the absolute owner of, and [had] good and merchantable title, free and clear of all encumbrances, to all the assets being sold hereby and [had] all the right, title and authority to sell and transfer the same____” Among the assets covered by that warranty were certain patterns used to produce marine hardware and other castings of various kinds. As part of the transaction, Metalcraft also purchased a facility in Shrewsbury Township, Pennsylvania, known as the Hungerford Foundry. As to that, the contract warranted “that the business presently being operated by the Seller ²⁸⁶ [Pratt] is not in violation of any applicable zoning, building, health or other laws or ordinances____” After settlement on the contract, Metalcraft began to operate Pratt’s former business, but problems soon arose. At some point — perhaps in the Fall of 1977, perhaps in the Spring of 1978 — Joseph H. Conboy and Associates claimed ownership of some of the patterns Metalcraft had bought from Pratt, and demanded their return.

Metalcraft returned them and notified Pratt, who reimbursed Metalcraft for the value of the patterns and the cost of their return. Sometime thereafter — apparently in May 1978 — the William H. Whiting Company similarly claimed some of the patterns. Metalcraft returned them to Whiting, although it is not clear precisely when this was done. And perhaps a year after that, Johnson Truck Body asserted ownership and demanded return of still more of the patterns.

Metal-craft returned them to Johnson, apparently in May 1982. In June 1978, meanwhile, the Shrewsbury Pennsylvania authorities brought charges of zoning violations with respect to the Hungerford Foundry. In April 1979 Metal-craft, through counsel, wrote Pratt about this situation. It received no response (Pratt, it seems, was seriously ill, having suffered two strokes) and resolved the zoning problem for $500 plus $377.85 in attorney’s fees and expenses.

During all this time, and until March 1983, Metalcraft continued to pay monthly installments of principal and interest on the note, although not always promptly. But on March 24, 1983, counsel for Metalcraft wrote Pratt, enclosing a check for $384.94 which, it asserted, was the final payment due under the note. To reach this conclusion Metalcraft computed the value of the reclaimed patterns, added the zoning violation costs, and produced total credits of $23,711.85 that it credited against the original principal balance of the note. It then recomputed the interest due, took account of the monthly payments it had made, and produced a balance of $384.94 as the final payment. ²⁸⁷ Pratt saw the matter otherwise and on Jnly 26, 1983, obtained a confessed judgment in the amount of $38,048.56 plus attorney’s fees of 15 percent.

On Metalcraft’s timely motion that judgment was vacated in September 1983. In November 1984, without further pleading, the case went to trial. Because of the breaches of the warranties of title and zoning, the trial judge found Metalcraft entitled to a credit of $10,727 against the indebtedness of $38,048.56. He ordered the balance of $27,321.56 to be paid in a lump sum of $7,205.04 “and the remaining balance of $20,116.52 is to be paid in monthly installments of $855.37, [the installments called for by the note] effective December 1, 1984.” He also entered judgment for attorney’s fees of 15 percent, in the amount of $4,098.23.

Metalcraft appealed. Pratt cross-appealed. In its appeal, Metalcraft argues that the trial court 1. applied an incorrect measure of damages to its claim for breach of warranty of title to the patterns; 2. incorrectly computed the credits to which Metalcraft was entitled; 3. improperly applied the credits against the balance due on the note; and 4. erred in entering judgment for attorney’s fees of 15 percent. In his cross-appeal Pratt contends that 1. the trial judge erred in allowing any credit against the note; and 2.

Metalcraft failed to plead its “counter-claim” property- We shall deal first with the cross-appeal. PRATT’S CROSS-APPEAL Allowance of Credits Against the Note It appears to be Pratt’s position that Metalcraft should be allowed no credits against the note because the note and the contract are separate documents. He says that “[t]he Note ²⁸⁸ is a legally binding negotiable contract, and [Metalcraft] should be ordered to give full faith and credit to it, paying the Note in full and meeting its obligations.” In other words argues Pratt, defenses or claims that might be available to Metalcraft under the contract (e.g. breach of warranty of title) are not available to it with respect to the note. Were Pratt a holder of the note in due course, this argument might have some merit, for a holder in due course takes the instrument free from certain defenses.

Comm. Law Art. (U.C.C.) § 3-305. Even though the payee of a note may be, under some circumstances, a holder in due course, § 3-302(2), Pratt did not achieve that status as to the breach of warranty claims because as to those he did not take the instrument without notice of any defense against it. Section 3-302(l)(c).

He had notice, for example, of the claims against at least the Whiting patterns long before the sale to Metalcraft. And in any event, even a holder in due course does not take the instrument free from defenses of a party to it with whom he has dealt. Section 3-305(2). What we have here is an integrated agreement consisting of a contract of sale and a note.

As the trial judge accurately observed, the contract expressly referred to and made provision for the note. The parties to this proceeding are the original parties to both contract and note. Under these circumstances, and to the extent established, a defense to or claim arising out of the contract is a defense against the note, whether we denominate it breach of warranty or partial failure of consideration. U.C.C. § 3-306, cf. Weast v. Arnold, 299 Md. 540 , 474 A.2d 904 (1984).

Thus, Pratt’s initial contention on cross-appeal lacks merit. 2 ²⁸⁹ Pleading As we have seen, the confessed judgment originally entered in Pratt’s favor was vacated on Metalcraft’s motion. The motion to vacate and the memorandum in support of it set forth in reasonable detail Metalcraft’s assertion of breach of warranty of title to the patterns and breach of the zoning warranty, as well as the amount of credit claimed by Metalcraft. Nevertheless, although there was some discovery activity, no pleadings whatsoever were filed after the vacation of the confessed judgment. According to Pratt this is fatal to Metalcraft because after the vacation of a confessed judgment, appropriate pleadings should be filed to bring the matter to issue.

Pratt’s notion that pleadings ordinarily should be filed after a confessed judgment has been vacated is correct. Former Md. Rule 645 d, in effect when the judgment in this case was vacated, provided that when a basis for vacating the confessed judgment had been sufficiently established, the court should “order the judgment vacated ... with leave to the defendant to file a pleading____” Present Rule 2-611(d) is to the same effect: “If the court finds that there is a substantial and sufficient basis for an actual controversy as to the merits of the action, the court shall order the judgment by confession ... vacated and permit the defendant to file a responsive pleading.” 3 See Boyce v. Plitt, 274 Md. 333 , 335 A.2d 101 (1975). But his complaint comes too late. After the judgment was vacated, Pratt’s lawyer wrote the clerk of court asking that the case “be placed on the active trial docket.” Neither in that letter nor elsewhere in the record is there the slightest indication of ²⁹⁰ objection to lack of pleadings.

The question was not raised and decided below; it is not before us. Md. Rule 1085. See B. Howard Richards, Inc. v. Shearer, 186 Md. 36, 38 , 45 A.2d 627 (1946). If it were before us, we would reject Pratt’s contention.

His argument that he was somehow surprised — despite the contentions made in Metalcraft’s motion supporting its motion to vacate, despite discovery by both sides, and despite a day’s trial with no objection raised on this point and no request for a postponement — is ludicrous. It is apparent from the transcript that both sides knew precisely what the issues in the case were, despite the lack of pleadings. Pratt had been informed of them in the memorandum supporting the motion to vacate, a document that contained all the information that any pleading would have furnished him. See Stevens & Kendall Co. Inc. v. Headlee, 56 Md.App. 310 , 467 A.2d 794 (1983) (at hearing on motion to vacate confessed judgment, trial court reduced amount of judgment without further pleadings).

Pratt’s second contention on cross-appeal is as meritless as his first. METALCRAFT’S APPEAL Breach of Warranty of Title — Measure of Damages As we have seen, the trial judge found that Pratt had breached the warranty of title to the Whiting and Johnson patterns, a finding not disputed by Pratt on appeal. He determined a value for those patterns as of the date of sale. He then reduced that value by deducting depreciation for the period the patterns were in Metalcraft’s possession.

Thus, he based the credit on damages allowed Metalcraft for the breach of warranty of title on the value of the patterns approximately at date of dispossession. In due course we shall address the correctness of the valuation figure assessed by the judge; for the present we consider only the correctness of the measure of damages applied. Metalcraft argues strenuously that the judge was wrong. It observes that the sale of the patterns was a sale of goods ²⁹¹ falling within Title 2 of the U.C.C., as contained in the Commercial Law Article of the Maryland Code.

It points to § 2-714 of that title, which in pertinent part provides: (2) The measure of damages for breach of warranty is the difference at the time and place of acceptance between the value of the goods accepted and the value they would have had if they had been warranted, unless special circumstances show proximate damages of a different amount. It is Metalcraft’s position that in this case acceptance occurred when it took possession of the patterns following execution of the contract of sale in 1977. Section 2-606. The value of the Whiting and Johnson patterns at that date, it contends, was zero because Pratt did not own them.

Pratt’s non-ownership of the patterns is not questioned on appeal. Thus, says Metalcraft, its measure of damages for the breach should have been the value of the patterns if they had been as warranted, i.e., their value at the time of sale, undiminished by subsequent depreciation. The choice, then, is between value at date of sale (Metalcraft) or value at date of dispossession (the trial judge). Although there appears to be no Maryland authority directly on point, we think the trial judge was correct.

There is no doubt that the language of § 2-714(2) can be read as Metalcraft reads it; indeed, it seems to say precisely what Metalcraft claims it does. At least one other court has construed it that way. In Murdock v. Godwin, 154 Ga.App. 824 , 269 S.E.2d 905 (1980) Godwin, in April 1974, purchased a car from Murdock. There was a warranty of title.

The car turned out to have been stolen. The police seized it in February 1977 and Godwin never saw it again. He sued Murdock and recovered the purchase price of the car (its value if it had been as warranted less zero — its value at acceptance). On appeal, Murdock claimed that the purchase price should have been reduced by the value of Godwin’s almost three years’ use of the vehicle.

The Georgia Court of Appeals rejected this argument, quoting the Georgia version of § 2-714(2) (identical to the Maryland ²⁹² statute) and observing “the trial court was correct in excluding irrelevant evidence as to the value of [Godwin’s] use of the automobile subsequent to” the time of acceptance (purchase). 269 S.E.2d at 907 . Unfortunately, however, things with respect to the U.C.C. are not always what they seem to be on first reading. Scholars contend that § 2-714(2) does not regulate damages for breach of warranty of title, but that it in fact relates only to breach of warranty of quality. R. Anderson, Uniform Commercial Code (3d ed. 1983) § 2-714:26; 2 A. Squillante and J. Fonseca, Williston on Sales (4th ed. 1974) § 16-8(2).

But see 3 W. Hawkland, U.C.C. Series (1984), § 2-714:03. This is said to be so because § 2-714(2) is based on § 69(6) and (7) of the Uniform Sales Act; those provisions pertained to breaches of warranty of quality, not of title. Menzel v. List, 24 N.Y.2d 91 , 298 N.Y.S.2d 979, 982 , 246 N.E.2d 742, 744 (1969). Anderson, supra 4 Hawk-land, however, notes that many courts treated these provisions as applicable to all breaches of warranty, on the theory that subsection (7) was merely illustrative of one method of applying the general rule established by subsection (6). 3 U.C.C. Series § 2-714:03.

It is suggested that because § 2-714(2) does not expressly apply to a breach of warranty of title, a court should look to pre-U.C.C. law in that situation, by virtue of the “special circumstances” provision of § 2-714(2) and because the U.C.C. comment to that section indicates it is not intended ²⁹³ to provide for the exclusive measure of damages. Anderson, §§ 2-714:26 and 2-714:27; official comment (3) to § 2-714. Pre-U.C.C. case law is not too helpful, however. Under it, decisions relating to the measure of damages for breach of warranty of title range from purchase price plus interest to value of the goods at time of dispossession, to value without specifying any time of determination, to value at time of sale (which may or may not be the same as the purchase price).

Anderson, § 2-714:27. See also Menzel, 298 N.Y.S.2d at 982 , 246 N.E.2d at 744 . We repeat that there are no Maryland reported decisions directly on point. Other jurisdictions have faced this problem.

They have applied § 2-714(2) to breaches of warranty of title. Jeanneret v. Vichey, 541 F.Supp. 80 (S.D.N.Y.1982), reversed on other grounds, 693 F.2d 259 (2d Cir.1982); City Car Sales, Inc. v. McAlpin, 380 So.2d 865 (Ala.Civ.App. 1979), cert. denied, 380 So.2d 869 (Ala.1980); Murdock v. Godwin, 154 Ga.App. 824 , 269 S.E.2d 905 (1980); DeWeber v. Bob Rice Ford, Inc., 99 Idaho 847 , 590 P.2d 103 (1979); Ricklefs v. Clemens, 216 Kan. 128 , 531 P.2d 94 (1975); Itoh v. Kimi Sales, Ltd., 74 Misc.2d 402 , 345 N.Y.S.2d 416 (Civ.Ct. City of N.Y., 1973); Schneidt v. Absey Motors, Inc., 248 N.W.2d 792 (N.D.1976). We shall do likewise. The statute is plain and unambiguous on its face and should be read according to its clear meaning.

Montgomery County v. Fulks, 65 Md.App. 227, 232 , 500 A.2d 302, 305 (1985). It manifests a legislative intent to apply the specified measure of damages to all breaches of warranty under the U.C.C. The next question is whether to apply § 2-714(2)’s “difference at the time and place of acceptance between the value of the goods accepted and the value they would have had as warranted” or whether there are “special circumstances [that] show proximate damages of a different amount.” We hold that there are special circumstances here which take the case out of the ordinary § 2-714(2) rule. ²⁹⁴ This, too, is an issue that other jurisdictions have addressed. With the sole exception of Georgia (Murdock v. Godwin, supra) all have found special circumstances to exist in breach of warranty of title cases. The special circumstances have arisen because, e.g., the buyer of a stolen car had use and possession of it for some period of time without notice of any defect, City Car Sales, 380 So.2d at 868 ; because the goods in question had been stolen, Itoh, 345 N.Y.S.2d at 420 ; and because a unique chattel was involved, Jeanneret, 541 F.Supp. at 85 .

Two of those factors are present here. Metalcraft had use and possession of the patterns for varying periods of time before it had knowledge of any title defects. And the patterns were unique; they were specially designed to produce castings to particular specifications. Since we conclude that this case falls within the “special circumstances” clause of § 2-714(2), we must now decide what measure of damages to apply under it.

Courts that have considered the question under the U.C.C. have almost uniformly rejected the view that the purchase price of the goods is the proper measure. See Annotation, “Measure of Damages in Action for Breach of Warranty of Title to Persona] Property Under UCC § 2-714,” 94 A.L.R.3d 583 (1979). The more recent cases we have cited above bear out this analysis. The value of the goods at the approximate date of dispossession, or something akin to that, is the measure of damages generally selected.

See, e.g., City Car Sales, 380 So.2d at 868 , DeWeber, 590 P.2d at 105 , Ricklefs , and Schneidt . Schneidt , it is true, involved a situation in which the goods had appreciated in value between the time of purchase and the time of dispossession. That was also true in Jeanneret. But in Itoh the court applied the value at date of