Keith Equipment Co. v. Casa Grande Cotton Finance Co.

Decision Date31 May 1996
Docket NumberCA-CV,No. 2,2
Citation187 Ariz. 259,928 P.2d 683
PartiesKEITH EQUIPMENT COMPANY, an Arizona corporation, Plaintiff/Appellee, v. CASA GRANDE COTTON FINANCE COMPANY, an Arizona corporation, Defendant/Appellant. 95-0163.
CourtArizona Court of Appeals

ESPINOSA, Presiding Judge.

Appellant Casa Grande Cotton Finance Company (Casa Grande) appeals from a jury award in favor of appellee Keith Equipment Company (KEC) on a breach of contract claim. Casa Grande raises numerous issues, among them that the trial court erred in admitting course of dealing evidence to establish the existence of a contract. Because we agree the admission of that evidence was prejudicial error, we reverse and remand for further proceedings.

Factual and Procedural Background

Casa Grande provides crop financing to cotton farmers for growing, harvesting and ginning their crops. In 1990, Casa Grande agreed to lend $1,018,193 to Estrella Partnership Farms (Estrella), including $78,606 for crop picking expenses. The Estrella partners executed a promissory note and security lien on the 1990 crop and its proceeds in favor of Casa Grande. The partners were Joe Andriano, Waylon Harris and Pete Lopez. Lopez also operated a cotton harvesting business, and Estrella hired Lopez to harvest the crop. To pay for the service, repair, and maintenance of his farm equipment, Lopez executed a "Picking Assignment" in favor of KEC in October 1990 which provided as follows:

Per a harvesting agreement I will be due certain monies from Estralla [sic] Partnership for harvesting all or part of their 1990 cotton crop.

In as much [sic] as I am indebted to Keith Equipment Co., Inc. for goods sold, services rendered, and/or equipment rentals in the amount of $100,000. We hereby request that [Casa Grande] pay Pete G. Lopez and Keith Equipment Co., Inc. jointly an amount equal to $1.60 per CWT for cotton delivered to your gin under said harvesting agreement up to the full amount stated above.

The Picking Assignment was signed by Lopez and the other Estrella partners, and delivered to Casa Grande. In November 1990, Casa Grande made a partial disbursement on the Picking Assignment to Lopez and KEC on behalf of Estrella. By December 1, Casa Grande had disbursed the full amount of the Estrella crop loan, determined that the proceeds of the 1990 crop would not repay the loan, and refused to advance Estrella any further funds.

Later in December, Andriano and Lopez met with Casa Grande's representative to discuss Casa Grande's refusal to finance the remaining harvest. According to Casa Grande, it agreed to advance "the absolute minimum expense to harvest the crop" which included only the cost of labor, fuel, and "picking grease." According to Estrella, however, Casa Grande had "made a commitment" to honor the terms of the Picking Assignment and to pay Lopez and KEC jointly in exchange for Lopez's promise to finish the harvest. Following the December meeting, Casa Grande disbursed four checks totaling $30,751.30 payable to Lopez, who then finished the harvest.

KEC filed a complaint against Casa Grande claiming it was obligated to advance this money to KEC as assignee under the Picking Assignment. 1 At trial, however, the trial court permitted KEC to pursue an alternative breach of contract theory and introduce evidence that the parties' "course of dealing" had established an implied contract between itself and Casa Grande pursuant to the Picking Assignment. 2 At the close of the evidence, the court granted KEC's motion to conform its pleadings to the evidence. The jury awarded KEC damages of $31,407.52, representing the amount it was due for the harvest under the terms of the Picking Assignment. 3

On appeal, Casa Grande contends the trial court abused its discretion by allowing KEC to assert a new legal theory, breach of contract, that was not contained in its pleadings or pretrial disclosure. In addition, Casa Grande contends the trial court erred by denying its motion for directed verdict on that claim and asserts several errors in the admission of evidence. We agree that the Picking Assignment did not contractually obligate Casa Grande to pay KEC, nor could such obligation be implied through the parties' course of dealing, evidence of which was erroneously admitted. In view of these conclusions, we need not address the propriety of the grant of KEC's motion to conform its pleadings as well as several of Casa Grande's additional claims of error.

Course of Dealing

To constitute a contract, a writing must manifest the parties' intent to be bound. Rogus v. Lords, 166 Ariz. 600, 804 P.2d 133 (App.1991). Casa Grande agreed to finance Estrella, an agreement contained in the promissory note and security agreement. In separate transactions, Estrella and Lopez executed a picking contract and then agreed Lopez could assign the proceeds to KEC. Although this Picking Assignment was delivered to Casa Grande, it was not a party to the agreement, nor did it take part in the negotiations between Estrella and Lopez. As Casa Grande points out, the Picking Assignment alone does not obligate it to KEC but merely "requests" that monies paid under the assignment be distributed jointly to Lopez and KEC.

Under the Picking Assignment, KEC was a third party creditor of Estrella. While Casa Grande had issued checks to Estrella's creditors on other occasions, including KEC, advancing loan funds to third parties does not create a contract in favor of those third parties. Pioneer Plumbing Supply Co. v. Southwest Savings and Loan Assoc., 102 Ariz. 258, 428 P.2d 115 (1967); California Cotton Oil Corp. v. Rabb, 88 Ariz. 375, 357 [187 Ariz. 262] P.2d 126 (1960). We can find no expression of Casa Grande's intent to be bound in the Picking Assignment or any other document in the record. Indeed, the security agreement held by Casa Grande and signed by the Estrella partners expressly disclaims any obligation between Casa Grande and Estrella's creditors, and declares any assignment by Estrella "void and of no effect" with respect to the lender. If Estrella executed an assignment for the benefit of its creditors, it would be in default and its rights under the loan terminated, in which case Casa Grande retained the right to harvest the crop in a manner it "deem[ed] appropriate." See Corenswet v. Amana Refrigeration, Inc., 594 F.2d 129 (5th Cir.1979) (express contract terms control over conflicting course of dealing).

Over Casa Grande's objections, the trial court admitted evidence that Casa Grande had paid KEC on behalf of Estrella under picking assignments executed in 1988, and also under picking assignments executed by other farmers. Casa Grande contends this was error. We agree. Course of dealing is defined as "a sequence of previous conduct between the parties to a particular transaction which is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct." A.R.S. § 47-1205(A). Such evidence is allowed to "give particular meaning to or supplement or qualify terms of an agreement." A.R.S. § 47-1205(C); see also Koenen v. Royal Buick Co., 162 Ariz. 376, 783 P.2d 822 (App.1989) (where terms in written contract are ambiguous, course of dealing evidence admissible to explain them). Course of dealing does not, however, create a contract....

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