Ljl Transp. v. Pilot Air Freight Corp.

• Decision Date: 22 January 2009
• Docket Number: No. 73 MAP 2007.,73 MAP 2007.
• Citation: 962 A.2d 639
• Parties: LJL TRANSPORTATION, INC., Louis P. Pektor, III, and Leo A. Decker, Appellants v. PILOT AIR FREIGHT CORPORATION, Appellee.
• Court: Pennsylvania Supreme Court

962 A.2d 639

LJL TRANSPORTATION, INC., Louis P. Pektor, III, and Leo A. Decker, Appellants v. PILOT AIR FREIGHT CORPORATION, Appellee.

No. 73 MAP 2007.

Supreme Court of Pennsylvania.

Argued April 16, 2008.

Decided January 22, 2009.

Barry L. Cohen, Esq., Sunah Park, Esq., Ira Silverstein, Esq., Lisa Marie Swan, Esq., Thorp Reed & Armstrong, L.L.P., Philadelphia, for LJL Transportation, Inc., Louis P. Pektor, III, and Leo A. Decker.

Walter Weir, Jr., Esq., Daniel D. Haggerty, Esq., Edward T. Kang, Esq., Weir & Partners, L.L.P., Philadelphia, for Pilot Air Freight Corporation.

BEFORE: CASTILLE, C.J., and SAYLOR, EAKIN, BAER, TODD, McCAFFERY, JJ.

OPINION

Justice TODD.

In this appeal, our Court is called upon for the first time to consider whether a party's conduct in breaching a contract may justify its immediate termination, even if the contract includes an express provision granting the breaching party the right to cure before the contract is terminated. For the reasons that follow, we conclude that Pennsylvania law permits the immediate termination of such a contract when there is a material breach of the contract so serious it goes directly to the heart and essence of the contract, rendering the breach incurable, and so we affirm the Superior Court's decision to that same effect.

LJL Transportation Inc. and its owners, Louis Pektor III and Leo A. Decker, ("Appellants") appeal the order of the Superior Court of Pennsylvania which upholds the order of the Court of Common Pleas of Northampton County granting summary judgment in favor of Appellee, Pilot Air Freight Corporation ("Pilot") on its counterclaim for breach of contract. Pilot is a company based in Lima, Pennsylvania and is engaged in the air-freight forwarding business which requires it to move, in an expedited fashion, heavy-duty freight shipments to various destinations throughout the country. Pilot accomplishes this by utilizing a network of both company-owned and company-franchised freight stations located at airports and other sites around the country. Each franchisee enters into a standard franchise agreement with Pilot which grants the franchisee: the use of the name and logo "Pilot Air Freight," an exclusive sales territory, and the right to receive operational, sales, and management services from Pilot. The agreement requires the franchisee to place all freight shipments with the Pilot Air Freight system, and specifically forbids the franchisee from conducting any other business from the franchised location unless given written authorization to do so by Pilot. The franchisee is also barred by the agreement from delivering any freight under the Pilot Air Freight name which originates with another freight forwarder, and is prohibited from delivering under another carrier's name any freight which originated in the Pilot system.

The franchisee is required to report at the end of each business day all business it transacted during that day. Upon receipt of these daily business reports, Pilot prepares and sends invoices to the franchisee's customers, and then collects payment directly from the customers. After collecting the customer payment, Pilot deducts a royalty fee and other costs specified by the franchise agreement, and it forwards the remainder of the funds to the franchisee. Pilot relies wholly on the franchisee's representations of the accuracy of the information contained in the daily reports, since it is the only means Pilot has of knowing what business was transacted at a particular franchise location during the course of a given day.

LJL Transportation Inc. ("LJL"), is a Pennsylvania corporation owned in equal shares by Pektor and Decker. LJL became a franchisee of Pilot in November 1991 after it was assigned all contractual rights and duties of another Pilot franchisee, R&D Air Freight. The franchise agreement was for a 10-year period set to expire in November 2001. At the time of this assignation, both Pektor and Decker also executed a separate guaranty agreement with Pilot, agreeing to be personally bound by the terms and conditions of Pilot's franchise agreement. LJL was assigned two Pennsylvania territories, one in Allentown, and one in Harrisburg.

According to the findings of the trial judge, the Honorable F.P. Kimberly McFadden, which Appellants do not contest, and which were based on a wide array of evidentiary materials submitted by Pilot in support of its cross-motion for summary judgment,¹ in early January 2001, Pilot learned the following information from employees of LJL. Since 1999, Appellants had been deliberately and systematically diverting freight shipments, required under the terms of the franchise agreement to be shipped through the Pilot Air Freight system, to Northeast Transportation ("Northeast"), a separate trucking company which was a direct competitor of Pilot and which was owned by Pektor and Decker. In its opinion, the trial court recounted the deposition testimony of Decker in which he admitted he knew that all shipments which began or ended outside of LJL's territory had to be reported to Pilot and that LJL had failed to report a number of shipments for "pricing reasons." Trial Court Opinion, 12/9/03, at 9 (citing Deposition of Leo Decker, at 212-214, 235 (R.R. at 309a-311a)). The trial court also looked to the testimony of Robert Zisko, a former owner of a minority interest in LJL, and later an employee, who testified he was personally aware of $3,000 to $5,000 a month in business in 1999 which was deliberately not reported to Pilot so that LJL could avoid paying Pilot the franchise fee on the shipment and avoid splitting the profits of the shipment with it, thus enabling LJL to "make more money off the shipment." Id. (citing Deposition of Robert Zisko, 10/8/2003, at 30 (R.R. at 367a)). Zisko acknowledged such conduct was inappropriate. Id. at 43, (R.R. at 371a). The trial court additionally referred to the sworn affidavit of former LJL employee Jody Sutton, which attested to the fact that Decker specifically encouraged employees to run shipments through Northeast without entering them into the Pilot system by offering the employees bonuses to do so. Trial Court Opinion, 12/9/03, at 9. Pilot also presented documentary evidence to the trial court showing that LJL customers were billed for shipments sent through Northeast on forms and invoices bearing the Pilot trademark, and the sworn affidavit of an LJL employee which attested to the fact that LJL employees were prohibited from having direct communications with Pilot, which was characterized to the employees by Decker as "our enemy." R.R. at 257a, 323-327a. Upon learning of LJL's conduct, Pilot immediately sent a letter to Appellants, dated January 4, 2001, indicating it was terminating the franchise agreement.

Appellants responded by filing a complaint against Pilot in the Court of Common Pleas of Northampton County, asserting breach of contract and related causes of action. Pilot filed an answer and counterclaim, an amended answer and amended counterclaim, and, finally, a third amended counterclaim. In the third amended counterclaim, Pilot sought legal and equitable relief, raising a breach of contract claim against Appellants, as well as additional causes of action. Appellants subsequently moved for partial summary judgment on their breach of contact claim, contending that Pilot breached the franchise agreement by wrongfully terminating it without giving them a chance to cure their breaches since, in their view, the terms of the franchise agreement gave them an unqualified right to cure their breach. Pilot moved for summary judgment on its breach of contract claim as well, arguing that Appellants had no right to cure. Pilot maintained cure would be impossible under the circumstances due to the fact Appellants had engaged in dishonest and improper conduct, and the resulting breach of trust from that conduct frustrated the essential purpose of the agreement by rendering it "meaningless and worthless." Pilot Cross-Motion for Summary Judgment, 10/27/2003, at ¶ 19.

Based on its review of both motions and the aforementioned accompanying evidentiary materials, the trial court concluded Appellants admitted to engaging in conduct that breached the contract and had no defense to their actions. The trial court flatly rejected Appellants' sole assertion that they had an unqualified right to cure under a provision of the franchise agreement, paragraph 23(c), which provides:

Cure. This Agreement immediately terminates upon receipt by Franchisee of written notice of termination from Pilot. Pilot shall allow Franchisee an opportunity to cure a default within ninety (90) days of receipt of written notice of a particular default.

Pilot Franchise Renewal Agreement, 11/14/91, at ¶ 23(c). The trial court found Appellants were not guaranteed a right to cure by this paragraph because of the nature of their admitted conduct.

Failing to find any governing Pennsylvania precedential authority, the trial court observed that courts in other jurisdictions have found that the nature of the conduct by a breaching party can render obsolete the cure provisions of the agreement. Trial Court Opinion, 12/9/2003, at 7. The trial court noted the similarities of the conduct in this case to what transpired in Southland Corp. v. Froelich, 41 F.Supp.2d 227 (E.D.N.Y.1999), where the franchisee engaged in a scheme to withhold a percentage of revenue it was obligated under the terms of the franchise agreement to report to the franchisor. The trial court recounted that the court in Southland found the revenue sharing requirement in the parties' franchise agreement created an implied covenant in which the franchisee agreed "not to engage in schemes or gimmicks that deprive the franchisor of its percentage," and additionally found the franchisee had breached this covenant by hiding revenue from the franchisor. Id. at 8 (quoting Southland, 41 F.Supp.2d at 246-247).

Here, the...