Metalcraft, Inc. v. Pratt
| Decision Date | 18 November 1985 |
| Docket Number | No. 129,129 |
| Citation | 500 A.2d 329,65 Md.App. 281 |
| Parties | , 42 UCC Rep.Serv. 14 METALCRAFT, INC., et al. v. Benjamin H. PRATT. Sept. Term 1985. |
| Court | Court of Special Appeals of Maryland |
Kevin M. McGeady (Edward L. Blanton, Jr. on brief), Towson, for appellants.
Jerry T. Lambdin (Charles E. Chlan & Associates on brief), Baltimore, for appellee.
Argued before MOYLAN, GARRITY and ADKINS, JJ.
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 [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. Metalcraft 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 Metalcraft, 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.
Pratt saw the matter otherwise and on July 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" properly.
We shall deal first with the cross-appeal.
PRATT'S CROSS-APPEAL
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 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(1)(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
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 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...
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