Soverign v. Integrated

NOTICE: NOT FOR OFFICIAL PUBLICATION.
UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT
PRECEDENTIAL AND MAY BE CITED ONLY AS AUTHORIZED BY RULE.
IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE
SOVEREIGN BANK, a federally charted banking
organization, Plaintiff/Appellee,
v.
INTEGRATED MACHINERY, INC., an Arizona
corporation, Defendant/Appellant.
No. 1 CA-CV 14-0325
FILED 7-7-2015
Appeal from the Superior Court in Maricopa County
No. CV2011-022496
The Honorable Arthur T. Anderson, Judge
AFFIRMED
COUNSEL
Jennings Haug & Cunningham, LLP, Phoenix
By Matthew H. Sloan, Joseph A. Brophy
Counsel for Plaintiff/Appellee
Jaburg & Wilk, PC, Phoenix
By Roger L. Cohen, Kathi M. Sandweiss
Counsel for Defendant/Appellant
SOVEREIGN v. INTEGRATED
Decision of the Court
MEMORANDUM DECISION
Judge Patricia A. Orozco delivered the decision of the Court, in which
Presiding Judge Patricia K. Norris and Judge Kent E. Cattani joined.
O R O Z C O, Judge:
¶1 Integrated Machinery, Inc. (Integrated) appeals from a
judgment in favor of Sovereign Bank. Integrated contends that after it
purchased certain equipment at a private Arizona Uniform Commercial
Code (UCC) sale, Sovereign Bank lost any rights it had to enforce
Integrated’s obligations pursuant to the terms of a forbearance agreement
between the parties. For the reasons stated below, we affirm the judgment
and award of attorney fees in favor of Sovereign Bank.
FACTS AND PROCEDURAL BACKGROUND
¶2 In September 2008, VMC Enterprises, Inc. (VMC)1 purchased
two pieces of heavy equipment. 2 VMC was in the business of leasing
equipment and subsequently leased the equipment at issue to Integrated.
¶3 Sovereign Bank filed a UCC financing statement regarding
this equipment when it sold the equipment to VMC. When VMC purchased
this equipment, all of VMC’s inventory and equipment was subject to a
perfected security interest in favor of Merrill Lynch Business Financial
Services, Inc (Merrill Lynch).
¶4 After VMC defaulted on its payment obligations, Sovereign
Bank sued VMC to enforce the terms of the master lease agreement. As a
result of that lawsuit, Sovereign Bank and VMC entered into a forbearance
agreement. Pursuant to the forbearance agreement, VMC agreed to a
1 For ease of reference, VMC includes VMC’s guarantors, Richard R.
Hammond, VMC’s president, and Janice M. Moe, VMC’s secretary, who
were also parties to the master lease agreement and forbearance agreement.
2 Although this transaction was titled a master lease agreement, on
appeal, Sovereign Bank does not dispute that VMC actually purchased the
equipment from Sovereign Bank’s predecessor-in-interest, Global Vantage
Ltd.
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SOVEREIGN v. INTEGRATED
Decision of the Court
stipulated judgment in favor of Sovereign Bank in exchange for an
agreement that Sovereign Bank would not seek to enforce the stipulated
judgment or take possession of the equipment as long as VMC made the
payments outlined in the forbearance agreement. Integrated also entered
into the forbearance agreement because it had possession of the equipment
at the time. Integrated expressly “represent[ed] and warrant[ed]” that if
VMC defaulted under the terms of the forbearance agreement, it would
voluntarily return possession of the equipment to Sovereign Bank. If
Integrated failed to return the equipment within ten days after being
requested to do so, it “shall become obligated to satisfy the Forbearance
Conditions set forth herein.” The forbearance conditions obligated VMC to
make payments to Sovereign totaling $127,703.76.
¶5 At this time, Merrill Lynch’s successor, Bank of America, held
a perfected security interest in all of VMC’s inventory and equipment. In
February 2011, three months after the parties entered into the forbearance
agreement, Bank of America notified Sovereign Bank and other parties that
it intended to sell the equipment. Bank of America then sold VMC’s assets,
including the equipment in Integrated’s possession, at a private sale.
Integrated purchased all of VMC’s equipment at the sale, including the
equipment at issue in this case, for $350,000.
¶6 VMC subsequently defaulted on the forbearance agreement,
and Sovereign Bank sent a written demand to Integrated to return the
equipment or, alternatively, satisfy the forbearance conditions pursuant to
section 7(b) of the forbearance agreement. When Integrated did not return
the equipment or satisfy the forbearance conditions, Sovereign Bank filed
this lawsuit for breach of the forbearance agreement and replevin.
¶7 Integrated filed a counterclaim seeking a declaration that
Integrated owned the equipment free and clear of any rights claimed by
Sovereign Bank. On cross-motions for summary judgment, the trial court
concluded that Integrated became the owner of the equipment after the sale
from Bank of America. The court rejected Integrated’s contention that the
forbearance agreement was no longer valid and found Integrated breached
the forbearance agreement. However, the court concluded that because
Integrated owned the equipment, Sovereign Bank was not entitled to obtain
possession of the equipment by replevin, but was only entitled to money
damages for Integrated’s breach.
¶8 The trial court awarded Sovereign Bank the amount owed
under the forbearance conditions, plus late fees and interest. The court
rejected Integrated’s claim that it was entitled to attorney fees as the
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Decision of the Court
successful party overall and awarded attorney fees and costs to Sovereign
Bank pursuant to the forbearance agreement § 7(b) and Arizona Revised
Statutes (A.R.S.) Section 12-341.01 (West 2015). 3
¶9 After an unsuccessful motion for new trial, Integrated filed a
timely notice of appeal. We have jurisdiction pursuant to A.R.S. § 12-
2101.A.1, 5.
DISCUSSION
I. Integrated’s Purchase of Equipment Did Not Excuse Breach of
Forbearance Agreement
¶10 On appeal from summary judgment, this court reviews de
novo the superior court’s application of the law. State Comp. Fund v. Yellow
Cab Co. of Phoenix, 197 Ariz. 120, 122, ¶ 5 (App. 1999). Contract
interpretation is generally a question of law. Powell v. Washburn, 211 Ariz.
553, 555, ¶ 8 (2006).
¶11 Integrated contends that after it purchased the equipment
from Bank of America, it was no longer bound by the forbearance
agreement. Integrated argues that its interest is distinct from VMC’s and
Sovereign Bank’s respective security interests in the equipment and
imposed no financial obligation on them. Sovereign Bank did not seek to
recover the equipment as a result of its security agreement with VMC or
any lien. Rather, Sovereign Bank sought damages for Integrated’s breach
of the forbearance agreement and does not seek to enforce any rights it may
have under the UCC.
¶12 Integrated entered into the forbearance agreement and
voluntarily agreed that if VMC defaulted on its obligations, it would either
return the equipment or satisfy the forbearance conditions. When VMC,
Sovereign Bank, and Integrated entered into the forbearance agreement,
Sovereign Bank obtained a separate right to pursue contract remedies. As
a voluntary party to the forbearance agreement, Integrated became liable
for contract damages in the event of VMC’s breach. The fact that Integrated
did not owe money to Sovereign Bank before the forbearance agreement is
of no consequence because Integrated voluntarily entered into the
forbearance agreement.
3 We cite the current version of applicable statutes when no revisions
material to this decision have since occurred.
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SOVEREIGN v. INTEGRATED
Decision of the Court
¶13 On appeal, Sovereign Bank does not dispute that Integrated
owned the equipment after purchasing it at a private sale in February 2011.
The forbearance agreement is an independent contract and did not include
any terms that conditioned Integrated’s performance on Sovereign Bank
maintaining an enforceable UCC security interest. When the terms of a
contract are clear and unambiguous, a court must enforce the contract as
written. Estes Co. v. Aztec Constr. Inc., 139 Ariz. 166, 168 (App. 1983).
¶14 Integrated argues this court should read the forbearance
agreement to require that Sovereign Bank retains a right to possess the
equipment. There is nothing in the agreement to support this
interpretation. Sovereign Bank was not exercising its rights as a secured
creditor, but was enforcing the terms of the forbearance agreement. The
forbearance agreement did not require Sovereign Bank to have a right of
possession for Integrated to perform. Paragraph 7 of the forbearance
agreement states:
[Integrated] hereby represents and warrants that:
a. It is currently in possession of the Leased
Equipment. Should VMC default under the terms of this
Agreement, [Integrated] hereby represents and warrants that
Sovereign Bank may recover possession of the Leased
Equipment from [Integrated] and [Integrated] shall, upon
request by Sovereign Bank, voluntarily return possession of
the Leased Equipment to Sovereign Bank.
b. Should [Integrated] fail to return possession of
the Leased Equipment within ten (10) days from receipt of a
written request from Sovereign Bank to return possession of
the Leased Equipment, then [Integrated] shall become obligated
to satisfy the Forbearance Conditions. . . . Failure to satisfy the
Forbearance Conditions shall result in an action being filed
against [Integrated] for breach of this Agreement, the
monetary damages . . . [include] but [are] not limited to those
set forth in Paragraph 4(d) through 4(i), replevin of the Leased
Equipment as well as costs and fees associated with said
action[.] (Emphasis added.).
¶15 The only condition imposed on Integrated’s performance was
VMC’s failure to satisfy the forbearance conditions. When this occurred,
Integrated became obligated to return the equipment or satisfy the
forbearance conditions. Integrated seeks to insert a condition not contained
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SOVEREIGN v. INTEGRATED
Decision of the Court
in the agreement. Therefore, the private sale did not impact Sovereign
Bank’s right to seek contract remedies under the forbearance agreement.
¶16 Although Sovereign Bank had no right to replevin after the
private sale, replevin was not Sovereign Bank’s only remedy. Unlike
replevin, Sovereign Bank’s contractual right to payment is not dependent
on owning the equipment or having a right to possession. See A.R.S. § 12-
1301 (West 2015) (replevin statute). Thus, the superior court did not enter
contradictory rulings in denying Sovereign Bank’s replevin claim and
allowing breach of contract damages.
¶17 Integrated argues that because Sovereign Bank could not take
possession of the equipment after the private sale, it had nothing from
which to forbear and, thus, the forbearance agreement could no longer be
enforced.4 Integrated argues it is entitled to rescind the contract because
Sovereign Bank no longer had an enforceable security interest and right to
possess the equipment after the sale. Rescission is justified when there is a
failure of consideration of an essential part of the contract. Hall v. Read Dev.,
Inc., 229 Ariz. 277, 285, ¶ 30 (App. 2012); Miller v. Crouse, 19 Ariz. App. 268,
272 (App. 1973).
¶18 The forbearance agreement encompassed the right to
repossess the equipment, but it also provided for payment if the equipment
was not returned. Because the forbearance agreement gave Sovereign Bank
a right to payment from VMC or, alternatively, from Integrated,
compensation was another component of the forbearance agreement.
Contrary to Integrated’s argument, the right to possess the equipment was
not the exclusive, essential part of the contract. Thus, when Sovereign Bank
lost the right to replevin, the forbearance agreement was not terminated,
4 When the forbearance agreement was enacted, Sovereign Bank gave
valuable consideration to VMC and Integrated by agreeing not to enforce
its right to take possession or demand payments. “Forbearance to assert a
legal claim is valid consideration for a contract.” Gill v. Kreutzberg, 24 Ariz.
App. 207, 209 (App. 1975). In return, Integrated agreed to pay VMC’s
obligations in the event VMC defaulted. Thus, the parties exchanged
consideration. Integrated incorrectly asserts that the date to determine
whether Sovereign Bank gave adequate consideration was the maturity
date of Integrated’s obligations. “The adequacy of consideration which
supports a contract is determined as of the date the contract was entered
into, not at a later date after other events have occurred.” Carter v. Safeway
Stores, Inc., 154 Ariz. 546, 548 n.1 (App. 1987) (citation omitted).
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SOVEREIGN v. INTEGRATED
Decision of the Court
Sovereign Bank could still enforce the right to the payment portion of the
contract.
¶19 Integrated argues that it could not return the equipment
because it was used as collateral for a new loan. The forbearance agreement
did not only require Integrated to turn over the equipment; it also provided
that Integrated would satisfy the forbearance conditions. Therefore,
Integrated could keep the equipment and subject it to another security
interest while still being required to pay Sovereign Bank pursuant to the
forbearance agreement. Integrated’s conduct did not alter its obligations
under the agreement.
¶20 In sum, the private sale to Integrated did not affect the parties’
contractual remedies, only Sovereign Bank’s replevin claim. Thus, the
forbearance agreement remained enforceable after the sale because
Sovereign Bank still had a right to enforce Integrated’s payment obligations
under the agreement. Accordingly, we affirm the judgment in favor of
Sovereign Bank on the breach of contract claim.
II. Damages
¶21 The trial court awarded Sovereign Bank $129,932.64 in
damages consisting of the payments due under the forbearance agreement,
late penalties, and interest. Integrated argues that Sovereign Bank was only
entitled to the damages caused by Integrated’s failure to satisfy the
forbearance conditions, which are limited, Integrated contends, to the rental
value of the equipment during the three-month forbearance period or,
alternatively, to the forbearance condition payments due during the three-
month forbearance period.
¶22 Integrated concedes, however, that Sovereign Bank is entitled
to the benefit of its bargain. Sovereign Bank agreed not to enforce a
judgment against VMC in exchange for payments from VMC. If VMC
defaulted, Integrated agreed it would return the equipment or satisfy the
forbearance conditions. Satisfying the forbearance conditions required
payments totaling $127,703.76. Because the private sale did not affect
Integrated’s payment obligation, there is no basis for limiting Sovereign
Bank’s damages to the three-month period before Integrated purchased the
equipment. Sovereign Bank was entitled to recover all of the payments still
owed under the forbearance agreement. Accordingly, we affirm the
judgment in favor of Sovereign Bank in the amount of $129,932.64.
¶23 Integrated argues that Sovereign Bank could have purchased
the equipment at the private sale or otherwise protected itself. But as
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SOVEREIGN v. INTEGRATED
Decision of the Court
previously discussed, Integrated’s contractual obligations were
independent of any possible UCC rights Sovereign Bank may have had
against VMC.
III. Motion for New Trial
¶24 Integrated argues the superior court erred in denying its
motion for new trial. We review the denial of a motion for new trial under
an abuse of discretion standard. Styles v. Ceranski, 185 Ariz. 448, 450 (App.
1996). Having determined that the court properly granted summary
judgment and awarded damages to Sovereign Bank, the trial court did not
err in denying Integrated’s motion for new trial.
IV. Attorney Fees
¶25 Both parties asserted success and sought attorney fees under
A.R.S. § 12-341.01.A. The trial court concluded Sovereign Bank was the
successful party after considering the success of both parties’ claims and
“the relative significance of each claim to the litigation as a whole.” The
court also found Sovereign Bank was entitled to fees under § 7(b) of the
forbearance agreement. “Determining ‘who is the successful party for
purposes of awarding attorneys’ fees is within the sole discretion of the trial
court, and will not be disturbed on appeal if any reasonable basis exists for
it.’” Berry v. 352 E. Virginia, L.L.C., 228 Ariz. 9, 13, ¶ 21 (App. 2011) (quoting
Sanborn v. Brooker & Wake Prop. Mgmt., Inc., 178 Ariz. 425, 430 (App. 1994)).
¶26 Although Integrated prevailed in its request for a declaration
of equipment ownership after the private sale, the forbearance agreement
allowed Integrated to retain the equipment and pay the forbearance
conditions. The trial court’s conclusion that Integrated owned the
equipment did not defeat Sovereign Bank’s claim for contract damages.
The central issue in this litigation was whether and to what extent
Integrated was obligated to Sovereign Bank. As to the that issue, the trial
court concluded that Integrated owed Sovereign Bank damages and
Sovereign Bank was thus the successful party. The award of attorney fees
was therefore not an abuse of discretion. See Berry, 228 Ariz. at 13-14, ¶ 22,
(holding in cases with competing claims, “trial court may apply a
‘percentage of success’ or ‘totality of the litigation’ test.”).
¶27 Additionally, § 7(b) of the forbearance agreement contains a
fee provision in Sovereign Bank’s favor. This also supports the fees award
to Sovereign Bank. On appeal, Integrated does not challenge the amount of
fees awarded. Therefore, we affirm the award of attorney fees and costs to
Sovereign Bank.
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Decision of the Court
CONCLUSION
¶28 We affirm the judgment and award of attorney fees in favor
of Sovereign Bank. Both parties request an award of attorney fees on appeal
pursuant to A.R.S. § 12-341.01.A. As the successful party on appeal,
Sovereign Bank is awarded its reasonable attorney fees upon compliance
with Arizona Rule of Civil Appellate Procedure 21. Sovereign Bank is also
entitled to its costs on appeal pursuant to A.R.S. § 12-342 (West 2015).
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