Alarmax Distributors v. New Canaan Alarm Company Inc. (2011)

MEMORANDUM OF DECISION

Sometime in 1999 the defendant began to buy component parts from the plaintiff for the assembly and sale of fire and security alarms for residential and commercial use.   In furtherance of this business relationship the plaintiff requested that the defendant submit a credit application/agreement which would allow it to charge purchases up to a certain dollar limit.   The agreement contained the following provision:  “In consideration of your supplying product on open account credit terms it is understood this account is to be paid in full on terms of net 30 days FOB shipping point.”

The agreement further provided that “should I fail to ․ comply with any payment terms ․ then the entire balance owing on this account will become due and immediately payable and our credit limitation established will be withdrawn.”   Neither party produced the original of this document in evidence.   The plaintiff was unable to find the signature page but the testimony of both Paul Chludzinski, president of the defendant and William Teitlebaum, board chairman and secretary of the plaintiff made it clear that the credit agreement had been signed by Mr. Chludzinski at the time that it was submitted to the plaintiff in 1999.   Initially, the defendant's credit limit was established at $5,000 but over time, as the parties developed their relationship, it increased to $15,000.   The defendant was considered a good customer and with good customers it was the plaintiff's practice to permit the account to exceed the credit limit for longer than 30 days as long as a lump sum payment on account was made from time to time.   This practice continued until sometime in 2005 when the defendant's bookkeeper was charged with embezzling in excess of $600,000 and was later convicted.   Not surprisingly, the loss of this money impaired the defendant's ability to meet its financial obligations on a current basis, including its account with the plaintiff.   The defendant made its final purchase from the plaintiff on May 5, 2005.   Thereafter, no further business was transacted between the parties.   On November 16, 2005 the plaintiff sent the defendant a demand letter which stated an account balance of $112,309.90.   On December 27, 2005 the defendant paid $2,500 on account and on February 14, 2006 paid $1,500 on account.   The defendant has made no further payments and on September 15, 2009 this action was commenced in multiple counts seeking the balance due and other relief.

The defendant has asserted two special defenses which create the issue in this case.   The first special defense alleges that the action is barred by the four-year statute of limitations set forth in G.S. § 42a–2–725 because the statute began to run on June 9, 2005, thirty days after the last purchase was made on May 9, 2005.   The second alleges that the parties entered into an oral contract for payment on or sometime prior to June 21, 2006 and therefore the action is barred by the three-year statute of limitations set forth in G.S. § 52–581.

With regard to the second special defense, in its amended answer of June 15, 2010 the defendant erroneously cited § 52–577 which, of course, has no application here because it governs only actions in tort.   On May 10, 2011 the defendant filed a request to amend the special defense in order to correct the citation error by substituting § 52–581 which applies to oral contracts.   The plaintiff has objected.   The court regards the amendment, if not conforming to the evidence, as at least conforming to the defendant's theory of the case as presented at trial.   The plaintiff suffers no prejudice.   The motion is hereby granted but the court finds nevertheless that the defendant has failed to prove the creation of a new contract as alleged for the reasons that appear, infra.   Moreover, subsection (b) of Sec. 52–581 specifically negates its application to causes of action governed by Article 2 of Title 42a which, of course, includes section 725.   There is no doubt that this is an action brought under Article 2 of Title 42a.   Therefore, § 52–581 is inapplicable by its terms.   The controlling statute of limitations provides in pertinent part as follows:

Sec. 42a–2–725.  Statute of limitations in contracts for sale.  (1) An action for breach of any contract for sale must be commenced within four years after the cause of action has accrued.   By the original agreement the parties may reduce the period of limitation to not less than one year but may not extend it.  (2) A cause of action accrues when the breach occurs, regardless of the aggrieved party's lack of knowledge of the breach.

Relying on the terms of the credit agreement which required payment 30 days after shipment, the defendant argues that the cause of action occurred 30 days after the last sale occurred on May 5, 2005, more than four years after this suit was instituted on September 15, 2009.   The plaintiff counters that there are several reasons why the breach of contract claim is not barred.  (1) The account was an “open account” as opposed to an “invoice by invoice” account and the course of dealing of the parties over time, in effect, vitiated the contractual requirement of payment 30 days after shipping;  (2) the defendant's failure to respond to the plaintiff's demand letter of November 16, 2005 constituted an acknowledgment of the debt by silence;  (3) the payment of February 14, 2006 tolled the statute, and (4) sometime in January 2006 the defendant asked for forbearance on the outstanding balance.

Assuming arguendo, that the cause of action occurred on June 9, 2005, as the plaintiff contends, this case turns on whether the statue of limitations was tolled by either the February 14, 2006 payment or the defendant's conduct in reaction to the demand letter of November 16, 2005.   Whether the 2006 payment tolled the statute depends in turn on whether the conduct of the parties in their dealing with one another caused a modification of the contractual terms as set forth in the credit agreement.   The defendant's contrary argument that the parties were powerless to extend the reach of § 42a–2–725 by their conduct is incorrect.   First, the prohibition against extension contained in the second sentence of subsection (1), by its own terms, applies only to the original agreement between the parties not to a subsequent course of conduct.   Moreover, subsection (4) of the statute states that:  “This section does not alter the law or tolling of the statute of the limitations ․” So, the law of tolling is expressly preserved by the statute itself.

“For a valid modification to exist, there must be mutual assent to the meaning and conditions of the modification and the parties ‘must assent to the same thing in the same sense.’  (Internal quotation marks omitted.)  Lar–Rob Bus Corp. v. Fairfield, 170 Conn. 397, 402 (1976);  see First Hartford Realty Corp. v. Ellis, 181 Conn. 25, 33 (1980) Modification of a contract may be inferred from the attendant circumstances and conduct of the parties.   See Rowe v. Cormier, 189 Conn. 371, 372–73 (1983);  Malone v. Santora, 135 Conn. 286, 292 (1949).

Whether the parties to a contract intended to modify the contract is a question of fact.  Three S. Development Co. v. Santore, 193 Conn. 174, 177–78, (1984).  (Alternate citations omitted.)  Herbert S. Newman and Partners v. CFC Construction LTD. Partnership, 236 Conn. 750, 761–62 (1996).   Conduct which is inconsistent with the written terms of a contract to which the other party assents may be deemed to have created a new contract arising by implication.  Malone v. Santora, 135 Conn. 286, 292 (1949).

Applying these principles to the present case requires a recitation of additional facts.   Shortly after the parties began to do business, the defendant permitted the plaintiff to “run up a balance” and make lump sum payments on account, periodically, but not at regular and fixed intervals.   The defendant did not have to pay the previous invoice before the plaintiff would ship another order.   Nor did the defendant have to bring its account current as a condition precedent to shipment.   During the entire time that the parties did business the defendant never paid on an invoice by invoice basis.   When in the plaintiff's judgment the account balance ran too high, its salesman, Doug Kenney, would call the defendant and ask the defendant to make a payment.   This practice was typical of their relationship, notwithstanding that each monthly invoice clearly stated that the terms were “net 30 days” and showed the account balance at the time.   The plaintiff never enforced the 30–day requirement.   Both the defendant's bank statements and the plaintiff's “account receivable aging reports” are replete with evidence of this practice.   These documents show that payments were made at irregular intervals and always in round numbers, e.g., $2,000 on December 11, 2005;  $2,500 on October 8, 2004;  $5,000 on February 20, 2004;  $10,000 on September 8, 2004.   At some point in their relationship the plaintiff told the defendant that it did not have to worry about the net 30–day requirement.   In the history of their 15–year association the defendant never paid within 30 days.   It is obvious that the defendant benefitted from this practice and followed it consistently.   Mr. Chludzinski's testimony corroborated these facts.   There is no question that the parties knowingly and intelligently ignored the payment terms of their agreement and instead created an open account which, in law, constituted an account stated.   “The delivery by the [creditor] to the [debtor] of each statement of the latter's account, with the [documentation] upon which the charges against [the debtor's account] were based, [is] a rendition of the account so that retention thereof for an unreasonable time constitute(s) an account stated which is prima facie evidence of the correctness of the account.  General Petroleum Products, Inc. v. Merchant's Trust Co., 115 Conn. 50, 56 (1932).”  (Alternate citation omitted.)  Citibank N.A. v. Manger, 105 Conn.App. 764, 766, n.2 (2008).   By their conduct the parties converted a 30–day payment arrangement into an account stated.   The essential element of a novation is the extinguishment of the original contract by the substitution of a new one.   Flagg Energy Development Corp. v. General Motors Corp., 244 Conn. 126, 145 (1998).   That is exactly what happened in this case.   The significance of this classification of the parties' relationship as that of an “account stated” is that it precludes classification of the billing practice as an “invoice by invoice” system and therefore allows the court to next consider whether the February 14, 2006 payment on account served to toll § 42a–2–725.

Properly, the plaintiff has pleaded the tolling of the statute in its reply.   Zatakia v. Ecoair Corp., 128 Conn.App. 362, 367 (2011).  “In Cadle Co v. Errato, supra, 71 Conn.App. 461, the court stated:  “The Statute of Limitations creates a defense to an action.   It does not erase the debt.   Hence, the defense can be lost by an unequivocal acknowledgment of the debt, such as a new promise, an unqualified recognition of the debt, or a payment on account ․ Whether partial payment constitutes unequivocal acknowledgment of the whole debt from which an unconditional promise to pay can be implied thereby tolling the statute of limitations is a question for the trier of fact ․

A general acknowledgment of an indebtedness may be sufficient to remove the bar of the statute.   The governing principle is this:  The determination of whether a sufficient acknowledgment has been made depends upon proof that the defendant has by an express or implied recognition of the debt voluntarily renounced the protection of the statute ․ But an implication of a promise to pay cannot arise if it appears that although the debt was directly acknowledged, this acknowledgment was accompanied by expressions which showed that the defendant did not intend to pay it, and did not intend to deprive himself of the right to rely on the Statute of Limitations ․ John H Kolb & Sons v. G & L Excavating, Inc., 76 Conn App. 599, 611 (2003).

Moreover, the plaintiff's assertion that the doctrine of tolling does not apply to a so called statute of repose, as a matter of law is legally incorrect.   Apart from the fact that Section 42a–2–725 is entitled “Statute of limitations in contracts for sale,” the distinction between a statute of limitations and a statute of repose is unimportant for two reasons:  first because in Neuhaus v. Decholnoky, 280 Conn 190, 201 (2006) our Supreme Court reaffirmed that a statute of repose such as is found in Sec. 52–584 “May be tolled under the continuing course of conduct doctrine,” thus undermining the plaintiff's universal negative proposition.   Next, the plaintiff's argument is based on the principle of “equitable tolling.”   The doctrine of equitable tolling has been defined as follows.  “The doctrine that the statute of limitations will not bar a claim if the plaintiff, despite diligent efforts, did not discover the injury until after the limitations period had expired.”   Black's Law Dictionary (9th Ed.2009) Wiele v. Board of Assessment Appeals, 119 Conn.App. 544, 554 (2010).   Equitable tolling is about injury discovery and excusable untimeliness, not debt acknowledgment.   The principle is inapplicable to the facts of this case which do not require the assessment of inequitable conduct by the plaintiff but simply require a factual determination of whether the defendant acknowledged the debt by its conduct over the course of several years.   Equitable consideration plays no part in this exercise.

Applying these principles, the court must determine first whether the February 14, 2006 payment on account acknowledged the debt.   This payment was made without qualification or reservation of any sort.   The defendant did not contest the account, the amount of the debt or its enforceability under the statute of limitations or any other theory of defense.   Indeed, there has never been any question in this case concerning the correctness of the account.   Mr. Chludzinski's testimony is unequivocally consistent with that acknowledgment.¹  As was the case in Cadle Co. v. Errato, supra, 71 Conn.App. at 465, the payment “demonstrates the defendant's recognition of the debt and [its] participation in satisfying the amounts owed.”   The unequivocal nature of the acknowledgment is reinforced by the two events which preceded the payment.   First, on November 16, 2005 the plaintiff sent the defendant a letter in which the plaintiff demanded immediate payment in full of the account in the amount of $112,309.90.   The defendant never responded to this letter.  “[A] general acknowledgment may be inferred from acquiescence as well as from silence, as where the existence of the debt has been asserted in the debtor's presence and he did not contradict the assertion.”  John H. Kolb & Sons v. G & L Excavating, Inc., supra, 76 Conn.App. at 611.   Next, in January 2006 the defendant orally requested that the plaintiff grant it forbearance ² to which the plaintiff assented while at the same time acknowledging both the amount and the past due status of the debt.   This was a fresh promise to pay the old debt.   This promise did not create a new contract but rather constituted an acknowledgment of the existing debt.   There was no evidence of any consideration to support this promise.   Past consideration will not support a new promise to pay.  Dick v. Dick, 167 Conn. 210, 224 (1974).   Thus, the trigger date for the running of § 42a–2–725 is February 16, 2006 and therefore the action was commenced well within four years thereafter.³  Even if a new contract were created, pursuant to the preclusive language of Sec. 52–581(b) this action was commenced well within four years from that date.

The plaintiff seeks to recover a service charges of 1.5% per month as provided for in the credit agreement.   Apparently, in a commercial transaction finance charges are recoverable if the party to be charged has agreed to them.   Northwestern Electric, Inc. v. Rozbicki, 6 Conn.App. 417 (1986).   Because the parties have fixed the amount of the charge for delinquent payments in their agreement they have determined that this charge shall be in lieu of prejudgment statutory interest awardable pursuant to G.S. § 37–3a.   Finance charges at this rate have been held valid in a consumer setting.  Brunswick School, Inc. v. Hutter, 53 Conn.App. 455 (1999).

Judgment may enter for the plaintiff in the principal amount of $109,984.55 ⁴ plus finance charges accrued to June 8, 2011 at the above rate in the amount of $105,546.88 with per diem at $54.22.   The plaintiff also seeks to recover prejudgment interest pursuant to Gen.Stat. § 37–3a in addition to the finance charge.   The court believes that it would be inequitable to award both since the finance charges were freely contracted for and fairly compensate the plaintiff for the wrongful detention of this money.  McCullough v. Waterside Associates, 102 Conn.App. 23, 33 (2007).

THE COURT

A. Willam Mottolese, J.T.R.

FOOTNOTES

FN1. The defendant's reference in its brief to Judge Adams' characterization of a minute portion of Mr. Chludzinski's testimony must be interpreted in the context of his entire deposition testimony, not in isolation.   In his testimony taken as a whole Mr. Chludzinski clearly and unequivocally acknowledged a debt of $112,000 which was an approximation at the time..  FN1. The defendant's reference in its brief to Judge Adams' characterization of a minute portion of Mr. Chludzinski's testimony must be interpreted in the context of his entire deposition testimony, not in isolation.   In his testimony taken as a whole Mr. Chludzinski clearly and unequivocally acknowledged a debt of $112,000 which was an approximation at the time.

FN2. Ballentine's Law Dictionary 3rd Ed. at 485 defines the term as “giving a debtor additional time for payment.”.  FN2. Ballentine's Law Dictionary 3rd Ed. at 485 defines the term as “giving a debtor additional time for payment.”

FN3. Neither the defendant's second special defense nor its discussion at page 14 of its brief alleges or explains the date on which this oral contract is claimed to have been created.   The July 21, 2006 letter from attorney Myron D. Mich. bears no relevance to this issue..  FN3. Neither the defendant's second special defense nor its discussion at page 14 of its brief alleges or explains the date on which this oral contract is claimed to have been created.   The July 21, 2006 letter from attorney Myron D. Mich. bears no relevance to this issue.

FN4. The plaintiff's trial brief contains numerous references to a balance of $109,994.55.   The court's trial notes contain a figure which is ten dollars less..  FN4. The plaintiff's trial brief contains numerous references to a balance of $109,994.55.   The court's trial notes contain a figure which is ten dollars less.

Mottolese, A. William, J.T.R.