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Hebberd-Kulow Enterprises, Inc. v. Kelomar, Inc.

California Court of Appeals, Fourth District, First Division

July 25, 2013

HEBBERD-KULOW ENTERPRISES, INC., Plaintiff and Respondent,
KELOMAR, INC., Defendant and Appellant.

APPEAL from a judgment of the Superior Court No. ECU03823 of Imperial County, Donal B. Donnelly, Judge.

Sutherland & Gerber and Lowell F. Sutherland for Defendant and Appellant.

Horton, Knox, Carter & Foote, Orlando B. Foote and Margarita McKee Haugaard for Plaintiff and Respondent.

HUFFMAN, Acting P. J.

Hebberd-Kulow Enterprises, Inc. (HKE) sold agricultural supplies to Kelomar, Inc. (Kelomar) for 20 years. HKE brought suit against Kelomar when Kelomar refused to pay for certain goods shipped under 33 separate invoices. Kelomar filed a cross-complaint alleging damages arising from HKE's delivery of nonconforming labels provided under a contract that did not involve the 33 invoices.

The matter proceeded to trial where the jury awarded HKE damages in the amount of $439, 792.99, consisting of $259, 120.50 of principal and $180, 672.49 of interest. The jury also awarded Kelomar $27, 769.94 on its cross-complaint.

Kelomar appeals, contending the court erred as a matter of law in interpreting the various contracts between the parties to include interest charges on late payments. In the alternative, Kelomar argues that even if the parties agreed that Kelomar would pay interest on any late payment, the amount of interest was improperly calculated because the principal awarded HKE was subject to a set off. We conclude the trial court erred in ruling that the parties' contracts included an interest charge for late payments (the interest provision). As we discuss below, the court made this ruling as part of its consideration of HKE's motions in limine, but did not appear to have a basis to do so on the record, and thus, we reverse the judgment. We do not reach Kelomar's set off argument.



HKE has sold agricultural supplies to Kelomar for 20 years. During these 20 years, Kelomar would routinely order products over the phone. HKE would agree to supply the items requested. In the phone call, the parties' representatives would discuss and agree to the type of item, its quantity, and its price. Kelomar would provide HKE with a purchase order number for the requested items. After delivery of the items to Kelomar, HKE would send Kelomar an invoice that corresponded to the applicable purchase order number. Kelomar often paid late, but HKE never charged Kelomar interest on the late payments.

The dispute between the parties arose after HKE delivered about $250, 000 worth of goods in the spring of 2007. These goods were shipped separately with corresponding invoices. In all, there were a total of 33 invoices for the subject goods. At the bottom of most invoices was printed: "Unpaid invoices beyond terms will be assessed a monthly service charge of 1-1/2%."

Kelomar did not pay any of these 33 invoices because it claimed to have incurred damages due to certain nonconforming labels supplied by HKE. These nonconforming labels were not part of the 33 unpaid invoices, but instead were shipped under a separate contract between the parties.

The Lawsuit

HKE filed suit against Kelomar for its failure to pay the 33 invoices. In response, Kelomar filed a cross-complaint for damages arising out of the defective labels.

HKE's Motion In Limine No. 4

Prior to trial, HKE filed several motions in limine. Motion in limine No. 4 sought to preclude evidence that would vary the express terms of the 33 invoices, specifically the charging of interest or a service charge if payment was made late. In support of this motion, HKE submitted the declaration of one of its trial attorneys, ostensibly authenticating copies of the 33 invoices that were attached to the attorney's declaration as Exhibit A.

Kelomar opposed motion in limine No. 4, arguing that the parties never intended any interest payment or service charge to be part of their contract and a prior course of conduct would show HKE never demanded payment of interest. Kelomar also argued that the issue of whether the interest provision contained in the invoices was a term of the contracts between the parties was governed by California Uniform Commercial Code section 2207.[1] In support of its opposition, Kelomar submitted a declaration from one of its trial counsel describing the facts he believed would be adduced at trial.

The trial court denied motion in limine No. 4, but in doing so, ruled that the 33 invoices, under section 2202, were writings intended by the parties as the final expression of their agreement. The court then stated that it found, under section 2202, that the "agreement between [the] parties may be explained or supplemented by either the course of dealing, course of performance, or usage of trade." However, the court made clear that it "found an express agreement between the parties, requir[ing] interest to be paid." The court, nevertheless, stated it would allow evidence at trial to show the interest provision had never been enforced or may have been waived. When HKE's counsel asked the court if it determined that the invoices were part of the parties' contracts under section 2207, the court responded: "And the reason that I stated that this morning is, I believe that's an issue of law that must be determined by the court. And I'd like to assist the parties by removing that issue from the table."

Kelomar's counsel then argued that additional evidence to be proffered at trial would bear on the issue of whether the parties intended to include the payment of interest as part of their contracts. During Kelomar's counsel's argument, the court and counsel engaged in the following exchange:

"[Kelomar's counsel]: I think the evidence is going to be undisputed that the parties understood that they were never going to pay interest. And I think there is additional testimony from Mike [Kulow], who, I think, at that time was the president of HKE, that the reason he did that was because he considered Kelomar to be a good customer, and he wanted to continue to get their business. [¶] And knew -- I don't know if he will actually testify to this. But I think he knew that the produce business was such that the cash flow was not always there when the bills came out. [¶] I think that the ...

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