The certificate of deposit posted by Southern Indiana Timber, Inc., as a timber buyer licensed under IC 25-36.5-1, with the INB Banking Center is forfeited to the benefit of Michael B. Maloney and Marsha A. Maloney. The amount of the forfeiture shall not exceed $33,500.
FINDINGS OF FACT
1. The department of natural resources (the "Department") is an "agency" as the term is defined in (sic IC 4-21.4-1-31 IC 4-21.5-1-3.
2. Adjudicatory proceedings of the Department are governed by IC 4-21.5 (sometimes referred to as the "Administrative Orders and Procedures Act" or the "AOPA").
3. The natural resources commission (the "Commission") is the "ultimate authority" (as defined in IC 4-21.5-1-15) for the Department. IC 14-3-3-1.1(a).
4. The Commission governs any hearing for the Department which is conducted under the AOPA. IC 14-3-3-25. To assist in the administration of hearings under the AOPA, the Commission has adopted a rule as codified. at 310 IAC 0.6-1.
5. On January 3, 1992, Michael G. Maloney and Marsha A. Maloney (collectively sometimes referred to as the "Maloneys") filed with the commission a Complaint for Violation Under Indiana Code 25-36.5-1 et seq. (the complaint) against Michael E. Grant (sometimes referred to as "Grant") and Southern Indiana Timber, Inc. (sometimes referred to as "SI Timber").
6. IC 2536.5-1 (the "Timber Licensing Chapter") provides for the registration of any person engaged in timber buying in Indiana and requires a "timber buyer" to post a corporate surety bond or a certificate of deposit with the Department. See, also, Kline v. DNR, 4 Caddnar 26 (1986) and Ransom v. DNR, 4 Caddnar 1 (1986).
7. The purpose of the bond or certificate of deposit is "to secure an honest cutting and accounting for timber purchased" by the timber buyer, to "secure payment to timber growers, and [to] insure the timber growers against all fraudulent acts" a timber buyer commits "in the purchase and cutting of the timber of this state." IC 25-36.5-1-3(a), IC 25-36.5-1-3(b), and IC 25-36.5-1-3(f).
8. As provided in IC 25-36.5-1-3(g), an affected person may commence an action under IC 4-21.5-3 for the forfeiture of a bond posted by a "timber buyer" due to a "timber grower" in an effort to recover "legally determined damages for timber wrongfully cut by a timber buyer or his agent." The surety or a person in possession of a certificate of deposit is also entitled to notification of any proceeding brought within IC 25-36.5-1-3(g) under the AOPA.
9. As used in the Timber Licensing Chapter, "timber" means "trees, standing or felled, and logs which can be used for sawing or processing into lumber for building or structural purposes or for the manufacture of any article. 'Timber' does not include firewood.... " IC 25-36.5-1-1.
10. "Timber grower" means "the owner, tenant, or operator of land in this state who has an interest in, or is entitled to receive any part of the proceeds from, the sale of timber grown in this state and includes persons exercising lawful authority to sell timber for a timber grower." IC 25-36.5-1-1.
11. The Maloneys were the owners in 1991 of parcels of land in Floyd County, Indiana on which timber was present. They were "timber growers" within the meaning of the Timber Licensing Chapter.
12. "Timber buyer" means a "person engaged in the business of buying timber from timber growers for sawing into lumber, processing, or resale, but does not include a person who occasionally purchases timber for sawing or processing for his own use and not for resale." IC 25-36.5-1-1.
13. During 1991, SI Timber was engaged in the business of buying timber from timber growers
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for sawing into lumber. SI Timber Licensing Chapter.
14. Grant is the president and only shareholder for SI Timber. Although SI Timber has existed since 1990 as an Indiana corporation, Grant has not treated the corporation as a legal entity distinguishable from himself. He stated on cross-examination, "I believe Michael E. Grant or Southern Indiana Timber would be the same."
15. Southern Indiana Timber, Inc. is merely a business name for Michael Grant. There is no corporate veil. Any reference to SI Timber in these Findings applies equally to Grant; and any reference to Grant also applies equally to SI Timber.
16. In 1991, Grant entered written agreements with the Maloneys for the purchase of timber owned by the Maloneys in Floyd County, Indiana. At issue in this proceeding is a contention by the Maloneys that they have not been properly compensated for this purchase. The Maloneys and Grant dispute both the amount of compensation paid and the amount of timber cut. "Report of Status Conference and Notice of Rescheduled Hearing", Item C. Issues (July 30, 1992).
17. The Commission has jurisdicition under AOPA over the subject matter of the issue in dispute pursuant to IC 25-36.5-1-3.
18. The Commission has jurisdiction under the AOPA over the persons of Michael G. Maloney, Marsha A. Maloney, Michael E. Grant, and Southern Indiana Timber, Inc.
19. SI Timber is a licensed timber buyer (License S0531) under the Timber Licensing Chapter. Stipulated Exhibit I.
20. For 1991, SI Timber provided security in the form of a certificate of deposit. See IC 25-36.5-1-3.
21. The certificate of deposit was placed in the possession of the INB Banking Center, 460 Spring Street, Jeffersonville, Indiana.
22. Pursuant to IC 25-36.5-1-3(g), the INB Banking Center has been notified of the initiation of the proceeding. In addition, the INB Banking Center has been notified of all subsequent activities in the proceeding.
23. INB Banking has elected not to participate in this proceeding, but the requirements of IC 25-36.5-1-3(g) have been met with respect to the person holding the security for a timber buyers license.
24. A hearing was held as scheduled in New Albany on August 28, 1992 during which the parties were given a full opportunity to present evidence. The hearing was conducted according to the AOPA and 310 IAC 0.6-1.
25. During the hearing, and for this proceeding generally, the Maloneys carry the burden of persuasion and the burden of going forward. "Report of Status Conference and Notice of Rescheduled Hearing", Item F (July 30, 1992).
26. In order to determine what disposition of this proceeding is appropriate, the Commission must apply the evidence adduced at hearing to the substantive law which governs contracts for the sale of timber.
27. Under Indiana common law, standing timber was considered realty rather than as goods or personalty. "Growing trees are regarded as part of the land to which they are attached .... Trees cannot be levied upon and sold as personal property." Once severed from the realty, timber was considered personalty. Owens v. Lewis, (1874), 46 Ind. 488, 508 and 509, 15 Am. Rep. 295.
28. The common law has been changed in Indiana and other states by their enactments of the Uniform Commercial Code. "Timber contracts are contracts for the sale of goods and governed by the Uniform Commercial Code" pursuant to UCC Sec. 2-107. Williams v. J.W. Black Lumber Co. (Ark. 1982), 628 S.W.2d 13, 16. To the same effect is Mills v. New River Wood Corp. (1985), 77 N.C.Ap. 576, 335 S.E.2d 759.
29. The Indiana version of the Uniform Commercial Code is set forth at IC 26-1.
30. More particularly, the statutory chapter which governs the sale of goods under the Uniform Commercial Code is IC 26-1-2.
31. As applicable to this proceeding, "goods" includes "growing crops and other identified things attached to realty as described in the section on goods to be severed from realty (IC 26-1-2-107)." IC 26-1-2-105(l).
32. IC 26-1-2107(2) provides as follows: A contract for the sale apart from the land of timber to be cut is a contract for the sale of goods within IC 26-1-2 whether the ... [(timber)] is to be severed by the buyer or seller even though it forms part of the realty at the time of contracting, and the parties can by identification effect a present sale before severance.
33. IC 26-1-2 governs the sale of timber by the Maloneys to Grant which is at issue in this proceeding. Both the growing trees and the severed timber constitute goods and they are personalty, not realty, under current Indiana law.
34. Three separate documents were entered relative to the Maloneys and Grant for the sale and purchase of timber in Floyd County at issue in this proceeding.
35. On May 6, 1991, a "Timber Sale Contract" was entered by which the Maloneys agreed to sell and Grant agreed to buy timber from a 40 acre parcel "for the total sum of 50% of net. Dollars ($20,000.00)." Stipulated Exhibit II. This contract is
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referenced here as the "May Contract".
36. Michael Maloney testified that he understood the May contract provided that the Maloneys would receive the greater of $20,000 or 50% of the net proceeds from the resale of the timber.
37. Grant testified that he would not guarantee a minimum figure where the boundaries of a parcel were uncertain, and neither he nor Michael Maloney knew where at least one of the boundaries was located for the parcel described in the May Contract. Grant believed the May Contract provided for payments to the Maloneys which were to be based on 50% of the net proceeds.
38. On August 8, 1991, a second "Timber Sale Contract" was entered between the Maloneys and Grant for the purchase and sale of timber on a distinct tract containing 38.15 acres. This second contract provided that the Maloneys would receive "the total sum of fifty (50%) percent of net proceeds from the sale of timber or Sixty-five Thousand and No/100 ($65,000.00) Dollars, whichever is the greater of the two." Stipulated Exhibit III. This contract is referenced here as the August Contract.
39. Maloney testified the August Contract was drafted by Maloney's attorney. Maloney also testified his understanding was that the August Contract provided for a payment of $65,000 or 50% net proceeds, whichever is greater.
40. Grant testified that he originally believed his responsibility on the August Contract would be for 50% of the net. Yet he also testified on direct examination that "the day that I signed that [August Contract], I knew that, you know, he (Maloney] wasn't going to work with me .... and if I was going to get those trees, I was going to have to pay him $65,000." When asked on cross-examination why he would sign the August Contract if he believed he could not work with Maloney, Grant testified "cause I was done indebted to a man that came out there, looked at the trees, and loaned me money."
41. On February 3, 1992, Michael Maloney and Michael Grant entered yet a third written agreement, this one entitled the "Secondary Timber Agreement". Claimant's Exhibit 1.
42. The Secondary Timber Agreement provided that the May Contract and the August Contract "guaranteed a combined payment of $85,000. To date a total of $19,000 has been paid to Seller [the Maloneys]; leaving a balance of $66,000. A new guaranteed payment of $50,000 is agreed by both parties predicated on" six conditions.
43. Among these six conditions, the Secondary Timber Agreement provided an extension until February 28, 1992 for Grant to "complete all transaction and cutting" of the timber still located on property covered in the August Contract. In addition, the Secondary Timber Agreement provided that an "extension of time, no later than June 1, 1992 may be granted" by Michael Maloney to allow Michael Grant "to complete total payment."
44. In addition, the Secondary Timber Agreement provided that a failure by Grant "to fulfill this revised agreement will result in the Seller [Maloney] vigorously pursuing" any of the following:
(1) this administrative action to recover the "1991 Bond Issue";
(2) civil action for triple damages for breach of contract; or
(3) criminal action for theft of timber in the Floyd County Prosecutor's Office.
45. The Secondary Timber Agreement embraces the entire substance of the May Contract and the August Contract with variations from each. Where a new contract embraces the entire substance of a former contract or contracts, with some variations, the former contract or contracts are merged into the new contract. Skaggs v. Merchants Retail Credit Association, Inc., (1988 Ind. App.), 519 N.E.2d 202.
46. The May Contract and the August Contract are merged into the Secondary Timber Agreement.
47. Both the May Contract and the August Contract had provided that any dispute which might arise between the Maloneys and Grant be submitted to mediation, and if mediation proved unsatisfactory, to arbitration by a three-person panel.
48. The Secondary Timber Agreement made, however, no reference to mediation or arbitration.
49. Neither the testimony of Michael Maloney nor the testimony of Michael Grant suggest any attempt or intention by either Maloney or Grant to seek mediation or arbitration.
50. The absence of any action by Grant or Maloney to mediate or arbitrate, coupled with terms in the Secondary Timber Agreement defining rights and remedies without reference to mediation or arbitration, demonstrate an abandonment and waiver by both Grant and Maloney of the opportunity to seek mediation or arbitration. This conclusion is consistent with the conclusion, under the doctrine of contract merger, the Secondary Timber Agreement supersedes the May Contract and the August Contract.
51. The "balance of $66,000" set forth in the Secondary Timber Agreement, as referenced in Finding 42, was an attempt by the Maloneys and Grant to set forth an amount
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for "liquidation damages" if the terms of the Secondary Timber Agreement were not met.
52. The Indiana Uniform Commercial Code provides in IC 26-1-2-718(l) that damages "may be liquidated in the agreement, but only at an amount which is reasonable in light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of other wise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty."
53. Evidence presented here indicates that liquidated damages of $66,000 were reasonable for a breach by Grant.
54. The guaranteed payment of $50,000" set forth in the Secondary Timber Agreement, as referenced in Finding 42, was an attempt by the parties to compromise a pending dispute and was contingent upon compliance with the stated conditions.
55. Grant made additional payments of $7,500 pursuant to the Secondary Timber Agreement. In other words, when added to $19,000 paid on the May Contract and the August Contract, Grant paid the Maloneys a total of $26,500.
56. In April 1992, Michael Maloney directed Grant to cease timber cutting and removal operations and to leave his property.
57. Since the full payment of $50,000 was due under the Secondary Timber Agreement by February 28, 1992, Grant had breached his contractual obligations.
58. A "cancellation" occurs under the Uniform Commercial Code when "either party puts an end to the contract for breach by the other." All contractual obligations which are still executor on both sides are discharged but any right based on prior breach or performance survives. In addition, the party causing the cancellation retains any remedy for breach of the whole contract or of unperformed balance. IC 26-1-2-106.
59. The April 1992 action by Michael Maloney, as referenced in Finding 56, constitutes his cancellation of the Secondary Timber Agreement.
60. In April 1992, Grant took his equipment from Maloneys' property in compliance with Michael Maloney's direction.
61. Grant left marketable timber on Maloneys' property in April 1992. Michael Grant testified the value of the cut timber was $30,000 gross (or $25,000 net).
62. One of the remedies available to the Maloneys for the breach of the Secondary Timber Agreement was to resell the cut timber "or the undelivered balance thereof" to other timber buyers. IC 26-1-27-06(l).
63. The Maloneys sold the timber to other timber buyers, but the sale price grossly below the value estimated by Michael Grant. Michael Maloney testified he sold a portion of the timber to Stem Wood for $3,700 and the remainder to Fred Dangler for payments of $2,322.35 and $473.43. Michael Grant characterized these timber sale prices as being "pretty ridiculous".
64. As provided in IC 26-1-2-706, where a resale is made by a seller to a third person or persons "in good faith and in a commercially reasonable manner, the seller may recover the difference between the resale price and the contract price together with incidental damages." The resale may be at a public or private sale by one or more contracts. "Where the resale is at private sale, the seller must give the buyer reasonable notification of his intention to resell."
65. For a seller to resell the goods and recover damages for the delinquency not satisfied by the resale, the seller is required to act in good faith, sell in a commercially reasonable manner, and give reasonable notice to the buyer of the intention to resell. Mott Equity Elevator v. Svihovec (N.D. 1975), 236 N.W.2d 900.
66. Where a seller avails himself of the remedy of resale under Section 2-706 of the Uniform Commercial Code, the seller must comply with the terms of the section. The burden of showing compliance with the section is upon the seller. Anheuser v. Oswald Refractories Co., Inc. (Mo. App. 1976), 541 S.W.2d 706.
67. The evidence at hearing was insufficient to determine whether Maloney complied with IC 26-1-2-706 in reselling the timber to Stem Wood and Fred Dangler. He has not established the sale was in good faith, performed in a commercially reasonable manner, or with reasonable notice to Grant.
68. The evidence most favorable to Grant is that the net value of the remaining timber was $25,000. For the purposes of this proceeding, Grant should be credited $25,000 for this timber.
69. Michael Grant testified an additional 70 trees were still standing but offered no valuation. Michael Maloney agreed that not all marketable trees were cut when Grant left the site in April 1992, but Maloney offered neither a standing tree count nor a valuation. Grant and Maloney dispute whether Fred Dangler cut timber additional to what was cut by Grant. The testimony referenced in this Finding is found to be without probative value.
70. Grant also offered testimony that about 30 ricks of
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firewood were cut and stacked for which he received no compensation. Michael Maloney testified that the Maloneys and Grant did not contract for the sale of firewood. No valuation was provided, and this testimony is found to be without
probative value.[FOOTNOTE i]
71. The preponderance of evidence is that the Secondary Timber Agreement dictates the financial responsibilities of Grant (and SI Timber) to the Maloneys for the timber at issue.
72. The Maloneys are entitled to $66,000 as liquidated damages for the breach of the Secondary Timber Agreement, with appropriate credits to Grant following entry of the Secondary Timber Agreement on February 3, 1992.
73. Appropriate credits to which Grant is entitled after February 3, 1992 are payments of $7,500 and $25,000 for the remaining timber. These credits total $32,500.
74. Grant (SI Timber) has failed to pay when due, and owes to the Maloneys, the amount of $33,500 for timber purchased.
75. The certificate of deposit posted by SI Timber with the INB Banking Center should, pursuant to IC 25-36.5-1-3, be forfeited to the benefit of the Maloneys toward satisfaction of this delinquency of $33,500. An order should be entered by the Commission to effect the forfeiture.
FOOTNOTE
i. Additionally, the definition of "timber" contained within IC 2536.5-1-1 specifically excludes "firewood". See Finding 9. Even if a value were placed on the firewood, the valuation appears irrelevant to this proceeding. The definition of "timber" contained in the Timber Licensing Chapter may also constitute a "course of dealing and usage of trade". IC 26-1-2-208(2). If so, the definition would suggest that firewood is also irrelevant to the contracts at issue in this proceeding.