Adt Security Serv. v. Premier Home Protect.

Citations: 181 P.3d 288; 64 U.C.C. Rep. Serv. 2d (West) 178; 2007 Colo. App. LEXIS 1393; 2007 WL 2128181Docket: 05CA1769

Court: Colorado Court of Appeals; July 26, 2007; Colorado; State Appellate Court

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

In the case of ADT Security Services, Inc. v. Premier Home Protection, Inc., the Colorado Court of Appeals addressed a breach of contract dispute. ADT, the plaintiff, appealed a judgment favoring Premier on its counterclaim regarding the breach of the covenant of good faith and fair dealing. Premier and Ronald Baskin, its president, cross-appealed the judgment awarding damages to ADT for unpaid attrition chargebacks and lead fees. The court affirmed the judgment in favor of ADT but reversed the judgment in favor of Premier.

The facts established that ADT, a subsidiary of Tyco International, authorized Premier to sell and install electronic security systems under an Authorized Dealer Agreement, which included guidelines for pricing and fees. Premier was required to pay a $200 connection fee for each contract sold to ADT, a fee that ADT could change at its discretion. In November 2002, ADT terminated Premier's dealership contract and subsequently sued for fraud and breach of contract, claiming entitlement to unpaid fees due to alleged misrepresentations by Premier regarding alarm monitoring contracts.

Premier countered that ADT had not followed collection procedures outlined in the guidelines and disputed the fraud allegations, arguing it was unaware of certain misrepresentations. Premier also claimed that ADT breached the contract by failing to set connection fees based on actual costs, relying on the covenant of good faith and fair dealing as the basis for its counterclaim. ADT contended that it fulfilled its duty of good faith because the connection fees were offset by bonuses for the monitoring contracts.

After a bench trial, the court ruled in favor of ADT on its breach of contract claim related to unpaid attrition chargebacks and lead fees, concluding that ADT substantially complied with collection procedures and did not prematurely terminate accounts, except for one. The court determined that ADT was permitted to terminate accounts in the collection process after 120 days, leading to a judgment for ADT of $640,276 in damages and $110,662.67 in prejudgment interest. Conversely, Premier was awarded $1,200 for the one account that was improperly terminated.

In terms of ADT’s fraud claims, the court found that Premier committed identity theft and fraudulent nondisclosure regarding credit card information, awarding ADT $16,171.60 for identity theft, $64,735.32 for credit card fraud, and $13,462 in prejudgment interest. On Premier’s counterclaim for breach of good faith and fair dealing, the court found that ADT charged excess connection fees, interpreting the contract's connection fee clause (Section 9.2.4) as referring to a variable fee rather than a fixed one, resulting in a judgment for Premier of $1,954,383 and $701,074 in prejudgment interest.

ADT appealed, arguing that the trial court incorrectly found it breached the duty of good faith and fair dealing regarding connection fees, asserting that Premier's expectations were not violated. The appeal also included a historical overview of the connection fee, established at $200 during Premier's dealership period (1999-2002), originally aimed at enhancing ADT's income, with subsequent adjustments and investigations into the fee practices.

ADT discontinued its connection fee and offsetting bonus in 2003 following an investigation. In April 2006, the SEC filed a civil injunctive action against Tyco in the Southern District of New York, alleging that Tyco had orchestrated a scheme in 1997 to exaggerate its operating income through transactions between ADT and its dealers. The SEC claimed that Tyco management instructed ADT to charge dealers a $200 connection fee for each alarm monitoring contract while simultaneously increasing the price paid to dealers by the same amount, labeling this payment a 'growth bonus.' According to the SEC, this maneuver led to an inflated operating income of approximately $567 million from September 1998 to December 2002, as the transaction should not have been recognized under generally accepted accounting principles. Tyco settled with the SEC in April 2006.

Regarding the duty of good faith and fair dealing, ADT argued it could not have breached this duty because a breach entails bad faith or deceit, which ADT claimed it did not exhibit by offsetting the connection fee with the bonus. However, this argument was not addressed as it was raised for the first time on appeal. ADT also contended that the trial court erred in finding a breach of good faith and fair dealing since it believed Premier's justified expectations under the contract were not violated. The court agreed with ADT, concluding that the trial court's judgment on this matter and the related damages award were to be reversed.

The implied covenant of good faith and fair dealing, inherent in contracts under the Uniform Commercial Code, applies when one party has discretionary authority over certain contract terms. This discretion allows a party to control performance terms post-contract formation. The doctrine aims to fulfill the parties' intentions and honor reasonable expectations, ensuring that one party's exercise of discretion does not undermine the other party's benefits from the contract. A breach occurs when one party acts dishonestly or outside accepted commercial practices, depriving the other of contractual benefits.

The duty of good faith in contractual agreements cannot contradict the explicitly negotiated terms. The focus of the statutory good faith requirement is on the faithful execution of the agreement's terms. A party is not obligated to accept significant changes to the contract or to assume conflicting obligations, nor can they unilaterally alter the contract's substantive terms. In the case of ADT and Premier, ADT's actions did not violate Premier's justified expectations as outlined in their contract, specifically concerning the connection fee defined as variable with ADT having discretion over its amount. The established connection fee was $200 and remained unchanged throughout the contract's term. Although the purchase price ADT would pay Premier for alarm monitoring contracts was unspecified, testimony indicated Premier received approximately $1200 for each contract after deducting the connection fee. Premier contended its expectations were that reimbursements would reflect actual connection costs, but it acknowledged the static nature of the $200 fee and the consistent net amount received. The trial court found that ADT breached good faith duties by charging more than what was justified for the connection fee, noting improper items included in the fee and discrepancies in ADT's reported costs. However, the court did not clarify Premier's justified expectations or how ADT's actions undermined them. The contract's clear indication of a variable connection fee supports the conclusion that Premier expected adjustments based on actual costs, although there was no contractual provision suggesting costs would regularly change.

Premier had no evidence to suggest it would not have entered into the contract if it had understood that the connection fee was not based on actual costs and that it would incur a $200 fee for each recruited customer. When Baskin signed the contract, the guidelines clearly indicated a $200 connection fee. Therefore, Premier reasonably expected this fee to remain constant unless officially changed. ADT's handling of the connection fee as fixed did not deprive Premier of contract benefits, as Premier was aware of the fee at the time of contract formation and could calculate its costs and potential profits based on that figure.

Baskin emphasized the importance of accurate fee calculations due to the substantial amount involved, arguing that Premier should be reimbursed for any portion of the fee that did not reflect actual costs. However, the connection fee remained unchanged throughout their business relationship. Premier's reliance on Amoco Oil Co. to claim that ADT's actions undermined its justified expectations was misplaced, as Amoco allowed flexibility in rental terms, which was not the case here. In contrast, while ADT had the discretion to modify the fee, the set amount was known and unaltered during the contract's duration. Thus, the implied covenant of good faith and fair dealing was not violated, leading to a reversal of the judgment on Premier's claim against ADT for breaching this covenant and the associated damages.

Premier's Cross-Appeal asserts that the trial court incorrectly ruled that, aside from one alarm monitoring account, ADT did not prematurely terminate accounts for nonpayment, thereby granting ADT entitlement to attrition chargebacks. Premier claims the trial court misinterpreted relevant provisions and overlooked critical extrinsic evidence. 

According to the attrition chargeback provisions, for accounts terminated due to nonpayment, Premier is required to pay ADT an attrition chargeback equivalent to approximately $1,200. The agreement states that this chargeback applies to Purchased Alarm Accounts that become either Canceled or Non-Producing Alarm Accounts within a twelve-month period. Canceled Alarm Accounts are those designated by ADT as canceled, while Non-Producing Alarm Accounts are defined by specific financial criteria regarding accounts receivable and delinquency.

The guidelines from 1999 and 2001 outline collection practices for terminating accounts based on their delinquency status. The 1999 guidelines mandated the cancellation of accounts with balances over 120 days old, while the 2001 guidelines introduced a notification process for accounts 90 days past due.

Premier argues that "120 days past due" should be interpreted strictly as requiring 120 days of delinquent MRR at the time of termination. In contrast, ADT asserts that this period begins when the account enters the collection process. The trial court found the term "120 days past due" ambiguous and interpreted it to mean that accounts can be terminated if they have been in the collection process for 120 days. This ambiguity, as defined by legal standards, necessitated the trial court to consider extrinsic evidence to ascertain the parties' intent. The court's decision on contract ambiguity and the interpretation of its terms constitutes a legal question, reviewed de novo.

In reviewing the trial court's findings, the standard applied is that these findings must be accepted unless they are clearly erroneous. The term "120 days past due" is deemed ambiguous, as it is unclear whether it refers to accounts being 120 days overdue from the first unpaid MRR or only when 120 days of unpaid MRR have accumulated. The trial court concluded that accounts can be terminated after being in the collection process for 120 days, a decision supported by the collection guidelines' purpose of improving customer retention and cash flow, as well as testimonial evidence from an ADT witness. The appellate court affirms the trial court's ruling regarding attrition chargebacks, but reverses the judgment on Premier's counterclaim for breach of the implied covenant of good faith and fair dealing, along with the related damages awarded. Judge Criswell concurs with the majority's opinion but expresses concerns about the relevance of the covenant in Premier's claim regarding the connection fee. He notes that the covenant applies only when no other criteria for discretion are established in the contract. Since the court found that the connection fee should be based on specific expenses, ADT's failure to adjust it was a violation of the contract’s express terms, making the covenant unnecessary for evaluating this issue. Premier's reliance solely on the covenant in its argument was insufficient to prove a violation.