Something to Think About When You’re Chin Deep in a Slice of Watermelon

avoiding contract disputesIt’s almost time for our annual 4th of July festivities. Aside from watching fireworks, one of the biggest Independence Day traditions is cookout/picnic complete with fresh watermelon. If you’re like most Americans you probably have fond childhood memories of you and your siblings being handed freshly-cut slices of watermelon, and then huddling in a circle to bury your faces in the half-moon of juicy goodness. You probably also remember being told not to swallow the seeds because a melon could grow in your belly. (Now that you’re an adult, I can safely tell you that you won’t grow a melon in your belly.)

avoiding contract disputesThere is nothing better to do with a watermelon than devour an icy cold slice on a hot summer Texas day. Except maybe watching those British guys who slowly made a watermelon explode after spending 20 minutes and using hundreds of rubber bands. It’s not as tasty, but it’s pretty cool to watch.

No wonder the National Watermelon Promotion Board (yes, there really is such a Board) proclaims watermelons as the most consumed melon in the U.S. 44 states grow watermelons (with Texas consistently one of the largest growers).

Given the size and profitability of the industry, it was inevitable that a court case would arise over watermelons.

The Contract:

In 2003, Lozano, owner of Sandia Depot, Inc., entered into a verbal agreement with Yeary, owner of Sky Farms, regarding the growth, harvest, and sale of watermelons. Sandia Depot would supply Sky Farms with watermelon seeds and seed money (pun intended). Sky Farms would then grow the watermelons. The advance money was for use of land, irrigation, crop insurance, fertilizer, and other expenses. After the watermelons had matured, Sandia Depot would harvest, sell, and ship the melons. Once the melons were sold, Sandia Depot and Sky Farms would settle up these expenses and split the proceeds evenly. They continued their agreement and it all seemed like smooth sailing for the next 5 years.

The Case

Then, in 2009, Lozano filed suit against Yeary claiming Yeary owed money for the 2008 watermelon harvest. Lozano filed the lawsuit in his individual capacity with a d/b/a for Sandia Depot. Yeary d/b/a Sky Farms filed a counterclaim alleging Lozano failed to render a correct accounting of Yeary’s share of the watermelon crop proceeds from 2003 to 2008 and requested attorney’s fees.

The Outcome

After a trial, a jury found in favor of Yeary and Sky Farms. The final judgment ordered Lozano to pay Yeary and Sky Farms $240,996.57, plus pre-judgment and post-judgment interest.

But Wait – There’s More

Lozano appealed asserting the judgment should have been directed towards his corporation, Sandia Depot, Inc. and not Lozano individually. The court rejected this argument stating, in part, “any . . . individual doing business under an assumed name may sue or be sued in its partnership, assumed or common name for the purpose of enforcing for or against it a substantive right. . . .” Further, there were several instances in trial where Lozano implied that he conducted business as an individual. The following is an example:
Q: Did you contract with Mr. Yeary in 2008 to plant watermelons?
A: Correct, yes
Q: Did you ever pay for any of the harvest of those watermelons?
A: Who did?
Q: You.
A: Yes, I did.
Q: Okay. So you not only expended money for purchasing watermelon seed, you also expended money for purchasing watermelon planting; is that correct?
A: Correct.
Q: And you also expended money for some of the growing of crops?
A: Correct.
Q: And you also paid for the harvest?
A: Correct.
Q: And you paid for marketing the melons?
A: Correct.
Q: And you kept all the money that you got from the proceeds of the sale of those melons?
A: Correct.

Why Did He Lose?

avoiding contract disputesLozano did not clarify that his company, Sandia Depot, Inc., was responsible for the growth, harvest, and sale of watermelons; instead, he answered that he personally did those acts. The court also noted there was no evidence in the record showing Sandia Depot was a corporation (even though Sandia Depot was a corporation). Both the trial and appellate courts found he was responsible in his personal capacity.

Lozano also contested the award of $240,996.57, plus pre- and post-judgment interest, against him. Yeary testified that, between 2004 and 2008, the gross total value of watermelons sold was $1,042,532.23. Lozano, on the other hand, testified that the total amount of gross sales was $204,392.00 for the same period of time. Yeary and Lozano also gave contradictory testimony regarding the amounts of advance monies. The appellate court upheld the award.
Lessons Learned:
Was this type of agreement required by law to be in writing? Probably no.

Would it have been better if it had been in writing? Yes!

Lozano might have been better off if he had put his agreement in writing. He could have specified that Yeary and Sky Farms were working with Sandia Depot, Inc. (instead of Lozano individually). One of the major reasons a person creates a corporation is for protection of personal liability, which Lozano “lost” when he didn’t maintain his corporate status when he filed suit!

A written agreement could have also explained what was included and excluded when they calculated the gross total value of the watermelons. Both sides could have legitimately calculated their gross total values, but there is a huge difference between $1 million and $200,000!

Having an agreement in writing with specific terms helps ensure everyone is on the “same page” about how they are working together. It’s human nature to forget the exact details of what was discussed five years later. That’s why it’s so important to get it in writing. A dispute might have been avoided if they had bothered to work out the details in the beginning and got it all down on paper rather than wait until years had passed.

Remember: We’re all eager to move forward in business when the opportunity arises and we think we found the right person to do business with. However, don’t let the excitement you feel make you throw caution to the wind and forgo the legal formality of putting your contract in writing. It can save you huge headaches down the road when you protect yourself and your business!

Learn how to avoid the problems Lozano and Yeary faced.

Learn about keeping up with your company requirements to protect yourself from personal liability at our Insider Tips to Protect Your Business on July 24th. Contact me for more information.

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