Lack of cases muddies NM contract law

“Founded by Paul Thompson, Santa Fe Valet and Limousine transportation has become the premier transportation provider in Northern New Mexico.”

That’s what the website boasts, adding that the company was founded in 2007. Details of the company’s origin story are filled in by a recent Court of Appeals opinion.

In 2007, Thompson was working as a parking valet at the Eldorado Hotel in Santa Fe. The opinion continues: “Thompson also ran a business driving people ... to and from the airport in Albuquerque in their [own] cars.”

He was already planning his limousine service. In April of that year he learned of a used BMW sedan for sale at a bargain price. The owner was asking for just $9,000, significantly less than it was worth. It was exactly the car Thompson needed to launch his business. But where was a parking valet going to come up with $9,000 on such short notice?

At the Eldorado, he had become acquainted with a Santa Fe attorney named Lewis G. Pollock. According to the Court of Appeals opinion, the two “became casual but not social friends.” Thompson called Pollock and arranged a meeting at which he outlined his business plan and asked for a loan of $9,000. Pollock was at first reluctant but, according to the opinion, Thompson offered to sweeten the deal by sharing profits. (Note to budding entrepreneurs: talk to an experienced business lawyer before doing anything like that, please.)

That was enough to interest Pollock. They reached some kind of agreement, the precise terms of which became the subject of protracted litigation. The opinion continues: “Pollock — a Harvard-educated lawyer — drafted the handwritten note and agreement that morning.”

The note required Thompson to pay Pollock $390 per month, with $300 going to reduce the principal and the flat sum of $90 per month as interest. Ninety dollars per month would reflect a 12% annual interest rate on the full amount, but of course if the monthly interest payment remained the same while the principal amount shrank, the effective percentage rate would skyrocket.

The second page of the handwritten contract provided that if Thompson continued in “the limousine/auto for hire business” after Jan. 1, 2008, Pollock would be entitled to a 35% share of “all profits.” The contract didn’t specify if it meant business involving the BMW or all such business in perpetuity, and didn’t explain how profits were to be calculated.

Thompson bought the BMW, started his business and made monthly payments on the note. Then, in September 2007, according to his trial testimony, his girlfriend read the agreement “and told him that it could be interpreted to cover much more than the profits derived from just use of the BMW.” Thompson testified that he spoke with Pollock to ask if Pollock “intended that broad a reading.” When Pollock said yes, Thompson immediately said that wasn’t what he had understood.

Thompson testified that he asked how he could get out of the arrangement and Pollock said “he would release him from the obligation if the Note was paid in full.” Pollock, under oath, denied having said that. Thompson promptly paid the note in full – but didn’t receive a written release. (Note to budding entrepreneurs: see previous note.)

When Thompson’s business took off, Pollock sued, claiming 35% of all profits involving any and all vehicles despite never having participated or invested in the company. Contract law is surprisingly tricky in New Mexico because we have so little of it. There’s a shortage of cases explaining how to interpret contracts, which makes it hard for lawyers to predict how courts will rule. Given that uncertainty (and the slowness of our courts), it usually makes business sense to settle out of court, which means our appellate courts are rarely called upon to decide contract cases, and so the vicious circle keeps turning.

Pollock v. Thompson is only a partial exception to the rule. The contract drawn up by the Harvard-trained lawyer was a mess. I think it would have been entirely reasonable for judges to construe every ambiguity against him. Moreover, courts are justified in refusing to enforce grossly unfair, one-sided contracts. Judges label such contracts “unconscionable.” I think the interpretation advocated by Pollock qualified for the label.

But the Court of Appeals found it unnecessary to follow either of those paths. Instead, it was enough that the trial court, in the middle of an overly complicated, internally inconsistent decision, gave credit to Thompson’s testimony that Pollock agreed to terminate the profit-sharing arrangement once the note was paid off. The appellate court affirmed Thompson’s victory. Its opinion discusses many interesting contract law issues, but the case boiled down to a simple question of whose trial testimony was more believable.