Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-89-02071/USCOURTS-ca10-89-02071-0/pdf.json

Parties Involved:
Sears, Roebuck and Company
Appellant
Max L. Smith
Appellee

Document Text:

FI LED 

UNITED STATES COURT OF APPEALS 

FOR THE TENTH CIRCUIT 

Uaitcd Stat~ Courr of Appeals 

Tenth Cir!:llit 

MAY 9 1990 

MAX L. SMITH, doing business as 

M. L. Smith Investments, a sole 

proprietorship, 

) 

) 

) 

) 

Plaintiff-Counter-Defendant, ) 

Appellee, ) 

v. 

SEARS, ROEBUCK AND COMPANY, 

a New York Corporation, 

Defendant-Counter-Claimant, 

Appellant. 

) 

) 

) 

) 

) 

) 

) 

) 

ORDER AND JUDGMENT* 

ROBERT L. HOECKER 

Clerk 

No. 89-2071 

(D.C. No. 88-0856 JB) 

(D. N.M.) 

Before MCKAY and BARRETT, Circuit Judges, and KANE,** District 

Judge. 

**The Honorable John L. Kane, Senior District Judge, United States 

District Court - for the District of Colorado, sitting by 

designation. 

Defendant, Sears, Roebuck and Company, appeals from an order 

of the district court granting plaintiff, Max L. Smith's motion 

for summary judgment. We affirm. 

Plaintiff commenced this action in district court pursuant to 

28 U.S.C. § 2201 asking the district court to declare that 

* This order and judgment has no precedential value and shall 

not be cited, or used by any court within the Tenth Circuit, 

except for purposes of establishing the doctrines of the law of 

the case, res judicata, or collateral estoppel. 10th Cir. R. 

36.3. 

Appellate Case: 89-2071 Document: 01019970074 Date Filed: 05/09/1990 Page: 1 
defendant, its tenant, had failed to effectively exercise its 

option to renew its lease. Defendant counterclaimed asking the 

court to declare that the lease had been renewed and extended for 

an additional ten-year period under the original terms. 

The undisputed facts show that defendant entered into a 

twenty-five year lease agreement with plaintiff's predecessor in 

interest. The lease granted defendant the option to extend the 

original term by up to two additional terms of ten years each. In 

order to exercise this option, defendant had to give the lessor 

"written notice of its intention to extend said term at least one 

(1) year prior to the expiration of the original term." The 

original term expired February 28, 1989. 

Defendant did . not give timely written notice of its intent to 

exercise this option. In early April, 1988, plaintiff notified 

defendant that it had begun negotiations _ for new tenants. 

Plaintiff also began negotiations for 

April io, 1 defendant orally informed 

a $2,600,000 loan. On 

plaintiff it intended to 

renew the lease. Defendant tendered written notice June 16, 1988. 

Plaintiff refused to accept the notice and thereafter commenced 

this action in district court. 

While admitting it had not given timely written notice, in 

its counterclaim defendant alleged that it was entitled to 

equitable relief. Defendant alleged that it had substantially 

complied with the terms of the option because plaintiff knew of 

its intention to renew and was not prejudiced by the delay. 

1 The date of this oral notice is in dispute. Because the 

district court decided this case on summary judgment, we accept defendant's allegation as correct. 

2 

Appellate Case: 89-2071 Document: 01019970074 Date Filed: 05/09/1990 Page: 2 
J 

Defendant also alleged it would be harmed if the court were to 

declare that defendant had not effectively exercised the option to 

renew because it had made improvements to the property valued at 

approximately $70,000 over the two previous years. 

Plaintiff moved for summary judgment on the grounds that 

defendant, by not tendering timely written notice, had not 

effectively exercised the option. The district court granted 

plaintiff's motion rejecting defendant's invocation of equity. 

The court held that equity was not available to relieve defendant 

of its duty to comply with the option terms when its default was 

due solely to defendant's own oversight or mistake. 

On appeal, defendant argues that the entry of summary 

judgment was "inappropriate" because certain facts ~eld to be 

undisputed actually were disputed, the case was in the wrong 

procedural posture for the entry of summary judgment, and the 

court should have considered equitable factors. Defendant argues 

that upon balance, equity favors defendant. 

In his reply brief, plaintiff argues that because defendant 

has moved out of the premises, this appeal is moot and should be 

dismissed. Defendant agrees but argues that we should vacate the 

district court's order and remand the case with directions to 

dismiss. See Great w. Sugar Co. v. Nelson, 442 U.S. 92 (1979). 

Defendant argues that, therefore, the district court's judgment 

will no longer operate as "res judicata in subsequent actions for 

damages" brought by either plaintiff or defendant. 

"A case becomes moot when the controversy between the parties 

no longer is 'live' or when the parties have no cognizable 

3 

Appellate Case: 89-2071 Document: 01019970074 Date Filed: 05/09/1990 Page: 3 
interest in the appeal's outcome." Keyes v. School Dist. No. 1, 

895 F.2d 659, 663 (10th Cir. 1990). Here, the parties have 

demonstrated a "cognizable interest in the appeal's outcome." 

Defendant, should it prevail on appeal or should the case be 

dismissed, intends to bring suit for damages. Because our 

determination here will clearly "affect the rights of [the] 

litigants," North Carolina v. Rice, 404 U.S. 244, 246 (1971), the 

appeal is not moot. 

Summary judgment shall be granted "if the pleadings, 

depositions, answers to interrogatories, and admissions on file, 

together with the affidavits, if any, show that there is no 

genuine issue as to any material fact and that the moving party is 

entitled to a judgment as a matter of law." Fed. R. Civ. P. 

56(c). In reviewing the grant of a motion for . summary judgment, 

we apply the same standard as that employed by the trial court. 

Osgood v. State Farm Mut. Auto. Ins. Co., 848 F.2d 141, 143 (10th 

Cir. 1988). To survive the motion, the nonmoving party must 

"present evidence from which a jury might return a verdict in his 

favor." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 257 

(1986). "Where different ultimate inferences may properly be 

drawn, the case is not one for a summary judgment." 

Bethlehem Steel Corp., 618 F.2d 1373, 1377 

1980)(citations omitted). 

Luckett v. 

(10th Cir. 

"An option must be exercised strictly ~ccording to its 

terms." Master Builders, Inc. v. Cabbell, 622 P.2d 276, 279 (N.M. 

App. 1980), cert. denied, 622 P.2d 1046 (N.M. 1981). Further, the 

intention to exercise an option must be 

4 

"unequivocal and 

Appellate Case: 89-2071 Document: 01019970074 Date Filed: 05/09/1990 Page: 4 
unqualified." 

1970). 

Northcutt v. McPherson, 473 P.2d 357, 359 (N.M. 

Defendant admits that it failed to exercise the option as 

required. Therefore, as a matter of law, plaintiff was entitled 

to the entry of summary judgment. Our review of the record shows 

that the court relied only on undisputed facts and the case was in 

the proper procedural posture for the entry of summary judgment. 

Defendant invoked the principles of equity in an attempt to 

avoid this legally mandated result. We review the district 

court's award of equitable relief for abuse of discretion, 

although we review de novo that portion of the district court's 

judgment which depends upon an interpretation of law. Downriver 

Community Fed. Credit Union v. Penn Square_ Bank, 879 F.2d 754, 758 

(10th Cir. 1989), cert. denied, 110 S. Ct. 1112 (1990). 

Defendant argues that it is entitled to equitable relief 

because its "failure to renew timely was innocent. It was a 

mistake, and it may have been negligent, but it was simply an 

oversight by its employees." Defendant's Brief on Appeal p. 11. 

In New Mexico, when a mistake 

is attributable to a party's own negligence in failing 

to exercise reasonable diligence in ascertaining the 

true facts and he had available the opportunity to 

ascertain the truth, equity will not grant relief. A 

party seeking such relief must show that his ignorance 

was excusable. The equitable defense of mistake of fact 

is not available where the alleged mistake was 

occasioned by a party's own negligence and against one 

who was free from fault. 

Albuquerque Nat'l Bank v. Albuquerque Ranch Estates, Inc., 654 

P.2d 548, 555 (N.M. 1982)(citations omitted). 

5 

Appellate Case: 89-2071 Document: 01019970074 Date Filed: 05/09/1990 Page: 5 
• 

The mistake here apparently occurred because defendant was 

reorganizing its Chicago office. The new real estate director 

received a notebook regarding her new area of responsibility from 

her predecessor. She did not send a renewal notice because she 

misunderstood the notations in the notebook. Mistakes occurring 

as a result of internal business decisions do not warrant 

equitable relief. 

In Western Savings Fund Society v. Southeastern Pennsylvania 

Transportation Authority, 427 A.2d 175 (Pa. 1981), the option to 

renew was not exercised because of a "massive branch expansion 

program." Id. at 177. The court noted that a heavy work load is 

"a state of affairs which businesses strive to achieve." 

Id. at 180. The lessee's failure to give timely notice did not 

evidence either the degree of 

unavoidable circumstances necessary 

equitable intervention. 

diligence or 

to justify 

the 

even 

"[I]t is not unreasonable to expect the commercial 

tenant ••• to protect his business interests with 

meticulousness, a meticulousness to which he would hold 

his landlord. All he, or his lawyer, need do is red 

flag that date on which he has to act." 

Id. (quoting J.N.A. Realty Corp. v. Cross Bay Chelsea, Inc., 366 

N.E.2d 1313, 1322 (N.Y. 1977)(Breitel, C.J., dissenting)). 

New Mexico has not addressed specifically the availability of 

equitable relief when a lessee has failed to timely exercise his 

option to extend a lease. Other· courts have used two basic 

approaches in analyzing the equities in this situation. 

Some courts grant no relief absent fraud, misleading 

statements by the lessor, or a clear waiver of the renewal option 

6 

Appellate Case: 89-2071 Document: 01019970074 Date Filed: 05/09/1990 Page: 6 
• 

requirements. See Ward v. Washington Distrib., Inc., 425 N.E.2d 

420 (Ohio 1980); Reynolds-Penland Co. v. Hexter & Lobello, 567 

S.W.2d 237 {Tex. 1978), dismissed by agreement (July 26, 1978); 

Sosanie v. Pernetti Holding Corp., 279 A.2d 904 (N.J. 1971); 

Woodrum v. Pulliam, 453 S.W.2d 263 (Ky. 1970); McClellan v. 

Ashley, 104 S.E.2d 55 (Va. 1958). 

Other courts balance the equities by determining (1) whether 

the delay was slight; (2) the amount of prejudice to the lessor; 

and (3) whether there was substantial hardship to the lessee. See 

Herbst v. Santa Monica Swim and Health Club, Inc., 238 Cal. Rptr. 

790 (Ct. App. 4th Dist. 1987), review denied and ordered not to be 

officially published, (1987); Romasanta v. Mitton, 234 Cal. Rptr. 

729 (Ct. App. 2d Dist. 1987), review denied and ordered not to be 

officially published, (1987); Ceres Terminals, Inc. v. Chicago 

City Bank and Trust Co., 453 N.E.2d 735 (Ill. Ct. App. 1983); 

LeMay v. Rouse, 444 A.2d 553 (N.H. 1982); Western Tire, Inc. v. 

Skrede, 307 N.~.2d 558 (N.D. 1981); Wharf Restaurant, Inc. v. Port 

of Seattle, 605 P.2d 334 (Wash. App. 1979); Koch v. H&S Dev. Co., 

163 So.2d 710 (Miss. 1964). 2 Because New Mexico has not indicated 

which approach it would sanction, we address defendant's arguments 

under both. 

Under the first approach, defendant does not argue that 

misleading statements by the lessor caused its failure to exercise 

2 Some courts have modified this "three-step" analysis to 

include the requirement for fraud as noted under the first 

approach. See Tartaglia v. R. A. C. Corp., 545 A.2d 573 (Conn. 

Ct. App.),certification denied, 548 A.2d 443 (1988); J.N.A. 

Realty Corp. v. Cross Bay Chelsea, Inc., 366 N.E.2d 1313 (N.Y. 

1977). 

7 

Appellate Case: 89-2071 Document: 01019970074 Date Filed: 05/09/1990 Page: 7 
• 

the option or that the requirement was waived. Defendant appears 

to argue that the court should find that plaintiff acted 

fraudulently because he operated as 

a savvy lessor eager to take advantage of the technical 

absence of a written instrument which he knew to be 

coming -- and to alter the status quo sufficiently that 

he might obtain a permanent windfall. Smith did not act 

in reliance on Sears' apparent decision not to renew. 

Rather, the decision to refinance appears to have been 

motivated by his knowledge that Sears had made a 

decision to renew but simply had not yet put it in 

writing. 

Defendant's Brief on Appeal p. 6. (Emphasis in original.) There 

is no evidence in the record supporting this contention. Even if 

proven, such actions do not amount to fraud leading to defendant's 

failure to timely exercise its option. 

Under the second approach, defendant argues that the delay 

was slight because plaintiff knew of defendant's intention to 

renew in late April. However, plaintiff cannot be bound by the 

oral notice which was inadequate under the terms of the contract. 

The required written notice was received almost three and a half 

months late. The district court did not abuse its discretion in 

finding that the delay was "more than slight." 

The district court found that the prejudice to plaintiff was 

substantial. Plaintiff took out a $2,600,000 loan on the property 

after defendant failed to renew its option. Plaintiff anticipated 

a higher rental rate in any new lease it executed either with 

defendant or a n·ew tenant in order to meet the monthly loan 

payments. 3 Contrary to defendant's assertion, plaintiff was not 

3 Defendant does not dispute the fact that it leased the 

property at the rate of $.80 per square foot and that the fair 

market value was $2.75-$3.00 per square foot. 

8 

Appellate Case: 89-2071 Document: 01019970074 Date Filed: 05/09/1990 Page: 8 
, 

required to use the loan proceeds for remodeling the property in 

order for the prejudice to be judged substantial. 

Defendant made approximately $70,000 worth of improvements to 

the property two years prior to the expiration of the lease. The 

district court found that the loss of these improvements did not 

amount to a substantial hardship to defendant compared to 

defendant's net gain from its advantageous rental rate. Further, 

"equitable relief is never justified by the mere fact that a 

tenant will suffer some sort of economic detriment." Ceres 

Terminals, Inc., 453 N.E.2d at 739, (citing J.N.A. Realty Corp., 

366 N.E.2d at 1318 (Breitel, C.J. dissenting)). 

The district court did not abuse its discretion in holding 

that equity _ was not available to relieve defendant of the 

consequences of its failure to timely exercise its option. 

The judgment of the United States District Court for the 

District of New Mexico is AFFIRMED. 

ENTERED FOR THE COURT 

PER CURIAM 

9 

Appellate Case: 89-2071 Document: 01019970074 Date Filed: 05/09/1990 Page: 9