Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca8-03-03824/USCOURTS-ca8-03-03824-0/pdf.json

Parties Involved:
Lipton-U. City
Appellant
Shurgard Storage Centers
Appellee

Document Text:

1

The Honorable Terry I. Adelman, United States Magistrate Judge for the

Eastern District of Missouri.

United States Court of Appeals

FOR THE EIGHTH CIRCUIT

___________

No. 03-3824

___________

Shurgard Storage Centers, * 

* 

Appellee, * 

* Appeal from the United States

v. * District Court for the Eastern

* District of Missouri.

Lipton-U. City, LLC, * 

* 

Appellant. *

___________

Submitted: September 16, 2004

Filed: January 12, 2005 

___________

Before LOKEN, Chief Judge, BEAM and SMITH, Circuit Judges.

___________

SMITH, Circuit Judge.

Lipton-U. City, LLC ("Lipton") and Shurgard Storage Centers ("Shurgard")

entered into a lease agreement with a purchase option. Shurgard subsequently

discovered a major problem with the price term of the agreement when Lipton

attempted to exercise it. Shurgard sought reformation or rescission of the sale

provision. After a trial on the merits, the district court1

 ordered rescission finding the

disputed contract term to be unconscionable. Judgment was entered in Shurgard's

favor and Lipton now appeals. We affirm.

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I. Background

In 1996, a representative of Lipton contacted Shurgard to discuss the purchase

of three self-storage facilities in the St. Louis area, including a facility located on

Olive Boulevard. Because no agreement could be reached on price, these negotiations

failed. In 1998, Lipton renewed its interest in purchasing the three properties and

made a second offer of $12,311,452.00. The Olive Boulevard property accounted for

$6,913,418.00 of that total price. This calculation was based on an annual netoperating income and a 9.5% capitalization rate. After a due diligence review of the

properties, Lipton became concerned about an existing environmental condition at the

Olive Boulevard property. Given the buyer's concerns, the parties agreed to a lease,

rather than a sale of the Olive Boulevard property. Shurgard drafted and circulated

a lease agreement to Lipton's and Shurgard's negotiators. The proposed lease

contained a purchase option provision, which was based on a formula using twelve

months of projected net-operating income and a capitalization rate of 10%. As

negotiations progressed, Lipton, through its representative, Donn Lipton, expressed

concern about the value it would receive given the purchase price and the

environmental condition of the Olive Boulevard property. Donn Lipton threatened to

terminate purchase negotiations if Shurgard did not make some significant

concessions. Donn Lipton also made clear that he expected a 20% return. 

Shurgard suggested a compromise regarding the definition or basis for netoperating income and forwarded a spreadsheet showing values for the Olive

Boulevard property ranging from $7.5 million to $8.5 million. Shurgard also

suggested that the parties use a 9.6% capitalization rate on a historic net-operating

income using results from the immediate past six months of business. Lipton

disregarded the spreadsheet, but noted that the lease payments would be $654,000.00.

Lipton's representatives saw the deal favorably, and using annualized figures,

projected that the value of the property would increase from approximately $7.2

million to about $7.9 million in five years. 

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Keith Allair, an investment banker concentrating in the self-storage industry

testified that annualized net-operating income is universally used in valuation

calculations.

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Given this forecast, Donn Lipton accepted Shurgard's compromise offer of a

9.6% capitalization rate on six-months of trailing net-operating income.

Unfortunately, the parties did not make their agreement abundantly clear. Donn

Lipton interpreted Shurgard's compromise to be a substantial price reduction by using

six-months of net-operating income instead of annualized or twelve-months of netoperating income. Thus, Shurgard believed the purchase price would be based upon

a full-year of net-operating income and Donn Lipton believed the price would be

based upon six months of net-operating income. Shortly thereafter, Donn Lipton and

Shurgard discussed the deal and Shurgard requested that the parties fix the six-month

period as either January through June or July through December.

On October 11, 1999, Shurgard representatives, who were drafting the lease,

circulated an internal e-mail memorandum describing its terms. The memorandum

indicated that the lease should apply a 9.6% capitalization rate on the annualized netoperating income for the latest six-month period, January 1 through July or July 1

through December 31, multiplied by two. The net-operating income was to be

determined by applying standard generally-accepted accounting principles2

 as

consistently applied by Shurgard. Shurgard copied Lipton representatives on this email memorandum and there are no records that anyone from Lipton disputed its

accuracy or contended net-operating income should not have been annualized.

The next day, Shurgard revised the lease pursuant to the earlier e-mail and

circulated the updated version. The updated lease inexplicably omitted any language

regarding multiplying by two or annualizing the net-operating income. Section 2.4

of the updated lease did, however, incorporate a capitalization rate of 9.6% and a

definition of net-operating income to be based on a set six-month period. After

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receiving a copy of the lease, Donn Lipton announced to his company's attorneys that

the lease reflected his successful negotiation of a purchase option price based on sixmonths of unannualized net-operating income. 

The parties continued to negotiate other terms of the lease, specifically other

provisions in section 2.4 and the fee mortgage provision found in section 1.15. At the

end of their negotiations, Shurgard's board of directors met to consider final approval

of the lease proposal. At that time, a copy of the lease was provided to each member

of the board. The board approved the lease and the parties signed the final draft. The

contract specified a ten-year lease term and set the initial annual rent at $636,000.00

based on a property valuation of approximately $7 million. 

About eight months after signing the lease, Lipton expressed an intent to

exercise the purchase option under section 2.4 and stated a price of $2,918,103.70.

Lipton calculated the price based on six-months of unannualized net-operating

income. Shurgard rejected this offer and filed suit in district court seeking

reformation or rescission citing the parties' misunderstanding about the price term.

Count II of Shurgard's First Amended Complaint, labeled "Rescission," specifically

alleged that: 

Lipton knew and understood that Shurgard had instructed its attorney to

specify the use of annualized . . . [net-operating income] in the

calculation of the purchase option price, and Lipton further knew and

understood that Shurgard executed the Lease Agreement . . . in the

mistaken belief that the language of the Lease Agreement as executed

called for such use of annualized . . . [net-operating income] in the

calculation of the purchase option price. 

* * * 

Shurgard would not have agreed to enter into the Lease Agreement if it

had known that the calculation of the purchase option price in Section

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2.4 of the Lease Agreement failed to require the use of annualized . . .

[net-operating income] as the parties had agreed, and Shurgard would

never have agreed to sell the Property to Lipton at a price that in effect

reflects only half of its true value.

At the end of the non-jury trial, the district court rejected Shurgard's mutual mistake

and fraud theories. However, the district court ordered rescission based on

unconscionability. The court found that Donn Lipton should have known that

Shurgard intended to annualize the net-operating income because he was copied on

the October 11 e-mail detailing the contract terms. The court reasoned that it would

be unconscionable to allow Lipton to purchase the Olive Boulevard property at half

its value based upon the lack of clarity of the price term. Lipton now seeks reversal

of the district court's order of rescission and judgment in favor of Shurgard.

II. Discussion

The parties agree that Missouri law applies. We review the district court's

interpretation of state law de novo. Kolb v. Paul Revere Life Ins. Co., 355 F.3d 1132,

1134 (8th Cir. 2004). Under Missouri law, "rescission may be granted when the other

party knows of the mistake or if the mistake is so obvious that it should have been

known or when enforcement of the contract would be unconscionable and relief

would impose no substantial hardship on the other party." Kassebaum v. Kassebaum,

42 S.W.3d 685, 695 (Mo. Ct. App. 2001). Moreover, "there is practically universal

agreement that, [under Missouri law] if the material mistake of one party was caused

by the other, either purposely or innocently, or was known to him, or was of such

character and accompanied by such circumstances that he had reason to know of it,

the mistaken party has a right to rescission [of the contract]." Silver Dollar City, Inc.

v. Kitsmiller Constr. Co., Inc., 931 S.W.2d 909, 915 (Mo. Ct. App. 1996). The

Missouri Court of Appeals in Silver Dollar City relies heavily on § 153 of the

Restatement (Second) of Contracts, which provides:

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[w]here a mistake of one party at the time a contract was made as to a

basic assumption on which he made the contract has a material effect on

the agreed exchange of performances that is adverse to him, the contract

is voidable by him if he does not bear the risk of the mistake under the

rule stated in § 154, and (a) the effect of the mistake is such that

enforcement of the contract would be unconscionable, or (b) the other

party had reason to know of the mistake or his fault caused the mistake.

Restatement (Second) of Contracts § 153. See also Silver Dollar City, 931 S.W.2d at

913–18. 

Lipton acknowledges the holdings of Kassebaum and Silver Dollar. However,

Lipton argues that § 153 of the Restatement is inapplicable because the mistake in

this case is one of expression rather than a mistake of an underlying fact. Lipton relies

on the introductory note contained in Chapter 6 of the Restatement, which provides:

The type of mistake dealt with in this Chapter is one that relates to

existing facts that the parties regard as a basis for making an agreement.

An important sub-category of such mistake is mistake as to expression,

in which the mistake relates to the contents or effect of a writing that

expresses an agreement. In general, the appropriate relief for mistake

takes the form of avoidance of the contract.

* * * 

If there is a mistake of only one party as to expression, avoidance may

be an appropriate remedy under the rule stated in § 153 . . . . If, however,

his mistake is in believing that a writing correctly expresses a prior

agreement and the other party knows that it does not correctly express

that agreement, the problem is one of the effect of the latter's failure to

disclose this fact. This is dealt with in §§ 160–61, together with other

instances in which nondisclosure may be tantamount to

misrepresentation.

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Restatement (Second) of Contracts ch. 6, introductory note. Under Missouri law,"[a]

mistake of expression occurs where the parties are of the same mind regarding the

terms of the agreement, but the writing intended to embrace those terms does not

express their true meaning." Smith v. Githens, 271 S.W.2d 374, 379 (Mo. Ct. App.

1954). Lipton and Shurgard were not of the same mind regarding the terms of the

agreement, as Lipton thought the contract was based on unannualized net-operating

income and Shurgard thought that the contract was based on annualized net-operating

income. The mistake here is not one of expression and the district court correctly

decided this case under § 153 of the Restatement.

Lipton also disputes two of the district court's findings of fact: (1) that Donn

Lipton knew or should have known of Shurgard's mistake of fact and (2) that the

price offered by Lipton was half of the value of the property. Findings of fact,

whether based on oral or documentary evidence, shall not be set aside unless clearly

erroneous, and due regard shall be given to the opportunity of the district court to

judge the credibility of the witnesses. Fed. R. Civ. P. 52(a). This standard of review

does not permit a court of appeals to substitute its own impressions for those of the

district court. Adzick v. UNUM Life Ins. Co., 351 F.3d 883, 889 (8th Cir. 2003).

Moreover, "[w]hen findings are based on determinations regarding the credibility of

witnesses, Rule 52 demands even greater deference to the . . . [district] court's

findings, and unless contradicted by extrinsic evidence or internally inconsistent, such

findings can virtually never be clear error." Id.

Based upon our review, we hold the district court was not clearly erroneous in

holding that Donn Lipton knew or should have known of Shurgard's mistake. Donn

Lipton was notified via e-mail that Shurgard thought the 9.6% capitalization rate

would be based on annualized net-operating income. Donn Lipton knew that section

2.4 of the lease did not apply the 9.6% capitalization rate on annualized net-operating

income and informed his attorneys that the lease reflected his successful negotiation

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of a purchase-option price based on six-months of unannualized net-operating

income. 

Furthermore, the record contained sufficient evidence for the district court to

conclude that the Olive Boulevard property should have been valued at approximately

$7 million. Specifically, Shurgard suggested a compromise regarding the definition

or basis for net-operating income and sent Donn Lipton a spreadsheet showing values

ranging from $7.5 million to $8.5 million. Shurgard also suggested that the parties use

a 9.6% capitalization rate on a historic net-operating income using the immediate past

six months of data. Lipton representatives thought the 9.6% capitalization rate on a

historic net-operating income was good, and using annualized figures, projected that

value of the property would increase from approximately $7.2 million to about $7.9

million in five years. This all occurred after Lipton's due diligence review. 

Lipton also argues that the district court erred in its equitable balancing of the

parties. Specifically, Lipton disputes the district court's findings of unconscionability

on two grounds: (1) Shurgard failed to plead unconscionability in its amended

complaint and (2) Lipton was substantially and materially prejudiced by the exercise

of the district court's equitable powers. Rule 54(b) of the Federal Rules of Civil

Procedure permits:

the district court to 'direct the entry of a final judgment as to one or more

but fewer than all of the claims or parties only upon an express

determination that there is no just reason for delay.' In determining that

there is 'no just reason for delay,' the district court must consider both

the equities of the situation and 'judicial administrative interests,'

particularly the interest in preventing piecemeal appeals. Applying the

abuse of discretion standard of review, . . . [this court] largely defer[s]

to the district court's weighing of the equities.

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See Interstate Power Co. v. Kansas City Power & Light Co., 992 F.2d 804, 806–07

(8th Cir. 1993) (citing Curtiss-Wright Corp. v. General Elec. Co., 446 U.S. 1, 8, 10

(1980)). 

Lipton maintains that because of Shurgard's failure to plead unconscionability

in its original or amended complaints, Lipton was not afforded an opportunity to

conduct proper discovery to develop evidence on the issue. Under the liberal notice

pleading standards of the Federal Rules of Civil Procedure, Shurgard was only

required to give "a short and plain statement of the claim showing that the pleader is

entitled to relief." Fed. R. Civ. P. 8(a). Moreover, "[a]ll pleadings should be construed

to do substantial justice." Fed. R. Civ. P. 8(f). Count II of Shurgard's First Amended

Complaint, labeled "Rescission," specifically alleges that: 

Lipton knew and understood that Shurgard had instructed its attorney to

specify the use of annualized . . . [net-operating income] in the

calculation of the purchase option price, and Lipton further knew and

understood that Shurgard executed the Lease Agreement on about

November 10, 1999 in the mistaken belief that the language of the Lease

Agreement as executed called for such use of annualized . . . [netoperating income] in the calculation of the purchase option price. 

* * * 

Shurgard would not have agreed to enter into the Lease Agreement if it

had known that the calculation of the purchase option price in Section

2.4 of the Lease Agreement failed to require the use of annualized . . .

[net-operating income] as the parties had agreed, and Shurgard would

never have agreed to sell the Property to Lipton at a price that in effect

reflects only half of its true value.

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The district court specifically found that the complaint sufficiently stated a claim in

equity that the enforcement of the contract, under principles of equity, would be

unconscionable. We cannot say that the district court abused its discretion in doing

so.

Finally, we disagree with the argument that Lipton was prejudiced by the

substantial change in his position after entering into the lease agreement. The district

court noted that most of the funds expended by Lipton occurred after Shurgard filed

suit, not before. Moreover, while Lipton did not specify the expenditures, the district

court found that they were spent on all three properties, not just the property located

on Olive Boulevard. While Lipton hired a manager to run the Olive Boulevard

property, that same manager ran the other properties under three separate agreements.

Lipton produced no evidence that it hired this manager contingent upon Lipton being

able to exercise its purchase option. Lipton does not dispute these findings of fact on

appeal. The district court did not abuse its discretion in balancing the equities in favor

of Shurgard. 

For the reasons stated above, the judgment of the district court is affirmed.

______________________________

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