Source: http://mn.gov/law-library-stat/archive/ctapun/0004/1723.htm
Timestamp: 2017-12-18 22:07:46
Document Index: 414685572

Matched Legal Cases: ['§ 549', '§ 549', '§ 549', '§ 549', '§ 549', '§ 549', '§ 549']

606 Vandalia Partnership, Respondent, vs. JLT Mobil Building Limited Partnership, et al., Appellants. C3-99-1723, Court of Appeals Unpublished, April 25, 2000.
C3-99-1723
JLT Mobil Building
File No. C9-96-13002
Kay Nord Hunt, Lommen, Nelson, Cole & Stageberg, P.A., 1800 IDS Center, 80 South Eighth Street, Minneapolis, MN 55402 (for respondent)
George G. Eck, Pillsbury Center South, 220 South Sixth Street, Minneapolis, MN 55402 (for appellants)
On appeal after remand in a real estate matter, appellant-tenant JLT Mobil Building Limited Partnership (JLT) challenges the district court’s award to respondent-landlord 606 Vandalia Partnership (Vandalia) of certain late payment fees. JLT alleges: (1) the late fee provision is inapplicable; (2) Vandalia waived any late fees; (3) the district court overstated the amount of the late fees; and (4) the late-fee provision is unenforceable. We reject each of JLT’s arguments and affirm.
In 1988, Gerald Trooien, as principal for JLT, bought certain property. In doing so, he personally borrowed $1.95 million from Midwest Federal Savings and Loan Association (Midwest Federal) and gave Midwest Federal a first mortgage on the property. JLT then leased most of the property to Nor-Lakes Services Midwest, Inc. (Nor-Lakes) under a long-term lease requiring Nor-Lakes to pay late fees under certain circumstances. Midwest Federal was later declared insolvent and, after a series of transactions not relevant here, its interest in the property was transferred to the Resolution Trust Corporation (RTC).
In April 1989, Trooien and JLT entered a series of agreements with Vandalia. The first agreement was JLT’s sale of the property to Vandalia on a contract for deed. The contract for deed included provisions stating: (1) the property was subject to Trooien’s first mortgage to Midwest Federal/RTC; (2) if Trooien/JLT defaulted on that mortgage, Vandalia could cure the default and offset any amounts paid to cure the default against the payments it owed JLT on the contract for deed; and (3) Vandalia’s monthly payments on the contract for deed were about $19,000. The second agreement was JLT’s conditional assignment of the Nor-Lakes lease to Vandalia. The assignment stated that if Vandalia defaulted on its contract for deed obligations, the rent collected from Nor-Lakes was to "inure" to JLT’s benefit. The third agreement was Vandalia’s lease to JLT of the portion of the property not already rented to Nor-Lakes. JLT’s monthly rent under this agreement was about $9,000 and the agreement included provisions requiring JLT to pay late fees under certain circumstances.
In early 1991, Trooien defaulted on the underlying mortgage, RTC started proceedings in federal district court to foreclose the mortgage, Vandalia stopped making contract for deed payments to JLT, and JLT stopped making rent payments to Vandalia. JLT vacated the property when its lease expired at the end of March 1992.
In April 1992, Vandalia sent Trooien a letter listing possible changes to the agreement and amounts Vandalia alleged were due under the agreement. The letter stated that after reducing the amounts Vandalia owed JLT under the contract for deed by the rent JLT failed to pay under the lease, Vandalia owed JLT a net amount of $101,463.71. By June 1992, (1) the federal district court had awarded RTC a judgment exceeding $2.2 million in the mortgage foreclosure proceeding; (2) a sheriff’s sale of the property had been ordered; (3) RTC had received a ruling entitling it, if necessary, to a deficiency judgment against Trooien; (4) Towle Real Estate Company had been appointed receiver for the property; and (5) Towle’s receivership was to be activated after cancellation of the contract for deed and upon the posting of a proper bond. The contract for deed was not immediately cancelled and no bond was posted. In August 1992, Trooien received a letter stating that Towle had been appointed as receiver for the property. Later, Vandalia negotiated with RTC for the purchase of RTC’s interest in the property and Vandalia secured Trooien’s agreement not to bid for those interests. In October 1993, a Vandalia-related entity, Arden Investments, Inc. (Arden), bought RTC’s interest in the property.
Arden then set a foreclosure sale date and notified Trooien. Trooien claims that in late 1993 he learned that while Towle had been appointed receiver, the receivership had not been activated and, as a result, the receiver had not been applying the rent paid by Nor-Lakes against Trooien’s mortgage debt. In March 1994, Trooien started proceedings to cancel the JLT-Vandalia contract for deed and Arden asked the federal district court to activate the receivership. In May 1994, the JLT-Vandalia contract for deed was cancelled and the federal district court activated the receivership. Trooien then asked the federal district court for an injunction to preclude the foreclosure sale. When the federal district court ruled that it no longer had jurisdiction, Trooien sought, and ultimately received, an injunction from the state district court. Arden appealed and this court reversed. Resolution Trust Corp. v. River Properties, No. C7-94-2547 (Minn. App. May 16, 1995).
Arden bought the property at an August 1995 foreclosure sale, a $96,016.95 deficiency judgment was entered against Trooien, which he paid six weeks later. In December 1995, JLT sued Vandalia, RTC, and others alleging Vandalia was not allowed to retain $580,982.02 in rent payments Vandalia had collected from Nor-Lakes because, under the assignment, Vandalia’s failure to satisfy its obligations under the contract for deed required those payments to "inure" to JLT’s benefit. RTC removed the suit to federal court and Vandalia counterclaimed for back rent and late fees under the lease. Later, JLT redeemed the property from Arden, the federal court dismissed JLT’s claims and declined to exercise supplemental jurisdiction over Vandalia’s counterclaim, JLT Mobil Bldg. Ltd. Partnership v. 606 Vandalia Partnership, No. 4-95-CU-958 (D. Minn. Sept. 26, 1996), and JLT appealed to the Eighth Circuit.
In December 1996, Vandalia sued JLT in state court seeking back rent, late fees (then about $290,000), and costs and fees. JLT defended on various grounds including its alleged right to an offset of Vandalia’s unpaid contract for deed obligations.
While Vandalia’s suit was pending in state court, the Eighth Circuit affirmed the federal district court’s dismissal of JLT’s claims. JLT Mobil Bldg. Ltd. Partnership v. 606 Vandalia Partnership, 121 F.3d 712 (8th Cir. 1997). Shortly thereafter, the state district court addressed the parties’ cross-motions for summary judgment, ruling that JLT had a right to offset under the parties’ agreement but that factual issues existed regarding whether JLT had properly exercised that right. Before trial, Vandalia and JLT entered a stipulation of undisputed facts stating, among other things, that both JLT and Vandalia were sophisticated parties regarding real estate dealings.
After trial, the district court issued a January 1998 ruling dismissing Vandalia’s claims against JLT for back rent and late fees because, among other things, (1) Vandalia defaulted when it stopped making its contract for deed payments to JLT; (2) Vandalia’s $19,000 monthly contract for deed payment exceeded JLT’s $9,000 rent payment; and (3) therefore, after an offset, JLT owed Vandalia nothing. Vandalia appealed and this court reversed, ruling the initial default of Trooien/JLT on the underlying mortgage precluded JLT from asserting its right to an offset. 606 Vandalia Partnership v. JLT Mobil Bldg. Ltd. Partnership, No. C6-98-457, 1998 WL 727750, at *2 (Minn. App. Oct. 20, 1998). We then remanded for the district court to determine how much JLT owed Vandalia under the lease, including any applicable late fees. Id. at *2-*3. On remand, the district court awarded Vandalia a $676,773.08 judgment including $113,017.41 for unpaid rent, $491,625.73 for late fees on the unpaid rent, and $72,129.94 in attorney fees. JLT appeals the award of late fees.
1. Noting that Vandalia’s payments to JLT were greater than its payments to Vandalia, JLT alleges that because it had a good-faith belief that it could exercise its offset rights, it also had a good-faith belief that it did not owe Vandalia any money. Therefore, JLT argues, it should not have to pay late fees. To support its argument, JLT cites Fanarjian v. Moskowitz, 568 A.2d 94 (N.J. Super. Ct. App. Div. 1989). Because Fanarjian’s facts and its procedural posture are each sufficient to thoroughly distinguish it from this case, its persuasive value here is limited.
2. The late fee provision states that a late fee may be assessed if JLT’s rent "is not paid within 7 days after written notice from [Vandalia] that it is due." JLT alleges that Vandalia’s April 1992 letter was not adequate notice that the rent was due. Because the letter proposed an offset calculation, it assumed each party owed the other money. It is unclear how a letter stating JLT owed Vandalia back rent and was using that back rent to reduce the amount Vandalia owed JLT can be construed to be a statement that no rent was owed.
Noting that Vandalia’s April 1992 letter reduced the amount Vandalia owed JLT under the contract for deed by the rent JLT owed Vandalia, JLT alleges Vandalia waived its ability to collect any late fees because the letter functionally admits that Vandalia did not expect payment from JLT. The letter does not address late fees and the lease requires any waiver of any of its provisions to be in writing. To read a letter not mentioning late fees as waiving late fees would be to read the letter inconsistently with the lease’s waiver-in-writing requirement. Moreover, waiver is “a voluntary and intentional relinquishment or abandonment of a known right” and, while its existence is generally a fact question, the existence of waiver "may" be decided as a legal question issue on undisputed facts. Montgomery Ward Co. v. County of Hennepin, 450 N.W.2d 299, 304 (Minn. 1990) (citing Blankholm v. Fearing, 222 Minn. 51, 57, 22 N.W.2d 853, 856 (1946)); see also Beck v. Spindler, 256 Minn. 543, 564, 99 N.W.2d 670, 684 (1959) (stating waiver is generally a fact question). Here, the parties disagree on the meaning of the letter. Therefore, the relevant facts are disputed and, as a result, the district court’s finding of fact that the letter served as "[a] notice of default" (i.e., as a prerequisite to the recovery of late fees rather than as a waiver of late fees) cannot be set aside unless clearly erroneous. See Minn. R. Civ. P. 52.01 (district court findings not set aside unless clearly erroneous).
Regarding the circumstances surrounding the letter, the district court found that, after receiving it, JLT "inquired as to the specifics" of Vandalia’s claim for unpaid rent and that one of Vandalia’s general partners provided those specifics. Viewing the record in the light most favorable to the district court’s findings, JLT’s investigation of the assertions in the letter suggests JLT treated the letter as a notice that it owed Vandalia money; i.e., it functionally treated the letter as a notice of default. See Trondson v. Janikula, 458 N.W.2d 679, 682 (Minn. 1990) (requiring record to be viewed in light most favorable to district court’s findings). For this reason, the record supports the district court’s determinations that the letter served as a notice of default and that there was no waiver by Vandalia.
3. JLT alleges that the plain meaning of the late-fee provision is that any rent remaining unpaid seven days after written notice that it was due is to be increased by five percent. It then alleges that the district court erred by adding five percent per month to the unpaid rent. The late-fee provision states:
In the event any Base Rent or additional rent is not paid within 7 days after written notice from [Vandalia] that it is due, a late payment fee equal to 5% (or, if less, the highest late payment fee permitted under applicable law) shall be added thereto for each month or portion thereof that it remains unpaid.
(Emphasis added). The crux of JLT’s argument seems to be that the late-fee provision uses the singular "fee," rather than the plural "fees" when referring to the late-fee calculation. But the emphasized language allows a single five percent late fee "for each month or portion thereof that it remains unpaid." The antecedent for "it" is the unpaid "Base Rent or additional rent." We reject JLT’s one-time late fee argument.[1]
Alternatively, JLT (1) cites Brookfield Trade Ctr., Inc. v. County of Ramsey, 584 N.W.2d 390, 394 (Minn. 1998) for the proposition that contract language is ambiguous if it is reasonably subject to multiple interpretations; (2) alleges several readings of the late fee provision are possible; and (3) argues that the late fee provision is ambiguous. Whether a contract provision is ambiguous is a legal question. Art Goebel, Inc. v. North Suburban Agencies, Inc., 567 N.W.2d 511, 515 (Minn. 1997). Here, the statement in the lease’s late-fee provision that a five percent late fee "shall" be added "for each month or portion thereof that [rent] remains unpaid" unambiguously requires a late fee of five percent per month. The district court did not misconstrue the late-fee provision.
4. The parties analogize the late-fee provision to a liquidated damage clause and JLT alleges that the district court's reading of the provision renders it not a liquidated damage clause, but an unenforceable penalty.
A contract's liquidated damage clause is prima facie valid based on the assumption that it is not a penalty for nonperformance but represents fair compensation for breach-related damages caused by a party’s nonperformance. Gorco Constr. Co. v. Stein, 256 Minn. 476, 481, 99 N.W.2d 69, 74 (1959). In deciding whether a clause is an acceptable amount of liquidated damages or an unacceptable penalty, the "controlling" factor is whether its amount is reasonable "in the light of the contract as a whole, the nature of the damages contemplated, and the surrounding circumstances." Id. at 482, 99 N.W.2d at 74 (footnote omitted). If "actual damages" cannot be determined under "ordinary rules" and if a liquidated damage provision is "not manifestly disproportionate" to actual damages, a liquidated damage provision "will be sustained." Id., at 483, 99 N.W.2d at 75 (footnote omitted). If, however, "damages resulting from a breach of contract [are] susceptible of definite measurement," the supreme court has "uniformly held an amount greatly disproportionate to be a penalty.[2]" Id., 99 N.W.2d at 75 (footnote omitted).
Noting that the lease limits the late fee to the lesser of five percent per month or "the highest late payment fee permitted under applicable law," JLT alleges that under Gorco and its progeny, Vandalia’s recovery must be limited to a "fair equivalent" of its actual damages. JLT then alleges that a five-percent-per-month late fee greatly exceeds Vandalia’s actual damages and concludes that the late fee is an unenforceable penalty. To support its argument, JLT cites foreign cases. We find those cases distinguishable.[3]
Here, JLT stipulated to its sophistication in real estate matters, drafted the late-fee provision it now challenges, and entered leases containing that provision both as landlord, in its lease to Nor-Lakes, and as tenant, in its lease from Vandalia. These facts weigh against JLT under the all-of-the-circumstances prong of the Gorco analysis. The record, however, lacks evidence on Vandalia’s actual damages. Therefore, it is unclear whether a $491,625.73 late fee is disproportionate to the damages Vandalia suffered when JLT did not pay $113,017.41 in 1991-92. The presumptive validity of a liquidated damages clause, however, requires that JLT show the liquidated damages to be disproportionate to the actual damages. Thus, both the all-circumstances and disproportionate-damages prongs of the Gorco analysis weigh against JLT. On this record, we conclude that JLT’s sophistication, its having drafted the late-fee provision, its having entered two leases containing that provision, the presumptive validity of that provision, and JLT’s failure to affirmatively rebut the presumptive validity of that provision requires that the district court be affirmed.[4]
5. JLT also argues that the district court’s reading of the late fee provision is unconscionable and that, therefore, its reading of that provision cannot be enforced. A contract provision is unconscionable if it is
such as no man in his senses and not under delusion would make on the one hand, and as no honest and fair man would accept on the other.
In re Estate of Hoffbeck, 415 N.W.2d 447, 449 (Minn. App. 1987) (quoting Hume v. United States, 132 U.S. 406, 411, 10 S. Ct. 134, 136, 33 L.Ed. 393 (1889)), review denied (Minn. Jan. 28, 1988). Under the U.C.C., whether a contract provision is unconscionable is a legal question reviewed de novo. Osgood v. Medical, Inc., 415 N.W.2d 896, 901 (Minn. App. 1987), review denied (Minn. Feb. 12, 1998); but see Continental Cas. Co. v. Knowlton, 305 Minn. 201, 211, 232 N.W.2d 789, 796 (1975) (stating "whether a contract between client and attorney is overreaching and unconscionable is generally a question of fact for the trial court"). On this record, (1) JLT entered two leases with the late fee provision, (2) at least two other commercial parties have entered leases with JLT that contain such provisions, and (3) the parties to the lease with the provision at issue here stipulated that they were "sophisticated, experienced parties in commercial real estate dealing[s]" and that their transactions were "fair market transactions[.]" Under these circumstances, the late-fee provision does not fit the Hoffbeck profile of an unconscionable provision.
6. Every aspect of this case has been tenaciously litigated and aspects of the case have been in one court system or another for most of a decade. The litigation has involved both the state and federal courts at both the district and appellate levels, and includes no less than four separate appeals. In light of the exhaustive litigation and extensive judicial involvement in every aspect of these disputes, it is time, at long last, that this case comes to an end.
[1] This analysis also addresses JLT’s assertion that, because the method of calculating the late fee is unspecified, the "5%" must refer to a rate of five percent per annum and that, therefore, Vandalia is entitled to a late fee of no more than $19,787.49.
[2] Regarding the amount of damages Vandalia suffered, JLT alleges Vandalia’s damages result from Vandalia’s inability to use the unpaid rent and that, under Arcadia Dev. Corp. v. County of Hennepin, 528 N.W.2d 857 (Minn. 1995), damages for an inability to use money are calculable under the prejudgment interest statute (Minn. Stat. § 549.09 (1998)). Arcadia, however, is a property tax refund case and does not involve a typical damage award. 528 N.W.2d at 858 (stating "[t]his case concerns the appropriate interest rate applicable to property tax refund"). Also, JLT’s argument inappropriately equates the interest on a damage award under Minn. Stat. § 549.09 with the damages themselves. See Nelson v. Illinois Farmers Ins. Co., 567 N.W.2d 538, 543 (Minn. App. 1997) (stating Minn. Stat. § 549.09 "applies to final judgments for liquidated or ascertainable damages that are not contingent", review denied (Minn. Oct. 21, 1997). While JLT cites Nelson in its argument that prejudgment interest is supposed to compensate a party for lost use of money, the money to which Nelson and Minn. Stat. § 549.09 refer is the damage award. See Minn. Stat. § 549.01, subd. 1(b) (stating preverdict "interest on damages" shall be calculated as provided in the statute); Nelson, 567 N.W.2d at 542-43 (citing Minn. Stat. § 549.09). Therefore, they assume the existence of a damage award to which Minn. Stat. § 549.09 can be applied and JLT’s attempt to use the statute to determine the damage award takes those authorities out of context.
[3] See Garcia v. Canan, 851 F. Supp. 327, 328-29 (N.D. Ill. 1994) (involving flat, rather than recurring fee where rate of interest not at issue); Gershin v. Demming, 685 N.E.2d 1125, 1130 (Ind. App. 1997) (affirming late fee of one percent per day to end of residential lease where there was only a short period to end of lease); MetLife Capital Fin. Corp. v. Washington Ave. Assocs. L.P., 713 A.2d 527, 534-36 (N.J. Super. A.D. 1998) (rejecting flat five percent late fee where there was no evidence that five percent was customarily used in industry, no attempt to quantify expected damages, and court inferred a "coercive” nature to late fee); Spring Valley Gardens Assocs. v. Earle, 447 N.Y.S.2d 629, 630 (N.Y. Sup. Ct. 1982) (rejecting flat $50 late fee on $405 rent amount as violating local ordinance and noting, in dicta, that late fee was "grossly disproportionate" to actual damages); North American Inv. Co. v. Lawson, 854 P.2d 384, 386 (Okla. App. 1993) (rejecting flat $60 late fee on $150 monthly residential rent as "unconscionable" and noting respondent landlord did not attempt to defend the late fee and that, under Oklahoma law, failure to defend generally results in reversal).
[4] We note foreign case law has rejected a similar late fee provision as a penalty. See Abb's Moving Serv., Inc. v. Wooldridge, 612 So.2d 449, 452 (Ala. 1993) (ruling unenforceable a late fee provision requiring a late fee of five percent for every 30 days payment was late). Abbs, however, did not involve a stipulation to the sophistication of the party challenging the late fee provision.