W.D. COWHERD and BETTY COWHERD v. CITY OF ELIZABETHTOWN
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RENDERED: OCTOBER 8, 1999; 10:00 a.m.
NOT TO BE PUBLISHED
C ommonwealth O f K entucky
C ourt O f A ppeals
NO.
1998-CA-001140-MR
W.D. COWHERD and
BETTY COWHERD
APPELLANTS
APPEAL FROM HARDIN CIRCUIT COURT
HONORABLE T. STEVEN BLAND, JUDGE
ACTION NO. 96-CI-01574
v.
CITY OF ELIZABETHTOWN
APPELLEE
OPINION
AFFIRMING
** ** ** ** **
BEFORE:
COMBS, HUDDLESTON, and KNOPF, Judges.
COMBS, JUDGE:
The appellants, W.D. and Betty Cowherd (the
Cowherds), appeal from the judgment of the Hardin Circuit Court
granting summary judgment in favor of the appellee, the City of
Elizabethtown (the City), and dismissing their counterclaim.
Having reviewed the record, we affirm the judgment of the circuit
court.
Since 1971, the City has operated and maintained a gas
storage field known as the Cecilia Storage Field, which is
located in Hardin County and comprises approximately 1500 acres.
The gas storage field includes a 252-acre farm, which the City
originally leased in 1971 from W.D. Cowherd’s parents.
In 1985,
the City re-negotiated and renewed its lease on the farm with the
Cowherds, who had purchased the farm from W.D.’s parents pursuant
to a land contract in 1964.
However, title to the farm was not
transferred to them until 1976.
In renewing the lease, the parties executed three
documents: a lease entitled “Oil and Gas Lease”; an amended lease
entitled “Amended Oil, Gas and Gas Storage Lease”; and a third
document entitled “Supplemental Agreement.”
All three documents
were signed by the parties and dated September 26, 1985.
The
“Oil and Gas Lease” provided that the term of the lease was for
ten years and that the City was to pay the Cowherds quarterly
rentals of one dollar per acre per annum.
However, pertinent to
this appeal, the "Amended Lease" changed the term of the original
lease and the rentals payable by the City.
It amended the term
of the lease from ten years to a “term of one year from the date
hereof, and the same shall continue in force and effect from year
to year.”
It also required the City to pay the Cowherds annual
rentals of one dollar per acre as well as one hundred dollars for
each well drilled on the farm.
The City’s rental payments were
due on or before the first day of October.
The "Supplemental
Agreement" incorporated the provisions of the original lease and
the amended lease and primarily addressed issues related to the
City’s access to the farm and any damages that might result from
its use of the property.
In addition to the rentals set forth in
the original and amended leases, this last document provided that
the City was to pay the Cowherds an amount equal to the value of
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835,000 cubic feet of gas to be calculated at the general rate
schedule in effect at that time.
In 1996, the City failed to pay the Cowherds the
rentals due under the lease on or before the first day of
October.
The Cowherds sent a letter to the Mayor of
Elizabethtown dated October 8, 1996, notifying the City that it
had breached the lease by failing to pay the rentals on time and
that they were terminating the lease.
Subsequently, on October
10, 1996, the City sent the Cowherds a check by registered mail
for the 1996 rentals; the Cowherds refused to accept the check.
On October 22, 1996, the City filed an action for a
declaratory judgment to determine the parties’ rights under the
lease.
The City also sought a temporary injunction to allow it
access to the Cowherds’ property in order to continue maintenance
and operation of the gas storage field pending the outcome of the
declaratory action.
The Cowherds filed a counterclaim seeking
damages for the City’s wrongful retention, possession, and use of
their property and alleging that the lease agreement with the
City was unconscionable.
The circuit court entered an agreed
order on October 28, 1996, setting out a month-to-month agreement
between the parties which allowed the City to continue to use the
farm for its storage field operations during the pendency of the
litigation for $400.00 per month — subject to further orders of
the circuit court.
On May 23, 1997, the City filed a motion for summary
judgment as to the declaratory action, which the circuit court
granted on September 2, 1997.
The court found that the City’s
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10-day delay in paying its rentals did not constitute a breach of
the lease and that “forfeiture of the lease agreements between
the parties [was] not justified under the facts of this case.”
The court did not address the Cowherds’ counterclaim but noted
that it was still pending.
Subsequently, on February 3, 1998,
the City filed a motion for summary judgment as to the
counterclaim.
On April 9, 1998, the court granted summary
judgment in favor of the City as to all remaining issues, holding
that the lease agreement was not unconscionable and dismissing
the Cowherds’ counterclaim.
This appeal followed.
The Cowherds first argue that the City forfeited the
lease in failing to pay the 1996 rentals on time.
They contend
that the court erred in denying the forfeiture and in granting
summary judgment in favor of the City.
The standard of review of a summary judgment on appeal
is whether the trial court correctly found that there was no
genuine issue as to any material fact and that the moving party
was entitled to judgment as a matter of law.
CR 56.03.
“The
record must be viewed in the light most favorable to the party
opposing the motion for summary judgment and all doubts are to be
resolved in his favor.”
Steelvest, Inc. v. Scansteel Service
Center, Inc., Ky., 807 S.W.2d 476, 480 (1991).
“The trial judge
must examine the evidence, not to decide any issue of fact, but
to discover if a real issue exists.”
Id. at 480.
“Only when it
appears impossible for the non-moving party to produce evidence
at trial warranting a judgment in his favor should the motion for
summary judgment be granted.”
Id. at 482.
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In general, forfeiture is not a favored creature in the
law.
In the case before us, the Hardin Circuit Court concluded
that based upon the facts, a “forfeiture of the lease agreements
between the parties [was] not justified” and that “[t]o hold
otherwise would be a gross injustice and violative of well
established equitable principles.”
In reaching its conclusion,
the court relied upon Ledford v. Atkins, Ky., 413 S.W.2d 68
(1967).
In Ledford, the Kentucky Supreme Court analyzed the
issue of whether the trial court erred in refusing to declare a
forfeiture of an oil lease where the lessee was thirteen days
late in making his rental payment.
The lessee had been stricken
with a serious illness around the time that the rentals where due
under the lease.
The evidence showed that the lessee had been in
the hospital and in a comatose state for approximately 23 days.
Upon regaining his health a few days after the rentals were due,
the lessee had a check immediately mailed to the lessor.
The
Supreme Court upheld the trial court’s refusal to declare a
forfeiture of the lease, reasoning that:
[W]e believe the better rule, the one
generally followed by the majority of states,
is to make allowances for extraordinary
circumstances and not to order a forfeiture
where the only failure has been a short delay
in making payment. Especially when the
forfeiture would result in the loss of
substantial investment on the part of the
lease and unjustly enrich the lessor. [sic]
This rule is recognized in 5 A.L.R.2d, pp.
994 and 995.
‘With allowances to be made for
ordinary variances in rulings from
state to state, explained in part
at least by differences in the
circumstances of cases, and except
for negative doctrines supported
with more or less consistency in
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one or two jurisdictions, the
correct general conclusion seems to
be that equity will grant relief
from termination of an ‘unless’
lease , or from forfeiture of an
‘or’ or other lease, for nonpayment
of delay rental, where it appears
the leaseholder had fully intended
to pay the full amount, but,
without gross negligence, and
because of accident, mistake,
inadvertence, mischance, etc.,
failed to do so strictly on time.’
Ledford v. Atkins, Ky., 413 S.W.2d 68, 69-70 (1967). (Emphasis
added).
The Supreme Court continued:
“[t]o forfeit the lease
under these conditions and especially so where the lessee stands
to lose a substantial investment already made in developing the
lease, in our opinion, would be a gross injustice.”
Id. at 71.
The Hardin Circuit Court found that the City had not
paid the 1996 rental due to an administrative error by one of its
employees.
In an affidavit, Cynthia J. Bailey, the secretary to
the superintendent of the City’s gas system, explained the reason
for the City’s late payment of the rentals.
She stated that
during the first week in September 1996, she prepared the
Purchase Orders for the rentals due in October on the City’s gas
leases — including the Cowherd’s lease.
Bailey explained that
she thought it was too early to process the orders, and so she
set them aside, intending to process them on September 25, 1996.
However, she was co-chairman of the City’s United Way campaign, a
position which required her to be away from the office much of
the week of September 22, 1996; she inadvertently forgot to
process purchase orders for the 1996 rental checks.
Bailey
further stated that she turned in the purchase orders for the
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October rentals to be processed on October 9, 1996; the checks
were mailed to the lessors on October 10, 1996.
The record indicates that the City had invested over
$1,500,000.00 in the Cecilia Storage Field.
Samuel Patrick
Ritchie, the Superintendent of the City's gas system, testified
in his deposition that 50% to 60% of the City's investment was
made on the Cowherds’ farm; that much of the operation and
maintenance of the storage field took place on the Cowherds’
property; and that without access to this property, the City’s
natural gas service would be curtailed.
W.D. Cowherd
acknowledged that over the entire course of the lease, the City
had made timely rental payments, and he admitted that he had
suffered no damages as a result of the late payment of the 1996
rentals.
Based upon these facts and circumstances, we find that
the court did not err in failing to declare a forfeiture of the
lease.
The court correctly held that it would be inequitable to
declare a forfeiture based upon the City’s 10-day delay in making
payments where the facts show that the delay was not intentional
and that it was the result of an accident or mistake which did
not cause the Cowherds to suffer any damages.
The Cowherds next argue on appeal that the court erred
in granting summary judgment in favor of the City as to their
claim that the terms of the lease were unconscionable.
Specifically, they allege that the rentals paid by the City
pursuant to the lease were unconscionable.
In dismissing the
counterclaim, the court found that the Cowherds' belief that they
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may have made a bad bargain was not sufficient reason to set
aside or to permit a re-negotiation of the lease agreement.
We
agree.
An unconscionable contract is a contract "which no man
in his senses, not under delusion, would make, on the one hand,
and which no fair and honest man would accept, on the other."
Louisville Bear Safety v. South Central Bell Telephone Company,
Ky. App., 571 S.W.2d 438,439 (1978), (quoting Black's Law
Dictionary 1694 (4th ed. 1976).
In summary, the doctrine of unconscionability
is used by the courts to police the excesses
of certain parties who abuse their right to
contract freely. It is directed against onesided, oppressive and unfairly surprising
contracts, and not against the consequences
per se of uneven bargaining power or even a
simple old-fashioned bad bargain . . . Wille
v. Southwestern Bell Telephone Co., 219 Kan.
755, 549, P.2d 903 (1976).
Id. at 440.
The Cowherds did not allege that the City had engaged
in oppressive bargaining tactics.
In his deposition, W.D.Cowherd
testified that the City re-negotiated the lease in 1985 at his
request.
He negotiated the lease himself, and Ritchie
(representing the City) stated that the parties went "back and
forth" regarding the provisions of the lease until they reached
an agreement.
The re-negotiated lease contained essentially the
same provisions as the original lease except for the changes
requested by Cowherds.
The record clearly substantiates that the
Cowherds actively engaged in the negotiations for the renewal of
the lease and that the lease was not the result of one-sided,
oppressive bargaining by the City.
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There are no genuine issues
as to the material facts of this case, and the court properly
found that the City was entitled to summary judgment as a matter
of law.
The Cowherds’ belief that they may have made a bad
bargain does not render the lease unconscionable.
Finally, the Cowherds argue that the court should have
held that the lease with the City was invalid for equitable
reasons.
They argue that the City failed to pay its rentals when
they were due and that this failure entitled them to terminate
the lease.
We have already found that the circuit court
correctly applied the Supreme Court’s reasoning in Ledford v.
Atkins, Ky., 413 S.W.2d 68, (1967), to this case.
The inequity
in this case would be for the City to have to forfeit an
investment of more than $1,500,000.00 because of the ministerial
mistake of one of its employees.
There is nothing in the record
to show that the City conspired or intended to make a late
payment.
We agree with the circuit court that “[t]o impose such
a penalty for a minor delay in payment is so extreme and severe
that equity cannot require such a result.”
Based upon the foregoing reasons, we affirm the
judgment of the Hardin Circuit Court.
ALL CONCUR.
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BRIEF FOR APPELLANTS:
BRIEF FOR APPELLEE:
James A. Maples
Francis L. Holbert
Elizabethtown, KY
Deborah Shaw
Elizabethtown, KY
ORAL ARGUMENT FOR APPELLANTS:
Charles B. West
Henderson, KY
James A. Maples
Elizabethtown, KY
ORAL ARGUMENT FOR APPELLEE:
Charles B. West
Henderson, KY
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