Kenneth Bettin, Appellant, vs. Chad Bettin, et al., Respondents.

Kenneth Bettin, Appellant, vs. Chad Bettin, et al., Respondents. A05-954, Court of Appeals Unpublished, March 7, 2006.

This opinion will be unpublished and

may not be cited except as provided by

Minn. Stat. § 480 A. 08, subd. 3 (2004).

 

STATE OF MINNESOTA

IN COURT OF APPEALS

A05-954

 

 

Kenneth Bettin,

Appellant,

 

vs.

 

Chad Bettin, et al.,

Respondents.

 

 

Filed March 7, 2006

Reversed and remanded

Halbrooks, Judge

 

 

Stearns County District Court

File No. C7-03-4182

 

Robert H. Wenner, Reichert, Wenner, Koch & Provinzino, P.A., 501 West St. Germain Street, P.O. Box 1556, St. Cloud, MN 56302 (for appellant)

 

Roger C. Justin, Rinke-Noonan, 1015 West St. Germain Street, Suite 300, P.O. Box 1497, St. Cloud, MN 56302 (for respondents)

 

            Considered and decided by Klaphake, Presiding Judge; Kalitowski, Judge; and Halbrooks, Judge.

U N P U B L I S H E D   O P I N I O N

HALBROOKS, Judge

            Appellant challenges the district court's findings that the contract between himself and respondent was both ambiguous and unconscionable.  Appellant contends that the district court erred by improperly considering parol evidence in concluding that the contract was ambiguous.  Appellant also asserts that the district court erred by rewriting the contract after finding that the contract was unconscionable.  Because we conclude that the contract is unambiguous and that the contract is not unconscionable, we reverse and remand for findings regarding the amount of respondent's nonpayment of rental income to appellant since 2002.

FACTS

            Appellant Ken Bettin owned a water softener/treatment business named Lindsay Ecowater Systems (LES) for 24 years.  In 1997, in the midst of marital-dissolution proceedings, the district court ordered appellant to sell the business.  Instead of selling the business outright, appellant purported to sell the business to his two sons, respondent Chad Bettin[1] and Scot Bettin.

LES consisted of a sales-and-service portion and a rental portion.  In the sales-and-service portion, LES sold water-treatment units to businesses or individuals and, for an additional cost, serviced those units.  In the rental portion, LES rented water-treatment units to businesses and individuals and was responsible, at no extra cost, for servicing and maintaining those units.

            In order to sell LES to respondent, appellant drafted a contract that gave respondent the sales-and-service portion outright, so long as appellant continued to receive the income from the rental portion for the rest of his life.  Respondent, as consideration, would service and maintain the rental units as needed and replace any lapsed units with new units of equal or greater value.  Appellant, as consideration, would conduct the billing and collection of the monthly rent, keeping the rental income for himself.  At appellant's death, the rental income would become respondent's property.  The contract provided respondent with the option of selling the business within the first five years, but it included conditions:  respondent must have appellant's approval, and, depending on the timing of the sale, appellant would receive a greater or lesser percentage of the purchase price.  Further, the agreement provided that any new owner would service and replace appellant's rental customers in the manner consistent with respondent's obligation.

            The contract included a clause stating that it did not purport to reflect the parties' entire agreement because there were additional issues that had yet to be resolved.  For instance, the parties needed to obtain corporate approval and come to an agreement regarding the inventory transfer.  Thus, the contract stated that the parties would draft a more formal agreement at a later date.  Despite not drafting another agreement, appellant and respondent acted in accordance with the terms of the contract for four years.

            During those four years, respondent serviced and maintained the rental units and, for a time, replaced lapsed units, forwarding the rental income to appellant.  In 1999, respondent ceased replacing lapsed units and instead paid appellant the dollar amount that the lapsed units were worth.  Appellant objected to this arrangement, but did not persist in his objection and accepted the monetary payments instead.  This arrangement went on for approximately three years. 

            In 2000 and 2001, respondent began to believe that the contract was unfair and that he should not be required to pay appellant that much money.  In 2002, respondent ceased making payments to appellant.  Appellant filed a breach-of-contract claim against respondent.

            The district court conducted a two-day bench trial.  The district court concluded that the contractual provision (provision) requiring respondent to service, maintain, and replace lapsed rental units, while appellant received the rental income for the term of his life, was unconscionable and, therefore, unenforceable.  The district court then concluded that respondent, by providing services for the rental units that appellant had in place when the contract began, had "more than satisfied [his] obligations to [appellant] under [the] agreement."  This appeal follows.

D E C I S I O N

I.

 

"[T]he primary goal of contract interpretation is to determine and enforce the intent of the parties."  Motorsports Racing Plus, Inc. v. Arctic Cat Sales, Inc., 666 N.W.2d 320, 323 (Minn. 2003).  Where there is a written agreement, the intent of the parties is determined from the plain language of the agreement itself.  Metro. Sports Facilities Comm'n v. Gen. Mills, 470 N.W.2d 118, 123 (Minn. 1991). 

Whether a contract is ambiguous is a question of law, on which the reviewing court owes no deference to the district court's determination.  Blackburn, Nickels, & Smith, Inc. v. Erickson, 366 N.W.2d 640, 643 (Minn. App. 1985), review denied (Minn. June 24, 1985).  An ambiguous contract is one that, based solely on the plain language, is reasonably susceptible of more than one construction.  Denelsbeck v. Wells Fargo & Co., 666 N.W.2d 339, 346 (Minn. 2003).  But an appellate court will not consider the terms of a contract to be ambiguous simply because the parties dispute their proper interpretation.  Knudsen v. Transp. Leasing/Contract, Inc., 672 N.W.2d 221, 223 (Minn. App. 2003), review denied (Minn. Feb. 25, 2004).  An unambiguous contract "must be given its plain and ordinary meaning, and shall be enforced by courts even if the result is harsh."  Minneapolis Pub. Hous. Auth. v. Lor, 591 N.W.2d 700, 704 (Minn. 1999) (citation omitted). 

Without identifying what it found to be ambiguous in the contract, the district court concluded that "[t]he contract was valid and its ambiguities and deficiencies were construed in favor of validity," while resolving any remaining ambiguities against appellant, the drafter. 

The contract includes a note stating the following:

Note:   This is the basic premises under which Ken Bettin will transfer a part of his Lindsay EcoWater Business to his sons, Chad and Scot Bettin.  However, this document is not intended to fully describe that transfer.  Other issues such as EcoWater Systems, Inc.  Selling Agreements, Corporate Approval, inventory transfer, etc., must all be agreed upon before a formal agreement is to be drafted.

 

No other issues were ever agreed upon, and no other agreement was ever drafted.

            It is not clear to us what the district court found to be ambiguous in the parties' contract.  Based on respondent's testimony concerning his expectation that there would be additional, articulated terms, the district court found that "[the contract] was never intended to reflect the entire agreement, nor was it intended to be the only memorial to the transaction."  The district court also found that respondent's obligation to appellant "was to end when the services [respondent] provided reasonably approximated the value of the rental business."  No such term exists in the written agreement.

A district court may not look to parol evidence to ascertain whether a contract is ambiguous, Flynn v. Sawyer, 272 N.W.2d 904, 907-08 (Minn. 1978), as it must make that finding using only the contract's plain language.  Denelsbeck, 666 N.W.2d at 346.  Thus, under the language of this contract, appellant gave the business to respondent, minus the rental income.  Respondent was to service, maintain, and replace lapsed rental units, while appellant handled billing and collection for the rental income.  This was to continue until appellant's death, at which time the rental income would become respondent's.

Further, if parties to a contract act or receive benefits under a preliminary agreement, they are bound even if they never execute a formal contract.  See United States v. Bedford Assocs., 657 F.2d 1300, 1313 (2d Cir. 1981); see also 1 Richard A. Lord, Williston on Contracts § 4.8 (4th ed. 1990).  Despite never drafting a more formal agreement, the parties acted in substantial conformity with the contract for four years.  Because we conclude that the contract is unambiguous, the district court erred by considering parol evidence in reaching its conclusion.

II.

 

Whether a contract is unconscionable is a question of law.  RJM Sales & Marketing, Inc. v. Banfi Prods. Corp., 546 F. Supp. 1368, 1375 (D. Minn. 1982). Most courts today conclude that the concept of unconscionability is two-pronged, in that there must be an "absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party."  8 Lord, supra, § 18:9 (quotation omitted); see also RJM Sales, 547 F. Supp. at 1375.  In addition, "[a] contract 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 (1889)), review denied (Minn. Jan. 28, 1988). 

"The concept of unconscionability was developed ‘to prevent the unjust enforcement of onerous contractual terms which one party is able to impose [on] the other because of a significant disparity in bargaining power.'"  United States v. Bedford Assocs., 491 F. Supp. 851, 864 (S.D.N.Y. 1980) (quoting Rowe v. Great Atl. & Pac. Tea Co., 46 N.Y.2d 62, 68, 385 N.E.2d 566, 569 (1978)), aff'd in part, rev'd in part, remanded, 657 F.2d 1300 (2d Cir. 1981).  Thus, "[a]bsent some violation of law or transgression of a strong public policy, the parties to a contract are basically free to make whatever agreement they wish, no matter how unwise it might appear to a third party."  Id.(quotation omitted).

"If a court determines that a contract contains an unconscionable clause, it may refuse to enforce the contract, enforce it without the offending language, or limit application of the unconscionable clause ‘to avoid any unconscionable result.'"  Kauffman Stewart, Inc. v. Weinbrenner Shoe Co., Inc., 589 N.W.2d 499, 502 (Minn. App. 1999) (quoting Restatement (Second) of Contracts § 208 (1981)).

Here, the district court found that "[t]he contract, were the Court to believe [appellant's] version of the facts, would be unconscionable, and therefore invalid."  The district court essentially rewrote the contract in such a way so as to avoid what it deemed to be an unconscionable result because the "consideration to [appellant] is immeasurable with no further benefit to [respondent]."  In its assessment of consideration, the district court found the sales-and-services aspect of the business that appellant gave to respondent to be irrelevant.

Thus, the district court chose the third of the three alternatives to "limit application of the unconscionable clause to avoid any unconscionable result."  Kauffman Stewart, Inc.,589 N.W.2d at 502 (quotation omitted).  The district court concluded that respondent was only to service, maintain, and replace lapsed rental units until he had provided appellant with an amount equal to the fair market value of the rental portion of LES.  At that point, the rental portion also became respondent's property, and appellant had no rights to it or the income it generated.

A.        Did respondent have a meaningful choice in signing the contract?

The first prong of the unconscionability analysis is whether the contract provided the party with a meaningful choice.  8 Lord, supra, § 18:9.  An example of a contract that does not provide a meaningful choice and requires the party to "take-it-or-leave-it" is an adhesion contract.  See Hauenstein & Bermeister, Inc. v. Met-Fab Indus., Inc., 320 N.W.2d 886, 891 (Minn. 1982). 

Here, respondent had a choice whether or not to sign the contract.  Appellant and respondent engaged in discussions regarding the sale of LES for months.  Respondent requested certain documents and information from appellant, and appellant complied.  The district court found, however, that certain financial documents provided by appellant were incorrect because the documents were allegedly for tax purposes only.[2]  After reading the first draft of the contract, respondent requested that appellant add information to the contract, which appellant did. 

There are other factors in this analysis, such as whether the contract is written in fine print or in "incomprehensible legalese."  8 Lord, supra § 18:10.  Neither factor is present in this case.  The contract did not contain any legalese, nor was the language like that found in a standard, boilerplate contract.  And nothing in the contract, including the provision, was typed in fine print. 

While it must be acknowledged that the parties are father and son, respondent had worked for appellant before this deal was struck.  Respondent engaged in months of negotiations and investigation, gave appellant input into the substance of the contract, and proceeded to enter into the contract.  On this record, we conclude that respondent had a meaningful choice whether or not to sign the contract.

B.        Was the contract unreasonably unfair to respondent?

The second prong of the unconscionability analysis is whether the contract is unreasonably unfair to the nondrafting party.  8 Lord, supra, § 18:9. 

People have a right to make legal contracts and to expect the courts to honor and give binding effect to their agreements. . . .  So important and unfettered is the right to contract that courts have no authority to invalidate unwise or improvident agreements or to rewrite them so as to achieve a fairer bargain for one party or another.

 

Pollock-Halvorson v. McGuire, 576 N.W.2d 451, 455 (Minn. App. 1998) (citation omitted), review denied (Minn. 1998). 

Moreover, "a situation of grossly unequal bargaining power" can render a contract unreasonably one-sided, Bedford Assocs., 657 F.2d at 1314, but that is a difficult standard to meet.  See Hauenstein & Bermeister, Inc., 320 N.W.2d at 891.  In fact, in Bedford Assocs., the Second Circuit did not find gross inequality in bargaining power between a company and the federal government.  Id. 

There is no assertion that the contract was obtained by fraud or deception.  But respondent contends that appellant was less than forthright regarding the financial disclosures, showing respondent profit-and-loss statements that did not reveal the true nature of the business.  Respondent testified, and claims in his brief to this court, that he is an inexperienced businessman and could not have understood the nature of the finances without appellant's assistance.  Thus, he argues, because appellant was less than truthful in the profit-and-loss statements, appellant misled respondent.

Respondent does not explain, however, why he purchased a business worth more than $600,000 if he were so inexperienced.  Further, respondent testified that, since taking over LES, all the while giving appellant the profit from the rental portion of the business, he has turned it into a business worth nearly $1.4 million.  Respondent may not have the college training that appellant does, but that alone does not render respondent inexperienced and does not create "a situation of grossly unequal bargaining power."

It was not until respondent's 2002 decision to cease making monthly payments to appellant that respondent contended that the provision was unfair.  Despite acting in conformity with the contract for four years, it was not until appellant brought the instant dispute against him that respondent alleged that the contract was unconscionable. 

In addition, the provision, at its inception, was not unreasonably unfavorable to respondent because, taking the contract as a whole, appellant gave respondent the entire sales-and-service portion of the business.  While respondent must service, maintain, and replace lapsed rental units without receiving that income until appellant's death, he received complete control over the sales portion of the business.  Further, the contract does not preclude respondent from acquiring his own rental customers, as he has done. 

While respondent may believe in hindsight that he struck a less-favorable deal than he thought, we conclude that because the provision does not rise to the level of unconscionability, the district court erred in rewriting the contract.

            Reversed and remanded.

[1] Appellant brought this suit against both Chad Bettin, in his personal capacity, and against LES, which Chad Bettin subsequently incorporated and re-named Bettin, Inc.  Because neither LES nor Bettin, Inc. was a party to the contract, and Chad Bettin eventually purchased Scot Bettin's share in the company, this opinion refers to Chad Bettin as the sole respondent. 

[2]  It is apparent from the district court's order that it did not find appellant to be a credible witness.  That determination seems to rest on the district court's experience with appellant in the context of his marriage dissolution proceeding and the district court's perceived inconsistency of appellant's testimony regarding business values, depending on the context.