Willow Point Partners, LLC, Appellant, vs. Willows on the Water, LLC, Respondent.

This opinion will be unpublished and

may not be cited except as provided by

Minn. Stat. § 480 A. 08, subd. 3 (2002).

 

STATE OF MINNESOTA

IN COURT OF APPEALS

A03-225

 

Willow Point Partners, LLC,

Appellant,

 

vs.

 

Willows on the Water, LLC,

Respondent.

 

Filed December 23, 2003

Reversed in part, affirmed in part as modified, and remanded

Randall, Judge

 

Washington County District Court

File No. C9-03-1677

 

Timothy J. Hassett, Marnie E. Polhamus, Felhaber, Larson, Fenlon & Vogt, P.A., 225 South Sixth Street, Suite 4200, Minneapolis, MN  55402-4302 (for appellant)

 

Mark W. Vyvyan, Fredrikson & Byron, P.A., 200 South Sixth Street, Suite 1200, 4000 Pillsbury Center, Minneapolis, MN  55402 (for respondent)

 

            Considered and decided by Randall, Presiding Judge, Minge, Judge, and Poritsky, Judge*.

U N P U B L I S H E D  O P I N I O N

RANDALL, Judge

On February 7, 2003, appellant Willow Point Partners (landlord) initiated an eviction action against respondent Willows on the Water (tenant) for failure to make timely rent payments.  In an effort to resolve the dispute, the parties entered into a settlement agreement, and the action was dismissed. On March 7, 2003, landlord again initiated an eviction action against tenant.  On March 28, 2003, the district court entered judgment in favor of landlord in the amount of $13,869.74.  On appeal from the March 28, 2003 judgment, landlord argues that, contrary to the district court's decision, (1) tenant was in default under the lease and tenant was not entitled to notice and an opportunity to cure; (2) tenant failed to satisfy the settlement agreement when it issued a check with insufficient funds; (3) tenant was required to pay the full amount due under the lease to redeem the property; and (4) landlord did not act in bad faith.  We reverse in part, affirm in part as modified, and remand.

FACTS   

Appellant (landlord) Willow Point Partners is a limited liability company, in which Terry Miller and Kevin Tacheny each own a 50 percent interest.  Miller and Tacheny formed Willow Point Partners to buy real property in Forest Lake, Minnesota.  On September 10, 2002, Willow Point Partners purchased the Forest Lake property from Judith Wilcox. 

Respondent (tenant) Willows on the Water is a limited liability company in which Kevin Tacheny owns a 100 percent interest.  Tacheny formed Willows on the Water to operate a bar and restaurant on the Forest Lake property just purchased by himself and Terry Miller doing business as Willow Point Partners.  Tacheny testified that he has spent over $300,000 in refurbishing, reconstructing, and renovating the property. 

On September 10, 2002, Miller entered into an agreement with Tacheny[1] to lease the Forest Lake property.  Put another way, Tacheny, d/b/a Willows on the Water, became the tenant renting from himself and Miller d/b/a Willow Point Partners.  The base rent for the property was $10,124 per month plus "additional rent" including Tacheny's monthly share of the real estate taxes, special assessments, and operating expenses.  The lease provided that rent would be paid on or before the first of each calendar month.  The lease also provided that Tacheny may be considered in default if Tacheny "fails to make payment of any amount due by the terms of [the] Lease on the due date thereof for a period of four months."  Miller testified that this language meant that rent due on January 1 would be in default on May 1.  Tacheny testified that the four-month default term was negotiated for and put in the lease agreement so that he would have time to get the Forest Lake property ready for business operation.

Ancillary to the basic lease and partnership, the parties entered into a further contract called a Member Control Agreement that stated "if Kevin R. Tacheny fails to make payments as required under the Lease for four months, then such action shall constitute an Event of Default as more particularly described under the Lease."  According to the Member Control Agreement, Miller could unilaterally exercise "remedies available to the landlord under the lease" after an event of default.  

            On February 7, 2003, Miller initiated an eviction action against Tacheny, alleging that Tacheny failed to pay rent for part of November 2002 and all of December 2002, January 2003, and February 2003.  On February 18, 2003, in an effort to resolve the dispute, the parties entered into a settlement agreement.  The settlement agreement required that Tacheny make a payment to Miller totaling $13,104.21, no later than noon on February 19, 2003.  Miller testified that he received this payment from Tacheny.  The settlement agreement also required Tacheny to make a second payment to Miller for the November and December rent totaling $13,869.74, "on or before February 28, 2003."[2]  This payment forms the basis of this lawsuit.

Miller testified that on February 28, 2003, he received another check in the amount of $13,869.74 from Tacheny.  Miller testified that the usual procedure was that he deposited all rent checks he received from Tacheny directly into Willow Point Partners' account at Lino Lakes Bank.  Tacheny testified that normally he paid rent to Miller through a check drawn from Tacheny's Lino Lakes Bank account, the rent checks were then delivered to Miller, and Miller subsequently deposited them into Willow Point Partners' bank account.  However, on March 3, 2003, Miller personally presented the check for final payment to Lino Lakes State Bank.  Charlotte LaVallee, a Lino Lakes Bank Vice President at the time, told Miller that Tacheny's account contained insufficient funds to cover the amount of the check.  LaVallee testified that if a check is deposited into an account and then presented for payment, the check is paid if funds are available in the account to cover the check.  If funds are not available, the bank contacts the person who holds the account to give that person an opportunity to cover the check.  If checks are not deposited but presented in person, that person is not contacted if funds are not available.  Miller returned the check to Tacheny, and on March 7, 2003, Miller brought a second eviction action against Tacheny.[3]   On March 20, 2003, following the initial hearing in this action, Tacheny deposited $13,869.74 (all the uncontested back rent due) with the Washington County Court Administrator. 

On March 28, 2003, the district court entered judgment in favor of Miller for that back rent in the amount of $13,869.74.  However, the district court found that Miller's eviction notice to Tacheny was ineffective because it was issued prior to any default.  This means that the court also found that Tacheny's check would have been honored in the normal course of business, and thus, Tacheny met its obligations under the settlement agreement.  In its conclusions of law, the district court stated that Tacheny acted in good faith and that Miller, in contrast, acted in bad faith.  The district court ordered the Washington County Court Administrator to pay the $13,869.74 deposited by Tacheny to Miller and dismissed Miller's eviction action against Tacheny with prejudice.  This appeal follows.

D E C I S I O N   1.  Default and Notice and Opportunity to Cure

 

Miller argues that district court erred by concluding that Tacheny met his obligations under the settlement agreement, and that the lease required Miller to give Tacheny notice and opportunity to cure any default.  We agree.  The relevant portion of section 19(a) states:

This Lease may be considered in default by Landlord in the event that:  (1)  Tenant fails to make payment of any amount due by the terms of this Lease on the due date thereof for a period of four months; or (2)  Tenant defaults in any of the terms, covenants, agreements, stipulations or conditions herein contained and shall not have cured such default within thirty (30) days after landlord by written notice has informed Tenant of such default.

 

The construction and effect of a contract are questions of law unless the contract is ambiguous.  Turner v. Alpha Phi Sorority House, 276 N.W.2d 63, 66 (Minn. 1979).  When the words of a contract are clear, "it is neither necessary nor proper in construing [a contract] to go beyond the wording of the instrument itself."  Telex Corp. v. Date Prods. Corp., 271 Minn. 288, 295, 135 N.W.2d 681, 686-87 (1965).  A court must construe unambiguous language according to its plain and ordinary meaning.  Bob Useldinger & Sons, Inc. v. Hangsleben, 505 N.W.2d 323, 328 (Minn. 1993).  If no ambiguity exists, interpretation of a contract is a question of law.  City of Virginia v. Northland Office Props. Ltd., 465 N.W.2d 424, 427 (Minn. App. 1991), review denied (Minn. Apr. 18, 1991).  But if the reviewing court determines that a contract is ambiguous, its meaning is a question of fact and the court may consider extrinsic evidence.  Id.  Because the lease agreement's language regarding the default clause and notice and opportunity to cure appear is unambiguous, we review the district court's construction and application of the agreement de novo.  Wolfson v. City of St. Paul, 535 N.W.2d 384, 386 (Minn. App. 1995), review denied (Minn. Sept. 28, 1995). 

Miller argues that on February 7, 2003, when the first eviction action was initiated, Tacheny was in default under clause 1 of the lease.  The district court concluded that Tacheny was not in default under the lease because the court determined that the relevant lease provision provided Tacheny with a complete four months before a default could occur.  The district court found:

The Lease provides that rent shall be paid on or before the first of each calendar month.  The lease, however, further provides that the Lease may not be considered in default by reason of non-payment unless Defendant "fails to make payment of any amount due by the terms of [the] Lease on the due date thereof for a period of four months."  Thus, non-payment of the rent payable on November 1, 2002, would not give rise to an event of default until March 1, 2003.

 

We conclude that Miller's calculations are correct.  Default occurs when Tacheny fails to make a payment on the due date for a period of four months.  Because the due date is the first of the month, by the first of the following month Tacheny would have two overdue payments.  For example, if rent is not paid on October 1 and November 1, rent is two months past due by November 2, even though only one month has elapsed.  Further, if rent is not paid on December 1, rent is three months past due by December 1, although only two months have elapsed.  If rent is not paid on January 1, rent is four months past due, even though only three months have elapsed.  Thus, when Tacheny failed to make timely rent payment on November 1, December 1, January 1, and February 1, there are four monthly payments in default, even though only three months have elapsed.  By March 1, 2003, Tacheny would be five monthly payments in default rather than four as calculated by the district court.  

Next, Miller argues that the district court erroneously concluded that the lease required Miller to give Tacheny notice and an opportunity to cure any default prior to commencing eviction proceedings.  Here, Tacheny was in default if (1) Tacheny failed to make timely payments for four months, or (2) Tacheny defaulted in any of the terms, covenants, agreements, stipulations, or conditions under the lease and failed to cure 30 days after receiving notice from Miller.  Miller argues that clause 1 controls because the language in clause 1 does not require notice and opportunity to cure if Tacheny defaults by failing to pay rent, and clause 1 and 2 are separated by the word "or" so that clause 2 is disjunctive to clause 1.  Tacheny argues that clause 2 controls because the language in clause 2 applies if Tacheny defaults under "any of the terms, covenants, agreements, stipulations, or conditions" under the lease.  Because the "or" separates the two clauses, if Tacheny defaulted under clause 1 by failing to pay rent for four successive months, notice by Miller, as Miller argues, was not required.  Tacheny argues that this court's unpublished decision in Parson v. Restaurant Enterprises Group, No. C3-95-2023, (Minn. App. Apr. 2, 1996), is directly on point with the facts in this case.  Tacheny's contention is misplaced.  The Parson case is not on point because in Parson, the overarching conjunction was "and."  Parson, 1996 WL 146468, at *2.  In this case, the word "or" separates the two default clauses so that Tacheny was only required to give notice if a default occurred under clause 2.  Therefore, we reverse the district court's finding that section 19(a)(2) of the lease controlled, and conclude that section 19(a)(1) controls. 

2.  Settlement Agreement

Because there were insufficient funds in Tacheny's account to cover the check, Miller argues that the district court erred by concluding that Tacheny satisfied his obligations under the settlement agreement.  We agree. 

The standard of review in an eviction action is whether the trial court's findings of fact are clearly erroneous.  Mpls. Cmty. Dev. Agency v. Smallwood, 379 N.W.2d 554, 555 (Minn. App. 1985), review denied (Minn. Feb. 19, 1986).  The district court's findings of fact "shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the trial court to judge the credibility of the witnesses."  Minn. R. Civ. P. 52.01.  Further, a reviewing court is not bound by and need not give deference to a district court's decision on a purely legal issue.  Frost-Benco Elec. Ass'n v. Minn. Pub. Utils. Comm'n, 358 N.W.2d 639, 642 (Minn. 1984).  "If [a] note is not payable on demand and is payable at or through a bank or the terms of the note require presentment, the note is dishonored if presentment is duly made and the note is not paid on the day it becomes payable or the day of presentment, whichever is later."  Minn. Stat. § 336.3-502(a)(2) (2002). "Presentment means a demand made by or on behalf of a person entitled to enforce an instrument . . . to pay the instrument made to the drawee or a party obliged to pay the instrument or, in the case of a note or accepted draft payable at a bank, to the bank[.]"  Minn. Stat. § 336.3-501(a) (2002).  "A course of dealing is a sequence of previous conduct between the parties to a particular transaction which is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct." Minn. Stat. § 336.1-205(1) (2002). 

Miller argues that he was entitled to the amount of Miller's check when he presented the check for payment at Lino Lakes Bank.  Tacheny argues that "a course of dealing" controls, and thus, his payment would have been satisfied had Miller deposited the funds.  Tacheny made only two or three payments before default occurred.  This does not establish usual and customary business.  As Miller points out, the settlement agreement was an interlocutory settlement to settle some intervening differences while keeping Tacheny's business open.  The settlement agreement called for $13,869.74 to be paid on February 28, 2003, and did not contain a negotiated grace period.  The check, issued by Tacheny and dated February 28, was presented as final payment and as accord and satisfaction.  Unless expressly bargained for, which was not done here, Tacheny could not safely assume a "four or five-day grace period."  It is true that Miller presented the check for payment rather than simply depositing it, but that does not change our analysis.  Miller was entitled to do either.  Miller was given a check dated February 28 and had a right to cash it that day if he wanted.  Under the law, when a check is issued, it should clear that day (unless something else is apparent on the instrument, such as a "postdated check").  Thus, we reverse the district court's conclusion that Tacheny fulfilled his obligations according to the settlement agreement. 

3.  Redemption

Finally, Miller argues that the district court erred by concluding that Tacheny could redeem the lease by paying the November and December rent when the rent for January, February, and March was still outstanding.  Miller wanted the $13,869.74 plus all other arrears due under the lease.  We disagree.  A "tenant may, at any time before possession has been delivered, redeem the tenancy and be restored to possession by paying to the landlord or bringing to the court the amount of the rent that is in arrears."  Minn. Stat. § 504B.291, subd. 1(a) (2002). 

In Soukup v. Molitor, 409 N.W.2d 253, 256 (Minn. App. 1987), the court stated that "where the landlord seeks to evict the lessee for failure to pay rent, the tenant, so long as he remains in possession, shall be permitted to retain possession by paying all money due and owing the landlord."

Because of the unique wording in this lease, a default occurs after four months of nonpayment.  At oral argument both parties agreed that technically Tacheny could always be "up to four payments, but no more than four payments" in arrears without facing eviction.  As the lease is written, Tacheny could avoid eviction by paying the arrears that he did.  Tacheny paid the first part of the interim settlement with no problems.  The second part of the interim settlement, in the amount of $13,869.74, Tacheny deposited into court and the court properly made that payment to Miller.  Miller now requests that the court find that because Tacheny was in default, he must make up every single month in arrears.  However, Miller concedes that even if that happens, Tacheny, once current, can go back to being four payments in arrears and not risk a default and eviction, thus, making the point almost moot.  Miller and Tacheny are still in business together, and Miller's counsel assured us at oral argument that Miller accepts that Tacheny can stay four payments in arrears and not suffer a default.  Both parties agree that any missed payments (arrearages) never "disappear" and eventually would have to be made up at least by the end of the ten-year lease.

Because we conclude that Tacheny and the district court miscounted and found only four payments in arrears instead of five, we direct Tacheny to forward at least one month rent to Miller within a reasonable amount of time after the release of this opinion to get the arrearages (if any) down to a maximum of four payments.  Tacheny is free to pay more, and there is nothing keeping Tacheny from paying all the arrearages in full.  There is no inference in the record that it was intended by the parties that Tacheny would remain four payments in arrears during the life of the ten-year lease.  Rather the record is clear that Miller and Tacheny negotiated for a four-month grace period to enable Tacheny, in a new start-up business with the expected outlay of a few hundred thousand dollars worth of capital improvements, to have some flexibility before the nonpayment of rent would cause Tacheny to forfeit his interest.  Presumably, it was to be a temporary feature of the business relationship. 

Taking into account the totality of the facts, and the respective equities of each party's position, we affirm the district court's finding that Tacheny is not subject to eviction after his payment of the $13,869.74 was tendered into court.  We modify that finding to state that Tacheny still owes Miller at least one month of back rent (which includes Tacheny's monthly share of real estate taxes, special assessments, and operating expenses for the Forest Lake property) to avoid eviction.  Because the release of this opinion will be almost a year since the district court heard the matter, we remand to the district court to supervise the accounting between Miller and Tacheny in accordance with this opinion.  Because of our decision indicating when a default of nonpayment occurs under clause 1, defaults are calculated the day a rent is due and not paid.  At all times, Tacheny needs to keep no more than four monthly rent payments behind (a total of three months) to avoid eviction pursuant to the terms of the lease.  Because of the interplay between Tacheny, "both as a landlord (along with Miller) to himself and as a renter to himself and Miller," we suggest good business practice dictates that he consider getting current with his own partner.

 

4.  Bad Faith Finding

Miller argues that the district court erred by finding that Miller acted in bad faith because the district court did not follow the requirements of Minn. R. Civ. P. 11 (2002) and Minn. Stat. § 549.211 (2002), and that the record does not support a finding of bad faith.  We agree.  The standard of review in an unlawful detainer action is whether the trial court's findings of fact are clearly erroneous.  Mpls. Cmty. Dev. Agency, 379 N.W.2d at 555.  Good faith determinations turn upon questions of fact and credibility.  McDonald v. Stonebraker, 255 N.W.2d 827, 831 (Minn. 1977).  Bad faith is defined as a party's refusal to fulfill some duty or contractual obligation based on an ulterior motive, not an honest mistake regarding one's rights or duties.  Lassen v. First Bank Eden Prairie, 514 N.W.2d 831, 837 (Minn. App. 1994), review denied (Minn. June 29, 1994).  

Tacheny argues that Miller's actions constituted bad faith when Miller prematurely filed the eviction notices against Tacheny and failed to deposit Tacheny's check into the Willow Point Partners' account.  We find Miller correctly calculated the amount of missed payments needed to constitute a default, and therefore, his eviction notice was not premature.  Next, as stated above, Miller had the right to either present for payment or deposit the settlement check dated February 28.  No finding of bad faith on Miller's part can result from the fact that Miller chose the option that Tacheny said was inconvenient for himself.  We conclude there is nothing in this record to support a finding of bad faith on the part of Miller.  Further, Miller correctly argues that the district court made a sua sponte finding of bad faith, and neither party had notice, or an opportunity to brief, or an opportunity to respond to the issue of bad faith.  Tacheny does not deny that neither party had notice or an opportunity to brief the issue, but argues that the issue of bath faith is moot.  We reject that argument.  In Tacheny's own brief, Tacheny argues for the preservation of the bad faith ruling claiming that he wanted to reserve the right to ask for sanctions against Miller in the future.  The issue is not moot, and we conclude the district court erred by finding Miller acted in bad faith.  We vacate that part of the district court's order finding Miller in bad faith.

Reversed in part, affirmed in part as modified, and remanded.

*   Retired judge of the district court, serving as judge of the Minnesota Court of Appeals by appointment pursuant to Minn. Const. art. VI, §  10.

[1]  To avoid confusion, hereinafter all references to appellant/landlord will use the term Miller, and all references to respondent/tenant will use the term Tacheny.

[2]  This amount consisted of $2,463.57 for a portion of the November 2002 rent, and $11,406.17 for the December 2002 rent. 

[3]  The settlement agreement provided that Miller would dismiss the first eviction action against Tacheny.  The initial eviction action was dismissed.