Opinion
No. C5-99-1206.
Filed February 15, 2000.
Appeal from the District Court, Ramsey County, File No. C0-98-000532.
Joel E. Abrahamson, Leonard, Street, Deinard, (for respondent)
Terence P. Durkin, (pro se appellant)
Considered and decided by Klaphake, Presiding Judge, Randall, Judge, and Peterson, Judge.
This opinion will be unpublished and may not be cited except as provided by Minn. Stat. § 480A.08, subd. 3 (1998).
UNPUBLISHED OPINION
Pro se appellant challenges the district court's ruling that he waived his right to rescind his obligations under a personal guaranty he executed with respondent to satisfy the obligations of the corporate defendant. In addition, appellant contends that any recovery is limited to stock pledged in the parties' stock-pledge agreement. Respondent filed a notice of review, challenging the district court's failure to award attorney fees. We affirm in part, reverse in part, and remand.
FACTS
Appellant Terence P. Durkin and respondent Philip L. Potter were formerly equal shareholders of Twin City Technical Castings, Inc. (Twin Cast), a metal casting company in St. Paul. Potter was Twin Cast's president and responsible for the day-to-day operations of the company. In 1991, Potter elected to sell his stock to Durkin for $600,000. Under the initial sale agreement, Durkin promised to give Potter $200,000 in cash and a personal promissory note for $400,000 at the closing. At the closing in January 1992, the parties executed four documents: a severance agreement, a noncompete agreement, Durkin's personal guaranty, and a stock-pledge agreement. Durkin was also allowed to substitute the noncompete agreement and guaranty in lieu of the promissory note. Under the noncompete agreement, Twin Cast was required to pay Potter 60 monthly payments over a five-year period. The guaranty provided that Durkin personally guaranteed Twin Cast's obligations under the noncompete agreement and that he would reimburse Potter for all out-of-pocket expenses incurred by Potter arising out of or in connection with the enforcement of the guaranty.
During the parties' pre-sale negotiations, Potter represented to Durkin that the 1991 real estate taxes would be paid in December before the closing date. Paragraph 9 of the severance agreement executed at the closing represented that the 1991 real estate taxes had been paid. However, Twin Cast learned later that the 1991 real estate taxes had not been paid. Twin Cast negotiated an extension with its lenders and the county and began looking for additional lenders and new investors who could provide the money necessary to satisfy the delinquent real estate taxes. But after negotiations with new investors broke down, Ramsey County foreclosed on the property and Twin Cast went of business.
Potter then commenced suit in Ramsey County District Court against Durkin and Twin Cast, seeking to recover the unpaid payments due on the noncompete agreement and to enforce the guaranty and severance agreement. He also sought equitable contribution and indemnification for the payment he made to satisfy a judgment obtained by the mortgagor of the Twin Cast property against him, Durkin, and Twin Cast that he personally satisfied. Durkin and Twin Cast countered, arguing they were entitled to rescind the noncompete, guaranty, and severance agreements because of Potter's material misrepresentation that the 1991 real estate taxes had been paid. They also insisted that any recovery was limited to stock pledged in the stock-pledge agreement and that Potter's equitable claims were barred by the equitable defenses of "unclean hands" and a balancing of the equities.
The matter was tried to the district court without a jury. The district court found that (1) Potter materially misrepresented that the 1991 real estate taxes had been paid, but that Durkin and Twin Cast had "many options to resolve any financial effects" that might have evolved from the misrepresentation; (2) Durkin and Twin Cast did not detrimentally rely on the misrepresentation; (3) Durkin and Twin Cast knew the 1991 tax payments were delinquent as of January 1993; (4) there was no proof Potter's misrepresentation was intentional or that Durkin and Twin Cast incurred damages; (5) by Twin Cast's continuing to make payments under the noncompete agreement, Durkin and Twin Cast waived the right to rescind the noncompete and severance agreement; (6) Durkin and Twin Cast breached the noncompete by failing to make the scheduled payments to Potter; (7) Twin Cast was liable to Potter under the severance agreement; and (8) equity required Twin Cast to indemnify Potter in the amount of $259,224.30 for his defense and satisfaction of the judgment obtained by the mortgagor.
The court ordered judgment in favor of Potter against Durkin and Twin Cast, jointly and severally, in the amount of $171,256.13 and against Twin Cast in the amount of $259,224.30. The district court denied both parties' motions for amended findings, conclusions of law, and order for judgment, except that the court did award Potter $1,500 in attorney fees against Durkin. This appeal follows.
DECISION
When reviewing a case tried by the district court without a jury, this court's review "is limited to determining whether the court's findings are clearly erroneous and whether it erred in its conclusions of law." Schweich v. Ziegler, Inc. , 463 N.W.2d 722, 729 (Minn. 1990) (citation omitted). The district court's findings of fact are not clearly erroneous if they are reasonably supported by evidence in the record considered as a whole. Thuma v. Kroschel , 506 N.W.2d 14, 18 (Minn.App. 1993), review denied (Minn. Dec. 14, 1993). A reviewing court must give due deference to the district court's opportunity to judge the credibility of the witnesses. Minn.R.Civ.P. 52.01. On appeal, this court is to consider the evidence "in the light most favorable to the prevailing party in determining whether the trial court's findings are clearly erroneous." Haas v. Harris , 347 N.W.2d 838, 839 (Minn.App. 1984) (citations omitted).
Here, the district court ruled that Twin Cast's continued payments to Potter pursuant to the noncompete agreement after it learned of Potter's material misrepresentation constituted a waiver of both Twin Cast's and Durkin's right to rescind the parties' contracts. Durkin argues that the district court erred in concluding that the acts of Twin Cast constituted a waiver of its right to rescind the noncompete agreement based on Potter's material misrepresentation.
Durkin concedes that the right to rescind may be lost if, after discovering the misrepresentation, a party commits acts of affirmance, acts of delay that evidence abandonment, or delays so long it disadvantages the other party. See Bakke v. Keller , 220 Minn. 383, 395, 19 N.W.2d 803, 809 (1945) (recognizing after fraud discovered right to rescind for fraud may be lost by acts of affirmance, acts or delay evidencing abandonment of right, or by acts of such character or delay so long that assertion of right would disadvantage defendant). "The right to rescind must therefore be exercised promptly on discovery of the facts from which it arises" and the right "may be waived by continuing to treat the contract as a subsisting obligation." Cut Price Super Markets v. Kingpin Foods, Inc. , 256 Minn. 339, 352, 98 N.W.2d 257, 267 (1959) (citations omitted); accord Gaertner v. Rees , 259 Minn. 299, 303, 107 N.W.2d 365, 368 (1961). "A party's continued recognition of a contract as binding after the other party's alleged breach acts as a waiver of that breach." Creative Communications Consultants, Inc. v. Gaylord , 403 N.W.2d 654, 657 (Minn.App. 1987) (citation omitted). Thus, where a party continues to make scheduled contractual payments after knowledge of an alleged breach of the contract, the right to assert the breach is waived as a matter of law. See Murphy Oil USA, Inc. v. Brooks Hauser , 820 F. Supp. 437, 442 (D.Minn. 1993) (holding party waived right to claim breach of contract by continuing to make full rental payments after learning of alleged breach (citing Creative Communications , 403 N.W.2d at 657)); see also Metropolitan Sports Facilities Comm'n v. General Mills, Inc. , 460 N.W.2d 625, 630 (Minn.App. 1990) (noting evidence could support conclusion party waived right to claim breach of contract and rescission of contractual obligations by continuing to treat contract as effective despite knowledge of alleged breach), aff'd 470 N.W.2d 118 (Minn. 1991).
Durkin testified that in November 1991, nearly two months before the closing date on January 6, 1992, he was aware the 1991 real estate taxes had not been paid. Potter testified that in February 1992, he and Durkin discussed the fact that the back taxes had not been paid by the end of 1991 as promised. Then, on January 22, 1993, Durkin sent a letter to the company's lender regarding a proposal to pay the unpaid 1991 real estate taxes. Despite this, Twin Cast continued to make payments to Potter under the noncompete agreement until September 1995.
Viewing the evidence in the light most favorable to the district court's findings, we conclude the district court did not err when it concluded that Twin Cast waived its right to rescind its obligations under the noncompete agreement.
Durkin argues that the district court erred when it concluded he waived his right to rescind his obligations under the guaranty. Durkin claims that Twin Cast was not a party to the guaranty and because no claim was made against it and no payment was made under the guaranty, he did not waive his right to rescind his obligations under the guaranty for Potter's misrepresentation.
Waiver is the intentional relinquishment of a known right and may be inferred from acts and conduct that is "so inconsistent with a purpose to stand upon one's rights as to leave no room for a reasonable inference to the contrary." Flaherty v. Independent Sch. Dist. No. 2144, 577 N.W.2d 229, 232 (Minn.App. 1998) (quotation omitted), review denied (Minn. June 17, 1998).
Durkin's personal guaranty was a contract separate from the noncompete agreement, and he could assert contractual rights or defenses independent of the noncompete agreement or Twin Cast. At the moment he learned of Potter's misrepresentation, Durkin could have rescinded his obligations under the guaranty regardless of Twin Cast's course of action. By remaining silent and doing nothing despite being aware of Potter's misrepresentation, Durkin continued to treat the guaranty as a subsisting obligation.
We conclude that, on these facts, Durkin acted in a manner inconsistent with his right to rescind his obligations under the guaranty and the district court did not err when it concluded that Durkin waived his right to rescind performance under the guaranty by failing to act promptly after learning of Potter's misrepresentation.
Durkin claims that Potter's claim is barred by the equitable doctrine of unclean hands. The doctrine of unclean hands
will be invoked only against a party whose conduct has been unconscionable by reason of a bad motive, or where the result induced by his conduct will be unconscionable.
Creative Communications , 403 N.W.2d at 657-58 (quotation omitted). The granting of equitable relief is within the sound discretion of the district court, and its decision will not be reversed absent a clear abuse of that discretion. Nadeau v. County of Ramsey , 277 N.W.2d 520, 524 (Minn. 1979).
The district court found that Potter's misrepresentations were not intentional. Potter testified during trial that the real estate taxes were not paid because the company was suffering a severe cash-flow shortage at the time. In addition, he stated that he did not sign any check for payment of the back taxes because Twin Cast's controller failed to issue the check. Viewing the evidence in the light most favorable to the district court's findings, we conclude the district court did not err when it refused to bar Potter's claim based on the doctrine of unclean hands.
Next, Durkin argues that the guaranty must be read and construed together with the stock-purchase agreement, the offer letter and acceptance letters, and the stock-pledge agreement, and that recovery under the guaranty is limited to a surrender of the 25,000 shares pledged.
Generally, instruments executed simultaneously, by the same parties, relating to the same transaction are considered and construed together because "they are, in the eyes of the law, one contract or instrument." Farrell v. Johnson , 442 N.W.2d 805, 806 (Minn.App. 1989) (citations omitted). Because the stock purchase agreement, the offer letter, and the acceptance letter were executed before the guaranty and stock-pledge agreement, we refuse to consider these documents as one with the guaranty and stock-pledge agreement. But, we shall consider the guaranty and stock-pledge agreement together because they were executed at the same time, between the same parties, and relate to the same subject matter.
Here, neither the language of the stock-pledge agreement nor the guaranty limits Potter's recovery solely to the pledged stock. The stock-pledge agreement provides that Potter is entitled to retain any recovery obtained under the noncompete agreement or the guaranty as liquidated damages for any default by Twin Cast or Durkin. This indicates that the stock-pledge agreement did not provide the sole remedy available to Potter for a default. Further, the stock-pledge agreement specifically states that nothing in the agreement precludes Potter from enforcing any remedies available under the noncompete agreement or Durkin's guaranty. We conclude that Potter's recovery is not limited to the pledged stock contained in the stock-pledge agreement.
We reject Durkin's argument that the guaranty is unenforceable because it lacks consideration. "[T]he detriment sustained in relying on a guaranty is sufficient consideration to support it." Tri-County State Bank v. Golf Props., Inc. , 395 N.W.2d 409, 412 (Minn.App. 1986) (citation omitted).
Potter argues that the district court's conclusion that he failed to prove the amount that Twin Cast failed to pay pursuant to paragraph 9 of the severance agreement is clearly erroneous because his testimony on the subject was uncontroverted. oThe district court is not required to accept uncontradicted testimony if the surrounding circumstances afford reasonable grounds for doubting the testimony's credibility. Varner v. Varner , 400 N.W.2d 117, 121 (Minn.App. 1987). Given that Potter was testifying regarding a significant amount allegedly due him, reasonable grounds existed for the district court to weigh his credibility. This district court finding is not clearly erroneous.
Finally, Potter argues that he is entitled to reasonable costs and attorney fees in excess of the $1,500 granted by the district court. The guaranty provides that Durkin will pay or reimburse Potter for all expenses, including reasonable costs and attorney fees "incurred by Potter arising out of or in connection with enforcement of this Guaranty." Because Durkin was contractually obligated to pay Potter's reasonable costs and attorney fees, the district court may have abused its discretion in limiting Potter's award to $1,500. See Bartley v. BTL Enters. , 490 N.W.2d 664, 667 (Minn.App. 1992) (reversing district court's denial of attorney fees where guarantors were "contractually obligated to pay * * * reasonable attorney fees" and remanding for determination of reasonable attorney fees). We remand for further reconsideration of reasonable costs and attorney fees.