Athena 2004, LLC v. LC Rochester, Inc.

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Athena 2004, LLC, Respondent, v. LC Rochester, Inc., et al., Appellants.

No. A22-0609

Court of Appeals of Minnesota

February 6, 2023

This opinion is nonprecedential except as provided by Minn. R Civ. App. P. 136.01, subd. 1(c).

Olmsted County District Court File No. 55-CV-18-3303

Daniel J. Heuel, O'Brien &Wolf, L.L.P., Rochester, Minnesota (for respondent)

John T. Giesen, Ken D. Schueler, Dunlap and Seeger, P.A. Rochester, Minnesota (for appellants)

Considered and decided by Smith, Tracy M., Presiding Judge; Worke, Judge; and Wheelock, Judge.

WORKE Judge

Appellants challenge the district court's denial of their motion for amended findings or a new trial, arguing that a contractual liquidated-damages clause is enforceable and that respondent did not substantially complete its work under the contract. By notice of related appeal (NORA), respondent challenges both parties' attorney-fee awards. We affirm in part and reverse in part.

FACTS

Appellant LC Rochester, Inc. (LC) operates a Little Caesar's pizza restaurant in south Rochester (the south store). LC operated another Little Caesar's in north Rochester (the north store) until July 2018. Respondent Athena 2004, LLC (Athena) owns the building in which LC operates the south store (the premises). In June 2014, LC and Athena entered into a contract requiring Athena to construct the premises and LC to lease part of the premises from Athena.

Section 7(b) of the contract required Athena to "[s]ubstantially [c]omplete" its work by September 1, 2014. Section 8(b) provided that Athena's work is not substantially complete until, among other things, Athena "obtained a certificate of occupancy (or local equivalent)." Section 7(c) provided that "for each day" substantial completion "is delayed beyond" September 15, 2014 LC would be entitled to "liquidated damages" of two days' rent.

Construction of the premises was delayed. In October 2016, the parties entered into an addendum to the lease with a new substantial-completion deadline of December 1, 2016, and a "[r]ent [c]ommencement [d]ate" of January 1, 2017. LC agreed to "waive its right to enforce the [l]iquidated[-][d]amages [c]lause" if Athena met the new substantial-completion deadline. If Athena did not meet the new substantial-completion deadline, the addendum would be void and LC's "right to enforce the [l]iquidated[-][d]amages [c]lause [would] be deemed fully restored."

On January 13, 2017, the City of Rochester issued a "temporary certificate of occupancy." According to the building inspector, the city issues a temporary certificate of occupancy when a building is safe enough for public use but does not fully comply with the state building code.

LC opened the south store for business on January 17, 2017. The temporary certificate of occupancy expired in June 2018. LC nonetheless continued operating the south store without interference from the city.

LC did not pay Athena any rent, however, because Athena had not obtained a permanent certificate of occupancy for the premises. As a result, Athena commenced a breach-of-contract action against LC for back rent. LC answered that Athena breached the contract by failing to substantially complete its work and that LC was entitled to liquidated damages.

The district court held a bench trial. The primary witnesses were appellant Tom Gommels (part owner of LC) and Ari Kolas (part owner of Athena).

On the issue of breach, the district court ruled that the lease addendum controlled and that both parties breached the addendum. The district court awarded Athena almost $45,000 in damages. The district court awarded $5,421.13 in damages to LC, including $3,293.07 in lost profits. The district court denied LC's motion for amended findings or a new trial, ruling that even if substantial completion were a condition precedent, it was immaterial and would cause disproportionate forfeiture if strictly applied. The district court also awarded contractual attorney fees of $10,000 to Athena and $1,000 to LC.

In LC's first appeal, this court reversed in part because Athena did not plead the disproportionate-forfeiture exception. Athena 2004, LLC v. LC Rochester, Inc., No. A20-0333, 2021 WL 318045, at *4, *7 (Minn.App. Feb. 1, 2021). This court also ruled that because substantial completion was a material condition precedent, and because Athena did not meet the substantial-completion deadline in the addendum, the addendum was void and the original contract controlled. Id., at *5-7. This court remanded for further proceedings. Id., at *7.

On remand, the district court determined that Athena substantially completed its work when the city issued the temporary certificate of occupancy.^[1] The district court also ruled that both parties breached the contract but that the liquidated-damages clause is an unenforceable penalty. The district court denied LC's motion for amended findings or a new trial, increased Athena's damages award to $59,271.70, reaffirmed LC's damages award for lost profits, and reaffirmed both parties' attorney-fee awards.

This appeal followed.

DECISION

Enforceability of liquidated-damages clause

LC argues that the district court erred by denying its motion for amended findings or a new trial. We review a district court's decision on whether to amend its findings or grant a new trial for an abuse of discretion. Christie v. Est. of Christie, 911 N.W.2d 833, 838 (Minn. 2018); Landmark Cmty. Bank, N.A. v. Klingelhutz, 927 N.W.2d 748, 754 (Minn.App. 2019). A district court abuses its discretion by misapplying the law or relying on clearly erroneous factual findings. Klingelhutz, 927 N.W.2d at 754; Zander v. Zander, 720 N.W.2d 360, 364 (Minn.App. 2006), rev. denied (Minn. Nov. 14, 2006). Findings of fact are not clearly erroneous if the record reasonably supports them. In re Civ. Commitment of Kenney, 963 N.W.2d 214, 221, 223 (Minn. 2021).

The district court denied LC's motion because the court concluded that the liquidated-damages clause is an unenforceable penalty. Liquidated-damages clauses "fix the amount to be paid in lieu of performance" "when actual damages are difficult to ascertain or prove." Frank v. Jansen, 226 N.W.2d 739, 743 (Minn. 1975); In re Qwest's Wholesale Serv. Quality Standards, 702 N.W.2d 246, 262 (Minn. 2005). But a liquidated-damages clause that constitutes a "penalty" is unenforceable. Frank, 226 N.W.2d at 743.

Waiver of Athena's penalty argument

LC argues that the district court erred by ruling on Athena's penalty claim because Athena waived the issue by failing to plead it as an affirmative defense. The district court ruled that any error in ruling on the penalty issue without Athena pleading it did not prejudice LC given LC's notice of and response to Athena raising the issue in its trial brief.

We agree with the district court. Athena raised the penalty defense in its trial brief. LC responded in its trial brief that Athena should have pleaded the penalty defense and that the liquidated-damages clause is enforceable and not a penalty. At trial-as LC admits- "LC made a record" to negate the penalty defense. Thus, we reject LC's waiver argument because any error in failing to plead the penalty defense did not affect LC's substantial rights. See Minn. R. Civ. P. 61; cf. Harry N. Ray, Ltd. v. First Nat'l Bank of Pine City, 410 N.W.2d 850, 855 (Minn.App. 1987) (stating that party challenging amendment of pleadings raising new issues has burden of showing prejudice from the amendment).

District court briefing deleted from court file

LC relatedly contends that the district court prejudicially erred by deleting LC's reply to Athena's written closing argument from the court file twice and redacting LC's memorandum supporting its motion for amended findings or a new trial (which discussed the refiled reply) on remand.^[2] The district court did this because LC filed the reply after the court had filed a notice intending to deny LC's request to file a reply, but ambiguously denying only Athena's request to respond to any reply by LC.

LC offers no Minnesota law showing that the district court erred. In any event, the deleted reply to Athena's closing argument contains a liquidated-damages argument that LC duplicated and expanded on in its postremand memorandum supporting its motion for amended findings or a new trial. Any error in deleting and redacting LC's district court briefing was harmless. Minn. R. Civ. P. 61; Bloom v. Hydrotherm, Inc., 499 N.W.2d 842, 845 (Minn.App. 1993), rev. denied (Minn. June 28, 1993) (stating that challenger has burden of showing prejudice under harmless-error doctrine).

Reasonable forecast and ability to ascertain actual damages

If substantial completion has not occurred, the applicable liquidated-damages period based on when the damages phase of this case occurred is September 1, 2014, to November 9, 2018. But the district court based its calculation of approximately $141,000 in accrued liquidated damages on a substantial-completion date in December 2016. Regardless of the correct substantial-completion date, we agree that the liquidated-damages clause constitutes a penalty. Because the substantial-completion issue is immaterial to our liquidated-damages conclusion, we resolve this case without deciding LC's claim that substantial completion has not occurred.^[3] We now proceed to the penalty issue.

Liquidated-damages clauses are prima facie valid, meaning proof of actual damages is not required for enforcement. Dean Van Horn Consulting Assocs., Inc. v. Wold, 395 N.W.2d 405, 407 (Minn.App. 1986); Dean Van Horn Consulting Assocs., Inc v. Wold, 367 N.W.2d 556, 560 (Minn. App 1985), rev. denied (Minn. July 17, 1985). But a liquidated-damages clause is enforceable only "(1) if the fixed...