Cook Associates, Inc. v. Utah Sch. and Institutional Trust Lands Admin.

243 P.3d 888

COOK ASSOCIATES, INC., dba Cook Slurry Company, a Utah corporation, Plaintiff and Appellant,

v.UTAH SCHOOL AND INSTITUTIONAL TRUST LANDS ADMINISTRATION, Defendant and Appellee.

No. 20090330-CA.

Court of Appeals of Utah.

Oct. 15, 2010.

Blake S. Atkin and Joseph H. Pugsley, Bountiful, for Appellant.

Thomas A. Mitchell, Salt Lake City, for Appellee.

Before Judges McHUGH, ORME, and CHRISTIANSEN.

OPINION

McHUGH, Associate Presiding Judge:

¶ 1 Cook Associates, Inc. (Cook) appeals the trial court's grant of summary judgment in favor of the Utah School and Institutional Trust Lands Administration (SITLA). We reverse and remand, in part, and affirm, in part.

BACKGROUND

¶ 2 On June 13, 1978, Cook and SITLA's predecessor agency, the Division of State Lands & Forestry,¹ entered into a forty-nine year ground lease (the Lease) for the use of school trust lands near Lehi, Utah, (the Property) for the purpose of operating an explosives manufacturing plant. Paragraph 11 of the Lease gives SITLA discretion to adjust the rental rate for the Property every five years "as [SITLA] shall deem to be reasonably necessary in the best interest of the State." The initial rental rate for the Property was $3,000 per year to be paid "on a calendar year basis in advance on or before the first day of June of each year." SITLA did not exercise its right to adjust the rent at the first five-year interval in 1983.

¶ 3 Early in the Lease, Cook began to experience financial difficulties. In January 1987, Merrill Cook (Mr. Cook), Cook's Chief Executive Officer, wrote to SITLA requesting a reduction in the rental rate, claiming that the explosives plant had not been in operation since the fall of 1984; that the Federal Aviation Agency had sued Cook for significant damages due to a dispute over the access road to the plant; and that the mining industry, the market for the plant's products, had been depressed for the past several years. Based on these economic factors, Mr. Cook requested "deferment of [L]ease payments [for at least one year] until the plant can become operational and profitable once again rather than forcing an out-and-out permanent closing of the plant." When that request was denied, Mr. Cook asked SITLA to reconsider, stating that the company had "already paid an enormous amount for a few acres" and that the $3,000 annual rental fee then in effect was "highway robbery."

¶ 4 SITLA did not raise the rent in 1988 and agreed to allow Cook to defer a portion of the rent for five years. In addition, SITLA agreed to amend the Lease to include 475 acres as a buffer zone around the facility. Although Mr. Cook acknowledged that the express inclusion of the buffer zone made "the cost of leasing the five acres [on which the facility was actually located] more palatable," he still believed that Cook was "paying a lot given the market value of the acreage [the company] actually use[d]." Despite Cook's renewed request that it be relieved of its obligation to pay the rent in 1987, SITLA concluded that it could not "legally waive any portion of [the L]ease fees," explaining, "[W]e do not own this land but are trustees and, as such, are bound by strict legal andfiduciary constraints. We are sympathetic to your situation, but we hope you realize we do not have the flexibility a private landowner would have." As a result, the parties amended the Lease in 1988 to defer a portion of the rent and to add the 475-acre buffer zone.

¶ 5 The next rental adjustment window occurred in 1993. In anticipation of an increase in the rental obligation, Mr. Cook wrote to SITLA on May 2, 1992, indicating that the buffer zone was of no value to Cook, in part because the company had not manufactured packaged blasting agents at the site for some years and "may or may not" do so again in the future. Mr. Cook also claimed that Cook had already paid SITLA $34,950 for the Property, which Mr. Cook concluded was "worth, at most, $7,500 in total." Notwithstanding Mr. Cook's assertions, in 1993, SITLA increased the rent to $3,610 per year. In doing so, SITLA recognized that the Property was "being used as a buffer area and manufacturing site" and indicated that the recommended increase was "[b]ased upon the Board-approved index for this type of lease ... [and] represent[ed] a 16.2% increase for industrial use during this five-year period."

¶ 6 In 1998, SITLA proposed that the rental rate be increased again, this time to $4,560 per year. In response, Cook admitted that "land values in the area ha[d] increased and ... the increase [SITLA] proposed [was] rather modest," but requested that the rent not be increased because the Utah facility had not generated any profit "for quite some time." SITLA denied the request and increased the rent as proposed.

¶ 7 During the five-year period between the 1998 rent increase and SITLA's next opportunity to adjust the rate in 2003, land values in the Lehi area continued to increase significantly. According to Cook, in 2000, SITLA transferred responsibility for the Lease from its Surface Group to its Planning and Development Group. Cook asserts that the Planning and Development Group markets and develops trust lands, while the Surface Group administers long-term leases. In 2003, SITLA commissioned development plans for the Property, which resulted in a new appraisal.

¶ 8 On August 1, 2003, Cook filed a petition with the United States Bankruptcy Court for the District of Minnesota seeking a Chapter 11 reorganization. At a hearing in the bankruptcy proceeding, Mr. Cook testified that due to defective product from its supplier, PCS Sales, Inc., Cook lost its mining customers and closed its Lehi, Utah plant in approximately 1999 or 2000.² Indeed, Cook's bankruptcy petition indicates that the Lehi facility generated no income for the years 2001, 2002, and 2003. On September 16, 2003, the bankruptcy court dismissed Cook's petition based upon the bankruptcy trustee's conclusion that Cook did not have sufficient funds to purchase insurance on any of its assets, was no longer operating, and had no source of income from which it could pay the administrative expenses of the Chapter 11 proceeding.

¶ 9 Pursuant to the new appraisal based on development plans for the Property, on May 27, 2004, SITLA attempted to raise Cook's rent from $4,560 to $345,600 per year, to be applied retroactively to June 1, 2003. Cook challenged this increase before SITLA's Board of Trustees (the Board) on the grounds that notice of the increase was untimely under the Lease and that "by raising the rental amount by seventy-five times (a 7500% increase) the current [L]ease amount, ... SITLA [was] acting in bad faith." The Board bifurcated the issues, devoting the first phase of its proceedings to the question of whether Cook had timely notice of the rent increase; only if it determined that Cook had received timely notice would the Board proceed to the second phase and consider Cook's allegation that SITLA acted in bad faith.

¶ 10 On May 4, 2005, the Board issued its Findings and Order, concluding that Cook did not receive timely notice of the proposed rental increase. The Board found that although Mr. Cook and his wife met with SITLA employees before the June 1, 2003 deadlinefor adjusting Cook's rental obligation, they were not specifically informed of the proposed increase. Although the Board found that the SITLA employees believed that rental rates would go up immediately on the current leasehold site if Cook did not agree to relocate, it found no evidence that this understanding had been clearly communicated to the Cooks. Thus, the Board concluded that Cook received no timely actual notice of the adjustment.

¶ 11 In rejecting SITLA's argument that the large increase in the value of the surrounding property itself was enough to put Cook on constructive notice that the rent would increase on June 1, 2003, the Board stated,

It was not unreasonable for Cook to believe that [SITLA] might be willing to hold rental due under [the Lease] to a figure near the previous rate, despite the changed nature of the area, since this precise approach had been taken in adjusting the rentals in 1998. Mr. Burton[, a long-time SITLA employee,] testified that [SITLA's] lease rental rates are often determined by using a percentage of the appraised value of the lease property, typically around five to seven percent.... [I]t is obvious that the customary process Mr. Burton testified to was not followed in the 1998 adjustment. The 1998 rental rate was set at $4,560 per year, or $9.50 per acre, despite the fact that lands in the area were then being valued at around $7,000 per acre.... Under a five to seven percent of appraisal approach, [SITLA] could have proposed a $350 to $490 per acre, or a $168,000 to $235,200 per year, rental rate in its 1998 adjustment.

Because SITLA had not adjusted the rent to reflect actual land value in 1998, the Board concluded that the changing nature of the area "was not enough, in and of itself, to alert Cook to a rent escalation for 2003."

¶ 12 As a result of the Board's decision, SITLA was unable to impose a rental adjustment in 2003. However, on July 20, 2005, SITLA sent a letter (the 2005 Letter) advising Mr. Cook against making improvements to the Property because SITLA intended to adjust the rent to "an amount equal to market value" at the next renewal date in 2008. On October 30, 2006, Cook filed a complaint against SITLA, alleging breach of the covenant of quiet enjoyment, breach of the covenant of good faith and fair dealing (the Covenant), and inverse condemnation. Cook requested damages, as well as a declaration that SITLA is required to increase rent according to the fair market value of the Property based on its use as an explosives facility, rather than the Property's value based on its potential residential use.

¶ 13 SITLA and Cook filed cross-motions for summary judgment. Thereafter, SITLA officially notified Cook that the rental rate would be...