Sterling Dev. Grp. Three, LLC v. Carlson

859 N.W.2d 414

STERLING DEVELOPMENT GROUP THREE, LLC, Sterling Development Group Eight, LLC, Plaintiffs and Appellants

v.James D. CARLSON, Defendant and Appellee.

No. 20140188.

Supreme Court of North Dakota.

Feb. 12, 2015.

Nancy J. Morris (argued), Jason T. Loos (on brief) and Erik R. Johnson (on brief), Fargo, N.D., for plaintiffs and appellants.

Charles K. Maier (argued), Loren L. Hansen (appeared) and Kermit J. Nash (on brief), Minneapolis, MN, for defendant and appellee.

Opinion

SANDSTROM, Justice.

[¶ 1] Sterling Development Group Three, LLC, and Sterling Development Group Eight, LLC, appeal from a judgment dismissing their action against James D. Carlson to collect on two personal guarantees and from an order awarding Carlson costs and disbursements. Because the district court's finding that the principal's contractual obligations were altered without Carlson's knowledge or consent is not clearly erroneous, and the court did not abuse its discretion in awarding costs and disbursements, we affirm the judgment and order.

I

[¶ 2] In 1983, Carlson founded PRACS Institute, Ltd., a medical research facility which began operating in East Grand Forks, Minnesota. In 1999, Sterling Development Group Three entered into a 15–year lease agreement with PRACS for a building located in East Grand Forks. Carlson signed the lease agreement as the president of PRACS. Carlson also signed a personal guaranty, which provided in relevant part:

SECTION 1. Statement of Guaranty. Guarantor guarantees a payment of rent under the attached lease pursuant to the terms thereof. If Obligor defaults in the payment of any installment of rent, Guarantor shall pay the amount of such installment within thirty (30) days after receipt of notice of default and demand for payment. Guarantor's liability hereunder shall not be affected by reason of any extension of time for payment of any installment granted by Obligee to Obligor.

[¶ 3] When PRACS expanded in 2004, Sterling Development Group Eight built an expansion to the Sterling Three building, and PRACS entered into a lease agreement with Sterling Eight for a term running simultaneously with the Sterling Three lease. Carlson signed a similar personal guaranty for the Sterling Eight lease. In January 2006, Carlson sold PRACS to Contract Research Solutions, Inc., which the parties refer to as Cetero. The Sterling companies consented to this “change of control.” Carlson's daily involvement in PRACS ceased at that point. Carlson received Cetero stock in the sale and became a member of Cetero's seven-member board of directors.

[¶ 4] In 2010, Cetero suspended its East Grand Forks operations, but continued to pay rent to the Sterling companies. In the spring of 2012, Cetero filed for bankruptcy. The bankruptcy trustee eventually rejected the East Grand Forks Cetero leases with the Sterling companies and stopped paying rent. The Sterling companies then brought this action against Carlson to collect more than $600,000 for unpaid rent under his personal guarantees.

[¶ 5] Following a bench trial, the district court dismissed the action. The court found Carlson was exonerated from liability under the personal guarantees because the original lease agreements had been altered in three respects by the Sterling companies and Cetero or PRACS without Carlson's knowledge or consent. First, the court found the Sterling companies and Cetero altered the contractual responsibility for providing janitorial services. Second, the court found the Sterling companies and PRACS altered PRACS' contractual obligation to pay real estate taxes so the Sterling companies could receive certain amounts of tax increment financing benefits. Third, the court found that the Sterling companies and Cetero altered the contractual method for calculating base rent adjustments for the leases. The court, after reviewing the Sterling companies' objections, awarded Carlson $7,069.30 for costs and disbursements.

II

[¶ 6] The Sterling companies argue the district court erred in finding the original lease agreements were contractually altered without Carlson's knowledge or consent, resulting in exoneration of his personal guaranty obligations.

[¶ 7] In Ag Servs. of America, Inc. v. Midwest Inv. Ltd. P'ship, 1998 ND 189, ¶ 10, 585 N.W.2d 571, this Court explained when an alteration may exonerate a guarantor's obligations:

Section 22–01–15, N.D.C.C., provides:

A guarantor is exonerated, except insofar as he may be indemnified by the principal, if, by any act of the creditor without the consent of the guarantor:

1. The original obligation of the principal is altered in any respect; or

2. The remedies or rights of the creditor against the principal in respect thereto are impaired or suspended in any manner.

Alteration of a contract “is a process wherein the parties make ‘[a] change in the provisions of a contract.’ Black's Law Dictionary 71 (5th ed.1979).” Biteler's Tower Serv., Inc. v. Guderian, 466 N.W.2d 141, 143 (N.D.1991). As this Court has observed, the materiality of an alteration of a principal's obligation is irrelevant; under N.D.C.C. § 22–01–15, a guarantor is exonerated if the creditor alters the principal's original obligation “in any respect” without the guarantor's consent. Tri–Continental Leasing Corp. v. Gunter, 472 N.W.2d [437,] 439 [ (N.D.1991) ]. To be exonerated, a guarantor need not be injured by an alteration in the principal's obligation. AMF, Inc. v. Fredericks, 212 N.W.2d 834, 836 (N.D.1973).

Whether there has been an alteration of an original agreement is a finding of fact subject to the clearly erroneous standard of review. See RRMC Constr., Inc. v. Barth, 2010 ND 60, ¶ 7, 780 N.W.2d 656; Moch v. Moch, 1997 ND 69, ¶ ¶ 5–8, 562 N.W.2d 558; Estate of Murphy, 554 N.W.2d 432, 437 (N.D.1996) ; Mandan Sec. Bank v. Heinsohn, 320 N.W.2d 494, 500 (N.D.1982), overruled on other grounds, First Interstate Bank v. Larson, 475 N.W.2d 538 (N.D.1991). A finding of fact is clearly erroneous if it is induced by an erroneous view of the law, if there is no evidence to support it, or if, after reviewing all of the evidence, we are left with a definite and firm conviction a mistake has been made. See, e.g., Chornuk v. Nelson, 2014 ND 238, ¶ 10, 857 N.W.2d 587.

[¶ 8] The district court found “[b]oth the Sterling Three and Sterling Eight leases required Sterling to provide the janitorial service in the PRACS leased spaces and PRACS would be billed for said services by reconciliation of the common area maintenance (CAM) payment to Sterling.... In June 2008, Cetero and Sterling Three and Sterling Eight agreed that Cetero could provide the janitorial services. This, then, would ... change the CAM payment to Sterling. This agreement altered the original lease agreements.” The Sterling companies argue the court erred because there was no contractual alteration of the lease terms regarding janitorial services.

[¶ 9] The lease agreement between Sterling Three and PRACS provided in relevant part:

2.1.2 Additional payment for common area maintenance. Lessee covenants and agrees to pay to Lessor a pro rata share of Lessee's expenses for common area maintenance incurred during each operating year of this Lease (CAM payment). Lessee's share shall be based on a ratio of the actual leased space divided by the total building square footage. These expenses include, but are not limited to real estate taxes and special assessments, parking lot repairs and maintenance, property management fees, snow removal, grounds maintenance, common area cleaning and janitorial services, sprinkling and alarm, repair, maintenance of building and fixtures (other than structural repairs which are Lessor's obligation, as stated in 3.1.1, below), repair and maintenance, water, electricity, utilities, garbage, property and liability insurance. Property management fees shall be seven percent (7%) of the annual base rent. Also included in the CAM payment are the utilities (including gas and electricity) attributable to the Lessee's demised premises in addition to the utilities attributable to the common area.

2.1.3 Lessees shall pay to Lessor an advance payment on the CAM payment in the amount of $4.00 per actual square foot of leased space (including the pro-rata share of the common area attributable to Lessee), per annum, paid in equal monthly installments. Said amount represents an estimate of the annual expenses to be incurred by the Lessor as additional rent under paragraph 2.1.2 above. The Lessor shall account to the Lessee annually for the actual additional rent by conducting an annual accounting of the expenses (including the utilities attributable to the Lessee's demised premises) on or before March 1 of each calendar year during the term hereof. Lessor's business records supporting the annual accounting shall be available to Lessee for inspection. If the additional rent is increased as a result of expenses paid by the Lessor, Lessor shall bill Lessee for the additional expenses at the time of delivering said accounting to Lessee, which shall be due within thirty (30) days thereof. If the amount collected for additional rent exceeds the amount due Lessor for additional rent, the Lessor shall refund said overpayment to Lessee within the same thirty-day period. Lessor may adjust the estimated annual CAM payment from year to year based on the prior years' expenses and anticipated future expenses by written notice to Lessee.

[¶ 10] Sections 2.1.2 and 2.1.3 of the lease agreement between Sterling Eight and PRACS are substantively identical in relevant part to these provisions except they refer to a “Maintenance” payment rather than a “CAM” payment and tie the “advance payment” to the amount called for under the Sterling Three lease. Section 3.2.2 in both leases provides: “Lessee services and expenses. Lessee shall be responsible for payment of, and shall be responsible for all cleaning for, the demised premises.”

[¶ 11] The evidence establishes that under this contractual arrangement, the Sterling...