MERCURY DEVELOPMENT, LLC, and EAGLE REALITY & DEVELOPMENT, LLC, Plaintiffs/Counterclaim Defendants
MOTEL SLEEPERS, INC., Defendant/Counterclaim Plaintiff.
MEMORANDUM OPINION & ORDER
GREGORY F. VAN TATENHOVE, District Judge.
The only remaining claim in this action is the Defendant's counterclaim for attorney's fees. [R. 37.] Both parties have filed extensive briefs about whether the clause concerning attorneys' fees found in § 11 of their real estate contract is enforceable, and about its relationship to the rest of the contract. Amidst the "sound and fury" of the numerous arguments raised in the parties' briefs, there remains only one pertinent issue for the Court to resolve. To enforce the provision or not to enforce it - that is the question. The answer, however, depends to some extent on the nature of the contingencies found in the parties' original agreement, which the Court seeks to further clarify in this opinion. The Court also endeavors to delineate the procedural posture of this case, which has become somewhat akin to Shakespeare's complicated plots, though certainly not as entertaining.
The Defendant, Motel Sleepers, Inc. ("MSI"), submitted in its amended answer to the Plaintiffs' complaint a counterclaim for attorneys' fees. [R. 19.] MSI later moved for summary judgment against the Plaintiffs' claims concerning breach of contract and fraud, and moved for summary judgment in MSI's favor on its counterclaim. [R. 30]. The Plaintiffs objected to MSI's motion and requested that the Court deny MSI's summary judgment motion but did not file any cross-motion for summary judgment. The Court has granted summary judgment to the Defendant MSI on the breach of contract claims but denied summary judgment on the counterclaim [R. 37], which left an orphaned claim - unsuitable for trial but on which a motion for summary judgment had not been filed by the Plaintiffs. The Court then utilized Fed.R.Civ.P. 56(f) to help solve that problem by informing the parties of its intent and allowing time for supplemental briefing on that issue. After considering the parties' lengthy arguments (including the references to Hamlet ), the Court holds that summary judgment will be GRANTED in MSI's favor on its counterclaim concerning attorneys' fees.
Defendant MSI is a company that contracts with various railway companies to offer long-term housing and food services to their employees who are on long-term assignments away from their permanent residences. [R. 30 at 3.] Plaintiff Mercury Development attempted to sell a piece of land in Somerset, Kentucky to MSI, brokered by Eagle Realty. [R. 31 at 3.] The property which MSI attempted to purchase was encumbered by a restrictive covenant requiring "NO MOTELS other than HOLIDAY INN EXPRESS shall be located on any lot unless approved by a member of Sitaram, LLC." [R. 20-17 at 6.] On March 18, 2010, both parties signed the contract under the assumption that the private MSI facility would not constitute a motel. [R. 30 at 8; R. 31 at 3.] In § 17 of the contract, entitled "This Contract is Contingent Upon The Following", the Executive Vice President of MSI included three handwritten conditions: "bank financing, signed contract from Norfolk Southern Railway, soil test." [R. 31-1 at 3; R. 41-1 at 3.]
MSI then approached Malvern National Bank (MNB) and secured financing up to $3, 067, 875 at the end of April, 2010. [R. 30-9.] On June 14, MSI and MBN agreed to increase the loan to $4, 647, 634 to accommodate building a larger facility than previously planned. [R. 30-10.] That same day MNB received an updated title commitment and draft deed, which made MNB aware of the restrictive covenant for the first time. [R. 27 at 8.] Fearing that the facility would have no resale value or opportunity for liquidation, MNB refused to provide financing unless Sitaram waived the covenant, which Sitaram would not do. [R. 26 at 6; R. 27 at 8-9.] Without adequate financing, MSI had to inform Mercury Development that "despite our good faith efforts the contingency will not be met and thus there is no legal obligation to close the transaction." [R. 30-11 at 2.] Mercury Development then sued MSI for breach of contract and fraud.
As mentioned above, the Court granted summary judgment in favor of MSI on all claims brought against it by the Plaintiffs. [R. 37.] The Court denied summary judgment on the Defendant's counterclaim for attorney's fees, but Plaintiffs had not sought summary judgment on the counterclaim. This claim, therefore, around which there was only a legal dispute, was left in limbo. To resolve that problem, the Court used Fed.R.Civ.P. 56(f)(1), Judgment Independent of the Motion, to notify the parties of the Court's intention to contemplate granting judgment in favor of the Plaintiffs. [R. 40]. As required by FRCP 56(f), the Court gave the parties notice of its intention and a reasonable time to respond before that action could take place. [R. 40]. Plaintiffs' response requested the Court to adhere to its inclination and rule in their favor. [R. 38.] MSI's response asked that the Court reconsider its proposed ruling on the matter of attorney's fees [R.39.] and outlined numerous reasons why judgment should be granted in its favor instead.
Before explaining why the law supports MSI's position in this matter, a brief procedural explanation is necessary. Rule 56(f) states:
After giving notice and a reasonable time to respond, the court may: (1) grant summary judgment for a nonmovant; (2) grant the motion on grounds not raised by a party; or (3) consider summary judgment on its own after identifying for the parties material facts that may not be genuinely in dispute.
Fed. R. Civ. P. 56(f). Here, because Plaintiffs had not moved for summary judgment on the counterclaim, subsection one was clearly implicated. Ruling for MSI in this context, however, is more complicated because summary judgment was already denied and none of the subsections provide a foundation for ruling in MSI's favor under these circumstances. The Court, however, construed MSI's objections to its intended ruling as a motion to reconsider pursuant to FRCP 60(b)(1) [R. 40 at 1], and after carefully considering the parties' arguments on the matter, the Court determined that the law supports MSI's position. Unlike the Plaintiffs, MSI moved for summary judgment on its counterclaim [R. 30 at 1], and the Court therefore will grant MSI's motion to reconsider and also award summary judgment to MSI on its counterclaim for attorney's fees.
When granting summary judgment on the claims asserted in the complaint, the Court held that no breach of contract had occurred because a condition to the contract had not been fulfilled. [R. 37 at 6-14.] In that analysis, the Court did not clarify whether the condition of obtaining financing was a condition precedent to contract formation or a condition precedent to contract performance. The Court then addressed MSI's counterclaim seeking recovery of attorney's fees, and suggested that the failure of a condition precedent might have voided the entire agreement, including the provision for attorney fees. [R. 37 at 16-17.] That supposition rested on Kentucky law that a contract conditioned on third-party approval is invalid in default of that condition. Green River Steel Corp. v. Globe Erection Co., 294 S.W.2d 507, 509 (Ky. 1956). The Court issued that decision under Rule 56(f) to allow careful briefing and response by the parties. As will be explained further below, after considering the parties' intent as shown by their words and conduct, and in light of Kentucky law, the Court holds that the condition of obtaining bank financing did not offer the bank an opportunity to approve the contract itself, but only an opportunity to approve financing for a party to the contract. As such, the requirement that MSI obtain financing was a condition precedent to contract performance rather than to contract formation. When MSI could not obtain the financing, the parties were excused from performance, per their contractual agreement. Because their agreement, however, is valid, the § 11 provision for attorney's fees will be enforced. Therefore the Court orders summary judgment be GRANTED in favor of defendant MSI's counterclaim for attorney's fees from Mercury Development.
In order to determine the appropriate course regarding the clause about attorney's fees, the Court believes it necessary to clarify any confusion that may have developed in this case about the real estate contract as a whole. Such clarification necessarily implicates several basic rules of contract interpretation, the differences between contracts and conditional agreements, and distinctions between conditions precedent to formation and conditions precedent to performance. First of all, it is important to remember that courts should protect the freedom of individuals to voluntarily enter into contractual agreements with others, and thus should not re-write a contract for the parties under the guise of construing it. Bennett v. Dudley, 391 S.W. 375, 376-77 (Ky. 1965); see also Zeitz v. Foley, 264 S.W.2d 267, 268 (Ky. 1954) ("contracts voluntarily made between competent persons are not to be set aside lightly, " for "the right of private contract is no small part of the liberty of the citizen"). Rather, the primary goal of the court should be "to effectuate the intentions of the parties." Cantrell Supply, Inc. v. Liberty Mut. Ins. Co., 94 S.W.3d 381, 384 (Ky. 2002). "Any contract or agreement must be construed as a whole, giving effect to all parts and every word in it if possible.'" Id. at 384-85 (quoting City of Louisa v. Newland, 705 S.W.2d 916, 919 (Ky. 1986).
When interpreting a contract, courts must determine which parts, if any, are ambiguous because the presence of ambiguity will direct the analysis. Frear v. P.T.A. Indus., Inc., 103 S.W.3d 99, 105-06 (Ky. 2003). If there is no ambiguity, the court must strictly enforce the contract's terms "by assigning language its ordinary meaning and without resort to extrinsic evidence." Frear, 103 S.W.3d at 106 (citing Hoheimer v. Hoheimer, 30 S.W.3d 176, 178 (Ky. 2000)); Mounts v. Roberts, 388 S.W.2d 117, 119 (Ky. 1965). When the language of the contract is ambiguous, however, the court must try to determine the intention of the parties by evaluating the contract "as a whole, and in doing so will consider the subject matter of the contract, the situation of the parties and the conditions under which the contract was written.'" Frear, 103 S.W.3d at 106 (quoting Whitlow v. Whitlow, 267 S.W.2d 739, 740 (Ky. 1954)). Thus, when resolving ambiguous or uncertain contract provisions, the court may use extrinsic evidence concerning the parties' intentions as well as "the circumstances surrounding execution of the contract, the subject matter of the contract, the objects to be accomplished, and the conduct of the parties." Cantrell, 94 ...