Filed: May 30, 2014
Latest Update: Mar. 02, 2020
Summary: United States Court of Appeals For the Eighth Circuit _ No. 12-3308 _ Commercial Resource Group, LLC lllllllllllllllllllll Plaintiff - Appellant v. The J.M. Smucker Company lllllllllllllllllllll Defendant - Appellee _ Appeal from United States District Court for the District of North Dakota - Fargo _ Submitted: October 23, 2013 Filed: May 30, 2014 (Corrected: 06/25/2014) _ Before RILEY, Chief Judge, COLLOTON, and KELLY, Circuit Judges. _ KELLY, Circuit Judge. J.M. Smucker Co. (“Smucker”) leased
Summary: United States Court of Appeals For the Eighth Circuit _ No. 12-3308 _ Commercial Resource Group, LLC lllllllllllllllllllll Plaintiff - Appellant v. The J.M. Smucker Company lllllllllllllllllllll Defendant - Appellee _ Appeal from United States District Court for the District of North Dakota - Fargo _ Submitted: October 23, 2013 Filed: May 30, 2014 (Corrected: 06/25/2014) _ Before RILEY, Chief Judge, COLLOTON, and KELLY, Circuit Judges. _ KELLY, Circuit Judge. J.M. Smucker Co. (“Smucker”) leased a..
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United States Court of Appeals
For the Eighth Circuit
___________________________
No. 12-3308
___________________________
Commercial Resource Group, LLC
lllllllllllllllllllll Plaintiff - Appellant
v.
The J.M. Smucker Company
lllllllllllllllllllll Defendant - Appellee
____________
Appeal from United States District Court
for the District of North Dakota - Fargo
____________
Submitted: October 23, 2013
Filed: May 30, 2014 (Corrected: 06/25/2014)
____________
Before RILEY, Chief Judge, COLLOTON, and KELLY, Circuit Judges.
____________
KELLY, Circuit Judge.
J.M. Smucker Co. (“Smucker”) leased a commercial building from Commercial
Resource Group (“CRG”). The lease provided that, after its initial term, it would
automatically renew unless Smucker provided written notice of its intent to terminate
the lease 180 days prior to the end of the current term. Smucker sent a termination
notice to CRG that arrived after the deadline. CRG refused to accept the notice and
filed suit in federal court based on diversity jurisdiction to recover rent for the
additional term. The district court found that because Smucker had substantially
performed its lease obligations, it would be unconscionable to hold Smucker to the
renewal. CRG appeals. With jurisdiction under 28 U.S.C. § 1291, we reverse.
I. Background
In March 2001, Smucker leased a commercial building in West Fargo, North
Dakota, from CRG. The parties negotiated an amendment to the lease in 2005. The
amendment provided that the lease would continue for an initial two-year term, and
it gave Smucker an option to renew the lease for up to four additional one-year terms.
After the initial term, the lease was set to renew automatically on July 1st of each year
unless Smucker provided CRG written notice of its intent to terminate 180 days prior,
i.e., by January 1st. The original lease specified the address to which the written
notice should be sent (“original address”). On September 15, 2006, CRG’s
management company informed Smucker of CRG’s change of address and notified
Smucker that “all future rent payments and lease correspondence” should be sent to
the new address (“2006 address”). Smucker received this notice and began sending
rent payments to the new address. The lease was not modified to reflect the change
of address.
In late 2009, Smucker decided to close down its West Fargo facility. On
December 22, 2009, Smucker sent a notice of termination to CRG by way of Federal
Express (“FedEx”); however, Smucker sent the notice to the original address instead
of the 2006 address. On December 23, 2009, Smucker received an email from FedEx
stating “FedEx attempted, but was unable to complete delivery [of the December 22,
2009, notice].” FedEx “[r]ecommended” that Smucker “[c]ontact [FedEx] to provide
correct delivery address and/or additional delivery information.” Smucker took no
action. FedEx sent a second email a week later, on December 30, 2009. The second
email stated, “FedEx attempted, but was unable to complete delivery.” This email
instructed that “[n]o action is required” because “[t]he package is being returned to
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the shipper.” Smucker took no additional action prior to the January 1st deadline for
terminating the lease.
After the deadline passed, Smucker sent a second termination notice to CRG,
this time to the 2006 address. The notice was dated January 4, 2010, and it arrived
on January 5, 2010. This second notice stated Smucker wanted to terminate the lease.
It also explained that Smucker had sent a timely termination notice to the original
address, but that notice had been returned “as undeliverable.” The parties disagree
as to whether this second notice effectively terminated the lease.
The district court found that Smucker had substantially performed the contract
and should not be held responsible for a “minor delay” that was the result of “an
honest mistake in mailing.” The court emphasized that Smucker “made a good faith
attempt” and “acted promptly to correct [its mistake].” As such, the district court held
that “[t]o punish Smucker in the form of hundreds of thousands of dollars . . . would
be an unconscionable result . . . especially where time was not of the essence to the
contract and where the untimely notice did not result in any demonstrable injury to
CRG.” Therefore, the district court granted Smucker summary judgment on the basis
of substantial performance.
II. Discussion
We review the district court’s grant of summary judgment de novo, giving the
“nonmoving party the benefit of all relevant inferences.” Nelson v. Corr. Med.
Servs., 583 F.3d 522, 527 (8th Cir. 2009) (en banc) (quotation omitted). The parties
agree that the lease was to renew automatically unless Smucker provided written
notice to CRG of its intent to terminate the lease by January 1, 2010. There is also
no dispute that Smucker’s notice failed to arrive by that date. Rather, at issue in this
case is whether the district court erred by: (1) failing to treat the lease cancellation
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provision as an option to terminate; and (2) allowing Smucker equitable relief despite
failure to strictly comply with the terms of the option.
A. Option to Terminate the Lease
The district court treated the lease cancellation provision as a standard contract
provision and found that: (1) Smucker had substantially performed its obligations
under the lease; and (2) time was not of the essence to the lease. CRG claims the
lease cancellation provision was an option to terminate the lease and as such required
strict compliance, including strict compliance with the time provisions.
As a case brought under diversity jurisdiction, the district court applied North
Dakota law.1 See, e.g., Shady Grove Orthopedic Assocs., P.A. v. Allstate Ins. Co.,
559 U.S. 393, 417 (2010) (Stevens, J., concurring) (“It is a long-recognized principle
that federal courts sitting in diversity apply state substantive law . . . .” (quotation
omitted)). Under North Dakota law, a lease is a contract between two parties, and
“[t]he rules of contract construction are . . . applied to leases.” Langer v.
Bartholomay,
745 N.W.2d 649, 655 (N.D. 2008); Kolling v. Goodyear Tire & Rubber
Co.,
272 N.W.2d 54, 60 (N.D. 1978) (“[T]he rules of construction relating to
contracts generally apply to the construction of leases.”). As with other contracts,
“[w]hether or not a [lease] requires performance at the exact time specified in the
[lease] depends on whether or not time is of the essence.”
Langer, 745 N.W.2d at
657. “[U]nless the intent that time is of the essence is manifest from the face of the
[lease], whether the parties intended time to be of the essence is a question of fact.”
Id. “Where time is not of the essence, [i.e., is non-material,] a reasonable delay in
performance does not constitute a breach of contract.”
Id. Instead, under the doctrine
of “substantial performance,” a party is relieved of exact compliance with the terms
1
We note the lease also contains a specific choice-of-law provision in which
the parties chose North Dakota law to govern this dispute.
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of a lease if the breach of the lease terms is non-material. See VND, LLC v. Leevers
Foods, Inc., 672 N.W.2d 445, 449, 453 (N.D. 2003) (citing Restatement (Second) of
Contracts § 241 (1977) and
Kolling, 272 N.W.2d at 60); see also Restatement
(Second) of Contracts §§ 241 & cmt. b, 237 & cmt. d. In this case, the district court
held that time was not of the essence to the contract, and therefore Smucker’s slight
delay was not a material breach.
However, option contracts are treated differently than regular contracts.
Langer, 745 N.W.2d at 657. An option is an irrevocable offer by the offeror to
perform. Matrix Props. Corp. v. TAG Invs.,
609 N.W.2d 737, 742 (N.D. 2000). See
generally Restatement (Second) of Contracts § 25. “Courts generally construe the
attempt to exercise an option strictly and require exact compliance because the
optionee is free to exercise the option if he chooses, but an optionor is bound to
perform if the option is properly exercised.”
Langer, 745 N.W.2d at 657–58. “As a
matter of law . . . time [is] of the essence” in exercising an option contract.
Id. at 658.
“[T]he optionee must perform the terms of the option within the specified time and
upon the terms and conditions provided in the agreement.”
Id. at 657. North Dakota
applies the same rules to an option in a lease as to an option to buy property, whether
for an option to renew a lease or an option to terminate.
Id. at 657–58.
The lease in this case contained an option to terminate, not simply a lease
cancellation provision. While the original lease provided an option to renew the lease
for up to three years, the amendment to the lease made renewal automatic and
termination optional. The amendment reads:
[T]his Commercial lease shall be automatically extended for four (4)
successive one-year periods, unless Tenant delivers written notice to
Landlord of Tenant’s intention to not extend the term for said additional
period, said notice to be delivered no later than 180 days prior to the
expiration of an option term.
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Through the provision for automatic extensions, CRG, the lessor, made an irrevocable
offer to extend the lease and no longer had the ability to terminate the lease at the end
of the current term—the lease would automatically renew based solely on the actions
of the lessee, Smucker. The lease could only be cancelled by Smucker, and only if
Smucker provided written notice to CRG by a specified date. As a result, after the
amendment, Smucker held an option to terminate the lease.
As an option to terminate the lease, the cancellation provision must be “strictly
construed” and “require[s] exact compliance.” Langer, 745 N.W.2d at 658. Also, “as
a matter of law . . . time [is] of the essence” to the option.
Id. Given the significant
differences between a standard lease cancellation provision and an option to
terminate, we find the district court erred in failing to treat the cancellation provision
in this case as an option to terminate.
B. Equitable Relief
In finding that Smucker had substantially performed its contract, the district
court essentially found all the factors relevant to equitable relief for failure to timely
exercise an option. CRG argues that these findings were in error and that equitable
relief should not be granted in this case. In particular, CRG asserts that holding
Smucker to the lease for another year is not unconscionable.
The Supreme Court of North Dakota has twice suggested the possibility that
equitable relief may be available when a party fails to timely exercise an option. See
Langer, 745 N.W.2d at 658–59; Western Tire, Inc. v. Skrede,
307 N.W.2d 558,
562–63 (N.D. 1981)). In Langer, the court recognized that “some courts have
invoked their equitable powers and allowed an option to be exercised when the
requirements for the option have not been
met.” 745 N.W.2d at 658. Generally, “[a]
court may invoke its equitable powers and an option may nevertheless be enforced
even if the holder failed to exercise it within the specified time if: (1) the delay is
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slight[;] (2) the delay has not prejudiced the other party[;] and (3) a failure to grant
relief would result in such hardship as to make literal enforcement of the option
unconscionable.” Id. The Supreme Court of North Dakota has also noted, however,
that courts generally limit equitable relief to a very particular situation: “[e]quitable
relief is generally granted in cases where a lessee has made valuable improvements
to the property in expectation of renewing a lease, but the lessee’s notice to renew is
slightly past the deadline, and the relief is necessary to avoid the inequitable
forfeiture or literal compliance is unconscionable.”
Id. at 658–59.
While the district court in this case did not explicitly grant equitable relief,
relying instead on the theory of substantial performance, the district court essentially
applied the equitable relief test outlined in Langer. The district court found that
“[u]pon discovery of the mistake, Smucker acted promptly to correct it, which caused
the notice to arrive shortly after the deadline specified in the contract.” The district
court also held that “[t]o punish Smucker in the form of hundreds of thousands of
dollars . . . would be an unconscionable result . . . especially . . . where the untimely
notice did not result in any demonstrable injury to CRG.” Thus, the district court
found that (1) the delay was slight (the notice arrived “shortly after”); (2) the delay
did not prejudice CRG (no “demonstrable injury”); and (3) enforcement of the lease
would be unconscionable (“would be an unconscionable result”).
Assuming without deciding that equitable relief is an available remedy in this
case, we find there is no showing of unconscionability upon enforcement of the
lease.2 In North Dakota, “[t]he determination whether a particular contractual
2
It is an open question whether North Dakota would allow equitable relief in
a case such as this. See Langer, 745 N.W.2d at 658–59 (discussing the possibility of
equitable relief); Western
Tire, 307 N.W.2d at 562–63 (denying equitable relief). It
is also an open question whether North Dakota would require a showing of both
procedural and substantive unconscionability in this context. See, e.g., Rutherford
v. BNSF Ry. Co.,
765 N.W.2d 705, 713–15 (N.D. 2009) (requiring a showing of both
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provision is unconscionable is a question of law for the court.” Strand v. U.S. Bank
Nat’l Ass’n ND, 693 N.W.2d 918, 921 (N.D. 2005). We conclude, as a matter of law,
that the harm suffered by Smucker is not so great as to rise to the level of substantive
unconscionability. There is no evidence that Smucker was at risk of losing anything
other than one year’s rent if the lease were enforced. See
Langer, 745 N.W.2d at 658.
In addition, there has been no showing that payment of one year’s rent, in and of
itself, constitutes a forfeiture or otherwise unconscionable result. Indeed, in exchange
for the rent paid, Smucker received the lease to, and thus the use of, the building for
an additional year. On this record, there is insufficient evidence to conclude as a
matter of law that enforcing the terms of the lease against Smucker will cause
Smucker “such hardship as to make literal enforcement of the option
unconscionable.”
Id.
III. Conclusion
For the reasons above, we reverse the district court’s order granting summary
judgment to Smucker and remand for further proceedings consistent with this
opinion.
COLLOTON, Circuit Judge, dissenting.
The question presented on this appeal is whether The J.M. Smucker Company
is entitled to equitable relief from strict enforcement of a lease with Commercial
Resource Group, LLC on a commercial building in West Fargo, North Dakota.
Smucker intended to terminate the lease on June 30, 2010, but due to what the district
procedural and substantive unconscionability at the time the lease was entered).
Because we find the lease is not substantively unconscionable, we need not consider
whether it is procedurally unconscionable.
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court described as “an honest mistake in mailing,” Smucker’s notice to terminate
arrived four days after the January 1 deadline set by the lease. Applying North
Dakota law, the district court granted equitable relief, observing that the notice
arrived shortly after the deadline, Commercial Resource Group suffered no
demonstrable injury from the slight delay, and an order requiring Smucker to pay
hundreds of thousands of dollars in back rent and utilities would be an
unconscionable result. The district court’s equitable ruling accords with North
Dakota law and should be affirmed.
We know that North Dakota is likely to allow equitable relief from option
contracts in appropriate cases, because the state supreme court said so in two
decisions. In Western Tire, Inc. v. Skrede, 307 N.W.2d 558 (N.D. 1981), the court
observed that decisions from other jurisdictions have granted equitable relief to
parties who failed timely to exercise an option to renew a lease, where “the delay is
slight, the delay has not prejudiced the landlord, and the failure to grant relief would
result in such hardship to the tenant as to make literal enforcement of the renewal
provision unconscionable.”
Id. at 562 (citing Fletcher v. Frisbee,
404 A.2d 1106
(N.H. 1979); L.S. Tellier, Annotation, Effect of Lessee’s Failure or Delay in Giving
Notice Within Specified Time, of Intention to Renew Lease,
44 A.L.R. 2d 1359
(1955)). The court in Western Tire rejected a lessee’s claim and distinguished
authorities granting relief, but gave no indication that equitable relief is categorically
unavailable in North Dakota.
In Langer v. Bartholomay, 745 N.W.2d 649 (N.D. 2008), the North Dakota
court said more explicitly that equitable relief is available in appropriate
circumstances:
A court may invoke its equitable powers and an option may nevertheless
be enforced even if the holder failed to exercise it within the specified
time if: (1) the delay is slight, (2) the delay has not prejudiced the other
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party, and (3) a failure to grant relief would result in such hardship as to
make literal enforcement of the option unconscionable.
Id. at 658. The North Dakota court thus followed the analysis of the Corbin treatise
on contracts concerning missed deadlines in option contracts. See 1 Joseph M.
Perillo, Corbin on Contracts § 2.15, at 203 (rev. ed. 1993). “[T]he determination of
the court turns not on a single factor but on balancing the equities between the
parties.”
Id. (internal quotation omitted). Equitable relief “is often for the purpose
of avoiding an inequitable forfeiture, but even where no inequitable forfeiture will
occur, specific performance or other appropriate remedy will nevertheless be given
if there has been such reliance on the promise as to make literal compliance with the
option limitation unconscionable.”
Id. at 202.
There is no genuine dispute here on the first two elements of Smucker’s claim
for equitable relief under the test outlined in Langer. Smucker’s delay in giving
notice to terminate the lease was slight. The four-day delay did not prejudice
Commercial Resource Group. The dispositive question is whether failure to grant
relief would result in such hardship as to make literal enforcement of the deadline
unconscionable.
What sort of hardship would the North Dakota court consider unconscionable?
The best indication comes from authorities cited by that court in explaining the
equitable rule. When a lessee gives untimely notice to renew a lease, literal
compliance may be unconscionable where the lessee has made “valuable
improvements to the property” that would be lost if the lessee were required to
relocate. Langer, 745 N.W.2d at 658. The loss of a strategic location, associated
goodwill, three pieces of unmovable equipment, and $25,000 in moving costs was
enough to show substantial harm justifying relief.
Fletcher, 404 A.2d at 1109 (cited
in Western
Tire, 307 N.W.2d at 562). So too was the inability to recoup a lessee’s
full investment in equipment that had been operated for ten years of the fifteen
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required, significant reduction in value of personal property that had to be removed,
and loss of goodwill established over ten years. Trollen v. City of Wabasha, 287
N.W.2d 645, 648 (Minn. 1979) (cited in
Langer, 745 N.W.2d at 658). Another
example of unconscionable hardship involved a loss of $142,038 in improvements,
the possible inability to use for tax purposes up to $100,000 in operating losses and
depreciation, and the continuing liability for outstanding loans and mortgages in the
amount of at least $112,000. Aickin v. Ocean View Invs. Co.,
935 P.2d 992, 994 n.3
& 1001 (Haw. 1997) (cited in
Langer, 745 F.3d at 658). See also Am. Houses, Inc.
v. Schneider,
211 F.2d 881, 883-84 (3d Cir. 1954) ($250,000 in losses, including lost
improvements and moving expenses) (cited in
Annotation, 44 A.L.R. 2d at 1362); JNA
Realty Corp. v. Cross Bay Chelsea, Inc.,
366 N.E.2d 1313, 1316-18 (N.Y. 1977) (loss
of $55,000 in property improvements and “a considerable amount” of customer good
will) (cited in
Fletcher, 404 A.2d at 1109); Galvin v. Simons,
25 A.2d 64, 65-66
(Conn. 1942) ($600 in costs plus inconvenience of moving and inability to find a new
location in the same area) (cited in
Annotation, 44 A.L.R. 2d at 1364); Xanthakey v.
Hayes,
140 A. 808, 811 (Conn. 1928) (loss of business good will and $4,000 in
improvements) (cited in
Annotation, 44 A.L.R. 2d at 1364).
The hardship suffered by Smucker measures up to that deemed sufficient to
justify equitable relief in the authorities referenced by the North Dakota Supreme
Court. Under the majority’s approach, Smucker is required to pay $279,450.55 in
rent payments and utility costs on a building for which it has no use. As of December
2009, Smucker notified Commercial Resource Group and others that it would close
the plant in West Fargo and consolidate its operations in one manufacturing facility.
Production had dropped off and demand no longer justified operating the plant; a
plant in Kentucky could take over all production. Smucker ceased operations in West
Fargo in April 2010, allowing two months to shut down and disassemble the plant
before the expiration of the lease term in June 2010. Some parts of the building and
its improvements were disassembled and sent to Kentucky. Another fifty to sixty
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pieces of equipment were sold at auction. By June 30, 2010, Smucker had vacated
the building.
Under these circumstances, the district court aptly concluded that to require
Smucker to pay hundreds of thousands of dollars in back rent and utilities—when
CRG suffered no demonstrable prejudice from a slight four-day delay in receipt of
Smucker’s notice to terminate—would be an unconscionable result that justifies
equitable relief under North Dakota law as best it can be discerned. I would affirm
the judgment of the district court.
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