FOR PUBLICATION FILED
Dec 07 2012, 10:23 am
CLERK
of the supreme court,
court of appeals and
tax court
ATTORNEY FOR APPELLANTS: ATTORNEY FOR APPELLEES:
STEVEN STOESZ DONALD D. LEVENHAGEN
Stoesz & Stoesz Landman & Beatty, Lawyers, LLP
Westfield, Indiana Indianapolis, Indiana
IN THE
COURT OF APPEALS OF INDIANA
ROBERT GELLER and JUDY GELLER, )
)
Appellants-Plaintiffs, )
)
vs. ) No. 29A02-1111-PL-1202
)
KURT P. KINNEY, HOLLY KINNEY, and )
A.M. RENTALS, INC., )
)
Appellees-Defendants. )
APPEAL FROM THE HAMILTON SUPERIOR COURT
The Honorable Wayne A. Sturtevant, Judge
Cause No. 29D05-0812-PL-2648
December 7, 2012
OPINION - FOR PUBLICATION
NAJAM, Judge
STATEMENT OF THE CASE
Robert and Judy Geller appeal the trial court’s judgment in favor of A.M. Rentals,
Inc. (“A.M.”) and the court’s calculation of damages for the Gellers against Kurt P.
Kinney and Holly Kinney.1 The Gellers raise two issues for our review, namely:
1. Whether the trial court erred in its interpretation of an exculpatory
clause in the Gellers’ contract with A.M.; and
2. Whether the trial court’s calculation of damages against the Kinneys
is clearly erroneous.
We affirm.
FACTS AND PROCEDURAL HISTORY
On March 23, 2011, the Gellers filed their amended complaint against the Kinneys
and A.M. Under Count I, the Gellers alleged that the Kinneys had breached their lease
agreement, causing the Gellers damages in excess of $70,000. Under Count II, the
Gellers alleged that A.M., the Gellers’ leasing agent, had failed “to properly investigate
the Kinneys before recommending them as tenants,” thereby breaching A.M.’s lease
management agreement with the Gellers. Appellants’ App. at 8. And under Count III,
the Gellers alleged that A.M. had breached its duties under Indiana Code Chapter 25-
34.1-10 when A.M. had failed to “exercise due diligence and care when investigating
possible tenants, recommending tenants to the Gellers, and executing lease agreements on
behalf of the Gellers.” Id. at 9.
1
The Kinneys have not filed a brief in this appeal.
2
Following a bench trial, on October 11, 2011, the trial court entered judgment for
the Gellers on their claim against the Kinneys but against the Gellers on both claims
against A.M. In its order, the court found the following facts:
4. The Gellers . . . lived [at 168 E. Columbine Lane, Westfield,
Indiana,] until November 2006, at which time they moved to 15639 Buxton
Court, Westfield, Indiana, another house [the] Gellers had purchased in
September 2006. Because Mr. Geller was transferred by his employer to a
position in Elmhurst, Illinois, effective on January 1st, 2007, the Gellers
listed the Columbine Lane house for sale . . . . The house did not sell in the
time the Gellers had it listed . . . and they began to consider leasing the
property. . . .
5. The Gellers’ initial awareness of [A.M.] came from a sign in a
subdivision where [A.M.] had another client. They did not consider any
other leasing agent and spoke only with [A.M.] about listing the Columbine
Lane property for lease. By October 26, 2006, the Gellers had discussed
the likelihood of leasing the Columbine Lane property with Decarius
Spells, [A.M.’s] representative, entered into the Lease and Management
Agreement, and authorized [A.M.] to enter the property into the multiple
listing service to begin finding a tenant for the property. One reason for
selecting [A.M.] was that the Gellers understood that [A.M.] was a
corporate relocation company as well as a home rental company, and
because the Gellers believed [A.M.] could attract the type of tenant the
Gellers were looking for to place in their home.
***
7. Neither party signed the Lease and Management Agreement, but
both the Gellers and [A.M.] accept its terms and agree that it is a legally-
binding contract for them both. Although Mr. Geller was the one
responsible for negotiating the agreement with [A.M.] . . . he admits to not
having read the agreement prior to the subsequent lease with the Kinneys
but had merely “kind of previewed it.” The evidence establishes that the
contract was in effect prior to October 26, 2006.
8. It was not until around March 15, 2007, that Decarius Spells, the
[A.M.] representative, contacted Mr. Geller and said that he had a party
interested in leasing the house. This party was the Kinney family. Up until
that time, Mr. Geller had limited contact with Mr. Spells because no other
tenants had even previewed the house in the nearly five months it had been
listed for lease. Mr. Geller had spoken with Mr. Spells only two other
3
times, those being the original telephone call of introduction and to
schedule a time to meet at the house, and the meeting that took place at the
house so Mr. Spells could see it. In that time, the Gellers also dropped the
requested monthly rental from $3,150 to $2,950, and then to $2,750.
Meanwhile, the Gellers were paying mortgages and associated expenses on
two houses totaling approximately $5,800 per month. While Mr. Geller’s
income was $175,000 per year, 22 percent of that amount ($38,500) came
from a bonus that he did not receive until the year’s end, and therefore[] his
gross monthly income before bonus was of $11,375. The Gellers did have
another rental property that was renting at a profit of $300 per month that
off-set some expenses.
9. The next contact with Mr. Spells was on the day the Kinneys
previewed the house, when Mr. Spells called to advise that they liked the
house and wanted to submit an application. There was a final call, and in
this call[] Mr. Spells discussed the Kinneys’ application and sought the
Gellers’ decision on whether to enter into a lease with the Kinneys. Of note
is that[,] in one of these final two telephone calls, the Gellers agreed to
another reduction in the monthly lease amount to $2,495. This completed a
21 percent drop from the original monthly rate and was in response to what
the Kinneys could afford to pay.
10. The content of this final telephone conversation between Mr. Spells
and Mr. Geller forms the factual crux of the lawsuit. In this conversation,
Mr. Spells went over the lease application . . . and the Kinneys’ credit
report . . . with Mr. Geller. Mr. Spells has no recollection of the Gellers,
the transaction involving the Gellers and the Kinney lease and specifically
has no recollection of his final conversation with Mr. Geller. He testified
that he was “very process oriented” and that he would have done everything
the same way in accordance with his procedure every time. He further
testified that he would have gone over the application and credit report line
by line starting at the top and reading down to the bottom. He
demonstrated how he did this during his testimony.
11. Mr. Geller does have a specific recollection of this conversation
from March of 2007. He recalls that Mr. Spells informed him that [A.M.]
had investigated the party and that the employment checked out and the
residential information checked out. Mr. Spells further advised Geller that
[A.M.] had pulled a credit bureau report and that it revealed that the
Kinneys filed bankruptcy several years before, but that since then[] the
Kinneys were clean. Geller testified that he asked Mr. Spells to confirm the
Kinneys were “clear” since their bankruptcy and [was] told by Mr. Spells
that “I wouldn’t mislead you.”
4
12. Mr. Geller recalls that he requested to see the credit report and Mr.
Spells stated he could not provide it[,] citing “confidentiality issues.”
Although Mr. Spells stated that he would not have denied such a request,
the only evidence before the Court is that [A.M.] did not supply the report
to the Gellers nor did they have it from any other source prior to
committing to a lease with the Kinneys. Having now seen that report, Mr.
Geller testified that there was information in it that was not conveyed to
him by Mr. Spells. That information specifically was (a) the existence of a
high fraud alert stating that the Social Security number used was for an
individual between 16 and 18 years of age[. (]The Court finds that this is a
misstatement of what [the credit report] reflects. The credit report says
only that Kurt Kinney would have obtained his Social Security number
between the ages of 16 and 18, and this is not inconsistent with his age at
the time of the report.[)]; (b) the current address provided for the Kinneys
was a commercial and not a residential property; and (c) there were
approximately $30,000 in delinquent debts incurred by the Kinneys since
the filing of their bankruptcy, as well as delinquent car payments and other
debts which were shown as current after the date of the bankruptcy.
13. In demonstrating how he would have gone over the credit report . . .
Mr. Spells came to the “Special Messages” section of the Kinneys’ credit
report, and testified, “And then going to any special messages. No special
messages.” In fact there were “special messages, including this notice:
***HIGH RISK FRAUD ALERT: INPUT CURRENT ADDRESS IS
COMMERCIAL**** AND **** SSN YEAR OF ISSUANCE: INPUT
SSN ISSUED: 1985-86; STATE: MI FILE SSN ISSUED: 1985-1986;
STATE: MI; (ESTIMATED AGE OBTAINED: 16 TO 18) ***.”
14. Mr. Geller also testified that there was additional information on the
Kinneys’ application to lease . . . which was not disclosed . . . , including
(a) the application revealed the Kinneys were only in their previous home
for nine months; (b) the Kinneys’ prior rental history had not been
investigated and verified, nor did it appear that any of the other information
on the application appeared to be verified; and (c) there was a discrepancy
between the income listed on the rental application and that given in the job
verification letter.
15. Based on the information that was provided from Mr. Spells and an
evaluation of their finances and other available options, the Gellers
authorized [A.M.] to enter into the lease with Kinneys . . . for a period of
three years at a monthly rental of $2,495.
***
5
18. The lease took effect March 22, 2007, and was uneventful through
August 2007. In September of 2007[,] however, the Kinneys tendered a
non-sufficient funds check to pay their rent, and when this was not made
good, [A.M.] filed suit on October 23, 2007, for eviction. The Kinneys,
having already defaulted on the lease, paid no further rent and by court
order were required to vacate the property no later than December 2, 2007.
The balance of the rent due under the lease is $74,850.
***
21. Mr. Geller claims that he would not have authorized [A.M.] to
proceed with the lease to the Kinneys had he had the information that
[A.M.] would have provided. While there is no question that the additional
information would have prompted more questions from Mr. Geller to
[A.M.], the totality of the circumstances at the time undermines that
assertion when the answers to those questions are unknown. For example,
as to the issue of the age of the person holding Kurt Kinney’s Social
Security number, a question would have revealed that this issue was
nothing more than a misunderstanding of the report. Further, as to the issue
of non-verification of application information, per Marlene Slagle’s
testimony on behalf of [A.M.], Mr. Geller would have presumably been
told that everything except employment had been verified and the
verification was in the file despite not being checked off on the application.
It is unknown what follow-up would have been done on any other questions
and the impact the additional information would have had on the Gellers’
decision.
22. With this said, the evidence is clear that [A.M.] failed to disclose
adverse material facts about the Kinneys that bore directly on the Gellers’
ability to evaluate the risks involved with leasing their property to the
Kinneys.
***
26. [I]n . . . paragraph [9 of the Lease and Management Agreement] it
says, “Agent shall not be liable to Owner for any error in judgment, nor for
any good faith act or omission in its performance or attempted performance
of any of its duties or obligations under this Agreement.” [(“The
exculpatory clause.”)]
27. The Gellers were not compelled in any way to enter into the contract
with [A.M.] Mr. Geller is an intelligent consumer with experience in the
contracts and financial matters dealing with real estate. . . . They came to
[A.M.] based on seeing one of [A.M.]’s signs in a neighborhood and signed
6
on after minimal contact with Mr. Spells. There is no evidence of any high
pressure sales techniques. This was not a situation of one party having a
dominant or even an advantageous bargaining position. Mr. Geller chose,
without any pressure from [A.M.], to commit to the Lease and Management
Agreement.
28. Mr. Geller testified that he believed, and the Court finds it true, that
neither [A.M.] nor Mr. Spells “did anything intentionally.” . . .
***
34. [Under the lease agreement with the Kinneys, t]he Gellers, as
lessors, were “required to reasonably mitigate damages.”
35. The Kinneys vacated the property on or about December 2,
2007. . . . [I]n January of 2008, the Gellers determined to sell the property
rather than to try to rent it again. The home was sold in a “short sale” on
March 8, 2008, for $300,000. The Gellers had purchased the home in 2002
for $279,000 . . . , had listed it for sale in the fall of 2006 for $375,000
without success, and relisted it for sale in January 2008 for $339,500. The
evidence fails to establish that they took a true loss on the home or that the
Kinneys were the cause of that loss. Given the need to relocate and the
housing market at the time, such a connection is speculative at best.
Id. at 31-42 (emphases added).
On Count I against the Kinneys, the court concluded that the Kinneys were liable
to the Gellers for the amount of unpaid rent between September 2007 and March 8, 2008,
or $15,613.87. The court then concluded that, after March 8, 2008, the Gellers mitigated
their losses by selling the home. And the court ruled for A.M. on Count II based on the
plain language of the Lease and Management Agreement between the Gellers and A.M.
On Count III, the court concluded as follows:
8. Under Indiana Code § 25-34.1-10-10(a)(3)(C), [A.M.] had a duty to
disclose to the Gellers “adverse material facts or risks actually known” by
[A.M.]
7
9. [A.M.], by its agent, Decarius Spells, failed to disclose to the Gellers
“adverse material facts or risks” actually known to them as required by the
above statute.
10. While the [relevant statute] establishes a duty owed by a licensee
who is an agent for another in a real estate transaction, it provides no
penalty for a breach. The Court can only conclude that failure to perform
that duty creates a cause of action for either an intentional tort, or for
negligence.
11. In this case, there is no evidence that supports that [A.M.] committed
an intentional tort. The evidence does establish, however, that Mr. Spells
was negligent in failing to perform a statutory duty owed to the Gellers . . . .
***
19. Although not citing the word “negligence” specifically, the
[exculpatory] clause is legally sufficient. It makes clear that [A.M.] is not
liable to the Gellers for any good faith act or omission in the performance
of its duties under the parties’ agreement. This is a faithful rendering in lay
person’s terms of the legal concept of negligence and puts the Gellers on
notice that [A.M.] has no responsibility for mistakes it may make in the
performance of its duties.
Id. at 45-48. Thus, the court held that A.M. was not liable to the Gellers under Count III
by virtue of the parties’ exculpatory clause. This appeal ensued.
DISCUSSION AND DECISION
Standard of Review
The Gellers appeal the trial court’s judgment following the entry of findings of
fact and conclusions thereon. When a trial court’s judgment contains specific findings of
fact and conclusions thereon, we apply a two-tiered standard of review. Bester v. Lake
Cnty. Office of Family & Children, 839 N.E.2d 143, 147 (Ind. 2005). First, we
determine whether the evidence supports the findings and, second, we determine whether
the findings support the judgment. Id. “Findings are clearly erroneous only when the
8
record contains no facts to support them either directly or by inference.” Quillen v.
Quillen, 671 N.E.2d 98, 102 (Ind. 1996). If the evidence and inferences support the trial
court’s decision, we must affirm. In re L.S., 717 N.E.2d 204, 208 (Ind. Ct. App. 1999),
trans. denied.
Issue One: The Exculpatory Clause
The Gellers first assert that the trial court erroneously concluded that the
exculpatory clause exempted A.M. from liability for its breach of duty under Indiana
Code Section 25-34.1-10-10(a)(3)(C). According to that statute:
A licensee representing a seller or landlord has the following duties and
obligations:
***
(3) To promote the interests of the seller or landlord by:
***
(C) disclosing to the seller or landlord adverse material facts or risks
actually known by the licensee concerning the real estate transaction
....
Ind. Code § 25-34.1-10-10(a). And the exculpatory clause in the parties’ contract states:
“Agent shall not be liable to Owner for any error in judgment, nor any good faith act or
omission in its performance or attempted performance of any of its duties or obligations
under this Agreement.” Appellants’ App. at 39-40.
The Gellers contend that the exculpatory clause is not sufficient to cover A.M.’s
failure to perform its duties under Indiana Code Section 25-34.1-10-10(a)(3)(C). On this
issue, the trial court concluded that, because the statute does not provide a “penalty for a
breach” of its duties, “the failure to perform that duty creates a cause of action for either
9
an intentional tort, or for negligence.” Id. at 46. The parties do not challenge that
rationale on appeal but, instead, dispute whether the language of the exculpatory clause
covers A.M.’s negligent performance of its duties.
We agree with the trial court’s ultimate conclusion for A.M. but not with its
rationale. It is well established that, “‘unless the contract provides otherwise, all
applicable law in force at the time the agreement is made impliedly forms a part of the
agreement without any statement to that effect.’” Van Prooyen Builders, Inc. v. Lambert,
907 N.E.2d 1032, 1035 (Ind. Ct. App. 2009) (quoting Miller v. Geels, 643 N.E.2d 922,
928 (Ind. Ct. App. 1994), trans. denied), aff’d on reh’g, 911 N.E.2d 619, trans. denied.
Accordingly, as a matter of law Indiana Code Section 25-34.1-10-10(a)(3)(C) was an
implied part of the Lease and Management Agreement. Thus, the Gellers’ claim against
A.M. on Count III is a claim that A.M. breached its contractual duties to the Gellers,
including the duties listed under Indiana Code Section 25-34.1-10-10(a).
Further, “[w]hen the parties have, by contract, arranged their respective risks of
loss . . . tort law should not interfere.” Greg Allen Const. Co. v. Estelle, 798 N.E.2d 171,
175 (Ind. 2003). The exculpatory clause exempts A.M. from liability for “any error in
judgment” and for “any good faith act or omission in its performance . . . of any of its
duties or obligations under this Agreement.” Appellants’ App. at 39-40. Here, the trial
court first found that the Gellers had met their burden of showing that A.M. breached
their statutory obligations under Indiana Code Section 25-34.1-10-10(a). Id. at 46. But
the court expressly noted that “Mr. Geller testified that he believed, and the Court finds it
true, that neither [A.M.] nor Mr. Spells ‘did anything intentionally.’” Id. at 40. The court
10
then concluded that A.M. successfully relied upon the plain language of the exculpatory
clause as an affirmative defense. See id. at 46-48.
Thus, the trial court did not address whether the Gellers or A.M. would have borne
the burden of proof on the intentional act issue. And, in any event, as discussed above
this is a contract case that requires this court to consider the application of the contract’s
plain language to undisputed facts, so an intentional act determination is not required.
We cannot say that the trial court’s conclusion that the exculpatory clause exempted
A.M. from liability for the breach of its statutory duties here was clearly erroneous.
Still, the Gellers contend, and the dissent agrees, that applying the exculpatory
clause to the duties listed under Indiana Code Section 25-34.1-10-10(a) violates public
policy. Indiana recognizes a “very strong presumption of enforceability” of freely
negotiated contracts. Fresh Cut, Inc. v. Fazili, 650 N.E.2d 1126, 1130 (Ind. 1995).
Nonetheless, a contract not prohibited by statute or clearly tending to injure the public
may be deemed unenforceable as a matter of public policy based on a consideration of
the following factors:
(i) the nature of the subject matter of the contract; (ii) the strength of the
public policy underlying the statute; (iii) the likelihood that refusal to
enforce the bargain or term will further that policy; (iv) how serious or
deserved would be the forfeiture suffered by the party attempting to enforce
the bargain; and (v) the parties’ relative bargaining power and freedom to
contract.
Id. (citations omitted).
Applying those five factors here leads to the conclusion that the exculpatory clause
does not violate public policy. The Lease and Management Agreement is an agency
agreement between the Gellers and A.M., and the strength of the public policy underlying
11
Indiana Code Section 25-34.1-10-10(a) is clear. To refuse to enforce the exculpatory
clause might further the policy behind the statute. But the statute does not prohibit an
exculpatory clause, and a valid exculpatory clause remains enforceable under the
common law. And, here, the exculpatory clause is limited in its application to “error[s] in
judgment” and only “good faith” breaches of A.M.’s statutory duties. Appellants’ App.
at 39-40. The exculpatory clause does not protect A.M. from treating its customers in
bad faith.
Finally, the fourth and fifth factors here are interrelated and weigh strongly in
favor of enforcing the exculpatory clause. The trial court expressly found that Mr. Geller
“is an intelligent consumer with experience in the contracts and financial matters dealing
with real estate.” Id. at 40. Further, the court found “no evidence of high pressure sales
techniques. This was not a situation of one party having a dominant or even an
advantageous bargaining position. Mr. Geller chose, without any pressure from [A.M.],
to commit to the Lease and Management Agreement.” Id. Considering those undisputed
findings, the parties had equal bargaining power and it would be an “[un]deserved . . .
forfeiture” by A.M. for this court to refuse to enforce the exculpatory agreement. See
Fresh Cut, 650 N.E.2d at 1130.
In sum, we cannot say that the trial court’s enforcement of the exculpatory clause
is clearly erroneous. We also hold that enforcing the exculpatory clause on these facts is
not contrary to public policy. As such, we affirm the trial court’s judgment for A.M.
12
Issue Two: Damages
The Gellers also assert that the trial court erroneously concluded that the sale of
the home in March of 2008 mitigated their losses from the Kinneys’ breach of the lease.
The Kinneys have not filed a brief in response on that issue. Accordingly, we do not
undertake the burden of developing argument for the appellee, as that duty remains with
the appellee. Parkhurst v. Van Winkle, 786 N.E.2d 1159, 1160 (Ind. Ct. App. 2003).
When the appellee does not file a brief, we apply a less stringent standard of review and
may reverse the trial court when the appellant establishes prima facie error. Id. “Prima
facie” is defined as “at first sight, on first appearance, or on the face of it.” Id. (citations
omitted). If the appellant is unable to meet the burden of prima facie error, however, we
will affirm. See Abouhalkah v. Sharps, 795 N.E.2d 488, 490 (Ind. Ct. App. 2003).
The Gellers argue that the trial court misapplied paragraph 13 of their lease
agreement with the Kinneys. That paragraph states, in relevant part:
Upon the occurrence of any Event of Default, Lessor and Lessor’s Agent
may, at its option, in addition to any other remedy or right it has hereunder
or by law:
***
c. Terminate this Lease at any time upon the date specified in a
notice to Lessees. Lessee[s’] liability for damage shall survive such
termination. Upon termination, such damages recoverable by Lessors from
Lessees shall be an amount equal to the rent and other payments provided
for in this Lease which would have become due and owing thereunder from
time to time during the Unexpired Term plus the cost and expenses paid or
incurred by Lessor or Lessor’s Agent in connection with obtaining
possession, removal and storage of Lessee’s property, maintenance of
Premises while vacant, reletting, lease fee incurred by the owner of the
Premises, putting Premises in acceptable condition to relet.
13
d. Without terminating this Lease, Lessors may relet the Premises
with[out] the same being deemed an acceptance of a surrender of this Lease
nor a waiver of Lessor’s rights and remedies and Lessors shall be entitled to
damage for the Unexpired Term. Any reletting by Lessors may be for a
period equal to or less than or extending beyond the remained [sic] of the
original term, or for any sum or to any Lessees or for any use Lessors deem
appropriate. Upon any occurrence herein, the Lessor will be required to
reasonably mitigate damages.
Pls.’ Exh. 4 at 5-6 (emphases added).
According to the Gellers, paragraph 13 created “options available to the Gellers”
and, “because the[y] chose to proceed according to paragraph 13c, there was no
requirement they mitigate their damages” under paragraph 13d. Appellants’ Br. at 13.
The Gellers further argue that, even if they did mitigate their damages, that does not
prohibit them from pursuing the full unpaid balance from the Kinneys. In sum, the
Gellers contend that “enforcement of a savings clause in a lease subverts the doctrine of
mitigation of damages.” See Nylen v. Park Doral Apartments, 535 N.E.2d 178, 183 (Ind.
Ct. App. 1989), trans. denied. We squarely rejected that argument in Nylen. As we
explained:
The doctrine of mitigation of damages creates an obligation on the part of
the landlord to use such diligence as would be exercised by a reasonably
prudent man under similar circumstances to re-let the premises, if possible,
in order to mitigate damages resulting from the tenant’s breach of lease.
The obligation exists even if there is no mandatory re-letting clause in the
lease. Further, courts have recognized and enforced the doctrine of
mitigation of damages while at the same time sustaining savings clauses.
Id. (citations omitted).
Stated another way, the Gellers’ argument ignores the fact that the duty to mitigate
damages is a common law duty independent of the contract terms. See Four Seasons
Mfg., Inc. v. 1001 Coliseum, LLC, 870 N.E.2d 494, 507 (Ind. Ct. App. 2007). Further:
14
[T]he non-breaching party is not entitled to be placed in a better position
than he would have been if the contract had not been broken. Indeed, the
non-breaching party, as a general rule, must mitigate his damages . . . .
Where a party does mitigate its damages, the breaching party is entitled to
set off the amount of the damages mitigated.
Id. (citations omitted). And, again, “‘it is well settled that, unless the contract provides
otherwise, all applicable law in force at the time the agreement is made impliedly forms a
part of the agreement without any statement to that effect.’” Van Prooyen, 907 N.E.2d at
1035 (quoting Miller, 643 N.E.2d at 928).
While the Gellers’ lease agreement only expressly refers to the duty to mitigate in
paragraph 13d, nothing in the language of paragraph 13c indicates that the parties agreed
to negate the Gellers’ common law duty to mitigate in the event the Gellers chose to
proceed with the termination of the lease under paragraph 13c. Accordingly, the trial
court’s conclusion that the Gellers’ sale of the home mitigated their damages is not
clearly erroneous.
Conclusion
In sum, we hold that the exculpatory clause of the Lease and Management
Agreement exempts A.M. from liability for its failure to perform its duties to the Gellers
under Indiana Code Section 25-34.1-10-10(a)(3)(C). We also hold that applying the
exculpatory clause on these facts is not contrary to public policy. Finally, we hold that
the trial court’s conclusion that the Gellers’ sale of their home mitigated the Kinneys’
damages to the Gellers is not clearly erroneous. As such, we affirm the court’s judgment.
15
Affirmed.
MAY, J., concurs.
KIRSCH, J., dissents with separate opinion.
16
IN THE
COURT OF APPEALS OF INDIANA
ROBERT GELLER and JUDY GELLER, )
)
Appellants-Plaintiffs, )
)
vs. ) No. 29A02-1111-PL-1202
)
KURT P. KINNEY, HOLLY KINNEY, and )
A.M. RENTALS, INC., )
)
Appellees-Defendants. )
KIRSCH, Judge, dissenting.
I respectfully dissent.
Here, the trial court properly concluded that A.M. Rentals, Inc. (“Agent”) had a
duty under Indiana Code section 25-34.1-10-10(a)(3)(C) to disclose to Robert Geller and
Judy Geller (collectively, “Owner”) the adverse material facts about the Kinneys’
creditworthiness that were actually known by Agent and that it breached this duty. It
then found that although Agent was negligent in failing to perform its statutory duty, it
had no liability because there was no evidence that Agent had committed an intentional
tort, and, accordingly, Agent had no liability because of the exculpatory clause here at
issue. I believe that the trial court erred in placing the burden on Owner to prove that
Agent had committed an act that was exculpated by the contract and in interpreting the
17
exculpatory clause to require the commission of an intentional act by Agent to establish
liability. I also believe that the clause as interpreted by the trial court vitiates the
contract, contravenes Indiana law and is unconscionable.
The exculpatory clause at issue provides: “Agent shall not be liable to Owner for
any error in judgment, nor for any good faith act or omission in its performance or
attempted performance of any of its duties under this Agreement.” Appellants’ App. at
39-40.
By the terms of the exculpatory clause, Owner releases Agent from liability
according to its terms. Thus, the clause is an affirmative defense that Agent must raise
and prove. Ind. Trial Rule 8(C). Agent had the burden of proving that its failure to
perform its statutory duty to disclose the known adverse material facts or risks to Owner
was due to an act or omission that it made in good faith. The trial court erred in shifting
the burden to Owner to prove the converse.
The contract here at issue does not define good faith, and the term is inherently
ambiguous.2 One legal commentator has noted that “the term . . . lacks a fixed meaning .
. . because [it] is loose and amorphous.”3 Another described good faith as “indefinable”
noting that it is “an elusive term best left to lawyers and judges to define over a period of
2
For an excellent discussion of the inherent ambiguity of good faith, see Stankiewicz, James J.,
Good Faith Obligation in the Uniform Commercial Code: Problems in Determining Its Meaning and
Evaluating Its Effect, 7 Val. U. L. Rev 389 (1973). Although Mr. Stankiewicz’s comments were in the
context of the Uniform Commercial Code, they apply with equal force here.
3
F.K. Juenger, Listening to Law Professors Talk About Good Faith: Some Afterthoughts, 69 Tul.
L. Rev. 1253, 1254 (1995).
18
time as circumstances require.”4 And, one court has observed that, “It is impossible to
define ‘good faith’ comprehensively and exactly.” Star Credit Corp. v. Molina, 298
N.Y.S.2d 570, 573 (Civ. Ct. Rec. 1969).
Good faith requires more than the absence of bad faith. In AquaSource, Inc. v.
Wind Dance Farm, Inc., 833 N.E.2d 535, 539 (Ind. Ct. App. 2005), we defined
good faith effort “as what a reasonable person would determine is a diligent and
honest effort under the same set of facts or circumstances.” See also Hamlin v.
Steward, 622 N.E.2d 535, 540 (Ind. Ct. App. 1993). Professor Steven J. Burton has
written that good faith requires parties to act fairly in order “to protect justifiable
expectations arising from their agreement.”5 Good faith under Article Two of the
Uniform Commercial Code on the part of a merchant includes the “observance of
reasonable commercial standards of fair dealing in the trade.” Ind. Code § 26-1-2-
103(1)(b).
The contract here was drafted by Agent. In accordance with the rules of contract
interpretation any ambiguity in the contract will be construed against the party who
drafted it. Boswell Grain & Elevator, Inc. v. Kentland Elevator Supply, Inc., 593 N.E.2d
1224, 1227 (Ind. Ct. App. 1992). Indiana Code section 25-34.1-10-10 provides that a
licensee representing a landlord has the duty to “exercise reasonable care and skill.”
Nothing in the contract excused Agent from this duty. Good faith on the part of a
licensed real estate agent should include the exercise of reasonable care and skill. Such a
4
P.J. Powers, Defining the Indefinable: Good Faith and the United Nations Convention on the
International Sale of Goods, 18 J.L. & Com. 333, 333 (1999).
5
Steven J. Burton, Principles of Contract Law, (2d ed. West Group, 2001) at 444-45.
19
construction is “what a reasonable person would determine is a diligent and honest
effort under the same set of facts or circumstances.” See AquaSource, 833 N.E.2d
at 539. It is also the construction necessary “to protect justifiable expectations arising
from their agreement.” See Burton, supra. Finally, it is consistent with the “observance
of reasonable commercial standards of fair dealing” in the real estate industry. See Ind.
Code § 26-1-2-103(1)(b).
Applying these observations of good faith to the contract here at issue and
interpreting the contract against Agent, its drafter, the trial court erred in interpreting the
exculpatory clause provision of releasing Agent from liability for any action other than an
intentional tort. The question before the trial court should have been whether Agent
exercised reasonable care and skill in dealing with the adverse material information that it
had about the prospective tenants, and the burden of showing such an exercise was on
Agent.
Moreover, I believe that the exclusionary clause as interpreted by the trial court
vitiates the duties imposed by the contract and by Indiana law on the part of Agent,
contravenes public policy and renders the provision unconscionable. The Indiana
General Assembly set out the duties that a licensed agent owes to a seller or landlord at
Indiana Code section 25-34.1-10-10. Included in those duties are the duties to
promote the interests of the seller or landlord by
...
(C) disclosing to the seller or landlord adverse material facts or risks
actually known by the licensee concerning the real estate transaction;
...
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(E) timely accounting for all money and property received [and]
...
(F) exercising reasonable care and skill . . . .
Here, Agent was a real estate professional licensed and regulated by the State of
Indiana. As such, Agent was entitled to the benefits of and subject to the duties imposed
by that status. As interpreted by the trial court, the inclusion of exculpatory clause in the
form agency agreement enabled Agent to avoid its statutory duties. I believe such an
interpretation is unconscionable and contrary to public policy.
Moreover, and as stated above, I believe it is reasonable to interpret the
exclusionary clause in a manner that does not contravene public policy or conscionability
by interpreting the phrase “good faith act or omissions” to exculpate only acts and
omissions that were consistent with Indiana law and reasonable commercial standards in
the real estate industry. Such an interpretation, for example, could exculpate the agent
from any liability for relaying inaccurate credit reporting information received from a
credit reporting agency of the type and character customarily relied upon by real estate
professionals.
I would reverse the decision of the trial court and remand with instructions to enter
judgment for Owner for all losses incurred as a result of Agent’s failure to perform its
statutory duties to disclose to Owner the adverse material facts known to Agent and to
exercise reasonable care and skill in this transaction.
21