Lamore Restaurant Group, LLC v. Akers

#24650-a-BARNETT, Circuit Judge
2008 SD 32

IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA

* * * *

LAMORE RESTAURANT GROUP, LLC
and KENNETH HERSLIP, Plaintiffs and Appellees,

v.

ROBERT AKERS and CYNTHIA AKERS, Defendants and Appellants.

* * * *

APPEAL FROM THE CIRCUIT COURT
OF THE SEVENTH JUDICIAL CIRCUIT
PENNINGTON COUNTY, SOUTH DAKOTA

* * * *

HONORABLE A. PETER FULLER
Judge

* * * *

JOHN K. NOONEY of
Nooney Solay & VanNorman, LLP Attorneys for plaintiffs
Rapid City, South Dakota and appellees.

COURTNEY R. CLAYBORNE and
MICHAEL K. SABERS of
Clayborne, Loos, Strommen & Sabers, LLP Attorneys for defendants
Rapid City, South Dakota and appellants.

* * * *

CONSIDERED ON BRIEFS
ON FEBRUARY 11, 2008

OPINION FILED 4/16/08
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BARNETT, Circuit Judge

[¶1.] Robert and Cynthia Akers (Akers) appeal from a judgment holding

that Akers and LaMore Restaurant Group, LLC and Kenneth Herslip (collectively

LaMore) had entered into a binding contract for the sale of two Rapid City, South

Dakota, commercial properties with the price to be set by a first and third

appraiser, notwithstanding the absence of a specified date for the appraisals. Akers

also appeal from that part of the judgment setting the specific date to be used by the

first and third appraisers in establishing the price for the two properties. We

affirm.

FACTS AND PROCEDURAL HISTORY

[¶2.] Akers are the owners of two commercial restaurant properties in Rapid

City, South Dakota. Pursuant to a lease, they rented both properties to LaMore,

who operated them as Denny's Restaurants. The original lease contained an option

to purchase at paragraph XXVIII and established an appraisal process for fixing the

price if the option was exercised. Several restrictions on the appraisal process were

set forth in paragraph XXVIII. If the respective appraisers were less than ten

percent apart, the average of those two numbers would be the final price. If the

first two appraisals differed in price by more than ten percent, the two appraisers

would agree upon a third appraiser, who would then choose either the first or the

second appraisal as the fair price. The third appraiser's choice would be final as to

price, subject to a minimum price of $2,500,000.

[¶3.] On February 23, 2005, LaMore indicated its intent to exercise the

option to purchase the properties. On that date, Akers signed an Addendum to the

lease agreement (hereinafter First Addendum), essentially repealing paragraph
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XXVIII of the original lease and revamping the agreed appraisal process. The First

Addendum removed the minimum purchase price of $2,500,000, leaving the price

solely to the appraisal process. The parties were to agree upon a Member of the

Appraisal Institute (MAI) certified appraiser within fourteen days of the exercise of

the option. That appraiser would set the price; if either party disagreed with the

first appraisal, they could then get another appraisal from an MAI certified

appraiser of their choice. If the two appraisals were within seven percent of each

other, the First Addendum required the two appraisers to "convene and determine

the value for the subject property, and to the extent that a compromise is not

reached between them, the two appraisals shall be averaged" which would then be

the final price. If the two appraisals differed by more than seven percent, "the

parties shall agree on a third MAI certified appraiser who shall work with the

initial MAI certified appraiser to determine the appraised value." (Emphasis

added).

[¶4.] Thus, if the first two appraisers differed by more than seven percent,

the second appraisal was discarded and a third appraiser, chosen by both parties,

would "work with" the first appraiser to determine the value.

[¶5.] The parties agreed to hire Joe Ibach to conduct the first appraisal.

Ibach appraised each property at $900,000, for a total of $1,800,000. Upon

notification of this appraisal, Akers exercised their right to hire a second MAI

appraiser, John Haeder. Haeder's appraisal did not use the same appraisal date as

Ibach. Instead, Haeder's appraisal date was some seven months later, on December

1, 2007. This lead to a significant difference in Haeder's appraisal: $1,045,000 for

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the Rushmore Road location, and $1,300,000 for the LaCrosse location. Two

reasons apparently drove the higher numbers. First, LaMore made substantial

improvements to one of the properties subsequent to exercising the purchase option

and after the first appraisal was conducted. Second, Akers received a December 1,

2007, outside offer on the properties and gave that information to the second

appraiser (Haeder), who used it to help determine the values he set on that same

date.

[¶6.] Since the first appraisal (Ibach) and the second appraisal (Haeder)

were more than seven percent apart, the First Addendum required the parties to

agree on a third appraiser. However, they could not agree on the third appraiser

and the matter went to court to settle. The trial court, after reviewing the First

Addendum, essentially ordered the parties to do what they had agreed to do; they

were sent out of court to agree upon a third appraiser. Thereafter, the parties

stipulated that Ken Simpson, a name offered by Akers, would be the third appraiser

assigned to work with Ibach, the first appraiser.

[¶7.] In the interim, negotiations continued between Akers and LaMore and

eventually in April 2007 a sale was finalized on the Rushmore Road property. This

was evidenced in a document entitled Second Addendum. The Second Addendum

set the agreed price at $950,000 for that property which was to be a credit against

any final price set by the first and third appraisers under the First Addendum.

This Second Addendum did not vitiate the First Addendum; it merely removed one

property from the dispute and left the overall appraisal price in the hands of the

first and third appraisers as contemplated by the First Addendum.

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[¶8.] During the process of working with Ibach, Simpson raised the question

of the date he should use in setting a value. This brought the matter back to the

trial court for clarification. The court took testimony, heard arguments, and

eventually ordered that the third appraiser utilize a date of September 1, 2005.

This date was a rough compromise between LaMore's assertion that the third

appraiser should use the same date (April 27) used by the first appraiser, and

Akers' contention that a later date should be utilized. Both parties apparently

balked at this compromise date and the matter again came back to the trial court.

[¶9.] Akers argued that the First Addendum was merely an agreement to

agree, and that there had been no meeting of the minds on a material term of the

contract, i.e., the date the third appraiser should use in fixing the value. In the

alternative, Akers argued that the court should set the date for the third appraisal

either as the date Simpson was retained by the parties, which would be much later

than the April 27 first appraisal, or some other later date (which would reflect the

improvements and the outside offer). However, Simpson testified that according to

appraisal protocols, the normal method of conducting a follow-up appraisal is to use

the same date as the first appraiser.

[¶10.] Following a final hearing, the court entered findings, conclusions and a

judgment finding that the First Addendum was enforceable despite the lack of a

specific date for the third appraiser to utilize. In so doing, it held that a contract

need not specify an exact price so long as a method for determining the price was

agreed to in the contract. Although the court expressed concerns about whether it

could pick a date for the appraiser under South Dakota law and that the use of a

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later date could be inequitable in light of the subsequent improvements made by

LaMore, the court set the date for the third appraiser at April 27, 2005, the date

used by the first appraiser. 1

[¶11.] Akers raise two issues on appeal:

Whether the First Addendum constituted a valid contract
which could be enforced by the parties.

Whether the trial court had the authority to determine a
date of valuation when none was supplied.

STANDARD OF REVIEW

[¶12.] "We review the circuit court's findings of fact under the clearly

erroneous standard." City of Deadwood v. Summit, Inc., 2000 SD 29, ¶ 9, 607

NW2d 22, 25 (citations omitted). "Conclusions of law are reviewed under a de novo

standard, giving no deference to the circuit court's conclusions of law." Id. (citations

omitted). "Existence of a contract is a question of law." In Estate of Neiswender,

2000 SD 112, ¶ 12, 616 NW2d 83, 86.

Contract interpretation is a question of law reviewable de
novo. Because we can review the contract as easily as the
trial court, there is no presumption in favor of the trial
court's determination. When the meaning of contractual
language is plain and unambiguous, construction is not
necessary. If a contract is found to be ambiguous the
rules of construction apply. Whether the language of a
contract is ambiguous is . . . a question of law.

Vander Heide v. Boke Ranch, Inc., 2007 SD 69, ¶ 17, 736 NW2d 824, 831-32 (citing

Ziegler Furniture and Funeral Home, Inc. v. Cicmanec, 2006 SD 6, ¶ 14, 709 NW2d

1. The trial court indicated that the option exercise date of February 23, 2005,
should be utilized but also found under the testimony that no change in value
occurred between the option exercise date and the first appraisal date; hence
the April 27 date.
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350, 354). "[W]hen contract language is ambiguous, and does not speak to a subject

it would normally be expected to, the court may go beyond the four corners of the

contract." Id. ¶ 40 (citation omitted).

ANALYSIS AND DECISION

ISSUE ONE

[¶13.] Whether the First Addendum constituted a valid contract
which could be enforced by the parties.

[¶14.] Akers argue that the contract in question is unenforceable because it

fails to set forth, in writing and with sufficient certainty, all material terms. Akers

thus contend there was no meeting of the minds to form a valid contract. Akers

further argue that even assuming a valid contract existed the trial court erred in its

determination as to the appropriate relief to be granted in order to enforce it. We

begin with an examination of whether a valid contract was created.

[¶15.] The essential elements of a contract are set forth in SDCL 53-1-2, and

three of the elements (parties capable of contracting, a lawful object, and sufficient

cause or consideration) are not at issue in this appeal. The final element is consent

to contract, which is "a question of law and is to be judged on the objective facts of

the particular case." Amdahl v. Lowe, 471 NW2d 770, 774 (SD 1991) (citing Federal

Land Bank v. Houck, 68 SD 449, 4 NW2d 213 (1942); McPherson v. Fargo, 10 SD

611, 74 NW 1057 (1898)). Akers argue that the First Addendum was insufficient

because it did not contain the specific date upon which the third appraiser would

base his evaluation.

The statute of frauds requires that contracts for the sale
of land must not only be in writing and signed by the
party who is to be charged, but the writing must contain

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all the material terms and conditions of the oral
agreement between the parties. To satisfy the statute of
frauds, a memorandum for the sale of land must describe
the land, the price, and the contracting parties; it need
not detail the form or delivery of deed, the time and place
of payment, or any other matters. The statute of frauds
requires only that the writing evidence the substance of
the contract. There is no fatal ambiguity if the contract
terms are sufficiently certain to make the acts required of
each party clearly ascertainable.

Amdahl, 471 NW2d at 774-75 (citations omitted).

[¶16.] "If an agreement leaves open essential terms and calls for the parties

to agree to agree and negotiate in the future on essential terms, then a contract is

not established." Weitzel v. Sioux Valley Heart Partners, 2006 SD 45, ¶ 23, 714

NW2d 884, 892 (citations omitted). Akers assert that the date for the third

appraisal is a material term of the contract and since the First Addendum provided

no such date the contract fails. In support of this assertion, Akers note that the

third appraiser, Simpson, testified that the date of appraisal was material to him.

Read in context, however, Simpson was merely stating a non-legal opinion that the

outcome of his appraisal would be affected by the date he used to set that price. The

reason it would affect the outcome is that between the dates of LaMore's appraisal

and Akers' appraisal many improvements were made by lessee LaMore and an

outside offer was also made on the property.

[¶17.] The mere fact that the date of the third appraisal could affect the

purchase price does not make it a material element of the contract. Additionally,

Akers cite no case authority for the proposition that a contract fails if it leaves the

date of appraisal to the discretion of the appraiser, or inferentially, to the rules used

by appraisers in conducting follow-up appraisals. Black's Law Dictionary 998 (8th

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ed 2004) defines "material" as: "Of such a nature that knowledge of the item would

affect a person's decision-making process; significant; essential." However, Black's

Law Dictionary defines "material term" as: "Contractual provisions dealing with

significant issues such as subject matter, price, payment terms, quantity, quality,

duration, or the work to be done." Id. at 1510. (emphasis added). Simpson is not

legally trained, nor was he called to testify as a legal expert. Simpson merely

testified that the date of appraisal was material to his outcome. He did not testify

that the date of appraisal was a "material term".

[¶18.] Purchase price, of course, is a material term to a real estate contract.

See Amdahl, 471 NW2d at 775 (citing Boekelheide v. Snyder, 71 SD 470, 26 NW2d

74 (1947); Carpenter v. Murphy, 40 SD 280, 167 NW 175 (1918); Phelan v. Neary,

22 SD 265, 117 NW 142 (1908)). The price term, therefore, must be sufficiently

definite for this Court to give it an exact meaning. See e.g., Weitzel, 2006 SD 45,

¶ 23, 714 NW2d at 892 (citations omitted). "However, absolute certainty is not

required; only reasonable certainty is necessary." Id. We have previously held that

not all terms, such as price, need be set out in the contract as long as they are in

fact fixed and determinable or reasonably certain. See generally, Nygaard v. Sioux

Valley Hosp. & Health Sys., 2007 SD 34, ¶ 15, 731 NW2d 184, 191-92. In fact,

"words that fix an ascertainable fact or event, by which the term of a contract can be

determined, make the contract definite and certain in that particular." Id.

¶ 13 (citing Kuhfeld v. Kuhfeld, 292 NW2d 312, 315 (SD 1980)).

[¶19.] LaMore asserts that option agreements are sufficiently definite as to

price to justify their enforcement if a practicable mode is provided by which the

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price can be determined by the court without any new expression by the parties

themselves. We agree.

[¶20.] "An agreement is not unenforceable for lack of definiteness of price or

amount if the parties specify a practicable method by which the amount can be

determined by the court without any new expression by the parties themselves." 1

Corbin on Contracts § 98 (1963). Likewise, option agreements have generally been

held or recognized to be sufficiently definite as to price to justify their enforcement

if either a specific price is provided for in the agreement or a practicable mode is

provided by which the price can be determined by the court without any new

expression by the parties themselves. J.R. Harvey, Annotation, Requisite

definiteness of price to be paid in event of exercise of option for purchase of property,

2 ALR3d 701, 703 (1965). Thus, an option to purchase at a price to be fixed by third

persons acting as appraisers or arbitrators does not fail for lack of definiteness. 77

AmJur2d Vendor and Purchaser § 38 (2007).

[¶21.] In this case, the method of determining price was the appraisal

process, controlled by the terms of the First Addendum entered into by Akers.

Other jurisdictions have upheld similar mechanisms for determining purchase

price. See Kane v. McDermott, 547 NE2d 708, 713 (IllApp 4th 1989) (holding option

to purchase real estate contained in lease which stated that tenant would purchase

"at the appraised bid as established by three disinterested persons" by definition

meant that the price was to be the fair market value of the property as set by three

disinterested persons); Miller v. McCullough, 224 SE2d 916 (1976) (finding option

contract which provided that the selling price of the property would be "the

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appraised value of the property at the time of purchase based on an MAI Appraisal"

to be sufficiently definite); see generally, J.R. Harvey, Annotation, Requisite

definiteness of price to be paid in event of exercise of option for purchase of property,

2 ALR3d 701 (1965).

[¶22.] In Marder's Nurseries, Inc. v. Hopping, 171 AD2d 63, 66 (NYAppDiv

1991), a contract for the sale of real property was held to be sufficiently definite

where it called for the purchase price to be the fair market value as set by two

appraisers, and if they could not agree, they would appoint a third appraiser, and

the price would be set by the decision of any two appraisers. In so holding, the court

noted the imperfect nature of the method chosen by the parties.

The method designed by the parties, moreover, is
seriously flawed, since there is no guarantee that the first
two appraisers would agree, or that, in the event of their
disagreement, they would be able to agree as to the
identity of the third appraiser. Further, there is no
guarantee that the third appraiser, if he or she agreed to
the appointment, would concur with either one of the
original two. We nonetheless conclude that this provision
is not so indefinite as to require cancellation of the
contract.

Id. at 71.

[¶23.] The method in the present case is similarly flawed. There is no

guarantee that the first appraiser and the third appraiser will agree on the fair

market value or on the date which they ought to appraise the property. However,

"a contract should not be canceled solely on the ground that the parties, having

stipulated that the purchase price was to be determined by a group of appraisers,

failed to foresee all possible obstacles or hindrances which might arise during the

course of the appraisal procedure." Id. at 71-72.

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[¶24.] In the instant case, the trial court found that "[b]y executing the First

Addendum, the parties agreed as to a methodology to determine the values of the

Denny's locations as determined by an MAI certified appraiser(s)." Furthermore,

the trial court found that "an agreement to leave the calculation to a third party or

parties constitutes an acceptable method of evaluation." The price term is

sufficiently definite because both parties specifically agreed to pay or accept

whatever price could be agreed upon by the appraisers.

[¶25.] Also, the First Addendum clearly altered the method by which price

was to be determined. It altered the way in which the appraisers would work

together and eliminated the minimum price term of $2.5 million. Furthermore, the

express terms of the Addendum provided that "each of the parties desires [sic] to

execute this Addendum, so as to modify certain terms and conditions . . . in the

Lease" and "the parties hereto, intending to be legally bound by the terms hereof

agree to amend the Lease Agreement as follows." "These words are indicative of a

completed agreement, and do not establish that there are material details upon

which the parties have not yet reached agreement." Amdahl, 471 NW2d at 775

(citing 17A AmJur2d Contracts § 32 (1991). Cf. Wiggins v. Shewmake, 374 NW2d

111, 115 (SD 1985)). We, therefore, hold that the contract is valid.

ISSUE TWO

[¶26.] Whether the trial court had the authority to determine a date
of valuation when none was supplied.

[¶27.] The trial court ordered that the valuation date to be used by the third

appraiser, working with the first appraiser, was April 27, 2005 (the date used by the

first appraiser). Akers' maintain that the date of appraisal is a material term of the

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contract and that by supplying the date of appraisal the trial court erred by way of

reforming the contract. In the alternative, they argue that if the trial court properly

engaged in reformation it abused its discretion by selecting the date the option was

exercised as the date for valuation.

[¶28.] However, as previously stated, we believe the date of appraisal is not a

material term of this contract, the price term is sufficiently definite, and a valid

contract exists. Therefore, the issue is not whether the trial court erred by

engaging in reformation but whether the court had authority to consider parol

evidence on the question of which date the third appraiser should use.

Introduction of Parol Evidence

[¶29.] The parties in this case first encountered trouble when they could not

agree on who would serve as the third appraiser. The trial court ordered the parties

to live up to the First Addendum and find agreement on naming a third appraiser,

which they did by selecting Simpson, an appraiser offered by Akers. The parties

then returned to the court because Simpson was unsure of what date to use for

valuation. The trial court heard extrinsic evidence in the form of live testimony

from Simpson, as well as argument from counsel, and ordered Simpson to use the

same date as the first appraiser, April 27, 2005.

[¶30.] It is a long standing principle that "[p]arol or extrinsic evidence may

not be admitted to vary the terms of a written instrument or to add to or detract

from the writing." Jensen v. Pure Plant Food Int'l. Ltd., 274 NW2d 261, 263-64 (SD

1979) (citation omitted). However, "when the writing is uncertain or ambiguous . .

. such evidence is admissible to explain the instrument." Id. (Emphasis added).

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Furthermore, "[i]n construing a contract where ambiguities exist, established trade

customs and usages may ordinarily be considered." Mash v. Cutler, 488 NW2d 642,

647 (SD 1992) (citing 17A AmJur2d Contracts § 355 (1991)). While this Court has

never decided whether parol evidence is admissible to explain a method for

determining a price term, we have allowed such evidence regarding other essential

terms of a contract for the sale of land. In Amdahl, 471 NW2d at 775, we stated

that "[a] general description of the land which is the subject of the contract is

sufficient, and parol evidence may be admitted to provide the more particular

description." Id. (citing Habeck v. Sampson, 88 SD 437, 221 NW2d 483 (1974); 2

Corbin on Contracts § 499). "This is an established exception to the general rule

that testimony is inadmissible for the purpose of proving the terms of a contract for

the sale of an interest in land which the statute of frauds requires to be in writing."

Id. Finally, Restatement of Contracts (Second) § 362(b) (1981) provides:

Apparent difficulties of enforcement due to uncertainty
may disappear in the light of courageous common sense.
Expressions that at first appear incomplete may not
appear so after resort to usage. . .

However, before extrinsic evidence can be heard the contract must be deemed

uncertain or ambiguous. In re J.D.M.C., 2007 SD 97, ¶ 30, 739 NW2d 796, 806.

Ambiguity in the First Addendum

[¶31.] The trial court did not make a conclusion of law as to whether

ambiguity exists in this agreement. However, whether the language of a contract is

ambiguous is a question of law for the court, which is reviewable de novo. All Star

Constr.v. Koehn, 2007 SD 111, ¶ 33, 741 NW2d 736, 744 (citation omitted). "[A]

contract is ambiguous only when it is capable of more than one meaning when

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viewed objectively by a reasonably intelligent person who has examined the context

of the entire integrated agreement and who is cognizant of the customs, practices,

usages and terminology as generally understood in the particular trade or

business." Ducheneaux v. Miller, 488 NW2d 902, 909 (SD 1992) (citations omitted).

The First Addendum provides:

In the event that the second MAI certified appraiser
determines that an appraised value exceeds the initial
MAI certified by more than seven percent, the parties
shall agree on a third MAI appraiser who shall work with
the initial MAI certified appraiser to determine the
appraised value.

(Emphasis added).

[¶32.] Within the context of the entire agreement, it is clear that both parties

intended to commit the calculation of price to third parties and agreed to be bound

by the result. It is also clear that the parties agreed that should the first two

appraisals differ by more than seven percent, a mutually agreed upon third

appraiser would work with the first appraiser to make the ultimate determination

as to the purchase price. As to the material terms of the contract there is no

ambiguity. However, as to the nonessential terms there exists ambiguity.

[¶33.] The phrase "the parties shall agree on a third MAI certified appraiser

who shall work with the initial MAI certified appraiser to determine the value," is

imprecise as to what date the third appraiser should use to set value. Therefore,

the trial court properly considered custom and usage testimony from Simpson, who

has been an appraiser in the Rapid City area for thirty-two years. Simpson testified

that per industry guidelines when multiple appraisers appraise a piece of property

they use the same date of valuation:

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Q. (By Mr. Nooney) Typically, in your experience, Mr.
Simpson, and consistent with the guidelines that
you operate under, be it the American Institute of
Appraisers or some other designation, when
multiple appraisers appraise a piece of property, do
they typically use different dates?

A. No. Not under this type of circumstance.

Furthermore, Simpson testified that in all of his experiences conducting second

appraisals he has never used a different date of valuation than the first appraiser.

As the trial court noted, using different dates for the appraisal would be comparing

apples to oranges.

[¶34.] After LaMore exercised the option, but before Haeder conducted the

second appraisal, LaMore paid for almost $200,000 worth of improvements to the

properties and Akers received an outside offer on the properties. Both of these

factors significantly affected the market value as reflected in Haeder's appraisal. In

fact, it resulted in the two appraisals differing by over $540,000. Indeed, the

property to be sold was not the same property on December 1, 2005, as it was when

LaMore exercised the option to purchase. 2 The apple became an orange.

[¶35.] Also, the plain language of the First Addendum expressly states that

the third appraiser was to "work with the initial . . . appraiser to determine the

appraised value." (Emphasis added). There is simply no mention of the initial

appraiser and the third appraiser even considering the second appraisal. In fact,

under the language of the First Addendum, if the second appraisal differed by more

2. Since we have determined that the agreement satisfied the statute of frauds
we need not consider whether the agreement should be specifically enforced
under SDCL 53-8-2(3) and the Restatement of Contracts (Second) § 129 due
to LaMore's change in position and reliance upon the agreement.
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than seven percent from the first, the second appraisal was dropped entirely.

Thus, Akers' argument that Simpson should have been instructed to use December

1, 2005, the date of the second appraisal, fails.

[¶36.] We find there was a sufficient basis for the trial court to interpret the

contract as requiring the first and third appraisers to use April 27, 2005, effectively

the date the option was exercised, as their date of valuation. Accordingly, we

affirm.

[¶37.] BARNETT, Circuit Judge, for SABERS, Justice, disqualified.

[¶38.] GILBERTSON, Chief Justice, KONENKAMP, ZINTER and

MEIERHENRY, Justices, concur.

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