1998 -NMCA- 86, Gilmore v. Duderstadt

• Citation: 1998 NMCA 86,961 P.2d 175,125 N.M. 330
• Decision Date: 28 May 1998
• Docket Number: No. 17613,17613
• Parties: , 1998 -NMCA- 86 James R. GILMORE, Plaintiff-Appellant/Cross-Appellee, v. Robert DUDERSTADT, Laura Duderstadt, and Laubo Corporation, Defendants-Appellees/Cross-Appellants.
• Court: Court of Appeals of New Mexico

Page 175

961 P.2d 175

125 N.M. 330, 1998 -NMCA- 86

James R. GILMORE, Plaintiff-Appellant/Cross-Appellee, v. Robert DUDERSTADT, Laura Duderstadt, and Laubo Corporation Defendants-Appellees/Cross-Appellants.

No. 17613.

Court of Appeals of New Mexico.

May 28, 1998.

Mark E. Komer, The Roehl Law Firm, P.C., Albuquerque, for Plaintiff-Appellant.

Michael L. Danoff, Michael Danoff & Associates, P.C., Albuquerque, for Defendants-Appellees.

OPINION

FLORES, Judge.

¶1 This appeal and cross-appeal arise from a breach of contract action involving an agreement between Plaintiff James R. Gilmore (Gilmore) and Defendants Robert and Laura Duderstadt (the Duderstadts) to operate and purchase the Duderstadts' fast-food restaurant business, Defendant Laubo Corporation (Laubo). On appeal, Gilmore contends that the trial court erred in (1) directing a verdict in favor of the Duderstadts and Laubo (collectively, Defendants) on his breach of contract claim relating to the purchase portion of the contract; (2) directing a verdict on his claim for punitive damages; and (3) denying his costs. In their cross-appeal, Defendants challenge the sufficiency of the evidence supporting the jury verdicts in favor of Gilmore on his claims for breach of contract relating to the employment portion of the contract and negligent misrepresentation. Defendants also contest the award of prejudgment interest in favor of Gilmore, and claim that they are entitled to their post-offer of judgment costs under Rule 1-068 NMRA 1998.

¶2 We reverse the trial court on all issues raised in the direct appeal, affirm on the issues raised in the cross-appeal and remand for a new trial on the merits of the breach of contract claim relating to the purchase portion of the contract and to determine whether punitive damages should be awarded.

I. FACTUAL AND PROCEDURAL BACKGROUND

¶3 The Duderstadts are the sole shareholders of their closely-held corporation, Laubo, which owns and operates several Arby's fast-food restaurants in New Mexico. The Duderstadts own the underlying real estate and three restaurant buildings. The Duderstadts lease this property to Laubo. In June 1992, Gilmore entered into a written contract with the Duderstadts to run Laubo on a trial basis and, if certain conditions were met, to purchase the company in a "bootstrap" sales transaction by which the Duderstadts would essentially finance most of the purchase price.

¶4 The contract between Gilmore and the Duderstadts consisted of two main parts: (1) an employment agreement and (2) an option to purchase. Under the employment portion of the contract, Gilmore was to be employed by Laubo as its president and CEO for a one-year period from June 1, 1992 to May 31, 1993. This period became known as the "trial period." It was to evaluate whether Gilmore was a capable manager and could run the business profitably enough to acquire it under the terms of the bootstrap sale. During the trial period, Gilmore was to be paid a base salary of $52,000. If, at the end of the trial period, Gilmore made a 10% net profit from Laubo's operations, he would receive a bonus calculated in accordance with a formula in the contract and be able to exercise the option to purchase Laubo in the bootstrap acquisition under the purchase portion of the contract. To exercise the option, Gilmore was required to give written notice of his intent to exercise within thirty days after the end of the trial period. If Gilmore did not make the 10% profit during the trial period, or elected not to exercise the option, he would forfeit a $50,000 escrow deposit set up at the outset of the contract, would not receive a bonus, and would lose the right to purchase the business.

¶5 The contract provided that the parties were to exercise good faith and due diligence in implementing the terms of the contract and in satisfying the conditions necessary to consummate the sale of the business. The contract did not expressly provide for the rent to be paid by Laubo during the trial period.

¶6 In June 1992, Gilmore began operating Laubo on a trial basis. In July 1992, the Duderstadts increased the rent on their properties from $15,000 to over $22,000 per month, an increase of over $7,000 per month. Gilmore objected to the rental increase. He had been under the impression that during the trial period, the rent would remain at $15,000 per month and that he would be held to the same level of expenses as the Duderstadts were subject to during the twelve months preceding the contract. Gilmore paid the increased rent during the trial period, believing that Mr. Duderstadt would offset his payment of "excess rent" when calculating Gilmore's profits at the end of the trial period.

¶7 In May 1992, Gilmore requested an extension of the trial period for three months, beginning May 31, 1993. At that time, Mr. Duderstadt's only response was, "we'll see." However, Gilmore stayed employed at Laubo until October 29, 1993. At no time from May 31, 1993 to October 29, 1993, did the Duderstadts ever inform Gilmore that the trial period was over, or that he no longer had the right to purchase the business because he had not made the ten percent profit. Mr. Duderstadt also calculated Gilmore's profitability through October 1993. On October 29, 1993, Mr. Duderstadt terminated Gilmore's employment, expressing dissatisfaction with the transaction and insecurity over getting paid under the bootstrap agreement. Mr. Duderstadt then offered to sell Laubo only if Gilmore could obtain an additional $200,000. Gilmore, could not meet this new term. On November 30, 1993, Gilmore tendered written notice of his intent to exercise the option to purchase.

¶8 In the complaint Gilmore eventually filed, he alleged that the Duderstadts breached the contract in bad faith by increasing the rent during the trial period in an attempt to prevent him from making the 10% net profit that was a condition of his option to purchase. Gilmore also claimed that, during the contract negotiations, the Duderstadts negligently misrepresented the amount of rent to be charged during the trial period.

¶9 At trial, Gilmore relied on several theories to support his breach of contract claim for compensatory damages based on the option to purchase. His primary claim was that, by raising the rent, the Duderstadts breached express promises in the contract "to exercise good faith and due diligence" in satisfying the conditions and implementing the terms of the contract. Gilmore further claimed that the increase in rent violated the implied covenant of good faith and fair dealing. Finally, he asserted that the increase in rent constituted an anticipatory repudiation of the Duderstadts' promise to consummate the sale of the business under the contract, which excused his failure to exercise the option on the date in question.

¶10 At the close of Gilmore's evidence, Defendants moved for a directed verdict on Gilmore's breach of contract claim for compensatory and punitive damages, arguing that Gilmore had failed to meet the 10% net profit condition and had failed to timely exercise the option to purchase. The trial court granted Defendants' motion for a directed verdict in part, dismissing the breach of contract claim for compensatory damages based on the option to purchase. The trial court ruled that because the issue of anticipatory repudiation was not raised in the pretrial order, Gilmore could not claim that the Duderstadts repudiated the contract by increasing the rent during the trial period. Thus, the trial court reasoned, there was nothing to excuse Gilmore's failure to give timely written notice of his intent to exercise the option.

¶11 In directing the verdict, the trial court limited Gilmore's claims and relief to the following: (1) his breach of contract claim for the bonus under the employment portion of the contract and (2) his negligent misrepresentation claim for the return of his $50,000 escrow deposit. Although the trial court allowed the parties to present evidence on the issue of punitive damages, it refused to instruct the jury on the issue at the close of the case. The jury returned verdicts in favor of Gilmore on both his breach of contract and negligent misrepresentation claims for $12,266.39 and $50,000, respectively. The trial court also awarded prejudgment interest in favor of Gilmore on both jury awards and ordered the parties to bear their own costs and attorney's fees.

II. DISCUSSION

A. Directed Verdict

¶1 Standard of Review

¶12 "A directed verdict is appropriate only when there are no true issues of fact to be presented to a jury." Sunwest Bank v. Garrett, 113 N.M. 112, 115, 823 P.2d 912, 915 (1992). "Directed verdicts are not favored and should only be granted when a jury could not logically and reasonably reach any other conclusion ." In re Estate of Kimble, 117 N.M. 258, 260, 871 P.2d 22, 24 (Ct.App.1994). A reviewing court is to consider all evidence, and any conflicts in the evidence or reasonable interpretations of the evidence are to be viewed in favor of the party resisting the directed verdict. Garrett, 113 N.M. at 115, 823 P.2d at 915. Thus, "if reasonable minds can differ on the conclusion to be reached under the evidence or the permissible inferences to be drawn therefrom, the question is one for the jury and it is error to direct a verdict." Melnick v. State Farm Mut. Auto. Ins. Co., 106 N.M. 726, 728, 749 P.2d 1105, 1107 (1988).

¶2 Pretrial Order

¶13 The trial court dismissed anticipatory repudiation as a theory of the case after determining that the issue had not been raised in the pretrial order. Initially, we determine that the issue was sufficiently set forth in the pretrial order. ¹ See State ex rel. Highway Dep't v. Branchau, 90 N.M. 496, 497, 565 P.2d 1013, 1014 (1977) ("The pretrial order determines the issues and becomes the law of the case."); see also United Nuclear Corp. v. General Atomic Co., 93 N.M. 105, 120, 597 P.2d 290, 305 (1979) (parties...