Behrens v. Wedmore

• Decision Date: 22 June 2005
• Docket Number: No. 22745, No. 22715
• Citation: 698 NW 2d 555,2005 SD 79
• Parties: JON C. BEHRENS and DONALD C. BEHRENS, Plaintiffs and Appellants, and HARRY C. BEHRENS and GEORGE T. BEHRENS, Plaintiffs, v. MELVIN D. WEDMORE, Defendant and Appellee.
• Court: South Dakota Supreme Court

2005 SD 79

698 NW 2d 555

JON C. BEHRENS and DONALD C. BEHRENS, Plaintiffs and Appellants, and HARRY C. BEHRENS and GEORGE T. BEHRENS, Plaintiffs, v. MELVIN D. WEDMORE, Defendant and Appellee.

Nos. 22715, 22745

Supreme Court of South Dakota.

Argued on January 13, 2004

Opinion Filed June 22, 2005

MICHAEL F. MARLOW SHEILA WOODWARD STEVEN K. HUFF of Johnson, Heidepriem, Miner, Marlow and Janklow Yankton, South Dakota Attorneys for plaintiffs and appellants.

DANIEL F. DUFFY GREGORY J. ERLANDSON of Bangs, McCullen, Butler, Foye & Simmons Attorneys for defendant Rapid City, South Dakota and appellee.

ZINTER, Justice.

[¶ 1.] Jon and Don Behrens (jointly referred to as Behrens) owned and operated a funeral home in Rapid City. Without the assistance of legal counsel, they negotiated an agreement to sell their business to Loewen International, Inc. After signing the agreement, Behrens engaged Melvin Wedmore, their long-time attorney, to close the transaction with Loewen. Some time after the transaction was closed, Loewen filed for bankruptcy protection and Behrens were unable to recover the full purchase price they had negotiated. Not satisfied with the outcome of the bankruptcy, Behrens filed this malpractice action against Wedmore. They contended that Wedmore should have better collateralized the transaction, should have advised them of the risks of an installment sale in bankruptcy, and that he charged an unreasonable attorney fee. A jury found for Wedmore on all issues. We affirm.

Facts and Procedural History

[¶ 2.] Behrens Mortuary was founded in 1879 by Behrens' great-grandfather. It was the second largest funeral home in South Dakota at the time of its sale to Loewen International, Inc. in 1997. Jon and Don began working in this family business in 1970 and 1983, respectively. They enhanced the business in many ways. Despite the success of the business, Behrens believed that they would have to sell it at some time because the next generation of their family was not interested in operating the business.

[¶ 3.] Robert Eastgate, a regional manager for Loewen, contacted Jon in the mid 1990's about buying the business. Jon told Eastgate that they were not interested in selling. Service Corp. International (SCI), Loewen's competitor, also contacted Behrens about buying the business. Behrens again indicated that they were not interested in selling.

[¶ 4.] Loewen continued to pursue the purchase by making a $2 million offer. The terms of this offer included a $1 million cash down payment, with the balance financed by Behrens on a ten-year, interest-free note. After Behrens rejected the offer, Loewen made another offer, this time in the amount of $4.1 million. Behrens responded with a counteroffer. The terms of the counteroffer included a $2.55 million cash down payment and an additional $2 million to be financed by Behrens on an interest-free note payable in ten equal payments.

[¶ 5.] Loewen was eager to acquire Behrens Mortuary because it was fighting a takeover bid from SCI and wanted a presence in the Rapid City market. Consequently, Loewen wrote a letter to Behrens containing the following alternate offers:

1. $4,100,000, which included the entire business, as well as the mortuary property and the retort (crematory) property; or

2. $3,400,000, (with $2,400,000 cash at closing) with a lease of the retort property.

Because the funeral home (mortuary property) was owned by Jon's and Don's fathers, these offers indicated that the mortuary property was included in the purchase price. The offer further indicated that Jon and Don were to determine how to allocate the total purchase price to that part of the business.

[¶ 6.] On March 25, 1997, Behrens responded with a counteroffer informing Loewen that its proposal to purchase the complete package was acceptable with the following changes in price and financing:

1. $2,550,000 cash at closing [$500,000 of this to be allocated to the purchase of the building from Behrens' fathers];

2. 10 equal annual payments of $200,000 commencing on the first anniversary of the Closing Date. (Unsecured promissory note to be defined.)

[¶ 7.] On April 16, 1997, Behrens and Loewen met and executed a writing that incorporated the terms of Behrens' March 25, 1997 counteroffer. Although the document included a provision noting that it was an offer open for acceptance until 5:00 p.m. on April 17, 1997, Behrens signed it the same day, April 16, 1997. By its terms, the writing provided that Behrens agreed to sell the entire business (including the mortuary property owned by their fathers and the crematory owned by Don and Jon) for $4.55 million. $2.55 million was to be paid on closing, and the $2 million balance was to be financed by Behrens on a no-interest, unsecured promissory note. The agreement further provided that closing would occur within ninety days. Loewen also had the right to execute a more detailed purchase agreement that included ancillary documents necessary to transfer all of the business assets.

[¶ 8.] A central issue in this litigation involved the legal characterization of this written agreement. Behrens contended that it was only a non-binding letter of intent. Therefore, Behrens argued that Wedmore was required to use his legal expertise to change the terms and better collateralize the sale in the event of a bankruptcy. On the other hand, Wedmore contended that it was a binding contract, and that the financing terms, including the $2 million unsecured note, could not have been renegotiated without losing the entire sale. For ease of reference, we refer to this writing as the "Initial Agreement."

[¶ 9.] Two days after signing the Initial Agreement, Behrens first consulted Wedmore about legal representation. According to Jon, they took the Initial Agreement to Wedmore and told him: that they were going to sell Behrens Mortuary; that there would be more information forthcoming; that "if you want to make any changes or anything you want to do to [the Initial] agreement, contact [Loewens];" and, that the "deal" was scheduled to close by June 30, 1997. However, according to Wedmore, he was only to close the transaction based on the Initial Agreement. Therefore, Wedmore contended that he was to review the closing documents and update the corporate records. Wedmore specifically contended that he was not hired to renegotiate the Initial Agreement or to change its terms, including the provision that called for the unsecured promissory note.

[¶ 10.] Negotiations to close the transaction continued over two months. Changes were made even after the July 15, 1997 stated expiration date of the Initial Agreement. During these negotiations, Wedmore contends that he unsuccessfully asked for additional security (including a guarantee, stock pledge, security interest, and letter of credit). He was successful in obtaining a $500,000 contract for deed for the mortuary. Wedmore also drafted a mortgage and promissory note that included interest. Together, these secured transactions reduced the $2 million unsecured indebtedness called for in the Initial Agreement by approximately $1 million. Wedmore also included bankruptcy-default and cross-default provisions in the contract for deed, promissory note, and mortgage. These provisions were intended to tie the assets together in order to prevent Loewen from defaulting on one, but not all of the assets sold. There was not, however, any cross-collateralization of the contract for deed and the promissory note.

[¶ 11.] The transaction finally closed on July 24, 1997.¹ Sometime after closing, Loewen filed for bankruptcy. The evidence reflects that, as a result of Wedmore's involvement, Behrens were better protected in the bankruptcy than they would have been had they only held the $2 million unsecured note described in the Initial Agreement. However, they were oversecured on the contract for deed and unsecured on the promissory note. Furthermore, the cross-default provisions (purportedly triggered by bankruptcy) and the foreclosure provisions were not fully enforceable in bankruptcy. Consequently, Behrens were unable to get their business back. Furthermore, because the indebtedness was not cross-collateralized, they were unable to use excess equity in the mortuary building (subject to the contract for deed) to secure the promissory note.

[¶ 12.] Behrens alleged that as a result of these problems, they incurred a $462,890 loss in the bankruptcy. They were also required to spend $14,579 in bankruptcy attorney fees. Behrens claimed that if Wedmore had better collateralized the promissory note, they would have been paid in full or they would have gotten their business back. Although Wedmore's efforts resulted in Behrens being better positioned than most other creditors in the Loewen bankruptcy,² Behrens contended that Wedmore committed malpractice. Behrens specifically alleged that Wedmore was negligent in negotiating and preparing the transactional documents and in failing to warn them of the potential risks of an installment sale in bankruptcy.

[¶ 13.] On the other hand, Wedmore's experts testified that Wedmore could not have better collateralized the transaction because the Initial Agreement was legally enforceable and it finalized the terms of the sale, which included the $2 million unsecured note. Under Wedmore's theory, his ability to negotiate for additional security was limited because the Initial Agreement was binding and further security demands risked a loss of the entire sale. He further contended that he did make additional efforts to obtain more security, but those efforts were rejected by Loewen. Wedmore finally contended that Behrens ultimately received approximately $4,088,286 after bankruptcy, which was substantially more than they could have received under the Initial Agreement that they had negotiated on their own.

[¶ 14.] With respect to attorney's fees, there is no dispute that Wedmore charged a 1% transaction fee for the...