Columbus Hotel Co. v. Pierce

• Decision Date: 23 December 1993
• Docket Number: No. 90-CA-0846,90-CA-0846
• Citation: 629 So.2d 605
• Parties: COLUMBUS HOTEL COMPANY, a Delaware Corporation, v. Elmer PIERCE, Jr., Charles N. White, d/b/a El Ark, Inc., an Arkansas Corporation, Kenneth L. Smotherman and Edwin C. Mauck, and all others holding by, through and under them; First Federal Bank for Savings; and City of Columbus, Mississippi.
• Court: Mississippi Supreme Court

Page 605

629 So.2d 605

COLUMBUS HOTEL COMPANY, a Delaware Corporation, v. Elmer PIERCE, Jr., Charles N. White, d/b/a El Ark, Inc., an Arkansas Corporation, Kenneth L. Smotherman and Edwin C Mauck, and all others holding by, through and under them First Federal Bank for Savings; and City of Columbus, Mississippi.

No. 90-CA-0846.

Supreme Court of Mississippi.

Dec. 23, 1993.

J. Randolph Lipscomb, Lipscomb Geeslin & McClanahan, Columbus, for appellant.

David L. Sanders, Mitchell McNutt Threadgill & Sams, Douglas Dalrymple, Columbus, for appellees.

Before HAWKINS, C.J., and SULLIVAN and McRAE, JJ.

SULLIVAN, Justice, for the Court:

Columbus Hotel Company (hereinafter, CHC) filed suit in 1988 against the lessee, El-Ark, Inc., and its sublessees/assignees to cancel a long term lease agreement. CHC alleged in its complaint that the lease had been breached by failure to render annual audits, numerous late payments and checks returned for insufficient funds, for tearing down a bus station on the property, and for entering into a deed of trust with First Federal Bank without the consent or knowledge of CHC.

CHC leased a motel facility to El-Ark, Inc. The lease and management of this motel has been assigned to various persons. Under the lease agreement El-Ark's duties as lessee remained unaffected by assignments or subleases. Certain lessees are not closely associated with El-Ark, Inc., except through assignment. To avoid confusion, the lessees and assignees/sublessees shall hereinafter be collectively referred to as El-Ark.

This 1979 agreement provided that the rent was $1500 per month, plus a percentage of profits from room rentals and other income such as that derived from the sale of food and beverages. This payment was due 75 days after the close of each accounting year, and was to be accompanied by a certified public accountant's audit of such profits.

Section IX of the agreement is pertinent to one issue. This section deals with failure to pay the rent as well as other types of breaches. It states that if El-Ark fails to comply with a provision other than payment of rent, then CHC can give notice in writing of the default; and if it is not cured by El-Ark within 30 days from the notice, CHC can elect to terminate the lease. If the default is such that it can not be reasonably cured within 30 days, then an extension could be given. This extension is limited to time necessary to cure through due diligence, but the period for cure cannot exceed 60 days after notice.

The lease provides that CHC's remedy for El-Ark's failure to cure such a default is forfeiture. Assuming that a default and failure to cure within the time provided for has occurred, the lease allows CHC to declare the lease forfeited, "and then all of LESSEE's rights of possession shall thereupon entirely cease...." (Ex. P-1, Lease Agreement).

During the early years of this lease, the tenants did not tender records along with the yearly percentage of revenues. Later, CHC began to ask for records along with the payment to confirm that it was receiving its due share of the profits. The tenants tried to comply with CHC's request by supplying notes of figures representing expenses and profits from the various areas of the motel business. By 1987, CHC had received a number of bad checks and demanded that they be cured and that El-Ark provide an audit in compliance with the lease.

A number of accounting firms have been hired to audit the motel's business, but the accountants were unsuccessful. The accountants gave reports, but qualified their results by stating that the accounting and record-keeping procedures employed by El-Ark were an inadequate basis for an audit. One expert witness of the accounting field testified that he could not give an opinion of what the annual profits were based on his review of the records. It is possible that what El-Ark actually profited was a greater amount than that which it reported to CHC. One accounting firm stated that it "attempted" to complete an audit, but that its report could not meet the standard of general audits. This firm suggested accounting procedures which could be used in the future to adequately substantiate an audit.

The chancellor found that CHC had waived its entitlement to a CPA's audit for the initial years of the lease through 1986. However, the chancellor found that that waiver ended for the 1987 year, and El-Ark had a duty to provide an audit to CHC. The chancellor The agreement also covered the disposition of improvements at the termination of the lease. It stated that if the lease were terminated because of breach by the lessee of any covenant in the lease, then all improvements of any kind were to be retained and fully owned by the lessor, CHC.

further concluded that El-Ark had not provided an adequate audit to comply with the lease for 1987, and thus was in default. However, the chancellor did not grant a forfeiture, reasoning that forfeiture would yield an unconscionable windfall to CHC. The chancellor concluded that it would be sufficient for El-Ark to begin to use the accountant's suggested procedures needed to provide proper audits in the future.

The market value of the fee simple interest in the motel property was $1,150,000, as determined by an appraisal; this value included some major improvements in the nature of remodeling made by El-Ark, et al., around 1986. The current tenant owed $1,000,000 on a deed of trust covering the leased premises, financed by First Federal. Though previous deeds of trust were consented to by CHC, this one was created without CHC's knowledge. Later, CHC found out about it, and as one item of correspondence put it, "the cat was out of the bag." Apparently, this figure was significant to the chancellor, since he found that forfeiture of the lease would yield an unconscionable windfall of $1,000,000 to CHC.

The lease also gave El-Ark an option to purchase a specific portion of the leased premises. The city had condemned the bus station located on this lot because it was unsafe and open to the public. CHC renewed this option as El-Ark represented that it would purchase the lot. El-Ark demolished the bus station which was on that lot, but did not purchase it.

One of CHC's complaints in this lawsuit is that El-Ark, Inc.'s officers misrepresented that it was an Arkansas corporation. CHC had requested information on El-Ark from the Arkansas Secretary of State, who responded that such a corporation was not listed in the state's records of Arkansas corporations. Later, however, the Arkansas Secretary of State determined that El-Ark was in fact an Arkansas corporation. It did not find it in its previous search because of a mistake in the name of the corporation: it did not have an "El-Ark, Inc.," in its records, but did have "El-Ark Corporation," which is the primary lessee in the instant case. El-Ark Corporation is chartered under the laws of Arkansas. The chancellor concluded that El-Ark Corporation had been mistakenly listed as El-Ark, Inc., in the lease, but was the business entity which dealt with CHC. ¹

I. FORFEITURE ²

The chancellor concluded that what the tenants tendered to CHC for 1987 was not an Because no reliable audits have been provided for any of the years, CHC will never know what it was entitled to during those years. While the chancellor found that CHC had waived its right to an audit through 1986, the tenants were directly put on notice that CHC required full compliance with those provisions of the lease, and the chancellor concluded that the tenants had breached the audit requirement for the 1987 revenues.

audit as required by the lease; the Chancellor further determined that having the proper audit was an important part of the agreement, as CHC was entitled to a percentage of the yearly profits. Because El-Ark, et al., have not shown why the chancellor was manifestly wrong in determining that a breach did occur and the proper audits were not provided after 1986, we affirm this finding.

In the instant case, neither party has alleged a flaw in the formation or the validity of the lease agreement. If the lease agreement was not an unconscionable contract, then it must be enforced according to its terms, subject to principles of equity.

We hold that the chancellor erred as a matter of law in finding that the result of the forfeiture was unconscionable. The chancellor reasoned that for CHC to receive the leased property, it would receive a windfall worth $1,000,000. The chancellor said that this would be a disproportionate loss to El-Ark.

However, El-Ark will no longer be paying CHC the monthly rent. Also, CHC will no longer be entitled to the additional rent based on a percent of their yearly profits, which, incidentally, have not been diligently paid or reported by El-Ark. The circumstances surrounding the course of dealing of these parties, especially the tenants' continued failure to keep adequate records for an audit, also support the lack of an unconscionable result. The record indicates that the tenants were fully aware of CHC's desire to receive proper audits and its power to terminate the lease. Furthermore, the lease stated that upon proper termination of the lease, improvements made by the tenant would become property of the lessor, CHC. There has been no challenge to the formation of the contract based on an unconscionable bargain theory. At one point, a tenant made a deed of trust on the property without CHC's knowledge or consent. The ostensible nature of this transaction is evidenced by one item of correspondence which acknowledged that "the cat was out of the bag," when CHC learned of this deed of trust. All of these circumstances are relevant to whether the result of forfeiture would be unconscionable.

The tenants would have made a better case for an unconscionable result had they been diligent in their attempts to begin proper accounting procedures. This Court recognizes that the tenants will lose a...