Cornish Coll. of The Arts v. 1000 Va. Ltd. P'ship

Decision Date25 October 2010
Docket NumberNos. 63790-8-I, 63792-4-I.,s. 63790-8-I, 63792-4-I.
Citation158 Wash.App. 203,242 P.3d 1
PartiesCORNISH COLLEGE OF THE ARTS, a Washington public benefit corporation, Respondent, v. 1000 VIRGINIA LIMITED PARTNERSHIP, a Washington limited partnership; One Thousand Virginia, a general partnership; and Donn Etherington, Jr., an individual, Appellants.
CourtWashington Court of Appeals

Jerry H. Kindinger, Wendy S. Moullett, Ryan Swanson & Cleveland PLLC, Seattle, WA, Charles K. Wiggins, Kenneth W. Masters, Shelby R. Frost Lemmel, Wiggins & Masters PLLC, Bainbridge Island, WA, for Appellants.

Richard C. Yarmuth, Rachel Hong, Jordan Gross, Yarmuth Wilsdon Calfo, Seattle, WA, for Respondent.

DWYER, C.J.

¶ 1 A superior court has the authority to grant an equitable grace period to the holder of an option to purchase property when an inequitable forfeiture would otherwise result. When monetary damages are inadequate to compensate a nonbreaching party, a lease containing an option to purchase is enforceable by specific performance. Properly finding that Cornish College of the Arts would otherwise suffer an inequitable forfeiture, the trial court herein granted to Cornish an equitable period of grace. Because a suitable substitute for the disputed property would be highly difficult-if not impossible-to procure, the trial court correctly awarded to Cornish specific performance of the option to purchase. Moreover, the trial court did not err in awarding to Cornish consequential damages, given that an award of consequential damages in addition to specific performance is permissible when necessary to make the nonbreaching party whole. The trial court erred, however, in finding defendant Donn Etherington, Jr. jointly and severally liable for Cornish's attorney fees and costs. Accordingly, we affirm as to the substantive claims raised below, and we affirm in part and reverse in part as to the award of attorney fees and costs.

I

¶ 2 Cornish College of the Arts is a private, nonprofit college offering bachelor's degrees in the visual and performing arts.1000 Virginia Limited is a Washington limited partnership. Its sole asset, and the property which is the subject of this dispute, is a parcel of real property at 1000 Virginia Street in Seattle. Donn Etherington, Jr. is themanaging member of Virginia-Terry, LLC, which is the general partner of Virginia Limited.1 Etherington manages the property at 1000 Virginia Street.

¶ 3 In April 2005, Cornish and Virginia Limited executed the "Commercial Sublease with Option to Purchase" (the Agreement). The Agreement provided for Cornish to sublease the bottom two floors of the six-story building located at 1000 Virginia Street from Etherington, who was in turn leasing the property from Virginia Limited. The lease term of 42 months was to terminate on December 31, 2008.

¶ 4 The Agreement also granted to Cornish an option to purchase the entire building and the land at 1000 Virginia Street. Pursuant to the Agreement, Cornish could exercise this option through December 2006 for a purchase price of $3 million due at closing.2 The Agreement provided that Cornish could extend the option period for an additional year by paying a deposit of $50,000 by January 1, 2007. If Cornish exercised its option to purchase, Virginia Limited was required to deliver clear title to the property and to demolish the upper four floors of the building.

¶ 5 The Agreement also provided for early termination by either party in the event of "substantial destruction" of the property. The pertinent provision states:

Substantial Destruction. If the damage to the Leased Premises is so substantial that repair of such damage will require more than 180 days to complete (or will require more than 90 days to complete if such casualty occurs after January 1, 2008), then either Etherington or Lessee may elect, by written notice given to the other not later than thirty (30) days after the date of such casualty, to terminate this Lease effective as of the date of such casualty.

This provision was presumably included due to the poor condition of the building.3

¶ 6 Finally, the Agreement included an attorney fees provision, which provides:

In the event that Cornish College, Etherington, or Virginia Limited shall commence proceedings or institute action to enforce any rights hereunder ... the substantially prevailing party shall be entitled to costs and reasonable attorney's fees, including those for appeal.

¶ 7 The Agreement between Cornish and Virginia Limited was not, however, the only contractual obligation affecting the property at 1000 Virginia Street. The property was also subject to an agreement with the Washington State Housing Finance Commission (WSHFC), pursuant to which Virginia Limited was obligated to provide low-income housing in the top four floors of the building for a certain term of years. In exchange, Virginia Limited would annually receive nearly $400,000 in tax credits for 10 years.

¶ 8 During the parties' negotiations, Etherington told Cornish that the obligation to provide low-income housing would end on December 31, 2007. In fact, Virginia Limited's obligation pursuant to its agreement with the WSHFC was to run through 2022. After discovering this-and believing that Virginia Limited's obligation to provide low-income housing would prevent Etheringtonfrom delivering clear title as required by the option agreement-Cornish representatives met with "attorneys, engineering consultants, housing groups and other interested parties, trying to find a way to help Mr. Etherington meet his obligations to deliver clear title."

¶ 9 On December 18, 2006, Cornish's chief financial officer, Jeff Riddell, requested disbursement of a $50,000check to extend the option period through December 31, 2007. Riddell intended to give the check to Etherington at a meeting on December 28. Riddell testified that when the meeting did not occur, he returned the check to his briefcase upon seeing that the postage meter at the college had already been set ahead to January 1. Riddell mailed the check on January 5. The payment to extend Cornish's option to purchase was, therefore, a few days late. The check contained only one signature, despite language on the check indicating that two signatures were required for amounts greater than $7,500. Etherington rejected the check, returning it to Cornish later that month.

¶ 10 Subsequently, a July 2007 appraisal commissioned by Etherington estimated that the value of the property, which was priced at $3 million in the Agreement, had risen to $7.7 million due to zoning changes by the city of Seattle.

¶ 11 In December 2007, Cornish attempted to exercise its option to purchase, maintaining that its late extension payment, though returned by Etherington, had extended the option period. Cornish included a check for $50,000, stating that it was an amount to which Etherington was entitled, given that the option was extended. Virginia Limited rejected Cornish's attempt to exercise the option, stating that Cornish had not timely extended the option.

¶ 12 Also in December 2007, Virginia Limited's structural engineer sent a letter to Etherington stating that certain parts of the building had deteriorated to a "dangerous" level. Four months later-nine months before the lease term ended-Etherington delivered to Cornish a "Notice of Lease Termination" ordering Cornish to vacate the premises. In a letter accompanying this notice, Etherington cites the "deterioration noted by our engineer in late December" as the event precipitating the eviction notice. Cornish fully vacated the premises by July 2008. Cornish then leased and renovated three separate spaces for classrooms and studios in order to replace its former space at 1000 Virginia Street.

¶ 13 Cornish sued Virginia Limited and Etherington, seeking specific performance of the option to purchase and damages for wrongful eviction. Virginia Limited and Etherington asserted counterclaims for breach of the lease, tortious interference with economic relations, and slander of title, all of which were dismissed by the trial court.

¶ 14 The trial court disposed of Cornish's substantive claims on summary judgment in favor of Cornish. The trial court granted to Cornish an equitable period of grace for the late option payment and ordered that the property be conveyed according to the terms of the parties' agreement. Although the trial court initially ordered both Etherington and Virginia Limited to convey the property, it later struck Etherington from the order because it found that he had no legal ownership of the property. The trial court, on summary judgment, found both Etherington and Virginia Limited liable for wrongful eviction.

¶ 15 Subsequent to the trial court's grant of an equitable grace period and award of specific performance to Cornish, Virginia Limited filed for bankruptcy. In its petition, Virginia Limited sought to reject its agreement with Cornish.4 The bankruptcy court denied Virginia Limited's motion to reject the Agreement, and the bankruptcy petition was dismissed. The bankruptcy court found that the filing "was a litigation tactic rather than a bona fide effort to reorganize." Cornish incurred approximately $55,000 in attorney fees litigating against Virginia Limited's bankruptcy petition.

¶ 16 Rather than proceed with a jury trial on the issue of damages for wrongful eviction, the parties stipulated that, were a jury asked to determine such damages, Cornish would be entitled to damages in the amount of $69,600. They further stipulated that Virginia Limited and Etherington were jointly and severally liable for that amount, subject to the defendants' right to appeal the liability judgment.

¶ 17 The case then proceeded to trial on those issues not resolved by summary judgment. After a three day bench trial, the trial court found that specific performance was inadequate to make Cornish whole and, thus, it additionally awarded to Cornish approximately $2.4 million in money damages....

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