Dunes Hospitality v. Country Kitchen Intern.

• Decision Date: 21 March 2001
• Docket Number: No. 21395, No. 21400.
• Citation: 2001 SD 36,623 N.W.2d 484
• Parties: DUNES HOSPITALITY, L.L.C., a South Dakota Limited Liability Company, Plaintiff and Appellee, v. COUNTRY KITCHEN INTERNATIONAL, INC., a Minnesota Corporation, Defendant and Appellant. Country Kitchen International, Inc., a Minnesota Corporation, Third-Party Plaintiff and Appellant, v. Venerts Investments, Inc., a South Dakota Corporation, James Berven, and William Folkerts, Third-Party Defendant and Appellee.
• Court: South Dakota Supreme Court

623 N.W.2d 484

2001 SD 36

DUNES HOSPITALITY, L.L.C., a South Dakota Limited Liability Company, Plaintiff and Appellee, v. COUNTRY KITCHEN INTERNATIONAL, INC., a Minnesota Corporation, Defendant and Appellant.

Country Kitchen International, Inc., a Minnesota Corporation, Third-Party Plaintiff and Appellant, v. Venerts Investments, Inc., a South Dakota Corporation, James Berven, and William Folkerts, Third-Party Defendant and Appellee.

Nos. 21395, 21400.

Supreme Court of South Dakota.

Argued January 10, 2001.

Decided March 21, 2001.

Thomas K. Wilka of Hagen, Wilka & Archer, P.C., Sioux Falls, SD, Attorneys for plaintiff and appellee Dunes Hospitality, L.L.C.

Lawrence R. Commers, Tim A. Staum of Mackall, Crounse & Moore, Minneapolis, MN, and Brian J. Donahoe of Cutler, Donahoe & Mickelson, Sioux Falls, SD, Attorneys for defendant and appellant Country Kitchen International, Inc.

SABERS, Justice.

[¶ 1.] Dunes Hospitality, LLC (Dunes) brought an action against Country Kitchen Int'l, Inc. (CKI) to set aside a settlement agreement on claims of fraud or economic duress. The jury rejected the fraud claim but found economic duress. We hold that the law of economic duress applies but that these facts do not constitute economic duress.

FACTS

[¶ 2.] Dunes was granted the right to manage a Country Kitchen restaurant in North Sioux City, South Dakota for a period of fifteen years. Dunes entered into an agreement for management of the restaurant with CKI on December 14, 1994. The members of Dunes included at least three lawyers, a law professor, a real estate broker and a doctor. In early 1996, the members became frustrated when the restaurant was still not meeting its revenue expectations. The members of Dunes asserted that the restaurant was mismanaged. They repeatedly sent complaints to CKI concerning poor service and the quality of food, apparently with no improvement. As problems persisted, the members of Dunes began to consider their options under the management agreement.

[¶ 3.] These options included firing CKI and replacing them with a new manager, running the restaurant themselves, or filing suit. Members of Dunes visited with CKI to discuss settlement of their claims. CKI attempted to force members of all four South Dakota locations to negotiate in unison. However, Dunes and the other restaurants refused, and eventually separate settlements were negotiated. On July 2, 1996, CKI sent Dunes a draft settlement agreement. Charles Sederstrom, a member of Dunes and an attorney in Omaha, Nebraska, was appointed to draft a counter proposal to CKI even though he and others opposed the settlement agreement. The settlement agreement was eventually executed by Jim Berven, a realtor and broker and general partner of Dunes, on August 22, 1996. The settlement agreement became final on August 30, 1996.

[¶ 4.] Pursuant to the settlement agreement, CKI agreed to designate a representative at its expense to perform management functions, waive all manager fees, modify the cash call provisions, and allow early termination of the agreement without cause. The agreement specifically provided that the law of Minnesota was to control its terms, that the agreement constituted the entire understanding between the parties, and unconditionally released CKI from any claims that relate to the management agreement.

[¶ 5.] On November 4, 1996, Dunes terminated the management agreement and filed this lawsuit. Dunes asserted that the settlement agreement was procured by fraud and economic duress and was therefore void. Dunes also alleged that CKI understated accounts payable to vendors by almost one-hundred percent, forced settlement by the all or nothing approach to the South Dakota restaurants, threatened complete withdrawal from the South Dakota locations, demanded additional cash calls and would have left the Dunes without service for the Country Inn and Suites Hotel to which the restaurant was affixed.

[¶ 6.] The jury found that the settlement agreement was not procured by fraud but by economic duress and was unenforceable. CKI appeals contending:

1. The trial court should have applied Minnesota law on economic duress.

2. The trial court incorrectly instructed the jury on economic duress.

3. Dunes failed to meet its burden of proof on economic duress, thereby requiring a directed verdict or judgment notwithstanding the verdict.

By notice of review Dunes raises one issue: Whether the trial court abused its discretion in curtailing Dunes rebuttal testimony.

STANDARD OF REVIEW

[¶ 7.] "Jury instructions are considered as a whole and will not be deemed erroneous if they sufficiently and correctly state the applicable law." Isaac v. State Farm Mut. Ins. Co., 522 N.W.2d 752, 759 (S.D.1994). In addition, the trial court's ruling on a motion for a directed verdict or for judgment notwithstanding the verdict "are presumed correct and this Court will not seek reasons to reverse." U.S. v. State, 1999 SD 94, ¶ 7, 598 N.W.2d 208, 211. "If sufficient evidence exists so that reasonable minds could differ, a directed verdict is not appropriate." Id. Questions of law are reviewed de novo. Id. ¶ 8, 598 N.W.2d 208.

[¶ 8.] 1. WHETHER THE TRIAL COURT SHOULD HAVE APPLIED MINNESOTA LAW ON ECONOMIC DURESS.

[¶ 9.] The settlement agreement provides that it "shall be construed in accordance with the laws of the State of Minnesota." In South Dakota, a stipulation that provides the governing law is permitted. See State ex rel Meierhenry v. Spiegel, Inc., 277 N.W.2d 298, 299 (S.D. 1979)

. CKI asserts that Minnesota law therefore controls. Minnesota courts refuse to recognize the defense of "economic duress" or "financial distress" in disputes involving contract law. See Johnson v. Hubbard Broadcasting Inc., 940 F.Supp. 1447, 1456 (D.Minn.1996); Prod. Credit Ass'n v. Farm Credit Bank, 781 F.Supp. 595, 604 n. 7 (D.Minn.1991); St. Louis Park Investment v. R.L. Johnson Inv., 411 N.W.2d 288, 291 (Minn.Ct.App.1987); Bond v. Charlson, 374 N.W.2d 423, 428 (Minn.1985).

[¶ 10.] We have generally recognized that parties may agree to be bound by the law of a particular state. State ex rel Meierhenry, 277 N.W.2d at 299. However, "such governing law agreements are subject to limitation and invalidation by the overriding public policy of the forum state." Id. (citing 16 AmJur2d, Conflict of Laws, § 46). Our legislature has also specifically stated that any contract which would exempt anyone "from responsibility for his own fraud ... [is] against the public policy of this state." SDCL 53-9-3. "Therefore, foreign laws will not be given effect if, by doing so, contract provisions would be enforced which would be contrary to the settled public policy of the domestic forum." State ex rel Meierhenry, 277 N.W.2d at 300 (citations omitted).

[¶ 11.] The Restatement (Second) Conflict of Laws, § 187 recognizes that generally "[t]he law of the state chosen by the parties to govern their contractual rights and duties will be applied." However, the comments to § 187 state:

A choice of law provision, like any other contractual provision, will not be given effect if the consent of one of the parties to its inclusion in the contract was obtained by improper means, such as misrepresentation, duress, or undue influence, or by mistake. Whether such consent was in fact obtained by improper means or by mistake will be determined by the forum in accordance with its own legal principles.

Restatement (Second) Conflict of Laws, § 187 cmt. b. "South Dakota applies the provisions of the Restatement (Second) of Conflicts of Laws in order to resolve questions about which state's laws govern in particular factual situations." Stockmen's Livestock Exch. v. Thompson, 520 N.W.2d 255, 257 (S.D.1994) (citing Chambers v. Dakotah Charter Inc., 488 N.W.2d 63 (S.D. 1992)).

[¶ 12.] Dunes alleged that it entered into the settlement agreement containing the choice of law provision because of fraud and economic duress. We are satisfied from the record that bona fide genuine issues of material fact existed concerning fraud and economic duress. That the jury eventually found against the position on fraud does not diminish the fact that these were more than bare assertions. Additionally, the jury found sufficient facts for economic duress. Although we reverse the economic duress issue as a matter of law, the facts in this record are sufficient for the purpose of considering the law to be applied.¹ As such, the laws of South Dakota apply as the forum state. The most significant contacts were in South Dakota. See Chambers, 488 N.W.2d at 67

(adopting the most significant relationship approach). Dunes signed the agreement in South Dakota, the negotiators for CKI visited South Dakota to make their demands, the restaurant is in South Dakota, and most of the investors are from South Dakota.

[¶ 13.] Therefore, the use of South Dakota law to determine economic duress was not error.

[¶ 14.] 2. WHETHER THE JURY INSTRUCTIONS ON ECONOMIC DURESS WERE IN ERROR.

[¶ 15.] CKI claims that the jury instructions on economic duress were in error because they were an inadequate statement of the law, were contradictory, failed to set forth reasonable alternatives, permitted lesser standards, and failed to identify the correct factors in determining the applicability of such a defense. We must determine whether South Dakota law recognizes the defense of economic duress, whether the jury instructions comport with that law and whether economic duress was established.

[¶ 16.] This Court has consistently stated that "it favors the compromise and settlement of disputed claims outside of court." Parkhurst v. Burkel, 544 N.W.2d 210, 212 (S.D.1996) (citations omitted). Yet, "[s]ettlements and releases are contractual agreements subject to rescission under the same grounds as any other contract." Id. In determining the validity of a settlement agreement in Drier v. Great American Insurance Company, 409 N.W.2d 357 (S.D.1987), we...