Kroblin v. RDR Motels, Inc.

Decision Date11 April 1984
Docket NumberNo. 83-919,83-919
Citation347 N.W.2d 430
PartiesAllen E. KROBLIN and Roger C. Dahlgaard, Appellees, v. RDR MOTELS, INC., Appellant.
CourtIowa Supreme Court

L. Don Snow and Leslie Ann Knock, of Mershon, Snow, Knock & Moothart, Cedar Falls, for appellant.

Hugh M. Field and Paula J. Larson, of Beecher, Beecher, Holmes & Rathert, Waterloo, for appellees.

Considered by HARRIS, P.J., and McCORMICK, McGIVERIN, SCHULTZ and WOLLE, JJ.

WOLLE, Justice.

This case involves a dispute over the purchase price to be paid by the buyer for the corporate stock of several corporations which owned and operated the Twin Torch Inn, a Waterloo motel. The buyer RDR Motels, Incorporated [buyer] appeals from an adverse decision in a declaratory judgment action brought by the sellers, Allen F. Kroblin and Roger C. Dahlgaard [sellers]. The buyer first contends that the contract of purchase was clear and precise, therefore the trial court erred in considering extrinsic evidence of its meaning. Secondly, the buyer contends that the parties were mutually mistaken as to the price, therefore the contract should be reformed. Finally, the buyer requests a new trial because the trial court adopted as its rulings on post-trial motions detailed findings which were prepared by counsel for the sellers upon direction given by the court in an ex parte communication. Although we disapprove the manner in which the trial court obtained and used the proposed rulings prepared by counsel, we find no merit in the buyer's assignments of error and affirm.

I. Background Facts.

The sellers and the buyer entered into a written contract for stock purchase on October 31, 1975, and agreed to sign another contract once the three corporations that owned the motel property were merged. The final written contract was signed on December 17, 1975. Both contracts provided that the purchase price was "$850,000.00 plus the excess of current assets over current liabilities less long-term liabilities." The contract did not contain other language more specifically allocating between the parties the general property taxes on the motel. The sellers and the buyer each contend that the other was responsible for paying the taxes which were due but unpaid at the time the motel property was transferred. Consequently, at the core of this lawsuit is the question whether the language "excess of current assets over current liabilities" unmistakably required one party or the other to bear the burden of these taxes.

The buyer contended that the unpaid property taxes were unquestionably "current liabilities" and therefore extrinsic evidence to the contrary should not have been considered. The buyer's principal officer, Ronald Roberts, testified that the parties' accountants were to calculate the exact price by applying the contract's assets-liabilities formula to the corporation's financial statements.

The sellers, on the other hand, contended that the parties agreed to treat certain real estate taxes as prepaid and therefore "current assets" for purposes of calculating the purchase price. The sellers offered extrinsic evidence--both testimony and documentary evidence--to explain how the parties intended to apply the contract's assets-liabilities formula to property taxes. Roger Dahlgaard, who negotiated the sale, testified that he told the buyer's principal officer Roberts during their negotiations that he understood real estate taxes to be prepaid, meaning paid for the current year. He said he asked and obtained assurance that the price would be based on that understanding. The sellers also relied heavily on Exhibit B, a handwritten list of various assets and liabilities which was prepared at the time the buyer took possession of the motel, reviewed by both Dahlgaard and Roberts, and then initialed by both of them. One of the current assets listed on that document was "prepaid land taxes ... $3,965.63." The sellers insist that that memorandum, together with the conversations between Dahlgaard and Roberts, showed that the parties intended certain current taxes to be treated as an asset, regardless whether such taxes would ordinarily be considered to be a liability for accounting purposes.

Both the sellers and buyer were represented by lawyers and accountants in negotiating and completing the transaction. Both the sellers and buyer had also had extensive experience in handling the purchase and sale of businesses. For nearly two years after the buyer took possession of the motel, the buyer made regular interest payments on the unpaid purchase price, using as a purchase price a figure which was consistent with the sellers' interpretation of the contract language. At trial, to support its own interpretation of the contract, the buyer itself proffered testimony of its own accountant as to what would be a proper computation of the purchase price "under the contract and in accordance with good accounting principles."

II. The Trial Court's Consideration of Extrinsic Evidence.

The buyer contends that the trial court erred in considering extrinsic evidence, arguing that the phrase "current assets over current liabilities" was clear, precise and susceptible to only one reasonable interpretation as to what taxes were owed by each party to the transaction. We disagree. Established principles of contract interpretation and the circumstances of this case support the trial court's consideration of the extrinsic evidence offered by the parties to determine what their contractual language meant.

We need not repeat the extensive discussion in several Iowa cases which explain when extrinsic evidence may properly be used. Contract interpretation involves ascertaining the meaning of contractual words, and extrinsic evidence is admissible as an aid to interpretation when it sheds light on the situation of the parties, antecedent negotiations, the attendant circumstances, and the objects they were striving to attain. Fashion Fabrics of Iowa, Inc. v. Retail Investors Corp., 266 N.W.2d 22, 25 (Iowa 1978); Hamilton v. Wosepka, 261 Iowa 299, 306-13, 154 N.W.2d 164, 168-72 (1967) (cataloguing cases and statements of commentators as to when parol evidence may be used to interpret and explain contracts). Here, the contract itself made no mention of property taxes and did not include sufficient financial data, incorporated by reference or otherwise, to enable the parties to insert exact numbers into the assets-liabilities formula. Even the buyer was required to offer its accountant's testimony to establish the exact price it intended to pay.

The buyer's reliance on the parol evidence rule is misplaced. When applicable, the parol evidence rule excludes extrinsic evidence which is solely offered for the purpose of varying, adding to, or subtracting from a written agreement. Montgomery Properties Corporation v. Economy Forms Corporation, 305 N.W.2d 470, 476 (Iowa 1981); Pappas v. Hauser, 197 N.W.2d 607, 611 (Iowa 1972). Among the exceptions to the parol evidence rule, however, is the principle that extrinsic evidence may be admitted to show that a writing is not an integrated agreement, not completely clear and unambiguous as to the subject in dispute, or ambiguous with respect to the subject of the lawsuit. In re Eickman Estate, 291 N.W.2d 308, 312 (Iowa 1980); Fashion Fabrics of Iowa, Inc., v. Retail Investors Corp., 266 N.W.2d at 25. Here, the language chosen by the parties for their written agreement simply did not unequivocally fix the rights and obligations of the parties with respect to general taxes on the motel property. The buyer itself has not shown that the court could have decided upon a specific agreed price without resorting to documentary evidence furnished by the buyer's accountants. Neither the sellers' evidence nor that introduced by the buyer was offered to change or vary the words of the contract; that evidence was offered to explain how the parties intended their assets-liabilities formula to apply to the financial accounts of the motel corporation. "Proof of the circumstances may make a meaning plain and clear when in absence of such proof some other meaning may also have seemed plain and clear." Hamilton v. Wosepka, 261 Iowa at 312, 154 N.W.2d at 171.

The buyer also contends that the trial court improperly considered the fact that the buyer made monthly payments of interest to the sellers for nearly two years after the sale based upon the sellers' interpretation of what the purchase price should be. Again, we conclude that the trial court properly could consider that evidence in deciding what the parties meant by what their contract said. A document will be read in the light of surrounding circumstances and given such practical construction as they themselves have placed upon it. Lovlie v. Plumb, 250 N.W.2d 56, 59 (Iowa 1977); see also Village Supply Co. v. Iowa Fund, Inc., 312 N.W.2d 551, 555 (Iowa 1981) ("The practical construction placed on an agreement by the parties will be given effect.").

III. The Buyer's Request for Reformation.

The buyer in its brief alternatively requests that if extrinsic evidence was properly considered, then the exhibit B handwritten memorandum should now be "reformed" because "all parties were mistaken when they believed the land taxes were in fact prepaid." At the outset, however, we note the buyer's concession in its brief that it did not seek reformation of the contract at any time during the proceedings in the trial court. Neither did it contend at any time during the trial that either the written contract or the exhibit B memorandum initialed by the parties was the product of a mutual mistake.

It is axiomatic that we will not ordinarily consider issues raised for the first time on appeal. See, e.g., Davoren v. Iowa Employment Security Commission, 277 N.W.2d 602, 603 (Iowa 1979); Lemon v. City of Muscatine, 272 N.W.2d 429, 430 (Iowa 1978). The request for reformation is not properly before us because it is based on a theory of mutual...

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