Midland Mut. Life Ins. Co. v. Mercy Clinics, Inc.

• Decision Date: 28 May 1998
• Docket Number: No. 96-1872,96-1872
• Citation: 579 N.W.2d 823
• Parties: MIDLAND MUTUAL LIFE INSURANCE COMPANY, Appellee, v. MERCY CLINICS, INC. f/k/a Mercy Health and Human Services Center, Appellant.
• Court: Iowa Supreme Court

Page 823

579 N.W.2d 823

MIDLAND MUTUAL LIFE INSURANCE COMPANY, Appellee, v. MERCY CLINICS, INC. f/k/a Mercy Health and Human Services Center, Appellant.

No. 96-1872.

Supreme Court of Iowa.

May 28, 1998.

Steven J. Woolley of Polack, Woolley & Troia, P.C., Omaha, Nebraska, and Michael J. Cunningham of Adams & Howe, P.C., Des Moines, for appellant.

Steven L. Nelson of Davis, Brown, Koehn, Shors & Roberts, P.C., Des Moines, for appellee.

Considered by HARRIS, P.J., CARTER, NEUMAN, SNELL, and ANDREASEN, JJ.

SNELL, Justice.

Both parties seek further review from a court of appeals decision affirming in part and reversing in part the district court's judgment. Midland Mutual Life Insurance Company seeks further review of the decision of the court of appeals to reduce the jury's award of damages. In its application for further review, Mercy Clinics, Inc. seeks further reductions in the amount of damages it owes to Midland, contending the jury's verdict is not supported by substantial evidence. We vacate the decision of the court of appeals as to the issue of damages; reverse the district court judgment in part and remand for entry of judgment.

I. Background Facts and Procedure

In 1983 West Roads, Ltd. owned a shopping center in Indianola, known as West Roads Shopping Center. On November 14, 1983, Mercy and West Roads entered into a lease agreement for a ten-year term to commence on February 1, 1984 and end on January 31, 1994. At the time the parties signed the lease, they signed two other related agreements. The "finish agreement" required Mercy to make monthly payments to reimburse West Roads for the cost of certain improvements made to the leased premises. The "expansion agreement" required West Roads to construct an addition to the shopping center to provide additional space for Mercy's clinic. The expansion agreement provided that if West Roads did not commence construction on the addition within twenty-four months, it was required to pay the negative cash flow on a building in Indianola owned by Mercy. West Roads did not construct the addition and thus, the terms of the expansion agreement were activated.

In January 1990, Future Development Corporation (FDC) purchased the West Roads Shopping Center from West Roads. To facilitate the purchase, FDC borrowed $1,385,000 from Midland. In connection with the loan, FDC signed a promissory note, a mortgage and security agreement, and an assignment of rents and leases. Under the terms of the assignment, FDC agreed as follows:

(b) [FDC] shall not terminate any Lease (except pursuant to the terms of such Lease upon a default by the tenant thereunder), or grant concessions or modify or amend any such Lease in any manner whatsoever, without the prior written consent of [Midland];

(c) [FDC] shall not collect any rent more than one (1) month in advance of the date on which it becomes due under the terms of each Lease.

(Emphasis added.) The assignment also provided that it was an assignment of rights only, and not a delegation of duties. An exhibit attached to the assignment specifically excluded payments under the finish agreement from assignment because those payments were assigned to People's Trust and Savings Bank of Indianola as consideration for the bank's agreement to release its first mortgage on the shopping center property when FDC entered into the loan agreement with Midland. People's had advanced West Roads money to be utilized for tenant improvements at the beginning of the lease and obtained a mortgage to secure repayment of the loan.

On January 18, 1990, Mercy, as a condition of FDC obtaining the loan from Midland, signed an "estoppel certificate" which provided that Midland would not be bound by any prepayment of more than one month's installment of rent or by any other change or modification of the lease without Midland's written consent. The estoppel certificate provided additional security to Midland. Its purpose was to ensure that FDC had a steady flow of resources with which to make monthly payments under the loan agreement. The estoppel certificate also provided:

The undersigned [Mercy] understands that pursuant to the Assignment of the Lease, if there is a default by the Borrower [Future Development] in the performance and observance of the terms of the Mortgage, you [Midland] may, at your option but are not required to, demand that all rents due under the Lease be paid directly to you or your account. Upon notification from you to that effect, the undersigned will remit any payments due under the Lease to your order. However, until written notification to that effect from you, the undersigned will continue to make Lease payments to borrower as required under the Lease.

During 1991, FDC became delinquent on its loan payments to Midland. This delinquency resulted from the termination of a lease with the shopping center's anchor tenant, a discount department store. Mercy was not aware of this delinquency. In July 1991, Mercy moved its clinic out of the West Roads Shopping Center into a new location in Indianola. Mercy continued to make lease payments to FDC for a period of time. Because Mercy was making lease payments for two different locations, however, it sought to terminate the lease at West Roads.

On May 5, 1992, Mercy and FDC entered into a written lease termination agreement. The agreement provided that Mercy would pay FDC $166,986, representing the present value of all payments owed by Mercy to FDC under the lease (including rent, insurance, taxes and common area maintenance (CAM) charges for the remainder of the term) and finish agreement, with a corresponding reduction for the amounts FDC owed Mercy under the expansion agreement. The terms of the agreement provided that Mercy was to pay $83,493 upon execution of the agreement, make monthly payments of $6,000 from June through October 1992, and render a payment of the remaining balance of $53,493 on November 1, 1992. All payments were made by Mercy as scheduled, beginning with the payment of $83,493 on May 5, 1992. Neither Mercy nor FDC notified Midland of the termination agreement and Midland did not learn of the agreement until March 1993.

Also in May 1992, FDC entered into negotiations with Midland for restructuring of its loan because of delinquent payments and related problems which had arisen in 1991. The parties signed a modification agreement which provided for a lump sum payment of $75,644 by FDC to Midland and execution of a new promissory note to cover interest that had accrued due to the delinquency. On May 6, 1992, FDC made a payment of $82,673. This amount included the lump sum payment specified in the modification agreement. The check was not deposited by Midland until May 27, 1992.

From May 1992 until July 1993, FDC made payments due Midland under the modification agreement. However, the August payment was not made until late October and no further payments were made. In August, Midland declared FDC to be in default. On August 25, 1993, Midland exercised its rights under the assignment clause and notified the remaining West Roads Shopping Center tenants that future payments should be made to Midland. Mercy did not receive this notification as it was no longer a tenant at that time. Midland ultimately commenced a foreclosure action against FDC and obtained a judgment and decree of foreclosure on March 21, 1994. Midland purchased the property at the sheriff's sale for a loan loss of approximately $900,000.

Midland sued Mercy claiming it breached the estoppel certificate by paying rent in advance and modifying the lease agreement without Midland's consent. The district court granted partial summary judgment to Midland on the issue of liability, finding as a matter of law that Mercy had breached the estoppel certificate. A jury trial was held to determine the amount of damages Midland suffered as a result of the breach. At trial, the parties stipulated that the maximum amount of damages incurred as a result of Mercy's breach was $154,150.71. The jury returned a verdict of $100,000. Mercy moved for entry of judgment notwithstanding the verdict, which the district court denied. Mercy appealed and the case was transferred to the court of appeals.

In its appeal, Mercy argued the district court erred as follows: (1) in denying Mercy's motion for judgment notwithstanding the verdict, which alleged the jury's verdict was excessive and not supported by substantial evidence; (2) in failing to instruct the jury about the rights between assignees and obligors (this alleged error was based on Mercy's claim that it was entitled to a credit for the amount of the payments FDC owed Mercy under the expansion agreement); (3) in refusing to allow Mercy to enter into evidence alleged admissions by Midland and contents of an affidavit; and (4) in failing to grant its motion for a new trial.

The court of appeals affirmed in part, reversed in part and remanded for entry of judgment for Midland in the amount of $71,477.71. It found that Mercy was entitled to a credit of $82,673, the amount of the lump sum payment made in May 1992 from FDC to Midland under the restructured loan. The court based its decision on the concept that in the event of a breach, the nonbreaching party is entitled to be placed in the position it would have occupied had no breach occurred. It concluded that mandating payment of the entire amount of the remaining lease payments from May 1992 until the end of the lease would place Midland in a better position than if no breach had occurred; in essence it would receive double payment because of the lump sum payment in May 1992. The court of appeals affirmed, without discussion, several other alleged errors regarding the jury's calculation of damages. The court of appeals also affirmed on Mercy's other claims of error. Both parties sought further review from the decision of the court of appeals.

In its application for further review, Mercy raises only the...