Rocky Mountain Hospitality, LLC v. Mountain Classic Real Estate, Inc.

• Citation: 523 P.3d 187
• Decision Date: 22 December 2022
• Docket Number: 20210798
• Parties: ROCKY MOUNTAIN HOSPITALITY, LLC, Appellant, v. MOUNTAIN CLASSIC REAL ESTATE, INC., Appellee.
• Court: Supreme Court of Utah

523 P.3d 187

ROCKY MOUNTAIN HOSPITALITY, LLC, Appellant,

v.MOUNTAIN CLASSIC REAL ESTATE, INC., Appellee.

No. 20210798

Supreme Court of Utah.

Heard September 12, 2022

Filed December 22, 2022

Rod N. Andreason, Zachary C. Lindley, Lehi, for appellant

Jeremy M. Hoffman, Scott L. Sackett II, Salt Lake City, for appellee

Chief Justice Durrant authored the opinion of the Court, in which Associate Chief Justice Pearce, Justice Petersen, Justice Hagen, and Justice Pohlman joined.

Chief Justice Durrant, opinion of the Court:

Introduction

¶1 Mountain Classic Real Estate, Inc. (Buyer) entered into a contract with Rocky Mountain Hospitality, LLC (Seller) to purchase a Super 8 motel for $3.4 million. The purchase price included a $30,000 earnest money deposit, which Buyer deposited with a title company to be held in escrow. The contract contains a default provision stating that if Buyer failed to complete the purchase, Seller could choose to retain the deposit as liquidated damages or "return it and sue" Buyer for other remedies.

¶2 Buyer failed to purchase the motel, and Seller eventually sold it to another buyer for significantly less money. Seller then filed this lawsuit seeking damages exceeding $780,000, but Seller failed to release its interest in the earnest money deposit before filing the complaint. Buyer moved to dismiss, arguing that under the contract's default provision, Seller had elected to retain the deposit as liquidated damages by failing to return the deposit before filing suit. In making its argument, Buyer relied on the court of appeals’ decision in McKeon v. Crump ,¹ which interpreted an identical default provision to require dismissal if a seller retained an earnest money deposit at the time it filed a complaint.² Shortly after receiving the motion to dismiss, Seller instructed the title company to release the deposit back to Buyer, but Buyer refused to accept the funds.

¶3 The district court agreed with Buyer and dismissed the complaint. Seller now appeals, arguing the default clause's language stating Seller can elect to "return [the deposit] and sue" does not require that the deposit be returned before the filing of a complaint, only that both happen within a reasonable time. It also claims that McKeon ’s language stating otherwise is either dicta or out-of-line with caselaw from this court interpreting similar default provisions. And Seller argues that even if we agree with the McKeon rule, under the equitable doctrines of substantial compliance, form over substance, and lack of prejudice, Seller's complaint should not be dismissed.

¶4 We reject Seller's arguments and affirm. Our caselaw establishes that the default clause obligates a seller to release its interest in an earnest money deposit before filing a complaint if the seller wishes to pursue a remedy other than liquidated damages. Because Seller failed to release its interest in the deposit before filing its complaint, it is barred from pursuing other remedies. And Seller has not convinced us that any of the equitable doctrines it cites apply to this case.

Background

¶5 Seller owned a sixty-five-room Super 8 motel located in Midvale, Utah.³ Buyer expressed interest in buying the motel, and the parties eventually executed a contract for Buyer to purchase the motel for $3.4 million. As part of the purchase price, Buyer paid a $30,000 earnest money deposit, which a title company held in escrow. The contract contains a default clause stating that "[i]f Buyer defaults, Seller may elect either to retain the Earnest Money Deposit as liquidated damages, or to return it and sue Buyer to specifically enforce this Contract or pursue other remedies available at law."

¶6 Buyer struggled to close the purchase on time. And even though Seller extended the closing date twice, Buyer ultimately failed to purchase the property. Seller eventually sold the motel to another buyer for $2.75 million—$650,000 less than what Buyer had agreed to pay.

¶7 Seller then sued Buyer, bringing claims for breach of contract and breach of the implied covenant of good faith and fair dealing, seeking damages of just over $780,000. When Seller filed the complaint, it had not returned the earnest money deposit to Buyer or instructed the title company to do so.

¶8 Buyer moved to dismiss, arguing that because Seller had not released its interest in the deposit before filing the complaint, it had elected under the default clause to keep the deposit as liquidated damages and could not pursue other remedies. In support of its argument, Buyer cited McKeon v. Crump , in which the court of appeals held that an identical default clause required a seller to release an earnest money deposit before the seller could pursue a claim for damages.⁴ To prove that Seller had not attempted to return the deposit before filing suit, Buyer submitted a declaration from one of the title company's employees.

¶9 Eleven days after receiving Buyer's motion to dismiss, Seller informed the title company that it was releasing its interest in the deposit and instructed the company to return the funds to Buyer. The title company attempted to release the funds, but Buyer refused to accept them.

¶10 After attempting to release the deposit to Buyer, Seller filed an opposition to the motion to dismiss and conceded that it did not return the deposit before filing suit. But Seller attempted to distinguish its situation from McKeon and relied on the fact that it had tried to return the deposit shortly after filing. Seller also argued, in the alternative, that if McKeon applied, its complaint should not be dismissed because (1) it substantially complied with its obligations under the default clause, (2) dismissal of the complaint would improperly elevate form over substance, and (3) Buyer was not prejudiced by its failure to return the deposit before filing suit. To support its assertion that it had attempted to release the funds to Buyer, Seller attached a declaration from one of its managing members to its opposition.

¶11 The district court granted Buyer's motion to dismiss, stating that Seller had failed to return the deposit before filing the lawsuit and had attempted to return the deposit only after filing. It then rejected Seller's equitable arguments and held that, under McKeon , Seller had elected to retain the deposit as liquidated damages and could not pursue other remedies. It accordingly dismissed Seller's complaint with prejudice.

¶12 Seller appeals. We have jurisdiction under Utah Code section 78A-3-102(3)(j).

Standard of Review

¶13 In dismissing Seller's complaint, the district court purported to grant a motion to dismiss under rule 12(b)(6) of the Utah Rule of Civil Procedure. When reviewing a motion to dismiss, a court must "accept the factual allegations in the complaint as true and interpret those facts and all reasonable inferences drawn therefrom in a light most favorable to the plaintiff as the nonmoving party."⁵ But the court relied on facts outside the complaint in its ruling—specifically, that Seller failed to release its interest in the deposit before filing its complaint and that it attempted to return the deposit shortly afterward. If, when considering a motion to dismiss under rule 12(b)(6), "matters outside the pleading are presented to and not excluded by the court, the motion must be treated as one for summary judgment and disposed of as provided in Rule 56, and all parties must be given reasonable opportunity to present all material made pertinent to such a motion."⁶ Both Seller and Buyer attached declarations to their filings to establish the facts surrounding Seller's handling of the deposit, and the district court relied on these facts in its ruling. Because the district court relied on facts outside the complaint, it should have converted the motion to dismiss into a motion for summary judgment.

¶14 It is typically "reversible error" for a district court to consider facts outside the complaint without giving all parties a reasonable opportunity to present all pertinent material, and we will generally not affirm "unless the dismissal can be justified without considering the outside documents."⁷ But we have made an exception when both parties submit evidence with their filings because, in that case, neither party is prejudiced by the district court's implicit conversion of the motion to dismiss into a motion for summary judgment.⁸ "Because from the outset the parties have submitted extraneous materials and treated the motion to dismiss as a motion for summary judgment, neither party was prejudiced or unfairly surprised by the trial court's implicit conversion of [Buyer's] 12(b)(6) motion into a motion for summary judgment."⁹ We will accordingly review the district court's ruling under the summary judgment standard.

¶15 "We review a district court's grant of summary judgment for correctness. We affirm a grant of summary judgment when the record shows there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law."¹⁰

Analysis

¶16 Seller makes two general arguments on appeal. First, it challenges the court of appeals’ caselaw the district court relied on in dismissing the complaint—caselaw that obligated Seller to release its interest in the deposit before filing suit. And second, Seller argues that even if it was obligated to release its interest in the deposit before filing suit, several equitable doctrines excuse its failure to strictly comply with its contractual obligations.

¶17 We reject Seller's arguments and affirm. Under both a plain language approach to interpreting the contract and Utah caselaw, the default clause obligated Seller to release its interest in the deposit before it could file its complaint seeking general damages. Because Seller retained its interest in the deposit when it filed suit, it is deemed to have elected to retain the deposit as liquidated damages. Its claims for general damages are accordingly barred, and the district...