R & F Financial Services v. North American Building Solutions , 2021 ND 12 ( 2021 )

FILED
IN THE OFFICE OF THE
CLERK OF SUPREME COURT
JANUARY 12, 2021
STATE OF NORTH DAKOTA
IN THE SUPREME COURT
STATE OF NORTH DAKOTA
2021 ND 12R & F Financial Services, LLC, Plaintiff and Appellant
v.
Cudd Pressure Control, Inc., and RPC, Inc., Defendants and Appellees
and
North American Building Solutions, LLC, Defendant
No. 20190287
Appeal from the District Court of Williams County, Northwest Judicial
District, the Honorable Benjamen J. Johnson, Judge.
AFFIRMED.
Opinion of the Court by Tufte, Justice.
Joseph A. Turman (argued) and Katrina A. Turman Lang (argued), Fargo,
N.D., for plaintiff and appellant.
Trevor A. Hunter (argued) and Kent A. Reierson (on brief), Williston, N.D., for
defendants and appellees.
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R & F Financial Services v. North American Building Solutions
No. 20190287
Tufte, Justice.
[¶1] R & F Financial Services, LLC, appeals from a district court order
dismissing its claims against Cudd Pressure Control, Inc., and RPC, Inc., and
granting Cudd’s and RPC’s counterclaims and cross claims. On appeal, R & F
argues that the court erred in finding the Lease was not a finance lease and,
in the alternative, that the court erred in finding the doctrines of impossibility
of performance and frustration of purpose to be inapplicable. We affirm.
I
[¶2] North American Building Solutions, LLC (“NABS”) and Cudd Pressure
Control, Inc. (“Cudd”) became associated with each other when NABS
managing member James Morken “stopped in at Cudd[’s]” business location.
On August, 30, 2011, Cudd and NABS entered into a lease agreement (the
“Lease”) whereby Cudd agreed to lease from NABS 60 temporary housing
modules. Pursuant to the agreement, NABS agreed to deliver and construct
the modules on certain real property located in Williams County. The terms of
the Lease required Cudd, at its sole expense, to obtain any conditional use
permits, variances or zoning approvals “required by any local, city, township,
county or state authorities, which are necessary for the installation and
construction of the modules upon the Real Property.” The Lease was set to
commence following substantial completion of the installation of all the
modules and was to expire 60 months following the commencement date.
Originally, NABS wanted to sell the modules to Cudd, but Cudd did not want
to fund the project and wanted to lease the modules.
[¶3] On April 18, 2012, Cudd accepted 28 modules from NABS pursuant to
the Acceptance and Lease Schedule #1 (“Schedule #1”); NABS assigned its
interest in the Lease to R & F; and NABS sold the modules to R & F by a bill
of sale. Cudd was not a party to the assignment or bill of sale, and Schedule #1
did not mention either document. R & F had purchased NABS’s interest in the
Lease to provide funding so that NABS would have the capital to complete the
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project. On June 28, 2012, Cudd accepted the final 32 modules from NABS
pursuant to the Acceptance and Lease Schedule #2 (“Schedule #2”), to which
R & F was not a party. NABS and Cudd agreed that the new commencement
date under the Lease was June 23, 2012.
[¶4] RPC, as the parent company of Cudd, guaranteed Cudd’s performance of
payment obligations to R & F under section 4 of the Lease. NABS was not a
party to the guaranty. There is nothing in the record showing that Cudd or
RPC consented to NABS’s assignment of its interest in the Lease and sale of
the modules to R & F. The Lease was for a set term and did not contain an
option for Cudd to purchase the modules at the expiration of that set term.
Paragraph 23 of the Lease provides that “in connection with such
interpretation and enforcement, this Lease shall be deemed to be a commercial
lease.”
[¶5] At the time R & F purchased NABS’s interest in the Lease, it understood
the purpose of the Lease was to fulfill Cudd’s need for employee housing. Given
the layout of the modules, they were designed for and had limited uses other
than housing. Cudd used the modules strictly for housing as required by the
Lease. The County required a conditional use permit for workforce housing,
and Cudd had been issued a permit allowing for the use of the modules as
workforce housing. On May 24, 2012, the City of Williston annexed, among
other properties, the Property into the City’s corporate limits.
[¶6] In September of 2013, the City adopted Resolution 13-127, which applied
to all workforce housing facilities subject to the City’s jurisdiction, and declared
that all workforce housing was temporary and extension of permits was subject
to review and requirements. Therefore, a workforce housing facility could
legally operate in the City post-annexation until its County-issued permit
expired. Permits could be extended for a period of 24 months, assuming certain
requirements were met. In December of 2013, the City modified the expiration
date policy and extended all approvals for workforce housing facilities to
December 31, 2015, such that all permits would expire the same day.
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[¶7] In September of 2015, the termination date for all workforce housing
facility permits was again extended to July 1, 2016, by motion. Ordinance No.
1026 codified the September motion, and under it, an existing workforce
housing facility had to have been in full compliance with the City in order to
be eligible for the extension. In December of 2015, Cudd complied with these
requirements, and the City extended Cudd’s permit for the maximum time
permitted to July 1, 2016. Cudd sent a letter to NABS stating that it viewed
the Lease as being terminated by operation of law as of July 1, 2016.
II
[¶8] Whether the transaction was a commercial lease or a finance lease is a
question of law. This Court has stated the standard of review in interpreting
contracts as follows:
The parties’ intent is ascertained from the writing alone if possible.
The language of a contract is to govern its interpretation if the
language is clear and explicit and does not involve an absurdity.
When the parties’ intent can be determined from the contract
language alone, interpretation of a contract presents a question of
law. When an agreement has been memorialized in a clear and
unambiguous writing, extrinsic evidence should not be considered
to ascertain intent. When a contract’s language is plain and
unambiguous and the parties’ intentions can be ascertained from
the writing alone, extrinsic evidence is not admissible to alter,
vary, explain, or change the contract. If a contract is ambiguous,
extrinsic evidence may be considered to determine the parties’
intent, and the contract terms and parties’ intent become
questions of fact.
Big Pines, LLC v. Baker, 2020 ND 64, ¶ 7, 940 N.W.2d 616. At oral argument,
the parties agreed that the Lease is unambiguous.
III
[¶9] “Finance lease” is defined by statute as a lease in which:
(1) The lessor does not select, manufacture, or supply the goods;
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(2) The lessor acquires the goods or the right to possession and
use of the goods in connection with the lease; and
(3) (a) The lessee receives a copy of the contract by which the
lessor acquired the goods or the right to possession and use of
the goods before signing the lease contract;
(b) The lessee’s approval of the contract by which the lessor
acquired the goods or the right to possession and use of the
goods is a condition to effectiveness of the lease contract;
(c) The lessee, before signing the lease contract, receives an
accurate and complete statement designating the promises
and warranties, and any disclaimers of warranties,
limitations, or modifications of remedies, or liquidated
damages, including those of any third party such as the
manufacturer of the goods, provided to the lessor by the
person supplying the goods in connection with or as part of the
contract by which the lessor acquired the goods or the right to
possession and use of the goods; or . . . .
N.D.C.C. § 41-02.1-03(1)(g). R & F argues it is the lessor of a finance lease to
which Cudd is the lessee. R & F argues “that the transaction between NABS
and Cudd, both at the outset and following the injection of funding by R & F,
constituted a finance lease.” The first element of a finance lease as defined by
statute is that the “lessor does not select, manufacture, or supply the goods.”
N.D.C.C. § 41-02.1-03(1)(g)(1). Here, NABS both manufactured and supplied
the goods. Additionally, the official comment to subsection (g) states, “A finance
lease is the product of a three party transaction.” N.D.C.C. § 41-02.1-03(1)(g)
cmt. At the outset of the transaction, the only parties to the Lease were Cudd
and NABS. Therefore, the transaction, at the outset, was not a finance lease.
[¶10] After R & F funded the transaction, it still did not qualify as a finance
lease. R & F met the first requirement under the statute because it did not
select, manufacture, or supply the modules. R & F, however, acquired the
modules through the bill of sale not involving Cudd months after the Lease had
been signed. The example contained in official comment (g) finds that a lessor
acquires the goods in connection with the lease when the lessor purchases the
goods simultaneously with leasing them back to the seller. NABS had already
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built and delivered to Cudd 28 modules prior to receiving any funds from R & F
under the assignment. The managing partner of NABS testified that it needed
the financing in order to honor its commitment to Cudd and that a failure to
acquire funding could have resulted in a breach of the Lease. On this record,
we conclude, R & F did not acquire the modules in connection with the Lease.
[¶11] In defense of its argument that R & F’s funding transformed the
transaction into a finance lease, R & F points to the extensive experience of its
principals with finance leasing. Official comment (g) states: “Unless the lessor
is comfortable that the transaction will qualify as a finance lease, the lease
agreement should include provisions giving the lessor the benefits created by
the subset of rules applicable to the transaction that qualifies as a finance lease
under this Article.” N.D.C.C. § 41-02.1-03(1)(g) cmt. R & F argues that it would
have included such a statement if it had not been comfortable that the
transaction would qualify as a finance lease. The Lease stated that “in
connection with such interpretation and enforcement, this Lease shall be
deemed to be a commercial lease.” The official comment counsels that neither
R & F nor its principals should have been comfortable that an agreement
which stated it “shall be deemed to be a commercial lease” would qualify as a
finance lease.
[¶12] R & F argues that the schedules, assignment, and guarantee transform
the Lease into a finance lease. As part of a single transaction, all contracts
entered into by NABS and Cudd must be construed together, and only the
provisions in the latter contracts which are inconsistent with the prior
contracts will supersede. N.D.C.C. § 9-07-07; Metcalf v. Security Int’l Ins. Co.,
261 N.W.2d 795, 800 (N.D. 1977) (citations omitted). Those provisions in all
the contracts which are not inconsistent remain effective and must be
construed together. Id.[¶13] Here, Schedule #1 entered into by NABS and Cudd acknowledged Cudd’s
acceptance of the first 28 modules and established that prorated rent would be
due “per unit until the Commencement Date of the Lease.” This is consistent
with the terms of the Lease which state, “Lessor shall notify Lessee as each
individual module is completed and ready for occupancy, at which time Lessee
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shall be entitled to take possession of such completed module. Upon taking
possession of each individual module, Lessee shall begin paying Lessor pro rata
rent as set forth in paragraph 4(a) of this Lease.” Schedule #1 acknowledged
that prorated rent for the 28 completed modules commenced on April 16, 2012.
This schedule further provides that it “forms a part of a Lease between NABS
and Cudd dated: August 30th, 2011.” While Schedule #1 states that the
prorated rent payments are to be made to R & F, it was not a party to the
schedule. This schedule updated the lease to reflect a new timeline, stating
that “the Modules will be constructed and installed in a continuous
construction phase of approximately three (3) months . . . .” Schedule #1 is
inconsistent with and supersedes the Lease only to the extent that it
acknowledged the delay in installation and construction of the modules and
provided that all rent payments due under Schedule #1 and the Lease were to
be paid to R & F instead of NABS.
[¶14] Schedule #2 is an acceptance of the final 32 modules and specifies a
commencement date of June 23, 2012. This schedule states, “Prorated rent on
the modules is due and owing from the date of occupancy of the individual
modules by Cudd,” which is consistent with the Lease. Cudd again
acknowledges that all rent payments shall be paid to R & F. Schedule #2 is not
inconsistent with the Lease or Schedule #1. Further, neither schedule
overrides the provision in the Lease that states it is to be construed as a
commercial lease.
[¶15] R & F also argues the Lease must be interpreted together with the
guaranty. The guaranty states that “the undersigned RPC, Inc., (the
‘Guarantor’) hereby guaranties to R & F the performance of Cudd’s payment
obligations to R & F under Section 4 of the above-referenced Lease
Agreement.” NABS is not a party to the guaranty, and therefore the Lease
cannot be construed together with the guaranty. N.D.C.C. § 9-07-07. Similarly,
Cudd was not a party to the assignment or the bill of sale and did not approve
either of them. Therefore, the assignment and bill of sale are not contracts
between these parties and the Lease cannot be construed together with those
documents.
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[¶16] R & F argues that, at the very least, the Lease should be deemed
severable or divisible and a finance lease was created as to the 32 modules
accepted under Schedule #2. This argument was not raised to the district court,
was not expressly considered by the court, and we do not address it here.
[¶17] R & F argues that if the transaction is not a finance lease, the court erred
in finding that the doctrines of impossibility of performance and frustration of
purpose were applicable. The district court’s order applied the same findings
of fact and conclusions of law to support its decision that both were applicable:
that the annexation of the property by the City and the use of the modules for
housing becoming illegal was unforeseeable, and it was a basic assumption of
the parties that these events would not occur.
[¶18] “This Court has recognized the doctrine of frustration of purpose may be
used to avoid all or part of a contractual claim.” City of Harwood v. City of
Reiles Acres, 2015 ND 33, ¶ 18, 859 N.W.2d 13 (citing Silbernagel v.
Silbernagel, 2011 ND 140, ¶ 13, 800 N.W.2d 320; WFND, LLC v. Fargo Marc,
LLC, 2007 ND 67, ¶ 18, 730 N.W.2d 841). The doctrine of frustration of purpose
is applicable when “after a contract is made, a party’s principal purpose is
substantially frustrated without his fault by the occurrence of an event the
non-occurrence of which was a basic assumption on which the contract was
made.” WFND, LLC, 2007 ND 67, ¶ 18 (quoting Tallackson Potato Co., Inc. v.
MTK Potato Co., 278 N.W.2d 417, 424 n.6 (N.D. 1979)); see also Restatement
(Second) of Contracts § 265 (1981) (adopted version).
[¶19] Our cases cite favorably to the three requirements for frustration of
purpose described in the Restatement. City of Harwood, 2015 ND 33, ¶ 18
(citing Restatement (Second) of Contracts § 265 comment (a) (1981)). First, the
purpose that is frustrated must have been “a party’s principal purpose” in
making the contract. Id. Here, the terms of the Lease limited Cudd, without
prior written consent of NABS, to using the modules for employee housing.
Further, Morken testified that the modules were designed with laundry
facilities, living spaces, kitchens, bedrooms, and bathrooms. Cudd intended to
and did use the modules for employee housing. Therefore, the principal
purpose of the Lease was to provide housing for Cudd’s employees. Second, the
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purpose must be “substantially frustrated.” Id. The Lease terms provided that
Cudd could not move the modules from the Property. The City’s regulations
prevented Cudd from applying for the necessary permit and terminated all
workforce housing inside the City’s jurisdiction, substantially frustrating
Cudd’s use of the modules as workforce housing.
[¶20] Third, the non-occurrence of the frustrating event must have been “a
basic assumption on which the contract was made.” Id.; Tallackson, 278
N.W.2d at 424 n.6 (citing Restatement of Contracts 2d § 285, at 77 (Tent. Draft
No. 9, 1974)). R & F argues that it was foreseeable at the time of contracting
that the County may terminate workforce housing. “The foreseeability of the
event is . . . a factor in that determination, but the mere fact that the event
was foreseeable does not compel the conclusion that its non-occurrence was not
such a basic assumption.” Restatement (Second) of Contracts § 265 comment
(a) (1981). Here, it was the combination of the City annexing the Property and
enacting its resolutions and ordinances which substantially frustrated Cudd’s
purpose in entering into the Lease. Morken testified that the parties did not
discuss a potential annexation of the Property by the City or that Cudd would
not be able to apply for a conditional use permit. The Lease put the burden on
Cudd to acquire a permit, which required that Cudd be able to apply for a
permit. Further, the Lease forbade Cudd from using the modules for anything
other than employee housing without written consent, the modules were
designed to be used for housing, and the Lease forbade Cudd from moving the
modules off the Property. While the City’s actions may have been foreseeable,
the district court findings that it was a basic assumption of the parties that
such actions would not occur was not clearly erroneous. Lastly, the frustrated
party must not be at fault. WFND, LLC, 2007 ND 67, ¶ 18 (citing Restatement
(Second) of Contracts § 265 (1981)). Here, Cudd did not petition the City to
annex the Property and cease granting permits for workforce housing.
Therefore, Cudd was not at fault. The court did not err in concluding the
doctrine of frustration applied. We need not reach the district court’s
alternative rationale relying on the doctrine of impossibility.
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IV
[¶21] We affirm.
[¶22] Jon J. Jensen, C.J.
Gerald W. VandeWalle
Daniel J. Crothers
Lisa Fair McEvers
Jerod E. Tufte
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