Eric Kafton and Amanda Kafton v. Robert Merchant Jr., D/B/A R.A.M. Construction

IN THE COURT OF APPEALS OF IOWA
No. 3-1182 / 13-1000
Filed March 26, 2014
ERIC KAFTON and
AMANDA KAFTON,
Plaintiffs-Appellants,
vs.
ROBERT MERCHANT JR., d/b/a
R.A.M. CONSTRUCTION,
Defendant-Appellee.
________________________________________________________________
Appeal from the Iowa District Court for Monona County, John D.
Ackerman, Judge.
Homeowners appeal the district court’s ruling on cross motions for
summary judgment. AFFIRMED IN PART, REVERSED IN PART, AND
REMANDED FOR DISMISSAL.
Michael P. Jacobs of Rawlings, Ellwanger, Jacobs, Mohrhauser & Nelson,
L.L.P., Sioux City, for appellants.
Thomas J. Culhane of Erickson & Sederstrom, P.C., Omaha, Nebraska,
for appellee.
Heard by Vogel, P.J., and Tabor and McDonald, JJ.
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TABOR, J.
We are asked to decide if homeowners Eric and Amanda Kafton may
bring a negligence suit against the contractor they hired to dig their basement
after they paid him “settlement funds” to lift a mechanic’s lien against their
property. After receiving a letter from the Kaftons listing complaints about his
work on their home, Robert Merchant (doing business as R.A.M. Construction)
filed a mechanic’s lien of $25,933 on their property for the remaining amount due
under the contract. After back-and-forth negotiations, Merchant released the lien
as the Kaftons delivered him a check for $20,000.
Eight months later, the Kaftons sued Merchant, alleging he negligently
damaged their property during the construction. Merchant answered and filed a
counterclaim, alleging the Kaftons breached the contract and still owed him
$4,029.95. Both parties filed motions for summary judgment. The district court
granted Merchant’s motion for summary judgment, holding “as a matter of law
the Kaftons’ intent was to enter a global settlement” of all claims arising from the
excavation work. The district court overruled the Kaftons’ motion for summary
judgment on Merchant’s counterclaim. On appeal, the Kaftons ask for their
negligence claims to be reinstated and for Merchant’s counterclaim to be
dismissed.
Like the district court, we find ourselves bound by the reasoning in
Mensing v. Sturgeon, 97 N.W.2d 145, 151 (1959), where the court held a
settlement without any express reservation of rights by the settlor constitutes a
complete accord and satisfaction of all claims arising from the same set of facts.
Accordingly, we affirm the grant of Merchant’s motion for summary judgment on
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the Kaftons’ negligence claims, reverse the denial of the Kaftons’ motion for
summary judgment on Merchant’s breach-of-contract counterclaim, and remand
for dismissal of the counterclaim.
I. Background Facts and Proceedings
In July 2011, the Kaftons entered a contract with Merchant to dig out the
basement beneath their home, which was originally built in 1884. The process
included jacking up the house, excavating the earth below, pouring new concrete
footings, and building new basement walls. Merchant completed the project in
October 2011, and submitted a final invoice dated November 2, 2011, for
$27,088.
On November 22, 2011, the Kaftons sent an email to Merchant
communicating their displeasure with the work done and disputing the amounts
owed on the invoice. Their complaints included a longer-than projected
completion time, daily mess and safety issues, backfill of only three-quarters of
the house, uneven wall and floor heights, and damage to an industrial fan lent to
Merchant, furnace wire, and their septic system.
On December 2, 2011, Merchant filed a mechanic’s lien in the amount of
$25,933, which he alleged represented the amount remaining unpaid on the
Kaftons’ account.
Through counsel, the Kraftons responded in a letter dated December 19,
2011, stating:
I represent Eric and Amanda Kafton. I have reviewed the
Mechanic’s Lien and your letter of December 12, 2011. I have also
reviewed the Kaftons’ line item by line item dispute regarding the
invoice plus their itemization of issues and damages and expenses
they suffered as a result of the work of RAM Construction. Clearly,
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some or all of these issues will result in an offset of the amount [you
claim] in favor of the Kaftons. In the interest of compromise and
settlement, they are willing to pay $17,873.10 in exchange for a full
and final release, including, obviously, a release of the Mechanic’s
Lien.
In a January 4, 2012 letter, Merchant’s attorney countered:
Be advised, that my client continues to deny a majority of the
issues, damages and expenses claimed by your clients. It is
evident to my client that the Kaftons used his original bid to obtain a
bank loan to pay for the construction cost. During the construction
the Kaftons experienced problems with their septic system, due to
no fault of my client, and required funds to address the septic issue.
Now the Kaftons are attempting to create issues and blame my
client for the septic problem to reduce his bill and pay for the
outstanding construction costs and septic expenses out of the total
amount of loan funds.
Merchant’s attorney continued:
My client is unable and unwilling to accept the settlement amount
stated in your letter as this would require him to take a loss on the
project. However, in the interest of resolving this matter, my client
will split the difference and accept payment in the amount of
$21,903.05 for full satisfaction on account and release the
mechanic’s lien.
On January 6, 2012, Merchant’s attorney sent an email to the Kaftons’
attorney proposing to release the mechanic’s lien upon receipt of $20,000 in
“settlement funds.” In a reply email, the Kaftons’ attorney wrote: “The release is
acceptable.” That email also noted the time the client would drop off the certified
check for $20,000. The mechanic’s lien release stated: “The Claimant, for
valuable consideration, acknowledges full and final satisfaction of the amount
claimed in the Mechanic’s Lien and releases and discharges such lien against
the above-referenced property.”
On September 10, 2012, the Kaftons filed a petition alleging Merchant was
negligent in his work, and his negligence caused damage to their property,
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including the septic tank, an industrial fan, furnace wire, and other personal
property. The petition also alleged: “Defendant’s negligence resulted in a
foundation that is uneven and unstable which is resulting in water intrusion and
damage to the upper floors of the residence.”
On September 28, 2012, Merchant filed an answer and counterclaim. As
affirmative defenses, Merchant asserted the Kaftons’ cause of action was barred
due to accord and satisfaction, release, discharge, and estoppel. Merchant also
filed a counterclaim, alleging the Kaftons failed to pay the amount agreed to in
the contract and owed him a balance of $4,029.95.
Both parties filed motions for summary judgment. In support of his motion,
Merchant presented an affidavit swearing he authorized release of the
mechanic’s lien because “he was under the impression that all present and future
disputes between the parties relating to [his] work on Plaintiffs’ home were
forever compromised and settled.” In resistance to Merchant’s motion for
summary judgment, Amy Kafton presented an affidavit avowing she and her
husband found the January 6, 2012, release of the mechanics lien “to be
acceptable in part, because it did not require us to release or waive any of our
claims for past or future damages. . . . Defendant never asked for nor did we ever
sign anything releasing any of our claims against Defendant.”
On May 24, 2013, the district court granted Merchant’s motion for
summary judgment on the Kaftons’ negligence claims, and overruled the Kaftons’
summary judgment motion on Merchant’s counterclaim. The Kaftons now
appeal.
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II. Standard of Review
We review the district court's ruling on motions for summary judgment for
correction of errors at law. Boelman v. Grinnell Mut. Reins. Co., 826 N.W.2d
494, 500–01 (Iowa 2014). Summary judgment is proper when there are no
genuine issues of material fact and the moving party is entitled to judgment as a
matter of law. Id. In ruling on a summary judgment motion, the court must look
at the facts in a light most favorable to the party resisting the motion. Peak v.
Adams, 799 N.W.2d 535, 542–43 (Iowa 2011) (internal citations omitted). The
court must also consider, on behalf of the nonmoving party, every legitimate
inference that can be reasonably deduced from the record. Id. An inference is
legitimate if it is “rational, reasonable, and otherwise permissible under the
governing substantive law.” Butler v. Hoover Nature Trail, Inc., 530 N.W.2d 85,
88 (Iowa Ct. App. 1994). On the other hand, an inference is not legitimate if it is
“based upon speculation or conjecture.” Peak, 799 N.W.2d at 543. If reasonable
minds can reach different resolutions, a fact question exists. See Estate of
Anderson ex rel. Herren v. Iowa Dermatology Clinic, PLC, 819 N.W.2d 408, 414
(Iowa 2012).
III. Analysis
The Kaftons challenge the district court’s grant of summary judgment to
Merchant on their negligence claims and the denial of their motion for summary
judgment on his breach-of-contract counterclaim. They argue no factual issue
exists regarding Merchant’s intent to release his mechanic’s lien against their
property, but a factual question does exist as to whether they intended to release
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their negligence claims against Merchant. They insist the issue of their intent
should be decided by a jury.
Merchant defends the grant of his motion for summary judgment,
contending the district court properly interpreted Mensing, 97 N.W.2d at 151–52,
as barring the Kaftons’ negligence claims under the doctrine of accord and
satisfaction.1 Merchant maintains when the Kaftons paid him $20,000 in return
for his release of the mechanic’s lien he was entitled to believe all the claims they
had negotiated were settled, absent any express reservation of the negligence
claims by the Kaftons. See Mensing, 97 N.W.2d at 151 (“The ordinary
reasonable and reasoning man occupying the position of the Sturgeons at the
time they accepted a settlement of their claim and executed the release and
dismissal of their suit would think the entire matter was settled.”).
Because the district court found Mensing dispositive of the issue before it,
we turn first to that case. Mensing involved a car accident where both parties
suffered injuries. The Sturgeons sued Mensing and later filed a written “Release
of All Claims” in return for receipt of $1000 from Mensing; the Sturgeons then
dismissed their suit with prejudice. Mensing, 97 N.W.2d at 920–21. A
considerable time after he paid the Sturgeons in settlement of their claims
against him, Mensing filed his own suit against the Sturgeons. The supreme
court decided Mensing did not reserve the right to bring suit for damages
sustained in the same collision. Id. at 147. The court decided the entry of a
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An “accord and satisfaction” is a method for parties to discharge a claim: the “accord” is
their agreement to exchange something of value to settle the claim and the “satisfaction”
is the execution of that agreement. Holm v. Hansen, 248 N.W.2d 503, 506 (Iowa 1976).
Essentially, the parties substitute a new contract for the old contract. Id.8
comprehensive settlement without any express reservation of rights by Mensing
constituted a complete accord and satisfaction of all claims of the parties arising
from the same accident. Id. at 150.
The district court found the instant facts controlled by Mensing.
In Mensing there were two parties disputing damages, the
defendants [Sturgeons] filed suit, executed a release that the
plaintiff [Mensing] did not sign, and the plaintiff [Mensing] paid
money for the defendants [Sturgeons] to release the claims they
had against the plaintiff [Mensing]. The plaintiff [Mensing] sought
additional damages in court that the accord and satisfaction barred.
All of these facts are present in the case at bar and there is no way
to distinguish this case from Mensing.
Both in the district court and on appeal, the Kaftons attack the reasoning in
Mensing and contend subsequent cases have diminished its potency. Notably,
in their appellate routing statement, the Kaftons asked the supreme court to
retain their case because proper resolution would require the court to
“distinguish, severely limit, or overrule” Mensing. Because the supreme court
transferred the case to our court, the Kaftons’ only remaining strategy is to
distinguish Mensing. See State v. Hastings, 466 N.W.2d 697, 700 (Iowa Ct. App.
1990) (noting court of appeals is not at liberty to overrule supreme court
precedent).
To distance their situation from Mensing, the Kaftons rely primarily on
Robinson v. Norwest Bank, 434 N.W.2d 128, 130 (Iowa Ct. App. 1988), where
our court found the parties’ intent to enter an accord and satisfaction was a jury
question. In that case, bank customers personally guaranteed loans to the
businesses they owned. Robinson, 434 N.W.2d at 128. When the liquidated
assets of the business were insufficient to satisfy the debt, the bank entered
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negotiations with the Robinsons. Id. at 129. The resulting written agreement
contained “no language releasing plaintiffs’ claims against the defendant.” Id.The Robinsons sued the bank for breach of a fiduciary relationship and the bank
moved for summary judgment arguing the negotiations and agreements
constituted an accord and satisfaction. Id. We decided:
The bank’s claim for a judgment on the notes can exist at the same
time claims can exist by plaintiffs for the breach of certain duties on
the part of the bank. A judgment against each by the other, the
bank against plaintiffs on the note and the plaintiff against the bank
for breach of fiduciary duty, while operating as a setoff one against
the other, can coexist.
Id. at 130.
Unwilling to apply the Mensing rationale to the plaintiffs’ separate and
unnegotiated claims against the bank, Robinson stated whether an accord and
satisfaction has been reached “ordinarily involves a pure question of intention” to
be resolved by a jury. Id.In this case, the district court rejected the comparison to Robinson. It
decided the matters addressed in the negotiations leading up to the $20,000
settlement and the negligence claims in the Kaftons’ petition originated from the
same set of facts. “Plaintiffs’ claims in the case at bar are not ‘separate and
distinct’ from the settlement. The settlement and the additional claims brought by
the Kaftons deal with the amount owed on the R.A.M. invoice and come from the
same set of facts.” We agree with the district court.
Mensing applies to situations, like the one before us, where a party has
bargained for a general release of claims against it and implicit in the bargain of
accord and satisfaction is a reciprocal release of its own claims. The idea is to
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promote honesty and fair dealing by requiring the party procuring the settlement
to make explicit any wish to preserve offsetting claims before paying for the other
side’s release of its claims. See Mensing, 97 N.W.2d at 150; see also State v.
Driscoll, 839 N.W.2d 188, 191–92 (Iowa 2013) (concluding criminal defendant
was entitled to restitution setoff for payments to victim’s estate as part of civil
release because preclusive effect could be determined from what the parties
intended to be accomplished by settlement); Peak v. Adams, 799 N.W.2d 535,
544 (Iowa 2011) (interpreting settlement agreement as showing parties’ mutual
intent as a matter of law); Brown v. Hughes, 99 N.W.2d 305, 308 (1960) (“The
release from defendant was bargained for, made, and accepted. Its validity is not
questioned. The plaintiff cannot now be heard to say that he had an undisclosed
intention to reserve the right to maintain his own cause of action.”).
By contrast, the record in Robinson did not reveal the Robinsons’ intent to
settle their claims against the bank when negotiating the amount they owed on
the loans. The Robinsons were not required to expressly reserve their tort claims
because those claims were separate and distinct from the settlement. Id. at 130.
Similarly, in Verne R. Houghton Ins. Agency, Inc. v. Orr Drywall Co., 470 N.W.2d
39, 42 (Iowa 1991), the supreme court decided it could not conclude as a matter
of law that a bad faith tort claim arose out of the same facts as the policyholder’s
release when the record was “replete with exchanges, negotiations and actions
by the parties in connection with the settlement which support Orr Drywall’s
contention that the parties intended to settle only the contract claim, not the tort
claim.” Likewise in Holm v. Hansen, 248 N.W.2d 503, 507–09 (Iowa 1976), the
court found a livestock purchaser could not decipher seller’s intent to include the
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possibility of future loss from disease in their agreement when they only
discussed what it would take to settle the matter of two cows infected with
brucellosis.
In this case, the district court was justified in looking to the series of
negotiations between the Kaftons and Merchant to determine whether the
parties’ intent could be determined as a matter of law. Settlement agreements
are essentially contracts and courts may apply legal principles applicable to
contract law when interpreting them. Waechter v. Aluminum Co. v. America, 454
N.W.2d 565, 568 (Iowa 1990). When interpreting contracts, courts may look to
extrinsic evidence, including “preliminary negotiations and statements made
therein.” See Peak, 799 N.W.2d at 544. Evidence of preliminary negotiations
enables the court to understand the subject matter of the agreement as
contemplated by the parties. See 17A C. J. S. Contracts § 424 (2014).
Negotiations started with the Kaftons’ November 22, 2011 email, which
provided a detailed accounting of their disputes about the charges in Merchant’s
final $27,088 invoice. The Kaftons specifically included a list of damages and
expenses they allegedly incurred to their property, including an industrial fan,
furnace wire, and septic system—the same items later listed in their negligence
lawsuit. The Kaftons wrote: “The work performed at our house was less than
satisfactory. . . . We are not paying for mistakes made by you . . . .”
Merchant responded twenty days later by filing a mechanic’s lien for
$25,933. A letter to the Kaftons from Merchant’s attorney said the amount was
“adjusted to reflect any and all disputes between the parties.”
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A week later, the Kaftons’ attorney responded with a letter again
referencing the damages suffered by his clients as a result of the construction
work. The letter predicted “some or all of these issues will result in an offset of
the amount claimed in favor of the Kaftons.” The attorney wrote that in the
interest of “compromise and settlement” the Kaftons offered to pay $17,873.10
“in exchange for a full and final release, including, obviously a release of the
Mechanic’s Lien.”
About two weeks later, Merchant’s attorney responded in a letter
emphasizing his client denied causing the alleged damages, especially those to
the Kaftons’ septic system. The January 4, 2012, letter said Merchant was not
willing to accept the Kaftons’ proposal because he would take a “loss on the
project.” Merchant’s attorney counter offered $21,903.05 for “full satisfaction on
account and release of the mechanic’s lien.”
The record does not reveal the contents of any oral communications the
parties had the following day, but on the morning of January 6, 2012, they
exchanged emails in which Merchant agreed to release the mechanic’s lien in
return for the Kaftons’ delivery of “settlement funds” in the form of a certified
check for $20,000. The Kaftons stated the release was “acceptable.”
Their correspondence shows the parties contemplated the settlement
would embrace the Kaftons’ negligence claims. The Kaftons introduced their
negligence claims in their original communication and proposed offsetting those
damages in their request for Merchant to release the mechanic’s lien. The only
part of the settlement proposal rejected by Merchant was the dollar figure that the
Kaftons were willing to pay. No fact finder could rationally conclude the
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Kaftons—after paying Merchant $20,000 to release the lien “in full and final
satisfaction of the amount claimed”—would reasonably believe Merchant still
owed them money for negligently damaging the property discussed in their
negotiations.
Furthermore, we do not find a fact question was generated by Amy
Kafton’s affidavit expressing her subjective belief that acceptance of the release
of the mechanic’s lien did not require them to release their negligence claims. In
searching for evidence of the parties’ intention, “we look to what the parties did
and said, rather than to some secret, undisclosed intention they may have had in
mind, or which occurred to them later.” See Waechter, 454 N.W.2d at 568–69.
At best, the Kaftons had “an undisclosed unilateral intent to reserve the right to
sue” Merchant. See Peak, 799 N.W.2d at 544.
Under the economic loss doctrine, a recovery in tort law was not available
for the Kaftons’ unfulfilled expectations concerning the quality of Merchant’s
construction work. See Determan v. Johnson, 613 N.W.2d 259, 260–61, 263
(Iowa 2000) (holding plaintiff’s damages in the form of expenses to repair defects
in her home’s construction fell under contract law). The Kaftons’ viable
negligence claims, alleging Merchant damaged their property, could have
coexisted with the separate contract claim, as was the situation in Robinson, if
both types of claims had not been intermingled in the parties’ negotiations.
Given the meshing of the tort and contract claims, it was natural for Merchant to
believe by releasing the mechanic’s lien for an amount less than the contract
price, the parties were settling the entire matter. See Mensing, 97 N.W.2d at
151.
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In a final attempt to cabin the rationale of Mensing, the Kaftons argue:
“The damages caused by Merchant were not the result of a single, isolated,
incident similar to a motor vehicle accident. The dispute between Kafton and
Merchant arises out of a number of things that occurred during the course of their
relationship.” But “reciprocal claims in a contract dispute are every bit as closely
intertwined as are the mutual allegations in a motor vehicle accident dispute that
each driver caused the other’s injuries.” See Cyr v. Cyr, 560 A.2d 1083, 1084
(Me. 1989) (finding rationale behind the rule in Mensing persuasive). We agree
with the district court’s conclusion that the language used by the Kaftons in
negotiations would have prompted a reasonable person to believe they intended
to reach a full accord and satisfaction of their claims. The parties negotiated and
reached a global settlement. We affirm the grant of summary judgment to
Merchant on the Kaftons’ negligence claims, reverse the denial of the Kaftons’
motion for summary judgment on Merchant’s breach-of-contract counterclaim,
and remand for dismissal of the counterclaim.
AFFIRMED IN PART, REVERSED IN PART, AND REMANDED FOR
DISMISSAL.