Coco's Restaurants, Inc, / X-app. v. Harsch Investment Properties, / X-res. ( 2020 )

IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
COCO’S RESTAURANT, INC., as ) No. 78759-4-I
successor-in-interest to FAR WEST ) (Consolidated with
SERVICES, INC. ) No. 78952-0-I)
Respondent/Cross- ) DIVISION ONE
Appellant, )
) UNPUBLISHED OPINION
v.
HARSCH INVESTMENT )
PROPERTIES, LLC, as successor-in- )
interest to SUTTER HILL LIMITED, )
QUALITY FOOD SERVICE, LLC, and )
BANWAIT, LLC, )
)
Appellant/Cross- )
Respondent.
__________________________________ ) FILED: February 24, 2020
HAZELRIGG, J. — Coco’s Restaurant, Inc. (Coco’s) and Harsch Investment
Properties, LLC (Harsch) were successors in interest to a lease formed in 1980 for
a commercial property. Harsch terminated the lease in 2017 due to Coco’s breach
after multiple unanswered notices of delinquency over the course of nearly eight
months based on Coco’s nonpayment of the variable sum portion of the rent. Upon
termination, Coco’s filed suit seeking reinstatement of the lease and restitution for
payments from Coco’s subtenant who had paid Harsch directly during the period
since termination. The court granted Coco’s motion for partial summary judgment
based on its equitable powers to avoid forfeiture after finding Coco’s breach of the
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lease to be non-material. Harsch appeals that ruling and Coco’s cross-appeals
the denial of their request for fees and costs.
FACTS
Harsch Investment Properties, LLC (Harsch) and Coco’s Restaurant, Inc.
(Coco’s) were successors in interest, as landlord and tenant respectively, to a
lease of a commercial property in Federal Way. Formed in 1980, the lease had an
initial term of 25 years with an option to extend for three consecutive five-year
terms. After assuming the lease, Coco’s exercised the option for the second and
third extension, setting the lease to expire on December 31, 2020. During the final
extension of the lease, Coco’s sublet the property to another business, Banwait,
LLC (Banwait). The sublease did not alter Coco’s obligations under the lease. The
rent owed to Harsch consisted of two parts; 1) a fixed monthly sum and 2) a
variable sum tied to the performance of the business operating on the premises.
Coco’s did not make the variable sum portion payments for five consecutive
quarters, beginning in the fourth quarter (Q4) of 2015; a total of $8,865.09. Harsch
first sent an email to Cocos on March 31, 2016 explaining it had not received the
gross sales statement and payment for Q4 of 2015. Harsch received an automatic
out-of-office reply but then sent multiple other reminders to Coco’s in April 2016
without response. A default notice was sent to Coco’s on June 22, 2016 detailing
its failure to provide gross sales statements or the variable sum portion payments
for Q4 of 2015 and the first quarter of 2016. Harsch did not raise the issue with
Coco’s again until January 10, 2017 when they sent another default notice. On
February 21, 2017, Harsch sought to terminate the lease due to the default. The
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termination date was March 3, 2017. During this period when no variable sum
portion payments were made, Coco’s did tender full base rent payments. The
breach was entirely based on nonpayment of the variable sum portion of rent.
Coco’s advanced the theory that a receptionist may have mislaid the January 2017
notice of default. They offered no explanation for the failure to respond to the prior
notices from Harsch.
On March 3, 2017, Coco’s responded to the termination notice and
enclosed the March base rent and the gross sales statements for the missing
quarters.’ Coco’s sent the full variable sum portion payment to Harsch on March
8, 2017. However, this was after the termination date set out in the February 21,
2017 notice and Harsch refused to accept the payment of the variable sum portion.
Harsch executed a Sublease Recognition and Attornment Agreement with Banwait
on March 4,2017, after termination of the least with Coco’s. Harsch then collected
rent directly from Banwait pursuant to this new agreement. The rent paid by
Banwait, first to Coco’s then to Harsch, was significantly higher than the amount
due to Harsch under the original lease with Coco’s
On May 25, 2017, Coco’s filed suit in King County Superior Court for
declaratory relief, seeking a determination that the lease remained in effect
because no substantial or material breach had occurred, and for a derivative claim
for restitution against Harsch for the amount Banwait had paid directly to Harsch.
Both parties filed motions for summary judgment. After the hearing on the motions,
the trial court granted Coco’s motion for partial summary judgment determining
1 The letter is misdated as 2019 but all parties agree it was in 2017.
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that Coco’s did not materially breach the lease and therefore Harsch could not
terminate it. A bench trial was conducted to determine the damages of both parties
and possible restitution owed. Harsch now appeals the denial of their motion for
summary judgment and grant of Coco’s competing motion. Coco’s cross-appeals
the superior court’s denial of their motion for costs and attorney fees.
ANALYSIS
Trial Court’s Rulings on Parties’ Motions for Summary Judgment
Harsch challenges the trial court’s grant of Coco’s motion for partial
summary judgment and denial of their competing motion. This court reviews an
order granting summary judgment de novo, considering the facts and reasonable
inferences in the light most favorable to the nonmoving party. DC Farms, LLC v.
Conagra Foods Lamb Weston, Inc., 179 Wn. App. 205, 218, 317 P.3d 543 (2014).
“Summary judgment is proper if the pleadings and accompanying documentary
evidence show that there is no genuine issue of material fact and that the moving
party is entitled to judgment as a matter of law.” k~. However, “[t]he general
standard of review for a trial court’s exercise of equitable authority is abuse of
discretion.” Kave v. McIntosh Ridge Primary Road Ass’n, 198 Wn. App. 812, 819,
394 P.3d 446 (2017). “[A] trial court has broad discretionary authority to fashion
equitable remedies, this court reviews such remedies under the abuse of discretion
standard.” Emerick v. Cardiac Study Center, Inc., P.S., 189 Wn. App. 711, 730,
357 P.3d 696 (2015).
Though Harsch separately assigns error to the denial of their summary
judgment motion, the analysis of the rulings on both summary judgment motions
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is substantively the same since the trial court resolved the motions brought by each
party on equitable grounds to avoid forfeiture. It is clear from the record that the
trial court took them up and heard argument on them in the same proceeding.
Harsch’s argument for summary judgment was that a breach by Cocos occurred
and therefore they were entitled to terminate the lease and possess the property
under the terms of the lease. Coco’s position in their motion for partial summary
judgment was that they did not materially breach and the court should exercise its
equitable discretion to prevent forfeiture. The ruling on either motion necessarily
dictates the outcome of the competing motion, so they will be analyzed together
here as they were at the trial court.
Harsch does not argue that the court did not have the authority to exercise
its equitable powers in this context. Rather, they contend that it was wrong for the
court to fashion a remedy to avoid forfeiture given the clear language of the
contract about default. “Because the trial court has broad discretionary authority
to fashion equitable remedies, we review such remedies under the abuse of
discretion standard.” Cornish Coil, of the Arts v. 1000 Va. Ltd. P’ship, 158 Wn. App.
203, 221, 242 P.3d 1 (2010); See also Borton & Sons, Inc. v. Burbank Properties,
LLC, 9 Wn. App. 2d 599, 613, 444 P.3d 1201 (2019) (Lawrence-Berrey C.J.,
concurring). As the court resolved the case in equity, an abuse of discretion
standard applies in reviewing the court’s grant of summary judgment to Coco’s.
“An abuse of discretion occurs when the trial court’s decision is manifestly
unreasonable or is exercised on untenable grounds or for untenable reasons.”
Cornish, 158 Wn. App. at 221.
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A. Grant of Coco’s Motion for Partial Summary Judgment
The trial court properly exercised its equitable powers to avoid forfeiture
after it determined the breach by Coco’s was non-material and had been cured. It
is well established in Washington that forfeiture is a drastic remedy that the courts
should avoid unless justice cannot be done otherwise. Stevenson v. Parker, 25
Wn. App. 639, 647, 608 P.2d 1263 (1980 (quoting Spedden v. Sykes, 51 Wn. 267,
272, 98 P. 752 (1908)); see Deming v. Jones, 173 Wn. 644, 648, 24 P.2d 85(1933). Here, the court considered whether the breach by Coco’s was material by
weighing factors set out in the Restatement (Second) of Contracts Section 241.
This was proper as the court engaged in this inquiry to determine whether forfeiture
would be an appropriate remedy or if equity required otherwise.
Our Supreme Court has made clear that when a contract does not include
a time is of the essence clause, “the question as to whether a delay in performance
is a material breach depends upon the surrounding circumstances.” Cartozian &
Sons, Inc. v. Ostruske-Murphy Inc., 64 Wn.2d 1,5,390 P.2d 548 (1964). Further,
“[w]hile any breach will give rise to cause of action for damages, a breach does not
become cause for repudiation until it is, under all of the circumstances surrounding
the contract, so material as to amount to a substantial or total failure of
consideration.” ki. 5-6.
The lease between Harsch and Coco’s did not contain a time is of the
essence clause, so the materiality analysis was appropriate. The question before
the court was whether Coco’s had materially breached the 40-year lease by failing
to furnish the percentage of rent based on a variable sum tied to the performance
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of the business operating on the premises. Jacks v. Blazer is a seminal case which
makes clear that when a court seeks to determine whether one party’s breach
justifies the other’s refusal to perform its contractual duty, the focus of the court’s
analysis should be whether that breach was material. 39 Wn. 277, 285-86, 235
P.2d 187 (1951).
As such, the court appropriately utilized the factors outlined in the
Restatement (Second) of Contracts Section 241 in making its determination.
Though Harsch argues that the court’s utilization of the Restatement factors reads
additional terms into the contract, this argument is without merit. The court did not
utilize the Restatement factors to change the duties of either party. Neither party
disputes that Coco’s breached the lease. The superior court simply engaged in a
materiality analysis to determine if forfeiture was a justifiable remedy; such
analysis is required by law.
Deming v. Jones is the most analogous to the case at hand in terms of
determining whether a breach justifies forfeiture. 173 Wn.2d 644, 24 P.2d 85(1933). In Deminci, the landlord appealed a trial court’s ruling for the tenant who
had breached the lease for a gasoline service station by not paying rent and
allegedly engaging in the sale of liquor and gambling on the property, with an
underlying argument that the tenant had artificially reduced sales at the business
to reduce the rent. ~ at 645. The landlord sent multiple termination notices
alleging the conduct and asserting that the tenant had breached by not paying the
rent in full. j~ at 646-47. Eventually the tenant furnished the full payment of rent
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due to the landlord, which was based on the gasoline sales, but the payment was
not provided until after the suit commenced. j4. at 647-48.
The Supreme Court rejected forfeiture as a remedy for the failure to pay the
percentage based on the sales of gasoline at the service station. at 648. The
Supreme Court specifically stated that “there was such carelessness and
inefficient business methods as would not ordinarily be excusable. Here, that
carelessness must be weighed in the scales against a forfeiture of rights which are
valuable out of all proportion to the harm [the landlord] have suffered by the
careless conduct.” ki. In the present case, the record establishes that Coco’s failed
to pay a total of $8,865.09 based on the percentage of sales, but that payment was
then furnished within two weeks of the notice of termination. This falls below the
threshold established in Deming, which has been controlling precedent for over 75
years.
Though Harsch argues that the trial court should have strictly construed the
contract terms, they were not required to do so under these circumstances.
“[E]quitable relief from such [a] strict construction may be warranted in limited
circumstances where an inequitable forfeiture would otherwise result.” Cornish,
158 Wn. App. at 217. Here, the trial court recognized that forfeiture would result
and determined, based on its materiality analysis, that it could properly exercise
its equitable authority to avoid such forfeiture. We affirm the trial court’s grant of
Coco’s partial summary judgment.
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B. Denial of Harsch’s Motion for Summary Judgment
Since we find that the court did not abuse its discretion in granting Cocos
partial motion for summary judgment, we also find the court did not err in denying
Harsch’s motion for summary judgment. Harsch appears to concede that our
review of the rulings on both motions will be resolved based on this court’s
determination of whether the trial court’s exercise of equitable powers was proper.
“Due to the discretionary nature of decisions made in equity, granting equitable
relief on summary judgment may be inappropriate in many cases.” jçj. at 220.
However, in Cornish we reinforced that equitable relief could be proper if a
reasonable person could only have reached one result. ~ In Cornish we held that
strong evidence supported the trial court’s conclusion that Cornish was entitled to
a grace period and that there was no dispute of material fact.
The same is true here that in reviewing the trial court’s exercise of an
equitable remedy to ensure that forfeiture did not occur, it logically followed that
Harsch’s motion would be denied and was proper for the judge to take both parties’
motions up at the same time, especially since neither party disputed any facts. We
hold that the court did not abuse its discretion in denying Harsch’s motion for
summary judgment as forfeiture would result from a non-material breach and
thereby the court properly exercised its equitable powers to craft an appropriate
remedy.
II. Weighing of Restatement Factors in the Context of Materiality Analysis
Though Harsch frames the issue as the court improperly drawing inferences
in Coco’s favor given the summary judgment posture of the case, Harsch is
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actually challenging the manner by which the superior court weighed the
Restatement (Second) of Contracts Section 241 factors. Harsch does not advance
substantial evidence arguments to question the findings under each of the
Restatement factors. Instead Harsch argues that under the summary judgment
posture, the court was required to draw all inferences, or weigh the Restatement
factors, in their favor as the nonmoving party. There was no dispute as to the
underlying facts and the court acted within its authority to weight the various factors
as it saw fit given those facts.2 The majority of Harsch’s arguments are not that
the judge resolved disputed facts or made inferences as to their summary
judgment motion, but that the Restatement (Second) of Contracts Section 241
factors were determined in Cocos favor.
Harsch agreed that no dispute of material fact existed at the time of
argument on the summary judgment motions. The parties’ competing motions
engaged two different bodies of law that were juxtaposed to one another. Coco’s
argued for the court to take equitable action while Harsch argued for legal
resolution. In order for the trial court to resolve the issue as to each party’s motion,
it was required to weigh and determine whether Coco’s breach was material. If it
was material, the equitable remedy would be rejected and Harsch would be entitled
to summary judgment. Conversely, if it was non-material then the court would be
able to exercise its equitable powers to avoid forfeiture. Harsch appears to agree
2 Harsch advanced an argument that the percentage of rent owed was not properly
calculated; not that the amount reported by Coco was inaccurate, just that the percentage
calculation itself was flawed.
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that the trial court was left to resolve this situation, but rejected the position that
material breach analysis was necessary.
The court properly utilized the Restatement (Second) of Contracts Section
241 factors in determining if the breach was material and the process of weighing
the factors may involve underlying inferences. Harsch points to no specific
inferences, however, and focuses their attack on the judges’ actual determination
reached under each factor. The Restatement (Second) of Contracts Section 241
factors are:
(1) whether the breach deprives the injured party of a benefit which
he reasonably expected, (2) whether the injured party can be
adequately compensated for the part of that benefit which he will be
deprived, (3) whether the breaching party will suffer a forfeiture by
the injured party’s withholding of performance, (4) whether the
breaching party is likely to cure his breach, and (5) whether the
breach comports with good faith and fair dealing.
Restatement 2d Section 241(a)-(e). These factors strongly weigh against
materiality which is why the court properly exercised its equitable powers to craft
a resolution to avoid forfeiture. The only factor that might weigh in favor of Harsch
is the first, whether the breach deprives the injured party of a benefit which is
reasonably expected. It is clear Harsch was deprived of a portion of the rent due
but they never pointed to any specific harm beyond that, such as how the delay in
payment of the variable sum portion of the rent led to lost opportunity.
The second factor, whether the injured party can be adequately
compensated for the part of the benefit which was deprived, weighs in favor of the
trial court’s finding that the breach was non-material since it was a financial benefit
that was provided to them prior to litigation. The third factor also weighs in favor
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of a determination that the breach was non-material, as Harsch’s termination of
the lease would lead to forfeiture of all rights Coco’s possessed under the lease,
including the collection of separate rent from Banwait. The fourth factor, whether
the breaching party is likely to cure, also indicates the breach was non-material
since Coco’s had furnished payment within fifteen days of the notice of termination.
The final factor, whether the breach comports with good faith and fair dealing, is
easily answered since Harsch agreed that no bad faith existed. Overall the
undisputed facts indicate the breach was non-material. In analyzing the case
under the Restatement factors, the judge did not improperly draw any inferences
in favor of Coco’s.
1.11. Cross-Appeal by Cocos as to Attorney Fees
Coco’s cross-appeals in this case based on the court’s denial of their motion
for attorney fees and costs under a provision in the contract. However, since the
court exercised its equitable discretion in crafting a remedy, it was not required to
follow the fee and cost provisions of the contract which would award them to the
prevailing party in certain contexts.
We review the legal basis to award fees under statute, contract, or in equity
de novo. In re Wash. Builders Ben. Trust, 173 Wn. App. 34, 83, 293 P.3d 1206(2013). The trial court fashioned an equitable remedy to prevent forfeiture, but
ruled that as part of its remedy it would be inequitable to allow Coco’s to collect
fees and costs. The court reasoned that though neither party acted in bad faith,
Cocos actions led to Harsch’s attempt to terminate the lease.
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The court’s rationale is correct and the record is clear as to the authority
upon which it relied in entering its order. In Gander v. Yeager this court reviewed
a trial court’s denial of fees after a party argued they should been awarded since
they prevailed on equitable grounds regarding an arbitration agreement. 167 Wn.
App. 638, 642-43, 282 P.3d 1100 (2012). The court noted that equitable grounds
that usually allow for attorney fees “are the bad faith or misconduct of a party,
‘actions by a third person subjecting a party to litigation,’ and the dissolution of
wrongfully issued temporary injunctions.” jç~ at 647 (quoting City of Seattle v.
McCready, 131 Wn2d 266, 274-75, 931 P.2d 156 (1997)). The court rejected the
claim that the appellant was entitled to attorney fees from the trial court’s equitable
remedy. at 650. The trial court in Gander offered a similar rationale to that of
the court in the present case in that the attorney fees were contemplated within the
context of the equitable remedy as a whole, with the superior court looking to the
actions of both parties that led to the need for the litigation. ~ at 643.
It follows that since Coco’s prevailed based on equitable grounds to enforce
a right under the contract that the fee provision contained within the lease is not
broad enough to include suits based on equity, thereby the court was not required
to award fees and costs. The lease’s fee provision states:
In the event any action is brought by Landlord to recover any rent
due and unpaid hereunder or to recover possession of the leased
land, or in the event any action is brought by Landlord or Tenant
against the other to enforce or for the breach of any of the terms,
covenants or conditions contained in this lease, the prevailing party
shall be entitled to recover reasonable attorneys’ fees to be fixed by
the court, together with costs of suit therein incurred.
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This provision provides that Coco’s would be able to recover if it had prevailed
based on the “terms, covenants or conditions contained in the lease.” However,
this was not how they prevailed in this case. Here, the court acted within its
discretion to craft an equitable remedy and therefore the law did not require a fee
award to Coco’s. We affirm the trial court’s denial of Coco’s motion for fees and
costs as well as the denial for the reconsideration of that motion. Additionally,
though Harsch argues for attorney fees under RAP 18.1, they are not the prevailing
party on appeal and that request is denied.
Affirmed.
9
A
WE CONCUR:
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