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Procrastinating Mitigation is Expensive
by Sara Palmer
The company HCS has been awarded some damages but denied attorney fees after a breach in contract from Lone Star.
In 2010 Lone Star Steakhouse & Saloon of Nebraska (Lone Star) began leasing property in west Omaha, Nebraska from Hand Cut Steaks Acquisitions, Inc. (HCS). The guarantor of the lease was LSF5 Cactus LLC (Cactus) - a subsidiary of Lone Star's parent company.
The lease was set for a 66-month term, to run from 2010 to 2016. The lease began with 6 months of free rent, followed by rent increasing incrementally. There were two provisions included in the lease. One: “an attorney fee provision: In the end of litigation between the parties to enforce the Lease, the prevailing part in any such action shall be entitled to recover reasonable costs and expenses of suit, including, without limitation, court costs, attorney's fees, and discovery costs." Two: “a choice-of-law provision: This Lease shall be construed, interpreted, and enforced pursuant to the applicable laws of the state in which the Premises are located. "
Another part of the lease was between Cactus and HCS, which stated "[Cactus], in consideration of the direct and material benefits that will accrue to [it], and for the purpose of inducing [HCS] to enter into [the lease] with Lone Star..., a subsidary of [Cactus], absolutely and unconditionally guarantees the payment and performance of, and agrees to pay and perform as primary obligor, all liabilities, obligations, and duties (including but not limited to payment of rent) imposed upon [Lone Star] under the terms of the ... Lease. “ And “ As an inducement to [HCS] to enter into this Lease, [Lone Star] agrees and acknowledges that its obligations under this Lease shall be guaranteed ... by its parent corporation, [Cactus], a Delaware limited liability company..."
In October 2012, Lone Star notified HCS that it planned to shut down its restaurant in 3 weeks. Lone Star paid rent up to February 2013. A month later in March, HCS served a notice of default to Lone Star. Not getting a response, in April HCS filed a suit against Lone Star and Cactus and later in the month demanded that Lone Star surrender the location. The demand letter stated that "this Notice shall in no way be construed as a termination of [the] Lease or as a relinquishment or waiver by [HCS] as to any rental amounts or other amounts due under [the] Lease..."
In early May, Lone Star surrendered the location and all the parties executed an acknowledgement of tender and receipt of premises agreement.
Before the trial, the district court allowed a motion of Cactus, "to dismiss it for lack of personal jurisdiction", only to later grant HCS' motion to reconsider its order and allowed limited discovery with regard to Cactus' contacts with Nebraska. After discovery, the court denied Cactus' renewed motion to dismiss and reserved ruling until trial.
A bench trial was held, where the issues of damages and "whether a land-lord may mitigate its damages by selling, rather than reletting, the property." For the first issue it was decided that HCS had not agreed to Lone Star's surrendering of the lease, as "HCS' actions were consistent with a landlord attempting to mitigate its damages" and that "HCS took reasonable steps to mitigate its damages after Lone Star's breach of the Lease."
As for the second issue, the district court found it unreasonable "to fault Lone Star for the lengthy closing process in the negotiations between [HCS] and [the buyer]" which began in December 2012. The terms of sale occurred in June 2013 and the sale was finally closed in April 2014. The court felt that demanding Lone Star "pay nearly a year's worth of damages because the closing period between [HCS] and [the buyer] was such a drawn out negotiation." As such, the district court ruled "that the accrual of damages ended when [HCS] signed its [LOI] to sell the Premises to [the buyer] on June 13th, 2013." The court awarded HCS the amount of $49, 415.27 to HCS from Lone Star.
In regards to Cactus, the district court "concluded that it lacked personal jurisdiction over Cactus and dismissed HCS' claims against it."
As for the issue of attorney fees, the district court overruled HCS's motion for attorney fees, based on the provision in the lease, based on “American Rule”, “contractual agreements for attorney fees are against public policy and will not be judicially enforced”.
HCS filed a timely appeal, and Lone Star asserted a cross-appeal.
HCS claimed that the district court erred three times. The first is "overruling the Motion for New Trial and awarding an insufficient amount of damages to HCS." The second, "overruling the Motion for New Trial and ruling that ... Cactus ... was properly dismissed from the action". The third was "overruling [HCS'] Motion for attorney fees."
As for Lone Star, it claimed that the district court erred five times. By "(1) failing to find that [HCS] accepted Lone Star's surrender of its tenancy, thereby teminating the lease"; (2) failing to find that [HCS] failed to mitigate damages, thereby excusing Lone Star's obligations under the lease; (3) finding that Lone Star breached the lease; (4) awarding damages to [HCS]; and (5) failing to enter judgment in favor of Lone Star."
The supreme court first addressed Lone Star's claim that HCS terminated the lease by accepting its surrender of the premises. The court felt that HCS never agreed to terminate the lease and that it was explicit in that it was not terminating the lease when it demanded that Lone Star surrender the property.
In regards to the mitigation of damages, the court affirmed the district court's ruling. It was concluded that "HCS' efforts to mitigate were reasonable only up to a certain point" and that the amount of damages awarded to HCS was correct.
As for Cactus not being under the district court's personal jurisdiction, the supreme court felt that "because Cactus guaranteed the full performance of a Nebraska business' obligations of a lease of Nebraska property in order to induce HCS to enter into that lease, which was governed by Nebraska law, Cactus has sufficient minimum contacts with Nebraska to justify the exercise of personal jurisdiction over it by Nebraska's courts." As such, the district court's dismissal of Cactus was reversed and it would be expected to "remand the case for further proceedings on HCS' claim against Cactus."
For the attorney fees, the district court's overruling was affirmed, as was the overruling of HCS' motion for a new trial.
In conclusion, "the district court's award of damages to HCS and the court's denial of HCS' requested attorney fees" was affirmed. The dismissal of Cactus was reversed and the district court would "remand the cause for further proceedings on HCS' claim against Cactus."
(Hand Cut Steaks Acquisitions v. Lone Star Steakhouse, 298 Neb. 705)
Decision: January 2018
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