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Steel Farms, Inc v. Croft & Reed

January 27, 2012

STEEL FARMS, INC., PLAINTIFF-COUNTERDEFENDANT-APPELLANT,
v.
CROFT & REED, INC., DEFENDANT-COUNTERCLAIMANT-RESPONDENT.



Appeal from the District Court of the Seventh Judicial District of the State of Idaho, Bonneville County. Hon. Joel E. Tingey, District Judge.

The opinion of the court was delivered by: Horton, Justice.

2012 Opinion No. 28

Stephen Kenyon, Clerk

The I.R.C.P. 54(b) judgment entered by the district court is vacated. The district court's grant of partial summary judgment is reversed and the case is remanded for proceedings consistent with this opinion.

Croft & Reed, Inc. and Steel Farms, Inc. had a pre-existing landlord-tenant relationship when they entered into a written agreement granting Steel Farms a lease and option (Option A) to purchase a farm in Bonneville County (the Property). The lease had an express four-year term. Steel Farms believed the four-year term was a mistake because the option to purchase the Property did not mature until after the four-year lease term expired. In response to a request from Steel Farms, Croft & Reed's secretary made a handwritten interlineation on the lease agreement which purported to extend the lease term for an additional year. While Steel Farms was a tenant, it purchased and installed irrigation equipment on the Property, which was attached to the Property's irrigation system. Steel Farms later granted Walker Land, Inc. an option to purchase the Property (Option B) from Steel Farms.

Steel Farms sought to exercise Option A after leasing the Property for four years, and Croft & Reed refused. Steel Farms sued, and the parties filed cross motions for summary judgment. The district court granted partial summary judgment in favor of Croft & Reed, and later certified that judgment under I.R.C.P. 54(b). Steel Farms appeals the certified judgment. We vacate and remand.

I. FACTUAL AND PROCEDURAL BACKGROUND

Kevin Steel and his brother, Doug Steel, were the secretary and president of Steel Farms. Beginning in the 1980s, Steel Farms entered into a series of agreements regarding the Property with Venna and Richard Reed, husband and wife, and their corporation, Croft & Reed. Richard and Venna each passed away before this litigation commenced.

For years, Croft & Reed leased agricultural property to Steel Farms as a crop share tenant. When Steel Farms first took possession of the Property, the Property had an irrigation system that consisted of a ground well, pump, mainlines, and hand lines. In 1993, Steel Farms received Richard Reed's permission to replace the hand lines with a pivot irrigation system. At its own expense, Steel Farms installed and maintained the pivot system, which it attached to the pre-existing ground well, pump, and mainline. The pivot line was detachable, and Steel Farms often moved the line, using it to irrigate two fields. The pivot line had a generator, motor, and wheels, and could be self-propelled. When the parties later entered a cash lease, the lease provided that Steel Farms was responsible for maintaining the pivot lines while Croft & Reed was responsible for maintaining the pump.

In 1994, the parties entered the first of a series of year-long cash leases. In 1998, Steel Farms purchased and installed a second pivot system on the Property so that it no longer had to move the pivot line to irrigate both fields. The lender that financed the purchase filed a UCC-1 financing statement to secure its interest in the purchased equipment. The lender also obtained an equipment disclaimer from Richard Reed whereby Croft & Reed waived any fixture claim to the equipment purchased by Steel Farms. In 2005, Steel Farms also purchased and installed a new pump.

On April 22, 2004, the parties entered into a Lease and Option agreement (Lease and Option) for Steel Farms' possession of the Property. The agreement described the Property by its physical address and stated "[t]he Premises shall consist of the lands and improvements and fixtures on the property more fully described on Exhibit 'A' attached hereto," which contained a metes and bounds legal description of the Property. The Lease and Option expressly stated that Steel Farms' lease began April 22, 2004 and ended March 1, 2008, with Steel Farms to pay $40,000 rent annually. The agreement provided that Steel Farms could not assign or otherwise transfer its "interest in this Lease or in the Premises . . . " without Croft & Reed's written consent.

Under the Lease and Option, Steel Farms also received Option A, an option to purchase the Property for $330,006.13 beyond its annual lease payments. The record demonstrates that the purchase price was based on an amortization schedule that accounted for several $40,000 annual payments and a six percent annual interest rate. Both Kevin Steel and Richard Hale, Croft & Reed's accountant, stated the sale was structured in this manner to effect certain tax planning favorable to the Reeds. Hale testified that the lease was for a five-year term and informed Steel Farms' attorney, via an April 23, 2004 fax, that the lease term was for a period of five, not four, years.

To exercise Option A, Steel Farms was required to:

. . . give written notice thereof to the Landlord subsequent to the maturity of this option on July 15, 2008 and during the Term of this lease (including any agreed extension or exercised option term but excluding any holdover term). Any attempt to exercise the Option that does not strictly comply with this paragraph is void and does not constitute an effective exercise the [sic] Option.

Steel Farms would become a holdover tenant if it "remain[ed] in possession of all or any part of the Premises after the expiration of the term hereof, with or without the express or implied consent of landlord . . . ." Steel Farms could not sell, contract to sell, assign, contract to assign, "or otherwise transfer or hypothecate or assign as security or pledge or otherwise encumber [Steel Farms'] interest in the Option or the Premises or any part thereof separate from this lease, without" Croft & Reed's written consent. If Steel Farms violated this provision, Option A would terminate immediately and without notice. The Lease and Option also contained a merger clause requiring alterations to be made by written instrument, and a clause providing for attorney fees in the event a party sought to enforce the Lease and Option.

In January 2006, Steel Farms requested Croft & Reed's consent to assign the lease to Walker Land and Cattle, LLC (Walker Land). A document to that effect was drafted and endorsed by both Venna Reed on behalf of Croft & Reed and Kevin Steel on behalf of Steel Farms. The document stated that the lease between Steel Farms and Croft & Reed began April 24, 2004 and ended March 1, 2009, rather than March 1, 2008 as stated in the Lease and Option. Walker Land did not endorse the document, and the assignment never occurred. Around that time, Kevin Steel was informed by Croft & Reed's secretary and the Reeds' daughter, Virginia Mathews, that all communications with Croft & Reed should be conducted through her.

In April 2006, Kevin approached Virginia because he believed that the written March 1, 2008 lease termination date was a mistake. Kevin believed the lease was intended to terminate on March 1, 2009, such that Option A could be exercised during the initial lease term. Virginia told Kevin she was unsure whether she was authorized to modify the Lease and Option, but after Kevin explained that he understood her role as secretary authorized her to make modifications on behalf of Croft & Reed, Virginia struck "2008" from the agreement and handwrote "2009." Both Virginia and Kevin placed their initials alongside the interlineation.

On April 18, 2006, two agreements were executed. One was a sublease, executed by Kevin Steel on behalf of Steel Farms, Venna Reed on behalf of Croft & Reed, and the several members of Walker Land. The agreement granted Walker Land a sublease interest in the Property for an initial term that began February 15, 2006 and terminated February 14, 2007. Walker Land could exercise two options to extend the sublease, each for an additional, consecutive year. If Walker Land exercised both options to extend, its sublease would ultimately expire on February 14, 2009. The other document was executed by Steel Farms and Walker Land, and it granted Walker Land Option B, an option to purchase the Property from Steel Farms for $832,830. Option B commenced March 21, 2006 and terminated simultaneously with the termination of Walker Land's sublease, but no later than November 15, 2008. The document granting Option B stated that at the time the document was executed, Steel Farms did not own the Property but rather leased it from Croft & Reed with an option to purchase the Property before Steel ...


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