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Pocatello Hosp., LLC v. Quail Ridge Medical Investor, LLC

Supreme Court of Idaho

December 18, 2014

POCATELLO HOSPITAL, LLC, dba PORTNEUF MEDICAL CENTER, LLC, Plaintiff-Respondent,
v.
QUAIL RIDGE MEDICAL INVESTOR, LLC and FORREST L. PRESTON, an individual, Defendants-Appellants

2014 Opinion No. 139

Page 1137

Appeal from the District Court of the Sixth Judicial District of the State of Idaho, Bannock County. Hon. Robert C. Naftz, District Judge.

The judgment is affirmed. Attorney's fees and costs on appeal are awarded to respondent.

Beard St. Clair Gaffney, PA, Idaho Falls, attorneys for appellant Quail Ridge Medical Investors, LLC and Forrest Preston. John M. Avondet argued.

Merrill & Merrill, Chartered, Pocatello, attorneys for respondents Pocatello Hospital, LLC d/b/a/ Portneuf Medical Centers, LLC. R. William Hancock, Jr. argued.

WALTERS, J. pro tem. Chief Justice BURDICK, Justices EISMANN, J. JONES and HORTON CONCUR.

OPINION

Page 1138

WALTERS, J. pro tem

This appeal stems from a 1983 Ground Lease of 4.25 acres of property in Pocatello, Idaho, which Quail Ridge Medical Investors, LLC (Quail Ridge) leases from Pocatello Hospital, LLC d/b/a Portneuf Medical Centers, LLC (PMC). This is the second appeal that has reached this Court related to payment of rent under the Ground Lease for the period of 2010 to 2012. Previously, Quail Ridge appealed a declaratory judgment entered by the district court which found PMC was entitled to an adjustment in the annual rent owed by Quail Ridge from $9,562.50 annually to $148,500 annually, and that Quail Ridge was obligated to pay PMC $416,812.50 in rent for the period at issue. This Court affirmed the court's declaratory judgment. While the first appeal was pending, PMC filed a new action seeking payment of the adjusted rents. In the second action, the district court found on summary judgment that Quail Ridge breached the Ground Lease by failing to pay the adjusted rents. Quail Ridge appeals, arguing the breach of contract and breach of guarantee claims are barred under res judicata. We affirm.

I. Factual and Procedural Background

In the prior appeal, this Court summarized the relevant facts of this dispute as follows:

Despite several transfers of interests in the property, the relationship of the parties is both undisputed and straightforward. PMC owns 4.25 acres of property in Pocatello. Quail Ridge is leasing the real property from PMC and is the owner of the building on the leased land. PMC is

Page 1139

the lessor and Quail Ridge is the lessee, each as successors in interest, under the Ground Lease Agreement of 1983 (the Lease).
In 1983, Intermountain Health Care, Inc. (IHC) and Sterling Development Co. (Sterling) entered into the Lease whereby IHC leased the subject real property, as Lessor, to Sterling, as Lessee.[1] The Lease provides that rent is to be paid annually and that the annual rent is to be calculated as 15 percent of the value of the land. The Lease provided that the land was to be assigned a value of $15,000 per acre (for a total of $9,562.50 per year) for the first three years.
Critically, section 1.3(b) of the Lease provides for periodic adjustments to the rent:
[1.3](b) Adjustments Based on Property Value. The annual net rental as set forth above shall be adjusted every three (3) years beginning on the Commencement Date of this Lease, referred to below as the rental adjustment date.
The parties' written agreement within ninety (90) days before the applicable rent adjustment date shall be a conclusive determination between the parties of the fair market value for the period to which the adjustment applies. If the parties have not so agreed by the applicable rent adjustment date, the determination shall be made as in the paragraph on Arbitration in Article 13.
The rent as adjusted shall be equal to fifteen percent (15%) percent [sic] of the fair market value of the leased land, exclusive of the improvements on the premises. Determination of fair market value shall be based on the highest and best use of the land on the applicable rent adjustment date without taking the leasehold into account. The determination shall take into account the parties' agreement that the initial minimum rent is the above-stated percentage applied to a fair market value of Fifteen Thousand and No/100 Dollars ($15,000.00) per acre and shall also take into account any determinations of market value made under this lease for the purpose of adjustments for periods preceding the applicable rent adjustment date.
If the determination of adjusted rent is made after the applicable rent adjustment date, lessee shall continue to pay rent at the rate applicable to the preceding period until the adjusted rate is determined. The party indebted shall, promptly after the determination, pay any difference for the period affected by the adjustment.
Thus, under the terms of the Lease, there were to be adjustments to the rent in 1986, 1989, 1992, 1995, 1998, 2001, 2004, 2007, and 2010. However, IHC and Sterling never adjusted the rent.
In 1996, Pocatello Medical Investors (PMI) became a subtenant of Sterling, with an option to purchase, and began operating the building located on the leasehold. In connection with this sublease, IHC (as Landlord), Sterling (as Tenant), and PMI (as Subtenant), entered into a Landlord Consent and Estoppel Certificate (1996 Estoppel Certificate). The 1996 Estoppel Certificate incorporated the Lease and provided that the rent was " currently" $9,562.50 per annum and that " [u]nder Section 1.3(b) of the Lease, the rent shall be adjusted on the next rent adjustment date, March 1, 1998." Despite this language, IHC did not subsequently seek a rent adjustment.
Around 2001, Sterling agreed to sell the building located on the leasehold to PMI. In order to facilitate this transaction, PMI created a new entity, Quail Ridge. Quail Ridge purchased the building from Sterling and assumed the Lease with IHC. Quail Ridge also assumed a $2.8 million dollar loan made by the Public Employee Retirement System of Idaho (PERSI) to Sterling in 1996 that was secured by a deed of trust to the building on the leased property. PMI became the subtenant of Quail Ridge.

Page 1140

In connection with this change, IHC[2] (as Landlord), Sterling (as Tenant), Quail Ridge (as Successor Tenant), and PMI (as Subtenant) all signed another Landlord Consent and Estoppel Certificate (hereinafter 2001 Estoppel Certificate) which was acknowledged and consented to by PERSI. The 2001 Estoppel Certificate was drafted by Richard Faulkner, who was counsel for Quail Ridge at the time. The 2001 Estoppel Certificate stated that the Lease was in full force and effect and that rent was $9,562.50 per annum. Also included in the 2001 Estoppel Certificate was a personal guarantee by Forrest Preston, a principal of Quail Ridge, for " payment and performance of any and all obligations" of Quail Ridge and PMI under the Lease.
In February 2009, shortly after PMC acquired the property and assumed IHC's rights and duties under the Lease, PMC began to investigate the possibility of a rent adjustment pursuant to section 1.3(b) of the Lease and had the 4.25 acres appraised. In October, 2009, PMC notified Quail Ridge of its intention to adjust the annual rent pursuant to the Lease. After the parties failed to reach an agreement, PMC filed its complaint alleging breach of contract and seeking a rent adjustment for 2007 and 2010. The parties waived the mandatory arbitration provision of the Lease and asked the court to determine the " fair market value" of the land to determine the rent obligation. The parties then filed cross-motions for summary judgment; both motions were denied.
PMC subsequently amended its complaint, asserting a claim for declaratory relief regarding the parties' rights under section 1.3(b) of the Lease. Prior to the trial, the district court concluded, as a matter of law, that the 2001 Estoppel Certificate was unambiguous, but that portions of section 1.3(b) of the Lease were ambiguous and warranted admission and consideration of extrinsic evidence regarding the intent of, and course of dealing between, the parties. A two day court trial was held in May of 2012. At the close of PMC's case in chief, Quail Ridge moved to dismiss PMC's breach of contract claim. PMC did not oppose the motion and the motion was granted. Thus, the only issue before the district court for decision was PMC's declaratory judgment claim.
In October 2012, the district court issued its decision. The district court concluded that section 1.3(b) of the Lease was ambiguous in part but that there was no credible evidence to aid it in the interpretation of the ambiguous language. As a result, the district court applied the current fair market value of the land to determine the annual rent. The district court concluded that the value of the land in 2010 was $232,941.18 per acre, making the annual rent $148,500 per year for the three year period of 2010, 2011, and 2012. The district court further found that PMC was not entitled to retroactive modification of the rent in 2007 because PMC failed to make a timely request for modification under the terms of the Lease.
In reaching these conclusions, the district court decided that the 2001 Estoppel Certificate did not modify the terms of the Lease and that PMC did not waive the rent adjustment provision in section 1.3(b) of the Lease. Based upon these findings, the district court considered the rent due per year, $148,500, less the $9,562.50 per year that Quail Ridge had paid for 2010, 2011, and 2012, and determined Quail Ridge was obligated to pay PMC a total amount of ...

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