This opinion will be unpublished and

may not be cited except as provided by

Minn. Stat. § 480A.08, subd. 3 (2006).

 

STATE OF MINNESOTA

IN COURT OF APPEALS

A06-872

 

Frederick L. O’Connell, Jr.,

Respondent,

 

vs.

 

Ralph D. Wahlstrom, et al,

Appellants,

 

Ricky B. Wahlstrom,

Defendant.

 

Filed ­­­June 5, 2007

Affirmed in part and reversed in part

Dietzen, Judge

 

Kanabec County District Court

File No. CX-01-817

 

Frederick L. O’Connell, Jr., 33480 Jackson Street Northeast, Cambridge, MN 55008 (pro se respondent)

 

Jack E. Pierce, Tracy J. Halliday, Pierce Law Firm, P.A., 6040 Earle Brown Drive, Suite 420, Minneapolis, MN 55430 (for appellants Evangeline K. Wahlstrom and Ralph D. Wahlstrom)

 

            Considered and decided by Stoneburner, Presiding Judge; Dietzen, Judge; and Worke, Judge.

U N P U B L I S H E D   O P I N I O N

 

DIETZEN, Judge

 

Appellants, who are vendors under a commercial real estate purchase agreement, challenge the district court judgment determining that appellants breached certain warranties contained in the agreement and awarding respondent damages, arguing that appellants did not breach the warranties and that respondent did not suffer any damages.  We affirm in part and reverse in part.

FACTS

In 1980, appellants Ralph and Evangeline Wahlstrom purchased real estate in Mora, Minnesota, upon which is located the Tower Mobile Home Park.  Appellant Evangeline Wahlstrom has been a realtor for approximately 12 years and owns her own business as a real estate broker.  She also managed the mobile home park on the subject property prior to its sale to respondent.

            The Tower Mobile Home Park is licensed and regulated by the Department of Health (DOH).  The DOH regulates and inspects mobile home parks to ensure compliance with applicable rules and regulations and determines the number of units allowed in the mobile home park.  Following each inspection, the DOH issues a written report setting forth the results of its inspection.           

In November 1996, appellants agreed to sell the real estate located at the “Tower Mobile Home Park.”  The purchase agreement called for a total cash payment of $50,000 at closing, with the balance of $175,000 subject to a contract for deed with monthly payments commencing February 1, 1997.  The purchase agreement contained the following provision under the provision entitled Deed/Marketable Title: “Seller shall deliver a General Warranty Deed: . . . conveying marketable title, subject to . . . (E) Rights of tenants as follows . . . : property has 40 rental pads and [one] rental [building], purchaser is buying property subject to these tenants, deposit on office to be transferred at closing.”  The agreement also provided that “Seller warrants that Seller has not received any notice from any governmental authority as to violation of any law, ordinance or regulation,” and “[a]ny notices received by Seller will be provided to Buyer immediately.” 

The contract for deed provided that “Seller warrants that title to the Property is, on the date of this contract, subject only to the following exceptions:  (a) Covenants, conditions, restrictions, declarations and easements of record, if any[.]”   Respondent purchased the property subject to the contract for deed.  Respondent also obtained a license from the DOH for up to 40 mobile home units on the property. 

In September 1997, the DOH inspected the mobile home park and issued a report finding that respondent was in violation of its rules.  Specifically, the DOH concluded that the park did not comply with its rule requiring a minimum of 10 feet between each mobile home.  Respondent soon learned that complying with the DOH spacing requirements would result in a reduction in the number of licensed units in the park and would require updating sewer, water, and electric connections to each rental pad to comply with current health code standards.

            When respondent received another citation from the DOH in 2000, he hired an engineering firm to redevelop the mobile home park.  But respondent discovered that an existing sewer line bisected the subject property and interfered with implementation of his redevelopment plan, and so he stopped the project.  Because respondent contended that appellant did not give him notice of the city sewer line, he ceased making payments on the contract for deed.

            Appellants then served respondent with a notice of cancellation of the contract for deed, and respondent brought legal action seeking to enjoin the cancellation.  In his complaint, respondent asserted that appellants failed to disclose the existence of the city’s sewer line easement and breached certain warranties that the mobile home park had 40 rental pads, and that appellant had not received notice from any governmental authority that it was in violation of any law, ordinance or regulation.  The district court granted the temporary injunction and scheduled the matter for trial.

            At trial, respondent testified that he purchased the subject property as an investment property and anticipated certain revenues based upon appellants’ warranty that the property had 40 rental pads.  Evangeline Wahlstrom testified that the agreement merely stated that the property was licensed for 40 mobile home pads that were available for rent.  She admitted that respondent was buying the property with an existing mobile home business and monthly rental income.

            A representative of the DOH submitted an affidavit that DOH inspectors issued written citations to the owner in 1990, 1991, 1996, 1997, and 1999, which found that the mobile home park was in violation of DOH rules that require a minimum of 10 feet between mobile homes.  In 1999, DOH inspectors identified eight specific lots that did not meet separation requirements.  Respondent testified that he was unable to rent out seven of those lots due to the spacing violations.  Wahlstrom admitted that she failed to disclose the DOH violations to appellant.

            A local realtor testified that the “rule of thumb” to determine the value of a mobile home park is to multiply gross annual income by 4.5.  Based on that formula, the realtor testified that the property had a value of $328,050, which compares to the purchase price of $250,000.  At the conclusion of respondent’s case, the district court granted appellants’ motion to dismiss respondent’s claim that appellant had failed to disclose the existence of the city’s sewer line easement. 

Following trial, the district court filed its findings of fact, conclusions of law, and judgment.  The district court concluded that appellants breached the warranty that the property had 40 rental pads and that appellants knew that the property’s DOH license for 40 rental pads was subject to compliance with the applicable spacing requirements, and it concluded that appellants breached the warranty that they had not received notice from any government authority of any violation of any law by failing to disclose the citations issued by the DOH.

The district court found that respondent suffered no general damages because the purchase price was less than the market value of the property, but it concluded that respondent suffered lost profits prior to trial because many of the mobile home pads were not available due to DOH spacing violations.  Based on its calculations of the unavailability of those mobile home pads, the district court concluded that respondent’s damages were $91,431 plus costs of $4,124.  Appellants moved for amended findings or a new trial, which the district court denied.  This appeal follows.

D E C I S I O N

I.

            Appellants argue that the district court erred in concluding that they breached certain warranties to respondent regarding the sale and purchase of the mobile home park property.  When reviewing mixed questions of law and fact, this court corrects erroneous applications of the law, but accords the district court discretion in its ultimate conclusions.  Rehn v. Fischley, 557 N.W.2d 328, 333 (Minn. 1997).  We reverse the district court’s findings of fact only if they are clearly erroneous.  Minn. R. Civ. P. 52.01.  

            To establish a breach of warranty claim, a plaintiff must prove the existence of a warranty, breach, causation between the breach and the harm, and damages.  Peterson v. Bendix Home Sys., Inc., 318 N.W.2d 50, 52-53 (Minn. 1982).  Where sellers of a mobile home park warrant that the park upon the subject lands is in compliance with the relevant ordinances, and the seller fails to inform the prospective purchaser of any nonconformity, the warranty is breached.  Parkside Mobile Estates v. Lee, 270 N.W.2d 758, 761-62 (Minn. 1978).   

            A.        Number of Rental Pads

            Appellants first argue that they did not warrant that the park had 40 rental pads that satisfied the requirements of the DOH.  The district court found that the language of the purchase agreement indicating that the “property had 40 rental pads” was “unambiguous” and “constitutes a general warranty in regards to the number of rental pads available in the mobile home park.”  Further, the district court found that “[appellants] made numerous assurances to [respondent] that the subject property had 40 rental pads” available in the park, and that Evangeline Wahlstrom knew the park’s license for 40 rental pads was subject to DOH spacing requirements.  The district court concluded that, accounting for the DOH spacing regulations, the park had only 32 available rental pads. 

            Here, the agreement indicated that the property had 40 rental pads, and Evangeline Wahlstrom made assurances to respondent that the property had 40 rental pads available to the park, despite her knowledge that it violated DOH spacing requirements.  On this record, the district court did not err by finding that appellants breached the general warranty set forth in the purchase agreement. 

            B.        DOH Violations

            Appellants also argue that the district court erred by finding that appellants breached the warranty that they had not received notice from governmental authority of any violation of law.  Appellants initially argue that the DOH violations related to the number of mobile homes that can be licensed in the park and do not relate to the real property.  We disagree.  Although the purchase agreement was for real property, the agreement indicated its location as the Tower Mobile Home Park and warranted that the property had 40 rental pads.  More importantly, the warranty broadly stated that “Seller has not received any notice from any governmental authority as to violation of any law, ordinance, or regulation,” and “[any] notices received by Seller will be provided to Buyer immediately.”  Here, appellants received notices from the DOH regarding violations that involved their use of the property.  Clearly, the notices fit within the scope of the warranty. 

Appellants also rely on Parkside Mobile Estates v. Lee, to argue that a warranty involving the mobile home business portion of the sale of a mobile home park is not enforceable unless it is separately and specifically set forth in the purchase agreement.  See Parkside,270 N.W.2d at 761.

In Parkside, a purchaser of a mobile home park brought an action against the sellers for breach of a warranty in a “rider” that was attached and part of the purchase agreement.  Id. at 759.  The rider warranted that the operation of the park complied with all laws and ordinances.  Id.  Following a jury verdict in favor of the purchaser, the district court granted the purchaser’s motion for a new trial on the issue of damages.  Id. at 761.  On appeal, the supreme court held, inter alia, that the warranty contained in the rider was actionable.  Id.  The Parkside court did not hold or address the issue of whether a warranty involving a mobile home park must be set forth separately or specifically in a “rider.”  Here, the warranty was in the purchase agreement and, therefore, is enforceable.  Thus, appellants’ argument lacks merit. 

Appellants next argue that respondent could have contacted the DOH and received copies of the citations.  The district court found that appellants were obligated under the purchase agreement to disclose the DOH citations to respondent and breached the warranty by failing to disclose them.  Further, appellants knew that the sale was for the mobile home park business and not just the real property. 

Here, one of the purposes of the warranty is to relieve respondent of the duty to check with the applicable governmental authorities to determine if any citations have been issued.  The warranty explicitly shifts that responsibility to the seller.  See Sterling Capital Advisors, Inc. v. Herzog, 575 N.W.2d 121, 127 (Minn. App. 1998) (stating that when purchasing real estate, a warranty is intended to relieve buyer of the duty to ascertain a fact for herself and it amounts to a promise by the seller to indemnify the buyer for any loss if the warranted fact proves untrue).  And appellants cannot plead negligence by respondent in failing to inquire when respondent, relying on appellants’ assurances, deemed it unnecessary to make an examination of public records.  See Erickson v. Mathwig, 226 Minn. 55, 57, 31 N.W.2d 918, 919 (1948).  On this record, the district court did not err by concluding appellants breached the warranty.

II.

Appellants argue that the district court abused its discretion in concluding that respondent was entitled to recover lost profits.  We review the district court’s award of damages for an abuse of discretion.  VanLandschoot v. Walsh, 660 N.W.2d 152, 156 (Minn. App. 2003).  On appeal from an order denying a new trial on the issue of damages, the evidence on damages must be evaluated in the light most favorable to the verdict.  Smith v. Rekucki, 287 Minn. 149, 154, 177 N.W.2d 410, 413 (1970). 

            When a vendor makes a material misrepresentation concerning the condition of real property, the vendee is entitled to recover an amount equal to the damage proximately caused by the misrepresentation.  Doty v. Brueckner, 352 N.W.2d 827, 830 (Minn. App. 1984).  The measure of damages is the difference between the market value of the land and the purchase price.  Investment Assocs., Inc.  v. Home Planners Co., 187 Minn. 556, 558, 246 N.W. 364, 365 (1932).  In addition to this “out-of-pocket” loss, the vendee may recover any special damages naturally and proximately caused by fraud prior to its discovery, including expenses incurred in mitigating damages.  B.F. Goodrich Co. v. Mesabi Tire Co., 430 N.W.2d 180, 182 (Minn. 1988).[1]  But in jurisdictions like Minnesota that follow the “out-of-pocket” rule, if the property is worth what plaintiff gave for it, he has suffered no damage and therefore cannot recover.  Berg v. Xerxes-Southdale Office Bldg. Co., 290 N.W.2d 612, 615 (Minn. 1980). 

In cases where the “out-of-pocket” rule is inapplicable because it would not place plaintiff in the same position he would have been without the misrepresentation, it may be appropriate to consider lost profits.  B.F. Goodrich, 430 N.W.2dat 183.  To recover lost profits, the plaintiff must show the loss was a direct consequence of the defendant’s breach.  Casper v. Klippen, 61 Minn. 353, 354, 63 N.W. 737, 738 (1895).  Damages for lost profits must be ascertainable to a reasonable degree of certainty.  Faust v. Parrott, 270 N.W.2d 117, 121 (Minn. 1978).  Determination of lost profits for breach of contract depends on the circumstances of each particular case.  Cardinal Consulting Co. v. Circo Resorts, Inc., 297 N.W.2d 260, 267 (Minn. 1980). 

Here, the district court applied the “out-of-pocket” rule and concluded that respondent was not entitled to damages from the breach of warranties and misrepresentation because the actual value of the property was more than what he paid for it.  The district court found that there were 32 available rental pads on the property if respondent complied with the health code requirements.  Multiplying those 32 pads by 12 (months) and by the $150 monthly rental fee in effect at the time of purchase, as well as by 4.5—a multiplier used by real estate experts in calculating the value mobile home parks (gross rent x 4.5)—the district court concluded the actual value of the property was $259,200.  Because respondent had paid $250,000 for the property, there were no “out-of-pocket” damages, and the district court did not abuse its discretion in awarding none. 

The district court nonetheless concluded that strict application of the “out-of-pocket” rule would not have made respondent whole and, therefore, awarded lost profits.  But the district court’s conclusion is contrary to the rule announced by the Berg court that “if the property is worth what [respondent] gave for it, he has suffered no damage and, therefore, cannot recover.”  Id. at 615.  Thus, the district court abused its discretion by awarding special damages for lost profits.  See Berg, 290 N.W.2d at 615. 

            We observe that respondent could have elected to pursue his cause of action for breach of warranty and sought “cost of cure” damages.  See Parkside, 270 N.W.2d at 762 n.5 (concluding that “the cost of curing the defect” was an appropriate measure of damages that would not require application of the “out-of-pocket” rule where defendant breached an express warranty in a purchase agreement rider).  But respondent elected not to pursue “cost-of-cure” damages. 

            Affirmed in part and reversed in part.