Amended May 15, 2017 Dutrac Community Credit Union and Kwik Trip, Inc. v. Radiology Group Real Estate, L.C. Shamrock Properties, L.C. Duffy Family Limited Partnership Bigger Better Betty Building, L.L.C. and Quad City OMS, L.C.

• Court: Supreme Court of Iowa
• Decided: March 3, 2017
• Docket: 16–0661
• Status: Published

Opinion

IN THE SUPREME COURT OF IOWA No. 16–0661

Filed March 3, 2017

Amended May 15, 2017

DUTRAC COMMUNITY CREDIT UNION and KWIK TRIP, INC.,

Appellees,

vs.

RADIOLOGY GROUP REAL ESTATE, L.C.; SHAMROCK PROPERTIES, L.C.; DUFFY FAMILY LIMITED PARTNERSHIP; BIGGER BETTER BETTY BUILDING, L.L.C.; and QUAD CITY OMS, L.C.,

Appellants.

Appeal from the Iowa District Court for Scott County, Mark R.

Lawson, Judge.

Defendants appeal the district court order granting summary

judgment in favor of the plaintiffs on their declaratory judgment action.

AFFIRMED.

Martha L. Shaff and Brandon W. Lobberecht of Betty, Neuman &

McMahon, P.L.C., Davenport, for appellants.

Peter D. Arling and Tonya A. Trumm of O’Connor & Thomas, P.C.,

Dubuque, for appellees. 2

ZAGER, Justice.

We are asked to determine whether the district court properly

granted the plaintiffs’ motion for summary judgment. DuTrac

Community Credit Union owns a parcel of real estate in Waterford Place,

a commercial development located in Davenport, Iowa. DuTrac is now

attempting to sell this parcel to Kwik Trip, Inc. As part of its due

diligence, Kwik Trip discovered that the real estate was subject to a 1996

restrictive covenant that required the approval by an architectural

control committee before any building or other structure could be

erected. This committee consisted of two named individuals. One of the

named members is deceased and the other named member has now

either resigned from the committee or refuses to act on its behalf.

DuTrac and Kwik Trip filed a declaratory judgment action asking the

district court to declare the restrictive covenant unenforceable based on

the doctrines of impossibility and supervening impracticability. The

defendants filed a resistance and asserted the restrictive covenant could

be made enforceable by modification. The district court granted the

plaintiffs’ motion for summary judgment. For the reasons set forth

below, we affirm the judgment of the district court. We find the

restrictive covenant cannot be enforced as written, the defendants’

proposed modification is not a practical or effective way to carry out the

original purpose of the covenant, and the covenant should be terminated.

I. Background Facts and Proceedings.

DuTrac Community Credit Union (DuTrac) owns a parcel of real

estate located in Davenport which is legally described as “Lot 6 and the

Southerly 20 feet of Lot 5 of Waterford Place, an Addition to the City of

Davenport, Scott County, Iowa.” The land is located in an area more

commonly known by the name of its development, Waterford Place. The 3

developer of Waterford Place was Cathedral Partners, a general

partnership. Waterford Place consists of eighteen commercial lots. Kwik

Trip, Inc. (Kwik Trip) is seeking to purchase the parcel of real estate

owned by DuTrac. While investigating title to the real estate, Kwik Trip

discovered a restrictive covenant that affects the land. The restrictive

covenant states in its entirety,

No building or other structure shall be erected on any lot in this addition without the approval of the architectural control committee consisting of David W. Lundy and/or Dennis J. Britt. This shall be interpreted to include approval of the structure, design, building materials, site plan, landscaping and signage.[1]

On September 4, 2015, DuTrac and Kwik Trip filed a petition for

declaratory judgment naming seventeen defendants. 2 All of the

defendants have an ownership interest in a parcel of real estate

contained in Waterford Place.

On September 21, Defendant Hawkeye Real Estate Investment Co.

filed an answer indicating it had no objections to the plaintiffs’ petition.

On October 6, these defendants—Radiology Group Real Estate, L.C.;

Shamrock Properties, L.C.; Quad City OMS, L.C.; Duffy Family Limited

Partnership; and Bigger Better Betty Building, L.L.C.—filed an answer to

1Originally, the restrictive covenant stated,

No building or other structure shall be erected on any lot in this addition without the approval of the architectural control committee consisting of David W. Lundy and Michael L. Duffy. This shall be interpreted to include approval of the structure, design, building materials, site plan, landscaping and signage. 2The named defendants were Radiology Group Real Estate, L.C.; Hawkeye Real Estate Investment Company; Spoden Commercial Properties, L.L.C.; St. Ambrose University; Scope Holdings, L.L.C.; 53rd & Eastern Properties, L.L.C.; Shamrock Properties, L.C.; ESK Davenport, L.L.C.; Quad City OMS, L.C.; JCO Properties, Inc.; QC Gums, L.L.C.; Duffy Family Limited Partnership; Bigger Better Betty Building, L.L.C.; JTG, L.L.C.; Extol, L.L.C.; TJECC, LLC, d/b/a “TJECEE, L.L.C.; and WFM Properties, L.L.C. 4

the plaintiffs’ petition denying the allegation that the restrictive covenant

was unenforceable. 3 Defendants St. Ambrose University and JTG, L.L.C.

filed answers denying the invalidity of the restrictive covenant. Both St.

Ambrose and JTG later filed withdrawals of the previously filed answers

and consented to entry of judgment as deemed equitable by the district

court. No other named defendant filed a responsive pleading with the

court, and default judgments have been obtained against them.

In the petition for declaratory judgment, DuTrac and Kwik Trip

allege that the restrictive covenant is no longer enforceable. Specifically,

DuTrac and Kwik Trip allege that the restrictive covenant is ambiguous

so it may be interpreted as a matter of law. Additionally, the restrictive

covenant provides no process by which new members of the architectural

control committee can or shall be added. The restrictive covenant names

two members to the committee. However, David Lundy is deceased, and

Dennis Britt has either resigned from the committee or refuses to act on

its behalf. Because the restrictive covenant does not provide a method

for determining the succession of membership to the committee, DuTrac

and Kwik Trip argue the committee is now effectively defunct. DuTrac

and Kwik Trip sought a judgment from the district court declaring the

restrictive covenant unenforceable against them based on the doctrine of

impossibility and the doctrine of supervening impracticability.

The surviving member of the architectural control committee,

Dennis J. Britt, executed three separate affidavits with regard to his

participation on the architectural control committee. Britt executed the

first affidavit on December 11, 2015, and stated that he had “no interest

3Only these named defendants appealed the district court’s grant of summary judgment and will be referred to as the appellants throughout. The other parties will be referred to by name. 5

in being a member of the [c]ommittee, and . . . no intention of making

any decisions or taking any actions on behalf of the [c]ommittee.” He

further stated that he had no intention to act on behalf of the committee,

and thus had “effectively resigned” from it. However, on December 16,

Britt executed a second affidavit wherein he discussed the terms of his

resignation from the committee by stating “[o]nce representatives are

appointed, I will resign.” Last, on February 16, 2016, Britt executed a

third affidavit that appeared to reaffirm the statements from his first

affidavit. He stated that he signed the second affidavit “in response to a

hypothetical situation posed to [him]: namely, if [he] was still a member

of the [c]ommittee, would [he] be willing to resign upon the appointment

of new representatives?” He then clarified that the second affidavit did

not affect his refusal to act on behalf of the committee and reaffirmed

that he had effectively resigned from it.

On January 29, 2016, DuTrac and Kwik Trip filed an application

for entry of default judgment against the remaining defendants who did

not file any responsive pleadings. DuTrac and Kwik Trip also filed a

motion for summary judgment that alleged there were no genuine issues

of material fact as to the allegations contained in their petition for

declaratory judgment. The motion for summary judgment requested that

the district court declare the restrictive covenant unenforceable and

terminate the restrictive covenant. The appellants resisted the motion

for summary judgment. The appellants asserted a factual dispute

existed as to the continued viability of the architectural control

committee based on the multiple affidavits submitted by Britt.

Accordingly, DuTrac and Kwik Trip could not establish, as a matter of

law, an objective impossibility or a legally sufficient supervening

impracticability to warrant the district court invalidating or declaring the 6

restrictive covenant unenforceable. Rather, the appellants argued that

under the Restatement (Third) of Property the appropriate remedy was

not to terminate the restrictive covenant, but to modify it. The appellants

provided a proposed method to modify the restrictive covenant. Their

proposal was to have all eighteen lot owners, or those willing to serve, act

as the successor architectural control committee.

A hearing was conducted on the motion for summary judgment on

March 10, and the district court issued its order granting summary

judgment to DuTrac and Kwik Trip on March 17. The district court

concluded that, due to the death and resignation or refusal to act of its

designated members, the architectural control committee no longer

existed. Accordingly, the district court found it was objectively

impossible for DuTrac and Kwik Trip to comply with the restrictive

covenant requiring approval of the architectural control committee prior

to the erection of any building or structure. The district court also

concluded it would be inappropriate to revise or modify the restrictive

covenant. The district court declared that the restrictive covenant

establishing an architectural control committee was invalid,

unenforceable, and of no further force or effect. The appellants filed a

timely notice of appeal, which we retained.

II. Standard of Review.

We review a district court’s grant of a motion for summary

judgment for correction of errors at law. Concerned Citizens of Se. Polk

Sch. Dist. v. City of Pleasant Hill, 878 N.W.2d 252, 258 (Iowa 2016).

“Summary judgment is appropriate when there is no genuine issue of

material fact and the moving party is entitled to judgment as a matter of

law.” Iowa Arboretum, Inc. v. Iowa 4-H Foundation, 886 N.W.2d 695, 701

(Iowa 2016) (quoting McKee v. Isle of Capri Casinos, Inc., 864 N.W.2d 7

518, 525 (Iowa 2015)). The district court’s grant of a motion for

summary judgment is proper when “the pleadings, depositions, answers

to interrogatories, and admissions on file, together with the affidavits, if

any, show that there is no genuine issue as to any material fact.” Id.

(quoting Iowa R. Civ. P. 1.981(3)). There is a question of material fact “if

reasonable minds can differ on how the issue should be resolved.”

Cemen Tech, Inc. v. Three D Indus., L.L.C., 753 N.W.2d 1, 5 (Iowa 2008)

(quoting Walker v. Gribble, 689 N.W.2d 104, 108 (Iowa 2004)). On our

review, we view the record in the light most favorable to the nonmoving

party. Iowa Arboretum, 886 N.W.2d at 701.

III. Analysis.

A. Impact of Britt Affidavits. The appellants argue that there is

a genuine issue of material fact as to whether Britt resigned from the

architectural control committee. The district court found that the

question of whether Britt formally resigned or not was not a material fact

in the case because neither party disputed that Britt refused to fulfill his

obligations under the restrictive covenant.

A fact is material to a case when its determination would affect the

outcome. See, e.g., Homan v. Branstad, 887 N.W.2d 153, 164 (Iowa

2016). A genuine issue of fact exists if reasonable minds may differ as to

the resolution of the question at hand. Id. If only the legal consequences

of undisputed facts are at issue, summary judgment is appropriate. Id.

We conclude that the effect of the multiple affidavits submitted by

Britt is not reasonably in dispute and does not create a factual dispute.

Whether Britt formally resigned from the committee or simply refuses to

act, the result is the same. Regardless of the characterization, Britt is no

longer fulfilling his obligations as a committee member under the

restrictive covenant, nor does he intend to act in any way on behalf of the 8

committee. Likewise, as noted by the district court at the oral argument

on the motion for summary judgment, the appellants acknowledged that

nothing would be gained by a trial on the issue. We agree with the

decision of the district court that the question of whether Britt resigned

from the architectural control committee is not a question of material

fact.

B. Impossibility and Supervening Impracticability. DuTrac

and Kwik Trip argued on the motion for summary judgment that the

architectural control committee had no members and therefore the

restrictive covenant was unenforceable under the doctrines of

impossibility or supervening impracticability. In response, the appellants

argued that there was a disputed issue of material fact because it was

unclear whether Britt had actually resigned from the committee.

We have previously recognized that restrictive covenants are

contracts. Fjords N., Inc. v. Hahn, 710 N.W.2d 731, 735 (Iowa 2006); see

also Compiano v. Kuntz, 226 N.W.2d 245, 249 (Iowa 1975) (“The

restrictive covenants were agreements or promises and therefore

contractual.”). “Because restrictive covenants are contractual in nature,

we apply contract-based rules of construction to interpret them.” Sky

View Fin., Inc. v. Bellinger, 554 N.W.2d 694, 697 (Iowa 1996); see also

Compiano, 226 N.W.2d at 249.

Generally, when we interpret contracts, we look to the language

contained within the four corners of the document. Clinton Physical

Therapy Servs., P.C. v. John Deere Health Care, Inc., 714 N.W.2d 603,

615 (Iowa 2006). “In the construction of written contracts, the cardinal

principle is that the intent of the parties must control, and except in

cases of ambiguity, this is determined by what the contract itself says.”

Iowa R. Civ. P. 6.904(3)(l); see also Peak v. Adams, 799 N.W.2d 535, 543 9

(Iowa 2011). If the intent of the parties is clear and unambiguous from

the words of the contract itself, we will enforce the contract as written.

Am. Soil Processing, Inc. v. Iowa Comprehensive Petroleum Underground

Storage Tank Fund Bd., 586 N.W.2d 325, 329 (Iowa 1998).

If the language of the contract is ambiguous, then we engage in

interpretation in order to determine “the meanings attached by each

party at the time the contract was made.” Clinton Physical Therapy

Servs., 714 N.W.2d at 615 (quoting E. Allan Farnsworth, Contracts § 7.9,

at 458 (3d ed. 1999)). To the extent necessary to reveal the parties’

intent, extrinsic evidence is admissible. Id. We do not find that the

restrictive covenant is ambiguous.

In a similar case in Texas, two developers of a subdivision placed

restrictive covenants on the property. Hollis v. Gallagher, No. 03–11–

00278–CV, 2012 WL 3793288, at *1 (Tex. App. Aug. 28, 2012). One of

the covenants provided that “[n]o two-story dwelling shall be permitted

on lots 1–23 without the consent of the undersigned.” Id. The

“undersigned” were the two developers. Id. The Gallaghers purchased a

lot in the subdivision and began constructing a two-story house. Id.

After construction began, another lot owner, Hollis, brought suit to

enforce the restrictive covenant. Id. The Gallaghers answered and

asserted that the restrictive covenant was unenforceable due to the

deaths of both developers. Id. at *2.

Utilizing the Restatement (Second) of Contracts, the court found

that the defense of impossibility rendered the restrictive covenant

unenforceable. Id. at *7. The developers did not leave a succession plan

in the restrictive covenant, and the court found that “[t]he plain language

of the restrictive covenant at issue made the developers ‘necessary for 10

performance.’ ” Id. at *5 (quoting Key Energy Servs., Inc. v. Eustace, 290

S.W.3d 332, 340 (Tex. App. 2009)).

Here, the text of the restrictive covenant is brief:

No building or other structure shall be erected on any lot in this addition without the approval of the architectural control committee consisting of David W. Lundy and/or Dennis J. Britt. This shall be interpreted to include approval of the structure, design, building materials, site plan, landscaping and signage.

The language of the restrictive covenant itself is limiting in two important

places. The first sentence of the covenant restricts the approval of the

committee to buildings and structures “erected” on any lot in the

Waterford Place development. The covenant goes on to explain what

building activities require approval: “structure, design, building

materials, site plan, landscaping and signage.” Notably, the covenant

does not require approval for activities outside the original construction

of buildings or structures in the development.

The restrictive covenant also specifically names two members,

David W. Lundy and Dennis J. Britt. It provides that the two could serve

together or alone with the language “consisting of David W. Lundy

and/or Dennis J. Britt.” It does not, however, provide for any succession

plan in the event both Lundy and Britt cease to serve on the committee.

The restrictive covenant does not provide for any replacement member in

the event either Lundy or Britt resigns, refuses to act, or dies.

The language of the restrictive covenant is limited and

unambiguous. The written language of the restrictive covenant appoints

two specifically named individuals, with no succession mechanism, thus

limiting its duration. There is no mechanism to transfer authority to

another member or to appoint new members to the committee. The

language of the restrictive covenant further limits the approval process to 11

buildings and structures to be erected on lots in the development. The

restrictive covenant does not address the approval process for other

types of building on the lots, such as modifications, additions, or

reconstruction.

The next step in our analysis is to determine whether DuTrac and

Kwik Trip could comply with the terms of the restrictive covenant. The

district court found that compliance could not be achieved under the

doctrine of impossibility. We originally recognized the doctrine of

impossibility of performance in Nora Springs Coop. Co. v. Brandau, 247

N.W.2d 744, 747 (Iowa 1976). In order to excuse nonperformance, the

term must be objectively impossible to perform. Id. The impossibility of

performance cannot be due to the fault of the nonperforming party. Id.

Similarly, we have also recognized the doctrine of discharge by

supervening impracticability from the Restatement (Second) of Contracts.

Am. Soil Processing, 586 N.W.2d at 330. The doctrine of discharge by

supervening impracticability provides,

Where, after a contract is made, a party’s performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary.

Restatement (Second) of Contracts § 261, at 313 (Am. Law Inst. 1981);

see also Am. Soil Processing, 586 N.W.2d at 330.

This rule recognizes that even though a party in assuming a duty has not qualified the language of the party’s undertaking, the court may still relieve the party of that duty “if performance has unexpectedly become impracticable as a result of a supervening event.”

Am. Soil Processing, Inc., 586 N.W.2d at 330 (quoting Restatement

(Second) of Contracts § 261 cmt. a, at 313). 12

Here, compliance with the approval process contained in the

restrictive covenant was both impossible and impracticable. Under the

doctrine of impossibility of performance, it was objectively impossible for

the committee to meet to approve any buildings or structures. One

member of the committee is deceased, and the other refuses to act on the

committee’s behalf. The committee has no acting members and no

succession plan to appoint new members. DuTrac and Kwik Trip

therefore argue that our analysis should end here. Because the existing

restrictive covenant cannot be complied with, we should declare the

covenant invalid and unenforceable.

C. Restatement (Third) of Property. However, because our

cases analyzing restrictive covenants under contract law theories and the

Restatement (Second) of Contracts date from the 1970s, and because we

have never before held that a strict contractual impossibility or

impracticability standard governs restrictive covenants, the appellants

urge us to consider the restrictive covenant under the Restatement

(Third) of Property: Servitudes. Section 7.10 provides a framework for

analyzing the modification or termination of a servitude:

(1) When a change has taken place since the creation of a servitude that makes it impossible as a practical matter to accomplish the purpose for which the servitude was created, a court may modify the servitude to permit the purpose to be accomplished. If modification is not practicable, or would not be effective, a court may terminate the servitude. Compensation for resulting harm to the beneficiaries may be awarded as a condition of modifying or terminating the servitude.

Restatement (Third) of Prop.: Servitudes § 7.10(1), at 394 (Am. Law Inst.

2000).

The comments to the rule expand on the rationale behind its

adoption. Because servitudes—in this case, a restrictive covenant— 13

create valuable property rights, there are competing interests and

concerns that the court must consider. Id. § 7.10 cmt. a, at 395. On

one side, because of the potential for a servitude to be of unlimited

duration, there is a risk that “absent mechanisms for nonconsensual

modification and termination, obsolete servitudes will interfere with

desirable uses of the land.” Id. However, because important property

rights are implicated, termination or modification should be approached

with caution. Id.

We have applied the Restatement (Third) of Property: Servitudes to

a case involving an easement. See Gray v. Osborn, 739 N.W.2d 855, 861

(Iowa 2007). And some time ago, we applied the recognized viability of

the changed conditions doctrine under the First Restatement of Property

(i.e., the indirect predecessor to the Third). See Thodos v. Shirk, 248

Iowa 172, 186–88, 79 N.W.2d 733, 741–43 (Iowa 1956). Thus, we have

indicated that restrictive covenants can terminate due to changed

conditions, even when a pure contractual approach might allow the

covenant to continue. Id. Section 7.10 addresses a related but different

question: whether a covenant can be modified to allow its original

purpose to continue, even if it is not possible to implement that covenant

according to its original terms.

1. Purpose of restrictive covenant. The first step under this test is

to analyze the underlying purpose of the restrictive covenant and

whether this purpose can still be accomplished. “The test is stringent:

relief is granted only if the purpose of the servitude can no longer be

accomplished.” Id. § 7.10 cmt. a, at 395.

The restrictive covenant was created by the developer, Cathedral

Partners, an Iowa general partnership managed by the Lundy

Corporation. David W. Lundy was President of the Lundy Corporation. 14

The restrictive covenant included only Lundy and Britt as the members

of the architectural control committee. It did not include any succession

mechanism, nor did it provide for any input from any of the lot owners.

It is clear that the principal purpose of the restrictive covenant was to

benefit the developers by enhancing the marketability of the lots. The

text of the restrictive covenant indicates that the purpose was for the

developers to exercise control over the original construction of the

development to maximize the value of the remaining lots. Of course,

these kinds of covenants also presumably benefit at least some

purchasers of the lots. The purchasers buy the lots because they

appreciate that other construction in Waterford Place will not be totally

uncontrolled, but will be subject to the review of the developers. Yet two

decades have passed, and none of the current owners of lots in the

development have, or ever had, any input or architectural control over

any other lot in the development.

Once the purpose is identified, we must analyze whether it is

“impossible as a practical matter to accomplish the purposes for which

the servitude was created.” Id. § 7.10(1). As discussed above, it is now

impossible for the purpose of the restrictive covenant to be fulfilled.

Lundy is deceased and Britt has either resigned or is refusing to act on

behalf of the architectural control committee. There is no mechanism for

succession or any means for appointing new or additional members to

the committee. It is now impossible as a practical matter to accomplish

the purpose for which the restrictive covenant was created—requiring

control of construction by review of the developers.

2. Modification or termination of restrictive covenant. The second

step of the test is to determine whether modification or termination is

appropriate. The appellants argue the district court should have 15

modified the restrictive covenant under the Restatement (Third) of

Property rather than declaring it unenforceable. They contend the

district court should have appointed a new architectural control

committee that included a representative of every lot owner in Waterford

Place.

With regard to modification, the Restatement (Third) of Property

provides that the “court may modify the servitude to permit the purpose

to be accomplished. If modification is not practicable, or would not be

effective, a court may terminate the servitude.” Id. § 7.10(1), at 394. The

modification or termination of the covenant is within the discretion of the

district court. Id. The comment to this section explains,

The changed-conditions rule has traditionally been used to terminate servitudes, rather than to modify them, but the less drastic step should be taken if modification would permit the servitude to continue to serve the purpose for which it was designed to an extent that it is worthwhile. Id. cmt. a, at 395. We agree with the district court that the modification proposed by

the appellants is not, as a matter of law, a practicable or effective way to

carry out the purpose of the restrictive covenant. As noted above, the

covenant reserved control over construction to the developers only. No

succession plan was set forth beyond the two named individuals, and the

required approvals had no stated criteria and applied only to initial

construction, not remodeling. We think the original covenant was thus

intended by design to be a limited-duration restriction that would run its

course once, as the developers presumably anticipated, all the lots were

quickly sold. Instead, as sometimes happens, the development took a

long time to reach full maturity.

We agree with the district court that a committee comprised of all

eighteen of the lot owners, each of whom has its own economic interests, 16

is not comparable to the original covenant or a practical modification of

it. With no standards to guide it other than the members’ own interests,

and with any ten owners wielding an absolute majority, such a

committee could hamstring the sale of the remaining undeveloped lots—

which would run directly contrary to the purpose of the original

covenant. Since the proposed modification is not practical, we agree that

the appropriate remedy in this case is the termination of the restrictive

covenant.

IV. Conclusion.

Under the Restatement (Third) of Property, circumstances have

changed since the creation of the restrictive covenant which makes it

impossible as a practical matter to accomplish the purpose for which the

covenant was originally created. However, modification of the restrictive

covenant, as proposed, is not practical, nor would it be effective to

accomplish the original purpose of the restrictive covenant. Termination

of the restrictive covenant was appropriate. We accordingly affirm the

judgment of the district court granting summary judgment to DuTrac

and Kwik Trip.

All justices concur except Waterman, J., who takes no part.