IN THE COURT OF APPEALS OF IOWA
No. 18-0204 Filed March 6, 2019
FLIX BREWHOUSE IOWA, LLC, Plaintiff-Appellee,
vs.
MERLE HAY MALL, L.P., Defendant-Appellant. ________________________________________________________________
Appeal from the Iowa District Court for Polk County, Jeanie Vaudt, Judge.
Merle Hay Mall appeals a district court ruling finding an enforceable
settlement agreement existed between Merle Hay Mall and Flix Brewhouse Iowa.
AFFIRMED.
Sarah K. Franklin and Elizabeth R. Meyer of Davis Brown Law Firm, Des
Moines, for appellant.
William B. Serangeli of Dickinson, Mackaman, Tyler & Hagen, P.C., Des
Moines, for appellee.
Heard by Potterfield, P.J., and Tabor and Mullins, JJ. 2
MULLINS, Judge.
Merle Hay Mall, L.P. (MHM), appeals a district court ruling finding an
enforceable settlement agreement between MHM and Flix Brewhouse Iowa, LLC
(Flix). MHM claims the parties did not reach an agreement on the meaning of the
contract terms in the settlement agreement, so no contract existed. We find an
enforceable settlement agreement existed and affirm the district court.
I. Background Facts and Proceedings
On April 4 and May 9, 2013, Flix, as tenant, and MHM, as landlord, entered
into a lease agreement. The lease was negotiated by Elizabeth Holland as CEO
and general counsel for MHM’s management company, Allan Reagan as president
of one of Flix’s management companies, and Matt Silvers as general counsel for
Flix. Holland drafted the lease agreement. The lease covered 37,000 square feet
of space located in Merle Hay Mall. Flix tendered a $1.5 million security deposit.1
MHM spent $12.8 million renovating the property to create appropriate space for
the theater and microbrewery—$5.3 million more than originally budgeted.
Article 36 of the lease established a landlord’s lien and security interest on
Flix’s personal property. The relevant portions of Article 36 state:
As further security for Tenant’s performance under this Lease, to the extent not expressly prohibited by applicable Law, Subject to the provisions set forth in Article 7, Paragraph D, Tenant hereby grants Landlord a lien and security interest in all tangible personal property existing and after-acquired property of Tenant placed in or relating to Tenant's business at the Premises, including but not limited to, insurance proceeds from casualty losses to personal property, fixtures, equipment, inventory, furnishings and other
1 The contract provided $500,000 of the security deposit would be released when Flix opened for business and paid its first month of rent, another $500,000 would be released at the end of the first full lease year, and the final $500,000 at the end of the second full lease year unless Flix had an ongoing default. 3
tangible personal property. . . . Tenant agrees to execute such financing statements, collateral assignment of rents and subleases, and other documents necessary to perfect a security interest, as Landlord may now or hereafter reasonably request in recordable form. Landlord may at its election at any time execute such a financing statement and collateral assignment as Tenant’s agent and attorney-in-fact or file a copy of this Lease as such financing statement and collateral assignment. Landlord shall be entitled hereunder to all of the rights and remedies afforded a secured party under the Uniform Commercial Code or other applicable Law in addition to any landlord's lien and rights provided by applicable Law. Provided that Tenant is not then in default of this Lease beyond any applicable cure period, Landlord following twenty four months (24) of continuous operation by Tenant agrees to execute a commercially reasonable subordination of its lien on Tenant's property to the lien of any bona-fide third-party lender to Tenant providing financing of furniture, fixtures and equipment and other removable personalty located at the Premises. In addition, subsequent to the 84th month of the Term, upon Tenant’s written request, Landlord agrees to release its lien rights over Tenant’s personalty provided that the Lease is then in good standing and Tenant is open for business and occupying the Premises for its Permitted Use.
On September 30, 2014, Flix signed a financing lease agreement for
personal property relating to food and drink service with GB Leasing, Inc. (GBL).2
The lease agreement granted GBL a security interest in the fixtures, furniture, and
equipment obtained through the lease. Flix opened for business in December
2014. In February 2015, MHM discovered the GBL lease. The parties did not
agree on the impact of the GBL lease on MHM’s lien subordination rights: MHM
claimed the GBL lease constituted a default under Article 36 of the MHM-Flix lease
and GBL was not a bona-fide third-party lender; Flix asserted Article 36 only
2 A finance lease is essentially a lease-to-own arrangement, where the lessor finances the asset and the lessee pays all other costs and has the option of purchasing the asset at the end of the lease for a nominal price. See Lease, Black’s Law Dictionary (10th ed. 2014). 4
applied to property Flix owned or had an interest in. MHM states it believed the
above language made it Flix’s lender and considered it a blanket lien over all of
Flix’s tangible personal property purchased or leased. MHM argued the provision
effectively prohibited finance lease agreements, but Flix did not hold a similar
understanding.
On March 6, MHM filed a financing statement. On September 2, MHM sent
a letter asserting Flix had defaulted under the lease for failure of GBL to
subordinate its lien rights to MHM’s rights. Flix responded and denied default,
contending the lease did not limit or prohibit the leasing of equipment, which is a
standard practice in the restaurant and cinema industries.
Flix sent MHM a notice-of-right-to-cure letter on January 13, 2016,
requesting release of the first $500,000 of the security deposit which should have
been released on February 1, 2015, if Flix was not in default. MHM did not
respond. On February 15, Flix sent a notice of default to MHM for its refusal to
release the first $500,000. Flix also sent a notice of right to cure to MHM for the
second $500,000 which should have been released on February 1, 2016. Citing
Article 36’s default provision, MHM refused to release the $1 million from Flix’s
security deposit.
On April 11, the parties agreed to enter negotiations in an attempt to resolve
their differences. Holland represented MHM, and Flix was represented by Joseph
Borg. On April 27, Borg emailed a settlement proposal to Holland. Holland had
not responded by May 4, so Borg resent the proposal. Holland replied that she
had not received the initial email and would address the proposal the next week;
further communication resulted in a conference call on May 11. 5
The proposed settlement agreement provided Flix would terminate the GBL
lease and listed assets which only MHM held a lien on. MHM would execute the
joint order to release the disputed security deposit funds from the escrow agent
and agree to execute an attached subordination agreement. The subordination
agreement provided MHM would subordinate its lien to GBL beginning December
17, 2016.
On the May 11 call, Holland stated MHM would agree to subordinate its
interest in Flix collateral after February 1, 2017, if Flix replaced GBL with a bona-
fide third-party lender or provided proof GBL was a true bona-fide third-party
lender. Holland testified during the call she explained her understanding of Article
36 to be that Flix could only finance after-acquired property after twenty-four
months of compliance with the lease—MHM had a full lien for the first twenty-four
months, then a step-down, and a release after eighty-four months. Borg
understood from the call MHM would not subordinate until February 1 and all
discussions of the provision were in the context of the GBL lease. The next day,
Holland emailed Borg stating MHM only required two things to move forward to
resolution: a subordination from GBL to MHM through February 1, 2017, and
information sufficient to determine GBL was a bona-fide third-party lender.
Borg sent a second settlement proposal on May 27, 2016. His email stated
“any subordination after February 1, 2017, would be to a ‘bona-fide third-party
lender’ as per the terms of the Shopping Center Lease.” The settlement and
subordination agreements were amended as requested in Holland’s email: moving
the subordination date to February 1, 2017, limiting MHM’s subordination to a
bona-fide third-party lender, changing the bona-fide third-party lien to “all assets 6
owned by Flix” in place of an identified list of assets, and substituting GBL with an
unnamed secured party in the subordination agreement. Borg resent the proposal
on June 3, and received a reply from Holland that MHM was awaiting comments
from local counsel and would then set up a time to discuss.
Borg followed up on June 16, and Holland responded she was waiting for
answers to a list of questions sent to MHM counsel that week. Borg and Holland
spoke by telephone on June 17; Holland was fine with the changes made and
indicated if GBL remained a secured creditor, MHM would require GBL to
acknowledge its lien rights were subordinate to MHM.
Borg sent a third proposed agreement on July 1 reflecting his understanding
of Holland’s requested changes. This version included a subordination agreement
with GBL subordinating its interests to MHM’s primary lien. The proposal was sent
again on July 13, at which point Holland asked for a Word version so she could
compare it to a document drafted by her Iowa counsel. Borg provided the
requested document on July 14, describing the proposed GBL subordination
agreement as a standard subordination agreement following the language of the
lease and noting the subordination agreement previously proposed by MHM was
inapplicable due to the expected termination of the Flix-GBL lease.
On August 2, in response to a status check by Borg, Holland emailed Borg
stating:
Our Iowa Counsel has reviewed the document and we will agree that provided nothing in our agreement will in any way be construed as an agreement that GB Leasing is in fact an arms length third party, we can agree to it. Until we are provided with this assurance, we will require this proviso. 7
Borg added a provision reflecting Holland’s request on August 3, creating the
fourth settlement proposal, which Holland said “looks good.”
Following Holland’s statements MHM agreed to the document, Flix began
to take steps to comply with its obligations under the settlement agreement. Flix
reached out to GBL and on September 6, GBL agreed to let Flix buy out the lease
agreement with a penalty payment of $15,000. Flix purchased the equipment from
GBL through the use of promissory notes.
On October 6, Holland emailed Borg asking if the revisions were acceptable
to Flix. She stated, “Please let me know if they are and we can move forward to
execute this document. If it is acceptable, please have Flix execute it and we will
sign second.” On October 13, Flix and GBL “accepted and executed the
agreement.”
On October 31, one of Holland’s associates contacted Borg about extending
the letter of credit for the final $500,000 of the security deposit, which was set to
expire on November 6. Borg testified the associate indicated the settlement
documents were fine, and Flix extended the letter of credit. Borg reached out to
Holland on November 16 for a status update on the settlement documents.
Holland responded and copied her associate asking if the letter of credit had been
extended and stated, “My understanding was that was what we were waiting for.”
On December 12, four months after approving the document and nearly two
months after stating if Flix executed the agreement MHM would sign second,
Holland left Borg a voicemail message stating the settlement agreement did not
make clear MHM’s lien subordination would be limited to after-acquired property. 8
She requested language be inserted in the agreement clarifying that. Borg did not
respond.
On December 13, William Serangeli, additional counsel for Flix, sent an
email to Holland demanding receipt of the executed settlement agreement.
Holland executed the Exhibit 4 of the agreement—a joint order for the release of
$1 million of the security deposit held in escrow—and forwarded it to the escrow
agent, who released the funds to Flix. No other portion of the settlement
agreement was returned to Flix executed by MHM.
On December 22, Flix filed a petition against MHM to enforce the settlement
agreement. A two-day non-jury trial was held in November 2017. The district court
found Holland’s emails on August 2, 3, and October 6, 2016, could reasonably be
understood by Flix to be assent to the terms of the settlement agreement. The
court found an enforceable settlement agreement existed and MHM was in breach
of the agreement. The court awarded Flix attorney fees as provided in the lease
agreement and settlement agreement. MHM appeals.
II. Standard of Review
“Determining the legal effects of a contract is a matter of law to be resolved
by the court.” Galloway v. State, 790 N.W.2d 252, 254 (Iowa 2010). Any disputed
material facts surrounding a settlement agreement are resolved by the finder of
fact. Wende v. Orv Rocker Ford Lincoln Mercury, Inc., 530 N.W.2d 92, 94 (Iowa
Ct. App. 1995). Our review of a contract interpretation is for correction of errors at
law. Iowa R. App. P. 6.907; Schaer v. Webster Cty., 644 N.W.2d 327, 332 (Iowa
2002). The district court’s findings of fact are binding on us if supported by
substantial evidence. Land O’Lakes, Inc. v. Hanig, 610 N.W.2d 518, 522 (Iowa 9
2000). If a reasonable mind would accept the evidence as adequate to reach a
conclusion, we consider it substantial for a finding of fact. Id. “Evidence is not
insubstantial merely because it could support contrary inferences.” Strong v.
Rothamel, 523 N.W.2d 597, 600 (Iowa Ct. App. 1994). “We view the evidence in
a light most favorable to the trial court’s judgment.” Land O’Lakes, 610 N.W.2d at
522 (citation omitted).
III. Analysis
MHM claims no settlement agreement can exist, stating the parties did not
agree on the meaning of the material terms in Article 36 of the lease agreement
and the subsequent settlement agreement. “For a contract to be valid, the parties
must express mutual assent to the terms of the contract.” Schaer, 644 N.W.2d at
338. “[M]utual assent is based on objective evidence, not on the hidden intent of
the parties.” Id. (quoting Hill-Shafer P’ship v. Chilson Family Trust, 799 P.2d 810,
815 (Ariz. 1990)). Assent is normally recognized through offer and acceptance.
Heartland Express, Inc. v. Terry, 631 N.W.2d 260, 268 (Iowa 2001). The
acceptance must match the offer “in all its conditions, without any deviation or
condition whatever.” Rick v. Sprague, 706 N.W.2d 717, 724 (Iowa 2005) (citation
omitted). “A settlement agreement need not be reduced to a writing before it is
enforceable unless required by statute or court rule.” Wende, 530 N.W.2d at 95.
The district court found the objective evidence in the record established
mutual assent to the terms of the fourth proposed settlement agreement. We find
substantial evidence supports the district court’s conclusion.
MHM points to testimony to support its claim the parties never agreed on
the meaning of the settlement agreement’s subordination obligations. Holland 10
testified she viewed the settlement agreement as an either-or between either
termination of Flix’s lease agreement with GBL or its subordination to the MHM
lease agreement. However, from the first proposed settlement agreement, Flix
offered to terminate the lease with GBL. MHM continued to require language
limiting any potential GBL financing. MHM specifically requested changes in the
first version of the subordination agreement which were incorporated. The
language of the proposed subordination agreement between MHM and an
unidentified bona-fide third-party lender then did not change from the second
proposed settlement agreement provided to Holland in May 2016 through the
fourth version of the settlement agreement as executed by Flix. After the initial
changes requested by MHM, no other modifications were requested to the
subordination agreement until Holland’s December call.
The objective evidence provided to the court reveals the changes requested
by MHM were accommodated by Flix to the extent MHM clearly communicated its
requests. MHM, through Holland, largely approved the settlement agreement with
the third proposed agreement subject to the addition of a provision noting nothing
in the agreement could be construed as finding GBL qualified as a bona-fide third-
party lender. A provision was added to that effect, and Holland told Borg it looked
good. In October, Holland asked Flix to execute the document and stated MHM
would execute second. Holland did not place any qualifications or conditions
requiring further changes to the documents before execution.
After Flix executed the document, it performed its obligations under the
settlement agreement. Flix terminated its lease with GBL, incurring a financial
penalty. MHM delayed executing the document until an existing line of credit for 11
the remaining security deposit from Flix to MHM was extended three months. After
the line of credit was extended, and two months after Flix had executed the
agreement she had approved, Holland requested further modification of the
agreement in a way that would limit Flix’s ability to obtain financing and would
modify the plain meaning of the third paragraph of Article 36. This request
occurred at approximately the same time Flix reached twenty-four months of
continuous operation, when, under Article 36, MHM’s lien would be subordinate to
any bona-fide third-party lender.
Holland’s December request limiting any subordination to after-acquired
property was a new and unexpected request to Flix. At trial, Holland testified she
had explained her understanding of Article 36 to Borg in the May 11 call, but Borg
recalled the discussion as framed around the timing of MHM’s subordination of
GBL’s lease and objections to GBL as a bona-fide third-party lender. Holland also
testified to only becoming aware Flix did not read Article 36 in the same way as
MHM during pre-trial settlement conversations with Reagan and Silvers.
A review of the objective evidence supports Flix’s interpretation of the
clause. The language of the third paragraph of Article 36 makes no mention or
implication limiting MHM’s subordination rights after twenty-four months of
operation to after-acquired property, despite the use of the “after-acquired” qualifier
in the previous paragraph. Moreover, in Holland’s email dated May 12, 2016, she
requires “A subordination from GB Leasing to Merle Hay Mall up through February
1, 2017.” The requested subordination did not specify it was limited for any
equipment or property acquired through GBL through February 1; it could be
understood to end the subordination February 1. We also note Holland testified 12
she was aware the limitation she requested in December made the property
lease’s subordination clause “useless” to Flix in obtaining outside financing.
We consider whether the objective evidence available at the time the
agreement was entered into could support the district court’s findings. In this
analysis we do not consider the hidden intent that may have been later revealed
during the trial process. Furthermore, we recognize that evidence supporting a
contrary inference does not make the evidence insubstantial. See Schaer, 644
N.W.2d at 338; Strong, 523 N.W.2d at 600. Viewing the evidence in the light most
favorable to the district court’s judgment, we find substantial evidence exists to
support a finding of an enforceable settlement agreement between Flix and MHM.
A reasonable person viewing the objective evidence could conclude a mutual
assent to the terms of the contract from Holland’s emails in August and October;
in particular the October statement, “If it is acceptable, please have Flix execute it
and we will sign second,” signaled objective assent to the terms of the agreement
and constituted an offer. Flix then executed the settlement agreement and took
actions to its detriment and for the benefit of MHM in conformance with the terms
of the agreement, constituting acceptance of MHM’s offer. It was only after Flix
had executed the agreement and MHM had accepted the benefits of Flix’s
performance that MHM informed Flix it wanted different terms than the agreement
Flix signed two months earlier at MHM’s urging.