Monticello MN MHC, LLC v. Kjellberg's Inc.

Background

MHC’s predecessor agreed to purchase a mobile home park from Kjellberg’s in August 2020. The parties later amended the agreement after MHC raised concerns about alleged illegal submetering and billing. The amended agreement required Kjellberg’s to place $1 million in escrow. The funds could be released to either the seller or purchaser after evaluating sewer expenses for 2021 and 2022. The agreement also provided for a possible 4% cap-rate price-adjustment payment.

MHC demanded release of the escrow funds, asserting that its sewer reconciliation and related calculation exceeded $1.2 million. Kjellberg’s refused to release the funds. MHC sued for breach of contract and sought declaratory judgments concerning release of the escrow funds. Kjellberg’s asserted counterclaims for breach of contract, breach of the implied covenant of good faith and fair dealing, and declaratory judgment.

MHC’s Claims

MHC argued that the contract was unambiguous and required release of the escrow funds to MHC. The court rejected two of Kjellberg’s proposed interpretations of “sewer expenses,” which would have calculated expenses on a per-unit basis or excluded property-wide expenses.

The court accepted Kjellberg’s third interpretation as a reasonable alternative. The agreement referred to sewer expenses based on usage and to the amount “determined to be due,” rather than simply the amounts listed on city invoices. The court explained that this language could require additional review to determine whether increased costs resulted from the relevant usage expenses or from unrelated increases, such as alleged property-maintenance problems.

Because “sewer expenses” was reasonably susceptible to two interpretations, the term was ambiguous. Interpreting an ambiguous contract term requires factual determination. The court therefore denied MHC’s motion for summary judgment on its breach-of-contract claim and denied summary judgment on its two declaratory-judgment claims. Those claims will proceed.

Kjellberg’s Counterclaims

Kjellberg’s breach-of-contract counterclaim alleged that MHC was required to provide sewer reconciliations quarterly. The court interpreted the agreement to require that the reconciliations be prepared quarterly and eventually provided to Kjellberg’s, not that they be delivered quarterly. Because the parties confirmed that MHC provided all the reconciliations after the full reconciliation period, the court held that MHC did not breach the contract. It granted summary judgment dismissing this counterclaim with prejudice.

Kjellberg’s implied-covenant claim relied partly on the alleged failure to provide quarterly reconciliations and partly on an asserted duty to maintain the property. The court held that MHC had no contractual duty to provide the reconciliations quarterly. It also held that the proposed maintenance duty was outside the scope of the agreement and therefore could not support an implied-covenant claim. The court further concluded that Kjellberg’s alleged damages were either not direct damages or were barred by the agreement’s waiver of consequential and other specified damages. The court granted summary judgment dismissing this counterclaim with prejudice.

Disposition

The order denied in part and granted in part MHC’s motion for summary judgment. It denied the motion on MHC’s claims I and II, denied the motion seeking dismissal of Kjellberg’s counterclaim III, and granted the motion seeking dismissal of Kjellberg’s counterclaims I and II. Counterclaims I and II were dismissed with prejudice. MHC’s breach-of-contract claim and both declaratory-judgment claims remain pending, so the court did not decide which party is entitled to the $1 million escrow account.