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Sterling Development Group Three, LLC v. Carlson

Supreme Court of North Dakota

February 12, 2015

Sterling Development Group Three, LLC, Sterling Development Group Eight, LLC, Plaintiffs and Appellants
v.
James D. Carlson, Defendant and Appellee

Page 415

Appeal from the District Court of Cass County, East Central Judicial District, the Honorable Steven L. Marquart, Judge.

Nancy J. Morris (argued), Jason T. Loos (on brief) and Erik R. Johnson (on brief), Fargo, N.D., for plaintiffs and appellants.

Charles K. Maier (argued), Loren L. Hansen (appeared) and Kermit J. Nash (on brief), Minneapolis, Minn., for defendant and appellee.

Dale V. Sandstrom, Daniel J. Crothers, Lisa Fair McEvers, Carol Ronning Kapsner, Gerald W. VandeWalle, C.J.

OPINION

Page 416

Sandstrom, Justice.

[¶1] Sterling Development Group Three, LLC, and Sterling Development Group Eight, LLC, appeal from a judgment dismissing their action against James D. Carlson to collect on two personal guarantees and from an order awarding Carlson costs and disbursements. Because the district court's finding that the principal's contractual obligations were altered without Carlson's knowledge or consent is not clearly erroneous, and the court did not abuse its discretion in awarding costs and disbursements, we affirm the judgment and order.

I

[¶2] In 1983, Carlson founded PRACS Institute, Ltd., a medical research facility which began operating in East Grand Forks, Minnesota. In 1999, Sterling Development Group Three entered into a 15-year lease agreement with PRACS for a building located in East Grand Forks. Carlson signed the lease agreement as the president of PRACS. Carlson also signed a personal guaranty, which provided in relevant part:

SECTION 1. Statement of Guaranty. Guarantor guarantees a payment of rent under the attached lease pursuant to the terms thereof. If Obligor defaults in the payment of any installment of rent, Guarantor shall pay the amount of such installment within thirty (30) days after receipt of notice of default and demand for payment. Guarantor's liability hereunder shall not be affected by reason of any extension of time for payment of any installment granted by Obligee to Obligor.

[¶3] When PRACS expanded in 2004, Sterling Development Group Eight built an expansion to the Sterling Three building, and PRACS entered into a lease agreement with Sterling Eight for a term running simultaneously with the Sterling Three lease. Carlson signed a similar personal guaranty for the Sterling Eight lease. In January 2006, Carlson sold PRACS to Contract Research Solutions, Inc., which the parties refer to as Cetero. The Sterling companies consented to this " change of control." Carlson's daily involvement in PRACS ceased at that point. Carlson received Cetero stock in the sale and became a member of Cetero's seven-member board of directors.

[¶4] In 2010, Cetero suspended its East Grand Forks operations, but continued to pay rent to the Sterling companies. In the spring of 2012, Cetero filed for bankruptcy. The bankruptcy trustee eventually rejected the East Grand Forks Cetero leases with the Sterling companies and stopped paying rent. The Sterling companies then brought this action against Carlson to collect more than $600,000 for unpaid rent under his personal guarantees.

[¶5] Following a bench trial, the district court dismissed the action. The court found Carlson was exonerated from liability under the personal guarantees because the original lease agreements had been altered in three respects by the Sterling companies and Cetero or PRACS without Carlson's knowledge or consent. First, the court found the Sterling companies and Cetero altered the contractual responsibility for providing janitorial services. Second, the court found the Sterling companies and PRACS altered PRACS' contractual

Page 417

obligation to pay real estate taxes so the Sterling companies could receive certain amounts of tax increment financing benefits. Third, the court found that the Sterling companies and Cetero altered the contractual method for calculating base rent adjustments for the leases. The court, after reviewing the ...


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