United States District Court, D. North Dakota, Northwestern Division
FINDINGS OF FACT, CONCLUSIONS OF LAW, AND ORDER FOR JUDGMENT
Charles S. Miller, Jr., Magistrate Judge
Plaintiff Bakken Residential, LLC (“Bakken”) commenced this action on October 19, 2012, against Cahoon Enterprises, LLC, (“Cahoon”), several weeks after Cahoon declared that it considered a real estate purchase agreement between the parties to have terminated because of Bakken’s failure to close on the property. Bakken had entered into an agreement with Cahoon to purchase 42.74 acres of land in the small community of Ray, North Dakota, during the height of the Bakken oil boom hoping to develop a large mobile home park on the western half of the property and make available for sale developed commercial lots in the eastern half. Bakken’s complaint asserts claims for breach of the purchase contract, unjust enrichment, and quantum meruit.
Initially, the major thrust of Bakken’s action was to obtain specific performance with its requests for damages being secondary. This is because Bakken continued with its development efforts after the action was filed, including spending money on final engineering and an updated appraisal for its lender. And, in an attempt to prevent the sale of the property to someone else in the interim, Bakken filed a lis pendens. It was not until 2015, when the demand for oilfield workforce housing was collapsing with the falling oil prices that Bakken abandoned its request for specific performance and focused instead on its arguments for damages.
At trial, Bakken’s primary focus was upon its claim for unjust enrichment, believing this would result in the largest dollar recovery. Essentially, Bakken’s argument is that all of the work it did on its proposed development in terms of planning, engineering, obtaining preliminary governmental approvals, and insuring that the site had adequate utilities (what it refers to collectively as “entitlements”) substantially benefitted Cahoon by making the property more valuable than what it was without all of these things, i.e., as “unentitled” property. Bakken contends that the court should enter an award against Cahoon for this increased value notwithstanding its own inability to capitalize on what, by its estimates, amounted to more than a doubling of the value of property.
In the alternative, Bakken seeks to recover the amount that it spent on its development as well as for a return of the earnest money deposited as part of the purchase agreement. Bakken contends that these amounts are recoverable at law because of Cahoon’s alleged breaches of the purchase agreement or, alternatively, in equity based upon on a claim for quantum meruit.
Cahoon moved at trial for dismissal of the action, contending that North Dakota law prohibits a foreign limited liability company from maintaining any action, suit, or proceeding in any court of this state until it possess a certificate of authority and that Bakken had let its certificate authority lapse prior to initiating this action and did not have one at the time of trial. This was the first time Cahoon raised this issue. Apart from that, Cahoon denies it breached the purchase agreement or that any breach was a proximate cause of the damages being claimed by Bakken. Cahoon also contends that equitable relief is not appropriate.
The case was tried to the court on June 2-3, 2015. Thereafter the court allowed time for the parties to submit post-trial briefs.
In each instance in which the court reserved ruling on the relevancy of a particular exhibit or item of testimony, the court has overruled the objections and given the evidence the weight it deserves under the circumstances.
FINDINGS OF FACT
1. Bakken is a Colorado limited liability company. Its members are Todd Oltmans and Michael Wilson, both of whom are from Colorado. Oltmans is a real estate developer and Wilson a dealer of manufactured homes and an investor in mobile home parks.
In 2011, Oltmans and Wilson began exploring the possibility of developing real estate in the Bakken oilfields in northwestern North Dakota because housing was then in short supply and the region one of the top-ten rental markets in the country. Given Oltmans’ and Wilson’s particular expertise, they were looking for an opportunity to develop a mobile home park for housing oilfield workers. They explored several possibilities and one that they eventually decided upon was a 42.74 acre tract located in Ray, North Dakota, that was listed for sale by Cahoon.
Oltmans and Wilson soon brought on another individual, Brian Robinson, to assist in obtaining the permits and approvals for the development of the property and then later to oversee the construction. Robinson is also from Colorado. He has an engineering degree and substantial prior experience in real estate development. Robinson is described as being a partner in the development of the property although not a member of Bakken.
2. Ray is small community. According to a market analysis obtained by Bakken, Ray had less than 700 persons going into 2012, which was up from a population of a little over 500 just before the Bakken boom. Ray is located along U.S. Highway 2 north and east of Williston, North Dakota, about 35 miles away by vehicle. The 42.74 acre tract owned by Cahoon abuts the south side of Highway 2 in an undeveloped area south and east of the developed area of Ray, which is primarily on the north side of Highway 2.
3. Cahoon is a Montana limited liability company with Mark Cahoon as its only member. Mark Cahoon arranged for the purchase of the 42.74 acre in 2010 from Paul Weyrich for $22, 000 with the assistance of his mother. Title to the property was initially put in his mother’s name and then later transferred to Cahoon, the limited liability company.
Following the purchase of the property, Cahoon obtained a state license for a mobile home park on the site for up to ninety units. And, while the record is somewhat unclear, it appears he also obtained a more limited initial approval from the City of Ray for a phase I development of 18 units. Eventually, Cahoon decided to abandon his effort to develop the mobile home park because he lacked the resources to put in the paved streets that the City was requiring. He then put the property up for sale.
4. Bakken began negotiating the terms of a purchase agreement with Cahoon’s listing agent, Ryan Visser, in the latter part of December 2011. The list price for the 42.74 acre tract was $4.8 million. On January 23, 2012, Bakken executed a written offer to purchase the property for $3.4 million that was accepted by Cahoon on January 30, 2012.
The initial purchase agreement was a two-page document. The first page was a standard offer-to- purchase form used by Visser. The second page, labeled Addendum #1, set forth a number of additional terms and conditions that were specifically negotiated by Bakken. The negotiations leading up to the execution of the initial purchase agreement were between Bakken and Visser. Bakken’s members did not actually meet Mark Cahoon until after the initial agreement was signed.
5. The initial purchase agreement provided that the closing on the purchase would take place on or before April 30, 2012, with Bakken’s obligation to purchase the property being subject to a number of conditions that are discussed in more detail below, including a 60-day period to conduct “due diligence.” The agreement required the deposit of $20, 000 in earnest money that would be refundable under certain circumstances, including the inability of Cahoon to furnish marketable title and the election of Bakken to terminate the agreement prior to the expiration of the 60-day due diligence period.
6. Soon after execution of the purchase agreement, Bakken retained Interstate Engineering to do a preliminary design for its proposed development of the property, which it named “Ray Crossing.” The preliminary layout provided for subdividing the western half of the tract into 102 individual lots along with city streets. Bakken planned on placing mobile homes on each of the lots that it would retain ownership of and rent out on a bedroom basis with no restriction upon the individuals living within the mobile homes having to be a single family or otherwise related. This was because the target market for renters was primarily oilfield workers. The preliminary design further provided for the eastern half of the 42.74 acre tract to be divided into seven lots of various sizes for commercial development, including possibly a truck stop, one or more motels and restaurants, storage units, possible retail, etc.
From the outset, Bakken’s proposed development was a highly speculative venture. Bakken itself did not have substantial money to invest in the project. Also, it had no binding commitments from any entity for the purchase of its commercial lots. Essentially, Bakken required 100% financing and, for that, it had turned to Momentum Funding, LLC (“Momentum Funding”), a private capital group. According to Oltmans, Bakken chose Momentum Funding because it had financed mobile home parks in other parts of the country. Also, Oltmans had a prior relationship with the firm.
According to the testimony of Bakken’s principals, Momentum Funding needed to do its own evaluation of the viability of the Ray Crossing project (what Oltmans referred to in his testimony variously as Momentum Funding doing its own “due diligence” or “underwriting”) before it would advance even the amount required for the purchase of the property. Based on this testimony as well as various exhibits, the assurances that Momentum Funding needed before advancing money for the purchase of the property, and for which it intended to take a mortgage to secure its loan, included: (1) evidence that Bakken had acquired, or would be able to acquire, the necessary permits and approvals; (2) there being sufficient utilities in place to serve the proposed development; (3) an appraisal/market analysis demonstrating the project’s economic viability and supporting the purchase price; and (4) assurances of Bakken obtaining good title, including title insurance that would extend to it as a mortgagee.
One of the consequences of Bakken lacking substantial resources of its own was its inability to complete the purchase of the property within the time frames required by the purchase agreement when certain problems arose that prevented it from being able to timely satisfy one or more of Momentum Funding’s conditions precedent for funding. In other words, Bakken was not able to complete the purchase of the land, work out any problems in terms of developing the property later, and then resell the property if things did not work out. This put Bakken in conflict with Cahoon, which was concerned about delaying the closing too long. Cahoon’s fear was that Bakken might not be able to complete the purchase given its lack of financial resources and, in the meantime, it might have lost out on a potential sale to another purchaser in what obviously was a frothy market, given Cahoon’s ability to acquire the property for $22, 000 and then turn around and enter into a sales agreement for $3.4 million not too long later.
7. While still within the 60-day due diligence period, it soon became obvious that Bakken faced at least two obstacles that likely would prevent it from obtaining the money to complete the purchase by the originally scheduled closing date of April 30, 2012. Probably the most significant was Interstate Engineering advising Bakken that the City of Ray lacked sufficient sewage treatment capacity for Ray Crossing. This was a problem that could not readily be addressed to the satisfaction of Momentum Funding in a short time frame.
The second obstacle was acquiring the necessary local approvals. The zoning for the 42.74 acre tract at the time of purchase was “highway commercial.” In order to develop the portion of the tract for a mobile home park, the City advised Bakken that it needed to obtain a zoning change to some form of residential zoning for that portion. Also, the property was not platted in the way that Bakken wanted to develop the property. This necessitated Bakken having to go through the platting process. Finally, given the size and nature of Bakken’s proposed development, the City was going to require that Bakken obtain the equivalent of a conditional use permit, a process that allowed the City to attach conditions to its approval of the project, which, as discussed later, were going to substantially add to its cost. It soon became obvious that the process of getting the necessary permits and approvals (or least sufficient assurance that they could be obtained upon terms satisfactory to Momentum Funding) was not going to be completed prior to Bakken having to ante up for the purchase of the property by April 30, 2012.
In recognition of these problems, Oltmans emailed Visser on March 13, 2012, requesting that the closing date be extended to July 15, 2012. The reasons given in the email essentially were (1) the unlikelihood of Bakken obtaining the necessary approvals and permits to insure it could proceed with its project by April 30, given that it had to start from scratch after determining that Cahoon’s mobile home park permit was not enough and the fact that the City would not be receiving word until June on whether its grant application to cover part of the cost of expanding it sewage treatment capacity would be approved, and (2) the need to investigate other issues that had arisen, including the possibility of having to bring in a substantial amount of fill for the site. Bakken stated that it remained confident, however, that a July 15 date for closing could be met if not sooner.
8. While Bakken was not in a position to close on the purchase at the end of April, Cahoon also had a problem. The initial purchase agreement required that Cahoon provide a preliminary commitment from a title insurance company within 30 days of execution of the initial purchase agreement, which would have been on or before March 1, 2012, and then a title insurance policy at closing. By March, Cahoon had missed the date for providing the initial title commitment and was in danger of not being able to provide it before April 30 as well as the actual title policy on that date. In fact, as it turned out, Cahoon was not able to provide the initial title commitment until July 19, 2012.
To make matters even more confusing, Bakken decided that it needed an updated abstract for its own purposes and soon began making demands for one, contending that Cahoon was required under the purchase agreement to have provided an updated abstract within five days of execution of the agreement. However, the agreement clearly said nothing of the sort. The earliest Cahoon would have been required to provide an updated abstract under the purchase agreement would have been at closing and a fair reading of all of the provisions together is that even this was not required since the parties had agreed upon title insurance.
In order to understand the reasons for the delay in the providing of the title commitment, some understanding of the process that the title company employed by Cahoon (and also it appears by Bakken) to provide the title insurance required by the purchase agreement (and separately by Momentum Funding) is necessary. The process that the title company followed in giving an initial title commitment was to: (1) first prepare an abstract for the property or update an old one; (2) have an attorney review the updated abstract and prepare a title opinion; and (3) issue a title commitment from a third-party title insurer based on the title opinion. Later, at the time of closing and probably after a quick check of the public records for any last minute filings, the title company would issue an actual title policy from a third-party title insurer for which it was an agent.
There is some indication in the record that a month or so may have passed following the execution of the purchase agreement before Visser delivered Cahoon’s old abstract to the title company. Whether this initial delay was the result of an oversight on Visser’s part or whether there was some initial confusion with respect to who would be following through on getting the title commitments is not clear. Notably, Oltmans contacted the title company on February 8, 2012, to ask for a title commitment - probably because it had already been advised by Momentum Funding that it was requiring its own mortgagee title policy. This contact is documented by a followup email that Oltmans sent to the title company the same day confirming his request for a “title commitment.” Bakken later points to this email as evidence that it started asking for an abstract for the property back in February. However, the email makes no mention of an abstract and the credible evidence is that Oltmans, who had previously not done work in a state where abstracts are used, initially focused only upon obtaining the title insurance. It was not until later in April that Bakken’s engineer asked to see an abstract to obtain information with respect to the utility easements on the property. And then, sometime after Bakken retained an attorney in May to help with the purchase of the property and the permitting, the attorney advised Bakken that it should obtain its own title opinion and that an abstract would be needed for him to prepare one.
The first documented request for an abstract by Oltmans was on April 18, 2012, when he emailed Visser asking him to forward the abstract because both the engineer and the title company needed it as soon as possible. There are two things of note with respect to this communication. First, it appears that Oltmans had been in contact again with the title company inquiring about the status of the title commitment. Second is the fact that no mention was made at that time about a need for an abstract so that Bakken could conducts its own title examination. Visser responded to this email, in part, by stating that he had delivered the abstract to the title company a week earlier, that the updating of the abstract was underway, and that it likely would take 2-4 weeks before the update would be completed.
It appears the updating of the abstract may have been completed on April 20, 2012, since that is the date of the last certification by the abstractor in the abstract. Bakken contends that Cahoon acted in bad faith by not making it available at that time. However, as alluded to earlier and will be addressed later, Cahoon was under no obligation to provide one, either as a matter of good faith or otherwise. Further, Bakken ignores the rest of the process for completion of the title commitment that Bakken expressly negotiated for, which was that the abstract (or at least the one Cahoon had updated) needed to be given to an attorney for the preparation of the opinion that would then be used by the title company to issue the preliminary title commitment. The evidence is that this process was not fully completed until July 19, 2012, when the title company provided Visser with the title commitment that was based upon an opinion it had received from its attorney dated July 9, 2012, along with the updated abstract. Then, and not to get too far ahead of what otherwise was happening in mid-April, Visser emailed the title commitment to Bakken on July 19, 2012, which is the same day he received it. He then hung on to the abstract in anticipation that he would be meeting with Bakken’s principals in Williston for a meeting that was planned for July 24, 2012, five days in advance of the extended closing date of July 31, 2012.
What is notably absent from the evidence presented is whether Bakken, if it really needed an abstract because it was the only thing standing in the way of it being able to close (as opposed to it initially being simply one of several items on the critical path, and not the primary one, and later, perhaps, a convenient excuse for its inability to close) made any effort to check with the abstract company to see if it could purchase its own abstract or have permission to use a copy of the one that the title company or its attorney was using. Later, after Bakken obtained counsel, there is an email from the attorney where he instructs Oltmans on what he would need to do to get an updated abstract.
9. In early April 2012, because of the delays making it improbable that either party would be ready to close by April 30, the parties revised the purchase agreement by executing a one-page document entitled “Addendum.” This document was signed by Cahoon on April 2, 2012, and by Bakken the next day. While this was the “second addendum, ” it was the first amendment to the purchase agreement since the initial purchase agreement had an addendum.
The first amendment/second addendum, as typewritten, contains six provisions. The first required the payment of an additional $30, 000 in earnest money bringing the total amount on deposit to $50, 000. The second and third provisions stated, respectively, that $20, 000 of the earnest money would become nonrefundable upon preliminary plat approval and the remaining $30, 000 would be nonrefundable upon final plat approval. The fourth provision extended the closing date to 30 days following final plat approval but, in any event, not later than July 15, 2012. The fifth provision provided Cahoon with the right of first refusal to purchase all contract drawings and consultant reports developed by Bakken at cost within fourteen days if Bakken did not perform. The sixth provision required Bakken to pay Cahoon monthly installments of $20, 000 beginning June 1, 2012, which would not be credited to the purchase price. After the listing of these provisions, there is a statement that all other terms and conditions of the original contract were to remain in place.
Finally, on the copy of the first amendment/second addendum submitted as an exhibit, the typewritten number “15” for the closing date of “July 15” is crossed off and replaced with the number “31, ” and this change was initialed by both parties. Also, in the version submitted to the court, the sixth provision requiring the payment of $20, 00 per month is crossed out. It appears from other documents and record evidence that these changes were made later when it became clear that the July 15 date for the closing could not be achieved. But whether this is true or not is not critical to the outcome.
10. In May 2012, Oltmans sought assistance from Benjamin Johnson, a local attorney from nearby Tioga, North Dakota, to assist in obtaining city approvals for Bakken’s project and helping to close on the real estate purchase, including handling any further negotiations with Cahoon. 11. The preliminary plat for Bakken’s project was approved by the City on May 14, 2012. But, even with that approval, a number of items remained open between Bakken and the City, some of which needed to be resolved before Bakken was willing or able (because of Momentum Funding’s requirements) to go forward. The primary issue was the City’s unwillingness to make any commitment as to when it would have sufficient sewage treatment capacity available. However, there were others. There was the issue of what the sewer hookup fees would be. As noted in a later email from Oltmans, the City was demanding upwards of $1 million in hookup fees for the entire project. Also, the City was demanding that Bakken fund improvements for a new city park on property adjacent to Bakken’s site to the tune of $60, 000 - $80, 000. Further, the City had demanded that Bakken make available to it up to ten of its mobile home units for its use, and it is not clear from the record what the status of that was by the time of the preliminary plat approval. In short, there were a lot of unknowns in terms of potential costs and when revenue could start being generated given the uncertainty at the time as to when sufficient sewage treatment capacity would be available, if at all.
12. On June 1, 2012, attorney Johnson submitted a proposed “addendum #3” to Visser that referenced the original agreement, including the first and second addendums. The first provision in the proposed “addendum #3” eliminated the sixth provision from the second addendum requiring the additional monthly payments of $20, 000 beginning June 1, 2012. The second provision called for reducing the sales price from $3.4 million to $2.9 million. The third provision provided for a return of all earnest money if the City of Ray did not (1) provide a “will serve” letter for sanitary sewer service indicating it would provide sufficient service to Bakken’s proposed development by December 1, 2012, or (2) approve a plan for private sanitary sewer service until city capacity would become available. This latter provision would have reversed the fact that, under the amended purchase agreement then in effect, $20, 000 of the $50, 0000 deposited as earnest money had become nonrefundable with the approval of the preliminary plat. Johnson’s June 1 proposed addendum #3 went nowhere.
13. Oltmans then submitted another version of a proposed “addendum 3, ” a copy of which was not made a part of the record, to Visser by email on June 18, 2012. The email accompanying the proposed addendum went on to state:
Please see the attached revised Addendum #3 for you review.
We realize through the latest number of recent disappointments on the project including the denial of our proposed private sewer option and the statement from the city engineer declaring no sewer service will be available until 2013, that adjustments must be considered.
Please review with Mark the specifics outlined below and respond promptly. We expect that communication lines will remain open with the opportunity to freely discuss any questions.
HOW WE GOT HERE:
1. City’s ability to provide capacity in 2012 for sewer - summer of 2013.
2. CITY TURNED DOWN PRIVATE SEWER OPTION. * * * *
3. INCREASED impact fees/ $408K for sanitary - $295, 800 for Water = $703, 800 / $6900 per lot vs $4K $2400 difference x 102 - NOW $7500 x 102 (Not INCLUDING Commercial) = $765, 000
4. $100K for city housing
5. $60K for Park.
6. $20K per month staring ...