Opinion
No. A06-105.
Filed December 26, 2006.
Appeal from the District Court, Hennepin County File No. EM 03-008641.
Gary A. Weissman, Weissman Law Office, (for respondent).
Daniel J. Boivin, Konstandinos Nicklow, Meshbesher Spence, Ltd., (for appellant).
Considered and decided by RANDALL, Presiding Judge; HALBROOKS, Judge; and STONEBURNER, Judge.
This opinion will be unpublished and may not be cited except as provided by Minn. Stat. § 480A.08, subd. 3 (2004).
UNPUBLISHED OPINION.
Appellant challenges the district court's determination that the handwritten settlement agreement between the parties is enforceable and that respondent did not breach a material term of the agreement when she reported the settlement proceeds to the Internal Revenue Service (IRS) as taxable income. Appellant also argues that the district court abused its discretion when it ordered appellant to pay respondent's attorney fees as consequential damages of appellant's breach. Because we conclude that the settlement agreement was enforceable and that respondent did not breach the agreement, we affirm in part. With respect to the attorney-fees issue, we conclude that the award of attorney fees as consequential damages under Minn. Stat. § 555.08 (2004) was an abuse of discretion, and, therefore, we reverse in part. But because the motion for an award of attorney fees was also based on Minn. Stat. § 549.211 (2004), we remand to the district court to make findings, if it deems it appropriate, as a basis for an award of attorney fees pursuant to the statute.
FACTS
Appellant Wendy's FourCrown, Inc., a franchisee of Wendy's International, Inc., owns Wendy's restaurants in the Twin Cities metropolitan area. Respondent Sarah Bruch was employed as appellant's human-resources director from May 2000 until December 2002. When respondent returned from maternity leave in December 2002, her job was terminated by appellant. Appellant characterized the separation as an "elimination of the position of Human Resources Director."
In 2003, respondent brought a lawsuit against appellant. Respondent alleged that her termination constituted gender and pregnancy discrimination as well as retaliation for blowing the whistle on discriminatory hiring practices. On the day that trial was scheduled, the district court mediated a settlement agreement. The resulting agreement was handwritten, signed by both parties, and read into the record. The settlement agreement provided:
Respondent also brought suit for failure to pay wages due and a parenting leave violation. In January 2004, both parties moved for summary judgment. The court denied respondent's motion for summary judgment and also dismissed respondent's claims for failure to pay wages due and whistleblowing.
(1) FourCrown will pay $80,000 to Sarah Bruch ("Bruch") on or before May 28, 2004.
(2) FourCrown and Bruch agree that this $80,000 settlement will be characterized as follows and disbursed in discrete checks:
a) $30,000 to Bruch, all as emotional distress
b) $25,000 to Weissman Law Office as attorney fees
c) $5,000 to Weissman Client Trust Account for costs
d) $20,000 to Ken Mary Burbach
(3) FourCrown will not withhold any taxes from any of these checks.
(4) FourCrown will indemnify and hold Bruch the Burbachs harmless for any taxes which the IRS or Wis. Dept. of Revenue might seek to impose on the funds which these agencies claim are taxable. In the event that Bruch receives notice of a tax levy, Bruch, through counsel, shall transmit the notice to FourCrown's counsel, who will arrange for defense or payment or both.
(5) FourCrown will pay Bruch's share of the mediator's fees.
(6) The parties shall be bound by a confidentiality agreement:
a.FourCrown shall not disclose the terms of this Settlement Agreement to anyone except its (a) president, (b) vice-presidents, (c) board members, (d) FourCrown's accountants.
b.Bruch shall not disclose the terms of this settlement agreement to anyone except
(a) her husband, parents, and sisters; parent-in-laws
(b) her attorney;
(c) her tax preparer
c.Each signatory shall require that those to whom she reveals this information shall not re-disseminate the information.
(7) Plaintiff releases defendant May 21, 2004
(8) More detailed agreement to follow
Despite the provision stating that a "[m]ore detailed agreement" would follow, no agreement was ever adopted by the parties because the parties were unable to agree to a mutually acceptable draft.
On February 21, 2005, respondent's tax preparer advised her that the settlement proceeds were taxable. The tax preparer calculated the appropriate taxes and provided respondent with a letter setting forth the estimated amount of tax at $21,501. Respondent's attorney forwarded the letter to appellant's attorney and included a request that appellant pay the tax liability pursuant to the settlement agreement. Appellant responded that it would not pay the taxes because the settlement agreement called for payment only if and when the taxing authorities actually imposed the taxes.
In April 2005, respondent and her husband filed joint tax returns with the IRS and the Wisconsin Department of Revenue. Upon the advice of the tax preparer, they disclosed the settlement-agreement proceeds of $80,000 but did not pay taxes on the settlement funds. Instead, they explained that a third party would be paying the taxes that were due.
Both the IRS and the Wisconsin Department of Revenue determined that taxes were due on the settlement proceeds and imposed penalties and interest on the respondent based on the amount due. Respondent then moved to enforce the settlement agreement and to compel appellant to pay the taxes and interest that respondent owed to the taxing authorities. Appellant moved the district court to release it from the settlement agreement, arguing that respondent breached the agreement by reporting the settlement amount as taxable income. Appellant argued that the provision in the settlement agreement, stating that appellant would "not withhold any taxes," represented the parties' intention that respondent would not report the settlement proceeds to either the IRS or to the Wisconsin Department of Revenue.
The district court found that appellant's contention is not supported by the record and that the total amount of taxes owed by respondent to the IRS and the Wisconsin Department of Revenue was then $22,845. The district court further found that respondent might owe an additional amount in 2006 as tax on the income realized in 2005 from the taxes paid to respondent by appellant pursuant to the terms of the settlement agreement.
Respondent also sought reimbursement for $4,472 in attorney fees that she incurred in the effort to enforce her rights under the settlement agreement. Respondent contended that attorney fees could be awarded under Minn. Stat. § 549.211 (2004), or as consequential damages pursuant to the Declaratory Judgment Act (Minn. Stat. § 555.08 (2004)). In June 2005, respondent gave appellant notice of her intention to claim attorney fees pursuant to Minn. Stat. § 549.211, based on appellant's prolongation of the litigation and its alleged bad-faith argument that appellant should be relieved of its obligation to pay any applicable tax. Under Minn. Stat. § 549.211, appellant had a 21-day period in which to withdraw its allegedly bad-faith claims, but it did not do so. Respondent also sought an order from the district court to condition any further legal action by appellant upon its posting a bond of at least $25,000 to ensure eventual payment.
The district court determined that the indemnification provision of the settlement agreement is enforceable and ordered appellant to tender to respondent a check for $22,845, plus interest. The court also ordered appellant to "indemnify and hold [respondent] harmless for any additional taxes owed in 2006 on payments under the Settlement Agreement made in 2005" and to tender a check to respondent's attorney for $4,472 to cover "attorney fees incurred as consequential damages of [appellant's] breach." The district court reserved its decision on respondent's request that appellant post a bond. This appeal follows.
DECISION I.
"A settlement of a lawsuit is contractual in nature, and to constitute a full and enforceable settlement, there must be a definite offer and acceptance with a meeting of the minds on the essential terms of the agreement." TNT Props., Ltd. v. Tri-Star Developers LLC, 677 N.W.2d 94, 100-01 (Minn.App. 2004); see also Minneapolis Cablesystems v. City of Minneapolis, 299 N.W.2d 121, 122 (Minn. 1980) (stating that"[a] contract requires a meeting of the minds concerning its essential elements"). A contract does not exist unless the parties have agreed "'with reasonable certainty about the same thing and on the same terms.'" Peters v. Mut. Benefit Life Ins. Co., 420 N.W.2d 908, 914 (Minn.App. 1988). Despite some incompleteness and imperfection of expression, an agreement should be upheld where a court can reasonably find the parties' intent by applying the words as the parties must have understood them. Hartung v. Billmeier, 243 Minn. 148, 151, 66 N.W.2d 784, 788 (1954). Where a court finds a contract to exist, Minnesota courts have held that a breach of that contract is material when "one of the primary purposes" of the contract has been violated. See Steller v. Thomas, 232 Minn. 275, 282-83, 45 N.W.2d 537, 542 (1950).
The existence of a contract and the terms of the contract are questions of fact for the district court. TNT Props., 677 N.W.2d at 101. The materiality of a breach is a question of fact. Cloverdale Foods of Minn., Inc. v. Pioneer Snacks, 580 N.W.2d 46, 49 (Minn.App. 1998). Findings of fact shall not be set aside on appeal unless clearly erroneous. Minn. R. Civ. P. 52.01. "Findings of fact are clearly erroneous only if the reviewing court is `left with the definite and firm conviction that a mistake has been made.'" Fletcher v. St. Paul Pioneer Press, 589 N.W.2d 96, 101 (Minn. 1999) (quoting Gjovik v. Strope, 401 N.W.2d 664, 667 (Minn. 1987)). If there is reasonable evidence tending to support the district court's findings of fact, this court will not reverse those findings. Id.
Appellant argues that the district court erred by determining that the settlement agreement is enforceable. Specifically, appellant contends that respondent's characterization of the settlement award as taxable income when she reported her income to the IRS and Wisconsin Department of Revenue constituted a material breach of the agreement because, based on paragraphs (3) and (4) of the agreement, both parties intended that respondent would not report the settlement proceeds as income.
The handwritten settlement agreement states, in relevant part, that
(3) FourCrown will not withhold any taxes from any of these checks.
(4) FourCrown will indemnify and hold Bruch the Burbachs harmless for any taxes which the IRS or Wis. Dept. of Revenue might seek to impose on the funds which these agencies claim are taxable. In the event that Bruch receives notice of a tax levy, Bruch, through counsel, shall transmit the notice to FourCrown's counsel, who will arrange for defense or payment or both.
Appellant contends that the parties intended that appellant would indemnify and hold respondent harmless only if and when a tax was actually levied by the IRS or the Wisconsin Department of Revenue. The district court disagreed, stating, "This contention is not supported by the Settlement Agreement or anything else in the record."
We agree with the district court that the language of the agreement is clear — that appellant would "not withhold any taxes" from the settlement proceeds paid to respondent. Contrary to appellant's argument, the language does not mention or imply that respondent cannot or should not report the income to the taxing authorities. See Knudsen v. Transp. Leasing/Contract, Inc., 672 N.W.2d 221, 223 (Minn.App. 2003) (stating "[a]bsent ambiguity, the terms of a contract will be given their plain and ordinary meaning and will not be considered ambiguous solely because the parties dispute the proper interpretation of the terms. . . ."). Therefore, we conclude that the district court did not err in its determination that respondent did not materially breach the agreement when she reported the settlement amount as taxable income and that appellant should indemnify respondent for the tax amount. The record supports this conclusion.
Appellant also argues, under the same rationale, that the district court erred by ordering appellant to indemnify and hold respondent harmless for any additional taxes that respondent may owe in 2006 for income realized from taxes paid to her by appellant in 2005. Appellant's argument is dependent on the determination that respondent materially breached the agreement by reporting the settlement proceeds as taxable income. Because we have concluded that the district court did not err in determining that respondent did not breach the settlement agreement when she reported the settlement proceeds as income, it follows that the district court did not clearly err when it ordered appellant to indemnify and hold respondent harmless for any additional taxes owed in 2006 as a result of appellant's payment to respondent for her 2005 tax obligations. We affirm the district court on these issues.
II.
Appellant contends that the district court abused its discretion by awarding attorney fees to respondent as consequential damages of appellant's breach. As a general rule, attorney fees may be recovered only if authorized by a specific contract or statute. Schwickert, Inc. v. Winnebago Seniors, Ltd., 680 N.W.2d 79, 87 (Minn. 2004); see also Geske v. Marcolina, 624 N.W.2d 813, 816 (Minn.App. 2001) (noting that when awarding a party attorney fees, the court may do so only if there is specific authority allowing recovery). "This court will reverse a district court's award of attorney fees only if the award constitutes an abuse of the district court's broad discretion." Mut. Serv. Cas. Ins. Co. v. Midway Massage, Inc., 695 N.W.2d 138, 143 (Minn.App. 2005), review denied (Minn. June 14, 2005).
Here, attorney fees were not authorized by contract, as the settlement agreement enforced by the district court does not contain any provision allowing for the recovery of attorney fees. We then look to respondent's assertion of a statutory basis for an award of attorney fees. Respondent argued to the district court that attorney fees could be awarded pursuant to Minn. Stat. § 549.211 (2004), or as consequential damages under Minn. Stat. § 555.08 (2004) (Declaratory Judgment Act). The district court made the following findings regarding attorney fees:
13. Attorney fees. [Respondent] has incurred $4,472 in attorney fees (and an unspecified amount of accountant fees) in an attempt to vindicate her rights under the Settlement Agreement for which [appellant] promised to indemnify her. [Respondent] has advanced alternative theories for the attorney fees:
(a) Plaintiff gave notice in June, 2005, to [appellant] of her intention to claim attorney fees pursuant to Minn. Stat. § 549.211 for [appellant's] prolongation of the litigation and its bad faith argument that [appellant] should be relieved of its obligation to defray [respondent's] taxes because she honestly reported the income to the IRS. That statute requires a 21-day safe harbor period during which a Defendant can avoid the prospect of attorney fees by withdrawing its purportedly bad faith claim. More than 21 days (approximately 120 days) have elapsed since that notice, and [appellant] did not withdraw its claim.
Minn. Stat. § 549.211, subd. 5(c), states that "[w]hen imposing sanctions, the [district] court shall describe the conduct determined to constitute a violation of this section and explain the basis for the sanction imposed." Here, the district court did not make any actual findings or "describe" appellant's alleged conduct that served to prolong the litigation or resulted in a bad-faith argument in violation of section 549.211. Instead, the district court merely restated respondent's allegations and found that respondent complied with the timing and procedural aspects of section 549.211.
The district court ordered appellant to pay respondent's attorney $4,472 "as and for attorney fees incurred as consequential damages of [appellant's] breach." The Declaratory Judgment Act gives the district court the ability to afford such supplemental relief as may be "necessary or proper." Minn. Stat. § 555.08 (2004); Casey v. State Farm Mut. Ins. Co., 464 N.W.2d 736, 739 (Minn.App. 1991), review denied (Minn. Apr. 5, 1991). "Attorney fees are properly awarded in a declaratory judgment action as consequential damages for the insurer's breach of contract." Id. But here the district court ordered fees as consequential damages despite the fact that respondent did not bring her action under the Declaratory Judgment Act.
Therefore, we conclude that the district court abused its discretion in awarding respondent attorney fees as consequential damages under Minn. Stat. § 555.08, and, therefore, reverse in part. But because respondent also asserted a claim for attorney fees under Minn. Stat. § 549.211 and the district court found that respondent satisfied the 21-day statutory notice requirement and that appellant did not withdraw its claim, we remand to the district court for findings under Minn. Stat. § 549.211, addressing appellant's conduct, if any, that served to prolong the litigation or resulted in a bad-faith argument. If the district court concludes that such findings are appropriate, an award of attorney fees based on Minn. Stat. § 549.211 would be merited.