Pankratz v. Hoff

#25820, #25828-aff in pt, rev in pt & rem-JKK

2011 S.D. 69

IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA

****
DUANE C. PANKRATZ, Plaintiff and Appellee,

v.

DOUGLAS H. HOFF, MARLENE E.
HOFF and BRIAN D. HOFF, Defendants and Appellants.

****

APPEAL FROM THE CIRCUIT COURT OF
THE FOURTH JUDICIAL CIRCUIT
PERKINS COUNTY, SOUTH DAKOTA

****

THE HONORABLE JOHN W. BASTIAN
Judge

****

DAVID E. LUST
REBECCA L. MANN of
Gunderson, Palmer, Nelson
& Ashmore, LLP
Rapid City, South Dakota Attorneys for plaintiff
and appellee.

THOMAS E. BRADY
RICHARD A. PLUIMER of
Brady Pluimer PC
Spearfish, South Dakota Attorneys for defendants
and appellants.

****

CONSIDERED ON BRIEFS
ON AUGUST 22, 2011

OPINION FILED 10/26/11
#25820, #25828

KONENKAMP, Justice

[¶1.] In this land contract dispute, the circuit court found ambiguity in the

contracts and admitted parol evidence to determine the parties’ intent. On appeal,

we conclude that the contracts are enforceable as written. We affirm in part,

reverse in part, and remand.

Background

[¶2.] Doug Hoff, his wife Marlene, and his son Brian Hoff owned 9,334.71

acres in Perkins County, South Dakota, making up the “Hoff Ranch.” Of the total

acreage, Doug and Marlene (the Hoffs) owned 8,200 acres, with the rest owned by

Doug and Brian together, or Brian alone. After forty years of ranching, the Hoffs

decided that it was time to sell and retire. In January 2006, they were at a stock

show in Denver, Colorado, where they met Duane Pankratz. They informally

discussed the sale of 8,000 acres of the ranch. Then, in March or April 2006,

additional discussions were had in Rapid City, with Pankratz visiting the ranch. At

some point thereafter, Doug, Marlene, and Pankratz met in Rapid City with

attorneys Jim Hurley and Riley Wilson of Bangs, McCullen, Butler, Foye &

Simmons.

[¶3.] Near the end of the parties’ negotiations, the Hoffs told Pankratz they

wanted to sell all 9,334.71 acres of the ranch. Pankratz was interested, but was

unable to secure the money to pay for the additional acres. Therefore, the parties

arranged for the sale of the entire ranch in two transactions. Pankratz agreed to

purchase 6,107.91 acres for $3,732,035, and lease the remaining 3,226.8 acres with

an option to purchase for $935,325. Attorneys Hurley and Wilson drafted the

-1-
#25820, #25828

documents. On June 28, 2006, the parties executed three separate contracts. The

first, entitled Real Estate Purchase Agreement, conveyed to Pankratz 6,107.91

acres of agricultural land for $3,732,035. In the second, entitled Right of First

Refusal and Option, the Grantors declared that they “own 3,226.8 acres” and gave

the “Option Holder an option to purchase their respective interests in the Property”

for $935,325. (Emphasis added.) The third was an agricultural lease for the 3,226.8

acres.

[¶4.] On July 19, 2007, Pankratz faxed a letter to the Hoffs giving them

“written notice that I [Pankratz] am exercising my option to purchase all of the real

estate as set forth on Exhibit A of the option agreement signed on June 28, 2006.

The number of acres are approximately 3226.8 acres for a price of $935,325.00.”

After Pankratz exercised his option, an issue arose concerning Brian’s ownership

interest in the option land. Brian did not want to sell his interest in the ranch

property, which made it impossible for the Hoffs to convey all 3,226.8 acres to

Pankratz. The parties differ on what discussions they had after Pankratz exercised

his option. Pankratz maintained that he did not know about Brian’s ownership

interest until after he exercised the option, and had he known, the transaction

would have been structured differently. The Hoffs, on the other hand, asserted that

Pankratz knew, or should have known, because Brian’s ownership interest in the

Hoff Ranch was shown in the Perkins County Equalization records, Farm Service

Agency Form 156, the Conservation Reserve Program contract, and the records with

the Perkins County Register of Deeds. Nonetheless, it is undisputed that after

Pankratz became aware of Brian’s ownership interests and Brian’s refusal to sell,

-2-
#25820, #25828

Pankratz agreed to allow the Hoffs and Brian to partition the option land so that

Pankratz could purchase 2,066.8 acres of the 3,226.8 acres.

[¶5.] After the land was partitioned, the parties could not agree on a sale

price. Pankratz claimed that he agreed to the partition on the condition that the

purchase price for all the acres purchased by him, including the already-purchased

6,107.91 acres, would be $500 per acre, on average. The Hoffs insisted that there

was no such agreement and that the price stated in the option agreement

controlled. They refused to close the sale at the price Pankratz wanted.

[¶6.] Pankratz brought suit against the Hoffs on multiple causes of action.

Only the breach of contract claim is relevant to this appeal. Pankratz alleged that

the Hoffs breached the option agreement when they refused to convey the option

property. The Hoffs answered and counterclaimed on grounds not relevant to this

appeal. During the court trial, Pankratz argued that the option agreement “must

be read in conjunction with the Real Estate Purchase Agreement because the

documents reflect a staged transaction to complete the purchase of the entire

Ranch.” Pankratz argued that the option agreement was ambiguous, requiring the

admission of parol evidence to ascertain the parties’ intent. The circuit court

agreed. It found that, being incomplete, the two contracts should be considered

together, and that parol evidence was admissible to determine the parties’

intentions.

[¶7.] Pankratz presented evidence that when the parties initially discussed

selling all 9,334.71 acres, they agreed that the purchase price would be $500 per

acre. Then, after the parties agreed to sell the ranch in two transactions, even

-3-
#25820, #25828

though the agreements do not state a $500 per acre price, Pankratz argued that the

parties still agreed to sell the entire ranch for an average price of $500 per acre.

Thus, Pankratz would purchase 6,107.91 acres at $610 per acre. Then, to realize

the average $500 per acre price, Pankratz would purchase the option land, 3,226.8

acres, at $289.86 per acre, making his total per acre purchase price $500. Pankratz

also presented evidence that, although he agreed to allow partition of the option

land and purchase less land after Brian’s ownership interest came to light, the

Hoffs agreed that Pankratz would still pay the average $500 per acre price.

Because the Hoffs ultimately refused to convey the partitioned option land,

Pankratz asked the court to grant him specific performance, mandating that the

Hoffs sell the partitioned option land, 2,066.8 acres, at $171.92 per acre.

[¶8.] The Hoffs, on the other hand, argued that the option agreement was a

completely integrated document, was not ambiguous, and the court should confine

its interpretation of the contract to its four corners. To the Hoffs, the option

agreement clearly indicated that they only intended to convey “their respective

interests” in the 3,226.8 acres. They also argued that Pankratz was, at the very

least, constructively aware that Brian owned some of the option land. They averred

that they did not breach the option agreement, but without waiving any defense,

they alternatively asserted that if a breach occurred, Pankratz was only entitled to

the price agreed to in the option agreement. Indeed, the option agreement

specifically contemplated a potential sale of less land than 3,226.8 acres: “A

prorated option price (price per acre) shall be used if a smaller tract is sold.” Thus,

the Hoffs asked the court to enforce the “prorated option price” provision.

-4-
#25820, #25828

[¶9.] After the trial, the court issued a memorandum decision, findings of

fact and conclusions of law, and a judgment. The court ruled that the Hoffs

breached the option agreement when they refused to sell Pankratz the option land.

Because the court found that the two contracts were not fully integrated, it relied on

parol evidence and concluded that the parties intended that Pankratz would have

the option to purchase all 3,226.8 acres of option land, and do so at an average $500

per acre price. The court rejected the Hoffs’ claim that the “prorated option price”

provision applied, because “the option land and the purchased land were priced

differently to allow the parties to achieve their initial objective: allowing the entire

ranch to be purchased for $500 per acre.” The court found that the “remedy is

complicated because after the partition, there are only 2,066.8 acres that can be

awarded to [Pankratz].” Nonetheless, the court recognized that Pankratz “does not

object to receiving only 2,066.8 acres[.]” Therefore, the court awarded Pankratz

specific performance, requiring the Hoffs to transfer 2,066.8 acres to Pankratz for

$355,315, which is approximately $171.92 per acre, for an average of $500 per acre.

[¶10.] On appeal, the Hoffs assert that the court erred when it admitted parol

evidence to determine the rights of the parties under the Real Estate Purchase

Agreement and the Right of First Refusal and Option agreement. By notice of

review, Pankratz asks that the Hoffs be ordered to pay for the value and use of the

option property during the pendency of the suit if the circuit court’s order is

affirmed.*

* Standard of review:

(continued . . .)
-5-
#25820, #25828

Analysis and Decision

[¶11.] The Hoffs argue that the option agreement is an unambiguous

integrated contract. They assert that they did not breach the option agreement

because, although it provides that the Grantors own 3,226.8 acres, the operative

provisions of the contract, which state that the Grantors agree to convey “their

respective interests” in the property, unambiguously indicate that the parties only

intended that Pankratz purchase the interests of the Hoffs in the option land. The

Hoffs further contend that Pankratz was constructively aware of Brian’s ownership

interest in the option land. Finally, the Hoffs assert that even if the option

agreement is ambiguous and they breached the agreement, the court erred when it

allowed parol evidence on the issue of what price Pankratz must pay for the option

land. Because Pankratz agreed to buy a smaller tract of the option land, the Hoffs

__________________
(. . . continued)
Contract interpretation is a question of law reviewable de novo.
Schulte v. Progressive Northern Ins. Co., 2005 S.D. 75, ¶ 5, 699 N.W.2d
437, 438 (citation omitted). “‘Because we can review the contract as
easily as the trial court, there is no presumption in favor of the trial
court’s determination.’” Cowan v. Mervin Mewes, Inc., 1996 S.D. 40, ¶
6, 546 N.W.2d 104, 107 (quoting Commercial Trust & Sav. Bank v.
Christensen, 535 N.W.2d 853, 856 (S.D. 1995)). “When the meaning of
contractual language is plain and unambiguous, construction is not
necessary. If a contract is found to be ambiguous the rules of
construction apply.” Pesicka v. Pesicka, 2000 S.D. 137, ¶ 6, 618
N.W.2d 725, 726 (citing Alverson v. Northwestern Nat’l Cas. Co., 1997
S.D. 9, ¶ 8, 559 N.W.2d 234, 235). “‘Whether the language of a
contract is ambiguous is . . . a question of law.’” Id. (quoting
Enchanted World Doll Museum v. Buskohl, 398 N.W.2d 149, 151 (S.D.
1986)).

Ziegler Furniture and Funeral Home, Inc. v. Cicmanec, 2006 S.D. 6, ¶ 14, 709
N.W.2d 350, 354.

-6-
#25820, #25828

insist that the “prorated option price” provision was implicated. Therefore,

Pankratz must pay $289.86 per acre (the option contract price, $935,325, divided by

the original option contract acres, 3,226.8).

[¶12.] In response, Pankratz maintains that the option agreement is not fully

integrated because it cannot stand alone. He argues that the option agreement, the

Real Estate Purchase Agreement, and the agricultural lease must be read together,

as they “work together in a staged transaction to complete the objective of the

parties — the sale and purchase of the entire Ranch.” Pankratz further contends

that the option agreement is ambiguous because the phrase “their respective

interests” is capable of being understood in two different senses. On the one hand,

it could mean that there were two grantors under the agreement and that they did

not own all of the property jointly. On the other hand, it could mean that the Hoffs

do not own all 3,226.8 acres, and intend only to convey the interests they

respectively own. Lastly, he declares that the “prorated option price” provision is

ambiguous because it does not provide an express formula, and thus the $500 per

acre average must be drawn on.

[¶13.] Extrinsic evidence may be considered if (1) the written agreement is

not a fully integrated document, or (2) the agreement is susceptible to two

reasonable meanings, and is therefore, ambiguous. See Kjerstad Realty, Inc. v.

Bootjack Ranch, Inc., 2009 S.D. 93, ¶ 6, 774 N.W.2d 797, 799-800 (quoting

McCollam v. Littau, 307 N.W.2d 144, 145 (S.D. 1981)); see also Farmers’ Elevator

Co. v. Swier, 50 S.D. 436, 443, 210 N.W. 671, 673 (1926). Here, the court concluded

that the option agreement was both ambiguous and not fully integrated. Therefore,

-7-
#25820, #25828

it allowed admission of parol evidence and concluded that the parties intended a

$500 average per acre price, regardless of the number of acres sold.

[¶14.] A document is fully integrated when the parties intend it to be a

complete and final expression of their agreement, and not fully integrated when the

parties might naturally make additional terms or agreements as a separate

agreement. See Berg v. Hudesman, 801 P.2d 222, 230 (Wash. 1990); see also Neal v.

Marrone, 79 S.E.2d 239, 242 (N.C. 1953); Renner Plumbing, Heating and Air

Conditioning, Inc. v. Renner, 303 S.E.2d 894, 898 (Va. 1983); 11 Richard A. Lord,

Williston on Contracts § 33:14 (4th Ed. 1999). “However, where the parties have

deliberately put their engagements in writing in such terms as import a legal

obligation free of uncertainty, it is presumed the writing was intended by the

parties to represent all their engagements as to the elements dealt with in the

writing. Accordingly, all prior and contemporaneous negotiations in respect to

those elements are deemed merged in the written agreement. And the rule is that,

in the absence of fraud or mistake or allegation thereof, parol testimony of prior or

contemporaneous negotiations or conversations inconsistent with the writing, or

which tend to substitute a new and different contract from the one evidenced by the

writing, is incompetent.” Neal, 79 S.E.2d at 242; see also Renner, 303 S.E.2d at 898;

Berg, 801 P.2d at 230; Williston on Contracts § 33:20.

[¶15.] From our review of these contracts, we conclude that the Real Estate

Purchase Agreement and the Right of First Refusal and Option agreement are fully

integrated documents: each stands alone. The Real Estate Purchase Agreement

contains all the essential terms to effect the sale and transfer of 6,107.91 acres for

-8-
#25820, #25828

$3,732,035. No language in the purchase agreement indicates that it is merely a

proposal or otherwise an incomplete contract. And the parties manifested their

assent by signing the agreement. Thus, there is nothing in the agreement that

prompts us to question its completeness. The same is true for the option

agreement. No language in the option agreement supports the notion that it is

anything but a complete and final expression of the parties’ understanding. And,

although the parties discussed selling the entire ranch for $500 per acre before

executing the written agreements, their final and complete expression indicates a

$610 per acre purchase price for the 6,107.91 acres and a $289.86 per acre price for

3,226.8 acres, unless less than 3,226.8 acres would be purchased, at which point the

price per acre provision would be triggered. The circuit court erred when it ruled

otherwise.

[¶16.] Nonetheless, the court further found that the option agreement was

ambiguous. A contract is ambiguous when it is capable of more than one reasonable

interpretation. See Ziegler, 2006 S.D. 6, ¶ 16, 709 N.W.2d at 335 (citations

omitted). The option agreement provides, in relevant part, that

WHEREAS Grantors own 3226.8 acres of real property and
improvements which is more particularly described in Exhibit A
attached hereto (the “Property”); and

WHEREAS Grantors desire to grant to the Option Holder an
option to purchase the portion of the Scotch Cap Ranch that is
set forth on Exhibit A of this Agreement for the terms and
conditions provided herein.
...
1. Grant of Right of Option. Subject to the provisions of this
Agreement, the Grantors grant to the Option Holder an option
to purchase their respective interests in the Property, which shall
be exercisable on the terms and conditions set forth herein.
...

-9-
#25820, #25828

3. Option. Commencing on the date of this Agreement and at
any time thereafter prior to the termination of this Agreement,
the Option Holder shall have the option to purchase the
ownership interests of the Grantors in the Property subject to the
limitations listed in Section 6. Upon exercise of this option, the
purchase price to be paid shall be Nine Hundred Thirty-Five
Thousand Three Hundred Twenty-Five Dollars ($935,325) (such
purchase price hereinafter the “Option Purchase Price”) . . . . A
prorated option price (a per acre price) shall be used if a smaller
tract is sold.

(Emphasis added.) The court found the agreement ambiguous because “their

respective interests” could reasonably be interpreted to include all 3,226.8 acres or

less. Accordingly, the court used parol evidence to determine how many acres the

parties meant to convey if Pankratz exercised the option. It found that the parties

intended that Pankratz would have the option to purchase all 3,226.8 acres because

email and testimonial evidence showed that the Hoffs sought to sell the entire

ranch, all 9,334.71 acres, to Pankratz. And there is no evidence that the Hoffs

intended to convey to Pankratz only the acres owned by them if Pankratz exercised

his purchase option. Thus, the court ruled that because the Hoffs refused to convey

to Pankratz all 3,226.8 acres, the Hoffs breached the option agreement.

[¶17.] The remedy requested by Pankratz for the breach was specific

performance. The court agreed that specific performance was the proper remedy,

but recognized that because of the partition, all 3,226.8 acres could not be sold.

Nonetheless, in light of Pankratz’s agreement to allow the partition and to purchase

2,066.8 acres, the court ordered that the Hoffs transfer to Pankratz 2,066.8 acres.

The court held that the property could not be transferred at the prorated option

price in the option agreement because the option agreement “was drafted to allow

the parties to achieve their goal of selling and purchasing the entire Ranch for $500

-10-
#25820, #25828

per acre.” The court ordered the Hoffs to transfer to Pankratz 2,066.8 acres for

$355,315, or $171.92 per acre.

[¶18.] The Hoffs challenge the court’s order for specific performance,

asserting that the court improperly considered parol evidence to set the per acre

price. They claim the option agreement unambiguously provides that when a lesser

tract is sold the price will be a “prorated option price,” which is a “price per acre.”

Because Pankratz agreed to purchase a lesser tract, the Hoffs maintain that the

“prorated option price” is $289.86 per acre ($935,325 divided by 3,226.8 equals

$289.86).

[¶19.] Pankratz, on the other hand, contends that the court properly used

parol evidence, not to alter the terms of the parties’ agreement, but to explain and

interpret the option agreement and Real Estate Purchase Agreement to reflect “the

parties’ intention of selling and purchasing the entire Ranch for $500 per acre in

two transactions.” To Pankratz, the “prorated option price” provision is ambiguous

because it does not contain an express formula, and simply taking the purchase

price in the agreement and dividing it by the number of acres intended to be sold

under the option agreement to reach a per acre price “would not encompass the true

nature of the parties’ deal, purchasing and selling the entire Ranch for $500 per

acre.”

[¶20.] Even if the option agreement can be deemed ambiguous, the parties

nonetheless agreed to an unequivocal contractual remedy in the event a lesser

amount of acreage was sold. The agreement provided: “A prorated option price (a

price per acre) shall be used if a smaller tract is sold.” By rejecting this provision

-11-
#25820, #25828

and declaring a different per acre price, the court improperly used extrinsic

evidence to show that the parties intended some other remedy than the one

provided in the contract they signed. See Pauley v. Simonson, 2006 S.D. 73, ¶ 8, 720

N.W.2d 665, 668.

[¶21.] No language in the option agreement suggests that the option property

to be sold would be at a price connected to what Pankratz already purchased under

the Real Estate Purchase Agreement. The option agreement clearly provides that

the purchase price of the option property is $935,325, and if a lesser tract were sold,

then the price would be prorated at a price per acre. A decision to grant specific

performance must be within the framework of the parties’ contract, ordering

performance of the contract terms. Free v. Free, 936 So. 2d 699, 704 (Fla. Ct. App.

2006) (citing Anthony James Dev., Inc. v. Balboa St. Beach Club, Inc., 875 So. 2d

696, 698 (Fla. Ct. App. 2004)). Therefore, the court erred when it went outside the

parties’ agreement to determine the price per acre for the option land, and then

altered the parties’ agreement to set the price per acre at $171.92. The agreement

provides for the sale of 3,226.8 acres at $935,325. The price per acre at the option

price is $289.86 per acre. Pankratz agreed to purchase a lesser tract of land,

2,066.8 acres, and therefore must pay $289.86 per acre, or $599,082.65. Pankratz

was entitled to specific performance, but not at the price per acre he sought. We

reverse and remand for the court to enter a judgment consistent with this opinion.

[¶22.] On notice of review, Pankratz seeks an order requiring the Hoffs to pay

the rental value on the 2,066.8 acres for their use of the land during the pendency of

this suit. As support, Pankratz cites SDCL 15-26A-28. That statute, however,

-12-
#25820, #25828

applies to appeals from judgments for which a bond has been filed under SDCL 15-

26A-25. Pankratz has not claimed, nor offered evidence of, the filing of a bond.

There being no other reason supporting the award of rental value on the property

he has not yet purchased, we decline to further consider the issue.

[¶23.] Affirmed in part, reversed in part, and remanded.

[¶24.] GILBERTSON, Chief Justice, and ZINTER and SEVERSON, Justices

concur.

[¶25.] WILBUR, Justice did not participate.

-13-