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Waste Connections of Kansas, Inc., A Delaware Corporation v. Ritchie Corporation

March 22, 2013

WASTE CONNECTIONS OF KANSAS, INC., A DELAWARE CORPORATION, APPELLANT,
v.
RITCHIE CORPORATION, A KANSAS CORPORATION, APPELLEE.



Appeal from Sedgwick District Court; MARK A. VINING, judge.

SYLLABUS BY THE COURT

SYLLABUS BY THE COURT 1. Summary judgment is appropriate when the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. The trial court is required to resolve all facts and inferences which may reasonably be drawn from the evidence in favor of the party against whom the ruling is sought. When opposing a motion for summary judgment, an adverse party must come forward with evidence to establish a dispute as to a material fact. In order to preclude summary judgment, the facts subject to the dispute must be material to the conclusive issues in the case. On appeal, we apply the same rules and where we find reasonable minds could differ as to the conclusions drawn from the evidence, summary judgment must be denied. 2. Kansas statutes authorizing declaratory judgment actions are remedial and meant to be liberally construed to settle and provide relief from uncertainty and insecurity with respect to disputed rights, status, and other legal relations. Nevertheless, a court may decline to render or enter a declaratory judgment if it will not terminate the uncertainty or controversy giving rise to the proceeding. 3. The primary rule for interpreting written contracts is to ascertain the parties' intent. If the terms of the contract are clear, the intent of the parties is to be determined from the language of the contract without applying rules of construction. If, on the other hand, the court determines that a written contract's language is ambiguous, extrinsic or parol evidence may be considered to construe it. If the language of a contract is ambiguous, and the intent of the parties cannot be ascertained from undisputed extrinsic or parol evidence, summary declaratory judgment is inappropriate. 4. Whether a contract has been formed by an exchange of writings is a question of law. Whether a contract has been breached is a question of fact. 5. Inherent in every Kansas contract, except an employment-at-will contract, is a duty of good faith and fair dealing. Whether the duty of good faith and fair dealing has been violated raises a question of fact. 6. The duty of good faith and fair dealing is an implied undertaking in every contract on the part of each party that he or she will not intentionally and purposely do anything to prevent the other party from carrying out his or her part of the agreement, or do anything that will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract. Ordinarily, if one exacts a promise from another to perform an act, the law implies a counterpromise against arbitrary or unreasonable conduct on the part of

the promisee. However, essential terms of a contract on which the minds of the parties have not met cannot be supplied by the implication of good faith and fair dealing. 7. A binding contract to buy property is not formed by an exchange of letters between counsel for the owner and counsel for a right of first refusal holder, when the letters and an enclosed Asset Purchase Agreement between the seller and a third party are ambiguous and fail to evidence a meeting of the seller's and the right holder's minds on the essential price term. 8. A holder of a right of first refusal does not waive and is not estopped from asserting its right to contest the price that must be paid upon exercise of its right, when it indicates that certain aspects of the seller's notice of a third party's offer for the encumbered property remain for discussion and later executes and secures the seller's execution of a Right of First Refusal and Release of Escrow and a Reservation of Rights that explicitly describe the price dispute. 9. In a right of first refusal situation, each party gives up something in exchange for increased certainty of opportunity to make a deal. The seller gives up its chance to negotiate with the holder of the right of first refusal for a price higher than the one a third party is willing to offer. The holder of the right of first refusal gives up its chance to negotiate with the seller for a price lower than one the seller is willing to accept from a third party. The key to activation of a holder's right of first refusal is mutual willingness to enter into a sale at a specific price satisfactory to both the third party and the seller. The seller may not force a purchase by the holder of the right of first refusal at a higher price. The holder of the right of first refusal may not force a sale to it at a lower price. The nature of a right of first refusal agreement means that neither the seller nor the right holder remains free to exercise unfettered business judgment to use sale of the subject property or other asset to maximize profit or shareholder value. Each has voluntarily constrained such judgment and taken on obligations to the other. 10. Language in the right of first refusal at issue in this case bound the seller to convey any offer it was willing to accept from a third party to the right holder. The offer did not need to be reduced to writing by the third party or set forth in an executed Asset Purchase Agreement to trigger the seller's obligation to communicate it in writing and then accept the specified amount in a purchase by the right holder. 11. Package deal status is not a barrier to activation of a right of first refusal on a portion of the property or single asset in the package. 12. In this case, breach of contract through a violation of the duty of good faith and fair dealing was only one of the possible breaches alleged by the right of first refusal holder. Genuine issues of material fact remain for trial on the breach of contract action, and the case must be remanded for further proceedings in the district court. 13. A claim for breach of a right of first refusal in a contract is not solely dependent upon the mere existence of a package deal alternative or upon the seller's involvement in setting the portion of the package price attributable to the encumbered property. Package deals in which a portion of the subject property is subject to a right of first refusal have the potential for artificial allocations to defeat or promote exercise of the right, but whether the allocation in a particular package deal is artificial and whether the seller's role in arriving at it constituted violation of the duty of good faith and fair dealing are just two possibilities for breach. 14. When an appeal from summary judgment in a breach of contract action leads to reversal and remand because of the existence of genuine issues of material fact, there is no prevailing party; and an award for costs, expenses, and reasonable attorney fees incurred in the district court and reasonable attorney fees incurred on appeal under contract language providing for such an award to the prevailing party is premature.

The opinion of the court was delivered by: Beier, J.

Review of the judgment of the Court of Appeals in 43 Kan. App. 2d 655, 228 P.3d 429 (2010).

Judgment of the Court of Appeals reversing and remanding to the district court is reversed. Judgment of the district court is reversed and remanded with directions.

The opinion of the court was delivered by BEIER, J.

This is a $550,000 price dispute arising out of plaintiff's right of first refusal to purchase a Wichita waste transfer station from defendant. The catalyst was a third-party's agreement to buy the transfer station and an adjoining landfill as a package deal or to buy the landfill alone.

The district court judge granted summary judgment to defendant Ritchie Corporation (Ritchie). A panel of our Court of Appeals reversed the summary judgment in Ritchie's favor, ruled that summary judgment should have been granted to plaintiff Waste Connections of Kansas, Inc. (Waste Connections), and ordered remand to the district court for determination of attorney fees. Waste Connections of Kansas, Inc. v. Ritchie Corp., 43 Kan. App. 2d 655, 228 P.3d 429 (2010). We granted Ritchie's petition for review.

Ritchie now argues that the Court of Appeals erred by discounting the role of Ritchie's business judgment when evaluating Waste Connections' breach of contract claim for violation of the implied duty of good faith and fair dealing, by holding that Waste Connections is not contractually obligated to pay $2 million for the station, and by disregarding controverted facts that should prevent judgment as a matter of law in Waste Connections' favor.

Our review of the record and analysis of the legal issues leads us to reverse the judgment of the district court, reverse the decision of the Court of Appeals, and remand the entire case to the district court for further proceedings.

FACTUAL AND PROCEDURAL BACKGROUND

On December 29, 1998, Ritchie conveyed title to a 16.8-acre tract of land in Sedgwick County to BFI Waste Systems of North America, Inc. (BFI). On the same day, Ritchie and BFI entered into an Escrow Agreement that entitled BFI to operate the property as a non-hazardous waste transfer station. BFI was required to make quarterly payments to Ritchie based on a per-ton amount of waste material processed at the transfer station. Under the Escrow Agreement, BFI had the right to operate the transfer station for an initial period of 35 years.

The Escrow Agreement provided that an escrow agent would redeliver a deed from BFI to Ritchie conveying title to the property back to Ritchie at the end of BFI's right to use the transfer station (Ritchie's "reversionary interest"). Ritchie granted BFI a right of first refusal with respect to Ritchie's entire interest, including Ritchie's reversionary interest in the property. The Right of First Refusal, set forth in Paragraph 21(m) of the Escrow Agreement, provided:

"Right of First Refusal. At all times this Escrow Agreement is in effect, Buyer shall have a right of first refusal with respect to Seller's interest in this Escrow Agreement, including without limitation Seller's reversionary interest in the property, however designated, to the effect that upon receipt by Seller of any offer to purchase Seller's interest in this Agreement or the Property by a third party, Seller shall give written notice to Buyer of the fact and terms of such third party offer. Buyer shall have forty-five (45) days after its receipt of such notice to notify Seller in writing of its election to purchase such interest(s) on such financial terms (the 'Election Term'). In the event Buyer does not notify Seller of its election to purchase such interest(s), then Seller may sell such interest(s) on such identical terms to such third party so long as such sale is consummated within ninety (90) days after such Election Term. If such sale to the third party is not consummated within such period, then the Buyer shall again have the right of first refusal to purchase such interest(s) prior to any sale to any third party. This right of first refusal shall specifically not apply to any transfer or assignment by Seller to an affiliate of Seller or to any stockholder of Seller or any of their affiliates." (Emphasis added.)

Paragraph 21(i) of the Escrow Agreement provided:

"Attorney[s'] Fees. In the event of any controversy, claim or dispute between the parties arising out of this Escrow Agreement or the breach thereof, the prevailing party shall be entitled . . . to recover its costs and expenses, including without limitation, reasonable attorneys' fees, expert witness fees and investigators' fees, which shall be determined by the court if the matter is litigated or otherwise in a separate action brought for that purpose."

Paragraph 21(g) of the Escrow Agreement contained an integration clause.

On May 12, 2000, BFI assigned all of its rights, title, and interest in and to the Escrow Agreement to Waste Connections. After that date, Waste Connections operated the transfer station.

On December 17, 2001, Ritchie and Waste Connections amended the Escrow Agreement to increase the amount of the quarterly payments for which it provided. In consideration for the increased payments, Ritchie agreed not to file a petition for annexation or consent to annexation by the City of Wichita with respect to adjacent property and agreed to exert its best efforts to maintain use of the adjacent property as "Land Devoted to Agricultural Use" or a buffer zone under K.S.A. 12-519(f).

Ritchie also owned a controlling interest in C & D Recyclers of Kansas, Inc. (C & D). Hale Thompson (Tom) Ritchie II was the President and CEO of Ritchie, as well as the representative of Ritchie and C & D, who had responsibility for the transfer station and an adjoining landfill. He had the authority to make any decisions that needed to be made on behalf of Ritchie and C & D.

At some point, Cornejo & Sons (Cornejo) approached Ritchie regarding the purchase of C & D assets or stock. After discussions, on June 22, 2007, Ritchie and C & D entered into an Asset Purchase Agreement with Cornejo. Pursuant to the Asset Purchase Agreement, Ritchie and C & D agreed to sell the landfill, certain option rights to purchase additional property adjacent to the landfill, and all of Ritchie's rights and obligations under the Escrow Agreement.

The Asset Purchase Agreement specified the following:

"2.1. Purchase Price Payment. The purchase price for the entirety of the Assets shall be Four Million Nine Hundred Fifty Thousand Dollars ($4,950,000) . . . , of which Two Million Dollars ($2,000,000) will be allocated and paid to Ritchie Corporation for the purchase of its rights and the assumption of its obligations under the Escrow Agreement.

"In the event that Waste Connections of Kansas, Inc.[,] shall, upon receipt of due and proper notice from Sellers, elect to exercise its right of first refusal under the Escrow Agreement, the parties agree that the purchase price for the remaining assets shall be Three Million Five Hundred Thousand Dollars ($3,500,000.00). "

The Asset Purchase Agreement also included an integration clause in its Section 12.3.

On June 27, 2007, Terry Pilgreen, counsel for Ritchie, sent a letter to Waste Connections. The letter stated in part:

"Ritchie Corporation has received an offer to acquire its interest in the Escrow Agreement for $2,000,000.00 cash as specified in the attached Asset Purchase Agreement. Waste Connections of Kansas, Inc.[,] holds a Right of First Refusal pursuant to Section 21(m) of the Escrow Agreement, and on behalf of my client, Ritchie Corporation, this correspondence shall serve as notice of the facts and terms of the referenced third-party offer. Should Waste Connections of Kansas, Inc.[,] not exercise its Right of First Refusal within forty-five (45) days after receipt of this notice, you are hereby advised that Ritchie Corporation will sell its interest in the Escrow Agreement for $2,000,000.00 cash as specified in the Asset Purchase Agreement."

Robert Epstein, counsel for Waste Connections, testified in a deposition that he called Pilgreen on August 2, 2007, and advised him that Waste Connections believed it should have to pay Ritchie only $1.45 million for the transfer station, not $2 million. He then sent a letter to Pilgreen on August 3, 2007. In the letter, Epstein stated in relevant part: "The purpose of this letter is to advise you that Waste Connections of Kansas, Inc.[,] has elected to exercise its option to purchase Ritchie Corporation's interest in the Wichita Transfer station property pursuant to the provisions of the Escrow Agreement.

"Please advise your client that Waste Connections of Kansas has exercised its option to purchase. There are certain matters with respect to the contract which I believe we need to discuss in greater detail. Please contact me upon your receipt of this letter so that we may proceed to complete this purchase and sale. We would like to schedule a conference call to discuss certain matters relating to this transaction."

Pilgreen forwarded Epstein's letter to Chuck Hill, Director of Regulatory Affairs at Cornejo, on August 6, 2007, and talked to Hill by telephone the same day about Waste Connections' position on the appropriate price for the transfer station. Hill's email response, dated the same day, stated:

"Terry: I have discussed this matter with Ron [Cornejo] and Dave Royce. Our position is as follows:

"We have a contract by which we agreed to purchase the Ritchie transfer station interest and the C & D Landfill for a combination price of $4,950,000, of which it was agreed $2 million would be allocated to and paid to Ritchie for the transfer station interest.

"Alternatively, if [Waste Connections] exercises its right of first refusal to purchase the Ritchie transfer station interest, we have agreed to pay 3.5 million for the landfill as a stand-alone purchase.

"It seems to us that any dispute as to the effect of the Cornejo/Ritchie purchase agreement on the Ritchie/[Waste Connections] escrow agreement is a matter to be resolved between Ritchie and [Waste Connections], and that we really have no particular rights to enforce as to [Waste Connections] at this time.

"As you will recall, we really had no initial desire to purchase anything other than the landfill, but Ritchie determined that because of the requirement for the agricultural buffer around the landfill, that you could not practically separate the two.

"I guess our bottom line position is that if Ritchie determines that the combined reading of the Cornejo/Ritchie purchase agreement with the Ritchie/[Waste Connections] escrow agreements is that [Waste Connections] must be allowed to purchase the transfer station interest for $1,450,000, that is okay with us, as long as we get the landfill for 3.5 million."

Epstein also testified in his deposition that he asked Pilgreen during an August 9, 2007, conference call whether Cornejo would be willing to allow Waste Connections to purchase the transfer station for $1.45 million while it paid $3.5 million for the landfill. Pilgreen did not respond.

On August 10, 2007, Epstein sent another letter to Pilgreen, which stated in part:

"The purpose of this letter is to advise you, again, that Waste Connections of Kansas, Inc.[,] has elected to exercise its right of first refusal pursuant to Paragraph 21(m) of the Escrow Agreement to purchase Ritchie Corporation's interest in the Wichita Transfer Station Property.

"I understand that you have already advised your client that Waste Connection of Kansas has elected to exercise its right of first refusal under the Escrow Agreement. Please provide me with your written confirmation of your client's timely receipt of my client's election. As we have made you aware, there are certain matters with respect to the contract which require ongoing discussion. We look forward to proceeding to complete this purchase and sale."

On August 15, 2007, Pilgreen sent a letter in response to Epstein:

"I am in receipt of your two pieces of correspondence dated August 3 and August 10, 2007, respectively, concerning the above referenced matter. I acknowledge that both pieces of correspondence were received within forty-five (45) days of your ...


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