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Alpha Real Estate Company of Rochester v. Delta Dental Plan of Minnesota

November 18, 2003

ALPHA REAL ESTATE COMPANY OF ROCHESTER, APPELLANT,
v.
DELTA DENTAL PLAN OF MINNESOTA, ET AL., RESPONDENTS.



Hennepin County District Court File No. 00-2147

Considered and decided by Kalitowski, Presiding Judge, Lansing, Judge, and Anderson, Judge.

SYLLABUS BY THE COURT

1. A dental clinic lease provision requiring an additional rent payment of five percent of adjusted cash receipts after those receipts exceeded $1ámillion is not a violation of the federal anti-kickback statute, 42 U.S.C. § 1320a-7b(b) (Supp. 1999), where there was a finding that none of the parties to the contract had any intent to violate that law.

2. A dental clinic lease provision requiring an additional rent payment of five percent of adjusted cash receipts after those receipts exceeded $1ámillion is a violation of the anti-fee-splitting law for dentists, Minn. Stat. §á150A.11, subd. 4 (2002).

3. Where a lease provides that illegal clauses are severable, a clause deemed illegal is severed from the contract, but the remainder of the contract remains in effect.

The opinion of the court was delivered by: Anderson, Judge

Affirmed in part, reversed in part, and remanded

OPINION

Appellant Alpha Real Estate Company ("Alpha") sued respondents Delta Dental Plan of Minnesota ("Delta") and Sui Generis Development Company ("Sui Generis"), a wholly owned subsidiary of Delta, to enforce the exercise of Alpha's option to purchase a dental clinic pursuant to Alpha's lease with Sui Generis; Sui Generis and Delta counterclaimed for breach of contract. After a trial, the district court concluded that Alpha had breached the parties' contract by failing to pay a five-percent rental surcharge and that the disputed provision was not illegal under federal or state law. Alpha appealed, and this court affirmed. Alpha Real Estate of Rochester v. Delta Dental Plan of Minn., C7-01-2259 (Minn. App. Aug. 13, 2002), aff'd in part, rev'd in part, and remanded, 664 N.W.2d 303 (Minn. 2003). The supreme court affirmed in part and reversed in part and remanded to this court to conduct a de novo review as to whether the five-percent rental surcharge violated state and federal law. Alpha Real Estate of Rochester v. Delta Dental Plan of Minn., 664 N.W.2d 303 (Minn. 2003). We affirm in part, reverse in part, and remand for determination of attorney fees.

FACTS

This case arises from the establishment of a dental clinic in Rochester, Minnesota. Delta Dental Plan of Minnesota is a nonprofit health-service-plan corporation that sells and administers dental benefits to group plans, governmental units, and labor unions on a contract basis. In 1995, Delta was experiencing difficulties finding service providers in the Rochester area. Delta contacted Dr. Ted Erickson, a Faribault dentist, and negotiated a contract under which Delta would purchase and construct a dental clinic in Rochester and Erickson would provide the services under a provider agreement. Both parties sought to keep the arrangement confidential.

To implement this plan, Delta formed a wholly owned subsidiary, Sui Generis Development Company, to purchase, construct, and equip the property and to act as landlord. Erickson formed two companies, Alpha Real Estate of Rochester ("Alpha"), which leased the property from Sui Generis, and Apollo Dental Center, PLC ("Apollo"), which leased the property from Alpha. Apollo also entered into a provider agreement with Delta and operated the dental clinic. Apollo is not a party to this appeal.

In 1995, the parties entered into lengthy negotiations concerning the dental clinic. A document known as the 1995 agreement contained the following provision, "If in any one calendar year during the first ten years of the Lease (1996-2005) the adjusted cash receipts exceed $1 million, [Alpha] shall pay to Sui Generis additional rent for that particular year a sum equal to five percent of adjusted cash receipts." The 1995 agreement also provides that Erickson may purchase the clinic, but, in that event, "the additional five percent rental formula based upon adjusted cash receipts shall continue for the remainder of the ten year period." The 1995 lease, a separate document, also contains the five-percent rental surcharge clause, but it does not provide that it continues after the sale of the clinic. The 1995 lease was replaced by the 1997 lease, which was drafted to reflect the fact that construction of the building had been completed; it contains the five-percent rental surcharge clause that was in the 1995 lease.

The benchmark amount of $1 million was attained in 1998 and in 1999, but Alpha did not pay the additional sums due under the five-percent clause in 1998 or 1999. Delta served notices of default but took no steps to evict Alpha, which otherwise continued to pay its rent.

In 1999, Alpha attempted to exercise its option to purchase the property, but Delta refused to convey the property unless Alpha agreed to pay the five-percent charge on a continuing basis after the sale pursuant to the 1995 agreement. Alpha sued for specific performance. Delta counterclaimed for breach of contract based on Alpha's failure to make payments in 1998 and 1999 under the five-percent clause, and a court trial was held.

The district court, finding the lease ambiguous and considering extrinsic evidence, held that the five-percent clause survived Apollo's exercise of the option to purchase the clinic and this court affirmed. Alpha Real Estate of Rochester v. Delta Dental Plan of Minn., C7-01-2259 (Minn. App. Aug. 13, 2002), aff'd in part, rev'd in part, and remanded, 664 N.W.2d 303 (Minn. 2003). The supreme court affirmed in part and reversed in part, holding in relevant part that the 1997 lease was a "complete integration" and "that under the 1997 lease Alpha's five percent additional rent obligation terminates upon the closing of the option to purchase." Alpha Real Estate Co. of Rochester v. Delta Dental Plan of Minn., 664 N.W.2d 303, 314 (Minn. 2003). Under the supreme court's decision, however, because the $1 million benchmark was achieved in 1998 while the 1997 lease was in effect and "because the district court ordered Alpha to pay Delta $165,500.81 in additional rent for 1998 and 1999," the challenge to the legality of the five-percent clause remained. Id. Because this court ...


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