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Lease, property damage dispute settled for $4.4M

PLAINTIFF SOUGHT TO HOLD TENANT'S PARENT COMPANIES LIABLE
Published: June 19, 2009
By Anne C. Vitale

A nonprofit education organization has reached a $4.4 million settlement of its Holt County action for property damage and lost rent against a tenant that leased property for an at-risk youth facility.

The plaintiff had filed a claim to pin liability on various insurance carriers for the tenant's parent companies.

"This hotly contested case involved numerous issues with respect to liability for property damage and waste and whether such incidents provided for insurance coverage," said plaintiff's attorney Robert D. Gaines, of Krigel & Krigel in Kansas City. "The case involved numerous depositions and over 400,000 pages of documents, most of which concerned plaintiff's attempt to pierce the corporate veil."

Heartland Educational Institute Inc. is a nonprofit foundation that owns the property and campus formerly occupied by Tarkio College, in Tarkio, Mo.

In September 1994, Heartland entered a 10-year lease for about half the Tarkio real estate with Youth Services International of Missouri Inc. At the same time, YSIM entered a lease for the other half of the real estate with First Bank Investors Trust. YSIM then operated Tarkio Academy, a residential facility and school with capacity of over 300 troubled students.

YSIM parent company Youth Services International Holdings Inc. entered into various promissory notes with Heartland. Defendants alleged that the parties amended the lease and promissory notes in 1996 and alleged that Heartland owed YSI $1,019,903.

Heartland alleged that during the lease term defendants allowed the real estate and buildings to fall into disrepair to the extent of at least $6 million. Heartland filed a lawsuit for lost rent, property damage and waste. It originally filed the case in Atchison County, but it was moved to Holt County on a change of venue.

Defendants disputed the amount and liability of all damage. Defendants also entered counterclaims for alleged balances owed on the promissory notes.

During the 10-year lease, YSIM's parent corporations YSI and Correctional Services had entered various contracts, leases, obligations and debts incurred for the operation of Tarkio Academy. YSIM came into administrative default with the state of Missouri in 2000.

Heartland claimed that this activity and other business transactions exposed YSIM's parent corporations to liability based on piercing the corporate veil. Heartland filed a claim to pierce the corporate veil, bolstered by the fact that YSIM was undercapitalized and that parent corporations YSI and Correctional Services dominated and controlled YSIM during most of the 10-year lease.

Heartland initially demanded $1,152,340 before litigation started and before it retained an attorney. After Heartland commenced litigation and completed extensive discovery, it increased the demand to nearly $15 million.

At the first mediation, YSI offered to settle for $125,000 plus enter a §537.065 agreement. Following a second mediation and extensive negotiations, the parties agreed to settle for $4.4 million.

"With a total damage figure in excess of $20 million, we are pleased with the settlement amount," said defense attorney Jean-Paul Assouad, of Kutak Rock in Kansas City.

The insurance carriers' decision to provide coverage was influenced by the threat of a §537.065 settlement between the parties, Gaines said, thereby exposing the carriers to additional millions of dollars of potential exposure where their only defense would be coverage under the policies.

  • $4.4 million settlement
  • Breach of contract/commercial lease
  • Court: Holt County Circuit Court
  • Case Number/Date: 07HOCV00023/March 27, 2009
  • Judge: Roger Prokes
  • Mediator: Richard McLeod
  • Plaintiff's Experts: John Ackerman, St. Louis (engineer/property damage); Henry Adamson, Overland Park, Kan. (appraiser/fair market value); Steve Browne, Kansas City (certified public accountant); Robert Downs, Kansas City (law professor/corporate veil); Bud Gibson, Cleveland (public adjuster/repair cost)
  • Defendants' Experts: William Brackman, Belton (construction costs); Donald Wengler, Overland Park, Kan. (business accounting practices)
  • Special Damages: $6,118,935 property damage; $2,117,225 rent; $2.4 million lost use/income; $4,079,232 waste; $400,000 owed under Capital Improvement Fund; $80,712 late charges; $5,267,208 interest. Defendants' counterclaims: $300,000 conversion of personal property; $1,019,903 balance on promissory note
  • Insurance Carriers: Admiral Insurance Co., AIG, Northland Insurance Co. (for all defendants)
  • Caption: Heartland Educational Institute Inc. v. Youth Services International of Missouri Inc., Youth Services International Inc., Youth Services International Holdings Inc., Correctional Services Corporation Inc.
  • Plaintiff's Attorneys: Robert D. Gaines and Sanford P. Krigel, Krigel & Krigel, Kansas City
  • Defendants' Attorneys: Jean-Paul Assouad, Larry Fields, Bradley Baumgart and Erin McClernon, Kutak Rock, Kansas City