Judge rules for Osage City
in pharmacy dispute
Wayne White | Managing Editor
LYNDON—After listening to a day and a half of testimony,
a district judge ruled in favor of Osage City in a dispute over
payment for space formerly occupied by a pharmacy in the city-owned
medical center.
Osage County District Court Judge Phillip M. Fromme ruled Tuesday
that Schroeder Drugs, Inc. should pay $68,382 rent, $27,050 in
real estate taxes, and $3,435 for insurance, for occupying a portion
of the city-built medical center from May 2006 to October 2008.
In February, Schroeder Drugs relocated to its former location
at 535 Market St. from Osage City’s medical center, located
at 131 W. Market St.
Monday’s court session included testimony from a string
of witnesses that included two former city managers of Osage City,
Don Cawby and Brian Silcott, Osage City Manager Nick Hernandez,
and former Osage City mayor Patrick Lawless.
Cawby testified the medical center project began in 2003 as an
effort to attract another doctor to Osage City, due to the expected
retirement of a local doctor. Discussions were initiated with
Stormont-Vail to build a medical clinic. Those talks developed
into a plan to include other medical services.
“Stormont-Vail wanted a co-located pharmacy,” Cawby
said.
Initially, a downtown vacant lot was considered and purchased
by the city, but was later determined too small for a medical
center and pharmacy.
Discussions then were held with Schroeder Drugs and medical supplier
Resource DME. Cawby said another Osage City pharmacy later indicated
“they were a little upset they weren’t approached.”
He said Schroeder Drugs was selected as a potential tenant because
“they showed an interest in doing something.”
The city then developed a public building commission to construct
the facility, due to Stormont-Vail’s desire not “to
hold capital in that property,” Cawby said.
After the purchase of property where the medical center was eventually
located, “The next step was to go to the tenants,”
he said, resulting in Stormont-Vail agreeing to sign a lease.
Schroeder Drugs and Resource DME signed agreements to lease space
in the building.
“Both wanted some kind of purchase arrangement down the
road,” Cawby said, noting such a stipulation was in the
agreement.
Silcott testified that when he moved to Osage City and took the
job as city manager in January 2006, the medical center was not
occupied.
Silcott said neither Resource DME nor Schroeder Drugs had signed
leases and his instructions were that the building should not
be occupied until leases were secured.
Questioned by Osage City attorney Rick Godderz, Silcott said a
lease had been sent to Schroeder Drugs, but was never signed.
A city employee gave keys to Schroeder Drugs, despite no lease
being signed.
“He moved in,” Silcott said, referring to Michael
Schroeder, president of Schroeder Drugs.
Godderz questioned if the city had attempted to evict Schroeder
because “he moved in without your knowledge.”
“We believed everybody was acting in good faith,”
Silcott said.
After the building was completed, Resource DME withdrew from the
deal, forfeiting to the city $5,000 as per the agreement to lease,
he said.
Silcott testified Schroeder Drugs never approached him or the
city council with a proposal to purchase a portion of the building.
He said the city made an offer to Schroeder Drugs with a selling
price of $282,217, even though the price included no finance costs.
“We wanted to create a hub of medical care,” Silcott
said. “We felt like our citizens were ahead because of the
quality medical care available.”
Silcott said the city had started paying the debt and wanted to
start receiving income from the property.
“Everyone wanted to come to terms and get it completed,”
he said.
A year later, the city sent an offer to Schroeder Drugs with a
sale price of $486,382. Silcott explained the original offer did
not include the cost of land, infrastructure, insurance or interest.
In 2008, Silcott took a job in Goddard, leaving Osage City. Schroeder
Drugs continued to operate the pharmacy at the medical center
location.
“From my opinion, everything was still up in the air, almost
the same as the first day I arrived,” Silcott said.
Lawless said he was mayor of Osage City from 1995 to 2007, and
was involved in the plan to establish the medical center. Questioned
by Godderz, Lawless said the city council was never approached
by Schroeder Drugs with a purchase agreement.
Hernandez said when he started his employment as city manager
in August 2008, he had a discussion with Schroeder about the allocation
of construction costs of the building, but never received a purchase
contract from the drug store.
“I felt like we drew out square foot by square foot the
city’s position,” Hernandez said.
He said that as of that time, Schroeder Drugs had paid no rent.
Hernandez said another offer was made to Schroeder, set at $360,247.50.
“That was a number I had come up with that included his
percentage of total construction costs, back rent, taxes and insurance,”
Hernandez said.
Questioned by Schroeder’s attorney, Patrick Riordan, Hernandez
said he believed the agreement to lease was binding on Schroeder.
“Yes, because he moved into the building knowing the conditions
of the agreement to lease,” Hernandez said.
Hernandez said although the city council was made aware of the
negotiations, no sale agreement was finalized. Schroeder’s
rejection of the city’s offer led to a notice of eviction
in September 2008.
Schroeder testified Tuesday that as the building neared completion,
he worked with a project manager on some of the features of the
pharmacy space. In May 2006, the pharmacy moved to the new location.
“We informed the city we were going to purchase our portion
of the building,” Schroeder said, noting conflicting information
was received regarding the construction costs of the facility.
“We wanted to get more information on how that figure was
arrived at,” he said. He did not know the total construction
cost before moving into the facility, he testified.
He met with city officials to discuss differences in square footage
figures. “I did not agree with their numbers,” Schroeder
said.
He said he believed the difference was due to the city including
a sidewalk as part of the space occupied by the pharmacy. Questioned
by the city’s attorney, Steve Pigg, Schroeder said he still
disagrees with the manner in which the space was allocated.
Schroeder also testified about the pharmacy’s counterclaim
of over $80,000, which included remodeling costs for the store
at 535 Market.
Schroeder said the remodeling was necessary because the store’s
inventory had grown at the medical center location and would not
fit into the old store.
“If I did not have to leave 131 W. Market, I would not have
had to remodel 535 Market for my own purposes,” Schroeder
said.
During closing arguments, Pigg said it was the position of the
city that “there was never any meeting of the minds central
to a (purchase) agreement.”
He said the only purchase consideration was in the agreement to
lease, which provided the tenant could purchase the property for
$1 after fulfilling the terms of a 20-year lease.
Riordan argued the city had no rental claim against Schroeder
Drugs.
“There wasn’t ever a written lease,” Riordan
said. “It wasn’t a binding contract. The agreement
to lease is not any kind of rental liability.”
Riordan said the understanding of all parties was that Schroeder
Drugs wished to buy the property.
“For two years, there was no demand for rent,” he
said.
Judge Fromme ruled that although the agreement to lease was not
a lease, “the court feels it was a legal binding agreement
between the parties.”
Fromme said he concluded there never was an agreement to purchase.
“They were clearly not able to reach an agreement,”
he said.
The judge said the city had relied on the agreements to lease
to proceed with issuing bonds for the project.
“Clearly the defendant moved into the occupied space and
used the space,” Fromme said, ordering Schroeder to pay
rent for 29 months, plus real estate tax and insurance.
Fromme also denied Schroeder Drugs’ counterclaim.
“There is no evidence of damages by the city,” he
said.
Fromme said Schroeder’s original $5,000 down payment will
go to the city but will not be included as part of the rent payment.
In a November 2008 pretrial hearing, Fromme had ruled Schroeder
Drugs must pay rent from October 2008 until the drug store vacated
the premises. Those funds, held in an escrow account, were to
be released to the city Tuesday. |
