                      United States Court of Appeals
                            FOR THE EIGHTH CIRCUIT
                                     ___________

                                     No. 03-3824
                                     ___________

Shurgard Storage Centers,                 *
                                          *
             Appellee,                    *
                                          * Appeal from the United States
      v.                                  * District Court for the Eastern
                                          * District of Missouri.
Lipton-U. City, LLC,                      *
                                          *
             Appellant.                   *
                                     ___________

                               Submitted: September 16, 2004
                                  Filed: January 12, 2005
                                   ___________

Before LOKEN, Chief Judge, BEAM and SMITH, Circuit Judges.
                              ___________

SMITH, Circuit Judge.

      Lipton-U. City, LLC ("Lipton") and Shurgard Storage Centers ("Shurgard")
entered into a lease agreement with a purchase option. Shurgard subsequently
discovered a major problem with the price term of the agreement when Lipton
attempted to exercise it. Shurgard sought reformation or rescission of the sale
provision. After a trial on the merits, the district court1 ordered rescission finding the
disputed contract term to be unconscionable. Judgment was entered in Shurgard's
favor and Lipton now appeals. We affirm.

      1
       The Honorable Terry I. Adelman, United States Magistrate Judge for the
Eastern District of Missouri.
                                     I. Background
       In 1996, a representative of Lipton contacted Shurgard to discuss the purchase
of three self-storage facilities in the St. Louis area, including a facility located on
Olive Boulevard. Because no agreement could be reached on price, these negotiations
failed. In 1998, Lipton renewed its interest in purchasing the three properties and
made a second offer of $12,311,452.00. The Olive Boulevard property accounted for
$6,913,418.00 of that total price. This calculation was based on an annual net-
operating income and a 9.5% capitalization rate. After a due diligence review of the
properties, Lipton became concerned about an existing environmental condition at the
Olive Boulevard property. Given the buyer's concerns, the parties agreed to a lease,
rather than a sale of the Olive Boulevard property. Shurgard drafted and circulated
a lease agreement to Lipton's and Shurgard's negotiators. The proposed lease
contained a purchase option provision, which was based on a formula using twelve
months of projected net-operating income and a capitalization rate of 10%. As
negotiations progressed, Lipton, through its representative, Donn Lipton, expressed
concern about the value it would receive given the purchase price and the
environmental condition of the Olive Boulevard property. Donn Lipton threatened to
terminate purchase negotiations if Shurgard did not make some significant
concessions. Donn Lipton also made clear that he expected a 20% return.

      Shurgard suggested a compromise regarding the definition or basis for net-
operating income and forwarded a spreadsheet showing values for the Olive
Boulevard property ranging from $7.5 million to $8.5 million. Shurgard also
suggested that the parties use a 9.6% capitalization rate on a historic net-operating
income using results from the immediate past six months of business. Lipton
disregarded the spreadsheet, but noted that the lease payments would be $654,000.00.
Lipton's representatives saw the deal favorably, and using annualized figures,
projected that the value of the property would increase from approximately $7.2
million to about $7.9 million in five years.



                                         -2-
       Given this forecast, Donn Lipton accepted Shurgard's compromise offer of a
9.6% capitalization rate on six-months of trailing net-operating income.
Unfortunately, the parties did not make their agreement abundantly clear. Donn
Lipton interpreted Shurgard's compromise to be a substantial price reduction by using
six-months of net-operating income instead of annualized or twelve-months of net-
operating income. Thus, Shurgard believed the purchase price would be based upon
a full-year of net-operating income and Donn Lipton believed the price would be
based upon six months of net-operating income. Shortly thereafter, Donn Lipton and
Shurgard discussed the deal and Shurgard requested that the parties fix the six-month
period as either January through June or July through December.

       On October 11, 1999, Shurgard representatives, who were drafting the lease,
circulated an internal e-mail memorandum describing its terms. The memorandum
indicated that the lease should apply a 9.6% capitalization rate on the annualized net-
operating income for the latest six-month period, January 1 through July or July 1
through December 31, multiplied by two. The net-operating income was to be
determined by applying standard generally-accepted accounting principles2 as
consistently applied by Shurgard. Shurgard copied Lipton representatives on this e-
mail memorandum and there are no records that anyone from Lipton disputed its
accuracy or contended net-operating income should not have been annualized.

       The next day, Shurgard revised the lease pursuant to the earlier e-mail and
circulated the updated version. The updated lease inexplicably omitted any language
regarding multiplying by two or annualizing the net-operating income. Section 2.4
of the updated lease did, however, incorporate a capitalization rate of 9.6% and a
definition of net-operating income to be based on a set six-month period. After


      2
        Keith Allair, an investment banker concentrating in the self-storage industry
testified that annualized net-operating income is universally used in valuation
calculations.

                                         -3-
receiving a copy of the lease, Donn Lipton announced to his company's attorneys that
the lease reflected his successful negotiation of a purchase option price based on six-
months of unannualized net-operating income.

       The parties continued to negotiate other terms of the lease, specifically other
provisions in section 2.4 and the fee mortgage provision found in section 1.15. At the
end of their negotiations, Shurgard's board of directors met to consider final approval
of the lease proposal. At that time, a copy of the lease was provided to each member
of the board. The board approved the lease and the parties signed the final draft. The
contract specified a ten-year lease term and set the initial annual rent at $636,000.00
based on a property valuation of approximately $7 million.

      About eight months after signing the lease, Lipton expressed an intent to
exercise the purchase option under section 2.4 and stated a price of $2,918,103.70.
Lipton calculated the price based on six-months of unannualized net-operating
income. Shurgard rejected this offer and filed suit in district court seeking
reformation or rescission citing the parties' misunderstanding about the price term.
Count II of Shurgard's First Amended Complaint, labeled "Rescission," specifically
alleged that:

      Lipton knew and understood that Shurgard had instructed its attorney to
      specify the use of annualized . . . [net-operating income] in the
      calculation of the purchase option price, and Lipton further knew and
      understood that Shurgard executed the Lease Agreement . . . in the
      mistaken belief that the language of the Lease Agreement as executed
      called for such use of annualized . . . [net-operating income] in the
      calculation of the purchase option price.

                                        ***

      Shurgard would not have agreed to enter into the Lease Agreement if it
      had known that the calculation of the purchase option price in Section

                                         -4-
      2.4 of the Lease Agreement failed to require the use of annualized . . .
      [net-operating income] as the parties had agreed, and Shurgard would
      never have agreed to sell the Property to Lipton at a price that in effect
      reflects only half of its true value.

At the end of the non-jury trial, the district court rejected Shurgard's mutual mistake
and fraud theories. However, the district court ordered rescission based on
unconscionability. The court found that Donn Lipton should have known that
Shurgard intended to annualize the net-operating income because he was copied on
the October 11 e-mail detailing the contract terms. The court reasoned that it would
be unconscionable to allow Lipton to purchase the Olive Boulevard property at half
its value based upon the lack of clarity of the price term. Lipton now seeks reversal
of the district court's order of rescission and judgment in favor of Shurgard.

                                     II. Discussion
       The parties agree that Missouri law applies. We review the district court's
interpretation of state law de novo. Kolb v. Paul Revere Life Ins. Co., 355 F.3d 1132,
1134 (8th Cir. 2004). Under Missouri law, "rescission may be granted when the other
party knows of the mistake or if the mistake is so obvious that it should have been
known or when enforcement of the contract would be unconscionable and relief
would impose no substantial hardship on the other party." Kassebaum v. Kassebaum,
42 S.W.3d 685, 695 (Mo. Ct. App. 2001). Moreover, "there is practically universal
agreement that, [under Missouri law] if the material mistake of one party was caused
by the other, either purposely or innocently, or was known to him, or was of such
character and accompanied by such circumstances that he had reason to know of it,
the mistaken party has a right to rescission [of the contract]." Silver Dollar City, Inc.
v. Kitsmiller Constr. Co., Inc., 931 S.W.2d 909, 915 (Mo. Ct. App. 1996). The
Missouri Court of Appeals in Silver Dollar City relies heavily on § 153 of the
Restatement (Second) of Contracts, which provides:



                                          -5-
      [w]here a mistake of one party at the time a contract was made as to a
      basic assumption on which he made the contract has a material effect on
      the agreed exchange of performances that is adverse to him, the contract
      is voidable by him if he does not bear the risk of the mistake under the
      rule stated in § 154, and (a) the effect of the mistake is such that
      enforcement of the contract would be unconscionable, or (b) the other
      party had reason to know of the mistake or his fault caused the mistake.

Restatement (Second) of Contracts § 153. See also Silver Dollar City, 931 S.W.2d at
913–18.

       Lipton acknowledges the holdings of Kassebaum and Silver Dollar. However,
Lipton argues that § 153 of the Restatement is inapplicable because the mistake in
this case is one of expression rather than a mistake of an underlying fact. Lipton relies
on the introductory note contained in Chapter 6 of the Restatement, which provides:


      The type of mistake dealt with in this Chapter is one that relates to
      existing facts that the parties regard as a basis for making an agreement.
      An important sub-category of such mistake is mistake as to expression,
      in which the mistake relates to the contents or effect of a writing that
      expresses an agreement. In general, the appropriate relief for mistake
      takes the form of avoidance of the contract.

                                         ***
      If there is a mistake of only one party as to expression, avoidance may
      be an appropriate remedy under the rule stated in § 153 . . . . If, however,
      his mistake is in believing that a writing correctly expresses a prior
      agreement and the other party knows that it does not correctly express
      that agreement, the problem is one of the effect of the latter's failure to
      disclose this fact. This is dealt with in §§ 160–61, together with other
      instances in which nondisclosure may be tantamount to
      misrepresentation.




                                          -6-
Restatement (Second) of Contracts ch. 6, introductory note. Under Missouri law,"[a]
mistake of expression occurs where the parties are of the same mind regarding the
terms of the agreement, but the writing intended to embrace those terms does not
express their true meaning." Smith v. Githens, 271 S.W.2d 374, 379 (Mo. Ct. App.
1954). Lipton and Shurgard were not of the same mind regarding the terms of the
agreement, as Lipton thought the contract was based on unannualized net-operating
income and Shurgard thought that the contract was based on annualized net-operating
income. The mistake here is not one of expression and the district court correctly
decided this case under § 153 of the Restatement.

       Lipton also disputes two of the district court's findings of fact: (1) that Donn
Lipton knew or should have known of Shurgard's mistake of fact and (2) that the
price offered by Lipton was half of the value of the property. Findings of fact,
whether based on oral or documentary evidence, shall not be set aside unless clearly
erroneous, and due regard shall be given to the opportunity of the district court to
judge the credibility of the witnesses. Fed. R. Civ. P. 52(a). This standard of review
does not permit a court of appeals to substitute its own impressions for those of the
district court. Adzick v. UNUM Life Ins. Co., 351 F.3d 883, 889 (8th Cir. 2003).
Moreover, "[w]hen findings are based on determinations regarding the credibility of
witnesses, Rule 52 demands even greater deference to the . . . [district] court's
findings, and unless contradicted by extrinsic evidence or internally inconsistent, such
findings can virtually never be clear error." Id.

       Based upon our review, we hold the district court was not clearly erroneous in
holding that Donn Lipton knew or should have known of Shurgard's mistake. Donn
Lipton was notified via e-mail that Shurgard thought the 9.6% capitalization rate
would be based on annualized net-operating income. Donn Lipton knew that section
2.4 of the lease did not apply the 9.6% capitalization rate on annualized net-operating
income and informed his attorneys that the lease reflected his successful negotiation



                                          -7-
of a purchase-option price based on six-months of unannualized net-operating
income.

       Furthermore, the record contained sufficient evidence for the district court to
conclude that the Olive Boulevard property should have been valued at approximately
$7 million. Specifically, Shurgard suggested a compromise regarding the definition
or basis for net-operating income and sent Donn Lipton a spreadsheet showing values
ranging from $7.5 million to $8.5 million. Shurgard also suggested that the parties use
a 9.6% capitalization rate on a historic net-operating income using the immediate past
six months of data. Lipton representatives thought the 9.6% capitalization rate on a
historic net-operating income was good, and using annualized figures, projected that
value of the property would increase from approximately $7.2 million to about $7.9
million in five years. This all occurred after Lipton's due diligence review.

       Lipton also argues that the district court erred in its equitable balancing of the
parties. Specifically, Lipton disputes the district court's findings of unconscionability
on two grounds: (1) Shurgard failed to plead unconscionability in its amended
complaint and (2) Lipton was substantially and materially prejudiced by the exercise
of the district court's equitable powers. Rule 54(b) of the Federal Rules of Civil
Procedure permits:

      the district court to 'direct the entry of a final judgment as to one or more
      but fewer than all of the claims or parties only upon an express
      determination that there is no just reason for delay.' In determining that
      there is 'no just reason for delay,' the district court must consider both
      the equities of the situation and 'judicial administrative interests,'
      particularly the interest in preventing piecemeal appeals. Applying the
      abuse of discretion standard of review, . . . [this court] largely defer[s]
      to the district court's weighing of the equities.




                                          -8-
See Interstate Power Co. v. Kansas City Power & Light Co., 992 F.2d 804, 806–07
(8th Cir. 1993) (citing Curtiss-Wright Corp. v. General Elec. Co., 446 U.S. 1, 8, 10
(1980)).

       Lipton maintains that because of Shurgard's failure to plead unconscionability
in its original or amended complaints, Lipton was not afforded an opportunity to
conduct proper discovery to develop evidence on the issue. Under the liberal notice
pleading standards of the Federal Rules of Civil Procedure, Shurgard was only
required to give "a short and plain statement of the claim showing that the pleader is
entitled to relief." Fed. R. Civ. P. 8(a). Moreover, "[a]ll pleadings should be construed
to do substantial justice." Fed. R. Civ. P. 8(f). Count II of Shurgard's First Amended
Complaint, labeled "Rescission," specifically alleges that:


      Lipton knew and understood that Shurgard had instructed its attorney to
      specify the use of annualized . . . [net-operating income] in the
      calculation of the purchase option price, and Lipton further knew and
      understood that Shurgard executed the Lease Agreement on about
      November 10, 1999 in the mistaken belief that the language of the Lease
      Agreement as executed called for such use of annualized . . . [net-
      operating income] in the calculation of the purchase option price.


                                         ***

      Shurgard would not have agreed to enter into the Lease Agreement if it
      had known that the calculation of the purchase option price in Section
      2.4 of the Lease Agreement failed to require the use of annualized . . .
      [net-operating income] as the parties had agreed, and Shurgard would
      never have agreed to sell the Property to Lipton at a price that in effect
      reflects only half of its true value.




                                          -9-
The district court specifically found that the complaint sufficiently stated a claim in
equity that the enforcement of the contract, under principles of equity, would be
unconscionable. We cannot say that the district court abused its discretion in doing
so.


       Finally, we disagree with the argument that Lipton was prejudiced by the
substantial change in his position after entering into the lease agreement. The district
court noted that most of the funds expended by Lipton occurred after Shurgard filed
suit, not before. Moreover, while Lipton did not specify the expenditures, the district
court found that they were spent on all three properties, not just the property located
on Olive Boulevard. While Lipton hired a manager to run the Olive Boulevard
property, that same manager ran the other properties under three separate agreements.
Lipton produced no evidence that it hired this manager contingent upon Lipton being
able to exercise its purchase option. Lipton does not dispute these findings of fact on
appeal. The district court did not abuse its discretion in balancing the equities in favor
of Shurgard.


      For the reasons stated above, the judgment of the district court is affirmed.
                        ______________________________




                                          -10-
