U.S. Gypsum Co. v. Schiavo Bros., Inc.

• Citation: 668 F.2d 172
• Decision Date: 23 December 1981
• Docket Number: Nos. 81-1168,81-1272 and 81-1273,s. 81-1168
• Parties: UNITED STATES GYPSUM COMPANY, Appellant/Cross-Appellee, v. SCHIAVO BROTHERS, INC., Appellee/Cross-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (3rd Circuit)

Page 172

668 F.2d 172

UNITED STATES GYPSUM COMPANY, Appellant/Cross-Appellee, v. SCHIAVO BROTHERS, INC., Appellee/Cross-Appellant.

Nos. 81-1168, 81-1272 and 81-1273.

United States Court of Appeals, Third Circuit.

Argued Sept. 22, 1981.

Decided Nov. 30, 1981.

Rehearing Denied Dec. 23, 1981.

Michael M. Baylson (argued), Duane, Morris & Heckscher, Philadelphia, Pa., for appellant/cross-appellee, U. S. Gypsum Co.

John M. Elliott (argued), Constance B. Foster, Dilworth, Paxson, Kalish & Levy, Philadelphia, Pa., for appellee/cross-appellant, Schiavo Bros., Inc.

Before ALDISERT, HIGGINBOTHAM and SLOVITER, Circuit Judges.

OPINION OF THE COURT

A. LEON HIGGINBOTHAM, Jr., Circuit Judge.

I.

While one man's junk may be another man's profit, there comes a point where clearing junkyard remnants constitutes a substantial financial cost. Here we are required to decide whether under Pennsylvania law the landlord or the primary lessee should bear the costs of clearing the junk left by the sublessees in this case. During the last three years, two district judges have been sorting out the appropriate property and damage doctrines to determine who pays for removal of the junk and other alleged damages arising out of the tenancy. We will affirm the rulings of the district court except as to its decision not to consider the issues of holdover rent and loss-of-use of purchase monies, and we will remand for further proceedings on those two claims.

II.

The facts of this case have been set forth twice, at length, in two different district court opinions, reported at 450 F.Supp. 1291 (E.D.Pa.1978) and 485 F.Supp. 46 (E.D.Pa.1979). We therefore only summarize them here.

The plaintiff, United States Gypsum Company (Gypsum) owned a landfill in southwest Philadelphia. In 1966, it entered into a lease agreement with the defendant Schiavo Brothers, Inc. (Schiavo). Gypsum and Schiavo also agreed by separate contract that Schiavo, a waste hauling firm, would haul waste for Gypsum. Schiavo sublet part of the property to automobile junkyard operators. Schiavo's lease with Gypsum was lawfully terminated by Schiavo, effective January 1, 1974, but most of the junkyard dealers (the sublessees) refused to leave until well into the summer of 1974. Meanwhile Gypsum had agreed to sell the property to Swann Oil Company, but the sale was delayed, allegedly because Swann would not accept transfer of the property until all of the debris left by the junkdealers had been cleared. That debris covered most of the property and included car seats, tires and other by-products of junkyard dealing. When the junkdealers finally left, Gypsum was obliged to hire a contractor to clear the debris. After the debris was cleared, Gypsum transferred the property to Swann in September, 1974, almost four months later than both parties had planned.

Gypsum sued Schiavo for the cost of the cleanup, for holdover rent ¹ and for damages compensating it for the loss of the use of the money due from Swann that was not received until after the clean-up. Jurisdiction was founded on diversity of citizenship, and the law of Pennsylvania governs the action.

The case was assigned to the calendar of Judge Herbert A. Fogel, who ordered that liability and damages be tried separately. Trial on liability issues began in November, 1975 and continued, intermittently, into January, 1976. Judge Fogel filed his judgment shortly before he resigned in May, 1978.

Judge Fogel ruled that under Pennsylvania law there was, implied in the lease between the parties, a covenant by Schiavo to return the leasehold property in the condition in which it received it, reasonable wear and tear excepted. He ruled that that covenant is a part of a tenant's obligations under a lease unless it is negated by contrary language in the lease, and that no such contrary intent was expressed in the lease at issue. He also found, however, that Schiavo had not breached the contract, and that in the context of the junkyard industry, the leaving of the debris was reasonable wear and tear to the property. He entered judgment in favor of Schiavo without mentioning the issues of holdover rent and loss of use of purchase monies.

Judge Louis H. Pollak was assigned the case after post-trial motions had been filed by both sides. He agreed with Judge Fogel that the implied covenant existed, but he reversed Judge Fogel's conclusion that Schiavo had not breached the covenant. He ruled that the debris exceeded reasonable wear and tear, and he therefore ordered a trial on damages relating to breach of the covenant. He also ruled, initially, that Judge Fogel should have entered findings on holdover rent and loss of use of purchase monies. However, upon a motion for reconsideration filed by Schiavo, Judge Pollak decided that Gypsum had not placed its claims "in so clear a focus as to warrant my concluding that (1) the claims were actually litigated, and (2) Judge Fogel erred in not ruling on them." 485 F.Supp. at 56. He therefore denied Gypsum any relief on the claims of holdover rent and loss of use of purchase monies.

After trial of damages Judge Pollak awarded Gypsum $96,815.00 to compensate it for its expenditures in clearing the debris caused by Schiavo's subtenants. He denied Gypsum's request for an award of prejudgment interest. He also dismissed, on the basis of res judicata, a second complaint brought by Gypsum seeking to recover holdover rent and loss of use of purchase monies.

Both parties appealed. Schiavo challenges the rulings of Judge Fogel and Judge Pollak that any implied covenant existed. Gypsum challenges Judge Pollak's rulings precluding recovery for holdover rent and loss of use of purchase monies, his dismissal of the second action, his refusal to award prejudgment interest, and his refusal to disburse to Gypsum certain escrow funds held by Schiavo.

III. Existence of the Implied Covenant

Schiavo vigorously disputes the rulings of both Judge Fogel and Judge Pollak that there existed an implied covenant in the agreement between the parties that Schiavo would return the property in the condition in which it received it, reasonable wear and tear excepted.

Schiavo implicitly concedes that under Pennsylvania law, the covenant exists unless it is, in some manner, negated. However it argues that the integration clause in the lease did negate any implied covenants. The integration clause said in part:

It is expressly understood and agreed by and between the parties hereto that this lease and the riders attached hereto and forming a part hereof set forth all the promises, agreements, conditions and understandings between the Lessor and or its Agent and Lessee relative to the demised premises, and that there are no promises, agreements, conditions, or understandings, either oral or written between them other than are herein set forth.

Although there is some force to Schiavo's contention, we have concluded that the courts of Pennsylvania would hold that the covenant was not negated by the integration clause at issue. The obligation of a tenant to return the leasehold property in the condition in which it was received, reasonable wear and tear excepted, is fundamental to the landlord-tenant relationship, even in a commercial setting. A landlord is entitled to presume that the tenant has implicitly promised not to waste the property. For that reason, only the clearest negation of the obligation will overcome the landlord's lawful expectation. We agree with Judge Fogel's discussion of the issue (450 F.Supp. at 1304), and affirm the district court's ruling on the point.

IV. Breach of the Implied Covenant

Schiavo also appeals Judge Pollak's determination that it is liable for $96,815.00, Gypsum's costs in clearing the debris that was left by Schiavo's subtenants.

Judge Fogel placed great weight on the trial evidence showing that "upon termination of a junkyard lease, the dealer rarely, if ever, cleared the property of accumulated debris...." 450 F.Supp. at 1306. He ruled that the implied covenant to return the property in the condition in which Schiavo received it, reasonable wear and tear excepted, had not been breached:

We find ... that USG has failed to meet its burden of establishing that, in the context of the junk car industry, the wear and tear to the land was excessive or unreasonable.

450 F.Supp. at 1305.

Part of Gypsum's timely motion for a new trial sought reconsideration of Judge Fogel's finding that the wear and tear inflicted on the property was reasonable. In a thoughtful opinion Judge Pollak ruled that he was empowered to reconsider Judge Fogel's conclusion on reasonableness; that, in his opinion, the Pennsylvania courts would not give controlling effect to industry custom; and that the wear and tear inflicted by Schiavo was not reasonable.

The parties disagree on whether the "reasonableness" determination is a finding of fact or a conclusion of law. Generally, where the primary facts are undisputed and only ultimate inferences and legal consequences are in contention, a question of law is presented; or, by some formulations, a mixed question of fact and law subject to review as a question of law. Ross v. Commissioner of Internal Revenue, 129 F.2d 310, 312 (5th Cir. 1942). See also 9 Wright and Miller, Federal Practice and Procedure (2d Ed.), § 2589, at 753; Fleer Corporation v. Topps Chewing Gum, Inc., 658 F.2d 139, 154 (3d Cir. 1981); Shultz v. Wheaton Glass Co., 421 F.2d 259, 267 (3d Cir. 1970), cert. denied, 398 U.S. 905, 90 S.Ct. 1696, 26 L.Ed.2d 64 (1970). ²

In this case, only the legal consequences of Schiavo's conduct, and not the particulars of the conduct itself, were in issue before Judge Pollak. He was asked to decide whether the law of landlord and tenant in Pennsylvania would hold Schiavo liable for damages because of the undisputed condition of the property after the termination of the lease. That determination is essentially a legal one.

We conclude that where a successor judge...