Melrose Gates, LLC v. Chor Moua, A14–1131.

• Decision Date: 17 February 2016
• Docket Number: No. A14–1131.,A14–1131.
• Parties: MELROSE GATES, LLC, Respondent, v. CHOR MOUA, et al., Appellants.
• Court: Minnesota Supreme Court

875 N.W.2d 814

MELROSE GATES, LLC, Respondent,

v.CHOR MOUA, et al., Appellants.

No. A14–1131.

Supreme Court of Minnesota.

Feb. 17, 2016.

Steven L. Theesfeld, Yost & Baill, LLP, Minneapolis, MN, for respondent.

Mark K. Hellie, Rylee J. Retzer–Busselman, American Family Insurance, Eden Prairie, MN, for appellants.

Darryn C. Beckstrom, Robert J. Olson, Lawrence R. McDonough, Dorsey & Whitney LLP, Minneapolis, MN, for amicus curiae Home Line, Inc.

OPINION

DIETZEN, Justice.

In this case, we revisit the applicability of equitable subrogation to parties in a landlord-tenant relationship. Respondent Melrose Gates, LLC (Landlord) leased an apartment to appellants Chor Moua and Maisse Xiong (Tenants). The apartment building in which Tenants lived was damaged by a fire. Landlord's insurer paid for the repairs to the building, and then the insurer brought a subrogation action in the name of Landlord against Tenants to recover the money the insurer paid to repair the building. The district court relied on our decision in RAM Mutual Insurance Co. v. Rohde, 820 N.W.2d 1 (Minn.2012), to grant summary judgment to Tenants, concluding that Landlord may not maintain a subrogation action in these circumstances. The court of appeals reversed and remanded, reasoning that the lease agreement clearly reflected the parties' expectation that Tenants would be liable. For the reasons set forth below, we conclude that the Landlord can proceed on a subrogation claim against Tenants for damage they caused to their own apartment, but not for damage to other property belonging to Landlord. We therefore affirm the decision of the court of appeals in part, reverse in part, and remand for further proceedings consistent with this opinion.

I.

Landlord owns a residential rental property in Brooklyn Center consisting of approximately 36 units. Landlord leased apartment 311 to Tenants for an initial rental period running from November 1, 2008 to April 30, 2009. Thereafter the lease agreement was extended under its original terms on a month-to-month basis.

Under the written lease, Tenants were required to pay rent of $800 per month, and to provide a security deposit of $759. The lease included blank lines that the parties filled in for the street address of the premises and the apartment number. The lease covered a variety of topics, including liability for damage to the leased property.

On June 2, 2012, Tenants' apartment and a neighboring apartment were damaged by a fire. For purposes of this appeal, the parties agree that the fire was caused by Tenants' negligence. Landlord had an insurance policy for the entire complex with coverage of approximately $19 million. Landlord's insurer, State Farm Fire and Casualty Company, paid approximately $470,000 for repairs to the building.

Tenants had a renter's insurance policy with American Family Insurance with limits of approximately $20,000 in personal property coverage and $300,000 in personal liability coverage. In November 2013, State Farm brought this subrogation action against Tenants to recover the money it had paid to repair the damage caused by the fire.

The parties filed cross-motions for summary judgment. The district court granted Tenants' motion and dismissed the subrogation action with prejudice. Applying the factors we articulated in RAM Mutual Insurance Co. v. Rohde, 820 N.W.2d 1, 14–16 (Minn.2012), the court determined that the parties did not reasonably expect that Tenants would be liable for these losses.

Landlord appealed,¹ and the court of appeals reversed and remanded. Melrose Gates, LLC v. Moua, No. A14–1131, 2015 WL 1608845, at *4 (Minn.App. Apr. 13, 2015). Like the district court, the court of appeals applied our decision in RAM to determine whether a subrogation action was available. 2015 WL 1608845, at *3–4. Unlike the district court, the court of appeals determined that the parties reasonably would have expected that Tenants would be liable in a subrogation action for the damage they caused. Id. at *4. Applying a de novo standard of review, the court of appeals concluded that the lease "unambiguously provides" that Tenants would reimburse Landlord for any damage caused by their negligence, that no other provision of the lease calls that unambiguous provision into question, and that the parties' intentions were therefore discernible from the language of the lease itself. Id.

II.

Tenants argue that the court of appeals misapplied our decision in RAM Mutual Insurance Co. v. Rohde, 820 N.W.2d 1 (Minn.2012), to the facts of this case. As a threshold matter, the parties dispute whether our standard of review of the district court's decision is de novo or for an abuse of discretion. The parties also dispute whether the insurer may maintain a subrogation action against the negligent tenants in this case. Because the law with respect to subrogation and the standard of review are intertwined, we will first discuss the relevant subrogation law before addressing the standard of review.

A.

Subrogation is the substitution of one party for another whose debt the party pays, which entitles the paying party to step into the shoes, or be substituted to all the rights, priorities, remedies, liens, and securities of, the other party. RAM, 820 N.W.2d at 5 (citing 16 Lee R. Russ & Thomas F. Segalla, Couch on Insurance § 222:5 (3d ed.1995) ); see also Black's Law Dictionary 1654–55 (10th ed.2014).

Generally, there are two types of subrogation: equitable and conventional. Medica, Inc. v. Atl. Mut. Ins. Co., 566 N.W.2d 74, 77 (Minn.1997). Equitable subrogation has its origins in common law, and its purpose is to place the responsibility for the payment of the debt upon the one who in equity ought to pay it. Id. (citing Westendorf ex rel. Westendorf v. Stasson, 330 N.W.2d 699, 703 (Minn.1983) ). Conventional subrogation is contractual and springs from the agreement between the insured and the insurer. Id. Under conventional subrogation, the parties may grant greater subrogation rights under the contract than would be recognized in equity. Id. (citing 16 George J. Couch, Couch on Insurance 2d § 61:3 (rev. ed.1983)). But even under conventional subrogation, the terms of subrogation are governed by equitable principles unless the contract clearly and explicitly provides to the contrary. Id. (citing Westendorf, 330 N.W.2d at 703 ).

Subrogation in the context of insurance is "the substitution of an insurer (subrogee) to the rights of the insured (subrogor)." RAM, 820 N.W.2d at 5 (quoting Medica, Inc., 566 N.W.2d at 76 ). Put differently, when an insurer has paid a loss, "the insurer is subrogated in a corresponding amount to the insured's right of action against any third party whose wrongful conduct caused the loss." Id. at 5–6. In this case, State Farm paid Landlord's costs to repair the apartment building and therefore seeks compensation in that amount under Landlord's right of action against Tenants.

To determine whether an insurer may maintain a subrogation action against the insured's negligent tenant, this court has adopted a case-by-case approach. Id. at 11–12. In doing so, we rejected the approach taken by the court of appeals in United Fire & Casualty Co. v. Bruggeman, 505 N.W.2d 87, 88–90 (Minn.App.1993), rev. denied (Minn. Oct. 19, 1993), which had adopted a rule that "barr[ed] insurers from pursuing subrogation claims against negligent tenants in the absence of an express agreement to the contrary." RAM, 820 N.W.2d at 11. Instead, we reasoned that a subrogation action is grounded in the contractual relationship between the landlord and the tenant, as well as the contractual relationship between the insurer and the insured, and therefore a rule that is defined by the respective contracts is superior to one that makes legal assumptions that do not comport with the reasonable expectations of the parties to the contract. Id. at 12. Moreover, the case-by-case approach best effectuates the intentions of the parties while taking into account equitable considerations. Id. at 12–13. Finally, the case-by-case approach "is more consistent with Minnesota's public policy of holding tortfeasors accountable for their actions." Id. at 13.

In RAM we also provided several principles to guide a district court's determination of which party bears financial responsibility for a particular loss. We stated that the analysis "begins with the written documents executed by the parties." Id. at 14. The lease agreement is a contract, which the court should interpret to determine whether it addresses the allocation of liability for a particular loss. See id. The lease itself may "indicat[e] which party agreed to bear the risk of loss for a particular type of damage." Id. at 15. For example, if the landlord were obligated to procure insurance governing a particular type of loss, such an obligation would be evidence that the insurer would not be able to maintain a subrogation action against the tenant. Id. But if the tenant were obligated to procure insurance covering a particular type of loss, that would be evidence that the tenant would be liable for that particular loss. Id.

Significantly, we observed that "[o]ften a court will be able to determine the expectations of the parties from the language of the lease itself." Id. But we also noted that the court may consider "other admissible evidence shedding light on the expectations of the parties," such as the types and amounts of insurance actually purchased by the parties. Id. (quoting Rausch v. Allstate Ins. Co., 388 Md. 690, 882 A.2d 801, 814 (2005) ). Finally, we stated that the court may consider principles of equity and good conscience, such as whether the lease is a contract of adhesion, whether the lease provisions allocating responsibility are unfair and in violation of public policy, and whether "the leased premises are part of a large multi-unit structure." Id. at 16.

B.

With these principles in mind we return to the question of the applicable standard of review. The case comes to us on...