H. K. H. Co. v. American Mortg. Ins. Co.

• Decision Date: 24 August 1982
• Docket Number: No. 80-4289,80-4289
• Citation: 685 F.2d 315
• Parties: H. K. H. CO., a partnership, consisting of Henry S. Hendler and J. M. Hendler, Plaintiff-Appellant, v. AMERICAN MORTGAGE INSURANCE COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 315

685 F.2d 315

H. K. H. CO., a partnership, consisting of Henry S. Hendler and J. M. Hendler, Plaintiff-Appellant, v. AMERICAN MORTGAGE INSURANCE COMPANY, Defendant-Appellee.

No. 80-4289.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Dec. 15, 1981.

Decided Aug. 24, 1982.

Jerome H. Sarrow, Kranitz, Comparet & Sarrow, Los Angeles, Cal., for plaintiff-appellant.

Arch T. Allen, III, Allen, Steed & Allen, Raleigh, N. C., M. Craig Haase, Reno, Nev., for defendant-appellee.

Appeal from the United States District Court for the District of Nevada.

Before SCHROEDER and POOLE, Circuit Judges, and KELLEHER, ^* District Judge.

KELLEHER, District Judge:

The appellant, H.K.H. Co., appeals from the district court's order, after trial without a jury, that judgment be entered in favor of the appellee, American Mortgage Insurance Company. The question presented to this court is whether the appellee breached its contract to provide lease guarantee insurance by refusing to fulfill the terms and conditions of the guaranteed lease after becoming the defaulting lessee's successor in possession.

The appellee, a Nevada partnership, filed this action on May 15, 1978, in the Second Judicial District Court of Washoe County, Nevada. The appellant, a North Carolina corporation, thereafter removed to the United States District Court for the District of Nevada, pursuant to 28 U.S.C. § 1441(a). On May 2, 1980, the district court entered its memorandum decision and order granting judgment in favor of appellee and denying the award of attorney's fees. 490 F.Supp. 1201 (D.Nev.1980). As discussed below, we affirm the district court's order.

I.

In 1973, D.H. Overmeyer Co., Inc. ("Overmeyer") sold its warehouse in Sparks, Nevada to Bergin Way Associates ("Bergin Way") and then leased back the property on a "net-net-net" basis for twenty-five years. "Net-net-net" leases are commonly used for commercial properties. Under a net-net-net lease, the lessee pays rent and all costs and expenses arising from the property, including taxes and insurance. The agreed-upon rent was approximately $12,400/month. As a condition to the sale and lease-back arrangement, Bergin Way required Overmeyer to obtain lease guarantee insurance. The appellee, American Mortgage Insurance Company ("AMIC"), provided this insurance after it had seen a copy of the Overmeyer lease and upon Overmeyer's payment of a single premium of $56,739. Under the lease guarantee insurance policy ("the policy"), AMIC guaranteed that Bergin Way would receive a monthly rental payment of $11,617.40 per month for the first eleven years of the Overmeyer lease.

The parties' dispute concerns paragraph 11(b) of the policy, entitled "Minimization of Rental Losses." That paragraph provides:

Company's Rights-At any time after the lessor notifies /AMIC/ by means of a notice of default or a default status report ..., that the lessee is thirty (30) days in default on a rental installment, then the Company may direct the lessor to commence appropriate action, including legal proceedings, if necessary, to obtain physical possession of the demised premises and to make all reasonable efforts to rerent said premises. The lessor shall agree to accept the company as a successor in possession to the lessee in default with the right to sublet or relet the premises to a tenant of /AMIC's/ own choosing for the unexpired term of the lease. No such sublessee or subtenant, however, shall use the premises for any purpose prohibited in the original lease. (emphasis added)

Thus, AMIC had two options under paragraph 11(b) upon the lessee's default. It could either allow the lessor to attempt to relet the premises, or it could take possession and use its own efforts to obtain new tenants. The policy also contained a ninety-day deductible, which provided that AMIC would not make any rental payments to the lessor for the first three months of the lessee's default.

Shortly after execution of the lease, Overmeyer defaulted in its monthly rental payments, filed for bankruptcy, and surrendered possession of the warehouse. AMIC chose to take possession, thereby becoming Overmeyer's "successor in possession," and also began making monthly rental payments to Bergin Way of $11,617.40. At the same time AMIC collected rent from various tenants who had subleased from Overmeyer. In early 1976 those subleases began to expire, and the warehouse virtually emptied. Three steps were taken to gain new occupants. First, AMIC hired a broker, who leased the premises on the basis of gross leases. ¹ The district court found the rentals negotiated by the broker to be "on the low side of the then prevailing market rate, but not unreasonably so" in light of the circumstances. Second, AMIC spent $112,000, and Bergin Way spent $15,000, on improvements and repairs. Third, Bergin Way spent $73,000 on a new roof. A portion of that sum was loaned to Bergin Way by AMIC.

In 1978, Bergin Way sold the property to the appellant, H.K.H. Co. ("H.K.H."). AMIC agreed to accept H.K.H. as Bergin Way's successor under the insurance policy. AMIC has paid H.K.H. $11,617.40 per month since the sale, but has refused to pay H.K.H. the taxes and other expenses that Overmeyer would have paid to Bergin Way or H.K.H. under the Overmeyer lease. Shortly after sale of the warehouse to the appellant, H.K.H. filed its complaint against AMIC for breach of contract and breach of an insurer's duty to deal fairly and in good faith. H.K.H. contends that when AMIC became Overmeyer's "successor in possession," it became liable to the lessor for the taxes and other expenses that would have been paid under the Overmeyer lease. The question presented to the court below, and to this court, is narrow: Under the language of the policy, did AMIC become obligated to fulfill the terms and conditions of the net-net-net Overmeyer lease, including payment of expenses and taxes, when it became Overmeyer's "successor in possession"?

II.

Where a civil action is brought under diversity jurisdiction, this court defers to the district court's interpretation of the law of the state in which the district court sits, unless that interpretation is clearly wrong. E.g., Pankow Construction Co. v. Advance Mortgage Corp., 618 F.2d 611 (9th Cir. 1980). However, appellant does not contend that the district court incorrectly determined the relevant Nevada law. Instead, appellant contends that the lower court incorrectly applied state principles of contract interpretation. A district court's interpretation of a contract, including a finding that the contract is or is not ambiguous, is freely reviewable. E.g., Boudreau v. Borg-Warner Acceptance Corp., 616 F.2d 1077 (9th Cir. 1980).

In construing the language of an insurance contract, as in construing the language of any contract or written instrument, the intention of the parties should control. Home Indemnity Co. v. Desert Palace, Inc., 86 Nev. 234, 236, 468 P.2d 19, 21 (1970). "A court should ascertain the intention of the parties from the language employed as applied to the subject matter in view of the surrounding circumstances," Mohr Park Manor, Inc. v. Mohr, 83 Nev. 107, 112, 424 P.2d 101, 105 (1967). In construing insurance contracts, the Nevada courts have further stated that the terms of a clause should be taken and understood "in their plain, ordinary, and popular sense." Home Indemnity Co. v. Desert Palace, Inc., 86 Nev. at 236, 468 P.2d at 21. However, the latter statement is not helpful where, as here, the dispute concerns interpretation of a clause, "successor in possession," that has no ordinary, popular sense. Moreover, there appear to be no cases that either have construed the contractual term, "successor in possession," or have delineated the general duties of the insurer, under a lease guarantee policy, upon the tenant's default. ²

A close examination of the policy compels the conclusion that the parties intended AMIC's liability, as a successor in possession, to be no more than the guaranteed rental payment of $11,617.40 per month. This examination begins with analysis of the parties' use of the phrase "successor in possession." The word "successor" has been defined as "one who takes the place that another has left, and sustains the like part or character. The definition goes beyond the borders of contract assignment and is used so as to obviate the need for an express assumption of burdens." Safer v. Perper, 569 F.2d 87, 95 (D.C.Cir.1977) (citations omitted). Using this definition, the appellant argues that, by electing to become Overmeyer's "successor," AMIC assumed the benefits and the burdens of the Overmeyer lease. How...