Home Ins. Co. v. Pan American Grain Mfg. Co.

• Decision Date: 04 February 2005
• Docket Number: No. 03-2625.,03-2625.
• Citation: 397 F.3d 12
• Parties: The HOME INSURANCE COMPANY, Plaintiff, Appellant, v. PAN AMERICAN GRAIN MANUFACTURING CO., INC. and Zorra Transport, Inc., Defendants, Appellees.
• Court: U.S. Court of Appeals — First Circuit

397 F.3d 12

The HOME INSURANCE COMPANY, Plaintiff, Appellant, v. PAN AMERICAN GRAIN MANUFACTURING CO., INC. and Zorra Transport, Inc., Defendants, Appellees.

No. 03-2625.

United States Court of Appeals, First Circuit.

Heard November 8, 2004.

Decided February 4, 2005.

William A. Graffam, with whom Jorge F. Blasini and Jiménez, Graffam & Lausell, were on brief, for appellant.

Derek A. Walker, with whom Heather J. Valliant and Chaffe, McCall, Phillips, Toler & Sarpy, L.L.P., were on brief, for appellees.

Before BOUDIN, Chief Judge, TORRUELLA, Circuit Judge, and FUSTÉ,^* District Judge.

TORRUELLA, Circuit Judge.

This appeal is a sequel to events that have already been litigated before this court. See Pan Am. Grain Mfg. Co., Inc. v. P.R. Ports Auth., 295 F.3d 108 (1st Cir.2002). In that case we ruled that the loss of the integrated tug and barge ZORRA ("ITB ZORRA") came about because of the negligence of its crew in straying from the charted navigation channel, and not — as claimed by the ITB ZORRA's owner, the Pan American Grain Company ("Pan American") — because of underwater obstructions in the docking area.¹

The starting point to the present appeal, however, is the issuance of a marine hull insurance policy ("the policy") by plaintiff-appellant the Home Insurance Company ("Home") to Pan American that provided coverage up to $6,500,000 in the event the ITB ZORRA was lost as a result of any of a variety of casualties. Pan American filed a claim on this policy for losses sustained when the ITB ZORRA caught fire on April 24, 1995. Home denied the claim, alleging that the casualty was the result of the vessel's unseaworthiness,² a condition which is excepted under the terms of the policy. Thereafter, Home filed suit seeking a declaratory judgment of non-coverage, to which Pan American responded with a counterclaim seeking recovery under the policy for the full amount of $6,500,000, in addition to various other damages. The Home Ins. Co. v. Pan Am. Grain Mfg. Co., Inc., No 95-1794 (D.P.R. Aug. 21, 1995) ("Answer and Counter-Claim"). Three years of litigation followed, at the end of which Home and Pan American entered into a settlement agreement, The Home Ins. Co. v. Pan Am. Grain Mfg. Co., Inc., No 95-1794 (D.P.R. Apr. 30, 1998) ("H/P Settlement Agreement"), the interpretation of which is the central issue of this appeal.³

Pursuant to the terms of the H/P Settlement Agreement, Home paid Pan American $3,333,000 in exchange for which Pan American agreed that Home would receive one third of any future recovery from third parties by Pan American until Home had recovered $1,333,000, and one third of all additional Pan American recoveries over a total of $10,000,000 until Home recouped its full $3,333,000. H/P Settlement Agreement at para. 6. At that time, Pan American was immersed in several attempts to recover damages for this casualty, including an arbitration proceeding in New York, five additional lawsuits in the U.S. District Court for Puerto Rico against various private parties, and an action against the U.S. Coast Guard in Miami.

The H/P Settlement Agreement further provided that until such time as Home recouped an initial sum of $1,333,000, Pan American was required to notify Home of any proposed third party settlement of ITB ZORRA claims, and to receive Home's written approval before effectuating any such settlement. Id. at para. 7. However, once the first $1,333,000 were recovered by Home, although Home was entitled to share in additional settlements over $10,000,000, up to the $3,333,000 total paid to Pan American, prior notice to Home and its approval were not required.

One further provision of the H/P Settlement Agreement is of relevance; indeed, it is at the crux of the present dispute: Although Home was to share in all recoveries of third party ITB ZORRA claims up to the total paid by Home to Pan American, Home was not entitled to share in any "verdict or award in favor of Pan American that specifically and separately award(s) Pan American a recovery for punitive damages and/or loss of use." Id. at para. 6 (emphasis supplied).

Approximately one year after the parties entered into the H/P Settlement Agreement, Home learned that Pan American had settled one of its outstanding ITB ZORRA suits, with Ochoa Fertilizer, Inc., for $800,000 ("the Ochoa settlement"). Pan American gave no prior notice of this settlement to Home, nor did Home give approval for Pan American to enter into the Ochoa settlement. Pan American claimed that the Ochoa settlement was for damages for "loss of use" of the ITB ZORRA, and thus specifically excluded from the H/P Settlement Agreement. Home, however, was not so easily put off. It contended that, irrespective of the label given to the amounts recovered under the Ochoa agreement, these sums could not constitute a recovery for "loss of use" of the ITB ZORRA, since under maritime law a shipowner is barred from recovering for loss of use where the insured vessel was a total loss, as was the case of the ITB ZORRA. See 2 Thomas J. Schoenbaum, Admiralty and Maritime Law, § 14-6, at 118-119 (4th ed. 2004) ("Only in a partial loss situation is there liability for [loss of use] damages."). Home further alleged that the Ochoa settlement was not the result of a "verdict or award," and thus was also not excluded from coverage of the H/P Settlement Agreement. Home therefore insisted on entitlement to one third of the $800,000 Ochoa settlement pursuant to the H/P Settlement Agreement, to be credited towards the amounts Home had paid to Pan American. Pan American rejected this demand and Home responded by filing this action, seeking to recover one third of the $800,000 Ochoa settlement, plus interest and attorneys' fees.

In the course of the proceedings, Home filed for summary judgment alleging (1) breach of the H/P Settlement Agreement, and (2) fraudulent inducement of the H/P Settlement Agreement. Pan American cross-motioned on Home's claim of breach of the H/P Settlement Agreement, and opposed the claim of fraudulent inducement, moving for summary judgment on both issues.

The motions were initially argued before a magistrate judge who ruled that there existed no genuine issues of material fact because the H/P Settlement Agreement was clear on its face as excluding Home from recovering for damages for loss of use of the ITB ZORRA. Home Ins. Co. v. Pan Am. Grain & Mfg. Co., Inc., No. 00-1184 (D.P.R. Apr. 19, 2002) ("Report and Recommendation"). Thus, the magistrate judge concluded that, as a matter of law, Pan American did not breach the terms of the H/P Settlement Agreement when it failed to notify Home, or seek Home's approval, of the Ochoa settlement. The magistrate judge further found that the Ochoa settlement constituted an "award" because it was "an agreement granted by a formal process — a mutually agreed upon resolution to negotiation bound by voluntary signatures of the involved parties." Report and Recommendation at 7. In so ruling, the magistrate judge relied on Black's Law Dictionary, Pocket Edition 54 (Bryan Garner et al., ed.1996), which defines "award" as "to grant by formal process or by judicial decree." See Report and Recommendation at 7. The magistrate judge, in effect, considered that if the term "award" referred only to the result of a formal judicial process, it would be redundant to the alternative term, "verdict," contained in the H/P Settlement Agreement, which also encompasses a judicial decision. Id. at 7-8. He thus found that the Ochoa settlement was an "award," and that therefore Home was not entitled to share in that settlement under the terms of the H/P Settlement Agreement. Additionally, the magistrate judge decided that because the Ochoa settlement "plainly states that the payment of $800,000 is to settle `claims or future claims for loss of use of property,'" id. at 10, the recovery of such damages was excluded by the specific terms of the H/P Settlement Agreement.

The magistrate judge's reasoning and recommendation that summary judgment be granted in favor of Pan American was adopted in essence by the district court, see Home Ins. Co. v. Pan Am. Grain & Mfg. Co., Inc., 286 F.Supp.2d 190 (D.P.R.2003), and this appeal was taken from that decision.

The standard of review of a district court's grant of summary judgment is de novo. Tum v. Barber Foods, Inc., 360 F.3d 274, 279 (1st Cir.2004). The same standard of review is applicable to a district court's interpretation of a settlement agreement, because it essentially involves the revisiting of a question of law. See Alternative Energy, Inc. v. St. Paul Fire & Marine Ins. Co., 311 F.3d 450, 451-52 (1st Cir.2002).

I.

We disagree with the district court's interpretation of the term "award." Under Puerto Rican law, "[i]f the terms of a contract are clear and leave no doubt as to the intentions of the contracting parties, the literal sense of its stipulations shall be observed." 31 P.R. Laws Ann. § 3471 (1991). This court has endorsed the Puerto Rico Supreme Court's conclusion that "clear" terms are those that "in themselves are lucid enough to be understood in one sense alone, without leaving any room for doubt, controversies or difference of interpretation...." Heirs of Ramírez v. Superior Court, 81 P.R.R. 347, 351 (1959) (internal citation omitted), quoted in Catullo v. Metzner, 834 F.2d 1075, 1079 (1st Cir.1987); see also Borschow Hosp. & Med. Supplies, Inc. v. César Castillo, Inc., 96 F.3d 10, 15-16 (1st Cir.1996) (espousing same standard). Our disagreement with the district court about the meaning of "award" does not suggest that the term itself admits of ambiguity. It is our view that the interpretation below went beyond the clear meaning of the term as used in legal writing in general, and in the H/P Settlement Agreement in particular, by misconstruing the voluntary settlement negotiation between parties as the kind of "formal process" referred to in the Black's pocket edition definition.

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