Lake Havasu Resort, Inc. v. Commercial Loan Ins. Corp.

• Decision Date: 27 October 1983
• Docket Number: CA-CIV,No. 1,1
• Citation: 678 P.2d 950,139 Ariz. 369
• Parties: LAKE HAVASU RESORT, INC., an Arizona corporation, Plaintiff-Appellant, v. COMMERCIAL LOAN INSURANCE CORPORATION, a Wisconsin corporation, licensed to do business in Arizona, Defendant-Appellee. 5977.
• Court: Arizona Court of Appeals

Page 950

678 P.2d 950

139 Ariz. 369

LAKE HAVASU RESORT, INC., an Arizona corporation, Plaintiff-Appellant, v. COMMERCIAL LOAN INSURANCE CORPORATION, a Wisconsin corporation, licensed to do business in Arizona, Defendant-Appellee.

No. 1 CA-CIV 5977.

Court of Appeals of Arizona Division 1, Department B.

Oct. 27, 1983.

Reconsideration Denied Dec. 22, 1983.

Mitchell, Jensen & Timbanard, P.C. by Sheldon Mitchell and A. Alexander Katz, Phoenix, for plaintiff-appellant.

Lewis & Roca by John P. Frank and Susan M. Freeman, Phoenix, for defendant-appellee.

OPINION

GREER, Judge.

The main issue we consider in this case concerns the rights and obligations of appellee Commercial Loan Insurance Co. (CLIC) as a "successor in possession" to a defaulting lessee under a policy of lease guaranty insurance it wrote to Lake Havasu Resort (Resort) as lessor. More specifically, we must determine to what extent, if any, CLIC is obligated under the terms of the original lease agreement once it takes possession of the demised premises. The facts necessary to a resolution of this matter are as follows.

On May 23, 1969, Resort entered into a long term ground lease with McCulloch Properties, Inc. for the lease of certain real property located in Lake Havasu City, Arizona. The lease was for a period of twenty-five years, with three separate ten year options. On the same date, Resort also entered into a license agreement with Ramada Inns, Inc. (Ramada), to operate a Ramada Inn motel on the leased premises. Resort subsequently constructed a Ramada Inn motel on the premises, subleased the property, and leased the motel to Lancelot Management Co. (Lancelot). The term of the sublease coincided with the remaining term of the master lease, including any option terms to be taken.

Financing for construction of the motel was obtained from Mohave Savings and Loan Association (Mohave). As a condition to the construction loan, Mohave required Resort to obtain an insurance policy guaranteeing part of the rental payments Resort was to receive. Resort purchased such a policy from CLIC. That policy guaranteed monthly rental payments of $10,187.92 for a fifteen year period, at a single premium price of $51,347.10.

Within one year after taking possession, Lancelot was in final default on the lease. Lancelot was thereafter evicted in June, 1974. In May, 1975, CLIC notified Resort that it was invoking paragraph 12(b) of the lease insurance policy, which allowed CLIC to become a "successor in possession to the lessee in default with the right to sublet or relet the demised premises." CLIC thereafter subleased the motel to Havasu Inns, Inc. (Havasu). Havasu was unable to successfully operate the motel. In order to mitigate its losses, CLIC took possession of the motel and operated it from July, 1978, through March, 1980. During the term of operation, CLIC upgraded a number of the motel facilities, made numerous repairs, and attempted to generate new business. Although CLIC was able to improve the financial picture of the motel, it was not able to recover the monthly policy payments it had begun making to Resort since the time of Lancelot's default. Limited efforts by Resort to sell the motel were unsuccessful.

The inability to generate a profit from the motel was apparently caused in part, by its poor location. Although the motel was located near several golf courses, it was in a residential area that had been by-passed by the newly constructed highway. Also, it was several miles from the more popular lakes and the London Bridge. And, perhaps just as damaging, the hoped for increase in the tourist industry to view the newly acquired London Bridge did not supply enough tourists to keep up with the onslaught of new motels in the city.

Legal problems erupted between Resort and CLIC when Resort took the position that CLIC was required to fulfill all obligations of the Lancelot lease because it had taken possession of the motel as a successor in possession. Although the procedural history of this case is somewhat involved, we need discuss it only briefly. Resort originally filed a three count complaint in 1976. Count one sought a declaratory judgment that, by reason of taking possession of the motel, CLIC was required to pay not only the monthly installments required by the policy, but also insurance and taxes on the property, and abide by all of the provisions of the lease. Count two sought damages arising from count one. Count three involved a claim of waste. Count two has become moot and Resort has not appealed the court's order directing a verdict in favor of CLIC on count three.

By way of amendments, Resort added counts four through six to the complaint. Count four centered on CLIC's return of the motel to Resort and requested a declaratory judgment that CLIC had become a tenant under the Lancelot lease and was bound by all terms of the lease. Count five is not involved in this appeal. Count six claimed a breach of the covenant of good faith and fair dealing in connection with the return of the premises and sought punitive damages. On appeal, Resort challenges the court's adverse rulings on counts four and five.

Resort also filed a separate complaint seeking a declaration of the party's rights to the furniture used in the motel. That complaint was consolidated with the first, and summary judgment was eventually granted CLIC on the furniture issue. Resort also appeals from the grant of summary judgment.

CLIC'S RIGHTS AND OBLIGATIONS UNDER THE LEASE

Before we reach the merits of this issue, we must first dispose of a procedural problem raised by Resort. The trial court ruled on a motion, and repeated it in its instructions to the jury and in its final judgment that during the period of CLIC's occupancy of the motel CLIC was bound by the terms of the Lancelot lease, but was not required to stay in possession and was therefore not bound by the lease terms after tendering possession back to Resort. Resort now claims that the court's order is law of the case and that CLIC has waived any right to object to the court's ruling because it has not filed a cross-appeal from that order. CLIC contends that because it did in fact perform all obligations of the lease while it was in possession the court's order had no practical effect and that therefore there was no sense appealing that order. CLIC does challenge the court's ruling by way of a cross-issue.

The approach taken by CLIC is correct. In Santanello v. Cooper, 106 Ariz. 262, 475 P.2d 246 (1970), our supreme court held that where an appellee seeks to uphold a new trial order on grounds set forth in his motion but not relied upon by the trial court, it is not necessary to cross-appeal. The court's decision was based upon the following holding in Maricopa County v. Corporation Commission of Arizona, 79 Ariz. 307, 310, 289 P.2d 183, 185 (1955):

[T]hat if appellee in its brief seeks only to support or defend and uphold the judgments of the lower court from which the opposing party appeals, a cross-appeal is not necessary .... If, however, it is sought by such cross-assignments to attack said judgment with a view either or (sic) enlarging his own rights thereunder or of lessening the rights of his adversary he must cross-appeal.

106 Ariz. at 265, 475 P.2d 249. CLIC seeks only to support the final judgment of the trial court and was therefore not required to file a separate cross-appeal.

With regard to the merits of this issue, the parties' dispute concerns paragraph 12(b) of the insurance policy, entitled "minimization of Rental Losses." That paragraph provides:

Company's Rights--At anytime after the lessor notifies the Company 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 demised premises to a tenant of the Company'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].

The interpretation of an insurance contract is a question of law to be determined by an appellate court independent of the trial court. Sparks v. Republic National Life Insurance Co., 132 Ariz. 529, 647 P.2d 1127 (1982); State Farm Fire and Casualty Co. v. Rossini, 107 Ariz. 561, 490 P.2d 567 (1971). On appeal, we will sustain the trial court's ruling on any theory supported by the evidence, even though the trial court's reasoning may differ from our own. Sparks; Minderman v. Perry, 103 Ariz. 91, 437 P.2d 407 (1968).

In construing the language of an insurance policy, as in construing the language of any other written agreement, the intent of both parties must control. Rodemich v. State Farm Mutual Automobile Insurance Co., 130 Ariz. 538, 637 P.2d 748 (App.1981); State Farm Mutual Automobile Insurance Co. v. O'Brien, 24 Ariz.App. 18, 535 P.2d 46 (1975). Where possible, the party's intent will be determined from the language of the policy. The terms of the policy are to be construed in a manner according to their plain and ordinary meaning. Sparks. Unfortunately, in the instant case the parties' dispute concerns a clause, "successor in possession," that does not have an ordinary, popular meaning. ¹

However, the Ninth Circuit Court of Appeals has recently decided the exact issue before us. See H.K.H. Co. v. American Mortgage Insurance Co., 685 F.2d 315 (9th Cir.1982). In H.K.H. Co. v. American Mortgage Insurance Co., D.H. Overmeyer Co. sold a warehouse to Bergin Way Associates, and then leased the property back for twenty-five years. As a condition to the...