Miller v. Safeco Title Ins. Co.

• Citation: 758 F.2d 364
• Decision Date: 15 April 1985
• Docket Number: Nos. 84-3553,84-3577,s. 84-3553
• Parties: Gary MILLER and Lezlie Miller, and Miller & Miller Custom Construction, Inc., Plaintiffs-Appellees, v. SAFECO TITLE INSURANCE CO., Defendant, Peter Lang and Earl Miller, dba Lang-Miller Investments, Defendants-Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 364

758 F.2d 364

1 Fed.R.Serv.3d 1075

Gary MILLER and Lezlie Miller, and Miller & Miller Custom Construction, Inc., Plaintiffs-Appellees, v. SAFECO TITLE INSURANCE CO., Defendant Peter Lang and Earl Miller, dba Lang-Miller Investments Defendants-Appellants.

Nos. 84-3553, 84-3577.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Nov. 8, 1984.

Decided April 15, 1985.

Margaretta Eakin, Portland, Or., for defendants-appellants.

Douglas P. Devers, Portland, Or., for plaintiffs-appellees.

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

Before SKOPIL, FARRIS and BEEZER, Circuit Judges.

FARRIS, Circuit Judge:

This case involves the interpretation of various documents associated with a series of construction loans. We reverse the district court's interpretation of an agreement between the parties, and affirm the cancellation of a deed of trust and the refusal to award contractual attorney fees to the lenders.

I FACTS AND PROCEEDINGS BELOW

Lang-Miller Investments, a California partnership, loaned Miller & Miller Custom Construction, Inc., an Oregon corporation, a sum in excess of $680,000 to be used for the construction of four houses. The loans were evidenced by a Building Loan Agreement and promissory notes bearing 18% interest. Repayment of the loans was initially secured by deeds of trust on the personal residences of plaintiff Gary Miller, the president of M & M, and his brother, then a shareholder, as well as on the real property upon which houses were to be constructed.

The parties entered into a "Participation Agreement and Guarantee" under which M & M agreed to pay additional interest over and above the 18% required by the notes. Like the other major documents, the Agreement was drafted by L-M's attorney. Paragraph 1 of the Agreement sets forth two alternative methods for calculating the additional interest, and provides that L-M is to receive whichever sum is greater. Subparagraph 1(A) calculates the additional interest as "equal to one-half ( 1/2) of the net profit from the sale of each lot." Subparagraph 1(B) provides for calculation of interest in a sum

equal to the amount required to pay to [L-M], a thirty-three and one-third (33 1/3) percent return on all funds advanced for the construction financing for each lot, less the amount of interest paid to [L-M] under the terms of the promissory note secured by a deed of trust on said lots in favor of [L-M]. It is expressly understood that this thirty-three and one-third (33 1/3) percent return is not computed on a per annum basis and represents an overall return on funds advanced. In the event that there is insufficient net profit from the sales of the above referenced lots, this additional interest payment shall be limited to the amount of net profit received by [M & M].

Three of the four houses sold at a loss, and the parties began to dispute the exact amount owed. When L-M began foreclosure proceedings against Gary Miller's personal residence, plaintiffs sued in state court for a temporary restraining order pending the outcome of a declaratory judgment action to determine the enforceability of the trust deed and M & M's liability for the approximately $80,000 that L-M claimed was due. When a temporary restraining order was granted, defendants removed the case to federal court on diversity grounds, where another restraining order was granted pending the outcome at trial. The district court applied the substantive law of Oregon.

A major issue at trial was whether the Participation Agreement provisions quoted above required the additional interest under subparagraph 1(A) and/or subparagraph 1(B) to be calculated and paid on the net profit from the sale of each individual house. The parties actually calculated additional interest after the first and only profitable sale. They did so without regard to whether the Agreement called for one final payment based on the total net profit from all four sales. Although there was testimony that both sides understood the Agreement to support their position, the record indicates that the trial court concluded solely from the wording of the Agreement and general principles of statutory construction that both subparagraphs called for additional interest payments based on the total net profit from the sale of all four houses. The court therefore held that no additional interest had accrued, and that M & M was entitled to a credit for the $29,071.14 in additional interest (calculated under subparagraph 1(B)) that it had paid to L-M following the first sale.

Another issue at trial was whether the standard form trust deed on the Miller residence was enforceable. Plaintiffs challenged it on the grounds that the amounts secured had been repaid, that the notes lacked a specific time for payment, and that foreclosure was prohibited because of L-M's "unclean hands." The trial court extinguished the trust deed on the grounds that it was intended to be "in the nature of a performance bond."

The court stated that although nothing in the trust deed indicated that it was not intended to secure a debt, there was "clear and convincing" testimonial evidence that it was not intended as security for construction advances. Wayne Miller, plaintiff's brother, who had also given a trust deed on his former residence property gave the following testimony:

Q (by plaintiff's attorney): Did Mr. Earl Miller ask you for a Trust Deed?

A: Yes.

Q: Did he tell you why he wanted a Trust Deed on your home?

A: Yes.

Q: Why was that?

A: Because of the fact that we were going to have entrusted to us large sums of money that--so that we wouldn't abscond with that money and that we would use the money for the projects or for the use intended rather than just taking the money and leaving with the money, so it was a security deal.

Q: Did he tell you it was in lieu of a performance bond?

A: I understood it to be in terms like that, yes.

Gary Miller testified that a trust deed was also required on his residence property for the same reasons that Wayne had stated. Lang testified that he had been concerned about the Millers' inexperience as builders and that they were unable to get a conventional performance bond.

The trial court also denied both parties' requests for contractual attorney fees. The district court decided that attorney fees were not "appropriate ... in light of [its] decision," and the court also indicated some doubt as to whether there was authority to allow such fees when the case had to be returned to the bankruptcy court.

II CONSTRUCTION OF PARTICIPATION AGREEMENT

The trial court construed the Agreement to require calculation of additional interest based on the net profit from all four houses combined, rather than on the net profit from each house as it was completed and sold. In explaining his "very difficult" decision, the trial judge did not appear to rely on any testimony about the intent or understanding of the parties, but instead analyzed the provisions on the basis of how they could be understood and reconciled. The judge also emphasized that the contract had been drafted by L-M's attorney and should therefore be construed most strictly against them. L-M argues that under the plain language of the Agreement "net profits" must be calculated for each lot separately. Alternatively, L-M argues that any language to the contrary only applies to subparagraph 1(B), leaving L-M entitled to the amount calculated for each house under subparagraph 1(A). ¹ Defendants also rely on the plain language of the contract and on general rules of statutory construction.

The interpretation of a contract is a mixed question of law and fact. When the district court's decision is based on an analysis of the contractual language and an application of the principles of contract interpretation, that decision is a matter of law and reviewable de novo. When the inquiry focuses on extrinsic evidence of related facts, however, the trial court's conclusions will not be reversed unless they are clearly erroneous. See In re U.S. Financial Securities Litigation v. Touche Ross & Co., 729 F.2d 628, 631-32 (9th Cir.1984); Hekker v. Sabre Const. Co., 265 Or. 552, 510 P.2d 347, 349 (1973); J. Calamari & J. Perillo, The Law of Contracts Sec. 3-12 (2d ed. 1977). The record indicates that the trial judge's decision was based solely on an analysis of the contract provisions and the application of general rules of contract construction. Our review is therefore de novo.

All of the language in both subparagraph 1(A) and subparagraph 1(B) discusses the payment computations in terms of the profits, advances and interest for each lot, except for the last sentence in subparagraph 1(B), which states:

In the event that there is insufficient net profit from the sales of the above referenced lots, this additional interest payment shall be limited to the amount of net profit received by the corporation. (Emphasis added).

The trial court apparently construed this language to refer to the lots "above referenced" in both subparagraphs, and therefore limited the payments under both alternatives to the net profit from all the lots together.

We agree that the language quoted above limits the amount of additional interest under subparagraph 1(B) to the total net profit from all the lots combined. However, the placement of the limiting language within and at the end of subparagraph 1(B) strongly suggests that it was intended to apply to that subparagraph only. A careful draftsman who intended to limit the interest under both subparagraph 1(A) and subparagraph 1(B) would have included the limitation in both subparagraphs or in an unindented paragraph either preceding or following the two subparagraphs.

In the absence of any clear intention to the contrary, we hold that the total net profit limitation only applies to subparagraph 1(B). It is worth reemphasizing that the parties actually calculated additional interest after...