Trustees of First Union Real Estate Equity and Mortg. Investments v. Mandell

• Decision Date: 09 March 1993
• Docket Number: No. 91-3890,91-3890
• Citation: 987 F.2d 1286
• Parties: The TRUSTEES OF FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS, an Ohio Business Trust, and Merchants National Bank & Trust Company of Indianapolis, Plaintiffs-Appellees, v. Sheldon MANDELL, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1286

987 F.2d 1286

The TRUSTEES OF FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS, an Ohio Business Trust, and Merchants National Bank & Trust Company of Indianapolis, Plaintiffs-Appellees, v. Sheldon MANDELL, Defendant-Appellant.

No. 91-3890.

United States Court of Appeals Seventh Circuit.

Argued Nov. 2, 1992.

Decided March 9, 1993.

Steven K. Huffer (argued), Marvin Mitchell, Mitchell, Hurst, Jacobs & Dick, Indianapolis, IN, for plaintiffs-appellees.

James R. Figliulo (argued), Daniel D. Kasten, Foran & Schultz, Chicago, IL, B. Keith Shake, Scott S. Morrisson, Henderson, Daily, Withrow & Devoe, Indianapolis, IN, for defendant-appellant.

Before RIPPLE and ROVNER, Circuit Judges, and ENGEL, Senior Circuit Judge. ^*

ENGEL, Senior Circuit Judge.

Sheldon Mandell appeals the district court's grant of summary judgment in favor of the Trustees of First Union Real Estate Equity and Mortgage Investments and Merchants National Bank & Trust Company of Indianapolis in this diversity action for declaratory judgment involving the interpretation of a rental clause in a ground lease. For the following reasons, we affirm.

I. BACKGROUND

The lease at issue covers property located in Johnson County, Indiana upon which stands an approximately 84,000 square-foot K-Mart store. In early 1976, the Trustees of First Union Real Estate Equity and Mortgage Investments ("First Union") equitably owned both the building and land. On April 15, 1976, Merchants National Bank and Trust Company of Indianapolis ("Merchants Bank"), acting as First Union's trustee and the building and land's legal owner, entered into a twenty-five-year ground lease with Cornwall Equities, Ltd. ("Cornwall"). This lease concerns the land only, and will expire on May 31, 2001. The lease provides the tenant with ten successive options to extend the lease for an additional five years per option.

One week after entering into the ground lease, Merchants Bank sold the K-Mart building to Cornwall. At the time of sale, S.S. Kresge Company ("Kresge") was operating the K-Mart under a lease dated April 30, 1974. This lease requires the tenant to pay rent of $230,000 per year plus one percent of annual gross sales over $8.5 million. Like the ground lease, the Kresge lease provides for an initial term of twenty-five years and permits ten successive five-year options. The initial term of the Kresge lease expires on May 31, 2000. Cornwall sold the K-Mart and its leasehold interest in the underlying land to Sheldon Mandell ("Mandell") in early 1977. Thus, Mandell is currently Merchants Bank's tenant under the 1976 ground lease and Kresge's landlord under the 1974 building lease.

Of controlling importance to this appeal, the ground lease requires Mandell to pay Merchants Bank $36,000 in annual base rent plus fifty percent of any percentage rent Mandell collects from Kresge under the building lease. Of course, Mandell's obligation to pay percentage rent is contingent upon Kresge's ability to generate annual gross sales in excess of $8.5 million. The provision embodying the percentage rent agreement is found at section 5(a) of the ground lease, which provides in full:

Section 5. Additional rent. (a) Tenant shall pay, from time to time, to Landlord as additional rent fifty percent (50%) of any and all percentage rent which S.S. Kresge Company, or its successor or assigns, pays to Tenant under their lease for part or all of the Demised Premises during the initial term and any period thereof, promptly after Tenant receives such percentage rent payments. Tenant shall forward with such payment such reports as Tenant shall receive from S.S. Kresge Company showing the computation of percentage rents.

(Emphasis added.)

During closing negotiations, the parties to the ground lease (Merchants Bank and Cornwall) reached an agreement concerning the tenant's rental obligations after the expiration of the initial twenty-five-year term. The resulting rider, section 5(b), reads as follows:

5(b) At the expiration of the initial term of the existing lease with S.S. Kresge Company and upon the execution of a new lease with S.S. Kresge Company, or any successor to said company by merger or corporate reorganization (exclusive, however, of any extension of the existing lease in accordance with the terms thereof), the basic rent payable hereunder shall be increased, from and after the commencement date of such new lease with S.S. Kresge Company, to the lesser of (i) $72,000 per annum, or (ii) an amount equal to $36,000 plus the average of the percentage rentals paid by Tenant to Landlord for the five years immediately preceding the commencement term of such new lease with S.S. Kresge Company. If a new lease is entered into with a party other than S.S. Kresge Company (or any successor to said company by merger or corporate reorganization), then there shall be no increase in basic rent as provided in this Section 5(b).

The question before us is whether the ground lease will require Mandell to continue paying percentage rent to Merchants Bank after the expiration of the initial period of the building lease should both Mandell and Kresge exercise one or more of their respective five-year options to extend.

As with many contract cases, the dispute resulting in this litigation did not arise until many years after the contract's execution. In this case, the parties had no occasion to question the ground lease until early 1990 when First Union decided to sell its interest in the ground lease. The potential buyer refused the deal because of a perceived ambiguity in section 5(a). Specifically, the buyer was concerned with the italicized language in section 5(a) quoted above which reads "and any period thereof." If these words refer to the term "initial term," then percentage rent would seemingly cease upon the expiration of the twenty-five-year period. If, however, the words refer to the term "their lease," then the obligation to pay percentage rent presumably would continue during any extension of the ground lease. Faced with this interpretive dilemma, First Union contacted Mandell requesting a position on the percentage rent issue. Not surprisingly, Mandell responded that he understood the lease to mean that percentage rent was collectible only during the initial term.

On June 20, 1990, First Union and Merchants Bank (collectively "Trustees") sued Mandell in the Southern District of Indiana. The two count complaint sought declaratory relief and reformation of the contract to make explicit Mandell's obligation to pay percentage rents during any extension of the Kresge lease. Mandell answered the complaint and raised two affirmative defenses: failure to state a claim upon which relief can be granted and laches. Thereafter, the parties filed cross-motions for summary judgment. On March 11, 1991, Mandell filed a motion for leave to amend his answer to add a bona fide purchaser defense against the reformation count. The Trustees objected to this motion arguing Mandell had waived the defense by missing the court's December 1, 1990 deadline for amending the pleadings. The district court sustained the Trustees' objection, but held the motion to amend under advisement pending the summary judgment determination.

The district court granted the Trustees' motion for summary judgment on November 21, 1991, and entered the following declaratory judgment:

The Tenant's duty under Section 5(a) of the Ground Lease to pay additional rent based on percentage rent payable under the Kresge Lease will continue during any optional renewal or extension period of the Kresge Lease, if both the Kresge Lease and Ground Lease are renewed.

The court dismissed the reformation count as moot. In a well-reasoned entry accompanying its declaratory judgment, the district court began its analysis by noting that the term "and any period thereof" was ambiguous as a matter of law because reasonable people could differ as to whether the phrase referred to "their lease" or "initial term." The court further found the ambiguity to be patent rather than latent, meaning that the ambiguity would be resolved from within the four corners of the document rather than relying on parol evidence. Viewing the ground lease as a whole, the court opined that "[i]t is more likely that the parties included the clause to clarify that the obligation to pay additional rent under the Ground Lease extended to percentage rent received during any period of the Kresge Lease." Dist.Ct.Op. at 14 (emphasis in original, footnote omitted). While aware that neither party proffered a perfect interpretation of the ambiguous terms, the court was convinced that having "and any period thereof" refer to "their lease" would result in the least amount of redundancy and surplusage.

II. DISCUSSION

The parties do not dispute that Indiana law controls this diversity action. See Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938); Transamerica Insurance Co. v. South, 975 F.2d 321, 327 (7th Cir.1992). Our review, of course, is in the fullest sense de novo, both as to the district court's grant of summary judgment (Samuelson v. Durkee/French/Airwick, 976 F.2d 1111, 1113 (7th Cir.1992)) and to its interpretation of state law. Salve Regina College v. Russell, --- U.S. ----, 111 S.Ct. 1217, 113 L.Ed.2d 190 (1991). Summary judgment is proper only if the record reveals no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).

In Indiana, as in other jurisdictions, the touchstone of contract interpretation is to determine the parties' intent. See First Federal Savings Bank of Indiana v. Key Markets, Inc., 559 N.E.2d 600, 603 (Ind.1990); generally 3 ARTHUR L. CORBIN, CORBIN ON CONTRACTS § 538, at 55 & n. 40 (1960). Consistent with the foregoing principle, Indiana courts will enforce an unambiguous...