Wilson Arlington Co. v. Prudential Ins. Co. of America

• Decision Date: 27 August 1990
• Docket Number: No. 88-6273,88-6273
• Citation: 912 F.2d 366
• Parties: WILSON ARLINGTON COMPANY; Selden Ring; Irving Axelrad, Plaintiffs-Appellants, v. PRUDENTIAL INSURANCE COMPANY OF AMERICA, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 366

912 F.2d 366

WILSON ARLINGTON COMPANY; Selden Ring; Irving Axelrad, Plaintiffs-Appellants, v. PRUDENTIAL INSURANCE COMPANY OF AMERICA, Defendant-Appellee.

No. 88-6273.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Feb. 2, 1990.

Decided Aug. 27, 1990.

Hillel Chodos, Gina Putkoski, Los Angeles, Cal., for plaintiffs-appellants.

Kenneth B. Bley, Cox, Castle & Nicholson, Los Angeles, Cal., for defendant-appellee.

Appeal from the United States District Court for the Central District of California.

Before NELSON, BRUNETTI and KOZINSKI, Circuit Judges.

KOZINSKI, Circuit Judge:

The answer to the question presented in this appeal is, yes, Virginia, there is a parol evidence rule.

I

In early 1984, Prudential put up for sale one of its hotel properties--the Arlington Hyatt Hotel located in Arlington, Virginia. Prudential circulated a limited number of informational brochures describing the property and offering it for $26.5 million. Selden Ring, a partner in Wilson Arlington, responded to one of the brochures with an offer to purchase, which he submitted to Prudential on August 15, 1984. The offer met Prudential's asking price and provided that income and expenses from the hotel's operations were to be prorated between Prudential and Wilson Arlington as of the date of the closing of escrow.

During the next four and a half months, the parties engaged in extensive negotiations on a number of deal points, including price, warranties and terms of escrow. On January 4, 1985, they signed a twenty-seven page "Sale Agreement" prepared by Prudential's in-house counsel. The Sale Agreement provided for the transfer of all of Prudential's interest in the hotel property to Wilson Arlington for $25.95 million. The parties also signed various other documents, including one titled "Assignment and Assumption of Management Agreement," which transferred to Wilson Arlington all of Prudential's rights and obligations under a management contract with the Hyatt Corporation (the Management Agreement). All of the documents were incorporated by reference into the Sale Agreement.

Escrow closed on March 26, 1985. Soon thereafter, Wilson Arlington made a demand on Prudential for reimbursement of expenses incurred in operating the hotel prior to closing. Prudential refused and instead made a claim against Wilson Arlington for monies the latter had collected as receivables from pre-closing hotel operations and for the hotel's cash on hand at the time of closing.

Because the parties were unable to resolve their differences, Wilson Arlington filed an action in the California Superior Court to recover approximately $300,000 from Prudential as reimbursement for the pre-closing accounts payable. Prudential removed the action to federal court pursuant to 28 U.S.C. Sec. 1332, where it counterclaimed against Wilson Arlington and its general partners, Selden Ring and Irving Axelrad, for approximately $600,000, consisting of the hotel's cash on hand and accounts receivable generated by pre-closing operations.

Wilson Arlington moved for summary judgment on all claims. The district court granted Wilson Arlington's motion as to the reimbursement of the accounts payable, but denied its other motions. The case proceeded to trial, and the jury found for Prudential on its counterclaim, awarding it $609,522 plus costs and interest. ¹ Wilson Arlington appeals; Prudential does not cross-appeal the entry of partial summary judgment against it as to the $300,000 in pre-closing accounts payable.

II

Wilson Arlington contends that the district court erred in denying its motions for summary judgment, as the plain language of the Sale Agreement and the Management Agreement entitled it to the pre-closing accounts receivable and cash on hand. ² Prudential, however, claims that these documents are not clear, that they do not embody the entire agreement between Prudential and Wilson Arlington, and that sufficient parol evidence exists supplementing and contradicting the language of the documents so as to raise a material issue of fact as to the parties' rights to the funds at issue. To resolve this dispute, we must determine when parol evidence is admissible under the law of Virginia to aid a court in interpreting a written agreement. First, however, we take a closer look at the documents governing the parties' rights.

A. The Sale Agreement requires Prudential to convey to Wilson Arlington the Arlington Hyatt Hotel's "Property" on the date of the closing of escrow, March 26, 1985. ³ Section 5 of the agreement provides for the proration between Prudential and Wilson Arlington of a number of the hotel's expense and income accounts as of the closing date, including utility bills, accounts payable and rent due from Elson's News and Gift Shops, Inc., a concessionaire in the hotel. ER at 74-77. The Sale Agreement does not, however, explicitly assign rights to the cash on hand or pre-closing accounts receivable to either party, other than those accounts mentioned in section 5. The allocation of these funds is instead governed by the Hyatt Management Agreement, which the Sale Agreement incorporates within its definition of the hotel's "Property." ⁴ Perhaps as an extra measure of caution, Prudential also assigned to Wilson Arlington all its rights and obligations under the Management Agreement in a separate document. See Assignment and Assumption of Management Agreement, ER at 164-66.

Under the Management Agreement, the Hyatt Corporation is responsible for the day-to-day operations of the hotel, including the renting of rooms and concession space. It is also responsible for the collection of rents "and other sums" from concessionaires and guests. ER at 177. Section 3.3 of the Agreement obligates Hyatt to maintain bank accounts--the "operating accounts"--in trust for the hotel's owner and to deposit into that account "all moneys received by Hyatt from the operations of the Hotel." ER at 178. Hyatt is authorized to use the operating accounts to pay the hotel's operating expenses, pay itself a management fee and to put aside a reserve for working capital. After monthly expenses and management fees have been deducted, "Hyatt shall remit to Owner out of the operating accounts the amount" of income that exceeds what is necessary to maintain the required level of working capital. ER at 184.

As the identity of the Owner changed as of the closing date, Hyatt thereafter began remitting these amounts, known as Owner's Remittance Amounts, ER at 184-85, to Wilson Arlington. Because neither the Sale Agreement nor the Management Agreement contained a proration clause pertaining to the calculation of the Owner's Remittance Amount, the remittances to Wilson Arlington after the closing date necessarily reflected cash on hand at the time of closing, plus amounts collected after the closing date on account of pre-closing receivables. It is these two items to which Prudential now lays claim.

B. While the path we are required to follow in construing the various documents is somewhat tortuous--involving two separate agreements and a number of clauses and definitions--it is nevertheless a clear one. It is impossible to read the two documents together with this question in mind and reach a conclusion other than that Wilson Arlington is entitled to all Owner's Remittance Amounts due under the Management Agreement as of the date of closing. While the parties were careful to provide for prorations with respect to other contracts the buyer would be assuming, such as rental agreements with the hotel's concessionaires, see p. 368 supra, they omitted any reference to proration of the amounts due under the Management Agreement. Looking at the language of the relevant contracts, therefore, it would appear Wilson Arlington was entitled to prevail--indeed, prevail on summary judgment.

Wilson Arlington did move for summary judgment. It lost, however, because the district court concluded that Prudential had raised a material issue of fact by presenting affidavits from its lawyers to the effect that cash on hand on the closing date would belong to the seller, as would any amounts received on account of the pre-closing receivables. See CR at 25, Affidavits in Opposition to Motion for Summary Judgment. Which brings us to the question raised by this appeal: Does Virginia law, which the parties agree governs this dispute, permit a party to present parol evidence to contradict or modify the terms of an integrated agreement? ⁵

1. There was a time, not all that long ago, when parties to a commercial transaction could rely on a simple maxim--a clear contractual term means what it says. Based on the notion that words can be used to convey a clear meaning, this principle formed the underpinnings of the parol evidence rule that made extrinsic evidence inadmissible to interpret, vary or add to the terms of an unambiguous written instrument. See Trident Center v. Connecticut General Life Ins. Co., 847 F.2d 564, 568-69 (9th Cir.1988). The policy supporting strict enforcement of this rule was clear: If parties to an agreement could not rely on written words to express their consent to the express terms of that agreement, those words would become little more than sideshows in a circus of self-serving declaration as to what the parties to the agreement really had in mind. The parol evidence rule thus enables parties to rely on written instruments as embodying a complete memorial of their agreement, and to avoid costly and disruptive litigation over the existence of oral and implied terms that may or may not have been contemplated by the parties.

Notwithstanding the importance of its function, the parol evidence rule has been severely eroded in many jurisdictions during the past few decades. See, e.g., Admiral Builders Sav. & Loan Assoc. v. South River Landing, Inc., 66 Md.App. 124, 502 A.2d 1096, 1098-1100 (1986); Darner Motor Sales, Inc. v. Universal Underwriters Ins. Co., 140 Ariz....