WXI/Z SOUTHWEST MALLS v. Mueller

Decision Date09 February 2005
Docket NumberNo. 24,492.,24,492.
Citation110 P.3d 1080,137 N.M. 343
PartiesWXI/Z SOUTHWEST MALLS Real Estate Liability Company, Plaintiff-Appellant, v. Frank MUELLER, Renee Mueller, and Aspen Ventures Accord, Inc., Defendants, and C.W. and Margaret Ritter, Defendants-Appellees.
CourtCourt of Appeals of New Mexico

William R. Keleher, Mark J. Fidel, Mary T. Torres, Modrall, Sperling, Roehl, Harris & Sisk, P.A. Albuquerque, NM, for Appellant.

Matthew P. Holt, Holt & Babington, P.C., Las Cruces, NM, for Appellees.

Certiorari Denied, No. 29,149, April 20, 2005.

OPINION

FRY, Judge.

{1} WXI/Z Southwest Malls Real Estate Liability Company (Southwest Malls) appeals from an order denying summary judgment against Defendants C.W. and Margaret Ritter (the Ritters) for unpaid rent and other tenant charges that it claims amount to over $200,000. The Ritters, who were assignors of a lease and guarantors of the rent, claim they were entitled to prompt notice from Southwest Malls that an assignee was failing to pay rent. The Ritters also claim that Southwest Malls breached the implied covenant of good faith and fair dealing in the guaranty by failing to provide such notice. For the reasons that follow, we hold that Southwest Malls had no express or implied duty under the guaranty to provide notice of the default prior to filing suit against the Ritters. We also hold that in such an arms-length, commercial transaction, the Ritters have failed to raise genuine issues of material fact as to any breach by Southwest Malls of the implied covenant of good faith and fair dealing. Both holdings are informed by the "long-standing backdrop of New Mexico law enforcing contractual obligations as they are written" and the public interest in ensuring that private parties are secure in the knowledge that their contracts will be enforced. United Props. Ltd. v. Walgreen Props., Inc., 2003-NMCA-140, ¶¶ 12, 10, 134 N.M. 725, 82 P.3d 535.

BACKGROUND

{2} The Ritters leased commercial space in a shopping mall, in which they operated a tavern. The lease period was for slightly more than ten years. Rent and various operating expenses shared by mall tenants were due monthly. Eight years into the lease, the Ritters sought to assign the lease to Frank and Renee Mueller (the Muellers), who would continue to operate the tavern. Southwest Malls, which became the landlord in 1999, consented to the assignment on the condition that the Ritters would continue to be liable for rent and would guarantee the lease. The Ritters signed the document and were listed as "assignor and guarantor." The assignment contained the following clause:

5. Continuing Liability. Landlord's consent to the Assignment is granted subject to Assignor remaining primarily liable on the lease, and Assignor, as a Guarantor (jointly and severally) under the Lease, hereby acknowledges such continuing liability to Landlord.

{3} Two months later, the Muellers assigned the lease to Aspen Ventures Accord, Inc. (Aspen), in which they had an interest. Southwest Malls again consented to the assignment, but on the condition that both the Ritters and Muellers remained liable on the lease as guarantors. The Ritters signed the assignment and were listed as "guarantors." The document contained this language:

5. Continuing Liability. Landlord's consent to the Assignment is granted subject to Assignor and all Guarantors of the Lease, if any, remaining primarily liable on the lease, and Assignor and all Guarantors, if any, hereby acknowledge the continuing liability of Assignor and Guarantors to Landlord under the Lease.

{4} Aspen failed to pay rent starting in August 2000. Southwest Malls apparently took no action to evict Aspen or terminate the lease, and Aspen did not surrender the premises. During the time that rent was going unpaid, a division of Southwest Malls was in contact with the Ritters regarding a separate dispute about monies owed prior to the assignment to the Muellers. Southwest Malls did not notify the Ritters about Aspen's default until April 2002, nearly two years after Aspen stopped paying rent, when it sued all three parties (the Ritters, the Muellers, and Aspen) for the unpaid rent and other charges. After the suit was filed, Aspen and the Muellers were both discharged in bankruptcy proceedings, and the trustee for Aspen reported that no assets remained for distribution. Thus, Southwest Malls seeks the full amount owing plus attorney fees from the Ritters under the lease, the assignments, and, in particular, the two guaranty agreements. {5} The Ritters defend on the grounds that Southwest Malls had a duty under the guaranty contract to timely notify them of Aspen's default, and that its unjustified delay in doing so both violated the covenant of good faith and fair dealing and allowed damages to pile up. The Ritters contend that had Southwest Malls simply informed them of the situation, they could have applied their extensive experience as restauranteurs either to operate the tavern themselves or locate new, paying tenants. In either case, the Ritters argue that they could have prevented the unpaid rent from growing to the amounts claimed by Southwest Malls.

{6} Southwest Malls moved for summary judgment, which the district court denied. The district court found that the Ritters did guarantee the payment of rent, but that there were two issues of material fact impacting the question of whether Southwest Malls breached the implied covenant of good faith and fair dealing: (1) whether a creditor like Southwest Malls owes a guarantor, like the Ritters, any notice that the principal obligor (Aspen) is in default on the underlying obligation, particularly where periodic payments are due; and (2) the failure by Southwest Malls to provide notice of Aspen's default, in the context of the ongoing communications with the Ritters, and the purported resulting harm to the Ritters.

{7} The district court issued an order authorizing interlocutory appeal, stating that the case involved controlling questions of law for which there are substantial grounds for difference of opinion and that an immediate appeal would advance the ultimate termination of the litigation. This Court granted the request for a permissive interlocutory appeal pursuant to NMSA 1978, § 39-3-4 (1999) and Rule 12-203(A) NMRA.

DISCUSSION
Standard of Review

{8} We review denials of summary judgment de novo because the issue on appeal is a question of law. Self v. United Parcel Serv., Inc., 1998-NMSC-046, ¶ 6, 126 N.M. 396, 970 P.2d 582. Summary judgment is appropriate where there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. Id. We consider any facts presented in the light most "favorable to support a trial on the issues because the purpose of summary judgment is not to preclude a trial on the merits if a triable issue of fact exists." Madsen v. Scott, 1999-NMSC-042, ¶ 7, 128 N.M. 255, 992 P.2d 268 (internal quotation marks and citation omitted). "[S]ummary judgment is not appropriate when the facts before the court are insufficiently developed or where further factual resolution is essential for determination of the central legal issues involved." Brown v. Taylor, 120 N.M. 302, 307, 901 P.2d 720, 725 (1995) (internal quotation marks and citation omitted). We address in turn each of the concerns that prevented the district court from granting summary judgment to Southwest Malls.

Duty to Notify Guarantor of Principal's Failure to Pay Monthly Rent

{9} The Ritters contend that even though the guaranty agreement did not expressly require any notice of default by the principal, Southwest Malls had a duty to alert them to the default so that they could take action to mitigate damages once Aspen stopped paying rent. This is a novel issue in New Mexico.

{10} A guaranty is a contract and we apply all of the general rules regarding the application and construction of contracts. See Shirley v. Venaglia, 86 N.M. 721, 724, 527 P.2d 316, 319 (1974) (stating that "[t]he guaranty agreement is a separate, distinct contract"); see also Restatement (Third) of Suretyship and Guaranty § 14 (1996) (stating that standard contract rules apply to secondary obligations). Therefore, we begin with a brief summary of these rules.

{11} "When discerning the purpose, meaning, and intent of the parties to a contract, the court's duty is confined to interpreting the contract that the parties made for themselves, and absent any ambiguity, the court may not alter or fabricate a new agreement for the parties." CC Hous. Corp. v. Ryder Truck Rental, Inc., 106 N.M. 577, 579, 746 P.2d 1109, 1111 (1987). "Absent ambiguity, provisions of [a] contract need only be applied, rather than construed or interpreted." Richardson v. Farmers Ins. Co., 112 N.M. 73, 74, 811 P.2d 571, 572 (1991). "Parties to a contract agree to be bound by its provisions and must accept the burdens of the contract along with the benefits. When a contract was freely entered into by parties negotiating at arm's length, the duty of the courts is ordinarily to enforce the terms of the contract which the parties made for themselves." Nearburg v. Yates Petroleum Corp., 1997-NMCA-069, ¶ 31, 123 N.M. 526, 943 P.2d 560 (internal citation omitted). "[C]ourts may not rewrite obligations that the parties have freely bargained for themselves... [i]n the absence of fraud, unconscionability, or other grossly inequitable conduct." United Props. Ltd., 2003-NMCA-140, ¶ 10, 134 N.M. 725, 82 P.3d 535 (internal quotation marks and citation omitted).

{12} As for the interpretation and application of a guaranty, "[t]he language of the written guaranty agreement governs the rights of the [g]uarantors" and "[t]he parties... are free to determine for themselves by contract . . . the duties and obligations which follow." Levenson v. Haynes, 1997-NMCA-020, ¶ 19, 123 N.M. 106, 934 P.2d 300; see Sunwest Bank v. Garrett, 113 N.M. 112, 116, ...

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