Schwegmann Family Trust No. 2 v. John Hancock Life Insurance ( 2009 )

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
August 11, 2009
No. 08-30650 Charles R. Fulbruge III
Clerk
SCHWEGMANN FAMILY TRUST NO. 2
Plaintiff-Appellee
v.
JOHN HANCOCK LIFE INSURANCE COMPANY, formerly known as
John Hancock Mutual Life Insurance Company
Third Party Defendant-Appellee
v.
TOYS R US INC., its subsidiaries & affiliates
Defendant-Appellant
Appeal from the United States District Court
for the Eastern District of Louisiana
USDC No. 2:06-CV-2478
Before JOLLY, SMITH, and BENAVIDES, Circuit Judges .
PER CURIAM:*
Defendant-Appellant Toys “R” Us – Delaware, Inc., formerly known as
Toys “R” Us, Inc., (“Toys”) appeals the district court’s grant of summary
*
Pursuant to 5TH CIR . R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR .
R. 47.5.4.
No. 08-30650
judgment in favor of Appellee, Schwegmann Family Trust No. 2
(“Schwegmann”), enforcing the terms of the lease entered into between
Schwegmann and Toys. The district court held that the lease specifically
addressed the circumstances at issue—concerning the effects of Hurricane
Katrina on the leased property—and thus held the contrary provisions contained
in the Louisiana Civil Code were inapplicable. For the following reasons, the
judgment of the district court is affirmed.
I.
In 1992, Toys entered into a twenty-five year land lease with Schwegmann
for property located in the eastern section of New Orleans, Louisiana. Pursuant
to the lease, Toys constructed a building on the leased property from which it
operated a toy store. On August 29, 2005, Hurricane Katrina struck the area,
damaging the store located on the leased property and the surrounding area.
Toys cleared out the contents of the building and discontinued payment of rent.
On May 11, 2006, Schwegmann sued Toys in district court to enforce the
lease and collect past due rent.1 Toys answered, filed a counterclaim for
Schwegmann’s failure to maintain its lease obligations, and then filed a third
party demand against John Hancock Mutual Insurance Company (“John
Hancock”), Schwegmann’s mortgagee. On May 16, 2007, Schwegmann filed a
motion for summary judgment seeking enforcement of the terms of the lease. On
June 12, 2007, Toys filed a cross-motion for summary judgment seeking to
dissolve the lease pursuant to Louisiana Civil Code Article 2715. On March 17,
2008, the district court granted Schwegmann’s motion and denied Toys’
cross-motion, holding that the terms of the lease, rather than Article 2715,
control the parties’ obligations. The district court’s order decided the issue of
liability only, leaving open the extent and amount of any damages. The
1
Schwegmann is a Louisiana trust and Toys is a Delaware corporation. This case was
brought pursuant to the district court’s diversity jurisdiction. 28 U.S.C. § 1332.
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No. 08-30650
judgment was certified for interlocutory appeal and further trial court
proceedings were stayed pending appeal. Toys now appeals the order of the
district court granting summary judgment in favor of Schwegmann.
II.
This Court reviews a district court’s grant of summary judgment de novo,
applying the same standards as the district court. Strong v. Univ. Healthcare
Sys., L.L.C., 482 F.3d 802, 805 (5th Cir. 2007). Summary judgment is proper if
the record reflects “that there is no genuine issue as to any material fact and
that the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c).
In deciding whether a genuine issue of material fact exists, this Court must
draw all reasonable inferences in favor of the responding party. Little v. Liquid
Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994) (en banc) (per curiam).
III.
Toys argues that the lease agreement, governed by Louisiana law, should
be dissolved pursuant to Louisiana Civil Code Article 2715 (“Article 2715”),
which provides, in pertinent part, that where the thing leased is “partially
destroyed, lost, or expropriated, or its use is otherwise substantially impaired,”
and the impairment “was caused by circumstances external to the leased thing,
the lessee is entitled to a dissolution of the lease.” La. Civ. Code art. 2715. Toys
asserts that as result of Hurricane Katrina the leased property was
“substantially impaired,” and thus they are entitled to terminate the lease under
Article 2715. Schwegmann counters that because the rules of the Civil Code
only become applicable for filling any gaps in a contract, they are inapplicable
here because the lease agreement had a provision addressing the responsibilities
of the parties in the event a “fire or other casualty” damaged or destroyed the
property.
Under Louisiana law, the rules of the Civil Code “become applicable for
filling any gaps in the parties’ agreement and for determining its overall validity
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and effectiveness.” La. Civ. Code art. 2668 cmt. (e). In Tassin v. Slidell Mini
Storage, Inc., 396 So. 2d 1261 (La. 1981), the Louisiana Supreme Court
explained the role of the rules in the Civil Code when interpreting contracts:
[T]he codal articles and statutes defining the rights and obliations
(sic) of lessors and lessees are not prohibitory laws which are
unalterable by contractual agreement, but are simply intended to
regulate the relationship between lessor and lessee when there is no
contractual stipulation imposed in the lease. . . . Our jurisprudence
is that the usual warranties and obligations imposed under the
codal articles and statutes dealing with lease may be waived or
otherwise provided for by contractual agreement of the parties as
long as such waiver or renunciation does not affect the rights of
others and is not contrary to the public good.
Tassin, 396 So. 2d at 1264. “In other words, the lease contract itself is the law
between the parties; it defines their respective rights and obligations so long as
the agreement does not affect the rights of others and is not contrary to the
public good.” Carriere v. Bank of La., 702 So. 2d 648, 666 (La. 1996); see also
Cerniglia v. Napoli, 517 So. 2d 1209, 1211 (La. Ct. App. 1987) (“[A]rticle [2697]
is applicable only where there is no lease agreement to the contrary. In the
present case the parties by adopting the fire clause clearly intended to avoid
automatic termination of the lease in the event of destruction of the premises by
a fire.” (citation omitted)).
Therefore, if the lease agreement “waive[s] or otherwise provide[s] for” the
situation covered by Article 2715, then the lease provision, and not Article 2715,
should apply. Article 2715 provides:
If, without the fault of the lessee, the thing is partially
destroyed, lost, or expropriated, or its use is otherwise substantially
impaired, the lessee may, according to the circumstances of both
parties, obtain a diminution of the rent or dissolution of the lease,
whichever is more appropriate under the circumstances. If the
lessor was at fault, the lessee may also demand damages.
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No. 08-30650
If the impairment of the use of the leased thing was caused by
circumstances external to the leased thing, the lessee is entitled to
a dissolution of the lease, but is not entitled to diminution of the
rent.
La. Civ. Code art. 2715. Schwegmann contends that § 12.02 of the lease covers
the situation here, and obviates the need to look to the codal provisions. Section
12.02 states that:
In the event the whole or any part of the Demised Premises 2 shall,
during the Lease Term, be damaged or destroyed by fire or other
casualty . . . Tenant shall . . . commence and proceed with due
diligence to repair, restore and/or rebuild the Demised Premises, or
portions thereof, substantially to their condition and character
immediately prior to such damage . . . .
The question posed here is whether § 12.02 of the lease provides for the situation
at issue because Hurricane Katrina was a “casualty” that “damaged” the leased
property. If § 12.02 does cover the instant situation, then the lease provision
trumps Article 2715 and Schwegmann is entitled to continuation of the lease
while Toys is obligated to repair the leased property as specified in § 12.02.
Schwegmann Family Trust No.2 v. KFC National Management Co., No.
06-2447, 2007 WL 60971 (E.D. La. Jan. 5, 2007), which involved a substantially
similar lease between KFC and Schwegmann, is instructive. In that case, KFC,
like Toys, contended that its leased properties were “substantially impaired such
that the properties were no longer fit for the express intended use of operating
a Kentucky Fried Chicken restaurant” due to the effects of Hurricane Katrina
and sought dissolution of its lease with Schwegmann via Article 2715 of the
Louisiana Civil Code. Schwegmann v. KFC, 2007 WL 60971, at *2. The KFC
lease contained a “destruction of premises” provision which provided that “[i]f
2
The “Demised Premises” is defined in § 1.01 of the lease as the “Tenants Parcel and
the Improvements” erected thereon.
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No. 08-30650
the building upon the demised premises be damaged or rendered untenantable
by fire or other casualty . . . Tenant shall . . . repair or replace said building.” Id.
at *3. The district court held that the lease provision addressed the rights and
obligations of the parties in the event that the leased property was damaged by
a casualty, and encompassed the effects on the property that occurred as a result
of Hurricane Katrina. Therefore, the court held that Article 2715 did not apply
and KFC was bound by the terms of the lease to repair or replace the building
and continue the lease. Id. at *3–4.
Toys argues that even if the lease provides for a situation in which the
premises are destroyed, it does not provide for a situation in which the use of the
premises are “substantially impaired.” Toys submitted an affidavit and report
from a local demographer stating that the area around the store location at issue
is no longer commercially viable because of decreased population and slow
rebuilding in the area. Toys asserts that these changes to the business climate
of the area are a “substantial impairment” that is not covered by § 12.02 of the
lease.
Despite Toys’ contentions, we hold that the lease is not silent as to the
impairment alleged by Toys. First, § 12.02 of the lease addresses situations in
which “the whole or any part of the Demised Premises” is “damaged or
destroyed” by a “fire or other casualty.” Under the Louisiana Civil Code, the
words of a contract must be given their generally prevailing meaning. La. Civ.
Code art. 2047. Hurricane Katrina was a casualty that damaged or destroyed
the leased property in part. The ordinary meaning of the verb “damage” is “[t]o
do or cause damage to; to hurt, harm, injure; now commonly to injure (a thing)
so as to lessen or destroy its value.” Oxford English Dictionary (2d ed. 1989).
The verb “impair” means “[t]o make worse, less valuable, or weaker; to lessen
injuriously; to damage, injure.” Id. There is substantial overlap between the
two concepts. Thus, the effects of Hurricane Katrina on the leased property,
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including injuries which lessened its value, are squarely addressed by the lease
and the lease should govern the rights of the parties. See Tassin, 396 So. 2d at
1269 (holding that “obligations imposed under the codal articles and statutes
dealing with lease may be waived or otherwise provided for by contractual
agreement”). Second, as in Schwegmann v. KFC, the lease “reflects that the
parties did consider circumstances in which damage to the properties could
make continuation of the lease no longer viable.” 2007 WL 60971, at *4. Section
12.01 of the lease provides for termination of the lease if the property is
destroyed or damaged in excess of a certain specified amount “during the last
five (5) years of the Lease Term or during any renewal period.” The damage
here occurred prior to that five-year mark and, therefore, the provisions of
§12.02 requiring repair and continuation of the lease, rather than termination
provisions of § 12.01, apply.
Even if the lease did not address the impairment complained of by Toys—
and thus Article 2715 governed—dissolution of the lease would still not be
warranted because the “thing leased” has not been “substantially impaired”
within the meaning of the statute. In Meadowcrest Professional Building
Partnership v. Toursarkissian, a Louisiana court rejected the contention that
negative changes in the business climate after Hurricane Katrina constituted a
substantial impairment to a commercial lease under Article 2715. 1 So. 3d 555,
556 (La. Ct. App. 2008). The court stated that:
[E]ven accepting defendant’s assertion about the negative business
climate as true, this is not the type of situation to which Art. 2715
applies. To rule otherwise would be to make the enforceability of
leases dependent on the vagaries of the marketplace, and this we
decline to do.
Id.; see also Schwegmann v. KFC, 2007 WL 60971, at *4 (noting that
“changed economic and demographic conditions [in the surrounding
neighborhood] do not make the leased land, itself, unsuitable for a retail
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No. 08-30650
business”). Therefore, under Louisiana law, the impairment complained
of by Toys does not constitute a substantial impairment and Toys is not
entitled to dissolution of the lease under Article 2715.
IV.
Based on the foregoing analysis, the judgment of the district court
is AFFIRMED.
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