Fairfax Portfolio, LLC v. Owens Corning Insulating Systems, LLC

FILED
United States Court of Appeals
UNITED STATES COURT OF APPEALS Tenth Circuit
FOR THE TENTH CIRCUIT February 6, 2013
Elisabeth A. Shumaker
Clerk of Court
FAIRFAX PORTFOLIO, LLC,
Plaintiff/Counter-
Defendant-Appellant,
No. 12-3126
v. (D.C. No. 2:11-CV-02007-CM)
(D. Kan.)
OWENS CORNING INSULATING
SYSTEMS, LLC,
Defendant/Counter-
Claimant-Appellee.
ORDER AND JUDGMENT*
Before ANDERSON and BALDOCK, Circuit Judges, and BRORBY, Senior Circuit
Judge.
This appeal involves a landlord-tenant dispute that was removed from a
Kansas state court and filed in the District of Kansas based on diversity of
citizenship. The landlord is plaintiff/counter-defendant Fairfax Portfolio, LLC
(Fairfax), and the tenant is defendant/counter-claimant Owens Corning Insulating
*
After examining the briefs and appellate record, this panel has determined
unanimously that oral argument would not materially assist the determination of this
appeal. See Fed. R. App. P. 34(a)(2); 10th Cir. R. 34.1(G). The case is therefore
ordered submitted without oral argument. This order and judgment is not binding
precedent, except under the doctrines of law of the case, res judicata, and collateral
estoppel. It may be cited, however, for its persuasive value consistent with
Fed. R. App. P. 32.1 and 10th Cir. R. 32.1.
Systems, LLC (Owens Corning). In the district court proceedings, the parties filed
cross-motions for summary judgment. In addition, Fairfax filed a motion to certify a
question of law to the Kansas Supreme Court concerning its claim that Owens
Corning was a holdover tenant and thus liable for holdover rent under the terms of
the parties’ lease agreement.
The district court denied Fairfax’s motion to certify and entered summary
judgment in favor of Owens Corning, concluding that Owens Corning was not liable
for holdover rent under the provisions of the parties’ lease agreement and that Fairfax
had failed to preserve a separate claim against Owens Corning for a holdover tenancy
by operation of law. The court therefore entered a judgment in favor of Owens
Corning on its counterclaim and directed Fairfax to return Owens Corning’s security
deposit in the amount of $42,102.08. The court also awarded Owens Corning
prejudgment interest and reasonable attorneys’ fees and costs. Exercising
jurisdiction under 28 U.S.C. § 1291, we affirm. We also deny the renewed motion to
certify that Fairfax has filed in this court pursuant to 10th Cir. R. 27.1 and Kan. Stat.
Ann. § 60-3201.
A. Factual Background
In January 2008, Fairfax and Owens Corning entered into a lease agreement
pursuant to which Fairfax agreed to lease a warehouse storage facility to Owens
Corning. Although the initial term of the lease terminated on December 3, 2008, the
-2-
parties subsequently executed an amendment to the lease agreement which extended
the term of the lease until December 3, 2009.
Under the terms of the lease agreement, Owens Corning was required to
maintain the premises in good condition and to repair any damage it caused to the
premises. See § 10 of Lease Agreement (Aplt. App. at 50). In particular, the lease
agreement specified that “[a]ny damage to building columns and walls as a result of
Tenant’s use of the Premises shall be repaired by Tenant promptly after such damage
occurs and no later than expiration of the term of the Lease.” Id. § 32 (Aplt. App.
at 60). The lease agreement also contains a section entitled “Surrender of Premises
and Holding Over.” Id. § 18 (Aplt. App. at 57). The latter section provides, in
relevant part, as follows:
Upon the expiration . . . of this Lease, . . . Tenant shall
immediately surrender the Premises to Landlord, together with all
alterations and improvements as provided herein, in broom-clean
condition and in good order, condition and repair, except for ordinary
wear and tear . . . .
If Tenant holds over after the expiration of the Initial Term or
Renewal Term, if applicable, Tenant shall become a tenant on a
month-to-month tenancy at monthly rent equal to 150% of the Rent in
effect during the last full month of the preceding term.
Id.
When the amended lease agreement expired in December 2009, it is
undisputed that Owens Corning fully vacated the leased premises and returned the
keys to the premises to Fairfax. It is also undisputed that Owens Corning did not use
-3-
the leased premises as a warehouse storage facility at any time after December 3,
2009.
However, during an inspection of the leased premises following Owens
Corning’s departure, Fairfax discovered a number of items on the property that were
in need of repair. Specifically, according to Fairfax, “[t]he property had sustained
substantial structural damage to areas including its walls, windows, and support
beams.” Aplt. Br. at 4 (citing Aplt. App. at 74-75). To remedy this situation, Fairfax
and Owens Corning subsequently agreed that Owens Corning would repair the
damaged items at its own expense. Towards this end, Fairfax returned the keys to the
leased premises to Owens Corning, and Owens Corning hired contractors to perform
the repair work. Ultimately, Owens Corning paid its contractors over $40,000 to
make repairs to the leased premises. The repairs were completed to Fairfax’s
satisfaction and Owens Corning returned the keys to the premises to Fairfax on April
19, 2010.
In November 2010, Fairfax filed a lawsuit against Owens Corning in a Kansas
state court, alleging that: (1) “Defendant was a ‘holdover tenant’ during the time that
defendant had possession of the premises to repair the damage”; and (2) “Pursuant to
the terms of the lease, defendant owes rent during the holdover tenancy at the rate of
150% of the stated monthly rent.” Aplt. App. at 13. Fairfax claimed it was therefore
entitled to a judgment against Owens Corning in the amount of $118,240.62, “after
giving credit for [Owens Corning’s] security deposit.” Id. As noted above, Owens
-4-
Corning removed the case to the District of Kansas based on diversity of citizenship,
and it then filed a counterclaim against Fairfax seeking the return of its security
deposit, alleging it was not liable to Fairfax for any holdover rent during the time that
the leased premises were being repaired.
B. The Pretrial Order
In September 2011, the district court entered a pretrial order. Because it is
relevant to the district court’s summary judgment rulings, we will briefly summarize
the pertinent parts of the pretrial order.
As a starting point, the pretrial order stated that it “shall supersede all
pleadings and control the subsequent course of this case. It shall not be modified
except by consent of the parties and the court’s approval, or by order of the court to
prevent manifest injustice.” R., Doc. 28 at 1.
Next, under the section of the pretrial order entitled “Nature of the Case,”
Fairfax stated it was “claim[ing] damages for breach of a lease contract.” Id. Fairfax
explained its theory of the case under the section of the pretrial order entitled
“Plaintiff’s Contentions.” According to Fairfax:
The lease contains provisions for payment of rent, and that
includes rent to be paid by the defendant as a “holdover tenant” if the
defendant remains in possession of the building after the expiration of
the lease. The lease required the tenant to repair any damage before
surrendering the premises to the landlord.
The lease expired on December 3, 2009. The lease provided for
rent in the sum of $32,068.54 per month. The lease provided that the
rent to be paid by a ‘holdover tenant’ was 150% of the lease rate, or
$48,102.81 per month. The tenant surrendered possession of the
-5-
building to the landlord on April 19, 2010. The tenant was a ‘holdover
tenant’ for five months, so the holdover rent that’s owed is $160,342.70.
Id. at 3.
Finally, under the section of the pretrial order entitled “List of Plaintiff’s
Theories of Recovery,” Fairfax “assert[ed] that it [was] entitled to recover from the
defendant based on breach of contract.” Id. at 5. Under the following section of the
pretrial order entitled “Essential Elements of Plaintiff’s Theory of Recovery (breach
of contract),” Fairfax stated that it had the burden of proving that: (1) “Defendant
remained in possession of the commercial warehouse until April 19, 2010”; and
(2) “As a result, defendant was a ‘holdover tenant’ and owes rent as “holdover
tenant[,]” under the lease.” Id. at 5-6.
C. Fairfax’s Summary Judgment Arguments
As noted above, the parties filed cross-motions for summary judgment in the
district court proceedings. Although we do not need to summarize all of the
arguments advanced by the parties in support of their respective motions, the
memorandum that Fairfax submitted to the district court in support of its motion for
summary judgment contains arguments that are pivotal to our disposition of this
appeal. As a result, we need to briefly summarize those arguments.
In its summary judgment memorandum, Fairfax began its analysis by noting
that “there is very little available on the issue of what exactly constitutes a holdover
tenancy under Kansas law when leased commercial property has been left in dire
-6-
need of repair following the lease’s termination.” Aplt. App. at 35. But according to
Fairfax:
Other courts have explored the issue in different ways. The two main
analyses involve 1) the rules of contract construction; or 2) an
investigation into the magnitude of the damage. Here, both approaches
are satisfied: first, the lease specifically provides for the possibility of a
holdover tenancy should the property not be returned to plaintiff in the
proper condition; second, the damage to the property was significant.
Therefore, defendant should be treated as a holdover tenant.
Id. Fairfax then proceeded to analyze this case under both approaches in two
separate sections of its memorandum. Id. at 36-43.
In the first section of its memorandum, Fairfax addressed the provisions of the
lease agreement, beginning its analysis by stating that “[t]he lease agreement includes
a clause that specifically provides for the possibility of a holdover tenancy. That
provision was triggered when the premises were not returned to plaintiff in good
condition as required by the lease agreement.” Id. at 36. After discussing the
decisions in Prospect Hill Acquisition, LLC v. Tyco Electronics Corp., 414 F.3d 181(1st Cir. 2005), Pinole Valley Trucking, Inc. v. Texas Development Co.,
No. 01-08-00599-CV, 2009 WL 1025750 (Tex. App. April 16, 2009) (unpublished),
and Swanson v. Public Storage, Inc., No. 00-2490-JWL, 2001 WL 584457 (D. Kan.
May 18, 2001) (unpublished), Fairfax then summarized its “contractual” arguments
based on the provisions of the lease agreement as follows:
Here, the lease agreement specifically provides for the possibility
of a holdover tenancy. Under the lease, defendant was required to
“maintain the premises in a condition and repair commensurate with
buildings of a similar class and character,” reasonable wear and tear
-7-
excepted. Defendant was expected to maintain on-site equipment,
machinery, and fixtures, along with the HVAC systems, floors, walls,
and doors. Furthermore, the lease provides that, upon expiration of the
lease, defendant was required to return possession of the subject leased
property to plaintiff “in good order, condition, and repair,” ordinary
wear and tear excepted. If these requirements were not met, defendant
would become a holdover tenant.
When defendant first tried to return possession of the premises to
plaintiff, it was in a severe state of disrepair. The damage included, but
was not limited to, broken fixtures and signs, along with damage to the
walls, the floor, roll up doors, and a number of support columns. Some
of the damage constituted a safety hazard. Much of that damage,
including the damage to the walls, floor, and roll up doors, was
specifically left to the maintenance of defendant under the lease
provisions. This was more than just ordinary wear and tear. Thus,
according to the lease agreement, defendant became a holdover tenant
when it failed to return the premises to plaintiff in proper condition at
the expiration of the lease.
Aplt. App. at 38-39.
The second section of Fairfax’s summary judgment memorandum was entitled
“Defendant was a holdover tenant because its treatment of the property resulted in
extreme damage requiring significant structural repairs.” Id. at 39. In this section,
Fairfax discussed the decisions in Cammack the Cook, L.L.C. v. Eastburn,
296 S.W.3d 884 (Tex. App. 2009), Creative Cabinets, Inc. v. Jorrie, 538 S.W.2d 207(Tex. App. 1976), Longmier v. Kaufman, 663 S.W.2d 385 (Mo. Ct. App. 1983), and
Consumers Distributing Co. v. Hermann, 812 P.2d 1274 (Nev. 1991) (per curiam). It
then summarized its “magnitude of the damage” arguments as follows:
This case is more like Cammack the Cook, Creative Cabinets,
and Longmier. Here, defendant’s treatment of the property resulted in
significant damage. Upon inspection, plaintiff discovered damage
including broken fixtures, thermostats and signs, along with damage to
-8-
the walls, the floor, and support columns. In contrast to Consumers,
this amounted to major structural damage. Two contractors were
required to make all of the appropriate repairs. Many of the columns
that supported the roof had to be restored. At one point, the roof
required extra support while the columns were repaired. A structural
engineer was required to assess whether the repair to the damaged
columns was sufficient to support the weight of the roof; an engineer
was also necessary to inspect the welding of the columns. This was not
simple touch-up work.
Aplt. App. at 42-43.
In sum, Fairfax argued to the district court that it was entitled to summary
judgment on the holdover issue based on two separate and distinct theories. First,
Fairfax argued that it was entitled to summary judgment based on the provisions in
the lease agreement. Second, Fairfax argued that it was entitled to summary
judgment by operation of law due to the extreme nature of the damage that Owens
Corning allegedly caused to the leased premises. As explained more fully below, the
district court referred to the latter theory as Fairfax’s “constructive holdover” theory.
D. The District Court’s Summary Judgment Rulings
The district court entered two orders regarding the parties’ cross-motions for
summary judgment. The first order was entered on January 17, 2012, and the second
order was entered on April 5, 2012. Both orders are germane to this appeal, and we
therefore discuss them in turn.
1. The Order Entered by the District Court on January 17, 2012
In its first summary judgment order, the district court stated that “[t]he issue
before the court—as framed by plaintiff—is whether, under Kansas law, a tenant
-9-
who, at the expiration or termination of a lease of a commercial warehouse, retains
possession of the property in order to repair structural damage is considered a
‘holdover tenant’ for the time necessary for the tenant to make the repairs.” Aplt.
App. at 372. Although the court acknowledged that “the Kansas Supreme Court has
not decided the particular question presented by this set of facts,” id. at 375, the court
nonetheless denied Fairfax’s motion to certify a question of law to the Kansas
Supreme Court under Kan. Stat. § 60-3201. The court explained that it “is often
required to predict how the Kansas courts would decide particular questions of state
law,” Aplt. App. at 375, and the court concluded that “certification would [not]
conserve the time, energy, and resources of the parties or the court,” id.
Having denied the motion to certify, the court then proceeded to address the
merits of Fairfax’s argument that it was entitled to summary judgment on its claim
for holdover rent based on the terms of the lease. As the court noted, Fairfax
“argue[d] that it [was] entitled to summary judgment because the terms of the lease
create[d] a holdover tenancy where property [was] not returned in proper condition.”
Id. at 376. The court rejected this argument, however, because it determined that
“[t]he terms of the lease do not unambiguously dictate that defendant should be
treated as a holdover tenant on the facts presented.” Id. The court explained its
reasoning as follows:
Section 18 of the lease agreement requires defendant, upon
expiration of the lease term, to surrender the property in good repair. It
then states, in the next paragraph, that a tenant “hold[ing] over” after the
expiration of the lease becomes a month-to-month tenant at a rate of
- 10 -
150 percent rent. Although these surrender conditions and holdover
provisions appear in the same section of the lease agreement, they are in
two distinct paragraphs. Plaintiff points to this proximity for the
proposition that failure to surrender the property “in broom-clean
condition”—as opposed to mere failure to surrender—triggers the
holdover provision. The court is unconvinced.
The court finds that the contract is not ambiguous. Ambiguity
does not arise unless there is genuine uncertainty as to which of two or
more possible meanings is proper; where in common sense there is no
ambiguity, the court will not strain to create ambiguity. Crescent Oil
Co., Inc., v. Federated Mut. Ins. Co., 888 P.2d 869, 872-73 (Kan. Ct.
App. 1995). Despite plaintiff’s arguments, the plain and ordinary
meaning of the term “holding over” in this section of the lease
agreement refers to the failure to surrender property, not failure to make
required repairs or failure to surrender in a particular condition. See
49 Am. Jur. 2d § 354 (1995) (stating that “[a] tenant who does not
abandon or relinquish the premises after the lease expires or is lawfully
declared terminated by the lessor, but who remains in possession, is
holding over”)[1]; Black’s Law Dictionary (9th Ed. 2009) (defining
“holdover tenant” as “[a] person who remains in possession of real
property after a previous tenancy (esp. one under a lease) expires, thus
giving rise to a tenancy at sufferance”). Plaintiff offers no evidence that
the parties intended any other meaning, and it would defy common
sense to read section 18 as triggering the holdover provision where a
tenant has surrendered the property but makes certain repairs after the
expiration of the lease.
Id. at 378.
The court next addressed “the issue of whether, putting aside the terms of the
lease, the defendant should nevertheless be treated as a holdover tenant by operation
of law.” Id. at 379. As the court noted, this issue arose during the parties’ summary
1
We note that the language quoted by the district court from 49 Am. Jur. 2d
§ 354 is now located in 49 Am. Jur. 2d § 275.
- 11 -
judgment briefing, and the court referred to it as Fairfax’s “constructive holdover”
theory.
The court began its analysis of Fairfax’s “constructive holdover” theory by
denying both parties’ requests for summary judgment on the theory. According to
the court, the cases argued by the parties in the summary judgment briefing indicated
that the question of whether to impose a holdover tenancy by operation of law in a
repair case depends on the “nature of the damage” to the leased property and the
“usability and/or leasability of the property” during the time that the tenant is making
repairs, and the court determined that “these facts are disputed” in this case. Id. This
did not end the court’s inquiry, however, because the court went on to note that
Fairfax had only asserted a claim for breach of contract in the pretrial order. As a
result, “[e]ven if the Kansas courts would permit a landlord to pursue damages based
on a ‘constructive holdover’ theory, the court [was] uncertain that such a theory can
arise from a breach of contract claim.” Id. at 381. The court “therefore directed
[Fairfax] to show cause why it should be permitted to pursue this ‘constructive
holdover’ theory at trial,” and it set a briefing schedule for both sides to submit briefs
on the issue. Id.
2. The Order Entered by the District Court on April 5, 2012
At the time the district court entered its second summary judgment order, the
court had received the parties’ briefs concerning the issue of whether Fairfax should
- 12 -
be permitted to pursue a “constructive holdover” theory at trial. As a result, the court
was “ready to rule” on that issue. Id. at 398.
Before addressing Fairfax’s “constructive holdover” theory, however, the court
summarized its earlier ruling regarding Fairfax’s “contractual holdover” theory.
Specifically, the court reiterated that it “held that the contract is not ambiguous: the
plain and ordinary meaning of the term ‘holding over’ in Section 18 of the lease
agreement refers to the failure to surrender property, not failure to make required
repairs or failure to surrender in a particular condition.” Id. at 400.
Given the district court’s holding concerning Fairfax’s “contractual holdover”
theory, Fairfax’s claim for holdover rent depended solely on whether the court would
permit it to pursue a “constructive holdover” theory. In its second summary
judgment order, the court decided not to permit Fairfax to pursue such a theory. The
court’s reasoning was as follows:
Plaintiff chose to limit its case initially by pursuing the narrow
theory that defendant breached the holdover provision in the lease. (Its
reasoning for doing so could be that success on this claim would entitle
it to 150 percent rent as opposed to some lessor amount). Plaintiff
might have argued, on the undisputed facts, a general breach, or that
defendant breached other obligations under the lease—such as the
obligation to maintain the premises under Section 10A or to repair
damage as required in Section 32. But plaintiff has never raised these
as grounds for relief. As defendant notes, plaintiff initially pleaded, and
consistently pursued, a single theory that the express holdover provision
in the lease required defendant to pay rent at 150% of the lease rate for
every month that the repair construction continued after expiration of
the lease. The court has held that the holdover provision plaintiff seeks
to enforce is not triggered by the facts.
- 13 -
The court does not believe that plaintiff should now be permitted
to proceed on a theory of “constructive holdover,” which first appeared
in briefing on summary judgment. The court finds that this is merely an
attempt to use common law concepts—which are not clearly authorized
under Kansas law—to pursue the benefit of the 150 percent penalty
contained in the holdover provision that the court has already held is
inapplicable here.
Id. at 402-03 (footnote omitted).
Because the district court rejected both Fairfax’s “contractual” and its
“constructive” holdover theories, the court concluded in its second summary
judgment order that Owens Corning was entitled to summary judgment on Fairfax’s
claim for holdover rent and on its counterclaim for the return of its security deposit.
The court therefore entered a judgment in favor of Owens Corning in the amount of
$42,102.08.
E. Disposition of This Appeal
We commend the district court for its thorough and well-reasoned summary
judgment orders, and we summarily affirm the rulings of the district court.
First, with regard to Fairfax’s “contractual holdover” theory, we conclude that
the district court correctly applied Kansas law in determining that the lease
agreement “is not ambiguous: the plain and ordinary meaning of the term ‘holding
over’ in Section 18 of the lease agreement refers to the failure to surrender property,
not failure to make required repairs or failure to surrender in a particular condition.”
Id. at 400. We also agree that it is undisputed that Owens Corning vacated and
surrendered the leased premises to Fairfax in December 2009. In fact, Fairfax
- 14 -
specifically alleged in its September 9, 2011, Memorandum in Support of Motion for
Summary Judgment that “[Owens Corning] vacated the premises in December of
2009.” Id. at 26, ¶ 4. Accordingly, we affirm the district court’s entry of summary
judgment in favor of Owens Corning on Fairfax’s “contractual holdover” theory, and
we see no reason to certify a question of law to the Kansas Supreme Court.
Second, in the briefs it has submitted to this court, Fairfax has utterly failed to
challenge the district court’s determination that it is barred from pursuing its
“constructive holdover” theory because it failed to preserve the theory in the pretrial
order. As a result, Fairfax has waived its right to appeal that ruling. See LifeWise
Master Funding v. Telebank, 374 F.3d 917, 927 n.10 (10th Cir. 2004) (concluding
that appellant waived its right to appeal rulings of district court that it did not
substantively address in its opening brief); Adler v. Wal-Mart Stores, Inc., 144 F.3d
664, 679 (10th Cir. 1998) (“Arguments inadequately briefed in the opening brief are
waived . . . .”). In addition, because this waiver is a matter of federal law, we again
see no reason to certify a question of law to the Kansas Supreme Court.
The judgment of the district court is affirmed. Fairfax’s motion to certify is
denied.
Entered for the Court
Wade Brorby
Senior Circuit Judge
- 15 -