Unpublished Disposition, 859 F.2d 924 (9th Cir. 1987)

MEMORANDUM^* 

Viacao Aerea Sao Paulo (VASP) filed suit against International Lease Finance Corporation (ILFC), alleging that ILFC breached an aircraft sublease agreement by refusing to refund Maintenance Reserve payments and a Security Deposit after the subleased airplane was completely destroyed in a crash. The district court granted summary judgment for ILFC, finding that according to the unambiguous language of the sublease, VASP was only entitled to a refund if it had exercised the purchase option. We affirm in part, reverse in part and remand for trial.

FACTS AND PROCEEDINGS BELOW

VASP is a Brazilian corporation engaged in providing commercial air transportation. ILFC is a California corporation that leases aircraft to commercial airlines.

On May 7, 1980, VASP and ILFC entered into a sublease agreement whereby ILFC subleased to VASP a Boeing 727 that ILFC had previously lease-purchased from Singapore Airlines, Ltd. (SAL). The initial term of the sublease was from June 6, 1980 through June 6, 1982. In December, 1981, the parties extended the sublease period through September 17, 1982.

On May 20, 1980, VASP paid to ILFC a $250,000 "Security Deposit." Under Article 4.1.1. of the sublease, this amount would "be refunded upon Lessee's purchase of the Aircraft at the expiration of the Initial Term per 3.2.1. above."

In accordance with Articles 4.1 and 10.7 of the sublease, VASP paid rent to ILFC in quarterly installments of $506,000. VASP also made monthly payments based on actual aircraft usage to fund a Maintenance Reserve. These payments totalled $1,326,682.72. Under Article 4.2, the Maintenance Reserve payments would "be retained by the Lessor upon termination of the sublease for whatever cause except in the event Lessee purchases the Aircraft at expiration of this Lease."

The sublease granted VASP the option to purchase the aircraft. To exercise this option, VASP had to give notice at least 180 days before the expiration of the initial term. The stated purchase price was $11,019,000 "less the Maintenance Reserve accumulated under Article 4.1 and less the Security Deposit of $250,000 tendered at the commencement of the Initial Term...." VASP never exercised this purchase option.

Under Article 10.7, in the event the aircraft became a total loss, VASP had the obligation to pay or cause to be paid to ILFC the Agreed Replacement Value of $14,000,000. Once this amount was paid, "the term of the sublease shall end and the Lessee shall thereupon obtain title to the Aircraft free and clear of all rights of the Lessor but otherwise without recourse or warranty and, if so requested by the Lessee, the Lessor shall execute or cause to be executed an appropriate bill of sale with respect to the Aircraft." (emphasis added).

Throughout the sublease period, VASP maintained standard Brazilian Aviation Insurance on the aircraft issued by the Insurance Company of the State of Sao Paulo (COSESP). SAL and ILFC were listed as the loss payees.

On June 8, 1982, the aircraft was completely destroyed in a crash in a remote area of Brazil. The aircraft was determined to be a total loss. VASP caused the full amount of insurance proceeds, $14,000,000, to be paid over directly to ILFC and SAL on or about July 9, 1982. On June 24, 1982, SAL and ILFC released all rights against VASP's insurer. Neither VASP nor the insurer requested a bill of sale.

On May 18, 1983, VASP requested that ILFC refund the unused Maintenance Reserve payments ($1,326,686.72), and the $250,000 Security Deposit. ILFC refused.

VASP filed suit against ILFC alleging breach of contract and tortious conversion. VASP moved for summary judgment on November 17, 1986. The district court denied the motion, finding that the sublease was ambiguous and that it would be necessary to consider extrinsic evidence. On August 31, 1987, ILFC moved for summary judgment. The court granted ILFC's motion finding that the language of the sublease was clear and that payment of the Agreed Replacement Value was not a "purchase" so as to entitle VASP to refunds. This timely appeal followed.

STANDARD OF REVIEW

This court reviews the grant or denial of summary judgment de novo. This court views all the evidence in the light most favorable to the nonmoving party and determines whether there is a genuine issue of material fact, and if not, whether the district court correctly applied the substantive law. See Idaho v. Hodel, 814 F.2d 1288, 1292 (9th Cir.), cert. denied sub. nom. Coeur D'Alene Tribe of Indians v. Idaho, 108 S. Ct. 159 (1987). The district court's construction of a contract based on an analysis of the contractual language and principles of contract interpretation is reviewed de novo. Miller v. Safeco Title Ins. Co., 758 F.2d 364, 367 (9th Cir. 1985). Whether or not a contract is ambiguous is also a question of law. Beck Park Apts. v. United States Dept. of Housing & Urban Dev., 695 F.2d 366, 369 (9th Cir. 1982).

ANALYSIS

The district court found that the sublease was unambiguous. It held that VASP was not entitled to a refund of the Security Deposit (under Article 4.1.1) or the Maintenance Reserves (under Article 4.2) because VASP's payment of the Agreed Replacement Value in accordance with Article 10.7 did not constitute a "purchase" of the aircraft. In other words, VASP would only have been entitled to the refunds if it had exercised the Article 3.2.1 purchase option.

VASP argues that this ruling was in error for three reasons. First, the sublease on its face was susceptible of two interpretations. Second, VASP offered extrinsic evidence that raised a genuine issue of material fact. And third, principles of California contract law¹  dictate a result in favor of VASP.

The California Civil Code provides that: "The language of a contract is to govern its interpretation, if the language is clear and explicit, and does not involve an absurdity." Cal.Civ.Code Sec. 1638 (West 1985). A contract is ambiguous when on its face it is capable of two different reasonable interpretations. See Wechsler v. Capitol Trailer Sales, Inc., 220 Cal. App. 2d 252, 33 Cal. Rptr. 680, 687 (1963).

We find that the sublease is unambiguous with regard to the $250,000 Security Deposit. Under Article 4.1.1, the $250,000 would be refunded if VASP purchased the aircraft "at the expiration of the Initial Term per 3.2.1 above." The "Initial Term" is defined in Article 3.1 as running for two years from the date of delivery of the aircraft. The term thus expired June 6, 1982. Article 3.2.1 refers to the option to purchase. It is undisputed that VASP did not exercise the Article 3.2.1 purchase option within the Initial Term.

VASP argues, however, that Article 4.1.1 is unclear because it does not expressly state that the deposit would be retained by ILFC unless VASP exercised the purchase option. Article 4.1.1 simply specifies one instance where the deposit would be refunded without precluding other possibilities. This is a strained reading of the contractual language. The sublease specifically states that the $250,000 "will be held by Lessor." Certainly, Article 4.1.1 does only specify one circumstance where the deposit would be refunded, but the sublease nowhere states or even implies that the deposit would be refunded if VASP paid the Agreed Replacement Value.

Article 4.2, dealing with the Maintenance Reserve payments, is more problematic. Under Article 4.2, ILFC would retain the Maintenance Reserve upon termination of the sublease unless VASP purchased the aircraft at the expiration of the lease. Unlike Article 4.1.1, 4.2 does not refer to the "Initial Term" or to Article 3.2.1. ILFC argues that despite the absence of any reference to the purchase option section of the sublease, "purchase" in Article 4.2 refers only to the exercise of the purchase option.²  VASP contends, on the other hand, that VASP's payment of the Agreed Replacement Value under Article 10.7 constituted a purchase of the aircraft. Article 10.7 never uses the term "purchase." Under Article 10.7, however, upon total loss of the aircraft and payment of the Agreed Replacement Value, "the term of the sublease shall end and [VASP] shall thereupon obtain title to the Aircraft...." VASP was also entitled to a bill of sale upon request.

The sublease provides that VASP was entitled to a refund of the Maintenance Reserves if it "purchased" the aircraft. The sublease does not specify that this "purchase" must be made pursuant to the option in Article 3.2.1. This case turns on whether "purchase" as used in the sublease is reasonably susceptible of differing interpretations. The sublease does not define the term "purchase." Words in a written contract must be given their ordinary and popular sense unless there is evidence the parties intended otherwise. Cal.Civ.Code Sec. 1644 (West 1985); Northridge Hosp. Found. v. Pic 'N' Save, 187 Cal. App. 3d 1088, 1095 n. 4, 232 Cal. Rptr. 329, 333 n. 4 (1986). The dictionary definition of "purchase" is "to obtain (as merchandise) by paying money or its equivalent: buy for a price." Webster's Third New Int'l Dictionary 1844 (1976). Under Article 10.7, VASP paid to ILFC an agreed-upon amount, took title to the aircraft, and was entitled to a bill of sale.

Moreover, the language of a contract is to be construed in light of the purposes of the parties to the agreement. See Leo F. Piazza Paving Co. v. Foundation Constructors, Inc., 128 Cal. App. 3d 583, 591, 177 Cal. Rptr. 268, 273 (1981). The purpose of the Maintenance Reserve lends support to VASP's interpretation. As stated in the district court's Statement of Uncontroverted Facts, the purpose of the Maintenance Reserve was to cover the cost of major overhauls of the aircraft. If VASP purchased the aircraft, ILFC would not bear the cost of an overhaul and so had no need for the Reserves. Similarly, because the plane was completely destroyed, ILFC will never need to finance an overhaul. The purpose for the Maintenance Reserves no longer exists.

Therefore, we find that the contract on its face is reasonably susceptible of both VASP's and ILFC's interpretations. The key term, "purchase" is undefined in the sublease. Under Article 10.7, money is paid and merchandise received in return. This transaction could fall within the common definition of "purchase." We do not find the absence of the specific word, "purchase" in Article 10.7 to be determinative.

The extrinsic evidence presented by the parties on summary judgment supports our view that the contract is ambiguous. In California, extrinsic evidence is admissible as a preliminary matter to ascertain the parties' intent, whether or not the contract appears ambiguous on its face. "The test of admissibility of extrinsic evidence to explain the meaning of a written instrument is not whether it appears to the court to be plain and unambiguous on its face, but whether the offered evidence is relevant to prove a meaning to which the language of the instrument is reasonably susceptible." Pacific Gas & Elec. Co. v. G.W. Thomas Dravage & Rigging Co., 69 Cal. 2d 33, 442 P.2d 641, 644, 69 Cal. Rptr. 561, 564 (1968) (emphasis added).

VASP presented evidence of a telex from the president of VASP to ILFC dated June 24, 1982 stating that payment of the Agreed Replacement Value would effect a purchase and entitle VASP to refunds under Article 4. ILFC did not respond to this telex. When a contract is uncertain, the court may look at the subsequent conduct of the parties to ascertain how they construed the contract. See Munier v. Hawkins, 190 Cal. App. 2d 655, 12 Cal. Rptr. 274, 279 (1961). Although the telex is certainly not conclusive as to the parties' intent at the time of contracting, it is relevant to VASP's understanding and precludes a finding that the contract is unambiguous as a matter of law.

VASP also presented the depositions of VASP negotiators Fernando Fernandes and Jose Martinelli. The negotiators testified that they believed VASP would be entitled to Security Deposit and Maintenance Reserve refunds in the event of a crash. Both admitted, however, that this issue was not discussed during contract negotiations. The deposition testimony shows what the VASP negotiators believed the contract to mean. Again, this supports VASP's contention that the contract is ambiguous and precludes summary judgment.

The extrinsic evidence offered by ILFC does not shed light on this apparent ambiguity. ILFC offered evidence that under Brazilian insurance law, VASP could not have obtained title to the aircraft following payments of the insurance proceeds. ILFC discusses "subrogatory abandonment," whereby VASP abandoned any interest in the aircraft as of the day of the crash, in exchange for the insurer's payment to ILFC. VASP argues that this evidence should not be considered because: 1) it contradicts the terms of Article 10.7 of the sublease, 2) it focuses on a wholly separate contract, and 3) the argument regarding Brazilian law is wrong on its face.

We do not decide whether the district court should or should not have admitted this evidence. Even if ILFC's discussion of Brazilian insurance law is accepted as relevant and correct, it does not compel summary judgment in favor of ILFC. ILFC's argument does not conclusively demonstrate that VASP did not "purchase" the aircraft. All that ILFC's argument shows is that once the insurer paid ILFC, VASP abandoned its rights to the salvage to the insurer. Title to the aircraft could thus have passed through VASP to the insurer. Moreover, the insurance contract between VASP and COSESP provided: "Insurers accept conditions of the Leasing Agreement entered into by International Lease Finance Corporation and Viacao Aerea Sao Paulo, S/A with respect to Article 10 of ... [the Sublease]." Under Article 10, VASP took title to the aircraft after complete destruction and payment to ILFC of the Agreed Replacement Value.

Thus, the extrinsic evidence offered by the parties at the summary judgment stage of this litigation, particularly the VASP telex and the testimony of the VASP negotiators, underscores that the language is unclear and susceptible to differing reasonable interpretations.³  When a contract is ambiguous or uncertain, the trial court should construe it after a full opportunity for the parties to present evidence of the conduct of the parties and the facts surrounding the execution of the contract. See Lynch v. Spilman, 67 Cal. 2d 251, 431 P.2d 636, 646, 62 Cal. Rptr. 12, 22 (1967). The question of the meaning of the contract should be tried on the merits and "the drastic procedure of summary judgment [can] not be resorted to as a substitute." Lynch, 431 P.2d at 646, 62 Cal. Rptr. at 22; see also Beck Park Apts., 695 F.2d at 369.

VASP argues that it is entitled to summary judgment based on the plain language of the sublease and on California principles of contract interpretation. As discussed above, the language of the sublease is unclear as to whether the payment of the Agreed Replacement Value is a "purchase." The extrinsic evidence offered by the parties thus far does not clear up the ambiguity. Finally, the contract law cited by VASP at most suggests that summary judgment for ILFC was improper.⁴ 

Summary judgment in favor of VASP is thus improper for the same reason it was improper in favor of ILFC. The contract is ambiguous and its meaning is therefore a factual question to be tried on the merits. See Lynch, 431 P.2d at 646, 62 Cal. Rptr. at 22; see also Beck Park Apts., 695 F.2d at 369.

VASP also appeals the denial of its April 31, 1987 motion for partial summary judgment wherein VASP sought to strike ILFC's nine affirmative defenses. The district court did not rule on the motion as it granted summary judgment for ILFC. On appeal, VASP argues for summary judgment on ILFC's First (failure to state a claim), Fifth (waiver), Sixth (consent) and Eighth (failure of consideration because of nonoccurrence of condition precedent) Affirmative Defenses.

The First and Eighth Affirmative Defenses are properly considered along with the merits. Whether VASP has failed to state a claim and whether the exercise of the purchase option was a condition precedent are directly related to whether VASP's payment of the Agreed Replacement Value was a "purchase."

The waiver and consent affirmative defenses are duplicative. ILFC claims that VASP has waived its right to a refund of the Maintenance Reserve and Security Deposit based on the following facts. Following the crash of the aircraft on June 8, 1982, VASP paid the Maintenance Reserves for May. On July 14, 1982, following distribution of the insurance proceeds, VASP paid the June Maintenance Reserves that were offset against an unused rental payment. During the period that these claims were being settled, VASP did not make a demand for refund of the Maintenance Reserves. The formal demand was made May 18, 1983.

VASP argues that, as a matter of law, ILFC cannot establish a waiver defense because ILFC has failed to show or even allege substantial prejudice. Moreover, because of the legal presumption against waiver, ILFC has not presented sufficient facts to support the defense. Implied waiver is a viable defense in California. A waiver may result from conduct " 'which, according to its natural import, is so inconsistent with the intent to enforce the right in question as to induce a reasonable belief that such right has been relinquished.' " Rubin v. Los Angeles Fed. Sav. & Loan Assn., 159 Cal. App. 3d 292, 298, 205 Cal. Rptr. 455, 459 (1984). And contrary to VASP's assertion, detrimental reliance is not a necessary element of waiver. Id. Finally, waiver is a question of fact. See Hennefer v. Butcher, 182 Cal. App. 3d 492, 503, 227 Cal. Rptr. 318, 324 (1986). The district court here has never ruled on the waiver defense. Because the defense involves questions of fact and intent, we do not resolve it on this appeal from summary judgment.

CONCLUSION

The sublease is clear that VASP was only entitled to a refund of the $250,000 Security Deposit if it exercised the purchase option during the initial term. With regard to the Maintenance Reserve, however, we find that the language of the sublease is susceptible of two reasonable interpretations. It is unclear whether a "purchase" under Article 4.2 means solely an exercise of the purchase option under Article 3.2.1 or could include the payment of the Agreed Replacement Value and transfer of title under Article 10.7.

Therefore, we AFFIRM the grant of summary judgment for ILFC with regard to the Security Deposit, REVERSE with regard to the Maintenance Reserves, and REMAND for trial. We AFFIRM the denial of VASP's motions for summary judgment and for partial summary judgment.

AFFIRMED in part; REVERSED in part; REMANDED for trial.

FARRIS, Circuit Judge, concurring:

The record suggests that the parties failed to consider the disposition of the Maintenance Reserve fund in the event that the aircraft was destroyed. The only reference in the sublease to the Maintenance Reserve is Article 4.2, which provided that ILFC would retain the Maintenance Reserve "except in the event Lessee purchases the Aircraft at expiration of this Lease." Article 4.1.1 provided that the Security Deposit "will be refunded upon Lessee's purchase of the Aircraft at the expiration of the Initial Term per 3.2.1 above." Article 3.2.1 set out an option to purchase, which VASP did not exercise. The lease does not include a definition of "purchase".

ILFC argues that "purchase" has the same meaning for the Maintenance Reserve as it does for the Security Deposit. The district court agreed. VASP argues that payment of the insurance proceeds to ILFC constitutes a purchase, in part because Article 10.7 provides that after payment to ILFC of the Agreed Replacement Value "the term of the sublease shall end and [VASP] shall thereupon obtain title to the Aircraft." The agreed replacement value was paid to ILFC.

If a "purchase" by VASP did not result from the payment of the insurance proceeds, ILFC did not breach the Maintenance Reserve provision by retaining the Reserve payments. The defect in VASP's argument is the failure of the lease agreement to indicate the intent of the parties to treat receipt of insurance proceeds by the lessor as purchase by the lessee. Such a provision should not be implied since the standards for implying additional terms to a contract are substantial and not present here. See Kessler v. General Cable Corp., 92 Cal. App. 3d 531, 542, 155 Cal. Rptr. 94, 101 (1979). In a practical sense, VASP could hardly "purchase" an aircraft that was no longer in existence.

Nonetheless, I concur in the majority opinion because the question is a close one and there are perhaps unresolved questions of material fact. Whether usage of the word "purchase" in the Maintenance Reserve provision was meant to encompass the payment of insurance proceeds to ILFC and thereby transfer title to the airplane to VASP turns on the intent of the parties and will therefore require the consideration of extrinsic evidence by the district court. See Pacific Gas & Elec. Co. v. G.W. Thomas Drayage & Rigging Co., 69 Cal. 2d 33, 442 P.2d 641, 644-46, 69 Cal. Rptr. 561, 564-67 (1968). I would have required a stronger showing by the moving party to justify remand but because the record is less than crystal clear, I concur.