Unpublished Disposition, 931 F.2d 61 (9th Cir. 1987)

No. 89-55609.

United States Court of Appeals, Ninth Circuit.

Before REINHARDT, CYNTHIA HALL, Circuit Judges, and RE,^*  Chief Judge.

MEMORANDUM^** 

Westor Associates ("Westor") sued Shurgard Income Properties Eleven ("Shurgard") for breach of contract, breach of the covenant of good faith and fair dealing, and bad faith denial of the existence of the contract. Shurgard counterclaimed for breach of contract. After a bench trial the district court awarded Westor only $6,637.11 in damages, rather than the more that $200,000 in damages claimed by Westor, and Westor now appeals.

* Prior to October 1986, Westor entered into an escrow on a parcel of land located in west Los Angeles ("the Westwood Property"). Shurgard became interested in acquiring the Westwood Property for construction and operation of a self-storage facility, and entered into negotiations with Westor for acquisition of the project. After Shurgard's Real Estate Investment Committee approved the acquisition, Westor and Shurgard entered into the Agreement of Purchase and Sale of Escrow Agreement Respecting Land and Joint Escrow Instructions ("the Agreement").

The Agreement provided that Shurgard would pay Westor $1,085,000.00 for an assignment of Westor's position in escrow, exclusive of the cost of the land itself, together with the plans and specifications Westor had developed and submitted to Shurgard. Those plans delineated a building with four floors above ground level and one floor below ground, or "4-up/1-down," which yielded approximately 38,705 square feet of rentable space.

In November 1986, the voters of the City of Los Angeles approved Proposition U ("Prop U"), which changed building code requirements in the district in which the Westwood Property is located, and made the contemplated 4-up-1-down design unlawful without a specific discretionary approval.

The parties entered into a series of amendments to their original agreement in response to Prop U. The instant dispute revolves around the amendment agreed to on March 12, 1987 ("Second Amendment"). Among other things, the Second Amendment: (1) provided that the parties would use their best efforts to obtain a height district change order permitting construction of the original 4-up/1-down design; (2) provided for an adjustment to the purchase price, calculated according to a "Shared Allocation" formula, in the event that Westor could obtain a building permit for a redesigned facility of not less than 50,000 square feet of net rentable space, which redesigned facility was acceptable to Shurgard and in compliance with applicable building codes as amended by Prop U; (3) required that Shurgard and Westor share equally in all costs for the redesign of the facility to comply with Prop U and in seeking the height district change order for the original design. See Second Amendment. The parties agree that in order for the redesigned facility to be "acceptable" to Shurgard, it had to be capable of yielding at least the same return to Shurgard's investors as the facility approved by Shurgard's Real Estate Investment Committee, taking into account any payments to be made by Shurgard to Westor under the allocation provision.

In connection with their attempt to redesign the facility, both Westor and Shurgard hired architectural firms. Westor hired Martin & Dvoretzky to prepare a proposal for a redesigned facility that would provide over 50,000 square feet of rentable space. Shurgard hired Ruhl-Parr & Associates to provide consulting services regarding design issues and to provide interior layouts.

In September 1987, as cost estimates neared completion, Shurgard informed Westor that it was concerned about costs and the overall economic value and rate of return for the redesigned facility. In October 1987 Shurgard advised Westor that because of the increased costs of constructing the proposed redesigned facility and insufficient rentable area and revenues, the redesigned facility was not "acceptable."

Westor subsequently filed suit against Shurgard, alleging breach of contract, breach of implied covenant of good faith and fair dealing, and bad faith denial of the existence of a contract. The instant appeal concerns only the first cause of action, in which Westor claimed that Shurgard breached the parties' amended contract in two ways: first, by failing to "accept" the redesigned facility and make payment under the "Shared Allocation" provision of the Second Amendment; second, by failing to pay Westor certain reimbursable expenses. Shurgard counterclaimed, alleging that Westor had also failed to pay certain reimbursable expenses.

The district court awarded Westor $6,637.11. This figure was the result of three decisions. First, the district court awarded Westor $16,956.02 in Westor's action for breach of contract based on Shurgard's share of the costs incurred by Westor when Westor was seeking to redesign the facility. Second, the district court refused to award Westor any "Shared Allocation" on the grounds that Shurgard's decision not to accept Westor's proposed redesigned facility was reasonable and made in good faith.¹  Third, the district court awarded Shurgard $10,318 on its counterclaim for reimbursement under the Second Amendment for expenses relating to Shurgard's employment of Ruhl-Parr to help with the interior layout of the redesigned facility. Westor appeals these last two decisions; Shurgard does not appeal.

II

The parties disagree about the appropriate standard of review in this case. In fact, the standard is clear, if complex:

"When the district court's decision on contract interpretation is based on an analysis of the contractual language and an application of the principles of contract interpretation, that decision is a matter of law and reviewable de novo. When the inquiry focuses on extrinsic evidence of related facts, however, the trial court's conclusions will not be reversed unless they are clearly erroneous.

Kern Oil & Refining Co. v. Tenneco Oil Co., 840 F.2d 730, 736 (9th Cir. 1988) (citations omitted), cert. denied, 488 U.S. 948.

The district court in the instant case considered extrinsic evidence to aid its interpretation of the contract, and neither party contests the propriety of its having done so. As such, the district court's conclusions are reviewed under the clearly erroneous standard.

III

The district court's conclusion that Shurgard reasonably exercised its right to accept or reject Westor's plan is not clearly erroneous.²  Westor admits that the reasonableness of Shurgard's decision turns on the rate of return likely to have been produced by Westor's redesigned facility. Nevertheless, Westor has failed to give this court any information indicating that the redesigned facility would produce a return to Shurgard equal to or greater than the original proposal.

Westor does argue that the income from the redesigned facility would have been greater, but this alone does not show that the rate of return would have been greater. For the rate of return is the percentage return on the investment. See R.T. 2-15-89, 140:14--19. The absolute amount of income thrown off by the investment is only one component of this concept. For example, a one hundred dollar investment that returns twenty-five dollars per year gives a "rate of return" of 25% per year. Similarly, a $100,000 investment that returns one thousand dollars per year has a "rate of return" of only 1%. The first investment, although it throws off less income in absolute terms, has a much higher "rate of return" than the second. Westor has failed to show that the redesigned facility would have generated more revenue than the original plan in proportion to the investment that the redesigned facility would have required. See, e.g., Grey at 3.

Moreover, there was conflicting testimony as to whether the design that Westor proposed would in fact produce the amount of revenue that Westor claimed. Westor's claim was primarily based on a survey of the rates charged per square foot by other facilities in the area that one architectural firm, not employed by either party for design, considered "comparable" to the proposal. R.T. 2-16-89, 68:1--75:16. Shurgard responded that none of Westor's plans produced space that Shurgard, in light of its experience in the industry, could expect to produce an acceptable return. R.T. 2-16-89, 15--38; 93; 130--132. The trial court's decision to credit Shurgard's witnesses over Westor's witnesses was not clearly erroneous. Thus, the district court's conclusion that Westor failed to prove Shurgard unreasonably rejected the redesigned facility was not clearly erroneous.

IV

Westor claims that it has no obligation to Shurgard to reimburse Shurgard for Ruhl-Parr's fees on the grounds that Ruhl-Parrs fees concerned the inside of the structure. The language of the Second Amendment to some extent belies this claim:

Shurgard and Westor shall share equally in all costs in proceeding with the redesign of the Facility ... and shall pay equal amounts to the respective payees or shall reimburse the other party to the extent that it has incurred expenses to be shared hereunder.

Second Amendment, Para 6.

Thus, the Amendment contemplates that "all costs" of redesign will be shared, and Shurgard's need to design an interior suitable for the carrying on of its business in a novel type of facility seems to be a necessary cost of design. Moreover, the district court's conclusion that the parties through the Second Amendment reacted to Prop U problems by creating an arrangement in the nature of a "joint venture" in which profits and costs would be shared does not seem clearly erroneous in light of the Second Amendment and the trial record.³ 

The district court's judgment is AFFIRMED.

REINHARDT, Circuit Judge, dissenting:

I respectfully dissent. As the majority indicates, the essential issue in the district court was whether Westor was able to redesign the facility in a manner that would provide at least the same rate of return as originally contemplated. I do not think the district judge ever focused on that issue clearly. Specifically, I do not believe he made findings that answer the critical question. Instead, the district court said that: (1) the defendant would not have turned down the deal if it thought that it was a good one; and (2) the defendant's actions were not arbitrary or capricious. Those findings are, in my view, non-responsive. I would remand to the district court with directions to make specific findings as to whether under Westor's revised proposal it was likely that Shurgard would receive the contemplated rate of return.