Unpublished Disposition, 848 F.2d 199 (9th Cir. 1986)Annotate this Case
ULTRAMAR AMERICA LIMITED, a Delaware corporation, Plaintiff/Appellant,v.Thomas W. DWELLE, individually and as Trustee of the WalterB. Allen, Jr. Trust and the Marjorie Allen DwelleTrust Created Under the Will of AnneAllen, et al., Defendants-Appellees.
Nos. 87-5731, 87-5867.
United States Court of Appeals, Ninth Circuit.
Argued and Submitted March 11, 1988.Decided May 20, 1988.As Amended June 2, 1988.As Amended July 21, 1988.
Before FARRIS and REINHARDT, Circuit Judges, and M.D. CROCKER,** Senior District Judge.
Appellant Ultramar American Limited (Ultramar) and appellees Thomas W. Dwelle, et al., former shareholders of Beacon Oil Company (Beacon), entered into a Stock Purchase Agreement on November 23, 1981 (closing date), whereby Ultramar purchased all of the shares of Beacon. Pursuant to the Agreement, $8,850,000 of the purchase price was deposited in an escrow fund to secure payment to Ultramar for any valid and cognizable indemnity claims made by Ultramar under the SPA for a period of five years after closing (cut-off date). The dispute here involves the parties' rights as to the escrow fund.
The Agreement provided Ultramar with recourse to the escrow fund for indemnity claims to the extent that the claims were not disputed or were resolved in Ultramar's favor pursuant to the indemnity provisions. The Agreement further provided that disputed claims not resolved under the indemnity provisions should be resolved by judicial proceedings. After five years, the remainder of the principal of the fund was to be distributed to the Beacon shareholders less sufficient funds to indemnify any claims asserted during the five-year life of the escrow fund but remaining unresolved and unpaid.
At issue are three environmental claims contained in two notices submitted by Ultramar to the shareholders on August 12, 1986, and November 6, 1986. Ultramar's indemnity claims are based on information from the California Regional Water Quality Control Board and the State Water Resources Control Board that the agencies were going to investigate three waste disposal sites for possible soil and groundwater contamination. The sites had been used by Beacon for waste disposal prior to the sale. The government agencies informed Ultramar that they intended to seek reimbursement for the costs of the investigation and any necessary remedial action from Beacon. Ultramar then notified the Beacon shareholders that it was making a claim upon the escrow fund based on the notices from the agencies. The district court granted summary judgment in favor of the Beacon shareholders, and Ultramar appeals.
A trial court's grant of summary judgment is reviewed de novo. California Architectural Bldg. Prod. v. Franciscan Ceramics, 818 F.2d 1466, 1468 (9th Cir. 1987). If a review of the pleadings and supporting documents shows that there is no genuine issue of material fact, the moving party is entitled to judgment as a matter of law. Id; Fed. R. Civ. P. 56(c).
The parties are in substantial agreement as to the underlying facts. The issue is whether or not the three environmental claims asserted by Ultramar are covered under any of the indemnity provisions of the Agreement. The interpretation of the meaning and effect of a contract is a question of law to be determined by the court. King v. Larsen Realty, Inc., 121 Cal. App. 3d 349, 356, 175 Cal. Rptr. 226, 230 (1981).
California Civil Code Sec. 2778 states: "In the interpretation of a contract of indemnity, the following rules are to be applied, unless a contrary intention appears: (1) Upon an indemnity against liability, expressly, or in other equivalent terms, the person indemnified is entitled to recover upon becoming liable ..." It is long settled law that this section means that the right to indemnification for liability arises when the liability is incurred or is legally imposed upon the indemnitee. Eva v. Anderson 166 Cal. 420, 424, 137 P. 16, 17 (1913); Alberts v. American Casualty Co., 88 Cal. App. 2d 891, 899, 200 P.2d 37, 42 (1948). No "contrary intention" is indicated in the contract for the types of claims raised by Ultramar.
Section 9.1(c) describes the types of third party claims for indemnity that may arise under the Agreement as:
(c) any and all actual or alleged liabilities or obligations of, or claims against, or costs or expenses incurred by [Beacon] ... arising out of any suit, action, claim or legal, administrative, arbitration or other proceeding or governmental investigation against [Beacon] in which the event giving rise thereto occurred prior to the closing date or which results from or arises out of any action or inaction by the company ..., or conduct of their business, prior to closing.
Finding of Fact No. 5 states: "No claim has been asserted by a third party for payment of any costs by UAL or Beacon with regard of the items referenced in UAL's environmental claims." A review of the pleadings and evidence here amply supports this finding. Ultramar's claim notice regarding the Kings County dump site states that "the County of Kings has been directed to investigate the contamination" and that the position of the County is that part of any contamination found as a result of the investigation is attributable to Beacon's use of the dump in the 1950's and 1960's. The claim further states that the County has "indicated that it intends to seek reimbursement from Beacon" for the investigation and any remedial action taken at the site. The Declaration of Richard S. Usher, general counsel and vice-president of Beacon since January, 1984 and November, 1986, respectively, states that undesignated county council members, at "numerous" council meetings on unspecified dates have indicated that the County intends to seek reimbursement from Beacon. On these facts alone, the contention that a governmental agency has asserted a claim against Beacon is not justified.
Ultramar's claims with regard to the Hanford refinery site and the Kettleman Hills site, at first blush, appear to be more substantial. Ultramar's August 12th claim notice refers to an order of the Regional Water Quality Board to perform a soil and groundwater assessment at the Hanford refinery site. The November 6th claim notice indicates the State of California has ordered solid waste assessments at various solid waste dumps in California, including the Kettleman Hills site used by Beacon before Ultramar's acquisition. These notices clearly purport to set out third party claims based upon claims made by the governmental agencies.
A review of the evidence pointed to by Ultramar, however, does not support the conclusions stated in Ultramar's claim notices or the Declarations submitted in support of their motion for partial summary judgment. The notices from the state agencies were part of a state-wide distribution to former and present operators of dump sites in California and/or to anyone who had ever used the dumps. The assessments pertain not to costs, but to assessing the dump sites for contamination at the sites and to rank them in order of the environmental risks they pose to water quality at all sites.
Ultramar contends that they have already expended money preparing SWAT (Solid Waste Assessment Test) reports1 which were required by the state agencies for use in ranking the dump sites, and that this gives rise to liability for all subsequent costs which may ultimately result from future state-mandated cleanup programs. Nowhere in the record is there any information that the governmental agencies have asserted that Beacon or Ultramar is responsible for the investigation costs being incurred by the agencies, or that the agencies are asserting that Beacon or Ultramar is responsible for cleanup costs.
The assessment programs were independently initiated programs which may ultimately result in promulgation of a state-mandated cleanup program, and the state may seek reimbursement from former users of the dump sites; but the assessment program presently being conducted as applied to the Hanford refinery and the Kettleman Hills sites does not support Ultramar's contention that these third parties have asserted any claims against Beacon for all costs which may arise in the future based upon Beacon's use of the dump sites prior to Ultramar's acquisition.
Ultramar argues that the district court erred in treating the three environmental claims as third party claims because the claims are equally cognizable under the other subdivisions of the Agreement. There is no error in treating the environmental claims as third party claims. Each claim clearly states that a third party--the governmental agency--has notified Ultramar that they will be required to bear investigation and cleanup costs for any possible contamination of water or soil by Beacon based upon their disposal practices prior to the Ultramar acquisition.
Ultramar contends that the district court ignored other applicable provisions of Sec. 9.1 which specifically provide coverage for contingent or potential liabilities. Section 9.1 of the SPA catalogued the types of liabilities for which Ultramar would be entitled to indemnification from the escrow fund. In sections 9.1(a) & (b) the Beacon shareholders agreed to indemnify Ultramar for "any and all liabilities ... of any nature, whether accrued, absolute, contingent or otherwise" existing and not set forth on the December 31, 1980 or October 31, 1981 Balance Sheets, "or arising out of transactions entered into, or any state of facts existing, prior to such date [s] or any claims against, or costs or expenses ... incurred by ... [Beacon], arising out of such liabilities or obligations."2
A contingent liability is defined in Black's Law Dictionary, 5th Ed., as follows: "One which is not now fixed and absolute, but which will become so in case of the occurrence of some future and uncertain event. Warren Co. v. C.I.R., 135 F.2d 679, 684, 685 [ (5th Cir. 1943) ]. A potential liability; e.g. pending lawsuit." The Warren case provides further enlightenment, as follows:
This construction of 'contingent liability' is reinforced, by analogy, by considering the situation of one who indorses, without more, his name on the back of a promissory note. In such a case his liability is not absolute. Until the maturity of the note and the compliance by the owner of certain statutory requirements his liability is only contingent. But it is a contingent liability which exists in praesenti, even though certain events in the future may have the effect of relieving him altogether of liability ...
135 F.2d at 684-85.
Ultramar has put forward a number of theories to show that Beacon had incurred a contingent liability in the period prior to the closing date. First, they contended that they had already paid for the SWAT report and that this gave rise to the existence of the contingent liability. That argument has been dealt with above. They also argued that the liability arose at the time of the improper disposal of the hazardous waste materials. Without evidence that the disposal practices were improper at the time, there is no reasonable basis for concluding that any liability would arise from that activity. Ultramar has provided nothing to support their allegation that the disposal practices were improper or unlawful at the time of disposal, nor is there anything in the Exhibits provided by Ultramar that indicates any improper activity on the part of Beacon. This activity in no way satisfies an act or set of acts which gives rise to a contingent liability cognizable under the indemnity provisions here in the way that cosigning a promissory note or being named in a lawsuit would give rise to contingent liability.
In granting summary judgment for Beacon, the district court concluded that the environmental claims did not represent claims "with respect to a then-existing liability" and that the "indemnitee is not entitled to recover against the indemnitor pursuant to indemnification against liability, until such time as the indemnitee has become liable to a third party and can establish the existence of that liability." (Conclusions of Law Nos. 6 and 7.) The district court thus did not rest its decision solely upon the premise that no third party claims had been asserted by the governmental agencies.
Finally, Ultramar contends that even if the claims do not satisfy the other subsections of Sec. 9.1, they are entitled to indemnification under Sec. 9.4(d). Section 9.4 of the Agreement sets out the methods for asserting indemnity claims against the escrow fund. Finally Section 9.4(d) states that:
Nothing herein shall be deemed to prevent [Ultramar] from making a claim hereunder for potential or contingent claims or demands provided the Claim Notice sets forth the specific basis for any such potential or contingent claim or demand to the extent then feasible and [Ultramar's] statement that it has reasonable grounds to believe that such claim or demand may be made.
The facts, however, show that no demands or assertions of liability or obligation have been made that either Ultramar or Beacon is liable for any cleanup costs, or that the investigations themselves resulted from any action or inaction of Beacon prior to the closing date of November, 1981. As stated before, the investigations were independently initiated by the governmental agencies and those agencies were, at the time the claim notices were presented until after the cut-off date, assessing the sites to determine if there is contamination at the sites, the levels of such contamination and possible spreading of the contamination from the sites into water sources. Beacon is addressed only insofar as being included in a state-wide program undertaken by the state agencies to identify and rank dump sites which may present contamination sources to ground water supplies. This background information does not support a reasonable ground to believe that demands or claims may be made for any of the cleanup costs for which Ultramar seeks indemnification.
The other arguments presented by Ultramar are without merit. There was no error in granting summary judgment before discovery to determine the intention of the parties with regard to the scope of the indemnification provisions.
Ultramar moved for summary judgment and agreed that the contract was unambiguous. A review of the declarations submitted in support of Ultramar's motion for summary judgment and in opposition to Beacon's motion for summary judgment reveals that Ultramar did not content some hidden meaning in the language used in the agreement to invoke the principle declared in Pacific Gas & Electric Co. v. G. W. Thomas Drayage etc. Co., 69 Cal. 2d 33, 69 Cal. Rptr. 561 (1968), which permits the court to consider extrinsic evidence where it is relevant to prove a meaning to which the language of the instrument is reasonably susceptible. Ultramar filed a motion for reconsideration in the trial court and again offered no such extrinsic evidence. If Ultramar had such evidence, it should have offered it in their motion for summary judgment, as pointed out bye the court in Spitser v. Kentwood Home Guardians, 24 Cal. App. 3d 215, 219, 100 Cal. Rptr. 798 (1982). In these circumstances the trial court's finding that the agreement is unambiguous and that parol evidence was not needed is correct.
Pursuant to Rule 11, Fed. R. Civ. P., the district court assessed sanctions personally against Ultramar's attorney, Loyd P. Derby, based upon his filing of the Motion for Reconsideration. The district court's legal conclusion that the conduct of Ultramar's attorney violated Rule 11 is reviewed de novo. Zaldivar v. City of Los Angeles, 780 F.2d 823, 828 (9th Cir. 1986).
Assessment of sanctions under Rule 11 is intended to curb widely acknowledged abuse from the filing of frivolous pleadings. Zaldivar v. City of Los Angeles, 780 F.2d at 829. We reverse the award of sanctions against Mr. Derby. The filing of the single motion that drew the sanctions does not demonstrate an abuse of the proceedings or process of the court, nor was the motion so baseless or lacking in plausibility that sanctions ought to be imposed. California Architectural Bldg. Prod. v. Franciscan Ceramics, 818 F.2d 1466, 1472 (9th Cir. 1987).
Both parties seek attorney's fees and costs incurred in this action pursuant to Sec. 17 of the Agreement. That section provides that in any court action to enforce the agreement or resolve a dispute, the successful or prevailing party is entitled to recover reasonable attorney's fees and other costs incurred in that action or proceedings. Beacon is thus entitled to recover the costs and reasonable attorney's fees incurred in this action in the district court and on appeal. Stock Purchase Agreement Sec. 17; Cal.Civ. Code Sec. 1717. Accordingly, the matter of determination of reasonable attorney's fees and costs is remanded for appropriate proceedings in the district court.
AFFIRMED IN PART, REVERSED IN PART AND REMANDED.
REINHARDT, Circuit Judge, dissenting:
I disagree with the majority's application of California law and its interpretation of the parties' indemnity agreement.
The majority reads California law to allow recovery on an indemnity agreement only when the actual amount of liability is determined. I believe the majority errs in its reading of California Civil Code Sec. 2778. The beginning of that section states:
Rules for interpreting agreement of indemnity. In the interpretation of a contract of indemnity, the following rules are to be applied, unless a contrary intention appears: (emphasis added)
In the Ultramar-Beacon contract, the indemnity agreement is not a mere form provision. The agreement regarding indemnity runs many pages and contains much detail. The agreement can, and should, be interpreted on its own terms--and those terms demonstrate "a contrary intention".
Sections 9.1(a), 9.1(b), and, in particular, 9.4(d) of the agreement, all seem to envision the ability to make claims for contingent liabilities against the fund, as long as those claims are made within the five-year period and a reasonable basis for the claims is offered. Section 9.4(d) says specifically
Nothing herein shall be deemed to prevent the Buyer from making a claim hereunder for potential or contingent claims or demands provided the Claim Notice sets for the specific basis for any such potential or contingent claim or demand to the extent then feasible and the Buyer's statement that it has reasonable grounds to believe that such a claim or demand may be made.
Thus, it seems clear that claims can be brought under the indemnity agreement even when the actual amount of liability is not determined.
The majority also argues that Beacon's liability is not yet sufficiently clear to constitute a "contingent liability" for the purpose of the agreement. The majority seems to believe that Ultramar's ability to recover from the indemnity fund turns on whether Ultramar can provide evidence "to support their allegation that [Beacon's] disposal practices were improper or unlawful at the time of disposal," maj.op. at 8. I do not think that such a stringent standard need be met to fall under the indemnity agreement's category of "contingent claims." Under the strict standards established by both state and federal toxic waste cleanup statutes, I think the fact of past dumpings of toxic materials together with the communications from governmental agencies is sufficient to constitute a "reasonable basis" for believing that "a claim or demand may be made."
For the above reasons, I respectfully dissent.
Honorable M.D. Crocker, Senior United States District Judge, for the Eastern District of California, sitting by designation
This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by 9th Cir.R. 36-3
It should be noted that Sec. 9.2(a) of the SPA limits indemnity liability on any specific matter to amounts which in the aggregate exceed $100,000. Ultramar alleges only that it has expended sums of money in the preparation of the SWAT report. Unless the expenditures exceed $100,000 they would not be reimburseable from the Escrow Fund even if they were classified as valid indemnity claims
Section 9.1(d) involves claims for indemnity arising out of breaches of warranty by Beacon. This section, however, does not lessen Ultramar's burden to establish that it had an obligation to pay an existing indebtedness prior to the cut-off date. As previously discussed, Ultramar did not establish the existence of such an obligation. Furthermore, Ultramar has raised the issue of a breach of warranty for the first time on appeal