Opinion
CAUSE NO. IP 02-0689-C H/K
October 7, 2002
ENTRY ON MOTION TO DISMISS
This diversity case presents a request for a declaratory judgment interpreting two similar long-term leases of commercial property in Indianapolis and Cincinnati. Plaintiffs-lessors C.S. V. Limited ("C.S. V.") and J C Partnership ("J C") seek a declaratory judgment that the rent increase provision in each lease should be interpreted to provide for a rent increase every five years of 37.5 to approximately 43 percent. Defendants-lessees contend the increases every five years should be between 7.5 and 10 percent.
Plaintiffs named as defendants W. E. Buehler Paper Co., d/b/a Bunzl Cincinnati ("Buehler"); Capital Consolidated, Inc., d/b/a Bunzl Indianapolis ("Capital Consolidated"), and Bunzl Distribution USA, Inc. Defendants filed a notice of removal invoking the court's diversity jurisdiction. Although the original complaint indicated that diversity of citizenship was not complete, the notice of removal describes a series of corporate mergers and name changes occurring before the complaint was filed. The notice of removal asserts that the true defendants in the case are Bunzl Distribution Midcentral, Inc., as a successor in interest to named defendants Buehler and Capital Consolidated, as well as the already-named Bunzl Distribution USA, Inc., plus two more entities: Bunzl Distribution Southeast, LLC, and Bunzl Indiana, L.P. The notice of removal also alleges the citizenship of the parties, including appropriate information about the citizenship of partners in partnership defendants. Based on the allegations in the notice of removal, which plaintiffs have not contested, diversity of citizenship is complete, the amount in controversy is sufficient as to each plaintiff's claim, and the court has subject matter jurisdiction.
The defendants have filed a motion to dismiss both C.S. V.'s and J C's claims under Fed.R.Civ.P. 12(b)(6) for failure to state a claim upon which relief can be granted. For the reasons stated below, the court grants defendants' motion to dismiss and dismisses C.S. V.'s Cincinnati lease claim on the merits with prejudice and J C's Indianapolis lease claim without prejudice, as the court declines to exercise jurisdiction under the Declaratory Judgment Act over this claim seeking a declaration about possible events nine years from now.
For purposes of a motion to dismiss under Rule 12(b)(6), the court takes as true the factual allegations of the parties asserting the claims and draws all reasonable inferences in favor of those parties. Veazey v. Communications Cable of Chicago, Inc., 194 F.3d 850, 853 (7th Cir. 1999). "Dismissal under Rule 12(b)(6) is proper only if the plaintiff could prove no set of facts in support of his claims that would entitle him to relief." Chavez v. Illinois State Police, 251 F.3d 612, 648 (7th Cir. 2001). Because both leases are attached to and referred to in the plaintiffs' complaint, the court may consider and interpret the leases in deciding the motion to dismiss without converting it to a motion for summary judgment. Beanstalk Group, Inc. v. AM General Corp., 283 F.3d 856, 858 (7th Cir. 2002); see Fed.R.Civ.P. 10(c) (copy of written exhibit attached to a pleading is part of pleading for all purposes).
Both leases provide that they are governed by Indiana substantive law. Compl. Ex. A, Cincinnati Lease § 10.3; Ex. B, Indianapolis Lease ¶ 37.4. Under Indiana law, "the construction of an unambiguous written contract is a question of law for the court." Allen v. Cedar Real Estate Group, LLP, 236 F.3d 374, 380 (7th Cir. 2001) (citation omitted). "When the terms of the contract are clear and unambiguous as written, those terms are conclusive as to the contract's meaning. The court will not look to extrinsic evidence in construing unambiguous contract language." In re Forum Group, Inc., 82 F.3d 159, 163 (7th Cir. 1996) (citations omitted); see also Beanstalk Group, Inc., 283 F.3d at 859 (affirming dismissal of contract interpretation case for failure to state a claim upon which relief can be granted).
If a court determines that a contract is ambiguous, the court must then determine whether that ambiguity is "patent" or "latent." Trustees of First Union Real Estate Equity and Mortg. Invs. v. Mandell, 987 F.2d 1286, 1290 (7th Cir. 1993) (applying Indiana law). A latent ambiguity is one that arises because of external facts; that is, the ambiguity does not become apparent until the terms of the contract are applied to a given set of circumstances. "Thus, with a latent ambiguity, `introduction of extrinsic evidence merely completes the instrument by identifying its object or subject matter.'" Estate of Starkey v. United States, 223 F.3d 694, 701 n. 6 (7th Cir. 2000).
A patent ambiguity is one that appears on the face of the contract by virtue of the words used and "is capable of resolution by carefully reading the contract." Id. Resolving a patent ambiguity is a decision for the court as a matter of law. First Fed. Sav. Bank of Indiana v. Key Markets, Inc., 559 N.E.2d 600, 603-04 (Ind. 1990). The court may not use extrinsic evidence but must gather the parties' intent from the contract as a whole — individual clauses, phrases, and sentences are not to be taken out of the context of the entire document. Beanstalk Group Inc., 283 F.3d at 860; Mandell, 987 F.2d at 1290-91 (patent ambiguities must be "clarified from within the four corners of the document").
I. The Cincinnati Lease
Defendant Buehler drafted and entered into a lease agreement with plaintiff C. S. V. on January 15, 1986, for commercial property located in Cincinnati, Ohio. Compl. ¶ 6 Ex. A. As currently amended, the term of the lease is twenty-five years, from January 15, 1986 through January 14, 2011. Compl. Ex. A. The portions of the lease and amendments relevant to this dispute are as follows:
3. Annual Base Rent Adjustment. Subsection (d) is hereby added as an additional subsection to Section 2.2 of the Existing Lease Agreement, as follows:
(d) On the Review Dates that are at the commencement of the 16th and 21st lease years (i.e., January 15, 2001 and January 15, 2006), the Annual Base Rent shall be adjusted as set forth in this subsection. . . . The Annual Base Rent shall be adjusted . . . (and shall continue thereafter until the next Review Date or termination of this lease) to the greater of the following:
(i) Increase the then existing Annual Base Rent by seven and one half percent (7 1/2%) per annum, or
(ii) Increase the then existing Annual Base Rent by the lesser of (1) seventy-five percent (75%) of the product of (A) Annual Base Rent, as may have been adjusted pursuant to this Section 2.2 on the previous Review Date, and (B) the percentage increase that may occur in the Consumer Price Index (all items) as published by the United States Department of Labor, Bureau of Labor Statistics for the Cincinnati area (1982-1984 = 100 base) ("CPI") between CPI as last published ninety days prior to the current Review Date, or (2) ten percent (10%) of the then existing Annual Base Rent. . . .
Compl. ¶ 7 (emphasis added).
The parties appear to agree that the lease provides for rent increases only every five years. See Pl. Br. at 8-9. The parties disagree over the size of those increases. The dispute revolves around the phrase "per annum." C.S. V. contends that the phrase "per annum" means the rent increase of 7.5 percent is to be applied each year, so that the increase every five years should be at least 37.5 percent, and perhaps closer to 43 percent if the 7.5 percent annual amounts are compounded. Defendants argue that the lease requires only that the increase every five years must be at least 7.5 percent. The controversy concerning the Cincinnati lease is ripe and current, for the parties disagree over the amount of the adjustment effective on January 15, 2001.
Because the ambiguity in this case appears on the face of the contract by virtue of the words used and not because of external facts, it is a patent ambiguity. As a result, the court may not consider and has not considered any extrinsic evidence, including the affidavit of James Von Deylen which was submitted with plaintiffs' brief opposing the motion to dismiss. Rather, the ambiguity will be resolved by working within the four corners of the Cincinnati lease. See Mandell, 987 F.2d at 1291 (under Indiana law, patent ambiguities are resolved "from within the four corners of the document").
C.S. V. relies heavily on the Indiana contract law principle that ambiguities in a contract are to be construed against the drafter. Apart from cases of insurance policies, however, this principle of contract interpretation generally serves as a tie-breaker that is applied only if other rules of interpretation fail to resolve the ambiguity. See Bishop v. Sanders, 624 N.E.2d 64, 68 (Ind.App. 1993); Indiana-Kentucky Elec. Corp. v. Green, 476 N.E.2d 141, 146 (Ind.App. 1985), citing Falley v. Giles, 29 Ind. 114, 115 (1867) (reversing trial court's reliance on rule to construe ambiguous term in a lease: "this rule is one of denier [sic, should be dernier or last] resort, applicable only where the language of the instrument will equally admit of either of two or more interpretations").
The more useful principle in this case is that the contract is to "be interpreted as a whole," such that sentences are not treated as "isolated units of meaning, but take meaning from other sentences in the document." Beanstalk Group, 283 F.3d at 860. In addition, basic principles of contract interpretation require the court to "make all attempts to construe the language in a contract so as not to render any words, phrases, or terms ineffective or meaningless." Doherty v. Davy Songer, Inc., 195 F.3d 919, 925 (7th Cir. 1999), quoting Indiana-American Water Co. v. Town of Seelyville, 698 N.E.2d 1255, 1259 (Ind.App. 1998); see also Mandell, 987 F.2d at 1290 ("court should resolve the ambiguity in such a way that harmonizes the contract's provisions rather than causes them to conflict"). Plaintiffs' proposed interpretation runs afoul of these principles.
The Annual Base Adjustment provision in amended Section 2.2(d) calls for the greater of the two alternative calculations to be applied on specific dates. Under plaintiffs' interpretation of Section 2.2(d)(i), each five years the annual rent would increase by 37.5 percent (five times 7.5 percent) or approximately 43 percent (if the increases are compounded), and that rate would remain in effect for the next five years, when it would increase by another 37.5 percent or approximately 43 percent over the new base. Under that approach, the second alternative calculation in Section 2.2(d)(ii) would be rendered a nullity. The second alternative calculation would never come into play because the increase in rent under that provision could not exceed 10 percent, which will always be less than the 37.5 to 43 percent that plaintiffs say is required under the first alternative. See Compl. ¶ 7 (Section 2.2(d)(ii) states that the alternative is the lesser of either a calculation based on the CPI or 10 percent of the then existing Annual Base Rent).
To avoid this analysis, plaintiffs argue that the "per annum" language is incorporated into the language of Section 2.2(d)(ii), so that the second alternative calculation would allow an increase capped at 10 percent per year. Under that reading, the second alternative could be triggered in times of high inflation, allowing for a higher increase in rent while still protecting the lessee from the worst effects of exceptionally high rates of inflation. The problem with the argument is that no language in the second alternative provides for an increase of 10 percent per year. The second alternative provides that the cap is "ten percent (10%) of the then existing Annual Base Rent. . . ." The words "per annum" do not appear in Section 2.2(d)(ii). Nothing in the section suggests that the rent is to be recalculated annually. Rather, a plain reading indicates the opposite. Section 2.2(d)(ii) calls for the lesser of two alternative calculations: one is a flat 10 percent of the "then existing Annual Base Rent"; the other calls for the product of the percentage change in CPI and the Annual Base Rent "as may have been adjusted . . . on the previous Review Date." Section 2.2(d)(ii) (emphasis added). Thus, the phrase "per annum," which C.S. V. interprets as requiring annual compounding, is not incorporated into the second alternative calculation.
Because the second alternative calculation cannot reasonably be read to provide for compounding the increase annually, under plaintiffs' reading of the lease, the first alternative calculation would always be selected as the greater of the two, effectively reading Section 2.2(d)(ii) out of the contract entirely. Thus, plaintiffs' interpretation of Section 2.2(d)(i) that effectively nullifies Section 2.2(d)(ii) is contrary to the interpretation principles of Indiana contract law. See Doherty v. Davy Songer, Inc., 195 F.3d 919, 925 (7th Cir. 1999), quoting Indiana-American Water Co. v. Town of Seelyville, 698 N.E.2d 1255, 1259 (Ind.App. 1998).
Accordingly, the court grants defendants' motion to dismiss with prejudice C. S. V.'s request for declaratory relief with respect to the Cincinnati lease.
II. The Indianapolis Lease
On December 7, 1990, plaintiff J C as lessor and Capital Consolidated as lessee entered into a lease agreement for commercial property located in Indianapolis. Compl. ¶ 11, Ex. B. On November 12, 1997, that lease was amended to add Paragraph 1.13.2(b), a provision similar to the Cincinnati lease's rent adjustment provision, and the term of the lease was extended until the year 2016. Id. ¶ 12, Ex. B. As amended, the new provision concerning the Annual Base Rent Adjustment will not take effect until the first Review Date on October 1, 2011. Id. J C argues that there is an actual, ripe dispute between the parties concerning the interpretation of the provision. J C makes the same argument that C.S. V. did with respect to the phrase "per annum" and how it is to be applied to the 7.5 percent increase in the annual base rent.
The two provisions of the two contracts are nearly identical and, therefore, the amended provision from the Indianapolis lease will not be quoted. One notable distinction, however, is the fact that in the Indianapolis lease, the second alternative calculation does not have the ten percent cap that is found in the corresponding provision of the Cincinnati lease. However, the Indianapolis lease does have an interpretation clause that states that the contract is not to be interpreted strictly either for or against either party. See Ex. B ¶ 37.10.
Under the Declaratory Judgment Act, "any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought." 28 U.S.C. § 2201(a). "The primary purpose of that Act is to avoid accrual of avoidable damages to one not certain of his rights and to afford him an early adjudication without waiting until his adversary should see fit to begin suit, after damage had accrued." NUCOR Corp. v. Aceros y Maquilas de Occidente, S.A., 28 F.3d 572, 577 (7th Cir. 1994) (citations omitted).
"An actual controversy exists when `the facts alleged, under all the circumstances, show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.'" Matter of VMS Securities Litigation, 103 F.3d 1317, 1327 (7th Cir. 1996), quoting Maryland Cas. Co. v. Pacific Coal Oil Co., 312 U.S. 270, 273 (1941).
Assuming for purposes of argument that the dispute over the Indianapolis lease presents a live case or controversy within the scope of Article III of the United States Constitution, the court still has discretion to determine whether to exercise jurisdiction under the Declaratory Judgment Act. See Wilton v. Seven Falls Co., 515 U.S. 277, 282 (1995); Brillhart v. Excess Ins. Co. of America, 316 U.S. 491, 494 (1942).
In this case, the disputed portion of the Indianapolis lease will not take effect, if ever, until October 2011, nine years from now. By that time, the building may no longer exist, the parties may no longer exist, or the dispute may no longer exist. Under these circumstances, exercising the court's discretion to issue a declaratory judgment at this time would be premature. The dispute involves "contingent future events that may not occur as anticipated, or indeed may not occur at all." See Thomas v. Union Carbide Agric. Prods. Co., 473 U.S. 568, 580-81 (1985); see also Reno v. Catholic Social Services, Inc., 509 U.S. 43, 58-59 (1993) (vacating and remanding declaratory judgment where record did not show a sufficiently ripe controversy); Public Serv. Comm'n of Utah v. Wycoff, 344 U.S. 237, 244 (1952) ("The disagreement must not be nebulous or contingent but must have taken on fixed and final shape so that a court can see . . . what effect its decision will have on the adversaries, and some useful purpose to be achieved in deciding them.").
Accordingly, the court determines that J C's claim for declaratory relief regarding the interpretation of the Indianapolis lease is not sufficiently ripe for adjudication and grants defendants' motion to dismiss the claim without prejudice.
Conclusion
For the reasons stated above, C.S. V.'s claim is dismissed with prejudice and J C's claim is dismissed without prejudice. When a motion to dismiss is granted, the court should ordinarily give the plaintiffs an opportunity to amend the complaint. It is not apparent how the problems identified by the court might be remedied by more pleading, but the court will give plaintiffs an opportunity to consider possible amendments. If no amended complaint is filed prior to November 7, 2002, the court will enter final judgment in accord with this entry.
So ordered.