G. MURRAY SNOW, District Judge.
On August 11, 2016, this matter was tried to the Court without a jury. Pursuant to Federal Rule of Civil Procedure 52, the Court hereby makes its findings of fact and conclusions of law.
This case arises out of a lease agreement (the "Lease Agreement") between Plaintiff Spirit Master Funding IV LLC ("Spirit Master") and Defendant Martinsville Corral Incorporated ("MCI"). Defendants Victor Spina, Amber Spina, William Spina and Beth Spina are the guarantors of the lease. Plaintiff filed suit in this Court on April 7, 2014, alleging that Defendants had breached the Lease Agreement. Early proceedings in litigation disposed of several of Plaintiff's claims. After competing motions for partial summary judgment, the Court found that MCI had, by failing to submit timely financial statements, committed a breach of the lease that was not sufficiently material to allow foreclosure.
In the Final Pretrial Order of June 11, 2016, the parties stipulated that the only contested issue of fact was "[w]hether Plaintiff incurred damages as a result of Martinsville's failure to submit timely financial statements." The only contested issue of law was "[w]hether Spirit [Master] is entitled to recover attorneys' fees as damages." The parties disagree as to whether this question should be answered by Arizona or Indiana law.
1. The Lease Agreement contains a choice of law provision providing that "[t]his Lease shall be governed by, and construed with, the laws of the state in which the Property is located, without giving effect to any state's conflict of law principles." (Lease Agreement § 17.19.)
2. The Property to which the Lease Agreement refers is located in the state of Indiana.
3. The Lease Agreement was attached to Plaintiff's Complaint, filed on April 7, 2014.
4. Spirit Master's Response to MCI's Motion to Dismiss, filed on June 16, 2014, contained no references or citations to Indiana law.
5. The Lease Agreement was attached to Plaintiff's Amended Complaint, filed on September 3, 2014.
6. On September 18, 2015, Plaintiff submitted a Motion for Partial Summary Judgment, which included two citations to Indiana cases and, in a footnote, a reference to the Lease Agreement's choice of law provision. (Doc. 79 at 7 & n.2.)
7. On March 21, 2016, this Court ruled that MCI had breached the Lease Agreement by its failure to submit timely financial statements, but that this breach was not a material breach.
8. On March 21, 2016, this Court ruled that Spirit Master's damages as a result of this breach were those, if any, "that accrued as a result of the delay in submission" of the financial statements.
9. On March 21, 2016, this Court ruled that a genuine issue of material fact existed as to whether Spirit Master suffered damages as a result of MCI's failure to submit timely financial statements.
10. On June 10, 2016, Plaintiff submitted Proposed Findings of Fact, which included six citations to Indiana cases and, in a footnote, a reference to the Lease Agreement's choice of law provision. (Doc. 104 at 4 & n.1, 5.)
11. As of August 29, 2016, Spirit Master has not presented evidence as to the amount, if any, of Spirit Master's damages as a result of MCI's failure to submit timely financial statements apart from a claim to recover its attorneys' fees pursuant to the lease.
12. The Lease Agreement provides that: "[I]n the event of any judicial or other adversarial proceeding concerning this Lease, to the extent permitted by Law, Lessor shall be entitled to recover all of its reasonable attorneys' fees and other Costs in addition to any other relief to which it may be entitled. In addition, Lessor shall, upon demand, be entitled to all attorneys' fees and all other Costs incurred in the preparation and service of any notice or demand hereunder, whether or not a legal action is subsequently commenced." (Lease Agreement § 17.07.)
Plaintiff seeks attorneys' fees as damages in accordance with the terms of the Lease Agreement. Under Indiana law, attorneys' fees may be awarded pursuant to a contractual provision, subject to a judicial determination of reasonableness. Absent a contract, statute, or other exception, however, a court has no discretion to award attorneys' fees to a prevailing party. See Kokomo Med. Arts Bldg. P'ship v. William Hutchens & Assocs., 566 N.E.2d 1093, 1096 (Ind. Ct. App. 1991). Under Arizona law, by contrast, a court may award reasonable attorneys' fees to a prevailing party. Ariz. Rev. Stat. Ann. ("A.R.S.") § 12-341.01(A) (2016). Additionally, Arizona law provides for contractual modification of the default statutory rule. Id. Therefore, while Plaintiff has the potential to recover attorneys' fees pursuant to the Lease Agreement under either state's law, Defendants could recover fees under Arizona law if determined to be the prevailing party.
A federal court sitting in diversity applies the choice of law rules of the state in which it sits. Abogados v. AT&T, Inc., 223 F.3d 932, 934 (9th Cir. 2000) (citing Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941)). As this Court sits in Arizona, it applies Arizona choice of law rules.
Here, the first step in the Restatement inquiry answers the question. Arizona statutory law on the issue of attorneys' fees expressly allows for contractual provisions to modify the default statutory rule. See A.R.S. § 12-341.01(A) (2016) ("[T]his section shall in no manner be construed as altering, prohibiting or restricting present or future contracts or statutes that may provide for attorney fees."); Bennett v. Appaloosa Horse Club, 201 Ariz. 372, 378, ¶ 26, 35 P.3d 426, 432 (App. 2001).
A litigant may be estopped from asserting inconsistent positions in the same or different litigation under the doctrine of judicial estoppel. This doctrine "prohibit[s] parties from deliberately changing positions according to the exigencies of the moment." New Hampshire v. Maine, 532 U.S. 742, 749-50 (2001) (internal quotation marks and citations omitted). In federal court, the federal law of judicial estoppel applies. See Rissetto v. Plumbers & Steamfitters Local 343, 94 F.3d 597, 603 (9th Cir. 1996). Defendants argue that Plaintiff should be estopped from arguing that Indiana law applies, based on Plaintiff's repeated references throughout this lawsuit to Arizona law. Under Ninth Circuit precedent, however, this argument fails.
The Ninth Circuit looks to three factors, originally formulated by the Supreme Court in New Hampshire v. Maine, to determine whether to apply judicial estoppel. See United States v. Kim, 806 F.3d 1161, 1167 (9th Cir. 2015). According to the Ninth Circuit:
Id. (quoting New Hampshire, 532 U.S. at 750-51) (internal quotation marks and citations omitted). The Supreme Court cautioned that these factors do not represent a "precise formula," but merely "inform the decision" as to whether to apply judicial estoppel. New Hampshire, 532 U.S. at 743.
Here, although Plaintiff repeatedly cited Arizona law in its motions, Plaintiff never specifically argued that Arizona law, rather than Indiana law, applied. See Gen. Signal Corp. v. MCI Telecomms. Corp., 66 F.3d 1500, 1505 (9th Cir. 1995) ("Although MCI cited California law in earlier papers, it never specifically asserted as a legal argument that California law was applicable."). Indeed, Plaintiff on several occasions throughout the litigation asserted the applicability of Indiana law—albeit far from clearly or forcefully. The Lease Agreement is attached to the Complaint and Amended Complaint, meaning that it, including its choice of law provision, is incorporated into those pleadings. See Fed. R. Civ. P. 10(c). Plaintiff cited Indiana cases alongside Arizona cases in its Motion for Partial Summary Judgment, (Doc. 79 at 7), and, in a footnote in that motion, noted the following: "Section 17.19 of the Lease Agreement states that the applicable law is the law of the `state in which the Property is located[.]' In this case, the Property is located in Indiana. The principles of breach of contract in Indiana are, however, the same as Arizona." (Id. at 7 n.2.) The same footnote appears, along with citations to Indiana case law, in Plaintiff's Proposed Findings of Fact and Conclusions of Law. (Doc. 104 at 4 & n.1.) The arguments that Plaintiff now makes in favor of the application of Indiana law are, to be sure, clearer than its earlier equivocal references to Indiana law, but they are not "clearly inconsistent."
Even to the extent that Plaintiff, Defendants, and the Court itself cited Arizona law, there has been no ruling from the Court that Arizona law does apply. The parties did not brief or argue the issue, and the Court did not rule. Cf. Gen. Signal Corp., 66 F.3d at 1505 ("Although . . . `a reasonable person . . . would have assumed that the parties both thought California law applied to the substantive issues of this case,' the district court did not adopt the view that California law applied.").
With respect to the third factor, Plaintiff gained no advantage by citing Arizona law, as all of the Court's dispositive rulings have thus far favored Defendants. Counts Three and Four of Plaintiff's Amended Complaint were dismissed at the motion to dismiss stage. Plaintiff's claim for money damages related to an alleged overpayment on real estate taxes was disposed of, in Defendants' favor, at the summary judgment stage. Defendants' breach of the Lease Agreement was judged immaterial on the basis of Arizona law, meaning that Plaintiff could not invoke the Lease Agreement's acceleration clause. All that remained after summary judgment was a question of fact as to damages caused by tardy financial statements.
MCI does assert that is suffered an unfair detriment as a result of Spirit Master's failure to clearly invoke its contractual right to the application of Indiana law. MCI cites, as the "most significant[]" detriment it suffered, its reliance on Arizona law to make a strategic decision as to continued participation in litigation.
Therefore, none of the factors this Court must consider in its judicial estoppel inquiry favor the application of that doctrine, and Plaintiff is not estopped from asserting that Indiana law should control.
Waiver is a similar concept to estoppel, but the inquiry is distinct. While estoppel protects the integrity of the judiciary, see Morgan Cty. Hosp. v. Upham, 884 N.E.2d 275, 280 (Ind. Ct. App. 2008), waiver looks to whether a litigant has intentionally relinquished a known right. City of Crown Point v. Misty Woods Props., LLC, 864 N.E.2d 1069, 1079 (Ind. Ct. App. 2007).
The Indiana Supreme Court has not addressed the question of whether a litigant may waive a contractual choice of law provision through non-assertion of that right during litigation. The Court must therefore "make a reasonable determination of the result" the Indiana Supreme Court would reach in this case. See Aetna Cas. & Sur. Co. v. Sheft, 989 F.2d 1105, 1108 (9th Cir. 1993).
Indiana courts have, on a number of occasions, addressed the waiver of a choice of law argument in litigation. See Sword v. NKC Hosps., Inc., 714 N.E.2d 142, 146 (Ind. 1999); Harvest Ins. Agency, Inc. v. Inter-Ocean Ins. Co., 492 N.E.2d 686 (Ind. 1986); Storey v. Leonas, 904 N.E.2d 229, 237 (Ind. Ct. App. 2009); Holland v. Miami Sys., Inc., 624 N.E.2d 478, 482 (Ind. Ct. App. 1993). But there are two differences between each of these cases and the case before this Court. First, none of the Indiana cases cited involved a contractual choice of law provision—rather, they involved choice of law arguments based on the location of the events in the case. Second, all the parties who were found to have waived their choice of law argument were seeking to assert out-of-state law instead of Indiana law, thus bringing them under the aegis of Indiana's Uniform Judicial Notice of Foreign Law Act, Ind. Code. § 34-38-4-4. The purpose of this statute is to provide "reasonable notice that the issue of another state's law will be raised"—notice which may not exist simply because another state has a connection to a dispute. See Sword, 714 N.E.2d at 146. Where, as here, there is a written contractual provision in addition to a connection to another state, it is less likely that a litigant will be caught off guard by a late-asserted choice of law argument. The question, therefore, is how to conduct the waiver analysis when a contractual choice of law provision exists. Indiana courts have not decided this issue.
Indiana courts have, however, dealt with the waiver of other contractual provisions. There is a well-developed set of Indiana cases on the waiver of the contractual right to arbitration. Indiana and numerous other jurisdictions have extended principles of waiver in the arbitration context to other contractual and statutory rights. See Integrity Ins. Co. v. Lindsey, 444 N.E.2d 345, 347-48 (Ind. Ct. App. 1983) (appraisal); see also, e.g., Armstrong v. LaSalle Bank Nat'l Ass'n, 552 F.3d 613, 616 (7th Cir. 2009) (remand under 28 U.S.C. § 1407); Russo v. Barger, 239 Ariz. 100, 104, 366 P.3d 577, 581 (Ct. App. 2016) (forum selection); Hennefer v. Butcher, 182 Cal.App.3d 492, 503 (1986) (appraisal). It is appropriate to apply these same principles to the waiver issue here. See Integrity Ins. Co., 444 N.E.2d at 347 (applying waiver principles from arbitration to appraisal because both rights, "like any other contract right, may be waived . . . .").
Generally, "a party's right to arbitration may be waived by subsequent actions that are inconsistent with that right." Kilkenny v. Mitchell Hurst Jacobs & Dick, 733 N.E.2d 984, 986 (Ind. Ct. App. 2000). But, "waiver is a question of fact under the circumstances of each case." Id. Capitol Construction Services v. Farah, LLC provides guidance as to the general factors that point toward a finding of waiver. 946 N.E.2d 624, 628 (Ind. Ct. App. 2011). In the arbitration context, courts look to (1) the "timing of the arbitration request," (2) "if dispositive motions have been filed," and (3) whether the "litigant is unfairly manipulating the judicial system by attempting to obtain a second bite at the apple due to an unfavorable ruling in another forum." Id. A review of cases applying these factors indicates that mere inconsistent actions are often insufficient for a finding of waiver.
Indiana courts have found no waiver when litigants engaged in trial business that was either helpful as a prelude to arbitration or necessary for the party's interests. See MPACT Constr. Grp., LLC v. Superior Concrete Constructors, Inc., 802 N.E.2d 901, 910-11 (Ind. 2004) (arbitration demand after six months of litigation, including filing of counterclaims and joinder of parties); Capitol Constr. Servs., 946 N.E.2d at 628-29 (demand after twenty month long discovery process). On the other hand, courts have found waiver when litigants needlessly participated in litigation and only demanded arbitration after receiving an unfavorable ruling. See St. Mary's Med. Ctr. of Evansville, Inc. v. Disco Aluminum Prods. Co., Inc., 969 F.2d 585, 589 (7th Cir. 1992) (demand after ten months of litigation, following a loss on a dispositive motion); JK Harris & Co., LLC v. Sandlin, 942 N.E.2d 875, 884-85 (Ind. Ct. App. 2011) (demand after default judgment); Tamko Roofing Prods., Inc. v. Dilloway, 865 N.E.2d 1074, 1078-80 (Ind. Ct. App. 2007) (demand after trial had begun and other party had presented evidence).
Guided by these decisions, the Court finds no waiver here. Plaintiff's numerous citations to Arizona law are certainly inconsistent
Nor is there a "second bite at the apple" here. In the arbitration context, a litigant who has already suffered defeat before invoking its arbitration rights seeks a new proceeding in a new forum to decide issues that were already decided in the court system. Here, however, the breach of contract issues that were already decided will not be brought up again if the choice of law provision is enforced now. Plaintiff does not seek to re-argue the issues it lost through the application of Arizona law; only to apply Indiana law to the first issue in this litigation where choice of law makes a difference.
The Court recognizes that even if the principles of breach of contract are the same in Arizona and Indiana, this issue could have been disposed of earlier. But in light of Indiana's public policy interest in enforcing choice of law provisions, see Allen v. Great Am. Reserve Ins. Co., 766 N.E.2d 1157, 1162 (Ind. 2002), and the principles of waiver as applied to these facts, the Court finds that Spirit Master has not waived its contractual right to the application of Indiana law.
Indiana generally follows the "American Rule," under which each party pays its own attorneys' fees. Siwinski v. Town of Ogden Dunes, 949 N.E.2d 825, 832 (Ind. 2011). This rule, may, however, be modified by statute or contract. Id. Indiana courts have, on numerous occasions, approved of contractual fee-shifting provisions. See, e.g., Depeyster v. Town of Santa Claus, 729 N.E.2d 183, 190 (Ind. Ct. App. 2000) ("[I]n light of the agreement to the contrary, the American Rule does not apply in this instance . . . ."); Parrish v. Terre Haute Sav. Bank, 438 N.E.2d 1, 3 (Ind. Ct. App. 1982) ("It is well settled that one is entitled to attorney fees when provided for by statute or contract.").
The instant case, however, is somewhat unusual. Here, the only monetary damages Spirit Master currently seeks are the attorneys' fees they expended in pursuing this legal action, as their earlier claims based on alleged unpaid interest and on the Lease Agreement's acceleration clause were dismissed on summary judgment. The question, therefore, is not simply whether a contract may validly provide for fee shifting under Indiana law—as discussed above, it may—but whether an award of attorneys' fees can serve as the only basis for monetary damages recovered by an otherwise non-prevailing party. It cannot.
In Rauch v. Circle Theatre, the Indiana Court of Appeals decided a dispute similar to the one before this Court. See 374 N.E.2d 546, 549 (Ind. Ct. App. 1978). In that case, as in this one, a defendant was found to have breached a real estate lease agreement. Id. at 552. In that case, as in this one, no damages were awarded to the plaintiff as a result of the breach. Id. at 552-53. In that case, as in this one, there was a lease agreement providing for the defendant's reimbursement of the plaintiff's attorneys' fees. Id at 553. The Indiana Court of Appeals refused to award fees in accordance with that provision. Id. at 554. It noted:
Id.
Rauch is applicable here.
For the reasons stated above, the Court finds in favor of Defendants and enters judgment in their favor. The parties are to bear their own costs and attorneys' fees.
