USCA1 Opinion
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
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No. 93-2115
No. 93-2116
IN RE SAN JUAN DUPONT PLAZA HOTEL FIRE LITIGATION.
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WILLIAM LYON and HOLDERS CAPITAL CORPORATION,
Appellants, Cross-Claimants, and Cross-Defendants,
v.
PACIFIC EMPLOYERS INSURANCE COMPANY
and FIRST STATE INSURANCE COMPANY,
Appellees, Cross-Defendants, and Cross-Claimants.
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APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Raymond L. Acosta, U.S. District Judge]
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Before
Boudin, Circuit Judge,
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Bownes, Senior Circuit Judge,
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and Stahl, Circuit Judge.
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Maureen E. Mahoney and Theodore A. Pianko with whom Milton A.
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Miller, Michael Bruce Abelson, Max L. Gillam, Latham & Watkins,
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Etienne Totti Del Valle, Dominguez & Totti and Sidley & Austin were on
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joint briefs for William Lyon and Holders Capital Corporation.
Ralph W. Dau with whom Peter B. Ackerman, O'Melveny & Myers,
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Raul E. Gonzalez-Diaz, A.J. Bennazar-Zequeira and Gonzalez & Bennazar
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were on brief for Pacific Employers Insurance Company.
Homer L. Marlow with whom Marlow, Connell, Valerius, Abrams, Lowe
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& Adler was on brief for First State Insurance Company.
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January 27, 1995
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BOUDIN, Circuit Judge. These two appeals stem from the
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third and final phase of the San Juan Dupont Plaza Hotel fire
litigation1 and concern insurance coverage. Appellants
William Lyon and Holders Capital Corporation ("Holders")
challenge the district court's determination that certain
excess liability policies issued by Pacific Employers
Insurance Company ("PEIC") and First State Insurance Company
("FSIC") to Lyon and others do not cover the appellants'
fire-related obligations. We affirm the district court.
I.
Lyon is a principal shareholder and director of Holders,
a holding company that invested in various hotels, including
the ill-fated Dupont Plaza. In phase I of the fire
litigation, the fire victims sued Holders and Lyon as well as
the hotel and other defendants affiliated with it. (Phase II
concerned liability claims against suppliers of goods and
services to the hotel, and phase III sought to allocate
liability of insurers.) Hoping to establish Lyon's personal
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1See In re Two Appeals Arising Out of San Juan Dupont
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Plaza Hotel Fire Litig., 994 F.2d 956 (1st Cir. 1993); In re
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San Juan Dupont Plaza Hotel Fire Litig., 989 F.2d 36 (1st
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Cir. 1993); In re Nineteen Appeals Arising Out of San Juan
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Dupont Plaza Hotel Fire Litig., 982 F.2d 603 (1st Cir. 1992);
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In re San Juan Dupont Plaza Hotel Fire Litig., 958 F.2d 361
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(1st Cir. 1992) (table); In re San Juan Dupont Plaza Hotel
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Fire Litig., 907 F.2d 4 (1st Cir. 1990); In re San Juan
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Dupont Plaza Hotel Fire Litig., 888 F.2d 940 (1st Cir. 1989);
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In re San Juan Dupont Plaza Hotel Fire Litig., 859 F.2d 1007
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(1st Cir. 1988); In re Recticel Foam, 859 F.2d 1000 (1st Cir.
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1988).
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liability (and so to reach his personal fortune), the fire
victims sought in phase I to pierce Holders' corporate veil
and to prove that the hotel was actually managed and
controlled by a de facto partnership of Holders' three
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shareholders, Brian Corbell, William Eberle and Lyon (the so-
called "Holders partnership").
In May 1989, after eight weeks of trial, Holders and
Lyon, along with the other phase I defendants, entered into a
multimillion dollar settlement agreement with the fire
victims. Under the agreement, Lyon was to seek contribution
from his various insurers, which included PEIC and FSIC, to
fund his portion of the settlement. PEIC and FSIC both paid
their policy limits to Lyon, $3 million and $2 million,
respectively, subject to their right to seek repayment by
Lyon if it was later determined in phase III that their
policies did not cover the hotel fire. Phase III does not
affect the victim's settlement fund. See In re Nineteen
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Appeals, 982 F.2d at 606.
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The insurance policies at issue here were part of an
excess coverage plan for the William Lyon Company, a southern
California residential building and development company, as
well as numerous other listed affiliated insureds, including
Lyon himself. Within the excess coverage framework, the PEIC
and FSIC policies provided second- and third-level excess
coverage; first-level excess coverage was provided by
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National Union Fire Insurance Company. Other than Lyon
himself, no entity connected to the Dupont Plaza was
expressly listed as an insured.
In phase III of the litigation, Holders and Lyon both
filed claims in the district court to affirm that PEIC and
FSIC were responsible to provide coverage for the fire. To
this end appellants needed a theory that would not only show
that the policies extended to Lyon or Holders but also
explain how Lyon or Holders could be liable for the fire
under the policies; after all, the hotel was not insured by
PEIC or FSIC; and in view of the settlement, no court had
ever held Lyon or Holders liable for the fire. Accordingly,
Lyon and Holders adopted the position taken by the fire
victims in phase I of the litigation, i.e., that Holders was
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merely a corporate shell and that Lyon had operated the hotel
through the alleged Holders partnership.
On this theory, Holders and Lyon claimed coverage under
the PEIC policy based on a so-called "omnibus" clause; this
clause (they argued) extended coverage to any entity (here,
Holders and the Holders partnership) in which a named insured
(here, Lyon) had management responsibility or responsibility
for insurance. Lyon claimed coverage for himself under the
FSIC policy based on a "joint venture endorsement," which he
argued explicitly covered his involvement in the alleged
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Holders partnership. Both policy provisions are set forth
below.
On December 7, 1992, the district court granted summary
judgment for PEIC and FSIC, ruling that neither policy
covered Holders' or Lyon's fire-related obligations. The
court held inter alia that PEIC's omnibus clause was
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ambiguous as to who was covered and thus should be construed
against Lyon, its supposed drafter; and that a sole
proprietor endorsement applicable to both the PEIC and FSIC
policies, which limited coverage for individual insureds to
their sole proprietorships, precluded coverage for Lyon's
business involvement in the Dupont Plaza. The district court
ordered Lyon to reimburse PEIC and FSIC the five million
dollars they had advanced for the settlement obligations and
then awarded PEIC and FSIC pre-judgment interest on the
amount. These appeals followed.
II.
Because the district court disposed of the case on
summary judgment, we review the court's ruling de novo,
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Goldman v. First Nat'l Bank of Boston, 985 F.2d 1113, 1116
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(1st Cir. 1993), and first address coverage under the PEIC
policy. Holders and Lyon claim that the district court erred
in finding that the omnibus clause was ambiguous and then in
construing it against Holders and Lyon. They contend that
the clause unambiguously extends coverage to Holders and the
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Holders partnership and, if ambiguous, then it should be
construed against the insurers or at least a trial should be
provided.
The omnibus clause is contained at the end of the named
insured endorsement which lists by name 53 insureds,
beginning with the William Lyon Company and including among
many business entities two individuals, one being Lyon. The
omnibus clause reads:
NAMED INSURED ENDORSEMENT
It is understood and agreed that item 1 of the
policy declarations ["Name of Insured"] shall read
as follows:
. . .
The interest of the William Lyon Company or any of
its affiliated entities in any joint power
agreement, joint venture, partnership or similar
entity, and any entity in which any named insured
owns majority interest, possesses management
responsibility, or responsibility for insurance.
Holders and Lyon treat the last 17 words of the final
sentence (beginning "any entity") as an independent clause;
assert that Lyon is a "named insured" and possessed
management or insurance responsibility for Holders, the
alleged Holders partnership, or both; and conclude that
Holders and the Holders partnership are each "any entity" of
the type described in the last 17 words and thus are insured
under the policy.
One may wonder at first glance why it is necessary to
trace through the omnibus clause to Holders or the Holders
partnership, since under an earlier clause of the endorsement
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Lyon himself is unquestionably a named insured. However, as
a partner or manager of Holders, Lyon was barred from making
a claim in his own right as a named insured because of the
PEIC policy's sole proprietor endorsement, which contains a
special limitation on coverage otherwise available to a named
individual insured. The sole proprietor endorsement reads as
follows:
INDIVIDUAL AS NAMED INSURED
It is agreed that if any named insured designated
in the declaration is an individual, coverage under
this policy for such individual named insured shall
apply only with respect to the conduct of a
business of which he is the sole proprietor.
In our view this provision excludes coverage not only for
Lyon claiming directly but also for Holders, or the supposed
Holders partnership, claiming through Lyon under the omnibus
clause. This is PEIC's first argument in its appeals brief
and we think that it is persuasive.
The parties are agreed that California law governs the
interpretation of the insurance policies in this case. But
there is nothing in the California precedents cited to us
that relates directly to the interplay between an omnibus
clause and a sole proprietor endorsement. We thus confront
the language of the two provisions head-on, mindful that an
insurance policy--like any other contract--is to be construed
as a whole and not by reading its parts in isolation. Cal.
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Civ. Code 1641; Bank of the West v. Superior Court, 833
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P.2d 545, 552 (Cal. 1992).
Reading the parts together, we think that a reference to
"any named insured" in the omnibus clause fairly means any
company or individual named in the named insured endorsement
but subject to any other language that directly restricts the
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extent to which that company or individual is classified as a
named insured. The sole proprietor endorsement does impose
such a restriction as to Lyon: it says that even though named
as an insured, he is covered "only with respect to the
conduct of a business of which he is the sole proprietor."
As already noted, it is for this reason that Lyon, even if
personally liable for the fire, would not be directly
protected as a named insured.
Appellants argue that we are not faced with a claim by
Lyon in his own right but rather with a claim by "any
entity"--here, Holders and the Holders partnership--in which
Lyon as "any named insured" has management or insurance
responsibility. Yet by virtue of the sole proprietorship
endorsement, Lyon is "any named insured" only with a respect
to the conduct of a business of which he is the sole
proprietor. A sole proprietorship is a business form in
which an individual--rather than, for example, a partnership
or corporation--owns the business. See Black's Law
___ _____________
Dictionary, 1392 (6th ed. 1990). No one claims that Holders
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or the Holders partnership fits this definition; nor is there
any plausible claim that Lyon's participation in either
entity was in the capacity of sole proprietor.
In sum, we think that by its language the sole
proprietor endorsement--in describing the coverage for "any
named insured" who is an "individual" limits other references
to Lyon as "any named insured" wherever that phrase appears.
Where the entity claiming through Lyon in the omnibus clause
is not a sole proprietorship, and his relationship to the
entity was not in his capacity as sole proprietor of a
business, then that entity is not covered by the omnibus
clause. And while the concept of ambiguity is not without
ambiguities of its own, the policy language does not appear
to us to be fuzzy or unclear on this point.
Insurance policies are commonly constructed not as a
continuous narrative but, as this one illustrates, by a
succession of juxtaposed clauses defining the insured, the
risks covered, the extent and amount of coverage, and
(typically) the various limitations or restrictions on all of
these concepts. Such a document not only invites but, like
some complicated Christmas toy, virtually demands that
different parts be inserted into one another according to the
instructions. Here, the fact that the sole proprietor
endorsement and the omnibus clause pivot on the same words
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("any named insured") makes it especially easy to read them
together.
Appellants respond by asserting that the sole proprietor
endorsement imposes no limitation on coverage for any entity
other than an individual because the endorsement itself
purports to restrict "coverage under this policy for such
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individual named insured . . ." The "function and purpose"
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of the endorsement, appellants say, was to limit coverage to
business, as opposed to personal, risks. Finally, they say
that PEIC has not previously relied on the sole proprietor
endorsement as it now does and has therefore "waived" this
interpretation as a ground for sustaining the judgment below.
We think that the underscored language is entirely
consistent with reading the limitation to apply not only to
"such individual named insured" but also any entity claiming
through such a named insured based on its relationship with
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the named insured: since Lyon could not claim coverage,
Holders cannot claim coverage derivatively through Lyon. As
for the purpose and function argument, the endorsement on its
face does not draw a personal versus business distinction; it
restricts claims to one specific business capacity in which
an individual may act, namely, as a sole proprietor, while
excluding other possibilities (e.g., partner, manager of a
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jointly owned company) that might otherwise be helpful to
appellants' claims.
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As for waiver, appellants confine themselves to two
sentences in their reply brief, offer no details, and can
fairly be said to have waived the waiver argument themselves.
See Ryan v. Royal Ins. Co., 916 F.2d 731, 734 (1st Cir.
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1990). Even if they had not, the argument on which we rest
is closely related to, although not identical with, the
ground on which the district court disposed of the claim
against FSIC. Under these circumstances, it is somewhat
difficult to imagine that Holders or Lyon was greatly
surprised to see the argument as the first one in PEIC's
appellate brief.
2. The FSIC policy presents overlapping but not
identical questions relating only to Lyon. The FSIC policy
itself does not contain the omnibus endorsement, so to
establish coverage, Lyon points to a different endorsement
relating to joint ventures. According to Lyon, "by its
terms" this endorsement "provides coverage `in the event of
any occurrence caused by or arising out of any joint venture
. . . or partnership (hereinafter joint venture) in which the
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insured has an interest.'" Therefore, Lyon says, the alleged
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Holders partnership is entitled to coverage.
This argument rests on a selective, and we think
misleading, quotation from the joint venture endorsement.
Its opening paragraph reads in full:
It is agreed tjay [sic] in the event of any
occurrence caused by or arising out of any joint
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venture, co-venture, joint lease, joint operating
agreement or partnership (hereinafter joint
venture) in which the insured has an interest, the
limit of liability of the company under this policy
shall be limited to the product of:
There follows a formula designed, broadly speaking, to limit
the insurer's liability to the share of the partner who is a
named insured. On its face, this endorsement is designed to
limit liability and not to extend coverage to any partnership
not otherwise covered (a number of partnerships are named
insureds).
Thus, the claim that the joint venture endorsement
extends protection to any partnership in which Lyon holds an
interest appears to be mistaken. But this does not end the
matter because Lyon is a named insured under the policy and
is entitled to claim in his own right as a partner (assuming
that there was a partnership and subject to the formula's
limitation), unless the FSIC policy otherwise restricts
Lyon's own protection. The district court found that it did
and we agree.
Although the FSIC policy itself does not contain the
sole proprietor endorsement contained in the PEIC policy, it
does have a provision, apparently common in excess liability
policies, providing that "[t]his policy, except where
provisions to the contrary appear herein, is subject to all
of the conditions, agreements, exclusions and limitations of
and shall follow the underlying policies in all respects,
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including changes by endorsement." The policy issued by the
lead excess insurer, National Union, contains a sole
proprietor endorsement (as does the PEIC policy).
The district court held that the sole proprietor
endorsement was adopted by the FSIC policy through the
"subject to" provision just quoted, and precluded coverage
for the Holders partnership. Lyon does not dispute that the
sole proprietor endorsement would be decisive if it applied--
manifestly, it would bar his own claim as a partner--but he
argues that the sole proprietor endorsement is not
incorporated because it is inconsistent with the coverage
extended by the FSIC policy. He points specifically to the
joint venture endorsement which (allegedly) "affirmatively
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grants coverage to William Lyon in his capacity as a partner
or joint venturer . . . ."
This conflict is wholly imaginary. The joint venture
endorsement does not grant coverage to William Lyon in his
capacity as partner; by its terms, it does not grant coverage
to any partner or partnership but rather (as already noted)
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restricts the extent of the protection available to otherwise
covered partnerships (e.g., partnerships listed as named
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insureds). The alleged Holders partnership is not a named
insured, nor has Lyon suggested any other basis--apart from
the joint venture endorsement--by which the partnership might
be covered.
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The result would not change even if the joint venture
endorsement were read affirmatively to extend coverage under
the FSIC policy to all partnerships where a named insured was
a partner. For reasons already indicated in our discussion
of the PEIC policy, we think that Lyon as a named insured
would still be restricted by the sole proprietor endorsement
(incorporated by the "subject to" endorsement); and a
partnership claiming through him would impermissibly be
seeking to take advantage of his status as a partner, a
status in which he has no protection.
Once again, there would be no irreconcilable conflict
between the joint venture and sole proprietor endorsements.
The joint venture endorsement would continue to protect
partnerships where the named insured, whose partner status
was used as the basis for covering the partnership, was
insured without limitation as to capacity. That would be
true under the FSIC policy of all insureds (e.g.,
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corporations) except individuals. The restriction of one
provision by another is not automatically a conflict where
both can continue to perform a function. See Cal. Civil Code
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1641, 1652.
To conclude as to coverage claims: based on their
language, neither the PEIC nor the FSIC policy extend
liability coverage for the fire to Holders, Lyon or the
alleged Holders partnership. One might argue about whether
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the language can be described as "plain," since a jig-saw
puzzle of provisions has to be solved to determine the scope
of the policies. But the fact remains that, when the
provisions are properly juxtaposed, their language excludes
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the claims here made.
Language is the baseline for interpretation of an
insurance policy or other legal document. But judges--like
everyone else--are more comfortable with their readings where
purpose is evident and congruent with language. It is hard
to say that "purpose" is completely clear in this case.
Neither side has tried seriously to illuminate the purpose of
the various provisions or how their rationales might
interact. We are therefore left with the words, and
appellants have given us no affirmative reason to disregard
the literal words of the policies.
Although we do not reach the insurers' other arguments
against liability, one of them is worth a brief mention, if
only to make clear that a literal reading of policy language
produces no obvious injustice. The pertinent documents as a
whole--most importantly, the application papers and the
policies--convey the surface impression that Lyon was
insuring his construction business and a bevy of related
enterprises which owned property in a number of states, not
including Puerto Rico. There is no indication in the papers
that a hotel in Puerto Rico existed or was in any way to be
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the subject of either policy; indeed, an entirely separate
insurance structure existed to cover Lyon's and the Dupont
Plaza entities' hotel operations.
If Lyon had owned the hotel as a sole proprietorship,
interesting problems might be posed. He would probably say
that the language of the policy squarely covered him as an
individual named insured operating as a sole proprietor; and
the insurers would say--as indeed they do in their
alternative defense on appeal--that the applications were
materially misleading in failing to furnish information about
the hotel. How this controversy would be resolved is a
matter of conjecture.
Yet if Lyon did prevail--he says, for example, that the
applications did not seek information about his investments
in the hotel--one suspects that the recovery would be
something of a windfall. Sometimes valid general provisions
in contracts do produce recoveries that no one quite
envisioned. In this instance, at worst, the general
provisions appear to have forestalled a recovery that no one
quite envisioned.
III.
We turn now to damages. As noted earlier, both insurers
paid Lyon up to their policy limits but subject to a
reservation of rights. After granting summary judgment in
favor of the insurers, the district court under California
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law awarded the insurers pre-judgment interest on the funds
they had advanced, at the rate of ten percent, to be paid by
Lyon. Lyon now argues that the district court erred in not
applying Puerto Rico law on pre-judgment interest, where an
award of pre-judgment interest depends on a showing of
obstinacy.
We review de novo a district court's choice-of-law
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determination. Putnam Resources v. Pateman, 958 F.2d 448,
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466 (1st Cir. 1992). In California, pre-judgment interest is
awarded virtually as a matter of right to a prevailing party
as delay damages to reflect the time value of money. See
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Cal. Civ. Code 3287; McConnell v. Pacific Mut. Life Ins.
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Co. of Cal., 24 Cal. Rptr. 5, 11 (Cal. App. Ct. 1962). In
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Puerto Rico, pre-judgment interest is imposed as a penalty
when the losing party was obstinate. See P.R. Laws Ann. tit.
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32, app. III, rule 44.3; Reyes v. Banco Santander de P.R.,
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N.A., 583 F. Supp. 1444, 1446 (D.P.R. 1984).
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Because the district court here was sitting in
diversity, it was required to follow Puerto Rico's choice-of-
law rules. Puerto Rico applies a "dominant contacts" test in
contract actions. In re San Juan Dupont Plaza Hotel Fire
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Litig., 745 F. Supp. 79, 82 (D.P.R. 1990). Under that test,
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the law that applies is the law of the jurisdiction with the
most significant contacts to the disputed issue, with due
consideration given to the policies at stake. Id. Although
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the factors do not all point one way, we agree with the
district court that California has the most significant
contacts with the issue of pre-judgment interest.
In substance, pre-judgment interest is sought here in
connection with the interpretation and enforcement of a
contract--specifically, two insurance policies--indisputably
governed by California law. The policies were applied for,
negotiated, issued and paid for in California; and the
William Lyon Company and Lyon himself were based there.
Puerto Rico, by contrast, has the main connection with the
fire but no contacts with the policies except for the
fortuity that insurance coverage was litigated in the same
case as liability for the fire.2
So far as the California pre-judgment interest rule aims
at reflecting the time value of money and making the deprived
litigant whole, California's interest applies with full force
in this case. The fact that the insurance companies paid
first and then sought reimbursement is happenstance; the
dispute still concerns liability under California policies.
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2PEIC and FSIC had earlier sought to litigate their
coverage in a declaratory judgment action in California but
the court dismissed the action in light of the omnibus Puerto
Rico litigation. Appellants have asked us to take judicial
notice of a supposed finding in the California action that
Puerto Rico has the most important contacts with this action.
A review of the transcript shows that the California judge
simply determined that a multiplicity of proceedings should
be avoided. The judge did not undertake a choice of law
analysis on any issue, let alone the one with which we are
concerned.
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To the extent that California wants its contracting parties
to pay (here, to repay) obligations promptly, again applying
California law serves California interests.
Of course, requiring pre-judgment interest may have a
secondary purpose--perhaps more than secondary in Puerto
Rico's case--since it discourages frivolous defenses.
Defendants who owe debts are less likely to stall and
litigate, thus benefitting the courts and the public. Puerto
Rico's use of an obstinacy test may suggest that it is less
concerned with making the creditor whole than with
discouraging meritless litigation in its courts. Even so, in
this case there is no conflict between Puerto Rico's interest
and the award to the insurers.
Here, the award of pre-judgment interest does not
frustrate Puerto Rico's desire to discourage obstinate
litigation; at most, pre-judgment interest has been awarded,
for different purposes, in a case where the debtor may not
have been obstinate. Since Puerto Rico's interests are not
threatened, there is no reason to engage in whatever
balancing might be required if California and Puerto Rico
interests actually conflicted. See, e.g., Fojo v. American
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Express Co., 554 F. Supp. 1199, 1201 (D.P.R. 1983).
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Affirmed.
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