AGK Sierra de Montserrat, L.P. v. Comerica Bank

109 F.4th 1132

AGK SIERRA DE MONTSERRAT, L.P., Plaintiff-Appellee, v. COMERICA BANK, Defendant-Appellant.

No. 23-15290

United States Court of Appeals, Ninth Circuit

Argued and Submitted February 13, 2024 San Francisco, California

Filed July 19, 2024

Appeal from the United States District Court for the Eastern District of California, Dale A. Drozd, District Judge, Presiding, D.C. No. 2:16-cv-01280-DAD-DB

Reuben A. Ginsburg (argued), Timothy J. Gorry, Jon-Jamison Hill, and Adam M. Korn, Michelman & Robinson LLP, Los Angeles, California; Gregory L. Maxim and Thomas G. Trost, Sproul Trost, Roseville, California; for Plaintiff-Appellee.

Ernest Slome (argued), Lann G. McIntyre, Jeffry A. Miller, and Daniel R. Velladao, Lewis Brisbois Bisgaard & Smith LLP, San Diego, California; Frank R. Perrott, Lewis Brisbois Bisgaard & Smith LLP, Sacramento, California, for Defendant-Appellant.

Before: Eric D. Miller, Bridget S. Bade, and Lawrence VanDyke, Circuit Judges.

Opinion by Judge VanDyke; Concurrence by Judge Miller

OPINION

VANDYKE, Circuit Judge:

Following a bench trial, the district court determined that Comerica Bank (Comerica) breached its agreement to indemnify AGK Sierra de Montserrat, L.P. (AGK) in two underlying lawsuits and accordingly awarded damages for attorney fees incurred in those underlying actions. In addition, the district court, relying on our forty-year-old decision in DeWitt v. Western Pacific Railroad Co., 719 F.2d 1448 (9th Cir. 1983), awarded AGK damages for attorney fees associated with the present first-party breach of contract suit enforcing the indemnity provision. But DeWitt is "only binding in the absence of any subsequent indication from the California courts that our interpretation was incorrect," Owen ex rel. Owen v. United States, 713 F.2d 1461, 1464 (9th Cir. 1983), and California appellate cases since DeWitt uniformly indicate that first-party attorney fees are not recoverable under an indemnity provision. Therefore, we reverse the district court's award of fees for litigating the present action. We remand for the district court to determine whether those fees are otherwise recoverable.

I.

In 2005, Westwood Montserrat, Ltd., began developing a residential subdivision in Loomis, California. Westwood obtained, and subsequently defaulted on, a construction loan from Comerica. Comerica then foreclosed on fifty-one lots in the development. Before the foreclosure, Westwood recorded a Declaration of Covenants, Conditions, and Restrictions and a Supplemental Declaration, which reserved certain rights for itself as the declarant.

In 2009, Comerica purchased the fifty-one lots at a trustee's sale, and then in 2010, it agreed to sell the lots to AGRE.¹ The Purchase and Sale Agreement (PSA) included a California choice-of-law clause and an attorney fees provision stating that:

In the event of any action between Buyer and Seller for enforcement or interpretation of any of the terms or conditions of this Agreement, the prevailing party in such action shall be entitled to recover its reasonable costs and expenses, including without limitation court costs and attorneys' fees actually incurred, as awarded by a court of competent jurisdiction.

After signing the agreement, AGRE was concerned about the possibility of Westwood remaining the declarant despite the foreclosure and sale of the lots, which would give Westwood significant control over development. Comerica and AGRE extended and amended the PSA on several occasions, the last of which required Comerica to revoke the Supplemental Declaration and assign AGK all its rights as declarant. AGRE then assigned the PSA to AGK on June 28, 2010.

Comerica provided the required assignment of rights on June 29, 2010. Because AGK remained concerned about potential litigation arising from Westwood claiming to be the declarant, the Assignment of Declarant Rights also included an indemnity provision. The provision stated that:

The undersigned agrees to indemnify, defend and hold Successor Declarant harmless from and against any and all loss, liability, claims or causes of action existing in favor of or asserted by any party arising out of the undersigned's position as "Declarant" under the CC&Rs on or before the date first above written.

The parties closed the deal, and Westwood indeed commenced several actions against AGK, which Comerica refused to indemnify. AGK then sued Comerica for breach of the indemnity provision, and Comerica removed the case to federal court. Following a nonjury trial, the district court found that the assignment, including the indemnity provision, was a valid and binding contract, and that Comerica breached the contract by failing to indemnify AGK in the suits with Westwood. That part of the district court's ruling has not been appealed.

The district court also determined that Comerica owed AGK for attorney fees and costs incurred in litigating the present breach of contract action—that is, the action to determine whether Comerica was obligated to indemnify AGK for its litigation with Westwood under the indemnity provision in the Assignment of Declarant Rights. The district court, relying on DeWitt, a 1983 Ninth Circuit case, determined that under California law "costs and attorney's fees for prosecuting an indemnification claim may be included in the indemnification award." 719 F.2d at 1453. Thus, in addition to the costs AGK experienced from the Westwood actions, the district court also awarded AGK $1,146,337.24 plus prejudgment interest for costs and fees incurred in prosecuting the indemnity action against Comerica. The sole issue before us is whether this latter award of fees for litigating the indemnity obligation between the parties was contrary to California law.

II.

"We review de novo the district court's interpretation of state law." Paulson v. City of San Diego, 294 F.3d 1124, 1128 (9th Cir. 2002). The parties dispute the standard by which we reexamine circuit precedent interpreting state law. AGK suggests we "must apply binding precedent even when it is clearly wrong." Silva v. Garland, 993 F.3d 705, 717 (9th Cir. 2021). But that rule applies to precedent interpreting federal law, not state law. See id. (interpreting federal law). Precedent interpreting federal law is binding absent a decision of the Supreme Court or our court sitting en banc that "undercut[s] the theory or reasoning underlying the prior circuit precedent in such a way that the cases are clearly irreconcilable." Miller v. Gammie, 335 F.3d 889, 900 (9th Cir. 2003) (en banc).

Interpretation of state law, however, is a different exercise. There, "[o]ur duty as a federal court . . . is to ascertain and apply the existing California law." Alvarez v. Chevron, 656 F.3d 925, 932 (9th Cir. 2011) (quoting Munson v. Del Taco, Inc., 522 F.3d 997, 1002 (9th Cir. 2008)). "In the absence of a pronouncement by the highest court of a state, the federal courts must follow the decision of the intermediate appellate courts of the state unless there is convincing evidence that the highest court of the state would decide differently." Owen ex rel. Owen, 713 F.2d at 1464 (internal quotation marks omitted). In other words, we use our "own best judgment in predicting how the state's highest court would decide the case." T-Mobile USA Inc. v. Selective Ins. Co. of Am., 908 F.3d 581, 586 (9th Cir. 2018) (quotation omitted). Circuit precedent interpreting state law, therefore, "is only binding in the absence of any subsequent indication from the California courts that our interpretation was incorrect." Alvarez, 656 F.3d at 932 (quotations omitted).

III.

Comerica appeals the district court's award of fees incurred by AGK in litigating the present action, arguing that, contrary to AGK's position in the district court, those fees are not covered by the text of the indemnity provision in the Assignment of Declarant Rights. AGK argues that, based on our precedent, first-party litigation costs like these are covered by standard indemnity provisions under California law. AGK also argues that those fees are otherwise recoverable under the attorney fees provision in the PSA. We address each of AGK's arguments in turn.

A.

As the district court explained, in the 1983 DeWitt decision, this court interpreted California law to provide that "costs and attorney's fees for prosecuting an indemnification claim may be included in the indemnification award." Dewitt, 719 F.2d at 1453. And in 1992, our court followed Dewitt's interpretation, specifically noting the absence of any indication at that point from California courts that its interpretation was incorrect. See Jones-Hamilton Co. v. Beazer Materials & Servs., 973 F.2d 688, 696 n.4 (9th Cir. 1992).

The two California cases DeWitt relied on, however, contained essentially no reasoning, and no subsequent California cases have followed them. Instead, there have been a half-dozen California cases that have gone the other way, explaining in some detail their reasons for doing so and, in some of the cases, explaining why DeWitt or the two cases it relied on are wrong. Moreover, other California cases make clear that the DeWitt rule, if it were the correct interpretation of California law, would combine with other California rules in a way that would work a dramatic change in how indemnity provisions are interpreted in California. On balance, "subsequent indication[s] from the California courts" strongly suggest that DeWitt's interpretation of California law was incorrect. Alvarez, 656 F.3d at 932 (quotations omitted). We therefore conclude it does not bind us.

1.

To start, DeWitt relied on two California appellate cases nearly devoid of reasoning on the issue for which DeWitt cited them. In DeWitt, a train conductor who worked for Western Pacific was injured in an accident on a spur line leading to a plant owned by the Flintkote Company. 719 F.2d at 1450. Flintkote had agreed to indemnify Western Pacific for any liability arising from its failure to maintain the spur...