Lyon v. Pacific Employers Insurance

UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT

No. 93-2115
No. 93-2116
IN RE SAN JUAN DUPONT PLAZA HOTEL FIRE LITIGATION.

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.

APPEALS FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF PUERTO RICO
[Hon. Raymond L. Acosta, U.S. District Judge]

Before

Boudin, Circuit Judge,

Bownes, Senior Circuit Judge,

and Stahl, Circuit Judge.

Maureen E. Mahoney and Theodore A. Pianko with whom Milton A.

Miller, Michael Bruce Abelson, Max L. Gillam, Latham & Watkins,

Etienne Totti Del Valle, Dominguez & Totti and Sidley & Austin were on

joint briefs for William Lyon and Holders Capital Corporation.
Ralph W. Dau with whom Peter B. Ackerman, O'Melveny & Myers,

Raul E. Gonzalez-Diaz, A.J. Bennazar-Zequeira and Gonzalez & Bennazar

were on brief for Pacific Employers Insurance Company.
Homer L. Marlow with whom Marlow, Connell, Valerius, Abrams, Lowe

& Adler was on brief for First State Insurance Company.

January 27, 1995

BOUDIN, Circuit Judge. These two appeals stem from the

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

1See In re Two Appeals Arising Out of San Juan Dupont

Plaza Hotel Fire Litig., 994 F.2d 956 (1st Cir. 1993); In re

San Juan Dupont Plaza Hotel Fire Litig., 989 F.2d 36 (1st

Cir. 1993); In re Nineteen Appeals Arising Out of San Juan

Dupont Plaza Hotel Fire Litig., 982 F.2d 603 (1st Cir. 1992);

In re San Juan Dupont Plaza Hotel Fire Litig., 958 F.2d 361

(1st Cir. 1992) (table); In re San Juan Dupont Plaza Hotel

Fire Litig., 907 F.2d 4 (1st Cir. 1990); In re San Juan

Dupont Plaza Hotel Fire Litig., 888 F.2d 940 (1st Cir. 1989);

In re San Juan Dupont Plaza Hotel Fire Litig., 859 F.2d 1007

(1st Cir. 1988); In re Recticel Foam, 859 F.2d 1000 (1st Cir.

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

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

Appeals, 982 F.2d at 606.

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

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

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,

Goldman v. First Nat'l Bank of Boston, 985 F.2d 1113, 1116

(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

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

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

individual named insured . . ." The "function and purpose"

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

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

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.

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

insured has an interest.'" Therefore, Lyon says, the alleged

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

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)

restricts the extent of the protection available to otherwise

covered partnerships (e.g., partnerships listed as named

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.,

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

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

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

determination. Putnam Resources v. Pateman, 958 F.2d 448,

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

Cal. Civ. Code 3287; McConnell v. Pacific Mut. Life Ins.

Co. of Cal., 24 Cal. Rptr. 5, 11 (Cal. App. Ct. 1962). In

Puerto Rico, pre-judgment interest is imposed as a penalty

when the losing party was obstinate. See P.R. Laws Ann. tit.

32, app. III, rule 44.3; Reyes v. Banco Santander de P.R.,

N.A., 583 F. Supp. 1444, 1446 (D.P.R. 1984).

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

Litig., 745 F. Supp. 79, 82 (D.P.R. 1990). Under that test,

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.

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

Express Co., 554 F. Supp. 1199, 1201 (D.P.R. 1983).

Affirmed.

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