Wyler Summit Partnership v. Turner Broadcasting System, Inc.

135 F.3d 658, 98 Cal. Daily Op. Serv. 823, 98 Daily Journal DAR 1102, 1998 U.S. App. LEXIS 1280, 1998 WL 32671

• Court: Court of Appeals for the Ninth Circuit
• Decided: January 30, 1998
• Docket: No. 96-16329
• Status: Published

Opinions

Opinion by Judge STAGG; Dissent by Judge TASHIMA.

STAGG, Senior District Judge:

This case concerns a contract dispute between the Wyler Summit Partnership (“Wyler Summit”) and Turner Broadcasting System, Inc., and Turner Entertainment Co. (hereinafter collectively referred to as “Turner”). At issue is the effect of certain provisions of a 1958 contract between film director William Wyler (“Wyler”) and MGM-Loew’s, Inc. (“MGM”) for the direction of the film classic Ben Hur. Wyler Summit, Wyler’s successor in interest to the Ben Hur contract, brought suit against Turner, MGM’s successor in interest, to recover compensation allegedly due thereunder. The district court granted Turner’s motion to dismiss for failure to state a claim upon which relief can be granted. We affirm the district court’s opinion in part, reverse in part, and remand for further proceedings in accordance herewith.

I. BACKGROUND

In 1958, Wyler entered into a written contract with MGM to direct the motion picture Ben Hur. In exchange for his services, MGM agreed to pay Wyler $350,000 plus a “percentage compensation” in the amount of three percent of the film’s gross receipts in excess of $20 million (the “percentage compensation provision”). The contract further provided that this “percentage compensation” shall be payable “in annual installments not to exceed the sum of $50,000 in any one year” (the “installment payment provision”).¹

Because of its extraordinary success,² Ben Hur has — according to the latest figures available to the court — generated in excess of $3.3 million in total “percentage compensation” for Wyler and his heirs.³ Of this sum, Wyler and his heirs have already been paid $1.8 million (in $50,000 annual payments). As a result of the installment payment provision, Turner retains another $1.5 million in deferred “percentage compensation” payable to Wyler’s heirs.⁴

Wyler’s heirs have conveyed their interest in the Ben Hur contract to Wyler Summit, a California partnership composed solely of Wyler’s heirs. It is undisputed that Wyler Summit is owed the deferred “percentage compensation” presently held by Turner (and any other deferred “percentage compensation” that might accrue in the future). However, Wyler Summit and Turner disagree as to when this debt is actually payable.

With the objective of having the installment payment provision judicially annulled and compelling Turner to remit the unpaid “percentage compensation,” Wyler Summit filed suit against Turner in the Northern District of California on September 28, 1995. Wyler Summit sought (1) a reformation of the Ben Hur contract deleting the installment payment provision; (2) declaratory relief determining the parties’ respective rights and obligations thereunder; and (3) a book accounting. In addition, Wyler Summit stated California state-law claims against Turner for breach of contract, unjust enrichment, breach of fiduciary duty, and breach of the implied duty of good faith and fair dealing.

In its complaint, Wyler Summit alleged that it is, in effect, being deprived of the lion’s share of the economic benefit of Wyler’s promised “percentage compensation” by the operation of the contract’s installment payment provision. Specifically, Wyler Summit alleged that Turner is earning, and will continue to earn, a significant amount of interest income on the approximately $1.5 million in deferred “percentage compensation” held by it; that the original parties to the contract never contemplated that the $50,000 annual installment payment provision — which was inserted solely at Wyler’s request to avoid income tax liability under the Internal Revenue Code of 1954⁵ — would work to deprive Wyler or his heirs of this benefit; and that Turner has rejected the partnership’s proposal to waive said provision. As a result thereof, Wyler Summit argued that Turner is enjoying an unbar-gained-for windfall at Wyler Summit’s expense.⁶ Accordingly, Wyler Summit prayed for a judgment, annulling the installment payment provision and ordering Turner to pay the partnership the accumulated “percentage compensation” in a lump sum. Only then, Wyler Summit argued, can an equitable result be realized.

On November 21, 1995, Turner filed a motion to dismiss the action pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, asserting, in the alternative, that Wyler Summit had failed to state a claim upon which relief can be granted; that all of the claims asserted by the partnership were time-barred; and that the equitable doctrine of laches barred the claims for reformation, unjust enrichment, and breach of fiduciary duty. Relying on the clear import of the contractual language in question, Turner contended in the memorandum supporting its motion that a maximum of $50,000 in “percentage compensation” is payable to Wyler Summit annually and that the deferred “percentage compensation” held by it will only be applied towards this sum in those years in which the “percentage compensation” due Wyler Summit does not exceed $50,000. Turner further contended that there is no certainty that Ben Hur will continue to generate “percentage compensation” for Wyler Summit in excess of $50,000 per year and that at some point in the future, the pool of deferred “percentage compensation” now held by it will be exhausted through annual payments to the partnership. Turner admitted that, in the meantime, it will earn and retain interest income on the deferred “percentage compensation” held by it, but insisted that this was the clear intent of the contract between Wyler and MGM.

After a thorough hearing on the matter, the district judge granted Turner’s motion on June 19, 1996, dismissing all of Wyler Summit’s claims. Wyler Summit appeals.

II. LAW AND ANALYSIS

We review de novo a district court’s dismissal of a complaint for failure to state a claim upon which relief can be granted. See Stone v. Travelers Corp., 58 F.3d 434, 436-37 (9th Cir.1995); Peloza v. Capistrano Unified School District, 37 F.3d 517, 520 (9th Cir. 1994), cert. denied, 515 U.S. 1173, 115 S.Ct. 2640, 132 L.Ed.2d 878 (1995). On a motion to dismiss, all well-pleaded allegations of material fact are taken as true and construed in a light most favorable to the non-moving party. See Parks School of Business, Inc. v. Symington, 51 F.3d 1480, 1484 (9th Cir. 1995). Under Rule 12(b)(6), a complaint “should not be dismissed unless it appears beyond doubt that [the] plaintiff can prove no set of facts in support of his claim which would entitle him to relief.” Hydranautics v. Filmtec Corp., 70 F.3d 533, 535-36 (9th Cir.1995).

We affirm the district court’s opinion except as follows. On appeal, Wyler Summit contends, inter alia, that the district court erred by dismissing its breach of contract claim against Turner. In its complaint, Wyler Summit alleged in pertinent part:

7. At the request and for the benefit of William Wyler, Loew’s Incorporated agreed to pay the percentage compensation in annual installments not to exceed the sum of fifty thousand dollars (the “installment payment provision”). It is not the intent of the parties in including the installment payment provision in the contract to provide an economic benefit to Loew’s Incorporated or to deprive William Wyler of the economic benefit of the percentage compensation.

11. Prior to the filing of this complaint, plaintiff communicated to Turner its willingness to waive the installment payment provision, which, as alleged above, had been included in the contract purely as a benefit to William Wyler. Turner rejected plaintiffs proposal that the installment payment provision be deleted from the contract and has refused to pay plaintiff the percentage compensation to which they are [sic] entitled, except as limited by the installment payment provision. ...

19. Turner’s failure and refusal to pay to plaintiff the accumulated percentage compensation constitutes a breach of contract....

Excerpts of Record 3, 4, and 6.⁷ The district court, however, dismissed this claim, concluding that Wyler Summit could not waive the installment payment provision because (1) the Ben Hur contract did not contain a clause authorizing such a waiver and (2) the provision at issue benefits Turner as well as Wyler Summit. We find that the district court incorrectly applied California contract law and the standards governing Rule 12(b)(6) motions with respect to this claim.

It is a well-established principle of California law that “a contracting party may waive conditions placed in a contract solely for the party’s benefit.” Sabo v. Fasano, 154 Cal.App.3d 502, 505, 201 Cal.Rptr. 270, 271 (Cal.App.2d Dist.1984). In fact, this maxim of contract law has appeared in California jurisprudence for more than nine decades since its first recognition by the California Supreme Court in Knarston v. Manhattan Life Ins. Co., 140 Cal. 57, 63, 73 P. 740, 741 (Cal.1903). See, e.g., WYDA Associates v. Merner, 42 Cal.App.4th 1702, 1714, 50 Cal. Rptr.2d 323, 330 (1st Dist.1996); Reeder v. Longo, 131 Cal.App.3d 291, 296, 182 Cal. Rptr. 287, 290 (2d Dist.1982); Doryon v. Salant, 75 Cal.App.3d 706, 712, 142 Cal.Rptr. 378, 381 (2d Dist.1977); Crescenta Valley Moose Lodge No. 808 v. Bunt, 8 Cal.App.3d 682, 87 Cal.Rptr. 428 (2d Dist.1970); Wesley N. Taylor Co. v. Russell, 194 Cal.App.2d 816, 828, 15 Cal.Rptr. 357, 365 (2d Dist.1961); O’Connell v. Zimmerman, 157 Cal.App.2d 330, 336, 321 P.2d 161, 165 (3d Dist.1958); Isaacson v. G.D. Robertson & Co., 85 Cal. App.2d 71, 75, 192 P.2d 486, 488 (2d Dist. 1948); Ellsworth v. Knowles, 8 Cal.App. 630, 632, 97 P. 690, 691 (1st Dist.1908).⁸ In Knarston, the California Supreme Court explained:

It is a well settled maxim that a party may waive the benefit of any condition or provision made in his behalf, no matter to what manner it may have been made or secured. Broom’s Legal Max. 547. It extends to all provisions, even constitutional and statutory, as well as conventional. The law will not compel a man to insist upon any benefit or advantage secured to him individually.

Id. (quotations and citations omitted)(emphasis added). Although most of the previously cited cases concern minor or procedural conditions precedent to performance, we see no impediment to the application of this principle in the ease sub judice, i.e., in the context of an executory contract.⁹

The district court acknowledged the existence of the waiver doctrine in its June 18, 1996 ruling. See Excerpts of Record at 107 (“A party may waive a contractual provision inserted solely for its own benefit”). However, relying on Eichman v. Fotomat Corp., 880 F.2d 149,165 (9th Cir.1989), it mistakenly conditioned the efficacy of such a waiver on the existence of “some other provision in the contract which allows the party to waive its obligations” thereunder. Excerpts of Record at 107 (emphasis in original). Because Wyler Summit had not alleged the existence of such a provision in the Ben Hur contract, the district court dismissed its waiver claim for failure to state a claim upon which relief can be granted. Neither Eich-man nor any other case applying California law, however, establishes such a limitation on the waiver doctrine.

Alternatively, the district court found that dismissal of Wyler Summit’s waiver claim was warranted because

[t]here is nothing in the contract to suggest that the percentage compensation provision was included solely for the benefit of Wyler. In fact, the opposite is true: the provision also benefits defendants by allowing them to limit Wyler’s annual payment. The clear benefit to defendants is underscored by plaintiffs allegations that defendants have profited and continue to profit from their retention of the deferred compensation.

Excerpts of Record at 116 (emphasis in original). In so finding, the district court committed two distinct errors. First, despite the standards applicable under Rule 12(b)(6) motions, it resolved a factual issue-whether the installment payment provision was included in the contract solely for Wyler’s benefit-in favor of the movant, Turner. See Crescenta Valley Moose Lodge No. 808 v. Bunt, 8 Cal. App.3d 682, 687, 87 Cal.Rptr. 428, 431 (2d Dist.1970)(“Whether a condition is solely for the benefit of [a particular contracting party] is for the trial court to determine as a fact from all the evidence”); Wesley N. Taylor Co. v. Russell, 194 Cal.App.2d 816, 828, 15 Cal.Rptr. 357, 365 (2d Dist.l961)(finding that the disputed contractual provisions were imposed by the plaintiff, and were for the sole benefit of the plaintiff, and the finding is supported by the evidence”).¹⁰ As established above, on a motion to dismiss, the court is not authorized to make such a factual determination. Rather, the court is to take all well-pleaded factual allegations as true and to draw all reasonable inferences therefrom in favor of the plaintiff. See Everest and Jennings, Inc. v. American Motorists Ins. Co., 23 F.3d 226, 228 (9th Cir.1994).

Second, the court conducted the wrong inquiry. Although potentially probative of the parties’ intent, the fact that the installment payment provision ‘presently benefits, or has benefited, MGM and/or Turner is not, ipso facto, determinative of the relevant inquiry in this case-whether said provision was originally (ie., in 1958) included in the contract solely for Wyler’s benefit. See, e.g., Sabo v. Fasano, 154 Cal.App.3d 502, 505, 201 Cal.Rptr. 270, 271 (2d Dist.1984) (“It is well-settled a contracting party may waive conditions placed in a contract solely for that party’s benefit”) (emphasis added); Doryon v. Salant, 75 Cal.App.3d 706, 712, 142 Cal.Rptr. 378, 381 (2d Dist.1977) (“[A] contracting party may waive provisions placed in a contract solely for his benefit”) (emphasis added); Wesley N. Taylor Co. v. Russell, 194 Cal.App.2d 816, 828, 15 Cal.Rptr. 357, 365 (2d Dist.1961) (“It is, of course, well settled that a contracting party may waive provisions placed in a contract solely for his benefit”) (emphasis added); Fairbanks, Morse & Co. v. Nelson, 217 F. 218, 221 (9th Cir.1914) (“[T]he party for whose benefit the provision is made, and who has the right to exact its performance, may waive the same”) (emphasis added); Ellsworth v. Knowles, 8 Cal.App. 630, 632, 97 P. 690, 691 (1st Dist. 1908) (“A party to a contract may waive a provision intended for his benefit”) (emphasis added); Knarston v. Manhattan Life Ins. Co., 140 Cal. 57, 63, 73 P. 740, 741 (Cal.1903) (“[Provisions in a contract may be waived by the party for whose benefit they are inserted”) (emphasis added). In paragraph 11 of its complaint, Wyler Summit alleged that the installment payment provision was “included in the contract purely as a benefit to William Wyler.” Excerpts of Record at 6 (emphasis added). On Turner’s motion to dismiss, the district court was obligated to accept this well-pleaded allegation as true, not to look beyond the complaint and make a factual determination based on incomplete evidence.

We hold that when considered in a light most favorable to the nonmovant, Wyler Summit’s complaint stated a cause of action for breach of contract on the basis of its alleged waiver of the installment payment provision and Turner’s subsequent failure to perform.¹¹ Accordingly, we reverse the district court’s opinion to this extent only and remand for trial on the issue of whether the installment payment provision is waivable, i.e., whether it was “inserted in” the contract solely for Wyler’s benefit. Under California law, the applicable statute of limitations for such a claim is four years. See Cal.Code Civ. Proc. § 337. Furthermore, a cause of action accrues when the plaintiff discovers, or could have discovered through reasonable diligence, the injury and its cause. See Angeles Chemical Co. v. Spencer & Jones, 44 Cal. App.4th 112, 120, 51 Cal.Rptr.2d 594 (2d Dist.1996); Hal Roach Studios v. Richard Feiner & Co., 896 F.2d 1542, 1549 (1990). The record does not indicate when Wyler Summit allegedly waived the installment payment provision. However, for the purposes of remand, we find that the four-year limitations period began to run on the day that Turner received notice of the alleged waiver.

AFFIRMED IN PART, REVERSED IN PART, and REMANDED for proceedings in accordance herewith.

1 . Paragraph 3 of the contract, entitled "Compensation,” provides in pertinent part:

[W]e agree to pay you as compensation in full thereof and for all rights herein granted and agree to be granted to us as follows:

(a) The sum of Three Hundred and Fifty Thousand Dollars ($350,000)....

(b) We shall further pay to you ...: (ii) An amount equal to three per cent (3%) of the gross receipts derived from the distribution and exhibition of said photoplay, in excess of Twenty Million Dollars ($20,000,-000) of such gross receipts....

The compensation provided for in this subdivision (b) shall be referred to herein as your "percentage compensation” and shall be payable in annual installments not to exceed the sum of Fifty Thousand Dollars ($50,000) in any one year....

The Ben Hur contract included other, alternative compensation provisions. However, these provisions never became operable and, therefore, will not be considered herein.

2 . Ben Hur garnered more Academy Awards than any other film in history, including Oscars for best picture (Sam Zimbalist, producer); actor (Charlton Heston); supporting actor (Hugh Griffith); director (Wyler); cinematography, color (Robert Surtees); art direction-set direction, col- or (William A. Homing, Edward C. Carfagno, and Hugh Hunt); costume design, color (Elizabeth Haffenden); sound (Franklin E. Milton); film editing (Ralph E. Winters and John D. Dunning); special effects (A. Arnold Gillespie, Robert MacDonald, and Milo Lory); and music, scoring of a dramatic or comedy picture (Miklos Rozsa). See Academy Awards for 1959 (visited Sept. 6, 1997) <http://us.imdb.com/Oscars/os-cars_1959.html>. As of January 31, 1995, Ben Hur had earned gross receipts in excess of $131 million. See Excerpts of Record at 54.

3 . Wyler died in 1981 at which time his children — Catherine Wyler, Melanie Wyler, Judith Wyler Sheldon, and David Wyler (hereinafter collectively referred to as "Wyler’s heirs”) — became his successors in interest to the Ben Hur contract.

4 . As a matter of illustration, in the reporting period ending January 31, 1995, Ben Hur grossed $2,298,897. Wyler’s heirs’ three percent share of this amount was $68,967. Pursuant to the terms of the contract, Wyler's heirs were paid $50,000 by Turner, and $18,967 was deferred, thereby increasing the total amount of deferred "percentage compensation” held by Turner to $1,532,127. See Excerpts of Record at 54.

5 . From 1954 to 1964, individuals paid an 89 percent marginal tax rate on taxable income over $100,000. For taxable income over $150,000, the marginal tax rate increased to 90 percent, and for income over $200,000, the marginal rate was 91 percent. See I.R.C. § 1(a) (1954). These high rates were only slightly reduced for married couples filing jointly. See I.R.C. § 2(a)(1954).

6 . Assuming the $1,532,127 in deferred “percentage income” held by Turner was invested in 30-year United States Treasury Bonds (which for all intents and purposes represent a zero-risk investment) and those bonds yielded 6.351 percent (the yield as listed in the Wall Street Journal's Market Diary for October 14, 1997, see Wall Street Journal, Oct. 14, 1997, at Cl) Turner would realize an annual income of $97,305.38 — enough not only to satisfy its annual $50,000 obligation to Wyler Summit, but also to add to its invested "principal." The probability that, over the long-run, market conditions would create a situation in which Turner would be forced to draw on, if not exhaust, this invested "principal” in order to meet its obligation to Wyler Summit is so unlikely as to be inconsequential.

7 .The dissent submits that the majority "over-lookfed]” the fact that Wyler Summit "does not even allege [in its complaint] that the installment payment provision was included solely for Wyler’s benefit.” We feel no need to address this point other than to reiterate that the complaint states clearly and unambiguously that "the installment payment provision ... had been included in the contract purely as a benefit to William Wyler.” Excerpts of Record at 4 (emphasis added); See also Excerpts of Record at 3 and 6.

8 . In addition, we note that there is clear precedent in this circuit for the application of the waiver doctrine. See Fairbanks Morse & Co. v. Nelson, 217 F. 218, 221 (9th Cir.1914).

9 . Accepting Wyler’s contentions as true, as we must on a motion to dismiss, the provision in question was included in the contract to effect tax savings on Wyler’s behalf. When viewed in this light, the provision in question would be of subordinate importance to the contract’s fundamental, fee-for-services cause and, therefore, subject to waiver under the authorities set forth above and in the dissent.

10 . Despite language in Crescenta Valley Moose Lodge and Russell to the contrary, one California appellate court has stated that the issue of whether a contractual provision was inserted into a contract solely for the benefit of one of the parties is a matter of contract interpretation and, therefore, a question of law. See WYDA Associates v. Merner, 42 Cal.App.4th 1702, 1715, 50 Cal.Rptr.2d 323, 330 (3d Dist.1996). We expressly reject this conclusion. The parties in the instant case do not dispute the meaning of the contractual language in question. Thus, this court is not called upon to engage in contractual interpretation per se. What is in dispute, however, is how and why the installment payment provision was included in the Ben Hur contract-an inquiry that calls for extrinsic evidence.

In the absence of controlling California Supreme Court precedent, we are fine-bound to apply the law as we believe that court would do so under the circumstances. See Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938); Commissioner v. Estate of Bosch, 387 U.S. 456, 465, 87 S.Ct. 1776, 1783, 18 L.Ed.2d 886 (1967)("If there is no decision by [the state supreme] court then federal authorities must apply what they find to be the state law after giving 'proper regard’ to relevant rulings of other courts of the State”). The weight of authority and the circumstances present herein compel us to conclude that this issue is, at best, a mixed question of law and fact. In other words, we are not, under the instant circumstances, prepared to make the broad assumptions necessary to find for either party on this issue as a matter of law.

11 . By so holding, we are neither “allowing] Wyler Summit to unilaterally rewrite” the Ben Hur contract, nor suggesting that it may be rewritten on remand. Rather, we are merely acknowledging a contracting parly’s right under long-standing California jurisprudence to waive a provision inserted in a contract solely for his benefit.

In response to the dissent’s broad assertion that this decision "will have a corrosive effect on the stability of contractual relations,” we note that on a Rule 12(b)(6) motion, a district court need only accept as true a plaintiff’s "well-pleaded” factual allegations. Accordingly, unfounded attempts at re-drafting contracts can and should be dismissed at an early stage, and parties attempting to abuse the judicial process may be sanctioned at the district court's discretion. At the same time, litigants, like Wyler Summit, who set forth plausible waiver arguments, must be allowed to pursue their rights under California law.