Bitler Investment Venture II,, et al v. Marathon Petroleum Company LP, et al
Filing
Filed opinion of the court by Judge Posner. The judgment awarding damages for waste regarding the four Michigan properties is VACATED with directions to the district court to double those damages. The dismissal of the contract claims relating to the canopies is AFFIRMED, but the dismissal of the contract and waste claims relating to the buildings on the properties in Adrian and Michigan Center is REVERSED and that aspect of the case is REMANDED for trial. Richard A. Posner, Circuit Judge; Ann Claire Williams, Circuit Judge and David F. Hamilton, Circuit Judge. [6547877-1] [6547877] [12-3722]
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In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 12‐3722
BITLER INVESTMENT VENTURE II, LLC, et al.,
Plaintiffs‐Appellants,
v.
MARATHON PETROLEUM COMPANY LP, et al.,
Defendants‐Appellees.
____________________
Appeal from the United States District Court for the
Northern District of Indiana, Fort Wayne Division.
No. 1:04‐cv‐00477‐TLS — Theresa L. Springmann, Judge.
____________________
ARGUED OCTOBER 28, 2013 — DECIDED JANUARY 27, 2014
____________________
Before POSNER, WILLIAMS, and HAMILTON, Circuit Judges.
POSNER, Circuit Judge. The appeal in this diversity suit
governed by Indiana and Michigan law presents issues of
contract and property law (the venerable doctrine of waste).
The plaintiffs, affiliated real estate firms that we’ll pretend
are one and call Bitler, sued affiliated oil companies that
we’ll also pretend are one and call Marathon. Bitler seeks
damages for harm caused by Marathon in attempting to
clean up pollution at gas stations that Bitler had leased to it.
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According to Bitler’s law firm, the suit sought more than $9
million in damages. “Beckman Lawson, LLP Announces
Complaint Filed Against Marathon Ashland Petroleum,
LLC,” Business Wire (2004), www.businesswire.com/news/
home/20041217005529/en/Beckman‐Lawson‐LLP‐
Announces‐Complaint‐Filed‐Marathon#.UuarIbTna70 (vis‐
ited Jan. 27, 2014). Later its expert witness estimated Bitler’s
damages at $17.4 million. But the final judgment was for
only $269,000, and Bitler appeals.
The leases, all signed in 1983, were for eleven years, but
Marathon had an option to renew for another ten. Eight of
the leased properties (all in either Indiana or Michigan) are
at issue in this appeal.
In the late 1980s the Environmental Protection Agency
adopted new regulations concerning pollution from under‐
ground storage tanks for gasoline and other petroleum
products; the storage tanks that Bitler had leased to Mara‐
thon were underground. The regulations required that the
tanks and their pipes be removed, upgraded, or replaced by
December 1998. 40 C.F.R. § 280.21(a). Bitler and Marathon
agreed to remove the tanks, and so the gas stations had to be
closed, as they couldn’t sell gasoline without a place to store
it, and no arrangements had been made to replace the un‐
derground tanks with above‐ground ones. All the gas sta‐
tions were closed in the 1990s.
The leases had had to be adjusted in light of the unfore‐
seen adverse development (the new regulations), and in
1992 the parties agreed to what they called a “Master
Amendment to Leases.” The amendment transferred owner‐
ship of the underground tanks to Marathon and made it
“fully responsible for removing” the tanks and pipes, filling
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the holes created by the removal, complying fully with all
environmental laws, “leav[ing] the Premises in a condition
reasonably useful for future commercial use,” and thus “re‐
plac[ing] any asphalt, concrete, or other surface, including
landscaping, which is damaged or destroyed during the tank
and pipe removal operation.” Marathon also agreed to “re‐
turn the Premises to [Bitler] as nearly as possible in the same
condition as it was in prior to such remediation work,” and
to be responsible “for any and all liability, losses, damages,
costs and expenses resulting from [Marathon’s] use of the
Premises and the removal of the underground storage tanks
and piping,” and, with an immaterial exception, to continue
paying rent at the rates specified in the leases.
Although stripped of their underground tanks, the prop‐
erties can be restored as gas stations with above‐ground
storage tanks, and may well be suitable sites for other com‐
mercial outlets as well, such as fast‐food outlets, because gas
stations tend to be strategically located in relation to auto‐
mobile traffic. For a time Marathon used one of the proper‐
ties as a tobacco shop.
Bitler advances both a breach of contract claim and a
waste claim with regard to each of the eight properties in
contention. The district judge rejected all the contract claims
on summary judgment, along with the waste claims relating
to two of the Michigan properties, located in Adrian and
Michigan Center respectively. The other six waste claims
went to trial before a jury, and Bitler prevailed. But the judge
refused to award double damages for waste, sought by Bitler
pursuant to a Michigan statute, with regard to the four
properties (of the six) that were in Michigan. See Mich.
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Comp. Laws § 600.2919(2)(a). We begin with the contract
claims.
Bitler leads with its weakest argument—that the indem‐
nity clause that we quoted from the Master Amendment re‐
quired Marathon to pay for any damage to the properties
during the cleaning up of the pollution. That’s not correct.
The Master Amendment requires Marathon to indemnify Bit‐
ler for liability that Bitler might have to third parties as a
consequence of Marathon’s remediation activities. The next
paragraph of the Master Amendment describes the amend‐
ment as “this Agreement to indemnify, defend, and hold
[Bitler] harmless.” And the paragraph after that requires,
just as in an insurance contract—of which an indemnity
agreement is a form—that Bitler notify Marathon “of any act
or occurrence involving a liability, claim, demand, or costs
indemnified against herein,” within a specified time “after
the occurrence of such act or occurrence shall have come to
[Bitler’s] knowledge.”
Bitler’s stronger claim of breach of contract is based on
the requirements in the Master Amendment that Marathon
“leave the Premises in a condition reasonably useful for fu‐
ture commercial use,” including repairing surface damage
from the removal of the tanks and piping, and “return the
Premises to [Bitler] as nearly as possible in the same condi‐
tion as it was in prior to such remediation work.” These pro‐
visions might seem to require Marathon to rebuild the gas
stations, complete with the installation of new underground
storage tanks. Obviously this was not contemplated. Other‐
wise the Master Amendment would not have required
Marathon to fill the holes created by removing the under‐
ground storage tanks; for to restore the property to its origi‐
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nal condition Marathon would have had to redig the holes in
order to install new underground tanks, which was never
contemplated. Presumably therefore “premises” refers to the
surface of the properties, not the underground.
But if as Bitler alleges Marathon made an inexcusable
mess in “remediating” the properties, so that without great
expense they could not be restored to any commercial use,
then it violated the provisions of the Master Amendment
that we quoted. Bitler argues that through failure to make
simple repairs Marathon allowed the buildings on two of the
Michigan properties—the ones in Adrian and Michigan Cen‐
ter—to collapse, and left them to rot where they fell, to be
condemned (and they were) by local government as unsafe,
abandoned eyesores. The judge, rejecting both the contract
claims and the waste claims relating to these properties, said
that Bitler had “consented” to the removal of the buildings.
But it had had no choice; as we said, they had been con‐
demned. Bitler’s contract and waste claims concerning these
buildings should not have been dismissed.
Bitler’s further claim, for what it calls “delay damages”
resulting from alleged breaches, fails. It argues that Mara‐
thon took an unconscionable time to complete the remedia‐
tion that it was required to do, thus improperly depriving
Bitler of timely opportunities to put the remediated proper‐
ties to new commercial uses. Yet pursuant to the Master
Amendment Marathon continued paying the rent specified
in the original leases. Since it was earning no money from
the properties during the remediation period, the obligation
to pay rent was a spur to its completing the remediation.
More important, had the parties meant to fix a deadline for
remediation they would have said so in the Master Amend‐
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ment, rather than leaving it to a court to determine what is
undue delay in completing an environmental clean‐up. The
fact that no deadline is specified in that otherwise very de‐
tailed agreement indicates that the continued rental was in‐
tended as a substitute for a deadline, much as when liqui‐
dated damages in the form of so much per day, week, or
month for missing a contractual deadline are specified as the
remedy for delay. See Note, “No (Easy) Way Out: ‘Liquidat‐
ing’ Stipulated Damages for Contractor Delay in Public Con‐
struction Contracts,” 44 Duke L.J. 357, 357–58 (1994). Bitler
offered nothing in the summary judgment proceeding to
counter this interpretation.
The judge was also right to reject Bitler’s claim that Mara‐
thon was required to replace the canopies over the gas
pumps on three of the properties, including the two on
which Marathon let the buildings go to seed. In all three in‐
stances Marathon had obtained Bitler’s consent to remove
the canopies after the gas pumps beneath them were re‐
moved, and there is no evidence that the grant of permission
was conditioned on Marathon’s replacing the canopies. Con‐
ceivably such canopies might have value as part of the struc‐
ture of a fast‐food outlet or a bank branch, not to mention a
resurrected gas station with above‐ground storage tanks. But
the Master Amendment does not require Marathon to con‐
vert the gas stations that it was busy dismantling to any spe‐
cific commercial use, such as one for which canopies would
be suitable.
So much for contract. On to waste, a common law doc‐
trine of great antiquity traditionally used to mediate the
competing interests of life tenants and remaindermen. Finlay
v. United States, 752 F.2d 246, 248–49 (6th Cir. 1985); Heliker v.
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Heliker, 151 N.W. 757, 758 (Mich. 1915); Jedediah Purdy,
“The American Transformation of Waste Doctrine: A Plural‐
ist Interpretation,” 91 Cornell L. Rev. 653, 662–65 (2006). To
illustrate, in the absence of such a doctrine the life tenant of a
timberland property would have an incentive to maximize
not the value of the property—that is, the present value of
the entire stream of future earnings obtainable from it—but
only the present value of the earnings stream obtainable dur‐
ing his expected lifetime. That might lead him to cut down
trees before they’d attained their mature growth even if the
present value of the timber would be greater if those trees
were spared till then. The doctrine of waste forbids the life
tenant to alter the property in a way that reduces its value.
He can’t, in other words, be allowed to steal from the re‐
maindermen, who are the owners of the property that the
life tenant is entitled merely to the use of during his lifetime.
There might seem no need for a separate doctrine of
waste, because the life tenant and the remaindermen could
negotiate an optimal plan for exploiting the property. And
indeed negotiated solutions to potential disputes, where fea‐
sible, normally are preferable to solutions imposed by judges
or other government officials. But since tenant and remain‐
dermen have only each other to contract with, the situation
is what economists call “bilateral monopoly,” so transaction
costs may be high—if A can negotiate only with B, and B
only with A, each has an incentive to be stubborn, in the
hope of thereby obtaining as much as possible of the surplus
that transaction will create. Moreover, remaindermen may
be children, who do not have the legal capacity to make
binding contracts—they may even be unborn children.
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But when as in this case parties both of whom have an in‐
terest in the same property already have a contract defining
their respective rights, we have to probe a bit to discover
what work the doctrine of waste might do. Between the
original lease and the Master Amendment, Bitler and Mara‐
thon seem to have covered all the bases. And parties compe‐
tent to contract (such as adults who are compos mentis) can, if
they want, contract around the law of waste—in effect nego‐
tiate their own private law of waste and enforce it under
contract law rather than property law. Stevens v. Mobil Oil
Corp., 412 F. Supp. 809, 812 (E.D. Mich. 1976), affirmed, 577
F.2d 743 (6th Cir. 1978); Lincoln Square Corp. v. Motor City Pa‐
per Tube Co., 64 N.W.2d 577, 580 (Mich. 1954); Restatement
(Third) of Property (Mortgages) § 4.6 and comment c, pp. 262–
67 (1997).
But the parties didn’t do that—didn’t by contract exclude
waste remedies—perhaps realizing that the law of waste can
continue to play a useful role even when the parties have a
detailed contract. For example, a lease may not indicate, di‐
rectly or by implication, every act by which a lessee can im‐
pair the value of the property, and so the landlord can still
have an action for waste unless the parties are found to have
intended the lease to be the exclusive source of their rights.
Also, waste can provide a remedy supplementary to the
remedy for breach of contract. True, as in any situation of
“election of remedies” (see, e.g., EEOC v. Waffle House, Inc.,
534 U.S. 279, 296–97 (2002); Illinois School District Agency v.
Pacific Insurance Co., 571 F.3d 611, 615–16 (7th Cir. 2009)), the
total compensatory damages awarded in a suit for breach of
contract and for waste can’t exceed the plaintiff’s total loss.
But because committing waste is tortious, the plaintiff may
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be entitled to punitive damages, see, e.g., Hausmann v. Haus‐
mann, 596 N.E.2d 216, 220 (Ill. App. 1992); Ky. Rev. Stat.
§ 381.350; cf. Snowden v. D.C. Transit System, Inc., 454 F.2d
1047, 1048 (D.C. Cir. 1971), which he couldn’t obtain in a suit
for just breach of contract. The judge was therefore right to
allow waste claims on six of Bitler’s properties to go to trial,
and wrong to reject the waste claims on Bitler’s properties in
Adrian and Michigan Center, where its failure as tenant to
maintain the buildings impaired the properties’ value.
Bitler’s contract and waste claims overlap almost com‐
pletely. The only harm Bitler could not have charged as
waste was delay in regaining possession of its properties in a
usable condition. But no reason is given to believe the delay
has reduced the value of the property (as distinct from in‐
come generated by its use); and it is the value of the prop‐
erty, which is the value to which the owner is entitled, that
the law of waste protects. Shiver v. United States, 159 U.S. 491,
497–98 (1895); Restatement (First) of Property § 139 and com‐
ment a, pp. 457–58 (1936).
Bitler complains finally, with regard to the four Michigan
properties for which the jury awarded waste damages, that
Michigan law entitles the victim of waste to double dam‐
ages, which the judge refused to award. The rule in Michi‐
gan is that a “tenant for years who commits or suffers any
waste … without having a lawful license to do so, is liable
for double the amount of actual damages.” Mich. Comp.
Laws § 600.2919(2)(a). So only if Marathon was a “tenant for
years” is it liable to Bitler for double the actual damages
caused by its waste. Originally of course it was a tenant for
years, but the Master Amendment in 1992 converted the
leases from fixed‐term leases that would continue on a
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month‐to‐month basis until the remediation was completed
and the properties handed back to Bitler. But although in a
literal sense Marathon was not a tenant for years during the
period of remediation, which is when it committed the waste
for which the jury found it liable, the literal sense is not the
correct one. The terms “tenant for years” and “estate for
years” are inexact references to a commercial or residential
lease for a determinable period of time, which “need not be
measured in specific numbers of years and may be for more
or less than a year.” 2 John G. Cameron, Jr., Michigan Real
Property Law § 20.7, p. 1098 (3d ed. 2005); see also In re
Macomb Occupational Health Care, LLC, 300 B.R. 270, 285
(Bankr. E.D. Mich. 2003). In other words, all that’s required
is some formula for determining when a lease for a specified
period of time can be terminated outside that period.
And we have that. The Master Amendment eliminated
the determinable time periods of 11 and 10 years in the
original lease, substituting the indeterminate date of comple‐
tion of the remediation. There’s nothing unusual about such
a substitution. Residential and commercial leases normally
specify contingencies that will make the term longer or
shorter. An example is a “permit contingency” in a lease of
premises for a restaurant, which allows termination in the
event the tenant is unable to obtain necessary permits. And
even the terms in the original leases to Marathon were not
fully determinate, since the leases were renewable.
It would not make sense, or conform to the reasonable
expectations of the parties, to limit liability for waste or other
misconduct by a tenant simply because a lease originally for
a specified time—that is, an estate for years—had to be ex‐
tended for an indefinite period to allow a response to un‐
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foreseen changes. Those changes were the new EPA regula‐
tions in the late 1980s, which required extensive clean‐up of
the properties. Neither Marathon nor the judge gave any
reason for interpreting the Michigan statute literally in such
a case.
So the judgment awarding damages for waste regarding
the four Michigan properties is vacated with directions to
the district court to double those damages. The dismissal of
the contract claims relating to the canopies is affirmed, but
the dismissal of the contract and waste claims relating to the
buildings on the properties in Adrian and Michigan Center
is reversed and that aspect of the case is remanded for trial.
AFFIRMED IN PART, REVERSED IN PART,
AND REMANDED WITH DIRECTIONS.
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