Galardi v. Naples Polaris, L.L.C.

129 Nev., Advance Opinion 33

IN THE SUPREME COURT OF THE STATE OF NEVADA

JACK GALARDI, AN INDIVIDUAL; No. 58261

AND BIRDIE, LLC, A NEVADA

LIMITED LIABILITY COMPANY,

Appellants,

vs.

NAPLES POLARIS, LLC, A NEVADA

LIMITED LIABILITY COMPANY,

Respondent.

Appeal from a district court order granting summary

judgment in a contract action. Second Judicial District Court, Washoe

County; Brent T. Adams, Judge.

Affirmed.

Armstrong Teasdale LLP and Bruce A. Leslie and Bret F. Meich, Las

Vegas,

for Appellants.

Holland & Hart, LLP, and J. Stephen Peek, Timothy A. Lukas, and

Tamara Reid, Reno,

for Respondent.

BEFORE PICKERING, C.J., HARDESTY and SAITTA, JJ.

OPINION

By the Court, PICKERING, C.J.:

This dispute arises out of a written option contract. Under the

contract, respondent Naples Polaris had the right to purchase Las Vegas

real property from appellants Jack Galardi and Birdie, LLC (together,

- /14164,

Galardi), for $8 million "cash." The property was subject to a deed of trust

securing approximately $1.3 million in debt. The question is whether

Naples or Galardi must pay off the $1.3 million debt. Specifically, does the

option contract require Galardi to deliver clear title, meaning Galardi

must remove the $1.3 million encumbrance for a net $6.7 million option

price? Or does it contemplate that Naples take title subject to preexisting

encumbrances, so that Galardi receives the full $8 million option price?

The district court granted summary judgment to Naples.

Galardi appeals and we affirm.

I.

Naples acquired its option rights by assignment from

Galardi's lessee, French Quarter, a nonparty. The deed of trust securing

the $1.3 million debt predated the option. French Quarter was operating

a topless club on the property but losing money and filed for bankruptcy

protection. We simplify the facts slightly, but what happened next is the

bankruptcy trustee lined up a fourth party to acquire the property and

Naples' option. The price was handsome—enough to pay off the $1.3

million encumbrance, to give Galardi the full $8 million option price he

demanded, and to generate surplus funds for Naples and French Quarter's

creditors.

Naples and Galardi welcomed the Bankruptcy court sale. But

they could not agree on whether the $1.3 million needed to retire the

preexisting encumbrance against the property should come out of Naples'

or Galardi's share of the sale proceeds. They stipulated to let the sale

close, with Galardi receiving $8 million and Naples reserving the right to

sue Galardi in state court for the $1.3 million. This suit over the proper

interpretation of the option contract followed, which the district court

decided on cross-motions for summary judgment.

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The option contract is in writing and includes an integration

clause. The contract is silent as to preexisting encumbrances in general

and the $1.3 million debt in particular. It says simply:

Buyer [Naples] shall have an option to purchase

the above described real estate for the sum of

$8,000,000 (Eight Million Dollars) cash.. . . Buyer

[Naples] shall pay all costs of transfer and closing

whereby Seller [Galardi] shall receive full

purchase price.

In their motions for summary judgment, both sides argued

that the option contract, as written, unambiguously favored its position.

Each focused on the phrase, "Buyer shall pay all costs of transfer and

closing whereby Seller shall receive full purchase price." Galardi argued

that "costs of transfer and closing" encompasses preexisting indebtedness,

so that he receives the $8 million "full purchase price" with no deductions.

Naples countered that "costs of transfer and closing" refers to transaction

costs such as recording fees and transfer taxes, not encumbrances. In

Naples' view, if Galardi meant for Naples to take title subject to

preexisting encumbrances, he needed to write the option contract to say so

specifically.

Both Naples and Galardi supported their readings of the

contract with testimonial evidence. Galardi offered excerpts from his

deposition, in which he testified that he understood that the deal would

net him $8 million; that French Quarter (later Naples, as French

Quarter's assignee) would "pick up the bank note, clean it up, send me $8

million and I'm gone." Naples offered an expert affidavit from Diane

Erickson, past president and current certification chair for the Nevada

Escrow Association with considerable Nevada real estate industry

experience. Addressing the contract provision that "Buyer shall pay all

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costs of transfer and closing," Ms. Erickson opined that in the real estate

industry, "[c]losing costs are separate and apart from the purchase price

and normally consist of the title policy fee, escrow fee, real property

transfer tax, recording fees, etc." She further opined, based on her

"experience in the industry, that whenever real property is transferred, it

is always given to the purchaser free and clear of any encumbrances or

liens, unless the agreement specifically states that it is to be acquired

'subject to' the existing encumbrance, and the buyer specifically agrees to

take over the payments of the existing loan."

Galardi did not dispute the real-estate-industry usages and

customs detailed in the Erickson affidavit. He argued instead that the

district court could only consider the Erickson affidavit if it deemed the

contract ambiguous and that, if the contract were ambiguous, it would

take a trial to resolve the ambiguity. The district court disagreed. It

deemed the contract unambiguous when considered in light of the trade

usages described in the Erickson affidavit; it rejected the deposition

testimony offered by Galardi as insufficient to create a genuine issue of

material fact. The district court thus granted summary judgment to

Naples and denied Galardi's cross-motion for summary judgment.

"[Tin the absence of ambiguity or other factual complexities,"

contract interpretation presents a question of law that the district court

may decide on summary judgment, Ellison v. Cal. State Auto. Ass'n, 106

Nev. 601, 603, 797 P.2d 975, 977 (1990), with de novo review to follow in

this court. May v. Anderson, 121 Nev. 668, 672, 119 P.3d 1254, 1257

(2005). Whether a contract is ambiguous likewise presents a question of

law. Margrave v. Dermody Props., 110 Nev. 824, 827, 878 P.2d 291, 293

(1994). A contract is ambiguous if its terms may reasonably be

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interpreted in more than one way, Anvui, LLC v. G.L. Dragon, LLC, 123

Nev. 212, 215, 163 P.3d 405, 407 (2007), but ambiguity does not arise

simply because the parties disagree on how to interpret their contract.

Parman v. Petricciani, 70 Nev. 427, 430-32, 272 P.2d 492, 493-94 (1954)

(concluding that summary judgment was appropriate because the

interpretation offered by one party was unreasonable and, therefore, the

contract contained no ambiguity), abrogated on other grounds by Wood v.

Safeway, Inc., 121 Nev. 724, 121 P.3d 1026 (2005). Rather, "an ambiguous

contract is 'an agreement obscure in meaning, through indefiniteness of

expression, or having a double meaning." Hampton v. Ford Motor Co.,

561 F.3d 709, 714 (7th Cir. 2009) (quoting Whiting Stoker Co. v. Chicago

Stoker Corp., 171 F.2d 248, 251 (7th Cir. 1948)).

Citing Dickenson v. State, Dep't of Wildlife, Galardi argues

that the district court erred in considering Naples' expert evidence of trade

usage and industry custom because it did not first declare the option

contract ambiguous. 110 Nev. 934, 937, 877 P.2d 1059, 1061 (1994) ("If

there is an ambiguity requiring extrinsic evidence to discern the parties'

intent, summary judgment is improper. However, if no ambiguity exists,

the words of the contract must be taken in their usual and ordinary

signification." (internal citation omitted)). Galardi argues that the district

court compounded its error, adding insult to injury, when it deemed the

deposition excerpts he submitted about how he understood the deal terms

insufficient to generate a genuine issue of material fact. But see Kaldi v.

Farmers Ins. Exch., 117 Nev. 273, 281, 21 P.3d 16, 21 (2001) (when an

integrated written contract is unambiguous, "parol evidence may not be

used to contradict [its] terms").

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Galardi's arguments track the former common-law rule that

trade usage and industry "custom can only supply incidents to a contract

when the contract is ambiguous on the point to which the party seeks to

apply the custom." 12 Richard A. Lord, Williston on Contracts § 34:7 (4th

ed. 2012). But this rule has lost adherents over time. Id. Modernly,

courts consult trade usage and custom not only to determine the meaning

of an ambiguous provision, but also to determine whether a contract

provision is ambiguous in the first place. 1 See, e.g., Restatement (Second)

of Contracts § 220 cmt. d (1981) ("[U]sage relevant to interpretation is

treated as part of the context of an agreement in determining whether

there is ambiguity or contradiction. . . . There is no requirement that an

ambiguity be shown before usage can be shown . . ."), 5 Margaret N.

Kniffin, Corbin on Contracts § 24.13, at 121 (rev. ed. 1998) ("Seldom

should the court hold that the written words of a contract exclude evidence

of the custom, since even what are often called 'plain' meanings are shown

to be incorrect when all the circumstances of the transaction are known;

and usages and customs are a part of those circumstances by which the

meaning of words is to be judged.").

Contract interpretation strives to discern and give effect to the

parties' intended meaning. Id. at 118-19. Words derive meaning from

usage and context. "It would be passing odd to forbid people to look up

words in dictionaries, or to consult explanatory commentaries that, like

lAlthough the Uniform Commercial Code (U.C.C.) does not control

this real-property-based dispute, we note that the U.C.C. expressly allows

evidence of 'usage of trade" to explain an agreement's terms. United

Servs. Auto Ass'n v. Schlang, 111 Nev. 486, 493, 894 P.2d 967, 971 (1995)

(quoting NRS 104.2202(1)); see Las Vegas Sands, LLC v. Nehme, 632 F.3d

526, 536-38 (9th Cir. 2011) (applying Nevada U.C.C. and citing Schlang).

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trade usage, are in the nature of specialized dictionaries" in interpreting a

written contract. Matter of Envirodyne Indus., 29 F.3d 301, 305 (7th Cir.

1994). We thus conclude, as other modern courts have, that "[a]mbiguity

is not required before evidence of trade usage . . . can be used to ascertain"

or illuminate contract terms. Puget Sound Fin., LLC v. Uni search, Inc., 47

P.3d 940, 943 (Wash. 2002); accord Metric Constructors, Inc. v. Nat'l

Aeronautics & Space Admin., 169 F.3d 747, 752 (Fed. Cir. 1999) ("Trade

practice and custom illuminate the context for the parties'

contract. . . . Before an interpreting court can conclusively declare a

contract ambiguous or unambiguous, it must consult the context in which

the parties exchanged promises."); Hickman v. Groves, 71 P.3d 256, 260

(Wyo. 2003) ("[E]vidence of usage may be admissible to give meaning to

apparently unambiguous terms of a contract" even "where other parol

evidence," such as "the parties' statements of what they intended the

contract to mean[,] are not admissible." (internal quotations omitted));

In,tersport, Inc. v. NCAA, 885 N.E.2d 532, 539 (Ill. App. 2008) ("contract

terms need not be found to be ambiguous before evidence of the custom

and usage of the terms in the parties' trade or practice can be considered");

cf. Warrington v. Empey, 95 Nev. 136, 139, 590 P.2d 1162, 1164 (1979)

("custom and usage may be used to establish the terms of a contract"

(dictum)).

We recognize that, ordinarily, "Mlle existence and scope of a

usage of trade are to be determined as questions of fact." Restatement

(Second) of Contracts § 222(2) (1981). To illustrate: If Galardi had

presented admissible evidence to contradict Ms. Erickson's statements

about the Nevada real estate industry's conventions and usages, a genuine

issue of material fact may have arisen that would defeat summary

7

judgment. Compare Den Norske Bank AS v. First Nat'l Bank of Boston, 75

F.3d 49, 58-59 (1st Cir. 1996) (describing usage evidence held sufficient to

create a genuine issue of material fact and defeat summary judgment in a

contract interpretation case), with Simon Wrecking Co. v. MU Ins. Co.,

530 F. Supp. 2d 706, 716 (E.D. Pa. 2008) (holding that party adequately

defeated opposing party's trade usage argument with proof the usage

claimed either did not exist or differed from that argued). But NRCP 56(e)

provides that, when a properly supported "motion for summary judgment

is made," the adverse party "must set forth specific facts showing that

there is a genuine issue for trial" or "summary judgment, if appropriate,

shall be entered." Thus, summary judgment may be granted in a case

requiring interpretation of an integrated written contract, if supported by

admissible evidence of trade usage that is both "persuasive" and

"unrebutted." Puget Sound Fin., LLC, 47 P.3d at 943; see Restatement

(Second) of Contracts § 212(2) (1981) ("A question of interpretation of an

integrated agreement is to be determined by the trier of fact if it depends

on the credibility of extrinsic evidence or on a choice among reasonable

inferences to be drawn from extrinsic evidence. Otherwise a question of

interpretation of an integrated agreement is to be determined as a

question of law."); see Intersport, 885 N.E.2d at 538-40 (consulting

industry usages in interpreting an integrated written contract and

affirming judgment on the pleadings); 5 Corbin on Contracts, supra, §

24.30, at 327.

The district court properly deemed the Erickson opinion

admissible and the option contract unambiguous in light of the trade

usage Ms. Erickson's affidavit established. "A usage of trade is a usage

having such regularity of observance in a place, vocation, or trade as to

8

justify an expectation that it will be observed with respect to a particular

agreement." Restatement (Second) of Contracts § 222(1) (1981). 2 In this

case, Galardi did not challenge Ms. Erickson's qualifications or the

legitimacy and relevance of her opinions. Ms. Erickson opined that unless

otherwise expressly stated, real property is "always given to the purchaser

free and clear of any encumbrances or liens." See NRS 111.170(1)(b)

(Nevada grant, bargain and sale deeds, "unless restrained by [contrary]

express terms," include a covenant that the property conveyed is "free

from encumbrances"). She further opined that, in the escrow setting, the

phrase "costs of transfer and closing" signifies costs "separate and apart

from the purchase price and normally consist[ing] of the title policy fee,

escrow fee, real property transfer tax, recording fees, etc."

Ms. Erickson's expert opinions comport with the language of

the option contract and make sense in light of both common law and

Nevada statutes. To credit Galardi's contrary reading that "costs of

transfer and closing" encompasses preexisting encumbrances would mean

that Galardi could have increased the option price at will just by

borrowing against the property and passing the debt along to the optionee,

which is unreasonable. The phrase "costs of transfer and closing" thus

does not carry a double meaning that renders the option contract

2Galardi, French Quarter, and Naples had counsel or commercial

real estate experience or both. Thus, Galardi makes no argument that he

did not know or have reason to know of the Nevada real estate industry

usages that the Erickson affidavit addressed. See Restatement (Second) of

Contracts § 222(3) (1981) ("[A] usage of trade in the vocation or trade in

which the parties are engaged or a usage of trade of which they know or

have reason to know gives meaning to or supplements or qualifies their

agreement.").

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ambiguous. See Parman, 70 Nev. at 430-31, 272 P.2d at 493-94. Nor does

the reference to "full purchase price" render the contract ambiguous,

particularly when read in light of the industry usages detailed in the

Erickson affidavit.

The deposition testimony Galardi offered that he (and perhaps

French Quarter) understood the deal terms to require the optionee to take

subject to existing encumbrances would, if admitted, contradict the option

contract's express terms. It thus was inadmissible under the parol

evidence rule. Daly v. Del E. Webb Corp., 96 Nev. 359, 361, 609 P.2d 319,

320 (1980) ("The parol evidence rule forbids the reception of evidence

which would vary or contradict the contract, since all prior negotiations

and agreements are deemed to have been merged therein."). Allowing

extrinsic evidence of objective facts such as industry usage and custom

does not open the door to a party's subjective understanding of a contract's

terms, when that understanding contradicts the contract's express terms.

Cf. AM Inel, Inc. v. Graphic Mgmt. Assocs., Inc., 44 F.3d 572, 575 (7th Cir.

1995) (discussing the admissibility of objective evidence as distinguished

from the subjective testimony by the parties as to what they believe the

contract means in the related context of construing ambiguous contracts);

Campanelli v. Conservas Altamira, S.A., 86 Nev. 838, 841, 477 P.2d 870,

872 (1970) (parties to a written contract are bound by its terms regardless

of their subjective beliefs at the time the agreement was signed). The

extrinsic evidence with which Galardi opposed Naples' properly supported

summary judgment motion was either inadmissible or irrelevant or both,

and thus insufficient to generate a genuine issue of material fact or to

establish his entitlement to judgment as a matter of law.

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The district court properly considered trade usage and

industry custom in interpreting the option contract, even though it also

found that the contract was unambiguous. For the option contract to

require the optionee to take the property subject to existing indebtedness,

it needed to so state. We therefore agree with the district court that the

contract placed responsibility for the $1.3 million debt on Galardi's side of

the ledger and affirm.

, C.J.

Pickering

We concur:

Harde

Saitta

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