DNC Parks & Resorts at Yosemite, Inc. v. United States

In the United States Court of Federal Claims

No. 15-1034C

(E-Filed August 15, 2017)

)

DNC PARKS & RESORTS AT )

YOSEMITE, INC., )

)

Plaintiff, )

) Motion for Summary Judgment; RCFC 56;

v. ) Affirmative Defenses; Prior Material

) Breach Doctrine

THE UNITED STATES, )

)

Defendant, )

)

v. )

)

YOSEMITE HOSPITALITY, LLC, )

)

Third-Party Defendant. )

)

Thomas P. McLish, Washington, DC, for plaintiff.

John H. Roberson, Senior Trial Counsel, with whom were Benjamin C. Mizer, Principal

Deputy Assistant Attorney General, Robert E. Kirschman, Jr., Director, and L. Misha

Preheim, Assistant Director, Commercial Litigation Branch, Civil Division, United States

Department of Justice, Washington, DC, for defendant.

OPINION

CAMPBELL-SMITH, Judge

This case involves alleged breaches of a contract for concession services in

Yosemite National Park. See Pl.’s Mot., ECF No. 44 at 4. Plaintiff claims that the

government breached its obligation under the contract “by failing to require [plaintiff’s]

successor concessioner to purchase for fair value all property [plaintiff] used or held for

use in its operations at Yosemite, along with [plaintiff’s] ‘possessory interest’ in certain

capital improvements.” Id. In its answer, defendant asserted several affirmative

defenses, including its claim that plaintiff committed a prior material breach of the

contract which relieves defendant of any continued performance thereunder, including

the obligations plaintiff now alleges defendant was required to fulfill. See Def.’s Answer

to Am. Compl., ECF No. 14 at 27-36. Before the court is plaintiff’s motion for partial

summary judgment with regard to that prior material breach affirmative defense, filed

under Rule 56 of the Rules of the United States Court of Federal Claims (RCFC). See

ECF No. 44. Plaintiff’s motion is fully briefed. For the following reasons, plaintiff’s

motion is GRANTED.

I. Background

In September 1993, the parties entered into a contract whereby plaintiff would

provide concession services to a variety of facilities in Yosemite National Park. See Am.

Compl., ECF No. 13 at 2. The contract had an initial term of fifteen years, until

September 30, 2008. The contract was renewed several times, and ultimately expired on

February 29, 2016. See id. Since that time, the concessions have been operated by

Yosemite Hospitality, LLC, the third-party defendant in this case. See ECF No. 50 at 6.

The contract at issue here includes two sections that are the subject of the current

dispute—“SECTION 12. TERMINATION,” see ECF No. 44-2 at 23-24, and “SECTION

13. COMPENSATION,” see id. at 24-25. Those provisions state as follows, and are

quoted in full to ensure a complete understanding of the context of the specifically

relevant portions:

SECTION 12. TERMINATION

(a)(1) The Secretary may terminate this contract or the Concessioner’s rights

to operate hereunder in whole or in part for default at any time and may

terminate this contract in whole or part when necessary for the purpose of

enhancing or protecting area resources or visitor enjoyment or safety.

(a)(2) The operations authorized hereunder may be suspended in whole or

in part at the discretion of the Secretary when necessary to enhance or protect

area resources or visitor enjoyment or safety.

(a)(3) Termination or suspension shall be by written notice to the

Concessioner and, in the event of proposed termination for default, the

Secretary shall give the Concessioner a reasonable period of time to correct

stated deficiencies.

(a)(4) Termination for default shall be utilized in circumstances where the

Concessioner has breached any requirements of this contract, including

failure to maintain and operate the required accommodations, facilities and

services to the satisfaction of the Secretary in accordance with the Secretary’s

requirements hereunder.

(b) In the event of termination of this contract or the Concessioner’s right

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to operate hereunder necessary for the purpose of enhancing or protecting

area resources or visitor enjoyment or safety, or for default, the total

compensation to the Concessioner for such termination shall be as described

in Section 13, “Compensation”.

(c) In the event it is deemed necessary to suspend operations hereunder

in whole or in part to enhance or protect area resources or visitor enjoyment

or safety, the Secretary shall not be liable for any compensation to the

Concessioner for losses occasioned thereby, including but not limited to, lost

income, profit, wages, or other monies which may be claimed, except as may

be provided in Section 13 hereof.

(d) To avoid interruption of services to the public upon the expiration or

termination of this contract or the Concessioner’s rights to operate hereunder

for any reason, the Concessioner, if requested by the Secretary, will:

(1) continue to conduce the operations authorized hereunder, pursuant to

the terms hereof, for a reasonable time to allow the Secretary to select a

successor, or will

(2) consent to the use by a temporary operator, designated by the

Secretary, of the CONSSIONER IMPROEMENTS and personal property, if

any, not including current or intangible assets, used in the operations

authorized hereunder upon fair terms and conditions, provided that the

Concessioner shall be entitled to an annual fee for the use of such

improvements and personal property, prorated for the period of use, in the

amount of the annual depreciation on such improvements and personal

property, plus a return on the book value of such improvements and personal

property equal to the prime lending rate, effective on the date the temporary

operator assumes managerial and operational responsibilities, as published

by the Federal Reserve System Board of Governors or as agreed upon by the

parties involved. In this instance the method of depreciation used shall be

either straight line depreciation or depreciation shown of Federal Tax

Returns.

SECTION 13. COMPENSATION

(a) The compensation described herein shall constitute full and just

compensation to the Concessioner from the Secretary for all losses and

claims occasioned by the circumstances described below.

(b) EXPIRATION OR TERMINATION, OPERATIONS ARE

CONTINUED

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(b)(1) If for any reason, including contract expiration or termination as

described herein, the Concessioner shall cease to be required by the Secretary

to conduct the operations authorized hereunder, or substantial part thereof,

and, at the time of such event the Secretary intends for substantially the same

or similar operations to be continued by a successor, whether a private

person, corporation or an agency of the Government, the Concessioner will:

(i) sell and transfer to the successor designated by the Secretary its

POSSESSORY INTEREST in CONCESSIONER and GOVERNMENT

IMPROVEMENTS, if any, as defined under this contract, and all other

property of the Concessioner used or held for use in the connection with such

operations; and

(ii) the Secretary will require such successor, as a condition to the

granting of a contract to operate, to purchase from the Concessioner such

POSSESSORY INTEREST, if any, and such other property, and to pay the

Concessioner the fair value thereof.

(b)(2) The fair value of any POSSESSORY INTEREST in

CONCESSIONER IMPROVEMENTS or in GOVERNMENT

IMPROVEMENTS shall be the original cost less straight line depreciation

over the estimated useful life of the asset according to Generally Accepted

Accounting Principals [sic], provided, however, that in no event shall any

such useful life exceed 30 years. In the event that such POSSESSORY

INTEREST is acquired by a successor, the successor will not be permitted to

revalue such POSSESSORY INTEREST, or alter the method of depreciation

or useful life.

(b)(3) The fair value of merchandise and supplies shall be actual cost

including transportation.

(b)(4) The fair value of equipment, and, computer software and programs,

shall be book value.

(c) EXPIRATION OR TERMINATION, OPERATIONS ARE

DISCONTINUED

(c)(1) If for any reason, including contract expiration or termination as

described herein, the Concessioner shall cease to be required by the Secretary

to conduct the operations authorized hereunder, or substantial part thereof,

and the Secretary at the time chooses to discontinue such operations, or

substantial part thereof within the area, and/or to abandon, remove, or

demolish any of the CONCESSIONER IMPROVEMENTS, if any, then the

Secretary will take such action as may be necessary to assure the

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Concessioner of compensation for:

(i) its POSSESSORY INTEREST, if any, in the amounts as set forth in

Section 13(b)(2) hereof;

(ii) the cost to the Concessioner of restoring any assigned lands to a

natural condition, including removal and demolition, (less salvage) if

required by the Secretary; and

(iii) the cost of transporting to a reasonable market for sale such movable

property of the Concessioner as may be made useless by such determination.

(c)(2) Any such property that has not been removed by the Concessioner

within a reasonable time following such determination shall become the

property of the United States without compensation therefor.

(d) DEFAULT

Notwithstanding any other provision of this contract to the contrary, in the

event of termination of this contract for default for failure to maintain and

operate the required accommodations, facilities, and services to the

satisfaction of the Secretary in accordance with the Secretary’s requirements

hereunder, compensation for the Concessioner’s POSSESSORY INTEREST

in CONCESSIONER IMPROVEMENTS and in GOVERNMENT

IMPROVEMENTS, if any, shall be as set forth in Section 13(b)(2) hereof.

ECF No. 44-2 at 23-25.

Plaintiff alleges that defendant breached its obligation to ensure that the third-

party defendant purchased the subject property at a fair price. See Am. Compl., ECF No.

13 at 22-23. In addition, plaintiff alleges that defendant’s failure to ensure the purchase

of certain property was a breach of the covenant of good faith and fair dealing, see id. at

23-24, as well as a violation of the terms of the prospectus that governed the solicitation

of the new concessions contract, see id. at 24-25.

In its answer to plaintiff’s amended complaint, defendant asserted three

affirmative defenses: (1) mootness of several claims, see ECF No. 14 at 23; (2) failure to

state a claim upon which relief can be granted, see id. at 24-26; and (3) prior material

breach of the covenant of good faith and fair dealing, claiming that plaintiff provided, in

bad faith, an inflated value for the property it expected the third-party defendant to

purchase, see id. at 27-36. Plaintiff now seeks summary judgment on the last defense,

claiming that the terms of the contract prevent defendant from availing itself of the

common law defense of prior material breach. See ECF No. 44.

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II. Legal Standards

Summary judgment is appropriate when there is no genuine issue of material fact

and the moving party is entitled to judgment as a matter of law. RCFC 56(a); Celotex

Corp. v. Catrett, 477 U.S. 317, 322 (1986). A fact is material if it “might affect the

outcome of the suit under the governing law.” Anderson v. Liberty Lobby, Inc., 477 U.S.

242, 248 (1986). An issue is genuine if it “may reasonably be resolved in favor of either

party.” Id. at 250. “[T]he mere existence of some alleged factual dispute between the

parties will not defeat an otherwise properly supported motion for summary judgment;

the requirement is that there be no genuine issue of material fact.” Id. at 247-48

(emphasis in original).

The moving party bears the initial burden of demonstrating the absence of any

genuine issue of material fact. Celotex Corp., 477 U.S. at 323. The burden then shifts to

the nonmoving party to show that a genuine issue of material fact does exist such that the

case should proceed to trial. Id. at 324.

The court must view the inferences to be drawn from the underlying facts in the

light most favorable to the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio

Corp., 475 U.S. 574, 587 (1986); Mingus Constructors, Inc. v. United States, 812 F.2d

1387, 1391 (Fed. Cir. 1987). The court, however, must not weigh the evidence or make

findings of fact. See Anderson, 477 U.S. at 249 (“[A]t the summary judgment stage the

judge’s function is not himself to weigh the evidence and determine the truth of the

matter but to determine whether there is a genuine issue for trial.”); Ford Motor Co. v.

United States, 157 F.3d 849, 854 (Fed. Cir. 1998) (“Due to the nature of the proceeding,

courts do not make findings of fact on summary judgment.”).

This case presents a question of contract interpretation, an issue properly resolved

as a matter of law. See Grumman Data Sys. Corp. v. Dalton, 88 F.3d 990, 997 (Fed. Cir.

1996). When interpreting a contract, the court looks first to the plain language. See

McAbee Constr., Inc. v. United States, 97 F.3d 1431, 1435 (Fed. Cir. 1996). “We give

the words of the agreement their ordinary meaning unless the parties mutually intended

and agreed to an alternative meaning.” Harris v. Dep’t of Veterans Affairs, 142 F.3d

1463, 1467 (Fed. Cir. 1998). “A contract should be interpreted in such a way that all

parts make sense.” Hughes Comms. Galaxy, Inc. v. United States, 998 F.2d 953, 958

(Fed. Cir. 1993) (citing United States v. Johnson Controls, Inc., 713 F.2d 1541, 1555

(Fed.Cir.1983)).

A contract term is ambiguous if it is “susceptible to more than one reasonable

interpretation.” McAbee, 97 F.3d at 1435. Absent ambiguity, the court must give the

contract terms their “plain and ordinary meaning,” and may not consider evidence

extrinsic to the agreement. Id. (citing Alaska Lumber & Pulp Co. v. Madigan, 2 F.3d

389, 392 (Fed. Cir. 1993) and Interwest Constr. v. Brown, 29 F.3d 611, 615 (Fed. Cir.

1994)).

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III. Analysis

Although neither the plaintiff nor the defendant frames the issue in precisely this

way, in order to determine whether defendant may raise the affirmative defense of prior

material breach, the court must engage in a two-part analysis. First, the court must decide

whether the parties are legally able to contract around the common law defense of prior

material breach. If so, the court then must consider whether the parties effectively did so.

A. Parties to a contract can legally agree to terms that displace the common

law defense of prior material breach.

As an initial matter, the court notes the wide latitude that parties have in

establishing the terms of a contract between them. As the Court of Claims has observed:

“It is so basic a tenet of contract law as to require no citation, that each party is entitled to

compliance by the other party with the plain terms of their agreement, unless it is

palpably illegal.” Am. Chemical Soc’y v. United States, 438 F.2d 597, 604 (Ct. Cl.

1971).

In its response to plaintiff’s motion, defendant insists that the defense of prior

material breach is available “irrespective of any contractual termination clause.” See

ECF No. 50 at 14. Defendant also describes its position as follows: “where a party

breaches a contract with a termination clause with respect to a central, material term of

the contract, and does so in bad faith, the non-breaching party is not required to adhere to

the contract’s termination clause requirements.” See ECF No. 50 at 16. Defendant

seems to argue that it is not possible for the parties to agree to terms that absolutely

displace the common law defense of prior material breach. Instead, defendant insists,

that a breach committed in bad faith, such as the breach plaintiff allegedly committed

here, prevents the operation of any such contract provision. See id. at 15. To be clear,

defendant does not argue that either the termination provision or compensation provision

of the contract is illegal. But defendant, essentially, argues for an exception to the

general rule that the parties are free to agree to, and will be bound by, any legal contract

terms.

In support of this argument, defendant cites as the “seminal case,” Olin Corp. v.

Central Industries, Inc., 576 F.2d 642, 647 (5th Cir. 1978). Id. at 16. In Olin, the United

States Court of Appeals for the Fifth Circuit reviewed the language of a termination

provision included in a contract for the sale of fertilizer. Olin, 576 F.2d at 647. The

termination provision at issue entitled the breaching party to provide notice of the breach

and the opportunity to cure the breach prior to termination. Id. The court concluded that,

because the contract did not indicate that the termination clause outlined the exclusive

means for terminating the contract, the defense of prior material breach was a

“cumulative remedy,” allowing immediate “termination for ‘a breach which is material,

or which goes to the root of the matter or essence of the contract.’” Id. (quoting Williston

on Contracts § 842 (3d ed.)).

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Defendant cites a number of additional cases that follow on the reasoning from

Olin. See L.K. Comstock & Co. v. United Eng’rs & Constructors, Inc., 880 F.2d 219,

232 (9th Cir. 1989) (quoting the discussion of Olin in 2 Corbin on Contracts § 1266 (C.

Kaufman supp. 1984) for the proposition that a termination clause governing notice of a

breach and opportunity to cure will not operate to prevent the non-breaching party from

rescinding the contract when a “vital breach,” frustrating the purpose of the contract, is

committed); Larken, Inc. v. Larken Iowa City Ltd. P’ship, 589 N.W.2d 700, 704 (Iowa

1998) (holding that the non-breaching party was not required to comply with the notice

and opportunity to cure provisions of the contract prior to termination when the breach

“went to the heart of the contract”); LJL Transp., Inc. v. Pilot Air Freight Corp., 599 Pa.

546, 567, 962 A.2d 639, 652 (2009) (concluding that “when there is a breach of contract

going directly to the essence of the contract, which is so exceedingly grave as to

irreparably damage the trust between the contracting parties, the non-breaching party may

terminate the contract without notice, absent explicit contractual provisions to the

contrary”); Southland v. Mir, 748 F.Supp. 969 (E.D.N.Y. 1990) (holding that a breach

that went to the “essence of the contract” vitiated the need to comply with the notice and

cure provisions of the contract). Desly Int’l Corp. v. Otkrytoe Aktsionernoe Obshchestvo

“Spartak”, 2016 WL 4532113 (E.D.N.Y. Aug. 29, 2016) (quoting Olin, 576 F.2d at 647:

“Unless a contract provision for termination for breach is in terms exclusive, it is a

cumulative remedy and does not bar the ordinary remedy of termination for a breach

which is material, or which goes to the root of the matter or essence of the contract.”).

This line of cases, however, does not go as far as defendant’s argument. Even the

court’s decision in Olin qualifies its conclusion as applicable only if the termination

provision at issue is not “exclusive.” Olin, 576 F.2d at 647. This necessarily implies that

the parties are free to agree to such an exclusive term, and cannot support application of

the blanket rule advocated by defendant in this case.

The reasoning in a recent case decided by this court bolsters this conclusion. In K-

Con Bldg. Sys., Inc. v. United States, 131 Fed. Cl. 275 (2017), the court considered

whether the defense of prior material breach precluded the recovery of liquidated

damages provided for in the contract at issue. The case involved a contract between

plaintiff and the Coast Guard for construction of a prefabricated building. See id. at 278.

The plaintiff did not complete the work, and as a result, the Coast Guard assessed

liquidated damages and terminated the contract for default. See id. In its initial

complaint, plaintiff challenged the termination and liquidated damages assessment, while

defendant counterclaimed to recover the liquidated damages. See id. Plaintiff defended

its claim to avoid payment of liquidated damages, in part, on the basis that defendant’s

improper termination of the contract was a prior material breach. See id. at 332-333.

The court began its analysis by defining the doctrine of prior material breach as

follows: “when a party to a contract is sued for breach, it may defend on the ground that

there existed a legal excuse for its nonperformance at the time of the alleged breach.” See

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id. at 332 (quoting Barron Bancshares, Inc. v. United States, 366 F/3d 1360, 1380 (Fed.

Cir. 2004)). The court explained that the doctrine:

is based on the principle that where performances are to be exchanged under

an exchange of promises, each party is entitled to the assurance the he will

not be called upon to perform his remaining duties of performance with

respect to the expected exchange if there has already been an uncured

material failure of performance by the other party.

Id. at 332-33 (quoting Restatement (Second) of Contracts § 237 cmt. b (Am. Law Inst.

1981)). Although the court recognized that the Coast Guard had, in fact, breached the

contract, the court held that the doctrine of prior material breach did not allow plaintiff to

avoid paying liquidated damages for its own breach on that basis. The court concluded

that the express terms of the contract made clear that plaintiff was liable for liquidated

damages, irrespective of the Coast Guard’s breach. See id. at 333.

The court’s decision in K-Con is in accord with the general contract principle that

the parties are free to contract for, and are bound by, any legal terms included in a

contract. The cases presented by defendant do not persuade the court to depart from this

maxim. As such, the court declines to adopt defendant’s position that a prior material

breach necessarily means that it would avoid liability to compensate plaintiff pursuant to

the termination clause in the contract. Instead, the court will look to the specific

language in the contract to make that determination.

B. The contract expressly provides for compensation when the contract is

terminated.

The contract provisions at issue, quoted in full above, relate to the issues of

contract termination and compensation. See ECF No. 44 at 6-7 (plaintiff’s’ motion

identifying sections 12 and 13 as the subject of this dispute); ECF No. 50 at 7

(defendant’s response identifying sections 12 and 13 as the provisions at issue). With

regard to termination of the contract, the following provisions are of particular relevance

here:

SECTION 12. TERMINATION

(a)(4) Termination for default shall be utilized in circumstances where the

Concessioner has breached any requirements of this contract . . .

(b) In the event of termination of this contract or the Concessioner’s right

to operate hereunder . . . for default, the total compensation to the

Concessioner for such termination shall be as described in Section 13,

“Compensation”.

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ECF No. 44-2 at 23.

The court finds these provisions unambiguous, and the plain language leads

directly to two conclusions. First, the contract dictates that termination resulting from

any breach on plaintiff’s part will be treated as a termination for default. Defendant has

made no argument that the breach alleged here falls outside the scope of this clause,

beyond the assertion addressed at length above that plaintiff’s prior material breach

excuses defendant’s compliance with the termination provisions. Defendant argues that

plaintiff was required to fulfill its duty of good faith and fair dealing in executing under

the contract, but breached that obligation, therefore excusing defendant from performing

its remaining obligations under the contract. See ECF No. 14 at 27-36 (statement of

defendant’s third affirmative defense); ECF No. 50 at 12 (defendant contends that “[t]he

breach of the duty of good faith and fair dealing constituted a prior material breach,

providing a legal excuse of the NPS’s nonperformance with respect to Section 13 of the

Contract”). The broadly inclusive language in section 12(a)(4), in the court’s view,

obviates any argument that this provision excludes the breach alleged here.

This conclusion is also supported by the broadly inclusive language in section

13(b)(1), which states that the compensation provisions apply “[i]f for any reason,

including contract expiration or termination as described herein, the Concessioner shall

cease to be required by the Secretary to conduct the operations authorized hereunder.”

ECF No. 44-2 at 24 (emphasis added).

In addition, section 12(b) clearly indicates that, in the event that the contract is

terminated for default, the compensation provisions in section 13 remain operative—that

compensation due to plaintiff “shall be as described” therein. Plaintiff correctly states,

“the Contract itself provides that [plaintiff’s] rights under Section 13 survive even if it

were to default under the Contract.” ECF No. 44 at 11. As such, the parties have agreed

to contract terms that displace defendant’s ability to assert the defense of prior material

breach to avoid payment to plaintiff under section 13.

The parties have no dispute regarding the contract language at issue. Because that

language is unambiguous, the court has no need to consider evidence extrinsic to the

contract. Consequently, any disputes of fact that may exist between the parties are

immaterial to the court’s present analysis. 1

1

Third-party defendant claims, in its opposition to plaintiff’s motion, that defendant

should be permitted to raise the defense of prior material breach because the provisions of

the contract are divisible. See ECF No. 65. This argument fails for the same reasons

defendant’s argument fails—the parties have agreed to terms that require defendant to

comply with the compensation requirements of section 13, even assuming a breach on

plaintiff’s part.

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IV. Conclusion

For the foregoing reasons, plaintiff’s motion for partial summary judgment, ECF

No. 44, is GRANTED, and defendant’s third affirmative defense asserted in answer to

the amended complaint, ECF No. 14, is DISMISSED.

On March 13, 2017, the court suspended all deadlines in this case. See ECF No.

53. The parties are directed to confer and file a joint status report proposing a schedule to

govern the next steps in this litigation, on or before September 1, 2017.

IT IS SO ORDERED.

s/ Patricia Campbell-Smith

PATRICIA CAMPBELL-SMITH

Judge

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