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Rexam Beverage Can Co. v. Bolger

August 24, 2010


Appeals from the United States District Court for the Northern District of Illinois, Eastern Division. No. 06 C 2234-Martin C. Ashman, Magistrate Judge.

The opinion of the court was delivered by: Tinder, Circuit Judge.


Before EASTERBROOK, Chief Judge, and MANION and TINDER, Circuit Judges.

This commercial landlord-tenant dispute involves a tenant who overstayed its welcome at a warehouse with a leaky roof, the replacement of which both landlord and tenant deny is their responsibility. After the tenant filed an action for declaratory judgment against the landlord, the landlord counter-claimed on several Illinois state law grounds. The district court, sitting in diversity, ruled in the landlord's favor and found the tenant liable for over $1.5 million in damages, including roughly $400,000 for the replacement of the roof. The district court also awarded the landlord over $800,000 in attorneys' fees and costs. The tenant appeals. We affirm in part, vacate in part, and remand for proceedings consistent with this opinion.

I. Background

A. Factual

In 1966, plaintiff-appellant Rexam's predecessor in interest and defendants-appellees' predecessor in interest entered into a complex tax-advantaged transaction under which Bolger's predecessor financed and constructed*fn1 a warehouse in Loves Park, Illinois, and leased it to Rexam and its predecessors for an extended period of time. (Loves Park is near Rockford; Rexam refers to the warehouse as the "Rockford Warehouse.") Rexam occupied the warehouse for nearly forty years without incident, and in late 2005 attempted to extend its tenure there for another five years. But the lease contained a provision requiring 180-days' renewal notice, and Rexam delayed in notifying Bolger of its intent to renew the lease until only about 90 days remained in the current lease term. Bolger informed Rexam in writing that the lease would expire at the end of the term, on March 31, 2006, and that Rexam would need to cede possession to him at that time. He also indicated that some repairs would need to be made to the property before Rexam vacated the warehouse.

Two weeks before Rexam was supposed to vacate, it filed a declaratory judgment action, seeking a ruling that Bolger had waived any objection to its late renewal notice. (This appeal stems in part from counterclaims related to that action.) While the action was pending before the district court, and even after it was eventually resolved in Bolger's favor in July 2007, Rexam remained in possession of the warehouse. In May 2006, Bolger notified Rexam that he intended to seek double the market rental value of the warehouse for each month that Rexam overstayed the lease. See 735 Ill. Comp. Stat. 5/9-202 ("Holdover Statute"). Apparently undeterred, Rexam demanded that Bolger honor its lease renewal request, continued to remit rent payments to Bolger, and paid the utilities each month. Bolger did not acknowledge the utility payments, which Rexam made directly to the providers, and he returned all the rent checks uncashed. Rexam nonetheless continued its occupation of the warehouse.

Rexam searched for a suitable replacement warehouse throughout 2006. It ultimately negotiated a lease for what it maintains was a "superior" facility in September 2006. It agreed to rent that property for a gross rate of $2.60 per square foot. (A gross rental rate has insurance, taxes, and utilities built in. "Net" or "triple net" rates reflect only the cost of the property itself; tenants typically pay the insurance, taxes, and utilities separately under so-called net leases.) Bolger's expert, whose testimony the district court credited over that of Rexam's lay witness, valued the Loves Park warehouse at a gross rate of $4.38 per square foot.

Sometime in mid-April 2007, Rexam moved into its new premises and informed Bolger that he could take possession of the warehouse after Rexam finished some repairs it believed were required under the lease. Between April and August 2007, Rexam undertook $265,000 worth of repairs to the Loves Park property. It completed the repairs on August 30, 2007, and ceded possession to Bolger on August 31, 2007, seventeen months after the lease had expired.

Bolger claims that several features of the warehouse were in disrepair when he retook possession. The roof is the main one at issue here. Bolger had the roof inspected on November 28, 2007, and the inspector determined that the roof flashings and insulation had been exposed to the weather and noted that the roof felt spongy when he walked on it. The inspector concluded that the roof would need to be removed and replaced, a project he estimated would cost $405,470.

Bolger made no attempt to repair or replace the roof. Instead, on January 16, 2008, he sold the property as-is for $1,825,000. (The buyer subsequently replaced the roof at its own expense.) Bolger claims this sale price reflected a significant discount for the poor condition of the roof, and asserts that the condition of the roof adversely affected his negotiations with potential buyers.

B. Procedural

This action is before us as a result of Rexam's March 14, 2006, attempt to procure a declaratory judgment that Bolger waived objections to its lease renewal. Rexam, a citizen of Delaware and Illinois for diversity purposes, filed its action in Illinois state court, but Bolger, who has Florida and Iowa citizenship, removed the action to the Northern District of Illinois on diversity grounds. See 28 U.S.C. §§ 1332, 1441. Bolger also filed Illinois state law counterclaims for forcible entry and detainer, wrongful possession, and breach of contract, and sought reimbursement of double rent under the Holdover Statute. On July 24, 2007, the district court determined that Rexam's notice of renewal was untimely and that its holdover tenancy was "willful" for the purposes of the Holdover Statute.

After Rexam vacated the property at the end of August 2007, Bolger amended his counterclaims and moved to set a termination date for Rexam's willful holdover tenancy. The court treated his motion as one for partial summary judgment, and on January 18, 2008, concluded that Rexam tendered possession of the property and ended its holdover tenancy on August 31, 2007. Even after this ruling and another ruling later that month, several elements of Bolger's counterclaims remained unresolved, including the fair market rental value of the warehouse and Rexam's liability, if any, for damage to the property and other alleged violations of the lease.

The case proceeded to a five-day bench trial, after which the district court entered final judgment for Bolger. The court determined that Rexam was liable for $1,156,232.24 in damages as a result of its holdover tenancy and the Holdover Statute; this amount was calculated using the gross rental rate of $4.38 per square foot and reflected a $101,471.59 setoff for Rexam's payment of utilities while it held over. The court also ordered Rexam to pay $405,470 to cover the replacement cost of the roof, and $20,306 to replace some broken dock levelers.

The district court later awarded Bolger $744,726.87 in attorneys' fees, $70,000 in supplemental attorneys' fees (to cover the expenses associated with his motion for attorneys' fees) and $5338.42 in taxable costs. All told, Rexam is on the hook for over $2.4 million: $1,582,008.24 in damages and $820,065.29 in attorneys' fees and costs. In this consolidated proceeding, Rexam disputes several aspects of the district court's three final judgments, including its liability for the roof and Bolger's proof of dam-ages thereto, the application of the Holdover Statute and the calculation of Bolger's damages thereunder, and the award and amount of Bolger's attorneys' fees. We consider these issues in turn.

II. Discussion

A. The Roof

1. Liability

Rexam first challenges the district court's conclusion that its lease with Bolger required it to replace the roof. Rexam argues here, as it did at trial, that it was only responsible for general maintenance and upkeep of the property and not for major repairs of the warehouse's structural components. It argues that the district court misconstrued the language of the lease and erroneously concluded that responsibilities not directly assigned to the landlord automatically fell to the lessee. Rexam also asserts that the district court incorrectly read pertinent clauses of the lease in isolation rather than as part and parcel of the document as a whole. Bolger counters that Rexam's obligation to replace the roof was "plainly discoverable in the lease," that the parties intended for Rexam to bear the cost of such structural changes, and that the "ordinary wear and tear" clause does not absolve Rexam of its responsibility to replace the roof. The district court's interpretation of contract language is a question of law that we review de novo. See Int'l Prod. Specialists, Inc. v. Schwing Am., Inc., 580 F.3d 587, 594 (7th Cir. 2009). We review its interpretation of state law the same way. Salve Regina Coll. v. Russell, 499 U.S. 225, 239 (1991); Estate of Moreland v. Dieter, 576 F.3d 691, 695 (7th Cir. 2009).

Under Illinois law, which the lease by its terms renders controlling and which is applicable in this diversity action, see Erie R.R. v. Tompkins, 304 U.S. 64, 78 (1938), leases are treated no differently than other written con-tracts, Williams v. Nagel, 643 N.E.2d 816, 822 (Ill. 1994), so we begin with an analysis of the terms of the lease, see Kallman v. Radioshack Corp., 315 F.3d 731, 735 (7th Cir. 2002) (applying Illinois law). Though the parties' dispute centers on a single paragraph of a twenty-four page lease, we must ultimately construe the provision as part of the whole lease, viewing it in light of the others; we cannot ascertain the intent of the parties from a single provision in isolation. Gallagher v. Lenart, 874 N.E.2d 43, 58 (Ill. 2007). However, if the language is unambiguous, that is, not susceptible to more than one meaning, we confine our analysis to the language of the lease, see id., and we read that language according to its ordinary meaning, Kallman, 315 F.3d at 736 (applying Illinois law). With these principles in mind, we look first to the provision at issue.

Article 5(c) of the lease states, in its entirety:

Maintenance and Alteration. Lessor shall have no obligation with respect to the maintenance and repair of the Premises or any buildings or improvements which may be erected or made thereon. Lessee shall be solely responsible for the maintenance of such buildings and Premises and for keeping all of the same in good condition, order and repair, including all structural and extraordinary changes that may be required, reasonable use and ordinary wear and tear excepted, and Lessee will repair, during the term, all injury or damage done by the installation or removal of equipment or property. Lessee may make structural and other alterations or additions to the Premises and to any buildings or improvements which may be erected or made thereon, provided the general character thereof is not materially changed and the value of the Premises as a whole is not reduced thereby.

Rexam argues that Article 5(c) obligates it to maintain the continuing operational state of the warehouse but not to replace substantial portions of the premises that wear out notwithstanding ordinary maintenance. It further contends that Article 5(c), when read as a whole and in conjunction with Article 11(a) ("Future Improvements"), "contemplate[s] that if in the future there is a structural or extraordinary change to the building, Rexam is responsible for the maintenance of that to the same extent as the rest of the Rockford Warehouse, 'reasonable use and ordinary wear and tear excepted.' " Appellant's Br. 23.

We do not read Article 5(c) like Rexam does. According to its plain, albeit structurally convoluted language, Article 5(c) places upon Rexam the responsibility for keeping the entirety of the premises and its structures "in good condition, order and repair, including all structural and extraordinary changes that may be required." As the rules of normal English grammar dictate, we read the phrase "including all structural and extraordinary changes that may be required" to modify the phrase preceding it, not, as Rexam would have it, modified by the "ordinary wear and tear excepted" language following it. Similarly, we read the "ordinary wear and tear excepted" language to modify the introductory clause of the sentence, "Lessee shall be solely responsible for the maintenance of such buildings and Premises and for keeping all of the same in good condition, order and repair." Pursuant to the plain terms of Article 5(c), read in accordance with common grammar rules, Rexam was responsible for keeping the premises in ...

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