Lead Opinion
Opinion by Judge STAGG; Dissent by Judge TASHIMA.
This сase 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 рrovision”).
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 defеrred “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 аgainst 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 1954
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 mоtion 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. Turnеr 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.,
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 payplaintiff 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.
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,
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.
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.,
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 Reсord 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,
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,
We hold that when considеred 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.
AFFIRMED IN PART, REVERSED IN PART, and REMANDED for proceedings in accordance herewith.
Notes
. 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....
. 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.
. 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.
. 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.
. From 1954 to 1964, individuals paid an 89 percent marginal tax rate on taxable inсome 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).
. 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
.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.
. 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,
. 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.
. Despite language in Crescenta Valley Moose Lodge and Russell to the contrary, one Califоrnia 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,
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,
. 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-plеaded” 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.
Dissenting Opinion
dissenting:
I respectfully dissent.
I do not agree that Wyler Summit has stated a claim for breach of contract based on a waiver theory. Notwithstanding the parties’ clear expression of their contractual intent, the majority allows Wyler Summit unilaterally to rewrite a material term of an unambiguous agreement nearly 40 years after its formation by misapplying the California law on waiver.
Preliminarily, I take issue with the majority’s conclusion that “the district court committed two distinct errors,” first, in misapplying the applicable standard under Rule 12(b)(6) and, second, in “eonduet[ing] the wrong inquiry,” on the “for-whose-benefit” issue. The district court, in fact, did not commit error in either respect and its judgment should be affirmed.
The district court concluded that “[tjhere 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 annuаl payment.” (Initial emphasis added, remaining emphases in the original.)
The interpretation of a contract is a question of law. HS Servs., Inc. v. Nationwide
For a contractual provision to be waivable, as the cases cited by the majority recognize, the provision must have been included in the contract solely for that party’s benefit. E.g. Sabo v. Fasano,
It is evident from the face of the installment payment provision and as a matter of plain common sense that, from the contract’s inception, the provision benefitted MGM just as much, if not more so, than it benefitted Wyler. The forbearance of the payment of any debt, without interest, primarily benefits the debtor. If any party receives only an “incidental” benefit from such an arrangement, it is the creditor, whose only benefit is a tax benefit.
This is not a factual issue. This is a contract interpretation issue. As a matter of law, the district court’s interpretation of the contract was the only sensible conclusion to reach. The issue was properly reached and correctly disposed of on a 12(b)(6) motion to dismiss, where the contract was appended to and incorporated in the complaint.
On the primary legal issue of waiver, the majority relies on a line of cases beginning with Knarston v. Manhattan Life Ins. Co.,
First, the majority conveniently overlooks the black letter rule that waiver may not
As the district court understood, fundamental changes in the parties’ contractual duties may not be accomplished unilaterally through waiver, but instead require a modification of the contract by mutual consent or through estoppel. See e.g., Howard v. County of Amador,
Further, even if Turner’s failure to comply with the installment payment provision would not by itself have constituted a material breach, the provision is clearly more cruciаl to the contractual agreement than the provisions waived in the cases on which the majority relies. See, e.g., Sabo v. Fasano,
In this respect, the present ease is not analogous to Knarston, where an insurance company waived the requirement that the insured pay its premiums by a specific date,
Second, in valid waiver cases, like Knarston and its progeny, waiver of the condition makes the waiving party’s duty of performance independent of the condition. See 1 B.E. Witkin, Summary of California Law, Contracts §§ 767-68 (9th ed.1987) (collecting cases). This alteration of the contract lacks consideration аnd other validating devices. Restatement § 84, cmt. d.; 2 E. Allan Farnsworth, Farnsworth on Contracts § 8.5, at 376-77 (2d ed. 1990) (“Farnsworth ”). However, this absence is tolerated because waiver spares one of the parties (usually the non-waiving party) the loss that would occur if the waiving party’s performance were excused by failure of the condition. See Restatement § 227, cmt. b. That rationale does not apply to the instant ease because the waiving party, Wyler Summit, has already fully performed all of its duties under the contract, so there is no performance to preserve.
In fact, the only effect of waiving the installment payment provision is to add to the performance obligations of Turner, the non-waiving party, by requiring it to pay more, earlier, than was originally required under the contract. Such offensive use of waiver to impose additional duties on other parties is expressly prohibited by our caselaw interpreting California law. Groves v. Prickett,
An even more radical departure is the majority’s conclusion that Turner’s continued compliance with the provision constitutes a breach of the contract. Tellingly, the majority cites no ease (nor has my research uncovered one) where a court has held, as the majority does, that a non-waiving party’s continued compliance with the terms of a waived provision provides grounds for breach.
The majority’s new formula for waiver will no doubt have a corrosive effect on the stability of contractual relations, particularly long-term agreements. Its overly-expansive reading of Knarston removes all limits on the kinds of provision that can be waived by parties eager to engage in a line-item redrafting of their agreements.
I would affirm the district court’s order that Wyler Summit’s complaint fails to state a claim for breach of contract based on a waiver theory.
. On this issue, the majority relies on both state and federal precedent. Assuming its reliance on state cases on how a contract should be construed on a 12(b)(6) motion is correct, as the majority notes, those cases are in conflict. See Maj. op. at 663 & n. 8. Unlike the majority, I believe that the better rule is stated in WYDA Assoc, v. Merner,
. If, as the majority hypothesizes (probably correctly), Wyler’s motive in agreeing to or insisting on the installment payment provision was to avoid or defer the payment of confiscatory income taxes, then he surely had no subjective intent that the provision could be waived by him. Otherwise, he would have run afoul of the constructive receipt of income doctrine, making all of his percentage compensation immediately taxable to him upon its receipt by MGM. See generally 2 Mertens Law of Federal Income Taxation §§ 10:01-10:03 (discussing the history and substance of the constructive receipt doctrine).
. The majority’s approach will lead to some bizarre results when applied to more typical waiver situations. Once an insurance company waived the requirement of notice of a claim, the insured presumably could be held liable for breach of the notice provision, if it gave notice anyway. Cf. Restatement § 230 ill. 1 & cmt. b (discussing waiver under identical facts). Similarly, if a seller of goods waived its right to limit the buyer's period for objections to the goods to a five-day period, the buyer could be held in breach if it complied with the five-day limit. Cf. Fairbanks, Morse & Co. v. Nelson,
. I therefore would not reach the statute of limitations issue and express no opinion on it.