## Facts

- Trident Center, a limited partnership developing an office complex in Los Angeles, borrowed $56.5 million from Connecticut General Life Insurance Company at 12.25% interest for 15 years, secured by a deed of trust.
- The promissory note barred prepayment during the first twelve years; prepayment in years 13–15 was allowed only with a sliding fee.
- The note provided that, upon default during years 1–12, the lender could accelerate the debt and add a 10% prepayment fee.
- After interest rates fell, Trident sought to refinance and attempted to repay the loan early; Connecticut General refused based on the no-prepayment clause.
- Trident sued for declaratory relief asserting it could prepay early by paying principal plus a 10% fee, relying on an interpretation tied to the acceleration/default provision.
- The case was removed to federal court; the district court dismissed for failure to state a claim, finding the contract unambiguous, and imposed Rule 11 sanctions on Trident’s counsel.

## Issues

1. Under California contract law, may a party offer extrinsic evidence to prove an intended meaning different from a facially unambiguous contract term (here, a no-prepayment clause)?
2. Did the district court err in imposing Rule 11 sanctions for advancing an interpretation arguably contrary to the contract’s plain language but supported by California’s parol-evidence doctrine?

## Decision

- The Ninth Circuit reversed the dismissal and remanded for further proceedings.
- Applying California law, the court held Trident was entitled to attempt to introduce extrinsic evidence supporting its proposed interpretation if the language was reasonably susceptible to that meaning.
- The Ninth Circuit reversed the Rule 11 sanctions, concluding Trident’s position was not frivolous given California’s expansive approach to extrinsic evidence in contract interpretation.

## Legal Principles

- In diversity cases, federal courts apply the forum state’s substantive contract law, including that state’s parol-evidence and interpretation rules.
- Under California law, apparent textual clarity does not by itself bar extrinsic evidence offered to prove an alternative meaning; admissibility turns on whether the evidence is relevant to a meaning to which the contract language is reasonably susceptible.
- A complaint seeking to prove an alternative contractual meaning via extrinsic evidence generally should not be dismissed solely because the written terms appear unambiguous on their face.
- Rule 11 sanctions are inappropriate where the legal theory has a reasonable basis in existing state law, even if the argument conflicts with a straightforward textual reading.

## Conclusion

The Ninth Circuit held that California’s interpretation doctrine permits extrinsic evidence to support a meaning different from seemingly clear contract language, so Trident’s claim could not be rejected at the pleading stage, and its counsel could not be sanctioned for pursuing a nonfrivolous argument grounded in California law.


Trident Ctr. v. Conn. Gen. Life Ins. Co., 847 F.2d 564 (9th Cir. 1988)