Travelers Casualty and Surety Company of America v. W.P. Rowland Constructors Corporation et al

Filing 108

ORDER, granting Travelers' motion for summary judgment 80 on Count 1 in the amount of $626,411.34; granting Travelers' motion for summary judgment 81 on Count 2; Defendants are ordered to provide Travelers with collateral in the to tal amount of $1,303,088 to cover Travelers financial exposure under the Bonds; collateral may not be disbursed until indemnifiable claims are determined; the remainder of the collateral, if any, must be returned to defendants once all claims are satisfied. Signed by Senior Judge Frederick J Martone on 5/21/13. (REW)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE DISTRICT OF ARIZONA

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Travelers Casualty and Surety Company of)
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America,
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Plaintiff,
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vs.
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W.P. Rowland Constructors Corporation,)
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et al.,
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Defendants.
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No. CV-12-0390-PHX-FJM
ORDER

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The court has before it plaintiff’s motion for partial summary judgment on Count 1

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(breach of contract) (doc. 80), defendants’ response (doc. 89), plaintiff’s reply (doc. 98); and

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plaintiff’s motion for partial summary judgment on Count 2 (specific performance–collateral

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security) (doc. 81), defendants’ response (doc. 92), and plaintiff’s reply (doc. 99).

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I.

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Plaintiff Travelers Casualty is a surety company that guarantees the performance of

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selected contractors. In 2011, Travelers issued over $17 million in performance bonds and

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over $17 million in payment bonds (“Bonds”) on behalf of Rowland Constructors in

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connection with certain construction projects in Texas and Oklahoma known as the

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Limestone Hospital, Comanche Hospital, and Birchman Church Projects. To induce

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Travelers to issue these Bonds, each of the defendants executed an Indemnity Agreement

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promising to indemnify Travelers from any claim it might receive or loss it might sustain as

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a result of issuing the Bonds. Amended Compl. Ex. A. Defendants also promised that if

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requested they each would provide collateral as security to protect Travelers against loss or

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exposure on the Bonds.

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By December 2011, defendants began experiencing cash flow problems and informed

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subcontractors that “any claim for unpaid work after the week of January 9th should be filed

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with the Surety Claims department.” Id. ¶ 37. Defendants failed to pay subcontractors and

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the subcontractors in turn made claims against Travelers.

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indemnification from defendants on claims it has already paid in the amount of $626,411.34.

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Travelers is also facing in excess of $516,000 in pending payment Bond claims, as well as

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a lawsuit on the Limestone Project performance bond with claimed damages against Rowland

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Constructors in excess of $2 million. Travelers has demanded that defendants deposit

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$1,303,088 as collateral security for pending and anticipated future claims. Id. ¶ 48.

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Defendants have refused to provide either the indemnification or the collateral.

Travelers has sought

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Travelers is also concerned that defendants have transferred or otherwise encumbered

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property that was to have served as collateral under the Bonds. For example, on January 13,

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2012, defendants William P. Rowland and Linda L. Rowland, trustees of the WLR Trust I,

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recorded warranty deeds transferring real property from the WLR Trust I (an indemnitor and

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defendant here) to the WLR Trust II and WLR Trust III, trusts that are not indemnitors. Id.

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¶ 42. Travelers contends that these transfers were made in order to protect assets from

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creditors such as Travelers.

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II.

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Defendants promised under the Indemnity Agreement to “exonerate, indemnify and

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save [Travelers] harmless from and against all Loss.” Id., Ex. A ¶ 3. The parties agreed that

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“[a]n itemized, sworn statement by an employee of [Travelers], or other evidence of

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payment, shall be prima facie evidence of the propriety, amount and existence of

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Indemnitors’ liability. Amounts due to [Travelers] shall be payable upon demand.” Id.

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Defendants also agreed under the Indemnity Agreement “to deposit with [Travelers],
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upon demand, an amount as determined by [Travelers] sufficient to discharge any Loss or

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anticipated Loss.” Id. ¶ 5. A collateral security provision provides a surety with access to

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funds from the indemnitors before the liquidation and payment of claims, so that the surety’s

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obligation to advance its own funds to satisfy bond obligations is reduced or eliminated.

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Travelers argues in Count 2 of the Amended Complaint that it is entitled to specific

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performance on the collateral security provision.

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Travelers filed this action against defendants under the Indemnity Agreement for (1)

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breach of contract; (2) specific performance on the collateral security provision; (3) quia

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timet, seeking equitable relief enjoining defendants from transferring assets that would

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otherwise be used to satisfy bond obligations; and (4) claim and delivery, permitting

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Travelers to obtain possession of defendant’s property in which it has perfected its rights as

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collateral under the Bonds. We have denied without prejudice Traveler’s motion for

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preliminary injunction (doc. 45).

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Travelers moves for summary judgment on Count 1 for breach of contract under the

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Indemnification Agreement. It asserts that to date it has paid $299,939.97 in claims on the

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Comanche Hospital Project, and $326,471.37 in claims on the Birchman Church Project, and

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asks us to enter partial judgment in its favor in the total principal sum of $626,411.34.

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Travelers also requests an award of attorney’s fees and costs incurred to date in the amount

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of $18,327.78. To avoid filing additional motions each time a new claim is paid, Travelers

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seeks judgment on Count 2 of the Amended Complaint on its right to receive collateral. It

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seeks a judgment ordering defendants to deposit $1,303,088 in collateral security.

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In response to both motions for summary judgment, defendants argue that (1)

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Travelers breached its duty of good faith and fair dealing under the Indemnity Agreement,

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and thereby failed to mitigate its damages, and (2) the Birchman Church Project Bond was

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not properly executed and is therefore void.

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III.

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A. Good Faith and Fair Dealing/Mitigation of Damages

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Defendants contend that Travelers breached its duty of good faith and fair dealing
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under the Indemnity Agreement when it induced Birchman Church to terminate its contract

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with Rowland Central. They contend that this early termination of the construction

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agreement caused Rowland to lose all potential profits that it would have realized at the

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completion of the project. Although defendants acknowledge that they began having cash

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flow problems in late 2011, they argue that if they had been able to complete the Birchman

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Project they would have been able to pay off most of the bond claimants.

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Defendants have presented no evidence to support their claim that Travelers breached

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its duty of good faith and fair dealing. Although they argue that Travelers “effectively urged

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Birchman Baptist Church to declare Rowland Central in default and to terminate the

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contract,” DSOF ¶ 39, the written correspondence between Travelers and Birchman

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demonstrates that Travelers acted within its rights under the Indemnity Agreement.

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Defendants agreed that if any defendant failed to “make payment of a properly due

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and owing bill in connection with any Contract,” Travelers could “take immediate possession

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of Contract funds, whether earned or unearned.” Amended Compl., Ex. A ¶ 6(d)(ii). It is

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undisputed that defendants failed to pay subcontractors in September, October, and

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November of 2011. Therefore, by their Agreement, Travelers was within its right to ask the

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Bond obligee (Birchman Church) for the contract funds.

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Defendants also contend that Travelers breached its duty of good faith when it filed

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two UCC-1 financing statements against defendants’ assets in December 2011. They argue

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that the UCC filings inhibited their ability to borrow money and impaired their business

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operations. But Travelers was within its rights under the Indemnity Agreement to perfect its

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security interest in collateral by filing financing statements. Id. ¶ 12.

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Travelers did not breach its duty of good faith and fair dealing in its communications
with Birchman or in filing the UCC-1 statements.
B. Validity of Birchman Church Bond

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Defendants also argue that Scott Lee, Director of Rowland Companies Central, Inc.,

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who executed the Birchman Church Project Bond, was not an officer of Rowland and was

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not authorized to execute the Bond. Without an authorized signature, defendants contend
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that the Bond is void.

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Again, we disagree. Defendants specifically agreed that the lack of a proper signature

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would not create a defense to their obligations under the Indemnity Agreement. “The failure

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to sign or the improper execution of a Bond shall not affect [Travelers’] rights under [the

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Indemnity Agreement], and Indemnitors waive any claim . . . arising out of the failure to sign

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or properly execute a Bond.” Id. ¶ 16. Therefore, defendants have waived the argument that

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the Bonds were not properly executed.

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IV. Count 1 – Breach of Contract

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Defendants have presented no issue of material fact with regard to its breach of the

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Indemnity Agreements. Therefore, it is ordered granting Travelers’ motion for partial

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summary judgment on Count 1 in the amount of $626,411.34. We will consider Travelers’

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request for attorney’s fees in a motion filed pursuant to LRCiv 54.2.

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V. Count 2 – Specific Performance

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Defendants agreed in the Indemnity Agreement “to deposit with [Travelers] upon

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demand, an amount as determined by [Travelers] sufficient to discharge any Loss or

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anticipated Loss.” Id. ¶ 5. Travelers asserts that it has pending payment Bond claims in

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excess of $516,000, including four lawsuits filed against Travelers by unpaid subcontractors.

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In addition, Limestone has filed an action against Rowland Constructors for construction

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defects with $2 million in claimed damages. Travelers has demanded $1,303,088.00 in

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collateral as security against these pending claims. Defendants have failed to provide

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Travelers with any portion of the collateral demanded.

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Travelers argues that as a surety, it is entitled to specific performance of the collateral

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security provision in the Indemnity Agreement, because it lacks an adequate remedy at law.

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Safeco Ins. Co. v. Schwab, 739 F.2d 431, 433 (9th Cir. 1984) (“Sureties are ordinarily

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entitled to specific performance of collateral security clauses,” because “[i]f a creditor is to

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have the security for which he bargained, the promise to maintain the security must be

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specifically enforced.”). Travelers contends that any remedy at law is inadequate in the face

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of defendants’ repudiation of their obligations under the collateral security clause in the
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Indemnity Agreement. Moreover, “where [a surety knows it will] have liability claims filed

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against it but [does] not know the amount of those claims, the legal remedy of money

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damages [is] not adequate.” Milwaukie Constr. Co. v. Glens Falls Ins. Co., 367 F.2d 964,

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966 (9th Cir. 1966).

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In response, defendants do not contest their contractual obligation to provide security

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under the Indemnity Agreement. Instead they argue that Travelers’ requested collateral is

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“grossly disproportionate to any reasonably foreseeable risk to Travelers.” Response at 11.

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Specifically, defendants contend that they are owed over $800,000 for work performed on

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the Limestone Project, and Rowland is being provided with a qualified defense by Zurich

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American Insurance Company on the construction defect lawsuit, which it argues will cover

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any potential liability for claims made on the performance Bond. But defendants do not

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explain how a disputed payment that may someday be paid, or a defense of litigation under

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a full reservation of rights, affects Travelers’ contractual right to specific performance under

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the collateral security provision.

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Travelers has submitted evidence of pending claims on the Birchman Church Project

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and pending lawsuits from unpaid subcontractors and suppliers on the Limestone Hospital

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Project in a total amount in excess of $516,000.

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performance bond subject to claims on the Limestone Project construction defect lawsuit,

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where Limestone is seeking to recover more than $2 million in damages.

Travelers also has a $14 million

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Travelers seeks judgment in the amount of $1,303,088 for specific performance of

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defendants’ collateral deposit obligation under the Indemnity Agreement. It is undisputed

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that defendants agreed to deliver security to collateralize their obligations in the event that

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Travelers faced liability on the Bonds. Travelers has sufficiently established that it currently

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faces in excess of $2.5 million in claims on the bonds Travelers is entitled to specific

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performance of the collateral security clause in the Indemnity Agreement. See The Power

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P.E.O. Inc. v. Emps. Ins. of Wausau, 201 Ariz. 559, 563, 38 P.3d 1224, 1228 (Ct. App. 2002)

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(ordering specific performance on collateral security agreement). It is ordered granting

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Travelers’ motion for partial summary judgment on Count 2.
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VI
IT IS ORDERED GRANTING Travelers’ motion for summary judgment on Count
1 in the amount of $626,411.34 (doc. 80).

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IT IS FURTHER ORDERED GRANTING Travelers’ motion for summary

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judgment on Count 2 (doc. 81). Defendants are ordered to provide Travelers with collateral

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in the total amount of $1,303,088 to cover Travelers financial exposure under the Bonds.

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Collateral may not be disbursed until indemnifiable claims are determined. The remainder

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of the collateral, if any, must be returned to defendants once all claims are satisfied.

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DATED this 21st day of May, 2013.

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