Employers Mutual Casualty Company v. B5 Incorporated et al

Filing 67

ORDER denying Plaintiff's 45 Motion for Partial Summary Judgment. (See Order for complete details.) Signed by Magistrate Judge Eileen S Willett on 11/20/2015. (ATD)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE DISTRICT OF ARIZONA

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Employers Mutual Casualty Company,
Plaintiff,

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ORDER

v.

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No. CV-14-01490-PHX-ESW

B5 Incorporated, et al.,

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Defendants.

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Pending before the Court is Plaintiff’s Motion for Partial Summary Judgment

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Regarding Collateral Security (Doc. 45) involving Plaintiff’s first and third claims for

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relief. Oral argument has been requested. However, the Court deems oral argument

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unnecessary to a determination of the issues presented. The request for oral argument is

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denied. The Federal Court has jurisdiction pursuant to 28 U.S.C. § 1332. The parties

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have consented to proceeding before a Magistrate Judge (Doc. 39) pursuant to Rule 73,

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Fed. R. Civ. P. and 28 U.S.C. § 636(c).

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After reviewing the parties’ submissions, the Court finds that genuine issues of

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material fact exist, and Plaintiff is not entitled to summary judgment on Counts I and III

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as a matter of law. Plaintiff’s Motion for Partial Summary Judgment will be denied for

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the reasons set forth herein.

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I. PROCEDURAL HISTORY

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Plaintiff filed a Complaint (Doc. 1) in Federal Court on July 1, 2014. Defendants

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filed an Answer (Doc. 28) on December 19, 2014. Plaintiff filed a “Motion for Partial

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Summary Judgment” (Doc. 45), “Statement of Facts in Support of Motion for Partial

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Summary Judgment” (Doc. 46), and “Declaration of Ryan Springer in Support of Motion

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for Partial Summary Judgment” (Doc. 47) on April 28, 2015. Defendants filed their

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“Response to Motion for Summary Judgment” (Doc. 60), “Statement of Facts in Support

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of Response to Motion for Summary Judgment” (Doc. 61), and “Declaration of Chris J.

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Brown” (Docs. 62-64) on June 19, 2015 with exhibits separately attached as Exhibit A

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(Doc. 62), Exhibit B (Doc. 63) and Exhibits C through F (Doc. 64). Plaintiff filed a

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“Reply in Support of Motion for Partial Summary Judgment” (Doc. 65) on July 13, 2015.

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Plaintiff seeks summary judgment on Counts I and III of the Complaint. Plaintiff

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alleges in Count I that Defendants breached their duty to indemnify Plaintiff, and Plaintiff

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seeks indemnification “in an amount to be proven at trial but in no event less than initial

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pay outs made by EMC in the amount of $344,854.29” (Doc. 1 at 7-8). Plaintiff alleges

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in Count III that Defendants failed to post collateral when demanded, as per the

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indemnity agreement, and Plaintiff seeks specific performance of the collateral security

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provision. (Id. at 10).

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In response to Plaintiff’s Motion for Partial Summary Judgment on Counts I and

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III, Defendants allege that Plaintiff violated the implied covenant of good faith and fair

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dealing. Therefore, Defendants assert that Plaintiff is not entitled to indemnification or

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specific performance of the collateral security provision.

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II. FACTS
Plaintiff Employers Mutual Casualty Company (“EMC”) is an Iowa corporation

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with its principal place of business located in Des Moines, Iowa.

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Incorporated d/b/a Spectrum Construction (“B5”) is an Arizona corporation with its

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principal place of business located in Tempe, Arizona. Defendant Chris J. Brown is the

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President of B5. Shelley Brown is Mr. Brown’s wife.

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Defendant B5

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Plaintiff EMC is a surety in the business of issuing surety bonds on behalf of

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contractors. Defendant B5 is a private contractor. EMC issued a performance bond

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(“Bond”) with a penal sum of $1,807,450.00 on behalf of B5 and Chris J. and Shelley

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Brown as principals. EMC issued the Bond to B5 to cover B5’s construction work

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performed on the United States Border Patrol Station (“Project”) located in Comstock,

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Texas. The general contractor on the Project was Gilbane Construction (“Gilbane”). On

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March 25, 2013, Gilbane hired B5 as a subcontractor. B5 was to perform “Earthwork

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and Site Utilities” at a contract price of $1,843,950.00 1 (Doc. 62-1 at 2). Defendants

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began work in May 2013.

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On October 8, 2012 as a condition for the issuance of the Bond, EMC required

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that B5 execute a General Application and Agreement of Indemnity (“GAI”). Defendants

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Chris J. and Shelley Brown each signed the agreement. The parties do not dispute that

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they “entered into an Indemnity Agreement, the terms of which speak for themselves.”

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(Doc. 28 at 3). Section twenty seven of the GAI sets forth a choice of law clause

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providing that the GAI “shall be construed and interpreted in accordance with the laws of

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the State of Iowa.” (Doc. 1 at 25). As neither party has cited the Court to Iowa law in the

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briefing, the Court deems the choice of law clause to have been waived for purposes of

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this dispositive motion. The relevant contractual provisions in the GAI are sections two,

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three, and eleven.

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From March 2013 until January 23, 2014, B5 submitted to Gilbane twelve

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Application and Certificate for Payment forms for work completed on the Project. All of

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B5’s pay applications were approved by both Gilbane and the United States Army Corps

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of Engineers. The history of B5’s work completed and billings submitted on the Project

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reflect that B5 substantially completed the work for which it was hired. The final

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submission indicates that Gilbane’s last payment to Defendants, once Defendants

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completed their work, would be $126,209.56, which included $102,209.56 retainage.

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By the time the January 23, 2014 Application and Certificate for Payment was
filed, the total contract sum had been increased by change orders with a combined value
of $225,241.59. The total contract sum became $2,045,191.59.
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On March 20, 2014, Defendants demobilized from the Project. Defendants were

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unable to complete their work without Gilbane’s installation of curbs and gutters on the

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Project.

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crushed rock and install stormwater protection prevention due to Gilbane’s failure to

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install curbs and gutters. A June 18, 2014 Termination for Default letter reflects that

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Gilbane sent B5 a written notice requesting deficiencies be cured on March 21, 2014 and

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April 9, 2014. Though Gilbane mailed the notices to an incorrect B5 address, Defendants

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eventually received both written notices. B5 nevertheless maintains that it was unable to

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complete its work, despite its delivery of all materials to the site, due to Gilbane’s lack of

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Specifically, B5 was unable to finish grading the Project’s driveway with

performance on the Project under the terms of the contract.

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Beginning in April 2014, EMC received claims against the Bond from parties who

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had and who had not subcontracted with B5 on the Project. EMC paid losses and

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expenses totaling $1,154,069.95 under the Bond. B5 disputes the losses and expenses

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EMC paid as being outside the scope of contracted work B5 had agreed to complete for

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the Project. B5 further asserts that it was not in default or breach of the Gilbane contract

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due to lack of proper notice, impossibility of performance, and financial impracticability.

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B5 states that its work on the Project was substantially completed, paid for, and approved

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by Gilbane when EMC started paying claims against the Bond. B5 further states that

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Chris Brown notified EMC of these facts in April 2014.

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III. LEGAL STANDARDS

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1. Summary Judgment

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Summary judgment is appropriate if the evidence, when reviewed in a light most

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favorable to the non-moving party, demonstrates “that there is no genuine dispute as to

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any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ.

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P. 56(a). Substantive law determines which facts are material in a case and “only

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disputes over facts that might affect the outcome of the suit under governing law will

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properly preclude the entry of summary judgment.” Anderson v. Liberty Lobby, Inc., 477

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U.S. 242, 248 (1986). “A fact issue is genuine ‘if the evidence is such that a reasonable

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jury could return a verdict for the nonmoving party.’” Villiarimo v. Aloha Island Air,

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Inc., 281 F.3d 1054, 1061 (9th Cir. 2002) (quoting Anderson, 477 U.S. at 248). Thus, the

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nonmoving party must show that the genuine factual issues “‘can be resolved only by a

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finder of fact because they may reasonably be resolved in favor of either party.’” Cal.

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Architectural Bldg. Prods., Inc. v. Franciscan Ceramics, Inc., 818 F.2d 1466, 1468 (9th

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Cir. 1987) (quoting Anderson, 477 U.S. at 250).

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Because “[c]redibility determinations, the weighing of the evidence, and the

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drawing of legitimate inferences from the facts are jury functions, not those of a judge . . .

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[t]he evidence of the nonmovant is to be believed, and all justifiable inferences are to be

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drawn in his favor” at the summary judgment stage. Anderson, 477 U.S. at 255 (citing

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Adickes v. S.H. Kress & Co., 398 U.S. 144, 158-59 (1970)); Harris v. Itzhaki, 183 F.3d

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1043, 1051 (9th Cir. 1999) (“Issues of credibility, including questions of intent, should be

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left to the jury.”) (citations omitted).

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When moving for summary judgment, the burden of proof initially rests with the

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moving party to present the basis for his motion and to identify those portions of the

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record and affidavits that he believes demonstrate the absence of a genuine issue of

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material fact. See Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). If the movant fails

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to carry his initial burden of production, the non-movant need not produce anything

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further. The motion for summary judgment would then fail. However, if the movant

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meets his initial burden of production, then the burden shifts to the non-moving party to

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show that a genuine issue of material fact exists and that the movant is not entitled to

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judgment as a matter of law. Anderson, 477 U.S. at 248, 250; Triton Energy Corp. v.

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Square D. Co., 68 F.3d 1216, 1221 (9th Cir. 1995). The nonmovant need not establish a

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material issue of fact conclusively in his favor. First Nat’l Bank of Ariz. v. Cities Serv.

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Co., 391 U.S. 253, 288-89 (1968). However, he must “come forward with specific facts

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showing that there is a genuine issue for trial.” Matsushita Elec. Indus. Co., Ltd. v.Zenith

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Radio Corp., 475 U.S. 574, 587 (1986) (internal citation and emphasis omitted); see Fed.

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R. Civ. P. 56(c)(1).

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Finally, conclusory allegations unsupported by factual material are insufficient to

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defeat a motion for summary judgment. Taylor v. List, 880 F.2d 1040, 1045 (9th Cir.

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1989); see also Soremekun v. Thrifty Payless, Inc., 502 F.3d 978, 984 (9th Cir. 2007)

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(“[c]onclusory, speculative testimony in affidavits and moving papers is insufficient to

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raise genuine issues of fact and defeat summary judgment”). Nor can such allegations be

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the basis for a motion for summary judgment.

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2. Implied Covenant of Good Faith and Fair Dealing

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Every contract in Arizona has an implied covenant of good faith and fair dealing.

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Rawlings v. Apodaca, 726 P.2d 565, 569 (Ariz. 1986). “The essence of that duty is that

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neither party will act to impair the right of the other to receive the benefits which flow

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from their agreement or contractual relationship.” Id. Moreover, “[t]he law of good

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faith, though inexact, attempts a remedy” in instances “where one party exercises

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discretion retained or unforeclosed under a contract in such a way as to deny the other a

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reasonably expected benefit of the bargain.” Savings. & Loan Ass’n v. SunAmp Sys., Inc.,

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838 P.2d 1314, 1319 (Ariz. Ct. App. 1992).

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The Arizona Supreme Court has explicitly held that the duty to act in good faith

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applies to sureties. Dodge v. Fidelity & Deposit Co., 778 P.2d 1240, 1243 (Ariz. 1989).

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A surety is entitled to indemnification for all money actually paid under the contract,

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unless the indemnitor can prove that such payments were not made in good faith. J. D.

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Halstead Lumber Co. v. Hartford Acc. & Indem. Co., 298 P. 925, 928 (Ariz. 1931) (“If

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the money was actually paid, the only way in which it can be attacked by the indemnitor

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is through a plea and proof of bad faith in the payment.”). Further, the Arizona Court of

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Appeals has instructed that a party cannot “use[] its discretion for a reason outside the

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contemplated range—a reason beyond the risks assumed by the party claiming a breach.”

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SunAmp Sys., 838 P.2d at 1319-20 (quoting Steven J. Burton, Breach of Contract and the

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Common Law Duty to Perform in Good Faith, 94 Harv. L. Rev. 369, 385-86 (1980)).

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Therefore, a surety may breach the implied covenant “by exercising express discretion in

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a way inconsistent with a party’s reasonable expectations and by acting in ways not

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expressly excluded by the contract's terms but which nevertheless bear adversely on the

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party’s reasonably expected benefits of the bargain.” Bike Fashion Corp., 46 P.3d at 435

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(citing Wells Fargo Bank v. Ariz. Laborers, Teamsters and Cement Masons Local No.

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395 Pension Trust Fund, 38 P.3d 12, 30 (Ariz. 2002)).

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3. Specific Performance

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For an order of specific performance to be granted, the following requirements

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must be met: (1) there must be a contract; (2) the terms of that contract must be certain

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and fair; (3) the party seeking specific performance must not have acted inequitably; (4)

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specific enforcement must not inflict hardship on the other party or public that outweighs

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the anticipated benefit to the party seeking specific performance; and (5) there must be no

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adequate remedy at law. How v. Fulkerson, 528 P.2d 853, 855 (Ariz. Ct. App. 1975).

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The Arizona Supreme Court has held that “[t]he inability to ascertain the scope of

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liability provides another reason why the legal remedy of monetary damages is not

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adequate.” Power P.E.O., Inc. v. Employees Ins. Of Wausau, 38 P.3d 1224, 1227 (Ariz.

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2002) (citing Milwaukie Constr. Co. v. Glens Falls Ins. Co., 367 F.2d 964, 966 (9th

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Cir.1966) (holding that in cases where a surety “knew it was going to have liability

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claims filed against it, but did not know the amount of those claims, the legal remedy of

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money damages would not be adequate.”)).

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IV. DISCUSSION

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In support of its Statement of Facts, Plaintiff submits the Declaration of Ryan

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Springer, claims attorney for EMC. Attached to the Declaration of Mr. Springer is a

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spreadsheet reflecting a list of claimants and “amount EMC paid” or “paid expenses.”

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(Doc. 47 at 4-5). There are no supporting invoices or bills, no dates of service, and no

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documentation which relate the amounts paid by EMC to the Project. Nor is there any

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description of the nature and scope of the work performed by the listed claimants which

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led EMC to pay the claimants under Bond No. S374509. Mr. Springer simply asserts that

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EMC paid the amounts and expenses “under the good faith belief that they were either

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necessary or expedient.” (Doc. 47 at 2).

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Assuming as true that the minimalist Declaration of Mr. Springer is sufficient

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proof that EMC paid claims and expenses of $1,154,069.95 related to the Project under

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the Bond due to B5’s actions or inactions, then the issue next presented to the Court is

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whether genuine issues of material fact exist regarding whether EMC breached the

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implied covenant of good faith and fair dealing inherent in the GAI by paying the sums

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listed.

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In support of its Response to Plaintiff’s Motion for Partial Summary Judgment,

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Defendants submit the Declaration of Chris J. Brown, President of B5.

Like Mr.

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Springer, Mr. Brown bases his affidavit on personal knowledge and belief. Attached to

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the Declaration of Mr. Brown are numerous documents reflecting: B5’s subcontract with

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Gilbane and the summary of work B5 was contracted to perform; the time schedule for

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the work; the Schedule of Values and price of the work charged; the Application and

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Certificate for Payment forms submitted for work performed on the Project by B5;

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Gilbane’s Conditional Waiver and Release forms executed for progress payments made

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over the course of the work B5 performed; Gilbane’s termination letter of June 18, 2014;

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and images of checks paid by EMC to various entities from April 2014 through October

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2014.

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completion of all contracted work for Gilbane.

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informed EMC that the materials for the remaining approved $24,000 of grading work

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had been delivered to the site. Mr. Brown states that EMC knew all the information set

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forth in Mr. Brown’s Declaration at the time it paid claims on the Bond.

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information includes Gilbane’s failure timely to complete curbs and gutters, rendering

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further performance by B5 impossible and/or financially impracticable under the Project

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contract.

Mr. Brown alleges that he notified EMC in April 2014 of B5’s substantial
Mr. Brown further asserts that he

Such

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Considering all the evidence presented in a light most favorable to the Defendants

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and drawing all justifiable inferences in their favor, the Court finds that Defendants have

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raised genuine issues of material fact regarding whether EMC breached the covenant of

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good faith and fair dealing by paying the sum of $1,154,069.95 under the Bond. The

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Court must consider the affidavit of an individual with personal knowledge who sets

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forth facts which are material and probative to the issues pending before it even if the

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affidavit is self-serving. United States v. Shumway, 199 F.3d 1093, 1103 (9th Cir. 1999);

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S.E.C. v. Phan, 500 F.3d 895, 909 (9th Cir. 2007) (“an affidavit that is self-serving bears

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on its credibility, not on its cognizability”). The Court cannot conclude as a matter of law

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that EMC’s actions in this case reasonably would have fallen within the contemplation of

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B5. A genuine issue of material fact exists as to whether EMC exercised its discretion in

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a way consistent with B5’s reasonable expectations. Whether EMC’s actions in this case

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were objectively reasonable under the circumstances is a question of fact. Whether EMC

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reasonably investigated claims it paid and treated Defendants’ positions taken reasonably

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under the circumstances are questions of fact. See Dodge v. Fidelity Deposit Co., 778

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P.2d 1240 (Ariz. 1989). EMC therefore is not entitled to judgment as a matter of law

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regarding Count I.

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With regard to Count III, the Court finds that genuine issues of material fact exist

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as to whether Plaintiff acted inequitably in this case. Further, the Court finds that an

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adequate remedy at law may well exist. If an adequate remedy at law exists, the Court

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need not fashion an equitable remedy. If the full value of all alleged claims has been paid

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by EMC under the Bond, EMC may seek a monetary judgment under the indemnification

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agreement and has no basis for requesting specific performance of the collateral security

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provision. Compare Power P.E.O., Inc. v. Emps. Ins. of Wausau, 38 P.3d at 1228-29

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(“[W]hen ‘liability had not yet been determined but claims were expected, the surety had

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no legal remedy under that provision for an indemnification award, but it did have an

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equitable remedy for specific performance of the collateral security provision.’”) (quoting

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U.S. Fid. & Guar. Co. v. J. United Elec. Contracting Corp., 62 F. Supp. 2d 915, 923

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(E.D.N.Y. 1999)). As an adequate remedy at law may exist for indemnification and

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genuine issues of material fact exist as to whether the Plaintiff has acted inequitably in

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this case, EMC has failed to prove that it is entitled to judgment as a matter of law on

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Count III.

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V. CONCLUSION

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For all of the reasons set forth herein,

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IT IS ORDERED denying Plaintiff’s Motion for Partial Summary Judgment

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(Doc. 45).
Dated this 20th day of November, 2015.

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