Allegheny Casualty Company v. Vedadi et al

Filing 80

ORDER granting #47 Counterdefendants' Motion to Dismiss all Tort-Based Counterclaims. ORDERED dismissing Counterclaim III insofar as it sounds in tort. Titanium's contract-based counterclaims, including for declaratory and injunctive relief, remain pending. FURTHER ORDERED that Plaintiff/Counterdefendant Allegheny Casualty Company and third party Counterdefendant International Fidelity Insurance Company shall file an Answer to the balance of the First Amended Answer and Counterclaim (Doc. #57 ) by May 12, 2017. Signed by Judge John J Tuchi on 4/28/17.(EJA)

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NOT FOR PUBLICATION

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IN THE UNITED STATES DISTRICT COURT

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FOR THE DISTRICT OF ARIZONA

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Allegheny Casualty Company,
Plaintiff,

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ORDER

v.

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No. CV-16-02270-PHX-JJT

Touraj Jason Vedadi, et al.,

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Defendants.

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Plaintiff/Counterdefendant Allegheny Casualty Company and third party

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Counterdefendant International Fidelity Insurance Company (collectively, “Allegheny”)

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moved the Court to dismiss Defendants/Counterclaimants Touraj and Shayna Vedadi’s,

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Titanium Builders LLC’s, TB Excavation LLC’s and TB Materials LLC’s (collectively,

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“Titanium”) Counterclaim III insofar as it seeks damages in tort for bad faith. (Doc. 47.)

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Titanium has filed a Response (Doc. 56) and Allegheny has filed a Reply in support of its

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Motion. (Doc. 58.) The Court finds this matter suitable for resolution without oral

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argument. See LRCiv 7.2(f).

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I.

RELEVANT FACTS AND PROCEDURAL HISTORY

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In 2014, Titanium entered four separate contracts to perform work related to the

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construction of multi-family apartments in North Dakota. The contracts gave the project

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owner the right to require Titanium to obtain bonds to insure the performance of the

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required work and payment of obligations under the contracts. Eventually, the owner so

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required, and Allegheny, acting as surety, issued those bonds, with Titanium acting as

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principal on the bonds and the project owner as obligee. (Doc. 56 at 2.) Before the bonds

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issued, Allegheny and Titanium entered into an Agreement of Indemnity (“Agreement”)

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wherein Titanium would indemnify Allegheny against all loss under the bonds to be

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issued, among other things.

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A dispute over the North Dakota project resulted in claims being made under the

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bonds, which claims Allegheny did not pay. Instead, Allegheny initiated the instant

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matter, seeking, among other things, indemnity from Titanium under the Agreement.

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Titanium brought counterclaims against Allegheny, including a counterclaim for “breach

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of the covenant of good faith and fair dealing and bad faith.” (Doc. 57 at 23.) To the

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extent Titanium counterclaims for tort damages under a bad faith theory, Allegheny seeks

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judgment on the pleadings. Allegheny does not seek to dismiss Titanium’s contract

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claims in its motion.

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II.

LEGAL STANDARD

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Under Federal Rule of Civil Procedure 12(c), “a party may move for judgment on

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the pleadings” after the pleadings are closed “but early enough not to delay trial.” A

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motion for judgment on the pleadings pursuant to Rule 12(c) challenges the legal

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sufficiency of the opposing party’s pleadings. Westlands Water Dist. v. Bureau of

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Reclamation, 805 F. Supp. 1503, 1506 (E.D. Cal. 1992).

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A motion for judgment on the pleadings should only be granted if “the moving

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party clearly establishes on the face of the pleadings that no material issue of fact remains

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to be resolved and that it is entitled to judgment as a matter of law.” Hal Roach Studios,

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Inc. v. Richard Feiner & Co., Inc., 896 F.2d 1542, 1550 (9th Cir. 1989). Judgment on the

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pleadings is also proper when there is either a “lack of cognizable legal theory” or the

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“absence of sufficient facts alleged under a cognizable legal theory.” Balistreri v.

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Pacifica Police Dept., 901 F.2d 696, 699 (9th Cir. 1988). In reviewing a Rule 12(c)

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motion, “all factual allegations in the complaint [must be accepted] as true and

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construe[d] . . . in the light most favorable to the non-moving party.” Fleming v. Pickard,

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581 F.3d 922, 925 (9th Cir. 2009). Judgment on the pleadings under Rule 12(c) is

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warranted “only if it is clear that no relief could be granted under any set of facts that

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could be proved consistent with the allegations.” Deveraturda v. Globe Aviation Sec.

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Servs., 454 F.3d 1043, 1046 (9th Cir. 2006) (internal citations omitted).

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III.

ANALYSIS

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Allegheny argues in brief that, under Arizona law, a surety cannot be liable in tort

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for a bad faith claim to a principal; nor can it be liable to an indemnitor in an agreement

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of indemnity. According to Allegheny, while a surety may be liable in tort for bad faith to

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its obligee, see, e.g., Dodge v. Fidelity and Deposit Co. of Maryland, 778 P.2d 1240

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(Ariz. 1989), the principal is not similarly situated to the surety as is the obligee. The

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Supreme Court of Arizona stated in Dodge that the relationship between a surety and an

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obligee is one “in which the law implies special duties not imposed on other contractual

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relationships,” and for which it thus would recognize an action in tort for bad faith. Id. at

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1242. In so concluding, the court in Dodge found present among its “most important

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factors” that the obligee plaintiff “had contracted for security or protection rather than for

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profit or commerical advantage.” Id. This factor was present in Dodge because the

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obligee—a homeowner—required the bond to protect against personal financial hardship

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that would occur once it had expended funds to purchase a home that was never

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completed.

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Allegheny argues that the law implies no similar special duties upon a surety to a

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principal precisely because, among other reasons, the principal did not contract “for

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security or protection rather than for profit or commercial advantage.” In the present case,

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it is irrefutable that the reason Titanium contracted for the performance and payment

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bonds was for profit or commercial advantage—the contracts with the project owner

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specified that the owner had the right to require performance and payment bonds; if

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Titanium did not comply with that provision, it would have been in breach of the

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contracts. And when, at the outset of the contracts, the owner had not yet required

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Titanium to secure the bonds, Titanium elected not to do so. Indeed, the only party, if

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any, that might be said to have sought security or protection from the performance and

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payment bonds in this case was the project owner, who is not a party to this action. For

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these reasons, the Court agrees with Allegheny.

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In opposing Allegheny’s argument, Titanium points to the following language

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found elsewhere in Dodge: “[w]e do not dispute that a surety has an enforceable

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obligation of good faith toward its principal.” Id. at 1243. Based on this citation,

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Titanium urges the Court to conclude that an action in tort lies for bad faith in the instant

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action. The Court is not persuaded. First, the above statement is dictum, not necessary to

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the court’s holding in Dodge. Second, the case the court in Dodge cited for the above

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proposition, Cushman v. National Surety Corp., 417 P.2d 537 (Ariz. 1966), undermines

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the conclusion Titanium would have this Court reach.

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In Cushman, the Supreme Court of Arizona addressed the requirement that a

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surety act in good faith generally, but never in the context of possible tort damages. The

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court in Cushman made explicitly clear that it considered liability for breach of the duty

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of good faith solely in terms of contract action: “The liability of a surety is measured by

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his contract, and while he is liable to the full extent thereof, such liability is strictly

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limited to that assumed by its terms.” Id. at 540.

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Although an aged case, on the above point Cushman stands for a proposition

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replete in subsequent Arizona case law: that every contract, no matter what the subject

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matter, carries with it the implied duty of good faith and fair dealing, Rawlings v.

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Apodaca, 726 P.2d 565, 569–70 (1986), and that duty is enforceable. But it is also

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consistent with the principle that “the remedy for breach of this implied covenant [of

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good faith and fair dealing] is ordinarily by action on the contract.” Burkons v. Ticor Title

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Ins. Co. of Cal., 813 P.2d 710, 720 (Ariz. 1991). It is only when a contract is between

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parties having a “special relationship” of the nature discussed in Dodge, where the goal

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of the contract is for “something more than commercial advantage,” id., that the breach is

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enforceable in tort. Allegheny has identified case law from numerous other jurisdictions

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that, while not precedential in nature, is uniformly persuasive in its reasoning consistent

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with the above. See, e.g., U.S. ex rel. Custom Grading, Inc. v. Great Am. Ins. Co., 952 F.

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Supp. 2d 1259, 1265 (D.N.M. 2013); Masterclean, Inc. v. Star Ins. Co., 556 S.E.2d 371,

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376-77 (S.C. 2001).

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For the same reasons that bad faith tort liability cannot lie based on the surety-

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principal relationship, neither can it lie based on any special duties running from surety to

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indemnitor through an agreement of indemnity. As Allegheny points out, it is the surety

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who looks to the indemnitor for indemnification, not the other way.

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In sum, Titanium has not produced a single case demonstrating that Arizona courts

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have upheld a bad faith claim sounding in tort against a surety brought by a principal or

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an indemnitor. Even if it found Titanium’s argument appealing, absent such law, this

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Court will not be so bold as to declare a new cause of action under Arizona law.
IT IS ORDERED granting Counterdefendants’ Motion to Dismiss all Tort-Based
Counterclaims (Doc. 47).

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IT IS FURTHER ORDERED dismissing Counterclaim III insofar as it sounds in

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tort. Titanium’s contract-based counterclaims, including for declaratory and injunctive

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relief, remain pending.

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IT IS FURTHER ORDERED that Plaintiff/Counterdefendant Allegheny

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Casualty Company and third party Counterdefendant International Fidelity Insurance

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Company shall file an Answer to the balance of the First Amended Answer and

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Counterclaim (Doc. 57) by May 12, 2017.

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Dated this 28th day of April, 2017.

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Honorable John J. Tuchi
United States District Judge

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