Arch Insurance Company v. Sierra Equipment Rental, Inc. et al

Filing 177

ORDER signed by District Judge Kimberly J. Mueller on 7/25/2016 ORDERING that Arch's 153 Motion for Summary Judgment is GRANTED. Arch is awarded $3,915,940.53 in damages. The order to show cause issued on 5/12/2016 is DISCHARGED as to Arch and Sierra. (Zignago, K.)

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UNITED STATES DISTRICT COURT

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FOR THE EASTERN DISTRICT OF CALIFORNIA

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ARCH INSURANCE COMPANY, a
Missouri corporation,
Plaintiff,

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No. 2:12-cv-00617-KJM-KJN

ORDER
v.
SIERRA EQUIPMENT RENTAL, INC., a
California corporation; MELVIN R.
WEIR, an individual; CAROLYN S.
SCAROLA, as trustee of the Dry Creek
Ranches Trust; CAROLYN S. SCAROLA,
an individual,

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Defendants.

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This matter is before the court on the motion for partial summary judgment
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brought by plaintiff Arch Insurance Company (Arch), on its breach of contract claim against
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defendant Sierra Equipment Rental, Inc. (Sierra). Mot., ECF No. 154. The motion is unopposed,
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as Sierra is without counsel.1 The court held a hearing on May 6, 2016, and neither party

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appeared. The court subsequently ordered the parties to show cause as to why they should not be
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sanctioned for failing to appear. ECF No. 170. Arch responded, indicating it did not appear at
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The court has previously addressed the problem posed by the lack of counsel for Sierra
given its corporate status. ECF Nos. 163, 167.
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the hearing due to a calendaring error compounded with the confusion over Sierra’s lack of

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representation. ECF No. 171. For reasons explained below, the court GRANTS Arch’s motion

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for partial summary judgment and DISCHARGES the order to show cause as to Arch. Sierra’s

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OSC is also DISCHARGED, given that nothing before the court indicates it could enforce any

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monetary sanctions ordered, and in light of the adverse decision by the court against Sierra in the

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resolution of this motion.

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I.

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FACTUAL BACKGROUND
In 2012, Sierra was a corporate entity in good standing with rights to conduct business in

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California. Stmt. of Undisputed Material Facts (SUMF) No. 23, ECF No. 155. Previously, on

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August 12, 2005, Sierra and others, including Melvin Weir and Carolyn Scarola (collectively,

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“Indemnitors”), executed a General Indemnity Agreement (GIA) as partial consideration for

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Arch’s issuance of bonds covering Sierra’s construction contracts for the two projects at issue

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here: the Lake County and Shasta County Projects. See SUMF Nos. 1, 2, 8; Pearce Decl., Ex. A,

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ECF No. 157 at 12.2 In consideration of Arch’s issuance of the payment and performance bonds,

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the GIA requires Sierra to indemnify and hold Arch harmless for any “loss” as defined in the

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GIA, which includes

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Any and all liability, losses, costs, expenses, and fees of whatever
kind or nature, that [Arch] may sustain or incur as a result of
executing any [b]ond or as a result of the failure of [Sierra] or
Indemnitors to perform or comply with [the GIA]. Loss includes
but is not limited to: (a.) sums posted by [Arch] as a reserve for the
payment of potential losses and / or expenses, (b.) all costs and
expenses incurred in connection with investigating, paying or
litigating any claim, and / or enforcing [the GIA], including but not
limited to legal fees and expenses, professional and consulting fees,
technical and expert witness fees and expenses, (c.) all accrued and
unpaid premiums owing to [Arch] for the issuance, continuation or
renewal of any [b]onds or for any policy of insurance issued by
[Arch] for [Sierra] or Indemnitors, (d.) funds advanced by [Arch] to
[Sierra] in connection with a Bonded Contract, and (e.) all other
amounts payable to [Arch] according to the terms and conditions of
[the GIA] . . . .

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SUMF No. 4; Pearson Decl., Ex. A at 9.

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All page numbers in this order cite to the ECF pagination unless otherwise stated.
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The GIA also requires the following:

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4. Posting of Collateral – Indemnitors agree to deposit with [Arch],
immediately upon demand by [Arch], an amount equal to the
greater of (a.) the amount of any reserve established by [Arch] to
cover any actual or potential Loss, or (b.) the amount of any claim
or claims or other liabilities asserted against [Arch] as a result of
issuing any [b]ond . . . .

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8. Discharge of Surety – Upon the request of [Arch], [Sierra] and
Indemnitors will procure the discharge of [Arch] from any [b]ond,
and all liability arising therefrom, and provide evidence to [Arch]
regarding the same.
9. Access to Books & Records – [Arch], including its designated
agents, shall, at any and all times, have unrestricted access upon
reasonable notice to review all books and records of [Sierra] and
Indemnitors . . . .

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SUMF Nos. 4, 5, 6; Pearson Decl., Ex. A at 9–10. Lastly, the GIA also provides that Sierra and

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the Indemnitors agree to accept vouchers or other evidence of payments made by Arch for any

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Loss sustained or incurred by reason of having executed any Bond. SUMF No. 26; Pearson

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Decl., Ex. A at 9.

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In reliance on Sierra and Indemnitors’ representations in the GIA, Arch issued

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bonds guaranteeing Sierra’s performance of two contracts, and Sierra’s payments to

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subcontractors and suppliers in connection with those contracts: (1) Sierra’s contract with the

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California Department of Transportation (CalTrans) for construction on Route 53 in Lake County

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(the Lake County Project) (payment and performance bonds, with penal sums of $11,311,521.95

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and $5,655,768.98, respectively to cover alternative performance of the contract if needed); and

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(2) Sierra’s subcontract with Tutor-Saliba Corporation (Tutor) for construction on Antler’s Bridge

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located in Shasta County (the Shasta County Project) (payment and performance bonds, with a

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penal sum of $6,532,874.00 to cover alternative performance of the subcontract if needed).

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SUMF Nos. 8–9. The bonds are collectively referred to as the “Bonds” in this order.

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By January 2012, Sierra had failed to pay a number of subcontractors on the Lake
County Project, resulting in numerous claims on the Bonds for that project. SUMF No. 10. At

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the same time, Sierra requested financial assistance from Arch. SUMF No. 11. In mid-February

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2012, Arch demanded that Sierra fulfill its obligations under the GIA, including exonerating Arch

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from potential liabilities, indemnifying Arch, and providing collateral in the amount of

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$1,461,918.83, the total amount in claims asserted against Arch’s Bonds at the time. SUMF No.

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15. However, by the end of February 2012, Sierra defaulted not only on its contract for the Lake

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County Project but also for the Shasta County Project contract, resulting in claims against both

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Projects’ Bonds by the Project owners, CalTrans and Tutor, and $6,737,855.98 in losses to Arch

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as of January 12, 2016. SUMF No. 10–13; Pearce Decl. ¶ 9, Ex. E. Tutor, with whom Sierra

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subcontracted for the Shasta County Project, filed a civil action against both Sierra and Arch as a

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result of the default, alleging damages in excess of $6,532,874.00. Id. at 13–14. At the time Arch

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filed its motion, the civil action was pending in Los Angeles Superior Court. Id.

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Since 2012 Arch has made numerous requests to inspect Sierra’s books and

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records. SUMF No. 25. Sierra has refused, and Arch retained legal counsel to gain access. Id.

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Arch has recovered $2,821,915.45 in credits against its losses under the Bonds. SUMF No. 27.

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As of January 12, 2016, Sierra’s corporate status with the California Secretary of State was

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forfeited, meaning Sierra has not filed its franchise tax return or paid the tax due thereunder.

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SUMF No. 28; Van Ornum Decl. ¶ 5 & Ex. B, ECF No. 156; see also Business Search – Field

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Descriptions and Status Definition, California Secretary of State web page, available at

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http://www.sos.ca.gov/business-programs/business-entities/cbs-field-status-definitions/ (last

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visited May 2, 2016 16:17GMT). Arch’s counsel has attempted to secure a stipulated judgment

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from Sierra but has been unsuccessful.

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II.

PROCEDURAL HISTORY

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Arch filed the complaint in this action on March 9, 2012. Compl., ECF No. 2. On

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May 18, 2012, the court granted Arch’s ex parte application for a right to attach order and writ of

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attachment against Sierra and the Indemnitors in the amount of $1,661,980 based on California

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Code of Civil Procedure section 487.010. See May 2012 Order, ECF No. 36. Subsequently on

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November 13, 2012, the court granted Arch’s motions for leave to amend the complaint and for a

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preliminary injunction freezing the assets of Sierra and Indemnitors. See November 2012 Order,
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ECF No. 71. In the same order, the court denied Arch’s request for a temporary restraining order

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to prevent Scarola individually, among other defendants who have since been dismissed from the

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case, from dissipating or concealing any assets she received from Sierra or the Indemnitors. Id. at

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9–11.

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The First Amended Complaint alleges a total of eleven claims for relief, some

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against all defendants, and some against only certain defendants. See generally First Am. Compl.

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(FAC), ECF No. 68. Arch moves for summary judgment only on the first cause of action: breach

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of contract against Sierra and the Indemnitors. FAC ¶¶ 36–48.

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As noted, Arch indicated it did not appear at hearing on the motion due to a

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calendaring error compounded with the confusion over Sierra’s lack of representation. ECF No.

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171. Given Arch’s response to the order to show cause and the court’s interest in reaching the

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merits of the case, the order to show cause against Arch is DISCHARGED. Sierra’s OSC is also

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DISCHARGED.

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III.

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SUMMARY JUDGEMENT
A.

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Legal Standard
As noted, Arch’s motion for partial summary judgment is unopposed. While “[a]

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district court may not grant a motion for summary judgment solely because the opposing party

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has failed to file an opposition,” Cristobal v. Siegel, 26 F.3d 1488, 1494–95 & n.4 (9th Cir.

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1994), “[t]he court may . . . grant an unopposed motion for summary judgment if the movant’s

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papers are themselves sufficient to support the motion and do not on their face reveal a genuine

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issue of material fact.” United States v. Real Property at Incline Village, 47 F.3d 1511, 1520 (9th

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Cir. 1995) (local rule cannot mandate automatic entry of judgment for moving party without

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consideration of whether motion and supporting papers satisfy Federal Rule of Civil Procedure

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56).

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The court does not weigh evidence or assess the credibility of witnesses; rather, it

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determines which facts are undisputed, then draws all inferences and views all evidence in the

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light most favorable to the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255

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(1986); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587–88 (1986).
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“Where the record taken as a whole could not lead a rational trier of fact to find for the non-

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moving party, there is no ‘genuine issue for trial.’” Matsushita, 475 U.S. at 587 (quoting First

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Nat’l Bank of Arizona v. Cities Serv. Co., 391 U.S. 253, 289 (1968)).

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The moving party bears the initial burden of “informing the district court of the

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basis for its motion, and identifying those portions of [the record] which it believes demonstrate

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the absence of a genuine issue of material fact.” Celotex Corp. v. Catrett, 477 U.S. 317, 323

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(1986). “Only disputes over facts that might affect the outcome of the suit under the governing

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law will properly preclude the entry of summary judgment.” Anderson, 477 U.S. at 247–48.

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B.

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Breach of Contract
The surety contracts of the kind at issue here are construed according to the same

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rules that govern interpretation of all contracts. Pacific Employers Ins. Co. v. City of Berkeley,

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158 Cal. App. 3d 145, 150 (1984). To prevail on a breach of contract claim under California law,

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which applies in this case, a plaintiff must prove (1) the existence of a contract, (2) the plaintiff’s

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performance of its obligations under the contract or excuse for nonperformance, (3) the

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defendant’s breach, and (4) resulting damage to the plaintiff. Richman v. Hartley, 224 Cal. App.

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4th 1182, 1186 (2014). The court looks first at whether a contract existed between Arch and

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Sierra.

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In California, to prove the existence of a contract, a plaintiff must show: (a) parties

Existence of a Contract

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capable of contracting, (2) the parties’ consent, (3) a lawful object, and (4) consideration. See

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Cal. Civ. Code § 1550. “Every contract requires the mutual assent or consent of the parties.”

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Meyer v. Benko, 55 Cal. App. 3d 937, 942 (1976) (citing Cal. Civ. Code §§ 1550, 1565). Consent

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may be manifested in several ways—in writing, through speech or by conduct—and “may be

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implied through action or inaction.” Knutson v. Sirius XM Radio Inc., 771 F.3d 559, 565 (9th Cir.

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2014). Ultimately, “[t]he existence of mutual consent is determined by objective rather than

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subjective criteria, the test being what the outward manifestations of consent would lead a

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reasonable person to believe.” Meyer, 55 Cal. App. 3d at 943. Parties consent when they “all

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agree upon the same thing in the same sense.” Cal. Civ. Code § 1580; Bustamante v. Intuit, Inc.,

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141 Cal. App. 4th 199, 209 (2006).

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First, a corporation has the power to enter into contracts in conducting its

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activities, and Sierra, at the time of contract was a corporate entity in good standing with the

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ability to conduct business lawfully in California. Cal. Corp. Code § 9140(i); see also Bates v.

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Coronado Beach Co., 109 Cal. 160, 162 (1895) (corporation has the power to enter into any

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contract essential to the transaction of its ordinary affairs). Second, the GIA was a six-page

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document, including the signature pages, with each provision clearly titled and numbered. See

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generally Pearce Decl., Ex. A. Sierra signed the GIA, and the signature was witnessed. Id. at 12–

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15. Objectively, a reasonable person would find that Sierra consented to the GIA. Cf. Silicon

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Valley Self Direct, LLC v. Paychex, Inc., No. 14-1055, 2015 WL 4452373, at *3 (N.D. Cal. July

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20, 2015) (mutual consent is determined by objective outward manifestation); see also Marin

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Storage & Trucking, Inc. v. Benco Contracting & Eng’g, 89 Cal. App. 4th 1042, 1049 (2001)

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(“ordinarily one who signs an instrument which on its face is a contract is deemed to assent to all

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its terms,” and “[a] party cannot avoid the terms of a contract on the ground that he or she failed

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to read it before signing.”). Third, California recognizes surety contracts as lawful instruments.

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Pacific Employers Ins. Co., 158 Cal. App. 3d at 150. Lastly, in return for Arch’s issuance of the

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Bonds covering Sierra’s construction contracts, Sierra agreed to indemnify and hold Arch

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harmless for certain losses as defined by the GIA, post collateral, procure Arch’s discharge from

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any Bond issued under the GIA, and provide Arch with access to its financial books and records

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if Arch requested. SUMF Nos. 1–6; Pearce Decl., Ex. A at 9–10. In other words, the GIA was

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supported by consideration. See Steiner v. Thexton, 48 Cal. 4th 411, 420-21 (2010) (for

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consideration to be valid, recipient of promise must provide bargained-for benefit or suffer

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prejudice in exchange for promise).

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The court finds as a matter of law that a contract existed between Arch and Sierra.

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2.

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The court next looks at whether Arch performed or was excused from non-

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Plaintiff’s Performance or Excuse from Non-Performance

performance. Here, Sierra agreed to the requirements in the GIA as consideration in exchange for
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Arch’s issuance of performance and payment bonds for Sierra’s construction projects. Arch

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issued the Bonds covering Sierra’s contracts for both the Lake County and Shasta County

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Projects. SUMF Nos. 8–9. Accordingly, the court finds that as a matter of law, Arch has

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performed its obligation under the GIA. Cf. American Express, F.S.B., Federal Sav. Bank v.

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Wright, No. 11-4492, 2012 WL 2343674, at *2 (N.D. Cal. June 20, 2012) (summary judgment

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granted where no genuine dispute of material fact exists as to whether plaintiff performed).

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3.

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The third element of a breach of contract claim is the defendant’s breach of the

Defendants’ Breach

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contract, or in this case, Sierra’s breach of the GIA. Arch argues Sierra breached its obligation to

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(1) indemnify, (2) provide collateral, (3) exonerate Arch, and (4) provide access to its books and

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records. Mot. at 8–10.

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Here, in terms of indemnification, Sierra agreed in the GIA to indemnify and hold

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Arch harmless for any “loss” as defined in the agreement, which includes, “Any and all liability,

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losses, costs, expenses, and fees of whatever kind or nature, that [Arch] may sustain or incur as a

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result of executing any [b]ond or as a result of the failure of [Sierra] or Indemnitors to perform or

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comply with [the GIA].” SUMF No. 4; Pearson Decl., Ex. A at 9. Sierra has yet to indemnify

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Arch for its defense costs arising from the claims asserted against the Bonds, and Arch’s

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payments on the Bonds to CalTrans, subcontractors, materialmen, and laborers. SUMF Nos. 12–

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22.

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With respect to providing collateral, Sierra agreed,

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[T]o deposit with [Arch], immediately upon demand by [Arch], an
amount equal to the greater of (a.) the amount of any reserve
established by [Arch] to cover any actual or potential Loss, or
(b.) the amount of any claim or claims or other liabilities asserted
against [Arch] as a result of issuing any [b]ond . . . .

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SUMF No. 4; Pearson Decl., Ex. A at 9. On February 17, 2012, Arch demanded that Sierra post

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$1,461,918.83 in collateral, the total amount in claims asserted against Arch’s Bonds at the time.

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SUMF No. 15. Sierra did not deposit the requested collateral. SUMF No. 20. Sierra also did not

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deposit any collateral for Tutor’s claim against Arch in connection with the Shasta County

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project, in the sum of $6,532,874.00 after Arch demanded it do so. SUMF No. 9, 13–14, 15. As
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discussed above, Tutor has filed a civil action against Arch, and in connection with that action, to

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date, Sierra has not “procure[d] the discharge of [Arch] from any Bond, and all liability arising

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therefrom, and provide[d] evidence to [Arch] regarding same.” SUMF No. 5; Pearson Decl., Ex.

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A at 10.

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Finally, Sierra agreed at the time of contracting to provide access to its books and

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records under the GIA at Arch’s request. SUMF No. 6; Pearson Decl., Ex. A at 10. Since 2012

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Arch has made numerous requests to inspect Sierra’s books and records, in vain. SUMF No. 25.

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Arch has had to retain legal counsel to advance its interests in the face of Sierra’s refusal. Id.

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As a matter of law, the court finds Sierra has breached its obligations with respect
to indemnification, collateralization, exoneration, and provision of access to books and records.

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4.

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Once a breach of contract has been shown, California law applies a liberal rule in

Damages

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allowing a court or jury to determine the amount of damages. Hunt Foods v. Phillips, 248 F.2d

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23, 33 (9th Cir. 1957); Cal. Lettuce Growers v. Union Sugar Co., 45 Cal. 2d 474, 486–87 (1955).

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California law also limits contract damages to damages reasonably within the contemplation of

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the parties as a probable result of a breach at the time the contract was formed. Brandon & Tibbs

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v. George Kevorkian Accountancy Corp., 226 Cal. App. 3d 442, 457 (1990). The California Civil

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Code provides that “[n]o damages can be recovered for a breach of contract which are not clearly

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ascertainable in both their nature and origin.” Cal. Civ. Code § 3301.

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Here, the GIA provides that Sierra, among others, “agree[s] to indemnify and hold

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harmless [Arch] for any and all Loss sustained or incurred by reason of having executed any and

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all Bonds.” SUMF No. 3; Pearce Decl., Ex. A at 9. As a result, Arch can recover, based on

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Sierra’s breach of contract, the $6,737,855.98 it incurred in losses paid for claims on the Bonds,

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loss adjustment expenses, consulting fees, attorney’s fees and related costs, less the

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$2,821,915.45 recovered from other Indemnitors or defendants since the beginning of this action,

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for a total of $3,915,940.53. SUMF No. 10–13; Pearce Decl. ¶ 9, Ex. E. However, with respect

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to the additional $6,532,874.00 Arch may suffer as a result of Tutor’s pending civil action arising

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from Sierra’s breach of contract, that amount is not currently recoverable, because it has not been
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finally determined. See StreamCast Networks, Inc. v. IBIS LLC, No. 05-04239, 2006 WL

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5720345, at *4 (C.D. Cal. 2006) (Where the underlying action to a claim is not final and a breach

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of contract claim will not settle all of the contractual issues on which plaintiff seeks relief,

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declaratory relief is appropriate).

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IV.

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Arch’s motion for summary judgment is GRANTED. Arch is awarded
$3,915,940.53 in damages.

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CONCLUSION

The order to show cause issued on May 12, 2016 is DISCHARGED as to Arch and
Sierra.
IT IS SO ORDERED.
DATED: July 25, 2016.

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UNITED STATES DISTRICT JUDGE
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