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Insurance Company of West v. Afford-As-Home, Inc.

United States District Court, W.D. Washington, Tacoma

December 2, 2014

INSURANCE COMPANY OF THE WEST, Plaintiff,
v.
AFFORD-A-HOME, INC., et al., Defendants.

ORDER GRANTING IN PART AND DENYING IN PART PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT

BENJAMIN H. SETTLE, District Judge.

This matter comes before the Court on Plaintiff Insurance Company of the West's ("ICW") motion for summary judgment (Dkt. 12). The Court has considered the pleadings filed in support of and in opposition to the motion and the remainder of the file and hereby grants the motion in part and denies it in part for the reasons stated herein.

I. PROCEDURAL HISTORY

On April 29, 2014, ICW filed an indemnification action against Defendants Afford-A-Home, Inc., Harold Janaszak, and Donna Janaszak ("Defendants"). Dkt. 1. ICW alleges that Defendants breached their Indemnity Agreement with ICW by failing to indemnify ICW for payments made on a performance bond. Id . ¶ 12.

On July 1, 2014, ICW moved for summary judgment. Dkt. 12. On July 28, 2014, Defendants responded. Dkt. 17. On August 1, 2014, ICW replied. Dkt. 20.

On September 23, 2014, the Court issued an order requesting additional briefing from the parties on a provision in the Indemnity Agreement. Dkt. 23. The Court also denied Defendants' request to dismiss the case for lack of subject matter jurisdiction, and reserved ruling on ICW's motion. Id.

On October 20, 2014, the parties filed additional briefing. Dkts. 27, 30. On October 27, 2014, ICW filed a reply brief. Dkt. 32.

II. FACTUAL BACKGROUND

In 2007, ICW posted two surety bonds-a performance bond and a maintenance bond-to the City of Buckley ("City") for the construction of a subdivision. Dkt. 1 ¶¶ 8-9. The performance bond guaranteed the construction of the subdivision in the amount of $541, 296.25. Dkt. 14, Declaration of Leonard Huseby ("Huseby Dec."), Ex. 2. The maintenance bond guaranteed the replacement or correction of items constructed in the subdivision in the amount of $486, 521.05.[1] Id.

In consideration for posting these bonds, Defendants executed an Indemnity Agreement in favor of ICW. Huseby Dec., Ex. 1. Under the Indemnity Agreement, Defendants agreed to indemnify and hold ICW harmless from all losses resulting from posting the bonds. Id. at 1. Defendants also agreed that if claims were made on the bonds they would, upon demand, deposit funds with ICW sufficient to indemnify ICW from all anticipated claims. Id. at 1-2.

The developer failed to complete the subdivision. Dkt. 21, Supplemental Declaration of Leonard Huseby ("Supp. Huseby Dec."), Ex. 6. On July 27, 2009, the City made claims in the amount of $541, 000 on the performance bond. Id. After receiving the City's claims, ICW contacted Defendants on several occasions. Supp. Huseby Dec. ¶ 3. During these communications, Defendants indicated that they planned to offer the City $207, 000 to resolve the matter. Id .

On November 8, 2013, the City sent ICW a demand letter. Huseby Dec., Ex. 3. In its letter, the City stated that it was "unwilling to wait any longer for ICW's response, " and demanded that ICW take action within twenty days. Id. at 2. The City further stated that it intended to sue ICW if ICW failed to fulfill its obligations under the bond. Id.

In response to the City's letter, ICW contacted Defendants again about resolving the City's claims. Supp. Huseby Dec. ¶ 5. Defendants told ICW that they would meet with the City to see whether the City would accept $207, 000. Id. ICW told Defendants that it did not think the City would agree to a settlement in that amount. Dkt. 28, Supplemental Declaration of Harold Janaszak ("Supp. Janaszak Dec."), Ex. 1 at 8.

On January 14, 2014, ICW followed up with Defendants. Supp. Huseby Dec., Ex.

8. ICW explained that it was "under a time limit" and needed to resolve the City's claims. Id. ICW also noted that it had no indication that Defendants were attempting to settle the City's claims. Id. ICW reiterated that it did not think the City would accept an offer of $207, 000. Id. Defendants told ICW that they were arranging a meeting with the City. Supp. Janaszak Dec., Ex. 1 at 12.

On January 30, 2014, ICW informed Defendants that ICW intended to resolve the City's claims and seek indemnification from Defendants unless they resolved the matter before the City's deadline. Supp. Huseby Dec., Ex. 9. On April 2, 2014, ICW demanded that Defendants post collateral in the amount of $541, 000. Huseby Dec., Ex. 5. Defendants did not post the requested collateral. Dkt. 1 ¶ 12.

On April 24, 2014, ICW paid $435, 000 to settle the City's claims. Dkt. 13, Declaration of Susan Karlan ("Karlan Dec.") ¶ 2. ICW also incurred expenses of $21, 236 in settling the claims. Id. According to Susan Karlan ("Karlan"), a Vice President at ICW, "[a]ll payments by ICW were made under the reasonable belief that ICW was liable or because it was expedient under all circumstances to make such payments." Id. ¶ 3.

III. DISCUSSION

ICW moves for summary judgment, arguing that Defendants breached the Indemnity Agreement by failing to post the requested collateral and by failing to indemnify ICW. Dkt. 12 at 5. ICW seeks summary judgment requiring Defendants to indemnify ICW for claims paid and expenses incurred, as well as a judgment specifically enforcing Defendants' obligations under the Indemnity Agreement. Id. at 2. In response, Defendants argue that ICW breached its fiduciary duty of good faith and that ICW is not entitled to damages or specific performance. Dkt. 17.

A. Summary Judgment Standard

Summary judgment is proper only if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). The moving party is entitled to judgment as a matter of law when the nonmoving party fails to make a sufficient showing on an essential element of a claim in the case on which the nonmoving party has the burden of proof. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). There is no genuine issue of fact for trial where the record, taken as a whole, could not lead a rational trier of fact to find for the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986) (nonmoving party must present specific, significant probative evidence, not simply "some metaphysical doubt"). See also Fed.R.Civ.P. 56(e). Conversely, a genuine dispute over a material fact exists if there is sufficient evidence supporting the claimed factual dispute, requiring a judge or jury to resolve the differing versions of the truth. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 253 (1986); T.W. Elec. Serv., Inc. v. P. Elec. Contractors Ass'n, 809 F.2d 626, 630 (9th Cir. 1987).

The determination of the existence of a material fact is often a close question. The Court must consider the substantive evidentiary burden that the nonmoving party must meet at trial-e.g., a preponderance of the evidence in most civil cases. Anderson, 477 U.S. at 254; T.W. Elec. Serv., Inc., 809 F.2d at 630. The Court must resolve any factual issues of controversy in favor of the nonmoving party only when the facts specifically attested by that party contradict facts specifically attested by the moving party. The nonmoving party may not merely state that it will discredit the moving party's evidence at trial, in the hopes that evidence can be developed at trial to support the claim. T.W. Elec. Serv., Inc., 809 F.2d at 630 (relying on Anderson, 477 U.S. at 255). Conclusory, nonspecific statements in affidavits are not sufficient, and missing facts will not be presumed. Lujan v. Nat'l Wildlife Fed'n, 497 U.S. 871, 888-89 (1990).

B. ICW's Motion for Summary Judgment

1. Breach

ICW argues that Defendants breached the Indemnity Agreement because they failed to post collateral or indemnify ICW. Dkt. 12 at 5. Defendants argue that ICW breached its fiduciary duty of good faith under the performance bond, and therefore the Indemnity Agreement is not enforceable. Dkt. 17 at 10.

Under Washington law, "[i]ndemnity agreements are interpreted like any other contract[]." Scott Galvanizing, Inc. v. N.W. EnviroServs., Inc., 120 Wn.2d 573, 580 (1993). The elements of a breach of contract claim in Washington are: (1) existence of a valid contract between the parties; (2) breach by the defendant; and (3) damages. See Hearst Commc'ns, Inc. v. Seattle Times Co., 154 Wn.2d 493 (2005).

Defendants do not dispute that they had a valid contract with ICW or that they breached the Indemnity Agreement. Instead, Defendants argue that ICW owed them a fiduciary duty of good faith under the performance bond. Dkt. 17 at 8-10. According to Defendants, ICW breached this duty by excluding Defendants from its negotiations with the City and by ignoring the defenses that Defendants wished to raise. Id. at 10. Defendants argue that ICW's breach of good faith precludes enforcement of the Indemnity Agreement. Id.

Washington state courts have not directly addressed whether sureties have a fiduciary duty of good faith in surety bonds. The Washington Supreme Court has determined that there is little difference between surety bonds and insurance contracts. See Colo. Structures, Inc. v. Ins. Co. of the West, 161 Wn.2d 577, 605 (2007). The Washington Supreme Court has further stated that "all surety bonds are regarded as in the nature' of insurance contracts, and controlled by the rules of interpretation of such contracts." Id. at 598 (citations omitted). Under Washington law, insurers have a fiduciary duty of good faith to their policyholders. Am. Mfrs. Mut. Ins. Co. v. Osborn, 104 Wn.App. 686, 696-97 (2001).

The Court need not resolve whether Washington law imposes a fiduciary duty of good faith in surety bonds, because Defendants have not counterclaimed for breach of the performance bond. In the absence of a counterclaim, Defendants' fiduciary duty arguments regarding the bond are irrelevant. The Indemnity Agreement is the contract at issue in this case. Defendants do not cite any authority or provision of the Indemnity Agreement that imposes a fiduciary duty of good faith on ICW under the Indemnity Agreement. Defendants therefore fail to raise an issue of material fact regarding the enforceability of the Indemnity Agreement.

Defendants breached the Indemnity Agreement as a matter of law. The City made claims on the performance bond, which ICW subsequently paid. Defendants, however, failed to post collateral or indemnify ICW as required by the Indemnity Agreement. The Court grants ICW's motion on the issue of liability.

2. Damages

ICW also argues that it is entitled to the damages it incurred as a result of settling the City's claims on the performance bond. Dkt. 12 at 5-6. In response, Defendants argue that ICW is not entitled to damages on several grounds. Dkt. 17 at 12-18.

"[A] surety is entitled to stand upon the letter of [its] contract." Commercial Ins. Co. of Newark, N.J. v. Pacific-Peru Constr. Corp., 558 F.2d 948, 954-55 (9th Cir. 1977) (citations omitted). In Washington, "[t]he words used in a contract should be given their ordinary meaning." MacLean Townhomes, L.L.C. v. Am. 1st Roofing & Builders Inc., 133 Wn.App. 828, 831 (2006). "Courts may not adopt a contract interpretation that renders a term absurd or meaningless." Id.

Defendants agreed to indemnify ICW for all losses resulting from posting the performance bond. Huseby Dec., Ex. 1 at 1. The Indemnity Agreement specifically provides that

any such payment or compromise made by [ICW] in the reasonable belief that it was liable for the amount paid or that it was expedient under all the circumstances to make such payment or compromise, shall be binding upon [Defendants]... whether or not such liability actually existed.

Id. The Agreement states that "[a]n itemized statement of the payment... sworn to by an [ICW] officer" is prima facie evidence of the amount of Defendants' liability. Id.

Additionally, the Indemnity Agreement includes a provision regarding ICW's obligation to defend against claims made on the performance bond. Id. That provision provides as follows:

If [Defendants] desire a claim against [ICW] to be resisted, [Defendants] shall (a) make a written request to [ICW] to defend against the claim including a statement of the basis for the defense, (b) simultaneously deposit with [ICW] cash or collateral acceptable to [ICW] in kind and amount, sufficient to cover the claim and any costs, interest, attorney fees, sanctions or other costs that may be awarded in any judgment or otherwise, and (c) either simultaneously deposit cash or collateral satisfactory to [ICW] in an amount sufficient to cover the expenses and attorney fees of defending against the claim or provide and pay the fees and expenses of counsel acceptable to [ICW] to conduct the defense.

Id.

Viewed in the light most favorable to Defendants, the evidence establishes that ICW reasonably believed it was expedient under the circumstances to pay the City's claims on the bond. Defendants were given ample time to settle the City's claims, but failed to do so. See Supp. Huseby Dec. ¶ 3. The City demanded that ICW take action. Huseby Dec., Ex. 3. To that end, the City told ICW that it intended to sue unless ICW fulfilled its obligations under the bond within twenty days. Id. at 2. In response to the City's demand, ICW informed Defendants that it was under a time limit and needed to resolve the City's claims. Supp. Huseby Dec., Ex. 8. ICW also noted that it had no indication of whether Defendants were attempting to settle the City's claims. Id. Defendants told ICW that they were arranging a meeting with the City. Supp. Janaszak Dec., Ex. 1 at 12. After not receiving any updates, ICW informed Defendants that ICW intended to settle the City's claims unless Defendants resolved the matter before the City's deadline. Supp. Huseby Dec., Ex. 9. Defendants, however, did not resolve the matter. Supp. Huseby Dec. ¶ 7. ICW subsequently paid a total of $456, 236 to settle the City's claims. Karlan Dec. ¶ 4. According to Karlan, "[a]ll payments by ICW were made under the reasonable belief that... it was expedient under all circumstances to make such payments." Id. ¶ 3.

There is an absence of evidence in the record to contest these facts. Given the City's demand and Defendants' failure to resolve the matter, ICW reasonably believed it was expedient under the circumstances to settle the City's claims. Thus, under the plain language of the Indemnity Agreement, ICW's payments are "binding upon [Defendants]." Huseby Dec., Ex. 1 at 1.

Defendants raise several arguments that they are not liable for ICW's payments. First, Defendants argue that ICW refused to consider available defenses. Dkt. 17 at 12. Additionally, Defendants argue that ICW was not actually liable for the amount paid. Id. at 13-16. Finally, Defendants argue that ICW did not provide an itemized statement of its payments. Id. at 17.

Defendants fail to raise a material issue of fact as to whether ICW reasonably believed it was expedient under the circumstances to pay the City's claims. Defendants argue that ICW refused to consider defenses, but ICW was not required to defend against the City's claims in this case. Under the Indemnity Agreement, Defendants had to satisfy three requirements if they wanted ICW to defend against the City's claims on the performance bond. Huseby Dec., Ex. 1 at 1. Specifically, Defendants had to (1) make a written request on ICW to defend against the City's claims; (2) deposit enough cash or collateral with ICW to cover the claims and any costs; and (3) deposit cash or collateral to cover the expense of defending against the claims or pay the expense of defending against the claim. Id. There is no evidence in the record that Defendants invoked this provision or complied with its requirements. Thus, ICW was not required to consider Defendants' defenses.

Defendants nevertheless argue that ICW waived the provision and its requirements. Dkt. 27 at 6. Under Washington law, "[a] waiver is the intentional and voluntary relinquishment of a known right." Jones v. Best, 134 Wn.2d 232, 241 (1998) (en banc). "[A waiver] may result from an express agreement or be inferred from the circumstances indicating an intent to waive." Bowman v. Webster, 44 Wn.2d 667, 669 (1954). "To constitute implied waiver, there must exist unequivocal acts or conduct evidencing an intent to waive; waiver will not be inferred from doubtful or ambiguous factors." Jones, 134 Wn.2d at 241. The party claiming waiver bears the burden of proving an intent to relinquish the right. Id. at 241-42.

Here, there is no evidence in the record that ICW waived the provision by express agreement. There is also no evidence establishing that ICW waived the provision through its conduct. After the City made claims on the performance bond, Defendants explained their defenses to ICW and told ICW that they would attempt to settle the City's claims for $207, 000. Supp. Huseby Dec. ¶¶ 3, 9. ICW, however, told Defendants that it did not think the City would agree to a settlement in that amount. Supp. Huseby Dec., Ex. 8; Supp. Janaszak Dec., Ex. 1 at 8. ICW also notified Defendants on several occasions that they intended to settle the City's claims if Defendants failed to do so. Supp. Huseby Dec., Exs. 8, 9. Although ICW waited to settle the City's claims, ICW's delay in doing so does not unequivocally evidence an intent to waive the provision. At most, ICW was accommodating Defendants' request to pursue settlement discussions with the City. See Supp. Janaszak Dec., Ex. 1 at 12. Under these circumstances, a reasonable fact finder would not find that ICW intended to waive the provision through its acts or conduct. Thus, ICW was not required to defend against the City's claims.

Additionally, ICW's actual liability is immaterial in this case. Under the Indemnity Agreement, any payment made by ICW in the reasonable belief that it was expedient under the circumstances to do so is binding on Defendants "whether or not such liability actually existed." Huseby Dec., Ex. 1 at 1. As discussed above, the evidence in the record establishes that ICW reasonably believed it was expedient under the circumstances to settle the City's claims. Thus, ICW's payments are binding on Defendants, regardless of whether there was actual liability in this case. See id.

Finally, Karlan-an ICW officer-provided a sworn itemization of ICW's payments. In her declaration, Karlan states that ICW paid $435, 000 to settle the City's claims. Karlan Dec. ¶ 2. Karlan also states that ICW incurred expenses of $21, 236, which consisted of consulting fees of $13, 213.47, investigation fees of $3, 353.54, attorney fees of $4, 155.85, and expenses of $513.50. Id. Under the Indemnity Agreement, Karlan's declaration is prima facie evidence of the amount of Defendants' liability. Huseby Dec., Ex. 1 at 1.

In sum, Defendants fail to raise a material issue of fact as to whether ICW reasonably believed that it was expedient under the circumstances to settle the City's claims on the performance bond. Under the terms of the Indemnity Agreement, ICW's payments of $456, 236 are binding on Defendants. The Court therefore grants ICW's motion on the issue of damages.

3. Specific Performance

Finally, ICW argues that it is entitled to specific performance of the Indemnity Agreement. Dkt. 12 at 6-7. Defendants argue that ICW is not entitled to specific performance because ICW already has an adequate remedy at law. Dkt. 17 at 11.

Specific performance of an indemnity agreement is appropriate when there is not an adequate remedy at law. Milwaukie Constr. Co. v. Glens Falls Ins. Co., 367 F.2d 964, 965-66 (9th Cir. 1966). A surety's legal remedy of money damages is inadequate if the surety anticipates paying claims on a bond, but has not yet made payments. Id. at 966. In such a situation, the surety's liability is uncertain and thus a breach of contract claim may not be maintained. Id. In contrast, a surety's legal remedy of money damages is adequate if the surety has already paid claims and may bring a breach of contract claim. See Commercial Ins. Co. of Newark, N.J. v. Pacific-Peru Constr. Corp., 558 F.2d 948, 954-55 (9th Cir. 1977).

ICW has an adequate remedy at law in this case. ICW paid $450, 000 to settle the City's claims and incurred $21, 236 in expenses. Karlan Dec. ¶ 2. ICW's liability is therefore certain. Indeed, ICW may sue-as it has here-for money damages for breach of the Indemnity Agreement. Moreover, ICW has made no showing that it anticipates any future claims on the bond. Under these circumstances, specific performance is unavailable. The Court therefore denies ICW's motion on the issue of specific performance.

IV. ORDER

Therefore, it is hereby ORDERED that ICW's motion for summary judgment (Dkt. 12) is GRANTED in part with respect to liability and damages, and DENIED in part with respect to specific performance.


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