Opinion
CIVIL ACTION No. 02-2507-KHV
May 28, 2003.
MEMORANDUM AND ORDER
D.F. Freeman Contractors, Inc. ("Freeman") brings suit against St. Paul Fire and Marine Insurance Company ("St. Paul") to collect on a payment bond which St. Paul issued on behalf of Julius Kaaz Construction Company, Inc. ("Kaaz"). This matter comes before the Court on Plaintiff D.F. Freeman Contractors, Inc.'s Motion For Summary Judgment (Doc. #8) filed January 14, 2003 and Julius Kaaz Construction Company's Motion To Intervene As A Matter Of Right ("Motion To Intervene") (Doc. #22) filed April 7, 2003. For reasons stated below, the Court sustains Freeman's motion for summary judgment and overrules Kaaz's motion to intervene.
I. Summary Judgment Standards
Summary judgment is appropriate if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. Rule 56(c), Fed.R.Civ.P.; accord Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247 (1986); Vitkus v. Beatrice Co., 11 F.3d 1535, 1538-39 (10th Cir. 1993). A factual dispute is "material" only if it "might affect the outcome of the suit under the governing law." Anderson, 477 U.S. at 248. A "genuine" factual dispute requires more than a mere scintilla of evidence. Id. at 252.
The moving party bears the initial burden of showing the absence of any genuine issue of material fact. See Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986); Hicks v. City of Watonga, Okla., 942 F.2d 737, 743 (10th Cir. 1991). Once the moving party meets its burden, the burden shifts to the nonmoving party to demonstrate that genuine issues remain for trial "as to those dispositive matters for which it carries the burden of proof." Applied Genetics Int'l, Inc. v. First Affiliated Secs., Inc., 912 F.2d 1238, 1241 (10th Cir. 1990); see also Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87 (1986); Bacchus Indus., Inc. v. Arvin Indus., Inc., 939 F.2d 887, 891 (10th Cir. 1991). The nonmoving party may not rest on its pleadings but must set forth specific facts. See Applied Genetics, 912 F.2d at 1241.
The Court must view the record in a light most favorable to the party opposing the motion for summary judgment. See Deepwater Invs., Ltd. v. Jackson Hole Ski Corp., 938 F.2d 1105, 1110 (10th Cir. 1991). Summary judgment may be granted if the nonmoving party's evidence is merely colorable or is not significantly probative. See Anderson, 477 U.S. at 250-51. "In a response to a motion for summary judgment, a party cannot rely on ignorance of facts, on speculation, or on suspicion, and may not escape summary judgment in the mere hope that something will turn up at trial." Conaway v. Smith, 853 F.2d 789, 794 (10th Cir. 1988). Essentially, the inquiry is "whether the evidence presents a sufficient disagreement to require submission to the jury or whether it is so one-sided that one party must prevail as a matter of law." Anderson, 477 U.S. at 251-52.
II. Facts
The following facts are either uncontroverted or construed in a light most favorable to defendant:
Pursuant to D. Kan. Rule 56.1, the Court deems admitted any facts which the parties have not specifically controverted with supporting references to the record.
On March 20, 2001, Kaaz entered into a contract with the City of Leavenworth, Kansas ("the City") for construction work on Shawnee Street. Kaaz hired Freeman for certain labor and materials on the Shawnee Street project, and Freeman performed its obligations under the subcontract. Also on March 20, 2001, Kaaz entered into a contract with the City for improvements to Gatewood Street. Kaaz hired Freeman to construct sidewalks and curbs on the project. After Freeman completed its work, the City complained about the quality of the sidewalks and ordered Kaaz to replace them. Kaaz attempted to negotiate the matter with the City and Freeman, but ultimately replaced the sidewalks at a loss of $232,476.22 in labor, materials, equipment, supplies, overhead and profit. Kaaz and the City subsequently arbitrated their dispute over the sidewalks. The arbitrators found:
1. That a large portion of the work was not acceptable.
2. That due to the City's failure to inspect and react to the cited problems and the subsequent confusing orders to the contractor, the contractor [should be] awarded a portion of the actual cost of replacement.
3. The award represent[ed] ½ of the claim less profit, overhead and attorney's fees.
4. Further it [was] the arbitrators' feelings that the contractor should pursue the claim for the other half against the subcontractor.
Attachment 1 to Affidavit Of Stephen Kaaz, Exhibit A to Defendant St. Paul Fire And Marine Insurance Company's Memorandum In Opposition To Plaintiff's Motion For Summary Judgment ("St. Paul Memorandum In Opposition") (Doc. #34) filed April 28, 2003. Pursuant to the arbitration award, the City paid Kaaz $87,299.82 for one-half of the amount which Kaaz spent to replace the sidewalks — not including profit, overhead and attorneys' fees.
Kaaz contends that Freeman is liable for the other half of its cost to replace the sidewalks on Gatewood Street plus overhead, profit and attorneys' fees, for a total of $137,338.66. Kaaz and Freeman are currently litigating that issue in the District Court of Johnson County, Kansas. See D.F. Freeman Contractors, Inc. v. Julius Kaaz Constr. Co. Inc., et al., Case No. 00CV07105.
To reimburse its losses on the Gatewood Street project, Kaaz withheld $102,421.63 of monies due Freeman on the Shawnee Street project. The contract for the Shawnee Street project, however, required Kaaz to provide a payment bond to secure payment to subcontractors and suppliers for the project. Pursuant to this requirement, Kaaz obtained from St. Paul a payment bond in the amount of $2,688,028.20 ("the Bond"). The Bond provides that
if the said principal or the sub-contractor or sub-contractors of said principal shall pay all indebtedness incurred for supplies, materials or labor furnished, used or consumed in connection with or in or about the construction or making of the above described improvement . . . this obligation shall be void otherwise, it shall remain in full force and effect.
Statutory Bond at 2, Exhibit C to Statement Of Uncontroverted Facts And Suggestions In Support Of Plaintiff D.F. Freeman Contractors, Inc.'s Motion For Summary Judgment ("Freeman Memorandum In Support") (Doc. #9) filed January 14, 2003. The Bond does not address any right of setoff by Kaaz or St. Paul.
From the Bond, Freeman seeks to collect the monies which Kaaz withheld. St. Paul, on the other hand, seeks to set off Freeman's alleged debt to Kaaz on the Gatewood project. St. Paul admits that if it is not entitled to set off the debt, Freeman is entitled to collect the sum of $102,421.63 plus prejudgment interest in the amount of $20,400.15.
III. Analysis
Freeman seeks summary judgment on its claim against the Bond. Specifically, Freeman argues that St. Paul may not set off amounts due under the Bond because under Kansas law, a party may not assert a right of setoff unless two judgments exist and the judgments are mutual. See Mohr v. State Bank of Stanley, 244 Kan. 555, 565, 770 P.2d 466, 475 (1989). Even if two mutual judgments exist, a party does not have an automatic right to setoff. See Taylor v. Taylor, 180 Kan. 213, 218, 303 P.2d 133, 137 (1956). Rather, the Court has discretion whether to allow setoff, taking into consideration the equities between the parties. Id.
Freeman also asserts that if two judgments exist, they are not mutual. The Court does not reach this assertion because it finds in favor of Freeman on its first argument.
St. Paul argues that the arbitration award which Kaaz obtained against the City constitutes a judgment for setoff purposes. See St. Paul Memorandum In Opposition (Doc. #34) at 16. In support of this argument, St. Paul asserts that the Gatewood Street subcontract binds Freeman to the arbitration award, but nothing in the factual record supports this assertion. The record does not reflect the terms of the Gatewood subcontract, and Freeman was not even a party to the arbitration proceedings. Moreover, the arbitrators did not find that Freeman was liable to Kaaz, nor did they determine the amount of any such liability. They stated only that "it is the arbitrators' feelings that the contractor should pursue the claim for the other half against the subcontractor." Attachment 1 to Affidavit Of Stephen Kaaz, Exhibit A to St. Paul Memorandum In Opposition (Doc. #34). The arbitrators' opinion that Kaaz should pursue a claim against Freeman is a far cry from a judgment against Freeman.
St. Paul urges the Court to follow the Restatement On The Law Third On Suretyship And Guaranty § 35 (1996). In relevant part, that section provides:
When the principal obligor has a claim against the obligee that is unrelated to the underlying obligation and, under the law governing set-offs, the principal obligor could set off that claim against the underlying obligation, the secondary obligor may utilize that claim to reduce its duty under the secondary obligation:
(a) to the extent that the claim is uncontested by the obligee or there is no genuine issue as to the obligee's liability to the principal obligor;
(b) if the principal obligor consents to the use of its claim by the secondary obligor; [or]
(c) if the principal obligor is made a party to the obligee's action to enforce the secondary obligation[.]
Id. St. Paul argues that it can satisfy the setoff requirements of the Restatement because (1) Kaaz has consented to St. Paul using its setoff claim, and (2) Kaaz has moved to intervene as a party in this action.
St. Paul overlooks the fact that in order to set off the debt under the Restatement, it must first show that Kaaz would have a right to set off the debt under Kansas law. See Comment to Restatement On The Law Third On Suretyship And Guaranty § 35 (no justification for giving principal obligor's unrelated claim greater utility in hands of surety than it would have in hands of principal obligor). Under Kansas law, Kaaz cannot set off the debt because it does not have a judgment against Freeman. See Mohr, 244 Kan. at 565, 770 P.2d at 475. Therefore, even under the Restatement, St. Paul is not entitled to set off Freeman's alleged debt on the Gatewood Street project.
St. Paul asks the Court to stay these proceedings until the state court decides the claims between Kaaz and Freeman on the Gatewood Street project. This request is tantamount to a request for prejudgment attachment or garnishment of funds to which Freeman is entitled under the Bond. The Kansas legislature has set forth specific requirements for such actions, none of which are shown in this case. See K.S.A. §§ 60-701 et seq. On this record, as a matter of law, St. Paul is not entitled to set off from amounts due for the Shawnee Street project, Freeman's alleged debt on the Gatewood Street project. Aside from the setoff issue, St. Paul does not dispute Freeman's right to recover on the Bond. Freeman is therefore entitled to summary judgment on its claim.
Kaaz seeks to intervene under Rule 24(a), Fed.R.Civ.P, "only in the event that [the Court] rules in Plaintiff's favor on Plaintiff's Motion For Summary Judgment that Defendant St. Paul Fire and Marine Insurance Company cannot raise Julius Kaaz Construction Company's defense of setoff." Motion To Intervene (Doc. #22) at 1. Although the Court rules in favor of plaintiff on the summary judgment motion, it does not find that St. Paul cannot raise Kaaz's right of setoff. Rather, it finds that Kaaz has no right of setoff because it does not have a judgment against Freeman. The motion to intervene is therefore moot.
Kaaz asserts that under the terms of the Gatewood subcontract, Freeman is bound by the arbitration award between Kaaz and the City. See Julius Kaaz Construction Company's Memorandum In Support Of Its Motion To Intervene As Of Right (Doc. #23) filed April 7, 2003. Specifically, Kaaz states that "Freeman has a valid, executable debt to Kaaz." Id. at 4 n. 1. Kaaz, however, does not argue that it has obtained a judgment to enforce the arbitration award against Freeman.
Even if the Court considered the merits of the motion to intervene, it would deny the motion as untimely. Kaaz seeks to intervene only if the Court enters summary judgment in favor of plaintiff. The purpose of the proposed intervention, after entry of summary judgment, is not clear. To allow intervention after the summary judgment motion has been sustained would cause prejudicial delay to Freeman and waste judicial resources. See United States v. Pitney Bowes, Inc., 25 F.3d 66, 70 (2d Cir. 1994) (circumstances relevant to timeliness include (1) how long applicant had notice of interest before it made motion to intervene, (2) prejudice to existing parties resulting from delay, (3) prejudice to applicant if motion is denied and (4) any unusual circumstances militating for or against finding of timeliness). Moreover, Kaaz has not shown that St. Paul could not or did not adequately represent its interest in the case. Kaaz agreed to let St. Paul assert its alleged setoff right in this lawsuit. The Court has determined that Kaaz has no enforceable setoff right in this case, and Kaaz has not established satisfactory grounds for intervention under Rule 24(a).
Rule 24(a) provides that
[u]pon timely application anyone shall be permitted to intervene in an action: (1) when a statute of the United States confers an unconditional right to intervene; or (2) when the applicant claims an interest relating to the property or transaction which is the subject of the action and the applicant is so situated that the disposition of the action may as a practical matter impair or impede the applicant's ability to protect that interest, unless the applicant's interest is adequately represented by existing parties.
IT IS THEREFORE ORDERED that Plaintiff D.F. Freeman Contractors, Inc.'s Motion For Summary Judgment (Doc. #8) filed January 14, 2003 be and hereby is SUSTAINED. Plaintiff is entitled to collect $102,421.63 plus prejudgment interest through September 30, 2002 in the amount of $20,400.15. On or before June 4, 2003, the parties shall file a stipulation regarding the amount of prejudgment interest due from September 30, 2002 through June 5, 2003. On June 5, 2003, the Clerk shall enter judgment in favor of plaintiff in the amount of $102,421.63, plus prejudgment interest through September 30, 2002 in the amount of $20,400.15, plus prejudgment interest from September 30, 2002 through June 5, 2003 in the amount to which the parties stipulate.
IT IS FURTHER ORDERED that Julius Kaaz Construction Company's Motion To Intervene As Of Right (Doc. #22) filed April 7, 2003 be and hereby is OVERRULED.