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Financial Pacific Ins. Co. v. Northrop

California Court of Appeals, First District, Third Division
Apr 28, 2009
No. A120741 (Cal. Ct. App. Apr. 28, 2009)

Opinion


FINANCIAL PACIFIC INSURANCE COMPANY, Plaintiff and Respondent, v. KIM NORTHROP, Defendant and Appellant. A120741 California Court of Appeal, First District, Third Division April 28, 2009

NOT TO BE PUBLISHED

Solano County Super. Ct. No. FCS027770

Jenkins, J.

In this appeal, defendant and appellant Kim Northrop (appellant) challenges: (1) the trial court’s order sustaining without leave to amend plaintiff and respondent Financial Pacific Insurance Company’s (FPIC) demurrer to her First Amended Cross-Complaint against FPIC for breach of contract and breach of the covenant of good faith and fair dealing; and, (2) the trial court’s subsequent grant of summary judgment and entry of judgment in favor of FPIC on its complaint against her for breach of contract and indemnification. We affirm.

Background

This litigation stems from a construction project gone sour. Appellant’s husband John owned Kristin Construction Company (Kristin). Kristin entered a contract with Bridgeport Public Utility District (Bridgeport PUD) for the construction of a deep well pump station, sewer stations, and other improvements to Bridgeport’s water and sewer system. The contract required that Kristin furnish a performance bond. FPIC wrote the performance bond. Under an agreement signed by both John Northrop and appellant (jointly, the Northrops), the Northrops agreed to indemnify FPIC for any losses on the performance bond.

On May 6, 2006, FPIC filed a complaint against appellant for breach of contract and indemnification, seeking damages in the amount of $849,556.13, as well as costs and attorney’s fees. The complaint alleged that FPIC issued a construction performance bond on behalf of Kristin and in favor of obligee, Bridgeport PUD, in the amount of $968,638. The performance bond was required under the terms of Kristin’s contract with Bridgeport PUD. The complaint alleged that late in 2003, a dispute arose under the contract between Bridgeport PUD and Kristin on issues of workmanship and project delays. Bridgeport PUD terminated Kristin and hired another contractor to complete the project. Kristin disputed the termination, and took the matter to arbitration as required under the terms of the contract. The complaint alleged that on November 29, 2005, after a seven-day arbitration hearing, the arbitrator awarded Bridgeport PUD damages of $849,566.13 against Kristin. Further, the complaint alleged that on December 13, 2005, FPIC paid Bridgeport PUD the full amount of the arbitration award: FPIC then demanded reimbursement from the Northrops as co-signatories to a Continuing Agreement of Indemnity Contractor’s Form (indemnity agreement), which they had formerly executed in favor of FPIC on January 6, 2003. The Northrops refused to indemnify FPIC.

In its opening brief, FPIC explains that it sued only appellant on the indemnity agreement because Bridgeport PUD assigned to FPIC the arbitration award against John Northrop and Kristen Construction, see post.

A copy of the bond (No. C701537) dated May 29, 2003, is attached to the complaint and is signed by John Northrop, Kristin’s owner. The face of the bond shows that the premium for the bond was $13,186.00.

The construction contract between Kristin and Bridgeport is not part of the record.

A copy of the indemnity agreement is attached to the complaint.

On December 12, 2006, the Northrops filed a First Amended Cross-Complaint (FACC) against FPIC pleading causes of action for breach of contract and breach of the covenant of good faith and fair dealing, as well as fraud/negligent misrepresentation. With regard to the claim for breach of contract, the FACC specifically alleged FPIC breached its contractual duty to “perform its obligations as required by the terms of the Performance Bond” causing damages to the Northrops. With regard to the claim for breach of the covenant of good faith and fair dealing, the FACC specifically alleged FPIC failed to “diligently respond[] to the claims of Bridgeport PUD and tak[e] action to mitigate the [Northrops’] potential damages” as required under the performance bond, the indemnity agreement and the Bridgeport PUD contract.

Cross-complaint was first filed on June 14, 2006. On November 14, 2006, the trial court entered an order sustaining FPIC’s demurrer to cross-complaint with 30 days leave to amend.

The FACC based the above claims on the performance bond and indemnity agreement incorporated in FPIC’s complaint as exhibits, as well as the following factual allegations: On or about December 4, 2003, Bridgeport PUD notified FPIC it intended to terminate Kristin from the construction project. Bridgeport PUD sent formal notice of Kristin’s termination to FPIC on or about December 19. In a letter dated January 22, 2004, FPIC notified Bridgeport PUD it would respond to its claim under the performance bond within 30 days. Between January 22 and March 30, 2004, FPIC did not investigate or take any action to resolve Bridgeport PUD’s claim. On March 31, 2004, FPIC retained a contractor to inspect the Bridgeport PUD project. After the inspection, FPIC took no further action to resolve Bridgeport PUD’s claim.

On January 12, 2007, FPIC filed a demurrer to the FACC. A hearing on FPIC’s demurrer was held on March 20, 2007. On April 16, 2007, the trial court filed its order sustaining without leave to amend FPIC’s demurrer as to all causes of action. The trial court ruled as follows: “[S]ureties are not insurers, and do not owe any non-contractual duties to their principals. (Citation). In the event of a dispute between the principal and the obligee, the surety owes no duty to defend, and has no right to represent the principal’s interest. (Citations.) [¶] In such situations, the surety may sit back and wait for the legal process to determine whether the principal is obligated to the obligee. It is at that time that its duty arises to pay the obligation. Its duty is therefore owed to the obligee, not the principal. (Citation.) [¶] The surety’s obligations are therefore limited by the surety agreement, which is strictly construed against expansion of obligations not contained in or clearly inferable from the surety contract. [¶] The first amended cross-complaint failed to identify any specific language in the surety agreement that obligated [FPIC] to ‘investigate’, ‘defend’, or take any other action, until the dispute between Kristen Construction [] and Bridgeport was legally resolved. [¶] This disposes of the breach of contract and breach of implied covenant causes of action.”

Northrop does not challenge the trial court’s order insofar as it sustains FPIC’s demurrer to the fraud/negligent misrepresentation cause of action alleged in the FACC. Accordingly, we do not discuss that cause of action further.

Having disposed of the Northrops’ cross complaint, FPIC moved for summary judgment against appellant on its breach of contract and indemnification claims. Appellant opposed the motion on the basis that there was a triable issue of material fact as to whether FPIC breached duties and obligations owed to appellant under the performance bond and indemnity agreement. Specifically in this regard, appellant contended that FPIC owed her a duty to “promptly determine if Northrop was indeed in default, and if so, take those steps necessary to complete the constructions project promptly, with time of the essence.” On September 18, 2007, the trial court took FPIC’s summary judgment motion under submission after hearing oral argument.

On October 17, 2007, the trial court issued its Order After Hearing on Motion for Summary Judgment. The trial court ruled as follows: “The Court determines that there is no triable issue as to any material fact. [¶] The indemnity agreement provides that... FPIC has ‘sole discretion’ to determine whether to pay a claim or complete construction. [¶] [FPIC] has established that... Northrop signed the Indemnification Agreement, that pursuant thereto [FPIC] issued its performance bond on the Bridgeport [PUD] construction project, that when difficulties occurred on the project a dispute arose resulting in an arbitration award against John Northrop and John Northrop dba Kristen Construction, and that thereafter [FPIC] paid Bridgeport [PUD] the amount of the arbitration award, $849,556.16. [¶]... [¶] Despite repeated demands Kimberley Northrop refused and refuses to pay FPIC $849,556.13, or any sum at all. [¶] Accordingly, defendant Kim Northrop, as an individual indemnitor on the indemnity agreement, is obligated to reimburse FPIC for payments made under the bond it issued pursuant to the indemnity agreement. Defendant Kim Northrop contends that FPIC should have completed the construction project. She has not demonstrated that FPIC owed her a legal duty to complete the project. [¶] This is not a factual dispute. As a matter of law, defendant Kim Northrop owes FPIC $849,556.00. [¶] The motion for summary judgment by FPIC is granted.”

FPIC served and filed Notice of Entry of Order on Summary Judgment on November 8, 2007. On November 28, appellant filed a motion for reconsideration. Judgment in favor of FPIC was entered on December 5, 2007. On January 31, 2008, the trial court denied appellant’s motion for reconsideration. Thereafter, appellant filed a timely notice of appeal on February 6, 2008.

Discussion

A. Applicable Standards of Review

On appeal from an order dismissing an action after the sustaining of a demurrer, we independently review the pleading to determine whether the facts alleged state a cause of action under any possible legal theory. (McCall v. PacifiCare of Cal., Inc. (2001) 25 Cal.4th 412, 415.) We give the complaint a reasonable interpretation, “treat[ing] the demurrer as admitting all material facts properly pleaded,” but do not “assume the truth of contentions, deductions or conclusions of law.” (Aubry v. Tri-City Hospital Dist. (1992) 2 Cal.4th 962, 967.) We liberally construe the pleading with a view to substantial justice between the parties. (Code Civ. Proc., § 452; Kotlar v. Hartford Fire Ins. Co. (2000) 83 Cal.App.4th 1116, 1120.) “If the trial court has sustained the demurer, we determine whether the complaint states facts sufficient to state a cause of action. If the court sustained the demurrer without leave to amend, as here, we must decide whether there is a reasonable possibility the plaintiff could cure the defect with an amendment. [Citation.] If we find that an amendment could cure the defect, we conclude that the trial court abused its discretion and we reverse; if not, no abuse of discretion has occurred. [Citation.] The plaintiff has the burden of proving that an amendment would cure the defect.” (Schifando v. City of Los Angeles (2003) 31 Cal.4th 1074, 1081.)

A plaintiff is entitled to summary judgment if there is no defense to the action, and “[a] plaintiff... has met his or her burden of showing that there is no defense to a cause of action if that party has proved each element of the cause of action entitling the party to judgment on that cause of action. Once the plaintiff... has met that burden, the burden shifts to the defendant... to show that a triable issue of one or more material facts exists as to that cause of action or a defense thereto. The defendant... shall set forth the specific facts showing that a triable issue of material fact exists as to that cause of action or a defense thereto.” (Code Civ. Proc., § 437c, subd. (p)(1).) We review the trial court’s grant of summary judgment de novo, liberally construing the evidence in support of the party opposing summary judgment and resolving doubts concerning the evidence in favor of that party. (Yanowitz v. L'Oreal USA, Inc. (2005) 36 Cal.4th 1028, 1037.)

Despite the different standards of appeal applicable to demurrer and summary judgment issues, appellant does not separately analyze why reversal is warranted on the trial court’s order sustaining demurrer as distinct from its order granting summary judgment. Rather, she conflates the two, asserting in essence that neither summary judgment nor demurrer was warranted because FPIC breached duties owed to her under the terms and conditions of the performance bond and indemnity agreement.

B. Analysis

1. Trial Court’s Ruling on Demurrer

We first address the trial court’s order sustaining FPIC’s demurrer without leave to amend. Appellant alleges two causes of action in the FACC: (1) breach of contract based on FPIC’s alleged failure to perform under the terms of the performance bond; and, (2) breach of the covenant of good faith and fair dealing under the indemnity agreement, the performance bond and the Bridgeport PUD contract.

The trial court properly sustained FPIC’s demurrer without leave to amend on appellant’s claim FPIC breached contractual duties owed to her under the performance bond. Under established principles of surety law, a performance bond is designed to “protect[] against loss caused by the contractor’s default in failing to complete the contract and pay mechanics.” (10 Miller & Starr, Cal. Real Estate (3d ed. 2001) § 28:102, pp. 309-310.) Under a standard construction performance bond, a surety undertakes either to promptly step in and construct the project if its principal fails to do so, or pay the obligee for its expenditures if it is forced to complete the task on its own. (Leatherby Ins. Co. v. City of Tustin (1977) 76 Cal.App.3d 678, 686; see also Cates Construction, Inc. v. Talbot Partners (1999) 21 Cal.4th 28, 40-41 [discussing surety’s contractual obligations under terms of performance bond].)

The performance bond issued by FPIC guarantees that upon default by the contractor, FPIC will step in and complete the contract or obtain bids to complete the contract. None of the terms and conditions of the performance bond imposes an obligation on FPIC with respect to Kristin or the Northrops in the event of Kristin’s default under the Bridgeport PUD contract. FPIC’s contractual duties under the performance bond flow to Bridgeport PUD as the obligee, not to Kristin Construction as the principal. (Schmitt v. Insurance Co. of North America (1991) 230 Cal.App.3d 245, 258 (Schmitt) [stating that under a statutory performance bond the “surety’s duty runs” to the obligee].) Indeed, the performance bond specifically states that “no right of action” shall accrue on the bond to any person other than the obligee.

The performance bond sets forth the Surety’s obligations in the event of a default by Contractor as follows: “Whenever Contractor shall be, and declared by Owner to be in default under the Contract, the Owner having performed Owner’s obligations thereunder, the Surety may promptly remedy the default, or shall promptly [¶] 1) Complete the Contract in accordance with its terms and conditions; or [¶] 2) Obtain a bid or bids for completing the Contract in accordance with its terms and conditions, and upon determination by Surety of the lowest responsible bidder, or, if the Owner selects, upon determination by the Owner and the Surety jointly of the lowest responsible bidder, arrange for a contract between such bidder and Owner, and make available as Work progresses... sufficient funds to pay the cost of completion less the balance of the contract price, but not exceeding” the bond amount of $968,638.00.

In the face of such established principles of surety law, appellant posits the novel theory that FPIC owed contractual duties to the Northrops under the performance bond to “finish the contract for [Kristin upon its default] in the most expeditious and cost efficient manner” because the indemnity agreement between the Northrops and FPIC “includes all the terms and obligations of the Performance bond and the construction contract, as each is expressly referenced and incorporated into the other.” This assertion is baseless. First, the construction contract is irrelevant to our demurrer analysis as it was not incorporated by reference in either the complaint or the FACC, and is not before us on appeal. Second, and more importantly, appellant failed to identify, either in her briefing or at oral argument, any specific terms or conditions set forth in the construction contract, the indemnity agreement or the performance bond to support the averments in the FACC that FPIC had a contractual duty to the Northrops to promptly respond to Bridgeport PUD’s notice of default and act to mitigate the Northrops’ potential damages. Nor has our independent examination of the performance bond and the indemnity agreement disclosed any such terms. In fact, the terms of the performance bond set forth FPIC’s obligations to Bridgeport PUD upon default of the contractor, but set forth no obligations owed by FPIC to the contractor upon such default. Moreover, the indemnity agreement vests in FPIC the “sole discretion” to determine its course of action when a claim is made against its performance bond upon a default by the contractor.

In sum, appellant failed to state a claim for breach of contract and has failed to establish a reasonable possibility that an amendment could cure the defect. Thus, the trial court did not abuse its discretion in sustaining FPIC’s demurrer without leave to amend on appellant’s breach of contract claim.

We have found no case, and appellant cites none, where a principal has sustained a cause of action under a standard construction performance bond on the theory its surety breached a contractual duty owed by surety to principal under the bond to promptly investigate claims and/or mitigate the principal’s damages. In this regard, at oral argument counsel for appellant initially asserted Schmitt, supra, stood for this proposition but subsequently conceded Schmitt did not go that far. Counsel was right to concede the point. In Schmitt, the appellate court actually reversed the trial court’s judgment in favor of a principal against a surety on a motor vehicle dealer’s bond, where the trial court concluded the surety had a duty under the bond to promptly investigate and pay claims arising under the bond. (Schmitt, supra, 230 Cal.App.3d at p. 248.) In reversing the judgment, the appellate court concluded that under principles of surety law “it is not the duty of the surety to protect the principal as if the principal were an insured under an insurance policy. [Rather], [t]he surety’s duty runs to the third party obligee[.]” (Id. at p. 258.) Accordingly, the appellate court held that the trial court’s view of the principal as an insured, allowing the application of ordinary “bad faith” law found in insurance contracts, did not apply in the surety context. (Id. at pp. 257-258.)

Regarding the breach of covenant claim, we note that “[t]he covenant of good faith and fair dealing, implied by law in every contract, exists merely to prevent one contracting party from unfairly frustrating the other party’s right to receive the benefits of the agreement actually made. (Citation.)” (Guz v. Bechtel National, Inc. (2000) 24 Cal.4th 317, 349.) Thus, the covenant cannot “be endowed with an existence independent of its contractual underpinnings, [and] cannot impose substantive duties or limits on the contracting parties beyond those incorporated in the specific terms of their agreement.” (Id. at pp. 349-350 [citations omitted].) Here, the trial court sustained the demurrer on the breach of covenant claim because appellant’s FACC failed to identify any language in the performance bond showing FPIC was obligated to “investigate” or “defend” appellant against Bridgeport’s claim until the dispute between Bridgeport and appellant was legally resolved. Having independently reviewed the terms of the performance bond, we conclude the trial court’s determination on this point was correct. Thus, absent the requisite contractual underpinnings, appellant cannot assert an affirmative breach of covenant claim under the performance bond. Therefore, the trial court properly sustained FPIC’s demurrer on Northrop’s second cause of action for breach of the covenant of good faith and fair dealing.

Nor do we think the defects in the covenant claim could be cured by amendment. In this regard, we note that under Arntz Contracting Co. v. St. Paul Fire & Marine Ins. Co. (1996) 47 Cal.App.4th 464 (Arntz), FPIC had a duty to exercise the broad discretion afforded it under the indemnity agreement to act in an objectively reasonable manner in settling Bridgeport PUD’s claim. We further note that in Arntz the appellate court allowed the contractor a set off against the surety’s indemnification claim for expenses that were neither reasonable or necessary in the completion of the project. (See Arntz, supra, 47 Cal.4th at p. 483 [concluding that although a surety need not “compromise its interests to protect the interests of the principal” in the considerations attending a surety’s initial takeover of a project, it must “weigh the viability of competing claims and the consequences of its possible responses to those claims so that it can, in good faith, decide if it is ‘desirable or necessary’ to take over the project to protect its interests”].) However, as explained in the summary judgment discussion following, Northrop has failed to identify facts supporting an Arntz-type claim for a set off against FPIC’s right to indemnification.

2. Trial Court’s Summary Judgment Ruling

The trial court ruled that FPIC was entitled to summary judgment on its claim for indemnification because FPIC established Northrop signed the indemnity agreement; the indemnity agreement accorded FPIC sole discretion whether to pay Bridgeport’s claim or complete the project; Kristin Construction disputed Bridgeport’s claim and subsequently suffered an adverse arbitration ruling in that dispute in the amount of $849,556.16; Bridgeport demanded FPIC pay the arbitration award under the performance bond; FPIC paid Bridgeport the amount of the arbitration award and then demanded indemnification from Northrop, which she refused. The trial court also ruled that appellant could not avoid summary judgment by asserting FPIC had a legal duty to complete the project because she had failed to demonstrate FPIC owed her any such legal duty.

The trial court’s factual findings are supported by the declaration of Edward Rocknich, FPIC’s staff attorney, in support of FPIC’s motion for summary judgment. In his declaration, Rocknich states that FPIC contacted John Northrop after Bridgeport notified FPIC of its intention to terminate Kristin Construction from the project. According to Rocknich, Northrop told FPIC he intended to oppose Bridgeport’s claim, retained an attorney and disputed Bridgeport’s claim via mandatory arbitration.

Moreover, Northrop agreed with allegations in Rocknich’s declaration in her response to FPIC’s separate statement of undisputed material facts. Northrop agreed with FPIC’s undisputed facts that she signed the indemnity agreement; that Kristin contracted with Bridgeport PUD for the purpose of a water and sewer system improvement project; that FPIC underwrote the performance bond; that a dispute arose between Bridgeport PUD and Kristin Construction late in 2003; that John Northrop and Kristin Construction disputed Bridgeport PUD’s claim, retained legal counsel and took the matter to mandatory arbitration; and that the arbitrator awarded Bridgeport PUD $849.556.16. Northrop further agreed with FPIC’s undisputed facts that Bridgeport demanded FPIC pay the arbitration award, and that FPIC paid the arbitration award pursuant to the performance bond. Based on FPIC’s undisputed material facts as agreed to by appellant, as well as appellant’s failure to raise an issue of fact that FPIC breached any obligation under the indemnity agreement, we conclude the trial court ruled correctly that FPIC was entitled to indemnification as a matter of law.

At oral argument, appellant’s counsel asserted that in her response to FPIC’s statement of undisputed facts, appellant meant only to admit that John Northrop disputed Bridgeport PUD’s damages claim, but not to admit John Northrop disputed Bridgeport PUD’s decision to remove him from the project. Fatally, however, appellant failed to raise a material issue of fact warranting denial of summary judgment on the basis of such a distinction.

Furthermore, Northrop failed to present facts that would establish that FPIC exercised its discretion under the indemnity agreement in an objectively unreasonable manner. (See Arntz, supra, 47 Cal.App.4th at p. 482 [holding that indemnity agreement did not grant surety “unconditional power to incur expenses in completing the project, regardless of [its] good faith belief in its actions”].) At oral argument, appellant’s counsel contended that the trial court erred in granting summary judgment on appellant’s covenant claim because her opposition conceded only the issue of termination, and made no concession regarding the reasonableness of the costs incurred in completing the construction project. We disagree. Once FPIC presented evidence sufficient to shift the burden to appellant, she was obliged to present evidence sufficient to establish the specific costs that were unwarranted and/or unreasonably occurred. Appellant failed to meet her burden in this regard. (See Arntz, supra, 47 Cal.App.4th at p. 484 [surety entitled to indemnification “for all expenses incurred in completing the project, subject only to the exclusion of expenses from work that was not undertaken in good faith”].)

In short, FPIC established its entitlement to summary judgment on its affirmative claims for breach of contract and indemnification, and appellant failed to produce evidence sufficient to raise a triable issue of fact precluding judgment on FPIC’s claims. Therefore, the trial court’s summary judgment order must be affirmed.

At oral argument, appellant’s counsel referred us to the declaration of John Northrop. However, this declaration was filed in support of appellant’s motion for reconsideration submitted after summary judgment, and therefore comes too late to affect the summary judgment calculus. Moreover, even if considered, the declaration fails to raise a triable issue of material fact that would justify denying summary judgment. Whereas the declaration recites Northrop’s subjective understanding of how matters stood at various points, it does not relate any conversations with FPIC from which FPIC would have known that Northrop wanted FPIC to assume responsibility to complete Kristen’s contract despite the outstanding dispute, or that suggest bad faith or neglect on FPIC’s part in failing to do so.

Disposition

The trial court’s order sustaining without leave to amend the demurrer to the claims in the FACC is affirmed. The trial court’s order granting FPIC summary judgment on its affirmative claims for breach of contract and indemnification is affirmed.

We concur: Pollak, Acting P. J., Siggins, J.


Summaries of

Financial Pacific Ins. Co. v. Northrop

California Court of Appeals, First District, Third Division
Apr 28, 2009
No. A120741 (Cal. Ct. App. Apr. 28, 2009)
Case details for

Financial Pacific Ins. Co. v. Northrop

Case Details

Full title:FINANCIAL PACIFIC INSURANCE COMPANY, Plaintiff and Respondent, v. KIM…

Court:California Court of Appeals, First District, Third Division

Date published: Apr 28, 2009

Citations

No. A120741 (Cal. Ct. App. Apr. 28, 2009)