Opinion
No. A04-934.
Filed February 1, 2005.
Appeal from the District Court, Carlton County, File No. C9-02-1648.
David H. Gregerson, Christine A. Longe, Gregerson, Rosow, Johnson Nilan, Ltd., (for respondent).
Jennifer M. Macaulay, Macaulay Law Offices, (for appellants).
This opinion will be unpublished and may not be cited except as provided by Minn. Stat. § 480A.08, subd. 3 (2004).
UNPUBLISHED OPINION
In this appeal from summary judgment in an action by respondent Old Republic Surety Company to recover payments made under a performance bond, appellants Richard and Kathy Hatanpaa, as indemnitors, challenge the district court's decision that they were liable. Because there are no genuine issues of material fact and because the district court properly applied the law, we affirm.
FACTS
In May 2000, the Fond du Lac Business Committee (the Tribe) and H.E.A.T., Inc. entered into a contract under which H.E.A.T. would provide heating systems for houses constructed for a tribal housing project. As required by the Tribe, H.E.A.T. then applied for payment and performance surety bonds from respondent Old Republic Surety Company. The application form consisted of four pages. The Hatanpaas assert that they never received page three, while Old Republic contends the application form was double-sided, and all four pages were given to the Hatanpaas. The first two pages consisted of forms to be filled out; the third page contained the indemnity agreement; and the fourth was a signature page. The first half of the signature page contained a signature by Richard Hatanpaa on behalf of H.E.A.T. for the application on the bonds. The second half began with a paragraph alerting the signers that the document included an indemnity agreement, followed by the signatures of Richard Hatanpaa and Kathy Hatanpaa.
Old Republic then issued payment and performance bonds naming H.E.A.T. as principal and Old Republic as surety in favor of the Tribe. The bonds described the project as "install forced air furnaces ductwork, gas piping boilers Radiant heat in 14 homes." The bonds were in the amount requested by appellants and the Tribe, $64,800.
After H.E.A.T. completed work on eight houses, the Tribe offered the company the opportunity to provide heating systems for an additional seven homes in 2001 under the same terms. H.E.A.T., however, asserted that the contract contemplated construction of a total of either 12, 14, or 15 homes, and sought an increase in the price. In July 2001, the Tribe declined the proposed increases and rebid the contract.
The Tribe made several demands on H.E.A.T. to correct deficiencies in its work, but asserted that it did not receive a response. The Tribe then submitted a claim to Old Republic on the performance bond. After investigation, the Tribe and Old Republic entered into a compromise settlement. Old Republic obtained an estimate from a contractor's firm to correct the deficiencies and then issued a draft on February 12, 2003, for $36,281.66 to the Tribe to pay its claims under the bond. On April 21, 2003, a further disputed claim was resolved for $5,509.17, increasing Old Republic's payment to the Tribe to a total of $41,790.83.
Old Republic then sued H.E.A.T. and appellants Richard and Kathy Hatanpaa individually under the indemnity agreement to recover the payments it made under the performance bond. The district court granted summary judgment in favor of Old Republic. The district court denied a motion for relief from the summary judgment, and Richard and Kathy Hatanpaa brought this appeal.
DECISION
When considering an appeal from summary judgment, the appellate court will determine whether there are genuine issues of material fact and whether the district court erred as a matter of law. State by Cooper v. French, 460 N.W.2d 2, 4 (Minn. 1990); Minn. R. Civ. P. 56.03. The evidence will be reviewed in the light most favorable to the party opposing the motion. Bol v. Cole, 561 N.W.2d 143, 146 (Minn. 1997). Questions of law are reviewed de novo. Id.
I.
The Hatanpaas first argue that summary judgment was not appropriate because there is a genuine issue of material fact as to whether they were given page three of the performance bond application form, which contains the indemnity-agreement provisions. Without that page, they contend that they were not bound by the indemnity agreement. Old Republic contends that the Hatanpaas failed to raise this issue to the district court and that it should not be considered for the first time on appeal. Further, even if it was raised, Old Republic asserts that the Hatanpaas did not present a genuine issue of material fact.
Generally, this court will not consider matters not argued and considered by the district court below. Thiele v. Stich, 425 N.W.2d 580, 582 (Minn. 1988). Summary judgment will be granted "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that either party is entitled to a judgment as a matter of law." Minn. R. Civ. P. 56.03. When opposing a summary-judgment motion,
an adverse party may not rest upon the mere averments or denials of the adverse party's pleading but must present specific facts showing that there is a genuine issue for trial. If the adverse party does not so respond, summary judgment, if appropriate, shall be entered against the adverse party.
Id. 56.05.
The Hatanpaas assert that they raised this issue in their answer. But a party may not avoid summary judgment by resting on mere averments in its pleadings. Id. Next, they argue that they raised the issue in their summary-judgment motion. In a three-page document containing 17 single-spaced paragraphs, the Hatanpaas asserted in paragraph nine that the page containing the terms of indemnity was not produced in written form when they filled out the bond application. But the Hatanpaas did not submit any sworn affidavits in support of their claim; they merely rely on their averments. When a party fails to submit evidence in the form of affidavit or deposition testimony, it cannot be considered. Kay v. Fairview Riverside Hosp., 531 N.W.2d 517, 520 (Minn.App. 1995), review denied (Minn. July 20, 1995). Further, Old Republic submitted an affidavit by its attorney asserting that the attached documents, which included all four pages of the application form and indemnity agreement, were true and correct copies. As required by the court rules, the documents were single-sided. Minn. R. Gen. Pract. 6.01.
Finally, the Hatanpaas argue that they raised the issue at the hearing, but the court failed to understand their argument. A review of the transcript shows they did not raise it. Further, they could not have raised it because they admitted they did not read the document but instead just signed the last page. The Hatanpaas have not shown that they raised a genuine issue of material fact or that they were entitled to judgment as a matter of law.
II.
Next, the Hatanpaas argue that because Old Republic did not provide a good-faith basis for payment on the performance bond and that they were prejudiced, their obligation to Old Republic was released. "A surety is a party who is liable to pay a debt but who is entitled, if the debt is enforced against him, to be indemnified by another who ought himself to have paid the debt before the surety was compelled to do so." MacKenzie v. Summit Nat'l Bank of St. Paul, 363 N.W.2d 116, 120 (Minn.App. 1985), review granted (Minn. May 18, 1985) and appeal dismissed (Minn. June 24, 1985). Under the terms of the indemnity agreement, Old Republic had the exclusive right to determine whether to settle or defend a claim under the bond and would not be liable to the principal except for "deliberate and willful malfeasance." See New Amsterdam Cas. Co. v. Lundquist, 293 Minn. 274, 284, 198 N.W.2d 543, 549 (1972) (holding that surety owes a duty of good faith to the indemnitor). "A majority of courts considering the issue have concluded that bad faith does not mean negligence, lack of diligence, or bad judgment, but rather implies a `conscious doing of wrong because of dishonest purpose or moral obliquity.'" The Surety's Indemnity Agreement: Law Practice 173-74 (Marilyn Klinger, et al. eds., 2002) (footnote omitted).
Absent collusion or fraud, settlement is generally deemed presumptively correct. Id. at 174. Indeed, the agreement provides that the Hatanpaas agreed to accept evidence of Old Republic's "payment as prima facie evidence of the propriety thereof. . . ." Under such a clause, once the surety submits the required documentation to the court, summary judgment is appropriate "except in the rare case where indemnitors are able to submit sufficient admissible evidence (as opposed to mere speculation or argument), to demonstrate an entitlement to go to trial on the issue of `bad faith' or to contest the amount of the surety's payments. . . ." Armen Shahinian, The General Agreement of Indemnity, in The Law of Suretyship 498-99 (Edward G. Gallagher ed., 2000).
The Hatanpaas argue that they presented genuine issues of material fact as to whether Old Republic acted in bad faith in settling because they had defenses to the claims. These include that the Tribe was in default for failing to allow them to provide additional heating systems pursuant to the contract; the underlying contract changed; the problems complained of were the result of design problems; and the Hatanpaas were not allowed to perform corrective work. These allegations do not constitute a showing that Old Republic engaged in bad faith or malfeasance in settling the Tribe's claim.
III.
Next, the Hatanpaas contend that Old Republic's payment on the performance bond was inappropriate because the Tribe defaulted on its obligations.
Under the law of suretyship, "the surety is not liable unless the principal is." Posch v. Lion Bonding Sur. Co., 137 Minn. 169, 171, 163 N.W. 131, 132 (1917). Accordingly, the performance bond provides that: "If there is no Owner Default, the Surety's obligation under this Bond shall arise. . . ." "Owner default" is defined as "Failure of the Owner, which has neither been remedied nor waived, to pay the Contractor as required by the Construction Contract or to perform and complete or comply with the other terms thereof."
The Hatanpaas briefly claim that the Tribe (the "owner") still owes H.E.A.T. $600 for work on the eight homes out of a total contract price of $43,200. But their primary complaint is that under the contract, H.E.A.T. had contracted to provide heating services for 12, 14, or 15 homes, but that the Tribe defaulted because it suspended the contract after eight homes were completed.
"The most important obligation on the part of the obligee is timely payment in an appropriate amount pursuant to the terms of the bonded contract." M. Michael Egan Marla Eastwood, Discharge of the Performance Bond Surety, in The Law of Suretyship 138 (Edward G. Gallagher ed., 2d ed. 2000). A de minimus departure of the obligee from its contractual duties as owners will not discharge the surety. Id. at 139.
Here, there is no dispute that the Tribe had substantially paid for those houses on which H.E.A.T. performed the work. The issue over whether the contract provided that H.E.A.T. was to supply heating systems for an additional four to seven homes does not constitute default under the performance bond.
IV.
Finally, the Hatanpaas argue that they were not proper parties in their individual capacities because the bonds themselves were not issued in their names.
Sureties commonly require that "individuals involved in the principal's business execute Indemnity Agreements in which each individual agreed to jointly and severally indemnify the surety. . . ." Surety's Indemnity Agreement, supra, at 53. The language of the indemnity agreement provides that "the undersigned join or joins in the foregoing indemnity agreement, and agree or agrees to be jointly and severally bound thereunder. . . ." The Hatanpaas signed this agreement in their own names without reference to H.E.A.T.
The Hatanpaas, however, argue that to be a valid undertaking, "the application must concur with the issuance of the bond applied for." Anchor Cas. Co. v. Bird Island Produce, Inc., 249 Minn. 137, 144, 82 N.W.2d 48, 53 (1957). They assert that just as the bond in Anchor was not issued on behalf of the individual officers, so too the bonds here were not issued on behalf of the Hatanpaas. But Anchor is not relevant here. First, in Anchor, the applications showed the officers were applying for individual bonds, while here the bond was issued for the corporation. Id. at 145, 82 N.W.2d at 54. Secondly, the case raised a parol-evidence question not at issue here. Id. at 146-47, 82 N.W.2d at 55. Here, H.E.A.T. applied for the bonds, while the Hatanpaas signed individually as indemnitors. The Hatanpaas have not shown that they should not be individually liable under the indemnity agreement.
The district court's decision granting summary judgment is affirmed.