Scott Co. of California v. US Fidelity & Guaranty Ins.Co.

Filed 8/21/06 Scott Co. of California v. US Fidelity & Guaranty Ins.Co. CA6

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 977(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 977(b). This opinion has not been certified for publication or ordered published for purposes of rule 977.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SIXTH APPELLATE DISTRICT

In the second of two prior appeals, this court held that triable issues of fact made summary judgment inappropriate in a lawsuit naming the sureties on a payment bond. (See Scott Co. of California v. United States Fidelity & Guaranty Ins. Co. (2003) 107 Cal.App.4th 197, disapproved on another point in Le Francois v. Goel (2005) 35 Cal.4th 1094, 1107 (Scott II)). Upon remand, the superior court conducted a trial and found that the sureties had agreed to be bound by their principal's settlement offer under Code of Civil Procedure section 998.[1] Accordingly, the superior court ruled that the sureties were entitled to benefit from the offer and were not liable for any attorney fees incurred by the plaintiff.

Plaintiff Scott Company of California (Scott) again appeals, contending that it should have prevailed at trial as a matter of law because it was undisputed that the sureties had not signed the principal's settlement offer and the court should not have admitted extrinsic evidence at trial. We find no error and affirm the judgment.

Background

This action originated in December 1990 when Scott, a mechanical subcontractor, sued Blount, Inc., the general contractor responsible for constructing the San Jose Convention Center.[2] Scott sought damages for cost overruns it had suffered as a result of construction delays and change orders caused by Blount. In the tenth cause of action, Scott asserted a "Claim on Payment Bond" against three sureties that had issued a "Labor and Material Payment Bond" to Blount. Scott alleged that these sureties had denied its claim without explanation and in bad faith, and it claimed attorney fees under Civil Code section 3250. The defendant sureties, respondents in this appeal (collectively, the "Sureties"), are United States Fidelity and Guaranty Company (USF&G), American Insurance Company (AIC), and Aetna Casualty and Surety Company (Aetna).

Following a court trial before the Honorable Robert H. Kroninger (ret.), Scott was awarded $442,054 in damages against Blount. (Scott I; see Scott Co. of California v. Blount, Inc. (1999) 20 Cal.4th 1103.) Blount, however, had made a pretrial settlement offer of $900,000, which Scott had rejected. Blount was therefore entitled to its postoffer costs under section 998. Although Scott was allowed its preoffer costs-- including attorney fees-- of $226,812, that amount was exceeded by $46,726.86 owed to Blount.

After these issues were fully litigated between Scott and Blount, attention returned to the claim against the Sureties. The Sureties moved for summary judgment on the ground that their liability was co-extensive with that of Blount; consequently, they owed Scott neither damages nor costs. Judge Kroninger denied the motion, but upon reconsideration by a different judge, the court agreed with the Sureties that their liability ended with the termination of Blount's obligation to Scott.

This court reversed. We agreed with Judge Kroninger that the Sureties could not rely on Blount's settlement offer to exonerate them under section 998 as a matter of law, because they had not supported their factual assertion that "they had consented to the offer and meant . . . to be bound by it." (Scott II, supra, 107 Cal.App.4th at p. 220.) The case was therefore remanded for trial or other disposition of Scott's claim against the Sureties for its postoffer fees.

After issuance of the remittitur, the Sureties again moved for summary judgment in an effort to establish that they should be relieved of liability for the attorney fees Scott had incurred after rejecting Blount's settlement offer. Scott also moved for summary judgment. The superior court denied both motions on the ground that a triable issue of fact existed as to whether the Sureties were encompassed in Blount's offer.

The matter then proceeded to trial. Scott emphasized that the Sureties had never offered to have judgment entered against them, nor had they ever expressed consent to such an outcome. The Sureties, following the guidance provided in Scott II, introduced evidence that they had intended to be parties to Blount's section 998 offer and to be bound by it. The trial court found that the Sureties were entitled to benefit from the offer because they had both consented to it and intended to be bound by it. The court entered judgment in the Sureties' favor and subsequently denied Scott's motion to vacate the judgment or grant a new trial. (§§ 663, 657.)

Discussion

Scott raises numerous arguments in this third appeal, attacking both factual and legal determinations made by the trial court. Scott emphasizes that the Sureties never submitted a written offer to Scott or provided "documentary proof" that they were parties to the offer. According to Scott, it was error to admit contradictory oral testimony by the Sureties' representatives that they had consented in advance to any settlement Blount might make. In any event, Scott argues, the evidence "confirmed" that the Sureties had not in fact authorized any judgment to be entered against them for $900,000.

Scott also addresses the trial court's alternative rulings,[3] which we find unnecessary to discuss. Whether the language of Blount's written offer to Scott was unclear, ambiguous, or unfairly conditional as to the Sureties' role as offerors is not properly before us at this stage in the proceedings. Nor is it necessary to evaluate the legal sufficiency of the offer under contract principles or under section 998 itself. Also irrelevant is the extensive discussion of decisions requiring a principal's signature before a settlement agreement entered into by the principal's agent is binding on the client. (See § 664.6.) Finally, we need not address the parties' debate over which party prevailed in the underlying litigation for the purpose of recovering post-offer fees. That issue was the subject of the first appeal, which was decided in Scott I. (See Scott v. Blount, supra, 20 Cal.4th 1103.)

The only question that was to be resolved upon remand was a factual one: Did the Sureties participate in or consent to the offer such that they would be bound by any resulting judgment?[4] The superior court, acting as trier of fact, answered affirmatively, based on testimony from representatives of the Sureties, from Blount's attorney, and from experts in surety claims. On appeal, only two issues are properly before us: (1) whether the trial court erred in admitting extrinsic evidence of the Sureties' prior authorization to Blount to show their consent to the offer and (2) whether substantial evidence supports the trial court's factual findings. The judgment must be affirmed if the court's factual findings were supported by properly admitted evidence.

1. Admission of Extrinsic Evidence

Early in the trial the Sureties offered witnesses who testified, over Scott's objection, that Blount's counsel had full authority to settle the action brought by Scott, and that the Sureties would have felt bound if a judgment had resulted. In admitting the evidence the trial court reasoned that Blount's expectations and the custom and practice at the time of the settlement offer were relevant to the question of the Sureties' consent. The court specifically stated that express written consent "was not required as a matter of practice. And the industry practice at the time is somewhat reflected by this state of mind of the surety at the time, and that all has some bearing on whether there really was a consent here." In the court's view, evidence of Blount's expectations and the custom and practices of the industry were "all . . . circumstantial evidence of what the sureties expected in that time frame."

Subsequently the court ruled that the evidence was admissible to interpret the offer, which it believed was ambiguous as to the Sureties' intent. In its statement of decision, however, the court also pointed out that extrinsic evidence is admissible to prove a meaning of which an offer is reasonably susceptible, even if the offer is not ambiguous. As noted earlier, we need not determine whether Blount's offer was ambiguous as a matter of law. Blount's intent in making the offer, Scott's understanding of that intent, and the meaning of the language used are not at issue. The only material question is a narrow one: whether the Sureties actually consented to be included in and bound by the contemplated settlement.[5] This was a matter for the superior court as trier of fact.

We further reject Scott's suggestion that the testimony regarding the Sureties' intent to be part of the settlement contravened this court's instructions in remanding the matter in the last appeal. This court did not say in Scott II that only documentary evidence would be acceptable as proof, as Scott repeatedly asserts. We only noted that Judge Kroninger, who presided over this case for its first 10 years, was "confident that the parties could resolve the issue of the Sureties' participation in the offer by documentary proof." (Scott II, supra, 107 Cal.App.4th at p. 220.) If his prediction had come to pass, the matter would have been resolved in the summary judgment proceedings after remand. Instead, having failed to produce undisputed facts supporting summary judgment, the Sureties proceeded to trial, where they presented testimony on the sole factual question before the court, whether they had authorized Blount to settle on their behalf.

Scott maintains, however, that any settlement under the terms of the offer would have foreclosed it from ever recovering from the Sureties, because the judgment called for dismissal of the Sureties with prejudice. This argument assumes too much. The purpose of the offer was to end the dispute between Scott and Blount. The liability of the Sureties was to end when Blount paid the judgment. If Blount defaulted from that payment, it was again on the hook--and, therefore, so were the Sureties. Scott recognized this basic fact in its own offer, in which it proposed accepting $1.5 million and having judgment taken against Blount in exchange for dismissal of its complaint with prejudice as to Blount and the Sureties. That offer was addressed to Blount.

We next turn to the adequacy of the Sureties' proof, because it is this question that underlies Scott's contention on appeal that it was entitled to judgment as a matter of law. Scott's assertions that the court misconstrued the offer, that the offer was unenforceable, and that the court misapplied section 998 all turn on the factual premise that the Sureties had not authorized or even known about the offer. If, however, the Sureties did consent to Blount's settlement, then judgment was correctly granted in their favor. As stated earlier, that consent need not have been expressed in the offer itself or established by "documentary proof."

2. Sufficiency of the Evidence

The "Labor and Material Payment Bond" had been issued jointly by the Sureties to Blount. It bound the Sureties in the amount of $91,663,000 to the owner of the project, the RDA, for the benefit of claimants such as Scott. The court admitted the master surety agreement between Blount and USF&G, the general indemnity agreement between Blount and AIC, and an indemnity contract between Blount and Aetna.

Clinton Johnson, a lawyer with expertise in construction law, observed, "The surety is part of the fabric of construction law so we – all construction lawyers truly come to understand how to deal with sureties." He testified that an accepted industry practice in construction litigation is to keep the bonding company at a distance from the case. Because of the indemnity agreements the principal has signed, it is in the principal's financial interests to handle a case without the participation of the surety. On its part, "the bonding company tends to give the lawyer and the client the authority to resolve . . . the case." The stronger the principal is financially, the more successful it will be in "keeping the bonding company from becoming involved in the case and thereby incur[ring] costs that [the principal] might have to pay." Even when the principal is not particularly strong, the effort "has always been to seek to obtain the consent of the bonding company to proceed and act on behalf of the bonding company." Having reviewed the history of the present case, Johnson expressed the opinion that the Sureties were nominal parties in the litigation. He noted that Blount was financially strong and the claim was very small in comparison to the amount of the bond. Blount was therefore "in control" here. It was the witness's "firm conviction that the sureties had given both implied and express consent to the firm." In circumstances like those presented here, a reasonable and experienced construction litigator in the position of Scott's attorney should have known that the principal and its counsel "had full authority to act on behalf of the surety and that the surety was a nominal party in the litigation because all the money was Blount's money and Blount was in charge and had been given the right to be in charge." Johnson further stated that a reasonable, experienced construction litigator would have understood and expected that Blount's offer "encompassed and included" the Sureties and that any ensuing judgment would have been enforceable against both Blount and the Sureties.

Gregory Thomas represented Blount as corporate counsel during the early stages of the litigation between the parties. Thomas testified that he did not consult with any of the Sureties before submitting the $900,000 settlement offer to Scott because it "involved no financial exposure to the sureties." Based on his 28 years of practice, he never expected dismissal of the Sureties before Blount paid the anticipated judgment. He further expected, based on his prior dealings with the Sureties in other cases against Blount (including others arising out of the San Jose Convention Center litigation), that if Blount defaulted, the Sureties would be bound by the settlement.

Frank Caufield, a representative from Aetna, testified that Blount, which had assumed Aetna's defense, "[a]bsolutely" had authority to settle the San Jose Convention Center lawsuit. Aetna would not have required Blount's attorney to obtain Aetna's express written consent before making the $900,000 offer to Scott. Caufield stated that if Scott had accepted the offer and Blount had "for whatever reason" defaulted in paying the $900,000, Aetna would have considered itself bound by the terms of the bond to pay.

Jason Stonefeld was a surety claims attorney with St Paul Fire and Marine Insurance Company, which owned USF&G. He testified about current practices of surety counsel when the principal on a payment bond was sued. If the principal was financially strong, the company had no concerns. If the lawsuit involved liability on a labor and material payment bond, the company's practice was to "tender that to the principal and leave it at that." Independent counsel was not required in current practice, and the principal had "complete authority" to settle the lawsuit on behalf of USF&G as long as the principal was funding the settlement. USF&G would consider itself bound by a judgment resulting from such a settlement.

Bobby Craton was senior surety counsel with Fireman's Fund Insurance Companies, which owned AIC. He explained that Blount was a "premier account," which meant that AIC had a "substantial comfort level" with the company that it did not have with others. Over a period of years AIC had acquired confidence in Blount's ability to resolve disputes without cost or expense to its sureties. In addition, "because Blount ha[d] guaranteed that they would pay for any expenses incurred, common practice was to tender defense to Blount, have them select counsel and have them pay the expense of the litigation and either settle or pay whatever judgment [ensued]." AIC's practice during the relevant period was only to check on the status of a pending lawsuit from time to time. In the many lawsuits he had seen filed against bonds issued to Blount ("dozens" to "[p]ossibly low hundreds"), Craton had never seen Blount ask for consent to settle a case. AIC's position was that if Blount was paying the judgment, it had no obligation to obtain such permission, but had full authority from AIC to settle. Although the $900,000 offer to Scott had not been submitted to AIC for approval, that was unnecessary; indeed, AIC expected Blount to resolve the case. Further, AIC would have considered itself bound to pay the judgment against Blount if the offer had been accepted and Blount had then defaulted.

Michael Saba, vice president of a surety claim consulting group, had previously worked for Fireman's Fund and USF&G. He became familiar with how those companies handled public works payment bonds and lawsuits involving general contractors. He had personally participated in possibly "hundreds" of lawsuits against Blount in which Fireman's Fund was also sued as surety. Blount was considered a flagship account, because it produced a "tremendous amount of premium" for sureties. Its financial strength gave it more latitude than smaller construction companies. Between 1970 and 1994 investigation of public works bond claims was minimal. When a large account was involved, the surety merely tendered the claim to the principal and periodically followed up. In those cases it was the custom and practice of surety companies not to require the principal's lawyer to obtain consent before extending a settlement offer. This was Saba's practice at Fireman's Fund whenever Blount was sued; Blount was expected to -- and

did -- hire counsel and settle claims without involving Fireman's Fund. Saba did not recall ever requiring Blount to obtain Fireman's Fund's permission to settle a lawsuit by a subcontractor. The bond, in Saba's opinion, was not affected; the surety would still be obligated to pay the judgment if the principal defaulted.

Eliot Jubelirer, whose law firm, Morgenstein and Jubelirer, represented the Sureties, had been the lead counsel for Blount at trial in Scott's action against Blount (Scott I). During the seven-week trial, no evidence of or even reference to the payment bond was made, no representatives of any of the Sureties were called as witnesses, and no evidence was presented on the bad-faith cause of action against the Sureties. Jubelirer's partner, Rocky Unruh, testified that the firm's assignment with respect to the Sureties was to defend their interests and take control of the cases. The Sureties' attorney[6] did not participate in the case. Scott's pleadings and discovery requests were served on Morgenstein and Jubelirer and frequently on counsel for the co-defendant, the RDA, but not on counsel for the Sureties. Unruh had personally signed the section 998 offer made to Scott. Scott's attorneys did not inquire as to the Sureties' part in the offer.

The defense also presented the testimony of Paul Seeger by offer of proof. Seeger had worked in the surety bond department at USF&G from 1988 to 1998. He would have testified, based on USF&G's practices and procedures, that a lawsuit brought on a labor and material payment bond would have been tendered to and accepted by Blount, which would then have had "sole authority" to defend USF&G's interests in that lawsuit. He would also have testified that Blount had USF&G's authorization to settle the San Jose Convention Center case for $900,000, and that USF&G would have considered itself bound by the section 998 offer if Scott had accepted it.

William Anderson, a surety claims attorney with an unrelated company, testified on behalf of Scott as an expert in surety bond claims. He stated that as a matter of custom and practice in the surety business, a tender of defense pursuant to an indemnity agreement did not give the principal's attorney the authority to make a binding offer to enter judgment against the surety or to commit the surety to pay a judgment if the principal were to default. In Anderson's opinion, the principal's attorney would have to obtain express authority before acting to bind the surety. Anderson acknowledged that the indemnity agreements between Blount and the Sureties did not require Blount to obtain such authority, and that public works payment bonds of the period under scrutiny called for joint and several obligations by both principal and surety. He understood that Scott's tenth cause of action, the bad-faith claim against the Sureties, alleged that the Sureties had not investigated Scott's claims "but instead ha[d] turned the entire matter over to Defendant Blount." He also acknowledged his deposition testimony in which he had stated that a knowledgeable and sophisticated construction lawyer representing a plaintiff subcontractor (such as Scott's attorney) "knew or should have known that the principal's lawyer was in control of and speaking for the sureties in this case." Anderson emphasized, however, that he had been focusing on implied consent in making that statement. On cross-examination, Anderson further acknowledged that he was offering no opinions about the specific practices of the Sureties involved in this case.

Taken together, the testimony of these witnesses provided abundant support for the trial court's conclusion that the Sureties not only had consented in advance to Blount's settlement of Scott's lawsuit, but had expected Blount to take control of the resolution of the case. It is also clear that the Sureties had believed themselves bound by any judgment that would have resulted from the settlement had Scott accepted Blount's section 998 offer. Thus, the precise question asked in Scott II was fully answered through a properly conducted court trial and factual findings. Because Blount was authorized to bind the Sureties to the settlement, the Sureties were entitled to benefit from the offer under section 998.

This result takes the case outside the reach of R.P. Richards, Inc. v. Chartered Construction Corporation (2000) 83 Cal.App.4th 146. There a contractor's surety was held to have been exonerated upon settlement because the subcontractor had released the contractor and accepted instead an unbonded obligation. Unlike the present case, however, the surety had not consented to the contractor's settlement, and the original obligation had been materially altered in a way not contemplated by the surety, thereby bringing into play Civil Code section 2819.[7] Neither R.P. Richards nor Civil Code section 2819 is discussed by the parties except in Scott's reply brief, where it is assumed that the R.P. Richards outcome would apply unless the Sureties themselves "made an offer." Here, however, the Sureties authorized Blount's section 998 offer and intended to be bound by any resulting settlement. Accordingly, Scott was not entitled to recover postoffer costs and attorney fees from the Sureties.

Disposition

The judgment is affirmed.

______________________________

ELIA, J.

WE CONCUR:

_____________________________

PREMO, Acting P. J.

_____________________________

DUFFY, J.

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[1] All further statutory references are to the Code of Civil Procedure except as otherwise specified.

[2] Scott also named the owner of the project, the Redevelopment Agency of San Jose (RDA), but it settled with the agency in October 1991.

[3] The trial court cited the following alternative grounds for its decision: (1) The Sureties were exonerated under Civil Code section 2839, as the $900,000 offer would have fully satisfied Scott's claim against Blount; (2) Scott failed to introduce evidence of its damages either at trial or in Scott I, and thus waived its right to recover post-offer fees; and (3) Scott was collaterally estopped from claiming post-offer fees, because the judge at the first trial had already determined that Scott was not the prevailing party for this purpose.

[4] The trial judge (Hon. William F. Martin) apologized for "simplifying 14 years of litigation," but he accurately summarized the specific issue before him: "[T]he issue . . . before me . . . is whether . . . the sureties consented to and agreed to be bound by the 998 offer made by the principal, Blount, way back when that offer was made for $900,000. . . . [I]f [the Sureties] did consent and were bound by it, then they are protected by 998 and the Supreme Court's ruling and are not responsible for the attorney fees after the 998 and to the trial, but if they did not, then they're exposed to those attorney's fees and costs, which is what Scott is after here today, and there's a factual dispute as to whether they consented [to] and participated in the 998 offer or not, and we're here to try that issue." Scott's attorney expressed the view that the court had "very accurately and succinctly framed the issues" before it.

[5] Even if we were called upon to determine whether the offer was ambiguous, the conclusion would not be dispositive. It has long been settled that the admissibility of extrinsic evidence to interpret the language of a written instrument depends not on whether the instrument is ambiguous, but whether the evidence is relevant to prove a meaning to which the contractual language is reasonably susceptible. (Pacific Gas & E. Co. v. G.W. Thomas Drayage etc. Co. (1968) 69 Cal.2d 33, 39-40; Morey v. Vannucci (1998) 64 Cal.App.4th 904, 912.) We see no patent contradiction between the terms of the offer (which called for dismissal of the Sureties) and the testimony introduced at trial.

[6] Due to a conflict of interest, Morgenstein and Jubelirer did not represent the Sureties, but remained counsel of record for Blount alone.

[7] Civil Code section 2819 states: "A surety is exonerated, except so far as he or she may be indemnified by the principal, if by any act of the creditor, without the consent of the surety the original obligation of the principal is altered in any respect, or the remedies or rights of the creditor against the principal, in respect thereto, in any way impaired or suspended. However, nothing in this section shall be construed to supersede subdivision (b) of Section 2822." (Italics added.) Civil Code section 2822, subdivision (b), which the R.P. Richards court declined to address, emphasizes that "an agreement by a creditor to accept from the principal debtor a sum less than the balance owed on the original obligation, without the prior consent of the surety and without any other change to the underlying agreement between the creditor and principal debtor, shall not exonerate the surety for the lesser sum agreed upon by the creditor and principal debtor." (Italics added.) Neither party seeks application of Civil Code sections 2819 and 2822, except indirectly and belatedly, in Scott's reply brief.