Jackson Contractor Group Inc v. Travelers Casualty and Surety Company of America

• Court: District Court, E.D. Washington
• Decided: January 5, 2024
• Docket: 2:22-cv-00178
• Status: Unknown

Opinion

1 2

3 4 5 UNITED STATES DISTRICT COURT EASTERN DISTRICT OF WASHINGTON 6

7 TRAVELERS CASUALTY AND SURETY COMPANY OF NO. 2:22-CV-0178-TOR 8 AMERICA, ORDER DENYING THIRD-PARTY 9 Third-Party Plaintiff, PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT 10 v.

11 FLAWLESS WALLS LLC, a Washington Limited Liability 12 Company, MICHAEL BRADLEY, an individual, JEREMY BOUCHEY, an 13 individual, JAMIE GORE, an individual, PAUL CASSEL, an 14 individual, KORTNEY CASSEL, an individual, DELMAR, LLC, a 15 Washington limited liability company, JROTH, LLC, a 16 Washington limited liability company, CASSEL UNLIMITED, 17 LLC, a Washington limited liability company, 18 Third-Party Defendants. 19

20 BEFORE THE COURT is Third-Party Plaintiff’s Motion for Summary 1 Judgment (ECF No. 68). This matter was submitted for consideration without oral 2 argument. The Court has reviewed the record and files herein and is fully

3 informed. For the reasons discussed below, Third-Party Plaintiff’s Motion for 4 Summary Judgment (ECF No. 68) is DENIED. 5 BACKGROUND

6 This case involves indemnification of Third-Party Plaintiff Traveler’s 7 Casualty and Surety Company (“Travelers”) for settlement with Jackson 8 Contractor Group, Inc. (“Jackson”) on behalf of Flawless Walls, Inc (“Flawless”). 9 Third-Party Plaintiff Travelers, Defendant in the underlying lawsuit, is a

10 Connecticut corporation licensed for insurance in Washington State. ECF No. 17 11 at 2, ¶ 2. Third-Party Defendant Flawless is a Washington limited liability 12 company, Defendant Cassel Unlimited, LLC is a Washington limited liability

13 company, Defendant Delmer, LLC, is a Washington limited liability company, 14 Defendant JROTH, LLC is a Washington limited liability company, and each of 15 the named individual defendants are Washington State citizens. ECF No. 73 at 2– 16 3, ¶¶ 1–11. The Court has jurisdiction under 28 U.S.C. § 1332(a), as there is

17 complete diversity between Travelers and all Third-Party Defendants, and the 18 amount in controversy exceeds $75,000. 19 On February 9, 2021, Flawless entered in a subcontract with Jackson to

20 perform work on Schweitzer Mountain Hotel and Resort. ECF No. 1 at 3, ¶ 6. On 1 February 25, 2021, pursuant to the agreement, Flawless obtained a Payment Bond 2 and a Performance Bond from Travelers to cover payment and performance of the

3 subcontract work for Jackson in the amount of $618,187. ECF No. 69 at 3, ¶ 2. In 4 relevant part the surety bond provided that: 5 [T]he condition of this obligation is such that if the Principal shall perform the Construction Work to be done under the Subcontract, then 6 this obligation shall be null and void; otherwise to remain in full force and effect. The Surety’s obligation hereunder shall not arise unless 7 Principal is in default under the Subcontract for failing to perform the Construction Work, and has been declared by the Obligee to be in 8 default under the Subcontract for failing to perform the Construction Work; and the Obligee has performed its obligations under the 9 Subcontract.

10 ECF No. 40-1 at 2.

11 As a condition for surety, Third-Party Defendants were required to enter into 12 an indemnity agreement, in which they would “exonerate, indemnify and save 13 [Travelers] harmless from and against all Loss . . . Amounts due to [Travelers] 14 shall be payable on demand.” Id. at 3, ¶ 3. The agreement also contained a clause 15 regarding the settlement of claims: 16 Company shall have the right, in its sole discretion, to determine for itself, and Indemnitor whether any claim, demand or suit brought 17 against Company or any Indemnitor in connection with or relating to any Bond shall be paid, compromised, settled, tried, defended or 18 appealed, and its determination shall be final, binding and conclusive upon the Indemnitors. Company shall be entitled to immediate 19 reimbursement for any and all Loss incurred under the belief it was necessary or expedient to make such payments. 20 1 ECF No. 70-2 at 1–2, ¶ 4. 2 On May 11, 2021, Jackson provided Flawless with a Notice of

3 Supplementation of work due to what it characterized as Flawless’ inability to 4 meet the agreed upon schedule. ECF No. 1 at 4, ¶ 13. However, Flawless 5 maintains that any failure to meet deadlines was due to Jackson’s mismanagement

6 and changing of construction plans. ECF No. 42 at 4–5, ¶¶ 7, 8. On or about 7 August 26, 2021, the contractual agreement between Flawless and Jackson ceased 8 to exist. Within filings pursuant the underlying lawsuit, Jackson asserted that 9 Flawless gave notice that it was going out of business and ceased all work on the

10 Subcontract project. ECF No. 1 at 5, ¶ 16. Flawless asserts that the subcontract 11 was mutually dissolved on August 13, 2021, with the expectation that Flawless 12 would complete select remaining projects and the subcontract would be

13 extinguished. ECF No. 42 at 5, ¶ 7. Specifically, according to Defendants, the 14 renegotiated contract was mutually beneficial as the working relationship with 15 Jackson had broken down. ECF No. 78-1 at 5. As a condition for this agreement, 16 Flawless would not receive payment for the work completed pursuant to the

17 August 2021 payment application. ECF No. 42 at 6, ¶ 8. 18 On March 25, 2022, Jackson sent a demand for payment under the 19 performance bond to Travelers, claiming losses in the amount of $753.154.40,

20 which Travelers denied. ECF Nos. 69 at 4, ¶ 6, 40-4 at 2–9. The underlying 1 lawsuit commenced on July 26, 2022. ECF No. 1. On December 16, 2022, 2 Jackson brought a motion for partial summary judgment. ECF No. 26. The Parties

3 notified the Court on February 21, 2023, that Travelers reached a settlement with 4 Jackson for $325,000 in exchange for full release of the bonds, before a decision 5 was rendered on the motion for summary judgment. ECF No. 70-3 at 2, ¶ 2. The

6 settlement agreement, dated May 2, 2023, also contained a provision that released 7 any claims Flawless may raise in connection with the action, including the 8 underlying subcontract with Jackson. Id. at ¶ 4. 9 In the interim, Travelers asserted a third-party complaint against Defendants

10 to indemnify it for the loss incurred settling the bond with Jackson, plus attorney’s 11 fees and related costs. ECF Nos. 60, 73. As it relates to this third-party action, the 12 parties generally disagree as to whether Travelers was exposed to liability under

13 the surety agreement. Defendants assert that Flawless performed under the 14 subcontract, and that Travelers had agreed that Jackson’s claim lacked merit under 15 the performance bond. ECF No. 75 at 7. Travelers asserts that its settlement with 16 Jackson was within the bounds of the indemnity agreement and “necessary and

17 expedient to resolve [Jackson’s] claim.” ECF No. 69 at 5, ¶ 10. 18 Travelers filed this motion for summary judgment on November 2, 2023, 19 arguing that no issue of material fact remains because the language of the

20 agreement is clear in granting Travelers the ability to settle all claims it deems 1 necessary or expedient per the indemnity clause. ECF No. 68 at 7. Flawless 2 responded, arguing in part that Travelers breached its duty of good faith and fair

3 dealing in the settling of the underlying lawsuit, as evidence existed on the record 4 that Jackson’s claims had no merit, and therefore it was not “necessary or 5 expedient” to settle the claim. ECF No. 75 at 6–7.

6 DISCUSSION 7 I. Summary Judgment Standard 8 Summary judgment may be granted to a moving party who demonstrates 9 “that there is no genuine dispute as to any material fact and the movant is entitled

10 to judgment as a matter of law.” Fed. R. Civ. P. 56(a). The moving party bears the 11 initial burden of demonstrating the absence of any genuine issues of material fact. 12 Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). The burden then shifts to the

13 non-moving party to identify specific facts showing there is a genuine issue of 14 material fact. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256 (1986). 15 “The mere existence of a scintilla of evidence in support of the plaintiff’s position 16 will be insufficient; there must be evidence on which the [trier-of-fact] could

17 reasonably find for the plaintiff.” Id. at 252. 18 For purposes of summary judgment, a fact is “material” if it might affect the 19 outcome of the suit under the governing law. Id. at 248. A dispute concerning any

20 such fact is “genuine” only where the evidence is such that the trier-of-fact could 1 find in favor of the non-moving party. Id. “[A] party opposing a properly 2 supported motion for summary judgment may not rest upon the mere allegations or

3 denials of his pleading but must set forth specific facts showing that there is a 4 genuine issue for trial.” Id. (internal quotation marks omitted); see also First Nat’l 5 Bank of Ariz. v. Cities Serv. Co., 391 U.S. 253, 288-89 (1968) (holding that a party

6 is only entitled to proceed to trial if it presents sufficient, probative evidence 7 supporting the claimed factual dispute, rather than resting on mere allegations). In 8 ruling upon a summary judgment motion, a court must construe the facts, as well 9 as all rational inferences therefrom, in the light most favorable to the non-moving

10 party, Scott v. Harris, 550 U.S. 372, 378 (2007), and only evidence which would 11 be admissible at trial may be considered, Orr v. Bank of Am., NT & SA, 285 F.3d 12 764, 773 (9th Cir. 2002).

13 II. Claim for Breach of Contract 14 “Indemnity agreements are interpreted like any other contracts.” Scott 15 Galvanizing, Inc. v. Nw. EnviroServices, Inc., 120 Wash. 2d 573, 580 (1993) 16 (citing Jones v. Strom Constr. Co., 84 Wash. 2d 518, 520 (1974)). Under the Erie

17 Doctrine, a federal court sitting in diversity applies federal procedural law and the 18 substantive law of the forum state. Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78 19 (1938). Here, the indemnity agreement contained a jurisdiction provision

20 providing that action may be brought “in any state in which any Indemnitor 1 resides, has property, or in which any Contract is performed.” ECF No. 70-2 at 3, 2 ¶ 14. Each of the third-party defendants are citizens of the state of Washington.

3 Further, the contract was executed in Washington. Id. at 3–9. Therefore, the Court 4 applies Washington law. 5 To prove a breach of contract claim, a party must establish three elements:

6 (1) the existence of a valid contract; (2) a breach of a duty imposed by that 7 contract; and (3) damages resulting from that breach. Nw. Indep. Forest Mfrs. v. 8 Dep't of Labor & Indus., 78 Wash. App. 707, 712 (1995). Travelers asserts that it 9 exercised its right under the indemnity agreement to resolve Jackson’s claims and

10 is owed the amount paid in the settlement. ECF No. 68 at 7. Defendants do not 11 dispute the existence of the indemnity agreement, nor that it was breached. 12 Instead, Defendants argue that in settling the underlying claim, Travelers violated

13 its duty of good faith and fair dealing, which Washington law recognizes under 14 every contract. Colorado Structures, Inc. v. Ins. Co. of the W., 161 Wash. 2d 577, 15 588 (2007); Bond Safeguard Ins. Co. v. Wisteria Corp., 173 Wash. App. 1026 16 (2013); Frank Coluccio Const. Co. v. King Cnty., 136 Wash. App. 751, 764

17 (2007). This covenant requires parties to “cooperate with each other so that each 18 may obtain the full benefit of performance.” Badgett v. Sec. State Bank, 116 19 Wash. 2d 563, 569 (1991) (internal citations omitted). The duty of good faith

20 arises when the contract in question gives one party discretionary authority to 1 determine a term therein. Goodyear Tire & Rubber Co. v. Whiteman Tire, Inc., 86 2 Wash. App. 732, 738 (1997). According to Defendants, Travelers did not

3 negotiate the settlement with Jackson in good faith because the underlying claim 4 lacked merit, and therefore they are relieved from indemnifying Travelers. ECF 5 No. 75 at 6.

6 As a preliminary matter, Defendants accuse Travelers of failing to submit an 7 “‘itemized, sworn statement’ or other admissible evidence sufficient to satisfy 8 paragraph three of the indemnification statement.” ECF No. 75 at 9. The 9 provision in the indemnification agreement requires that “[a]n itemized, sworn

10 statement by an employee of Company, or other evidence of payment, shall be 11 prima facie evidence of the propriety, amount and existence of Indemnitor’s 12 liability.” ECF No. 70 at 1, ¶ 3. Travelers proof of settlement agreement and

13 declaration of Patrick G. Toulouse serve as satisfaction for this requirement of the 14 indemnification agreement. ECF Nos. 70, 70-3. 15 Defendants offer evidence that they opposed settlement and argue that 16 Traveler’s choice to settle after previously furthering an argument that Jackson’s

17 claim had no merit is a demonstration of bad faith. ECF No. 77 at 5, ¶ 3(e). 18 Defendants assert that Flawless “fully and properly completed its work under the 19 agreement between Jackson Contractor and Flawless Walls.” ECF No. 76 at 4. In

20 position letters sent to Travelers, Defendants assert that “Jackson Contractor Failed 1 to Satisfy the Conditions Precedent to Maintaining any Claim or Action Against 2 the Bond” and “Flawless Walls Performed the Construction Work Such that any

3 Obligation of Travelers under the Bond is Now Null and Void,” and were within 4 the bounds of the subcontract, therefore the surety agreement would not be 5 triggered. ECF Nos. 78-1 at 6–7; 78-2 at 3. At all times they maintained that

6 Jackson’s claim against the performance bond was improper because “Flawless 7 Walls performed the work under the parties’ agreement . . . Flawless Walls 8 performed the construction work under the parties’ contract and, as a result, any 9 obligation of Travelers under the performance bond is null and void.” ECF 78-2 at

10 3. They also request the Court stay its order on the present motion to extend their 11 discovery window to determine whether payment to Jackson was “necessary OR 12 expedient.” Id. at 13.

13 This matter is similar to Bond Safeguard Insurance Co. v. Wisteria Corp., 14 173 Wash. App. 1026 (2013), but presents an important distinction. Initially, both 15 Wisteria, a logging company, and its bond provider, Bond Safeguard Insurance 16 Co., refused to pay the Department of Natural Resources (“DNR”) after it alleged

17 the logging company breached conditions of its contract to cut and remove trees. 18 173 Wash. App. 1026 at *2. Before a lawsuit was filed, the surety provider settled 19 the claim with DNR pursuant to the indemnity clause:

20 The Company shall have the exclusive right to determine for itself and the Indemnitors whether any claim or suit brought against the Company 1 or the Principal upon any such bond shall be settled or defended, and its decision shall be binding and conclusive upon the Indemnitors. 2

3 Id. at *1. 4 The bond provider then sued Wisteria for indemnification of the payment to 5 DNR, and in response, the logging company argued that it was exempt for payment 6 because the bond provider had breached it duty of good faith by not properly 7 investigating the defenses set forth before settling. Id. at *2. The court rejected 8 the logging company’s argument, even in the face of its contention that DNR’s 9 claim was meritless, because it determined that the bond provider was within its

10 right to settle pursuant to the contract. Id. at *3. The Court arrived at this 11 conclusion in part because Wisteria provided no evidence of its compliance with 12 the contract, and as such could not prove it would have fared better without the

13 settlement. Id. at *4. The Court found that, given the information provided, the 14 bond provider properly investigated and settled the claim before a lawsuit could be 15 filed, and therefore was within its right to seek indemnification. Id. 16 Like in Bond Safeguard Insurance Co., Travelers examined the evidence

17 and made a business decision to settle. In this case, Travelers benefitted from a 18 more in-depth investigation than that of Bond Safeguard Co., because Travelers 19 had the opportunity to review Defendants’ position as part of the underlying

20 lawsuit. However, after reviewing the evidence, Travelers chose to litigate this 1 matter, rather than settling initially, and defended Flawless in response to 2 Jackson’s Motion for Summary Judgment, taking the position that it had performed

3 its duty under the subcontract. ECF No. 37 at 7–8. Travelers placed the blame on 4 Jackson for creating delays in the project and pointed to the fact that Jackson never 5 declared Flawless in default or sought to terminate the subcontract for cause, both

6 conditions precedent to accessing the performance bond. Id. at 8, 17; see also ECF 7 No. 17 at 6–7, ¶ 23 (“On information and belief, Flawless completed its 8 Subcontract performance as modified.”); ECF No. 37 at 3 (“Flawless encountered 9 issues with the Project, namely due to numerous design issues leading to hundreds

10 of Requests for Information (“RFIs”) to the Architect, responsive Architect’s 11 Supplemental Instructions (“ASIs”), and ensuing change orders.”); Id. at 4 (“Since 12 there is genuine issue of material fact as to Flawless’ performance under the

13 Subcontract and the scope of that Subcontract, this [motion for summary 14 judgment] should be denied”). Unlike Wisteria in Bond Safeguard Ins. Co., 15 Flawless has produced evidence, including statements of position Flawless 16 provided to Travelers that describe a rocky and tenuous working relationship with

17 Jackson, in which Flawless still managed to substantially perform, which raise 18 questions of material fact as to whether it would have fared better without the 19 settlement. See generally ECF Nos. 78-1, 78-2; Bond Safeguard Ins. Co., 173

20 Wash. App. at *4. Additionally, Flawless provided an email exchange with 1 Jackson disputing the costs Jackson demanded under the Notice of 2 Supplementation. ECF No. 42-1. Third-Party Plaintiff Travelers adopted and

3 relied on many of these arguments both in its initial correspondence denying 4 Jackson’s claim and in its Cross Motion for Summary Judgment in the underlying 5 suit. See generally ECF Nos. 37, 40-3, 40-4, 40-5.

6 The indemnification agreement gives Travelers sole discretion “under the 7 belief it was necessary or expedient” to settle claims for itself and Defendants. 8 ECF No. 70-2 at 1–2, ¶ 4. While Defendants would read ambiguity into this 9 provision, the Court declines to do so, as this specific line had been upheld by

10 courts in other jurisdictions. Travelers Cas. & Sur. Co. of Am. v. Highland P'ship, 11 Inc., No. 10CV2503 AJB DHB, 2012 WL 5928139, at *7 (S.D. Cal. Nov. 26, 12 2012); Travelers Cas. & Sur. Co. of Am. v. Dunmore, No. CIV S-07-

13 2493LKK/DAD, 2009 WL 1586936, at *2 (E.D. Cal. June 5, 2009). However, the 14 Court does find that questions of fact still remain as to whether Travelers breached 15 a duty of good faith to Defendants in settling the underlying lawsuit with Jackson. 16 In interpreting Washington contract law, the Ninth Circuit has determined that

17 “[g]ood faith limits the authority of a party retaining discretion to interpret contract 18 terms; it does not provide a blank check for that party to define terms however it 19 chooses.” Scribner v. Worldcom, Inc., 249 F.3d 902, 910 (9th Cir.2001).

20 Travelers relies extensively on Dunmore and Highland Partnership, in 1 support of its contention that the explicit term of the indemnification provision 2 gives it the sole discretion to settle claims, and that the Court cannot find a breach

3 of good faith because to do so would upset the terms of contract. ECF 80 at 5–6; 4 See Highland P'ship, Inc., No. 10 CV2503 AJB DHB, 2012 WL 5928139, at *6 5 (internal citation omitted) (“[T]he implied covenant [of good faith] will only be

6 recognized to further the contract's purpose; it will not be read into a contract to 7 prohibit a party from doing that which is expressly permitted by the agreement 8 itself.”). These cases are based on California contract law and are thus persuasive 9 but not binding on the Court. The Court in Highland Partnership declined to find

10 a breach of the duty of good faith because it determined that all parties were 11 sophisticated business entities and finding bad faith in the settlement of a claim 12 would rewrite the terms of the indemnification contract. No. 10CV2503 AJB

13 DHB, 2012 WL 5928139, at *7. However, in making this finding, the court drew 14 attention to the limiting factor of the same indemnification provision at issue here; 15 namely that Travelers has the sole discretion to settle claims in ways it finds to be 16 expedient or necessary. Id. (emphasis added). In considering all facts in the light

17 most favorable to Defendants, the Court cannot determine if Travelers, in good 18 faith, made a “necessary or expedient,” settlement given Traveler’s position 19 regarding Flawless in its initial dealing with Jackson.

20 While the indemnification agreement here gives Travelers sole discretion to 1 settle claims, contract law requires that both parties receive the benefit of the 2 indemnification agreement within the surety. Evidence provided by both parties

3 indicates that Travelers believed that Flawless upheld, at least to some extent, its 4 end of the bargain in performing under the subcontract. See ECF No. 17 at 6–7, ¶ 5 23; see generally ECF No. 37 at 8–10 (“Flawless therefore had an opportunity to

6 cure to the extent it was in default, curing any default by August of 2021 when the 7 work was complete.”) (“Further, after Flawless and Jackson performed their work, 8 there was no work left to perform under the subcontract.”). See Edmonson v. 9 Popchoi, 172 Wash. 2d 272, 280 (2011) (quoting RESTATEMENT (SECOND)

10 OF CONTRACTS § 205 cmt. a (1981)) (“The duty of good faith requires 11 ‘faithfulness to an agreed common purpose and consistency with the justified 12 expectations of the other party.’”). Statements made by Travelers demonstrate that

13 it believed Flawless to have performed under the subcontract. ECF No. 37 at 8 14 (“Further, any delay was not Flawless’ fault, rather it was caused by numerous 15 design changes.”). 16 Thus, as it stands the Court cannot definitively say if the settlement for

17 $325,000 was done in good faith such that each party receives the “full benefit of 18 performance.” Bagett, 116 Wash.2d at 569. The terms of the surety agreement 19 were only triggered if Flawless failed to perform the work under the subcontract,

20 or if it was found in default for failure to perform. ECF No. 40-1 at 2. Defendants have raised a question of material fact as to whether they upheld their end of the 2|| surety agreement relating to the subcontract, and thus have been denied the full 3|| benefit of that contract with Travelers. See Rekhter v. State, Dep't of Soc. & 4|| Health Servs., 180 Wash. 2d 102, 113 (2014) (finding that the duty of good faith only attaches to express terms of a contract). Given the discretionary power that Travelers had over the settlement of the claim and the question of fact remaining as 7|| to whether conditions of the surety agreement were triggered, summary judgment is not proper. ECF No. 70-3 at 2, 4 4. 9 The Court notes that the window for discovery in this matter closes on May 13, 2024, and Third-Party Defendants are free to seek additional materials provided they adhere to the rules therein. ECF No. 67 at 3. ACCORDINGLY, IT IS HEREBY ORDERED: 13 Third-Party Plaintiff's Motion for Summary Judgment (ECF No. 68) is 14 DENIED. 15 The District Court Executive is directed to enter this Order and furnish 16|| copies to counsel. 17 DATED January 5, 2024.

gp a fino 0. Cee 19 On Xe THOMAS O. RICE <> United States District Judge 20

ORDER DENYING THIRD-PARTY PLAINTIFF’S MOTION FOR