The Ohio Casualty Insurance Company v. Superior Air, Inc. et al, No. 3:2022cv00535 - Document 36 (S.D. Cal. 2023)
Court Description: ORDER Granting in Part and Denying in Part 25 Plaintiffs Motion for Summary Judgment or, In the Alternative, Motion for Partial Summary Judgment. Signed by Judge Michael M. Anello on 6/6/23. (aas)
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The Ohio Casualty Insurance Company v. Superior Air, Inc. et al Doc. 36 Case 3:22-cv-00535-MMA-KSC Document 36 Filed 06/06/23 PageID.894 Page 1 of 18 1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA 10 11 12 THE OHIO CASUALTY INSURANCE COMPANY, 15 16 ORDER GRANTING IN PART AND DENYING IN PART PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT OR, IN THE ALTERNATIVE, MOTION FOR PARTIAL SUMMARY JUDGMENT Plaintiff, 13 14 Case No. 22-cv-535-MMA (KSC) v. SUPERIOR AIR, INC., et al., Defendants. [Doc. No. 25] 17 18 19 This is an indemnity action brought by Plaintiff The Ohio Casualty Insurance 20 Company (“Plaintiff” or “Ohio Casualty”) against Defendants Superior Air, Inc. (“SAI”), 21 Vinod Jothilingam, and Vandana Ahuja (collectively, “Defendants”). Doc. No. 1 22 (“Compl.”). Presently before the Court is Plaintiff’s motion for summary judgment or, in 23 the alternative, partial summary judgment. Doc. No. 25. Plaintiff seeks indemnity and 24 collateral security for losses and expenses it incurred, and may incur in the future, in 25 investigating and resolving claims under construction-related surety bonds it issued and 26 in enforcing its rights under an indemnity agreement. Id. Defendants filed an opposition, 27 Doc. No. 27, to which Plaintiff replied, Doc. No. 28. The Court found the matter suitable 28 for determination on the papers and without oral argument pursuant to Federal Rule of -1- 22-cv-535-MMA (KSC) Dockets.Justia.com Case 3:22-cv-00535-MMA-KSC Document 36 Filed 06/06/23 PageID.895 Page 2 of 18 1 Civil Procedure 78(b) and Civil Local Rule 7.1.d.1. See Doc. No. 29. For the reasons set 2 forth below, the Court GRANTS in part and DENIES in part Plaintiff’s motion. I. BACKGROUND 1 3 Except where otherwise noted, the following facts are not reasonably in dispute. 2 4 5 Defendants executed a General Agreement of Indemnity (“Indemnity Agreement”) in 6 favor of Ohio Casualty as partial consideration for Ohio Casualty’s issuance of surety 7 bonds on behalf of SAI. 3 Doc. No. 28-1 (“Plaintiff’s Separate Statement” or “PSS”) 8 No. 2; Doc. No. 25-2, Decl. of Sonia Linnaus in Supp. of Mot. Summ. J. (“Linnaus 9 Decl.”) ¶ 7; Doc. No. 25-2, Ex. A (“Agreement”) at 18–22. 4 By executing the Indemnity 10 Agreement, Defendants agreed to indemnify and hold harmless Ohio Casualty from any 11 liability, costs, and expenses arising from Defendants’ default on their obligations under 12 bonds issued by Ohio Casualty. PSS at Nos. 4–5; Agreement ¶¶ 1, 4. The Indemnity 13 Agreement entitles Ohio Casualty to recover “all disbursements made by it in good faith 14 under the belief that it is or was or might be liable for the sums and amounts disbursed or 15 that it was necessary or expedient to make such disbursements, whether or not such 16 17 18 19 20 21 22 23 24 25 26 27 28 1 These material facts are taken from the parties’ separate statements and responses thereto, as well as the supporting declarations and exhibits. Disputed material facts are discussed in further detail where relevant to the Court’s analysis. Facts that are immaterial for purposes of resolving the current motions are not included in this recitation. 2 In opposition, Defendants dispute many of Plaintiff’s statements of fact. See Doc. No. 27-4. However, many of Defendants’ explanations are largely irrelevant. For example, in response to the statement “The Indemnity Agreement defines ‘Loss’ as: ‘Any loss, fees, costs and expenses, including pre- and postjudgment interest at the maximum rate permitted by law, court costs, counsel fees, accounting, engineering and outside consulting fees, which [OCIC] may sustain or incur. . . ,’” Defendants state, “Disputed. The bracketed language is interpolated.” PSS at No. 5. This is not a valid basis for disputing the fact. The bracketed language “[OCIC]” stands for “Ohio Casualty” and replaces the word “Surety” in the Indemnity Agreement. See Doc. No. 25-2 at 15 ¶ 1. Defendants do not dispute that Ohio Casualty is the surety in this case and the surety referenced in the Indemnity Agreement. To the extent Defendants purport to dispute a fact but do not provide a relevant basis for doing so, the Court treats the fact as undisputed. 3 The Indemnity Agreement is in the name of Ohio Casualty’s parent company, Liberty Mutual Group. See Agreement at 14. SAI executed the agreement on April 15, 2020. Id. at 18. Jothiligam and Ahuja executed the agreement on May 28, 2020. Id. at 19–22. 4 All citations to electronically filed documents refer to the pagination assigned by the CM/ECF system. -2- 22-cv-535-MMA (KSC) Case 3:22-cv-00535-MMA-KSC Document 36 Filed 06/06/23 PageID.896 Page 3 of 18 1 liability, necessity, or expediency existed,” including “pre- and post-judgment interest at 2 the maximum rate permitted by law, court costs, counsel fees, accounting, engineering 3 and outside consulting fees” by reason of: 4 5 6 7 8 (a) a request for a Bond; (b) execution or procurement of a Bond, including any cost incurred by [Ohio Casualty] in fulfilling its obligations under any Bond; (c) the failure of [Defendants] to comply with any covenants or conditions of [the] Agreement . . . ; or (d) in enforcing any conditions of [the] Agreement. 9 PSS at Nos. 4–5; Agreement ¶¶ 1, 4. The Indemnity Agreement further provides that 10 “vouchers or other evidence of any such payments shall be prima facie evidence of the 11 fact and amount of liability to [Ohio Casualty].” PSS at No. 4; Agreement ¶ 4. Ohio 12 Casualty has the right under the Indemnity Agreement, at “its option and sole discretion, 13 to adjust, settle or compromise any claim, demand, suit or judgment upon any Bond.” 14 Agreement ¶ 8. In addition, the Indemnity Agreement also provides that Defendants 15 must deposit collateral on demand by Ohio Casualty, in an amount to be determined by 16 Ohio Casualty, for anticipated losses, even if no losses have yet been sustained. Id. ¶ 5. 17 Upon default or breach by Defendants, Ohio Casualty may take over any bonded projects 18 and recover all expenses incurred carrying them to completion. Id. ¶ 8. 19 Defendants entered into the Indemnity Agreement to obtain bonds from Ohio 20 Casualty securing SAI’s work on various projects (the “Bonded Projects”). PSS at No. 7; 21 Linnaus Decl. ¶ 12. Ohio Casualty, acting as surety, issued the following bonds on 22 behalf of SAI as principal for various construction projects: (1) a performance and 23 payment bond in the penal amount of $1,551,739.00 for the Lindbergh Elementary 24 School Modernization Project (“Lindbergh Project”); (2) a performance and payment 25 bond in the penal amount of $4,600,00.00 for the Channel Islands High School HVAC 26 Replacement Project (“Channel Islands Project”); (3) a performance and payment bond in 27 the penal amount of $612,000.00 for the Grossmont Union High School District Bus 28 Maintenance Facility Project (“Grossmont Project”); (4) a performance and payment -3- 22-cv-535-MMA (KSC) Case 3:22-cv-00535-MMA-KSC Document 36 Filed 06/06/23 PageID.897 Page 4 of 18 1 bond in the penal amount of $1,873,000.00 for the Village 3 Elementary School District 2 Project (“Village Project”); (5) a performance and payment bond in the penal amount of 3 $104,335.00 for the Standley Middle School HVAC Project; (6) a performance and 4 payment bond in the penal amount of $739,804.00 for the Valhalla Locker Room 5 Modernization Project; and (7) a performance and payment bond in the penal amount of 6 $558,179.00 for the Eastlake High School Roof and HVAC Replacement Phase 5 Project 7 (collectively, the “Bonds”). PSS at No. 7; Linnaus Decl. ¶ 12; Doc. No. 35, Ex. B at 4. 5 8 Eventually, Defendant SAI experienced cash flow problems which led to “eventual 9 bond claims.”6 PSS at No. 8; Linnaus Decl. ¶ 13. For example, to date, Ohio Casualty 10 has paid out $112,268.14 to claimants under the payment bond issued for the Channel 11 Islands Project. PSS at Nos. 20–22; Linnaus Decl. ¶ 24; Doc. No. 25-2, Ex. I at 149. No 12 claims have been paid out on any performance bonds. In response to issues being raised 13 by obligees on multiple projects, and pursuant to its obligations under the Indemnity 14 Agreement, Ohio Casualty “commenced an investigation of” all the Bonded Projects. 15 PSS at Nos. 23–31; Linnaus Decl. ¶¶ 13–32; Agreement at 15. On April 7, 2022, 16 pursuant to the Indemnity Agreement, Ohio Casualty made a demand upon Defendants to 17 provide collateral to cover its exposure on the Bonded Projects, which it calculated at that 18 point to total $3,500,000.00. PSS at No. 33. To date, Defendants have refused to post 19 collateral.7 PSS at No. 34. 20 21 22 23 24 25 26 27 28 5 Exhibit B of the Linnaus Declaration was originally located at Doc. No. 25-2 at 24. Because Plaintiff’s original Exhibit B was in an illegible format, the Court directed the parties to file a supplemental, readable, version. Doc. No. 34. Accordingly, the parties jointly filed a supplemental Exhibit B on May 22, 2023. Doc. No. 35. 6 Defendants dispute the potential causes of SAI’s financial difficulties. PSS at No. 8. 7 Defendants “dispute” Plaintiff’s Facts 33 and 34 on the basis that Plaintiff’s “collateral demanded exceeds the outstanding liabilities and amounts being held by [Plaintiff].” PSS at Nos. 33–34. This is not a valid basis for disputing these facts. Defendants disagree with their potential liability, but do not dispute that Plaintiff demanded $3,500,000.00 in collateral and that Defendants have not posted the requested collateral. -4- 22-cv-535-MMA (KSC) Case 3:22-cv-00535-MMA-KSC Document 36 Filed 06/06/23 PageID.898 Page 5 of 18 1 Plaintiff initiated this action on April 18, 2022. Doc. No. 1. Plaintiff seeks to have 2 Defendants indemnify Plaintiff for the money it has already paid to bond claimants along 3 with associated investigation and defense costs, which Plaintiff calculates is $690,637.98. 4 PSS at No. 36; Linnaus Decl. ¶ 36; see Ex. I. In addition, Plaintiff seeks specific 5 performance of the Indemnity Agreement’s collateral security provision in the amount of 6 $4,820,000.00, which Plaintiff calculates is its current total potential exposure on the 7 Bonds. PSS at No. 38; Linnaus Decl. ¶ 36. 8 II. LEGAL STANDARD 9 A principal purpose of the summary judgment procedure is to identify and dispose 10 of factually unsupported claims. Celotex Corp. v. Cattrett, 477 U.S. 317, 323–24 (1986). 11 Summary judgment is proper “if the movant shows that there is no genuine dispute as to 12 any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. 13 P. 56(a). “In considering a motion for summary judgment, the court may not weigh the 14 evidence or make credibility determinations, and is required to draw all inferences in a 15 light most favorable to the non-moving party.” Freeman v. Arpaio, 125 F.3d 732, 735 16 (9th Cir. 1997). 17 The party moving for summary judgment bears the initial burden of identifying 18 those portions of the pleadings, discovery, and affidavits that demonstrate the absence of 19 a genuine issue of material fact. Celotex, 477 U.S. at 323. An issue of fact is “genuine” 20 only if there is sufficient evidence for a reasonable fact finder to find for the non-moving 21 party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248–49 (1986). A fact is 22 “material” if it may affect the outcome of the case. Id. at 248. If the party moving for 23 summary judgment does not have the ultimate burden of persuasion at trial, that party 24 must produce evidence which either negates an essential element of the non-moving 25 party’s claims or that party must show that the non-moving party does not have enough 26 evidence of an essential element to carry its ultimate burden of persuasion at trial. Nissan 27 Fire & Marine Ins. Co. v. Fritz Cos., 210 F.3d 1099, 1102 (9th Cir. 2000). 28 -5- 22-cv-535-MMA (KSC) Case 3:22-cv-00535-MMA-KSC Document 36 Filed 06/06/23 PageID.899 Page 6 of 18 1 Once the moving party meets his or her initial burden, the non-moving party must 2 go beyond the pleadings and, by its own evidence, set forth specific facts showing that 3 there is a genuine issue for trial. Nissan Fire & Marine Ins. Co., 210 F.3d at 1102. In 4 order to make this showing, the non-moving party must “identify with reasonable 5 particularity the evidence that precludes summary judgment.” Keenan v. Allan, 91 F.3d 6 1275, 1279 (9th Cir. 1996). In addition, the party seeking to establish a genuine issue of 7 material fact must take care to adequately point a court to the evidence precluding 8 summary judgment because a court is “not required to comb the record to find some 9 reason to deny a motion for summary judgment.” Carmen v. San Francisco Unified 10 School Dist., 237 F.3d 1026, 1029 (9th Cir. 2001) (citation omitted). If the non-moving 11 party fails to point to evidence precluding summary judgment, the moving party is 12 entitled to judgment as a matter of law. Celotex, 477 U.S. at 323. 13 14 III. REQUESTS FOR JUDICIAL NOTICE Both parties have requested judicial notice of materials submitted in support of 15 their respective positions regarding Plaintiff’s motion for summary judgment pursuant to 16 Federal Rule of Evidence 201. See Doc. Nos. 25-4; 27-3. Neither request is opposed. 17 Under Rule 201(b), the Court can take judicial notice of facts not subject to 18 reasonable dispute, including the existence orders and decisions by other courts. Fed. R. 19 Evid. 201(b); Lee v. City of Los Angeles, 250 F.3d 668, 690 (9th Cir. 2001). Under Rule 20 201(d), the Court must take notice if requested by a party and if supplied with the 21 necessary information. Fed. R. Evid. 201(d). 22 Plaintiff asks the Court to consider only one exhibit under the judicial notice 23 doctrine: the cross-complaint by Great American Insurance Company in an action in state 24 court entitled Superior Air Inc. v. Fast Track Construction Corp., et al., County of 25 Ventura, Case No. 56-2022-00566050-CU-BC-VTA. See Doc. No. 25-4 at 5–18. 26 Defendants request judicial notice of the same cross-complaint, see Doc. No. 27-3 at 5– 27 11, and the following two exhibits: (1) Ohio Casualty’s answer to the above mentioned 28 cross-complaint, see Doc. No. 27-3 at 13–23; and (2) a print-out of a search regarding the -6- 22-cv-535-MMA (KSC) Case 3:22-cv-00535-MMA-KSC Document 36 Filed 06/06/23 PageID.900 Page 7 of 18 1 status of Fast-Track Construction Corporation from the California Secretary of State’s 2 Online Business Search, see Doc. No. 27-3 at 25. 3 4 Because all three exhibits are proper for judicial notice, the Court GRANTS the parties’ requests for judicial notice for all requested documents pursuant to Rule 201. 5 IV. DISCUSSION 6 Plaintiff argues it is entitled to summary judgment or, in the alternative, partial 7 summary judgment on each of the claims in its Complaint, including: (1) breach of 8 contract (Indemnity Agreement) as to all Defendants; (2) declaratory relief as to all 9 Defendants; (3) quia timet as to all Defendants; (4) specific performance as to all 10 Defendants; and (5) statutory indemnity against SAI only. See Doc. Nos. 1; 25-1 at 16– 11 24. The Court first addresses Plaintiff’s claims for breach of the Indemnity Agreement 12 and specific performance. 13 A. 14 15 16 Objections As an initial matter, both parties object to various pieces of evidence provided by the opposing side. See Doc. Nos. 27-5; 28-2; 28-3; 28-4. “A trial court can only consider admissible evidence in ruling on a motion for 17 summary judgment.” Orr v. Bank of Am., NT & SA, 285 F.3d 764, 773 (9th Cir. 18 2002); see also Fed. R. Civ. P. 56(c). However, courts will consider evidence with 19 content that would be admissible at trial even if the form of the evidence would be 20 inadmissible. See Celotex, 477 U.S. at 324; Fraser v. Goodale, 342 F.3d 1032, 1036–37 21 (9th Cir. 2003) (admitting a diary in considering summary judgment where its contents 22 were within the author’s personal knowledge and could be admitted in several ways at 23 trial despite a hearsay objection). 24 Objections such as lack of foundation, speculation, hearsay, and relevance are 25 duplicative of the summary judgment standard itself. See Burch v. Regents of the Univ. 26 of Cal., 433 F. Supp. 2d 1110, 1119–20 (E.D. Cal. 2006). A court can award summary 27 judgment only when there is no genuine dispute of material fact. “Statements based on 28 improper legal conclusions or without personal knowledge are not facts and can be -7- 22-cv-535-MMA (KSC) Case 3:22-cv-00535-MMA-KSC Document 36 Filed 06/06/23 PageID.901 Page 8 of 18 1 considered as arguments, not as facts, on summary judgment. Instead of challenging the 2 admissibility of this evidence, lawyers should challenge its sufficiency.” Rose v. J.P. 3 Morgan Chase, N.A., No. 12-CV-225-WBS-CMK, 2014 WL 546584, at *3 (E.D. Cal. 4 2014). Accordingly, the Court OVERRULES the parties’ objections because they rest 5 on the grounds of speculation, hearsay, lack of personal knowledge, lack of foundation, 6 and relevance. 7 B. Breach of Indemnity Agreement 8 Ohio Casualty seeks to recover $690,637.98 for monies already expended in 9 relation to the Bonds. See Doc. No. 25-1 at 19. Of this amount, $112,268.14 represents 10 the amount already paid to settle claims.8 See Doc. No. 25-4 at 15. Ohio Casualty cites 11 to the following portions of the Indemnity Agreement to support its right to recover 12 monies in the above amount: 13 14 4. Indemnity: Indemnitors shall exonerate, hold harmless, indemnify, and keep [Ohio Casualty] indemnified from all liability for Loss. Indemnitors shall pay [Ohio Casualty] for Loss promptly upon demand. If [Ohio Casualty] makes any Loss payment, Indemnitors agree that in any accounting between [Ohio Casualty] and Principals, between [Ohio Casualty] and Indemnitors, or either or both of them, [Ohio Casualty] is entitled to recover from Indemnitors all disbursements made by it in good faith under the belief that it is or was or might be liable for the sums and amounts disbursed or that it was necessary or expedient to make sure disbursements, whether or not such liability, necessity or expediency existed; and that the vouchers or other evidence of any such payments made by [Ohio Casualty] shall be prima facie evidence of the fact and amount of the liability to [Ohio Casualty]. 15 16 17 18 19 20 21 22 1. Definitions: Loss: [A]ny loss, fees, costs and expenses, including pre- and post-judgment interest at the maximum rate permitted by law, court costs, 23 24 25 26 27 28 8 To date, Ohio Casualty has paid out two claims, including $35,000.00 to Captive-Aire Systems, Inc. and $77,268.14 to Trustees of the Southern California Pipe Trades Trust Funds in relation to the payment bond issued for the Channel Islands Project. See PSS at Nos. 20–22; Linnaus Decl. ¶ 24; Doc. No. 25-2, Ex. I at 149. The remaining amounts Ohio Casualty seeks to recover include expenses incurred in investigation and litigation related to the Bonds. Ex. I at 149–151. -8- 22-cv-535-MMA (KSC) Case 3:22-cv-00535-MMA-KSC Document 36 Filed 06/06/23 PageID.902 Page 9 of 18 1 counsel fees, accounting, engineering and outside consulting fees, which [Ohio Casualty] may sustain or incur or otherwise determine in its sole and absolute discretion, by reason of: (a) a request for a Bond; (b) execution or procurement of a Bond, including any cost incurred by [Ohio Casualty] in fulfilling its obligations under any Bond; (c) the failure of Indemnitors to comply with any covenants or conditions of this [Indemnity] Agreement or Other Agreement; or (d) in enforcing any of the covenants and conditions of this [Indemnity] Agreement or Other Agreements.9 2 3 4 5 6 7 See Doc. No. 25-1 at 19; PSS at Nos. 4–5; Agreement ¶¶ 1, 4. 8 9 California law has long recognized the right of a surety, such as Ohio Casualty, to indemnification under the terms of a written indemnity agreement. See, e.g., Fid. & 10 Deposit Co. of Md. v. Whitson, 187 Cal. App. 2d 751, 756 (1960). “An indemnity 11 agreement is to be interpreted according to the language and contents of the contract as 12 well as the intention of the parties as indicated by the contract.” Myers Bldg. Indus., Ltd. 13 v. Interface Tech., Inc., 13 Cal. App. 4th 949, 968 (1993). To establish a valid claim for 14 breach of an indemnity agreement under California law, Plaintiff must demonstrate the 15 existence of an indemnity agreement, Plaintiff’s performance under the agreement, 16 breach of the agreement, and damages. See Reichert v. Gen. Ins. Co. of Am., 68 Cal. 2d 17 822, 830 (1968). 18 There is no dispute that Ohio Casualty and Defendants are parties to the Indemnity 19 Agreement at issue. See PSS at No. 2; Doc. No. 27 at 8. Nor is there any dispute that the 20 Indemnity Agreement provides Ohio Casualty with broad discretion to determine its 21 losses and settle claims for payment. PSS at No. 5. Moreover, as noted above, the 22 Indemnity Agreement states that “vouchers or other evidence of any . . . payments made 23 by [Ohio Casualty] shall be prima facie evidence of the fact and amount of [Defendants’] 24 25 26 27 28 9 Numerous courts in other jurisdictions have upheld similar loss provisions. See, e.g., Transamerica Ins. Co. v. Bloomfield, 401 F.2d 357, 362 (6th Cir. 1968) (Paragraph VI granted to the Company “the right to pay, settle or compromise any expense, claim or charge of the character enumerated in this agreement, and the voucher or other evidence of such payment shall be prima facie evidence of the propriety thereof and of the Indemnitor's liability therefor to the Company”). -9- 22-cv-535-MMA (KSC) Case 3:22-cv-00535-MMA-KSC Document 36 Filed 06/06/23 PageID.903 Page 10 of 18 1 liability to [Ohio Casualty].” Agreement ¶ 4. “Provisions in indemnity agreements . . . 2 providing that vouchers and other evidence of payment shall be prima facie evidence of 3 the propriety thereof, have been upheld as not against public policy and enforced by the 4 courts.” Great Am. Ins. Co. v. Roadway Eng’g Works, Inc., No. 16-CV-00070-WBS- 5 SKO, 2016 WL 5157651, at *3 (E.D. Cal. Sept. 21, 2016) (quoting Transamerica Ins. 6 Co., 401 F.2d at 362 (6th Cir. 1968)). 7 Once the moving party shows that an indemnity agreement contains such a prima 8 facie evidence clause, the burden shifts to the non-moving side to show that the amount 9 claimed is incorrect (i.e., that Ohio Casualty did not pay what it claims to have paid) or 10 that Ohio Casualty acted in bad faith in making such payments. See Travelers Cas. & 11 Sur. Co. of Am. v. K.O.O. Constr., Inc., No. 16-CV-00518-JCS, 2016 WL 7324988, at *8 12 (N.D. Cal. Dec. 16, 2016) (concluding that “courts have routinely held that sort of burden 13 shifting provision to be valid and enforceable in indemnity contracts” and collecting 14 cases re: the same); Cas. v. Dunmore, No. 07-CV-02493-TLN-DB, 2016 WL 6611184, at 15 *2 (E.D. Cal. Nov. 9, 2016) (“[a]ny alleged bad faith on behalf of a surety is a defense to 16 liability that must be pleaded and proved by the defendants as opposed to constituting an 17 element of a surety’s case for breach of contract”); see also Peter Culley & Assocs. v. 18 Superior Court, 10 Cal. App. 4th 1484, 1497 (1992), as modified on denial of reh’g (Dec. 19 16, 1992) (“The settlement is presumptive evidence of liability of the indemnitee and of 20 the amount of liability, but it may be overcome by proof from the indemnitor that the 21 settlement was unreasonable (e.g., unreasonable in amount, entered collusively or in bad 22 faith, or entered by an indemnitee not reasonable in the belief that he or she had an 23 interest to protect).”). 24 To meet its burden of showing bad faith, an indemnitee must show that the surety 25 engaged in “objectively unreasonable conduct” in paying the claims for which the surety 26 seeks indemnity. See Arntz Contracting Co. v. St. Paul Fire & Marine Ins. Co., 47 Cal. 27 App. 4th 464, 483 (1996). “Good faith does not require perfection, or require that the 28 surety had complete knowledge of the circumstances behind the claim before making its -10- 22-cv-535-MMA (KSC) Case 3:22-cv-00535-MMA-KSC Document 36 Filed 06/06/23 PageID.904 Page 11 of 18 1 settlement decision.” Travelers Cas. & Sur. Co. of Am. v. Highland P’ship, Inc., No. 10- 2 CV-2503-AJB-DHB, 2012 WL 5928139, at *9 (S.D. Cal. Nov. 26, 2012) (internal 3 citation and quotation marks omitted). Rather, it depends on “whether the surety 4 believed in good faith that it was either necessary or desirable for it to act to protect its 5 interests as a surety, or whether there was no rational justification for the sureties [sic] 6 actions.” Id. (emphasis in original). 7 Here, Ohio Casualty submitted both a sworn statement from its Senior Surety 8 Claims Counsel, Sonia Linnaus, as well as a spreadsheet summary detailing its losses in 9 connection with resolving two claims on the Bonds and other costs associated with the 10 following: 11 12 13 14 15 16 17 (1) investigating the claims on the Bonds; (2) investigating and monitoring all the Projects to mitigate potential claims; (3) defending [Ohio Casualty] in the Fast Track Cross-Complaint [in the above mentioned state court action]; (4) enforcing [Ohio Casualty]’s rights under the Indemnity Agreement in the instant action. . . ; (5) retaining Matson Driscoll Damico LLP to administer the escrow account; (6) retaining [Watt, Tieder, Hoffar & Fitzgerald LLP] as legal counsel; and (7) paying consultants’ expenses incurred with the investigation of the various bond claims. 18 Doc. No. 25-1 at 13; PSS at No. 36. The spreadsheet includes check numbers and the 19 dates that the checks were issued. See Ex. I at 149–151. The Court finds that this is 20 sufficient evidence under the prima facie evidence clause to shift the burden to 21 Defendants to prove that (1) the amount Ohio Casualty seeks is incorrect, or (2) that Ohio 22 Casualty engaged in “objectively unreasonable conduct” in handling its obligations under 23 the Indemnity Agreement. See Arntz Contracting Co., 47 Cal. App. 4th at 483. 24 First, Defendants do not technically argue that the amount Ohio Casualty seeks to 25 have reimbursed is incorrect. As stated above, Ohio Casualty seeks a total of 26 $690,637.98 in reimbursement, which consists of $112,268.14 for two paid out claims on 27 the Channel Islands Project payment bond, and $578,369.84 for expenses incurred in 28 investigation, consultation, and litigation related to the Bonds. Ex. I at 149–151. Instead, -11- 22-cv-535-MMA (KSC) Case 3:22-cv-00535-MMA-KSC Document 36 Filed 06/06/23 PageID.905 Page 12 of 18 1 Defendants argue that they have not committed any breach because Ohio Casualty 2 “possessed” and “controlled ‘held funds’ of [SAI] in the amount of $613,611.19.” Doc. 3 No. 27 at 9, 15. Specifically, Defendants contend that they have “already reimbursed” 4 Ohio Casualty as to its payments of $77,268.14 and $35,000.00—totaling $112,268.14— 5 on the Channel Islands Project payment bond claims “because [SAI] already provided 6 [Ohio Casualty] with sufficient funds, so there are no outstanding reimbursements due.” 7 Id. Ohio Casualty replies that it “is not in ‘total control’ of bonded contract funds nor is 8 it ‘holding $613,611.19’ but rather has participated with SAI in disbursements of funds to 9 pay [other] vendors.” Doc. No. 28 at 3 (emphasis in original). As stated above, the Court 10 finds that Ohio Casualty provided sufficient evidence to establish its losses. In addition, 11 the declaration of Ms. Linnaus establishes that Ohio Casualty has used the above- 12 referenced “held funds” to pay vendors on other Bonded Projects, including the Village 13 Lindbergh Projects. 10 Linnaus Decl. ¶ 32. Although Defendants take issue with Ohio 14 Casualty’s payment of $77,268.14, the evidence indicates that Ohio Casualty made the 15 payment after Defendants had already been offered “several opportunities to resolve [the] 16 claim.” Doc. No. 27 at 13; Doc. No. 27-1, Decl. of John Woo in Supp. of Opp. to Mot. 17 Summ. J. (“Woo Decl.”) ¶ 9; Doc. No. 27-1, Ex. F at 38. In any event, as noted above, 18 the Indemnity Agreement provides Ohio Casualty with broad discretion to determine its 19 losses and to settle claims for payment. PSS at No. 5; Agreement ¶ 1 (“Loss”), ¶ 12. 20 Furthermore, as to Defendants’ dispute of the $35,000.00 payment, they only contend 21 that it “was part of a larger shared settlement between [Ohio Casualty]” and another 22 vendor’s surety. Id.; PSS at No. 22; Woo Decl. ¶ 13. The Court finds Defendants’ 23 24 25 26 27 28 10 Relatedly, Defendants also argue the Indemnity Agreement is ambiguous as to the “language of what exactly is entailed in the ‘full performance of [the Indemnity] Agreement’ concerning the order and sequence in which [held] funds are applied.” Doc. No. 27 at 24. The Court disagrees. Ambiguity exists when language is reasonably susceptible to more than one application to material facts. California State Auto. Ass’n., Inter-Ins. Bureau v. Sup. Ct., 177 Cal. App. 3d 855, 859 (1986). “[F]ull performance of [the Indemnity] Agreement” is clearly in reference to Defendants’ performance of their contractual obligations. -12- 22-cv-535-MMA (KSC) Case 3:22-cv-00535-MMA-KSC Document 36 Filed 06/06/23 PageID.906 Page 13 of 18 1 argument, and their evidence, insufficient to establish a genuine issue of material fact as 2 to the amount that Ohio Casualty has already paid and seeks in reimbursement. See 3 Hansen v. United States, 7 F.3d 137, 138 (9th Cir. 1993) (holding that “[w]hen the 4 nonmoving party relies only on its own affidavits to oppose summary judgment, it cannot 5 rely on conclusory allegations unsupported by factual data to create an issue of material 6 fact.”). 7 Second, as to bad faith, Defendants claim that all of the “purported losses to 8 attorneys, investigative firms, and others” are disputed. Doc. No. 27 at 28. However, 9 Defendants only rely on the declaration of Defendant Jothilingam to argue that 10 Defendants “did not ask for any of [Ohio Casualty’s] interventions on the projects” and 11 that “none of the projects themselves required [Ohio Casualty’s] meddling.” Id.; Doc. 12 No. 27-2, Decl. of Vinod Jothilingam in Supp. of Opp. to Mot. Summ. J. (“Jothilingam 13 Decl.”) ¶ 15. To the extent Defendants rely on Mr. Jothilingam’s declaration to argue 14 Ohio Casualty’s payments and expenses were made in bad faith and unreasonable, the 15 Court finds that the declaration does not support such a reasonable finding by the trier of 16 fact—it merely supports an inference that Defendants disagreed with Ohio Casualty’s 17 decisions regarding settlement and investigation of certain claims. As stated above, there 18 is no dispute that the Indemnity Agreement provides Ohio Casualty with broad discretion 19 to determine its losses and to settle claims for payment. PSS at No. 5; Agreement ¶ 1 20 (“Loss”), ¶ 12. As such, Defendants’ opinion alone regarding Ohio Casualty’s liability is 21 insufficient to create a genuine issue of material fact. Hansen, 7 F.3d at 138; see also 22 FTC v. Publ’g Clearing House, 104 F.3d 1168, 1171 (9th Cir. 1996) (“A conclusory, 23 self-serving affidavit, lacking detailed facts and any supporting evidence, is insufficient 24 to create a genuine issue of material fact.”). 25 In sum, even viewing the evidence in Defendants’ favor, there is no triable issue of 26 material fact as to whether Ohio Casualty actually incurred the losses it claims or did not 27 pay the claims in good faith. Therefore, the Court GRANTS Ohio Casualty’s motion for 28 summary judgment on its breach of the Indemnity Agreement claim. Accordingly, -13- 22-cv-535-MMA (KSC) Case 3:22-cv-00535-MMA-KSC Document 36 Filed 06/06/23 PageID.907 Page 14 of 18 1 Defendants are ordered to reimburse Plaintiff $690,637.98 for monies already expended 2 in relation to the Bonds. 3 C. 4 Specific Performance Ohio Casualty also seeks specific performance of the collateral security provision 5 in the Indemnity Agreement. See Doc. No. 25-1 at 24. Specifically, Ohio Casualty seeks 6 no less than $4,820,000.00 in collateral, which represents its estimated pending and 7 future liabilities related to the issuance of the Bonds. Id.; Linnaus Decl. ¶ 36. Ohio 8 Casualty relies on the following provisions in the Indemnity Agreement to support its 9 claim: 10 11 12 13 14 15 16 17 18 19 20 21 22 5. Collateral: Upon an Event of Default or determination by [Ohio Casualty] that a potential Loss exists, [Ohio Casualty] may demand that Indemnitors deposit a sum of money equal to an amount determined by [Ohio Casualty], or collateral security of a type and value satisfactory to [Ohio Casualty], to cover the Loss, whether or not [Ohio Casualty] has: (a) established or increased any reserve; (b) made any Loss payment; or (c) received any notice of any claims therefor. 1. Definitions: Loss: [A]ny loss, fees, costs and expenses, including pre- and post-judgment interest at the maximum rate permitted by law, court costs, counsel fees, accounting, engineering and outside consulting fees, which [Ohio Casualty] may sustain or incur or otherwise determine in its sole and absolute discretion, by reason of: (a) a request for a Bond; (b) execution or procurement of a Bond, including any cost incurred by [Ohio Casualty] in fulfilling its obligations under any Bond; (c) the failure of Indemnitors to comply with any covenants or conditions of this [Indemnity] Agreement or Other Agreement; or (d) in enforcing any of the covenants and conditions of this [Indemnity] Agreement or Other Agreements. 23 24 25 See Doc. No. 25-1 at 22; PSS at Nos. 6, 34; Agreement ¶¶ 1, 5. Despite the fact that there is often no actual monetary loss at the time specific 26 performance of a collateral security provision is sought, a court can nevertheless award 27 the equitable relief. See, e.g., Milwaukie Construction Co. v. Glens Falls Ins. Co., 367 28 F.2d 964, 968 (9th Cir. 1966) (affirming award of collateral security to surety); General -14- 22-cv-535-MMA (KSC) Case 3:22-cv-00535-MMA-KSC Document 36 Filed 06/06/23 PageID.908 Page 15 of 18 1 Ins. Co. of Am. V. Singleton, 40 Cal. App. 3d 439, 442 (1974) (awarding collateral 2 security under a bond agreement). In fact, “[s]ureties are ordinarily entitled to specific 3 performance of collateral security clauses” because “[i]f a creditor is to have the security 4 position for which he bargained, the promise to maintain the security must be specifically 5 enforced.” Safeco Ins. Co. of Am. v. Schwab, 739 F.2d 431, 433 (9th Cir. 1984) (internal 6 citation omitted). Moreover, specific performance can be awarded on a motion for 7 summary judgment. See U.S. Fidelity and Guar. Co. v. Stanley Contracting, Inc., 303 F. 8 Supp. 2d 1169, 1175 (D. Or. 2004) (granting summary judgment and awarding specific 9 performance of collateral security provision in an amount agreed upon by the parties). 10 Ohio Casualty is mainly seeking collateral security for the following: (1) potential 11 liabilities on the payment and performance bonds associated with the Grossmont Project; 12 (2) a pending cross-complaint in state court against it by one of the sureties for a 13 subcontractor on the Channel Islands Project; (3) additional potential liabilities related to 14 the bonds for the Channel Islands Project; and (4) outstanding costs associated with 15 defending the instant action and the above-referenced state court action. See Doc. 16 No. 25-1 at 9–14; Linnaus Decl. ¶¶ 36–38. According to Ohio Casualty, it estimates that 17 its total potential liability on the Bonds is $6,820,000.00, but it is seeking only 18 $4,820,000.00 as collateral security because it “recognizes that SAI has asserted an 19 affirmative claim in the litigation involving the Channel Islands Project and that there 20 may be various other defenses available to SAI” and itself that may reduce Ohio 21 Casualty’s liability by $2,000,000.00. PSS at No. 38; Linnaus Decl. ¶ 38. 22 23 Defendants do not contest the validity of the collateral security provision. Rather, Defendants contest the estimated amount of total potential liability.11 But Defendants 24 25 26 27 28 11 For example, Defendants dispute the amount of potential liability for the Channel Islands Project, arguing that the amount is “impossible” because the “penal sum of the bond is [only] $4,600,000.00 which caps [Ohio Casualty’s total claim liability.” PSS at No. 25. However, this is not true. As the declaration of Defendant Jothilingam makes clear, there are payment and performance bonds on the Channel Islands Project which have penal sums of $4,600,000.00 each. See Jothilingam Decl. ¶ 7; see also Doc. No. 27-2 at 6, 10. -15- 22-cv-535-MMA (KSC) Case 3:22-cv-00535-MMA-KSC Document 36 Filed 06/06/23 PageID.909 Page 16 of 18 1 offer no evidence to that end, whereas Ohio Casualty offers the declaration of its senior 2 claims counsel. Linnaus Decl. ¶¶ 36–38. In any event, the exact amount sought by Ohio 3 Casualty under the collateral security provision is of no significant consequence; by 4 ordering specific performance, the Court is only telling the parties to do what they 5 contracted to do. In this case, Defendants agreed that if Ohio Casualty asked for 6 collateral security, they would provide it. And a surety is allowed to seek security against 7 future loss so long as the surety’s beliefs are reasonable.12 See Milwaukie Const. Co., 8 367 F.2d 964, 944 (internal citation omitted). 9 Although Ohio Casualty’s full liability on the bonds has not yet been determined, 10 the fact that it may be liable for the full penal amounts—namely, on the Channel Islands 11 Project bonds—for pending and potential bond claims is sufficient to entitle Ohio 12 Casualty to the specific performance it seeks. See Amer. Motorists Ins. Co. v. United 13 Furnace Co., 876 F.2d 293, 299, 302 (2d Cir. 1989) (“Having bargained for collateral 14 security and having failed to receive it,” plaintiff’s claim for specific performance was 15 ripe, even though the surety’s indemnity liability for the full amount of the bond was 16 “speculative”). Moreover, Paragraph Five of the Indemnity Agreement is sufficiently 17 clear and definite that upon demand, “an amount determined by [Ohio Casualty]” to 18 cover any loss or potential loss shall be deposited with Ohio Casualty. Therefore, 19 because Ohio Casualty may be liable for the full penal sums on the Bonds, specifically 20 the Channel Islands Project bonds where there are current claims being investigated and a 21 lawsuit pending, the Court finds the collateral amount requested by Ohio Casualty to be 22 23 24 25 26 27 28 12 As to Defendants’ argument that Ohio Casualty “frustrated [SAI]’s expectations of its surety” and that Ohio Casualty mishandled its issuing of bonds related to the Channel Islands Project which led to its “unreasonable” collateral demand, the Court is not convinced. The Court notes that “a surety bond is not an insurance policy, and ‘. . . it is not the duty of the surety to protect the principal as if the principal were an insured under an insurance policy.”” Arntz, 47 Cal. App. 4th at 482–483 (internal citation omitted). -16- 22-cv-535-MMA (KSC) Case 3:22-cv-00535-MMA-KSC Document 36 Filed 06/06/23 PageID.910 Page 17 of 18 1 reasonable.13 See Safeco, 739 F.2d at 433–34 (finding specific performance should be 2 granted after a demand on the bonds has been made, regardless of whether the surety has 3 paid out on the bond); Am. Contractors Indem. Co. v. Bigelow, 09-CV-8108-HRH, 2011 4 WL 5546052, at *12 (D. Ariz. Apr. 11, 2011) (“As long as plaintiff remains at risk for the 5 full penal sums of the bonds, defendants must post the $3,331,399.00 in additional 6 collateral that plaintiff has demanded.”). 7 Accordingly, the Court GRANTS Ohio Casualty’s motion for specific 8 performance. As such, Defendants shall post collateral security in an amount no less than 9 $4,820,000.00. However, as attested to in the Linnaus Declaration, any amounts not 10 expended after all claims have been settled must be returned to Defendants. Linnaus 11 Decl. ¶ 37; see also Safeco, 739 F.2d at 433 (explaining that a surety that has demanded 12 funds pursuant to a collateral security agreement must either use those funds for payment 13 on the bonds or else return the funds to the indemnitors). 14 D. Remaining Claims 15 Plaintiff’s Complaint and motion for summary judgment contain five claims: 16 (1) breach of contract; (2) declaratory relief; (3) quia timet; (4) specific performance; and 17 (5) statutory indemnity. The Court construes Claims 2, 3, and 5 as seeking either 18 19 20 21 22 23 24 25 26 27 28 13 To the extent Defendants argue bad faith or breach of the implied covenant of good faith and fair dealing in regard to Ohio Casualty’s collateral demand, the Court is not persuaded. See Doc. No. 27 at 21–22. Here, there is no evidence Ohio Casualty acted in bad faith by seeking to enforce the collateral security provision. Even if Ohio Casualty does not believe it currently is obligated to pay on the Bonds, the collateral security provision applies to potential losses—and pending claims on the Channels Islands Project bonds and the pending cross-claim in the state court suit are clearly potential losses. Moreover, the Court notes that Defendants have not brought any counterclaim for breach of the implied covenant of good faith and fair dealing. And, in any event, the Indemnity Agreement gives Ohio Casualty the authority to settle claims against it in its sole discretion and to determine its losses and potential losses, and that is what Ohio Casualty has done here. Although it applies to surety contracts, the doctrine of the implied covenant of good faith and fair dealing cannot be used to create implicit rights that contradict the express terms of the agreement. Carma Developers (Cal.), Inc. v. Marathon Development Cal., 2 Cal. 4th 342, 374 (1992) (“We are aware of no reported case in which a court has held the covenant of good faith may be read to prohibit a party from doing that which is expressly permitted by an agreement.”). -17- 22-cv-535-MMA (KSC) Case 3:22-cv-00535-MMA-KSC Document 36 Filed 06/06/23 PageID.911 Page 18 of 18 1 duplicative remedies 14 or alternative relief to Defendants’ breach of contract and specific 2 performance claims. Because the Court has found that summary judgment is appropriate 3 on Plaintiff’s first and fourth claims, Plaintiff’s remaining claims are rendered moot. As 4 such, the Court DENIES the remainder of Plaintiff’s motion and DISMISSES Plaintiff’s 5 claims for declaratory relief, quia timet, and statutory indemnity as moot. 6 V. CONCLUSION 7 For the reasons set forth above, the Court GRANTS in part and DENIES in part 8 Plaintiff’s motion for summary judgment with respect to the claims alleged in the 9 Complaint. Specifically, the Court: 10 1. GRANTS Plaintiff’s motion with respect to its first cause of action for breach of 11 the Indemnity Agreement. Accordingly, Defendants must reimburse Plaintiff 12 $690,637.98 for monies already expended in relation to the Bonds. 13 2. GRANTS Plaintiff’s motion with respect to its fourth cause of action for specific 14 performance. Accordingly, Defendants must post collateral security in an amount 15 no less than $4,820,000.00. Plaintiff shall return to Defendants any unused portion 16 of the collateral. 17 3. DENIES the remainder of Plaintiff’s motion and DISMISSES Plaintiff’s 18 remaining claims as moot. 19 The Court further DIRECTS the Clerk of Court to enter judgment accordingly and 20 close this case. 21 22 IT IS SO ORDERED. Dated: June 6, 2023 23 24 25 26 27 28 14 For example, Plaintiff’s quia timet claim is duplicative of its specific performance claim. Quia timet (literally, “because he fears”) gives a court the equitable power, at the request of a surety, to seize funds owed and apply them to a debt if the surety can show that “the debts are currently due, the principal is unable or refuses to pay them, and if they are not paid[,] the surety will become liable.” Western Cas. & Sur. Co. v. Biggs, 217 F.2d 163, 165 (7th Cir. 1954). Thus, this claim must be dismissed as moot because quia timet is not an independent ground for recovery and Plaintiff cannot obtain the same security twice. -18- 22-cv-535-MMA (KSC)
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