Opinion
EP-01-CA-483-DB
January 28, 2003
MEMORANDUM OPINION AND ORDER
On this day, the Court considered Plaintiff National American Insurance Company's "Motion for Partial Summary Judgment and Brief in Support" ("Motion for Partial Summary Judgment"), filed in the above-captioned cause on September 27, 2002. Defendants Innovative PBX Services, Inc., Donald W. Young, David W. Young, Claudine Young, and Irma I. Young, filed a "Response to Plaintiff's Motion for Partial Summary Judgment" ("Response") on October 15, 2002.
After due consideration, the Court is of the opinion that Plaintiff's Motion should be denied for the reasons that follow.
FACTS
Plaintiff National American Insurance Company ("NAICO" or "Surety") is a Nebraska corporation with its principal place of business in Oklahoma. Defendant Innovative PBX Services, Inc. ("IPS" or "Principal") is a Texas corporation with its principal place of business in Texas. Defendants Donald W. Young, David W. Young, Claudine Young, and Irma I. Young, are residents and citizens of Texas.
On June 13, 1996, Defendants, Donald Young, David Young, Claudine Young and Irma Young, individually and on behalf of IPS, entered into a General Agreement of Indemnity and Financing Statement ("Indemnity Agreement") with NAICO. The Youngs and IPS (collectively, "the Indemnitors") executed the Indemnity Agreement for the purpose of inducing NAICO to issue contract surety bonds on behalf of IPS. Under Section 2 of the Indemnity Agreement, the Indemnitors agreed to indemnify and hold NAICO harmless "from and against every claim, demand, liability, loss, cost, charge, counsel fee, suit, order, judgment (or other adjudication), and any expense or liability, by whatever nature arising from or related to the execution" of bonds on behalf of IPS. Furthermore, Section 6 of the Indemnity Agreement states in relevant part:
If for any reason the Surety shall deem it necessary to establish or to increase a reserve for any possible liability or loss on any bond, the Undersigned Indemnitors will deposit with the Surety, immediately upon demand, a sum of money equal to such reserve and any increase thereof as collateral security to the Surety for such liability or loss. The Surety shall have the right to use the deposit, or any part thereof, in payment or settlement of any liability, loss or expense for which the Undersigned Indemnitors would be obligated to indemnify the Surety under the terms of this Agreement.
In addition, according to Section 9 of the Indemnity Agreement, the Indemnitors agreed to hold any payments, received for or on account of any contract bonded by NAICO, as a trust fund for use in fulfilling "obligations incurred in the performance of the contract and for labor, materials and services furnished in the prosecution of the work provided in the contract. . . ."
On June 14, 1996, IPS and NAICO executed a Miller Act payment bond ("Bond") in favor of the Government of the United States of America ("the Government") in connection with a contract between IPS and the Government ("the Contract") for a project at the Department of Veterans Affairs Medical Center in Palo Alto, California ("the Project"). IPS subsequently entered into a subcontract ("the Subcontract") with Nortel Communications Systems, Inc. ("Nortel") for work to be done on the Project. Thereafter, on or about December 23, 1997, WilTel Communications, LLC ("WilTel"), a successor to Nortel on the Subcontract, submitted a claim to NAICO for $675,000 owed to it by IPS for labor and materials WilTel had furnished to the Project. Pursuant to the Indemnity Agreement, NAICO requested from the Indemnitors the sum of $200,000. The Indemnitors deposited the requested sum with NAICO. On August 28, 1998, Williams Communications Solutions, LLC ("Williams"), a successor to WilTel on the Subcontract, filed suit against IPS and NAICO in the United States District Court for the Northern District of California to recover the $675,000. NAICO ultimately paid Williams $354,244 in settlement of the Bond claim and the suit was dismissed.
The Miller Act is a federal statute which requires the posting of performance and payment bonds before the United States government awards a contract for construction, alteration, or repair of a public work. 40 U.S.C. § 270 (a)-(d) (West 2001).
NAICO maintains that the Indemnitors have refused to indemnify NAICO for its losses, costs, and expenses on the Bond On December 28, 2001, NAICO filed a Complaint with this Court asserting contractual, statutory, and common law rights to reimbursement and indemnity of all of its losses, costs, and expenses incurred in connection with the issuance of the Bond on IPS's behalf NAICO seeks actual damages, punitive damages, interest, attorney fees, and costs.
AUTHORITIES
Summary judgment should be granted only where "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." FED. R. Civ. P. 56(c). The party that moves for summary judgment bears the initial burden of identifying those portions of the pleadings and discovery on file, together with any affidavits, which it believes demonstrate the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986). "If the moving party fails to meet this burden, the motion must be denied, regardless of the nonmovant's response." Tubacex, Inc. v. M/V Risan, 45 F.3d 951, 954 (5th Cir. 1995). If the movant does meet this burden, however, the nonmovant must go beyond the pleadings and designate specific facts showing that there is a genuine issue for trial. Celotex, 477 U.S. at 324, 106 S.Ct. at 2553. The party opposing a motion supported by evidence cannot discharge his burden by alleging mere legal conclusions. Anderson v. Liberty Lobby, 477 U.S. 242, 248-49, 106 S.Ct. 2505, 2509-10, 91 L.Ed.2d 202 (1986). Instead, the party must present affirmative evidence in order to defeat a properly supported motion for summary judgment. Id. "If the nonmovant fails to meet this burden, then summary judgment is appropriate." Tubacex, 45 F.3d at 954. When making a determination under Rule 56, factual questions and inferences are viewed in a light most favorable to the nonmovant. Lemelle v. Universal Mfg. Corp., 18 F.3d 1268, 1272 (5th Cir. 1994).
DISCUSSION
In its Motion for Partial Summary Judgment, NAICO avers that it is entitled to summary judgment as a matter of law as to the reimbursement and indemnity cause of action, based on Defendants' failure to indemnify NAICO for all losses, costs, and expenditures incurred in connection with the issuance of the Bond on behalf of IPS, pursuant to the Indemnity Agreement. The Court disagrees.
A. Choice of Law
As an initial matter, the Court must make a choice of law analysis to determine whether the Indemnity Agreement is governed by the laws of the State of Oklahoma or the State of Texas. Paragraph 26 of the Indemnity Agreement states in relevant part: "This Agreement shall be governed and construed in accordance with the law of the State of Oklahoma." NAICO, however, cites to Texas cases for the elements of an indemnity action and for the proposition that common law principles of reasonableness and good faith are inapplicable to an indemnity action.
The State of Texas, the chosen forum for this suit, recognizes the "party autonomy rule," which operates to give effect to the express agreement of the parties that the contract is to be governed by the laws of a particular state if the contract bears a reasonable relation to the chosen state and no countervailing public policy of the forum demands otherwise. DeSantis v. Wackenhut Corp., 793 S.W.2d 670, 677 (Tex. 1990) (citing First Commerce Realty Investors v. K-F Land Co., 617 S.W.2d 806, 808-09 (Tex.Civ.App.-Houston [14th Dist.] 1981, writ ref d n.r.e.)). The DeSantis court referred to section 187 of the Restatement (Second) of Conflict of Laws where the "party autonomy" rule is formulated. Section 187 states:
Law of the State Chosen by the Parties
(1) The law of the state chosen by the parties to govern their contractual rights and duties will be applied if the particular issue is one which the parties could have resolved by an explicit provision in their agreement directed to that issue.
(2) The law of the state chosen by the parties to govern their contractual rights and duties will be applied, even if the particular issue is one which the parties could not have resolved by an explicit provision in their agreement directed to that issue, unless either
(a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties' choice, or
(b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which, under the rule of § 188, would be the state of the applicable law in the absence of an effective choice of law by the parties.
(3) In the absence of a contrary indication of intention, the reference is to the local law of the state of the chosen law.
RESTATEMENT (SECOND) OF CONFLICT LAWS § 187 (1971).
Under Section 187(1), the law of the chosen state, Oklahoma, governs the Parties' contractual rights if the particular issue, whether reasonableness and good faith principles apply to indemnity actions, could have been resolved by an explicit provision in the agreement. Because the Parties in this case could have resolved the issue by an explicit provision requiring a showing of reasonableness and good faith prior to recovery, the law of Oklahoma, the chosen state, governs their contractual rights.
Even assuming that Section 187(1) yielded the opposite conclusion, the Court finds that Section 187(2) also operates to give effect to the express agreement of the Parties that the Indemnity Agreement be governed by Oklahoma law.
Under Section 187(2), Oklahoma law applies to govern the Indemnity Agreement unless one of the exceptions stated therein apply. The first exception, Section 187(2)(a), applies if the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties' choice. In the DeSantis case, the court found that because one of the parties had its corporate headquarters in Florida and some of the negotiations had taken place there, Florida had a substantial relationship to the parties and the transaction. DeSantis, 793 S.W.2d at 678. Similarly, here, Oklahoma has a substantial relationship to the parties because NAICO, the Surety, has its principal place of business there. Thus, Oklahoma law applies to govern the Agreement unless the exception stated in Section 187(2)(b) applies.
According to the DeSantis court, whether the exception stated in Section 187(2)(b) applies depends on three determinations: (1) whether a state has a more significant relationship with the parties and their transaction than the chosen state; (2) whether that state has a materially greater interest than the chosen state in deciding whether the principles of reasonableness and good faith apply to an indemnity action; and (3) whether that state's fundamental policy would be contravened by the application of the law of the chosen state in this case. DeSantis, 793 S.W.2d at 678.
Applying these tests to the facts of this case, the Court finds that the law of Oklahoma applies to the Indemnity Agreement. First, the Court must decide whether Texas has a more significant relationship to the parties and their transaction than Oklahoma. Under the Agreement, NAICO was to issue surety bonds on behalf of IPS in connection with contracts IPS may enter into. In this instance, IPS entered into a contract with the Government for the Project in California. Aside from the fact that the Indemnitors are residents and citizens of Texas, Texas does not have a more significant relation to the Parties and their transaction than Oklahoma, where NAICO maintains its principal place of business.
Second, the Court must inquire whether Texas has a materially greater interest than Oklahoma in deciding whether the principles of reasonableness and good faith apply to indemnity actions. In Texas, where an indemnity agreement is silent as to the requirements for good faith and reasonableness, as is the case in the agreement at issue, "the indemnitee is required to show that the settlement was not only made in good faith, but that it was also `reasonable considering the risk involved.'" Associated Indem. Corp. v. CAT Contracting, Inc., 964 S.W.2d 276, 284 (Tex. 1998). Thus, Texas is directly interested in deciding whether common law principles of reasonableness and good faith apply to an indemnity action. However, the Oklahoma courts have also spoken on the issue and have decided that such principles also apply to such an action. Under the laws of that state, a principal is "permitted to show lack of good faith and exercise of reasonable discretion on the part of [a surety] in its defense" to an indemnity action. Maryland Cas. Co. v. Ballard, 259 P. 528, 531 (Okla. 1927). Furthermore, reasonableness and good faith must be shown prior to recovery of attorney fees in such an action. OKLA. STAT. ANN. tit. 15, § 427 (West 2003). Thus, the Court finds that Texas does not have a materially greater interest than Oklahoma, in deciding whether common law principles of good faith and reasonableness apply to an indemnity action.
Third, the Court must decide whether the application of Oklahoma law in this case would be contrary to a fundamental policy in Texas. The focus here is on "whether the law in question is a part of state policy so fundamental that the courts of the state will refuse to enforce an agreement contrary to that law, despite the parties' original intentions, and even though the agreement would be enforceable in another state connected with the transaction." DeSantis, 793 S.W.2d at 681. The law in question is the application of reasonableness and good faith to an indemnity claim, and as stated above, such common law principles do apply to an indemnity action in Texas, contrary to what NAICO would have the Court believe. Thus, the Court finds that the application of good faith and reasonableness principles to the Indemnity Agreement is not contrary to any fundamental policy in Texas. Therefore, because neither of the exceptions under Section 187(2) apply, the Court finds that Section 187(2) also operates to give effect to the express agreement of the parties to have the Indemnity Agreement be govemed by Oklahoma law.
Thus, having conducted the analysis under both, Section 187(1) and Section 187(2), the Court finds that the law of Oklahoma, the chosen state, governs the construction and interpretation of the Indemnity Agreement.
B. Reimbursement and Indemnity
In support of its Motion, NAICO avers that it is entitled to summary judgment because the Indemnitors have admitted every essential element for breach of the Indemnity Agreement. To sustain a claim for indemnification under Oklahoma law, a plaintiff must prove (1) due execution of the indemnity agreement; (2) a breach of the agreement; and (3) loss or damage resulting therefrom. Nat'l Sur. Corp. v. Robert M. Barton Corp., 484 F. Supp. 222, 225 (W.D.Okla. 1979).
NAICO cites to Transamerica Ins. Co. v. Avenell, 66 F.3d 715, 719 (5th Cir. 1995), for the elements of an indemnity action. However, having determined that Oklahoma law governs the resolution of this indemnity action, the Court relies on Oklahoma case law for guidance as to the elements of such an action.
Defendants argue that NAICO is not entitled to a judgment as a matter of law because there are genuine issues of material fact. Oklahoma law, as Defendants point out, permits an indemnitor to raise a number of questions as to the conduct of the surety in handling a bond claim in its own defense to an indemnity action by the surety. Here, Defendants raise questions with regard to NAICO's actions in handling and settling Williams's claim. Under Oklahoma law, a defendant is permitted to show lack of good faith and exercise of reasonable discretion on the part of a surety in handling a bond claim. Maryland Cas. Co., 259 P. at 531 (holding that a plaintiff is not prevented from recovering sums expended and paid out on the official bond, provided such expenditures were reasonable, and incurred in good faith and in the exercise of reasonable discretion); Minton v. Am. Sur. Ca of New York, 88 P.2d 883 (Okla. 1939) (defendant was allowed to challenge the good faith of the settlement and payment of the bond claim by denying that the surety made a competent investigation of the matter). Furthermore, under Oklahoma law, summary judgment is improper where there are material questions of fact regarding the reasonableness of the settlement. F.D.I.C. v. Frates, 44 F. Supp.2d 1176, 1226 (N.D.Okla. 1999).
Here, Defendants question whether NAICO's failure to disclose a $265,000 settlement offer made earlier in the litigation and rejected by NAICO was reasonable and in good faith, especially in light of the fact that the case was ultimately settled for $354,244. Defendants also question NAICO's use of the $200,000 deposit which had been completely disbursed and unavailable at the time of the settlement. Defendants argue that, pursuant to Paragraph 9 of the Indemnity Agreement, such deposit was to be held in trust to be used for the payment of the bond claim and not for payments of expenses incurred by NAICO. NAICO counters that such deposit constituted "collateral security," pursuant to Paragraph 6, to be used for payment of any liability, loss or expense for which the Defendants would be obligated to indemnify it under the terms of the Indemnity Agreement. If the deposit constituted "collateral security," Defendants counter, then Oklahoma law required that NAICO give prior notice to IPS before disposition of such collateral. OKLA. STAT. ANN. tit. 12A, § 1-9-611 (West 2003). These factual disputes raise genuine issues of material fact.
Furthermore, Defendants question whether the payments made for attorney fees in defending Williams's claim were reasonably incurred in good faith. In an indemnity action, the costs of defense are recoverable provided they were incurred in good faith and in the exercise of reasonable discretion. OKLA. STAT. ANN. tit. 15, § 427 (West 2003). In United States v. Hardage, 985 F.2d 1427 (10th Cir. 1993), the court reversed an award of attorney fees and remanded the case for a determination of the reasonableness of the legal expenses incurred. According to Defendant David Young's Declaration, at NAICO's recommendation, IPS retained Kevin Solan to represent it in the litigation. IPS paid Attorney Solan's firm $34,486.50 in attorney fees during the period of March 4, 1999 to October 15, 1999. Yet, as Defendants rightly point out, vouchers attached to NAICO's Motion for Partial Summary Judgment show that payments were made to Mr. Solan by NAICO for work done during the same period of time. These facts and arguments present additional genuine issues of material fact as to whether NAICO's expenses for attorney fees were incurred in good faith and in the exercise of reasonable discretion.
Having considered the evidence presented by both Parties, the Court is of the opinion that there are significant issues of material fact which render summary judgment inappropriate. The Court is, therefore, of the opinion that NAICO's Motion for Partial Summary Judgment should be denied.
Accordingly, IT IS HEREBY ORDERED Plaintiff National American Insurance Company's "Motion for Partial Summary Judgment and Brief in Support" is DENIED.