Opinion
Case No. 2:97CV235C
May 6, 2001
ORDER
This diversity matter comes before the court on cross-motions for partial summary judgment by Plaintiff United Pacific Insurance Company ("UP" or "surety"), Third-Party Defendant Dale Barton Agency ("Barton"), and Defendants Knudsen Construction, Inc., et. al (hereinafter collectively referred to as "Knudsen" or "indemnitors"). UP and Barton move for summary judgment on several claims, asserting: 1) that UP's claimed attorneys' fees — the basis for UP's first claim of relief — are now payable on demand because the written indemnity agreement between UP and Knudsen is clear on its face and there is no implied reasonableness requirement on fees claimed; 2) that Knudsen's seven counterclaims for relief against UP are barred by the applicable statutes of limitation; and 3) that Knudsen's five claims for relief contained in the Third-Party Complaint against Barton are similarly barred by the applicable statutes of limitation. Knudsen moves for partial summary judgment, asserting: 1) there is an implied element of reasonableness in the agreement and that therefore they are not liable for excessive or redundant fees; and 2) that some of UP's claimed fees are time-barred. Knudsen has not moved for summary judgment on any of its counterclaims against UP nor for its third-party claims against Barton.
Background
This is a case regarding indemnity for attorneys' fees. Plaintiff UP is a corporate surety that issued performance and payment bonds ("bonds") to cover a Utah construction project undertaken by Knudsen. UP is seeking to enforce a written indemnity agreement ("agreement") that requires Knudsen to reimburse UP for all attorney fees and expenses ("attorneys' fees" or "fees") which UP incurred subsequent to its issuance of bonds for a construction project.
At issue are approximately $1.2 million in attorneys' fees and costs that UP incurred while first defending, and then successfully seeking to overturn an adverse judgment, in an action by the construction project's lender against the bonds issued by UP. In that action, the lender first obtained a $3.5 million dollar judgement against UP. In an effort to overturn this adverse judgment, UP hired its own counsel and, after a seven-year litigation period, successfully absolved itself of liability after an appeal process which reversed the judgment and remanded the case for a new trial, which ultimately ended in a judgment for UP.
In the present case, UP is seeking what it alleges is the entire amount of attorneys' fees that it incurred overturning the earlier judgment. In doing so, it relies primarily on three provisions in the agreement:
NOW, THEREFORE, in consideration of the execution of any such Bond or Bonds and as an inducement of such execution, we, the undersigned, agree and bind ourselves, our heirs, executors, administrators, successors, and assigns, jointly and severally:
. . .
SECOND: To indemnify, and keep indemnified, and hold and save harmless the Surety against all demands, claims, loss, costs, damages, expenses, and attorneys' fees whatever, and any and all liability therefor, sustained or incurred by the Surety by reason of executing or procuring the execution of any said Bond or Bonds, or any other Bonds, which may be already or hereafter executed on behalf of the Contractor, or renewal or continuation thereof; or sustained or incurred by reason of making any investigation on account thereof, prosecuting or defending any action brought in connection therewith, obtaining a release therefrom, recovering or attempting to recover any salvage in connection therewith, or enforcing by litigation or otherwise any of the agreements herein contained. Payment of amount due surety hereunder together with legal interest shall be payable upon demand.
(Indemnity Agreement at 1.) (emphasis added).
. . .
TENTH: The Surety shall have the exclusive right for itself and for the undersigned to decide and determine whether any claim, demand, suit or judgment upon said Bond or Bonds shall, on the basis of liability, expediency or otherwise be paid, settled, defended or appealed, and its determination shall be final, conclusive and binding upon the undersigned . . .; and any loss, costs, charges, expense or liability thereby sustained or incurred, as well as any and all disbursement on account of costs, expenses and attorneys' fees, deemed necessary or advisable by the Surety shall be borne and paid immediately by the undersigned, together with legal interest. In the event of any payment, settlement, compromise or investigation, an itemized statement of the payment, loss, costs, damages, expenses, or attorneys' fees, sworn to by any officer of the Surety or the voucher or vouchers or other evidence of such payment, settlement or compromise, shall be prima facie evidence of the fact and extent of the liability of the undersigned to the Surety in any claim or suit hereunder and in any and all matters arising between the undersigned and the Surety.
Id. at 2. UP contends that these clauses require Knudsen to reimburse UP for any claims it tenders because "the extent of the liability of" Knudsen is determined solely by the sum sworn by UP and that this sum, once demanded, is now payable to UP. In essence, UP claims that all that is required by the agreement is that UP submit a sworn list that tallies the attorneys' fees it paid.
Knudsen, on the other hand, while admitting that it has a duty to reimburse UP for attorneys' fees, challenges the amount it actually owes. Knudsen argues that the amount claimed by UP is too great, and that it actually owes UP a lesser amount for basically two reasons: first, it asserts that some of the fees are redundant and/or unreasonable and are therefore not subject to reimbursement under the agreement; second, it argues that some of the fees are time-barred by the applicable statute of limitation.
In addition Knudsen also has counterclaims against both UP and Barton. Knudsen contends that its agreement with UP is a grossly unfair, one-sided contract of adhesion. Knudsen also argues that UP and Barton breached their alleged fiduciary duty to Knudsen to assure that the construction lender had properly escrowed the loan proceeds the loan proceeds for the construction project. In answer to these claims, UP counters, asserting first that claims for fee reimbursement under the contract must be accepted on their face absent a showing of fraud or bad faith (not unreasonableness), and second that none of its claims are time-barred. UP and Barton also contend that Knudsen's counterclaims are time-barred.
The questions to be resolved, therefore, are: 1) whether the agreement is binding on its own terms or whether it has an implied element of reasonableness requiring that UP must not only submit an accounting of fees it demands from Knudsen, but also ensure that submitted fees are reasonable; 2) whether any of the fees UP submitted are time-barred under the applicable statute of limitations; 3) whether Knudsen's counterclaims are time-barred or otherwise legally barred.
Knudsen has not moved for summary judgment on the merits of its counterclaims. Therefore, only UP's and Barton's contention that the counterclaims are legally barred is at issue.
Analysis
A. Is the Indemnity Agreement Enforceable on Its Face or Should the Court Imply a Standard of Reasonableness Regarding the Amount of Fees Claimed?Under Utah law, "[a]ttorney fees awarded pursuant to contract or statute are usually those found by the court to be `reasonable,' unless the statute or contract provides otherwise." Ringwood v. Foreign Auto Works, Inc., 786 P.2d 1350, 1361 (Utah App. 1990) (emphasis added), quoting Canyon Country Store v. Bracey, 781 P.2d 414, 420 (Utah 1989). The Ringwood court applied this rule in an indemnity situation. See id. Knudsen relies on this case in support of its contention that all claims for attorneys' fees under indemnity agreements are, under Utah law, subject to a determination of reasonableness. Knudsen, however, does not address exception to the rule where a statute or a contract provides otherwise.
At the March 28, 2001 hearing on these cross motions, the parties agreed that Utah law governs this matter.
Under Utah law, "contracts mean what they say, and parties will be bound by them." Russ v. Woodside Homes, Inc., 905 P.2d 906 n. 1 (Utah App. 1995) citing Resource Management Co. v. Weston Ranch Livestock Co., 706 P.2d 1028, 1047 (Utah 1985). It is axiomatic in Utah contract law that "[p]ersons dealing at arm's length are entitled to contract on their own terms without the intervention of the courts for the purpose of relieving one side or the other from the effects of a bad bargain." Biesinger v. Behunin, Utah, 584 P.2d 801, 803 (1978). Parties "should be permitted to enter into contracts that actually may be unreasonable or which may lead to hardship on one side." Carlson v. Hamilton, 332 P.2d 989, 991 (1958); see also Bekins V Ranch v. Huth, Utah, 664 P.2d 455, 459 (Utah 1983) (affirming policy). "Although courts will not be parties to enforcing flagrantly unjust agreements, it is not for the courts to assume the paternalistic role of declaring that one who has freely bound himself need not perform because the bargain is not favorable." Resource Management, 706 P.2d at 1040. These principles are continually reaffirmed in Utah case law. See, e.g., id. (recognizing cases and policy). "[T]he courts cannot supervise decisions made in the business world and grant relief when the bargain proves improvident." Cole v. Parker, 300 P.2d 623, 626 (Utah 1956). Absent "legal excuse or justification for failure to perform the obligations of a contract, it must be enforced according to its terms." Zions Properties, Inc. v. Holt, 538 P.2d 1319, 1322 (Utah 1975). These principles have been recognized and applied in indemnity contracts. See Pavoni v. Nielsen, 999 P.2d 595, 599 (Utah App. 2000).
The important question is therefore: does the agreement "provide otherwise"? The agreement reads:
The Surety shall have the exclusive right for itself and for the undersigned to decide and determine whether any claim, . . . suit or judgment upon said Bond or Bonds shall . . . be paid, settled, defended or appealed, and its determination shall be final, conclusive and binding upon the undersigned . . .; and any loss, costs, charges, expense or liability thereby sustained or incurred, as well as any . . . costs, expenses and attorneys' fees, deemed necessary or advisable by the Surety shall be borne and paid immediately by the undersigned. . . . In the event of any payment, settlement, compromise or investigation, an itemized statement of the payment, loss, costs, damages, expenses, or attorneys' fees, sworn to by any officer of the Surety or the voucher or vouchers or other evidence of such payment, settlement or compromise, shall be prima facie evidence of the fact and extent of the liability of the undersigned to the Surety in any claim or suit hereunder and in any and all matters arising between the undersigned and the Surety.
(Indemnity Agreement ¶ 10.) (emphasis added).
This provision explicitly provides that a sworn statement by an officer of UP on the extent and fact of liability is evidence of the actual extent and liability to the surety. Because the indemnity contract explicitly provides that the surety has the exclusive right to determine appropriate attorney action and that the indemnitor is bound that decision, Knudsen is liable for the fees as tendered so long as they were not tendered in bad faith. No implied element of reasonableness inheres in the agreement because the agreement specifically provides otherwise. UP is thus entitled to attorneys' fees in the amount tendered to the extent that they were not tendered in bad faith.
UP concedes that this seeming "blank check" regarding attorneys' fees can be challenged if it is demonstrated that plaintiff committed fraud or acted in bad faith in submitting fees for indemnification. (Pl.'s Mem. in Supp. of Mot. for Part. Summ. J. at 5-6.)
B. Are Some Claims at Issue Time-Barred?: The Applicable Statute of Limitations
1. UP's Claims for Fees
Under Utah law, an action on any contract, obligation or liability founded upon an instrument in writing must be brought within six years. Utah Code Ann. § 78-12-23 (1996). "As a general rule, a cause of action for indemnity does not arise until the party seeking indemnity results in his damage, either through payment of a sum clearly owed or through the injured party's obtaining an enforceable judgment." Perry v. Wholesale Supply Co., 681 P.2d 214, 218 (Utah 1984) (emphasis added).
The Indemnity Agreement specifically provides:
NOW, THEREFORE, in consideration of the execution of any such Bond or Bonds and as an inducement of such execution, we, the undersigned, agree and bind ourselves, our heirs, executors, administrators, successors, and assigns, jointly and severally: . . .
To indemnify, and keep indemnified, and hold and save harmless the Surety against all demands, claims, loss, costs, damages, expenses, and attorneys' fees whatever, and any and all liability therefor, sustained or incurred by the Surety by reason of executing or procuring the execution of any said Bond or Bonds, or any other Bonds, which may be already or hereafter executed on behalf of the Contractor, or renewal or continuation thereof; or sustained or incurred by reason of making any investigation on account thereof, prosecuting or defending any action brought in connection therewith, obtaining a release therefrom, recovering or attempting to recover any salvage in connection therewith, or enforcing by litigation or otherwise any of the agreements herein contained. Payment of amount due surety hereunder together with legal interest shall be payable upon demand.
(Indemnity Agreement at 1.) (emphasis added).
Under the plain language of the contract, it is apparent that failure to pay upon demand would constitute breach. Indeed, UP asserts that Knudsen breached the indemnity agreement by refusing to pay UP "upon demand" as provided by the agreement. UP paid its counsel in the underlying action monthly from 1986 to 1996. Thereafter, UP made a demand, as provided by the indemnity agreement, for Knudsen to indemnify them for total costs. Knudsen refused to tender payment upon UP's demand in 1996 and UP contends that this action was a breach of the specific provision emphasized above. UP filed this action April 11, 1997, less than a year after the alleged breach. Utah law provides that an action on any contract, obligation or liability founded upon an instrument in writing must be brought within six years. See Utah Code Ann. § 78-12-23. As such, none of UP's claims are time barred. The breach of contract claim was brought within one year of the alleged breach — Knudsen's refusal to pay "upon demand" — and is therefore well within the six year statutory allotment.
2. Knudsen's Counterclaims
Knudsen's counterclaims are in part based on an allegation of breach of fiduciary duty by UP and Barton. Knudsen contends that when UP and Barton issued bonds to the Knudsen, UP and Barton breached their fiduciary duty to discern that the owner's construction lender had failed to escrow the loan proceeds in a construction account sufficient to insure that Knudsen would be fully paid for its work. The remaining counterclaims rely on an allegation that the indemnity agreement is grossly unfair, one-sided contract of adhesion. As a threshold matter, there are two issues with regard to viability Knudsens's counterclaims: first, whether their claims against UP are time-barred, and, even if so, are they still permitted as a "set-off"; and 2) whether their claims against Barton are time-barred.
With regard to the claim that UP and Barton breached their fiduciary duty to Knudsen to monitor the escrow of construction loan proceeds, sufficient evidence has been presented to demonstrate that Knudsen knew about the problems with the loan escrow at the latest in 1988. With regard to the second claim that the indemnity agreement is a contract of adhesion, Knudsen signed the agreement in 1982. Under Utah law, an action for cancellation of an instrument is generally deemed to accrue on the date on which the instrument was delivered. See, e.g., Baker v. Pattee, 684 P.2d 632, 635 (Utah 1984). At best then, given the six year statute of limitation in Utah, Knudsen's counterclaim could only have been brought as late 1994, six years after it would have known about any alleged problems with the escrow. See Utah Code Ann. § 78-12-23 (six-year statute of limitation on actions based upon a written instrument). Therefore, no matter how Knudsen styled its claim against UP, it would fall well outside the six years allowed by the statute of limitation since the counterclaims were filed in 1997.
With regard to the first issue, defendants seem to concede that their counterclaims would be time-barred under the applicable statute of limitations, but nevertheless contend that their claims are valid as a setoff.
Utah law does, however, allow otherwise time-barred claims to be raised as a "setoff" against liability claims. Jacobsen v. Bunker, 699 P.2d 1208, 1210 (Utah 1985). "A defendant may therefore utilize a counterclaim, normally barred by the statute of limitations, to offset a plaintiff's claim, but only to the extent the claims equal each other." Coulon v. Coulon, 915 P.2d 1069, 1072 (Utah 1996). However, the claims may be offset only if they coexisted. See id. (emphasis added), citing Salt Lake City v. Telluride Power Co., 17 P.2d 281, 286 (Utah 1932). On this point, Knudsen's "offset" argument fails because the claims at no time coexisted.
[T]he cross-demands must coexist; that is they must subsist in such a way that if one party had brought suit on his demand the other could have set up the demand he held against that of the plaintiff. There must be an overlapping of live demands in point of time. If the demand of one party becomes barred and is not subsisting as a cause of action when the demand of the other party comes into existence, the former demand is not available.
Telluride, 17 P.d at 285, quoting O'Neil v. Eppler, 162 P. 311, 312 (emphasis added). "[T]wo claims are coexistent and overlapping in point of time . . . [if] both are subsisting claims before the statute of limitations has run against either. Id. at 286 (emphasis added). Here, as discussed above, the statute of limitations ran on Knudsen's counterclaim at the latest in 1994 — six years after Knudsen knew of any alleged problem with the escrow. This present action was filed in 1997, and therefore Knudsens claimed "setoff" action against UP is at least three years too late.
Knudsen's claim against Barton for breach of fiduciary duty is similarly time-barred. As discussed above, the claim against Barton's alleged breach of fiduciary duty would have begun to run in 1988, the latest date that the evidence suggests Knudsen would have known of the apparent problem with the escrow. Knudsen's claim against Barton therefore fails because the statute of limitation ran on the claim, six years later, in 1994. See Utah Code Ann. § 78-12-23. Accordingly, Knudsen's claim against Barton is time-barred. Finally, because Barton has no claim against Knudsen, Knudsen cannot maintain that its claim against Barton is a "setoff."
Order
For the reasons set forth above, Defendants' motion for summary judgment is DENIED and Plaintiff and Third Party Defendant's Motion for Summary Judgment is GRANTED in part as to Defendants' counterclaims and third-party claims.