Westfield Ins. Co.
v.
Harvest Constr. Gen. Contracting, Inc.

Not overruled or negatively treated on appealinfoCoverage
Court of Appeals of Kansas.Nov 9, 2012
288 P.3d 159 (Kan. Ct. App. 2012)

No. 105,855.

2012-11-9

WESTFIELD INSURANCE COMPANY, Appellee, v. HARVEST CONSTRUCTION GENERAL CONTRACTING, INC., Mabe Brothers, LLC, Matthew Mabe, Jennifer Mabe, John Mabe, and Laura Mabe, Appellants, and Cedar Springs Management, FLP, Paul Mabe, and Yvette A. Mabe, Defendants.

Appeal from Johnson District Court; Kevin P. Moriaty, Judge. Barry L. Pickens and J. Loyd Gattis, of Spencer Fane Britt & Browne LLP, of Kansas City, Missouri, and J. Nick Badgerow, of the same firm, of Overland Park, Kansas, for appellants. Diane Hastings Lewis, Heather F. Shore, and G. Steve Ruprecht, of Brown & Ruprecht, PC, of Kansas City, Missouri, for appellee.


Appeal from Johnson District Court; Kevin P. Moriaty, Judge.
Barry L. Pickens and J. Loyd Gattis, of Spencer Fane Britt & Browne LLP, of Kansas City, Missouri, and J. Nick Badgerow, of the same firm, of Overland Park, Kansas, for appellants. Diane Hastings Lewis, Heather F. Shore, and G. Steve Ruprecht, of Brown & Ruprecht, PC, of Kansas City, Missouri, for appellee.
Before LEBEN, P.J., ATCHESON, J., and BUKATY, S.J.


MEMORANDUM OPINION


LEBEN, J.


The district court granted summary judgment to Westfield Insurance Company under an indemnification agreement that allowed the insurance company to make payments on behalf of a general contractor. But the party providing indemnity—making good on a loss or liability—under such an agreement can recover against those who have agreed to reimburse it (the indemnitors) only if it first shows that it acted reasonably and in good faith in its financial actions. Because Westfield Insurance didn't present any evidence regarding the reasonableness and good-faith nature of its actions, the district court erred in granting summary judgment: Summary judgment, or judgment without a trial, is appropriate only when the party who filed the summary-judgment motion has shown that there is no material dispute, and Westfield Insurance's failure to address reasonableness and good faith left its motion without adequate support on a key point. We therefore reverse the district court's judgment and remand the case for further proceedings.

As an additional and alternative basis for our ruling, we conclude that even if the summary-judgment motion had been properly supported, the district court abused its discretion when it granted summary judgment without granting a reasonable extension of response time after the responding party's counsel had withdrawn. The indemnitors had not filed any response to the summary-judgment motion when the district court ruled. But they had filed a timely motion for an extension of time to respond, and Westfield Insurance had told the court it had no objection to a reasonable extension of time. The district court proceeded to grant summary judgment without even ruling on the indemnitors' request for an extension of time. We find no reason that would justify denying altogether any extension of time to respond to the summary-judgment motion, and we find that the district court abused its discretion by granting summary judgment without first providing a reasonable extension of time for the indemnitors to respond to the motion.

Factual Background

This lawsuit arose out of a project to build a Cambria Suites Hotel in Oklahoma City. Harvest Construction General Contracting, Inc. (Harvest Construction) agreed to build the hotel for a company called Suenos Oklahoma City, LLC (Suenos). As is normal in large construction projects, Harvest Construction got a payment bond and a ‘performance bond from an insurance company—here, Westfield Insurance. Under those bonds, Westfield Insurance agreed to make payments or to perform under the building contract if Harvest Construction defaulted.

As also is normal, Westfield Insurance got security to protect it in case it had to perform under the bonds. Harvest Construction and several related parties—Mabe Brothers, LLC, Cedar Springs Management FLP, Matthew Mabe, Jennifer Mabe, Paul Mabe, Yvette Mabe, John Mabe, and Laura Mabe—agreed to indemnify Westfield Insurance from any loss or expense it incurred by performing under the bonds. Three of these parties—Paul Mabe, Yvette Mabe, and Cedar Springs Management FLP—are not parties to the appeal. We will collectively refer to the members of this group who had agreed to indemnify Westfield Insurance and who have appealed the district court's judgment as the indemnitors.

Specifically, the indemnification agreement provided that Westfield Insurance could charge the indemnitors for “any and all disbursements made ... in good faith ... under the belief that it is or was liable for the sums and amounts so disbursed, or that it was necessary or expedient to make such disbursements, whether or not such liability, necessity, or expediency existed.”

Although Harvest Construction was the general contractor for the project, it hired subcontractors to do much of the work. Harvest Construction's contracts with its subcontractors included “pay-if-paid clauses,” which provided that Harvest Construction was obligated to pay the subcontractors only after it received a payment from the project owner, Suenos.

During the project, Harvest Construction began experiencing financial difficulties. Harvest Construction and Westfield Insurance worked out a new arrangement under which payments to subcontractors would be paid by Westfield Insurance rather than by Harvest Construction, though the new arrangement was still consistent with the pay-if-paid provision. Under the agreement, Harvest Construction would bill Suenos for completed work; Suenos would pay Westfield Insurance rather than Harvest Construction; and Westfield Insurance was to pay subcontractors and vendors in amounts approved by Harvest Construction, which was still supervising the work as the general contractor.

But after several months, in October 2009, Harvest Construction complained that Westfield Insurance was taking actions without Harvest Construction's approval and that this was driving up the cost of the project. Harvest Construction stopped approving payments.

In the coming months, Harvest Construction complained to Westfield Insurance that the insurance company was improperly assuming control of the project and simply approving whatever amounts subcontractors claimed. The construction project was completed in March 2010; Westfield Insurance ultimately closed out the project without Harvest Construction's help after the general contractor stopped responding to the insurance company's requests for assistance.

Westfield Insurance filed suit against the indemnitors in October 2009, and most of the individual indemnitors were served in mid-November. The indemnitors served a formal answer on Westfield Insurance's attorney in December 2009, but for reasons not clear in our record, the answer doesn't appear in the court's file.

Westfield Insurance filed a motion for summary judgment on March 26, 2010. Of significance to this appeal, neither the motion nor an attached affidavit (from Westfield Insurance employee James Walker) addressed the issue of whether Westfield Insurance's payments had been made in good faith after reasonable investigation.

Kansas court rules give a party 21 days to respond to a summary-judgment motion, and another 3 days is added if the motion is served by mail, as occurred here. See Supreme Court Rule 141 (2011 Kan. Ct. R. Annot. 232) (setting 21–day response time); K.S.A. 60–206(e) (providing 3 extra days if served by mail). So the indemnitors had until April 19, 2010, to respond. But the same day the summary-judgment motion was filed, the indemnitors' attorney filed for leave to withdraw; the district court granted withdrawal 5 days later. The indemnitors would need a new attorney.

The indemnitors' new counsel filed an appearance on April 19, and the attorney asked the court either to put the summary-judgment motion on hold until discovery could be taken or, in the alternative, to grant a 60–day extension of time for the indemnitors to respond to the summary-judgment motion. The motion said that counsel for Westfield Insurance “has no objection to an extension of time” to file a response. Westfield Insurance's attorney filed a formal response agreeing that Westfield Insurance “does not object to a reasonable extension of time,” but that 60 days would be too long.

The court scheduled a conference call with the attorneys for May 18, 2010. The court's docket entry for that call notes the appearance of the attorneys for hearing on the defendants' motion for an extension of time, but—without further reference to that motion—the docket entry says that the court “will grant summary judgment” and that the “judge will determine the amount of damages” at a hearing set for June 22, 2010. Neither the docket entries made by the district court nor our record on appeal show any ruling on the motion for an extension of time, and Westfield Insurance does not suggest on appeal that the district court ever made such a ruling.

The hearing set for June 22 didn't actually take place until November 3, and it was further extended until December 1 to give the parties had enough time to present their arguments. James Walker testified for Westfield Insurance, and Matthew Mabe testified for the indemnitors. On December 28, 2010, the district court adopted Westfield Insurance's proposed findings and entered summary judgment against the indemnitors for just over $2.5 million. Judgment was formally entered in February 2011 for that amount. Neither the court's findings nor its judgment made any reference to Westfield Insurance's good faith or the reasonableness of its actions in handling matters under the payment or performance bonds.

Standard of Review on Appeal

Two standards of review guide us in this appeal.

As for summary-judgment issues, we review whether summary judgment should have been granted independently, without any required deference to the district court. See Hansford v. Silver Lake Heights, 294 Kan. 707, 710, 280 P.3d 756 (2012). We will review specific rules regarding the consideration of summary-judgment motions in the next section of our opinion.

As for the district court's ruling on a motion for an extension of time, we review such decisions only for abuse of discretion. See In re J.A.H., 285 Kan. 375, 384–85, 172 P.3d1 (2007). Typically, a district court abuses its discretion in such matters only when no reasonable person would take the view adopted by the court. Unruh v. Purina Mills, 289 Kan. 1185, 1202, 221 P.3d 1130(2009).

Analysis

I. The District Court Should Not Have Granted Summary Judgment Because Westfield Insurance Hadn't Submitted Any Evidence on a Required Element of Its Claim.

The resolution of this appeal boils down to three key points:

• Summary judgment should not be granted unless the moving party shows that there's no material dispute, and that requires the movant to present at least some evidence supporting all required elements of the movant's legal claim.


• A surety seeking indemnification must show that its conduct was reasonable.


• Westfield Insurance didn't present any evidence that its conduct in handling payments to subcontractors was reasonable, so the district court could not grant summary judgment in its favor.
We will look in turn at each of the three points.
The Moving Party Must Affirmatively Show That It Is Entitled to Judgment in Its Favor Before the Responding Party's Duty to Respond Arises.

Summary judgment is appropriate only when the pleadings and evidence presented to the court 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. O'Brien v. Leegin Creative Leather Products, Inc., 294 Kan. 318, 330, 277 P.3d 1062 (2012). The burden of proving that there's no genuine issue of material fact rests on the moving party. Russell v. Braden, 42 Kan.App.2d 811, 819–20, 217 P.3d 997 (2009). Accordingly, the party opposing the motion has no duty to present evidence in opposition to the motion if the moving party's submission fails to eliminate the possibility of a factual dispute. See White v. Thomas, 660 F.2d 680, 682–83 (5th Cir.1981) (applying similar federal rule on summary judgment); 2361 State Corporation v. Sealy, Inc., 402 F.2d 370, 375 (7th Cir.1968) (same); Jecies v. Matsuda, 503 F.Supp. 580, 583 (S.D.N.Y.1980) (same); Grubbs v. Sea Mist Oceanfront Resort, No. 4:09–cv–01942–TLW, 2010 WL 4226111, at *2 (D.S.C.2010) (unpublished opinion) (same); 10A Wright, Miller & Kane, Federal Practice & Procedure: Civil § 2727, pp. 480–85 (3d ed.1998).

So even though the indemnitors didn't file a response to Westfield Insurance's summary-judgment motion, we still must determine whether the motion and supporting materials eliminated the possibility of a factual dispute on all material issues. If not, the district court's grant of summary judgment was in error. A Surety Seeking Indemnification Must Show That Its Conduct Was Reasonable.

The written agreement between the indemnitors and Westfield Insurance noted that Westfield Insurance would act as the surety for Harvest Construction, and Westfield Insurance proceeded to issue the anticipated performance and payment bonds. The agreement explicitly provided that Westfield Insurance was entitled to charge the indemnitors for “any and all disbursements made ... in good faith ... under the belief that it is or was liable for the sums and amounts so disbursed, or that it was necessary or expedient to make such disbursements, whether or not such liability, necessity or expediency existed.”

Consistent with that agreement—under which Westfield Insurance could only recover disbursements made in a good-faith belief that it was liable to make those payments or that it was necessary and expedient to do so, having taken over Harvest Construction's obligations—Kansas law imposes a duty of good faith and fair dealing in all contracts except those for employment at will. Bank of America v. Narula, 46 Kan.App.2d 142, Syl. ¶ 11, 261 P.3d 898 (2011). That duty specifically applies to a case like this one, in which a surety seeks to recover sums it has paid from an indemnitor: “A surety seeking to enforce an indemnity agreement has an implied obligation of good faith.” Hartford v. Tanner, 22 Kan.App.2d 64, Syl. ¶ 6, 910 P.2d 872, rev. denied 259 Kan. 927 (1996). That means that the “surety seeking indemnification [must] show that its conduct was reasonable.” 22 Kan.App.2d 64, Syl. ¶ 7. Factors to be considered in determining the reasonableness of the surety's conduct generally include the thoroughness of its investigation, the cooperation of the indemnitor, and the attempts made to mitigate the claims. Hartford Fire Ins. Co. v. P & H Cattle Co., Inc., 451 F.Supp.2d 1262, 1279 (D.Kan.2006) (citing Tanner, 22 Kan.App.2d at 76), aff'd 248 Fed. Appx. 942 (10th Cir.2007) (unpublished opinion). Westfield Insurance Didn't Present Any Evidence Regarding the Reasonableness of Its Conduct.

Given the points we've already discussed, Westfield Insurance could obtain summary judgment only if it showed that its conduct in handling and paying the subcontractor claims was reasonable and done in good faith. But neither its motion for summary judgment nor the affidavit attached to it addressed these issues in any way. For example, those materials never even alleged facts relating to the thoroughness of the insurance company's investigation or whether it acted to mitigate the claims. We noted earlier in the factual background that Harvest Corporation complained about the way Westfield Insurance handled the payment of the subcontractors as construction of the hotel was completed. We certainly cannot simply assume—without supporting evidence—that Westfield Insurance handled that process reasonably and in good faith. So the district court should not have granted summary judgment. Westfield Insurance's Additional Argument That This Error May Be Overlooked Is Not Correct.

We must address one additional argument here: Westfield Insurance asserts that even if the district court was wrong to grant summary judgment, the error may be overlooked because issues related to its good faith and reasonableness were tried to the court—and decided in Westfield Insurance's favor—when the court held an evidentiary hearing to determine what damages should be awarded.

Westfield Insurance is correct that some evidence related to good faith and reasonableness was presented to the district court in that hearing because it was relevant to determining the amount of damages. The indemnitors claimed in their answer to the original suit that Westfield Insurance had failed to mitigate its damages and had failed to properly resolve claims under the bonds. So it was proper to present evidence on those questions when the district court was determining the amount of damages to be awarded to Westfield Insurance.

But that did not transform an evidentiary hearing on damages into a trial on the underlying merits, i.e., whether Westfield Insurance should receive judgment against the indemnitors at all—the district court had already granted summary judgment on liability. Yet the indemnitors had also raised a liability defense in their answer that Westfield Insurance had “fail[ed] to perform a condition precedent” to any recovery, an allegation broad enough for pleading purposes to include the indemnitors' claim that a failure of reasonableness and good faith in resolving claims should bar any recovery. The indemnitors were entitled to have contested proceedings on liability resolved on summary judgment only if Westfield Insurance first met the requirement of providing evidence that showed the absence of factual disputes on all material issues, including these issues of reasonableness and good faith. It didn't do so, and the presentation of some related evidence in an evidentiary hearing limited to determining the amount of damages doesn't erase the district court's error in granting summary judgment on liability.

II. The District Court Should Not Have Granted Summary Judgment Without First Granting a Reasonable Extension of Time for the Indemnitors to Respond to the Motion.

The indemnitors' attorney filed a motion for leave to withdraw on the same day Westfield Insurance filed its summary-judgment motion. The indemnitors were able to get a new attorney in place before the response was due, and that attorney filed a motion on the day the response was due for either a 60–day extension of time to respond or a temporary pause in the case (a stay) to allow for some discovery, such as depositions, to occur. Westfield Insurance had no objection to an extension, though it said that 60 days was too long. The district court made no ruling on the extension request, instead granting summary judgment during a telephone conference call that was apparently scheduled for the purpose of discussing the extension request.

We can reverse the district court on a matter of this sort only for an abuse of discretion, and here that can be done only if no reasonable person would agree with the district court's decision. This is such a case.

Our courts seek to provide justice through rules designed “and administered to secure the just, speedy and inexpensive determination of every action.” K.S.A. 60–102. When one party has not yet had an opportunity to present its position to the court, the court should make that possible unless there is some good reason not to do so. That might be the case, for example, if the party has already caused undue delay in the proceeding and has not even suggested that it may have a viable position. But here, the indemnitors had pled affirmative defenses in their answer that suggested the possibility of real defenses both to liability and damages. And Westfield Insurance had no objection to a reasonable extension of time to respond to the summary-judgment motion. In addition, no scheduling order had been entered in the case, the indemnitors hadn't sought previous extensions, the case involved a substantial amount of money, and, like in many business disputes, the records involved in transactions in which large sums had been paid to subcontractors in a hotel-construction project could reasonably take more than 21 days to review. In these circumstances, the district court abused its discretion by effectively denying the extension request when it granted summary judgment without ever ruling on the motion. See Fouts v. Armstrong Commercial Laundry Distributing Co., 209 Kan. 59, 64–65, 495 P.2d 1390 (1972) (noting that an appellate court “view[s] with grave concern the denial of a continuance where the effect for all practical purposes deprives a party of his day in court”).

This provides an additional—and an alternative—basis for our ruling on appeal. Even if there were some way to view Westfield Insurance's summary-judgment motion as having provided an adequate basis for summary judgment, the district court still was wrong to grant the motion without first allowing a reasonable extension of time for the indemnitors' new attorney to prepare their response.

Conclusion

Westfield Insurance's motion for summary judgment didn't provide evidence in support of a key element of its claim, so the district court was wrong to grant summary judgment. Since we have now determined that the motion and its supporting materials, as filed, cannot support judgment for Westfield Insurance, we note that—as the case returns to the district court for further proceedings—the motion in the form Westfield Insurance filed it has now been denied on appeal as a matter of law. Westfield Insurance would be free to file a further summary-judgment motion in the district court, with additional support on the issues of reasonableness and good faith.

Because no ruling should have been made in the district court on liability, no evidentiary hearing should have been held on damages. Testimony taken at that hearing may be admitted in further proceedings, just as any other testimony taken in advance of trial may be used in summary-judgment motions or as evidence at trial. But all findings of fact and conclusions of law made by the district court are set aside because the foundation for a damages hearing—a proper determination of liability—was not present.

The district court's judgment against the indemnitors (Harvest Construction, Mabe Brothers, LLC, Jennifer Mabe, John Mabe, Laura Mabe and Matthew Mabe) is reversed, and the case is remanded for further proceedings consistent with this opinion.