Arntz Contracting Co. v. St. Paul Fire & Marine Ins. Co., A064300

• Decision Date: 17 July 1996
• Docket Number: No. A064300,A064300
• Citation: 54 Cal.Rptr.2d 888,47 Cal.App.4th 464
• Court: California Court of Appeals Court of Appeals
• Parties: , 96 Cal. Daily Op. Serv. 5301, 96 Daily Journal D.A.R. 8581 ARNTZ CONTRACTING CO. et al., Cross-complainants, Cross-defendants and Appellants, v. ST. PAUL FIRE AND MARINE INSURANCE COMPANY, Cross-defendant, Cross-complainant and Appellant.

Page 888

54 Cal.Rptr.2d 888

47 Cal.App.4th 464, 96 Cal. Daily Op. Serv. 5301,

96 Daily Journal D.A.R. 8581

ARNTZ CONTRACTING CO. et al., Cross-complainants, Cross-defendants and Appellants, v. ST. PAUL FIRE AND MARINE INSURANCE COMPANY, Cross-defendant, Cross-complainant and Appellant.

No. A064300.

Court of Appeal, First District, Division 1, California.

July 17, 1996.

Certified for Partial Publication ^*.

Rehearing Denied Aug. 9, 1996.

Review Withdrawn Nov. 13, 1996.

Jerome B. Falk, Jr., Steven L. Mayer, Therese M. Stewart, Pauline E. Calande, Howard, Rice, Nemerovski, Canady, Robertson, Falk & Rabkin, San Francisco, R.W. Miller, Stephen R. Miller, Andrew C. Gately, Miller Law Firm, Kansas City, MO, for appellant Arntz Contracting Co.

Dan K. Webb, Kimball R. Anderson, Winston & Strawn, Chicago, IL, C. Donald McBride, Musick, Peeler & Garrett, San Francisco, John W. Keker, Gary M. Cohen, Keker & Van Nest, San Francisco, for Appellant St. Paul Fire and Marine Insurance Company.

Peter W. Davis, San Francisco, Ezra Hendon, Oakland, Valarie Mark, Crosby, Heafey, Roach & May, for Appellant St. Paul Fire and Marine Insurance Company.

STRANKMAN, Presiding Justice.

A general contractor was terminated from a public works construction project by the property owner who complained of deficient workmanship, and the surety that had issued performance and labor and material bonds on the project took over the project and completed construction using substitute contractors. In a lawsuit between the original general contractor and the surety, the surety recovered most of its completion costs and assorted expenses under the parties' indemnification agreements executed in connection with the bonds.

However, the contractor recovered against the surety upon claims of breach of contract in the surety's failure to honor a promise to bond future projects, and interference with prospective economic relations because the surety's termination of bonding and other acts frustrated the contractor's ability to secure bonding from other sureties. The surety's recovery on the indemnity agreements, after substantial offsets, was about $813,000. The contractor's recovery on its contract and tort actions was $16.5 million in compensatory damages, plus prejudgment interest and attorney fees and costs totaling about $8.4 million. The contractor was also awarded $100 million in punitive damages, but the trial court vacated the award. The contractor and surety both appeal.

We affirm the judgment in most particulars, but reverse the judgment as to the interference with prospective economic relations cause of action and strike the award of prejudgment interest based upon that tort claim. We also reverse the award to the contractor of attorney fees and costs and remand the case with directions to the trial court to determine the prevailing party on the separate contracts enforced in this litigation, rather than the prevailing party in the action as a whole, and to recalculate any recoverable fees, costs, and expenses accordingly.

FACTS

In 1982, Arntz Contracting Company and related corporations and individuals (Arntz) contracted with the Richmond Housing Authority (the RHA) for the $4.6 million construction of Triangle Court Public Housing Project (Triangle Court). Because the project was a public work, Arntz had to post performance and labor and materials bonds to assure its faithful performance and payments to subcontractors and suppliers. St. Paul Fire & Marine Insurance Company (St. Paul) issued the Triangle Court bonds. Contractors generally have only one surety at a time, and St. Paul had issued bonds on Arntz projects since 1980. At the inception of the relationship between Arntz and St. Paul, the parties executed industry standard indemnity agreements by which Arntz (both corporate entities and individuals) promised to indemnify St. Paul for all losses suffered "by reason of executing" the bonds.

The Triangle Court project was troubled from the start by underfunding, inadequate architectural drawings, and faulty subcontractor work. Various disputes erupted between Arntz and the RHA and, on November 5, 1984, the RHA terminated Arntz upon complaints of deficient work and demanded that St. Paul complete the project. St. Paul's claims department was alerted of the RHA's demand and established a file to monitor the Triangle Court problems. Arntz believed the termination wrongful and sued the RHA a few days later, the first strand in what was to become a web of litigation.

Arntz and St. Paul had a series of meetings to discuss Arntz's termination from the Triangle Court project, and Arntz claims that an oral promise by St. Paul to continue bonding it grew out of these negotiations. Thomas Arntz, the project manager of Triangle Court, testified that there was an informal meeting between the parties two days after Arntz's termination in which Arntz told St. Paul that it viewed the termination as wrongful and expressed its interest in doing whatever was necessary to preserve its good relationship with St. Paul because Arntz needed bonding to stay in business. No final agreement was reached at that meeting, but the parties reconvened on November 15.

By that time, St. Paul had advised Arntz's bond broker that all bonding was suspended. At the November 15 meeting, St. Paul announced that it would complete the project with a substitute contractor selected by putting the project "out to bid." Arntz objected because it wanted to maintain control of the project, and suggested that it be allowed to select a "friendly" substitute contractor. The parties also discussed Arntz's interest in maintaining a good relationship with St. Paul for bonding purposes. According to Thomas Arntz, St. Paul's representatives conferred among themselves and then announced it would permit Arntz to select the substitute contractor and continue bonding Arntz if Arntz posted $1 million in collateral, to which Arntz agreed. Thomas Arntz testified that the meeting concluded with St. Paul's assurance that the parties' bonding relationship would be "business as usual."

The parties met again on December 4, 1984, and bonding was discussed among other matters. It was agreed that St. Paul would visit Arntz's office to audit its books for bonding, which it did the next day. Both parties were represented by counsel at the December 4 meeting, and Arntz's attorney wrote a December 6 letter to St. Paul's attorney "to formalize the agreement" reached at the meeting. The letter recited that the parties agreed to a substitute contractor, that "Arntz would meet with representatives of St. Paul to re-establish an appropriate bond capacity for pending and future work," and that Arntz agreed to provide $1 million "in collateral as security for the actions set forth above."

On December 10, 1984, various contracts were executed by St. Paul, Arntz, and the substitute contractor, Cal Custom Construction Company (Cal Custom): St. Paul and Cal Custom signed a relet contract for completion of Triangle Court and Cal Custom and Arntz signed an agreement giving Arntz essential control of the project. The next day, St. Paul and Arntz executed the later disputed agreement in which Arntz pledged as collateral $1 million held in cash and securities accounts (Collateral Agreement).

St. Paul immediately resumed bonding Arntz with the issuance of a $2.3 million bid bond the day after the Collateral Agreement was executed. In early 1985, St. Paul wrote to Arntz confirming its "decision to continue to provide bonding on new projects." A St. Paul internal memorandum attaches a copy of that letter and states that "we have agreed to continue providing bonds to Arntz Contracting since coming to an agreement with them on the completion of [Triangle Court]."

At Triangle Court, there was little progress made in completing construction since Cal Custom was substituted for Arntz in late 1984 because all the parties became immersed in a dispute over the measures needed to correct deficient stucco and other work. In Spring 1985, Arntz sued St. Paul and the RHA seeking a declaration that Cal Custom was not obligated to honor the RHA's demand for complete stucco removal and, in August 1985, obtained a temporary restraining order preventing stucco tear-off.

In addition to disputes over the proper scope of corrective work, Arntz also disputed St. Paul's entitlement to reimbursement for a Triangle Court consultant's fees. A St. Paul claims officer testified that Arntz's refusal to reimburse these expenses signaled trouble in the parties' indemnity arrangement. In July 1985, St. Paul refused to issue any future bonds unless Arntz paid all Triangle Court expenses. At first, Arntz continued to deny an obligation to pay the consultant's fees, but on September 6, 1985, capitulated to St. Paul's demand for reimbursement and sent a check for the consultant's fees to Arntz's bonding agent.

St. Paul never resumed bonding Arntz after the July 1985 termination. According to St. Paul, it would have considered bonding Arntz in early September 1985 had Arntz reaffirmed an "iron-clad" commitment to pay all future expenses. But another event occurred that forestalled any such consideration. The RHA terminated St. Paul from Triangle Court and removed Cal Custom from the project on September 17, 1985, just a few days after the Arntz court order restraining stucco tear-off was dissolved. St. Paul blamed Arntz for the termination, claiming that it obstructed Cal Custom's completion of Triangle Court.

Arntz turned to other sureties for bonding. Arntz obtained limited bonding in 1986 from another surety company, but the relationship was soon terminated when that small company was acquired by a larger company that did not want to bond Arntz because Arntz was involved in a lawsuit with St. Paul. Arntz applied to a host of large, front line sureties but all declined to bond it. In applying for bonding, Arntz's bond broker completed...