Barr/Nelson, Inc. v. Tonto's, Inc.

• Decision Date: 01 July 1983
• Docket Number: No. C6-81-1289,C3-82-529.,C6-81-1289
• Citation: 336 NW 2d 46
• Parties: BARR/NELSON, INC., Respondent, v. TONTO'S, INC., et al., Respondents, Richard Larsen, et al., Respondents, and TONTO'S, INC., et al., third party plaintiffs, Respondents, v. BALBOA INSURANCE COMPANY, et al., third party defendants, Appellants, and BARR/NELSON, INC., third party plaintiff, Respondent, v. HOLLENBACK AND NELSON, INC., third party defendant, Respondent, Key Plumbing and Heating, third party defendant, Respondent, Volk Trucking and Excavation, Inc., third party defendant, Respondent, Ko-Son Piping Company, Inc., third party defendant, Respondent, Bituminous Roadways, Inc., third party defendant, Respondent.
• Court: Minnesota Supreme Court

336 N.W.2d 46 (1983)

BARR/NELSON, INC., Respondent, v. TONTO'S, INC., et al., Respondents, Richard Larsen, et al., Respondents, and TONTO'S, INC., et al., third party plaintiffs, Respondents, v. BALBOA INSURANCE COMPANY, et al., third party defendants, Appellants, and BARR/NELSON, INC., third party plaintiff, Respondent, v. HOLLENBACK AND NELSON, INC., third party defendant, Respondent, Key Plumbing and Heating, third party defendant, Respondent, Volk Trucking and Excavation, Inc., third party defendant, Respondent, Ko-Son Piping Company, Inc., third party defendant, Respondent,

Bituminous Roadways, Inc., third party defendant, Respondent.

Nos. C6-81-1289, C3-82-529.

Supreme Court of Minnesota.

July 1, 1983.

Edward A. Towey, St. Paul, for appellants.

Bassford, Heckt, Lockhart & Mullin, Lynn G. Truesdell and Rebecca L. Moos, Minneapolis, for Barr/Nelson, Inc.

Plunkett, Schmitt & Plunkett and Hugh V. Plunkett III, Austin, for Tonto's, Inc., et al.

Leonard, Street & Deinard and Lowell J. Noteboom, Minneapolis, for Larsen, et al.

David Grant, Minneapolis, for Hollenback and Nelson, Inc., third party defendant.

Donald J. Fraley, Wayzata, for Key Plumbing and Heating, third party defendant.

A.H. Michals and Jerome R. Klukas, Minneapolis, for Volk Trucking and Excavation, Inc., third party defendant.

Malcolm D. MacGregor, Minneapolis, for Ko-Son Piping Co., Inc., third party defendant.

Howard A. Knutson, Burnsville, for Bituminous Roadways, Inc., third party defendant.

Heard, considered and decided by the court en banc.

TODD, Justice.

Tonto's Inc. contracted with Barr/Nelson for the construction of a restaurant. Balboa Insurance Company furnished payment and performance bonds. The owner declared Barr/Nelson in default and arranged for completion of the building. Litigation followed involving all interested parties including subcontractors. Tonto's settled the case with all parties, reserving only its alleged claims against Balboa, who did not participate in the settlement. The jury awarded general and punitive damages to Tonto's for willful and malicious breach of the covenant of good faith by Balboa. The jury found no fraud. We approve the settlement agreement but reverse the award of damages under the facts of this case.

This litigation arises from the design and construction of a Tonto's Restaurant in Minneapolis. The owner, Tonto's, Inc. and Everett Cilley ("Tonto's"), signed a contract with Barr/Nelson, Inc., George Barr and David Nelson ("Barr/Nelson"), the general contractor, to construct the building. The construction contract was bonded with payment and performance bonds, signed by the surety Balboa Insurance Company, AVCO Financial Insurance Group and Action Surety ("Balboa Insurance Company"). Tonto's signed a separate contract with the architect Richard Larsen and Larsen Associates, Inc. ("Larsen").

When the construction project was not completed in October, 1978, Tonto's declared Barr/Nelson in default. Tonto's finally terminated Barr/Nelson's contract in January, 1979, three months after the scheduled completion date. Barr/Nelson began litigation, seeking damages for breach of the construction contract, wrongful termination of the contract and interference with business relationships. Barr/Nelson sued Larsen for breach of contract and malpractice. Tonto's counterclaimed against Barr/Nelson for breach of contract and counterclaimed against Larsen for breach of contract and contribution. Larsen cross-claimed against Tonto's for breach of contract and contribution.

Tonto's hired a new contractor and architect to complete construction. Subsequently, Tonto's sued Balboa Insurance Company, the original contractor's surety, for breach of contract and for punitive damages. Balboa counterclaimed against Tonto's and cross-claimed against Barr/Nelson, claiming subrogation and indemnity. Ultimately, Barr/Nelson and Tonto's brought in some of the subcontractors on the project, Hollenbeck and Nelson, Inc., Key Plumbing and Heating, Volk Trucking and Excavation, Ko-Son Piping Company, Inc., and Bituminous Roadways, Inc., as defendants. The subcontractors, in turn, asserted claims against Barr/Nelson.

All parties except the surety, Balboa Insurance Company, signed a settlement agreement conditional upon obtaining summary judgment as to liability of the parties. The settlement agreement, a modified Pierringer release, released all claims among and between the settling parties, but retained the owner's action against Balboa for "independent acts" apart from its liability for the acts of the contractor. Barr/Nelson moved for summary judgment on the following matters:

1) That all claims of Balboa be dismissed as a matter of law, except for claims for indemnity for attorneys fees up to $19,803.82, which is the amount of fees through May 15, 1981;

2) That, as a matter of law, and the conditional settlement agreement, the owner retain claims against Balboa for independent acts (fraud and breach of the covenant of good faith).

3) That all other claims of all parties be dismissed as a matter of law and pursuant to the conditional settlement agreement.

The trial court granted Barr/Nelson's summary judgment motion and Balboa appealed.

The action between Tonto's and Balboa relating to Balboa's independent acts of breach of good faith and fraud arose in part from a dispute about Small Business Administration bonds which Balboa obtained to guarantee Barr/Nelson's payment and performance. To obtain SBA bonding for Barr/Nelson, Balboa filed a Surety Bond Guarantee Assistance Application and a Surety Bond Guarantee Underwriting Review with the SBA. Tonto's claimed that much of the information supplied by Balboa on the Application and Review was false and forged. Tonto's conditioned the construction contract on Barr/Nelson's procurement of the bonds because they were skeptical of Barr/Nelson's ability and wanted assurance that Barr/Nelson was a bond-worthy contractor. Tonto's claimed that Balboa's false statements enabled Barr/Nelson to secure SBA bonding. Without the bonding, Tonto's would not have hired Barr/Nelson and would not have suffered damages through poor workmanship and delays.

The action arose also from alleged false representations made to Tonto's by Balboa after Barr/Nelson's default. Tonto's argued that Balboa represented to them that Barr/Nelson could complete the restaurant and that Balboa would hire a supervisor to assist in the completion. As a result of Balboa's representations, Tonto's argued, Tonto's did not terminate Barr/Nelson until January 1979, although Barr/Nelson had agreed to complete construction in October 1978. Balboa also promised to hire Donald Augst, a contractor with 30 years' experience, to supervise Barr/Nelson's completion of the restaurant. Balboa never hired Augst and never supervised completion itself.

Finally, Tonto's claimed that Balboa reported falsely to the SBA, indicating that the project was substantially completed and that there were no claims under the surety bond. All of these actions by Balboa, Tonto's concluded, justified punitive damages for fraud and breach of the covenant of good faith.

At the close of Tonto's evidence, Balboa moved for a directed verdict, arguing that Tonto's had not shown that its damages exceeded the bond amount and that it had not proved fraud. The trial court denied the motion. At the close of all the evidence, both parties submitted jury instructions to the court. Balboa objected that the instruction ultimately given by the court on the duty of a surety wrongly stated the law. In addition, Balboa objected that the court should have ruled as a matter of law that a surety's duty to take over a construction contract does not arise until the contractor is terminated by the owner, not when the contractor defaults, as Tonto's argued.

The jury answered the special verdict form provided to it, finding that Barr/Nelson was in default, that Balboa had not perpetrated a fraud on Tonto's but that Balboa had breached its covenant of good faith, inflicting damages of $75,000 on Tonto's as a result. The jury found Balboa's conduct willful and malicious and the cause of Tonto's damages. The jury assessed $500,000 punitive damages against Balboa.

Balboa moved for JNOV or new trial but the court denied its motion and ordered judgment for $575,000. Balboa renewed its motion for a new trial or, in the alternative, remittitur. The court denied this motion. Balboa appealed and the appeal from the partial summary judgment was consolidated with Balboa's post-trial appeal.

The issues are:

1. Should a Pierringer-type settlement be permitted in a dispute involving a construction contract?

2. If a settlement agreement is approved, what rights survive as between the owner and the nonsettling surety?

3. Were the acts of the surety fraudulent as a matter of law?

4. May punitive damages be awarded in a contract action for a willful and malicious breach of a covenant of good faith?

5. May general contract damages be awarded to an owner against a surety where the owner has settled with the contractor?

6. Should attorney's fees be awarded to an insurer where its insured has settled its claims with the subcontractors and owner?

1. Balboa claims that the settlement agreement used in this case should not be permitted. It claims that the agreement is collusive and has the effect of juxtaposing the parties. We do not find such a result and approve the use of Pierringer-type releases in construction contract disputes as a tool of settlement.

2. Any claim the owner may have against the surety for the acts of the contractor was waived when the contractor and owner agreed to the settlement. Having approved the settlement agreement, however, we find that the settling owner may still have rights against the non-settling surety, as the settlement agreement failed to address all the claims the owner has against the surety. The owner claims contractual rights...