Cates Construction, Inc. v. Talbot Partners

• Decision Date: 28 March 1997
• Docket Number: Nos. B085960,B087801,s. B085960
• Citation: 53 Cal.App.4th 1420,62 Cal.Rptr.2d 548
• Court: California Court of Appeals Court of Appeals
• Parties: Previously published at 53 Cal.App.4th 1420 53 Cal.App.4th 1420, 97 Cal. Daily Op. Serv. 2385, 97 Daily Journal D.A.R. 4201 CATES CONSTRUCTION, INC., et al., Plaintiffs and Appellants, v. TALBOT PARTNERS et al., Defendants and Respondents. TIG INSURANCE COMPANY, Plaintiff and Appellant, v. TALBOT PARTNERS et al., Defendants and Respondents.

Page 548

62 Cal.Rptr.2d 548

Previously published at 53 Cal.App.4th 1420

53 Cal.App.4th 1420, 97 Cal. Daily Op. Serv. 2385,

97 Daily Journal D.A.R. 4201

CATES CONSTRUCTION, INC., et al., Plaintiffs and Appellants, v. TALBOT PARTNERS et al., Defendants and Respondents.

TIG INSURANCE COMPANY, Plaintiff and Appellant, v. TALBOT PARTNERS et al., Defendants and Respondents.

Nos. B085960, B087801.

Court of Appeal, Second District, Division 5, California.

March 28, 1997.

Certified for Partial Publication. ^*

Review Granted July 23, 1997.

William J. Allard, Los Angeles, for Plaintiff and Appellant Cates Construction, Inc.

Bottum & Feliton, Steve Johnson, and Jerry Garcia, Los Angeles; Bryan Cave and William I. Chertok; and Horvitz & Levy, Barry R. Levy, Encino, Daniel J. Gonzalez, Ari R. Kleiman, Encino, and Andrea M. Gauthier, Encino, for Plaintiff and Appellant TIG Insurance Company.

John S. Alevra; Shoop & Leanse and Paul Shoop, Malibu; Marcus M. Kaufman, Newport Beach; and Buchalter, Nemer, Fields & Younger and Bernard E. LeSage, Los Angeles, for Defendants and Respondents Talbot Partners and PAA Interpro.

Price, Postel & Parma, J. Terry Schwartz, and Christopher E. Haskell, Santa Barbara; and Esner, Higa & Chang, Andrew N. Chang, and Stuart B. Esner, Los Angeles, for Defendants and Respondents Bank of Montecito and Mountain Financial Corp.

ARMSTRONG, Associate Justice.

TIG Insurance, a commercial surety company formerly called the Transamerica Insurance Company ("Transamerica") and Cates Construction ("Cates"), a building contractor, appeal from judgments entered against them and in favor of respondents Talbot Partners ("Talbot"), a developer, and The Bank of Montecito ("Bank"), Talbot's lender. The appeals present a number of questions regarding the damages which may be assessed against a corporate surety in a lawsuit brought by performance bond obligees. In the published portions of this opinion, we conclude, in accord with long-standing California law, that a surety's liability for compensatory damages is co-extensive with that of the principal. We also conclude that a surety may be liable for a tortious breach of the covenant of good faith and fair dealing implied in the bond. We affirm the award of compensatory damages in favor of Talbot and the award of compensatory damages to the Bank. As to the award of punitive damage in favor of Talbot, we determine that the award is excessive, and reduce the award to $15 million. Finally, we conclude that the trial court used an erroneous method for calculating pre-judgment interest. We reverse those awards and remand to the trial court for a correct calculation.

FACTUAL AND PROCEDURAL SUMMARY

In 1989, Talbot hired Cates to build a condominium project, called the Portico, on At the time the construction contract was signed, Talbot required Cates to furnish a performance bond and a labor and materials payment bond to assure that the project would be timely completed and that Talbot would be protected if it were not. Cates and Transamerica executed the bonds, with Cates as principal and Talbot as obligee. The Bank was a co-obligee on each bond under a Lender's Dual Obligee Rider executed by Transamerica and Cates. Talbot paid the $27,000 premium on the bonds.

Malibu property which Talbot had purchased for $1 million. The construction contract provided that Cates would be paid the Cost of Work, as defined, plus a twelve percent fee; that the project would be complete and ready for occupancy in eight months; and that time was of the essence. The Bank provided Talbot's construction financing, secured by a deed of trust on the property and conditioned on the issuance of a performance bond in favor of the Bank.

The performance bond provided that in the event of default by Cates, if Talbot had performed under the construction contract, Transamerica was required to promptly "1) Complete the Contract in accordance with its terms and conditions, or 2) Obtain a bid or bids for completing the Contract in accordance with its terms and conditions ... and arrange for a contract between such bidder and Owner, and make available as Work progresses ... sufficient funds to pay the cost of completion less the balance of the contracting price, but not exceeding ... [$3.9 million]." Transamerica and Cates had previously entered into an indemnity agreement which allowed Transamerica to recover from Cates all good faith disbursements made by Transamerica under the bonds.

Under a fund control agreement entered into by Talbot, Cates, and Transamerica, Cates was to submit monthly applications to Talbot for reimbursement of costs incurred. Talbot and the Bank were to review the requests and the Bank was to disburse the funds to Surety Disbursements, which was to confirm the progress of the work and obtain lien releases before disbursing funds to Cates or to subcontractors.

Construction on the Portico project began on May 1, 1989. Cates and Talbot agreed to various extensions of time. At trial, Talbot waived any claim for damages through June 1, 1990.

During the course of construction, Cates submitted twenty-two payment requests which were paid as submitted. The twenty-third request was submitted in early November 1990. It was not paid, because both Talbot's and Cates's records showed that Talbot had already paid several hundred thousand dollars more than the Cost of Work. Attempts to resolve the problem failed. In late November, Cates notified Talbot that unless additional amounts were paid it would abandon the job as of December 4, 1990. On November 29, Talbot advised Transamerica of Cates's intent to default, informed Transamerica that it had paid everything it owed under the contract, and demanded that Transamerica perform under the bond.

Cates abandoned the job on December 4, 1990. The project was incomplete and not ready for occupancy. On December 17, 1990, Cates recorded a $645,367 mechanic's lien on the project, against Talbot. Cates went out of business shortly thereafter.

After a good deal of correspondence and other communications between all the parties, on January 9, 1991, Transamerica informed Talbot that its position was that Talbot had breached the contract by failing to make payments, that there was a legitimate dispute between Cates and Talbot, and that Transamerica would not intercede or arrange for performance of the contract. Correspondence and communications continued.

On February 14, 1991, at Transamerica's request, Cates gave Talbot notice of its voluntary default. On March 1, 1991, Talbot and the Bank informed Transamerica that as a result of the delayed completion of the construction contract, Talbot was in default on its loans and the Bank was proceeding to foreclose. There were at that time over $935,000 of mechanic's liens against the project, including the Cates lien.

In February, Cates assigned its rights against Talbot to Transamerica, and on On March 19, 1991, Transamerica, choosing the first of its options under the performance bond, began the process of completing the job. It did so through an on-site superintendent, PCA, which was not a licensed contractor.

March 14, 1991, at a time when Cates was out of business, Transamerica filed this lawsuit to foreclose on Cates's mechanic's lien, naming Cates as plaintiff. The lawsuit was authorized by the Transamerica claims specialist handling the Talbot claim and was filed by Transamerica's attorneys.

On May 10, 1991, Transamerica joined as plaintiff in Cates's lawsuit against Talbot. That suit brought causes of action for breach of the construction contract, to foreclose on the mechanic's lien, and for declaratory relief. ¹ Cates and Transamerica later named the Bank as a defendant. Talbot cross-complained against Cates for breach of the construction contract and against Transamerica for recovery under the performance bond, breach of the bonds, and breach of the implied covenant of good faith and fair dealing in the bonds. In December 1991, the Bank cross-complained against Transamerica for breach of the bonds.

The Bank foreclosed on the project on June 18, 1991. At that time, Talbot owed the Bank $7,753,282. Construction was not complete, some of the work was defective and required repair, and the project lacked permit sign-offs for certificates of occupancy.

By stipulation of the parties, the breach of contract claims were heard by retired Justice David Eagleson, sitting without a jury. Justice Eagleson ruled against Transamerica and Cates on all causes of action in their complaint ² and for Talbot and the Bank on all contract causes of action in their cross-complaints.

On Talbot's cause of action for breach of contract against Cates, the court found that Cates had breached the contract, by, inter alia, failing to construct the project in good quality and free of defects; charging rates substantially higher than standard local rates; and using construction funds in ways other than those approved by Talbot, so that subcontractors were unpaid, resulting in mechanic's liens on the project. The court found that all delays beyond June 1, 1990 were caused by Cates, and that if Cates had not breached the contract, the project would have been available for Talbot to sell on or before June 1, 1990.

On Talbot's causes of action against Transamerica for breach of the bonds and for recovery on the performance bond, the court found that Transamerica breached the performance bond by failing to conduct a thorough or adequate investigation of Talbot's declaration that Cates was in default and by joining in the mechanic's lien suit without such an investigation. The court found that an investigation would have revealed that Talbot was not in default but Cates was, that Cates's abandonment of the job was unjustified, and that at the time Cates abandoned the job, Talbot had paid the full Cost of Work plus an additional sum of $276,730, and owed no further amounts. Transamerica also breached by failing to...