City of Lemmon v. U.S. Fidelity & Guaranty Co.

• Decision Date: 11 June 1980
• Docket Number: No. 12754,12754
• Citation: 293 N.W.2d 433
• Court: South Dakota Supreme Court
• Parties: CITY OF LEMMON, a Municipal Corporation, Plaintiff, v. UNITED STATES FIDELITY & GUARANTY COMPANY and Esther D. Wells, Individually andas Personal Representative of the Estate of Duane Wells, Deceased, Defendantsand Appellants, and Schmucker, Paul, Nohr & Associates and Soil Exploration Company, Defendants andAppellees, and Orville Willett d/b/a B and W Pools and B and W Pools, Inc.; Bank of Lemmon; Patrick LaSalle d/b/a LaSalle Construction Company; Timber Weld Manufacturing; Christ P. Hoff d/b/a Hoff Readymix; Fullerton Lumber Company; Nick Krebs andSon; Globe,Inc.; Joe Messmer d/b/a Joe's Plumbing; Julian Wolff d/b/a Wolff's Heating andPlumbing; Stock's Electric, Inc.; and other unknown John Doe Lien Claimants,Defendants.

Page 433

293 N.W.2d 433

CITY OF LEMMON, a Municipal Corporation, Plaintiff, v. UNITED STATES FIDELITY & GUARANTY COMPANY and Esther D Wells, Individually andas Personal Representative of the Estate of Duane Wells, Deceased Defendantsand Appellants and Schmucker, Paul, Nohr & Associates and Soil Exploration Company, Defendants andAppellees and Orville Willett d/b/a B and W Pools and B and W Pools, Inc.; Bank of Lemmon; Patrick LaSalle d/b/a LaSalle Construction Company; Timber Weld Manufacturing; Christ P. Hoff d/b/a Hoff Readymix; Fullerton Lumber Company; Nick Krebs andSon; Globe,Inc.; Joe Messmer d/b/a Joe's Plumbing; Julian Wolff d/b/a Wolff's Heating andPlumbing; Stock's Electric, Inc.; and other unknown John Doe Lien Claimants,Defendants.

No. 12754.

Supreme Court of South Dakota.

Argued March 19, 1980.

Decided June 11, 1980.

James P. Hurley of Bangs, McCullen, Butler, Foye & Simmons, Rapid City, for defendants and appellants United States Fidelity & Guaranty Company and Esther D. Wells, Individually and as Personal Representative of the Estate of Duane Wells, Deceased; Thomas E. Simmons of Bangs, McCullen, Butler, Foye & Simmons, Rapid City, on brief.

Marvin D. Truhe of Lynn, Jackson, Shultz & Lebrun, Rapid City, for defendants and appellees Schmucker, Paul, Nohr & Associates; Gregory A. Eiseland of Lynn, Jackson, Shultz & Lebrun, Rapid City, on brief.

Robert F. LaFleur, Rapid City, for defendant and appellee Soil Exploration Company.

DUNN, Justice.

United States Fidelity and Guaranty (USFG), defendant, appeals from a judgment dismissing its supplemental cross claim for failure to state a claim upon which relief can be granted. Defendant-appellant Esther Wells, individually and as personal representative of the estate of Duane Wells (Wells), appeals from the denial of her motion for relief from default and entry of default judgment against her. Mrs. Wells also appeals from the dismissal of the supplemental cross claim, mentioned above, in which she was joined. We affirm in part and reverse in part.

The City of Lemmon, South Dakota (city), as plaintiff brought this lawsuit against defendants, Wells, USFG, Schmucker, Paul, Nohr & Associates (SPN), Soil Exploration Company (SEC), and various subcontractors and lien claimants. All parties were involved in the city's project of constructing a new municipal swimming pool, wading pool and bathhouse at Lemmon, South Dakota.

The city, as owner of the construction project, entered into a bonded public construction contract with Wells as general contractor. Wells agreed to construct the project in accordance with project plans and specifications prepared by SPN, the city's project architect and engineer, and under the supervision and subject to the approval of SPN. Pursuant to its contract with the city to supply engineering services for the project, SPN employed SEC to analyze soil conditions existing at the project site. SEC was to evaluate the suitability of the site for the project and make engineering recommendations concerning proper foundation, structure design, and proper construction procedures. In accordance with South Dakota law, Wells obtained a construction surety bond from USFG in the amount of the construction contract in the sum of $155,450.00. This bond was conditioned upon the faithful performance by Wells of the construction contract under the terms of SPN's plans and specifications and under the supervision, inspection, and approval of SPN. It was further conditioned upon payment by Wells for materials and labor incorporated into the project by the lien claimants.

Construction of the new swimming pool complex began in the spring of 1974 and, under the terms of the construction contract, was to be completed on July 15, 1974. Construction was not completed on July 15, 1974, but Wells was given an additional twelve months to complete the project on or before July 15, 1975. In the spring of 1975, however, the bathhouse portion of the project showed definite signs of differential movement causing serious cracking of concrete walls, floors and slabs.

The project was not completed and litigation was filed to determine the liability of each of the parties for failure of the project. The city's lawsuit against USFG, as finally amended, consisted of four counts. One count was based upon the performance bond, and the other three counts alleged direct rather than vicarious liability against USFG, including fraud, deceit, misrepresentation, suppression of facts, and breach of a covenant of good faith. The latter three counts were for compensatory damages in the amount of $500,000 and punitive damages in the amount of $2,000,000. The city's action against SPN was for negligent breach of its contract with the city and negligent misrepresentation regarding its contract duties. Wells and SEC were sued for negligence, and a claim of indemnity was brought against the various lien claimants.

Upon completion of discovery, USFG deposited with the trial court the sum of $194,129.80. This sum represented the full amount of the performance bond plus interest from the date that Wells, USFG's principal, ceased work on the project.

Immediately prior to the date set for trial, USFG settled the claim of the city by payment in the amount of $294,120.80, and settled and fully satisfied the cross claims and demands of the lien claimants in the amount of $21,327.75. The lien claimants were subcontractors, laborers and materialmen on the project. In exchange for these payments from USFG totaling $315,448.55, the city and the lien claimants assigned to USFG all of their claims and rights of action against the remaining principal defendants, SPN and SEC, and released all parties to this action, including SPN and SEC. Following various default orders of the trial court and USFG's settlement payment to the city, USFG filed a supplemental cross claim to reflect the changes that had occurred in the litigation and the issues remaining to be litigated. Therefore, on the date that the trial court entered the judgments which are the subject of this appeal, essentially all that remained of this litigation was the amended cross claim of USFG against SPN and SEC, the amended cross claims of SPN and SEC against USFG and Wells, and the supplemental cross claim of USFG in which Wells was joined against SPN and SEC, which was filed after USFG's settlement payment to the city.

SPN and SEC filed various motions before the trial court, including a motion to dismiss the supplemental cross claim of USFG and Wells. The trial court entered its memorandum decision dated December 28, 1978, holding that SDCL 56-2-14, 15 and 16 provide that the surety, USFG, may only look to its principal, Wells, for recovery in full or in part of USFG's settlement payment to the city. The trial court stated that USFG, as a surety, cannot recover any amount from other parties such as SPN or SEC even though such third parties may have caused or contributed to the loss or unjustly benefited from USFG's settlement payment. On March 12, 1979, the trial court entered its judgment dismissing the supplemental cross claim of USFG and Wells against SPN and SEC for failure to state a claim upon which relief can be granted. It should be noted here that about one month before the supplemental cross claim was dismissed, Mrs. Wells signed a stipulated judgment against Wells and in favor of USFG in the amount of $315,443.55.

The issue of the propriety of the default judgment entered against Wells involves a separate set of facts. Duane Wells, general contractor on the Lemmon project, was killed in an airplane crash prior to the commencement of the instant litigation. The first action to determine the rights of the parties to this project, however, was entitled B and W Pools, Inc. and Bank of Lemmon v. Duane Wells, United States Fidelity and Guaranty Co. and City of Lemmon, and was filed prior to the death of Duane Wells. Wells hired an attorney and filed an answer and counterclaim. The B and W lawsuit and the instant lawsuit were consolidated by order of the trial court on March 29, 1978. When the present lawsuit was brought by the City of Lemmon, Mrs. Wells was without funds to continue to employ an attorney to pursue this litigation. Mrs. Wells therefore did not file an answer or other pleadings in the city's suit. She was, however, served with all pleadings and documents of record by all counsel throughout this litigation.

Mrs. Wells stated in her affidavit in support of her motion for relief from default that she recognized that USFG had pleaded the same claims that she would have pleaded and pursued in discovery had she been financially able to do so. When USFG settled the claims of the city and the lien claimants, Mrs. Wells was joined on October 4, 1978, in the supplemental cross claim against SPN and SEC. On October 20, 1978, SPN and SEC filed their motion for default judgment against Mrs. Wells, but failed to serve her with a notice of intention to take default judgment. Mrs. Wells then filed her motion for relief from default. The trial court recognized that Mrs. Wells' motion was for relief from a position of default because she was joined in the supplemental cross claim before SPN and SEC filed their motion for default judgment, and no default order had been entered against her in the city's litigation. The trial court, however, denied Mrs. Wells' motion and entered a default order and final judgment of dismissal barring and forever foreclosing Mrs. Wells from asserting any claim arising out of the subject matter of this action.

We address the issue of default first. We find the trial court erred in not permitting Mrs. Wells to pursue the claims set forth in the supplemental cross claim against SPN and SEC. We agree that SDCL 15-6-55(c) and 15-6-60(b) support Mrs. Wells' contention that the default judgment should be set aside. SDCL 15-6-55(c) states: ¹

For good cause shown the court may set aside...