Fid. v. Bondwriter Sw. Inc.

• Decision Date: 28 July 2011
• Docket Number: No. 1 CA–CV 09–0612.,1 CA–CV 09–0612.
• Parties: FIDELITY AND DEPOSIT COMPANY OF MARYLAND, Plaintiff/Appellant/Cross–Appellee,v.BONDWRITER SOUTHWEST, INC.; David G. Sparks; Jane Sparks; Katherine Stanton, Defendants/Third Party Plaintiffs/Appellees/Cross–Appellants.
• Court: Arizona Court of Appeals

228 Ariz. 84

263 P.3d 633

613 Ariz. Adv. Rep. 9

FIDELITY AND DEPOSIT COMPANY OF MARYLAND, Plaintiff/Appellant/Cross–Appellee,

v.BONDWRITER SOUTHWEST, INC.; David G. Sparks; Jane Sparks; Katherine Stanton, Defendants/Third Party Plaintiffs/Appellees/Cross–Appellants.

No. 1 CA–CV 09–0612.

Court of Appeals of Arizona, Division 1, Department B.

July 28, 2011.

Lewis Brisbois Bisgaard & Smith LLP by Karen L. Karr, Dominique Barrett, Phoenix, Attorneys for Plaintiff/Appellant/Cross–Appellee.Curtis Ensign, P.L.L.C. by Curtis Ensign, Phoenix, Attorneys for Defendant/Appellee/Cross–Appellant.

OPINION

GEMMILL, Judge.

¶ 1 Fidelity and Deposit Company of Maryland (“Fidelity”) sued Bondwriter Southwest, Inc., David Sparks, and Katherine Stanton (collectively “Bondwriter”) for breach of contract and negligence. After a three-day bench trial, the court ruled in Fidelity's favor on both claims and found Fidelity sustained damages in excess of $511,000. The court also concluded that Bondwriter was only five percent at fault and awarded Fidelity judgment against Bondwriter for $25,533.04. Fidelity appeals the court's judgment, arguing that the trial court erred by apportioning its contract damages based upon fault. Bondwriter cross appeals, raising several issues involving the court's rulings on the underlying claims.

¶ 2 We conclude that comparative fault principles are not applicable to Fidelity's breach of contract claim against Bondwriter. We affirm in part, vacate in part, and remand for a redetermination of the attorneys' fees award, for entry of a revised judgment in favor of Fidelity, and for any other appropriate proceedings consistent with this opinion.

FACTS AND PROCEDURAL HISTORY

¶ 3 Fidelity and Bondwriter are corporations authorized to conduct surety business in Arizona. David Sparks is the president and CEO of Bondwriter. Katherine Stanton is an employee and agent of Bondwriter.

¶ 4 In 2000, Fidelity and Bondwriter entered into an agency agreement. The agreement authorized Bondwriter to solicit applications for surety bonds on behalf of Fidelity and also to collect premiums for those bonds. The agreement limited Bondwriter's authority to act on behalf of Fidelity. Specifically, the agreement provided the following:

LIMITATION OF AUTHORITY OF AGENT

EIGHTEENTH Nothing herein contained shall be considered or construed as authorizing Agent or any of its employees or subagents to represent the Company for any lines or types of bonds or policies except those which are specifically authorized by Company to Agent, its employees, and/or sub-agents, through any Specific Authorization incorporated herein. Agent shall be responsible for all acts of its employees, and/or sub-agents. Agent shall indemnify and save Company harmless from all costs, causes of action, and damages suffered by Company resulting from unauthorized acts or transactions by Agent, its employees, and/or sub-agents, but only to the extent the Agent would have been liable to the Company by statute or common law for those costs, causes of action, and damages.

NINETEENTH The authority of Agent shall extend no further than is expressly stated in this Agreement and attachments hereto. Agent shall not make, alter, or discharge contracts for Company or waive forfeitures or proofs of loss, grant permits, quote extra rates for special risks, extend the time for payment of premiums, attempt to commit Company to the payment of any claim, or bind Company in any way not specifically authorized. Agent shall not make oral or written representations to insured which would attempt to modify the terms or conditions of any bond or policy.

Attached to the agency agreement was a document entitled Power of Attorney Instructions and Discretionary Authority (“power of attorney agreement”). In the power of attorney agreement, Fidelity gave Sparks and Stanton power of attorney, and Sparks and Stanton agreed to submit all bond requests to Fidelity “for approval and specific authority obtained before the bond is executed or a commitment is given.”

¶ 5 In July 2004, Bondwriter requested authority to issue performance and payment bonds to Adaptive CM. (“Adaptive”), a general contractor and construction management company owned by Paul and Tina Nelson. According to trial testimony, a performance bond is usually issued with a contract and guarantees that the contract will be performed. A payment bond is usually issued in conjunction with a performance bond and guarantees payment of any subcontractors or supplies.

¶ 6 Adaptive needed the bonds for two separate construction projects. One project was for the City of Flagstaff (“Flagstaff Project”) and the requested bond amount for that project was $2,379,724. The other project was for Arizona State University (“ASU Project”), for which the bond amount was $784,774. Fidelity informed Sparks that it approved the bond request for the ASU Project but had not approved the request for the Flagstaff Project because Fidelity needed additional financial information from Adaptive.

¶ 7 On July 19, 2004, Sparks e-mailed Adaptive that Bondwriter had received approval for the ASU Project and that the bonds for that project would be delivered the next morning. Sparks said Fidelity had deferred approval on the Flagstaff Project bonds until it received further financial information from Adaptive.

¶ 8 The next day, Sparks asked Stanton to issue the bonds for Adaptive. Stanton mistakenly believed Sparks' request related to the Flagstaff Project and she issued payment and performance bonds to Adaptive for the Flagstaff Project in the amount of $2,379,724. That same day, Sparks delivered the Flagstaff Project bonds to Adaptive's receptionist. Unfortunately, in a departure from his usual practice, Sparks did not review the bonds before he dropped them off.

¶ 9 A few hours later, Sparks and Stanton discovered that they (i.e., Bondwriter) had issued the wrong bonds. Stanton immediately contacted both Fidelity and Adaptive and advised them of the error and told them Sparks was returning to Adaptive's office to retrieve the bonds. An employee of Adaptive replied that the bonds were still at the front desk. When Sparks arrived, however, he was told that the bonds were locked in Paul Nelson's office and could not be retrieved. Sparks returned to Adaptive's office the next day and was able to retrieve the original bonds at that time. Stanton called Fidelity and advised that Sparks had retrieved the Flagstaff Project bonds from Adaptive. No one affiliated with Fidelity or Bondwriter contacted Flagstaff to advise it of the error.

¶ 10 Only later was it revealed that before Bondwriter was able to retrieve the Flagstaff Project bonds from Adaptive, Paul Nelson signed the bonds and had them photocopied. Shortly thereafter, Adaptive delivered the copies to Flagstaff. Even though the City's procedures required contractors to provide original bonds, the City accepted the bonds without examining them to determine whether they were originals or copies.

¶ 11 On July 26, 2004, Flagstaff sent Adaptive a notice to proceed on the Flagstaff Project. Unbeknownst to Fidelity or Bondwriter, Adaptive began work on the Flagstaff Project the next day. The following month, Fidelity informed Bondwriter and Adaptive that it was not going to issue bonds for the Flagstaff Project. Adaptive never told Bondwriter or Fidelity that it had copied the original bonds and delivered them to Flagstaff to secure its construction contract.

¶ 12 In 2005, after Adaptive was unable to complete the Flagstaff Project, Fidelity received claims on the bonds from Flagstaff and the project's subcontractors. Fidelity investigated and learned that the City possessed only copies of the bonds and considered whether the copied bonds would be binding on Fidelity. Fidelity's attorneys conferred with outside counsel to evaluate Fidelity's liability on the bonds and ultimately decided to honor the bonds because it concluded it was legally obligated to do so. Fidelity paid a total of $875,735 in claims and expenses to finish the project and received $364,674 in payments from Flagstaff.

¶ 13 In January 2006, Fidelity filed a complaint against Bondwriter alleging breach of contract and negligence. Fidelity alleged that Bondwriter breached its contracts with Fidelity by issuing and delivering the Flagstaff Project bonds to Adaptive without authorization from Fidelity. Fidelity also alleged that Bondwriter was negligent in issuing the bonds without authority.

¶ 14 Bondwriter filed a notice identifying Flagstaff and Adaptive as non-parties at fault and also filed a third-party complaint against Adaptive and Paul and Tina Nelson, alleging negligence, negligent misrepresentation, common law fraud, and common law indemnity.

¶ 15 Fidelity moved for partial summary judgment on its breach of contract claim. The court denied the motion but ordered the parties to brief whether Arizona Revised Statutes (“A.R.S.”) § 34–222 (2011) ¹ required Flagstaff to have the original bonds before it could make a valid claim on them. The court subsequently ruled the bonds were not valid:

The Court finds that pursuant to A.R.S. § 34–222 the original bond was not delivered to the City of Flagstaff and therefore was an invalid bond. The Court further relies on Larson v. National Surety Co., 171 Minn. 455, 214 N.W. 507 (1927), as persuasive authority in support of this ruling.

¶ 16 Relying on that ruling, Bondwriter filed its own motion for summary judgment. Bondwriter argued that because the bonds were not validly delivered to Flagstaff, Bondwriter did not “execute” the bonds and therefore did not breach the agency agreement. In addition, Bondwriter asserted that it did not breach its duty to Fidelity by executing a bond without proper authority. The court denied Bondwriter's motion.

¶ 17 The matter proceeded to a three-day bench trial, after which the court found in favor of Fidelity on both breach of contract and negligence. The...