Fischer Construction Co. v. Fireman's Fund Insurance Co.

• Decision Date: 19 December 1969
• Docket Number: 10139.,No. 10138,10138
• Parties: FISCHER CONSTRUCTION COMPANY, Appellants, v. FIREMAN'S FUND INSURANCE COMPANY, Appellees. FIREMAN'S FUND INSURANCE COMPANY, Appellants, v. FISCHER CONSTRUCTION COMPANY, Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

420 F.2d 271 (1969)

FISCHER CONSTRUCTION COMPANY, Appellants, v. FIREMAN'S FUND INSURANCE COMPANY, Appellees.

FIREMAN'S FUND INSURANCE COMPANY, Appellants, v. FISCHER CONSTRUCTION COMPANY, Appellees.

Nos. 10138, 10139.

United States Court of Appeals Tenth Circuit.

December 19, 1969.

COPYRIGHT MATERIAL OMITTED

Ted Pool, Del City, Okl. (John L. Garrett, Garrett, Pool & Smith, Del City, Okl., with him on the brief), for appellant Fischer Construction Co.

Byrne A. Bowman, Felix, Bowman, McIntyre & McDivitt, Oklahoma City, Okl., for appellees Fireman's Fund Insurance Co.

Before MURRAH, Chief Judge, and PICKETT and LEWIS, Circuit Judges.

MURRAH, Chief Judge.

This appeal is from a judgment against Fischer Construction Co., a partnership, as principal on payment and performance bonds, indemnifying Fireman's Fund for losses incurred after take-over and completion of the Fischers' bonded contracts with the Oklahoma Highway Department. A statement of the basic facts will put the case in perspective and elucidate the trial court's judgment and our modification of that part of the judgment based on the jury verdict.

The Fischers successfully bid on approximately $1,600,000 of highway contracts with the state of Oklahoma and Fireman's agreed to provide the statutorily-required performance and payment bonds for these jobs, subject to conditions expressed in a letter agreement. In this letter the Fischers agreed to set up a separate "special" bank account of $200,000, to deposit in that account all funds received in payment on these contracts, and to use that account exclusively for payment of contract expenses. The letter also required a Subordination Agreement by T. R. Benedum, to which a duplicate deposit slip in the amount of $200,000 was to be attached. The Fischers obtained a short-term loan of $200,000 and deposited it in a special account, submitting the deposit slip to Fireman's. The bonds were then issued. Five days after deposit the Fischers repaid the loan from the same account.

Eleven months after the contracts were let Fireman's began to receive complaints from the Fischers' creditors and sent a representative to look at their books. He discovered approximately $320,000 in outstanding bills on the contracts. The absence of the $200,000 from the special account was discovered at about the same time and the report of the later-appointed receiver shows that substantially all of the Fischers' construction equipment was encumbered at this time. On the basis of the information discovered Fireman's ordered the state of Oklahoma to stop paying the Fischers on the contracts. Fireman's representatives conferred with the Fischers a week later and gathered more data from their books. Two days after that conference Raymond Fischer signed a statement of default on the contracts for Fireman's attorney. A week later Fireman's retained an out-of-state contractor to estimate the cost of completing the work and informed the Fischers that they would not be allowed to complete the contracts. On the same day, in their own attorney's office, Fischers signed letters admitting default, copies of which were sent to the Highway Department and the prime contractor. Fireman's then negotiated two contracts for the completion of the work and paid all unpaid bills, suffering a loss of $555,928.97.¹

A few months later Fireman's filed their complaint seeking appointment of a receiver for the Fischers and indemnification under its indemnity agreement with the Fischers.² A receiver was appointed without objection. In its motion for summary judgment on its claim, Fireman's specifically alleged facts which it said constituted fraudulent inducement to become surety and sought judgment for the loss incurred in the completion of the work, either as a loss resulting from these fraudulent acts or as a loss reimbursible under its indemnity agreement with Fischers.³

At the hearing on the motion Fischers' counsel conceded that Fireman's was entitled to the judgment on the basis of the indemnity agreement because of Fischers' default on their contracts, but refused to concede that Fischers had fraudulently secured the bonds.⁴ The court declined summary judgment on either theory to afford the Fischers an opportunity to answer Fireman's fraud allegations.

The Fischers then answered and counterclaimed. Contrary to the admissions at the summary judgment hearing, the answer denied default. It also denied fraud and asserted that Fireman's had spent excessive amounts in completing the work. The counterclaim alleged two separate torts by Fireman's and sought actual and punitive damages for both. The first tort asserted was that the Fischers' insolvency resulted from Fireman's negligent investigation and wrongful interference with the contract payments. The second tort alleged was that subsequent to its stopping of the contract payments Fireman's agreed to release the payments and to finance the Fischers if they would admit insolvency, that the Fischers issued payroll checks in reliance on that agreement, and that Fireman's then breached the agreement. This breach allegedly injured the Fischers by bringing on their insolvency and angering employees who, upon receiving the "bouncing" paychecks, destroyed some of the Fischers' construction equipment.

The trial court first dismissed the counterclaim and then, by a nunc pro tunc order treated the dismissal as a summary judgment for Fireman's. In its nunc pro tunc judgment the court found that Fischers were insolvent and unable to pay their bills when the contract payments were stopped and that Fireman's had a right to stop the payments, take possession of the premises and complete the work. The dismissal and summary judgment were held to be non-appealable orders in two prior attempted appeals by the Fischers. The summary judgment is now appropriately here for review.

Although the subsequent pretrial order included among defendant's contentions both torts of the counterclaim, the summary judgment was undoubtedly intended to remove the issue of wrongful stoppage of payments from the trial, leaving only the second part of the counterclaim, i. e., breach of an agreement to release funds. On trial the court accordingly refused to admit the Fischers' proof of non-default because of their admissions, but did allow evidence on the alleged agreement to release payments and finance the Fischers. At the close of the Fischers' evidence, however, the court directed a verdict on the counterclaim, thus taking from the jury the second tort alleged in the counterclaim.

Consistently with the summary judgment on the stoppage of payments issue and the directed verdict on the agreement to release payments issue, the court instructed the jury, without objection, that the Fischers were insolvent as a matter of law at the time in question and had admitted Fireman's right to finish the work. The effect of these instructions was to establish as a matter of law the Fischers' liability to Fireman's under its indemnity agreement, leaving to the jury only the questions of the Fischers' alleged fraud as an alternative basis of recovery and the reasonableness of completion costs in the calculation of Fireman's loss under either theory.

The jury was told that Fireman's claimed it had been induced to become surety on the bonds by the Fischers' fraudulent representations and that the Fischers denied they had committed fraud. The jury was conventionally instructed on fraud as a basis of recovery. The court even went so far as to comment on the evidence as it related to the fraud issue, but finally cautioned the jury to disregard the comment. The jury returned a verdict of $200,000 for Fireman's, apparently on the indemnity agreement, and specifically exonerated the Fischers on the fraud issue.

The Fischers' appeal challenges the summary judgment and directed verdict on the counterclaim and the denial of a motion for new trial. Fireman's cross-appeal asserts as error the trial court's denial of judgment n. o. v. on the fraud theory and the denial of judgment n. o. v. for the full amount of its loss under either theory. We must thus determine whether the summary judgment and the directed verdict correctly disposed of the counterclaim, whether Fireman's completion costs were reasonable, and whether Fireman's was entitled, as a matter of law, to a finding that Fischers had committed fraud. We note, initially, that if we were to adopt the admission of default and liability under the indemnity agreement made by the Fischers' attorney at the summary judgment hearing there would be no question concerning the propriety of the summary judgment and directed verdict. We will, however, consider the propriety of these rulings in light of all the relevant facts.

While different rules have been promulgated to explicate directed verdicts and summary judgments, in the final analysis they both turn on whether any genuine issue of fact survives the pleadings and depositions or evidence, requiring fact-findings. Thus, we have often said summary judgment is justified only if no material issue of fact survives the pleadings, affidavits and depositional proof. Well Surveys, Inc. v. Perfo-Log, Inc., 396 F.2d 15 (10th Cir. 1968); H. B. Zachry Co. v. O'Brien, 378 F.2d 423 (10th Cir. 1967); McCullough Tool Co. v. Well Surveys, Inc., 395 F.2d 230 (10th Cir. 1968); Jensen v. Voyles, 393 F.2d 131 (10th Cir. 1968); Bumgarner v. Joe Brown Co., 376 F.2d 749 (10th Cir. 1967); Wagoner v. Mountain Savings & Loan Association, 311 F.2d 403 (10th Cir. 1962). The prevailing rule on directed verdicts, at least in this Circuit, seems to be that a directed verdict is justified only if the proof is all one way or so overwhelmingly preponderant in favor of the movant as to permit no other rational conclusion. Weeks v. Latter-Day Saints Hospital, 418 F.2d 1035 (10th Cir. 1969); Derr v. Safeway Stores, Inc., 404 F.2d 634 (10th Cir. 1968); Gulf Insurance Co. v. Kolob Corp., 404...