Flood Control Dist. of Maricopa Cnty. v. Paloma Inv. Ltd. P'ship

• Decision Date: 31 May 2012
• Docket Number: No. 1 CA–CV 10–0106.,1 CA–CV 10–0106.
• Citation: 635 Ariz. Adv. Rep. 4,279 P.3d 1191,230 Ariz. 29
• Parties: FLOOD CONTROL DISTRICT OF MARICOPA COUNTY, Plaintiff/Counterclaimant/Appellant/Cross–Appellee, v. PALOMA INVESTMENT LIMITED PARTNERSHIP, a limited partnership; Prudential Insurance Company of America, a New Jersey corporation; Paloma Ranch Joint Venture, a joint venture; Hartford Fire Insurance Company; Gillespie Dam Investments, L.L.C., a limited liability company; Charter, L.L.C., a limited liability Company, Defendants/Counterdefendants/Appellees/Cross–Appellants.
• Court: Arizona Court of Appeals

230 Ariz. 29

279 P.3d 1191

635 Ariz. Adv. Rep. 4

FLOOD CONTROL DISTRICT OF MARICOPA COUNTY, Plaintiff/Counterclaimant/Appellant/Cross–Appellee,

v.PALOMA INVESTMENT LIMITED PARTNERSHIP, a limited partnership; Prudential Insurance Company of America, a New Jersey corporation; Paloma Ranch Joint Venture, a joint venture; Hartford Fire Insurance Company; Gillespie Dam Investments, L.L.C., a limited liability company; Charter, L.L.C., a limited liability Company, Defendants/Counterdefendants/Appellees/Cross–Appellants.

No. 1 CA–CV 10–0106.

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

May 31, 2012.

Swenson, Storer, Andrews, & Frazelle, P.C. By Michael J. Frazelle, Phoenix, Helm & Kyle By John D. Helm, Roberta S. Livesay, and Jeffrey L. Hyrcko, Tempe, Attorneys for Appellant/Cross–Appellee/Plaintiff/Counter–Defendant.

Mersch, Clark, & Rothschild, P.C. By J. Emery Barker & Scott H. Gann, Tucson, Haralson, Miller, Pitt, Feldman & McNally, LLC By Stanley G. Feldman, Thomas G. Cotter, & Rebecca A. Reed, Tucson, Attorneys for Appellees/Cross–Appellants.

OPINION

KESSLER, Judge.

¶ 1 This appeal relates to the obligation of the Flood Control District of Maricopa County (“District”) to indemnify owners of the Gillespie Dam (“Dam Owners”) for a settlement the Dam Owners entered into with farmers injured by a 1993 breach of the Dam (“Farmers”). We hold, inter alia, that: (1) An agreement by which the District agreed to indemnify the Dam Owners against “all liability” covers all liability, including liability subject to a covenant not to execute between the Dam Owners and the Farmers; (2) The Dam Owners' indemnity claim was not barred by Arizona's notice of claim statute or the statute of limitations; (3) Pursuant to Arizona Rule of Civil Procedure 68, the superior court correctly declined to award expert witness fees as a sanction when the claimant offered no evidence that the fees had a rational nexus to the presentation of evidence at trial; (4) Rule 68 does not require apportionment of sanctions among parties, but a trial judge has discretion to allocate such sanctions among the parties; and (5) The superior court erred in denying the Dam Owners prejudgment interest on the settlement amount with the Farmers but did not err in denying the Dam Owners' claims for prejudgment interest on their request for attorneys' fees. Accordingly, we affirm the judgment in all respects except we reverse and remand to the superior court to consider allocation of Rule 68 sanctions and to determine the amount of prejudgment interest on the Farmers' settlement amount, accruing as of the date of the judgment approving the Farmers' settlement with the Dam Owners.

FACTUAL AND PROCEDURAL HISTORY

¶ 2 In the early 1980s, the District undertook a flood control project in the floodplain of the Gila River from 91st Avenue to the Gillespie Dam, approximately thirty-six miles. Part of the project involved clearing sections of the river bed owned by the Dam Owners immediately upstream from the Dam. The District did not have sufficient funds for the project so it requested free easements from owners of land within the clearing zone. The Dam Owners granted the District an easement over 26.8 acres of that land, in exchange for the District's agreement to construct and maintain the flood control measures and to indemnify the Dam Owners, as described infra. In 1991, the District purchased the entire 26.8 acre plot.

¶ 3 In 1993, the Gila River flooded and the Gillespie Dam breached, causing extensive downstream flood damage to the Farmers' properties. The Farmers filed a complaint for damages against the Dam Owners and the District. ¹ In 1997, the District filed a complaint seeking a declaratory judgment that the indemnity clause in the easement agreement did not apply to the claims the Farmers brought against the Dam Owners. The Dam Owners filed a counterclaim seeking compensation pursuant to the indemnity agreement and damages based on a separate allegation that the District caused the breach of the Gillespie Dam.²

¶ 4 The District's declaratory judgment case was consolidated for trial with the Farmers' suit against the Dam Owners and the District. The jury found that the District did not cause the Dam to fail, but that it was ten percent at fault for the damage to the Farmers caused by the Dam's breach.³It found the Dam Owners were eighty percent at fault for the Farmers' damages on the theory that the Dam Owners negligently maintained the dam.

¶ 5 After the liability finding but before the jury decided damages, the Dam Owners and the Farmers settled the dispute between them with a Damron/ Morris agreement. United Servs. Auto. Ass'n v. Morris, 154 Ariz. 113, 741 P.2d 246 (1987); Damron v. Sledge, 105 Ariz. 151, 460 P.2d 997 (1969). The Dam Owners agreed to pay $3.3 million to the Farmers, consented to a $14.75 million judgment, and agreed to either assign their indemnity claims against the District to the Farmers if the Farmers so requested or to permit the Farmers to assert their claim against the District by joining in the Dam Owners' indemnity action. In exchange, the Farmers agreed not to execute on the judgment against the Dam Owners beyond the $3.3 million.

¶ 6 While approval of that settlement was pending, trial was held on the damages the flood caused the Farmers. The jury awarded the Farmers $5.36 million, of which $536,000 was assessed against the District based on the earlier allocation of fault.

¶ 7 The superior court then determined that the settlement the Dam Owners had negotiated with the Farmers was reasonable and entered judgment consistent with the settlement. We affirmed the reasonableness of the settlement between the District and the Farmers, but declined to decide whether all of the damages awarded in that stipulated judgment were within the scope of the indemnification agreement. Rather, we left the scope of the indemnity agreement to be determined in the remaining portion of the declaratory judgment action. A Tumbling–T Ranches v. Flood Control Dist. of Maricopa Cnty. (A Tumbling–T III), 220 Ariz. 202, 208, 213, ¶¶ 15, 17, 29, 32, 42, 204 P.3d 1051, 1057, 1062 (App.2008).⁴

¶ 8 The litigation then entered what appears to be its final stage—the declaratory judgment claim between the Dam Owners and the District on the scope of the indemnity agreement, the Dam Owners' counterclaims against the District and related matters. After hearing testimony and receiving exhibits, the superior court earlier had determined that the indemnity agreement covers liability for all damages arising out of the flood, except for damages caused by intentional acts or omissions by the Dam Owners. After the jury's verdicts on liability and damages, the superior court then held that the indemnity agreement obligated the District to indemnify the Dam Owners for $14.75 million, the full amount of the stipulated judgment, despite the fact that the jury had decided the Farmers' damage was only $5.36 million. Finally, the superior court awarded attorneys' fees to the Dam Owners for their defense of the underlying litigation and Rule 68 sanctions in favor of the District and against certain Dam Owners (not parties to the indemnity agreement) who failed to recover against the District. The District filed a timely notice of appeal and the Dam Owners filed a timely notice of cross appeal. This Court has jurisdiction pursuant to Article 6, Section 9, of the Arizona Constitution and Arizona Revised Statutes (“A.R.S.”) section 12–2101(A)(1) (Supp. 2011).

ANALYSIS

¶ 9 On appeal the District argues that: (1) The indemnity agreement does not cover the damages to the Farmers resulting from the breach of the Dam, does not apply to losses beyond that paid by the Dam Owners to the Farmers as part of the settlement (“phantom damages”), and only applies to damages caused by the District's acts within the easement prior to its purchase of the easement in 1991; (2) The Dam Owners may not enforce the Indemnity Agreement because they failed to comply with Arizona's notice of claim statute and the indemnity claim is time-barred; (3) The superior court erroneously denied part of its claim for expert witness fees pursuant to Rule 68(g); and (4) The superior court erroneously failed to apply the Rule 68(g) sanction to PWUA.

¶ 10 On their cross appeal, the Dam Owners argue that the superior court erroneously: (1) Denied their claim for pre-judgment interest; (2) Denied a request for additional attorneys' fees based on a contingent fee agreement between one of the Dam Owners and counsel; and (3) Failed to apportion expert witness fees among the parties required to pay them.

I. The superior court correctly concluded that the indemnity agreement applies to all liability arising from the District's use of the easement.A. The superior court correctly determined that the indemnity covers all liability.

¶ 11 We now address the issue left unanswered in A Tumbling–T III, 220 Ariz. at 209, 211, ¶¶ 23, 29, 204 P.3d at 1058, 1060: Whether the indemnity agreement between the District and the Dam Owners applies to the entire liability to which the Dam Owners stipulated in the settlement with the Farmers, including the $11.45 million the Dam Owners will not have to pay pursuant to the covenant not to execute. In other words, is the District liable for the difference between the $14.75 million stipulated judgment and the $3.3 million the Dam Owners have to pay the Farmers? Based on this record and the language of the easement and indemnity agreement, we affirm the superior court's ruling that the indemnity agreement covers all liability of the Dam Owners related to the dam failure, including the amount subject to the covenant not to execute.

¶ 12 As we explained in A Tumbling–T III, 220 Ariz. at 209–10, ¶¶ 23, 26–28, 204 P.3d at 1058–59, the language of the indemnity agreement determines the extent of the indemnitor's liability to the indemnitee and in the insurance context, an...