Hartford v. Tanner, 72511

• Decision Date: 09 February 1996
• Docket Number: No. 72511,72511
• Parties: The HARTFORD, Appellant, v. Donald F. TANNER, Appellee.
• Court: Kansas Court of Appeals

Page 872

910 P.2d 872

22 Kan.App.2d 64

The HARTFORD, Appellant, v. Donald F. TANNER, Appellee.

No. 72511.

Court of Appeals of Kansas.

Feb. 9, 1996.

Review Denied April 11, 1996.

Syllabus by the Court

1. A surety is one who binds himself or herself for the payment of a sum of money, or for the performance of something else, for another who is already bound for such payment or performance.

2. The construction of a written instrument is a question of law.

3. Parties who are mentally competent may contract on their own terms unless the contract is illegal, contrary to public policy, or obtained by fraud, mistake, overreaching, or duress.

4. An exception to the freedom of contract principle exists when a contract is so one-sided that it is found to be unconscionable.

5. A duty of good faith and fair dealing is implied in all contracts.

6. A surety seeking to enforce an indemnity agreement has an implied obligation of good faith.

7. The implied covenant of good faith requires a surety seeking indemnification to show that its conduct was reasonable.

8. Conclusive or prima facie evidence clauses in surety agreements are contrary to public policy.

9. Parties to an indemnity agreement which subjects the right to compromise a claim against the principal or indemnitor to the sole discretion of the surety may expect that compromise and payment will be made only after reasonable investigation of the claims, counterclaims, and defenses in the underlying action.

10. Substantial evidence is evidence which possesses both relevance and substance and which furnishes a substantial basis of fact from which the issues can reasonably be resolved.

11. The party seeking recovery has the responsibility to present evidence to support its prayer.

12. The appellate court may not consider a litigant's contention of inadequate findings of fact and conclusions of law when the litigant did not make an objection to the trial court.

Appeal from Johnson District Court; Gerald T. Elliott, Judge.

James E. Switzer and Scott C. Long, of Payne & Jones, Chartered, Overland Park, for appellant.

Lawrence L. Ferree, III, and G. Peter Bunn, III, of Ferree, Bunn & O'Grady, Chtd., Overland Park, for appellee.

Before GERNON, P.J., MARQUARDT, J., and JAMES W. PADDOCK, District Judge Retired, Assigned.

MARQUARDT, Judge:

The Hartford (Hartford) seeks indemnification, as a surety, from Donald F. Tanner on two bond contracts Tanner signed as an indemnitor. After a trial to the district court, the district court ruled that Hartford's payments on the bonds were not reasonable and, therefore, Hartford was not entitled to indemnification from Tanner. Hartford appeals both the use of the "reasonableness" legal standard and the application of that standard.

Tanner and Ronald Brock were partners who imported "gray market" motor vehicles that required conversion to bring them into compliance with standards set by the Environmental Protection Agency (EPA) (19 C.F.R. § 12.73 [1995] ) and the Department of Transportation (DOT) (19 C.F.R. § 12.80 [1995]; see 19 C.F.R. § 113.11 [1995] ). Federal regulations require that importers obtain a surety bond from the United States Customs Service (Customs) to ensure that the conversions are made.

To obtain a Customs bond from Hartford, an applicant must sign Hartford's printed application form. Brock and Tanner signed such forms for the issuance of three bonds. Hartford then issued bond No. 4474858 on October 20, 1981, for $68,000, bond No. 4474859 on November 2, 1981, for $27,000, and bond No. 4474873 on November 10, 1981, for $7,000.

Hartford asserts that the obligations of the parties are controlled by their printed application form and that Hartford's good faith should be controlled by the language of the form only. The form contains broad indemnity provisions in Hartford's favor. It states, inter alia:

"SECOND: That the undersigned [principal and indemnitor] will at all times indemnify and keep indemnified the Surety, and hold and save it harmless from and against any and all liability for damages, loss, costs, charges and expenses of whatsoever kind or nature (including counsel and attorney's fees) which the Surety shall or may, at any time sustain or incur by reason or in consequence of having executed the bond or other instrument herein applied for, or any and all other bonds or other instruments executed for or at the instance and request of the undersigned and will pay over, reimburse, and make good to the Surety, its successors, and assigns, all sums and amounts of money which the Surety, or its representatives shall pay, or cause to be paid, or become liable to pay, by reason of the execution of any such instruments, or in connection with any litigation, investigation, or other matters connected therewith, such payment to be made to the Surety as soon as it shall have become liable therefore, whether Surety shall have paid out such sum, or any part thereof, or not. That in any accounting which may be had between the undersigned and the Surety, the Surety shall be entitled to credit for any and all disbursements in and about the matters herein contemplated, made by it in good faith under the belief that it is or was liable for the amounts so disbursed, or that it was necessary or expedient to make such disbursements, whether such liability, necessity, or expediency existed or not.

....

"ELEVENTH: That the Surety shall have the exclusive right for itself, and for the principal on or in said bond or other instrument, to decide and determine whether any claim, demand, liability, suit, action, judgment or adjudication, made, brought, or entered against the Surety or principal on or in said bond or other instrument, or both, whether jointly or severally, or jointly and severally, shall, or shall not, be defended, tried, appealed, or settled, and its decision shall be final, conclusive and binding upon the undersigned."

Brock imported four Mercedes-Benz automobiles. Tanner paid Exclusively Mercedes (Peter Scarpias) to bring these vehicles into compliance with federal regulations. There is no evidence that the conversion work was completed; however, Scarpias led Tanner to believe that all of the conversion work had been completed and that the documentation to prove his work had been submitted to both the EPA and DOT. No documentation on the completed work was ever sent to Tanner or Customs.

In December 1981, the vehicles were delivered to a used car dealership, Mercedes Unlimited. The owners of Mercedes Unlimited stole the vehicles, were subsequently charged with theft, and pled guilty on June 8, 1983.

Customs demanded payment of $6,511.11 on bond No. 4474873, and on May 2, 1984, Hartford paid Customs' demand.

Various notices of "penalty or liquidated damages" and letters were sent to Brock and Hartford over a period of 4 years on bond No. 4474858. Two of the letters stated:

"As surety, you are entitled to the same relief which would have been afforded the principal. Further relief will be granted upon receipt of proof that the vehicle was modified to conform to EPA and/or DOT standards and was not sold prior to this release by those agencies."

The two notices stated:

"If you feel there are extenuating circumstances, you have the right to object to the above action. Your petition should explain why you should not be penalized for the cited violation. Write the petition as a letter or in legal form; submit in (triplicate); addressed to the Commissioner of Customs, and forward to the District Director of Customs at 300 S. Ferry St., Terminal Island, Ca. 90731 Attn: F, P & F. (213) 548-2448. Unless the amount herein demanded is paid or a petition for relief is filed with the District Director of Customs within 60 days from the date hereof, further action will be taken in connection with your bond or the matter will be referred to the United States Attorney."

Jeffrey Hodges, Hartford's attorney, acknowledged that Hartford had received notices from Customs on bond No. 4474858. Hodges testified that these notices are routinely sent by Customs but he would not take any action unless there were "large amounts being demanded, or numerous ones coming in. Really depends on the situation."

The first contact Hodges had with Tanner was around November 8, 1983. In a telephone conversation, Tanner informed Hodges that five of the vehicles had been stolen and that the thieves had been convicted. Tanner's attorney, John Skoog, wrote Customs a letter on October 22, 1984, protesting its $58,365 claim. A copy of this letter was sent to Brock and Hartford.

Skoog testified that after February 10, 1986, he had a phone conversation with Hodges. Skoog told Hodges that the "notices are generated automatically by the Customs Department as long as a protest is on file. There's no effect, they don't need to be honored." Skoog further informed Hodges that adjudication of the $58,365 claim was on hold and they would not have an answer on the claim for about 18 months.

Hodges never indicated to Skoog or Tanner that Hartford intended to pay either of the liquidated damage assessments.

On April 15, 1986, Hartford received one of many demands from Customs for payment of the $58,365. On April 16, 1986, Hartford, without any further contact with Skoog or Tanner or any further investigation, paid the $58,365.

Susan Kohn Ross, an attorney specializing in customs, testified that Skoog's letter was sufficient to start the mitigation procedure with Customs. Ross also testified that because of the backlog of about 9,000 cases at Customs at that time, cases were routinely mitigated for cents on the dollar.

About the same time as the two bonds in question in this case were being disputed, Customs made a demand on Hartford for payment on a $27,000 bond on which Tanner was indemnitor. Hartford petitioned Customs for release from its obligation on this bond. Hartford was never required to pay anything on this bond.

On ...