Safeco Ins. Co. of America v. Schwab
| Decision Date | 31 July 1984 |
| Docket Number | Nos. 83-5980,83-6232,s. 83-5980 |
| Citation | 739 F.2d 431 |
| Parties | SAFECO INSURANCE COMPANY OF AMERICA, Plaintiff-Appellant, v. Joseph C. SCHWAB, et al., Defendants-Appellees. |
| Court | U.S. Court of Appeals — Ninth Circuit |
James S. Wiederschall, Booth, Mitchell, Strange & Smith, Los Angeles, Cal., for plaintiff-appellant.
David M. Stern, Stern & Miller, Santa Monica, Cal., for defendants-appellees.
Appeal from the United States District Court for the Central District of California.
Before CHOY, NELSON and CANBY, Circuit Judges.
Safeco Insurance Company brought a diversity action against Joseph, Ronald, and Patti Schwab requesting specific performance of what Safeco alleged to be a collateral security clause in an indemnity contract. The district court dismissed Safeco's complaint under Fed.R.Civ.P. 12(b)(6) because the court regarded the disputed clause as affording Safeco only a right to recover after suffering loss. We reverse and remand.
The Royal Himmel Distilling Company wished to operate a distillery in the United States. It was required to provide the federal government with a bond for $1,250,000 to protect against any default in taxes. See 27 C.F.R. Sec. 19.231 (1983). Safeco issued the bond for Royal Himmel. To protect itself from loss, Safeco executed an indemnity agreement with the Schwabs on January 4, 1982. The second paragraph of the agreement provided that the Schwabs will pay Safeco upon demand:
An amount sufficient to discharge any claim made against Surety [Safeco] on any Bond. This sum may be used by Surety to pay such claim or be held by Surety as collateral security against any loss on any Bond.
On November 16, 1982, the United States demanded payment on Safeco's bond. Safeco then requested that the Schwabs provide Safeco with collateral security of $1,250,000, the amount of the bond. Safeco intended to hold the $1,250,000 as protection against future loss stemming from the government's claim; if the loss did not materialize, Safeco intended to return the funds to the Schwabs. When the Schwabs refused to post the collateral security, Safeco sued in district court for specific performance of paragraph 2 of the indemnity contract.
The district court did not regard paragraph 2 as providing for collateral security. Instead, it read paragraph 2 as providing for indemnity once a "claim" is made on the bond. The district court applied Cal.Civ.Code Sec. 2778(2) (West 1974), which provides that unless a contrary intention appears, "[u]pon an indemnity against claims ... the person indemnified is not entitled to recover without payment thereof." Because Safeco had yet to pay the amount demanded, the district court held that Safeco's suit under paragraph 2 of the indemnity contract failed to state a claim upon which relief could be granted.
Safeco now appeals, arguing that the district court gave a "clearly wrong" interpretation to the indemnity contract. 1
A collateral security provision provides that once a surety such as Safeco receives a demand on its bond, the indemnitor must provide the surety with funds which the surety is to hold in reserve. If the claim on the bond must be paid, then the surety will pay the loss from the indemnitor's funds; otherwise, the surety must return the funds to the indemnitor. Sureties are ordinarily entitled to specific performance of collateral security clauses. "If a creditor is to have the security position for which he bargained, the promise to maintain the security must be specifically enforced." Marine Midland Trust Co. v. Alleghany Corp., 28 F.Supp. 680, 683-84 (S.D.N.Y.1939); accord Milwaukie Construction Co. v. Glens Falls Insurance Co., 367 F.2d 964 (9th Cir.1966). The California courts follow this rule. A California appellate court has authorized prejudgment attachments in suits for specific performance of collateral security provisions. General Insurance Co. v. Howard Hampton Inc., 185 Cal.App.2d 426, 8 Cal.Rptr. 353 (1960). A California district court has specifically enforced a collateral security provision. See General Insurance Co. v. Singleton, 40 Cal.App.3d 439, 442, 115 Cal.Rptr. 291, 292 (1974).
The district court here held that paragraph 2 provided for indemnity after Safeco incurs a loss, not for collateral security in anticipation of loss. Some factors support that interpretation. First, the provision lacks the clarity of the collateral security provisions in Marine Midland, Milwaukie Construction, and the California cases. 2 Second, the first sentence of paragraph 2 would indeed be interpreted by California courts, if read in isolation, as providing only for indemnity after loss. See Cal.Civ.Code Sec. 2778(2) (West 1974). Finally, because the contract between Safeco and Schwab was Safeco's form agreement, California law provides that any uncertainty should be interpreted against Safeco. See Cal.Civ.Code Sec. 1654 (West 1973 & Supp.1984).
Despite the above factors, the district court's interpretation of paragraph 2 is clearly wrong. To read the paragraph as providing Safeco only with a right to indemnity after payment, as the district court did, conflicts with the second sentence in the paragraph. That sentence states that Safeco may hold the sum received from Schwab "as collateral security against any loss on any Bond." If Safeco has only a right to indemnity after incurring loss, the second sentence's reference to collateral security would be meaningless. To make sense of both constituent sentences paragraph 2 must be read as a collateral security provision.
Interpreting paragraph 2 as a collateral security provision does not violate Cal.Civ.Code Sec. 2778(2) (West 1974). Section 2778(2) provides that as a general matter indemnities against "claims" should be interpreted as allowing for indemnity only after payment of the claim. The section contains an exception, however, for instances where "a contrary intention appears." The second sentence in paragraph 2 would be nonsense if we interpreted "claim," as used in the paragraph, to mean "loss." Therefore, the sentence expresses a contrary intention sufficient to justify interpreting the...
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