Smith Plumbing Co., Inc. v. Aetna Cas. & Sur. Co.

• Decision Date: 28 May 1986
• Docket Number: No. 17691-PR,17691-PR
• Citation: 149 Ariz. 524,720 P.2d 499
• Court: Arizona Supreme Court
• Parties: SMITH PLUMBING COMPANY, INC., an Arizona corporation, dba White Mountain Supply Company, Plaintiff/Appellant, v. AETNA CASUALTY & SURETY COMPANY, a Connecticut corporation, Defendant/Appellee, White Mountain Apache Tribe, dba Apache Development Enterprise, Defendant/Intervenor/Appellee.

Page 499

720 P.2d 499

149 Ariz. 524

SMITH PLUMBING COMPANY, INC., an Arizona corporation, dba White Mountain Supply Company, Plaintiff/Appellant, v. AETNA CASUALTY & SURETY COMPANY, a Connecticut corporation, Defendant/Appellee White Mountain Apache Tribe, dba Apache Development Enterprise, Defendant/Intervenor/Appellee.

No. 17691-PR.

Supreme Court of Arizona, In Banc.

May 28, 1986.

Reconsideration Denied July 15, 1986.

Killian, Legg, Nicholas & Fischer by Charles W. Wirken, Mesa, for plaintiff/appellant.

Robert C. Brauchli, Pinetop, for defendants/appellees.

HOLOHAN, Chief Justice.

This matter arises in this court on the petition by Aetna Casualty & Surety Co. and the White Mountain Apache Tribe doing business as Apache Development Enterprise to review a decision of the Court of Appeals. The appellate court had ruled that the superior court had jurisdiction over the claim by Smith Plumbing Co., Inc., an Arizona corporation, against Aetna, a surety on a performance bond for the White Mountain Apache Tribe's Enterprise. (Smith Plumbing Co., Inc. v. Aetna Casualty & Surety Co., 149 Ariz. 545, 720 P.2d 520 (App.1984)). We granted review to determine whether the exercise of jurisdiction by the superior court in this case violated the Tribe's right of sovereign immunity or interfered with the exclusive jurisdiction of the tribal court.

FACTS

The facts necessary to the decision of this case are not in dispute. In 1963 the Tribal Council of the White Mountain Apaches created the White Mountain Apache Housing Authority to receive financial assistance from the United States Department of Housing and Urban Development (HUD) to build low income housing on the reservation. The Authority is an Indian corporation created by the Tribe and granted the necessary corporate powers to contract and to borrow money for the purpose of developing housing on the reservation. In its formation ordinance the Authority was also granted the power to waive immunity from suit for its obligations. ¹ In 1968 the Tribe created the White Mountain Apache Development Enterprise to undertake construction projects on the reservation. The Enterprise is in reality a development enterprise of the White Mountain Apache Tribe. The Housing Authority contracted with the Enterprise in 1978 to build four low income housing projects financed with HUD funds. The Enterprise was to act as general contractor for the projects.

Pursuant to HUD regulations, the Enterprise, as general contractor, obtained a performance-payment bond for each construction contract from Aetna. The provisions of the bonds are on standard form documents prepared by HUD; they bind the Enterprise and its surety Aetna to the Authority, as owner of the projects, in the amount of the original contract sums. The bonds contain the standard conditions guaranteeing the payment of wages and materialmen on the projects.

The Enterprise entered into a subcontract with G, S & D Plumbing, a private business not connected with the Tribe, to supply all plumbing materials and labor for installation in the housing projects. Smith, a wholesale plumbing supplier in Lakeside, Arizona, outside the boundaries of the reservation, supplied G, S & D with plumbing supplies for the housing projects. Smith sold plumbing supplies to G, S & D on open account for a number of months, but Smith alleges that G, S & D stopped making payments on the account in June of 1980 leaving a balance owed of over $75,000. Smith claims the amount due is for material furnished to G, S & D for the housing project.

Smith initially filed suit in the United States District Court against G, S & D, the Enterprise and Aetna, but the federal court dismissed the action for lack of subject matter jurisdiction. Smith then filed a complaint in the superior court against the Authority on the basis of unjust enrichment and against the Authority and Aetna on the performance-payment bonds.

Aetna and the Authority filed a motion to dismiss the complaint, which the trial court denied. The Enterprise thereafter moved to intervene in the action as an indispensable party pursuant to Ariz.R.Civ.P. 24, 16 A.R.S., asserting its status as the principal obligor on the bonds and its obligation to indemnify Aetna and the Authority for any judgment obtained against them. Smith did not oppose the Enterprise's motion, and the trial court granted it. Some months later, because Smith had never completed service of process upon the Authority, Smith filed a Notice of Dismissal as to the Authority only. Aetna and the Enterprise then filed a motion to dismiss, which the trial court granted, holding that it lacked jurisdiction over the Tribe and its agencies and that the surety could not be sued "directly."

Smith appealed the trial court's order dismissing the action against both Aetna and the Enterprise, but on appeal Smith sought relief only against Aetna. Concluding that Smith had waived any claim of error in the trial court's dismissal of the Enterprise, the Court of Appeals affirmed that portion of the trial court's order. The court reversed the dismissal of Aetna, ruling that the action could proceed against Aetna without joinder of the Enterprise.

APPEALS COURT DECISION

Although we granted review in this case to resolve issues concerning state and tribal jurisdiction, some additional comment on other issues decided by the Court of Appeals is appropriate.

Originally in the Court of Appeals Aetna contended that the bonds protected only the Authority, as owner, against the contractor's nonperformance and were not subject to action by an unpaid materialman. Citing this court's decision in Webb Construction Company v. Crane Company, 52 Ariz. 299, 80 P.2d 698 (1938), the Court of Appeals held that Smith could maintain the action against Aetna. Construing the bonds as payment bonds in addition to performance bonds, the Court of Appeals held that a materialman was a beneficiary who could maintain a direct action against the surety without using the Tribe as a "conduit" to reach the surety. (149 Ariz. at 548 - 549, 720 P.2d at 523-524.) In this court, Aetna and the Tribe do not contest the ruling that Smith may sue on the bonds in an appropriate court (Petition for Review, p. 2).

Aetna argued that it is immune from action by Smith because it is entitled to assert its principal's sovereign immunity. The Court of Appeals rejected this argument, and we approve its ruling.

Generally, a surety may assert any defense available to its principal. Spear v. Industrial Comm'n., 114 Ariz. 601, 562 P.2d 1099 (App.1977). One exception to this rule is where a principal takes advantage of a personal defense. Personal defenses "are ordinarily of such a character that the principal, as he chooses, may insist upon them or not." 74 Am.Jur.2d Suretyship § 104 (1974). The Tribe may choose to waive its sovereign immunity. White Mountain Apache Indian Tribe v. Shelley, 107 Ariz. 4, 7, 480 P.2d 654, 657 (1971). Because the Tribe has the power either to insist upon or to waive its sovereign immunity, that immunity is considered a personal defense not available to the Tribe's surety. See 74 Am.Jur.2d Suretyship § 109.

The sovereign immunity doctrine originates in social policy designed to protect the state "from burdensome interference with the performance of its governmental functions...." 72 Am.Jur.2d States, Territories, and Dependencies § 99 (1974). The compensated surety of a sovereign does not perform the governmental functions that require protection; therefore, the protections a government needs to conduct its functions do not extend to the surety. Furthermore, to allow a compensated surety such as Aetna to assert its principal's sovereign immunity and so avoid payment on a bond would be to provide a windfall to the surety. Centraal Stikstof Verkoopkantoor, N.V. v. Alabama State Docks Department, 415 F.2d 452, 458 (5th Cir.1969). If Aetna were allowed this defense, it would receive valuable consideration in the form of compensation by the principal, without assuming the risk of payment in the event of its principal's default. Id.; see generally 74 Am.Jur.2d Suretyship §§ 256-59 (1974). The Court of Appeals refused to sanction such a result. It stated:

Aetna must surely have been aware of the immunity of its principal from suit, and could have taken steps to protect itself, for example, by requiring the Enterprise and the Authority to identify all subcontractors and suppliers and to obtain releases from the latter prior to final payment. Having failed to do so, it cannot now escape its obligations under the bond under the guise of sovereign immunity.

(149 Ariz. at 553, 720 P.2d at 528.) We agree.

Aetna also argued that the action of the plaintiff could not be maintained against the surety without joinder of the principal.

Ordinarily, the principal obligor on a surety bond must be joined in any action against the surety. Ariz.R.Civ.P. 17(f), 16 A.R.S. The rule has an exception permitting actions against a surety without joinder of the principal obligor "when the latter resides beyond the limits of the state, or in such a part of the state that he cannot be reached by ordinary process of law...." Id. We agree with the Court of Appeals holding that the exception was intended to apply where the principal obligor was not subject to "jurisdiction for whatever reason, and is broad enough to encompass the Enterprise, which, although 'residing' within the state of Arizona, cannot be made subject to the court's jurisdiction because of its immunity from suit." (149 Ariz. at 551, 720 P.2d at 526.)

Once the principal is shown to be within an exception to Ariz.R.Civ.P. 17(f), the plaintiff may proceed against the surety alone. First Nat'l Bank of Albuquerque v. The Standard Accident Insurance Co., 38 Ariz. 77, 81-82, 297 P. 864, 866 (1931). A creditor's neglect in failing to reach principal does not impair his right to pursue the surety. Kerby v. State, 62 Ariz. 294, 308-09...