A Tumbling-T Ranches v. Flood Control Dist., 1 CA-CV 07-0760.

• Citation: 204 P.3d 1051
• Decision Date: 28 November 2008
• Docket Number: No. 1 CA-CV 07-0760.,1 CA-CV 07-0760.
• Parties: A TUMBLING-T RANCHES, an Arizona general partnership; Russell Badley Farms, Inc., an Arizona corporation; Rosemary L. Edwards, individually and as Trustee of the Rosemary L. Edwards Trust; John E. Fornes, Jr., and Shelley Fornes, husband and wife; PJ Farms Limited Partnership, an Arizona limited partnership; J & A Fornes, II, an Arizona general partnership; Delmar John and Jean John, husband and wife d/b/a Delmar John Farms; Gila River Farms, Inc., an Arizona corporation; Roy Pierpoint and Ella Pierpoint, husband and wife; Pierpoint Farms, Inc., an Arizona corporation; and Wood Brothers Farms, an Arizona general partnership, Plaintiffs/Appellees, v. FLOOD CONTROL DISTRICT OF MARICOPA COUNTY, a body politic, Defendant/Appellant.
• Court: Court of Appeals of Arizona

204 P.3d 1051

A TUMBLING-T RANCHES, an Arizona general partnership; Russell Badley Farms, Inc., an Arizona corporation; Rosemary L. Edwards, individually and as Trustee of the Rosemary L. Edwards Trust; John E. Fornes, Jr., and Shelley Fornes, husband and wife; PJ Farms Limited Partnership, an Arizona limited partnership; J & A Fornes, II, an Arizona general partnership; Delmar John and Jean John, husband and wife d/b/a Delmar John Farms; Gila River Farms, Inc., an Arizona corporation; Roy Pierpoint and Ella Pierpoint, husband and wife; Pierpoint Farms, Inc., an Arizona corporation; and Wood Brothers Farms, an Arizona general partnership, Plaintiffs/Appellees, v. FLOOD CONTROL DISTRICT OF MARICOPA COUNTY, a body politic, Defendant/Appellant.

No. 1 CA-CV 07-0760.

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

November 28, 2008.

Review Denied March 17, 2009.

Haralson, Miller, Pitt, Feldman & McAnally, P.L.C. By Thomas G. Cotter, Tucson, Stanley G. Feldman and Kinerk, Beal, Schmidt, Dyer & Sethi, P.C. By Burton J. Kinerk, Tucson, Attorneys for Plaintiffs/Appellees.

Law Offices of Reed King By Reed W. King, Phoenix, Co-Counsel for Plaintiffs/Appellees.

Swenson, Storer, Andrews, Frazelle & Sayre, P.C. By Michael J. Frazelle, Phoenix, Attorneys for Defendant/Appellant.

OPINION

BARKER, Judge.

¶ 1 The principal question presented to us in this matter is whether a Damron/Morris agreement¹ may be entered into based on an indemnity and hold-harmless agreement contained within a property easement as contrasted with an insurance contract. For the reasons that follow, we hold that it may, but that the liability of the indemnitor for amounts found to be reasonable will depend on the construction of the indemnity agreement at issue.

I.

A.

¶ 2 This case involves damages alleged from the failure of the Gillespie Dam on January 9, 1993. The Gillespie Dam is located on the Gila River, halfway between Buckeye and Gila Bend, Arizona, some sixty miles southwest of Phoenix. This litigation has been on-going for thirteen years. We previously considered aspects of this case eight years ago. See A Tumbling-T Ranches v. Paloma Inv. Ltd. P'ship, 197 Ariz. 545, 5 P.3d 259 (App.2000). In addition to this appeal, there is another aspect of this matter presently on appeal, A Tumbling-T Ranches v. Flood Control District of Maricopa County, 1 CA-CV 07-0453 (Ariz.App. filed July 5, 2007), and a separate indemnity action still pending in the superior court, Flood Control District of Maricopa County v. Paloma Investment Limited Partnership, CV 1997-007081 (Maricopa County Super. Ct. filed Apr. 17, 1997). Because of the extended factual and legal background with regard to this proceeding, we limit ourselves to that which is necessary to the issue presented to us. Nonetheless, some discussion of the overall proceeding is required so that the pending issues can be put in their proper context.

B.

¶ 3 Appellant Flood Control District of Maricopa County ("District") appeals both from (1) the trial court's findings concerning the reasonableness of a settlement agreement entered into between the Appellees (referred to collectively by the parties as "the Farmers") and various parties (referred to collectively as "the Dam Owners")² and (2) the fact that the trial court permitted the procedure. By way of background, in 1982, the Dam Owners gave the District an easement to establish a channel in portions of the Gila River, upstream from the Gillespie Dam. The easement contained an indemnity agreement whereby the District agreed to indemnify and hold the Dam Owners harmless from certain liabilities. After the Gillespie Dam failed on January 9, 1993, the Farmers filed a complaint against the Dam Owners on January 1, 1995, claiming damages to their properties, which were adjacent to, or near, the Gila River. These claims were based upon negligence, strict liability, trespass, and nuisance, arising out of the maintenance, ownership, and control of the dam. The Farmers also named the District in their 1995 lawsuit and alleged that the upstream clearing and piloted channel project, which had been the subject of the easement, also caused them damages.

¶ 4 On March 5, 1997, the Farmers' 1995 lawsuit against the Dam Owners was consolidated with another 1995 case that arose out of the same facts and circumstances.³ The following month, the Dam Owners filed an indemnity action against the District, based upon the indemnity clause contained in the easement. Though not the subject of this appeal, portions of the 1997 indemnity case were tried to the court on May 8, 2000. The trial court determined that the language of the indemnity clause was broad enough to cover all fault of the District, unless it was based on intentional acts of the Dam Owners.

¶ 5 The 1995 consolidated cases were subsequently consolidated with the 1997 indemnity action filed by the District. The consolidated cases were then bifurcated into a liability and a damages phase. The liability phase was tried to a jury based on theories of inverse eminent domain and negligence. The jury found in favor of the District on the inverse eminent domain claim. However, on the negligence claim, the jury made a fault determination of 80% attributable to the Dam Owners, 10% to the District, and 10% to non-parties.

¶ 6 On September 18, 1996, and January 4, 2005, the Dam Owners tendered the defense of this matter to the District, which tenders the District declined. After the liability phase but before the damages phase, the Dam Owners entered into a settlement agreement with the Farmers. The agreement stated that a stipulated judgment would be entered in favor of the Farmers and against the Dam Owners in the amount of $14.75 million. The stipulated judgment also provided that the Dam Owners would pay the Farmers approximately $3.3 million in return for a covenant not to execute against the Dam Owners on the remainder of the judgment. The judgment expressly provided that the Farmers were not releasing the Dam Owners from liability even though the Farmers agreed (as set forth in the covenant not to execute) they would take no steps against the Dam Owners to collect on the judgment.

¶ 7 The Farmers requested a reasonableness hearing on the settlement agreement. Over the District's objection, the trial court granted the hearing. It took place on March 30, 2007. After the hearing, the trial court ruled that $14.75 million was a reasonable settlement, that "the Agreement was not the product of bad faith, fraud, or collusion," and that the indemnity claim against the District was not limited to the $3.3 million actually paid by the Dam Owners. The District timely appealed. We have jurisdiction pursuant to Arizona Revised Statutes ("A.R.S.") section 12-2101(B) (2003).

II.

¶ 8 The District makes several arguments on appeal: (1) that the trial court erred in conducting a reasonableness hearing, (2) that the trial court erred in determining that the indemnity claim is not restricted to the amount actually paid by the Dam Owners, (3) that the trial court erred in determining that the October 11, 2006 settlement was free of fraud or collusion, and (4) that the trial court erred in determining that the settlement amount was reasonable. A fundamental contention running throughout the District's arguments is that the principles underlying Damron/Morris agreements are restricted to insurance settings and thus inapplicable here. We address that contention first before turning to the District's specific arguments.

III.

¶ 9 The District contends that the "reasonableness hearing procedure [permitted with a Damron/Morris agreement] is inapplicable to this case as this matter does not involve any attempts to require a liability insurer for any settling defendant to pay a stipulated judgment on the basis of a failure to cover a claim." The District argues that "[t]he Farmers and the Dam Owners have improperly attempted to engraft insurance bad faith principles onto a commercial transaction involving an indemnity clause which exists outside of the special relationship created by a liability insurance transaction." The District has confused the basis for a Damron/Morris agreement with the basis for an insurance bad faith claim.

¶ 10 An insurance bad faith claim is based upon the breach of a duty owed to an insured by the insurer. Noble v. Nat'l Am. Life Ins. Co., 128 Ariz. 188, 190, 624 P.2d 866, 868 (1981) ("We have determined that ... there is a legal duty implied in an insurance contract that the insurance company must act in good faith in dealing with its insured on a claim, and a violation of that duty of good faith is a tort.") The breach of such a duty gives rise to an insurance bad faith claim and tort damages based upon the special relationship that exists between an insurer and an insured. Rawlings v. Apodaca, 151 Ariz. 149, 163, 726 P.2d 565, 579 (1986) ("[B]ecause of the special relationship between an insurer and its insured, the insured may maintain an action to recover tort damages. ...").

¶ 11 A Damron/Morris agreement, however, is based upon general principles of indemnity law. The Arizona Supreme Court made this plain in United Servs. Auto. Ass'n v. Morris, 154 Ariz. 113, 120, 741 P.2d 246, 253 (1987). When referring to whether a judgment entered pursuant to such an agreement would be binding on the insurer, the Arizona Supreme Court based its decision on "general principles of indemnification law" and held:

An indemnitor is bound by the settlement made by its indemnitee if, but only if, the indemnitor was given notice and opportunity to defend.... [T]he indemnitor will be liable to the indemnitee to the extent that the indemnitee establishes that the settlement was reasonable and prudent under all the circumstances.

Id. (citations omitted). This statement is essentially a paraphrase of Restatement (Second) of Judgments § 57(1) (1982), applicable to indemnitors generally, which provides as...