U.S. on Behalf and for the Benefit of Army Athletic Ass'n v. Reliance Ins. Co.

• Decision Date: 16 September 1986
• Docket Number: No. 85-6290,ARMY-NAVY,85-6290
• Citation: 799 F.2d 1382
• Parties: UNITED STATES of America on Behalf and for the Benefit of ARMY ATHLETIC ASSOCIATION and Naval Academy Athletic Association, Plaintiff-Appellant, v. RELIANCE INSURANCE COMPANY, Defendant-Appellee. RELIANCE INSURANCE COMPANY, Third-Party-Plaintiff, v.'83 FOUNDATION, a California Non-Profit corporation; Robert H. Finch, an individual; and Rolfe G. Arnhym, an individual, Third-Party Defendants.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1382

799 F.2d 1382

UNITED STATES of America on Behalf and for the Benefit of

ARMY ATHLETIC ASSOCIATION and Naval Academy

Athletic Association, Plaintiff-Appellant, v. RELIANCE INSURANCE COMPANY, Defendant-Appellee.

RELIANCE INSURANCE COMPANY, Third-Party-Plaintiff, v. ARMY-NAVY '83 FOUNDATION, a California Non-Profit

corporation; Robert H. Finch, an individual; and

Rolfe G. Arnhym, an individual,

Third-Party Defendants.

No. 85-6290.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Aug. 7, 1986.

Decided Sept. 16, 1986.

Stephen D. Petersen, Asst. U.S. Atty., Los Angeles, Cal., for plaintiff-appellant.

George C. Mitchel, Booth, Mitchel, Strange & Smith, Los Angeles, Cal., for defendant-appellee.

Appeal from the United States District Court for the Central District of California.

Before TANG and BRUNETTI, Circuit Judges, and JAMESON, ^* District Judge.

JAMESON, District Judge:

The United States, plaintiff-appellant, brought this action on behalf of the Army Athletic Association (Army) and the Naval Academy Athletic Association (Navy) (collectively the Academies), to recover on a bond issued by defendant-appellee, Reliance Insurance Company (Reliance), securing moneys to be paid the Academies from the proceeds of the 1983 Army-Navy football game by the Army-Navy '83 Foundation (Foundation). Reliance refused to pay a claim made by the Academies, asserting that the underlying contract between the Academies and Foundation was modified to its prejudice. On cross-motions for summary judgment, the district court granted Reliance's motion, holding that the bond was exonerated by material modifications of the contract, at least one of which was prejudicial to the rights of Reliance as surety. ¹ We affirm.

I. Background

On February 18, 1983, the Foundation, a non-profit organization formed to facilitate preparations for the 1983 Army-Navy football game, and the Academies entered into a contract to play the game at the Rose Bowl in Pasadena. Traditionally, the game was played in Philadelphia. The parties drew the contract to ensure that the Academies would receive approximately the same revenue from the 1983 game as they had received from the 1982 game and would not incur additional expenses as a result of the change in location.

The contract followed the basic format used in prior years, with some changes. The Foundation was entitled to "revenue generated from ticket sales, and broadcast rights...." (Contract p 2(a)). The Foundation was required to pay each academy $875,000--$550,000 from television revenues and $325,000 from ticket sales and concession proceeds. (Contract p 2(b)). The Foundation agreed to compensate each Academy up to $100,000 for additional costs which were "in excess of those expenses actually incurred by the Army and Navy in conjunction with the 1982 Army-Navy Game." (Contract p 2(c)). Finally, the Foundation agreed to provide funds to transport cadets, midshipmen and support personnel to Pasadena and to provide housing and meals for them while there. (Contract p 2(d)).

The contract required the Foundation to obtain two bonds. One bond guaranteed the Foundation's obligation of $650,000 for ticket sales and concession proceeds. (Contract p 2(b)). The Academies released this bond when they collected the money. The second bond, the subject of this lawsuit, guaranteed the Foundation's obligation to pay up to $200,000 to cover additional expenses incurred by the Academies. (Contract p 2(c)). When the Foundation failed to pay for the additional expenses, the Academies filed this action to recover their additional expenses from Reliance.

To obtain the bonds, the Foundation had contacted Robert E. Coates, president of the insurance brokerage firm of Ingham, Coates & Payne. Coates, in turn, contacted Dale Dolton of Reliance. Because the Foundation had no assets, Reliance required 100% collateral and indemnification from a financially able person. The Foundation assured Reliance that it was entitled to the television proceeds from the game. In a letter dated February 18, 1983, the Foundation assured Reliance that it would assign the television proceeds to Reliance up to the face amount of the bonds. The television proceeds were initially estimated at $1,100,000. After negotiation with ABC, the television contract amounted to $1,450,000. The Foundation never made the assignment. On their face, the bonds did not mention an assignment of the television proceeds. The bonds contained only two conditions: (1) a force majeure clause; and (2) a six month statute of limitations.

Subsequent to the issuance of the bonds, the Academies and the Foundation executed three modifications of the contract. ² The first modification changed the date of the game from December 3, 1983 to November 25, 1983, a change required by ABC. The second modification, to comply with the National Collegiate Athletic Association (NCAA) master plan, changed the contract to direct payment of the television proceeds to the Army as the host school, rather than to the Foundation. As a result of the second modification the Foundation was entitled to only $350,000 of the television proceeds. The modification, however, relieved the Foundation of its $1,100,000 obligation to the Academies.

Finally, less than one week before the game, the Academies and the Foundation executed a third modification of the contract. Unexpectedly, the airlines reserved to transport the cadets, midshipmen and supporting personnel to Pasadena, required payment prior to take off. Paragraph 2(d) of the contract required the Foundation to make such payments, but the Foundation was unable to do so prior to the game and consequent receipt of ticket and television revenues. Pursuant to the third modification, the Academies provided the necessary funds. In return, the Foundation waived its rights to ticket revenue already retained by the Academies, which was payable to the Foundation, and to television revenues in excess of $1,100,000 (i.e. $350,000).

Apparently the only persons with knowledge of both the Foundation's assurance that Reliance would receive an assignment of the television proceeds and the three subsequent modifications to the contract were the president and vice-president of the Foundation. Depositions support Reliance's assertion that it knew nothing about the modifications of the contract. The Academies assert they knew nothing about the Foundation's agreement to assign the television proceeds to Reliance.

II. Issues on Appeal

The parties present the following issues on appeal:

(1) Whether the modifications materially changed the bonded contract to the prejudice of Reliance;

(2) Whether Reliance was estopped to assert further conditions to its liability which are undisclosed on the face of the bond;

(3) Whether Reliance ratified or waived any objection to the modifications; and

(4) Whether triable issues of fact prevent summary judgment and whether the district court erred in denying the Academies' request for further discovery.

III. Applicable Law and Standard of Review

A. Applicable Law

The Academies assert jurisdiction under 28 U.S.C. Sec. 1345. Where the United States asserts Sec. 1345 jurisdiction, this court has held that Erie v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), does not control. United States v. California, 655 F.2d 914, 916-17 (9th Cir.1980). "[A]pplication of state substantive law is not mandated. Where, however, there is 'no clear federal law to apply, federal courts have referred to state law to provide the appropriate rule.' " Id. at 917 (quoting United States v. Nationwide Mutual Ins. Co., 499 F.2d 1355, 1356-57 (9th Cir.1974)). There is no clear body of federal common law with regard to modifications of an underlying bonded contract. Consequently, since there is no "significant conflict" between federal and state law, the court will look to state substantive law for guidance. See United States v. California, 655 F.2d at 917.

B. Standard of Review

This court reviews a grant of summary judgment de novo. Roberts v. Continental Ins. Co., 770 F.2d 853, 855 (9th Cir.1985) (citing Lojek v. Thomas, 716 F.2d 675, 677 (9th Cir.1983)). "Viewing the evidence in the light most favorable to the opposing party, we must determine whether there is any genuine issue of material fact and whether the substantive law was correctly applied." Roberts, 770 F.2d at 855 (citing Fed.R.Civ.P. 56(c); Amaro v. Continental Can Co., 724 F.2d 747, 749 (9th Cir.1984)).

IV. Effect of Modifications of Contract

The primary issue is whether the modifications of the bonded contract exonerate Reliance. As a general rule a surety will be discharged where the bonded contract is materially altered or changed without the surety's knowledge or consent. 72 C.J.S. Principal and Surety Sec. 124 (1951). See also Cal.Civ.Code Sec. 2819 (West 1985); Anstalt v. F.I.A. Ins. Co., 749 F.2d 175 (3d Cir.1984); Argonaut Ins. Co. v. Town of Cloverdale, 699 F.2d 417 (7th Cir.1983); Continental Bank & Trust Co. v. American Bonding Co., 605 F.2d 1049 (8th Cir.1979); Verdugo Highlands, Inc. v. Security Ins. Co., 240 Cal.App.2d 527, 49 Cal.Rptr. 736 (1966). In addition, where, as here, a compensated surety seeks exoneration, it must show that the alteration caused prejudice or damage. 72 C.J.S. Principal and Surety Sec. 124 (1951). See also Ramada Development Co. v. United States Fidelity and Guaranty Co., 626 F.2d 517 (6th Cir.1980) (rule in substantial number of jurisdictions requires surety to show some injury, loss or prejudice). Thus, Reliance must demonstrate that the modifications were material and that some prejudice resulted.

The parties dispute the effect of the modifications. The Academies argue that the net effect of the modifications was to benefit the Foundation. Although under the second modification the Foundation lost its right to receive $1,100,000 in television revenue, it was also relieved of its obligation to guarantee...