Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_05-cv-00122/USCOURTS-caed-2_05-cv-00122-8/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1332 Diversity-Breach of Contract

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1

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

AMERICAN MANUFACTURERS NO. 2:05-cv-00122-MCE-GGH

MUTUAL INSURANCE COMPANY

and AMERICAN MOTORISTS

INSURANCE COMPANY, 

Plaintiffs,

v. MEMORANDUM AND ORDER

CAROTHERS CONSTRUCTION INC.,

DAVID L. CAROTHERS, and

TERRI L. CAROTHERS,

Defendants.

----oo0oo----

Through the present action, Plaintiff American Manufacturers

Insurance Company (“American Manufacturers”) seeks to enforce the

provisions of a General Indemnity Agreement (the “Indemnity

Agreement”) executed by Defendant Carothers Construction, Inc. 

(“CCI”) as a prerequisite to American Manufacturers’ issuance of

security bonds applicable to CCI’s public works construction

project with the City of Folsom (“City”). 

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 The Court’s jurisdiction in this matter is predicated on 1

diversity of citizenship pursuant to 28 U.S.C. §1441(b). The

parties agree that California law applies inasmuch as the

Indemnity Agreement contains a choice of law provision

specifically providing that it “shall be interpreted under the

substantive law of the State of California, USA.” Indemnity

Agreement, Exh. 1 to the Decl. of Stephen J. Beatty, p. 4.

 Some of the factual allegations as set forth in this 2

section are disputed by the parties. To the extent either party

has interposed evidentiary objections to these facts, however,

those objections are overruled unless otherwise noted. 

Additionally, this section incorporates the facts considered by

the Court in ruling on this motion. The Court need not rule on

objections to evidence not discussed below, and declines to do

so, because that evidence was not germane to the Court’s

decision. 

2

American Manufacturers ultimately incurred substantial completion

costs on the project after Folsom declared CCI to be in default

and demanded that American Manufacturers become involved. 

American Manufacturers now moves for partial summary judgment

against CCI (and David and Terri Carothers, individually) as to

its First Cause of Action, for Breach of the Indemnity Contract,

and the Third Cause of Action, for statutory reimbursement under

California Civil Code § 2847 against CCI, only. As set forth 1

below, that Motion is granted in part and denied in part.

BACKGROUND2

On or about March 12, 2002, CCI entered into a contract with

the City for construction of Folsom Fire Station #35 (the “Folsom

Project”). At CCI’s request, and as a prerequisite for award of

the project, American Manufacturers issued a performance bond on

behalf of CCI, as principal, in connection with the Folsom

Project. 

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3

Both CCI and its owners, David and Terri Carothers, were

signatories on the Indemnity agreement executed in connection

with issuance of the performance Bond on the Folsom Project. All

parties to that Agreement acknowledged that American

Manufacturers would not have issued the performance bond without

Defendants’ commitment, as Indemnitors, to reimburse American

Manufacturers for all losses arising under the bond. (See

Indemnity Agreement, p. 1, attached as Exh. 1 to the Decl. of

Stephen J. Beatty). The Indemnity Agreement defines that

obligation on page 2, paragraph 1, as follows:

Indemnitors agree to indemnify and hold harmless Surety

[American Manufacturers] immediately upon demand for

any and all Loss sustained or incurred by reason of

having executed any and all Bonds.

The Indemnity Agreement goes on to define the term “Loss” as

follows:

Loss includes all sums: (a.) paid by Surety to

claimants under the Bonds, (b.)sums required to be paid

to claimants by Surety but not yet, in fact, paid by

Surety, by reason of execution of such Bonds, (c.) all

costs and expenses incurred in connection with

investigating, paying or litigating any claim,

including but not limited to legal fees and expenses,

technical and expert witness fees and expenses and (d.)

all costs and expenses incurred in connection with

enforcing the obligations of the Principal and

Indemnitors under this Agreement including, but not

limited to legal fees and expenses... and (f.) all

other amounts payable to Surety according to the terms

and conditions of this Agreement.

Id. at p. 1, Definitions, Loss.

Significantly, the Agreement also leaves to the discretion

of American Manufacturers whether to pay claims submitted under

its performance bond, as well as the amount to pay on such

claims:

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 The Indemnity Agreement defines “Default” as including 3

“[a]n instance or condition in which Indemnitors ... forfeit,

breach, abandon, default or [are] declared in default on any

Bonded Contract”, or “neglect or refuse to pay for any labor or

materials used in the prosecution of a Bonded Contract.” Id. at

p. 1, Definitions, Default.

4

Surety shall have the exclusive right to decide and

determine whether any claim, liability, suit or

judgment made or brought against Surety on any Bond

shall or shall not be paid, compromised, resisted,

defended, tried or appealed, and Surety’s decision

thereon shall be final and binding upon the

Indemnitors.

Id. at p. 2, ¶5.

Moreover, the Indemnity Agreement gives American

Manufacturers, as Surety, the right to complete work under a

bonded project, like the Folsom Project at issue in this

litigation, at Defendants’ expense:

In the event of a Default, Surety shall have the 3

right, but not the obligation, to take possession of

the work under any and all Bonded Contracts, and

complete or consent to the completion of such Bonded

Contracts at the expense of the Indemnitors.

Id. at p. 2, ¶6.

On June 18, 2003, the City advised American Manufacturers

that it had received written notice from CCI of CCI’s intent to

demobilize from the Folsom Project. The City demanded that

American Manufacturers step in to complete the Project in the

event of such mobilization. 

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5

By letter dated June 26, 2003, the City informed CCI that it

considered CCI to have breached/defaulted on its obligations

under the construction contract because of CCI’s alleged

abandonment of the Project, its alleged failure to fulfill

contractual requirements, its alleged failure to supply

sufficient properly skilled labor to the project, 

and its alleged failure to make timely payment to subcontractors

and suppliers for materials and/or labor expended on the project. 

On July 18, 2003, the City notified American Manufacturers that

it had terminated CCI as of that date for the above-enumerated

reasons. The City simultaneously made a formal demand, given

that termination, for American Manufacturers to complete the

Folsom Project under its performance bond. The City warned

American Manufacturers that its failure to commence performance

within thirty (30) days would subject it to both liquidated

damages and various other costs. 

In addition to the City’s completion demand pursuant to the

terms of its performance bond, American Manufacturers also

received twenty (20) separate demands from unpaid subcontractors

and suppliers. Six of those unpaid vendors proceeded to file

suit against American Manufacturers as CCI’s payment bond surety.

With respect to completion of the Folsom Project, American

Manufacturers hired a construction consultant and ultimately, on

or about October 31, 2003, entered into a Completion Agreement

with CCI whereby CCI agreed, in pertinent part 1) to complete the

Project under American Manufacturers’ direction; 2) to accept

specified direct costs for completing the project; 

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6

and 3) to reaffirm its obligations under the Indemnity Agreement

as described above. (See Folsom Completion Agreement, Ex. 12 to

Beatty Decl.). In completing the Project under this arrangement,

American Manufacturers claims it incurred net completion costs in

the amount of $122,850.75.

While American Manufacturers’ net completion costs included

some of the pre-takeover claims asserted against the performance

bond that were resolved at or shortly after the time American

Manufacturers assumed responsibility for the Folsom Project,

those costs did not include settlement of three different

lawsuits as well as an additional claim that were not resolved

until later. American Manufacturers claims those to have paid an

additional $203,712.73 to resolve those claims. 

One of the lawsuits brought by against CCI for its alleged

nonpayment of claims for goods and services, George T. Jordan dba

Jordan Construction Electric v. Carothers Construction, Inc., et

al., Sacramento County Superior Court Case No. 03AS01445,

resulted in various cross-complaints, including cross-complaints

against the City filed by both CCI and American Manufacturers. 

While the parties ultimately reached a joint Settlement Agreement

dated June 25, 2006, and while American Manufacturers received a

monetary payment under the terms of that settlement, CCI received

no funds. It nonetheless voluntarily waived, under the

Agreement, all its claims against the City “arising directly or

indirectly out of, or in any way relating to the Jordan Electric

Lawsuit, the cross complaints filed therein, the [Folsom]

Project, the [Folsom] Contract, the Bonds, and the Takeover

Agreement.” 

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7

(Settlement Agreement, Ex. 47 to the Beatty Decl., p. 5). 

By letter to Defendants dated January 16, 2004, American

Manufacturers advised of its intent to seek reimbursement and

indemnification for all loss and expense it incurred, pursuant to

the terms of the Indemnity Agreement. According to American

Manufacturers, Defendants have failed and refused, and continue

to fail and refuse, those demands for payment, which now total

some $464,572.66 (exclusive of interest) and include, in addition

to completion costs and bond claims, both legal, consultant and

expert fees and costs.

In opposing American Manufacturers’ request for summary

adjudication as to its breach of contract and statutory

reimbursement claims, Defendants place primary emphasis on the

fact that the City, and not CCI, was the party in breach as to

the Folsom Project and that accordingly American Manufacturers

should not have stepped in, completed the project, and resolved

unpaid claims pursuant to its performance bond. Defendants also

contend that American Manufacturers acted in bad faith by failing

to act in accordance with standard industry practices in its

handling of the bonds claims. Defendants contend that American

Manufacturers erroneously paid certain claims, overpaid other

claims, and wrongfully failed to pass through certain claims made

by CCI to the City for payment. 

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8

STANDARD

The Federal Rules of Civil Procedure provide for summary

judgment when “the pleadings, depositions, answers to

interrogatories, and admissions on file, together with

affidavits, if any, show that there is no genuine issue as to any

material fact and that the moving party is entitled to a judgment

as a matter of law.” Fed. R. Civ. P. 56(c). One of the

principal purposes of Rule 56 is to dispose of factually

unsupported claims or defenses. Celotex Corp. v. Catrett, 477

U.S. 317, 324 (1986).

Rule 56 also allows a court to grant summary adjudication on

part of a claim or defense. See Fed. R. Civ. P. 56(a) (“A party

seeking to recover upon a claim ... may ... move ... for a

summary judgment in the party’s favor upon all or any part

thereof.”); see also Allstate Ins. Co. v. Madan, 889 F. Supp.

374, 378-79 (C.D. Cal. 1995); France Stone Co., Inc. v. Charter

Township of Monroe, 790 F. Supp. 707, 710 (E.D. Mich. 1992).

The standard that applies to a motion for summary

adjudication is the same as that which applies to a motion for

summary judgment. See Fed. R. Civ. P. 56(a), 56(c); Mora v.

Chem-Tronics, 16 F. Supp. 2d 1192, 1200 (S.D. Cal. 1998). 

In considering a motion for summary judgment, the court must

examine all the evidence in the light most favorable to the nonmoving party. U.S. v. Diebold, Inc., 369 U.S. 654, 655 (1962). 

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9

Once the moving party meets the requirements of Rule 56

by showing that there is an absence of evidence to support the

non-moving party’s case, the burden shifts to the party resisting

the motion, who “must set forth specific facts showing that there

is a genuine issue for trial.” Anderson v. Liberty Lobby, Inc.,

477 U.S. 242, 256 (1986). Genuine factual issues must exist that

“can be resolved only by a finder of fact, because they may

reasonably be resolved in favor of either party.” Id. at 250. 

In judging evidence at the summary judgment stage, the court does

not make credibility determinations or weigh conflicting

evidence. See T.W. Elec. v. Pacific Elec. Contractors Ass’n, 809

F.2d 626, 630-631 (9th Cir. 1987), citing Matsushita Elec. Indus.

Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).

ANALYSIS

A. Improper Service

In opposing this Motion, Defendants make a preliminary

argument that because of improper service the Motion should be

denied on that ground alone without even resorting to the merits

of American Manufacturers’ claims. Defendants argue that

American Manufacturers failed to timely make personal service so

as to permit a March 19, 2007 hearing date. As American

Manufacturers points, out, however, the Local Rules of this

District permit electronic service of documents filed during the

pendency of an action. E.D. Local Rule 5-135(a). A document is

deemed filed on a particular day if filed prior to midnight on a

that business day. Id. at Rule 5-134(b). 

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10

Here, American Manufacturers electronically filed and served its

motion and supporting papers on February 16, 2007, and scheduled

the hearing for March 19, 2007, 31 days later, in compliance with

Local Rule 78-230(b). Hence service of this Motion was proper.

B. Breach of Contract

California law has long recognized the right of a surety,

like American Manufacturers, to be indemnified under the terms a

written indemnity agreement. See, e.g., Fidelity & Deposit Co.

of Md. v. Whitson, 187 Cal. App. 2d 751 (1960). In order to

demonstrate a valid claim for breach of an indemnity agreement

under California law, the existence of an indemnity agreement and

breach of the agreement following performance must be

established. See Reichert v. Gen. Ins. Co. of Am., 68 Cal. 2d

822, 830 (1968); Four Star Elec., Inc. v. F&H Constr., 7 Cal.

App. 4 1375, 1380 (1991). The obligations of a surety are th

measured by the terms of its performance bond. City of

Sacramento v. Trans Pac. Indus., 98 Cal. App. 3d 389, 400-01

(1979). 

Here, the terms of the Indemnity Agreement at issue are

clear. Defendants expressly agreed to indemnify and hold

American Manufacturers harmless for and any all costs and

expenses, including payment to bond claimants as well as all

other costs incurred in completing the project upon which

American’s performance bond was issued. 

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 As Defendants categorically state in their Opposition: 4

“For Surety to prevail as to liability, it must first prove that

Defendants were in “Default” on the Folsom Project, and that

Plaintiff acted appropriately.” Opp., 18:26-28. Defendants

maintain that “[i]t was because of the City’s breach that the

demobilization occurred, and since the City was in breach and

Carothers was not, the Surety should not have stepped in to

complete the Project. The Surety breached its obligations to

Defendants by doing so.” Opp., 9:18-20.

11

The agreement is equally clear that reimbursable costs include all

legal, technical and expert expenses incurred in settling claims

and completing the Folsom Project. 

Defendants do not dispute that monies were expended by

American Manufacturers pursuant to its performance bond, although

they do dispute the amount of recoverable damages on American’s

part as discussed in more detail below. As to the fact of

Defendants’ liability, as opposed to the extent thereof,

Defendants’ primary argument rests with the assertion that they

cannot be liable for breach of contract because American

Manufacturers impermissibly assumed responsibility for completion

of the Folsom Contract without determining whether CCI, as

opposed to the City, actually breached the underlying

construction agreement between CCI and the City. Defendants 4

argue that such assessment, as well as a determination that CCI

was in breach of the agreement, is a necessary prerequisite for

any recovery by American Motorists. 

Defendants’ position is misplaced. The terms of the

Indemnity Agreement itself specify when a “default” occurs that

triggers American Manufacturers’ obligation to intervene in

ensuring that a project is completed and that payment for work

and materials in connection with a project has been made. 

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 Defendants spend much of their Opposition arguing that the 5

City in fact was the breaching party. They contend, for example,

that the City failed to make timely payments, interfered with the

work of subcontractors, failed to approve change orders, and

failed to pay for the onsite storage of construction materials

despite being obligated to do so. Defendants’ attempt to point

the finger at the City is disingenuous since CCI executed a

settlement agreement waiving and releasing all claims against the

City related to the project, and dismissed its lawsuit against

the City with prejudice. CCI cannot attempt to avoid its

indemnity obligations by relitigating claims that have already

been waived, released and dismissed by CCI. 

12

As enumerated above, the Agreement states that default occurs

when the indemnifying party, here CCI, either abandons, defaults,

or is declared in default on the bonded project. 

When the City defaulted and terminated CCI after CCI’s

abandonment of that Folssom Project, that default and termination

triggered American’s performance bond obligations and its right

to be indemnified for completion costs incurred. American was

not obligated to make a legal determination as to whether and to

what extent either the City or CCI may have breached the Folsom

Contract prior to American’s takeover and completion of the

project. The surety does not have to prove default before 5

acting in accordance with its obligations under a performance

bond. Gen. Ins. Co. of Am. v. Singleton, 40 Cal. App. 3d 439,

443-44 (1974). As the Singleton court states: “To require

plaintiff to establish a case against the defendants [the

indemnitors] in the same manner that a claimant against the

indemnitees would have been obligated to do, would defeat the

purposes of the clauses in the indemnity agreement allowing the

indemnitee to settle claims.” Id. at 444. 

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13

Indemnity agreements like those involved here are intended to

facilitate the handling of settlement by sureties and obviate

unnecessary and costly litigation. Id. Were the rule to be

otherwise, a performance bond surety would have no duty to act

until the bond principal and obligee litigated their respective

rights and the court determined that the principal was in breach

and the obligee was not. As American Manufacturers argues, this

would be an absurd result which the law does not support.

Defendants also cannot argue that American Manufacturers is

precluded from establishing a breach of contract unless it shows

it acted in good faith in handling the performance bonds. Surety

indemnity agreements like the one before this Court have been

repeatedly upheld and enforced in California and elsewhere as

giving rise to a presumption of the reasonableness of the loss

and expense incurred by the surety in resolving claims, and

consequently the surety’s good faith in doing so. See, e.g.,

Gen. Ins. Co. of Am. v. Singleton, 40 Cal. App. 3d at 444; Fallon

Elec. Co., Inc. v. The Cincinnati Ins. Co., 121 F.3d 125, 128 (3d

Cir. 1997) (holding that indemnity agreement provisions shift

burden to indemnitors to prove bad faith). Consequently, any

alleged bad faith on American Manufacturer’s part is a defense to

liability which must be pleaded and proved by Defendants as

opposed to constituting an element of American’s prima facie case

in showing a breach of contract. Here, Defendants have not even

pled an affirmative defense of bad faith, as they must in order

to bring that issue before the Court. Failure to plead an

affirmative right with specificity waives the right to assert the

defense. 

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14

See Horton v. Potter, 369 F.3d 906, 911-912 (6th Cir. 2004).

Even assuming Defendants should be permitted to assert a bad

faith defense, they have failed to produce any adequate evidence

that bad faith on American’s part precludes its recovery under

the Indemnity Agreement. To successfully establish a bad faith

defense, Defendants would had been required to prove that

American engaged in “objectively unreasonable conduct” in

handling its obligation under the performance bond. See Arntz

Contracting Co. v. St. Paul Fire and Marine Ins. Co., 47 Cal.

App. 4th 464, 483 (1996). The issue of what constitutes such

conduct in the context of surety claims handling requires the

specialized knowledge of someone with relevant experience in the

surety industry. See F.R.E. 702; Randolph v. Collectramatic,

Inc., 590 F.2d 844, 848 (10th Cir. 1979). Here no such proof has

been provided, either in the form of expert opinion or otherwise.

In sum, the Court finds that American Manufacturers have

established, as a matter of law, Defendants’ liability under the

First Cause of Action, for Breach of the Indemnity Agreement

between the parties.

C. Statutory Reimbursement

California Civil Code § 2847 establishes a statutory right

to reimbursement in favor of a surety making payments under bond

obligations. The statute provides in pertinent part as follows:

If a surety satisfies the principal obligation, or any

part thereof, whether with or without legal

proceedings, the principal is bound to reimburse he has

disbursed, including necessary costs and expenses.

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As a Third Cause of Action, American Manufacturers contend that,

in addition to having breached the Indemnity Agreement, CCI as

the bond principal is also liable for American’s disbursements

under section 2847.

Aside from the general arguments posited by Defendants

against any finding of liability on its part in breaching the

Indemnity Agreement, CCI makes no specific argument as to why

summary judgment should not be granted as to the merits of

American Manufacturers’ statutory reimbursement claim. Since

those arguments have already been disposed of, the Court finds in

favor of American Manufacturers as to the Third Cause of Action.

D. Damages

American Manufacturers correctly cites provisions of the

Indemnity Agreement establishing that the amounts it paid 

are prima facie evidence of loss and expense and liability for

same. (See, e.g., Indemnity Agreement, Exh. 1 to the Beatty

Decl., p. 2, ¶1). American Manufacturers consequently asks the

Court to establish the amount of damages for which Defendants are

liable.

After carefully examining the evidence, the Court finds that

it is impossible to do this at the present juncture. Even if the

Court assumes that all monies paid out by American Manufacturers

and properly reimbursable under the terms of the Indemnity

Agreement, there are other unresolved factors bearing upon

Defendants’ liability which cannot be determined at this juncture

as a matter of law. 

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 The Court rejects American Manufacturers’ contention that 6

neither David Carothers, President of CCI, or CCI Controller

Debbie Darbonne are qualified to offer evidence as to these

additional claims. The Declarations of both Mr. Carothers and

Ms. Darbonne attest to these claims and authenticate letters to

American’s construction consultant, Sage Associates, containing

the pass-through demands (Exhibits 20 and 32 to Defendants’

Appendix of Evidence re: Folsom Project). Those demands are

hence properly at issue, and American’s objections to same on

grounds of lack of foundation, improper authentication and

inadmissible hearsay are accordingly overruled.

16

Irrespective of the propriety of American Manufacturers’ own

payments pursuant to the performance bond, which the Indemnity

Agreement arguably encompasses, Defendants for example contend

that American failed to pass through additional claims on CCI’s

behalf to the City that should have resulted in a sizable credit

against American’s payment of in excess of a million dollars.6

In fact, Defendants assert that “when this additional amount of

money is taken into consideration, it exceeds any amount that

Surety is claiming in this litigation.” (Opp., 11:10-12). 

Defendants maintain that American Manufacturers refused in bad

faith and in breach of its obligations to Carothers to pass this

claim through the City, and never included it within the lawsuit

eventually brought against the City.

Resolution of this question requires the assessment of

factual questions not amenable to determination on summary

judgment. Consequently, while the Court finds that Defendants

are liable to American Manufacturers under both the terms of the

Indemnity Agreement and California Civil Code section 2847, an

assessment of damages cannot be made as a matter of law.

///

///

Case 2:05-cv-00122-MCE-KJN Document 168 Filed 08/08/07 Page 16 of 17
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 Because oral argument will not be of material assistance, 7

the Court ordered this matter submitted on the briefs. E.D. Cal.

Local Rule 78-230(h).

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CONCLUSION

Based on the foregoing, the Court grants summary

adjudication as to Defendants’ liability under the First and

Third Causes of Action. Resolution of any damages, however, 7

cannot be made on summary judgment and that portion of American

Manufacturer’s Motion is accordingly denied.

IT IS SO ORDERED.

Dated: August 8, 2007

_____________________________

MORRISON C. ENGLAND, JR.

UNITED STATES DISTRICT JUDGE

Case 2:05-cv-00122-MCE-KJN Document 168 Filed 08/08/07 Page 17 of 17