Court Opinion

ID: 4185985
Source: CourtListenerOpinion
Date Created: 2017-07-13 17:02:52.517317+00
Date Added: 2024-06-11T14:39:48.640914
License: Public Domain

NOTICE: NOT FOR OFFICIAL PUBLICATION.
 UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL
                 AND MAY BE CITED ONLY AS AUTHORIZED BY RULE.

                                    IN THE
             ARIZONA COURT OF APPEALS
                                DIVISION ONE

         LEXON INSURANCE COMPANY, a Texas corporation,

                                Plaintiff/Appellee,

                                        v.

VALLEY SPRINGS ESTATES, LLC, an Arizona limited liability company;
JAMES LEO CROWLEY; LJC DEVELOPMENT, LLC, an Arizona limited
liability company; and CEDAR RIDGE INVESTMENTS, LLC, an Arizona
             limited liability company, Defendants/Appellants.

                             No. 1 CA-CV 16-0096
                               FILED 7-13-2017

           Appeal from the Superior Court in Coconino County
                         No. S0300CV201300153
                The Honorable Jacqueline Hatch, Judge

                                  AFFIRMED

                                   COUNSEL

Jennings, Haug & Cunningham, L.L.P., Phoenix
By Matthew H. Sloan, Robert J. Lamb
Counsel for Plaintiff/Appellee

Aspey, Watkins & Diesel, P.L.L.C., Flagstaff
By Whitney Cunningham, Colleen Maring, Kathryn G. Mahady
Counsel for Defendants/Appellants
                   LEXON v. VALLEY SPRINGS et al.
                        Decision of the Court

                      MEMORANDUM DECISION

Judge Jon W. Thompson delivered the decision of the Court, in which
Presiding Judge Randall M. Howe and Judge Lawrence F. Winthrop joined.

T H O M P S O N, Judge:

¶1            Valley Springs Estates, LLC (Valley Springs), James Leo
Crowley, LJC Development, LLC (LJC), and Cedar Ridge Investments, LLC
(Cedar Ridge) (appellants) appeal from the trial court’s judgment in favor
of appellee Lexon Insurance Company (Lexon) after a jury trial, and from
the court’s denial of their motion for judgment as a matter of law. For the
following reasons, we affirm.

              FACTUAL AND PROCEDURAL HISTORY

¶2           Appellants are real estate developers and investors.
Sometime in 2006 or 2007, appellants decided to develop two residential
subdivisions--Valley Springs in Mohave County and Cedar Ridge in the
City of Flagstaff. In 2007, appellants asked Mahoney Group Insurance
Agency (Mahoney Group) to find a surety to provide subdivision
performance bonds for both projects. Mahoney Group took the bonds to
Lexon, and Lexon agreed to issue the bonds.

¶3          In March 2007, appellants signed a general agreement of
indemnity (GAI) for Valley Springs, and in July 2007 appellants signed a
GAI for Cedar Ridge. Both GAIs contained the following provision:

             The indemnitors will pay to [Lexon] . . .
             premiums and charges at the rates, and at the
             times specified in respect to each such bond in
             [Lexon’s] schedule of rates, which, with any
             additions, or amendments thereto, is by
             reference made a part hereof, and will continue
             to pay the same where such premium is annual,
             until the Company shall be discharged and
             released from any and all liability and
             responsibility upon and from each such bond or
             matters arising therefrom . . . .

Lexon’s schedule of rates provided, in relevant part:

                                     2
                   LEXON v. VALLEY SPRINGS et al.
                        Decision of the Court

      G. Subdivision Bonds

                       Specialty Rates: Rate per M

      $24.00/M/Annum of cost of improvements or bond penalty

      $48.00/M/Biennium of cost of improvements or bond
      penalty

      1.   The above rates are charged on the cost of improvements
           or bond penalty, whichever is higher.

      2. Premium is charged on an annual basis. Premium is
         considered fully earned in the initial term. Renewals will
         be charged at the same rates on the remaining Bond
         Penalty if reduced by the Obligee and fully earned in the
         first renewal term. Pro-rated return premiums will be
         issued if the work is completed in the second renewal
         term, subject to the minimum annual earned premium,
         and the Surety has been released of liability by the
         Obligee.[1]

The performance bond for Valley Springs was in the amount (or penal sum)
of $2,525,105.66 and the performance bond for Cedar Ridge was in the
amount of $971,463.60. Appellants paid a two percent premium for each
bond at the time they were issued.2 The premium for the Valley Springs
bond was $50,502 and the premium for the Cedar Ridge bond was $19,429.
Mahoney Group received a commission equal to twenty-five percent of
each premium.

1In this case Mohave County and City of Flagstaff are the obligees and
Lexon is the surety. The only obligation an obligee has under a subdivision
bond is to release and discharge the bond after work is finished.

2 Lexon’s underwriter, Gregory Semrow, testified that he used Lexon’s
schedule of rates and decided that appellants would pay Lexon’s specialty
rate for subdivision bonds because appellants did not have an established
relationship with Lexon, but that he discounted the specialty rate to 2
percent of the bond penalty instead of 2.4 percent ($20 per thousand dollars
per year) because appellants’ financial statements were favorable and
Lexon’s risk was therefore lower.

                                     3
                   LEXON v. VALLEY SPRINGS et al.
                        Decision of the Court

¶4            Neither project was completed within a year. Because some
work had been completed at Valley Springs, appellants successfully got
Mohave County to reduce the amount of the Valley Springs bond to
$1,984,230.82, and Lexon issued an amended bond. Mahoney Group sent
an invoice to appellants for a second annual premium on the Valley Springs
bond for $39,685, a reduced amount in accordance with the lowered bond
amount. Appellants paid that amount in June 2008. Appellants paid a
second two percent premium of $19,429 on the Cedar Ridge bond in August
2008.

¶5           After 2008, appellants stopped paying annual premiums to
Lexon for either project.3 Lexon remained liable on the bonds, which
continued to “auto-renew” annually.4 The Cedar Ridge project was not
completed until 2014. In September 2014, the City of Flagstaff released
Lexon from liability under the bond. At the time of trial, Valley Springs
had not been completed.

¶6            In February 2013, Lexon filed a complaint in superior court
seeking contract damages from appellants5 for the unpaid premiums and
attorneys’ fees. Lexon filed a motion for summary judgment in June 2014.
Appellants filed a cross-motion for summary judgment, and the trial court
denied both motions, finding there were genuine issues of material fact. In
October 2014, appellants filed an amended answer and counterclaim
seeking a refund of the premiums they paid Lexon in 2008. Appellants filed
another motion for summary judgment in May 2015. Lexon filed a cross-
motion for summary judgment. After oral argument, the court denied both
motions for summary judgment. The court found there were genuine
issues of material fact and that the terms of the contract were ambiguous.

3 In 2009, Lexon took over the Valley Springs and Cedar Ridge accounts
from Mahoney Group and began attempting to collect its renewal
premiums.

4 A subdivision bond cannot lapse and remains in effect until the obligee
(here Mohave County or City of Flagstaff) releases it.

5 Lexon also sued other indemnitors who have since been dismissed from
the case.

                                    4
                     LEXON v. VALLEY SPRINGS et al.
                          Decision of the Court

¶7             After a four-day jury trial6, the jury found in favor of Lexon
on all counts and in favor of Lexon on appellants’ counterclaim, and
awarded Lexon $297,274.32. Appellants filed motions for a new trial and
for judgment as a matter of law, which the trial court denied. The court
entered a final judgment in favor of Lexon in May 2016. Appellants timely
appealed. We have jurisdiction pursuant to Arizona Revised Statues
(A.R.S.) sections 12-120.21(A)(1) (2016), -2101(A)(1) (2016).

                                DISCUSSION

¶8            Appellants raise three issues on appeal: 1) whether the trial
court erred by refusing to grant their motion for judgment as a matter of
law following the jury’s verdict in favor of Lexon; 2) whether the trial court
abused its discretion by permitting Lexon to admit into evidence the
schedule of rates it disclosed seven months before trial but subsequent to
the parties’ discovery deadline; and 3) whether the trial court abused its
discretion by allowing Lexon to present improper expert opinion
testimony.

    A. Denial of Motion for Judgment as a Matter of Law

¶9              Appellants first argue that the trial court erred by refusing to
grant them judgment as a matter of law following the jury’s verdict. (OB at
34). “We review de novo whether a trial court should have granted a
judgment as a matter of law.” A Tumbling -T Ranches v. Flood Control Dist.
of Maricopa Cty., 222 Ariz. 515, 524, ¶ 14, 217 P.3d 1220, 1229 (App. 2009)
(citations omitted). “A motion for [judgment as a matter of law] should be
granted ‘if the facts produced in support of the claim or defense have so
little probative value, given the quantum of evidence required, that
reasonable people could not agree with the conclusion advanced by the
proponent of the claim or defense.’” Id. (quoting Orme Sch. v. Reeves, 166
Ariz. 301, 309, 802 P.2d 1000, 1008 (1990)). We “view ‘the evidence in a light
most favorable to upholding the jury verdict’ and will affirm ‘if any
substantial evidence exists permitting reasonable person to reach such a
result.’” Id. (quoting Hutcherson v. City of Phoenix, 192 Ariz. 51, 53, ¶ 13, 961
P.2d 449, 451 (1998)). ‘[T]he interpretation of a contract is a question of law
or at most, a mixed question of law and fact . . . .” United Cal. Bank v.
Prudential Ins. Co. of Am., 140 Ariz. 238, 257, 681 P.2d 390, 409 (App. 1983).

6The sole issue before the jury was whether premiums on the bonds were
due annually.

                                       5
                    LEXON v. VALLEY SPRINGS et al.
                         Decision of the Court

¶10          Appellants argue that the schedule of rates was not and could
not have been incorporated by reference into the parties’ contract. To
incorporate a document into a contract by reference, “[t]he reference must
be clear and unequivocal and must be called to the attention of the other
party, he must consent hereto, and the terms of the incorporated document
must be known or easily available to the contracting parties. . . .” Id. at 268,
681 P.2d at 420 (citing 17A C.J.S. Contracts § 299 at 136 (1963)) (emphasis
added). Although it is not necessary that a contract specifically state that
another document is “’incorporated by this reference herein,’ the context in
which the reference is made must make clear that the writing is part of the
contract.” Id. Physical attachment of the document is not necessary.
Weatherguard Roofing Co., v. D.R. Ward Const. Co., 214 Ariz. 344, 347, ¶ 10,
152 P.3d 1227, 1230 (App. 2007) (citation omitted).

¶11           Appellants agree that the GAIs’ references to Lexon’s
schedule of rates are clear and unequivocal. However, they argue that 1)
they could not have consented to the terms of the schedule of rates because
the schedule of rates was not “known and easily available” to them, and 2)
the reference to the schedule of rates was never called to their attention.
Thus, appellants argue, no substantial evidence “would permit any
reasonable person to find . . . three of the four elements required for the
(schedule of rates) to have been incorporated by reference.”

¶12           We disagree. Appellants agreed to be bound by the terms of
the GAIs, which clearly stated that appellants would pay Lexon “premiums
and charges at the rates, and at the times specified in respect to each such
bond in [Lexon’s] schedule of rates, which, with any additions, or
amendments thereto, is by reference made a part hereof. . ..” LJC’s owner,
John Crowley, testified that he reviewed the GAIs before signing them and
was aware that they referenced a schedule of rates.7 David Hickman at
Mahoney Group testified that Lexon quoted a premium rate of two percent
per year for the two subdivision bonds and that he orally communicated
Lexon’s premiums to John Crowley.              Gregory Semrow, Lexon’s
underwriter, testified that he set the premiums at two percent per year, he
communicated the premiums to Mahoney Group, and that no one ever
asked him to provide the schedule of rates. Thus, there was substantial
evidence that the terms of the schedule of rates were communicated to
appellants, or easily available to them at the time they entered into the

7Crowley testified that he asked David Hickman for a copy of the schedule
of rates but was not provided with a copy. He also testified that he was not
aware the premiums would be charged annually, even though, as noted
supra, he paid second annual premiums on both bonds.

                                       6
                    LEXON v. VALLEY SPRINGS et al.
                         Decision of the Court

contract with Lexon. See Weatherguard, 214 Ariz. at 346, ¶ 8, 152 P.3d at
1229.

¶13           Because sufficient evidence supported the jury’s verdict, the
trial court did not err in denying appellants’ motion for judgment as a
matter of law.

    B. Admission of the Schedule of Rates into Evidence

¶14           In June 2015, Lexon’s attorneys found a document entitled
“schedule of rates” and disclosed the document to appellants in its third
supplemental disclosure statement. The disclosure was made after the
parties’ agreed-upon April 30, 2015 discovery deadline. Appellants filed a
motion to strike the disclosure. The trial court denied the motion to strike,
noting that there was “no evidence that [Lexon] intentionally held back the
‘rate schedule,’” and that “[b]oth sides have a duty to continue to disclose.”
Appellants did not seek to conduct any additional discovery. In November
2015, appellants filed a motion in limine requesting that the schedule of
rates be excluded, and the trial court denied the motion in limine.

¶15           We review the trial court’s rulings on discovery and
disclosure matters for an abuse of discretion. Preston v. Amadei, 238 Ariz.
124, 130, ¶ 15, 357 P.3d 159, 165 (App. 2015) (citation omitted). Appellants
argue that 1) Lexon never sought leave of the court by motion and
supporting affidavit as required by Arizona Rule of Civil Procedure 37(c)(2)
(Rule 37(c)(2)) to extend its time for disclosure, and 2) Rule 37(c) required
exclusion of the schedule of rates because the untimely disclosure was
neither harmless nor supported by good cause.

¶16           The applicable version of Rule 37(c)8 provides, in relevant
part:

              (1) A party who fails to timely disclose
                  information required by Rule 26.1 shall not,
                  unless such failure is harmless, be permitted
                  to use as evidence at trial . . . the information
                  or witness not disclosed, except by leave of
                  court for good cause shown.

8In their opening brief appellants cite a version of Rule 37 that was not in
effect at the time this action was filed; however, they concede in their reply
brief that the applicable version of Rule 37 is the version cited by Lexon,
which was in effect until April 15, 2014.

                                       7
                       LEXON v. VALLEY SPRINGS et al.
                            Decision of the Court

                 ....

              (2) A party seeking to use information which
                  the party first disclosed later than sixty (60)
                  days before trial must obtain leave of court
                  by motion, supported by affidavit, to extend
                  the time for disclosure. Such information
                  shall not be used unless the motion
                  establishes and the court finds:

                 (i)      that the information would be
                          allowed under the standards of
                          subsection (c)(1) notwithstanding the
                          short time remaining before trial; and

                 (ii)     that the information was disclosed as
                          soon as practicable after its discovery.

Under this version of the Rule, leave from the trial court is not required if a
disclosure is made after a disclosure deadline so long as the disclosure is
made more than sixty days before trial. The disclosure here was made more
than seven months before trial. Thus, leave from the court was not required
and the trial court did not abuse its discretion by admitting the schedule of
rates.

   C. Alleged Improper Expert Opinion Testimony

¶17           Finally, appellants argue that the trial court erred by allowing
Lexon to offer undisclosed expert opinion testimony about the industry
standard regarding frequency of premiums on subdivision bonds through
its lay witnesses, and by allowing Lexon to comment on the testimony
during closing argument. We review the trial court’s decision to admit lay
witness opinion testimony for an abuse of discretion. Lewis v. N.J. Riebe
Entrs., 170 Ariz. 384, 396, 825 P.2d 5, 17 (1992).

¶18           At trial, appellants objected to Lexon’s witnesses testifying
about an industry standard regarding the frequency of subdivision bond
premiums (both during Lexon’s direct examination of those witnesses and
in the context of several jury questions), on the ground that the witnesses
had not been disclosed as expert witnesses. The trial court ruled that Lexon
would not be permitted to elicit testimony about industry standards. The
court, however, permitted Lexon to elicit testimony from its witnesses
Dawn Fykes, Gregory Semrow, and Michael Belinski, about their firsthand
experience with subdivision bond premiums. Fykes, a Mahoney Group

                                       8
                    LEXON v. VALLEY SPRINGS et al.
                         Decision of the Court

employee with experience procuring subdivision bonds, testified that she
never procured a subdivision bond for John Crowley, or for anyone else,
that did not have annual premiums. Semrow, the underwriting vice
president of Lexon who worked with Mahoney Group on the Valley
Springs and Cedar Ridge bonds, testified that he underwrote tens of
thousands of subdivision bonds during his career and none had premiums
that were other than annual or bi-annual. Belinski testified that in his
experience as Lexon’s collections attorney, he never saw an instance where
Lexon did not charge a subdivision bond annually. In its closing argument,
Lexon argued that other GAIs appellants had entered into for bonds
procured by Mahoney Group contained language similar to the Lexon GAIs
“[b]ecause that language, that type of agreement is what’s typical in the
surety industry.” Counsel further argued that Lexon’s witnesses “all
testif[ied] that premiums due on subdivision bonds are always, always due
annually.” Appellants made no objections during Lexon’s closing
argument.

¶19           Arizona Rule of Evidence 701 provides:

              Opinion Testimony by Lay Witnesses

              If a witness is not testifying as an expert,
              testimony in the form of an opinion is limited to
              one that is:

              (a) rationally based on the witness’s perception;

              (b) helpful to clearly understanding the
                  witness’s testimony or to determining a fact
                  in issue; and

              (c) not based on scientific, technical, or other
                  specialized knowledge within the scope of
                  Rule 702.

We find no abuse of discretion. Lexon’s lay witnesses, who all had years of
experience with subdivision bonds, gave testimony rationally based on
their own experience with subdivision bonds, and the testimony was
helpful to determining the facts of the case. Furthermore, appellants
waived their argument concerning Lexon’s closing argument by failing to
make a timely objection below. See Martinez v. Jordan, 27 Ariz. App. 254,
256, 553 P.2d 1239, 1241 (1976) (citing Tryon v. Naegle, 20 Ariz. App. 138, 510
P.2d 768 (1973)).

                                      9
                   LEXON v. VALLEY SPRINGS et al.
                        Decision of the Court

   D. Attorneys’ Fees and Costs

¶20           Both sides request their attorneys’ fees and costs on appeal
pursuant to A.R.S. § 12-341.01 (2016). We award Lexon reasonable
attorneys’ fees and costs upon compliance with ARCAP 21.

                             CONCLUSION

¶21          For the foregoing reasons, we affirm the judgment in favor of
Lexon.

                         AMY M. WOOD • Clerk of the Court
                         FILED: AA

                                      10