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Arch Insurance Co. v. Sierra Equipment Rental, Inc.

United States District Court, E.D. California

July 25, 2016

ARCH INSURANCE COMPANY, a Missouri corporation, Plaintiff,
v.
SIERRA EQUIPMENT RENTAL, INC., a California corporation; MELVIN R. WEIR, an individual; CAROLYN S. SCAROLA, as trustee of the Dry Creek Ranches Trust; CAROLYN S. SCAROLA, an individual, Defendants.

          ORDER

         This matter is before the court on the motion for partial summary judgment brought by plaintiff Arch Insurance Company (Arch), on its breach of contract claim against defendant Sierra Equipment Rental, Inc. (Sierra). Mot., ECF No. 154. The motion is unopposed, as Sierra is without counsel.[1] The court held a hearing on May 6, 2016, and neither party appeared. The court subsequently ordered the parties to show cause as to why they should not be sanctioned for failing to appear. ECF No. 170. Arch responded, indicating it did not appear at the hearing due to a calendaring error compounded with the confusion over Sierra’s lack of representation. ECF No. 171. For reasons explained below, the court GRANTS Arch’s motion for partial summary judgment and DISCHARGES the order to show cause as to Arch. Sierra’s OSC is also DISCHARGED, given that nothing before the court indicates it could enforce any monetary sanctions ordered, and in light of the adverse decision by the court against Sierra in the resolution of this motion.

         I. FACTUAL BACKGROUND

         In 2012, Sierra was a corporate entity in good standing with rights to conduct business in California. Stmt. of Undisputed Material Facts (SUMF) No. 23, ECF No. 155. Previously, on August 12, 2005, Sierra and others, including Melvin Weir and Carolyn Scarola (collectively, “Indemnitors”), executed a General Indemnity Agreement (GIA) as partial consideration for Arch’s issuance of bonds covering Sierra’s construction contracts for the two projects at issue here: the Lake County and Shasta County Projects. See SUMF Nos. 1, 2, 8; Pearce Decl., Ex. A, ECF No. 157 at 12.[2] In consideration of Arch’s issuance of the payment and performance bonds, the GIA requires Sierra to indemnify and hold Arch harmless for any “loss” as defined in the GIA, which includes

Any and all liability, losses, costs, expenses, and fees of whatever kind or nature, that [Arch] may sustain or incur as a result of executing any [b]ond or as a result of the failure of [Sierra] or Indemnitors to perform or comply with [the GIA]. Loss includes but is not limited to: (a.) sums posted by [Arch] as a reserve for the payment of potential losses and / or expenses, (b.) all costs and expenses incurred in connection with investigating, paying or litigating any claim, and / or enforcing [the GIA], including but not limited to legal fees and expenses, professional and consulting fees, technical and expert witness fees and expenses, (c.) all accrued and unpaid premiums owing to [Arch] for the issuance, continuation or renewal of any [b]onds or for any policy of insurance issued by [Arch] for [Sierra] or Indemnitors, (d.) funds advanced by [Arch] to [Sierra] in connection with a Bonded Contract, and (e.) all other amounts payable to [Arch] according to the terms and conditions of [the GIA] . . . .

SUMF No. 4; Pearson Decl., Ex. A at 9.

         The GIA also requires the following:

4. Posting of Collateral - Indemnitors agree to deposit with [Arch], immediately upon demand by [Arch], an amount equal to the greater of (a.) the amount of any reserve established by [Arch] to cover any actual or potential Loss, or (b.) the amount of any claim or claims or other liabilities asserted against [Arch] as a result of issuing any [b]ond . . . .
. . .
8. Discharge of Surety - Upon the request of [Arch], [Sierra] and Indemnitors will procure the discharge of [Arch] from any [b]ond, and all liability arising therefrom, and provide evidence to [Arch] regarding the same.
9. Access to Books & Records - [Arch], including its designated agents, shall, at any and all times, have unrestricted access upon reasonable notice to review all books and records of [Sierra] and Indemnitors . . . .

SUMF Nos. 4, 5, 6; Pearson Decl., Ex. A at 9-10. Lastly, the GIA also provides that Sierra and the Indemnitors agree to accept vouchers or other evidence of payments made by Arch for any Loss sustained or incurred by reason of having executed any Bond. SUMF No. 26; Pearson Decl., Ex. A at 9.

         In reliance on Sierra and Indemnitors’ representations in the GIA, Arch issued bonds guaranteeing Sierra’s performance of two contracts, and Sierra’s payments to subcontractors and suppliers in connection with those contracts: (1) Sierra’s contract with the California Department of Transportation (CalTrans) for construction on Route 53 in Lake County (the Lake County Project) (payment and performance bonds, with penal sums of $11, 311, 521.95 and $5, 655, 768.98, respectively to cover alternative performance of the contract if needed); and (2) Sierra’s subcontract with Tutor-Saliba Corporation (Tutor) for construction on Antler’s Bridge located in Shasta County (the Shasta County Project) (payment and performance bonds, with a penal sum of $6, 532, 874.00 to cover alternative performance of the subcontract if needed). SUMF Nos. 8-9. The bonds are collectively referred to as the “Bonds” in this order.

         By January 2012, Sierra had failed to pay a number of subcontractors on the Lake County Project, resulting in numerous claims on the Bonds for that project. SUMF No. 10. At the same time, Sierra requested financial assistance from Arch. SUMF No. 11. In mid-February 2012, Arch demanded that Sierra fulfill its obligations under the GIA, including exonerating Arch from potential liabilities, indemnifying Arch, and providing collateral in the amount of $1, 461, 918.83, the total amount in claims asserted against Arch’s Bonds at the time. SUMF No. 15. However, by the end of February 2012, Sierra defaulted not only on its contract for the Lake County Project but also for the Shasta County Project contract, resulting in claims against both Projects’ Bonds by the Project owners, CalTrans and Tutor, and $6, 737, 855.98 in losses to Arch as of January 12, 2016. SUMF No. 10-13; Pearce Decl. ¶ 9, Ex. E. Tutor, with whom Sierra subcontracted for the Shasta County Project, filed a civil action against both Sierra and Arch as a result of the default, alleging damages in excess of $6, 532, 874.00. Id. at 13-14. At the time Arch filed its motion, the civil action was pending in Los Angeles Superior Court. Id.

         Since 2012 Arch has made numerous requests to inspect Sierra’s books and records. SUMF No. 25. Sierra has refused, and Arch retained legal counsel to gain access. Id. Arch has recovered $2, 821, 915.45 in credits against its losses under the Bonds. SUMF No. 27. As of January 12, 2016, Sierra’s corporate status with the California Secretary of State was forfeited, meaning Sierra has not filed its franchise tax return or paid the tax due thereunder. SUMF No. 28; Van Ornum Decl. ¶ 5 & Ex. B, ECF No. 156; see also Business Search - Field Descriptions and Status Definition, California Secretary of State web page, available at http://www.sos.ca.gov/business-programs/business-entities/cbs-field-status-definitions/ (last visited May 2, 2016 16:17GMT). Arch’s counsel has attempted to secure a stipulated judgment from Sierra but has been unsuccessful.

         II. PROCE ...


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