Unpublished Disposition, 904 F.2d 40 (9th Cir. 1989)

Nos. 89-55030, 89-55031.

United States Court of Appeals, Ninth Circuit.

Before DAVID R. THOMPSON and TROTT, Circuit Judges, and STANLEY A. WEIGEL, District Judge^* .

MEMORANDUM^** 

Appellant and cross-appellee, Hartford Accident & Indemnity Co. ("Hartford"), appeals the district court's denial of its request for attorney fees on its breach of contract and declaratory judgment action against appellees and cross-appellants, J.R.L.A. Compliance, Inc. d/b/a A.C.I. ("JRLA") and Lou Adler ("Adler"). JRLA and Adler appeal the district court's grant of summary judgment in favor of Hartford on their fraud, breach of fiduciary duty, and breach of contract counterclaims. We have jurisdiction pursuant to 28 U.S.C. § 1291 and we affirm.

FACTS

In September 1979, Adler and Jas Rarewala incorporated JRLA. Adler is currently a 50% shareholder of JRLA. JRLA engaged in the business of converting foreign gray market vehicles that did not conform to domestic safety and emissions standards. In March 1980, JRLA and Hartford entered into an agreement, pursuant to which Hartford issued Immediate Delivery and Consumption Entry Bond, No. 5036756 (the "First Bond"). The First Bond was in the penal sum of $200,000, with a term extending from March 24, 1980 to March 23, 1981. The Department of Customs ("Customs") required this bond and subsequent bonds as a condition precedent to JRLA's importation of automobiles into the United States during the period covered by the bonds.

Approximately one month after Hartford issued the First Bond, JRLA and Adler executed a Specific Indemnity Agreement ("SIA"). The SIA provided that Adler and JRLA would "indemnify and save harmless [Hartford] ... on said bond or undertaking, from and against any and all demands, liability, loss, cost, damage or expense of whatever nature or kind, including counsel fees, which [Hartford] shall or may, at any time, for any cause, incur, sustain or be put to, for or by reason or in consequence of the execution of such bond or undertaking." Appellees' Supp. ER at 1.

In January 1981, Hartford issued bond no. 5036756-A ("Second Bond") in the penal sum of $200,000, for the importation of cars from March 24, 1981 to March 23, 1982. Also in January 1981, Hartford first received notice from Customs regarding certain alleged violations. It received additional notices in June and September 1981. In December 1981, Hartford issued bond no. 5036756-B ("Third Bond") in the penal sum of $200,000 (later increased to $300,000 in April 1982), for the period covering April 30, 1982 to April 29, 1983.

On February 15, 1983, Hartford renewed the Third Bond, this time in the amount of $200,000, covering imports from April 30, 1983 to April 29, 1984. That same day, Hartford informed JRLA that it had received a "final notice" from customs for claims against the bonds totaling in excess of $200,000. In April 1983, Hartford directed the insurance agency handling the JRLA account to have JRLA and Adler execute a General Indemnity Agreement ("GIA"). This agreement would have covered all previous and subsequent bonds of any type issued by Hartford on behalf of JRLA. The insurance agency returned the GIA to Hartford unsigned.

JRLA ceased doing business in late 1983. But it continued its efforts to reduce the amount of damages claimed by Customs. In September and October 1982, JRLA filed petitions for mitigation with Customs. In August 1983, JRLA retained Mary Baluss ("Baluss") to represent it in administrative proceedings before Customs. Baluss sought to reduce Customs' claims and cancel any penalties. Baluss kept Hartford apprised of her efforts.

On October 22, 1984, Customs sent a "formal demand" to Hartford in the amount of $109,628.66. As a result of this demand, Hartford requested JRLA and Adler to post cash or collateral in the sum of $200,000.¹  In response, Adler's attorney wrote to Hartford on December 27, 1984, stating that Adler was not responsible under the SIA. In this letter, Adler's attorney stated that Hartford's request for collateral was premature, that other persons caused the liability on the bond, and that Adler "never agreed to personally guarantee the obligations of JRLA Compliance, Inc. on the bond to Hartford. Any indemnity or guaranty that was obtained was obtained through fraud." ER at 93.

On March 13, 1985, Hartford received a letter from Baluss, stating that JRLA's "situation with Customs is basically terminal." Id. at 96. On March 26, 1985, Hartford commenced the present action. Hartford claimed that JRLA and Adler had breached the SIA by failing to provide collateral. It also sought a declaration that JRLA and Adler were required to indemnify it for its losses under any of the bonds. JRLA and Adler filed counterclaims based upon both the bonds and the SIA. Their claims included fraud, breach of fiduciary duty, and breach of the implied covenant of good faith and fair dealing.

On July 31, 1985 Hartford made a formal demand on JRLA and Adler to provide collateral of $486,718.86 immediately, or it would seek a preliminary injunction. JRLA and Adler refused to provide collateral on the ground that the demand was premature. Hartford's subsequent motion for preliminary injunction was denied by the district court on October 7, 1985. The court ruled that because no "suit, action or proceeding" growing out of or relating to the bonds had occurred, no collateral was due. Alternatively, the court found that even if Customs' demands for liquidated damages could be construed to be a "proceeding," the bond was ambiguous and would be construed against Hartford.

The litigation continued and JRLA continued its mitigation efforts. In September 1987, the Environmental Protection Agency submitted its final recommendations to Customs. It determined that the aggregate damages remaining on all bonds amounted to $222,287.79. On April 21, 1988, JRLA paid this sum to Customs. Customs thereafter confirmed that the payment satisfied all known claims and demands against JRLA and Hartford on the bonds. Hartford paid no money to Customs or any other entity in connection with the bonds.

On August 1, 1988, the district court granted JRLA's and Adler's motion for summary judgment. The district court determined that because any obligation under the SIA had been discharged, Hartford no longer had any cause of action under that agreement. The court also denied Hartford's request for attorney fees. It held that nothing in the SIA provided for attorney fees for Hartford in its suit against JRLA and Adler on the SIA.

On October 24, 1988, the district court granted Hartford's motion for summary judgment on JRLA's and Adler's second amended counterclaim. The district court ruled that JRLA and Adler had failed to articulate any evidence to show that Hartford had committed fraud or bad faith breach of either the SIA or the bonds. The court entered judgment on November 23, 1988, and on December 19, 1988, denied the parties' motions for costs. Hartford timely filed its notice of appeal on December 22, 1988, and JRLA and Adler timely filed their cross-appeal on January 3, 1989.

DISCUSSION

"California law governs the substantive issues of state law in this diversity action. Because the contracts and transactions in issue in this case took place in California, we apply the law of that state." Los Angeles Nut House v. Holiday Hardware Corp., 825 F.2d 1351, 1353 (9th Cir. 1987) (citation omitted).

Hartford contends the district court erred by not awarding it attorney fees for its prosecution of its claims against JRLA and Adler. It maintains the SIA contains a specific provision for attorney fees that includes actions to enforce its provisions. JRLA and Adler argue that the SIA contains no such provision, and even if it did it would not cover the present suit.

"The [California] Legislature has established that in the absence of an express agreement or statute, each party to a lawsuit is responsible for its own attorney's fees." Davis v. Air Technical Ind., 22 Cal. 3d 1, 5, 582 P.2d 1010, 1012, 148 Cal. Rptr. 419, 421 (1978). Hartford requests attorney fees pursuant to a contract. Therefore, California Civil Code Sec. 1717 controls the award of such fees. This section provides:

(a) In any action on a contract, where the contract specifically provides that attorney's fees and costs, which are incurred to enforce that contract, shall be awarded either to one of the parties or to the prevailing party, then the party who is determined to be the party prevailing on the contract, whether he or she is the party specified in the contract or not, shall be entitled to reasonable attorney's fees in addition to other costs.

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(b) (1) The court, upon notice and motion by a party, shall determine who is the party prevailing on the contract for purposes of this section, whether or not the suit proceeds to final judgment. Except as provided in paragraph (2), the party prevailing on the contract shall be the party who recovered a greater relief in the action on the contract. The court may also determine that there is no party prevailing on the contract for purposes of this section.

Cal.Civ.Code Sec. 1717 (West Supp.1990).

We need not decide whether the SIA provides for attorney fees, because neither party was a prevailing party in the litigation. In its order denying the parties' motions for costs under Rule 54,²  the district court ruled that "no costs will be awarded on the alternative bases that there is no prevailing party, or if there is, that the litigation was conducted in such a way that it would be unjust to require either party to pay the costs of the other." Appellees' Supp. ER at 49.

We review the district court's denial of attorney fees for an abuse of discretion. See Lange v. Penn. Mut. Life Ins. Co., 843 F.2d 1175, 1184 (9th Cir. 1988). The case of Nasser v. Superior Court, 156 Cal. App. 3d 52, 202 Cal. Rptr. 552, 556 (1984), is instructive on this point. In Nasser, the lessor and lessee entered into a five-year lease of business property, with a three-year option. At the end of the five years, the parties could not agree on the terms for the next three years. The lessors commenced an action for unlawful detainer. The lessee filed a separate action for declaratory relief, later consolidated with the lessor's suit. The lessee's declaratory judgment action sought to validate the option to renew and establish a monthly rental of $565. The trial court found the option agreement enforceable but set the monthly rental at $674. It also found that there was no prevailing party in the litigation. The court of appeal affirmed. It reasoned that since "the option was validated, [but] petitioner was forced to pay a rental amount higher than he requested in his declaratory relief action and higher than previously offered ... the judgment 'must be considered good news and bad news as to each of the parties.' " Id. at 60, 202 Cal. Rptr. at 556 (quoting Kytasty v. Godwin, 102 Cal. App. 3d 762, 774, 162 Cal. Rptr. 556, 563 (1980)).

In the present case, Hartford sought a declaratory judgment to establish JRLA's and Adler's liability as indemnitors. In moving for a preliminary injunction, Hartford sought an order which would have required JRLA and Adler to post collateral. That motion was denied as premature. Hartford's declaratory relief action was subsequently mooted when all claims by Customs were satisfied. On the other side of the case, JRLA and Adler lost on all their counterclaims. Thus, the judgment is good news and bad news for each of the parties. The district court did not abuse its discretion by finding that none of the parties was a prevailing party.

As previously noted, the district court denied all the parties' motions for costs. It held that none of the parties was a prevailing party and that their conduct in this litigation made it unjust to require any party to pay another party's costs.

"Whether or not to award costs is a decision made by the trial judge and 'his decision will not be overturned unless he has abused his discretion.' " Trans Container Servs. (Basel) A.G. v. Security Forwarders, Inc., 752 F.2d 483, 488 (9th Cir. 1985) (quoting Chavez v. Tempe Union High School Dist., 565 F.2d 1087, 1095 (9th Cir. 1977)). For the reasons previously stated, we conclude that the district court did not abuse its discretion in ruling that none of the parties was a prevailing party.

Although JRLA and Adler did not raise the district court's dismissal of their claim for breach of fiduciary duty in their opening brief, Hartford raised it in its second brief and JRLA and Adler responded in their reply brief. Thus, this court has discretion to consider the issue. See International Union of Bricklayers Local No. 20 v. Martin Jaska, Inc., 752 F.2d 1401, 1404 n. 4 (9th Cir. 1985). We affirm the dismissal of this claim.

In Sumitomo Bank v. Iwasaki, 70 Cal. 2d 81, 447 P.2d 956, 73 Cal. Rptr. 564 (1968), the California Supreme Court explored the circumstances under which a surety could discharge its obligation because of the creditor's failure to disclose information about the obligation the surety was guaranteeing. During that discussion, the court stated that " [n]o general duty imposes upon the creditor the obligation to disclose to the surety such matters as the creditor knows might affect the surety's risk." Id. at 85, 447 P.2d at 959, 73 Cal. Rptr. at 567. The court further stated:

Although the surety is said to be a "favorite of the law," the creditor does not stand as a fiduciary in his relation to the surety. "The contract of suretyship ... is not in strictness uberrimae fidei, or one in which there is an obligation, irrespective of some fiduciary relation between the parties, to make full and voluntary disclosure of all matters known to the creditor that would or might be material to the surety's risk."

Id. at 85 n. 3, 447 P.2d at 959 n. 3, 73 Cal. Rptr. at 567 n. 3 (citations omitted). JRLA and Adler have not refuted the foregoing statement of California law, nor have they presented any legal authority that an indemnitor/indemnitee relationship is fiduciary in nature. We conclude that the district court properly dismissed JRLA's and Adler's claim for breach of fiduciary duty.

Adler contends the district court erroneously granted Hartford summary judgment on Adler's fraud claim. Adler asserts that Hartford fraudulently failed to disclose that it would contend that the SIA applied to not only the First Bond, but also to the Second and Third Bonds. Adler also maintains that Hartford issued the Second and Third Bonds while fruadulently failing to inform Adler there were outstanding liquidated damage claims from Customs.

Adler relies principally on Sumitomo Bank. In that case, the California Supreme Court adopted the Restatement of Security Sec. 124 (1941).³  See Sumitomo Bank, 70 Cal. 2d at 90-91, 447 P.2d at 963, 73 Cal. Rptr. at 571. The court held that Sec. 124(1) applied not only at the beginning of the suretyship, but also throughout the relationship if the surety signed a continuing guaranty. Id. at 92-93, 447 P.2d at 964, 73 Cal. Rptr. at 572. But Adler's reliance on Sumitomo Bank is misplaced. A party's failure to make the disclosures required under Sumitomo Bank does not give rise to an action for fraud. It only gives rise to a defense on the part of the surety. See Restatement of Security Sec. 124(1) (1941).

Because Adler's fraud claim is "grounded solely on omissions, [its] validity ... depends on allegations that would establish some duty of disclosure on the part of [Hartford]. No such duty is shown. There is no allegation of a confidential relationship, or of any representation by [Hartford] that was likely to mislead for want of the disclosures, or of any active concealment of the undisclosed matters." Goodman v. Kennedy, 18 Cal. 3d 335, 346-47, 556 P.2d 737, 745, 134 Cal. Rptr. 375, 383 (1976) (citations omitted). "The only other basis for a duty of disclosure is one which may exist when one party to a transaction has sole knowledge or access to material facts and knows that such facts are not known to or reasonably discoverable by the other party." Id. at 347, 556 P.2d at 745, 134 Cal. Rptr. at 383. Under this standard, Adler's claims for fraud must also fail.

Adler first contends Hartford fraudulently concealed its intention to claim that the SIA would apply not only to the First Bond, but also to the Second and Third Bonds. To show fraud, Adler must prove that Hartford had access to some "material facts." When a contract goes sour, parties to the contract often find that they have different interpretations of various terms. But the failure to disclose these varying interpretations at the beginning of a contractual relationship does not provide a predicate for a later fraud action. Adler's argument in reality is that he and Hartford simply had different interpretations of the contract. This argument does not articulate any misstatement of fact upon which to base a fraud claim.

Adler also contends Hartford continued to issue more bonds to JRLA, while concealing from Adler that Customs had issued various demands for liquidated damages against previous bonds. Although this information may constitute a material fact, Adler must show that Hartford knew that such facts were not known to or reasonably discoverable by Adler. The liquidated damage claims made by Customs concern bonds that were signed by JRLA and the claims were made in relation to cars imported by JRLA. The evidence further shows that JRLA was in contact with Customs concerning these claims. See ER at 83-84.⁴  Adler has come forth with no evidence to show why he could not have reasonably discovered Customs' demands when they were evidently known to the company which he cofounded and of which he was a 50% shareholder. Absent some evidence on this element of his claim, Adler's fraud action must fail.

JRLA and Adler argue they are entitled to tort and contract damages for Hartford's breach of the implied covenant of good faith and fair dealing arising out of the execution of the bonds and the SIA. They contend there are genuine issues of material fact concerning approximately eight actions taken by Hartford that support a claim for breach of the implied covenant.

JRLA and Adler allege that Hartford: (1) failed to disclose its interpretation that the SIA would apply to the Second and Third Bonds; (2) failed to advise Adler of outstanding Customs' claims on the First and Second Bonds before issuing the Third Bond; (3) commenced this present action without a good faith belief in its rights; (4) threatened to pay Customs' claims in full despite knowledge that JRLA was attempting to mitigate such claims; (5) used an altered bond in a hearing before the district court; (6) filed frivolous motions; (7) attempted to obtain a general indemnity agreement from JRLA and Adler; and (8) advanced unreasonable settlement positions.

Whether Hartford's actions constitute a breach of the implied covenant of good faith and fair dealing is a question of fact. Cf. Leslie Salt Co. v. St. Paul Mercury Ins. Co., 637 F.2d 657, 660 (9th Cir. 1981) (noting that under California law the "question whether the insurer acted in good faith in rejecting a claim is one of fact for the jury"). Because bad faith is often a question of intent, it is ordinarily an improper question for resolution by summary judgment. See Braxton-Secret v. A.H. Robins Co., 769 F.2d 528, 531 (9th Cir. 1985); Arizona Laborers Local 395 v. Conquer Cartage Co., 753 F.2d 1512, 1518 (9th Cir. 1985). "However, where the palpable facts are substantially undisputed, such issues can become questions of law which may be properly decided by summary judgment. But summary judgment should not be granted where contradictory inferences may be drawn from such facts, even if undisputed." Braxton-Secret, 769 F.2d at 531 (citation omitted).

Here, the facts are not seriously in dispute. JRLA's and Adler's allegations of bad faith fall into roughly three categories. First, that Hartford sought in bad faith to require JRLA and Adler to post collateral. Second, that Hartford failed to inform Adler that Hartford would seek indemnification from him on all the bonds. Finally, that Hartford interfered with JRLA's mitigation efforts.

Hartford frequently made demands for collateral from JRLA and Adler. It also vigorously sought an injunction to compel them to post collateral. But JRLA and Adler have come forward with no evidence to show that these actions were taken in bad faith. We agree with the district court when, in denying Hartford's request for collateral, it stated that the "bewildering Customs systems of 'demands,' 'final demands,' mitigation proceedings, and possibly final-final or even final-final-final demands makes it difficult to put one's finger on where liability ... arises so as to trigger off the remedies of the SIA." ER at 97. Although the district court denied Hartford's request for collateral, it was never clear that Hartford was not entitled to collateral. Therefore, JRLA's and Adler's mere allegations that Hartford aggressively sought such collateral do not create an inference of bad faith on the part of Hartford.

Hartford also sought to hold Adler as an indemnitor on all the bonds. But we agree with the district court that Adler could not "really believe that Hartford would put hundreds of thousands of dollars of risk behind a low asset corporation without believing that its half and only responsible owner was standing behind the risk." Appellees' Supp. ER at 48. Thus, Hartford's attempts to hold Adler responsible as an indemnitor under all the bonds does not allow for an inference of bad faith.

Finally, JRLA and Adler allege that Hartford attempted to interfere in its mitigation efforts. The most serious of these allegations is that Hartford threatened to pay Customs' claims and then proceed against JRLA and Adler for the sum paid. This threat occurred while JRLA was attempting to mitigate its liability to Customs. A threat to deny a party the benefits of its contract can constitute a breach of the implied covenant of good faith and fair dealing. See Fletcher v. Western Nat'l Life Ins. Co., 10 Cal. App. 3d 376, 401, 89 Cal. Rptr. 78, 93 (1970) ("We think that, similarly, the implied-in-law duty of good faith and fair dealing imposes upon a disability insurer a duty not to threaten to withhold or actually withhold payments, maliciously and without probable cause, for the purpose of injuring its insured by depriving him of the benefits of the policy.").

Hartford, however, did not threaten to withhold benefits. To the contrary, it threatened to provide the benefits JRLA had sought in obtaining the bond, namely, payment of the Customs' demands which JRLA had not paid, and which, according to its counsel, JRLA was incapable of paying. As was the case with regard to Hartford's demand for collateral, the threat to pay off Customs' claims against the bonds may have been premature. It most certainly was an aggressive attempt to get JRLA to pay the claims. But there was no showing that this was something which the bonds or the SIA precluded. Moreover, this conduct must be viewed against the backdrop of the "bewildering" morass of Customs systems which the district court found to exist, and which were brought into play in this case. Accordingly, we conclude that Hartford's threat to pay off the Customs claims did not breach an implied covenant of good faith and fair dealing.

AFFIRMED.⁵