Opinion
No. 1 CA-CV 19-0818
10-27-2020
DAVID FIELD, et al., Plaintiffs/Appellants, v. ARTIZAN EXCAVATION INC., Defendant/Appellee.
COUNSEL Dickinson Wright PLLC, Phoenix By Denise H. Troy Counsel for Plaintiffs/Appellants Elardo, Bragg, Rossi, & Palumbo PC, Phoenix By John A. Elardo, Michael E. Palumbo, Katherine Ann Stewart Counsel for Defendant/Appellee
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 UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL AND MAY BE CITED ONLY AS AUTHORIZED BY RULE.
Appeal from the Superior Court in Maricopa County
CV 2015-013053
The Honorable Christopher T. Whitten, Judge
AFFIRMED
COUNSEL
Dickinson Wright PLLC, Phoenix
By Denise H. Troy
Counsel for Plaintiffs/Appellants
Elardo, Bragg, Rossi, & Palumbo PC, Phoenix
By John A. Elardo, Michael E. Palumbo, Katherine Ann Stewart
Counsel for Defendant/Appellee
MEMORANDUM DECISION
Presiding Judge Jennifer B. Campbell delivered the decision of the Court, in which Judge Lawrence F. Winthrop and Chief Judge Peter B. Swann joined.
CAMPBELL, Judge:
¶1 David and Holly Field (collectively, "the Fields") appeal from the superior court's entry of summary judgment dismissing third-party claims against Artizan Excavation, Inc. ("Artizan"). For the following reasons, we affirm.
BACKGROUND
¶2 In November 2012, the Fields purchased a home ("the residence"). As detailed in the purchase agreement, the seller had acquired the residence through a foreclosure and sold it to the Fields "as-is" and "with all faults."
¶3 More than two years after taking possession of the residence, the Fields notified Crandall Custom Homes, L.L.C. ("Crandall"), the general contractor for the construction of the residence, that they had discovered significant property damage, including "substantial cracking in the interior of the home," broken pipes, and "inoperable doors and windows." Although Crandall responded and inspected the residence, the parties were unable to resolve the matter, so the Fields filed a construction defect complaint against Crandall alleging a breach of the implied warranty of workmanship and habitability.
¶4 In its combined answer and third-party complaint, Crandall asserted numerous defenses, including "indemnification from others whose negligence, acts, omissions, conduct and/or fault caused [the Fields'] damages." Crandall also brought indemnity and breach of contract claims against four subcontractors, including Artizan and Fox Custom Homes, LLC ("Fox").
¶5 Approximately a year into the litigation, the Fields and Crandall stipulated to an entry of judgment against Crandall for $2 million ("the stipulated judgment"). At the same time, the Fields and Crandall entered into a "Settlement Agreement, Assignment and Covenant Not to
Execute" ("the settlement agreement"). In consideration for the Fields' promise not to execute on the judgment, Crandall assigned its "rights, claims, and causes of action" against the subcontractors and their insurers.
¶6 After separately answering Crandall's third-party complaint, denying liability, Artizan and Fox moved for summary judgment, both separately and joining in each other's motions. Together, the subcontractors argued, among other things, that: (1) the Fields disclaimed any warranties by purchasing the residence on an "as-is" basis; (2) the Fields either knew of the property damage before they entered the purchase agreement or, at a minimum, the damage was discoverable at that time; (3) Crandall failed to notify the subcontractors of the construction defect claim and provide them with an opportunity to repair the alleged defects, as required under the Purchaser Dwelling Act; (4) Crandall's third-party claims are time-barred by both the statute of repose, and the statute of limitations; (5) the stipulated judgment is unenforceable against Artizan and Fox because neither the Fields nor Crandall provided the subcontractors with notice of their intent to settle and an opportunity to defend.
¶7 While the motions for summary judgment were pending, the Fields and Fox reached a settlement agreement, and the superior court granted their stipulation to dismiss Fox with prejudice. After sua sponte ordering additional briefing regarding the enforceability of the assigned claims, the superior court found the settlement agreement unenforceable against Artizan (although wholly enforceable against Crandall) because the subcontractor received no notice and opportunity to defend before the Fields and Crandall entered the "'Damron/Morris' type of agreement." Having so found, the court entered summary judgment in favor of Artizan and dismissed Crandall's third-party claims.
¶8 After denying the Fields' motion for reconsideration, the superior court entered a final judgment dismissing Artizan from the action with prejudice and awarding Artizan its attorneys' fees and costs. The Fields timely appealed.
DISCUSSION
¶9 The Fields contend that the superior court improperly entered summary judgment in favor of Artizan. Specifically, they argue that Crandall's assignment of its contractual and indemnity claims against Artizan as part of the settlement agreement is enforceable, even if the stipulated judgment is not.
¶10 In reviewing a grant of summary judgment, we view the facts and the reasonable inferences to be drawn from those facts in the light most favorable to the non-moving party. Normandin v. Encanto Adventures, LLC, 246 Ariz. 458, 460, ¶ 9 (2019). We determine de novo, however, whether the superior court correctly applied the law and whether any genuine issues of material fact exist. Diaz v. Phoenix Lubrication Service, Inc., 224 Ariz. 335, 338, ¶ 10 (App. 2010); see also Ariz. R. Civ. P. 56(a) ("The court shall grant summary judgment if the moving party shows that there is no genuine dispute as to any material fact and the moving party is entitled to judgment as a matter of law.").
¶11 A "Morris agreement" generally refers to "a settlement agreement in which an insured defendant admits to liability and assigns to a plaintiff his or her rights against the liability insurer . . . in exchange for a promise by the plaintiff not to execute the judgment against the insured." Safeway Ins. Co. v. Guerrero, 210 Ariz. 5, 7, ¶ 1 n.1 (2005) (citing United Servs. Auto Ass'n v. Morris, 154 Ariz. 113 (1987)). While a true Morris agreement is restricted to the insurance setting, the "general principles of indemnity law," which govern the validity of Morris settlement agreements and assignments, apply equally outside the insurance context to resolve purely commercial indemnification disputes. A Tumbling-T Ranches v. Flood Control Dist. of Maricopa Cnty., 220 Ariz. 202, 207-08, ¶¶ 11, 14, 15, 17 (App. 2008) (rejecting the contention that the principles underlying Morris agreements are limited to insurance matters) (citing Restatement (Second) of Judgments § 57(1) (1982)); see also Colo. Cas. Ins. Co. v. Safety Control Co., 230 Ariz. 560, 566, ¶¶ 16-17 (App. 2012).
¶12 Because a "covenant not to execute insulates [an] indemnitee from potential liability, neither party to [a Morris-type] settlement has an incentive to minimize the stipulated judgment amount." Fidelity Nat. Title Ins. Co. v. Centerpoint Mechanic Lien Claims, LLC, 238 Ariz. 135, 141, ¶ 26 (App. 2015). Accordingly, to protect the indemnitor and avoid "collusive settlements that bear little relation to the merits of the underlying case," a Morris-type "agreement must be preceded by appropriate notice" to the indemnitor. Leflet v. Redwood Fire and Cas. Ins. Co., 226 Ariz. 297, 300, 302, ¶¶ 14, 23 (App. 2011) (quoting Parking Concepts, Inc. v. Tenney, 207 Ariz. 19, 22, ¶ 13 (2004)). In other words, when a liability is covered under the terms of an indemnity agreement, whether inside or outside the insurance context, the "indemnitor is bound by the settlement made by its indemnitee if, but only if, the indemnitor was given notice and opportunity to defend." A Tumbling-T Ranches, 220 Ariz. at 207, ¶ 11 (quoting Morris, 154 Ariz. at 120). To be sufficient, the "notice, whether written or oral, must contain full
and fair information concerning the pending action." Litton Sys. Inc. v. Shaw's Sales and Service, Ltd., 119 Ariz. 10, 14 (App. 1978).
¶13 On appeal, the Fields do not contest the superior court's finding that neither they nor Crandall notified Artizan of their intent to enter the settlement agreement and agree to a stipulated judgment. Given their failure to comply with the notification requirement, the stipulated judgment is, without question, unenforceable against Artizan. Leflet, 226 Ariz. at 302, ¶ 23 (absent notice, an indemnitee "can face no liability for the resulting stipulated judgment"). Nonetheless, the Fields contend that Crandall's assignment of its rights against Artizan remains binding and enforceable.
¶14 Consistent with Arizona's public policy permitting parties to freely contract, a party may assign its contractual rights to a third party unless: (1) the assignment materially changes the obligor's duty or increases the obligor's risk; (2) a statute or public policy prohibits the assignment; or (3) the contract validly precludes the assignment. Highland Village Partners, L.L.C. v. Bradbury & Stamm Constr. Co., 219 Ariz. 147, 150-51, ¶¶ 11, 17 (App. 2008) (citing Restatement (Second) of Contracts § 317(2) (1981)). Because Morris agreements are often both "unpredictable" and "unfair," limits are imposed on their use. Leflet, 226 Ariz. at 302, ¶ 21 n.5 (quoting Morris, 154 Ariz. at 119). They may "exist only within the confines of the doctrine that created them," Id. at 301, ¶ 16, and an agreement "that falls 'outside the permitted parameters' is unenforceable." Fidelity, 238 Ariz. at 141, ¶ 28 (quoting Safeway, 210 Ariz. at 15, ¶ 34). When parties have negotiated a Morris-type agreement outside the proscribed parameters, the plaintiff can collect neither from the indemnitee nor the indemnitor. Leflet, 226 Ariz. at 301, ¶ 16; see also Safeway, 210 Ariz. at 15, ¶ 34 ("If counsel negotiate [non-compliant Morris] agreements, the result will be that their clients can collect neither from the defendant . . . nor from the [indemnitor].").
¶15 First, the Fields contend that the superior court's reliance on Safeway, Fidelity, and Leflet was erroneous because those cases involved the assignment of claims against insurers and the third-party claims at issue in this case are directly against Artizan, not its insurance carrier. Contrary to the Fields' contention that Safeway, Fidelity, and Leflet "have no application" here, the general principles of indemnity law, governing true Morris agreements, apply with equal force to purely commercial indemnity agreements forged outside the insurance context. See A Tumbling-T Ranches, 220 Ariz. at 207-08, ¶¶ 11, 15, 17.
¶16 Second, the Fields rely on Colorado Casualty for the proposition that courts should separately consider whether an assignment provision is valid, independent of the enforceability of the associated stipulated judgment. The Fields reliance is misplaced, however, because unlike this case, there was "no dispute" in Colorado Casualty "that [the indemnitor had] received notice" and an opportunity to defend and was therefore "bound . . . by the stipulated judgment." 230 Ariz. at 567, ¶ 23. Moreover, the Fields have not cited, and our research has not revealed, any case which upheld the validity of an assignment while simultaneously holding the associated judgment unenforceable.
¶17 Third, the Fields argue that Safeway is distinguishable because it involved a breach of a "cooperation clause inherent in insurance agreements," whereas Crandall's contract with Artizan contained neither a cooperation clause nor an anti-assignment provision. Because Crandall did not breach a contract with Artizan by assigning its rights against the subcontractor in the settlement agreement, the Fields contend that Safeway "simply does not apply" to this case. While the precise issue in Safeway concerned whether an insurer had breached its duty to the insured, with the supreme court explaining that in the absence of such a breach, the Morris agreement at issue "was outside the permitted parameters," Safeway, 210 Ariz. at 10, ¶ 16 (internal quotations omitted), the principle that a non-conforming Morris agreement is unenforceable has been extended more broadly to agreements that are contrary to the "public policy underlying Morris." Leflet, 226 Ariz. at 301, ¶ 19 (holding a settlement agreement between an insured and insurer that permitted the primary insurer to avoid its obligation to pay policy limits and pass its liability to other insurers was unenforceable); see also Fidelity, 238 Ariz. at 141, ¶ 29 (holding a settlement agreement between parties whose interests "aligned" was unenforceable).
¶18 In this case, Artizan had no notice that the Fields and Crandall intended to enter a settlement agreement and therefore no knowledge that Crandall intended to assign its contractual and indemnity rights against Artizan to the Fields, a party with whom Artizan had never contracted. Akin to the unenforceable settlement agreement at issue in Leflet, which ostensibly permitted the indemnitee to settle below its policy obligations, 226 Ariz. at 300, ¶ 8, the settlement agreement in this case allowed Crandall to stipulate to damages while avoiding all financial liability. Given the lack of notice and the public policy principles underlying Morris agreements, the superior court did not err by finding the entire settlement agreement, not just the stipulated judgment, unenforceable.
¶19 Finally, the Fields argue that Crandall's assignment is enforceable because the settlement agreement contains a severability provision, and therefore the portions of the agreement concerning the unenforceable stipulated judgment may be removed. As Artizan correctly points out, however, the Fields' covenant not to execute the stipulated judgment provided the necessary consideration for Crandall's assignment. See Leflet, 226 Ariz. at 302, ¶ 22 ("It is elementary that for an enforceable contract to exist there must be an offer, an acceptance, [and] consideration."). Absent the stipulated judgment, the Fields' covenant not to execute is illusory and the settlement agreement is void for want of consideration. See Allen D. Shardon, Inc. v. Cole, 101 Ariz. 122, 123 (1966) (explaining "that an illusory promise lacks mutuality of obligation," rendering a contract void for lack of consideration). Therefore, the superior court did not err by granting summary judgment in favor of Artizan and dismissing the third-party claims against it.
CONCLUSION
¶20 For the foregoing reasons, we affirm the superior court's summary judgment ruling. Both parties request an award of their attorneys' fees on appeal pursuant to A.R.S. § 12-341.01. In our discretion we grant Artizan's request, conditioned upon compliance with ARCAP 21.