Opinion
Civil No. 99-1266-AS
May 23, 2001
OPINION
The matters before the court are: Defendant Frontier Insurance Company's ("Frontier") motion for summary judgment (#38) against Plaintiff Oregon Canadian Forest Products, Inc. ("Plaintiff"); Plaintiff's cross motion for summary judgment (#44) against Defendant Frontier; Plaintiff's motion to strike concise statement of facts (#60); and Plaintiff's motion to strike summary judgment exhibit (#64).
The Plaintiff's summary judgment motion against Frontier is only for Plaintiff's second claim for material payment of the bond, because it is the only claim asserted against Frontier in the complaint.
FACTS
Plaintiff is an Oregon corporation with its headquarters in North Plains, Oregon. It sells wholesale lumber products to various national and international markets. North Valley Lumber Truss Company ("North Valley"), Highland Framers, Inc., and Valley Construction were Nevada companies owned by Jay Wright, Sr., and his son, Jay Wright, Jr.In December 1997, Frontier, as an insurance company, had issued a surety bond for the benefit of Plaintiff in the amount of $1.5 million, covering payments owed by North Valley to Plaintiff. By the spring of 1998, North Valley owed Plaintiff approximately $2.5 million for lumber products.
In 1998, North Valley, as well as the other Wright-owned companies experienced financial difficulties. A group of affiliated companies, the InterBank Group, acquired a 51% interest in the companies in April 1998. Frontier sought indemnity and financial information from InterBank Group as a condition of issuing the $2 million bond to Plaintiff. InterBank provided a financial statement declaring a combined net worth of $38 million. The InterBank Group offered an indemnity agreement to Frontier, which was accepted.
Plaintiff and North Valley agreed in the spring of 1998 to allow repayment of their debt monthly, with balloon payments every six months. North Valley also agreed to replace the $1.5 million bond already in place, with a $2 million bond to secure the outstanding balance due.
Frontier and Plaintiff negotiated the language of the new $2 million bond and the accompanying agreement in August and September of 1998. Frontier requested to have language inserted into the agreement that Plaintiff "shall immediately give written notice to Frontier in the event of a default in payments" by North Valley under the agreement.
On September 1, 1998, North Valley made its first monthly payment to Plaintiff. On October 8, 1998, Frontier issued a new $2 million bond on the obligations of North Valley under the restructured payment agreement with the accompanying language.
The payments due on November, December and January, 1999, were not made until January 6, 1999. The check for the payment due on February 1, 1999, was not received by Plaintiff until February 12, 1999. Plaintiff was notified two and a half weeks later that the February check had bounced.
On March 4, 1999, Plaintiff called a default on the contract, gave North Valley a 30-day notice to cure the default and notified Frontier of the default. This was the first notice by Plaintiff to Frontier that any payments had not been made on time.
In an April 7, 1999, letter Frontier advised North Valley that, at that specific time, it would not raise any revised payment arrangements between Plaintiff and North Valley as a defense to any claim on the bond and that Frontier did not want to be an impediment. North Valley and Plaintiff did not come to any revised agreement and North Valley did not cure the default. On May 6, 1999, after North Valley failed to cure the default, Plaintiff made a claim against the bond issued by Frontier.
On July 27, 1999, Frontier denied the claim on the grounds that Plaintiff had allegedly not provided Frontier with timely written notice, and that Plaintiff should have given notice of the late payments in October through January and February 1999.
In July 1998, InterBank Group filed for bankruptcy and listed debts of $7.5 million, while being investigated by the Immigration and Naturalization Service and the Internal Revenue Service. In August 1999, the INS and IRS executed a criminal search warrant of the InterBank companies' offices and seized significant amounts of their records. InterBank principals have since been criminally indicted on several counts.
LEGAL STANDARD
Federal Rule of Civil Procedure 56(c) authorizes the granting of summary judgment where no genuine issue exists regarding any material fact and the moving party is entitled to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986); See also Anthes v. Transworld Systems, Inc., 765 F. Supp. 162, 165 (D.Del. 1991). The moving party has the initial burden of showing the absence of a genuine issue of material fact essential to the nonmovant's case. Celotex, at 165. Once the moving party has met this burden, the burden shifts to the nonmovant to establish that there is a genuine issue of material fact. Id. at 324.
An issue is material if, under the substantive law of the case, resolution of the factual dispute could affect the outcome of the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986). The evidence is to be viewed in a light most favorable to the nonmoving party, and all justifiable inferences are also to be drawn in the nonmovant's favor. Id. at 255. No genuine issue of material fact exists for trial where the record as a whole could no lead the trier of fact to find for the non-moving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). However, if after the court has drawn all justifiable inferences in the nonmovant's favor, "the evidence is merely colorable, or is not significantly probative, summary judgment may be granted." Id. at 249-50.
DISCUSSION
Oregon Canadian's Motion to Strike Summary Judgment Exhibit
The court initially considers the admissibility of certain evidence for the purposes of Frontier's motion for summary judgment. Materials submitted in support or in opposition to a motion for summary judgment must set forth facts as would be admissible in evidence. FRCP 56(e). Plaintiff moves to strike Exhibit 97 from the materials submitted by Frontier in reply and in support of it Motion for Summary Judgment pursuant to FRCP 56 and Local Rule 7. Exhibit 97 is a deposition exhibit of a letter dated February 23, 2000, from Jay Wright to Wayne Holm.
Plaintiff contends that the letter is hearsay because Wright's deposition was not taken in this case, nor is he a party. Plaintiff asserts that the Wright letter is not a statement made by one testifying at trial, is being offered to prove the truth of the matter asserted, and does not meet any exceptions to the hearsay rule of FRE 803. See FRE 801, 803.
Frontier contends that Exhibit 97 is admissible because it is being offered into evidence for purposes of impeachment, and not for the truth of the matter asserted. Frontier asserts that this exhibit supports impeachment because it establishes Holm's past inconsistent statements.
Whether a statement is being offered for its truth or for some other purpose is a foundational fact that must be determined by the court before the evidence is admissible. A statement which is hearsay is not admissible where it does not meet one of the exceptions provided under FRE 803. However, statements are often offered for other purposes, such as impeachment, offered to show prior inconsistent statements used to impeach a witness's credibility. See FRE 613.
The court finds that the exhibit is being used not for the truth of the matter asserted, but to impeach Holm's credibility as a witness. The motion to strike the exhibit is denied. Even if the exhibit were stricken, its absence from the record would not be outcome determinative in this instance.
Parties' Motions for Summary Judgment
Plaintiff's second claim for relief was filed against Frontier for material payment of the bond, alleging that: Defendant Frontier executed, and Plaintiff accepted the bond ensuring payment to Plaintiff of the contract in the amount of $2 million; Plaintiff gave Frontier notice of North Valley's default; Frontier has not made any payment to cure the default or pay the bond; and Plaintiff has performed all of the conditions and covenants required of it under the terms of the bond.
Based on the uncontested facts set out above, as well as Frontier's answer to the complaint, it is undisputed that Frontier did in fact issue the bond ensuring payment to Plaintiff, there was a default by North Valley on the $2 million bond, and Frontier has not made any payment to Plaintiff. The only issue remaining for the court is the late notice on the part of Plaintiff; whether Frontier was prejudiced due to the late notice, and whether Plaintiff acted reasonably in giving late notice to Frontier.
Frontier argues that Plaintiff made a business decision not to honor the notice requirement that had been negotiated between Frontier and Plaintiff, and instead unilaterally altered the notice and payment schedule provisions, hiding North Valley's increasingly desperate financial situation for over five months from the surety, Frontier. Frontier contends its obligations under the bond were discharged by the acts of Plaintiff based on Oregon suretyship law.
Plaintiff counters that under the legal obligations imposed by suretyship and insurance law Frontier is unable to show that it has been prejudiced by the late notice. Plaintiff contends that Frontier is unable to show it was prejudiced by the late notice for two reasons: all of the indemnitors on the $2 million bond were insolvent and unable to pay both in November of 1998 and March of 1999; and Frontier would not have handled the situation any differently in November of 1998 than it did in March of 1999.
Plaintiff instead contends that because Frontier cannot show as a matter of law that it suffered any prejudice as a result of the late notice, it has no defense to the $2 million bond it issued for the benefit of Plaintiff, and Plaintiff is entitled to summary judgment on its claim against Frontier for material payment on the bond.
A. The Bond Rider as a Condition Precedent to Frontier's Performance
Before addressing the issue of prejudice incurred by the late notice, the court addresses Frontier's separate argument that there was a condition precedent to its performance on the bond.
Frontier contends that independent of its defenses, any obligation Frontier may have had to Plaintiff was excused by Plaintiff's breach of a condition precedent to Frontier's performance under the terms of the Co-Obligee Rider to the bond. Frontier contends that a provision in a surety bond "requiring notice of loss within a specified period after discovery is recognized as valid, and unless waived, must be complied with as a condition precedent to recovery upon the bond." Id., quoting Outlook Farmers' v. Elevator Co. v. American Surety Co., 70 Mont. 8, 223 P. 905, 911 (1924). In December 1998, at the request of Plaintiff, Frontier agreed to execute a Co-Obligee Rider to the bond, naming Plaintiff's bank, U.S. Bank, as Co-Obligee. The Rider provided as follows:
The rights of the Obligee(s) shall be subject to the following conditions (a) The Surety shall not be liable under this bond to the Obligee(s), or any of them, unless the obligee(s) or any of them shall perform all the other obligations to be performed under said contract at the time and in the manner therein set forth.
One of Plaintiff's obligations set forth by the Rider in order to hold Frontier liable under the bond, was to give Frontier immediate notice of any default by North Valley.
Frontier asserts that Plaintiff's owner, Wayne Holm, even acknowledged that a failure to pay on time by North Valley was a payment "default" under the contract, and the contract required immediate written notice to Frontier in the event of a default in the payments. Frontier contends that since Plaintiff was required to notify them if the payment was even one day late and Plaintiff did not do so for many months after the default, that notice was indisputably late.
Plaintiff does not dispute the timing of the notice for purposes of Frontier's motion for summary judgment.
Frontier contends that the terms of the Co-Obligee Rider were a condition precedent to Frontier's performance under the bond, and that the breach of a condition precedent to another's performance excuses performance. Shaw v. Mobile Oil, 272 Or. 109, 535 P.2d 756 (1975).
Frontier contends that the language of the Rider makes clear that the covenant of payment by Frontier was mutually dependant on the covenant of Plaintiff to perform its obligations under the contract in strict compliance.
The court does not agree that the Rider established by the parties created a separate agreement from the bond so that Frontier would not be liable under the bond if Plaintiff did not give timely notice. Instead, as discussed in detail below, there must be a showing of prejudice to Frontier in order to discharge their obligation to Plaintiff under the bond.
B. Showing of Prejudice by Late Notice
Legal Standard
A surety is an entity who contracts to answer for the debt of another. The principal is the primary obligor, in this instance, North Valley; the obligee is the person to whom the principal and surety owe a duty, in this instance, Plaintiff; and the Surety is the secondary obligor, in this instance, Frontier.
Under Oregon law, a surety is discharged if it is prejudiced by the creditor's late notice. Haddock Const. v. Wilber, et al., 178 Or. 659, 169 P.2d 599 (1946). A two-part inquiry must take place when a surety or insurer contends that it has been provided late notice: (1) has the insurer been prejudiced by the late notice; (2) if the insurer was prejudiced, did the insured act reasonably in failing to give notice at an earlier time? See Lusch v. Aetna Casualty Surety Co., 272 Or. 593, 599-00, 538 P.2d 902 (1975); Carl v. Oregon Automobile Ins. Co., 141 Or. App. 515, 520-21, 918 P.2d 861 (1996). A bonding company "must also show that its rights have been injuriously affected before it can defeat its contract of suretyship." Neilson v. titile Guaranty Surety Co., 81 Or. 422, 427, 159 P. 1151 (1916).
Once prejudice is shown, the issue then becomes whether the insured acted reasonably in failing to give notice at an earlier time. Carl v. Oregon Automobile Ins. Co., 141 Or. App. 515, 520-21, 918 P.2d 861 (1996). If a surety is objecting to the obligor being given an extension of time for performance of the insured obligation, the surety must show that the extension has caused a loss. Restatement (3rd), Suretyship Guaranty § 40. The burden is on the surety or the insurer to show prejudice or loss. Carl, at 521.
Step One: Possible Prejudice to Frontier
Inability to take steps to prevent default Frontier contends that when notice was finally given, all of the steps that a surety may take to prevent a default by its principal were ineffective; North Valley was out of business, the indemnitor had ceased any efforts to help North Valley, and the indemnitor was on the verge of bankruptcy.
Plaintiff counters that the indemnitors (InterBank Group, Inc., the Wright Companies, and the Wrights individually) on the $2 million bond owed to Plaintiff were equally unable to respond to a demand for indemnity in November 1998 as they were in March 1999. InterBank Group was insolvent in 1998 according to Plaintiff's qualified expert, Darrell Dorrell. See Affidavit of Darrel Dorrell in Support of Plaintiff's Motion for Summary Judgment. Plaintiff argues that by the end of April 1998, InterBank Group showed a negative net worth of $5,967,901.54, and between January and November 1998, they had a net operating loss of $274,218.26. Id. Plaintiff asserts that InterBank had virtually no assets either when the bond was issued in October, or when the claim was made against the bond in the spring.
Plaintiff also argues that in November 1998, the Wright companies and the Wrights individually would have been completely unable to respond to a demand by Frontier, to post additional collateral or cash reserves. In fact, Plaintiff contends Frontier did make a demand upon the Wright companies to post additional collateral of $1 million in November and December 1998 as a result of claims made against Frontier on several unrelated bonds. Plaintiff asserts that the Wrights were unable to do so on the unrelated bonds and ignored that request for additional collateral.
Clearly, Frontier would not have been able to obtain any additional cash reserves or cash collateral from either the indemnitor, InterBank Group, or the Wright Companies, had Plaintiff put Frontier on notice of the late payments sooner than it did. The court finds that Frontier has not established that it was prejudiced with regards to an inability to take steps it would have if it had received prompt notice.
Inability to investigate
Frontier contends that, as in the cases of Carl and Port Services, the court must find that Frontier was prejudiced as a matter of law, because it was unable to make a reasonable investigation to protect its interest when North Valley defaulted on its payments to Plaintiff. See Carl v. Oregon Automobile Insurance Co., 141 Or. App. 515, 519, 918 P.2d 861, 862 (1996); Port Services v. General Insurance Co., 838 F. Supp. 1402, 1405 (1993). Frontier also contends that it was entitled to the opportunity to investigate the default in a timely manner before North Valley's assets were depleted, and before North Valley's business operations were in such disarray that the tools normally available to a surety were no longer effective.
Both Carl and Port Services involved leaking underground storage tanks in which the federal court, applying Oregon law, held that the insurer was prejudiced and that the insured had acted unreasonably. Id. In both of the above cases, the courts found that the late notice prejudiced the insured because the late notice allowed the insured time to remove and destroy the tank.
Plaintiff contends that Frontier cannot show that evidence has been destroyed or lost in the interim as was established in the environmental cleanup cases of Carl and Port Services. Id. Plaintiff asserts that in both of those cases, the late notice to the insurance companies caused prejudice because in the interim contaminated soils were removed, tanks were replaced and destroyed, and new soil was put in place.
Plaintiff cites to the The Law of Suretyship, 12-12, American Bar Association, Tort Insurance Practice Section (1993) for the proposition that circumstances were not so egregious in the failure to give notice that Frontier should be fully discharged of its obligations as the surety:
The contracts of compensated sureties frequently contain [a notice requirement], but some courts are reluctant to give the condition its ordinary meaning; and hold that the surety is discharged only to the extent of the loss suffered. In conclusion, only in the most egregious of circumstances will failure to give notice result in a discharge.
Plaintiff argues that Frontier has not identified any fact which made it more difficult to investigate the claim in March of 1999, than it would have been in October or November of 1998. Plaintiff finally contends that if Frontier cannot produce evidence that it would have achieved a "better result" if it had received proper notice, it may not take advantage of late notice as a defense. Halsey v. Fireman's Fund Ins. Co., 68 Or. App. 349, 353, 681 P.2d 168 (1984).
The court does not find this suit analogous to the contamination issues. In those cases, investigation and the insured's payment on claims depended on physical evidence of the amount of contamination, remedial measures, the extent and kind of material causing the contamination. Frontier has not put forth any evidence that there was the possibility of a better result against the claim before the late payments were made by North Valley. Frontier has not shown that it was prejudiced by the late notice with regards to an inability to investigate the claim against the bond.
Material changes
Oregon has adopted the Restatement, Security, § 128, which states:
Where, without the surety's consent, the principal and the creditor modify their contract otherwise than by extension of time of payment (b) The compensated surety is, (i) discharged if the modification materially increases his risk, and (ii) not discharged if the risk is not materially increased but his obligation is reduced to the extent of loss due to the modification.
A material change is one that a careful and prudent person undertaking the risk would regard as substantially increasing the chance of loss. Fassett v. Deschuted Enterprises, 69 Or. App. 426, 432, rev. den, 298 Or. 150, 690 P.2d 506 (1984).
Frontier contends that the underlying contract has been modified by Plaintiff's agreement to accept a different payment schedule, allowing North Valley to make payments late and without the knowledge of Frontier. Frontier cites to United States v. Reliance Ins. Co., 799 F.2d 1382, 1386 (9th Cir. 1986) for this contention:
When [a surety] has committed itself with respect to one contract, amendments which convert that agreement into a significantly different one should be brought to the attention of the surety so that it may exercise its own business judgment as to whether it wishes to continue its commitment.
Frontier argues that the consequence of the changes to the underlying contract was to severely limit or eliminate the options that a surety normally has to address the default of its principal, and that this caused material prejudice thereby discharging Frontier's obligations under the bond.
Plaintiff contends that if Frontier, as the surety, is unable to demonstrate any material or measurable difference in the collateral value between the time notice should have been raised and the time notice was actually received, the defense of lack of notice should not be available. Plaintiff contends that Frontier has not quantified or even discussed any difference between the asset position of the companies in October or November 1998, as compared to the March 1999 (when notice was received). Plaintiff asserts that the actually language depended upon by Frontier was not written into the bond under October 12, 1998. Frontier, Plaintiff asserts, already had a $2 million exposure to Plaintiff without any notice of default requirements.
Plaintiff further contends that it did not extend the ultimate due date by which the entire balance of North Valley's obligation had to be paid, and instead it allowed North Valley extra time to make the November and December payments, and North Valley was current on the payment agreement again by January 6, 1999. Plaintiff asserts that this did not materially increase the risk to Frontier. See Samuelson v. Promontory Investment Group., 85 Or. App. 315, 320, 736 P.2d 707 (1987).
In Samuelson the surety contended that a six-month extension for repayment of the guaranteed loan had been done without her knowledge and consent, and therefore discharged her obligation as a surety. The court noted however, that the surety had agreed to subordinate her position to a loan with a three-year repayment schedule, and because the six-month extension on interim payments did not exceed the three years, it did not "substantially increase her risk." Samuelson v. Promontory Investment Corp., 85 Or. App. 315, 320, 736 P.2d 707 (1987).
Plaintiff asserts that it is clear as found in the above case, that the underlying contract has not undergone substantial change.
The court finds that Frontier was obligated under the bond for $2 million dollars in the spring 1998, and that obligation was unchanged in March of 1999 when Plaintiff made a claim against the bond issued by Frontier. The payments did not substantially increase Plaintiff's risk, and the contract has not undergone any substantial change. Therefore, Frontier has not shown that it incurred prejudice due to material changes that substantially increased its risk.
Step Two: Plaintiff's Reasonableness
Finally, Plaintiff contends that even if Frontier can show prejudice, Plaintiff acted reasonably in not giving notice prior to March 1999 and, therefore, Frontier may not avoid its obligations as surety to Plaintiff.
As the two-part inquiry is set out, the consideration of a plaintiff's reasonableness is required only where it has been found that there was prejudice to the surety. The court notes that because Frontier has not shown that it incurred any prejudice by the late notice, the consideration of Plaintiff's reasonableness in the situation is unnecessary.
Frontier has not established that it has been prejudiced, as a matter of law, by any late notice on the part of Plaintiff. Because of this it has not met its burden of proof as the moving party on its summary judgment motion to show the absence of genuine issues of material fact and, therefore, Frontier's motion for summary judgment is denied.
Plaintiff, as the moving party on its motion for summary judgment, has established that because the facts as they are alleged do not show any prejudice to Frontier, it has no defense to the $2 million bond it issued for the benefit of Plaintiff. Based on the uncontested facts of the case, there are no remaining issues of material fact, and Plaintiff is entitled to summary judgment against Frontier for material payment on the bond. Plaintiff's cross motion for summary judgment is therefore granted.
CONCLUSION
Based on the foregoing reasons, Defendant Frontier's motion for summary judgment (#38) is DENIED; Plaintiff's cross motion for summary judgment (#44) on Plaintiff's second claim is GRANTED; Plaintiff's motion to strike concise statement of facts (#60) is DENIED AS MOOT; and Plaintiff's motion to strike summary judgment exhibit (#64) is DENIED.