SEABOARD SURETY COMPANY v. WALKER (1989)

In this action we consider whether a surety who issued performance and payment bonds prior to January 1, 1988, is barred by former Code of Civil Procedure sections 877 and 877.6, subdivision (c) ¹ from bringing an action against a tortfeasor who has entered into a good faith settlement.   We conclude that no bar exists and reverse the judgment of dismissal.

BACKGROUND

This appeal originates from an action involving the design and construction of the Dry Creek Inn, a motel and restaurant in Healdsburg, California.   In August of 1983, the owners of the project (Dry Creek) entered into a written agreement with defendants Ted A. Walker and Walker & Associates, the architects, to prepare plans and specifications for construction of the complex.   As part of the contract between Dry Creek and defendants, defendants were required to supervise the work being done by the contractors.

Dry Creek also contracted with Associated Professional Builders, Inc. (the contractor) to provide the construction for the project.   As required by the terms and conditions of the construction agreement between Dry Creek and the contractor, the contractor agreed to furnish to Dry Creek performance and payment bonds for the construction of the complex.   Performance and payment bonds in the amount of $2,536,500 were executed and delivered to Dry Creek.   Plaintiff Seaboard Surety Company was the surety on the bonds.

The contractor subsequently breached its contract with Dry Creek by failing to construct in accordance with the plans and specifications and abandoning the project.   Dry Creek brought suit against the contractor, plaintiff and defendants.   It sued the contractor for breach of contract, breach of express and implied warranties and fraud;  it sued plaintiff for payment under the performance bonds, breach of covenant of good faith and fair dealing and violation of Insurance Code section 790.03;  it sued defendants for breach of the architect's contract, professional malpractice and negligent supervision of construction.

In October of 1986, Dry Creek entered into a settlement agreement with defendants for $100,000.   In consideration of this payment Dry Creek agreed to release defendants from all claims resulting from “the design, construction, supervision of construction, review of construction, certification of payment for construction, and/or reconstruction work․”  (Emphasis supplied.)

Thereafter, the court ordered that the settlement was made in good faith pursuant to the provisions of section 877.6.   Plaintiff challenged the determination that the settlement between Dry Creek and defendants was in good faith and filed a petition for writ of mandate.   The petition was denied.   The remainder of the action proceeded to trial.   Judgment was entered against the contractor and plaintiff for breach of contract and damages were awarded for the cost of repairs.²

THE COMPLAINT

In November of 1986, plaintiff filed the instant action against defendants, Imperial Bank (the construction lender) and Gosliner/McLean Associates, Inc. (a construction consultant retained by Imperial Bank).   The first two causes of action are against defendants only.   The first alleges that as the architects on the project, defendants negligently failed to find and report defects in the work of the contractor, reported a greater percentage of work completed than the contractor actually performed and approved progress payments when they knew or should have known that the work was done improperly.   As a consequence of this negligence, there were less loan-contract funds available to plaintiff from which to correct the defective work and complete the contract work in accordance with the performance bond.   In its second cause of action, plaintiff claimed that it was subrogated to the rights of Dry Creek in terms of recovering from defendants for their negligent acts.

After defendants demurred and the parties presented oral and written arguments, the court sustained defendants' demurrer without leave to amend on the grounds that plaintiff's first two causes of action failed to state facts sufficient to constitute a cause of action, and more particularly that the suit against defendants was barred by section 877.6.   The court dismissed plaintiff's action against defendants and this appeal followed.

DISCUSSION

In reviewing the sufficiency of a complaint against a demurrer, we are guided by established rules:  We treat the demurrer as admitting all material facts which are properly pleaded, but not contentions, deductions or conclusions of fact or law.  (Blank v. Kirwan (1985) 39 Cal.3d 311, 318, 216 Cal.Rptr. 718, 703 P.2d 58.)  “A judgment of dismissal entered after the trial court has sustained a demurrer without leave to amend will be affirmed on appeal if any of the grounds stated in the demurrer is well taken.”  (E.L. White, Inc. v. City of Huntington Beach (1978) 21 Cal.3d 497, 504, 146 Cal.Rptr. 614, 579 P.2d 505, fn. omitted.)

We preliminarily note that at the time plaintiff filed its complaint section 877.6, subdivision (c) provided as follows:  “A determination by the court that the settlement was made in good faith shall bar any other joint tortfeasor from any further claims against the settling tortfeasor for equitable comparative contribution, or partial or comparative indemnity, based on comparative negligence or comparative fault.”   In an amendment effective January 1, 1988, approximately three weeks before the judgment was rendered in this action, the Legislature extended the reach of section 877.6, subdivision (c) to coobligors on a contract debt, providing that a good faith settlement by one coobligor bars any further claim by any coobligor against the settling party.   (Stats.1987, ch. 677, No. 8 West's Cal.Legis.Service, § 3, p. 845;  see also Far West Financial Corp. v. D & S Co. (1988) 46 Cal.3d 796, 803–804, fn. 6, 251 Cal.Rptr. 202, 760 P.2d 399.)   The amendment has no application to the instant action, since legislative enactments are generally presumed to operate prospectively and not retroactively unless the Legislature expresses a different intention.  (§ 3;  Evangelatos v. Superior Court (1988) 44 Cal.3d 1188, 1206–1209, 246 Cal.Rptr. 629, 753 P.2d 585;  Hoffman v. Board of Retirement (1986) 42 Cal.3d 590, 593, 229 Cal.Rptr. 825, 724 P.2d 511.)   With respect to the subject legislation, the Legislative Counsel's Digest of Senate Bill No. 1395 (1987 Reg.Sess.) explicitly states:  “[The amendment] would not apply to co-obligors with respect to a contract made prior to January 1, 1988.”

It has been acknowledged that former section 877.6, subdivision (c) represents a codification of the principles established by our Supreme Court in American Motorcycle Assn. v. Superior Court (1978) 20 Cal.3d 578, 146 Cal.Rptr. 182, 578 P.2d 899.  (Far West Financial Corp. v. D & S. Co., supra, 46 Cal.3d at p. 805, 251 Cal.Rptr. 202, 760 P.2d 399;  Tech–Bilt, Inc. v. Woodward–Clyde & Associates (1985) 38 Cal.3d 488, 493–496, 213 Cal.Rptr. 256, 698 P.2d 159.) ³  Both American Motorcycle and the statute itself (until the January 1, 1988 amendment) deal exclusively with liability between joint tortfeasors.   That is not the situation in the present action.

“ ‘We begin with the fundamental rule that a court “should ascertain the intent of the Legislature so as to effectuate the purpose of the law.”   [Citation.]  In determining such intent “[t]he court turns first to the words themselves for the answer.”  [Citations.]  We are required to give effect to statutes “according to the usual, ordinary import of the language employed in framing them.”  [Citations.]  “If possible, significance should be given to every word, phrase, sentence and part of an act in pursuance of the legislature purpose.”  [Citation.];  “a construction making some word surplusage is to be avoided.”  [Citation.]  “When used in a statute [words] must be construed in context, keeping in mind the nature and obvious purpose of the statute where they appear.”  [Citations.]  Moreover, the various parts of a statutory enactment must be harmonized by considering the particular clause or section in the context of the statutory framework as a whole.  [Citations.]’ ”  (Palos Verdes Faculty Assn. v. Palos Verdes Peninsula Unified Sch. Dist. (1978) 21 Cal.3d 650, 658–659, 147 Cal.Rptr. 359, 580 P.2d 1155;  see also Fontana Unified School Dist. v. Burman (1988) 45 Cal.3d 208, 218, 246 Cal.Rptr. 733, 753 P.2d 689.)

The clear meaning of section 877.6 as it read at the time pertinent to this case is that the statute was only applicable to joint tortfeasors.   It was not until the 1987 amendment that the Legislature expanded the statute's application to coobligors whose liability is predicated on contract.

 The term “joint tortfeasors” refers to defendants whose negligence or other tortious act has concurred to produce injury.  (Turcon Construction, Inc. v. Norton–Villiers, Ltd. (1983) 139 Cal.App.3d 280, 282–283, 188 Cal.Rptr. 580.)   Plaintiff was not sued by Dry Creek for negligence in causing damage to the project;  rather, it was sued under a separate and distinct contractual obligation it owed to Dry Creek through the performance bond.   Even if it were argued that plaintiff stands in the shoes of the contractor, the contractor was merely found liable for breach of contract, not for negligence.   Consequently, we must conclude that plaintiff is not a joint tortfeasor.

However, we reject plaintiff's assertion that it is not suing defendants for the same act that was the basis of the original action by Dry Creek.   Plaintiff maintains that Dry Creek's action against defendants was for the negligent supervision of the construction project, while its suit against defendants is for the negligent issuance of certificates of payment;  Dry Creek's allegations of negligence were based on defendants' failure to discover the defective work of the contractor, whereas plaintiff alleges that defendants negligently authorized progress payments causing foreseeable harm to plaintiff.  (See Montijo v. Swift (1963) 219 Cal.App.2d 351, 353, 33 Cal.Rptr. 133 [architect who supervises construction work owes duty of care to persons who may be foreseeably injured];  Commercial Standard Ins. Co. v. Bank of America (1976) 57 Cal.App.3d 241, 248–249, 129 Cal.Rptr. 91 [it is reasonably foreseeable that negligent disbursement of loan proceeds could cause harm to surety].)  The difficulty with plaintiff's assertion is that while Dry Creek's complaint against defendants did not explicitly allege that the architects had negligently authorized progress payments, the good faith settlement agreement relieves defendants of all liability for this act.

 This leaves us with the question of whether a party whose liability was based on a contract executed prior to January 1, 1988, may seek indemnity from a tortfeasor who has entered into a good faith settlement pursuant to section 877.6.   We are aware of the conflict in Court of Appeal cases on whether an indemnity claim resting on an implied contract theory is barred by a good faith settlement.  (Compare IRM Corp. v. Carlson (1986) 179 Cal.App.3d 94, 109–110, 224 Cal.Rptr. 438 [claim barred] and Stratton v. Peat, Marwick, Mitchell & Co. (1987) 190 Cal.App.3d 286, 292, 235 Cal.Rptr. 374 [same] with County of Los Angeles v. Superior Court (1984) 155 Cal.App.3d 798, 803, 202 Cal.Rptr. 444 [claim not barred] and Bear Creek Planning Com. v. Title Ins. & Trust Co. (1985) 164 Cal.App.3d 1227, 1239, 211 Cal.Rptr. 172 [same].) ⁴  However, in our view parties found liable for breach of contracts executed prior to January 1, 1988, may seek indemnity from settling tortfeasors.   This is because the nonsettling party was not a tortfeasor as contemplated by former section 877.6, subdivision (c).

We believe the 1987 Legislature recognized that former sections 877 and 877.6 substantially impaired the statutory objective of promoting voluntary settlements.   Through amendment it remedied the existing defect by barring indemnity actions by all nonsettling parties, not just joint tortfeasors, against settling parties.   Since the benefit of the 1987 legislation is not available to defendants in this case, we must conclude that plaintiff's action is not barred by section 877.6, subdivision (c).

The judgment is reversed.   Costs of appeal awarded to appellant.

FOOTNOTES

1.   All further statutory references are to the Code of Civil Procedure unless otherwise indicated.

2.   The jury also awarded Dry Creek an additional $547,341 as damages due to plaintiff's failure to implement reasonable standards for prompt investigation and processing of claims arising under its bonds and failure to settle Dry Creek's claim promptly.  (Ins.Code, § 790.03, subds. (g)(3) and (5).)

3.   “In contrast to the remaining subdivisions of section 877.6, which enunciate rules of procedure, subdivision (c) prescribes a substantive right of discharge from liability.”  (Shane v. Superior Court (1984) 160 Cal.App.3d 1237, 1245, 207 Cal.Rptr. 210.)

4.   Resolution of the conflicting views is presently pending before the Supreme Court in Bay Development Ltd. v. Superior Court, review granted June 18, 1987, S000888.

WHITE, Presiding Justice.

BARRY–DEAL and MERRILL, JJ., concur.