Duty To Indemnify May Exist Despite The Running Of The Statute Of Limitations If There Is A Justifiable Belief That Such Duty Is Owed

Author: Sitar Bhatt

On June 21, 2016, in Hatch Development, LLC, et. al. v. Gary Solomon and Bobbie Solomon, et. al., Division One of the Arizona Court of Appeals issued an opinion allowing an indemnity plaintiff to assert the duty to indemnify even if the statute of limitations has run.

Trial Court Ruling

Plaintiffs Jason and Shannon Hatch, husband and wife, and Hatch Development LLC, (“Hatch”) filed a complaint seeking indemnity against Gary and Bobbie Solomon, husband and wife, and SOL’S Construction Co., Inc., (“Solomon”) in September 2011. The indemnity complaint alleged that Hatch, Solomon, and the Town of Taylor were sued in 2007 by Lee and Debbie Hunt (“Hunts”) for water damages caused by sewer and water line construction work performed by Solomon on Hatch’s property. The indemnity complaint also alleged that Solomon was solely liable for the construction and left sewer line trenches open, which resulted in water damage to the Hunts’ property. Additionally, the indemnity complaint alleged that Hatch and the Town of Taylor had settled the lawsuit with the Hunts to avoid litigation costs. Hatch claimed that Solomon, who was not part of the settlement agreement, was liable to Hatch for the amounts paid under the settlement agreement under principles of indemnity.

Solomon answered the complaint and filed a counterclaim denying liability and contesting Hatch’s right to indemnification. According to Solomon, Hatch was barred from asserting a claim against Solomon as the two-year statute of limitations for injuries to property had run by the time the settlement agreement was reached. Due to the statute of limitations having expired, Solomon applied it to the elements of common law indemnity outlined in MT Builders, L.L.C., v. Fisher Roofing, Inc., 219 Ariz. 297, 303 n.2 ¶ 13 (App. 2008), to argue Hatch cannot prove one of the essential elements Hatch and Solomon owed a legally enforceable obligation to the third party, the Hunts.  Also, Solomon argued Hatch was liable because of Hatch’s failure to act after being notified of mud in the sewer system.

In Superior Court, both parties filed motions for summary judgment. The trial court granted Hatch’s motion for partial summary judgment on Solomon’s indemnity claim and denied Solomon’s motion for summary judgment. Solomon filed motions to reconsider, asserting newly discovered evidence. The trial court allowed Hatch to respond to the motions. After oral arguments, the trial court denied the motions to reconsider and granted Hatch’s motions for summary judgment on damages and on the counterclaim. A judgment was entered in favor of Hatch in the amount of $263,697.65, plus costs, as well as attorney fees in the amount of $51,997.40. Solomon timely appealed and challenged the summary judgment ruling on Hatch’s indemnity claim.

Appellate Decision

On appeal, Solomon argued the three-pronged test set forth in MT Builders for proving common law indemnity prohibited Hatch from bringing its claim. Footnote 2 in MT Builders, 219 Ariz. at 303 n.2 ¶ 13, sets forth the common law duty to indemnify arises under certain circumstances:

In general in an action for common law indemnity, the indemnity plaintiff must show, first, it has discharged a legal obligation owed to a third party; second, the indemnity defendant was also liable to the third party; and third, as between itself and the defendant, the obligation should have been discharged by the defendant. Absent consent or fault of the defendant, the plaintiff must show it has extinguished its own and the defendant’s liability to prove it has discharged the obligation to the third party in satisfaction of the first element.

The court found Solomon’s reliance on the footnote to be misguided because the three-pronged test applies only when the indemnity defendant is not at fault and has not consented to the indemnity plaintiff’s payment to the third party. There was no evidence presented by Solomon of it objecting to Hatch’s payment to the Hunts.

The court stated a duty to indemnify may arise in at least two alternative circumstances. The first being when the party seeking indemnity has “extinguished an obligation owed by the party from whom it seeks indemnification.” The second scenario in which the duty to indemnify arises is when the indemnity defendant is “at fault.” To assert these two scenarios, the court turned to the Restatement (First) of Restitution (1973) § 76 and 78. According to § 76:

A person who, in whole or in part, has discharged a duty which is owed by him but which as between himself and another should have been discharged by the other, is entitled to indemnity from the other, unless the payor is barred by the wrongful nature of his conduct.

Restatement § 78 states:

A person who with another became subject to an obligation upon which, as between the two, the other had a prior duty of performance, and who has made payment thereon although the other had a defense thereto…

(b) is entitled to restitution if he became subject to the obligation with the consent of or because of the fault of the other and, if in making payment, he acted…

(ii) in the justifiable belief that such duty [owed by the indemnity plaintiff to the injured third party] existed.

While the court agreed Hatch cannot assert a duty to indemnify because of the statute of limitations expiring, the court applied Restatement § 78(b)(ii) to affirm the trial court’s decision. The court found Hatch presented undisputed facts that established the indemnity plaintiff’s justifiable belief the statute of limitations would not bar its obligation to the Hunts under the circumstances and based on Solomon’s undisputed fault. The key fact was the presentation of an uncontested declaration from Hatch’s attorney stating the Hunts’ lawsuit could have been refiled pursuant to A.R.S. § 12-504 despite the statute of limitations having expired. Also, Hatch and the Town of Taylor had represented to the Hunts “each party would continue to pursue the settlement as agreed,” and if Hatch backed out of the settlement negotiations, further litigation would have ensued.

Solomon also argued Hatch was barred from obtaining indemnity because Hatch illegally hooked up the sewer system to the town lines without the Arizona Department of Environmental Quality (“ADEQ”) permission. While Solomon raised this issue for the first time on its motion to reconsider, the court of appeals considered the argument because Hatch was afforded an opportunity to respond and there were oral arguments on that motion to reconsider.

Under Arizona law, a party seeking common law indemnity must be without independent or active fault. Herstam v. Deloitte & Touche, LLP,186 Ariz. 110, 117-18 (1996). Solomon argued because Hatch connected the sewer line without ADEQ approval as required by Taylor Town Code, it made Hatch negligent per se and but for the negligence, the flooding and damage would not have resulted. The Court of Appeals quickly dismissed this argument. While acknowledging Hatch’s actions may have violated the town code, this alleged omission was not the proximate cause of the damage to the Hunts’ property. Based off the facts presented, the court found the damage was most immediately and directly caused by Solomon’s failure to properly cover a manhole and fill in trenches at the worksite. Also, Solomon failed to proffer evidence of how ADEQ’s approval would have prevented its own negligent acts in installing the pipes.

As for Solomon’s liability argument against Hatch, the Court of Appeals sided with the trial court in its holding Hatch was not an active participant in causing the water flow issue and the indemnity plaintiff’s only liability was a result of the status as owner of the property rather than as an actively negligent party. Hatch presented undisputed facts it immediately notified Solomon and insisting that as the contractor, Solomon make sure no water gets into the lines through the construction. Also, it was determined at all relevant time, Solomon was in control of the job site.

Takeaway

A majority of time, the issue regarding indemnification will arise in disputes involving general contractors and subcontractors. The Court of Appeal’s ruling upholding Hatch’s summary judgment despite the statute of limitations having run eliminates a defense argument that a subcontractor can assert if the general contractor can argue it was acting under the good faith belief it owed an obligation to the injured parties at the time of the settlement.

ABOUT THE AUTHOR

Sitar Bhatt is an associate in Tyson & Mendes’ Phoenix, AZ office. Mr. Bhatt specializes in insurance defense, personal injury, professional liability, and general civil litigation. Contact him at (602)385-5656 or sbhatt@tysonmendes.com.

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