896 F2d 555 Safeco Insurance Co of America v. E Young

896 F.2d 555

Unpublished Disposition

NOTICE: Ninth Circuit Rule 36-3 provides that dispositions other than opinions or orders designated for publication are not precedential and should not be cited except when relevant under the doctrines of law of the case, res judicata, or collateral estoppel.

SAFECO INSURANCE CO. OF AMERICA, a Washington Corporation,
William E. YOUNG; Evangeline Young,
DON A. HARRIS & ASSOCIATES, INC., a Nevada Corporation;
Donald A. Harris; Ethel Pollen,

No. 88-15826.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Jan. 10, 1990.
Decided Feb. 20, 1990.

Before WALLACE, ALARCON and LEAVY, Circuit Judges.

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William and Evangeline Young appeal from the district court's judgment awarding Safeco Insurance Company of America (Safeco) $421,000 under two indemnity agreements and denying the Youngs' counterclaims against Safeco and third-party claims against Safeco's bonding agent, Donald Harris. We affirm.



William Young (Young), an experienced real estate broker and investor, met Charles E. Parsons (Parsons) in 1976. Parsons, who was in the construction business, told Young that he wanted to start his own construction company and tried to interest Young in investing in it. Parsons told Young that he would act as a general contractor specializing in federal government projects and described the investment, capitalization, and anticipated profits of a company to be called Construction Management, Inc. (CMI). Parsons invited Young to a meeting to discuss the investment further and offered Young a 5% stock premium in CMI if Young located other investors and the CMI project came to fruition.


In order to bid on government projects, CMI was required by federal law to post performance and completion bonds. Before the first meeting for potential investors in CMI, Young and Parsons agreed to give personal indemnifications to obtain the necessary bonds for CMI. Young and Parsons agreed not to ask any other investors for personal indemnifications.


Prior to the first meeting of potential investors, Young was informed by Parsons that his state contractor's license had been suspended by the Nevada State Contractors Board. Parsons also told Young that he had encountered business problems on an apartment project that had resulted in litigation. Parsons did not tell Young that he was subject to an IRS tax lien.


Young and Parsons persuaded Kenneth Seltzer (Seltzer), the Youngs' accountant, to invest $5,000 before the April, 1979 meeting of potential investors. At that meeting, Seltzer opined that Parsons' projections of anticipated profits for CMI were overly optimistic and unrealistic. The next day, Seltzer withdrew his investment by stopping payment on his check and informed Young that Parsons' financial projections were unrealistic.


During the April meeting, Donald Harris (Harris) was introduced by Parsons as Safeco's bonding agent. Harris had been appointed by Safeco as its attorney-in-fact, "with full authority to execute on behalf of [Safeco] fidelity and surety bonds or undertakings and other documents of a similar character issued by the company in the course of its business and to bind Safeco Insurance Company of America hereby as fully as if such instruments had been duly executed by its regularly elected officers at its home office."

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The district court found that Harris supported Parsons' financial projections for CMI at the meeting. The district court also found that Harris informed potential investors that Safeco kept close track of its contractors during the course of all bonded construction projects to ensure against the possibility of losses to investors. The district court further found that Harris informed the potential investors that he had conducted an investigation of Parsons that revealed him to be a reputable contractor. The parties do not dispute the sufficiency of the evidence to support these findings.


After the first meeting of potential investors, several individuals, including the Youngs, invested in CMI. The district court found that Harris told the Youngs that there was no risk to them in signing the indemnity agreement because of Parsons' competence and experience and Safeco's oversight policy.


On April 12, 1979, Parsons and his wife, the Youngs, and CMI executed an indemnity agreement in favor of Safeco. The indemnity agreement obligated the Youngs to indemnify Safeco for all losses and expenses, including attorney's fees, in connection with the bonds and for any claim made against the bonds. A second, substantially similar indemnity agreement was executed on May 10, 1979. Both Young and his wife understood that the indemnity agreements placed their property at risk; they sought and were granted a specific exclusion of Mrs. Young's separate property from the provisions of the second indemnity agreement. In return for their obligations under the indemnity agreements, the Youngs received a commission from CMI of 1.75 per cent of the gross profit of each job.


As a result of disagreements between Parsons and some of the investors, due in part to his failure to invest cash rather than accounts receivable in CMI, he returned their money. The Youngs and Parsons agreed that they would proceed with CMI even if no other investors could be found. The Youngs received 50% of the stock of CMI in exchange for a total investment of $26,000.


From May 10, 1979, to June 22, 1981, Young was vice-president, secretary, and a director of CMI. Mrs. Young was a director during the same time period. Parsons served as president, treasurer, and director. Parsons' wife owned 50% of the stock of CMI.


Young was actively involved in the management of CMI and received a weekly salary. He coordinated accounting and office administration. He went to pre-bid and pre-job conferences. He attended meetings with government personnel about jobs in progress. The Youngs had access to the CMI books, correspondence, and files and received copies of CMI financial statements.


Safeco issued bonds pursuant to the indemnity agreements for three CMI projects: the Nellis Air Force Base Youth Center project, the China Lake Naval Weapons Center project, and the Mill Valley Post Office project. Because of the small size of the projects, Safeco management questioned the efficacy of issuing the bonds. Nevertheless, because of Harris' high regard for Parsons and the Youngs' strong financial position, Safeco issued the bonds.


In late December 1980, and again in late January 1981, the Youngs sought to terminate the indemnity agreements, citing ill health. Safeco acknowledged the Youngs' withdrawal of indemnification for future projects effective March 13, 1981, but advised the Youngs that their withdrawal did not release them from personal liability for previously issued bonds.


On June 22, 1981, the Youngs resigned from all official positions with CMI. The next day, the Parsons agreed to repurchase the Youngs' stock for $25,000. The repurchase agreement acknowledged the Youngs' continued obligations under the indemnity agreements on jobs in progress, but gave the Youngs the right to demand an independent audit of those jobs.


After the Youngs' withdrawal of indemnification, they asked Harris for monthly meetings. At these meetings, Harris assured the Youngs that the work on the construction of the Mill Valley Post Office was proceeding smoothly. This job was bonded by Safeco and subject to the indemnity agreements. Harris believed that all the bills were being paid on this job. He had no information to the contrary until January 1982.


In late January 1982, subcontractors on the Mill Valley Post Office began to make claims against CMI bonds. As a result of these claims, Safeco investigated the project. Safeco discovered that Parsons had failed to make numerous payments to subcontractors and had failed to complete work as paid for.


Safeco completed all unfinished work and paid all material suppliers and contractors at a cost of $421,234.21. Safeco demanded indemnification from the Youngs under the indemnity agreements. The Youngs refused, asserting that had Safeco monitored the project as Harris had represented, no losses would have occurred.


On November 5, 1982, Safeco instituted an action against the Youngs, seeking a judicial declaration of the Youngs' obligations under the indemnity agreements and recovery of the funds expended on the Mill Valley Post Office project. The Youngs counterclaimed against Safeco and filed a third-party complaint against Harris, alleging causes of action for violations of state and federal securities laws, intentional and negligent misrepresentation, and intentional infliction of emotional distress. The Youngs also sought rescission of the indemnity agreements. After a bench trial, the district court entered judgment in favor of Safeco and Harris and awarded Safeco $421,234.21, interest, attorney's fees, and costs.



The district court's findings with respect to the elements constituting fraud are reviewed for clear error. Northwest Acceptance Corp. v. Lynnwood Equip., Inc., 841 F.2d 918, 920 (9th Cir.1988). "A finding that one person is another's agent is generally reviewed as a question of fact, governed by the clearly erroneous standard. The nature and extent of the agent's authority and whether apparent authority existed are also questions of fact." Dogherra v. Safeway Stores, Inc., 679 F.2d 1293, 1295 (9th Cir.), cert. denied, 459 U.S. 990 (1982). In addition, "[a] district court's determination considering negligence is a question of fact." In re White Cloud Charter Boat Co., 813 F.2d 1513, 1518 (9th Cir.1987). A finding is clearly erroneous when "the reviewing court is left with the definite and firm conviction that a mistake has been committed." Anderson v. City of Bessemer City, 470 U.S. 564, 573 (1985). The trial judge's determinations regarding the credibility of witnesses deserve even more deference than usual fact findings. Id. at 575; Fed.R.Civ.P. 52(a).


I. Harris' Alleged Misrepresentations


The Youngs alleged causes of action against Harris, and against Safeco on an agency theory, for negligent and intentional misrepresentation. The district court denied relief on these causes of action because it found that the Youngs did not reasonably rely on Harris' representations in their decision to invest in CMI. The Youngs assert that this finding was clearly erroneous.


Under a negligent or intentional misrepresentation theory, an aggrieved party's reliance on a representation must be justifiable. Restatement (Second) of Torts Secs. 525, 552 (1977). The test is "whether the recipient has information which would serve as a danger signal to any normal person of his intelligence and experience." Collins v. Burns, 741 P.2d 819, 821 (Nev.1987).


The Youngs assert that Harris made three misrepresentations to induce them to enter into the indemnity agreements. Harris represented that he had conducted a full investigation of Parsons' qualifications as a contractor, that Safeco would monitor the construction projects to insure against loss to the investors, and that there was no risk to the Youngs in entering into the indemnity agreements.


Before the first meeting of potential investors, the Youngs were aware that Parsons' state contractors license had been suspended and that a prior construction project in which he was involved was experiencing problems and was in litigation. The Youngs were also aware of their accountant's objections to the CMI financial projections and of his withdrawal of his investment after the first meeting. These facts put the Youngs on notice that Parsons might not be a reputable contractor as represented by Harris. These facts also raised the possibility that the Youngs would face liability for indemnification of Safeco and that their investment in CMI was at risk. The suspension of Parsons' license, his admission of past business problems, and the challenge to his financial projections for CMI by the Youngs' own accountant raised the "danger signal" that made reliance on Harris' representations unjustifiable.


The Youngs contend that the district court's finding of unjustifiable reliance must be overturned because it is based on an acceptance of one of two versions of conflicting testimony by Seltzer. Seltzer testified on direct examination that he had invested in CMI before the first meeting for potential investors. On cross-examination, Seltzer stated that he was not able to remember whether he had invested before or after the first meeting. The Youngs argue that Seltzer raised objections to Parsons' projections at the first meeting for potential investors. Because Harris was so persuasive, however, Seltzer invested in CMI after the meeting. As a result, the Youngs assert that their reliance on Harris' representations was justified.


The district court resolved this conflict by finding that Seltzer invested before the first meeting. When "there are two permissible views of the evidence, the factfinder's choice between them cannot be clearly erroneous." Anderson v. City of Bessemer City, 470 U.S. at 574. The district court's determination to accept Seltzer's first version of the events is an entirely plausible interpretation of the evidence and is not clearly erroneous.


Because the district court's finding that the Youngs did not justifiably rely on Harris' statements is not clearly erroneous, we do not reach the question whether Harris exceeded the scope of his agency with Safeco in making those statements.

II. Safeco's Alleged Negligence


The Youngs argue that the district court erred in finding that Safeco's conduct did not create its losses. The Youngs' theory rests on several bases. First, the Youngs contend that Safeco was negligent in bonding CMI. Second, the Youngs assert that Safeco negligently monitored the progress of the construction job. Third, the Youngs allege that Safeco increased its own losses by negligently completing the work on the Mill Valley Post Office project and by negligently handling claims against the performance bonds.


A basic principle of the law of indemnity is that a contract of indemnity will not be construed to indemnify the indemnitee against losses resulting from his own negligent acts. United State v. Seckinger, 397 U.S. 203, 211 (1970) (applying federal law); Buckeye Cellulose Corp. v. Braggs Elec. Constr. Co., 593 F.2d 824, 827 (8th Cir.1979) (applying Arkansas Law); Brown v. Seaboard Coast Line R. Co., 554 F.2d 1299, 1302 (5th Cir.) (applying Georgia law), cert. denied, 434 U.S. 975 (1977); E.L. White, Inc. v. City of Huntington Beach, 21 Cal.3d 497, 507, 146 Cal.Rptr. 614, 620 (1978); Price v. Shell Oil Co., 2 Cal.3d 245, 256-57, 85 Cal.Rptr. 178, 186 (1970).


The record does not demonstrate that Safeco was negligent. Safeco carefully reviewed the Youngs' financial statements, CMI's financial projections, Mr. Young's business experience and his involvement in CMI, Parsons' expertise in federal construction jobs, and the recommendations of Parsons' employers, in deciding to bond CMI. All of these factors were favorable. The record shows that Safeco's conduct reflected "the degree of care in a given situation which a reasonable man under similar circumstances would exercise." Driscoll v. Erreguible, 87 Nev. 97, 482 P.2d 291, 294 (1971).


Safeco's alleged failure to monitor the progress of the CMI construction projects is similarly not a bar to indemnification. The Youngs offer no authority, and our research revealed none, that Safeco owed a duty to the Youngs to monitor the construction projects.


Finally, the Youngs do not point to any evidence in the record to demonstrate that either Safeco's completion of the Mill Valley Post Office project or its handling of claims from subcontractors on that project was performed in a negligent manner. The record shows instead that the work was completed in a timely fashion to prevent further claims on the bonds. Furthermore, Safeco processed all claims on the bonds fairly and efficiently, guarding the Youngs' interests as well as its own. The district court's finding that Safeco was not negligent is not clearly erroneous.

III. Rescission


The Youngs assert that because Harris made material false representations, they have established a basis for rescission of the indemnity agreements whether his intent was innocent or fraudulent. The Youngs contend that the district court erred in concluding that the indemnity agreements were valid and enforceable against them.


Under Nevada contract law a party seeking recession is only required to show actual reliance to rescind a contract. The evidence need not show justifiable reliance. Pacific Maxon, Inc. v. Wilson, 96 Nev. 867, 619 P.2d 816, 818 (1980). No more than actual reliance is required because the maker of the misrepresentation "should not be allowed to profit from the credulity or negligence of the party upon whom it had its intended effect." Id. A party seeking rescission of a contract based on an intentional misrepresentation of fact must prove that he "was deceived in fact by the misrepresentation which the other party made knowingly and with the intention that it be relied upon." Id.


The district court found that Harris did not intentionally make any false representations of fact to the Youngs. This finding is not clearly erroneous. Harris' statement that he had investigated Parsons was not false, because he had made inquiries to Parsons' former employers. Harris' statement that the Youngs faced no risk in entering into the General Agreements of Indemnity was a statement of opinion, not actionable under Nevada law. Clark Sanitation, Inc. v. Sun Valley Disposal Co., 87 Nev. 338, 487 P.2d 337, 339 (1971) (citing Banta v. Savage, 12 Nev. 151 (1877)); see generally W.P. Keeton, Prosser and Keeton on Torts Sec. 109, at 762 (5th ed. 1984) (a prediction as to events to occur in the future is generally a statement of opinion only). Finally, the Youngs introduced no evidence to show the falsity of Harris' statement that Safeco routinely monitored its bonded construction projects, as was their burden.


Nevada courts have not yet reached the issue whether rescission may be based upon an innocent or negligent misrepresentation. Pacific Maxon, Inc. v. Wilson, 96 Nev. 867, 619 P.2d at 818 n. 1. Because Nevada courts have not yet addressed this issue, we must use our best judgment to predict how the Nevada Supreme Court would rule, looking for guidance to well-reasoned decisions by courts of other jurisdictions. City of Angoon v. Hodel, 836 F.2d 1245, 1246 (9th Cir.1988).


The proposition that an innocent misrepresentation of a material fact may provide a ground for rescission has been accepted by many jurisdictions. See, e.g., Foster v. Cross, 650 P.2d 406, 409 (Alaska 1982) ("[A] material misrepresentation, whether innocent, negligent, or fraudulent, [is] an adequate ground for rescission."); Lenhardt v. City of Phoenix, 105 Ariz. 142, 460 P.2d 637, 639 (1969) ("[A] transaction induced by the material though innocent misrepresentation of a party is voidable against that party."); Morrow v. Wm. Berklund Forest Prods. Co., 81 Idaho 428, 346 P.2d 623, 630 (1959) (innocent material misrepresentations render a contract voidable.).


For rescission to be based on an innocent misrepresentation, the statement must be a material inducement to enter into the contract. 13 Williston on Contracts Sec. 1540. A misrepresentation is material "if it would be likely to induce a reasonable person to manifest his assent." Restatement (Second) of Contracts Sec. 162(2). A misrepresentation induces a party's manifestation of assent "if it substantially contributes to his decision to manifest his assent." Id. Sec. 167.


The district court concluded that Harris' representations did not substantially contribute to the Youngs' decision to enter into the indemnity agreements, because they were aware of facts that cast doubt on Harris' assertions. This finding is not clearly erroneous. As a result, the Youngs have not established that they were entitled to rescission.

IV. Attorney's Fees


Safeco has requested an award of attorney's fees in prosecuting this appeal. Under the indemnity agreements, the Youngs must indemnify Safeco for "all loss and expense, including attorney's fees, ... incurred by [Safeco] on account of any breach of this Agreement by any of the [indemnitors]." Contracts to pay an indemnitee's attorney's fees are valid under Nevada law. Corrao Constr. Co. v. Curtis, 94 Nev. 569, 584 P.2d 1303, 1305 (1978). Because the Youngs repudiated the indemnity agreements and Safeco was required to pursue its right to indemnity in court, Safeco is entitled to its attorney's fees on appeal.

V. Issues Not Presented on Appeal


The Youngs also allege causes of action for violation of state and federal securities laws and for intentional infliction of emotional distress in their counterclaim and third-party complaint. The Youngs have not discussed these claims in their briefs before this court. Accordingly, we do not reach these issues. Northwest Acceptance Corp. v. Lynnwood Equip., Inc., 841 F.2d at 923; Collins v. City of San Diego, 841 F.2d 337, 339 (9th Cir.1988) ("It is well established in this Circuit that claims which are not addressed in the appellant's brief are deemed abandoned.").



Safeco's motion for attorney's fees on appeal is granted. Determination of the proper amount of attorney's fees related to this appeal is remanded to the district court.


The judgment is AFFIRMED. REMANDED for a determination of attorneys' fees on appeal.


This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by 9th Cir.R. 36-3