Liability for Stipulated Judgment Despite Covenant Not to Execute

Indemnity—Liability for Stipulated Judgment Despite Covenant Not to Execute

Flood Control District v. Paloma Investment, Ltd., 635 Ariz. Adv. Rep. 4 (App. Div. I, May 31, 2012) (J. Kessler)

CONTRACTUAL AGREEMENT TO INDEMNIFY FOR “ALL LIABILITY” INCLUDES OBLIGATION TO PAY AMOUNT OF STIPULATED JUDGMENT SUBJECT TO COVENANT NOT TO EXECUTE ALA DAMRON AGREEMENT/PREMATURE NOTICE OF CLAIM VALID WHERE GOVERNMENT SUFFERS NO DETRIMENT TO ABILITY TO INVESTIGATE AND EVALUATE/RULE 68 EXPERT FEE SANCTIONS APPLY TO FEES RELATED TO ACTUAL TESTIMONY AND PREPARATION TO TESTIFY ONLY/ARS § 12-341.01 GIVES TRIAL JUDGE DISCRETION TO AWARD REASONABLE HOURLY RATE AND NOT ACTUAL CONTINGENT FEE

The Flood Control District of Maricopa County [district] undertook a flood control project in the area of the Gillespie Dam. The district negotiated an easement with the Gillespie Dam owners [dam owners] and promised to indemnify the dam owners for “all liability” that might arise out of its flood control project and the operation and maintenance of the dam by the dam owners. Sure enough, after the district altered the waterway in the vicinity of the dam the dam failed and flooded the farmers below the dam. The farmers sued the district and the dam owners ultimately entering into a Damron agreement whereby the dam owners stipulated to judgment against it for $14.75 million, paid $3.3 million up front and received a covenant not to execute from the farmers on the difference ($11,450M). While this agreement was pending court approval a jury awarded the farmers damages in the amount of $5.36 million of which $536,000 was assessed against the district (jury found district 10% at fault, dam owners 80%). District appealed claiming it has no obligation to indemnify and the farmers cross appealed for an increase in the expert witness fees.

The Arizona Court of Appeals held that when an indemnification clause uses broad and unqualified language like “all liability” it should be given its broadest application and only exceptions expressly stated in the contract should apply. Further, where the contractual language refers to all “liability” as opposed to all “loss” the indemnitor is liable for the full amount of the unpaid stipulated judgment. A liability exists without regard to whether it is ever “paid” whereas a loss only occurs upon payment.

The district then claimed that the dam owners had failed to bring a timely notice of claim regarding the indemnity matter. In fact, the dam owners had served a notice of claim several years before the indemnity claim accrued upon entry of the stipulated judgment. The Court of Appeals rejected this argument finding that a premature notice of claim is nonetheless valid provided the government does not claim its ability to investigate and evaluate the claim was hampered by the early notice.

Next The Court of Appeals rejected the district's argument that it was entitled to payment of certain expert fees as a rule 68 sanction. The court found that rule 68 allows the court to award a party who beats its offer of judgment to recover “reasonable expert witness fees.” This means fees charged for actually testifying and fees charged to prepare to testify. Other “expert” functions such as “project management” and “expert coordination” do not qualify. However, the court agreed with the district that rule 68 (g) gives the trial court the discretion to apportion sanctions among the parties based upon factors such as their percentage of the judgment, whether a particular party shared responsibility in creating the costs and whether a single party held up a settlement other parties supported.

Next, the court ruled that interest begins to run on the date the stipulated judgment was found by the court to be reasonable and was entered. It was at that moment this item of damages became liquidated.

On the issue of attorneys' fees under ARS § 12-341.01 the trial court has wide discretion in determining whether fees should be awarded at all and if so in what amount. The fact an attorney is working under a contingency fee does not entitle her to a comparable award under the statute. Instead, the trial court is free to apply the lodestar approach—a reasonable hourly rate multiplied by the number of hours spent by the attorney on the matter—such an approach is presumptively reasonable.