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National Surety Corporation v. Dustex Corporation

United States District Court, N.D. Iowa, Eastern Division

March 10, 2015

NATIONAL SURETY CORPORATION, Plaintiff,
v.
DUSTEX CORPORATION and MIRON CONSTRUCTION CO., INC., Defendants.

REPORT AND RECOMMENDATION

JON STUART SCOLES, Chief Magistrate Judge.

I. INTRODUCTION

On the 20th day of January 2015, this matter came on for hearing pursuant to the Court's Order of September 24, 2014. Judge Edward J. McManus referred this matter to a magistrate judge, pursuant to 28 U.S.C. § 636(b), "to conduct an evidentiary hearing on defendants' affirmative defense of equitable estoppel and file an R&R." See Order (docket number 151). Plaintiff National Surety Corporation ("NSC") was represented by its attorneys, Todd S. Schenk and James R. Murray. Defendant Dustex Corporation ("Dustex") was represented by its attorneys, Christopher P. Jannes and Elizabeth R. Meyer. Defendant Miron Construction Co., Inc. ("Miron") did not appear, pursuant to a stipulation that it would "not be directly participating in the estoppel evidentiary hearing because the issue of Miron's entitled [ sic ] to coverage is not an issue to be presented at the evidentiary hearing." See Proposed Stipulation (docket number 158) at 2, ¶ 5.

At the Court's direction, Dustex filed a post-hearing brief and argument (docket number 192) on February 4, 2015, NSC filed a response (docket number 196) on February 18, and Dustex filed a reply (docket number 197) on February 25.

II. PROCEDURAL HISTORY

On January 14, 2013, NSC initiated this action by filing a complaint seeking declaratory judgment. NSC asked the Court to declare that it had no duty to defend or indemnify Dustex and Miron in an arbitration action which was then pending before the American Arbitration Association ("AAA"). Dustex and Miron filed answers on March 21, 2013.[1] In its answer, Dustex asserted, among other things, that NSC failed to effectively give Dustex notice that NSC was defending the arbitration action under a reservation of rights. Accordingly, Dustex argues that NSC is estopped from denying coverage.

On January 21, 2014, NSC filed separate motions for summary judgment against Dustex and Miron. NSC asked the Court to declare, as a matter of law, that there was no coverage under the policy and it owed no duty to defend and/or indemnify Dustex or Miron. Dustex and Miron filed a joint motion for summary judgment on the same date, claiming "NSC did not timely and unambiguously reserve its rights under the policies."[2] Defendants argued that "[b]y its actions or inactions, NSC is estopped from asserting the absence of insurance coverage in this action."[3] Also on January 21, Miron filed a motion for partial summary judgment, asking that it be declared an additional insured under Dustex's policy with NSC.

On May 9, 2014, the Court ruled on the four motions for summary judgment. Judge McManus concluded that the insurance policy issued by NSC to Dustex did not require NSC to defend or indemnify Dustex in the underlying arbitration action. Because the Court found that there was no coverage under the policy, it further concluded that Miron's claim to be an additional insured under the policy could be denied as moot.[4] Regarding the affirmative defense of estoppel, the Court concluded that there were "complex disputed questions of material fact on which summary judgment cannot be granted." See Order (docket number 142) at 12.

Following the Court's ruling on the motions for summary judgment, the only issue remaining to be tried was Defendants' equitable affirmative defense of estoppel.[5] After briefing by the parties, Judge McManus concluded that there is no right to a jury tril on this equitable affirmative defense.[6] He then referred the matter to a magistrate judge to conduct an evidentiary hearing on the affirmative defense.

III. RELEVANT FACTS

A. Construction Project

In 2006, the Board of Trustees of the Municipal Electric Utility of the City of Cedar Falls, Iowa - more commonly referred to as Cedar Falls Utilities ("CFU") - wanted to make an environmental upgrade to its Streeter Station Unit No. 6. On August 10, 2006, CFU and Miron executed an Agreement (Exhibit 2) for construction of the upgrade. The $3.35 million project included the installation of a "baghouse" to collect emissions from the coal-fired boiler. On February 7, 2007, Miron and Dustex executed a Purchase Agreement (Exhibit 3), requiring Dustex to fabricate the baghouse equipment for $1.83 million.

Dean Baston, Miron's chief financial officer, testified that while the project was substantially complete by the end of 2007, CFU would not sign a certificate of substantial completion. In addition to standard "punch list" items, CFU raised concerns regarding the performance of the baghouse. Dustex, Miron, and CFU met in 2008 in an attempt to resolve the dispute, although CFU's focus was apparently diverted following massive flooding in June 2008, and the plant was not operating for a substantial period of time. The parties continued to negotiate in 2009, but were unable to reach an agreement.

B. Demand for Arbitration

On August 18, 2009, Miron filed an arbitration demand against CFU with the AAA, seeking $475, 000 for money allegedly due on the contract. CFU filed an answer on September 2, 2009, claiming damages against Miron for breach of contract in the amount of $1, 461, 000. On January 11, 2010, CFU and Miron submitted a "tolling agreement" to Dustex, which would extend certain deadlines. Dustex, who was not a party to the arbitration action at that time, declined to execute the tolling agreement.

On November 18, 2010, CFU filed a motion in the arbitration action, asking that Dustex be ordered to participate as a party. Attorney William L. Sitton, Jr., acting as Dustex's attorney, responded to the motion on November 24, 2010. Apparently, the motion was never ruled on by the arbitrator. On December 2, 2010, however, CFU filed an action in the Iowa District Court for Black Hawk County, seeking an order compelling Dustex to participate in the arbitration action. Dustex was served with the petition on about December 13, 2010.

C. State Court Declaratory Judgment Action

On December 15, Sitton wrote to Dustex's insurance agent, with the subject line: "Miron Construction Company, Inc. Purchase Agreement."[7] The letter states that "[t]wo arbitration claims have been filed against Dustex in Cedar Falls, Iowa." At the time of hearing, Sitton acknowledged that was a misstatement. Actually, there was a declaratory judgment action pending against Dustex in state district court, and a motion had been filed to bring Dustex into the arbitration between Miron and CF U.Sitton's letter then described the "long history" of the dispute between CFU and Miron, and identified perceived issues. Attached to the letter were copies of various documents, including some related to the underlying arbitration action.[8]

Upon receipt of Sitton's letter, Dustex's insurance agent forwarded the information to the Fireman's Fund Insurance Company.[9] Brian McCoy, an adjuster with Fireman's Fund, opened a file on December 17, 2010. On December 22, McCoy called Sitton and acknowledged receipt of the claim. According to his file note, McCoy advised Sitton that the arbitration appeared to be based on breach of contract and he questioned whether there was coverage under the policy. Sitton responded that there was more to the claim than adherence to a contract.[10]

Earlier on December 22, Sitton sent an email to Miron's and CFU's attorneys, advising them he had not heard back from Dustex's insurer, and requesting a 20-day extension of the deadline to respond to the state court action.[11] CFU's attorney replied the following day, denying the requested extension. Sitton then sent an email to McCoy, Fireman's Fund's adjuster, advising him that CFU was unwilling to agree to an extension, and reminding him that a response to the declaratory judgment action was due not later than January 3.[12]

Also on December 22, 2010, Sitton sent an email to Patrick Paul, Dustex's CEO, indicating that he had "[b]een going back and forth with claims rep from Fireman's Fund as to whether this is a covered occurrence. $64, 000 question."[13] Sitton advised Paul that he had been sending Fireman's Fund "communications from Miron/CFU that raise issues affecting property damage and advertising injury."

D. Initial Representation

In a file note dated December 23, McCoy wrote that he had reviewed the complaint in the arbitration action and it was based on a "fabric filter provided by Dustex and installed by Miron."[14] The note also states that "[t]here appears to be no coverage for this matter." In a December 27 note, however, McCoy wrote that he "[t]ook another look at policy" and it "[a]ppears that claimant CFU may be alleging property damage."[15] In a file note dated December 29, Jeanne Meyers (apparently another Fireman's Fund employee) opined that Dustex was owed a defense under a reservation of rights.

I have reviewed all of the notes and the policy provisions as well as the arbitration proceeding. I feel that we owe the insured a defense under a reservation of rights. The Arbitration Proceeding is a claim against the insd. and as such we owe the defense. There is also allegation of Property damage incurred by the Plaintiff, contained within the Arbitration Filing.

Claim History (Exhibit 1) at 24.

Apparently, Fireman's Fund routinely retains the Duncan Green law firm in Des Moines to represent its insured's interests. On December 30, Duncan Green advised Brian McCoy that attorney Brad Obermeier would be handling the matter. McCoy then sent an email to Dustex, with a copy to Sitton, confirming an earlier voicemail and stating that attorney Brad Obermeier "will be defending Dustex's interests in this matter."[16] The subject line on the email was the caption in the state court declaratory judgment action.

Sitton responded on January 3, 2011, asking about Obermeier's qualifications.[17] Sitton expressed concern that "the attorney selected by FF to defend this breach of contract action does not appear to be experienced in 1) Construction litigation, or 2) AAA arbitration under the Construction Rules."[18] At the hearing, Sitton explained that while the pending action was a declaratory judgment action, it involved an interpretation of a construction contract and, therefore, he believed a construction attorney was required.

The case was almost immediately reassigned to Martin Kenworthy, another lawyer at the Duncan Green law firm. Apparently, Kenworthy sent an email to Sitton indicating his involvement in the case. Sitton responded with an email on January 3, asking about Kenworthy's qualifications.[19] Among other things, Sitton asked Kenworthy about his experience with AAA construction arbitration claims and "assured" Kenworthy that "an adequate defense demands" an attorney who is active in construction litigation, AAA arbitrations, and selecting construction arbitrators.[20] Kenworthy has an undergraduate degree in construction engineering and worked for nine years in the field before returning to law school. It is undisputed that he is highly qualified and experienced in construction litigation.

On January 6, 2011, Sitton wrote to Patrick Paul at Dustex to give a "status report" regarding the declaratory judgment action and the arbitration proceeding. The letter states that the "defense torch" was passed to Martin Kenworthy, and Sitton states that "I am satisfied that he can protect your interests in both pending matters."[21] The remainder of the letter is devoted to the defense of the arbitration action.

On January 10, 2011, Sitton wrote to CFU's attorney and informed him that "Dustex's carrier has retained counsel on behalf of Dustex to represent it in the declaratory judgment action and the arbitration claim filed by Miron."[22] Sitton also states that "I typically appear for Dustex in arbitration claims, and will be doing so here." Kenworthy testified that he regularly discussed the arbitration action with Sitton and Sitton provided input in ...


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