The Discovery Rule, Statutes of Limitations and Surety Bond Contractual Limitation Clauses
Posted by: Mark Albright on Fri, Oct 16, 2015Share this post
SURETEC INSURANCE COMPANY’S OPPOSITION TO DEVELOPER’S SURETY AND INDEMNITY COMPANY’S MOTION FOR SUMMARY JUDGMENT; AND REQUEST FOR FURTHER DISCOVERY BEFORE RULING ON MOTION
COMES NOW Defendant, Third-Party Plaintiff, SURETEC INSURANCE COMPANY (hereinafter “SureTec” or “Third-Party Plaintiff”), by and through its undersigned counsel of record, and opposes the Motion for Summary Judgment filed by Developer’s Surety and Indemnity Company (hereinafter “Developer’s” or “Movant”), which Motion seeks a dismissal of SureTec’s third-party claims against Developer’s, and is opposed on the basis of the following Points and Authorities.
OPPOSITION POINTS AND AUTHORITIES
I. STATEMENT OF FACTS
Respondent SureTec is a commercial surety company that issues, among other things, payment and performance bonds on private and public construction projects.
This case arises out of a construction project at the Tonopah, Nevada Air Force Base, under Prime Contract No. F42650-02-C-7010, between Prime Contractor CSC Applied Technology Group, now known as PAE Applied Technologies, LLC (“PAE”), and the United States Air Force as owner. PAE retained Saiz Construction Company, Inc. (“Saiz”) to perform certain of its contract work, under a Subcontract Agreement dated September 30, 2010, relating to the removal and replacement of certain sections of the Base’s runway, in conjunction with the removal of an existing Barrier Arresting Kit (“BAK”) and the replacement thereof with a new Aircraft Arresting System (“AAS”) on the runway (hereinafter the “Project”). On or about October 28, 2010, SureTec issued a performance bond, No. 5091791, with respect to this Subcontract Project naming Saiz as its principal on the bond.
PAE later claimed that it had sustained property and other damages and losses as a result of allegedly inadequate, negligent, and/or defective designing, engineering, development and construction of the Subcontract Project work. PAE thus initiated the instant litigation (first by filing a suit in State Court in Nye County Nevada on December 19, 2014, which was removed hereto [Document 3], and then by amending its Complaint within this federal case number to name the correct SureTec entity which had actually issued the bond, SureTec Insurance Company, as a Defendant) and named both SureTec and Saiz in its First Amended Complaint filed herein on March 16, 2015. Document 12. SureTec filed its Answer, Crossclaim and Third-Party Complaint [Document 20] on April 20, 2015, naming Movant Developer’s as a Third-Party Defendant, and alleging in pertinent part as follows:
9. Third-Party Plaintiff is informed and believes, and based thereon alleges, that the following individuals and entities (hereinafter referred to as the “Design Professionals/Inspecting Consultants”) were hired, retained, and engaged by Saiz, or by a Saiz subcontractor, or by PAE to design or engineer, or provide design or engineering advice, drawings, or specifications, regarding different aspects of the Project, or to test and inspect the site or the Project before, during and/or after construction, and are primarily liable for the damages, if any, which form the basis for the claims and allegations pursued by Plaintiff PAE herein: . . .; RISUN TECHNOLOGIES LLC, a Utah limited liability company; . . . .
. . . .
12. Third-Party Plaintiff is informed and believes, and based thereon alleges, that the following individuals and entities are insurers and/or sureties (hereinafter “Insuring/Bonding Third-Party Defendants”) who issued policies of insurance and/or performance bonds or other bonds in favor of certain of the Contracting Third-Party Defendants listed above: DEVELOPERS SURETY AND INDEMNITY COMPANY, an Iowa corporation, with respect to Performance Bond No. 539952P issued on behalf of Risun Technologies, LLC, in favor of Saiz Construction Company on or about October 29, 2010, for the Project; JOHN DOES 21 through 30; and ROE BUSINESS ENTITIES 21 through 30, inclusive.
On that basis, various third-party causes of action were brought by SureTec against Risun Technologies LLC (hereinafter “Risun”), the principal on Movant Developer’s bond, and against Movant Developer’s, including a cause of action for declaratory relief, and a cause of action for specific performance of the indemnity obligations owed by Developer’s on its bond. Document 20. Movant Developer’s filed an Answer to the Third-Party Complaint on June 4, 2015 [Document 59], after its same counsel had also filed a separate Answer for Movant’s principal on the bond, Risun, on that same date [Document 58]. Thus, the April 20, 2015 Third-Party Complaint against Risun and Developer’s, at issue in the present Motion, was filed approximately 4 months after the primary underlying lawsuit was first filed by PAE, and only 34 days after the filing by PAE of a pleading properly naming SureTec Insurance Company, as the actual issuer of the bond sued on by PAE. It is on the basis of that primary underlying lawsuit, that the third-party liability against Developer’s is now asserted by SureTec, seeking indemnity and contribution from Risun and its bond issuer.
Movant now seeks a dismissal of the Third -Party Complaint on the basis of a clause within its bond indicating that “[a]ny suit under this bond must be instituted before the expiration of two (2) years from the date on which final payment under the subcontract falls due.” Movant contends that the final payment under Risun’s sub-sub-contract with Saiz fell due, at the latest, on May 9, 2012, such that no suit could be brought arising under the Movant’s bond after May 9, 2014. Points and Authorities in Support of Motion (Document 84) at p. 4, ll. 13-19. In short, therefore, Movant contends that the present Third-Party Complaint at issue in its Motion (seeking indemnity for the claims raised in the underlying PAE Amended Complaint) became time-barred approximately 7 months before the PAE suit was even filed, and 10 months before SureTec was properly named therein, even though that suit’s claims are what give rise to the third-party liability now asserted. In other words, according to Movant Developer’s, SureTec’s claims were time-barred before they ever even accrued! This means that Developer’s is seeking to have its contractual limitations period treated as though it were the equivalent of a statute of repose, not subject to any discovery or other claim accrual rules. This position is, however, unreasonable and not supported by Nevada law.
II. LEGAL ANALYSIS
A. Nevada Law Would Not Enforce the Subject Shortened Limitations Period At Issue in the Subject Bond, as it Is Unreasonable, and Thus, Not Enforceable.
Movant contends that, under Nevada law: (1) a limitations period under its bond may be shortened, by contractual agreement, from that provided by statute, as long as the shortened period is reasonable; and (2) the shortened period required by its bond contract, two years from the last invoice date, is reasonable. Therefore, Movant contends, the SureTec third-party claims against it must be dismissed, as Nevada’s six year statute of limitations for actions on a written contract have been properly and reasonably shortened, and the deadline for filing claims has passed. Document 38, Points and Authorities, at pp. 3-4.
Movant’s analysis is, however, inaccurate on both points. (1) Nevada law does not recognize a bond issuer’s right to shorten a statutory limitations periods by contract, as was attempted herein; and (2) even if Nevada law would recognize such a right, the two-year limitations period, running not from the date of claim accrual, but from a fixed date (“on which final payment under the subcontract falls due”) at issue herein, would not meet the test of reasonableness, as it is inherently unreasonable, and should not be upheld. Indeed, such a limitations period does not shorten the statute of limitations, but creates an invalid contractual statute of repose, which is inherently unreasonable, as demonstrated by this case, in which Movant’s arguments, if accepted, would lead to the absurd and unreasonable result of SureTec’s third-party claims having become time-barred before SureTec itself was sued.
(i) Nevada Surety and Insurance Law Would Not Allow for the Enforceability of the Instant Contractually Shortened Limitations Period in the Subject Bond Contract.
Nevada’s legislature and its highest court have established legal precedents to uphold the public policy of requiring insurers and bond issuers to honor their obligations, and to prevent those selling such products to rely on broadly construed protective clauses which would thwart the very purpose for which these types of contracts are purchased. See e.g., Jacobson v. American Fidelity Fire Ins. Co., 91 Nev. 614, 617, 541 P.2d 2, 4 at n.1. (Nev. 1975)(“Surety contracts are to be interpreted with a view toward effectuating the purposes for which the contract was designed.”); NRS 691B.030 (“Any insurer which executes any surety contract as surety shall be estopped, in any proceeding to enforce the liability which it has assumed to incur, to deny its power to execute such contract or assume such liability.”)
In order to advance these public policies, Nevada law requires that Surety Bond issuers be treated as “insurers” for all legal purposes. Thus, those who rely upon surety bonds are subject to the same legal protections as are applicable to insureds under traditional insurance policies. NRS 691B.010 states the following:
All contracts of surety insurance covering subjects located or to be performed in this state are subject to the applicable provisions of Chapter 687B of NRS (the insurance contract), and to other applicable provisions of this Code. [Emphasis added.]
Therefore, Developer’s performance bond is not merely a surety instrument governed by NRS Chapter 691B (Sureties), but is also to be treated as an insurance contract governed by NRS Chapter 687B (Contracts of Insurance). Developer’s attempt to contractually limit the time period during which Plaintiff can bring a lawsuit is therefore subject to Nevada legal authorities which have held such contractual limitations periods, in insurance contracts, to be void as a matter of public policy.
Movant cites to a federal district court case from 1982 to support its proposition that a stipulated limitations period for commencing an insurance claim would be upheld in Nevada. Opp. at p. 3, ll. 25-27. However, this decision was decided without the benefit of Nevada law having yet been established on that question. This Court need not act under any such handicap, as the Nevada Supreme Court has subsequently ruled on this issue. In State Farm Mut. Auto. Ins. Co. v. Fitts, 120 Nev. 707, 710-711, 99 P.3d 1160, 1162-1163 (2004), the Nevada Supreme Court held that a contractual limitation provision that required the insured to demand arbitration or file suit within two years of the date of an accident violated public policy and was void. The Court held that the six year statute of limitations for bringing suit on a written contract, under NRS 11.190, applied to suits brought under or for breach of the policy, and that the claim did not accrue, for purposes of this statutory period beginning to run, until formal denial of a claim made on the policy. Id. The Court reasoned that an insurer should not be able to rely upon a shorter contractual limitations period, or an earlier claim accrual date, which would deprive parties of the very benefit for which the contract was obtained. Indeed, the Court further noted that upholding the provision would force the insured to file suit prematurely, as to matters which might otherwise be resolved without suit, which would unnecessarily consume “precious judicial resources.” Id.
Similarly, in the present case, if SureTec, Saiz, Risun, or others who might have a claim on the Developer’s bond were required to sue thereon, before said parties had themselves been sued for claims at the project, this would be a waste of judicial resources. Based thereon, Developer’s, likewise, cannot simply decide for itself the date on which claims accrue against it, and choose its own limitations period running from that date, so as to deny liability based upon the bond obligations at issue in this matter. Indeed, Developer’s is estopped, by statute, from making such arguments, and is certainly not entitled to summary judgment at this early stage of the proceedings.
(ii) Even Were it Otherwise Allowable Under Nevada Law, the Contractual Limitations Period at Issue Herein Is Unreasonable, and Thus Fails Under Nevada Law.
Movant has conceded in its Motion that, even if otherwise allowable, contractual limitations provisions will only be upheld if they are reasonable. For example, the case of Holcomb Condominium HOA v. Stewart Venture, LLC, 300 P.3d 124 (Nev. 2013), cited by Movant, not only made that point, but included the following explanation, ignored by Movant, as to the test of a reasonable, versus an unreasonable, limitations clause:
A contractually modified limitations period is unreasonable if the reduced limitations period “effectively deprives a party of the reasonable opportunity to vindicate his or her rights.” [Citation omitted.] See also William L. Lyon & Assoc., 139 Cal. Rptr. 3d at 680 (“‘Reasonable’ in this context means the shortened period nevertheless provides sufficient time to effectively pursue a judicial remedy”) [citation omitted]. Thus, a limitations provision that requires the plaintiff to bring an action before any loss can be ascertained is per se unreasonable.” Furleigh v. Allied Group, Inc., 281 F.Supp.2d 952, 968 (N.D. Iowa 2003).
Id., at 129 [emphasis added].
Thus: the test of whether a statutory limitations period is reasonable is whether it has the effect of depriving a claimant of any reasonable ability to pursue its claims, before it can ascertain its loss. In the present case, this invalid deprivation of the right to pursue claims, is exactly the outcome which would occur if the present Motion were granted, as SureTec had no way of knowing what its loss would be, or that it needed to pursue a claim against Developer’s for indemnity, until SureTec was itself sued. Indeed, as discussed in greater detail below, SureTec still does not have the ability to ascertain its loss, and the claim has thus still not accrued. By the date PAE’s suit was filed, however, according to Movant’s reasoning, the right to claim against the bond had already been lost! Thus, the clause relied upon by Movant clearly is unreasonable as it “deprives a party” from pursuing and “vindicat[ing]” its rights, and does so before that right has even accrued, or its loss has even been ascertained.
(iii) The Provision Relied on By Movant Developer’s Fails Every Test of Reasonableness, in that it Appears in an Adhesion Contract, Bars Claims which Have not yet Accrued, and Establishes an Invalid Contractual Repose Period.
The Supreme Court of Massachusetts in Creative Playthings Franchising Corp. v. Reiser, 978 N.E.2d 765, 770 (Mass. 2012) was asked to review the reasonableness of a contractual limitations period. In the course of its review, the Court noted that such clauses would normally be upheld, but with certain exceptions, which might render those clauses unreasonable, and, as such, invalid and unenforceable. These three tests of unreasonableness, which would prevent such a clause from being upheld, apply if (i) the clause appears in an adhesion contract, (ii) the clause violates a discovery rule, thus barring claims which have not yet accrued, or (iii) if the clause acts as a repose period, and cuts off a claim before it had otherwise accrued:
Any contractual reduction in a limitations period that is unreasonable or not subject to negotiation by the parties, such as in a contract of adhesion, will be unenforceable. . . . .
Reiser argues that, under our discovery rule, contractually shortened limitations periods are not valid and enforceable if the limitations period ends before the injured party “could or should” have discovered the facts resulting in the harm . . . . We agree that a contractual limitations provision that did not permit operation of the discovery rule would be unreasonable and, therefore, invalid and unenforceable.
. . . . The limitations provision at issue sets forth a maximum eighteen-month period after the first act or omission giving rise to any liability within which a party must bring a claim, regardless of whether the act or omission “could have been discovered with reasonable diligence.” This language would appear to impose a limitation of repose, which would be per se invalid and unenforceable; limitations of repose may be imposed only by the Legislature. See Sisson v. Lhowe, 460 Mass. 705, 718, 954 N.E.2d 1115 (2011); Joslyn v. Chang, 445 Mass. 344, 350–351, 837 N.E.2d 1107 (2005).
Id. [Emphasis added.]
The Creative Playthings court did not describe these three tests as cumulative. Any one of the tests, standing alone, would be sufficient to override a limitations provision in a contract. Here, however, these three tests of reasonableness are each applicable, and the clause relied upon by Developer’s fails all three tests. For example, the bond is a form instrument which was almost certainly a contract of adhesion, offered on a take-it-or-leave-it-basis, and the limitations clause is therefore subject to being stricken given that the party on whose behalf the bond was issued likely had no ability to negotiate the document’s deprivation of its statutory limitations period of 6 years for claims on a written instrument. NRS 11.190(1)(b). At the very least, further discovery should be allowed in this case to determine what type of negotiations Risun and Developer’s had over the terms of the bond, if any. As Risun’s and Developer’s interests in responding to such discovery will potentially be adverse to one another, a method for fairly conducting such discovery in light of the dual representation of both parties by the same counsel may also need to be determined.
Similarly, the clause at issue in the present case refuses to take into account the possibility of a claim only being discovered after the two year period has expired, by asserting a date for expiration of claims which has no bearing on when claims might arise or be discovered or might otherwise accrue. Hence, the clause at issue in the present case is clearly, in that regard, not just a contractual provision of limitations, but of repose, which is claimed to have expired before the claims arising thereunder even accrued, including on the basis of any loss-accrual rule, or any discovery-accrual rule, or any other accrual rule. By tying the deadline for making a claim against the bond to a date certain (two years after the last invoice date), which has nothing to do with the date on which a claim on the bond might otherwise arise (including based on the date a breach by the principal on the bond might first be discovered, or the date on which the bond issuer might breach its own obligations thereunder, or a determination of a need to pursue the bond might arise due to suit being filed against a bond claimant, by which the need to sue on the bond was first established (as in Fitts, above)), Developer’s has given itself the benefit of an invalid contractual provision of repose, cutting off claims on the bond before they may have even accrued. Thus, causes of action seeking indemnity for PAE claims only filed against Suretec in March of 2015, are now claimed by Developer’s to have been cut off in May of 2014, several months before they even arose. This clearly violates the prohibition against contractual periods of repose.
Indeed, even if contractual repose periods were otherwise enforceable, which they are not, when compared to Nevada’s actual statute of repose with respect to latent construction defect claims, which is eight years, with an additional two years if the alleged latent defects are discovered in the eighth year (NRS 11.204), the imposition of a contractual repose period of only two years would be inherently unreasonable. Similarly, by reducing the claim period for actions on a written instrument from six years (under NRS 11.190(1)(b)) to two (a 2/3 reduction), the provision is far from reasonable.
The prohibition against a contractual provision of repose, discussed by the Massachusetts Supreme Court in Creative Playthings, is also applicable in Nevada. As noted by the Nevada Supreme Court in the 2013 Holcomb decision: “a limitations provision that requires the plaintiff to bring an action before any loss can be ascertained is per se unreasonable.” Holcomb, 300 P.3d at 129. In the present case, until the lawsuit was filed against Saiz and SureTec, claims for indemnity under Developer’s performance bond had not yet accrued. Indeed, those claims will not have fully accrued until a judgment, if any, is entered on those claims hereafter, or any settlement is paid. If the claims accrued upon discovery, then there are material fact questions that only discovery will resolve as to when discovery of the potential claims took place, or as to other dates which would lead to accrual of the claims. For example, the PAE Complaint indicates that, despite claimed prior notices, it was not until March 12, 2014 that SureTec was first invited to visit the site of the project (a restricted Air Force base) to ascertain and discover for itself the extent and nature and possible defenses to any potential claims, and the need to pursue any possible third-party claims.
In Furleigh v. Allied Group, Inc., 281 F.Supp.2d 952, 968-69 (N.D. Iowa 2003), which is one of the cases relied upon by the Nevada Supreme Court in Holcomb, the U.S. District Court for the Northern District of Iowa held as follows:
Further, a limitations provision that requires the plaintiff to bring an action before any loss can be ascertained is per se unreasonable. [citations omitted] . . . . Pursuant to the discovery rule, the plaintiff’s claim accrues when the claimant knows or should know through the exercise of reasonable diligence of the acts constituting the alleged violation.
In another case relied upon by the Nevada Supreme Court, William L. Lyon & Assoc., Inc. v. Superior Court, 204 Cal. App. 4th 1294 (Ct. App. 2012), the court refused to allow a contractual limitations period to act as a period of repose, ruling that the two year contractual limitations period for a purchaser’s breach of contract claim against their broker did not begin to expire until the claim accrued, which, in that case, was held to be when the purchasers reasonably discovered the broker and the agent had failed to disclose their knowledge of construction defects. Where a genuine issue of material fact exists as to when claimants actually discovered the facts regarding construction defects, summary judgment is precluded.
(iv) Movant’s Arguments Ignore the “Notice-Prejudice Rule”, Further Demonstrating the Unreasonable Nature of the Clause Relied on by Movant.
In Las Vegas Metro. Police Dep’t v. Coregis Ins. Co., 256 P.3d 958 (Nev. 2011), the Nevada Supreme Court reversed a defense judgment in favor of an insurer who had raised a defense with respect to late notice of the claim, and adopted the “notice-prejudice rule” which requires an insurer asserting a late-notice defense to prove it has been prejudiced by a policyholder’s untimely notice of a claim. The court further ruled that questions as to the timeliness of the policyholder’s notice rendered summary judgment for the insurer inappropriate. The Nevada Supreme Court noted that a majority of jurisdictions have adopted this notice-prejudice rule. Further, of the jurisdictions that require a showing of prejudice, a majority place that burden on the insurer, because it is less difficult for the insurer to show prejudice than for the policyholder to prove a negative and demonstrate that its untimely notice had not prejudiced the insurer. The court reasoned that because insurance policies typically are contracts of adhesion, equity favored placing the burden on the insurer. Similarly, the court reasoned that because the notice provision is intended as a protection for the insurer, the insurer
should bear the burden of proving that it should apply as a bar to coverage.
In the present case, Movant’s reliance on the two year provision as a defense is misplaced, as Movant has not shown how it suffered any prejudice from the allegedly late third-party complaint, filed after the two years had, allegedly and according to Movant, already expired. This further demonstrates the inherent unreasonableness of the clause relied upon by Movant, which, to be upheld as a defense herein, would violate the notice-prejudice rule.
B. The Claims Against Risun and Its Bond Issuer Have Not Yet Even Accrued, and Thus, Cannot Yet Be Barred by any Limitations Period.
The present third-party claims are based on SureTec’s right to pursue any claims which its principal, Saiz, could assert; and, as such, arise out of whatever claims Saiz might have against Risun, and Risun’s bond issuer, Developer’s. Thus, a key question in this matter is when Saiz’s claims against Risun and its bond issuer may have accrued. Since the present claims seek indemnity and contribution from a surety bond issuer, these claims will not truly accrue until the parties seeking indemnification (in this case SureTec and or its principal on the bond through whom it claims, Saiz) have suffered a loss or damage. In a construction defect case, such as this, that would be the date on which the third-party claimant has had a judgment entered against it or reasonably agreed to settle a claim to avoid a judgment. Based thereon, the current third-party claims against Developer’s have not yet fully accrued even now, demonstrating how preposterous it would be to rule that the claims are already barred.
As the United States District Court for the District of Nevada, the Honorable District Court Judge Andrew P. Gordon, recently noted, in the case of Camino Properties, LLC v. Insurance Company of the West, 2015 WL 2225945 (D. Nev. May 12, 2015), it is “the nature of the principal’s liability (not the surety’s liability)” which “defines the applicable limitations period” on a claim against a surety bond issuer. Thus, Judge Gordon ruled that an off-site completion bond issuer, which was sued on its bond by an assignee of a city in whose favor it had originally been issued, was subject to the 6-year statute of limitations applicable to a contract claim, when liability was asserted against it based on a claim that the bond issuer’s principal failed to abide by contractual requirements owed to the city. Furthermore, the Camino Properties decision also noted that a “surety’s liability usually accrues at the same time as the principal.” Id. (Significantly, the court noted that “a surety’s liability may accrue at a later time” than that of its principal, but did not indicate that a surety’s liability may accrue before its principal’s liability accrues.)
Based on these principles, the question in the present case is the date on which any claim might have been brought by Saiz against Risun, based on a breach of contract claim between Saiz and Risun. For example, in the Camino Properties case, the court ruled that the date on which the city could first have brought claims on its contract against the surety’s principal was the relevant date on which any statute of limitations would first have begun to run. As the bond issuer had “submitted no evidence” demonstrating that “the city knew of” its principal’s “alleged failure to complete the improvements before” the date on which the bond issuer later asserted the statute of limitations had begun to run, the bond issuer’s requested summary judgment was denied.
Similarly, in the present case, the First Amended Complaint first indicates any communication by PAE to Saiz of any asserted deficiencies in its work in or about March of 2011, which is still less than six (6) years ago. Moreover, further repair work was then undertaken by Saiz pursuant to a memorandum of understanding in 2011 and no formal show cause notice was issued until March 5, 2012. See, First Amended Complaint (Doc. #12) filed March 16, 2015, at paragraphs 16-22. A formal default notice was not provided to Saiz until April 3, 2013 (Id. at para. 27). Thus, the six (6) year statute of limitations applicable to Saiz’s breach of contract claims against Risun, upon which a claim might concurrently or subsequently have been asserted against Risun’s bond issuer, would still not have run as of even the present date.
However, the claims now to be pursued by Saiz against Risun (upon which the present SureTec claims against Risun’s bond issuer are based and derivative) are claims for indemnity, based not on any direct losses which Saiz suffered heretofore, but based on losses which Saiz (or SureTec, on its behalf) may suffer hereafter if judgment is entered against it or it is required to settle with PAE as a result of the present case. Indemnity claims do not accrue, at all, until after a judgment has been entered or a claim has been paid. “A cause of action for indemnity or contribution accrues when payment has been made.” Aetna Casualty and Surety Co. v. Aztec Plumbing Corp., 106 Nev. 474, 476, 796 P.2d 227, 229 (1990). Thus, as the present third-party claims arise in indemnity, the limitations period (whether a six (6) year limitations period under Nevada’s statute of limitations on written contracts, or a two (2) year limitations period under the unreasonable contractual provision relied upon by Developer’s to which neither Saiz nor SureTec ever agreed) has not yet even begun to run.
For example, paragraph 45, at page 35, of SureTec’s Third-Party Complaint against Risun and Risun’s bond issuer, Developer’s, provides that SureTec “is entitled to obtain certain insurance proceeds from, and/or to be indemnified by the above-named Insuring/Bonding Third-Party Defendants [including Developer’s] in that Saiz is a named insured or additional insured under the policies and insurance provided by the Insuring/Bonding Third-Party Defendants, or is a beneficiary entitled to restitution under certain of the bonds issued by said” parties. Similarly, Defendant Saiz Construction Company, in its own Third-Party Complaint (Doc. #48) filed on June 1, 2015, against Risun, included a second claim for relief against Risun, for breach of contract, which cause of action included a reference to section 9.1 of the agreement between Saiz and Risun indicating that Risun would hold Saiz and its officers and employees harmless and would indemnify them from any and all claims (see, Doc. #48 at paragraph 35), and also included a separate cause of action for express indemnity claims against Risun. Document 48.
These indemnity claims were supported by the Developer’s performance bond issued in Risun’s favor and the indemnity claims will not accrue until and unless Saiz, and/or SureTec as the bond issuer to Saiz, allows a settlement to be paid to avoid the possibility of a judgment, or suffers the loss of a judgment being entered against them. See Aztec Plumbing, above, and see also, Saylor v. Arcotta, 126 Nev. Adv. Op. 9, 225 P.3d 1276, 1279 (2010) (reversing lower court’s summary judgment on third-party equitable indemnity and contribution claims, given that such claims had not yet accrued, and thus had “not yet begun to run” and would not do so until judgment was entered against the party asserting such claims); Dadeland Depot., Inc. v. St. Paul Fire & Marine Ins., Co., 483 F.3d 1265, 1271-72 (11th Cir. 2007) (actions against performance bond issuer had not yet accrued, until arbitration proceeding determined the liability of the contractor which was the principal on the bond, for purposes of establishing an entitlement to payment under the performance bond).
Based on the foregoing, it is clear that the claims against Developer’s have not yet accrued even today, let alone had they accrued as of the time the Movant now asserts that a contractual limitations period had already expired. Based thereon, the contractual clause in question is inherently unreasonable, and unreasonable per se, and Developer’s Motion, based thereon, must be denied.
C. To the Extent that Any Discovery Accrual Rule Applies, Genuine Issues of Material Fact Preclude Summary Judgment at this Time.
Even if this Court were to reject the foregoing analysis, and determine that the accrual of the claim against Risun and therefore against its bond issuer might have already occurred at some earlier time, then, any question of fact with respect to the timing of the accrual of the claim should preclude summary judgment at this time, herein. See, Mariner Village v. America State Insurance Co., 344 So. 2d 1337 (Fla. Ct. App. 1977) (the existence of material issue of fact as to whether the claim against the surety accrued before or after a certain date precluded summary judgment). For example, if this Court were, for some unforeseen reason, to reject the valid argument set forth above that the claims have, even now, not yet accrued, as no judgment loss or settlement loss has yet occurred, then any other possible accrual date for said claims, such as the date of Risun’s breach, would still be postponed until the date on which the claims were or could have been discovered. However, genuine questions of material fact would prevent any summary judgment from issuing under any such application of a discovery accrual rule.
Regardless of when a breach occurs, discovery accrual rules have long been upheld in Nevada, to postpone the date on which any limitations period begins to run. See, e.g., Bemis v. Estate of Bemis, 967 P.2d 437, 114 Nev. 1021 (1998)(recognizing that the general rule concerning statutes of limitation is that a cause of action accrues when the wrong occurs and a party sustains injuries for which relief could be sought, and that an exception to the general rule has been recognized in the form of the so-called “discovery rule” under which the statutory period of limitations is tolled until the injured party discovers or reasonably should have discovered facts supporting a cause of action); Soper v. Means, 111 Nev. 1290, 1294, 903 P.2d 222, 224 (1995) (NRS 11.190(1)(b) provides a six year limitation period for contract actions, which accrues not as soon as a breach occurs but when the plaintiff knows or should know of facts constituting a breach); Oak Grove Inc. v. Sell & Gossett, 99 Nev. 616, 623, 668 P.2d 1075, 1079 (1983)(“When the Plaintiff knew or in the exercise of proper diligence should have known of the facts constituting the elements of his cause of action is a question of fact for the trier of fact.”)
That such a discovery rule may apply to construction defect cases, in the absence of expiration of a legislative (not a contractual) statute of repose, as opposed to limitations, is well established. A.J. Aberman Inc. v. Funk Building Corp., 428 A2d 594, 599 (Pa. Super. 1980)(applying the discovery rule to a breach of contract claim for defects to a roof, explaining that “it is the law in Pennsylvania. . . that in the case of a latent defect in construction, the statute of limitations will not start to run until the injured party becomes aware, or by the exercise of reasonable diligence should have become aware, of the defect.”); Poffenberger v. Risser, 431 A.2d 677, 680 (Md. Ct. App. 1981)(rejecting statute of limitations defense asserted against home-owner who did not originally realize that his home had been erected too close to a side-yard setback, and filed suit within three years of discovery, “we now hold that the discovery rule is to be applicable generally in all actions, and the cause of action accrues when the claimant in fact knew or reasonably should have known of the wrong.”); McKinley v. Willow Construction, Co., 693 P.2d 1023, 1024 (Co. Ct. App. 1984)(cause of action for breach of contract, arising out of faulty pool construction, would not accrue, and statute of limitations would not begin to run “until the plaintiff knows or should know, in the exercise of reasonable due diligence, all material facts essential to show the elements of that cause of action.”); Ehrenhaft v. Malcom Price Inc., 483 A.D. 1192 (D.C. Ct. App. 1984)(same); Swaw v. Ortell, 484 N.W. 2nd 780, 797 (Ill. Ct. App. 1984)(“the discovery rule applies to actions against contractors for failure to construct or design a building properly”); Matusik v. Dorn, 756 P.2d 346 (Ariz. Ct. App. 1988)(same)
The discovery rule also applies to claims on surety bonds. For example, in Altoona Area School Dist. v. Campbell, 618 A.2d 1129 (Penn. 1992), the court explained that a filing deadline applicable in that State to performance bonds, being a limitations period, was “thus subject to the discovery rule.” Id. at 1135. The court explained that: “the discovery rule tolls the running of a statute of limitations [against a surety on a performance bond] until the plaintiff knows or reasonably should know that an injury has occurred.” Id. at 1135. The court went to hold that since there were material questions of fact in dispute regarding the date when the one year statute of limitations applicable in that case to performance bonds began to expire, the trial court properly denied a motion for summary judgment filed by the contractor and the surety based on the statute of limitations. Id. at 1135.
The Nevada Supreme Court has followed the discovery rule for decades in contract actions. The court provided a brief history of the rationale for the discovery rule in Bemis v. Estate of Bemis,
967 P.2d 437 (Nev 1998) noting that the rationale behind the rule is “that the policies served by statutes of limitation do not outweigh the equities reflected in the proposition that plaintiffs should not be foreclosed from judicial remedies before they know that they have been injured and can discover the cause of their injuries.” Movant cannot ignore these rules or pretend they do not apply to contractual limitations periods in the same manner as to statutes of limitations imposed by law. To do so would be to violate the principle, which Movant’s motion itself concedes, that to be valid, a contractual limitations period must be reasonable. The clause relied upon by Plaintiff is not reasonable as it does not allow for such distinctions to be made, but is essentially a contractual repose limitations. As such, it is not enforceable.
In 1000 Virginia LP v. Vertecs Corp., 146 P.3d 423, 428 (Wash. 2006), the Supreme Court of Washington explained the “discovery rule of accrual” in a construction defect case as follows:
Statutes of limitations do not begin to run until a cause of action accrues. . . . In many instances an action accrues immediately when the wrongful act occurs, but in some circumstances where the plaintiff is unaware of harm sustained a “literal application of the statute of limitations” could “result in grave injustice.” Gazija [v. Nicholas Jerns Co., 543 P.2d 338, 338 (1975)]. To avoid this injustice, courts have applied a discovery rule of accrual, under which the cause of action accrues when the plaintiff discovers, or in the reasonable exercise of diligence should discover, the elements of the cause of action. Green v. A.P.C., 960 P.2d 912 (1998).
In the present matter, the question of when reasonable diligence could have discovered the basis of any claim is a genuine issue of material fact, not appropriate for adjudication on a summary judgment basis, and upon which discovery must still be performed.
D. Rule 56(d) Request for Additional Time.
Even if this Court were to reject the analysis that the claims at issue herein have even now, not yet accrued, numerous genuine issues of material fact would exist with respect to an alternative discovery accrual analysis, and summary judgment should not be granted at this stage of the proceedings.
For example, to the extent that the claims at issue herein are ultimately derivative of Saiz’s rights as an additional insured under the bond (See, SureTec’s Third-Party Complaint at Paragraphs 46-54) and also therefore based on and derivative of Risun’s rights under the bond (id.), numerous questions of fact exist with respect to the state of Saiz’s knowledge and Risun’s knowledge, at various times, for purposes of determining when any statute of limitations might begin to run under a discovery accrual rule. Further, Developer’s would surely agree that it cannot be held liable unless the underlying principal on its bond (Risun) is also liable. See, Great American Ins. Co. v. General Builders, Inc., 113 Nev. 346, 351, 934 P.2d 257, 260 (1997) (“in a contract of surety, one party, the surety, binds itself to answer for the debt, default or miscarriage of another, the principal obligor.”). See also, Camino Properties, above. However, as the liability of the principal, Risun, has not yet been adjudicated, it would be premature to release Developer’s and claims on its bond from this matter at this early stage of the proceedings. To do so would thwart the purpose of NRS 691B.030.
Nevada case law, Nevada statutory law, and equity dictate that SureTec should not be prevented from maintaining this action, until any questions of fact raised by the Motion, and by this Court’s ruling as to whether it will, in any fashion, uphold the clause relied upon, are ascertained, including through complete discovery. As a result, Defendants’ Motion for Summary Judgment must be denied. Cutting off all such inquiries on the basis of a claim that the contractual limitations period ran regardless of discovery and regardless of other factors affecting claim accrual, such that the contractual limitations period is in fact a contractual repose period, is, as the Nevada Supreme Court has indicated in Holcomb, per se unreasonable.
Based on the allegations of the Amended Complaint, there is little basis to conclude that Risun, Developer’s principal on the bond , would have known of the present issues more than two years ago, let alone be given a meaningful opportunity to investigate the same. Per the Plaintiff, PAE’s pleading, SureTec was first invited to visit the site and review the alleged deficiencies in March of 2014, and the site visit finally was able to be scheduled and take place on August 19, 2014. ¶¶ 30 – 33. This latter date was only 8 months before the Third-Party Suit was filed. Even if the two year limitations provision were applicable and enforceable, and even if it started to run at that time, there would still be time left, even today, to pursue a claim on the bond until August 19, 2016. If Nevada’s six year statute of limitations were applicable, and started to run at the inspection, there would still be almost five years left to sue Developer’s on the bond. However, as the third-party claims are essentially for indemnity as to claims against SureTec, the fact is that the right to pursue such claims have still not yet accrued, for purposes of determining when any limitations period begins to run, and will not fully accrue until hereafter, if and when any judgment is entered against Saiz or SureTec or Risun in the underlying litigation, or any settlement payment is made by them therein.
(Alternatively, to the extent that Developer’s Answer and affirmative defenses, or its Motion for Summary Judgment, are the first notice that Developer’s intends to breach its bond obligations, it may be that the right to pursue a claim against Developer’s has only now accrued, with the filing of those recent filings by Developer’s, in this case, and that the two year contractual limitations period, or the six year statutory period, are only now commencing to run, herein.)
Third Party Defendant Developer’s position, that the contractual deadline for certain claims expired on May 9, 2014, would mean that SureTec’s right to sue Developer’s had already expired, before SureTec suffered any loss (despite the loss-accrual rule to which its indemnity claims are subject) and before it was even able to visit the site and ascertain for itself whether there were any problems actually manifest at the site, and, if so, to what extent those issues were based on Risun’s work (despite any discovery accrual rule which might apply). Developer’s cannot possibly claim that it is “reasonable” for its contractual limitations period to be upheld, where doing so would mean that the claims at issue herein expired before they accrued.
Of course, before the Court can meaningfully address these questions, discovery must be taken to ascertain the facts as to the nature of when various parties, including Risun and Saiz knew what, and when and on what basis the claims have accrued or will accrue herein. Genuine issues of material fact therefore exist in this case which prevent the entry of summary judgment, especially at this early stage of the proceedings. Indeed, entry of summary judgment is proper only “after adequate time for discovery.” Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).
FRCP 56(d) allows the Court to refuse summary judgment, continue a hearing or “make such other order as is just” when a party opposing summary judgment demonstrates that it cannot “for reasons stated present facts essential to justify the party’s opposition.” FRCP 56(d); see also Texas Partners v. Conrock Co., 685 F.2d 1116, 1119 (Ninth Cir. 1982) (reversing summary judgment where plaintiffs were not afforded opportunity to proceed with discovery). Rule 56(d) provides a device for litigants to avoid summary judgment when they have not yet had sufficient time to develop affirmative evidence. Burlington Northern Santa Fe Ry. Co. v. The Assiniboine and Sioux Tribes of Fort Peck Reservation, 323 F.3d 767, 773 (Ninth Cir. 2003). See also, Aviation Ventures, Inc. v. Joan Morris, Inc., 110 P.3d 59, 62-63, 121 Nev. 113 (Nev. 2005) (finding court abused its discretion by not permitting the non-movant to engage in discovery pursuant to Nevada’s equivalent rule, to allow it an opportunity to marshal facts to oppose a motion for summary judgment).
SureTec hereby requests further discovery before this Court issues any Summary Judgment herein, including on the basis of the Declaration of Cynthia Vincent, filed as Exhibit “A” hereto.
The timing of a summary judgment motion is particularly significant when considering a Rule 56(d) request for more time to conduct discovery. Thus, where a summary judgment motion is brought early in the litigation, as here, a Rule 56(d) request for additional time should be granted as a matter of course. Burlington Northern, 323 F.3d at 774. In Burlington Northern, the Ninth Circuit reviewed the trial court’s grant of a motion for summary judgment filed by plaintiff less than one month after the plaintiff initiated suit. The Ninth Circuit reversed, holding that the defendant’s request should have been granted insofar as the discovery sought was dispositive of a pivotal question in the action. Id. On the issue of timing, the Ninth Circuit counseled: “Where … a summary judgment motion is filed so early in the litigation, before a party has had any realistic opportunity to pursue discovery relating to its theory of the case, district courts should grant any [Rule 56(d)] motion fairly freely.” Id. at 773.
Here, facts with respect to claim accrual questions are held by parties such as Saiz, which has its own counsel, and Risun, who is represented by the same law firm representing the Surety Bond trying to escape liability. Due to the infancy of this action, where parties are still making appearances and the parties are trying to coordinate with the Air Force in scheduling a site inspection of the military facility later in the year 2015, the specificity required in describing the facts likely to be discovered through the discovery process should not be treated as a stringent requirement. See, Burlington Northern, 323 F.3d at 774 (explaining that, “where… no discovery whatsoever has taken place, the party making a Rule 56[(d)] motion cannot be expected to frame its motion with great specificity as to the kind of discovery likely to turn up useful information, as the ground for such specificity has not yet been laid”).
Recently, discovery requests were served on Risun by Suretec, including Interrogatories and Requests to Produce Documents. These discovery requests seek relevant information from Risun, such as Request for Production No. 10, which states as follows:
Produce all correspondence, emails or other documentation that relate to, or mention in any way, Risun being notified of any construction defects or related claims at the Project or relating to the Subject Property.
Further, Interrogatory No. 17 requests the following:
Has any report, claim or notice been made to or by any person at Risun concerning the construction defects claimed in this litigation? If so, state:
(a) the name, title, and employer of the person who made the report, claim or notice;
(b) the date and type of report made;
(c) the name, address, and telephone number of the person for whom the report was made; and
(d) the name, address, and telephone number of each person who has an original or copy of the report.
In the present case, the statute of limitations/repose clause claimed as dispositive by Movant herein should be stricken as unreasonable and unlawful on its face (as would be appropriate under the legal authorities cited above), and a loss accrual rule should be applied thereto, such that any limitations period has not yet even begun to run (as would likewise be appropriate thereunder). If this Court were to reject this reasoning, however, then discovery is needed in this case, to include further information about when and what Risun and Saiz were informed of, relative to PAE’s claims, or to allow further analysis of other claim accrual questions, which raise numerous material questions of fact that warrant discovery before any summary adjudication.
For the reasons set forth above, Developer’s Motion for Summary Judgment should be denied. The contractual limitations provision in question, on which Developer’s Motion is based, is not enforceable in Nevada, is not reasonable even were it enforceable, and is invalid and unreasonable per se, as a contractual statute of repose, and as limiting rights in an adhesion contract. Moreover, even were the clause to be upheld, the time period referenced therein should be held to have not yet even begun to run, as no judgment or settlement payment has yet been incurred by SureTec, or by Saiz, or by Risun. To the extent that the Court disagrees with this analysis, and believes any basis might exist upon which the clause might be upheld, and a different claim accrual rule be applied, then discovery should be allowed before granting the motion, to allow the parties to ascertain any facts applicable to any such reasoning the Court might offer, including as to the date of discovery of claims arising under the bond, and any other questions relating to when any applicable limitations period determined by this Court to be applicable, fairly and reasonably began to run.
DATED this _____ day of October, 2015.
ALBRIGHT, STODDARD, WARNICK & ALBRIGHT
D. CHRIS ALBRIGHT, ESQ.
Nevada Bar No. 004904
G. MARK ALBRIGHT, ESQ.
Nevada Bar No. 001394
801 S. Rancho Drive, Suite D-4
Las Vegas, Nevada 89106
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