Old Republic Surety v. Morris Eshaghpour

IN THE COURT OF APPEALS OF TENNESSEE
AT NASHVILLE
Assigned on Briefs April 1, 2003
OLD REPUBLIC SURETY COMPANY v. MORRIS ESHAGHPOUR
Appeal from the Circuit Court for Davidson County
No. 98C-1087 Walter C. Kurtz, Judge
No. M2002-01890-COA-R3-CV - Filed June 4, 2003
A building contractor agreed to make certain repairs to a residence and procured a performance bond
as required by the Metro Government. To obtain the bond the contractor was required to execute
an indemnity agreement favorably to the bonding company. The homeowner complained of the
quality of the contractor’s workmanship, and the Codes Department of the Metro. Government
determined that certain remedial action should be taken by the contractor in order to achieve
compliance with the building code. The contractor declined to do so, insisting that the problems
complained of were caused by the homeowner; whereupon, the bonding company engaged another
contractor to make the repairs, and filed this action against the initial contractor for indemnification.
The Circuit Court ruled in favor of the bonding company. We affirm.
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Circuit Court Affirmed
WILLIAM C. KOCH , JR., J., WILLIAM B. CAIN , J., and PATRICIA J. COTTRELL , J.
Todd E. Panther, Nashville, Tennessee, for the appellant, Morris Eshaghpour.
Melissa Kurtz Blackburn, Nashville, Tennessee, for the appellee, Old Republic Surety Company.
OPINION
PER CURIAM
I.
During the early-to-mid-nineties Morris Eshaghpour was president of Morris Eshaghpour
Contracting Corporation (“MECC”), a Nashville business. In 1990, MECC took out a $40,000
surety bond from Old Republic Surety Company (“Old Republic”) to meet the bonding requirements
of the Metropolitan Government of Nashville and Davidson County. Although the bond named the
Department of Codes Administration as the obligee, the bond was not only for the benefit of the
Metropolitan Government, but also “for the benefit of the owners of property on which work is
performed by the [contractor] pursuant to [an issued] permit . . ..” In connection with the bond, Mr.
Eshaghpour executed an indemnity agreement with Old Republic Surety Company in April 1990.
Under the indemnity agreement Mr. Eshaghpour had to indemnify Old Republic Surety Company
for payments the company was obligated to make pursuant to the bond. This obligation mirrored
and reinforced language in the bond: “Should the Company execute [the] bond(s), the undersigned
agree as follows: . . . (2) to indemnity the Company and hold it harmless against all loss, liability,
costs, claim damages, and expenses, internal or external of whatever kind and nature . . . which the
Company may sustain or incur for or by reason of said Company writing said bond(s).”
While the bond and indemnity agreement were in effect, MECC entered into a contract in
August 1994 to sell a Davidson County residence it had built to Joy Ann Moyer. Accompanying the
completion of the construction of that property, the Metro Department of Codes Administration
issued a letter of occupancy on November 2, 1994, stating:
Through routine inspections and visual observations, we have
determined that the work performed substantially complies with the
requirements of the applicable codes and ordinances . . .. However,
granting of this Final Use and Occupancy in no way relieves the
contractor of its responsibility for any work performed not in
accordance with applicable codes and ordinances.
Right away, in December of 1994, Ms. Moyer began experiencing and noting problems with
the property and complained to Mr. Eshaghpour, who denied responsibility for the problems. Mr.
Eshaghpour claimed that Ms. Moyer’s problems were due to alterations and changes that Ms. Moyer
had made to the topography of the land after she moved in the property and to drainage problems
caused by other construction taking place at the top of the hill behind her home.
Ultimately Ms. Moyer notified Old Republic of the problems, and it notified Mr. Eshaghpour
of Ms. Moyer’s claim in a letter dated June 28, 1995. In addition to setting forth the claim and
reminding Mr. Eshaghpour of the indemnity agreement, Old Republic wrote to Mr. Eshaghpour:
“You have the primary responsibility to resolve this problem. It is requested that you advise us as
to your position relative to this claim. . . . It is requested that you contact [us] immediately and
advise us of your intentions. Failure to do so can result in cancellation of your bond and the
revocation of your Metropolitan Government Permit.” Mr. Eshaghpour responded to this letter on
July 12, 1995, by denying all responsibility for the problems Ms. Moyer complained of. On July 24,
1995, Old Republic wrote back to Mr. Eshaghpour and told him that it would require Ms. Moyer to
prove her claim or else it would be denied, but that Old Republic would “continue to look to your
company to indemnify Old Republic Surety Company should the claimant persist in her claim.”
Ms. Moyer did persist. She made a complaint to the Department of Codes Administration,
which, in turn, made an inspection of the property and notified Old Republic, as surety, to make the
necessary repairs. In a letter to Old Republic, the Codes Department stated:
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The items listed in the attached sheet have not been completed so as
to comply with the requirements of the Metropolitan Building Codes.1
The contractor is unwilling to comply with these requirements.
Therefore, in accordance with the terms and conditions of the bond
and Metropolitan Code of Laws, we hereby notify you to secure the
services of a licensed and bonded contractor to make the necessary
repairs to this property to bring it into compliance with Metropolitan
Code of Laws.
Upon receiving this letter, Old Republic sought to have MECC make the repairs on the
enclosed list. Old Republic sent a copy of the letter and code violations list to Mr. Eshaghpour with
a letter stating “It is requested that you take immediate steps to resolve this situation. As we have
previously advised, we will look to your company to indemnity Old Republic Surety Company from
any loss, cost or expense.” Mr Eshaghpour received this letter but did not respond to it. According
to Mr. Eshaghpour,
The October 18, 1995 letter from Old Republic Surety Company
requested that I take immediate steps to resolve the situation.
However, the items identified in the October 2, 1995 letter from the
Department of Codes Administration were items that were not
MECC’s responsibility. I had explained to Ms. Moyer that these
items were not MECC’s responsibility in December 1994, and I gave
this explanation to Old Republic Surety Company in my July 21,
1995 letter.
Thus, Mr. Eshaghpour rested his position on his July 1995 response to Ms. Moyer’s complaints
without replying to the new correspondence from Old Republic that included a claim from Metro
Codes Administration along with that department’s itemization of the ways in which the house did
not meet building codes.
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The list contained violations including:
1. Correct the location of the positive drain to remove crawl space drainage to
daylight. Gravel as ne cessary the foundation walls to create positive flow to crawl
space drain.
2. Slope landscape so as to provide drainage away from the house. Remove earth as
needed to correct grade to construction provisions. Curb area across foundation
under HV AC supply ducts and unit where storm water drains to crawl space area.
3. Comple te installing two approved columns where tributary beam is not supported
at intervals provided by the provisions.
4. Correct floor undulation in kitchen area where needed to level out floor.
5. Repair nail pops and seam cracks in sheetrock where needed.
6. Repair electrical light and outlet to operate as per National Electrical Code.
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After Old Republic received no response from Mr. Eshaghpour to its October letter, it again
wrote to him on December 21, 1995, stating:
We have been advised by the Metropolitan Government of Nashville
and Davidson County of Tennessee that the code violations . . . have
still not been corrected. We have been advised by the building
inspector to secure the services of a license[d] and bonded contractor
to make the necessary repairs to this property to bring it into
compliance with the Metropolitan code of laws . . ..
Since we have written to you several times regarding this matter, we
are going to proceed in fulfilling our obligation under your bond. I
want to assure you, however, that we fully intend to take legal action
against you to recover any and all loss, cost and expense this
company incurs pursuant to the bond application and indemnity
agreement that you executed on January 26, 1990 . . ..
Unless we hear from you within five days of receipt of this letter, we
shall proceed accordingly.
When Old Republic received no response from MECC, Old Republic authorized Ms. Moyer to hire
an independent third party to both inspect the premises and provide an opinion and a bid.
Subsequently, Donald Estes of Ray Bell Construction provided a report that partially concurred with
the letter from Metro Codes and provided an estimate to repair the listed items. Old Republic then
reached a settlement with Ms. Moyer, hired the contractors to make the necessary repairs, paid those
contractors and Ms. Moyer, and thereafter sought indemnification from Mr. Eshaghpour.
Because Mr. Eshaghpour resisted paying Old Republic, the company in April 1998 filed suit
in the Circuit Court for Davidson County against Mr. Eshaghpour to enforce the parties’ indemnity
agreement. Mr. Eshaghpour denied that he owed Old Republic under the agreement, and he raised
two affirmative defenses: (1) that Old Republic failed to conduct a proper investigation that would
have revealed that MECC was not responsible for the items the homeowner complained about, and
(2) that as a surety, Old Republic had a duty to present all available defenses on MECC’s behalf,
which it did not do. Mr. Eshaghpour also averred that the repair costs sought by Old Republic were
“unreasonable and do not cover work for which he or [MECC] is responsible.”
In May 1999, Old Republic moved for summary judgment, and the circuit court granted the
motion. The court found that the surety had the power under the indemnity agreement to settle
claims, and that before settling, Old Republic gave Mr. Eshaghpour adequate opportunity to address
or otherwise respond to the homeowner’s claims as identified by the codes department. The court
found that the undisputed facts failed to establish bad faith on the surety’s part in settling with the
homeowner. The court then entered judgment against Mr. Eshaghpour for $17,220.88, the amount
claimed by Old Republic for the repairs, plus attorneys fees and costs.
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Believing the court had erred, Mr. Eshaghpour appealed. In November 2001, we handed
down an opinion, Old Republic Sur. Co. v. Eshaghpour, No. M1999-01918-COA-R3-CV, 2001 WL
1523364 (Tenn. Ct. App. Nov. 30, 2001) (No Tenn. R. App. P. 11 application filed), affirming on
the issue of liability but vacating and remanding on the issue of damages and attorneys fees. In our
ruling, we said, “[W]e vacate the award of damages and remand to the trial court for proof, which
may be by affidavit or sworn verification, of the amounts paid by Old Republic due to the claim
herein and, therefore, owing under the indemnity agreement.”
On remand, Mr. Eshaghpour took discovery from Mike Jankowski, a senior vice president
of Old Republic’s who supervised the claims department, and who gave evidence of the amount the
company paid to settle Ms. Moyer’s claim. Thereafter, Old Republic submitted its claim for
damages to the court in the amount of $16,810.88 plus attorneys fees of $4,802.50. There was no
hearing. To support its claim, Old Republic supplied the court with two affidavits and a deposition
from Mr. Jankowski, plus copies of checks issued by the company in payment of Ms. Moyer’s
claims, plus an affidavit on attorneys fees. Against all of this, Mr. Eshaghpour merely argued that
the materials submitted by Old Republic were insufficient to support a judgment against him since
the company had not shown the reason why the checks were written for the stated amounts.
The circuit court recognized that the court of appeals had affirmed on the issue of liability
and that the appellate court had “remanded the case for a determination of damages.” The circuit
court took into account Mr. Eshaghpour’s position that Old Republic had failed to prove any
damages, nevertheless, upon considering all the materials and both sides’ arguments, the circuit court
in July 2002 granted judgment for Old Republic for $16,810.88 plus $3,537.50 in total attorneys
fees. The circuit court found that the check copies submitted by Old Republic were written to pay
Ms. Moyer’s claim and that the amount of the checks were supported by invoices for the necessary
repairs. The court ultimately rested its ruling on a conclusion that “Mr. Jankowski’s statements
along with his personal knowledge as to payments surrounding the claim are sufficient to eliminate
any question of fact regarding damages.” For the second time, Mr. Eshaghpour has appealed.
Mr. Eshaghpour continues his initial argument that Old Republic failed to prove that it
incurred costs and expenses that were covered by the Bond. To determine whether Old Republic
proved its damages - or failed to do so - recourse must be had to the testimony of its Claims
Manager, Michael Jankowski, who testified by deposition and affidavit. He was not employed by
Old Republic at the time the Bond was executed, or when the work was performed, and thus had no
personal knowledge of the nature of the work performed by the contractors employed by Old
Republic to make the repairs to Ms. Moyer’s property.
Mr. Eshaghpour concedes that various documents identified by Mr. Jankowski are business
records of Old Republic and are admissible as such. Included in these documents are copies of
checks issued by Old Republic which support the amount of damages as found by the trial court.
This would, prima facie, appear to end the matter, but Mr. Eshaghpour argues that “the establishment
of these documents as admissible business records does not establish whether Old Republic Surety
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Company incurred damages that are covered under the Bond,” because Michael Jankowski was not
competent to testify as to whether Old Republic incurred damages.
The Circuit Court found that the plaintiff offered sufficient proof of the damages it incurred,
pointing out that Mr. Jankowski, in his supplemental affidavit, testified that the checks were issued
to satisfy the claim of Ms. Moyer pursuant to invoices submitted by the contractor who was engaged
to perform the required corrective work conformable to the building codes. The obligation of the
Bond was “. . . . to secure . . . the costs of repairs incurred by [Ms. Moyers] resulting from the failure
of [Mr. Eshaghpour] to comply with and conform to the above mentioned laws and ordinances of
the Metro Gov’t.” The record adequately reveals that the repairs were required to bring Ms.
Moyer’s property into Codes compliance, and, concomitantly, that Old Republic honored its
obligation to pay the costs thereof. The indemnity agreement, in plain language, required Mr.
Eshaghpour to reimburse Old Republic these costs. We have reviewed the evidence in the light most
favorable to Mr. Eshaghpour, and conclude that the judgment of the Circuit Court is correct. Staples
v. CBL & Assoc., 15 S.W. 3d 83 (Tenn. 2000). The judgment is accordingly affirmed with costs
assessed to the appellant.
PER CURIAM
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