Free Response in Opposition to Motion - District Court of Arizona - Arizona

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Charles D. Onofry ­ 012837 ReNae A. Nachman ­ 022614 SCHNEIDER & ONOFRY, P.C. 3101 North Central Avenue Suite 600 Phoenix, Arizona 85012-2658 Telephone: (602) 200-1280 Fax: (602) 230-8985 E-mail: [email protected] Attorneys for Third-Party Defendant Chemical Lime Company of Arizona IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA STEVEN SCHRUM, Plaintiff, vs. THE BURLINGTON NORTHERN SANTA FE RAILWAY COMPANY, a corporation, Defendant. (Assigned to the Honorable Robert C. Broomfield) No. CIV04-619-PHX-RCB THIRD-PARTY DEFENDANT CHEMICAL LIME'S RESPONSE TO BNSF'S MOTION FOR RECONSIDERATION

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THE BURLINGTON NORTHERN SANTA FE RAILWAY COMPANY, a corporation, Third-Party Plaintiff, vs. CHEMICAL LIME COMPANY OF ARIZONA, a corporation, ABC Corporations I-IV, fictitious corporations, Third-Party Defendant.

Pursuant to this Court's Order dated September 18, 2006, Third-Party Defendant Chemical Lime, by and through undersigned counsel, hereby responds to Defendant/Third-Party Plaintiff BNSF's Motion for Reconsideration and urges the Court

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to deny the same. This response is supported by the attached memorandum of points and authorities. SUMMARY OF CHEMICAL LIME'S POSITION Chemical Lime agrees that BNSF asserted a claim that it was entitled to both indemnity and defense pursuant to the parties' indemnity agreement. As such, Chemical Lime agrees that the Court's Order which granted both BNSF's and Chemical Lime's motion for summary judgment against Plaintiff does not, in and of itself, dispose of BNSF's separate "duty to defend" claim. That said, Chemical Lime denies that it owes a duty to defend under the facts of this particular case. Since the prior summary judgment motions focused on the claimed indemnity obligation, Chemical Lime submits this response setting forth why BNSF cannot recover its litigation costs under a claimed duty to defend. STATEMENT OF FACTS The relevant and material facts are relatively straight forward. Chemical Lime operates a lime plant in Nelson, Arizona. Coal is used as a part of that process. As a natural incident to its operations, coal and lime dust is generated. At the time of Plaintiff's alleged injuries, BNSF operates it trains on the Chemical Lime property where the coal and lime products are loaded. Plaintiff - who had a life-long pre-existing asthma condition ­ is a BNSF employee who worked on the trains that serviced the Nelson plant. Complaint; SOF, ¶1.) (Plaintiff's

He filed a FELA complaint against BNSF claiming that he

suffered some undefined respiratory ailment after breathing in some of the coal and lime dust at the Nelson plant. (SOF, ¶2.) While Chemical Lime never disputed that Plaintiff may have been exposed to some lime or coal dust, Plaintiff had no evidence that he was exposed to unusual dust levels or levels which exceeded what was accepted by the

Response to BNSF Mot Reconsider

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Arizona Department of Environmental Quality (ADEQ), OSHA, or any other relevant standard. In fact, plaintiff never tested to determine the dust levels. Id., ¶3. At no time during the litigation did Plaintiff claim that Chemical Lime was "negligent" in maintaining its property because of the dust levels. Rather, plaintiff's only claimed "negligence" (as identified by his liability expert, Frank Berg) was BNSF's failure to investigate a potential exposure and BNSF's failure to supply respiratory equipment. Id., ¶3. In his view, the mere fact that there was an exposure ­ regardless of whether it exceeded any acceptable level or not ­ triggered BNSF's obligation to investigate the exposure and, if necessary, remediate it or provide Plaintiff with respiratory equipment. Id., ¶4. According to Plaintiff, BNSF failed in those obligations. Id., ¶3. Both BNSF and Chemical Lime moved for summary judgment against plaintiff. By Order dated June 6, 2006, this Court granted BNSF and Chemical Lime's summary judgment motions because there was insufficient evidence to establish that any alleged exposure caused his alleged aggravated asthmatic condition. BNSF admits that there is no indemnity obligation inasmuch as plaintiff's complaint has been dismissed. However, BNSF now seeks to recover all of its litigation expenses claiming that Chemical Lime owed it a "duty to defend" these claims. (See, BNSF's Motion for Summary Judgment on Indemnification Claims, dated 1/17/06, at pp. 2 and 4; BNSF's Response to Chemical Lime's Motion for Summary Judgment dated 1/17/06, at pp. 2, 5, and 6; BNSF's Reply in Support of Motion for Summary Judgment dated 3/10/06, at pp. 1, and 3 - 6; and BNSF Motion for Reconsideration dated 6/2/06, at p. 4.) Throughout the litigation, BNSF has alternatively relied on two separate contracts and their respective indemnity provisions as the basis for this claim: (1) the 1991 industry track contract; and (2) the 2002 industry track contract. Id., ¶¶5, 6. BNSF purports to have tendered the defense through various letters, although in none

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of them does BNSF make an unconditional offer to relinquish complete control of the defense of this matter. (SOF, ¶7.) ARGUMENT The question presented is whether the parties expressed an intention in their indemnity contract that Chemical Lime owed BNSF a duty to defend claims even where even where the only alleged negligence was attributable to BNSF, Chemical Lime was not alleged to be negligent, and Chemical Lime's actions never caused any injury to the claimant. The interpretation of indemnity provisions is governed by special rules. For instance, indemnity provisions are construed to cover only those losses and liabilities which reasonably appear to have been intended by both parties. Barnes v. Lopez, 25 Ariz. App. 477, 544 P.2d 694 (1976). They are also construed against the entity that drafted the agreement (i.e., BNSF) and had a superior bargaining position. See, e.g., Allison Steel Mfg. Co. v. Superior Court, 22 Ariz. App. 76, 80, 523 P.2d 803, 807 (1974); Equitable Life and Cas. Ins. Co. v. Rutledge, 9 Ariz. App. 551, 554, 454 P.2d 869, 872 (App. 1969). Any ambiguity is resolved against the drafting party. See, e.g., Sutter Home Winery, Inc. v. Vintage Selections, Ltd., 971 F.2d 401, 406 (9th Cir. 1992). Finally, where, as here, "an indemnification contract is not given by one in the insurance business but is given incident to a contract whose main purpose is not indemnification, the indemnity provision must be construed strictly in favor of the indemnitor." Martin & Pritz Assoc., Inc. v. Hudson Construction Services, Inc., 602 N.W.2d 805, 809 (Iowa 1999). A. There Is No Duty to Defend Because that Obligation Is Not Referenced in the Specific Indemnity Provision Implicated Under the Facts of this Case. The 1991 contract that BNSF relies on contains no less than five separate provisions discussing potential indemnity obligations. See, 1991 Agreement, ¶¶4(a), 4(b), 5(e), 6, 6(a), and 6(b). They all relate to different types of claims. One of those Case 2:04-cv-00619-RCB Document 126 -4 Filed 09/28/2006 Page 4 of 14

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provisions specifically addresses the parties' respective obligations for FELA claims such as this one. It provides as follows: Regardless of any negligence or alleged negligence of Santa Fe, [Chemical Lime] shall indemnify and hold harmless Santa Fe from any liability or claimed liability arising under the Federal Employees Liability Act (45 U.S.C. §51, et seq.) for any incident caused, wholly or in part, by property, equipment, fixtures, or a condition belonging to or under the control of industry. 1991 Contract, ¶4(b) (emphasis added). Conspicuous by its absence is any stated "duty to defend" or any reference whatsoever that Chemical Lime would be responsible for paying attorneys' fees, costs, or any other litigation expense. Where, as here, an indemnity agreement does not provide for a "duty to defend" or otherwise refer to payment of attorneys' fees and costs, those expenses are not covered. For example, in George Smith Georgia World Congress Center Authority v. Miller Brewing Co., 566 S.E.2d 361 (Ga. App. 2002), Miller Brewing leased space from the Congress Center Authority (hereinafter, the "Authority") for an upcoming trade show. Miller signed an agreement where it agreed "to indemnify and save

harmless Authority from any and all liability or claims of liability . . ." Id. A participant at the trade show fell, was injured, and brought claims against both the Authority and Miller. The Authority settled the claim and then asked Miller to pay its attorneys' fees. When Miller refused, the Authority sued. On cross-motions for summary judgment, the trial court held that Miller had no obligation to pay the attorneys' fees and litigation expenses. The Court of Appeals affirmed. The Court reasoned that there simply was "no language, express or otherwise, [which] obligates Miller to pay the Authority's attorneys' fees." Id. at 363. Moreover, the Court explained that the contractual

language focused only on Miller's duty to indemnify and hold harmless, and "not on the

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legally separate duty to defend the authority or to pay for expenses of litigation or attorneys' fees." Id. This same reasoning was followed by the Court in Kinsinger v. Taco Tico, Inc., 861 S.2d 669 (La.App. 2003). In that case, plaintiff claimed that she broke a tooth on a foreign object in a pinto bean. She sued the restaurant (Taco Tico), McGreevey's (the pinto bean supplier), and Kelly Bean (who supplied the beans to McGreevey's). Kelly Bean had provided McGreevey with an agreement that "all `prewashed pinto beans' would be free of stones and agrees to indemnify said customer against any claims or damages that result from any such stones." After all parties settled,

McGreevey sought to recover its litigation expenses pursuant to the indemnity agreement. Just as in George Smith, supra, the Kinsinger court held that the litigation expenses were not recoverable because there was no stated duty to defend or language indemnifying the customer for attorneys' fees and costs. Id. at 671. These cases establish that absent a reference to a duty to defend, attorneys' fees are not recoverable. BNSF's failure to set forth a "duty to defend" provision in ¶4(b) or otherwise refer to recovery of litigation expenses is also significant because of how those same issues are addressed in other parts of the very same 1991 contract. For instance, ¶¶4(a), 5(e), 6, 6(a), and 6(b) all discuss indemnity obligations for other factual situations, but in one form or another, specifically state that the indemnity obligation extends to litigation expenses. For instance, ¶¶4(a) and 5(e) refer to being indemnified for all "expenses." Paragraph 6 states that BNSF will be reimbursed "for all costs . . ." Paragraphs 6(a) and (b) specifically state that Chemical Lime "shall assume the defense of all such claims . . ." Yet, none of this language is found in ¶4(b), the FELA indemnity provision. This omission clearly has legal significance. Case 2:04-cv-00619-RCB Document 126 -6 Filed 09/28/2006 Page 6 of 14

Response to BNSF Mot Reconsider

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B.

Paragraph 8 of the 1991 Contract Does Not Apply Because Its Terms Are Not Triggered. Alternatively, BNSF relies upon ¶8 of the 1991 Contract as establishing a

"duty to defend." This provision does not apply for either of two reasons. First, ¶8 is a more general statement of certain obligations, which must yield to the specific provisions of ¶4(b), which governs FELA claims. Chan v. Society Expeditions, Inc., 123 F.3d 1287, 1296 (9th Cir. 1997). Second, this provision is not "triggered." The relevant language provides as follows: Upon written notice from Santa Fe, [Chemical Lime] agrees to assume the defense of any lawsuit . . . relating to any matter covered by this agreement for which [Chemical Lime] has an obligation to assume liability for and/or save and hold harmless Santa Fe. (SOF, ¶5.) The operative triggering event is a claim "for which Chemical Lime has an obligation to assume liability;" in other words, those claims for which it must hold BNSF harmless. Thus, the question then becomes whether Chemical Lime has liability under the FELA indemnity provision, ¶4(b). The answer is "no." Chemical Lime has no liability under ¶4(b) for two reasons. First, ¶4(b) applies only where Chemical Lime "caused" the liability in some fashion. In other

words, this provision requires proof that there was a cause and effect between the claim and the damages. Yet, this Court has already ruled as a matter of law that there is no evidence that Plaintiff's alleged condition was caused by anything that occurred at the Chemical Lime plant. Since there is insufficient evidence to establish any cause, there is no liability under ¶4(b) and, hence, no triggering event under ¶8. Paragraph 4(b) also is not triggered because Plaintiff never alleged that Chemical Lime was negligent. Clearly, ¶4(b) requires that there be some negligence Case 2:04-cv-00619-RCB Document 126 -7 Filed 09/28/2006 Page 7 of 14

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"wholly or in part" committed by Chemical Lime to trigger potential indemnity obligations. In this case, however, Plaintiff never alleged (and certainly never proved) that the exposure constituted negligence. Indeed, how could Plaintiff ever prevail on a

negligence claim by making the singular allegation that he was exposed to "some" coal/lime dust? Rather, the negligence which Plaintiff alleged ­ and was testified to by Plaintiff's liability expert ­ was BNSF's failure to investigate the exposure. BNSF's position should also be rejected because its interpretation would place Chemical's obligations on par with that of an insurance company. However, case law holds that ordinary contracts should not be construed like insurance contracts to impose a duty to defend absent a finding that indemnity is owed. For instance, in Regan Roofing Co. v. Superior Court, 24 Cal.App.4th 425, 29 Cal.Rptr.2d 413 (1994), the trial court held that the indemnity provision "was the functional equivalent of a contract of insurance" and found a duty to defend without any determination that the subcontractor was at fault. Id. at 431, 29 Cal.Rptr.2d at 415. In reversing, the appellate court held: No determination has yet been made as to whether the subcontractors were negligent in the performance of their work, giving rise to a duty to indemnify and a related duty to defend. [The general contractor] has not clearly established that under this indemnity clause, the duty to defend against claims of liability is entirely free-standing of the duty to indemnify for liability arising out of a subcontractor's negligence. While an insurance company has a broad duty to defend, due to the possibility of coverage under the policy, a contract of indemnity is not construed in precisely the same manner as is an insurance contract . . . . Id. at 436, 29 Cal.Rptr.2d at 436; see also, Heppler v. J.M. Peters Co., 73 Cal.App.4th 1265, 1282, 87 Cal.Rptr. 2d 497, 512-513 (1999) ("Insurers have a distinct and freestanding duty to defend their insureds . . . as opposed to indemnitors, whose duty to defend is not triggered until it is determined that the proceeding against the indemnitee is `embraced by the indemnity.' . . . Plaintiffs' reliance on a line of insurance coverage Case 2:04-cv-00619-RCB Document 126 -8 Filed 09/28/2006 Page 8 of 14

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cases . . . is misplaced." (citations omitted)); Grand Trunk Western R.R. v. Auto Warehousing Co., 686 N.W.2d 756, 762 (Mich. App. 2004). Against this background, the Court's finding that Plaintiff did not prove causation, while precluding any indemnity claim, also precludes a duty to defend claim. C. No Duty To Defend Can Exist Because BNSF Was Alleged To Have Been Solely Negligent. It is undisputed that Plaintiff neither alleged nor proved that Chemical Lime was negligent. As such, if Plaintiff prevailed at trial, it would have been due to BNSF's sole negligence. The question then becomes whether the parties clearly intended that a duty to defend would exist when BNSF was solely negligent. Again, the answer is "no." Under well established Arizona law, it is acknowledged that parties to a contract can agree to protect one party against their own active negligence, but that intention must be expressed in clear and unequivocal terms. Washington Elementary School Dist. #6 v. Baglino Corp., 169 Ariz. 58, 59-60, 817 P.2d 3, 4-5 (1991). Even assuming arguendo that a party can be indemnified for their sole negligence, it necessarily follows that this intention must likewise be expressed in clear and unequivocal terms. Paragraph 8 does not meet the "clear and unequivocal" test in establishing a claimed duty to defend in the face of BNSF's sole negligence. Yet, in at least two of the separate and specific indemnity provisions, it expressly provides that the indemnity obligations do not exist for claims arising "from the sole negligence of [BNSF] . . ." See, ¶¶4(a) and 6(b). Yet, ¶¶4(b) and 8 on which BNSF relies are silent on what obligations, if any, exist where BNSF is solely negligent. The failure to address this question creates an ambiguity in the contract (which is construed against the drafter ­ BNSF) or, at the very minimum, presents a fact question as to what the parties truly intended.

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D.

No Duty To Defend Could Exist Because of the Inherent Conflict of Interest. If, as Chemical Lime contends, it has no duty to defend for BNSF's sole

negligence, or it is in Chemical Lime's interest to prove that BNSF was at fault. Conversely, it is in BNSF's interest to prove that Chemical Lime was at fault. A clear divergence of interests exists between these two parties. Arizona case law holds that a duty to defend cannot exist in the face of such a conflict. In Bridgestone/Firestone North America Tire, L.L.C. v. A.P.S. Rent-aCar & Leasing, Inc., 414 Ariz. Adv. Rep. 27, 88 P.3d 572, 579-80 (App. 2004), the court held that where a divergence of interests exists between an indemnitor and indemnitee, there is no duty to defend. Relying on the Restatement (Second) of Judgments § 57 (1982), the court noted that when one party has attempted to vouch in another party and bind that party to subsequent judgments, the general rules do not apply when the purported indemnitor could not properly assume the defense because of a conflict of interest. Under § 57(3) of the Restatement, a conflict of interest exists "when the injured person's claim against the indemnitee is such that it could be sustained on different grounds, one of which is within the scope of the indemnitor's obligation to indemnify and another of which is not." Id. at 579. The court highlighted comment c to the Restatement: In such circumstances, it is to the interest of the indemnitee [MT] that, if liability be established against him, it be established on a ground within the indemnity obligation so that he can shift the loss to the indemnitor [Fisher]. It is to the interest of the indemnitor [Fisher] that, if liability be established against the indemnitee [MT], it be on a ground outside the indemnity obligation. Neither of them could defend the action in a way that would fairly protect the interests of the other in all respects. Because of the conflict, the indemnitor [Fisher] cannot properly be called on to take control of the defense of the action, for he would be required either to sacrifice his own interests without a fair opportunity to litigate questions concerning his liability or to commit a breach of his duty to conduct a vigorous defense of the indemnitee [MT.... Case 2:04-cv-00619-RCB Document 126 - Filed 09/28/2006 - 10 Page 10 of 14

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*

*

*

When, because of [a] conflict of interest between the indemnitee and indemnitor, the indemnitor cannot properly take over the defense of the indemnitee, the situation is one of a justified refusal by the indemnitor to defend the action. Id. at 579-80 (emphasis added); see also Piedmont Equip. Co. v. Eberhard Mfg. Co., 665 P.2d 256 (Nev. 1983) (manufacturer had no duty to defend a distributor or retailer charged with negligence, breach of warranty, or strict liability where latter party was attempting to prove it was not actively negligent, noting application of the Restatement (Second) of Judgments § 57 (1982)). This rule applies in this case. E. No Duty To Defend Exists Because There was No Proper Tender of The Defense. A duty to defend is not triggered until there is a timely, proper, and unqualified tender of defense. Whether a proper "tender" has been made is a question of law. See Bloch v. Arrowhead-Puritas Waters, Inc., 798 F.2d 1238, 1240 (9th Cir. 1986) (finding that the tender of defense was insufficient as a matter of law); Litton Systems, Inc. v. Shaw's Sales & Serv., Ltd., 119 Ariz. 10, 14, 579 P.2d 48, 52 (App. 1978). To be proper, a tender must, inter alia, be unqualified and completely relinquish the defense. The Litton court explained the requirements of a legitimate tender in the following terms: The notice, whether written or oral, must contain an unequivocal and certain and explicit demand to undertake the defense thereof, with an offer to surrender control of the action to the indemnitor at least as to that portion of the claim for which the indemnitee seeks ultimately to hold the indemnitor liable. Litton, 119 Ariz. at 14, 579 P.2d at 52 (App. 1978) (emphasis added).

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An example of an improper tender was discussed by the court in U.S. Wire & Cable Corp. v. Ascher Corp., 167 A.2d 633 (N.J. 1961), a case relied upon by Litton. In U.S. Wire, plaintiff-buyer sued a seller for breach of warranty. The seller notified the product manufacturer of the lawsuit. The purported "tender letter" stated the need for cooperation between the seller and manufacturer in the defending the action, and advised in part: In the event that the [plaintiff] is successful in the Albuquerque action, [indemnitee-seller] will hold your company[, indemnitor-manufacturer], responsible for any sums that they have to pay to the [plaintiff] based upon your warranty, as well as all of its costs and expenses that it may incur in defending the New Mexico action. * * *

We are giving you timely notice of the institution of this law suit and we would like an early indication on your part as to what part you will play in defending the suit. Id. at 635. The court held that the notice was not a proper tender because the letter did not include an unequivocal, certain and explicit demand to assume the defense, nor did it include an offer to surrender control of the lawsuit to manufacturer. Id. at 637. In this case, BNSF never made an unequivocal offer to relinquish complete control of the defense. (SOF, ¶7.) The most it stated was that it was looking to be "indemnified" and that it was "tendering" the case. CONCLUSION For all the foregoing reasons, Chemical Lime respectfully requests that this Court deny BNSF's motion for reconsideration.

Response to BNSF Mot Reconsider

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Dated this 28th day of September, 2006. SCHNEIDER & ONOFRY, P.C.

By

s/Charles D. Onofry Charles D. Onofry ReNae A. Nachman 3101 North Central Avenue, Suite 600 Phoenix, Arizona 85012-2658 Attorneys for Third-Party Defendant Chemical Lime Company of Arizona

Response to BNSF Mot Reconsider

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CERTIFICATE OF SERVICE I hereby certify that on September 28, 2006, I electronically transmitted the attached document to the Clerk's office using the CM/ECF System for filing and transmittal of a Notice of Electronic Filing to the following CM/ECF registrants: George T. Burgess, Esq. Hoey & Farina, PC 542 South Dearborn, Suite 200 Chicago, Illinois 60605 Attorneys for Plaintiff William L. Thorpe, Esq. Sal J. Rivera, Esq. Melissa Wilson Rawlinson Fennemore Craig 3003 North Central Avenue, Suite 2600 Phoenix, Arizona 85012-2913 Attorneys for BNSF Charles Hamilton Houston, III Thomas Thomas & Appel, PC 2700 North Central Avenue, Suite 800 Phoenix, AZ 85004 Attorneys for BNSF I hereby certify that on September 28, 2006, I served the attached document by facsimile and US mail on the following, who are not registered participants of the CM/EFC System: William D. Black, Esq. One East Camelback Road, Suite 630 Phoenix, Arizona 85012-1658 s/Janice Froechte

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