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American Motorists Insurance v. the Club At Hokuli`A

October 27, 2011

AMERICAN MOTORISTS INSURANCE
SOM/KSC COMPANY,
v.
THE CLUB AT HOKULI`A, INC., A HAWAII NONPROFIT CORPORATION; HOKULI`A COMMUNITY ASSOCIATION, INC., A HAWAII NONPROFIT CORPORATION; 1250 OCEANSIDE PARTNERS, A HAWAII LIMITED PARTNERSHIP; TEXTRON FINANCIAL CORPORATION, A DELAWARE CORPORATION; RED HILL 1250, INC., A WASHINGTON CORPORATION; AND OCD, LLC, A HAWAII LIMITED LIABILITY COMPANY, DEFENDANTS.
OCD, LLC, A HAWAII LIMITED LIABILITY COMPANY, CROSS-CLAIMANT,
v.
1200 OCEANSIDE PARTNERS, A HAWAII LIMITED PARTNERSHIP, CROSS-DEFENDANTS



The opinion of the court was delivered by: Susan Oki Mollway Chief United States District Judge

ORDER DENYING OCD, LLC'S Plaintiff, MOTION FOR SUMMARY JUDGMENT

I. INTRODUCTION.

Plaintiff American Motorists Insurance Company

("AMICO") is a surety on various performance bonds relating to a luxury residential development on the Big Island of Hawaii. When the bonds' principal, Defendant 1250 Oceanside Partners ("Oceanside"), allegedly defaulted on its development obligations, the bonds' obligees, The Club at Hokuli`a, Inc. ("The Club") and Hokuli`a Community Association ("HCA"), made a demand on AMICO. This lawsuit followed. Besides suing Oceanside, The Club, and HCA, AMICO sues Defendant Textron Financial Corporation ("Textron"), another bond obligee; a former Oceanside general partner, OCD, LLC ("OCD"); and a present Oceanside general partner, Red Hill 1250, Inc. ("Red Hill").

OCD now moves for summary judgment with respect to all of AMICO's claims against it. Those claims are for breach of indemnity agreements, specific performance, quia timet, and declaratory relief.

OCD argues that: (1) OCD cannot be held jointly and severally liable by AMICO for Oceanside's breach of its indemnification agreements with AMICO because OCD was no longer an Oceanside partner when Oceanside's obligation to indemnify AMICO accrued; (2) AMICO's claims against OCD are time-barred; and (3) OCD's obligation to AMICO under the indemnification agreements was discharged because, after OCD's dissociation from Oceanside, AMICO materially altered OCD's obligation to AMICO. Given material factual disputes, the court denies OCD's motion.

II. FACTUAL AND PROCEDURAL BACKGROUND.

A. General Background.

Around 1990, Oceanside bought 1,550 acres of land on the Big Island of Hawaii for a luxury residential community development to be named "Hokuli`a." Aff. Stephen Beatty ¶ 6, ECF No. 210-1. Oceanside planned to develop various recreational amenities for Hokuli`a homeowners, including a golf course, golf maintenance facility, clubhouse, beach activity center, and tennis courts. Id. at ¶ 8. Oceanside formed and organized HCA as Hokuli`a's homeowners' association, and formed and organized The Club to administer and manage Hokuli`a's golf club. Id. at ¶ 7.

In 1999 and 2001, Oceanside agreed to build facilities and improvements at Hokuli`a for The Club and HCA. See Decl. Phil Edlund Supp. The Club & HCA's Mot. Partial Summ. J. ("Edlund Decl.") Ex. A ("Club Improvements Agreement"), ECF No. 203-2; Edlund Decl. Ex. B ("Amended Club Improvements Agreement"), ECF No. 203-3; Edlund Decl. Ex. E ("Phase I Agreement"), ECF No. 203-6; Edlund Decl. Ex. G ("Phase II Agreement"), ECF No. 203-8. Oceanside also contracted with the County of Hawaii to develop and construct improvements related to Hokuli`a. See Pls. Second Amended Compl. ¶ 22, ECF No. 144 ("Complaint").

B. Oceanside Partnership.

Oceanside is a limited liability partnership registered in Hawaii. See Declaration of Rex Y. Fujichaku ("Fujichaku Decl.") Ex. 14, ECF No. 446-16 ("Oceanside Formation Agreement"). Oceanside's founding general partners were Ocean Club Development Company ("OCDC") and Red Hill. Id. OCDC and Red Hill established Oceanside in April 1990 for the sole purpose of developing the Hokuli'a project. See id. at 5.

In December 1999, OCDC assigned all of its partnership interests in Oceanside to OCD. See Fujichaku Decl. Ex. 20, ECF No. 446-22. On May 22, 2002, OCD sold its partnership shares to Red Hill. See Declaration of Masato Hasegawa at ¶ 4, ECF No. 357-1.

C. Surety Bonds.

The original and Amended Club Improvements Agreements, the Phase I Agreement, and the Phase II Agreement (collectively, the "Development Agreements") each required Oceanside to execute a surety bond in favor of The Club or HCA. See Club Improvements Agreement at 3; Amended Club Improvements Agreement at 4; Phase I Agreement at 3; Phase II Agreement at 2. In addition, Oceanside executed bonds in favor of the County for the contracted development and construction. See Complaint at ¶ 23. From 1999 to 2001, AMICO issued nine bonds ("the Bonds"), with penal sums totaling $118,846,694.00. See Declaration of Steve Squatrito ("Squatrito Decl.") Exs. 1a-1h, ECF No. 446-2. The Bonds issued in favor of The Club and HCA required Oceanside to complete construction by specific dates and bound AMICO to pay stated sums if Oceanside did not satisfy its obligations. See Squatrito Decl. Ex. 1g, ECF No. 446-2 ("Phase I Bond"); Squatrito Decl. Ex. 1h, ECF No. 446-2 ("Club Improvements Bond"); Squatrito Decl. Ex. 1i, ECF No. 446-2 ("Phase II Bond").

D. Dual Obligee Riders.

On August 29, 2001, by way of separate bond riders, Deere Credit Inc. ("Deere"), one of Oceanside's lenders, was added as a dual obligee to the Amended Club Improvements Bond, the Phase I Bond, and the Phase II Bond. See Squatrito Decl. Exs. 6a-c, ECF No. 446-7. In 2005, Deere was deleted as a dual obligee from the three Bonds. See Squatrito Decl. Exs. 7a-c, ECF No. 446-8. On June 27, 2006, Textron, another of Oceanside's lenders, was added as a dual obligee on all nine Bonds. See Squatrito Decl. Exs. 8a-i, ECF No. 446-9.

E. Indemnity Agreements.

When AMICO issued the Bonds, Oceanside and its general partners entered into two written agreements in which they agreed to indemnify AMICO with respect to any losses AMICO might incur as surety. One of the agreements was entered into in 1999, one in 2001. See Squatrito Decl. Ex. 2, at 1, ECF No. 446-3 ("1999 Indemnity Agreement"); Squatrito Decl. Ex. 3, at 2, ECF No. 446-4 ("2001 Indemnity Agreement"). Whether OCD is liable under either indemnity agreement is the subject of this motion.

Oceanside entered into the 1999 Indemnity Agreement on September 13, 1999. See 1999 Indemnity Agreement. Oceanside's general partners at the time (OCDC, Inc., and Red Hill) signed the agreement. Id. In relevant part, the 1999 Indemnity Agreement provides:

The Indemnitors will indemnify and save the Company [AMICO] harmless from and against every claim, demand, liability, cost, charge, suit, judgment, attorneys' fees and expense which the Company may pay or incur by reason of having executed or procured the execution of, such bonds, or any renewals or continuations thereof or substitutes thereof, or by reason of the failure of the Indemnitors to perform or comply with any of the covenants or conditions of this Agreement, in making any investigation on account thereof, in prosecuting or defending any action which may be brought in connection with any bond, in obtaining a release from liability and enforcing any of the agreements herein contained.

OCD, while not an Oceanside general partner in September 1999, acquired all of OCDC's interests in Oceanside in December 1999.

Oceanside and AMICO entered into the 2001 Indemnity Agreement on June 12, 2001, after OCDC had assigned its interests to OCD. See 2001 Indemnity Agreement. The 2001 Indemnity Agreement provides in relevant part:

Indemnitors agree to indemnify and hold harmless Surety immediately upon remand for any and all Loss sustained or incurred by reason of having executed any and all Bonds.

The Indemnitors [sic] obligation to indemnify the Surety shall also apply to any Bond renewals, continuations or substitutes therefore. 2001 Indemnity Agreement at 2, ¶ 1. In the agreement, "Bonds" refers to any bonds issued prior or subsequent to June 12, 2001. Id. at 1.

F. Alleged Default on the Bond Obligations.

AMICO says that some of the bonded work was not completed by the completion dates ...


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