TWENTY SEVENTH ANNUAL SOUTHERN SURETY … SURETY LAW UPDATE TWENTY SEVENTH ANNUAL SOUTHERN SURETY AND FIDELITY CLAIMS CONFERENCE Charleston, South Carolina APRIL 21st & 22nd, 2016

THE SURETY LAW UPDATE

TWENTY SEVENTH ANNUAL SOUTHERN SURETY AND FIDELITY CLAIMS

CONFERENCECharleston, South Carolina

APRIL 21 & 22 , 2016st nd

PRESENTED BY:

Jeffrey S. PriceManier & Herod

150 Fourth Avenue North, Suite 2200Nashville, TN 37219

(615) [email protected]

Kathryn M. TrumanWestfield Group

One Park Circle P.O. Box 5001Westfield Center, OH 44251

(330) [email protected]

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Table of Contents

I. SURETY LIABILITY AND DEFENSES .................................................................... 4

A. DECLARATION OF DEFAULT AND/OR NOTICE REQUIREMENTS .................. 4

1. Performance Bonds ......................................................................................... 4

2. Payment Bonds .............................................................................................. 10

B. SCOPE AND LIMITATION OF BONDED OBLIGATION ..................................... 17

1. Performance Bonds ....................................................................................... 17

2. Payment Bonds .............................................................................................. 19

C. STANDING .......................................................................................................... 30

1. Performance Bonds ....................................................................................... 30

2. Payment Bonds .............................................................................................. 31

D. DAMAGES RECOVERABLE FROM THE SURETY............................................ 32

E. PAY WHEN PAID CLAUSES .............................................................................. 40

F. LIMITATION OF ACTIONS ................................................................................. 42

1. Public Works Projects ................................................................................... 42

2. Private Projects .............................................................................................. 43

3. Miller Act Projects .......................................................................................... 44

G. DISCHARGE OF SURETY .................................................................................. 47

H. SOVEREIGN IMMUNITY .................................................................................... 48

II. CIVIL PROCEDURE ............................................................................................... 49

A. SUBJECT MATTER JURISDICTION .................................................................. 49

B. PERSONAL JURISDICTION ............................................................................... 51

C. IMPROPER VENUE ............................................................................................ 51

D. PLEADING CONDITIONS PRECEDENT ............................................................ 53

E. RES JUDICATA/RETRAXIT ................................................................................ 54

F. DEFAULT JUDGMENT AGAINST PRINCIPAL ................................................... 56

G. PROCEDURAL ISSUES ..................................................................................... 57

III. AGREEMENTS OF INDEMNITY ........................................................................ 66

H. SURETY’S RIGHTS UNDER AGREEMENT OF INDEMNITY ............................ 66

I. INDEMNITOR DEFENSES TO LIABILITY .......................................................... 73

J. COLLATERAL DEPOSIT DEMANDS/PRELIMINARY INJUNCTIONS ............... 78

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IV. BAD FAITH ......................................................................................................... 83

V. ARBITRATION PROVISIONS ................................................................................ 87

VI. BANKRUPTCY ................................................................................................... 93

A. PREFERENCES ................................................................................................. 93

B. PROPERTY OF THE DEBTOR’S ESTATE ......................................................... 94

C. DISCHARGE ....................................................................................................... 94

D. MISCELLANEOUS BANKRUPTCY .................................................................... 95

VII. SUBROGATION AND ASSIGNMENTS .............................................................. 98

A. ASSIGNMENT OF RIGHTS TO WHICH SURETY IS SUBROGATED ............... 98

B. CGL POLICIES ................................................................................................... 99

C. MISCELLANEOUS SUBROGATION................................................................... 99

VIII. WAIVER AND RELEASE ................................................................................... 99

IX. MISCELLANEOUS BONDS ............................................................................. 101

A. INJUNCTION BONDS .................................................................................... 101

B. SUPERSEDEAS BONDS .............................................................................. 102

C. MOTOR VEHICLE DEALER BONDS ................................................................ 104

D. SUBDIVISION BONDS ...................................................................................... 106

E. BID BONDS ....................................................................................................... 109

F. WRITS OF ATTACHMENT ............................................................................... 110

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SOUTHERN SURETY

Surety Law Update 2016

I. SURETY LIABILITY AND DEFENSES

A. DECLARATION OF DEFAULT AND/OR NOTICE REQUIREMENTS

1. Performance Bonds

In Curtiss-Manes-Schulte, Inc. v. Safeco Insurance Company of America, 2015

WL 404352 (W.D.Mo. January 29, 2015) the plaintiff prime contractor hired other

contractors to complete the principal subcontractor’s work without giving notice to the

surety or giving the surety an opportunity to complete the work. In response to an

earlier status inquiry, the plaintiff had indicated to the surety that there were delays and

problems with the principal’s work, and the surety had claims on other projects, sued

the principal for indemnity and participated in a bankruptcy proceeding filed by the

principal’s president. The court interpreted the bond to give the surety options to

complete the work in the event the principal was declared in default but not to require

the plaintiff to give notice to the surety that it was considering or declaring a default.

The court also thought that a three-day cure notice provision in the subcontract did not

entitle the surety to notice even though the subcontract was incorporated by reference

into the bond. The plaintiff did not give the subcontractor the three day notice, but the

court thought that “In this case, such notice was not necessary because Balkenbush

[the subcontractor] declared itself to be in default . . . .” The court looked to insurance

notice-prejudice cases and stated, “Absent a specific notice requirement to Safeco,

Safeco cannot use Balkenbush’s own declaration of default –rather than a declaration

by CMS –as a ‘technical escape hatch’ by which to avoid liability.” The court denied the

surety’s motion for summary judgment.

In Travelers Casualty and Surety Company of America v. City of South

Pittsburg, Tennessee, No. M2014-00269-COA-R9-CV, 2015 WL 414053 (Tenn. Ct.

App. Jan. 30, 2015), the City of South Pittsburg (the “City”) hired James C. Hailey &

Company (“Hailey”), an engineering firm, to design and supervise repairs to an existing

lagoon and construction of a new lagoon at the City’s wastewater treatment plant. W&O

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Construction Company, Inc. (“W&O”) was hired to complete the improvements. On

June 24, 2009 the City sent a letter notifying Travelers that it was considering declaring

W&O in default of its contract, and on July 22, 2009, W&O was formally declared to be

in default, and the City requested that Travelers proceed with its obligations under the

performance bond. In August 2009, the City sued Hailey and W&O for breach of

contract and professional negligence, and sought a declaratory judgment construing the

terms of the City’s contract with W&O. In March 2011 the City filed an amended

complaint alleging that defects had arisen in the completed projects and adding

Travelers as a party, alleging failure to ensure that the project was completed and that

Travelers was liable for funds expended to repair the damaged plant. Travelers moved

for summary judgment on four grounds, including a limitations argument, which was

based upon the bond’s requirement that a suit be brought against Travelers on the

earlier of the date of “Contractor Default,” the date W&O ceased work on the project, or

the date Travelers failed or refused to perform its obligations under the bond. The trial

court denied the motion, and Travelers appealed, contending that the bond’s term

“Contractor Default” meant an occurrence or event in which the Contractor failed to

perform or comply with the construction contract, and that it was not necessary to have

a notice and formal declaration of default in that regard. Thus, Traveler’s argued that

the two-year limitations began in February 2009. The bond defined “Contractor Default”

as the “[f]ailure of Contractor, which has neither been remedied nor waived, to perform

or otherwise to comply with the terms of the Contract.” The court determined that the

language “which has neither been remedied nor waived” indicated an intent that W&O

have an opportunity to perform or comply with the contract, or for the City to have an

opportunity to waive W&O’s non-performance or non-compliance, and thus, it was only

after W&O failed to remedy its non-performance or non-compliance, or the City waived

it, that a “Contractor Default” would occur under the bond. Id. The court also noted that

the bond unambiguously set forth the conditions by which Travelers’ obligation to

perform under the bond would arise: after the City requested a meeting, offered to pay

the Travelers the balance of the contract price, and formally declared W&O in default.

The first two conditions occurred on June 24, 2009, and the last on July 24, 2009.

Thus, provided none of the other noted events in the bond had occurred earlier, the

court found that the City had timely filed suit. The court also found issues of fact as to

when W&O ceased working on the project, precluding resolution on summary judgment

because the determination of this date was material in determining whether the two-

year limitations period had run.

Niagara University v. Hanover Insurance Co., 999 N.Y.S.2d 792 (N.Y.A.D. 2015)

reversed a judgment for the surety based on the two year suit limitation provision of the

performance bond. The Court thought that the obligee raised an issue of fact as to the

date the principal “ceased working” on the project. Apparently, the project was

completed on December 21, 2007, but the principal allegedly performed repair work in

June 2009 and June 2010. The suit was filed in September 2010.

Peekskill City School District v. Colonial Surety Co., 595 Fed.Appx. 91 (2nd Cir.

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2015) affirmed summary judgment for the surety reported at 6 F.Supp.3d 372 (S.D.N.Y.

2014). The surety sued the obligee for a declaratory judgment. The obligee moved to

dismiss but did not file a counterclaim. The surety then dismissed its declaratory

judgment action. The obligee sued the surety, but the two year contractual limitations

period had run. The Court held that the pending declaratory judgment action did not toll

the running of the limitations period and pointed out that the obligee could have

protected its rights by answering and asserting its claim in the declaratory judgment

action or by filing its own, timely suit. The Court rejected the obligee’s argument that it

was not really suing on the bond as not asserted in the lower court and not supported

by anything in the record. The Court did not reach the obligee’s argument that the

surety should not have been permitted to dismiss the declaratory judgment action. Any

challenge to the dismissal had to be raised by a motion for reconsideration or direct

appeal in the declaratory judgment action not by filing a separate suit.

In Selective Insurance Company of America v. Ohio Department of Rehabilitation

and Correction, 2015 WL 872972 (Ohio App. March 3, 2015) a subcontractor on a

public project sent the owner, the Ohio Department of Rehabilitation and Correction

(ORDC), an affidavit of claim seeking to detain contract funds pursuant to R.C.

1311.28. At the time it received the affidavit, ORDC held sufficient contract funds to

cover the subcontractor’s claim, but ORDC did not withhold the amount claimed and

subsequently paid the contractor all but a small amount of the contract funds, which

was eventually paid to the subcontractor. The subcontractor and the surety reached a

settlement under which the subcontractor’s claim against ORDC was assigned to the

surety. The Court of Claims granted the surety summary judgment, and ORDC

appealed. The Court of Appeals affirmed. The Court rejected ORDC’s argument that

the surety was asserting a subrogation claim barred by R.C. 2743.02(D). The Court

held that “Under R.C. 2743.02(D), . . . Selective is the claimant and had no collateral

recovery. Therefore, there is no reduction of any recovery against the state.” The

Court did not reach ORDC’s attempted arguments about the subcontractor’s work and

the validity of the lien because under R.C. 1311.28 the public owner has a duty to

withhold the amount claimed and “cannot ignore the mandate of the statute because it

doubts the validity of the lien.” Finally, the Court rejected ORDC’s argument that the

surety was required to indemnify ORDC for the amount ORDC wrongfully paid to the

prime contractor. The Court stated, “ORDC is not entitled to recover damages from

Selective for its own negligence in failing to detain funds.” [SFAA filed an amicus brief

in support of the surety’s position in this appeal.]

Dallas/Fort Worth International Airport Board v. INET Airport Systems, Inc., 2015

WL 1442889 (N.D.Tex. March 30, 2015) primarily involved a dispute between the public

owner and the bond principal. The surety aspect was the surety’s motion for summary

judgment on the grounds that the obligee’s performance bond claim was barred by the

applicable limitations period. The court agreed with the surety as to the limitations

argument and stated, “A suit on a performance bond may not be brought after the first

anniversary of the date of final completion, abandonment, or termination of a public

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contract. Tex. Gov’t Code §2253.078. Here, the summary judgment evidence

establishes that the contract was terminated on June 7, 2012. The suit was not filed

until August 5, 2013. Hence, the claim against Hartford is not timely.” The court also

noted that even if it accepted the obligee’s “absurd argument that it had not terminated

the contract” the principal abandoned the contract years before the suit was filed.

In Electrical Contractors, Inc. v. Fidelity & Deposit Co. of Maryland, No. 3:13-cv-

00514, 2015 WL 1444481 (D. Conn. Mar. 30, 2015), a subcontractor brought an action

against the general contractor alleging breach of the subcontract, violation of the duty of

good faith and fair dealing, violation of the Connecticut Unfair Trade Practices Act,

unjust enrichment, and quantum meruit. The subcontractor also named the sureties

defendants. The case arose from difficulties which were encountered during work on

the project, such as the subcontractor’s submission of various proposed change orders

for additional compensation for work it believed was beyond the scope of the original

contract and that had become necessary only because the prime contractor

mismanaged the project. All of the subcontractor’s claims were rejected, and the

subcontractor submitted a claim against the payment bond to the sureties. In an e-mail,

the sureties stated that they considered the matter to be in dispute, and reserved all

rights and defenses, and nearly four months later, the sureties formally denied the bond

claim. In the action, the subcontractor sought to enforce its right to payment under the

bond, arguing that the sureties for the prime contractor had forfeited their right to assert

the prime contractor’s defenses because the sureties failed to respond to the

subcontractor’s claim within ninety days as required by Connecticut law (Conn. G.S.

§49-42(a)). The court rejected this argument in light of a Connecticut Supreme Court

case (Electrical Contractors, Inc. v. Insurance Company of the State of Pennsylvania,

104 A.3d 713, 723-724 (Conn. 2014)) which held that the “ninety day requirement

contained in §49-42(a) was directory, rather than mandatory…and the legislature did

not intend that a surety that fails to pay or deny a claim by the statutory deadline

thereby waives any substantive defenses and forfeits its rights to contest the merits of

the claim.”

Eddystone Borough v. Peter V. Pirozzi General Contracting, LLC, Case No. 2:13-

cv- 1470 (E.D.Pa. April 7, 2015) found that the public owner failed to comply with either

the termination provisions of the contract or the conditions precedent in the performance

bond. The court noted that the bond was very similar to the A312 and EJCDC forms

and that no owner default and the notice and meeting requirements of Article 3 of the

bond were conditions precedent to the surety’s obligations. The court rejected the

obligee’s argument that the surety had to prove prejudice from the obligee’s breaches

and granted summary judgment dismissing the claims against the surety.

Curtiss-Manes-Schulte, Inc. v. Safeco Insurance Company of America, 2015 WL

2062566 (W.D.Mo. May 4, 2015) granted reconsideration of the denial of the surety’s

motion for summary judgment reported at 2015 WL 404352 (W.D.Mo. January 29, 2015)

and upon reconsideration granted the motion. The obligee prime contractor completed

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the bonded subcontract work without terminating the subcontract, giving notice to the

surety, or allowing the surety an opportunity to mitigate its damages. In its prior decision

the court thought that the bond did not require notice of a default. Upon reconsideration,

the court held that the bond’s statement that “Whenever the Principal shall be, and is

declared by the Obligee to be in default under the Subcontract, with the Obligee having

performed its obligations in the Subcontract, the Surety may promptly remedy the

default, or shall promptly . . . “ required an unequivocal termination for default and

demand on the surety. Here, there was no dispute that the obligee did not declare the

subcontractor to be in default, and so the court granted summary judgment to the surety.

In Liberty Mutual Insurance Co. v. Integrated Pro Services, LLC, 2015 WL

3620147 (E.D.La. June 9, 2015) the public owner terminated the bonded contract for

default and the surety met its performance bond obligations by taking over completion

of the work. The principal disputed the termination, and the dispute between the

principal and the obligee was the subject of state court litigation. The surety sued the

principal and individual indemnitors seeking judgment for its net losses to date and an

order that the defendants deposit collateral for additional expected losses. Two of the

individual defendants asserted that they sold any interest in the principal shortly after

the indemnity agreement was signed, but they did not assert that they gave written

notice per the provision of the indemnity agreement to be relieved of responsibility for

future bonds. The court denied the surety’s motion for summary judgment.

The court admitted that the surety did not have to prove that it was liable to the

obligee and that the indemnity agreement required indemnity for payments made in

good faith. Since the indemnity agreement did not define good faith, the court looked to

the Louisiana Procurement Code which defined good faith at La. Rev. Stat. §39:1553(B)

as “honesty in fact in the conduct or transaction concerned and the observance of

reasonable commercial standards of fair dealing.” The court thought that “the

legitimacy of the claims against the surety bonds is relevant to the issue of Liberty

Mutual’s good faith and whether it made any payments ‘under the belief that it is, or

was, or might be liable.’” The court found that the issues of fact related to the liability on

the surety bonds would best be resolved in the pending state court litigation and denied

the surety’s motion based on the current record. The court also thought that there were

issues of fact as to the amount of the surety’s damages. The surety had spent

$3,141,480.11 and received payments of $1,586,644.04 for a net loss to date of

$1,554,836.07, but the court thought that that there were issues of fact as to what future

payments the surety might receive from the obligee or what claims the surety, as a

completing contractor, might have against the obligee. Therefore, the court concluded

“that genuine issues of material fact preclude summary judgment with respect to the

issues of damages and collateral security.”

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As to the two indemnitors who argued they were not bound by the indemnity

agreement, the court thought that even though they did not follow the procedure in the

agreement to be released, the surety could nevertheless have chosen to terminate their

obligations and that there were issues of fact with respect to whether the surety did so.

The court denied the surety’s motion and entered an order to stay and administratively

close the case pending resolution of the state court litigation with the obligee. Thus, the

surety was out- of-pocket over $1.5 million in meeting its bond obligations but was left

with no recourse against the indemnitors pending the state court’s determination of the

principal’s dispute with the obligee.

Flatiron-Lane, a Joint Venture v. Case Atlantic Co., 2015 WL 4644727 (M.D.N.C.

August 4, 2015) was primarily a dispute between the prime contractor and a

subcontractor on a design build project for two highway bridges. The surety aspect was

that each side also made claims against the other’s sureties. After trial, the court found

that the prime contractor owed the subcontractor $306,717.34 and, therefore, the prime

contractor’s claims against the subcontractor’s surety necessarily failed. However, in a

multi-page footnote the court discussed the prime contractor’s failure to give the

subcontractor’s surety timely notice of the alleged default as required by the bond and

the resulting valid defense to the surety. On the subcontractor’s payment bond claim

against the prime contractor’s sureties, the court found that the sureties were liable to

the same extent as the prime contractor.

In Heckler Electric Company, Inc. v. Liberty Mutual Insurance Co., 2015 WL

7313860 (D.N.J. November 20, 2015) a contractor asserted that its subcontractor

defaulted and that it had to pay a sub-subcontractor to keep the project moving. The

contractor made claims against the surety for the allegedly defaulting subcontractor

under both the performance bond for the cost of completing the work and the payment

bond for the amount paid to the sub-subcontractor. The contractor and the

subcontractor’s surety both filed motions for summary judgment, and the

subcontractor’s surety filed a motion for sanctions under Rule 11, F.R.C.P. The court

denied all of the motions. The court found that there were issues of fact as to whether

the contractor complied with the conditions precedent in the performance bond and

what amounts, if any, were owed to the sub-subcontractor for work it performed for the

subcontractor. The court denied the summary judgment motions without prejudice and

also denied the Rule 11 motion because there were no exceptional circumstances to

support it.

MG Hotel, LLC v. Bovis Lend Lease LMB, Inc., 133 A.D.3d 519, 21 N.Y.S.3d 21

(N.Y. App. Div. 2015) affirmed summary judgment for a subcontractor’s surety, and

awarded the surety the unpaid subcontract balance, because there was no evidence

the subcontractor defaulted. The owner asserted that certain HVAC equipment was

defective, but not that its installation failed to comply with the specifications. The

owner’s claim was properly against the manufacturer of the equipment and was limited

by the terms of the manufacturer’s warranty to the purchase price of the units.

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2. Payment Bonds

In Diaz Construction v. The Industrial Development Board of the Metropolitan

Government of Nashville and Davidson County, 2015 WL 1059065 (Tenn.App. March 6,

2015) a third tier subcontractor asserted a mechanics lien, and the first tier subcontractor

bonded off the lien. The Court held that the claimant’s failure to serve its statutory notice

of nonpayment on the prime contractor barred the lien claim. Tennessee Code §66-11-

145(a) required a remote contractor to give notice of nonpayment to “the owner and

prime contractor in contractual privity with the remote contractor.” The claimant argued

that the bond principal did not have standing to object to the lien claim. The Court

disagreed and stated, “If Allegheny [the bond principal] can show Diaz did not properly

perfect its mechanics’ lien, the performance bond will not be available to satisfy Diaz’s

claim.” On the merits, the Court affirmed dismissal of the lien claim for failure to give

the required notice. The claimant argued that it was not in contractual privity with the

prime contractor and, therefore, the statute did not require notice. The Court thought the

wording of the statute was to recognize the possibility of multiple primes and held that

notice was required to the prime contractor upstream from the claimant even though the

claimant was not in privity with the prime. Since here the claimant admittedly did not

give notice to the prime contractor, its lien claim failed, and the trial court correctly

dismissed its claim against the bond principal.

In Pierce Foundations, Inc. v. JaRoy Construction, Inc., No. 14-CA-669, 2015 La.

App. LEXIS 557 (La. Ct. App. Mar. 25, 2015), the court examined a claim by the

subcontractor against a general contractor and statutory surety. The subcontractor for a

parish public works project brought action against the general contractor and general

contractor's surety for monies allegedly owed under the subcontract. After the District

Court, in a bench trial, rendered judgment for subcontractor, and the Court of Appeal

dismissed a premature appeal, the Twenty–Fourth Judicial District Court again rendered

judgment in favor of subcontractor, and awarded subcontractor interest from date of

original judgment. Surety and subcontractor appealed. The Court of Appeal held that

subcontractor's failure to file a sworn statement with the public authority of the amount

allegedly due to it by general contractor's surety, and to record such sworn statement

with the recorder of mortgages, deprived the subcontractor of right to bring action

against the surety.

In Building Solutions Since 1977, LLC v. New Haven Housing Authority, 2015 WL

1868107 (Conn.Super. March 31, 2015) the court considered a motion to strike the

plaintiff subcontractor’s substituted complaint filed after the court granted a motion to

strike the original complaint, see 2014 WL 2024854 (Conn.Super. April 23, 2014). The

surety aspect of the motion was based on the argument that the substituted complaint

failed to allege the existence of the bond and compliance with the notice requirements of

G.S. §49-42. The court found that the substituted complaint alleged the existence of the

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bond and substantial compliance with the notice requirement. The court concluded,

“Whether the plaintiff in fact substantially complied with these requirements is not

properly before the court on a motion to strike. Accordingly, the motion to strike count

two is denied.” In an apparently related case, American Pride Builders, Inc. v. New

Haven Housing Authority, 2015 WL 1919558 (Conn.Super. March 31, 2015) the court

reached the same conclusion.

In U.S. for the use of Innovative Metals Company, Inc. v. Southwest Sheet Metal

of NC, LLC, 2015 WL 1920122 (E.D.N.C. April 28, 2015) a second tier subcontractor

sued the prime contractor and its Miller Act payment bond surety. The defendants

moved to dismiss the bond claim on the grounds that the claimant’s notice of its claim

and suit were untimely. The claimant alleged that it last worked on the project when it

completed an inspection and delivered a warranty. The notice and suit would be timely

from that date. The defendants argued that this was not subcontract work for purposes

of the Miller Act, but the court thought there were issues of fact as to the nature of the

work and taking the allegations in the light most favorable to the plaintiff it denied the

motion to dismiss.

In Vanguard Builders, Inc. v. Granite Re, Inc., 348 P.3d 1093 (Okla. Civ. App.

2015), a subcontractor involved with construction of gymnasium at a public school

brought action against the general contractor’s surety for unpaid bond proceeds.

Approximately eight months after completing its work on the project, the subcontractor

notified the surety of its claim against the bond. The claim was denied four months

later, exactly one year and 14 days after the subcontractor had last performed work on

the project. The subcontractor then brought suit against the surety, and the surety filed

a motion for summary judgment, alleging that the subcontractor had failed to file suit to

recover on the bond within the one-year statute of limitation required under the

Oklahoma public works bonding statute. The surety’s motion was granted, and the

subcontractor appealed. The Oklahoma Court of Appeals held that the one-year

limitations period for subcontractor's claim against surety to collect bond proceeds, due

to main contractor's alleged failure to pay fully for subcontractor's work on construction

project for public school gymnasium, began to run on the day subcontractor performed

the last of its labor on the project, rather than when the amount due was finally decided

or when the project was substantially complete, which would be evidenced by school's

payment for the work. The court found that the language of the statute appeared to

show a statute of repose, which can bar a cause of action before it accrues, but noting

that the limitation period was subject to waiver and estoppel under the same

circumstances as other statutes of limitation, the majority believed that there were

enough disputed facts to potentially support the application of waiver or estoppel.

Namely, the court found that there were questions surrounding the subcontractor’s right

to payment, alleged representations made by the contractor, and the contractor’s

decision that the subcontractor was owed no money. Accordingly, the majority

remanded the case. The dissenting judge would have affirmed grant of summary

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judgment to the surety because the alleged misrepresentations upon which the surety

relied were made by the contractor, not the surety.

In Peter Scalamandre & Sons, Inc. v. FC 80 Dekalb Associates, LLC, 2015 WL

3604613 (N.Y.A.D. June 10, 2015) the contractor on a private project asserted a

mechanics lien claim, and the owner bonded it off. The contractor sued the owner and

the surety. Both sides moved for summary judgment, and the trial court denied the

motions. The Appellate Division affirmed. The Court found that various notice

provisions in the contract might have been waived by the conduct of the parties and that

the lien release executed by the contractor might have been treated by the parties “as a

mere receipt of the amounts stated, and that the waiver was not intended to encompass

or preclude claims that the plaintiff subsequently presented to the defendants for

additional work.”

In U.S. for the use of Stuart C. Irby Co. v. Pro Construction, Inc. 2015 WL

3671731 (M.D.Ga. June 15, 2015) a supplier to a first tier subcontractor on a federal

project sued the prime contractor and its Miller Act payment bond surety. On cross

motions for summary judgment, the court entered judgment for the claimant. The last of

the material supplied was delivered to the subcontractor’s office rather than the job site,

and the defendants argued that circumstantial evidence at least raised an issue of fact

as to whether it was used on the bonded project. The court found, however, that there

was no issue of fact suggesting that the supplier did not have a good faith belief that

the material was for the bonded project, and held that such a good faith belief was all

that was required. The unpaid material was delivered over several months on an open

account basis, and separate invoices were sent. The court rejected the defendants’

argument that the 90 day notice requirement had to be met separately for each invoice.

The court held that a single notice within 90 days of the final furnishing was sufficient.

The court also awarded “service charges” of 1½ % per month and attorneys fees as

provided in the open account agreement between the claimant and the subcontractor

plus pre and post judgment interest. The court rejected the defendants’ argument that

the service charges were already interest and awarding them and prejudgment interest

was a duplicative recovery. Even though the “service charges” were a percentage of

the amount owed each month, the court gave credence to the provision in the open

account agreement reciting that they were for the cost of keeping the account not

interest. The court directed the claimant to file a motion setting out the amount of

attorneys fees it claimed.

In Cemex Construction Materials South, LLC v. Falcone Brothers & Associates,

Inc., 349 P.3d 210 (Ariz. Ct. App. 2015), a materialman had filed suit against the

general contractor, alleging it had not been paid for materials it had supplied to a public

works improvement project. The contractor moved for summary judgment claiming it

had not received the statutorily required twenty-day notices and that the notices were

insufficient to satisfy the statutory requirements of A.R.S. § 34-223(A) (Arizona’s “Little

Miller Act”). The trial court denied the motion, concluding that materialman's certificates

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of mailing and affidavits were sufficient to meet the purposes of the Little Miller Act. The

materialman appealed. The Arizona Court of appeals held that Little Miller Act notices,

apprising general contractor of estimate of costs, provided by materialman within twenty

days of supplying labor or materials for a public works improvement project, are

required to be sent by registered or certified mail, and the Little Miller Act does not

authorize service of twenty day notices by first class mail with certificates of mailing as

permitted by the mechanic's lien notice provision in A.R.S. § 33–992.01(F). The court

also found that the last sentence of § 34-223(A), which prescribes the method of

mailing, applies to both the notice materialmen are required to provide to general

contractor of estimate of costs within twenty days of supplying labor or materials and the

notice of any unpaid balance within 90 days of completion of work on public works

improvement project. Finally, the court, citing both Arizona and federal Miller Act

precedent, acknowledged that courts have, to some extent, mitigated the stringency of

the notice requirements by determining that the requirements are satisfied when the

contractor receives actual notice of a materialman’s claim. Accordingly, the court stated

that “if a notice sent pursuant to the [Little Miller Act] is actually received by a contractor,

the fact that it was sent by a method other than registered or certified mail will not

preclude a materialman’s action on the bond.”

In P & D Mechanical, Inc. v. Gar-San Corp., 2015 WL 5133872 (Conn.Super. July

9, 2015) the surety on a public project moved to dismiss the claimant subcontractor’s

complaint as untimely and for lack of the statutory notice. The surety argued that the

complaint did not meet the one year filing requirement of G.S. §49-42(b). The last date

the claimant worked was February 16, 2013. The surety argued that the action against

it was commenced on February 17, 2014. The claimant argued that it delivered the

process to a proper officer for service within the limitations period and he served it

within 30 days therefore its claim was not barred pursuant to G.S. §52-593a. The court

agreed with the claimant and rejected the surety’s argument that G.S. §52-593a should

not apply because the action on the statutory payment bond was in derogation of the

common law. The court found, however, that the claimant failed to comply with the

notice requirements of G.S. §49-42(a). The defendant’s timely communication failed to

state the amount claimed with substantial accuracy and its accurate notice was

untimely. The court, therefore, granted the surety summary judgment.

In Northeast Panel Co. v. Rizzo Corp., 2015 WL 5237174 (Conn.Super. August 4,

2015) a subcontractor sued the prime contractor and its payment bond surety alleging

violations of the Prompt Payment statute, G.S. §49-41a, and the Little Miller Act, G.S.

§49-42. The court granted the defendants’ motion to strike the complaint as to claims

against the surety. The complaint alleged that the claimant gave notice of its claim to

the defendants but did not allege the dates on which its performance ended. Therefore,

the allegations did not establish that timely notice was provided as required by §49-42,

and the court granted the motion to strike the payment bond claim. The court disagreed

with the prime contractor’s contention that there was no private right of action under

§49-41a, but found that this was a separate cause of action from the right against the

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payment bond under §49-42 and that the surety was not liable for the alleged violations

of §49-41a. Therefore, the court granted the motion to strike the §49-41a claim as to the

surety.

In Firefighter Sales and Service v. Travelers Casualty and Surety Company of

America, No. 1:14-cv-2337 2015 WL 5749627 (N.D. Ohio September 30, 2015) a

supplier to a subcontractor on a public project sued the surety on the prime contractor’s

payment bond, and the court granted summary judgment to the surety because the

claimant failed to provide timely notice of its claim. On May 14, 2013, the claimant

delivered material to the subcontractor’s warehouse, and the subcontractor delivered

them to the job site between September and December of 2013. On or about

September 16, 201, the claimant furnished notice to the prime contractor pursuant to

Ohio R.C. §1311.261. Thus, the notice was timely if measured from the date the

subcontractor delivered the material to the job but not if measured from the date the

claimant delivered the material to the subcontractor. The court held that the claimant

was required to furnish notice within twenty-one days of the date it delivered its

materials to the subcontractor, and could not benefit from the later September date

because the claimant did not furnish the materials to the public improvement site; the

subcontractor did.

U.S. for the use of Kogok Corp. v. Travelers Casualty and Surety Company of

America, 2015 WL 5634607 (N.D.W.Va. September 24, 2015) involved claims by a

second tier subcontractor against the prime contractor’s Miller Act sureties. Following

the court’s prior decision reported at 55 F.Supp.3d 852 (N.D.W.Va. 2014), the claimant

filed a reformulated complaint and the sureties moved to dismiss the claims against

them on the grounds that the claimant did not give notice of the claims as required by

the Miller Act and that they included delay damage claims which the court held in the

prior decision were barred by the subcontract. The court agreed with the sureties that

the new claims added in the reformulated complaint had not been included in the

claimant’s Miller Act notice to the prime contractor and, therefore, were barred. The

court stated, “Kogok did not comply with the written notice requirements of the Miller

Act. Its claims under the Pay Applications and PCOs at issue were not listed or

discussed in the October 16, 2013 Notice of Claim, which was Kogok’s only proper

written notice.” The court also adhered to its prior holding that the no damage for delay

clause barred the claimant’s delay claims and held that the law of the case doctrine

applied to prevent reconsideration of that issue. The court granted the sureties’ motion

to dismiss.

In Firefighter Sales and Service v. Travelers Casualty and Surety Company of

America, 2015 WL 5749627 (N.D.Ohio September 30, 2015) a supplier to a

subcontractor on a public project sued the surety on the prime contractor’s payment

bond. The court granted summary judgment to the surety because the claimant failed

to provide timely notice of its claim. The claimant delivered material to the

subcontractor’s warehouse on May 14, 2013. The subcontractor later delivered them to

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the job site between September 2013 and December 2013. The claimant furnished

notice to the prime contractor pursuant to Ohio R.C. §1311.261 on or about September

16, 2013. Thus, the notice was timely if measured from the date the subcontractor

delivered the material to the job but not if measured from the date the claimant

delivered the material to the subcontractor. The court held that “All Lines was required

to issue its Notice of Furnishing within twenty- one days of the date it delivered its

materials to TSI’s warehouse. The Court finds that All Lines cannot benefit from the

later September date because All Lines did not furnish the materials to the public

improvement site; TSI did.”

JSI Communications v. Travelers Casualty & Surety Company of America, 2015

WL 8051607 (5th Cir. December 4, 2015) reversed summary judgment for the payment bond surety of the prime contractor on a Mississippi public project. The claimant was a second tier subcontractor on the project. The prime contractor filed an interpleader action and paid the balance owed the first tier subcontractor into court. The claimant had not given notice of its claim and was not initially a defendant in the interpleader action. Shortly after judgment was entered in the interpleader action, the claimant gave the prime contractor and surety notice of its claim. The notice was timely under the Mississippi Little Miller Act. The prime contractor then amended its complaint in the interpleader action and obtained an amended judgment that extended its release of liability to include any claims made by anyone added to the action for materials, labor or equipment furnished to the first tier subcontractor. When the claimant sued on the bond, the district court granted summary judgment to the surety, and the claimant appealed.

The surety argued that it was no longer liable to the claimant because the liability

of the bond principal was extinguished by the judgment in the interpleader action. The

Fifth Circuit disagreed. The fact that the prime contractor’s liability to the first tier

subcontractor was extinguished in the interpleader action had no effect on the second

tier subcontractor’s ability to recover on the bond. The Court noted that full payment to

a first tier subcontractor is not a defense to an otherwise valid claim by someone who

furnished labor or material to that subcontractor. The Court also rejected any argument

that the judgment in the interpleader action barred the bond claim by res judicata or

collateral estoppel. The scope of the interpleader action was determined by the “stake”

deposited, i.e. the subcontract balance. Any bond obligation was separate and distinct

from that stake, and the bond obligation was not mentioned or litigated in the action.

The Court thought that the prime contractor’s indemnity obligation to the surety “has no

bearing on our decision regarding Travelers’s bond obligation to JSI under the

Mississippi Little Miller Act.” The Court, therefore, reversed summary judgment for the

surety.

Since the evidence submitted in the trial court established that the claimant met

the requirements of a valid bond claim and the surety “has offered no basis, other than

those rejected above, for its failure to pay,” the Court entered summary judgment for the

claimant in the amount of its claim and remanded the case for the district court to

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consider the claimant’s requests for attorneys fees and bad faith damages, which had

been denied by the district court on the ground that there was no bond liability for the

underlying claim.

In Wagner Interior Supply of Wichita, Inc. v. Dynamic Drywall, Inc., 2015 WL

5750465 (Kan.App. October 2, 2015) a supplier to a subcontractor on a private project

filed a timely lien statement but misidentified the prime contractor and the owner of the

improved property. After the time period for the claimant to file a lien statement expired,

the prime contractor filed a Release of Lien Bond to allow the property to be

refinanced. The claimant then sued on the bond, and the trial court granted summary

judgment to the defendants because the claimant failed to timely perfect its lien, barring

it from collecting on the bond. On appeal, the Court of Appeal reversed, holding that,

“when [the prime contractor] chose to file a bond instead of to challenge Wagner’s lien

as unperfected, Wagner’s lien was discharged, mooting any claims regarding the lien’s

imperfection.” There was no dispute that the claimant had furnished material that was

used on the job or as to the amount the claimant was owed. Therefore, the claimant

was entitled to recover on the bond even though it may not have had a perfected

lien. The Court remanded the case with instructions to enter summary judgment for the

claimant.

In Dykier v. Cox, 2015 WL 7720349 (Cal.App. November 30, 2015) the plaintiff

successor trustee filed a petition to remove and surcharge the bond principal but

admittedly failed to mail notice of her petition to the surety as required by Probate Code

§1213. The trial court, however, found that the surety received constructive notice

through its agent and, later, actual notice but “chose not to participate” in the

proceeding. After obtaining a $280,209.31 judgment, the successor trustee sought to

enforce it against the surety bond in spite of the lack of statutory notice. The surety

argued that it did not receive notice to comply with due process, and the Court treated

that as separate from the statutory notice. The Court held that notice to the agent was

constructive notice to the surety and that a post-judgment letter from the bond principal

gave the surety time to file its own appeal of the judgment. Finally, the appellate court’s

mediation office invited the surety’s attorney to participate. Somehow, the Court held

that each of these notices was sufficient to satisfy the requirements of due process and

stated, “At each juncture, Platte River Insurance Company chose not to get involved,

despite having sufficient notice of the claims against Cox [the principal] to satisfy due

process.” The surety also argued that the failure to give the statutory notice meant the

trial court lacked jurisdiction to enforce the surcharge judgment against the bond. The

Court noted that the bond principal actively litigated the successor trustee’s claims and

that the notices given to the surety informed it of the issues being litigated. The Court

clearly thought that the surety was trying to use a technicality to avoid liability and

affirmed judgment against the bond. [The Court did not certify this decision for

publication].

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B. SCOPE AND LIMITATION OF BONDED OBLIGATION

1. Performance Bonds

In APAC-Kansas, Inc. v. BSC Steel, Inc., 2015 WL 866898 (D.Kan. March 2,

2015) the claimants were suppliers or subcontractors to a third tier subcontractor. The

first tier subcontractor furnished a payment bond to the prime contractor. The claimants

moved for summary judgment against the principal and surety. The defendants argued

that the claimants were not within the scope of the bond’s coverage. The bond was

conditioned on payment for labor and material used or reasonably required for use in

performance of the subcontract “for all or any part of which the Contractor and Owner is

liable.” Initially, the defendants argued that this meant the bond covered only obligations

for which both the Owner (here the United States) and the prime contractor were liable.

After it was pointed out that there could be no such claimants, the defendants argued

that the phrase should be read as the Contractor and/or the Owner so there was

coverage if one or both were potentially liable to the claimant. The court disagreed and

thought that the phrase was just a general reference to the costs of constructing the

project and made the principal and surety liable to claimants seeking payment for work

used in performance of a subcontract for which the prime contractor and owner would

be liable.

New Bern Riverfront Development, LLC v. Weaver Cooke Construction, LLC (In re

New Bern Riverfront Development, LLC), Case No. 09-10340-8; Adv.Proc. No. 10-23-8

(Bankr.E.D.N.C. March 3, 2015) granted the surety’s motion for reconsideration of the

court’s denial of the surety’s motion for partial summary judgment reported at 521 B.R.

718 (Bankr.E.D.N.C. 2014). The bonded contract contained a mutual waiver of

consequential damages. The court granted the principal summary judgment on the

obligee’s consequential damage claims, but in the earlier decision denied the surety’s

similar motion. The court thought that while the surety was not secondarily liable for

consequential damages caused by the principal’s breach, it could be liable for

consequential damages caused by its own breach of its obligations under the

performance bond.

After considering the surety’s motion for reconsideration, the court granted the

motion and, upon reconsideration, granted the surety’s motion for partial summary

judgment on the issue of consequential damages. The court reasoned that in its

Complaint the obligee sought only compensatory damages against the surety. The

court stated, “Although, as noted in the court’s December 5, 2014 Order, New Bern

asserted allegations that Travelers failed to perform its independent obligations under

the Performance Bond, it never sought consequential damages for that alleged breach.

. . . The court agrees that it incorrectly found that New Bern had adequately plead (sic.)

a claim for the recovery of non-derivative consequential damages against Travelers.”

In Ohio Casualty Insurance Co. v. Cox, 2015 WL 5612175 (E.D. Ky. September

22, 2015) the court adopted the recommendation of the Magistrate Judge reported at

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2015 WL 5626374 (E.D. Ky. June 5, 2015). The surety issued bonds in reliance upon

an indemnity agreement executed by the contractor (David Cox d/b/a DBR Engineering)

and Mr. Cox individually, and purportedly also executed by Mrs. Cox. DBR

subsequently defaulted in its performance under the bonded contracts. Ohio Casualty

has made payments based on those incidents of default, producing this dispute. Mr.

Cox died and the Probate Court appointed Mrs. Cox Administratrix of his estate. Based

on DBR's defaults, Ohio Casualty filed a Proof of Claim on the Estate and demanded

that Mrs. Cox individually honor the Indemnity Agreement through payment of Ohio

Casualty's claims and expenses, but Mrs. Cox–individually and as Administratrix—

refused to pay. Mrs. Cox denied signing the agreement and filed third-party claims

against the insurance agent and notary involved. The surety filed a motion for partial

summary judgment, and the third-party defendants also filed a motion for summary

judgment and sought sanctions against Mrs. Cox. The court granted both motions and

awarded the third-party $17,212.50 in sanctions against Mrs. Cox. Mrs. Cox also

moved for summary judgment or judgment on the pleadings on several grounds,

arguing that the indemnity agreement was invalid under K.R.S. 371.065 by not stating a

maximum amount and a termination date, that is was not supported by consideration,

that the surety was estopped to assert its claim against her, and that requiring her to

sign the agreement would violate the Equal Credit Opportunity Act (ECOA). The court

rejected each argument.

In Hartford Casualty Insurance Co. v. City of Marathon, 2015 WL 4633683

(S.D.Fla. July 31, 2015) the court, following remand from the Eleventh Circuit,

considered the City’s claims under the performance bond for construction of a

wastewater treatment facility. After the surety declined to take over the work without a

completion agreement, the City contracted with a new contractor. The new contract

amount exceeded the balance remaining in the defaulted contract by $43,042.88. The

court thought that in light of the difficulties in taking over an existing project this was

reasonable. The City also paid the completion contractor $335,189 for outstanding

payables the principal owed its subcontractors. The court found that this was

reasonable and “no more than Hartford was obligated to pay under its payment bond.”

The City also paid an engineering firm $46,234 for additional work associated with

completion of the contract and paid $2,808 to keep the job cite in good order and

prevent deterioration of installed equipment while the job was idle. The court allowed

each of these expenses for a total of $427,273.88 plus prejudgment interest.

The City also claimed liquidated damages of $1,500 per day for each day from the

original contract completion date to the date the work was actually completed – a total of

471 calendar days. The court found that under Florida law the party claiming liquidated

damages has the burden of presenting evidence to apportion the fault for delay if the

parties shared responsibility. Here, the City made no effort to present such evidence

and relied on a “total delay claim.” The surety, however, showed that at least some

portions of the delay were the City’s concurrent responsibility including specifically 64

days during settlement negotiations and 44 days for change order work beyond the

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scope of the original contract. Therefore, since the City did not meet its burden of

apportioning the fault, its claim for delay damages failed. Finally, the court allowed the

City 30 days to file any claim for attorneys fees and costs and gave the surety 15 days

to file its response. The court would then enter a final judgment in favor of the City.

King County v. Vinci Construction Grands Projects/Parsons RCI/ Frontier-Kemper,

JV, 2015 WL 6865706 (Wash.App. November 9, 2015) was primarily a dispute over

allegedly differing site conditions, defaults and damages between the public owner and

the contractor. After years of litigation and a three month jury trial, the public owner

recovered $155,831,471 for the contractor’s default and the contractor recovered

$26,252,949 for its claims. The trial court also awarded the owner attorneys fees and

costs of $14,720,387.19. The Court affirmed the damage award appealed by the

contractor. The sureties appealed the award of attorneys fees and the trial court’s

holding that they were jointly and severally liable for the damages awarded against the

contractor. The Court held that under the rules of Olympic Steamship and Colorado

Structures, the sureties were liable for the obligee’s attorneys fees. The Court followed

Colorado Structures in applying the insurance policy holding of Olympic Steamship to a

performance bond, and stated, “The County had to take legal action to obtain the benefit

of the performance bond. Under Olympic Steamship and Colorado Structures, the

County was entitled to recover attorneys fees from the Sureties.” The Court rejected the

argument that on a public works bond the surety’s liability is only as set out in the

comprehensive statutory scheme governing public work. The Court also found that the

fees to litigate coverage disputes with the sureties could not be segregated from the

owner’s fees in general. The sureties made largely the same arguments made by the

contractor (which the owner would have had to address anyway), but the Court thought

that meant the fees could not be segregated. The Court stated, “Because the Sureties

denied liability when it expressly adopted VPFK’s defenses, the County could only

obtain the benefit of the Bond by defeating VPFK’s defenses.” Finally, the Court

rejected the sureties’ argument that they were not liable for consequential damages.

The Bond incorporated the contract, and the contract provided that the contractor and

its sureties would be liable for damages and costs, including “(3) any other special,

incidental or consequential damages incurred by the County which results or arises from

the breach or termination for default.”

2. Payment Bonds

In State v. Ross Bros. & Co., 342 P.3d 1026 (Ore.App. January 14, 2015) a

subcontractor sued the prime contractor on a state Department of Transportation project

for breach of contract and quantum meruit. The subcontractor also sued the surety on

the contractor’s statutory payment bond. The defendants counterclaimed alleging

deficient work by the subcontractor. The trial court denied the subcontractor’s breach of

contract claims, apparently because it thought the subcontractor had not followed the

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procedures in the subcontract to assert or preserve its claims. The trial court, however,

entered judgment for the subcontractor against the prime contractor on the quantum

meruit claim but concluded that “because KT [the subcontractor] brought its quantum

meruit claim against Ross [the prime contractor] only, it was not entitled to judgment

against Safeco on its bond claims.” The subcontractor appealed, and the prime

contractor and surety cross appealed. The defendants argued that the quantum meruit

claim should fail because there was a written contract governing the work. The Court of

Appeals refused to consider this argument because it thought the argument had not

been presented in the trial court and, therefore, was not preserved for appeal.

On the subcontractor’s appeal, the Court thought that the subcontractor did not

have to include the surety in its quantum meruit claim because if the subcontractor was

entitled to be paid by the contractor for labor and material furnished on the project its

bond claim covered the prime contractor’s payment obligation. The Court stated, “In

sum, the trial court’s view that KT could not recover against Safeco on the bond claims

because KT’s complaint failed to explicitly identify Safeco as a defendant to the

quantum meruit claim was incorrect. Further, as explained, KT properly brought its

bond claims against Safeco in compliance with ORS 279C.600(1). Safeco’s liability on

the bond claims is measured by Ross’s liability to KT for labor and materials provided to

the public works project.”

Finally, the trial court had entered a supplement judgment against the prime

contractor, but not against the surety, for attorneys fees. The Court declined to

consider the cross- appeals from the supplemental judgment because “neither party

presents any argument as to why the trial court erred in entering the supplemental

judgment.” Thus, the Court affirmed the attorneys fee award against only the prime

contractor without reaching the merits of the issue.

In Stewart v. Continental Casualty Co., 2015 WL 225290 (S.D.Ala. January 16,

2015) the court added prejudgment interest and statutory attorneys fees to the

$150,000 judgment for the claimant previously entered, see 2014 WL 5819373

(S.D.Ala. November 10, 2014). The court denied the claimant’s request for costs

because the request was not filed within 15 days of the judgment as required by Local

Rule 54.1. The court also denied recovery of the claimant’s expenses other than

taxable costs because the Alabama Little Miller Act, at Ala. Code §39-1-1(b), “does not

provide for recovery of expenses, but instead is specifically limited to an award of

attorney’s fees.” The claimant, the Delaware Insurance Commissioner as receiver for a

subcontractor’s surety, was the successor to the subcontractor as plaintiff, and multiple

law firms were involved. The court carefully analyzed the attorney’s fees claimed and

declined to include any that were duplicative, for clerical tasks, or that did not advance

the claim. However, the court also rejected the defendant surety’s argument that no

fees should be awarded because the judgment was small in comparison to the amount

of the subcontractor’s original notice of claim or because the Commissioner rejected an

offer of judgment that would have obtained the same result without most of the litigation

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costs.

Data Optics Cable, Inc. v. Americom Automation Services, Inc., Case No. 1:14-cv-

21372 (S.D.Fla. January 22, 2015) granted the claimant leave to amend its complaint to

seek attorneys fees from the surety defendants pursuant to §§627.428 and 627.756,

Florida Statutes.

Yelverton v. Federal Insurance Co. (In re Yelverton), 2015 WL 525180

(Bankr.D.D.C. February 5, 2015) denied reconsideration of its Order dismissing the

Debtor’s claim against the surety for the Chapter 7 Trustee in Bankruptcy. The court

also noted the defendant was surety for the Chapter 7 Trustee and the Debtor’s

allegations of misconduct by the U.S. Trustee would not be a basis for a claim against

the surety.

In APAC-Kansas, Inc. v. BSC Steel, Inc., 2015 WL 866898 (D.Kan. March 2,

2015) the claimants were suppliers or subcontractors to a third tier subcontractor. The

first tier subcontractor furnished a payment bond to the prime contractor. The claimants

moved for summary judgment against the principal and surety. The defendants argued

that the claimants were not within the scope of the bond’s coverage. The bond was

conditioned on payment for labor and material used or reasonably required for use in

performance of the subcontract “for all or any part of which the Contractor and Owner is

liable.” Initially, the defendants argued that this meant the bond covered only obligations

for which both the Owner (here the United States) and the prime contractor were liable.

After it was pointed out that there could be no such claimants, the defendants argued

that the phrase should be read as the Contractor and/or the Owner so there was

coverage if one or both were potentially liable to the claimant. The court disagreed and

thought that the phrase was just a general reference to the costs of constructing the

project and made the principal and surety liable to claimants seeking payment for work

used in performance of a subcontract for which the prime contractor and owner would

be liable.

The court also rejected the defendants’ argument that the subcontracts contained

pay-if- paid provisions and the claimants had not shown satisfaction of the provisions.

The court thought the provisions were just pay-when-paid timing clauses not conditions

precedent and that the claimants did not have to show payment to the higher tier

subcontractors or to the prime contractor. The defendants argued that they were

discharged because the principal had paid its subcontractor (a second tier

subcontractor) for the work. The court noted that the suit was on the bond and

“Because APAC was not paid for the equipment and services it provided to the Project,

APAC is covered under the Bond.” The defendants argued that the claimants did not

give timely notice that they were unpaid, but the court found that there was no notice

requirement in the bond or any applicable statute. The third tier subcontractor’s

employees, or former employees, admitted the amounts owed. The court granted the

claimants’ motions for summary judgment for those amounts plus prejudgment interest

as provided in the claimants’ agreements with the third tier subcontractor.

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The Erection Co. v. Archer Western Contractors, LLC, 2015 WL 926782 (D.Nev.

March 4, 2015) was primarily a dispute between the prime contractor and a

subcontractor. The surety aspect was the motion by the prime contractor’s Miller Act

surety to dismiss the subcontractor’s payment bond claim for lost profits. The court

granted the surety’s motion and stated, “the Miller Act, 40 U.S.C. §3131 et seq., bars a

subcontractor such as TEC from recovery of unrealized profits.”

Franco Belli Plumbing & Heating & Sons, Inc. v. Citnalta Construction Corp., 5

N.Y.S.3d 409 (N.Y.A.D. 2015) affirmed the trial court’s denial of summary judgment to

both the claimant subcontractor and the prime contractor and its surety. The Court

thought that there were issues of fact as to whether the prime contractor’s agreement to

pay for certain acceleration costs included the subcontractor’s claim and as to issues of

liability and damages between the claimant and the prime contractor. The Court

rejected the argument that certain provisions of the subcontract were an unenforceable

pay-when- paid clause. The Court thought the provisions were merely a procedure for

the prime contractor to submit claims for increased costs to the owner and that “they

have no application to plaintiff’s claim, which is against Citnalta [the prime], not SCA [the

owner], and we, therefore, do not reach the issue of whether they are otherwise

unenforceable.” Finally, the Court stated, "Arguments by the parties about whether

plaintiff is seeking delay or acceleration damages are without merit; regardless of the

nomenclature used, plaintiff’s claim is for its increased costs.”

In Harris v. Mortgage Professionals, Inc., 781 F.3d 946 (8th Cir. 2015) the issue

was what statute of limitations applied to a suit on the Missouri statutory Mortgage

Brokers Bond. The District Court thought that it was the three year statute of limitations

in §516.130(2) R.S.Mo. for “an action upon a statute for a penalty or forfeiture” and

granted summary judgment to the surety. The Eighth Circuit disagreed and held that

the applicable limitation was the ten year period under §516.110(1) for “an action upon

any writing . . . for the payment of money or property.” The Court reversed the surety’s

summary judgment and remanded the case.

In Nacimento Water Company, Inc. v. International Fidelity Insurance Co., 2015 WL

1275451 and 1276583 (C.D.Cal. March 19, 2015) the obligee on bonds for a developer

sued the surety, and the surety filed cross claims or third party claims against several

indemnitors and a potential defendant on a subrogation or unjust enrichment type claim.

In two separate orders the court addressed motions for summary judgment on the

surety’s cross claims and third party claims. The potential defendant on a future

subrogation claim was a lender that had foreclosed on the development property. The

court held that the surety’s potential claims against the lender were not ripe for

adjudication. Indeed, the court thought that there was no present claim against the

lender and any potential one depended on future events that might or might not occur

such as an agreement between the lender and the obligee of the bonds. The court,

therefore, granted the lender’s motion for summary judgment.

As to the indemnitors, the court found that the two indemnity agreements were clear

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and included the bonds at issue. However, as to one of the bonds, the court found that

the statute of limitations had run for a suit by the obligee against the principal on their

underlying contract and, therefore, Cal. Code Civ. Proc. §359.5 barred a claim against

the principal or surety on the bond. The court denied the indemnitors’ motion for

summary judgment except for the surety’s indemnity action based on the one time-

barred bond claim.

In Hamilton Pacific Chamberlain, LLC, B-410955, 2015 WL 1406092 (Comp. Gen.

March 30, 2015) the low bidder submitted a bid bond without filling in a penal sum. The

contracting officer rejected the bid, and the low bidder protested to the GAO. The GAO

denied the protest and stated, “A bid bond is defective where no penal sum has been

inserted on the bond, and the bond does not otherwise establish the intention of the

surety to be bound in the required amount.” In its discussion, the GAO was confused

by the fact that the bond had the surety’s Treasury Limit ($6,457,000) inserted in the

space where multiple sureties can limit their respective liability and the fact that the

power of attorney stated that the attorney-in-fact had authority to bind the surety only up

to $5 million. The amount of the bid bond required by the solicitation (the lower of 20%

of the bid price or $3 million) would have been $225,800. The GAO relied on these

discrepancies to distinguish a prior decision, Professional Restoration Services, Inc., B-

232424, 89-1 CPD ¶13 (1989), which had found a bond with no penal sum filled in to be

acceptable because “there was no reason to question whether the surety intended to

bind itself up to the liability limit listed in PRSI’s bid bond.” Here, there was both no

penal sum and no basis from the other information to conclude that the surety clearly

intended to be bound up to a specific amount.

In Bond Restoration, Inc. v. Ready Cable, Inc., 462 S.W.3d 597 (Tex. App. –

Amarillo 2015) a supplier sold material to a subcontractor on a City of Houston project.

The supplier contacted the prime contractor asking for information on the bond, but the

prime contractor did not respond. The supplier also contacted the City but did not have

the City’s project name or number. After the time to make a bond claim expired, the

supplier sued the prime contractor asserting that under the McGregor Act, Tex. Govt.

Code §2253.001, et seq. the prime contractor was obligated to provide the requested

bond information and that its failure to do so caused the supplier’s damages. The Court

held that the statutory remedy for not providing the bond information was set forth in

Govt. Code §2253.024(e) which stated that a person failing to provide the required

information “is liable to the requesting person for that person’s reasonable and

necessary costs incurred in getting the requested information.” The Court, therefore,

held that the plaintiff did not have a private right of action for consequential damages --

the amount it asserted it would have recovered from the bond. The prime contractor

also argued that the supplier had not shown the material it furnished was delivered to

the job site or incorporated into the job. The Court rejected this alternate argument

because the statute required only that the material be delivered for use on the project

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(here the subcontractor picked it up). The Court, therefore, reversed judgment for the

material supplier because the judgment was based solely on its claim for consequential

damages from breach of the statutory duty to provide information about the bond.

In Ergon Asphalt and Emulsions, Inc. v. Capriati Construction Corp., Inc., 2015

WL 1959851 (D. Nev. April 29, 2015) the claimant supplier and the prime contractor on

a Nevada DOT project disputed whether the supplier was entitled to payment of asphalt

price escalation amounts that the DOT paid the prime contractor pursuant to the terms

of the prime contract. The prime contractor and supplier had exchanged various

proposals but did not have a signed agreement. The court held, however, that under an

unjust enrichment theory the supplier was entitled to receive the escalation payments

made by the DOT. The surety aspect of the case was the court’s decision that the

sureties on the statutory payment bond should be liable based on the prime contractor’s

failure to pay for labor and material related to the project. Thus, the sureties were liable

for a debt based in the prime contractor’s unjust enrichment.

In First American Title Insurance Co. v. Star City Title & Settlement Agency, Inc.,

2015 WL 2092814 (W.D. Va. May 5, 2015) a title insurer paid off a lien on real property

and sued the title agent and its surety on the bond required by the Virginia Consumer

Real Estate Settlement Practice Act (CRESPA). The plaintiff sued as the subrogee of

the secured party whom it had paid. The court held that the suit was barred by the five

year statute of limitations for suit on a written contract, Va. Code §8.01246. The plaintiff

stood in the shoes of the secured party to whose rights it was subrogated, and the

breach occurred when the principal recorded the deed of trust in second position without

obtaining the release of a prior credit line deed of trust. The court rejected the plaintiff’s

argument that there was no breach until the holder of the credit line deed of trust

foreclosed on the real property. The court found that under Virginia law the cause of

action accrued when the breach occurred, not when the damage was discovered, and

here the breach occurred when the deed of trust was recorded in second position rather

than in first position. Since more than five years elapsed between that recording and

filing suit on the bond, the claim was barred and the motion to dismiss filed by the

principal and surety was granted.

Window Specialists, Inc. v. Forney Enterprises, Inc., 2015 WL 2265568 (D.D.C.

May 14, 2015) was primarily a dispute between a second tier subcontractor and the first

tier subcontractor on a federal project over responsibility for non-conforming work. After

a trial, the court held that the second tier subcontractor breached the subcontract. The

surety aspect of the case was in the second tier subcontractor’s unjust enrichment claim

against the prime contractor’s Miller Act payment bond surety. The court thought that

the Miller Act permitted such a claim. However, since the doors and windows installed

by the claimant did not function properly and had no value, no benefit was conferred by

the work.

In Double R & J Trucking Service, Inc. v. Patton Installations of Florida, L.L.C.,

Case No. 14-cv-2234 (E.D. La. May 21, 2015) the claimant was a second tier

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subcontractor on one federal levee project and a third tier subcontractor on another.

The surety aspects of the decision were the claimant’s assertion of Miller Act claims and

its inclusion of a surety in its unjust enrichment, Louisiana Prompt Payment Act, open

account, and breach of contract claims. The court recognized that on the project where

it was a third tier subcontractor the claimant could not assert a Miller Act claim and that

the bond principal and surety were not liable to the claimant under the Prompt Payment

Act, open account or breach of contract theories. The court also thought that the

claimant could not assert unjust enrichment claims since it had an adequate remedy at

law against the subcontractor for whom it worked. The court, therefore, dismissed all

the surety bond claims except the Miller Act claim on the project on which the claimant

was a second tier subcontractor.

In U.S. for the use of Asphalt Contractors & Site Work, Inc. v. KAR Contracting,

LLC, 2015 WL 3651279 (S.D.W.Va. June 11, 2015) a first tier subcontractor on a

federal project sued the prime contractor and its Miller Act payment bond surety. The

defendants moved to dismiss the complaint for failure to state a claim. The defendants

argued that the suit was not filed within the Miller Act one year limitation period. The

court noted that the suit was filed more than one year after the date of the claimant’s

unpaid invoice attached to the complaint but thought that the facts alleged in the

complaint did not foreclose the possibility that the claimant furnished additional labor or

material after the date of the invoice. The court also found that even if the prime

contractor paid the claimant the amount of the subcontract, the point of the complaint

was that additional work had been performed at the request of the prime contractor and

the owner. Therefore, the complaint stated claims for breach of the subcontract and

breach of the payment bond. The complaint also validly pled as an alternative a claim

for quantum meruit. However, the court dismissed a claim based on the federal Prompt

Payment Act because the plaintiff failed to establish that it had a private right of action

under the statute. Finally, the court denied the motion as to the claim for attorneys fees

even though it recognized that the Miller Act did not provide for recovery of such fees.

The court thought that the claimant could seek to recover fees under the bad faith

exception to the American Rule if, as the case progressed, there was a factual basis for

such a claim. Thus, the court denied the motion to dismiss except for the Prompt

Payment Act claim.

Valdez v. Hollenbeck, 465 S.W.3d 217 (Tex. 2015) reversed the Court of Appeals

decision reported at 410 S.W.3d 1 (Tex. App. – San Antonio 2013) and held that the two

year limitations period of former Tex. Probate Code §31 (now codified at Tex. Estates

Code §55.251) controlled the time for an equitable bill of review of an Order closing a

probate estate. The Court did not need to reach the issue of whether tolling could apply

to delay the start of the two year period because here, even if it applied, the claimants

had information that put them on inquiry notice of the claims more than two years prior

to their filing of the petition for bill of review. The Court, therefore, reversed the Court of

Appeals and, without considering the merits of the claims, entered judgment for the

estate administrator and his surety.

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In U.S. for the use of Stuart C. Irby Co. v. Pro Construction, Inc. 2015 WL

3671731 (M.D. Ga. June 15, 2015) a supplier to a first tier subcontractor on a federal

project sued the prime contractor and its Miller Act payment bond surety. On cross

motions for summary judgment, the court entered judgment for the claimant. The last of

the material supplied was delivered to the subcontractor’s office rather than the job site,

and the defendants argued that circumstantial evidence at least raised an issue of fact

as to whether it was used on the bonded project. The court found, however, that there

was no issue of fact suggesting that the supplier did not have a good faith belief that

the material was for the bonded project, and held that such a good faith belief was all

that was required. The unpaid material was delivered over several months on an open

account basis, and separate invoices were sent. The court rejected the defendants’

argument that the 90 day notice requirement had to be met separately for each invoice.

The court held that a single notice within 90 days of the final furnishing was sufficient.

The court also awarded “service charges” of 1½ % per month and attorneys fees as

provided in the open account agreement between the claimant and the subcontractor

plus pre and post judgment interest. The court rejected the defendants’ argument that

the service charges were already interest and awarding them and prejudgment interest

was a duplicative recovery. Even though the “service charges” were a percentage of

the amount owed each month, the court gave credence to the provision in the open

account agreement reciting that they were for the cost of keeping the account not

interest. The court directed the claimant to file a motion setting out the amount of

attorneys fees it claimed.

In Chasney & Company, Inc. v. Hartford Accident & Indemnity Co., 2015 WL

3887792 (D. Md. June 22, 2015) the first tier subcontractor on a federal project sued the

Miller Act surety, and the prime contractor intervened. The defendants then moved to

dismiss the action for failure to state a claim based on a no damage for delay clause in

the subcontract. The court rejected the claimant’s argument that the Miller Act overrode

the no damages for delay clause. The court found that the clause affected only the

measure of damages and thus defined the sum justly due under the Miller Act. The

clause provided that the subcontractor could recover delay damages to the extent they

were recovered from the owner, and in its complaint the claimant alleged that the prime

contractor “obtained additional compensation from the Owner for the delays to the

[p]roject, including the delays suffered by Chasney.” Thus, on its face the complaint

stated a claim, and the court denied the motion to dismiss.

Barham Construction, Inc. v. City of Riverbank, 2015 WL 4457568 (Cal. App. July

21, 2015) was largely a dispute between the prime contractor and the owner over

responsibility for delay. In an earlier decision reported at 2011 WL 3436453 (Cal. App.

August 8, 2011), the Court held that the surety was not entitled to attorneys’ fees for

defending against the owner’s claims because there was no attorneys fee provision in

the performance bond. In the second appeal, the owner argued that half of the

attorneys’ fees incurred by the prime contractor should be considered incurred in

defense of the surety and so disallowed. The Court recognized that the surety’s liability

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was derivative of the principal’s, and found that the services in defending against the

owner’s claims could not be separated between services defending the prime contractor

and services defending the surety. Therefore, the owner failed to show that the trial

court abused its discretion in allowing recovery of fees incurred in litigating issues

common to the claims against the principal and the surety.

Suntech of Connecticut, Inc. v. Lawrence Brunoli, Inc., 2015 WL 5236913 (Conn.

Super. July 31, 2015) found after trial that the prime contractor was not liable to the

claimant subcontractor and, therefore, entered judgment for the surety on the prime

contractor’s payment bond.

In Northeast Panel Co. v. Rizzo Corp., 2015 WL 5237174 (Conn. Super. August 4,

2015) a subcontractor sued the prime contractor and its payment bond surety alleging

violations of the Prompt Payment statute, G.S. §49-41a, and the Little Miller Act, G.S.

§49-42. The court granted the defendants’ motion to strike the complaint as to claims

against the surety. The complaint alleged that the claimant gave notice of its claim to

the defendants but did not allege the dates on which its performance ended. Therefore,

the allegations did not establish that timely notice was provided as required by §49-42,

and the court granted the motion to strike the payment bond claim. The court disagreed

with the prime contractor’s contention that there was no private right of action under

§49-41a, but found that this was a separate cause of action from the right against the

payment bond under §49-42 and that the surety was not liable for the alleged violations

of §49-41a. Therefore, the court granted the motion to strike the §49-41a claim as to the

surety.

In Richards v. Acme Heating and Air Conditioning, Inc., 2015 WL 5714410 (D.

Utah September 29, 2015) union workers of a subcontractor sued the subcontractor and

the prime contractor and the surety on the prime contractor’s bond. The claimants were

granted summary judgment against the subcontractor and the surety but did not seek

summary judgment against the prime contractor as principal on the bond because they

believed that “any liability of Ascent Construction as principal on the payment bond

would be secondary to that of Fidelity as the surety.” The surety took the position that

the judgment was not final because the claim against the prime contractor was

unresolved.

To “clarify” the issue the court dismissed the claim against the bond principal

reasoning that “Because Plaintiffs have obtained judgment against the bond, there is no

need to enter judgment against Ascent.” The court then went on to award interest at 1%

per month, liquidated damages of 20% of the principal amount, audit fees, and

reasonable attorneys’ fees approximately equal to the principal amount based on the

Collective Bargaining Agreement (CBA) between the union and the subcontractor. The

surety contested the award of these additional items against it, but the court found “that

the compensation due to Acme’s workers was defined by the terms of a CBA, and the

fact that it is based on a CBA rather than some other type of agreement is immaterial.”

The court thus recognized no distinction between money owed the workers for labor on

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the job and the additional amounts the subcontractor owned the union welfare plans

under the CBA. Finally, the court allowed the claimants to supplement their attorneys’

fee claim to add any amounts incurred after the date of their motion.

In U. S. for the use of 3L Leasing v. Grillot, 2015 WL 5882957 (E.D. La. October 7,

2015) the lessor of a barge sued the prime contractor and its Miller Act surety claiming

numerous categories of alleged damages including lease payments, repairs and

allegedly missing or contaminated fuel. The claimant moved for summary judgment,

which the court denied. The court did not reach what categories of damages were

recoverable or the other legal issues in the case because it found that “Clearly, the facts

of this case are so contested that it is impossible for summary judgment to be entered

as to either defendant.”

Developers Surety and Indemnity Co. v. Barlow, No. 14-4160, 2015 WL 6075709

(10th Cir. October 15, 2015) affirmed summary judgment for the surety against two

individual indemnitors. See Developers Surety and Indemnity Co. v. Network Electric,

Inc., 2014 WL 3640748 (D. Utah July 23, 2014. The indemnitors, Mr. and Mrs. Barlow,

signed the indemnity agreement in 2004, when Mr. Barlow was a co-owner and officer

of the principal. By 2006, Mr. Barlow had sold his interest in the principal, was no

longer an officer, and the Barlows had moved to another state, but they had failed to

exercise their option under the agreement to terminate liability for future bonds by giving

the surety written notice. The surety suffered losses and expenses on bonds written in

2008 and 2009, eventually suing the Barlows to recover those losses and

expenses. The Court rejected the Barlows’ arguments that they received no benefit

from the bonds written after Mr. Barlow left the principal because there was no

requirement that the Barlows have a specific, beneficial interest in each bond. There

was consideration for the original agreement and the surety’s issuance of the bonds

was not a failure to mitigate damages. The Court also noted that the agreement itself

provided the Barlows with a way to terminate their liability for future bonds and stated,

“The Barlows cannot escape the notice requirement by pointing to facts known by

Developers that might indicate that the Barlows no longer wished to abide by the

Agreement.”

Rojas v. Westco Framers LLC, Case No. 15-cv-168, 2015 WL 6164061 (D. Colo.

October 21, 2015) involved wage claims by employees of a subcontractor. The

plaintiffs sought leave to file a second amended complaint adding two additional

plaintiffs. The prime contractor and its surety opposed the motion, arguing that the

amendment would be futile because the two new plaintiffs failed to give notice of their

claims as allegedly required by Wyo. Stat. Ann. §16-6-113. The court assumed, in the

absence of argument to the contrary, that the statute applied to the suit, but found that it

required only notice of the original institution of the action on the bond not notice each

time a person was added to the action. The court therefore rejected the surety’s futility

argument and granted the motion for leave to amend.

In Conviron Controlled Environments, Inc. v. Arch Insurance Co., Case No. 14-cv-

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2030 (E.D.N.Y. November 13, 2015) a subcontractor on a New York public project sued

the surety on the prime contractor’s payment bond. The subcontract provided that

retainage would be released upon a number of conditions including the owner’s

acceptance of the subcontractor’s work and payment for that work. There were

disputed backcharges, but the subcontractor moved for partial summary judgment for

the unpaid subcontract balance less the disputed backcharges. The court thought that

State Finance Law §137 controlled the claim, that the subcontract was not incorporated

into the bond, and that the conditions on final payment in the subcontract were not a

defense the surety could assert. The court also noted, however, that even if the

subcontract provisions applied they would not defeat summary judgment.

The prime contract was incorporated into the bond by reference, and it conditioned

final payment on the owner’s written acceptance of the work. The court held that this

was a mere timing provision, not a condition precedent to payment, and under New

York law delayed the payment obligation for only a reasonable period of time. The

prime contract provided that the owner would promptly make the final inspection. The

court found “the Owner has failed for more than two years to ‘promptly’ inspect and

accept the work on the Project. Accordingly, Arch may not now rely on this contract

language as a justification for withholding Conviron’s payment.”

Finally, the court rejected the surety’s defenses based on the potential for so-far

unasserted liquidated damages or the subcontractor’s filing of a mechanics lien in spite

of a waiver in the subcontract. The Waiver of Lien provision was unenforceable under

New York law, and the possible liquidated damages claim, without any evidence the

subcontractor delayed the project, was too speculative to defeat summary judgment.

The court awarded the subcontractor the admitted subcontract balance plus

prejudgment interest at 9% per annum from the date of written demand on the surety.

The court denied the subcontractor’s claim for attorneys fees under State Finance Law

§137(4)(c) because, “Although ultimately unsuccessful, this Court is not of the view that

Arch’s position is so clearly meritless as to rise to the level contemplated by the State

Finance Law.”

In U.S. for the use of Universal Contractors, Inc. v. Commercial Interiors, Inc.,

2015 WL 7273151 (D. Md. November 18, 2015) a subcontractor on a federal project

sued the prime contractor and Miller Act payment bond surety. The prime contractor

filed a counterclaim. The court denied cross motions by the subcontractor and prime

contractor finding numerous issues of fact preventing entry of summary judgment for

either party.

In Hypower, Inc. v. National Union Fire Insurance Company of Pittsburgh, Pa.,

2015 WL 7451171 (D. Kan. November 23, 2015) a subcontractor’s Miller Act suit was

stayed pending arbitration between the subcontractor and the bond principal. The

arbitrator found that the subcontractor was due an amount substantially less than it

claimed, plus post-award interest pursuant to Texas law, plus specific performance of a

pass-through provision of the subcontract. The arbitrator declined to find that the

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subcontractor was a prevailing party for purposes of an attorneys fee provision in the

subcontract. The bond principal intervened in the Miller Act case, and the surety settled

with the subcontractor based on the amount awarded in the arbitration. The

subcontractor moved to confirm the award (as interpreted by the subcontractor)

including “post judgment” interest and attorneys fees and an order for specific

performance of the pass through obligations. The court found that the Texas post

judgment interest statute did not apply to arbitration awards and denied the claim to

post award interest under Texas law. The court also thought that the arbitrator’s finding

that the subcontractor was not a prevailing party meant there was no contractual basis

for a fee award and found no applicable statutory basis. The court granted specific

performance of the pass through provision to the extent it was included in the arbitration

award. Essentially, the court affirmed the arbitration award and denied the

subcontractor’s attempts to improve it.

In U.S. for the use of Jack Daniels Construction, Inc. v. Liberty Mutual Insurance

Co., 2015 WL 9460115 (M.D. Fla. December 28, 2015) a second tier subcontractor

sued the surety on the prime contractor’s Miller Act payment bond. A separate suit

between the first tier subcontractor and the prime contractor had been resolved with a

net amount owed the prime contractor, but the court in that suit declined to consider the

second tier subcontractor’s claims because they were the subject of this separate

action.

The surety and the use plaintiff both filed motions for summary judgment as to

certain aspects of the case. The court granted the surety’s motion as to the use

plaintiff’s claim for attorneys fees because under the F.D. Rich decision the issue was

one of federal law, and there was no statutory or contractual basis for the attorneys fee

claim. The court recognized that under the Miller Act the claimant could not recover

unearned profits on work not performed, but the sub-subcontractor denied it was

making such a claim and the court found issues of fact as to whether any part of the

claim was for such lost profits. The court also found issues of fact as to whether

portions of the claim were for delay damages barred by the sub-subcontract, whether

portions of the claim were not for the cost of work actually performed, and whether

portions of the claim were released.

The court also denied the claimant’s motion for summary judgment as to breach

of contract damages and the surety’s affirmative defenses of payment, estoppel, waiver

and mitigation. The court did hold that the surety’s prior breach argument (that the

claimant breached the sub-subcontract) failed because there was no privity between the

prime contractor or its surety and the claimant. Similarly, the court thought that in the

absence of privity the surety could not assert a setoff defense.

C. STANDING

1. Performance Bonds

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In Liberty Mutual Insurance Co. v. Travelers Casualty and Surety Company of

America, 2015 WL 1737811 (S.D. Miss. April 16, 2015) the surety for the prime

contractor took over the work. It alleged that a subcontractor’s work was defective,

demanded that the subcontractor’s surety remedy it, and sued the subcontractor and its

surety when the surety declined to do so. The subcontractor’s surety moved to dismiss

the complaint because the prime contractor’s surety lacked standing. That is, the

subcontractor’s surety argued that the plaintiff surety was not an obligee of the bond or

a third party beneficiary. The prime contractor’s surety cited several Fifth Circuit cases

in which the subcontractor’s surety had itself asserted claims by subrogation to the

rights of its principal. The subcontractor’s surety also argued that the prime contractor’s

surety had assigned its rights to its completion contractor and the completion contractor

was not an obligee or beneficiary of the bond. The court denied the motion to dismiss

and held that “Given the allegations of the complaint and the contracts” the prime

contractor’s surety had standing to assert the claims.

2. Payment Bonds

Bowen Engineering, Corp. v. Pacific Indemnity Co., 83 F.Supp.3d 1185 (D. Kan.

January 6, 2015) held that the claimant was a third tier subcontractor and, therefore,

too remote to assert a lien under K.S.A. 60-1103 or a claim against the statutory lien

release bond.

In U.S. for the use of Pacific Western Inc. v. Liberty Mutual Insurance Co., 2015

WL 3648062 (E.D.N.Y. June 10, 2015) the issue was whether the claimant furnished

transportation services to a subcontractor (and so was within the coverage of the Miller

Act) or to a mere materialman. The prime contractor ordered a particular type of asphalt

pavement material from Soil Stabilization Products Co. Inc. (SSP). The use plaintiff

transported the material to the project cite but was not paid by SSP. The defendants

moved to dismiss the complaint on the ground that the use plaintiff was not within the

coverage of the Miller Act. The court examined the factors used by the courts to

distinguish between a subcontractor and a materialman and found that the facts alleged

in the complaint did not support a finding that SSP was a subcontractor. The court

granted the motion to dismiss the Miller Act claim and declined to exercise

supplemental jurisdiction over the claimant’s state law claim against the principal.

Therefore, the court dismissed the complaint without prejudice but gave the use plaintiff

30 days to seek to amend the complaint.

In U.S. for the use of Pileco, Inc. v. Slurry Systems, Inc., 804 F.3d 889 (7th Cir.

2015) the supplier of a large piece of equipment sued the prime contractor and its Miller

Act surety. The prime contractor counterclaimed and filed a third party claim against the

claimant’s parent company that actually owned the equipment alleging damages caused

1047843.1

by defects in the equipment. The first trial resulted in a confused verdict (albeit

substantially in favor of the prime contractor) and the trial court granted a new trial. The

second time the jury returned a more coherent verdict that gave the claimant a net

recovery of $2.23 million.

Both sides appealed. The Court rejected the surety’s argument that the claimant

could not recover from the payment bond because the equipment was built and

delivered to the prime contractor by the parent company not the claimant and, therefore,

only the parent company “furnished” the equipment under the Miller Act. The Court

thought this was too restrictive a reading of “furnish” and held that the claimant could

recover pursuant to its contract with the prime contractor even though it was a

middleman between its parent and the prime contractor. The Court also held that the

trial court erred in refusing to award the claimant prejudgment interest on its net

recovery and statutory costs and remanded the case for their calculation. Otherwise,

the Court affirmed the trial court’s judgment based on the second trial.

D. DAMAGES RECOVERABLE FROM THE SURETY

United States for the use of Sprinkle Masonry, Inc. v. THR Enterprises, Inc., 2015

WL 1518900 (E.D. Va. March 31, 2015) primarily a dispute between the prime

contractor and claimant subcontractor over monies allegedly owed on two Miller Act

projects. The court determined that the subcontractor was due payments on both

projects and entered judgment jointly and severally against the contractor and its surety.

St. Louis Housing Authority ex rel. Jamison Electric, LLC v. Hankins Construction

Co., 2015 WL 1636610 (E.D.Mo. April 13, 2015) noted that since federal jurisdiction

was based on 28 U.S.C. §1352 (a suit on a bond mandated by federal law) the court

would look to Miller Act precedent for the award of prejudgment interest. The court

disallowed prejudgment interest on an amount the claimant owed to its supplier and

disallowed costs for service of process fees.

Murray v. Fidelity and Deposit Company of Maryland, 2015 WL 1873212 (N.D.

Ohio April 23, 2015) reiterated its prior holdings reported at 2013 WL 4431242 (N.D.

Ohio August 16, 2013) and 2014 WL 4458895 (N.D. Ohio September 10, 2014) finding

that the surety on a statutory mortgage brokers bond was bound by the plaintiffs’

judgment against the principal under the doctrine of collateral estoppel but that the limit

on the surety’s liability was the single penal sum of $150,000. The court rejected the

claimants’ argument for cumulative penal sums. The court entered a declaration that

the surety was liable for no more than $150,000 and left it to the state court class action

to determine the individual class members’ damages.

In Ergon Asphalt and Emulsions, Inc. v. Capriati Construction Corp., Inc., 2015

WL 1959851 (D. Nev. April 29, 2015) the claimant supplier and the prime contractor on

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a Nevada DOT project disputed whether the supplier was entitled to payment of asphalt

price escalation amounts that the DOT paid the prime contractor pursuant to the terms

of the prime contract. The prime contractor and supplier had exchanged various

proposals but did not have a signed agreement. The court held, however, that under an

unjust enrichment theory the supplier was entitled to receive the escalation payments

made by the DOT. The surety aspect of the case was the court’s decision that the

sureties on the statutory payment bond should be liable based on the prime contractor’s

failure to pay for labor and material related to the project. Thus, the sureties were liable

for a debt based in the prime contractor’s unjust enrichment.

In Friends of the Coliseum v. City of Corpus Christi, 2015 WL 1956949 (Tex. App.

– Corpus Christi April 30, 2015) the trial court granted a temporary injunction preventing

demolition of a City building, and the plaintiff’s posted a $30,000 bond. The Court of

Appeals held that the temporary injunction was void and of no effect. The City claimed

the $30,000 bond, and the plaintiff’s disputed the claim. The trial court granted the City

summary judgment in the amount of the bond, and the plaintiffs appealed. The Court

recognized that under Texas Rule of Civil Procedure 684 the City would be entitled to

the face amount of the bond but held that the Rule also allowed a lower recovery based

on equitable circumstances and good cause. The trial court erred in granting summary

judgment because there were genuine issues of fact as to whether equitable

circumstances and good cause justified a recovery of less than the full amount of the

bond. The Court reversed the summary judgment and remanded for further

proceedings.

In U.S. for the use of Pileco, Inc. v. Slurry Systems, Inc., 804 F.3d 889 (7th Cir.

2015) the supplier of a large piece of equipment sued the prime contractor and its Miller

Act surety. The prime contractor counterclaimed and filed a third party claim against the

claimant’s parent company that actually owned the equipment alleging damages

caused by defects in the equipment. The first trial resulted in a confused verdict (albeit

substantially in favor of the prime contractor) and the trial court granted a new trial. The

second time the jury returned a more coherent verdict that gave the claimant a net

recovery of $2.23 million. Both sides appealed. The Court rejected the surety’s

argument that the claimant could not recover from the payment bond because the

equipment was built and delivered to the prime contractor by the parent company not

the claimant and, therefore, only the parent company “furnished” the equipment under

the Miller Act. The Court thought this was too restrictive a reading of “furnish” and held

that the claimant could recover pursuant to its contract with the prime contractor even

though it was a middleman between its parent and the prime contractor. The Court also

held that the trial court erred in refusing to award the claimant prejudgment interest on

its net recovery and statutory costs and remanded the case for their calculation.

Otherwise, the Court affirmed the trial court’s judgment based on the second trial.

In Sterling Industries, Inc. v. Sheet Metal Workers’ National Pension Fund, 2015

1047843.1

WL 3407927 (E.D.N.Y. May 27, 2015) an employer sued several union-related benefit

and trust funds seeking an injunction to prevent them from withdrawing union

employees. The court granted a TRO and preliminary injunction secured by a $50,000

bond. Two weeks later, the plaintiff voluntarily dismissed the action. The defendants

admitted that they suffered no damages from the TRO or injunction other than attorneys

fees in defending the action. The defendants moved for an award of attorneys fees

against the bond. The plaintiff opposed the motion and moved for release of the bond.

The court noted the general rule that an injunction bond is not liable for attorneys fees

incurred in litigating the injunction and found that neither Rule 11 nor alleged bad faith

nor ERISA provided otherwise in this matter. The court, therefore, denied the

defendant’s motion for an award of damages and granted the plaintiff’s motion to

release the bond.

Goodrich Quality Theaters, Inc. v. Fostcorp Heating and Cooling, Inc., 39 N.E.3d

660 (Ind. 2015) reversed the Court of Appeals decision reported at 16 N.E.3d 426 (Ind.

App. 2014). The prime contractor bonded off mechanics liens asserted by three

subcontractors. The trial court awarded the subcontractors attorneys fees incurred to

enforce their liens, as well as judgments for monies due under their subcontracts, and

the Court of Appeals reversed the attorneys fee awards. The Indiana Supreme Court

stated the issue and its decision as: “The question before us is whether, under Indiana’s

mechanics lien statute, lienholders are entitled to collect attorneys fees incurred in

foreclosing upon their liens from a party who posts a surety bond securing the liens. By

the statute’s plain language, under the circumstances our answer is yes.” The Court

relied on the statute permitting bonding off of mechanics liens, Ind. Code §32-28-3-11,

rather than upon the attorneys fee provision applicable to the liens themselves, Ind.

Code §32-28-3-14. The Court held that the prime contractor, by bonding off the liens,

made itself liable for the claimant’s attorneys fees and stated, “Returning to §32-28-3-

11, we hold that the subcontractor lienholders are entitled to collect attorney’s fees from

Roncelli [the prime contractor].”

SRM Construction Material and Supply v. KCI Construction Co., 2015 WL

5315776 (E.D. Mo. September 11, 2015) stayed the plaintiff subcontractor’s action

against the surety pending completion of arbitration between the claimant and the

principal. The court rejected the subcontractor’s argument that the surety’s liability was

separate and distinct from that of the principal and found that, to the contrary, “principal

must be liable before surety can be liable to plaintiff.”

In Richards v. Acme Heating and Air Conditioning, Inc., No. 2:13-cv-34, 2015 WL

5714410 (D. Utah September 29, 2015) union workers of a subcontractor sued the

subcontractor, prime contractor and the surety on the prime contractor’s bond. The

claimants were granted summary judgment against the subcontractor and the surety but

did not seek summary judgment against the prime contractor as principal on the bond

because they believed that any liability the principal on the payment bond would be

secondary to that of the surety. The surety took the position that the judgment was not

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final because the claim against the prime contractor was unresolved. To “clarify” the

issue, the court dismissed the claim against the bond principal reasoning that a

judgment was obtained against the bond, there was no need to enter judgment against

the principal. The court then awarded interest at 1% per month, liquidated damages of

20% of the principal amount, audit fees, and reasonable attorneys fees approximately

equal to the principal amount based on the Collective Bargaining Agreement (CBA)

between the union and the subcontractor. The surety contested the award of these

additional items against it, but the court found terms of a CBA defined the compensation

due. The court thus recognized no distinction between money owed the workers for

labor on the job and the additional amounts the subcontractor owed the union welfare

plans under the CBA. The court also allowed the claimants to supplement their

attorneys fee claim to add any amounts incurred after the date of their motion.

United States v. American Home Assurance Co., 2015 WL 5718685 (CIT

September 30, 2015) considered the award of interest following remand from the Court

of Appeals for the Federal Circuit, see 789 F.3d 1313 (Fed. Cir. 2015). The court

awarded statutory 6% interest under 19 U.S.C. §580 as required by the Federal Circuit

decision and determined that the “time when said bonds became due” under the

statutory formula was the date Customs demanded payment pursuant to a reliquidation

of the entries even though the surety protested that demand because the protest was

denied and not appealed, rendering the October 2, 2005 demand final and

conclusive. Thus, the interest was calculated at 6% per annum from October 2, 2005 to

the date of judgment, January 23, 2014, on the principal amount of $600,000 for a total

of $299,441.10 of statutory interest. The court rejected the Government’s arguments

that the statutory interest should run until entry of judgment following the remand from

the Federal Circuit and that it should also receive equitable prejudgment interest,

because statutory interest already more than compensated the Government for the time

value of the money owed. The court adhered to its policy of awarding post judgment

interest at the rate specified in 28 U.S.C. §1961.

In U. S. for the use of 3L Leasing v. Grillot, 2015 WL 5882957 (E.D.La. October

7, 2015) a barge lessor sued the prime contractor and its Miller Act surety, claiming

numerous categories of alleged damages including lease payments, repairs and

allegedly missing or contaminated fuel. The claimant moved for summary judgment,

which the court denied, explaining that “the facts of this case are so contested that it is

impossible for summary judgment to be entered as to either defendant.”

In U.S. for the use of Pileco, Inc. v. Slurry Systems, Inc., 2015 WL 6500193 (7th

Cir. October 28, 2015) the supplier of a large piece of equipment sued the prime

contractor and its Miller Act surety. The prime contractor counterclaimed and filed a

third party claim against the claimant’s parent company that actually owned the

equipment alleging damages caused by defects in the equipment. The first trial resulted

in a confused verdict (albeit substantially in favor of the prime contractor) and the trial

court granted a new trial. The second time the jury returned a more coherent verdict

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that gave the claimant a net recovery of $2.23 million. Both sides appealed. The Court

rejected the surety’s argument that the claimant could not recover from the payment

bond because the equipment was built and delivered to the prime contractor by the

parent company not the claimant and, therefore, only the parent company “furnished”

the equipment under the Miller Act. The Court thought this was too restrictive a reading

of “furnish” and held that the claimant could recover pursuant to its contract with the

prime contractor even though it was a middleman between its parent and the prime

contractor. The Court also held that the trial court erred in refusing to award the

claimant prejudgment interest on its net recovery and statutory costs and remanded the

case for their calculation. Otherwise, the Court affirmed the trial court’s judgment based

on the second trial.

In United States v. American Home Assurance Co., 2015 WL 6500703 (CIT

October 28, 2015) the surety on a continuous entry bond and the U. S. Customs and

Border Protection Agency (Customs) cross moved for summary judgment on Customs’

claims. The court rejected a deemed liquidation argument by the surety because it

found that expiration of the time to appeal a court order sustaining rates on particular

entries did not start Customs’ six month period to liquidate those entries. The injunction

against liquidation in the case terminated only upon expiration of the time to appeal the

final judgment. Customs’ liquidation was timely measured from the final judgment. The

court also rejected the surety’s arguments that the continuous entry bond did not secure

antidumping duties in excess of 5% of the merchandise’s value and that Customs was

obligated to demand payment from the surety on a single entry bond covering one of the

entries before looking to the continuous entry bond.

Much of the court’s discussion, however, was devoted to the ongoing disputes

over Customs’ attempts to collect duplicate prejudgment interest. The court held that

Customs was entitled to statutory 6% interest from the date when payment on the bond

became due as provided in 19 U.S.C. §580. The court also held that Customs was

entitled to post-liquidation interest pursuant to 19 U.S.C. §1505(d) but that this interest

was subject to the limitation of the penal sum of the bond. The court found that §1505

interest applied to antidumping duties, but rejected Customs’ claim that the surety had

forfeited this argument by not protesting, or by not appealing denial of its protest.

Denial of a protest would be final if not appealed only as to the amount owed by the

importer. The court found, “As to defenses to claims for damages relating to its

contractual obligations to pay under the bond, however, a surety is not precluded from

raising defenses in a collection action because it failed to protest or, because its protest

was denied, and it failed to appeal to this Court.” Finally, the court rejected Customs’

claim to equitable prejudgment interest in addition to the §580 interest. The court found

that the statutory interest made the Government whole and held that “it would be

inequitable to award the United States both statutory prejudgment interest under §580

and equitable prejudgment interest under the principles of equity.” [emphasis by the

court]. There was no dispute that the Government was entitled to post judgment

interest at the rate set forth in 28 U.S.C. §1961. The court directed the parties to confer

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and provide a proposed judgment by November 19.

King County v. Vinci Construction Grands Projects/Parsons RCI/ Frontier-

Kemper, JV, No. 70432–0–I, 2015 WL 6865706 (Wash. App. November 9, 2015),

involved a dispute over allegedly differing site conditions, defaults and damages

between the public owner and the contractor. After years of litigation and a three month

jury trial, the public owner recovered $155,831,471 for the contractor’s default, the

contractor recovered $26,252,949 for its claims, and the trial court awarded the owner

attorneys fees and costs of $14,720,387.19. The sureties appealed the award of

attorneys fees and the trial court’s holding that they were jointly and severally liable for

the damages awarded against the contractor, but the Court held that under the rules of

Olympic Steamship and Colorado Structures, the sureties were liable for the obligee’s

attorneys fees. The Court followed Colorado Structures in applying the insurance policy

holding of Olympic Steamship to a performance bond, and stated, “The County had to

take legal action to obtain the benefit of the performance bond. Under Olympic

Steamship and Colorado Structures, the County was entitled to recover attorneys fees

from the Sureties.” The Court rejected the argument that the surety’s liability on a public

works bond is only as set forth in the comprehensive statutory scheme governing public

work and also found that the fees to litigate coverage disputes with the sureties could

not be segregated from the owner’s fees in general, stating, “Because the Sureties

denied liability when it expressly adopted VPFK’s defenses, the County could only

obtain the benefit of the Bond by defeating VPFK’s defenses.” Finally, the Court

rejected the sureties’ argument that they were not liable for consequential damages,

finding that the Bond incorporated the contract, and the contract provided that the

contractor and its sureties would be liable for damages and costs, including “(3) any

other special, incidental or consequential damages incurred by the County which results

or arises from the breach or termination for default.”

In Conviron Controlled Environments, Inc. v. Arch Insurance Co., Case No. 14-

cv-2030 (E.D.N.Y. November 13, 2015) a subcontractor on a New York public project

sued the surety on the prime contractor’s payment bond. The subcontract provided that

retainage would be released upon a number of conditions including the owner’s

acceptance of the subcontractor’s work and payment for that work. There were

disputed backcharges, but the subcontractor moved for partial summary judgment for

the unpaid subcontract balance less the disputed backcharges. The court thought that

State Finance Law §137 controlled the claim, that the subcontract was not incorporated

into the bond, and that the conditions on final payment in the subcontract were not a

defense the surety could assert. The court also noted, however, that even if the

subcontract provisions applied they would not defeat summary judgment.

The prime contract was incorporated into the bond by reference, and it

conditioned final payment on the owner’s written acceptance of the work. The court

held that this was a mere timing provision, not a condition precedent to payment, and

under New York law delayed the payment obligation for only a reasonable period of

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time. The prime contract provided that the owner would promptly make the final

inspection. The court found “the Owner has failed for more than two years to ‘promptly’

inspect and accept the work on the Project. Accordingly, Arch may not now rely on this

contract language as a justification for withholding Conviron’s payment.”

Finally, the court rejected the surety’s defenses based on the potential for so-far

unasserted liquidated damages or the subcontractor’s filing of a mechanics lien in spite

of a waiver in the subcontract. The Waiver of Lien provision was unenforceable under

New York law, and the possible liquidated damages claim, without any evidence the

subcontractor delayed the project, was too speculative to defeat summary

judgment. The court awarded the subcontractor the admitted subcontract balance plus

prejudgment interest at 9% per annum from the date of written demand on the

surety. The court denied the subcontractor’s claim for attorneys fees under State

Finance Law §137(4)(c) because, “Although ultimately unsuccessful, this Court is not of

the view that Arch’s position is so clearly meritless as to rise to the level contemplated

by the State Finance Law.”

United States v. Great American Insurance Co., 2015 WL 7175689 (CIT

November 16, 2015) denied the surety’s motion to dismiss for failure to state a claim.

The Government sued to recover antidumping duties and numerous forms of interest.

The entry was deemed liquidated pursuant to 19 U.S.C. §1504(d) on February 20,

2009. Customs provided bulletin notice of the deemed liquidation on December 18,

2009, and reliquidated the entry on January 8, 2010. The court held that Customs had

the right under 19 U.S.C. §1501, as amended in 2004, to reliquidate the deemed

liquidation and that the 90 day period to do so started when the notice of the deemed

liquidation was transmitted (December 18, 2009) not the actual date of the deemed

liquidation (February 20, 2009). The court recognized that Customs had to post the

bulletin notice within a reasonable period of time following the deemed liquidation, but

could not resolve on a motion to dismiss whether Customs’ ten month delay was

unreasonable.

In U.S. for the use of Universal Contractors, Inc. v. Commercial Interiors, Inc.,

2015 WL 7273151 (D. Md. November 18, 2015) a subcontractor on a federal project

sued the prime contractor and Miller Act payment bond surety. The prime contractor

filed a counterclaim. The court denied cross motions by the subcontractor and prime

contractor finding numerous issues of fact preventing entry of summary judgment for

either party.

United States v. American Home Assurance Co., 789 F.3d 1313 (Fed. Cir. 2015)

reversed in part and affirmed in part the decision of the Court of International Trade

(CIT) reported at 964 F. Supp. 2d 1342 (CIT 2014). The Court affirmed the CIT’s

holding that the surety on a continuous entry bond was liable for anti-dumping duties.

Customs made a timely liquidation of the initial entries, and the surety filed a protest.

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While that protest was pending, Customs made an erroneous re-liquidation, which the

surety also protested. The protests were denied, and the surety did not seek judicial

review. The surety argued that the second liquidation voided the first liquidation, the

second liquidation was erroneous, therefore there was no effective liquidation and by

operation of law the entries were deemed liquidated at the 0% rate claimed by the

importer. The Court disagreed and found that no deemed liquidation occurred. The

Court reasoned that the second liquidations, while erroneous, were effective because

the surety did not appeal denial of its protest. The Court stated, “In sum, even though it

is undisputed that Customs’ 2005 reliquidations were erroneous, AHAC’s failure to

challenge those reliquidations in the Court of International Trade resulted in those

liquidations becoming final and conclusive.” The Court, therefore, affirmed the CIT

holding that the surety was liable for the duties up to the penal sum of its bond.

The Government also claimed both statutory prejudgment interest pursuant to 19

U.S.C. §580 and equitable prejudgment interest. The CIT held that §580 did not apply

to antidumping duties but awarded equitable prejudgment interest. The Government

appealed the former and the surety the latter. The Court held that §580 by its plain

terms applied to “all bonds” for the recovery of duties, and that included antidumping

duties. It reversed the CIT and instructed the CIT on remand to calculate the amount of

statutory interest owed. On the surety’s cross-appeal of the CIT award of prejudgment

interest, the Court found that equitable prejudgment interest rested on the equities of

each case and that the award of statutory prejudgment interest “altered the landscape

of the case.” The Court vacated the CIT’s award of equitable prejudgment interest and

remanded the issue so that the CIT could reconsider its decision in light of the fact that

statutory prejudgment interest was awarded.

United States v. American Home Assurance Co., 100 F. Supp. 3d 1364 (CIT

2015) considered the Government’s claims to pre and post judgment interest on

antidumping duties owed by the surety. The court awarded prejudgment interest, up to

the penal sums of the bonds, pursuant to 19 U.S.C. §1505(d) for post-liquidation

interest on duties that the surety had protested but failed to appeal denial of its protests.

The court held, “Since AHAC failed to contest its denied protests, CBP’s charge of

1505(d) interest is final and conclusive pursuant to §1514.”

The Government also claimed statutory penalty interest pursuant to 19 U.S.C.

§580. The court recognized that the Federal Circuit in a companion case, United States

v. American Home Assurance Co., 789 F.3d 1313 (Fed. Cir. 2015), had held that §580

interest applied to the antidumping duty claims and awarded interest at 6% per annum

from the date of the Government’s first formal demand for payment.

Finally, the Government claimed equitable prejudgment interest in addition to the

statutory penalty interest. The Federal Circuit had remanded that issue to the CIT. The

court rejected the surety’s arguments that the Government’s alleged delays in

prosecuting its claims should bar equitable prejudgment interest but held that no

equitable prejudgment interest was due because, “The 6% rate under §580 far exceeds

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the applicable rates at which the Government would receive equitable interest. Section

580 interest more than fairly compensates the Government for the time value of the

unpaid duties. To award equitable pre-judgment interest in these circumstances would

overcompensate the Government.” The court awarded post judgment interest at the rate

provided in 28 U.S.C. §1961.

E. PAY WHEN PAID CLAUSES

In APAC-Kansas, Inc. v. BSC Steel, Inc., 2015 WL 866898 (D. Kan. March 2,

2015) the claimants were suppliers or subcontractors to a third tier subcontractor. The

first tier subcontractor furnished a payment bond to the prime contractor. The claimants

moved for summary judgment against the principal and surety. The defendants argued

that the claimants were not within the scope of the bond’s coverage. The bond was

conditioned on payment for labor and material used or reasonably required for use in

performance of the subcontract “for all or any part of which the Contractor and Owner is

liable.” Initially, the defendants argued that this meant the bond covered only obligations

for which both the Owner (here the United States) and the prime contractor were liable.

After it was pointed out that there could be no such claimants, the defendants argued

that the phrase should be read as the Contractor and/or the Owner so there was

coverage if one or both were potentially liable to the claimant. The court disagreed and

thought that the phrase was just a general reference to the costs of constructing the

project and made the principal and surety liable to claimants seeking payment for work

used in performance of a subcontract for which the prime contractor and owner would

be liable.

The court also rejected the defendants’ argument that the subcontracts contained

pay-if- paid provisions and the claimants had not shown satisfaction of the provisions.

The court thought the provisions were just pay-when-paid timing clauses not conditions

precedent and that the claimants did not have to show payment to the higher tier

subcontractors or to the prime contractor. The defendants argued that they were

discharged because the principal had paid its subcontractor (a second tier

subcontractor) for the work. The court noted that the suit was on the bond and

“Because APAC was not paid for the equipment and services it provided to the Project,

APAC is covered under the Bond.” The defendants argued that the claimants did not

give timely notice that they were unpaid, but the court found that there was no notice

requirement in the bond or any applicable statute. The third tier subcontractor’s

employees, or former employees, admitted the amounts owed. The court granted the

claimants’ motions for summary judgment for those amounts plus prejudgment interest

as provided in the claimants’ agreements with the third tier subcontractor.

Franco Belli Plumbing & Heating & Sons, Inc. v. Citnalta Construction Corp., 5

N.Y.S.3d 409 (N.Y.A.D. 2015) affirmed the trial court’s denial of summary judgment to

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both the claimant subcontractor and the prime contractor and its surety. The Court

thought that there were issues of fact as to whether the prime contractor’s agreement to

pay for certain acceleration costs included the subcontractor’s claim and as to issues of

liability and damages between the claimant and the prime contractor. The Court

rejected the argument that certain provisions of the subcontract were an unenforceable

pay-when- paid clause. The Court thought the provisions were merely a procedure for

the prime contractor to submit claims for increased costs to the owner and that “they

have no application to plaintiff’s claim, which is against Citnalta [the prime], not SCA [the

owner], and we, therefore, do not reach the issue of whether they are otherwise

unenforceable.” Finally, the Court stated, "Arguments by the parties about whether

plaintiff is seeking delay or acceleration damages are without merit; regardless of the

nomenclature used, plaintiff’s claim is for its increased costs.”

In Tymeless Flooring, Inc. v. Rotolo Consultants, Inc., 172 So.3d 145 (La. App.

2015) a second tier subcontractor on a private works project sued the first tier

subcontractor and the surety on a lien release bond. The issue was whether the

payment provision in the subcontract was a pay-if-paid clause imposing a condition

precedent on the claimant’s right to payment or only a pay-when-paid clause that would

delay the right to payment for only a reasonable time. The trial court held that it was a

pay-if-paid clause and dismissed the action without prejudice as prematurely filed. The

Court of Appeal held that the provision was a pay-when-paid clause, reversed the

dismissal, and remanded the case for determination of whether a reasonable time for

payment had elapsed.

In Conviron Controlled Environments, Inc. v. Arch Insurance Co., Case No. 14-cv-

2030 (E.D.N.Y. November 13, 2015) a subcontractor on a New York public project sued

the surety on the prime contractor’s payment bond. The subcontract provided that

retainage would be released upon a number of conditions including the owner’s

acceptance of the subcontractor’s work and payment for that work. There were

disputed backcharges, but the subcontractor moved for partial summary judgment for

the unpaid subcontract balance less the disputed backcharges. The court thought that

State Finance Law §137 controlled the claim, that the subcontract was not incorporated

into the bond, and that the conditions on final payment in the subcontract were not a

defense the surety could assert. The court also noted, however, that even if the

subcontract provisions applied they would not defeat summary judgment.

The prime contract was incorporated into the bond by reference, and it

conditioned final payment on the owner’s written acceptance of the work. The court

held that this was a mere timing provision, not a condition precedent to payment, and

under New York law delayed the payment obligation for only a reasonable period of

time. The prime contract provided that the owner would promptly make the final

inspection. The court found “the Owner has failed for more than two years to ‘promptly’

inspect and accept the work on the Project. Accordingly, Arch may not now rely on this

contract language as a justification for withholding Conviron’s payment.”

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Finally, the court rejected the surety’s defenses based on the potential for so-far

unasserted liquidated damages or the subcontractor’s filing of a mechanics lien in spite

of a waiver in the subcontract. The Waiver of Lien provision was unenforceable under

New York law, and the possible liquidated damages claim, without any evidence the

subcontractor delayed the project, was too speculative to defeat summary judgment.

The court awarded the subcontractor the admitted subcontract balance plus

prejudgment interest at 9% per annum from the date of written demand on the surety.

The court denied the subcontractor’s claim for attorneys’ fees under State Finance Law

§137(4)(c) because, “Although ultimately unsuccessful, this Court is not of the view that

Arch’s position is so clearly meritless as to rise to the level contemplated by the State

Finance Law.”

F. LIMITATION OF ACTIONS

1. Public Works Projects

In Vanguard Builders, Inc. v. Granite Re, Inc., 348 P.3d 1093 (Okla. Civ. App.

2015) the trial court granted summary judgment to the surety because the claimant

subcontractor did not sue within the one year period required under the Oklahoma

public works bonding statute. In a 2-1 decision, the Court vacated the summary

judgment and remanded the case. The claimant argued that the one year period should

run from when the final payment (retainage) was due or from completion of the project

and payment to the prime contractor. The statute, however, required suit within one

year of the last date the claimant furnished labor or material on the project. There was

no dispute that the claimant did not meet that deadline. However, the Court noted that

the limitation period was subject to waiver and estoppel under the same circumstances

as other statutes of limitation. The majority thought there were disputed facts that could

support application of waiver or estoppel and remanded the case. The dissenting

Judge would have affirmed because the alleged misrepresentations on which the

claimant relied were made by the prime contractor not the surety. The dissent

recognized that waiver and estoppel could be applied in a proper case, but thought that

they had to be based on acts or conduct of the surety itself not the principal.

In Tecton Corp., Inc. v. Liberty Mutual Insurance Co., 2015 WL 6554406 (Pa.

Super. September 9, 2015) a subcontractor on a public project took a very relaxed

approach to seeking payment. The subcontractor eventually sued the surety on the

prime contractor’s Public Works Contractors’ Bond Law payment bond more than one

year and 90 days after the subcontractor completed its work on the project. The Court

affirmed summary judgment for the surety and rejected the subcontractor’s arguments

for tolling or estoppel. Even if the contractor made assurances of payment, such

assurances would have been irrelevant because the subcontractor knew it was not paid

and could have sued the surety before the limitations period expired. The contractor’s

alleged promises could not be imputed to the surety because the surety made no direct

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promise to pay.

In Mason v. International Fidelity Insurance Co., 2015 WL 5453929 (Cal. App.

September 16, 2015) the claimant rented equipment to a subcontractor on a public

project and, after the subcontractor was removed from the project, rented equipment

directly to the prime contractor. The claimant issued a stop notice claim in the amount

of $61,025, which was eventually settled for $40,000. The settlement included a

complete release for all rentals to the subcontractor but did not include rentals directly to

the prime contractor. When the claimant received only partial payment for its rentals to

the prime contractor, it sued the prime contractor’s surety. The surety argued that it

could set off against the claim amounts that it asserted the claimant had been overpaid

for the rentals to the subcontractor, but the Court held that the settlement between the

prime contractor and the claimant, which was paid by the contractor not the surety,

resolved what was owed for rentals to the subcontractor and the surety could not re-

open that settlement to claim a credit against amounts owed for the rentals to the prime

contractor. The Court also found that the trial court’s determination of the amount owed

for rentals to the prime contractor ($26,911.04) was supported by substantial evidence

and that the amount of attorney’s fees awarded to the claimant ($87,150) was not

excessive.

2. Private Projects

In Spilsbury v. U.S. Specialty Insurance Co., 2015 WL 476228 (D. Nev. February

4, 2015) the principal and indemnitors sued the surety and related entities for slander of

title and other causes of action based on the surety’s efforts to foreclose on deeds of

trust. The plaintiffs alleged that the surety executed the deeds of trust pursuant to the

power of attorney in the indemnity agreement. The defendants moved to dismiss the

complaint. The court found that although the two year statute of limitations had expired,

the plaintiffs alleged facts which could be the basis for the application of equitable

tolling and so denied the motion to dismiss based on limitations. The court dismissed

the claims based on a Nevada statute dealing with the duties of a secured creditor upon

payment of the underlying indebtedness because the plaintiffs had not alleged the

statutory preconditions, but the court granted the plaintiffs leave to amend their

complaint if they could plead the missing facts. Finally, the court granted the motion to

dismiss as to the plaintiffs who were not owners of the properties or parties to the deeds

of trust. The court found that these other plaintiffs did not have standing to assert the

claims in the complaint.

In Bricklayers Insurance and Welfare Fund v. Speranza Brickwork, Inc., 2015 WL

1529579 (E.D.N.Y. March 31, 2015) the claimant union welfare funds sued the payment

bond surety for the employer seeking to recover unpaid contributions for work on a

public project. The claimants did not give the notice required by State Finance Law

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§137 but relied on the statutory exception to the notice requirement for benefit claims

under Labor Law §220-g. The surety argued that the suit was not filed within the one

year period required by §220-g and moved for summary judgment, but the court held

that the longer two year limitation provision of the bond effectively extended the time for

suit. The court held, “Given the lack of an express prohibition against extending the

statute of limitations period in Section 220-g, and the decisions in the relevant case law

which uphold longer limitations provisions agreed to by the parties to bonds mandated

by State Finance Law §137 and New York Labor Law §220-g, the Court concludes that

the two- year limitations period provided in the Bond governs, and plaintiff’s suit was

timely filed.”

In Travelers Casualty & Surety Co. v. HUB Mechanical Contractors, Inc. 2015

WL 6158826 (S.D. Miss. October 20, 2015) the surety had brought an action against the

principal, two individual indemnitors, and, in an amended complaint, another company

owned by one of the indemnitors. The court noted that one of the indemnitors, Mr.

Curry, testified at his deposition that he forged his wife’s signature to the indemnity

agreement “on the advice of Jones [the surety’s agent], as he knew she would not

consent to signing and Travelers would not issue bonds for Hub Mechanical without her

signature.” Upon various motions for summary judgment and partial summary judgment

the court noted that the surety did not dispute the forgery and granted summary

judgment to Mrs. Curry because she “would only be liable to Travelers through the

Indemnity Agreement which she did not sign.” The court granted the surety partial

summary judgment on its fraud claim against Mr. Curry as to liability leaving, the

amount of damages to be proven. In doing so, the court rejected Mr. Curry’s argument

that the agent’s knowledge should be imputed to the surety because the agent was

acting against the surety’s interest. However, the court denied the surety summary

judgment as to the payment bond losses, finding that under Mississippi law there was

an issue of fact as to whether performance bonds could be understood to include

payment bonds. The court also granted the new, successor corporation summary

judgment because the surety did not amend its complaint to sue the new entity for over

three years after it was aware of the facts. The court held that the general three year

statute of limitations barred the claim. Finally, the court granted the surety summary

judgment dismissing various counterclaims asserted by the defendants for abuse of

process, intentional tort, intentional interference with business relations and conspiracy

because “Defendants have had adequate opportunity for discovery and have failed to

make a showing sufficient to establish essential elements in all of their counterclaims.”

3. Miller Act Projects

In U.S. for the use of Gilbane Federal Co. v. Berkley Regional Insurance Co.,

2015 WL 2452298 (M.D. Fla. May 21, 2015) the surety defendant filed a motion to

dismiss on the ground that the action was barred by the one year limitation provision of

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the Miller Act. The surety then moved separately to stay discovery pending the court’s

decision on the motion to dismiss. The court took “a preliminary peek at the merits of

the motion to dismiss” and thought that there were likely issues of fact as to whether the

claimant performed original contract work within the one year period and issues related

to the principal’s bankruptcy filing and dealings between the claimant and the owner.

The court, therefore, concluded that the motion to dismiss was unlikely to be dispositive

of the action and denied the surety’s motion for a stay of discovery.

In U.S. for the use of Cemex Construction Materials Pacific, LLC v. Romero

General Construction Corp., 2015 WL 3407873 (E.D. Cal. May 26, 2015) the prime

contractor had several paving contracts at Travis Air Force Base. The use plaintiff filed

an allegedly timely suit against the contractor and its Miller Act payment bond surety on

one of the contracts. The surety showed the claimant that the material for which it was

allegedly unpaid was actually used on other contracts for which the contractor had a

different surety. After some effort, the use plaintiff identified the other contracts and the

surety and moved for leave to file an amended complaint adding the new surety. The

court noted that it could not consider possible prejudice to the new party because that

party was not yet before the court. It, therefore, did not reach the question of whether

the amended complaint would be barred by the one year suit limitation provision of the

Miller Act or would relate back to the date the original complaint was filed. The court

granted the use plaintiff leave to file its proposed amended complaint.

In U.S. for the use of Asphalt Contractors & Site Work, Inc. v. KAR Contracting,

LLC, 2015 WL 3651279 (S.D.W.Va. June 11, 2015) a first tier subcontractor on a

federal project sued the prime contractor and its Miller Act payment bond surety. The

defendants moved to dismiss the complaint for failure to state a claim. The defendants

argued that the suit was not filed within the Miller Act one year limitation period. The

court noted that the suit was filed more than one year after the date of the claimant’s

unpaid invoice attached to the complaint but thought that the facts alleged in the

complaint did not foreclose the possibility that the claimant furnished additional labor or

material after the date of the invoice. The court also found that even if the prime

contractor paid the claimant the amount of the subcontract, the point of the complaint

was that additional work had been performed at the request of the prime contractor and

the owner. Therefore, the complaint stated claims for breach of the subcontract and

breach of the payment bond. The complaint also validly pled as an alternative a claim

for quantum meruit. However, the court dismissed a claim based on the federal Prompt

Payment Act because the plaintiff failed to establish that it had a private right of action

under the statute. Finally, the court denied the motion as to the claim for attorneys fees

even though it recognized that the Miller Act did not provide for recovery of such fees.

The court thought that the claimant could seek to recover fees under the bad faith

exception to the American Rule if, as the case progressed, there was a factual basis for

such a claim. Thus, the court denied the motion to dismiss except for the Prompt

Payment Act claim.

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In Fisk Electric Co. v. DQSI, L.L.C., 2015 WL 6696751 (E.D. La. November 3,

2015) the plaintiff subcontractor had sued the prime contractor and its Miller Act surety

on October 15, 2013. The subcontractor sought payment for a substantial delay claim,

and the case was settled. The settlement called for a cash payment and the

submission of a pass through delay claim. There was a settlement agreement with an

integration clause and a release. When the pass through claim was submitted,

however, the Government took the position that the prime contractor had been paid for

any delay and had released the Government from further liability. The subcontractor

then sued the prime contractor for alleged fraud seeking rescission of the release and

re-asserting the claims in its original suit, including the payment bond claim. The court

found that the subcontractor had alleged a plausible fraud claim but had not met the

requirements of Rule 9(b), F.R.C.P. that a plaintiff must state with particularity the

circumstances constituting fraud. The court, therefore, dismissed the fraud claim with

leave to amend. The surety also argued that the renewed suit was barred by the one

year limitation provision of the Miller Act.

The court thought that the one year requirement was a limitations or claim-

processing rule subject to tolling. If the claimant were successfully to plead fraud it

would be entitled to argue that the settlement agreement and dismissal of the earlier,

timely suit were annulled. Therefore, the validity of the Miller Act claim depended on the

validity of the fraud claim, and so the surety’s motion to dismiss was denied without

prejudice.

United States v. Great American Insurance Co., 2015 WL 7175689 (CIT

November 16, 2015) denied the surety’s motion to dismiss for failure to state a

claim. The Government sued to recover antidumping duties and numerous forms of

interest. The entry was deemed liquidated pursuant to 19 U.S.C. §1504(d) on February

20, 2009. Customs provided bulletin notice of the deemed liquidation on December 18,

2009, and reliquidated the entry on January 8, 2010. The court held that Customs had

the right under 19 U.S.C. §1501, as amended in 2004, to reliquidate the deemed

liquidation and that the 90 day period to do so started when the notice of the deemed

liquidation was transmitted (December 18, 2009) not the actual date of the deemed

liquidation (February 20, 2009). The court recognized that Customs had to post the

bulletin notice within a reasonable period of time following the deemed liquidation, but

could not resolve on a motion to dismiss whether Customs’ ten month delay was

unreasonable.

In U.S. for the use of Asphalt Contractors & Site Work, Inc. v. KAR Contracting,

LLC, 2015 WL 8074073 (S.D.W.Va. December 4, 2015) a subcontractor on a Miller Act

project sued the prime contractor and its payment bond surety for the cost of asphalt

work that exceeded the amount the claimant originally computed as needed for the

project.

The court concisely summarized the claimant’s problem as, “The situation at hand

is a textbook example of a unilateral mistake, made by the Plaintiff.” The claimant used

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the wrong drawing in computing the amount of asphalt it would need. The prime

contractor paid the claimant the subcontract price. The court found issues of fact as to

the date the claimant last worked on the project, and therefore denied the defendants’

motion for summary judgment based on the Miller Act limitations provision, but granted

summary judgment on the merits because the claimant could show neither a breach of

the subcontract and payment bond nor a right to recover in quantum meruit.

G. DISCHARGE OF SURETY

In JJK Group, Inc. v. VW International, Inc., No. TDC-13-3933, 2015 WL

1459841 (D. Md. Mar. 27, 2015), the prime contractor on a federal project sued the

subcontractor and the subcontractor’s performance bond surety. Although the

Government initially accepted the subcontractor’s work, once it discovered latent

defects, the Government revoked acceptance of the subcontractor’s work and

demanded replacement of the work. Id. at *7-8. After the subcontractor’s refusal to do

the replacement work, the prime contractor hired another subcontractor to perform the

work. Id. at *10. At issue was whether the replacement work constituted a “cardinal

change” in the contract, such that the subcontractor was not required to perform the

replacement work. In government contracts, a cardinal change is a change so drastic

that it constitutes a material breach of the contract and frees the contractor of its original

contractual obligations. Id. at *28. The court concluded that while the evidence

suggested that no cardinal change occurred, summary judgment was not appropriate on

that issue. The surety argued that the named Plaintiff, JJK Group, Inc., was not the

obligee on the bond, which named John J. Kirklin, Inc., and that once the work was

completed it had no further obligations. Id. at *34-35. The court ruled that the named

obligee, John J. Kirklin, Inc., had taken the appropriate legal action to change its name

to JJK Group, Inc., that they were the same legal entity, and the entity was thus the

proper plaintiff and obligee. Id. The court then held that under Maryland law, the liability

of the surety was coextensive with that of its principal, and liability did not cease upon

initial completion of the work. Id. at *35-36. Therefore, to the extent the principal was

liable for the cost of replacement work, the surety was likewise liable. Id. at *36.

Palm Energy Group, LLC v. Greenwich Insurance Co. (In re Tri-Union

Development Corp.), Case No. 03-44908; Adv. Proc. No. 11-3032, 2015 WL 5730745

(Bankr. S.D. Tex. September 28, 2015) involved the cost to plug and abandon certain

offshore oil and gas wells, where parties had potential exposure for the costs involved,

including the surety for the bankrupt owner operator (Tri-Union) and a predecessor in

interest of the owner operator (Apache). Under the terms of a settlement entered into

between several parties, some of the wells were satisfactory plugged and abandoned

while other wells, which proved more costly, were not finished under the terms of the

settlement. The predecessor in interest then stepped in and finished the work on the

remaining wells, but the bond obligee, the United States Department of Interior, Bureau

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of Ocean Energy Management (BOEM), nevertheless sought payment of the balance of

the bond penalties ($3,900,000) and moved for summary judgment. The surety argued

that the work guaranteed by the bond had been completed at no cost to the

Government and therefore the bond claims were moot, that the Government’s delay in

demanding remediation of the wells impaired its suretyship rights and constituted a pro

tanto discharge, and, in the alternative, that the forfeiture issue was subject to an

administrative appeal before the Interior Department Board of Land Appeals. The court

found that the fact that the predecessor in interest completed the work after the

Government made its first demand on the surety was not a defense because there was

unquestionably a default, and further recognized that the BOEM might have to distribute

the forfeited money to the predecessor in interest that did the work, but found this to be

proper because the predecessor in interest’s responsibility was secondary to the bond

principal’s obligation that the surety guaranteed. The Government’s regulations, the

settlement among the parties, and the sale agreement between the predecessor in

interest and the bond principal all placed primary responsibility on the bond

principal. The court also rejected the surety’s pro tanto discharge argument because

the Government had no duty to act to protect the surety’s interests, and held that the

plaintiff, BOEM, was not seeking review of any agency action and the exhaustion of

administrative remedies doctrine did not apply. The court granted summary judgment to

BOEM and denied the surety’s motion for summary judgment.

H. SOVEREIGN IMMUNITY

In Fidelity and Guaranty Insurance Underwriters, Inc. v. United States, 2015 WL

6760712 (Fed. Cir. November 6, 2015) the contractor’s liability insurer paid an asbestos-

related claim and sued the United States pursuant to an indemnification provision in the

contract. The insurer argued that it was an equitable subrogee of its insured and relied

on cases finding Tucker Act jurisdiction for suits by sureties as subrogee of the bonded

contractor. The Court held that sovereign immunity barred the suit and affirmed the

Court of Federal Claims’ order dismissing the complaint for lack of subject matter

jurisdiction. In distinguishing cases involving sureties, the Court emphasized that

sureties undertake obligations to the United States and specifically noted that the United

States can sue the surety if the surety fails to perform. The insurer, by contrast, only

undertook and performed an obligation to the contractor. The Court concluded, “As

Gibbs’s general liability insurer, USF&G in this case had no responsibility for contract

performance and had no obligations owed to the government. It therefore failed to

establish jurisdiction under the Tucker Act.”

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II. CIVIL PROCEDURE

A. SUBJECT MATTER JURISDICTION

In Advance Industrial Coating, LLC v. Westfield Insurance Co., Case No. 2:15-cv-

141 (M.D. Fla. March 6, 2015) the court dismissed the complaint without prejudice. The

plaintiff alleged a claim on a public construction bond, but it relied on diversity of

citizenship for federal jurisdiction. The plaintiff alleged that it was a Florida LLC, but it

did not allege the citizenship of its members. The plaintiff also alleged that the surety

was an Ohio corporation authorized to issue surety bonds in Florida, but it did not allege

the location surety’s principal place of business.

St. Louis Housing Authority ex rel. Jamison Electric, LLC v. Hankins Construction

Co., 2015 WL 1636610 (E.D. Mo. April 13, 2015) noted that since federal jurisdiction

was based on 28 U.S.C. §1352 (a suit on a bond mandated by federal law) the court

would look to Miller Act precedent for the award of prejudgment interest. The court

disallowed prejudgment interest on an amount the claimant owed to its supplier and

disallowed costs for service of process fees.

In The Frederick Quinn Corp. v. West Bend Mutual Insurance Co., 2015 WL

2210336 (N.D. Ill. May 8, 2015) the surety for a subcontractor moved to dismiss the

prime contractor’s suit for lack of federal jurisdiction. The surety argued that the facts

alleged by the prime contractor showed that its cost to complete the subcontract work,

less the admitted subcontract balance, was less than the $75,000 jurisdictional amount.

The prime contractor responded that its claim included additional amounts of interest

and attorneys fees. The court noted that the jurisdictional amount must be “exclusive of

interest and costs” and disregarded the claimed interest. The subcontract provided for

attorneys fees, however, and so fees that predated filing of the complaint could be

included. However, the general allegations of the complaint were not sufficient to

determine the amount genuinely in controversy. Therefore, the court granted the plaintiff

leave to file an amended complaint including whatever details it deems necessary to

establish the amount in controversy. In the absence of such an amended complaint, the

surety’s motion to dismiss was granted, otherwise it was denied as moot.

In Baistar Mechanical, Inc. v. FMD Restoration, Inc., 2015 WL 2405426 (D.D.C.

May 21, 2015) a prime contractor sued the subcontractor and its surety alleging

jurisdiction under the Miller Act. The surety moved to dismiss for lack of federal

jurisdiction since the Miller Act did not apply to the bond. The prime contractor then

asserted diversity as an alternative basis for jurisdiction, but it and the subcontractor

both appeared to be Virginia corporations. The court granted the motion and dismissed

the case without prejudice based on lack of federal jurisdiction.

In U.S. for the use of Mitchell Acoustics & Drywall, Inc. v. GSC Construction, Inc.,

2015 WL 3891885 (W.D. Okla. June 24, 2015) a first tier subcontractor on a federal

project sued the prime contractor and its surety. The surety moved to dismiss on the

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grounds that the amount in controversy was less than $75,000. The court denied the

motion because the suit was filed under the Miller Act not the diversity statute. The

court had supplemental jurisdiction over the use plaintiff’s other claims. The court

granted the prime contractor’s motion to compel mediation and arbitration pursuant to

the terms of the subcontract and stayed further judicial proceedings pending completion

of that process.

In U.S. Specialty Insurance Co. v. A-Val Architectural Metal Corp., 2015 WL

3948115 (S.D.N.Y. June 29, 2015) the surety sued the principal and indemnitors

including the Estate of a deceased indemnitor. The Estate moved to dismiss for lack of

subject matter jurisdiction based on the “probate exception” to federal diversity

jurisdiction. The court found that it had jurisdiction to hear the surety’s claim for a

judgment against the Estate but not for the other relief requested by the surety (deposit

of collateral). A final money judgment would not interfere with the probate court’s

orderly administration of the Estate but merely determine the surety’s right to

distribution of property at the conclusion of the estate proceeding. The court also

declined to abstain from hearing the surety’s claims under the Colorado River and

Thibodaux abstention doctrines. Finally, the court denied the motion to dismiss of

another individual indemnitor because the complaint stated a claim against her and her

arguments to the contrary rested almost entirely on factual allegations outside of the

complaint.

In Industrias Vassallo, Inc. v. Puerto Rico Electric Power Authority (In re Industrias

Vassallo, Inc.), Case No. 08-7752, Adv. Proc. No. 09-258 (Bankr. D.P.R. July 31, 2015)

the surety on a utility payment bond for the bankrupt principal sought to pursue an

amended complaint in the adversary proceeding after the principal and utility had settled

their dispute and requested dismissal of the adversary proceeding. The court held that

nothing in the remaining dispute between the surety and the utility would have any

conceivable effect on the bankruptcy estate and, therefore, the Bankruptcy Court lacked

jurisdiction over the proposed amended complaint. The court concluded, “The

bankruptcy court is not the correct forum for a proceeding between two non-debtor

parties which does not affect the bankruptcy estate.”

In Town of Georgetown v. David A. Bramble, Inc., 2015 WL 4935502 (D. Del.

August 19, 2015) the public obligee sued the contractor and its surety in state court,

and the defendants removed the action to federal court based on diversity of

citizenship. The obligee moved to remand the action based on a forum selection

provision in the performance bond that stated, “any proceeding, legal or equitable,

under this Bond may be instituted in any court of competent jurisdiction” in the location

of the work. The court found that this permissive language was not a waiver of the right

to object to jurisdiction in the state court or a waiver of the right to remove the case. The

court denied the obligee’s motion to remand.

In Fire Stop Systems, Inc. v. Liberty Mutual Insurance Co., 2015 WL 6750788

(M.D. Fla. November 5, 2015) a subcontractor on a City of Orlando project sued the

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prime contractor’s Little Miller Act payment bond surety. The suit was filed, however, in

the Fort Myers Division of the Middle District of Florida rather than in the Orlando

Division. The surety moved to dismiss for improper venue or, in the alternative, to

transfer the case to the Orlando division. The court applied the analysis for a motion to

transfer venue and found that the convenience of witnesses, the locus of the operative

facts, and the interests of efficiency and justice all favored transfer of the case. The

court ordered that the case be transferred to the Orlando Division.

Ames Department Stores, Inc. v. Lumbermens Mutual Casualty Co. (In re Ames

Department Stores, Inc.), 2015 WL 8031191 (Bankr.S.D.N.Y. December 7, 2015) found

that the Bankruptcy Court had jurisdiction over various disputes between the debtor and

the surety on a bond given to protect a workers compensation insurer. The bond was

written in 2000, the Chapter 11 bankruptcy was filed in 2001 and the debtor, the surety,

and the bond obligee engaged in numerous disputes and partial settlements resolving

some things and reserving their respective rights and contentions as to others. The

Bankruptcy Court rejected the surety’s argument that under the McCarran-Ferguson Act

the surety’s state court liquidation proceeding had exclusive jurisdiction over the

remaining disputes. The decision took the form of a report and recommendation to the

district court, which had withdrawn the reference but requested such a report.

B. PERSONAL JURISDICTION

In Ricale Associates, LLC v. McGregor, No. 15-cv-541, 2015 WL 5781063

(D.N.J. September 29, 2015) the plaintiff, a New Jersey motorcycle dealer that sold a

number of motorcycles through auction houses in Tennessee sued the auction houses

and a number of other defendants, including the surety on the bond of one of the

auction house defendants. The surety objected to personal jurisdiction in New Jersey

and moved to dismiss on that basis. The plaintiffs did not argue that the surety itself

conducted business in New Jersey or that it was foreseeable that the bond principal

would conduct business with a New Jersey entity. Instead, the plaintiffs argued that

“the very nature of a surety bond makes the issuer unsure who it will benefit” and so the

surety knew the bond could benefit persons outside of Tennessee, which, as the court

recognized, would effectively mean nationwide jurisdiction over the surety. The bond,

however, protected against the principal’s failure to pay certain title fees and taxes or

failure to deliver a valid vehicle title, and the court found no basis to hold that the surety

should have reasonably anticipated being haled into court in New Jersey, granting the

surety’s motion to dismiss for lack of personal jurisdiction.

C. IMPROPER VENUE

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In U.S. for the use of Cherox, Inc. v. Travelers Casualty & Surety Co., 2015 WL

4389568 (D.P.R. July 15, 2015) a Puerto Rican company acted as a subcontractor on a

project in the U.S. Virgin Islands. When it allegedly was not paid, it sued the prime

contractor’s Miller Act payment bond surety in the district of Puerto Rico. The surety

moved to dismiss or transfer the case for improper venue. The claimant argued that its

work was organized in Puerto Rico and so Miller Act venue was proper there. The court

disagreed, noted that all of the actual work (excavation, pipe installation, paving, etc.)

took place in the Virgin Islands, and transferred the case to the U.S. District Court for

the Virgin Islands.

In U.S. for the use of QSR Steel Corporation, LLC v. Safeco Insurance Company

of America, 2015 WL 4393576 (D. Conn. July 16, 2015) a subcontractor on a federal

project sued the Miller Act payment bond surety in the federal judicial district where the

project was located as required by the venue provision of the Miller Act, 40 U.S.C.

§3133(b)(3)(B). The subcontract included a forum selection clause requiring suit in the

Circuit Court of the City of Virginia Beach, Virginia or the United States District Court for

the Eastern District of Virginia, Norfolk Division. The court, largely on its own initiative,

transferred the case to the Eastern District of Virginia holding that the statutory Miller

Act venue could be altered by contract. The surety did not object to the transfer.

In Citi Structure Construction v. Zurich American Insurance Co., 2015 WL

4934414 (S.D.N.Y. August 18, 2015) a subcontractor on two New York Metropolitan

Transportation Authority projects sued the prime contractor’s surety but not the prime

contractor. The surety moved to dismiss based on a forum selection clause in the

subcontracts. The subcontracts provided that exclusive venue for any action on the

subcontract or on any bonds in connection with the projects would be in the New York

Supreme Court for Westchester County. The court treated the surety’s motion as one to

dismiss for forum non conveniens and rejected the subcontractor’s argument that the

surety was not a party to the subcontracts and, therefore, could not enforce the forum

selection clauses. The court held that the forum selection clauses were valid and that

the surety was sufficiently closely related to the prime contractor that it could enforce

the clauses. The court granted the surety’s motion to dismiss.

In U.S. for the use of Twin City Electric LLC v. Sauer Inc., No. 15-cv-1847, 2015

WL 5794139 (W.D. La. September 30, 2015), the case was transferred from the district

in which the project was located to the Middle District of Florida, where the office of the

prime contractor was located, because of the forum selection clause in the claimant’s

subcontract which provided that if a dispute was not resolved, either party “may seek to

have the dispute resolved in any court having jurisdiction over [the prime contractor’s]

office address written above.”

In U.S. for the use of Galvin Bros., Inc. v. Fidelity and Deposit Company of

Maryland, No. 14-cv-6051, 2015 WL 5793346 (E.D.N.Y. September 30, 2015) a

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subcontractor sued the prime contractor’s Miller Act payment bond surety in the U.S.

District Court where the job was located (as provided in the Miller Act), but the

subcontract included a requirement that all disputes be resolved in Boston,

Massachusetts. The surety moved to dismiss for improper venue or, in the alternative,

to transfer the action to the U.S. District Court for the District of Massachusetts. The

court held that the Miller Act provision was a matter of venue rather than jurisdiction and

thus could be changed by the parties’ contract. Consequently, the court determined

that the surety could enforce the subcontract provision, which specifically stated it was

for the benefit of and enforceable by the contractor’s surety, and that the forum

selection clause was not so unreasonable or unjust as to effectively deprive the

subcontractor of its day in court. The Court also concluded that New York Gen. Bus.

Law §757, which voided out of state forum selection clauses in construction contracts,

did not apply both because the project was public not private and because as a federal

project, the Miller Act provided a federal cause of action controlled by federal law. In

conclusion, the court held that “[i]t would be presumptuous to assume that the only

available venue for this action is the United States District Court for the District of

Massachusetts” and dismissed the case without prejudice and without acknowledging

that the Miller Act requires suit in federal court, apparently presuming that the

subcontractor could elect to demand arbitration or institute some other proceeding in

Boston. On reconsideration, in Case No. 14–CV–6051, 2015 WL 6030267, the Plaintiff

argued that the court’s dismissal without prejudice had the unintended consequence of

time-barring any future filings. The court found that the Plaintiff had shown a compelling

reason for the court to transfer the case rather than dismiss it, and accordingly vacated

the previous judgment and ordered the case transferred to the United States District

Court for the District of Massachusetts.

U.S. for the use of Crux Subsurface, Inc. v. TK Construction US, LLC, 2015 WL

8759330 (D. Colo. December 15, 2015) (dismissed the suit without prejudice for

improper venue)

D. PLEADING CONDITIONS PRECEDENT

In Howard Robson, Inc. v. Town of Rising Sun, 2015 WL 424773 (D. Md. January

30, 2015) the prime contractor and its surety sued the public obligee, and the obligee

filed a counterclaim. The surety moved to dismiss the counterclaim against it because

the obligee failed to comply with the conditions precedent in the bond. The

counterclaim alleged that the obligee “fully complied with the terms and conditions of

the Performance Bond.” The court thought that for purposes of a motion to dismiss

under Rule 12(b)(6) that was equivalent to alleging performance of all conditions

precedent and sufficient to survive the motion. The court noted that the surety could

assert that the obligee failed to comply with conditions precedent as an affirmative

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defense and that denial of the motion to dismiss was without prejudice to the surety’s

right to renew its contention at a later time.

Davis Group, Inc. v. Ace Electric, Inc., 2015 WL 3935422 (M.D. Fla. June 26,

2015) involved claims and counterclaims between the prime contractor and a first tier

subcontractor, and their respective sureties, over responsibility for delays on a federal

project. The prime contractor and its surety moved for summary judgment on several

aspects of the claims. The court found issues of fact as to responsibility for the delays

and denied the motion as to breach of contract. The prime contractor and its surety also

argued that the subcontractor failed to give notice of its delay claims and that such

notice was a condition precedent to liability. However, in its counterclaim the

subcontractor alleged that all conditions precedent had been “satisfied, waived or

excused” and the prime contractor and surety in their answer responded only “Without

knowledge, therefore denied.” The court held that this response filed to meet the

specificity requirements of Rule 9(c) and so constituted an admission that any

conditions precedent had been met. On the notice of delays issue, the court stated,

“Because TDG [the prime contractor] and Westfield [its surety] have admitted that all

conditions precedent have been satisfied, waived, or excused, their summary judgment

arguing to the contrary must be DENIED.”

E. RES JUDICATA/RETRAXIT

In J & B Boat Rental, LLC v. JAG Construction Services, Inc., 2015 WL 2376004

(E.D. La. May 18, 2015) the claimant rented a boat to a subcontractor for use on what

was allegedly a Miller Act project. The subcontractor filed for bankruptcy, and in the

bankruptcy claim process the Bankruptcy Court found that the claimant was owed

$48,046.86 for the use of its boat and related expenses. Of that amount, the claimant

received a distribution of $3,661.17 leaving a balance owed of $44,385.69. In its bond

suit against the prime contractor and surety, the claimant moved for summary judgment

based on the findings of the Bankruptcy Court and the defendants moved for summary

judgment “arguing that J&B should be precluded from maintaining this action because it

pursued its claims against former co-defendant JAG Construction Services, in the

context of JAG’s bankruptcy proceeding.” The court denied both motions.

The court held that the claimant was not required to join the prime contractor and

surety in an adversary proceeding in the Bankruptcy Court and that claim preclusion did

not bar the Miller Act suit. The court rejected the defendants’ argument that under

Louisiana law partial payment by the subcontractor extinguished the bond claim. The

court thought this alleged rule did not apply to, and was inconsistent with, the Miller Act.

The court also rejected the claimant’s argument that the Bankruptcy Court’s allowance

of the claim bound the prime contractor and surety by collateral estoppel. The court

found that “Collateral estoppel does not apply here because LDI and Western Surety

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did not have the opportunity to litigate any issues in the context of JAG’s bankruptcy

proceeding.”

Throughout its decision the court relied on the Miller Act, but the prime contract

was let by a levee and conservation district. The court incorrectly thought that the Miller

Act applied because the project was funded by the federal government.

In Mason v. International Fidelity Insurance Co., 2015 WL 5453929 (Cal. App.

September 16, 2015) the claimant rented equipment to a subcontractor on a public

project and, after the subcontractor was removed from the project, also rented

equipment directly to the prime contractor. There were reasons to believe that the

claimant and the subcontractor exaggerated the amounts owed for the rentals to the

subcontractor, and the prime contractor settled the claimant’s stop notice claim of

$61,025 for $40,000. The settlement included a complete release for all rentals to the

subcontractor but did not include rentals directly to the prime contractor. When the

claimant received only partial payment for its rentals to the prime contractor, it sued the

prime contractor’s surety. The surety argued that it could set off against the claim

amounts that it asserted the claimant had been overpaid for the rentals to the

subcontractor. The Court held that the settlement between the prime contractor and

the claimant, which was paid by the contractor not the surety, resolved what was owed

for rentals to the subcontractor and the surety could not re-open that settlement to claim

a credit against amounts owed for the rentals to the prime contractor. The Court also

found that the trial court’s determination of the amount owed for rentals to the prime

contractor ($26,911.04) was supported by substantial evidence and that the amount of

attorneys fees awarded to the claimant ($87,150) was not excessive. The Court

affirmed the trial court’s judgment and post judgment award of attorneys fees.

JSI Communications v. Travelers Casualty & Surety Company of America, 2015 WL 8051607 (5th Cir. December 4, 2015) reversed summary judgment for the payment bond surety of the prime contractor on a Mississippi public project. The claimant was a second tier subcontractor on the project. The prime contractor filed an interpleader action and paid the balance owed the first tier subcontractor into court. The claimant had not given notice of its claim and was not initially a defendant in the interpleader action. Shortly after judgment was entered in the interpleader action, the claimant gave the prime contractor and surety notice of its claim. The notice was timely under the Mississippi Little Miller Act. The prime contractor then amended its complaint in the interpleader action and obtained an amended judgment that extended its release of liability to include any claims made by anyone added to the action for materials, labor or equipment furnished to the first tier subcontractor. When the claimant sued on the bond, the district court granted summary judgment to the surety, and the claimant appealed.

The surety argued that it was no longer liable to the claimant because the liability

of the bond principal was extinguished by the judgment in the interpleader action. The

Fifth Circuit disagreed. The fact that the prime contractor’s liability to the first tier

subcontractor was extinguished in the interpleader action had no effect on the second

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tier subcontractor’s ability to recover on the bond. The Court noted that full payment to

a first tier subcontractor is not a defense to an otherwise valid claim by someone who

furnished labor or material to that subcontractor. The Court also rejected any argument

that the judgment in the interpleader action barred the bond claim by res judicata or

collateral estoppel. The scope of the interpleader action was determined by the “stake”

deposited, i.e. the subcontract balance. Any bond obligation was separate and distinct

from that stake, and the bond obligation was not mentioned or litigated in the action.

The Court thought that the prime contractor’s indemnity obligation to the surety “has no

bearing on our decision regarding Travelers’s bond obligation to JSI under the

Mississippi Little Miller Act.” The Court, therefore, reversed summary judgment for the

surety.

Since the evidence submitted in the trial court established that the claimant met

the requirements of a valid bond claim and the surety “has offered no basis, other than

those rejected above, for its failure to pay,” the Court entered summary judgment for the

claimant in the amount of its claim and remanded the case for the district court to

consider the claimant’s requests for attorneys’ fees and bad faith damages, which had

been denied by the district court on the ground that there was no bond liability for the

underlying claim.

F. DEFAULT JUDGMENT AGAINST PRINCIPAL

Berkley Regional Insurance Co. v. Trademark Construction, Inc., 2015 WL

4999801 (S.D. Ala. August 21, 2015) adopted the recommendation of the Magistrate

Judge and entered a default judgment against the principal and indemnitors in the

amount of the surety’s net losses and expenses.

Hanover Insurance Co. v. Red Cliff, Inc., 2014 WL 10121215 (W.D. Tex. October

7, 2015) entered a default judgment for the surety against the principal and indemnitors

in the amount of the surety’s losses and expenses plus pre and post judgment interest.

The court found that no hearing on damages was necessary because the affidavits and

supporting evidence provided by the surety established the amount owed.

In Hartford Fire Insurance Co. v. The Harris Company of Fort Smith, Inc., 2015

WL 7012848 (W.D. Ark. November 12, 2015) the surety completed the bonded project

and sued a subcontractor of the principal’s. The subcontractor filed third party

complaints against the principal and a fellow subcontractor. The principal did not

respond to the third party complaint, and the subcontractor obtained a default judgment.

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The subcontractor then filed a motion for summary judgment or partial summary

judgment against the surety, and the fellow subcontractor filed a motion for summary

judgment on the third party complaint against it. The surety’s attorney then entered an

appearance for the principal and moved to set aside the default and default judgment.

The court disagreed with the principal’s argument that it was protected by the

surety’s pleadings under the common-defense doctrine. The court thought that since

the default judgment against the principal could bind the surety under Drill South, Inc. v.

International Fidelity Ins. Co., 234 F.3d 1232 (11th Cir. 2000) the inconsistent results that the common-defense doctrine was designed to avoid were not present. However, the court agreed with the principal’s argument that the default judgment should be set aside under Rule 60(b) based on the excusable neglect of the principal’s counsel. The subcontractor would not be prejudiced, the delay involved had no impact on the judicial proceedings, the principal acted in good faith, and the principal asserted meritorious defenses to the subcontractor’s claims. The court noted that the principal was apparently insolvent and had no interest in the litigation, and that counsel apparently assumed that the default would not be imputed to the surety. The court granted the motion to set aside the default and ordered the principal to file its response to the third party complaint. This, of course, mooted the subcontractor’s argument that the surety was bound by the default judgment.

The subcontractor also moved for summary judgment on the merits of several of

the surety’s claims. The court found issues of fact precluding summary judgment on

most of them but granted the motion as to several claims on which the record did not

include evidence to support issues of fact as to the subcontractor’s liability. Finally, the

court denied the motion of the fellow subcontractor because it found that there were

genuine issues of fact as to the cause of the building’s structural failure.

G. PROCEDURAL ISSUES

In Skycom SRL v. F.A. & Partners, Inc., 2015 NY Slip Op 30007(U) (N.Y. Sup. Ct.

January 7, 2015) a second tier subcontractor sued, among others, the surety on two

mechanics lien release bonds. The defendants moved to dismiss. The defendants

argued that the plaintiff was doing business in New York without the proper registrations

and so was barred from prosecuting the suit by Business Corporations Law §1312. The

court found that the facts of record were insufficient to establish whether the plaintiff’s

contacts with New York were systematic and regular enough to require compliance with

the statute. The court did dismiss the plaintiff’s unjust enrichment claim against the

surety for work on one of the projects. The court held, “Vigilant, a surety for the 42nd

Street high-rise, derived no benefit from Skycom’s performance of the sub-

subcontract.”

In International Union of Painters and Allied Trades District Council 711 Health &

Welfare, and Vacation Fund v. Petric & Associates, Inc., 2015 WL 273653 (D.N.J.

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January 22, 2015) the union funds sued a subcontractor on a public project alleging

non- payment of fringe benefit contributions owed for labor provided by union members.

The funds also sued the prime contractor and its payment bond surety. The prime

contractor and subcontractor filed cross claims against each other alleging various

breach of contract claims. The subcontractor also filed a cross claim against the

surety. The court granted the plaintiff funds’ motion to dismiss the various cross claims

among the defendants as not arising from the same transaction or occurrence as the

plaintiff’s claims. The cross claims failed the “logical relationship” test because their trial

would not involve a substantial duplication of proof, and they would unreasonably

complicate and delay adjudication of the claimant’s straightforward claim for fringe

benefit contributions.

Data Optics Cable, Inc. v. Americom Automation Services, Inc., Case No. 1:14-cv-

21372 (S.D. Fla. January 22, 2015) granted the claimant leave to amend its complaint

to seek attorneys’ fees from the surety defendants pursuant to §§627.428 and 627.756,

Florida Statutes.

In Pro Lawns, Inc. v. Fidelity and Deposit Company of Maryland, 2015 WL 350637

(M.D. Ala. January 23, 2015) a subcontractor on a public project sued the sureties for

the prime contractor but not the prime contractor. Apparently, the subcontractor was

trying to avoid submitting the dispute to arbitration as provided in the subcontract. The

prime contractor moved for leave to intervene and to compel arbitration. The

subcontractor argued that the Alabama Little Miller Act payment bond provided that the

claimant could sue the contractor and the surety or either of them and that it, therefore,

could sue the sureties alone. The court noted the subcontractor’s strategy to avoid

arbitration and granted the prime contractor’s motion for leave to intervene. The court

gave the subcontractor a week to show cause why the prime contractor’s motions to

compel arbitration and stay the suit should not be granted.

In U.S. for the use of TQ Constructors, Inc. v. Travelers Casualty and Surety

Company of America, Case No. 7:14-cv-205 (E.D.N.C. January 26, 2015) a

subcontractor sued the prime contractor and its surety, and the contractor filed a

counterclaim against the subcontractor. The court granted the prime contractor’s

motion to join the subcontractor’s surety as a counterclaim defendant.

Washington International Insurance Co. v. Southern Mechanical Plumbing, Inc.,

Case No. 3:14-cv-4028 (N.D. Tex. January 27, 2015) reviewed the surety’s efforts to

serve the principal and indemnitor and granted the surety leave to serve the defendants

by delivering the summons and complaint to a person over the age of 16 at the

principal’s usual place of business as permitted by Tex. Rule of Civ. Proc. 106(b) and

F.R.C.P. 4(e)(1).

In Mississippi Division, United Sons of Confederate Veterans, Inc. v. Hartford Fire

Insurance Co., 2015 WL 417823 (S.D. Miss. January 30, 2015) the obligee sued the

surety and the surety filed third party claims against several subcontractors. One of the

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subcontractors failed to answer, and the clerk entered its default. The court set aside

the default noting the preference for resolution of disputes on the merits, that the delay

was not willful, and the lack of any prejudice to the surety or the other parties.

In Asia Pacific Hotel Guam, Inc. v. Dongbu Insurance Co., Ltd., 2015 WL 582955

(Guam Terr. February 3, 2015) the surety completed the work and recovered an

arbitration award against the obligee. The trial court affirmed the award, including

prejudgment interest from the date of the final award by the arbitrators, and the obligee

appealed. The surety cross-appealed as to the date from which prejudgment interest

ran. After an exhaustive and scholarly review of the law on the grounds to set aside

arbitration awards, the Court held that the trial court properly affirmed the award but set

aside the trial court’s summary judgment for the surety enforcing the award because it

found issues of fact as to the meaning of some of the amounts in the award and the

amount to which the surety was entitled by subrogation. There was a dispute whether

the surety had been awarded more as subrogee of the contractor than the surety had

expended to meet the bond obligations. The Court also set aside the trial court’s order

foreclosing the surety’s mechanics liens since the amount to which the surety was

entitled had not yet been determined. Finally, on the surety’s cross-appeal, the Court

held that its decision in a prior appeal of the case decided that the date for calculation

of prejudgment interest was the arbitrators’ final award not an earlier award that left

some issues open. Therefore, the surety’s argument on its cross appeal was foreclosed

by the Court’s earlier decision.

U.S. for the use of Reliable Construction PM, Inc. v. Land Frog, Inc., 2015 WL

740034 (E.D.N.Y. February 20, 2015) dismissed the subcontractor’s Miller Act suit for

failure to prosecute. The attorney for the corporate use plaintiff withdrew, and the use

plaintiff did not secure substitute counsel despite ample warning and time to do so. The

court granted the surety’s motion to dismiss.

In Metropolitan Lofts of NY, LLC v. Metroeb Realty 1, LLC, 2015 WL 894869 (NY

Sup.Ct. Kings Co. February 27, 2015) the plaintiff secured an injunction preventing the

sale of real property and in connection with the injunction posted a $3 million bond with

an individual, Linda Garrahan, as the surety. After a trial, the plaintiff was found not to

have a valid contract to purchase the property and the injunction was set aside. The

defendant owner of the property and an intervenor, a contract purchaser of the property

who was delayed by the injunction, sought damages for the delay caused by the

wrongful injunction and to compel substitution of a bond from an admitted surety. The

court reviewed each of the items of damage claimed, including lost interest and

attorneys’ fees, and awarded substantial damages to the defendant and the intevenor.

The claimants pointed out that they were unable to locate Ms. Garrahan or the

alleged financial institutions at which she worked or which supposedly secured the bond

obligations. They also represented that Ms. Garrahan was involved in a number of

cases alleging that her bonds were fraudulent. These arguments, however, were first

made after the injunction had been dissolved. The court found no basis to order

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substitution of a different bond. It pointed out that the bond became effective upon its

service and filing and it remained enforceable against the surety according to its terms.

Pursuant to CPLR 2505 the defendant could have objected to the surety at the time the

bond was served and filed but did not do so.

In Federal Deposit Insurance Corp. v. Safeco Insurance Company of America, 605

Fed.Appx. 609 (9th Cir. 2015) the surety appealed denial of its motion for a new trial in a

Commercial Money Center lease bonds case. In connection with its fraudulent

inducement defense, the surety objected to the trial court’s instruction to the jury that

knowledge possessed by the surety’s agent could be imputed to the surety. The Court

disagreed and explained that “Anthony was not simply a soliciting agent. He signed the

SSAs as Safeco’s Attorney-in-Fact, and signed amendments changing material

elements of the agreements as Safeco’s Attorney-in-Fact. Because Anthony was

empowered to bind Safeco to the surety bonds and the SSAs, the district court did not

err by instructing the jury that any knowledge possessed by Anthony could be imputed

to Safeco.” The Court also held that the choice of law provision in the agreements was

broad enough to require application of Nevada law to the entire relationship among the

parties.

In Nacimento Water Company, Inc. v. International Fidelity Insurance Co., 2015 WL

1275451 and 1276583 (C.D. Cal. March 19, 2015) the obligee on bonds for a developer

sued the surety, and the surety filed cross claims or third party claims against several

indemnitors and a potential defendant on a subrogation or unjust enrichment type claim.

In two separate orders the court addressed motions for summary judgment on the

surety’s cross claims and third party claims. The potential defendant on a future

subrogation claim was a lender that had foreclosed on the development property. The

court held that the surety’s potential claims against the lender were not ripe for

adjudication. Indeed, the court thought that there was no present claim against the

lender and any potential one depended on future events that might or might not occur

such as an agreement between the lender and the obligee of the bonds. The court,

therefore, granted the lender’s motion for summary judgment.

As to the indemnitors, the court found that the two indemnity agreements were clear

and included the bonds at issue. However, as to one of the bonds, the court found that

the statute of limitations had run for a suit by the obligee against the principal on their

underlying contract and, therefore, Cal. Code Civ. Proc. §359.5 barred a claim against

the principal or surety on the bond. The court denied the indemnitors’ motion for

summary judgment except for the surety’s indemnity action based on the one time-

barred bond claim.

In Selective Insurance Company of America v. Glen Wilde, LLC, 2015 WL 1471186

(W.D.N.C. March 30, 2015) the surety executed a payment bond, delivered it to the

principal, and the principal paid the premium. The principal did not sign the payment

bond and did not deliver it to the owner. The owner obtained a copy from the insurance

agent, and the principal was a member of the owner LLC. The principal sent the owner

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a proposed change order to increase the contract price by the amount of the premium

plus a markup. The claimant was an unpaid subcontractor. The court recognized that

delivery and acceptance were necessary for formation of a valid bond. The court found

issues of fact as to whether there was delivery of the payment bond but granted

summary judgment to the surety on the ground that the obligee did not accept the bond.

The court reasoned that the contract did not require a payment bond, therefore the

proposed change order was an offer to provide one and the owner’s rejection of the

change order rejected the offer.

In Building Solutions Since 1977, LLC v. New Haven Housing Authority, 2015 WL

1868107 (Conn. Super. March 31, 2015) the court considered a motion to strike the

plaintiff subcontractor’s substituted complaint filed after the court granted a motion to

strike the original complaint, see 2014 WL 2024854 (Conn. Super. April 23, 2014). The

surety aspect of the motion was based on the argument that the substituted complaint

failed to allege the existence of the bond and compliance with the notice requirements of

G.S. §49-42. The court found that the substituted complaint alleged the existence of the

bond and substantial compliance with the notice requirement. The court concluded,

“Whether the plaintiff in fact substantially complied with these requirements is not

properly before the court on a motion to strike. Accordingly, the motion to strike count

two is denied.” In an apparently related case, American Pride Builders, Inc. v. New

Haven Housing Authority, 2015 WL 1919558 (Conn.Super. March 31, 2015) the court

reached the same conclusion.

In PBI Bank, Inc. v. E-Z Construction Company, Inc., 2015 WL 2152908 (Ky. App.

May 8, 2015) a subcontractor filed its mechanics lien claim in May, 2008. The bank

acted as surety on a bond to release the lien. The penal sum of the bond

($315,655.16) was twice the amount of the lien ($157,827.58). The subcontractor also

claimed interest at 18% per annum as provided in the construct subcontract, and in a

prior appeal the Court upheld the award of interest at the contract rate. After remand,

the bank argued the penal sum limited its obligation. The trial court disagreed and

entered judgment as of March 25, 2014, in the amount of $428,077.41. On appeal, the

Court noted that at the time of the trial court’s initial judgment and the first appeal, the

total claimed with interest already exceeded the penal sum. The bank should have

raised its penal sum argument in the first appeal, and having failed to do so could not

raise it after remand. The Court treated the prior rulings as law of the case and affirmed

the judgment without reaching the merits of whether the penal sum would have limited

the bank’s liability for interest if the argument had been properly preserved.

In Rajagopalan v. Meracord, Inc., 2015 WL 2237922 (W.D. Wash. May 12, 2015) it

appeared that the class plaintiffs were trying to obtain a default judgment against a

business (including by dismissing claims against the business’ owner) as a step to trying

to collect on certain license bonds. Two sureties moved for leave to intervene, and the

plaintiff’s dismissed a Count alleging violation of state licensing statutes. The court

found that with that Count dismissed, the proposed intervenors did not show a

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protectable interest in the remaining issues or a common question of law or fact

between their claims or defenses and the remaining issues in the case. It therefore

denied the sureties’ motion for leave to intervene.

In Herr Industrial, Inc. v. CTI Systems, SA, 2015 WL 3670686 (D. Kan. June 12,

2015) a subcontractor on a project located in Kansas sued the prime contractor and the

surety on the contractor’s mechanics lien release bond. The subcontract, however,

included a forum selection clause stating that “The PARTIES agree to submit to the

exclusive jurisdiction of the courts of the Grand-Duchy of Luxembourg.” The prime

contractor was domiciled in Luxembourg and recovered a default judgment there

against the subcontractor. The defendants moved to dismiss the Kansas suit, and the

court agreed that the forum selection clause was enforceable. Federal law controlled

because forum selection was a matter of procedure not substance, and there was no

strong Kansas public policy against enforcement of the parties’ agreement. The court

granted the motion to dismiss the subcontractor’s claims as in violation of the forum

selection clause. The subcontractor also sought a declaratory judgment that the

Luxembourg default judgment was not enforceable. The court held that the

Luxembourg court had jurisdiction over the subcontractor and dismissed the declaratory

judgment claim on its merits.

Hanover Insurance Co. v. Plaquemines Parish Government, 2015 WL 4167745

(E.D. La. July 9, 2015) involved claims and counterclaims among the surety, the public

owner, the architect, and numerous subcontractors. The court held that the statutory

defense of comparative fault under La. Civil Code art. 2323 applied only to negligence

claims not to breach of contract claims and, therefore, did not bar the numerous claims

and cross claims alleging that various parties were solidarily liable for breach of

contract. The court emphasized that while comparative fault did not bar the breach of

contract claims, the claiming party would still have to prove solidary liability in each

instance and stated, “an obligation is generally solidary when each obligor is liable for

the whole performance.” The court also noted that comparative fault would apply to the

Parish’s negligence claims against many of the other parties.

In Hartford Fire Insurance Co. v. Harris Company of Fort Smith, Inc., 2015 WL

4391910 (W.D. Ark. July 16, 2015) the surety on a federal project took over the work

following the contractor’s termination. The surety sued a subcontractor to recover the

cost to complete or correct work that the subcontract either failed to perform or

performed improperly. In connection with a discovery dispute, the subcontractor filed a

motion to compel, and the surety filed a motion for a protective order, related to the

subcontractor’s requests for production of documents. The court recognized a

distinction between documents created in anticipation of litigation and documents

created in the normal course of completing the project. The court held that documents

created after the surety hired local counsel were in anticipation of litigation and so

subject to the work- product privilege. For documents created prior to that date, the

court directed the surety to review its privilege log documents “and to closely scrutinize

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and identify any documents which relate to Hartford Fire’s role or purpose in completing

construction” as opposed to in anticipation of the salvage litigation. Similarly, the court

held that documents prepared by an architecture firm retained by the surety would not

be privileged if they predated the retention of the firm to assist with the anticipated

litigation (i.e. they were part of completing the project) and directed production of such

documents to the extent not already produced. Finally, the court ordered production of

documents communicated to third parties not involved in the litigation and sustained the

surety’s objections to production of a Memorandum provided to an expert witness. The

court concluded, “except in particular instances, the documents submitted for in camera

inspection were properly withheld by Hartford Fire based on attorney-client privilege,

work-product privilege, and/or the expert materials protected by Fed. R. Civ. P. 26(b)(4).”

Carter Douglas Company, LLC v. Logan Industrial Development Authority, Inc.,

Case No. 1:14-cv-63 (W.D. Ky. July 27, 2015) granted the surety’s motion for leave to

intervene in the principal’s suit against the obligee. The surety had entered into a

takeover agreement and claimed the right to payment of the contract balance including a

fund held by the owner’s counsel. The court found that the surety met the requirements

under F.R.C.P. 24(a)(2) for intervention as of right.

In Berger Enterprises v. Zurich American Insurance Co., 2015 WL 5014114 (E.D.

Mich. August 21, 2015) the plaintiff subcontractor settled a prior suit against the prime

contractor and its Miller Act surety, and as part of the settlement the prime contractor

was to submit the subcontractor’s pass through claim to the owner. After the second

suit was filed, the prime contractor submitted the pass through claim, but it had filed for

bankruptcy and the owner took the position that the bankruptcy trustee had to certify the

claim. The subcontractor moved to dismiss the case without prejudice. The surety

opposed dismissal without prejudice. The court granted the dismissal without prejudice

reasoning that the case was in the preliminary stage, the surety would not be

prejudiced, and if the bankruptcy trustee certified the claim the case would become

moot.

In Vigil v. Wesco Insurance Co., 2015 WL 4997201 (Cal. App. August 21, 2015)

the trial court dismissed the plaintiff homeowner’s claims against the contractor license

bond surety because the bond was issued after the alleged breaches by the contractor.

On appeal the homeowners argued that they should have been granted leave to amend

to allege a continuing violation by the contractor after the bond’s date because the

contractor failed to repair the supposedly defective work or committed a continuing

fraudulent concealment of relevant facts. The Court found that the homeowners could

allege no damage separate and apart from the alleged faulty work that predated the

bond and affirmed dismissal of the claims against the surety without leave to amend.

In American Shoring, Inc. v. Miniscalco Construction, LLC, 2015 WL 5144028

(E.D. Pa. August 31, 2015) a subcontractor sued the prime contractor and its payment

bond surety. Apparently as a result of an official of the prime contractor being on

vacation when the complaint was served, the defendants failed to file a timely answer

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and the clerk entered their default. The defendants promptly moved to set aside the

default and tendered a proposed answer. The court weighed whether the plaintiff would

be prejudiced, whether the defendants asserted a meritorious defense, and whether the

default was the result of culpable conduct. The court concluded that each factor

weighed in favor of setting aside the default and granted the defendants’ motion.

In Western Surety Co. v. Bykev International, Inc., Case No. 14-cv-9673 (S.D.N.Y.

September 1, 2015) a customs bond surety sued the principal and indemnitors. The

defendants moved to dismiss for insufficient service of process. The court found that

validity of the alleged service was not supported by the record but denied the motion to

dismiss and gave the surety 30 days to effect proper service on the defendants.

Employers Mutual Casualty Co. v. Precision Construction & Maintenance, LLC,

Case No. 2:14-cv-1420 (E.D. La. September 17, 2015) followed the court’s prior

opinions reported at 2015 WL 5165539 (E.D. La. September 2, 2015) and 2015 WL

5254706 (E.D. La. September 8, 2015) and held that under Iowa law, which was

applicable to the case as specified in the indemnity agreement, a claim for indemnity did

not accrue until legal liability became fixed or certain. Because the surety’s liability

beyond the $10,000 it had already paid, and for which it had been awarded judgment,

was in dispute in state court litigation with the obligee, the indemnity action was

premature as to possible future losses. The court, therefore, denied the surety’s

request to stay further action until the resolution of the state court litigation and instead

dismissed the surety’s remaining claims for indemnity against future losses and

expenses without prejudice.

In Bueker v. Madison County, 2015 IL App. (5th) 140473-U (Ill. App. September

24, 2015) several citizens who allegedly lost money due to the Madison County

treasurer’s “rigging” of tax lien auctions sued, among others, the surety on the tax

collector’s public official bond. The obligee named in the bond was the Madison County

Government, and the statutes requiring the bond provided that the obligee should be

the People of the State of Illinois. The trial court dismissed the claims against the

surety, and the claimants appealed. The Court rejected the argument that the People of

the State of Illinois meant any citizen and stated, “Reading the instrument and the

language of the statute together, we find that in this instance, ‘the People of the State of

Illinois’ refers to the body politic and not the individual citizens of the county.” The Court

affirmed judgment dismissing the claims against the surety but noted that this did not

mean the surety might not ultimately have exposure should the County be found liable

for the bond principal’s misdeeds and assert its own claim.

City of Lenexa v. Western Surety Co., 2015 WL 5926951 (Kan. App. October 9,

2015) dismissed the appeal of the principal and indemnitors from an order construing

two settlement agreements because the order was not a final judgment. The Court

rejected the appellants’ argument based on the collateral order doctrine.

Rojas v. Westco Framers LLC, Case No. 15-cv-168 (D. Colo. October 21, 2015)

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apparently involved wage claims by employees of a subcontractor. The plaintiffs sought

leave to file a second amended complaint adding two additional plaintiffs. The prime

contractor and its surety opposed the motion and argued that the amendment would be

futile because the two new plaintiffs did not give notice of their claims as allegedly

required by Wyo. Stat. Ann. §16-6-113. The court assumed, in the absence of argument

to the contrary, that the statute applied to the suit but found that it required only notice of

the original institution of the action on the bond not notice each time a person was

added to the action. The court rejected the surety’s futility argument and granted the

motion for leave to amend.

In Town of Darien v. Allstate Fire Systems, LLC, 2015 WL 8487960 (Conn. Super.

November 13, 2015) the Town accepted a purported bond from a non-existent surety.

At least five unpaid subcontractors filed suits against the Town. After deducting its

costs to complete and to correct defective work, the Town was left holding a contract

balance of $168,451.27. The claims of unpaid subcontractors substantially exceeded

that amount. The Town filed this interpleader action asking to pay the contract balance

into court. The court found that the initial prerequisites for interpleader had been met

and entered an interlocutory order directing the Town to pay the contract balance into

court.

Rajagopalan v. Fidelity and Deposit Company of Maryland, 2015 WL 8213198

(W.D. Wash. December 8, 2015) dismissed an attempt by class action plaintiffs from

another case (see, Rajagopalan v. Meracord, Inc., 2015 WL 2237922 (W.D. Wash. May

12, 2015)) to sue the surety on various license bonds. The court held that a class

certified in one action could not then sue other defendants in separate actions as if the

class was some sort of free-floating, independent legal entity. The court found that the

suit against the surety was a separate action on separate contracts over which the court

did not have jurisdiction.

In Matter of the Estate of Ibarra, 2015 WL 8462090 (Iowa App. December 9, 2015)

involved an estate proceeding and the trial court’s disallowance of fees claimed by a

successor administrator and his attorney. The surety for the original administrator, who

was also an heir and admittedly took funds to which he was not entitled, had tried to

settle the matter and offered repeatedly to pay the net amount of the estate’s loss after

offsetting the amount that would have been paid to the bond principal. The successor

administrator did not use Iowa Code 633.186(2) to collect from the surety and leave the

surety to collect from the bond principal. Instead, the successor administrator insisted

on first suing the bond principal, obtaining a judgment, and then making a claim on the

surety bond. The trial court thought this needlessly increased the fees and expenses of

the successor administrator and his attorney. The trial court accordingly substantially

reduced the amount of fees and expenses allowed. The Court of Appeals agreed and

affirmed the trial court except for one small item of fees unrelated to the surety. The

surety (IMT) also appealed asking the court to limit its exposure to the amount the bond

principal took from the estate (the value of a life insurance policy), but the Court declined

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to reach that argument “as we have found in IMT’s favor on the other claims and

therefore IMT’s liability could not exceed the value of the life insurance policy.”

III. AGREEMENTS OF INDEMNITY

H. SURETY’S RIGHTS UNDER AGREEMENT OF INDEMNITY

In Fidelity and Deposit Company of Maryland v. Edward E. Gillen Co., 2015 WL

403817 (E.D. Wis. January 28, 2015) the defendant indemnitor was a part of the

principal joint venture and also a subcontractor. The surety sued for breach of the

indemnity agreement, particularly the failure to post collateral for demands made on the

surety by subcontractors of the defendant, and failure to maintain the net worth required

by an agreement with the surety. The defendant served subpoenas on the joint venture

and the other partner in the joint venture. The recipients of the subpoenas moved to

quash them as unduly burdensome. The information sought in the subpoenas included

claims asserted against the surety, set-offs the surety had asserted, and whether the

joint venture diverted payments that should have been used to satisfy the defendant’s

obligations. The court thought this information was not relevant to the surety’s claims

against the defendant and quashed the subpoenas.

Insurance Company of the West v. Afford-A-Home, Inc., 2015 WL 687413 (W.D.

Wash. February 18, 2015) added attorneys fees to the surety’s judgment against the

principal and indemnitors, see 2014 WL 6809204 (W.D. Wash. December 2, 2014).

American Contractors Indemnity Co. v. Moody, 2015 WL 877782 (Cal. App.

February 27, 2015) and Moody v. Lanak & Hanna, P.C., 2015 WL 877380 (Cal. App.

February 27, 2015) rejected appeals by the principal on a lost instrument bond. The

surety incurred expenses in successfully defending against a claim on the bond and

sued the principal to recover the expenses. The principal filed a cross-complaint

against the surety’s attorneys. The trial court granted the surety summary judgment,

granted the attorneys’ motion to strike the cross claim, and awarded fees to the

attorneys pursuant to the California Anti- SLAPP statute, Code of Civil Procedure

§425.16. The principal filed separate pro se appeals from the orders, and the Court of

Appeals affirmed. The Court characterized the principal’s briefs as “indecipherable” and

“incomprehensible” and found that the principal had not met his burden of establishing

any error by the trial court.

In Developers Surety and Indemnity Co. v. Woods of Somerset, LLC, 455 S.W.3d

487 (Mo. App. 2015) the trial court, following remand of the case after an earlier appeal

reported at 422 S.W.3d 330 (Mo. App. 2013), entered an Order stating, “judgment is

hereby entered in favor of Developers Surety and Indemnity Company.” The surety

timely moved to amend the Judgment to state the amount owed, and the trial court

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entered an amended Judgment awarding $57,000 in damages and $144,000 in

attorneys’ fees and costs. The principal and indemnitors appealed arguing that the

mandate following the first appeal just said enter judgment for the surety and the trial

court did so in its first Order and did not have jurisdiction to enter the amended

Judgment for an actual amount. The Court affirmed the amended Judgment and

awarded the surety additional attorneys’ fees and costs to be determined by the trial

court.

American Southern Insurance Co. v. Dan House Electric, Inc., Case No. 5:15-cv-

10 (M.D. Fla. April 2, 2015) entered judgment by default for the surety against the

principal and indemnitors. The court found that the surety’s complaint stated the factual

basis for its claim and that the defendants were indebted for the surety’s losses and

expenses pursuant to the general agreement of indemnity.

In Construction Services, Inc. of Duluth v. Town of Alborn, 2015 WL 1880250

(Minn. App. April 27, 2015) the bond principal sued the obligee for alleged breach of

contract. The Court affirmed summary judgment for the obligee. The Court held that the

assignment provision of the indemnity agreement was triggered by the principal’s

default, and the principal’s claim to contract funds had, therefore, been assigned to the

surety.

In Industrias Vassallo, Inc. v. Puerto Rico Electric Power Authority (In re

Industrias Vassallo, Inc.), Case No. 08-7752, Adv. Proc. No. 09-258 (Bankr. D.P.R. July

31, 2015) the surety on a utility payment bond for the bankrupt principal sought to

pursue an amended complaint in the adversary proceeding after the principal and utility

had settled their dispute and requested dismissal of the adversary proceeding. The

court held that nothing in the remaining dispute between the surety and the utility would

have any conceivable effect on the bankruptcy estate and, therefore, the Bankruptcy

Court lacked jurisdiction over the proposed amended complaint. The court concluded,

“The bankruptcy court is not the correct forum for a proceeding between two non-debtor

parties which does not affect the bankruptcy estate.”

First National Insurance Company of America v. RHJ-JOC, Inc., 2015 WL

224966 (S.D. Tex. January 15, 2015) granted the surety’s unopposed summary

judgment against the individual indemnitors and default judgment against the corporate

indemnitors.

In Travelers Casualty and Surety Co. of America v. DiPizio Construction Co., No.

14-CV-576A, 2015 WL 2151828 (W.D.N.Y. May 7, 2015), the court denied the principal

and indemnitors’ motion to stay the surety’s action in federal court pending the outcome

of litigation in state court between the principal and the obligee on a project involving the

Erie Canal Inner Harbor. The court found that the principal had not met its burden of

proof in demonstrating the necessity of the stay and noted that the legal issues in the

federal court were not the same as those pending in state court and as such, even if the

state court determined that the principal did not default on the construction contract, the

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principal’s obligation to indemnify against damages incurred by Travelers as surety to

the obligee would not be affected. The court also found that a stay would prejudice

Travelers for delaying resolution of claims pertaining to payments on bonds unrelated to

the Erie Canal Inner Harbor Project.

American Contractors Indemnity Co. v. R.E. Jenkins, Inc., 2015 WL 2184293

(M.D. La. May 8, 2015) granted summary judgment to the surety against an individual

indemnitor. The court rejected the indemnitor’s contention in her answer that the

bankruptcy discharge of her husband, who was also an indemnitor, barred the surety’s

claim against her. The court stated, “bankruptcy does not extend the effect of the filing

spouse’s discharge to the separate property of the non-filing spouse.” The court also

granted the surety a judgment by default against the bond principal which had been

properly served but failed to answer the complaint.

XL Specialty Insurance Co. v. Truland, 2015 WL 2195181 (E.D. Va. May 11, 2015)

granted summary judgment to the surety against the individual indemnitors for breach of

contract in the amount of $16,790,728.42 including prejudgment interest. The court also

held that Mr. Truland’s retirement accounts were pledged in the indemnity agreements

and that the pledge was valid and enforceable. The court reasoned that using the

accounts as part of the security for the bonds constituted a distribution of the funds in

the accounts. The court also held that the exclusion of the indemnitor’s residence from

liability for their indemnity obligations meant only the deeded lot on which their house

was located and not a larger contiguous parcel that had a different address. The court

held that certain disputed assets were part of Mrs. Truland’s sole and separate estate

and so not subject to liability for the surety’s indemnity claims. The court granted

summary judgment to the defendants on several fraud and fraudulent inducement

counts because it had already held that most of the disputed property was subject to

the surety’s claims and the remaining assets were not fraudulently misrepresented. It

denied the defendant’s motion as to other property because its transfer exhibited

badges of fraud and the alleged fraudulent intent would be an issue for trial.

In Liberty Mutual Insurance Co. v. Sumo-Nan LLC, 2015 WL 2449480 (D.Ha. May

20, 2015) the surety sued numerous indemnitors and several indemnitors filed

counterclaims. One set of indemnitors moved for summary judgment on the claims

against them, and the surety moved to strike that set of indemnitors’ counterclaims.

The court granted the surety’s motion and dismissed the counterclaims. The moving

indemnitors did not allege a breach of the indemnity agreement by the surety or specific

facts that would support a fraud claim. The counterclaim for punitive damages was not

properly asserted as punitive damages are a remedy not a separate cause of action.

The court denied the surety’s motion to strike certain exhibits incorporated into the

counterclaims as the product of settlement negotiations. The surety’s motion was moot

since the counterclaims were dismissed, but in any event its evidentiary objections were

premature. The court denied the indemnitors’ motion for summary judgment on the

surety’s claims for breach of contract, unjust enrichment and quia timet. Construing the

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facts in the surety’s favor, there were issues of fact and the summary judgment motions

were denied.

In Liberty Mutual Insurance Co. v. Integrated Pro Services, LLC, 2015 WL

3620147 (E.D. La. June 9, 2015) the public owner terminated the bonded contract for

default and the surety met its performance bond obligations by taking over completion

of the work. The principal disputed the termination, and the dispute between the

principal and the obligee was the subject of state court litigation. The surety sued the

principal and individual indemnitors seeking judgment for its net losses to date and an

order that the defendants deposit collateral for additional expected losses. Two of the

individual defendants asserted that they sold any interest in the principal shortly after

the indemnity agreement was signed, but they did not assert that they gave written

notice per the provision of the indemnity agreement to be relieved of responsibility for

future bonds. The court denied the surety’s motion for summary judgment.

The court admitted that the surety did not have to prove that it was liable to the

obligee and that the indemnity agreement required indemnity for payments made in

good faith. Since the indemnity agreement did not define good faith, the court looked to

the Louisiana Procurement Code which defined good faith at La. Rev. Stat. §39:1553(B)

as “honesty in fact in the conduct or transaction concerned and the observance of

reasonable commercial standards of fair dealing.” The court thought that “the

legitimacy of the claims against the surety bonds is relevant to the issue of Liberty

Mutual’s good faith and whether it made any payments ‘under the belief that it is, or

was, or might be liable.’” The court found that the issues of fact related to the liability on

the surety bonds would best be resolved in the pending state court litigation and denied

the surety’s motion based on the current record. The court also thought that there were

issues of fact as to the amount of the surety’s damages. The surety had spent

$3,141,480.11 and received payments of $1,586,644.04 for a net loss to date of

$1,554,836.07, but the court thought that that there were issues of fact as to what future

payments the surety might receive from the obligee or what claims the surety, as a

completing contractor, might have against the obligee. Therefore, the court concluded

“that genuine issues of material fact preclude summary judgment with respect to the

issues of damages and collateral security.”

As to the two indemnitors who argued they were not bound by the indemnity

agreement, the court thought that even though they did not follow the procedure in the

agreement to be released, the surety could nevertheless have chosen to terminate their

obligations and that there were issues of fact with respect to whether the surety did so.

The court denied the surety’s motion and entered an order to stay and administratively

close the case pending resolution of the state court litigation with the obligee. Thus, the

surety was out- of-pocket over $1.5 million in meeting its bond obligations but was left

with no recourse against the indemnitors pending the state court’s determination of the

principal’s dispute with the obligee.

American Southern Insurance Co. v. Environmental Innovations, Inc., 2015 WL

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3863635 (M.D. Fla. June 22, 2015) adopted the recommendation of the Magistrate

Judge and entered a default judgment against the principal and indemnitor in the

amount of the surety’s paid losses and expenses and ordered the defendants to post

collateral in the amount of the surety’s reserve against future losses. The court gave

the surety 30 days to file a motion of attorneys fees. The court denied the surety’s other

requests for relief such as that the defendants be ordered not to transfer or encumber

their assets, that they be ordered to produce books and records and that the court

retain jurisdiction to increase the judgment should the surety suffer additional losses.

The Magistrate Judge thought that this additional relief either was not supported by the

allegations of the complaint and the surety’s motion or was duplicative of the relief now

available to the surety as a judgment creditor.

Philadelphia Indemnity Insurance Co. v. Manitou Construction, Inc., 2015 WL

3904557 (N.D. Ga. June 25, 2015) granted the surety summary judgment against the

principal and individual indemnitor in the amount of the surety’s losses, expenses and

attorneys fees. The court found that “the undisputed evidence of record, including the

declaration of Philadelphia’s bond claim representative and the documents attached

thereto” established the fact and amount of the defendants’ liability.

Hanover Insurance Co. v. Persaud Companies, Inc., 2015 WL 4496448 (D.Md.

July 22, 2015) entered a default judgment for the surety against the principal and

indemnitors. The court reviewed the surety’s evidence and held that it supported entry

of judgment for the amount of the surety’s losses and expenses, including attorneys

and consultant fees.

Arch Insurance Co. v. Nizar and Nuha Katbi Family Trust, 610 Fed. Appx. 622 (9th

Cir. 2015) affirmed summary judgment for the surety against several indemnitors. The

defendants executed the indemnity agreement in 2006. In 2007 the principal wrote the

surety indicating it was switching sureties. In 2009 the principal returned to the surety.

No new indemnity agreement was signed, and the surety showed that the defendants

treated the agreement as still in force. The Court rejected the defendants’ argument that

the 2007 letter terminated the indemnity agreement and stated, “The parties never

abandoned that contract, and Katbi is estopped from claiming that they did.”

Berkley Regional Insurance Co. v. Trademark Construction, Inc., 2015 WL

4999801 (S.D. Ala. August 21, 2015) adopted the recommendation of the Magistrate

Judge and entered a default judgment against the principal and indemnitors in the

amount of the surety’s net losses and expenses.

Hanover Insurance Co. v. Red Cliff, Inc., 2014 WL 10121215 (W.D. Tex. October

7, 2015) entered a default judgment for the surety against the principal and indemnitors

in the amount of the surety’s losses and expenses plus pre and post judgment interest.

The court found that no hearing on damages was necessary because the affidavits and

supporting evidence provided by the surety established the amount owed.

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In Washington International Insurance Co. v. Lynch Botelho Corp., No. 1:14-cv-

11632, 2015 WL 6453145 (D. Mass. October 23, 2015), the surety sued the principal

and indemnitors, and the court granted the surety summary judgment for the amount of

its payment to settle a payment bond claim, less a partial payment made by the

defendants. The surety was directed to submit a proposed form of final judgment

including an explanation of its calculation of prejudgment interest. The court also stated

that it would “review the documentation of WIIC’s request for attorney’s fees and enter

an award in conjunction with the entry of final judgment.”

In Washington International Insurance Co. v. Lynch Botelho Corp., 2015 WL

6453145 (D. Mass. October 23, 2015) the surety sued the principal and indemnitors.

The court granted the surety summary judgment for the amount of its payment to settle

a payment bond claim, less a partial payment made by the defendants, and directed the

surety to submit a proposed form of final judgment that included an explanation of its

calculation of prejudgment interest. The court also stated that it “will review the

documentation of WIIC’s request for attorney’s fees and enter an award in conjunction

with the entry of final judgment.”

Financial Casualty & Surety, Inc. v. Parker, 2015 WL 6684552 (S.D. Tex.

November 2, 2015) granted the surety summary judgment against an agent based on

the agent’s contractual obligation to indemnify the surety. The defendant argued that

the surety’s claim was barred by the statute of limitations, but the court found that under

Texas law the indemnification cause of action accrued upon entry of judgment against

the surety rather than upon forfeiture of the bond or the principal’s failure to appear.

The bonds were for cases in New Jersey, and under New Jersey procedure the earliest

the judgment would have been entered was 75 days after the forfeiture order. The court

did not need to reach the surety’s arguments as to the effect of remission proceedings

or other causes of delay because even using the earliest date the surety’s suit was

timely. The court found that the surety’s calculations gave the defendant the credits to

which she was entitled and correctly calculated the amount owed. The court entered

judgment for that amount plus prejudgment interest and attorneys fees.

Trustees of the Sheet Metal Workers’ International Association Local Union No. 28

Benefit Funds v. Metropolis Sheetmetal Contractors, Inc., 2015 WL 6736122 (S.D.N.Y.

November 3, 2015) granted the defendant, third party plaintiff surety a judgment by

default against an individual indemnitor.

Liberty Mutual Insurance Co. v. Sumo-Nan LLC, 2015 WL 7303523 (D. Ha.

November 18, 2015) granted the surety’s motion for partial summary judgment on its

breach of contract claim against the principal. The court found that the surety met its

obligations and the principal had breached the indemnity agreement. The court

rejected various arguments put forward by the principal based on allegations that the

surety did not first collect from other indemnitors. The court found, “Nothing in the

agreements offered by the parties obligated Liberty Mutual to pursue each of its

indemnitors, or each of its indemnitors in any particular order, much less offered Sumo-

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Nan absolution in the event Liberty Mutual chose to pursue it first.” The court also

denied the principal’s request under Rule 56(d) to delay resolution of the surety’s

summary judgment motion pending additional discovery.

In Employers Mutual Casualty Co. v. B5 Inc., 2015 WL 7451150 (D. Ariz.

November 23, 2015) the surety paid losses and expenses under bonds for a defaulted

subcontractor on a federal project in Arizona. The surety sued the principal and

indemnitors and moved for partial summary judgment seeking both a judgment for its

losses and expenses to date and specific performance of the collateral deposit

provision in the indemnity agreement. The defendants argued that the obligee prime

contractor was at fault and its failures prevented the principal from returning to the

project and finishing its work. The surety submitted an affidavit and spreadsheet listing

its payments. The Magistrate Judge termed this a “minimalist” declaration establishing

the surety’s payments but thought that an affidavit from one of the indemnitors blaming

the obligee for problems on the project raised “genuine issues of material fact regarding

whether EMC breached the covenant of good faith and fair dealing by paying the sum

of $1,154,069.95 under the Bond.” On the issue of specific performance of the

collateral deposit obligation, the Magistrate Judge denied the surety’s motion because,

“an adequate remedy at law may exist for indemnification and genuine issues of

material fact exist as to whether the Plaintiff has acted inequitably in this case.”

In Aspen American Insurance Co. v. Albania Travel & Tour, Inc., 2015 N.Y. Slip.

Op. 32264 (U) (N.Y. Sup. Ct N.Y. Co. November 30, 2015) the surety on a travel

agent’s bond paid the obligee and sued the principal and indemnitor. The court granted

summary judgment to the surety finding that the surety performed its bond obligation in

good faith. The court entered judgment for the amount of the surety’s loss payment plus

costs and referred the surety’s claims for attorneys fees to a referee to determine the

amount of the fees.

Western Surety Co. v. Bothern Contracting LLC, Case No. 4:15-cv-39 (E.D.N.C.

December 2, 2015) granted the surety summary judgment against the principal and an

individual indemnitor in the amount of the surety’s losses and expenses. The other

individual indemnitor had apparently filed for Chapter 13 bankruptcy. The court noted

that an automatic stay normally results from a bankruptcy filing and denied the surety’s

motion as to that defendant without prejudice. The court also certified the judgments

against the principal and one indemnitor as final.

Platte River Insurance Co. v. Premier Power Renewable Energy, Inc., 2015 WL

8328265 (E.D. Cal. December 9, 2015) granted the surety partial summary judgment

against two individual indemnitors. The surety’s motion sought indemnity for its losses

and expenses to date, and the defendants did not oppose the motion. The court noted

that the bond principal had not filed a responsive pleading in the case and that the

surety was separately seeking a default judgment against it.

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In RLI Insurance Co. v. Russell, Case No. 2:14-cv-2479 (D. Kan. December 23,

2015) the surety sued the principal and indemnitors for breach of the indemnity

agreement and sued several individuals for fraud in obtaining progress payments by

misrepresentations. The defendants filed motions to dismiss for failure to state a claim,

improper venue and failure to file the claims as compulsory counterclaims in suits on the

bonds. The court noted that, “Incredibly, not one shred of authority is cited in support of

these various arguments for dismissal of the contractual indemnity claims” and denied

the motions as to suit for breach of the indemnity agreement. The court rejected the

argument that the claims should have been asserted in the bond actions holding that

such cross claims are permissive not compulsory. The court also held that the venue

provisions applicable to suits on the bonds did not govern venue of the indemnity action

and that venue for the surety’s suit was proper. Finally, the court noted that the action

was not premature even though the surety did not yet know the total of its ultimate

losses. The damages to date exceeded the jurisdictional amount, and the ultimate

amount owed would be determined at trial.

One indemnitor argued that the case should be dismissed as to her because her

signature was not notarized. The court found that there was no statutory or other

requirement for a notarized signature and a jury could plausibly decide that she signed

the agreement and intended to be bound. The court did grant the motion to dismiss as

the surety’s claim for non-contractual indemnification against the defendants other than

the bond principal. The court also found that the fraud allegations did not meet the

heightened pleading requirements of Rule 9(b), F.R.C.P. in that the surety did not allege

which defendants made which fraudulent misrepresentations and, with one exception,

did not allege the specific dates of the fraudulent representations. The court granted

the surety leave to amend its complaint to meet the specificity requirements of Rule 9(b)

and denied the motion to dismiss without prejudice to its re-assertion if the amended

complaint was not adequate. The court rejected the individual defendants’ argument

that Kan. Stat. §17-7688 shielded them from personal liability because the bond

principal was an LLC. They were sued for their own actions not vicariously for the

LLC’s, and the fraud claims were separate from the breach of contract claims.

I. INDEMNITOR DEFENSES TO LIABILITY

In Guarantee Company of North America v. Metro Contracting, Inc., 2015 WL

402909 (D.S.C. January 28, 2015) the surety sued the principal and two individual

indemnitors. One of the individual indemnitors asserted that her signature on the

indemnity agreement was forged and filed cross claims and third party claims against

persons allegedly involved. The surety settled with the principal and the other

indemnitor, moved for judgment per the settlement and moved to dismiss its claim

against the indemnitor whose signature was allegedly forged. That indemnitor filed a

Rule 11 motion against the surety and objected to dismissal of the other claims. The

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court denied the Rule 11 motion, entered judgment pursuant to the settlement,

dismissed the surety’s claims against the objecting indemnitor with prejudice and

dismissed her other various claims without prejudice.

In Travelers Casualty & Surety Company of America v. Costanza, 3 N.Y.S.3d 810

(N.Y.A.D. 2015) the surety paid the penalty of its motor vehicle dealer bond and sued an

individual indemnitor. The trial court granted summary judgment to the surety, and the

indemnitor appealed. In a 4-1 decision, the Appellate Division reversed because it

thought the indemnitor’s evidence established an issue of material fact. The indemnitor

alleged that he contacted the agent through whom the bond was written, told the agent

he was no longer involved with the business of the principal, and asked that the bond

be cancelled. He argued that the agent represented the surety. The Appellate Division

also held that the indemnitor should have been permitted to amend his answer to assert

as an affirmative defense that his individual liability had been terminated prior to the

acts or omissions that gave rise to the bond claims. The dissenting Justice would have

affirmed summary judgment for the surety because the record did not support an

inference that the agent was acting as an agent for the surety as opposed to acting as a

broker representing the principal and indemnitor.

In Fidelity and Deposit Co. of Maryland v. M. Hanna Construction Co. Inc., No.

4:14-cv-170, 2015 WL 632047 (E.D. Tex. Feb. 13, 2015), plaintiffs filed a motion for

summary judgment against a surety that had issued payment and performance bonds

for certain contractors. Because the plaintiffs had established all the elements to

recover for breach of an indemnity agreement under Texas law, the only remaining

argument against granting the plaintiff’s motion for summary judgment was that the

plaintiff had only moved for summary judgment with regard to some of the projects that

had not been completed. The defendant therefore argued that the performance bonds

issued on the projects as to which the plaintiff had not sought summary judgment could

result in a setoff in the defendant’s favor. The court recognized that there might, in fact,

be a setoff, but nonetheless granted the plaintiff’s motion for summary judgment, noting

that it would be more efficient and expeditious to do so rather than to hold off until the

final amount of the loss was clear. The court also granted a cross-motion for partial

summary judgment by the defendants which sought to void the homestead waiver

provision in the indemnity agreement. The court granted the defendant’s motion for

summary judgment on this limited issue, finding that those types of exemption

provisions were illegal in Texas and should be carved out of an otherwise enforceable

contract.

In XL Specialty Insurance Co. v. Truland, 2015 WL 925582 (E.D. Va. March 3,

2015) the defendant indemnitors moved to dismiss the counts of the surety’s complaint

alleging fraud and misrepresentation. The court found that the surety adequately

alleged that the defendants misrepresented their financial condition to induce the surety

to enter into and continue a bonding relationship and pled the factual basis for the fraud

and misrepresentation claims. The defendants also argued that these claims were time

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barred, but the court found that a factual basis to determine when the claims arose was

not shown on the face of the complaint and so could not be raised in a motion to

dismiss. The court denied the motions to dismiss the fraud and misrepresentation

claims. The court granted the motion and dismissed the surety’s claim for breach of

fiduciary duty as subsumed within the surety’s breach of contract claims. Under Virginia

law, a separate common law duty must exist in order to give rise to both a breach of

contract and a breach of fiduciary duty claim. The court found that “Outside of the

contractual relationship, Defendants owed no independent common law duty to

Plaintiffs.”

XL Specialty Insurance Co. v. Truland, 2015 WL 925595 (E.D. Va. March 3, 2015)

dismissed the indemnitors counterclaims. The defendants alleged that the surety did not

handle its collateral in a commercially reasonable manner and did not enforce the

principals’ contracts to collect sums supposedly owed to the principals. The court found

that these counterclaims were asserted to reduce or eliminate the debts the defendants

owed to the surety and were more properly pled as affirmative defenses.

Gray Insurance Co. v. Terry, 606 Fed.Appx. 188 (5th Cir. 2015) affirmed summary

judgment for the surety against two individual indemnitors. The Court found that the

surety established a prima facie case and the defendants had not presented evidence

indicating that the surety acted in bad faith or that the attorneys fees incurred by the

surety were excessive.

Lexon Insurance Co. v. Naser, 781 F.3d 335 (6th Cir. 2015) affirmed judgment for

the surety reported at 2014 WL 1509289 (E.D.Mich. April 16, 2014). The defendant

was a part owner of a supplier of durable medical equipment, prosthetics and orthotics.

He signed the bond application in two places – on behalf of the corporate principal and

as an individual indemnitor. The Court agreed with the trial court’s findings that the

defendant signed the indemnity agreement in his individual capacity and that the surety

did not act in bad faith in paying the claim of the Centers for Medicare and Medicaid

Services.

Contractors Bonding and Insurance Co. v. Berry, 2015 WL 3855299 (Wash. App.

June 22, 2015) affirmed summary judgment for the surety against the principal and

individual indemnitors. The defendants’ primary argument was that the trial court

should have granted a continuance of the hearing on the summary judgment motion so

that they could conduct discovery. The Court found, however, that they had not shown

any valid reason the discovery was not conducted in the more than ample time the suit

had been pending or what relevant facts they alleged they could have developed with

the discovery. The Court found that the affidavit submitted by the surety was made on

personal knowledge and supported entry of summary judgment.

In Developers Surety and Indemnity Co. v. Krause, 2015 WL 3962287 (N.D. Ill.

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June 29, 2015) the surety sued the principal and indemnitors. The defendants moved

to dismiss the complaint because the surety had separately sued the agent responsible

for issuing the bonds alleging that they were unauthorized. The fact remained that the

surety had honored its obligations on the bonds and paid the principal’s debts, and the

court denied the motion to dismiss. Neither collateral estoppel nor judicial estoppel

applied, and “Most fundamentally, however, nothing presented in Defendants’ motion

suggests that Developers’ pleadings are inconsistent between the two cases.”

In Platte River Insurance Co. v. Khan, 2015 WL 4104687 (E.D.N.Y. July 7, 2015)

the sureties on cigarette tax bonds paid losses and expenses, recovered substantial

sums in settlements in the principal’s bankruptcy proceeding, and sued indemnitors to

recover the balance of their losses and expenses plus interest. The court granted the

sureties’ motions for summary judgment. The defendants argued that they were

discharged by the bankruptcy settlements, but the settlement documents explicitly

reserved the sureties’ rights against any non-bankrupts and the court found that the

settlements for less than the entire debt were reasonable and in good faith. The court

also rejected arguments based on release of certain indemnitors as to future bonds

since the losses and expenses were incurred under bonds already written. The court

entered judgment for the sureties’ respective net losses and expenses plus

prejudgment interest.

Arch Insurance Co. v. Nizar and Nuha Katbi Family Trust, 610 Fed. Appx. 622 (9th

Cir. 2015) affirmed summary judgment for the surety against several indemnitors. The

defendants executed the indemnity agreement in 2006. In 2007 the principal wrote the

surety indicating it was switching sureties. In 2009 the principal returned to the surety.

No new indemnity agreement was signed, and the surety showed that the defendants

treated the agreement as still in force. The Court rejected the defendants’ argument that

the 2007 letter terminated the indemnity agreement and stated, “The parties never

abandoned that contract, and Katbi is estopped from claiming that they did.”

3D Bail Bonds v. Douglas, 2015 WL 7709250 (Conn. Super. October 19, 2015)

entered judgment for the surety against several individual indemnitors for the amount

owed on bail bond premiums and rejected the argument of some of the defendants that

although they signed the documents they did not read or understand them.

In Travelers Casualty & Surety Co. v. HUB Mechanical Contractors, Inc., 2015 WL

6142841 (S.D. Miss. October 19, 2015) the surety sued the principal, two individual

indemnitors, and, in an amended complaint, another company owned by one of the

indemnitors. The court noted that one of the indemnitors, Mr. Curry, testified at his

deposition that he forged his wife’s signature to the indemnity agreement “on the advice

of Jones [the surety’s agent], as he knew she would not consent to signing and

Travelers would not issue bonds for Hub Mechanical without her signature.” Upon

various motions for summary judgment and partial summary judgment the court noted

that the surety did not dispute the forgery and granted summary judgment to Mrs. Curry

because she “would only be liable to Travelers through the Indemnity Agreement which

1047843.1

she did not sign.”

The court granted the surety partial summary judgment on its fraud claim against

Mr. Curry as to liability leaving the amount of damages to be proven. In doing so, the

court rejected Mr. Curry’s argument that the agent’s knowledge should be imputed to

the surety. The agent was acting against the surety’s interest.

Mr. Curry admitted signing the Indemnity Agreement but claimed to have sent a

letter terminating his liability as to any future performance bonds before the bonds at

issue were written. The agent and the surety denied receiving such a letter. The court

granted the surety summary judgment as to its payment bond losses, which it thought

would not be covered by the alleged letter even if it existed. However, in a revised

opinion reported at 2015 WL 6158826 (S.D. Miss. October 20, 2015) the court held that

under Mississippi law there was an issue of fact as to whether performance bonds

could be understood to include payment bonds and denied the surety summary

judgment as to the payment bond losses.

The court granted the new, successor corporation summary judgment because the

surety did not amend its complaint to sue the new entity for over three years after it was

aware of the facts. The court held that the general three year statute of limitations

barred the claim. Finally, the court granted the surety summary judgment dismissing

various counterclaims asserted by the defendants for abuse of process, intentional tort,

intentional interference with business relations and conspiracy because “Defendants

have had adequate opportunity for discovery and have failed to make a showing

sufficient to establish essential elements in all of their counterclaims.”

In Travelers Casualty & Surety Co. v. HUB Mechanical Contractors, Inc., No.

2:13-cv-101, 2015 WL 6159151 (S.D. Miss. October 20, 2015) the court decided three

motions in limine filed by the surety. The court first granted the motion to preclude an

argument that the surety failed to mitigate its damages because the alleged failure to

mitigate was an affirmative defense under Mississippi law and the defendants did not

plead it. The court also granted the motion to prevent the defendants from

characterizing the plaintiff as an “insurance company” because the defendants admitted

the plaintiff was acting as a surety and said they had no intention of characterizing it as

an insurance company. The court denied the surety’s motion as to an alleged letter

terminating the remaining indemnitor’s liability because the letter, if it existed, would be

relevant and the court found that the alleged letter could apply to payment bond losses

even though it said “performance bonds.” The court thought that the letter would be

relevant “to determine whether an intent to terminate the indemnity agreement with

regards to both kinds of bonds was conveyed to Travelers.”

Western Surety Co. v. Bothern Contracting LLC, Case No. 4:15-cv-39 (E.D.N.C.

December 2, 2015) granted the surety summary judgment against the principal and an

individual indemnitor in the amount of the surety’s losses and expenses. The other

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individual indemnitor had apparently filed for Chapter 13 bankruptcy. The court noted

that an automatic stay normally results from a bankruptcy filing and denied the surety’s

motion as to that defendant without prejudice. The court also certified the judgments

against the principal and one indemnitor as final.

J. COLLATERAL DEPOSIT DEMANDS/PRELIMINARY INJUNCTIONS

In Selective Ins. Co. of Am. v. Envtl., Safety & Health, Inc., No. 3:14-CV-531-

TAV-CCS, 2015 WL 914824, at *1 (E.D. Tenn. Mar. 3, 2015), Selective Insurance

Company of America's (“Selective”) filed a Motion for Preliminary Injunction for Deposit

of Collateral, Deposit of Proceeds of Bonded Contracts into Trust Account, and Access

to Books and Records against defendants Environmental, Safety & Health, Inc. (“ESH”),

William Garibay (“Garibay”), and Go Fish LLC (“Go Fish”) (ESH, Garibay, and Go Fish,

collectively, the “Indemnitors”). The Indemnitors did not file a response to the motion for

injunctive relief, but together with plaintiff, submitted a proposed agreed order resolving

the motion. The other defendant in the action, First Tennessee Bank (“First

Tennessee”), filed a response in opposition to the motion for injunctive relief, also noting

its objection to the proposed order, asserting that the requested relief interfered with the

bank's collateral rights. First Tennessee also filed a motion to dismiss the conversion

claims against it. The Court denied the motion to dismiss and granted Selective’s

motion for injunctive relief. In arguing that the conversion claim should be dismissed,

First Tennessee took issue with the last element required to state a claim for

conversion: defying the true owner's rights. It argued that “unless Selective's allegations

establish that Selective was the ‘true owner’ of the funds at issue with an immediate and

superior right of possession at the time of First Tennessee's exercise of dominion over

the funds, then First Tennessee's actions as a secured creditor were authorized by law

under its consensual lien on ESH's accounts....” The court disagreed, explaining that

under the unambiguous language of the General Agreement of Indemnity (“GAI”), ESH

had agreed to hold all bonded contract proceeds in trust for the benefit of Selective and

ESH's subcontractors and suppliers and for the exclusive purpose of satisfying the

conditions of the bonds. Consequently, the court found that Selective had established

itself as the “true owner” of the property at issue. First Tennessee also argued that it

did not defy Selective's rights because paragraph 11 of the GAI subordinated

Selective's interest in the bonded contract proceeds to First Tennessee's purported

security interest. The court, however, agreed with Selective’s argument that “to the

extent ESH assigned its interest in the bonded contract proceeds as collateral, that

interest would not attach until the purpose of the trust was satisfied.” The court

therefore found that Selective had successfully stated a claim for conversion and denied

the motion to dismiss. On the motion for injunctive relief, the court granted the motion,

finding that Selective had successfully shown a likelihood of success on the merits, the

potential harm others, a public interest, and irreparable harm.

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In Travelers Casualty and Surety Co. of America v. Padron, No. 5:15-CV-200-

DAE, 2015 U.S. Dist. LEXIS 57265 (W.D. Tex. May 1, 2015), in consideration for

issuing certain construction bonds, the bond principals executed an indemnity

agreement in favor of Travelers which not only obligated the bond principals to deposit

collateral with Travelers sufficient to cover any loss, but also obligated the indemnitors

to provide Travelers access to its books and records upon demand. After receiving

claims exceeding $5.5 million, Travelers, concerned about the financial condition of the

bond principals and suspicious as to whether the bond principals were properly applying

the contract funds, demanded that the bond principals deposit $2 million in collateral

and make their books and records available for examination. The demands went

unanswered, and Travelers filed a complaint seeking specific performance of the bond

principals’ obligations under the indemnity agreement as well as injunctive relief. The

court denied the motion to require the principals to deposit $2 million in collateral, noting

that although Travelers had no adequate remedy at law, the harm facing Travelers was

not irreparable because Travelers could recover the collateral through specific

performance. However, the court granted Travelers’ motion to grant access to the

books and records because Travelers could not assess the financial stability of the bond

principals, the viability of the bond claims, or its potential liability on those claims without

access to the bond principals’ books and records and would suffer irreparable harm

without such access because the rights would be rendered meaningless if they had to

await final judgment. The principals did not make any rebuttal argument, which the

court weighed this factor in favor of Travelers. The court also accepted Travelers’

argument that an injunction was within the public interest because public policy supports

protecting sureties and enforcing explicit terms of agreement entered into between

knowledgeable parties.

In Liberty Mutual Insurance Co. v. Integrated Pro Services, LLC, 2015 WL

3620147 (E.D. La. June 9, 2015) the public owner terminated the bonded contract for

default and the surety met its performance bond obligations by taking over completion

of the work. The principal disputed the termination, and the dispute between the

principal and the obligee was the subject of state court litigation. The surety sued the

principal and individual indemnitors seeking judgment for its net losses to date and an

order that the defendants deposit collateral for additional expected losses. Two of the

individual defendants asserted that they sold any interest in the principal shortly after

the indemnity agreement was signed, but they did not assert that they gave written

notice per the provision of the indemnity agreement to be relieved of responsibility for

future bonds.

The court denied the surety’s motion for summary judgment. The court admitted

that the surety did not have to prove that it was liable to the obligee and that the

indemnity agreement required indemnity for payments made in good faith. Since the

indemnity agreement did not define good faith, the court looked to the Louisiana

Procurement Code which defined good faith at La. Rev. Stat. §39:1553(B) as “honesty

in fact in the conduct or transaction concerned and the observance of reasonable

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commercial standards of fair dealing.” The court thought that “the legitimacy of the

claims against the surety bonds is relevant to the issue of Liberty Mutual’s good faith

and whether it made any payments ‘under the belief that it is, or was, or might be

liable.’” The court found that the issues of fact related to the liability on the surety bonds

would best be resolved in the pending state court litigation and denied the surety’s

motion based on the current record. The court also thought that there were issues of

fact as to the amount of the surety’s damages. The surety had spent $3,141,480.11

and received payments of $1,586,644.04 for a net loss to date of $1,554,836.07, but the

court thought that that there were issues of fact as to what future payments the surety

might receive from the obligee or what claims the surety, as a completing contractor,

might have against the obligee. Therefore, the court concluded “that genuine issues of

material fact preclude summary judgment with respect to the issues of damages and

collateral security.”

As to the two indemnitors who argued they were not bound by the indemnity

agreement, the court thought that even though they did not follow the procedure in the

agreement to be released, the surety could nevertheless have chosen to terminate their

obligations and that there were issues of fact with respect to whether the surety did so.

The court denied the surety’s motion and entered an order to stay and administratively

close the case pending resolution of the state court litigation with the obligee. Thus, the

surety was out- of-pocket over $1.5 million in meeting its bond obligations but was left

with no recourse against the indemnitors pending the state court’s determination of the

principal’s dispute with the obligee.

American Southern Insurance Co. v. Environmental Innovations, Inc., 2015 WL

3863635 (M.D. Fla. June 22, 2015) adopted the recommendation of the Magistrate

Judge and entered a default judgment against the principal and indemnitor in the

amount of the surety’s paid losses and expenses and ordered the defendants to post

collateral in the amount of the surety’s reserve against future losses. The court gave

the surety 30 days to file a motion of attorneys fees. The court denied the surety’s other

requests for relief such as that the defendants be ordered not to transfer or encumber

their assets, that they be ordered to produce books and records and that the court

retain jurisdiction to increase the judgment should the surety suffer additional losses.

The Magistrate Judge thought that this additional relief either was not supported by the

allegations of the complaint and the surety’s motion or was duplicative of the relief now

available to the surety as a judgment creditor.

In Safeco Insurance Company of America v. JAAAT Technical Services, LLC,

2015 WL 3886149 (E.D. Va. June 23, 2015) the surety provided bonds for the prime

contractor on several federal projects located in Georgia and North Carolina. The prime

contractor subcontracted “essentially all of the work” on each project to Tetra Tech

Tesoro, Inc. (TTT). The surety sued the prime contractor seeking, among other things,

an injunction freezing the prime contractor’s assets. The court entered a consent order

for a preliminary injunction directing that any payments on the bonded jobs be made as

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directed by the surety. In submitting the consent order, however, “JAAAT and Safeco

neglected to tell this court about the other lawsuits arising from the projects” including a

preliminary injunction entered by a North Carolina trial court requiring “JAAAT not to

spend any of its money received from the North Carolina projects on anything or any

entity except TTT.” The court stated, “Obviously trying to get around the North Carolina

injunction, neither JAAAT nor Safeco told the Court that the North Carolina case even

existed, much less had resulted in an injunction governing JAAAT’s funds.” The court

thought that the comity and Rooker-Feldman doctrines and the court’s equitable

concerns together required the court to vacate its preliminary injunction and deny the

prime contractor’s request for an injunction against TTT, which had been added to the

case as a third party defendant after entry of the consent order.

Great American Insurance Co. v. RDA Construction Corp., 2015 WL 5163043 (D.

Mass. September 3, 2015) granted the surety summary judgment against the principal

and indemnitors. The court recognized that good faith under the indemnity agreement

required only that the surety not act with a dishonest purpose, conscious wrong doing, or

ill will. Bad faith required more than bad judgment, negligence or insufficient zeal. The

defendants contested the obligee’s termination of the bonded contract and the way that

the surety elected to re-procure the work, but the court found that many of the

defendants’ allegations were not supported by the record and that even if they were they

would not rise to the level of bad faith. The surety acted within its rights under the

indemnity agreement. The court granted the surety summary judgment on its claims for

indemnity, for specific performance of the collateral deposit provision of the indemnity

agreement and for quia timet and exoneration. Finally, the court dismissed various

counterclaims filed by the defendants, which the court found failed for the same reasons

the surety was entitled to affirmative relief.

Employers Mutual Casualty Co. v. Precision Construction & Maintenance, LLC,

Case No. 2:14-cv-1420 (E.D. La. September 17, 2015) followed the court’s prior

opinions reported at 2015 WL 5165539 (E.D. La. September 2, 2015) and 2015 WL

5254706 (E.D. La. September 8, 2015) and held that under Iowa law, which was

applicable to the case as specified in the indemnity agreement, a claim for indemnity did

not accrue until legal liability became fixed or certain. Because the surety’s liability

beyond the $10,000 it had already paid, and for which it had been awarded judgment,

was in dispute in state court litigation with the obligee, the indemnity action was

premature as to possible future losses. The court, therefore, denied the surety’s

request to stay further action until the resolution of the state court litigation and instead

dismissed the surety’s remaining claims for indemnity against future losses and

expenses without prejudice.

Argonaut Insurance Co. v. HK&S Construction Holding Corp., Case No. 3:15-cv-

2764 (N.D. Tex. October 6, 2015) entered a Temporary Restraining Oder directing the

principal and indemnitors to deposit collateral equal to the surety’s reserve within 14

days from the date of the Order.

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In Great American Insurance Co. v. Fountain Engineering, Inc., No. 15-CIV-

100682015, WL 6395283 (S.D. Fla. October 22, 2015), the court denied the surety’s

motion for a preliminary injunction ordering the principal and indemnitors to deposit

collateral as required by the indemnity agreement despite recognition of the substantial

body of law supporting the surety’s request. In considering the factor of irreparable

harm, the court both disregarded the contractual provision acknowledging such harm

and rejected the cases finding that having to pay with the surety’s own money and seek

reimbursement would be such harm.

In Ohio Casualty Insurance Co. v. Campbell’s Siding & Windows, 2015 WL

6758137 (D. Idaho November 4, 2015) the surety sued the principal and indemnitors.

The surety moved for a preliminary injunction requiring deposit of collateral as provided

in the indemnity agreement. The defendants did not oppose the motion, but the court

nevertheless denied it because the court thought the surety had not established

irreparable harm. The court recognized that the surety had met the other requirements

for a preliminary injunction but stated, “As to irreparable injury, however, the Court finds

OCIC has not satisfied this element. The injury complained of in the Motion for

Preliminary Injunction is economic. In its Motion, OCIC seeks an injunction ordering the

Defendants to deposit collateral security in the amount of $870,220. (Dkt.3.) Such

relief is economic and does not establish irreparable injury that cannot be remedied

later.”

In Employers Mutual Casualty Co. v. B5 Inc., 2015 WL 7451150 (D. Ariz.

November 23, 2015) the surety paid losses and expenses under bonds for a defaulted

subcontractor on a federal project in Arizona. The surety sued the principal and

indemnitors and moved for partial summary judgment seeking both a judgment for its

losses and expenses to date and specific performance of the collateral deposit

provision in the indemnity agreement. The defendants argued that the obligee prime

contractor was at fault and its failures prevented the principal from returning to the

project and finishing its work. The surety submitted an affidavit and spreadsheet listing

its payments. The Magistrate Judge termed this a “minimalist” declaration establishing

the surety’s payments but thought that an affidavit from one of the indemnitors blaming

the obligee for problems on the project raised “genuine issues of material fact regarding

whether EMC breached the covenant of good faith and fair dealing by paying the sum

of $1,154,069.95 under the Bond.” On the issue of specific performance of the

collateral deposit obligation, the Magistrate Judge denied the surety’s motion because,

“an adequate remedy at law may exist for indemnification and genuine issues of

material fact exist as to whether the Plaintiff has acted inequitably in this case.”

Great American Insurance Co. v. JMR Construction Corp., Case No. 2:15-cv-2226

(D. Nev. November 25, 2015) granted the surety a temporary restraining order to

prevent several indemnitors from alienating real property, and ordered the indemnitors

to provide the surety with collateral and access to the indemnitors’ books and records.

The court also restrained the indemnitors and all persons acting in concert with them

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from alienating, transferring, selling or liening the indemnitors’ real and personal

property until the collateral was posted.

Insurance Company of the State of Pennsylvania v. Lakeshore Toltest JV, LLC,

2015 WL 8488579 (S.D.N.Y. November 30, 2015) denied the surety’s motion for a

preliminary injunction ordering the indemnitors to deposit collateral to collateralize the

surety against substantial expected losses. The court adopted a very narrow view of

irreparable harm as occurring only if there is a threatened, imminent loss that will be

very difficult to quantify at trial. The court distinguished the cases relied upon by the

surety and found that the surety had not established irreparable harm. The court also

thought that the surety had delayed in seeking the injunction and that this alleged delay

undercut the contention that the surety faced irreparable harm.

Safeco Insurance Company of America v. Lawrence Brunoli, Inc., 2015 WL 7760159 (D. Conn. December 2, 2015) considered the surety’s request for supplemental relief following remand from the Court of Appeals. The Second Circuit affirmed the court’s order that the principal and indemnitors deposit collateral and directed recalculation of the amount of the collateral in light of events since the original order was entered, see 559 Fed.Appx. 9 (2nd Cir. 2015). The appeal did not include the district court’s original award of attorneys’ fees, which the defendants paid. After remand the surety sought to add to its judgment its fees and costs on appeal, its fees to meet the court’s directions to supplement its original fee application, its fees in a payment bond suit, and its fees in responding to the indemnitors’ complaint to the Connecticut Department of Insurance.

The court found that it had supplemental jurisdiction over the request for fees on

appeal and entered judgment for the amount claimed. The court denied fees for

supplementing the original fee application on the theory that it would be making two fee

awards for the same time period. The court found that it did not have supplement

jurisdiction over the claims for fees in the payment bond suit and DOI proceeding and

denied the application as to them without prejudice to the surety asserting them in a

separate proceeding.

Great American Insurance Co. v. JMR Construction Corp., 2015 WL 8328267 (D.

Nev. December 8, 2015) granted the surety an unopposed preliminary injunction

requiring the principal and indemnitors to deposit collateral and provide access to

specified books and records. On November 25 the court had granted a temporary

restraining order, and the preliminary injunction opinion followed the same reasoning.

IV. BAD FAITH

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In Clark County School District v. Travelers Casualty and Surety Co. of America,

No. 2:13-cv-01100-JCM-PAL. 2015 WL 139399 (D. Nev. Jan. 12, 2015), the court

dismissed a claim for breach of the implied covenant of good faith and fair dealing that

was filed against a surety, noting that Nevada precludes claims of bad faith by principals

against sureties. The court also denied a motion for summary judgment by the plaintiff,

finding the motion premature because the defendant had not yet had time to conduct

discovery on whether the plaintiff itself had caused some of the delays at issue.

In Fidelity and Deposit Company of Maryland v. M. Hanna Construction Co., Inc.,

2015 WL 632047 (E.D. Tex. February 13, 2015) the surety issued bonds for the

principal on eight projects. The surety paid losses and sued the principal and

indemnitors. The defendants asserted that on one project the surety acted in bad faith

and failed to mitigate damages in connection with the performance bond on one project.

The surety moved for partial summary judgment as to losses and expenses on all

bonds except the one performance bond. The defendants moved for partial summary

judgment asking the court to void the homestead waiver provision in the indemnity

agreement as illegal under Texas law. The court granted both motions, found that the

defendants were liable to the surety for $1,262,596.69 plus pre and post judgment

interest for losses sustained as of a certain date on all but the one bond, and declared

the homestead waiver provision void and unenforceable.

Consolidated Electrical Contractors & Engineers, Inc. v. Center Stage/Country

Crossing Project, LLC, 2015 WL 836920 (Ala. Civ. App. February 27, 2015) recognized

an injunction bond posted by the plaintiff is a limit on the damages that can be awarded

to the party enjoined unless the injunction was obtained in bad faith. The trial court

found bad faith and awarded damages against the plaintiff in excess of the bond

amount (although against the surety only in the amount of the bond). The Court of

Appeals thought that the record did not support a finding that the plaintiff obtained the

injunction in bad faith, i.e. without probable cause and with malice. It reversed the trial

court award to the extent it exceeded the bond amount.

In Clark County School District v. Travelers Casualty and Surety Co. of America,

No. 2:13-CV-1100 JCM, 2015 WL 1578163 (D. Nev. Apr. 8, 2015), the obligee sought

reconsideration of the court’s prior decision, but the court once again held that an

obligee may not bring a tortious bad faith claim against a surety in Nevada because a

surety does not have a special relationship with an obligee that would support a claim

for tortious breach of the covenant of good faith and fair dealing, as the “special element

of reliance” and “vastly superior bargaining power” were not present.

Aspen Air Conditioning, Inc. v. Safeco Insurance Company of America, 170

So.3d 892 (Fla. App. 2015) awarded the surety attorneys fees as a sanction against the

claimant subcontractor and its attorneys for persisting in making an argument for which

there was no good faith basis.

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In U.S. Sewer & Drain, Inc. v. Earle Asphalt Co., 2015 WL 3461087 (D.N.J. June

1, 2015) a first tier subcontractor on a state project sued the prime contractor and its

payment bond surety. The court granted the surety’s motion to dismiss the

subcontractor’s claims for bad faith breach of the bond and civil conspiracy. The court

held that under New Jersey law there was no cause of action for bad faith breach of a

surety bond and that the civil conspiracy claim depended on the bad faith claim (i.e. the

subcontractor alleged the principal and surety conspired to commit bad faith).

In Board of Trustees, Roofers Union Local 30 Combined Health and Welfare

Fund v. Liberty Mutual Insurance Co., 2015 WL 4273584 (E.D. Pa. July 14, 2015) the

claimant union benefit funds alleged that a subcontractor failed to make required

payments for wages, benefits and dues. The claimants sued the surety for the prime

contractor on the project and, among other things, alleged that the surety acted

unreasonably and in bad faith and claimed attorneys fees and costs. The surety moved

to dismiss, or in the alternative to strike, the claims for bad faith and attorneys’ fees.

The court noted that there is not common law bad faith tort claim under Pennsylvania

law and that the Pennsylvania insurance bad faith statute, 42 Pa.C.S. §8371, does not

apply to surety bonds. The court dismissed the separate bad faith claim and granted

the motion to strike the bad faith allegation. The claimant argued that it could claim

attorneys’ fees under the exception to the American Rule for a litigant that acts in bad

faith, wantonly, vexatiously or for oppressive reasons. The court found that this

exception is not an end-run around the insurance bad faith statutes and applies only to

bad faith conduct in the litigation itself. If, during the course of the litigation, the

claimant believes the surety or its attorneys are acting in bad faith the claimant can file

an appropriate motion requesting an award of attorneys’ fees.

Great American Insurance Co. v. RDA Construction Corp., 2015 WL 5163043 (D.

Mass. September 3, 2015) granted the surety summary judgment against the principal

and indemnitors. The court recognized that good faith under the indemnity agreement

required only that the surety not act with a dishonest purpose, conscious wrong doing, or

ill will. Bad faith required more than bad judgment, negligence or insufficient zeal. The

defendants contested the obligee’s termination of the bonded contract and the way that

the surety elected to re-procure the work, but the court found that many of the

defendants’ allegations were not supported by the record and that even if they were they

would not rise to the level of bad faith. The surety acted within its rights under the

indemnity agreement. The court granted the surety summary judgment on its claims for

indemnity, for specific performance of the collateral deposit provision of the indemnity

agreement and for quia timet and exoneration. Finally, the court dismissed various

counterclaims filed by the defendants, which the court found failed for the same reasons

the surety was entitled to affirmative relief.

In Fidelity and Deposit Company of Maryland v. C.E. Hall Construction, Inc., No.

14-14698, 2015 WL 5559721 (11th Cir. September 22, 2015), the court affirmed

summary judgment for the surety reported at 2013 WL 5328344 (S.D. Ga. September

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20, 2013). The principal disputed the claims of the obligee and several subcontractors

but declined to deposit collateral with the surety to support a demand that the surety

contest the claims. The surety then settled the claims and sued the principal and

indemnitors when they failed to reimburse the surety. The Court found that the surety

acted within its rights under the Indemnity Agreement and concluded that there were no

genuine issues of fact to support the defendants’ allegations of bad faith. The Court

explained that bad faith implies a dishonest purpose or a “motive of interest or ill will”

and that merely exercising the contractual right to settle claims if the surety deemed the

settlement to be expedient was not evidence of bad faith. The Court also rejected the

defendants’ argument that the surety owed them a fiduciary duty based on the

assignment clause of the Indemnity Agreement.

In VSI Sales, LLC v. International Fidelity Insurance Co., 2015 WL 5568623 (D.

Del. September 22, 2015) a subcontractor’s supplier sued the subcontractor’s surety for

alleged bad faith and breach of the covenant of good faith and fair dealing. The surety

moved to dismiss the complaint for failure to state a claim upon which relief could be

granted. The court first determined what state’s law applied. The plaintiff argued that

the bond incorporated the subcontract by reference and the subcontract provided that it

would be governed by the law of the location of the project (Delaware). The court

disagreed finding that the bond incorporated only the description of the work and not

every substantive portion of the subcontract. Further, the court found that even if

incorporated into the bond, the narrowly drawn choice of law provision applied only to

contractual disputes arising directly from the subcontract. In the absence of a

contractual choice of law, the Delaware courts, and therefore the federal court sitting in

Delaware, apply the “most significant relationship” test. Here, the plaintiff was a

Pennsylvania corporation with its main office in Pennsylvania, and the surety was a

New Jersey corporation that issued the bond through its office in Pennsylvania. The

court held that Pennsylvania law applied and Pennsylvania law did not recognize bad

faith or breach of the implied covenant of god faith and fair dealing claims against

sureties. Therefore, the court granted the surety’s motion and dismissed the case.

In Softmart, Inc. v. Twin City Fire Insurance Co., No. 14-cv-2287, consolidated

with Nilson v. Softmart, Inc., No. 12-cv-3914, (E.D. Pa. October 1, 2015) the insured

filed an action against the insurer, including claims for statutory bad faith, breach of

contract based on alleged delay in responding to the claim, and bad faith in refusing to

enter into a tolling agreement. The insurer moved for partial summary judgment

dismissing these claims, and the court granted the motion, finding that the record

established no violation or improper conduct by the insurer. The court explained, “At

this stage, whether Twin City’s determinations were legally correct is not at issue; it

suffices that the determinations were reasonable and based on through investigation”

and “Because there was no unreasonable delay in the coverage determination …

Softmart’s breach claim necessarily fails to the extent that it is based on Defendant’s

dilatory conduct.”

1047843.1

Choate Construction Co. v. Auto-Owners Insurance Co., Case No. A15A1629

(Ga. App. November 18, 2015) is the second appeal in the case. The prior opinion is

reported at 736 S.E.2d 443 (Ga. App. 2012). A contractor on a public project required

performance and payment bonds from a subcontractor. The subcontractor was

Dedmon Electrical Services, owned by Thad Dedmon. The contractor gave the

subcontractor the bond form to use, and the forms were returned executed by the surety

but naming D.E.S. Electrical Contractors as the principal and signed by Jacqueline

Payne as owner. The bonds were in the correct amount and identified the project. The

contractor accepted the bonds without inquiring as to the discrepancies. In the prior

appeal, the Court held that there were issues of fact precluding summary judgment for

the surety. After remand, the trial court denied the obligee’s motion for partial summary

judgment as to liability and granted the surety summary judgment as to the obligee’s

bad faith and attorneys’ fees claims. The obligee appealed, and the Court of Appeals

affirmed.

In a 6-1 decision, the Court held that its prior opinion was law of the case and

established that issues of fact precluded summary judgment on the bond claims. After

remand, the obligee did not present new evidence to fill in any gaps or even argue that

the original evidence was deficient and new evidence satisfied the deficiencies. The

Court rejected the obligee’s arguments as to its bad faith and attorneys fee claims

because there was a bona fide controversy between the parties and so no bad faith as

a matter of law. The dissenting Judge reasoned that the prior decision finding issues of

fact as to the surety’s summary judgment motion did not mean there were issues of fact

as to the obligee’s motion (even though the prior decision viewed all of the facts in the

light most favorable to the obligee since it was then the party opposing summary

judgment) and would have found that the subcontractor and the principal on the bond

were both sole proprietorships of Thad Dedmon and thus legally the same entity. The

dissent glossed over the evidence that Mr. Dedmon’s poor credit would have caused

the surety not to issue the bond if it had been told the true facts.

V. ARBITRATION PROVISIONS

In Lasco Inc. v. Inman Construction Corp., 467 S.W.3d 467 (Tenn. App. 2015) the

claimant’s subcontract provided for arbitration pursuant to the Construction Industry

Rules of the American Arbitration Association. There was no separate attorneys fee

provision in the subcontract. The claim was arbitrated, and the arbitrator awarded

attorneys fees to the prime contractor and its surety. The trial court vacated the

attorneys fee award as exceeding the power of the arbitrator, and the prime contractor

and surety appealed. The Court of Appeals held that incorporation of the Construction

Industry Rules by reference made them part of the subcontract. Rule 45 provided for

award of attorneys fees “if all parties have requested such an award or it is authorized

by law or their arbitration agreement.” Here, both the claimant subcontractor and the

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defendant prime contractor and surety requested fees in the arbitration proceeding.

The Court thought that this authorized the arbitrator to award fees pursuant to Rule 45,

and so reversed the trial court. The Court remanded the case for entry of an Order

confirming the arbitrator’s award and a determination of the prime contractor and

surety’s reasonable fees on appeal.

In U.S. for the use of Cache Valley Electric Co. v. Travelers Casualty and Surety

Company of America, 2015 WL 164064 (D. Utah January 13, 2015) a second tier

subcontractor sued the sureties for the first tier subcontract and the Miller Act payment

bond sureties for the prime contractor. The claimant did not sue the first tier

subcontractor or the prime contractor. The subcontract and sub-subcontract contained

arbitration provisions and a dispute over responsibility for allegedly defective work was

before the arbitrators in a consolidated prime contractor-subcontractor-subsubcontractor

arbitration. The court granted the sureties’ motion to stay the suit pending resolution of

the arbitration. The court rejected the claimant’s argument that a stay would be contrary

to the prompt payment goal of the Miller Act and recognized that a stay would avoid

inconsistent results, promote judicial economy and not work an undue hardship on the

claimant.

In E. Cornell Malone Corp. v. Continental Casualty Co., 2015 WL 222334 (E.D. La.

January 14, 2015) a subcontractor on a public project sued the prime contractor and the

prime contractor’s payment bond sureties. The subcontract included a pay-if-paid

clause and a provision binding the subcontractor to the outcome of any dispute

resolution between the owner and the prime contractor involving the subcontractor’s

work. The owner asserted defects in the subcontractor’s work, and the owner and

prime contractor were litigating their disputes in a state court proceeding. The court

granted the defendants’ motion to stay the federal court suit pending a resolution of the

state court action between the prime contractor and the owner. The court reasoned that

a stay was required to avoid the possibility of conflicting results and that the

subcontractor was not prejudiced because it could pursue its action once the issues

between the prime contractor and owner were resolved in state court.

In Pro Lawns, Inc. v. Fidelity and Deposit Company of Maryland, 2015 WL 350637

(M.D. Ala. January 23, 2015) a subcontractor on a public project sued the sureties for

the prime contractor but not the prime contractor. Apparently, the subcontractor was

trying to avoid submitting the dispute to arbitration as provided in the subcontract. The

prime contractor moved for leave to intervene and to compel arbitration. The

subcontractor argued that the Alabama Little Miller Act payment bond provided that the

claimant could sue the contractor and the surety or either of them and that it, therefore,

could sue the sureties alone. The court noted the subcontractor’s strategy to avoid

arbitration and granted the prime contractor’s motion for leave to intervene. The court

gave the subcontractor a week to show cause why the prime contractor’s motions to

compel arbitration and stay the suit should not be granted.

In U.S. for the use of Big B Construction, Inc. v. Mascon, Inc., Case No. 2:14-cv-

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1979 (E.D. Cal. February 10, 2015) the claimant subcontractor, the prime contractor

and the prime contractor’s Miller Act payment bond surety stipulated to stay the suit, toll

the running of any limitations periods, and seek to resolve the dispute by mediation and

arbitration.

U.S. for the use of John Jamar Construction Services v. Travelers Casualty and

Surety Company of America, 2015 WL 757858 (S.D. Tex. February 23, 2015) granted

the surety’s motion to stay the claimant subcontractor’s Miller Act suit pending

arbitration between the claimant and the principal. The court reasoned that the stay so

as not to undermine the contractual agreement to resolve the underlying disputes by

arbitration and thwart the federal policy favoring arbitration.

In Elite Construction Team, Inc. v. Wal-Mart Stores, Inc., 2015 WL 925927 (D. Md.

March 3, 2015) an allegedly unpaid subcontractor sued the owner and the contractor’s

surety. The court granted the owner’s motion to dismiss and the surety’s motion to stay

the payment bond action pending mediation and arbitration between the subcontractor

and the prime contractor. As to the stay, the court noted the possibility of inconsistent

results and the lack of any prejudice to the subcontractor if the action were stayed while

efforts were made to resolve the underlying dispute.

In Granite Re Inc. v. Jay Mills Contracting, Inc., 2015 WL 1407376 (Tex. App. –

Fort Worth March 26, 2015) the prime contractor and a first tier subcontractor had a

Blanket Agreement which included an arbitration provision and a Work Order that

incorporated the Blanket Agreement by reference. The subcontractor provided a bond

for the project, and the bond incorporated the Work Order by reference. The

subcontractor abandoned the work, the prime contractor sued the surety, and the surety

moved to compel arbitration. The trial court denied the surety’s motion, but on an

interlocutory appeal the Court of Appeals reversed. The Court found that the string of

incorporations by reference constituted a valid agreement to arbitrate. The Court did

not reach the surety’s alternate arguments based on direct benefits estoppel and third

party beneficiary. The Court also found that the dispute was within the scope of the

arbitration agreement. The Court remanded the case with instructions to enter an order

to compel arbitration of the dispute.

In Five Star Electric Corp. v. Federal Insurance Co., 8 N.Y.S.3d 98 (N.Y.A.D. 2015)

the claimant subcontractor worked for one of the two principals on the bond. The

principals were a “two company consortium” of Siemens Industry, Inc. (Siemens) and

Transit Technologies LLC (Transit Tech). The claimant’s subcontract with Transit Tech

called for arbitration. Siemens was willing to participate in the arbitration, but the

claimant “would only permit Siemens’ participation on what could only be described as

extortionate terms which Siemens could not rationally accept.” The trial court granted

partial summary judgment holding that the two sureties were bound by the results of the

arbitration between the claimant and Transit Tech. The Appellate Division reversed and

held, “with one of the surety bond’s principals unable to participate in the underlying

arbitration, the sureties cannot be collaterally estopped from contesting the result.” The

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Court also found no error in the trial court’s denial of Siemens’ motion to dismiss one of

the sureties’ third party complaint against Siemens for indemnity should the surety be

found liable to the claimant.

Granite Re Inc. v. Jay Mills Contracting, Inc., 2015 WL 1869216 (Tex. App. – Fort

Worth April 23, 2015) denied the surety’s motion for rehearing but withdrew the Court’s

prior opinion reported at 2015 WL 1407376 (Tex. App. – Fort Worth March 26, 2015)

and filed a revised decision reaching the same result. The prime contractor and a first

tier subcontractor had a Blanket Agreement which included an arbitration provision and

a Work Order that incorporated the Blanket Agreement by reference. The

subcontractor provided a bond for the project, and the bond incorporated the Work

Order by reference. The subcontractor abandoned the work, the prime contractor sued

the surety, and the surety moved to compel arbitration. The trial court denied the

surety’s motion, but on an interlocutory appeal the Court of Appeals reversed. The

Court found that the string of incorporations by reference constituted a valid agreement

to arbitrate. The Court did not reach the surety’s alternate arguments based on direct

benefits estoppel and third party beneficiary. The Court also found that the dispute was

within the scope of the arbitration agreement. The Court remanded the case with

instructions to enter an order to compel arbitration of the dispute.

In Advance Industrial Coating, LLC v. Westfield Insurance Co., No. 2:15-cv-141-

FtM-38DNF, 2015 WL 1822510 (M.D. Fla. Apr. 16, 2015), the defendant surety

demanded arbitration pursuant to the subcontract and moved to stay plaintiff

subcontractor’s lawsuit pending arbitration proceedings, asserting that the subcontract

required that all disputes be resolved by arbitration. The court found that because the

subcontract stated that any controversy or dispute “may” be decided by arbitration that

arbitration was permissive not mandatory, and because arbitration between the plaintiff

and the principal was not required the surety was not entitled to a stay.

St. Paul Guardian Insurance Co. v. Cordova Constructors MS, LLC, 2015 WL

2160518 (N.D. Miss. May 7, 2015) granted the surety’s motion to enforce a settlement

agreement reached with the principal and indemnitors. One of the individual

indemnitors refused to sign the settlement documents. After a hearing, and a

modification to the agreement, the agreement was entered into the record but she still

refused to sign. The court adopted the Magistrate Judge’s recommendation and

granted the surety’s motion to enforce the settlement. The court’s order included a

provision that if the indemnitor did not sign the settlement documents the court would

enter a consent judgment that under the settlement agreement was to be entered in the

event the defendants defaulted. The court also awarded the surety attorneys fees

incurred in enforcing the settlement.

In Sterling Construction Corp. v. SOS Construction and Roofing, Inc., No. 3:14-

cv-1959, 2015 WL 2189588 (N.D. Ind. May 11, 2015), the court decided a motion to

compel arbitration in a dispute between a general contractor and subcontractor where

both parties agreed that the disagreement should be arbitrated but did not agree on

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where arbitration should occur. The subcontract stated that any arbitration proceedings

were to be conducted in Indiana, but also stated that the subcontract was governed by

the laws of Nebraska. Under Nebraska law, the arbitration could occur only in

Nebraska, but the court resolved this dispute by noting that the Federal Arbitration Act

preempted the Nebraska statute prohibiting out-of-state arbitration. It therefore held that

Indiana was the proper venue for arbitration.

In J. Don Gordon Construction, Inc. v. Brown, 2015 WL 3537497 (Ala. June 5,

2015) a property owner and related entities agreed with the contractor and its surety to

submit their disputes to arbitration. The arbitrator awarded $157,750.80 to the owner,

$91,272.40 to the contractor (for a net of $66,478.40 to the owner) and legal fees of

$362,287 to the owner against the surety. The decision does not explain why the

attorneys fee award was against only the surety. The contractor and surety sought to

vacate the award as in excess of the arbitrator’s powers or the result of evident partiality

by the arbitrator. The Court found that the contractor and surety had not met the high

threshold to set aside an award under the Federal Arbitration Act (FAA) and affirmed the

circuit court’s judgment on the award.

In Schneider Electric Buildings Critical Systems, Inc. v. Western Surety Co., 2015

WL 1656449 (D. Md. April 14, 2015) a first tier subcontractor (Schneider) sued the

surety (Western) for its second tier subcontractor seeking to compel Western to

arbitrate pursuant to a provision in the second tier subcontract. Previously, however,

Western had sued Schneider in state court asking the court to stay any arbitration

demand against it and for a declaratory judgment that it was not obligated to participate

in arbitration under the sub-subcontract provision. The state court agreed with Western

and held on February 20, 2015, that there was no agreement to arbitrate between

Western and Schneider. The court found that under the Colorado River abstention

doctrine dismissal of the federal suit was appropriate given that the state court action

had already decided the issue and could resolve the other disputes between the parties,

i.e., the suretyship defenses to the claim.

In Five Star Electric Corp. v. Federal Insurance Co., 8 N.Y.S.3d 98 (N.Y.A.D.

2015) the claimant subcontractor worked for one of the two principals on the bond. The

principals were a “two company consortium” of Siemens Industry, Inc. (Siemens) and

Transit Technologies LLC (Transit Tech). The claimant’s subcontract with Transit Tech

called for arbitration. Siemens was willing to participate in the arbitration, but the

claimant “would only permit Siemens’ participation on what could only be described as

extortionate terms which Siemens could not rationally accept.” The trial court granted

partial summary judgment holding that the two sureties were bound by the results of the

arbitration between the claimant and Transit Tech. The Appellate Division reversed and

held, “with one of the surety bond’s principals unable to participate in the underlying

arbitration, the sureties cannot be collaterally estopped from contesting the result.” The

Court also found no error in the trial court’s denial of Siemens’ motion to dismiss one of

the sureties’ third party complaint against Siemens for indemnity should the surety be

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found liable to the claimant.

In Sterling Construction Corp. v. SOS Construction and Roofing, Inc., 2015 WL

2189588 (N.D. Ind. May 11, 2015) a subcontract provided that it would be governed by

Nebraska law (the project was in Nebraska) but that arbitration would be conducted

solely in St. Joseph’s County, Indiana. The subcontractor argued that Nebraska law,

and specifically the Nebraska Prompt Pay Act, prohibited arbitration outside of

Nebraska. The court held that the Federal Arbitration Act preempted this provision

because it purported to void an agreement to arbitrate. The court also found that the

subcontractor’s surety was bound by the arbitration provision because the subcontract

performance bond incorporated the subcontract by reference.

In Hanover Insurance Co. v. Atlantis Drywall & Framing LLC, 611 Fed. Appx.

585 (11th Cir. 2015), the Eleventh Circuit, on rehearing, held that the surety was not

obligated to arbitrate its indemnity claim, concluding that there was no basis to compel

the surety to arbitrate its indemnity claim because the plain language of the

subcontract’s arbitration provision allowed arbitration only at the option of the prime

contractor and here, the prime contractor was not involved in the lawsuit and had not

exercised the option to initiate arbitration.

Pimentel v. Lund, Case No. 72046-5-I (Wash. App. September 8, 2015) affirmed

dismissal of the claimant’s request for a trial de novo following an arbitration proceeding.

The request was not timely served (although it may have been timely filed) and so did

not comply with MAR 7.1(a). The Court also affirmed the award of attorneys fees to the

surety in the trial court and awarded the surety its attorneys fees on appeal subject to

compliance with RAP 18.1.

In Irving Materials, Inc. v. Angelo Iafrate Construction Co., 2015 WL 5680488

(W.D. Ky. September 25, 2015) a supplier to a second tier subcontractor sued the

second tier subcontractor (AIC) and its surety. The defendants moved to compel

arbitration of the claim. The contract between the supplier and AIC consisted of a

Credit Application (on the supplier’s form) and a Purchase Order (on AIC’s form). Both

included arbitration provisions, but the provisions were inconsistent with each

other. The court determined that the Purchase Order controlled, giving AIC the option

to resolve disputes by arbitration. However, AIC had written to the supplier stating that

AIC “hereby chooses litigation in the Macomb County, Michigan Circuit Court.” AIC

argued that this was a choice to litigate only in the designated Michigan court, but

nothing in the agreements said that AIC could choose the forum, only that it could

choose between litigation and arbitration. Because it chose litigation, its motion to

compel arbitration was denied. The court also rejected the defendants’ argument that

the surety could still chose arbitration and found that the surety was bound by the

waiver, reasoning that the surety’s derivative rights could not rise higher than the rights

of the party through whom it claimed.

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In U.S. for the use of D.R. Peck Excavating, Inc. v. International Fidelity

Insurance Co., 2015 WL 4111423 (D. Mass. July 7, 2015) a subcontractor sued the

prime contractor and its payment bond surety, and the prime contractor filed a

counterclaim against the subcontractor and its surety. An arbitration proceeding

resulted in an award for the subcontractor, and without waiting for expiration of the three

month period to challenge the award under the Federal Arbitration Act, the

subcontractor moved to dismiss the claim against its surety (which apparently was

causing the surety to hold collateral). The prime contractor did not dispute that the

award had been entered but opposed the motion on the grounds that its period to

challenge the award had not expired and so the motion to dismiss was premature. The

court denied the motion to dismiss and noted that the three month waiting period would

expire on July 28.

Double H Masonry, Inc. v. Liberty Mutual Insurance Co., Case No. 15-cv-5004

(D.S.D. November 4, 2015) stayed the plaintiff subcontractor’s suit against the surety

pending arbitration of the plaintiff’s claim against the prime contractor. The court

rejected the subcontractor’s argument that SDCL 21-25A-3 prohibited staying the case.

The court stated, “The South Dakota statute, initially passed while this judge was in the

South Dakota Legislature in 1971, precludes an insurance policy from requiring

arbitration . . . . The problem with that argument is that a payment bond is not a policy

of insurance . . . . The prohibition against arbitration in SDCL 21-25A-3 is not applicable

to a surety bond but only to insurance policies.”

VI. BANKRUPTCY

A. PREFERENCES

Dwyer v. Insurance Company of the State of Pennsylvania (In re Pihl, Inc.), 529

B.R. 414 (Bankr. D. Mass. 2015) was a contest between the surety and the bankruptcy

trustee of the principal over two categories of contract funds held by the principal’s

bank. One category, the “Pre-Existing Balance,” was in the principal’s bank account

when the second category, the “September Payment,” was received on September 17,

2013. As of that date, the surety had received claims, the principal had abandoned

work on the bonded public projects, and the surety had filed a UCC-1 financing

statement. On September 20 the principal filed a voluntary Chapter 7 petition. The

surety and the Trustee filed cross motions for summary judgment to determine

entitlement to the funds. The court recognized that the surety could assert both

subrogation rights and rights as the principal’s assignee under the indemnity agreement

but found genuine issues of fact as to when the principal first defaulted so as to trigger

the surety’s rights. The court held that the facts were not sufficient to support the

surety’s argument that the principal held the contract funds as a constructive trustee

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under Massachusetts law. The court also found that it could not decide if the Trustee

was entitled to void as preferences the surety’s recorded security interest and writ of

attachment served on the bank because they may or may not have entitled the surety to

a greater recovery than it would otherwise have been entitled to as a subrogee or

assignee. From the description of the facts, it appears that the principal had defaulted

in its payment obligations, and its obligations under the indemnity agreement, well

before it abandoned the work, but the record was not sufficient to allow findings as to

the date of such defaults.

B. PROPERTY OF THE DEBTOR’S ESTATE

Dwyer v. Insurance Company of the State of Pennsylvania (In re Pihl, Inc.), 529

B.R. 414 (Bankr. D. Mass. 2015) was a contest between the surety and the bankruptcy

trustee of the principal over two categories of contract funds held by the principal’s

bank. One category, the “Pre-Existing Balance,” was in the principal’s bank account

when the second category, the “September Payment,” was received on September 17,

2013. As of that date, the surety had received claims, the principal had abandoned

work on the bonded public projects, and the surety had filed a UCC-1 financing

statement. On September 20 the principal filed a voluntary Chapter 7 petition. The

surety and the Trustee filed cross motions for summary judgment to determine

entitlement to the funds. The court recognized that the surety could assert both

subrogation rights and rights as the principal’s assignee under the indemnity agreement

but found genuine issues of fact as to when the principal first defaulted so as to trigger

the surety’s rights. The court held that the facts were not sufficient to support the

surety’s argument that the principal held the contract funds as a constructive trustee

under Massachusetts law. The court also found that it could not decide if the Trustee

was entitled to void as preferences the surety’s recorded security interest and writ of

attachment served on the bank because they may or may not have entitled the surety to

a greater recovery than it would otherwise have been entitled to as a subrogee or

assignee. From the description of the facts, it appears that the principal had defaulted

in its payment obligations, and its obligations under the indemnity agreement, well

before it abandoned the work, but the record was not sufficient to allow findings as to

the date of such defaults.

C. DISCHARGEABILITY

In Heers v. Parsons (In re Heers), 529 B.R. 734 (9th Cir B.A.P. 2015) the debtor

was an attorney who acted as the administrator of a decedent’s estate. The heir of the

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decedent and the surety on the administrator’s bond obtained final judgments against

the administrator for penalties and interest assessed by the IRS because the Estate’s

tax return and taxes were not timely filed or paid. There was no allegation that the

administrator stole anything or received a personal benefit. The issue on appeal was

whether the judgments were non-dischargeable as defalcations while acting in a

fiduciary capacity under 11 U.S.C. §523(a)(4). The Court discussed the Supreme Court

decision in Bullock v. BankChampaign, 133 S.Ct. 1754 (2013) and held in a 2-1

decision that the debts were non-dischargeable. The Court recognized that the debts

did not meet the first two categories identified by the Supreme Court in that they were

not for bad faith, moral turpitude or other immoral conduct and were not for intentionally

improper or criminally reckless conduct. The majority concluded, however, that the

Supreme Court had articulated a third category for a heightened recklessness. The

majority found that the debtor’s conduct met this third category and stated, “The

materiality of the risks Debtor blindly disregarded is fully reflected in the $439,621.61 in

interest and penalties ultimately assessed by the IRS . . . We conclude that the

bankruptcy court did not err in granting summary judgments in favor of Parsons and

ACIC on their §523(a)(4) adversary proceeding claims based on Debtor’s multiple

defalcations of her fiduciary duties to the Estate.” The dissenting Judge thought that

criminal recklessness was required and would have found issues of fact as to whether

the debtor’s conduct met that requirement.

In Western Surety Co. v. Swanks (In re Swanks), 2015 WL 4659398 (Bankr. N.D.

Tex. August 5, 2015) the surety on a car title bond showed that one of the debtors had

fraudulently obtained clear title to a car by use of the bond and that the debtors

concealed or made false oaths in the bankruptcy about the car, whether it had been

sold and the location of any proceeds of a sale. The court granted the surety a non-

dischargeable judgment and denied the debtors a discharge.

In United Fire & Casualty Co. v. Eldridge (In re Eldridge), No. 15-60312; Adv.

Proc. No. 15-6014, (Bankr. E.D. Ky. October 14, 2015) the surety filed an adversary

proceeding objecting to the dischargeability of its claim based on 11 U.S.C. §523(a)(4)

(“fraud or defalcation while acting in a fiduciary capacity”). The debtor was an

indemnitor on the bonds and an owner and officer of the bond principal. The debtor

filed a motion to dismiss in response, arguing that his obligations had been discharged

without objection by the surety in a previous bankruptcy. Finding that the bond and the

claims predated the 2005 bankruptcy, that the surety had been given notice of the

earlier bankruptcy, and that the surety had not objected to discharge of its claim at that

time, the court held that the indemnitor’s debt to the surety was discharged in the 2005

bankruptcy and granted the motion to dismiss the adversary proceeding.

D. MISCELLANEOUS BANKRUPTCY

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Yelverton v. Federal Insurance Co. (In re Yelverton), 2015 WL 525180 (Bankr.

D.D.C. February 5, 2015) denied reconsideration of its Order dismissing the Debtor’s

claim against the surety for the Chapter 7 Trustee in Bankruptcy. The court also noted

the defendant was surety for the Chapter 7 Trustee and the Debtor’s allegations of

misconduct by the U.S. Trustee would not be a basis for a claim against the surety.

In Industrias Vassallo, Inc. v. Puerto Rico Electric Power Authority (In re

Industrias Vassallo, Inc.), Case No. 08-7752, Adv.Proc. No. 09-258 (Bankr. D.P.R. July

31, 2015) the surety on a utility payment bond for the bankrupt principal sought to

pursue an amended complaint in the adversary proceeding after the principal and utility

had settled their dispute and requested dismissal of the adversary proceeding. The

court held that nothing in the remaining dispute between the surety and the utility would

have any conceivable effect on the bankruptcy estate and, therefore, the Bankruptcy

Court lacked jurisdiction over the proposed amended complaint. The court concluded,

“The bankruptcy court is not the correct forum for a proceeding between two non-debtor

parties which does not affect the bankruptcy estate.”

In Surfacemax, Inc. v. Precision 2000, Inc. (In re Surfacemax, Inc.), 2015 WL

5676776 (Bankr. E.D.N.C. September 25, 2015) the debtor subcontractor filed an

adversary proceeding against the prime contractor and its surety, and the prime

contractor counterclaimed. The prime contractor had demanded arbitration of the

various disputes with the subcontractor prior to the filing of the bankruptcy petition. The

court first examined the subcontractor’s various theories, and whether they were “core”

or “noncore” to the bankruptcy proceeding. The court concluded that although the

turnover of property claim was core, the claims for breach of contract, quantum meruit,

conversion, and unfair trade practices were noncore and should be referred to

arbitration. The court also determined that the turnover claim should also be decided in

the arbitration for reasons of efficiently adjudicating all the claims. The court referred

the disputes between the subcontractor and the prime contractor to arbitration and

stayed the adversary proceeding as to the bond claim pending completion of arbitration.

In American Contractors Indemnity Co. v. R.E. Jenkins, Inc., No. 14-504-BAJ-

SCR, 2015 WL 2184293 (M.D. La. May 8, 2015), The surety issued payment and

performance bonds in favor of R.E. Jenkins, Inc. (“Jenkins”) in connection with the

construction of classrooms at a high school. As subcontractor, Jenkins was to provide

labor and materials for the heating, ventilation, and air condition system at the school.

The surety also issued bonds to Jenkins on a second HVAC construction project for the

City of Baton Rouge. As an inducement for issuance the bonds, Tracey Middleton

(“Middleton”), her husband, Charles, and Kenneth Kendrick executed a General

Agreement of Indemnity (“GIA”) in favor of the surety. Jenkins failed to pay certain

invoices on both projects, resulting in the surety’s payment of the outstanding claims.

The surety also incurred additional costs and expenses, including attorneys’ fees, in

settling the payment disputes. The surety filed a complaint against Jenkins and

Middleton to recoup its losses, obtained a default against Jenkins and moved for

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summary judgment against Middleton to enforce the GIA. Middleton asserted in her

answer that she was protected from ACIC’s action because her husband was granted a

discharge of this debt after filing for Chapter 7 bankruptcy. Disagreeing, the court

explained that Middleton and her husband each sighed the GIA as individuals, and,

thus, agreed to be individually bound by its terms and conditions. Indeed, Middleton

was not listed as a co-debtor on her husband’s debt to ACIC, and while federal law

would preclude the collection of a debt against a discharged debtor and his community

property, “bankruptcy does not extend the effect of the filing spouse’s discharge to the

separate property of the non-filing spouse.” Consequently, Middleton’s separate

property could not be protected in the action, and ACIC was entitled to collect its

damages from Middleton’s separate property.

In J&B Boat Rental, LLC v. JAG Construction Services, Inc., No. 12-323, 2015

WL 2376004 (E.D. La. May 18, 2015), a subcontractor entered into an oral contract with

a supplier to provide tugs to move barges, and a dispute later arose as to the rental rate

for the vessels. The supplier provided notice of non-payment and filed a Miller Act

payment bond lawsuit against the payment bond surety and prime contractor, and

asserted a breach of contract action against the subcontractor. The supplier was

seeking approximately $66,000 in principal. After the action was filed, the subcontractor

filed for bankruptcy and the case was stayed. The supplier filed a proof of claim in the

bankruptcy case and an evidentiary hearing was held regarding the oral contract. The

Bankruptcy Court found that the claimant was owed approximately $48,046.86 for the

use of the tug and related expenses. Of that amount, the supplier received a

distribution of $3,661.17 as an unsecured creditor, leaving a balance owed of

$44,385.69. The District Court for the Eastern District of Louisiana then granted the

supplier’s motion to lift the stay to pursue the Miller Act payment bond claim against the

prime contractor and surety, reopened the case, and dismissed the subcontractor. The

supplier moved for summary judgment based on the findings of the Bankruptcy Court

and the prime contractor and surety filed cross-motions for summary judgment “arguing

that J&B should be precluded from maintaining this action because it pursued its claims

against former co-defendant JAG Construction Services, in the context of JAG’s

bankruptcy proceeding.” Dismissing this argument, the court found that the recovery in

the bankruptcy case had no bearing on the Miller Act lawsuit, making claim preclusion

inapplicable. The court also rejected the claimant’s argument that the decision of the

bankruptcy court collaterally estopped the prime contractor and surety, explaining that

because neither the surety not the prime contractor had an opportunity to litigate any

issues in the context of the subcontractor’s bankruptcy proceeding, collateral estoppel

could not apply.

In Dynamic Drywall, Inc. v. McPherson Contractors, Inc. (In re Dynamic Drywall,

Inc.), 2015 WL 4497967 (Bankr. D. Kan. July 21, 2015) the debtor subcontractor filed

an adversary proceeding against the prime contractor and its payment bond surety.

The adversary proceeding involved only state law issues, and the defendants timely

answered and requested a jury trial. The defendants then moved to withdraw the

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reference to the Bankruptcy Court so that the case could be resolved in the district

court. The defendants’ motion was not filed within 20 days of service of the complaint

as required by local rule, but the court recognized that since a timely demand for a jury

trial was made and the defendants did not consent to the Bankruptcy Court conducting

such a trial, the case would have to be tried by the district judge. The case was in its

initial stages, and it was more efficient to withdraw the reference now that part way

through the proceedings. The court, therefore, granted the defendants’ motion and

recommended that the district court withdraw the reference and transfer the adversary

proceeding to the district court’s docket.

Ames Department Stores, Inc. v. Lumbermens Mutual Casualty Co. (In re Ames

Department Stores, Inc.), 2015 WL 8031191 (Bankr. S.D.N.Y. December 7, 2015) found

that the Bankruptcy Court had jurisdiction over various disputes between the debtor and

the surety on a bond given to protect a workers compensation insurer. The bond was

written in 2000, the Chapter 11 bankruptcy was filed in 2001 and the debtor, the surety,

and the bond obligee engaged in numerous disputes and partial settlements resolving

some things and reserving their respective rights and contentions as to others. The

Bankruptcy Court rejected the surety’s argument that under the McCarran-Ferguson Act

the surety’s state court liquidation proceeding had exclusive jurisdiction over the

remaining disputes. The decision took the form of a report and recommendation to the

district court, which had withdrawn the reference but requested such a report.

VII. SUBROGATION AND ASSIGNMENTS

A. ASSIGNMENT OF RIGHTS TO WHICH SURETY IS SUBROGATED

In Construction Services, Inc. of Duluth v. Town of Alborn, 2015 WL 1880250

(Minn. App. April 27, 2015) the bond principal sued the obligee for alleged breach of

contract. The Court affirmed summary judgment for the obligee. The Court held that the

assignment provision of the indemnity agreement was triggered by the principal’s

default, and the principal’s claim to contract funds had, therefore, been assigned to the

surety.

In International Fidelity Insurance Co. v. Quenzer Electric Systems, Inc., 18

N.Y.S.3d 645 (N.Y.A.D. 2015) the surety for a defaulted contractor sued the contractor

and indemnitors. The contractor filed a third party complaint against the obligee

claiming that funds were owed under the contract. The Court affirmed dismissal of the

third party complaint because the assignment provision of the indemnity agreement

combined with the contractor’s default meant that the surety, not the contractor,

possessed the right to payment. The Court stated, “Where a contractor assigns its

rights under a contract to a surety, it is no longer the real party in interest with respect to

its claims against the owner.”

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B. CGL POLICIES

In JDS Builders Group, Inc. v. Scottsdale Insurance Co., Case No. 15-cv-297

(N.D. Cal. June 15, 2015) a contractor sued its liability insurer and, among other things,

claimed that the insurer was obligated to defend claims against the contractor’s surety.

The court granted the insurer’s motion to dismiss that aspect of the complaint because

the indemnity agreement was not an “insured contract” within the provision of the policy

that obligated the insurer to defend the insured’s indemnitee if the suit “seeks damages

for which the insured has assumed the liability of the indemnitee in a contract or

agreement that is an ‘insured contract.’” The definition of insured contract required that

the insured assume tort liability that would be imposed by law in the absence of any

contract or agreement. Here, the surety’s bond liability was purely one of contract not

tort.

C. MISCELLANEOUS SUBROGATION

In First American Title Insurance Co. v. Star City Title & Settlement Agency, Inc.,

2015 WL 2092814 (W.D. Va. May 5, 2015) a title insurer paid off a lien on real property

and sued the title agent and its surety on the bond required by the Virginia Consumer

Real Estate Settlement Practice Act (CRESPA). The plaintiff sued as the subrogee of

the secured party whom it had paid. The court held that the suit was barred by the five

year statute of limitations for suit on a written contract, Va. Code §8.01246. The plaintiff

stood in the shoes of the secured party to whose rights it was subrogated, and the

breach occurred when the principal recorded the deed of trust in second position without

obtaining the release of a prior credit line deed of trust. The court rejected the plaintiff’s

argument that there was no breach until the holder of the credit line deed of trust

foreclosed on the real property. The court found that under Virginia law the cause of

action accrued when the breach occurred, not when the damage was discovered, and

here the breach occurred when the deed of trust was recorded in second position rather

than in first position. Since more than five years elapsed between that recording and

filing suit on the bond, the claim was barred and the motion to dismiss filed by the

principal and surety was granted.

VIII. WAIVER AND RELEASE

Travelers Casualty & Surety Company of America v. Cummins Mid-South, LLC,

460 S.W.3d 308 (Ark. App. 2015) held that a release executed by an officer of the

claimant equipment supplier barred the claim. The claimant furnished a generator to a

first tier subcontractor. The prime contractor paid the claimant for some repair work on

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the generator. In connection with that payment, the claimant executed a release that

stated it was an “UNCONDITIONAL WAIVER AND RELEASE” and that it “covers the

full and final payment of the contract amount for labor, services and equipment, or

material furnished on the job of Armed Forces Reserve Center” and that it released any

bond rights. The Court held that the Release was unambiguous and barred the claim,

and that there was no fraud or misrepresentation by the prime contractor to allow

rescission of the Release. Finally, the Court rejected the claimant’s unjust enrichment

argument because there was a written contract (the subcontract between the claimant

and the first tier subcontractor) and, therefore, “the concept of unjust enrichment has no

application.”

In Military & Federal Construction Company, Inc. v. Ace Electric, Inc., 2015 WL

3953814 (E.D.N.C. June 29, 2015) the prime contractor on a federal project and its first

tier subcontractor disputed responsibility for delays on the project. The subcontractor

filed a counterclaim against the prime contractor and its Miller Act payment bond surety.

And the prime contractor and surety moved for summary judgment. The court found

that genuine issues of fact as to the enforceability of waiver provisions in each monthly

payment application and denied summary judgment based on these waivers. The court

granted the prime contractor and surety summary judgment dismissing the

subcontractor’s quantum meruit claim because of the admitted existence of the

subcontract covering the work.

However, the court held that a subcontract provision that acceptance of payment

constituted a release of any claims, other than for retainage, for anything which occurred

during the payment period was enforceable and barred the subcontractor’s delay claims

against the contractor. The court stated, “Thus, under the plain language of paragraph

5.12, MFCC [the prime contractor] is entitled to summary judgment with respect to Ace’s

breach-of-contract counterclaim for delay damages.” As to the same claim on the Miller

Act payment bond, however, the court noted that a waiver of Miller Act claims must be

clear and explicit and meet the requirements of 40 U.S.C. §3133(c). The court stated,

“Because a Miller Act waiver must be ‘clear and explicit,’ the court declines to award

summary judgment based on the waiver in paragraph 5.12.”

In U.S. for the use of DVBE Trucking and Construction Company, Inc. v. McCarthy

Building Companies, Inc., 2015 WL 4198794 (N.D. Cal. July 10, 2015) the claimant’s

subcontract provided that in the event of a claim based on actions of the owner (in this

case the Department of Veterans Affairs) the subcontractor would “follow the disputes

resolution procedures agreed to by the [prime contractor] and the [VA], including but not

limited to those procedures set forth in FAR 52.233-1 DISPUTES (JUL 2002).

[Subcontractor] shall be bound by the result of any such dispute resolution procedure

with the [VA] or others to the same degree as McCarthy.” The prime contractor

submitted the subcontractor’s claim to the VA and appealed its deemed denial to the

board of contract appeals. The prime contractor and its sureties moved to stay

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proceedings in the Miller Act suit pending the outcome of the pass through claim against

the VA.

The court found that the subcontract provision was an unenforceable waiver of

the subcontractor’s Miller Act rights. The subcontract was not signed after work began,

and so the waiver was void under 40 U.S.C. §3133(c), and the waiver was not

sufficiently clear and explicit. The court denied the defendants’ motion to stay.

In Cell-Crete Corp. v. Safeco Insurance Company of America, Case No. G051112

(Cal. App. December 11, 2015) a second tier subcontractor claimed under the prime

contractor’s payment bond on a public project. The claimant’s original proposal was

based on work that was different, and substantially less costly, than what was specified

in the project specifications. The claimant furnished a preliminary notice and also

executed a full release, in the form mandated by statute, for that proposal. The claimant

performed no work under this original proposal.

The claimant agreed to perform work as required by the owner in a second

proposal and gave a second preliminary notice with a later date but the same dollar

amount and work description as the first notice. It also executed another full release,

before it started work, stating that it had been paid in full. This release was on a

somewhat different form but also complied with the statute. The trial court found that

the second preliminary notice was effective for the work performed and that both of the

releases, despite their timing and actual language, were intended to apply only to the

first contract under which no work was actually performed. Thus, the trial court found

that the claimant met the requirements for stating a claim on the bond and entered

judgment for the claimant, including attorneys’ fees. On the surety’s appeal, the Court

of Appeals stated the issue as, “whether Cell-Crete is foreclosed from collecting on the

payment bond notwithstanding its unimpeachable work on the Project and adequate

preliminary notice.” The Court found that it was not, and affirmed the trial court, by

holding that the second release was intended to apply only to the first, non-performed

contract. The Court stated, “Thus, both waivers were intended to apply to the ‘first

contract’ from July 2011; there was no intent to prospectively waive rights under a

forthcoming second contract.”

IX. MISCELLANEOUS BONDS

A. INJUNCTION BONDS

In Sterling Industries, Inc. v. Sheet Metal Workers’ National Pension Fund, No.

2:14-cv-5956, 2015 WL 3407927 (E.D.N.Y. May 27, 2015) the court had previously

granted a motion for a temporary restraining order and injunction enjoining the

defendants, a union, from withdrawing manpower, directed the defendants to show

cause as to why an injunction should not issue, and ordering the plaintiff to post a

$50,000 bond to ensure that the defendants would be compensated for costs and

damages incurred if it turned out that the restraining order had been improvidently

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granted. The defendants later moved to dismiss the claim for lack of federal question

jurisdiction, and the plaintiff ultimately filed a notice of voluntary dismissal. The

defendants moved to recover their attorney’s fees from the bond. The plaintiff opposed

that motion and moved for return of the bond. The court denied the defendant’s motion

for attorney’s fees, reasoning that the defendants had not sustained a business loss as

a result of the TRO and that the law forbids recovery of attorney’s fees expended in

litigating injunctions. The court also noted that neither ERISA nor Federal Rule of Civil

Procedure 11 entitled the defendants to attorney’s fees, because the plaintiffs had not

acted vexatiously or in bad faith.

B. SUPERSEDEAS BONDS

In Boardwalk Apartments, L.C. v/ State Auto Property and Casualty Insurance Co.,

2015 WL 265040 (D. Kan. January 21, 2015) the defendant insurance company argued

that it should not have to post a supersedeas bond to stay execution pending

disposition of post- trial motions because, among other reasons, it was rated A, XII by

A.M. Best and it was on the Treasury List. The court thought that the evidence of

financial strength showed that requiring a supersedeas bond would not pose a financial

hardship on the defendant and ordered a bond in the amount of the judgment.

White v. Potorff, 2015 WL 302810 (Tex. App. – Dallas January 23, 2015) is an

example of the needless litigation caused by Texas Civil and Practice Remedies Code

§52.006 capping the amount of supersedeas bonds at 50% of the judgment debtor’s net

worth. The plaintiff’s judgment was for $30 million. The defendant alleged that his net

worth had decreased in less than three months from $8 million to negative $1 million

(largely based on a gift to his minor daughter and a re-appraisal of the value of his

residence). The trial court found that his net worth was $7,566,651 and set the bond at

half of that amount. The defendant appealed, and the Court of Appeals found that his

net worth was $4,215,115 (it disagreed with the trial court’s finding that the creditor had

proven the transfer to the daughter was fraudulent) and set the bond at 50% of that

amount.

In Liberty Mutual Insurance Co. v. Mitchell, No. 15-cv-1037, 2015 U.S. Dist.

LEXIS 8914 (C.D. Ill. Jan. 27, 2015), the plaintiff surety filed a motion for an emergency

temporary restraining order requesting that the Court immediately issue a temporary

restraining order and preliminary injunction to quash, vacate, or stay any proceedings

initiated by Defendant George Mitchell to collect on an underlying judgment for tort

damages. The underlying judgment arose out of an Illinois state court action for

damages incurred while the Mitchell was working as a trackman for a railway company.

The railway company appealed, filing a supersedeas bond issued by the surety. While

the appeal was pending, the railway company discovered evidence suggesting that

Mitchell was not as injured as the jury found him to be, and it sought reconsideration of

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the judgment and requested that the appellate court stay its decision on the pending

direct appeal until the trial court resolved the issue. The appellate denied the request

and affirmed the trial court’s judgment. The railway company’s efforts to prevent

Mitchell from attempting to collect on the underlying judgment were rebuffed. Mitchell

then filed suit against Liberty, and Liberty filed the declaratory action requesting the

restraining order. Without considering the merits of the motion for a temporary

restraining order, the court summarily dismissed the complaint, not only questioning

whether it had subject matter jurisdiction over the action, but also finding that Liberty’s

interests had been closely aligned with and represented by the railway company and

because the railway company had raised the same issues in state court, the surety

should not have the opportunity to bring them in federal court. Additionally, to the extent

the surety sought injunctive relief, the court determined that the Anti-Injunction Act,

which bars federal courts from granting any injunctive relief that would have the effect of

enjoining an ongoing state proceeding, would bar relief in the matter.

In Giant of Maryland, LLC v. Taylor, 109 A.3d 142 (Md. App. 2015) a former

employee recovered a judgment for discrimination. The employer appealed. The trial

court also awarded attorneys fees in a separate judgment, and the employer posted a

supersedeas bond for the attorneys fee judgment and appealed. The appeal from the

attorneys fee judgment was filed more than 30 days after the fee judgment, however,

was untimely and the appeal was dismissed for lack of jurisdiction. After several

judgments in the Court of Special Appeals and the Court of Appeals, the judgment on

the merits was reversed and the case remanded for a new trial. The employee argued

that she was nevertheless entitled to enforce the final attorneys fee judgment, and the

trial court entered judgment against the surety on the bond.

On the surety’s appeal, the Court of Special Appeals noted that the statutory

basis for the fee award was that the employee was the prevailing party, but she was no

longer a prevailing party. The Court concluded, “Giant is not obligated to satisfy the Fee

Judgment because the statutory basis for the award of fees is not satisfied. Traveler’s

liability on the Bond is dependent upon the liability of its principal, Giant. . . . It follows

that because Giant is not obligated to perform, Travelers also cannot be liable on the

Bond.” The Court reversed the trial court judgment. The Court rejected the surety’s

alternative argument based on a lack of separate notice to the surety as provided in

Rule 1-404 because the surety was not prejudiced. The surety and principal made

essentially the same arguments, and the principal was on notice of all relevant motions

and opposed them.

Cox v. Simmonds, 2015 WL 513146 (Tex. App. – Corpus Christi February 5,

2015) held that an appeal bond for an appeal from the justice court to the county court

was not a supersedeas bond and that the judgment of the county court could not be

amended to add the surety as a judgment debtor once the county court’s plenary power

over the judgment expired 30 days after entry of the judgment.

21X Properties, LP v. Superior Court of San Mateo County, Case No. A144030

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(Cal. App. March 26, 2015) held that a supersedeas bond was required to stay

execution of a judgment deciding the right to interpleaded funds in the registry of the

court but that in setting the amount of the bond pursuant to Code of Civil Proc. §917.2

the court should take into consideration the fact that payment of the judgment itself was

already assured by the funds held by the court.

Wickliffe v. Tooley, 2015 WL 5013691 (Tex. App. – Dallas August 25, 2015) was

a dispute over a parcel of real property in which the Probate Court required a

supersedeas bond of $75,000 from a corporate surety. The Court held that the amount

was in error because it was based on the value of the property not the projected rent or

revenue as provided for in Tex. R. App. P. 24.2(a)(2)(A). In the Probate Court the

appellant had not objected to the requirement of a corporate surety, and so waived the

argument. The Court of Appeals reduced the bond amount to $5,400 based on

evidence admitted at the Probate Court hearing and otherwise affirmed the Probate

Court’s order.

C. MOTOR VEHICLE DEALER BONDS

In Centennial Casualty Co., Inc. v. Western Surety Co., 772 S.E.2d 274 (S.C.

2015), the Supreme Court of South Carolina reversed the Court of Appeals on a

decision regarding the relationship between a wholesale auctioneer and a motor vehicle

dealer. The wholesale auctioneer and dealer entered into an agreement to purchase

vehicles from various sellers. South Carolina’s Dealer Bond Statute, required all dealers

and wholesalers to obtain a surety bond for “indemnification for loss or damage suffered

by an owner of a motor vehicle, or his legal representative.” Accordingly, the dealer

obtained a bond and the auctioneer arranged the sales. The bills of sale included

language that appointed the auctioneer the “agent and representative” of the dealer and

sellers. When the dealer’s checks were returned for insufficient funds, the auctioneer

sought reimbursement from its insurance carrier, Centennial Casualty Company.

Centennial paid the claims and subsequently demanded reimbursement from the surety

under the Dealer Bond Statute. The surety refused to pay, contending that the statute

did not apply as neither Centennial nor the auctioneer were a “legal representative” who

suffered a loss or damage. The trial court ruled in Centennial’s favor, and the surety

appealed. The appellate court reversed, finding that neither parties were “legal

representatives” of the dealer. The Supreme Court of South Carolina granted certiorari,

and held that because the bill of sale unequivocally appointed the auctioneer as the

“agent and legal representative” of the seller, the subrogated insurer of the wholesale

auctioneer could maintain a claim on the purchaser’s motor vehicle dealer bond.

In Stokes v. TLCAS, LLC, 348 P.3d 739 (Utah Ct. App. 2015), Auto-Owners, the

surety on a motor vehicle dealer’s bond, settled with the bond claimants and both the

surety and the claimants obtained a judgment against the principal, TLCAS, and

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indemnitors. The Utah Court of Appeals affirmed both judgments. As to the surety, the

Court held that TLCAS mistakenly argued that the surety had a duty to defend it under

the bond contract and erroneously asserted that surety’s settlement with the claimants

was done in bad faith. The Court concluded that TLCAS’s argument mistakenly relied

on case law about an insurance company’s duty to defend its insured and explained

that Auto-Owners did not insure TLCAS but instead held a bond and in consideration for

that bond, TLCAS had agreed to indemnify Auto-Owners for costs incurred relating to

the bond.

In Tower Insurance Company of New York v. Rose City Auto Group, 2015 WL

4910475 (D. Ore. April 17, 2015) the surety on a motor vehicle dealer bond filed an

interpleader for the $40,000 bond amount. The court previously allowed the surety to

recover its costs and attorneys fees of $12,170.42 leaving the sum of $27,829.58. The

sole consumer claimants were awarded $1,001.04 for their damages from the dealer’s

failure to apply for a title in their names. The court awarded $17,976.23 to a lender that

had proven its loss but denied the claim of another lender based on its failure to prove

the amount claimed. The court found that the record supported another lender’s claim

but only for $9,384.52. Finally, the court held that the Oregon statutory bond reserved

$20,000 of the $40,000 penal sum for consumer claims and, therefore, the two allowed

lender claims exceeded the amount available to pay them and had to be pro rated. This

resulted in the return of $6,828.54 to the surety even though the two lenders were not

fully compensated.

In Brown v. BYRV, Inc., 2015 WL 4507159 (D. Ore. July 24, 2015) disappointed

purchasers of a recreational vehicle sued the manufacturer and dealer and the dealer’s

surety. The court stayed the claims against the surety pending arbitration between the

claimant and the principal. The court rejected the claimant’s argument that the surety

was not a party to the arbitration agreement and, therefore, had no right to seek to

enforce it.

In Brown v. Dick Smith Nissan, Inc., 777 S.E.2d 208 (S.C. 2015) the automobile

dealer made numerous misrepresentations in an attempt to obtain financing for the

purchase of a used Mazda 6. The purchaser eventually returned the car to the dealer,

but was subjected to claims, including for a deficiency judgment, by a bank that had

financed her supposed purchase of a different car based on the dealer’s

misrepresentations. She then sued the dealer and its surety. The South Carolina

Supreme Court reversed the Court of Appeals and reinstated the trial court’s judgment

for the claimant. The Court found that the evidence supported the trial court’s findings

that the dealer acted in bad faith and violated the Dealers Act and that the claimant was

damaged as a result. The Court of Appeals erred in ignoring the trial court findings and

substituting its own. Therefore, the Court reinstated the trial court judgment awarding

the claimant damages, interest and attorneys’ fees.

In Bernal v. Maximum Auto Search Corp., 2015 WL 5032049 (D. Colo. August 26,

2015) a disappointed customer sued the auto dealer and its surety. The only allegation

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against the surety was that the statute granted the plaintiff a cause of action against the

surety for any damages resulting from fraud or fraudulent misrepresentation. The

defendants moved for partial summary judgment, and the surety argued that it could be

liable only after a finding of fraud or fraudulent misrepresentation by the principal and

the surety’s failure to pay. In effect, the surety argued that the suit against it was

premature. The court disagreed and stated, “Clearly, Plaintiff cannot collect from

Western on the dealer’s bond unless and until judgment is entered in favor of plaintiff

and against Maximum Auto. . . . however, naming Western as party in this case

promotes efficiency and full and complete notice to Western . . . I therefore conclude

that Plaintiff’s inclusion of Western as a party to this case is proper.” The court denied

the defendants’ motion.

In Ricale Associates, LLC v. McGregor, 2015 WL 5781063 (D.N.J. September 29,

2015) the plaintiff New Jersey motorcycle dealer sold a number of motorcycles through

auction houses in Tennessee and sued the auction houses and a number of other

defendants including the surety on the bond of one of the auction house defendants.

The surety objected to personal jurisdiction in New Jersey and moved to dismiss on that

basis. The plaintiffs did not argue that the surety itself conducted business in New

Jersey or that it was foreseeable that the bond principal would conduct business with a

New Jersey entity. Instead, the plaintiffs argued that “the very nature of a surety bond

makes the issuer unsure who it will benefit” and so the surety knew the bond could

benefit persons outside of Tennessee. The court recognized that this argument would

effectively mean nationwide jurisdiction over the surety. The bond, however, protected

against the principal’s failure to pay certain title fees and taxes or failure to deliver a

valid vehicle title. The court found no basis to hold that the surety should have

reasonably anticipated being haled into court in New Jersey and granted the surety’s

motion to dismiss for lack of personal jurisdiction.

D. SUBDIVISION BONDS

In Lexon Insurance Co. v. County Council of Berkeley County, 770 S.E.2d 547

(W.Va. 2015) the trial court entered a default judgment against the surety on two

subdivision bonds and denied the surety’s motion to set aside the judgment. The West

Virginia Supreme Court reversed. The Court understood that the bond penalty was the

upper limit of the surety’s liability not a “sum certain” owed by the surety in the event of

a breach by the principal. Therefore, pursuant to W.Va. Rule of Civ. Proc. 55(b)(2) the

court had to determine the amount of the judgment, and the defendant surety was

entitled notice and an opportunity to be heard. The trial court erred in proceeding under

Rule 55(b)(1), which allowed the court to direct entry of judgment by the clerk if the suit

was for a sum certain or a sum which could be made certain by computation.

The Court also held that the default should have been set aside. The obligee and

the surety engaged in negotiations and correspondence, and after the obligee filed suit

it agreed to an indefinite extension of the surety’s time to answer subject to withdrawal

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of the consent on 15 days notice. The parties did not file a stipulation with the court as

contemplated by Rule 6(b), and the Court found that ambiguous E-mails and a letter

from the obligee requesting an answer failed clearly to articulate an intent to seek a

default if the surety did not file its answer. In light of the preference for resolving

disputes on their merits, the default should have been set aside.

In Camino Properties, LLC v. Insurance Co. of the West, No. 2:13-cv-02262,

2015 WL 2225945 (D. Nev. May 12, 2015), the United States District Court for the

District of Nevada examined cross motions for summary judgment. A developer went

bankrupt before it finished a project to make off-site improvements to public roads. A

third party, Camino Properties, LLC bought the unfinished projects and set out to

complete them. The City of North Las Vegas, which had required the now-defunct

developer to purchase a surety bond in its favor, assigned its rights under that bond to

Camino. Camino finished the projects and sought to collect on the bond. The surety first

argued that the claims on the bond were barred by the statute of limitations, arguing that

a three-year statutory period was applicable, which is the Nevada statute of limitations

for claims arising from statutory liabilities. But the court held that the six-year limitations

period applicable to claims for breach of contract applied instead, reasoning that

although the bond was statutorily required, the relevant inquiry was whether the

principal’s liability arose from a statute, and in this case it did not. The bond guaranteed

compliance with a contract, not a statute. The surety also argued that only the City, not

Camino, could enforce the Bond, but the court found that the City’s assignment of the

Bond was valid, so long as the city assigned its rights for the purpose of completing the

project, which the court found was an open fact question.

In Malone v. Webster Bank, 2015 WL 4280902 (Mass. App. July 16, 2015) a

bank entered into a tripartite agreement with a developer and public entity to assure

completion of infrastructure required by a subdivision plan. The tripartite agreement,

and a fund set aside pursuant to it, functioned as a bond to assure completion of the

infrastructure work. The bank honored its obligations to the Town, but the plaintiff home

owners nevertheless sued because the developer’s sewer connection on their property

was defective. The Court affirmed summary judgment dismissing the suit. The Court

noted that “No private right of action accrues pursuant to a bond or agreement executed

pursuant to the provisions of G.L. c.41, §81U . . . Thus, to the extent the plaintiffs argue

they are intended or foreseeable beneficiaries of the tripartite agreement, their argument

is unavailing.”

In Nacimiento Water Company, Inc. v. International Fidelity Insurance Co., 2015

WL 4554288 (C.D. Cal. July 28, 2015) the obligee entered into a tolling agreement with

the surety but not with the principal. The statute of limitations to sue the principal

expired. The court granted the surety summary judgment pursuant to Cal. Code of Civ.

Proc. §359.5 which stated, in part, “the expiration of the statute of limitations with respect

to the obligations of the principal, other than the obligations of the principal under the

bond, shall also bar an action against the principal or surety under the bond. . . .” The

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court noted that the Water Company could secure payment from a future developer of

the project, but that because its claim against the principal had expired it could not

pursue a claim against the surety.

In Camden County v. Lexon Insurance Co., 2015 WL 5157321 (S.D. Ga.

September 1, 2015) the County obligee on a subdivision bond accepted alternative

security from a successor developer and released the surety. A number of property

owners in the development intervened in the action and sought to assert claims against

the surety predicated on the contention that the County’s release of the bond and

acceptance of alternative security was an ultra vires act and void. The court granted

the surety’s motion to dismiss the intervenors’ complaint finding that the County acted

within its constitutional and statutory authority and thus its action, while in retrospect

perhaps imprudent, was not ultra vires.

In Bond Safeguard Insurance Co. v. National Union Fire Insurance Company of

Pittsburgh, Pa., No. 14-15233, 2015 WL 5781002 (11th Cir. October 5, 2015) the surety

on a series of subdivision bonds sued the insurer of the bond principal and

indemnitor. Following a settlement, the surety amended its complaint against the

principal and indemnitor, deleting claims for breach of the General Agreement of

Indemnity and stating claims for negligence and misrepresentation in administering the

projects and securing the bonds. A consent judgment was entered. The surety sued

the insurer after it refused to defend the principal and indemnitor or to pay the

judgment. The Eleventh Circuit affirmed summary judgment for the insurer based on

the policy’s Exclusion for loss arising out of any contractual liability, holding that the

surety’s “pleading of its claim in tort does not alter the fact that all of its asserted losses

arose from Ward’s and LRC’s contractual breaches of the development contracts and

the GAI. The plain language of Exclusion 4(h) does not limit its applicability to loss in

connection with only contract claims. Given the Florida Supreme Court’s broad

interpretation of the unambiguous phrase ‘arising out of,’ we find a sufficient causal

connection between Bond-Lexon’s purported negligence claim and the contractual

liability of Ward and LRC to enforce the exclusion according to its terms.”

City of Lenexa v. Western Surety Co., 2015 WL 5926951 (Kan. App. October 9,

2015) dismissed the appeal of the principal and indemnitors from an order construing

two settlement agreements because the order was not a final judgment. The Court

rejected the appellants’ argument based on the collateral order doctrine.

In The City of Waukegan v. Bond Safeguard Insurance Co., 2015 WL 6870106

(N.D. Ill. November 6, 2015) the obligee on a subdivision bond sued the surety and

several entities related to the surety in Illinois state court. The defendants removed the

case to federal court, and the obligee filed a motion to remand. The actual surety, Bond

Safeguard Insurance Company, had once been an Illinois corporation but at the

relevant time, the date the suit was filed, it was a South Dakota corporation with its

principal place of business in Tennessee. Therefore, there was diversity between the

plaintiff obligee and the surety. The obligee also sued Lexon Surety Group based on a

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letter from that entity stating that it was the surety on the bond. The court thought that

at the preliminary stage that was sufficient to find that Lexon Surety Group was not

fraudulently joined, but it was a Florida corporation with its principal place of business in

Tennessee and so did not destroy diversity jurisdiction. The final defendant, Lexon

Holding Company was alleged to be a subsidiary of Lexon Surety Group but was not

alleged to have done anything wrong. The court found that Lexon Holding Company

was fraudulently joined and disregarded its citizenship. The court denied the obligee’s

motion to remand and granted the defendants’ motion to dismiss as to Lexon Holding

Company.

In City of Elgin v. Arch Insurance Co., 2015 IL App (2d) 150013 (Il. App.

December 10, 2015) the obligee of several subdivision bonds sued the sureties and

other parties. One of the sureties filed a counterclaim against the successor developer

of the project (TRG). The trial court dismissed the surety’s claims against TRG. After

the sureties, and various other parties, reached a settlement with the obligee (the

Town), the surety appealed dismissal of its claims against TRG. The Court thought that

as the successor under the Annexation Agreement TRG had primary obligations to the

Town that the surety, as a secondary obligor, paid pursuant to its bond and, therefore,

TRG was equitably obligated to the surety even though there was no indemnity

agreement between them. The settlements had mooted some of the surety’s original

claims, such as a demand for collateral, exoneration, and quia timet, but the Court held

that the trial court erred in dismissing the surety’s claims for indemnity and unjust

enrichment and remanded the case for further proceedings.

E. BID BONDS

In Hamilton Pacific Chamberlain, LLC, No. B-410955 (Comp. Gen. March 30,

2015), the Department of Veteran Affairs (“VA”) issued an invitation for bids for the

upgrade of a heating, ventilation and air conditioning system at the Hunter Holmes

McGuire VA Medical Center. Hamilton Pacific Chamberlain (“HPC”) was the apparent

low bidder. However, HPC failed to enter an amount in the penal sum of the bond

section, and the liability limit listed exceeded the upper limit of the attorney-in-fact’s

authority to bind the surety, as indicated by the attached power of attorney.

Consequently, the bid was rejected for noncompliance with the bid guarantee

requirements in the solicitation. HPC’s protested to the Government Accountability

Office (“GAO”), arguing that the omission of the penal sum did not render the bid bond

unenforceable because its surety was liable up to the amount authorized in the power of

attorney. The GAO denied the protest, stating that “[a] bid bond is defective where no

penal sum has been inserted on the bond, and the bond does not otherwise establish

the intention of the surety to be bound in the required amount.” Thus, the GAO found

that because the omission of the penal sum called into question the enforceability of the

bond, the contracting officer reasonably rejected HPC’s bid.

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In Anthem Builders, Inc. v. United States, 121 Fed. Cl. 15 (2015) the Department

of Veterans Affairs rejected a low bidder as not responsible and the bidder filed suit in

the Court of Federal Claims. The initial bid bond named “First Standard Asurety LLP”

as the surety and represented that the bond was secured by an Irrevocable Trust

Receipt from First Mountain Bancorp. After the contracting officer questioned the bond,

the bidder submitted a bond naming David Eugene Harris as an individual surety. The

court discussed the bond(s) in detail and found that they did not comply with the

solicitation requirements without really reaching the issue of whether there were in fact

any assets behind them. The court denied the plaintiff’s motion for summary judgment

and granted the Government’s motion for summary judgment based on the

administrative record.

In K.C. Electrical Construction, B-411591, 2015 WL 5114253 (Comp. Gen. August

31, 2015) The low bidder submitted a bid bond with the bidder’s president as an

individual surety. The supposed asset supporting the bond was an “Irrevocable Pledge

of Escrow” from The Escrow Company which stated that it “hereby acknowledges and

irrevocably assigns all proceeds of Escrow Account 15A04097 (FDIC 27006) . . .” The

GAO found that even with supplemental information furnished by the bidder, this

supposed pledge did not meet the requirements of FAR §28.203 and stated, “The FAR

requires that an escrow account, submitted as an individual surety’s security interest, be

in the name of the contracting agency and provide the CO with the sole and unrestricted

right to draw on all or part of the funds in the account.” Here, the purported escrow

account did not meet these requirements and the contracting officer properly rejected

the bid.

In J. Smentkowski, Inc. v. Lacey Township, 2015 WL 6511656 and 6519205

(N.J.A.D. October 29, 2015) a disappointed bidder argued that the low bid should have

been rejected because the bid bond and the consent of surety were defective. The bids

were originally due April 1 but the bidding was postponed to April 21 and an additional

month was added to the term of the proposed contract. The bid bond referenced the

original bid date. The trial court noted that the bidder had contacted the surety and

allegedly been told to use the bond, and found that there had been no material change

to the surety’s obligation. The trial court also found that the conditions in the consent of

surety were only those that the Town was statutorily obligated to perform anyway

(timely award and execution of the contract). The Court agreed with the trial court and

affirmed its denial of the protest and dismissal of the disappointed bidder’s complaint.

F. WRITS OF ATTACHMENT

Dwyer v. Insurance Company of the State of Pennsylvania (In re Pihl, Inc.), 529

B.R. 414 (Bankr. D. Mass. 2015) was a contest between the surety and the bankruptcy

trustee of the principal over two categories of contract funds held by the principal’s

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bank. One category, the “Pre-Existing Balance,” was in the principal’s bank account

when the second category, the “September Payment,” was received on September 17,

2013. As of that date, the surety had received claims, the principal had abandoned

work on the bonded public projects, and the surety had filed a UCC-1 financing

statement. On September 20 the principal filed a voluntary Chapter 7 petition. The

surety and the Trustee filed cross motions for summary judgment to determine

entitlement to the funds. The court recognized that the surety could assert both

subrogation rights and rights as the principal’s assignee under the indemnity agreement

but found genuine issues of fact as to when the principal first defaulted so as to trigger

the surety’s rights. The court held that the facts were not sufficient to support the

surety’s argument that the principal held the contract funds as a constructive trustee

under Massachusetts law. The court also found that it could not decide if the Trustee

was entitled to void as preferences the surety’s recorded security interest and writ of

attachment served on the bank because they may or may not have entitled the surety to

a greater recovery than it would otherwise have been entitled to as a subrogee or

assignee. From the description of the facts, it appears that the principal had defaulted

in its payment obligations, and its obligations under the indemnity agreement, well

before it abandoned the work, but the record was not sufficient to allow findings as to

the date of such defaults.

In Platte River Insurance Co. v. Premier Power Renewable Energy, Inc., No.

2:14-CV-1666-WBS-EFB, 2015 WL 5474344, at *1 (E.D. Cal. Sept. 17, 2015) report

and recommendation adopted, No. 2:14-CV-1666-WBS-EFB, 2015 WL 6460414 (E.D.

Cal. Oct. 26, 2015), the court held that the surety was entitled to pre-judgment writs of

attachment against the principal and individual indemnitors but that, with certain

exceptions, the surety had not proven what specific, non-exempt property it could

attach. The defendants appeared to be actively evading payment and discovery as to

their financial transactions making it difficult to meet the court’s requirements to prove

specific, non-exempt property, but the court also rejected the surety’s request for a

Temporary Protective Order to freeze the defendant’s assets while the surety conducted

discovery, finding that under Cal. Civ. Proc. Code §486.010(b), such a TPO is meant to

enable the creditor to apply for a writ of attachment, and in the instant case, the court

had already ruled on the writ of attachment.