THE SURETY UPDATE

TWENTY FORTH ANNUAL SOUTHERN SURETY AND FIDELITY CLAIMS

CONFERENCECharleston, South Carolina

APRIL 18TH & 19TH, 2013

PRESENTED BY:

Jeffrey S. PriceJarrod W. StoneManier & Herod

150 Fourth Avenue North, Suite 2200Nashville, TN 37219

(615) 244-0030JPrice@ManierHerod.com

JStone@ManierHerod.com

Gretchen A. EckJohn R. O'Donnell

Liberty Mutual Surety2815 Forbs Avenue, Suite 102Hoffman Estates, Illinois 60192

Gretchen.Eck@LibertyMutual.comJohn.O'Donnell@LibertyMutual.com

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Table of Contents

I. SURETY LIABILITY AND DEFENSES .......................................................................... 1

A. DECLARATION OF DEFAULT AND/OR NOTICE REQUIREMENTS ................ 1 1. Performance Bonds ................................................................................ 1 2. Payment Bonds – Public Works ............................................................. 2 3. Payment Bonds - Miller Act .................................................................... 3

B. SCOPE AND LIMITATION OF BONDED OBLIGATION ..................................... 4 1. Performance Bonds ................................................................................ 4 2. Payment Bonds ....................................................................................... 7

C. STANDING ........................................................................................................ 12 1. Payment Bonds – Public Works ........................................................... 12 2. Payment Bonds – Miller Act ................................................................. 13 3. Payment Bonds – Private/Common Law ............................................. 14

D. DAMAGES RECOVERABLE FROM THE SURETY ......................................... 14

E. PAY WHEN PAID CLAUSES ............................................................................ 17

F. LIMITATION OF ACTIONS ................................................................................ 18 1. Private Projects ..................................................................................... 18 2. Miller Act Projects ................................................................................. 18

G. DISCHARGE OF SURETY ................................................................................ 19

H. ACCORD AND SATISFACTION/SETTLEMENT .............................................. 20

I. ARBITRATION PROVISIONS/ENFORCEMENT OF BONDED CONTRACT ... 21

II. CIVIL PROCEDURE ..................................................................................................... 25

A. NECESSARY AND INDISPENSABLE PARTIES/INTERVENTION .................. 25

B. JURISDICTION .................................................................................................. 26

C. IMPROPER VENUE ........................................................................................... 29

D. PLEADINGS GENERALLY ............................................................................... 33

E. RES JUDICATA ................................................................................................. 34

F. DEFAULT JUDGMENT ..................................................................................... 35

G. STAY OF PROCEEDINGS ................................................................................ 36

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H. MISCELLANEOUS PROCEDURAL ISSUES .................................................... 38

III. AGREEMENTS OF INDEMNITY .................................................................................. 41

A. SURETY’S RIGHTS UNDER AGREEMENT OF INDEMNITY ........................... 41

B. EXECUTION OF THE INDEMNITY AGREEMENT ............................................ 44

C. INDEMNITOR DEFENSES TO LIABILITY ........................................................ 46

D. ESTABLISHMENT OF AMOUNT OF LIABILITY .............................................. 50

E. DEFAULT JUDGMENT ..................................................................................... 51

F. PROCEDURAL ISSUES .................................................................................... 53

G. COLLATERAL DEPOSIT DEMANDS/PRELIMINARY INJUNCTIONS ............ 55

IV. BAD FAITH .................................................................................................................. 58

A. BAD FAITH IN INDEMNITY LAWSUITS ........................................................... 58

B. BAD FAITH IN ADDRESSING CLAIMS UNDER BONDS ................................ 60

V. BANKRUPTCY ............................................................................................................. 61

A. SURETY’S RIGHTS AGAINST DEBTORS GENERALLY ................................ 61

B. PREFERENCES ................................................................................................ 61

C. NON-DISCHARGEABILITY OF DEBT .............................................................. 62

D. PROPERTY OF THE DEBTOR’S ESTATE ....................................................... 63

E. MISCELLANEOUS BANKRUPTCY .................................................................. 64

VI. SUBROGATION, ASSIGNMENTS AND THIRD PARTY CLAIMS .............................. 64

A. PURSUIT OF CONTRACT BALANCES ............................................................ 64

B. GOVERNMENT & OFFSET ............................................................................... 66

C. CLAIMS AGAINST THIRD-PARTIES ................................................................ 67

D. CGL POLICIES .................................................................................................. 70

E. DAMAGES FOR DELAY ................................................................................... 71

VII. UNDERWRITING, BOND ISSUANCE AND AGENCY ISSUES................................... 71

VIII. MISCELLANEOUS ....................................................................................................... 73

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I. SURETY LIABILITY AND DEFENSES A. DECLARATION OF DEFAULT AND/OR NOTICE REQUIREMENTS 1. Performance Bonds

In Stonington Water Street Assoc., LLC v. National Fire Insurance Company of Hartford, 472 F. App’x 71, 2012 WL 2688698 (2nd Cir. July 9, 2012), the U.S. Court of Appeals for the Second Circuit affirmed the district court’s determination that the obligee’s delayed notice of the principal’s default prejudiced the surety. The Second Circuit agreed that the obligee’s act of hiring replacement workers during the period of delay deprived the surety of its contractual right under Paragraph 4 of the performance bond to protect itself by participating in the selection of replacement workers.

In CC-Aventura, Inc. v. Weitz Company, LLC, 492 F. App’x 54 (11th Cir. October 11, 2012), the U.S. Court of Appeals for the Eleventh Circuit affirmed the district court’s conclusion that the surety was not liable on a performance bond because the obligee failed to give notice to the surety of the subcontractor’s default before the obligee undertook to remedy the default itself. On appeal, the prime contractor relied on Dooley & Mack Constructors, Inc. v. Developers Surety & Indemnity Co., 972 So.2d 893 (Fla. App. 2007) to argue that the subcontract authorized it to remedy the default without notice to the surety. The Eleventh Circuit disagreed and distinguished the language of the performance bond in Dooley & Mack to language in the performance bond at issue. The performance bond at issue provided that the obligee “after reasonably notice to Surety may…arrange for the performance of the Principal’s obligation under the subcontract.” After reading the performance bond and the subcontract harmoniously, the court held that surety had a right to “reasonable” notice before the obligee undertook to remedy the principal’s default.

In Carnell Construction Corp. v. Danville Redevelopment & Housing Authority, C.A. No. 4:10-cv-7, 2012 WL 2367157 (W.D. Va. June 21, 2012), the U.S. District Court for the Western District of Virginia, in advance of a third trial, again refused to grant the surety’s motion for judgment as a matter of law. It was clear that the obligee did not comply with the conditions precedent in Paragraphs 3 and 4 of the A312 Performance Bond. However, the contract did not include those conditions and allowed the obligee to complete the work following a default. Following the grant of new trial, the case was transferred to a different judge. In its original decision on the issue, the prior judge had reasoned that the contract and bond incorporated each other, that the differing rights following a default were an ambiguity, and that the ambiguity would be construed against the drafter of the bond (which the court seemed to assume was the surety). The court determined that this prior ruling was the law of the case. Therefore, it would not be disturbed absent a clearly erroneous result or other changed circumstances. Because neither condition was present, the motion was denied.

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2. Payment Bonds – Public Works

In Cal. Paving & Grading Co. Inc. v. Lincoln Gen. Ins. Co., 206 Cal. Rptr. 3d 405 (Cal. Ct. App. May 21, 2012), the subcontractor sued the surety who provided a payment bond after the general contractor filed for bankruptcy and did not pay the subcontractor for its completed work. The surety moved for dismissal on the basis that the subcontractor’s claim was not timely. The surety asserted that the project was a public work. The California statutory scheme required a subcontractor on a public project to file a preliminary 20-day stop notice on both the surety and the public agency. The court found that the subcontractor’s work was a public work because the subcontract was in furtherance of the contract for construction for the city. The court found that the 20-day notice requirement was applicable and affirmed the trial court’s dismissal.

In API Elec. Co. v. N. Am. Specialty Ins. Co., Case No. A11-1790, 2012 WL 1914126 (Minn. Ct. App. May 29, 2012), the general contractor obtained a payment bond from a surety to cover payments to subcontractors. After the completion of the project, the general contractor failed to pay the subcontractor all payments due. The subcontractor gave notice of the missing payments to the surety 127 days after the completion of the project. The applicable statute required a claimant to provide notice within 120 days of the completion. Previous decisions had allowed a clearly expressed alteration of the notice period if the purposes of the statute were not frustrated by the change. Thus, an express lengthening of the notice period in a bond could enlarge the 120 day notice period. However, the bond in this case did not specify a longer period. As a result, the 120 day notice period in the statute governed the bond. Moreover, as the bond was “to be construed in conformity with statutory requirements when conflicts arise, the indefinite notice provision in the bond [could not] prevail over the more specific statutory 120-day period.”The court affirmed the lower court’s summary judgment in favor of the surety.

In Safety Signs, LLC v. Niles-Wiese Construction Co., Inc., 820 N.W.2d 854 (Minn. Ct. App. 2012), the Minnesota Court of Appeals held that notice of a payment bond claim, required under Minn. Stat. § 574.31, subd. 2(a), is effective upon mailing – not receipt by the surety and the contractor. The court nonetheless held that the claimant’s notice to the contractor was defective because the claimant mailed the notice of claim to the contractor at its business address, not the address listed on the payment bond. According to the court, complying with the public works statute’s express provision that notice must be transmitted to the surety and the contractor at the address listed on the payment bond is a condition precedent to recovery under the payment bond. The court reversed summary judgment granted in favor of the claimant and held that “strict compliance with the statutory notice requirements cannot be waived.”

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3. Payment Bonds - Miller Act

In U.S. for the use of Alban Tractor Company, Inc. v. Hudson Insurance Co., 2013 WL 509151, Case No. 1:12-cv-1538 (D. Md. Feb. 11, 2013), the court discussed the Miller Act’s ninety (90) day notice requirement. In Alban, the claimant rented equipment to a first tier subcontractor. The claimant gave notice to the prime contractor and surety on August 4, 2011, for allegedly unpaid invoices for equipment and materials furnished between February 1, 2011, and May 10, 2011. This notice was timely, and the parties agreed to a joint check arrangement under which the claimant received substantial payments. The claimant continued to furnish equipment, and the last of its equipment was returned on December 28, 2011. It gave notice on April 12, 2012, purporting to amend its earlier notice. Since more than 90 days elapsed between the final furnishing on December 28, 2011, and the new notice on April 12, 2012, the notice was untimely. The court rejected the claimant’s argument that it could “amend” its earlier notice and stated that the purpose of the Miller Act’s ninety (90) day notice requirement “is to allow general contractors to make final payments to subcontractors after waiting a reasonable amount of time to determine whether there are outstanding claims by second-tier subcontractors.” The court also rejected the claimant’s argument that the joint check agreement constituted a direct contract with the prime and thus removed any notice requirement. The court dismissed the claims for equipment or material supplied by the claimant after August 2011.

In D.D.S. Indus., Inc. v. C.T.S., Inc., Case No. 1:11-cv-11561, 2012 WL 2178962 (D. Mass. June 13, 2012), an allegedly unpaid first tier subcontractor on a federal project sued the prime contractor and surety. The prime contractor moved to dismiss the Miller Act count of the complaint for failure to state a claim under Rule 12(b)(6). The prime contractor argued that the complaint did not allege that the plaintiff had given timely notice of its claim or that suit was filed within the one year limitation period. The court noted that a first tier subcontractor does not have to give notice of its claim. Due to the procedural posture, the court drew all inferences in favor of the nonmovant and the complaint and a weekly payroll record were sufficient basis for a reasonable conclusion that original contract work, as opposed to repair or corrective work, was done within the one year period prior to the date suit was filed. Consequently, the Magistrate Judge denied the motion to dismiss.

In U.S. for the use of ProBuild Co., LLC v. Scarborough, 2012 WL 3257839 (E.D. Va. July 19, 2012) the Magistrate Judge recommended denial of the individual surety’s motion for judgment on the pleadings. The surety argued that an Affidavit of Individual Surety was attached to the Miller Act payment bond, that it limited the duration of the bond to one year, and that the claimant’s material was furnished after expiration of the one year period. The Judge noted that the Affidavit was not attached to the Complaint and had various inconsistencies. The Judge refused to consider it connection with the Rule 12(c) motion but also questioned whether the Affidavit merged with the bond and stated, “To the extent that the Miller Act contemplates that a surety’s obligation will be apparent from the terms of the contract and payment bond, and the terms of the Bond in this case do not reference the Affidavit, it would be patently unfair and contrary to the Act’s remedial purpose to read the

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Affidavit as limiting Scarborough’s liability.” The decision, however, rested on the strictures of Rule 12(c) and the fact that the asserted defense did not appear on the face of the pleadings. No objection was filed, and on August 8 the District Court adopted the Magistrate Judge’s decision.

In U.S. for the use of IGW Electric, LLC v. Scarborough, 2013 WL 286264 (E.D. Va. January 24, 2013) a second tier subcontractor sued the prime contractor’s surety on a Miller Act project. The surety filed a motion to dismiss claiming that the sub-subcontractor failed to comply with the Miller Act’s ninety (90) day notice requirement, which is a condition precedent for recovery under the Miller Act for second tier subcontractors. Viewing the facts pled in the complaint as true, the court noted that the complaint alleged an express and implied contract directly between the prime contractor and the “second tier” subcontractor and that the subcontractor provided notice on behalf of the “second tier” subcontractor. The court found that the facts alleged in the complaint met the plausibility standard of Bell Atlantic v. Twombly and were sufficient to support the claimant’s argument that the Miller Act’s notice requirement was met and/or was inapplicable.

B. SCOPE AND LIMITATION OF BONDED OBLIGATION

1. Performance Bonds

In Paul Reed Construction and Supply, Inc. v. Arcon, Inc., Case No. 8:12-cv-48, 2012 WL 6086915 (D. Neb. December 5, 2012), the U.S. District Court for the District of Nebraska granted summary judgment in favor of the surety. A second tier subcontractor on a state roadway project obtained a performance bond, but not a payment bond, from the surety. An unpaid supplier asserted a claim under the prime contractor’s statutory contract bond, and the prime contractor withheld money from the first tier subcontractor. The first tier subcontractor sued the second tier subcontractor and its surety. In a motion for summary judgment, the first tier subcontractor argued that, although performance bond generally relate only to the performance of non-payment obligations, the performance bond at issue, which provided that the second tier subcontractor would “promptly and faithfully perform said subcontract,” incorporates the entire subcontract and every obligation therein, including the second tier subcontractor’s payment obligations. The court disagreed and held that, read in light of the well understood distinction between the types of bonds, and reading any ambiguity against the obligee because it dictated the form, the performance bond guaranteed only that the work would be completed satisfactorily, the “non-payment obligations,” not that the principal would also pay its suppliers. The court granted summary judgment dismissing the surety.

In Choate Construction Co. v. Auto-Owners Ins. Co., 736 S.E.2d 443 (Ga. App. November 20, 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

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identified the project but did not identify Dedmon Electric Services in any way. The contractor accepted the bonds without inquiring as to the discrepancies. After the subcontractor defaulted, the contractor sued the surety. The trial court granted the surety summary judgment because the principal on the bond was not the subcontractor. On appeal, the court found questions of fact existed as to the intent of the parties in issuing the bond. The surety’s attorney admitted to the trial court that the bond producer had fraudulently misled the surety as to the identity of the principal because it knew Thad Dedmon might not qualify due to lack of credit while Jacqueline Payne, an elderly woman with good credit but no connection to the actual subcontractor, would qualify. Additionally, the correct identification of the project and amount of the subcontract also raised issues of fact and summary judgment should have been denied. The court reversed the judgment.

In Hartford Casualty Insurance Co. v. Intrastate Construction Corp., Case No. 11-16041, 2012 WL 6571039 (11th Cir. December 17, 2012), the U.S. Court of Appeals for the Eleventh Circuit rejected the reasoning of the district court in its decision reported at Hartford Casualty Insurance Co. v. City of Marathon, 825 F.Supp.2d 1276 (S.D. Fla. 2011). The City planned to construct an advanced wastewater treatment system consisting of a series of treatment facilities at various locations. The City awarded the principal the contract for Service Area No. 3 in the amount of $2,061,000, and the surety provided the required bonds. Almost a year later, and after notices from unpaid subcontractors and suppliers, the City and the principal executed a Change Order No. 1 adding Service Area No. 7 to the contract for an additional cost of $2,984,487. The surety’s attorney-in-fact wrote a letter to the City giving the surety’s consent to the Area 7 Change Order, but when the surety learned of the Change Order, it immediately advised that its bonds only covered work performed on Area No. 3. The City then terminated the contract for default because the contractor failed to provide a bond for the Change Order work and demanded that the surety perform the original Service Area No. 3 work. The surety offered a takeover agreement, but the City rejected it. The surety filed a declaratory judgment action and the City counterclaimed for the Area 3 work. The district court granted summary judgment to the surety. On appeal, the U.S. Court of Appeals for the Eleventh Circuit thought that there was no case or controversy as to the Area 7 work. The City did not contend the surety was responsible for it, and the surety did not seek relief as to Area 7. The court held, however, that, under the prime contract, the contractor was obligated to bond the Area 7 change order work, and its failure to do so was a breach that justified termination of the contract for cause. Since the contract was properly terminated for cause, the surety was obligated to perform the Area 3 work. The Court reversed summary judgment for the surety as to the City’s counterclaim, vacated denial of the City’s motion for summary judgment on its counterclaim, and remanded the case for reconsideration of the City’s counterclaim for excess costs to complete the Area 3 work.

In Nova Casualty Co. v. New York City Housing Authority, 2012 NY Slip Op. 32962, Docket No. 602527/2008 (N.Y. Sup. Ct. N.Y. Co. December 17, 2012) the obligee terminated two contracts and demanded that the surety perform any remaining work. The surety paid

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payment bond claims but refused to complete the work unless the obligee provided adequate assurances that it would pay the surety the remaining contract funds. The obligee refused to provide such assurances and eventually paid in excess of the contract funds to complete one of the contracts. The court held that the UCC provision for adequate assurance applied only to contracts for the sale of goods and that New York case law extending the doctrine was limited to situations analogous to sales contracts and did not apply to construction contracts or bonds. The court thought that the surety was obligated under the performance bond and that the obligee did not waive its performance bond rights. Even if the surety was subrogated to the rights of the subcontractors and suppliers it paid under the payment bond, those claims to contract funds were inferior to the obligee’s right to use the contract funds to complete the work. The surety contested the amount the obligee spent on completion of the one contract, but the contract was made a part of the bond and the contract stated that “The Authority’s certificate as to the excess cost and excess time, if any, of completing the Work, and the amount of damage suffered, shall be binding and conclusive upon the Contractor and his sureties.” The court granted the obligee summary judgment for the amount it spent in completion costs on the one contract less the remaining contract funds in its hands on both contracts.

In U.S. for the use of LW Construction of Charleston, LLC v. Hanover Insurance Co., 2013 WL 681852 (W.D.N.C. February 4, 2013) the prime contractor on a federal project sued the surety for a subcontractor. The prime contractor asserted that the surety was liable under the bonds to compensate it for the costs of completing and/or correcting defective work performed by the subcontractor, who was terminated by the prime contractor. The prime contractor also asserted that the surety was liable to it under the Miller Act and pursuant to the North Carolina Unfair Deceptive Trade Practices Act. The surety moved to dismiss the last two (2) counts asserted by the prime contractor. Noting that the Miller Act required the prime contractor to provide bonds to the United States, the court held that the bonds issued by the surety on behalf of the subcontractor were not “Miller Act” bonds. The court also held that an action under the UDTPA must be based on substantial aggravating circumstances attending a breach of contract. According to the court, “the Amended Complaint fails to set forth factual allegations demonstrating the level of substantial aggravating circumstances necessary to elevate a contractual dispute over a surety performance bond into a tort.” The court granted the surety’s motion and dismissed the Miller Act and UDTPA claims.

In Lake County Grading Co., LLC v. Village of Antioch, 2013 WL 622157 (Ill. App. February 20, 2013) the claimant performed grading work in connection with two residential developments. The developer’s infrastructure agreements with the Village required it to provide bonds, and it provided performance bonds but no payment bonds. The appeals court treated the Illinois Public Construction Bond Act as applicable to the agreements, and the Act required a payment bond for the protection of persons working on the projects. The court read the Act into the agreements and held that the claimant was an intended third party beneficiary of the agreement’s requirement to procure payment bonds and that the claimant could sue the owner for breach of the payment bond requirement (even though the claimant did not comply with the Act’s time limitations). In other words, the court allowed the claimant to sue for breach

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of the agreements (four year SOL), not for breach of the non-existent payment bonds. The court stated, “[t]he specific language to be included in the bond pursuant to section 1 is intended to clarify what might otherwise be seen as ambiguous bond language, not to expand a performance bond into a payment bond. In other words, the statute’s specific language related to payment is deemed to be included in the bond only after the public entity satisfies the predicate condition of requiring the contractor to procure a payment guarantee.” The Court affirmed judgment for the claimant against the owner.

2. Payment Bonds

In Ohio Farmers Ins. Co. v. Ind. Drywall & Acoustics, Inc., Case No. 49A02-1106-CC-534 (Ind. App. May 22, 2012), the court reversed the trial court’s denial of the payment bond surety’s motion for summary judgment. There was no dispute that the prime contractor was indebted to the claimant subcontractor or that the claimant gave notice of its claim, submitted a proof of claim, and requested a copy of the bond. There was no dispute that the surety failed to provide a copy of the bond and failed to respond with a statement of any undisputed amounts as required by the bond. The bond had been properly recorded in the land records of the county where the work was performed. However, the bond required suit within one year of the last date anyone worked on the project or the date the claimant gave its notice of a claim, whichever occurred earlier. The claimant sued the surety more than one year after the principal was terminated for default. The one year limitations period in the bond was dispositive even though the subcontractor was a third party beneficiary to the bond. The trial court also properly denied the summary judgment motion and motion for judgment on the evidence by the subcontractor.

In U.S. for the use of Morgan Buildings & Spas, Inc. v. BKJ Solutions, Inc., 2012 WL 2994717 (W.D. Okla. July 20, 2012), the prime contract with the Corps of Engineers required both site work and the furnishing and installation of modular buildings. The supplier of the modular buildings sued the surety on the payment bond. The surety asserted that the bond covered only the site work and moved for summary judgment. The court found that the Miller Act and the bond itself were unambiguous. They both covered all labor and material furnished for use in performance of the contract. Hence, the plaintiff’s work was covered, and the surety’s motion was denied.

In Clayton B. Obersheimer, Inc. v. Travelers Casualty & Surety Company of Am., 96 A.D.3d 1284 (N.Y.A.D. 2012), the appeals court affirmed the trial court’s partial summary judgment for the claimant subcontractor on a public project. The claimant did not dispute that the surety was entitled to assert all defenses available to its principal, but asserted that the surety sound fund pension contributions and payments allegedly owed to the claimant’s subcontractors and suppliers. The claimant agreed that joint checks could be issued to cover any debts owed to its subcontractors and suppliers. The union aspect apparently involved a claim by one union that it was entitled to contributions because of work performed by members. However, a failure to pay the other union did not breach the subcontract. The court held that the affidavits submitted by the surety created an issue of fact only as to the amount

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owed, not to the surety’s liability for that amount. Hence, it affirmed the partial summary judgment as to liability.

In Costa v. Brait Builders Corp., 463 Mass. 65, 2012 WL 3084656 (Mass. August 1, 2012) , the Massachusetts Supreme Judicial Court considered whether a subcontractor providing labor or materials to a public construction project for which a statutory payment bond has been obtained by the prime contractor may, by private agreement, forgo its right to pursue payment under the bond. The court held that a contractual waiver of the right to claim on a public works payment bond was void as against public policy. The court held that “the strong public policy behind the [statutory] bond requirement renders unenforceable a provision purporting to waive claims against such a bond.” The court did enforce a consequential damages waiver incorporated into the subcontract via a “flow down” clause. The court declined to disturb the trial court’s award of damages under G.L. c. 93A (c. 93A) (for unfair and deceptive business practices) or for attorneys’ fees. The court did strike consequential damages awarded by the trial court.

In Contractors Bonding and Insurance Co. v. Kenneth R. Rogers Plumbing and Heating Co., Inc., Appeal No. C-110866 (Ohio App. September 26, 2012), the principal was a subcontractor on a project with the University of Cincinnati. The surety issued bonds on behalf of the principal with the penal sum of its original subcontract - $138,900.00. The University of Cincinnati terminated the lead contractor and hired the principal, already a subcontractor, to complete work on the project. The University of Cincinnati transferred the lead contractor’s work to the principal via a change order that also increased the sum of its work to $818,932.80. Another subcontractor on the project submitted a claim against the bond issued on behalf of the principal for an amount exceeding the original penal sum. The surety paid the $138,900 into the trial court and asked for a discharge from further liability. The trial court held that the surety’s liability was limited to $138,900, and a subcontractor appealed. The appeals court affirmed the trial’s court’s conclusion. One of the bonds furnished to the court had a “blank” penal sum. R.C. 153.571 provided that if the amount was left blank the penal sum was “the full amount of the principal’s bid, including alternates.” The appeals court rejected the subcontractor’s argument that “alternates” included change orders and found that it meant alternate bids. The claimant argued that R.C. 153.11 required that the bond cover properly approved change orders, and that this meant the amount of the bond increased automatically when the lead contractor’s work was added to the bonded contract. The appeals court held that adding the terminated lead contractor’s work to the bonded contract was not a change order as contemplated by R.C. 153.11 and so rejected the claimant’s argument. The appeals court concluded that there were no issues of fact and the surety’s liability was limited to $138,900.

In Missouri Dept. of Transportation ex rel. On Point Contractors, LLC v. Aura Contracting, LLC, 2012 WL 5907471 (Mo. App. November 27, 2012), a private owner retained the principal to perform certain construction work. The owner obtained a permit for the work, and, as a requirement for the permit’s issuance, the principal was required to obtain a Permit

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Surety Bond that protected the Missouri Highways and Transportation Commission. Instead of filing a mechanics lien, a subcontractor/claimant sued the surety and the Commission under the Permit Surety Bond. The claimant argued that the Permit Surety Bond was, in fact, a statutory public works payment bond. The Missouri Court of Appeals held that the work was on a private project and the public works bonding statutes did not apply. Accordingly, the claimant’s remedy was to file a mechanics lien. The court affirmed summary judgment for the surety and the Commission.

In Electrical Contractors, Inc. v. Insurance Company of the State of Pennsylvania, Case No 3:11-cv-1432, 2012 WL 6021321 (D. Conn. December 3, 2012), the U.S. District Court for the District of Connecticut certified to the Connecticut Supreme Court the issue of whether pursuant to Gen. Stat. §49-42(a) a surety’s failure to deny a claim within 90 days of receipt waived the surety’s ability to assert any defenses. This is sometimes referred to as the Barreira Landscaping issue. The district court essentially invited the Connecticut Supreme Court to answer the following questions: Question 1: (a) Is a surety’s failure to meet the 90 day deadline under Section 49-42 deemed to be an exhaustion of remedies entitling claimants to bring suit for an adjudication of their claim, or (b) does the failure to meet the 90 day deadline operate as a waiver of a surety’s defenses directing the Court to enter judgment for the claimant in the full amount of the claim? Question 2: Does a surety’s request for further information to substantiate a claim constitute (a) a “denial” of the claim under Section 49-42 or (b) a “good faith dispute” of the claim under Section 49-42?

In U.S. for the use of C&J of Crown Point, L.L.C. v. Singleton, Case No. 11-cv-857, 2012 WL 6026139 (E.D. La. December 4, 2012), the owner of the project terminated the prime contractor on two (2) separate occasions. Prior to the prime contractor’s final termination, a dredging subcontractor performed work for the prime contractor on the bonded contract. The plaintiff in the lawsuit was a second dredging subcontractor that allegedly “bought out” the subcontractor who performed work on the bonded project. The claimant asserted a claim under the Miller Act payment bond issued by the surety for the unpaid sums owed to the initial dredging subcontractor. The surety and the prime contractor moved for summary judgment arguing that (1) there was no subcontract with the claimant; (2) there was no assignment from the actual subcontractor to the claimant; and (3) the Miller Act limitations period had run for any claim by the dredging subcontractor. The surety also argued that, far from being enriched by the subcontractor’s dredging work, the prime contractor actually suffered damages and had to pay for completion by another subcontractor. The court found issues of fact that precluded summary judgment. There were facts, including correspondence from the prime contractor, suggesting that the claimant was a subcontractor or supplier directly to the prime contractor, and there were disputed issues of fact as to responsibility for any defective or incomplete work.

In Trustees of the Construction Industry and Laborers Health and Welfare Trust v. Concrete Coring of Nevada, Inc., Case No. 2:10-cv-1600 (D. Nev. December 14, 2012), the

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U.S. District Court for the District of Nevada entered judgment for the plaintiff union health and welfare funds for contributions owed by the contractor. The court held that the contractor’s license bond surety was liable for the unpaid contributions and for attorneys’ fees and costs, but only up to the penal sum of the $10,000 bond.

In Drago Custom Interiors, LLC v. Carlisle Building Systems, Inc., 57 A.3d 668 (R.I. 2012), a subcontractor on a public project sued the prime contractor and its payment bond surety. The matter was stayed and sent to arbitration. The first arbitration award found that the contractor owed the claimant $43,543.02 plus interest but that the subcontractor had not offered any evidence that the surety issued a bond or was responsible for the claim. The arbitrator thus determined that the surety was not liable to the subcontractor. The subcontractor then requested that the arbitrator reopen proceedings so that it could offer the bond in evidence. Instead, the arbitrator issued two amended awards. The first repeated that there was no evidence of a bond but found that the issue of the surety’s liability was neither asserted nor denied and stated that the award was without prejudice to the subcontractor’s claims against the surety in the litigation. The second amended award deleted the finding as to the surety’s liability not being asserted or denied but repeated that the award was without prejudice to the subcontractor’s rights in the litigation. The subcontractor asked the trial court to confirm the award as to the prime contractor and modify it to make the surety liable. The surety argued that the arbitrator could not modify the first award stating the surety was not liable and asked that the first award be confirmed. The trial court thought that it had the inherent authority to remand the case and did so asking the arbitrator to clarify whether the surety had ever contested its liability and what was intended by making the award without prejudice to any claims against the surety in the litigation. On remand, the arbitrator issued yet another award finding that the surety had not contested its liability and concluding that both the prime contractor and the surety were liable for the $43,543.02 plus interest. The subcontractor moved to confirm this post-remand award and the surety moved to vacate it and confirm the original award. The trial court confirmed the post-remand award and the surety appealed. The Rhode Island Supreme Court found that the trial court had no inherent power to remand the matter to the arbitrator. The court nevertheless affirmed the result, judgment against the surety, because the trial court had authority to vacate the second amended award and order a rehearing. The court found that the arbitrator’s various awards were indefinite and inconsistent and that, in the words of the statute, “the arbitrator so imperfectly executed his powers that a final and definite award with respect to [the surety’s] liability was not made.”

In Erie Materials, Inc. v. Universal Group of New York, Inc., 101 A.D.3d 1529 (N.Y.A.D. 2012), a subcontractor on a public project failed to pay a supplier, and the supplier sued the surety on the prime contractor’s payment bond required by New York State Finance Law §137. The surety contended that some of the supplies had been diverted and not used on the project. In the trial court the surety argued that the “diversion exception” in New York’s Lien

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Law did not apply to the §137 bond claim, but on appeal the surety no longer contested that the exception applied. Instead, the surety argued that the claimant had not established that it believed in good faith that all of the material was furnished for the bonded project. The appeals court held that, since the surety’s position in the trial court was that the diversion exception did not apply, the claimant did not have the burden to produce evidence to establish the basis for the exception. The appeals court found that the surety did not demonstrate the existence of any factual issues and affirmed judgment for the claimant including attorneys’ fees.

In Fisk Electric Co. v. Fidelity and Deposit Company of Maryland, 2013 WL 592907 (E.D. La. February 14, 2013), the prime contractor on a federal project agreed to pay $2.7 million for a generator even though it had previously been offered the same generator for a lower price by a different supplier. There was unexplained “shared savings” in the purchase negotiations, and the sureties on a Miller Act payment bond issued on behalf of the prime contractor argued that the prime contractor and the supplier may have colluded to negotiate an artificially inflated price for the generator, to be borne by the sureties. When the supplier sought payment from the sureties, they paid $2 million. The supplier sued for the balance of the purchase price, plus attorneys’ fees. The U.S. District Court for the Eastern District of Louisiana recognized that fraud, if pled as an affirmative defense with specificity, could be a defense to a Miller Act claim, but held that the sureties had not pled it with the necessary specificity and had not raised a genuine issue of fact as to any fraud defense. The sureties also argued that the remaining balance due for the generator is not recoverable under the Miller Act because it was attributable to “savings” rather than “labor or materials.” The court disagreed and acknowledged that “the amount properly recoverable under the Miller Act by a subcontractor is the agreed contract amount without regard to whether the amount may or may not include profits.” The court granted summary judgment in favor of the supplier for the balance of the purchase order, but denied the supplier’s claim for attorneys’ fees because the supplier had not identified evidence in support of its claim for fees.

In U.S. for the use of MMS Construction & Paving, L.L.C. v. Head, Inc., Case No. 10-cv-1340, 2013 WL 706172 (W.D. Okla. February 26, 2013), the court refused to set aside jury verdicts for a subcontractor against the prime contractor. The prime contractor’s surety moved for judgment as a matter of law because no evidence had been presented at trial to support a claim against it. During the pre-trial conference, however, the parties agreed that the surety would be liable on the payment bond for any amounts awarded to the claimant on its breach of contract claim against the contractor. The surety did not dispute entering into the agreement in its motion for judgment as a matter of law. The court held that the surety was not entitled to judgment as a matter of law based on the agreement.

In Terral Riverservice, Inc. v. Target Construction, Inc., 2012 WL 1377628 (W.D. La. April 19, 2012), the U.S. District Court for the Western District of Louisiana granted summary judgment to a first tier supplier of rip rap on a Miller Act project. The court expressed displeasure at the frivolous and disingenuous arguments as well as the dilatory tactics of the

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prime contractor and the surety. The court entered judgment for the amount claimed plus legal interest from the date of judicial demand less a credit for a partial payment.

In J.H. Larson Electrical Co. v. C & S Electric, LLC, 2012 WL 1070016 (Minn. App. April 2, 2012), a supplier to a subcontractor on a public project signed lien waivers that indicated no money was owed for material it had furnished. After the subcontractor failed to pay, the supplier sued the prime contractor on the payment bond. The court affirmed judgment for the prime contractor even though it used the term promissory estoppel instead of equitable estoppel. The appeals court found that the defense was more properly termed equitable estoppel. Regardless, the prime contractor reasonably relied on the lien waivers to release payments to the subcontractor and therefore the subcontractor was equitably estopped from changing its position to the prime contractor’s detriment.

C. STANDING

1. Payment Bonds – Public Works

In LaSalle Group, Inc. v. Gray Insurance Co., Case No. 1-11CV377HSO, 2012 WL 1934428 (S.D. Miss. May 29, 2012) the prime contractor on a Mississippi public project sued the surety for a subcontractor. Following termination of a subcontractor by the general contractor, the general contractor filed suit against the surety for recovery under both payment and performance bonds. The surety moved to dismiss the payment bond claim on the basis that the general contractor was not a proper claimant under the payment bond. The district court failed to address the merits of the motion. Instead, it stayed the proceeding pending a resolution of pending litigation between the subcontractor, the surety and other parties pending in Michigan state court.

In White-Spunner Construction, Inc. v. Construction Completion Company, LLC, 103

So.3d 781 (Ala. 2012), a subcontractor on an Alabama public project sued the prime contractor and the prime contractor’s surety. The subcontractor provided labor, supervision and some material for the framing work on the project. The subcontractor in turn obtained the workers from another entity. The subcontractor was licensed in Alabama as a general contractor, but the other entity which actually employed the workers was not licensed. The trial court thought that the unlicensed entity was just a labor broker and did not need to be licensed. The trial court granted summary judgment to the subcontractor, against the prime contractor and surety, for the balance owed on various invoices plus interest and attorneys fees. The trial court granted summary judgment to the surety dismissing the subcontractor’s bad faith claim. The prime contractor and surety appealed, and the subcontractor cross appealed the dismissal of its bad faith claim. The Alabama Supreme Court found that there was no labor broker exception in the licensing statute, that the entity employing the workers was within the definition of a contractor which was required to be licensed. The prime contractor and surety had standing to raise the violation of the licensing statute as a defense. The contract between the subcontractor (CCC) and the employer of the workers (Buena Vista) was illegal and void

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due the employer’s lack of required license. The court dismissed the subcontractor’s cross appeal on the bad faith claim as moot.

In Wright v. C. Watts and Sons Construction Co., Inc., 2012 WL 4472125, Case No. 2:12-cv-2089 (W.D. Ark. September 27, 2012), the principal contracted with the owner of property adjoining a highway project to take fill material from the owner’s land and park an office trailer on the property for 1 to 18 months. By separate letter agreement, the principal acknowledged that it would build a parking lot for the owner on his land, that it would remove debris and reseed grass, and that it would grade and reseed all haul roads to the owner’s property. The owner filed a lawsuit against the principal and the surety seeking damages for breach of contract, trespass, negligence and an injunction against the principal from making further modifications to the owner’s property. The U.S. District Court for the Western District of Arkansas held that the public works statutes governing the payment bond cannot be reasonably interpreted to require protection for claims based on negligence. The district court further held that the trespass claims “are not within the scope of protection afforded by the legislature to furnishers of labor and materials used in or incident to the construction of public works.” Finally, the district court held that the breach of contract claims were not covered under the payment bond and dismissed the claims against the surety. The court reasoned, “In the absence of any statement that labor was performed or materials furnished for which payment has not been made, Plaintiff’s claims against Travelers are dismissed.”

2. Payment Bonds – Miller Act

In U.S. for the use of M.E.G. International, Inc. v. Brasfield & Gorrie, LLC, Case No.

4:11-cv-139, 2012 WL 1583687, (M.D. Ga. April 30, 2012), a claimant sought payment for subcontract work under the prime contractor’s Miller Act payment bond. The prime contractor/principal argued that the claimant contracted solely with a second-tier subcontractor on the project and, as a third-tier subcontractor, was not entitled to relief under the Miller Act. The claimant asserted that it contracted with both a first-tier subcontractor and a second-tier subcontractor and could assert a claim under the Miller Act. The claimant submitted a contract it allegedly entered into with both the first-tier subcontractor and the second-tier subcontractor (who were affiliated with one another) into evidence. The U.S. District Court for the Middle District of Georgia denied the prime contractor’s motion for summary judgment because it found the claimant had sufficient evidence to create a genuine fact dispute as to whether the first-tier subcontractor contracted directly with the claimant.

In Mo-Kan Iron Workers Pension Fund v. Travelers Casualty and Surety Co., Case No. 2:12-cv-2490, 2012 WL 5933064 (D. Kan. November 27, 2012), several union pension funds sued sureties for the prime and first tier contractors to recover benefits owed by a third tier subcontractor on a federal project. The suit was filed pursuant to the Miller Act, and the sureties moved to dismiss it. According to Supreme Court precedent, Miller Act bonds only protect those who have a direct contractual relationship with the general contractor or subcontractor. Consequently, the court held that the claimants were too remote to state a Miller Act claim on the prime contractor’s bond because the Miller Act protections only

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extended to the second tier contractor. The first tier subcontractor’s bond was not required by or provided under the Miller Act. The court granted the motion to dismiss.

In U.S. for the use of O.L.S., Inc. v. Southwind Construction Servs., LLC, 2013 WL 452858 (10th Cir. February 7, 2013) a third tier subcontractor was not paid for equipment leased to the second tier subcontractor. The third tier subcontractor sued the first tier subcontractor, the prime contractor and the surety under the Miller Act and argued that the first tier subcontractor operated as a prime contractor on the federal project. The court held that a contract with the Government was necessary to be the prime contractor, and a contract with the prime contractor was an essential prerequisite to being a first tier subcontractor. The court did not re-characterize the first tier subcontractor as the prime contractor because the Miller Act defines prime contractor as the party who is awarded the contract by the government and posts the surety bond. The Court affirmed the district court’s dismissal of the suit for lack of jurisdiction because the claimant, as a third tier subcontractor, was not protected by the bond and could not invoke Miller Act jurisdiction.

3. Payment Bonds – Private/Common Law

In Minnesota Laborers Health and Welfare Fund v. Granite RE, Inc., 826 N.W.2d 210 (Minn. Ct. App. 2012), the plaintiffs were “multi-employer, jointly-trusted employee benefit plans” that collected funds on behalf of union employees from employers bound by various collective bargaining agreements. The principal under the bond was bound by such a collective bargaining agreement and allegedly failed to pay fringe benefit obligations for work performed by employees on the bonded project. The trial court dismissed the case filed by the plaintiffs because the fringe benefit plan was not an intended third party beneficiary of the bond and that the suit was barred by a one year limitation provision in the bond. The trial court also found that the one (1) year contractual limitations period in the payment bond was not tolled by the fraudulent concealment doctrine because the surety, who had no direct contract with the plaintiffs and was not a party to any alleged fraud, could not be held liable to the plaintiffs for the principal’s fraudulent concealment. On appeal, the Minnesota Court of Appeals held that, because the payment bond guaranteed the payment of all labor costs, the parties to the payment bond contemplated a benefit to a third party (i.e., the funds). The court also held that the surety can be bound by the principal’s alleged fraudulent concealment of a cause of action, but that genuine issues of material fact remained about whether the plaintiffs acted with reasonable diligence to discover the fraudulent concealment. The court reversed judgment for the surety and remanded the case for further proceedings.

D. DAMAGES RECOVERABLE FROM THE SURETY In Continental Cas. Co. v. A.W. Baylor Versapanel-Plastering, Inc., 97 So.3d 937 (Fla.

App. 2012), a subcontractor on a private project made a claim against the prime contractor and the prime contractor’s surety. The subcontract provided for arbitration and the parties stipulated that the arbitrators would determine the right to attorneys fees under §713.29. The subcontractor recovered an award far less than the amount claimed, and the arbitrators found

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that neither side was the prevailing party and declined to award any fees. The subcontractor then filed an action in state court seeking attorney fees pursuant to the Florida statutes governing attorneys’ fees against an insurer, §627.428, which is applicable to a subcontractor’s action to enforce a bond claim pursuant to §627.756. Following the trial court’s grant of fees, the surety appealed, and the Florida Court of Appeal reversed. The Florida Court of Appeals explained the conflict between the two sets of statutes. If the claimant recovered some amount but the surety prevailed on the significant issues, the surety would be entitled to prevailing party fees under §713.29 whereas the claimant would be entitled to fees under §627.428. On appeal, the court held that §713.29 was the controlling statute because the claimant brought an action to enforce a §713.23 bond. As a result, no fees should have been awarded and the trial court was reversed.

In Doukas v. Facilities Dev. Corp., 2092 So. 3d 303 (Fla. App. 2012)(per curiam), a surety and related entities sued the contractor and indemnitors for the balance of the premium for a bond that was rejected by the obligee. Following a grant of summary judgment in their favor, the contractor and indemnitors asked for an award of attorneys’ fees from the surety. The trial court granted the request and the surety appealed. Although the appeals court felt that the fees were justified, it ultimately held that the trial court did not explain its basis of the amount awarded with sufficient specificity in regard to hourly rate, number of hours reasonably expended and the appropriateness of reduction or enhancement. The appeals court remanded the matter for the trial court to make the necessary findings.

In U.S. for the use of New Millennium Bldg Sys., LLC v. Paul S. Akins Co., Inc., Case No. 4:12-cv-76, 2012 WL 4051874 (M.D. Ga. September 13, 2012), the second tier subcontractor sued the prime contractor and its surety to recover attorneys’ fees from the surety pursuant to a Georgia statute, O.C.G.A. §10-7-30. The second tier subcontractor’s claims against the surety were under the Miller Act. The court granted the prime contractor and surety’s motion to dismiss the attorneys’ fee claim. The court held that statutory state law claims for attorneys’ fees could not be brought as part of a Miller Act proceeding.

In Gold Strike Heights Homeowners Ass’n v. Fin. Pac. Ins. Co., 2012 WL 2866688 (Cal. App. July 13, 2012), a homeowners association sued the surety on a bond conditioned on construction of a clubhouse as part of Phase II because it was not built. The jury awarded the face amount of the bond. The trial court granted a judgment notwithstanding the verdict because the claimants had not presented evidence of the cost to build the clubhouse. The appeals court affirmed the result on different grounds. The court found that the project documents provided to prospective purchasers showed the clubhouse as part of Phase II. Since Phase II had not yet been built there was no trigger for the surety’s obligation to build the club house. Hence, no breach of the bond occurred. The Completion Security Agreement requiring the bond contained a fee shifting clause. The trial court also awarded the principal and surety fees in a drastically reduced amount even though a fee shifting clause in the bond existed. On a cross appeal of the amount awarded, the court reversed the trial court’s order excluding from the fees arguments that the court found were valid even though not accepted by the trial court.

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In Reliable Truss & Components, Inc. v. Travelers Cas. & Sur. Co. of Am., 2012 WL

4466304 (Conn. Super. September 11, 2012), the surety for a subcontractor paid a supplier for materials it furnished to the project, but denied liability for interest as called for in the supplier’s contract with the bond principal. The court granted the surety summary judgment on the interest issue. The court held that a Connecticut statute barred interest as part of the sum justly due under the contract because the bond did not expressly require that the surety would be liable for interest on a claim on the bond. Although an exception to the express requirement of interest could arise if the construction contract was with a state or federal government entity, the court found the exception inapplicable because there was no contention that the United States was a party to the contract on which the claim was made. The parties appeared to implicitly concede that a state or local government entity was not a party to the contract.

In Current Builders of Fla., Inc. v. Certified Lower Keys Plumbing, 105 So.3d 582 (Fla. App. 2012), the prime contractor on a condominium project contracted with a subcontractor for plumbing work. The prime contractor subsequently accepted a note and mortgage on one of the units, and later a deed to the unit, as satisfaction of its claim for money owed by the owner. It deeded the unit to a related corporation and went out of business claiming it had no duty to pay the subcontractor because it no longer had any assets. The subcontractor’s lien was transferred to a bond. The court affirmed judgment for the subcontractor against the bond except for the starting date for prejudgment interest. The trial court had awarded interest from the date the subcontractor completed its work. The court instead awarded interest from the date the prime contractor was paid by the owner by the transfer of the deed.

In Sacramento Municipal Utility District v. Fcc Corp., 2012 WL 2703135 (Cal. App. July 9, 2012), the court affirmed a large judgment for the public owner against the contractor. The owner appealed the trial court’s denial of its claim for attorneys’ fees. Admittedly, there was no fee shifting provision in the contract, but the owner relied on the performance bond, which stated, “In the event suit is brought upon this bond by the Obligee and judgment is recovered, the Surety shall pay all costs incurred by the Obligee in such suit, including a reasonable attorney’s fee to be fixed by the Court.” The Court held that this provision did not apply to fees for suing on the construction contract and as a result applied the “American Rule” and denied the request for fees. Although this case did not directly involve a surety’s liability under the performance bond, the court’s ruling implies that a surety would be liable for attorneys’ fees under the performance bond.

In Secured Sys. Tech., Inc. v. Vigilant Ins. Co., 2013 WL 541424 (Conn. Super. January 16, 2013), a second tier subcontractor sued the surety for the first tier subcontractor on both a payment bond and a mechanics lien release bond. The parties each moved for summary judgment as to certain portions of the dispute. The surety argued that counts for unjust enrichment and quantum meruit should be dismissed because there was a binding contract under which the work was performed. In an earlier New York federal district court case, the parties entered into a stipulation that New York law would govern the liability of the first tier subcontractor to the second tier subcontractor. Relying upon the stipulation and collateral

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estoppel, the court applied New York law. As a result, the unjust enrichment and quantum meruit claims could be pled in the alternative to the breach of contract claims. The surety argued that portions of the plaintiff’s claims were barred by a release. The court found it improper to resolve whether the release was a mere receipt or a knowing waiver of claims because genuine issues of material fact existed. The court granted the surety’s motion as to the plaintiff’s claim for statutory attorneys’ fees. The court held that G.S. § 42-185o barred fees claimed pursuant to G.S. § 52-249 unless the bonds explicitly provided for their award. Since the bonds did not, the surety was granted summary judgment as to that claim. The court also denied the plaintiff’s summary judgment motion as to the surety’s liability finding that there were genuine issues of fact as to the principal’s underlying liability and, therefore, as to the surety’s liability.

In Hartford Accident and Indemnity Co. v. Crum & Forster Specialty Ins. Co., Case No. 10-cv-24590, 2012 WL 5818138 (S.D. Fla. November 15, 2012), the surety for the contractor on a condominium project defended the owner’s claims and thereafter sought indemnity from the contractor’s liability insurer. The insurer submitted an offer of judgment, purportedly pursuant to §768.79, Florida Statutes. The surety failed to accept the offer, and the court eventually granted the insurer summary judgment. The insurer moved for an award of attorneys’ fees and costs incurred after the settlement offer based upon the offer of judgment statute. The court held that statute applied and awarded fees to the insurer. The court analyzed the claimed fees for reasonableness under a lodestar analysis, made some reductions, and disallowed the insurer’s claim for non-taxable costs such as computer research and travel expenses.

E. PAY WHEN PAID CLAUSES

In BMD Contractors, Inc. v. Fidelity and Deposit Company of Maryland, 679 F.3d 643 (7th Cir. 2012), the U.S. Court of Appeals for the Seventh Circuit affirmed summary judgment for the payment bond surety reported at 2011 WL 6065104 (S.D. Ind. January 13, 2011). An unpaid second tier subcontractor and its supplier sued the payment bond surety for the first tier subcontractor. The owner of the project had defaulted, and the prime contractor did not pay the first tier subcontractor. Distinguishing between pay-when-paid and pay-if-paid clauses, the Court held that the condition precedent language in the claimant’s subcontract was an unambiguous pay-if-paid clause. Moreover, Indiana law did not void the clause or render it unenforceable because it only limited remedies under the subcontract without destroying the ability of the plaintiffs to file mechanics liens. Lastly, the court held that the surety’s defenses included all the defenses of the principal, including the pay-if-paid clause. Hence, the court affirmed the district court’s summary judgment order in favor of the surety.

In Faith Techs., Inc. v. Fidelity & Deposit Co. of Md., 2012 WL 4476541 (D. Kan. September 27, 2012), the court granted summary judgment in favor of the prime contractor and the surety based on the “pay-if-paid” clauses in the prime contractor’s subcontracts with the claimants. The court declined to revisit prior holdings that the pay-if-paid clause was valid. Following discovery, the parties agreed that the owner had not made such payments and the

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clause had not been triggered. As a result, the court granted summary judgment for the defendant.

F. LIMITATION OF ACTIONS

1. Private Projects

In Sweetwater Apartments, P.A., L.L.C. v. Ware Construction Servs., Inc., Case No. 2:11-cv-155, 2012 WL 3155564 (M.D. Ala. Aug. 3, 2012), the surety for a subcontractor was sued by the project owner, which was a dual obligee on the subcontractor’s performance bond and the beneficiary of a one year warranty requirement in the bonded subcontract. The surety argued that the two (2) year limitations period in the A312 bond barred the owner’s action because it applied instead of the usual six (6) year limitations period. The court held that the shorter contractual limitation as void pursuant to Alabama public policy. The court also found that the one (1) year warranty required by the bonded subcontract was covered by the bond. The surety asserted that the owner had not complied with the condition precedent in the bond that the principal be declared in default and its contract terminated. The court noted that it was unclear how a dual obligee could terminate the subcontract to which it was not a party. Although this issue was a pure issue of law, the parties had not addressed it. Accordingly, the court denied summary judgment. Finally, the court found that the principal received sufficient notice when the owner demanded warranty work within the one (1) year warranty period. The surety’s obligation also found was co-extensive with the principal’s. Hence, the court denied the surety’s summary judgment motion.

In Centre Fence Co., Inc. v. The Orlando Company, LLC, 2012 N.Y. Slip Op. 32782 (Sup. Ct. Richmond Co. November 16, 2012), a subcontractor on a private project moved for summary judgment against the prime contractor and its surety. The bond had a contractual limitations period running from the date the claimant last performed work under the bonded contract. The surety opposed the motion and moved to compel answers to discovery requests. The court found that the last day the claimant worked was a material, disputed issue. The court denied the claimant’s motion and granted the surety’s motion to compel discovery.

2. Miller Act Projects

In U.S. for the use of Martin Marietta Materials, Inc. v. DTC Engineers & Constructors, LLC, Case No. 5:11-cv-111, 2012 WL 2311491 (E.D.N.C. June 18, 2012), a supplier to a bankrupt first tier subcontractor on a federal project sued the prime contractor and its Miller Act surety. The claimant filed a timely action in state court, voluntarily dismissed the state court action, and then re-filed in federal court after the one (1) year statute of limitation period had expired. The claimant argued that N.C. Rule 41(a) gave it one year following dismissal of the timely suit to re-file and, in the alternative, that the Miller Act limitation period should be equitably tolled. The court held that N.C. Rule 41(a) did not apply to a case under the Miller Act because subject matter jurisdiction was predicated upon the Miller Act, not diversity of

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citizenship. The court further held that no basis for equitable tolling existed, as the defendants did not mislead the claimant or cause it to file in the wrong court. The court dismissed the claimant’s lawsuit for failure to state a claim.

In United States for the use of JEMS Fabrication, Inc. v. Benetech, LLC, 2013 WL

594090 (E.D. La. February 15, 2013), a subcontractor sued the prime contractor and its sureties, who issued Miller Act payment bonds. The sureties moved for summary judgment on the basis that the suit was not filed within the one (1) year Miller Act limitation period. The subcontractor had delivered fabricated material to the job within the one year period, and the issue was whether that this had any bearing on the start of the one (1) year period. The sureties argued that the Fifth Circuit did not distinguish between original contract work and remedial work and, instead, looked to whether the project was substantially complete before the delivery. The court disagreed with the sureties’ analysis and instead considered other factors for whether material delivered are part of the original contract or constitute repairs including the relation to the overall subcontract and whether the material was part of the original contract and necessary to operation of the facility. The court thought that the deliveries met these tests or, at least, that the subcontractor had established issues of fact. The court denied the sureties’ motion for summary judgment.

G. DISCHARGE OF SURETY In XL Specialty Insurance Co. v. Massachusetts Highway Dept., 2012 WL 3139874

(Mass. Super. July 12, 2012), the Massachusetts Superior Court considered a performance bond claim on a roadway project involving MassDOT. The principal/prime contractor notified the surety, XL Specialty Insurance Co. (“XL”) and MassDOT that it was financially unable to perform its obligations and tendered a Notice of Voluntary Default. XL and MassDOT negotiated a Takeover Agreement pursuant to which XL agreed to complete the bonded contract under a full reservation of rights. XL also entered into a Completion Agreement with a completion contractor, Bridges, LLC (“Bridges”). The minimum clearance requirement for a railroad on the project and lack of cooperation on any alternative ways to protect the right-of-way prevented progress in demolishing the existing bridge. MassDOT granted several time extensions but eventually refused further extensions and threatened the surety with liquidated damages. XL wrote MassDOT declaring a discharge of its bond obligations. Shortly thereafter, the railroad company reduced the minimum clearance it required, which for the first time made it feasible to protect the right-of-way with a shield as originally contemplated. Demolition of the existing bridge was finally performed approximately four (4) years later. XL moved for partial summary judgment declaring that it was discharged from obligations under the performance bond. The court recognized Massachusetts law discharging a compensated surety if the contract is materially modified, thereby increasing the surety’s risk without its consent, but rejected XL’s attempt to invoke the cardinal change doctrine as applied in other states. The court held that there were disputed issues of fact that precluded summary judgment on the surety’s material modification theory. XL surety also argued that, under the Spearin doctrine, MassDOT breached the implied warranty that the project could be built in

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accordance with the original contract plans, which did not include a vertical clearance measurement. The court thought that a reasonable jury could conclude that the contractor was to investigate the clearance issue prior to bidding. The court also rejected the XL’s impossibility and frustration of purpose arguments as grounds for summary judgment. The vertical clearance issue was not an unanticipated circumstance preventing performance, and MassDOT was not necessarily responsible for the railroad’s lack of cooperation. Section 3.04 of the bonded contract provided that “All alterations, extensions of time, extra work and any other changes authorized under these specifications, or under any part of the Contract may be made without obtaining the consent of the surety or sureties on the contract bonds.” The performance bond itself provided, inter alia, that “notice to the surety of [all duly authorized modifications, alterations, changes or additions to said contract that may hereafter be made] being hereby waived....” MassDOT argued that this constituted the surety’s consent to any changes. XL argued that this boilerplate provision was not consent to the material changes that occurred. The court thought that the provision waived notice of only “typical” changes, not ones materially increasing the XL’s risk, but that the jury would have to decide whether the changes here were material or typical. Ultimately, the court denied XL’s motion for partial summary judgment in its entirety.

H. ACCORD AND SATISFACTION/SETTLEMENT

In U.S. for the use of Pro-Spec Painting, Inc. v. Parsons Evergreene, LLC, 2012 WL

3038587 (D.N.J. July 25, 2012), the U.S. District Court for the District of New Jersey granted the principal’s and sureties’ motion to enforce a settlement agreement. The parties agreed on an amount, and the claimant’s attorney, who was authorized to settle the matter, indicated a draft of the written agreement was acceptable and would be signed. Even though the claimant refused to sign it, the court found that there was a meeting of the minds. As a result, the principal and sureties met their burden to enforce the settlement agreement. The court did not find an exception to the American Rule and denied the principal’s and sureties’ request for attorneys fees due to the absence of proof of wanton or bad faith conduct by the claimant.

In J.H. Landworks, LLC v. T. LaRiviere Equipment & Excavation, Inc., Case No. 2:11-cv-488, 2012 WL 4758079 (D. Idaho October 5, 2012), a subcontractor on a federal project sued the prime contractor and its surety. The prime contractor moved for summary judgment based on a release the claimant signed in connection with a $100,000 payment. The amount space in the release was left blank, and the prime contractor later filled it by writing in the amount of the payment, $100,000. The issue was whether the payment constituted a waiver of all claims or was only a partial payment with the balance to be paid when the owner paid the contractor. As an issue of first impression in Idaho, the court found that there was an implied authorization to fill in blank spaces in a contract but only to conform to the agreement of the parties. Here, there were disputed issues of fact as to the terms of the agreement and consequently, the court denied the prime contractor’s motion for summary judgment. The court also found that genuine issues of material fact existed over whether an accord and satisfaction had been completed.

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In United States Sur. Co. v. Global Egg Corp., 2013 WL 247433 (M.D. Fla. January 2,

2013), the court denied the surety’s motion for a preliminary injunction to prevent an equipment vendor from removing its equipment from the job site in violation of a prior existing agreement among the surety, its principal and the equipment vendor. The court previously granted the surety a temporary restraining order, which had expired. Subsequently, the equipment vendor made preparations to remove its equipment. However, the vendor denied that it ever intended to remove its equipment and claimed that it was just securing the equipment to protect it from vandalism or theft while the job was delayed and that its inquiry as to interstate transportation was to bring other equipment to the site, not to remove what was already there. The court held that the surety had not shown a substantial likelihood of prevailing on its claim that the equipment vendor breached, or intended to breach, the agreement because emails from the vendor’s management discussed securing the equipment, not moving it in violation of the contract. The court also found that the financial difficulties of the rental company did not constitute irreparable harm or lack of a remedy at law for the surety. I. ARBITRATION PROVISIONS/ENFORCEMENT OF BONDED CONTRACT

In U.S. for the use of Maverick Construction Management Services v. Consigli Construction Co., Inc., 873 F. Supp. 2d 409 (D. Me. 2012), a subcontractor sued the prime contractor and the prime contractor’s surety following termination by the prime contractor. The defendants moved to stay the case and to compel arbitration pursuant to the subcontract. The court found the arbitration provision was enforceable, even though it was unilateral, because the contract as a whole was supported by consideration. The claimant argued that the suit should not be stayed as to the surety because the surety had not agreed to be bound by the result of any arbitration between the claimant and the prime contractor. The surety, however, acknowledged that its liability was coextensive with that of the contractor. The court granted the motion to stay and stated because litigation of the surety’s liability would be duplicative and create the risk of inconsistent judgments.

In Jimmie Lyles Carpets, Inc. v. Munlake Contractors, Inc., 2012 WL 2222857 (S.D. Miss. June 14, 2012), a subcontractor on a Mississippi public project sued the prime contractor and its surety in Mississippi state court. The surety and the prime contractor removed the case to federal court. The subcontractor argued that the court should order arbitration pursuant to a provision in the subcontract. The defendants argued that the case should be transferred to the Western District of Missouri pursuant to a forum selection clause in the subcontract. The court found the forum selection clause to be mandatory and enforceable. The court held that, even though the surety was not a party to the subcontract, its liability was determined by that of its principal and it should have the benefits and disadvantages of the agreement between the prime contractor and the subcontractor. The court transferred the entire action to the Western District of Missouri.

In U.S. for the use of Postel Erection Group, L.L.C. v. Travelers Casualty and Surety Company of America, Case No. 6:12-cv-182, 2012 WL 2505674 (M.D. Fla. June 28, 2012), an

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alleged second tier subcontractor sued the sureties on the prime contractor’s Miller Act payment bond. The first tier subcontractor was engaged in arbitration with the prime contractor, and the sureties moved to stay the Miller Act suit pending the outcome of the arbitration. The court granted the sureties’ motion based on its inherent power to control its docket and the interests of judicial economy. The court noted that there was a “murky” but close relationship between the first tier subcontractor and the claimant but did not depend on that relationship in granting the motion.

In PC Construction Co. v. City of Salisbury, 871 F. Supp. 2d 475 (D. Md. 2012), the prime contractor and its surety on a public project sued the obligee and several other project participants seeking an order to compel arbitration pursuant to a provision in the prime contract. The city had previously sued the prime contractor, surety, and others involved in the project in state court, and it opposed the action to compel arbitration. The court was faced with competing definitions of word “claims” in documents incorporated into the construction contract. The court found that the better reading of the documents would carve out a smaller subsection of claims for arbitration, claims against the city, not claims by the city.

In Webster Grading, Inc. v. Granite Re, Inc., 879 F. Supp. 2d 1013 (D. Minn. July 16, 2012), a dispute arose between a first tier subcontractor, a second tier subcontractor, and their respective sureties, on a public project. The first tier subcontractor sought arbitration pursuant to the Federal Arbitration Act. Although the subcontract did not provide for arbitration, a pass through agreement did. The court found that the first tier subcontractor had waived any right to arbitrate because it knew of its potential right to arbitrate, it had sued the second tier subcontractor and its surety, including the commencement of discovery, and it had delayed for almost a year in asserting the claim to arbitrate. The court found that, under the circumstances, the second tier subcontractor and its surety would be prejudiced if the court were to stay the case and order arbitration of the disputes because they had already incurred expenses in the discovery process.

In Worthington Mid-Rise Construction, Inc. v. RSL Contractors, Ltd., 2012 WL 3031226 (Tex. App. July 26, 2012), a second tier subcontractor filed a mechanics lien. The general contractor and its surety bonded off the lien to obligate themselves to pay the amount the contractor would have been entitled to if it proved a valid lien. The second tier subcontractor sued on the bond but also sued the first tier subcontractor which demanded arbitration pursuant to an arbitration clause in the sub-subcontract. The prime contractor and surety argued that the claims against them on the bond were not subject to any arbitration agreement. The subcontract containing the arbitration clause was valid and the dispute between the claimant the first tier contractor fell within its provisions. The court reversed the trial court and ordered arbitration between the claimant and the first tier subcontractor pursuant to the Federal Arbitration Act and stayed the rest of the case pending completion of the arbitration.

In New England Excavation & Demolition, LLC v. Colonial Am. Cas. & Sur. Co., 2012 WL 3535770 (Mass. App. August 17, 2012), a subcontractor sued the prime contractor and its

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surety. A settlement agreement provided for a partial payment and arbitration of other claims between the principal and the subcontractor. The first issue on appeal was whether the surety was bound by the arbitration award. The court held that the surety had not agreed to arbitrate and distinguished cases in which the bond incorporated a contract that contained the arbitration agreement. Here, the bond incorporated a subcontract between the obligee and the prime contractor but the subcontractor was not a party to that subcontract. The settlement agreement that contained the arbitration agreement clearly did not obligate the surety to arbitrate and was not incorporated by reference into the bond. The Court also denied prejudgment interest from the date of original demand on the surety. Under the settlement agreement, the surety had no obligation to make any further payment until at least the date the prime contractor’s liability was determined.

In GOE Lima, LLC v. Ohio Farmers Insurance Co. (In re GOE Lima, LLC), Case No. 08-35508; Adv. Proc. No. 09-3204, 2012 WL 4634885 (Bankr. N.D. Ohio October 1, 2012), the prime contract provided for arbitration of any “Claim” between the contractor and the owner pursuant to the AAA Construction Industry Rules. The Rules provided that the arbitrator would rule on issues of his or her own authority and jurisdiction including issues of the existence, scope or validity of the arbitration agreement. The performance bond under which the owner asserted a claim incorporated the contract by reference. Although a prima facie agreement to arbitrate existed between the parties, the court held that the provisions were not a general provision covering all disputes. The court found that the surety’s asserted defense that the owner had not complied with the conditions precedent set forth in the performance bond was not a “Claim” between the owner and contractor and so not normally subject to arbitration. However, in this case the court had previously held that the owner could assign its claim against the surety if the cause of action had already accrued at the time of the assignment. That is, it could assign an existing action for breach but not a right under a bond that had not yet been breached. The court also considered whether the owner and assignee had waived their right to arbitrate by taking actions inconsistent with the right and delaying the assertion of the right long enough for actual prejudice to occur. The court found that the owner and assignee had not waived a right to arbitration and ordered the adversary proceeding stayed pending completion of arbitration of both the issue of the principal’s breach of the construction contract and the issue of the owner’s performance of the conditions precedent set forth in the bond.

In Integrated Construction Enters., Inc. v. Bradley Sciocchetti, Inc., 2012 WL 5845616 (N.J.A.D. November 20, 2012), the court granted the motion of a subcontractor and its surety to confirm an arbitration award in favor of the subcontractor. The court disregarded the general contractor’s assertions that scope of the arbitration award was modified by the parties. The court found that the attempted unilateral modification by the general contractor was ineffective. The Court thought that the arbitrator had not exceeded his authority and that there was no evident mathematical error to correct.

In Great American Insurance Co. v. Hinkle Contracting Corp., Case No. 12-1014, 2012 WL 5936178 (4th Cir. November 28, 2012), the U.S. Court of Appeals for the Fourth Circuit

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reversed the district court decision reported at 826 F. Supp. 2d 969 (S.D. W. Va. 2011). The court considered the scope of an arbitration clause contained in a written agreement between a prime contractor and a subcontractor, which was incorporated without limitation in a performance bond issued by a surety guaranteeing the subcontractor’s obligations. The court ultimately held that the subcontractor’s surety was bound by the subcontract arbitration clause. The court acknowledged that the surety’s participation in the arbitration proceedings was referenced numerous times throughout the bonded subcontract and, moreover, that the subcontract does not evidence a clear intent to exclude the surety’s claims from arbitration. The arbitration provision, which applied to claims “aris[ing] under or relat[ing] to” the subcontract, applied to the surety’s claims. The court disagreed that the surety’s claims bore a general, rather than significant, relation to the subcontract and disagreed “with this attempt to shield the claims from the broad reach of the arbitration clause.”

In Island Insurance Co. v. NORESCO, LLC, Case No. 1:12-cv-499, 2012 WL 6629588 (D. Haw. December 19, 2012), the surety for a subcontractor on a federal project and the prime contractor disagreed on whether the prime contractor’s possible claim based on the subcontractor’s alleged failure to pay Davis Bacon Act wages to its employees was subject to arbitration. The bond incorporated the subcontract, which provided that “[c]laims, disputes, and matters in question arising out of or relating to this Agreement as to matters solely between Contractor and Subcontractor…shall be decided by arbitration[.]” The court first noted that it should not assume that the parties agreed to arbitrate unless there is “clear and unmistakable” evidence that they agreed to do so. According to the court, the arbitration provision in the bonded contract clearly limits the requirement to arbitrate to matters solely between the prime contractor and the subcontractor – not matters involving the surety. The court held that the surety was not obligated to arbitrate the prime contractor’s Davis Bacon Act wage claim.

In LaSalle Group, Inc. v. Veterans Enterprise Technology Services, LLC, 2012 WL 1113549 (W.D. Mo. April 2, 2012), the prime contractor and a subcontractor on projects for the Army Corps of Engineers entered into a Liquidation Agreement, pursuant to which the prime contractor and subcontractor agreed to cooperate with one another to complete the projects and to prosecute all claims made to the Corps. The subcontract contained an arbitration agreement, but the Liquidation Agreement did not. The prime contractor settled with the Corps without the subcontractor’s consent, and the subcontractor sued for the original amount of its claim and sought to have the settlement funds from the Corps held by the court. The prime contractor moved to dismiss the suit based on the arbitration clause in the subcontract, and the prime contractor’s surety sought to stay the Miller Act payment bond suit pending the arbitration.

The court found that the Liquidation Agreement supplemented the subcontract and that the parties remained obligated to arbitrate their disputes. The court dismissed the case against the prime contractor and stayed the case against the Miller Act payment bond surety pending outcome of the arbitration.

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II. CIVIL PROCEDURE

A. NECESSARY AND INDISPENSABLE PARTIES/INTERVENTION

In Gulf Atlantic Floor Systems, Inc. v. North American Specialty Insurance Co., Case No. 11-cv-1067, 2012 WL 154735 (W.D. Okla. May 1, 2012), a second tier subcontractor sued the payment bond surety for the first tier subcontractor. The first tier subcontractor moved for leave to intervene as a matter of right and, in the alternative as a permissive intervener. The first tier subcontractor sought to asserted breach of contract and negligence claims against the second tier subcontractor. The court denied the motion to intervene as a matter of right or for permissive intervention. The breach of contract and negligence claims arose from the contract for construction, not the payment bond. Hence, the interest of the first tier subcontractor did not extend to the action and intervention as a matter of right would be improper. Because the breach of contract and negligence claims arose from the contract for construction, there were no common issues of law and fact predicating permissive intervention.

In Selective Insurance Company of America v. Glen Wilde, LLC, C.A. No. 5:12-cv-34, 2012 WL 1884533 (W.D.N.C. May 23, 2012), the surety executed the performance and payment bonds and delivered them to the principal, who paid the premium. The principal, however, did not sign the bonds and did not deliver them to the obligee because a dispute had arisen between the principal and the obligee over reimbursement of the premium. The surety sued the obligee and a number of subcontractors for a declaratory judgment that the bonds were unenforceable. The surety did not sue the principal, and the obligee moved to join the principal as a plaintiff or to dismiss for lack of an indispensable party. Joining the principal as a defendant would have destroyed diversity jurisdiction. The judge found that complete relief could be afforded the existing parties without joining the principal. Moreover, if joined, the principal would be a defendant, not a plaintiff. The judge held that the principal was neither a necessary nor an indispensable party, denied the obligee’s motion to add the principal, and recommended denial of the motion to dismiss.

In Barcelona Equipment, Inc. v. Target Construction, Inc., C.A. No. 11-2183 (E.D. La. June 21, 2012), six (6) second tier subcontractors sued the first tier subcontractor, the prime contractor and their respective sureties. The court consolidated the cases, and one claimant moved to sever its action. The court denied the motion but indicated it might consider severance for trial if, following the close of discovery and completion of any motions practice, it appeared a consolidated trial would be inefficient.

In Painters District Council No. 2 v. Sutton Painting, LLC, 2012 WL 4435289 (E.D. Mo. September 26, 2012), the surety sought to intervene, as a matter of right, in a lawsuit between a union benefit plan/trustees and a contractor to enforce the surety’s an assignment made by the plan to the surety and the surety’s asserted equitable lien on any judgment the plan obtained against the contractor. The surety asserted that it paid the plan in return for an assignment of the plan’s rights under a personal guaranty of the contractor’s obligations. After weighing factors for intervention as a matter of right, the court granted the surety’s motion,

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granted the plan’s motion for judgment by default as to liability, and ordered the defendants to produce payroll and related records needed to determine the amount owed.

In First National Insurance Company of America v. Peralta Community College District, Case No. 12-cv-5943, 2013 WL 622944 (N.D. Cal. February 15, 2013), First National Insurance Company (“First National”), the surety, brought suit against Peralta Community College District (the “District”) for breach of contract and violation of California’s Prompt Payment Statutes based on the District’s alleged breach of a Takeover Agreement with First National relating to the construction of certain ADA improvements to the District’s Laney College. “IMR” was the original bonded contractor that was terminated following it filing for bankruptcy. The District argued that First National did not join IMR, a necessary and indispensible party pursuant to Fed. R. Civ. P. 19. According to the District, because joining IMR would defeat diversity jurisdiction, First National’s lawsuit must be dismissed. The relevant “contracts” in the lawsuit were the Takeover Agreement, the Performance Bond and the Bonded Contract. The court acknowledged that IMR was only a party to the Bonded Contract and actually rejected the Bonded Contract and stipulated that all funds due thereunder were to be paid to First National. According to the court, (1) it could afford complete relief to First National and the District without including IMR as a party, (2) the District’s argument that IMR may be subject to collateral estoppels was unpersuasive, and (3) the District’s argument that IMR is a necessary party as a matter of law based on its status as a co-obligor on the bond with First National was unpersuasive. The court found that IMR was not a necessary and indispensible party. The District also argued that First National could not assert a Prompt Payment Act violation because it was not an “original contractor” within the meaning of the Act. The court noted that the takeover agreement provided that First National was not a contractor and would be responsible for retaining a completion contractor to perform the work to meet its obligations as surety. The court held that even though it entered into a takeover agreement, “First National is not a ‘contractor’ as a matter of law within the meaning of the Prompt Payment statute . . . .” The court dismissed the Prompt Payment Act claim without leave to amend.

B. JURISDICTION

In Asbestos Abatement Contractors, Inc. v. Home Guard Environmental Restoration Services, Inc., C.A. No. 11-3118, 2012 WL 1664549 (E.D. La. May 11, 2012), a second tier subcontractor sued the prime contractor, the first tier subcontractor, and the first tier subcontractor’s unauthorized surety, Asurety Partners, LLP. The claimant failed to sue the prime contractor’s payment bond surety. The plaintiff’s sole ground for federal subject matter jurisdiction was the Miller Act. After first defaulting, Asurety moved to set aside its default and to dismiss for lack of jurisdiction. The claimant did not oppose setting aside the default. Relying on Fifth Circuit precedent, the court held that the Miller Act granted jurisdiction only for suit on the general contractor’s bond, not for suit on a bond provided by a first tier subcontractor. The court noted that the claimant had not identified a payment bond surety for

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the general contractor. The court subsequently dismissed the case without prejudice for lack of federal subject matter jurisdiction.

In Roth Bros., Inc. v. Ohio Farmers Insurance Co., Case No. 1:12-cv-158, 2012 WL 21220013 (S.D. Ind. June 11, 2012), an allegedly unpaid subcontractor on a project to construct a building for use by the FBI sued the prime contractor and surety. Diversity of citizenship jurisdiction was not present, but the claimant asserted federal question jurisdiction pursuant to the Miller Act. The defendants moved to dismiss on the basis that the project was not subject to the Miller Act. The defendants asserted that the project was constructed by a private entity on private land for lease to the United States. For purposes of the motion to dismiss the court only considered the allegations in the complaint. The court found the use of the building by the FBI as sufficient to invoke Miller Act jurisdiction. Therefore, the court denied the motion to dismiss because the complaint alleged federal question jurisdiction over the claim against the surety and the court had supplemental jurisdiction over the other aspects of the case.

In Surface America, Inc. v. United Surety & Indemnity Co., 867 F. Supp. 2d 282 (D.P.R. 2012), a subcontractor on several public projects sued the prime contractor and its surety in federal court relying on diversity jurisdiction. The subcontractor alleged that it was owed a subcontract balance of $65,278.82 and relied on its claim for court costs and legal fees to reach the jurisdictional threshold of $75,000.01. The diversity statute requires the amount in controversy exceed $75,000, exclusive of interest and costs. The court noted the distinction between attorney fees as costs which cannot augment the amount in controversy compared to attorney fees as damages which can augment it. The subcontractor argued that costs and fees incurred in connection with the claim before filing suit were part of its damages for purposes of the jurisdictional amount. A contract which provides for attorney fees can constitute damages. Although the subcontract contained an attorneys’ fee provision, the court found that the subcontract was not incorporated into the bond and the bond itself did not provide for recovery of attorneys fees. The court also noted that attorneys’ fees could be awarded under Puerto Rican law for obstinate conduct, but found no showing of obstinate conduct by the defendants. The court held that there was no contractual or statutory obligation of the defendants to pay attorneys fees and, therefore, they could not be included in computing the jurisdictional amount. The court granted the defendants’ motion to dismiss for lack of subject matter jurisdiction.

In Metro Foundation Contractors, Inc. v. Arch Insurance Co., 2012 WL 4465342 (2nd Cir. September 28, 2012), a subcontractor sued the surety, and the surety filed a third party complaint against the principal, who asserted claims directly against the subcontractor and eventually recovered a judgment against the subcontractor. On appeal, the subcontractor argued that the judgment was null and void because (1) the district court lacked subject matter jurisdiction over the principal’s claims or (2) it should have exercised the discretion to decline supplemental jurisdiction over those claims. The court acknowledged that the principal and the subcontractor were not diverse citizens for the purposes of jurisdiction, but held that the district court properly exercised supplemental jurisdiction over the principal’s claims against the

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subcontractor. The court rejected the subcontractor’s argument under Section 1367(b), which provides that district courts shall not have supplemental jurisdiction “over claims by persons proposed to be joined as plaintiffs under Rule 19 [of the Fed. R. Civ. P.] or seeking to intervene as plaintiffs under Rule 24.” The court acknowledged that the principal was served with a third-party complaint and was brought in the lawsuit involuntarily. The Second Circuit also held that the district court did not abuse its discretion in exercising supplemental jurisdiction, even though there was a state court action between the subcontractor and the principal. The subcontractor brought both actions and should not be heard to complain about the existence of parallel proceedings that it caused. The same factual issues would be present in the suit against the surety alone or the suit involving the surety and principal, so judicial economy counseled in favor of exercising supplemental jurisdiction. The court affirmed judgment against the subcontractor.

In U.S. for the use of Burkholder v. Connelly, 2012 WL 4471599 (E.D.N.C. September 26, 2012), the principal argued that a lawsuit filed by a subcontractor against it and its surety must be dismissed because the complaint was filed one day after the expiration of the Miller Act limitations deadline. The principal argued that this created a jurisdictional defect. The claimant had been terminated and barred from the job site on August 23, 2010, but a second tier subcontractor had continued to work for six more days to complete its work on August 29, 2010. The court noted that the Miller Act limitations period started on August 23, 2010 (the last date the claimant furnished labor or material) and the suit was one day late unless the work of the second tier subcontractor counted. The second tier subcontractor apparently was paid and was not a party to the case. The court held that the complaint and amended complaints failed to allege facts to support Miller Act jurisdiction because they did not show that the second tier subcontractor was an employee or agent of the claimant first tier subcontractor. Therefore, taking the factual allegations of the complaint and amended complaints as true, the action was filed one day too late. The court dismissed the action for lack of subject matter jurisdiction.

In Western Surety Co. v. Leo Construction, LLC, Case No. 3:12-cv-1190, 2012 WL 3775882 (D. Conn. January 11, 2013), the surety sued the principal and indemnitors, but failed to allege the citizenship of the parties to the satisfaction of the court. For instance, the surety failed to state the state where a corporation had its principal place of business and whether South Dakota was the corporation’s sole state of incorporation. The surety also failed to address the citizenship of the members of a limited liability company, which is a factor in determining diversity jurisdiction. Based on a prior ruling from the court, the surety filed an affidavit as to its citizenship and moved for leave to file an amended complaint alleging the citizenship of the defendants. Two of the indemnitors also filed an affidavit showing their citizenship and moved to set aside their default. The court granted the surety’s motion and granted the motion of the two defendants and gave them time to answer. As to the remaining defendants, the court noted that they were in default and that the court was now satisfied as to jurisdiction and invited the surety to renew its motion for default judgment.

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In Gatlin Plumbing & Heating, Inc. v. Welty Building Co., Ltd., Case No. 2:12-cv-114, 2013 WL 704736 (N.D. Ind. February 26, 2013), a claimant sued a surety and a principal, along with other contractors, for violation of the Miller Act. The surety and principal argued that the court should dismiss a claimant’s complaint for lack of subject matter jurisdiction because the bonded project was not a public work under the Miller Act and, therefore, the bond issued on behalf of the principal (notably, a “performance” bond) was not a Miller Act bond. The surety and the principal further asserted that the court lacked supplemental jurisdiction over the claimant’s remaining claims. In the alternative, the surety and the principal argued that the court should stay the lawsuit to allow for arbitration and/or mediation in accordance with the subcontract. The court expressed great doubt about whether the actual facts would support Miller Act jurisdiction, but since on a motion to dismiss it had to accept the factual allegations of the complaint, it denied the motion to dismiss but granted the alternative motion to stay.

In B & S Equipment Co., Inc. v. Cahaba Disaster Recovery, L.L.C., 2012 WL 1327791 (E.D. La. April 16, 2012), a second tier subcontractor sued the first tier subcontractor, prime contractor and the prime contractor’s payment bond surety in state court. Pursuant to the existence of complete diversity, the surety removed the case. The prime contractor and first tier subcontractor joined in the surety’s removal petition. The second tier subcontract provided that exclusive venue for any dispute involving the second tier subcontract would be in Jefferson Parish, Louisiana. The claimant moved to remand the case arguing that the venue provision prevented the second tier subcontractor from joining in the removal petition. The rule of unanimity requires all defendants to consent to removal. The court held that it was not satisfied because the first tier subcontractor had contractually waived its right to removal and as a result could not validly consent to the surety’s petition. The court granted the claimant’s motion and remanded the case to state court.

C. IMPROPER VENUE In Roberts Welding, LLC v. Hanover Insurance Co., Case No. 1:12-cv-2838, 2012 WL

6698646 (D. Md. December 21, 2012), a subcontractor sued a surety under a payment bond for labor and/or materials furnished to a project involving the District of Columbia Water and Sewer Authority. The surety argued that the dispute was governed by the District of Columbia’s “Little Miller Act” and that the appropriate venue was the Superior Court for the District of Columbia. The subcontractor argued, in addition to the project being performed in Maryland, that the D.C.’s “Little Miller Act” was not applicable, because the WASA was exempt in that it is an independent entity completely autonomous from the District of Columbia government. The court held that the District of Columbia “Little Miller Act” applied to the bond and that suit was proper in the Superior Court for the District of Columbia. The court dismissed the complaint without prejudice to allow the subcontractor to re-file in DC Superior Court.

In Ohio Farmers Insurance Co. v. Graham Construction Services, Inc., 2012 WL 1574646 (D.N.D. May 3, 2012), the surety for a subcontractor on two projects sued the obligee prime contractor for a declaratory judgment that it was not indebted to the obligee, that any

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debt would be reduced by amounts the obligee owed the principal, and, in the alternative, that the penal sums of the bonds limited its obligations. The subcontractor was named as a defendant and filed a crossclaim against the obligee. The obligee moved to dismiss or transfer the case pursuant to a venue provision in the subcontract requiring, at the obligee’s discretion, that the proper forum was the Minnesota State Superior Court. The Declaratory Judgment Act grants federal courts broad discretion to abstain from exercising jurisdiction over a declaratory judgment suit. As a result, a federal court may abstain from hearing a declaratory judgment suit when a parallel state court suit is pending. Hence, the obligee’s suit in federal suit was stayed while the parallel state court suit was pending. The court also denied the motion to dismiss pursuant to the stay.

In E. Cornell Malone Corp. v. Sisters of the Holy Family, St. Mary’s Academy of the Holy Family, 2012 WL 1886055 (E.D. La. May 23, 2012), an allegedly unpaid subcontractor sued both the owner and the payment bond sureties for the general contractor, but failed to sue the general contractor. The sureties moved for dismissal on the basis of improper venue, the dispute resolution clause in the subcontract, and a pay-if-paid clause in the subcontract. The sureties also sought a stay of litigation based upon an already commenced state court suit. The sureties argued that a forum selection clause in the subcontract required that the proper venue for the suit was in Harris County, Texas. The court held that the venue selection clause was void under both a Louisiana statute and federal law. Instead, the suit was already in the proper venue pursuant to the forum selection provision in the payment bond. The court also rejected the sureties’ request to stay the case because the state court proceedings were not parallel. The court did not enforce the dispute resolution of the subcontract. The court found that the subcontractor had sued on the payment bond and the Louisiana Private Works Act, not on the subcontract. As a result, the pay-if-paid clause in the subcontract was not a condition precedent to the sureties’ liability. The court recognized that sureties can generally assert their principal’s defenses. Yet, the court found that pay-if-paid provisions would contravene the statutory scheme. The court denied the sureties’ motion to dismiss or in the alternative to stay the case.

In Builder’s Iron, Inc. v. Western Sur. Co., Case No. 12-cv-823, 2012 WL 2406026 (E.D. La. June 25, 2012), an unpaid subcontractor sued the payment bond sureties for the prime contractor on a private project in Louisiana, but did not sue the contractor. The sureties argued that a forum selection clause in the subcontract required suit in Harris County, Texas. There was a pending suit in Louisiana state court between the owner and the prime contractor in which the contractor allegedly sought to obtain payment of a balance owed, including funds due to the plaintiff subcontractor. The sureties argued that this was a parallel proceeding, and the court should stay the case pending the resolution of the state court matter. The sureties also argued that the suit was premature pursuant to the dispute resolution clause and pay-if-paid clause in the subcontract. The court held that the venue selection clause in the subcontract was void under La. R.S. § 9:2779A and federal law. Venue for the suit was proper pursuant to the venue provision in the payment bond, the location of the project. The court also rejected the sureties’ request to stay

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the case because of parallel state court proceedings because it found the pending proceedings were not parallel. Finally, the court declined to enforce the dispute resolution or pay-if-paid provisions of the subcontract. The court found that the subcontractor had sued on the bond and the Private Works Act, not on the subcontract. Hence, the pay-if-paid clause was not enforceable by the sureties as sureties and general contractors will be held to pay amounts due to subcontractors in Louisiana even when the general contractor has not received payment. The court denied the sureties’ motion to dismiss or, in the alternative, to stay the case.

In Cooper Electric Supply Co. v. Travelers Casualty and Surety Company of America, C.A.No. 12-359, 2012 WL 2020877 (D.N.J. June 5, 2012), a supplier to a subcontractor on a Pennsylvania public project sued the prime contractor’s surety in a New Jersey state court. The surety removed the suit to federal court and moved to transfer the case to the Eastern District of Pennsylvania, where the project was located. The court noted that all of the contractors involved were in New Jersey, the states were contiguous, and the bond was issued by the surety from an office in New Jersey. The court denied the motion to transfer finding that the relevant public and private factors did not support a transfer and did not overcome the presumption in favor of the plaintiff’s choice of forum.

In Wake Plumbing and Piping, Inc. v. McShane Mechanical Contracting, Inc., Case No. 5:12-cv-150 (E.D.N.C. June 21, 2012), the U.S. District Court for the Eastern District of North Carolina transferred the claimant’s payment bond suit to the United States District Court for the Eastern District of Michigan based on a forum selection clause in the claimant’s subcontract.

In Crescent Electric Supply Co. v. Central Electric of Sullivan, Inc., Case No. 11-cv-3398, 2012 WL 3042490 (W.D. Mo. July 11, 2012), a supplier sued two subcontractors, who filed a third party complaint against the general contractor’s surety. The supplier’s action was settled, and it moved to dismiss its complaint. The surety moved to transfer the remaining third party complaint to the federal court in Michigan where an action was already pending involving the same subcontractors, the general contractor and the surety. Relying on the “first filed rule,” which gives an original case priority in deciding the merits over a later case, the court found that the third party complaint duplicated claims already before the court in Michigan and directed transfer of the case.

In U.S. for the use of Purcell P & C, LLC v. Toltest Inc., 2012 WL 2871787 (W.D. Wash. July 12, 2012), a subcontractor sued the prime contractor and its surety in the federal court where the project was located asserting claims, inter alia, under the Miller Act. Based upon a forum selection clause in the subcontract, the prime contractor and the surety moved to dismiss or transfer the case to Ohio. The court recognized that the Miller Act provides for suit in the location of the project. Relying on three earlier court of appeals opinions, the court held that the forum selection clause of the subcontract trumped the statutory venue provision. Moreover, the clause was enforceable because the parties possessed comparable bargaining power. The court also rejected the subcontractor’s argument that the United States should be considered a real party to the dispute because the United States was only a nominal

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party. Additionally, the surety could assert the subcontract venue clause even though it was not a party to the subcontract because it stands in the shoes of the prime contractor, a signatory to the contract. The court dismissed the case for improper venue.

In U.S. for the use of Trinity Industrial Services, LLC v. Federal Insurance Co., C.A. No. 5:12-cv-203, 2012 WL 4928907 (M.D. Ga. October 16, 2012), a claimant on a federal project in Georgia sued a prime contractor and its surety under the Miller Act. The surety and the prime contractor filed a joint motion to transfer or dismiss that requested the Middle District of Georgia to transfer the case to the Western District of Oklahoma pursuant to a forum selection clause found in the subcontract between the prime contractor and the claimant. The defendants requested that, in the alternative, the state law claims be dismissed and the Miller Act claimed stayed until the state law claims were decided in a proper forum. The court held that since federal jurisdiction was mandatory under the Miller Act and the subcontract permitted filing an action only in state court, the subcontract clause was invalid with respect to the claimant’s Miller Act claim. Since the clause was invalid, the Miller Act venue provision controlled, and the suit was brought in the proper court. The court rejected the defendants’ alternative argument that the Miller Act case should be dismissed or stayed. The court pointed out that a claimant can sue the surety alone or the contractor alone and that the Miller Act claim did not depend on first recovering for breach of the subcontract. The Miller Act granted a right to sue on the bond independent of any separate action against the contractor. The court denied the defendants’ motion.

In NC Contracting, Inc. v. Munlake Contractors, Inc., 2012 WL 5303295 (E.D.N.C. October 25, 2012), a subcontractor on a private project sued the prime contractor, the owner and the prime contractor’s surety for payment. The defendants moved to dismiss the lawsuit, pursuant to Fed. R. Civ. P. 12(b)(3), due to improper venue. The defendants argued that the forum selection clause in the subcontract between the subcontractor and the prime contractor required that all disputes arising under the subcontract be pursued in Jackson County, Missouri. The subcontractor argued that the selected forum was so unreasonable as to effectively deny it a day in court and that the strong public policy of North Carolina barred enforcement of the venue provision. The court found that Missouri was not that inconvenient and that the North Carolina Statute relied upon by plaintiff to void the venue provision, N.C. Gen. Stat. §22B-2, did not apply because venue was a procedural question to be decided under federal law. The court dismissed the subcontractor’s suit without prejudice and held that the surety could invoke the forum selection clause even though it was not a party to the subcontract.

In The Gray Casualty and Surety Company v. Lebas, Case No. 12-cv-2709, 2013 WL 74351 (E.D. La. January 7, 2013), the surety sued the Secretary of the Louisiana Department of Transportation and Development seeking declaratory judgment and to enjoin the DOTD from disqualifying the surety from issuing bonds on future DOTD projects. The surety argued that the disqualification violated substantive and procedural due process. The DOTD moved to dismiss the action based on sovereign immunity and improper venue or, in the alternative,

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asked the court to abstain from hearing it due to federalism concerns. At the time the complaint was filed, the DOTD was located in the East Baton Rouge Parish in the Middle District of Louisiana. The court dismissed the case for improper venue without reaching the merits of the surety’s complaint or the DOTD’s defenses.

In U.S. for the use of Kountry Wood Products, LLC v. Ohio Farmers Insurance Co., Case No. 3:12-cv-542, 2013 WL 550562 (N.D. Ind. February 12, 2013), a second-tier supplier on a project located in Fort McCoy, Wisconsin, filed suit against a surety under the Miller Act. The surety moved to dismiss for improper venue, arguing that venue was proper in the U.S. District Court for the Western District of Wisconsin, where the project was located. The court considered the intent behind the Miller Act’s requirement that suit be brought in “any district in which the contract was to be performed and executed.” The claimant argued that because it did its work in the Northern District of Indiana, venue was proper. The court did not understand the purpose of the venue provision and held that, “[g]iven the purpose of the Miller Act, and applying the plain meaning of the venue provision, the Court finds that the Plaintiff’s allegation that it performed its contract obligations in this district is sufficient to confer venue in this Court.” The court denied the surety’s motion.

D. PLEADINGS GENERALLY

In J&B Boat Rental, LLC v. JAG Construction Servs., Inc., C.A. No. 12-323, 2012 WL 2154525 (E.D. La. June 13, 2012), a second tier subcontractor on a federal project sued the prime contractor, its surety and the first tier subcontractor. The second tier subcontractor alleged an oral contract for the rental of boats at $300 per hour. The defendants moved to dismiss the complaint because it did not allege the basis for its claim (i.e., that the $300 applied “around the clock” instead of the flat price of $2,000 per day). The court denied the motion because the complaint conformed to the Miller Act and Fed. R. Civ. P. Rule 8.

In Travelers Casualty and Surety Company of America v. Van Cook, Case No. 5:11-cv-408, 2012 WL 3637779 (E.D. Ky. August 23, 2012), the principal and indemnitors moved to dismiss the surety’s complaint because the surety did not attach executed copies of the bonds it issued on behalf of the principal to the complaint. The court found it sufficient that the surety pled that it executed the bonds on behalf of the principal. The court denied the motion and pointed out that if the defendants actually disputed that the bonds were executed, it could raise that argument at the appropriate time.

In Cives Corp. v. George A. Fuller Co., Inc., 2012 WL 2913538 (N.Y.A.D. July 18, 2012), a subcontractor sued the prime contractor and its alleged surety, and attached a copy of the payment bond to the complaint. The surety moved to dismiss based on the argument that the bond never took effect and provided various letters and emails to support this contention. The trial court granted the surety’s motion, and the Appellate Division reversed. The Appellate Division held that the letters and emails were not the type of unambiguous, authentic, and undeniable “documentary evidence” that could be considered on a motion to dismiss.

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In U.S. for the use of Advance Concrete, LLC v. THR Enterprises, Inc., 2012 WL

3686290 (E.D. Va. July 18, 2012), a subcontractor sued a surety and a prime contractor for, inter alia, breach of contract, quantum meruit and violation of the Miller Act. The defendants sought to have the complaint dismissed on the basis of the subcontractor’s failure to state a claim upon which relief may be granted because certain change orders requested by the subcontractor were not approved. According to the prime contractor, because the change orders were not approved, certain conditions precedent to recovery were not established and the entire claim was not ripe or plausibly pled. The court thought that the complaint adequately alleged breach of contract claims and that accepting the allegations, which included satisfying all conditions precedent, there was no basis for a stay. According to the court, the claimant could not “avoid the change order provisions of the contract by alleging that unauthorized work it performed is compensable under a theory of quantum meruit.”

In SureTec Insurance Co. v. New Faze Development Inc., 2012 WL 3704925 (E.D. Cal. August 24, 2012), the U.S. District Court for the Eastern District of California granted the surety’s motion to modify the pretrial scheduling order to permit the surety to file a second amended complaint adding a count to foreclose on a deed of trust. The court found good cause for the amendment and that the surety acted promptly after it discovered that the defendants failed to make payments as allegedly intended.

In Wake Plumbing and Piping, Inc. v. McShane Mechanical Contracting, Inc., Case No. 2:12-cv-12734, 2012 WL 6591664 (E.D. Mich. December 18, 2012), the claimant filed a lawsuit against a contractor and its surety for breach of contract, unjust enrichment, promissory estoppel and breach of a payment bond. The defendants filed a motion to dismiss for failure to state a claim upon which relief may be granted. At issue was whether the agreement between the claimant and the contractor was simply a purchase order or whether it was “more,” as alleged by the claimant, such that the material terms of the entire agreement were set forth through a series of transactions between the claimant and the contractor. The defendants argued that the claimant’s claims could not be supported on an “implicit contract” theory. The claimant asserted that its complaint included a claim for breach of an express contract and that the parties’ course of conduct dictated its terms. The court refused to dismiss the claimant’s causes of action because they were “facially plausible.” E. RES JUDICATA

In Hinkle Contracting Co., LLC v. Great Am. Ins. Co., C.A. No. 11-320, 2012 WL 1880620 (E.D. Ky. May 21, 2012), the prime contractor attempted to circumvent an earlier decision by a federal district court in West Virginia. The West Virginia court had previous determined that the arbitration provision in the subcontract was enforceable and stayed other issues pending. The Kentucky court held that claim preclusion barred relitigation of issues already decided by the West Virginia court, ordered the prime contractor and subcontractor to arbitrate their disputes, and stayed the action as to the surety. The court rejected the prime contractor’s contention that the West Virginia court implicitly held certain of the surety’s

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defenses subject to arbitration, and stated that the West Virginia court explicitly excluded the claim under the bonds as outside of the arbitration requirements of the subcontract.

In Carpenters Health and Security Trust of Western Washington v. Paramount Scaffold. Inc., 2013 WL 392717 (W.D. Wash. January 31, 2013), the U.S. District Court for the Western District of Washington addressed a dilemma created by the differing opinions of the Washington Supreme Court and the Ninth Circuit relative to whether ERISA preempted state lien law with respect to payment bond claims for union fringe benefits. The claimant (i.e., union funds) alleged that contributions were owed by a subcontractor on a public project and asserted a lien on retainage and a payment bond claim against the prime and its surety. The prime and surety sued first in state court and obtained summary judgment. The claimant then sued in federal court. The prime and surety moved to dismiss the federal suit on the ground that the union trust funds’ claims were compulsory counterclaims in the state court suit and that the state court judgment was res judicata barring them. The court recognized this as forum shopping but thought that it was bound to give the state court judgment the same effect that a state court would, and held that the claims were compulsory counterclaims. It granted the prime contractor and surety’s motion to dismiss what it termed the “lien” claim but which apparently included the payment bond claim.

F. DEFAULT JUDGMENT In U.S. for the use of ProBuild Co., LLC v. Scarborough, 2012 WL 1571500 (E.D. Va.

April 11, 2012), the claimant on a Miller Act project sued the individual surety, the principal, and two individuals associated with the principal who signed the credit agreement with the claimant. One of the individual guarantors filed for bankruptcy, and the claimant moved for a default judgment against the principal and the other guarantor. The court found that personal and subject matter jurisdiction existed and that venue was proper. The complaint also sufficiently pled a Miller Act claim and claims under breach of the credit agreement and the personal guaranty of the individuals. The court granted the motion for default judgment.

In Hartford Casualty Insurance Co. v. Southern Surety Associates, Inc., Case No. 1:11-cv-609, 2012 WL 208818 (S.D. Ala. June 8, 2012), the court granted the surety a default judgment against an insurance agency in the amount of bond premiums that were billed by the agency, but not remitted to the surety, plus costs. The court declined to include the surety’s attorneys’ fees in the judgment because the agency agreement did not contain an attorneys’ fee provision and there was no statutory or other basis to vary the “American Rule.”

In Alutiiq International Solutions, LLC v. OIC Marianas Insurance Corp., 2012 WL 3205862 (D. Nev. August 2, 2012), a subcontractor sued a surety. The surety moved to dismiss, its counsel withdrew, and a default judgment was entered against it. The surety retained new counsel and moved to set aside the judgment. The surety argued that the default judgment was improper because it was not served with written notice of the application at least seven (7) days before the hearing and that it was entitled to written notice pursuant to Fed. R. Civ. P. 55(b)(2) because the motion to dismiss constituted an appearance. The subcontractor

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argued that the surety was not entitled to notice because, once the court granted the withdrawal of the surety’s counsel, the surety needed to file an appearance in the lawsuit subsequent to that date. The subcontractor further argued that it had been delayed for fifteen (15) months in trying to secure payment and if the motion to set aside were granted it would essentially be starting over. The court nevertheless granted the surety’s motion and set aside the default judgment.

In Arch Insurance Co. v. DCM Group LLC, 2012 WL 3887098 (E.D.N.Y. August 2, 2012), union benefit funds/trustees filed a lawsuit against a project’s prime contractor, a masonry subcontractor and the surety for the prime contractor. The surety paid the claims of the union benefit funds/trustees and received an assignment of their claims against the masonry subcontractor, the employer for the laborers to whom the funds benefited. The surety moved for default judgment against the masonry subcontractor on the basis of the subcontractor’s failure to answer the original complaint filed by the union benefit funds/trustees (via the assignment). The court recommended entry of a judgment by default in favor of the surety against the employer and meticulously analyzed the various items of the claims.

In U.S. for the use of Kirby Building Systems, LLC, 2013 WL 572246 (S.D. Ga. February 13, 2013), a second tier subcontractor sued the first tier subcontractor, the prime contractor and the prime contractor’s surety. The second tier subcontractor sought default judgment against the surety, who moved to open the default on the basis of a misunderstanding by one of its employees as to the joint representation by the prime contractor’s counsel (i.e., the surety believed it was represented by the prime contractor’s counsel under a tender arrangement). The court held that this error constituted good cause to set aside the default and directed the clerk to docket the surety’s proposed answer. The first tier subcontractor, however, had not responded, and the court entered a default judgment against it in the amount claimed by the second tier subcontractor. G. STAY OF PROCEEDINGS

In Choice Construction, Inc. v. JMR Construction Corp., Case No. 2:12-cv-192, 2012 WL 2904239 (D. Nev. July 16, 2012), a subcontractor on a federal project sued the general contractor and its Miller Act surety. The contractor moved to stay the action pending resolution of its claims against the owner in the Court of Federal Claims. The court granted the stay, and the surety joined in the contractor’s motion. The court refused to stay the subcontractor’s claims against the surety for allegedly violating the Nevada Unfair Claims Practices Act. The court thought that the Unfair Claims Practices Act claim was unrelated to the prime contractor’s Court of Federal Claims action. As a result, a stay pursuant to abstention principles was improper.

In County of Butte v. Travelers Casualty & Surety Company of America, Case No. 2:11-cv-424, 2012 WL 3283477 (E.D. Cal. August 10, 2012), the County of Butte sued the prime contractor and the surety in the U.S. District Court for the Eastern District of California. The prime contractor and the surety moved to compel arbitration and stay the case. The County

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agreed that the bonded contract contained an arbitration provision, but argued that the prime contractor waived its right to compel arbitration of any dispute between it and the County. The court granted the motion, stayed the case, and ordered arbitration of the County’s claims.

In P1 Group, Inc. v. TEPA EC, LLC, Case No. 2:12-cv-2412, 2012 WL 4667062 (D. Kan. October 3, 2012), a subcontractor sued the prime contractor and its surety, who issued a Miller Act payment Bond, for sums allegedly due for work performed on a federal project. The prime contractor and the surety moved to compel arbitration and stay the complaint. The parties agreed that the subcontract contained an arbitration provision, but the subcontractor believed it to be unconscionable and not enforceable by the surety, who was not a party to the subcontract. The court disagreed and granted the defendants’ motion to stay the case pending arbitration between the claimant and the prime contractor. The court deferred ruling on the defendants’ claims to attorneys fees under a provision in the subcontract and denied their claim for fees based on alleged bad faith or frivolousness by the by the subcontractor in opposing the stay.

In United States for the use of D.D.S. Industries, Inc. v. C.T.S., Inc., Case No. 1:11-cv-11561, 2012 WL 5878667 (D. Mass. November 20, 2012), the surety requested a stay of proceedings against as a result of the Commonwealth Court of Pennsylvania ordering the surety into liquidation/receivership. The court held that “exceptional circumstances warrant a stay.” According to the court, the state administrative agency is responsible for distributing money to claimants on insurance and surety contracts through a proof of claims procedure. To allow the claimant in the suit to circumvent the established administrative process for equitable distribution of the remaining assets of an insurer in liquidation would undermine Pennsylvania’s legitimate interest in insurance regulation. Interestingly, the court also recommended staying the action as to the bond principal because “in the interest of judicial economy, these claims should not be split between two fora. This litigation should be stayed pending the resolution of the state administrative agency proceeding.”

In U.S. for the use of Clifford & Galvin, LLC v. Endicott Constructors, Corp., Case No. 1:12-cv-10152, 2012 WL 6553457 (D. Mass. December 13, 2012), a subcontractor sued a prime contractor and a surety for sums due in relation to a Miller Act project. The prime contractor and the surety moved to dismiss or, in the alternative, to stay the proceeding and compel arbitration pursuant to a clause in the subcontract. The subcontractor did not disagree that the subcontract fell under the “ambit” of arbitration. The court allowed the defendants’ motion to stay the case pending arbitration between the prime contractor and the subcontractor. The court did not dismiss the case, however, because the subcontractor’s claims against the surety under the Miller Act were “not arbitrable and may only be brought before a federal court.” The court did acknowledge that the claim against the surety would only be litigated in the event the subcontractor was successful against the prime contractor in arbitration. The court also declined to compel arbitration because there was no evidence that the subcontractor would not submit to arbitration voluntarily.

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In U.S. for the use of Alamo Environmental, Inc. v. Cape Environmental Management, Inc., 2012 WL 6726571 (W.D. Okla. December 27, 2012), second tier subcontractors filed suit against the prime contractor, first tier subcontractor and the prime contractor’s surety for sums due on a federal/Miller Act project. The first tier subcontractor had asserted claims against the prime contractor and the surety, but the second tier subcontractors were no longer parties to the lawsuit. The prime contractor moved to compel arbitration pursuant to a provision in its contract with the first tier subcontractor. The subcontractor argued that the arbitration provision was illusory and lacked mutuality because it provided the prime contractor with a unilateral right to determine whether claims would be settled in a court or through arbitration. The court rejected the subcontractor’s position and found that the subcontract was supported by consideration as a whole. The court also found that the arbitration provision was clear, that the prime contractor had not waived its enforcement, and that the arbitrator should decide whether any conditions precedent had been met. The court stayed rather than dismissed the case because the subcontractor also asserted claims against the surety, which was not a party to the arbitration agreement.

H. MISCELLANEOUS PROCEDURAL ISSUES

In Developers Surety & Indemnity Co. v. IndyMac Ventures, LLC, Case Nos. A132229, A132231, A132232, and A132268, 2012 WL 2053567 (Cal. Ct. App. June 5, 2012), four (4) allegedly unpaid subdivision subcontractors sued, among others, the surety for the subdivision developer. The surety filed substantively identical cross-complaints against the developer’s lender. The lender then entered into a set aside agreement with the surety. The surety sought declaratory relief stating that if the surety had to pay the subcontractors it would be entitled to recover from the lender. The trial court dismissed the surety’s cross-complaints with prejudice as seeking an advisory opinion because the surety had not yet paid the subcontractors. In reversing, the court acknowledged that a party may seek a declaration of rights as to its rights of indemnification should it be held liable in the principal action. The Court directed that the surety be allowed to amend its cross-complaint in each action to state a claim for a declaration that it would be entitled to indemnity based on breach of the set aside agreement and for an accounting to determine the amount due under the agreement.

In Shafer Redi-Mix, Inc. v. J. Slagter & Son Construction Co., 2012 WL 2160998 (Mich. App. June 14, 2012), a concrete supplier sued the prime contractor and surety on a Michigan public project. In the case evaluation, the evaluators awarded $100,000 to the claimant and only $1 to the prime contractor on its counterclaim. The claimant rejected the case evaluation, and the matter proceeded to trial. The claimant recovered $104,791.88. Even after adding costs and interest to the date of the case evaluation, this was just short of 110% of the case evaluation. The trial court, therefore, awarded case evaluation sanctions against the claimant. The prime contractor and surety requested sanctions in excess of $199,000 and the trial court awarded $100,000 consisting of costs of $550 plus reasonable attorneys’ fees. The claimant appealed the determination that it was liable for case evaluation sanctions and the prime contractor and surety appealed the amount awarded. The court affirmed the judgment of the trial court. The court rejected that various items and theories which should have been

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considered part of its recovery to get it past the 110% barrier. The prime contractor and surety argued that the actual time its counsel spent preparing for the case should have been the basis for the sanctions not the reasonableness of that time in light of the nature and complexity of the case, the counsel’s experience, and the amount in dispute. The court found that the trial court appropriately focused on the amount of preparation that was reasonably required and held that its determination of a reasonable fee was supported by the record and thus not an abuse of discretion.

In U.S. for the use of CKF Excavating, LLC v. ACC Construction, Inc., 2012 WL 3161294 (W.D. Ky. Aug. 3, 2012), the U.S. District Court for the Western District of Kentucky held that the prime contractor’s Prompt Payment Act certifications showing amounts claimed for the claimant subcontractor’s work were admissible evidence. According to the court, the certifications were relevant nonhearsay.

In Ohio Farmers Ins. Co. v. Graham Construction Servs., Inc., Case No. 4:12-cv-21, 2012 WL 4049849 (D.N.D. Sept. 13, 2012), the original prime contractor, I.C.S., Inc. (“ICS”) assigned the contract to Graham Construction Services, Inc. (“Graham”). Travelers Casualty and Surety Company of America (“Travelers”) issued bonds on behalf of ICS and Graham relative to the prime contract. Graham subcontracted with Central Trenching, Inc. (“Central”). Ohio Farmers Insurance (“Ohio Farmers”) issued a performance bond on behalf of Central. Ohio Farmers filed a declaratory judgment action against Graham and Central, seeking a declaration that it had no obligation to perform the project pursuant to its performance bond. Central filed a crossclaim against Graham and a third-party complaint against Travelers (under the payment bond). Graham had filed a lawsuit in Minnesota state court against Central and two other entities on the theory that Central breached its contract and caused delays and damages to the bonded project. The court held that was no actual present controversy existed between Ohio Farmers and Graham because no demand had been made that Ohio Farmers take over or perform the work. Ohio Farmers had pled a “potential claim at best.” Essentially, Graham had only put the plaintiff on notice that if Central did default, then Graham would look to Ohio Farmers. The court also dismissed the various cross claims and counterclaims based on a forum selection clause in Central’s subcontract, which gave Graham the option of electing suit in Minnesota (the location of its main office) or North Dakota (the location of the project). The forum selection clause governed contract disputes and tort disputes related to the contract pursuant to the intent of the parties. Pursuant to the clause, Graham had filed suit in Minnesota, and the court found the entire matter should be decided in that case. It rationalized away the contrary forum selection clause in the bond by reasoning that the requirement for suit in the “location in which the Work or part of the Work is located” included the location of the first tier subcontractor’s main office since the contract defined Work to include documentation necessary for the project.

In Oden Metro Turfing, Inc. v. Continental Casualty Co., 2012 WL 5423704 (W.D. La. October 10, 2012), the plaintiff, a subcontractor on several Texas public road projects, sued the surety for the prime contractor. In 2000, the subcontractor and the surety entered into a

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settlement agreement in an action in the Eastern District of Texas. The settlement agreement allegedly provided for a division of the first $400,000 obtained by either the subcontractor or the surety pursuant to the Texas Trust Fund Act. In the case at hand, the subcontractor, whose corporate powers were revoked in 2002, sued for breach of the Trust Fund Act provision in the settlement agreement. The surety moved to dismiss for lack of capacity, lack of subject matter jurisdiction, and improper venue. After the suit was filed, the subcontractor’s corporate powers were reinstated. Under Texas law a reinstatement of a corporation relates back to the date the powers were revoked. As a result, the subcontractor possessed capacity. The retroactive reinstatement also conferred subject matter jurisdiction upon the court as an exception of the usual rule where subject matter jurisdiction is determined at the time of filing. However, the court transferred the case to the Eastern District of Texas where venue was proper.

In U.S. for the use of Tarmac America, LLC v. Pro Way Paving Sys., LLC, 2013 WL 212703 (M.D. Fla. Jan. 18, 2013), a supplier to a first tier subcontractor on a Miller Act project sued the subcontractor, the subcontractor’s manager pursuant to an alleged credit guaranty, and the surety for the prime contractor. The supplier and the surety reached a settlement, and the supplier’s claim against the surety was dismissed. The first tier subcontractor, however, filed a cross claim against the surety, and the prime contractor intervened and filed a claim against the subcontractor. The court granted the supplier summary judgment against the subcontractor and its manager. The other remaining claims forced the court to rule whether the summary judgment ruling was final and immediately appealable under Rule 54(b). Because both equitable interests and judicial administrative interests, the court refused to certify the judgment as final pursuant to Rule 54(b).

In Sunbelt Rentals, Inc. v. Tempest Windows, Inc., 94 A.D.3d 1088 (N.Y.A.D. April 24, 2012), the original plaintiff was an equipment supplier to a subcontractor on a private project. The supplier sued the owner, prime contractor, subcontractor and the subcontractor’s surety. The other parties asserted various claims. The surety settled with the plaintiff supplier. The supplier’s claims against all of the defendants were dismissed with prejudice. By stipulation, the owner’s and prime contractor’s cross claims against the surety were dismissed without prejudice to allow for refilling in a proper forum. The stipulation preserved the claims between the subcontractor and the prime contractor. The prime contractor and owner then filed a third party complaint against the surety, which the surety moved to dismiss. The trial court denied the surety’s motion, and granted a partial summary judgment motion against the surety. The Appellate Division reversed. It held that the claims against the surety were not a proper third party complaint because impleading the surety was improper. In New York, impleader requires that the liability against the third party plaintiff must arise out of claims by the plaintiff (the equipment supplier) against the third party defendants. After the dismissal of the party (which could have triggered liability for the surety), impleading of the surety was improper. The third party complaint should have been dismissed, and the partial summary judgment should have been denied.

In U.S. for the use of Technica, LLC v. Carolina Cas. Co., 2012 WL 1229885 (S.D. Cal. April 12, 2012), the case was reassigned to a judge who had already ruled against the

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principal and surety in another case. Based on affidavit from the surety’s counsel setting forth bias and prejudice exhibited by the judge against the defendants and their counsel in their previous case, the surety moved for dismissal. The court detailed how its various rulings against the principal and surety would not lead a reasonable person to question the court’s impartiality and denied the motion. The court further refused to refer the issue to another judge pursuant to 28 U.S.C. §144, because it found the affidavit to be legally insufficient. The affidavit was deficient because it was signed by counsel, not a party and it was wholly based upon ruling and administrative efforts. III. AGREEMENTS OF INDEMNITY A. SURETY’S RIGHTS UNDER AGREEMENT OF INDEMNITY

In Mid-Continent Cas. Co. v. Don Brady Construction Co., Inc., 2012 WL 1598149 (S.D. Ala. May 7, 2012), the surety received notice that the principal had not paid laborers and suppliers and, therefore, that it may be subject to payment bond claims and liability under its bonds. The surety filed a motion for summary judgment against the principal and indemnitors based on an affidavit from the surety’s assistant vice president of the surety’s incurred losses and expenses and reserves against anticipated future losses and expenses. The affidavit was admissible and sufficient evidence to show the liability of the indemnitors and principal to the surety. The court granted the surety’s motion for summary judgment.

In Travelers Casualty and Surety Company of America v. J.O.A. Construction Company, Inc., 479 F. App'x 684 (6th Cir. May 2, 2012), the U.S. Court of Appeals for the Sixth Circuit affirmed summary judgment for the surety against the principal and indemnitors and denial of the defendants’ motion for reconsideration. The principal’s attorney had represented the principal and surety in a collateral arbitration proceeding during the pendency of the indemnity action. The district court denied the defendants’ “Rule 60” motion seeking a Hirsch remand, and the Sixth Circuit affirmed the denial. The defendants also argued that the surety was required to demonstrate its own good faith in paying claims, which argument was rejected by the Sixth Circuit as “contrary to the plain language of the Agreement’s indemnification clause.” The Court examined the provisions of the indemnity agreement, found that the surety had acted within its rights under the agreement, and affirmed the district court.

In American Contractors Indemnity Co. v. Quality Asbestos & Demolition Services, LLC, Case No. 11-cv-10894, 2012 WL 1658539 (E.D. Mich. May 11, 2012), the surety filed suit against the principal and indemnitors seeking indemnification for $188,662.44 in losses already incurred under the bonds issued on behalf of the principal, as well as $302,035.17 in collateral security for pending claims. The court granted the surety’s unopposed motion for summary judgment against the principal and indemnitors based on an affidavit from an officer of the surety. The court also held that the surety was entitled to recover its losses to date and to collateral security for pending claims.

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In Great American Insurance Co. v. T.R. Driscoll, Inc., 2012 WL 4450963 (E.D.N.C. September 25, 2012), the U.S. District Court for the Eastern District of North Carolina granted the surety summary judgment against the principal in the amount of the surety’s payment and performance bond losses and expenses, but stayed the action as to two individual indemnitors who had filed for bankruptcy.

In Cincinnati Insurance Co. v. Tommy L. Griffin Plumbing and Heating Co., Case No. 5:11-cv-166, 2012 WL 4759086 (M.D. Ga. October 5, 2012), the surety moved for summary judgment in its indemnity action against the principal, Tommy L. Griffin Plumbing and Heating Co., and against Sandra Lawson, in her capacity as the executrix of the Estate of Lois S. Griffin and the Estate of Tommy L. Griffin, Sr. The two (2) individual indemnitors passed away between the time when the surety incurred its losses and the motion for summary judgment. Another individual indemnitor who had previously filed for bankruptcy was not included in the surety’s motion. The court reviewed the pertinent terms of the indemnity agreement, and found that they were clear and enforceable. The court relied on an affidavit of the surety’s bond claim superintendent, and an attached itemized list of payments made by the surety, to enter judgment in the amount of the surety’s losses and expenses.

In Westfield Insurance Co. v. Harvest Construction General Contracting, Inc., 2012 WL 5519096 (Kan. App. November 9, 2012), the surety filed a motion for summary judgment against the principal and indemnitors, who requested an extension of time to respond to the summary judgment motion. The trial court granted the surety’s motion for summary judgment without ruling on the request for an extension of time. The Kansas Court of Appeals reversed the summary judgment in favor of the surety because it failed to show that it acted reasonably and in good faith in its financial actions – a condition under the indemnity agreement for recovery against the principal and the indemnitors. The Kansas Court of Appeals also provided that, even if the motion for summary judgment had been properly supported, the trial court abused its discretion when it granted summary judgment without granting a reasonable extension of time to respond to the principal and indemnitors. The indemnitors had not opposed the surety’s motion, but their attorney had withdrawn and on the day an opposition would have been due, a new attorney entered an appearance and requested an extension of time. The trial court held a telephone conference call and granted the surety’s summary judgment motion without explicitly ruling on the request for an extension of time. The Kansas Court of Appeals thought failure to grant some reasonable additional time was an abuse of discretion and an alternative basis to reverse the judgment.

In Travelers Casualty and Surety Co. v. Highland Partnership, Inc., Case No. 10-cv-2503, 2012 WL 5928139 (S.D. Cal. November 26, 2012), the surety filed a complaint against the principal and indemnitors with respect to their liability under an agreement of indemnity. The surety filed a motion for summary judgment with respect to its claims for: (1) statutory indemnity against the principal; (2) breach of contract (i.e., the agreement of indemnity) as to all defendants; (3) quia timet as to all defendants; (4) declaratory relief as to all defendants; and (5) specific performance as to all defendants. The court considered the first two causes of action for reimbursement for monies already paid as a result of issuing bonds on behalf of the

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principal, but the remaining causes of action seek collateral with respect to future claims under the bonds or, in the alternative, declaratory relief with respect to the defendants’ obligations to the surety with respect to both past and future losses. Finally, the surety asserted that summary judgment was proper with respect to the defendants’ counterclaim, breach of a Joint Defense Agreement. The court reviewed the agreement of indemnity and the proof offered by the surety and granted the motion as to the amount of losses paid to date. The court denied the motion as to the surety’s attorneys’ fees (approximately $1,000,000) because it thought the surety had not presented evidence that the fees were reasonable. The court also granted the surety summary judgment on the defendants’ counterclaim for alleged breach of an oral promise to minimize attorneys’ fees. With respect to the Joint Defense Agreement, which incorporated the written indemnity agreement, the court held that the parole evidence rule would bar the alleged oral agreement at odds with the integrated, written agreements. Finally, the court granted the surety’s motion as to deposit of collateral and ordered the defendants to deposit collateral sufficient to cover the pending payment bond claims.

In Developers Surety and Indemnity Co. v. Kipling Homes, L.L.C., 2013 WL 315960 (N.D. Ill. January 28, 2013), the surety sued to enforce the indemnity agreement and moved for summary judgment. An individual indemnitor argued that the agreement did not apply to the bonds on which the surety suffered losses because the principals on those bonds were not the principal named in the indemnity agreement. The agreement covered bonds for the named entity and for its “present or future majority owned or controlled subsidiaries or affiliates.” In its reply in support of its motion for summary judgment, the surety submitted documents showing the relationship between the bond principals and the parent entity named in the indemnity agreement, but the court refused to consider the new documents because Local Rule 56.1 required a Statement of Material Facts with the initial motion. Because the surety failed to comply with Local Rule 56.1, the court could not grant judgment in favor of the surety as a matter of law. The court denied the motion without prejudice.

In Hartford Fire Insurance Co. v. NBC General Contractors Corp., Case No. 09-cv-5363, 2013 WL 685210 (N.D. Cal. February 22, 2013), the surety moved for summary judgment against an individual indemnitor, who did not file an opposition or statement of non-opposition to the motion for summary judgment, as required by Civil Local Rule 7-3. The district court noted that the U.S. Court of Appeals for the Ninth Circuit has held that a district court may not grant a motion for summary judgment simply because the nonmoving party fails to file an opposition, even if the failure violates a local rule. The district court found that the surety offered sufficient evidence to establish all necessary elements of its breach of the indemnity agreement claim. Moreover, the district court found that the surety met its burden on summary judgment by addressing the absence of evidence supporting the indemnitor’s affirmative defenses, shifting the burden to the indemnitor to come forward with evidence in support of his defenses. Because the indemnitor failed to do this, the district court granted summary judgment in favor of the surety.

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In Guarantee Co. of N. Am. USA v. Mercon Construction Co., Case No. 6:11-cv-1400, 2012 WL 1232104 (M.D. Fla. April 12, 2012), the surety settled with the obligee and sued the principal and indemnitors. The defendants filed two counterclaims, which the surety moved to dismiss. The first counterclaim asserted a bad faith claim against the surety. Although bad faith could be used as an affirmative defense to the surety’s indemnity claim, it could not be employed as a counterclaim. Hence, the bad faith claim was dismissed. The second counterclaim sought damages for the surety’s settlement of the principal’s affirmative claims against the obligee’s surety. The defendants argued that the right to settle claims provision of the indemnity agreement applied to claims against the surety not the principal’s affirmative bond claims. The surety highlighted other provisions of the indemnity agreement that assigned the affirmative claim to the surety. The court agreed with the surety and dismissed the counterclaim. The court also noted that even if the surety did not have authority to settle the affirmative claim it would not have breached the indemnity agreement by doing so. The settlement might not have been effective, but the indemnity agreement would not have been breached.

In Waco Scaffolding – Columbus v. Kastra Painting, Inc., 2012 WL 1229937 (S.D. Ohio April 12, 2012), the U.S. District Court for the Southern District of Ohio granted the surety summary judgment against the principal and indemnitors for the unpaid premium for the bond, the surety’s settlement with a claimant subcontractor, and the surety’s attorneys fees in defending against the subcontractor’s claim and enforcing the defendants’ indemnity obligations. The principal attempted, unsuccessfully, to show genuine issues of material fact existed as to the parties’ relationships. B. EXECUTION OF THE INDEMNITY AGREEMENT

In Am. Contractors Indemnity Co. v. Wilkens, 2012 WL 2362744 (Cal. Ct. App. June 22, 2012), the court affirmed summary judgment for the subdivision bond surety against the principal and indemnitors for a sum that was not disputed by the parties. One individual indemnitor argued that he was not an indemnitor who agreed to indemnify the surety even though he signed the indemnity agreement as an individual as well as on behalf of several business entities. The indemnitor further argued that, even if he was an indemnitor, he was subjectively mistaken as to his liability. The indemnitor argued that he was not listed in the space for indemnitors and this caused him to believe he was not bound individually. The Court found that the indemnity agreement was clear and the operative phrase was the “undersigned” and the principal was one of the “undersigned”.

In Safeco Insurance Company of America v. Mountaineer Grading Co., 2012 WL 3079175 (S.D. W. Va. July 30, 2012), the court conducted a bench trial in an indemnity lawsuit. Following the trial, the court concluded that an individual indemnitor (former wife of the other individual indemnitor) presented evidence to demonstrate beyond a reasonable doubt that she did not sign the indemnity agreement. The court entered judgment in favor of the wife who did not sign the indemnity agreement and stayed the case with respect to the remaining defendant, the former husband.

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In Cincinnati Insurance Co. v. Ralston Brown, Inc., Case No. 09-cv-6359, 2012 WL

4464449 (N.D. Ill. September 25, 2012), an individual indemnitor moved for summary judgment against the surety. According to the indemnitor, he did not have a meeting of the minds with the surety because his insurance broker told him that indemnity agreements were “applications only” and failed to explain that the indemnity agreements were actually part of the application forms he filled out on behalf of the principal. The court held that the individual indemnitor failed to present any evidence in support of this alleged defense. The individual indemnitor clearly signed his own name twice to the indemnity agreements – once as the president of the principal and once in his individual capacity. The individual indemnitor also argued that the indemnity agreements were not enforceable because his wife was required to sign them as the secretary of the principal and in her individual capacity and failed to do so. The court disagreed and denied the individual indemnitor’s motion for summary judgment.

In Ohio Cas. Ins. Co. v. Cox, C.A.No. 11-334, 2012 WL 1378404 (E.D. Ky. April 18, 2012), the surety received claims on its bonds and sued an indemnitor both in her own right and as personal representative of the estate of her late husband. The indemnitor denied signing the indemnity agreement and filed a third party complaint against the witness to her signature, the notary, and the surety on the notary’s bond. The third party defendants moved to dismiss the third party complaint as premature (the surety did not yet have a judgment), lacking in proximate cause, or illogical because if the indemnitor did not sign she would not be held liable and if she did sign there was nothing wrong with the witness’ or notary’s actions. The court found that the third party complaint alleged facts sufficient to support several causes of action including pain and suffering, punitive damages, statutory damages, court costs, and action on the notary bond. The proximate cause arguments were factual determinations and at the early stages of litigation, it would be premature to determine them. The court denied the motion to dismiss.

In Insurance Company of the West v. Ollinger Construction, Inc., Case No. 11-cv-575, 2012 WL 6651923 (S.D. Ala. December 20, 2012), the surety brought suit against a principal, Ollinger Construction, Inc., on whose behalf it issued bonds to enforce an indemnity agreement. “Ollinger/Mostellar & Associates, Inc.” initially executed the indemnity agreement on behalf of the surety, along with four (4) other individual indemnitors. The signatories to the indemnity agreement specifically represented that they were acting “for themselves and their heirs, executors, administrators, successors, and assigns.” Following execution of the indemnity agreement, the principal members of Ollinger/Mostellar & Associates, Inc. parted ways. Tom Ollinger purchased Wayne Mostellar’s share of Ollinger/Mostellar & Associates, Inc. and changed the name to Ollinger Construction, Inc. Tom Ollinger then sold the company to another individual. The new owner met with an insurance bonding agent and advised that Ollinger Construction, Inc. was under new ownership and management. The new owner and the agent allegedly orally agreed that any outstanding agreements between Ollinger/Mostellar & Associates, Inc. did not apply to Ollinger Construction, Inc. Ollinger Construction, Inc. subsequently obtained a bond from the same surety in whose favor the indemnity agreement was executed. Ollinger Construction, Inc. did not sign any indemnity agreement in favor of the

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surety. The court held that Ollinger Construction, Inc. was the successor to Ollinger/Mostellar & Associates, Inc. and so was bound by the indemnity agreement. Alleged oral changes were barred by the agreement itself, which required any modifications to be in writing signed by the surety. The court granted the surety’s motion for summary judgment in the amount of the surety’s losses and expenses.

C. INDEMNITOR DEFENSES TO LIABILITY

In Insurance Commissioner of Connecticut v. Novotny, 2012 WL 2087408 (W.D. Pa. June 8, 2012), the surety’s receiver sought to enforce a judgment against two indemnitors. In post judgment discovery, the receiver requested production of documents in the possession of the indemnitors’ accountant. The defendants asserted the Pennsylvania statutory accountant-client privilege to shield the documents. The court held that the defendants waived any such privilege in the indemnity agreement where they agreed that the surety would have access to their books and records wherever located and directed any third party in possession of such records to furnish them to the surety. Moreover, the doctrine of merger of judgment did not apply because the surety did not seek to pursue a new cause of action.

In SureTec Ins. Co. v. Nat’l Concrete Structures, Inc., Case No. 12-cv-60051 (S.D. Fla. July 3, 2012), the surety paid losses and expenses and sued the principal and individual indemnitors. One of the individual indemnitors, the wife of a partial owner of the principal, filed counterclaims for damages and rescission based on alleged violation of the federal Equal Credit Opportunity Act (ECOA). The surety moved to dismiss the counterclaims, and the court granted the dismissal.

In Am. Contractors Indemnity Co. v. Carolina Realty and Dev. Co., Inc., 2012 WL 2711802 (D.S.C. July 9, 2012), the U.S. District Court for the District of South Carolina granted summary judgment in favor of the principal and the indemnitors in an action filed by the surety. The principal was a subcontractor on a project in Florida when it became involved in claims and counterclaims with the prime contractor and its sureties in an action in Florida federal district court. The Florida action was settled, and a release was executed that included all claims among the parties and their sureties and encompassed all other matters between them related to the project. The surety then sued the principal and indemnitors on the indemnity agreement to recover the losses incurred in the settlement, as a result of satisfying payment bond claims, and in expenses. The defendants argued that the release executed in relation to the Florida suit released their indemnity obligations. Because the language in the settlement agreement was unambiguous, the court agreed and held that the four corners of the agreement released the claims. The broad general release in the settlement made it unnecessary for the court to consider the parties’ intent, an inquiry which would have forestalled summary judgment.

In Insurance Company of the West v. Triangle Maintenance Service, LLC, Case No. 1:11-cv-190, 2012 WL 4467555 (N.D. Miss. September 27, 2012) the surety moved for summary judgment against two individual indemnitors, as the principal had filed for

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bankruptcy. One indemnitor argued she signed the indemnity agreement under duress and as a result of the undue influence of her husband, the co-indemnitor, and that she signed based on an alleged “unilateral mistake.” Both indemnitors argued that summary judgment was premature and that discovery should be conducted pursuant to Fed. R. Civ. P. 56(d). With respect to the wife’s alleged defenses, the court found that her arguments of duress and undue influence were premised on the conduct of her husband – not the surety. Moreover, the wife was under a legal obligation to read the indemnity agreement and its provisions before signing the same, and the fact that the agreement was notarized belied the wife’s contention that she was unaware of the import of the document. The court granted summary judgment to the surety in the amount of its losses and expenses, as set forth in an affidavit of the surety’s claims consultant, finding that the indemnity agreement was “fully enforceable.”

In Liberty Mutual Insurance Co. v. Marine Electric Co., Inc., 2012 WL 5207537 (W.D. Ky. October 22, 2012), the surety sued the principal and indemnitors for, inter alia, claims under an indemnity agreement. The indemnitors filed counterclaims and affirmative defenses, and the surety moved to dismiss the counterclaims and to strike one of the affirmative defenses. The indemnitors alleged that the surety breached the indemnity agreement by not recording it as a UCC-1 financing statement, by not taking over the bonded projects in a timely or cost effective manner, and by not financing the principal. The court found that the surety’s actions were consistent with the clear and unambiguous terms of the indemnity agreement. The indemnitors also asserted a counterclaim for fraud because they were supposedly told that the principal’s assets would be adequate and their personal assets would not be at risk. The court found that the counterclaim did not meet the Rule 9(b) requirement that fraud must be pled with particularity. Finally, the indemnitors alleged violations of Kentucky unfair claims practices and unfair trade practices statutes and the federal Equal Credit Opportunity Act. The court held that none of the cited statutes applied to the bonds or to the indemnity agreement. The court granted the surety’s motion, dismissed the counterclaims and struck the affirmative defense. Following dismissal of their counterclaims, the principal and indemnitors in the above-referenced decision (reported at 2012 WL 5207537 (W.D. Ky. October 22, 2012)) moved for leave to file amended counterclaims against the surety and a third party complaint in Liberty Mutual Insurance Co. v. Marine Electric Co., Inc., 2012 WL 5463036 (W.D. Ky. November 8, 2012). The court again found that the surety’s actions were consistent with the clear and unambiguous terms of the indemnity agreement and that the proposed amendments would be futile. The court held that (1) the indemnitors could not rely on alleged breaches of the Kentucky Unfair Claims Settlement Practices Act and (2) the surety’s actions explicitly authorized by the indemnity agreement could not be the basis of a claim for breach of the implied duty of good faith and fair dealing. The court found that e-mails indirectly sent to the surety by a prospective purchaser of the principal could not be the basis of a fraud counterclaim because “as a passive recipient, [the surety] was not involved in any purported fraudulent scheme.” Finally, the indemnitors failed to allege a factual basis for a tortious interference with contract claim against the surety after the prospective purchase did not materialize. The court also denied the indemnitors leave to file a third party complaint against

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the prospective purchaser since the proposed third party complaint attempted to state an independent claim that was not derivative of, or dependent on the outcome of, the surety’s suit.

In International Fidelity Insurance Co. v. The Aulson Company, Inc., Case No. 11-cv-9240, 2012 WL 6021130 (S.D.N.Y. December 4, 2012), two sureties filed suit against various indemnitors and the principal. Prior to filing the suit, the principal informed the sureties that it was financially unable to meet its bonded obligations. The sureties incurred losses as a result of the bond principals defaulting in their obligations, and, on August 1, 2007, the sureties entered into a Forbearance, Restructuring, Intercreditor and Security Agreement (the “Forbearance Agreement”) with the indemnitors. Per the Forbearance Agreement, the sureties agreed to liquidate and reduce the principal amounts of indebtedness owed to them to $4,500,000 and $1,500,000. The sureties also agreed to forebear on collection of the indebtedness for two years (until July 31, 2009). In the Forbearance Agreement, the indemnitors largely waived their right to assert defenses against the plaintiffs. After two payments, the principal and indemnitors defaulted on the agreements and the sureties filed suit. The indemnitors argued that the sureties should have pursued a delay claim against one of the bond obligees and that the proceeds of that delay claim would have paid their obligations. The court granted the sureties’ motion for summary judgment. There was no provision in any of the indemnity agreements that obligated the sureties to pursue a claim against the obligee. The indemnitors argued that not pursuing the claim was a failure to mitigate damages, but the court found that the indemnitors’ obligations under the agreements and notes were to pay a liquidated amount, and the sureties did not have any obligation first to seek payment from another party. The court granted summary judgment to the sureties.

In Arch Insurance Co. v. WM Masters and Associates, Inc., Case No. 3:12-cv-2092 2013 WL 145201, (N.D. Tex. January 14, 2013), the surety sued the principal and indemnitors. Two indemnitors filed a Fed. R. Civ. P. 12(b)(6) Motion to Dismiss for Failure to State a Claim on the basis that the surety, as a foreign corporation, cannot maintain a suit under the Texas Business Organizations Code (“TBOC”) without registering with the Texas Secretary of State. In response, the surety argued that the TBOC’s registrations requirement did not apply to the surety, because it fell within the TBOC’s express exemption afforded to foreign corporations engaging in interstate activity. The surety also argued that the proper vehicle to challenge its capacity to sue in Texas is a Motion for Summary Judgment, not a 12(b)(6) Motion to Dismiss. The court found that, because the surety obtained an active license from the Texas Department of Insurance to transact business in the State of Texas, it need not register under the TBOC. The court denied the defendants’ motion to dismiss.

In SureTec Insurance Co. v. National Concrete Structures, Inc., Case No. 12-cv-60051, 2013 WL 394873 (S.D. Fla. January 31, 2013), the U.S. District Court for the Southern District of Florida granted summary judgment in favor of the surety against the principal and certain indemnitors. The district court held that the defendants’ arguments that the surety acted in bad faith were unpersuasive. Moreover, the court rejected the argument of one individual

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indemnitor that there was no consideration supporting her execution of the agreement. The court noted that the agreement itself described the consideration and that the surety issued its bonds in reliance on the executed agreement. The court found that continuing events may change the amount owed to the surety and deferred ruling on the amount of losses, prejudgment interest, expenses and attorneys fees to be included in the final judgment.

In Insurance Company of the West v. Engineered Systems and Construction, Inc., 2013 WL 676150 (Cal. Ct. App. February 26, 2013), the California Court of Appeals reversed summary judgment for the surety against the principal and indemnitors. The surety presented a 1996 indemnity agreement executed by the principal and the indemnitors. The surety bond under which the loss was suffered was issued by the surety in 2004. In 2006, the principal and the indemnitors executed a new indemnity agreement, because the principal wanted to obtain a contract that was larger than the prior work it performed. The “larger contract” was successfully completed, but the owner on the project relating to the surety bond issued in 2004 submitted a claim and filed suit against the principal and surety as well as other entities involved with the project. The indemnitors offered to defend the surety through counsel retained by the principal’s insurer. The surety did not accept this offer, and the principal and indemnitors did not deposit collateral as requested by the surety. After considerable litigation, the surety settled the owner’s claim for $250,000 and sought to recover that amount plus $433,110.64 in attorneys’ fees. The trial court granted summary judgment for the $250,000 and for attorneys’ fees, with the amount of fees to be determined in a post judgment proceeding. The indemnitors argued that the 2006 indemnity agreement replaced the 1996 indemnity agreement, but that the 2006 indemnity agreement applied only to the 2006 project. Accordingly, the indemnitors denied liability under the surety bond issued in 2004. The court disagreed but nevertheless reversed summary judgment for the surety because both indemnity agreements provided that the surety was entitled to recover for any payments to settle claims in the reasonable belief that it was liable for the amount paid or that it was expedient under all the circumstances to make the payment. The principal and indemnitors presented an affidavit that tended to dispute the principal’s liability to the owner to whom the settlement payment was tendered. The court concluded that the affidavit “was sufficient to create a triable issue of fact on whether [the surety] had a reasonable belief it was liable for the $250,000 or whether the settlement was ‘expedient’ under all the circumstances.” The Court went on to express its opinion that the 2006 indemnity agreement applied to bond issued in 2004, but did not foreclose evidence on the issue following remand. The court thought that the amount of attorneys’ fees was an item of damages to be proven as a part of the summary judgment proceedings, not as a post judgment issue. The court directed that its decision not be published in the official reports.

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D. ESTABLISHMENT OF AMOUNT OF LIABILITY

In Ins. Co. of the West v. Caicos Corp., 2012 WL 2979030 (W.D. Wash. July 20, 2012), the surety moved for summary judgment against an individual indemnitor. The indemnitor admitted to signing the indemnity agreement and that he was obligated to the surety. However, he disputed the amount claimed. The court granted the surety’s motion as to liability. However, the surety did not show that no genuine issue of material fact existed as to the amount because the indemnitor presented evidence of over $600,000 that may not have been accounted for by the surety in computing liability. The court invited the surety to file an additional motion with further evidence as to the amount owed.

In Fidelity and Deposit Co. of Md. v. Benetech, LLC, C.A. No. 11-cv-2722, 2012 WL 2565010 (E.D. La. July 2, 2012), the court denied the surety’s motion for summary judgment against the principal and indemnitors because there was a genuine issue of material fact as to the amount of liability owed to the surety. The surety admitted receiving over $4 million of indemnification from unnamed “third parties” and failed to submit vouchers or other evidence of its payments. The surety relied on a spreadsheet to substantiate the amount claimed, but the principal and the indemnitors argued that at least some of the amount had been repaid. The court found that the defendants should be allowed discovery as to the amount owed and denied the surety’s motion.

In Liberty Mutual Insurance Co. v. Blaze Building Corp., Case No. 1:11-cv-1082, 2012 WL 3231097 (N.D. Ohio August 6, 2012), the U.S. District Court for the Northern District of Ohio denied summary judgment for the surety against the principal and the indemnitors due to the existence of factual issues. During the process of investigating claims submitted under the bonds issued on behalf of the principal, the surety’s counsel asked the indemnitors on multiple occasions whether they had any defenses to the claims. The indemnitors failed to provide the surety with any defenses and also failed to provide the surety with the requested collateral security to offset settlement payments. The court declined to grant the summary judgment motion because it felt that a jury should decide the amount of any “indemnification award.”

In Gray Insurance Co. v. ZFI Engineering & Construction, Inc., 2012 WL 3252717 (M.D. Fla. July 23, 2012), after sustaining $100,000 in expenses and $25,000 in losses as a result of issuing surety bonds, the surety sued the principal and the indemnitors in federal court on the basis of diversity jurisdiction. The defendants filed a motion to dismiss for lack of subject matter jurisdiction and argued that only the paid losses could be considered in satisfying the jurisdictional amount because the expense payments should be excluded as “costs.” The judge recommended denial of the motion, since the indemnity agreement provided for recovery of the expenses, which were properly included in the amount in controversy.

In SureTec Insurance Co. v. BRC Construction, 2012 WL 5214293 (E.D. Cal. October 22, 2012), the U.S. District Court for the Eastern District of California denied the surety’s unopposed motion for attorneys’ fees, filed after the clerk had entered default judgment against the principal and the indemnitors for the surety’s losses. The default judgment declined to

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include attorneys’ fees and directed the surety to file an application and motion for the fees. The surety filed the motion, and the district court held that, since the fees were incurred to defend bond claims, rather than the indemnity lawsuit, they were part of the damages sought in the complaint and should have been awarded in the default judgment. The court denied the motion for attorneys’ fees without prejudice.

In Liberty Mutual Insurance Co. v. Hisaw & Associates General Contractors, Inc., Case No. 11-11012, 2013 WL 632126 (5th Cir. February 20, 2013), the U.S. Court of Appeals for the Fifth Circuit affirmed in part and reversed in part and judgment entered by and vacated the fee award granted by the district court. The indemnity agreement had been modified to limit the liability of the personal indemnitors as long as the net worth of the principal did not fall below $3,000,000. The modification provided that if the net worth of the principal fell below $3,000,000, the indemnitors would be liable for any “distributions, payments or dividends or bonuses, redemption of stock, loans or sale of assets.” In the district court, the surety argued that various transfers made by the personal indemnitors were recoverable pursuant to the modification. The surety recovered a judgment in excess of $16,000,000 from the principal but only $45,000 plus attorneys’ fees from the indemnitors. The surety claimed attorneys’ fees of $354,349. The district court reduced the indemnitors’ liability for the attorneys’ fees by half of the full amount. The surety and the indemnitors both appealed. The Fifth Circuit rejected the surety’s argument that various indirect transfers that benefited the indemnitors violated the modification. The court relied on the literal language of the modification and held, for example, that the principal’s payment of rent to a corporation wholly owned by the indemnitors was not a violation. With respect to the indemnitors’ appeal, the Fifth Circuit held that the $45,000 (salary) that the district court had awarded the surety was not a “distribution” forbidden by the modification. Since the surety obtained no recovery from the indemnitors, it was not entitled to attorneys fees’ from them, and the attorneys’ fees portion of the district court judgment was also vacated. E. DEFAULT JUDGMENT

In Western Surety Co. v. Merrick, C.A. No. 3:11-cv-626, 2012 WL 3235694 (W.D. Ky. August 6, 2012), the surety sued the principal and indemnitors. After the surety moved for entry of a judgment by default, the defendants filed untimely answers and opposed the surety’s motion. The court permitted filing of the late answers and denied the surety’s motion.

In Ullico Casualty Co. v. Abba Shipping Lines, Inc., 891 F. Supp. 2d 4 (D.D.C. September 16, 2012), the surety, after obtaining the clerk’s entry of default against the principal, filed a motion seeking damages in the amount of $75,000 and attorneys’ fees in the amount of $42,936.58, plus interest and costs. The court granted the motion, with the exception of approximately $3,000 in fees that the surety failed to establish, as the principal has conceded its liability by defaulting.

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In Ohio Casualty Insurance Co. v. HDE, Inc., 2012 WL 6106410 (M.D. Fla. November 19, 2012), the surety sought default judgment against the principal, who failed to file a response to the surety’s indemnity lawsuit within the time limits set forth in the Federal Rules of Civil Procedure. The Magistrate Judge recommended that the motion be denied without prejudice pending resolution of the surety’s claims against the other defendants. The Magistrate Judge reasoned that under Rule 54(b) the judgment would be against only one defendant and the preferred practice is to wait to enter judgment until the trial on the merits against the remaining defendants. According to the judge, the “entry of a default judgment against [the principal] now would create the possibility of inconsistent determinations against joint Defendants where only one of the Defendants has been defaulted.” The judge further stated that “it would be both inefficient and uneconomical to enter judgment against [the principal] at this time.”

In The Gray Casualty and Surety Co. v. McConnell Contracting, LLC, Case No. 1:11-cv-184 2012 WL 1145186 (S.D. Ala. April 5, 2012), the U.S. District Court for the Southern District of Alabama granted the surety judgment by default against the principal and indemnitors for the amount of the surety’s losses plus interest and attorneys fees. Likewise, in The Gray Casualty and Surety Co. v. McConnell Contracting, LLC, 2012 WL 4434748 (S.D. Ala. September 26, 2012), the U.S. District Court for the Southern District of Alabama allowed a surety to amend its default judgment against the principal and the indemnitors, as the surety had paid additional losses and believed the debt to be firm.

In Travelers Indemnity Co. v. Titanium Mechanical Corp., 2013 WL 431324 (E.D.N.Y. February 4, 2013), the surety moved for default judgment against the principal and the indemnitors, and the court ordered that the surety provide a legal analysis of whether “it is appropriate for a court to enter a default judgment on a complaint for contractual indemnification that fails to indentify the contract or bond under which indemnification is being sought, especially where the Indemnity Agreement dates back to 2001.” The surety allegedly re-stated the complaint in lieu of providing a detailed legal analysis requested by the court, and the magistrate judge refused to enter default judgment in favor of the surety. The complaint did not identify the construction contracts or bonds that formed the basis of the claim, and the surety had not provided copies of vouchers or other evidence establishing payments under the bonds. The surety relied on an affidavit from its claims representative listing the losses “in a conclusory fashion.” The magistrate judge also questioned whether the individual defendant sued, Inna Sitkovetsky, was the same person as the Inna Sitkovetsky served with the complaint because on the indemnity agreement her address was 265 Haring St. in Brooklyn whereas she was served at 2645 Haring St. in Brooklyn.

In Travelers Casualty and Surety Company of America v. Evans, Case No. 1:10-cv-2003, 2012 WL 3132653 (E.D. Cal. July 31, 2012), the surety moved for default judgment against the indemnitors and the principal under Fed. R. Civ. P. 55(b)(2). The magistrate recommended entry of default judgment against the principal and indemitors, based on his review of the indemnity agreement and the surety’s support for its losses and expenses. In the following case, Travelers Casualty and Surety Company of America v. Evans, Case No. 1:10-

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cv-2003, 2012 WL 4468422 (E.D. Cal. September 26, 2012), the district judge reviewed and approved the Findings and Recommendations of the magistrate judge and agreed that the surety was entitled to a judgment by default against the principal and indemnitors. One indemnitor had filed for bankruptcy, however, and as to him the court stayed proceedings and directed the surety to report on the status of the bankruptcy in six months.

In Great American Insurance Co. v. Wayne Evans Auction Co., Case No. 4:12-cv-45, 2012 WL 2154245 (M.D. Ga. June 13, 2012), the U.S. District Court for the Middle District of Georgia granted the surety judgment by default against the principal and indemnitors pursuant to Fed. R. Civ. P. 55(b)(2). An affidavit established the amount of the surety’s loss, expenses and interest. According to the court, the “amount sought [by the surety] is for a sum certain or an amount that can be easily computed.” No evidentiary hearing was needed.

In Bond Safeguard Insurance Co. v. Ridgeview Development, LLC, No. 11-CV-03275-WJM-KMT, 2012 WL 4511285 (D. Colo. October 1, 2012), the U.S. District Court for the District of Colorado entered default judgment against the principal and indemnitors for the surety’s unpaid premiums, losses and expenses, and court costs under Fed. R. Civ. P. 55(b)(2). The court also awarded post-judgment interest.

In First National Insurance Company of America v. Maxim Construction, Inc., 3:11-CV-00715-LRH, 2012 WL 6204293 (D. Nev. December 12, 2012), the U.S. District Court for the District of Nevada entered a default judgment against the principal and indemnitors in the amount of the surety’s losses plus prejudgment interest and attorneys fees. The court weighed the following factors: (1) the possibility of prejudice to the plaintiff; (2) the merits of the plaintiff's substantive claims; (3) the sufficiency of the complaint; (4) the sum of money at stake in the action; (5) the possibility of a dispute concerning material facts; (6) whether the default was due to the excusable neglect; and (7) the strong policy favoring decisions on the merits.

In Liberty Mutual Insurance Co. v. CTS Earthmoving, Inc., CV-12-00089 JMS-KSC, 2012 WL 6704055 (D. Ha. December 4, 2012), the magistrate recommended entry of judgment by default in the surety’s suit against the principal and indemnitors. The Magistrate Judge recommended a judgment for the surety’s losses, pre-judgment interest, taxable costs, attorneys’ fees and non-taxable expenses.

F. PROCEDURAL ISSUES

In American Contractors Indemnity Co. v. Boeding, 490 Fed. Appx. 141 (10th Cir. July 25, 2012), the U.S. Court of Appeals for the Tenth Circuit dismissed an appeal by an individual indemnitor of a judgment imposing a constructive trust on property titled in the name of another defendant. According to the court, the indemnitor lacked standing. The judgment against the other defendant, a limited liability company, had been certified for appeal pursuant to Fed. R. Civ. P. 54(b). Because the indemnitor was not an attorney, she could not represent the limited liability company or otherwise appeal the judgment in federal court.

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In Travelers Casualty and Sur. Co. of Am. v. 3B’s Partnership, Case No. 12-cv-86 (D.N.M. June 20, 2012), the court denied the indemnitors’ motion to dismiss the surety’s action. Two state court proceedings involving the obligee, principal, surety and various subcontractors were settled. As part of the settlement, the parties executed a release. The indemnitors were not parties to the state court suits. The surety then sued the indemnitors in federal court. The indemnitors argued that the dispute, and the effect of the release, were questions of state law and should be decided in state court. The court reviewed abstention and various theories for a federal court to decline to exercise its jurisdiction and held that none of them applied.

Kalos v. Centennial Surety Associates, Inc., 2012 WL 6210117 (D. Md. December 12, 2012) is one of many suits filed by an unhappy indemnitor whose property was foreclosed upon to pay her obligations on bonds which she alleges were fraudulently issued. The court described many of the prior suits, granted the defendants’ motion to dismiss based on res judicata, awarded the defendants’ attorneys’ fees, and enjoined the indemnitor from filing similar future actions.

In Neon Construction Enterprises, Inc. v. International Bonding and Construction Services, Inc., 2012 WL 3111748 (V.I. Super. July 25, 2012), the plaintiff entered into an indemnity agreement with an “individual surety.” After the obligee rejected the bonds, the plaintiff sued the surety and related entities. The defendants entered a special appearance and moved to dismiss based on choice of law and forum selection clauses in the indemnity agreement, which required application of Virginia law and suit in Virginia, where the individual surety was located. The court held that surety was a type of insurance under Virgin Islands law and that V.I.C. §820(a) voided any agreement in a contract of insurance that required application of the law of another forum or deprived the Virgin Islands courts of jurisdiction over an action against the insurer. The court applied V.I.C. §820(a) to the indemnity agreement, and denied the individual surety’s motion. The court concluded, “The forum selection and choice-of-law clauses set forth in the General Agreement of Indemnity, and relied upon by Defendants, are not enforceable under Virgin Islands law.”

In Western Surety Co. v. Leo Construction, LLC, 3:12-CV-1190 CSH, 2012 WL 3775882 (D. Conn. August 29, 2012), the surety sued the principal (a LLC) and four individual indemnitors in federal district court on the basis of diversity jurisdiction. According to the court, the surety failed to plead sufficient facts to establish the existence of diversity of citizenship. The surety failed to specify its own principal place of business and whether it was incorporated in more than one state. The surety also failed to specify the states where the members of the LLC were citizens. The court ordered each party to file an affidavit setting forth the information needed to address whether there was diversity jurisdiction.

In The Hanover Insurance Co. v. Northern Building Co., 891 F. Supp. 2d 1019 (N.D. Ill. September 4. 2012), the surety for a subcontractor settled with a payment bond claimant and sued the principal and indemnitors. The surety filed a motion for summary judgment. In response, the principal filed a counter motion for summary judgment, dismissal of the lawsuit

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or change of venue. After suit was filed, the owner of the bonded project paid the prime contractor, who paid the surety the amount of its settlement with the payment bond claimant. The surety continued to pursue the principal and indemnitors to recover its expenses. The defendants argued that the $75,000 jurisdictional amount was no longer established. The court disagreed because at the time the suit was filed, the amount in controversy exceeded $75,000. The fact that later events reduced the amount of the surety’s claim did not deprive the court of diversity jurisdiction. The court enforced the indemnity agreement and held that in the absence of bad faith the surety had the right to settle the disputed claim. The court opined that the disagreement between the surety and the principal as to whether the claim should have been paid did not amount to bad faith. The court denied the defendants’ motion and granted summary judgment to the surety.

In Atlantic Mutual Insurance Co. v. M.H. Kane Construction Corp., 100 A.D.3d 564, 954 N.Y.S.2d 530 (N.Y.A.D. November 27, 2012), the surety who issued performance bonds on behalf of a principal sued the indemnitors. Pursuant to the defendants’ motion, the trial court transferred the case to another county more convenient for prospective nonparty witnesses that the defendants intended to testify at trial. The defendants anticipated that the nonparty witnesses would testify on the issue of whether the principal was properly terminated by the obligee. The Appellate Division reversed the motion to transfer and held that the defendants “failed to make the requisite showing that those witnesses were actually contacted and were willing to testify, or to set forth the substance and materiality of their testimony.” The Appellate Division also noted that the defendants failed to provide any reason why traveling to the county where the lawsuit was filed would constitute a hardship for any of the witnesses. G. COLLATERAL DEPOSIT DEMANDS/PRELIMINARY INJUNCTIONS

In Arch Insurance Co. v. Sierra Equipment Rental, Inc., Case No. 2:12-cv-617, 2013 WL 85332 (E.D. Cal. January 7, 2013), the principal previously notified its surety that it needed $3,000,000 in financial assistance after defaulting on a bonded project. In turn, the surety requested that the principal and the indemnitors deposit collateral in an amount the surety estimated it had received in claims, discharge the surety from the bonds, and allow the surety to inspect the principal’s books and records, all in accordance with the terms of a General Agreement of Indemnity executed by the principal and the indemnitors. The surety previously obtained a preliminary injunction against the principal and the indemnitors, but requested a “turnover order” directing the defendants to cooperate in transferring possession of assets. The court granted the surety’s motion for a turnover order directing the defendants to surrender certain property.

In Hanover Ins. Grp. v. Singles Roofing Co., Inc., Case No. 10-cv-611, 2012 WL 2368328 (N.D. Ill. June 21, 2012), the court had ordered the principal and indemnitors to deposit substantial collateral with the surety, only to have the defendants file for bankruptcy. The indemnity action was stayed by the bankruptcy filings, but eventually one of the individual indemnitors was denied a discharge. The surety then moved for a preliminary injunction to obtain the collateral, to prevent transfer of the indemnitor’s assets, and to obtain access to the

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indemnitor’s books and records. The indemnitor moved to dismiss the complaint. The court denied the indemnitor’s motion to dismiss. The court granted the surety’s motion for a preliminary injunction based upon the strong likelihood of success on the merits, the insufficiency of damages and a balancing of the equities.

In Safeco Insurance Company of America v. Hirani/MES JV, 480 F. App'x 606 (2nd Cir. May 4, 2012), the U.S. Court of Appeals for the Second Circuit affirmed partial summary judgment for the surety requiring the principal and the indemnitors to immediately deposit collateral security sufficient to cover the surety’s anticipated costs and expenses as a result of issuing bonds on behalf of the principal. The defendants appealed, arguing that the district court did not consider its equitable defenses, primarily related to the surety’s bad faith, and improperly calculated the amount of collateral security to deposit. The indemnity agreement at issue required the defendants to provide enough collateral security to “discharge any claim made against [the surety]” and to “cover all exposure under … [the] bonds.” According to the court, the defendants’ allegations of bad faith did not implicate the surety’s “right to the interim remedy of collateral security.” Moreover, the court rejected the argument that the surety had not shown irreparable harm and held that the surety had bargained for collateral security and would be harmed if it was not received. Notably, the court stated that the defendants’ own arguments about not being able to deposit the collateral and litigate the action supported a finding of irreparable harm.

In Colonial Surety Co. v. Phoenix Contracting Group, Inc., NNHCV106015539S, 2012 WL 1624015 (Conn. Super. April 17, 2012), the surety sued the principal and indemnitors and demanded a prejudgment remedy for (1) the expenses incurred to date of about $90,000 and (2) deposit of collateral of $3.5 million. An obligee on a bond issued by the surety on behalf of the principal asserted a claim of $3.5 million in its complaint against the surety. The court found that the Connecticut prejudgment remedy statute allowed an attachment of the defendant’s property for the $90,000 because the surety had shown probable cause to believe that it would obtain a judgment in that amount. The court held, however, that the prejudgment remedy statute did not authorize an order to post collateral. The court stated, “The order sought by the plaintiff as a prejudgment remedy is not authorized by General Statutes Section 52-278a(d) which defines the term ‘prejudgment remedy.’”

In Travelers Casualty and Sur. Co. of Am. v. Graves, Case No. 2:11-cv-937, 2012 WL 1684538 (D. Nev. May 14, 2012), the surety on a bond to the Nevada Department of Taxation sought to compel several indemnitors to deposit collateral in the amount that the Department had demanded from the surety. The Department’s demand was equal to the penal sum of the bond, $291,000. The indemnitors argued that the taxes due were actually less than the demand. They also asserted they were possibly less than the jurisdictional threshold of $75,000 for diversity jurisdiction. Two of the indemnitors moved to stay the surety’s suit until final determination of the tax liability. The court denied the motion and held that the amount in controversy was the $291,000 demand against the surety, meaning that subject matter jurisdiction existed. The potential for a lower claim by the surety was irrelevant to the indemnitor’s obligation to deposit collateral for the surety’s exposure.

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In Travelers Cas. and Sur. Co. of Am. v. W.P. Rowland Constructors Corp., Case No.

12-cv-390, 2012 WL 1718630 (D. Ariz. May 15, 2012), the surety sued the principal and indemnitors and moved for a preliminary injunction requiring deposit of collateral, prohibiting transfer of assets, and ordering that the defendants use contract funds only to pay bonded obligations. The court granted the unopposed motion as to the use of the contract funds. Pursuant to the Erie Doctrine, the court employed the standards of F.R.C.P. 65. The court found that the surety failed to demonstrate the required irreparable harm to support either a mandatory injunction for deposit of collateral or a prohibitory injunction against transfer of the defendants’ assets. The court denied the surety’s motion as to deposit of collateral and prohibiting transfer of assets without prejudice as to the surety renewing its requests upon a showing of the necessary irreparable harm.

In International Fidelity Insurance Co. v. Solutions to Every Problem, Inc., Case No. 3:12-cv-37 (E.D. Tenn. July 3, 2012), the obligee terminated a principal’s right to prosecute work on a bonded contract and called upon the surety under its performance bond. The principal thought the termination was wrongful and asserted claims against the obligee. The surety paid losses and expenses under the bonds issued on behalf of the principal and anticipated incurring additional losses. In the lawsuit at issue, the surety sued the principal and the indemnitors and filed a motion for preliminary injunction seeking to enforce a deposit of collateral provision in the indemnity agreement. The principal and indemnitors argued that the surety’s claims should be stayed until completion of the principal’s litigation with the obligee. The court denied the request for a stay and, moreover, granted the surety’s motion for preliminary injunction. According to the court, the surety was likely to prevail on the merits and would suffer irreparable harm if the injunction were not granted. The balance of the equities and the public interest in freedom of contract favored the surety. The court conditioned the injunction on the surety posting a bond in the amount of the contract balances it anticipated receiving from the obligee.

In Bond Safeguard Ins. Co. v. Dixon Builders I, LLC, 2012 WL 2988790 (Ohio App. July 23, 2012), the trial court ordered the principal and indemnitors to deposit $600,000 with the clerk of the court as collateral to protect the surety on 32 subdivision bonds. On appeal, the defendants argued that the surety was not entitled to injunctive relief and that a new LLC, “Dixon Builders II,” was not an indemnitor because it was not an affiliate of Dixon Builders I. According to the court, deposit of the collateral by the principal and the indemnitors would preserve the status quo, the purpose of a preliminary injunction. Consequently, the court affirmed the order for deposit of collateral as specific enforcement of the collateral deposit provision of the indemnity agreement. Finally, the court found that Dixon Builders II was created to avoid liability for the principals of Dixon Builders I and that funds were often commingled. Ultimately, the court agreed that the evidence supported the trial court’s finding that Dixon Builders II was an affiliate of Dixon Builders I for purposes of the indemnity agreement.

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In Travelers Casualty and Surety Company of America v. Highland Partnership, Inc., 10CV2503 AJB DHB, 2012 WL 3307208 (S.D. Cal. August 10, 2012), the surety filed an ex parte application for a temporary restraining order and order to show cause regarding issuance of a preliminary injunction. The surety sought to prevent the principal form dissipating $500,000 in proceeds of a settlement. The court thought that the surety had not met its burden of establishing irreparable harm because the surety failed to provide sufficient evidence of the principal’s actual or impending insolvency. The court did not find it persuasive that the surety had paid over $1.5 million of the principal’s debts.

In Hartford Fire Insurance Co. v. Saunders Concrete Co., Inc., Case No. 5:11-cv-677, 2012 WL 3822097 (N.D.N.Y. September 4, 2012), the U.S. District Court for the Northern District of New York granted the surety a preliminary injunction ordering the principal and indemnitors to deposit the amount demanded by the surety into an escrow account. The defendants argued that the surety’s right to demand collateral was triggered only by the obligee’s arbitration demand and, since the action had been dismissed and the surety not compelled to arbitrate, the surety could not invoke its right to demand collateral under the indemnity agreement. Even though the arbitration case was dismissed, the obligee had demanded payment, however, and clearly sought to enforce the bond. The court found, “Plaintiff reasonably sought to avail itself of its express right under the Agreement to demand collateral based on its belief that it might incur liability or loss and, thus, permissibly deemed itself insecure unless or until Defendants provided sufficient collateral.”

In Travelers Casualty and Surety Company of America v. Industrial Commercial Structures, Inc., Case No. 6:12-cv-1294, 2012 WL 4792906 (M.D. Fla. October 9, 2012) the surety sought a preliminary injunction enforcing the collateral deposit provision of the indemnity agreement. The principal, surety and obligee were engaged in state court litigation, in which the principal alleged that the obligee had wrongfully terminated its bonded contract. The surety demanded collateral in the amount of its anticipated attorneys’ fees and anticipated loss in the state court litigation. The court noted the case law supporting enforcement of collateral deposit provisions, the irreparable harm to the surety if it was not granted relief, and the public interest in enforcement of contracts and solvent sureties. The court entered a preliminary injunction ordering deposit of the collateral demanded by the surety conditioned on the surety posting an injunction bond. IV. BAD FAITH A. BAD FAITH IN INDEMNITY LAWSUITS

In Guarantee Co. of N. Am. USA v. Mercon Construction Co., Case No. 6:11-cv-1400, 2012 WL 1232104 (M.D. Fla. April 12, 2012), the surety settled with the obligee and sued the principal and indemnitors. The defendants filed two counterclaims, which the surety moved to dismiss. The first counterclaim asserted a bad faith claim against the surety. Although bad faith could be used as an affirmative defense to the surety’s indemnity claim, it could not be employed as a counterclaim. Hence, the bad faith claim was dismissed. The second

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counterclaim sought damages for the surety’s settlement of the principal’s affirmative claims against the obligee’s surety. The defendants argued that the right to settle claims provision of the indemnity agreement applied to claims against the surety not the principal’s affirmative bond claims. The surety highlighted other provisions of the indemnity agreement that assigned the affirmative claim to the surety. The court agreed with the surety and dismissed the counterclaim. The court also noted that even if the surety did not have authority to settle the affirmative claim it would not have breached the indemnity agreement by doing so. The settlement might not have been effective, but the indemnity agreement would not have been breached.

In Travelers Cas. and Surety Co. of Am. v. Caridi, 2012 WL 1662494 (Conn. Super. April 19, 2012), the surety sought a prejudgment remedy with respect to attaching real property owned by two individual indemnitors. The indemnitors argued that the surety failed to act in good faith by conducting an adequate investigation of a botched bonded construction project, even though the indemnity agreement at issue did not impose an express good faith requirement on the surety. Relying on a prior Connecticut case, the Connecticut Superior Court held that a surety’s enforcement of the indemnity agreement requires the surety co comply with a covenant of good faith and fair dealing, which “can be express or implied.” The court held that the indemnity agreement at issue contained an implied covenant of good faith and fair dealing, and that the surety was under an obligation to conduct a proper investigation of a claim. However, the court ultimately held that the “failure to investigate, standing only and not accompanied by other evidence of an improper motive, is not enough to constitute bad faith[.]” The court granted the surety’s application and authorized attachment of the defendants’ real estate.

In RLI Ins. Co. v. Craig Wallace Construction, LLC, Case No. 5:11-cv-134 (N.D. Tex. June 8, 2012), the U.S. District Court for the Northern District of Texas entered summary judgment for the surety against the principal and indemnitors. The surety provided evidence of its loss and expense payments and its reserve for future losses. The defendants argued only that the surety had not affirmatively proven that it made the payments in good faith. The court held that the surety’s general allegation that all conditions precedent had been met or waived was sufficient in the absence of any contention, beyond a general denial, that the surety failed to act in good faith. The court also found that the surety had affirmatively established its good faith by settling and paying claims against the bond via an affidavit from the person responsible for handling the claims. The defendants failed to contradict the evidence of the surety’s good faith.

In Lumbermens Mutual Casualty Co. v. Dinow, Case No. 06-cv-3881, 2012 WL 4498827 (E.D.N.Y. September 28, 2012), the surety sought summary judgment against one Indemnitor. Prior to the lawsuit, the surety issued a performance bond on behalf of a principal with a dual obligee rider that named two (2) additional obligees, but provided that set forth explicit language as to the conditions under which the additional obligees could make a claim under the performance bond. According to the principal, one of the additional obligees failed to follow the conditions of the dual obligee rider relative to asserting a claim. The court denied

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the surety’s motion for summary judgment against the indemnitor because issues of fact existed as to whether (1) the additional obligee satisfied the conditions of the dual obligee rider, (2) the surety settled the underlying claims in good faith, and (3) whether it should have paid a particular payment bond claim.

In First National Insurance Company of America v. Duncan Pipeline, Inc., Case No. 2:11-cv-85, 2013 WL 632256 (N.D. Ga. February 19, 2013), the surety sought indemnification from the principal and the indemnitors. The surety presented evidence that it gave the principal and indemnitors a copy of each claim made under the surety bonds, solicited the defendants’ input regarding amounts owed to claimants, and provided the defendants with an itemized statement of the amounts it paid to each claimant. In response, the defendants disputed their liability under the indemnity agreement by arguing that the surety acted in bad faith and failed to mitigate its damages. The defendants argued that the surety acted in bad faith because an affiliated company was also surety for the prime contractor on one of the projects, the surety demanded that contract funds not be paid to the principal, and the surety did not act aggressively enough to collect contract funds. The court found that the surety was not a “dual agent,” did not owe the defendants a fiduciary duty and acted within its rights under the indemnity agreement. The court granted the surety summary judgment in the amount of its losses and expenses and denied the defendants’ late motion for leave to file a counterclaim. B. BAD FAITH IN ADDRESSING CLAIMS UNDER BONDS

Glidepath, LLC v. Lawrence Brunoli, Inc., 2012 WL 6924526 (Conn. Super. December 21, 2012) largely involved a dispute between the prime contractor on a public project and one of its subcontractors. The subcontractor, however, also sued the contractor’s payment bond surety alleging breach of the Little Miller Act, G.S. § 49-42, breach of the implied covenant of good faith and fair dealing, and violation of the Connecticut Unfair Trade Practices Act (CUTPA). The surety moved for summary judgment. The surety argued that the subcontractor failed to give timely notice of its claim and failed to sue within the required one (1) year period. The court held that there were issues of fact as to when the time periods started to run and, therefore, whether the subcontractor’s notice and suit were timely. The court held that the subcontractor, as an intended third party beneficiary under the bond, could assert a claim for breach of the implied covenants of good faith and fair dealing against the surety. However, the court found that it was for the trier of fact to determine whether the surety’s actions were “sufficient, negligent or amount to a purposeful failure to make an inquiry for purposes of remaining ignorant of facts” with respect to its denial of the subcontractor’s claim. The court denied the surety’s motion as to the CUTPA claim because there were issues of fact as to whether the surety “purposefully failed to make an inquiry into the plaintiff’s claims for purposes of remaining ignorant of facts, and, thus, violated CUTPA.”

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V. BANKRUPTCY

A. SURETY’S RIGHTS AGAINST DEBTORS GENERALLY

In Forman v. Carver Fed. Savings Bank (In re East Coast Sanitation Co. Inc.), 79 UCC Rep. Serv. 2d 279 (Bankr. D.N.J. December 11, 2012), the bankruptcy trustee for a solid waste hauler claimed that recorded security interests of two lenders and a surety were on vehicles of the debtor void because they had not been approved by the Board of Public Works, as allegedly required by N.J.S.A. § 48:3-7. The court noted that U.C.C. §§ 9-406 and 9-408 were adopted in New Jersey without exceptions for the Public Utility Law relied upon by the trustee. These sections superseded the requirement for prior approval by the Board of Public Works. The court also agreed with the defendants that the Public Utility Law did not require prior approval to finance the purchase of sanitation trucks. The court granted summary judgment to the defendants and found that their liens were valid and enforceable.

B. PREFERENCES

In Sparkman v. Johnson Concrete Co. (In re Mainline Contracting, Inc.), Case No. 09-7927-8, Adv. Proc. No. 11-262-8, 2012 WL 2373666 (Bankr. E.D.N.C. June 22, 2012), the bond principal made several payments to a subcontractor within the ninety (90) day preference period. The bankruptcy trustee brought an adversary proceeding to recover the payments as preferences. The subcontractor argued that the payments were on bonded projects, and, if they had not been made, it would have made a claim on the bond and been paid by the surety. The surety would then have received the contract funds through indemnification from the subcontractor. Thus there was “new value” for the payments through the theory of indirect transfer. The court held that there were issues of fact as to whether the debtor intended the payments to be a contemporaneous exchange for new value and whether the subcontractor would have timely filed a claim against the bond, an element of the indirect transfer defense. The court denied the parties’ respective motions for summary judgment as to this defense.

In Campbell v. Hanover Ins. Co. (In re ESA Envtl Specialists, Inc.), 2013 WL 765705

(4th Cir. March 1, 2013), the U.S. Court of Appeals for the Fourth Circuit, in affirming the district court and bankruptcy court on other grounds, held that the surety had not received a voidable preference. The surety provided new bonds to the principal within ninety (90) days before bankruptcy, and as a condition of issuing the new bonds the surety received a letter of credit. The letter of credit was secured by a certificate of deposit purchased with funds that the principal obtained by a loan from an investor and turned over to the bank. The court treated the transfer of funds to the bank as security for the letter of credit as an indirect preferential transfer to the surety. The issue was whether the preference was voidable. The bankruptcy court and district court held that the surety provided new value in the form of the bonds and that the funds turned over to the bank were “earmarked” for the transaction and never were property of the debtor. Therefore, the estate was not diminished in the transaction, and there was no basis for a preference action. Earmarking is common law defense to

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preferential transfers that allows a transfer from one creditor to another creditor by way of an intermediate transfer to the debtor. The Fourth Circuit disagreed as to the earmarking theory because the security to the surety was not on account of an antecedent debt. That is, the new obligation to the lender was not offset by reduction in an existing obligation to the surety, and so the debtor’s estate was diminished by the transfer. The Fourth Circuit, however, found that the contracts with the government were protected by the “new value” defense. The surety submitted an affidavit from an officer of the principal that the new contracts had a value in excess of the amount of the letter of credit. Thus, the new contracts were new value in excess of the amount transferred in the letter of credit. The Fourth Circuit rejected the Trustee’s argument that the value should be measured by the payments under the new contracts actually received by the contractor. The dissent argues that the new contracts were not a payment of new value and instead should have been characterized as a conditional promise to pay in the future.

C. NON-DISCHARGEABILITY OF DEBT

In Kapetanakis v. First National Insurance Co. (In re Kapetanakis), 478 Fed. Appx. 217 (5th Cir. June 12, 2012), the U.S. Court of Appeals for the Fifth Circuit held that the indemnitor’s debt to the surety was not dischargeable and affirmed the judgment of the bankruptcy court. One indemnitor admitted that he forged the signatures of three other indemnitors. The debt was found nondischargeable because the surety successfully proved its claim under 11 U.S.C. § 523(a)(2)(A).

In Phillips v. Travelers Cas. and Sur. Co. of Am. (In re Phillips), 2012 WL 3779294 (S.D. Tex. August 30, 2012), two (2) two individual debtors appealed the bankruptcy court’s summary judgment awarding the surety a non-dischargeable judgment for $623,609.05 plus pre and post judgment interest. One of the debtors was appointed guardian for the estates of various veterans. The Veterans Administration determined that he had misused estate funds and made payments to the successor guardians. The successor guardians also recovered interest and attorneys’ fees from the surety on the bonds. In the bankruptcy court, the debtors submitted an agreed judgment for liability and non-dischargeability, so the only issue was the amount owed. The district court rejected their attempt to appeal anything but the amount. The court held that the federal statutes limited the amount paid out by the government. The statutes did not limit the liability of the surety. As a result, the amount the successor trustees could recover from the debtor or the surety under state law was not limited by the statutes. The district court affirmed the bankruptcy court’s summary judgment on the amount of attorney fees’ and interest.

In Poynter v. Great American Ins. Co., 482 B.R. 557 (W.D. Ky. October 16, 2012), the district court affirmed the bankruptcy court’s decision that the indemnitor’s debt to the surety was non-dischargeable. The debtor was the sole owner of the principal company and an indemnitor. Progress payments received on the bonded projects were used to pay a personal loan of the debtor and to pay other entities owned by the debtor instead of project obligations. The debtor’s action constituted a breach of the trust fund provision of the indemnity

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agreement. The surety opposed discharge of its claim in the debtor’s bankruptcy pursuant to 11 U.S.C. § 523(a)(4), which, in relevant part, stops discharge of a debtor for defalcation while acting in a fiduciary capacity. The debtor argued that there was no express or statutory trust because the elements of a trust under Kentucky law were not established. The court found that the required elements were: the intent to create a trust, a res, a trustee, and beneficiaries. The indemnity agreement created a trust, the progress payments were the res, the indemnitor was the trustee, and the materialmen, subcontractors and surety were the beneficiaries. Because the requirements of a trust were met, the court held that the debt to the surety was non-dischargeable pursuant to 11 U.S.C. §523(a)(4).

In Mid-Continent Casualty Co. v. Collins (In re Collins), Case No. 11-1180; Adv. Proc. No. 11-57, 2012 WL 5906969 (Bankr. S.D. Ala. Nov. 26, 2012), the debtor was an indemnitor and an officer of the corporate principal. The corporate principal had failed to pay its contractors in full, even though it had been paid by the federal government. The surety objected to the discharge of its claim pursuant to 11 U.S.C. §523(a)(4) based on defalcation while in a fiduciary capacity. Corporate officers are generally not fiduciaries within the meaning of § 523(a)(4) unless the funds are entrusted for a particular purpose and creditor has a special relationship to the funds. The indemnity agreement provided that the principal (but not the indemnitors) would hold funds received on bonded jobs in trust. The court found that the agreement did not trigger the exception, so as to make the debtor a fiduciary. The surety also argued that his position as a corporate officer and 40% owner of the principal made the debtor responsible for carrying out the corporate principal’s fiduciary responsibilities to the surety. The debtor, however, denied that he had any role in the principal’s decisions on expenditures due to illness. The court found that the surety had not shown that the debtor was responsible for improperly using funds from the bonded jobs or used the funds for purposes other than paying subcontractors on the jobs. The court held that the surety had not established that the debtor was a fiduciary and granted summary judgment to the debtor on the surety’s §523(a)(4) claim.

D. PROPERTY OF THE DEBTOR’S ESTATE

In DuBois v. IMBR Crane (In re Scott Fabricating, Inc.), 478 B.R. 901 (Bankr. N.D. Ind. 2012), the trustee in bankruptcy for a first tier subcontractor sued a supplier that had rented equipment to the debtor to recover an alleged preferential transfer. After the subcontractor’s checks bounced, the equipment supplier made a claim on the prime contractor’s payment bond to the public owner. The prime contractor paid the equipment supplier to avoid the bond claim and any breach of its prime contract with the owner. The Trustee argued that the debtor had an interest in the funds comprising this payment and as a result the payment had been made from property of the estate. The trustee alleged the payment was a setoff against monies owed to the debtor. The court disagreed because the trustee did not produce evidence of any set off of the payment against monies owed to the debtor. The payment was described by the court as a payment by the surety to evade the claim against the bond. The court entered judgment for the equipment supplier.

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E. MISCELLANEOUS BANKRUPTCY

In In re Sappah, Case No. 11-3129-8, 2012 WL 6139644 (Bankr. E.D.N.C. Dec. 11, 2012), the court dismissed the debtors’ Chapter 13 case because, on the petition date, their noncontingent, liquidated debts, including their debt to the surety, exceeded the debt limit for Chapter 13 cases outlined in 11 U.S.C. §109(e). The male debtor’s guarantee agreement as an indemnitor was a separate obligation which was noncontingent and liquidated. According to the court, together with other unsecured debts, the total amount of unsecured debt exceeded the § 109(e) limits. The court gave the debtors ten (10) days to convert the case to Chapter 7. VI. SUBROGATION, ASSIGNMENTS AND THIRD PARTY CLAIMS A. PURSUIT OF CONTRACT BALANCES

In Mount Vernon City School District v. Nova Cas. Co., 19 N.Y.3d 28 (N.Y. April 3, 2012), the surety refused to complete work on a bonded project following a contractor’s default. The obligee finished the work and sued the contractor and surety for failure to perform. The performance bond provided that the surety would not be liable for the contractor’s obligations unrelated to the contract, and that the contract price would not be reduced or set off on account of such obligations. The obligee retained contract funds because of a notice of withholding from the New York Department of Labor (DOL). With the contractor’s agreement, it paid $214,000 earned on the bonded job to the DOL for underpaid wages on another job. The $214,000 would have covered the obligee’s excess costs to complete the work. The surety argued that it was discharged by the obligee’s breach of the bond provision or, in the alternative, because the obligee’s payment to the DOL increased the surety’s risk by diverting contract funds in violation of Art. 3A of the Lien Law. The Court held the surety was not a subrogee because it had not competed performance and therefore could not succeed to the rights of the parties protected by the Lien Law and could not object that the payment to DOL was a breach of the obligee’s duty under the Lien Law. The Court thought that the record did not establish that the surety was harmed, or its risk increased, by the payment because the money would otherwise have gone to the contractor not to the surety. The money would not have been available to the principal regardless.

In International Fidelity Insurance Co. v. Western Virginia Water Authority, Case No. 7:11-cv-441, 2012 WL 2357368 (W.D. Va. June 20, 2012), the surety sued the obligee to recover the remaining contract funds, including retainage. The obligee filed a third party complaint against the principal and a bank that was supposed to hold the retainage in escrow but instead deposited it in the principal’s account. The escrow agreement expressly stated that, upon receipt of checks drawn by the obligee and made payable to the bank as escrow agent, the bank would promptly notify the principal and invest the proceeds. The obligee, however, made the checks for the retainage payable to the contractor (not the bank). In the

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lawsuit, the bank moved to dismiss the third party complaint. The court found that the bank lacked constructive notice because a financial institution does not have a duty to inquire into notations made on the instrument received by the institution. On that basis, the court dismissed the breach of contract and breach of fiduciary duty claims. However, it permitted discovery as to the obligee’s theory that the bank had actual knowledge that the checks were intended for the retainage account in spite of the fact that they were not payable to the bank.

In a follow up opinion (International Fidelity Insurance Co. v. Western Virginia Water Authority, Case No. 7:11-cv-441, 2012 WL 4503191 (W.D. Va. September 28, 2012)), the U.S. District Court for the Western District of Virginia granted and denied in part the surety’s motion for summary judgment and granted in part and denied in part the obligee’s motion for summary judgment. The bonded contract required 5% retainage. The obligee agreed to pay the retainage into an escrow account at a bank, but the obligee failed to make the checks payable to the bank or indicate on them that they were for the escrow account, instead making contract funds payable to the principal. The bank therefore deposited them in the principal’s account. After the surety paid a payment bond loss it demanded release of the retainage. The obligee agreed, but discovered that there were no funds in the escrow account established for retainage. The surety sued the obligee for (1) the amount that should have been held as retainage and (2) the larger amount paid under the payment bond on a material alteration/discharge theory. The court granted the surety summary judgment against the obligee and in favor of the surety for the retainage amount. The court reasoned that the surety was subrogated to the rights of the principal and of the obligee and so could claim the retainage fund even though the principal could not complain that it had been wrongfully released. The surety’s subrogation rights related back to the execution of the bonds and entitled it to judgment for the retainage amount. The surety further argued that the owner materially altered the contract and increased the surety’s risk by failing to withhold the retainage and that the alteration discharged the surety from its payment bond obligations. The surety sought to recover from the obligee the amount paid to the payment bond claimant. According to the court, although the law recognizes a material alteration of the bonded contract can discharge the surety, there was no such discharge.

In the third follow up case (International Fidelity Insurance Co. v. Western Virginia Water Authority, 2012 WL 5364196 (W.D. Va. October 30, 2012)), the U.S. District Court for the Western District of Virginia granted the obligee summary judgment against the principal for the amount of retainage that had been wrongfully released to the principal instead of held in an escrow account (i.e., the amount the obligee owed the surety per the last decision of the court). The court found that the close contractual arrangement between the obligee and the principal, and the facts of the case, compelled a finding of an implied right of indemnification in favor of the obligee against the principal.

In Colonial Surety Co. v. United States, 108 Fed. Cl. (2013), the surety sought to recover from the government obligee a partial summary judgment in the amount of the obligee’s payment to the principal that the surety asserted was wrongfully tendered. Prior to the lawsuit, the surety financed the completion of the bonded contract and satisfied payment

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bond claims, even though the bonded contract was never formally “terminated” by the obligee. Nonetheless, the surety argued that the obligee “demanded” that the surety directly pay all of the principal’s subcontractors and suppliers and place a full time consultant on site to ensure completion of the bonded contract and avoid an “immediate default termination” of the principal. In response, the surety demanded that future payments be withheld, and, after a meeting among the principal, the surety and the obligee, a formal modification of the bonded contract was executed requiring that future payments be sent to the contract in care of the surety at the surety’s address. The obligee made two payments as agreed, but, after the work was completed, the disbursing agency erroneously wired the final payment to the principal. The obligee argued there was a jurisdictional defect with respect to the surety’s lawsuit. The court recognized that the erroneous payment breached the obligee’s duty as a stakeholder and that equitable subrogation could allow the surety to stand in the shoes of the principal and sue the obligee. The surety argued that the erroneous payment increased its risk and amounted to a pro tanto discharge. The court thought that another decision directed that it had no jurisdiction over an affirmative pro tanto discharge claim. The court also was not persuaded by the argument that the modification was a contract between the surety and the obligee. As to the surety’s equitable subrogation claims, the court thought that there were issues of fact as to whether the surety met its obligations under either bond, and thus denied both summary judgment motions. B. GOVERNMENT & OFFSET

In Hartford Fire Insurance Co. v. United States, Case No. 1:11-cv-499 (Fed. Cl. October 22, 2012), the contractor had two separate contracts with the Corps of Engineers, both of which were bonded by the surety. Following a termination on one contract, the contractor filed suit against the Corps. The contractor and the Corps agreed to a settlement of that suit under which the termination for default was to be converted to a termination for convenience and the Government would pay $700,000. While the dispute over that contract proceeded, problems arose on the second contract, and the Corps notified the surety that it was considering a termination for default. The surety eventually assumed completion of the second contract and spent $1.6 million in excess of the contract balance on the second contract. Prior to the Corps transmitting the $700,000 “settlement payment,” the surety wrote the contracting officer on the second contract demanding that the $700,000 available to the Corps on the first contract be offset against any costs to complete the second contract. Nonetheless, the Corps paid the $700,000 settlement fund to the contractor. After completing the second contract, the surety sued to recover the $700,000 wrongfully paid to the contractor, and the Corps moved to dismiss the action for failure to state a claim. The Corps filed a motion to dismiss the surety’s claims. The court found that the surety alleged facts establishing that it was subrogated to the Corps’ rights, including the right of setoff, which extended to settlement funds. Moreover, the surety’s notice to the contracting officer was sufficient to make the Corps a stakeholder of the settlement proceeds. The fact that the settlement was paid from the “Judgment Fund” would not have prevented the contractor from collecting it or the Corps from

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setting off against it, and so would not prevent the surety from asserting a right to it. The court held that the surety adequately stated a claim for relief and denied the motion.

In M.E.S., Inc. v. United States, 104 Fed. Cl. 620 (2012), the court had previously allowed a surety on a post office construction project to intervene in the suit initially by the contractor against the obligee for excess re-procurement costs. The surety’s complaint in intervention sought a declaration barring affirmative relief for the obligee against the surety if the contractor succeeded in its action. In the alternative, the surety sought a setoff of any damages against the excess re-procurement costs. The surety also sought for any recovery by the contractor against the obligee to be held for the benefit of the surety or setoff against damages pursuant to a claim the obligee asserted against the surety in the U.S. District Court for the Eastern District of New York. The surety and the obligee ultimately settled in the district court lawsuit, and the contractor and the obligee moved to dismiss the surety’s complaint in the current case. The court dismissed the surety’s claims based upon lack of subject matter jurisdiction. The court found that it did not have jurisdiction under the Tucker Act because the surety was not an equitable subrogee, as it had neither performed the contract nor financed completion of the contract. The court refused to exercise ancillary jurisdiction over the surety’s remaining claims because the surety no longer could intervene in the case as of right. The surety’s interests would be adequately protected by the contractor who had the same interests as the surety in seeking an affirmative recovery from the obligee. C. CLAIMS AGAINST THIRD-PARTIES

In Bond Safeguard Ins. Co. v. Wells Fargo Bank, N.A., 2012 WL 6685528 (11th Cir. December 21, 2012) (per curiam), two subdivision bond sureties paid losses and sued two lenders alleging that the lenders wrongfully required the developers to make payments to the lenders. The sureties argued that the payments left the developers unable to complete the improvements covered by the bonds. The district court dismissed the complaint, and the sureties appealed. The court distinguished between general claims which belong to all creditors and may only be brought by a bankruptcy trustee and personal claims of a specific creditor which may be brought directly by the creditor itself. The Court affirmed because the causes of action based on any wrongful payments were general claims and belonged to the trustee in bankruptcy of the developers as property of the estate. The sureties, therefore, lacked standing to make the claims, and the case was properly dismissed.

In Safeco Ins. Co. of Am. v. Victoria Mgmt, LLC, 2012 WL 1606101 (S.D. Fla. May 7, 2012), the surety on a private project sued, inter alia, the project architect. The surety alleged claims against the architect for professional negligence and common law indemnity. The architect moved to dismiss the common law indemnity claim because no “special relationship” existed between the architect and the surety or the bond principal and Florida law requires the existence of a special relationship as an element of a common law indemnification claim. The court held that a special relationship may exist between an architect and a surety due to the architect’s duty of care in the design of the project and its administration and declined to dismiss the claims.

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In Hartford Fire Ins. Co. v. Henry Bros. Construction Mgmt Servs., LLC, 877 F.Supp.2d

614 (N.D. Ill. July 3, 2012), the surety for a prime contractor on a school project sued the owner’s construction manager to recover losses caused by the construction manager’s approval of payment requests for work not performed or not performed satisfactorily. The surety asserted claims via subrogation for breach of contract and negligent misrepresentation. The construction manager moved to dismiss the negligent misrepresentation claim based on the argument that the surety alleged purely economic damages, meaning its negligent misrepresentation claim should generally be barred. The court found that the claim did not fit within the exception to the general rule for persons who are “in the business of supplying information for the guidance of others in their business transactions.” Because the relationship between the owner and the construction manager was predicated upon the creation of a tangible object, the construction manager was not sufficiently in the business of supplying information. The court granted the construction manager’s motion.

In Auto-Owners Ins. Co. v. Tomberlin, Young & Folmer Ins. Co., 874 F.Supp.2d 1310 (M.D. Ala. 2012), the surety settled with the obligee and sued the producer on the bond and the two individual owners of the agency for breach of contract, breach of fiduciary duty, misrepresentation, suppression of material facts and indemnification. The surety alleged that the defendants misrepresented or concealed various facts prior to writing the bond. The defendants moved for summary judgment on the grounds that the surety’s settlement with the obligee was a voluntary payment and that the two (2) year statute of limitations barred certain causes of action. The court held that the voluntary payment doctrine did not apply because the bond conferred a legal obligation to pay. The court also found that issues of fact existed as to when the statute of limitations began to run, as it was uncertain when the surety was on inquiry notice to investigate the actions of the defendants. The court denied the defendant’s summary judgment motion as to the two defenses but deferred ruling on other grounds asserted in the defendant’s motion.

In Auto-Owners Insurance Co. v. Tomberlin, Young & Folmer Insurance Co. d/b/a South Central Agency, 880 F. Supp. 2d 1236 (M.D. Ala. 2012), the court ruled on the defendants’ motion for summary judgment as to several claims deferred in the court’s prior opinion. The court granted summary judgment to the defendants as to the surety’s claims for breach of contract and breach of fiduciary duty in the underwriting process, breach of fiduciary duty after the bond was written, and indemnification, but denied the defendants’ motion as to the surety’s claims for negligent misrepresentation and suppression of material facts. With respect to Counts I and II (breach of contract and breach of fiduciary duty in the underwriting process), the court found that the Amended Complaint failed to place the defendants on notice that the surety contended that there were other defaults before the bond was issued. According to the court, without notice, reliance on other alleged defaults as separate breach of contract and breach of fiduciary duty claims is an authorized attempt to amend the Amended Complaint. The court next considered whether the lack of bonding on other subcontracts was a default known to the defendants, such that the failure to disclose that default to the surety was a breach of contract or fiduciary duty. The court held that the surety did not present sufficient

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evidence to show the defendants’ knowledge and, therefore, granted the defendants summary judgment on Counts I and II. With respect to Count III (breach of fiduciary duty after the bond was written), the defendants argued that they owed no fiduciary duty to monitor the progress of the construction contract once the bonds were written. The court agreed and granted summary judgment in favor of the defendants as to Count III. Because the defendants won on the breach of contract and fiduciary duty claims, the court ruled in favor of the defendants on Count IV (indemnification). Finally, the defendants argued that Counts V and VI (negligent misrepresentation and suppression of material facts) were improper on statute of limitations grounds and the doctrine of voluntary payment grounds. The court denied summary judgment as to Counts V and VI because issues of fact existed as to the truth of representations made by the defendants and relied on by the surety in issuing the bonds. Similarly, issues of fact foreclosed summary judgment on the defendants’ counterclaim for a declaration that the defendants were only soliciting agents and the surety was solely responsible for underwriting the bonds and on the defendants’ contention that the surety should have handled the claims differently.

In Hanover Ins. Grp. v. DNH Bus. Consultants, P.C., Case No. 12 C 565, 2012 WL 1886458 (N.D. Ill. May 23, 2012), the surety sued the principal’s accounting firm and the individual accountant for the accountant’s alleged inaccurate statements and misrepresentations upon which the surety relied in issuing the bonds to the principal. The surety failed to sufficiently plead federal subject matter jurisdiction because it only plead the defendant’s residence, not its citizenship. Hence, the surety insufficiently plead diversity jurisdiction. Additionally, the surety failed to state a claim as it did not sufficiently allege that the primary purpose and intent of the accountant-client relationship was to benefit the third party, in this case, the surety. Lacking allegations of independent facts substantiating the surety conclusory allegations, the court granted dismissal both for lack of subject matter jurisdiction and failure to state a claim.

In Prestige Builder & Management LLC v. Safeco Insurance Company of America, 2012 WL 4801769 (E.D.N.Y. October 10, 2012) an allegedly unpaid subcontractor on a public project sued the prime contractor, the prime contractor’s surety and three (3) individual employees of the prime contractor who signed pay applications that allegedly contained false statements or fraudulent omissions about the subcontractor’s work and money owed to the subcontractor. The individual defendants moved to dismiss the claims against them primarily on the basis that the subcontractor lacked standing to assert said claims. The subcontractor relied on the doctrine of “third-party reliance” and contended that the individual defendants’ fraudulent representations to the owner induced the owner to pay funds to the contractor, instead of withholding them for payment to the subcontractor. The court found that the “third-party reliance” doctrine was applicable and denied the defendants’ motion. This case may be used by a surety when invoking the doctrine of equitable subrogation.

In Developers Surety and Indemnity Co. v. Populous, Inc., Case No. 11-cv-645 (W.D. Mo. July 19, 2012), the surety for a subcontractor on work at the Kansas City Chiefs stadium

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paid the penal sum of its bond and sued various other parties including the architect, construction manager and program manager for approving and paying the principal’s invoices resulting in substantial overpayments to the principal. The program manager moved to dismiss the complaint. The court held that for purposes of the motion, the surety was subrogated to the rights of the owner. The contract between the owner and the program manager included the duty to oversee the architect in its review and approval of applications for payment. The court rejected cases based on alleged duties to prevent safety violations. The court also rejected the program manager’s argument that the existence of a contractual duty foreclosed the surety’s negligence claim. The court denied the program manager’s motion to dismiss.

In a follow up case (Developers Surety and Indemnity Co. v. Populous, Inc., 2012 WL 4858607 (W.D. Mo. October 11, 2012)), the surety settled with the actual obligee and additional obligees on the bond, and the remaining defendants filed for summary judgment challenging the surety’s ability to sue as subrogee of the obligees. The consultants argued that since the surety paid the penal sum, albeit with a reservation of rights, it was a volunteer as to the amount it now asserted was an overpayment. That is, by paying the obligee and not withholding the amount now asserted as an overpayment, the surety was a volunteer as to the amount of the overpayments to the principal and barred by the “voluntary payment doctrine” from seeking to recover the overpayment. The court implicitly agreed with this reasoning, but held that, since the surety had not paid the entire cost to complete the principal’s work, the obligee was not made whole, and the surety could not exercise subrogation rights in competition with the party protected by the bond. Even though the court relied on the “voluntary payment doctrine” in its holding, the court seemed to actually hold that equity would not permit the surety to only pay part of the obligee’s loss and then pursue “the very claims the obligee may need to bring in order to recover the costs incurred to complete the project” via subrogation. The court never stated whether the obligees assigned their rights to the surety, which would have likely avoided the issue of subrogation.

D. CGL POLICIES

In Hartford Accident and Indemnity Co. v. Crum & Foster Specialty Insurance Co., 2012 WL 2260915 (S.D. Fla. June 15, 2012), the surety for an insolvent contractor defended against and paid to settle claims by a condominium association and prosecuted related claims against subcontractors and their sureties on the condominium project. After a global settlement, the surety sued one of the commercial general liability insurers of the contractor to recover defense costs, including attorneys’ fees. The court held that the surety was not the equitable subrogee of the contractor because the surety paid defense costs to protect the interests of the contractor, not the surety’s own interests and the bond did not obligate the surety to defend the principal, therefore the surety was a volunteer. Moreover, the defense costs were the surety’s own debt, not the debt of the insured contractor. Therefore, the Court held that the commercial general liability insurer was entitled to summary judgment because the surety was not subrogated to the rights of the insured. The court did not reach the issue of whether defense was ever validly tendered to the insurer.

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E. DAMAGES FOR DELAY In XL Specialty Insurance Co. v. Commonwealth, Case No. 08-4093, 2013 WL 56123

(Mass. Super. January 3, 2013), the Massachusetts Superior Court, after quoting an “English nursery rhyme,” considered whether the surety (as subrogee of the general contractor) may recover damages incurred as the result of a two (2) year delay in a roadway construction project bonded by the surety. According to the surety, the owner substantially delayed the project by not relocating utilities that had to be moved before the contractor could start work. After the contractor defaulted, the surety took over the project. After a trial, the court awarded the surety damages caused by the owner’s neglect of its obligations. The court found that the owner’s abuse of its contractual obligations was so pronounced that it forfeited its right to rely on the protections of the contract. According to the court, the surety was entitled to rely on the equitable adjustment provisions in the contract. Based on this computation, the surety was entitled to damages for 749 days of delay, in the amount of $592,249 (for extended general conditions) plus $3,261,204 (cost escalation). This was less than the $5,215,513 initially sought by the surety.

VII. UNDERWRITING, BOND ISSUANCE AND AGENCY ISSUES

In Choate Construction Co. v. Auto-Owners Ins. Co., 736 S.E.2d 443 (Ga. App. November 20, 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 but did not identify Dedmon Electric Services in any way. The contractor accepted the bonds without inquiring as to the discrepancies. After the subcontractor defaulted, the contractor sued the surety. The trial court granted the surety summary judgment because the principal on the bond was not the subcontractor. On appeal, the court found questions of fact existed as to the intent of the parties in issuing the bond. The surety’s attorney admitted to the trial court that the bond producer had fraudulently misled the surety as to the identity of the principal because it knew Thad Dedmon might not qualify due to lack of credit while Jacqueline Payne, an elderly woman with good credit but no connection to the actual subcontractor, would qualify. Additionally, the correct identification of the project and amount of the subcontract also raised issues of fact and summary judgment should have been denied. The court reversed the judgment.

In Temple v. BancInsure, Inc., Case No. 1:10-cv-1059, 2012 WL 4458186 (W.D. Ark. Sept. 25, 2012), the plaintiff, a contractor, submitted a bid on a Louisiana Department of Transportation (LDOT) project. The bid was allegedly rejected because the surety on the bid bond was not a surety listed on the “Treasury List” prepared by LDOT. The contractor sued the surety for negligence, breach of contract and promissory estoppel based upon the surety providing the bond without being on the Treasury List. The plaintiff’s argument largely rested on the alleged duty of the surety to investigate the proper bond requirements of the particular

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project. The court granted the surety’s motion for summary judgment because (1) the surety did not represent that it was on the Treasury List, (2) there was no special relationship creating a duty on the part of the surety to educate or advise the contractor as to the bonding requirement, (3) the contract did not obligate the surety to advise the contractor or possess knowledge of the bond requirements and (4), the surety did not induce the contractor’s alleged reliance on the surety and therefore, could not be liable for promissory estoppel.

In First Sealord Surety v. Durkin & Devries Insurance Agency, Case No. 2:10-cv-832, 2013 WL 180223 (E.D. Pa. January 17, 2013), a surety that contracted with insurance agency to solicit business for its bonding brought an action against the agency that alleged negligent misrepresentation, breach of contract and breach of fiduciary duty. The surety asserted that the agency failed to convey adverse information regarding one of the agency’s clients as required by the “Agency Agreement.” According to the surety, it suffered losses in connection with the bonds issued on behalf of the client as a result of the agency’s misrepresentations. The court went through a detailed analysis of the factual claims asserted by the surety and the agency. The surety served a subpoena on the other surety that had cancelled its contract with the agency. The agency filed three motions: (1) a motion to dismiss the negligent misrepresentation claim, (2) a motion to quash the subpoena, and (3) a motion for summary judgment on the breach of contract and breach of fiduciary duty claims. The court denied all three motions. The agency argued that the statute of limitations or the economic loss rule barred the negligent misrepresentation claim and that there were no misrepresentations or, if there were, they did not cause any loss. The court found that the allegations in the amended complaint that the agency did not answer questions truthfully in order to conceal its prior cancellation and the other surety’s claims against it stated a negligent misrepresentation claim. The agency was in the business of supplying information to others for financial gain and profited from providing information to sureties. Moreover, the court held that the claim fit within the state’s exception to the economic loss rule. The court also held that the discovery rule tolled the running of the two year statute of limitations and that the surety’s allegations that it would not have entered into an agency relationship, and thus would not have issued bonds for the agency’s client, were sufficient to support the negligent misrepresentation cause of action. The court thought the subpoenaed material from the other surety was relevant to the issues of what the other surety accused the agency of doing and when the agency knew of the claims and any alleged confidentiality agreement between the agency and the other surety would not prevent compliance with the subpoena. Finally, the court found that, as the surety’s agent, the agency had a fiduciary duty separate from the Agency Agreement and that the record established issues of fact as to the breach of contract and breach of fiduciary duty claims. The agency argued that the surety underwrote the bonds based on its own analysis of the contractor. The surety argued that the agency failed to disclose information it had as to the contractor’s cash flow problems and made representations about the contractor that were untrue. The court held that there were genuine issues of material fact and denied the agency’s summary judgment motion.

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VIII. MISCELLANEOUS

In Navillus Tile, Inc. v. Bovis Lend Lease LMB, Inc., 98 A.D.3d 953 (N.Y.A.D. September 12, 2012), the City of New York entered into a contract with a contractor but did not require the contractor to procure a payment bond. Instead, the contract included a “payment guarantee” in which the City afforded a cause of action to persons furnishing labor or materials to the contractor or its subcontractors consistent with Section 137 of the New York State Finance Law (i.e., imposing liability on the City). A subcontractor sued the contractor and the City for payment for labor and/or materials furnished to the project. The City filed a motion to dismiss, which was granted by the trial court on the basis that the subcontractor had not followed the procedures set forth in the contract, even though it had complied with those in Section 137. The appeals court disagreed and found that more onerous provisions in the contract would be void for public policy reasons. The appeals court reversed summary judgment in favor of the defendants because the subcontractor had correctly followed the provisions in Section 137.

In Hamlet at Willow Creek Dev. Co., LLC v. Northeast Land Dev. Corp., 99 A.D.3d 661 (N.Y.A.D. October 3, 2012), a surety issued a bond that named the excavation contractor and subcontractor as principals and the Town as obligee. The bond was conditioned on payment to the Town of fees to haul away excavated dirt. The Appellate Division refused to alter its prior decision to let the developer sue on the bond after it paid fees to the Town, but it did revise its prior holding to remove the condition that the developer had to try to collect the fees from the contractor and subcontractor before resorting to the surety. The Appellate Division reduced the developer’s summary judgment by the amount claimed for both the conversion of fill and replacement fill dirt resulting from the bond principal’s alleged over-excavation. The developer had not met its prima facie burden of proving either claim.

In Earth Trades, Inc. v. T & G Corp., 2013 WL 264440 (Fla. January 24, 2013), a subcontractor brought an action against a prime contractor for breach of contract, alleging nonpayment. In response, the prime contractor asserted that the subcontractor was unlicensed and breached its subcontract. The prime contractor also filed a third party complaint against the subcontractor’s surety under the bonds. The Florida Supreme Court held that the doctrine of in pari delicto did not prevent a general contractor from suing an unlicensed subcontractor and the subcontractor’s surety even if the general contractor was aware of the subcontractor’s unlicensed status. The subcontractor and its surety argued that the general contractor was also barred from enforcing the bond because it was in pari delicto with the subcontractor. The Court reviewed the statute, the 2003 amendments, and related statutes and held, “[the prime contractor’s] alleged knowledge of [the subcontractor’s] licensure status, if proven, would make both parties wrongdoers, but they would not share substantially equal fault. Accordingly they do not stand in pari delicto.”

In Envtl Staffing Acquisition Corp. v. B & R Construction Mgmt, Inc., 725 S.E.2d 550 (Va. 2012), a contract between a public housing authority and a developer required the

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developer to obtain performance and payment bonds from its construction contractor. The contractor obtained bonds from Genesis Capital Corporation (“Genesis”). After a first tier subcontractor failed to pay a second tier subcontractor, the second tier subcontractor learned that Genesis was not operating and not authorized to transact business in the state of the project. The second tier subcontractor sued as an intended third party beneficiary of the bond requirement in the bonded contract. The contract, however, disclaimed any intent to benefit anyone other than the parties. The court distinguished between the rights of an “intended” beneficiary and an “incidental” beneficiary. It found that the second tier subcontractor was an incidental beneficiary of the promise to obtain a payment bond but not an intended third party beneficiary who could sue for breach of the promise. The court therefore affirmed dismissal of the complaint and pointed out that the contractor signed the bond as principal and was jointly and severally liable for the bond obligations. The second tier subcontractor could, therefore, have sued the contractor as bond principal but chose not to do so.