Annual Survey of Fidelity and Surety Law, 1994
May, Ronald A., Marmor, Russell I., Welbaum, R. Earl, Crane, David D., Linder, Charles W., Jr., Defense Counsel Journal
I. PUBLIC CONSTRUCTION BONDS
A. Miller Act Bonds
1. Jurisdictional Issues
Contract Disputes Act does not preclude action by subcontractor against U.S. Postal Service under Postal Reorganization act. Miller Act or other claim lies concurrently in federal district court.
For reasons not apparent from the court's opinion, certain subcontractors on a post office job in Victorville, California, sued the U.S. Postal Service in federal court to establish and foreclose equitable liens for the value of their services, but they did not file a Miller Act claim. While the Postal Reorganization Act(1) provides that the Postal Service has the power to sue and be sued, the district court held that the Contract Disputes Act(2) precluded subcontractors from pursuing their claims in district court.
On appeal, the Ninth Circuit reversed and held that the subcontractors may assert a claim against the Postal Service in district court for which they have any independent jurisdictional basis (whether Miller Act or not), regardless of whether the subcontractors also could pursue their claims under the Contract Disputes Act. Wright v. U.S. Postal Service.(3)
2. Substantive Issues
Miller Act preempts state remedies for bad faith and vexatious failure to pay.
In Tacon Mechanical Contractors v. Aetna Casualty and Surety Co.(4) a Texas federal court could barely conceal its exasperation with the attorneys, stating, "With the cajoling of the court, the parties were able to get the paperwork straightened out."
The subcontractor in this case also was exasperated. It sued the Miller Act surety on a variety of state law claims, most of which arose from the Texas regulatory statutes. These included breach of the duty of good faith and fair dealing, vexatious failure to pay and tortious interference with contract. The court concluded that these were preempted by the Miller Act and that there could be no recovery for them.
Guarantor of subcontractor is entitled to claim as a subcontractor.
In an interestingly long opinion, a federal court in Illinois found that an individual who had guaranteed the performance of a subcontract was entitled to sue the surety, with all the rights of the subcontractor itself. CTI Ltd. v. Mellon Stuart Co.(5)
B. State and Local Bonds
1. Procedural Issues
Continuing performance after termination extended notice period so as to commence with last delivery of materials under South Carolina payment bond statute.
A supplier gave notice later than the statutory cutoff set at 90 days as required. The claimant continued to deliver materials after that date, and notice was given later within 90 days of the last of such deliveries. The surety contended that the claimant's notice was defective under the state statute, but the South Carolina Court of Appeals held the notice sufficient. Moore Electric Supply v. Ward.(6)
Statutory notice requirements not applicable to common law bond where surety failed to record bond.
Martin Paving Co. v. United Pacific Insurance Co.(7) deals in depth with the somewhat convoluted history of Florida's payment bond legislation. The surety argued that various amendments to the Florida statute eliminated the common law bond so that notice requirements were applicable to a claim made under the bond it had issued. The court disagreed but held that notice requirements did apply to suits under common law bonds, as well as statutory bonds. While the claimant had failed to furnish the required notices, the surety also had failed to comply with a statute that required that the bond be filed as a public record. Thus the surety's failure excused the claimant from compliance with any of the notice requirements.
Public obligee not barred by one-year statute of limitations as period applies only to payment bond claimants and not performance claimants.
Not unlike those in many states, Maryland's Little Miller Act requires that actions under it must be brought within one year of final acceptance. The performance obligee filed suit under the performance bond four years after the contract appears to have been completed. When the bonding company moved for summary judgment, the motion was denied because Maryland's one- year limitation was held not to apply to actions under performance bonds, and that decision was affirmed by the Maryland Supreme Court. Anne Arundel County v. Fidelity and Deposit Co.(8)
2. Substantive Issues
ERISA and construction suretyship meet.
We do not frequently see bond cases involving the Employee Retirement Security Act of 1974,(9) but--surprise!--the period covered by this survey includes two interesting claims for employee benefits against sureties for failure to comply with ERISA. Suggesting a spiritual disinclination to find a construction surety liable, the surety was absolved in each case, but each opinion involved a different legal analysis and different grounds for finding non-liability.
Neither principal nor surety is "employer" under ERISA in action by employees of subcontractor.
In Bleiler v. Cristwood Contracting Co.(10) the pension fund trustee brought an action in state court on a payment bond, alleging that a subcontractor to the defendant and its surety failed to contribute to a pension fund. The action was removed to federal court, where the principal and surety moved to dismiss. The district court held that the principal and surety were not signatories to a collective bargaining agreement and therefore were not employers liable to pay the subcontractor's unpaid contributions to the pension fund.
ERISA preempts claims against principal and surety by employees of subcontractor.
Similar facts were involved in Williams v. Ashland Engineering Co.,(11) in which trustees filed suit against the subcontractor, the general contractor and its surety. Observing that the action that was based on a payment bond issued pursuant to state law, the district court held that ERISA preempts state laws relating to employee benefits and therefore an action could not be maintained against the general contractor and its surety.(12)
Lessor of equipment to subcontractor not covered as "supplier" by Indiana statutory payment bond for local public works.
DOW-PAR v. Lee Corp.(13) involved a typical and familiar situation in which a lessor of equipment to a subcontractor attempts to recover under a statutory payment bond. The claimant made a two-fold argument that it was protected by the statutory scheme and that the language of the bond provided coverage. A trial court's summary judgment against the lessor was upheld on appeal by the Indiana Court of Appeals, but the reasoning in the court's holding and in a concurring opinion diverge as to the basis for lack of recovery. The opinions, while perhaps influenced by the third-tier standing of the claimant, bear close attention.
Surety's obligation under bid bond expired when bid expired under its own terms.
In School Building Committee v. Commercial Union Insurance Co.(14) the public authority's invitation for bids stated specifically that all bids would remain in effect for 30 days after the opening. The bids were opened on September 28, 1990, and the contractor was selected on October 19, but the subcontractor was not selected until December. In attempting to enforce the subcontractor's bid bond, the public authority was found to have lost its rights.
II. PRIVATE CONSTRUCTION BONDS
Mechanics' lien bond is substitution for mechanics' lien law procedure.
In Stone v. Housing Authority(15) it was summarily decided that a subcontractor claiming under a mechanic's lien bond need not file a bond equal to the amount claimed, as required by mechanic's lien law, in a proceeding where liens were earlier discharged on motion of the owner and surety. The claimant may make demand for the amount due without bringing an independent action against the surety, and need not file a bond as a precondition to making the demand.
Surety not bound by summary judgment against principal.
In S.D.I. Corp. v. Fireman's Fund Insurance Cos.(16) the surety was allowed to litigate its own liability, although the plaintiff had obtained summary judgment by default against the principal. The mere fact that the surety opposed the motion did not entitle the plaintiff to summary judgment against it in same proceeding on the basis of collateral estoppel, where the record did not establish that issues such as whether the plaintiff in fact performed its contract had been litigated.
Surety's conclusionary allegations are insufficient to oppose claimant's motion for summary judgment.
In Accu Line Contracting Inc. v. Aetna Casualty & Surety Co.(17) a payment bond surety's summary judgment based on the "mere conclusory allegations of its expert witness" was reversed and remanded to the trial court to award the subcontractor the amount due from the principal/general contractor for work the subcontractor performed.
Without dealing with the facts, the New York Appellate Division ruled on law that the party opposing summary judgment must present admissible evidence establishing a triable issue of act; mere conclusionary or unsubstantiated allegations or assertions are insufficient as evidence to oppose the motions.
Subrogated surety of subcontractor may enforce mechanics liens against property owner.
In Golden Eagle Insurance Co. v. First Nationwide Financial Corp.(18) the surety satisfied payment bond claims in excess of $3 million for a full release and one month later received the …
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Publication information: Article title: Annual Survey of Fidelity and Surety Law, 1994. Contributors: May, Ronald A. - Author, Marmor, Russell I. - Author, Welbaum, R. Earl - Author, Crane, David D. - Author, Linder, Charles W., Jr. - Author. Journal title: Defense Counsel Journal. Volume: 62. Issue: 3 Publication date: July 1995. Page number: 434+. © 1999 International Association of Defense Counsels. COPYRIGHT 1995 Gale Group.
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