Academic journal article Defense Counsel Journal

Annual Survey of Fidelity and Surety Law, 1999

Academic journal article Defense Counsel Journal

Annual Survey of Fidelity and Surety Law, 1999

Article excerpt

This roundup of recent cases covers public and private construction bonds, fidelity and financial institution bonds, and sureties' remedies

Edited by Charles W. Linder Jr.

I. PUBLIC CONSTRUCTION BONDS

A. Bonds under Federal Laws

Federal courts lack jurisdiction to hear case challenging state court judgment that university operating federal research facility was liable for its failure to obtain Miller Act bond on construction of facility.

This interesting decision by a federal district court in California involved construction at the Stanford Linear Accelerator Center, a federal research facility operated by Stanford University. Stanford engaged a contractor to do the work but did not require a Miller Act bond. When the contractor went into bankruptcy, a group of subcontractors completed the work and sued Stanford in federal court for failure to obtain a bond.

The action was dismissed, the court holding that the absence of a bond kept it from having jurisdiction under the Miller Act. It suggested that the subcontractors file suit for breach of contract in state court. They did so, and the state court found Stanford liable and ordered it to pay damages to the subcontractors. The state court also found that Stanford had an obligation to obtain a Miller Act payment bond. The state court action was affirmed on appeal, after which Stanford filed suit in federal court seeking declaratory relief and an injunction to bar enforcement of the state court judgment.

The U.S. District Court for the Northern District of California dismissed Stanford's claims with prejudice, holding that federal district courts do not have jurisdiction over challenges to state court decisions, even where those challenges raise federal constitution issues.

Board of Trustees of Leland Stanford Junior University v. Modual A/C Systems Inc., 54 F.Supp.2d 965 (N.D. Cal. 1999).

B. State and Local Bonds

1. Jurisdictional

Action by surety against principal and obligee dismissed when principal realigned as plaintiff, and diversity thereby was destroyed.

This was a diversity action filed by a surety against its principal and a public authority operating a waste water treatment plant in Mobile, Alabama. The surety sought a declaratory judgment as to the rights and obligations of its principal and the public authority. Those two defendants asserted cross-claims against each other, and the public authority counter-claimed against the surety, although the principal did not.

The federal district court in Alabama found that it had responsibility to align the parties properly. The opinion acknowledges that there is a split in the circuits as to the manner in which this proper alignment is to be achieved. One group of cases applies the "principal purpose" or "primary issue" test and looks beyond the pleadings to identify the primary matter in dispute. Another group of decisions holds that realignment is proper only when there are no actual conflicts between the parties.

The court in this case found that, since the principal had not sought relief against the surety, it would apply the "principal purpose" test, and doing so, it found that the principal should be aligned in this action with the surety, thereby destroying diversity.

Federal Insurance Co. v. Bill Harbert Construction Co., 82 F.Supp.2d 1331 (S.D. Ala. 1999).

Motion to dismiss action by surety against indemnitor where another action in federal court between same parties did not justify abstention.

In American Home Assurance Co. v. Roxco Ltd., 81 F.Supp.2d 674 (S.D. Miss. 1999), a serious controversy arose between a contractor and its surety. The contractor claimed the surety had fraudulently and negligently misrepresented that it would underwrite the contractor's "future surety needs." The contractor also alleged that it had been defamed and that the surety and others had converted property and funds belonging to the contractor. …

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