TWENTY SEVENTH ANNUAL SOUTHERN SURETY AND FIDELITY CLAIMS

Transcription

1 TWENTY SEVENTH ANNUAL SOUTHERN SURETY AND FIDELITY CLAIMS CONFERENCE Charleston, South Carolina st nd APRIL 21 & 22, 2016 THE SURETY LAW UPDATE PRESENTED BY: Jeffrey S. Price Manier & Herod 150 Fourth Avenue North, Suite 2200 Nashville, TN (615) Kathryn M. Truman Westfield Group One Park Circle P.O. Box 5001 Westfield Center, OH (330)

2 Table of Contents I. SURETY LIABILITY AND DEFENSES... 4 A. DECLARATION OF DEFAULT AND/OR NOTICE REQUIREMENTS Performance Bonds Payment Bonds B. SCOPE AND LIMITATION OF BONDED OBLIGATION Performance Bonds Payment Bonds C. STANDING Performance Bonds Payment Bonds D. DAMAGES RECOVERABLE FROM THE SURETY E. PAY WHEN PAID CLAUSES F. LIMITATION OF ACTIONS Public Works Projects Private Projects Miller Act Projects G. DISCHARGE OF SURETY H. SOVEREIGN IMMUNITY II. CIVIL PROCEDURE A. SUBJECT MATTER JURISDICTION B. PERSONAL JURISDICTION C. IMPROPER VENUE D. PLEADING CONDITIONS PRECEDENT E. RES JUDICATA/RETRAXIT F. DEFAULT JUDGMENT AGAINST PRINCIPAL G. PROCEDURAL ISSUES III. AGREEMENTS OF INDEMNITY H. SURETY S RIGHTS UNDER AGREEMENT OF INDEMNITY I. INDEMNITOR DEFENSES TO LIABILITY J. COLLATERAL DEPOSIT DEMANDS/PRELIMINARY INJUNCTIONS... 78

3 IV. BAD FAITH V. ARBITRATION PROVISIONS VI. BANKRUPTCY A. PREFERENCES B. PROPERTY OF THE DEBTOR S ESTATE C. DISCHARGE D. MISCELLANEOUS BANKRUPTCY VII. SUBROGATION AND ASSIGNMENTS A. ASSIGNMENT OF RIGHTS TO WHICH SURETY IS SUBROGATED B. CGL POLICIES C. MISCELLANEOUS SUBROGATION VIII. WAIVER AND RELEASE IX. MISCELLANEOUS BONDS A. INJUNCTION BONDS B. SUPERSEDEAS BONDS C. MOTOR VEHICLE DEALER BONDS D. SUBDIVISION BONDS E. BID BONDS F. WRITS OF ATTACHMENT

4 SOUTHERN SURETY Surety Law Update 2016 I. SURETY LIABILITY AND DEFENSES A. DECLARATION OF DEFAULT AND/OR NOTICE REQUIREMENTS 1. Performance Bonds In Curtiss-Manes-Schulte, Inc. v. Safeco Insurance Company of America, 2015 WL (W.D.Mo. January 29, 2015) the plaintiff prime contractor hired other contractors to complete the principal subcontractor s work without giving notice to the surety or giving the surety an opportunity to complete the work. In response to an earlier status inquiry, the plaintiff had indicated to the surety that there were delays and problems with the principal s work, and the surety had claims on other projects, sued the principal for indemnity and participated in a bankruptcy proceeding filed by the principal s president. The court interpreted the bond to give the surety options to complete the work in the event the principal was declared in default but not to require the plaintiff to give notice to the surety that it was considering or declaring a default. The court also thought that a three-day cure notice provision in the subcontract did not entitle the surety to notice even though the subcontract was incorporated by reference into the bond. The plaintiff did not give the subcontractor the three day notice, but the court thought that In this case, such notice was not necessary because Balkenbush [the subcontractor] declared itself to be in default.... The court looked to insurance notice-prejudice cases and stated, Absent a specific notice requirement to Safeco, Safeco cannot use Balkenbush s own declaration of default rather than a declaration by CMS as a technical escape hatch by which to avoid liability. The court denied the surety s motion for summary judgment. In Travelers Casualty and Surety Company of America v. City of South Pittsburg, Tennessee, No. M COA-R9-CV, 2015 WL (Tenn. Ct. App. Jan. 30, 2015), the City of South Pittsburg (the City ) hired James C. Hailey & Company ( Hailey ), an engineering firm, to design and supervise repairs to an existing lagoon and construction of a new lagoon at the City s wastewater treatment plant. W&O

5 Construction Company, Inc. ( W&O ) was hired to complete the improvements. On June 24, 2009 the City sent a letter notifying Travelers that it was considering declaring W&O in default of its contract, and on July 22, 2009, W&O was formally declared to be in default, and the City requested that Travelers proceed with its obligations under the performance bond. In August 2009, the City sued Hailey and W&O for breach of contract and professional negligence, and sought a declaratory judgment construing the terms of the City s contract with W&O. In March 2011 the City filed an amended complaint alleging that defects had arisen in the completed projects and adding Travelers as a party, alleging failure to ensure that the project was completed and that Travelers was liable for funds expended to repair the damaged plant. Travelers moved for summary judgment on four grounds, including a limitations argument, which was based upon the bond s requirement that a suit be brought against Travelers on the earlier of the date of Contractor Default, the date W&O ceased work on the project, or the date Travelers failed or refused to perform its obligations under the bond. The trial court denied the motion, and Travelers appealed, contending that the bond s term Contractor Default meant an occurrence or event in which the Contractor failed to perform or comply with the construction contract, and that it was not necessary to have a notice and formal declaration of default in that regard. Thus, Traveler s argued that the two-year limitations began in February The bond defined Contractor Default as the [f]ailure of Contractor, which has neither been remedied nor waived, to perform or otherwise to comply with the terms of the Contract. The court determined that the language which has neither been remedied nor waived indicated an intent that W&O have an opportunity to perform or comply with the contract, or for the City to have an opportunity to waive W&O s non-performance or non-compliance, and thus, it was only after W&O failed to remedy its non-performance or non-compliance, or the City waived it, that a Contractor Default would occur under the bond. Id. The court also noted that the bond unambiguously set forth the conditions by which Travelers obligation to perform under the bond would arise: after the City requested a meeting, offered to pay the Travelers the balance of the contract price, and formally declared W&O in default. The first two conditions occurred on June 24, 2009, and the last on July 24, Thus, provided none of the other noted events in the bond had occurred earlier, the court found that the City had timely filed suit. The court also found issues of fact as to when W&O ceased working on the project, precluding resolution on summary judgment because the determination of this date was material in determining whether the twoyear limitations period had run. Niagara University v. Hanover Insurance Co., 999 N.Y.S.2d 792 (N.Y.A.D. 2015) reversed a judgment for the surety based on the two year suit limitation provision of the performance bond. The Court thought that the obligee raised an issue of fact as to the date the principal ceased working on the project. Apparently, the project was completed on December 21, 2007, but the principal allegedly performed repair work in June 2009 and June The suit was filed in September Peekskill City School District v. Colonial Surety Co., 595 Fed.Appx. 91 (2 nd Cir.

6 2015) affirmed summary judgment for the surety reported at 6 F.Supp.3d 372 (S.D.N.Y. 2014). The surety sued the obligee for a declaratory judgment. The obligee moved to dismiss but did not file a counterclaim. The surety then dismissed its declaratory judgment action. The obligee sued the surety, but the two year contractual limitations period had run. The Court held that the pending declaratory judgment action did not toll the running of the limitations period and pointed out that the obligee could have protected its rights by answering and asserting its claim in the declaratory judgment action or by filing its own, timely suit. The Court rejected the obligee s argument that it was not really suing on the bond as not asserted in the lower court and not supported by anything in the record. The Court did not reach the obligee s argument that the surety should not have been permitted to dismiss the declaratory judgment action. Any challenge to the dismissal had to be raised by a motion for reconsideration or direct appeal in the declaratory judgment action not by filing a separate suit. In Selective Insurance Company of America v. Ohio Department of Rehabilitation and Correction, 2015 WL (Ohio App. March 3, 2015) a subcontractor on a public project sent the owner, the Ohio Department of Rehabilitation and Correction (ORDC), an affidavit of claim seeking to detain contract funds pursuant to R.C At the time it received the affidavit, ORDC held sufficient contract funds to cover the subcontractor s claim, but ORDC did not withhold the amount claimed and subsequently paid the contractor all but a small amount of the contract funds, which was eventually paid to the subcontractor. The subcontractor and the surety reached a settlement under which the subcontractor s claim against ORDC was assigned to the surety. The Court of Claims granted the surety summary judgment, and ORDC appealed. The Court of Appeals affirmed. The Court rejected ORDC s argument that the surety was asserting a subrogation claim barred by R.C (D). The Court held that Under R.C (D),... Selective is the claimant and had no collateral recovery. Therefore, there is no reduction of any recovery against the state. The Court did not reach ORDC s attempted arguments about the subcontractor s work and the validity of the lien because under R.C the public owner has a duty to withhold the amount claimed and cannot ignore the mandate of the statute because it doubts the validity of the lien. Finally, the Court rejected ORDC s argument that the surety was required to indemnify ORDC for the amount ORDC wrongfully paid to the prime contractor. The Court stated, ORDC is not entitled to recover damages from Selective for its own negligence in failing to detain funds. [SFAA filed an amicus brief in support of the surety s position in this appeal.] Dallas/Fort Worth International Airport Board v. INET Airport Systems, Inc., 2015 WL (N.D.Tex. March 30, 2015) primarily involved a dispute between the public owner and the bond principal. The surety aspect was the surety s motion for summary judgment on the grounds that the obligee s performance bond claim was barred by the applicable limitations period. The court agreed with the surety as to the limitations argument and stated, A suit on a performance bond may not be brought after the first anniversary of the date of final completion, abandonment, or termination of a public

7 contract. Tex. Gov t Code Here, the summary judgment evidence establishes that the contract was terminated on June 7, The suit was not filed until August 5, Hence, the claim against Hartford is not timely. The court also noted that even if it accepted the obligee s absurd argument that it had not terminated the contract the principal abandoned the contract years before the suit was filed. In Electrical Contractors, Inc. v. Fidelity & Deposit Co. of Maryland, No. 3:13-cv , 2015 WL (D. Conn. Mar. 30, 2015), a subcontractor brought an action against the general contractor alleging breach of the subcontract, violation of the duty of good faith and fair dealing, violation of the Connecticut Unfair Trade Practices Act, unjust enrichment, and quantum meruit. The subcontractor also named the sureties defendants. The case arose from difficulties which were encountered during work on the project, such as the subcontractor s submission of various proposed change orders for additional compensation for work it believed was beyond the scope of the original contract and that had become necessary only because the prime contractor mismanaged the project. All of the subcontractor s claims were rejected, and the subcontractor submitted a claim against the payment bond to the sureties. In an , the sureties stated that they considered the matter to be in dispute, and reserved all rights and defenses, and nearly four months later, the sureties formally denied the bond claim. In the action, the subcontractor sought to enforce its right to payment under the bond, arguing that the sureties for the prime contractor had forfeited their right to assert the prime contractor s defenses because the sureties failed to respond to the subcontractor s claim within ninety days as required by Connecticut law (Conn. G.S (a)). The court rejected this argument in light of a Connecticut Supreme Court case (Electrical Contractors, Inc. v. Insurance Company of the State of Pennsylvania, 104 A.3d 713, (Conn. 2014)) which held that the ninety day requirement contained in 49-42(a) was directory, rather than mandatory and the legislature did not intend that a surety that fails to pay or deny a claim by the statutory deadline thereby waives any substantive defenses and forfeits its rights to contest the merits of the claim. Eddystone Borough v. Peter V. Pirozzi General Contracting, LLC, Case No. 2:13- cv (E.D.Pa. April 7, 2015) found that the public owner failed to comply with either the termination provisions of the contract or the conditions precedent in the performance bond. The court noted that the bond was very similar to the A312 and EJCDC forms and that no owner default and the notice and meeting requirements of Article 3 of the bond were conditions precedent to the surety s obligations. The court rejected the obligee s argument that the surety had to prove prejudice from the obligee s breaches and granted summary judgment dismissing the claims against the surety. Curtiss-Manes-Schulte, Inc. v. Safeco Insurance Company of America, 2015 WL (W.D.Mo. May 4, 2015) granted reconsideration of the denial of the surety s motion for summary judgment reported at 2015 WL (W.D.Mo. January 29, 2015) and upon reconsideration granted the motion. The obligee prime contractor completed

8 the bonded subcontract work without terminating the subcontract, giving notice to the surety, or allowing the surety an opportunity to mitigate its damages. In its prior decision the court thought that the bond did not require notice of a default. Upon reconsideration, the court held that the bond s statement that Whenever the Principal shall be, and is declared by the Obligee to be in default under the Subcontract, with the Obligee having performed its obligations in the Subcontract, the Surety may promptly remedy the default, or shall promptly... required an unequivocal termination for default and demand on the surety. Here, there was no dispute that the obligee did not declare the subcontractor to be in default, and so the court granted summary judgment to the surety. In Liberty Mutual Insurance Co. v. Integrated Pro Services, LLC, 2015 WL (E.D.La. June 9, 2015) the public owner terminated the bonded contract for default and the surety met its performance bond obligations by taking over completion of the work. The principal disputed the termination, and the dispute between the principal and the obligee was the subject of state court litigation. The surety sued the principal and individual indemnitors seeking judgment for its net losses to date and an order that the defendants deposit collateral for additional expected losses. Two of the individual defendants asserted that they sold any interest in the principal shortly after the indemnity agreement was signed, but they did not assert that they gave written notice per the provision of the indemnity agreement to be relieved of responsibility for future bonds. The court denied the surety s motion for summary judgment. The court admitted that the surety did not have to prove that it was liable to the obligee and that the indemnity agreement required indemnity for payments made in good faith. Since the indemnity agreement did not define good faith, the court looked to the Louisiana Procurement Code which defined good faith at La. Rev. Stat. 39:1553(B) as honesty in fact in the conduct or transaction concerned and the observance of reasonable commercial standards of fair dealing. The court thought that the legitimacy of the claims against the surety bonds is relevant to the issue of Liberty Mutual s good faith and whether it made any payments under the belief that it is, or was, or might be liable. The court found that the issues of fact related to the liability on the surety bonds would best be resolved in the pending state court litigation and denied the surety s motion based on the current record. The court also thought that there were issues of fact as to the amount of the surety s damages. The surety had spent $3,141, and received payments of $1,586, for a net loss to date of $1,554,836.07, but the court thought that that there were issues of fact as to what future payments the surety might receive from the obligee or what claims the surety, as a completing contractor, might have against the obligee. Therefore, the court concluded that genuine issues of material fact preclude summary judgment with respect to the issues of damages and collateral security.

9 As to the two indemnitors who argued they were not bound by the indemnity agreement, the court thought that even though they did not follow the procedure in the agreement to be released, the surety could nevertheless have chosen to terminate their obligations and that there were issues of fact with respect to whether the surety did so. The court denied the surety s motion and entered an order to stay and administratively close the case pending resolution of the state court litigation with the obligee. Thus, the surety was out- of-pocket over $1.5 million in meeting its bond obligations but was left with no recourse against the indemnitors pending the state court s determination of the principal s dispute with the obligee. Flatiron-Lane, a Joint Venture v. Case Atlantic Co., 2015 WL (M.D.N.C. August 4, 2015) was primarily a dispute between the prime contractor and a subcontractor on a design build project for two highway bridges. The surety aspect was that each side also made claims against the other s sureties. After trial, the court found that the prime contractor owed the subcontractor $306, and, therefore, the prime contractor s claims against the subcontractor s surety necessarily failed. However, in a multi-page footnote the court discussed the prime contractor s failure to give the subcontractor s surety timely notice of the alleged default as required by the bond and the resulting valid defense to the surety. On the subcontractor s payment bond claim against the prime contractor s sureties, the court found that the sureties were liable to the same extent as the prime contractor. In Heckler Electric Company, Inc. v. Liberty Mutual Insurance Co., 2015 WL (D.N.J. November 20, 2015) a contractor asserted that its subcontractor defaulted and that it had to pay a sub-subcontractor to keep the project moving. The contractor made claims against the surety for the allegedly defaulting subcontractor under both the performance bond for the cost of completing the work and the payment bond for the amount paid to the sub-subcontractor. The contractor and the subcontractor s surety both filed motions for summary judgment, and the subcontractor s surety filed a motion for sanctions under Rule 11, F.R.C.P. The court denied all of the motions. The court found that there were issues of fact as to whether the contractor complied with the conditions precedent in the performance bond and what amounts, if any, were owed to the sub-subcontractor for work it performed for the subcontractor. The court denied the summary judgment motions without prejudice and also denied the Rule 11 motion because there were no exceptional circumstances to support it. MG Hotel, LLC v. Bovis Lend Lease LMB, Inc., 133 A.D.3d 519, 21 N.Y.S.3d 21 (N.Y. App. Div. 2015) affirmed summary judgment for a subcontractor s surety, and awarded the surety the unpaid subcontract balance, because there was no evidence the subcontractor defaulted. The owner asserted that certain HVAC equipment was defective, but not that its installation failed to comply with the specifications. The owner s claim was properly against the manufacturer of the equipment and was limited by the terms of the manufacturer s warranty to the purchase price of the units.

10 2. Payment Bonds In Diaz Construction v. The Industrial Development Board of the Metropolitan Government of Nashville and Davidson County, 2015 WL (Tenn.App. March 6, 2015) a third tier subcontractor asserted a mechanics lien, and the first tier subcontractor bonded off the lien. The Court held that the claimant s failure to serve its statutory notice of nonpayment on the prime contractor barred the lien claim. Tennessee Code (a) required a remote contractor to give notice of nonpayment to the owner and prime contractor in contractual privity with the remote contractor. The claimant argued that the bond principal did not have standing to object to the lien claim. The Court disagreed and stated, If Allegheny [the bond principal] can show Diaz did not properly perfect its mechanics lien, the performance bond will not be available to satisfy Diaz s claim. On the merits, the Court affirmed dismissal of the lien claim for failure to give the required notice. The claimant argued that it was not in contractual privity with the prime contractor and, therefore, the statute did not require notice. The Court thought the wording of the statute was to recognize the possibility of multiple primes and held that notice was required to the prime contractor upstream from the claimant even though the claimant was not in privity with the prime. Since here the claimant admittedly did not give notice to the prime contractor, its lien claim failed, and the trial court correctly dismissed its claim against the bond principal. In Pierce Foundations, Inc. v. JaRoy Construction, Inc., No. 14-CA-669, 2015 La. App. LEXIS 557 (La. Ct. App. Mar. 25, 2015), the court examined a claim by the subcontractor against a general contractor and statutory surety. The subcontractor for a parish public works project brought action against the general contractor and general contractor's surety for monies allegedly owed under the subcontract. After the District Court, in a bench trial, rendered judgment for subcontractor, and the Court of Appeal dismissed a premature appeal, the Twenty Fourth Judicial District Court again rendered judgment in favor of subcontractor, and awarded subcontractor interest from date of original judgment. Surety and subcontractor appealed. The Court of Appeal held that subcontractor's failure to file a sworn statement with the public authority of the amount allegedly due to it by general contractor's surety, and to record such sworn statement with the recorder of mortgages, deprived the subcontractor of right to bring action against the surety. In Building Solutions Since 1977, LLC v. New Haven Housing Authority, 2015 WL (Conn.Super. March 31, 2015) the court considered a motion to strike the plaintiff subcontractor s substituted complaint filed after the court granted a motion to strike the original complaint, see 2014 WL (Conn.Super. April 23, 2014). The surety aspect of the motion was based on the argument that the substituted complaint failed to allege the existence of the bond and compliance with the notice requirements of G.S The court found that the substituted complaint alleged the existence of the

11 bond and substantial compliance with the notice requirement. The court concluded, Whether the plaintiff in fact substantially complied with these requirements is not properly before the court on a motion to strike. Accordingly, the motion to strike count two is denied. In an apparently related case, American Pride Builders, Inc. v. New Haven Housing Authority, 2015 WL (Conn.Super. March 31, 2015) the court reached the same conclusion. In U.S. for the use of Innovative Metals Company, Inc. v. Southwest Sheet Metal of NC, LLC, 2015 WL (E.D.N.C. April 28, 2015) a second tier subcontractor sued the prime contractor and its Miller Act payment bond surety. The defendants moved to dismiss the bond claim on the grounds that the claimant s notice of its claim and suit were untimely. The claimant alleged that it last worked on the project when it completed an inspection and delivered a warranty. The notice and suit would be timely from that date. The defendants argued that this was not subcontract work for purposes of the Miller Act, but the court thought there were issues of fact as to the nature of the work and taking the allegations in the light most favorable to the plaintiff it denied the motion to dismiss. In Vanguard Builders, Inc. v. Granite Re, Inc., 348 P.3d 1093 (Okla. Civ. App. 2015), a subcontractor involved with construction of gymnasium at a public school brought action against the general contractor s surety for unpaid bond proceeds. Approximately eight months after completing its work on the project, the subcontractor notified the surety of its claim against the bond. The claim was denied four months later, exactly one year and 14 days after the subcontractor had last performed work on the project. The subcontractor then brought suit against the surety, and the surety filed a motion for summary judgment, alleging that the subcontractor had failed to file suit to recover on the bond within the one-year statute of limitation required under the Oklahoma public works bonding statute. The surety s motion was granted, and the subcontractor appealed. The Oklahoma Court of Appeals held that the one-year limitations period for subcontractor's claim against surety to collect bond proceeds, due to main contractor's alleged failure to pay fully for subcontractor's work on construction project for public school gymnasium, began to run on the day subcontractor performed the last of its labor on the project, rather than when the amount due was finally decided or when the project was substantially complete, which would be evidenced by school's payment for the work. The court found that the language of the statute appeared to show a statute of repose, which can bar a cause of action before it accrues, but noting that the limitation period was subject to waiver and estoppel under the same circumstances as other statutes of limitation, the majority believed that there were enough disputed facts to potentially support the application of waiver or estoppel. Namely, the court found that there were questions surrounding the subcontractor s right to payment, alleged representations made by the contractor, and the contractor s decision that the subcontractor was owed no money. Accordingly, the majority remanded the case. The dissenting judge would have affirmed grant of summary

12 judgment to the surety because the alleged misrepresentations upon which the surety relied were made by the contractor, not the surety. In Peter Scalamandre & Sons, Inc. v. FC 80 Dekalb Associates, LLC, 2015 WL (N.Y.A.D. June 10, 2015) the contractor on a private project asserted a mechanics lien claim, and the owner bonded it off. The contractor sued the owner and the surety. Both sides moved for summary judgment, and the trial court denied the motions. The Appellate Division affirmed. The Court found that various notice provisions in the contract might have been waived by the conduct of the parties and that the lien release executed by the contractor might have been treated by the parties as a mere receipt of the amounts stated, and that the waiver was not intended to encompass or preclude claims that the plaintiff subsequently presented to the defendants for additional work. In U.S. for the use of Stuart C. Irby Co. v. Pro Construction, Inc WL (M.D.Ga. June 15, 2015) a supplier to a first tier subcontractor on a federal project sued the prime contractor and its Miller Act payment bond surety. On cross motions for summary judgment, the court entered judgment for the claimant. The last of the material supplied was delivered to the subcontractor s office rather than the job site, and the defendants argued that circumstantial evidence at least raised an issue of fact as to whether it was used on the bonded project. The court found, however, that there was no issue of fact suggesting that the supplier did not have a good faith belief that the material was for the bonded project, and held that such a good faith belief was all that was required. The unpaid material was delivered over several months on an open account basis, and separate invoices were sent. The court rejected the defendants argument that the 90 day notice requirement had to be met separately for each invoice. The court held that a single notice within 90 days of the final furnishing was sufficient. The court also awarded service charges of 1½ % per month and attorneys fees as provided in the open account agreement between the claimant and the subcontractor plus pre and post judgment interest. The court rejected the defendants argument that the service charges were already interest and awarding them and prejudgment interest was a duplicative recovery. Even though the service charges were a percentage of the amount owed each month, the court gave credence to the provision in the open account agreement reciting that they were for the cost of keeping the account not interest. The court directed the claimant to file a motion setting out the amount of attorneys fees it claimed. In Cemex Construction Materials South, LLC v. Falcone Brothers & Associates, Inc., 349 P.3d 210 (Ariz. Ct. App. 2015), a materialman had filed suit against the general contractor, alleging it had not been paid for materials it had supplied to a public works improvement project. The contractor moved for summary judgment claiming it had not received the statutorily required twenty-day notices and that the notices were insufficient to satisfy the statutory requirements of A.R.S (A) (Arizona s Little Miller Act ). The trial court denied the motion, concluding that materialman's certificates

13 of mailing and affidavits were sufficient to meet the purposes of the Little Miller Act. The materialman appealed. The Arizona Court of appeals held that Little Miller Act notices, apprising general contractor of estimate of costs, provided by materialman within twenty days of supplying labor or materials for a public works improvement project, are required to be sent by registered or certified mail, and the Little Miller Act does not authorize service of twenty day notices by first class mail with certificates of mailing as permitted by the mechanic's lien notice provision in A.R.S (F). The court also found that the last sentence of (A), which prescribes the method of mailing, applies to both the notice materialmen are required to provide to general contractor of estimate of costs within twenty days of supplying labor or materials and the notice of any unpaid balance within 90 days of completion of work on public works improvement project. Finally, the court, citing both Arizona and federal Miller Act precedent, acknowledged that courts have, to some extent, mitigated the stringency of the notice requirements by determining that the requirements are satisfied when the contractor receives actual notice of a materialman s claim. Accordingly, the court stated that if a notice sent pursuant to the [Little Miller Act] is actually received by a contractor, the fact that it was sent by a method other than registered or certified mail will not preclude a materialman s action on the bond. In P & D Mechanical, Inc. v. Gar-San Corp., 2015 WL (Conn.Super. July 9, 2015) the surety on a public project moved to dismiss the claimant subcontractor s complaint as untimely and for lack of the statutory notice. The surety argued that the complaint did not meet the one year filing requirement of G.S (b). The last date the claimant worked was February 16, The surety argued that the action against it was commenced on February 17, The claimant argued that it delivered the process to a proper officer for service within the limitations period and he served it within 30 days therefore its claim was not barred pursuant to G.S a. The court agreed with the claimant and rejected the surety s argument that G.S a should not apply because the action on the statutory payment bond was in derogation of the common law. The court found, however, that the claimant failed to comply with the notice requirements of G.S (a). The defendant s timely communication failed to state the amount claimed with substantial accuracy and its accurate notice was untimely. The court, therefore, granted the surety summary judgment. In Northeast Panel Co. v. Rizzo Corp., 2015 WL (Conn.Super. August 4, 2015) a subcontractor sued the prime contractor and its payment bond surety alleging violations of the Prompt Payment statute, G.S a, and the Little Miller Act, G.S The court granted the defendants motion to strike the complaint as to claims against the surety. The complaint alleged that the claimant gave notice of its claim to the defendants but did not allege the dates on which its performance ended. Therefore, the allegations did not establish that timely notice was provided as required by 49-42, and the court granted the motion to strike the payment bond claim. The court disagreed with the prime contractor s contention that there was no private right of action under 49-41a, but found that this was a separate cause of action from the right against the

14 payment bond under and that the surety was not liable for the alleged violations of 49-41a. Therefore, the court granted the motion to strike the 49-41a claim as to the surety. In Firefighter Sales and Service v. Travelers Casualty and Surety Company of America, No. 1:14-cv WL (N.D. Ohio September 30, 2015) a supplier to a subcontractor on a public project sued the surety on the prime contractor s payment bond, and the court granted summary judgment to the surety because the claimant failed to provide timely notice of its claim. On May 14, 2013, the claimant delivered material to the subcontractor s warehouse, and the subcontractor delivered them to the job site between September and December of On or about September 16, 201, the claimant furnished notice to the prime contractor pursuant to Ohio R.C Thus, the notice was timely if measured from the date the subcontractor delivered the material to the job but not if measured from the date the claimant delivered the material to the subcontractor. The court held that the claimant was required to furnish notice within twenty-one days of the date it delivered its materials to the subcontractor, and could not benefit from the later September date because the claimant did not furnish the materials to the public improvement site; the subcontractor did. U.S. for the use of Kogok Corp. v. Travelers Casualty and Surety Company of America, 2015 WL (N.D.W.Va. September 24, 2015) involved claims by a second tier subcontractor against the prime contractor s Miller Act sureties. Following the court s prior decision reported at 55 F.Supp.3d 852 (N.D.W.Va. 2014), the claimant filed a reformulated complaint and the sureties moved to dismiss the claims against them on the grounds that the claimant did not give notice of the claims as required by the Miller Act and that they included delay damage claims which the court held in the prior decision were barred by the subcontract. The court agreed with the sureties that the new claims added in the reformulated complaint had not been included in the claimant s Miller Act notice to the prime contractor and, therefore, were barred. The court stated, Kogok did not comply with the written notice requirements of the Miller Act. Its claims under the Pay Applications and PCOs at issue were not listed or discussed in the October 16, 2013 Notice of Claim, which was Kogok s only proper written notice. The court also adhered to its prior holding that the no damage for delay clause barred the claimant s delay claims and held that the law of the case doctrine applied to prevent reconsideration of that issue. The court granted the sureties motion to dismiss. In Firefighter Sales and Service v. Travelers Casualty and Surety Company of America, 2015 WL (N.D.Ohio September 30, 2015) a supplier to a subcontractor on a public project sued the surety on the prime contractor s payment bond. The court granted summary judgment to the surety because the claimant failed to provide timely notice of its claim. The claimant delivered material to the subcontractor s warehouse on May 14, The subcontractor later delivered them to

15 the job site between September 2013 and December The claimant furnished notice to the prime contractor pursuant to Ohio R.C on or about September 16, Thus, the notice was timely if measured from the date the subcontractor delivered the material to the job but not if measured from the date the claimant delivered the material to the subcontractor. The court held that All Lines was required to issue its Notice of Furnishing within twenty- one days of the date it delivered its materials to TSI s warehouse. The Court finds that All Lines cannot benefit from the later September date because All Lines did not furnish the materials to the public improvement site; TSI did. JSI Communications v. Travelers Casualty & Surety Company of America, 2015 WL (5 th Cir. December 4, 2015) reversed summary judgment for the payment bond surety of the prime contractor on a Mississippi public project. The claimant was a second tier subcontractor on the project. The prime contractor filed an interpleader action and paid the balance owed the first tier subcontractor into court. The claimant had not given notice of its claim and was not initially a defendant in the interpleader action. Shortly after judgment was entered in the interpleader action, the claimant gave the prime contractor and surety notice of its claim. The notice was timely under the Mississippi Little Miller Act. The prime contractor then amended its complaint in the interpleader action and obtained an amended judgment that extended its release of liability to include any claims made by anyone added to the action for materials, labor or equipment furnished to the first tier subcontractor. When the claimant sued on the bond, the district court granted summary judgment to the surety, and the claimant appealed. The surety argued that it was no longer liable to the claimant because the liability of the bond principal was extinguished by the judgment in the interpleader action. The Fifth Circuit disagreed. The fact that the prime contractor s liability to the first tier subcontractor was extinguished in the interpleader action had no effect on the second tier subcontractor s ability to recover on the bond. The Court noted that full payment to a first tier subcontractor is not a defense to an otherwise valid claim by someone who furnished labor or material to that subcontractor. The Court also rejected any argument that the judgment in the interpleader action barred the bond claim by res judicata or collateral estoppel. The scope of the interpleader action was determined by the stake deposited, i.e. the subcontract balance. Any bond obligation was separate and distinct from that stake, and the bond obligation was not mentioned or litigated in the action. The Court thought that the prime contractor s indemnity obligation to the surety has no bearing on our decision regarding Travelers s bond obligation to JSI under the Mississippi Little Miller Act. The Court, therefore, reversed summary judgment for the surety. Since the evidence submitted in the trial court established that the claimant met the requirements of a valid bond claim and the surety has offered no basis, other than those rejected above, for its failure to pay, the Court entered summary judgment for the claimant in the amount of its claim and remanded the case for the district court to

16 consider the claimant s requests for attorneys fees and bad faith damages, which had been denied by the district court on the ground that there was no bond liability for the underlying claim. In Wagner Interior Supply of Wichita, Inc. v. Dynamic Drywall, Inc., 2015 WL (Kan.App. October 2, 2015) a supplier to a subcontractor on a private project filed a timely lien statement but misidentified the prime contractor and the owner of the improved property. After the time period for the claimant to file a lien statement expired, the prime contractor filed a Release of Lien Bond to allow the property to be refinanced. The claimant then sued on the bond, and the trial court granted summary judgment to the defendants because the claimant failed to timely perfect its lien, barring it from collecting on the bond. On appeal, the Court of Appeal reversed, holding that, when [the prime contractor] chose to file a bond instead of to challenge Wagner s lien as unperfected, Wagner s lien was discharged, mooting any claims regarding the lien s imperfection. There was no dispute that the claimant had furnished material that was used on the job or as to the amount the claimant was owed. Therefore, the claimant was entitled to recover on the bond even though it may not have had a perfected lien. The Court remanded the case with instructions to enter summary judgment for the claimant. In Dykier v. Cox, 2015 WL (Cal.App. November 30, 2015) the plaintiff successor trustee filed a petition to remove and surcharge the bond principal but admittedly failed to mail notice of her petition to the surety as required by Probate Code The trial court, however, found that the surety received constructive notice through its agent and, later, actual notice but chose not to participate in the proceeding. After obtaining a $280, judgment, the successor trustee sought to enforce it against the surety bond in spite of the lack of statutory notice. The surety argued that it did not receive notice to comply with due process, and the Court treated that as separate from the statutory notice. The Court held that notice to the agent was constructive notice to the surety and that a post-judgment letter from the bond principal gave the surety time to file its own appeal of the judgment. Finally, the appellate court s mediation office invited the surety s attorney to participate. Somehow, the Court held that each of these notices was sufficient to satisfy the requirements of due process and stated, At each juncture, Platte River Insurance Company chose not to get involved, despite having sufficient notice of the claims against Cox [the principal] to satisfy due process. The surety also argued that the failure to give the statutory notice meant the trial court lacked jurisdiction to enforce the surcharge judgment against the bond. The Court noted that the bond principal actively litigated the successor trustee s claims and that the notices given to the surety informed it of the issues being litigated. The Court clearly thought that the surety was trying to use a technicality to avoid liability and affirmed judgment against the bond. [The Court did not certify this decision for publication].

17 B. SCOPE AND LIMITATION OF BONDED OBLIGATION 1. Performance Bonds In APAC-Kansas, Inc. v. BSC Steel, Inc., 2015 WL (D.Kan. March 2, 2015) the claimants were suppliers or subcontractors to a third tier subcontractor. The first tier subcontractor furnished a payment bond to the prime contractor. The claimants moved for summary judgment against the principal and surety. The defendants argued that the claimants were not within the scope of the bond s coverage. The bond was conditioned on payment for labor and material used or reasonably required for use in performance of the subcontract for all or any part of which the Contractor and Owner is liable. Initially, the defendants argued that this meant the bond covered only obligations for which both the Owner (here the United States) and the prime contractor were liable. After it was pointed out that there could be no such claimants, the defendants argued that the phrase should be read as the Contractor and/or the Owner so there was coverage if one or both were potentially liable to the claimant. The court disagreed and thought that the phrase was just a general reference to the costs of constructing the project and made the principal and surety liable to claimants seeking payment for work used in performance of a subcontract for which the prime contractor and owner would be liable. New Bern Riverfront Development, LLC v. Weaver Cooke Construction, LLC (In re New Bern Riverfront Development, LLC), Case No ; Adv.Proc. No (Bankr.E.D.N.C. March 3, 2015) granted the surety s motion for reconsideration of the court s denial of the surety s motion for partial summary judgment reported at 521 B.R. 718 (Bankr.E.D.N.C. 2014). The bonded contract contained a mutual waiver of consequential damages. The court granted the principal summary judgment on the obligee s consequential damage claims, but in the earlier decision denied the surety s similar motion. The court thought that while the surety was not secondarily liable for consequential damages caused by the principal s breach, it could be liable for consequential damages caused by its own breach of its obligations under the performance bond. After considering the surety s motion for reconsideration, the court granted the motion and, upon reconsideration, granted the surety s motion for partial summary judgment on the issue of consequential damages. The court reasoned that in its Complaint the obligee sought only compensatory damages against the surety. The court stated, Although, as noted in the court s December 5, 2014 Order, New Bern asserted allegations that Travelers failed to perform its independent obligations under the Performance Bond, it never sought consequential damages for that alleged breach.... The court agrees that it incorrectly found that New Bern had adequately plead (sic.) a claim for the recovery of non-derivative consequential damages against Travelers. In Ohio Casualty Insurance Co. v. Cox, 2015 WL (E.D. Ky. September 22, 2015) the court adopted the recommendation of the Magistrate Judge reported at

18 2015 WL (E.D. Ky. June 5, 2015). The surety issued bonds in reliance upon an indemnity agreement executed by the contractor (David Cox d/b/a DBR Engineering) and Mr. Cox individually, and purportedly also executed by Mrs. Cox. DBR subsequently defaulted in its performance under the bonded contracts. Ohio Casualty has made payments based on those incidents of default, producing this dispute. Mr. Cox died and the Probate Court appointed Mrs. Cox Administratrix of his estate. Based on DBR's defaults, Ohio Casualty filed a Proof of Claim on the Estate and demanded that Mrs. Cox individually honor the Indemnity Agreement through payment of Ohio Casualty's claims and expenses, but Mrs. Cox individually and as Administratrix refused to pay. Mrs. Cox denied signing the agreement and filed third-party claims against the insurance agent and notary involved. The surety filed a motion for partial summary judgment, and the third-party defendants also filed a motion for summary judgment and sought sanctions against Mrs. Cox. The court granted both motions and awarded the third-party $17, in sanctions against Mrs. Cox. Mrs. Cox also moved for summary judgment or judgment on the pleadings on several grounds, arguing that the indemnity agreement was invalid under K.R.S by not stating a maximum amount and a termination date, that is was not supported by consideration, that the surety was estopped to assert its claim against her, and that requiring her to sign the agreement would violate the Equal Credit Opportunity Act (ECOA). The court rejected each argument. In Hartford Casualty Insurance Co. v. City of Marathon, 2015 WL (S.D.Fla. July 31, 2015) the court, following remand from the Eleventh Circuit, considered the City s claims under the performance bond for construction of a wastewater treatment facility. After the surety declined to take over the work without a completion agreement, the City contracted with a new contractor. The new contract amount exceeded the balance remaining in the defaulted contract by $43, The court thought that in light of the difficulties in taking over an existing project this was reasonable. The City also paid the completion contractor $335,189 for outstanding payables the principal owed its subcontractors. The court found that this was reasonable and no more than Hartford was obligated to pay under its payment bond. The City also paid an engineering firm $46,234 for additional work associated with completion of the contract and paid $2,808 to keep the job cite in good order and prevent deterioration of installed equipment while the job was idle. The court allowed each of these expenses for a total of $427, plus prejudgment interest. The City also claimed liquidated damages of $1,500 per day for each day from the original contract completion date to the date the work was actually completed a total of 471 calendar days. The court found that under Florida law the party claiming liquidated damages has the burden of presenting evidence to apportion the fault for delay if the parties shared responsibility. Here, the City made no effort to present such evidence and relied on a total delay claim. The surety, however, showed that at least some portions of the delay were the City s concurrent responsibility including specifically 64 days during settlement negotiations and 44 days for change order work beyond the