Annual survey of fidelity and surety law, 1998.

• Author: Linder, Charles W., Jr.
• Position: Part 1

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

1. PUBLIC CONSTRUCTION BONDS

   1. Bonds under Federal Laws

      1. Jurisdictional

         Bonds for highway and related projects are not Miller Act bonds, although partly funded by federal funds and federally monitored.

         In Operating Engineers Health and Welfare Trust Fund v. JWJ Contracting Co.,(1) a large number of pension trust funds filed suit under the Miller Act, the Arizona Little Miller Act, and a number of other federal statutes, including the Employee Retirement Income Security Act of 1974. The resolution of the state court claims will be discussed below. The U.S. District Court for Arizona dismissed the claims under the Miller Act, concluding that the projects at issue were not "public works of the United States" as required by that Act.

         The basis for the decision was that the bonds in question had much broader coverage than would have been required by the Miller Act alone. While noting that the federal government was "intimately involved" in the control and monitoring of the projects and that they were constructed for the benefit of the general public, it held that the projects were not for the protection of the federal government.

      2. Procedural

         Notice and suit requirements under Miller Act were met by claimant whose conduct demonstrated to surety that claimant was looking to surety for payment.

         In this federal district court case from the Middle District of Alabama, the bonding company sought a summary judgment that the claim was barred by late notice. The court noted that the last date on which materials making up a part of the claim were delivered was more than 90 days prior to notice.

         Examining the conduct of the parties more closely, however, the court found that there was expressed or implied information given in a timely manner by the claimant to the bonding company, which constituted sufficient evidence of compliance to deny the surety's motion for summary judgment. The court went on to hold that the action was also commenced within the one-year time period set forth by the Miller Act. JB Systems v. Federal Insurance Co.(2)

         One year suit. Nature of work in last year important.

         In Hussman Corp. v. Fidelity and Deposit Co. of Maryland,(3) the U.S. District Court for the District of New Jersey engaged in an elaborate but useful discussion of the situation in which remedial or corrective work or materials are furnished and the claimant contends that such work or materials extends the one-year limitation period afforded by the Miller Act.

         After first noting that the majority rule is that such work or materials do not extend the limitation period, the court discussed some contrary holdings and finally took an intermediate position advanced in Georgia Electrical Supply Co. v. United States Fidelity and Guaranty Co.(4) In doing so, the court gave considerable weight to the furnishing of operating manuals less than a year before the action was filed.

   2. State and Local Bonds

      1. Jurisdictional

         Jurisdiction declined by federal court and case dismissed where state court action pending on same bonds.

         After the surety had filed a federal declaratory judgment action against certain claimants, one of them filed suit in state court against the defaulting contractor, and the bonding company intervened in that action. The federal district court in North Carolina concluded that the bonding company was using its declaratory judgment action as "a device for procedural fencing and forum shopping." As a consequence, the action was dismissed. Aetna Casualty and Surety Co. v. Alpha Mechanical Inc.(5)

      2. Procedural

         Action against surety stayed pending arbitration.

         It is somewhat troubling to read the opinion of a California Court of Appeal in Federal Insurance Co. v. Superior Court (Mackey).(6) In the first paragraph of the opinion, the sureties are referred to as "the carriers." A few paragraphs later, the obligation forming the basis for the lawsuit is characterized as "an insurance bond." Nevertheless, the court seems to have come up with an acceptable ruling that an action against those sureties should be deferred until an arbitration already pending was completed.

         Arbitration award against principal not conclusive as to sureties where based in part on work not covered by bond.

         Sette-Juliano Contracting Inc. v. Aetna Casualty and Surety Co.,(7) involved arbitration as it relates to claims under surety bonds. In this instance, the plaintiff commenced an arbitration proceeding seeking the balance under its subcontract, plus interest. The sureties did not participate in the arbitration, and it resulted in a substantial award of damages in favor of the plaintiff. The plaintiff then sued the sureties under a bond issued to discharge a lien claim filed earlier by the plaintiff.

         The determination made by the arbitration was somewhat ambiguous as to whether the amounts awarded were or were not covered by the bond. Accordingly, the New York Appellate Division reversed a lower court award of summary judgment to the plaintiffs and remanded for further proceedings to determine if the bond indeed covered the entire award.

         Iowa law deeming contractor's abandonment as "complete" to trigger date for filing claims cannot be used to deny claims for late filing.

         In Employers Mutual Casualty Co. v. City of Marion,(8) the surety brought an action for declaratory judgment that it was not liable under a public improvement bonds. Iowa has an interesting statute providing that where a contractor abandons work, the improvement is deemed completed for the purpose of filing claims. The contractor did so in this case, and the surety argued that such "completion" started the running of the time limitation for filing suit.

         After some elaborate verbal prestidigitation, the Iowa Supreme Court found that the "plain language" of the statute compelled a finding that the claim was timely.

      2. Substantive

         Supplier of steel on highway project not subcontractor under Puerto Rico law, and claims by its own supplier not covered by bond.

         In this case from the First Circuit, a ruling by the U.S. District Court for Puerto Rico was affirmed. Bethlehem Steel Export Corp. v. Redondo Construction Corp.(9)

         Bethlehem furnished steel to Transcontinental Steel Co., which in turn furnished it to the principal contractor on a highway in Puerto Rico. The contractor paid for the steel in full, but Transcontinental failed to remit to Bethlehem. After it went into bankruptcy, Bethlehem tried to claim under the contractor's bond.

         There is an interesting discussion in the opinion about how certain words should or should not be translated from Spanish into English, but the First Circuit upheld the district court's finding that under no circumstances could Transcontinental be considered anything more than a supplier of materials.

         Claims by pension fund trustees not pre-empted by ERISA and are valid claims under bonds.

         Two quite similar cases from the Sixth and the Tenth Circuits reach the same result--that the Employee Retirement Income Security Act of 1974 does not preempt claims under surety bonds for fringe benefit contributions owned pension funds by a defaulting contractor.

         In Operating Engineers, cited at footnote 1, the trust had sought payment under the Miller Act, a Little Miller act, the Davis-Bacon Act, the Labor Management Relations Act, and ERISA. As noted above, the claim under the Miller Act was dismissed. It was argued forcefully that ERISA preempts state regulation of employee benefit plans, but the Ninth Circuit disagreed.

         In Trustees .for Michigan Laborers' Health Care Fund v. Seaboard Surety Co.,(10) the Sixth Circuit came to the same conclusion.

         Union claims for contributions and other damages under collective bargaining agreement not covered by payment bond.

         A case somewhat similar to the two preceding cases was filed by the trustees of four union trust funds seeking fringe benefits and other damages under collective bargaining agreements applicable to a contractor on the Denver International Airport.

         The federal district court upheld the claims, but the Tenth Circuit reversed in Lenon v. St. Paul Mercury Insurance Co.(11) The applicability of ERISA was not discussed, but the contention of the surety was upheld that the contributions sought did not directly relate to any labor actually supplied or furnished by the contractor but were simply damages for breach of the collective bargaining agreement.

         Claim for interest penalty covered by payment bond and not against public policy.

         In Washington International Insurance Co. v. Superior Court (G.K. Backlund Inc.),(12) the surety attempted to limit the claim against it by striking portions of the complaint that requested payment of a 2 percent interest penalty for failure to make timely payments. It argued unsuccessfully that such claims for penalties were not covered by the bond and that it would violate pubic policy to allow coverage under the bond for conduct which was willful on the part of the defaulting contractor.

         The discussion is thorough, and the decision of the California Court of Appeal seems sensible.

         "Permit bond" required by state highway department was performance bond, not payment bond, and recovery disallowed under Little Miller Act.

         This curious little case involved a "permit bond" rather than a contract. The Alabama Department of Transportation issued a "permit" to allow a construction company to build a turnout lane on an Alabama highway. Under the terms of the permit, the contractor was required to file a bond or certified check with the department. It filed a $10,000 cash bond and employed a subcontractor to construct the lane. Thereafter the principal contractor filed for relief under Chapter 11 of the Bankruptcy Code.

         The subcontractor sought to claim under the bond, but the federal bankruptcy court found it was only a bond guaranteeing performance to...