Annual survey of fidelity and surety law, 2003, part II: this roundup of recent cases covers public and private construction bonds, financial institution bonds and sureties' remedies.

• Author: Brownstein, Bettina E.

1. PUBLIC CONSTRUCTION BONDS

1. Bonds under Federal Laws

   1. Procedural

      Miller Act's limitations barred suit by subcontractor that failed to bring action within one year after it last performed labor or supplied materials or equipment.

      The U.S. Department of the Navy awarded Eastern General Contractors a contract to perform work on a revitalization project at the Gorton Submarine Base in Connecticut. The general contractor obtained a bond from Employers Insurance of Wausau. Eastern subcontracted with Safe Environment of America Inc. to provide all labor and materials for asbestos and lead-containing materials abatement.

      After Safe began work, the Navy demanded changes in the scope of the project that caused significant disruptions and delays. Eastern and Safe then entered into a written agreement in which Eastern promised to sponsor and prosecute to the Navy on Safe's behalf a request for equitable adjustment. The agreement also provided that payment or disallowance of the equitable adjustment would extinguish all further obligations of Eastern to Safe and that Eastern would pay Safe its portion of the equitable adjustment within 10 days of Eastern's receipt of an adjustment from the Navy.

      In February 2001, Safe submitted information to Eastern for an adjustment of approximately $1.1 million, but then Eastern terminated Safe and hired two replacement subcontractors, one of which used Safe's asbestos and lead abatement plan. In March 2001, Eastern submitted a request for adjustment for approximately $2.2 million, which included Safe's portion. The Navy settled with Eastern for $1.5 million, a settlement that applied to two different requests submitted by Eastern.

      Unaware of the Navy's payment of $1.5 million, Safe wrote Eastern demanding prosecution of the request. Eastern informed Safe that it had been submitted but that its portion had been disallowed. Moreover, Eastern accused Safe of fraud, asserting that the $1.5 million exceeded the actual value of the services it provided. In response, after notifying Eastern that it might file a claim on Eastern's bond, Safe filed suit in state court. Then, after it learned of the Navy's $1.5 million payment through discovery, Safe filed suit in federal court under the Miller Act to recover on the bond.

      In Safe Environment of America Inc. v. Employers Insurance of Wausau, (1) the surety moved to dismiss under Federal Rule 12(b)(6) for failure to state a claim and for summary judgment on the basis that the statute of limitations had expired before the complaint was filed. It claimed that the last labor, materials or equipment were supplied on June 29, 2001, while the date of the complaint, October 18, 2002, was more than the one-year Miller Act limitation period. The federal district court in Massachusetts found ample evidence to support the surety's position.

      In opposition, Safe ingeniously argued that the replacement subcontractor's use of Safe's abatement plan was analogous to the use of a subcontractor' s piece of equipment by a contractor after the subcontractor had stopped work on the project. The court lauded Safe's creativity but declined to accept the contention. It determined that an abatement plan did not constitute materials within the meaning of the Miller Act and that the use of the plan did not equate to "supplying materials."

      The court also rejected Safe's argument that the surety should be equitably estopped from asserting the limitations defense because Eastern had lied to it, or as the court delicately put it, "had been less than forthcoming." Safe had not shown any attempt by Wausau to mislead it, the court continued, and Safe could have filed suit against the bond before the limitations period had run.

      The court also rejected Safe's contention that Eastern's bad behavior should be attributed to the surety because the latter "stands in Eastern's shoes," observing that the surety was not raising its principal's defense but rather raising the statute as its own defense.

   2. Substantive

      Surety on public construction project was third-party beneficiary with standing to enforce forum selection clause and waiver in contract between general contractor and subcontractor.

      Costal Masonry Inc. v. Reliance Insurance Co. (2) was an appeal from a bankruptcy court's orders granting Reliance summary judgment. The district court affirmed the bankruptcy court's rulings.

      In 1999, creditors filed Chapter 7 bankruptcy against Systems Engineering and Energy Management Associates (SEEMA). The trustee filed an action to recover preference payments made by SEEMA. The defendants were subcontractors and suppliers on various SEEMA projects and SEEMA's surety, Reliance, which had issued bonds required by the Miller Act. Coastal was one of the subcontractors on two federal projects. Fifteen of the subcontractors, including Coastal, filed crossclaims against Reliance to recover any amount for which they were found liable to the bankruptcy trustee.

      Coastal cross-claimed on the bond and for unjust enrichment or quantum meruit. It sought reimbursement for $50,000 it paid to the trustee to settle the preference action. In defense, Reliance argued that Coastal had waived its rights under the Miller Act as to each of the subcontracts it signed with SEEMA. In identical clauses, Coastal agreed that its claims would be litigated in the state court in Norfolk, Virginia, or in the federal district court for the Eastern District of Virginia, also in Norfolk. Coastal also agreed that this would be its exclusive remedy in lieu of any claim against SEEMA's Miller Act surety or any other procedure or law. Coastal responded that Reliance, not being a party to the subcontractor, could not avail itself of the venue-remedy provisions.

      The federal district court agreed with the bankruptcy court that the intent of the clause was to prevent claims against the bonding company and that the only way to enforce such a clause was to allow the surety to assert it as a defense to claims against it. Therefore, Reliance, as the surety, was the intended beneficiary of the waiver and could enforce it.

      The court also rejected Coastal's equitable theories for relief. It found that "equitable remedies are designed to give relief where justice demands, but the law fails to provide." This was not the situation in this instance: Coastal had an available remedy through the Miller Act but had waived that right. It could not now circumvent the very waiver that deprived it of that remedy through the equitable powers of the court.

      U.S. Navy's waiver of Miller Act's requirement of bond deprived federal court of subject matter jurisdiction over second-tier subcontractor's claim against prime and first-tier subcontractor.

      In Rivera de Leon d/b/a Bay Rats Underwater v. Maxon Engineering Services Inc., (3) the U.S. District Court for Puerto Rico dismissed the Miller Act claim of a second-tier subcontractor for lack of subject jurisdiction because the U.S. Navy had waived the obligation of the prime contractor to obtain a surety bond.

      The Navy and a joint venture composed of Perini Jones Inc. and Perini International contracted to do two construction projects at the U.S. Naval Station in Roosevelt Roads. The projects were for demolition and underwater construction at two different sites: Bulkhead Charlie and Pier Three. In February 2000, the joint venture subcontracted with Maxon Engineering, the first tier subcontractor, to perform some of the construction, which in turn subcontracted a portion of the work to Rivera, the second-tier subcontractor. The agreement called for Rivera to furnish materials, equipment and a photographic analysis of the projects. Rivera provided an invoice of the materials and equipment required to begin its work--$186,000 for Bulkhead Charlie and $240,000 for Pier Three.

      There was no written contract between Rivera and Maxon, even though Maxon had promised one. Rivera began working and submitted a bill to Maxon, which it did not pay. In June 2000, Maxon terminated Rivera. Neither Maxon nor the joint venture ever paid Rivera for any of its work, materials or equipment. So Rivera sued for recovery under the Miller Act and also under Puerto Rican law.

      Maxon and the Perini companies moved to dismiss under Rule 12(b)(1) and (6). The presiding magistrate recommended that the motion be dismissed for lack of subject matter jurisdiction, but denied the motion as to the assertion of failure to state a claim. The magistrate also recommended that the court retain jurisdiction over defendants' state law claims. The defendants objected.

      The district court agreed with the magistrate and affirmed the recommendations. It found ample evidence that the Navy had waived the requirement for the general contractor to furnish a bond, and so there was no recoverable payment bond. Thus, the court lacked subject matter jurisdiction over the case, and Rivera could not sustain a claim under the Miller Act.

2. State and Local Bonds

   1. Procedural

      Claimant under Maryland's Little Miller Act did not comply with statute's notice requirements, parties did not contract for longer notice period, and prior verbal notice could not remedy effective notice.

      In CTI/DC Inc. v. Selective Insurance Co., (4) the federal district court in Maryland, applying Maryland law, determined that a supplier of construction materials for a public construction project had not filed timely a sufficient statutory notice of a claim under the state's Little Miller Act.

      HR General Management Corp. contracted with an agency of Prince George's County to perform work on a construction project in Cheverly, Maryland, and obtained a bond from Selective. HRGM in turn subcontracted with Selby Construction Inc., which entered into an agreement with CTI/DC to supply materials for the project. CTI/DC furnished the materials but Selby failed to pay in accordance with their contract.

      All supplies and materials were last furnished to the project on October 1, 2002. On...