John Fatino Published About Owners Insurance Company v. Fidelity and Deposit Company of Maryland

American Bar Association Fidelity & Surety Law Committee News

John F. Fatino was published in the Fall edition of the American Bar Association Fidelity & Surety Law Committee News. Mr. Fatino's Case Note concerned a recent decision of the United States Court of Appeals for the Eighth Circuit of import to the industry. A summary of the Case Note follows.

Owners Insurance Company v. Fidelity and Deposit Company of Maryland

Recently, the United States Court of Appeals for the Eighth Circuit reversed and remanded a summary judgment ruling for the Eastern District of Missouri. Owners Ins. Co. v. Fid. & Deposit Co. of Maryland, 41 F.4th 956 (8th Cir. 2022). This case stemmed from two subcontractors’ allegations that a surety breached the terms of a private works payment bond when it refused to pay litigation costs, attorneys’ fees, and interest awarded in a preceding arbitration. The district court granted the surety’s motion for summary judgment, holding that the surety released itself from those awards when it paid for labor and materials. The appellate court reversed, holding that the surety had not released itself from the remaining arbitration awards when it paid for labor and materials.

Facts, Procedural History, and Court Rulings:

BCC Partners, “BCC”, hired Ben F. Blanton Construction, “Blanton”, to build luxury apartments in the St. Louis area. Blanton obtained a bond with Fidelity and Deposit Company “F&D”. The bond protected BCC from subcontractors asserting liens against BCC property if Blanton failed to pay its subcontractors. The bond provided that “If [Blanton] shall promptly make payment to all claimants as hereafter defined, for all… labor and material used or reasonably required for use in the performance of Blanton’s contract with BCC, then F&D’s surety obligation “’shall be void; otherwise, it shall remain in full force and effect.’” The bond also provided that claimants, including subcontractors, may sue for “sum or sums as may be justly due” against F&D’s bond. Two subcontractors asserted claims against Blanton for failure to pay for labor and materials. Blanton maintained that the subcontractors’ labor and materials were deficient or incomplete. The arbitration found in favor of the subcontractors, awarding $525,000 in labor, materials, costs, attorneys’ fees, and interest. F&D was not a party to the arbitration. Instead of paying, Blanton filed for bankruptcy protection. F&D paid the subcontractors for the labor, materials, and some interest, but denied the claim for fees and costs because F&D claimed the bond did not obligate it to pay those awards. The subcontractors sued and argued that F&D breached the terms of
the payment bond. After the parties cross-moved for summary judgment, the district court granted F&D’s motions.

Court’s Analysis:

The appellate court reconciled the two conflicting clauses in the payment bond by considering the intent of the clauses in the whole agreement and relying upon the Miller Act’s interpretive guidance (although the case was decided under Missouri law). The appellate court held that the clause releasing F&D from subcontractor liability assumed that clause applied only if the subcontractor had not yet incurred additional costs. The appellate court, instead, held that the scope of F&D’s obligations for this particular case were contained in the paragraph addressing what happens if the subcontractor has not been paid in full. In that paragraph, no language limits what “sum or sums justly due”the subcontractor may recover. The appellate court also looked at separate clauses in the payment bond as indicators that F&D knew of and was willing to pay these additional awards, if and when they arose, and that separate cases did not release F&D. 

Miller Act Interpretation:

The subcontractors relied on the phrase “’sum or sums as may be justly due’” when they argued that F&D should pay for all awards, not just labor and materials under the private works payment bond. The phrase “’sum or sums as may be justly due’” derives from the Miller Act, which provides subcontractors labor and materials protection deriving from payment bonds on federal projects. The appellate court pointed to Eighth Circuit precedent, where the subcontractor was entitled to interest and attorneys’ fees as a part of “’the purchase price of the materials’” and “’sums justly due.’”

F&D argued, and the district court agreed, that prior case law was not dispositive and held for several reasons; (1) the Miller Act is remedial and should consequently be liberally construed, (2) the Miller Act provides a federal cause of action and is not substantive state law, and (3) the Miller Act was designed to protect federal project subcontractors, not private project subcontractors. The appellate court disagreed with F&D, holding that the Miller Act language was useful to interpret the meaning of the parties because the invocation of the Miller Act’s language “sum or sums justly due” indicates intent for Miller Act interpretation. The appellate court thus reversed the summary judgment in favor of F&D and remanded for further proceedings.

For more information

John F. Fatino, Member, Whitfield & Eddy, P.L.C., Des Moines, Iowa. 515-288-6041 or William C. Dix, J.D. Candidate, University of Iowa College of Law, assisted in the preparation of these materials.

The full article is published on the American Bar Association Fidelity & Surety Law Committee website located here.



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