Eighth Circuit Affirms Judgment Between Competing Sureties

04.29.2019

The United States Court of Appeals for the Eighth Circuit recently affirmed a decision of the United States District Court for the Southern District of Iowa on issues of suretyship between competing sureties. In United States of America for the use of Wesco Distribution, Inc, v. Liberty Mutual Insurance Co., -F.3d-, 2019 WL 1574913 (8th Cir. April 12, 2019), the Eighth Circuit reviewed an Iowa federal case between competing sureties on a project for the federal government. Liberty Mutual Insurance Co. (Liberty) issued bonds on behalf of the Principal Contractor on the project. International Fidelity Insurance Co. (IFIC) bonded the electrical subcontractor on the project. The case arose out of a contract to build an Army Reserve Center, and the unanticipated bankruptcy of the bonded Principal Contractor. Following retention of a Replacement Contractor, the contracts were reaffirmed, and in particular, the separately bonded electrical subcontract was ratified with a remaining work to be completed balance of about $350,000 on a $1.1 Million subcontract. Before the work on the Project could be resumed, the electrical subcontractor also declared bankruptcy. Many claims were made on the various bonds, however, by the time of trial all of the claims of subcontractors and suppliers were resolved. The only remaining issues for trial involved arguments regarding which surety was responsible for the payments that had been made as a result of performance and payment claims on the Project. Of note, despite the ratification of the electrical subcontract for about $350,000, Liberty paid well in excess of the $1.1 Million original scope of work related to the electrical scope of work on the Project, including rework of work that had been completed and accepted prior to the cessation of work as a result of the bankruptcies.

Liberty sought the full penal sum of the performance bond issued by IFIC on behalf of the electrical subcontractor. IFIC denied the claims of Liberty on account of contractual issues for which IFIC believed the claims against its bonds were not appropriately presented. Namely, the Eighth Circuit analyzed IFIC’s defenses that: Liberty was not the “successor” of the Principal Contractor; The Ratification Agreement discharged IFIC’s performance bond, and; Liberty failed to meet conditions precedent to bond coverage.

On the first argument, the Court examined IFIC’s argument that the word “successor” was ambiguous in relation to equitable subrogation principles under the language of the bond issued, and should be read narrowly, such as in the realm of corporate law. The Court declined IFIC’s proposed interpretation, and instead found a broader meaning of “successor” more closely tracks the purposes of the Miller Act and Federal Acquisition Regulations. While not addressed in detail in the Court’s reasoning, the Court declined to recognize any distinction in this case for the issue that IFIC, having bonded a subcontractor, did not provide a traditional Miller Act bond, unlike Liberty.

The next argument addressed relates to IFIC’s position that the ratification agreement replaced or materially altered the subcontract it bonded. Part of IFIC’s contention in this regard appears to relate to the lengthy delay occasioned by the bankruptcy of the Principal Contractor. To reach its conclusion that IFIC was not materially prejudiced, the Court assumed that the Iowa courts would adopt the position of the Restatement of Suretyship. Under that Rule, the Court states a surety “is discharged from any unperformed duties . . . if the modification . . . imposes risks on the [surety] fundamentally different from those imposed . . . prior to modification.” While the Court recognized the greatly increased costs of completing the subcontract, versus the ratification agreement, those costs, the Court reasoned, were experienced after the ratification agreement, and thus could not be the material alteration IFIC desired to void its bond.

Finally, the Court examined the issue raised by IFIC regarding the failure of conditions precedent. Specifically, IFIC argued that the Principal Contractor was not performing at the time of its subcontractor’s default, and therefore IFIC’s duties under the bond could not have been properly triggered. However, the Court dismissed these contentions in holding that the successor obligee status effectively imbued Liberty and its successor principal contractor with the powers to satisfy the conditions precedent IFIC sought to use as a defense to Liberty’s claims.

As a result, the Court affirmed the district court judgment and held IFIC liable for the full penal sum of its performance bond, despite the seemingly excessive costs to complete the electrical scope of work under the Project.

For any questions, contact Drew Gentsch at 515-288-6041. See United States of America for the use of Wesco Distribution, Inc, v. Liberty Mutual Insurance Co., -F.3d-, 2019 WL 1574913 (8th Cir. April 12, 2019). 

Attorneys

Menu