Archive for the 'PA – Sureties' Category

2018 BAD FAITH CASES: NO COMMON LAW BAD FAITH IN SURETY’S PAYING ON PERFORMANCE BOND AND SEEKING REIMBURSEMENT FROM CONTRACTOR/INDEMNITORS (Philadelphia Federal)

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This case involves indemnification claims for payment made under a surety (performance) bond. Sureties are not subject to Pennsylvania’s Bad Faith Statute. The surety paid millions of dollars in connection with a construction contract, and sought reimbursement from the parties entering an indemnification agreement in connection with the bond issued.

The indemnity agreement required indemnification for payments made in good faith. If the payments were fraudulently made no indemnification would be required. The court found the contract itself did not set a good faith standard. Thus, it looked to the common law defining good faith conduct in analyzing the facts.

The indemnitors had to show an “improper motive” or “dishonest purpose” behind the surety payments. “Bad faith is not simply bad judgment or negligence, but rather it implies the conscious doing of a wrong because of dishonest purpose or moral obliquity.” It “is more than ‘a lack of diligence or negligence,’ and ‘even gross negligence cannot support a finding of bad faith.’”

The indemnitors put on no evidence of bad faith and summary judgment was entered for the surety.

Date of Decision: September 25, 2018

Allied World Insurance Co. v. Perdomo Industrial, LLC, U. S. District Court Eastern District of Pennsylvania CIVIL ACTION NO. 17-3027, 2018 U.S. Dist. LEXIS 163906 (E.D. Pa. Sept. 25, 2018) (Kearney, J.)

MAY 2018 BAD FAITH CASES: SURETY NOT SUBJECT TO PENNSYLVANIA’S BAD FAITH STATUTE (Philadelphia Federal)

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The plaintiff contracted with a construction firm to perform work at a project in Phoenixville, Pennsylvania, and obtained performance and payment bonds from a surety. The contractor did not complete the project on time, and the surety proposed a plan for completion, which the plaintiff found wanting. It sued for breach of contract and bad faith.

The surety argued that surety companies are not insurers under Pennsylvania’s bad faith statute. The Court agreed, and dismissed the bad faith claim. The Court reasoned that “suretyship and insurance contracts are widely different . . . [and there is no] direct contractual relationship and no such promise of prompt, expeditious payment[]” with a surety. While the Court acknowledged that the parties were in direct contractual relationship with another, the defendant never assumed the role of insurer.

Date of Decision: May 2, 2018

Charlestown Township v. United States Surety Co., United States District Court, Eastern District of Pennsylvania, Civil Action No. 17-5469, 2018 U.S. Dist. LEXIS 74498 (E.D. Pa. May 2, 2018) (Ditter, J.)

 

 

JULY 2015 BAD FAITH CASES: (1) INSURANCE BAD FAITH STATUTE DOES NOT APPLY TO SURETIES; (2) PRINCIPLES ALLOWING AWARD OF ATTORNEY’S FEES FOR BAD FAITH CONDUCT IN BRINGING/DEFENDING/PURSUING LITIGATION CANNOT BE USED TO END RUN THE INSURANCE BAD FAITH STATUTE (Philadelphia Federal)

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In Board of Trustees, Roofers Union Local 30 v. Liberty Mutual Insurance Company the court reiterated, with thorough citation of authority, that Pennsylvania’s insurance bad faith statute does not apply to sureties.

The court also made clear that a plaintiff cannot use the argument that it is entitled to attorney’s fees under a bad faith, wanton, oppressive, and vexatious conduct theory, as such extraordinary relief from the “American Rule” that each side pays its own attorney’s fees in the absence of a statute or contract allocating fees, addresses an entirely different context than the insurance bad faith statute. This exception, as set forth in federal case law cited by the court, “deals with either bad faith initiation/defense of the lawsuit or conduct of the party or its attorney during the course of the litigation—it is not intended as an end run around the insurance bad faith statutes or to punish bad faith that does not involve willful abuse of the judicial process.”

Though not mentioned in this federal opinion discussing Third Circuit case law on awarding attorney’s fees in this limited context, the same argument would likely apply to Pennsylvania statutes 42 Pa.C.S. §§ 2503(6)(7)(9), on the right to receive attorney’s fees as taxable litigation costs:

“The following participants shall be entitled to a reasonable counsel fee as part of the taxable costs of the matter: (6) Any participant who is awarded counsel fees as a sanction against another participant for violation of any general rule which expressly prescribes the award of counsel fees as a sanction for dilatory, obdurate or vexatious conduct during the pendency of any matter.   (7) Any participant who is awarded counsel fees as a sanction against another participant for dilatory, obdurate or vexatious conduct during the pendency of a matter. (9) Any participant who is awarded counsel fees because the conduct of another party in commencing the matter or otherwise was arbitrary, vexatious or in bad faith.”

Date of Decision:   July 14, 2015

Bd. of Trs. v. Liberty Mut. Ins. Co., CIVIL ACTION NO. 15-2820, 2015 U.S. Dist. LEXIS 91723 (E.D. Pa. July 14, 2015) (Buckwalter, J.)

JANUARY 2014 BAD FAITH CASES: PRIMA FACIE EVIDENCE CLAUSE ENFORCED AGAINST PRINCIPAL IN SURETY CASE THAT CONSIDERED STANDARDS FOR BAD FAITH IN SURETY CONTEXT (Chester County)

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Plaintiff, the surety, brought suit against its principal seeking indemnification for damages paid on the principal’s behalf after issuing a bond for a construction project. Under the surety agreement, the principal was liable for indemnifying the surety for all losses and expenses arising from the execution or procurement of the bonds. The surety contract also included a “prima facie evidence clause.” Under the clause, the surety was allowed to pay or compromise any claim, demand, suit, judgment, or expense arising out of the bonds if the surety reasonably believed it was liable for the amount paid, or that it was expedient under the circumstances to make such a payment or compromise. The payment would be binding upon the principal as a loss or expense covered by the indemnity clause whether or not the liability actually existed.

Courts enforce prima facie evidence clauses against the principal unless the principal is able to demonstrate either bad faith or fraudulent payment by the surety. In the context of a surety contract, bad faith requires a showing of recklessness or improper motive, such as self-interest or ill will. In this scenario, plaintiffs produced an itemized statement, which was explicitly listed as sufficient to establish prima facie evidence in the surety agreement. Defendants were unable to demonstrate the payment in question as made in bad faith, making the court’s decision turn on the parties’ agreement as a matter of law. Defendants failed to create any genuine issue of material fact, and therefore summary judgment was entered in favor of the plaintiff.

Date of Decision: March 8, 2013

Lincoln Gen. ins. co. v. Gracie Corp., Civil Action No. 2008-06251, 2013 Pa. Dist. & Cnty. Dec. LEXIS 190 (March 8, 2013 Pa. County Ct.) (Tunnell, J.).

NOVEMBER 2013 BAD FAITH CASES: EASTERN DISTRICT DECIDES PENNSYLVANIA BAD FAITH STATUTE DOES NOT EXTEND TO SURETY BONDS (Philadelphia Federal)

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An Eastern District judge held Pennsylvania’s bad faith statute does not apply to companies that issue surety bonds.  Plaintiff hired a construction company to make improvements to its public spaces. The construction contract required the construction company to purchase a bond for the value of the project, which it did, through the defendant surety company. Approximately two years after beginning the project, the construction company filed for bankruptcy, and plaintiff requested the face value of the bond from the surety. When the surety refused to provide the face value of the bonds to plaintiff, plaintiff filed suit against the surety, including a count for bad faith.

The surety moved to have the count dismissed, arguing Pennsylvania’s bad faith statute only applies to insurance contracts, not surety contracts. The bad faith statute does not define insurance contracts, and the Pennsylvania Supreme Court has not been faced with the specific question, so the district court was forced to predict whether the state Supreme Court would find ‘insurance contracts’ included surety contracts. Based on commentary regarding the differences between insurance and surety contracts, as well as an unreported case, the district court held surety contracts are not insurance contracts under the Pennsylvania bad faith statute. The court found the legislature could have specifically included surety contracts, as well as other types of insurance-related contracts, had it so desired. Since the legislature declined to create an expansive statute, to enforce the statute in a broad manner would be inconsistent with legislative intent. Thus, the court held surety bonds are not insurance contracts within the meaning of the bad faith statute, and granted the surety’s motion to dismiss the claim.

Date of Decision: October 2, 2013

Upper Pottsgrove Twp. v. Int’l Fid. Ins. Co., Civil Action No. 13-1758, 2013 U.S. Dist. LEXIS 142372 (E.D. Pa. Oct. 2, 2013) (Dalzell, J.).

NOVEMBER 2013 BAD FAITH CASES: DISTRICT COURT REAFFIRMS ITS REFUSAL TO FIND A FIDUCIARY DUTY BETWEEN SURETY AND POLICYHOLDER (Western District)

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The District Court refused to reopen its judgment dismissing plaintiff’s fiduciary-in-fact, tortious interference, and bad faith claims, previously discussed on this Blog.

Plaintiff argued the court committed legal error by applying the gist of the action doctrine to its bad faith claim because the applicability of the doctrine depends upon evidence adduced during discovery and that the court did not construe the facts of the complaint in plaintiff’s favor as required on a Rule 12(b)(6) review.

The court found it was appropriate to dismiss the claim with prejudice at the pleadings stage, despite some cases requiring evidence adduced during the discovery phase.

The court found the indemnity agreement signed by plaintiff and its surety made clear the parties’ relationship was of a contractual nature; therefore, the fiduciary responsibilities at play were those that arise in a contractual setting.

The face of the complaint made it apparent the tortious bad faith claim was merely a re-cast breach of contract claim, and therefore the court was obligated to apply the doctrine. Furthermore, the Third Circuit Court of Appeals allows district courts to apply the doctrine at the pleading stage to dismiss claims with prejudice. Therefore, it was not legal error to apply the gist of the action doctrine sua sponte at the pleading stage and dismiss the complaint with prejudice.

Furthermore, despite not construing all facts in favor of plaintiff, the court correctly applied the Rule 12(b)(6) standard of review because it is only required to draw inferences in the plaintiff’s favor to the extent the inferences are reasonable. To accept plaintiff’s alleged inferences would have contradicted the well-pleaded factual allegations, and therefore the court was not required to do so.

Such an approach would force the court to accept legally insufficient statements as a plausible cause of action, eliminating meaningful review. Based on these requirements, the court determined it could not allow plaintiff to use its asserted facts to leverage a breach of contract lawsuit into a meritless tort suit and refused to vacate its dismissal with prejudice.

Since there was no change in controlling law or new facts presented to the court, it refused to open the judgment. The court reiterated plaintiff’s allegation that its insurer failed to make payments on its behalf under their indemnity agreement could only sound in contract, and therefore also denied plaintiff’s alternative request for leave to amend its complaint, as the complaint was legally, not factually, insufficient.

Date of Decision: September 5, 2013

Reginella Constr. Co. v. Travelers Cas. & Sur. Co. of Am., Civil Action No. 12-1047, 2013 U.S. Dist. LEXIS 76353 (W.D. Pa. Sept. 5, 2013) (Hornack, J.).

JUNE 2013 BAD FAITH CASES: PENNSYLVANIA DISTRICT COURT FINDS SURETY OWES NO FIDUCIARY DUTY TO POLICYHOLDER; GIST OF THE ACTION DOCTRINE BARS BAD FAITH CLAIMS (Western District)

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The court was presented with a question of whether a surety is a fiduciary, as well as whether a breach of surety contract could result  in a bad faith claim.

Plaintiff is a Pittsburgh-based construction company that primarily deals in large-scale public construction projects for school districts, state universities and agencies, municipalities, and other public entities. It is common practice in the construction industry for general contractors to purchase surety bonds when undertaking large-scale projects. A surety bond guarantees the general contractor’s performance of the work and its payments of subcontractors and suppliers, and act to reduce the risks inherent in logistically complicated projects. Typically, only the project owners, subcontractors, and suppliers are entitled to make claims and receive payment under the bond, although the general contractor obtains and pays the premium due on the bond.

This case arises out of three surety bonds provided to plaintiff by the carrier for two separate projects. The first two bonds were issued for plaintiff’s contract with a Pennsylvania school district (“the school district”) and the remaining bond was for plaintiff’s contract with the Ohio Turnpike Commission (“the OTC”) for re-construction of two service plazas along the turnpike.

The school district project began and continued without incident from August 2010 through April 2012. Then, in mid-April 2012, the school district approved a $554,702 invoice from plaintiff, but failed to issue payment. On April 26, Travelers sent a letter to the school district, demanding payment on the project for “the entire amount of the contract funds remaining in the custody of [the school district], including any and all estimates earned by [plaintiff] but unpaid at this time.”

Six weeks later no payments had been made by the carrier or the school district, resulting in the subcontractors on the project not being paid. Plaintiff alleges at this time the carrier met with the subcontractors privately and informed them that the project was going to be terminated. This allegedly caused the subcontractors to slow down, stop working, and submit inflated and premature claims against plaintiff. This led to the shutdown of the school district project on June 11, 2012.

The surety bonds issued in connection with the school district project, a performance bond and a payment bond, had a combined value of $19,297,000, the full value of the school district contract. Under the performance bond, the carrier guaranteed plaintiff’s performance in the event that plaintiff defaulted in its obligation, but if the school district defaulted, the carrier was not obligated to guarantee plaintiff’s performance.

The payment bond provided that the carrier would “have no obligation to [the subcontractors, suppliers, laborers, and other claimants]” until they “have given notice to [the carrier and the school district] stating a claim [for payment] is being made under this bond.” After receiving a properly submitted claim, the carrier is responsible for promptly paying or arranging for payment of any undisputed amounts at its own expense.

In its complaint, plaintiff alleged the carrier breached its fiduciary duty to plaintiff as its surety on the school district project, and that the carrier acted in bad faith by refusing to pay plaintiff’s subcontractors as required under the terms of the bond agreements. The carrier claims it owed no fiduciary duty to plaintiff and Pennsylvania does not recognize a tort-based bad faith claim by a principal against a surety.

The second contract for the OTC project was also bonded by the carrier for the full contract price of $9,930,730. Six months into the project, plaintiff fired a subcontractor on the project. The subcontractor then filed a lien against the project, which under Ohio law allowed OTC to withhold payment from plaintiff until plaintiff obtained a lien-over bond to guarantee payment of the claim.

At this point, plaintiff had terminated its bond relationship with the carrier, but the OTC project bond remained intact. The carrier, however, refused to issue the lien-over bond, alleging the contract bond did not require it to issue lien-over bonds, that plaintiff should seek the bond from its new surety, and that the contract bond required OTC to release payment. OTC continued to refuse payment on the project until plaintiff procured the lien-over bond, and the carrier refused to issue the lien-over bond until May 2012, at which point OTC terminated the contract.

Plaintiff’s contract bond for the OTC project guaranteed plaintiff’s performance of the work as well as plaintiff’s payment of “all lawful claims of subcontractors, material suppliers and laborers” in the event of plaintiff’s default. The bond stated its purpose was to “benefit any subcontractor, material supplier or laborer having a just claim, as well as for [the OTC].” Plaintiff claims the carrier breached its fiduciary duty as plaintiff’s surety, and acted in bad faith in refusing to issue the lien-over bonds as allegedly required by the contract bond.

In response to plaintiff’s complaint, the carrier filed a motion to dismiss. The court first faced the choice of law issue presented by the diversity of the parties. Applying Pennsylvania’s “most significant relationship” forum test, the court found Pennsylvania law applicable for the school district issues because both parties were Pennsylvania entities, the parties established minimum contacts with Pennsylvania, and no other state was involved.

The court also applied Pennsylvania law to the OTC claims because there were no relevant differences between the substantive law of the two states. Neither Ohio nor Pennsylvania has specifically held whether a principal may bring a breach of fiduciary duty or common law bad faith claim against a surety, requiring the district court to predict how the state supreme courts would rule.

On the breach of fiduciary duty claim, the court predicted the Pennsylvania Supreme Court would not impose fiduciary duties on a surety. A fiduciary duty exists “whenever one person has reposed a special confidence in another to the extent that the parties do not deal with each other on equal terms.” This may be shown by demonstrating the existence of a relationship normally considered to be fiduciary in nature, such as attorney and client or principal and agent, or by establishing a “disparity in position between the parties.”

Pennsylvania case law views surety bonds as “commercial guarantee instruments rather than policies of insurance,” stating specifically, “suretyship is not insurance.” Furthermore, imposing a fiduciary relationship between parties to a contact is the exception rather than the rule.

Finally, the split loyalties the surety maintains in a surety bond contract between the principal and the owner of the project are not indicative of a fiduciary relationship. Thus, the court predicted the Pennsylvania High Court would hold that as a matter of law, a surety does not owe a fiduciary duty to its principal.

Furthermore, the court found no “overmastering influence” on the part of the surety to establish a fiduciary relationship in this specific circumstance, and dismissed the breach of fiduciary duty claims.

In determining the tort bad faith claims, the court applied the gist of the action doctrine. The gist of the action doctrine prevents a plaintiff from bringing a contract claim under the guise of a tort claim to avoid a bar on certain claims. Under Pennsylvania law, “tort actions lie for breaches of duties imposed by law as a matter of social policy, while contract actions lie only for breaches of duties imposed by mutual consensus agreements between particular individuals.”

Thus, the gist of the action doctrine bars tort claims “(1) arising solely from a contract between the parties; (2) where the duties allegedly breached were created and grounded in the contract itself; (3) where the liability stems from a contract; or (4) where the tort claim essentially duplicates a breach of contract claim or the success of which is wholly dependent on the terms of a contract.”

The court found the gist of the action doctrine barred both claims of bad faith against the carrier arising out of the school district project and the OTC project. Pursuant to plaintiff’s complaint, the carrier’s conduct was allegedly tortious because of perceived rights and duties set forth in the bond agreements.

Furthermore, there was a dispute as to whether or not plaintiff defaulted on the school district project and whether the bond for the OTC project required the carrier to issue lien-over bonds. Thus, the true question in plaintiff’s alleged tort claims is whether the carrier breached its contractual duties. Therefore, the court dismissed the plaintiff’s bad faith claims with prejudice.

Date of Decision: May 30, 2013

Reginella Constr. Co. v. Travelers Cas. & Sur. Co. of Am., Civil Action No. 12-1047, 2013 U.S. Dist. LEXIS 76353 (W.D. Pa. May 30, 2013) (Hornack, J.)

APRIL 2009 BAD FAITH CASES
NO TORT CAUSE OF ACTIONS AGAINST SURETY AKIN TO STATUTORY BAD FAITH CLAIM AGAINST INSURERS (Middle District)

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In Western Surety Company v. WGG, Inc., the court observed that while bad faith claims can be brought against an insurer in the nature of a tort (statutory bad faith) or contract (breach of duty of good faith and fair dealing), only the later type of claims exists against a surety.

Date of Decision:  January 29, 2009

W. Sur. Co. v. WGG, Inc., UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF PENNSYLVANIA, Civil Action No. 1:07-CV-1551, 2009 U.S. Dist. LEXIS 6220 (M.D. Pa. Jan. 29, 2009) (Kane, J.)

MARCH 2009 BAD FAITH CASES
BAD FAITH CLAIM DISMISSED BECAUSE A SURETY BOND IS NOT AN INSURANCE POLICY UNDER THE STATUTE (Middle District)

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In United States ex rel. SimplexGrinnell, LP v. Aegis Insurance Company, the court dismissed a bad faith claim regarding failure to pay a surety bond because a surety bond is not an insurance policy, so it can not be the basis for a claim under the bad faith statute.

In this case, a subcontractor was never paid by the contractor for work completed so it applied for payment to the surety who had issued a bond.  When the surety denied payment, the subcontractor filed suit against the contractor and the surety and added a bad faith claim against the surety.  The court granted the surety’s motion to dismiss the bad faith claim.

The court held that, although the statute does not define “an action arising under an insurance policy,” it is generally understood that suretyship is not insurance.  It cited case law and legal treatises that explain the differences between a surety and an insurer (e.g., the instrument generated is for financial credit instead of indemnity and there is greater commercial sophistication of the parties involved in suretyship).  The court focused on how there is an indirect relationship between a surety and the party owed the money but there is a direct relationship between an insurer and its insured.  It also agreed with a prior court that allowing a bad faith claim against a surety would result in the surety having greater liability than its principal because the bad faith action could be brought against it but not against the principal (the contractor, in this case).

The court disagreed with two cases from the Eastern District of Pennsylvania because it felt they had accepted application of the statute to suretyship without analysis.  It, instead, agreed with other courts that addressed the legislative intent of the bad faith statute and found that the differences between surety bonds and insurance policies did not merit expanding the statute to include surety bonds.

Date of Decision:  January 14, 2009

United States ex rel. SimplexGrinnell, LP v. Aegis Ins. Co., No. 1:08-CV-01728, 2009 U.S. Dist. LEXIS 2381 (M.D. Pa. Jan. 14, 2009)(Rambo, J.)

FEBRUARY 2008 BAD FAITH CASES
PENNSYLVANIA’S BAD FAITH STATUTE DOES NOT APPLY TO PROVIDERS OF A SURETY BOND (Middle District)

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The plaintiff filed a complaint alleging the defendant breached a contract between the two parties in which plaintiff would construct a water line under a river for the defendant.  The defendant filed a counterclaim alleging the plaintiff breached its contract.  The defendant also filed a third party complaint against Safeco Insurance Company of America (“Safeco”) who provided a performance bond on the contract on behalf of the plaintiff.  The third party complaint alleged that Safeco breached its contract under the performance bond and violated Pennsylvania’s bad faith insurance statute.

With regards to the bad faith count, the defendant alleged Safeco acted in bad faith in the manner that it investigated and denied the defendant’s coverage under the bond and acted in bad faith by withholding certain information from the defendant while encouraging it to reach an assignment agreement with a drilling contractor who placed a bid for completion of the outstanding work.

Safeco filed a partial motion to dismiss the count for bad faith because the statute does not apply to providers of surety bonds.

The court noted the differences between an insurance agreement and a surety bond.  An insurance agreement is an agreement by which one for a consideration agrees to pay money to another on the death, destruction, loss, or injury of someone or something while a contract for suretyship is one to answer for the debt, default or miscarriage of another.  The insurer and insured share a direct contractual relationship for the said payment while a surety does not have a direct contractual relationship with a party such as defendant and has simply agreed to answer for the debt of the plaintiff to the extent he fails to pay them.

The court stated that the Pennsylvania legislature did not intend to include surety bonds within the purview of the Pennsylvania bad faith statue, and if they have, they would have stated explicitly.  As a result, the court granted Safeco’s partial motion to dismiss the bad faith count of defendant’s third party complaint.

Date of decision:  January 28, 2008

Intercon Construction, Inc. v. The Williamsport Municipal Water Authority, United States District Court for the Middle District of Pennsylvania, Civil Action No. 4:07-CV-1360, 2008 U.S. Dist. LEXIS 6022, (M.D. Pa. 2008) (McClure, J.).

R.E.M.