Pa. Nat. Mut. Cas. Ins. Co. v. Pine Bluff

Decision Date15 January 2004
Docket NumberNo. 02-3735.,No. 02-3600.,No. 02-3646.,02-3600.,02-3646.,02-3735.
PartiesPENNSYLVANIA NATIONAL MUTUAL CASUALTY INSURANCE COMPANY, a Pennsylvania Corporation, Plaintiff/Appellant, Cannon Contracting, Inc., Intervenor Plaintiff, v. CITY OF PINE BLUFF, Defendant/Appellee, David Mitchell Construction, Inc.; David R. Mitchell; Theresa Mitchell; Karl F. Dix, Jr.; Pine Bluff National Bank; Nobel Insurance Company, Defendants. Surety Association of America, Amicus on Behalf of Appellant. Pennsylvania National Mutual Casualty Insurance Company, a Pennsylvania Corporation, Plaintiff, Cannon Contracting, Inc., Intervenor Plaintiff/Appellant, v. City of Pine Bluff, Defendant/Appellee, David Mitchell Construction, Inc.; David R. Mitchell; Theresa Mitchell; Karl F. Dix, Jr.; Pine Bluff National Bank; Nobel Insurance Company, Defendants. Pennsylvania National Mutual Casualty Insurance Company, a Pennsylvania Corporation, Plaintiff/Appellee, Cannon Contracting, Inc., Intervenor Plaintiff/Appellee, v. City of Pine Bluff, Defendant/Appellant, David Mitchell Construction, Inc.; David R. Mitchell; Theresa Mitchell; Karl F. Dix, Jr.; Pine Bluff National Bank; Nobel Insurance Company, Defendants. Surety Association of America, Amicus on Behalf of Appellee.
CourtU.S. Court of Appeals — Eighth Circuit

Before WOLLMAN, BOWMAN, and RILEY, Circuit Judges.

WOLLMAN, Circuit Judge.

In this suretyship case, the City of Pine Bluff, Arkansas (City), and Pennsylvania National Mutual Casualty Insurance Company (Penn National) cross-appeal the district court's findings regarding the contours of equitable subrogation, suretyship, and municipal immunity in Arkansas. We conclude that the City must reimburse Penn National for the losses it suffered after the City released funds to a general contractor despite notice of the general contractor's default and a request from the surety to withhold funds pending investigation. We therefore reverse and remand with directions to enter judgment for Penn National.

I.

After severe ice storms littered Pine Bluff with debris in December 2000, the City applied for Federal Emergency Management Agency (FEMA) funds and hired general contractor David Mitchell Construction (Mitchell) to clean up the aftermath. The contract required that the City withhold ten percent of any progress payments to Mitchell as retainage,1 and Mitchell agreed to pass on payment to subcontractors working on the project within ten days of any progress payment from the City. Acting as surety, Penn National underwrote a combined performance and payment bond for the project in the penal sum of $3.5 million.2

As the work progressed, Mitchell and the City began arguing over pricing and Mitchell's hauling of debris allegedly ineligible for FEMA reimbursement. On March 26, 2001, the City terminated its contract with Mitchell and arranged for City employees to complete the work — actions Penn National did not discover until approximately June 5, 2001. On that date, the City returned to Penn National a completed status inquiry form indicating that the contract had been terminated and that the final contract price was "disputed." The form also contained a notation that the City had received some $2.8 million in claims from unpaid subcontractors supplying labor and materials on the project.

By letter dated June 15, 2001, Penn National requested that the City not release any funds allocated to the project without Penn National's written consent. The letter stated that Penn National was investigating unpaid subcontractor claims and asserted potential subrogation rights to contract funds. Despite the letter, however, the Pine Bluff City Council approved a settlement and release with Mitchell a few days later, paying Mitchell and Mitchell's creditors approximately $2 million.3 Although the record does not indicate whether this amount included FEMA monies the City received prior to Penn National's June 15 letter, the City later received FEMA payments totaling approximately $1.8 million. Dist. Ct. Order of Sept. 24, 2002 at 4.

Penn National brought suit against the City and others, originally seeking a declaratory judgment and a bill quia timet.4 Various unpaid subcontractors also intervened in the litigation or instituted separate suit against Penn National on the payment bond. Penn National then investigated the various subcontractor claims as litigation progressed.

Penn National ultimately determined that two subcontractors, Rental Service Corporation (Rental) and Cannon Contracting (Cannon), possessed valid bond claims. Penn National settled with each, albeit in different ways. Rental originally alleged claims totaling $204,492.24, but accepted an unconditional payment of $165,000.00 in full settlement. Cannon originally claimed an unpaid balance of $669,869.93, but accepted an unconditional payment of $400,000.00 plus an escrowed $269,869.93, the release of which is conditioned on Penn National's success in this lawsuit.5 In return, both Rental and Cannon expressly assigned their rights to Penn National.

Penn National then sought to amend its complaint against the City to include requests for declaratory and equitable relief, including equitable subrogation. After consolidating related cases, the district court permitted amendment and simultaneously considered the parties' motions for summary judgment. In sum, the district court rejected the City's contention that it was immune from suit and concluded that equitable subrogation did not furnish Penn National with actionable rights against the City.

II.

We review the district court's summary judgment rulings de novo, Evergreen Invs., LLC v. FCL Graphics, Inc., 334 F.3d 750, 753 (8th Cir.2003), and Arkansas substantive law governs that inquiry. Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78, 58 S.Ct. 817, 82 L.Ed. 1188 (1938); United Fire & Cas. Ins. Co. v. Garvey, 328 F.3d 411, 413 (8th Cir.2003). Before reaching the merits, however, we must consider two threshold arguments.

The City initially contends that Penn National never requested "damages" and has therefore waived any request for monetary relief. We reject this argument because a liberal reading of the amended complaint and a survey of the parties' arguments before the district court reveals that Penn National was pursuing, inter alia, recovery from municipal pockets. See Fed.R.Civ.P. 8(a); Conley v. Gibson, 355 U.S. 41, 47-48, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). Given that the City has consistently argued its immunity from damages, it is difficult to understand how the City can now claim lack of notice regarding Penn National's request or prejudice arising therefrom.

The City also mentions the election-of-remedies rule, asserting that Penn National's request for a declaration of priority to contract funds and to recover the funds from others is necessarily repugnant to a recovery from City coffers. Once again, we cannot fathom why. Designed to prevent double recovery for a single injury, Smart v. Sunshine Potato Flakes, L.L.C. 307 F.3d 684, 686 (8th Cir.2002), the election-of-remedies rule applies when a party possesses two appropriate but inconsistent remedies and deliberately pursues one remedy to the other's exclusion. Van Curen v. Ark. Prof'l Bail Bondsman Licensing Bd., 79 Ark.App. 43, 84 S.W.3d 47, 58 (2002). The rule does not prohibit assertion of multiple causes of action, Sexton Law Firm, P.A. v. Milligan, 329 Ark. 285, 948 S.W.2d 388, 395 (1997), nor does it preclude pursuit of consistent remedies, even to final adjudication, so long as the plaintiff receives but one satisfaction. Kapp v. Bob Sullivan Chevrolet Co., 232 Ark. 266, 335 S.W.2d 819, 821 (1960). Here, the City's contention that Penn National elected only a declaratory remedy is misplaced because Penn National also requested equitable subrogation and sought recovery of specified funds. Seeking a declaration of priority to funds and pursuing judgment in an equal amount reflects no assertion of inconsistent remedies. To establish that the City paid the wrong party and should be liable, the court must first conclude that Penn National was entitled to priority payment.

We next consider the contours of equitable subrogation in suretyship. Equitable subrogation is one of a surety's principal mechanisms for reducing loss. See Prairie State Bank v. United States, 164 U.S. 227, 231, 32 Ct.Cl. 614, 17 S.Ct. 142, 41 L.Ed. 412 (1896) (recognizing surety's subrogation rights as "elementary."). Arising by operation of law, the doctrine permits the surety to acquire and assert the rights of those parties whom the surety pays. Welch Foods, Inc. v. Chicago Title Ins. Co., 341 Ark. 515, 17 S.W.3d 467, 470 (2000).

A prerequisite to equitable subrogation is the surety's full satisfaction of any underlying debt or obligation. American Sur. Co. of New York v. Westinghouse Elec. Mfg. Co., 296 U.S. 133, 137, 56 S.Ct. 9, 80 L.Ed. 105 (1935); St. Paul Fire & Marine Ins. Co. v. Murray Guard, Inc., 343 Ark. 351, 37 S.W.3d 180, 183 (2001). The parties here dispute whether Penn National's settlement with Cannon satisfies this requirement because the settlement involves a partially conditional payment. The district court thought the conditional payment presented a "boot-strapping" problem and concluded that Penn National had not fully satisfied Cannon's claim, but we disagree.

As noted by Justice Cardozo, full satisfaction is necessary because, "[i]f the holding were different, the surety would reduce the protection of the bond to the extent of its...

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