U.S. v. Seaboard Sur. Co.

• Decision Date: 27 April 1987
• Docket Number: Nos. 379,487,D,s. 379
• Parties: 34 Cont.Cas.Fed. (CCH) 75,340, 25 Fed. R. Evid. Serv. 169 UNITED STATES of America, Plaintiff-Appellee, Cross-Appellant, v. SEABOARD SURETY COMPANY and the Home Insurance Company, Defendants-Appellants, Cross-Appellees. SEABOARD SURETY COMPANY and the Home Insurance Company, Defendants-Third-Party- Plaintiffs, v. JOSEPH MORTON COMPANY, INC., Joseph J. Battaglia, and the Perkins & Will Partnership, Third-Party-Defendants. ockets 86-6145, 86-6163.
• Court: U.S. Court of Appeals — Second Circuit

Page 956

817 F.2d 956

34 Cont.Cas.Fed. (CCH) 75,340, 25 Fed. R.

Evid. Serv. 169

UNITED STATES of America, Plaintiff-Appellee, Cross-Appellant, v. SEABOARD SURETY COMPANY and the Home Insurance Company,

Defendants-Appellants, Cross-Appellees.

SEABOARD SURETY COMPANY and the Home Insurance Company, Defendants-Third-Party- Plaintiffs, v. JOSEPH MORTON COMPANY, INC., Joseph J. Battaglia, and the

Perkins & Will Partnership, Third-Party-Defendants.

Nos. 379, 487, Dockets 86-6145, 86-6163.

United States Court of Appeals Second Circuit.

Argued Nov. 25, 1986.

Decided April 27, 1987.

Peter R. Ginsberg, Asst. U.S. Atty. for E.D.N.Y., Brooklyn, N.Y. (Andrew J. Maloney, U.S. Atty. for E.D.N.Y., Robert L. Begleiter and Thomas B. Roberts, Asst. U.S. Attys., of counsel), for plaintiff-appellee, cross-appellant.

William W. Thompson, Jr., Alexandria, Va., (Michael L. Thomas, Hudson, Creyke, Koehler & Tacke, of counsel), for defendants-appellants, cross-appellees.

Before MANSFIELD, ^* PRATT, and ALTIMARI, Circuit Judges.

GEORGE C. PRATT, Circuit Judge:

This appeal arises from the decade-long effort to expand the federal government's facilities for research into animal diseases at Plum Island, a small, federally owned island just off the eastern tip of Long Island's north fork. The appellants, Seaboard Surety Co. and The Home Insurance

Co. ("the sureties"), provided a bond pursuant to the Miller Act, 40 U.S.C. Sec. 270a et seq., guaranteeing the performance of The Joseph Morton Company ("Morton"), which was the general construction contractor on that project. The sureties were held liable based on Morton's breach of its contract with the United States for the Plum Island expansion. On appeal they challenge the jurisdiction of the district court, the admission of certain evidence of bad faith on the part of the sureties, and the calculation of the prejudgment interest awarded by the trial court.

BACKGROUND

In the early 1970s, the Department of Agriculture ("DOA"), which operates the government's Plum Island Animal Disease Center, began making plans to expand that facility. The first step was to develop criteria to be used in the design and eventual construction of the new buildings. Central to those criteria, and to subsequent events, was the goal of insuring that Plum Island be operated as a "bio-containment" facility; that is, that the extremely dangerous strains of animal diseases being studied not become hazardous to the surrounding environment. It was thus necessary to design air-tight buildings, using sophisticated ventilation and filters.

Once the criteria had been established, the government in 1973 hired Perkins & Will, an architectural and engineering firm, to prepare plans and specifications for the proposed facilities which would meet the design criteria. The Perkins & Will designs were accepted by the government and became the basis for an invitation for bids issued by the DOA on August 4, 1976. The low bid was submitted by Morton, which on September 24, 1976, was awarded the contract for $10,049,000, subsequently increased to $10,689,000.

Construction on the project began in March 1977, and was almost immediately beset by problems. On March 23, 1977, the government issued the first in what quickly became a series of "cure notices", which put a contractor on notice that some aspect of its performance is unsatisfactory and which require certain specified corrective action to be taken by a fixed date.

Throughout the time Morton was on the job, there were various problems that culminated on February 14, 1979, with the issuance of a final, 55-page cure notice, detailing many inadequacies in Morton's work, including defective construction, poor maintenance, and undue delays. Unsatisfied with Morton's response, the government terminated Morton for default on March 1, 1979.

At the time of termination, the government had approved payment to Morton, on an as-completed basis, of $9,048,060, of which it had actually paid $8,231,260. The sureties claim that approximately 85% of the total project was completed, since the amount approved for payment represented 85% of the total contract price. As the government notes, however, none of the work on such a project is officially accepted or approved until the entire project is complete.

In any event, the government next turned to the sureties and requested that they step in and complete the project. After offering to complete the project using Morton, an option the government understandably rejected, the sureties, in letters dated April 13, 1979 and May 2, 1979, declined to complete. As we will discuss more fully infra, a surety has the option, when its principal is default-terminated, of either coming in and completing the project or paying the government its damages, essentially the cost of completion. Trinity Universal Insurance Company v. United States, 382 F.2d 317, 321 (5th Cir.1967), cert. denied, 390 U.S. 906, 88 S.Ct. 820, 19 L.Ed.2d 873 (1968). A surety may, of course, also challenge the propriety of the default termination, thereby, in effect, denying liability on the bond.

This latter course was followed by the sureties in this case. On May 30, 1980, Seaboard sent to Mr. Calvin Persinger, the government's contracting officer on the project, a letter stating, "Seaboard Surety Company ... shares the position of its principal ... that the default determination After the sureties declined either to complete the project or pay the cost of completion, the government hired Lasker-Goldman Corporation, a joint venture of Lasker-Goldman Company and Goldman Associates, as "construction manager" to oversee the anticipated completion and assess the cost and magnitude of completing the work. As a result of Lasker-Goldman's assessment and a shortfall in funds available for completion of the project, it was eventually decided that two of the buildings covered by the original contract, a diagnostic research laboratory (DRL) and a vaccine research laboratory (VRL), would not be completed.

                was unwarranted and that the contract was not breached by Morton, but by the Government.  Accordingly, Seaboard denies any liability under its performance bond."    Apparently, Seaboard's denial of liability spoke for its co-surety, The Home Insurance Co., and there is no issue raised as to any difference in the positions of the two sureties for purposes of this appeal
                

In December 1980, congress appropriated an additional $10,100,000 for completion of the project, and by 1985, it had been finished, except for the VRL and DRL. The cost of completion was almost as high as the initial cost of the project, despite the fact that 85% of the original appropriation had been paid to Morton, and despite the fact that two of the five buildings planned were never completed. The government attributes the high cost of completion to inflation, poor work by Morton that had to be corrected if the facility was adequately to contain the viruses being studied, and deterioration of the material left on the site, where it sat, apparently unattended, from March 1979, when Morton was terminated, to sometime in 1980, when Lasker-Goldman took over. The sureties claim that Lasker-Goldman was vastly overpaid (over $4,600,000) for its role as construction manager. In any case, the DOA ultimately spent in the neighborhood of $20 million to build 60 percent of a project initially budgeted at $10,689,000.

As might be expected, these events gave rise to multiple legal proceedings. In March 1980 Morton filed for bankruptcy under Chapter 11, a petition that was dismissed in April 1983 when the bankruptcy court refused to discharge Morton. In 1980 Morton, its principal Joseph J. Battaglia, and a Morton employee were indicted in connection with the submission of fraudulent documents to the DOA as part of a change order Morton submitted on the Plum Island project. In April 1981 they were convicted of conspiracy to defraud the United States, in violation of 18 U.S.C. Sec. 371, making false statements in the change order in violation of 18 U.S.C. Sec. 1001, and obstructing justice, 18 U.S.C. Sec. 1503. These convictions were upheld on appeal. United States v. Joseph Morton Company, et al., No. CR-80-413 (E.D.N.Y. April 24, 1981), aff'd, Nos. 81-1174, -1233 (2d Cir. Jan. 11, 1982).

Morton took the offensive on March 1, 1982, filing a complaint in the court of claims (now the claims court), seeking determinations that it had not breached its contract with the United States and that the termination was one "for the convenience of the government." On the same day, the government filed the instant suit against the sureties, seeking to enforce their obligations based on Morton's breach.

In July 1983, while proceedings in the instant suit were stayed, the claims court ruled that the criminal conviction of Morton, even though it came after the termination, justified the government's conduct as a default termination. Joseph Morton Co. v. United States, 3 Cl.Ct. 120 (1983). This holding was affirmed by the federal circuit, Joseph Morton Company, Inc. v. United States, 757 F.2d 1273 (Fed.Cir.1985). Neither the claims court nor the federal circuit reached the issue of whether termination was justified based on Morton's poor performance. Id. at 1275.

Following the resolution of Morton's claims court action, proceedings went forward in the instant case. After extensive discovery, a jury trial began on May 7, 1986. The major focus of the case was Morton's performance from 1977 to 1979, with the government seeking to show that Morton had flagrantly breached the contract For their part, the sureties sought to establish that while Morton's work was far from perfect, termination due to deficient performance had not been justified. They also attempted to show that the original Perkins & Will design had been fundamentally flawed, rendering performance by Morton (in constructing a functioning bio-containment facility) impossible, and...