BRUNSWICK NURS. & CON. CTR., INC. v. Great American Ins. Co.

• Decision Date: 09 January 1970
• Docket Number: No. 873.,873.
• Citation: 308 F. Supp. 297
• Parties: BRUNSWICK NURSING & CONVALESCENT CENTER, INC., Plaintiff, v. GREAT AMERICAN INSURANCE COMPANY, Defendant, v. READDICK SHEET METAL WORKS, a partnership consisting of Herbert Readdick, Gilbert L. Readdick, and William S. Readdick, and Enloe, West & Granade, Inc., Third-party Defendants.
• Court: U.S. District Court — Southern District of Georgia

308 F. Supp. 297

BRUNSWICK NURSING & CONVALESCENT CENTER, INC., Plaintiff, v. GREAT AMERICAN INSURANCE COMPANY, Defendant, v. READDICK SHEET METAL WORKS, a partnership consisting of Herbert Readdick, Gilbert L. Readdick, and William S. Readdick, and Enloe, West & Granade, Inc., Third-party Defendants.

No. 873.

United States District Court S. D. Georgia.

January 9, 1970.

Albert Fendig, Jr., Brunswick, Ga., for plaintiff.

John M. Gayner, III, Brunswick, Ga., for defendant.

ORDER ON MOTION FOR SUMMARY JUDGMENT

LAWRENCE, Chief Judge.

Brunswick Nursing & Convalescent Center, Inc. has sued the defendant surety company on a payment and performance bond furnished by Wall Construction Company in connection with the erection of a nursing home at Brunswick. The complaint alleges that the surety is indebted to plaintiff in the amount of $81,950 as a result of defects in the roof flashing and resulting water damage.

Defendant moves for summary judgment claiming that it has been discharged as a matter of law because of a change in the terms of the contract made without its consent and because the surety's risk was increased by the acts of the obligee. The matter has been submitted to the Court on briefs.

Brunswick Nursing & Convalescent Center was incorporated and organized in September, 1963. The record shows that it thereafter entered into an agreement with Associated Nursing Service, Inc. so as to enable Brunswick to obtain funds it needed in excess of a construction loan commitment of $390,000. Associated agreed to subscribe for 14,520 additional shares of the Nursing Center at $10.00 per share and to pay for such stock by paying all construction costs in excess of the first mortgage. The parties to the contract agreed that R. M. Kelley would have sole and exclusive authority to enter into contracts for Brunswick Nursing Center and to do everything necessary to accomplish the construction of the improvements. Kelley was president of Associated. He was also vice-president of the Nursing Center.

The erection of the building was commenced in 1964 pursuant to a contract under which Wall Construction Company agreed to construct the Center for the sum of $494,000. The payment and performance bond which was executed on January 7, 1964, referred to the construction contract dated December 20, 1964. That agreement provided that the building was to be erected in accordance with certain drawings and specifications. It called for bimonthly payments of 95% of the value determined by contract prices of labor and materials incorporated in the work.

Unbeknownst to Great American Insurance Company, certain arrangements and understandings were entered into between Kelley and Wall and Associated. Between February 1 and June 1, 1964, plaintiff drew down ten payments from the lending bank under the construction loan. The certificates for these periodic payments to Wall were approved by Kelley as vice-president of the Brunswick Nursing Center. In net cash they amounted to $359,000. But instead of all of these funds going to Wall Construction Company, 20% of the first two payments (totalling around $200,000) and 10% of the next eight payments was paid by Wall to Associated by check — a total of $78,337.50, which expectedly would have been retained in full by the contractor.

Thus, approximately 19 percent of the total loan commitment was diverted from the contract sums and line item amounts. This, says defendant, necessitates cost cutting by the contractor increasing the surety's risk through possibility of defective construction. The surety further asserts that if Wall had kept this amount it could be applied to the present claim of $81,950 for the defective construction of the building.

Under Georgia law any change in the terms of the contract is considered a novation and discharges the surety in the absence of the latter's consent. The surety is also discharged by any act of the creditor which injures him or increases his risk. Ga.Code § 103-202, 103-203. A novation under the statute is "a change in the nature and terms of the contract." American Surety Company of New York v. Garber, 114 Ga. App. 532, 151 S.E.2d 887. A surety is discharged even though he is not injured by the contract change. Alropa Corporation v. Snyder, 182 Ga. 305, 315, 185 S.E. 352. A change by the obligee and principal in the terms of payments to the contractor from that provided in the building contract operates to discharge the surety. Lowndes Alliance Warehouse Co. v. Greene, 17 Ga.App. 542, 87 S.E. 826; Mauney v. Hartford Accident & Indemnity Co., 68 Ga.App. 515, 23 S. E.2d 490; Blackburn v. Morel, 13 Ga. App. 516, 79 S.E. 492; 72 C.J.S. Principal and Surety § 133b; 17 Am.Jur.2d Contractors Bonds § 31. Such change or alteration in the contract must be material. Johnson v. Brown, 51 Ga. 498; Whitmer Company v. Sheffield, 51 Ga. App. 623, 181 S.E. 119. I find that the diversion of over $68,000 of the construction funds into the pocket of Kelley or Associated was a material change in the contract provisions as to the payment schedule.¹

However, this lawsuit cannot be resolved by resort to abstract principles of the law of suretyship. It is more complicated. As already noted, the agreement between Brunwick Nursing Center and Associated conferred broad powers on Kelley to make binding contracts for the former in connection with the project. As vice-president of Brunswick he approved certificates of periodic payments to the contractor. By secret agreement with the latter percentage kickbacks were then made by Wall to Associated. Difficult questions under the law of agency are evoked by these facts. The increased risk to the surety under § 103-203 must result from an act by the creditor. Is such requirement fulfilled by an unauthorized, surreptitious, self-profiting act of a plenary agent of the obligee? And, viewing the matter as a novation, did Kelley as plaintiff's vice-president or agent possess authority to modify the contract terms as to payment and in doing so to bind Brunswick by a new agreement? The law books seem to furnish no satisfactory answer.

A surety is not discharged by an agreement between the principal and the creditor, such as an extension of the contract, when the person who purports to represent the obligee lacks authority to do so. 72 C.J.S. Principal and Surety § 180. The agreement between Associated and Brunswick did not authorize Kelley to enter into any arrangement with Wall to his own profit and to Brunswick's prejudice. That was the agent's act, not his principal's. There is no evidence that the board of directors or any other officer of Brunswick knew that the dual agent had made an underhand deal with Wall. Unless his knowledge is imputed to Brunswick, plaintiff had none. If an officer or agent while acting for the corporation is himself engaged in perpetrating a fraud upon it, his knowledge is not constructive notice to the corporation. 3 Fletcher Cyclopedia Corporations § 826; Hartford Accident & Indemnity Company v. Hartley, D.C., 275 F.Supp. 610, 618 (affd. 389 F.2d 91). There is an exception to this rule called the "sole representative" doctrine which applies "when the transaction on behalf of the corporation, to which notice is sought to be imputed, is intrusted `solely' to the officer or agent having the knowledge." See 3 Fletcher Cyclopedia Corporations § 827; Fouche & Fouche v. Merchants' National Bank of Rome, 110 Ga. 827, 36 S.E. 256; Taylor v. Felder, 3 Ga.App. 287, 59 S.E. 844. In connection with imputation of knowledge of a fraudulent dual agent to a principal see also 4 A.L.R.3d 224ff.

Kelley's authority to enter into contracts in connection with the project was "sole and exclusive" — indeed, it was so extensive that "the other parties hereto and they included Brunswick Nursing Center shall in no way interfere with the operations...