American Cas. Co., In re

• Decision Date: 08 July 1988
• Docket Number: 87-1125,Nos. 86-1728,s. 86-1728
• Citation: 851 F.2d 794
• Parties: In re AMERICAN CASUALTY COMPANY, AMERICAN CASUALTY COMPANY, Plaintiff-Appellant, (86-1728), Plaintiff-Appellee, (87-1125), v. CITY OF DETROIT, Defendant-Appellee, (86-1728), Defendant-Appellant, (87-1125), Brady Mechanical, Inc., Defendant.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 794

851 F.2d 794

In re AMERICAN CASUALTY COMPANY,

AMERICAN CASUALTY COMPANY, Plaintiff-Appellant, (86-1728), Plaintiff-Appellee, (87-1125), v. CITY OF DETROIT, Defendant-Appellee, (86-1728),

Defendant-Appellant, (87-1125),

Brady Mechanical, Inc., Defendant.

Nos. 86-1728, 87-1125.

United States Court of Appeals, Sixth Circuit.

Argued Oct. 22, 1987.

Decided July 8, 1988.

Paul A. Callam (argued), Jenkins, Augsperger, Reebel & Zameck, Southfield, Mich., Merle R. Jenkins, for American Cas.

Alberta P. Whitfield, City of Detroit Law Dept., Detroit, Mich., Charles A. Moore (argued), for City of Detroit.

Before LIVELY and WELLFORD, Circuit Judges; and BROWN, Senior Circuit Judge.

WELLFORD, Circuit Judge.

Plaintiff, American Casualty Company ("American"), appeals from a judgment holding it liable as surety on a performance bond for two construction contracts between Brady Mechanical, Inc. ("Brady") and the City of Detroit ("City"). In a consolidated case, the City of Detroit as defendant and third party plaintiff, appeals the district court's denial of its claim for attorney fees and additional costs. Two contracts for the development and refurbishment of a housing project in Detroit were awarded in May of 1982 to Brady. American issued performance and payment bonds to the City to guarantee the satisfactory completion of the Brady contracts.

The housing project consisted of numerous buildings, heated by means of a centralized steam plant. The steam was distributed from the plant through 10" high pressure steam lines to various substations located throughout the project, where the pressure was reduced and the steam subsequently distributed to individual buildings. Brady's contract called for replacement of the main high pressure line and various low pressure lines which were old and in a state of serious disrepair, and for the rerouting of low pressure lines away from certain buildings slated to be demolished as part of the renovation project.

After Brady's commencement of its work under the contracts in the spring of 1982, Brady began to experience problems and disputes. In order to perform its work, Brady required certain periods of time to shut down the lines and cut off the steam heat source. According to Brady, it was understood that the steam would be shut down throughout the entire summer of 1982. According to the City, however, it was understood that the steam would be shut down only during limited periods, not for the entire summer, and certainly not during the winter, because the steam lines were the source for both heat and hot water in the housing project. Eventually Brady attempted to construct a temporary steam line for use while the primary steam line was shut down. The temporary steam line was ineffective. The parties dispute about responsibility for the cost of the temporary lines. Brady contends that due to problems with the existing structures, it was prevented from constructing adequate temporary lines. The City contends that Brady used an inadequate design for the temporary system. The memorandum of a conference between Brady and the City, dated April 12, 1982, states: "Utility service (hot water) must be maintained with minimal disruption to area residents during the construction activities."

In addition to the problems about shut downs, disputes between the City and Brady arose with respect to payment of Brady's invoices. Early during the course of the project, representatives of Brady had dealt with Odell Jones, the construction manager. When it appeared that extra work would be necessary, Jones simply instructed Brady to add the cost to various line items on Brady's application for payment. This happened on several occasions. When the City realized what was occurring, it put a halt to the practice and required Brady to comply thereafter with the contract provisions requiring written change orders. The City, moreover, undertook a review of the initial applications for payment which had included charges for extra work. As a result of this review and examination of records, payments to Brady were delayed. There were other delays in payments to Brady, which the City contends were the result of Brady's failure to supply adequate documentation in conjunction with applications for payment. Of the nineteen payments made during the construction period, only seven were made approximately on time in accordance with the contract requirements that they were to be made at approximate thirty day intervals. Six payments were made two months after receipt of Brady's application for payment. The remainder were made about three months following receipt of Brady's application for payment. Brady maintains that the severe effect on its cash flow of these payment delays threatened its economic survival, and that the City used Brady's financial distress to coerce submission to unreasonable change orders which reduced its legitimate claims for extras.

The mechanical engineer designer of the project, Ellis, Naeyaert, Genheimer Associates, Inc. ("Ellis"), which was retained by the City for assistance in review of the progress and quality of Brady's work, reviewed requests for payment. The Ellis firm questioned Brady's method of compacting the backfill of pipe trenches. Subsequent tests by a geotechnical engineering firm demonstrated that based on the random testing, substantial evidence existed that compaction requirements and backfill quality requirements were not being met. The City instructed Brady to correct these alleged defects. Brady denied the charges, refuting its non-conformance and set forth conditions with which the City was expected to comply before Brady would or could complete the project. The City notified Brady that its conditions were unacceptable and that it intended to notify American, the bonding company. Brady ceased operations on the project in September of 1983 and abandoned the site, leaving some of its equipment and unused materials ordered on the job.

During negotiations between the City, Brady and American, the latter party filed suit in the district court seeking a declaratory judgment with respect to its liability on the performance bonds for the contracts. The City responded by a counterclaim, seeking damages for Brady's breach of contract, impleading Brady as a third party defendant.

At the conclusion of a bench trial, the district court held that Brady, rather than the City, had breached its contract through defective work and by abandoning the work in violation of its contract without justification; that the City was entitled to damages which were supported by evidence in the amount of $1,207,343 and was further entitled to costs and attorney fees. The district court subsequently reduced the judgment to $709,504.42, based upon evidence that approximately $500,000, consisting of retainage and unearned funds from the two contracts, was in the possession of the City and should be credited against the judgment. In connection with the finding that Brady, rather than the City, had materially breached the contracts, the district court held that the City's delays in making payments to Brady and limitations of steam shutdowns were not a material breach of the contract nor did the City prevent or interfere substantially with Brady's performance. The district court also held that Brady's remedy in the event of a material breach by the City, had there been such a breach, was to pursue the provisions of p 10 of the general conditions of the contract which provided for dispute resolution.

With respect to that portion of the judgment concerning attorney fees and costs, the court directed that a magistrate conduct a hearing to determine the appropriate amount to be paid to the City for its legal costs. Following a hearing, the magistrate determined that the City was entitled to an award of $235,223.75 for attorney fees and $275,390.61 in addition for costs. On American's motion, the district court set aside the magistrate's award and substituted only "statutory costs" to the City, on the basis that the City had filed its application for attorney fees too late under the applicable local rules ¹. The district court also held that the City had failed to plead specifically its claim for attorney fees in compliance with Rule 9(g) of the Federal Rules of Civil Procedure, citing also in support of its decision Michigan cases dealing with indemnification, Hayes v. General Motors Corp., 106 Mich.App. 188, 308 N.W.2d 452 (1981), and Harbenski v. Upper Pennisula Power Co., 118 Mich.App. 440, 325 N.W.2d 785 (1982). The district court ruled that the City could not recover attorney fees and costs from American under its indemnity agreement.

American appeals from the district court's judgment of liability and its assessment of damages for breach of contract on the part of Brady. The City appeals the district court's denial of attorney fees and costs. We affirm in part and remand as to damages.

I. AMERICAN'S APPEAL

A. Liability

Because jurisdiction in this case is based upon diversity of citizenship, state law governs matters of substance while federal law dictates procedural issues. Erie v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). Consequently, we look to Michigan law to determine whether the issue of whether there was a material breach of contract is one of fact or law. See Adams Apple Distributing Co. v. Papeleras Reunidas, 773 F.2d 925, 929 (7th Cir.1985). Under Michigan jurisprudence, whether there has been a substantial performance of a contract or, to the contrary, a material breach, is a question of fact for the trier of fact. Pratt v. Van Rensselaer, 235 Mich. 633, 209 N.W. 807 (1926). A finding by the district judge acting as the trier of fact that a party prevented or rendered impossible performance by another party to the contract "will not be reversed unless the evidence clearly preponderates in the opposite direction." Kiff Contractors, Inc. v. Beeman, 10...