BOARD OF ED. CENT. SCH. DIST. NO. 2 v. Aetna Cas. & Sur. Co.
| Decision Date | 15 December 1971 |
| Docket Number | Docket 35086.,No. 24,24 |
| Citation | 453 F.2d 264 |
| Parties | The BOARD OF EDUCATION CENTRAL SCHOOL DISTRICT NO. 2 OF the TOWNS OF BEDFORD ET AL., Plaintiff-Appellant, v. AETNA CASUALTY AND SURETY CO., Defendant-Appellee. |
| Court | U.S. Court of Appeals — Second Circuit |
Robert N. Shiverts, New York City (Louis E. Yavner, New York City, of counsel), for plaintiff-appellant.
David A. Trager, New York City (Max E. Greenberg and George N. Toplitz, New York City, Max E. Greenberg, Trayman, Harris, Cantor, Reiss & Blasky, New York City, of counsel), for defendant-appellee.
Before MOORE, SMITH and HAYS, Circuit Judges.
This is an appeal by the Board of Education Central School District No. 2, of the Towns of Bedford, New Castle, North Castle and Pound Ridge (the Board), from a judgment granting the Aetna Casualty and Surety Co.'s (Aetna) motion for summary judgment dismissing the complaint and denying the Board's cross-motion for summary judgment.
The sole issue on this appeal is whether the District Court was correct in stating that Aetna could not be liable on any cause of action brought by the Board because New York law absolves a surety of all liability on a performance bond once it has been determined that the principal's construction contract was illegal because it was not let in conformity with the New York State competitive bidding statute.1 For the reasons stated below, we find that the District Court was in error. The judgment is therefore reversed insofar as the Board's complaint was dismissed and the case is remanded for proceedings consistent with this opinion.
In November 1963 the Board published an advertisement requesting bids for the general construction and site work for its Middle School.2 Six bids were submitted. The three lowest bids were as follows:
Contractor Base Bid
Rand Construction Co. $2,276,800
Fabrizio & Martin, Inc. $2,326,900
Walter A. Stanley Construction Co. $2,549,000
The contract was awarded to the Rand Construction Co. in January 1964. Subsequently, the Rand Co. asked to withdraw its bid because it had made an error in computation. The Board consented.
The contract was then awarded to Fabrizio & Martin, Inc. (Fabrizio), the next lowest bidder. However, Fabrizio also discovered a mathematical error in its computation, which it claimed had been understated in the amount of $171,000. Fabrizio also asked either to withdraw or correct its bid.
Fabrizio's request was followed by a series of meetings, letters and telephone calls between representatives of Fabrizio and the Board during which it was decided to change the plans and specifications to compensate for the error. The changes were made with the consent of the Board, the Board's attorney, the architect and Fabrizio. To effectuate the changes, a change order was signed on March 17, 1964. The Board, however, did not submit the change order to the State Education Department for approval, as it was required to do, until June 1967.
At the same time that the change order was signed, the Board and Fabrizio entered into a general construction contract which incorporated the change order. Pursuant to the contract, Fabrizio as principal, and Aetna as surety, executed a performance bond and delivered it to the Board as obligee. Thereafter Fabrizio commenced work on the school. The pertinent provisions of the bond in issue before us are:
On March 23, 1965, as a result of a dispute between the Board and Fabrizio, a supplemental agreement was executed. Aetna, as surety, took part in the discussions leading up to this agreement and consented to it.
About one year later, Fabrizio notified the Board of its intention to cease further construction of the school. The Board responded by declaring Fabrizio in default. Aetna was notified of the default and was requested to make arrangements to complete the work. The request was refused. Subsequently, the Board relet the unfinished portions of the work to other contractors who completed the school.
Fabrizio commenced an action against the Board in the Southern District of New York, Docket No. 66 Civ. 2935, seeking to recover damages for alleged breach of contract, detention of materials and for the value of services rendered in the construction of the school. The complaint stated six causes of action. Each one of them was premised on an alleged breach of contract or on a theory of quantum meruit. Prior to serving or filing its answer the Board moved to stay the action pending arbitration. Argument on this motion was before Judge McLean, United States District Judge for the Southern District of New York.3
In ruling on this motion, Judge McLean found that the effect of the change order on the original plans and specifications was such that the Board should have requested new bids on what was essentially a new contract in order to conform to the requirements of the New York State competitive bidding statute. Since all would-be bidders were denied an opportunity to submit their bids, the contract was held to be illegal and thus invalid. The Board's motion to compel arbitration was therefore denied on the ground that the arbitration clause in the invalid contract was also invalid. No appeal was taken from this decision. The decision is unreported but is set forth in the appellant's appendix, 48a-73a.
After Judge McLean's decision was rendered, the Board served its answer to Fabrizio's complaint. The answer contained seven affirmative defenses and two counterclaims. In pertinent part, the Board's defenses alleged the invalidity of the contract and cited Judge McLean's decision. One counterclaim sought recovery of all money paid to Fabrizio and the other sought damages caused by Fabrizio's breach of contract. The Board then moved for summary judgment dismissing the complaint and granting the relief sought in the counterclaims. Argument on this motion was presented to Judge Ryan, District Judge, for the Southern District of New York.4
In dismissing Fabrizio's complaint, Judge Ryan first stated that he agreed with Judge McLean's ruling that the contract, having been awarded in violation of the New York State competitive bidding statute, was invalid. He then held, on the basis of the New York Court of Appeals decision in Gerzof v. Sweeney, 22 N.Y.2d 297, 292 N.Y.S.2d 640, 239 N.E.2d 521 (1968), that Fabrizio could not base any recovery against the Board on the invalid contract whether it alleged breach of contract or quantum meruit but that the Board was entitled to recover such damages as it might establish.
A trial was ordered to determine the extent of the Board's recovery. This action is presently pending. Fabrizio appealed from the dismissal of three of its six causes of action. The appeal was dismissed because it was not an appeal from a final order.
With respect to the Board's Fourth and Fifth counterclaims, which Judge Ryan characterized as the "crux" of the litigation, he held that "Under the philosophy of Gerzof v. Sweeney, supra, while defendant may not under the Fourth counterclaim recover the entire amount it has so far paid Fabrizio, it may well recover from Fabrizio some of this money under the `Gerzof' guidelines," but he also held that the Court ". . . would be loath here to compel the repayment by plaintiff of over two million dollars without an inquiry into the merits." (Fabrizio, supra, 290 F.Supp. at 956).
Thus far the Fabrizio-Board litigation has produced two decisions (1) arbitration has been denied because the construction contract containing the arbitration clause was illegal; and (2) Fabrizio cannot recover from the Board under the illegal contract. Still open for decision is Fabrizio's liability to the Board. It was to cover any such potential liability that the Board required and Fabrizio sought and paid for Aetna's monetary guarantee of prompt and faithful performance.
The Board, seeking to hold Aetna liable on its performance bond, commenced the instant action in the Westchester County Supreme Court of New York. A petition by Aetna pursuant to 28 U.S.C. § 1332 to remove the action to the Federal Court was granted. As noted, the Board's complaint was dismissed on Aetna's motion for summary judgment on the theory that Aetna, as surety, was absolved of all liability because the construction contract was invalid. This ruling is at issue here.
The Trial Court on Aetna's motion for summary judgment concluded that since the March 17, 1964 contract between the Board and Fabrizio "was null and void, the surety Aetna is not liable on a performance bond of that same contract." The Board of Education, Central School District No. 2, etc., v. Aetna Casualty and Surety Co., Docket No. 68 Civ. 1162 . For New York law, the Court relied on Village of Medina v. Title Guaranty &...
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