Continental Bank & Trust Co. v. American Bonding Co.
| Decision Date | 03 October 1979 |
| Docket Number | No. 78-1894,78-1894 |
| Citation | 605 F.2d 1049 |
| Parties | CA 79-3241 CONTINENTAL BANK & TRUST COMPANY, as Trustee for the Lot Purchasers, Appellee, and Calwood Leisure Association, Inc., Donald L. Ewens, Harold D. Barnhard, Appellees, v. AMERICAN BONDING COMPANY, Appellant, v. CALWOOD LEISURE ASSOCIATION, INC., Appellee, v. Richard D. WALKER, John W. Markham, Systems Leisure Properties, Inc., and Camp Leisure Lake, Inc., Appellees. |
| Court | U.S. Court of Appeals — Eighth Circuit |
David M. Duree, Leritz & Reinert, Francis L. Kenney, Jr., St. Louis, Mo., for appellant.
John R. McFarland, Joseph A. Kral (argued), and Kenneth W. Bean of Coburn, Croft, Shepherd, Herzog & Putzell, St. Louis, Mo., and Robert C. Smith, Jr. (argued), and Bruce H. Beckett of Smith, Lewis & Rogers, Columbia, Mo., on brief for appellees.
Before ROSS, STEPHENSON and HENLEY, Circuit Judges.
Defendant American Bonding Company (American, the surety) denies liability on five performance bonds which it executed in May 1973 in connection with a land development project, Leisure Lake Subdivision, in Callaway County, Missouri. The bonds guaranteed the performance by Systems Leisure Properties, Inc. (Systems, the principal) of obligations Systems had undertaken in five construction contracts to complete specified improvements on the project. The improvements were not completed, and plaintiff, Continental Bank & Trust Company (Continental, the bank), one of the named obligees on the bonds, sought recovery from the surety. The district court 1 awarded plaintiff the full face amount on each of the bonds, and the surety has appealed. We affirm in part, reverse in part, and remand for additional proceedings.
The promoters of the project were Richard D. Walker and John W. Markham. They were assisted by Walker's attorney, Gary Goldman. The promoters and Goldman formed the following organizations: Camp Leisure Lake, Inc. (Camp Lake Inc., the corporate developer), Camp Leisure Lake, Ltd. (Camp Ltd., the partnership developer) and Systems. 2
Camp Lake Inc. and Systems were each owned by Walker (80%) and Markham (20%). Camp Ltd. was owned by Walker (64%), Markham (16%) and Camp Lake Inc. (Walker and Markham) (5%). Gary Goldman was the limited partner of Camp Ltd., owning a 15% Partnership interest. However, Goldman's liability was limited to his $150 capital contribution, and he had no obligation to make additional contributions. Thus for all practical purposes, all of these entities were owned by Walker and Markham. 3
Leisure Lake Subdivision was to be developed as a recreational area and campsite, and the promoters planned to use land-holding trusts as the vehicle through which to purchase the property and then subdivide and sell it to individual lot buyers. Accordingly, three subdivision trusts were created in August 1972 and May 1973. The original landowners accepted a "first beneficial interest" in each trust, and Walker, Leisure Property Systems, Inc. and Camp Ltd. held second or "final beneficial interests." Plaintiff, Continental, agreed to act as trustee, which involved holding legal title to the land, executing installment sales contracts to lot buyers and collecting the lot buyers' installment payments. The trust estate consisted of the land and the proceeds of sale received from the lot buyers.
The promoters originally envisioned that improvement of the property would proceed simultaneously with sales to lot purchasers. Rather than rely upon lot buyer payments as the source of financing for the improvements, the promoters arranged for a loan from the Continental Bank for this purpose. On May 18, 1973, Continental, on its own behalf and as agent for the Bank of California, entered into a loan agreement with Camp Lake Inc. committing a total of $1,200,000 to the project. 4
Camp Lake Inc., as borrower, was the only entity entitled to obtain the loan proceeds, which it could draw upon request. Apparently monthly requests were anticipated. However, disbursements were limited in amount to the "maximum borrowing base" at the time of each request, a figure tied to a percentage of the revenue coming into the Leisure Lake Subdivision trusts from lot buyers and to similar funds attributable to another Missouri project, Lake Sherwood A. 5
Systems was the Walker/Markham entity charged with improving the property. 6 In order to enhance the property's attractiveness to lot buyers, the promoters decided to obtain bonds for certain major improvements. 7 While all improvements were to be financed by the loan proceeds, only certain improvements were to be bonded. Furthermore, the bonds were issued without a "set-aside letter" which would have required the lender or developers to set aside or designate specific funds for construction of the bonded improvements. In the absence of a set-aside or similar provision, Camp Lake Inc. was free to allocate the loan funds however it saw fit to implement the purpose of the loan, i. e., "for developing and promoting the sale of lots."
On May 11, 1973, American as surety executed five bonding agreements naming Systems as principal and Continental and Camp Ltd. as obligees. 8 The bond agreements incorporated five construction contracts 9 in which Systems undertook "to complete as soon as possible" the "necessary" water system, lake construction, sewer system and four comfort stations, road system, swimming pool and pavilion for the property. At the same time, Walker, Markham, Camp Lake Inc. and Systems agreed to indemnify the surety in the event of its liability for the principal's default.
Continental had disbursed over $700,000 of the loan proceeds when, in August 1973, the promoters realized that lot sales were not progressing because prospective buyers were reluctant to purchase before completion of the improvements. Two hundred nineteen lots had been sold, but the costs of promoting the project had apparently become prohibitive. Mr. Walker decided to cease all sales efforts until the improvements had been constructed, on the theory that a greater percentage of prospective buyers would then purchase lots. He informed Continental of this decision, and lot sales ceased by September 1973. 10
The banks then participated with the developers in extensive efforts to obtain refinancing for the project so that funds would be available for construction of the improvements. Under the original loan agreement, the lending limit was tied to revenue from lot buyers. Thus when sales ceased, the "maximum borrowing base" for loan disbursements stabilized, and additional Continental loan funds were not available for development. Systems stopped work on the improvements shortly thereafter.
By January 1975 refinancing negotiations had broken down. 11 Systems had not resumed work on the improvements, and subcontractors had filed mechanics' liens. In February 1975 Continental notified American that Systems was in default.
The surety concedes that its principal did not complete the bonded improvements but nevertheless denies liability on two bases. First, American raises defenses which it contends Systems could have raised in a suit on the underlying construction contracts. American relies on the doctrine that the surety's liability is measured by that of the principal, and if the principal is discharged from its bonded obligation, the surety's liability terminates. Bolivar Reorganized School Dist. No. 1 v. Am. Surety Co. of N. Y., 307 S.W.2d 405, 410 (Mo.1957); Watkins v. Lankford, 363 Mo. 1046, 1053, 256 S.W.2d 788, 793 (1953).
In addition, American raises defenses on the bonds themselves, contending that the bonded obligations were wrongfully increased in scope, or, in the alternative, that Systems (and therefore American) had been released from any liability for default. We consider these issues seriatim.
American first alleges that the construction contracts were too vague and indefinite to be enforced, as they required Systems only to complete "the necessary" improvements without reference to actual plans and specifications. "A promise to be consideration for the promise of another must be definite and certain." Burger v. City of Springfield, 323 S.W.2d 777, 783 (Mo.1959). However, indefiniteness can be cured by the subsequent conduct of the parties, and as in this case, once an indefinite promise has been partly or wholly performed, the contract becomes sufficiently clear and binding upon all parties. 1 WILLISTON ON CONTRACTS § 49 (1957). Accord, Phillips Petroleum Co. v. Buster, 241 F.2d 178, 183 (10th Cir.), Cert. denied, 355 U.S. 816, 38 S.Ct. 18, 2 L.Ed.2d 33 (1957); Veterans Linoleum & Rug, Inc. v. Tureen, 432 S.W.2d 372, 375 (Mo.App.1968). 12
Next American asserts that the construction contracts were void for lack of consideration. Continental, Camp Lake Inc. and Systems were parties to these agreements, and Continental merely agreed to accept and execute sales contracts when these were presented by Camp Lake Inc. American urges that the subdivision trust agreements already required Continental to perform this service, and that a promise to perform a preexisting duty does not constitute consideration for a return promise. See J. Calamari and J. Perillo, THE LAW OF CONTRACTS §§ 61, 62 (1970).
This contention did not prevent American from accepting over $4,600 in premiums, and on this basis the district court found sufficient consideration to hold the surety liable for its own absolute and unconditional guaranty. Furthermore, by virtue of the developers' assignments of their beneficial interests in the 1972 and 1973 trust agreements, only Continental was entitled to the benefits derived from execution of sales contracts under the terms of the trusts. It is doubtful whether in these circumstances Continental in fact owed a preexisting duty to any third person to execute sales contracts. Finally, in the...
To continue reading
Request your trial
-
Old Republic Ins. Co. v. United States
...increase in the surety's risk has been demonstrated here and the surety cannot be discharged. See Continental Bank & Trust Co. v. American Bonding Co., 605 F.2d 1049, 1056-57 (8th Cir.1979) (surety liable on bond where it failed to establish in the record that modification materially increa......
-
Coalition to Preserve Educ. on the Westside v. School Dist. of Kansas City, WD
...or wholly performed, the contract becomes sufficiently clear and binding upon all parties." Continental Bank and Trust Co., et al. v. American Bonding Co., et al., 605 F.2d 1049, 1054 (8th Cir.1979). In the instant case, as noted, the District's contention that the contract lacked sufficien......
-
Shelton v. Consumer Prod. Safety Comm'n
...them, that filed the amended pleadings is unpersuasive and not supported by the law. See, e.g., Continental Bank & Trust Co. v. American Bonding Co., 605 F.2d 1049, 1055 n.13 (8th Cir. 1979) (holding that defendant could not revive waived right to jury trial because opposing party's amended......
-
Fireman's Fund Ins. Co. v. U.S.
...626 F.2d 517 (6th Cir.1980), Argonaut Ins. Co. v. Town of Cloverdale, 699 F.2d 417 (7th Cir.1983), Continental Bank & Trust Co. v. Calwood Leisure Ass'n, Inc., 605 F.2d 1049 (8th Cir.1979), and from the Fifth and Ninth Circuits applying the rule to federal government contracts, see St. Paul......