Continental Ins. Co. v. City of Virginia Beach

• Decision Date: 29 November 1995
• Docket Number: Civ. A. No. 2:95cv212.
• Citation: 908 F. Supp. 341
• Court: U.S. District Court — Eastern District of Virginia
• Parties: CONTINENTAL INSURANCE CO. Plaintiff, v. The CITY OF VIRGINIA BEACH, Defendant.

908 F. Supp. 341

CONTINENTAL INSURANCE CO. Plaintiff, v. The CITY OF VIRGINIA BEACH, Defendant.

Civ. A. No. 2:95cv212.

United States District Court, E.D. Virginia, Norfolk Division.

November 29, 1995.

Timothy Gerard Clancy, Cumming, Hatchett, Moschel, Patrick & Clancy, Hampton, VA, Wendy Ann Hartmann, Robert F. Carney, Whiteford, Taylor & Preston L.L.P., Baltimore, MD, for Continental Insurance Company.

Charles Bernard Miller, Assistant City Attorneys, Richard Jay Beaver, Office of City Attorney, Virginia Beach, VA, for City of Virginia Beach.

OPINION AND FINAL ORDER

CLARKE, District Judge.

Continental Insurance Company filed this action against the City of Virginia Beach alleging that its duty as surety under a performance bond was discharged when the City materially deviated from the contract between the City and the construction contractor. A bench trial was held on October 18-19, 1995. Instead of presenting closing arguments, both parties agreed to submit written post-trial memorandums. Based on the evidence presented and the parties' memorandums, the Court makes the following findings of fact and conclusions of law pursuant to Rule 52 of the Federal Rules of Civil Procedure. For the reasons set forth below, judgment is GRANTED for the Plaintiff for $252,720.68 (the $234,827.63 stipulated to by the parties plus consulting fees minus the amount Plaintiff agreed it owed Defendant at trial). The Court DENIES all other claims, including the prejudgment interest requested by the Plaintiff, the liquidated damages sought by the Defendant, and the declaratory relief sought by the Plaintiff.

I. FACTUAL AND PROCEDURAL HISTORY

On November 8, 1991, the Defendant, the City of Virginia Beach (City), contracted with Utility Builders, Inc. (Utility) for the construction of certain sewer and water lines in an area of Virginia Beach known as Lynnwood/Michaelwood. At this time, Plaintiff, Continental Insurance Co. (Continental), as the surety for the construction contract, executed a performance and payment bond in favor of the City for $1,336,863.00, the contract amount. Under the Original Contract, the construction project was to be completed by September 4, 1992.

Utility began the construction work in November of 1991. The contract provided for a monthly payment to the contractor during the course of the project. Each month, Utility submitted monthly requisitions for payment to the City. The City Inspector for the Lynnwood/Michaelwood project, Barry Turner, then determined the amount of work for which Utility should be paid. Mr. Turner did this by verifying the amount of work Utility submitted as having been installed. Mr. Turner approved payment on the basis of the number of feet of various types of sewer pipe that were installed or the number of manholes installed without regard to its having been inspected or tested.

The measurement for payment, which was signed by Mr. Turner and the contractor's representative, was then submitted as part of the Contractor's Estimate to Mr. Clyde March, one of the City's Construction Inspectors. Upon receiving the Contractor's Estimate, Mr. March would review it and send it and an Estimate Voucher to the Project Engineer. The Project Engineer would then determine if he had any "exceptions" to the estimate. If approved, Mr. March and the Project Engineer would then sign a Department of Public Utilities Contractor's Estimate and Invoice Transmittal, the form required under the Original Contract to be filled out in order for payments to be made.

In accordance with this procedure, Utility was paid for six monthly estimates between December 1991 and May 1992, totalling $1,031,462.00. On June 16, 1992, before paying Utility its seventh monthly estimate, the City learned that Utility had filed for bankruptcy. The City immediately declared Utility to be in default under the contract and withheld the seventh payment.

Prior to Utility's bankruptcy, the City had no reason to suspect that Utility would not complete the contract. During this time period, the City had not required and Utility had not submitted test reports for compaction of fill and backfill. In addition, very few tests of the work already in place had been performed by either the contractor or the City. As of June 15, 1992, no (0%) testing of the sewer force mains had been done, although 3,005 feet had been measured for payment. As for the gravity sewer lines, 65% of the deflection tests and 50% of the infiltration and exfiltration tests had been completed, but 0% of the mirror tests had been performed, even though the City had paid Utility 100% of the cost of 12,210 feet of sewer. The City also paid Utility for 58 "installed" manholes despite the fact that the inverts, drop connections, and interior finishes were not completed and the frame and covers were not at final surface grade. Moreover, the City paid Utility in full for sewers before site restoration, grading, and driveway replacement had been performed.

After declaring Utility in default, the City demanded that Continental, as the performance bond surety, complete the Original Contract. Continental hired a consultant to prepare and issue a package of "rebid" documents soliciting bids for the completion of the contract. Precon Construction, Inc. (Precon) was the lowest responsible bidder, and thus was selected to finish the project. On October 28, 1992, the three parties—the City, Continental, and Precon—entered into a Tri-Party Agreement which set forth the terms of the Completion Contract. Besides detailing the components of the project that needed to be completed, the Tri-Party Agreement also provided a mechanism for correcting any of Utility's work found to be defective. If Precon found any defects beyond the work outlined in the contract, it would submit a defect repair request to Continental's consultant; once the repair was authorized, Precon would correct the problem.

While Precon was completing the project, numerous defects in Utility's work were discovered. Initially, Continental paid for most of these repairs, but when the amount of the repairs became substantial, Continental and the City agreed to divide the cost of the remainder of the repairs in order to expedite the completion of the project. Each party, however, reserved its right to sue the other for the amounts it paid for the repairs. Continental paid Precon $183,102.63 to repair the defects; the City paid $86,735.99. In addition, a certain number of line items in the Completion Contract were actually repairs of Utility's defective work and were paid by Continental at a cost of $51,725.50.

The bottom line, therefore, is that, at the time of the default, the City had already paid Utility $1,031,462.00 of the $1,336,863.00 total contract amount, despite the fact that very little of the testing and inspection had been completed. Because Utility had received most of the contract money already, the parties were then forced to spend an additional amount ($321,563.62), beyond the cost of completing the unfinished work under the contract, to correct problems discovered when the City made the required inspections and tests.

After the project was concluded, Continental filed suit against the City to collect the $234,827.63¹ the insurance company had paid Precon to correct or complete work performed by Utility that the City had measured for payment and had paid to Utility prior to inspecting the work. Continental also claimed prejudgment interest, consulting fees spent to repair the defects, and court costs.² Additionally, Continental asked the court to enter a declaratory judgment pronouncing that Continental has no more liability under the contract. Continental maintains that the City's 100% payments to Utility constituted a material variation from the contract thereby releasing Continental from its obligation as surety. If the City had performed the tests and inspections prior to paying Utility the full amount for each of the items installed, Continental asserts, the defects that gave rise to the exorbitant repair costs would have been discovered, some of the payments would have been withheld, and enough money would have been available to cover the cost of completing the contract.

The City, on the other hand, denies that its payment procedure constituted a material variation from the contract terms and has filed a counterclaim for the $86,735.99 it paid to Precon for the repairs. The City is also seeking to recover the liquidated damages provided for in the Original Contract due to the project's failure to be completed on time.³ The City bases its claim on the theory that Continental was still liable as the performance bond surety and therefore was fully responsible for the completion costs.

II. CONCLUSIONS OF LAW

Federal court jurisdiction exists in this matter. Continental is a New Hampshire corporation with its principal place of business in New York. The City of Virginia Beach is a municipal corporation located in the State of Virginia. Because diversity of citizenship exists and the amount in controversy exceeds $50,000.00, this Court has jurisdiction pursuant to 28 U.S.C. § 1332. The Court also has jurisdiction to issue declaratory relief under 28 U.S.C. § 2201. The substantive laws of Virginia apply to the contract and suretyship issues in this case. Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938).

During the trial, the parties stipulated that if Plaintiff proved a material variation to the contract between the City and Utility, Plaintiff was entitled to $234,827.63,⁴ and if Plaintiff did not prove a material variation, Defendant was entitled to $86,735.99.⁵ Thus, the primary issue this Court must decide is whether the City's actions constituted a material variation from the Contract.

A. The Terms of the Original Contract

The crux of the problem in this case lies in the contract language and in the procedures the City used in paying Utility....