Hardaway Co. v. Amwest Sur. Ins. Co.

• Decision Date: 31 March 1993
• Docket Number: No. 92-8153,92-8153
• Parties: The HARDAWAY COMPANY, Plaintiff-counter-defendant-Appellant, v. AMWEST SURETY INSURANCE COMPANY, Defendant-counter-claimant-Appellee.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1395

986 F.2d 1395

The HARDAWAY COMPANY, Plaintiff-counter-defendant-Appellant, v. AMWEST SURETY INSURANCE COMPANY, Defendant-counter-claimant-Appellee.

No. 92-8153.

United States Court of Appeals Eleventh Circuit.

March 31, 1993.

Rehearing Denied May 21, 1993.

Steven Elliot Scheer, Savannah, GA, Geoffrey Johnson and Frederick P. Alimoti, Saddle River, NJ, for appellant.

Roy E. Paul, Bouhan Williams & Levy, Savannah, GA, David Jason Merbaum, and Jefferson B. Slagle, Thompson & Slagle, Norcross, GA, for appellee.

Appeal from the United States District Court for the Southern District of Georgia.

Before ANDERSON, DUBINA and BLACK, Circuit Judges.

DUBINA, Circuit Judge:

In this construction case involving the bonded performance of a now defunct subcontractor, B & F Contractors, Inc. ("B & F"), the plaintiff prime contractor, Hardaway Company ("Hardaway"), appeals the district court's order granting summary judgment to the defendant surety company, Amwest Surety Insurance Company ("Amwest"). The district court found that Hardaway's release of its claims against B & F terminated Hardaway's rights against Amwest as a matter of state law, despite the explicit reservation of those rights in the release agreement between Hardaway and B & F.

The district court determined that under Georgia law a surety is discharged when the principal debtor is discharged unless (1) the discharging creditor reserves all rights against the surety and (2) the discharge of the principal debtor is done with the knowledge and consent of the surety. Since Hardaway explicitly reserved its rights to proceed against Amwest when releasing B & F, the first requirement was not in issue. Regarding the second requirement, the district court concluded that Amwest had not consented to Hardaway's release of B & F, and thus found that Amwest was discharged.

As in the district court, the first requirement is not at issue in this appeal. Regarding the second requirement, we must first determine whether Amwest consented to the release, because if Amwest consented we would have no need to reach the issue of whether consent is required. Because we agree with the district court that Amwest did not consent to the release, we must determine whether Georgia law requires consent. Since there is confusion in Georgia law regarding this issue, we certify the question to the Supreme Court of Georgia.

I. STATEMENT OF THE FACTS

This case concerns the construction of a public works project for the Georgia Department of Transportation ("DOT"). Hardaway as prime contractor secured B & F as subcontractor to perform earthmoving services needed to prepare the site. Amwest guaranteed B & F's performance.

When B & F encountered difficulty in paying vendors, it demanded payment from Hardaway for additional costs incurred. Pursuant to its interpretation of a clause in the subcontract, Hardaway referred the claim to the DOT and refused to make payment on its own. When B & F continued experiencing difficulty in performing, Hardaway notified B & F that it was in default and demanded that Amwest fulfill the subcontract. Under an agreement with Hardaway (the "Takeover and Hold Harmless Agreement"), Amwest took over performance of the subcontract and agreed to finish the job, using B & F's own resources to do so.

B & F then commenced a civil action against Hardaway in South Carolina state court for payment of the additional cost overruns. After being removed to federal court, that litigation was settled by an agreement between Hardaway and B & F to which Amwest was not a party. Paragraph six of the settlement agreement purported to "release" Hardaway's claims against B & F for its default under the subcontract, while preserving any warranty claims against B & F and specifically providing that Hardaway retained its rights against Amwest. ¹

Alleging diversity of citizenship as the basis for federal jurisdiction, Hardaway then sued Amwest in the United States District Court for the Southern District of Georgia to recover damages for B & F's default. Amwest defended that Hardaway's release of its claims against B & F also terminated its rights against the surety, notwithstanding the parties' attempt to preserve those rights. In the alternative, Amwest counterclaimed for the cost overruns, to which it claimed to be entitled as subrogee of B & F. The district court agreed with Amwest, granted summary judgment to Amwest, denied Hardaway's cross-motion for summary judgment, and dismissed the alternative counterclaim pursuant to Amwest's voluntary withdrawal. This appeal followed.

II. ANALYSIS

A. DID AMWEST CONSENT TO HARDAWAY'S RELEASE OF B & F?

The district court determined that since the language of the surety contract does not explicitly mention release of the principal or diminishment of security as a permissible modification, Amwest's consent to modifications in the surety contract was not advance consent to Hardaway's discharge of B & F. We review the district court's interpretation of state law de novo. Salve Regina College v. Russell, --- U.S. ----, ---- - ----, 111 S.Ct. 1217, 1221-25, 113 L.Ed.2d 190 (1991); Forbus v. Sears Roebuck & Co., 958 F.2d 1036, 1041 (11th Cir.), cert. denied, --- U.S. ----, 113 S.Ct. 412, 121 L.Ed.2d 336 (1992).

Hardaway argues that it has the power to modify the subcontract and that this power includes the power to release B & F. Thus, it argues that the surety contract constitutes Amwest's consent to Hardaway's release of B & F. The surety contract provides that

[the] terms and conditions of said Principal Contract [the subcontract between Hardaway and B & F] may be changed, amended, altered, or modified at any time, without notice to the Surety and without procuring the consent, approval or waiver of the Surety, and any such change, amendment, alteration or modification shall not release the Surety from liability under this bond.

Both parties agree that a surety may consent in advance to conduct which would otherwise discharge him, Regan v. United States Small Business Admin., 926 F.2d 1078, 1082 (11th Cir.1991) (applying Georgia law), but Amwest argues that the common usage of the word "modify" means something different from "release" and that the contract should be interpreted according to its plain meaning. The district court agreed with Amwest, finding that modification means "a change, alteration or amendment that 'introduces new elements into the details, or cancels some of them, but leaves the general purpose and effect of the subject matter intact.' " (Order at 10 (quoting Black's Law Dictionary 905 (5th ed. 1979)). Cf. Delta Diversified, Inc. v. Citizens & Southern Nat'l Bank, 171 Ga.App. 625, 320 S.E.2d 767, 772 (1984) (holding that surety consented to subordination of collateral in advance where contract expressly provided that modification or release of principal's obligations would not discharge surety).

In response, Hardaway points to other provisions in the subcontract itself, incorporated into the surety bond by reference, which already granted Hardaway the right to make the kind of changes that the district court held were encompassed by the term "modify." Hardaway premises its argument on the rule that nothing permitted in the subcontract and incorporated in the surety bond can be taken to discharge the surety, see Winston Corp. v. Continental Casualty Co., 508 F.2d 1298, 1301 (6th Cir.), cert. denied, 423 U.S. 914, 96 S.Ct. 218, 46 L.Ed.2d 142 (1975) (applying Georgia law), and contends that a surety bond which also includes additional language granting the right to "modify" must be taken to mean the release of the subcontractor if the contract is not to be redundant.

The bulk of Amwest's response emphasizes the difference between "modify" and "release," without addressing Hardaway's contention about avoiding redundancy in construing contract language. Amwest's only true counter-argument is that, even assuming "modify" includes "release," the surety is obligated to secure only the subcontractor's performance of the agreement as modified (i.e., as released). "To hold otherwise would be to mandate that the obligee could change the principal's Subcontract (say, by deleting a north-south road and adding one running east to west), but that the surety's obligation would still be to perform the Subcontract according to its original terms...." (Amwest Br. at 25). Thus, once B & F's obligations are released, there is nothing left for Amwest to secure. However, the example Amwest uses to illustrate this argument shows why it fails to rebut Hardaway's contention. According to Hardaway, such a change is already encompassed in the subcontract term allowing Hardaway to alter B & F's performance. Because Amwest has consented to those changes in advance, the changes may also affect Amwest's obligation to secure B & F's performance. Changes that release B & F do not.

The best argument that the district court's construction does not create a redundant contract lies in the Winston-based premise of Hardaway's position: a modification permitted in the subcontract (and incorporated into the surety bond) does not discharge the surety. This holding of Winston was concededly an extrapolation by the Sixth Circuit of the majority rule in order to ascertain unclear Georgia law. 508 F.2d at 1304 (employing majority rule that compensated sureties do not benefit from canon of stricti juris ). But cf. Houston Gen. Ins. Co. v. Brock Constr. Co., 241 Ga. 460, 246 S.E.2d 316, 318-19 (1978) (holding that stricti juris does not apply to compensated sureties, but unambiguous contracts must not be extended by interpretation). Thus, the parties to the surety agreement might well have intended merely to state in clear terms a meaning that otherwise could have been subject to dispute, to wit, that modifications would not release the surety. Hardaway concedes that the court should not read terms into a contract unless "there arises from the...