In re Technology for Energy, Corp.
| Decision Date | 08 February 1991 |
| Docket Number | Adv. No. 1-89-0266.,Bankruptcy No. 3-85-00455 |
| Citation | 123 BR 979 |
| Parties | In re TECHNOLOGY FOR ENERGY, CORP., Debtor. PUBLIC SERVICE ELECTRIC & GAS CO., & Bechtel Engineering Co., Inc., Plaintiffs, v. TECHNOLOGY FOR ENERGY, CORP., & American Insurance Co., Defendants. |
| Court | U.S. Bankruptcy Court — Eastern District of Tennessee |
John A. Lucas and Jeffrey S. Norwood of Hunton & Williams, Knoxville, Tenn., for Public Service Elec. & Gas Co. & Bechtel Engineering Co., Inc.
G. Rhea Bucy & A. Scott Derrick of Gullett, Sanford, Robinson & Martin, and Lawrence R. Ahern, III of Bass, Berry & Sims, Nashville, Tenn., for Technology for Energy, Corp.
Robert L. Crossley and Nicholas A. Della Volpe of Baker, Worthington, Crossley, Stansberry & Woolf, Knoxville, Tenn., and Thomas E. Ray of Patrick, Beard, Richardson & Ray, Chattanooga, Tenn., for American Ins. Co.
Technology for Energy (TEC) is the debtor in a Chapter 11 bankruptcy case. Before its bankruptcy, TEC agreed to build a radiation monitoring system for a nuclear power plant that the plaintiffs, Bechtel and Public Service, were building in New Jersey. The parties made the contract in the form of two purchase orders; TEC was the seller; Bechtel and Public Service were the buyers. American Insurance Company issued a combination payment and performance bond for each purchase order. Bechtel and Public Service brought this suit against American Insurance and TEC primarily to collect on the bonds.
The penal sums of the bonds are $3,067,962 and $805,709, which make the total $3,873,671.00. Bechtel and Public Service have sued American Insurance for more than twice this total.
After hearings and conferences with the attorneys, the court entered an order that it would first decide whether Bechtel and Public Service can recover more than the penal sum of either bond. This memorandum is the court's decision. In light of the procedure followed, the court's order will be in the form of a declaratory judgment.
The court will refer to both Bechtel and Public Service as Bechtel. Since the bonds are the same except for the penal sums, the court will refer to them as one bond. The court will refer to the two purchase orders as one purchase order.
The first paragraph of the bond provides:
KNOW ALL MEN BY THESE PRESENTS, That we, Technology for Energy Corporation, as Seller and The American Insurance Company as Surety, are held and firmly bound unto Public Service . . . as Owner-Obligee, and Bechtel Power Corporation, in its capacity as Manager for Public Service . . . as Additional Obligee, in the penal sum of $3,067,962 or $805,709 for the payment of which we jointly and severally bind ourselves, our heirs, assigns, executors, administrators and successors firmly by these presents.
The next part of the bond is the "Condition." It provides that the bond will be void if TEC meets the condition but will remain effective if TEC fails to meet the condition. The condition is that TEC will fully perform the purchase order, will pay all damages resulting from its failure to perform, and will pay any costs incurred by Bechtel and Public Service in making good a default by TEC.
The next paragraph sets out the duties of American Insurance if TEC defaults.
The Surety agrees that whenever Seller shall be, and is declared by BECHTEL to be, in default under the Purchase Order, the Surety shall promptly remedy the default, or will complete the Purchase Order in accordance with its terms and conditions and shall fully indemnify and hold harmless the OWNER and BECHTEL, from all costs, damages and expenses which may arise thereafter (including reasonable attorney\'s fees) and which OWNER and BECHTEL may suffer by reason of Surety\'s failure to so do.
The next paragraph says that changes in the purchase order will not release American Insurance from the bond.
The next two paragraphs both begin with the word "provided":
The bond says that American Insurance will not be liable to both obligees for more than the penalty of the bond. American Insurance argues that this clause limits its total liability to the penal sum because "penalty" means "penal sum."
Judge Stair has previously decided that New Jersey law governs the rights of the parties under the bond. Public Service Electric & Gas Co. v. American Insurance Co. (In re Technology for Energy, Corp.), 88 B.R. 182 (Bankr.E.D.Tenn.1988).
Older cases from New Jersey and other states use "penalty" to refer to the dollar amount of a bond. Cramp & Co. v. Doughty, 89 N.J.L. 288, 98 A. 260 (N.J. 1916); Gloucester City v. Eschbach, 54 N.J.L. 150, 23 A. 360 (N.J.Sup.Ct.1892); see also Metropolitan Cas. Ins. Co. v. United States, 87 F.2d 144 (9th Cir.1936); Goodspeed v. Duby, 131 Or. 275, 283 P. 6 (1929); Robinson Mfg. Co. v. Blaylock, 192 N.C. 407, 135 S.E. 136 (1926); School District No. 3 of Ford County v. United States Fidelity & Guaranty Co., 96 Kan. 499, 152 P. 668 (1915); Getchell & Martin Lbr. & Mfg. Co. v. Peterson & Sampson, 124 Iowa 599, 100 N.W. 550 (1904).
Bonds and courts now commonly use "penal sum" or "amount" to mean the dollar amount of a bond. This avoids confusion since "penalty" often comes up in bond cases when it does not refer to the dollar amount of the bond. See, e.g., Reid v. Miles Const. Co., 307 F.2d 214 (8th Cir. 1962); Massachusetts Bonding & Ins. Co. v. United States, 97 F.2d 879 (9th Cir. 1938); Dean v. Seco Elec. Co., 35 Oh.St.3d 203, 519 N.E.2d 837 (1988); General Ins. Co. v. City of Colorado Springs, 638 P.2d 752 (Colo.1981).
However, the use of "penalty" to mean the amount or penal sum has not disappeared. Fisher v. Fidelity & Deposit Co., 125 Ill.App.3d 632, 80 Ill.Dec. 880, 466 N.E.2d 332 (1984); Caron v. Andrew, 133 Cal.App.2d 402, 284 P.2d 544 (1955); 72 C.J.S. Principal & Surety § 72 (1987).
According to Bechtel, the context shows that "penalty" does not mean "penal sum." Bechtel relies on the rest of the paragraph to support this argument. The second clause of the same sentence says that American Insurance will be liable only for "a single payment for each single breach or default." The final sentence gives American Insurance a way to pay its debt without worrying about any dispute between Bechtel and Public Service over which one should get the money. Thus, the rest of the paragraph protects American Insurance from having to pay the same damages twice as the result of having two obligees.
Bechtel says that the clause in question serves the same purpose. To reach this result, Bechtel reads "penalty" to mean all damages caused by the failure of TEC or American Insurance to carry out the purchase order.
Bechtel's argument makes the clause in question redundant with the second clause of the same sentence. The second clause says that American Insurance will be liable only once for the same damages. This leads to the result that American Insurance will not be liable for more than the total damages even though there are two obligees. There is no need for the first clause to say the same thing less clearly. The clauses would not be joined by "nor" if they were intended to say the same thing.
This clause of the bond equates to the wording of the bond in Monmouth Lumber Co. v. Indemnity Insurance Co., 21 N.J. 439, 122 A.2d 604 (1956); it said, "The aggregate liability of Surety hereunder to the Obligees or their assigns is limited to the penal sum above stated."
Bechtel's argument is not strong enough to convince the court that "penalty" should be given the peculiar meaning for which Bechtel is arguing. The court concludes that "penalty" means "penal sum". Thus, the bond appears to limit American Insurance's total liability to the penal sum, but Bechtel has a another argument for holding that the bond did not limit American's liability to the penal sum.
Bechtel argues that the bond is unlike the typical performance bond. The typical performance bond gives the surety the choice of refusing to perform the contract after the contractor defaults. In that case the surety is liable to the owner for the damages caused by the contractor's default but only up to the penal sum of the bond. Borough of Totowa v. American Sur. Co., 39 N.J. 332, 188 A.2d 586 (1963); School District No. 3 of Ford County v. United States Fidelity & Guaranty Co., supra; Fisher v. Fidelity & Deposit Co., supra; Edmund D. Cook, Inc. v. Commercial Cas. Ins. Co., 15 N.J.Misc. 256, 190 A. 99 (Sup.Ct.1936) aff'd per curiam 117 N.J.L. 440, 190 A. 102 (N.J.1937); Veneto v. McCloskey, 333 Mass. 95, 128 N.E.2d 337 (1955).
On the other hand, the penal sum does not limit the liability of a surety that takes over performance of the contract. The surety who takes over performance has a duty to complete the contract without regard to cost. Furthermore, the penal sum does not limit its liability for damages caused by its own default while performing the contract. Federal Surety Co. v. Lalonde, 31 F.2d 673 (9th Cir.1929); Copeland Sand & Gravel, Inc. v. Insurance Company...
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