John T. Callahan & Sons, Inc. v. Dykeman Elec. Co.
| Decision Date | 23 May 2003 |
| Docket Number | No. CIV.A.01-11024-MBB.,CIV.A.01-11024-MBB. |
| Citation | 266 F.Supp.2d 208 |
| Parties | JOHN T. CALLAHAN & SONS, INC., Plaintiff, v. DYKEMAN ELECTRIC CO., INC., Employers Insurance of Wassau A Mutual Company and Harrier Electric Co., Defendants. |
| Court | U.S. District Court — District of Massachusetts |
Michael K. Crossen, Rubin & Rudman, Boston, MA, for John T. Callahan & Sons, Inc., Plaintiff.
Christopher C. Whitney, Little, Bulman, Medeiros & Whitney, Providence, RI, Robert D. Friedman, Perkins, Smith & Cohen, LLP, Boston, MA, Scott K. Pomeroy, Little, Bulman, Medeiros & Whitney, P.C, Providence, RI, for Dykeman Electric Company, Inc., Employers Insurance of
Wausau, A Mutual Company, Harrier Electric Company, Defendants.
# 55);
# 50);
44)
Pending before this court are the above styled summary judgment motions. (Docket Entry ##44, 50 & 55). After conducting a hearing, this court took the motions under advisement.
The present dispute concerns a subcontract for electrical work involving renovations to the Lynn English High School in Lynn, Massachusetts. Plaintiff and defendant in counterclaim John T. Callahan & Sons, Inc. ("Callahan"), the project's general contractor, entered into a $19,236,689 contract with the City of Lynn. Defendant Dykeman Electric Company, Inc. ("Dykeman") entered into the $2,127,000 subcontract with Callahan to perform electrical work. Defendant Employers Insurance of Wassau A Mutual Company ("Wassau") issued a payment bond and a performance bond on the project naming Callahan as the obligee, Dykeman as the principal and Wassau as the surety. The penal sum on the bonds amounted to $2,127,000. Dykeman invoiced Callahan for the $21,355 cost of the payment and the performance bonds.
The performance bond triggered Wassau's performance "whenever [Dykeman] shall be, and declared by [Callahan] to be in default under the subcontract."1 (Docket Entry # 64, Ex. D; emphasis added). The performance bond therefore required a default by the principal (Dykeman) and a declaration of default by the obligee (Callahan). A default under the subcontract occurred, inter alia, "if a receiver is appointed on account of the Contractor's insolvency." (Docket Entry # 64, Ex. C, ¶ 14.2).2 Callahan therefore had the ability to declare Dykeman in default at the time of the May or June 1999 appointment of a receiver, described below, but chose not to make such a declaration until October 2000.
To protect its exposure, Wassau required Dykeman, its two principals (Thomas C. Dykeman and Christopher Dykeman) and their spouses (Constance and Linda Dykeman) to execute a general indemnity agreement. The indemnitors, including Dykeman, pledged the machinery and equipment at the work site as security. Under the agreement, if Wassau established a reserve to cover "any liability, claim asserted, suit or judgment under" a bond, then Wassau could demand that the indemnitors, including Dykeman, deposit an equal sum of money as collateral security regardless of whether Wassau had made a payment on either bond. .
Wassau therefore had the ability to file a claim with the receiver in October 2000 when Callahan "asserted" its claim and declared Dykeman in default. At that time, which was prior to the March 2001 dissolution, the receiver still retained the proceeds from the February 2000 sale of Dykeman's assets. Accordingly, before Dykeman formally dissolved, Wassau could have filed a claim with Dykeman's receiver together with a motion to extend the October 25, 1999 deadline for filing claims and requested that the proceeds of any sale of Dykeman's assets be deposited with Wassau in an amount equal to Wassau's reserve. There is little indication that Wassau availed itself of these protections.
The construction project did not proceed smoothly or on schedule. On May 20, 1999, Dykeman filed for receivership protection under Rhode Island law in Rhode Island Superior Court ("the Rhode Island court"). The Rhode Island court immediately appointed a temporary receiver3 and restrained the filing of any lawsuit against Dykeman. The receiver's powers, set forth in the appointment order, endowed him with the ability to conduct Dykeman's business, take possession of Dykeman's assets and prevent the cancellation of any contract with Dykeman.4 With respect to Wassau's authority under the general indemnity agreement to take possession of the work under the subcontract,5 a June 28, 1999 order by the receiver barred any party from taking possession of "any property in the possession of [Dykeman]" without the receiver's prior approval. (Docket Entry # 14, Ex. B).
Within a week, Wassau learned of the state court filing and shortly thereafter obtained the receivership papers. L. Neal Foxhill ("Foxhill"), an assistant vice president in charge of Wassau's bond claim department, spoke with Christopher Dykeman as well as with a lower level Wassau employee. In memoranda dated May 26 and 28, 1999, Foxhill acknowledged the "serious deterioration" of Dykeman's assets and financial condition as well as the delays and difficulties at the project site. (Docket Entry # 64, Ex. J & K). At some point in time, Foxhill established a reserve and completed a reserve report. Foxhill also wrote a June 2, 1999 letter to Dykeman and the individual indemnitors demanding their indemnification under the general indemnity agreement and urging them to prioritize the completion of work on the bonded project as opposed to on any unbonded work. Foxhill did not demand that the indemnitors match the amount of any Wassau funds held in reserve. Dykeman proved cooperative in encouraging the receiver to use Lynn English progress payments to pay Lynn English materialmen and laborers.
By letter dated June 3, 1999, Foxhill told the receiver that Wassau had a contingent claim for an undetermined amount because of its obligation to pay completion costs for the Lynn English project under the performance and payment bonds. (Docket Entry # 47, Ex. C). Wassau did not file a formal claim for a specified amount. Likewise, Callahan never submited a proof of claim to the receiver. (Docket Entry ## 46 & 65,11165).
Callahan, concerned about Dykeman's plans to complete the project, called a June 25, 1999 meeting to discuss the receivership filing. Christopher Dykeman, his attorney, Stephen Callahan, Steven J. Loeper ("Loeper"), Callahan's project manager, Callahan's attorney and Mike Baxter ("Baxter") of Wassau attended the meeting. Christopher Dykeman assured the group that Dykeman would complete the work. Participants were also advised that parties might bid for Dykeman's assets 6
as well as its ongoing contracts and that Christopher and Thomas Dykeman,7 in addition to three other suitors, were interested. In short, Dykeman would continue to work on the project, "be put out to bid" and "bought as a going concern." (Docket Entry #64, Ex. N). Although present, Baxter did not participate in the discussions.
Around this time period, Wassau recognized that Dykeman was not in default because Callahan had not declared Dykeman's default. Specifically, an internal Wassau memorandum explains that "since Dykeman is not in default, [Wassau would have] no speaking role [at the June 25th meeting], but we can offer encouragement to the parties to the contract to keep moving forward." (Docket Entry # 64, Ex. 0; Docket Entry # 66, Ex. C). According to Wassau, Callahan "was not going to consider the filing of the receivership an act of default." (Docket Entry #64, Ex. N). Just prior to the June 25th meeting, Loeper voiced his concern to Foxhill that Dykeman's filing for receivership might constitute an act of default under the subcontract. Loeper wanted to know what would happen if Callahan declared a default and a successor company purchased Dykeman and completed the subcontract. Foxhill told Loeper "that a successor company would not have the benefit of [the performance and payment] bonds and would have to provide its own bonds." (Docket Entry # 48, Foxhill Deposition, p. 75;8 Docket Entry # 49, Ex. D).
In the summer of 1999, Dykeman's work on the project slowed or halted at various times due to poor design, scheduling and planning.9 In August or September 1999, Christopher Dykeman prepared a summary of Dykeman's increased costs to present to the city as part of Callahan's global reimbursement claim. Dykeman continued to remain on the project in the fall of 1999 and the winter of 2000.
On January 27, 2000, the receiver notified Callahan and Wassau, as well as other Dykeman creditors, of an offer to purchase Dykeman's assets for $606,000 by defendant Harrier Electric Company ("Harrier"), a recently formed corporation whose officers, principals and/or stockholders were also Dykeman's principals.10 The trustee also notified Callahan and Wassau of the offer of Netlectric Realty LLC ("Netlectric")11 to purchase other Dykeman assets and real estate for $184,000. The purchase price for the assets and the real estate totaled $790,000. The notice sent to Wassau, Callahan and other Dykeman creditors included the receiver's petition to approve the sale of the assets free and clear of all liens, including the sale of the machinery and equipment pledged to Wassau under the general indemnity agreement. There is no indication that either Wassau or Callahan objected to the proposed sale.12
The petition to sell the assets free and clear of liens advised Wassau, Callahan and other interested parties that the transfer of any release on their part would be without prejudice to proceed with a claim against...
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