Kesk, Inc. v. National Union Indemnity Company

• Decision Date: 20 December 1963
• Docket Number: 8224,Civ. A. No. 8149,8188,8197.
• Citation: 224 F. Supp. 766
• Parties: KESK, INC. v. The NATIONAL UNION INDEMNITY COMPANY. UNITED STATES of America for the Use and Benefit of INTERSTATE ELECTRIC COMPANY v. KESK, INC., United States Fidelity & Guaranty Company, National Union Indemnity Company of Pittsburgh, Pennsylvania, and Mojave Electric Company, Inc. GENERAL ELECTRIC COMPANY v. KESK, INC., United States Fidelity & Guaranty Company, National Union Indemnity Company, Mojave Electric Company, Inc., Irving Sulmeyer, Trustee in Bankruptcy of Mojave Electric Company, Inc. WESTINGHOUSE ELECTRIC CORPORATION v. KESK, INC., and United States Fidelity & Guaranty Company, NATIONAL UNION INDEMNITY COMPANY, Third-Party Defendant.
• Court: U.S. District Court — Western District of Louisiana

224 F. Supp. 766

KESK, INC. v. The NATIONAL UNION INDEMNITY COMPANY.

UNITED STATES of America for the Use and Benefit of INTERSTATE ELECTRIC COMPANY v. KESK, INC., United States Fidelity & Guaranty Company, National Union Indemnity Company of Pittsburgh, Pennsylvania, and Mojave Electric Company, Inc.

GENERAL ELECTRIC COMPANY v. KESK, INC., United States Fidelity & Guaranty Company, National Union Indemnity Company, Mojave Electric Company, Inc., Irving Sulmeyer, Trustee in Bankruptcy of Mojave Electric Company, Inc.

WESTINGHOUSE ELECTRIC CORPORATION v. KESK, INC., and United States Fidelity & Guaranty Company, NATIONAL UNION INDEMNITY COMPANY, Third-Party Defendant.

Civ. A. Nos. 8149, 8188, 8224, 8197.

United States District Court W. D. Louisiana, Shreveport Division.

December 20, 1963.

Charles D. Egan, Cook, Clark, Egan, Yancey & King, Shreveport, La., Phelps, Dunbar, Marks, Claverie & Sims, New Orleans, La., for Kesk, Inc., and U. S. Fidelity & Guaranty Co.

A. Morgan Brian, Jr., Deutsch, Kerrigan & Stiles, New Orleans, La., for National Union Indemnity Co. of Pittsburgh, Pa.

BEN C. DAWKINS, Jr., Chief Judge.

These suits began as actions by suppliers against the principal contractor, and its surety, on a Capehart housing project, for failure of a subcontractor to pay for materials furnished and used in the project. Summary judgments were granted in favor of the original complainants in cases numbered 8149, 8188, and 8224, against the prime contractor Kesk, Inc. Cross-claims and a third party demand were filed in these three cases against National Union, surety for Mojave, the subcontractor, by Kesk and USF&G, its surety.¹ The fourth case, number 8197, is a direct action by Kesk against National Union. The cases were consolidated since in each indemnity is sought from National Union.

The basic facts are that on March 9, 1959, the United States, acting through the Department of the Army and under the authority of the Capehart Act, 42 U.S.C. § 1594 et seq., executed a contract with Kesk and Bossier Base Development Co., Inc., a so-called mortgagor-builder. By this contract, Kesk undertook to furnish all labor, materials and equipment necessary to construct two hundred (200) Capehart permanent family housing units at Bossier Base, Louisiana, under Contract No. DA-03-050-eng-3441, FHA Project No. 059-81015 Army No. 4. Kesk previously had caused the mortgagor-builder to be incorporated, all of its stock being placed in escrow with a private lending mortgagee. Provision was made for transferring the entire stock to the Government upon completion of the project.

This procedure for establishing a mortgagor-builder corporation is essentially a device for obtaining private capital to finance government military housing projects. Private lenders are protected since such projects are FHA insured under provisions of the Armed Services Housing Mortgage Insurance Act, 12 U.S.C. § 1748 et seq. Contemporaneously with the execution of the housing contract the Government leased the land upon which the houses were to be built to the mortgagor-builder. Rentals later to be received from persons occupying the houses were to be paid upon the indebtedness due the lending mortgagee, and upon its payment in full, the mortgagor-builder was to be dissolved, with title to the houses passing to the Government.

As the prime contractor, Kesk was required to give a payment and performance bond, which it did with USF&G as surety. For its own protection, Kesk, in turn, required a conventional suretyship bond from its electrical subcontractor, Mojave Electric Company. Mojave defaulted on the contract in early 1960, and bankruptcy soon followed. Kesk immediately notified National Union, Mojave's surety, that Kesk would hold National Union responsible for any loss and demanded that it take steps to fulfill its suretyship obligations. National Union denied all responsibility upon the ground that it was released by reason of allegedly premature payments made to Mojave by Kesk in violation of the subcontract agreement.

There is but one primary question to be decided: Did Kesk make premature payments to Mojave, and, if so, was National Union thereby released?

The parties agree that solution of this question lies in a correct interpretation of the subcontract between Kesk and Mojave. Kesk contends that it had a duty to make progress payments on account to Mojave for 90% of the work completed and inventory on the job site. National Union argues that Kesk was obligated to make payments only for work completed and materials in place, and that payments for inventory were premature. Each relies upon typed provisions in Section 4 of the subcontract, pertinent portions of which provide:

"* * * The Subcontractor shall submit a requisition for payment five (5) days in advance of Contractor's requisition to the Owners. Contractor shall pay to Subcontractor an amount equal to 90% of all work completed and in place (less any work rejected by Contractor or Owner) except that no claim for payment shall be made by Subcontractor which is in excess of the amount approved by the Owners for payment by the Owners to the Contractor.

"Contractor shall pay to the Subcontractor the total of approved requisitions for work completed and inventory on job site within five (5) days of receipt of receipt sic of Contractor's payment from the Owners." (Emphasis added.)

Accepted rules of contract interpretation will resolve the superficial conflict between the provisions quoted above.² Wherever possible, if consistent with the intention of the parties and the general purpose of the agreement, a construction which gives effect to all provisions of the contract should be adopted.³

In the first paragraph quoted above it is clearly provided that payment shall be made for all work completed. The second paragraph just as plainly states that payment shall be made for work completed and for inventory on the job site. Any inference from the first that payment is to be only for work completed is negated by the second paragraph. Effect can be given to both by applying the broader provisions of the second. This is the interpretation placed upon the agreement by the parties, Kesk and Mojave.⁴

The reasonableness of this interpretation also is emphasized by the fact that Kesk, under its prime contract, received payment for inventory.⁵ The composition of this inventory for which Kesk was paid included inventory belonging to subcontractors as well as Kesk's own inventory. That the parties intended to provide for a portion of this payment to be turned over to subcontractors for their share of the inventory seems reasonably to follow.

National Union relies upon the principle that ambiguous provisions in a contract should be resolved against the drafter, in this case, Kesk. However, this rule of interpretation is one of last resort, not to be utilized when the intent of the parties otherwise can be discerned.⁶ We thus conclude that the quoted provisions of Section 4 of the subcontract required Kesk to pay both for work completed and for inventory on the job site.

An alternative and rather tenuous defense urged by National Union is that Article 24 of the 1958 AIA General Conditions⁷ applies to the Mojave subcontract. The subcontract was written on an AIA standard form for subcontracts which contained the statement: "For Use in Connection with the Sixth Edition of the Standard Form of Agreement and General Conditions of the Contract." The Sixth Edition was the 1951 version, and its Article 24 does not support National Union's contention.⁸

A further effort to escape this result is made by argument that since the subcontract was written after 1958 the parties must have had reference to the newer 1958 General Conditions, even though the subcontract used expressly specified the Sixth Edition (1951 version).

Section 1 of the subcontract states:

"The Subcontractor agrees to furnish all material and perform all work as described in Section 2 hereof for FHA Project No. 059-81015-Army No. 4 and ENG. Serial No. ENG-03-050-59-27 — 200 Capehart Permanent Housing Units for U. S. Army Engineer District, Little Rock , Little Rock, Arkansas hereinafter called the Owner, at Bossier Base, Shreveport, Louisiana in accordance with The General Conditions of the Contract between the Owner and the Contractor and in accordance with the drawings and Specifications prepared by Van Os and Flaxman hereinafter called the Architect, all of which General Conditions, Drawings and Specifications signed by the parties thereto or identified by the Architect, form a part of a contract between the Contractor and the Owner dated, March 9 1959, and hereby become a part of this Contract."

All subsequent references to General Conditions clearly were intended to refer to provisions of the prime contract specified in Section 1. The prime contract was not even written on an AIA Standard Form. In subcontract sections 5(b) and (e), dealing, respectively, with applications for payment by the subcontractor, and payments by the contractor, where references were made to Article 24 of the General Conditions, "Article 24" was specifically deleted. Two other provisions of the subcontract which were not deleted have significance only if reference is made to the AIA General Conditions.⁹ National Union contends that in order to give these provisions meaning it must be held that the AIA General Conditions constitute a part of the subcontract.

As noted, however, the very article which National Union wants applied, Article 24 of the 1958 AIA General Conditions, was specially and deliberately deleted at every place where it appeared in the subcontract. According to Section 1 of the subcontract, the General Conditions to which the subcontract has reference are those that are made a part of the prime contract and are signed by the parties thereto or identified by the architect. The parties to the prime contract did not sign the AIA General...