Larson v. Granite re, Inc.

Decision Date07 July 2008
Docket NumberNo. 07-1186.,No. 07-1188.,07-1186.,07-1188.
Citation532 F.3d 724
PartiesDennis LARSON, a Minnesota resident, Appellant/Cross-Appellee, v. GRANITE RE, INC., Appellee/Cross-Appellant.
CourtU.S. Court of Appeals — Eighth Circuit

Marvin T. Fabyanske, argued, Hannah R. Stein, on the brief, Minneapolis, MN, for Appellant/Cross-Appellee.

Joseph Arthur Nilan, argued, David H. Gregerson, on the brief, Minneapolis, MN, for Appellee/Cross-Appellant.

Before COLLOTON and SHEPHERD, Circuit Judges, and GOLDBERG,1 Judge.

SHEPHERD, Circuit Judge.

Strom Construction ("Strom")2 asserts multiple claims against Granite Re, Inc.'s ("Granite's") payment bond. The parties appeal and cross-appeal the district court's3 judgment. We affirm.

I.

The following statement of facts is based on the evidence before the district court. We view the facts in the light most favorable to the judgment. Willis v. Henderson, 262 F.3d 801, 803 (8th Cir. 2001). This case arises out of a multi-million dollar road construction project (the "Project") at Turtle Mountain Indian Reservation near Belcourt, North Dakota. The Chippewa Band of Indians (the "Tribe") served as the prime contractor on the Project. Prior to the execution of the prime contract between the Tribe and the Bureau of Indian Affairs (the "BIA"), the Tribe and Gerald Martin, a member of the Tribe, entered into negotiations for Martin to serve as the main subcontractor for the Project. Martin was a small contractor with very limited road construction experience and no established line of bond credit. By all accounts, Martin lacked the requisite equipment, working capital, experience, and qualifications to undertake the Project.

Anticipating a need for subcontract payment and performance bonds relating to the Project, Martin contacted Goldleaf Financial, Ltd. ("Goldleaf") in 2001. Goldleaf's business was to help small companies obtain surety credit by providing a limited guarantee to the surety. Martin's contact was Goldleaf's president, Dennis Larson. Goldleaf had engaged in a number of transactions with Jonathan Pate, owner of the Pate Agency. Jonathan Pate was a bond agent for a number of specialty sureties that wrote smaller bonds for smaller contractors. One of those sureties was Granite, which Pate owned in part. During the spring of 2002, Goldleaf referred Martin to Pate in an effort to obtain bonding for Martin.

Goldleaf, largely through Larson, collected background and financial information concerning the Project and Martin. Larson went to Belcourt to gather information on Martin, and, though he discovered that Martin did not have the requisite equipment, working capital, or experience to complete the Project, Larson believed that Martin could complete the Project with assistance. Larson sent information to Granite regarding Martin and the Project with a request that payment and performance bonds be issued for Martin. In order to induce Granite to issue the bonds, Goldleaf provided a limited (15%) guarantee on the bonds and offered to set up an escrow account on the Project to assure control of the Project funds.4

In late February or early March 2002, Martin met with BIA representatives to discuss the Project. Around that time, Larson offered his services to Martin both as a subcontractor for moving dirt, the largest part of the work making up the Project, and as a supplier of heavy equipment. On March 8, 2002, Martin and Larson entered into a subcontract in which Larson agreed to perform the dirt moving work on the Project.5 At that time, Larson knew that no prime contract was in place between the BIA and the Tribe and no subcontract had been executed between the Tribe and Martin.

In March 2002, Paul Strom, of Strom Construction, verbally agreed with Larson to supply scrapers and operators to complete the dirt moving work that Larson had subcontracted to perform for Martin. Larson agreed to pay Strom $0.76 per cubic yard of loose dirt. According to Strom, this amount was based on Strom performing short haul work, that is moving dirt distances of one-half mile or less. Larson and Strom did not agree to a start date.

On March 15, 2002, the BIA awarded a $5,229,788.40 prime contract to the Tribe for the Project; however, the Tribe and Martin did not enter into a subcontract at that time. Work on the Project was to begin in May 2002, after the spring thaw. North Dakota imposes restrictions on the weight of vehicles that can drive on the state's highways during the spring thaw, so there is a period of time every year (usually April and May) when heavy construction equipment cannot be transported. A BIA official contacted Larson and told him to move forward in mobilizing the heavy equipment to the Project site before the road restrictions were in place, so the equipment would be on-site and available as soon as the BIA issued a notice to proceed. According to Larson, the official made the same statement to Martin. Larson then called Strom and directed him to mobilize his equipment. Based on his discussions with Martin and Larson, Paul Strom understood that work on the Project would begin on May 6, 2002. Strom's equipment, consisting of three scrapers, was mobilized to the site in March 2002. At that time, Larson knew that there was no contract in force between Martin and the Tribe and that no payment or performance bonds were in force.

Disputes arose among the BIA, the Tribe, and Granite regarding the contracts and the bonds. On April 9, 2002, the Tribe and Martin attempted to enter into a subcontract worth of $886,404.81, one-sixth of the total Project. On April 26, 2002, Granite faxed a copy of the proposed subcontract bonds in the sum of $886,404.81 to Larson at Goldleaf. However, the BIA deemed the subcontract unacceptable and refused to agree to it. Larson was aware of the BIA's rejection of the purported subcontract. The original bond documents, which were never signed by Martin, were never released from Granite's possession and were voided internally by Granite. Strom's equipment remained idle at the Project site from April to June of 2002.

In July, the resolution of the contract and bonding issues between the BIA and the Tribe appeared to be at hand, and Martin directed Larson to have Strom mobilize his equipment operators to the Project site. At that time, there was still no subcontract in force between Martin and the Tribe. Both Larson and Strom were aware of this. Three of Strom's operators and Strom's foreman, Brad Barry, arrived at the site on July 15, 2002. Once Strom's equipment operators arrived at the Project site, Strom paid them for 12 hours per day, even though they were unable to begin work.

The BIA and the Tribe eventually agreed to divide the Project into three phases under three separate contracts. The first phase ("Phase I") would involve 1.5 to 2 miles of road construction. On July 23, 2002, the Tribe and Martin executed a written subcontract for Phase I (the "Tribe/Martin subcontract") in the amount of $1,696,588.39. That same day, Granite executed and issued payment and performance bonds in the sum of $1,696,588.39, naming Martin as bond principal and the Tribe as bond obligee. Jonathan Pate signed the bonds on behalf of Granite.

Pate testified that Granite performed no additional investigation as to Martin between the preparation of the April bonds and the issuance of the July bonds. Pate further stated that Granite was not aware that Strom's equipment and operators were at the Project site prior to the bonds' issuance and that if Granite had known of potential outstanding claims at that time, it would not have issued the bonds. Pate also stated that, prior to issuance, he had no discussions with Martin, the Tribe, the BIA, or Strom. At that point, Pate had only discussed the Project with Larson and individuals associated with Goldleaf and was unaware that Larson was a subcontractor on the Project. Pate testified that Larson had a conflict of interest in that he served as: (1) bond agent, helping Martin to obtain the bond; (2) escrow agent, controlling the finances on the Project; and (3) subcontractor such that there was a possibility that he would have claims against the bond.

On July 30, 2002, the BIA issued a notice to proceed, and Strom's employees began work on the Project that day. When the work started, it became apparent that none of Martin's workers possessed the requisite experience or knowledge required to serve as the Project Superintendent, planning and supervising the overall construction of the Project. Strom's foreman, Barry, filled this role. There was no written agreement between any of the parties—Martin, Larson, or Strom—as to an increase in Barry's wage corresponding to the increase in duties. According to Barry, he, Larson, and Paul Strom met to discuss Barry serving as supervisor, and Larson and Paul agreed to pay Barry a higher wage.

At the outset of Phase I, an issue arose regarding the necessity of moving dirt distances greater than one-half mile. Strom had submitted its bid with the understanding that it would perform short haul work, moving dirt distances less than one-half mile, and that Martin would perform the long haul work, moving dirt distances in excess of one-half mile. However, the BIA, due to concerns over excessive erosion and potential environmental problems, prohibited Martin from opening up more than 350,000 square feet of the Project at any given time. The import of the BIA prohibition was that the long haul and short haul work could not take place concurrently. Martin opted to proceed with the long haul work.

Strom offered to use his scrapers to help Martin for an additional $0.41 per cubic yard. This increase stemmed from the fact that Strom would be moving dirt a greater distance than that included in its original bid which would lengthen Strom's travel time and, ultimately, lessen the total cubic yards of loose dirt Strom could move (the measure by which Strom was to...

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