Lite House, Inc. v. North River Ins. Co.

• Citation: 471 S.E.2d 166,322 S.C. 26
• Decision Date: 03 April 1996
• Docket Number: No. 24426,24426
• Court: United States State Supreme Court of South Carolina
• Parties: The LITE HOUSE, INC., Petitioner, v. The NORTH RIVER INSURANCE CO., Respondent and Third Party Plaintiff, v. Wayne GRIMSLEY and W.W. Grimsley and Co., Inc., Third Party Defendants. . Heard

Page 166

471 S.E.2d 166

322 S.C. 26

The LITE HOUSE, INC., Petitioner, v. The NORTH RIVER INSURANCE CO., Respondent and Third Party Plaintiff, v. Wayne GRIMSLEY and W.W. Grimsley and Co., Inc., Third Party

Defendants.

No. 24426.

Supreme Court of South Carolina.

Heard April 3, 1996.

Decided May 20, 1996.

R. Bryan Barnes, of Rogers, Townsend & Thomas, P.C., Columbia; and John C. Bradley, Jr., of McCutchen, Blanton, Rhodes & Johnson, Columbia, for petitioner.

Frank S. Potts, of Lide, Montgomery, Potts & Medlock, P.C., Columbia, for respondent.

ON WRIT OF CERTIORARI TO THE COURT OF APPEALS

BURNETT, Justice:

We granted certiorari to review the Court of Appeals decision in The Lite House, Inc., v. North River Ins. Co., 316 S.C. 326, 450 S.E.2d 63 (Ct.App.1994). We affirm as modified.

FACTS

W.W. Grimsley & Company, Inc., a business owned and operated by Wayne Grimsley, ¹ constructed residential buildings for sale to others. As part of the licensing requirements for residential builders, respondent provided a surety bond on behalf of Grimsley to the South Carolina Residential Builders Commission (the Commission). ² The bond provided in part as follows:

The condition of this bond is such that if [Grimsley] shall in all respects comply with the rules and regulations pertaining to Construction Standards and Health and Safety requirements promulgated by [the Commission], then this obligation shall be void; otherwise it is to remain in full force and effect....

In 1991, Grimsley obtained materials from petitioner to be used in a residential construction project. However, Grimsley failed to pay for the materials and, at the closings of the residences involved, falsely signed affidavits stating that all material suppliers, including petitioner, had been paid in full. Thereafter, Grimsley became insolvent. Petitioner then brought this action against respondent to recover the money owed by Grimsley. ³ Petitioner alleged in its complaint that Grimsley's act of failing to pay for the materials, and Grimsley's act of signing the false affidavits, fell within the purview of the protection extended by the surety bond and therefore petitioner was entitled to recover. The circuit court disagreed and rendered judgment against petitioner. The Court of Appeals affirmed.

ISSUE

Did the Court of Appeals err in holding that the wrongful acts of Grimsley were not covered under the terms of the surety bond?

DISCUSSION

The Court of Appeals held that Grimsley's failure to pay for the materials and Grimsley's act of signing the false affidavits were not covered under the terms of the surety bond because these acts did not involve construction standards or health and safety requirements. Petitioner argues this was error in two respects. First, petitioner contends the Court of Appeals erred in focusing on whether Grimsley's acts violated an actual construction standard or health and safety requirement rather than focusing on whether the acts violated a "rule or regulation which pertains to construction standards and health and safety requirements". Petitioner maintains that since the Commission promulgated a regulation which states a builder's license may be revoked for "misconduct in the performance of home building", ⁴ and this regulation "pertains to construction standards", ⁵ the condition of the surety bond was triggered whether or not Grimsley's acts of "misconduct" were themselves a violation of a construction standard or health and safety requirement. We disagree.

In Kennedy v. Henderson, 289 S.C. 393, 346 S.E.2d 526 (1986), a case involving a surety bond similar to the bond at issue here, this Court held that the trial judge erred in failing to sustain a demurrer to the plaintiff's complaint where no violations of any construction standards or health and safety requirements were alleged or inferred in the complaint, even though the complaint clearly alleged "misconduct" on the part of the builder.

In Kennedy, the plaintiffs hired a builder to construct a dwelling-house type building to be used as a nursery. The plaintiffs advanced the builder $11,000 for the project. When the builder failed to commence construction on the building and failed to return the plaintiffs' money, they brought an action against the builder. The plaintiffs also sought to recover from the builder's surety under the terms of a bond containing the identical condition as the bond issued by respondent in this case.

As in the case at hand, the question presented to the Court inKennedy was whether the alleged wrongful acts of the builder fell within the purview of the protection extended by the surety bond. In holding that the alleged wrongful acts were not covered under the terms of the bond, we stated:

The surety bond in question is very clear. It is conditioned on the builder's compliance with certain rules and regulations pertaining to construction standards and health and safety requirements. It is not a performance bond guaranteeing completion of the work contracted. No violations of any construction standards or health and safety regulations are alleged or inferred in the complaint. In fact, the complaint on its face shows that a violation of any of these standards would be virtually impossible because construction of the nursery was never begun.

Id. at 396-397, 346 S.E.2d at 528.

Under Kennedy, therefore, in order to state a cause of action under the terms of a surety bond such as the one at issue here, a violation of some construction standard or health and safety requirement must be alleged or inferred in the complaint. This is so because the bond, as written, is neither a performance bond guaranteeing completion of the work contracted nor a payment bond guaranteeing that all material suppliers will be paid. ⁶

Next, petitioner argues that even if an actual violation of a construction standard or health and safety requirement was required to trigger liability under the terms of the surety bond, the complaint sufficiently alleged a violation of a construction standard. ⁷ We disagree.

Although not specifically defining the term "construction standard", this Court essentially held in Kennedy that a construction standard is something related to the actual construction of a building, residence, etc. Here, the wrongful acts alleged in petitioner's complaint, i.e., Grimsley's failure to pay petitioner for the materials and Grimsley's signing of false affidavits indicating petitioner had been paid, had nothing to do with the actual construction of the residences involved. Consequently, no violation of any construction standard is alleged or inferred in petitioner's complaint.

In short, whereas Grimsley's acts of failing to pay for the materials and signing the false affidavits may constitute "misconduct", ⁸ and may be grounds to revoke, suspend, or restrict Grimsley's license pursuant to S.C.Code Ann. § 40-59-90 (Supp.1995) and 27 S.C.Code Ann.Reg 106-7 (Supp.1995), or may be grounds for criminal prosecution under S.C.Code Ann. § 29-7-20 (Supp.1995), the acts do not fall within the purview of the protection extended by the surety bond at issue. ⁹ Consequently, the Court of Appeals correctly held that petitioner could not recover under Grimsley's license bond. However, to the extent the Court of Appeals' opinion may be read as holding that...