McWane, Inc. v. Fidelity & Deposit Co. of Maryland, 02-4152.

• Decision Date: 22 June 2004
• Docket Number: No. 02-4225.,No. 02-4152.,02-4152.,02-4225.
• Citation: 372 F.3d 798
• Parties: McWANE, INC., Plaintiff-Appellant/Cross-Appellee, v. FIDELITY & DEPOSIT COMPANY OF MARYLAND, Defendant-Appellee/Cross-Appellant, Grooms Construction Company, Inc.; Highland County Water Company, Inc., Defendants.
• Court: U.S. Court of Appeals — Sixth Circuit

372 F.3d 798

McWANE, INC., Plaintiff-Appellant/Cross-Appellee, v. FIDELITY & DEPOSIT COMPANY OF MARYLAND, Defendant-Appellee/Cross-Appellant Grooms Construction Company, Inc.; Highland County Water Company, Inc., Defendants.

No. 02-4152.

No. 02-4225.

United States Court of Appeals, Sixth Circuit.

Argued: March 16, 2004.

Decided and Filed: June 22, 2004.

COPYRIGHT MATERIAL OMITTED

Daniel F. Gourash (argued and briefed), David Andrew Bell (briefed), Porter, Wright, Morris & Arthur, Cleveland, OH, Mark E. Elsener, Porter, Wright, Morris, & Arthur, Cincinnati, OH, Michael John Montgomery (briefed), Zeiger, Tiggs, Little & Lindsmith, Columbus, OH, for Appellant.

William H. Woods (argued and briefed), Dennis D. Liston (briefed), McNamara & McNamara, Columbus, OH, for Appellee.

Before: KRUPANSKY and GILMAN, Circuit Judges; RUSSELL, District Judge.^*

OPINION

KRUPANSKY, Circuit Judge.

This appeal involves a contract dispute between appellant/cross-appellee McWane, Inc., through its Clow Water Systems Company Division ("McWane"), and appellee/cross-appellant Fidelity & Deposit Company of Maryland ("F&D"), regarding F&D's denial of McWane's claim on a payment bond ("Bond"), issued by F&D as surety to the general contractor Grooms Construction Co., Inc. ("Grooms"), on a water-main project owned by Highland County Water Company ("Highland"). McWane operated as a material supplier on the project prior to Grooms' bankruptcy.¹ McWane appeals from the district court's denial of its motion for summary judgment and the grant of summary judgment to F&D predicated on the court's conclusion that McWane impaired F&D's suretyship status when it endorsed a series of multiparty checks from the public municipality. Additionally, F&D has cross-appealed from the district court's decision that neither the joint check rule nor the Uniform Commercial Code ("UCC") were dispositive in support of F&D's argument for summary judgment. For the reasons discussed below, this court reverses the district court's grant of summary judgment to F&D while affirming the district court's conclusion that neither the joint check rule nor the UCC proved dispositive in the instant case.

In March of 2000, F&D agreed to stand surety on a payment bond for Grooms, the low bidder and general contractor on a water main project owned by Highland. McWane contracted with Grooms to supply pipe materials for the Project.² Prior to the start of construction, Highland arranged with Grooms to issue joint checks during phases of the Project, with each check made payable to Grooms and its many suppliers, including McWane.³ Highland and Grooms arrived at this arrangement without prior notice to McWane or the other suppliers.⁴

This arrangement required McWane, along with other named suppliers on the project, to endorse a joint check and return it to Grooms prior to the issuance of separate payment from the General Contractor. Highland issued a total of four joint checks between April and July of 2000, totaling approximately $1.1 million.⁵ After McWane and other co-payees had endorsed the checks, Grooms then issued separate checks. After the multiple parties endorsed check # 2, Grooms presented a separate check to McWane for $180,912.24.⁶ That check cleared and was applied to outstanding invoices. After the multiple parties endorsed check # 3, Grooms presented a separate check to McWane for $78,156.73, which cleared. After Highland issued check # 4 and prior to full endorsement from all co-payees, Grooms presented McWane with a separate check in the amount of $111,522.38, at the same time that McWane endorsed check # 4. However, before McWane deposited check # 4, Grooms stopped payment. McWane received no other money directly from Grooms, but did receive four checks directly from Highland (being previously endorsed by Grooms) totaling $29,817.63.

Once Grooms stopped payment on the check, McWane submitted a claim to F&D on the Bond for $440,208.56, the estimated amount of Grooms' arrears to McWane.⁷ On September 7, 2000, F&D denied McWane's claim. In its denial letter, F&D maintained that McWane had forfeited its right to recover under the joint check rule.

On November 24, 2000, McWane filed a complaint against Highland, Grooms, and F&D. The claims against Grooms included an action on an account and breach of contract, while the claims against F&D were for breach of payment bond and declaratory judgment. F&D and Highland also filed cross-claims. Thereafter, the parties conducted discovery, including depositions of various party representatives.

On October 31, 2001, the parties filed simultaneous motions for summary judgment. McWane filed a motion for summary judgment against F&D, Highland, and Grooms, while both F&D and Highland filed separate motions for summary judgment against McWane.

On September 13, 2002, the district court granted McWane's unopposed motion for summary judgment against Grooms in the amount of $470,214.82, plus interest. The court also granted Highland's and F&D's motions for summary judgment against McWane and denied McWane's motions for summary judgment against Highland and F&D. The court concluded that McWane was not entitled to recover against F&D because McWane had impaired F&D's suretyship status. However, the court refused to find dispositive F&D's additional claims involving the application of the joint check rule and the UCC.

On October 11, 2002, McWane made timely appeal from the district court's order denying its motion for summary judgment against F&D. McWane did not appeal the grant of Highland's motion for summary judgment, and Grooms did not appeal the uncontested grant of summary judgment in favor of McWane. On October 18, 2002, F&D timely filed its notice of cross-appeal.

This court has jurisdiction over this action pursuant to 28 U.S.C. §§ 1291. This court reviews de novo a district court's grant of summary judgment. Peters v. Lincoln Elec. Co., 285 F.3d 456, 465 (6th Cir.2002). A district court's interpretation of state law is also governed by the de novo standard. Ferro v. Garrison Ind., Inc., 142 F.3d 926, 931 (6th Cir.1998).

"Suretyship is the contractual relation whereby one person, the surety, agrees to answer for the debt, default or miscarriage of another, the principal, with the surety generally being primarily and jointly liable with the principal." Solon Family Physicians, Inc. v. Buckles, 96 Ohio App.3d 460, 645 N.E.2d 150, 152 (1994) (citing Hopkins v. INA Underwriters Ins. Co., 44 Ohio App.3d 186, 542 N.E.2d 679, 682 (1988)); see also Manor Care Nursing & Rehab. Ctr. v. Thomas, 123 Ohio App.3d 481, 704 N.E.2d 593 (1997); St. Paul Fire & Marine Ins. Co. v. Industrial Comm. of Ohio, 30 Ohio St.3d 17, 506 N.E.2d 202, 204 (1987) (stating that the surety's obligation is created concurrently with that of the principal debtor).

The doctrine of surety has several defenses by which the surety may avoid liability on the contracted payment bond. F&D has relied upon one of these defenses in arguing that by signing the multiple-party checks presented by Grooms, McWane extended the time of payment by Grooms without F&D's consent, thus discharging the surety obligation.

The district court agreed with F&D's argument that McWane impaired Fidelity's "suretyship status" by unilaterally negotiating the highland checks back to Grooms, without Fidelity's consent, and thereby intentionally forfeiting its right to be paid for its materials from the proceeds of the four multiple-party checks. The district court concluded, "Ohio courts would hold that plaintiff impaired its suretyship status by endorsing the checks presented by Grooms without taking steps to secure payment from Grooms for the materials plaintiff had supplied so as to relieve Fidelity of liability to plaintiff under the Payment Bond."

The determination of the district court, in the instant case, hinged on the Ohio court's decision in a markedly similar case, Water Works Supplies, Inc v. Grooms Const. Co., Inc., No. 10CV 010 (Ohio Ct. Com. Pl. Sept 27, 2001) (unpublished decision). In Water Works, the trial court concluded that F&D's surety obligations were discharged when another supplier, Water Works, endorsed the joint checks issued by Highlands. However, upon review, the Ohio Court of Appeals found little merit in that conclusion, relying instead on the clear language of the Bond to reverse the lower court's grant of summary judgment to F&D. Water Works Supplies, Inc., v. Grooms Construction Co., Inc., 2003 WL 1563809 (Ohio Ct.App.2003) (unpublished table opinion), appeal not accepted for review Water Works Supplies, Inc. v. Grooms Constr. Co., Inc., 99 Ohio St.3d 1469, 791 N.E.2d 984 (2003). In the instant case, this court considers persuasive the reasoning and conclusions of the Ohio Court of Appeals, as the Water Works suit involved the same defendant, the same project, the same joint checks and the identical payment bond waiver clause as presented in the case sub judice.

The Ohio courts have recognized that an agreement between the creditor and principal that extends the time for performance will not discharge the surety "absent a concrete showing of prejudice." Water Works, 2003 WL 1563809 at *4. As the Ohio Court of Appeals noted in reversing the lower court's decision in Water Works, an adequate showing of prejudice may arise where "the principal could have paid the debt by forwarding to the claimant its share of a payment received from the owner, had the claimant not given the principal an opportunity to misapply or dissipate those funds by agreeing to an extension." Id.

In the instant case, F&D has claimed that by endorsing the joint checks, McWane improperly granted Grooms an extension of time for payment. In response, McWane has argued persuasively that F&D expressly waived any defense based upon an extension of time in the waiver clause of the Bond.

Evaluating the merit of F&D's defense requires an examination of the language of the Bond. See ...