Nashville Ford Tractor v. Great American

• Decision Date: 29 December 2005
• Citation: 194 S.W.3d 415
• Parties: NASHVILLE FORD TRACTOR, INC. v. GREAT AMERICAN INSURANCE COMPANY.
• Court: Tennessee Court of Appeals

194 S.W.3d 415

NASHVILLE FORD TRACTOR, INC. v. GREAT AMERICAN INSURANCE COMPANY.

Court of Appeals of Tennessee, at Nashville.

April 16, 2004 Session.

December 29, 2005.

Published pursuant to Tenn. Ct. App. R. 11.

Arthur E. McClellan and Jade A. Rogers, Gallatin, Tennessee, for the appellant, Great American Insurance Co.

John R. Reynolds, Nashville, Tennessee, for the appellee, Nashville Ford Tractor, Inc.

OPINION

WILLIAM C. KOCH, JR., P.J., M.S., delivered the opinion of the court, in which WILLIAM B. CAIN and FRANK G. CLEMENT, JR., JJ., joined.

This appeal involves a dispute over the payment for leased construction equipment used on two sewer projects for the City of Gallatin. The general contractor was required to take over and complete the work after a subcontractor and sub-subcontractor defaulted. Thereafter, the company that had leased three pieces of construction equipment to the subcontractor and sub-subcontractor submitted claims for payment to the general contractor and the contractor's bonding company. The general contractor declined to pay for the equipment and filed suit for breach of contract against the subcontractor in the Circuit Court for Sumner County. The contractor also sought a declaratory judgment regarding its rights, as well as those of its bonding company, the subcontractor, and the City, under the construction contract, the subcontracts, and the payment bond. Following a two-day bench trial, the trial court awarded the equipment leasing company a $38,399 judgment against the bonding company and the sub-subcontractor and a $29,232 judgment against the subcontractor. The court also denied the equipment leasing company's request for pre-judgment interest because it had intentionally falsified documents during the collection process. The bonding company appealed. We have determined that the trial court erred by failing to dismiss all of the equipment leasing company's claims against the payment bond after expressly finding that the leasing company had committed fraud during the claims process. Accordingly, we reverse the judgment against the contractor's surety.

I.

Ralph M. Webster has been in the construction industry in Gallatin and Sumner County since 1954.¹ Beginning in 1994, Mr. Webster subcontracted the underground utility work on his construction projects to Murrell Construction.² On May 8, 1996, the City of Gallatin awarded Mr. Webster a $532,853 contract to install approximately 14,000 linear feet of sewer lines and appurtenant structures in the area of Lock Four Road. Mr. Webster's bid for the project was based on cost estimates provided by Murrell Construction, and Mr. Webster entered into a $433,490 subcontract with Murrell Construction to perform all the work required by the prime contract. The difference between the amount of the prime contract and the subcontract represented the value added by Mr. Webster in providing oversight, administrative support, and the performance and payment bonds required by statute and the prime contract.³ The deadline for completion of the Lock Four Road project was November 8, 1996.

Work began in earnest at the Lock Four Road site on June 1, 1996. On that day, Mr. Webster, at Murrell Construction's request, transported to the construction site a Fiat-Allis Hitachi FX210 excavator (Hitachi excavator) that Murrell Construction had been leasing from Nashville Ford Tractor, Inc. (Nashville Ford Tractor) for approximately one year.⁴ Murrell Construction used the Hitachi excavator to dig the trenches for the installation of sewer lines and other underground structures on its subcontracts with Mr. Webster. According to Randy Murrell, the Hitachi excavator was at the Lock Four Road site throughout June and July 1996.

On July 8, 1996, the City of Gallatin awarded Mr. Webster a second contract to install approximately 4,000 linear feet of sewer lines and appurtenant structures at the Gallatin Industrial Center. Mr. Webster subcontracted all of the work under the prime contract to Murrell Construction. The City agreed to pay Mr. Webster $256,999 for the work, and Mr. Webster agreed to pay Murrell Construction $218,622. Thus, Mr. Webster's profit on the Gallatin Industrial Center project would have been $38,377 minus expenses. The deadline for completion of the Gallatin Industrial Center project was January 3, 1997.

Murrell Construction subcontracted with Randy Murrell's brother, Ted Murrell, to assist on the Lock Four Road project.⁵ On July 9, 1996, Ted Murrell leased a Samsung SE210 excavator (Samsung excavator) from Nashville Ford Tractor, and on August 20, 1996, he leased a Fiat-Allis FR140 rubber wheel loader (Fiat-Allis wheel loader) for earth moving. With two excavators on the Lock Four Road site, Randy Murrell could continue work in one direction with his crew while Ted Murrell set off in the opposite direction with a second crew. However, in mid-August 1996, Murrell Construction had Mr. Webster transport the Hitachi excavator to the Gallatin Industrial Center site so that work could begin on the second project. According to Randy Murrell, the Hitachi excavator remained at the Gallatin Industrial Center for four to five weeks before being moved back to the Lock Four Road site.⁶

By October 1996, the Lock Four Road project was in serious trouble. The November 8, 1996 deadline was fast approaching, and Murrell Construction was not on target to meet it. In addition, the cost of labor, materials, and equipment for the two large City projects had pushed Murrell Construction's financial resources to the breaking point. Although Murrell Construction received checks totaling more than $265,000 from Mr. Webster in July, August, and September 1996 as progress payments on the two projects, Murrell Construction and Ted Murrell were unable to make the August 1996 lease payments to Nashville Ford Tractor on the Hitachi excavator and the Fiat-Allis wheel loader. In September and October 1996, they were unable to make the lease payments on all three pieces of heavy equipment they were leasing from Nashville Ford Tractor.⁷

In late October or early November 1996, James Steven Denny, one of the owners of Nashville Ford Tractor, spoke with Mr. Webster about the delinquency on the Murrell Construction and Ted Murrell accounts.⁸ Mr. Webster informed him that Murrell Construction was about to receive a large draw on the two projects and advised him that Nashville Ford Tractor should attempt to get its money from the Murrells then.⁹ However, when Murrell Construction received the December 13, 1996 progress payment of $49,158.50 from Mr. Webster, the Murrells did not use these funds to pay the outstanding balances on their accounts with Nashville Ford Tractor. They explained to Nashville Ford Tractor that the December progress payment was not as large as they had been expecting.

In December 1996, Nashville Ford Tractor retrieved the Fiat-Allis wheel loader from the Lock Four Road site but allowed the Murrells to continue using the Hitachi and Samsung excavators for the next few months because the two City projects could not be completed without them. Throughout this time, the Murrells repeatedly assured Mr. Denny that both projects were nearing completion, that the final payments on the subcontracts from Mr. Webster would be sufficient to cover the outstanding balance on the equipment leases, and that they would bring their accounts with Nashville Ford Tractor current when they received the final subcontract payments.

Unfortunately, Murrell Construction did not complete the two City projects and thus never received the expected final payments. Substantially all of the pipe and appurtenant structures had been installed at the Gallatin Industrial Center site by the end of November 1996, and the same was true of the Lock Four Road project by the end of January 1997. However, the rain that had fallen during the construction had caused a great deal of soil erosion, and by March 1997, Murrell Construction had not yet fully restored the surface areas to their pre-construction condition as required by the contracts. As a result, Murrell Construction could not obtain releases from all of the adjoining landowners, and the City would not accept the projects as complete without the releases. Unable to pay their laborers or make further lease payments, Murrell Construction and Ted Murrell abandoned the job sites in early or mid-March 1997 and arranged with Nashville Ford Tractor to reclaim the two excavators.¹⁰

Shortly after Murrell Construction abandoned the two job sites in March 1997, Nashville Ford Tractor began attempting to collect on the Murrells' delinquent lease accounts from the City, Mr. Webster, and Great American Insurance Company (Great American), the company that issued the performance and payment bonds for both projects.¹¹ On March 22, 1997, Nashville Ford Tractor's collections manager wrote to the City requesting assistance in collecting $72,607.50 in unpaid lease payments for the three pieces of equipment it claimed Murrell Construction had used on the Lock Four Road project under subcontract with Mr. Webster.¹² Nashville Ford Tractor threatened to file a lien against the Lock Four Road project if the leases remained unpaid.

Attached to Nashville Ford Tractor's letter to the City were documents purporting to be copies of the original lease agreements for the Hitachi excavator for the months of August 1996 through March 1997 and for the Samsung excavator for the months of September 1996 through January 1997. Copies of the lease agreements for the Fiat-Allis wheel loader were not attached to the letter, and the leases attached to the letter did not add up to $72,607.50. Of even greater concern, the copies of the lease agreements attached to the letter showed that Nashville Ford Tractor had altered the original agreements after they had been signed by or sent to Murrell Construction and Ted Murrell. On the originals, the space indicating where the...