National Fire Ins. of Hartford v. Fortune Const.
| Decision Date | 07 February 2003 |
| Docket Number | No. 01-15124.,01-15124. |
| Citation | 320 F.3d 1260 |
| Parties | NATIONAL FIRE INSURANCE COMPANY OF HARTFORD, Plaintiff-Counter-Defendant-Appellee, v. FORTUNE CONSTRUCTION COMPANY, Defendant-Counter-Claimant-Third-Party-Plaintiff-Appellant, Arkin Construction Company, Inc., Third-Party-Defendant. |
| Court | U.S. Court of Appeals — Eleventh Circuit |
W. Frank Greenleaf, Welbaum, Guernsey, Hingston, Greenleaf & Gregory, LLP, Coral Gables, FL, for Fortune Constr. Co. Michael A. Piscitelli, Vezina, Lawrence & Piscitelli, P.A., Fort Lauderdale, FL, for National Fire Ins. Co.
Appeal from the United States District Court for the Southern District of Florida.
Before TJOFLAT and KRAVITCH, Circuit Judges, and VINSON*, District Judge.
The primary issue presented by this appeal is whether a surety on construction contract performance and payment bonds issued on behalf of a subcontractor has superior rights to retained contract balances in the possession of the general contractor when the general contractor completed the performance and has unsatisfied claims against the defaulting subcontractor.
This case arises out of two construction projects — the Winston Park project in Coconut Creek, Florida, and the West Brickell project in Miami, Florida. As general contractor on the projects, Fortune Construction Company ("Fortune") entered into two separate subcontracts with Arkin Construction Company ("Arkin") to build the two apartment complexes, the Winston Park Subcontract and the West Brickell Subcontract. National Fire Insurance Company ("National Fire"), as surety, issued on behalf of Arkin, as principal, performance and payment bonds for the two construction projects. The performance bond and payment bond documents for the Winston Park project were standard forms issued by the American Institute of Architects.1 The performance bond and payment bond documents for the West Brickell project were drafted by National Fire with language that materially differed from the Winston Park bonds. Each of the performance bonds and each of the payment bonds incorporated the appropriate subcontract between Fortune and Arkin by reference.
During construction of the two projects, Arkin began experiencing financial difficulty. National Fire provided financing to Arkin for a short time, but later refused to continue to finance Arkin. Both projects were behind schedule by this time. Arkin's financial difficulties prompted Fortune and National Fire to enter into negotiations about what to do when Arkin defaulted. There was some discussion about National Fire procuring a completion contractor and about the possibility that Fortune could complete construction. The West Brickell project was near completion, but a substantial amount of work still needed to be done on the Winston Park project. Negotiations were still ongoing when, on May 29, 1997, Arkin abandoned both construction projects. On June 12, 1997, Fortune declared Arkin in default and notified National Fire accordingly.
A flurry of letters between the attorneys for Fortune and National Fire ensued. During this increasingly acrimonious exchange, National Fire contends that it tendered, or offered to tender, a completion contractor. While National Fire asserts that Fortune rejected this tender because Fortune wanted to complete construction itself, Fortune maintains that the tender was never made. Fortune demanded that National Fire perform its obligations under both performance bonds by completing the subcontracts. National Fire did not do so. While National Fire made payments to payment bond claimants on both projects, both of the construction projects were actually completed by Fortune as the general contractor, and Arkin is now a dissolved corporation.
The construction subcontracts between Fortune and Arkin each contained a clause obligating Arkin to pay liquidated damages for delays in completing the projects. The Winston Park Subcontract provided for liquidated damages of $35 per day per incomplete apartment and $1,000 per day for incomplete common areas. The West Brickell Subcontract provided for liquidated damages after a specified date of $30 per day per incomplete apartment. Due to Arkin's dilatory performance during the Winston Park and West Brickell construction, Fortune invoked these liquidated delay damages clauses before Arkin abandoned the projects. By the time Arkin defaulted, Arkin owed $1,693,500 in liquidated delay damages on the Winston Park project and $93,600 in liquidated delay damages on the West Brickell project. The subcontracts also made Arkin responsible for the acts and omissions of its own sub-subcontractors. Allied Fire Protection Systems ("Allied"), one of Arkin's sub-subcontractors, failed to pay Davis-Bacon Act wages to its laborers for work performed on the West Brickell project, which apparently involved federally subsidized housing. Consequently, the Department of Labor jointly charged Fortune, Arkin, and Allied a total of $71,126 in back wages attributable to Allied's improper payments, which Fortune paid.
In addition to the West Brickell Subcontract between Fortune and Arkin, the parties entered into a letter agreement dated January 15, 1996 (the same date as the West Brickell Subcontract). This letter agreement recognized that the electrical work had been excluded from Arkin's subcontract on the West Brickell project, but that Arkin had full responsibility for cost overages if the cost of the electrical work exceeded $669,000. Arkin's responsibility was "either finding a replacement subcontractor" for the electrical work at $669,000 or "issuing a credit change order to Fortune" for any amount incurred over and above $669,000.2 However, this letter agreement was not listed as part of the contract documents in the West Brickell Subcontract, which contained two merger and integration clauses. During the West Brickell construction, Fortune's original electrical subcontractor, Monohan's Electric Co., defaulted and did not complete the electrical work. Arkin failed to provide another electrical contractor to complete the project within the fixed $669,000 price. In hiring another electrical contractor, Fortune incurred additional costs amounting to $404,118.81 in excess of $669,000,3 for which Fortune claims a credit against Arkin.
After Fortune completed the two construction projects, Fortune presented National Fire with an accounting of its "performance" costs to complete the Arkin subcontracts. National Fire then prepared an accounting of the net remaining contract proceeds.4 According to National Fire, the remaining contract proceeds exceeded Fortune's costs of completion. National Fire requested that, according to the terms of the bonds, the unpaid contract balances be credited to the respective subcontracts and paid to National Fire, as the subrogee of Arkin. Fortune refused to pay National Fire the contract balances, claiming that it had superior right to the contract balances due to National Fire's failure to perform on its performance bonds and because of Fortune's right to set off the remaining contract claims Fortune had against Arkin. National Fire initiated this civil action against Fortune alleging assignment of Arkin's rights under the subcontracts, equitable subrogation, and breach of the bond contracts. Fortune filed a counterclaim against National Fire for failure to perform under the performance bonds and failure to make the required payments under the payment bonds with respect to payments for Davis-Bacon Act violations, electrical overages, and the liquidated delay damages. Fortune also joined Arkin as a third party defendant responsible for the same damages, due to its breach of the two subcontracts.
Before trial, National Fire filed seven different motions for partial summary judgment.5 The district court entered three separate orders granting partial summary judgment with respect to several of National Fire's motions and granted the remainder in a pretrial conference order. In its first partial summary judgment order, the district court pointed to the language of the "Performance Bond Contract," although the court did not specify which performance bond,6 and held that National Fire had a right to equitable subrogation "under the payment and performance bonds." Thus, the district court held that National Fire's equitable subrogation right to the contract balances was superior to Fortune's right to set off its claims against Arkin under both the payment and the performance bonds. In its pretrial conference order, the district court characterized this ruling as establishing that, to the extent the contract balances exceeded Fortune's reasonable costs to complete construction after Arkin's default, "the excess is to be paid to National Fire up to the amount of National Fire's payment bond expenditures." (R.67 at 2.) In that same order, the district court held that "National Fire had no obligation to complete [construction itself] or to tender [a completion contractor], but rather its obligation was to pay the excess of the costs to complete the contract over the contract balance, if any."7 (R.67 at 3.) According to the district court, as a matter of law, National Fire's failure to complete construction or to arrange for the completion of construction was not a breach of National Fire's performance bond obligations, and thus Fortune was not entitled to consequential damages from National Fire for the costs that Fortune incurred due to Arkin's default under the subject subcontracts.
In its second order granting National Fire partial summary judgment, the district court held that the letter agreement between Fortune and Arkin concerning liability for electrical overages was a separate agreement that had not been integrated into the contracts on which the bonds had been issued. In its third order granting National Fire partial summary judgment, the district court summarily...
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