Ram Const. Co., Inc. v. American States Ins. Co.

• Citation: 749 F.2d 1049
• Decision Date: 28 December 1984
• Docket Number: No. 84-3146,84-3146
• Parties: RAM CONSTRUCTION COMPANY, INC., Debtor, v. AMERICAN STATES INSURANCE COMPANY. AMERICAN STATES INSURANCE COMPANY v. RAM CONSTRUCTION COMPANY, INC. and Equibank. Appeal of AMERICAN STATES INSURANCE COMPANY.
• Court: United States Courts of Appeals. United States Court of Appeals (3rd Circuit)

Page 1049

749 F.2d 1049

RAM CONSTRUCTION COMPANY, INC., Debtor, v. AMERICAN STATES INSURANCE COMPANY.

AMERICAN STATES INSURANCE COMPANY v. RAM CONSTRUCTION COMPANY, INC. and Equibank.

Appeal of AMERICAN STATES INSURANCE COMPANY.

No. 84-3146.

United States Court of Appeals, Third Circuit.

Argued Oct. 1, 1984.

Decided Dec. 6, 1984.

As Amended Dec. 26, 1984.

Rehearing Denied Dec. 28, 1984.

Jack W. Plowman (argued), Robert Blumling (argued), Plowman & Spiegel, Pittsburgh, Pa., for appellant American States Ins. Co.

Richard B. Tucker, III (argued), Tucker Arensberg, P.C., Pittsburgh, Pa., for appellee.

Before ALDISERT, Chief Judge, and HUNTER and WEIS, Circuit Judges.

OPINION OF THE COURT

WEIS, Circuit Judge.

In this appeal we determine that the bankruptcy judge's ruling--that two separate agreements existed between a contractor and owner--was a matter of contract construction subject to plenary review. Although the district court used the clearly erroneous test, the error is not reversible because under either standard the result here is the same. We also conclude that the bankruptcy judge did not err in ruling that a surety's right of equitable subrogation does not include the right to use profits from a post-bankruptcy contract to offset losses on pre-bankruptcy jobs. Accordingly, we will affirm.

In two consolidated adversary proceedings, the bankruptcy judge determined that liens of a surety should be avoided and denied it priority. The district court on appeal affirmed the orders of the bankruptcy judge.

Ram Construction Company filed for reorganization under Chapter 11 of the Bankruptcy Code on January 21, 1983. At that time, among other construction jobs, Ram was engaged in the removal of a landslide on Saw Mill Run Boulevard in Pittsburgh, Pennsylvania (Slide I), pursuant to a contract with the City dated December 8, 1982. As it had for other projects Ram was performing for the City, American States furnished a performance bond, as well as a labor and material bond, for the Slide I contract.

On February 16, 1983, about three weeks after the filing of the petition, a large rock slide occurred at the project site on the Boulevard (Slide II). There were two fatalities, and the road was closed, causing severe traffic congestion. The City was anxious to remove all debris from the roadway, to stabilize the hillside, and to reopen the Boulevard promptly. The Director of Public Works requested a proposal from Ram to undertake the work.

On February 21, 1983, Ram responded to the City by a letter agreeing to clear the road, but at substantially increased unit prices on all categories of earth and rock removal. Part of the increase was the result of the City's insistence that the work proceed 24 hours a day, seven days per week until completion. To facilitate the work the road would remain closed for the duration of the project, a change from the Slide I contract under which traffic had to be maintained.

The Director of Public Works then asked City Council for "Authorization and Approval for Extra Work on the Saw Mill Run Boulevard rock slide." After receiving that approval, the Department of Public Works issued an "Authorization for Additional Work," utilizing the City Controller's number for the original contract. A new written contract between the City and Ram was not prepared nor were new surety bonds executed.

Under the provisions of the Slide I contract, the City could have required Ram to perform "additional" work at the same unit prices, unless the amount of added work exceeded twenty-five percent of the original contract. The bankruptcy judge found that proviso inapplicable to the situation presented here because of the substantial increase in work required by the second slide.

American States presented evidence that it had suffered losses on other contracts that Ram had performed for the City, e.g., the "sewer job," and that a profit was expected on Slide II. With these facts established, the surety contended that it was entitled to offset its earlier losses against the profits earned on Slide II.

The bankruptcy judge concluded that new contract rights and accounts had been created because the amount of work as well as the unit prices were greatly increased and the around the clock working conditions were significantly different from the original undertaking. That the City, for its convenience and for purposes of internal administration, labeled the project as "additional work" was not dispositive of whether there were two contracts or one. Consequently, the subrogation interest of American States, created by payments made in connection with pre-bankruptcy contracts, did not carry through to the Slide II project begun after the filing of the petition.

The district court affirmed the bankruptcy judge's finding that two separate contracts had been executed and stated, "the factual finding of the bankruptcy court was not clearly erroneous; the court correctly construed the intent of the parties in determining the existence of distinct contracts."

In this court, American States contends that the district court erred in applying the clearly erroneous standard to review the bankruptcy judge's conclusion that there were two separate contracts, and that both forums erred in denying setoff rights. Ram argues that because the Slide II agreement was post-petition, there was no right of setoff against pre-petition obligations to which the surety's subrogation rights could apply.

I

We turn first to the surety's contention that the district court applied an inappropriate standard of review.

The distinction between issues of fact and law in contract disputes is not always sharply defined. When the controversy is over "historical" or "narrative" facts, the clearly erroneous rule is appropriate. For example, in this case, the price agreed on, the amount of work to be performed, and the terms of performance are narrative facts. As to those matters, the surety admits "there is little, if any, dispute as to the facts of this case, and American States does not contend that the factual findings are clearly erroneous, but many of the legal conclusions drawn from these findings are in error."

When the question is one of contract interpretation, the difference between factual and legal conclusions is often confused with the assignment of functions between court and jury. When the agreement is in writing, ambiguous terms are interpreted by the jury, unambiguous ones by the court. Although this latter function is sometimes said to be a legal one, see Brokers Title Co., Inc. v. St. Paul Fire & Marine Ins. Co., 610 F.2d 1174, 1178 (3d Cir.1979), commentators differ.

Some authorities maintain that all questions of contract interpretation are factual matters, some of which are entrusted to the jury in ordinary civil litigation (ambiguous writings), and others which are for resolution by the judge (unambiguous terms). See Community College of Beaver County v. Community College of Beaver County, Society of the Faculty (PSEA/NEA), 473 Pa. 576, 592, 375 A.2d 1267, 1275 (1977); RESTATEMENT (SECOND) OF CONTRACTS Sec. 212 comment d (1981); 3 CORBIN ON CONTRACTS Sec. 554 (1960); 4 WILLISTON ON CONTRACTS Sec. 616 at 648-49, 660-63 (3d ed. 1961). This distribution of functions rests on outdated common law policy considerations, such as jury illiteracy and lack of respect for writings, as well as such continuing concerns as a judicial desire for uniformity. Meyers v. Selznick Co., Inc., 373 F.2d 218, 222 (2d Cir.1966); RESTATEMENT OF CONTRACTS 2d Sec. 212; 4 WILLISTON ON CONTRACTS Sec. 616.

In instances of contract interpretation, therefore, assignment to judge or jury does not of itself determine the standard of review to be applied on appeal. Interpretation by a trial court of a factual matter is reviewable on a clearly erroneous basis, rather than as a plenary one.

Sometimes there is, however, a mixed question of law and fact in which the legal operation of words is intertwined with their interpretation. When that occurs, the reviewing court should separate the issue into its respective parts, applying the clearly erroneous test to the factual component, the plenary standard to the legal. See Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98 (3d Cir.1982). Cf. Pullman Standard v. Swint, 456 U.S. 273, 102 S.Ct. 1781, 72 L.Ed.2d 66 (1982).

When the question is one of "construction" as distinguished from "interpretation" of the contract, the issue is one of law. Professor Corbin's definition of construction starts with interpretation but does not end there. Construction of the contract determines its legal operation--"its effect upon the action of courts and administrative officials.... When a court gives a construction to the contract as that is affected by events subsequent to its making and not foreseen by the parties, it is departing very far from mere interpretation ...." 3 CORBIN ON CONTRACTS Sec. 534, at 9. In determining the legal effect an agreement will have on an event the parties did not foresee, the process is construction, not interpretation. Id. at 12.

"Construction, which may be usefully distinguished from interpretation, is a process by which legal consequences are made to follow from the terms of the contract and its more or less immediate context, and from a legal policy or policies that are applicable to the situation." Patterson, The Interpretation and Construction of Contracts, 64 COLUM.L.REV. 833, 835 (1964). When construction of a contract is the issue before an appellate court, the question is one of law and freely reviewable.

That an agreement is not committed to a single writing does not change the standard of review. When the interpretation of oral contracts or partly oral, partly written, contracts is before an appellate court, special deference is due the factfinder's ability to make credibility assessments. Meyers v. Selznick Company, Inc., 373 F.2d 218 (2d Cir.1966). However,...