Safeco Ins. v. White House, TN

• Decision Date: 03 February 1999
• Docket Number: Nos. 97-6094,97-6105,s. 97-6094
• Citation: 191 F.3d 675
• Parties: (6th Cir. 1999) Safeco Insurance Company of America and Eatherly Construction Company, Plaintiffs-Appellants/Cross-Appellees, v. City of White House, Tennessee, Defendant-Appellee/Cross-Appellant, United States Environmental Protection Agency, Intervenor-Appellee. Argued:
• Court: U.S. Court of Appeals — Sixth Circuit

Page 675

191 F.3d 675 (6th Cir. 1999)

Safeco Insurance Company of America and Eatherly Construction Company, Plaintiffs-Appellants/Cross-Appellees, v. City of White House, Tennessee, Defendant-Appellee/Cross-Appellant, United States Environmental Protection Agency, Intervenor-Appellee.

Nos. 97-6094, 97-6105

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT

Argued: February 3, 1999

Decided and Filed: September 20, 1999

Appeal from the United States District Court for the Middle District of Tennessee at Nashville; No. 87-00883--John T. Nixon, District Judge. [Copyrighted Material Omitted] Alfred H. Knight, Alan D. Johnson, WILLIS & KNIGHT, Nashville, Tennessee, for Appellants.

Peter H. Curry, Robb S. Harvey, TUKE YOPP & SWEENEY, Nashville, Tennessee, for Defendant-Appellee/Cross-Appellant.

Lisa W. Edwards, Mark L. Gross, Richard S. Ugelow, Charles, E. Leggott, U.S. DEPARTMENT OF JUSTICE, CIVIL RIGHTS DIVISION, APPELLATE SECTION, Washington, D.C., for Intervenor.

Before: MARTIN, Chief Judge; and NELSON and BOGGS, Circuit Judges.

OPINION

BOGGS, Circuit Judge.

Safeco Insurance Company of America and Eatherly Construction Company appeal from two final orders of the district court. Appellants believe that the district court made several errors in the case, which involves an alleged breach of contract by Eatherly. Also, the contract incorporated EPA regulations that Appellants believe violated the Constitution by imposing improper race-based preferences. A jury found that Appellants did not prove that Eatherly did not breach the contract; the district court ruled that the regulations, as it found them to exist, did not violate the Constitution. The City of White House cross-appeals from the district court's order awarding White House damages for the breach but denying it pre-judgment interest. We vacate the judgments below and remand for further proceedings.

I. Background to the Appeal

A. Bid and Execution of Contract

In January 1987, the City of White House, Tennessee ("White House") advertised for bids on Contract III, Job No. 78-16 ("the Project"), for the construction of a sanitary sewer system for White House. On March 12, 1987, White House opened the bids. Eatherly Construction Company, a Tennessee partnership, submitted the low bid, priced at $2,643,749.10. Moore Construction Company submitted the second-lowest bid, at $2,998,029.56, see Safeco Ins. Co. v. City of White House, Tennessee, 36 F.3d 540, 543 (6th Cir. 1994) ("Safeco I")--$345,280.46 higher than Eatherly's bid. ¹ White House chose Eatherly, the low bidder. On March 12, 1987, Safeco Insurance Company of America, a Washington corporation, executed a "Bid Bond." In return for a payment of five percent of the amount bid by Eatherly, Safeco pledged to act as surety for any agreement between Eatherly and White House.

The EPA had already offered a grant to White House to help pay for the Project. To receive the grant, White House had to ensure compliance with several EPA requirements. Thus, White House selected the low bidder "subject to concurrence by the U.S. Environmental Protection Agency." Further, the contract documents incorporated EPA's standard and supplemental requirements (titled "Contractors on Federally Assisted Wastewater Facilities Construction Requirements"). One EPA mandate provided that, "A contractor must comply with the following provisions in its award of subagreements. . . . (d) The requirement for small, minority, women's and labor surplus area business in [40 C.F.R.] §33.240." Another contract document stated that:

It is the policy of the Environmental Protection Agency (EPA) to require its grantees to award a fair share of subagreements to small and minority and women's businesses on contracts ans [sic] subagreements performed under EPA construction grants. This requirement is contained in 40 Code of Federal Regulations Part 33 Section 240.

The contract also provided that, if Eatherly chose to subcontract part of the project, it must submit to the EPA--and to White House, within 10 days after the bid opening--"evidence of the positive steps taken to utilize small, minority, and women's businesses."

On April 9, 1987, Eatherly executed the contract and returned it to White House, which executed the contract on April 16, 1987. On that day, Safeco agreed to act as surety on a "Payment Bond" (guaranteeing that Eatherly would pay its subcontractors and pay for materials and labor) and a "Performance Bond" (guaranteeing White House that Eatherly would perform).

The contract provided that, within 90 days of execution, White House would issue a Notice to Proceed. Thus, White House had until July 15, 1987, to issue the Notice. To verify compliance with the contract terms (including the EPA requirement), the contract required Eatherly to document its compliance, and it permitted White House to reject the bid if Eatherly did not comply. On June 17, 1987, Eatherly informed White House that Eatherly was withdrawing its bid pursuant to its belief that the contract allowed withdrawal after 90 days from the date of bid opening. See Safeco I, 36 F.3d at 543.

On July 16, 1987, White House awarded the contract to Moore Construction Company, the second lowest bidder, for its original bid plus $20,000 for an increase in the price of materials. See ibid. On July 23, 1987, White House wrote to Safeco to demand payment under the Bid Bond. White House contended that Eatherly failed to comply with the EPA requirements; Eatherly contended that it complied with all requirements and that it did not breach the contract by withdrawing the bid. Faced with these conflicting arguments, Safeco sought a declaratory judgment resolving its liability to White House.

B. Initial Proceedings in District Court

In November 1987, Safeco filed a complaint in federal court seeking a declaratory judgment regarding the extent of its liability under the Bid Bond. On information and belief, Safeco related Eatherly's contentions that Eatherly complied with the contract requirements; that White House neither unconditionally accepted the bid nor unconditionally awarded the contract; and that the contract permitted Eatherly to withdraw the bid. Because Safeco (a Washington corporation) named White House (Tennessee) and Eatherly (Tennessee) as defendants, it asserted federal jurisdiction based on diversity. In its answer, White House asserted counter-claims and cross-claims against Safeco and Eatherly for damages under the Bid Bond and Performance Bond, and White House cross-claimed against Eatherly for breach of contract.

Continuances, motions, a magistrate judge's report, and orders followed. The district court adopted the magistrate judge's report that held that Eatherly and White House had a contract, but that material issues of fact remained regarding whether Eatherly breached it by failing to make a good-faith effort to comply with the EPA regulations. In 1990, Chief District Judge Nixon, as he was then, realigned the parties to align Eatherly with Safeco. To preserve diversity, Judge Nixon dismissed without prejudice Eatherly, which he found dispensable.

Eatherly reacted by filing an action in state court against Safeco and White House. See Safeco I, 36 F.3d at 544. Safeco asked District Judge Nixon to stay the federal case, but he denied the motion. White House filed a motion for summary judgment claiming that Eatherly committed anticipatory breach by withdrawing its bid after the contract arose. District Judge Nixon granted the motion. He awarded damages of $352,847.08, pre-judgment interest of $207,358.03, and attorney's fees and costs.

C. Safeco I and its Aftermath

Safeco appealed to this court. On October 3, 1994, this court issued its decision in Safeco Insurance Company v. City of White House, Tennessee, 36 F.3d 540 (6th Cir. 1994) ("Safeco I"). We held that the district court had subject matter jurisdiction because it did not err by dismissing Eatherly. See id. at 544-46. Next, we held that a contract bound Eatherly and White House. See id. at 546-47. We reversed the district court's finding that Eatherly breached the contract. We explained that EPA approval served both as "a promise and condition for Eatherly." Id. at 548. "Eatherly was under a duty to seek EPA approval, and yet EPA approval was itself a condition of Eatherly's duty to perform." Ibid. The opinion concluded by explaining the district court's error:

The issue of breach, then, centers on whether Eatherly exercised good faith in its attempts to comply with the EPA's requirements. If Eatherly made a good faith effort to comply with the EPA's regulations, and the EPA nonetheless withheld approval, Eatherly would have satisfied its obligations under the contract, and Eatherly would have no duty to perform further.

Exactly what constitutes a good faith effort is a difficult question that involves a factual determination.... The analysis is complicated by the question of whether Eatherly withdrew its bid too early and whether Eatherly should have made further attempts to obtain EPA approval. . . . Thus, on the issue of breach, there is clearly a genuine issue of material fact concerning Eatherly's good faith.

Ibid.

Upon remand, the parties began preparing for trial. On June 12, 1995, the Supreme Court issued its opinion in Adarand Constructors, Inc. v. Pena, 515 U.S. 200 (1995), which applied strict scrutiny to federal racial classifications governing construction projects. On June 30, Safeco moved for summary judgment, arguing that the EPA regulations violated the Constitution in light of Adarand and thus that the "contractual obligation is unenforceable."

On August 8, the district court granted White House's motion for a pre-trial ruling on damages. The court held that "the principal measure of damages in this case is, as this Court previously held [before Safeco I], the difference between the Eatherly Construction Company bid and the second low bidder's contract price." In...