Seaboard Sur. Co. v. Board of Chosen Freeholders of Warren County

• Decision Date: 02 February 1988
• Citation: 537 A.2d 310,222 N.J.Super. 409
• Parties: SEABOARD SURETY COMPANY and Federal Insurance Company, Plaintiffs-Respondents, v. BOARD OF CHOSEN FREEHOLDERS OF the COUNTY OF WARREN, Defendant-Appellant.
• Court: New Jersey Superior Court — Appellate Division

Page 409

222 N.J.Super. 409

537 A.2d 310

SEABOARD SURETY COMPANY and Federal Insurance Company Plaintiffs-Respondents, v. BOARD OF CHOSEN FREEHOLDERS OF the COUNTY OF WARREN Defendant-Appellant.

Superior Court of New Jersey,

Appellate Division.

Argued Jan. 5, 1988.

Decided Feb. 2, 1988.

James A. Scarpone, Newark, for appellant (Scarpone & Edelson, attorneys; David E. Shaver, on the brief).

Robert W. McCann, Hawthorne, for respondent Seaboard Sur. Co. (Klotz & McCann, attorneys; Richard J. Allen, Jr., on the brief).

Roger P. Sauer, Roseland, for respondent Federal Ins. Co. (Lum, Hoens, Abeles, Conant & Danzis, attorneys; Roger P. Sauer, of counsel; Dennis B. O'Brien, on the brief).

Before Judges PRESSLER, BILDER and SKILLMAN.

The opinion of the court was delivered by

PRESSLER, P.J.A.D.

This controversy arises out of contracts entered into by defendant County of Warren with a group of eight prime contractors for the construction of a new county correctional facility. A consolidated arbitration proceeding is presently pending to which the County and all prime contractors are named parties. During the pendency of the arbitration proceeding but before the holding of any hearings, two of the contractors against whom the County had asserted claims in arbitration, Roanoke Iron and Bridge Works, Inc. and Universal Tank & Iron Works, Inc., became insolvent and bankruptcy proceedings were commenced. Consequently and by operation of federal law, the further prosecution of the arbitration proceedings against these two contractors was automatically stayed. The underlying issue raised by this appeal is whether plaintiffs, who are their respective sureties and each of whom issued a performance bond to the County as required by state law, can either be compelled to arbitrate in their stead or be bound by the arbitration award without participating in the arbitration proceedings.

The trial court entered judgment declaring that the sureties have a contractual obligation to arbitrate and that each had received "sufficient notice of and opportunity to defend the demands for arbitration served upon them by the county." The judgment, however, stayed performance of the sureties' arbitration obligation until the determination in the bankruptcy proceedings of the obligations of each of the contractors to the county or until entry of an order in the bankruptcy proceedings vacating the automatic stay of the arbitration. The County appeals from the stay provision of the judgment. Neither surety has cross-appealed.

The critical facts are largely undisputed. On January 12, 1983 the County entered into a contract with Universal Tank & Iron Works, Inc. for the supply and installation of water supply systems for the proposed correctional facility at the bid price of $226,649. On the same day plaintiff Federal Insurance Company issued a performance bond in favor of the County in that amount. On August 31, 1983 the County entered into a contract with Roanoke Iron & Bridge Works, Inc. for the supply and installation of prison and detention equipment at the bid price of $787,000, and on the same day, plaintiff Seaboard Surety Company issued its performance bond in favor of the County in that amount. ¹ All eight prime contracts, including these two, were in standard American Institute of Architects form and contained a provision binding the parties to arbitration by the American Arbitration Association of all contractual disputes.

In May 1985 one of the other contractors, Soldo Construction Co., Inc., filed a demand for arbitration against the County. The County responded in September 1985 by filing a counter-demand against Soldo and by filing its own demands against the other seven contractors, most of whom, including Universal Tank, then filed a counter-demand. The arbitration proceeding continued through its various prehearing stages, all eight contractors, including Roanoke and Universal Tank, actively participating. In June 1986 all of the various arbitration demands and counter-demands were consolidated by the American Arbitration Association for determination by a single panel of arbitrators. In September 1986 respective counsel for Roanoke and Universal Tank advised the County that their clients had become debtors in federal bankruptcy proceedings--Roanoke in Virginia and Universal Tank in Indiana.

During the next two months, the County attempted to obtain the consent of each of the two contractors to the continuation of the arbitration despite the automatic stay of proceedings against them. By mid-November 1986 both had refused to do so. In the meantime, in mid-October 1986, the County wrote to each of the sureties informing it of the pendency of the consolidated arbitration proceeding, advising it of its venue and docket number, and further advising that, "[t]his letter will serve as the County's formal notice to you that a claim has been made by the County against the Principal on the Performance Bond." Seaboard, Roanoke's surety, replied to the County's notice by letter dated November 3, 1986, requesting, "[i]n order that Seaboard may be better apprised of the issues involved in said arbitration," that the County "furnish us with copies of the claims made by the respective parties, the dates these claims were filed, and advise whether any hearings have been held to date in the subject arbitration." The record does not indicate a response to the notice by Federal, Universal Tank's surety. In any event, by mid-November the County was advised by the two insolvent contractors that neither would consent to continued participation in the arbitration proceeding, and the County forthwith filed an arbitration demand against each of the sureties, seeking to have them arbitrate in the place and stead of their principals.

As of the time the County served its arbitration demands on the sureties, no formal hearings had yet taken place in the consolidated arbitration proceedings, which were still at a relatively preliminary stage. According to the County, shortly after the demands were served, a preliminary conference was held for the purpose of fixing a schedule for the submission of written claims by the parties and the tentative setting of hearing dates. The County, pursuant to the schedule, served its claims against the principals upon the sureties. Thereafter, so the County alleges without dispute, the sureties have received "copies of all correspondence, statement of claims, and any other documents emanating from or submitted to the American Arbitration Association since the filing of the County's Arbitration demand." As we further understand the record, the sureties did not respond to any of these documents or notices, did not attend any of the arbitrators' procedural conferences, and did not attend any of the hearings which, according to the record, commenced in June 1987 and were still ongoing at the time of oral argument of this appeal.

The first significant response of Seaboard was to obtain an order to show cause in January 1987, supported by a verified complaint joining not only the County as a defendant but also its principal, Roanoke, which it already knew to be protected by the automatic stay against litigation provided for by 11 U.S.C.A. § 362. The relief sought by the verified complaint was a judgment declaring that it would not be bound by the decision of the arbitrators, that it was not required to arbitrate, and that its obligations were only adjudicatable by a court of chancery. The order to show cause set a return date of February 26, 1987. The County filed and served its answer and counterclaim at the end of January 1987, the counterclaim seeking an adjudication that the surety would be bound by the arbitration and had an independent contractual duty to arbitrate.

On January 29, 1987 the court, apparently on its own motion, entered an order placing the action on the inactive list by reason of the pending bankruptcy proceedings against Roanoke. The County moved for reconsideration, urging that while the case could not proceed against Roanoke, the pending bankruptcy proceeding did not affect the continued prosecution of the dispute between it and Roanoke's surety, Seaboard. Judge Diana, who heard the motion, which Seaboard contested, agreed and accordingly entered an order in March 1987 severing the claims against Roanoke, restoring the action as between Seaboard and the County to the active calendar, and transferring the matter to the Law Division. Judge Diana explained his reasons for his ruling in a letter opinion in which he relied on Lynch v. Johns-Manville Sales Corp., 710 F.2d 1194, 1196 (6th Cir.1983), which held that "[i]t is universally acknowledged that an automatic stay of proceeding accorded by [11 U.S.C.A.] § 362 may not be invoked by entities such as sureties, guarantors, co-obligors, or others with a similar legal or factual nexus to the Chapter 11 debtor." It is also significant to note that Judge Diana also concluded that Raymond Intern. Bldrs. v. First Indem. of America, 104 N.J. 182, 516 A.2d 620 (1986), an opinion whose relevance we address hereafter and which was then relied on by Seaboard, had no applicability at that stage of the proceedings.

Following the transfer of the action to the Law Division, it was consolidated with Federal Insurance Company's parallel action, which it had commenced in March 1987 and to which the County had responded in the same manner as its response to Seaboard's action. A bench trial, based on the...