State Nat'l Ins. Co. v. Wash. Int'l Ins. Co.
| Decision Date | 19 January 2018 |
| Docket Number | 8:17CV224 |
| Parties | STATE NATIONAL INSURANCE COMPANY, INC., Plaintiff, v. WASHINGTON INTERNATIONAL INSURANCE COMPANY, Defendant. |
| Court | U.S. District Court — District of Nebraska |
Monica L. Freeman, Woods, Aitken Law Firm, Lincoln, NE, Todd W. Weidemann, Woods, Aitken Law Firm, Omaha, NE, for Plaintiff.
Saloni Shah, T. Scott Leo, The Law Offices of T. Scott Leo, Chicago, IL, T. Randall Wright, Baird, Holm Law Firm, Omaha, NE, for Defendant.
This matter is before the Court on defendant Washington International Insurance Company's ("Washington") Motion for Summary Judgment (Filing No. 20) pursuant to Federal Rule of Civil Procedure 56. With jurisdiction in this diversity case under 28 U.S.C. § 1332(a)(1), the Court grants the Motion.
On February 12, 2016, the Nebraska Public Power District ("NPPD") entered into a contract ("Contract") with general contractor JEL Management, LLC's ("JEL") for the construction of a permanent modular office building at the Cooper Nuclear Station in Brownville, Nebraska. The Contract required JEL to provide a surety bond "for the faithful performance and fulfillment of the contract." See Neb. Rev. Stat. § 52–118 et seq. On March 8, 2016, JEL, as principal, and Washington, as surety, executed a performance bond ("Washington Bond") in the amount of $1,246,907 under which Washington agreed to secure JEL's faithful performance of the Contract and "the payment of all laborers and mechanics for labor that shall be performed and for the payment for material and equipment rental which is actually used or rented in the erecting, furnishing, or repairing" the building. Washington further agreed that "no change, extension of time, alteration or addition to the terms of the Contract, or to the work to be performed thereunder, or the specifications accompanying the same [would] in any way affect its obligations on this bond."
In March 2016, JEL and Wallmasters Modular, Inc. ("Wallmasters") entered into a purchase order agreement ("Subcontract") under which Wallmasters agreed to deliver a modular building to the site for $730,500.1 Wallmasters, in turn, entered into a purchase contract with Builders Choice, LLC ("Builders Choice") under which Builders Choice would perform almost all of Wallmasters's scope of work under the Subcontract.
The Subcontract required Wallmasters to obtain a performance bond and a payment bond in the penal sum of $730,500. On March 14, 2016, Wallmasters, as contractor, and plaintiff State National Insurance Company, Inc. ("State National"), as surety, executed the required bonds ("State National Bonds") for the benefit of JEL in the amount of $730,500. Under the State National Bonds, Wallmasters and State National generally bound themselves to JEL "to pay for labor, materials and equipment furnished for use in the [Subcontract]" and for the performance of the Subcontract.
Those bonds were not the first State National had executed on Wallmasters's behalf. Before January 19, 2016, Wallmasters asked State National to execute bonds to guaranty Wallmasters's performance and payment in relation to other construction contracts. State National saw Wallmasters as a risk and would not provide any payment or performance bonds without certain protections. To that end, State National required Wallmasters to use State National's contract administrator, Cinium Risk Management, LLC ("Cinium"), under the terms of a Master Project Accounting Agreement ("MPAA") effective January 19, 2016. JEL was not a party to the MPAA.
The MPAA was "deemed to apply to all construction projects and contracts for which" State National was to provide surety bonds. "As an express condition precedent to" State National issuing such bonds, the MPAA required that Cinium be used to administer all payments for Wallmasters's work. Under the MPAA, Wallmasters agreed to direct the obligee under any State National bond to issue all payments to Cinium. The direction took the form of an Irrevocable Directive of Draw Proceeds ("IDDP"). The purpose of the arrangement was to protect State National from bond claims and ensure the laborers and suppliers on Wallmasters's contracts were paid.
On March 14, 2016, Wallmasters executed an IDDP directing JEL to make all payments for the NPPD project to Cinium. Lance Herrman ("Herrman"), JEL's Director of Operations, countersigned the IDDP, certifying JEL's agreement to comply with the directive. The IDDP stated it was "not intended as an assignment of the [Subcontract]" and did not amend or alter Wallmasters's obligations. State National issued the State National Bonds upon receipt of the executed IDDP.
On April 6, 2016, Wallmasters sent JEL an invoice for $730,500 and a Conditional Waiver and Release on Progress Payment indicating that payment should be made to Wallmasters. In a related email exchange the next day, Herrman, adopting Wallmasters's language, indicated the invoice "for 730,500.00 less 10% retainage is approved the expected payment date for this invoice is 06/10/2016 and will be paid to Cinium Risk Management LLC on behalf of Wallmasters Modular Inc. as per the IDDP agreement." When Cinium asked Herrman on June 17, 2016, when it could expect payment, Herrman responded that JEL could not pay until all of the modular units were delivered.
As the project moved forward, JEL issued two change orders to Wallmasters, first adding $81,795 to the Subcontract price and then deducting $37,359.58. Based on those change orders, Washington sets the final Subcontract price at $774,935.42.
On August 18, 2016, JEL issued a check to Wallmasters for $24,000. On September 7, 2016, JEL sent Wallmasters a Partial Lien Release form. Wallmasters signed and returned the release to JEL as instructed and sent JEL another invoice. The next day, Wallmasters sent payment information for a Wallmasters account at U.S. Bank. Later that day, a JEL affiliate wired $657,4502 to Wallmasters's account. JEL soon realized the payment should have been made to Cinium. On October 25, 2016, JEL notified Wallmasters that further payments due to Wallmasters would be made to Cinium. JEL and its affiliate later requested a return of the wire to Wallmasters but were unsuccessful.
On October 26, 2016, Wallmasters told Cinium it would forward the funds it had received directly to Cinium, but it never did. Wallmasters also never paid Builders Choice, which had delivered and installed the modular building at the NPPD site pursuant to its agreement with Wallmasters.
On December 8, 2016, Builders Choice made a claim against the State National payment bond in the amount of $912,436. State National paid Builders Choice $730,500 in "full settlement of [its] claim against Wallmasters." State National took a General Release & Assignment from Builders Choice under which Builders Choice assigned "all of its rights, title and interest against any person or person which may be liable to [Builders Choice], including but not limited to Wallmasters and JEL, for any labor, materials and/or services provided by" Builders Choice for the NPPD project.
On January 4, 2017, Cinium and State National filed suit in the District Court of Nemaha County Nebraska against Wallmasters and JEL alleging breach of contract against each defendant.3 On January 9, 2017, Wallmasters filed for bankruptcy. State National and Cinium filed a claim in the bankruptcy proceedings for the initial Subcontract amount of $730,500. They also moved for relief from the automatic stay to allow them to pursue their claims against JEL. In granting relief, the bankruptcy court decided Wallmasters had no interest in any retainage held by JEL because "any such sum is held in trust for the benefits of [Cinium and State National] and/or because [they] are subrogated to any rights of [Wallmasters] in any Retainage."
On August 30, 2017, JEL wired $93,485.42 to Cinium for the benefit of Wallmasters. Adding that payment to the two JEL previously made to Wallmasters, Washington maintains JEL has fully paid the Subcontract price of $774,935.42.
Noting Wallmasters did not sign either change order and affirmatively disputed the back charges in the second change order, State National maintains there is a genuine dispute as to the final Subcontract price and whether JEL has paid in full. With respect to the JEL's $24,000 check, State National questions whether the payment is related to the NPPD project and reports the payment does not show up in JEL's accounting records.
On June 5, 2017, State National filed suit against Washington in the District Court of Nemaha County Nebraska. On June 26, 2017, Washington removed the case to this Court (Filing No. 1). A week later, Washington moved to dismiss for failure to state a claim (Filing No. 7).
On July 24, 2017, State National filed an Amended Complaint (Filing No. 9) asserting two causes of action: a claim against the Washington Bond and a claim for contribution. Washington answered (Filing No. 11) the Amended Complaint and withdrew its Motion to Dismiss.
On October 5, 2017, Washington moved for summary judgment (Filing No. 20), arguing fundamental principles of suretyship and sub-suretyship warrant judgment in its favor. See, e.g., A & P Sheet Metal Co. v. Edward Hansen, Inc. , 140 N.J.Super. 566, 357 A.2d 37, 42–44 (1976) (discussing Restatement of Security §§ 146, 147 (1941) ). Washington argues State National cannot enforce the Builders Choice assignment against Washington because State National, as surety for Wallmasters, is the principal surety for the Builders Choice claim and has the primary obligation to pay the claim. See id. at 44 (); Irish v. Woods , 864 N.E.2d 1117, 1122 (Ind. Ct. App. 2007) (analyzing Restatement (Third) of Suretyship & Guar. §§ 53, 57, 59 (1996) ). In Washington's view,...
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