United City of Yorkville v. Ocean Atl. Serv. Corp.

• Court: U.S. District Court — Northern District of Illinois
• Writing for the Court: REBECCA R. PALLMEYER
• Decision Date: 30 September 2013
• Docket Number: No. 11 CV 1984,11 CV 1984
• Citation: United City of Yorkville v. Ocean Atl. Serv. Corp., No. 11 CV 1984 (N.D. Ill. Sep 30, 2013)
• Parties: THE UNITED CITY OF YORKVILLE, Plaintiff, v. OCEAN ATLANTIC SERVICE CORPORATION; AMERICAN SOUTHERN INSURANCE COMPANY; and OCEAN ATLANTIC/PFG WESTBURY, LLC Defendants.

THE UNITED CITY OF YORKVILLE, Plaintiff, v. OCEAN ATLANTIC SERVICE CORPORATION; AMERICAN SOUTHERN INSURANCE COMPANY;and OCEAN ATLANTIC/PFG WESTBURY, LLC Defendants.

No. 11 CV 1984

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION

Dated: September 30, 2013

Judge Rebecca R. Pallmeyer

MEMORANDUM OPINION AND ORDER

Plaintiff United City of Yorkville ("Yorkville" or "the City") brought this lawsuit for payment on certain construction bonds related to public improvements to be constructed in Yorkville, a town in Kendall County, Illinois. Defendant American Southern Insurance Company ("American Southern"), acting as a surety, issued the bonds to Yorkville on behalf of Defendant Ocean Atlantic Service Corporation ("Ocean Atlantic"). Ocean Atlantic, the principal on the bonds, failed to compete the project, and subcontractors filed liens on the subject property. Yorkville then sought payment on the bonds. American Southern refused to make payment, and warned Plaintiff that the bonds at issue were performance bonds-that is, bonds meant to assure performance of the contracted construction work-rather than payment bonds, which guarantee payment of laborers and suppliers for a project. When Plaintiff brought this suit in March 2011, the Defendants denied liability.¹ American Southern again warned Plaintiff that the bonds at issue were performance bonds. More than a year later, in June 2012, Plaintiff sought leave to file an amended complaint seekingpayment on the bonds, and adding, in the alternative, a claim for performance. American Southern moved to dismiss that claim, Count IV of Plaintiff's Third Amended Complaint, as time-barred. (American Southern's Mot. to Dismiss Count IV (hereinafter "Def.'s Mot. to Dismiss") [63] at 4.) This court overruled American Southern's timeliness objection without prejudice to reconsideration on a showing, on summary judgment or at trial, that the Plaintiff's delay in demanding performance unduly prejudiced American Southern. (See Oct. 12, 2012 Order [86].) The parties have now brought cross motions for summary judgment on all of Plaintiff's claims. For the reasons set forth herein, Defendant's motion [91] is granted, and Plaintiff's motion [94] is denied.

PROCEDURAL HISTORY

Yorkville filed its original complaint on March 21, 2011, alleging, in three counts, that Defendants failed to make promised payments on six construction bonds covering public improvements in Yorkville.² (See Pl.'s Comp. [1].) On June 29, 2012, Yorkville moved for leave to amend its complaint to add Count IV, which seeks performance of the construction covered by the bonds as an alternative claim for relief, should the court conclude that the bonds are performance bonds rather than payment bonds. The court granted Yorkville's motion [51] on July 9, 2012, without prejudice to American Southern's timeliness defense. (See Jul. 9, 2012 Minute Order [56].) Yorkville filed its third amended complaint on July 9, 2012. (See Third Am. Compl. (hereinafter "3d Am. Compl.").) The parties have since filed cross motions for summary judgment.

FACTUAL BACKGROUND

In May of 2005, Defendant Ocean Atlantic, a real estate developer, owned approximately 300 acres of land, the Westbury Village Subdivision Property ("Westbury Village"), located partially within the Yorkville city limits. (Pl.'s 56.1 ¶ 6.) Ocean Atlantic planned to develop Westbury Villageas a "contiguous planned unit development with commercial and residential uses, together with open and recreational use areas." (Id. ¶ 7.) As a condition of the property's development, Yorkville required Ocean Atlantic to make and pay for certain public infrastructure improvements, including earthwork, sanitary sewer, water main, storm sewer, streets, erosion control, and landscaping improvements. (Id. ¶ 8.) Yorkville Subdivision Control Ordinance § 8.02.01 requires a developer to post an irrevocable bond payable to the City of Yorkville "to assure the satisfactory installation of required improvements." (Yorkville Subdivision Control Ordinance, Ord. No. 2004-52 § 8.02.01 [96-7], Ex. 4 to Pl.'s 56.1, at 18.) The ordinances required Ocean Atlantic, as a developer, to post bonds covering 110% of the estimated cost of the improvements. (Pl.'s 56.1 ¶ 10.) To satisfy this requirement, between October of 2005 and June of 2006, American Southern, acting as a surety for Ocean Atlantic, issued several bonds to Yorkville covering the required improvements.³ (Pl.'s 56.1 ¶¶ 11-18.) All of the bonds are identical, except for the amount insured and the specific improvements guaranteed. Each bond represented that 110% of the cost of the relevant improvement "is available to be drawn upon for the benefit of [Yorkville] upon presentation to [American Southern] of your demand for performance." (The Bonds at 1.)

The bonds set forth a list of events or conditions that would entitle the City of Yorkville to deem Ocean Atlantic in default, triggering the right to make a demand on the bonds. One of those conditions is "if the City of Yorkville has determined that the public improvements or other improvements covered by this [bond] have been or are likely to be the subject of liens or otherclaims by contractors, subcontractors or third parties." (3d Am. Compl. at 4, 6-7, 10, 14⁴; The Bonds at 3.) In the event of a default, the bonds provide that the City of Yorkville can make a demand on the bonds by "presenting the Surety with a letter from the City Clerk . . . demanding performance accompanied by the certificate of the City Clerk . . . certifying the basis for the default and demand on this Subdivision Bond." (Ex. A to 3d Am. Compl. at 3; Ex. E to 3d Am. Compl. at 3; Ex. F to 3d Am. Compl. at 3; Ex. G to 3d Am. Compl. at 3; Ex. J to 3d Am. Compl. at 3; Ex. K to 3d Am. Compl. at 3.)

Ocean Atlantic contracted with subcontractors to complete some of the improvements. (Pl.'s 56.1 ¶¶ 20, 22, 24.) Those subcontractors included: Aurora Blacktop, Inc. ("Aurora Blacktop") for street improvements; Pirtano Construction Company ("Pirtano") for water main and sanitary and storm sewer improvements; and Ryan Incorporated Central ("Ryan") for earthwork and erosion control improvements (collectively "the Subcontractors"). (Id.) The project stalled after Ocean Atlantic ran into financial difficulties, and the subdivision was never completed. The Subcontractors filed mechanics liens against the Westbury Village property for the unpaid work, the first on February 22, 2007; a second on August 22, 2007; and a third on November 27, 2007.⁵ (Def.'s 56.1 Resp. ¶¶ 21, 23, 25.)

In December of 2007, Ocean Atlantic retained CEMCON, Ltd, ("CENCOM"), a licensed professional engineering firm, to determine what improvements had been completed, and the cost to complete the remaining work. (Def.'s 56.1 ¶¶ 26-27; Heath Aff. [93-13], Ex. I to Def.'s 56.1, ¶ 7.) CEMCON estimated that as of December 2, 2007, the cost to complete the improvements was atleast $568,023.06 and, including contingent factors, $720,577.14. (Def.'s 56.1 ¶ 28.) The record is silent as to what, if any, action was taken regarding the bonds between December 2007 and May 2009.

On May 26, 2009, the Yorkville City Council directed the City Clerk to make demand upon American Southern for payment on three of the bonds covering sanitary improvements, each of which was already subject to a lien.⁶ (Pl.'s 56.1 ¶ 28-32.) Yorkville made that demand by letter on May 28, 2009, notifying American Southern that improvements covered by the bonds were subject to liens, and demanding "payment of the referenced bonds." (Pl.'s 56.1 ¶¶ 29-32; May 28, 2009 Letter from Yorkville City Clerk Jacquelyn Milschewski to American Southern, Ex. I to 3d Am. Compl., at 1.) American Southern, acting through the United Risk Management Corporation ("URMC")-a company it "engaged to assist [it] pertaining to the claims made by Yorkville"-responded in a letter on June 18, 2009 that the bonds at issue were performance bonds, not payment bonds. (Def.'s Rule 56.1 Stmt. of Facts [93] (hereinafter "Def.'s 56.1") ¶ 12; June 18, 2009 Letter from URMC to Milschewski, Ex. M to 3d Am. Compl., at 1-2.) URMC, on behalf of American Southern, wrote that because the bonds were performance bonds, not payment bonds, Yorkville had no basis to demand payment for unpaid contractors, subcontractors, or third parties: the City could only demand completion of construction work. (June 18, 2009 Letter from URMC to Milschewski at 1-2.) The letter also requested (without setting a specific deadline) that Yorkville "[p]lease advise, in writing" if Yorkville would make a demand on American Southern "to complete and guarantee the performance/completion of the bonded improvements" pursuant to the bonds. (Id. at 2.)

In the meantime, it had become clear that sanitary improvements were not the only aspect of the project that was incomplete. On June 17, 2009, Ocean Atlantic sent a letter to Yorkville,stating that because the default provisions on the bonds had been met through liens and pending foreclosures⁷ on the property, "it is our recommendation that the City call all of the bonds . . . to ensure that the subdivision is completed and that all existing mechanics liens are released . . . . Funds received from the bonds should be placed into an escrow to pay for the release of any mechanics liens and to ensure the completion of any improvements." (June 17, 2009 Letter from Ocean Atlantic to Yorkville [96-13], Ex. 9 to Pl.'s 56.1, at 1.) Yorkville characterizes this letter as an acknowledgment, on the part of Ocean Atlantic, the developer, that "payment on [each of the bonds] should be made." (3d Am. Compl. at 4, 8, 11.) American Southern does not offer its own spin on the letter's meaning; it argues that the letter is irrelevant since the bonds "specifically state[] that neither the obligee [Yorkville] nor the surety [American Southern] are bound by the instructions of the principal [Ocean Atlantic]." (American Southern's...