Winston Corporation v. Continental Casualty Company

• Decision Date: 20 June 1973
• Docket Number: Civ. No. 70-179.
• Parties: The WINSTON CORPORATION, Plaintiff, v. CONTINENTAL CASUALTY COMPANY, Defendant.
• Court: U.S. District Court — Southern District of Ohio

361 F. Supp. 1023

The WINSTON CORPORATION, Plaintiff, v. CONTINENTAL CASUALTY COMPANY, Defendant.

Civ. No. 70-179.

United States District Court, S. D. Ohio, E. D.

March 2, 1973.

On Motion for Reconsideration June 20, 1973.

Dwight I. Hurd, Columbus, Ohio, for plaintiff.

John J. Petro, Columbus, Ohio, for defendant.

OPINION AND ORDER

CARL B. RUBIN, District Judge.

The Winston Corporation, an Ohio corporation, brings this action against Continental Casualty Company, a company organized under the laws of Illinois, on a performance and payment bond issued by Continental as surety for Diversified Engineering and Sales Corporation. The Court's diversity jurisdiction has been properly invoked under 28 U. S.C. § 1332 and the amount in controversy exceeds $10,000.00. The parties are in agreement that the law of Georgia will control the decision of this Court. This matter has now been submitted, following trial to the Court, on the evidence, exhibits, stipulations, and briefs of the parties.

This suit emerges from Winston's efforts to construct, between 1967 and 1969, the King's Inn Nursing Home in Atlanta, Georgia. While Winston and several of its principal officers had some experience in the construction field, primarily in residential housing, the decision to construct this nursing home represented a major and novel commitment of the corporation's resources. By the end of the summer of 1967, it had tentatively arranged for construction loans and commitments from banks in Atlanta, Georgia, and Rochester, New York. Bids were then let and three general contractors including Diversified Engineering and Sales Corporation of Atlanta, Georgia, bid on the project. The three bids came in at approximately $900,000.00 but after further negotiations, Winston entered into a contract with Diversified dated October 3, 1967, whereby Diversified agreed to build the nursing home for $752,874.00 in accordance with plans, specifications, and subcontracts attached to that document. The term of the contract provided for completion of the structure within three hundred (300) days from the time construction commenced.

As a further condition to the contract of October 3, 1967, Diversified agreed to supply a performance and payment bond for the benefit of Winston as obligee. This bond was executed on October 3, 1967, between Diversified, as principal, and Continental, as surety, and by its express terms incorporated the provisions and specifications of the contract of the same date.¹ Before it authorized the bonding of the nursing home project, Continental investigated the financial condition of Diversified and its principals, David W. Knight and Vance Dyer. This investigation revealed that while Diversified's assets, like those of many construction companies, were comparatively thin, its principal Knight appeared quite substantial and, on this basis, Continental accepted the risk of bonding the project.

Prior to the commencement of construction in January, 1968, Continental discovered that Knight was suffering financial ruin and would no longer be participating in the construction of the nursing home. Continental did not object in any form to Knight's withdrawal from the project and accepted Dyer as chief officer of Diversified in his place. It made no effort, however, to inform Winston of the data it had uncovered during its prebonding investigations, which revealed the less than solid financial condition of both Diversified and Dyer. Neither did Continental disclose to Winston that Diversified and Dyer had submitted financial reports which overstated their actual net worth. Continental did not, at any time, suggest that Knight's departure from the project altered their obligations under the bond of October 3, 1967.

Construction work on the nursing home finally commenced in January of 1968 and proceeded disastrously almost from the outset. Under pressure from the municipal authorities, Diversified found it necessary to move the entire site of the project ten feet from where it had expected to build it; and problems having to do with the foundation of the nursing home were also encountered. By the late spring and summer of 1968, it became obvious to everyone connected with the project that construction of the nursing home had fallen hopelessly behind schedule. Despite increased exhortations from Winston and its agents, Diversified was unable to maintain a construction pace reasonably calculated to yield a completed structure at the expiration of the 300-day term. In August, 1968, for example, 70% of the term had elapsed but the structure was only 28% completed. A new certifying architect was brought in at that time in an effort to impose firmer control on the course of the construction.

By the summer of 1968 it had also become obvious to all interested observers that there was little correlation between the percentage of completed structure and the percentage of depleted construction funds. In the middle of September, 1968, for example, approximately one-third of the building was completed but approximately one-half of the contract price had been expended for that portion of the construction.

Continental followed developments at the construction site closely and its agents prepared a continuous stream of memoranda about the position the company should take were a claim filed under the bond. Some of Continental's agents were of the opinion that the bond was not in legal force because of Winston's alleged failures to abide by Article 8.3 of the contract; others argued in memos to the home office that Continental was discharged from its obligations because of a change made in the manner of disbursements in January, 1968, by the lending bank in Atlanta. There is no evidence, however, that Continental firmly decided on a legal course of action prior to the time that a claim was actually made upon the bond in December, 1969.

The 300-day term of the contract expired by November, 1968. Winston, in an effort to clarify its exposure, called for a meeting of the three parties to the surety contract in January, 1969. The company was concerned, as its deadline for closing the permanent loan was April 1, 1969, and because it had already entered into a lease with River City Corporation for the completed nursing home. Continental declined to attend this meeting, indicating somewhat cryptically that it would proceed in accordance with its obligations under the bond. The surety refused, however, to give Winston any opinion on the effect further delay in the construction of the nursing home would have on the continued validity of the bond.

Events reached their climax in April, 1969, with Winston bringing things to a head. It requested a meeting among the three parties in Atlanta, but Continental refused to attend. After negotiations on April 3, 1969, Winston decided to terminate, pursuant to Article 22 of the General Conditions of the Contract,² Diversified's participation in the construction of the nursing home. Diversified reacted to this move by threatening legal action and after further negotiations the parties entered into an agreement dated April 7, 1969. By its terms Diversified was relieved of further responsibility towards the construction of the King's Inn Nursing Home. All of its contracts with the project's subcontractors were assigned to Winston, which took over day by day responsibility for the construction. While the documents drafted by Winston and Diversified do not directly state that the contractor was in default under the contract, the agreement of April 7th constituted the functional equivalent of a declaration of default. Although Winston vigorously denied that this was the intent of the parties, the effect of these negotiations leads inescapably to our present conclusion. It is undisputed that Continental was not given the seven days written notice of plaintiff's intent to default Diversified as was required by Article 22.

With Winston in direct charge of the project, things began to proceed more smoothly. An extension of the bank loans was negotiated and while the original lease for the nursing home was terminated, a new one, albeit at less favorable terms, was entered into. Under Winston's control the nursing home project was completed on October 24, 1969, at a total cost of $1,018,000.00. After Continental refused, in December, 1969, to recognize any liability under the bond, Winston brought the present action to recover actual damages in the amount of approximately $619,000.00 plus interest. This amount represents the additional construction costs over and above the contract price; increased interest on the extension of the permanent loan and the construction loan; and the loss of rental income due to Winston's inability to perform on its lease with River City Corporation. In addition, Winston is seeking to recover punitive damages against Continental for its alleged failure to comply in good faith with the terms of the bond and for the surety's failure to make financial information concerning Diversified available to Winston.

On the state of facts as set forth above, this Court is of the opinion that judgment must be entered in favor of the surety. Our holding is based on two primary grounds: that the agreement entered into between Winston and Diversified on April 7, 1969 constituted a novation of the original contract which, under principles of Georgia law, discharged the surety; and on the further ground that Winston failed to abide by the notice provisions of Article 22 of the Contract, see n. 2 supra. We believe that certain other contentions advanced by the parties are without legal merit.³ These legal conclusions will be discussed in more detail below.

In the past many Georgia courts followed the rule that a compensated surety was not a favorite of the law and had to show that a novation was detrimental to it before being entitled to a discharge. See Peachtree Roxboro Corp. v. United States Casualty...