Xl Specialty v. Com., Dept. of Transp.

• Decision Date: 17 January 2006
• Docket Number: Record No. 0628-04-2.
• Citation: 47 Va. App. 424,624 S.E.2d 658
• Court: Virginia Supreme Court
• Parties: XL SPECIALTY INSURANCE COMPANY v. COMMONWEALTH of Virginia, DEPARTMENT OF TRANSPORTATION.

624 S.E.2d 658

47 Va. App. 424

XL SPECIALTY INSURANCE COMPANY v. COMMONWEALTH of Virginia, DEPARTMENT OF TRANSPORTATION.

Record No. 0628-04-2.

Court of Appeals of Virginia, Richmond.

January 17, 2006.

Andrew J. Terrell, Alexandria (Jane Saindon Dudley; Robert F. Carney; Whiteford, Taylor & Preston, LLC, on briefs), for appellant.

Richard Tyler McGrath, Senior Assistant Attorney General (Jerry W. Kilgore, Attorney General; Judith Williams Jagdmann, Attorney General; Maureen Riley Matsen, Deputy Attorney General; Steven O. Owens, Senior Assistant Attorney General, on brief), for appellee.

Amicus Curiae: The Surety Association of America (Edward G. Gallagher, Vienna; Wickwire Gavin, P.C., on brief), for appellant.

Present: Chief Judge FITZPATRICK, Judge BENTON and Retired Judge BUMGARDNER.^*

FITZPATRICK, Chief Judge.

Appellant, XL Specialty Insurance Company (XL), argues that the trial court erred by: (1) granting the Commonwealth of Virginia, Department of Transportation's (VDOT's) motions to dismiss XL's claims because they were barred by sovereign immunity and (2) failing to allow XL leave to amend its motions for judgment after VDOT's defensive pleas had been sustained.¹

We hold that the trial court properly dismissed XL's claims based on sovereign immunity, as XL was not a party to the contract on which it brings this claim and there is no explicit waiver of sovereign immunity for equitable claims of subrogation. However, we also hold that the trial court abused its discretion in failing to allow XL leave to amend its motions for judgment and, therefore, we affirm in part, reverse in part, and remand the case to the trial court for action consistent with this opinion.

I. BACKGROUND

In 1998, Bravos Concrete, Inc. (Bravos) contracted with VDOT to complete two construction projects, one in Chesterfield County and the other in York County. The Commonwealth required Bravos to guarantee its performance, and as a result Bravos entered into a contract with XL as the surety for payment and for performance on both contracts.² Bravos defaulted on the contracts in 1999, and VDOT required XL to complete the unfinished work. XL entered into takeover agreements with VDOT, under which it agreed to arrange for the completion of the contracts. After the construction was completed, XL submitted a payment request to VDOT for its completion of work defectively done by Bravos for which Bravos had been paid by VDOT. The alleged amount of the overpayments was approximately $530,000 for the Chesterfield project and $210,000 for the York project. VDOT denied the claim, and XL requested that VDOT hold a hearing pursuant to Code § 33.1-386.³ Following that hearing, the deputy commissioner denied XL's claims but offered a settlement of $13,000.

XL rejected the proposed settlement and filed two motions for judgment, one for each project, in the Circuit Court for the City of Richmond. Each motion for judgment asserted two counts of breach of contract. XL did not include in the suits a claim for breach of the takeover agreements. VDOT filed motions to dismiss the motions for judgment because sovereign immunity barred any recovery. The trial court, by letter opinion, granted the motions to dismiss. XL filed additional motions requesting that the trial court reconsider its determination or, in the alternative, grant it leave to amend the motions for judgment to include allegations of breach of the takeover agreements. The trial court denied the motions to reconsider and the request to amend the initial motions for judgment and dismissed the cases.

XL filed a timely notice of appeal to this Court. However, we transferred the appeal to the Supreme Court of Virginia pursuant to Code § 8.01-677.1. See XL Specialty Insurance Co., 269 Va. at 362, 611 S.E.2d at 356. The Supreme Court determined, inter alia, that the proper forum was this Court because the appeal originated as an administrative agency decision and XL was required to follow the procedures set forth in Code § 33.1-192.1, which in turn mandates compliance with Code § 33.1-386. Id. at 372, 611 S.E.2d at 361-62.⁴ Thus we address the remaining issues raised.

II. ANALYSIS

A. SOVEREIGN IMMUNITY

XL first contends that the trial court erred by dismissing its motions for judgment on the ground that they were barred by sovereign immunity. XL asserts two independent grounds for this claim: (1) the trial court erred in concluding that no express contract existed between XL and VDOT and (2) the trial court erred in finding that the equitable right of subrogation failed to give XL a remedy against VDOT. Our analysis of these issues must be guided by the Supreme Court's directives in XL Specialty Insurance Co., 269 Va. at 362, 611 S.E.2d at 356. In that case the Supreme Court specifically found, as a necessary component of addressing the issue of jurisdiction, that there was no express contract between XL and VDOT and that the right of equitable subrogation provided no basis for a remedy.

VDOT's plea of sovereign immunity was made as a plea in bar, and thus we must accept the averments in the motions for judgment as true and rely solely on the pleadings. Tomlin v. McKenzie, 251 Va. 478, 480, 468 S.E.2d 882, 884 (1996). The decision that sovereign immunity barred XL's claims is a legal determination, to be reviewed de novo by this Court. Sheets v. Castle, 263 Va. 407, 410, 559 S.E.2d 616, 618 (2002).

XL first contends that an express contract between XL and VDOT exists because of the tripartite relationship between XL, VDOT, and Bravos and, thus, sovereign immunity does not bar the actions. In support of its claim, XL cites Wiecking v. Allied Medical Supply Corp., 239 Va. 548, 551, 391 S.E.2d 258, 260 (1990) (holding that sovereign immunity is no bar to valid contract actions against the Commonwealth). XL concedes that there is no direct contract between it and VDOT but bases the requisite connection on its "tripartite agreement" hypothesis.

XL notes that three express contracts exist for each construction project: the original construction contract, the surety agreement, and the takeover agreement. XL argues that because the surety relationship is a "tripartite agreement" with rights and obligations for all parties, even though XL and the Commonwealth never had a signed contract until the takeover agreement, an express contract still exists. Some of these obligations include the Commonwealth's duties to protect contract funds and to prevent improper disbursement of such funds. Southwood Builders, Inc. v. Peerless Insurance Co., 235 Va. 164, 170, 366 S.E.2d 104, 107 (1988); American Surety Co. v. Plank & Whitsett, Inc., 159 Va. 1, 10, 165 S.E. 660, 663 (1932). If XL had failed to perform, VDOT would have been entitled to enforce the surety obligations in court because the bond was made for the benefit of VDOT. First Virginia Bank-Colonial v. Baker, 225 Va. 72, 77, 301 S.E.2d 8, 11 (1983); Aetna Casualty & Surety Co. v. Earle-Lansdell Co., 142 Va. 435, 451, 129 S.E. 263, 267 (1925). Moreover, a surety can look back to the date the bond was issued to ensure the obligee's compliance with the contract. International Fidelity Insurance Co. v. Ashland Lumber Co., 250 Va. 507, 511, 463 S.E.2d 664, 667 (1995). Not only do the parties have reciprocal obligations, but it is well-settled law in Virginia that the terms of the bond must be read together with the construction contract to fully understand the extent of all parties' responsibilities. New Amsterdam Casualty Co. v. Moretrench Corp., 184 Va. 318, 324, 35 S.E.2d 74, 77 (1945).

However, the Supreme Court in its remand opinion specifically rejected the tripartite agreement theory. "[N]either the contracts nor the record here support a conclusion that the performance bond and construction contract created an express contract between VDOT and XL." XL Specialty Insurance Co., 269 Va. at 369, 611 S.E.2d at 360. In its analysis, the Supreme Court reviewed the cases cited by XL. Id. at 368, 611 S.E.2d at 359. The Court determined that "none of these cases, however, held that a direct contractual relationship is established between non-signatories to these contracts by virtue of related rights and duties that arise from such separate contracts." Id. The Court cited approvingly the decisions of other courts that hold "that the rights and duties arising from such separate contracts do not create a contractual relationship." Id. Thus, there was no express contract between XL and VDOT that would abrogate the Commonwealth's claim of sovereign immunity.

XL next contends that, failing the establishment of a direct contractual relationship, the doctrine of equitable subrogation provides the contractual nexus to withstand a claim of sovereign immunity by the Commonwealth. The Supreme Court also rejected this theory. Noting that they had "not previously considered whether a surety advancing a claim relating to the construction contract based on equitable subrogation is a `contractor' for purposes of Code § 33.1-387," the Supreme Court concluded that the doctrine of equitable subrogation does not qualify XL as a "contractor" for the purposes of that statute. Id. at 370, 611 S.E.2d at 361. The Court analyzed federal cases holding that equitable subrogation did not qualify a surety as a "contractor" for purposes of the federal Contract Disputes Act. Id. at 371, 611 S.E.2d at 361 (citing Fireman's Fund Insurance Co. v. Secretary of the Navy, 313 F.3d 1344, 1351 (Fed.Cir.2002); Admiralty Construction Co. v. Dalton, 156 F.3d 1217, 1221 (Fed.Cir.1998)). The Court also noted that statutes in abrogation of sovereign immunity "must be strictly construed." Id.

Sovereign immunity is a firmly established doctrine in Virginia. Virginia Board of Medicine v. Virginia Physical Therapy Ass'n, 13 Va.App. 458, 464, 413 S.E.2d 59, 63 (1991). Waivers of sovereign immunity must be clearly expressed and will not be implied from general statutory language. Id. at 465, 413...