Opinion
No. 97 C 6276
March 31, 2000
MEMORANDUM OPINION AND ORDER
Plaintiff Fidelity Deposit Company of Maryland has filed a two-count amended complaint against defendant County of Lake, requesting a declaratory judgment that defendant committed an "Owner Default" under the terms of a government construction bond for which plaintiff was the surety (Count I) and alleging breach of the bond (Count II).
PROCEDURAL HISTORY
On August 10, 1999, the court set a briefing schedule on the parties' cross motions for summary judgment. The schedule required plaintiff to file its motion for summary judgment on August 11, 1999; defendant was to file an opposition to plaintiff's motion and a cross motion for summary judgment by September 23, 1999; and plaintiff was directed to file its reply and response by October 21, 1999.
On August 11, 1999, plaintiff timely filed its motion for summary judgment and its Local Rule 12(M) statement of facts. On September 23, 1999, defendant timely filed a brief in response to plaintiff's motion and a supporting Local Rule 12(N)(3) statement of fact. On that same date, defendant also filed a cross motion for summary judgment and a memorandum in support of its cross motion. In support of this brief, defendant filed a Local Rule 12(M) statement of facts. Plaintiff subsequently filed a motion to enlarge the briefing schedule. The court granted plaintiff's motion and gave plaintiff until October 28, 1999, to file its reply brief in support of its original motion for summary judgment and its opposition to defendant's cross motion for summary judgment. Defendant was directed to reply by November 12, 1999. The court set a ruling date of January 13, 2000.
Local Rule 12(M) has since been renumbered and is now L.R. 56.1 (a). For convenience, this opinion will refer to the old numbering system.
Despite being given leave of court, plaintiff has added nothing to the instant record since its initial submissions. Plaintiff never filed a reply brief in support of its original motion for summary judgment or an opposition to defendant's cross motion for summary judgment. Moreover, plaintiff never filed a Local Rule 12(N) statement. The facts set forth in defendant's Local Rule 12(M) statement are therefore deemed admitted. See, e.g., Federal Trade Commission v. Febre, 128 F.3d 530, 536 (7th Cir. 1997) (holding that district courts may deem a defendant's facts admitted when the plaintiff does not properly admit or deny those facts in a statement pursuant to Local Rule 12(N) and collecting cases in which the Seventh Circuit has upheld strict compliance with Local Rule 12).
The court faults both parties for briefing these motions in a haphazard manner. Plaintiff blatantly contravened the schedule set by the court, while defendant flouted the dictates of L.R. 7.1 by filing 40 pages of briefs in support of its cross motion and opposition to plaintiffs motion without leave of court. See L.R. 7.1 ("Neither a brief in support of or in opposition to any motion . . . shall exceed 15 pages without prior approval of the court."). Moreover, both parties are to be faulted for their prolix and abstruse briefs. The disorderly and convoluted manner in which the parties chose to brief these motions, as well as the parties' failure to cite to the record in their briefs, prolonged the ruling and caused the court to waste time and resources locating supporting material in the record.
FACTS
On May 28, 1996, defendant awarded MG Midwest Corporation ("MG") a contract to construct the Lake County Sheriff's Substation II in Libertyville, Illinois, for the price of $592,864. The contract took the form of a purchase order dated June 20, 1996, which included a form purchase order, an invitation to bid, general conditions, supplemental general conditions, design drawings and technical specifications. MG gave defendant separate payment and performance bonds in the sum of $592,864. Defendant was the obligee on these bonds, MG the principal, and plaintiff the surety. On June 20, 1996, MG's Articles of Incorporation were amended and MG's name was changed to Kaplan Associates, Inc ("Kaplan"). Plaintiff continued to consider MG the contractor, though there is evidence that various of plaintiffs agents knew or should have known that MG was operating under the name Kaplan Associates, Inc.MG submitted a total of five pay applications, all of which defendant paid. On April 22, 1997, defendant sent plaintiff a letter advising plaintiff that it was considering declaring MG in default and requesting that the three parties convene for a conference pursuant to Article 3.1 of the performance bond. At the May 6, 1997, conference, representatives for the three parties discussed work delays and certain other issues. On May 16, 1997, defendant informed plaintiff's counsel that MG was behind schedule but would be able to catch up if more manpower were committed to the project. On May 30, 1997, however, defendant terminated MG, notified plaintiff of the termination, and requested that plaintiff abide by the performance bond.
Soon thereafter defendant and plaintiff entered into a Takeover Agreement that stated: "a controversy exists between FD and County wherein FD asserts that an Owner Default, as defined in the bond, exists which FD contends prevents its obligation from arising, and the County denies that any Owner Default exists and contends that FD has the obligation to proceed under the bond. . . . Whereas, FD and County desire to reserve their respective rights, claims, causes of action, and defenses regarding the controversy above [over whether an Owner Default had occurred] and prescribe the methods by which the Surety and the County shall implement the Surety's takeover of the work." Plaintiff subsequently filed this action.
DISCUSSION
Plaintiff argues that defendant paid MG for its five applications for payment without requiring proper waiver forms from MG's subcontractors. Plaintiff also argues that defendant did not examine the sworn statements and waivers MG submitted before paying MG for its first five pay applications. Plaintiff contends that as a result, defendant: (1) materially breached the purchase order; and (2) materially breached defendant's performance bond obligation.
According to plaintiff, by paying MG without properly examining the waivers submitted, defendant violated Article 7.1 of the purchase order, which governs applications for payment under the purchase order. Article 7.1 provides: "All applications for payment shall be made on `Walker, Sworn Statement for Contractor and Subcontractor to Owner' forms, listing all monies paid. . . . There shall be attached to the Application for Payment waiver forms for each Subcontractor, material supplier and/or person or entity for work or service performed and/or material supplied, reciting the actual consideration received. Waiver forms are required only for work performed at the site or materials delivered by the supplier to the site." Plaintiff argues that by violating Article 7.1, defendant has committed both an "Owner Default" as described in both bonds (the essence of Count I) and has breached its obligation under Article 3 of the performance bond to pay plaintiff the balance of the purchase price after defendant declared a contractor default (the essence of Count II).
The bonds define the term "Owner Default" as the "Failure of the Owner, which has neither been remedied nor waived, to pay the Contractor as required by the construction contract or to perform and complete or comply with the terms thereof." Plaintiff essentially argues that defendant's failure to ensure that the waivers submitted with each pay application matched that pay application was a failure to comply with the terms of the construction contract, and therefore constituted an Owner Default.
The definition of "Owner Default" is found in Article 12.4 of the performance bond and Article 15.3 of the payment bond.
In addition, plaintiff contends that by making improper payments, defendant reduced the Balance of the Contract Price that was ultimately paid to plaintiff after MG defaulted, and thus breached the performance bond. The performance bond provides that if MG defaults on the contract, defendant must pay plaintiff the Balance of the Contract Price, which is defined in Article 12.1 of the bonds as "The total amount payable by the Owner to the Contractor under the Construction Contract after all proper adjustments have been made, . . . reduced by all valid and proper payments made to or on behalf of the Contractor under the Construction Contract." Plaintiff argues that payments not made in accordance with Article 7 are not "valid and proper" payments under Article 12.1. Plaintiff contends that because defendant failed to examine the waivers and sworn statements before paying MG for the first five pay applications, the payments defendant made on these pay applications did not satisfy Article 7.1 and therefore were neither "valid" nor "proper" under Article 12.1 of the performance bond.
This provision is contained in Article 3.3.
According to plaintiff, by making these allegedly invalid and improper payments, defendant reduced the balance of the contract price by $185,252.77, and thus materially breached the performance bond obligation to pay plaintiff the balance of the contract price. Plaintiff concludes that defendant is therefore liable to plaintiff for up to $185,252.77. The calculations behind plaintiff's $185,252.77 figure are as follows: Plaintiff contends that defendant paid $119,948.06 without receiving any supporting subcontractor waivers; $37,820.71 in reliance on waivers improperly issued by Kaplan; and $27,464.00 in reliance on a duplicate waiver issued by Layla Construction ("Layla").
The court notes that the above figures add up to $185,232.77, not $185,252.77. Because plaintiff does not explain where it got the additional $20, the court will assume that plaintiff miscalculated and that plaintiff is actually claiming a total loss of $185,232.77.
Plaintiff argues that the contract funds held by defendant were plaintiffs collateral and that defendant therefore was required to take all available steps to protect these funds. As defendant notes, however, the Seventh Circuit has held that a surety has merely "an unperfected security interest in the contract proceeds until the time [the contractor] actually defaulted and [the surety] had to perform on the bonds. . . . Prior to default, . . . [the contractor] and not [the surety] ha[s] rights in all monies already paid over." Capitol Indemnity Corp. v. United States, 41 F.3d 320, 325 (7th Cir. 1994), cert. denied, 515 U.S. 1144 (1995). Capitol's holding suggests that plaintiff did not gain rights in the contract funds until MG defaulted.
The cases plaintiff cites which hold that an obligee's improper release of retainage constitutes a breach of the obligation the obligee owes to the surety are inapplicable to the instant case because plaintiff is alleging the improper release of progress payments. As the Seventh Circuit has explained, "Funds intended from the inception of a contract to settle potential claims [that is, retainage funds] differ vastiy from progress payments, which belong to the free flow of commerce from the time they are properly paid over." Capitol Indemnity Corp. v. United States, 41 F.3d 320, 325 (7th Cir. 1994) (citing, inter alia, Northwest Water Comm'n v. Carlo V. Santucci, Inc., 516 N.E.2d 287 (Ill.App.Ct. 1987) (explaining the difference between retainage and amounts already paid)).
Plaintiff presents cases decided under other states' laws which hold that a surety may be discharged when the obligee makes unauthorized advance payments. See, e.g., Transamerica Ins. Co. v. City of Kennewick, 785 F.2d 660, 661 (9th Cir. 1996) (holding that under Washington state law, although sureties may be liable despite unauthorized advance payments where these payments are made reasonably and in good faith, the surety's obligation will not be enforced if the obligee acted negligently); Southwood Builders, Inc. v Peerless Inc. Co., 366 S.E.2d 104 (Va. 1988) ("Payments of substantial sums before they are due . . . are generally held to be such variations in the terms of the contract as will discharge the surety from its obligations to the owner."); Continental Ins. Co. v. City of Virginia Beach, 908 F. Supp. 341 (E.D.Va. 1995) (following Southwood).
Plaintiff appears to argue, in essence, that by paying MG without requiring contemporaneous lien waivers, defendant made unauthorized advance payments. None of the cases plaintiff cites discuss this situation or support this proposition. The obligees in Kennewick andSouthwood paid the contractors or subcontractors in advance, before they had completed their work. Plaintiff in the instant case does not contend or offer any evidence that defendant paid MG before the subcontractors completed their work. Rather, plaintiff simply contends that defendant paid MG before the subcontractors submitted their waivers for work already completed. Plaintiff has not presented a single case to support the proposition that a payment made before receiving a lien waiver constitutes an "advance payment" as defined in the caselaw.
As a general rule, "If a contract that a surety has guaranteed is altered without the surety's consent, he is discharged, on the theory that he insured only the original contract." Argonaut Ins. Co. v. Town of Cloverdale, Indiana, 699 F.2d 417, 419 (7th Cir. 1983). In Argonaut, the Seventh Circuit noted that a corollary to this rule is that a surety is discharged if the obligee "makes advance payments to the principal . . . beyond those provided for in the contract." Id. The court explained that the rationale behind this rule is that "unauthorized advances reduce the principal's incentive to complete the contract, thereby increasing the risk to the surety, and increase the cost of the surety's substitute performance (in this case the argument would be that if the [obligee] had retained the [money] it erroneously paid [the contractor] its loss on its dealings with [the contractor] would have been that much less)." Id. TheArgonaut court suggested, however, that "the rule on unauthorized advances may well be just a vestige of an era when sureties were usually not compensated and therefore were treated with a judicial tenderness that they do not deserve today." Id.
The Seventh Circuit concluded in Argonaut that assuming the rule on unauthorized advances remains viable, the modern rule is that "a discharge because of unauthorized payments to the principal operates only to the extent of the unauthorized payments." Argonaut, 699 F.2d at 419. Therefore, even if defendant is guilty of dispensing "unauthorized" payments, plaintiff would not be wholly discharged, but would recover only to the extent that it was injured or prejudiced by the material modification. See. e.g., National Surety Corp. v. United States, 118 F.3d 1542, 1548 (Fed. Cir. 1997); Mergentime, 775 F. Supp. at 19 (citing Argonaut for the proposition that a compensated surety will not be discharged from its bond obligations unless it demonstrates injury or prejudice).
Assuming that the rule in Argonaut (which involved a private contract) applies to the government contract at issue in the instant case, plaintiff must demonstrate: (1) that defendant made unauthorized payments; and (2) that plaintiff has been injured or prejudiced by these unauthorized payments.
See Fireman's Fund Ins. Co. v. United States, 909 F.2d 495, 497 (Fed. Cir. 1990) (raising but declining to decide the question whether the Argonaut rule applies to government contracts).
In response to plaintiff's contention that defendant made unauthorized payments, defendant has presented evidence that although it paid all five pay applications without requiring contemporaneous waivers, MG did in fact submit waivers in support of the first four pay applications (the matter of the fifth pay application is discussed below). Defendant contends that because it ultimately received lien waivers for the payments it made to MG, the payments it made were valid and proper.
Defendant explains that MG did not submit the subcontractor's lien waivers for Pay Application No. 1 at the time that it submitted Pay Application No. 1. Rather, MG submitted its subcontractors' lien waivers for Pay Application No. 1 later, after defendant had paid that pay application. Presumably defendant paid MG in advance because the subcontractors refused to waive their lien rights until they were paid. According to MG's project manager, Peter Wala ("Wala"), MG did not have the capital to pay the subcontractors out of its own pocket before requesting progress payments from defendant. Wala testified that this is a standard practice in the construction industry. For this reason, MG submitted the lien waivers for Pay Application No. 1 along with Pay Application No. 2. Over the course of the next 3 payment applications, MG continued to submit the lien waivers that related to the previous payment application with the subsequent payment application; lien waivers for Pay Application No. 2 accompanied Pay Application No. 3, waivers for Pay Application No. 3 accompanied Pay Application No. 4, and waivers for Pay Application No. 4 accompanied Pay Application No. 5. By calculating the waivers in this fashion, defendant is able to demonstrate that plaintiffs claim that defendant paid MG $119,948.06 without receiving supporting waivers is incorrect.
The court delineates below how the subcontractors' waivers correspond to defendant's payments to MG.
In light of defendant's evidence, the only argument plaintiff can advance to support its theory that defendant improperly paid MG for Pay Applications Nos. 1 through 5 is that defendant should have required MG to submit with each application, waivers that corresponded to that particular application. The plain language of Article 7.1 does not require MG to supply waivers before releasing payment. In fact, Article 7.1 states that the waiver forms must recite "the actual consideration received," thus implying that a subcontractor need not submit a waiver form until it has received consideration, Defendant's failure to request contemporaneous waivers did not, therefore, render defendants' payments to MG improper or invalid.
As Kentucky's highest court held when faced with similar language as contained in Article 7.1: "The contract gave [the owner] a privilege or right to require the affidavit, but there is no language in either the building contract or the bond which imposed on (the owner] the duty of obtaining the affidavit before making payment. . . . If [the surety] had wanted to condition [the owner's] payment to [the contractor] upon receipt of an affidavit then it should have so provided in its bond or required such a provision to be incorporated in the contract." United Bonding Insurance Co. v. Sperry Hutchinson Co., 465 S.W.2d 291, 293 (Ky. 1971) (rejecting defendant's contention that it was absolved from liability on the bond because the owner had not obtained an affidavit from the contractor before paying the contractor's assignee).
Defendant's evidence also successfully rebuts plaintiffs claim that defendant improperly paid Kaplan $37,820.71. Plaintiff attempts to argue that Kaplan had taken over from MG as the general contractor of the project. Although plaintiff vaguely contends that the waiver forms submitted by Kaplan should have alerted defendant that "something was amiss," plaintiff does not present a cognizable legal argument under which the court could find liability. Plaintiff does not cite caselaw or otherwise explain the legal ramifications of a general contractor delegating its duties. In addition, defendant presents evidence that Kaplan was not, in fact, operating as the general contractor. To the degree that the parties dispute the functions that Kaplan was performing, this dispute is not material, because plaintiff does not argue or demonstrate that defendant did not receive value for the work Kaplan performed. It was not improper, therefore, for defendant to pay MG for Kaplan's work.
Plaintiff rests its contention that Kaplan had become the general contractor on the fact that several of Kaplan's waiver forms described the work Kaplan had performed as "General Work." Yet the sworn statements that accompany these waiver forms clearly delineate the work Kaplan was performing: general conditions, grading work, lightgauge framing, gypsum board, and painting. Plaintiff also bases its argument that Kaplan had become the general contractor on Layla's waiver, which identifies Kaplan as its employer. As defendant argues, nothing in the contract forbade Kaplan, a subcontractor, from subcontracting its own work.
As for plaintiff's argument that defendant paid Layla twice in reliance on a duplicate waiver, all that the evidence demonstrates is that Layla submitted a duplicate waiver (a waiver in the amount of $27,464.00 accompanied Pay Application No. 4 and a second waiver for $24,717 accompanied Pay Application No. 5). Yet plaintiff's own exhibit establishes that defendant never paid Layla for its first waiver, in the amount of $27,464, because it only paid for "acceptable waivers," and it excluded the first Layla waiver from this category. Because defendant paid MG only once for Layla's work, plaintiff "cannot contend that defendant improperly paid MG for that work.
As discussed above, even if plaintiff could prove that defendant's payments were unauthorized, plaintiff would also have to demonstrate that it has been injured or prejudiced by those unauthorized payments. Significantly (and fatally), plaintiff does not claim that defendant overpaid any of the subcontractors or paid them for work that was not done. It is undisputed that defendant paid a total of $334,583.46 to MG. Defendant convincingly breaks down this figure and demonstrates that these payments were neither invalid nor improper under plaintiffs theory. Of the $334,583.46 total, defendant paid $240,933.06 towards the first four pay applications. Defendant presents evidence that it ultimately received waivers from the subcontractors for $229,230.14 of the $240,933.06.
Defendant explains that of the remaining $11,702.92, the sworn statements indicate that Gallasi Cut Stone was paid $2,083 for which it did not submit a waiver, and that Joe's Masonry was paid a total of $14,120 but only submitted waivers in the amount of $4,500 (leaving $9,620 as the amount the company for which the company did not submit waivers). Defendant notes that plaintiff has presented no evidence that Gallasi delivered materials to the site (as described above, Article 7.1 required waivers only for materials delivered to the site). Moreover, plaintiff has not paid either Gallasi or Joe's on any bond claim.
$2,083 + $9,620 = $11,703.
That leaves $93,650.40 of the total $334,583.46 unaccounted for. On May 16, 1997, defendant paid MG $93,650.40 in response to Pay Application No. 5. On May 30, 1997, defendant declared MG in default and terminated the Purchase Order. There is no evidence that defendant ever received waivers from the subcontractors for this $93,650.40. Yet the evidence reveals that by the time defendant paid MG on Pay Application No. 5, plaintiff should have been aware that defendant was using trailing waiver procedures. On Feb 6, plaintiff's attorneys asked Wala for a copy of Pay Application No. 4. On February 17, 1997, Wala furnished plaintiff's attorneys with a copy of Pay Application No. 4, including the waivers and sworn statements that were submitted with that application. On April 28, 1997, plaintiff's attorneys asked Joni Young, the director of defendant's purchasing department, to send them another copy of Pay Application No. 4, a request with which Young quickly complied.
$334,583.46 — $240,933.06 = $93,650.40.
Once plaintiff received the various copies of Pay Application No. 4, plaintiff was on notice that the payments defendant made on each pay application did not correspond to the waivers MG sent defendant along with that pay application. Moreover, following the May 6, 1996, meeting, Young understood that plaintiff had no objection to defendant paying MG on Pay Application No. 5., and Weber understood that plaintiff had urged defendant to pay MG for Pay Application No. 5. Plaintiff subsequently asked MG to show plaintiff the waivers that related to this pay application. This request demonstrates that plaintiff knew that MG had not included in Pay Application No. 5 the waivers that corresponded to that pay application.
Defendant argues that by its own conduct, plaintiff waived its claim against defendant with respect to Pay Application No. 5. "Waiver is the relinquishment of a known right." Gray v. Mundelein College, 695 N.E.2d 1379, 1389 (Ill.App.Ct. 1998). "Waiver may be made by an express agreement or it may be implied from the conduct of the party who is alleged to have waived a right." Ryder v. Bank of Hickory Hills, 585 N.E.2d 46, 49 (Ill. 1992). "`An implied waiver may arise where a person against whom the waiver is asserted has pursued such a course of conduct as to sufficiently evidence an intention to waive a right or where his conduct is inconsistent with any other intention than to waive it.'" Id. (quoting Kane v. American National Bank Trust Co., 316 N.E.2d 177, 182 (Ill.App.Ct. 1974)).
Taken together, the evidence demonstrates that plaintiff told defendant to pay MG for Pay Application No. 5. The evidence also establishes that by the time plaintiff importuned defendant to pay MG, plaintiff knew or should have known that defendant had a practice of paying the contractor before receiving the subcontractors' waivers. Plaintiff therefore knew or should have known that MG would not submit the waivers in support of Pay Application No. 5 along with that pay application, but would instead submit them along with Pay Application No. 6. Plaintiff's course of conduct is entirely inconsistent with any intention to argue that it was improper for defendant to pay MG the $93,650.40 for Pay Application No. 5 without first receiving waivers in support of that pay application. The court therefore concludes that plaintiff has waived its claim to recover the money defendant paid MG for Pay Application No. 5.
For the foregoing reasons, plaintiff's motion for summary judgment is denied and defendant's cross motion for summary judgment is granted.
Finally, defendant argues that it is entitled to recover attorneys' fees. In support, defendant cites paragraph 17 of the Invitation to Bid, which is incorporated into the Purchase Order. Paragraph 17 reads in relevant part: "The County shall be entitled to recover its attorney's fees and expenses in any successful action by the County to enforce this contract." The instant lawsuit is not an action by the County. Defendant's request for attorneys' fees is therefore denied.
ENTER.