Summary
treating performance bond as penal bond and awarding full amount
Summary of this case from Lexon Ins. Co. v. Cnty. Council of Berkeley Cnty.Opinion
No. COA11–1601.
2012-08-7
SYNOVUS BANK, formerly known as Columbus Bank and Trust Company, as successor in interest through name change and by merger with The National Bank of South Carolina, Plaintiff, v. The COUNTY OF HENDERSON, Crossclaimant & Defendant–Appellee, and Lexon Insurance Company, Crossclaim Defendant & Defendant & Third–Party Plaintiff–Appellant.
Shumaker, Loop & Kendrick, LLP, by William H. Sturges and Daniel R. Hansen, for Lexon Insurance Company. Office of the County Attorney of Henderson County, by County Attorney Charles Russell Burrell and Deputy County Attorney Sarah G. Zambon, for Henderson County.
Appeal by Defendant and Third–Party Plaintiff Lexon Insurance Company from order entered 19 August 2011 by Judge Gary M. Gavenus in Superior Court, Henderson County. Heard in the Court of Appeals 8 May 2012. Shumaker, Loop & Kendrick, LLP, by William H. Sturges and Daniel R. Hansen, for Lexon Insurance Company. Office of the County Attorney of Henderson County, by County Attorney Charles Russell Burrell and Deputy County Attorney Sarah G. Zambon, for Henderson County.
McGEE, Judge.
Seven Falls, LLC (Seven Falls), a real estate developer, entered into a development agreement (the development agreement) with the County of Henderson (Henderson County) in May of 2008. The development agreement included approval from Henderson County for Seven Falls to develop a large subdivision (the project), in multiple phases. In return, Seven Falls agreed to certain terms and conditions, including making certain infrastructure improvements in the subdivision.
In the development agreement, Henderson County acknowledged that it had previously, on 21 June 2007, approved a development plan for phase 1 of the project. The development agreement was to commence on 1 March 2008 and was to expire on 28 February 2013, “provided, however, so long as [Seven Falls] ha[d] met the minimum number of units submitted for approval as set forth ... and ha [d] provided the public facilities set forth ... the term of th[e] Agreement shall be automatically renewed for an additional period of five (5) years [.]” The development agreement included a term that would allow modification or amendment of the development agreement “by the mutual consent of the parties[.]”
The Land Development Code of Henderson County required Seven Falls to obtain a subdivision improvement guarantee, guaranteeing Seven Falls would enter into a performance agreement with Henderson County, timely complete infrastructure improvements, and obtain a performance surety bond or other guaranty of funds to complete the project:
Subpart E. Subdivision Improvement Guarantees
§ 200A–115. General
Where the required improvements have not been completed, prior to the submission of the final plat for approval, the approval of said plat shall be subject to the applicant guaranteeing the installation of the improvements within two (2) years. Plans, specifications, quantities, unit costs and estimated total costs shall be provided by the applicant to the Subdivision Administrator together with a schedule indicating time of initiation and completion of the work, as a whole or in stages and any required fee. Cost estimates must be prepared by a professional engineer, professional land surveyor or landscape architect at the applicant's expense. The applicant shall guarantee the installation of such improvements by ...:
A. Filing a performance or surety bond or an irrevocable standby letter of credit in the amount of 125 percent of the cost to complete the work as determined by cost estimates. Portions of the guarantee may be released as work progresses.
....
§ 200A–116. Amount and Terms of Guarantee;
Time Limits
All guarantees shall be accompanied by a written agreement (performance agreement) specifying the terms and the amount of the guarantee. .... The Planning Director shall have the authority to approve all improvement guarantee applications. The Planning Director may also, upon proof of difficulty, grant an extension of completion dates set forth in its approval for a maximum of one (1) additional year, but the time between initiation and the completion of the required improvements shall not exceed two (2) years. If the improvements are not completed within the two (2) years the applicant shall be in breach with the requirements of this section and the improvement guarantee and any and all monies and accrued interest shall be forfeited by the applicant. If the Planning Director has found that the applicant has made a good faith effort in completing the required improvements within the two (2) years, the County may allow the applicant to execute a second improvement guarantee. .... The amount of the guarantee shall be sufficient to provide adequate funds to the County to ensure, in the case of default, the installation of all required improvements uncompleted at the time of default.
Land Development Code of Henderson County, North Carolina.
Pursuant to this requirement in the Land Development Code of Henderson County, Seven Falls obtained a “Subdivision Performance Bond” (the performance bond) from Lexon Insurance Company (Lexon), in the amount of $6,000,000.00. The performance bond went into effect 17 July 2008 and was set to expire 17 July 2009. Seven Falls and Henderson County executed a performance guarantee agreement (the performance guarantee) on 20 July 2009, which “superced[ed] prior Agreements between [Henderson County] and [Seven Falls] regarding the improvement guarantee.” Pursuant to the performance guarantee, Seven Falls was required to provide Henderson County with a performance surety bond in an amount of at least $5,926,374.00. Seven Falls met this obligation by obtaining an extension of the performance bond from Lexon, which extended the effective period of the performance bond until 17 July 2010. Seven Falls further agreed to complete various infrastructure improvements by 1 June 2010, including roads, drainage, water and sewage treatment, and bridges. By the terms of the performance guarantee, failure to complete these infrastructure improvements in a satisfactory manner by 1 June 2010 could lead to “the full amount of the [performance] bond [being] executed and collected[.]”
Lexon obtained an Irrevocable Standby Letter of Credit (the letter of credit) from The National Bank of South Carolina, now Synovus Bank (Synovus), on 8 July 2008. The letter of credit, in the amount of $3,240,000.00, “was issued for the purpose of providing funds to complete the Improvements in the Seven Falls development located in Henderson County, should Lexon's Bond be called by the County.”
Due to financial troubles, Seven Falls failed to complete the required infrastructure improvements by 1 June 2010. Henderson County made a declaration of default on 2 June 2010, which it sent to Seven Falls and Lexon. Henderson County, by resolution dated 7 June 2010, requested Lexon to either complete the infrastructure improvements, or pay Henderson County pursuant to the performance bond. Lexon did neither.
Synovus filed its complaint in this matter on 18 June 2010, alleging that both Lexon and Henderson County had demanded that Synovus pay to them the full funds authorized by the letter of credit. In its complaint, Synovus did not indicate how Lexon would use the funds but, with regards to Henderson County, stated:
Upon information and belief, Henderson County intends to use the subject funds to, among other things, remediate certain conditions at Seven Falls that are in violation of various plans and permits, which will lead to a more timely and efficient completion of the Improvements covered by the Letter of Credit and [performance] Bond.
Because both Lexon and Henderson County made demand for payment of the funds guaranteed by the letter of credit, Synovus filed its complaint in this matter for a declaratory judgment determining who should receive the funds. Also, because Synovus had deposited the full line of credit funds with the Clerk of Superior Court in Henderson County, Synovus further asked that it be absolved of any further liability in the matter. Henderson County answered Synovus' complaint on 13 July 2010, and, in its answer, included a crossclaim against Lexon requesting that the trial court order Lexon to pay Henderson County the full amount of the performance bond, along with interest from the 1 June 2010 date of default. Lexon answered Synovus' complaint on 19 July 2010, and answered Henderson County's crossclaim on 12 August 2010. Henderson County moved for summary judgment against Lexon on 10 June 2011, contending that Henderson County was entitled to judgment as a matter of law.
This matter was heard by the trial court and an order granting summary judgment in favor of Henderson County was filed 19 August 2011. The trial court ordered Lexon to pay to Henderson County the full $6,000,000.00, the amount of the performance bond, along “with interest at the legal rate from 1 June 2010 until paid, together with the costs of this action.” The trial court further ordered the clerk of court to release to Henderson County the letter of credit funds deposited by Synovus, along with accrued interest, said funds and interest to be credited to Lexon against the judgment against it. Lexon appeals.
I.
Lexon raises the following issues on appeal: (1) whether the trial court erred in granting summary judgment in favor of Henderson County; (2) whether the trial court erred in finding Lexon liable for the full amount of the performance bond; (3) whether the trial court erred in awarding Henderson County prejudgment interest on the entire amount of the performance bond because Henderson County's actions interfered with Lexon fulfilling part of its obligation; and (4) whether the trial court erred in awarding prejudgment interest as a matter of law.
II.
Lexon argues that it is not liable under the performance bond if Seven Falls is not liable. This is because, according to Lexon, Seven Falls is Lexon's principal, and Lexon, as surety, is not liable unless its principal is liable. Lexon argues that Seven Falls is not liable, because the performance bond was tolled by North Carolina's Permit Extension Act and, therefore, Seven Falls' failure to perform did not trigger Lexon's obligation to pay pursuant to the performance bond. We disagree.
Lexon's argument depends on this Court agreeing that the Permit Extension Act (the Act), N.C. Gen.Stat. § 153A–344.1, as amended by S.B. 831, 2009 N.C. Session Law ch. 406 and H.B. 683, 2010 N.C. Session Law ch. 177, serves to toll performance bonds. We do not agree with Lexon's argument. First, the Act applies to “development approvals” as defined in Section 3 of the Act, which is limited to “approvals issued by the State, any agency or subdivision of the State, or any unit of local government[.]” 2010 N.C. Session Law ch. 177, Section 3 (ratified 10 July 2010). Nothing in Section 3 suggests the Act applies to the performance bond issued by Lexon, a private insurance company. Second, the Act contains a section that reads as follows:
SECTION 5. This act shall not be construed or implemented to:
....
(8) Modify any person's obligations or impair the rights of any party under contract, including bond or other similar undertaking.
2010 N.C. Session Law ch. 177, Section 5(8).
By its very terms, the Act does not serve to alter Lexon's obligations under the performance bond. Though not binding on this Court, the Fourth Circuit Court of Appeals, by an unpublished opinion, had already rejected Lexon's argument. County of Brunswick v. Lexon Ins. Co., 425 F. Appx. 190, 192–93, 2011 WL 1542517 (4th Cir.2011) (“Lexon also argues that this action should be stayed pursuant to North Carolina's Permit Extension Act of 2009. However, the Permit Extension Act specifically does not apply to bond obligations. See 2010 N.C. Sess. Laws 177 Section 5(8) (‘This act shall not be construed or implemented to ... [m]odify any person's obligations or impair the rights of any party under contract, including bond or other similar undertaking.’). Therefore, Lexon's argument that its obligations under the Bonds should be extended fails because the Permit Extension Act, on its face, is inapplicable to the Bonds.”). We hold that the Act does not apply to the performance bond.
III.
Lexon also appears to argue that Seven Falls had not defaulted on its obligations under the development agreement because Seven Falls' obligations to perform under the development agreement had been tolled by the Act. This argument also fails.
The development agreement went into effect on 1 March 2008 and was set to expire on 28 February 2013 at the earliest. The Act served to toll the running of the five year effective term of the development agreement. The Act did not modify other obligations under the development agreement. Pursuant to the development agreement, Seven Falls was required to “complete the infrastructure of each phase within two (2) years of phase development plan approval.” The Phase 1 development plan was approved by Henderson County on 21 June 2007. Therefore, pursuant to the development agreement, Seven Falls had until 21 June 2009 to complete the infrastructure for Phase 1.
Seven Falls and Henderson County entered into the performance guarantee on 20 July 2009, modifying certain terms of the development agreement. Relevant to this appeal, the performance guarantee allowed Seven Falls until 1 June 2010 to complete certain infrastructure improvements, including roads, erosion control, drainage, bridges, water distribution systems, and sewer systems. Pursuant to the performance guarantee, Seven Falls was required to provide a performance bond in the amount of at least $5,926,374.00. The performance bond was to remain in effect until at least forty-five days after 1 June 2010—the date by which Seven Falls was required to have completed the infrastructure requirements.
Seven Falls and Lexon had executed a performance bond in the amount of $6,000,000.00 on 17 July 2008, which expired on 17 July 2009. This performance bond stated that “Seven Falls [as Principal] ... and Lexon ... as Surety, are held and firmly bound unto the Henderson County Board of Commissioners as Obligee, in the penal sum of Six Million & no/100 Dollars ($6,000,000.00) [.]” The performance bond further stated:
WHEREAS, [t]he Principal has entered into a Performance Agreement with Henderson County guaranteeing subdivision improvements as required by the Land Development Code as shown on the Development Plan of the Seven Falls Phase I and 2(a) approved on or about June 21, 2007 and September 21, 2007 respectively by the Henderson County Planning Board and/or Henderson county Planning Staff. These improvements are delineated in the Performance Agreement which is attached to this agreement as an Appendix.
NOW THEREFORE, THE CONDITION OF THIS OBLIGATION IS SUCH, that if said Principal shall well and faithfully construct the said improvements in good and workmanlike manner and shall do and perform the things agreed by it to be done and performed in accordance with the said Performance Guarantee Agreement, the [n] this obligation shall be void[.] ... In the event the Principal does not construct the said improvements or if these improvements are constructed in a poor and not workmanlike manner, the Surety shall provide the above penal amount of this obligation to the Obligee. [Emphasis added.]
A continuation certificate was executed on 6 July 2009, extending the term of the performance bond until 17 July 2010. This extension satisfied the requirement, in the performance guarantee, that Seven Falls provide a performance bond effective until at least forty-five days past 1 June 2010.
The performance guarantee includes a section “7” which states:
Failure to Complete Improvements. In the event that [Seven Falls] does not complete the required improvements or obtain an extension by the expiration date of this Agreement, the full amount of the surety bond will be executed and collected to ensure the improvements are constructed. [Emphasis added.]
Seven Falls failed to complete by 1 June 2010 the infrastructure improvements required pursuant to the performance bond and the performance guarantee. Henderson County sent a declaration of default to Seven Falls and Lexon on 2 June 2010. Henderson County requested that Lexon complete the infrastructure improvements or pay Henderson County the amount due pursuant to the performance bond. Lexon neither completed the improvements nor paid pursuant to the performance bond. Henderson County filed its crossclaim against Lexon on 13 July 2010, four days before the performance bond was due to expire.
The performance provisions of the development agreement and the performance guarantee are contractual obligations not altered by the Act.2010 N.C. Session Law ch. 177, Section 5(8) (“This act shall not be construed or implemented to. [m]odify any person's obligations or impair the rights of any party under contract[.]”). The Act further states:
(a) For any development approval extended by [the Act], the holder of the development approval shall:
(1) Comply with all applicable laws, regulations, and policies in effect at the time the development approval was originally issued by the governmental entity.
(2) Maintain all performance guarantees that are imposed as a condition of the initial development approval for the duration of the period the development approval is extended or until affirmatively released from that obligation by the issuing governmental entity.
(3) Complete any infrastructure necessary in order to obtain a certificate of occupancy or other final permit approval from the issuing governmental entity.
(b) Failure to comply with any condition in this section may result in termination of the extension of the development approval by the issuing governmental entity.
2010 N.C. Session Law ch. 177, Section 7.1. It is clear that the Act did not modify the terms of the performance guarantee entered into between Seven Falls and Henderson County. The performance bond expired on 17 July 2010. If we agreed with Lexon's argument, Lexon would be completely relieved of its contractual obligations. There would be no identifiable source of funding for the completion of the infrastructure improvements, and no benefit to the developer, Seven Falls, Henderson County, or its residents. The only beneficiary would be Lexon, which would be absolved of the duty to honor the terms of the agreement it struck with Seven Falls. Nothing in the Act suggests this result. The trial court did not err in granting summary judgment in favor of Henderson County on this issue. This argument is without merit.
IV.
Lexon further argues that the trial court erred in ruling that Lexon was liable for the entire $6,000,000.00 performance bond. We disagree.
Lexon argues that there were material issues of fact concerning the damages suffered by Henderson County; specifically, Lexon argues it presented sufficient evidence to survive summary judgment that the actual cost to complete the required improvements would be less than $6,000,000.00. We need not address this argument.
The performance bond states in part that Lexon was “held and firmly bound unto [Henderson County] in the penal sum of Six Million & no/100 Dollars ($6,000,000.00), to the payment of which sums, well and truly to be made, we ... bind ourselves ... firmly by these presents.” Though not determinative, Lexon describes the $6,000,000.00 amount of the performance bond as a “penal sum.” Penal sum is defined as “[t]he monetary amount specified as a penalty in a penal bond.” Blacks Law Dictionary 1247 (9th ed.2009). A penal bond is defined as “[a] bond requiring the obligor to pay a specified sum as a penalty if the underlying obligation is not performed.” Blacks Law Dictionary 202 (9th ed.2009). Our Supreme Court has discussed rules of contract interpretation as applied to insurance agreements:
The words used in the policy having been selected by the insurance company, any ambiguity or uncertainty as to their meaning must be resolved in favor of the policyholder, or the beneficiary, and against the company. .... As in other contracts, the objective of construction of terms in the insurance policy is to arrive at the insurance coverage intended by the parties when the policy was issued. .... If such a word has more than one meaning in its ordinary usage and if the context does not indicate clearly the one intended, it is to be given the meaning most favorable to the policyholder, or beneficiary, since the insurance company selected the word for use ..... Where the immediate context in which words are used is not clearly indicative of the meaning intended, resort may be had to other portions of the policy and all clauses of it are to be construed, if possible, so as to bring them into harmony. Each word is deemed to have been put into the policy for a purpose and will be given effect, if that can be done by any reasonable construction in accordance with the foregoing principles.
Trust Co. v. Insurance Co., 276 N.C. 348, 354–55, 172 S.E.2d 518, 522 (1970) (citations omitted). Lexon chose to include the word “penal” to modify the word “sum.” We assume that Lexon included the word “penal” in the bond for a purpose. The plain meaning of “penal sum” is an amount awarded to a beneficiary as a penalty if some obligation is not performed. The term “penal sum” suggests the entire $6,000,000.00 was due once Seven Falls failed in the performance of the duties enumerated in the performance bond.
Even assuming the meaning of “penal sum” is not clear, additional terms of the performance bond supply context in support of this interpretation. The performance bond states: “In the event [Seven Falls] does not construct the said improvements or if these improvements are constructed in a poor and not workmanlike manner, [Lexon] shall provide the above penal amount of this obligation to [Henderson County].” The “above penal amount” of the obligation was the full $6,000,000.00. The intent of the parties can further be partially inferred by the terms of the performance guarantee, which required that Seven Falls obtain the performance bond. The performance guarantee stated: “In the event that [Seven Falls] does not complete the required improvements or obtain an extension by the expiration date of this Agreement, the full amount of the [performance] bond will be executed and collected to ensure the improvements are constructed.”
Finally, assuming the meaning of “penal sum” is not clear from a plain reading or a contextual reading, we must then interpret “penal sum” “in favor of the policyholder, or the beneficiary, and against the company.” Id. at 354, 172 S.E.2d at 522 (citation omitted).
The trial court properly required Lexon to pay to Henderson County the full amount of the performance bond. Lexon's argument is without merit.
V.
Lexon argues that the trial court treated the performance bond as a penal bond and, therefore, the trial court erred in awarding Henderson County prejudgment interest. We agree.
“Actions on Penal Bonds.—In an action on a penal bond, the amount of the judgment, except the costs, shall bear interest at the legal rate from the date of entry of judgment under G.S. 1A–1, Rule 58, until the judgment is satisfied.” N.C. Gen.Stat. § 24–5(a1) (2011). We reverse that portion of the 19 August 2011 order awarding prejudgment interest and remand for action consistent with this opinion. In light of our holdings above, we do not address Lexon's additional argument.
Affirmed in part, reversed and remanded in part. Judges STEPHENS and HUNTER, JR. concur.
Report per Rule 30(e).