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District Contractors, Inc. v. North American Specialty Insurance Co.

September 8, 2003

DISTRICT CONTRACTORS, INC., PLAINTIFF,
v.
NORTH AMERICAN SPECIALTY INSURANCE COMPANY, DEFENDANT.



The opinion of the court was delivered by: Rosemary M. Collyer United States District Judge

MEMORANDUM OPINION

District Contractors, Inc. ("District") has sued North American Specialty Insurance Company ("NAS") as surety for two construction projects on which District alleges that it performed work but was not fully paid. NAS has filed a motion to dismiss or, in the alternative, for summary judgment. Finding that District has no claim under one of the surety bonds, but that it might have a valid claim under the other, the Court will grant the motion as a motion for summary judgment in part and deny it in part.

Background Facts

This dispute had its origin when Union Dismantling & Salvage, Inc. ("Union") and NAS agreed that NAS, as surety, would provide performance and payment bonds for the excavation and demolition work Union performed in the Washington, D.C., area.*fn1 To protect NAS, that company obtained an indemnity agreement from Horace G. Baldwin, James R. Passero and Edna Rose Passero, the individuals behind Union. The Union Indemnity Agreement was signed on May 11, 2001. NAS entered into a similar arrangement in November 2001 with Prince Construction Company, Inc. ("Prince"), and its principals, Alberto Gomez and Maria Cristina Gomez.

Prince and Union then agreed to form Prince Construction Co., Inc./Union Dismantling & Salvage, Inc., A Joint Venture ("Joint Venture"). On or about October 19, 2001, the Joint Venture, as contractor, agreed with J.A. Jones/Tompkins Builders, Inc., as owner/obligee, to provide excavation services for a project commonly referred to as the Gallery Place Excavation Package, 707 7th Street, N.W., Washington, D.C. ("Gallery Place Project"). NAS issued performance and payment bonds, both bearing Bond No. 189425 ("Gallery Place Bonds"), and both in the penal sum of $2,220,000, to secure the Joint Venture's performance of the Gallery Place Project contract.

Thereafter, in January 2002, Union, as contractor, agreed with Kadcon Corporation ("Kadcon"), as owner/obligee, to perform demolition, excavation, and other services at the Eagle Building, 3333 M Street, N.W., Washington, D.C. ("M Street Project"). NAS again issued performance and payment bonds to Kadcon, both bearing Bond No. 192502 ("M Street Bonds"), in the penal sum of $819,400, to secure Union's performance on the project.

Circumstances for Union apparently went from bad to worse and on March 20, 2002, it filed a bankruptcy petition under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Maryland. The case was converted to a Chapter 7 liquidation on or about June 17, 2002. After the conversion to a Chapter 7 case, Union ceased all work on the M Street Project.

In July 2002, the bankruptcy court granted a motion by Union's chapter 7 bankruptcy trustee to reject the contract between Union and Kadcon for the M Street Project. Kadcon then called upon NAS to fulfill its obligations as surety. Kadcon and NAS entered into a takeover agreement ("Takeover Agreement") on July 15, 2002, by which NAS substituted itself for Union on the original contract between Union and Kadcon and Kadcon agreed to permit NAS to enter into a subcontract with Construction Management, Inc. ("CMI") to perform the remaining work on Union's contract with Kadcon. CMI then entered into a subcontract with Prince to perform work on the M Street Project and Prince, in turn, subcontracted with District to perform a portion of the work on the M Street Project. Because the work on the Gallery Place Project was performed by the Joint Venture, it was not affected by Union's bankruptcy. District asserts that it also performed work on the Gallery Place Project, sending its bills directly to the Joint Venture. When the parties briefed this case in the spring of 2003, work on both projects was on-going.

District now seeks damages in excess of $250,000, plus interest, costs, and attorneys' fees from NAS against the M Street Payment Bond. It also seeks damages of $52,338.12 plus interest, costs, and attorneys' fees from NAS against the Gallery Place Payment Bond. It is to be noted that District's owners and officers, James R. Passero and George Carr, are former owners/officers/employees of Union.

Relevant Terms of the Bonds and Contracts

The M Street Payment Bond defines a "Claimant" as "an individual or entity having a direct contract with the Contractor or with a subcontractor of the Contractor to furnish labor, materials or equipment for use in the performance of the Contract." Motion to Dismiss or, in the Alternative, for Summary Judgment, Exh. 1 at ¶ 15.1. The "Contractor" at issue was Union. Under the Bond, NAS is obligated to "pay for labor, materials and equipment furnished for use in the performance of the Construction Contract, which is incorporated herein by reference." Id., Exh. 1 at ¶ 1.

When NAS and Kadcon agreed to the Takeover Agreement, NAS agreed to take over performance of Union's work and stepped into the shoes of Union. The Takeover Agreement states, "The term 'Contractor' as used in the Original Contract shall be deemed, after the date of this Agreement, to refer to the Surety [NAS] rather than to the Former Contractor [Union]." I d., Exh. 2 at ¶ 1. In addition, the Takeover Agreement specified that the M Street Payment Bond "shall remain in full force and effect in accordance with its terms and conditions." Id., Exh. 2 at ¶ 10. And, by way of the Takeover Agreement, Kadcon agreed that CMI would perform the remaining work as a subcontractor to NAS.

The Gallery Place Payment Bond is similar. It defines a claimant as "one having a direct contract with the Subcontractor for labor or material, or both, used or reasonably required for use in the performance of the Subcontract...." Id., Exh. 4 at ...


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