United States of America for the use of Wesco Distribution, Inc. Plaintiff
Liberty Mutual Insurance Company Defendant-Appellee International Fidelity Insurance Company Defendant-Appellant
Submitted: December 11, 2018
from United States District Court for the Southern District
of Iowa - Des Moines
LOKEN, MELLOY, and ERICKSON, Circuit Judges.
appeal is part of a complex dispute over costs that resulted
from contractor defaults in completing a federal government
construction project. After partial summary judgment rulings
and a bench trial, the district court entered judgment against a
subcontractor's surety, International Fidelity Insurance
Co. ("Fidelity"), and in favor of the general
contractor's surety, Liberty Mutual Insurance Co.
("Liberty"), for the full amount of Fidelity's
performance bond. Fidelity appeals. We affirm.
March 2012, Greenleaf Construction Co.
("Greenleaf") entered into a Prime Contract with
the United States to build an Army Reserve Center in Des
Moines, Iowa. As required by the Miller Act, 40 U.S.C. §
3131(b), Greenleaf obtained a performance bond and a payment
bond from Liberty naming Greenleaf as principal and the
United States as obligee. "A performance bond protects
the owner, or obligee, ensuring project completion if the
general contractor defaults. A payment bond ensures that
laborers and material suppliers will be paid if the general
contractor defaults." Pa. Nat'l Mut. Cas. Ins.
Co. v. City of Pine Bluff, 354 F.3d 945, 949 n.2 (8th
Cir. 2004) (citations omitted). In April, Greenleaf entered
into a Subcontract in which International Electric, Inc.
("Electric"), agreed to perform defined electrical
and communications work on the project for $1, 020, 000. The
Subcontract required Electric to furnish performance and
payment bonds in the amounts of $1, 020, 000 (the bonds'
"penal sum"). Electric obtained the bonds from
Fidelity, naming Electric as principal and Greenleaf as
obligee. The performance bond obligated Fidelity to
"promptly remedy" a default by Electric on the
Subcontract or "arrange for the performance of
[Electric's] obligation under the subcontract."
January 2014, Greenleaf, Liberty, and the United States
entered into a Takeover Agreement in which Greenleaf and the
government "agreed to an immediate consensual
termination and default" of the Prime Contract. Liberty
agreed to "complete the Contract in accordance with its
terms" and "reaffirm[ed] the validity of
[Liberty's] Bonds to secure the obligations of its
completion." The Takeover Agreement provided that
Liberty "becomes entitled to all rights, titles, and
interests of Greenleaf in and to the [Prime] Contract."
The government agreed to accept Vertex Companies, LLC
("Vertex"), as Liberty's "completion
contractor." The government also agreed to work with
Liberty "to agree on a schedule establishing a new
construction completion date," which had been October
February 7, Liberty and Electric entered into a Subcontract
Ratification Agreement in which Liberty agreed to pay
Electric $244, 134 for work previously performed under the
Subcontract but not paid by Greenleaf. Electric agreed to
"perform the balance of the work for [the unpaid balance
of the $1, 020, 000 Subcontract amount, $347, 612] in
accordance with the terms and conditions of the Subcontract,
as modified by this Agreement." Fidelity was not asked
to -- and did not -- bond the Ratification Agreement.
dispute soon arose between Electric and Vertex as completing
general contractor, and Electric never returned to the
project. Liberty terminated Electric for its default in April
2014 and notified Fidelity. Fidelity refused to complete
Electric's obligations under the Subcontract. Liberty
hired an electrical subcontractor, ABC Electric, to complete
work under the Subcontract. ABC Electric concluded that much
of the work Electric had performed needed to be redone and
ultimately charged Liberty $1, 657, 745 to complete
electrical and communications work on the project.
lawsuit began in August 2014 when the federal government sued
Greenleaf, Electric, Liberty, and Fidelity on behalf of an
unpaid supplier. That claim has been resolved. Liberty filed
a cross-claim against Fidelity and Electric for breach of the
Subcontract and breach of Fidelity's performance and
payment bonds. Ruling on cross-motions for summary
judgment, the district court granted Liberty partial summary
judgment, ruling that Liberty may assert claims against
Fidelity's performance bond, the bond was not discharged
by replacement or material alteration, and Fidelity's
obligations "were triggered by the satisfaction of the
bond's conditions precedent." After a bench trial on
Liberty's claims against the performance and payment
bonds, the court entered judgment against Fidelity for $1,
020, 000, the full amount of its performance bond. Fidelity
has not appealed the $104, 231 judgment entered in favor of
Liberty on its claims against Fidelity's payment bond.
argues it is not liable to Liberty on the performance bond
because (1) Liberty was not Greenleaf's
"successor" entitled to assert a claim on the bond;
(2) the Ratification Agreement discharged Fidelity's
performance bond because it was either an entirely new
agreement or materially altered Electric's Subcontract,
and Fidelity did not bond the Ratification Agreement; and (3)
Liberty's claim did not meet conditions precedent to the
performance bond's coverage.
The Successor Issue.
holding that Liberty may assert a claim against
Fidelity's performance bond, the district court first
ruled that, by satisfying Greenleaf's obligations under
the Prime Contract and the Subcontract, Liberty became
subrogated to Greenleaf's rights through equitable
subrogation. The court noted it is well-established
"that a surety who pays the debt of another is entitled
to all the rights of the person he paid to enforce his right
to be reimbursed," Pearlman v. Reliance Ins.
Co., 371 U.S. 132, 136-37 (1962), and the Supreme Court
of Iowa expansively views the rights of a subrogee who
"steps into the shoes" of another, Iowa
Dep't of Human Servs. v. Unisys Corp., 637 N.W.2d
142, 156 (Iowa 2001). Without challenging this general
principle, Fidelity argues that Liberty as subrogee acquired
no right to assert a claim against the performance bond
because the bond provides, "No right of action shall
accrue on this bond to or for the use of any . . .
corporation other than [Greenleaf] or the heirs, executors,
administrators or successors ...