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United States v. Liberty Mutual Insurance Co.

United States Court of Appeals, Eighth Circuit

April 12, 2019

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

          Appeal from United States District Court for the Southern District of Iowa - Des Moines

          Before LOKEN, MELLOY, and ERICKSON, Circuit Judges.


         This 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[1] 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.

         I. Background.

         In 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."

         In 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 12, 2013.

         On 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.

         A 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.

         This 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.[2] 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.

         Fidelity 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.

         II. The Successor Issue.

         In 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 ...

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