Burdette v. Lascola

Gilbert, C. J., delivered the opinion of the Court. This appeal is concerned with the effort by the Peoples Lumber and Supply Company, Inc., (Peoples), appellant, to avoid financial responsibility under a “completion bond” that it signed on behalf of a builder, Perry G. Burdette, another appellant. The question before us is who is the obligee under the bond. Before undertaking to resolve the issue, a brief history of surety law is in order so as to comprehend better the matter.

Suretyship commenced with the beginning of civilization. 1 References to suretyship are found in the Bible. 2 Although there is evidence of a surety contract as far back as 2750 B.C., 3 and in the Code of Hammurabi, about 2250 B.C., the earliest written contract of suretyship that has been found dates to 670 B.C. By the year 150 A.D., the Romans had developed “a highly technical law of suretyship.” 4 The concept of a corporate surety did not evolve in this country until the late 19th Century. 5 The delay in the development of corporate surety may have been related to the fact that the United States, prior to the latter half of the 19th Century, was primarily an agricultural country. 6 It was not ⁷²² until the Industrial Revolution that the corporate surety emerged. 7 With the emergence of the corporate surety as a business entity, judicially created rules of interpretation of surety bonds came into being. Two of those rules, and the two with which we are most directly concerned in the matter before us, are 1) “to ascertain the intention of the parties and to give effect to that intention if it can be done consistently with legal principles.” Walsh v. Jefferson Federal Savings & Loan Association, 216 Md. 131, 137 , 139 A. 2d 847, 850 (1958). See also Levy v. Glens Falls Indemnity Co., 210 Md. 265, 273 , 123 A. 2d 348, 352 (1956); Lange v. Board of Education, 183 Md. 255, 260 , 37 A. 2d 317, 320 (1944); Hospital for Women v. United States Fidelity & Guaranty Co., 177 Md. 615, 619 , 11 A. 2d 457, 459 (1940). 2) The old doctrine of favoring the surety by construing strictly a claim against him does not apply to the business surety. Its liability is to be interpreted liberally.

Hospital for Women v. United States Fidelity & Guaranty Co., 177 Md. at 618-19 , 11 A. 2d at 459 . See also Lange v. Board of Education, supra; American Fidelity Co. v. State, 128 Md. 50, 56 , 97 A. 12, 14 (1916); State v. National Surety Co., 126 Md. 290, 293 , 94 A. 916, 917 (1915); Aetna Indemnity Co. v. Waters, 110 Md. 673, 699 , 73 A. 712, 722 (1909); Smith v. Turner, 101 Md. 584, 587 , 61 A. 334, 336 (1905). For the reasons hereinafter set forth, we think the appellant, Peoples, while admittedly not engaged in the surety business, was, nevertheless, a surety for profit in the instant case. We shall, therefore, liberally construe the bond.

Walsh v. Jefferson Federal Savings & Loan Association, 216 Md. at 137 , 139 A. 2d at 850 ; Hospital for Women v. Fidelity Guaranty Co., 177 Md. at 618 , 11 A. 2d at 459 ; Lange v. Board of Education, 183 Md. at 260 , 37 A. 2d at 320 . On March 15, 1973, appellees, Vincent J. LaScola and his wife, Lucy, entered into a contract with appellant, Perry G. Burdette, who agreed to build a home for $89,863 on land which the LaScolas owned in the Mt. Airy area of Frederick ⁷²³ County. Although the contract contained no completion date or provisions relating to completion, the LaScolas received the impression from John Burdette, the builder’s foreman, that the house would be completed in six months.

The financial transactions involved were succinctly set out in the opinion of the trial judge: “The LaScolas financed the construction of their house by means of the proceeds of a $60,000.00 loan from Farmers and Mechanics National Bank plus $29,863.00 of their own capital, all of which was held by the bank in an escrow account. As the work proceeded, the bank issued draw checks which were made payable to LaScola, the builder and [Peoples,] the surety. LaScola and the surety endorsed the first four draw checks totalling $71,880 to the builder. After that, when it became apparent the work was not progressing because subcontractors had not been paid, Mr. LaScola used what was left in the escrow account, except for $187.53, to pay subcontractors [directly] in an effort to get the house finished.

Furthermore, Mr. LaScola and his family ... did a lot of the work themselves, and he paid out-of-pocket additional sums for labor and material.” Peoples became involved in the case as a surety as a result of their execution of a completion bond by their predecessor in interest, Peoples Lumber and Supply Company. 8 Farmers and Mechanics National Bank required such a bond as a condition precedent to its making a construction loan available to appellees. Before agreeing to act as surety, Peoples required Perry G. Burdette to pay approximately $40,000 of the $70,000 that he then owed to them for prior purchases of building materials and supplies. By so doing, Peoples became a surety for profit. 9 ⁷²⁴ Matters did not proceed to appellee’s satisfaction because Burdette did not complete the construction of the house. As a result, LaScola filed a “Bill of Complaint for Specific Performance and Other Relief” on August 8, 1974, in the Circuit Court for Montgomery County, Maryland.

An initial order which directed Burdette to complete certain specified items was passed on February 5, 1976, and the case was continued with trial reset for July 6 and 7, 1976. The trial actually occurred on December 8 and 9, 1977. Judge Joseph M. Mathias filed his “Memorandum Opinion and Order” in the case on February 15, 1978. He awarded damages to the appellees as follows: “For extra labor and materials, to complete the house (plus credit for items not installed) $10,090.62 For additional rent the LaScolas incurred by reason of the builder’s unreasonable delay in completing the house 912.50 For expert witness fees 1,535.00 For attorney’s fees 8,585,00 $21,123.12 Minus balance in escrow account 187.53 Net damages awarded in favor of plaintiffs against both defendants $20,935.59” Peoples and Burdette noted an appeal where they pose five issues for our review.

We shall discuss each in the order they have been put to us. I. The threshold question presented by appellants is whether the chancellor erred in awarding judgment to the owners against the surety under the terms and provisions of the completion bond. The completion bond reads as follows: “KNOW ALL MEN BY THESE PRESENTS, that we, P. G. Burdette, principal, and Peoples Lumber ⁷²⁵ Supply Company, surety, are held and firmly bound unto the FARMERS AND MECHANICS NATIONAL BANK, its successors and assigns, and Vincent J. LaScola and Lucy S. LaScola, his wife, as their interests may appear in the full sum of Eighty-nine Thousand, Eight Hundred Sixty-three ($89,863.00) Dollars, for which sum, we, jointly and severally, for ourselves, our heirs, administrators or executors, promise to pay to the said FARMERS AND MECHANICS NATIONAL BANK, its successors and assigns, and/or Vincent J. LaScola and Lucy S. LaScola, his wife, owners. “WHEREAS, FARMERS AND MECHANICS NATIONAL BANK has agreed to make to Vincent J. LaScola and Lucy S. LaScola, his wife, owners as above, a loan in the sum of Sixty Thousand ($60,000.00) Dollars, secured by a first mortgage upon the following described real estate in Frederick County, Maryland: Approximately fifteen (15) acre tract of land located on the east side of Penn Shop Road between Route 80 and Route 27 for the purpose of erecting thereon a dwelling, said loan to be payable in certain installments, which loan was made only upon the condition that the said owners as above, complete the said dwelling according to plans and specifications accompanying the application for said loan, and save harmless and protect the said FARMERS AND MECHANICS NATIONAL BANK against all liens for labor and/or material, which might be placed upon said property. “AND WHEREAS, the said owners have contracted with the above named principal to complete said building, according to plans and specifications forming a part of said contract. “NOW, THEREFORE, the condition of the above obligation is such, that if the said principal or ⁷²⁶ principals named above shall fully complete said dwelling according to said plans and specifications and save harmless and protect the said FARMERS AND MECHANICS NATIONAL BANK against all liens for labor and/or material, which may be filed against said property, including all costs, counsel fees, or other expenses incurred, that this obligation is to be void; otherwise, to remain in full force and effect.” Judge Mathias interpreted the bond as remaining in full force and effect until the principal (Burdette) satisfied the express condition requiring that he “fully complete said dwelling according to plans and specifications.” Because the principal did not complete the house as promised, the surety, Peoples, was held to be liable under the bond. We believe that Judge Mathias’s decision is supported both by the language of the bond itself and by the applicable case law.

The obligation entered into was to be void “if the said principal or principals named above shall fully complete said dwelling according to said plans and specifications and save harmless and protect the said FARMERS AND MECHANICS NATIONAL BANK against all liens for labor and/or material, which may be filed against said property, including all costs, counsel fees, or other expenses incurred ... otherwise [the obligation was] to remain in full force and effect.” The chancellor read the quoted language as containing two express conditions. One was that Burdette “fully complete said dwelling”; the other was to “protect the bank from lien claims.” The dwelling was not completed. Ergo, that condition was not fulfilled, and “the bond remained in full force and effect.” Since the bond was not discharged, “the surety... [remained] liable under it.” The completion bond states that Peoples, as surety, is liable ⁷²⁷ both to Farmers and Mechanics National Bank and the LaScolas. The relevant portion of the agreement reads: “KNOW ALL MEN BY THESE PRESENTS, that we ...

Peoples Lumber Supply Company, surety are held and firmly bound unto the FARMERS AND MECHANICS NATIONAL BANK ...and Vincent J. LaScola and Lucy S. LaScola... [and we]promise to pay to the said FARMERS AND MECHANICS NATIONAL BANK ... and/or Vincent J. LaScola and Lucy S. LaScola, his wife, owners.” (Emphasis supplied.) The bond, as Judge Mathias observed, “might... properly be called a ‘dual obligee bond.’ See Aetna Ins. v. Maryland Cast Stone, 254 Md. 109, 118 , [ 253 A. 2d 872, 874 (1969)].” In Aetna, the Court of Appeals had the opportunity to construe the language of a completion bond. The provisions of the bond involved in the Aetna case read as follows: “’KNOW ALL MEN BY THESE PRESENTS, THAT we, GILBERT CORPORATION, Suite 903 World Building, 8121 Georgia Avenue, Silver Spring, Maryland (hereinafter called the Principal) and AETNA INSURANCE COMPANY, a Connecticut Corporation licensed to do business in the State of Maryland (hereinafter called the Surety) are held and'firmly bound unto PARK HEIGHTS JOINT VENTURE (hereinafter called the Owner-Obligee) and MARYLAND NATIONAL BANK, Baltimore, Maryland 21203 (hereinafter called the Lender-Obligee), their successors and assigns as their respective interests may appear, as Obligees (hereinafter collectively referred to as Obligees), for the use and benefit of claimants as hereinbelow defined, in the sum of FOUR HUNDRED THOUSAND and no/100 DOLLARS ($400,000.00), lawful money of the United States of America, for the payment of which Principal and Surety bind themselves, their estate representatives, successors ⁷²⁸ and assigns, jointly and severally, firmly by these presents. ‘WHEREAS, Principal has entered into a construction contract with Owner-Obligee dated the day of 1965, for the construction of EIGHT STORY APARTMENT BUILDING TO CONTAIN (28) TWENTY EIGHT UNITS, TO BE LOCATED AT 6000 PARK HEIGHTS AVENUE, BALTIMORE, MARYLAND, on Owner Obligee’s premises at 6000 Park Heights Avenue, Baltimore, Maryland, in accordance with plans and specifications prepared by which contract, plans and specifications are by reference made a part hereof, as fully as if recited at length herein. ‘WHEREAS, Lender-Obligee has agreed to lend to Owner-Obligee monies to be secured by a mortgage on the above mentioned premises of Owner-Obligee and to be used in making payments under said construction contract, and Lender-Obligee desires protection as its interest may appear in the event of default by the Principal under said construction contract with Owner-Obligee, said protection to be subject to the performance by the Obligees, or either of them, of the obligations to the Principal as set forth in said construction contract. ‘NOW, THEREFORE, the condition of this obligation is such that, if Principal shall pay all persons who have contracts directly with the Principal for labor and materials furnished pursuant to the provisions of said construction contract, failing which such persons shall have a direct right of action against Principal and Surety under this obligation, and further that, if Principal shall cause all mechanics’ liens filed by reason of non-payment for labor and material furnished in the prosecution of said construction to be discharged of record, then this obligation shall be null and void; otherwise, to ⁷²⁹ be and remain in full force and effect, subject, however, to the following express conditions: ‘1. The Principal and Surety shall not be liable to the Obligees, or either of them, unless the said Obligees, or either of them, make payment to the Principal or, in the event of Principal’s abandonment of project or default, to the Surety, strictly in accordance with the terms of said construction contract as to payments, and perform all the other obligations to be performed under said construction contract at the time and in the manner therein set forth. ‘2. A claimant is defined as one having a direct contract with the Principal or with a subcontractor of the Principal for labor, material, or both, used or reasonably required for use in the performance of the contract, labor and material being construed to include that part of water, gas, power, light, heat, oil,