National Union Fire Insurance Co. of Pittsburgh v. Wadsworth Golf Construction Co. of Midwest

BARBERA, Judge. • This' case involves a surety’s obligation under a payment bond. Appellants, National Union Fire Insurance Company of ²⁶¹ Pittsburgh, Federal Insurance Company, and Fidelity and Deposit Company of Maryland (collectively, “the Sureties”), appeal from an order issued by the Circuit Court for Dorchester County granting a motion for summary judgment in favor of appellee, Wadsworth Golf Construction Company of the Midwest d/b/a Wadsworth Golf Construction Company (“Wadsworth”). The Sureties raise the following questions, which we have set forth substantially as they appear in their brief: I. Whether the trial court erred in granting [Wads-worth’s] motion for summary judgment by ruling that [the Sureties] forfeited all defenses to the [Wads-worth’s] payment bond claim when they did not communicate a decision on the claim to Wadsworth within 45 days of the date that the proof of claim was received.

II

Whether the trial court erred in granting [Wads-worth’s] motion for summary judgment by ruling that the subcontract payment clauses are void as a matter of public policy. For the reasons that follow, we answer “no” to the first question and affirm the judgment of the circuit court on that basis. Our disposition of the first issue obviates the need to reach the second question presented. I. On November 22, 1999, Clark Construction Group, Inc. (“Clark” or “the general contractor”) contracted with the Maryland Economic Development Corporation (“MEDCO” or “the owner”) to serve as general contractor for the construction of the Hyatt Regency Chesapeake Bay Resort in Cambridge. 1 At the same time, for the purpose of guaranteeing completion of the construction, Clark executed a surety bond (or “payment bond”) in favor of MEDCO in the amount of ²⁶² $70,864,000.00. 2 This bond secured Clark’s obligation to pay-all labor, material, and equipment costs necessary to construct the resort.

The payment bond provides, in pertinent part: 4 The Surety shall have no obligation to Claimants under this Bond until: 4.1 Claimants who are employed by or have a direct contract with the Contractor have given notice to the Surety (at the address described in Paragraph 12) and sent a copy, or notice thereof, to the Owner, stating that a claim is being made under this Bond and, with substantial accuracy, the amount of the claim. 6 When the Claimant has satisfied the conditions of Paragraph 4, the Surety shall promptly and at the Surety’s expense take the following actions: 6.1 Send an answer to the Claimant, with a copy to the Owner, within 45 days after receipt of the claim, stating the amounts that are undisputed and the basis for challenging any amounts that are disputed. 6.2 Pay or arrange for payment of any undisputed amounts. Eight days later, Clark subcontracted with Wadsworth to build an 18-hole golf course, and to complete excavation and rough grading work for all buildings, parking lots, and roads located on the resort. The subcontract provided that Clark would pay Wadsworth a base price of $3,986,000.00. During the course of construction, the base price was increased to $5,696,318.00.

Clark also asked Wadsworth to complete additional work, not included in the base price, totaling $138,714.45. The subcontract also provided, in Paragraph 4.j.: At any time all monies due Clark from the Owner are not paid, Clark shall, in its sole discretion, apportion the non ²⁶³ payment equitably and reduce the payments otherwise due Subcontractor accordingly. Such reductions shall continue until Clark is paid all monies due it, provided, however, if the withholdings relate to Subcontractor’s work, Subcontractor shall be paid in full when Clark’s right to recover from the Owner is finally determined or expires. Subcontractor acknowledges that this Article 4.j. establishes a reasonable time for payment.

According to Wadsworth, it completed construction of the golf course and the required site work sometime before March 2002. At that time, Wadsworth unsuccessfully attempted to collect the monies Clark still owed it, approximately $720,963.45, ie., the remainder of the base price ($582,249.00), plus the cost of the additional work ($138,714.45) performed by Wadsworth. The reason for Clark’s non-payment is that sometime in late 2001, MEDCO discontinued payments to Clark, causing Clark, in turn, to discontinue payments to Wadsworth. On March 23, 2002, Wadsworth notified the Sureties by certified letter of its claim for payment under the payment bond.

Ten days later, Federal Insurance Company, one of the Sureties, responded to Wadsworth’s claim, stating: Please be advised that American International Group [“AIG”] is the lead surety with regard to this matter. As a result, by copy of this letter, I am forwarding a copy of your letter to Susan Hellerman of AIG for her review and investigation and request that she keep me appraised of the status of her investigation. Federal Insurance Company writes this letter under a full reservation of its rights and with the understanding that any actions we have taken or may take do not constitute a waiver of any defenses available under the bond or applicable law, including specifically any defenses pertaining to statutes of limitation or timely filing of appropriate notices. By letter dated April 5, 2002, Ms. Hellerman, of AIG, acknowledged receipt of Wadsworth’s claim.

She requested that Wadsworth document its claim against the payment bond ²⁶⁴ by submission of a completed Proof of Claim form (a blank form was enclosed with the letter) and supporting materials. The letter further stated: “Please be advised that this action is taken at this time without waiver of or prejudice to any of the rights and defenses, past or present, known or unknown which either the above referenced Surety (National Union Fire Insurance Company) or Principal (The Clark Construction Group, Inc.) may have in this matter.” On May 3, 2002, Wadsworth submitted to AIG the completed Proof of Claim form and supporting documentation. Shortly thereafter, AIG notified Wadsworth by letter that it had received the documents, and that it would “immediately take[ ] this matter up with the above referenced Principal (The Clark Construction Group, Inc.), in order to ascertain their position on [the] claim as presented.” The letter further stated: “I [Susan Hellerman] will be in contact with you in due course regarding [Clark’s] position on the Proof of Claim as presented by your company on the above referenced bond.” Wads-worth, however, received no further information from the Sureties regarding its claim, despite having sent a second letter, on July 23, 2002, requesting an answer to its claim. On November 6, 2002, Wadsworth filed a single count complaint in the Circuit Court for Dorchester County against the Sureties.

The complaint alleged breach of contract and sought $752,738.72 in damages, plus pre-judgment and post-judgment interest. 3 That same day, Wadsworth also filed a motion for summary judgment, arguing that the Sureties had waived the right to challenge Wadsworth’s claim under the payment bond because the Sureties had not “answered” Wads-worth’s claim within 45 days of receiving notice of it. Wads-worth appended to its motion the affidavits of Wadsworth’s vice-president, Brian R. Cunfer, and attorney, Stephen P. Lagoy. ²⁶⁵ In response, the Sureties filed a motion to stay proceedings pending the outcome of litigation that Clark had initiated against MEDCO. 4 The Sureties also filed a cross-motion for summary judgment, raising two grounds for relief: (1) pursuant to Article 4.j. of the subcontract, the money Clark owed to Wadsworth was not then “due” because MEDCO had not paid Clark; and (2) the Sureties’ payment obligation under the terms of the payment bond arose only when Clark failed to pay amounts “due.” Appended to the Sureties’ motion was the affidavit of Michael Mansager, employed by Clark as the Project Executive responsible for the management and oversight of Clark’s contract with MEDCO, who testified that Clark had paid Wadsworth “all sums currently due and owing.” The motions came on for a hearing on April 28, 2003. At its close, the court stated: I’m going to grant the motion for summary judgment on behalf of Wadsworth — Wadsworth is the Plaintiff here — and I base that on two things: (1) I think that under the terms of the bond itself that they [the Sureties] are estopped from now contesting because there was not a response within the time set forth in the payment bond. Secondly, however — in other words, that would be enough to decide the matter, but if I’m wrong on that then I think that the General Assembly has made plain in the portion of the statute that has been read to me that a construction here that would make this on a pay-if-paid basis would be void against public policy of the state.

I don’t know all of the background here, but I’m convinced that this contract under the enactments of the Gen ²⁶⁶ eral Assembly is against public policy if I were to construe it as pay-as-paid — or pay-when-paid. That’s the ruling of the Court. A written order embodying the court’s judgment was thereafter entered on the docket. This timely appeal followed.

II

This appeal is taken from the grant of summary judgment. We review such judgments de novo. Tyma v. Montgomery County, 369 Md. 497, 504 , 801 A.2d 148 (2002); Middlebrook Tech. LLC v. Moore, 157 Md.App. 40, 58 , 849 A.2d 63 (2004).

In doing so, we are required to determine whether a dispute of material fact exists. Beyer v. Morgan State Univ., 369 Md. 335, 359-60 , 800 A.2d 707 (2002). “ ‘A material fact is a fact the resolution of which will somehow affect the outcome of the case.’ ” Matthews v. Howell, 359 Md. 152, 161 , 753 A.2d 69 (2000) (quoting King v. Bankerd, 303 Md. 98, 111 , 492 A.2d 608 (1985)). Summary judgment is only appropriate when, upon review of the facts and inferences therefrom in the light most favorable to the non-moving party, there is no genuine issue of material fact and the party in whose favor judgment is entered is entitled to judgment as a matter of law. Md. Rule 2 — 501(f); Sadler v. Dimensions Healthcare Corp., 378 Md. 509, 533 , 836 A.2d 655 (2003).

If the record reveals that a material fact is in dispute, summary judgment is inappropriate. Okwa v. Harper, 360 Md. 161, 178 , 757 A.2d 118 (2000). Once we have concluded that there is no genuine issue of material fact, we review the trial court’s grant of summary judgment to ascertain if it was legally correct. Jahnigen v. Smith, 143 Md.App. 547, 555 , 795 A.2d 234 , cert. denied, 369 Md. 660 , 802 A.2d 439 (2002).

III

The first of the two independent grounds upon which the court granted summary judgment in favor of Wadsworth is that the Sureties failed to answer Wadsworth’s claim within 45 ²⁶⁷ days of receiving it, as required by the payment bond, and, as a consequence of that failure, the Sureties were foreclosed from disputing the claim. The court was correct in so ruling. The provisions for filing and responding to a claim against the payment bond are found in Paragraphs 4 and 6 of that document. Paragraph 4 requires that a claimant notify the surety “that a claim is being made under this Bond and, with substantial accuracy, the amount of the claim.” Paragraph 6 then requires that, [w]hen the Claimant has satisfied the conditions of Paragraph 4, the Surety shall promptly and at the Surety’s expense take the following actions: Send an answer to the Claimant ... within 45 days after receipt of the claim, stating the amounts that are undisputed and the basis for challenging any amounts that are disputed[,] and “[p]ay or arrange for payment of any undisputed amounts.” It is undisputed that Wadsworth properly notified the Sureties that it was filing a claim under the payment bond.

It is also undisputed that the Sureties did not submit to Wadsworth an answer within 45 days of receiving the claim, in compliance with Paragraph 6.1, and the Sureties did not pay or arrange for payment of the undisputed claim, in compliance with Paragraph 6.2. On these undisputed facts, the court concluded that the Sureties were foreclosed from raising defenses to their non-payment of Wadsworth’s claim. The Sureties marshal several arguments in support of their position that this conclusion was error as a matter of law. They argue: (1) Wadsworth’s claim for non-payment was not ripe because Clark’s right to recover from MEDCO had not yet been determined; (2) the plain language of the bond does not set forth express consequences for a surety’s failure to answer a claim within 45 days of receiving it; and (3) the failure to answer Wadsworth’s claim did not manifest an intentional or implied intent to waive any right to defend against Wadsworth’s claim.

We are not persuaded by any of these arguments. ²⁶⁸ IV. We begin our analysis with a review of the characteristics of a suretyship contract and a summary of the relevant principles governing the interpretation and construction of contracts. A suretyship contract is a tripartite agreement among “a principal obligor, an obligee, and a surety.” Atlantic Contracting & Material Co., Inc. v. Ulico Cas. Co., 380 Md. 285, 299 , 844 A.2d 460 (2004); see also Peter A. Alces, The Law of Suretyship and Guaranty 1-1 (2003) (stating “[suretyship law orders the rights and liabilities of three parties inter se: the debtor, the creditor, and the surety”).

In a payment bond, like the one at issue in the instant case, “the surety guarantees the principal’s duty to the obligee to pay its (the principal’s) laborers, subcontractors, and suppliers.” Atlantic Contracting, 380 Md. at 299 , 844 A.2d 460 . , “The liability of a surety is coextensive with that of the principal.” Id. Ultimate liability, however, “ ‘rests upon the principal obligor rather than the surety, but the obligee has a remedy against both.’ ” Chicago Title Ins. Co. v. Lumbermen’s Mut. Cas.

Co., 120 Md.App. 538, 550 , 707 A.2d 913 (1998) (quoting General Motors Acceptance Corp. v. Daniels, 303 Md. 254, 259 , 492 A.2d 1306 (1985)). Consequently, upon default by the principal of the obligation to pay, the surety is immediately liable. Atlantic Contracting, 380 Md. at 300 , 844 A.2d 460 . 5 “ ‘A surety bond is a contract and is to be construed a's such.’ ” Id. (citation omitted).

As with all contracts, a suretyship contract is interpreted by its terms. General Motors Acceptance Corp., 303 Md. at 261 , 492 A.2d 1306 . “Maryland has long adhered to the objective law of contract interpretation and construction.” Wells v. Chevy Chase Bank, F.S.B., 377 Md. 197 , 224 n. 12, 832 A.2d 812 (2003). Therefore, ²⁶⁹ “[a] court construing an agreement under this test must first determine from the language of the agreement itself what a reasonable person in the position of the parties would have meant at the time it was effectuated. In addition, when the language of the contract is plain and unambiguous there is no room for construction, and a court must presume that the parties meant what they expressed.

In these circumstances, the true test of what is meant is not what the parties to the contract intended it to mean, but what a reasonable person in the position of the parties would have thought it meant. Consequently, the clear and unambiguous language of an agreement will not give [ ]way to what the parties thought that the agreement meant or intended it to mean.” Id. at 224-25 , 832 A.2d 812 (citation omitted). “The interpretation of unambiguous contract terms presents a question of law for the court to resolve.” Chicago Title Ins. Co.,