National Union Fire Insurance v. David A. Bramble, Inc.

BATTAGLIA, Judge. In the present case we are asked to determine the effect of a general contractor’s payment bond surety’s failure to fulfill a contractual provision requiring it to answer a subcontractor’s payment claim within 45 days after receiving that claim. We determine that the language of the payment bond requires the sureties to delineate those portions of the claim that they intend to dispute within the 45-day period and that, under the language of the bond, a failure to do so results in the entirety of the claim being undisputed. We hold that Wadsworth Golf Construction Company of the Midwest and David A. Bramble, Inc. are entitled to judgment against the sureties because, under the terms of the payment bond, the sureties are precluded from disputing Wadsworth and Bramble’s claims, and thereby, we affirm the judgments of the Court of Special Appeals.

Background Common Facts On November 22, 1999, Clark Construction Group, Inc. (“Clark” or “the general contractor”) contracted with Maryland Economic Development Corporation (“MEDCO” or “the owner”) to serve as general contractor to oversee the construction of the Hyatt Regency Chesapeake Bay Resort in Cambridge, Maryland. 1 For the purpose of guaranteeing the ¹⁹⁹ completion of the construction, Clark executed a surety bond (or “payment bond”) in favor of MEDCO in the amount of $70,864,000.00. Issued jointly by National Union Fire Insurance Company of Pittsburgh, PA (“National Union”), Federal Insurance Company (“Federal”), and Fidelity and Deposit Company of Maryland (“Fidelity”) (collectively “the sureties”), the payment bond, provided by Clark, was a “form” surety bond, specifically identified as Document A312 from the American Institute of Architects, and was provided by Clark. No alterations were made to the original language of the payment bond. The payment bond secured Clark’s obligation to pay subcontractors for all labor, material, and equipment costs necessary to construct the resort should it default or MEDCO fail to make payment to Clark.

Among its many provisions were: 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' ... 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. Wadsworth Facts Eight days after the bond was executed, on November 30, 1999, Clark subcontracted with Wadsworth Golf Construction ²⁰⁰ Company of the Midwest (“Wadsworth”) to build, for over ten million dollars, an 18-hole golf course and to complete excavation and rough grading work for all buildings, parking lots, and roads located on the resort. During the course of construction, the base amount of the contract was increased to over five million dollars, and Clark requested that Wadsworth complete additional work, not included in the base amount, worth $138,714.45. Wadsworth completed the construction of the golf course and the required site work sometime before March 2002, and Clark made periodic progress payments to Wadsworth as MEDCO paid Clark.

When the work was completed, Wads-worth unsuccessfully attempted to collect $720,963.45 still owed by Clark. On March 23, 2002, Wadsworth notified the sureties by certified letter of its claim under the payment bond for the amount that Clark had failed to pay. Ten days later, Federal Insurance Company 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 apprised of the status of her investigation.

Federal Insurance Company writes this letter with 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 or appropriate notices. By letter dated April 5, 2002, AIG acknowledged receipt of Wadsworth’s claim through a letter addressed to Wadsworth and copied to Clark. AIG requested that Wadsworth document its claim against the payment bond by submission of a completed Proof of Claim form, which was enclosed with the letter, and that Wadsworth attach supporting documentation ²⁰¹ such as subcontracts, signed purchase orders, and signed invoices. The letter also 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 copies of the subcontract, billing and payment documentation, and notice letters. 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: “[AIG] 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 reference bond.” Wadsworth, however, received no further information from AIG or 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 under the payment bond for labor and materials for which Clark did not pay, plus pre- and post-judgment interest. 2 That same day, Wadsworth also filed a motion for summary judgment, arguing that the sureties were not entitled to challenge its claim under the payment bond because the sureties had not answered Wadsworth’s claim and had delineated the grounds for dispute here and the amounts within 45 days of receiving it.

Wadsworth appended the affidavits of its vice-president, Brian R. Cunfer, and attorney, ²⁰² Stephen P. Lagoy, to its Motion, which verified the accuracy of the exhibits attached to the proof of claim and attested to their knowledge of the allegations in the complaint. In response, the sureties filed a motion to stay the proceedings pending the outcome of litigation that Clark had instituted against MEDCO. 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 yet payable 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 at the time the claim was submitted. 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 averred that Clark had paid Wads-worth “all sums currently due and owing.” On April 28, 2003, a hearing on the motions was held at which time Judge Marvin Smith, sitting by special assignment, granted the motion on alternative grounds, the first being that Wadsworth was entitled to the money under the terms of the bond, and the second being public policy.

A written order embodying the court’s judgment was subsequently entered on the docket on May 5, 2003. On May 28, 2003, the sureties filed a notice of appeal to the Court of Special Appeals. The Court of Special Appeals affirmed Judge Smith’s conclusion that the bond language operated to preclude the sureties from disputing the claims submitted by Wadsworth due to their failure to comply with Paragraph 6 of the payment bond because Paragraph 6 “provides the surety 45 days to dispute a subcontractor’s claim for payment and, if the surety does not answer within that time period,” the surety cannot thereafter dispute the claim. National Union Fire Insurance Co. of Pittsburgh v. Wadsworth Golf Construction Company of the Midwest, 160 Md.App. 257, 274 , 863 A.2d 347, 357 (2004).

Moreover, the opinion noted that its construction of Paragraph 6 was consistent with the purpose of such bonds, ²⁰³ which is to “insure that claimants who perform work are paid for their work in the event that the principal does not pay.” Id. The court concluded that to interpret Paragraph 6 otherwise would render the provision nugatory. Because the sureties did not appeal from the alternative ground for Judge Smith’s determination, public policy, the Court of Special Appeals did not address that ground. Bramble Facts On May 16, 2000, Clark subcontracted with David A. Bramble, Inc. (“Bramble”) to provide water and sewer piping systems at the resort.

The subcontract provided that Clark would pay Bramble a base price of $2,055,00.00, which was increased by $400,000.00 during the construction process. Bramble completed the required site work in March of 2002, at which time Bramble unsuccessfully attempted to collect the monies that it believed were outstanding from Clark. On June 14, 2002, Bramble notified the sureties by letter of its claim for payment under the bond, in the amount of $455,511.53. Nearly one month later, Federal responded to Bramble’s claim by sending a letter that was identical in content to that sent to Wadsworth, stating that it forwarded the claim to the lead surety, AIG.

At some point thereafter, AIG requested that Bramble document its claim under the payment bond by submitting a completed Proof of Claim form along with materials supporting its assertion. On April 22, 2003, Bramble submitted the form to AIG. On April 25, 2003, AIG informed Bramble by letter that the amount of the claim should be reduced to $336,334.63. Bramble received no additional correspondence from the sureties regarding its claim until after suit was filed.

At the end of April, Bramble filed a single count complaint in the Circuit Court for Dorchester County against the sureties alleging breach of contract and seeking $500,000.00 3 in damages, plus pre-judgment and post-judgment interest. Bramble then filed ²⁰⁴ a motion for summary judgment, which the sureties opposed. In a hearing on June 12, 2003, Judge Smith granted summary judgment in favor of Bramble relying on his holding in Wads-worth. The sureties filed a timely appeal with the Court of Special Appeals presenting questions identical to those in the Wadsworth case.

In an unreported opinion, the Court of Special Appeals, relying entirely upon its reasoning in Wads-worth, affirmed the entry of summary judgment. The sureties filed a petition for a writ of certiorari on January 14, 2005 in both cases and presented the following question, which we have reformulated for clarity purposes: Whether the Circuit Court improperly granted Wadsworth and Bramble’s Motions" for Summary Judgment based on the terms of Paragraph 6 of the payment bond, which requires the sureties to answer a submitted claim within 45 days of receipt and detail the amounts which are disputed and which are not. On March 11, 2005, we granted the petitions and issued the writs. National Union v. Wadsworth, 385 Md. 511 , 869 A.2d 864 (2005); National Union v. Bramble, 385 Md. 511 , 869 A.2d 864 (2005).

Because we determine that the language of Paragraph 6 of the payment bond requires that the sureties answer a subcontractor’s claim and delineate the portions of the claim that they intend to dispute within 45 days after the claim is submitted and that the sureties failed to do so, we find that Wadsworth and Bramble are entitled to judgment under the bond and affirm the judgments of the Court of Special Appeals. Our determination, like that of the Circuit Court, is based solely on an interpretation and application of the language of the payment bond. Discussion Primarily, the sureties contend that their failure to answer Wadsworth and Bramble’s claims within the 45-day period set forth in Paragraph 6 indicates that the entirety of the claims were being disputed. They argue that if they are not able to dispute the claim of the subcontractor, then they could be forced to make payment for claims not properly covered by ²⁰⁵ the bond.

Moreover, the sureties assert that to determine otherwise could result in the subcontractors receiving a windfall at the expense of other legitimate claimants entitled to recover under the terms of the bond. The sureties suggest that it would be more appropriate to award the subcontractors consequential damages arising from the breach of contract. Finally, the sureties contend that the result of the Circuit Court’s grant of summary judgment is punitive and inconsistent with the long standing principle in Maryland law prohibiting the courts from expanding the scope of a bond or insurance policy. Conversely, Wadsworth and Bramble assert that Judge Smith’s determination that the plaintiffs were entitled to recover was supported by the facts adduced in support of their motions for summary judgment.

Wadsworth and Bramble argue that because the sureties breached the provision of the contract governing the procedures for investigating claims, the sureties were precluded from raising any defense on the merits relating to coverage or otherwise. Therefore, Wads-worth and Bramble assert that Judge Smith properly granted their motions. The History and Fundamental Principles of Suretyship LI] At the outset, we shall examine our understanding of the fundamental principles governing surety bonds. A surety bond is a “tripartite agreement among a principal obligor, his obligee, and a surety.” General Motors Acceptance Corp. v. Daniels, 303 Md. 254, 259 , 492 A.2d 1306, 1309 (1985); Atlantic Contracting & Material Co., Inc. v. Ulico Casualty Co., 380 Md. 285, 299 , 844 A.2d 460, 468 (2004).

It is a “three party arrangement intended to provide personal security for the payment of a debt or performance of an obligation.” William H. Woods, Historical Development of Suretyship from Prehistoric Custom to a Century’s Experience with the Compensated Coiporate Surety, in The Law of Suretyship 3 (Edward G. Gallagher ed., 2000). Baldwin’s Century Edition of Bouvier’s Law Dictionary (1948) defines “surety” as: “A person who ²⁰⁶ binds himself for the payment of a sum of money, or for the performance of something else, for another.” Uncompensated personal suretyship “was the dominant form of security in early Rome ... [and Roman law] provided the surety with certain unique