Ulico Casualty Co. v. Atlantic Contracting & Material Co.

⁶⁸¹ DEBORAH S. EYLER, Judge. In the Circuit Court for Prince George’s County, Ulico Casualty Company (“Ulico”) sued Atlantic Contracting & Material Company, Inc. (“Atlantic”), on an indemnity agreement that Atlantic gave Ulico in connection with Ulico’s issuance of a performance and payment surety bond. Ulico sought to recover monies it had paid on a claim made on the surety bond and the attorneys’ fees, costs, and expenses it had incurred in pursuing recovery from Atlantic. The case was tried to the court, which awarded Ulico some but not all of the monies it sought.

Neither party is satisfied with the court’s ruling. Ulico, the appellant and cross-appellee, contends the court should have reimbursed it fully for the monies it paid on the claim and the full amount of its attorneys’ fees, costs, and expenses. Atlantic, the appellee and cross-appellant, contends the court should not have found it liable at all. For the following reasons, we shall reverse the judgment of the circuit court and remand the case for further proceedings not inconsistent with this opinion.

FACTS AND PROCEEDINGS On June 27, 1997, Gilbert Southern Corporation (“Gilbert”) entered into a general contract with the State of North Carolina Department of Transportation to repair a segment of the northbound lanes of Interstate 85 (“the Project”). Soon thereafter, Gilbert and Atlantic entered into a subcontract for Atlantic to perform the concrete paving work on the Project. On September 2, 1997, Ulico issued a “Performance and Payment Bond” (“Bond”) on behalf of Atlantic, as principal, in favor of Gilbert, as obligee, under the general contract for the Project. The Bond guaranteed Atlantic’s performance of its duties under the subcontract and its prompt payment “to all persons supplying [Atlantic] with labor and materials in the prosecution of the work provided for in [the subcontract between Gilbert and Atlantic] ... and [the prompt payment ⁶⁸² of] all other obligations incurred by [Atlantic] in connection with such work....” In partial consideration for the issuance of the Bond, Atlantic and its individual owners, John Madden and Thomas Madden, executed a General Agreement of Indemnity and Security (“Indemnity Agreement”), in favor of Ulico.

On June 24,1998, a representative of Clearwater Hydraulics & Driveshaft Service (“Clearwater”) informed Ulico by telephone that Clearwater had billed Atlantic for $21,843.48 in repairs to equipment Atlantic was using in connection with the Project but Atlantic had not paid Clearwater’s bill. Clear-water was looking to Ulico, as Atlantic’s surety, for payment. A representative of Ulico sent Clearwater a Proof of Claim form and a letter requesting that it submit the form and supporting documentation for its claim. On July 28, 1998, Malcolm F. Bailey of Clearwater executed the Proof of Claim, under oath, stating that Atlantic owed Clearwater $21,843.48 for “repair to equipment used on paving job at 1-85 North, Granville County project.” Bailey further attested in the Proof of Claim that no credits were due to Atlantic.

The bills sent by Clearwater to Atlantic, and supporting back-up documents, were attached to the Proof of Claim. The dates and amounts of the bills are: $8,299.18 (12/5/97); $7,565.36 (5/15/98); and $4,834.14 (5/15/98). Clearwater did not transmit the Proof of Claim and supporting documents to Ulico until August 27, 1998. By then, Atlantic had paid the $4,834.14 bill, by check dated July 31, 1998, which was negotiated by Clearwater on August 6, 1998.

There is no evidence that Clearwater informed Ulico about the payment, and the evidence showed that it did not amend or update its Proof of Claim to reflect the payment. On August 31, 1998, Cherie Rondinelli, Bond Claims Manager for Ulico, wrote to John Madden referencing the Bond and Project and giving notice that Ulico had received a claim by Clearwater “alleg[ing] that [it is] owed $21,843.48 for damages provided to the above stated bond and project.” Rondinelli asked Madden to advise her in writing, within 5 days of ⁶⁸³ receipt of the letter, of Atlantic’s reasons for delaying payment to Clearwater. On September 3, 1998, Thomas Madden responded in writing to Rondinelli’s letter, stating that Atlantic had sent Clear-water a check for $4,834.14 in partial payment of Clearwater’s bill and that the balance ($15,864.54) was “being disputed and must be resolved prior to completion of payment.” On October 26, 1998, Rondinelli wrote to Thomas Madden acknowledging receipt of his September 3, 1998 letter and saying: Atlantic continues to state that the balance due is being disputed and will be resolved prior to completion of the project. What is the nature of the dispute?

Please provide the surety with documentation of the dispute and amount. Is the project complete, if no, what percentage of the project is complete? When do you expect the project to be completed? In addition, Rondinelli asked for a copy of the canceled $4,834.14 check remitted to Clearwater and certain other documents pertaining to the Project.

On December 3, 1998, not having received a response to her October 26 letter, Rondinelli again wrote to Thomas Madden, referencing the Bond. She repeated that Ulico still had not received documentation to support Atlantic’s “defenses against [Clearwater’s] claim against the aforementioned bond[,]” and then emphasized: In order to proper [sic] and thoroughly investigate the above claim, it is imperative that the surety receive this information. Atlantic’s lack of cooperation with Ulico is placing the surety in a difficult position of possibly having to incur a payment loss on this bond due to the lack of documentation and valid defenses. Rondinelli again asked for the information requested in her October 26 letter and warned that if Atlantic did not respond within 5 working days, “[Ulico] may be forced to seek other avenues and seek restitution via its rights under the indemnity agreement.” ⁶⁸⁴ Atlantic did not respond to the December 3 letter.

On December 29, 1998, having heard nothing from Atlantic since her last correspondence, Rondinelli again wrote to Thomas Madden. She stated that Ulico had not received the requested documentation from Atlantic and that it had “validated Clearwater’s claim of $20,698.62.” Rondinelli advised that “Atlantic’s lack of response and documentation [had] placed [Ulico] in a position of incurring a loss in [the amount of $20,698.62]” and demanded that Atlantic pay Ulico that sum, by check, within 5 working days of receipt of the letter. She admonished that if Atlantic did not make payment as demanded, Ulico “w[ould] be forced to seek other restitution via its rights under the indemnity agreement.” Rondinelli’s letter was sent to Atlantic by certified mail. On December 31, 1998, Ulico issued a check for $20,698.62 to Clearwater.

The check was delivered to Clearwater five days later, on January 4, 1999, when Clearwater executed an assignment of its claim against Atlantic to Ulico and a release of Ulico from all liability under the Bond. The release states, “the sum of $20,698.62 is justly due and owing by contract to [Clearwater] and that [Clearwater] has not released or discharged the same or any part hereof, that there are no counterclaims or set-offs to said account.... ” By letter of January 5,1999, which was transmitted to Ulico by facsimile at 4:50 p.m. that day, John Madden responded to Rondinelli’s December 29 letter, stating he had received it that day (January 5); that he had called Rondinelli on December 11, but had been put in her voice mail, which had a message that she was out of the office for a few days, and he had not received a return call; and that he had again called her office that day (January 5) and was put in her voice mail, which by message stated she would be out of the office until January 7. Madden’s letter went on to state that the dispute over Clearwater’s bill was “predicated on the fact that unauthorized work was performed and billed for” and that the invoices Atlantic had from Clearwater totaled $15,864.54, not ⁶⁸⁵ $20,698.62. The letter attached a copy of the disputed invoices and of Atlantic’s July 31, 1998 cancelled check to Clearwater, for $4,834.14.

Madden further stated that Atlantic had finished most of its work on the Project on September 13, 1998, with the exception of minor punch list items, and that the entire Project was completed on November 25, 1998. He concluded by directing Ulico not to make any payment to Clearwater. The next day, Madden sent another letter to Rondinelli, again complaining that he had made numerous telephone calls to Ulico that had not been returned. Atlantic refused to make payment to Ulico.

On September 19, 2000, in the Circuit Court for Prince George’s County, Ulico filed suit against Atlantic, seeking to recover under the Indemnity Agreement the $20,698.62 it had paid Clearwater, plus interest, attorney’s fees, costs, and expenses. Atlantic answered, and discovery ensued. The case was tried to the court on December 14, 2001. By agreement of counsel, the deposition of Kathleen Palmer, a Claims Coordinator for Ulico, who worked under Rondinelli’s direction, was moved into evidence, as were the documents identified by Palmer that constituted Ulico’s claims file. 1 The documents include those we have discussed above.

John Madden appeared and testified on behalf of Atlantic. He stated that Clearwater had not supplied labor or materials for the Project for Atlantic. Rather, it had performed repair work on some hydraulic motors for a “CMI concrete belt placer” machine that Atlantic was using for the Project. Madden explained that the belt placer machine belonged to Atlantic, had a lifetime of 10 or 15 years, was not dedicated to the Project, and had been used on several other projects.

Madden further testified that Atlantic paid only $4,834.14 of the total amount billed by Clearwater because the balance was for materials, mostly pumps, that were not received by Atlan ⁶⁸⁶ tic and had been fraudulently obtained by one of its employees, who later was discharged, in a collaborative scheme with one of Clearwater’s employees. Madden explained that the basis for Atlantic’s dispute with Clearwater was set forth in a letter he wrote to Bailey (of Clearwater) on June 3, 1998. In that letter, Madden expressed disappointment that Bailey had not brought his concerns about the rogue Atlantic employee to Madden’s attention earlier. Madden’s file copy of the June 3 letter to Clearwater bears a handwritten note, “Send to Ulico,” dated September 3,1998.

Madden testified that he wrote that note to his secretary, directing her to send a copy of the June 3 letter to Ulico, to inform it of the basis for Atlantic’s dispute over Clearwater’s bill. He testified that he did not know whether the letter was sent, although he assumed it was. Madden’s file does not contain any documentation that the letter was sent to Ulico before the end of December 1998, and Ulico’s claim file does not contain the letter. Madden’s September 3, 1998 letter to Rondinelli does not reference any attachments.

Madden testified that on several occasions in December 1998, he attempted to contact Rondinelli by telephone, leaving messages on her voice mail, but got no response. At the conclusion of the trial, the court took the matter under advisement, and the parties submitted written motions for judgment. On March 4, 2002, the court issued a decision by memorandum opinion and order. The court found that Ulico repeatedly had requested from Atlantic information and documentation about the dispute over the Clearwater claim but Atlantic had not provided Ulico the information or documentation until January 5,1999, after Ulico had paid the claim and after it had notified Atlantic that it had paid the claim.

The court concluded that “no issue of bad faith or fraud has been proven regarding [Ulico’s] payment of Clearwater’s claim” and that Ulico was entitled to “stand upon the letter of the [Indemnity] Agreement.” ⁶⁸⁷ The court did not award Ulico full reimbursement of the sum it had paid to Clearwater, however. The court found that, notwithstanding that Ulico had paid Clearwater’s claim in good faith, only part of Clearwater’s repair work was covered by the Bond, and therefore Ulico was entitled to reimbursement only for that part of the claim that was covered by the Bond. The court based its conclusion on the definition of “Loss” in the Indemnity Agreement, which it interpreted to mean that Ulico only was entitled to reimbursement for claims paid that were covered by the Bond. The court then read the Bond language to mean that payments covered by the Bond are those due and owing “to all persons supplying [Atlantic] with labor and materials in the prosecution of the work provided for in [the subcontract between Gilbert and Atlantic].... ” Relying upon several federal cases interpreting the Miller Act, 28 U.S.C. 270, et seq., the court concluded that repairs to equipment used by a subcontractor that materially enhance the equipment’s value so as to make it available for jobs other than the one covered by a surety bond are not payments within the scope of the bond.

By contrast, repairs to a subcontractor’s equipment incidental to carrying on the particular project covered by the bond that do not add to the value of the equipment are covered. The court found that the repairs made by Clearwater to Atlantic’s belt placer were not incidental; rather, they added to the value of the belt placer. Therefore, they were not covered by the Bond. The court further found that Clear-water’s labor charges, totaling $3,234, aided in the completion of the Project, and therefore were covered by the Bond.

On that basis, the court awarded Ulico $3,234 plus $614.46 in interest (at the legal rate of 6% from December 31, 1998, to the date of the decision). Ulico filed a motion to alter or amend, asking the court 1) to reconsider its ruling and award it the full amount it had paid on Atlantic’s behalf, and 2) to award it attorneys’ fees, costs, and expenses under the Indemnity Agreement, an issue that ⁶⁸⁸ was raised at trial but was not addressed by the court in its decision. Atlantic filed an opposition. On March 27, 2002, the court issued a written ruling that, under the language of the Indemnity Agreement, Ulico was entitled to recover attorneys’ fees.

The court then held an evidentiary hearing, on April 19, 2002. Ulico submitted bills and supporting documents showing the attorneys’ fees it had incurred in prosecuting its suit against Atlantic on the Indemnity Agreement. On May 3, 2002, the court issued a memorandum order finding that, under the circumstances of the case, an award of $5,750 in counsel fees to Ulico was fair and reasonable. On that basis, the court granted the motion to alter or amend, revised its award to a total sum of $9,598.46, and entered judgment in that amount.

Ulico noted a timely appeal, raising two questions, which we have rephrased: I. Did the trial court err in not awarding Ulico the total sum it paid to Clearwater when the sum was paid without fraud and in good faith?

II

Did the trial court err or abuse its discretion in not awarding Ulico the full amount of attorneys’ fees, costs, and expenses it incurred in pursuing recovery from Atlantic? Atlantic noted a timely cross-appeal, presenting three questions. One question is simply a mirror image of Ulico’s second question. We have combined and rephrased Atlantic’s other questions, as follows: III.

Did the trial court err in awarding Ulico any part of the sum it paid Clearwater, because none of that sum was covered by the Bond or because the Proof of Claim form filed by Clearwater was defective, and in either case Ulico made the payment as a volunteer? DISCUSSION This case is in essence a contract dispute over the parties’ Indemnity Agreement, which, as noted, Atlantic' and its own ⁶⁸⁹ ers entered into as partial consideration for Ulico’s issuing the Bond in connection with the Project. Ulico’s two questions and Atlantic’s cross-appeal question are interrelated, and we shall discuss them together. A surety bond is a three-party agreement.

In a performance bond, the surety assures the obligee that if the principal fails to perform its contractual duties, the surety will discharge the duties itself, either by performing them or paying the obligee the excess costs of performance. Gen. Motors Acceptance Corp. v. Daniels, 303 Md. 254, 259 , 492 A.2d 1306 (1985); Mercy Medical v. United Healthcare of the Mid-Atlantic, Inc., 149 Md.App. 336 , 815 A.2d 886 (2003); USF & G v. Feibus, 15 F.Supp.2d 579 (M.D.Pa.1998), aff'd, 185 F.3d 864 (3rd. Cir.1999).

In a payment bond, the surety guarantees the principal’s duty to the obligee to pay its (the principal’s) laborers, subcontractors, and suppliers. Feibus , 15 F.Supp.2d. at 581 n. 2. A surety’s liability on its bond is primary, and is joint and several with the principal. Upon default by the principal of the obligation to perform or pay, the surety is immediately liable.

Gen. Motors Acceptance Corp. v. Daniels, supra, 303 Md. at 259 , 492 A.2d 1306 . The surety’s liability is not secondary, like the liability of a guarantor. Id. at 260 , 492 A.2d 1306 .

The bond is the measure of the surety’s obligation. In the construction industry, it is standard practice for surety companies to require contractors for whom they write bonds to execute indemnity agreements by which the principal and its individual backers agree to indemnify the surety against any loss it may incur as a result of writing the bond on the principal’s behalf. See generally The Surety’s Indemnity Agreement — Law & Practice (Marilyn Klinger, et al, eds., Am. Bar Assoc.2002).

In this appeal, neither party challenges the trial court’s factual findings, including its finding that Ulico paid Clear-water in good faith, without fraud, in the belief that, as Atlantic’s surety on a payment bond, it was liable to Clear-water for the unpaid repair charges Clearwater had billed to ⁶⁹⁰ Atlantic. As discussed above, the trial court concluded that, while the evidence showed that Atlantic had paid part of Clearwater’s bill and may have had a valid defense to the rest of the claim, Atlantic neither apprised Ulico of those facts nor furnished documentation of them in a timely manner. The focal point of the appeal, from both parties’ perspectives, is not the court’s finding that on those facts Ulico paid Clear-water in good faith but its legal conclusion that, under the language of the Indemnity Agreement, even though Ulico paid Clearwater in good faith, Ulico was not entitled to reimbursement for a part of Clearwater’s repair bill that, under the court’s interpretation, was not covered by the Bond. Ulico first contends that the court was legally incorrect in reading the Indemnity Agreement to mean that its reimbursement right was controlled by the terms of the Bond, so that having paid the claim in good faith, it nevertheless had to prove that it actually would have been liable to Clearwater on the Bond for the full amount of the claim before being entitled to reimbursement from Atlantic.

Ulico also contends that, even if the court correctly concluded that its right to reimbursement depended upon a showing that it would have been liable to Clearwater for the full payment under the Bond, the decision to limit the award still was erroneous because the plain language of the Bond covered all of Clearwater’s claim. In addition, Ulico contends that the trial court erred in applying federal case law pertaining to the Miller Act in interpreting the common law Bond in this case. Finally, Ulico contends that, under the terms of the Indemnity Agreement, it was entitled to recover the attorneys’ fees, costs, and expenses it incurred in obtaining reimbursement from Atlantic, and that the court erred in awarding it only a part of its fees, expenses, and costs. Atlantic counters that the trial court’s conclusion that Ulico’s right to reimbursement under the Indemnity Agreement was controlled by the terms of the Bond was legally correct, and that it properly used federal case law to interpret the Bond coverage language.

It contends on cross-appeal, howev ⁶⁹¹ er, that the court’s analysis of the language of the Bond did not go far enough and that the court should have found, as a matter of law, that none of the Clearwater charges were covered by the Bond. Atlantic asserts that because the Bond did not cover the charges, Ulico was not required to pay them, and did so merely as a volunteer; and that, as a mere volunteer, Ulico was not entitled to reimbursement. Atlantic maintains that because it had no liability to Ulico under the Indemnity Agreement, the court should not have ordered it to pay any part of Ulico’s attorneys’ fees, costs, and expenses. Finally, Atlantic also argues that Clearwater’s Proof of Claim did not seek payment of repairs covered by the Bond and that is an additional reason why Ulico’s payment was voluntary and not subject to reimbursement.

We note at the outset of our analysis that Atlantic’s “volunteer doctrine” argument, which is based on common law principles, is misplaced. Equity implies a right to reimbursement by the principal in favor of the surety when the surety pays a debt for which the