Roofers Local 30 Welfare Fund v. International Fidelity Insuran

NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_____________
No. 15-1367
_____________
BOARD OF TRUSTEES, ROOFERS LOCAL NO. 30 COMBINED WELFARE FUND;
BOARD OF TRUSTEES, ROOFERS LOCAL NO. 30 COMBINED PENSION FUND;
BOARD OF TRUSTEES, ROOFERS LOCAL NO. 30 COMBINED VACATION
FUND; BOARD OF TRUSTEES, ROOFERS LOCAL NO. 30 COMBINED ANNUITY
FUND; BOARD OF TRUSTEES, ROOFERS LOCAL NO. 30 POLITICAL ACTION
AND EDUCATION FUND; BOARD OF TRUSTEES, COMPOSITION ROOFERS
UNION LOCAL NO. 30 APPRENTICESHIP FUND; ROOFING CONTRACTORS
ASSOCIATION INDUSTRY FUND; DELAWARE VALLEY ROOFING
CONTRACTORS ASSOCIATION INDUSTRY ADVANCEMENT FUND
v.
INTERNATIONAL FIDELITY INSURANCE COMPANY,
Appellant
______________
APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN
DISTRICT OF PENNSYLVANIA
(D.C. Civ. Action Nos. 2:10-cv-04721, 2:10-cv-04722)
District Judge: Honorable Petrese B. Tucker
______________
Submitted Under Third Circuit L.A.R. 34.1(a)
October 26, 2015
______________
Before: GREENAWAY, JR., SCIRICA, and ROTH, Circuit Judges.
(Opinion Filed: March 15, 2016)
1
______________
OPINION*
______________
GREENAWAY, JR., Circuit Judge.
Appellant International Fidelity Insurance Company appeals the District Court’s
grant of summary judgment in favor of Appellees on their claims for breach of surety
bonds. For the following reasons, we will affirm.
I. BACKGROUND
Appellees are trust funds established under collective bargaining agreements
(“CBAs”) between Local Union No. 30 of the United Union of Roofers, Waterproofers
and Allied Workers and two companies, Brown’s Roofing, Inc. (“Brown”) and Brown &
Guarino, Inc. (“B&G”). The CBAs required Brown and B&G to make monthly
contributions to Appellees. To guarantee their contributions to Appellees, Brown and
B&G entered into identical surety bonds with Appellant in June 2006.
Both surety bonds required Appellees to notify Appellant of a claim against the
bonds within one year of “actual knowledge of default” by either Brown or B&G. App.
60, 74. In the bond agreements, the parties defined “default” as “occurring at such a
point in time as it is determined within the sole and exclusive discretion of [Appellees],
that [Brown or B&G] has accrued delinquencies in contributions which cannot be
resolved with [Appellees].” Id. The notice of default was a condition precedent that
triggered Appellant’s payment obligations to Appellees under the surety bonds.
*
This disposition is not an opinion of the full Court and pursuant to I.O.P. 5.7
does not constitute binding precedent.
2
In August 2008, Brown and B&G were delinquent on their contributions to
Appellees and Appellees sued the companies. The suits were resolved when Appellees
entered into settlement agreements with each company in January 2009 and secured
consent judgments by mid-2009. However, in January 2010, Brown and B&G stopped
making contributions under both the settlement agreements and the CBAs. In June 2010,
Appellees sent Appellant letters of claims on the Brown and B&G surety bonds, asserting
that the companies had been in default since January 2010. Appellant denied liability.
Appellees sued Appellant to enforce the Brown and B&G surety bonds.
Following discovery, the parties filed cross-motions for summary judgment. The District
Court granted summary judgment in favor of Appellees, concluding that Appellant was in
breach of the two surety bonds. This timely appeal followed.
II. JURISDICTION AND STANDARD OF REVIEW
The District Court had jurisdiction under 28 U.S.C. § 1332. We have jurisdiction
under 28 U.S.C. § 1291.
We exercise plenary review over a district court’s grant of summary judgment,
applying the same standard as the district court. EEOC v. Allstate Ins. Co., 778 F.3d 444,
448 (3d Cir. 2015). To be granted summary judgment, the moving party must
demonstrate “that there is no genuine dispute as to any material fact and the movant is
entitled to judgment as a matter of law.” Wolfe v. Allstate Prop. & Cas. Ins. Co., 790
F.3d 487, 496 n.8 (3d Cir. 2015) (quoting Fed. R. Civ. P. 56(a)). Here, the parties agree
that no genuine dispute as to any material fact exists and that Appellees’ claims for
breaches of the Brown and B&G surety bonds should be decided as a matter of
3
Pennsylvania contract law. See Lesko v. Frankford Hosp., 15 A.3d 337, 342 (Pa. 2011)
(interpretation of an unambiguous contract presents a question of law); Beckwith Mach.
Co. v. Nat’l Union Fire Ins. Co. of Pittsburgh, 890 A.2d 403, 406 (Pa. Super. Ct. 2005) (a
surety bond is a contract and its language determines the extent of the surety’s liability).
III. ANALYSIS
A. Appellees’ June 2010 Notices of Default Were Timely
Appellant first defends liability on the ground that the notices of default sent by
Appellees in June 2010 were untimely because Appellees had “actual knowledge” of
default by Brown and B&G in August 2008, when Appellees sued the companies based
on their delinquencies. Appellant’s Br. at 20. Appellant argues that Appellees’ filing of
suit was a “judicial admission” that Brown and B&G “had accrued delinquencies in
contributions that could not be resolved without judicial intervention.” Id. at 23. Even if
it is true that Appellees had determined that the companies’ delinquencies could not be
resolved without filing suit, the phrase “without judicial intervention” is not in the
definition of default as agreed upon by the parties in the surety bonds. Appellant’s
argument is defeated by the unambiguous language of the surety bonds, to which we
must give effect. See Standard Venetian Blind Co. v. Am. Empire Ins. Co., 469 A.2d 563,
566 (Pa. 1983) (a court interpreting a contract must give effect to the parties’ intent, as
manifested by the contract’s clear and unambiguous language).
The parties defined “default,” in the surety bonds, as “occurring at such a point in
time as it is determined within the sole and exclusive discretion of [Appellees], that
[Brown or B&G] has accrued delinquencies in contributions which cannot be resolved
4
with [Appellees].” App. 60, 74. Appellant offers no case law suggesting that a trustee’s
decision to file suit over delinquencies constitutes an admission, as a matter of law, that
the delinquencies cannot ever be resolved. We agree with the District Court that, by the
plain language of the surety bonds, the parties left the determination of default to the
“sole and exclusive” discretion of Appellees.1 Here, Appellees determined that default
occurred in January 2010 and notified Appellant of the companies’ default in June 2010.
Therefore, the June 2010 notices of default were timely.2
B. Appellees Acted Reasonably and in Good Faith
Appellant next argues that Appellees’ surety bond claims should be dismissed
because Appellees did not exercise their discretion reasonably and in good faith, in
violation of the duties of good faith and fair dealing implied in the surety bonds.
Appellant maintains that Appellees acted unreasonably by not declaring default by
Brown and B&G in August 2008 when the companies were delinquent and by waiting to
1
Appellant contends that the District Court “erred by rewriting the Bonds to include an
affirmative ‘declaration’ of default” by Appellees when it concluded that the Brown and
B&G bonds granted “sole and exclusive discretion to [Appellees] in declaring default.”
Appellant’s Br. at 24. This argument is unavailing. Although the surety bonds use the
verb “determine” rather than “declare,” the verb choice does not change the fact that,
under the surety bond, Appellees had sole discretion to decide when a delinquency
ripened into a default. As such, we simply decline to impute a determination of default to
Appellees based on their decision to file suit against Brown and B&G.
2
Appellant argues that declining to find default when Appellees sued the companies is
“contrary to the well-established principle of suretyship that the liability of the surety
accrues at the same time as that of the bond principal.” Appellant’s Br. at 25 & n.3
(citing Leedom v. Spano, 647 A.2d 221, 226 (Pa. Super. Ct. 1994)). Although “[i]t is a
fundamental principle of surety law that upon default by the principal, both principal and
surety thereupon become liable on the original undertaking,” Leedom, 647 A.2d at 226,
here, the parties contracted to define default as a point in time left to the discretion of
Appellees. Thus, the parties contracted around this general principle and it is inapposite.
5
do so until June 2010. The District Court concluded that Appellees were not subject to
these implied duties because Appellees were not parties to the surety bonds, but held, in
the alternative, that Appellees acted in accordance with the duties. We need not decide
whether, as a matter of Pennsylvania contract law, Appellees were subject to duties
implied in the surety bonds between Appellant and Brown and B&G because we agree
with the District Court that Appellees acted reasonably and in good faith.
Appellees reasonably believed that the best course of action in August 2008 was to
file suit with the aim of entering into settlement agreements with Brown and B&G, rather
than filing a bond claim. First, the trustee for Appellees testified that filing a bond claim
would have been a “death knell” for Brown and B&G that would put them “out of
business.” App. 302, 311. As the District Court explained, it was in Appellees’ interests
for the companies to remain in business and employ Appellees’ union members. Second,
both Brown and B&G had previously resolved delinquencies with Appellees through
settlement agreements entered into after litigation was initiated. It was reasonable for
Appellees to believe that Brown and B&G’s delinquencies as of August 2008 could be
similarly resolved through settlement agreements, and it was also reasonable for
Appellees to wait to file bond claims until it was evident that Brown and B&G could not
comply with those agreements.
Appellant contends that Appellees delayed their filing of bond claims to maximize
Appellees’ damages. We decline to ascribe this bad faith to Appellees. It was reasonable
for Appellees to believe in August 2008 that Brown and B&G’s delinquencies could be
addressed in settlement agreements—as they were by January 2009—and it was
6
reasonable for Appellees to believe that Brown and B&G would comply with the
settlement agreements—as they did until January 2010. Therefore, we find that
Appellees acted reasonably and in good faith.3
C. Appellees Did Not Materially Modify the Surety Bonds
Appellant further asserts that its obligations under the surety bonds are discharged
because Appellees materially modified the bonded CBA obligations by entering into
settlement agreements with Brown and B&G. The settlement agreements required the
companies to resolve their delinquencies by making payments over an 18-month period,
in addition to the regular monthly payments.
It is well established in Pennsylvania law that a surety is completely discharged of
its obligation “if, without the surety’s consent, there has been a material modification in
the creditor-debtor relationship and said modification has substantially increased the
surety’s risk.” Reliance Ins. Co. v. Penn Paving, Inc., 734 A.2d 833, 838 (Pa. 1999)
(quoting Cont’l Bank v. Axler, 510 A.2d 726, 729 (Pa. Super. Ct. 1986)). A modification
is material if it is “a significant change in the principal debtor’s obligation to the creditor
that in essence substitutes an agreement substantially different from the original
3
Appellant also argues that Appellees failed to mitigate their damages. Appellant failed
to plead the affirmative defense of failure to mitigate and therefore has waived the claim.
See Prusky v. ReliaStar Life Ins. Co., 532 F.3d 252, 258 (3d Cir. 2008) (citing Koppers
Co., Inc. v. Aetna Cas. and Sur. Co., 98 F.3d 1440, 1448 (3d Cir. 1996) (applying
Pennsylvania law); Williams v. Masters, Mates & Pilots of Am., 120 A.2d 896, 901 (Pa.
1956)). In any event, to prove a failure to mitigate, Appellant must demonstrate what
reasonable actions Appellees failed to undertake, see Koppers, 98 F.3d at 1448, and we
have concluded that Appellees acted reasonably.
7
agreement on which the surety accepted liability.” Id. (quoting Cont’l Bank, 510 A.2d at
729).
Appellant argues that the companies’ dual payment obligations substantially
increased its risk because the companies’ total monthly obligations increased their risk of
defaulting. However, Appellant has not made the threshold showing of a material
modification to the relationship between Appellees and Brown and B&G. See Cont’l
Bank, 510 A.2d at 729 (defense of discharge failed when guarantors failed to make a
“threshold showing of a material modification without their consent, in the creditor-
debtor . . . relationship”).
The settlement agreements did not substantially change the terms of the CBAs
because, although the agreements increased the companies’ total monthly obligations, the
settlement payments consisted of the companies’ obligations under the CBAs—i.e., the
obligations on which Appellant accepted surety liability. Cf. McIntyre Square Assocs. v.
Evans, 827 A.2d 446, 452 (Pa. Super. Ct. 2003) (holding that an extension of a five-year
lease for another five years with a “significant[]” increase in rent was a material
modification); Reliance, 734 A.2d at 839 (holding that a twentyfold increase in a bonded
obligation was a material modification). Moreover, Appellant’s total surety exposure
was the same because the consequences of breaching the settlement agreements were the
same as those for defaulting under the CBAs: the companies would owe all unpaid
contributions, related interest, liquidated damages, and attorneys’ fees and costs. See
App. 60, 74, 156, 200. Therefore, we cannot conclude that the settlements substituted
terms or obligations that were “substantially different from the original agreement[s] on
8
which the surety accepted liability.” Reliance, 734 A.2d at 838 (quoting Cont’l Bank,
510 A.2d at 729). Accordingly, we agree with the District Court that the settlement
agreements did not materially modify the companies’ CBA obligations so as to discharge
Appellant from liability under the surety bonds.
D. The B&G Bond Rider Is Valid
Appellant defends partial liability on the B&G surety bond on the ground that a
May 2008 rider to the bond increasing the maximum surety liability from $400,000 to
$800,000 is void because Appellees did not notify Appellant of B&G’s delinquencies
prior to Appellant issuing the rider. The District Court equated Appellant’s argument
with an allegation of fraud and concluded that Appellant had failed to establish that
Appellees fraudulently concealed B&G’s delinquencies.
We reach the same conclusion as the District Court. Appellees owed Appellant a
duty of disclosure of B&G’s delinquencies if Appellant had requested the information or
if Appellees knew that or had reason to know that Appellant was unaware of the
information. See Park Paving Co. v. Kraft, 105 A. 39, 40 (Pa. 1918) (“[W]here the
principal is in default, and the surety executed the bond in ignorance thereof, he will not
be bound, where knowledge of such default was withheld from him by the obligee, but . . .
where the surety has knowledge of [the default], the bond is good.”) (emphasis added).
In other words, concealment of facts material to Appellant’s decision to issue the B&G
rider would constitute fraud upon Appellant that would negate Appellant’s liability as to
the rider. See id.9
Here, Appellant simply argues that Appellees should have notified Appellant of
B&G’s delinquencies, but offers no facts indicating concealment. There is no evidence
that Appellant requested information about B&G’s financial condition from Appellees
prior to issuing the B&G bond rider. Nor has Appellant established that Appellees
should have known that Appellant was unaware of the information. Moreover, Appellees
had no reason to believe that Appellant—a sophisticated surety company—would not
investigate B&G’s financial condition prior to increasing the maximum surety liability of
B&G’s bond. Cf. Restatement (First) of Security § 124 cmt. b (“A creditor may have a
lesser burden of bringing facts to the notice of a compensated surety who is known to
make careful investigations before taking any obligation than to a casual surety who
relies more completely upon the appearances of a transaction.”). As the District Court
noted, Appellant had concerns as early as 2007 about B&G’s financial condition.
Therefore, we conclude that the rider is valid and Appellant is liable for the full sum of
the B&G bond.
IV. CONCLUSION
For the foregoing reasons, we will affirm the judgment of the District Court.
10