McWane Inc v. Grooms Construction

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206 2 McWane, Inc. v. Fidelity Nos. 02-4152/4225
ELECTRONIC CITATION: 2004 FED App. 0191P (6th Cir.) & Deposit Co. of Md.
File Name: 04a0191p.06
Before: KRUPANSKY and GILMAN, Circuit Judges;
RUSSELL, District Judge.*
UNITED STATES COURT OF APPEALS
_________________
FOR THE SIXTH CIRCUIT
_________________ COUNSEL
MCWANE, INC., X ARGUED: Daniel F. Gourash, PORTER, WRIGHT,
Plaintiff-Appellant/ - MORRIS & ARTHUR, Cleveland, Ohio, for Appellant.
William H. Woods, McNAMARA & McNAMARA,
Cross-Appellee, - Columbus, Ohio, for Appellee. ON BRIEF: Daniel F.
- Nos. 02-4152/4225
- Gourash, David Andrew Bell, PORTER, WRIGHT, MORRIS
v. > & ARTHUR, Cleveland, Ohio, for Appellant. William H.
, Woods, Dennis D. Liston, McNAMARA & McNAMARA,
-
FIDELITY & DEPOSIT Columbus, Ohio, for Appellee.
-
COMPA NY OF MARYLAND, - _________________
Defendant-Appellee/ -
Cross-Appellant, - OPINION
- _________________
-
GROOMS CONSTRUCTION - KRUPANSKY, Circuit Judge. This appeal involves a
COMPANY , INC.; HIGHLAND - contract dispute between appellant/cross-appellee McWane,
COUNTY WATER COMPANY , - Inc., through its Clow Water Systems Company Division
INC., - (“McWane”), and appellee/cross-appellant Fidelity & Deposit
Defendants. - Company of Maryland (“F&D”), regarding F&D’s denial of
- McWane’s claim on a payment bond (“Bond”), issued by
N F&D as surety to the general contractor Grooms Construction
Appeal from the United States District Court Co., Inc. (“Grooms”), on a water-main project owned by
for the Southern District of Ohio at Cincinnati. Highland County Water Company (“Highland”). McWane
No. 00-00986—Herman J. Weber, District Judge. operated as a material supplier on the project prior to
Argued: March 16, 2004
Decided and Filed: June 22, 2004
*
The Honorable Thomas B. Russell, United States District Judge for
the Western District of Kentucky, sitting by designation.
1
Nos. 02-4152/4225 McWane, Inc. v. Fidelity 3 4 McWane, Inc. v. Fidelity Nos. 02-4152/4225
& Deposit Co. of Md. & Deposit Co. of Md.
Grooms’ bankruptcy.1 McWane appeals from the district arranged with Grooms to issue joint checks during phases of
court’s denial of its motion for summary judgment and the the Project, with each check made payable to Grooms and its
grant of summary judgment to F&D predicated on the court’s many suppliers, including McWane.3 Highland and Grooms
conclusion that McWane impaired F&D’s suretyship status arrived at this arrangement without prior notice to McWane
when it endorsed a series of multiparty checks from the public or the other suppliers.4
municipality. Additionally, F&D has cross-appealed from the
district court’s decision that neither the joint check rule nor This arrangement required McWane, along with other
the Uniform Commercial Code (“UCC”) were dispositive in named suppliers on the project, to endorse a joint check and
support of F&D’s argument for summary judgment. For the return it to Grooms prior to the issuance of separate payment
reasons discussed below, this court reverses the district from the General Contractor. Highland issued a total of four
court’s grant of summary judgment to F&D while affirming joint checks between April and July of 2000, totaling
the district court’s conclusion that neither the joint check rule approximately $1.1 million.5 After McWane and other co-
nor the UCC proved dispositive in the instant case.
In March of 2000, F&D agreed to stand surety on a
also had in formation that Grooms was a slow-pay to its suppliers. Not
payment bond for Grooms, the low bidder and general until June 2000 d id F&D receive Grooms’ overdue 19 99 year-end
contractor on a water main project owned by Highland. financial stateme nt which indicated that the contracto r had sustained $2
McWane contracted with Grooms to supply pipe materials for million in lo sses in 1999 .
the Project.2 Prior to the start of construction, Highland
3
Because Highland had concerns about Grooms’ reputation for slow-
pay to its suppliers, Highland instituted a multiple-party check payment
arrangement that would include, as co-payees, G rooms and all suppliers
1 whose invoices were submitted with a pa rtial paym ent req uest. Neither
McW ane is engaged in the business of selling a nd sup plying d uctile
iron water pipe and associated pipe fittings to contractors. Grooms was Highland nor Grooms advised McWane which invoices were submitted
a general contractor engaged in the business of installing water and sewer with any p articular partial p ayment requ est.
lines but ceased do ing business in January 2001. Grooms continues to be 4
an active Ohio corporation. On April 29, 1998, Grooms entered into a On April 11, 2000 , Gro oms subm itted a letter to Highland
credit agreement with McW ane that permitted Grooms to p urchase representing that Grooms had ob tained agreement from its sup pliers to
materials from McW ane on an account and ap plied to all future sales. Highland’s multiple-party check payment procedure. Grooms did not
The agreement required payment within thirty days of the invoice date, contact McW ane prior to that letter and Highland did not confirm
provided for interest to accrue at the rate of 18% per annum on all past McW ane’s acquiescence to the pro cedure.
due accounts, and permitted McW ane to recover all costs and expenses of
collection. 5
Highland issued the following four checks:
2
Multiple-party check #1 on Ap ril 19, 2000, to Grooms, M cW ane and
At the time, Grooms’ financial condition was dire and F&D was Water Works as co-payees in the amount of $396,095.24.
unaware of the situation because it had failed to follow its standard Multiple-party check #2 on May 17, 2000 to Grooms, McW ane, Water
underwriting procedures prior to underwriting the Bond . When the W orks and another supplier, Pittsburgh Pipe, as co-payees in the
Payment Bo nd was issued by F&D through its authorized bonding agent amo unt of $471 ,997 .23.
on M arch 7, 2000, F& D performed no separate underwriting on the Multiple-party check #3 on June 21, 2 000 to Grooms and McW ane as co-
Project and the mo st recent information o n file was Groom s’ 1998 year- payees in the amou nt of $7 7,11 1.25 .
end financial statement which showed a strong cash position, though F&D Multiple-party check #4 on July 19, 2000 to Groom s, McW ane, and
Nos. 02-4152/4225 McWane, Inc. v. Fidelity 5 6 McWane, Inc. v. Fidelity Nos. 02-4152/4225
& Deposit Co. of Md. & Deposit Co. of Md.
payees had endorsed the checks, Grooms then issued separate while the claims against F&D were for breach of payment
checks. After the multiple parties endorsed check #2, Grooms bond and declaratory judgment. F&D and Highland also filed
presented a separate check to McWane for $180,912.24.6 cross-claims. Thereafter, the parties conducted discovery,
That check cleared and was applied to outstanding invoices. including depositions of various party representatives.
After the multiple parties endorsed check #3, Grooms
presented a separate check to McWane for $78,156.73, which On October 31, 2001, the parties filed simultaneous
cleared. After Highland issued check #4 and prior to full motions for summary judgment. McWane filed a motion for
endorsement from all co-payees, Grooms presented McWane summary judgment against F&D, Highland, and Grooms,
with a separate check in the amount of $111,522.38, at the while both F&D and Highland filed separate motions for
same time that McWane endorsed check #4. However, before summary judgment against McWane.
McWane deposited check #4, Grooms stopped payment.
McWane received no other money directly from Grooms, but On September 13, 2002, the district court granted
did receive four checks directly from Highland (being McWane’s unopposed motion for summary judgment against
previously endorsed by Grooms) totaling $29,817.63. Grooms in the amount of $470,214.82, plus interest. The
court also granted Highland’s and F&D’s motions for
Once Grooms stopped payment on the check, McWane summary judgment against McWane and denied McWane’s
submitted a claim to F&D on the Bond for $440,208.56, the motions for summary judgment against Highland and F&D.
estimated amount of Grooms’ arrears to McWane.7 On The court concluded that McWane was not entitled to recover
September 7, 2000, F&D denied McWane’s claim. In its against F&D because McWane had impaired F&D’s
denial letter, F&D maintained that McWane had forfeited its suretyship status. However, the court refused to find
right to recover under the joint check rule. dispositive F&D’s additional claims involving the application
of the joint check rule and the UCC.
On November 24, 2000, McWane filed a complaint against
Highland, Grooms, and F&D. The claims against Grooms On October 11, 2002, McWane made timely appeal from
included an action on an account and breach of contract, the district court’s order denying its motion for summary
judgment against F&D. McWane did not appeal the grant of
Highland’s motion for summary judgment, and Grooms did
not appeal the uncontested grant of summary judgment in
W ater W orks as co-payees in the amount o f $17 2,60 0.76 .
favor of McWane. On October 18, 2002, F&D timely filed its
6 notice of cross-appeal.
Approximately $111,00 0 of check #2 represented payment for the
current Project, while $69,000 was applied to invoices due on a prior
separate project, per Grooms’ instruction. W hile McW ane’s name This court has jurisdiction over this action pursuant to
app eared on check # 1 for p artial end orsem ent, as of the date of issuance 28 U.S.C. §§ 1291. This court reviews de novo a district
of that check, McW ane was owed no mo ney from Groom s and, thus, court’s grant of summary judgment. Peters v. Lincoln Elec.
received no proceeds from check #1. Co., 285 F.3d 456, 465 (6th Cir. 2002). A district court’s
7 interpretation of state law is also governed by the de novo
This claim was submitted on August 3, 2000. M cW ane standard. Ferro v. Garrison Ind., Inc., 142 F.3d 926, 931 (6th
subsequently reduced this amo unt to $427,705.69 to reflect a sales tax Cir. 1998).
credit that was given to G rooms.
Nos. 02-4152/4225 McWane, Inc. v. Fidelity 7 8 McWane, Inc. v. Fidelity Nos. 02-4152/4225
& Deposit Co. of Md. & Deposit Co. of Md.
“Suretyship is the contractual relation whereby one person, when another supplier, Water Works, endorsed the joint
the surety, agrees to answer for the debt, default or checks issued by Highlands. However, upon review, the Ohio
miscarriage of another, the principal, with the surety generally Court of Appeals found little merit in that conclusion, relying
being primarily and jointly liable with the principal.” Solon instead on the clear language of the Bond to reverse the lower
Family Physicians, Inc. v. Buckles, 645 N.E.2d 150, 152 court’s grant of summary judgment to F&D. Water Works
(Ohio Ct. App.1994) (citing Hopkins v. INA Underwriters Ins. Supplies, Inc., v. Grooms Construction Co., Inc., 2003 WL
Co., 542 N.E.2d 679, 682 (Ohio Ct. App.1988)); see also 1563809 (No. 01CA18) (Ohio Ct. App., 2003) (unpublished
Manor Care Nursing & Rehab. Ctr. v. Thomas,704 N.E.2d table opinion), appeal not accepted for review Water Works
593 (Ohio Ct. App.1997); St. Paul Fire & Marine Ins. Co. v. Supplies, Inc. v. Grooms Constr. Co., Inc., 791 N.E.2d 984
Industrial Comm. of Ohio, 506 N.E.2d 202, 210 (Ohio Ct. (Ohio, 2003). In the instant case, this court considers
App.1987) (stating that the surety’s obligation is created persuasive the reasoning and conclusions of the Ohio Court
concurrently with that of the principal debtor). of Appeals, as the Water Works suit involved the same
defendant, the same project, the same joint checks and the
The doctrine of surety has several defenses by which the identical payment bond waiver clause as presented in the case
surety may avoid liability on the contracted payment bond. sub judice.
F&D has relied upon one of these defenses in arguing that by
signing the multiple-party checks presented by Grooms, The Ohio courts have recognized that an agreement
McWane extended the time of payment by Grooms without between the creditor and principal that extends the time for
F&D’s consent, thus discharging the surety obligation. performance will not discharge the surety “absent a concrete
showing of prejudice.” Water Works, 2003 WL 1563809 at
The district court agreed with F&D’s argument that *4. As the Ohio Court of Appeals noted in reversing the
McWane impaired Fidelity’s “suretyship status” by lower court’s decision in Water Works, an adequate showing
unilaterally negotiating the highland checks back to Grooms, of prejudice may arise where “the principal could have paid
without Fidelity’s consent, and thereby intentionally the debt by forwarding to the claimant its share of a payment
forfeiting its right to be paid for its materials from the received from the owner, had the claimant not given the
proceeds of the four multiple-party checks. The district court principal an opportunity to misapply or dissipate those funds
concluded, “Ohio courts would hold that plaintiff impaired its by agreeing to an extension.” Id.
suretyship status by endorsing the checks presented by
Grooms without taking steps to secure payment from Grooms In the instant case, F&D has claimed that by endorsing the
for the materials plaintiff had supplied so as to relieve Fidelity joint checks, McWane improperly granted Grooms an
of liability to plaintiff under the Payment Bond.” extension of time for payment. In response, McWane has
argued persuasively that F&D expressly waived any defense
The determination of the district court, in the instant case, based upon an extension of time in the waiver clause of the
hinged on the Ohio court’s decision in a markedly similar Bond.
case, Water Works Supplies, Inc v. Grooms Const. Co., Inc.,
No. 10CV 010 (Ohio Ct. Com. Pl. Sept 27, 2001) Evaluating the merit of F&D’s defense requires an
(unpublished decision). In Water Works, the trial court examination of the language of the Bond. See G.F. Business
concluded that F&D’s surety obligations were discharged Equip., Inc. v. Liston, 454 N.E.2d 1358, 1359 (Ohio Ct. App.
Nos. 02-4152/4225 McWane, Inc. v. Fidelity 9 10 McWane, Inc. v. Fidelity Nos. 02-4152/4225
& Deposit Co. of Md. & Deposit Co. of Md.
1982) (noting that the precise words of the contract serve to The said SURETY for value received hereby stipulates
bind the surety). In interpreting a surety contract, other words and agrees that no change, extension of time, alteration
cannot be added by construction or implication, but the or addition to the terms of the contract or to the WORK
meaning of the words actually used is to be ascertained in the to be performed thereunder of the SPECIFICATIONS
same manner as the meaning of similar words used in other accompanying the same shall in any way affect its
contracts. They are to be understood in their plain and obligation on this BOND, and it does hereby waive
ordinary sense, to be read in the light of the surrounding notice of any such change, extension of time, alteration
circumstances and of the object intended to be accomplished. or addition to the terms of this contract to the WORK or
See Troyer v. Horvath, 468 N.E.2d 351, 353 (Ohio Ct. to the SPECIFICATIONS.
App.1983) (“A bond is to be construed as a contract between
the parties and interpreted in accordance with its terms.”); F&D has claimed that by not requiring Grooms to
RESTATEMENT (THIRD), SURETYSHIP AND GUARANTY § 6 immediately pay McWane its share of the joint check,
(1996) (“Each rule in [the] Restatement stating the effect of McWane extended the time by which Grooms was allowed to
suretyship status may be varied by contract between the pay, thereby extending the time for performance of the
parties subject to it.”). “Furthermore, any doubtful language underlying contract. However, F&D’s payment bond contract
in the contract of surety must be construed strongly against expressly waived notice of any extension of time. See Water
the surety, and in favor of indemnity, which the creditor has Works 2003 WL 1563809 at *4 (“A surety bond is, however,
reasonable ground to expect.” Solon Family Physicians, 645 a contract and a surety may contractually waive defenses”).
N.E.2d at 152.
F&D has further maintained that McWane impaired its
F&D issued the Bond on March 7, 2000, identifying itself suretyship status by mishandling certain collateral, namely,
as surety for Grooms as general contractor on the water the four checks that Highland wrote to Grooms, McWane, and
project. The Bond provided, in pertinent part, that F&D was other suppliers. Grooms received these checks from
Highland, presented them for signature by McWane and the
held and firmly bound unto Highland County Water other co-payees, and deposited them into its bank account.
Company . . . and unto all persons, firms, and Pursuant to this arrangement, Grooms then paid McWane by
corporations who are or which may furnish labor, or who separate check. McWane has argued that because they did
furnishes materials to perform as described under the not have possession or control over the joint checks from
contract. . . . PROVIDED that beneficiaries or claimants Highland they could not have impaired F&D’s suretyship.
hereunder shall be limited to the SUBCONTRACTORS, McWane’s position represents the proper elaboration of
and persons, firms, and corporations having a direct suretyship principles and guiding law.
contract with th e PR INCIP AL or its
SUBCONTRACTORS. In limited circumstances, an obligee [i.e. McWane] may be
held liable for impairment of suretyship status if it acts “to
The Bond also contained a broad waiver clause whereby F&D increase the secondary obligor’s [i.e. F&D] risk of loss by
contractually waived certain potential surety defenses. In increasing its potential cost of performance or decreasing its
pertinent part, that clause provided: potential ability to cause the principal obligor [i.e. Grooms]
to bear the cost of performance.” RESTATEMENT (THIRD),
Nos. 02-4152/4225 McWane, Inc. v. Fidelity 11 12 McWane, Inc. v. Fidelity Nos. 02-4152/4225
& Deposit Co. of Md. & Deposit Co. of Md.
SURETYSHIP AND GUARANTY § 37(1). The burden is on that a creditor not in possession of collateral cannot be
F&D, as a compensated surety, to prove that McWane is liable for its unjustified impairment.
liable for any alleged loss or prejudice resulting from its
impairment of F&D’s suretyship status. RESTATEMENT See also, Mid-Continent Refrigerator v. Whitterson, 289
(THIRD), SURETYSHIP AND GUARANTY § 49(2)(a)(i). N.E.2d 379, 382 (Ohio Ct. App.1972); Boyd v. Royal
Indemnity,185 N.E. 422, 423 (Ohio 1933).
To discharge a surety based on impairment of collateral, the
surety must prove that the obligee (i) failed to obtain or In the instant case, the record reveals that McWane had
maintain perfection in collateral, (ii) released collateral neither possession nor control of the joint checks. Nor did
without obtaining substituted collateral of equal value, McWane have possession of anything of actual value from
(iii) failed to perform a duty to preserve the value of Highland. Instead, Grooms presented the multi-party checks
collateral, or (iv) failed to comply with applicable law in to McWane for endorsement solely to facilitate the release of
disposing of collateral. RESTATEMENT (THIRD), SURETYSHIP funds from Highland to Grooms, rather than to satisfy an
AND GUARANTY § 42 (2) (a) - (d). The record before this outstanding debt from Grooms. In each instance, Grooms
court indicates that McWane did not possess any collateral tendered separate payment to McWane. Moreover, at the
belonging to Grooms that secured a debt. As McWane had time Grooms presented the joint checks to McWane for
neither power over, nor possession of, any collateral signature, the appellant had no indication from Grooms which
belonging to Grooms, it cannot be held liable for any alleged funds represented by each check stood as payment for
impairment of F&D’s suretyship status. See Woolworth v. materials supplied by McWane.
Brinker, 11 Ohio St. 593 (Ohio 1860) (stating that to give
effect to a relinquishment “there must have been a parting Consequently, the district court erred in determining that
with something actually in the power and possession” of the McWane impaired F&D’s suretyship status when it endorsed
creditor, for without the relinquishment the surety could still the multi-party checks presented to it by Grooms.
exercise its subrogation rights against the debtor).
In its cross-appeal, F&D has maintained that the joint check
The Ohio Supreme Court affirmed this position, regarding rule and the UCC each provide an alternative defense to
the duty of a creditor not in possession of collateral, in McWane’s claim for payment on F&D’s Bond to Grooms,
Buckeye Fed. Savings & Loan Ass’n v. Guirlinger, 581 which the district court should have entertained. F&D urges
N.E.2d 1352, 1354 (Ohio 1991): this court to find error in the district court’s conclusion that
neither the UCC provisions nor the joint check rule were
We find that the most equitable and commonsense material in its decision to grant F&D’s motion for summary
approach is to require the party in possession of the judgement.
collateral to carry the responsibility to conserve it.
Public policy will not be served by requiring a creditor F&D has maintained that Ohio courts should recognize the
out of possession to supervise and, probably, second, joint check rule as applicable to the instant matter, thereby
guess the debtor as the guarantor in its handling of the discharging F&D’s liability as surety. McWane has
collateral in its rightful possession. We hold, therefore, responded that the joint check rule does not apply to
extinguish Fidelity’s obligations as a surety because the rule
Nos. 02-4152/4225 McWane, Inc. v. Fidelity 13 14 McWane, Inc. v. Fidelity Nos. 02-4152/4225
& Deposit Co. of Md. & Deposit Co. of Md.
does not apply to the surety of a co-payee, but merely 1164, 1167 (9th Cir. 1986). Moreover, Ohio courts have not
provides that the maker of a joint check is deemed to have yet recognized the joint check rule. See Water Works 2003
paid the materialman named as payee. McWane’s position is WL 1563809 at *5. Consequently, the district court did not
consonant with the terms and application of the rule. err in refusing to find the joint check rule dispositive in the
case sub judice.
The joint check rule does not innoculate F&D from liability
in this instance. The rule provides that when a subcontractor F&D has further maintained, in its cross-appeal, that under
and the materialman are joint payees, and no agreement exists the UCC, McWane’s endorsement on the multiple-party
with the owner or general contractor as to the allocation of the checks represented an unsecured loan to Grooms. McWane
proceeds, a materialman, by endorsing the check, is deemed has responded that it could not negotiate the joint checks at
to have received the monies owed. This rule emerged from the time of endorsement because McWane never possessed or
the California Supreme Court decision in Post Brothers controlled the checks.
Construction Company v. Yoder, 569 P.2d 133 (Cal. 1977).
In that resolution, the court concluded that the joint check rule The record evidence indicates that each of the joint checks
barred the supplier’s claim against the surety, because the was made payable to two or more entities and McWane was
owner/contractor was the maker of the multi-party check. It the first party to endorse each joint check. Additionally, the
reasoned that when the supplier endorsed the multiple-party joint checks were made payable to all co-payees and not
check, it waived its right to recovery from the maker of the alternatively, and could not be negotiated until all of the co-
check. The court further reasoned that the surety for the payees had endorsed a given check. Finally, McWane was
maker of the checks could use the joint check rule as a not a holder of the checks because a single co-payee cannot
defense to the supplier’s claim. Id. at 134. be a “holder” under U.C.C. § 3-110: “If an instrument is
payable to two or more persons not alternatively, it is payable
As stated and applied, however, the rule does not extend to all of them and may be negotiated, discharged, or enforced
beyond the relationship between the maker of the checks and only by all of them.” See also Pamar Enterprises, Inc. v.
his or her sureties. As a co-payee, Grooms and its surety Huntington Banks of Mich., 580 N.W.2d 11, 15 (Mich. Ct.
F&D stand beyond the reach of the joint check rule. Id. at App. 1998). Accordingly, McWane lacked the legal capacity
P.2d 137; see also Iowa Supply co. v. Grooms & Co. to negotiate, discharge, or enforce these checks under the
Construction, Inc., 428 N.W.2d 662, 666 (Iowa 1998) strictures of the U.C.C, and the district court did not err in not
(concluding that the rule only bars claims against the maker considering the UCC dispositive in rendering F&D claims.
of the check for the money due from a subcontractor).
The district court’s grant of summary judgment to F&D is
In addition, federal courts that have considered the rule, reversed, the district court’s resolution of the joint check rule
have noted that a joint check arrangement, standing alone, and the UCC is affirmed, and the case is remanded for further
does not waive a supplier’s right to recover from a proceedings consistent with this opinion.
contractor’s surety. See, e.g., United States ex rel. Clark-
Fontana Paint Co. v. Glassman Construction Co., 397 F.2d
8, 11 (4th Cir. 1968); United States ex rel. Youngstown
Welding and Eng'g Co. v. Travelers Indem. Co., 802 F.2d