Angelo Iafrate Construction, LLC v. Potashnick Construction, Inc.

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 03-2306
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Angelo Iafrate Construction, LLC, *
*
Plaintiff/Appellant, *
*
v. *
*
Potashnick Construction, Inc.; *
Travelers Casualty and Surety *
Company, *
*
Defendants/Appellees. *
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Appeals from the United States
No. 03-2425 District Court for the
___________ Eastern District of Arkansas.
Angelo Iafrate Construction, LLC, *
*
Plaintiff/Appellee, *
*
v. *
*
Potashnick Construction, Inc., *
*
Defendant, *
*
Travelers Casualty and Surety *
Company, *
*
Defendant/Appellant. *
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Submitted: February 9, 2004
Filed: June 1, 2004
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Before LOKEN, Chief Judge, BOWMAN, and WOLLMAN, Circuit Judges.
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WOLLMAN, Circuit Judge.
Angelo Iafrate Construction, LLC (Iafrate) appeals from the district court’s1
grant of Travelers Casualty and Surety Company’s (Travelers) motion for partial
summary judgment and the judgment entered in favor of Travelers after trial on the
remaining contract claims. Travelers cross-appeals, arguing that the district court
erred in entering a default judgment against Potashnick and abused its discretion
when it failed to award attorneys’ fees.2 We affirm.
I.
The Arkansas State Highway Commission (the Commission) contracted with
Potashnick to do grading and structural work on three portions of highway, known
as Jobs 51, 52 and 53. Delay of the work on the second portion of the highway, Job
52, forms the basis of this dispute. The contracts incorporated the Arkansas Standard
Specifications for Highway Construction, Edition of 1991 (1991 Standard
Specifications). Aetna, now Travelers (as Aetna’s successor in interest), served as
surety for the contracts, signing performance and payment bonds for each of the jobs.
The Commission later contracted with T.L. James & Co., Inc., now Iafrate (as T.L.
James’ successor in interest), to complete base work and do surfacing work on the
1
The Honorable James M. Moody, United States District Judge for the Eastern
District of Arkansas.
2
We deny Travelers’ motion to strike portions of appellant’s brief.
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same portions of highway addressed in Potashnick’s contracts (Jobs 56 and 57). Job
56 included the segments from both Job 51 and Job 52.
Potashnick faced financial problems in 1997, and Travelers began receiving
notice of its difficulties in August 1997. Work at the contract site slowed to a halt,
and by December 31, 1997, Potashnick informed the state’s chief engineer that it
lacked the financial ability to continue Jobs 52 and 53. The Commission
acknowledged the voluntary default, and Travelers received the termination notice
in January 1998. The Commission issued a suspension order, as required by the
performance bond, allowing Travelers 60 days in which to prepare to resume work
on Job 52. The Commission granted Travelers an extension and ultimately delayed
the resumption of the assessment of working days until May 7, 1998. During the
suspension, Travelers hired Barrington Consulting, Inc. to negotiate with contractors
and to supervise the completion of the projects. Travelers hired several contractors
to complete different aspects of the work. The work was completed and accepted by
the Commission on July 24, 1998.
The Commission then assessed liquidated damages against Travelers as
specified in the Potashnick contracts. Travelers followed the administrative appeals
process and filed a complaint before the Arkansas State Claims Commission to seek
reassessment of the liquidated damages. The parties reached a settlement under
which Travelers paid $37,532.11, and its complaint was dismissed with prejudice.
The delay in work on Job 52 affected Iafrate’s ability to complete Job 56.
Iafrate therefore filed an administrative complaint against the Commission for delay
damages. A stay order was entered and the Commission negotiated an agreement
with Iafrate in which it assigned to Iafrate its rights as obligee under the performance
and payment bonds. Iafrate then filed a complaint against Travelers and Potashnick.
Potashnick failed to appear, and a clerk’s default was issued against it. Travelers
litigated the case, and the district court granted partial summary judgment in its favor,
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holding that Iafrate’s theory of liability based on its contract rights as a third party
beneficiary failed as a matter of law and finding that there was no breach of an
implied contract. The remaining breach of contract claims proceeded to a bench trial,
following which the district court concluded that Travelers was not liable. The court
found that Iafrate had failed to show that Travelers “breached any duty under the
performance bond,” that Travelers had no duty under the bond to disclose its
knowledge of the principal’s potential financial difficulties prior to default, and that
once default had been declared, “Travelers took all reasonable steps to effect the
completion of the job in a timely manner.” D. Ct. Judgment of Sept. 19, 2002, at 12.
The district court later denied Travelers’ motion for attorneys’ fees. D.Ct. Order of
May 29, 2003.
Iafrate later moved for a default judgment against Potashnick, which the court
granted in the amount of $989,200.93.3 Travelers filed an opposition to Iafrate’s
motion for judgment against Potashnick, arguing that the district court would be
taking an incongruous position if it found on the merits for Travelers but entered a
default judgment against the primary obligor, Potashnick. The district court
concluded in its order, however, “that the entry of default against Potashnick is not
inconsistent with the rulings of the Court regarding the liability of Separate
Defendant, Travelers. The facts which were presented at trial to exonerate Travelers
do not necessarily exonerate Potashnick on all claims.” D. Ct. Order of April 29,
2003.
3
The Clerk entered default under Fed. R. Civ. P. 55(a) against Potashnick on
July 12, 2001; the district court entered default judgment under Fed. R. Civ. P.
55(b)(2) on April 29, 2003.
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II.
This case is in federal court based on diversity jurisdiction. We conclude that
we have subject matter jurisdiction under the recent holding in GMAC Commercial
Credit LLC v. Dillard Dep’t Stores, 357 F.3d 827 (8th Cir. 2004), in which we held
that an LLC’s citizenship is the citizenship of its members. Id. at 829. Through
supplemental briefing, Iafrate has established that its two members, Angelo E. Iafrate
and Dominic Iafrate, are both citizens of Michigan. Because Travelers is
incorporated and has its principal place of business in Connecticut and Potashnick has
citizenship only in Missouri, diversity of citizenship exists under the holding
announced in GMAC. 28 U.S.C. § 1332. Arkansas law controls this diversity action.
See Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78 (1938).
A.
We review the district court’s grant of summary judgment de novo. Credit
Card Debt Solutions, Inc. v. Home Fed. Bank, 363 F.3d 805, 808 (8th Cir. 2004).
Summary judgment is appropriate if there is no genuine issue of material fact and the
movant is entitled to judgment as a matter of law. Id. We review the district court’s
factual findings for clear error and its legal conclusions de novo. Consolidated Elec.
& Mechs., Inc. v. Biggs Gen. Contracting, Inc., 167 F.3d 432, 434 (8th Cir. 1999).
We conclude that the district court properly disposed of these contract claims.
Iafrate contends that Travelers breached its performance bond obligations both
to the Commission, enforceable by Iafrate through assignment, and to Iafrate directly.
The performance bond is a contract signed by three parties: the Commission as the
obligee, Potashnick as the principal obligor, and Travelers as the secondary obligor.
Under the contract, Potashnick and Travelers owed a duty to the state to complete
performance according to the project contracts. Travelers’ duty is established by the
language of the bond. See New Amsterdam Casualty Co. v. Detroit Fidelity & Surety
Co., 58 S.W.2d 418, 419 (Ark. 1933). Under the bond, Travelers’ duty was to
complete the project according to the contract in the event Potashnick defaulted.
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Summary judgment was appropriate on Iafrate’s third party beneficiary claims
because no material issue of fact exists as to whether Iafrate was an intended
beneficiary under the contract. Iafrate argues that because they knew that Iafrate
would be affected by the timeliness of Potashnick’s work, Travelers and Potashnick
owed it a contractual duty. It is a general rule under Arkansas contract law, however,
that a contract “will not be construed as having been made for the benefit of a third
party unless it clearly appears that such was the intention of the parties.” Howell v.
Worth James Constr. Co., 535 S.W.2d 826, 828 (Ark. 1976). The party does not have
to be named in the contract, but the parties to the contract must have intended to
confer a direct benefit upon the third party. Id. at 828-29 (citing Carolus v. Ark. L&P
Co., 262 S.W. 330 (1924)). Construction contracts may include other prime
contractors as third party beneficiaries, but such an intent must be evidenced in the
language of the contract. See, e.g., Little Rock Wastewater Util. v. Larry Moyer
Trucking, 902 S.W.2d 760, 763-64 (Ark. 1995).
Iafrate contends that several sections of the Standard Specifications create a
duty for Potashnick to work with other contractors, thereby establishing an intent to
make such contractors beneficiaries. Section 105.08, entitled “Coordination and
Cooperation Between Contractors” states that “[w]hen separate contracts are let
adjacent to or within the limits of any one project, the work of each Contractor shall
be conducted so as not to interfere with or hinder the progress or completion of the
work being performed by other Contractors.” 1991 Standard Specifications § 105.08.
The specifications also state, however, that they are “not intended” to make “the
public or any member thereof a third party beneficiary thereunder, or to authorize
anyone not a party to the contract to maintain a suit for personal injuries or property
damage pursuant to the terms or provisions of the contract.” 1991 Standard
Specifications § 107.14.
Performance obligations due under a performance bond are commonly owed
solely to the obligee, whereas payment bonds are intended to ensure that laborers and
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material suppliers will be paid in the event of a default. See Pa. Nat’l Mut. Cas. Ins.
Co. v. City of Pine Bluff, 354 F.3d 945, 949 n.2 (8th Cir. 2004); Restatement (Third)
of Suretyship & Guaranty § 31, comment b. Here, the performance bond does not
specify any beneficiaries, but the payment bond includes as beneficiaries those parties
with claims for “materials, labor and supplies” provided incident to the contract work.
Iafrate does not fall within this intended class of beneficiaries and therefore may not
recover as a third party beneficiary.
Iafrate also argues that Travelers and Potashnick owed the Commission a duty
to inform the state of Potashnick’s financial problems when it first became aware of
the problems in August 1997. Iafrate argues that the standard specifications impose
an affirmative duty on the surety because they state that the surety must advise the
Highway Department if it is having any difficulty that “may affect its ability to
perform.” 1991 Standard Specifications § 103.05. If the language of a policy is
unambiguous, effect must be given to the plain language of the policy without resort
to the rules of construction. Castaneda v. Progressive Classic Ins. Co., No. 03-1258,
2004 WL 965938 (Ark. May 6, 2004). The plain meaning of section 103.05 does not
support Iafrate’s argument. The section directly addresses the surety and requires it
to give notice only of a difficulty in its own finances that would preclude its ability
to perform on the bond. Because Travelers was in no financial trouble itself, it did
not breach this duty of notification.
Iafrate contends that Travelers should have known of Potashnick’s default and
begun performance earlier. Travelers, however, did not have a common law or
contractual duty to begin performance any earlier than it did. Iafrate’s attempted
analogy to United States v. Minn. Trust. Co., 59 F.3d 87, 90 (8th Cir. 1995), in which
we stated that a surety is responsible to ascertain when performance is due if the
contract does not provide for notice to the surety, is inapposite because Travelers’
performance bond did provide for notice. The performance bond stated that the chief
engineer would give notice of default or termination to both the contractor and the
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surety according to section 108.08 of the 1991 Standard Specifications, triggering a
suspension period of 60 days.
In addition, Travelers’ nondisclosure of Potashnick’s pending financial
problems did not result in a breach of its duty of timely completion under the
contract. Its timely completion is instead governed by the time frame for suspension
and resumption orders provided for in the performance bond and the amount of
working days specified in the contract. Working days, defined in the contract, are not
assessed during poor weather or during certain winter months. The contract specifies
that if the contractor or surety exceeds the specified number of working days
allocated to complete the work, damages will be based on specified daily liquidated
damages. In this case, Travelers has already settled the liquidated damages dispute
with the Commission. The Commission ultimately declared Travelers’ completion
of the project timely, and the claim related to liquidated damages was dismissed with
prejudice by the Claims Commission. Iafrate therefore may not now attempt to
enforce the Commission’s right to timely completion or to claim damages on that
basis.
Finally, Iafrate argues that it may recover from Travelers based on Travelers’
duty to indemnify the Commission for claims “brought because of any injuries or
damage received or sustained by any person, persons, or property on account of the
operations of the said Contractor.” 1991 Standard Specifications § 107.14. Because
Iafrate does not have its own contract right under the specifications, however, it may
only recover under this provision as assignee of the Commission. Travelers’ duty to
indemnify only arises if Iafrate’s claim against the Commission is successful and the
damages Iafrate claims on that basis are “clearly and unequivocally” within the scope
of the indemnity agreement. See Weaver-Bailey Contractors, Inc. v. Fiske-Carter
Constr. Co., 657 S.W.2d 209, 210-11 (Ark. Ct. App. 1983).
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“Indemnity agreements are construed strictly against the party seeking
indemnification.” Chevron U.S.A. Inc. v. Murphy Exploration & Prod. Co., No. 03-
612, 2004 WL 396263, at *3 (Ark. Mar. 4, 2004). Moreover, “the intent of the
indemnitor’s obligation to indemnify against [the losses] must be expressed in clear
and unequivocal terms and to such an extent that no other meaning can be ascribed.”
Id. The scope of Travelers’ duty to indemnify under section 107.14 does not clearly
encompass Iafrate’s claim against the Commission for economic delay damages. The
language of that section instead reflects an intent to impose a duty to indemnify
claims for personal injury and property damage caused by the work performed under
the contract.
B.
The default judgment against Potashnick is a subject of both Iafrate’s appeal
and Travelers’ cross-appeal. Because a surety and its principal are jointly liable
within the limits of the performance and payment bonds, both parties claim that a
default judgment against Potashnick affects the liability of Travelers as its surety. A
default judgment entered by the court binds the party facing the default as having
admitted all of the well pleaded allegations in the plaintiff’s complaint. See Taylor
v. City of Ballwin, 859 F.2d 1330, 1333 n.7 (8th Cir. 1988); Fed. R. Civ. P. 55(b)(2).
Iafrate argues that the district court erred in granting judgment on the merits
to Travelers because the default judgment against Potashnick is binding on Travelers.
Iafrate invokes the language in Drill South, Inc. v. International Fidelity Ins. Co., 234
F.3d 1232 (11th Cir. 2000) (per curiam), which states that “a surety is bound by any
judgment against its principal, default or otherwise, when the surety had full
knowledge of the action against the principal and an opportunity to defend.” Id. at
1235. Drill South involved a default judgment against a principal that was entered
without objection from the surety and before the surety fully litigated its own case.
We decline to extend the language in Drill South to cover a situation where, as here,
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the surety has obtained a judgment in its favor before the default judgment against its
principal was entered. We therefore reject Iafrate’s circuitous reasoning.
Travelers, concerned that it may face future lawsuits, argues that the district
court erred in entering the default judgment after ruling in Travelers’ favor on the
merits, resulting in inconsistent verdicts in violation of Frow v. De La Vega, 82 U.S.
552 (1872). When co-defendants are similarly situated, inconsistent judgments will
result if one defendant defends and prevails on the merits and the other suffers a
default judgment. See Frow, 82 U.S. at 554. To avoid such inconsistent results, a
judgment on the merits for the answering party should accrue to the benefit of the
defaulting party. Bastien v. R. Rowland & Co., 631 F. Supp. 1554, 1561 (E.D. Mo.
1986), affirmed without opinion 815 F.2d 713 (8th Cir. 1987); see also Restatement
(Third) of Suretyship and Guaranty § 68(1). The common-defense doctrine in
Arkansas law similarly states that if an answering party asserts “a defense on the
merits that equally applies to the other defendant,” the success of the defense
“operates as a discharge to all the defendants.” Sutter v. Payne, 989 S.W.2d 887, 889
(Ark. 1999); see also Davenport v. Lee, 72 S.W.3d 85, 89 (Ark. 2002). The doctrine
“applies even if the defaulting defendant makes his or her first appearance after the
answering defendant is no longer in the case.” Sutter, 989 S.W.2d at 890. Parties are
not similarly situated and a default judgment does not establish inconsistent
judgments, however, if the liability of the defaulting party is based on independent
wrongful acts or a legal theory distinct from the one under which the answering party
prevailed. See Bastien, 631 F. Supp. at 1561; Davenport, 72 S.W.3d at 89.
Even if the entry of the default judgment resulted in a judgment inconsistent
with the judgment on the merits for Travelers, the issue is not properly before us.
Pfanenstiel Architects, Inc. v. Chouteau Petroleum Co., 978 F.2d 430, 433 (8th Cir.
1992). Potashnick may seek to have the default judgment set aside, but Travelers
need not do so. The district court correctly held that Travelers is not liable under its
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bond or the contract, and it may not later be indirectly held liable for the same acts
because of a default judgment entered against its co-defendant. Id.
C.
We review a district court’s denial of attorneys’ fees for abuse of discretion.
Am. Travelers Life Ins. Co. v. AIG Life Ins. Co., 354 F.3d 756, 760 (8th Cir. 2004).
The applicable Arkansas statute states that a prevailing party in a contract suit “may
be allowed a reasonable attorney’s fee to be assessed by the court.” Ark. Code. Ann.
§ 16-22-308 (2003). Under the statute, no award of fees is mandatory, and the trial
court, presumably better acquainted with the circumstances of the proceedings, has
discretion whether to award fees and in what amount. Jones v. Abraham, 999 S.W.2d
698, 705-06 (Ark. Ct. App. 1999). In this case, no facts lead us to conclude that the
district court abused its discretion. Travelers has merely asserted that it is entitled to
attorneys’ fees because it prevailed and because it believed that Iafrate should never
have brought the lawsuit, an opinion held by most prevailing parties.
The judgment is affirmed.
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