Breath of Life Christian Church v. Travelers Insurance Company

IN THE COURT OF APPEALS OF TENNESSEE
AT MEMPHIS
February 23, 2010 Session
BREATH OF LIFE CHRISTIAN CHURCH v. TRAVELERS INSURANCE
COMPANY
Direct Appeal from the Chancery Court for Shelby County
No. CH-07-0451 Arnold B. Goldin, Chancellor
No. W2009-00284-COA-R3-CV - Filed March 26, 2010
The trial court awarded summary judgment to Defendant surety in this breach of contract
action. We affirm.
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Affirmed;
and Remanded
D AVID R. F ARMER, J., delivered the opinion of the Court, in which A LAN E. H IGHERS, P.J.,
W.S., and H OLLY M. K IRBY, J., joined.
Stacy Alane Clinton and Addie M. Burks, Memphis, Tennessee, for the appellant, Breath of
Life Christian Church.
Elizabeth B. Stengel, Memphis, Tennessee, for the appellee, Travelers Insurance Company.
MEMORANDUM OPINION 1
In March 2007, Breath of Life Christian Church (“Breath of Life”) filed a complaint
alleging breach of contract against Travelers Insurance Company (“Travelers”) in the
Chancery Court for Shelby County. In its complaint, Breath of Life alleged that Travelers
1
Rule 10 of the Rules of the Court of Appeals of Tennessee provides:
This Court, with the concurrence of all judges participating in the case, may affirm, reverse
or modify the actions of the trial court by memorandum opinion when a formal opinion
would have no precedential value. When a case is decided by memorandum opinion it shall
be designated “MEMORANDUM OPINION”, shall not be published, and shall not be cited
or relied on for any reason in any unrelated case.
had failed to perform its obligations as surety under a performance bond issued to Bricks,
Inc. (“Bricks”), a general contractor with whom Breath of Life had contracted to construct
its worship center. Breath of Life asserted that Bricks had failed to comply with the terms
of the contract for construction and that, as surety for Bricks, it was Travelers’ legal
obligation “to compensate or complete the contract[.]” Breath of Life alleged that Travelers
had failed to comply with its obligations under the performance bond that was issued in
October 2003, and prayed for damages in the amount of $707,000. Breath of Life attached
its contract with Bricks and the performance bond issued by Travelers to its complaint. It
also attached correspondence from Travelers to Breath of Life dated January 2007, in which
Travelers acknowledged receipt of Breath of Life’s December 2006 correspondence advising
it that “[w]hile the building was erected, there are several matters which are still incomplete
and several other problems relating to this construction problem” and stated that it was
conducting an investigation under reservation of rights. Breath of Life also attached copies
of relevant documents filed in an on-going lawsuit between itself and Bricks to its complaint
against Travelers.
Travelers answered in May 2007 and asserted twenty-five defenses to Breath of
Life’s complaint. Travelers asserted, inter alia, that Bricks had not defaulted on the
construction contract and that Breath of Life had failed to comply with the terms and
conditions of the performance bond. Travelers stated that it therefore was not liable under
the terms of the bond. Following discovery, Travelers moved for summary judgment in
December 2007. In its motion, Travelers asserted that there were no disputed issues of
material fact and that Breath of Life had failed to comply with the terms and conditions of
the performance bond where it “did not comply with the protocol required to perfect a claim
against the performance bond.”
The trial court heard oral argument on Travelers’ motion in May 2008, and awarded
summary judgment to Travelers in June 2008. In its order, the trial court found that the
material facts were not disputed; that the language of the performance bond “unambiguously
sets out a process that an owner must satisfy in order for the surety to be liable under the
bond”; and that Breath of Life had not satisfied that process. The trial court further stated:
During oral argument, counsel for [Breath of Life] argued that the notice
requirement in the performance bond was not an absolute condition precedent
to trigger Travelers[’] obligations. [Breath of Life] urged the court to find that
it substantially complied with the notice requirement and, therefore, Travelers
was liable. The court would entertain the notion that [Breath of Life]
substantially complied with the notice requirements of the performance bond,
but, as indicated above, there are no facts to support this finding.
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The trial court observed that, although Breath of Life contended that Travelers was not
prejudiced by its failure to follow the process delineated in the bond, Travelers’ position was
that the process was designed to minimize liability. The trial court also noted that Breath of
Life conceded that “the purpose of the provisions in the Performance bond was . . . not to be
mere technical steps, but rather to insure that the Surety was notified of any issues and
provided with an opportunity to assert its rights to have the project completed.” The trial
court found that “there [were] no statements of fact that indicate that [Breath of Life] found
Bricks in default. Bricks was not fired nor did [Breath of Life] claim the project was
incomplete.”
Breath of Life filed a motion to alter or amend or to set aside the judgment in July
2008. The trial court denied the motion on December 18, 2008. On December 24, 2008,
Breath of Life filed a motion to consolidate its appeal of the present case with its appeal of
Sanders v. Holloway, et. al., CH 05-0577-2, litigation arising from a materialman’s lien in
which Breath of Life cross-claimed against Bricks and alleged breach of contract. The trial
court denied the motion in March 2009. Breath of Life filed a notice of appeal to this Court
on January 16, 2009, and oral argument was heard in February 2010.
On appeal, Breath of Life does not contend that it complied with the precisely
delineated notice and procedural mechanisms of the performance bond. Rather, in its brief,
it argues that Travelers “knew or should have known that [Breath of Life] declared Bricks,
Inc. to be in default and intended to seek payment to complete the project as permitted by the
Surety’s bond.” It submits that its failure to follow the strict language of the bond was
merely a technical violation that did not prejudice Travelers, and that the bond was
“ambiguous as to whether the notice provision would apply under the circumstances in that
a lawsuit had already been filed against it by an agent of the Appellee’s insured.” Breath of
Life’s argument, as we perceive it, is that the trial court erred by awarding summary
judgment to Travelers because there is a genuine issue of material fact regarding whether
Travelers had notice of the dispute between Breath of Life and Bricks and regarding whether
Travelers was prejudiced by Breath of Life’s failure to follow the precise language of the
bond’s claim protocol.
We begin our discussion by noting that the interpretation of a contract is a matter of
law that we review de novo on the record, with no presumption of correctness for the
determination of the trial court. Barnes v. Barnes, 193 S.W.3d 495, 498 (Tenn. 2006). The
“cardinal rule” of contract construction is to ascertain the intent of the parties and to
effectuate that intent consistent with applicable legal principles. Frizzell Constr. Co. v.
Gatlinburg, L.L.C., 9 S.W.3d 79, 85 (Tenn. 1999). When the language of the contract is plain
and unambiguous, courts determine the intentions of the parties from the four corners of the
contract, interpreting and enforcing it as written. Int'l Flight Ctr. v. City of Murfreesboro,
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45 S.W.3d 565, 570 (Tenn. Ct. App. 2000).
In this case, we agree with the trial court that the relevant portions of the performance
bond are not ambiguous. Sections three, four, and five of the bond provide:
3. If there is no Owner Default, the Surety’s obligation under this Bond shall
arise after:
3.1 The Owner has notified the Contractor and the Surety at its
address described in Paragraph 10 below that the Owner is
considering declaring a Contractor Default and has requested
and attempted to arrange a conference with the Contractor and
the Surety to be held not later than fifteen days after receipt of
such notice to discuss methods of performing the Construction
Contract. If the Owner, the Contractor and the Surety agree, the
Contractor shall be allowed a reasonable time to perform the
Construction Contract, but such an agreement shall not waive
the Owner’s right, if any, subsequently to declare a Contractor
Default; and
3.2 The Owner has declared a Contractor Default and formally
terminated the Contractor’s right to complete the contract. Such
Contractor Default shall not be declared earlier than twenty days
after the Contractor and the Surety have received notice as
provided in Subparagraph 3.1; and
3.3 The Owner has agreed to pay the Balance of the Contract
Price to the Surety in accordance with the terms of the
Construction Contract or to a contractor selected to perform the
Construction Contract in accordance with the terms of the
contract with the Owner.
4. When the Owner has satisfied the conditions of Paragraph 3, the Surety
shall promptly and at the Surety’s expense take one of the following actions:
4.1 Arrange for the Contractor, with consent of the Owner, to perform and
complete the Construction Contract; or
4.2 Undertake to perform and complete the Construction
Contract itself, through its agent or through independent
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contractors; or
4.3 Obtain bids or negotiated proposals from qualified
contractors acceptable to the Owner for a contract for
performance and completion of the Construction Contract,
arrange for a contract to be prepared for execution by the Owner
and the contractor selected with the Owner's concurrence, to be
secured with performance and payment bonds executed by a
qualified surety equivalent to the bonds issued on the
Construction Contract, and pay the Owner the amount of
damages as described in Paragraph 6 in excess of the Balance of
the Contract Price incurred by the Owner resulting from the
Contractor’s default; or
4.4 Waive its rights to perform and complete, arrange for
completion, or obtain a new contractor and with reasonable
promptness under the circumstances:
.1 After investigation, determine the amount for which it may be
liable to the Owner and, as soon as practicable after the amount
is determined, tender payment therefore to the Owner; or
.2 Deny liability in whole or in part and notify the Owner citing
reasons therefore.
5. If the Surety does not proceed as provided in Paragraph 4 with reasonable
promptness, the Surety shall be deemed to be in default on the Bond fifteen
days after receipt of an additional written notice from the Owner to the Surety
demanding that the Surety perform its obligations under this Bond, and the
Owner shall be entitled to enforce any remedy available to the Owner. If the
surety proceeds as provided in Subparagraph 4.4 and the Owner refuses the
payment tendered or the Surety has denied liability, in whole or in part,
without further notice the Owner shall be entitled to enforce any remedy
available to the Owner.
The bond unambiguously sets-forth the conditions under which Travelers’ obligations
as surety would arise. We agree with Breath of Life that a mere technical violation of the
protocol might not relieve Travelers of its obligations in all circumstances. In this case,
however, we must disagree that section three of the bond is merely a notice provision that
should be dispensed with where Travelers had some indication of difficulties between Breath
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of Life and Bricks. Rather, section three also provides a mediation mechanism that seeks to
avoid default.
Additionally, the on-going litigation between Breath of Life and Bricks arose from
a mechanics and materialman’s lien filed by a subcontractor against Breath of Life and
Bricks, and subsequent cross-claims asserting breach of contract by Breath of Life and
Bricks. Breath of Life asserts Travelers had actual notice of the litigation in April 2007,
when Breath of Life’s legal counsel contacted insurance agent Richard Luther Powell (Mr.
Powell) regarding bonding off the lien against it. Breath of Life contends that Mr. Powell’s
deposition testimony demonstrates that Travelers had actual notice of the litigation between
Breath of Life and Bricks.
In his deposition, Mr. Powell stated that he acts as an agent for several companies,
including Travelers, that he received a letter from counsel for Breath of Life on April 7,
2005, and that he executed release of lien bonds for Breath of Life and Bricks shortly
thereafter. Mr. Powell stated that he approached Travelers to ask them to provide a bond to
Breath of Life, that Travelers refused to provide a bond for Breath of Life, and that Travelers
agreed to provide a bond to Bricks. Mr. Powell stated, “[n]o surety company likes to
execute[] unsupported release of lien bonds, and Travelers was - - was okay with supporting
their contractor, but they did not want to provide the bond for the church.”
Contrary to Breath of Life’s assertion, Mr. Powell’s deposition does not create an
issue of material fact with respect to whether Travelers had actual notice that Breath of Life
had a claim against Bricks or that it was considering declaring Bricks to be in default. It
demonstrates only that Breath of Life’s legal counsel contacted an independent insurance
agent, who requested a “release of lien” bond from Travelers. The materialman’s lien,
moreover, was filed against both Breath of Life and Bricks. Sanders v. Holloway, No.
W2008-02566-COA-R3-CV, 2009 WL 4642597, at *1 (Tenn. Ct. App. Dec. 9, 2009) (no
perm. app. filed).
There is nothing in the record to suggest that Breath of Life informed Travelers that
it was declaring Bricks to be in default and making a claim on the performance bond until
December 2006. Additionally, it did not afford Travelers the opportunity to exercise the
options contained in section 4 of the bond. Even if were we to assume that Bricks was in
default of the construction contract and that Travelers had actual notice of the litigation
between Breath of Life and Bricks and waived the notice and conference provisions, there
is nothing in the record to suggest that Travelers waived its rights under section 4 and agreed
to be liable for whatever amounts Breath of Life unilaterally determined were necessary to
complete the construction.
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We must disagree that Breath of Life’s failure to follow the protocol set-forth in the
performance bond was merely a technical violation of the formal notice requirements in this
case. As noted above, Breath of Life cross-claimed against Bricks in April 2005 after a
materialman’s lien was filed against both Breath of Life and Bricks. Eight months later, on
December 20, 2006, it informed Travelers that “[w]hile the building was erected, there
[were] several matters which [were] still incomplete and several other problems relating to
this construction project[,]” and that it was making a claim on the bond. In its December
2006 correspondence, Breath of Life also stated that it believed Bricks had notified Travelers
of the pending litigation. Despite the unambiguous provisions of the performance bond,
Breath of Life simply did nothing to contact Travelers regarding its dispute with Bricks until
eight months after litigation was commenced between it and Bricks. Additionally, Breath
of Life failed to provide Travelers with the options delineated in section 4 of the bond. As
far as we can determine from the record, Bricks has not been found to be in default of the
construction contract. See Sanders v. Holloway, et. al., No. W2008-02566-COA-R3-CV,
2009 WL 4642597 (Tenn. Ct. App. Dec. 9, 2009). Accordingly, whether Travelers would
be liable for undetermined damages should Bricks be found to be in default by the trial court
is not properly before us at this time.
In light of the foregoing, we affirm the judgment of the trial court. Costs of this
appeal are taxed to the Appellant, Breath of Life Christian Church, and its surety, for which
execution may issue if necessary.
_________________________________
DAVID R. FARMER, JUDGE
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