Monday, May 18, 2009
C.A. Reverses Allocation of Costs Between Surety Bonds
By SHERRI M. OKAMOTO, Staff Writer
This district’s Court of Appeal Friday ruled that a surety which had issued a payment and performance bond to a contractor and subcontractor on the same construction project could not allocate the loss from the subcontractor’s failure to pay a materials supplier between the bonds.
Reversing the decision of Los Angeles Superior Court Judge Aurelio Munoz, who has since retired, Div. Five clarified that the happenstance of Cam Painting Inc. and its subcontractor obtaining bonds from the same surety did not affect the surety’s obligations to Cam as obligee on the bond between the subcontractor and surety.
As contractor for a Los Angeles Unified School District project, Cam Painting Inc. obtained a $2.29 million payment and performance bond for the project from the First National Insurance Company, naming the school district as obligee.
First National, as surety on the bond, was bound to render any payment for materials that Cam or its subcontractors failed to make, and entitled to an award of attorney fees if a lawsuit were filed upon the bond.
Cam then hired Sabco Electrique Inc. as a subcontractor and required it to provide a payment and performance bond with Cam as the obligee. Sabco obtained a $400,000 bond from First National as well.
The payment portion of the bond stated that if Sabco failed to pay a supplier, First National would make the payment and would be entitled to attorney fees if a lawsuit were filed.
Both Cam and Sabco entered into indemnity agreements connected to their respective bonds agreeing to pay First National all costs, including attorneys’ fees, incurred by reason of having executed the bond.
In March 2005, Allsale Electric filed suit against Sabco, the school district, Cam and First National alleging that Sabco owed it $47,000 for materials it had supplied.
Sabco filed a cross-complaint against Cam and First National, claiming that Cam owed it $44,000. Cam also cross-complained against Sabco, maintaining that the subcontractor had breached its contract with Cam by drilling into areas containing asbestos, contrary to contract specifications.
First National eventually paid Allsale’s claim, allocating half the payment to the Cam bond, and the other half to the Sabco bond. It then sought indemnity from both companies.
By the time of trial, First National had recovered almost everything it had paid Allsale from the school district and only sought recovery of $2,246 plus attorney fees in equal amounts from Cam and Sabco.
On Cam’s cross-complaint against Sabco, Munoz found that Sabco had breached its contract with Cam and awarded Cam $12,992 against Sabco and First National, jointly and severally. He also awarded Cam $20,000 in attorney fees against Sabco only.
While Munoz determined that Cam owed Sabco a final payment of $47,000, he ordered that Sabco take nothing on its cross-complaint against Cam or First National.
He found in favor of First National on its claims for indemnity against Sabco and Cam, ruling that each was required to reimburse First National for $23,500 disbursed under each bond, plus costs and expenses, and allocated the costs between them.
As a prevailing party, First National was also awarded $25,203 in attorney fees jointly and severally against Cam and Sabco.
Writing for the appellate court, Justice Orville A. Armstrong explained that Sabco’s bond from First National made First National responsible to Cam as the obligee for Sabco’s debt to Allsale.
Had First National been Cam’s surety, but not Sabco’s, he reasoned that First National “surely would have tendered the entire matter to Sabco,” and the “coincidental fact that First National also bonded Cam did not dilute its obligation to Cam as obligee on the Sabco bond.”
As Allsale’s complaint alleged that Sabco, not Cam, owed it money, the complaint brought no cause of action against Cam except on the bond, and First National had no reason to believe any fault or obligation was Cam’s, Armstrong wrote.
Joined by Presiding Justice Paul Turner and Justice Richard M. Mosk, Armstrong held that First National was not entitled to attribute any of the Allsale loss to the Cam bond, and was therefore not entitled to indemnity from Cam for the sum paid to Allsale or the attorney fees it incurred in that action.
No longer a prevailing party, First National was also no longer entitled to an award attorney fees, Armstrong added.
As for Cam’s cross-complaint against Sabco, Armstrong explained that a surety’s liability is commensurate with that of a principal, Armstrong, and as Sabco had been found liable for attorney fees to Cam, First National was jointly and severally liable as well.
John J. Immordino and Susannah M. Dudley of Wilson Elser Moskowitz Edelman & Dicker represented First National while Jennifer M. Schildbach and Francis J. Lanak of Lanak & Hanna represented Cam Painting.
The case is First National Insurance Company v. Cam Painting, Inc., B200830.
Copyright 2009, Metropolitan News Company