TWENTY FORTH ANNUAL SOUTHERN SURETY AND FIDELITY CLAIMS CONFERENCE Charleston, South Carolina APRIL 18 TH & 19 TH, 2013 LITIGATING POST-TURNOVER HOA AND CONDO ASSOCIATION BOND CLAIMS PRESENTED BY: Gregory P. Brown, Esq. Emily B. Whelchel, Esq. Hill Ward Henderson, P.A. Bank of America Plaza 101 East Kennedy Boulevard Tampa, Florida 33602 gbrown@hwhlaw.com Jeremy Medeiros Home Office Counsel Liberty Mutual Surety 1600 N. Collins Blvd. - #4000 Richardson, Texas 75080 972-808-4759 (direct) 866-548-7265 (fax) Jeremy.Medeiros@LibertyMutual.com
I. INTRODUCTION Claims brought by homeowners and condominium associations, attempting to stand in the shoes of the developer/owner after turnover to the association, present unique issues for courts to decide. Not surprisingly, a new breed of contingency fee attorneys has emerged specializing in litigating these unique post-turnover homeowners and condominium association claims. Over the last decade, homeowners and condominium associations have attempted to assert themselves as third-party beneficiaries or assignees to bring their claims against performance bond sureties. This paper will discuss what success, if any, associations have had in asserting these claims, as well as some related legal issues and practical tips. II. CASE STUDIES/NATIONAL TRENDS On multi-family condominium projects and large single-family home subdivision developments, owners/developers will usually require the general contractor to have a performance bond in place to guarantee the contractor s satisfactory completion of the project. A performance bond is a written agreement in which one party (the surety) guarantees that a second party (the principal) will fulfill its obligations to a third party (the obligee). Generally, a performance bond benefits only the obligees expressly named on the bond. See Bona v. Peoples Gas System, Inc., 557 So.2d 581 (Fla. 3d DCA 1990); Beach Point Condominium Ass'n, Inc. v. Beach Point Corp., 480 So.2d 239 (Fla. 4th DCA 1985); Aetna Casualty &Surety Co. v. Crabtree, 383 So.2d 657 (Fla. 1st DCA 1980); State of Florida ex rel. Westinghouse Electric Supply Co. v. Wesley Construction Co., 316 F. Supp. 490 (S.D. Fla. 1970), aff'd 453 F.2d 1366. Under certain limited situations, however, some courts have recognized third-party claims against performance bonds which is significant for purposes of this paper and the analysis of an association s potential claim(s). For instance, when a statute or bond requires a performance bond surety to pay for labor or materials, subcontractors and suppliers may claim to be intended third-party beneficiaries of the performance bond. See Johnson Electric Co. v. Columbia Casualty Co., 101 Fla. 186, 133 So. 850 (1931), 77 A.L.R. 1; Sugarland Drainage Dist. v. Barr, 99 Fla. 928, 128 So. 25 (1930). However, on private construction contracts, performance bonds generally secure the owner, not the subcontractors and suppliers; therefore, subcontractors and suppliers are unlikely to be intended third-party beneficiaries on those projects. See National Gypsum Co. v. Travelers Indemnity Co., 417 So.2d 254 (Fla. 1982); School Board of Palm Beach County ex rel. Major Electrical Supplies of Stuart, Inc. v. Vincent J. Fasano, Inc., 417 So.2d 1063 (Fla. 4th DCA 1982). The same rationale applies under the Miller Act for government projects. See Transamerica Premier Insurance Co. v. Ober, 894 F.Supp. 471 (D. Me. 1995); but see United States ex rel. Blount Fabricators, Inc. v. Pitt General Contractors, Inc., 769 F.Supp. 1016 (E.D. Tenn. 1991) (subcontractor can be third-party beneficiary if this is the intent of parties as expressed in the language of the bond). Moreover, prime contractors generally cannot recover against the performance bond of another prime contractor. See J. Louis Crum Corp. v. Alfred Lindgren, Inc., 564 S.W.2d 544 (Mo. Ct.App. 1978); Moore Construction Co. v. Clarksville Dept. of Electricity, 707 S.W.2d 1 (Tenn. Ct.App. 1985). Claimants other than the named obligees may also seek relief under a performance bond using theories of assignment and subrogation. Generally, obligees can assign their performance bond claims to third parties, unless the surety can show prejudice or the bond 2
prohibits the assignment by limiting the claimants to the named obligees. Southern Patrician Associates v. International Fidelity Insurance Co., 381 S.E.2d 98 (Ga. Ct.App. 1989); Hunters Pointe Partners Limited Partnership v. United States Fidelity & Guaranty Co., 442 N.W.2d 778 (Mich. Ct. App. 1989). Several courts around the nation have addressed claims brought by a post-turnover homeowners or condominium association against a surety on a performance bond. The cases hinge on whether the association has standing to bring such a claim by virtue of its position standing in the shoes of the original owner/developer. Associations have brought claims under the theories that they are assignees of claims on the bond or third-party beneficiaries of the bond, neither of which have been successful in courts thus far. However, courts have discussed certain fact issues that could potentially pave the way for homeowners or condominium associations, and their innovative attorneys, to successfully assert a performance bond claim against the surety. A. Assignees of rights to construction contract may not have standing to sue on the bond. In a Texas case, Augusta Court Co-Owners Association v. Levin, Roth & Kasner, P.C., 971 SW.2d 119 (Ct. App. Tex. 1998), a condominium association filed a legal malpractice lawsuit against its former law firm for failure to timely sue the surety on a standard performance bond issued for construction of the condominiums. Finding that the limitations period set forth in the performance bond expired before the law firm was retained, the trial court ruled that the law firm did not cause the condominium association s injury and granted summary judgment in the law firm s favor. The appellate court affirmed the lower court s judgment, but on the alternative grounds of standing. The performance bond named the condominiums original developer as the owner and primary obligee, as is customary. The developer encountered financial problems, and the lender took over the project. At the time of the takeover, the project was substantially complete but numerous construction problems allegedly existed. After multiple transfers in ownership, the rights in the construction contract were ultimately assigned to the condo association. The association filed suit against the construction company and the architect which ended in an arbitration and final judgment confirming the arbitration award in favor of the association on its claim against the construction company. The association then filed its malpractice suit against the law firm alleging that they failed to timely sue the surety on the performance bond. The trial court ultimately granted judgment in favor of the law firm, but denied summary judgment on the ground of standing. The law firm argued on appeal that the trial court erred in denying summary judgment on the ground that the association lacked standing to sue on the performance bond, because under the plain terms of the bond, the Association, as a mere assignee of the named owner, had no right of action against the surety. Id. at 123. The appellate court first focused on the language of the bond itself. Texas, like many other states, applies the rule of strictissimi juris ( of the strictest right or law ) in interpreting guaranty and surety agreements to refrain from extending the guarantor s or surety s obligation by implication beyond the written terms of the agreement. Id. However, in this case, the rule of strict construction was inapplicable, since the parties obligations under the 3
bond were certain. The performance bond only named the original owner-developer as obligee and named the lender as an additional obligee. While the association alleged that it acquired rights in the performance bond via the assignment of the construction contract, the bond did not expressly authorize a right of action by an assignee of the named owner. Specifically, the bond provided that [n]o right of action shall accrue on this bond to or for the use of any person or corporation other than the Owner named herein or the heirs, executors, administrators or successors of Owner. (emphasis added). Id. Significantly the right of action clause makes no mention of assigns. By contrast, the general obligation clause states that the Contractor and Surety bind themselves and their heirs, executors, administrators, successors and assigns, jointly and severally, firmly by these presents. (emphasis added). The court therefore concluded that the parties to the performance bond did not intend for the assigns of the owner to have a right of action on the bond. If they had, they would have included assigns in the right of action clause. The court rejected the association s arguments of ambiguity, adding that in any event, should an ambiguity exist in the contract documents, the rule of strict construction required an interpretation in favor of the surety. The association also argued that it could have sued as a successor of the named owner of the bond. The court disagreed, stating that the meaning of the word successor, when used in a contract depends largely on the kind and character of the contract, its purposes and circumstance, and context. Id. at 125. In this case, the association acquired rights in the construction contract solely by assignment. The association did not obtain those rights by consolidation or merger with the named owner of the bond, nor did it assume any of the obligations associated with the ownership of the development. Because the association did not step into the shoes of the owner of the entire development, it was not a successor as that term has been defined by the courts. Thus, the association lacked standing to sue on the performance bond. The Texas court in Augusta relied on several out-of-state cases to support its opinion. Though not involving homeowners or condominium associations, the following cited cases support the theory that an assignment of rights to a construction contract does not provide standing to sue on the bond: In Southern Patrician Associates v. International Fidelity Ins. Co., 191 Ga. App. 106, 381 S.E.2d 98 (1989), Southern, the owner, contracted with CM, the general contractor, to renovate a mall. CM in turn subcontracted with R&M. When CM went into bankruptcy before completion of the work, CM s surety assigned all of its rights and obligations under the general contract to Southern. Southern terminated R&M for nonperformance and looked to R&M s surety to complete the work under the terms of its performance bond, which incorporated the subcontract. When R&M s surety failed to respond, Southern filed for arbitration pursuant to a provision in the general contract, which was incorporated into the subcontract. R&M s surety refused arbitration, asserting that Southern, as CM s assignee, had no right of action under the terms of R&M s surety s bond. The court agreed. Noting the inclusion of assigns in the general obligation clause in the bond and their exclusion from the right of action clause, the court concluded that the words successors and assigns have different meanings. Id. at 99. Because the bond specifically excluded assigns of the obligee from a right of 4
action, the court refused to extend the surety s liability by implication or interpretation. Id. In a later Georgia case, TRST Atlanta, Inc. v. 1815 Exchange, Inc., 220 Ga. App. 184, 469 S.E.2d 238 (1996), Barge-Wagener contracted to build a high-rise apartment building for Club Tower. Id. at 239. St. Paul furnished a performance bond on behalf of Barge-Wagener, the principal, and in favor of Club Tower, the obligee. Id. TRST, Club Tower s lender and alleged successor under the contract and bond, sued Barge- Wagener s successor for breach of contract and negligent construction. Id. It also sued St. Paul on the performance bond. Id. The trial court granted summary judgment for St. Paul, concluding that TRST was not the successor to Club Tower, the obligee on the bond. Id. The appellate court affirmed, finding no summary judgment proof of a duly authorized legal succession by which TRST had become invested with the rights and had assumed the burdens of Club Tower. Id. at 240. Relying on the holding in Southern Patrician, the court held that St. Paul s surety contract specifically excluded TRST, as a mere assignee of the obligee, from a right of action on the bond. Id. The court in Augusta also relied on Young v. General Ins. Co., 33 Ill. App. 3d 119, 337 N.E.2d 739 (1975), a case out of Illinois. In Young, plaintiff s predecessor, SVMCB, contracted with Transco to construct a building on land owned by SVMCB. Id. at 740. Transco subcontracted with Engelhardt. Id. Their subcontract incorporated by reference the general contract and required Engelhardt to furnish a performance bond to Transco. Id. at 741. General furnished the bond, which named Engelhardt as principal, Transco as obligee and incorporated by reference the subcontract. Id. Young, SVMCB s successor, sued on the bond relying on the assignment of the bond by Transco. Id. at 742. However, the assignment was executed more than ten years after the bond was issued and also after the defendant moved to dismiss the action on the ground that Young was not an obligee under the bond. Id. The effect of the assignment was to give the plaintiff the status of an assignee, not that of a successor to Transco. Id. at 742-43. See also Rush Presbyterian St. Luke s Medical Center v. Safeco Ins. Co., 825 F.2d 1204, 1205-06 (7 th Cir. 1987) (holding that the right of action clause in a performance bond furnished by the subcontractor to the general contractor barred the owner from suing the surety, even though the owner was the disclosed principal of the general contractor, the named obligee on the bond). B. Third-party beneficiaries may not have standing to sue on the bond. In Florida, a court held that a condominium association could not bring a claim against the bonding company since it was not a third-party beneficiary of the bond secured by the general contractor in favor of the original owner-developer. In Beach Point Condo Association, Inc. v. Beach Point Corporation, et al., 480 So. 2d 239 (Fla. 4 th DCA 1985), the association brought a lawsuit against the owner-developer, general contractor, architect, and bonding company for construction defects. The trial court found, and the appellate court affirmed, that the association was not a third-party beneficiary on the payment and performance bond secured by the general contractor in favor of the original owner-developer of the condominium. The court applied traditional third-party beneficiary concepts and reasoned that [a]lthough the association s creation may have been foreseen, it appears that the association was not even in existence at the time the construction contract was executed and the bond secured. Under these circumstances, and the unambiguous provisions of the bond, we fail to see any basis for 5
a claim that is manifest from the terms of the bond that the parties intended to benefit the association. Id. at 240. In a significant dissenting opinion, one judge would have reversed and remanded the case for a determination of the intent of the parties, i.e. whether or not the association was a third-party beneficiary on the payment and performance bond, since it is a mixed question of fact and law. The dissenting judge also noted that construction was not completed at the time [the association] took over from the developer which fact creates the anomaly that the [association] is the only aggrieved party. Id. If the association could not sue on the bond, the judge reasoned, then the bond is a nullity. The dissenting judge based his dissent on the authority of Crabtree v. Aetna Casualty and Surety Company, 438 So. 2d 102 (Fla. 1 st DCA 1983), which held that a third-party beneficiary who was not named as an obligee on the bond could recover on a surety bond intended for his benefit as well as for the benefit of the formal parties thereto. In Crabtree, without significant discussion, the court looked to the terms of the bond and evidence of related transactions between the parties to determine whether the unnamed obligee was intended to be a third-party beneficiary of the bond. III. OTHER POTENTIAL (LEGAL) ISSUES A. Extent to which claims belong to the association itself or whether these are more properly individual claims - Ability to fight class certification Certain states have enacted statutes or rules that allow a homeowners or condominium association to assert a class action lawsuit in its own name on behalf of its unit owner members for certain matters of common interest, including the common elements (including California, Florida, Maryland, Ohio, Utah, Nevada, New Jersey, Colorado, Connecticut, Hawaii, Illinois, Massachusetts, North Dakota, and Oregon). This would necessarily include claims arising from the faulty design and construction of the common elements of a condominium and could also include claims for defects in an individual unit if the defect is prevalent throughout the building. See Lesser, Steven B., Stockman, William E., and Ammendola, Michele C., Construction Defect Litigation, Florida Condominium and Community Association Law, The Florida Bar (2011). The determination of whether a defect is prevalent throughout a building can be difficult and thus the basis for arguing against class certification in some instances. B. Insurance statutes attorneys fee provisions; omnibus insureds It is not unusual for insureds to seek recovery of attorneys fees incurred in pursuing an insurer for defense or indemnity. See 4 Bruner & O Connor Construction Law 11:64 (2012)(discussion of attorneys fee statutes in New York, Florida, Pennsylvania, Indiana, and Massachusetts). Though case law on the subject is sparse, one could make a similar argument on behalf of an association seeking recovery under a surety bond. Such arguments would likely carry more weight in states where the recovery of attorneys fees in suits against insurers is permitted by statute, such as Florida, where the statute has also been interpreted to permit not only named insureds to recover attorneys fees but also persons covered by the policy but not specifically named or designated an insured. See Fla. Stat. 627.428; Continental Cas. Co. v. Ryan Inc. Eastern, 974 So. 2d 368 (Fla. 2008) (an omnibus insured is one who is covered by a provision in the liability policy but not specifically named or designated). 6
IV. PRESUIT ANALYSIS AND PRACTICE TIPS Traditionally, construction cases consume an excessive amount of time and can be very costly to pursue. Thus, it is very important for any attorney advising a homeowners or condominium association to provide a very detailed analysis of the association s potential claims and causes of action, as well as the practical and economic aspects of bringing such claims. One of the first steps to take is to determine whether any of the potential defendants has sufficient financial resources to satisfy a judgment. This could include insurance, a performance bond, or other personal financial resources to assure the association that a judgment would be collectible. As has become clear across the country, to pursue a claim against a payment or performance bond, the association should carefully analyze the language of the bond to determine whether it is listed as a third-party beneficiary or if it has another basis to give it standing to sue the surety, such as via an assignment or successor relationship. Another practical tip is for the attorney and/or claims handler to appear in front of the association as soon as possible after learning of an association s potential defect claim(s). Generally, homeowners and condominium association meetings must be publicized, and it is worth requesting an opportunity to be heard at the meeting to fully explain the potential pitfalls in bringing a claim against the performance bond. Making the association aware of the complex legal issues and expenses involved in litigating construction defect claims, including those against sureties, can have a great impact on their decision to bring a lawsuit. V. CONCLUSION There have been relatively few published cases where courts were faced with the decision of whether to allow a homeowners or condominium association to make a postturnover claim on a payment bond. Though courts have not allowed such claims thus far, it may be likely in the future, depending on the bond s language and the parties intent and conduct, that associations could prevail on such claims. Attorneys representing associations, defending against associations, and representatives of the bonding companies must all be aware of the pertinent issues and facts that courts rely on in determining these claims. 7
Gregory P. Brown is a Shareholder in the firm s Litigation Group. His practice primarily involves representing sureties in contract and commercial bond matters. He also focuses a portion of his practice on real estate-related commercial and construction litigation, concentrating in the representation of developers and contractors. Greg also represents creditors in bankruptcy proceedings, and he defends and prosecutes trade secret and noncompete cases. Emily B. Whelchel is an Associate in the firm s Construction & Design and Commercial Litigation Groups. Her practice primarily involves representing owners, developers, contractors, subcontractors, design professionals, and sureties in construction defect disputes, bond claims, lien foreclosure actions, and complex commercial litigation. Jeremy Medeiros attended Southern Methodist University Dedman School of Law in Dallas, Texas. He is licensed to practice law in California and Maryland. 8