Knecht, Inc. v. United Pacific Insurance Company

860 F.2d 74, 1988 WL 110137

• Court: Court of Appeals for the Third Circuit
• Decided: November 17, 1988
• Docket: 88-1280
• Status: Published

Opinions

OPINION OF THE COURT

GREENBERG, Circuit Judge.

This matter is before the court on appeal by defendant United Pacific Insurance Company from an order denying its motion pursuant to Fed.R.Civ.P. 59(e) to alter or amend a summary judgment entered in favor of plaintiff Knecht, Inc. and from an order for attorney’s fees in this action on a labor and material payment bond. The district judge ruled on cross-motions for summary judgment that Knecht was entitled to recover on the bond and thus our scope of review on this issue is plenary. See Goodman v. Meade Johnson & Co., 534 F.2d 566, 573 (3d Cir.1976), cert. denied 429 U.S. 1038, 97 S.Ct. 732, 50 L.Ed.2d 748 (1977). We will affirm the summary judgment but will reverse the order for attorney’s fees.

The undisputed facts leading to this appeal are as follows. On November 19,1983 Knoll International, Inc., as owner, entered into a contract with Sordoni Construction Co., as contractor, for the construction of a new assembly/shipping facility adjacent to Knoll’s plant in East Greenville, Montgomery County, Pennsylvania. This was a substantial project with a maximum cost to Knoll of $14,700,000 and, not surprisingly, the contract documents were complex. They provided for protection of Knoll from lien claims and also set forth that “[i]f requested by Owner [Knoll], Contractor [Sordoni] shall, at Owner’s cost, provide surety bond or bonds (a) to assure the timely performance of the Work in full compliance with the Final Drawings and Specifications for the Project and (b) to assure that all labor, materials, equipment and supplies incorporated into the Work or employed in connection therewith will be paid for in full. Such surety bond or bonds will be issued by sureties, in amounts and on terms acceptable to Owner and in compliance with the laws of the State of Pennsylvania.”

On October 28, 1983, in anticipation of the execution of the contract, Knoll and Sordoni made a stipulation barring lien claims against the property by Sordoni and any subcontractor, materialman, workman or any other person for any labor or material supplied on the project. This stipulation was filed in the office of the Montgomery County Prothonotary on November 2, 1983, apparently pursuant to section 402 of the Pennsylvania Mechanics’ Lien Law of 1963, Pa.Stat.Ann. tit. 49, § 1402 (Purdon 1965).

On November 21, 1983 Sordoni and United, respectively as principal and surety, executed a labor and material payment bond binding themselves jointly and severally to Knoll for $14,700,000. The condition of the bond, which incorporated the Knoll-Sordoni contract, was that if Sordoni “shall promptly make payment to all claimants as hereinafter defined, for all labor and material used or reasonably required for use in the performance of the Contract, then this obligation shall be void; otherwise it shall remain in full force and ef-fect____” A claimant was defined in the bond as a person with a direct contract with the principal on the bond, i.e., Sordoni, or with a subcontractor of the principal, for labor and material used or reasonably required for performance of the contract. The bond further provided that the principal and surety agreed jointly and severally that every unpaid claimant “may sue on this bond for the use of the claimant, prosecute the suit to final judgment for such sum or sums as may be justly due claimant, and have execution thereon. The owner, [Knoll] shall not be liable for the payment of any costs or expenses of any such suit.”

On September 13, 1984 Sordoni and W.J. Ambrose, Inc. entered into a subcontract incorporating the Knoll-Sordoni contract and providing for Ambrose to perform the heating, ventilating and air conditioning work on the Knoll project. The Sordoni-Ambrose subcontract included Article 19.1 which provided that:

ASSIGNMENT AND SUBCONTRACTING.

Neither this Agreement nor any monies due or to become due hereunder shall be assignable without the prior written consent of the Contractor [Sordoni] nor shall the whole or any part of the Work be subcontracted without like prior written consent. Any such assignment or subcontracting without such prior written consent shall be void and of no effect and shall vest no right or right of action in the assignee or sub-subcontractor against the Contractor. The Contractor’s consent to any assignment or subcontracting shall not relieve the Subcontractor [Ambrose] of any of its agreements, duties, responsibilities or obligations under this Agreement and the other Contract Documents and the Subcontractor shall be and remain as fully responsible and liable for the defaults, neglects, acts and omissions of its assignees and sub-subcontractors and all persons directly or indirectly employed by them as it is for its own defaults, neglects, acts and omissions and those of its own officers, servants and employees. The Subcontractor shall bind each of its permitted sub-subcontractors to all of the terms, provisions and covenants of this Agreement and the other Contract Documents with respect to permitted subcontracted portions of the Work. The Contractor’s consent to any subcontracting shall not be deemed to create any contractual or third party beneficiary relationship between the Contractor and any sub-subcontractor to whom the Work, or any portion thereof, is subcontracted, and shall not vest any right or right of action in such sub-subcontractor against the Contractor or the Owner [Knoll].

On October 18, 1984 Ambrose entered into a sub-subcontract with Knecht to perform sheet metal work on the Knoll project. The Ambrose-Knecht contract incorporated the Sordoni-Ambrose contract which was referred to as the “principal contract” and provided that Knecht was bound by the provisions of the principal contract.¹

The parties agree that work went forward on the project and payments were made to Sordoni by Knoll which in turn paid Ambrose. Ambrose, however, defaulted in its obligations to Knecht by failing to pay $134,784 due Knecht even though Ambrose requested and received payment for Knecht’s work. Ultimately, Knecht and three other creditors of Amb-rose filed an involuntary petition in bankruptcy against Ambrose.

On May 1, 1986 Knecht brought this diversity action under Pennsylvania law against United on the bond. The parties filed cross-motions for summary judgment and on October 9, 1987 the district judge, apparently without opinion, entered an order denying United’s motion and granting Knecht’s. The order also recited “that judgment is entered in favor of the plaintiff and against the defendant.” United then moved under Fed.R.Civ.P. 59(e) to alter or amend the judgment but this motion was denied by order of November 18, 1987 which also provided that United was to pay Knecht $134,784 with interest and that a hearing would be later held to assess attorney’s fees.² On December 7, 1987 the judge took testimony on the issue of attorney’s fees. On March 16, 1988 the judge entered an order for $48,432.84 for attorney’s fees, the order reciting that it was predicated on the language of the bond allowing for recovery for all “sums ... justly due.” Thus, in the judge’s view unless Knecht’s fees were allowed Knecht “would not be made whole” and would not recover all sums justly due. This appeal followed.

Leaving aside the award of attorney’s fees, it might be wondered on the basis of our recitation what issue could be raised by United on this appeal. It is, after all, clear that United and Sordoni in the bond agreed with Knoll that a claimant could bring an action against them jointly or severally on the bond for labor and materials supplied on the project. There is no doubt that Knecht performed the services and supplied the materials for which it seeks recovery and is a claimant as defined in the bond, as it had a sub-subcontract with Ambrose which was a subcontractor of Sor-doni. United does not contend otherwise nor does it challenge Knecht’s computation of its claim or suggest that Knecht is procedurally barred from bringing this case. While it is true that Knecht as a sub-subcontractor was precluded by the contract documents from asserting a lien against the property and, along with other possible claimants, as a matter of law by the filing of the stipulation against liens in the pro-thonotary's office, nothing in the bond in any way conditioned a claimant’s right to claim under it on its right to assert a lien.³ Finally, while the Sordoni-Ambrose agreement limited the right of a sub-subcontractor to make a claim against Sordoni, this agreement made no reference to the bond and by its express terms never prejudiced the right of a sub-subcontractor to bring an action against United.

Accordingly, the facts seem to point to the same result as that reached in Pennsylvania Supply Co. v. National Casualty Co., 152 Pa.Super. 217, 31 A.2d 453 (1943). There the Superior Court of Pennsylvania held that a materialman could bring an action against a surety on a bond in which a building contractor was the principal and the owner was the obligee, inasmuch as the bond incorporated the building contract and the contract required that the contractor-principal pay for the materials used on the project. The court observed that “[wjhat may have prompted the obligee to require protection for third parties, also is unimportant. She was protected by the stipulation against liens and her motives may have been altruistic or even sentimental, without affecting the obligation of the surety.” 152 Pa.Super. at 221, 31 A.2d at 456. Here, too, the owner, Knoll, for reasons which are not our concern obtained protection for sub-subcontractors. Similarly, the Supreme Court of Pennsylvania in Dravo-Doyle Co. v. Royal Indemnity Co., 372 Pa. 64, 92 A.2d 554 (1952), made it clear that if a subcontract specifically requires a subcontractor to pay the materialmen, a surety on the subcontract will be liable to an unpaid materialman. In Dravo-Doyle, however, there was no such promise as the subcontractor’s obligation under the subcontract was limited to satisfaction of lien claimants. Here, however, the bond, though incorporating the Knoll-Sordoni contract, did not condition the obligation of either the principal or surety to satisfaction of obligations under the Knoll-Sordoni contract, nor was the right of a claimant under the bond in any way related to its ability to assert a lien. Rather, the undertaking of the principal and surety was simply to pay claimants for labor and material. See also Restatement of Security, § 165 (1941). Thus, under established Pennsylvania law United should be liable on the bond.

United seeks to avoid its plainly stated obligation by advancing what it characterizes in its brief as the basic principle of surety law, that where the liability of the surety is joint and several with the principal, its liability will be no greater than that of the principal. It observes that “[a]s a general rule, the liability of a surety ends with the extinguishment of the obligation of his principal.” Therefore, United contends that “a determination as to whether United is liable in damages to Knecht requires an examination as to whether Knecht has any right of action against Sordoni.” It then points out that under the above quoted Article 19.1 of the Sordoni-Ambrose contract, a sub-subcontractor is not in a contractual or third party beneficiary relationship with Sordoni and can have no right of action against either Sordoni or Knoll.⁴ Accordingly, as Knecht can assert no claim against Sordoni, United, as Sordoni’s surety, cannot be liable to Knecht. In support of this contention, United relies primarily on Dravo-Doyle Co. v. Royal Indemnity Co., 372 Pa. 64, 92 A.2d 554, discussed above, and McShain v. Indemnity Ins. Co. of North America, 338 Pa. 113, 12 A.2d 59 (1940).

We do not doubt that United has correctly stated general surety law. For example, in Exton Drive-In, Inc. v. Home Indemnity Co., 436 Pa. 480, 261 A.2d 319 (1969), cert. denied, 400 U.S. 819, 91 S.Ct. 36, 27 (1970), the Supreme Court of Pennsylvania held that inasmuch as a contractor was not liable for delay in completing a paving contract, his surety on a performance bond was not liable to the owner either as the liability of the surety was no greater than that of the principal. 436 Pa. at 489-91, 261 A.2d at 325. McShain was an action in which a contractor, who terminated a subcontract by reason of the subcontractor’s violation of his agreement, sued the subcontractor’s surety on a bond conditioned for the faithful performance of the subcontract. The surety joined the subcontractor as an additional defendant. At a jury trial a verdict was returned for the contractor against the surety but not against the subcontractor. The trial judge’s order for a new trial was affirmed. The Supreme Court of Pennsylvania found that there was an error in receipt of evidence against the surety and pointed out that in any event it was axiomatic that “the liability of a surety is not greater than that of a principal and that a judgment in favor of the principal upon the merits of the case can be asserted as a defense by the surety.” 338 Pa. at 118, 12 A.2d at 61. See also East Crossroads Center, Inc. v. Mellon-Stuart Co., 416 Pa. 229, 205 A.2d 865 (1965).

It is clear from Exton Drive-In and McShain that if the obligation of the surety is limited to a guarantee of the performance of a contract by the principal, the obligee will be unable to recover against the surety if the obligee has no cause of action against the principal on the contract.⁵ But this principle of law is not controlling here as Knecht is not asserting its claim on its sub-subcontract. Rather, it is suing on the bond which was an undertaking to Knoll by United and Sordoni that, without regard to the provisions of later subcontracts, created an independent liability to claimants as defined in the bond and in the clearest language possible allowed the claimants to sue on the bond. Thus, under the bond Sordoni became liable to a sub-subcontractor even though as a matter of ordinary contract law it would otherwise have had no obligation to the sub-subcontractor.

Further, nothing expressly set forth in the above quoted Article 19.1 of the Sordoni-Ambrose contract in any way released or extinguished the rights of a sub-subcontractor such as Knecht under the bond. Indeed, the Article never mentioned the bond. United in its brief points to no other provision of the Sordoni-Ambrose subcontract or the Ambrose-Knecht sub-subcontract which released or terminated the rights of a sub-subcontractor as a claimant under the bond even though the Sordoni-Ambrose subcontract precluded Ambrose’s sub-subcontractors from filing mechanic’s lien claims on the project. We emphasize that the Sordoni-Ambrose agreement which was incorporated into the Ambrose-Knecht agreement simply provided that sub-subcontractors would not be in a contractual or third party beneficiary relationship with Sordoni and would have no right of action against it.

We also observe that Sordoni could have provided in its agreement with Ambrose that any sub-subcontractor waive any right on the bond against either the principal or surety. In this regard we point out that inasmuch as the bond was in place when the Sordoni-Ambrose subcontract was executed Sordoni had reason to seek such a provision. In view of all of the aforesaid, we will affirm the order of November 18, 1987.

In reaching our result, we have not overlooked the fact, emphasized by United, that on January 14, 1982 Sordoni executed an indemnity agreement which contemplated that United from time to time might issue bonds on behalf of Sordoni which in turn broadly agreed to indemnify United for losses on the bonds. While the practical consequence of that agreement may be to place the loss for Knecht’s claim on Sordoni we regard that as immaterial. We see no reason why Knecht’s rights against United can be negated by a collateral understanding between United and Sordo-ni.⁶

Our conclusion that Knecht may recover on the bond from United does not determine United’s liability for attorney’s fees. In considering this issue our scope of review is plenary.⁷

The parties are in accord that in this diversity action we resolve the attorney’s fee issue under Pennsylvania law, see Montgomery Ward & Co. v. Pacific Indemnity Co., 557 F.2d 51, 56 (3d Cir.1977), and that counsel fees are recoverable only if permitted by statute, clear agreement of the parties, or some other established exception. Ibid.; Corace v. Balint, 418 Pa. 262, 271-73, 210 A.2d 882, 887 (1965). We agree. Further, inasmuch as Knecht does not rely on a statute to support the award of attorney’s fees and the facts of this case do not conform to any established exception, we need only predict whether the Supreme Court of Pennsylvania would construe the bond so as to include attorney’s fees.⁸

The bond provides that every claimant who has not been paid for work or labor done or performed or material furnished may sue on the bond for such sum or sums “as may be justly due.” Thus, the bond does not specifically allow recovery of attorney’s fees. Further, inasmuch as United’s obligation cannot be extended beyond the language on the bond, we need only resolve whether the attorney’s fees may be regarded as a sum “justly due.” See Reliance Universal, Inc. v. Ernest Renda Contracting Co., 308 Pa.Super. 98, 454 A.2d 39, 45 (1982).

The district judge noted that unless the fees were paid, Knecht would not be made whole. This undoubtedly is correct but the judge’s holding proved too much, as it is always true that when a plaintiff must make expenditures for attorney’s fees to recover a debt it will not be made whole unless its fees are also recovered. Further, whenever a person is indebted to another the sum owed may be regarded as justly due. For example, a patron’s obligation on an open account for merchandise purchased from a merchant may be said to be for a debt “justly due.” Thus, we see no significance with respect to attorney’s fees in the fact that Knecht may sue for a sum “justly due.” In fact, we can hardly conceive of how a bond could be written to authorize a claimant to sue for anything less than a sum justly due. We also observe that in some contracts express provision is made for recovery of attorney’s fees in the event of an action for a breach. Yet in United’s bond no reference was made to attorney’s fees. In the circumstances, we conclude that attorney’s fees are not recoverable in this action.

While we are directed to no Supreme Court of Pennsylvania case controlling our result, precedent supports our conclusion. In Can-Tex Industries v. Safeco Ins. Co., 460 F.Supp. 1022 (W.D.Pa.1978), an action decided under Pennsylvania law, the court held that a surety on a payment bond on a construction contract conditioned on the payment by the principal of all money due any claimant for labor or materials on the project, was not liable for attorney’s fees when the principal defaulted as the fees were not due for labor or materials. While Can-Tec was in part based on statutory interpretation, it supports our result. Recently the Supreme Court of Ohio in Dean v. Seco Electric Co., 35 Ohio St.3d 203, 519 N.E.2d 837 (1988), considered a case in which a contractor had delivered a labor and material bond with language authorizing an action against the surety identical to that in the bond in this action. In Dean the principal had underpaid employees in violation of the prevailing wage statute. The court held that under the bond, statutory penalties for underpayment and attorney’s fees incurred by the employees in bringing the action could not be regarded as sums justly due. Thus, the surety was not liable for them. Dean is a compelling precedent.⁹

Further, our result is consistent with F.D. Rich Co. v. United States, 417 U.S. 116, 94 S.Ct. 2157, 40 L.Ed.2d 703 (1974), in which the Supreme Court determined that under federal law a Miller Act bond posted by a contractor to protect persons supplying labor and material did not authorize an award of attorney’s fees when the contractor failed to make payment even though the plaintiff was entitled to recover such sum as was “justly due.” 40 U.S.C. § 270b(a). The court noted that a contrary result in the context of everyday commercial litigation would have obviated the American rule that each litigant must bear the cost of its own legal representation. 417 U.S. at 130-31, 94 S.Ct. at 2165-66. While Rich is not binding on us as we decide this case under Pennsylvania law, it nevertheless is extremely instructive. Certainly the reasoning in Rich is directly contrary to that of the district judge. We also point out that we have previously predicted in another context that the Supreme Court of Pennsylvania in announcing Pennsylvania law would follow the Supreme Court of the United States. Aloe Coal Co. v. Clark Equipment Co., 816 F.2d 110, 117-19 (3d Cir.), cert. denied, — U.S. -, 108 S.Ct. 156, 98 L.Ed.2d 111 (1987). We think it would here as well.

The order of November 18, 1987 will be affirmed and the order of March 16, 1988 will be reversed. The matter is remanded to the district court for further proceedings consistent with the opinion.

1 . The Ambrose-Knecht contract was on a printed Ambrose form and provided that Ambrose was entering its order for materials, equipment and/or services to be performed pursuant to the contract documents prepared by the architect and engineer as part of the “contract between WJ. AMBROSE, INC. and Knecht, Inc. (hereinafter referred to as PRINCIPAL CONTRACT) and hereby become a part of the Contract as if set forth at length attached hereto.” United contends that notwithstanding this reference to the Ambrose-Knecht contract, it was the Sordo-ni-Ambrose contract which was incorporated. Knecht disputes this, contending that the Amb-rose-Knecht contract means what it says. While undoubtedly there is a dispute of fact on this point, for purposes of this appeal we accept United’s contention which seems to be accurate as under Knecht’s interpretation the Ambrose-Knecht contract incorporated itself. Thus, in view of our result, the dispute of fact is not material.

2 . The judge also ordered that a hearing would be held on Knecht’s claim for punitive damages but this claim was later dismissed on United’s motion. Knecht has not cross-appealed from the order denying punitive damages.

3 . We also note that under the Pennsylvania Mechanic’s Lien Law of 1963 Knecht did not have standing to file a lien. See Pa.Stat.Ann. tit. 49, §§ 1201(6), 1303(a) (Purdon 1965).

4 . United does not contend in its brief on this appeal that Sordoni did not consent to the Amb-rose-Knecht sub-subcontract. In any event, it is clear that Sordoni was aware of the Ambrose-Knecht sub-subcontract and it does not assert in its brief that it objected to it.

5 . United also relies on Central Contracting Co. v. Maryland Casualty Co., 242 F.Supp. 858 (W.D. Pa. 1965), aff’d, 367 F.2d 341 (3d Cir.1966), but we find that case somewhat tangential as it simply deals with whether a forum selection provision in a subcontract should be available to a surety sued by a subcontractor in a situation which the surety was expressly mentioned in the subcontract.

6 . We note that in his dissent Judge Cowen relies, inter alia, on Dravo-Doyle Co. v. Royal Indemnity Co., 372 Pa. 64, 92 A.2d 554 and Van Cor, Inc. v. American Casualty Co., 417 Pa. 408, 208 A.2d 267 (1965). See dissent at 82-83. We have already explained why Dravo-Doyle is not inconsistent with our result. See above, at 78. VanCor is also not inconsistent as it simply holds, insofar as germane here, that a surety under a bond guaranteeing performance of a contract which became part of the bond, will not be liable to an entity making a claim under the bond for delay damages when the entity is not entitled to make a direct claim against the principal for such damages.

7 . A trial was held on December 7, 1987 on the issue of whether Knecht should be awarded attorney’s fees and if so the amount. The evidence, however, seems to have been directed primarily to the quantum of fees rather than United’s liability for them. Following the trial the parties submitted proposed findings of fact and conclusions of law. The findings of the court awarding the fees were set forth in its order of March 16, 1988 which simply recited ‘‘[t]he Court’s decision to award attorneys' fees is predicated on the language of the subject labor and material bond which allows for recovery of all ‘sums ... justly due.’ Under the circumstances presented, the Court finds that the plaintiff would not be made whole, nor would recover all ‘sums justly due,’ unless the Court required the defendant to reimburse the plaintiff for the attorney's fees it incurred on the prosecution of this litigation." We regard this holding as essentially a legal conclusion as it is obvious that a litigant who expends money to recover a debt is not made whole absent recovery of its attorney's fees. Thus, our review is plenary. United States v. Adams, 759 F.2d 1099, 1106 (3d Cir.), cert. denied, 474 U.S. 906, 971, 106 S.Ct. 275, 336, 88 L.Ed.2d 236, 321 (1985). Further, this is not a case in which the court interpreted ambiguous language to arrive at a meaning. See Ram Construction Co. v. American States Ins. Co., 749 F.2d 1049, 1052 (3d Cir.1984). But even if we reviewed the matter under a clearly erroneous standard, our result would not be different.

8 .Knecht on this appeal does not'rely on 42 Pa.Cons.Stat. Ann. § 2503 (Purdon 1981).

9 . The Dean court was sharply divided but the dissenters, though contending that the bond in-eluded an obligation for the statutory penalties, never mentioned attorney’s fees.