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Knecht Inc. v. United Pacific Insurance Co.

argued: August 29, 1988.


On Appeal from the United States District Court for the Eastern District of Pennsylvania, D.C. Civ. No. 86-2977.

Sloviter, Greenberg and Cowen, Circuit Judges.

Author: Greenberg


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. Mead 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 effect. . . . "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:


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 subsubcontractors 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 subsubcontractor 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.*fn1

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 Ambrose 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.*fn2 On December 7, 1987 the judge took testimony on the issue of attorney's fees. On March 16, 1987 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 Sordoni. 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 prothonotary'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.*fn3 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 "[w]hat 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 , 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.*fn4 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 L. Ed. 2d 46 (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 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 , 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.*fn5 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. ...

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