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Great American Insurance Co. v. Norwin School District

September 29, 2008

GREAT AMERICAN INSURANCE CO.
v.
NORWIN SCHOOL DISTRICT
v.
SHOFF CONSTRUCTION AND DESIGN, INC. FOREMAN PROGRAM & CONSTRUCTION MANAGERS, INC. FOREMAN PROGRAM & CONSTRUCTION MANAGERS, INC., APPELLANT



On Appeal from the United States District Court for the Western District of Pennsylvania District Court No. 04-cv-01148 District Judge: The Honorable Terrence F. McVerry.

The opinion of the court was delivered by: Stafford, District Judge.

PRECEDENTIAL

ARGUED May 20, 2008

Before: SMITH and NYGAARD, Circuit Judges, and STAFFORD, District Judge.*fn1

OPINION

Third-Party Defendant, Foreman Program & Construction Managers, Inc. ("Foreman"), appeals from a judgment entered in favor of Third-Party Plaintiff, Norwin School District ("Norwin"), on Norwin's breach of contract claim against Foreman. We vacate the District Court's judgment and remand to the District Court with directions to enter judgment in Foreman's favor.

I. FACTS

Our trek through the factual morass from which this case arose begins in 2001, when Norwin undertook two public school construction projects. These two projects spawned, inter alia, four contracts and two payment bonds, namely: (1) two construction contracts, under which Shoff Construction and Design, Inc. ("Shoff"), agreed to serve as the general contractor for the two projects, one for the construction of a new Sheridan Terrace Elementary School and one for renovations and additions to Hillcrest Intermediate School, both in North Huntingdon, Pennsylvania; (2) an architectural services contract, under which N.J. Cunzolo & Associates, Inc. ("Cunzolo"), agreed to serve as architect for the two projects; (3) a construction management services contract, under which Foreman agreed to perform construction management services for the two projects; and (4) two payment bonds,*fn2 one on each project, issued by Great American Insurance Company ("GAIC") as surety on behalf of Shoff as principal and in favor of Norwin as obligee.

A. The Norwin-Foreman Construction Management Contract

Norwin and Foreman entered into a construction management contract (the "CM Contract") on August 20, 2001, using the American Institute of Architects ("AIA") standard form B801/Cma--1992, entitled "Standard Form of Agreement Between Owner and Construction Manager." As noted on the cover page of the agreement, Form B801/Cma--1992 was intended to be used in conjunction with the 1992 edition of AIA standard form B141/Cma, entitled "Standard Form of Agreement Between Owner and Architect." Both forms incorporated by reference standard form A201/Cma--1992, entitled "General Conditions of the Contract for Construction" ("General Conditions"). The lump sum fee to be paid Foreman for its services under the CM Contract was $807,168.00 ($391,408.00 for Sheridan and $415,760.00 for Hillcrest).

The CM Contract required Foreman to act as a joint adviser (with Cunzolo, the architect) to Norwin throughout the Sheridan and Hillcrest projects. During the pre-construction phase of the projects, Foreman was required to assist Norwin in a number of tasks, including selection of the project contractors and preparation of the construction contracts. Once the construction contracts were awarded, Foreman was responsible for administering those contracts in cooperation with Cunzolo as set forth in Form A201/Cma.

Among other things, Foreman was required to review Shoff's applications for progress and final payments. Based on Foreman's observations of the work performed and evaluations of Shoff's applications for payment, Foreman was required to certify the amounts to be paid to Shoff by Norwin. As stated in Article 2.3.11.3 of the CM Contract, Foreman's certification constituted "a representation to [Norwin] . . . that the Work ha[d] progressed to the point indicated and the quality of the Work [wa]s in accordance with the Contract Documents." Under Article 2.3.11.4, the issuance of a certificate of payment was not a representation that Foreman had "(1) reviewed construction means, methods, techniques, sequences for [Shoff]'s own Work, or procedures, (2) reviewed copies of requisitions received from Subcontractor and material suppliers and other data requested by [Norwin] to substantiate [Shoff]'s right to payment, or (3) ascertained how or for what purpose [Shoff] ha[d] used money previously paid on account of the Contract Sum." Indeed, Article 4.7 provided that Norwin, not Foreman, was responsible for furnishing any services necessary "to ascertain how or for what purposes [Shoff] ha[d] used the money paid by or on behalf of [Norwin]." In other words, before issuing a certificate for payment, Foreman was required to verify the quality and quantity of Shoff's work but not the appropriateness of Shoff's expenditure of monies.

B. The Norwin-Cunzolo Architectural Services Contract

Cunzolo and Norwin entered into an architectural services contract (the "AS Contract") using Form B141/Cma, the Form intended to be used in conjunction with Foreman's CM Contract. Like the CM Contract, the AS Contract incorporated by reference the General Conditions set forth in form A201/Cma.

In addition to design services, Cunzolo agreed to perform construction administration tasks in cooperation with Foreman. Among other things, Cunzolo-like Foreman-was required under the terms of the AS Contract to review and certify the amounts due to Shoff. In particular, at the time of final completion of the projects, Cunzolo was required-under Article 2.6.14 of the AS Contract-to issue "a final Project Certificate for Payment upon compliance with the requirements of the Contract Documents." As stated in Article 2.6.9.1, Cunzolo's certification constituted "a representation to [Norwin] . . . that . . . the work ha[d] progressed to the point indicated and the quality of the Work [wa]s in accordance with the Contract Documents." Under Article 2.6.9.2, Cunzolo's certification was not a representation that Cunzolo (1) "made exhaustive or continuous on-site inspections to check the quality or quantity of the Work, (2) reviewed construction means, methods, techniques, sequences or procedures, (3) reviewed copies of requisitions received from Subcontractors and material suppliers, or (4) ascertained how or for what purpose [Shoff] ha[d] used money previously paid on account of the Contract Sum." Like Article 4.7 in the CM Contract, Article 4.9 in the AS Contract made it Norwin's responsibility to provide all necessary services-including auditing services-"to verify [Shoff's] Application for Payment or to ascertain how or for what purposes [Shoff] ha[d] used the money paid by or on behalf of [Norwin]." As was the case for Foreman, Cunzolo was required to verify the quality and quantity of Shoff's work before issuing a certificate of payment, but he was not required to verify the appropriateness of Shoff's expenditure of monies.

C. The Norwin-Shoff Construction Contracts

Norwin and Shoff entered into the Sheridan and Hillcrest construction contracts (collectively the "Shoff Contracts") on February 18, 2002, and April 17, 2002, respectively, using the AIA standard form A101/CMa, entitled "Standard Form of Agreement Between Owner and Contractor." The Shoff Contracts specifically incorporated not only form A201/CMa, containing the General Conditions applicable to construction contracts, but also document 00800, entitled "Supplementary Conditions."*fn3 The contract price of the Sheridan project was $3,750,700.00; the contract price of the Hillcrest project was $5,422,400.00.*fn4

Each of the Shoff Contracts required Norwin to make monthly progress payments to Shoff based upon "Applications for Payment" submitted by Shoff to Foreman and upon "Certificates for Payment" issued to Norwin by Foreman and Cunzolo. The amounts requested in each Application for Payment were required to be based upon a "Schedule of Values" that allocated the entire contract sum among the various portions of the work to be done. Upon receipt of an Application for Payment, Foreman was required to forward the application to Cunzolo. If Foreman and Cunzolo were both satisfied with the amounts requested in the Application for Payment, they issued a Certificate for Payment-signed by each-to Norwin.

Consistent with provisions in both the CM Contract and the AS Contract, the Shoff Contracts-through Article 9.4.3 of the General Conditions-provided that the issuance of a Certificate for Payment constituted "representations made separately by [Foreman] and [Cunzolo] to [Norwin], based on their individual observations at the site and the data comprising the Application for Payment submitted by [Shoff], that the Work ha[d] progressed to the point indicated and that, to the best of [Foreman]'s and [Cunzolo]'s knowledge, information and belief, quality of the Work [wa]s in accordance with the Contract Documents." Also consistent with the CM Contract and the AS Contract, Article 9.4.3 of the General Conditions provided that a Certificate for Payment did not constitute a representation that Foreman or Cunzolo "(1) made exhaustive or continuous on-site inspections to check the quality or quantity of the Work, (2) reviewed [Shoff's] construction means, methods, techniques, sequences or procedures, (3) reviewed copies of requisitions received from Subcontractors and material suppliers and other data requested by [Norwin] to substantiate [Shoff]'s right to payment, or (4) made examination to ascertain how or for what purpose [Shoff] ha[d] used money previously paid on account of the Contract Sum."

Until the work was fifty percent (50%) complete, Norwin was required under Article 5.6.1 of the Shoff Contracts to retain ten percent (10%) from its monthly payments as security against Shoff's performance. Article 5.7.1 in each of the Shoff Contracts provided that, upon "Substantial Completion" of the work, progress payments were to be modified by adding "a sum sufficient to increase the total payments to ninety-five percent (95%) of the Contract Sum, less such amounts as [Foreman] recommends and [Cunzolo] determines for incomplete Work and unsettled claims." The Sheridan contract, but not the Hillcrest contract, defined "Substantial Completion" to mean fifty percent (50%) completion. The Sheridan contract, but not the Hillcrest contract, further specified that retainage was to be reduced to five percent (5%) when the work was fifty percent (50%) complete.*fn5

Using somewhat different language, the Supplementary Conditions applicable to both contracts addressed the matter of retainage as follows:

9.3.6: The sum or sums withheld by [Norwin] from [Shoff] shall be 10 percent of the amount due [Shoff] until 50 percent of the Contract is completed. When the Contract is 50 percent complete, one-half of the amount retained by [Norwin] shall be released to [Shoff], provided that [Cunzolo] approves the Application for Payment; and provided further, that [Shoff] is making satisfactory progress and there is no specific cause for greater withholding.

9.3.7: The sum or sums withheld by [Norwin] from [Shoff] after the Contract is 50 percent completed shall not exceed 5 percent of the value of completed work based on monthly progress payment requests.

Article 6 in the Shoff contracts provided that "[f]inal payment, constituting the entire unpaid balance of the Contract Sum, shall be made by [Norwin] to [Shoff] when (1) the Contract has been fully performed by [Shoff] . . . and (2) a final Project Certificate for Payment has been issued by [Foreman] and [Cunzolo]." The parties' responsibilities with regard to final payment were explained in greater detail in the General Conditions:

9.10.1. Upon completion of the Work, [Shoff] shall forward to [Foreman] a written notice that the Work is ready for final inspection and acceptance and shall also forward to [Foreman] a final Contractor's Application for Payment. Upon receipt, [Foreman] will forward the notice and Application to [Cunzolo] who will promptly make such inspection. When [Cunzolo], based on the recommendation of [Foreman], finds the Work acceptable under the Contract Documents and the Contract fully performed, [Foreman] and [Cunzolo] will promptly issue a final Certificate for Payment stating that to the best of their knowledge, information and belief, and on the basis of their observations and inspections, the Work has been completed in accordance with terms and conditions of the Contract Documents and that the entire balance found to be due [Shoff] and noted in said final Certificate is due and payable.

The General Conditions further provided that the final Certificate for Payment constituted a "representation that conditions listed in Subparagraph 9.10.2 as precedent to the Contractor's being entitled to final payment have been fulfilled." Subparagraph 9.10.2 of the General Conditions provided that "[n]either final payment nor any remaining retained percentages shall become due" until Shoff submitted to Cunzolo through Foreman certain documents, including, inter alia, (1) "an affidavit that payrolls, bills for materials and equipment, and other indebtedness connected with the Work for which [Norwin] or [Norwin]'s property might be responsible or encumbered . . . ha[d] been paid or other wise satisfied;" and (2) "consent of surety, if any, to final payment."

C. The Payment Bonds

As required under Pennsylvania law and Article 11.4.1 of the Supplementary Conditions, Shoff was required to procure payment bonds for the two school projects, each in the amount of one hundred percent (100%) of the contract price. Shoff obtained the required payment bonds from GAIC.*fn6 Under paragraph 1 in each of the payment bonds, GAIC and Shoff agreed to jointly and severally bind themselves to Norwin "to pay for labor, materials and equipment furnished for use in the performance of the Construction Contract, which is incorporated herein by reference." Paragraph 8 in each of the two bonds states: "By [Shoff] furnishing and [Norwin] accepting this Bond, they agree that all funds earned by [Shoff] in the performance of the Construction Contract are dedicated to satisfy obligations of [Shoff] and [GAIC] under this Bond, subject to [Norwin]'s priority to use the funds for the completion of the work."

To obtain the bonds, Charles and Melanie Shoff signed an "Agreement of Indemnity"-dated July 26, 2001-under which they agreed to indemnify GAIC for any losses and expenses arising from issuance of the bonds. In addition, on March 25, 2004, the Shoffs executed a loan and collateral security agreement, which provided, inter alia, that "as of the date of this agreement, there were in excess of $750,000.00 in accrued debts owed to the equipment, labor and materials suppliers relating to the [bonded] Projects," and "[the Shoffs] have requested financial assistance from [GAIC] to enable [Shoff] to meet its financial obligations and complete its bonded construction projects that have not been terminated." GAIC obtained a mortgage on the Shoff's personal property as collateral security on the loan note.

D. The Payments

Shoff received eighteen (18) progress payments on the Sheridan project and seventeen (17) progress payments on the Hillcrest project. For each payment, Shoff submitted Applications for Payment, designating both the contract sum earned to date and the amount of retainage-expressed both as a percentage and a dollar amount-to be subtracted from the total earned. In each case, Shoff obtained a Certificate of Payment from Foreman and Cunzolo and received payment from Norwin with the designated retainage subtracted. At the time of each payment, Shoff, Foreman, Cunzolo, and Norwin were all aware of the amounts-in terms of dollars and percentages-being retained from the payments due.

On the Sheridan project, Shoff designated ten percent (10%) retainage on the first six of its Applications for Payment. On the next nine Applications for Payment, when the work was fifty percent (50%) or more completed, Shoff designated five percent (5%) retainage. On Application No. 16, when work completed to date totaled $3,652,547.49 (ending contract price was $3,731,574.00), Shoff designated retainage of two and a half percent (2.5%). On Application Nos. 17 and 18, Shoff reduced retainage to less than one percent (0.67%).

On the Hillcrest project, Shoff designated ten percent (10%) retainage on the first five of its Applications for Payment. On the next seven Applications for Payment, when the work was fifty percent (50%) or more complete, retainage was at or near five percent (4.75% to 5%). On Application No. 16, when work completed to date was estimated at a total of $5,649,902.51 (ending contract price was, in fact, $5,615,267.11), Shoff designated retainage of three and a half percent (3.5%). On Application No. 17, retainage was reduced to two percent (2%).

Each time Shoff submitted an Application for Payment, Charles Shoff, as President of Shoff, certified as follows:

[T]o the best of the Contractor's knowledge, information and belief the work covered by this application for Payment has been completed in accordance with the Contract Documents, that all amounts have been paid by Contractor for Work for which previous Certificates for Payment were issued and payments received from the owner, and that current payment shown herein is now due.

Shoff's certifications were sworn and notarized. As provided in Article 9.4.3 of the General Conditions, Foreman had no duty to "ma[k]e examination to ascertain how or for what purpose [Shoff] ha[d] used money previously paid on account of the Contract Sum."

Shoff submitted its final Applications for Payment for Sheridan on September 4, 2003, and for Hillcrest on November 24, 2003. Shoff requested a final payment of $24,961.17 for Sheridan and $78,362.65 for Hillcrest. On the Sheridan project, Foreman and Cunzolo both signed the final Certificate of Payment in the amount of $19,961.17, $5000.00 less than was requested. On the Hillcrest project, Foreman, but not Cunzolo, signed the final Certificate of Payment in the amount of $78,362.65.

With its final Applications for Payment, Shoff transmitted affidavits-one each for the two projects-to Foreman, indicating that all of Shoff's debts relating to the two projects had been paid. Specifically, on AIA form G706, "Contractor's Affidavit of Payment of Debts and Claims," Shoff certified that "payment has been made in full and all obligations have otherwise been satisfied for all materials and equipment furnished, for all work, labor, and services performed, and for all known indebtedness." On the Affidavit forms were boxes for Shoff to check, indicating whether the "Consent of Surety to Final Payment" was or was not attached.*fn7 Shoff checked neither box, and the Consent of Surety to Final Payment was not attached.

Foreman admitted that it did not obtain the consent of surety before certifying Shoff's final Application for Payment on both projects. Foreman explained that it signed and submitted the Final Certificates for Payment without the consent of surety because (1) it had not experienced any problems with Shoff on past projects, (2) Shoff's performance on the Sheridan and Hillcrest projects-both in terms of timeliness and quality-had been very good, (3) Shoff had met its obligations with regard to final punch list items, (4) contractors and subcontractors generally want to be paid promptly, (5) Norwin's board met only once in a 30-day period to approve and issue payments, (6) Foreman wanted to get the Final Certificates for Payment "in the works" so that those certificates could be submitted at the next school board meeting, and (7) Shoff had indicated that the surety's consent would be forthcoming.

Unknown to Foreman, and despite certifications and affidavits to the contrary, Shoff failed to pay all of its debts to subcontractors and suppliers, resulting in liens that were not disclosed to Foreman, Cunzolo, or Norwin. Shoff's President, Charles Shoff ("Charles Shoff"), explained at trial that, while the payments his company received from Norwin were used to pay subcontractors and vendors, the jobs "lost $800,000," meaning "there wasn't enough money to pay" all of the debts. Indeed, it appears that some of the subcontractors and suppliers had begun making claims against the payment bonds before Shoff made its final Applications for Payment, a fact that was communicated to neither Foreman nor Norwin.*fn8 It was not until July 1, 2004-many months after Shoff submitted its final Applications for Payment on September 4, 2003 (Sheridan), and November 24, 2003 (Hillcrest)-that GAIC informed Norwin that it had received bond payment claims totaling nearly $800,000.00, roughly the same amount that Shoff said was "lost" on the projects.

II. PROCEEDINGS

A. The Claims

Invoking the District Court's diversity jurisdiction, GAIC filed suit against Norwin on August 4, 2004, alleging that Norwin breached both of the Shoff Contracts by failing to obtain GAIC's consent before making final payments to Shoff. According to GAIC, the final payment under each of the contracts should have been equal to five percent (5%) of the contract price, the amount of retainage allegedly required at the time of final payment. As alleged by GAIC, "[Norwin's] failure, as . . . bond obligee and stakeholder, to obtain [GAIC's] consent prior to paying Shoff, impaired [GAIC's] security to the extent that the retainage was improperly paid." Under the doctrine of ...


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