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American Contractors Indemnity Co. v. United States

June 29, 2009

AMERICAN CONTRACTORS INDEMNITY COMPANY, PLAINTIFF-APPELLANT,
v.
UNITED STATES, DEFENDANT-APPELLEE.



Appeal from the United States Court of Federal Claims in 07-CV-374, Judge Margaret M. Sweeney.

The opinion of the court was delivered by: Dyk, Circuit Judge

Before NEWMAN, SCHALL, and DYK, Circuit Judges.

American Contractors Indemnity Company ("ACIC") filed a complaint under the Tucker Act, 28 U.S.C. § 1491(a)(1), against the United States seeking damages for an alleged breach of contract by the Small Business Administration ("SBA"). On the government's motion, the Court of Federal Claims dismissed ACIC's complaint for failure to state a claim upon which relief could be granted. Am. Contractors Indem. Co. v. United States, 81 Fed. Cl. 682, 693 (2008). We reverse and remand.

The question here is whether the SBA is liable under a security bond guarantee agreement. In particular, the question is whether the SBA's obligation is voided because the plaintiff surety, ACIC, agreed to an amendment of the underlying bond, and the amendment has an effective date before the date of the SBA's approval of the amendment.

BACKGROUND

ACIC is a California company that acts as surety for the performance of construction contracts by issuing performance and payment bonds. In 2002, DiGiovanni Insulation and Refractory, Inc. ("DiGiovanni"), a construction company, applied to ACIC for performance and payment bonds to guarantee its completion of a construction project in New Orleans, Louisiana, for Steve Ho, owner of the Hoshun Chinese Cuisine restaurant.

Because DiGiovanni could not otherwise qualify for commercial surety bonds, it applied to participate in the SBA's bond guarantee program. As a general matter, the SBA will enter into bond guarantee agreements with sureties if the principal for whom the bond is sought is a "small business concern" that cannot otherwise obtain commercial bonds and the bond is for less than $5,000,000. See generally 15 U.S.C. § 694b. DiGiovanni qualified for the SBA program as a small business concern, and on September 27, 2002, ACIC and the SBA entered into a written Surety Bond Guarantee Agreement ("Guarantee Agreement"). Under the Guarantee Agreement, the SBA agreed to reimburse 80% of any loss by ACIC on SBA-approved bonds issued for the project, "subject to the regulations in 13 CFR [§] 115." One of the incorporated provisions was 13 C.F.R. § 115.19(e), entitled "Denial of Liability[:] Alteration." That section provided that the SBA is not liable under a bond guarantee agreement if [w]ithout obtaining prior written approval from SBA . . . , the Surety agrees to or acquiesces in any material alteration in the terms, conditions, or provisions of the bond, including . . . acquiescing in any alteration to the bond which would increase the bond amount by at least 25% or $50,000.

13 C.F.R. § 115.19(e) (emphasis added).

On October 4, 2002, ACIC issued performance and payment bonds for DiGiovanni, each with a penal sum equal to the construction contract price of $1,781,850. DiGiovanni then commenced work. On March 24, 2003, DiGiovanni and the owner of the project agreed in a written "Change Order" to modify the work to be done, resulting in a contract price increase of $240,000. On May 19, 2004, ACIC submitted to the SBA a revised Guarantee Agreement in the amount of $2,021,850. The SBA approved the increased bond on June 2, 2004.

At some point, DiGiovanni and ACIC also agreed to a rider modifying the bonds with an effective date of March 24, 2003. While the effective date stated on the rider was before the SBA's approval, the date that DiGiovanni and ACIC reached agreement on the bond modification is disputed. The parties differ as to whether the agreement was reached before or after the SBA approved the increase.

In or around July 2004, ACIC received notice that DiGiovanni had defaulted on the project; claims were then made on the bonds by the project owner and DiGiovanni's suppliers and subcontractors. ACIC investigated and settled the claims, incurring a net loss of over half a million dollars. ACIC timely notified the SBA of the claims and submitted requests for payment pursuant to the Guarantee Agreement. After investigating ACIC's requests, however, the SBA refused to reimburse ACIC for its loss on the bonds. In a final decision dated May 4, 2007, the SBA concluded that "ACIC acquiesced in the bond amount [increase] of $240,000.00 prior to obtaining the approval of SBA as required by 13 CFR § 115.19(e)" and that, as a result, the SBA would not "honor this claim or any other claim arising out of the DiGiovanni default."

On July 12, 2007, ACIC filed a complaint in the Court of Federal Claims seeking recovery under the Guarantee Agreement. In response, the government filed a "Motion to Dismiss" for failure to state a claim. Attached to the motion were two exhibits not attached to ACIC's complaint. The first exhibit was a document on ACIC letterhead entitled "Surety Rider" with a stated effective date of March 24, 2003. The Surety Rider stated that the DiGiovanni bond would be increased pursuant to the "changed order of $240,000.00" to $2,021,850. The document was signed by Macharl S. Zwart of the Martin Insurance Agency, as agent for ACIC. The second exhibit was a copy of the revised Guarantee Agreement, indicating that it was received by the SBA on May 19, 2004, and approved on June 2, 2004. Relying on the two documents, the government argued:

ACIC offers no evidence that . . . prior written approval was received for the $240,000 change in the bond amount as of its effective date, March 24, 2003. . . . Thus, because . . . ACIC materially altered the bond through increasing it by $240,000 without SBA's prior approval, the SBA properly determined that it was not liable, and ACIC has not articulated a basis for its breach of contract claim.

Def. Mot. Dismiss 5, Am. Contractors Indem. Co., 81 Fed. Cl. at 682 (No. 07-CV-003). In response, ACIC argued that dismissal was inappropriate because the documents submitted by the government did not prove that ACIC had agreed to the increase before June 2, 2004, since "it is common in the surety industry" to retroactively date bond increases to match a contract change order. The Court of Federal Claims rejected ACIC's argument and granted the motion to dismiss, holding that ACIC "failed to allege any facts suggesting that it submitted to the SBA a request for written approval before the bond was ...


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