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U.S. Estates, Inc. v. American Safety Casualty Insurance Company

June 28, 2010

U.S. ESTATES, INC., PLAINTIFF-RESPONDENT/ CROSS-APPELLANT,
v.
AMERICAN SAFETY CASUALTY INSURANCE COMPANY, INC.,*FN1 DEFENDANT/THIRD-PARTY PLAINTIFF-RESPONDENT, AND COMMERCE INSURANCE SERVICES, INC., DEFENDANT/THIRD-PARTY PLAINTIFF-RESPONDENT/ CROSS-APPELLANT,
v.
ATLANTIC UNDERWRITING GROUP, INC., THIRD-PARTY DEFENDANT, AND
BOGEY'S TRUCKING & PAVING, INC., PLAINTIFF/INTERVENOR -APPELLANT,
v.
RAY PERSIA, U.S. ESTATES, INC., PERSIA HOMES, AND U.S. ESTATES, LLC, DEFENDANTS-RESPONDENTS/CROSS-APPELLANTS.



On appeal from Superior Court of New Jersey, Law Division, Camden County, Docket No. L-1339-06.

Per curiam.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Submitted October 1, 2009

Before Judges Fisher and Espinosa.

Plaintiff U.S. Estates, Inc. (U.S. Estates) was required by the planning board of the Township of Gloucester (the Township) to post a performance bond for the public improvements portion of a residential development. However, the escrow agent approved by the surety misappropriated the escrowed funds and this litigation followed. The appeal and cross-appeals here concern three summary judgment orders. U.S. Estates appeals from a December 13, 2007 order that dismissed its complaint against American Safety Casualty Insurance Company, Inc. (American Safety), the surety that approved the escrow agent, and a February 29, 2008 order that dismissed its complaint against Commerce Insurance Services, Inc. (Commerce), the broker that procured the performance bond. Commerce cross-appeals from that portion of the court's February 29, 2008 decision holding that it owed a duty to U.S. Estates. The subcontractor, plaintiff Bogey's Trucking and Paving, Inc. (Bogey's), appeals from an order dated June 20, 2008 that denied summary judgment to Bogey's on its claim for the unpaid amount due and granted summary judgment to U.S. Estates, dismissing Bogey's complaint. We affirm in part and reverse in part.

Defendant Ray Persia is a part owner in U.S. Estates, a general contractor. In 2003, Persia acquired land on behalf of U.S. Estates, that he intended to subdivide into a residential development in Gloucester Township. Before he began the site approval process, Persia executed a contract, dated November 28, 2003, that identified the parties as "Ray Persha [sic] as Contractor and Bogey's Trucking & Paving, Inc. as Subcontractor" for Bogey's to perform nine phases of specified work, totaling $350,903 for the project, and specifying discrete payment amounts for each phase of work. The contract required "Contractor [to] pay Subcontractor for its satisfactory performance within 5 days after completion of each Project Phase." Bogey's sent invoices to Ray Persia from January 29, 2004 through June 19, 2006 totaling $370,168.50 and received payments of $166,300 directly from U.S. Estates and Persia Homes in the following amounts on the following dates:

1/19/04$4,000 2/24/0437,300 3/9/0420,000 4/13/0485,000 3/6/0610,000 6/15/0610,000

Bogey's claims that it is owed $203,868.50 for its work. At his deposition, Persia testified that because Bogey's did not complete the project, the balance owed to Bogey's was only $80,000.

Bogey's did not require Persia or U.S. Estates to post a performance bond or escrow any funds to guarantee payment of the contract amounts. In fact, Donald Bogey testified that he never had a conversation with Persia about the requirement imposed by American Safety for him to place the contract money in escrow to obtain a bond. Bogey's commenced work on the project before any bond was secured.

However, when U.S. Estates went to the Township planning board for site approval hearings in 2004, the Township required U.S. Estates to post a performance bond for the public improvements portion of the development before site work could begin. The purpose of the bond was to ensure that if U.S. Estates defaulted, the bonding company would pay for the work to be completed. Because U.S. Estates was a new company with a limited financial history and inexperienced with subdivision development, it encountered significant difficulties in obtaining the performance bond. At some point, the Township issued a stop work order, requiring U.S. Estates to cease construction until it obtained the required bond.

U.S. Estates approached a broker, Commerce, to procure the bond. At Commerce's recommendation, U.S. Estates deposited $280,000 at Commerce Bank*fn2 to cover payments to Bogey's. Still, Commerce experienced difficulty as well and approached another broker, Atlantic Underwriting Group, Inc. (Atlantic) for additional help in obtaining the bond.

In April 2004, after more than four months of attempts to obtain a bond, the performance bond was successfully placed with a surety, American Safety, with certain conditions. In the underwriting process, American Safety was concerned that U.S. Estates did not have formal financial statements that provided bank statement documentation. Matthew Semeraro, an underwriter with American Safety, explained, "We felt that in order for the improvements to be completed, there needed to be an administrator over those funds to disburse them as work was completed and verified, so that's the reason why we chose to go with the funds control." So, although U.S. Estates had deposited $280,000 at a commercial bank, American Safety required that the funds be placed in escrow with an administrator that it approved. In addition, U.S. Estates was required to execute a General Agreement of Indemnity in which it agreed to indemnify American Safety from any loss arising out of the issuance of the bond.

The parties to the performance bond were American Safety, U.S. Estates and the Township. The performance bond provided that, in the event that the Township declared U.S. Estates to be in default in completing the site improvements for the development, American Safety was obliged to complete the project. The bond also states, "No right of action shall accrue on this bond to or for the use of any person or corporation other than" the Township.

The funds administrator approved by American Safety was Funds Administration Services, Inc. (FAS), an established company in the business of acting as a funds control administrator for commercial sureties. No negative information about FAS was known at the time.

A Funds Administration Agreement (the FAS Agreement), dated May 20, 2004, stated that it was an agreement among Bogey's, the "Subcontractor", U.S. Estates, the "General Contractor", and FAS, the "Funds Administrator". Although not a party to the FAS Agreement, American Safety was identified as the "Surety." Commerce was not a party to the FAS Agreement and had no rights or obligations pursuant to its terms.

Donald Bogey, the sole shareholder and President of Bogey's did not execute the FAS Agreement. He testified that he did not authorize anyone to sign the FAS Agreement on Bogey's behalf and that he saw it for the first time at his deposition. Jim DeLorenzo executed the FAS Agreement, purportedly on behalf of Bogey's. However, Donald Bogey testified that DeLorenzo was a pipe foreman who was not authorized to sign contracts on behalf of Bogey's; that DeLorenzo never told Bogey about the FAS Agreement; and that he was discharged in 2005 because he was taking material out of the yard.

The FAS agreement provided a mechanism for the payment of funds due to Bogey's under its contract from funds deposited by U.S. Estates with FAS and granted certain rights to American Safety. U.S. Estates was required to forward all funds due under the subcontract with Bogey's to FAS for deposit in a commercial checking account at the Bank of America (the Funds Administration Account). FAS was the sole signatory for the Funds Administration Account and was authorized to disburse funds to Bogey's upon receipt of properly submitted documentation. In the event of a default by Bogey's or conflicting demands regarding the contract funds, ¶ 6.2.0 provided that "all funds... shall be disbursed only with the written consent of Surety." FAS was required by ¶ 8.2.0 to maintain adequate records of contract funds received and disbursed and to permit inspection by U.S. Estates, Bogey's or American Safety. ¶ 8.4.0 identified FAS's obligations regarding insurance:

Funds Administrator agrees to maintain a policy of insurance protecting Subcontractor, General Contractor and Surety from errors and omissions on its part in performing obligations pursuant to this Agreement; further, Funds Administrator agrees to obtain fidelity type insurance protecting itself from acts of dishonesty, intentional fraud and criminal or malicious acts relating to its performance of its obligations pursuant to this Agreement. Funds Administrator will provide evidence of said coverage to both Contractor and Surety upon request.

Therefore, only American Safety and U.S. Estates - and not Bogey's - had the right to request evidence of insurance coverage from FAS. The record is silent as to whether any request for such evidence was ever made or whether the insurance was secured.

Bogey's alleged consent to the terms of the FAS Agreement is memorialized in the following paragraphs:

4.0.0 Subcontractor desires that Funds Administrator receive and disburse all funds paid by General Contractor to Subcontractor for or on account of Project under the Contract, including all progress payments, retainage, bonuses, change orders, claims, equitable or other adjustments, or any other sums payable in connection with the Project ("Contract Funds").

4.1.0 Subcontractor hereby specifically requests that Funds Administrator provide the services contemplated in this Funds Administration Agreement ("Agreement"), and acknowledges that Subcontractor will receive benefit therefrom and that Funds Administrator, by virtue of its performance of the Funds Administration Agreement, shall in no way be construed to interfere with Subcontractor's business, any agreement, written or oral, Subcontractor may enter into in connection with the Contract, the Project or Subcontractor's performance of the work contemplated by the Contract ...


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