Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca8-03-02425/USCOURTS-ca8-03-02425-0/pdf.json

Parties Involved:
Angelo Iafrate Construction
Appellee
Potashnick Construction
Not Party
Travelers Casualty and Surety Company
Appellant

Document Text:

United States Court of Appeals

FOR THE EIGHTH CIRCUIT

 ___________

 No. 03-2306

 ___________

Angelo Iafrate Construction, LLC, *

*

Plaintiff/Appellant, *

*

v. *

*

Potashnick Construction, Inc.; *

Travelers Casualty and Surety *

Company, *

*

Defendants/Appellees. *

 ___________

Appeals from the United States

 No. 03-2425 District Court for the

 ___________ Eastern District of Arkansas.

Angelo Iafrate Construction, LLC, *

*

Plaintiff/Appellee, *

*

v. *

*

Potashnick Construction, Inc., *

*

Defendant, *

*

Travelers Casualty and Surety *

Company, *

*

Defendant/Appellant. *

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The Honorable James M. Moody, United States District Judge for the Eastern

District of Arkansas.

2

We deny Travelers’ motion to strike portions of appellant’s brief.

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___________

Submitted: February 9, 2004

 Filed: June 1, 2004

___________

Before LOKEN, Chief Judge, BOWMAN, and WOLLMAN, Circuit Judges.

___________

WOLLMAN, Circuit Judge.

Angelo Iafrate Construction, LLC (Iafrate) appeals from the district court’s1

grant of Travelers Casualty and Surety Company’s (Travelers) motion for partial

summary judgment and the judgment entered in favor of Travelers after trial on the

remaining contract claims. Travelers cross-appeals, arguing that the district court

erred in entering a default judgment against Potashnick and abused its discretion

when it failed to award attorneys’ fees.2

 We affirm.

I.

The Arkansas State Highway Commission (the Commission) contracted with

Potashnick to do grading and structural work on three portions of highway, known

as Jobs 51, 52 and 53. Delay of the work on the second portion of the highway, Job

52, forms the basis of this dispute. The contracts incorporated the Arkansas Standard

Specifications for Highway Construction, Edition of 1991 (1991 Standard

Specifications). Aetna, now Travelers (as Aetna’s successor in interest), served as

surety for the contracts, signing performance and payment bonds for each of the jobs.

The Commission later contracted with T.L. James & Co., Inc., now Iafrate (as T.L.

James’ successor in interest), to complete base work and do surfacing work on the

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same portions of highway addressed in Potashnick’s contracts (Jobs 56 and 57). Job

56 included the segments from both Job 51 and Job 52.

Potashnick faced financial problems in 1997, and Travelers began receiving

notice of its difficulties in August 1997. Work at the contract site slowed to a halt,

and by December 31, 1997, Potashnick informed the state’s chief engineer that it

lacked the financial ability to continue Jobs 52 and 53. The Commission

acknowledged the voluntary default, and Travelers received the termination notice

in January 1998. The Commission issued a suspension order, as required by the

performance bond, allowing Travelers 60 days in which to prepare to resume work

on Job 52. The Commission granted Travelers an extension and ultimately delayed

the resumption of the assessment of working days until May 7, 1998. During the

suspension, Travelers hired Barrington Consulting, Inc. to negotiate with contractors

and to supervise the completion of the projects. Travelers hired several contractors

to complete different aspects of the work. The work was completed and accepted by

the Commission on July 24, 1998.

The Commission then assessed liquidated damages against Travelers as

specified in the Potashnick contracts. Travelers followed the administrative appeals

process and filed a complaint before the Arkansas State Claims Commission to seek

reassessment of the liquidated damages. The parties reached a settlement under

which Travelers paid $37,532.11, and its complaint was dismissed with prejudice.

The delay in work on Job 52 affected Iafrate’s ability to complete Job 56.

Iafrate therefore filed an administrative complaint against the Commission for delay

damages. A stay order was entered and the Commission negotiated an agreement

with Iafrate in which it assigned to Iafrate its rights as obligee under the performance

and payment bonds. Iafrate then filed a complaint against Travelers and Potashnick.

Potashnick failed to appear, and a clerk’s default was issued against it. Travelers

litigated the case, and the district court granted partial summary judgment in its favor,

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The Clerk entered default under Fed. R. Civ. P. 55(a) against Potashnick on

July 12, 2001; the district court entered default judgment under Fed. R. Civ. P.

55(b)(2) on April 29, 2003.

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holding that Iafrate’s theory of liability based on its contract rights as a third party

beneficiary failed as a matter of law and finding that there was no breach of an

implied contract. The remaining breach of contract claims proceeded to a bench trial,

following which the district court concluded that Travelers was not liable. The court

found that Iafrate had failed to show that Travelers “breached any duty under the

performance bond,” that Travelers had no duty under the bond to disclose its

knowledge of the principal’s potential financial difficulties prior to default, and that

once default had been declared, “Travelers took all reasonable steps to effect the

completion of the job in a timely manner.” D. Ct. Judgment of Sept. 19, 2002, at 12.

The district court later denied Travelers’ motion for attorneys’ fees. D.Ct. Order of

May 29, 2003.

Iafrate later moved for a default judgment against Potashnick, which the court

granted in the amount of $989,200.93.3

 Travelers filed an opposition to Iafrate’s

motion for judgment against Potashnick, arguing that the district court would be

taking an incongruous position if it found on the merits for Travelers but entered a

default judgment against the primary obligor, Potashnick. The district court

concluded in its order, however, “that the entry of default against Potashnick is not

inconsistent with the rulings of the Court regarding the liability of Separate

Defendant, Travelers. The facts which were presented at trial to exonerate Travelers

do not necessarily exonerate Potashnick on all claims.” D. Ct. Order of April 29,

2003.

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II.

This case is in federal court based on diversity jurisdiction. We conclude that

we have subject matter jurisdiction under the recent holding in GMAC Commercial

Credit LLC v. Dillard Dep’t Stores, 357 F.3d 827 (8th Cir. 2004), in which we held

that an LLC’s citizenship is the citizenship of its members. Id. at 829. Through

supplemental briefing, Iafrate has established that its two members, Angelo E. Iafrate

and Dominic Iafrate, are both citizens of Michigan. Because Travelers is

incorporated and has its principal place of business in Connecticut and Potashnick has

citizenship only in Missouri, diversity of citizenship exists under the holding

announced in GMAC. 28 U.S.C. § 1332. Arkansas law controls this diversity action.

See Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78 (1938).

A.

We review the district court’s grant of summary judgment de novo. Credit

Card Debt Solutions, Inc. v. Home Fed. Bank, 363 F.3d 805, 808 (8th Cir. 2004).

Summary judgment is appropriate if there is no genuine issue of material fact and the

movant is entitled to judgment as a matter of law. Id. We review the district court’s

factual findings for clear error and its legal conclusions de novo. Consolidated Elec.

& Mechs., Inc. v. Biggs Gen. Contracting, Inc., 167 F.3d 432, 434 (8th Cir. 1999).

We conclude that the district court properly disposed of these contract claims.

Iafrate contends that Travelers breached its performance bond obligations both

to the Commission, enforceable by Iafrate through assignment, and to Iafrate directly.

The performance bond is a contract signed by three parties: the Commission as the

obligee, Potashnick as the principal obligor, and Travelers as the secondary obligor.

Under the contract, Potashnick and Travelers owed a duty to the state to complete

performance according to the project contracts. Travelers’ duty is established by the

language of the bond. See New Amsterdam Casualty Co. v. Detroit Fidelity & Surety

Co., 58 S.W.2d 418, 419 (Ark. 1933). Under the bond, Travelers’ duty was to

complete the project according to the contract in the event Potashnick defaulted. 

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Summary judgment was appropriate on Iafrate’s third party beneficiary claims

because no material issue of fact exists as to whether Iafrate was an intended

beneficiary under the contract. Iafrate argues that because they knew that Iafrate

would be affected by the timeliness of Potashnick’s work, Travelers and Potashnick

owed it a contractual duty. It is a general rule under Arkansas contract law, however,

that a contract “will not be construed as having been made for the benefit of a third

party unless it clearly appears that such was the intention of the parties.” Howell v.

Worth James Constr. Co., 535 S.W.2d 826, 828 (Ark. 1976). The party does not have

to be named in the contract, but the parties to the contract must have intended to

confer a direct benefit upon the third party. Id. at 828-29 (citing Carolus v. Ark. L&P

Co., 262 S.W. 330 (1924)). Construction contracts may include other prime

contractors as third party beneficiaries, but such an intent must be evidenced in the

language of the contract. See, e.g., Little Rock Wastewater Util. v. Larry Moyer

Trucking, 902 S.W.2d 760, 763-64 (Ark. 1995).

Iafrate contends that several sections of the Standard Specifications create a

duty for Potashnick to work with other contractors, thereby establishing an intent to

make such contractors beneficiaries. Section 105.08, entitled “Coordination and

Cooperation Between Contractors” states that “[w]hen separate contracts are let

adjacent to or within the limits of any one project, the work of each Contractor shall

be conducted so as not to interfere with or hinder the progress or completion of the

work being performed by other Contractors.” 1991 Standard Specifications § 105.08.

The specifications also state, however, that they are “not intended” to make “the

public or any member thereof a third party beneficiary thereunder, or to authorize

anyone not a party to the contract to maintain a suit for personal injuries or property

damage pursuant to the terms or provisions of the contract.” 1991 Standard

Specifications § 107.14. 

Performance obligations due under a performance bond are commonly owed

solely to the obligee, whereas payment bonds are intended to ensure that laborers and

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material suppliers will be paid in the event of a default. See Pa. Nat’l Mut. Cas. Ins.

Co. v. City of Pine Bluff, 354 F.3d 945, 949 n.2 (8th Cir. 2004); Restatement (Third)

of Suretyship & Guaranty § 31, comment b. Here, the performance bond does not

specify any beneficiaries, but the payment bond includes as beneficiaries those parties

with claims for “materials, labor and supplies” provided incident to the contract work.

Iafrate does not fall within this intended class of beneficiaries and therefore may not

recover as a third party beneficiary.

Iafrate also argues that Travelers and Potashnick owed the Commission a duty

to inform the state of Potashnick’s financial problems when it first became aware of

the problems in August 1997. Iafrate argues that the standard specifications impose

an affirmative duty on the surety because they state that the surety must advise the

Highway Department if it is having any difficulty that “may affect its ability to

perform.” 1991 Standard Specifications § 103.05. If the language of a policy is

unambiguous, effect must be given to the plain language of the policy without resort

to the rules of construction. Castaneda v. Progressive Classic Ins. Co., No. 03-1258,

2004 WL 965938 (Ark. May 6, 2004). The plain meaning of section 103.05 does not

support Iafrate’s argument. The section directly addresses the surety and requires it

to give notice only of a difficulty in its own finances that would preclude its ability

to perform on the bond. Because Travelers was in no financial trouble itself, it did

not breach this duty of notification.

Iafrate contends that Travelers should have known of Potashnick’s default and

begun performance earlier. Travelers, however, did not have a common law or

contractual duty to begin performance any earlier than it did. Iafrate’s attempted

analogy to United States v. Minn. Trust. Co., 59 F.3d 87, 90 (8th Cir. 1995), in which

we stated that a surety is responsible to ascertain when performance is due if the

contract does not provide for notice to the surety, is inapposite because Travelers’

performance bond did provide for notice. The performance bond stated that the chief

engineer would give notice of default or termination to both the contractor and the

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surety according to section 108.08 of the 1991 Standard Specifications, triggering a

suspension period of 60 days. 

In addition, Travelers’ nondisclosure of Potashnick’s pending financial

problems did not result in a breach of its duty of timely completion under the

contract. Its timely completion is instead governed by the time frame for suspension

and resumption orders provided for in the performance bond and the amount of

working days specified in the contract. Working days, defined in the contract, are not

assessed during poor weather or during certain winter months. The contract specifies

that if the contractor or surety exceeds the specified number of working days

allocated to complete the work, damages will be based on specified daily liquidated

damages. In this case, Travelers has already settled the liquidated damages dispute

with the Commission. The Commission ultimately declared Travelers’ completion

of the project timely, and the claim related to liquidated damages was dismissed with

prejudice by the Claims Commission. Iafrate therefore may not now attempt to

enforce the Commission’s right to timely completion or to claim damages on that

basis.

Finally, Iafrate argues that it may recover from Travelers based on Travelers’

duty to indemnify the Commission for claims “brought because of any injuries or

damage received or sustained by any person, persons, or property on account of the

operations of the said Contractor.” 1991 Standard Specifications § 107.14. Because

Iafrate does not have its own contract right under the specifications, however, it may

only recover under this provision as assignee of the Commission. Travelers’ duty to

indemnify only arises if Iafrate’s claim against the Commission is successful and the

damages Iafrate claims on that basis are “clearly and unequivocally” within the scope

of the indemnity agreement. See Weaver-Bailey Contractors, Inc. v. Fiske-Carter

Constr. Co., 657 S.W.2d 209, 210-11 (Ark. Ct. App. 1983).

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“Indemnity agreements are construed strictly against the party seeking

indemnification.” Chevron U.S.A. Inc. v. Murphy Exploration & Prod. Co., No. 03-

612, 2004 WL 396263, at *3 (Ark. Mar. 4, 2004). Moreover, “the intent of the

indemnitor’s obligation to indemnify against [the losses] must be expressed in clear

and unequivocal terms and to such an extent that no other meaning can be ascribed.”

Id. The scope of Travelers’ duty to indemnify under section 107.14 does not clearly

encompass Iafrate’s claim against the Commission for economic delay damages. The

language of that section instead reflects an intent to impose a duty to indemnify

claims for personal injury and property damage caused by the work performed under

the contract.

B.

The default judgment against Potashnick is a subject of both Iafrate’s appeal

and Travelers’ cross-appeal. Because a surety and its principal are jointly liable

within the limits of the performance and payment bonds, both parties claim that a

default judgment against Potashnick affects the liability of Travelers as its surety. A

default judgment entered by the court binds the party facing the default as having

admitted all of the well pleaded allegations in the plaintiff’s complaint. See Taylor

v. City of Ballwin, 859 F.2d 1330, 1333 n.7 (8th Cir. 1988); Fed. R. Civ. P. 55(b)(2).

Iafrate argues that the district court erred in granting judgment on the merits

to Travelers because the default judgment against Potashnick is binding on Travelers.

Iafrate invokes the language in Drill South, Inc. v. International Fidelity Ins. Co., 234

F.3d 1232 (11th Cir. 2000) (per curiam), which states that “a surety is bound by any

judgment against its principal, default or otherwise, when the surety had full

knowledge of the action against the principal and an opportunity to defend.” Id. at

1235. Drill South involved a default judgment against a principal that was entered

without objection from the surety and before the surety fully litigated its own case.

We decline to extend the language in Drill South to cover a situation where, as here,

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the surety has obtained a judgment in its favor before the default judgment against its

principal was entered. We therefore reject Iafrate’s circuitous reasoning.

Travelers, concerned that it may face future lawsuits, argues that the district

court erred in entering the default judgment after ruling in Travelers’ favor on the

merits, resulting in inconsistent verdicts in violation of Frow v. De La Vega, 82 U.S.

552 (1872). When co-defendants are similarly situated, inconsistent judgments will

result if one defendant defends and prevails on the merits and the other suffers a

default judgment. See Frow, 82 U.S. at 554. To avoid such inconsistent results, a

judgment on the merits for the answering party should accrue to the benefit of the

defaulting party. Bastien v. R. Rowland & Co., 631 F.Supp. 1554, 1561 (E.D. Mo.

1986), affirmed without opinion 815 F.2d 713 (8th Cir. 1987); see also Restatement

(Third) of Suretyship and Guaranty § 68(1). The common-defense doctrine in

Arkansas law similarly states that if an answering party asserts “a defense on the

merits that equally applies to the other defendant,” the success of the defense

“operates as a discharge to all the defendants.” Sutter v. Payne, 989 S.W.2d 887, 889

(Ark. 1999); see also Davenport v. Lee, 72 S.W.3d 85, 89 (Ark. 2002). The doctrine

“applies even if the defaulting defendant makes his or her first appearance after the

answering defendant is no longer in the case.” Sutter, 989 S.W.2d at 890. Parties are

not similarly situated and a default judgment does not establish inconsistent

judgments, however, if the liability of the defaulting party is based on independent

wrongful acts or a legal theory distinct from the one under which the answering party

prevailed. See Bastien, 631 F. Supp. at 1561; Davenport, 72 S.W.3d at 89.

Even if the entry of the default judgment resulted in a judgment inconsistent

with the judgment on the merits for Travelers, the issue is not properly before us.

Pfanenstiel Architects, Inc. v. Chouteau Petroleum Co., 978 F.2d 430, 433 (8th Cir.

1992). Potashnick may seek to have the default judgment set aside, but Travelers

need not do so. The district court correctly held that Travelers is not liable under its

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bond or the contract, and it may not later be indirectly held liable for the same acts

because of a default judgment entered against its co-defendant. Id.

C.

We review a district court’s denial of attorneys’ fees for abuse of discretion.

Am. Travelers Life Ins. Co. v. AIG Life Ins. Co., 354 F.3d 756, 760 (8th Cir. 2004).

The applicable Arkansas statute states that a prevailing party in a contract suit “may

be allowed a reasonable attorney’s fee to be assessed by the court.” Ark. Code. Ann.

§ 16-22-308 (2003). Under the statute, no award of fees is mandatory, and the trial

court, presumably better acquainted with the circumstances of the proceedings, has

discretion whether to award fees and in what amount. Jones v. Abraham, 999 S.W.2d

698, 705-06 (Ark. Ct. App. 1999). In this case, no facts lead us to conclude that the

district court abused its discretion. Travelers has merely asserted that it is entitled to

attorneys’ fees because it prevailed and because it believed that Iafrate should never

have brought the lawsuit, an opinion held by most prevailing parties.

The judgment is affirmed.

______________________________

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