Opinion ID: 894285
Heading Depth: 2
Heading Rank: 1

Heading: Type of Bonds

Text: In order to resolve the central issue in this case, we first determine whether the bonds issued by Hartford were judgment bonds. In this regard, it has been explained that [t]he type of bond involved is not material unless it is an injunction or judgment bond. With this type of bond, the surety is obligating itself to pay a particular judgment rendered against a principal, even though the surety had no notice, so long as the judgment is one within the purview of the agreement between surety and principal. 74 Am. Jur. 2d Suretyship § 153 (1974). See also 46 Am. Jur. 2d Judgments § 553 (1969). In a judgment or injunction bond, the judgment against the principal is conclusive against the surety if it is free of fraud and collusion. 74 Am. Jur. 2d Suretyship § 153 (1974). Ohio Cas. Ins. Co. v. Kentucky Natural Res. & Envtl. Prot. Cabinet, 722 S.W.2d 290, 292 (Ky. Ct. App. 1986). Hartford argues, essentially, that the surety in a judgment bond explicitly grants the right to recover against the bond immediately upon a judgment against the principal. Hartford urges that the clear language of the bonds establishes that Hartford never agreed to pay unquestioningly any judgment rendered against its principals. Hartford claims that the obligation it bonded was the principals’ compliance with state laws, rules, and orders relating to mortgage lenders, and the principals’ payment of any moneys due to the State or persons designated by the State pursuant to a lawsuit brought by the Commissioner of Banking. Thus, Hartford argues, the bonds are in the nature of performance bonds. Directing this 10 Court’s attention to State v. Myers, 74 W. Va. 488, 82 S.E. 270 (1914), a case involving a judgment bond, Hartford submits that, while the Myers opinion does not quote language from the bond therein being considered, the deciding factor in the case was that the surety “expressly stipulated” that paying a judgment or fine “shall be the condition of his bond.” State v. Myers, 74 W. Va. at 492, 82 S.E. at 272. Respondents, the Curtises and Rhodes/Cochran (hereinafter collectively referred to as “Respondents”), note that, through a performance bond, the surety guarantees the performance of an underlying contract. A judgment bond, on the other hand, is one in which the surety agrees to be liable for a judgment based on a specific violation covered by the bond. Respondents argue that the language used in the instant bonds demonstrates that Hartford agreed to be liable for judgments based upon its principals’ violations of “Article 17, Chapter 31, of the Code of West Virginia.” Thus, Respondents contend, the language of the bonds issued by Hartford is clear in expressing that the bonds are, in fact, judgment bonds. In conducting our analysis, we are mindful that “[t]he liability of a surety is generally measured by his or her contract or bond.” 72 C.J.S. Principal and Surety § 81 at 222 (2005) (footnotes omitted). See In re Microwave Prods. of Am., Inc. 118 B.R. 566, 570 (W.D. Tenn. 1990) (“The liability of the surety is measured by the terms of his contract.” (citation omitted)); State ex rel. Duckett v. Pettee, 50 N.C. App. 119, 121, 273 S.E.2d 317, 11 319 (1980) (“The principal and his surety are liable under a contract expressed in definite terms and their liability cannot be carried beyond the fair meaning of those terms.” (internal quotations and citation omitted)). In addition, consideration should be given to the statute requiring the bond: “The scope of a statutorily required surety bond is determined by the language and purpose of the bond and the terms of the statute it is given under.” 72 C.J.S. Principal and Surety § 82 at 223. To identify the type of bonds that were issued by Hartford, we will contrast judgment bonds with performance bonds, insofar as Hartford has argued that the Hartford bonds are in the nature of performance bonds. A judgment bond has been described as a bond “‘in which the surety agrees to be liable for a judgment based on a specific statutory violation covered by the bond.’ Lawyers Sur. Corp. v. Riverbend Bank, N.A., 966 S.W.2d 182, 188 (Tex. App.-Fort Worth 1998, no pet.).” Old Republic Sur. Co. v. Bonham State Bank, 172 S.W.3d 210, 214 (Tex. Ct. App. 2005). See also Ohio Cas. Ins. Co. v. Kentucky Natural Res. & Envtl. Prot. Cabinet, 722 S.W.2d at 292 (explaining that “judgment bond” is a bond in which “the surety is obligating itself to pay a particular judgment rendered against a principal, even though the surety had no notice, so long as the judgment is one within the purview of the agreement between surety and principal. 74 Am. Jur. 2d Suretyship § 153 (1974).”). 12 A performance bond, on the other hand, has been defined as: “1. A bond given by a surety to ensure the timely performance of a contract. . . . 2. A third party’s agreement to guarantee the completion of a construction contract upon the default of the general contractor. Also termed completion bond; surety bond; contract bond.” Black’s Law Dictionary 1158 (7th ed. 1999). Both of the Hartford bonds6 utilized a mandatory bond form prepared by the West Virginia Commissioner of Banking.7 The bonds are basically identical and state: THE CONDITION OF THE ABOVE OBLIGATION IS SUCH THAT; WHEREAS, the above bound principal, in pursuance of the provisions of Article 17, Chapter 31, of the Code of West Virginia, as amended, (hereinafter the “Act”) has obtained, or is about to obtain, from the Commissioner of 6 The principals on the two bonds were required by law to obtain the same prior to being issued a license to conduct their business in West Virginia. W. Va. Code § 31-17-4 (2002) (Repl. Vol. 2003) is the version of the statute in effect at the time the Hartford bonds were issued. While the statute has been amended over the years, the past and current versions of W. Va. Code § 31-17-4 still require license applicants to “[f]ile with the commissioner a bond in favor of the state for the benefit of consumers.” See W. Va. Code § 31-17-4(b)(3) (2002) (Repl. Vol. 2003) (requiring bond in connection with application for lender’s license); W. Va. Code § 31-17-4(c)(3) (2002) (Repl. Vol. 2003) (requiring bond in connection with application for broker’s license); W. Va. Code § 31-17-4(e)(3) (2010) (Supp. 2012) (requiring bond in connection with application for lender’s license); W. Va. Code § 31-17-4(f)(3) (2010) (Supp. 2012) (requiring bond in connection with application for broker’s license). 7 Because Hartford did not draft the bond, in considering its terms we will not apply the general rule that “when the surety is a corporation and supplies bonds for a consideration, the courts will construe the obligations of the bond most strongly against the surety. See, Hicks v. Randich, 106 W. Va. 109, 144 S.E. 887 (1928).” Cecil I. Walker Mach. Co. v. Stauben, Inc., 159 W. Va. 563, 567-68, 230 S.E.2d 818, 820 (1976). 13 Banking of the State of West Virginia, a license to conduct a Mortgage Lender[/Broker] business. NOW, THEREFORE, if the said principal [specific principal named here] shall conform to and abide by the provisions of said Act and of all rules and orders lawfully made or issued by the Commissioner of Banking thereunder, and shall pay to the State and shall pay to any such person or persons properly designated by the State any and all moneys that may become due or owing to the State or to such person or persons from said obligor in a suit brought by the Commission on their behalf under and by virtue of the provisions of said Act, then this obligation shall be void, otherwise it shall remain in full force and effect. If any person shall be aggrieved by the misconduct of the principal, he may upon recovering judgement [sic] against such principal issue execution of such judgement [sic] and maintain an action upon the bond of the principal in any court having jurisdiction of the amount claimed, provided the Commissioner of Banking assents thereto. (Emphasis added). The above-quoted language from the bonds requires, as Hartford contends, that the principals comply with Article 17, Chapter 31, of the West Virginia Code, which is known as the Mortgage Lender, Broker, and Servicer Act, and pay money due to the State or persons designated by the State under circumstances outlined in the bonds. Relevant to the instant cases, however, and as also quoted above, the bonds go on to specify that an aggrieved person “may upon recovering judgement [sic] against such principal issue execution of such judgement [sic] and maintain an action upon the bond of the principal[.]” (Emphasis added). Thus, the language of the Hartford bonds grants an aggrieved person who has obtained a judgment against the principal the right to execute said judgment through an 14 action upon the bond.8 Reading this plain language in light of the definition of a judgment bond quoted above, it is clear that the Hartford bonds are judgment bonds.9 The foregoing bond language plainly demonstrates that Hartford has “agree[d] to be liable for a judgment based on a specific statutory violation covered by the bond,” i.e., a violation of the West 8 In arguing the Hartford bonds are not judgment bonds, Hartford places significance on the fact that the bonds require an aggrieved person to “maintain an action upon the bond.” We find this argument unpersuasive. An action on the bond would provide Hartford an opportunity to adjudicate the potential existence of collusion or fraud, or to challenge whether its principal’s conduct violated a condition of the bond. See Syl. pt. 4, in part, State v. Nutter, 44 W. Va. 385, 30 S.E. 67 (1898) (holding, for purposes of a judgment bond, that “a judgment against the principal is conclusive upon the sureties, so that they cannot contest the liability, in the absence of fraud or collusion” (emphasis added)). See also Ohio Cas. Ins. Co. v. Kentucky Natural Res. & Envtl. Prot. Cabinet, 722 S.W.2d 290, 292 (Ky. Ct. App. 1986) (“In a judgment or injunction bond, the judgment against the principal is conclusive against the surety if it is free of fraud and collusion.” (emphasis added; citation omitted)); Old Republic Sur. Co. v. Reyes, No. 05-01-01881-CV, 2002 WL 1772976, at  (Tex. Ct. App. Aug. 2, 2002) (“[A] surety may contest in litigation based on a claim on a judgment bond whether the principal’s conduct violated a condition of the bond and whether the judgment was obtained by fraud or collusion.” (citation omitted)). 9 Where contractual language is plain, it must be applied without construction: “A valid written instrument which expresses the intent of the parties in plain and unambiguous language is not subject to judicial construction or interpretation but will be applied and enforced according to such intent.” Syl. pt. 1, Cotiga Development Company v. United Fuel Gas Company, 147 W. Va. 484, 128 S.E.2d 626 ([1962]). Syl. pt. 1, Sally–Mike Props. v. Yokum, 175 W. Va. 296, 332 S.E.2d 597 (1985). In other words, “[i]t is not the right or province of a court to alter, pervert or destroy the clear meaning and intent of the parties as expressed in unambiguous language in their written contract or to make a new or different contract for them.” Syl. pt. 3, Cotiga Dev. Co. v. United Fuel Gas Co., 147 W. Va. 484, 128 S.E.2d 626 (1962). 15 Virginia Mortgage Lender, Broker, and Servicer Act. Old Republic Sur. Co. v. Bonham State Bank, 172 S.W.3d at 214 (internal quotations and citation omitted). In addition, we find the Hartford bond language to be similar to the statutory language that applied to the bond that was described as a judgment bond in State v. Myers 74 W. Va. 488, 82 S.E. 270. The bond in Myers was required by the West Virginia Code of 1913, sec. 1144 (ch. 32, para. 28), which stated, in relevant part, that No county or license court nor town council shall authorize the issuing of any license to sell spirituous liquors . . . until the applicant shall have given bond with good security . . . in the penalty of at least [$3,500], conditioned that he will not permit any person to drink to intoxication on any premises under the control of such applicant; and will not knowingly sell or furnish any intoxicating drink to any person who is intoxicated at the time, or who is known to him to have the habit of drinking to intoxication, or whom he knows, or has reason to believe, is under the age of twenty-one years, and that he will not sell or furnish such drink to any person on Sunday; and with the further condition, that he will pay all such damages and costs as may be recovered against him by any person under any of the provisions of chapter thirty-two of the code of West Virginia, as amended. And such applicant and his securities in said bond shall be liable, in a suit or suits thereon, for the fine and costs which may be recovered against him for any offence under this chapter which is a violation of any of the conditions of said bond, as well as for the damages hereinbefore provided for, until the penalty of such bond is exhausted. Much like the Hartford bonds, the statute requiring the bond at issue in Myers stated that the bond would be conditioned upon the principal’s compliance with the statutory provisions relating to the sale of intoxicating drink, which included the condition that the principal 16 would pay “all such damages and costs as may be recovered against him by any person under any of the provisions” of the referenced code. Also similar to the Hartford bonds, the statute goes on to require that “such applicant and his securities in said bond shall be liable, in a suit or suits thereon, for the fine and costs which may be recovered against him for any offence under this chapter which is a violation of any of the conditions of said bond[.]” As will be discussed in more detail below, the Myers Court observed that the surety on a judgment bond is bound by a judgment against its principal. Thus, by treating the bond at issue in that case as a judgment bond, the Myers Court clearly did not consider the foregoing language holding the principal and his surety liable “in a suit or suits” for damages that may be recovered against the principal as making the bond anything other than a judgment bond.10 Furthermore, we note that other courts interpreting similar language have reached the same result. For example, the Supreme Court of Texas addressed the question of whether a particular bond was a general undertaking bond or a judgment bond in Howze v. Surety Corp. of America, 584 S.W.2d 263 (Tex. 1979). The Howze court determined that the bond was a judgment bond in which the surety agreed “to be liable for a judgment against the principal.” Howze, 584 S.W.2d at 265. The bond at issue in Howze stated: “‘[the principal and surety are] firmly bound unto THE STATE OF TEXAS in the sum of $25,000.00 dollars payable at Austin, Travis County, Texas for the use by a consumer, the 10 Compare note 8, supra. 17 State, or any political subdivision thereof who establishes liability against a dealer for damages, penalties, or expenses . . . .’” Id. (latter emphasis added). In concluding that this language created a judgment bond, the Howze court reasoned that [t]he Act and bond both state specifically that the surety is not liable until the State, political subdivision or consumer establishes liability. It is implicit that one establishes liability by obtaining a judgment in a court of competent jurisdiction. A consumer can only make a claim upon the surety when he has obtained a judgment against the principal, or when he sues them together in the same suit. These bonds are, therefore, judgment bonds; and the surety is bound despite the fact that it was neither notified nor joined as a party. Id. (footnote omitted). See also Axess Int’l, Ltd. v. Intercargo Ins. Co., 183 F.3d 935, 940 (1999) (finding bond was judgment bond based on language stating that “the condition of this obligation is that the penalty amount of this bond [$50,000] shall be available to pay any judgment for damages against the Principal arising from the Principal’s transportation related activities” (internal quotations omitted)). Having found that the Hartford bonds are judgment bonds,11 we find no error 11 Hartford also has argued that the Commissioner of Banking had no authority to require a judgment bond insofar as a judgment bond ignores a surety’s rights under W. Va. Code § 45-1-3 (1923) (Repl. Vol. 2010) to notice of a proceeding before a judgment arising therefrom is binding on said surety, or, in the absence of such notice, an opportunity to present defenses its surety would have had. We find this argument to be without merit. The statute directing the Commissioner of Banking to prepare a bond form to be used by mortgage lender and mortgage broker license applicants simply states that the “[a]pplication for a lender’s or broker’s license shall each year be submitted in writing under oath, in the form prescribed by the commissioner . . . .” W. Va. Code § 31-17-4(a) (2002) (Repl. Vol. (continued...) 18 in the findings of the circuit courts of Jackson and Kanawha Counties reaching the same conclusion.