Court Opinion

ID: 2735630
Source: CourtListenerOpinion
Date Created: 2014-09-22 16:03:11.898627+00
Date Added: 2024-06-11T10:03:33.538499
License: Public Domain

In the Supreme Court of Georgia

                                                       Decided: September 22, 2014

S14G0360. STATE OF GEORGIA DEPARTMENT OF CORRECTIONS v.
      DEVELOPERS SURETY AND INDEMNITY COMPANY.

     HINES, Presiding Justice.

    This Court granted certiorari to the Court of Appeals in State Dept. of

Corrections v. Developers Sur. and Indem. Co., 324 Ga. App. 371 (750 SE2d

697) (2013), to consider whether the State’s sovereign immunity is waived for

a claim asserted by a surety on a contract with the State. See 1983 Ga. Const.

Art. I, Sec. II, Para. IX.1 For the reasons which follow, we find that it is, and

      1
          1983 Ga. Const. Art. I, Sec. II, Para. IX states:

      (a) The General Assembly may waive the state's sovereign immunity from suit by enacting
      a State Tort Claims Act, in which the General Assembly may provide by law for procedures
      for the making, handling, and disposition of actions or claims against the state and its
      departments, agencies, officers, and employees, upon such terms and subject to such
      conditions and limitations as the General Assembly may provide.

      (b) The General Assembly may also provide by law for the processing and disposition of
      claims against the state which do not exceed such maximum amount as provided therein.

      (c) The state's defense of sovereign immunity is hereby waived as to any action ex contractu
      for the breach of any written contract now existing or hereafter entered into by the state or
      its departments and agencies.

      (d) Except as specifically provided by the General Assembly in a State Tort Claims Act, all
accordingly, we affirm the judgment of the Court of Appeals.2

     The facts as found by the Court of Appeals are the following. The Georgia

Department of Corrections (“GDOC”) entered into a construction contract

(“Contract”) with Lewis Walker Roofing (“Walker Roofing”) to re-roof several

buildings at Valdosta State Prison. The Contract contained two “no assignment”

clauses,3 and as a prerequisite to contracting with GDOC, Walker Roofing was

       officers and employees of the state or its departments and agencies may be subject to suit and
       may be liable for injuries and damages caused by the negligent performance of, or negligent
       failure to perform, their ministerial functions and may be liable for injuries and damages if
       they act with actual malice or with actual intent to cause injury in the performance of their
       official functions. Except as provided in this subparagraph, officers and employees of the
       state or its departments and agencies shall not be subject to suit or liability, and no judgment
       shall be entered against them, for the performance or nonperformance of their official
       functions. The provisions of this subparagraph shall not be waived.

       (e) Except as specifically provided in this Paragraph, sovereign immunity extends to the state
       and all of its departments and agencies. The sovereign immunity of the state and its
       departments and agencies can only be waived by an Act of the General Assembly which
       specifically provides that sovereign immunity is thereby waived and the extent of such
       waiver.

       (f) No waiver of sovereign immunity under this Paragraph shall be construed as a waiver of
       any immunity provided to the state or its departments, agencies, officers, or employees by
       the United States Constitution.

       2
       An appeal requiring a first impression construction of the sovereign immunity provision of
the Georgia Constitution is within this Court’s exclusive appellate jurisdiction. See Ga. Const. of
1983 Art. VI, Sec. VI, Para. II.
       3
        The no-assignment clauses stated that “[t]his Agreement and the proceeds of this Agreement
may not be assigned nor may the performance thereunder by assigned, except with the prior written
consent of the [GDOC]” and “[n]either party to the contract shall assign the contract or sublet it as
a whole nor shall the Contractor assign any moneys due or to become due to him hereunder.”

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required to obtain payment and performance bonds. It obtained such payment

and performance bonds from Developers Surety and Indemnity Company

(“Developers Surety”). Walker Roofing and Developers Surety had previously

signed a general agreement of indemnity in favor of Developers Surety that

included a provision in which Walker Roofing assigned to Developers Surety

the company's right to payment under bonded contracts as security against any

losses that Developers Surety might suffer under a bond. GDOC was not a party

to the indemnity agreement. The bonds required Developers Surety, upon

default of Walker Roofing, to “promptly remedy the default or defaults or to

promptly perform the [c]ontract in accordance with its terms and conditions.”

It also specified that Developers Surety was to give GDOC notice “within

twenty-five (25) days after receipt of a declaration of default of the surety's

election either to remedy the default or defaults promptly or to perform the

contract promptly.”

    Walker Roofing did not complete its work within the time frame required

by the Contract, and GDOC declared Walker Roofing in default. On September

23, 2010, GDOC issued a formal notice of default with respect to the

performance of Walker Roofing, thus triggering Developers Surety's obligations

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under the performance bond. Developers Surety did not notify GDOC within 25

days of receipt of GDOC's notice of default regarding whether it would remedy

the default or perform the contract. However, approximately three months after

the declaration of default, Developers Surety gave GDOC the option of entering

into a contract with another company for the completion of the work. GDOC

then contracted with that company to finish the project. Under the payment and

performance bonds and prior to Walker Roofing's default, Developers Surety

had provided financial assistance to Walker Roofing in the amount of

$577,118.60; it incurred an additional $160,161.39 in costs and attorney fees

arising from its investigation of its liability, if any, under the default.

    On July 12, 2011, Developers Surety filed suit against GDOC for breach of

contract and for a declaratory judgment that it had no obligation under the

payment and performance bond it issued to Walker Roofing on behalf of

GDOC. GDOC filed a counterclaim for breach of contract. The parties filed

cross-motions for summary judgment, and the trial court determined that

Developers Surety's claims were not barred by sovereign immunity and that

GDOC had breached the construction contract as a matter of law. It concluded

that GDOC waived its sovereign immunity by entering into the contract with

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Walker Roofing, and that the doctrine of equitable subrogation gave Developers

Surety the ability to file suit against GDOC once it incurred liability and paid

the obligations of its principal under the bond. Consequently, the trial court

granted summary judgment to Developers Surety and denied it to GDOC; in the

same order, the trial court entered judgment in favor of Developers Surety in the

amount of $577,118.60.

     GDOC appealed to the Court of Appeals, contending, inter alia, that it was

entitled to summary judgment because Developers Surety was not a party to the

Contract, and thus, the State's waiver of sovereign immunity for breach of

contract did not apply to Developers Surety.4 The Court of Appeals affirmed the

trial court’s findings that GDOC waived sovereign immunity by entering into

the Contract, and that the doctrine of equitable subrogation gave Developers

Surety the ability to “step into the shoes” of Walker Roofing and file suit

against GDOC.

       4
         GDOC also contended that granting summary judgment to Developers Surety was
unwarranted because the anti-assignment clauses contained in the Contract rendered any assignment
by Walker Roofing to Developers Surety ineffectual, and because the trial court erred in finding that
GDOC materially breached the Contract by imposing restrictions on Walker Roofing's access to the
project site that were contrary to the Contract terms; GDOC further maintained that the trial court
erred in dismissing its counterclaim asserting breach of the performance bond by Developers Surety
in that Developers Surety did not comply with the terms of such bond. However, those portions
of the opinion of the Court of Appeals rejecting these additional contentions by GDOC are not at
issue in this appeal following the grant of certiorari to the Court of Appeals.

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     In Georgia, the doctrine of sovereign immunity has constitutional status,

and such immunity may be waived only by an act of the General Assembly or

by the Constitution itself. Georgia Dept. of Corrections v. Couch, ___ Ga. ___

(Case No. S13G1555, decided June 16, 2014); Georgia Dept. of Natural

Resources v. Center for a Sustainable Coast, Inc., 294 Ga. 593, 597–598, (755

SE2d 184) (2014). And, the Georgia Constitution provides for the waiver of the

State’s defense of sovereign immunity, “as to any action ex contractu for the

breach of any written contract now existing or hereafter entered into by the

[S]tate or its departments and agencies.” Ga. Const. of 1983, Art. I, Sec. II, Par.

IX (c). OCGA § 50–21–1 (a) echoes this Constitutional provision:

      The defense of sovereign immunity is waived as to any action ex
      contractu for the breach of any written contract existing on April 12,
      1982, or thereafter entered into by the state, departments and agencies
      of the state, and state authorities.

    There is no doubt that by entering into the Contract, GDOC waived the

defense of sovereign immunity for any breach of the Contract for which it could

be held liable. Similarly, there is little question that Walker Roofing could

maintain an action against GDOC for the alleged breach of the Contract. Thus,

the next step in the analysis is the determination of the status of Developers

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Surety as surety for Walker Roofing. OCGA § 10-7-56 provides that,

    A surety who has paid the debt of his principal shall be subrogated,
    both at law and in equity, to all the rights of the creditor and, in a
    controversy with other creditors, shall rank in dignity the same as the
    creditor whose claim he paid.

And, subrogation has been well-defined as,

    the substitution of another person in the place of the creditor, so that
    the person in whose favor it is exercised succeeds to all the rights of
    the creditor. It is of equitable origin, being founded upon the dictates
    of refined justice, and its basis is the doing of complete, essential, and
    perfect justice between the parties, and its object is the prevention of
    injustice.

Bankers Trust Co. v. Hardy, 281 Ga. 561, 562 (640 SE2d 18) (2007).

Thus, as subrogee of Walker Roofing, Developers Surety, stands in the place of

Walker Roofing and may “succeed” to its rights. Id. In this case, Walker

Roofing had a right of action, i.e., an action for breach of contract against

GDOC. And, the plain language of the constitutional waiver of the State’s

sovereign immunity in the case of a suit for breach of a written contract entered

into by the State expressly addresses the “action” itself, not the party bringing

the action. See Georgia Dept. of Natural Resources v. Center for a Sustainable

Coast, 294 Ga. 593, 598 (2) (755 SE2d 184) (2014) ( ordinary signification is

                                        7
to be given to words in construing a constitutional provision).

The action in this case remains one for breach of contract; it is not transformed

into another cause of action, either legal or equitable, against GDOC merely

because Developers Surety stands in the place of Walker Roofing as the

subrogee. Compare Georgia Dept. of Natural Resources v. Center for a

Sustainable Coast, supra. (sovereign immunity bars injunctive relief against the

State at common law). Subrogation is merely a basis upon which Developers

Surety, after having incurred liability and paid its bond obligations for its

principal, can assert the claim for breach of contract initially belonging to its

principal, Walker Roofing.

          In its analysis, the Court of Appeals found persuasive the reasoning

of Insurance Co. of the West v. United States, 243 F.3d 1367 (C.A. Fed., 2001).

As noted, in that case, the surety of a contractor that had financed the

completion of a government contract following the contractor’s default sued the

government directly to recover the remaining funds, and that federal court held

that under the Tucker Act, 28 USC § 1491 (a)(1), the federal government’s

waiver of sovereign immunity for any claim founded upon an express or implied

contract with the United States applied to the subrogees as well as to the original

                                         8
parties to the contract. A pivotal point in that federal court’s analysis was the

fact that the Tucker Act waived immunity as to claims, not particular claimants.

Insurance Co. of the West v. United States, supra.           As discussed, our

constitutional provision waiving sovereign immunity for actions sounding in

contract also does so expressly in terms of “actions,” not parties. Furthermore,

as noted by that federal court, there is nothing novel about employing the

doctrine of equitable subrogation in regard to claims by sureties against the

government. Indeed, there is a tradition in federal law of permitting a surety to

succeed to the contractual rights of a contractor against the government in the

circumstances in which the surety takes over contract performance or when it

finances completion of the defaulted contract. Id. at 1370, citing Prairie State

Bank v. United States, 164 U.S. 227, 231 (17 SCt 142, 41 LEd 412) (1896). So

too, there is long recognition in this State of the precept that a surety who has

paid the debt of its principal may sue on the original indebtedness in an action

to enforce a legal right, such as an action for breach of contract. See Fender v.

Fender, 30 Ga. App. 319 (117 S.E. 676) (1923); Lumpkin v. Mills, 4 Ga. 343

(1848). This is consistent with the fact that the right of subrogation is an

inchoate one, which becomes choate when the surety is called upon to perform

                                        9
its obligation under a payment or performance bond. Cotton States Mut. Ins. Co.

v. Citizens and Southern Nat. Bank, 168 Ga. App. 83, 86 (1) (308 SE2d 199)

(1983).

     It is noteworthy that the General Assembly has provided that a payment

bond is mandated for all State public works construction contracts with an

estimated contract amount greater than $100,000.00, and that the State may

require such a bond for public works construction contracts that are estimated

to be less than that amount. OCGA § 13-10-60. Thus, at best, it would be

inconsistent, and at worst, unjust and impractical, to require a surety’s bond to

ensure payment or performance in favor of the State in the case of a defaulted

construction contract with the State, but then to bar the surety from exercising

its right of subrogation in an action for the breach of the contract in the event

that the State is the defaulting party. As the Court of Appeals quite aptly noted,

to raise the complete defense of sovereign immunity in such a case would be to

discourage businesses from issuing payment or performance bonds for the

benefit of the State. State Dept. of Corrections v. Developers Sur. and Indem.

Co., supra at n.4. Inasmuch as a fundamental purpose of sovereign immunity

is the protection of State funds, this Court will not sanction a result that is

                                       10
contrary to the constitutional and statutory text and would hamper the issuance

of such payment and performance bonds, and thus, potentially cause greater

exposure of the State’s treasury and resources. Georgia Dept. of Corrections

v. Couch, supra.

    Simply, there is waiver of the State’s sovereign immunity in this case of a

claim asserted by a surety on a contract with the State.

   Judgment affirmed. All the Justices concur.

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