Court Opinion

ID: 9478295
Source: CourtListenerOpinion
Date Created: 2023-08-05 06:45:23.347377+00
Date Added: 2024-06-11T17:46:21.101738
License: Public Domain

COWEN, Circuit Judge,
concurring in part and dissenting in part:
I.
I agree with my colleagues that the district court erred in awarding attorneys’ fees. There exists, however, an additional and independent basis to reverse the grant of attorneys’ fees, even if we had determined that fees were allowable. The district court clearly failed to make the findings of fact required by this Court’s decision in Lindy Bros. Builders, Inc. v. American Radiator & Sanitary Corp., 487 F.2d 161 (3d Cir.1973) (Lindy I).
In Lindy I, we stated that “the first inquiry of the Court should be into ... how many hours were spent in what manner by which attorneys____ After determining ... the services performed by the attorneys, the district court must [then] attempt to value those services.” Id. at 167; see *82also Pawlak v. Greenawalt, 713 F.2d 972, 977 (3d Cir.1983), cert. denied, 464 U.S. 1042, 104 S.Ct. 707, 79 L.Ed.2d 172 (1984); Lindy Bros. Builders v. American Radiator & Standard Sanitary Corp., 540 F.2d 102 (3d Cir.1976) (Lindy II). The majority states that “the findings of the court awarding the fees were set forth in its order of March 16, 1988....” Maj.Op. at 80 n. 7. However, this order merely states in relevant part:
The Court’s decision to award attorneys’ fees is predicated on the language of the subject labor and material payment bond which allows for recovery of all ‘sums ... justly due.’ Under the circumstances presented, the Court finds that the plaintiff would not be made whole, nor would recover all ‘sums ... justly due,’ unless the Court required the defendant to reimburse the plaintiff for the attorneys’ fees it incurred in the prosecution of this litigation.
App. at 859-60. This language does not qualify as a finding under Lindy I.
II.
I part company with my colleagues sharply with respect to the issue of United’s liability under the bond and I, therefore, respectfully dissent.
Knecht argues that the provisions in the Knecht-Ambrose sub-subcontract are legally insufficient to incorporate into that contract the Ambrose-Sordoni subcontract and that, in any event, it has an independent right under the bond to recover as an intended third-party beneficiary. The majority’s holding adopts the position of Knecht that the bond “created an independent liability to claimants ... and in the clearest language possible allowed the claimants to sue on the bond.” Maj.Op. at 79.
This conclusion, however, flies in the face of the Pennsylvania Supreme Court’s decision in Dravo-Doyle Co. v. Royal Indem. Co., 372 Pa. 64, 92 A.2d 554 (1952). There the Pennsylvania Supreme Court determined the question of liability on the bond only after ascertaining whether the contractual terms between the general contractor and the subcontractor contained any limitation regarding the obligation of the subcontractor to pay unpaid material-men. In the course of making this determination, the court stated that “[t]he question here involved is one of interpreting the contract [between the general contractor and the subcontractor] with a view to determining (a) whether the parties intended to benefit any third parties, and (b) if so, what parties they intended to benefit.” 372 Pa. at 69, 92 A.2d at 556. The court found that the contract between the general contractor and the subcontractor contained no specific promise by the subcontractor to pay the materialmen. Additionally, the court determined that the contract restricted the subcontractor to payment of obligations for which liens had been established. 372 Pa. at 69, 92 A.2d at 556.
In light of these findings, the court held that “in plain and unambiguous words the parties to the contract have shown their intention to limit the third-party beneficiaries to a specific class of persons, viz., those who have liens.” 372 Pa. at 69-70, 92 A.2d at 556. Thus, Dravo clearly indicates that the terms of the bond and the contract must be construed together to determine who can claim as a third party beneficiary.1
*83The majority has cited only one case, Pennsylvania Supply Co. v. National Casualty Co., 152 Pa.Super. 217, 31 A.2d 453 (1943), in support of its position that there is an independent basis for liability under the bond. However, this intermediate appellate court case has been distinguished repeatedly and cannot withstand the strong language of Dravo. See, e.g., Van Cor, Inc. v. American Casualty Co., 417 Pa. 408, 208 A.2d 267 (1965) (per curiam). In Van Cor, a subcontractor obtained a performance bond and a labor and material payment bond in the course of a construction project for a local school authority. The bond required, among other things, that the subcontractor cooperate with the other contractors. When the subcontractor became bankrupt, Van Cor, the general contractor, sued the surety for damages caused by the delay resulting from the subcontractor’s default. In holding that Van Cor was not an intended beneficiary of the bond, the Pennsylvania Supreme Court first examined the underlying contract documents.2 The court stated that, “We are considering now the possible liability of one contractor to another arising out of such contract provisions, because I think it may safely be said that if [the principal] were not liable at the suit of [Van Cor], it would be futile to assert liability against the surety.” 417 Pa. at 412, 208 A.2d at 269 (quoting lower court opinion of Judge Charles Waters). The court finally concluded that:
Despite the apparently increasing liberal policy in this respect, and even though a corporate surety in business for profit is not a ‘favorite of the law,’ Pennsylvania Supply Co. v. National Casualty Co., supra, I cannot bring myself to the conclusion that the parties to the contract and bond in suit intended to make [ Van Cor ] a third-party beneficiary entitled to recover for delay damages such as here involved.
417 Pa. at. at 414, 208 A.2d at 270 (quoting lower court opinion of Judge Charles Waters).
In determining who the intended beneficiaries are under the suretyship bond which United gave to Knoll (as Dravo and Van Cor indicate we must do), it is clear that Sordoni did not intend Knecht to be a beneficiary, and equally clear that Knecht did not consider itself a beneficiary until Amb-rose subsequently defaulted. For example, Harry C. Knecht, president of Knecht, testified that he did not rely on the bond. While Knecht’s original sub-subcontract with Ambrose was signed October 18, 1984 (and later amended in February, 1985), Knecht stated that he had never seen the bond before April, 1985.3 App. at 343. It was only after one of Knecht’s material-men requested a copy of the bond that Knecht even looked at it. App. at 344.4
A.
More fundamentally, the majority simply has failed to explain how this case falls *84outside the realm of black-letter suretyship law. Under general principles of surety-ship law, the liability of the surety can be no greater than the liability of its principal.5 United States v. Seaboard Sur. Co., 817 F.2d 956, 962 (2d Cir.1987), cert. denied, — U.S. -, 108 S.Ct. 161, 98 L.Ed.2d 115 (1987); Pacific Lining Co. v. Algernon-Blair Constr. Co., 812 F.2d 237, 241 (5th Cir.1987), certification denied, 506 So. 2d 505 (La.1987), opinion after certification denied, 819 F.2d 602 (5th Cir.1987); Painters Local Union No. 171 v. Williams & Kelley, Inc., 605 F.2d 535, 539 (10th Cir.1979); Smith v. Sinclair, 424 F.Supp. 1108, 1115 (D.C.Okla.1976); Diversified Utilities Sales, Inc. v. Monte Fusco Excavating Contracting Co., 71 F.R.D. 661, 664 (E.D.Pa.1976); Exton Drive-In, Inc. v. Home Indem. Co., 436 Pa. 480, 489-90, 261 A.2d 319, 325 (1969), cert. denied, 400 U.S. 819, 91 S.Ct. 36, 27 L.Ed.2d 46 (1970). It has long been the rule in Pennsylvania that the liability of the surety ends with the extinguishment of the liability of the principal. Metropolitan Nat’l Bank v. Merchants & Mfrs.’Nat’l Bank, 155 Pa. 20, 25 A. 764 (1893); In re Brock, 312 Pa. 7, 166 A. 778 (1933). The bond clearly provides that the principal and surety are jointly and severally liable for the benefit of the claimants. Because Sordoni successfully extinguished its liability, i.e., it paid Ambrose in full, there can be no liability on the part of United.6 Moreover, Knecht’s counsel conceded during oral argument that no cause of action could lie against Sordoni. Such an astonishing concession highlights the weakness of Knecht’s case. Yet the majority chooses to ignore this critical concession.
Instead, the majority, by permitting Knecht to recover from United, is permitting Knecht to do indirectly what it could not do directly — namely, recover from Sor-doni. The facts of this case demonstrate that the majority’s conclusion defies normal commercial practice. In keeping with commercial practice, United obtained a letter of indemnification from Sordoni which contained the following provisions:
SECOND: To indemnify, and keep indemnified, and hold and save harmless the Surety against all demands, claims, loss, costs, damages, expenses and attorneys’ fees whatever, and any and all liability therefor, sustained or incurred by the Surety by reason of executing or procuring the execution of any said Bond or Bonds, or any other Bonds, which may be already or hereafter executed on behalf of the Contractor, or renewal or continuation thereof; or sustained or incurred by reason of making an investigation on account thereof, prosecuting or defending any action brought in connection therewith, obtaining a release therefrom, recovering or attempting to recover any salvage in connection therewith or enforcing by litigation or otherwise any of the agreements herein contained. Payment of amounts due Surety hereunder together with legal interest shall be payable upon demand.
THIRD: To furnish money to the Contractor or to the Surety as needed for the prompt payment of labor, materials, and any other costs or expenses in connection with the performance of contracts when and as requested to do so by the Surety.
App. at 625.
This agreement of indemnity between United and Sordoni merely affirms the common law right of indemnification in favor of United and against Sordoni.7 The *85surety’s right of indemnification, however, is conditioned upon the surety’s assertion of those defenses available to the principal. Section 108(5) of the Restatement provides:
*84DISCHARGE BY EXACT PERFORMANCE OF DUTY.
A contractual duty is discharged by the exact performance thereof.
*85Where the principal has a defense which is known to and available to a surety who has become a surety with the consent of the principal, and the surety does not assert it, or asserts it in an action without giving the principal notice of the action and an opportunity to defend it, or where the surety as well as the principal has a defense, the principal has no duty to reimburse the surety unless business compulsion requires performance by the surety.
Commentary on Subsection (5):
j. Where both surety and principal have defenses it would be contrary to the equitable basis of the rule of reimbursement if the surety by paying the creditor could compel the principal to reimburse him____ It should be observed that generally the surety is under no business compulsion to perform where the principal has a substantial defense.
Restatement of Security § 108(5) (1941). Therefore, United must assert the defense that Knecht has no cause of action against Sordoni. Ignoring the bald concession that Knecht cannot hold Sordoni liable defeats the essential purpose of these Restatement provisions.8 The majority’s holding also undercuts several other sections of the Restatement of Security, including section 110 which states:
SURETY’S RIGHT OF REIMBURSEMENT AFTER DISCHARGE OF PRINCIPAL OBLIGATION.
Where the principal’s obligation has been discharged by payment or by release from the creditor not reserving his rights against the surety, the principal has no duty to reimburse the surety.
Restatement of Security § 110 (1941). By holding United liable, Sordoni will bear the burden under its agreement of indemnification with United. This is precisely the result which the above-cited provisions of the Restatement seek to prevent.9
B.
Finally, I take issue with the majority’s holding that the proper interpretation of the “Principal Contract” was not a material fact in dispute. United’s argument — that it is not liable because its principal, Sordoni, is not liable — rests on its assertion that certain provisions in the Ambrose-Sordoni subcontract disclaiming liability to possible third-party beneficiaries have been incorporated into the Knecht-Ambrose sub-subcontract. Specifically, United has argued that Sordoni disclaimed any liability to possible third party beneficiaries by virtue of Article 19.1 in the Sordoni-Ambrose subcontract, and that Paragraph 2 of the Terms and Conditions of the Knecht-Amb-*86rose sub-subcontract incorporate all of the provisions of the Sordoni-Ambrose subcontract, including Article 19.1.10 United then argues that since its liability as surety can rise no higher than the liability of Sordoni, the principal, it was error to enter judgment against United.
The majority has acknowledged United’s position that the “Principal Contract” is in fact the contract between Sordoni and Ambrose. Maj.Op. at 77. Reference to several of the paragraphs in the Terms and Conditions of the Knecht-Ambrose sub-subcontract makes it readily apparent that (even if it is uncertain who the intended parties are) the parties to the “Principal Contract” logically could not be Ambrose and Knecht.11 For example, Paragraph 7 of the Terms and Conditions of the Knecht-Ambrose sub-subcontract provides:
Payments to Subcontractor will be made 3 days after our receipt of payment of PRINCIPAL CONTRACT. Subcontractor, as a condition precedent to payment hereunder, shall furnish all necessary releases, lien waivers, affidavits and other documents required by CONTRACTOR to keep Owner’s premises free from liens or claims for liens of all material-men, subcontractors or laborers. Acceptance of final payment by Subcontractor shall be a full and complete discharge of W.J. Ambrose, Inc. No payment, including final payment, shall be construed to be an acceptance of defective work or improper materials.
App. at 250.
It simply makes no sense to construe this provision to mean that payments to Knecht are to be made three days after payment of the Knecht-Ambrose contract. Further, Knecht’s counsel conceded in an early briefing of the ease that such a construction might render sections of the Terms and Conditions “legally unnecessary” and would constitute “excess verbiage.” App. at 445. The majority apparently accepts the logical inconsistency of Knecht’s argument regarding this point. Maj.Op. at 77 n. 1. The majority, however, dismisses the point as immaterial based upon the belief that there is an independent right to sue under the bond. If, however, the incorporated language of the contract must be considered in determining who the intended beneficiaries are — as I believe it must be considered under the rulings of the Pennsylvania Supreme Court in Dravo and Van Cor — then the factual dispute regarding the interpretation of the bond is material. The only logical resolution of the dispute demonstrates that sub-subcontractors such as Knecht were never intended to be third-party beneficiaries.
On the basis of the foregoing, I respectfully dissent.

. Knecht attempts to distinguish Dravo on the basis that Dravo involved a performance bond (not a labor and material payment bond as in the instant case). See Knecht’s Brief at 21. The Pennsylvania Supreme Court did state in Dravo that, "The bond, of course, only insured that the Industrial Contracting Company [the subcontractor] would carry out the terms of the contract. Therefore, the decision involves an interpretation of the contract.” 372 Pa. at 68, 92 A.2d at 556. However, the court also noted that the distinction was irrelevant and stated that, "the question here is not the type of bond but what parties it was the intention of the contracting parties to benefit.” 372 Pa. at 70, 92 A.2d at 556. See also, Annotation, Labor or material furnished subcontractor for public works improvement as within coverage of bond of principal contractor, 92 A.L.R.2d 1250, § 2 (1963) (stating that "[w]ith respect particularly to a nonstatutory bond, it has been held that the contract and bond are to be read together, and that the intention of the parties is the principal consideration in the interpretation of the contract and the bond with respect to the coverage thereunder.”) (footnotes omitted). The majori*83ty, notwithstanding the language in Dravo disapproving of a distinction between labor and material payment bonds and performance bonds, attempts to distinguish Van Cor on such grounds. Maj.Op. 80, n. 6. Additionally, the majority adheres to the position that Dravo is not inconsistent with their result. Id. Because of the majority's misplaced focus on the bond, they are willing to look only to the bond to determine liability and refuse to consider contractual provisions which may limit liability unless those provisions have become part of the bond. Since Dravo makes clear that the contract must be examined to determine whether liability exists under the bond, the majority’s result is inconsistent with Dravo.

.In fact the court noted that "the terms of the contract and specifications between the authority and [the principal] became part of the bond issued by the surety”, Van Cor, 417 Pa. at 411, 208 A.2d at 269, even though the bond apparently did not explicitly incorporate the contract as it did in Dravo. Thus, it is clear that the court in Van Cor believed that the contract documents must be considered in determining who the bond was intended to benefit.

. Knecht began working on the project in June, 1984. App. at 351-52.

. The record shows that Ambrose, at the time of Knecht’s contract negotiations with Ambrose, owed Knecht approximately $40,000.00 for a previous construction project. Knecht, in light of Ambrose’s prior failure to pay, could have protected itself against another default by Amb-rose. Now Knecht seeks to make Sordoni pay twice when Knecht could have taken appropriate measures to protect itself.

. The majority does not contest the fact that Sordoni is the principal for whom United posted the bond.

. See, e.g., Restatement of Contracts § 386 (1932), which provides:

. See, e.g., Restatement of Security, § 104 (1941):
REIMBURSEMENT BY PRINCIPAL: IN GENERAL.
(1) Where the surety makes a payment or otherwise performs on default by the principal, or where the surety’s property is used to satisfy the principal’s duty, it is the duty of the principal to reimburse the surety to the extent of his reasonable outlay if
(a) the surety’s obligation has been incurred, or his property has been subjected to a charge, with the consent of the principal, or
*85(b) the principal has assumed an obligation which was once the primary obligation of the surety.

. In addition, numerous courts have acknowledged the basic rule of suretyship law that a surety can assert a defense of its principal. See, e.g., Rhode Island Hosp. Trust Nat'l Bank v. Ohio Co. Ins. Co., 789 F.2d 74, 78 (1st Cir.1986) (stating that "[t]he basic rule on the liability of sureties is that ‘the surety is not liable to the creditor unless his principal is liable’[;] thus he may plead the defenses which are available to his principal____”); Siata Int'l U.S.A., Inc. v. Insurance Co. of No. Am., 362 F.Supp. 1355, 1360 (E.D.Pa.1973) (noting that "[i]t is true that this [payment by the principal] is a valid defense for a surety in a suit by the obligee, and would discharge the surety pro tanto."), rev’d on other grounds, 498 F.2d 817 (3d Cir.1974).

. The commentary following Section 122, “Release of Principal”, states a similar rationale for not placing liability on the surety once a principal has been released:
Where the surety and principal are bound jointly, the release of one is the release of both unless the rights of the obligee are reserved against the other____ If the principal has no longer a duty as a result of the creditor’s act, the surety should not be held to an obligation to answer for a default of that duty. Furthermore, if the surety could be compelled to pay after the principal’s release, he would be entitled to reimbursement if he had become a surety at the principal’s request or with his consent. Such an outcome would be unfair to the principal after a release because it would afford the creditor a means of attacking the principal indirectly through the surety.
Restatement of Security § 122 (1941) (emphasis added).

. Paragraph 2 provides:
Work performed by Subcontractor shall be in strict accordance with CONTRACT DOCUMENTS applicable to the work to be performed and materials, articles and/or equipment to be furnished hereunder. Subcontractor shall be bound by all provisions of these documents and also by applicable provisions of the PRINCIPAL CONTRACT to which the CONTRACTOR is bound, and to the same extent.
App. at 250.

. Harry Knecht testified that he understood the “Principal Contract” to refer to the contract between Knoll and Sordoni. App. at 320.