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READING TUBE CORP. v. EMPLOYERS INS.

October 22, 1996

READING TUBE CORPORATION, Plaintiff,
v.
EMPLOYERS INSURANCE OF WAUSAU, Defendant.



The opinion of the court was delivered by: JOYNER

 Joyner, J.

 October 22, 1996

 INTRODUCTION

 This diversity action concerns an alleged breach of a performance bond. The plaintiff is Reading Tube Corporation ("Reading Tube"), a Pennsylvania company that contracted to purchase an industrial furnace from Advanced Furnace Technology, Inc. ("AFTEC"), another Pennsylvania company, in the fall of 1992. In December 1992, Defendant Employers Insurance of Wausau ("Wausau"), a Wisconsin corporation, issued a performance bond in the amount of $ 677,755, naming Reading Tube as obligee. On August 25, 1995, Reading Tube declared AFTEC in default and requested that Wausau honor the performance bond. When Wausau refused, taking the position that Reading Tube had wrongfully terminated its contract with AFTEC, this lawsuit ensued.

 The pending complaint contains two claims. In the first, Reading Tube seeks damages arising from Wausau's alleged breach of the performance bond; in the second, Reading Tube requests punitive damages, costs, attorney's fees, and interest pursuant to Pennsylvania's bad faith statute, 42 Pa. Cons. Stat. Ann. § 8371, for Wausau's alleged bad faith in refusing to honor its obligations under the performance bond.

 At the conclusion of discovery, the parties both filed motions for summary judgment pursuant to Fed. R. Civ. P. 56(c). Wausau argues that it is entitled to summary judgment because the contract on which Reading Tube bases its claim(s) is illegal, and violates significant public policies of Pennsylvania. In the event the matter proceeds to trial, Wausau has asked the Court, in its authority under Fed. R. Civ. P. 42(b), to try the issue of liability before proceeding to the issue of damages.

 Reading Tube makes several arguments in its summary judgment motion. First, Reading Tube argues that it is clear that the furnace does not perform in accordance with the specifications in the contract or in the subsequent corrective plan to which both parties agreed. Reading Tube also argues that Wausau breached its obligations under the performance bond in bad faith, and that Reading Tube's damages have been established to a certainty. Finally, Reading Tube opposes the motion to bifurcate.

 This Memorandum therefore addresses (1) Reading Tube's motion for summary judgment (2) Wausau's motion for summary judgment and (3) Wausau's motion to bifurcate.

 FACTUAL SUMMARY

 In the fall of 1992, AFTEC and Reading Tube entered into a written agreement pursuant to which AFTEC was obligated to design, manufacture and install an industrial furnace in exchange for $ 677,755. The contract required the furnace to be able to heat copper billets to a temperature of 1900 degrees Fahrenheit so that they could be produced at a rate of 40,000 pounds of copper billets per hour. AFTEC was to install the furnace by April 16, 1993. On December 3, 1992, Reading Tube and AFTEC modified their agreement to change the payment terms and to provide for the issuance of a performance bond. Wausau issued the bond in the amount of $ 677,755 naming Reading Tube as obligee, and later entered into an agreement with Universal Refractories, Inc. ("Universal"), AFTEC's parent company, which obligated Universal to indemnify Wausau in the event it incurred liability under the performance bond.

 By August 1995, the furnace still was not performing in accordance with the specifications set forth in the CPA. Representatives from Reading Tube, AFTEC, Universal, and Wausau reconvened on August 17, 1995, to discuss the possibility of corrective action. Reading Tube claims that at this meeting, AFTEC allegedly admitted that it could not comply with the CPA. Accordingly, on August 25, 1995, Reading Tube notified AFTEC that it was formally declaring a default under the contract. Reading Tube then notified Wausau that it was requesting the latter party to undertake its obligations under the performance bond.

 After Reading Tube declared AFTEC in default, Lee Thompson, AFTEC's executive vice president, contacted Sherry Tanck, the Wausau bond claims representative in charge of the performance bond issued on behalf of AFTEC. According to notes taken by Ms. Tanck, Mr. Thompson expressed his concern that Reading Tube would settle for the penal sum of the performance bond. Mr. Thompson was of the opinion that the project would have been completed had AFTEC had the opportunity to replace three valves that AFTEC had previously suggested replacing. Mr. Thompson communicated this view to Wausau. On September 8, 1995, Wausau contacted Reading Tube to inform it of its decision not to honor the performance bond because of AFTEC's position that they had substantially performed their obligations under the contract. Wausau further stated that AFTEC was willing to address these items but because of Reading Tube's termination of the contract, AFTEC was unable to provide any further service. ...


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