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October 17, 2002


The opinion of the court was delivered by: Franklin S. Van Antwerpen, United States District Judge


Defendant National Fire Insurance Company of Hartford ("National Fire") moves for summary judgment pursuant to Fed.R.Civ.P. 56, against Wise Investments, Inc. ("Wise"), in an action to recover on a performance bond on which National Fire is named as the surety. Wise's claim under the bond arises from the disputed performance of a contract between itself, as owner, and Bracy Contracting, Inc. ("Bracy"), as general contractor, to build an outpatient clinic in Allentown, Pennsylvania for the Department of Veterans Affairs (the "VA"). In reaching our decision, we consider Defendant National Fire Insurance Company of Hartford's Motion for Summary Judgment, filed September 13, 2002, Plaintiff Wise Investments, Inc.'s Memorandum of Law in Opposition to Defendant National Fire Insurance Company of Hartford's Motion for Summary Judgment, filed September 25, 2002, and Defendant's Reply Memorandum thereto, filed October 3, 2002. Because disputed issues of material of fact remain as to whether Bracy, Wise, or both failed to fulfill their obligations under the contract, we deny National Fire's Motion for Summary Judgment in part, and grant the motion in part as set forth below.


We have original subject matter jurisdiction over claims between citizens of different states in which the monetary amount in dispute is greater than $75,000 under 28 U.S.C. § 1332. Plaintiff Wise Investments, Inc. is incorporated in the state of Nevada and has its principal place of business in Colorado. Defendant Bracy Contracting, Inc. is incorporated in Pennsylvania and has its principal place of business in Allentown, Pennsylvania. Defendant National Fire Insurance Company of Hartford is incorporated in Connecticut and has its principal place of business in Illinois. Wise Investments seeks damages from each defendant well in excess of the statutory minimum. As there is complete diversity between the parties and the amount in controversy exceeds $75,000, this court has jurisdiction to hear Plaintiff's complaint.


The court shall render summary judgment "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). An issue is "genuine" only if there is a sufficient evidentiary basis on which a reasonable jury could find for the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A factual dispute is "material" only if it might affect the outcome of the suit under governing law. Id. at 248, 106 S.Ct. 2505. All inferences must be drawn, and all doubts resolved, in favor of the non-moving party. United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S.Ct. 993, 8 L.Ed.2d 176 (1962); Gans v. Mundy, 762 F.2d 338, 341 (3d Cir. 1985), cert. denied, 474 U.S. 1010, 106 S.Ct. 537, 88 L.Ed.2d 467 (1985).

On a motion for summary judgment, the moving party bears the initial burden of identifying those portions of the record that it believes demonstrate the absence of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). To defeat summary judgment, the non-moving party must respond with facts of record that contradict the facts identified by the movant and may not rest on mere denials. Id. at 321 n. 3, 106 S.Ct. 2548 (quoting Fed.R.Civ.P. 56(e)); see First Nat'l Bank of Pa. v. Lincoln Nat'l Life Ins. Co., 824 F.2d 277, 282 (3d Cir. 1987). The non-moving party must demonstrate the existence of evidence that would support a jury finding in its favor. See Anderson, 477 U.S. at 248-49,106 S.Ct. 2505.

When federal courts sit in diversity cases, they must apply the substantive law of the states where they sit. Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). When they are required to interpret or apply state law, they must consider and accept the decisions of the state's highest court as the ultimate authority regarding state law. Ciccarelly v. Cary Canadian Mines, Ltd., 757 F.2d 548, 553 (3d Cir. 1985). When, however, the highest court of the state has not authoritatively considered the issue, "our disposition of such cases must be governed by a prediction of how the state's highest court would decide were it confronted with the problem." McKenna v. Ortho Pharmaceutical Corp., 622 F.2d 657, 661 (3d Cir. 1980).


In January of 1999, Wise Investments, Inc. contracted with Bracy Contracting, Inc. to build an outpatient clinic for the Department of Veterans Affairs at 3110 Hamilton Boulevard in South Whitehall Township, Pennsylvania. Wise executed two documents with Bracy, a construction contract (the "Primary Contract") dated January 7, 1999, and a contingency contract (the "Contingency Allowance") also dated January 7, 1999. The parties agreed to the Contingency Allowance in the event that a less expensive alternative to a concrete retaining wall would not be suitable for the clinic property.

At the same time the parties made their agreement, Bracy, as general contractor, provided a performance bond (the "Bond") to Wise, the obligee, naming National Fire Insurance Company of Hartford as the surety. The Bond, discussed in greater detail below, incorporated the terms of the construction contract*fn1 by reference. It also limited coverage specifically to performance — the cost of completion of the project — and made no mention of recovery for additional costs such as liquidated damages or attorneys' fees. The contract, by contrast, expressly contemplated liability for such additional costs.

As construction progressed, Wise became dissatisfied with Bracy's performance. Among other problems, it alleges that one of Bracy's subcontractors had improperly graded the site of the retaining wall. After several attempts at remedying the work had failed, Wise and Bracy executed a document outlining the understanding of both parties regarding the disputed work and payment for it. This February 19, 2000 agreement (the "Alternate Wall Agreement") also provided for the construction of a concrete retaining wall at the southwest corner of the clinic property. At some time thereafter, Bracy ceased its construction efforts, believing it was not obligated to perform. Final completion of the wall was delayed until June 15, 2000, although it is unclear whether substantial completion was achieved as planned by March 31, 2000. Other outstanding items for the clinic project remained unfinished according to Wise, including punch list items.

In May of 2000, Bracy filed a mechanic's lien against Wise in the Court of Common Pleas of Lehigh County. The claim sought recovery of money allegedly owed by Wise to Bracy for work on the retaining wall.*fn2 After Bracy had filed the state lien claim, Wise gave written notice to Bracy that it was in default of the Construction Contract on November 17, 2000 and sent a copy to National Fire as well. The copy never reached National Fire because its address listed in the Bond was not correct. On December 27, 2000, Wise sent a second copy to National Fire's Chicago office, which the company acknowledged receipt of by letter dated January 10, 2001.

On July 10, 2001, shortly before the state court trial regarding the lien, Wise brought a separate action in federal court seeking recovery for Bracy's allegedly inadequate performance. The lawsuit named Bracy and the surety, National Fire, as defendants. Count IX of the Complaint alleges that National Fire is liable for Bracy's failure to perform the Construction Contract and all other claims Wise may have against Bracy. Bracy filed its answer on September 18, 2002 and brought a counterclaim against Wise. We denied Wise's motion to dismiss the counterclaim by memorandum dated November 1, 2001. National Fire now moves for summary judgment on Count IX of the Complaint.

IV. DISCUSSION A. Scope of Coverage Under the Bond

We first consider the scope of the performance bond issued by National Fire that names Wise as obligee. The parties do not dispute that the Bond applies to the Primary Contract dated January 7, 1999. The issue we now resolve is whether the Bond also applies to the Contingency Allowance dated January 7, 1999 and the subsequent Alternate Wall Agreement dated February 19, 2000. For the reasons set forth below, we find that the scope of the Bond applies to all three agreements.

1. Plaintiff Wise's Position

2. Defendant National Fire's Position

National Fire argues that the terms of the Bond refer to a "written agreement dated January 7, 1999" covering only the Primary Contract and not the Contingency Allowance or the Alternate Wall Agreement.

3. The Bond's Coverage Extends to All Three Agreements

We agree with Wise's position for two reasons. First, the existence of a prior state court decision regarding the three agreements warrants the application of collateral estoppel. The district courts have broad discretion in deciding whether to apply the doctrine of collateral estoppel. Parklane Hosiery Co. v. Shore, 439 U.S. 322, 331, 99 S.Ct. 645, 651, 58 L.Ed.2d 552 (1979). To apply the doctrine, courts consider four elements: (1) whether the issue decided in the prior adjudication was identical with the one presented in the later action; (2) whether there was a final judgment on the merits; (3) whether the party against whom the plea is asserted was a party or in privity with a party to the prior adjudication; and (4) ...

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