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Sloan Co. v. Liberty Mutual Insurance Co.

August 25, 2009

SLOAN COMPANY, PLAINTIFF,
v.
LIBERTY MUTUAL INSURANCE CO., DEFENDANT.



The opinion of the court was delivered by: Schiller, J.

MEMORANDUM

Plaintiff Sloan & Company brought this action against Defendant Liberty Mutual Insurance Company, alleging breach of contract of a surety bond. Currently before the Court are the parties' cross-motions for summary judgment, upon which the Court held oral argument on August 21, 2009. For the reasons that follow, Plaintiff's motion is granted in part and denied in part, Defendant's motion is granted in part and denied in part, and judgment in the amount of $785,067.00 is entered in Plaintiff's favor.

I. BACKGROUND

On May 7, 2004, Shoemaker Construction Company (the "Contractor") entered into a contract with Isle of Capri Associates, LP (the "Owner") for a $90.7 million construction project known as Waterfront Square Condominiums & Spa, at Piers 36-39 North, Philadelphia, Pennsylvania (the "Project"). (Mem. of Law in Supp. of Mot. by Pl. to Lift Stay and Enter Summ. J. against Def. [Pl.'s Summ. J. Mem.] at 1; Mem. of Law in Supp. of Def.'s Cross-Motion for Summ. J. and in Opp'n to Pl.'s Mot. for Summ. J. [Def.'s Summ. J. Mem.] at 3.) Liberty Mutual issued a payment bond (the "Surety Bond") on September 9, 2004 to Shoemaker for the construction of the Project. (Pl.'s Summ. J. Mem. at 1; Def.'s Summ. J. Mem. at 4.) The Surety Bond identified Defendant as "Surety," Shoemaker as "Contractor," and the Isle of Capri Associates, LP as "Owner." (Pl.'s Summ. J. Mem. Ex. A-2 [Surety Bond].)

On November 12, 2004, Sloan entered into a subcontract (the "Subcontract") with Shoemaker to provide drywall and carpentry work for the Project. (Pl.'s Summ. J. Mem. at 2 & Ex. A-1 [Subcontract]; Def.'s Summ. J. Mem. at 3.) The Subcontract rendered Sloan a potential Claimant under the Surety Bond, which defines Claimant to include any entity that has a direct contract with the Contractor "to furnish labor, materials or equipment for use in the performance of the Contract." (Surety Bond ¶ 15.1.)

The Contractor filed an action on May 31, 2007 against the Owner in the Court of Common Pleas of Philadelphia County, alleging that it had substantially completed the work on the Project, but the Owner had failed to pay, in violation of the parties' contract. (Pl.'s Summ. J. Mem. at Ex. B [Contractor's Compl.].) Shortly after the Contractor sued the Owner, and in fulfillment of the notice requirements of the Surety Bond, Plaintiff provided Defendant with notice of its claims for outstanding amounts due and owing by the Contractor and requested payment. (Id. at 7 & Ex. A-3 [Notice of Claim]; Def.'s Summ. J. Mem. at 5.)

By letter dated July 12, 2007, Defendant denied Plaintiff's claim in its entirety. (Pl.'s Summ. J. Mem. at 3 & Ex. A-4 [Surety's Resp. to Claim]; Def.'s Summ. J. Mem. at 5.) Defendant noted that the Owner had not yet made payment to the Contractor for Plaintiff's work and referenced the Philadelphia County court action. (Surety's Resp. to Claim.) The Defendant asserted that the Subcontract contained "a clear condition precedent that necessitates that Isle of Capri make payment to Shoemaker prior to Sloan being able to assert a payment demand(s) against Shoemaker and/or its Surety." (Id.) The specific language that Liberty Mutual referred to, which it termed a "pay-if-paid" defense, reads:

Final payment [to the Subcontractor] shall be made within thirty (30) days after the last of the following to occur, the occurrence of all of which shall be conditions precedent to such final payment: . . . (6) Contractor shall have received final payment from the Owner for the Subcontractor's Work . . . . (Subcontract § 6(f).)

Plaintiff filed it Complaint on December 18, 2007. Defendant moved for dismissal or a stay of the action, pending the resolution of the Contractor's case against the Owner.*fn1 The Court granted the stay. After being informed that the Contractor's case was settled, Plaintiff filed a motion for summary judgment on October 22, 2008. (Pl.'s Summ. J. Mem. at 5.) The stay was lifted shortly thereafter and Defendant filed a cross-motion for summary judgment on December 10, 2008. On July 14, 2009, the case was transferred from the Honorable Bruce W. Kauffman to this Court. Oral argument on the motions for summary judgment was held on August 21, 2009.

II. STANDARD OF REVIEW

Summary judgment is appropriate "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); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986). The moving party bears the initial burden of identifying those portions of the record that it believes illustrate the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). If the moving party makes such a demonstration, the burden then shifts to the non-movant, who must offer evidence that establishes a genuine issue of material fact that should proceed to trial. Id. at 324; see also Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (1986). When the moving party does not bear the burden of persuasion at trial, it may meet its burden on summary judgment by showing that the nonmoving party's evidence is insufficient to carry its burden of persuasion at trial. Celotex,477 U.S. at 323. Thereafter, the nonmoving party demonstrates a genuine issue of material fact if sufficient evidence is provided to allow a reasonable finder of fact to find for the nonmoving party at trial. Anderson, 477 U.S. at 248.

In reviewing the record, "a court must view the facts in the light most favorable to the nonmoving party and draw all inferences in that party's favor." Armbruster v. Unisys Corp., 32 F.3d 768, 777 (3d Cir. 1994). Furthermore, a court may not make credibility determinations or weigh the evidence in making its determination. See Reeves v. Sanderson Plumbing Prods., 530 U.S.133, 150 (2000); see also Goodman v. Pa. Tpk. Comm'n, 293 F.3d 655, 665 (3d Cir. 2002). The same standards apply to cross motions for summary judgment. Appelmans v. City of Phila, 826 F.2d 214, 216 (3d Cir. 1987); see also Transportes Ferreos de Venezuela II CA v. NKK Corp., 239 F.3d 555, 560 (3d Cir. 2001).

III. DISCUSSION

Plaintiff moves for summary judgment in the amount of $1,074,260.09, plus interest and taxable costs. (Pl.'s Summ. J. Mem. at 14.) Defendant, in response, contends that it is entitled to assert the defense of a "pay-if-paid" clause in the Subcontract. (Def.'s Summ. J. Mem. at 1.) It also asserts that Plaintiff has incorrectly calculated the amount of its claim and is entitled to recover, at most, $785,067. The parties raise several additional arguments that the Court will address prior to reaching the key issue in this case: whether §6(f) of the Subcontract is a "pay-if-paid" or "pay-when-paid" clause.

A. Defendant Complied with the Terms of the Surety Bond and Has Not Forfeited its Right to Dispute the Claim Amount

Plaintiff contends that Defendant failed to comply with the terms of the Surety Bond in disputing the amount of Sloan's claim and, therefore, has forfeited its right to dispute that amount. (Pl.'s Summ. J. Mem. at 9-11.) Defendant contends that its response fully complied with the requirements of § 6.1 of the Surety Bond. That provision stipulates that once the Claimant has satisfied the conditions of § 4, the Surety, at its own expense, shall "[s]end an answer to the Claimant, with a copy to the Owner, within 45 days after receipt of the claim, stating the amounts that are undisputed and the basis for challenging any amounts that are disputed." (Surety Bond § 6.1.)

By letter dated June 7, 2007, Sloan gave Liberty Mutual notice of its impending claim for unpaid amounts, as required by § 4.1 of the Surety Bond. Thirty-five days later, on July 12, 2007, Liberty Mutual responded by denying payment in its entirety on the basis of the "pay-if-paid" provision in the Subcontract. Noting that the Owner had not yet paid the Contractor for Plaintiff's work, Defendant asserted that the Subcontract contained "a clear condition precedent that necessitates that Isle of Capri [the Owner] make payment to Shoemaker [the Contractor] prior to Sloan being able to assert a payment demand(s) against Shoemaker and/or its Surety." (Surety's Resp. to Claim.) Plaintiff contends that Defendant "has never disputed the amount of Sloan's Claim, only the timing of when it would be paid." (Pl.'s Summ. J. Mem. at 9.) As such, since 45 days have passed since receipt of the claim, Plaintiff argues that Defendant is now barred by the terms of the Surety Bond from disputing the amount of the claim. Defendant rejects this argument, asserting that it fully complied with the Surety Bond's provisions when it "disputed the claim in its entirety, provided the basis for rejecting the amount claimed by Sloan, and requested that Sloan provide documentation to support its position." (Def.'s Summ. J. Mem. at 24.)

The Court does not read § 6.1 to proscribe a formalistic requirement that a Surety must list the undisputed amount, even if that amount is zero. Reading § 6.1 in such a way, so as to rule that Defendant forfeited its right to contest the claim amount, would run contrary to the Pennsylvania Supreme Court's directive to avoid forfeitures of rights when interpreting contracts. Carsek Corp. v. Schifter, 246 A.2d 365, 369 (Pa. 1968) (noting that Pennsylvania Supreme Court has "always sought to avoid forfeitures, and has interpreted contracts in such a way as to effectuate that purpose."). Defendant had no reason to state an undisputed amount, because it was contesting the entire amount of the claim. Since Liberty Mutual disputed the entire amount of Sloan's claim, its response adheres to the plain and unambiguous requirements of § 6.1 of the Surety Bond.

In its Reply Memorandum, Plaintiff contends that "Liberty Mutual's response to Sloan's claim contested only Sloan's entitlement to payment at that time, not the amount of the claim . . . ." (Reply Mem. in Supp. of Mot. by Pl. for Summ. J. against Def. and Resp. by Pl. to Cross-Motion by Def. [Pl.'s Reply Mem.] at 16.) To the extent Plaintiff believes Defendant was required to dispute the value of the work performed by Plaintiff, in addition to raising a general defense to liability, the Court is not convinced by this argument. Such a reading is not evident from the text of ยง 6.1 and would lead to an undesirable forfeiture of Defendant's rights. It would also cause further confusion as, to the extent this reading would require Defendant to ...


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