McWane, Inc. v. Fidelity & Deposit Co. of Maryland, 372 F.3d 798

372 F.3d 798 | 6th Cir. | 2004

Before: KRUPANSKY and GILMAN, Circuit Judges;

RUSSELL, District Judge. ^[*] UNITED STATES COURT OF APPEALS _________________ FOR THE SIXTH CIRCUIT _________________ COUNSEL ARGUED: Daniel F. Gourash, PORTER, WRIGHT, M C W ANE , I NC ., (cid:88) MORRIS & ARTHUR, Cleveland, Ohio, for Appellant. (cid:45) Plaintiff-Appellant/ William H. Woods, McNAMARA & McNAMARA, (cid:45) Cross-Appellee, Columbus, Ohio, for Appellee. ON BRIEF: Daniel F. (cid:45) Nos. 02-4152/4225 Gourash, David Andrew Bell, PORTER, WRIGHT, MORRIS (cid:45) > v. & ARTHUR, Cleveland, Ohio, for Appellant. William H. (cid:44) Woods, Dennis D. Liston, McNAMARA & McNAMARA, (cid:45) Columbus, Ohio, for Appellee. F IDELITY & D EPOSIT (cid:45) C OMPA NY OF M ARYLAND , (cid:45) _________________ (cid:45) Defendant-Appellee/ (cid:45) OPINION Cross-Appellant, (cid:45) _________________ (cid:45) G ROOMS C ONSTRUCTION (cid:45) KRUPANSKY, Circuit Judge. This appeal involves a C OMPANY , I NC .; H IGHLAND (cid:45) contract dispute between appellant/cross-appellee McWane, (cid:45) C OUNTY W ATER C OMPANY , Inc., through its Clow Water Systems Company Division (cid:45) I NC ., (“McWane”), and appellee/cross-appellant Fidelity & Deposit (cid:45) Company of Maryland (“F&D”), regarding F&D’s denial of Defendants. (cid:45) McWane’s claim on a payment bond (“Bond”), issued by (cid:78) F&D as surety to the general contractor Grooms Construction Co., Inc. (“Grooms”), on a water-main project owned by

Appeal from the United States District Court Highland County Water Company (“Highland”). McWane for the Southern District of Ohio at Cincinnati. operated as a material supplier on the project prior to No. 00-00986—Herman J. Weber, District Judge. Argued: March 16, 2004 Decided and Filed: June 22, 2004 conclusion that McWane impaired F&D’s suretyship status arrived at this arrangement without prior notice to McWane or the other suppliers. ^[4] when it endorsed a series of multiparty checks from the public municipality. Additionally, F&D has cross-appealed from the This arrangement required McWane, along with other district court’s decision that neither the joint check rule nor named suppliers on the project, to endorse a joint check and the Uniform Commercial Code (“UCC”) were dispositive in return it to Grooms prior to the issuance of separate payment support of F&D’s argument for summary judgment. For the from the General Contractor. Highland issued a total of four reasons discussed below, this court reverses the district

joint checks between April and July of 2000, totaling court’s grant of summary judgment to F&D while affirming approximately $1.1 million. ^[5] After McWane and other co- the district court’s conclusion that neither the joint check rule nor the UCC proved dispositive in the instant case.

In March of 2000, F&D agreed to stand surety on a also had in formation that Grooms was a slow-pay to its suppliers. Not payment bond for Grooms, the low bidder and general until June 2000 d id F&D receive Grooms’ overdue 19 99 year-end contractor on a water main project owned by Highland. financial stateme nt which indicated that the contracto r had sustained $2 McWane contracted with Grooms to supply pipe materials for million in lo sses in 1999 . the Project. ^[2] Prior to the start of construction, Highland ^[3] Because Highland had concerns about Grooms’ reputation for slow-

pay to its suppliers, Highland instituted a multiple-party check payment arrangement that would include, as co-payees, G rooms and all suppliers ^[1] whose invoices were submitted with a pa rtial paym ent req uest. Neither McW ane is engaged in the business of selling a nd sup plying d uctile

Highland nor Grooms advised McWane which invoices were submitted iron water pipe and associated pipe fittings to contractors. Grooms was with any p articular partial p ayment requ est. a general contractor engaged in the business of installing water and sewer lines but ceased do ing business in January 2001. Grooms continues to be ^[4] an active Ohio corporation. On April 29, 1998, Grooms entered into a On April 11, 2000 , Gro oms subm itted a letter to Highland credit agreement with McW ane that permitted Grooms to p urchase representing that Grooms had ob tained agreement from its sup pliers to materials from McW ane on an account and ap plied to all future sales. High land’s multiple-party check payment procedure. Grooms did not The agreement required payment within thirty days of the invoice date, contact McW ane prior to that letter and Highland did not confirm provided for interest to accrue at the rate of 18% per annum on all past McW ane’s acquiescence to the pro cedure. due accounts, and permitted McW ane to recover all costs and expenses of ^[5] collection.

Highland issued the following four checks: Multiple-party check #1 on Ap ril 19, 2000, to Grooms, M cW ane and ^[2] At the time, Grooms’ financial condition was dire and F&D was Water Works as co-payees in the amount of $396,095.24.

unaware of the situation because it had failed to follow its standard Multiple-party check #2 on May 17, 2000 to Grooms, McW ane, Water underwriting procedures prior to underwriting the Bond . When the W orks and another supplier, Pittsburgh Pipe, as co-payees in the Payment Bo nd was issued by F&D through its authorized bonding agent amo unt of $471 ,997 .23. on M arch 7, 2000, F& D performed no separate underwriting on the Multiple-party check #3 on June 21, 2 000 to Grooms and McW ane as co- Project and the mo st recent information o n file was Groom s’ 1998 year- payees in the amou nt of $7 7,11 1.25 . end financial statement which showed a strong cash position, though F&D Multiple-party check #4 on July 19, 2000 to Groom s, McW ane, and Nos. 02-4152/4225 McWane, Inc. v. Fidelity 5 6 McWane, Inc. v. Fidelity Nos. 02-4152/4225

& Deposit Co. of Md. & Deposit Co. of Md. payees had endorsed the checks, Grooms then issued separate while the claims against F&D were for breach of payment checks. After the multiple parties endorsed check #2, Grooms bond and declaratory judgment. F&D and Highland also filed presented a separate check to McWane for $180,912.24. ^[6]

cross-claims. Thereafter, the parties conducted discovery, That check cleared and was applied to outstanding invoices. including depositions of various party representatives. After the multiple parties endorsed check #3, Grooms On October 31, 2001, the parties filed simultaneous presented a separate check to McWane for $78,156.73, which motions for summary judgment. McWane filed a motion for cleared. After Highland issued check #4 and prior to full summary judgment against F&D, Highland, and Grooms, endorsement from all co-payees, Grooms presented McWane while both F&D and Highland filed separate motions for with a separate check in the amount of $111,522.38, at the summary judgment against McWane. same time that McWane endorsed check #4. However, before McWane deposited check #4, Grooms stopped payment.

On September 13, 2002, the district court granted McWane received no other money directly from Grooms, but McWane’s unopposed motion for summary judgment against did receive four checks directly from Highland (being Grooms in the amount of $470,214.82, plus interest. The previously endorsed by Grooms) totaling $29,817.63. court also granted Highland’s and F&D’s motions for summary judgment against McWane and denied McWane’s Once Grooms stopped payment on the check, McWane motions for summary judgment against Highland and F&D. submitted a claim to F&D on the Bond for $440,208.56, the estimated amount of Grooms’ arrears to McWane. ^[7] On

The court concluded that McWane was not entitled to recover against F&D because McWane had impaired F&D’s September 7, 2000, F&D denied McWane’s claim. In its suretyship status. However, the court refused to find denial letter, F&D maintained that McWane had forfeited its dispositive F&D’s additional claims involving the application right to recover under the joint check rule.

of the joint check rule and the UCC. On November 24, 2000, McWane filed a complaint against On October 11, 2002, McWane made timely appeal from Highland, Grooms, and F&D. The claims against Grooms the district court’s order denying its motion for summary included an action on an account and breach of contract, judgment against F&D. McWane did not appeal the grant of Highland’s motion for summary judgment, and Grooms did not appeal the uncontested grant of summary judgment in

W ater W orks as co-payees in the amount o f $17 2,60 0.76 . favor of McWane. On October 18, 2002, F&D timely filed its notice of cross-appeal. ^[6] Approximately $111,00 0 of check #2 represented payment for the

current Project, while $69,000 was applied to invoices due on a prior This court has jurisdiction over this action pursuant to separate project, per Grooms’ instruction. W hile McW ane’s name 28 U.S.C. §§ 1291. This court reviews de novo a district app eared on check # 1 for p artial end orsem ent, as of the date of issuance court’s grant of summary judgment. Peters v. Lincoln Elec. of that check, McW ane was owed no mo ney from Groom s and, thus, Co. , 285 F.3d 456, 465 (6th Cir. 2002). A district court’s received no proceeds from check #1.

interpretation of state law is also governed by the de novo ^[7] This claim was submitted on August 3, 2000. M cW ane standard. Ferro v. Garrison Ind., Inc ., 142 F.3d 926, 931 (6th

subsequently reduced this amo unt to $427,705.69 to reflect a sales tax Cir. 1998). credit that was given to G rooms. Nos. 02-4152/4225 McWane, Inc. v. Fidelity 7 8 McWane, Inc. v. Fidelity Nos. 02-4152/4225

& Deposit Co. of Md. & Deposit Co. of Md. “Suretyship is the contractual relation whereby one person, when another supplier, Water Works, endorsed the joint the surety, agrees to answer for the debt, default or checks issued by Highlands. However, upon review, the Ohio miscarriage of another, the principal, with the surety generally Court of Appeals found little merit in that conclusion, relying being primarily and jointly liable with the principal.” Solon instead on the clear language of the Bond to reverse the lower Family Physicians, Inc. v. Buckles , 645 N.E.2d 150, 152 court’s grant of summary judgment to F&D. Water Works (Ohio Ct. App.1994) (citing Hopkins v. INA Underwriters Ins. Supplies, Inc., v. Grooms Construction Co., Inc. , 2003 WL Co. , 542 N.E.2d 679, 682 (Ohio Ct. App.1988)); see also 1563809 (No. 01CA18) (Ohio Ct. App., 2003) (unpublished Manor Care Nursing & Rehab. Ctr. v. Thomas ,704 N.E.2d table opinion), appeal not accepted for review Water Works 593 (Ohio Ct. App.1997); St. Paul Fire & Marine Ins. Co. v. Supplies, Inc. v. Grooms Constr. Co., Inc ., 791 N.E.2d 984 Industrial Comm. of Ohio , 506 N.E.2d 202, 210 (Ohio Ct. (Ohio, 2003). In the instant case, this court considers App.1987) (stating that the surety’s obligation is created persuasive the reasoning and conclusions of the Ohio Court concurrently with that of the principal debtor). of Appeals, as the Water Works suit involved the same

defendant, the same project, the same joint checks and the The doctrine of surety has several defenses by which the identical payment bond waiver clause as presented in the case surety may avoid liability on the contracted payment bond. sub judice . F&D has relied upon one of these defenses in arguing that by signing the multiple-party checks presented by Grooms, The Ohio courts have recognized that an agreement McWane extended the time of payment by Grooms without between the creditor and principal that extends the time for F&D’s consent, thus discharging the surety obligation. performance will not discharge the surety “absent a concrete

showing of prejudice.” Water Works , 2003 WL 1563809 at The district court agreed with F&D’s argument that *4. As the Ohio Court of Appeals noted in reversing the McWane impaired Fidelity’s “suretyship status” by lower court’s decision in Water Works , an adequate showing unilaterally negotiating the highland checks back to Grooms, of prejudice may arise where “the principal could have paid without Fidelity’s consent, and thereby intentionally the debt by forwarding to the claimant its share of a payment forfeiting its right to be paid for its materials from the received from the owner, had the claimant not given the proceeds of the four multiple-party checks. The district court principal an opportunity to misapply or dissipate those funds concluded, “Ohio courts would hold that plaintiff impaired its by agreeing to an extension.” Id. suretyship status by endorsing the checks presented by Grooms without taking steps to secure payment from Grooms In the instant case, F&D has claimed that by endorsing the for the materials plaintiff had supplied so as to relieve Fidelity joint checks, McWane improperly granted Grooms an of liability to plaintiff under the Payment Bond.” extension of time for payment. In response, McWane has

argued persuasively that F&D expressly waived any defense The determination of the district court, in the instant case, based upon an extension of time in the waiver clause of the hinged on the Ohio court’s decision in a markedly similar Bond. case, Water Works Supplies, Inc v. Grooms Const. Co., Inc ., No. 10CV 010 (Ohio Ct. Com. Pl. Sept 27, 2001) Evaluating the merit of F&D’s defense requires an (unpublished decision). In Water Works , the trial court examination of the language of the Bond. See G.F. Business concluded that F&D’s surety obligations were discharged Equip., Inc. v. Liston , 454 N.E.2d 1358, 1359 (Ohio Ct. App. Nos. 02-4152/4225 McWane, Inc. v. Fidelity 9 10 McWane, Inc. v. Fidelity Nos. 02-4152/4225

& Deposit Co. of Md. & Deposit Co. of Md. 1982) (noting that the precise words of the contract serve to The said SURETY for value received hereby stipulates bind the surety). In interpreting a surety contract, other words and agrees that no change, extension of time, alteration cannot be added by construction or implication, but the or addition to the terms of the contract or to the WORK meaning of the words actually used is to be ascertained in the to be performed thereunder of the SPECIFICATIONS same manner as the meaning of similar words used in other accompanying the same shall in any way affect its contracts. They are to be understood in their plain and obligation on this BOND, and it does hereby waive ordinary sense, to be read in the light of the surrounding notice of any such change, extension of time, alteration circumstances and of the object intended to be accomplished. or addition to the terms of this contract to the WORK or See Troyer v. Horvath , 468 N.E.2d 351, 353 (Ohio Ct. to the SPECIFICATIONS. App.1983) (“A bond is to be construed as a contract between

F&D has claimed that by not requiring Grooms to the parties and interpreted in accordance with its terms.”); immediately pay McWane its share of the joint check, R ESTATEMENT (T HIRD ), S URETYSHIP AND G UARANTY § 6 McWane extended the time by which Grooms was allowed to (1996) (“Each rule in [the] Restatement stating the effect of pay, thereby extending the time for performance of the suretyship status may be varied by contract between the underlying contract. However, F&D’s payment bond contract parties subject to it.”). “Furthermore, any doubtful language expressly waived notice of any extension of time. See Water in the contract of surety must be construed strongly against Works 2003 WL 1563809 at *4 (“A surety bond is, however, the surety, and in favor of indemnity, which the creditor has a contract and a surety may contractually waive defenses”). reasonable ground to expect.” Solon Family Physicians , 645 N.E.2d at 152.

F&D has further maintained that McWane impaired its suretyship status by mishandling certain collateral, namely, F&D issued the Bond on March 7, 2000, identifying itself the four checks that Highland wrote to Grooms, McWane, and as surety for Grooms as general contractor on the water other suppliers. Grooms received these checks from project. The Bond provided, in pertinent part, that F&D was

Highland, presented them for signature by McWane and the held and firmly bound unto Highland County Water other co-payees, and deposited them into its bank account. Company . . . and unto all persons, firms, and Pursuant to this arrangement, Grooms then paid McWane by corporations who are or which may furnish labor, or who separate check. McWane has argued that because they did furnishes materials to perform as described under the not have possession or control over the joint checks from contract. . . . PROVIDED that beneficiaries or claimants Highland they could not have impaired F&D’s suretyship. hereunder shall be limited to the SUBCONTRACTORS, McWane’s position represents the proper elaboration of and persons, firms, and corporations having a direct suretyship principles and guiding law. c o n t r a c t w i t h t h e P R I N C I P A L o r i t s

In limited circumstances, an obligee [i.e. McWane] may be

SUBCONTRACTORS.

held liable for impairment of suretyship status if it acts “to The Bond also contained a broad waiver clause whereby F&D increase the secondary obligor’s [i.e. F&D] risk of loss by contractually waived certain potential surety defenses. In increasing its potential cost of performance or decreasing its pertinent part, that clause provided: potential ability to cause the principal obligor [i.e. Grooms]

to bear the cost of performance.” R ESTATEMENT (T HIRD ), Nos. 02-4152/4225 McWane, Inc. v. Fidelity 11 12 McWane, Inc. v. Fidelity Nos. 02-4152/4225 & Deposit Co. of Md. & Deposit Co. of Md. S URETYSHIP AND G UARANTY § 37(1). The burden is on that a creditor not in possession of collateral cannot be F&D, as a compensated surety, to prove that McWane is liable for its unjustified impairment. liable for any alleged loss or prejudice resulting from its

See also, Mid-Continent Refrigerator v. Whitterson , 289 impairment of F&D’s suretyship status. R ESTATEMENT N.E.2d 379, 382 (Ohio Ct. App.1972); Boyd v. Royal (T HIRD ), S URETYSHIP AND G UARANTY § 49(2)(a)(i).

Indemnity ,185 N.E. 422, 423 (Ohio 1933). To discharge a surety based on impairment of collateral, the In the instant case, the record reveals that McWane had surety must prove that the obligee (i) failed to obtain or neither possession nor control of the joint checks. Nor did maintain perfection in collateral, (ii) released collateral McWane have possession of anything of actual value from without obtaining substituted collateral of equal value, Highland. Instead, Grooms presented the multi-party checks (iii) failed to perform a duty to preserve the value of to McWane for endorsement solely to facilitate the release of collateral, or (iv) failed to comply with applicable law in

funds from Highland to Grooms, rather than to satisfy an disposing of collateral. R ESTATEMENT (T HIRD ), S URETYSHIP outstanding debt from Grooms. In each instance, Grooms AND G UARANTY § 42 (2) (a) - (d). The record before this tendered separate payment to McWane. Moreover, at the court indicates that McWane did not possess any collateral time Grooms presented the joint checks to McWane for belonging to Grooms that secured a debt. As McWane had signature, the appellant had no indication from Grooms which neither power over, nor possession of, any collateral funds represented by each check stood as payment for belonging to Grooms, it cannot be held liable for any alleged materials supplied by McWane. impairment of F&D’s suretyship status. See Woolworth v. Brinker , 11 Ohio St. 593 (Ohio 1860) (stating that to give

Consequently, the district court erred in determining that effect to a relinquishment “there must have been a parting McWane impaired F&D’s suretyship status when it endorsed with something actually in the power and possession” of the the multi-party checks presented to it by Grooms. creditor, for without the relinquishment the surety could still exercise its subrogation rights against the debtor).

In its cross-appeal, F&D has maintained that the joint check rule and the UCC each provide an alternative defense to The Ohio Supreme Court affirmed this position, regarding McWane’s claim for payment on F&D’s Bond to Grooms, the duty of a creditor not in possession of collateral, in which the district court should have entertained. F&D urges Buckeye Fed. Savings & Loan Ass’n v. Guirlinger , 581 this court to find error in the district court’s conclusion that N.E.2d 1352, 1354 (Ohio 1991): neither the UCC provisions nor the joint check rule were material in its decision to grant F&D’s motion for summary We find that the most equitable and commonsense judgement. approach is to require the party in possession of the collateral to carry the responsibility to conserve it.

F&D has maintained that Ohio courts should recognize the Public policy will not be served by requiring a creditor joint check rule as applicable to the instant matter, thereby out of possession to supervise and, probably, second, discharging F&D’s liability as surety. McWane has guess the debtor as the guarantor in its handling of the responded that the joint check rule does not apply to collateral in its rightful possession. We hold, therefore, extinguish Fidelity’s obligations as a surety because the rule Nos. 02-4152/4225 McWane, Inc. v. Fidelity 13 14 McWane, Inc. v. Fidelity Nos. 02-4152/4225 & Deposit Co. of Md. & Deposit Co. of Md. does not apply to the surety of a co-payee, but merely 1164, 1167 (9th Cir. 1986). Moreover, Ohio courts have not provides that the maker of a joint check is deemed to have yet recognized the joint check rule. See Water Works 2003 paid the materialman named as payee. McWane’s position is WL 1563809 at *5. Consequently, the district court did not consonant with the terms and application of the rule. err in refusing to find the joint check rule dispositive in the

case sub judice . The joint check rule does not innoculate F&D from liability in this instance. The rule provides that when a subcontractor F&D has further maintained, in its cross-appeal, that under and the materialman are joint payees, and no agreement exists the UCC, McWane’s endorsement on the multiple-party with the owner or general contractor as to the allocation of the checks represented an unsecured loan to Grooms. McWane proceeds, a materialman, by endorsing the check, is deemed has responded that it could not negotiate the joint checks at to have received the monies owed. This rule emerged from the time of endorsement because McWane never possessed or the California Supreme Court decision in Post Brothers controlled the checks. Construction Company v. Yoder , 569 P.2d 133 (Cal. 1977).

The record evidence indicates that each of the joint checks In that resolution, the court concluded that the joint check rule was made payable to two or more entities and McWane was barred the supplier’s claim against the surety, because the the first party to endorse each joint check. Additionally, the owner/contractor was the maker of the multi-party check. It joint checks were made payable to all co-payees and not reasoned that when the supplier endorsed the multiple-party alternatively, and could not be negotiated until all of the co- check, it waived its right to recovery from the maker of the payees had endorsed a given check. Finally, McWane was check. The court further reasoned that the surety for the not a holder of the checks because a single co-payee cannot maker of the checks could use the joint check rule as a be a “holder” under U.C.C. § 3-110: “If an instrument is defense to the supplier’s claim. Id. at 134.

payable to two or more persons not alternatively, it is payable As stated and applied, however, the rule does not extend to all of them and may be negotiated, discharged, or enforced beyond the relationship between the maker of the checks and only by all of them.” See also Pamar Enterprises, Inc. v. his or her sureties. As a co-payee, Grooms and its surety Huntington Banks of Mich ., 580 N.W.2d 11, 15 (Mich. Ct. F&D stand beyond the reach of the joint check rule. Id. at App. 1998). Accordingly, McWane lacked the legal capacity P.2d 137; see also Iowa Supply co. v. Grooms & Co. to negotiate, discharge, or enforce these checks under the Construction, Inc ., 428 N.W.2d 662, 666 (Iowa 1998) strictures of the U.C.C, and the district court did not err in not (concluding that the rule only bars claims against the maker considering the UCC dispositive in rendering F&D claims. of the check for the money due from a subcontractor).

The district court’s grant of summary judgment to F&D is In addition, federal courts that have considered the rule, reversed, the district court’s resolution of the joint check rule have noted that a joint check arrangement, standing alone, and the UCC is affirmed, and the case is remanded for further does not waive a supplier’s right to recover from a proceedings consistent with this opinion. contractor’s surety. See, e.g., United States ex rel. Clark- Fontana Paint Co. v. Glassman Construction Co. , 397 F.2d 8, 11 (4th Cir. 1968); United States ex rel. Youngstown Welding and Eng'g Co. v. Travelers Indem. Co. , 802 F.2d

NOTES

[*] The Honorable Thomas B. Russell, United States District Judge for the Western District of Kentucky, sitting by designation. 1 Nos. 02-4152/4225 McWane, Inc. v. Fidelity 3 4 McWane, Inc. v. Fidelity Nos. 02-4152/4225 & Deposit Co. of Md. & Deposit Co. of Md. Grooms’ bankruptcy.

[1] McWane appeals from the district arranged with Grooms to issue joint checks during phases of court’s denial of its motion for summary judgment and the the Project, with each check made payable to Grooms and its many suppliers, including McWane.

[3] Highland and Grooms grant of summary judgment to F&D predicated on the court’s