Opinion
Case No. 1:18-CV-5427
2020-06-17
MYERS CONTROLLED POWER, LLC, Plaintiff, v. FIDELITY AND DEPOSIT COMPANY OF MARYLAND; Zurich American Insurance Company, Defendants.
Craig G. Penrose, Laurie & Brennan LLP, Chicago, IL, for Plaintiff. Thomas Gerald Cronin, Courtney A. Nichol, Gordon & Rees Scully Mansukhani, Chicago, IL, for Defendants.
Craig G. Penrose, Laurie & Brennan LLP, Chicago, IL, for Plaintiff.
Thomas Gerald Cronin, Courtney A. Nichol, Gordon & Rees Scully Mansukhani, Chicago, IL, for Defendants.
ORDER
CHARLES RONALD NORGLE, Judge
Plaintiff's motion for summary judgment [22] is granted. Defendants’ motion for summary judgment [31] is denied. The parties shall submit an agreed written status regarding the remaining claim in this matter by August 5, 2020.
MEMORANDUM OPINION
Myers Controlled Power, LLC ("Plaintiff") brings this diversity action against sureties Fidelity and Deposit Company of Maryland and Zurich American Insurance Company (collectively, "Defendants" or the "Sureties") over $2.1 million that the Sureties allegedly owe by virtue of a flow-down payment bond. Put simply, Myers was a subcontractor on a rehabilitation project of the Washington, D.C. Metro's Orange and Blue lines, a project for which the Sureties issued a payment bond. Plaintiff was initially paid for its work related to the project by non-party Truland Walker Seal Transportation in May and June of 2014. Myers completed its work on the project on June 18, 2014. Shortly thereafter, Truland declared bankruptcy. In July 2016, the U.S. Bankruptcy Court for the Eastern District of Virginia initiated an adversary proceeding against Plaintiff, which ultimately resulted in a finding that the payment by Truland to Plaintiff had been a preference. The bankruptcy court issued an order against Plaintiff for repayment of the $2.1 million it had earlier received, which was memorialized in a July 25, 2018 judgment and was affirmed by a district court on May 24, 2019. This action seeking payment of that $2.1 million from the Sureties was brought on August 9, 2018. Pending before the Court are cross-motions for summary judgment.
The material facts in this matter are undisputed, but the case presents a potentially dispositive, novel question of law relating to whether this action is time-barred by the statute of limitations. Before turning to the legal issues, the relevant background will be outlined in more depth. I. BACKGROUND
In January 2011, Truland entered into a subcontract agreement with Clark Construction Group, the prime contractor on a rehabilitation project of the Orange and Blue subway lines in and around Washington, D.C. The total sum to be paid under that subcontract was $45 million. Truland further subcontracted with Nationwide Electrical Services, which in turn entered into a supplier subcontract with Plaintiff, Myers. The total to be paid under the Myers-NES subcontract was $17,041,113. Defendants jointly issued a payment bond in this case stating, in part, that "this Bond shall inure to the benefit of all persons supplying labor and material in the prosecution of the work provided for ... and that such person may maintain independent actions upon this bond in their own names." Dkt. 33 at 2-4.
In April 2014, Truland engaged a restructuring officer. The restructuring officer prepared a memorandum which stated that Truland was "out of trust" with its suppliers and indicated that Truland had received funds to pay subcontractors but had used the money on other projects. Truland was found to be "out of trust" by approximately $23.7 million. On May 9, 2014, Clark formally notified Truland that it was in default in a letter that was also provided to Defendants in this case. On May 13, 2014, Clark informed a Myers executive vice president that "Clark will ensure that [Plaintiff] receives the payment that are due for all gear which has been produced and will be produced. Clark will issue Joint Checks to [Plaintiff]/Truland that will be endorsed by Truland and then sent to [Plaintiff] by Clark." Dkt. 23 at 4. Plaintiff, Clark, and Truland ultimately entered into a Joint Check Agreement. Fidelity and Deposit Company of Maryland also signed the Joint Check Agreement.
On May 27, 2014, Plaintiff released equipment with a cost of $1,819,206.31. This Bill of Sale for the released equipment included $181,920.63 in "Overhead/Profit," for a total of $2,001,126.94. On June 18, 2014, Myers released additional equipment with a cost of $261,667.00. The June 18th Bill of Sale included an additional $26,166.70 for "Overhead/Profit," for a total Invoice of $287,833.70. On July 11, 2014, Clark delivered a check to Truland in the amount of $2,107,039.86. The check was payable jointly to Myers and Truland. Truland endorsed the check and had it delivered back to Clark. Clark then forwarded the check to Myers.
Shortly thereafter, on July 23, 2014, Truland filed a voluntary bankruptcy petition under Chapter 7 in the United States Bankruptcy Court for Eastern District of Virginia, Case No. 14-2766-BFK. On July 21, 2016, the Trustee in the bankruptcy case filed an adversary proceeding against Myers, Case No. 16-1151-BFK. On July 25, 2018, the court in the adversary action issued a memorandum opinion after conducting a trial and receiving evidence on February 1, 2018 and March 29, 2018. The Court determined the check issued by Clark jointly to Truland and Myers for Myers’ delivery of materials was a preference under 11 U.S.C. § 547. In conjunction with the Memorandum Opinion, the bankruptcy court also entered a judgment order in favor of the Trustee and against Myers for $2,107,039.86 (the amount of paid to Plaintiff in July 2014), plus pre-judgment interest at the federal rate. On May 24, 2019, the district court affirmed the decision.
On March 5, 2018 (before the judgment in the adversary action), Plaintiff made a formal bond claim notifying all parties including the Defendants of the Adversary Claim. Defendants received the Notice of Claim on March 8, 2018. On July 26, 2018, Myers (through counsel) notified Defendants via email of the judgment in the Adversary Action. To date, Defendants have not made any payment to Myers under the Bond. The Defendants have filed a contingent secured Proof of Claim in the Bankruptcy Case arising under the indemnity agreement under the Bond.
This action was filed on August 9, 2018. Plaintiff moved for summary judgment on Count 1 on June 6, 2019. Defendants cross-moved for summary judgment on July 10, 2019.
Plaintiff's second claim against Defendants is for bad faith.
II. ANALYSIS
This case presents a novel, purely legal question related to the interplay of the bankruptcy judgment (which clawed back a payment Plaintiff had previously received) and the statute of limitations. Put simply, did Plaintiff's action accrue in April or June of 2014 (when the original default or the completion of work occurred, respectively) or in 2018 when the judgment was entered in the bankruptcy court ordering repayment of the $2.1 million? Neither party has pointed to directly controlling precedent on this issue, and neither party has cited to any case dealing with a directly analogous issue. The Court also has located no such cases in its review of the matter.
Put another way, was Plaintiff's cause of action against the Sureties revived by the bankruptcy judgment?
1. Standard of Review
Before the Court are cross motions for summary judgment. Summary judgment should be granted if "the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). There are no disputes as to the material facts in this case. The dispute, rather, revolves around what the legal effect springs from the undisputed facts. Thus, the question turns to whether Plaintiff or Defendants are entitled to judgment as a matter of law as to the first count in the complaint.
2. Choice of Law and Statute of Limitations
A federal court in a diversity action must apply the choice-of-law rules of the jurisdiction in which it sits. Rexford Rand Corp. v. Ancel, 58 F.3d 1215, 1219 (7th Cir. 1995). Illinois courts apply the Second Restatement method of choice-of-law analysis and begin by characterizing the issue in terms of substantive law. Ruiz v. Blentech Corp., 89 F.3d 320, 324 (7th Cir. 1996). Illinois courts have adopted the doctrine of "depecage," which refers to the process of dividing a case into individual issues, each subject to a separate choice-of-law analysis. Ruiz, 89 F.3d at 324. In the absence of a conflict, Illinois law applies as the law of the forum. Dearborn Ins. Co. v. Int'l Surplus Lines Ins. Co., 308 Ill. App. 3d 368, 373, 241 Ill.Dec. 689, 719 N.E.2d 1092, 1096 (1999).
In this case, Plaintiff has argued a theory of liability under either Virginia or Illinois law, and Defendants have not devoted any argument as to the issue of general surety liability principles. Rather, Defendants have focused their defense on the argument that this action is barred by the statute of limitations. Given the facts of the case, it appears clear that if a substantive dispute existed, the substantive law of Virginia would apply. However, Defendants have not briefed the issue of liability on the bond in the first instance (again, instead only raising the statute-of-limitations affirmative defense) and thus the Court need not analyze this issue in depth.
"When its jurisdiction is based on diversity of citizenship, a federal court is obliged to apply the statute of limitations of the state in which it sits." Reinke v. Boden, 45 F.3d 166, 170 (7th Cir. 1995) (citing Guaranty Trust Co. of New York v. York, 326 U.S. 99, 110, 65 S. Ct. 1464, 1470, 89 L. Ed. 2079 (1945) ). The Court thus is obliged to apply the proper Illinois statute of limitations. In any event, the outcome of this case is not impacted by which potentially relevant statute of limitations applies. The parties have argued that either the Illinois construction statute of limitations, 735 ILCS 5/13-214, or the Illinois, Virginia, or Washington, D.C. bond statutes of limitations apply.
The Illinois construction statute provides for a four-year statute of limitations, and the bond statutes each provide for a one-year statute of limitations. If the claim was revived by the bankruptcy court's July 2018 judgment, the claim was timely under any of these statutes. If the claim was not revived by the bankruptcy judgment, the claim was untimely under any of these statutes.
This suit was filed on August 8, 2018.
The Court, in its initial review of the pending motions, uncovered Illinois case law suggesting that in some circumstances a ten-year statute of limitations may apply to a bond in similar circumstances. See People ex rel. Skinner v. Hellmuth, Obata & Kassabaum, Inc., 114 Ill. 2d 252, 263, 102 Ill.Dec. 412, 500 N.E.2d 34, 39 (1986) (discussing 735 ILCS 5/13-206 ). If the ten-year statute of limitations did apply, the claim would be timely regardless of at which relevant point the claim accrued. However, the Court has reviewed the supplemental briefing which it ordered on this issue and agrees with Defendants’ position that the more specific statute of limitations should apply in this case—the four-year statute codified at 735 ILCS 5/13-214. The Court in this regard agrees with the reasoning in James McHugh Constr. Co. v. Int'l Fid. Ins. Co., No. 1:14-CV-02399, 2016 WL 5477518, at *3 (N.D. Ill. Sept. 29, 2016), which discusses the legislative amendment to 735 ILCS 5/13-214 in response to Hellmuth and the distinction between these two Illinois statutes.
Thus, the Court analyzes whether the claim in this case was timely under the Illinois construction statute, 735 ILCS 5/13-214.
3. The Accrual of the Bond Claim
As referenced throughout the above, the key issue in this case is whether Plaintiff's claim in this Court is timely under the applicable Illinois statute of limitations. Plaintiff argues that its claim against the Sureties was revived by the bankruptcy court judgment (or the affirmance by the district court), and that the statute of limitations began to run on either of those dates (either July 25, 2018 or May 24, 2019). It points to general principles of suretyship law and Illinois case law discussing what constitutes an injury to support this view. Defendants, on the other hand, argue that Illinois law imposes a bright-line rule holding that such a claim begins to accrue, at the latest, once the project is completed. They further argue that Plaintiff could and should have joined the Sureties to the adversary bankruptcy proceeding to protect itself in the event that the $2.1 million was clawed back in those proceedings. They point to Illinois case law on the first point and bankruptcy decisions allowing such joinder on the second.
The Court need not analyze this distinction in this case because if the claim is timely as to one, it is timely as to the other given the facts in this case. In other words, the analysis is not impacted by setting the date of the accrual at the bankruptcy judgment or at the district court's affirmance.
As noted above, no controlling or directly analogous law on this issue has been cited or located by the parties or the Court. Thus, the Court turns to the statute and the background principles of suretyship and statutes of limitation in coming to its decision.
735 ILCS 5/13-214 reads, in part, as follows:
Actions based upon tort, contract or otherwise against any person for an act or omission of such person in the design, planning, supervision, observation or management of construction, or construction of an improvement to real property shall be commenced within 4 years from the time the person bringing an action, or his or her privity, knew or should reasonably have known of such act or omission. Notwithstanding any other provision of law, contract actions against a surety on a payment or performance bond shall be commenced, if at all, within the same time limitation applicable to the bond principal.
735 ILCS 5/13-214. As a general rule, the statute of limitations begins to run for purposes of a construction contract upon the completion of the contracted work. Santucci Const. Co. v. City of Danville, 128 Ill. App. 3d 954, 957, 84 Ill.Dec. 234, 471 N.E.2d 1000, 1002 (1984) ("We consider the rule to be that when a construction contract is involved, the period of limitation will begin to run against the contractor's claim for payment prior to the completion of the contract only in very rare circumstances.") (citing O'Brien v. Sexton, 140 Ill. 517, 524, 30 N.E. 461, 464 (1892) ).
Plaintiff counters that the facts in this case do not lend themselves to the general rule, arguing instead that the statute of limitations began to run only once Plaintiff actually suffered an injury. This injury occurred, in their view, once the $2.1 million was clawed back. Illinois law supports the general proposition that a cause of action accrues and the statute of limitations begins to run once facts exist which authorize the bringing of an action. E.g., Meeker v. Summers, 70 Ill.App.3d 528, 26 Ill.Dec. 919, 388 N.E.2d 920, 921 (1979) ("In general, a cause of action accrues when facts exist which authorize one party to maintain an action against another."). Plaintiffs extrapolate from this principle that because it was paid the $2.1 million in full in 2014, no injury accrued at that point, and the injury actually occurred when the bankruptcy court ruled against it, leading to a judgment requiring the return of the funds.
Well-established principles of suretyship law appear to support this position. The Restatement (Third) of Suretyship & Guaranty § 70 (1996), for example, states:
When a secondary obligation is discharged in whole or part by performance by the principal obligor or another secondary obligor, or by realization upon collateral securing such performance, the secondary obligation revives to the extent that the obligee, under a legal duty to do so, later surrenders that performance or collateral, or the value thereof, as a preference or otherwise.
A leading treatise on the matter contains a similar statement of the law:
Thus, a surety is not released by a payment that is a preference under the bankruptcy laws, which the creditor is
obliged to refund, as preferential payment is deemed by law to be no payment at all.
72 C.J.S. Principal and Surety § 129. This principle, although not explicitly adopted by the Seventh Circuit, is commonly approved of by different courts, including the Sixth, Ninth and Tenth Circuits. See In re SNTL Corp., 571 F.3d 826, 835-36 (9th Cir. 2009) (collecting cases); Lowrey v. Mfrs. Hanover Leasing Corp. (In re Robinson Bros. Drilling, Inc.), 6 F.3d 701, 704 (10th Cir. 1993) ; Wallace Hardware Co., Inc. v. Abrams, 223 F.3d 382, 408 (6th Cir. 2000) ; Herman Cantor Corp. v. Cent. Fidelity Bank (In re Herman Cantor Corp.), 15 B.R. 747, 750 (Bankr. E.D. Va. 1981) ; Coles v. Glaser, 2 Cal. App. 5th 384, 389-90, 205 Cal. Rptr. 3d 922, 926 (Ct. App. 2016).
Defendants acknowledge this principle, but argue that the mere revival of a claim does not strip them of defenses related to that claim, including statute of limitations defenses. By analogy, they point to a recent district court cases in which sureties were able to rely on affirmative defenses to defeat the post-bankruptcy court claims. Kimball v. XL Specialty, No. CCB-16-2619, 2016 WL 6082411, 2016 U.S. Dist. LEXIS 143793 (D. Md. Oct. 18, 2016) (surety had been released by waiver signed by contractor); Baltimore Scrap Corp. v. Exec. Risk Specialty Ins. Co., 388 F. Supp. 3d 574, 583 (D. Md. 2019), as amended (June 17, 2019).
These cases do not involve the potential revival of a suretyship obligation by virtue of a bankruptcy judgment, however. More on point, Defendants point out that bankruptcy courts allow joinder of sureties in similar situations, and Defendants argue that because Plaintiff could have joined the Sureties in the bankruptcy proceeding, Plaintiff has missed its opportunity to recover against them. Plaintiff does not directly counter this argument in its briefing. The Court notes, however, that the bankruptcy took place in Virginia. The parties agree that the Virginia statute of limitations that would apply to this dispute was one year. The Virginia bankruptcy adversary proceeding commenced on July 25, 2018, more than one year after the original default (April 2014) or the completion of the work (June 2014). In the Court's view, this undercuts Defendants’ argument that Plaintiff could have joined Defendants to the bankruptcy proceeding, as it appears Defendants similarly could have raised a statute of limitations defense at that point.
Thus, returning to general suretyship principles, the Court holds that the order requiring the repayment of the $2.1 million revived the Sureties’ obligation to Plaintiff. See In re SNTL Corp., 571 F.3d 826, 835-36 (9th Cir. 2009) ; Lowrey v. Mfrs. Hanover Leasing Corp. (In re Robinson Bros. Drilling, Inc.), 6 F.3d 701, 704 (10th Cir. 1993) ; Wallace Hardware Co., Inc. v. Abrams, 223 F.3d 382, 408 (6th Cir. 2000) ; Restatement (Third) of Suretyship & Guaranty § 70 (1996) ; 72 C.J.S. Principal and Surety § 129. Moreover, the Court views this "revival" as one that begins running the statute of limitations anew. In effect, the principle underlying the "revival" of the cause of action is the recognition that prior to the order requiring repayment, Plaintiff suffered no injury that would have justified the bringing of an action. The Surety's obligation is revived because the Plaintiff suffered an injury once ordered to repay the money. Broadly, this injury theory is supported in Illinois law. Schreiber v. Hackett, 173 Ill.App.3d 129, 131, 122 Ill.Dec. 914, 527 N.E.2d 412, 413 (1st Dist. 1988) ; Meeker v. Summers, 70 Ill.App.3d 528, 529, 26 Ill.Dec. 919, 388 N.E.2d 920 (1979).
Thus, the Court agrees with Plaintiff's argument that its claim against the sureties was revived upon the bankruptcy judgment and that this revival constitutes the beginning of a new statute of limitations against the Sureties. This interpretation is supported by the fact that no injury was truly suffered by Plaintiff until it was ordered to repay the money it had received—money, it is worth restating, that it was owed for completing work.
4. Prejudgment Interest
Finally, the Court agrees with Plaintiff that Plaintiff is entitled to prejudgment interest under 815 ILCS 205/2 from the filing of this suit to the date of this Order.
III. CONCLUSION
Thus, Plaintiff's motion for summary judgment is granted. Defendants motion for summary judgment is denied.
IT IS SO ORDERED.