DANCO, INC. v. ARCH INSURANCE COMPANY

 

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-6284-05T36284-05T3

DANCO, INC.,

Plaintiff-Respondent,

v.

ARCH INSURANCE COMPANY,

Defendant-Appellant,

and

UNITED STATES FIDELITY AND

GUARANTY COMPANY, and

TRAVELERS CASUALTY AND SURETY

COMPANY OF AMERICA,

Defendants.

______________________________________

 

Submitted April 18, 2007 - Decided May 9, 2007

Before Judges Wefing and Yannotti.

On appeal from the Superior Court of New Jersey, Law Division, Burlington County, Docket No. L-1382-05.

Stradley, Ronon, Stevens & Young, attorneys for appellant (Francis X. Manning and David M. Burkholder, of the Pennsylvania Bar, admitted pro hac vice, of counsel and on the brief).

Lario & Saldutti, attorneys for respondent (Robert L. Saldutti, on the brief).

PER CURIAM

Defendant Arch Insurance Company (Arch) appeals from a judgment entered on June 30, 2006, granting summary judgment in favor of plaintiff Danco, Inc. (Danco) and awarding Danco $102,398.69, plus pre-judgment interest. For the reasons that follow, we reverse.

Danco is a wholesale supplier of heating, air conditioning and plumbing supplies to commercial users. Voegele Mechanical, Inc. (Voegele) is a heating, ventilating, and air conditioning (HVAC) contractor and was one of Danco's customers. Danco extended credit to Voegele for the materials that it purchased. In 2004, Voegele had a contract with the Henderson Corporation (Henderson) to perform certain plumbing and HVAC work on a project known as Seabrook Village in Tinton Falls, New Jersey. Voegele obtained its HVAC and plumbing materials from Danco for the Seabrook project.

Arch provided Voegele with performance and payment bonds for the Seabrook project. Relevant here is the payment bond, under which Voegele agreed to promptly pay all claimants who provided labor or materials for the project. In the bond, Arch agreed that any claimant who had not been "paid in full" within ninety days after having performed the work or furnished the materials may bring an action for monies due.

According to Danco, in the second quarter of 2004, Voegele's outstanding accounts receivable escalated and, at one point, Voegele owed Danco approximately $500,000. Daniel T. Campbell (Campbell) of Danco and George Voegele met to discuss Voegele's account. Campbell suggested that Voegele arrange to finance payment of the receivables through an entity called Contractors Credit (CC).

Danco contacted CC and was advised of the terms on which CC would loan money against the receivables. Voegele would be responsible on the note, and there would be recourse to Danco in the event that Voegele defaulted. Voegele and Danco agreed to the financing arrangement and approximately $500,000 was loaned to Voegele and paid to Danco. That sum included the monies due for the materials Danco had provided to Voegele for the Seabrook project.

Under the agreement with CC, Voegele was required to repay the loan in twelve monthly installments along with interest. It is undisputed that Voegele made only one payment and then filed for protection under the federal bankruptcy laws. CC thereupon declared the loan in default, accelerated the amounts due, and demanded that Danco pay the loan, plus interest and costs.

Because Danco was not in a position to pay CC the entire amount due at the time, Danco and CC agreed that Danco would make monthly payments. It appears that Danco received certain monies pursuant to an approved plan in Voegele's bankruptcy action, but the amounts received did not include payment for the materials provided for the Seabrook project. Danco thereupon made a claim under the payment bond issued by Arch and Arch denied the claim.

On or about April 15, 2005, Danco brought this action against Arch and certain other insurers that issued construction bonds for work performed by Voegele. Danco alleged that Arch had an obligation under the payment bond issued to Voegele to pay for all of the materials supplied for the Seabrook project; Arch breached its contract to pay Danco for the materials supplied; Arch breached its covenant of good faith and fair dealing by refusing to make payment pursuant to the bond; Arch's actions constitute legal and equitable fraud; and Arch should be estopped from raising any defense to Danco's claim because it had paid claims "similarly situated" to Danco's claim. Arch filed an answer denying liability, and asserted among other things, that the agreement between Danco, Voegele and CC was a novation that "completely discharged any liability" that Arch had under the payment bond.

Arch thereafter filed a motion for summary judgment on Count II of the complaint, in which Danco asserted its breach of contract claim. Danco filed a cross-motion for summary judgment. The motions were argued on May 26, 2006, and the judge concluded that the agreement between Danco, Voegele and CC was not a novation and Arch remained liable on the payment bond because Danco had not been paid for the supplies it provided to Voegele for use on the Seabrook project. The judge conducted a hearing on June 29, 2006, to determine the amount owed to Danco. The judge rejected Danco's claim for attorneys' fees but found that Danco was entitled to pre-judgment interest. Judgment was entered for Danco on June 30, 2006, and this appeal followed.

Arch raises the following contentions for our consideration: 1) Danco was paid and therefore cannot satisfy the condition precedent for payment under the terms of the payment bond; 2) the transaction between Danco, Voegele and CC was a novation, which discharged Arch's obligation under the payment bond; and 3) the award of pre-judgment interest was manifestly unjust. We have carefully reviewed the record in light of the arguments advanced by the parties and we are convinced that the judge erred in granting Danco's motion for summary judgment.

The bond issued by Arch for the payment of the materials and supplies provided for the Seabrook project is a surety bond. A "[s]uretyship is a contractual relation resulting from an agreement whereby one person, the surety, engages to be answerable for the debt, default, or miscarriage of another, the principal." Eagle Fire Prot. Corp. v. First Indem. of Am. Ins. Co., 145 N.J. 345, 353 (1996) (quoting Amelco Window Corp. v. Fed. Ins. Co., 127 N.J. Super. 342, 346 (App. Div. 1974)). A surety "is chargeable only according to the strict terms of its undertaking and its obligations cannot and should not be extended either by implication or by construction beyond the confines of its contract." Id. at 356 (quoting Monmouth Lumber Co. v. Indemnity Ins. Co. of N. Am., 21 N.J. 439, 452 (1956)).

The bond issued by Arch defines the terms upon which Arch would be obligated to pay for the materials provided for the Seabrook project:

The above named Principal [Voegele] and Surety [Arch] hereby jointly and severally agree with the Obligee [Henderson] that every claimant as herein defined, who has not been paid in full before the expiration of a period of ninety (90) calendar days after the date on which Claimant did or performed the work or labor, or furnished the materials for which said claim is made may sue on this bond for the use of such Claimant, prosecute the suit to final judgment for such sum or sums as may be justly due Claimant, and have execution thereon. The [O]bligee shall not be liable for the payment of any costs or expenses of any such suit.

[Emphasis added.]

Under this provision of the bond, Arch was not obligated to pay Danco for the materials it provided for the Seabrook project because Danco was "paid in full" when it received payment pursuant to the financing agreement between Danco, Voegele and CC. To conclude otherwise would be to require Arch to pay, not according to the "strict terms" of its undertaking, but pursuant to an unwarranted extension and expansion of Arch's contractual obligations. Eagle Fire, supra, 145 N.J. at 356.

In his decision on the record, the judge found that Danco had not been paid for the materials provided for the Seabrook project. The record does not support that finding. Rather, the record shows beyond question that Danco received full payment for the materials provided to Voegele for the Seabrook project. Indeed, in his deposition, Campbell testified that after CC made the loan to Voegele and wired the funds to Danco, Voegele's account had a "zero balance." Although Danco had to repay CC when Voegele defaulted, this does not alter the fact that Danco was "paid in full" for the materials supplied for the Seabrook project when CC wired the funds to Danco's account.

To require Arch to pay Danco in the circumstances presented here would be to engraft onto the surety bond new terms and conditions that Arch never agreed to. It is undisputed that Danco and Voegele entered into their financing agreement without any participation by Arch. Under the terms of the payment bond, Arch had agreed to pay the claimants who supplied materials for the Seabrook project. Arch never agreed to pay Danco in the event that Voegele defaulted on the loan made by CC, and Danco was required to repay the monies that had been loaned to Voegele.

Rather than filing a claim under the Arch payment bond, Danco elected to receive payment through the financing arrangement it worked out with Voegele and CC. According to Campbell, Danco did so because Voegele's outstanding receivables were having a negative effect on its line of credit with Commerce Bank. Having chosen to obtain payment through the financing agreement with CC, and having been fully paid for its materials, Danco could not thereafter seek payment under Arch's payment bond because it made a bad business decision to guaranty the repayment of the loan made to Voegele.

The circumstances presented in this case are similar to those in Scaccia Concrete Corp. v. Hartford Fire Ins. Co., 720 N.Y.S.2d 193 (App. Div. 2001). In that case, Hartford provided a labor and material payment bond for a public works project to a contractor named Gemma. New Superior was the subcontractor for the concrete and masonry work on the project and Scaccia provided materials for the project. Alleging that it had not been paid for its materials, Scaccia sought payment under the Hartford bond. Id. at 194.

Hartford denied the claim, asserting that Scaccia had been "paid in full" because New Superior had provided promissory notes to Scaccia, which Scaccia accepted as full payment. In its action against Hartford to compel payment under the bond, Scaccia argued that the notes were a conditional payment only. However, the New York court held that Scaccia had accepted and treated the notes as full payment, thereby relieving Hartford from its obligation to pay under the bond. Ibid.

The Scaccia decision supports our conclusion that the receipt by Danco of the monies advanced by CC for payment of the Voegele receivables relieved Arch of its obligation to pay Danco under the payment bond. Danco did not receive promissory notes but was actually paid in cash. Furthermore, Danco's books indicated that after CC wired the funds to Danco, Voegele's account had a "zero balance." The fact that the payment may have been conditional is of no legal significance whatsoever. Danco had been "paid in full" and therefore Arch was no longer obligated under the bond to pay Danco's claim.

In view of our determination, we need not address Arch's argument that the financing agreement between Danco, Voegele and CC was a novation, or its contention that the judge erred in awarding pre-judgment interest. We also need not address Danco's assertions that Arch is barred from raising the novation defense because it stands in Voegele's "shoes" and because Voegele acted in bad faith in entering into the financing arrangement with Danco and CC.

We reverse the judgment entered on June 30, 2006. We remand for entry of an order granting Arch's motion for summary judgment on Count II of Danco's complaint and for further proceedings on the remaining claims asserted by Danco against Arch.

Reversed and remanded for further proceedings in conformance with this opinion. We do not retain jurisdiction.

 

Danco later settled its claims against United States Fidelity and Guaranty Company and Travelers Casualty and Surety Company of America.

(continued)

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A-6284-05T3

May 9, 2007