Curtiss-Manes-Schulte, Inc. v. Safeco Insurance Company of America

Filing 44

ORDER entered by Judge Nanette Laughrey. Safeco's Motion for Reconsideration, 40 , is granted. The January 29, 2015 Order denying Safeco's Motion for Summary Judgment, 39 , is vacated, and Safeco's Motion for Summary Judgment, 19 , is granted. (Cross, Ashley)

IN THE UNITED STATES DISTRICT COURT FOR THE
WESTERN DISTRICT OF MISSOURI
CENTRAL DIVISION
CURTISS-MANES-SCHULTE, INC.,
Plaintiff,
v.

No. 2:14-cv-04100-NKL

SAFECO INSURANCE COMPANY
OF AMERICA,
Defendant.
ORDER
Plaintiff Curtiss-Manes-Schulte (CMS), a general contractor, filed this lawsuit against
Defendant Safeco Insurance Company of America, a surety, alleging breach of contract and
vexatious refusal. The lawsuit arises out of Safeco’s denial of a claim filed by CMS under a
performance bond issued by Safeco to one of CMS’s subcontractors, Balkenbush Mechanical,
Inc. In October 2014, Safeco filed a Motion for Summary Judgment, and argued that it was
entitled to summary judgment on CMS’s claims because CMS did not provide notice of
Balkenbush’s default sufficient to trigger Safeco’s duties under the performance bond. [Doc.
19]. The Court denied this Motion, concluding that neither the subcontract between CMS and
Balkenbush nor the performance bond issued by Safeco required CMS to provide notice to
Safeco of Balkenbush’s default or CMS’s intention to hire replacement contractors. [Doc. 39].
Before the Court is Safeco’s Motion for Reconsideration of this Court’s Order denying Safeco’s
Motion for Summary Judgment, [Doc. 40]. The Motion for Reconsideration is granted. The
Order denying Safeco’s Motion for Summary Judgment is vacated. Safeco’s Motion for
Summary Judgment, [Doc. 19], is granted.

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I.

Undisputed Material Facts

Plaintiff, CMS, was the general contractor for a renovation project located at Fort
Leonard Wood, Missouri. On October 19, 2010, it entered into a $1.5 million 1 subcontract with
Balkenbush Mechanical to replace an air conditioning system for the Fort Leonard Wood project.
[Doc. 20-3]. The subcontract between CMS and Balkenbush required Balkenbush to secure a
performance bond for the work. Id. at 1. On October 26, 2010, Defendant Safeco, as the surety
for Balkenbush, issued a performance bond with CMS as the obligee and Balkenbush as the
principal. [Doc. 20-4].
The subcontract between CMS and Balkenbush outlines what remedies are available to
CMS should Balkenbush render unsatisfactory performance. [Doc. 20-3]. The subcontract
between CMS and Balkenbush states:
FAILURE OF PERFORMANCE
Should Sub-Contractor fail to satisfy contractual deficiencies or to
commence and continue satisfactory correction of the default with
diligence or promptness within three (3) working days from receipt
of Curtiss-Manes-Schulte, Inc. written notice, then Curtiss-ManesSchulte, Inc., without prejudice to any right or remedies, shall have
the right to take whatever steps it deems necessary to correct
deficiencies and charge the cost thereof to Sub-Contractor, who
shall be liable for such payment, including reasonable overhead,
profit and attorneys’ fees.
Id. at p. 2. Likewise, the performance bond issued by Safeco lists what remedies are available
should Balkenbush default on its obligations under the subcontract and at what point Safeco is
obligated to provide those remedies. [Doc. 20-4]. Article 4 of the performance bond states:
4.
PRINCIPAL DEFAULT.
Whenever the Principal
[Balkenbush] shall be, and is declared by the Obligee [CMS] to be
in default under the Subcontract, with the Obligee having
performed its obligations in the Subcontract, the Surety [Safeco]
may promptly remedy the default, or shall promptly:
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The subcontract was originally for approximately $1.35 million, but was modified by subsequent “change orders”
submitted by CMS to Balkenbush for additional work.

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4.1
4.2
4.3
4.4

COMPLETE SUBCONTRACT. . . .
OBTAIN NEW CONTRACTORS. . . .
PAY OBLIGEE. . . .
DENY LIABILITY. . . .

Id. at p. 2]. The performance bond incorporates the subcontract by reference. Id. at p. 2, ¶ 1.
By October 2011, CMS was aware that Balkenbush’s work on the project was behind
schedule. That concern was communicated to Safeco and Liberty Mutual Surety (presumably
affiliated with Safeco for the purpose of the bond) on July 30, 2012, through a “Contract Bond
Status Query.” [Doc. 29-4]. CMS stated that the contract was not complete, that work had not
progressed satisfactorily, and that the contract was “9 months past due – liquidated damages will
be assessed.” Id. CMS also stated that the probable completion date would be “? 30 days – been
saying this for several months now.” Id. CMS admits it did not declare Balkenbush in default
in the “Contract Bond Status Query.” [Doc. 41, p. 3]. At some point after July 2012,
Balkenbush walked off the job, and in January 2013, the president of Balkenbush, Todd
Balkenbush, filed a personal petition in the United States Bankruptcy Court for the Western
District of Missouri. [Doc. 29-18].
While Todd Balkenbush’s bankruptcy proceeding was ongoing, CMS took steps to finish
the air conditioning work that was supposed to be completed by Balkenbush. After an April
2013 walkthrough by the owner of the property, CMS hired various contractors throughout the
spring and summer to finish the work and to complete a “punch list” of items identified by the
owner as incomplete. The project was completed in October 2013, and the owner assessed
liquidated damages against CMS for its delay in completing the project.
On December 12, 2013, CMS submitted a “Notice of Claim on Subcontract Bonds” letter
to Safeco. [Doc. 29-5]. The letter demanded $65,449.93, which was the amount CMS incurred as
a result of Balkenbush’s default. The letter states that due to the default, CMS hired substitute
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performance to complete the project and to correct discrepancies. It lists costs incurred by CMS
to complete the project and the amount of liquidated damages assessed against it by the United
States. The letter also points out that CMS completed the Contract Bond Status Query in July
2012, which indicated that the project was not complete and was behind. On February 5, 2014,
Safeco denied CMS’s performance bond claim, stating in part that “CMS’s correction and
completion of Balkenbush’s allegedly incomplete and deficient work without declaring a default
and without notifying Safeco violated the terms of the Performance Bond, deprived Safeco of an
opportunity to mitigate damages, stripped Safeco of its rights and nullified Safeco’s duty to
perform.” [Doc. 29-10, p. 2]. This litigation ensued shortly thereafter. CMS admits that it “did
not ever find Balkenbush in default of their contract” because “Balkenbush found themselves in
default of their contract when they walked off the job.” [Doc. 41-1, depo. pg. 109:14-19].
II.

Discussion

“Motions for reconsideration serve a limited function: to correct manifest errors of law or
fact or to present newly discovered evidence.” Arnold v. ADT Sec. Servs., Inc., 627 F.3d 716,
721 (8th Cir.2010) (quoting Hagerman v. Yukon Energy Corp., 839 F.2d 407, 414 (8th
Cir.1988)). Upon reconsideration of the law of construction performance bonds, the plain
language of the performance bond in this case, and CMS’s concession that it did not declare
Balkenbush to be in default, the Court grants Safeco’s Motion for Reconsideration, vacates its
January 29, 2015 Order denying Safeco’s Motion for Summary Judgment, and grants Safeco’s
Motion for Summary Judgment, [Doc. 19].
As the Court previously stated, “the “usual rule of contracts [is] that an obligor is not
discharged because he is not notified that the time for his performance is due, unless he has

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stipulated for notification.” U.S. v. Minn. Trust Co., 59 F.3d 87, 90 (8th Cir. 1995). This is
because:
The surety, when he undertakes his obligation, must realize that
there is a risk that the principal will not perform. If the surety
wishes notification, he can insert a requirement for it in his
contract. If he does not stipulate for notification, the surety has the
burden of ascertaining when, if ever, his performance is due, and
of taking whatever steps seem appropriate to him for his own
protection.
Id. (citing to the rational described in the Restatement of Security § 136). Previously, the Court
concluded that nothing in the performance bond or subcontract required CMS to provide notice
of Balkenbush’s default to Safeco before Safeco’s duties under the performance bond were
triggered. However, upon review of case law interpreting provisions nearly identical to section 4
of the performance bond in this case, the Court concludes that the phrase “[w]henever the
Principal [Balkenbush] shall be, and is declared by the Obligee [CMS] to be in default under the
Subcontract” is a provision that stipulates for notice, acts as a condition precedent to any duty
owed by Safeco, and is inserted into performance bonds “to avoid the common-law rule that a
secondary obligor such as [the surety] is not entitled to notice when the time for its performance
is due.” See L & A Contracting Co. v. Southern Concrete Servs., 17 F.3d 106, 111 (5th Cir.
1994) (referring to the nearly identical performance bond provision in that case as a “notice of
default provision”).
Cases from the Fifth and Second Circuits interpreting language nearly identical to that
found in section 4 of the performance bond are instructive. In L & A Contracting, a general
contractor entered into a subcontract with a concrete company. The subcontract between the
general and subcontractor required the subcontractor to obtain a performance bond. The
performance bond stated that the surety would become liable to take certain actions to remedy

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the subcontractor breach “[w]henever Principal shall be, and shall be declared by Obligee to be
in default under the subcontract, the Obligee having performed Obligee’s obligations
thereunder.” L & A Contracting, 17 F.3d at 109 n. 6. The relationship between the two
companies soon deteriorated, and the general contractor sent a letter to the subcontractor and the
surety requesting that the surety “take the necessary steps to fulfill this contract to prevent any
further delays and costs to” the general contractor. The surety did not respond and took no
action. The subcontractor eventually completed its obligations under the contract, but the
general contractor sued the subcontractor and the surety for breach of contract. The district court
concluded that the subcontractor breached the subcontract and that both the subcontractor and
the surety were liable to the general contractor. Id. at 109. The subcontractor and the surety
appealed and argued that the general contractor did not declare a default sufficient enough to
trigger its duties under the performance bond. In vacating the judgment against the surety and
rendering judgment in the surety’s favor, the Fifth Circuit concluded that the general contractor
did not establish a declaration of default and that none of the letters sent to the surety or any
other correspondence amounted to an “unequivocal declaration of default.” Id. at 111.
Interpreting the notice of default provision, the Fifth Circuit stated that the performance bond
imposed liability on the surety for the subcontractor’s breach “only if two conditions exist[ed].
First, [the subcontractor] must have been in default of its performance obligations under the
subcontract. Second, [the general contractor] must have declared [the subcontractor] to be in
default.” Id. at 110 (emphasis in original). The Fifth Circuit stated that the phrase “declared . . .
to be in default” was not ambiguous and that
a declaration of default sufficient to invoke the surety’s obligations
under the bond must be made in clear, direct, and unequivocal
language. The declaration must inform the surety the principal has
committed a material breach or series of breaches of the
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subcontract, that the obligee regards the subcontract as terminated,
and that the surety must immediately commence performing under
the terms of its bond.
Id. at 111. The Fifth Circuit reasoned that “[s]erious legal consequences attend a declaration of
default” and that “[g]iven the consequences that follow a declaration of default, it is vital that the
declaration be made in terms sufficiently clear, direct, and unequivocal to inform the surety that
the principal has defaulted on its obligations and the surety must immediately commence
performing under the terms of its bonds.” Id. 2
Citing L & A Contracting, the Second Circuit reached a similar outcome in Elm Haven
Constr. Ltd. P’ship v. Neri Constr. LLL, 376 F.3d 96 (2d Cir. 2004). In Elm Haven, a general
contractor and a subcontractor entered into a subcontract which required the subcontractor to
obtain a performance bond and a payment bond. The performance bond stated that “[w]henever
Principal shall be, and be declared by Obligee to be in default under the subcontract, the Obligee
having performed Obligee’s obligations thereunder” the surety had certain obligations under the
performance bond. Id. at 98. The subcontract between the general and subcontractor was
incorporated into the performance bond by reference and outlined procedures to be followed in
the event of a default by the subcontractor. Id. Like in this case, the general contractor was
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L & A Contracting has also been cited by the Eighth Circuit in Bremer Bank v. John Hancock Life Ins. Co., 601
F.3d 824 (8th Cir. 2010). In Bremer Bank, a case unrelated to construction performance bonds, an owner participant
in an aircraft transaction sued a trustee and the lender participant alleging that the owner participant’s equity in the
aircraft and its lease were improperly extinguished by the trustee in the aftermath of the aircraft’s lessee’s
bankruptcy filing. The owner participant claimed, among other arguments, that that the defendants failed to declare
a default before exercising remedies under the aircraft’s lease. The Eighth Circuit disagreed, concluding that a
notice sent by one of the defendants “left no doubt” that one of the defendants was declaring a default and exercising
its remedies. Id. at 830. The owner participant claimed that the default declaration was insufficient and cited to L &
A Contracting. The Eighth Circuit stated that L & A Contracting was “not to the contrary” of its decision because in
L & A Contracting, the contractor did not use the word “default” in its notices or clarify whether the subcontractor’s
deficiencies amount to a material breach justifying a default, but in the case before it, the defendants
“unambiguously declared that events of default had occurred and them emphatically stated it was exercising
remedies for which a default declaration was a condition precedent.” Id. The Eighth Circuit remarked that L & A
Contracting required “clear, direct, and unequivocal language” that would “inform the surety that the principal has
committed a material breach, . . . that the obligee regards the subcontract as terminated, and that the surety must
immediately commence performing under the terms of its bond”’ and that the notice provided by defendants did so.
Id. (quoting L & A Contracting, 17 F.3d at 111).

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required to give the subcontractor seventy-two hours written notice to cure a default, and if the
subcontractor did not cure, the general contractor could perform the work itself, withhold
payment from the subcontractor, and/or terminate its subcontract with the subcontractor and hire
another subcontractor. Id. Shortly after the work began, the general and subcontractor began
complaining about each other’s performance. The general contractor sent letters directly to the
surety requesting “assistance in this matter” and informing the surety that certain portions of the
work for which the subcontractor was responsible would be performed by others because the
subcontractor failed to perform. Id. at 99. The general contractor eventually entered into a new
subcontract with another company to complete the work. After doing so, the general contractor
sent a final letter to the surety stating that it was forced to supplement the subcontractor’s work,
that the subcontractor had “virtually abandoned the job,” and that as a result, it had incurred
significant losses. Id. The surety responded by denying the claim because “there has been no
declaration of default which would trigger the surety’s obligations.” Id. The general contractor
sued the surety, and the district court granted summary judgment in favor of the surety after
concluding that the general contractor did not make a “sufficiently clear, direct, and unequivocal
or precise declaration of default.” Id. The general contractor appealed, and the Second Circuit
affirmed. In doing so, the Second Circuit reiterated that in order to trigger the surety’s liability
under the default declaration provision of the performance bond, two conditions had to be met.
The subcontractor had to be in default, and the general contractor had to declare the
subcontractor in default under the subcontract in precise terms. Id. at 100. The Second Circuit
concluded that up until the last letter sent by the general contractor to the surety, none of the
letters were sufficiently clear to declare a default. The last letter did function as a declaration of
default. However, the surety was excused from performance because by the time the general

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contractor sent the final letter, it had already hired replacement contractors and had therefore
“breached its obligation to [the surety] under the Performance Bond to give [the surety] the
option to cure [the subcontractor’s] default.” Id.
The provisions interpreted in L & A Contracting and Elm Haven are nearly identical to
the provision triggering Safeco’s performance in this case. Under section 4 of the performance
bond in this case, then, Safeco’s duty to complete the subcontract, obtain new contractors, pay
CMS, or deny liability is triggered when (1) Balkenbush is in default and when (2) CMS declares
Balkenbush to be in default under the subcontract. CMS concedes that it “did not ever find
Balkenbush in default of their contract,” [Doc. 41-1, depo. pg. 109:14-19], and therefore, the
second condition required to trigger Safeco’s duty under the performance bond was not met.
Further even if the “Notice of Claim on Subcontract Bonds” was sufficiently clear to declare a
default, this letter was sent in December 2013, nearly eight months after CMS hired replacement
contractors and deprived CMS of its right under the performance bond to either complete the
subcontract or obtain or aid in obtaining new subcontractors. See Elm Haven, 376 F.3d at 100.
Therefore, Safeco is entitled to summary judgment against CMS’s claims. 3

3

In this Court’s original Order denying Safeco’s Motion for Summary Judgment, the Court relied on American
Surety Co. of New York v. United States, 317 F.2d 652 (8th Cir. 1963), because the facts in that case were similar to
the facts in this case. [Doc. 39, pp. 9-11]. However, the Court relied on American Surety after determining that the
performance bond in this case did not require notice to Safeco of Balkenbush’s default. As discussed above, after
reviewing case law from other courts interpreting nearly identical performance bond language to mean that an
obligee must notify a surety of the principal’s default, the Court concludes that the performance bond in this case
required a default declaration by CMS before Safeco’s duties under the performance bond were triggered. This
conclusion means that American Surety is no longer analogous in an important way. In American Surety, without
quoting the language of the performance bond at issue in that case, the Eighth Circuit stated that the performance
bond “contained no provision requiring notice to the surety in the event of . . . default.” American Surety, 317 F.2d
at 654. The Eighth Circuit found this fact “conclusive” in determining that the surety could not complain that it did
not have knowledge of the default. Id. at 656. Having now determined that the declaration of default provision in
this case’s performance bond requires notice to Safeco of Balkenbush’s default, the Court concludes that the facts in
American Surety are not analogous because the performance bond in American Surety did not contain a default
declaration provision. The reasoning for why the surety was not released of its duty under the performance bond in
American Surety – because the surety did not stipulate for notice of a default – does not apply to this case, where
Safeco stipulated for notice of a default.

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CMS argues that it did not declare Balkenbush to be in default because “Balkenbush
found themselves in default of their contract when they walked off the job.” [Doc. 41-1, depo.
pg. 109:14-19]. However, the plain language of the performance bond specifically requires that
a default declaration be made “by the Obligee,” who in this case, is CMS. Further, even if
Balkenbush did walk off the job, there is no evidence of any kind of communication to CMS or
Safeco of a voluntary default by Balkenbush. See 4A Bruner & O’Connor Construction Law §
12:36 n. 2 (“Contractors going out of business sometimes sign letters of ‘voluntary default’
under which they admit that they are unable to perform the bonded contract, authorize the
obligee to terminate the bonded contract, and consent to the surety taking over performance.
Without the obligee’s termination of the bonded contract or a letter of ‘voluntary default,’ the
performance bond surety runs a risk of later claims by the contractor of ‘tortious interference’
with its performance of the contract and domination. To minimize this risk in the absence of a
‘voluntary default’ letter, AIA Document A312-1984, Performance Bond (1984) specifically
provides for a conference between the obligee, contractor, and surety to discuss the obligee’s
intent to declare the contractor in default. Once the principal has acknowledged ‘voluntary
default,’ the surety must act promptly in deciding which of its rights it wishes to exercise. . . .”)
(internal citations omitted). Therefore, this argument is not persuasive.
In its Order denying Safeco’s Motion for Summary Judgment, this Court originally
concluded that “the fact that CMS technically did not declare the default because Balkenbush
declared it first does not discharge Safeco from its duties” and that “to hold otherwise would be
inconsistent with the ‘modern trend’ in Missouri to ‘exercise restraint in requiring strict
compliance with the terms of notice provisions.’” [Doc. 39, p. 8]. In coming to this conclusion,
the Court cited to Thomas v. A.G. Elec., Inc., 304 S.W.3d 179 (Mo. Ct. App. 2009). In

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determining whether the plaintiffs’ claims under a payment bond should be dismissed because
the plaintiffs did not comply with a notice requirement set forth in a payment bond, the Missouri
Court of Appeals stated that “[t]he modern trend in Missouri courts has been to exercise restraint
in requiring strict compliance with the terms of notice provisions.” Id. at 187. The Missouri
Court of Appeals further stated that in insurance cases, absent a showing of prejudice, the insurer
cannot defeat its liability under the policy by claiming that the insured failed to give written
notice of its claim under the policy and that this same reasoning applied to the notice requirement
in the payment bond at issue. However, in Thomas, the Missouri Court of Appeals was
addressing the issue of a payment bond, not a performance bond like the one in this case – a
nuance previously missed by this Court.
It is relevant that when discussing a less rigorous notice standard, the court in Thomas
was discussing a payment bond and not a performance bond like the one in this case which gives
Safeco the option to complete the project or hire new contractors. The distinction is important
because a payment bond does not afford the surety the right to complete the contract by takeover
or to select new subcontractors to complete the project. See Miller-Stauch Const. Co. v.
Williams-Bungart Elec., Inc., 959 S.W.2d 490, 494 (Mo. Ct. App. 1998) (recognizing that
payment and performance bonds “are distinguished by different obligations assumed by the
surety” and that under a payment bond, “the surety is responsible for certain unsatisfied debts of
its principal and has no responsibility related to the completion of the project”). “Where the
surety’s performance bond options include contract completion by takeover, tender, or financing
of the principal,” – unlike the payment bond in Thomas but like the performance bond issued by
Safeco – “timely notice of default is an essential prerequisite to the surety’s contract completion
obligation and loss mitigation efforts.” 4A Bruner & O’Connor Const. Law § 12:36. This is

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because unlike under a payment bond, when a subcontractor defaults under a performance bond
that gives a subcontractor the right to complete the project or hire new contractor, notice of a
default allows the surety to exercise its right to select or participate in selecting the lowest
bidding subcontractor to complete the project in order to mitigate its damages under the
performance bond. See Dragon Const., Inc. v. Parkway Bank & Trust, 678 N.E.2d 55, 58 (Ill.
App. Ct. 1997) (quoted by Bruner & O’Connor at § 12:36). In other words, notice under a
performance bond that gives the surety a right to complete the project or hire new subcontractors
is essential to that surety’s right to mitigate its damages. And by failing to declare a default, the
obligee “prejudices the surety’s right to exercise its performance bond options.” Bruner &
O’Connor at § 12:36. The relevant distinction as to whether notice is essential or less strictly
enforced is whether the surety has the right and responsibility to complete the contract at the time
of default. See id. (stating that courts enforce notice of default requirements less rigorously
“[w]here the surety’s performance bond option is limited to indemnification of the obligee for its
losses in completing the contract and affords no right to the surety to oversee completion”)
(emphasis added).
It makes sense that a less strict notice standard may apply to payment bonds and
performance bonds affording no right to the surety to oversee completion, because the
opportunities for the surety to mitigate its damages are less. But where the surety has a right to
choose who completes the contract and at what cost, notice of default so that the surety may step
in and exercise that right is essential. This reasoning is consistent with the reasoning in Thomas
as to why a less strict notice requirement was imposed for the payment bond in that case. The
Missouri Court of Appeals stated that the function of the notice requirement in the payment bond
was to afford the surety of an opportunity to investigate the claim before paying or denying

12

liability. Thomas, 304 S.W.3d at 188. The court also noted that the surety “may be hard-pressed
to show prejudice” in the context of that case because “the nature of the wrong . . . does not
likely become more difficult to investigate over time despite a lack of prompt notice.” Id. at 188
n. 12. The performance bond in this case, however, affords Safeco the right to oversee
completion of the subcontract, should it choose to do so, and the function of the notice
requirement in this case is not simply to allow Safeco to investigate whether it will pay a claim,
but to allow Safeco to procure an alternative method to complete the project while the project is
ongoing. Further, unlike the wrong in Thomas, the nature of the wrong in this case – an
unfinished construction subcontract subject to liquidated damages for delay – becomes more
difficult and more expensive to remedy with lack of prompt notice and the ability to choose
replacement contractors at a price that would mitigate Safeco’s damages. Therefore, the less
rigorous notice provision applied to the payment bond in the Thomas case is inapplicable to the
performance bond in this case, and the Court’s reliance on Thomas was in error.
Because the default declaration requirement of the performance bond was not met,
Safeco’s duties under the performance bond were not triggered. The Court vacates its Order
denying Safeco’s Motion for Summary Judgment and grants summary judgment in favor of
Safeco.
III.

Conclusion

Safeco’s Motion for Reconsideration, [Doc. 40], is granted. The January 29, 2015 Order
denying Safeco’s Motion for Summary Judgment, [Doc. 39], is vacated. Safeco’s Motion for
Summary Judgment, [Doc. 19], is granted.

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s/ Nanette K. Laughrey
NANETTE K. LAUGHREY
United States District Judge
Dated: May 4, 2015
Jefferson City, Missouri

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