The Appeals Court found in a July 6, 2019 surety law decision, Colonial American Casualty and Surety Company v. Ralph Sevinor et al. that a husband and wife (“the Sevinors”) were liable under an indemnity agreement they made for bonds issued to their company, Capital Floors. The bonds were issued on a public construction contract and should have only protected the general contractor as required by M.G.L. c. 149, § 44F. The surety, Colonial, did not issue the correct bonds and improperly paid subcontractors claiming $93,000 for claims that, by law, should have been filed against the general contractor’s statutory bond only.
The Appeals Court stated in its decision that “Viewing the evidence in the light most favorable to the Sevinors, we assume, without deciding, that the bonds issued to Capital Floors were unenforceable based on their incongruity with the language of § 44F.” However, the judges deciding the appeal found under the general indemnity agreement the Sevinors had signed with Colonial, they owed Colonial. They reasoned “Even if the bonds themselves were unenforceable, and Colonial were not liable under them for the claims at issue here, the terms of the [general indemnity they signed] required Capital Floors and the Sevinors to indemnify Colonial for claims Colonial paid ‘in good faith under [its] belief that. .. [it] was or might be liable therefor’”
As a result of this decision, the Sevinors’ liability for the original $93,000 claimed by Colonial has, with prejudgment interest, attorney fee payable under the general indemnity, and post-judgment interest at twelve percent on all of the preceding now has reached over $250,000. For its part, Colonial has attached two homes owned by the Sevinors in Marblehead to secure payment of any final judgment.
The Sevinors have made an application for further appellate review of the Appeals Court decision to the Supreme Judicial Court of Massachusetts, the state’s highest court. The application is pending. If the Supreme Judicial Court does not grant further appellate review, the Sevinors will have to pay the full judgment to Colonial or have one or more of the attached properties sold to satisfy the judgment.
The Sevinors’ company wins the bid for a public project that required statutory bonding
In early 2002, Eastern Contractors, a general contractor, won a public bid to complete a construction project for the Lincoln-Sudbury Regional High School, a Massachusetts.
Under Massachusetts law, public construction contracts are subject to bonding requirement under several sections of M.G.L. c. 149. Under M.G.L. c. 149, § 29, the general contractor must obtain a payment bond for at least fifty percent of the contract price for public construction contracts. Subcontractor and suppliers on the public construction project are entitled to claim against this § 39 bond if they follow the specific procedures set out under the statute.
Capital Floors, the Sevinors’ company, and Eastern Contractors entered into two subcontracts for specific flooring work Capital Floors agreed to perform. Under M.G.L. c. 149, Section 44F, general contractors, in turn, may request subcontractors who filed with the general contractor’s winning bid to obtain a separate statutory bond under M.G.L. c. 149, § 44F. Section 44F bonds are intended to indemnify the general contractors (or its surety) if the general contractor’s § 29 bond has to pay out because of a filed subcontractor defaulting on paying its subcontractors or suppliers.
On this public contract, Eastern Contractors asked Capital Floors to obtain performance and payment bonding in amounts that matched the subcontract amounts. Eastern Contractors did not specify statutory bonding and did not reference the general bid or any statutory bonding requirements. Capital Floors applied for the required payment bonds through its broker who placed the bonds with Colonial.
The bonds, as issued, had Capital Floors as the principal “for the use and benefit of the claimants herein below defined.” The claimants were “those who had direct contracts with Capital Floors and who provided labor, material or both on the project.” As issued, the bond provided direct rights for subcontractors and suppliers to claim against the bond instead of only allowing Eastern Contractors or its surety to claim on the bonds.
When it issued the bond, Colonial claimed it did not know about the public contract requiring statutory bonds and did not know that Eastern Contractors, according to Mr. Sevinor, had purportedly asked Capital Floors to obtain statutory bonds issued under M.G.L. c. 149, § 44F.
The Sevinors’ general indemnity agreements with Colonial
Before Capital Floors had won its filed sub-bid and entered into subcontracts with Eastern Contractors, Mr. Sevinor and his wife executed general indemnity agreements with Colonial for payments made under any bonds Colonial issued for Capital Floors.
In these indemnity agreements, the Sevinors agreed to:
exonerate, indemnify, save [Colonial] harmless from and against all liability, loss, cost, damage and expense of whatsoever kind or nature….which [Colonial] may in good faith sustain, incur, be put to or to which it may be exposed (1) by reason of having executed any Bond…”
Colonial’s payments on Capital Floors’ bonds
In 2004 and 2005, Colonial received claims from five different claimants who asserted they were unpaid subcontractors, laborers or suppliers of Capital Floors on the Lincoln-Sudbury Regional High School construction project. Two of the five claimants on Capital Floors’ bonds filed suit against Colonial. Colonial retained counsel to defend the lawsuits and evaluate the bond claims involved in the suits. In Colonial’s opinion, the five claims were all payable under Capital Floors’ bonds as issued and, accordingly, Colonial settled the five bond claims for a little more than $93,000.00 during 2005 and 2006.
Colonial pays claimants with no rights under a § 44F bond and then sues the Sevinors ten years later for indemnity
In December 2014, Colonial sent a written demand for indemnity to the Sevinors. Although almost ten years had passed, the indemnity agreements the Sevinors had signed were “under seal.” By statute, a contact made under seal has a twenty-year statute of limitations, and not the six-year statute applicable to a simple contract. When the Sevinors did not pay, Colonial filed a lawsuit against the Sevinors under their general indemnities in Essex Superior Court.
The Sevinors’ main argument, in the Superior Court and the Appeals Court, against Colonial’s recovering on its indemnity claims was that the bond claimants should have had no right to collect on the Sevinors’ company’s statutory bond under § 44F of M.G.L. c. 149. Under the bonding scheme established by the Legislature, the claimants could only claim under the statutory bond required under M.G.L. c. 149, § 29, that the general contractor had to obtain and file to proceed with a public project like the Lincoln-Sudbury Regional High School.
To correctly make a claim under the general contractor’s § 29 statutory bond, each of the five claimants had to notify Eastern Contractors, the general contractor, and not the Sevinors’ company, by written notice sent by certified or registered mail within sixty-five days after the last date they performed work on the public project. If made, the claimants’ written notice to Eastern Contractors had to state with substantial accuracy the amount of the claim, identify the Sevinors’ company, Capital Floors, as the subcontractor for whom they worked. If the claimants strictly complied with the written notice requirements in a timely manner and Eastern Contractors or its surety accepted the claims, they would pay the approved claims and seek payment from the Sevinors’ company or its surety the that issued the statutory bond under § 44F on behalf of the Sevinors’ company in favor of Eastern Contractors. If the general contractor and its surety did not accept the claims against the Sevinors’ company claimants, they hen had to file suit on the § 29 bond within one year.
In this case, none of the five claimants Colonial ever filed the correct notice to comply with M.G.L. c. 149, § 29’s strict provisions. As a result, neither Eastern Contractors nor its surety ever received any claim for payment due for work done for the Sevinors’ company. Consequently, neither Eastern Contractors nor its surety ever claimed any indemnification from Capital Floors or Colonial.
Because of the failures of the claimants seeking payment from Capital Floors to comply with the required statutory notices under the general contractor’s § 29 bond, Eastern Contractors and its surety had no legal liability to pay any claimant. Consequently, they also had no legal right to have any indemnity from Capital Floors.
Thus, Sevinors claimed that if Colonial had issued the proper statutory bond under M.G.L. c. 149, § 44F, which only allowed for payment to the general contractor on the public project, Colonial would not have improperly paid the claimants under Capital Floors’ statutory bond, and the Sevinors’ would have no liability to anyone.
Superior Court rules the bonds Colonial issued were not void for violating M.G.L. c. 149, § 44F
The Superior Court judge hearing the case did not accept the Sevinors’ argument. Instead, he ruled that there was no direct conflict between the Capital Floors bond terms which allowed unpaid laborers and suppliers to recover on the bonds and the terms of § 44F which allow general contractors to seek indemnity for claims made on their § 29 bonds.
The judge found the provisions of Colonial’s bonds did not follow the statutory scheme, but he ruled they were not in direct conflict with a subcontractor’s statutory bond under § 44F. The judge concluded, “General Laws c. 149, § 44F includes no language which prevents the parties to a subcontractor’s bond from bargaining or agreeing to additional terms. The parties can add rights and restrictions that do not conflict with the statutory language.”
After the Superior Court entered final judgment, the Sevinors appealed to the Appeals Court.
The Appeals Court focuses on Colonial acting in good faith under the indemnities even if the bonds were unenforceable
The Appeals Court judged the case from a different angle than the Superior Court but with the same result for the Sevinors.
The judges stated that if even the bonds were unenforceable, and Colonial had paid the claims at issue here without having any liability, “the terms of the [general indemnities] required…the Sevinors to indemnify Colonial for claims Colonial paid ‘in good faith under [its] belief that. .. [it] was or might be liable therefor’” (Emphasis in the decision).
To the Appeals Court, the undisputed facts showed that Colonial paid the five claims under the belief that it was liable for them under the bonds because:
- the claims were, to the extent that Colonial was able to determine, timely;
- the claimants appeared to have provided materials or supplies directly to Capital Floors;
- Capital Floors and the Sevinors were given notice of the claims and did not object.
The judges did note the Sevinors’ argument that Colonial had the responsibility to issue the bonds and that Colonial should have recognized the need for statutory bonds complying with § 44F, even if neither Capital Floors nor the Sevinors asked for § 44F bonds. However, based on the broad terms of the independent indemnities the Sevinors signed, and the complete lack of any evidence of “bad faith” on Colonial’s part in handling the bonds and the claims under the bonds, the judges affirmed the judgment against the Sevinors.
The Sevinors file for further appellate review to the Supreme Judicial Court
The Massachusetts Appeals Court is an intermediate appellate court. The ultimate judicial authority resides with the Supreme Judicial Court. Parties dissatisfied with an Appeal Court’s decision may apply for further appellate review. However, the allowance of any further appeal is discretionary with the Supreme Judicial Court.
On August 2, 2019, the Sevinors filed their application for further appellate review with the Clerk of the Supreme Judicial Court. Colonial will have twenty days to file its opposition. Agency Checklists will monitor the docket and update any decision it finds on the Sevinors’ applicaion.