• Taming the Dragon
  • June 19, 2009
  • Law Firm: Frost Brown Todd LLC - Office
  • In the area of surety law, one case that has garnered significant controversy is Dragon Construction, Inc. v. Parkway Bank & Trust, 678 N.E.2d 55 (Ill. App. Ct. 1997). Although an Illinois case, Dragon has been cited in the First, Second, Fourth, Sixth, Seventh, Tenth, and D.C. Circuits, as well as in the Court of Appeals of Florida, Illinois, Michigan, and Puerto Rico. In light of such an assortment of cases drawing off of Dragon, both in distinguishing and following the case, it is worth taking a moment to consider the cumulative effect. Framed at the extremes, the dispute in Dragon is whether courts will err to avoid transforming sureties into commercial guarantors or to avoid discharging sureties for hyper-technicalities.

    In Dragon, the surety did not receive the required notice prior to appointment of a replacement contractor, who was hired absent competitive bidding, which was required by the bond. The court found the bond null and void, granting summary judgment for the surety.

    A number of cases have expressed distaste for the prospect of discharging a surety for notice and other mitigating considerations. For example, in one Michigan Court of Appeals case, the court dismissed Dragon and its progeny as providing an unnecessary windfall to sureties:

    We decline to follow cases from other jurisdictions that allow a surety to be discharged for technical violations of the bond.

    Kilpatrick Bros. Painting v. Chippewa Hills Sch. Dist., No. 262396, 2006 Mich. App. LEXIS 736, at *13 (Mich. Ct. App. March 16, 2006). Likewise, in a Sixth Circuit case, the court did not find Dragon as persuasive authority for the contention that the failure to notify of late payments voided the bond. Lyndon Prop. Ins. Co. v. E. Kentucky Univ., 200 Fed. Appx. 409, 415 (6th Cir. 2006).

    Similarly, in a case from the District Court of Maryland, the court was not swayed by Dragon, giving it the back of the hand as "not binding authority." Bell BCI Co. v. HRGM Corp., Civil No. JFM-03-1357, 2004 U.S. Dist. LEXIS 15305, at *24-25 (D. Md. August 6, 2004). When actually considering the case, the court distinguished Dragon, noting that the surety at issue "had ample notice" of the contractual difficulties and the possibility of termination for default. HRGM, 2004 U.S. Dist. LEXIS 15305, at *25. The court further reflected that the surety had not alleged that the replacement contractor at issue "was an unreasonable selection as the reprocurement subcontractor." HRGM, 2004 U.S. Dist. LEXIS 15305, at *26. Additionally, the surety displayed "no inclination to act," in spite of the need for "swift action." HRGM, 2004 U.S. Dist. LEXIS 15305, at *27.

    Other cases have not only embraced Dragon, but also have built upon it. In one District Court of Massachusetts case, the court, citing Dragon, among other cases, noted that the construction contract's notice request "exists precisely to provide the surety an opportunity to protect itself against loss by participating in the selection of the successor contractor to ensure that the lowest bidder is hired and damages mitigated." Enter. Capital, Inc. v. San-Gra Corp., 284 F.Supp.2d 166, 177 (D. Mass. 2003). The court further noted that the surety's "deprivation of mitigation opportunities" meant that the surety's burden was met, even if it had to "show injury, loss, or prejudice." San-Gra, 284 F.Supp.2d at 177.

    Along with touching upon the debate as to a prejudice requirement, the San-Gra court additionally entered the fray as to the question of whether the judicial result of the deprivation of mitigation opportunities should be to discharge liability entirely or merely reduce liability in an amount commensurate to the extent of prejudice to the surety's opportunity to minimize expenses. San-Gra, 284 F.Supp.2d at 177 n.16. The court sided with the full discharge faction, giving two reason: 1) the principal was also not notified of the default; and 2) conditions precedent to the bond were not met. San-Gra, 284 F.Supp.2d at 177 n.16.

    Another court faced a comparable conundrum in a case from the District Court for the District of Columbia. Hunt Constr. Group, Inc. v. Nat'l Wrecking Corp., 542 F.Supp.2d 87 (D.D.C. 2008). In Hunt, the sureties argued that Hunt breached the bond and rendered it void by depriving "them of their right to protect themselves under the terms of the performance bond." Hunt, 542 F.Supp.2d at 92. The sureties relied on Dragon and similar cases.

    To attack those cases, Hunt relied on a case from the Washington (State) Supreme Court, holding "that a surety's liability is not conditioned on a declaration of default." Hunt, 542 F.Supp.2d at 93 (citing Colorado Structures, Inc. v. Ins. Co. of the W., 167 P.3d 1125 (Wash. 2007)). The court examined other cases that reached similar conclusions as Colorado Structures. Hunt, 542 F.Supp.2d at 94. Ultimately, the Hunt court declined "to adopt the reasoning of Colorado Structures, as it would turn a performance surety into a commercial guarantor -- an undertaking well beyond the limits of the surety." Hunt, 542 F.Supp.2d at 94.

    One case in Illinois managed to balance the above considerations and both distinguish and follow Dragon. Solai & Cameron, Inc. v. Plainfield Cmty. Consol. Sch. Dist., 871 N.E.2d 944, 955 (Ill. App. Ct. 2007). The surety looked to Dragon in arguing that the owner's actions compromised its ability to "mitigate its damages as contemplated by the performance bond rendering the agreement null and void." Solai, 871 N.E.2d at 955. In initially distinguishing the case, the court noted that Dragon was not directly on point, in that the bond at issue did not require notice. Solai, 871 N.E.2d at 956. But the court distilled Dragon and found larger similarities, causing a Dragon analysis to be persuasive. Solai, 871 N.E.2d at 956.

    Specifically, the court commented that the conduct at issue stripped the surety "of its rights, just as the actions of the contractor in Dragon stripped the surety of its options, to mitigate." Solai, 871 N.E.2d at 956. Among other holdings, the court found that the school exceeded its authority under the bond by hiring a replacement contractor first and then declaring default and termination, nullifying the surety's duty to perform. Solai, 871 N.E.2d at 956.

    The kind of balancing act displayed by Solai is indicative of the lessons to draw from Dragon. Few cases will mimic Dragon's facts, but the larger lesson persists. Rendering a surety void of mitigation options may result in a court, more so in certain jurisdictions, rendering the bond null and void.