• Bonding Is Not Always a Positive Experience
  • December 3, 2013 | Author: William W. Abbott
  • Law Firm: Abbott & Kindermann, LLP - Sacramento Office
  • If you were hoping for an insightful article on human relationships, you are out of luck and clearly, you are reading the wrong blog. But if you are interested in bonding as it relates to subdivisions and improvement agreements, read on. With a frequency slightly ahead of locusts appearing every seventeen years, cases involving subdivision improvement bonds are cyclical, trailing serious downturns in the real estate development market. Two cases this year illustrate interesting features of this practice area.

    In The H.N. and Frances C. Berger Foundation v. Perez (2013) 218 Cal.App.4th 37, a foreclosing lender sued to compel a county to enforce subdivision improvement bonds to complete subdivision related improvements. After the original developer defaulted, the county required the bonding company to complete some of the required improvements. The foreclosing lender sued to have all of the improvements completed, arguing that it was a third party beneficiary under the subdivision improvement agreements. Not so held the trial and appellate courts. Of interest was the court’s interpretation of the Subdivision Map Act which, as applied to the surety requirements, was intended to benefit the county and the public generally, but not individual lot owners. While the agency and the public are beneficiaries, the court’s analysis overlooks that but for the improvement agreement and related surety, the subdivider would be prohibited by law from selling individual lots to the public. Given the origins and evolution of the Subdivision Map Act, I think a reasonable interpretation could extend the benefits of the surety to the lot owners. At least by the terms of the particular agreement in this lawsuit, that was not the result.

    The second case involves a claim on a labor and materials bond posted for offsite improvements. In Nissho of California, Inc. v. Bond Safeguard Insurance Company (October 22, 2013, E052746) --- Cal.App.4th ---, a developer posted a series of full performance and labor and material bonds. The subdivider and the city entered into an offsite improvement agreement for improvements on adjacent city owned land. The subdivider and landscaping company entered into a series of contracts for both onsite and offsite improvement work. After extensive improvements by the landscaping company, the subdivider defaulted. The landscape company sued the subdivider and bonding company to recover for its offsite work.

    As authorized by the Subdivision Map Act, the city had required a surety of only 50% of the estimated labor and material costs moved against all of the posted security. While the trial court granted the relief sought by the landscaping company, the appellate court reversed holding the claimant could only proceed against the surety posted specifically for the offsite improvement work, not the other surety. The landscaping company was presumed to know that the city may have required less than 100% of the estimated cost. Thus, a claimant’s allowable recovery will be determined by the improvement agreement and related surety. Contractor and subcontractors must exercise due diligence at the time they enter into agreements if they desire to achieve full recovery years later in the event of a developer default.