UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
DEBTOR CASE NO. 93-60281
MANLON, INC. PLAINTIFF
VS. ADV. NO. 93-6028
SANITATION DISTRICT NO. 1
OF CAMPBELL AND KENTON COUNTIES;
ASSOCIATED PIPELINE CONTRACTORS, INC.;
ACCELERATION NATIONAL INSURANCE
COMPANY; BELLEVIEW SAND & GRAVEL, INC. DEFENDANTS
This matter is before the Court on the Motion of defendant Acceleration National Insurance Company ("Acceleration") to Dismiss Count Seven of the Plaintiff's Complaint, and on the plaintiff's Motion to Strike Reply Memorandum Filed by Acceleration. Moving parties and respondents have filed their respective briefs, and these issues are ready for decision. This Court has jurisdiction of this matter pursuant to 28 U.S.C.'1334(b); it is a core proceeding pursuant to 28 U.S.C. '157(b)(2)(E)(F) and (H).
The plaintiff's Complaint was filed herein on August 24, 1993. It seeks turnover of property, a determination of the validity, priority and extent of liens, and the setting aside of preferential and post-petition transfers. Count VII alleges that the plaintiff entered into a contract with Acceleration to provide a Payment Bond ("the bond") for payment of all charges related to the Part III, Project I-515B, Elijah Creek Gravity Sewer contract which the plaintiff failed to pay.
Count VII further alleges that the beneficiaries of the bond are defendant Sanitation District No. 1 and the various providers of goods and services for the project; that several subcontractors made claims against the bond and were not paid; that Acceleration's failure to pay claims is a breach of its contract with the plaintiff; and that the breach has caused the plaintiff actual and consequential damages in an undetermined amount.
Acceleration's Motion to Dismiss, filed herein on October 21, 1993, states that the bond is a surety bond and not an insurance policy, and that its obligations run to Sanitation District No. 1 and other beneficiaries and not to the plaintiff, who is the principal on the bond. The plaintiff, in its Response to Motion to Dismiss filed herein on November 17, 1993, responds that while the bond is for the benefit of the owner (Sanitation District No. 1), laborers, suppliers, and subcontractors, the contract for the bond is between Acceleration and itself, and can be breached as any other contract can be breached.
Acceleration's position appears to be based on the premise that the plaintiff in Count VII of the Complaint is making a claim under the bond. This Court agrees that a principal on a bond cannot claim under it, but does not agree that this is what the plaintiff is attempting to do. This Court believes that the question of breach of the contract for the bond is a valid one. A surety bond is not an insurance policy, as Acceleration states, but "...it is ordinarily construed in similar fashion." William C. Roney & Co. v. Federal Ins. Co., 674 F.2d 587 (6th Cir. 1982), at page 590. As stated in Hurst v. First Kentucky Trust Co., 560 S.W.2d 816, Ky., (1978), "All policies of insurance are contracts by which the insured agrees to pay certain sums upon the happening of a particular event." At page 818.
Research does not reveal a case exactly on point, but in W.C. Shepherd Co., Inc. v. Royal Indemnity Co., 192 F.2d 710 (5th Cir. 1951), a contractor and its surety entered into a written agreement whereby the surety agreed to pay certain classes of the contractor's bills arising out of the performance of its bonded construction jobs. This was a separate agreement, but was for the purpose of seeing to it that the bonded construction jobs were performed and that the bills generated pursuant thereto were paid.
Under the agreement, the surety was to advance sums to the contractor from which these bills would be paid. The surety agreed as follows:
'From and after the date of this Agreement the Surety intends from time to time to advance or make available the moneys necessary for the payment, adjustment or discharge of the outstanding unpaid bills of the Contractor for materials, supplies and similar subcontractor's charges heretofore incurred in the performance of the Bonded Contracts, and intends to advance such further moneys as may be required for the payment of bills incurred by the Contractor subsequent to the date hereof in the performance of the Bonded Contracts.'
At page 713.
The relationships among surety, principal and beneficiaries are the same as or similar to their relationships under the performance bond itself, and this Court believes that the agreement in the Shepherd case may be looked on as an extension of the performance bond. The court said:
The times and amounts of such installments were made definite in some degree by the requirements of moneys to pay existing bills and bills subsequently incurred in the performance of the bonded contracts. These were matters as to which both the Contractor and the Surety were already bound to existing creditors and to obligees under the bonded contracts.
At page 716. The court found that the surety had an obligation to advance the funds to the contractor as set out above, and that failure to advance the funds would be considered a breach of their contract.
In consideration of the foregoing, it is therefore the opinion of this Court that Acceleration's Motion to Dismiss Count Seven of the Plaintiff's Complaint should be overruled. In view of this decision, the plaintiff's Motion to Strike Reply Memorandum Filed by Acceleration is rendered moot. An order in conformity with this opinion will be entered separately.
By the Court -
Ann E. Samani, Esq.
Phillip L. Hanrahan, Esq.
Carl E. Grayson, Esq.
Michael L. Baker, Esq.