Performance Bond Pleading Pitfalls…and Surety Defenses

In the recent decision of 84 Lumber Company v. F.H. Paschen, S.N. Nielsen & Assocs., LLC, No. 12-1748, 2017 WL 467679 (E.D. La. Feb. 3, 2017), the United States District Court for the Eastern District of Louisiana dismissed a general contractor’s claims against a project surety, holding that the contractor had not adequately pled satisfaction of the performance bond’s “conditions precedent.” The case arose out of two school construction projects in the New Orleans area, the Mildred Osborne Project and the South Plaquemines Project.  F.H. Paschen, S.N. Nielsen & Associates, LLC (“Paschen”) served as the general contractor on both projects.  Paschen subcontracted part of its work to J & A Construction Management Resources Company, Inc. (“J & A”) and J & A in turn subcontracted with plaintiff 84 Lumber Company (“84 Lumber”).  Fidelity and Deposit Company of Maryland (“Fidelity”) issued performance bonds for each of the sub-subcontracts between J & A and 84 Lumber.  Both bonds identified 84 Lumber as the Principal, J & A as the Obligee, and Fidelity as the Surety.  Fidelity added riders to both bonds, which amended the bonds by naming Paschen as a dual obligee.

On July 5, 2012, 84 Lumber sued Paschen, Fidelity, and other defendants in the Eastern District of Louisiana, alleging that it was not paid in full for work performed under its sub-subcontract with J & A.  Paschen answered 84 Lumber’s complaint, adding J & A as a third-party defendant and cross-claiming against Fidelity.  As against Fidelity, Paschen asserted two claims.  First, Paschen sought damages for the failure of both J & A and 84 Lumber to perform under Paschen’s subcontract with J & A.  Second, Paschen sought to recover damages as a dual obligee on the performance bonds issued by Fidelity.

After a multiyear stay pending arbitration, in 2016, Fidelity moved for summary judgment and judgment on the pleadings, respectively, on Paschen’s claims.  On the first claim, Fidelity argued that it could not be held liable for 84 Lumber’s alleged breach of the J & A subcontract – – as 84 Lumber was not a party to that subcontract and Fidelity did not bond that subcontract.  Fidelity opposed Paschen’s second claim by noting that the performance bonds clearly set out certain conditions precedent to Fidelity’s obligations, and that Paschen’s third-party complaint did not adequately plead the satisfaction of the conditions precedent as required under Rule 9(c) of the Federal Rules of Civil Procedure.

The Eastern District ruled in favor of Fidelity on both motions and dismissed all of Paschen’s claims against the surety.  The grant of summary judgment was straightforward. Paschen’s claims arising out of J & A’s breach of its subcontract with Paschen were dismissed because Paschen submitted no evidence indicating that the performance bonds applied to a contract other than the sub-subcontract between J & A and 84 Lumber or that the bonds guaranteed the performance of any party besides 84 Lumber.

More interestingly, the Court also granted judgment on the pleadings, approving of Fidelity’s “conditions precedent” pleading argument.  Interpreting the bond language, the court isolated two conditions precedent to trigger Fidelity’s obligations under the performance bond.  First, the Court found that the bond required that 84 Lumber be in default of the bonded sub-subcontract between 84 Lumber and J & A.  Second, the Court read the bond to mandate that 84 Lumber be declared in default by one of the obligees.  The Court then turned to the requirements of Federal Rule of Civil Procedure 9(c), which instructs that “[i]n pleading conditions precedent, it suffices to allege generally that all conditions precedent have occurred or been performed.”  The Court determined that, while Paschen pleaded the satisfaction of the first condition, satisfaction of the second condition precedent was not pleaded anywhere on the face of Paschen’s complaint.  Paschen’s failure to allege that it had declared 84 Lumber in default resulted in dismissal of its claims against the surety.

This case sounds a warning to obligees suing performance bond sureties in federal court: Plead satisfaction of applicable conditions precedent, or have your claims thrown out.  On the other hand, the decision of the Eastern District of Louisiana in Paschen provides sureties with more ammunition to seek speedy dismissals of claims made against them. The technicalities of pleading do matter.