By: Thomas S. Tripodianos Published: May 2009

The Owner can make claim as equitable subrogee to the rights of the Town under the payment and performance bonds posted by Contractor.

Question. This matter arises from the excavation work undertaken in anticipation of the construction of a residential subdivision and golf course. Is the Contractor’s surety responsible for the reimbursement of the Owner for certain fees and costs the Owner paid to the Town, and additional fees and costs the Owner may be required to pay to the Town, in connection with the excavation?

Answer. YES. The Owner is entitled to recover the excavation fees as the equitable subrogee of the Town under certain bonds posted with respect to the excavation.

The Owner entered into an excavation agreement with Contractor1, pursuant to which Contractor1 undertook to perform excavation work with respect to the Owner's 186-acre development project. The excavation agreement apparently was entered into in anticipation of the conditional approval of the subdivision that ultimately was granted by the Planning Board of the Town (hereinafter the Planning Board). Among the conditions imposed in connection with that approval was the requirement that the Owner implement certain mitigation measures identified in a findings statement that had been adopted by the Planning Board, in satisfaction of the requirements of the State Environmental Quality Review Act (ECL art 8, hereinafter SEQRA). One of those measures was the payment of fees required by the Town Code.

The excavation agreement specified that Contractor1 would be required to remove from the site and haul away approximately 1.665 million cubic yards of material in accordance with the SEQRA findings statement and the final engineering plan. It also specifically obligated Contractor1 to pay “any municipal fee ... pursuant to the Town requirements,” making specific reference to the Town Environmental Preservation Capital Reserve Fund. The agreement also provided that Contractor1 “shall not over excavate any area.” With respect to Contractor1's compensation for its services, the excavation agreement provided that the Owner would have “no financial obligation to [Contractor1] other than [Contractor1] shall own any and all excess material taken from the site in conformance with the approved plan.”The excavation agreement further provided, however, that Contractor1 would be paid $1.5 million to excavate the drainage and sewers for the development. The excavation agreement was signed by Contractor1's principal.

The municipal fees to which the excavation agreement referred (hereinafter the Environmental Fund fees) are imposed by the Town Environmental Preservation Capital Reserve Fund Law. Prior to commencement of the excavation, the applicant “must post a bond in such form as shall be approved by the Town Attorney and in an amount to be specified by the Planning Board to guarantee performance in accordance with the approved site plan or the approved subdivision plan”.

To satisfy its obligations under the excavation agreement, Contractor1 entered into an oral agreement with the Excavate-Co. According to Excavate-Co's principal, Contractor1 agreed to sell Excavate-Co approximately 471,425 cubic yards of excess fill at $3.50 per cubic yard, or approximately $1.65 million, which Contractor1 would dedicate to the payment of the Environmental Fund fees due to the Town. According to Contractor1, however, Excavate-Co was to make the payments for the fill directly to the Town.

Surety issued a “payment bond” (hereinafter the first payment bond) to the Town in the amount of $500,000. Executed by Excavate-Co, the first payment bond recited that Excavate-Co, as “Principal,” was obligated to provide a bond guaranteeing the payment of fees to the Town for the removal of material from the site, and bound Surety,” to pay those fees in the event that Excavate-Co failed to do so. The first payment bond was amended on the day of its issuance to add Contractor1 as a principal. According to Excavate-Co, however, the Town rejected the first payment bond because the amount was insufficient.

Another “payment bond” in the amount of $1.5 million (hereinafter the second payment bond) was executed by Paving Corp. as “Principal,” and Excavate-Co as “Sureties.” The second payment bond recited that Paving Corp. has applied to mine property belonging to the Owner at the same location and provided that the principal and sureties “hereby undertake and become bound in the sum of $1,500,000 to the Town for the payment of any sum due the Town by Paving Corp. for the mining of property of the Owner, incidental to the development of said site. According to Excavate-Co, the Town rejected the second payment bond because it was not issued by a bonding company.

The Owner disputes Excavate-Co's contention that the Town rejected the first and second payment bonds.

Contractor1 and Excavate-Co, as “Principals,” and Surety executed a “Performance (Completion) Bond” (hereinafter the performance bond). According to its terms, Surety was obligated to the Town, up to the sum of $1.665 million, to satisfy the obligation of Contractor1 and Excavate-Co to remove approximately 1.6 million cubic yards of fill at The Owner site “in accordance with the construction specification of the Town all in conformance with the plot and drainage plan approved by the Town Planning Board and to the satisfaction of the Town.”

According to Excavate-Co, the performance bond replaced the first and second payment bonds, and was intended to comply with the bonding requirement of Town Code, and was accepted by the Town. The Town Attorney required, however, that the performance bond be relabeled a “restoration bond,” and that the language of the bond be modified to provide for Surety's guaranty of the principals' obligation to remove the fill “in accordance with the construction specifications of the Town and the Town Planning Board, as approved, pursuant to the Town Planning Board's Subdivision Grant, and Town Planning Board's Site Plan Grant, and furthermore, in conformance with the Plot and Drainage Plan approved by the Town Planning Board and to the full satisfaction of the Town .”

Surety made the requested change in a rider, which was executed by Contractor1 and Excavate-Co, on behalf of Contractor1 and Excavate-Co, respectively; the Town Board accepted the performance bond.

According to Excavate-Co, Excavate-Co paid the sum of $500,000 to the Town and the sum of $485,000 directly to Contractor1 pursuant to its oral agreement with Contractor1. Excavate-Co's payments to the Town were made on its behalf by Paving Corp. in the sum of $300,000.

By letter the Town advised The Owner of its “concerns” with respect to a number of issues related to the project, including the over-excavation of the property and the failure to pay “all outstanding fees related to the excess materials application.”

The Town issued a stop-work order with respect to the project, citing over-excavation of the property. In order to resume work, The Owner paid the sum of $740,000 in Environmental Fund fees to the Town, and agreed, in a stipulation dated to deposit with the Town the additional sum of $250,000 with respect to the Town's claim for additional fees as a result of the claimed over-excavation. The Owner also paid the sum of $50,000 to the Town for the engineering costs the Town had incurred in determining the amount of the over-excavation.

The Owner seeks damages as equitable subrogee to the rights of the Town under the payment and performance bonds.

Equitable Subrogation

The Owner attempts to establish a contract claim against Excavate-Co based upon Excavate-Co's liability to the Town under the payment and performance bonds. Although The Owner is not a party to those bonds, it asserts that, having paid to the Town the Environmental Fund fees and engineering costs guaranteed by the bonds, it is entitled, as the equitable subrogee of the Town, to recover from Excavate-Co the funds it has paid to the Town. Although The Owner’s argument is a novel one, it is meritorious and The Owner is entitled to judgment against Excavate-Co on this ground. The doctrine of equitable subrogation “is broad enough to include every instance in which one party pays a debt for which another is primarily answerable and which in equity and good conscience should have been discharged by the latter, so long as the payment was made either under compulsion or for the protection of some interest of the party making the payment, and in discharge of an existing liability

As an equitable doctrine, subrogation is designed to promote justice, and thus, is dependent upon the particular relationship of the parties and the nature of the controversy in each case Considering the circumstances here, insofar as the first payment bond and the performance bond are concerned, The Owner has satisfied all the requisite elements of its equitable subrogation claim and thus established its prima facie entitlement to judgment as a matter of law against Excavate-Co for the Environmental Fund fees and engineering costs it paid to the Town.

In its capacity as a principal under the first payment bond and the performance bond, Excavate-Co agreed that it would pay the Environmental Fund fees and engineering costs directly to the Town. “Surety bonds-like all contracts-are to be construed in accordance with their terms” The first payment bond explicitly bound Excavate-Co to pay up to the sum of $500,000 with reference to “fees for the removal of materials” from the site. The performance bond expressly incorporated by reference all of the terms, regulations, and conditions imposed by the Town in connection with the construction and excavation at the site, which necessarily included the obligation to pay the Environmental Fund fees and engineering.

In satisfying Excavate-Co's obligation to the Town, The Owner acted “under compulsion or for the protection of some interest” of its own. As the developer of a 177-unit residential development, The Owner had an undeniable interest in the timely completion and approval of the project. That interest was threatened when the Town withheld certificates of occupancy and stopped work on the project by reason of the alleged over-excavation. In order to address this threat, The Owner paid the Town the sums of $990,000 in Environmental Fund fees and $50,000 in engineering costs, and thereby satisfied the Town's condition for permitting development work to resume. The payments were made, therefore, for the purpose of protecting The Owner’s interest in the completion of the project.

Finally, the Environmental Fund fees and the engineering costs were obligations “which in equity and good conscience should have been discharged by” Excavate-Co. Excavate-Co agreed, both as a principal on the performance bond and in its oral contract with Contractor1, to pay the Environmental Fund fees and engineering costs required by the Town. In return, Excavate-Co took possession of the fill, a valuable commodity. Excavate-Co thus received the benefit of its bargain. The Owner, by contrast, both paid the fees and costs required of it and otherwise lost the ability to recover the value of that commodity, which would thus enable it to recover the fees and costs it had paid. In “equity and good conscience,” therefore, The Owner should be able to recover the value of its payments to the Town from Excavate-Co.

On this basis, The Owner thus established its prima facie entitlement to judgment as a matter of law with respect to claim sounding in equitable subrogation, insofar as asserted against Excavate-Co on the first payment bond and the performance bond. The same cannot be said, however, of The Owner’s claim with respect to the second payment bond. Excavate-Co is not a principal under the second payment bond; the principal on that bond is Paving Corp.. There is no evidence as to the relationship between Excavate-Co and Paving Corp.. The Owner failed to carry its burden, therefore, with respect to its equitable subrogation claim under the second payment bond.

In response to The Owner’s prima facie showing with respect to the performance bond and the first payment bond, Excavate-Co's obligation, if it is to avoid the entry of judgment against it, is to demonstrate the existence of a material and triable issue of. Excavate-Co raised such an issue with respect to the first payment bond, but has not done so with respect to the performance bond.

Generally, delivery and receipt of a bond constitutes sufficient approval and acceptance of it Here, however, the Town Code requires that the bond be “approved by the Town Attorney ... in an amount to be specified by the Planning Board”. Excavate-Co claims that the Town did not accept the first payment bond.. Thus, Excavate-Co raised a material issue of fact whether the Town Board had accepted those bonds pursuant to the requirements of the Town Code

Excavate-Co did not raise a triable issue of fact, however, with regard to the Town's acceptance of the performance bond.

Surety

Surety contends that the Town never accepted the performance bond because it was renamed a “restoration bond” and that, in any event, the performance bond only obligated it to pay the cost of restoring the premises in the event of default by the contractor. Contrary to these contentions, as shown above, the Town Board issued a resolution adopting the performance bond which, as amended, did not absolve Surety of its conditional liability as surety for the payment of the Environmental Fund fees and engineering costs, but rather expanded Surety's obligations to include a requirement that it restore the site in the event of breach by the principals. Surety also argues that The Owner cannot recover under the doctrine of equitable subrogation because it was satisfying its own debt when making payments to the Town. As discussed above, however, the Owner was paying the obligations of Contractor1 and Excavate-Co, obligations for which Surety was conditionally liable as surety under the performance bond.

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