Surety Case Law Note: Saved By The Lien Release And Waiver Form
July 19, 2022
In this Surety Today blog post we will provide a Case Law Note to consider the issue of the impact of lien release and waiver forms on a payment bond claim against a Miller Act surety. Read on to learn more about lien releases and waivers.
UNITED STATES F/U/B CHASNEY & COMPANY, INC. V. HARTFORD ACCIDENT & INDEM. CO., 168 F. Supp. 3d 824 (D. Md.)
This case arises from a government construction project that was fraught with disruption and delay. Not surprisingly, the owner of the project was the United States Army Corps of Engineers (“USACE”). The bonded principal contracted with USACE for the construction of an Army Reserve Center in Baltimore, Maryland (“the Project”). Hartford issued payment and performance bonds with a penal sum of $9,704,231. The principal entered into a subcontract with Chasney & Company, Inc. (“Chasney”) to perform HVAC and plumbing services on the Project for $1,500,000.
During the course of performance on the Project, Chasney and the principal encountered numerous design defects and other deficiencies attributable to the Government. These defects resulted in extended delays and unexpected costs. The principal submitted over two dozen claims to the USACE. Chasney submitted a $380,687.65 delay claim through the principal, however, USACE officials were dismissive of Chasney’s claim and stated that it lacked any merit. Ultimately, the principal and USACE settled the claims, but none of the settlement was attributed to Chasney’s claim. Chasney filed suit and Hartford moved for summary judgment contending that Chasney had waived and released any claims.
The subcontract between Chasney and the principal provided that Chasney “shall furnish guarantees and all other documents required by the Prime Contract for [Chasney’s] work, including releases of all claims and liens as a condition precedent for final payment,” and that “[p]artial releases may be required at [principal’s] option as a condition precedent to any partial payments for work completed.” The subcontract further provided that the principal “shall not be liable to [Chasney] for delays caused by the [Government] or other subcontractors or suppliers.” During the three year performance of the work, Chasney executed a series of twenty-four “Subcontractor’s Partial Release, Waiver of Lien and Affidavit.” By signing each Partial Release, “in consideration of the payments previously made and payment for the period covered by the current payment due,” Chasney agreed to:
waive[ ] and release[ ] all…liens…and claims and demands against [principal] and/or its sureties…in any manner arising out of [Chasney’s] work, labor, services, equipment or materials…performed or furnished…in connection with the project, through the period covered by the current payment and all previous payments.
By signing the releases, Chasney affirmed that it was “aware of no claims nor any circumstances that could give rise to any future claims” against the principal, Hartford, or others involved on the Project. Each release form also included a space for Chasney to list claim exceptions, but Chasney listed none in any of the forms.
The Court began its analysis by noting that it is a “cardinal rule of the surety/principal relationship that a surety occupies the shoes of its principal,” HPS Mech., Inc., 2014 WL 3845176, at *13 (quoting United States ex rel. Walton Tech., Inc. v. Weststar Eng’g, Inc., 290 F.3d 1199 (9th Cir.2002), and in general, the surety’s liability on a payment bond is “defined by the liability of the underlying contract,” Id. (quoting Morganti Nat’l, Inc. v. Petri Mech. Co., No. Civ.A.3:98CV309 (SRU), 2004 WL 1091743, at *11 (D. Conn. May 13, 2004)). Further, the Court noted that a surety on a Miller Act payment bond is “liable only to the extent that the general contractor would be liable” and the surety “may avail itself of most contract defenses, including the doctrines of release and waiver.” United States ex rel. Kogok Corp. v. Travelers Cas. & Sur. Co. of Am., 55 F.Supp.3d 852, 857–59 (N.D.W.Va.2014).
The Court held that the lien release and waiver forms were clear and unambiguous and that Chasney voluntarily executed the documents and that the waivers barred the claims against Hartford. The Court state “[b]y signing each release, Chasney waived all claims relating to work performed through the covered period: no reasonable factfinder could conclude otherwise.” In reaching its holding the Court considered a number of issues and asserted defenses:
Miller Act Prohibition Against Waivers
When releases are involved in the Miller Act context you need to be mindful of the fact that there are restrictions on releases in bond situations and the Chasney Court addressed the issue. Under 40 USCA §3133(c), any waiver of a claim on a bond is void unless it is in writing, signed by the party who is making the waiver and executed after the party waiving has provided labor and/or materials. In this case, the Miller Act waiver restriction did not apply because the lien releases were all signed, they were in writing, signed by the party waiving and were signed after the work had been performed.
Insufficient Consideration
Chasney contended that the lien release waivers were not valid because of insufficient consideration under the “preexisting duty rule.” The theory is simple enough: “payment of a sum which the payor was under a previous legal or statutory obligation to pay is not sufficient consideration to support a contract.” Chasney argued that because the principal was obligated, pursuant to the subcontract to compensate Chasney for its contributions to the Project, the lien release waivers “in consideration of the payments previously made and payment for the period covered by the current payment due” are void for lack of additional consideration. The Court rejected this argument because the lien release waivers were expressly authorized by the subcontract and as such they are supported by the same consideration that supports the Subcontract. Other courts have adopted the same approach, holding that “a release required by the provisions of a contract is supported by the same consideration that supports the contract itself,” Sauer, 742 F.Supp.2d at 720 (quoting Yakima Asphalt Paving Co. v. Wash. State Dep’t of Transp., 45 Wash.App. 663, 726 P.2d 1021, 1024 (1986)); see also Military & Fed. Constr. Co. v. Ace Elec., Inc., No. 7:14–CV–23–D, 2015 WL 3953814, at *5 (E.D.N.C. June 29, 2015) (“A waiver that is required in the original subcontract…is supported by the consideration that supports the subcontract.”); First Gen. Constr. Corp. v. Kasco Constr. Co., Civ. No. 10–2655, 2011 WL 2038542, at *5 (E.D. Pa. May 24, 2011) (“[T]he consideration for the releases is the same as the consideration for [the] Subcontract. Accordingly, no additional or independent consideration is necessary because the parties were careful to include the releases as a term of the contract.” (quoting Kenneth Hantman, Inc. v. Whiting–Turner Contracting Co., Civ. No. 07–1574, 2008 WL 4072591, at *7 (E.D. Pa. Sept. 2, 2008)); Inland Empire Builders, Inc. v. United States, 424 F.2d 1370, 1376 (Ct. Cl. 1970) (“Decisions of this court that a release called for by a contract is not without consideration, even though the contractor receives only amounts otherwise due, are legion[.]”); Command Tech., Inc., 2015 WL 6470277, at *14 (“We hold that the execution of the Release was a precondition of payment under the contract, and, therefore, no new consideration was necessary….”).
Ripeness
Chasney contended that the lien release waiver could not have operated as a release of Chasney’s claim for delay damages because Chasney was not yet entitled under the provisions of subcontract to recover such damages. The Court dispatched this argument by noting that the lien release and waiver form unambiguously waived “claims and demands…in any manner arising out of…work, labor, services, equipment or materials…performed or furnished…in connection with the project, through the period covered by the current payment and all previous payments.” Nothing in the language restricted the operation of the waiver to fully ripened, perfected claims for which Chasney enjoys a present right to payment. Indeed, in signing each waiver form Chasney affirmed under the penalties for perjury that it was “aware of no claims nor any circumstances that could give rise to any future claims” against the principal. Further, the forms included a space for Chasney to list any exceptions, but no exceptions were ever listed. Chasney unmistakably had a delay claim, which claim it waived by executing the releases.
I think that one of the takeaways here is that as a claim handler when you get a claim and you are doing your initial response letter, it would be a good practice to ask for any and all lien releases and waiver forms because you might be able to put together a history of waivers and releases that might get you summary judgment.
If you have questions regarding the issues discussed in this post, please do not hesitate to contact Michael A. Stover, Esq. (410-659-1321/mstover@wcslaw.com) or any member of the Surety and Fidelity Practice Group.