New Amsterdam Casualty Co. v. Bettes (407 S.W.2d 307, 1966)

CLAUDE WILLIAMS, Justice.

This is an appeal from a judgment for $1,178,770 in favor of T. J. Bettes Company against New Amsterdam Casualty Company. The recovery of T. J. Bettes Company was upon alleged obligation of four bonds executed by L. A. Peterson, Inc., as principal, and New Amsterdam Casualty Company as surety, said bonds being conditional upon the faithful performance by L. A. Peterson, Inc., of contracts for the construction of buildings located in Virginia and New York.

The factual background of the parties and subject matter involved in this litigation is so complex that the record will not yield to a simple statement.

BACKGROUND OF PARTIES

L. A. Peterson, Inc. (hereinafter called Contractor or Peterson, Inc.) is a Texas corporation engaged in the construction business. All of the stock of this corporation was owned by L. A. Peterson with the exception of two shares, one owned by his wife and one by his brother. Its directors were R. C. Peterson, James R. Cash, B. W. Morris, Frank Zitzman and L. A. Peterson.

South Falls Corporation was incorporated under the laws of the State of Texas. James R. Cash, Billy W. Morris and L. A. Peterson each owned one-third of the stock of this corporation. Later, the stock of the company owned by L. A. Peterson was transferred to L. A. Peterson, Inc.

Disco Corporation was a wholly owned subsidiary of South Falls Corporation. Morris, Peterson and Cash were officers and directors of this corporation. Both corporations were engaged in acquiring land and constructing buildings thereon in various parts of the United States. The corporations will be referred to as South Falls and Disco, respectively, and collectively as South Falls-Disco.

Because of the interrelationship between Peterson, Inc. and South Falls-Disco, Peterson, Inc., was the contractor on the majority of the building projects constructed by South Falls-Disco in Iowa, Illinois, Ohio, Texas, Virginia and New York.

T. J. Bettes Company (hereinafter called Bettes) is a Texas corporation engaged in the mortgage banking business, one facet of which is the making of interim construction loans. Bettes was the interim construction lender on the building projects mentioned above in Ohio, Illinois, Iowa, Texas, Virginia and New York. On each of the projects Bettes required that Peterson, Inc. and an approved corporate surety execute dual obligee bonds, being identical with those bonds involved in the present litigation and which will be described in more detail hereinafter.

THE VIRGINIA AND NEW YORK CONSTRUCTION CONTRACTS

Peterson, Inc. engaged to build buildings for Disco in Norfolk, Newport News and Richmond, Virginia and in Plattsburgh, New York. On each of these jobs Bettes required that South Falls-Disco, L. A. Peterson, Inc. and L. A. Peterson, James R. Cash and B. W. Morris, individually, execute a loan agreement which spelled out in detail the conditions under which Bettes’ loan was being made with reference to interim financing of the respective jobs. These loan agreements provided, inter alia, that on each construction project South Falls-Disco should furnish Bettes as security the following instruments: (1) note and deed of trust; (2) collateral assignment of an unconditional contract to purchase the buildings previously executed by A. A. Rosen, a New York investor; and (3) collateral assignment of landlord’s interest under a twenty-year lease previously executed by Maxam’s Inc., a large discount department store chain. Also, Peterson, Inc. was required to furnish the owner, South Falls-Disco, and the lender, Bettes, dual obligee payment and performance bonds executed by an acceptable corporate surety.

On January 19, 1962 Disco, as owner, and L. A. Peterson, Inc., as contractor, executed three standard form agreements for the construction of “Maxam’s Department Stores” in Norfolk, Newport News and Richmond, Virginia for an agreed consideration of $861,802 each. The completion date in each contract was May 26, 1962. In each of the contracts Peterson, Inc. agreed to furnish all of the materials and to perform all of the work shown on the drawings and described in the specifications for each of the respective jobs and to do everything required to be done by the contract. Article 7 of the contract entitled “Guaranty Bonds” provided:

“Contractor shall furnish to owner and to T. J. Bettes Company, as construction loan lender, performance and payment bonds, in which owner and such lender shall be obligees (commonly referred to as dual obligee bonds) as their respective interests may appear. Such bonds shall be executed by a corporate surety satisfactory to both owner and lender. Owner agrees that the interest of the lender in such bonds shall be the amount of construction money which it shall have advanced, together with interest on each such advance from the time of the advance at the rate of 6 per cent per annum, which interest and claim of such lender on each such bond shall be prior and superior to any interest and claim of owner.”

On June 5, 1962 South Falls, as owner, and L. A. Peterson, Inc., as contractor executed a construction contract for the construction of “Forest Hills Outlet Store, Plattsburgh, New York”, such contract having the same general provisions as the Virginia contracts except that the amount was to be $750,000.

Subsequent to the execution of each of the construction contracts Peterson, Inc. as principal and New Amsterdam, as surety, executed two bonds, a payment bond and a performance bond, on each of the four construction projects in question.

THE PERFORMANCE BONDS

The four performance bonds, which are of vital concern in this litigation, were all on standard A. I. A. forms and the one on the Norfolk, Virginia project is illustrative of all:.

“KNOW ALL MEN BY THESE PRESENTS:

That L. A. Peterson, Inc., 7135 Empire Freeway, Dallas, Texas as Principal, hereinafter called Contractor, and NEW AMSTERDAM CASUALTY COMPANY, a corporation organized and existing under the laws of the State of New York, as Surety, hereinafter called Surety, are held and firmly bound unto Disco Corporation, 1066 W. Mockingbird Lane, Dallas, Texas and T. J. Bettes Co., Houston, Texas as Obligee, hereinafter called Owner, in the amount of Eight Hundred and sixty-one thousand, eight hundred two dollars and no/ 100 Dollars ($861,802.00), for the payment whereof Contractor and Surety bind themselves, their heirs, executors, administrators, successors and assigns, jointly and severally, firmly by these presents.

“WHEREAS, Contractor has by written agreement dated January 19, 1962 entered into a contract with Owner for general construction of Maxam’s Department Store, Norfolk, Virginia in accordance with drawings and specifications prepared by Donald H. Speck, which contract is by reference made a part hereof and is hereinafter referred to as the Contract.

“NOW, THEREFORE, THE CONDITION OF THIS OBLIGATION is such that, if Contractor shall promptly and faithfully perform said Contract, then this obligation shall be null and void; otherwise it shall remain in full force and effect.

“The Surety hereby waives notice of any alteration or extension of time made by the Owner.

“Whenever Contractor shall be, and declared by Owner to be in default under the Contract, the Owner having performed Owner’s obligations thereunder, the Surety may promptly remedy the default, or shall promptly

(1) Complete the Contract in accordance with its terms and conditions, or

(2) Obtain a bid or bids for submission to Owner for completing the Contract in accordance with its terms and conditions, and upon determination by Owner and Surety of the lowest responsible bidder, arrange for a contract between such bidder and Owner and make available as work progresses (even though there should be a default or a succession of defaults under the contract or contracts of completion arranged under this paragraph) sufficient funds to pay the cost of completion less the balance of the contract price; but not exceeding, including other costs and damages for which the Surety may be liable hereunder, the amount set forth in the first paragraph hereof. The term “balance of the contract price,” as used in this paragraph, shall mean the total amount payable by Owner to Contractor under the Contract and any amendments thereto, less the amount properly paid by Owner to Contractor.”

Each bond contained an endorsement which reads as follows:

“The Surety shall not be liable under this bond to the obligees, or either of them unless the said obligees, or either of them, shall make payments to the principal, strictly in accordance with the terms of said contract as to payments and shall perform all the other obligations to be performed under said contract at the time and in the manner therein set forth. This agreement is hereby attached to and becomes a part of the bond.”

The four labor and material payment bonds covering each of the four construction projects contained basically the same information as the four performance bonds.

ALLEGED DEFAULT IN CONTRACTS BY PETERSON, INC.

After the work on the Virginia construction contracts had been carried off almost to completion Peterson, Inc., was called upon to correct the defects and deficiencies claimed by the owners. The requested corrections were not made. Bettes claimed that in order to procure the acceptance of the Virginia buildings by the tenant, it was required to place in escrow the sum of $80,570 for repairs and completion of the buildings. It was claimed that New Amsterdam refused to perform its obligation under the bond.

It was also claimed' that in November 1962 L. A. Peterson, Inc., abandoned the work on the Plattsburgh project at a time when it was only 25 to 30 per cent complete. It was alleged that after such abandonment it was discovered that the value of the work completed was only about $188,000, and that South Falls would be required to expend the further sum of $561,700 to complete the project. It was alleged that New Amsterdam refused to perform its obligation as surety on this breach.

Bettes’ cause of action against New Amsterdam and Peterson, Inc., was to recover not only actual damages which it claimed to have incurred in the completion of the projects but also special damages in the nature of diminution of value of the property caused by delay in completion of the construction contract.

FINDINGS OF FACT AND JUDGMENT ON THE VIRGINIA BONDS

The case was tried to the court without a jury and the trial judge filed Findings of Fact and Conclusions of Law. Among other things the court found that as to the Virginia bonds the principal, Peterson, Inc., and the surety, New Amsterdam, were liable not only for the $80,570 required to complete the construction of the projects but also the sum of $460,000 representing the diminution in value of the buildings and the lender’s security by virtue of the loss of the twenty-year lease and also the loss of the Rosen agreement to purchase the property. In this connection the trial court found that Maxam’s lease and the Rosen contract to purchase were terminable unless the buildings were completed on time; that the Virginia buildings were not completed on time; that liens totaling $557,-235.34 were filed against the Virginia projects; that because of the filing of the liens and the failure of L. A. Peterson, Inc., to complete the construction on time, the time expired on the Maxam’s lease and the Rosen agreement to purchase. The court further found that Bettes, in mitigation of its damages, was compelled to enter into negotiations with Rosen and Maxam’s to salvage what it could from those transactions. The court found that the Maxam’s twenty-year lease was lost, that as a result of the renegotiation of the Rosen contracts to purchase Rosen agreed to purchase the Virginia buildings only upon condition that permanent financing be procured for him, and that the only lease Bettes could procure in place of the Maxam lease was a two-year lease at a reduced rental by another discount chain. The court found that because of the loss of the Max-am lease the Bettes Company’s security was impaired and diminished to the extent of 20 per cent of the value of the property, or $460,000, which the court found was additional damages to be assessed against the principal and surety on the performance bond. The judgment, as relates to the Virginia contracts, was against Peterson, Inc. and New Amsterdam for (a) $80,570, representing actual cost of completion of the construction of the Virginia projects; and (b) $460,000, being the diminution in value of the buildings and the lender’s security by virtue of the loss of the twenty-year lease and the agreement to purchase.

OPINION

VIRGINIA BONDS

As to that portion of the judgment relating to the Virginia projects appellant does not challenge the award of $80,570, representing the cost of completion of the job, but vigorously attacks, by six points of error, that portion of the judgment wherein the amount of $460,000 is awarded for diminution of value of the security of Bettes. Thus we are confronted with the principal issue as to whether the trial court was correct in holding that $460,000 alleged diminution in the lender’s security was a proper measure of damages and recoverable under the Virginia bonds.

Appellee Bettes places great reliance upon that part of the bond which provides that whenever the contractor shall be in default under the contract the surety may do one of two things: (1) complete the contracts in accordance with its terms and conditions, or (2) obtain a bid or bids for submission to owner for completing the contract in accordance with its terms and conditions and arrange for a contract between such bidder and owner and make available as work progresses sufficient funds to pay the cost of completion less the balance of the contract price; but not exceeding, including other costs and damages for which the surety may be liable hereunder, the amount set forth in the first paragraph of the bond. This provision, says Bettes, is broad and comprehensive and contemplates any and all costs and damages less than the amount of the bond principal. It relies upon cases such as Prudence Co., Inc. v. Fidelity & Deposit Co. of Maryland, 2 Cir., 77 F.2d 834, modified and affirmed 297 U.S. 198, 56 S.Ct. 387, 80 L.Ed. 581; Kidd v. McCormick, 83 N.Y. 391; Trainor Co. v. Aetna Casualty & Surety Co,, 290 U.S. 47, 54 S.Ct. 1, 78 L.Ed. 162, 165, and Purdy v. Massey, 306 Pa. 288, 159 A. 545, as holding that special damages in the nature of depreciation in value of property is recoverable against a surety under an undertaking of the character presented by this appeal.

Appellant supports its position that the diminution, if any, of the security held by Bettes is not a proper measure of damages in an action upon a bond of the character here presented, by pointing to the express provisions of the bond itself which, it contends, may not be enlarged upon by implication or otherwise. Appellant further -contends that the cases relied upon by .appellee, while containing some broad and general language, do not, upon close analysis, .actually hold that special damages of the character here claimed are within the contemplation of the law nor the parties as proper damages against a surety on a completion bond.

Having carefully examined this record in the light of the contentions here advanced we agree with appellant that the trial court .applied an erroneous measure of damages ■in allowing the item of $460,000.

We are here dealing with the obligation