Subdivision Bonds Chapter 12
This chapter from The Law of Suretyship examines the unique aspects of Subdivision Bonds as compared with Public Works Bonds.
August 1, 2000
Although Subdivision Performance and Payment Bonds (Subdivision Bonds) are somewhat similar to traditional Public Works Performance and Payment Bonds (Public Works Bonds), there are many differences and distinctions which require a separate review, description and analysis. The unique aspects of Subdivision Bonds as compared with Public Works Bonds include:
(1) The governmental control mandated by the statutory scheme requiring a developer to enter into a Subdivision Agreement secured by Subdivision Bonds.
(2) The differing roles, positions and obligations of the principal and obligee on Subdivision Bonds.
(3) The shift of the funding responsibility for the placement of the improvements from the obligee to the principal.
(4) The distinctions in coverages and limitation periods.
(5) The special claims handling procedures and methodologies in avoiding and responding to claims from the obligee and/or third parties.
Each of the above distinctions will be discussed to highlight and focus upon special claims handling issues raised by Subdivision Bonds.
I. Governmental Control
A. The Power to Control Subdivision Growth
Many states, counties, cities and other local governmental entities (hereinafter collectively referred to as Public Agency) have enacted statutes, codes or ordinances (hereinafter collectively referred to as Statutory Scheme) for regulating land use and subdivision growth. Obtaining approval from the Public Agency, whether through a subdivision map, permit or otherwise, is often the initial step a developer must take in developing a parcel of real property. The Statutory Scheme enacted by the Public Agency establishes its authority to regulate and control the design and improvements of subdivision developments within their jurisdiction. In the course of regulating the design and improvements within a subdivision, the Public Agency may impose conditions on the issuance of a subdivision map or other standards for the improvements. This power provides a means for the Public Agency to require compliance with certain conditions by a developer in exchange for the right to subdivide.(1)
B. The Goals and Purposes of the Statutory Scheme
A primary goal of the Statutory Scheme is to encourage orderly community development by providing for the regulation and control of the design and improvement of a subdivision with proper consideration to its relation to adjoining areas.(2) The Statutory Scheme is intended to facilitate the coordination of subdivision planning (lot size, configuration, street patterns and utility easements) with the overall community planning shown on general and specific plans adopted by the Public Agency. A related purpose of the Statutory Scheme is to assure consistency of subdivision design and improvements with local standards for development, (type and density), public health and other environmental concerns. Another critical function of the Statutory Scheme is to insure that the developer properly installs streets, sewers and drains prior to their dedication to the Public Agency and its taking over their maintenance.(3) These goals and purposes will prevent the subdivision from becoming an undue burden on the community and local taxpayers.(4)
C. The Subdivision Agreement and the Subdivision Bond
When public improvements required by the Public Agency as part of the Statutory Scheme have not been completed, the Public Agency often requires the developer to enter into an improvement agreement (Subdivision Agreement) as a condition to beginning any work of improvement on the property.(5) In the typical Subdivision Agreement entered into between a developer and a Public Agency, the developer agrees to construct the improvements required by the Public Agency at the developer's expense in accordance with the Statutory Scheme.
Most Statutory Schemes require the developer's obligations under a Subdivision Agreement to be guaranteed by the posting of security acceptable to the Public Agency.(6) In addition to assuring faithful performance of the work covered by the Subdivision Agreement, security may be required to cover liability for changes or alterations in the work and cost and reasonable fees, including attorneys' fees.(7) Often, the Public Agency may require that the security warrant the work for one (1) year following completion and acceptance of the improvements, including liability for defective work, labor and materials.(8)
The form of security most commonly required of a developer is a faithful performance bond executed by a corporate surety.(9) Many Public Agencies also require a labor and material bond to accompany the performance bond.
The amount of security required to secure performance of the obligation under a Subdivision Agreement is determined by the Public Agency, generally within a prescribed monetary range. The portion of the security which guarantees faithful performance of the completion of the improvements or agreement (i.e. the performance bond) is generally in an amount not less than fifty percent (50%) or more than one hundred percent (100%) of the total estimated cost of the improvements (or the acts to be performed). The labor and material bond secures payment to the contractor, subcontractors, laborers, material men and persons furnishing equipment. Generally, the payment bond is not less than fifty percent (50%) or more than one hundred percent (100%) of the total estimated cost of the improvements. In addition to the base cost of the improvements, the security also can cover costs and reasonable expenses and fees, including attorneys' fees, that the Public Agency may incur in successfully enforcing the secured obligation.(10)
Once the improvement work commences, the developer and the Subdivision Performance Bond surety may be held liable until all subdivision improvements are completed and accepted.(11) In this regard, the developer and its surety would also be obligated to maintain and repair any completed improvements until all subdivision improvements guaranteed by the security are completed and accepted.(12) Even modifications to a Subdivision Agreement, such as extensions of time for completion of the work granted by the local agency without notice to the surety, may not exonerate the surety, as the Subdivision Agreement may incorporate a waiver of any notice requirements by the surety.(13)
II. The Differing Roles, Positions And Obligations Of the Principal and Oligee
A. The Principal
Although Subdivision Bonds are somewhat similar to Public Works Bonds, the developer's role, position and obligation under a Subdivision Agreement as secured by the Subdivision Bonds is quite different from those of a contractor entering into a public works contract secured by Public Works Bonds. In a Public Works Bond, the surety secures the performance of the contractor. In a Subdivision Bond, the surety secures the obligations of the developer under the Subdivision Agreement. The Developer may or may not be the contractor. Where the developer is not the actual builder of the subdivision improvements and has separately contracted with a builder, there is no privity of contract between the surety and the builder of the subdivision improvements. If the builder defaults, the Public Agency has a claim against the developer under the Subdivision Agreement and its surety under the Subdivision Performance Bond. If the Public Agency makes demand on the Subdivision Performance Bond, the surety may communicate with the builder in an attempt to address the Public Agency's claim. The surety will, however, deal primarily with the developer as its principal to assure performance. As a result of the unique interplay between the parties, it is incumbent upon the surety to monitor the progress of the builder and communicate with the developer and Public Agency to assure the orderly completion of the obligations secured by the Subdivision Bonds.
B. The Obligee
The Subdivision Bonds secure the obligations of the developer under the Subdivision Agreement and name the Public Agency as the obligee.(14) The primary distinction in the role of the Public Agency as an obligee on Subdivision Bonds, as opposed to Public Works Bonds, is that the Public Agency has no obligation to pay the developer for the cost of the subdivision improvements. The consideration given by the Public Agency for the protections afforded under the Subdivision Bonds is the right to develop the subdivision. By accepting and acting upon this right, the developer assumes the obligation to pay for the subdivision improvements required under the Subdivision Agreement.
A secondary distinction between the role of the obligee on Subdivision Bonds as opposed to Public Works Bonds is that the obligee generally takes a far more active role in determining and dictating the scope, method and operation of the work to be performed on a public works contract as opposed to a Subdivision Agreement. Whereas, in a typical public works contract there are often detailed plans, specifications and subcontractor requirements, a typical Subdivision Agreement, by comparison, incorporates rather simple plans and limited engineer's estimates allowing the developer to utilize its own method and operation for completion, with no subcontractor designation requirements. The distinctions between a public works contract and a Subdivision Agreement are also demonstrated by contrasting the time requirements and damage exposures. Public works contracts generally include a detailed schedule of performance with a fixed date for completion which includes exposure for delay, liquidated and consequential damages. A Subdivision Agreement, by comparison, identifies a date generally one or two years in the future for completion. Within this broad time frame, which is relatively easily extended, the developer can schedule its work as it wants with no delay, liquidated or consequential damage exposure.
III. Shift in Funding
As noted, the developer assumes the responsibility to fund the costs of constructing or placing the subdivision improvements required by the Public Agency. From the surety's perspective, this shift in funding responsibility should be a critical part of its underwriting evaluation and if the Subdivision Bonds are written, funding of the improvements must be closely monitored. In this regard, the key areas of inquiry for the surety underwriters include:
(1) Has the developer properly estimated the costs necessary to complete the improvements? The Public Agency generally provides engineer's estimates for these expenses. The surety underwriter should attempt to ascertain the propriety of the engineer's estimates and any major deviation between the engineer's estimates and the amount the developer has budgeted for completion.
(2) Has the developer set aside sufficient funds to complete the subdivision improvements? If a project is to be self-funded by the developer, the surety must be assured that the developer has separately committed sufficient funds to complete the subdivision improvements. If a project is to be financed through a bank (hereinafter Set Aside Bank), it is normal procedure for the Set Aside Bank to provide the surety with an agreement which provides that the Set Aside Bank, as part of its commitment to fund the entire project, has segregated sufficient funds to be used solely for the completion of the subdivision improvements (Set Aside Agreement).(15) Ascertaining the precise source of payment and procedure to be followed in funding the subdivision improvements is an essential underwriting consideration.
(3) Has the developer or Set Aside Bank complied with its obligations by using the funds set aside to pay for the completion of the improvements and payment to the contractor, subcontractors and suppliers completing the improvements? Monitoring the activities of developer and the distribution from the Set Aside Bank are critical to avoid exposure to loss on the Subdivision Bonds.
IV. Distinction in Coverage and Limitation Periods
Although similar in some respects, a primary distinction between a Public Works Performance Bond and a Subdivision Performance Bond is in the scope of coverage. Both types of bonds incorporate the underlying contracts (public works contract and Subdivision Agreement) by reference.(16) However, while a Public Works Performance Bond provides security for the performance of all of the principal's contract work, a Subdivision Performance Bond guarantees only the public improvement portion of the overall development.(17) By way of example, a developer with a project to build a hundred single family residences may be required to enter into a Subdivision Agreement which includes completion of the subdivision improvements. The Subdivision Performance Bond guarantees only the developer's completion of the streets, curbs and gutters, storm drains, sewers and any grading necessary to accomplish these public improvements.(18) The Subdivision Performance Bond does not guarantee or involve any grading for individual lots or driveways, or the development or construction of the individual homes. The Public Agency's claim is limited to the improvements specifically included within the Subdivision Agreement. Therefore, if a developer fails to complete any portion of the actual homes, the Public Agency has no claim against the surety on the Subdivision Performance Bond for the completion of the homes, but is limited to the subdivision improvements set forth in the Subdivision Agreement.(19)
Another distinction in coverage is that a public works contract secured by a Public Works Performance Bond generally includes significant contract obligations including performance guarantees, warranties, and specific damage exposures (delay, consequential and liquidated damages). Although Subdivision Agreements often require the posting of a separate Warranty Bond or the subsequent reduction of the Subdivision Performance Bond to cover certain warranty obligations once the improvements are completed, Subdivision Performance Bonds generally do not include coverage for performance guarantees, delay, consequential or liquidated damages.(20)
As noted above, while Public Works Performance Bonds generally include broader coverage, the limitation period for making a claim on a Public Works Performance Bond is often reduced by the terms of the bond to a period of time less than that which may be provided in statute. Excluding latent defects and certain warranty claims, most Public Work Performance Bonds have a limitation period included within the bond of one or two years from the date of acceptance or completion.
In sharp contrast, the limitation period on a Subdivision Performance Bond usually runs from the agreed upon completion date of the required improvements,(21) or as may be modified by any extensions granted by the Public Agency. The nature of subdivision development and the changes in the housing marketplace often require the developer to seek extensions on the time period afforded in the Subdivision Agreement for the completion of the improvements. Unless there is a dangerous condition or some other health hazard, the Public Agency regularly grants a developer's request for time extensions.
Most Subdivision Bond forms and the Statutory Scheme preclude the necessity of the Public Agency or the developer to notify the Surety of the extension.(22) Thus, whereas in most cases, the surety can determine its exposure on a Public Works Performance Bond within a couple of years of completion, the surety's exposure on a Subdivision Bond may regularly be extended out for six to ten years, or more. It is therefore very important for the surety to maintain open lines of communication with both the Public Agency and developer, and take appropriate action to monitor the financial status of the developer and the progress of the required improvements.
A particularly difficult issue involving the limitation period on Subdivision Bonds and the normal extensions afforded by the Public Agency involves the Set Aside Bank. Often, the Set Aside Agreement delivered to the surety to assure that there are sufficient funds for completion of the subdivision improvements include time limitations of their own. If the project is extended, it is incumbent upon the developer and the surety to make sure that the Set Aside Agreement is also extended. Therefore, not only should the surety monitor the completion of the project, it must also ensure that its security, i.e. the Set Aside Agreement, is in place. If the project is self-funded by the developer, the surety must be vigilant in assessing the developer's continuing ability to place the improvements, and where necessary or appropriate, request the furnishing of collateral to the surety.
Assuming that the surety is able to properly monitor the situation and protect against exposure, the limitation extensions common in the Subdivision Bond context often assist in negating exposure on the Subdivision Bonds. Subdivision development is often delayed when the economy or housing market is slow. When the market turns, in many cases it is possible for the developer to obtain new sources of revenue to complete the subdivision improvements so that it can sell the units. From the surety's perspective, it is important to understand and appreciate these issues and to work with the developer and Public Agency to mitigate its exposure to loss.
V. Subdivision Bond Claim Handling
If a principal is declared in default on a Public Works Performance Bond, the surety must evaluate the default in the context of the terms and conditions of the construction contract. As a matter of practice, the Public Works Bond surety should always contact the principal to determine if there are any legitimate defenses to the default. Based upon its investigation, and assuming that the default is determined to be proper, the surety will exercise a variety of options, including, inter alia, financing the principal, tendering a completion contractor, providing a completion contractor or paying the bond penalty. The surety will evaluate a complicated set of factors including the availability and amount of remaining contract funds, the status of the completed work, the percentage of the completed work, whether the remaining work is to be performed by subcontractors and whether the subcontractors' contracts can be ratified and completed by the subcontractors.
If a principal is declared in default on a Subdivision Performance Bond, the initial investigation relative to the default is rather straightforward. If the time frame for completing the subdivision improvements has expired, it is within the limitation period for making a claim, and the improvements are not complete, generally the principal will have no defense to a demand on a Subdivision Performance Bond. As compared to a Public Works Performance Bond default, the traditional completion options of the Subdivision Performance Bond surety are also less complicated. In most cases, if no other approaches are available to the surety, it will either complete the work with a completion contractor or pay the obligee an amount necessary for the construction and installation of the required improvements, often the full penal sum of the bond.(23)
Recognizing that the completion options are somewhat limited, special pre-claim and post-claim handling procedures and methodologies may be established to limit or eliminate exposure on Subdivision Bonds. Avoiding exposure to loss on Subdivision Bonds requires vigilant and consistent monitoring and communication with the Public Agency, developer, principal, builder, indemnitors and Set Aside Bank well before any claim is made. After Subdivision Bonds are issued, key suggested pre-claim investigations and contacts include:
(1) The surety should obtain a projected schedule of completion of the subdivision improvements from the developer. The surety should monitor the progress of the subdivision improvement work. It should obtain periodic status reports from the Public Agency to be compared with the actual completion of the work within the developer's projected schedule. The surety should determine the reasons for any delay from the developer, and obtain assurances that the project will be completed on a timely schedule.
(2) If the developer is self-funding, it is essential for the surety to closely monitor the developer's financial ability to complete the subdivision improvements. If the developer has bank financing, it is incumbent upon the surety to communicate often with the Set Aside Bank to assure that the Set Aside Bank is properly disbursing funds as subdivision improvements are completed and that set aside funds are used solely for their intended purpose.
(3) The surety must monitor the work performed by the builder and be sure that the developer and indemnitor(s) are properly reviewing and/or supervising the completion of the work.
(4) The surety must communicate with the developer to determine if there are any major changes in its development plans or financial condition which could impact its ability to timely complete the subdivision improvements. If a developer's financial condition changes or economic or marketplace conditions change, the developer must work with the Public Agency to make sure that appropriate extensions are applied for and obtained, and that the Set Aside Bank understands and agrees to maintain its financing and/or Set Aside Agreement during the extended time frame.
(5) The surety must communicate with the developer and the Set Aside Bank to assure that if the Set Aside Bank forecloses on the property, it will require any third party purchaser to assume or take title to the property subject to the developer's subdivision improvement obligations. These negotiations should also deal with the Set Aside Bank's obligations under the Set Aside Agreement. Although a Set Aside Bank may not have a legal obligation to work with the surety, if properly presented as an option, a Set Aside Bank will often work with the parties to deal fairly with the property.
(6) The surety must notify and communicate with the developer and all indemnitors relating to any potential problem relative to the completion of the subdivision improvements. Often, in the complicated interactions between the parties in a potential subdivision loss situation, the indemnitors are not given proper attention. Not only should the indemnitors be made aware of any potential claim, if provided for under the terms of the indemnity agreement, demand for collateral and other enforcement techniques under the indemnity agreement should be employed to maximize the involvement of the indemnitors to mitigate the ultimate exposure to loss. Often indemnitors have the ability to, and if properly communicated with will, take the necessary action to solve a developer's problems before a loss is suffered on the Subdivision Bonds.
Assuming that the foregoing preventative actions taken by the surety cannot avoid a claim, the following should be considered as part of a comprehensive investigation of the claim:
(1) Who is making the claim? Most Subdivision Performance Bonds identify the Public Agency as the sole obligee on the Subdivision Performance Bond and therefore any claim brought by any other party may be subject to denial.(24)
(2) Has the claim been timely presented? To make this determination, the Subdivision Agreement must be reviewed for the completion date and the appropriate statute of limitations must be applied. If it appears that the claim is time barred, that should not be the end of the surety's investigation. Most Statutory Schemes and most Subdivision Bonds, allow extensions of the completion dates without the surety's consent. Therefore, the surety must determine if any extensions have been granted. It should also seek information on what extension procedures were available to the Public Agency and whether it complied with its rules in extending the time for completion.
(3) Has the developer commenced any subdivision improvements? As noted in the previous sections, the Public Agency requires the issuance of Subdivision Bonds to assure that the development has no adverse effect on its overall development plan and to assure the improvements are installed at no cost to the Public Agency. If the developer decides not to move forward with the development and no work on the subdivision improvements has been commenced, a relatively strong argument can be made that the Public Agency should not be able to enforce the Subdivision Agreement or recover on the Subdivision Performance Bond.
For example, one California Court held that the surety's obligation on a subdivision bond commenced only after the principal had begun construction of the improvements.(25) "The language of the instrument of credit executed by [the bank] indicates that the parties intended to provide security for full completion of improvements whose construction had already begun."(26) As no work had been commenced and the Public Agency had no intention of completing the project, the court determined that no purpose would be served by imposing an obligation on the surety to complete the improvements or otherwise pay out on the bond. Similarly, the Appellate Court of Connecticut refused to hold the surety on a subdivision bond liable where "no lots in the subdivision had been conveyed." "[B]ecause no lots in the subdivision were conveyed, no improvements were required."(27)
(4) Who owns the property on which the subdivision improvements were to be completed? If the developer owns the property, it is likely that he will work with the Public Agency to obtain an extension. Generally, developers have signed indemnity agreements with the surety. Thus, any demand made by the Public Agency will be tendered to the developer. If the developer has lost the property in foreclosure, the foreclosing bank or a subsequent third-party purchaser may pressure the Public Agency to require completion of the subdivision improvements. As neither the foreclosing bank nor the third-party purchaser are obligees and have no direct right to make claim on the Subdivision Bonds, they often attempt to persuade the Public Agency to require the placement of the improvements. While the Public Agency arguably has no legal obligation to act on behalf of the bank or the third party purchasers, the Public Agency often finds it in its best interest to require the improvements. Communicating with the Public Agency early and explaining that these parties are receiving a windfall or an unjust benefit by the placement of the improvements may be helpful in persuading the Public Agency not to require the surety to place the improvements.
For example, in City of Sacramento v. Trans Pacific Industries, Inc.(28) a subsequent purchaser of the property was able to persuade the Public Agency to pursue placement of the subdivision improvements for its benefit. In order to get certain improvements in place at no cost to the subsequent purchaser, the subsequent purchaser entered into an agreement with the Public Agency whereby he agreed to construct all the improvements on the parcels he purchased in exchange for the Public Agency's promise to reimburse him from any judgment the Public Agency was successful in recovering against the developer/principal and its surety in the lawsuit the Public Agency had already filed against the developer and surety.(29)
In order to preempt this situation, it is advisable to contact the Public Agency as soon as the surety learns of any property transfer. The surety should request that the Public Agency require any subsequent purchaser who is actually developing the property to execute a new Subdivision Agreement secured by appropriate bonds as a condition of any issuance of permits to commence work on the project in order to avoid an unjust resolution as between the surety and original developer. The unjust resolution is the result of the fact that the surety would have no indemnity rights against the subsequent purchaser. Such course of action by the Public Agency is supported by the general rules of suretyship and the covenant of good faith and fair dealing implied in all contracts which may be summarized as follows:
The contract of suretyship imports entire good faith and confidence between the parties as to the whole transaction. The creditor is bound to observe good faith with the surety. He must withhold nothing, conceal nothing, release nothing which will possibly benefit the surety. He must not do any act injurious to the surety or inconsistent with its rights. He must not omit any act required by the surety which duty enjoins him to do, if such omission injures the surety.(30)
The Public Agency, as creditor, is therefore duty bound not to do any act injurious to the interests of the surety. Additionally, in every contract, including bonds which a surety executes for the benefit of the Public Agency, there is an implied covenant of good faith and fair dealing that neither shall do anything which will have the effect of destroying or injuring the rights of the other to receive the fruits of the contract.(31)
(5) Has the public agency incurred any damage as a result of the developer's failure to complete the improvements? Once a determination has been made as to the surety's liability, the surety must also consider whether the Subdivision Performance Bond is a "penalty bond" or an "indemnity bond." A "penalty bond" may be treated by the courts as a liquidated damage should the developer fail to complete the improvements. Upon the default of the principal and timely notice of claim, the surety will be required to pay the full penal sum of the bond, regardless of whether or not the Public Agency has incurred any damage, or intends to complete the improvements.(32)
An "indemnity bond," however, will be liable only for the actual cost of completing the required improvements.(33)
The purpose of such a bond is to provide funds necessary to cover the costs of completing the improvements. Recovery is limited to the reasonable completion costs, and may not exceed the face amount of the bond.(34) Some courts however, have held that the Public Agency may recover from the bond even if no loss has been incurred, or where the Public Agency failed to establish any intent or need to complete the bonded improvements.(35)
Subdivision Bonds secure the obligations of the developer under the Subdivision Agreement. Basic handling of a claim against a Subdivision Bond should necessarily comply with the applicable statutory regulations and the surety's established claims handling procedures. Additionally, understanding and appreciating the unique aspects of Subdivision Bonds should assist the surety in establishing a monitoring program and developing special preventative procedures to avoid claims. Further, where claims are made against a surety on a Subdivision Bond, recognition of the roles, responsibilities and unique interplay between the principal, Public Agency, builder, indemnitors, and Set Aside Bank must be employed to establish alternative approaches or options to satisfy, reduce or eliminate the exposure of the surety. Consistent monitoring, communication and creativity, both before and after a claim is made, are the keys to superior Subdivision Bond claims handling.
2. The basic purpose of a subdivision performance bond is to "assure those who purchase homes in a new subdivision that they will receive the public improvements that were a large part of the inducement to purchase lots and/or homes in that development." Town of Southington v. Commercial Union Insurance Company, 54 Conn.App. 328, 334.735 A.2d 835 (Conn.App., 1999), certification granted in part by Town of Southington v. Commercial Insurance Company, 251 Conn. 906, 738 A.2d 1093 (Conn., 1999).
3. See, e.g. Evola v. Wendt Construction Company, 170 Cal.App.2d 21, 338 P.2d 498 (Cal.App., 1959) (the Subdivision Map Act discussed in this case has since been amended).
4. "The reason for requiring the subdivider to install street improvements is directly related to the public health, safety and welfare. Such a requirement assures suitable access routes, advances the objectives of the community plan, and protects the municipality and its taxpayers from the burden of constructing additional streets to accommodate new developments." General Insurance Company of America v. City of Colorado Springs, 638 P.2d 752, 757 (Colo., 1982).
5. See, e.g., South Central Coast Regional Comm. v. Charles A. Pratt Construction Company, 128 Cal.App.3d 830, 180 Cal.Rptr. 555 (Cal.App., 1982), called into doubt by Lakeview Development Corp. v. City of South Lake Tahoe, 915 F.2d 1290 (9th Cir. (Cal.) 1990).
6. See, e.g., 11 O.S. 1951 §1425; Connecticut General Statutes §8-25; RCW §58.17.130.
7. See e.g., California Government Code, §66499.9.
8. See, e.g., California Government Code, §66499.9(c).
9. An example of another form of security is found in Vale Dean Canyon Homeowners Association v. Dean,100 Or.App. 158, 785 P.2d 772 (Or.App., 1990) wherein the Public Agency required a certificate of deposit as security to assure performance of the Subdivision Agreement.
10. See, e.g., California Government Code, §66499.
11. See, e.g., Kern County v. Edgemont Development Corp., 222 Cal.App.2d 874. 879, 35 Cal.Rptr. 629 (Cal.App., 1963), and Mount Florence Group v. City of Peekskill, 652 N.Y.S.2d 814, 235 A.2d 787, (N.Y.A.D., 1997). See however, Town of Southington v. Commercial Union Insurance Company, 54 Conn.App. 328, 333-34, 735 A.2d 835 (Conn.App., 1999), certification granted in part by Town of Southington v. Commercial Insurance Company, 251 Conn. 906, 738 A.2d 1093 (Conn., 1999) interpreting a Connecticut statute to require the surety's completion of the improvements only to the extent necessary to serve conveyed lots.
12. County of Kern and Mount Florence Group, supra.
13. See, e.g., City of Sacramento v. Trans Pacific Industries, 98 Cal.App.3d 389, 400, 159 Cal. Rptr. 514 (Cal.App., 1979).
14. In Weber v. Pacific Indemnity Company, 204 Cal.App.2d 334,22 Cal.Rptr. 366 (Cal.App., 1962), in ruling the Public Agency was the sole obligee on a Subdivision Bond, the court denied a contractor's claim against the bond, even though the bond expressly covered all costs and expenses incurred in the performance of the subdivision agreement. But see, City of University City v. Frank Miceli & Sons Realty & Building, 347 S.W.2d 131 (Mo., 1961) in which the court acknowledged the homeowners as third party beneficiaries of a Subdivision Performance Bond and therefore proper claimants on the bond, but denied recovery on other grounds.
15. See, e.g., City of Los Angeles v. Anchor Casualty Company, 204 Cal.App.2d 175, 22 Cal.Rptr. 278 (Cal.App., 1962).
16. See, e.g., City of Sacramento v. Trans Pacific Industries, Inc., 98 Cal.App.3d 389, 400, 159 Cal.Rptr. 514 (Cal.App., 1979) citing Bloom v. Bender, 48 Cal.2d 793, 313 P.2d 568 (Cal., 1957). See also, City of O'Fallon v. Bank of Belleville, 171 Ill.App.3d 584, 586, 525 N.E.2d 1162 (Ill.App., 1988) (an underlying agreement may be incorporated in bond where "alluded to," even if not specifically referred to in bond.) Further, an oral contract may in some jurisdictions constitute a valid basis for a contract of suretyship. See, East Baton Rouge Parish v. Travelers Insurance Company, 342 So.2d 226, (La.App., 1977).
17. Township of Wyckoff v. Sarna, 136 N.J.Super. 512, 347 A.2d 16 (N.J.Super.A.D., 1975).
18. Courts will construe a Subdivision Performance Bond in a fair and reasonable manner based upon a consideration of its language and provisions. In City of O'Fallon v. Bank of Belleville, 171 Ill.App.3d 584, 586, 525 N.E.2d 1162 (Ill.App., 1988), the surety argued that the portion of the development not completed by the developer--the culvert -- was not covered by the Subdivision Bond which by its terms included streets and sidewalks. Interpreting the Subdivision Performance Bond as incorporating the Subdivision Agreement, the court held the surety bound to complete the improvements prescribed and required by the Public Agency. Thus, the court held that the definition of"street" in the Public Agency's ordinance encompassed the culvert. See also Town of Brookfield v. Greenridge, Inc., 177 Conn. 527, 418 A.2d 907 (Conn., 1979) (implicit obligation to include underdrain in construction of road improvements based upon good road-building practice although underdrain was not specifically indicated on filed map nor spelled out in road specifications).
20. See, e.g., Bd of Supervisors of Stafford County v. Safeco Insurance Co. of America, 226 Va. 329, 339, 310 S.E.2d 445 (Va., 1983) (Supreme Court of Virginia rejected County's claim for consequential damages other than interest, limiting recovery to the principal amount of the bond).
21. See, however, Commercial Standard Insurance Company v. Tab Construction, Inc., 94 Nev. 536, 583 P.2d 449 (Nev., 1978), wherein Subdivision Payment Bond contained six-month limitations period from the date of completion of improvements. However, the Supreme Court of Oklahoma rejected a limitations period set forth in the bond as void by a local statute, and further held a two year limitations period set forth in a sidewalk ordinance to be void as a violation of the State's Constitution. Instead, the Court applied a five (5) year limitations period for breach of contract. (Sherwood Forest No. 2 Corp. v. City of Norman, 1980 OK 191, 632 P.2d 368 (Okla., 1980), citing City of Norman v. Liddell, 596 P.2d 879 (Okla., 1979).)
22. See, e.g., City of Sacramento v. Trans Pacific Industries, 98 Cal.App.3d 389, 400, 159 Cal.Rptr. 514 (Cal.App., 1979).
23. In General Insurance Company of America v. City of Colorado Springs, 638 P.2d 752, 757 (Colo., 1981), the Supreme Court of Colorado rejected the City's contention that the subdivision bond was a "penalty bond," liable in the full amount for the Principal's failure to perform, but rather deemed the bond an "indemnity bond," liable only for the actual cost of completing the required improvements.
24. See, e.g., Hewson Construction, Inc. v. Reintree Corporation, 101 Wash.2d 819, 685 P.2d 1062 (Wash.,1984), and W.S. Dickey Clay Mfg. Co. v. Ferguson Investment Company, 1963 OK 298, 388 P.2d 300 (Okla., 1963). In Hewson, the court denied the subcontractor who installed the sidewalks on a subdivision improvement a right of action to enforce a Subdivision Performance Bond. The court rejected the subcontractor's argument that it was a third-party beneficiary of the Subdivision Performance Bond holding that such bonds run solely to the obligee-Public Agency. In W.S. Dickey, the court denied a material supplier a right of action against a Subdivision Bond despite the fact that the bond contained language binding the surety to laborers and materialmen. Finding that the subdivision law did not require the developer to guarantee payment for labor and materials the court held that the surety was confined to the measure of liability as contemplated by the law requiring the Subdivision Bond. See also, Evola v. Wendt Construction Company, 170 Cal.App.2d 21, 388 P.2d 498 (Cal.App., 1959) and Norton v. First Federal Savings, 128 Ariz. 176, 624 P.2d 854 (Ariz., 1981), called into doubt by Hartford Accident and Indemnity Company v. Arizona Department of Transportation, 172 Ariz. 564, 838 P.2d 1325 (Ariz.App., 1992). But see, Vale Dean Canyon Homeowners Association v. Dean, 100 Or.App. 158. 785 P.2d 772 (Or.App., 1990). In Vale Dean, an Oregon court permitted lot owners, as third party beneficiaries of the Subdivision Agreement, to enforce the terms of the Subdivision Agreement. The court based its decision on the finding that, in entering into the Subdivision Agreement, the Public Agency intended to benefit the lot owners. Interestingly, the court refused to give much credence to testimony by the Public Agency to the effect that its intent was to assure that the improvements would be placed at no cost to itself. This case may be limited to the particular circumstances of the case and the language of the particular Subdivision Agreement.
25. County of Yuba v. Central Valley National Bank, Inc., 20 Cal.App.3d 109, 97 Cal.Rptr. 369 (Cal.App.,1971); holding limited by City of Los Angeles v. Amwest Surety Insurance Co., 63 Cal.App.4th 378, 73 Cal.Rptr.729 (Cal.App., 1998).
26. County of Yuba, supra, at 112.
27. "The basic purpose of performance bonds is not to punish the developer for failure to make the required improvements, or to unduly benefit a local government, but to assure those who purchase homes in a new subdivision that they will receive the public improvements that were a large part of the inducement to purchase lots and/or homes in that development." Town of Southington v. Commercial Union Insurance Co., 54 Conn.App. 328. 334, 735 A.2d 835 (Conn.App., 1999), certification granted in part by Town of Southington v. Commercial Insurance Company, 251 Conn. 906, 738 A.2d 1093 (Conn., 1999). See also, Town of New Windsor v. Inbro Development Corp., 112 Misc.2d 983, 448 N.Y.S.2d 99 (N.Y.Supp., 1982), wherein the Statutory Scheme limited collection on the Subdivision Performance Bond to an amount commensurate with the extent of building development that had taken place in the subdivision. When the Public Agency filed suit to enforce payment on a Subdivision Performance Bond prior to any construction by the developer/principal the court held that condition of the Subdivision Performance Bond had not occurred.
28. 98 Cal.App.3d 389, 159 Cal.Rptr. 514 (Cal.App., 1979).
29. See also, Board of County Supervisors of Prince William County v. Sie-Gray Developers, Inc., 230 Va 24.334 S.E.2d 542 (Va., 1985), wherein the Court upheld an assignment of the County's rights under the Subdivision Performance Bond to a subsequent developer of the improvements, and Will County v. Woodhill Enterprises, Inc., 4 Ill.App.3d 68, 274 N.E.2d 476 (Ill.App., 1971), in which the court allowed an assignee of Public Agency to pursue claim against Performance Bond. But see, Morro Palisades Co. v. Hartford Acc. & Indem. Co., 52 Cal.2d 397, 340 P.2d 628 (Cal., 1959), in which the court denied an assignee's recovery against the bond, where the assignee did not seek to compel the subdivision improvements, but rather sought to recover a money judgment on its own behalf.
30. Massachusetts Bonding & Ins. Co. v. Osborne, 233 Cal.App.2d 648,662,43 Ca1.Rptr. 761 (Cal.App., 1965), quoting County of Glen v. Jones, 146 Cal. 518, 520, 80 P. 695 (Cal., 1905).
31. See, e.g., Kendall v. Ernest Pestana, Inc., 40 Cal.3d 488, 500, 220 Cal.Rptr 818 (Cal., 1985), superseded by statute on other grounds as stated in Ranco Santa Paula Mobilehome Park, Ltd. v. Evans, 26 Cal.App.4th 1139, 32 Cal.Rptr.2d 464 (Cal.App., 1994).
32. See, e.g., Clark v. Barnard, 108 U.S. 436, 2 S.Ct. 878 (U.S. Mass., 1883); City of Los Angeles v. Amwest Surety Insurance Company, 76 Cal.Rptr.2d 903 (Cal.App., 1998), ordered not to be officially published (Oct. 1998).
33. In General Insurance Company of America v. City of Colorado Springs, 638 P.2d 752, 757 (Colo., 1981), the Court rejected the City's contention that the subdivision bond was a "penalty bond," but rather deemed the bond an "indemnity bond," liable only for the actual cost of completing the required improvements. Relying upon, United States v. Zerbey, 271 U.S. 332,46 S.Ct. 532 (U.S., 1926); Morro Palisade Co. v. Hartford Accident & Indemnity Co., 52 Cal.2d 397, 340 P.2d 628 (Cal., 1959); County of Los Angeles v. Margulis, 6 Cal.App.2d 57, 44 P.2d 608, (Cal.App., 1935).
34. Bd. of Supervisors of Stafford v. Safeco Insurance Company of America, 226 Va. 329, 335, 310 S.E.2d 445 (Va., 1983). Bd. of County Supervisors of Prince William County v. Sie-Gray Developers, Inc., 230 Va. 24, 334 S.E.2d542 (Va., 1985). Town of Poughkeepsie v. Holden Construction Co., Inc., 71 A.D.2d 886, 419 N.Y.S.2d 531 (N.Y.A.D.,1979), case remanded to assess Public Agency's damages resulting from developer's breach.
35. Bd. of Supervisors of Stafford v. Safeco Insurance Company of America, 226 Va. 329, 337-38, 310 S.E.2d445 (Va., 1983). A surety stands in the shoes of its principal and may not assert defenses not available to the principal. The surety had conceded that the County's lack of intent to complete the improvements was not a viable defense to the principal's failure to complete the improvements. (Citing Cohen v. Mayflower Corp., 196 Va. 1153, 1164, 860 S.E.2d 860 (Va., 1955).)
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