Ventana DBS LLC v. The Hayner Hoyt Corp., 2020 U.S. Dist. Lexis 169082 and 169084 (N.D. N.Y. September 16, 2020) involved disputes between a prime contractor, a subcontractor, and their respective sureties. Initially, the subcontractor sued the prime contractor and its surety. The prime contractor later filed a separate action against the subcontractor and its surety. The cases were consolidated. The subcontractor and its surety moved to dismiss the prime contractor’s separate action against them on the grounds that the claims asserted were compulsory counterclaims in the first action and so were barred. The prime contractor opposed the motion to dismiss and moved for leave to amend its answer in the first action to assert its claims as counterclaims. The court found that the two suits arose out of the same transaction or occurrence and that judicial economy dictated that the prime contractor’s claims should have been filed as counterclaims in the first action. The court granted the motion to dismiss the second action. The court also granted the prime contractor’s motion for leave to file its claims as counterclaims against the subcontractor in the first action. The subcontractor’s surety was not a party to the first action, but the court found that the surety and its principal had the same interest and were “functionally equivalent” and, therefore, the surety should be considered an “opposing party” for purposes of the Rule 13(a) compulsory counterclaim. The court, therefore, allowed the subcontractor’s surety to be joined as a defendant in the new counterclaim. In Kudsk v. Federal Solutions Group, Inc., 2020 U.S. Dist. Lexis 169722 (C.D. Cal. September 16, 2020), a subcontractor on three federal projects asserted numerous claims against the surety for the original, defaulted prime contractors and the completion contractor used by the surety. After trial, the Magistrate Judge ruled on the various claims and counterclaims of the parties. On one project, the parties essentially agreed that the subcontractor was owed $93,190.50 subject to offsets arising from the other projects. On the second project, the court attributed various delays and failures to pursue claims with the government to the surety’s completion contractor rather than the subcontractor and held that the subcontractor substantially completed its work and that the surety failed to prove its counterclaim damages. The court awarded the subcontractor $236,910.89, which included extra work that the court found was outside the scope of the original subcontract. The court rejected the surety’s counterclaim for completion costs on the second project. On the third project, the court rejected the subcontractor’s contentions and held that it was entitled to no recovery. The government never issued a notice to proceed on the contract, and the court held “that Kudsk’s claim for payment based on the pre-Notice administrative activities he performed, and for lost profits from the TLF Firearm Project, fails.” In re Hopedale Mining LLC, 2020 Bankr. Lexis 2429 (Bankr. S.D. Ohio September 4, 2020) involved an order approving the sale of certain of the debtors’ assets. The surety aspect of the order preserves the surety’s “Existing Collateral” and the debtor’s obligations to the surety under the “Existing Surety Bonds” and “Existing Bond Agreements” and also provides that the order and Sale Agreement do not “alter, diminish or enlarge the rights of Surety under an existing Surety Bond to the obligee of such Existing Surety Bond” and preserves the surety’s rights, claims and defenses against the obligees. The order also provides that the purchaser of an asset can “seek authorization from the appropriate governmental unit in accordance with non- bankruptcy law to operate the Assets purchased in the sale under the Existing Permits and the Existing Surety Bonds until such Buyer obtains the Replacement Permits and the Replacement Surety Bonds.” If so, the purchaser and the debtor shall enter into an Interim Agreement that indemnifies the debtors and the surety. Insurance Company of the State of Pennsylvania v. Giuliano, Trustee (In re LTC Holdings, Inc.), 2020 U.S. Dist. Lexis 170790 (D. Del. September 17, 2020) involved a contest between the surety for a contractor and an assignee bank over entitlement to a $5.5 million tax refund paid by the United States. The Bankruptcy Court granted summary judgment to the secured bank, In re LTC Holdings, 597 B.R. 565 (Bankr. D. Del. 2019), and the surety appealed. The District Court affirmed. The Court did not deny that the surety was subrogated to the rights of the United States, including the right to set off losses on the bonded contracts against funds owed to the contractor. However, the parties, including the United States, the secured creditor, the bankruptcy trustee, and the surety, had entered into a Stipulation to allow payment of the tax refund to the estate. The Bankruptcy Court’s Tax Refund Settlement Order approved the Stipulation. The parties, including the secured creditor and the surety, reserved claims against the refund, including the surety’s subrogation claims, but the Stipulation and Order also provided that the United States waived its setoff rights against the tax refund to allow its payment to the estate. At the time the Settlement Order was entered, the bonded contracts were not yet complete, and the United States had unsatisfied claims against the contract funds. When the surety later completed the work, it was subrogated to the Government’s rights, but the Government’s claim to set off against the tax refund had already been released.
