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Developers Surety and Indemnity Co. v. City of Durham

United States District Court, M.D. North Carolina

September 18, 2014



L. PATRICK AULD, Magistrate Judge.

This case comes before the Court on: (1) Selective Insurance Company of America's Motion for Summary Judgment (Docket Entry 41); (2) Developers Surety and Indemnity Company's Motion for Summary Judgment (Docket Entry 43); (3) Defendant's Motion for Summary Judgment pursuant to Fed.R.Civ.P. 56 (Docket Entry 44); (4) Plaintiff's Objections to Evidence Submitted by Defendant in Support of Defendant's Motion for Summary Judgment (Docket Entry 59); (2) Plaintiffs' Objections to Evidence Submitted by Defendant in Support of Defendant's Response Briefs (Docket Entry 66);.[1] For the reasons that follow, the Court will grant in part and deny in part Plaintiffs' summary judgment motions, will deny Defendant's summary judgment motion, and will deny as moot Plaintiffs' evidentiary-related motions.


The instant action arises out of a dispute regarding Plaintiffs' obligations under bonds that they issued in connection with subdivision developments in Durham, North Carolina. Plaintiffs Developers Surety and Indemnity Company ("Developers Surety") and Selective Insurance Company of America ("Selective") are surety companies authorized to write bonds in the state of North Carolina. (See Docket Entry 1, ¶¶ 1-2.) Sherron Road Ventures, LLC ("Sherron Road") and Durham Land Associates, LLC ("Durham Land"), [2] both owned and controlled by MacGregor Development Company ("MacGregor"), were the developers of subdivisions Ravenstone and Stonehill Estates (the "Subdivisions"), respectively. (See id., ¶¶ 4-6.) Upon agreement with the City of Durham (the "City"), in connection with the development of the Subdivisions, the Developers were to construct certain infrastructure improvements, such as sidewalks and streets, and were to implement certain stormwater facilities, such as detention ponds, within the Subdivisions. (See id., ¶¶ 13-14.)

Section 60(1) of the City Ordinance in effect at the time of the development of the Subdivisions (the "Old Zoning Ordinance") provided that "no Certificates of Occupancy or Compliance shall be issued and no permanent individual water or sewer services provided until all required improvements have been completed or until an acceptable performance guarantee, sufficient to insure completion of all required improvements, has been filed with the City or County, as appropriate." (Docket Entry 1-1 at 1.)[3] With respect to the form of such performance guarantee, the Old Zoning Ordinance expounded that "[s]uch guarantee may be in the form of a surety bond, letter-of-credit, or some other surety instrument acceptable to the City or County... [and] shall be conditioned upon the performance of all work necessary to complete the specified improvements and the delivery of all necessary encroachment agreements, with said performance and delivery to be done within a stipulated time period." (Id.) Moreover, per the Old Zoning Ordinance, "[t]he required amount of the guarantee shall be as determined by the City or County and shall allow for administrative costs, inflation, and other contingencies." (Id. at 1-2.)

Because the Developers desired to sell certain homes or lots within the Subdivisions before the completion of the agreed-upon infrastructure and stormwater facilities, they sought to comply with the Old Zoning Ordinance by causing Plaintiffs, as sureties, to execute surety bonds for the Subdivisions naming the City as the obligee. (Docket Entry 1, ¶ 20.) Specifically, Selective, through its agent Trisure Corporation ("Trisure"), issued the following seven bonds for certain sidewalk and final street asphalt work in the Subdivisions: B720185, B720188, B720377, B720183, B720187, B720376, and B720388; the following five bonds for maintenance of certain stormwater ponds in the Subdivisions: B720078, B720079, B720080, B720386, and B720181; and the following two bonds for conversion/construction of certain stormwater ponds in the Stonehill Estates Subdivision: B720378 and B720379. ( Id., ¶¶ 21-24; see also Docket Entry 48-1.) Developers Surety, also through its agent Trisure, issued the following five bonds for certain sidewalk and final street asphalt work in the Subdivisions: 593637, 593640, 580036S, 593636, and 593638. (Docket Entry 1, ¶¶ 25-26; see also Docket Entry 48-2.)[4] Each of the foregoing bonds falls into one of three categories: (1) bonds addressing the sidewalks and street asphalt in the Subdivisions (the "Street and Sidewalk Bonds"); (2) bonds explicitly referring to the operation and maintenance of stormwater facilities in the Subdivisions (the "Stormwater Maintenance Bonds"); and (3) bonds addressing the construction or "conversion" of stormwater facilities in the Subdivisions (the "Stormwater Construction Bonds").

The Street and Sidewalk Bonds, with the exception of Bond Nos. B720376 and 580036S, contain language akin to the following:

For the completion of approximately [] linear feet of five foot wide concrete sidewalk and the final asphalt for street acceptance for [Subdivision phase].

(See Docket Entries 48-3, 48-6, 48-12, 48-16, 48-17, 48-18, 48-30, 48-33, 48-36, 48-39.) Of the two Street and Sidewalk Bonds with notable differences, Bond No. 580036S omits the phrase "for street acceptance" (Docket Entry 48-27 at 1), and Bond No. B720376 reads:

For completion of utility adjustments, the final asphalt and approximately 3000 foot concrete sidewalk and handicapped ramps for street acceptance for Phase 2 section 1 to Ravenstone Subdivision.

(Docket Entry 48-9 at 1 (emphasis added).)

With respect to the Stormwater Maintenance Bonds, each contains language substantially similar to the following:

THE CONDITION OF THIS OBLIGATION IS SUCH, that whereas the Principal has entered into a Stormwater Facility Agreement and Covenant Version 082203 for a stormwater facility (facilities) located at [Subdivision phase and pond reference]; and the Principal has agreed to operate and to maintain this facility in perpetuity, and has agreed to provide surety for the perpetual operation and maintenance; and whereas, the City is willing to allow the Principal to file a bond with it to guarantee that the stormwater facility is operated and maintained in accordance with the Agreement; now, therefore, the Principal will operate and maintain the stormwater facilities in perpetuity in accordance with the Agreement.

(Docket Entry 48-21 at 1; see also Docket Entry 48-15 at 1; Docket Entry 48-23 at 1; Docket Entry 48-25 at 1; Docket Entry 48-26 at 1.) Finally, the Stormwater Construction Bonds state that they cover "conversion of the ponds from sediment and erosion contral [sic] ponds into permanent facilities." (Docket Entry 48-22 at 1; see also Docket Entry 48-24 at 1.)

The City dictated the language contained in the Bonds. (See Docket Entry 45 at 6.) That is, the City supplied the bond form, and "Trisure[] would complete the bond form supplied by the City by inserting the penal sum and the underwritten obligation language supplied by the City." (Id. (citing Docket Entry 44-9 at 16).) Moreover, as the City's brief in support of its summary judgment motion describes, Plaintiffs and their agent Trisure accepted the language provided by the City without further inquiry:

Heidi O'Connor, agent with Trisure, who processed the bonds for both [Plaintiffs], testified in her deposition that in processing the bonds at issue in this case she engaged in no analysis of the scope of the underwritten obligations and she demonstrated through her testimony an inability to interpret the bond language. Similarly, Andrea Vallandingham, senior underwriter with Selective, testified that in underwriting the Selective bonds she performed no analysis of the scope of the underwritten obligation. [Plaintiffs] and their agent, Trisure, did not have or consider the Durham Code of Ordinances, the City's former land use ordinance, the City's current Unified Development Ordinance, the City's subdivision requirements, City development review standards, City standards and specifications, the City's Best Management Practices for Stormwater Manual, or any of the applicable stormwater facility agreements when it issued bonds at issue in this case.

(Id. at 6-7 (internal citations omitted).) Thus, the City bears sole responsibility for the Bonds' language and penal sums.

The City calculated the penal sum for each of the Bonds according to pre-determined standards. With respect to the Street and Sidewalk Bonds, City employee Albius Mufalo "would... determin[e] the linear feet of sidewalk needed and multiply[] this number by a cost per linear foot, and [] determin[e] the number of tons of final asphalt needed and multiply[] this number by a cost per ton." (Docket Entry 46 at 5; see also Docket Entry 48-69 at 16.) Mr. Mufalo understood that the per-ton price of asphalt accounted for "associated items" to the laying of the final inch of asphalt, but admitted that he was "given the rate" by his manager and was not aware of the "breakdown" of the per-ton price. (Docket Entry 48-69 at 15.) For the Stormwater Construction Bonds, the penal sum was "based upon the City's estimate of the stormwater-facility construction cost." (Docket Entry 42 at 8 (citing Docket Entry 48-68 at 7, 12).) Finally, as to the Stormwater Maintenance Bonds, "[t]he City determined the average annual maintenance cost and multiplied this cost by 20 to determine the amount of the... Bonds." (Docket Entry 42 at 13 (citing Docket Entry 48-48).)

The parent company of the Developers filed for bankruptcy on November 14, 2008 (see Docket Entry 45 at 9 (citing In re MacGregor Dev. Co., No. 8:09-bk-8089 (Bankr. E.D. N.C. ))) and the Developers ceased work in the Subdivisions before completing all of the infrastructure relevant to the Bonds. Then, according to the City,

[i]n Spring 2011, with the required infrastructure still not complete, the City proceeded to prepare detailed estimates of the cost to the City to complete the streets in conformance with the approved Construction Drawing and City Requirements. The City also determined the cost to complete the required stormwater facilities in conformance with the approved Construction Drawings and City Requirements. After formulation of the aforementioned completion cost estimates, the City, through the City Attorney's Office, made demands on Plaintiffs to pay the City's estimated cost to complete, up to the penal sum of the applicable subdivision bonds. Plaintiffs responded by filing their Complaint.

(Id. at 9-10 (internal citations omitted).)

Plaintiffs now ask the Court to hold as a matter of law that:

(1) the scope of work under the Street and Sidewalk Bonds is limited to "(i) installing incomplete sidewalk segments, if any, and (ii) applying the final one-inch layer of asphalt on the streets to which final asphalt has not yet been applied, with the cost to complete sidewalks and final asphalt calculated as of one year from the date of each [Street and Sidewalk] Bond" (Docket Entry 41, ¶ 1; accord Docket Entry 43, ¶ 1);
(2) "the penal sum of [Selective's Street and Sidewalk] Bond for Ravenstone, Phase 2, Section 1 (Bond No. B720376) has been reduced to $45, 000" (Docket Entry 41, ¶ 3);
(3) "[t]he scope of work under each of Selective's five [Stormwater Maintenance Bonds] is limited to producing security for costs of operating and maintaining already-constructed and fully converted stormwater facilities and does not include any costs to construct, complete, or convert stormwater facilities" (id., ¶ 4); and
(4) "should the Court rule that the scope of work required under the [Stormwater Maintenance] Bonds includes costs to construct, complete, or convert stormwater facilities, the penal sum of Selective's [Stormwater Maintenance] Bond for the Ravenstone Wetland stormwater facily (Bond No. B720181) should be reduced by $100, 000 due to the City's failure to maintain a $100, ...

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