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06/28/78 UNITED STATES FIDELITY AND GUARANTY

June 28, 1978

UNITED STATES FIDELITY AND GUARANTY COMPANY
v.
N.J.B. PRIME INVESTORS & OTHERS *FN1



Franklin. Civil action commenced in the Superior Court on August 29, 1975. The case was heard by Lynch, J., on a motion to dismiss.

Hale, C.j., Keville, & Grant, JJ.

SYLLABUS BY THE COURT

Contract, Performance and breach, Implied contract. Volunteer. Subrogation. Surety. Jurisdiction, Civil, Unjust enrichment.

The opinion of the court was delivered by: Keville

Where the surety on a payment and performance bond made payments on behalf of the principal, even though it was not legally obligated to do so by the terms of the bond, the surety was not entitled to reimbursement by an obligee on the bond. [457-460]

In an action by a surety on a payment and performance bond against a construction lender seeking reimbursement for monies voluntarily advanced on behalf of the principal, a general contractor, there was no merit to the surety's contention that it was entitled to be subrogated to the borrower's rights under the construction loan agreement. [460]

Where the surety on a payment and performance bond made payments on behalf of the principal, even though it was not legally obligated to do so by the terms of the bond, the surety was not entitled to reimbursement by an obligee on the ground of unjust enrichment in the absence of conduct amounting to wrongful conversion by the obligee. [460-461]

By this action the plaintiff, the surety on a payment and performance bond, seeks reimbursement from the defendant N.J.B. Prime Investors (Investors) for monies allegedly advanced under the bond. Investors filed a motion to dismiss on the grounds that the plaintiff's complaint failed to state a claim upon which relief could be granted (Mass.R.Civ.P. 12[6], 365 Mass. 755 [1974]) and that the plaintiff failed to join necessary parties (Mass.R.Civ.P. 12[7], 365 Mass. 755 [1974]). The trial Judge allowed the motion on both grounds. Since he had before him at the hearing on the motion (and did not exclude) an affidavit of one Krause filed on behalf of Investors, we assume that he treated the rule 12(b)(6) portion of the motion as a motion for summary judgment under Mass.R.Civ.P. 56, 365 Mass. 824 (1974). *fn2 See the second to last sentence of Mass.R.Civ.P. 12(b), 365 Mass. 755-756 (1974), and the ninth paragraph of the Reporters' Notes to that rule. The plaintiff appeals from the judgment entered following the allowance of the motion.

The pleadings and affidavit *fn3 disclose the following undisputed facts. Investors agreed to lend Deerfield Acres, Inc. (Deerfield), the owner of certain real estate in Deerfield (locus), $2,250,000 for the construction of a motel; these funds were to be disbursed periodically during the construction. As security for the loan Deerfield gave Investors a mortgage on the locus. Deerfield engaged R. E. Bean Construction Co., Inc. (Bean), as general contractor. Pursuant to the construction contract Bean obtained from the plaintiff a bond under which the plaintiff effectively promised to satisfy the claims of suppliers of material and labor whom Bean might fail to pay. Deerfield was named as obligee in the bond. Later by virtue of a rider Investors became an additional obligee.

Investors disbursed to Deerfield slightly more than $2,000,000 under the loan agreement. But following Deerfield's failure to complete construction of the motel within eighteen months as required by the construction loan agreement, its failure to make an interest payment when due, and the recording by a subcontractor of a notice of contract (G. L. c. 254, § 4), Investors, acting in accordance with sections 5, *fn4 6, *fn5 and 8 *fn6 of the loan agreement, refused to disburse the remaining loan proceeds. Deerfield fell in arrears in its payments to Bean for work performed under the construction contract; as a result, Bean was unable to make payments to certain suppliers of material and labor. At the request of Bean, and in claimed reliance on Investors' obligations under the loan agreement, the plaintiff made payments to these suppliers in order to maintain the progress of the construction. Investors has not resumed disbursements of the loan proceeds, and either it or its assignees (see note 1, (supra) ) have begun foreclosure proceedings on the mortgage.

1. The plaintiff contends that it has alleged sufficient facts to prove a contractual right to reimbursement from Investors for the payments it made at Bean's request to certain suppliers of labor and material. The plaintiff relies on language contained in the rider adding Investors as an obligee and set forth in the margin. *fn7 The plaintiff's reliance is misplaced.

We begin by observing that this is not a case in which the plaintiff as surety "arrange for completion of the Contract upon default of the Principal ." Bean did not default on the construction contract; Deerfield did. Therefore, the plaintiff's contractual right to reimbursement, if any, must rest on the provision that "there shall be no liability on the part of the . . . Surety under this bond to the Obligees, or either of them, unless the Obligees, or either of them, shall make payments to the Principal . . . strictly in accordance with the terms of said Contract as to payments." That language must be construed in light of the circumstances under which the rider to the bond was executed (Louis Stoico, Inc. v. Colonial Dev. Corp., 369 Mass. 898, 902 [1976]; Dickson v. Riverside Iron Works, Inc., ante 53, 55 [1978]) and, in particular, the terms of the original bond, the construction contract and the construction loan agreement. See Kelley v. Ryder, 276 Mass. 24, 27 (1931), and Roger Williams Grocery Co. v. Sykes, 357 Mass. 485, 488-489 (1970), and case cited.

We interpret the language solely as an attempt to provide for the discharge of the plaintiff's liability upon the bond in the event Deerfield should fail to pay Bean as required by the construction contract and, upon that failure, Investors should fail to step in to make the payments due Bean. *fn8 We see nothing in the language obligating Investors so to step in. Such an obligation would have the effect of requiring Investors to continue disbursements of the loan proceeds (although directly to Bean rather than to Deerfield) even when, as here, Deerfield was in default on the construction loan agreement. Had the parties intended to provide in the rider for such an obligation, so obviously inconsistent with sections 5 and 6 of the construction loan agreement (see notes 4 and 5, (supra) ), we believe that they would have used more explicit language. Bancroft v. Abbott, 3 Allen 524, 527-528 (1862). The case of Travelers Indem. Co. v. First Natl. State Bank, 328 F. Supp. 208 (D.N.J. 1971), relied on by the plaintiff, involved contractual agreements among the parties very different from those in the present case together with various Federal statutes and regulations. Id. at 212-214, 216-217.

Since, as the plaintiff itself alleges in its complaint, Deerfield had not made payments to Bean (the principal) "strictly in accordance with the terms" of the construction contract and Investors had not stepped in to make the payments due Bean, it follows from what we have already said that the plaintiff was not legally obligated by the terms of the bond to make the payments for which it now seeks reimbursement (but see note 8, (supra) ). The plaintiff's payments having been voluntary, they could not create either an express or implied contract obligating Investors to reimburse the plaintiff even if it is assumed that those payments were made on behalf of Investors. Bancroft v. Abbott, 3 Allen at 525-527. Blake v. Traders Natl. Bank, 149 Mass. 250, 252 (1889). 10 Williston, Contracts ยง 1282 (3d ed. 1967). See Foote v. Cotting, 195 Mass. 55, 61 (1907); Newell v. Hadley, 206 Mass. 335, 342-343 (1910); Bartholomew v. Stobbs, 280 Mass. 559, 561-562 (1932); Keljikian v. Star Brewing Co., 303 Mass, 53, 54 (1939); Blair v. Claflin, 310 Mass. ...


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