Sureties that issue subdivision bonds in California, as well as their developer principals, are all too familiar with claimants seeking to recover damages from the various types of surety bonds required by California’s Subdivision Map Act.  In defending themselves, sureties and their counsel are typically forced to rely on older subdivision case law as well as case law that considers disputes far outside the suretyship context.  This past year, California courts, in The H.N. and Frances C. Berger Foundation v. Perez, (2013) 218 Cal. App .4th 37 and Nissho of California, Inc. v. Bond Safeguard Ins. Co. (2013) 220 Cal. App. 4th 974, provided sureties with fresh ammunition to defend against the claims of unintended beneficiaries.

In the first case, The H.N. and Frances C. Berger Foundation v. Perez, the appellate court considered the appeal by the H.N. and Frances C. Berger Foundation of the lower court’s dismissal of its complaint.  The Berger Foundation owned a substantial amount of developed and undeveloped land adjacent to various parcels owned by Desert Gold Ventures that Desert Gold Ventures was just starting to develop.  Travelers Casualty and Surety Company of America, Desert Gold’s surety, issued subdivision performance and payment bonds to the County of Riverside for the development as required under the Subdivision Map Act.  These bonds guaranteed construction of various public improvements for the development, including roads, gutters, sewers, and water lines.  Desert Gold failed to construct these improvements, and so the County asserted a claim against the subdivision performance bond that Travelers issued.  Travelers and the County then entered into an agreement whereby Travelers would complete only a portion of the public improvements that Desert Gold was required to construct.  The Berger Foundation objected to this settlement agreement.  It wanted Travelers to complete all of the public improvements, which would have conferred a substantial benefit upon the value of the adjacent land it owned.

Travelers refused, and so The Berger Foundation filed suit seeking to challenge the validity of the agreement between the County and Travelers.  In response to the suit, Travelers and the County filed a motion seeking to dismiss the complaint on the grounds that The Berger Foundation was not a beneficiary under the subdivision performance bond and thus had no standing to compel Travelers to construct all the public improvements. The trial court agreed and dismissed the complaint.

The appellate court affirmed that decision.  In doing so, the appellate court determined that according to the underlying subdivision improvement agreement and Travelers’ bond, The Berger Foundation was not a named party, not an intended signatory, nor expressly identified in any capacity, let alone as a third party beneficiary. The agreement and the bond did not reflect the intent of the contracting parties to confer any of the rights or impose any of the obligations of the contracts on anyone or any group or class other than themselves, their successors or assigns. More important, the agreement and bond did not reference any benefits to be conferred to third parties in the general class of private property owners of the affected tract, such as The Berger Foundation.  To the extent that The Berger Foundation would have benefitted by completion of the public improvements, such benefits were merely incidental and did not give The Berger Foundation standing to challenge Travelers’ settlement agreement with the County.

In the second case, Nissho of California, Inc. v. Bond Safeguard Ins. Co., a landscaper subcontractor, Nissho of California, Inc., filed suit on various labor and material payment bonds that the developer, Suncal PSV, LLC, obtained from its surety, Bond Safeguard Insurance Company, pursuant to the Subdivision Map Act.  The Subdivision Map Act requires a developer to obtain one or more labor and material payment bonds for the benefit of the developer’s subcontractors. The penal sum of the payment bonds must be at least fifty percent of the estimated costs of construction.  Rather than obtain just one payment bond covering all construction of the public improvements, Suncal obtained different payment bonds, each covering fifty percent of the cost of the different categories of public improvements it was required to construct.  These categories were domestic water, storm drain, sanitary sewer system, pavement, aggregate base, curb and gutters, and offsite landscaping and traffic.  Suncal did this so it could obtain releases of the payments bonds more quickly, which would limit its exposure as well as decrease the total premiums it would have had to pay its surety.  The City of Palm Springs allowed Suncal to use this strategy.

Nissho performed only landscaping work for Suncal, including some work on private improvements in addition to the bonded public improvements.  Nissho’s claim exceeded $1 million.  This claim nearly doubled the penal sum of the payment bond Suncal obtained for the landscaping work.  So, to recover the full amount of its damages, Nissho filed suit against all of the payment bonds for the development. Safeguard argued that it was only liable for Nissho’s landscaping work on the landscaping and traffic bond, which had a penal sum of $566,200. The trial court rejected that argument and awarded Nissho $1,041,148 against Safeguard and all of the bonds it issued for the development.  The trial court did not differentiate between the scopes of work covered by each of the payment bonds.

Safeguard appealed and the appellate court reversed the trial court’s award.  Among other factors, the appellate court focused on the intent of Suncal and the City when Suncal provided and the City accepted the various payment bonds.  The court found it significant that the City accepted these bonds with knowledge and consent that the bonds covered specific areas of work.  Further, the payment bonds complied with all requirements of the Subdivision Map Act.  Given that compliance and the intent of Suncal and the City, the court refused to disregard the parties’ intent and noted that Nissho had not stated any legal principle allowing it to do so.  The appellate court overturned Nissho’s $1,041,148 judgment against Safeguard and limited Nissho’s judgment against Safeguard to just the penal sum of the landscaping and traffic bond, $566,200.

In both these cases, the appellate courts followed long-standing California law that a surety undertakes no liability for anything which is not within the letter of its bond. The obligation is strictissimi juris; that is, the surety has consented to be bound only within the express terms of its contract and its liability must be found within that contract or not at all. See, e.g., Schmitt v. Ins. Co. of North America (1991) 230 Cal. App. 3d 245, 258.  In these cases, the key factor that permitted the appellate courts to strictly construe the bonds and bonded obligations was that the bonds and related agreements complied with the requirements of the Subdivision Map Act, and the bonds and related agreements clearly defined the surety’s obligations.  These statutorily compliant and clear expressions of the surety’s obligations took away any potential for the court to use its own interpretation of the surety’s obligations, or worse, to adopt the claimants’ overly broad and improper interpretations.  Had there been any ambiguity in the bonds and the related agreements, or had any of the bonds or agreements failed to comply with Subdivision Map Act, the results in these two cases may very well have been different.