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Great American Insurance Co. v. E.L. Bailey & Company, Inc.

United States Court of Appeals, Sixth Circuit

November 7, 2016

Great American Insurance Company, Plaintiff-Appellee,
E.L. Bailey & Company, Inc.; Edward L. Bailey, Defendants-Appellants.

         Appeal from the United States District Court for the Eastern District of Michigan at Detroit. No. 2:12-cv-13033-Arthur J. Tarnow, District Judge.

          Argued: September 28, 2016


          Thomas D. Noonan, STRENGER & NOONAN, Bloomfield Hills, Michigan, for Appellants.

          Lawrence R. Moelmann, HINSHAW & CULBERTSON LLP, Chicago, Illinois, for Appellee.

         ON BRIEF:

          Thomas D. Noonan, STRENGER & NOONAN, Bloomfield Hills, Michigan, Michael F. Smith, THE SMITH APPELLATE LAW FIRM, Washington, D.C., for Appellants.

          Lawrence R. Moelmann, Stephen R. Swofford, HINSHAW & CULBERTSON LLP, Chicago, Illinois, for Appellee.

          Before: GILMAN, GIBBONS, and STRANCH, Circuit Judges.



         The State of Michigan contracted with E.L. Bailey & Company, Inc., a general contractor, to construct a prison kitchen. After delays, Bailey and the State sued each other for breach of contract in the Michigan Court of Claims. As required by Michigan law, Bailey had obtained surety bonds guaranteeing its performance from Great American Insurance Company (GAIC) in exchange for which Bailey agreed to assign GAIC the right to settle claims related to the construction project if Bailey allegedly breached the construction contract. Exercising this right, GAIC negotiated with the State to settle Bailey's claims without Bailey's knowledge. GAIC then sought a declaratory judgment from the district court recognizing its right to settle. The district court granted summary judgment to GAIC. On appeal, Bailey's sole argument is that GAIC settled Bailey's claims against the State in bad faith. Because Bailey presented insufficient evidence of bad faith, we AFFIRM.

         I. BACKGROUND

         A. Factual History

         Bailey[1] and GAIC entered into a surety agreement (the Agreement) in 2006 under which GAIC would issue surety bonds on behalf of Bailey, as required by Michigan law for Bailey to contract with the State of Michigan. In this three-way surety relationship, Bailey, the "principal, " paid GAIC, the "surety, " to provide bonds guaranteeing contract performance to the State, the "obligee" or "owner." In September 2009, Bailey entered into a nearly $5, 000, 000 contract with the State to serve as the general contractor for the construction of a prison kitchen at the Huron Valley Women's Correctional Facility in Ypsilanti, Michigan (the Project). In connection with this construction contract, GAIC provided a performance bond, guaranteeing performance of the contract work, and a payment bond, guaranteeing payments to subcontractors and suppliers. Under the Agreement, Bailey agreed to indemnify GAIC for all payments or other expenses GAIC incurred due to either bond, and to pay upon demand collateral in an amount to be determined by GAIC. In the event of an alleged breach of Bailey's contract with the State, its contracts with its subcontractors, or the Agreement itself, the Agreement assigned to GAIC all Bailey's rights "growing in any manner out of" its contract with the State, as well as all its claims "against any party" and the resulting proceeds. The Agreement further granted GAIC the right to settle any claim in connection with any related contract.

         Under Bailey's contract with the State, if different stages of Project work were not complete after set numbers of days, the contract permitted the State to withhold liquidated damages of $1, 000 per day. Bailey and the State have disputed the Project's due dates, but the latest due date for what the contract referred to as "substantial completion" was April 2, 2011 (after multiple extensions agreed to by the State). The contract required "final completion" sixty days later, which would have been June 1, 2011. The State alleged in the Michigan Court of Claims that Bailey achieved substantial completion on April 4, 2012, and had not achieved final completion as of January 1, 2013. Bailey argued that it achieved substantial completion on December 15, 2011. Bailey never finalized completion, and GAIC later reached an agreement with the State to have another contractor complete the Project.

         A State-appointed mediator reviewed the evidence submitted by both parties in August 2012 and found that substantial completion occurred on April 4, 2012, 368 days after the April 2, 2011 due date. The mediator apportioned 278.5 days of this delay to Bailey and 89.5 days to the State. In addition, the mediator noted that prior to this due date Bailey had requested a fourteen-week extension, but the State granted Bailey only an eight-week extension and did not pay Bailey for the additional six weeks. The record and briefs contain no specific identification of the number of days for which the State withheld liquidated damages or for which Bailey was unpaid, except that Bailey agreed at the mediation hearing that it had been compensated through November 16, 2010. It appears that the State withheld $1, 000 per day for both the 368 days following the due date and for the six weeks (42 days) of ungranted extension time prior to the due date, for a total of 410 days. This number nearly matches the $411, 000 amount that the State, in email negotiations with GAIC, said it had withheld.

         Bailey blames the Project's delays on the State and its architect/engineer, Byce & Associates. Bailey alleges that Byce's design plans contained numerous defects that prevented construction progress until the State and Byce provided Bailey with viable alternative designs. As its primary example, Bailey alleges that Byce's original design for the main power source for the new food service building was impossible to construct, and that after Bailey notified Byce about the defects it took Byce and the State 344 days to provide a viable alternative. According to an expert consultant retained by Bailey to calculate its claims against the State, this redesign may have ultimately delayed the Project by 42 days. The State acknowledged in an email that the original design for the power source represented a "serious design flaw."

         B. Litigation History

         The procedural history of this case includes litigation before three courts, of which we recite only the details relevant to this decision. First, Bailey and the State brought claims against each other in the Michigan Court of Claims in October 2011. The Court of Claims stayed the case pending mediation, and in August 2012 the mediator recommended that the State offer Bailey $220, 400.75 to resolve all claims. The State rejected the mediator's recommendation. The claims between Bailey and the State were later transferred to another mediation-like method of alternative dispute resolution called facilitation, scheduled for September 12, 2013. On September 11, GAIC's counsel informed Bailey's counsel that GAIC had agreed to a proposed settlement with the State, releasing Bailey's claims against the State with prejudice in exchange for the State paying GAIC $358, 000, representing final payment under the construction ...

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