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
D. Noonan, STRENGER & NOONAN, Bloomfield Hills, Michigan,
Lawrence R. Moelmann, HINSHAW & CULBERTSON LLP, Chicago,
Illinois, for Appellee.
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.
B. STRANCH, CIRCUIT JUDGE.
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.
Bailey 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.
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.
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.
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."
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